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THE ZENITH
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM .............. TO ..............
COMMISSION FILE NUMBER 1-9627
ZENITH NATIONAL INSURANCE CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 95-2702776
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION
OR ORGANIZATION)
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21255 CALIFA STREET, WOODLAND HILLS, 91367-5021
CALIFORNIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (818) 713-1000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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Common Stock, $1.00 Par Value New York Stock Exchange
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes __X__ No ______
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock of the registrant held by
non-affiliates of the registrant on March 22, 1999 was approximately
$223,324,000 (based on the closing sale price of such stock on such date).
At March 22, 1999, there were 17,116,000 shares of Zenith Common Stock
outstanding, net of 7,855,000 shares of treasury stock.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Annual Report to Stockholders for fiscal year ended
December 31, 1998 -- Part I and Part II.
(2) Portions of the Proxy Statement in connection with the 1999 Annual
Meeting of Stockholders -- Part III.
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PART I
ITEM 1. BUSINESS.
GENERAL
Zenith National Insurance Corp. ("Zenith"), a Delaware corporation
incorporated in 1971, is a holding company engaged through its wholly-owned
insurance subsidiaries, Zenith Insurance Company ("Zenith Insurance"), CalFarm
Insurance Company ("CalFarm Insurance"), ZNAT Insurance Company ("ZNAT
Insurance") and Zenith Star Insurance Company ("Zenith Star"), in the
property-casualty insurance business. The average combined ratio (as defined
below) for the 10 years ended December 31, 1998 of Zenith's property-casualty
operations was 101.7%. Zenith also conducts real estate operations through a
wholly-owned subsidiary which develops land and constructs private residences
for sale in Las Vegas, Nevada. On December 31, 1996, Zenith Insurance completed
the acquisition of Associated General Commerce Self-Insurers' Trust Fund
("AGC-SIF"), a Florida workers' compensation self-insurers' fund, by merging it
with and into Zenith Insurance. On April 1, 1998, Zenith Insurance acquired
substantially all of the assets and certain liabilities of RISCORP, Inc. and
certain of its subsidiaries (collectively, "RISCORP") related to RISCORP's
workers' compensation business (the "RISCORP Acquisition").
Effective March 31, 1999, Zenith Insurance completed its sale of CalFarm
Insurance to Nationwide Mutual Insurance Company for $275,000,000 in cash,
subject to post-closing adjustment in certain circumstances.
The 1998 edition of Best's Key Rating Guide ("Best's") assigns Zenith
Insurance, CalFarm Insurance, ZNAT Insurance and Zenith Star (collectively, the
"P&C Companies") ratings of A+ (superior). Moody's Investors Service ("Moody's")
has assigned insurance financial strength ratings of A3 (good) to the P&C
Companies. Standard & Poor's Corporation ("S&P's") has rated the insurance
financial strength of the P&C Companies AA- (very strong). These Best's, Moody's
and S&P ratings are based upon factors of concern to policyholders and insurance
agents and are not directed toward the protection of investors. The P&C
Companies' Best's rating is under review.
At December 31, 1998, Zenith and its subsidiaries had approximately 1,800
full-time employees.
The principal executive offices of Zenith are located at 21255 Califa
Street, Woodland Hills, California 91367-5021, telephone (818) 713-1000.
GLOSSARY OF SELECTED INSURANCE TERMS
The following terms when used herein have the following meanings:
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Assume To receive from a ceding company all or a portion
of a risk in consideration of receipt of a
premium.
Cede To transfer to a reinsurer all or a portion of a
risk in consideration of payment of a premium.
Combined ratio The sum of underwriting expenses, net incurred
losses, loss adjustment expenses and
policyholders' dividends, expressed as a
percentage of net premiums earned. The combined
ratio is the key measure of underwriting
profitability used in the property and casualty
insurance business.
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Development The amount by which losses, measured subsequently
by reference to payments and additional estimates,
differ from those originally reported for a
period. Development is favorable when losses
ultimately settle for less than levels at which
they were reserved or subsequent estimates
indicate a basis for reserve decreases on open
claims. Development is unfavorable when losses
ultimately settle for more than levels at which
they were reserved or subsequent estimates
indicate a basis for reserve increases on open
claims.
Excess of loss reinsurance A form of reinsurance in which the reinsurer pays
all or a specified percentage of a loss caused by
a particular occurrence or event in excess of a
fixed amount and up to a stipulated limit.
Incurred but not reported Claims relating to insured events that have
claims occurred but have not yet been reported to the
insurer or reinsurer.
Loss adjustment expenses The expenses of investigating and settling claims,
including legal and other fees, and general
expenses of administering the claims adjustment
process.
Loss ratio Net losses incurred expressed as a percentage of
net premiums earned.
Net premiums earned The portion of net premiums written applicable to
the expired period of policies.
Participating policy A policy upon which dividends may be paid after
expiration.
Policyholders' surplus or The amount remaining after all liabilities are
statutory capital subtracted from all admitted assets, as determined
in accordance with statutory accounting practices.
This amount is regarded as financial protection to
policyholders in the event an insurance company
suffers unexpected or catastrophic losses.
Reinsurance A transaction in which an original insurer, or
cedant, remits a portion of the premium to a
reinsurer, or assuming company, as payment for the
reinsurer's assumption of a portion of the risk.
Reserves or loss reserves The balance sheet liability representing estimates
of amounts needed to pay reported and unreported
claims and related loss adjustment expenses.
Retrocession A reinsurance of reinsurance assumed.
Retrospectively-rated policy A policy containing a provision for determining
the insurance premium for a specified policy
period on the basis of the loss experience for the
same period.
Statutory accounting Accounting practices prescribed or permitted by
practices the states' departments of insurance. In general,
statutory accounting practices address
policyholder protection and solvency and are more
conservative in presentation of earnings, surplus
and assets than generally accepted accounting
principles.
Treaty A contract of reinsurance.
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Underwriting The process whereby an insurer reviews
applications submitted for insurance coverage and
determines whether it will accept all or part, and
at what premium, of the coverage being requested.
Underwriting expenses The aggregate of policy acquisition costs and the
portion of administrative, general and other
expenses attributable to the underwriting process
as they are accrued and expensed.
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DESCRIPTION OF THE BUSINESS
Zenith, through its insurance subsidiaries, conducts business principally in
the property and casualty insurance industry. Property-casualty operations
comprise Workers' Compensation (52.6% of 1998 consolidated net premiums earned);
Other Property-Casualty, principally automobile, homeowners, farmowners,
commercial coverages and health insurance (41.9% of 1998 consolidated net
premiums earned); and Reinsurance (5.5% of 1998 consolidated net premiums
earned). Results of such operations for the three years ended December 31, 1998
are set forth in the table in the section "Property-Casualty Insurance
Operations" on page 32 of Zenith's 1998 Annual Report to Stockholders, which
table is hereby incorporated by reference. The earnings of Zenith's
property-casualty operations are supplemented by the generation of investment
income discussed under "Investments." Zenith also conducts real estate
operations through wholly-owned subsidiaries that develop land and construct
private residences for sale in Las Vegas, Nevada. Zenith's business segments are
described in Notes to Consolidated Financial Statements -- Note 17 -- "Segment
Information" on pages 68 and 70 of Zenith's 1998 Annual Report to Stockholders,
which note is hereby incorporated by reference.
PARENT
Zenith is a holding company owning directly or indirectly all of the capital
stock of certain property and casualty insurance and non-insurance companies.
WORKERS' COMPENSATION
Workers' Compensation insurance provides coverage for the statutorily
prescribed benefits that employers are required to pay to their employees
injured in the course of employment. The standard workers' compensation policy
issued by Zenith Insurance, ZNAT Insurance and Zenith Star provides payments
for, among other things, temporary or permanent disability benefits, death
benefits, medical and hospital expenses and expenses of vocational
rehabilitation. The benefits payable and the duration of such benefits are set
by statute, and vary by state and with the nature and severity of the injury or
disease and the wages, occupation and age of the employee. Zenith is currently
licensed to conduct business in 44 states and the District of Columbia. The
Workers' Compensation business has grown over the past three years with an
expanding presence in Florida with the acquisitions of AGC-SIF in 1996 and
substantially all of the assets and certain liabilities related to the workers'
compensation business of RISCORP in 1998 (see below). During 1998, Zenith's
insurance subsidiaries wrote workers' compensation insurance in 37 states.
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Net premiums earned in 1998 by state are set forth in the table below:
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(DOLLARS IN THOUSANDS) 1998 PREMIUMS EARNED %
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California.................... $ 123,173 44.2%
Florida....................... 85,399 30.6
Texas......................... 20,999 7.5
North Carolina................ 9,143 3.3
Arkansas...................... 7,431 2.7
Illinois...................... 5,491 2.0
Alabama....................... 4,713 1.7
Other......................... 22,311 8.0
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$ 278,660 100.0%
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Zenith's low five-year workers' compensation loss ratio of 54.1% through
1998 is attributed to Zenith's managed care efforts, return-to-work strategies,
and safety and health, anti-fraud and litigation efforts. During the past 10
years, the Zenith's Workers' Compensation combined ratio was 104%.
Zenith's goal is to be a specialist risk-oriented national workers'
compensation insurer. National results for workers' compensation insurers in
recent years have been favorable by recent historic standards, although the
California workers' compensation market has been impacted by intense rate and
price competition, increased average costs per claim and a decline in industry
premium volume since 1995.
Competition, regulation, rate adequacy and the feasibility of containing the
elements of the cost of claims are among the key factors in determining the
favorability of a given workers' compensation market.
In Florida, minimum premium rates for workers' compensation insurance are
established by the Florida Insurance Commissioner. Minimum rates increased by
1.6% in 1999 and decreased 3.2% and 11.3% in 1998 and 1997, respectively. Since
rates were deregulated in California, insurance companies file and use their
own, actuarially determined rates for workers' compensation insurance in
California. Companies must file such rates with the state of California
Department of Insurance (the "Department of Insurance"), but the use of
scheduled rating credits allows companies considerable flexibility in
determining the amount of premium to be charged to a policyholder or potential
policyholder. The future profitability of Zenith's Workers' Compensation
operation will be dependent upon its ability to compete in an open rating
environment in California, the success of Zenith's geographic expansion outside
of California, the economic outlook for areas in which Zenith operates, Zenith's
continuing efforts to control medical and indemnity costs through return-to-work
efforts, managed care strategies, safety and health, fraud and litigation
efforts and the ability to keep operating expenses in line with premium volume.
At present, competition is intense and Zenith is focused on returning the
Workers' Compensation operation to profitability and achieving the overall goal
of a combined ratio of 100% or lower.
Generally, premiums for workers' compensation insurance policies are a
function of the applicable premium rate, which includes the insured employer's
experience modification factor (where applicable) and the amount of the insured
employer's payroll. Payrolls may be affected significantly by changes in
employment and wage levels. A deposit premium is paid at the beginning of the
policy period, periodic installments are paid during the policy period and the
final amount of the premium is generally determined as of the end of the policy
period after the policyholder's payroll records are audited. Additional policy
features may be added to enhance the outcome for the policyholder in the event
of favorable claims experience. Predominant among such features has been,
historically, the participating policy in which a dividend has been paid after
policy expiration. With the advent of open rating in California and an emphasis
on, among other
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things, overall pricing at inception, dividends became insignificant as an
element in workers' compensation insurance in California. They are also
immaterial on Florida business. As part of the RISCORP Acquisition, Zenith
Insurance assumed approximately $32,000,000 of premium in-force on
retrospectively-rated policies. Retrospective rating also allows the
policyholder to share in the benefits of favorable loss experience although a
certain amount of less-than-favorable experience will result in additional
premiums being billed to the policyholder.
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 and 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 generally accepted accounting principles basis
("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 an audited
"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 with assistance from 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 $92,336,000 and that Zenith Insurance owed an additional
$57,336,000 above the $35,000,000 already paid to RISCORP. On March 26, 1999,
after deducting $6,765,000 for the value of assets not transferred to Zenith
Insurance by RISCORP, Zenith Insurance paid $53,689,000 to RISCORP including
interest in the amount of $3,118,000 computed from April 1, 1998. Of this
amount, $50,853,000 was paid directly to RISCORP and $2,836,000 was paid into an
escrow account. The escrow account has a balance of $12,836,000 and is available
to satisfy RISCORP's indemnification obligations to Zenith under the Asset
Purchase Agreement. Although the determination of "Final Purchase 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.
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 financial
statements as of and for the year ended December 31, 1998. The carrying values
of premiums receivable and the liability for unpaid losses and loss adjustment
expenses at December 31, 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
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adjustment expenses could be higher than Zenith's carrying value of liabilities
for such claims at December 31, 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. Similarly,
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 data 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 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
$50,000,000 in excess of $182,000,000 for net unpaid losses and allocated loss
adjustment expenses acquired from RISCORP. After deducting reinsurance premiums
of $16,000,000, Zenith has recorded reinsurance recoverable of $24,510,000 and a
deferred benefit of $8,510,000 at December 31, 1998. Future adverse loss
development, if any, of the reserves acquired from RISCORP would be recoverable
up to the $50,000,000 limit, although the benefit of such reinsurance
recoverable would be deferred and recognized over the recovery period of such
reinsurance.
The excess of the purchase price, including acquisition expenses, over the
estimated fair value of net assets acquired is $19,851,000, which is net of a
deferred tax asset of $10,228,000, and is being amortized over 25 years.
Amortization expense from April 1, 1998 through December 31, 1998 was $595,000.
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.
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.
OTHER PROPERTY-CASUALTY
Zenith, through CalFarm Insurance, offers a comprehensive line of property
and casualty insurance for individual and commercial customers, including
automobile, farmowners, commercial coverages and homeowners coverage, primarily
in the rural and suburban areas of California, with about 105,000 policies
in-force. Additionally, in 1995 CalFarm Insurance assumed the group health
insurance business that was previously written by CalFarm Life Insurance
Company, a former subsidiary of Zenith, with about 24,000 certificates in-force.
Automobile insurance includes coverage for automobile bodily injury, property
damage and physical damage. Automobile bodily injury and property damage
insurance provide coverage for third party liability, bodily injury and property
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damage arising from the ownership, maintenance or use of an automobile.
Automobile physical damage coverage insures against physical loss of the
insured's own vehicle. Farmowners and homeowners insurance includes coverage for
direct physical damage to real and personal property, loss of personal property
by theft and legal liability for injury to others and damage to property of
others. Commercial multiple peril provides coverage for businesses against
property damage and general liability. Health insurance premiums are written
under a program sponsored by the California Farm Bureau Federation (the "Farm
Bureau") which includes a preferred provider organization plan and a Medicare
supplement product. For the 13 years since CalFarm was acquired by Zenith, the
average combined ratio of Zenith's Other Property-Casualty operation was 100.1%.
Automobile insurance (both commercial and personal) is the largest line of
CalFarm Insurance's business, representing 10.6% of Zenith's premiums written in
1998. CalFarm Insurance insured approximately 19,000 personal automobiles and
61,500 commercial and farm vehicles in 1998. Group health and farmowners
business represented 8.7% and 9.2%, respectively, of Zenith's premiums written
in 1998.
Zenith's Other Property-Casualty operations are subject to the regulatory
provisions of California Initiative Proposition 103 ("Proposition 103"). The
principal effects of Proposition 103 on Zenith's Other Property-Casualty
business are as follows: rates must be approved by the California Insurance
Commissioner prior to use; rates on personal automobile policies must be offered
to "good drivers" (as defined) at a discount of at least 20% from rates
otherwise charged and an insurer cannot refuse to sell a "good driver" policy to
a qualified applicant; personal automobile insurance policies cannot be
cancelled or non-renewed except for non-payment of premium, fraud or material
misrepresentation, or a substantial increase in hazard; and personal automobile
insurance rates must be based on the following factors in decreasing order of
importance: driving record, number of miles driven, number of years of driving
experience, and other factors which may be adopted by the California Insurance
Commissioner. New automobile rating factor regulations pertaining to Proposition
103 were implemented during 1997 which further limit the impact of territorial
rating on automobile insurance rates.
In January 1997, the mandatory proof of insurance law and Proposition 213,
which created the Personal Responsibility Act of 1996, became effective in
California. Proposition 213 limits non-economic recoveries by uninsured
motorists in motor vehicle accidents.
The California Legislature passed legislation in September 1996 which
created the California Earthquake Authority ("CEA"). The CEA, which became
operational in December 1996, is a privately financed, publicly managed state
agency, which provides limited earthquake coverage throughout California.
Participation in the CEA is voluntary and CalFarm Insurance elected not to
participate. CalFarm Insurance can elect to participate in the CEA at a later
date subject to meeting the participation requirements at that time. CalFarm
Insurance continues to offer homeowners and associated earthquake insurance with
broader coverages than are available through the CEA as long as private
reinsurance is available and affordable. Earthquake exposure is closely
monitored through the use of earthquake modeling software and simulation
techniques and through the use of industry experts. In 1998, CalFarm Insurance
expanded the scope of its catastrophe management efforts to include an analysis
of brush fire exposures. Catastrophe reinsurance is used to reduce Zenith's
exposure from excessive catastrophe losses. See "Reinsurance Ceded."
Effective March 31, 1999, Zenith Insurance completed the sale of CalFarm
Insurance to Nationwide Mutual Insurance Company for $275,000,000 in cash,
subject to post closing adjustment in certain circumstances. The transaction
will result in an estimated after tax gain of $100,000,000, or $5.84 per share.
The net change in Zenith's consolidated invested assets as a result of the
transaction is estimated to be a decrease of approximately $15,000,000.
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REINSURANCE
Zenith Insurance selectively underwrites a book of assumed reinsurance.
Treaties come in a variety of forms, but the principal arrangements are either
proportional in nature, in which the assuming company shares pro-rata in the
premiums and losses of the cedant, or arrangements under which the assuming
company pays losses in excess of a certain limit in return for a premium,
usually determined as a percentage of the cedant's primary insurance premiums.
Zenith operates its reinsurance activity as a participant in treaties in which,
typically, the reinsurance coverage is syndicated to a number of assuming
companies. Depending upon market conditions and other factors, the volume of
premiums written fluctuates from year to year. Zenith's current participation in
the reinsurance market emphasizes the reinsurance of large individual property
risks and property catastrophe reinsurance. By diversifying its geographical
spread, Zenith's assumed reinsurance business is written so as to limit the
company's exposure to losses from any one event in a worst-case scenario to a
maximum of approximately 5% of consolidated stockholders' equity.
An important element in the pricing of reinsurance is the supply of
reinsurance capacity (i.e., capital) relative to demand. In recent years, new
capital has been made available to provide world-wide reinsurance capacity. Most
notably, such capital has been contributed by new companies in Bermuda and by
contributions to Lloyd's syndicates by corporations with limited liability.
Zenith has observed decreases in catastrophe reinsurance rates for 1998 and 1997
and, to a lesser extent in 1999, which directly impacts premium income. Since
the inception of this operation in 1985, the average combined ratio of Zenith's
Reinsurance operation was 92.3%.
REAL ESTATE OPERATIONS
Zenith's real estate operations develop, build and sell private residences
in Las Vegas, Nevada. In 1998, this operation closed and delivered 275 homes at
an average selling price of $137,000, compared to 305 homes at an average
selling price of $149,000 the prior year. Sales in 1998 were $37,737,000 and
pre-tax income was $1,363,000, compared to sales of $45,419,000 and pre-tax
income of $1,678,000 the previous year. Land acquired at a cost of $42,142,000
will support the construction and sale of an estimated 1,125 homes over the next
several years and possibly some commercial and/or apartment development.
Increased interest rates or other factors may impact the rate of home sales, but
Zenith believes that the land it has acquired is strategically located and will
have long-term value.
INVESTMENTS
Zenith's Investment operation provides investment income and realized gains
on investments, primarily from investments in debt securities.
Investment policies of Zenith and its insurance subsidiaries are established
by their respective Boards of Directors, taking into consideration state
regulatory restrictions with respect to investments in connection with reserve
obligations, as well as the nature and amount of various kinds of investments.
Zenith's principal investment goal is to maintain safety and liquidity, enhance
principal values and achieve increased rates of return consistent with
regulatory constraints. The allocation among various types of securities is
adjusted from time to time based on market conditions, credit conditions, tax
policy, fluctuations in interest rates and other factors. See Management's
Discussion and Analysis of Consolidated Financial Condition and Results of
Operations -- Investments on pages 37-38 of Zenith's 1998 Annual Report to
Stockholders, which discussion is hereby incorporated by reference. At December
31, 1998, the consolidated investment portfolio consisted primarily of taxable
bonds and short-term investments supplemented by smaller portfolios of
redeemable and other preferred and common stocks. The average life of the
consolidated portfolio was 4.2 years at December 31, 1998.
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Stockholders' equity will fluctuate as interest rates fluctuate due to the
classification of the changes in fair value of certain "available-for-sale"
securities in stockholders' equity. Zenith has identified certain securities,
amounting to approximately 96% of the investments in debt securities at December
31, 1998, as available-for-sale. In 1998, stockholders' equity increased by
$1,378,000, net of deferred taxes, as a result of changes in the fair values of
such investments.
YEAR 2000
The Year 2000 Problem refers to the inability of information technology
("IT") and non-information technology ("non-IT") systems to accurately process
dates during and after 1999. IT systems include computer hardware and software.
Non-IT systems include equipment that incorporates embedded micro controllers
such as elevators, security systems and HVAC systems. If not corrected, the
processes of IT and non-IT systems that are date sensitive could fail or
miscalculate data resulting in disruptions of operations such as a temporary
inability to process transactions, send and receive electronic data with third
parties or otherwise engage in normal business activities. There may also be a
negative impact on the economic and social infrastructure on which Zenith
depends.
In early 1996, Zenith formed a Year 2000 team consisting of staff familiar
with Zenith's IT and non-IT systems to coordinate the elimination, to the extent
possible, of Zenith's exposure to the Year 2000 Problem. Reports of the Year
2000 team's efforts are presented to Zenith's Board of Directors periodically.
Since 1996, Zenith has been systematically replacing and modifying its
internal systems to function correctly with dates from 1999 forward, thereby
rendering them "Year 2000 Compliant." Internal systems ("Internal Systems")
consist of (1) core information technology systems supporting corporate level
accounting and financial reporting processes ("Core Corporate IT Systems"); (2)
core information technology systems supporting operational processes involving
(a) underwriting, premium collection and claims processes in Zenith's insurance
operations (including those systems acquired in the RISCORP Acquisition) and (b)
land acquisitions, development, construction, sales and escrow
tracking/monitoring in the real estate operations ("Core Operational IT
Systems"); (3) computer networks and communications infrastructure ("IT
Infrastructure"); (4) personal and laptop computers including applications
("Other IT Equipment"); and (5) owned facility systems which rely on
non-computer equipment incorporating embedded microprocessors, such as
elevators, HVAC and security as well as office equipment such as facsimile and
copy machines and postage meters ("Facilities and Other Non-IT Systems"). The
majority of Zenith's Year 2000 compliance efforts have been staffed internally,
although Zenith has engaged and will continue to engage technical consultants to
assist its internal staff, as well as to assist Zenith in reviewing its
progress.
The Internal Systems are being corrected through a process with five phases,
some of which are concurrent: (1) Inventory (listing IT and non-IT systems and
their components); (2) Assessment (identifying possible Year 2000-related
failures and developing strategies to repair, replace, or eliminate them); (3)
Remediation (creating or acquiring corrections to identified deficiencies); (4)
Validation (confirming whether corrections would be successful); and (5)
Implementation (installing corrections into the business operations for general
use).
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The status and scheduled completion dates of efforts to make the Internal
Systems supporting Zenith's operations Year 2000 Compliant are as follows:
<TABLE>
<CAPTION>
INVENTORY ASSESSMENT REMEDIATION VALIDATION IMPLEMENTATION
------------- ------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Core Corporate IT Systems Completed Completed Completed Completed Completed
Core Operational IT Systems:
Workers' Compensation Completed Completed 4/30/99 5/31/99 5/31/99
Other Property-Casualty Completed Completed Completed 4/30/99 4/30/99
Reinsurance Completed Completed Completed Completed Completed
Real Estate Operations Completed Completed Completed 5/31/99 5/31/99
IT Infrastructure:
Workers' Compensation Completed Completed 6/30/99 7/31/99 7/31/99
Other Property-Casualty Completed Completed 6/30/99 7/31/99 7/31/99
Reinsurance Completed Completed 6/30/99 7/31/99 7/31/99
Real Estate Operations Completed Completed Completed Completed Completed
Other IT Equipment:
Workers' Compensation Completed Completed 5/31/99 7/31/99 7/31/99
Other Property-Casualty Completed Completed 5/31/99 7/31/99 7/31/99
Reinsurance Completed Completed 5/31/99 7/31/99 7/31/99
Real Estate Operations Completed Completed Completed Completed Completed
Facilities and Other Non-IT
Systems:
Woodland Hills, CA Completed Completed Completed Completed Completed
Sarasota, FL Completed Completed 5/31/99 8/31/99 8/31/99
Sacramento, CA Completed Completed Completed Completed Completed
</TABLE>
Zenith plans to further test and refine the Internal Systems during the
second half of 1999, to assure that they all function in Zenith's operating
environment on an interconnected basis.
Zenith's Year 2000 efforts also include a systematic assessment of the Year
2000 Compliant status of third parties upon which Zenith relies in its business
operations, including major suppliers of services and products, owners of its
leased facilities and principal business partners (collectively, "Key External
Dependencies"). Zenith has used letters, questionnaires, surveys and interviews
to determine whether these Key External Dependencies will achieve Year 2000
Compliant status. To date, Zenith has been unable, in most cases, to obtain
reliable information, and is therefore uncertain about the state of readiness of
many of its Key External Dependencies. Although none of the Key External
Dependencies has informed Zenith that it has a Year 2000 issue that would have a
material impact on Zenith, few have provided definitive statements, written
assurances or warranties that they will be Year 2000 Compliant. Zenith intends
to continue its systematic assessment, including follow-ups of its Key External
Dependencies.
All companies are faced with certain unknown risks arising from Year 2000
issues that may impact them negatively. Zenith's Year 2000 efforts have been
designed to mitigate to the extent possible its risks from Year 2000-related
failures faced by Zenith. Despite Zenith's Year 2000-related efforts, Zenith
recognizes the possibility of some negative impact on its operations resulting
from Year 2000-related failures. Zenith believes that the most reasonably likely
worst-case, Year 2000 scenarios could include failures of Zenith's Internal
Systems, a failure of one or more of its critical Key External Dependencies,
such as financial institutions, agents/brokers or reinsurers, and/or the
contamination of Zenith's IT systems due to receipt of corrupted data. Such a
scenario could result in a disruption of Zenith's normal business activities and
could have a material adverse impact on its financial condition and results of
operations. In the quarter ended September 30, 1998, Zenith began developing
contingency plans to substantially reduce material business disruptions from
such risks. Zenith intends such plans to include measures, such as 1)
acceleration into the last
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<PAGE>
quarter of 1999 the performance of obligations and duties otherwise owed in the
first quarter of 2000; 2) identification of alternatives to Key External
Dependencies that may not be Year 2000 Compliant and therefore unable to meet
Zenith's needs; and 3) certain activities in Zenith's pre-existing Business
Recovery/Resumption Plan designed for Zenith to operate during, and to recover
from, catastrophes. All contingency plans are expected to be in place by
September 30, 1999.
Zenith has been planning to upgrade its IT Infrastructure and its other IT
equipment for some time; however, because of the Year 2000 Problem, certain
components of those plans will be accelerated and completed by mid-1999. The
table below sets out the costs for either repairing Zenith's IT systems ("IT
Repair Costs") or for replacing them ("IT Replacement Costs").
<TABLE>
<CAPTION>
EXPENDITURES PERCENT TOTAL
AS OF EXPENDED AS ESTIMATE TO ESTIMATED IT
(DOLLARS IN THOUSANDS) 12/31/98 OF 12/31/98 COMPLETE EXPENDITURE
- ----------------------------------------------------------- ------------- ------------- ----------- ------------
<S> <C> <C> <C> <C>
IT Repair Costs............................................ $ 4,522 80% $ 1,100 $ 5,622
IT Replacement Costs:
Software................................................. 197 13% 1,277 1,474
Hardware................................................. 191 8% 2,125 2,316
Related Expenditures..................................... 341 51% 322 663
------------- --- ----------- ------------
Total.................................................. $ 5,251 52% $ 4,824 $ 10,075
------------- --- ----------- ------------
------------- --- ----------- ------------
</TABLE>
IT Repair Costs and IT Replacement Costs include external costs and the cost
of dedicated information technology personnel. IT Repair Costs are expensed as
they are incurred; IT Replacement Costs are capitalized in accordance with
Statement of Position 98-1. (See Note 1 to the Consolidated Financial Statements
included in Zenith's 1998 Annual Report to Stockholders on pages 54-57, which
note is herein incorporated by reference.) The internal cost of user
participation in acceptance testing has not been measured and is not included in
the foregoing estimates. Although not quantified at this time, costs associated
with non-IT systems and contingency planning are not expected to be significant.
All Year 2000-related costs have been, and will continue to be, funded from
internal sources. No planned information technology projects were deferred
because of Year 2000-related efforts.
The reader is directed to the "Forward-Looking Information" section of the
Managements Discussion and Analysis of Consolidated Financial Condition and
Results of Operations section of Zenith's 1998 Annual Report to Stockholders on
page 30, which section is herein incorporated by reference, and cautioned that
the foregoing discussion on the Year 2000 Problem must be read in conjunction
with such section. The forward looking information on the Year 2000 Problem,
including its impact on Zenith, future costs, scheduled completion dates, and
the success of Zenith's efforts in preparing for it are based on management's
best estimates of future events. Such estimates, however, are subject to the
inherent uncertainty of the ultimate effect and the extent of the Year 2000
Problem and the availability of technical resources and hardware.
LOSS AND LOSS EXPENSE RESERVES AND CLAIMS, AND LOSS DEVELOPMENTS
The P&C Companies maintain reserves for the payment of losses and for the
expenses of settling both reported and unreported claims that have been incurred
under their insurance policies and reinsurance contracts. The amount of such
reserves, as related to reported claims, is based upon periodic case-by-case
evaluation and judgment by the P&C Companies' claims departments, with actuarial
review. The estimate of unreported claims arising from accidents which have not
yet been reported to the P&C Companies, commonly known in the industry as
"incurred but not reported," is based upon the P&C Companies' experience and
statistical information with respect to the probable number and nature of such
claims. The P&C Companies monitor these factors and
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<PAGE>
revise their reserves as they deem appropriate. Reserves are based on estimates,
and no assurance can be given that the ultimate liability will not be more or
less than such estimates.
Reference is made to "Property-Casualty Loss Development" on pages 46-47 of
Zenith's 1998 Annual Report to Stockholders, which is hereby incorporated by
reference, and the table setting forth the reconciliation of changes in the
liabilities for loss and loss adjustment expenses included in Notes to
Consolidated Financial Statements -- Note 14 -- "Loss and Loss Adjustment
Expense Reserves" on page 65 of Zenith's 1998 Annual Report to Stockholders,
both of which are hereby incorporated by reference. These tables show the
development of loss and loss adjustment expense liabilities as originally
estimated under GAAP at December 31 of each year presented. The accounting
methods used to estimate these liabilities are described in Notes to
Consolidated Financial Statements -- Note 1 -- "Summary of Accounting Policies,
Operations and Principles of Consolidation" on pages 54-57 of Zenith's 1998
Annual Report to Stockholders, which note is hereby incorporated by reference.
The one year loss and loss adjustment expense reserve development for Zenith's
three segments of property casualty business is set forth in the table in the
Management's Discussion and Analysis of Consolidated Financial Condition and
Results of Operations on page 33 of Zenith's 1998 Annual Report to Stockholders,
which table is hereby incorporated by reference.
WORKERS' COMPENSATION
Zenith's Workers' Compensation reserves, on the average, are paid within
approximately 2.2 years. Zenith regards the timely settlement of its Workers'
Compensation claims as important to its profitability and makes use of
compromises and releases for claim settlements to expedite this process.
Zenith Insurance maintains four regional offices in California and offices
outside of California in Florida, Texas, Arkansas, Pennsylvania, Utah, Illinois,
North Carolina and Alabama, each of which is fully staffed to conduct all
workers' compensation claims operations, including review of initial reports of
work injury, assignment of appropriate field investigation and determination of
whether subrogation should be pursued. Workers' Compensation claims operations
are supported by computer systems that provide immediate access to policy
coverage verification and claims records and enable Zenith Insurance to detail
claims payment histories and policy loss experience reports.
The 1998 underwriting results include $2,000,000 of catastrophic workers'
compensation losses. In 1997, loss and loss adjustment expense reserves were
strengthened by $11.8 million for accident years 1995 and 1996.
On April 1, 1998 Zenith Insurance acquired substantially all of the assets
and liabilities of RISCORP's workers' compensation business. See Note 15 in
Notes to Consolidated Financial Statements on pages 65-67 of Zenith's 1998
Annual Report to Stockholders which Note is hereby incorporated by reference and
the item headed "Contingencies Surrounding Fair Values of Certain Assets
Acquired and Liabilities Assumed From RISCORP" in Note 9 in the Notes to
Consolidated Financial Statements on Page 62 of Zenith's Annual Report to
Stockholders which Note is hereby incorporated by Reference.
OTHER PROPERTY-CASUALTY
Other Property-Casualty loss reserves are paid, on the average, within
approximately 3.5 years. Property insurance coverages and CalFarm Insurance's
concentration of business in California expose Zenith to catastrophe losses from
events in California. Insurance liabilities ceded by CalFarm Insurance protect
against losses in excess of $5,000,000 from any one event. See "Reinsurance
Ceded." In 1998 and 1997, CalFarm Insurance sustained losses of $5,000,000 and
$1,500,000, respectively, in conjunction with California wind and storm damage.
1996 results benefited from the absence of catastrophe losses. In 1998, CalFarm
Insurance sustained an
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<PAGE>
underwriting loss in the group health business of $2,991,000, as compared to
income of $125,000 and $42,000 in 1997 and 1996, respectively.
CalFarm Insurance maintains three claims and legal offices in California to
conduct all claims operations of the Other Property-Casualty business. All
claims operations of CalFarm Insurance are supervised by its home office claims
department. Health claims is a separate operation located in the home office.
REINSURANCE
Zenith expects that, on the average, its Reinsurance reserves will be paid
in approximately 2.6 years. In addition to information supplied by ceding
companies, Zenith makes use of industry experience in arriving at estimates of
ultimate losses for certain reinsurance assumed arrangements. The 1998
Reinsurance underwriting results include catastrophe losses of $4,500,000
attributable to Hurricane Georges. There were no catastrophes reported in
Reinsurance in 1997 or 1996.
Zenith Insurance has participated, to a limited extent, in the reinsurance
arrangements of ceding companies that have written both directors' and officers'
liability coverage ("D & O") policies and professional indemnity policies,
including such coverage written for practicing certified public accountants.
Actions alleging negligence against directors, officers or accountants by
parties suffering financial losses in savings and loan failures give rise to
claims under D & O policies or professional indemnity policies which, in turn,
give rise to claims against Zenith Insurance. Such claims have not had, and are
not expected to have in the future, a material adverse effect on Zenith's
consolidated financial condition.
ENVIRONMENTAL AND ASBESTOS LOSSES
The process of evaluating an insurance company's exposure to the cost of
environmental and asbestos damage is subject to significant uncertainties. Among
the complications are lack of historical data, long reporting delays,
uncertainty as to the number and identity of insureds with potential exposure
and unresolved legal issues regarding policy coverage. The legal issues
concerning the interpretations of various insurance policy provisions and
whether environmental and asbestos losses are, or were ever intended to be,
covered are complex. Courts have reached different and sometimes inconsistent
conclusions regarding such issues as: when the loss occurred and which policies
provide coverage, how policy limits are applied and determined, how policy
exclusions are applied and interpreted, whether clean-up costs are covered as
insured property damage and whether site assessment costs are either indemnity
payments or adjusting costs.
Zenith has exposure to asbestos losses in its Workers' Compensation
operation for medical, indemnity and loss adjustment expenses associated with
covered workers' long-term exposure to asbestos or asbestos-contained materials.
Most of these claims date back to the 1970's and early 1980's and Zenith's
exposure is generally limited to a pro rata share of the loss for the period of
time coverage was provided. Zenith also has potential exposure to environmental
and asbestos losses and loss adjustment expenses beginning in 1985 through its
Reinsurance operation and through CalFarm Insurance, which writes liability
coverage under farmowners' and small commercial policies, however such losses
are substantially excluded from all such coverage. The business reinsured by
Zenith contains exclusion clauses for environmental and asbestos losses, and in
1988 an absolute pollution exclusion was incorporated into CalFarm Insurance's
policy forms. All claims for damages resulting from environmental or asbestos
losses are identified and handled by Zenith's most experienced claims/legal
professionals. Environmental and asbestos losses have not been material and
Zenith believes that its reserves for environmental and asbestos losses are
appropriately established based on currently available facts, technology, laws
and regulations. However, due to the long-term nature of these claims, the
inconsistencies of court coverage decisions, plaintiff's expanded theories of
liability, the risks inherent in major litigation and
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<PAGE>
other uncertainties, the ultimate exposure from these claims may vary from the
amounts currently reserved.
REINSURANCE CEDED
In accordance with general industry practices, Zenith's insurance
subsidiaries annually purchase excess of loss reinsurance. Reinsurance makes the
assuming reinsurer liable to the ceding company to the extent of the
reinsurance. It does not, however, discharge the ceding company from its primary
liability to its policyholders in the event the reinsurer is unable to meet its
obligations under such reinsurance treaty. Historically, no material costs have
been incurred by Zenith or its subsidiaries from uncollected reinsurance. The
purpose of such reinsurance is to protect Zenith from the impact of large,
unforeseen losses. Such reinsurance reduces the magnitude of sudden and
unpredictable changes in net income and the capitalization of insurance
operations. Zenith monitors the financial condition of its reinsurers and does
not believe that it is exposed to any material credit risk through its ceded
reinsurance arrangements. Zenith believes that its ceded reinsurance
arrangements are adequate and consistent with industry practice.
Insurance premiums ceded by Zenith's insurance subsidiaries amounted to
$54,487,000, $26,191,000 and $24,642,000 in 1998, 1997 and 1996, respectively,
or 9.3%, 5.3% and 5.4% of gross earned premiums in 1998, 1997 and 1996,
respectively. Reinsurance recoverable on unpaid losses amounted to $245,609,000
and $87,665,000 in 1998 and 1997, respectively, or 24.6% and 14.3% of gross
reserves for unpaid losses and loss adjustment expenses in 1998 and 1997,
respectively. The increase in 1998 insurance premiums ceded and reinsurance
recoverable on unpaid losses is due to the RISCORP Acquisition. Each insurance
subsidiary maintains separate reinsurance arrangements, which were as follows
during 1998:
Zenith Insurance -- Workers' Compensation reinsurance covered all claims
between $550,000 and $100,000,000 per occurrence. The coverage from $550,000 to
$5,000,000 is placed with General Reinsurance Corporation, the coverage from
$5,000,000 to $10,000,000 with Employers Reinsurance Corporation and the
remaining three layers from $10,000,000 to $60,000,000 primarily with NAC
Reinsurance Corporation, Transatlantic Reinsurance Company, Zurich Reinsurance
and the London reinsurance market (primarily Lloyd's syndicates and certain
United Kingdom reinsurance companies). Catastrophe reinsurance covers an
additional $40,000,000 in excess of $60,000,000 and is placed with UNUM Life
Insurance Company, ReliaStar Life Insurance Company and Connecticut General
Life. Effective April 1, 1998, Zenith entered into a 20% quota-share reinsurance
agreement with American Re-Insurance covering Florida workers' compensation
business. This arrangement has been terminated effective March 31, 1999.
Catastrophe reinsurance covers losses of approximately $17,500,000 in excess
of approximately $1,700,000 arising out of certain assumed reinsurance treaties
for non-United States catastrophes. All of such catastrophe reinsurance is
placed with Renaissance Reinsurance Company Limited. Zenith's exposure to losses
from assumed reinsurance is limited by the terms upon which it is written to a
maximum probable loss from any one event of approximately 5% of Zenith's
consolidated stockholders' equity.
In connection with the RISCORP Acquisition, Zenith Insurance entered into an
aggregate excess of loss reinsurance agreement with Inter-Ocean Reinsurance
Company, Ltd. which provides ceded reinsurance for unpaid loss and allocated
loss adjustment expenses assumed by Zenith from RISCORP at April 1, 1998 up to
$50,000,000 in excess of $182,000,000. A cut-through endorsement between
Inter-Ocean Reinsurance Company and American Re-Insurance Company provides for
Zenith to recover such reinsurance from American Re-Insurance Company in the
event of the insolvency of Inter-Ocean Reinsurance Company.
Also, in connection with the RISCORP Acquisition, Zenith Insurance acquired
approximately $244,304,000 of reinsurance recoverables from principally quota
share arrangements entered into
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<PAGE>
by RISCORP. The principal reinsurers from which such amounts are recoverable
are: American Re-Insurance Company, Chartwell Reinsurance Company, Continental
Casualty Co., Swiss Re-Insurance Company, Trenwick Reinsurance Company and TIG
Reinsurance Company.
Prior to Zenith's acquisition of AGC-SIF, AGC-SIF purchased aggregate excess
and specific excess reinsurance for protection against losses in excess of
stated retentions in each year of coverage. Beginning in 1997, reinsurance for
business written in Florida was combined with Zenith's existing reinsurance
arrangements.
CalFarm Insurance -- For personal and commercial property lines of business,
reinsurance is maintained for claims in excess of $350,000 up to $4,000,000 per
occurrence. On liability coverages for personal and commercial lines,
reinsurance covers losses up to $5,000,000 per occurrence, subject to a
retention of $500,000. This reinsurance coverage is all placed with General
Reinsurance Corporation. CalFarm Insurance has property catastrophe reinsurance
that provides for recovery of 95% of $105,000,000, excess of a retention of
$5,000,000, for which the principal reinsurers are Centre Cat Ltd. and
Renaissance Reinsurance Company. CalFarm Insurance also maintains reinsurance
agreements with Employers Reinsurance Corporation and Duncanson & Holt for
excess risks on its accident and health contracts. Employers Reinsurance
Corporation provides coverage for CalFarm's Farm Bureau health insurance program
for aggregate losses in excess of $2,000,000 on those individual health policy
claims that exceed $120,000 for each insured in each calendar year. Effective
January 1, 1999, Employers Reinsurance Corporation will provide coverage on
those individual health policy claims that exceed $100,000 for each insured in
each calendar year without any aggregate retention. Duncanson & Holt provides
coverage on other group health policy claims that exceed $100,000 in each
calendar year.
CalFarm Insurance participates in a quota share contract whereby it retains
20% of the first $1,000,000 on umbrella risks (comprehensive coverage in excess
of primary policy limits) underwritten, with the remainder of up to $10,000,000
for commercial lines and up to $5,000,000 for personal lines ceded to General
Reinsurance Corporation. Facultative reinsurance is placed on property coverage
in excess of $4,000,000 on all property lines, and on umbrella limits in excess
of $10,000,000 for commercial lines and $5,000,000 for personal lines.
Facultative reinsurance is used on fewer than 1% of CalFarm Insurance's
policies. Facultative coverage is placed primarily with General Reinsurance
Corporation. Other companies used are Employers Reinsurance Corporation,
American Reinsurance Company and other reinsurers.
Pooling Agreement -- The P&C Companies are parties to a pooling agreement.
Under the pooling agreement, the results of underwriting operations are ceded
(the risks are transferred) to Zenith Insurance and are then reapportioned, or
retro-ceded (the risks are transferred back), to those four companies in the
following proportions: Zenith Insurance, 79.5%; CalFarm Insurance, 18%; ZNAT
Insurance, 2%; and Zenith Star, 0.5%. Transactions pursuant to the pooling
agreement are eliminated on consolidation and have no impact on Zenith's
consolidated financial statements. Effective with the close of the proposed sale
of CalFarm Insurance, CalFarm Insurance will cease to participate in the pooling
agreement and will participate in a transaction with the remaining pool members
to restore its pre-pooling insurance assets and liabilities. Zenith Insurance
will retain 97.5% of the pool after CalFarm ceases to participate.
MARKETING AND STAFF
The Workers' Compensation business of Zenith Insurance, ZNAT Insurance and
Zenith Star is produced by approximately 2,200 independent licensed insurance
agents and brokers throughout California, Texas, Florida and other areas in
which Zenith conducts its Workers' Compensation operations. Certain CalFarm
Insurance agents referred to below also sell workers' compensation policies.
Zenith Insurance's assumed reinsurance premiums are generated nationally by
brokers and reinsurance intermediaries.
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<PAGE>
CalFarm Insurance maintains a sales force of approximately 140 agents who
primarily sell insurance products for CalFarm Insurance, principally in rural
and suburban areas of California. In addition, approximately 200 independent
agents market CalFarm Insurance products and approximately 1,900 independent
agents market the CalFarm Insurance health insurance products.
Applications for insurance submitted by all agents and brokers are evaluated
by professional underwriters based upon numerous factors, including underwriting
criteria and standards, geographic areas of underwriting concentration,
actuarial judgments of rate adequacy, economic considerations, and review of
known data on the particular risk. Zenith's insurance subsidiaries, as opposed
to their agents and brokers, retain authority over underwriting, claims
processing, safety engineering and auditing.
CALIFORNIA FARM BUREAU FEDERATION
The Farm Bureau was formed to provide its members with a variety of
agriculture-related services, including property and casualty and health
insurance. The Farm Bureau is California's largest general farm organization,
and represents more than 78,000 member families in 58 counties. The Farm Bureau
continues to work actively to encourage its membership to place their insurance
with CalFarm Insurance. Farm Bureau membership is a prerequisite to the purchase
of farmowners, automobile and health insurance from CalFarm Insurance. Of the
estimated 78,000 member families, approximately 62% are insured by CalFarm
Insurance. The business of CalFarm Insurance is closely tied to the California
farm economy. However, approximately 48% of Farm Bureau members (and CalFarm
Insurance insureds) are non-farmers, and approximately 64% of CalFarm Insurance
premium volume is generated by non-farm business. Total written premium in
CalFarm Insurance attributable to sales that were sponsored by the Farm Bureau
constituted 29%, 31%, and 31% of Zenith's total written premium for the years
1998, 1997 and 1996, respectively. The agreement of CalFarm Insurance with the
Farm Bureau, which is subject to cancellation by either party on six months'
notice, requires CalFarm Insurance to make annual payments to the Farm Bureau of
$240,000 plus 2% of the gross written premium under the Farm Bureau group health
insurance program. Pursuant to such provisions, total payments by CalFarm
Insurance to the Farm Bureau were approximately $1 million in each of 1998, 1997
and 1996.
CalFarm Insurance continues to be the largest writer of farmowners policies
in the state and benefits from its sponsorship by the Farm Bureau. Such benefit
is derived from the use of the CalFarm Insurance name and the Farm Bureau
membership lists. Further, CalFarm Insurance's ability to sell products to Farm
Bureau members is enhanced by the Farm Bureau relationship. The Farm Bureau
benefits since Farm Bureau membership is required to obtain automobile insurance
at discounted rates, farmowners and health insurance policies from CalFarm
Insurance, which generates membership and revenues for the Farm Bureau. If the
relationship between CalFarm Insurance and the Farm Bureau were terminated,
Zenith believes that it could retain a significant amount of the business it
currently has with Farm Bureau members because of the quality and tailored
features of the products it offers in what it regards as its "niche market" and
the long-term relationships established between its agents and these
policyholders. In the event of such termination, however, Zenith expects that
there would be an increased risk of nonrenewal of existing insurance coverage as
well as a possible adverse effect on new policy revenues, but it cannot estimate
the financial impact of any such termination. Zenith anticipates the
continuation of a close working relationship with the Farm Bureau and the
promotion among its membership of the purchase of insurance products from
CalFarm Insurance as an attractive feature of Farm Bureau membership.
COMPETITION
Competition in the insurance business is based upon price, product design
and quality of service. The insurance industry is highly competitive, and
competition is particularly intense in the
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California workers' compensation market which was deregulated with respect to
prices in 1995. Zenith's insurance subsidiaries compete not only with other
stock companies, but with mutual companies and other underwriting organizations
such as the State Compensation Insurance Fund. Competition also exists with
self-insurance and captive insurers. Over the years there has been increased
competition from direct-writing companies and, in the property and casualty
field, from affiliates of large life insurance companies. Many companies in
competition with Zenith's subsidiaries have been in business for a much longer
time, have a larger volume of business, are more widely known, and/or possess
substantially greater financial resources.
REGULATION
STATE DEPARTMENTS OF INSURANCE
Insurance companies are primarily subject to regulation and supervision by
the Department of Insurance in the state in which they are domiciled and, to a
lesser extent, other states in which they conduct business. Zenith's insurance
subsidiaries are primarily subject to regulation and supervision by the
Department of Insurance, except for Zenith Star, which is primarily subject to
regulation and supervision in the state of Texas. These states have broad
regulatory, supervisory and administrative powers. Such powers relate to, among
other things, the grant and revocation of licenses to transact business; the
licensing of agents; the standards of solvency to be met and maintained; the
nature of and limitations on investments; approval of policy forms and rates;
periodic examination of the affairs of insurance companies; and the form and
content of required financial statements.
In California, Zenith Insurance, CalFarm Insurance and ZNAT Insurance are
required, with respect to their workers' compensation line of business, to
maintain on deposit investments meeting specified standards that have an
aggregate market value equal to the companies' loss reserves. For this purpose,
loss reserves are defined as the current estimate of reported and unreported
claims net of reinsurance, plus a statutory formula reserve based on a minimum
of 65% of earned premiums for the latest three years. Zenith Insurance and ZNAT
Insurance are subject to similar deposit requirements in certain other states
based on those states' retaliatory statutes.
Detailed annual and quarterly reports must be filed by Zenith's insurance
subsidiaries with the California Department of Insurance and with the insurance
departments of the other states in which they are licensed to transact business,
and their businesses and accounts are subject to periodic examination by such
agencies, usually at three year intervals. Zenith Insurance, CalFarm Insurance
and ZNAT Insurance were examined by the Department of Insurance as of December
31, 1996, and the Report of Examination contained no material findings. Zenith
Star was examined by the Texas Department of Insurance as of December 31, 1996,
and the Report of Examination contained no material findings.
THE NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS
The National Association of Insurance Commissioners ("NAIC") is a group
formed by state Insurance Commissioners to discuss issues and formulate policy
with respect to regulation, reporting and accounting of insurance companies.
Although the NAIC has no legislative authority and insurance companies are at
all times subject to the laws of their respective domiciliary states and, to a
lesser extent, other states in which they conduct business, the NAIC is
influential in determining the form in which such laws are enacted. In
particular, Model Insurance Laws, Regulations and Guidelines (the "Model Laws")
have been promulgated by the NAIC as a minimum standard by which state
regulatory systems and regulations are measured. Adoption of state laws which
provide for substantially similar regulations to those described in the Model
Laws is a requirement for accreditation by the NAIC.
Under NAIC model regulations, insurers are required to maintain minimum
levels of capital based on their investments and operations, known as "risk
based capital" ("RBC") requirements.
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The computation of the RBC ratio for 1998 has not yet been completed due to the
pending restatement of the P & C Companies' previously filed statutory basis
financial statements following the determination of the RISCORP purchase price
on March 19, 1999. However, the 1998 RBC ratio is expected to be significantly
above the RBC control, or required, level of capital under the regulations.
The NAIC Insurance Regulatory Information System ("IRIS") key financial
ratios (11 ratios for property and casualty companies), developed to assist
insurance departments in overseeing the financial condition of insurance
companies, are reviewed by experienced financial examiners of the NAIC to select
those companies that merit highest priority in the allocation of the regulators'
resources. The 1998 IRIS results for the P&C Companies showed no results outside
the "normal" range for such ratios, as such range is determined by the NAIC.
In 1998, the NAIC adopted the Codification of Statutory Accounting
Principles guidance (the "Codification"), which will replace the current
Accounting Practices and Procedures manual as the NAIC's primary guidance on
statutory accounting (statutory accounting is a comprehensive basis of
accounting based on prescribed accounting practices, which include state laws,
regulations and general administrative rules, as well as a variety of
publications of the NAIC). The NAIC is now considering amendments to the
Codification that would also be effective upon implementation. The NAIC has
recommended an effective date of January 1, 2001. The Codification provides
guidance for areas where statutory accounting has been silent and changes
current statutory accounting in some areas.
It is not known whether the state of California Department of Insurance will
adopt the Codification, and whether the state of California Department of
Insurance will make any changes to that guidance. Implementation of the
Codification may affect the surplus level and capitalization requirements of
Zenith's insurance subsidiaries on a statutory basis. Zenith has not determined
the potential impact of the Codification.
INSURANCE HOLDING COMPANY SYSTEM REGULATORY ACT
Zenith's insurance subsidiaries are subject to the California and Texas
Insurance Holding Company System Regulatory Acts ("Holding Company Acts"), which
contain certain reporting requirements, including the requirement that such
subsidiaries file information relating to capital structure, ownership,
financial condition and general business operation. The Holding Company Acts
also limit dividend payments and material transactions by Zenith's insurance
subsidiaries. See Management's Discussion and Analysis of Consolidated Financial
Condition and Result of Operations -- Liquidity and Capital Resources on pages
39-40 of Zenith's 1998 Annual Report to Stockholders, which discussion is hereby
incorporated by reference.
OTHER REGULATION
Property and casualty insurance coverage is subject to certain regulation as
described herein under "Description of Business -- Other Property-Casualty," and
Zenith's Other Property-Casualty rates are subject to prior approval by the
Department of Insurance. The provisions of Proposition 103 do not apply to
Workers' Compensation, Health insurance or Reinsurance, which combined to
account for 68% of Zenith's property-casualty earned premiums in 1998.
ITEM 2. PROPERTIES.
Zenith Insurance owns a 120,000 square foot office facility in Woodland
Hills, California which is the corporate home office of Zenith, Zenith Insurance
and ZNAT Insurance. In addition, Zenith Insurance owns a 176,000 square foot
branch office facility in Sarasota, Florida.
18
<PAGE>
CalFarm Insurance owns its home office building consisting of 133,000 square
feet (and surrounding property of approximately 4 acres) in Sacramento,
California.
In addition, Zenith Insurance and CalFarm Insurance, in the regular conduct
of their business, lease offices in various cities. See Notes to Consolidated
Financial Statements -- Note 9 -- "Commitments and Contingent Liabilities" on
page 62 of Zenith's 1998 Annual Report to Stockholders, which note is hereby
incorporated by reference.
Zenith considers its owned and leased facilities to be adequate for the
needs of the organization.
ITEM 3. LEGAL PROCEEDINGS.
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 acquisition of
RISCORP, 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.
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 ultimate liability, if any, will not
have a material adverse effect on the consolidated financial condition or
results of operations of Zenith.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
19
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Zenith's Common Stock, par value $1.00 per share, is traded on the New York
Stock Exchange under the symbol ZNT. The table below sets forth the high and low
sales prices of the Common Stock for each quarterly period during the last two
fiscal years.
<TABLE>
<CAPTION>
QUARTER 1998 1997
- ------------------------------------------------------------ ------- -------
<S> <C> <C>
First
High...................................................... 29 1/16 27 7/8
Low....................................................... 24 1/2 25 7/8
Second
High...................................................... 30 1/2 27 1/2
Low....................................................... 28 24 5/8
Third
High...................................................... 28 1/2 28 5/8
Low....................................................... 23 9/16 26 5/16
Fourth
High...................................................... 25 7/8 28 3/4
Low....................................................... 22 7/8 25 7/16
</TABLE>
As of March 8, 1999, there were 326 registered holders of record of Zenith
Common Stock.
The table below sets forth information with respect to the amount and
frequency of dividends declared on Zenith Common Stock. Based upon Zenith's
financial condition, it is currently expected that cash dividends will continue
to be paid in the future.
<TABLE>
<CAPTION>
DATE OF DECLARATION TYPE AND AMOUNT OF RECORD DATE FOR
BY ZENITH BOARD DIVIDEND PAYMENT PAYMENT DATE
- ------------------------------------ ----------------------- --------------------- ------------------------
<S> <C> <C> <C>
February 25, 1999................... $.25 cash per share April 30, 1999 May 14, 1999
December 8, 1998.................... $.25 cash per share January 29, 1999 February 12, 1999
September 28, 1998.................. $.25 cash per share October 30, 1998 November 13, 1998
May 20, 1998........................ $.25 cash per share July 31, 1998 August 15, 1998
February 24, 1998................... $.25 cash per share April 30, 1998 May 15, 1998
December 11, 1997................... $.25 cash per share January 30, 1998 February 13, 1998
September 4, 1997................... $.25 cash per share October 31, 1997 November 14, 1997
May 15, 1997........................ $.25 cash per share July 31, 1997 August 15, 1997
February 27, 1997................... $.25 cash per share April 30, 1997 May 15, 1997
</TABLE>
The Holding Company Acts limit the ability of Zenith Insurance to pay
dividends to Zenith, and of CalFarm Insurance, ZNAT Insurance and Zenith Star to
pay dividends to Zenith Insurance, by providing that the appropriate insurance
regulatory authorities in the states of California and Texas must approve any
dividend that, together with all other such dividends paid during the preceding
twelve months, exceeds the greater of: (a) 10% of the paying company's statutory
surplus as regards policyholders at the preceding December 31; or (b) 100% of
the net income for the preceding year. In addition, any such dividend must be
paid from policyholders' surplus attributable to accumulated earnings. During
1998, Zenith Insurance paid no dividends to Zenith. During 1999, Zenith
Insurance will be able to pay $32,975,000 in dividends to Zenith without prior
approval, of which $30,000,000 was paid on March 12, 1999. In 1999, CalFarm
Insurance, ZNAT Insurance and Zenith Star, together, will be able to pay
$9,374,000 in dividends to Zenith Insurance without prior approval.
20
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
The Five-Year Summary of Selected Financial Information, included in
Zenith's 1998 Annual Report to Stockholders on pages 44-45, is hereby
incorporated by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
Management's Discussion and Analysis of Consolidated Financial Condition and
Results of Operations, included in Zenith's 1998 Annual Report to Stockholders
on pages 30-43 is hereby incorporated by reference.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The "Market Risk of Financial Instruments" section of the Management's
Discussion and Analysis of Consolidated Financial Condition and Results of
Operations included in Zenith's 1998 Annual Report to Stockholders on pages
38-39 is hereby incorporated by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Reference is made to the "Property-Casualty Loss Development" data on pages
46-47 of Zenith's 1998 Annual Report to Stockholders for information setting
forth the loss and loss adjustment expense liability development for 1988
through 1998 and to the consolidated financial statements and notes thereto on
pages 48-70 of Zenith's 1998 Annual Report to Stockholders, which are hereby
incorporated by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
21
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information set forth under the captions "Section 16(a) Beneficial
Ownership Reporting Compliance" and "Election of Directors" in the Proxy
Statement distributed to stockholders in connection with Zenith's 1999 Annual
Meeting of Stockholders (the "Proxy Statement") which is to be filed by Zenith
after the date this Report on Form 10-K is filed is hereby incorporated by
reference.
EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
OFFICER
NAME AGE POSITION TERM SINCE
- ----------------- --- ---------------------------------------- ------ --------
<S> <C> <C> <C> <C>
Stanley R. Zax 61 Chairman of the Board and President (1) Annual 1977
Fredricka Taubitz 55 Executive Vice President and Annual 1985
Chief Financial Officer (1)
Jack D. Miller 53 Executive Vice President (2)(3) Annual 1997
James P. Ross 52 Senior Vice President (1) Annual 1978
John J. Tickner 60 Senior Vice President and Secretary (1) Annual 1985
Keith E. Trotman 62 Senior Vice President (2)(4) Annual 1988
Philip R. Hunt 55 Senior Vice President (2)(5) Annual 1988
</TABLE>
- ------------------------
(1) Officer of Zenith and its subsidiaries.
(2) Officer of Zenith's subsidiaries only.
(3) Designated as an executive officer of the registrant on February 24, 1998.
(4) Ceased being an executive officer of the registrant on February 24, 1998.
(5) Ceased being an executive officer of the registrant on April 30, 1998.
Each of the executive officers has occupied an executive position with
Zenith or a subsidiary of Zenith for more than five years, except for Mr. Jack
D. Miller who was previously with Industrial Indemnity Company, a
property-casualty insurance company, serving as the President and Chief
Executive Officer from 1995 to 1997; acting President and Chief Executive
Officer from 1994 to 1995; and in various other positions from 1987 to 1994,
culminating in Executive Vice President and Chief Operating Officer.
There are no family relationships between any of the executive officers, and
there are no arrangements or understandings pursuant to which any of them were
selected as officers.
ITEM 11. EXECUTIVE COMPENSATION.
The information set forth under the headings "Directors' Compensation,"
"Executive Compensation," "Summary Compensation Table," "Option/SAR Grants in
Last Fiscal Year," "Aggregated Option/SAR Exercises in Last Fiscal Year and
Fiscal Year-End Option/SAR Values," "Employment Agreements and Termination of
Employment and Change in Control Arrangements," "Compensation Committee
Interlocks and Insider Participation" and "Board of Directors' Report on
Executive Compensation; Performance Bonus Committee Report on Performance Based
Compensation Plans for Executive Officers" in the Proxy Statement is hereby
incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information set forth under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Proxy Statement is hereby incorporated
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information set forth in footnote 3 to the table set forth under the
caption "Election of Directors" in the Proxy Statement is hereby incorporated by
reference.
22
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Documents filed as part of the report:
1. FINANCIAL STATEMENTS:
Report of Independent Accountants
Financial Statements and notes thereto incorporated by reference from
Zenith's 1998 Annual Report to Stockholders in Item 8 of Part II
above:
Consolidated Financial Statements of Zenith National Insurance Corp.
and Subsidiaries:
Consolidated Balance Sheet as of December 31, 1998 and 1997
Consolidated Statement of Operations for the years ended
December 31, 1998, 1997 and 1996
Consolidated Statement of Cash Flows for the years ended
December 31, 1998, 1997 and 1996
Consolidated Statement of Stockholders' Equity for the years
ended December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
2.FINANCIAL STATEMENT SCHEDULES:
Report of Independent Accountants on Financial Statement Schedules
Zenith National Insurance Corp. and Subsidiaries:
As of December 31, 1998:
I --Summary of Investments -- Other Than Investments in
Related Parties
For the years ended December 31, 1998, 1997 and 1996:
III --Supplementary Insurance Information
IV--Reinsurance
Zenith National Insurance Corp.:
As of December 31, 1998 and 1997 and for the years ended December
31, 1998, 1997 and 1996:
II --Condensed Financial Information of Registrant
The information on Property-Casualty Loss Development is on pages
46-47 of Zenith's 1998 Annual Report to Stockholders.
Schedules other than those listed above are omitted since they are
not applicable, not required or the information required to be set
forth therein is included in the consolidated financial statements or
in the notes thereto.
23
<PAGE>
3. EXHIBITS
The Exhibits listed below are filed in a separate Exhibit Volume to this
Report.
<TABLE>
<S> <C> <C>
2.1 Amended and Restated Agreement and Plan of Merger by and among Zenith AGC Acquisition
Insurance Company, Zenith Insurance Company, Zenith National Insurance Corp., Associated
General Commerce Self-Insurers' Trust Fund and AGC Risk Management Group Inc. dated as
of October 7, 1996. (Incorporated herein by reference to Exhibit 2.1 to Zenith's Annual
Report on Form 10-K for the year ended December 31, 1996.)
2.2 Stock Acquisition Agreement, dated as of September 19, 1995, between Anchor National
Life Insurance Company and Zenith National Insurance Corp. (Incorporated herein by
reference to Exhibit 2.1 to Zenith's Report on Form 8-K dated October 6, 1995.)
2.3 Amendment No. 1 to Stock Acquisition Agreement dated as of December 27, 1995, by and
among Anchor National Life Insurance Company, SunAmerica Life Insurance Company and
Zenith National Insurance Corp. (Incorporated herein by reference to Exhibit 2.1 to
Zenith's Report on Form 8-K dated January 9, 1996.)
3.1 Certificate of Incorporation of Zenith as in effect immediately prior to November 22,
1985. (Incorporated herein by reference to Exhibit 3 to Zenith's Amendment on Form 8,
date of amendment October 10, 1985, to Zenith's Current Report on Form 8-K, date of
report July 26, 1985.) Certificate of Amendment to Certificate of Incorporation of
Zenith, effective November 22, 1985. (Incorporated herein by reference to Zenith's
Current Report on Form 8-K, date of report November 22, 1985.)
3.2 By-Laws of Zenith, as currently in effect. (Incorporated herein by reference to Exhibit
3.2 to Zenith's Annual Report on Form 10-K for the year ended December 31, 1988.)
4.1 Indenture dated as of May 1, 1992 entered into between Zenith and Norwest Bank
Minnesota, National Association, as trustee, pursuant to which Zenith issued its 9%
Senior Notes due May 1, 2002. (Incorporated herein by reference to Exhibit 4 to Zenith's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1992.)
4.2 Indenture, dated July 30, 1998, between Zenith National Insurance Corp. and Norwest Bank
Minnesota, National Association. (Incorporated herein by reference to Exhibit 10.6 to
Zenith's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998.)
10.1 Purchase Agreement, dated as of February 4, 1981, among Reliance Insurance Company,
Zenith, the Selling Stockholders referred to therein, and Eugene V. Klein, Daniel
Schwartz and Harvey L. Silbert as agents for the Selling Stockholders. (Incorporated
herein by reference to the exhibit to the Schedule 13D filed by Reliance Financial
Services Corporation on March 9, 1981 with respect to the common stock of Zenith.)
10.2 Asset and Liability Assumption Agreement, dated as of June 4, 1985, between Zenith
Insurance and the Insurance Commissioner of the State of California (the
"Commissioner"). (Incorporated herein by reference to Exhibit 1 to Zenith's Current
Report on Form 8-K, date of report July 26, 1985.)
10.3 Memorandum and Agreement of Closing dated as of July 26, 1985, among Zenith Insurance,
Zenith and the Commissioner (Incorporated herein by
</TABLE>
24
<PAGE>
<TABLE>
<S> <C> <C>
reference to Exhibit 10.6 to Zenith's Annual Report on Form 10-K for the year ended
December 31, 1985), together with the following exhibits:
(a) Exhibit A -- Grant Deed, dated July 25, 1985, by the Commissioner in favor of Zenith
Insurance. (Incorporated herein by reference to Exhibit 10.6 to Zenith's Annual
Report on Form 10-K for the year ended December 31, 1985.)
(b) Exhibit B -- Bill of Sale, dated as of July 26, 1985, by the Commissioner in favor
of Zenith Insurance. (Incorporated herein by reference to Exhibit 10.6 to Zenith's
Annual Report on Form 10-K for the year ended December 31, 1985.)
(c) Exhibit C -- Assignment of Assets and Assumption of Liabilities, dated as of July
26, 1985, between the Commissioner and Zenith Insurance. (Incorporated herein by
reference to Exhibit 10.6 to Zenith's Annual Report on Form 10-K for the year ended
December 31, 1985.)
(d) Exhibit D -- Noncompetition Agreement, dated as of July 26, 1985, between the
Commissioner and Zenith Insurance. (Incorporated herein by reference to Exhibit 28.3
to Zenith's Current Report on Form 8-K, date of report July 26, 1985.)
(e) Exhibit E -- First Assignment Separate from Certificate, dated July 26, 1985, by the
Commissioner in favor of Zenith. (Incorporated herein by reference to Exhibit 10.6
to Zenith's Annual Report on Form 10-K for the year ended December 31, 1985.)
(f) Exhibit F -- Engagement and Reimbursement Agreement, dated as of July 26, 1985,
between Zenith Insurance and the Commissioner. (Incorporated herein by reference to
Exhibit 28.2 to Zenith's Current Report on Form 8-K, date of report July 26, 1985.)
10.4 Asset Purchase Agreement, dated as of June 17, 1997, by and among Zenith Insurance
Company and RISCORP, Inc., RISCORP Management Services, Inc., RISCORP of Illinois, Inc.,
Independent Association Administrators Incorporated, RISCORP Insurance Services, Inc.,
RISCORP Managed Care Services, Inc., CompSource, Inc., RISCORP Real Estate Holdings,
Inc., RISCORP Acquisition, Inc., RISCORP West, Inc., RISCORP of Florida, Inc., RISCORP
Insurance Company, RISCORP Property & Casualty Insurance Company, RISCORP National
Insurance Company, RISCORP Services, Inc., RISCORP Staffing Solutions Holding, Inc.,
RISCORP Staffing Solutions, Inc. I and RISCORP Staffing Solutions, Inc. II.
(Incorporated herein by reference to Exhibit 10.1 to Zenith's Current Report on Form
8-K/A, date of report June 17, 1997.)
10.5 First Amendment, entered into June 26, 1997, to the Asset Purchase Agreement dated as of
June 17, 1997, by and among Zenith Insurance Company and RISCORP, Inc., RISCORP
Management Services, Inc., RISCORP of Illinois, Inc., Independent Association
Administrators Incorporated, RiSCORP Insurance Services, Inc., RISCORP Managed Care
Services, Inc., CompSource, Inc., RISCORP Real Estate Holdings, Inc., RISCORP
Acquisition, Inc., RISCORP West, Inc., RISCORP of Florida, Inc., RISCORP Insurance
Company, RISCORP Property & Casualty Insurance Company, RISCORP National Insurance
Company, RISCORP Services, Inc., RISCORP Staffing Solutions Holding, Inc., RISCORP
Staffing Solutions, Inc. I and RISCORP Staffing Solutions, Inc. II. (Incorporated herein
by reference to Exhibit 10.2 to Zenith's Current Report on Form 8-K, date of report
April 1, 1998.)
</TABLE>
25
<PAGE>
<TABLE>
<S> <C> <C>
10.6 Second Amendment, entered into July 11, 1997, to the Asset Purchase Agreement dated as
of June 17, 1997, by and among Zenith Insurance Company and RISCORP, Inc., RISCORP
Management Services, Inc., RISCORP of Illinois, Inc., Independent Association
Administrators Incorporated, RISCORP Insurance Services, Inc., RISCORP Managed Care
Services, Inc., CompSource, Inc., RISCORP Real Estate Holdings, Inc., RISCORP
Acquisition, Inc., RISCORP West, Inc., RISCORP of Florida, Inc., RISCORP Insurance
Company, RISCORP Property & Casualty Insurance Company, RISCORP National Insurance
Company, RISCORP Services, Inc., RISCORP Staffing Solutions Holding, Inc., RISCORP
Staffing Solutions, Inc. I and RISCORP Staffing Solutions, Inc. II. (Incorporated herein
by reference to Exhibit 10.3 to Zenith's Current Report on Form 8-K, date of report
April 1, 1998.)
10.7 Amendment No. 3 entered into March 30, 1998, to the Asset Purchase Agreement dated as of
June 17, 1997, by and among Zenith Insurance Company and RISCORP, Inc., RISCORP
Management Services, Inc., 1390 Main Street Services, Inc., RISCORP of Illinois, Inc.,
Independent Association Administrators Incorporated, RISCORP Insurance Services, Inc.,
RISCORP Managed Care Services, Inc., CompSource, Inc., RISCORP Real Estate Holdings,
Inc., RISCORP Acquisition, Inc., RISCORP West, Inc., RISCORP of Florida, Inc., RISCORP
Insurance Company, RISCORP Property & Casualty Insurance Company, RISCORP National
Insurance Company, RISCORP Services, Inc., RISCORP Staffing Solutions Holding Company,
RISCORP Staffing Solutions, Inc. I and RISCORP Staffing Solutions, Inc. II.
(Incorporated herein by reference to Exhibit 10.4 to Zenith's Current Report on Form
8-K, date of report April 1, 1998.)
10.8 Assumption and Indemnity Reinsurance Agreement, dated as of April 1, 1998, by and
between Zenith Insurance Company and RISCORP National Insurance Company. (Incorporated
herein by reference to Exhibit 10.5 to Zenith's Current Report on Form 8-K, date of
report April 1, 1998.)
10.9 Assumption and Indemnity Reinsurance Agreement, dated as of April 1, 1998, by and
between Zenith Insurance Company and RISCORP Insurance Company. (Incorporated herein by
reference to Exhibit 10.6 to Zenith's Current Report on Form 8-K, date of report April
1, 1998.)
10.10 Assumption and Indemnity Reinsurance Agreement, dated as of April 1, 1998, by and
between Zenith Insurance Company and RISCORP Property & Casualty Insurance Company.
(Incorporated herein by reference to Exhibit 10.7 to Zenith's Current Report on Form
8-K, date of report April 1, 1998.)
10.11 Stock Purchase Agreement, dated as of February 22, 1999, between Zenith Insurance
Company and Nationwide Mutual Insurance Company. (Incorporated herein by reference to
Zenith's Current Report on Form 8-K, date of report March 9, 1999.)
*10.12 Zenith's Non-Qualified Stock Option Plan, as in effect immediately prior to December 6,
1985. (Incorporated herein by reference to Zenith's Registration Statement on Form S-8
(SEC File No. 2-97962).)
*10.13 Zenith's Amended and Restated Non-Qualified Stock Option Plan, adopted by Zenith's Board
of Directors on December 6, 1985. (Incorporated herein by reference to Zenith's
Registration Statement on Form S-8
(SEC File No. 33-8948).)
*10.14 Amendment No. 2 to the Zenith National Insurance Corp. Amended and Restated
Non-Qualified Stock Option Plan, dated as of April 9, 1996.
</TABLE>
26
<PAGE>
<TABLE>
<S> <C> <C>
(Incorporated herein by reference to Exhibit 10.4 to Zenith's Quarterly Report on Form
10-Q for the quarter ended June 30, 1996.)
*10.15 Zenith National Insurance Corp. 1996 Employee Stock Option Plan, approved by the
Stockholders on May 22, 1996. (Incorporated herein by reference to Exhibit 10.5 to
Zenith's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996.)
*10.16 Employment Agreement, dated December 11, 1997, between Zenith and Fredricka
Taubitz.(Incorporated herein by reference to Exhibit 10.8 to Zenith's Annual Report on
Form 10-K for the year ended December 31, 1997.)
*10.17 Employment Agreement, dated January 5, 1998, between Zenith and John J.
Tickner.(Incorporated herein by reference to Exhibit 10.9 to Zenith's Annual Report on
Form 10-K for the year ended December 31, 1997.)
*10.18 Employment Agreement, dated December 11, 1997, between Zenith and Stanley R. Zax.
(Incorporated herein by reference to Exhibit 10.10 to Zenith's Annual Report on Form
10-K for the year ended December 31, 1997.)
*10.19 Employment Agreement, dated October 20, 1997, between Zenith and Jack D. Miller.
(Incorporated herein by reference to Exhibit 10.1 to Zenith Quarterly Report on Form
10-Q for the quarter ended June 30, 1998.)
*10.20 Stock Option Agreement, dated as of March 15, 1996, between Zenith and Stanley R. Zax.
(Incorporated herein by reference to Exhibit 10.3 to Zenith's Quarterly Report on Form
10-Q for the quarter ended June 30, 1996.)
*10.21 Zenith National Insurance Corp. Executive Officer Bonus Plan, dated as of March 21,
1994. (Incorporated herein by reference to Exhibit 10.12 to Zenith's Annual Report on
Form 10-K for the year ended December 31, 1996.)
10.22 Agreement of Reinsurance No. 7276 between CalFarm Insurance Company and General
Reinsurance Corporation, dated as of February 5, 1988. (Incorporated herein by reference
to Exhibit 10.15 to Zenith's Annual Report on Form 10-K for the year ended December 31,
1991.)
10.23 Agreement of Reinsurance No. B226 between CalFarm Insurance Company and General
Reinsurance Corporation, dated as of January 13, 1988. (Incorporated herein by reference
to Exhibit 10.16 to Zenith's Annual Report on Form 10-K for the year ended December 31,
1991.)
10.24 Agreement of Reinsurance No. B197-A between CalFarm Insurance Company and General
Reinsurance Corporation, dated as of January 13, 1988. (Incorporated herein by reference
to Exhibit 10.17 to Zenith's Annual Report on Form 10-K for the year ended December 31,
1991.)
10.25 Agreement of Reinsurance No. B196-A between CalFarm Insurance Company and General
Reinsurance Corporation, dated as of January 13, 1988. (Incorporated herein by reference
to Exhibit 10.18 to Zenith's Annual Report on Form 10-K for the year ended December 31,
1991.)
10.26 Life, Disability and Accidental Death Facultive Reinsurance Agreement between CalFarm
Insurance Company and Occidental Life Insurance Company of California, effective April
1, 1971. (Incorporated herein by reference to Exhibit 10.21 to Zenith's Annual Report on
Form 10-K for the year ended December 31, 1991.)
10.27 Agreement of Reinsurance No. 420 among General Reinsurance Corporation, American
Reinsurance Company, Cat Limited, Renaissance Reinsurance Company and Vesta Fire
Insurance Company and CalFarm Insurance, Zenith Insurance and ZNAT Insurance, effective
September 1, 1996. (Incorporated herein by reference to Exhibit 10.23 to Zenith's Annual
Report on Form 10-K for the year ended December 31, 1996.)
</TABLE>
27
<PAGE>
<TABLE>
<S> <C> <C>
10.28 Aggregate Excess of Loss Reinsurance Agreement between Associated General Contractors
Self Insurers Trust Fund and Reliance Insurance Company effective December 31, 1991.
(Incorporated herein by reference to Exhibit 10.24 to Zenith's Annual Report on Form
10-K for the year ended December 31, 1996.)
10.29 Specific Excess Workers' Compensation and Employers' Liability Policy between Planet
Insurance Company (now Reliance National Indemnity Company) and Associated General
Contractors of Florida Self Insurance Fund effective January 1, 1993. (Incorporated
herein by reference to Exhibit 10.25 to Zenith's Annual Report on Form 10-K for the year
ended December 31, 1996.)
10.30 Interim Reinsurance Agreement by and among Zenith Insurance Company, RISCORP Insurance
Company and RISCORP Property & Casualty Insurance Company dated as June 18, 1997,
together with (1) related Trust Agreement by and among RISCORP Insurance Company, as
guarantor, Zenith Insurance Company, as beneficiary, and First Union National Bank, as
trustee, dated as of June 18, 1997 (with amendment no. 1 thereto), and (2) related Trust
Agreement by and among RISCORP Property & Casualty Insurance Company, as guarantor,
Zenith Insurance Company, as beneficiary, and First Union National Bank, as trustee,
dated as of June 18, 1997 (with amendment no. 1 thereto.) (Incorported herein by
reference to Exhibit 10.1 to Zenith's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1997.)
10.31 Workers' Compensation Quota Share Reinsurance Agreement, dated October 13, 1998, between
Zenith Insurance Company and American Re-Insurance Company. (Incorporated herein by
reference to Exhibit 10.10 to Zenith's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1998.)
10.32 Aggregate Excess of Loss Reinsurance Agreement, dated August 1, 1998, between Zenith
National Insurance Group and Inter-Ocean Reinsurance Company LTD.
10.33 Special Endorsement to Retrocessional Agreement No. 8DDDR01-C122, dated August 1, 1998,
between American Re-Insurance Company, Inter-Ocean Reinsurance Company and Zenith
Insurance Company, CalFarm Insurance Company, ZNAT Insurance Company and Zenith Star
Insurance Company.
10.34 Trust Agreement, dated December 18, 1998, between Inter-Ocean Reinsurance Company, LTD
and Zenith Insurance Company, CalFarm Insurance Company, ZNAT Insurance Company and
Zenith Star Insurance Company.
10.35 Reinsurance Agreement, dated February 12, 1998, between Zenith Insurance Company and
Renaissance Reinsurance Company Limited.
10.36 Agreement of Reinsurance #8051 between General Reinsurance Corporation and Zenith
Insurance Company, ZNAT Insurance Company, Zenith Star Insurance Company and CalFarm
Insurance Company, dated as of May 22, 1995. (Incorporated herein by reference to
Exhibit 10.13 to Zenith's Annual Report on Form 10-K for the year ended December 31,
1995.)
10.37 Workers' Compensation and Employers' Liability Reinsurance Agreement between Zenith
Insurance Company and Employers Reinsurance Corporation, effective January 1, 1986.
(Incorporated herein by reference to Exhibit 10.14 to Zenith's Annual Report on Form
10-K for the year ended December 31, 1991.)
10.38 Line of Credit Agreement, dated as of December 15, 1994, between Zenith and Sanwa Bank
of California. (Incorporated herein by reference to
</TABLE>
28
<PAGE>
<TABLE>
<S> <C> <C>
Exhibit 10.10 to Zenith's Annual Report on Form 10-K for the year ended December 31,
1994.)
10.39 Amendment dated as of December 28, 1995 to Line of Credit Agreement, dated as of
December 15, 1994, between Zenith and Sanwa Bank of California. (Incorporated herein by
reference to Exhibit 10.1 to Zenith's Annual Report of Form 10-K for the year ended
December 31, 1995.)
10.40 Second Amendment, dated June 28, 1996, to Line of Credit Agreement, dated December 15,
1994 between Zenith and Sanwa Bank California. (Incorporated by reference to Exhibit
10.2 to Zenith's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996.)
10.41 Third Amendment, effective as of January 2, 1998, to Line of Credit Agreement, dated
December 15, 1994 between Zenith and Sanwa Bank California. (Incorporated herein by
reference to Exhibit 10.15 to Zenith's Annual Report on Form 10-K for the year ended
December 31, 1997).
10.42 Fourth Amendment, dated September 15, 1998, to the Line of Credit Agreement, dated
December 15, 1994, between Zenith National Insurance Corp. and Sanwa Bank California.
(Incorporated herein by reference to Exhibit 10.5 to Zenith's Quarterly Report on Form
10-Q for the quarter ended September 30, 1998.)
10.43 Fifth Amendment, dated March 8, 1999, to the Line of Credit Agreement, dated December
15, 1994, between Zenith National Insurance Corp. and Sanwa Bank California.
10.44 Revolving Note dated July 1, 1997, from Zenith National Insurance Corp. to City National
Bank. (Incorporated herein by reference to Exhibit 10.2 to Zenith's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1997.)
10.45 Modification of Note dated October 10, 1997 modifying the original Revolving Note dated
July 1, 1997 between Zenith National Insurance Corp. and City National Bank.
(Incorporated herein by reference to Exhibit 10.5 to Zenith's Quarterly Report on Form
10-Q for the quarter ended September 30, 1997.)
10.46 Loan Revision Agreement, dated June 26, 1998, to the promissory note, dated July 1,
1997, between Zenith National Insurance Corp. and City National Bank. (Incorporated
herein by reference to Exhibit 10.1 to Zenith's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1998.)
10.47 Credit Agreement dated as of July 24, 1997 between Zenith National Insurance Corp. and
Bank of America National Trust and Savings Association, together with Tranche A and
Tranche B Promissory Notes referenced therein. (Incorporated herein by reference to
Exhibit 10.3 to Zenith's Quarterly Report on Form 10-Q for the quarter ended June 30,
1997.)
10.48 Restated Tranche A Note, dated July 23, 1998 between Zenith National Insurance Corp. and
Bank of America National Trust and Savings Association. (Incorporated herein by
reference to Exhibit 10.3 to Zenith's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1998.)
10.49 Amendment No. 1 to Credit Agreement dated January 21, 1998 amending the original Credit
Agreement dated July 24, 1997 between Zenith National Insurance Corp. and Bank of
America. (Incorporated herein by reference to Exhibit 10.31 to Zenith's Annual Report on
Form 10-K for the year ended December 31, 1997).
10.50 Second Amendment, dated July 23, 1998, to the Credit Agreement, dated July 24, 1997,
between Zenith National Insurance Corp. and Bank of America National Trust and Savings
Association. (Incorporated herein by reference to Exhibit 10.2 to Zenith's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1998.)
</TABLE>
29
<PAGE>
<TABLE>
<S> <C> <C>
10.51 Third Amendment, dated August 21, 1998, to the Credit Agreement, dated July 24, 1997,
between Zenith National Insurance Corp. and Bank of America National Trust and Savings
Association. (Incorporated herein by reference to Exhibit 10.4 to Zenith's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1998.)
10.52 Capital Securities Guarantee Agreement, dated July 30, 1998, between Zenith National
Insurance Corp. and Norwest Bank Minnesota, National Association. (Incorporated herein
by reference to Exhibit 10.7 to Zenith's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1998.)
10.53 Amended and Restated Declaration of Trust of Zenith National Insurance Capital Trust I,
dated July 30, 1998, between Zenith National Insurance Corp., the trustees and the
holders. (Incorporated herein by reference to Exhibit 10.8 to Zenith's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1998.)
10.54 Purchase Agreement between Zenith National Insurance Corp., Zenith National Insurance
Capital Trust I, Credit Suisse First Boston Corporation, BancAmerica Robertson Stephens
and Donaldson, Lufkin & Jenrette Securities Corporation, dated July 27, 1998, for
$75,000,000 Zenith National Insurance Capital Trust I 8.55% Capital Securities.
(Incorporated herein by reference to Exhibit 10.9 to Zenith's Quarterly Report on Form
10-Q for the quarter ended September 30, 1998.)
11 Statements re computation of per share earnings. (Incorporated herein by reference to
Notes to Consolidated Financial Statements -- Note 16 -- "Earnings Per Share" on page 68
of Zenith's 1998 Annual Report to Stockholders.)
13 Zenith's Annual Report to Stockholders for the year ended
December 31, 1998, but only to the extent such report is expressly incorporated by
reference herein, and such report is not otherwise to be deemed "filed" as a part of
this Annual Report on Form 10-K.
21 Subsidiaries of Zenith.
23 Consent of PricewaterhouseCoopers LLP, dated March 26, 1999. (Incorporated herein by
reference to page F-1 of this Annual Report on Form 10-K.)
27 Financial Data Schedule for year ended December 31, 1998.
</TABLE>
- ------------------------
*Management contract or compensatory plan or arrangement
(b)REPORTS ON FORM 8-K
The Registrant filed a Current Report on Form 8-K dated February 22, 1999
on March 9, 1999 in connection with the sale by Zenith Insurance Company
of CalFarm Insurance Company to Nationwide Mutual Insurance Company.
30
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on April 9, 1999.
<TABLE>
<S> <C> <C>
ZENITH NATIONAL INSURANCE CORP.
By: /s/ STANLEY R. ZAX
-----------------------------------------
Stanley R. Zax
Chairman of the Board and President
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated, on April 9, 1999.
<TABLE>
<C> <S>
/s/ STANLEY R. ZAX
- --------------------------------------------- Chairman of the Board, President and
Stanley R. Zax Director (Principal Executive Officer)
/s/ GEORGE E. BELLO
- --------------------------------------------- Director
George E. Bello
/s/ MAX M. KAMPELMAN
- --------------------------------------------- Director
Max M. Kampelman
/s/ MICHAEL WM. ZAVIS
- --------------------------------------------- Director
Michael Wm. Zavis
/s/ WILLIAM S. SESSIONS
- --------------------------------------------- Director
William S. Sessions
/s/ HARVEY L. SILBERT
- --------------------------------------------- Director
Harvey L. Silbert
/s/ ROBERT M. STEINBERG
- --------------------------------------------- Director
Robert M. Steinberg
/s/ SAUL P. STEINBERG
- --------------------------------------------- Director
Saul P. Steinberg
/s/ GERALD TSAI, JR.
- --------------------------------------------- Director
Gerald Tsai, Jr.
- --------------------------------------------- Director
Robert J. Miller
/s/ FREDRICKA TAUBITZ Executive Vice President and Chief Financial
- --------------------------------------------- Officer (Principal Financial and Accounting
Fredricka Taubitz Officer)
</TABLE>
31
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements on
Form S-8 (File Nos. 33-8948, 33-22219, 333-04399 and 333-42751) of our report
dated March 26, 1999 on our audits of the consolidated financial statements and
financial statement schedules of Zenith National Insurance Corp. and
subsidiaries as of December 31, 1998 and 1997, and for each of the three years
in the period ended December 31, 1998, which is included in this Annual Report
on Form 10-K.
PricewaterhouseCoopers LLP
Los Angeles, California
March 26, 1999
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULES
To the Board of Directors of
Zenith National Insurance Corp.:
Our audits of the consolidated financial statements referred to in our report
dated March 26, 1999 appearing on page 71 of the 1998 Annual Report to
Stockholders of Zenith National Insurance Corp. (which report and consolidated
financial statements are incorporated by reference in this Annual Report on Form
10-K) also included an audit of the financial statement schedules listed in Item
14(a)(2) of this Form 10-K. In our opinion, these financial statement schedules
present fairly, in all material respects, the information set forth therein when
read in conjunction with the related consolidated financial statements.
PricewaterhouseCoopers LLP
Los Angeles, California
March 26, 1999
F-2
<PAGE>
SCHEDULE I -- SUMMARY OF INVESTMENTS --
OTHER THAN INVESTMENTS IN RELATED PARTIES
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
DECEMBER 31, 1998
<TABLE>
<CAPTION>
COLUMN D
---------------
COLUMN C AMOUNT AT WHICH
COLUMN A COLUMN B ---------- SHOWN IN THE
- -------------------------------------------------- ---------- FAIR BALANCE
TYPE OF INVESTMENT COST(1) VALUE SHEET(2)
- -------------------------------------------------- ---------- ---------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Fixed maturities:
Bonds:
United States Government and government
agencies and authorities.................... $ 180,064 $ 181,466 $ 180,637
Public utilities.............................. 37,497 38,695 38,695
Industrial and miscellaneous.................. 528,934 537,488 536,748
Redeemable preferred stocks..................... 14,045 14,347 14,347
---------- ---------- ---------------
Total fixed maturities.................... 760,540 771,996 770,427
---------- ---------- ---------------
Equity securities:
Floating rate preferred stocks.................. 16,614 17,324 17,324
Convertible and nonredeemable preferred
stocks........................................ 7,679 7,350 7,350
Common stocks, industrial....................... 22,402 26,935 26,935
---------- ---------- ---------------
Total equity securities................... 46,695 51,609 51,609
---------- ---------- ---------------
Short-term investments............................ 187,123 187,123 187,123
Other investments................................. 39,522 39,522 39,522
---------- ---------- ---------------
Total investments......................... $1,033,880 $1,050,250 $ 1,048,681
---------- ---------- ---------------
---------- ---------- ---------------
</TABLE>
- ------------------------
(1) Original cost for equity securities. Original cost reduced by repayments and
adjusted for amortization of premiums or accrual of discounts for fixed
maturities.
(2) Amount at which shown in the balance sheet may differ from Cost or Fair
Value for fixed maturities depending on the classification of the underlying
securities in accordance with Statement of Financial Accounting Standards
No. 115 -- "Accounting for Investments in Certain Debt and Equity
Securities."
F-3
<PAGE>
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
ZENITH NATIONAL INSURANCE CORP.
BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
(DOLLARS AND SHARES IN THOUSANDS) 1998 1997
--------- ---------
<S> <C> <C>
Investments:
Common stocks, at fair value (cost $606 in 1998 and $676 in 1997)....................... $ 968 $ 1,088
Short-term investments (at cost, which approximates fair value)......................... 5,543 38,994
Other invested assets................................................................... 4,736 4,736
Cash...................................................................................... 148 730
Investment in subsidiaries (Note A)....................................................... 447,311 353,462
Receivable from subsidiaries (Note A)..................................................... 43,919 33,714
Federal income taxes receivable (Note A).................................................. 154
Other assets.............................................................................. 12,115 11,327
--------- ---------
Total assets...................................................................... $ 514,740 $ 444,205
--------- ---------
--------- ---------
LIABILITIES
Payable to banks.......................................................................... $ 5,000
Senior notes payable, less unamortized discount of $404 in 1998 and $526 in 1997 (Note
B)...................................................................................... 74,596 $ 74,474
30 year subordinated debt, less unamortized discount of $278 in 1998 (Note C)............. 77,042
Cash dividends payable to stockholders.................................................... 4,338 4,222
Federal income taxes payable (Note A)..................................................... 583
Other liabilities......................................................................... 6,229 3,643
--------- ---------
Total liabilities................................................................. 167,788 82,339
--------- ---------
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 24,970, outstanding 17,148 in 1998;
issued 24,681, outstanding 17,819 in 1997............................................... 24,970 24,681
Additional paid-in capital................................................................ 270,679 264,098
Retained earnings......................................................................... 188,243 186,268
Accumulated other comprehensive income--net unrealized appreciation on investments, net of
deferred tax expense of $5,167 in 1998 and $5,025 in 1997............................... 9,596 9,332
--------- ---------
493,488 484,379
Less treasury stock at cost (7,822 shares in 1998 and 6,862 shares in 1997)............... (146,536) (122,513)
--------- ---------
Total stockholders' equity........................................................ 346,952 361,866
--------- ---------
Total liabilities and stockholders' equity........................................ $ 514,740 $ 444,205
--------- ---------
--------- ---------
</TABLE>
See notes to condensed financial information.
F-4
<PAGE>
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
ZENITH NATIONAL INSURANCE CORP.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------
(DOLLARS IN THOUSANDS) 1998 1997 1996
------------ ------------- -------------
<S> <C> <C> <C>
Net investment (expense) income................................................. $ (801) $ 1,196 $ 2,697
Realized gains (losses) on investments.......................................... 22 (446)
------------ ------------- -------------
Total (expense) revenue......................................................... (779) 750 2,697
Operating expense............................................................... 3,835 3,557 2,970
Interest expense................................................................ 6,011 3,980 4,877
------------ ------------- -------------
Loss before federal income tax benefit and equity in income of subsidiaries..... (10,625) (6,787) (5,150)
Federal income tax benefit...................................................... 3,496 2,097 1,845
------------ ------------- -------------
Loss before equity in income of subsidiaries.................................... (7,129) (4,690) (3,305)
Equity in income of subsidiaries (Note A)....................................... 26,229 32,790 40,905
------------ ------------- -------------
Net income...................................................................... $ 19,100 $ 28,100 $ 37,600
------------ ------------- -------------
------------ ------------- -------------
</TABLE>
See notes to condensed financial information.
F-5
<PAGE>
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
ZENITH NATIONAL INSURANCE CORP.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------
(DOLLARS IN THOUSANDS) 1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Investment income received.................................................... $ 445 $ 903 $ 612
Operating expenses paid....................................................... (4,587) (1,465) (3,651)
Interest paid................................................................. (5,468) (3,648) (4,908)
Income taxes refunded (paid).................................................. 4,563 2,505 (616)
------------- ------------- -------------
Net cash used in operating activities....................................... (5,047) (1,705) (8,563)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments:
Debt and equity securities available-for-sale............................... (4,652) (19) (11,446)
Other debt and equity securities and other investments...................... 4,793 (10,000)
Proceeds from sales of investments:
Securities available-for-sale............................................... 11,631
Other investments........................................................... 5,423
Net change in short-term investments.......................................... 33,457 (8,274) 55,865
Capital expenditures.......................................................... (11,014)
Other......................................................................... (1,408) 469 (3,151)
------------- ------------- -------------
Net cash provided by (used in) investing activities......................... 32,190 (1,784) 31,268
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash received from bank line of credit........................................ 7,000
Cash paid on bank line of credit.............................................. (2,000)
Cash dividends paid to common stockholders.................................... (17,010) (17,695) (17,605)
Net proceeds from issuance of subordinated debt (Note C)...................... 77,038
Proceeds from exercise of stock options....................................... 6,527 4,940 2,572
Purchase of treasury shares................................................... (24,023) (482) (7,611)
Dividends received from subsidiaries.......................................... 22,750 15,000
Capital contribution to Zenith Insurance (Note C)............................. (65,000)
Net cash to subsidiary (Note A)............................................... (10,257) (6,757) (14,594)
------------- ------------- -------------
Net cash (used in) provided by financing activities......................... (27,725) 2,756 (22,238)
Net (decrease) increase in cash................................................. (582) (733) 467
Cash at beginning of year....................................................... 730 1,463 996
------------- ------------- -------------
Cash at end of year............................................................. $ 148 $ 730 $ 1,463
------------- ------------- -------------
------------- ------------- -------------
RECONCILIATION OF NET INCOME TO NET CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................................... $ 19,100 $ 28,100 $ 37,600
Income from subsidiaries (Note A)............................................. (26,229) (32,790) (40,905)
Federal income taxes (Note A)................................................. 1,097 371 (2,461)
Other......................................................................... 985 2,614 (2,797)
------------- ------------- -------------
Net cash used in operating activities....................................... $ (5,047) $ (1,705) $ (8,563)
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
See notes to condensed financial information.
F-6
<PAGE>
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
ZENITH NATIONAL INSURANCE CORP.
NOTES TO CONDENSED FINANCIAL INFORMATION
The accompanying condensed financial statements and the related notes should
be read in conjunction with the consolidated financial statements and notes
thereto of Zenith National Insurance Corp. ("Zenith") and subsidiaries. Certain
1997 amounts have been restated to conform to the 1998 presentation.
A. Investment In Subsidiaries
Zenith owns, directly or indirectly, 100% of the outstanding stock of
Zenith Insurance Company ("Zenith Insurance"), CalFarm Insurance Company,
ZNAT Insurance Company, Zenith Star Insurance Company, Perma-Bilt, A Nevada
Corporation ("Perma-Bilt"), Zenith Development Corp. ("ZDC"), 1390 Main
Street LLC and Zenith National Insurance Capital Trust I (the "Trust").
These investments are included in the financial statements on the equity
basis of accounting. Temporary advances in the ordinary course of business
are included in other assets. Included in investment in subsidiaries is
$2,009,000 of the unamortized excess of cost over underlying net tangible
assets of companies acquired prior to 1970, which is considered to have
continuing value.
Zenith partially funds the cash flow requirements of its real estate
construction subsidiaries. Intercompany interest charges to such
subsidiaries reduce Zenith's interest expense. The receivable from
subsidiaries mainly comprises principal and capitalized interest on loans to
Perma-Bilt and ZDC of $45,032,000 and $34,334,000 in 1998 and 1997,
respectively.
Zenith files a consolidated federal income tax return. The equity in the
income of subsidiaries of $26,229,000 in 1998, $32,790,000 in 1997 and
$40,905,000 in 1996 is net of a provision for federal income tax expense of
$13,230,000 in 1998, $17,475,000 in 1997 and $21,362,000 in 1996. Zenith has
formulated tax allocation procedures with its subsidiaries and the 1998,
1997 and 1996 condensed financial information reflect Zenith's portion of
the consolidated taxes.
Zenith Insurance paid no dividends to Zenith in 1998 and paid dividends
to Zenith of $22,750,000 in 1997 and $15,000,000 in 1996.
B. Senior Notes Payable
As of December 31, 1998 and 1997, Zenith had $75,000,000 of its 9%
Senior Notes due 2002 (the "9% Notes") issued and outstanding. Interest on
the 9% Notes is payable semi-annually. The 9% Notes are general unsecured
obligations of Zenith.
C. Subordinated Debt
On July 30, 1998, Zenith sold $77,320,000 of 8.55% Subordinated
Deferrable Interest Debentures due 2028 (the "Subordinated Debentures") to
the Trust. The semi-annual interest payments on the Subordinated Debentures
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.
Zenith used $65,000,000 from the net proceeds to make a capital contribution
to Zenith Insurance and used $2,320,000 to acquire all of the issued voting
stock of Zenith National Insurance Capital Trust I. The remaining net
proceeds were used for general corporate purposes. The discount on the
Subordinated Debentures of $282,000 is being amortized over the term of the
Subordinated Debentures. During 1998, $2,775,000 of interest and discount
were expensed.
Zenith's guarantee of the Subordinated Debentures is subordinated to all
other indebtedness of Zenith.
F-7
<PAGE>
SCHEDULE III -- SUPPLEMENTARY INSURANCE INFORMATION
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
<TABLE>
<CAPTION>
COLUMN C
-----------
FUTURE COLUMN E
COLUMN B POLICY -----------
----------- BENEFITS, OTHER COLUMN G
DEFERRED LOSSES, COLUMN D POLICY COLUMN F -----------
COLUMN A POLICY CLAIMS ----------- CLAIMS AND ----------- NET
- ------------------------------ ACQUISITION AND LOSS UNEARNED BENEFITS PREMIUM INVESTMENT
SEGMENT COSTS EXPENSES PREMIUMS PAYABLE REVENUE INCOME
- ------------------------------ ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
1998
- ------------------------------
Property and Casualty
Workers' Compensation....... $ 6,157 $ 524,183 $ 53,754 $ 278,660
Other Property-Casualty..... 16,432 110,855 95,540 222,045
Reinsurance................. 1,352 73,646 8,671 29,150
----------- ----------- ----------- ----------- ----------- -----------
23,941 708,684 157,965 529,855 $ 54,394
Reinsurance ceded............. 288,963
Registrant.................... (801)
----------- ----------- ----------- ----------- ----------- -----------
Total....................... $ 23,941 $ 997,647 $ 157,965 $ -- $ 529,855 $ 53,593
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
1997
- ------------------------------
Property and Casualty
Workers' Compensation....... $ 4,034 $ 339,215 $ 25,229 $ 242,064
Other Property-Casualty..... 15,575 109,003 95,636 214,406
Reinsurance................. 1,231 77,383 7,604 32,251
----------- ----------- ----------- ----------- ----------- -----------
20,840 525,601 128,469 488,721 $ 51,136
Reinsurance ceded............. 87,665
Registrant.................... 1,196
----------- ----------- ----------- ----------- ----------- -----------
Total....................... $ 20,840 $ 613,266 $ 128,469 $ -- $ 488,721 $ 52,332
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
1996
- ------------------------------
Property and Casualty
Workers' Compensation....... $ 4,870 $ 329,670 $ 28,330 $ 210,916
Other Property-Casualty..... 14,422 108,899 88,884 204,778
Reinsurance................. 1,460 87,858 9,995 37,162
----------- ----------- ----------- ----------- ----------- -----------
20,752 526,427 127,209 452,856 $ 48,457
Reinsurance ceded............. 93,651
Registrant.................... 2,697
----------- ----------- ----------- ----------- ----------- -----------
Total....................... $ 20,752 $ 620,078 $ 127,209 $ -- $ 452,856 $ 51,154
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
<CAPTION>
COLUMN H COLUMN I
----------- -----------
BENEFITS, AMORTIZATION COLUMN J
CLAIMS, OF DEFERRED ----------- COLUMN K
COLUMN A LOSSES AND POLICY OTHER -----------
- ------------------------------ SETTLEMENT ACQUISITION OPERATING PREMIUMS
SEGMENT EXPENSES COSTS EXPENSES WRITTEN
- ------------------------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
1998
- ------------------------------
Property and Casualty
Workers' Compensation....... $ 220,983 $ 43,182 $ 60,608 $ 277,191
Other Property-Casualty..... 148,712 49,028 19,896 215,452
Reinsurance................. 13,195 4,727 960 29,856
----------- ----------- ----------- -----------
382,890 96,937 81,464 522,499
Reinsurance ceded.............
Registrant.................... 3,835
----------- ----------- ----------- -----------
Total....................... $ 382,890 $ 96,937 $ 85,299 $ 522,499
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
1997
- ------------------------------
Property and Casualty
Workers' Compensation....... $ 197,450 $ 41,225 $ 40,188 $ 238,963
Other Property-Casualty..... 139,832 44,514 23,551 218,370
Reinsurance................. 10,883 6,474 707 29,780
----------- ----------- ----------- -----------
348,165 92,213 64,446 487,113
Reinsurance ceded.............
Registrant.................... 3,557
----------- ----------- ----------- -----------
Total....................... $ 348,165 $ 92,213 $ 68,003 $ 487,113
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
1996
- ------------------------------
Property and Casualty
Workers' Compensation....... $ 159,047 $ 35,921 $ 32,704 $ 210,603
Other Property-Casualty..... 137,423 43,247 16,031 212,399
Reinsurance................. 18,230 4,925 1,709 35,059
----------- ----------- ----------- -----------
314,700 84,093 50,444 458,061
Reinsurance ceded.............
Registrant.................... 2,969
----------- ----------- ----------- -----------
Total....................... $ 314,700 $ 84,093 $ 53,413 $ 458,061
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
F-8
<PAGE>
SCHEDULE IV -- REINSURANCE
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
<TABLE>
<CAPTION>
COLUMN F
COLUMN C COLUMN D ----------
COLUMN B ------------ ----------- PERCENTAGE
COLUMN A -------------- CEDED TO ASSUMED COLUMN E OF AMOUNT
- ------------------------------------------------------- GROSS OTHER FROM OTHER -------------- ASSUMED
(DOLLARS IN THOUSANDS) AMOUNT COMPANIES COMPANIES NET AMOUNT TO NET
-------------- ------------ ----------- -------------- ----------
<S> <C> <C> <C> <C> <C>
DECEMBER 31, 1998
Premiums earned........................................ $ 545,573 $ 54,487 $ 38,769 $ 529,855 7.3%
-------------- ------------ ----------- -------------- ----------
-------------- ------------ ----------- -------------- ----------
DECEMBER 31, 1997
Premiums earned........................................ $ 477,527 $ 26,191 $ 37,385 $ 488,721 7.6%
-------------- ------------ ----------- -------------- ----------
-------------- ------------ ----------- -------------- ----------
DECEMBER 31, 1996
Premiums earned........................................ $ 435,568 $ 24,642 $ 41,930 $ 452,856 9.3%
-------------- ------------ ----------- -------------- ----------
-------------- ------------ ----------- -------------- ----------
</TABLE>
F-9
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AGGREGATE EXCESS OF LOSS
REINSURANCE AGREEMENT
BETWEEN
ZENITH NATIONAL INSURANCE GROUP
AND
INTER-OCEAN REINSURANCE COMPANY LTD.
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INDEX
<TABLE>
<S> <C> <C>
ARTICLE I. DEFINITIONS . . . . . . . . . . . . . . . . . . . . 1
ARTICLE II. AGGREGATE RETENTION, NET RETENTION AND
AGGREGATE LIMIT . . . . . . . . . . . . . . . . . . 3
ARTICLE III. REPORTS . . . . . . . . . . . . . . . . . . . . . . 4
ARTICLE IV. REMITTANCES . . . . . . . . . . . . . . . . . . . . 5
ARTICLE V. PREMIUM . . . . . . . . . . . . . . . . . . . . . . 5
ARTICLE VI. COMMUTATIONS OF CEDED REINSURANCE . . . . . . . . . 5
ARTICLE VII. CREDIT FOR REINSURANCE; SPECIAL DEPOSIT IN
TRUST . . . . . . . . . . . . . . . . . . . . . . . 5
ARTICLE VIII. SALVAGE AND SUBROGATION . . . . . . . . . . . . . . 8
ARTICLE IX. REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . 8
ARTICLE X. RESERVING, TAXES, RIGHT OF INSPECTION AND
PARTICIPATION, CLAIMS MANAGEMENT, TERRITORY . . . . 8
ARTICLE XI. EXCLUSIONS . . . . . . . . . . . . . . . . . . . . . 9
ARTICLE XII. EXTRA CONTRACTUAL OBLIGATIONS; LOSSES IN
EXCESS OF POLICY LIMITS . . . . . . . . . . . . . .11
ARTICLE XIII. DECLARATORY JUDGMENT EXPENSES . . . . . . . . . . .11
ARTICLE XIV. ERRORS AND OMISSIONS . . . . . . . . . . . . . . . .12
ARTICLE XV. INSOLVENCY . . . . . . . . . . . . . . . . . . . . .12
ARTICLE XVI. TERM AND TERMINATION . . . . . . . . . . . . . . . .13
ARTICLE XVII. GOVERNING LAW . . . . . . . . . . . . . . . . . . .13
ARTICLE XVIII. NOTICES . . . . . . . . . . . . . . . . . . . . . .13
ARTICLE XIX. ASSIGNMENTS AND SURVIVAL . . . . . . . . . . . . . .13
ARTICLE XX. FEDERAL EXCISE TAX . . . . . . . . . . . . . . . . .14
ARTICLE XXI. CURRENCY . . . . . . . . . . . . . . . . . . . . . .14
ARTICLE XXII. OFFSET AND SECURITY CLAUSE . . . . . . . . . . . . .14
ARTICLE XXIII. MISCELLANEOUS . . . . . . . . . . . . . . . . . . .15
SIGNATURE PAGE . . . . . . . . . . . . . . . . . . . . . . . . . .16
</TABLE>
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AGGREGATE EXCESS OF LOSS
REINSURANCE AGREEMENT
THIS AGREEMENT is made and entered into as of August 1, 1998 by
and between ZENITH NATIONAL INSURANCE GROUP. (the "Company") and INTER-OCEAN
REINSURANCE COMPANY LTD., a Bermuda stock insurance company (the "Reinsurer").
WHEREAS, the Reinsurer desires to reinsure the Company, and the
Company desires that the Reinsurer reinsure the Company, to the extent and upon
the terms and conditions and subject to the exceptions, exclusions and
limitations set forth herein; and nothing hereinafter shall in any manner create
any obligations or establish any rights against Reinsurer in favor of any third
party or person not parties to this Agreement; and
NOW, THEREFORE, in consideration of the mutual covenants and
promises contained herein and for other good and valuable consideration, the
receipt and adequacy of which are hereby acknowledged, the parties hereto hereby
agree as follows:
ARTICLE 1. DEFINITIONS
As used herein, the following terms shall have the following
respective meanings:
"ACCIDENT YEAR" as used herein shall refer to each 12-month
period commencing January 1 and ending December 31 in which covered claims
occur. For purposes of this Agreement, the period from January 1, 1998 up to,
but not including, March 31, 1998 also shall be considered an Accident Year.
"AGGREGATE ULTIMATE NET LOSSES" shall mean the aggregate sums
paid or to be paid by the Company in settlement of losses under contracts and
Policies that are the Subject Business reinsured hereunder, including Allocated
Loss Adjustment Expenses, plus any Extra Contractual Obligations and Losses in
Excess of Policy Limits and any Declaratory Judgment Expenses, all as respects
covered losses attributable to claims made (for claims made Policies) and losses
occurring during the Accident Years prior to March 31, 1998 and paid or payable
by the Company while the Agreement is in effect for which the Company is liable,
after making proper deductions for all other forms of insurance, including but
not limited to deductibles and self-insured retentions, as well as Ceded
Reinsurance, whether collectible or not, and all salvages, and all recoveries of
every nature.
Aggregate Ultimate Net Losses does not include any of the
following: (i) all net losses or ALAE paid by the Company before March 31, 1998,
(ii) all net losses or ALAE incurred by the Company for losses occurring, on or
after March 31, 1998, (iii) all net losses or ALAE under insurance or
reinsurance contracts and Policies written by the Company on or after March 31,
1998, (iv) all net losses or ALAE under contracts and Policies written by the
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Company before March 31, 1998 but amended, effective on or after March 31, 1998
but only to the extent that such losses or ALAE would not have been covered
prior to March 31, 1998 of such amendments, (v) all net losses or ALAE for
which the Company becomes obligated to pay as a result of a merger with or
acquisition of any other insurance or reinsurance company that takes place after
the Effective Date of this Agreement, (vi) all unallocated loss adjustment
expenses of the Company, and (vii) all costs and expenses of the Company
incurred in connection with Ceded Reinsurance collection activities.
"AGGREGATE RETENTION" shall mean Aggregate Ultimate Net Losses
equal to $182,000,000.
"ALLOCATED LOSS ADJUSTMENT EXPENSES" OR "ALAE" shall mean all
expenses incurred by the Company in the investigation, appraisal, adjustment,
settlement or defense of specific claims covered under the Policies reinsured
hereunder, including but not limited to court costs, attorney fees, medical cost
containment expenses, outside adjuster fees, and prejudgment and post judgment
interest that are allocable to specific losses that are or would be covered
under this Agreement in each case as determined in accordance with the Company's
standard practice in effect as of the March 31, 1998 of this Agreement. However,
such amounts shall not include office expenses of the Company, including
salaries of their officials and employees, and loss adjustment expenses
unallocable to claims recoverable under contracts and Policies reinsured
hereunder.
"CEDED REINSURANCE" shall mean those contracts of reinsurance in
effect prior to and as of March 31, 1998 as to which the Company is a party as a
ceding insurer and that reinsures the obligations of the Company with respect to
any portion of Aggregate Ultimate Net Losses.
"COMMUTATION" shall mean a commutation, release of liability,
loss portfolio transfer or other similar transaction, which is consummated or is
effective on or after March 31, 1998 with respect to any Ceded Reinsurance.
"DECLARATORY JUDGMENT EXPENSES" shall have the meaning set forth
in Article XIII hereof.
"EFFECTIVE DATE" shall mean 12:01 a.m., Eastern Standard Time,
August 1, 1998.
"EXTRA CONTRACTUAL OBLIGATIONS" shall have the meaning set forth
in Article XII hereof.
"INCURRED BUT NOT REPORTED" or "IBNR" shall refer to that amount
of reserves for outstanding losses and Allocated Loss Adjustment Expenses
arising from covered losses that have already occurred prior to March 31, 1998
but have not yet been reported to and/or recorded as losses recoverable under
contracts and Policies reinsured hereunder by the Company. Such amounts shall
contemplate the ultimate valuation of such losses and Allocated Loss Adjustment
Expenses.
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"LOSSES IN EXCESS OF POLICY LIMITS" shall have the meaning set
forth in Article XII hereof.
"PREMIUM" shall have the meaning set forth in Article V hereof.
"MONTHLY REPORT" shall have the meaning set forth in Article III
hereof.
"SUBJECT BUSINESS" shall mean all contracts and Policies of
insurance (herein referred to as "Policies") produced and underwritten by
RISCORP Property and Casualty Insurance Company, RISCORP Insurance Company, and
RISCORP National Insurance Company on or after January 1, 1983 and prior to
March 31, 1998, where the related insurance and reinsurance premium has been
written and earned before March 31, 1998, for claims made, or losses occurring,
during the Accident Years within that period, subject to the exclusions set
forth in Article XI herein.
"SUBJECT NET EARNED PREMIUM" shall mean gross premium earned on
Subject Business less earned premium ceded for Ceded Reinsurance that inures to
the benefit of this Agreement, and less earned premium derived from any Pool,
Association, Syndicate, Exchange Plan, Fund or other facility described in
Article XI, from January 1, 1998 through and including March 31, 1998.
"YEARLY REPORT" shall have the meaning set forth in Article III
hereof.
ARTICLE II. AGGREGATE RETENTION, NET RETENTION AND AGGREGATE LIMIT
(a) COVER. Commencing on the Effective Date, the Reinsurer
hereby agrees to indemnify the Company in respect of all Aggregate Ultimate Net
Losses in excess of the Aggregate Retention up to but not exceeding the
Aggregate Limit.
(b) AGGREGATE RETENTION. The Company shall retain all Aggregate
Ultimate Net Losses in an amount equal to the Aggregate Retention. The Company
shall first pay the entire amount of its Aggregate Retention under Subject
Business and the Reinsurer shall thereafter pay its Aggregate Limit on Subject
Business to the extent Aggregate Ultimate Net Losses exceed the Company's
Aggregate Retention.
c) AGGREGATE LIMIT. THE REINSURER SHALL INDEMNIFY THE COMPANY
100% OF AGGREGATE ULTIMATE NET LOSSES IN EXCESS OF THE AGGREGATE RETENTION,
HOWEVER, THE MAXIMUM AMOUNT OF AGGREGATE ULTIMATE NET LOSSES THAT MAY BE CEDED
UNDER THIS AGREEMENT SHALL NOT EXCEED $50,000,000. UNDER NO CIRCUMSTANCES WILL
THE REINSURER'S INDEMNITY OBLIGATION HEREUNDER EXCEED $50,000,000 IN TOTAL IN
EXCESS OF THE COMPANY'S AGGREGATE RETENTION.
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ARTICLE III. REPORTS
(a) YEARLY REPORTS. During the term of this Agreement, the
Company shall deliver to the Reinsurer, within thirty (30) calendar days after
the end of each calendar year, a report (a "Yearly Report") setting forth (i)
its calculation of Aggregate Ultimate Net Losses cumulative to date, (ii) the
annual convention statements of the Company as filed hereafter with the
appropriate insurance regulatory authority, and (iii) if applicable, a statement
of any amount payable by the Reinsurer pursuant to Articles II and IV hereof and
a demand for payment of such amount. Paid and outstanding losses including a
provision for Incurred But Not Reported losses, contemplating the ultimate
valuation of losses and ALAE shall be provided by reserve category, line of
business and Accident Year.
(b) MONTHLY REPORTS. During the term of this Agreement, the
Company shall deliver to the Reinsurer, within thirty (30) calendar days after
the end of each month, a report (a "Monthly Report") setting forth (i) its
calculation of Aggregate Ultimate Net Losses cumulative to date, and (ii) if
applicable, a statement of any amount payable by the Reinsurer pursuant to
Articles II and IV hereof and a demand for payment of such amount. Paid and
outstanding losses including a provision for Incurred But Not Reported losses,
contemplating the ultimate valuation of losses and ALAE shall be provided by
reserve category, line of business and Accident Year.
(c) ADDITIONAL REPORTS. In addition, the Company shall include
in Monthly Reports or any Yearly Reports during the term of this Agreement such
additional information and documentation as the Reinsurer may reasonably request
and specify (including, but not limited to, data supporting reserve reviews (to
the extent available in the ordinary course of business of the Company), Ceded
Reinsurance monitoring and collection activity, Commutations, loss activity on
asbestos, pollution and other categories with respect to Incurred But Not
Reported loss calculations, and all adjustments to net losses).
(d) CONFIDENTIALITY OF REPORTS. Except as otherwise required by
law, by governmental or regulatory authorities, or in response to a court order,
or upon the prior written consent of the Company, all non-public information
included in all Yearly Reports, Monthly Reports and Additional Reports and
amendments thereto shall be kept confidential by the Reinsurer and its
directors, officers, employees, agents and representatives, shall not be
disclosed to any other person or entity, and shall only be used for the purposes
provided herein. Notwithstanding the foregoing, non-public information included
in a Yearly Report, Monthly Report and Additional Reports or amendments thereto
may be disclosed to any retrocessionaire of the Reinsurer to the extent such
disclosure is necessary for the Reinsurer to retrocede any of its liabilities
hereunder to such retrocessionaire.
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ARTICLE IV. REMITTANCES
(a) COVERAGE PAYMENTS. Except as provided in paragraph (b) of
this Article IV, the Reinsurer shall pay to the Company any and all amounts
payable hereunder, as shown and demanded in each Yearly Report, Monthly Report
or amendments thereto, within fifteen (15) calendar days following receipt by
the Reinsurer of each such Yearly Report, Monthly Report or amendments thereto
from the Company. Any payments by the Reinsurer to the Company or other entity
or person designated by the Company to receive payment of amounts due hereunder
on behalf of the Company shall constitute payment to the Company under this
Agreement.
(b) NO SETTLEMENTS UNTIL PAYMENT BY COMPANY. Except in the event
of insolvency of the Company as described in Article XV, no settlements shall be
payable by the Reinsurer to the Company for Aggregate Ultimate Net Losses
recoverable hereunder until the Company has effected cumulative payments of
Aggregate Ultimate Net Losses during the term of this Agreement in an amount
equal to the Aggregate Retention hereunder.
(c) REPAYMENT TO REINSURER. If the Reinsurer shall have paid any
amounts under this Agreement that are subsequently deemed not to be due by the
Reinsurer, then the Company shall promptly remit such amounts to the Reinsurer.
ARTICLE V. PREMIUM
A premium in the amount of sixteen million dollars ($16,000,000)
in immediately available funds shall be paid to the Reinsurer in consideration
of the coverage provided hereunder as follows: (i) a semi annual installment due
on August 1, 1998 and (ii) a semi-annual installment due on February 1, 1999.
ARTICLE VI. COMMUTATIONS OF CEDED REINSURANCE
In the event that the Company commutes, amends or terminates any
reinsurance agreement which was in place as of the Effective Date pertaining to
the Subject Business, the parties hereto will amend this Agreement in such a
manner so as to put each party in the same relative economic position as it
would have been in the absence of any such commutation, amendment or
termination. For example, a reinsurance agreement pertaining to the Subject
Business which was in place as of the Effective Date may be deemed to remain in
place irrespective of any commutation, release of liability, loss portfolio
transfer or other similar transaction with respect thereto.
ARTICLE VII. CREDIT FOR REINSURANCE; SPECIAL DEPOSIT IN TRUST
(a) Credit For Reinsurance; As regards Aggregate Ultimate Net
Losses coming within the scope of this Agreement, the Company agrees that when
it shall file with the
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insurance regulatory authority or set up on its books, reserves for losses
covered hereunder which it shall be required by law to set up, it will forward
to the Reinsurer a statement showing reserves ceded to the Reinsurer, including
IBNR (hereinafter referred to as "Reinsurer's Obligations"). Within fifteen (15)
days of its receipt of such statement, the Reinsurer hereby agrees that it will
apply for and secure delivery to the Company of a clean, irrevocable and
unconditional Letter of Credit, issued by a qualified bank acceptable to
insurance regulatory authorities having jurisdiction over the Company, and/or
establish a Trust Account for the benefit of the Company, in each case
containing provisions acceptable to the insurance regulatory authorities having
jurisdiction over the Company in an amount equal to the Reinsurer's Obligations,
as shown in the statement prepared by the Company.
(b) If a Letter of Credit is to be used to satisfy the
requirements of this Article VII, the Letter of Credit shall be issued for a
period of not less than one year, and shall be automatically extended for one
year from its date of expiration or any future expiration date. The Letter of
Credit shall remain in effect to the extent necessary to fulfill the Reinsurer's
Obligations as described in paragraph (a) above; however, the Reinsurer may
substitute a Letter of Credit from a new qualified bank if, thirty (30) days
prior to any expiration date, the issuing bank shall notify the Company by
certified or registered mail that the issuing bank elects not to consider the
Letter of Credit extended for any additional period and the new qualified bank
simultaneously confirms that it will issue a Letter of Credit under the same
terms upon expiration of the existing Letter of Credit.
(c) The Reinsurer and the Company agree that the Letters of
Credit or Trust Account provided by the Reinsurer pursuant to the provisions of
this Agreement may be drawn upon at any time, and be utilized by the Company or
any successor of the Company including, without limitation, any liquidator,
rehabilitator, receiver or conservator of the Company. Notwithstanding the
unconditional nature of the obligation represented by the Letter of Credit or
the Trust Account, the Reinsurer and the Company agree that the Letter of Credit
or Trust Account proceeds be used only as follows:
(i) to reimburse the Company for the Reinsurer's Obligations,
the payment of which is due under the terms of this
Agreement and which has not been otherwise paid;
(ii) to make refund of any sum which is in excess of the actual
amount required to pay the Reinsurer's Obligations under
this Agreement; and
(iii) to fund an account with the Company for the Reinsurer's
Obligations. Such cash deposit shall be held in an
interest bearing account separate from the Company's
other assets, and interest thereon not in excess of
the prime rate shall accrue to the benefit of the
Reinsurer.
(d) In the event the amount drawn by the Company or any
insurance regulatory authority on any Letter of Credit or Trust Account is in
excess of the actual amount of the Reinsurer's Obligations, the Company shall be
deemed to be holding such funds in trust for
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the benefit of the Reinsurer and shall promptly return to the Reinsurer the
excess amount so drawn. All of the foregoing shall be applied without diminution
because of insolvency on the part of the Company or the Reinsurer.
(e) The issuing or trustee bank shall have no responsibility
whatsoever in connection with the priority of withdrawals made by the Company
or the disposition of funds withdrawn, except to ensure that withdrawals are
made only upon the order of properly authorized representatives of the Company.
(f) At annual intervals, or more frequently as agreed but never
more frequently than semi-annually, the Company shall prepare a specific
statement of the Reinsurer's Obligations, for the sole purpose of amending the
Letter of Credit or adjusting the Trust Account balance, in the following
manner:
(i) If the statement shows that the cumulative balance of the
Reinsurer's Obligations exceed the balance of the Letter of
Credit or market value of the eligible assets held in the
Trust Account as of the statement date, the Reinsurer shall,
within thirty (30) days after receipt of notice of such
excess, secure delivery to the Company of an amendment to
the Letter of Credit increasing the amount of credit by the
amount of such difference or add eligible assets to the
Trust Account with a market value equal to such difference.
(ii) If, however, the statement shows that the Reinsurer's
Obligations are less than the balance of the Letter of
Credit or market value of the eligible assets held in the
Trust Account as of the statement date, the Company shall,
within thirty (30) days after receipt of written request
from the Reinsurer, release such excess credit or excess
assets by agreement to secure an amendment to the Letter of
Credit reducing the amount of credit available by the amount
of such excess credit or withdraw assets from the Trust
Account with such excess value and deliver them to the
Reinsurer.
(g) Special Deposit In Trust; Notwithstanding the foregoing, on
or before December 31, 1998, the Reinsurer shall deposit in the Trust Account
cash or Eligible Securities (as defined in the Trust Agreement) with a market
value equal to the Experience Fund Calculation (as defined in the Aggregate
Excess of Loss Retrocession Agreement between the Reinsurer and American
Re-Insurance Company pertaining to this Agreement). While this Agreement remains
in effect, as of December 31, of each year thereafter, commencing December 31,
1999, the Reinsurer shall add such additional assets to the Trust Account as
shall be necessary to maintain cash or Eligible Securities in the Trust Account
with a market value equal to the Experience Fund Calculation.
(h) Security required for the Reinsurer's Obligations under
Sections (a) through (f) above shall be reduced (but not below zero) by the
value of the Eligible Securities deposited in the Trust Account established
under Section (g) of this Article VII.
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ARTICLE VIII. SALVAGE AND SUBROGATION
(a) All salvages, subrogation, recoveries or reimbursements,
after deduction of expenses applicable thereto, recovered or received subsequent
to a loss settlement under the subject business reinsured hereunder shall be
applied as if recovered or received prior to the settlement and all necessary
adjustments shall be made by the parties hereto, provided always, that nothing
in this clause shall be construed to mean that losses under this Agreement are
not recoverable until the Company's Ultimate Net Loss has been ascertained.
(b) Subrogation and salvage shall always be used to reimburse
the Reinsurer according to its participation in the loss before being used to
reimburse the Company for its portion of the loss. The Company will credit the
Reinsurer with its share of any recoveries, salvages or reimbursements on
account of claims and settlements involving reinsurance hereunder. Expenses
hereunder shall exclude all office expenses of the Company and all salaries and
expenses of its officials and employees that are not allocable to salvages,
subrogation, recoveries or reimbursements under the Subject Business reinsured
hereunder.
ARTICLE IX. REPRESENTATIONS AND WARRANTIES
The Company represents and warrants to the Reinsurer as of the
Effective Date that any reinsurance which inures to the benefit of the Subject
Business hereunder is deemed to remain in place for the duration of this
Agreement.
ARTICLE X. RESERVING, TAXES, RIGHT OF INSPECTION AND PARTICIPATION,
CLAIMS MANAGEMENT, TERRITORY
(a) RESERVING. For insurance regulatory accounting purposes,
(i) the Company shall determine the amount of its reserves on the Subject
Business and may change those reserves from time to time as it, in its sole
discretion, deems necessary or appropriate, (ii) the Reinsurer shall determine
the amount of its reserves on its liability hereunder and may change those
reserves from time to time as it, in its sole discretion, deems necessary or
appropriate.
(b) TAXES. The Company will be liable for all taxes on premiums
(except Federal Excise Taxes) reported to the Reinsurer hereunder and will
reimburse the Reinsurer for such taxes where the Reinsurer is required to pay
the same.
(c) RIGHT OF INSPECTION. At all reasonable times during the term
of this Agreement, the Reinsurer shall have the right to inspect and copy,
through its duly authorized representatives, the books, records and accounts of
the Company and its subsidiaries pertaining
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to the Subject Business and the calculation of Aggregate Ultimate Net Losses and
all claims under this Agreement.
(d) COMPANY CLAIMS MANAGEMENT. The Company shall manage the
payment of losses and ALAE and the defense of pending or threatened claims,
suits or proceedings relating to the Subject Business in good faith and in
accordance with its existing practices on the date of this Agreement and
consistent with the Company's payment of its losses and ALAE in general and its
defense of claims, suits or proceedings in general.
(e) CERTAIN RIGHTS OF PARTICIPATION IN EXTRAORDINARY CLAIMS.
During the term of this Agreement, the Company shall advise the Reinsurer of any
claim or group of related claims pertaining to the Subject Business which
exceeds or is reasonably likely to exceed two hundred fifty thousand dollars
($250,000) on a net basis, and any material subsequent developments pertaining
thereto. In each case, the Company shall furnish to the Reinsurer within thirty
(30) days of receipt of notice of such claim, dispute, litigation or other
matter, a written statement setting forth a reasonable amount of pertinent
information respecting the same; provided, however, that a failure to furnish
such written statement to Reinsurer within such thirty (30) day period shall not
relieve Reinsurer of its obligations under the Agreement. Upon the written
request of the Reinsurer, the Company will afford the Reinsurer an opportunity
to participate with the Company, at the sole expense of the Reinsurer, in the
settlement of such claim, and the Company and the Reinsurer shall cooperate in
every respect in such settlement. Notwithstanding the foregoing, all final
determinations as to the handling, defense, settlement or any other matter
relating to any such claim shall be made by the Company, in its reasonable
discretion.
(f) TERRITORY. The Reinsurer's liability shall be limited to
losses occurring within the territorial limits covered by the original contracts
and Policies reinsured hereunder.
ARTICLE XI. EXCLUSIONS
This Agreement does not apply to and specifically excludes:
(a) Business derived from any Pool, Association, including Joint
Underwriting Association, Syndicate, Exchange, Plan, Fund or other facility
directly as a member, subscriber or participant, or indirectly by way of
reinsurance or assessments. This exclusion shall not apply to business assumed
by the Company from the NCCI pool or to intercompany reinsurances among the
Company and affiliated and/or member companies of the Company.
(b) Liability of the Company arising from its participation or
membership, whether voluntary or involuntary, in any insolvency fund, including
any guarantee fund, association, pool, plan or other facility which provides for
the assessment of, payment by, or assumption by the Company of a part or the
whole of any claim, debt, charge, fee or other
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obligations of an insurer, or its successors or assigns, which has been declared
insolvent by any authority having jurisdiction.
(c) Liability excluded by the provisions of the following
clauses attached hereto. The word "Reassured" used therein means "Company."
Nuclear Incident Exclusion Clause Liability - Reinsurance -
No. 1B
Nuclear Incident Exclusion Clauses - Physical Damage -
Reinsurance - No. 2
Nuclear Incident Exclusion Clause - Reinsurance - No. 4
(d) The Company's liability for punitive, exemplary or
consequential damages or compensatory damages, including incurred expenses,
resulting from a legal action of the Insured or assignee against the Company,
other than an action arising from insurance coverage or claim handling.
(e) Losses arising from the perils of earthquake, landslide and
other earth movement.
(f) Contracts and Policies issued by the Company to insurance or
reinsurance companies (each hereafter referred to as the "insurer") which
provides insurance against liability of the insurer for any damages resulting
from the alleged or actual tortious conduct of the insurer in the handling of
claims made by any of its Policyholders or in the handling of any other business
matters with any of its Policyholders.
(g) War risk, bombardment, invasion, insurrection, rebellion,
revolution, military or usurped power, or confiscation by order of any
government or public authority, as excluded under a standard policy containing a
standard war exclusion clause.
(h) Financial Guarantees, Credit Insurance, Warranty Insurance,
Political Risk or Financial Insurance, including residual value or similar types
of coverage.
(i) All liability beyond circumscribed policy provisions,
including but not limited to punitive, exemplary or consequential damages or
compensatory damages, including any expenses related thereto, resulting from a
claim of an insured or assignee against the Company. However, this exclusion
shall not apply to liabilities reinsured hereunder as provided under Article
XII, EXTRA CONTRACTUAL OBLIGATIONS AND EXCESS JUDGMENT, and Article XIII,
DECLARATORY JUDGMENT EXPENSES.
(j) All risks, lines or classes of business, perils and
exposures specifically excluded under Policies reinsured hereunder and those
which are excluded under reinsurance coverages inuring to the benefit of this
Agreement.
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ARTICLE XII. EXTRA CONTRACTUAL OBLIGATIONS; LOSSES
IN EXCESS OF POLICY LIMITS
(a) This Agreement shall protect the Company within the limits
hereof, where its Aggregate Ultimate Net Losses include any Extra Contractual
Obligations. "Extra Contractual Obligations" shall mean those liabilities not
covered under any other provision of this Agreement and which arise from the
handling of any claim on Subject Business covered hereunder, such liabilities
arising because of, but not limited to, the following: failure by the Company to
settle within the Policy limit, or by reason of alleged or actual negligence,
fraud or bad faith in rejecting an offer of settlement or in the preparation of
the defense or in the trial or any action against its insured or Company, or in
the preparation or prosecution of an appeal consequent upon such action, but
only to the extent that liability for such failure, negligence, bad faith, etc.
arose from acts or omissions by the Reinsured taking place prior to the
Effective Date.
(b) This Agreement shall also protect the Company, within the
limits hereof, where Aggregate Ultimate Net Losses include Losses in Excess of
Policy Limits. Losses in Excess of Policy Limits shall mean those losses in
excess of Policy limits, but otherwise within the coverage terms of the Policy
reinsured hereunder, including legal costs and expenses in connection therewith,
incurred by the Company as a result of an action against it by its insured or
its insured's assignee to recover damages awarded by a court of competent
jurisdiction to a third party claimant because of alleged failure by the Company
to settle within the Policy limit or by reason of alleged or actual negligence,
fraud, or bad faith in rejecting an offer of settlement or in the preparation of
the defense or in the trial of any action against its insured or in the
preparation of prosecution of an appeal consequent upon such action but only to
the extent that such failure, negligence, fraud, etc. occurred prior to the
Effective Date.
(c) However, coverage under this Agreement shall not apply where
any Extra Contractual Obligation or Loss in Excess of Policy Limits has been
incurred due to fraud by a member of the Board of Directors or a corporate
officer of the Company acting individually or collectively or in collusion with
any individual or corporation or any other organization or party involved in the
presentation, defense or settlement of any claim covered hereunder.
ARTICLE XIII. DECLARATORY JUDGMENT EXPENSES
(a) This Agreement shall indemnify the Company, within the
limits of this Agreement, for Declaratory Judgment Expenses paid by the
Company that arise from the business reinsured hereunder.
(b) "Declaratory Judgment Expenses" shall mean legal expenses
paid by the Company for the investigation, analysis, evaluation, and/or
resolution of litigation of coverage issues between the Company and any
other party to determine the Company's obligation to defend, indemnify
and/or pay on behalf of its insured(s) under contracts and Policies
reinsured hereunder arising from a specific claim or claims.
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(c) The date on which Declaratory Judgment Expenses are incurred
by the Company shall be deemed, in all circumstances, to be the same date as
the specific claim or claims under the Policy reinsured hereunder.
(d) Recoveries from any form or insurance and/or reinsurance
that protect the Company against claims the subject matter of this clause will
inure to the benefit of the Reinsurer and shall be deducted from the total
amount of Declaratory Judgment Expenses for purposes of determining the amount
recoverable hereunder.
ARTICLE XIV. ERRORS AND OMISSIONS
Errors or omissions on the part of the Company shall not
invalidate the reinsurance under this Agreement, provided such errors or
omissions are corrected promptly after discovery thereof, but the liability of
the Reinsurer under this Agreement or any exhibits or endorsements attached
thereto shall in no event exceed the limits specified herein or therein, nor be
extended to cover any risks, perils or classes of insurance generally or
specifically excluded therein.
ARTICLE XV. INSOLVENCY
In the event of the insolvency of the Company and the appointment
of a conservator, liquidator or statutory successor, the appropriate amount of
reinsurance provided by this Agreement shall be payable by the Reinsurer
directly to such Company or to its liquidator, receiver or statutory successor
on the basis of the liability of the Company under the contract or contracts
reinsured. Subject to the right of offset and the verification of coverage, the
Reinsurer shall pay its share of the loss without diminution because of the
insolvency of such Company. The liquidator, receiver or statutory successor of
such subsidiary shall give written notice of the pendency of each claim against
such Company on a Policy or bond reinsured within a reasonable time after such
claim is filed in the insolvency proceeding. During the pendency of such claim,
the Reinsurer may, at its own expense, investigate such claim and interpose in
the proceeding where such claim is to be adjudicated any defense or defenses
which it may deem available to such Company, its liquidator or receiver or
statutory successor. Subject to court approval, any expense thus incurred by the
Reinsurer shall be chargeable against such Company as part of the expense of
liquidation to the extent of such proportionate share of the benefit as shall
accrue to the Company solely as a result of the defense undertaken by the
Reinsurer. The reinsurance shall be payable as set forth above except where this
Agreement specifically provides for the payment of reinsurance proceeds to
another party in the event of the insolvency of such subsidiary. The provisions
of this Article XV shall only apply to the insolvent company or companies that
are the Company hereunder.
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ARTICLE XVI. TERM AND TERMINATION
This Agreement shall be binding as of the date hereof and shall
remain bound until the natural expiry or prior termination of all liabilities on
the Subject Business, or until it is otherwise commuted by mutual agreement
between the parties hereto.
ARTICLE XVII. GOVERNING LAW
This Agreement shall be governed by and construed in accordance
with the laws of Bermuda without regard to its principles' of choice of law.
ARTICLE XVIII. NOTICES
Any notice or other communication hereunder shall be in writing
and delivered in person or by courier, telegraphed, telexed or by facsimile
transmission or mailed by certified mail, postage prepaid, return receipt
requested, as follows:
If to the Company: ZENITH NATIONAL INSURANCE GROUP
21255 Califa Street
Woodland Hills, CA 91367-5021
Attention: Stanley R. Zax
If to the Reinsurer: INTER-OCEAN REINSURANCE COMPANY LTD.
12 Wesley Street, P.O. Box HM 1204
Hamilton, HM FX
Bermuda
Attention: President
or to such other place as the Reinsurer or the Company may designate as to the
Reinsurer or the Company, respectively, by written notice to the other.
ARTICLE XIX. ASSIGNMENTS AND SURVIVAL
(a) ASSIGNMENTS AND DELEGATIONS. Except as otherwise provided
herein, this Agreement is not intended to confer any rights upon any person or
persons other than the parties hereto. This Agreement may not be assigned or
delegated, in whole or in part, by the Reinsurer without the prior written
consent of the Company. With the prior written consent of the Reinsurer (which
shall not be unreasonably withheld), the terms, conditions, rights and
obligations under the Agreement shall be fully assignable in the event the
Company cedes, sells or otherwise transfers all or part of the reserves which
are subject of the Agreement. Subject to the foregoing, this Agreement shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and assigns.
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(b) SURVIVAL. Notwithstanding anything herein to the contrary,
the provisions of this Agreement shall survive any direct or indirect sale or
exchange of capital stock, merger, consolidation, sale or transfer of
substantially all assets, business combination or other change in control of, or
change in the form of business conducted by, the Company or the Reinsurer.
ARTICLE XX. FEDERAL EXCISE TAX
(a) The Reinsurer agrees to allow for the purpose of paying the
Federal Excise Tax the applicable percentage of the premium payable hereon (as
imposed under Section 4371 of the Internal Revenue Code) to the extent such
premium is subject to the Federal Excise Tax.
(b) In the event of any return of premium becoming due hereunder
the Reinsurer will deduct the applicable percentage from the return premium
payable hereon and the Company or its agent is responsible for recovering the
tax from the United States Government.
ARTICLE XXI. CURRENCY
Whenever the word "Dollar" or the "$" sign appears in this
Agreement, they shall be construed to mean United States Dollars and all
transactions under this Agreement shall be in United States Dollars.
ARTICLE XXII. OFFSET AND SECURITY CLAUSE
(a) Each party hereto has the right, which may be exercised at
any time, to offset any amounts, whether on account of premiums or losses or
otherwise, due from such party to another party under this Agreement or any
other reinsurance agreement heretofore or hereafter entered into between them,
against any amounts, whether on account of premiums or losses or otherwise due
from the latter party to the former party. The party asserting the right of
offset may exercise this right, whether as assuming or ceding insurer or in both
roles in the relevant agreement or agreements.
(b) Each party hereby assigns and pledges to the other party (or
to each other party, if more than one) all of its rights under this Agreement to
receive premium or loss payments at any time from such other party
("Collateral"), to secure its premium or loss obligations to such other party at
any time under this Agreement and any other reinsurance agreement heretofore or
hereafter entered into by and between them ("Secured Obligations"). If at any
time a party is in default under any Secured Obligation or shall be subject to
any liquidation, rehabilitation, reorganization or conservation proceeding, each
other party shall be entitled in its discretion, to apply, or to withhold for
the purpose of applying in due course, any Collateral assigned and pledged to it
by the former party and otherwise to realize upon such Collateral as security
for such Secured Obligations.
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(c) The security interest described herein, and the term
"Collateral," shall apply to all payments and other proceeds in respect of the
rights assigned and pledged. A party's security interest in Collateral shall be
deemed evidenced only by the counterpart of this Agreement delivered to such
party.
(d) Each right under this Article is a separate and independent
right, exercisable, without notice or demand, alone or together with other
rights, in the sole election of the party entitled thereto, and no waiver,
delay, or failure to exercise, in respect of any right, shall constitute a
waiver of any other right. The provisions of this Article shall survive any
cancellation or other termination of this Agreement.
(e) In the event of the insolvency of a party hereto, offsets
shall only be allowed in accordance with the laws of the insolvent party's state
of domicile.
ARTICLE XXIII. MISCELLANEOUS
(a) ENTIRE AGREEMENT; AMENDMENTS AND WAIVERS. This Agreement,
together with the Aggregate Excess of Loss Retrocession Agreement and the
Assignment Agreement of even date herewith, constitute the entire agreement
between the parties pertaining to the subject matter hereof and supersedes all
prior agreements, understandings, negotiations and discussions, whether oral or
written, between the parties hereto. No supplement, modification or waiver of
this Agreement shall be binding unless executed in writing by the party to be
bound thereby. No waiver of any of the provisions of this Agreement shall be
deemed or shall constitute a waiver of any other provision hereof (whether or
not similar), nor shall such waiver constitute a continuing waiver unless
otherwise expressly provided.
(b) COUNTERPARTS. This Agreement may be executed in two
counterparts, each of which shall be deemed an original, but both of which
together shall constitute one and the same instrument.
(c) HEADINGS. The headings of the Articles and the paragraphs
herein are inserted for convenience of reference only, and are not intended to
be a part of or to affect the meaning or interpretation of this Agreement.
(d) SEVERABILITY. In the event any term or provision of this
Agreement shall to any extent be invalid or unenforceable, the remainder of this
Agreement shall not be affected thereby and each term of this Agreement shall be
valid and enforceable to the fullest extent permitted by law. Further, any
change to any term or provision of this Agreement required by any insurance
regulator having jurisdiction over any party shall be incorporated into this
Agreement and shall not invalidate the Agreement.
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SIGNATURE PAGE
IN WITNESS WHEREOF the parties hereto have caused this Agreement to be
executed in duplicate by their duly authorized representatives.
On this 18th day of December, 1998
INTER-OCEAN REINSURANCE COMPANY LTD.
By: /s/ Michael Sullivan Attest: /s/ M. Armstrong
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Title: Vice President
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On this 24th day of December, 1998
ZENITH NATIONAL INSURANCE GROUP
By: /s/ John J. Tickner Attest: /s/ James Ross
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Name: John J. Tickner
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Title: Sr. Vice President
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SPECIAL ENDORSEMENT
TO
RETROCESSIONAL AGREEMENT NO. 8DDDR01-C122
(HEREINAFTER "ENDORSEMENT")
This Endorsement is made by and among AMERICAN RE-INSURANCE COMPANY, Princeton,
New Jersey (hereinafter "Reinsurer"), INTER-OCEAN REINSURANCE COMPANY LTD.,
Hamilton, Bermuda (hereinafter "Company"), and ZENITH INSURANCE COMPANY, CALFARM
INSURANCE COMPANY, ZNAT INSURANCE COMPANY and ZENITH STAR INSURANCE COMPANY,
(collectively hereinafter "Payee"). This Endorsement is part of and shall be
attached to Retrocessional Agreement No. 8DDDR01-C122 (hereinafter
"Retrocessional Agreement") and pertains to the Agreement identified below
(hereinafter "Agreement").
For value received, the Reinsurer, the Company and the Payee hereby agree that,
with respect to the Company's loss payment obligations arising under the
Agreement, which Agreement is reinsured in whole or in part by the Reinsurer
under the Retrocessional Agreement:
1. In the event the Company is declared insolvent and placed in liquidation by
a court of competent jurisdiction, and is therefore unable to pay any loss
for which the Company would otherwise be legally liable under the
Agreement, the Reinsurer shall become liable to pay amounts due to the
Company under the Retrocessional Agreement directly to Zenith Insurance
Company acting as agent to the Payee.
2. The Reinsurer's obligation to make payments pursuant to this Endorsement
shall be limited by the Company's liability under the terms, limits and
conditions contained in the Agreement.
3. Any payment by the Reinsurer pursuant to this Endorsement shall be, to the
extent of such payment, in substitution, satisfaction and discharge of the
Reinsurer's reinsurance obligation to the Company, its liquidators,
receiver, or statutory successor under the Retrocessional Agreement.
Neither this Endorsement, nor any other provision of the Retrocessional
Agreement or the Agreement, shall be construed in a manner which would
subject the Reinsurer to liability for a duplicative payment of losses
reinsured under the Retrocessional Agreement.
4. In the event of a claim by the Payee against the Reinsurer pursuant to this
Endorsement, the Reinsurer shall be entitled to all rights of the Company
under the Agreement, including but not limited to salvage and subrogation
rights and any rights the Company may have to collateral which secures
obligations arising under the Agreement.
5. In the event the Agreement is terminated or expires, or upon the cessation
of all liability of the Company under the Agreement, this Endorsement shall
simultaneously and automatically terminate.
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6. The provisions of this Endorsement only shall apply with respect to the
Agreement listed below:
Aggregate Excess of Loss Reinsurance Agreement No.: 8DDD999-A122
Agreement effective date: August 1, 1998
7. Except as expressly herein stated, nothing herein contained shall vary,
alter or amend the terms, conditions, or limitation of the Retrocessional
Agreement endorsed hereby.
8. There shall be no modification of, or change in, the terms of this
Endorsement without the prior written approval of the parties to this
Endorsement.
IN WITNESS WHEREOF the authorized parties hereto have executed this Endorsement
in triplicate to be effective on this 1st day of August, 1998.
AMERICAN RE-INSURANCE INTER-OCEAN REINSURANCE
COMPANY COMPANY LTD.
/s/ Dominic Addesso /s/ Michael Sullivan
- --------------------------------- -------------------------------
ZENITH INSURANCE COMPANY,
CALFARM INSURANCE COMPANY,
ZNAT INSURANCE COMPANY and
ZENITH STAR INSURANCE COMPANY
/s/ John J. Tickner
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TRUST AGREEMENT
Dated as of December 18, 1998
among
INTER-OCEAN REINSURANCE COMPANY, LTD.,
as Grantor
ZENITH INSURANCE COMPANY, CALFARM INSURANCE COMPANY,
ZNAT INSURANCE COMPANY, AND ZENITH STAR INSURANCE COMPANY,
(Collectively referred to as the Beneficiary)
and
THE CHASE MANHATTAN BANK
As Trustee
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PARTIES PAGE
RECITALS ----
<S> <C>
Section 1. Deposit of Assets to the
Trust Account . . . . . . . . . . . . . 2
Section 2. Withdrawal of Assets from the
Trust Account . . . . . . . . . . . . . 2
Section 3. Application of Assets . . . . . . . . . 3
Section 4. Redemption, Investment and
Substitution of Assets . . . . . . . . . 4
Section 5. The Income Account . . . . . . . . . . . 5
Section 6. Right to Vote Assets . . . . . . . . . . 5
Section 7. Additional Rights and Duties
Of the Trustee . . . . . . . . . . . . . 5
Section 8. The Trustee's Compensation,
Expenses and Indemnification . . . . . . 7
Section 9. Resignation of the Trustee . . . . . . . 8
Section 10. Termination of the Trust Account . . . . 9
Section 11. Definitions . . . . . . . . . . . . . . 9
Section 12. Governing Law . . . . . . . . . . . . . 11
Section 13. Successors and Assigns . . . . . . . . . 11
Section 14. Severability . . . . . . . . . . . . . . 11
Section 15. Entire Agreement . . . . . . . . . . . . 11
Section 16. Amendments . . . . . . . . . . . . . . . 12
Section 17. Notices, etc . . . . . . . . . . . . . . 12
Section 18. Headings . . . . . . . . . . . . . . . . 13
Section 19. Counterparts . . . . . . . . . . . . . . 13
Section 20. Mergers, Consolidations . . . . . . . . 13
</TABLE>
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EXHIBIT A List of Reinsurance Agreements
EXHIBIT B List of Assets Deposited to the Trust Account
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TRUST AGREEMENT
TRUST AGREEMENT, dated as of December 18, 1998, (the "AGREEMENT"), among
Inter-Ocean Reinsurance Company, Ltd., a Bermuda corporation (the "GRANTOR"),
Zenith Insurance Company, a California corporation, Calfarm Insurance Company,
a California corporation, ZNAT Insurance Company, a California corporation, and
Zenith Star Insurance Company, a Texas Corporation (together with any successor
thereof by operation of law, including, without limitation, any liquidator,
rehabilitator, receiver or conservator, collectively the "BENEFICIARY"), and The
Chase Manhattan Bank, a New York banking corporation (the "TRUSTEE") (the
Grantor, the Beneficiary and the Trustee are hereinafter each sometimes referred
to individually as a "PARTY" and collectively as the "Parties").
WITNESSETH:
WHEREAS, the Grantor and the Beneficiary have entered into the reinsurance
agreements listed in Exhibit A hereto (the "Reinsurance Agreements");
WHEREAS, the Beneficiary desires the Grantor to secure payments of all
amounts at any time and from time to time owing by the Grantor to the
Beneficiary under or in connection with the Reinsurance Agreements;
WHEREAS, the Grantor desires to transfer to the Trustee for deposit to a
trust account (the "Trust Account") assets in order to secure payments under or
in connection with the Reinsurance Agreements;
WHEREAS, the Trustee has agreed to act as Trustee hereunder, and to hold
such assets in trust in the Trust Account for the sole use and benefit of the
Beneficiary; and
WHEREAS, this Agreement is made for the sole use and benefit of the
Beneficiary and for the purpose of setting forth the duties and powers of the
Trustee with respect to the Trust Account;
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NOW, THEREFORE, for and consideration of the premises and for other good
and valuable consideration, the receipt of which is hereby acknowledged, the
Parties hereby agree as follows:
SECTION 1. DEPOSIT OF ASSETS TO THE TRUST ACCOUNT.
(a) The Grantor shall establish the Trust Account and the Trustee
shall administer the Trust account in its name as Trustee for the Beneficiary.
The Trust Account shall be subject to withdrawal by the Beneficiary solely as
provided herein.
(b) The Grantor shall transfer to the Trustee, for deposit to the
Trust Account, the assets listed in Exhibit B hereto, and may transfer to the
Trustee, for deposit to the Trust Account, such other assets as it may from time
to time desire (all such assets actually received in the Trust Account are
herein referred to individually as an "Asset" and collectively as the "Assets").
The Assets shall consist only of cash (United States legal tender) and Eligible
Securities (as hereinafter defined).
(c) The Grantor hereby represents and warrants (i) that any
Assets transferred by the Grantor to the Trustee for deposit to the Trust
Account will be in such form that the Beneficiary whenever necessary may, and
the Trustee upon direction by the Beneficiary will, negotiate any such Assets
without consent or signature from the Grantor or any person in accordance with
the terms of this Agreement and (ii) that all Assets transferred by the Grantor
to the Trustee for deposit to the Trust Account consist only of cash and
Eligible Securities.
(d) The Trustee shall have no responsibility to determine whether
the Assets in the Trust Account are sufficient to secure the Grantor's
liabilities under the Reinsurance Agreements.
SECTION 2. WITHDRAWAL OF ASSETS FROM THE TRUST ACCOUNT.
(a) Without notice to the Grantor, the Beneficiary shall have the
right, at any time and from time to time, to withdraw from the Trust Account,
upon written notice to the Trustee (the "Withdrawal Notice"), such Assets as are
specified in such Withdrawal Notice. The Withdrawal Notice may designate a third
party the "Designee")
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to whom Assets specified therein shall be delivered and may condition delivery
of such Assets to such Designee upon receipt, and deposit to the Trust Account,
of other Assets specified in such Withdrawal Notice. The Beneficiary need
present no statement or document in addition to a Withdrawal Notice in order to
withdraw any Assets; nor is said right of withdrawal or any other provision of
this Agreement subject to any conditions or qualifications not contained in this
Agreement.
(b) Upon receipt of a Withdrawal Notice, the Trustee shall immediately
take any and all steps necessary to transfer the Assets specified in such
Withdrawal Notice and shall deliver such assets to or for the account of the
Beneficiary or such Designee as specified in such Withdrawal Notice.
(c) Subject to paragraph (a) of this Section 2 and to Section 4 of this
Agreement, in the absence of a Withdrawal Notice the Trustee shall allow no
substitution or withdrawal of any Asset from the Trust Account.
(d) The Trustee shall have no responsibility whatsoever to determine that
any Assets withdrawn from the Trust Account pursuant to this Section 2 will be
used and applied in the manner contemplated by Section 3 of this Agreement.
SECTION 3. APPLICATION OF ASSETS.
The Beneficiary hereby covenants to the Grantor that it shall use
and apply any withdrawn Assets, without diminution because of the insolvency of
the Beneficiary or the Grantor, for the following purposes only:
(i) to pay or reimburse the Beneficiary for the Grantor's share
under the Reinsurance Agreements regarding any losses and allocated loss
expenses paid by the Beneficiary but not recovered from the Grantor, or for
unearned premiums due to the Beneficiary, if not otherwise paid by the Grantor
in accordance with the terms of the Reinsurance Agreements;
(ii) to make payment to the Grantor of any amounts held in the
Trust Account that exceed 102% of the actual amount required to fund the
Grantor's entire Obligations (as hereinafter defined), and
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(iii) where the Beneficiary has received a Termination Notice (as
hereinafter defined) pursuant to Section 10 of this Agreement and where the
Grantor's entire Obligations remain unliquidated and undischarged ten days prior
to the termination Date (as hereinafter defined), to withdraw amounts equal to
such Obligations and deposit such amounts in a separate account, in the name of
the Beneficiary, in any United States bank or trust company, apart from its
other assets, in trust for the uses and purposes specified in subparagraphs (i)
and (ii) of this Section as may remain executory after such withdrawal and for
any period after such Termination date. For the purposes of this subparagraph
(iii), the phrase "the Trust Account" in subparagraph (ii) of this Section shall
be deemed to read "the separate account" established pursuant to this
subparagraph (iii).
SECTION 4. REDEMPTION, INVESTMENT AND SUBSTITUTION OF ASSETS.
(a) The Trustee shall surrender for payment all maturing Assets
and all Assets called for redemption and deposit the principal amount of the
proceeds of any such payment to the Trust Account.
(b) From time to time, at the written order and direction of the
Grantor, the Trustee shall invest Assets in the Trust Account in Eligible
Securities.
(c) From time to time, subject to the prior written approval of
the Beneficiary, the Grantor may direct the Trustee to substitute Eligible
Securities for other Eligible Securities held in the Trust Account at such time.
The Trustee shall have no responsibility whatsoever to determine the value of
such substituted securities or that such substituted securities constitute
Eligible Securities.
(d) All investments and substitutions of securities referred to
in paragraphs (b) and (c) of this Section 4 shall be in compliance with the
relevant provisions of the New York Insurance Law, as set forth in the
definition of "Eligible Securities" in Section 11 of this Agreement. The Trustee
shall have no responsibility whatsoever to determine that any Assets in the
Trust Account are or continue to be Eligible Securities. Any instruction or
order concerning such investments or substitutions of securities shall be
referred to herein as an "Investment Order". The Trustee shall
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execute Investment Orders and settle securities transactions by itself or by
means of an agent or broker. The Trustee shall not be responsible for any act or
omission, or for the solvency, of any such agent or broker unless said act or
omission is the result, in whole or in part, of the Trustee's negligence,
willful misconduct or lack of good faith.
(e) Any loss incurred from any investment pursuant to the terms
of this Section 4 shall be borne exclusively by the Trust Account. The Trustee
shall not be liable for any loss due to changes in market rates or penalties for
early redemption.
SECTION 5. THE INCOME ACCOUNT.
All payments of interest and dividends actually received in respect
of Assets in the Trust Account shall be deposited by the Trustee, subject to
deduction of the Trustee's compensation and expenses as provided in Section 8 of
the Agreement, in a separate account (the "Income Account") established and
maintained by the Grantor at an office of the Trustee in New York City. The
Grantor shall have the right to withdraw funds from the Income Account at any
time.
SECTION 6. RIGHT TO VOTE ASSETS.
The Trustee shall forward all annual and interim stockholder
reports and all proxies and proxy materials relating to the Assets in the Trust
Account to the Grantor. The Grantor shall have the full and unqualified right to
vote any Assets in the Trust Account.
SECTION 7. ADDITIONAL RIGHTS AND DUTIES OF THE TRUSTEE.
(a) The Trustee shall notify the Grantor and the Beneficiary in
writing within ten days following each deposit to, or withdrawal from the Trust
Account.
(b) Before accepting any Asset for deposit to the Trust Account,
the Trustee shall determine that such Asset is in such form that the Beneficiary
whenever necessary may, or the Trustee upon direction by the Beneficiary will,
negotiate such Asset without consent or signature from the Grantor of any person
or entity other than the Trustee in accordance with the terms of this Agreement.
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(c) The Trustee may deposit any Assets in the Trust Account in a
book-entry account maintained at the Federal Reserve Bank of New York or in
depositories such as the Depository Trust Company. Assets may be held in the
name of a nominee maintained by the Trustee or by any such depository.
(d) The Trustee shall accept and open all mail directed to the
Grantor or the Beneficiary in care of the Trustee.
(e) The Trustee shall furnish to the Grantor and the Beneficiary a
statement of all Assets in the Trust Account upon the inception of the Trust
Account and at the end of each calendar quarter thereafter.
(f) Upon the request of the Grantor or the Beneficiary, the
Trustee shall promptly permit the Grantor or the Beneficiary, their respective
agents, employees or independent auditors to examine, audit, excerpt, transcribe
and copy, during the Trustee's normal business hours, any books, documents,
papers and records relating to the Trust Account or the Assets.
(g) The Trustee is authorized to follow and rely upon all
instructions given by officers named in incumbency certificates furnished to the
Trustee from time to time by the Grantor and Zenith Insurance Company, acting as
agent for the Beneficiary, respectively, and by attorneys-in-fact acting under
written authority furnished to the Trustee by the Grantor or the Beneficiary,
including, without limitation, instructions given by letter, facsimile
transmission, telegram, teletype, cablegram or electronic media, if the Trustee
believes such instructions to be genuine and to have been signed, sent or
presented by the proper party or parties. The Trustee shall not incur any
liability to anyone resulting from actions taken by the Trustee in reliance in
good faith on such instructions. The Trustee shall not incur any liability in
executing instructions (i) from an attorney-in-fact prior to receipt by it of
notice of the revocation of the written authority of the attorney-in-fact or
(ii) from any officer of the Grantor or the Beneficiary named in an incumbency
certificate delivered hereunder prior to receipt by it of a more current
certificate.
(h) The duties and obligations of the Trustee shall only be such
as are specifically set forth in this Agreement, as it may from time to time be
amended, and no
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implied duties or obligations shall be read into this Agreement against the
Trustee. The Trustee shall only be liable for its own negligence, willful
misconduct or lack of good faith.
(i) No provision of this Agreement shall require the Trustee to
take any action which, in the Trustee's reasonable judgment, would result in any
violation of this Agreement or any provision of law.
(j) The Trustee may confer with counsel of its own choice in
relation to matters arising under this Agreement and shall have full and
complete authorization from the other Parties hereunder or any action taken or
suffered by it under this Agreement or under any transaction contemplated hereby
in good faith and in accordance with opinion of such counsel.
SECTION 8. THE TRUSTEE'S COMPENSATION, EXPENSES AND INDEMNIFICATION.
(a) The Grantor shall pay the Trustee, as compensation for its
services under this Agreement, a fee computed at rates determined by the Trustee
from time to time and communicated in writing to the Grantor. The Grantor shall
pay or reimburse the Trustee for all of the Trustee's expenses and disbursements
in connection with its duties under this Agreement (including attorney's fees
and expenses), except any such expense, or disbursement as may arise from the
Trustee's negligence, willful misconduct or lack of good faith. The Trustee
shall be entitled to deduct its compensation and expenses from payments of
dividends, interest and other income in respect of the Assets held in the Trust
Account prior to the deposit thereof to the Income Account as provided in
Section 5 of this Agreement. The Grantor shall indemnify, defend and save
harmless the Trustee from all loss, liability or expense (including the fees and
expenses of in house or outside counsel) arising out of or in connection with
(i) its execution and performance of this Agreement, except to the extent that
such loss, liability or expense is due to the negligence or willful misconduct
of the Trustee, or (ii) its following any instructions or other directions from
the Grantor, except to the extent that its following any such instructions or
direction is expressly forbidden by the terms hereof. Anything in this agreement
to the contrary notwithstanding in no event shall the Trustee be liable for
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special, indirect or consequential loss or damage of any kind whatsoever
(including but not limited to lost profits), even if the Trustee has been
advised of the likelihood of such loss or damage and regardless of the form of
action. The Grantor hereby acknowledges that the foregoing indemnities shall
survive the resignation of the Trustee or the termination of this Agreement and
hereby grants the Trustee a lien, right of set-off and security interest in the
funds in the Income Account for the payment of any claim for compensation,
reimbursement or indemnity hereunder.
(b) No Assets shall be withdrawn from the Trust Account or used
in any manner for paying compensation to, or reimbursement or Indemnification
of, the Trustee.
SECTION 9. RESIGNATION OF THE TRUSTEE.
(a) The Trustee may resign at any time by giving not less than 90
days' written notice thereof to the Beneficiary and to the Grantor, such
resignation to become effective on the acceptance of appointment by a successor
trustee and the transfer to such successor trustee of all Assets in the Trust
Account in accordance with paragraph (b) of this section 9.
(b) Upon receipt of the Trustee's notice of resignation, the
Grantor and the Beneficiary shall appoint a successor trustee. Any successor
trustee shall be a bank that is a member of the Federal Reserve System or
chartered in the State of New York and shall not be a Parent, a Subsidiary or an
Affiliate of the Grantor or the Beneficiary. Upon the acceptance of the
appointment as trustee hereunder by a successor trustee and the transfer to such
successor trustee of all Assets in the Trust Account, the resignation of the
Trustee shall become effective. Thereupon, such successor trustee shall succeed
to and become vested with all the rights, powers, privileges and duties of the
Trustee, and the Trustee shall be discharged from any future duties and
obligations under this Agreement, but the Trustee shall continue after its
resignation to be entitled to the benefits of the indemnities provided herein
for the Trustee.
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SECTION 10. TERMINATION OF THE TRUST ACCOUNT.
(a) The Trust Account and this Agreement, except for the
indemnities provided herein, may be terminated only after (i) the Grantor or the
Beneficiary has given the Trustee written notice of its intention to terminate
the Trust Account (the "Notice of Intention"), and (ii) the Trustee has given
the Grantor and the Beneficiary the written notice specified in paragraph (b) of
this Section 10. The Notice of Intention shall specify the date on which the
notifying Party intends the Trust Account to terminate (the "Proposed Date").
(b) Within ten Business Days following receipt by the Trustee of
the Notice of Intention, the Trustee shall give written notification (the
"Termination Notice") to the Beneficiary and the Grantor of the date (the
"Termination Date") on which the Trust Account shall terminate. The Termination
Date shall be (a) the Proposed Date (or if not a Business Day, the next Business
Day thereafter), if the Proposed Date is at least 30 days but no more than 45
days subsequent to the date the Termination Notice is given; (b) 30 days
subsequent to the date the Termination Notice is given (or if not a Business
Day, the next Business Day thereafter), if the Proposed Date is fewer than 30
days subsequent to the date the Termination Notice is given; or (c) 45 days
subsequent to the date the Termination Notice is given (of if not a Business
Day, the next Business Day thereafter), if the Proposed Date is more than 45
days subsequent to the date the Termination Notice is given.
(c) On the Termination Date, upon receipt of written approval of
the Beneficiary, the Trustee shall transfer to the Grantor any Assets remaining
in the Trust Account, at which time all liability of the Trustee with respect to
such Assets shall cease.
SECTION 11. DEFINITIONS.
Except as the context shall otherwise require, the following terms
shall have the following meanings for all purposes of this Agreement (the
definitions to be applicable to both the singular and the plural forms of each
term defined if both such forms of such term are used in this Agreement):
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The term "Affiliate" with respect to any corporation shall mean a
corporation which directly, or indirectly through one of more intermediaries,
controls or is controlled by, or is under common control with, such
corporation. The term "control" (including the related terms "controlled by" and
"under common control with") shall mean the ownership, directly or indirectly,
or more than fifty percent (50%) of the voting stock of a corporation.
The term "Business Day" shall mean any day on which the offices of
the Trustee in New York City are open for business.
The term "Eligible Securities" shall mean and include certificates
of deposit issued by a United States bank and payable in United States legal
tender and securities representing investments of the types specified in
subsections (1), (2), (3), (8) and (10) of Section 1404(a) of the New York
Insurance Law; provided, however, that no such securities shall have been issued
by a Parent, a Subsidiary or an Affiliate of either the Grantor or the
Beneficiary.
The term "Obligations" shall mean, with respect to the Reinsurance
Agreements, (a) losses and allocated loss expenses paid by the Beneficiary, but
not recovered from the Grantor, (b) reserves for losses reported and
outstanding, (c) reserves for losses incurred but not reported, (d) reserves for
allocated loss expenses and (e) reserves for unearned premiums.
The term "person" shall mean and include an individual, a
corporation, a partnership, an association, a trust, an unincorporated
organization or a government or political subdivision thereof.
The term "Parent" shall mean an institution that, directly or
indirectly, controls another institution.
The term "Subsidiary" shall mean an institution controlled,
directly or indirectly, by another institution.
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SECTION 12. GOVERNING LAW.
This Agreement shall be subject to and governed by the laws of the
State of New York without regard to its choice of laws principles.
SECTION 13. DESIGNATION AS AGENT; SUCCESSORS AND ASSIGNS.
The Beneficiary designates Zenith Insurance Company to act as its
agent with respect to any directions or instructions that may be given pursuant
to this Agreement and hereby agrees that any direction given by, payment of
trust proceeds to or other release of assets to Zenith Insurance Company shall
be deemed to be directions of and a payment or release to the Beneficiary under
this Agreement. This designation shall remain in effect and shall not be revoked
without the consent of the Trustee and the Grantor. No Party may assign this
Agreement or any of its obligations hereunder, without the prior, written
consent of the other Parties; provided, however, that this Agreement shall inure
to the benefit of and bind those who, by operation of law, become successors to
the Parties, including, without limitation, any liquidator, rehabilitator,
receiver or conservator and any successor merged or consolidated entity and
provided further that, in the case of the Trustee, the successor trustee is
eligible to be a trustee under the terms hereof.
SECTION 14. SEVERABILITY.
In the event that any provision of the Agreement shall be declared
invalid or unenforceable by any regulatory body or court having jurisdiction,
such invalidity or unenforceability shall not affect the validity or
enforceability of the remaining portions of this Agreement.
SECTION 15. ENTIRE AGREEMENT.
This agreement constitutes the entire agreement among the Parties,
and there are no understandings or agreements, conditions or qualifications
relative to this Agreement which are not fully expressed in this Agreement.
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SECTION 16. AMENDMENTS.
This Agreement may be modified or otherwise amended, and the
observance of any term of this Agreement may be waived, if such modification,
amendment or waiver is in writing and signed by all of the Parties.
SECTION 17. NOTICES, ETC.
Unless otherwise provided in this Agreement, all notices,
directions, requests, demands, acknowledgments and other communications required
or permitted to be given or made under the terms hereof shall be in writing and
shall be deemed to have been duly given or made (a) (i) when delivered
personally, (ii) when made or given by prepaid telex, telegraph or telecopier,
or (iii) in the case of mail delivery, upon the expiration of three days after
any such notice, direction, request, demand, acknowledgment or other
communication shall have been deposited in the United States mail for
transmission by first class mail, postage prepaid, or upon receipt thereof,
whichever shall first occur and (b) when addressed as follows:
If to the Grantor:
Inter-Ocean Reinsurance Company, Ltd.
12 Wesley Street
Hamilton, Bermuda HM FX
Attention: President
Fax: (441) 292-5552
If to the Beneficiary:
Zenith Insurance Company
Calfarm Insurance Company
Znat Insurance Company
Zenith Star Insurance Company
c/o Zenith Insurance Company
21255 Califa St.
Woodland Hills. CA 91367
Attention: John J. Tickner, General Counsel
Fax: 1 818 594 7269
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If to the Trustee:
Chase Manhattan Bank
450 West 33rd Street
New York, New York 10001
Fax: 212-946-7682
Attention: Escrow Department, 15th Floor
Each Party may from time to time designate a different address for
notices, directions, requests, demands, acknowledgments and other
communications by giving written notice of such change to the other Parties.
All notices, directions, requests, demands, acknowledgments and other
communications relating to the Beneficiary's approval of the Grantor's
authorization to substitute Assets and to the termination of the Trust
Account shall be in writing and may not be made or given by prepaid telex,
telegraph or telecopier.
SECTION 18. HEADINGS.
The headings of the Sections and the Table of Contents have been
inserted for convenience of reference only, and shall not be deemed to
constitute a part of this Agreement.
SECTION 19. COUNTERPARTS
This Agreement may be executed in any number of counterparts, each
of which when so executed and delivered shall constitute an original, but
such counterparts together shall constitute one and the same Agreement.
SECTION 20. MERGERS, CONSOLIDATIONS
Any corporation into which the Trustee in its individual capacity
may be merged or converted or with which it may be consolidated, or any
corporation resulting from any merger, conversion or consolidation to which
the Trustee in its individual capacity shall be a party, or any corporation
to which substantially all the corporate trust
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business of the Trustee in its individual capacity may be transferred, shall be
the Trustee under this Trust Agreement without further act.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed and delivered by their respective officers thereunto duly
authorized as of the date first above written.
INTER-OCEAN REINSURANCE COMPANY, LTD.
As Grantor
By: /s/ Michael Sullivan
----------------------------------------
Title: Vice President
----------------------------------------
ZENITH INSURANCE COMPANY
CALFARM INSURANCE COMPANY
ZNAT INSURANCE COMPANY
ZENITH STAR INSURANCE COMPANY
As Beneficiary
By: /s/ John J. Tickner
----------------------------------------
Title: Sr. Vice President
----------------------------------------
CHASE MANHATTAN BANK
As Trustee
By: /s/ Robert J. Stanislaro
----------------------------------------
Title: Vice President
----------------------------------------
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<PAGE>
EXHIBIT A
Aggregate Excess of Loss Reinsurance Agreement
Dated as of August 1, 1998
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<PAGE>
EXHIBIT B
List of Assets Deposited to the Trust Account
---------------------------------------------
<TABLE>
<CAPTION>
CUSIP PAR DESCRIPTION MARKET VALUE RATINGS+
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
00077qaa8 1500m AAB-Global 7 1/4% due 5/31/05 $1,609,080.00 AA-
06422kaaO 2000m Bank One Texas 6 1/4% due 2/15/08 $2,058,680.00 AA-
073902bhO 2000m Bear Stearns 6 1/8% due 2/1/03 $2,025,000.00 A
125569dp5 1000m CIT Group 6 3/8% due 8/1/02 $1,021,920.00 A+
638585bj7 1800m Nationsbank 6 1/8% due 7/15/04 $1,851,048.00 A+
TOTAL MARKET VALUE $8,565,728.00
</TABLE>
- ------------------------------
+ Ratings are S&P's
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FEE SCHEDULE FOR TRUST AGREEMENT
Dated as of ________ among Inter-Ocean Reinsurance Company, LTD., as
Grantor, Zenith Insurance Company, Calfarm Insurance Company, ZNAT Insurance
Company, and Zenith Star Insurance Company, as Beneficiary and The Chase
Manhattan Bank as Trustee.
Minimum Annual Fee - $5,000
Maximum Annual Fee - $10,000
Fee is calculated as 5 basis points times the market value in trust at each
year end and is payable in arrears.
This schedule shall not be amended without the consent of the Grantor and
the Trustee.
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<PAGE>
REINSURANCE AGREEMENT
entered into between
ZENITH INSURANCE COMPANY, WOODLAND HILLS, CALIFORNIA, UNITED STATES OF AMERICA
(hereinafter called the "Reassured")
of the one part,
and
certain INSURANCE and/or REINSURANCE COMPANIES, who have subscribed to this
Agreement, each to the extent of the proportion underwritten and not one for
another, as set out in the Signing Schedule(s) attached hereto,
(hereinafter called the "Reinsurers")
of the other part.
This Agreement is to cover the EXCESS LIABILITY which may accrue to the
Reassured under policies and/or contracts issued and/or accepted by the
Reassured covering their participation in certain Proportional Treaty
Reinsurances, as per attached schedule, and applicable to losses occurring:-
SECTION 1, 2 AND 3
Worldwide excluding the United States of America;
SECTION 4
All losses occurring in Europe (Europe being defined for the purpose of this
Agreement as the area encompassed between Longitudes 15DEG. West and 35DEG.
East passing through zero degrees and between Latitudes 70DEG. North and
36DEG. North. (See map attached)
This Agreement is subject to all terms, clauses and conditions as contained in
the original Treaties, as per attached schedule, other than as contained
herein:-
ARTICLE 1
INSURING CLAUSE
SECTION 1
The Reinsurers hereby agree to indemnify the Reassured for that part of their
Ultimate Nett Loss which exceeds GBP1,000,000 on account of each and every Loss
Occurrence, and the sum recoverable under this Agreement shall be up to but not
exceeding GBP1,000,000 Ultimate Nett Loss on account of each and every Loss
Occurrence (subject to the provisions of ARTICLE 12 (REINSTATEMENT)).
<PAGE>
2
SECTION 2
The Reinsurers hereby agree to indemnify the Reassured for that part of their
Ultimate Nett Loss which exceeds GBP2,000,000 on account of each and every
Loss Occurrence, and the sum recoverable under this Agreement shall be up to
but not exceeding GBP2,000,000 Ultimate Nett Loss on account of each and
every Loss Occurrence (subject to the provisions of ARTICLE 12
(REINSTATEMENT)).
SECTION 3
The Reinsurers hereby agree to indemnify the Reassured for that part of their
Ultimate Nett Loss which exceeds GBP4,000,000 on account of each and every
Loss Occurrence, and the sum recoverable under this Agreement shall be up to
but not exceeding GBP4,000,000 Ultimate Nett Loss on account of each and
every Loss Occurrence (subject to the provisions of ARTICLE 12
(REINSTATEMENT)).
SECTION 4
The Reinsurers hereby agree to indemnify the Reassured for that part of their
Ultimate Nett Loss which exceeds GBP8,000,000 on account of each and every
Loss Occurrence, and the sum recoverable under this Agreement shall be up to
but not exceeding GBP4,500,000 Ultimate Nett Loss on account of each and
every Loss Occurrence (subject to the provisions of ARTICLE 12
(REINSTATEMENT)).
ARTICLE 2
WARRANTY
It is hereby warranted that no claim will be payable under this Agreement unless
the relative Ultimate Nett Loss includes payments by the Reassured under
business, the subject matter hereof, in respect of two or more original risks.
For the purposes of this Agreement, any one risk is defined as all values at one
location including all business interruption and/or time element exposures
whether by way of Contingent Business Interruption, Suppliers or Customers
extensions.
ARTICLE 3
DEFINITION OF LOSS OCCURRENCE
The words "Loss Occurrence" shall mean each and every loss and/or catastrophe
and/or calamity and/or occurrence and/or series thereof arising out of and
directly occasioned by one event.
ARTICLE 4
PERIOD AND TERMINATION
This Agreement is in respect of losses occurring during the period commencing on
the 12th February, 1998, and expiring on the 11th February, 1999, both days
inclusive.
<PAGE>
3
Either party shall have the right to terminate this Agreement immediately by
giving the other party notice:-
(a)
if the performance of the whole or any part of this Agreement be prohibited or
rendered impossible de jure or de facto in particular and without prejudice to
the generality of the preceding words in consequence of any law or regulation
which is or shall be in force in any country or territory or if any law or
regulation shall prevent directly or indirectly the remittance of any or all or
any part of the balance of payments due to or from either party;
(b)
if the other party has become insolvent or unable to pay its debts or has lost
the whole or any part of its paid up capital;
(c)
if there is any material change in the ownership or control of the other party;
(d)
if the country or territory in which the other party resides or has its head
office or is incorporated shall be involved in armed hostilities with any
other country whether war be declared or not or is partly or wholly occupied
by another power;
(e)
if the other party shall have failed to comply with any of the terms and
conditions of this Agreement.
All notices of termination in accordance with any of the provisions of the above
paragraphs (a) to (e) inclusive shall be by cable, telex, telefax or any other
permanent means of instantaneous communication and shall be deemed to be served
upon despatch or where communications between the parties are interrupted upon
attempted despatch.
All notices of termination served in accordance with any of the provisions of
this Agreement shall be addressed to the party concerned at its head office
or at any other address previously designated by that party.
In the event of this Agreement being terminated then the Premium due to the
Reinsurers shall be calculated upon the Gross Nett Written Premium Income of the
Reassured for the period this Agreement was in force or pro rata temporis of the
Minimum Premium, whichever is the greater. Any Reinstatement Premium however,
shall continue to be based on the full annual Premium for this Agreement. The
rights and obligations of both parties to this Agreement shall remain in full
force until the effect of termination has been completed.
This Agreement shall follow Local Standard Time at the place where the loss
occurs.
If this Agreement should expire while a Loss Occurrence covered hereunder is in
progress it is understood and agreed that, subject to the other conditions of
this Agreement, the Reinsurers hereon are responsible as if the entire loss or
damage had occurred prior to the expiration of this Agreement, provided that no
part of that Loss Occurrence is claimed against any renewal of this Agreement.
<PAGE>
4
ARTICLE 5
ULTIMATE NETT LOSS
The term "Ultimate Nett Loss" shall mean the sum actually paid by the Reassured
in respect of any Loss Occurrence including expenses of litigation, if any, and
all other loss expenses of the Reassured (excluding, however, office expenses
and salaries of officials of the Reassured) but salvages and recoveries,
including recoveries from all other reinsurances, whether collected or not,
other than Underlying Reinsurances provided for herein, shall be first deducted
from such Ultimate Nett Loss to arrive at the amount of liability, if any,
attaching hereunder.
All salvages, recoveries or payments recovered or received subsequent to any
loss settlement hereunder shall be applied as if recovered or received prior to
the aforesaid settlement, and all necessary adjustments shall be made by the
parties hereto. Nothing in this clause shall be construed to mean that a
recovery cannot be made hereunder until the Reassured's Ultimate Nett Loss has
been ascertained.
Notwithstanding the foregoing, it is a condition of this Agreement that in
arriving at its Ultimate Nett Loss arising out of any one Loss Occurrence for
the purposes of this Agreement, the Reassured will extract from payments under
Stop Loss or Aggregate Contracts the proportion applicable to the one Loss
Occurrence in question. The basis of the extraction shall be the percentage that
the loss from the Loss Occurrence in question bears to the Ultimate Nett Loss of
the Reassured's Original Reassured applied to the amount paid by the Reassured
as a claim on a Stop Loss acceptance(s) or Aggregate Contracts involved.
ARTICLE 6
NETT RETAINED LINES CLAUSE
This Agreement shall only protect the portion of any business the subject matter
of this Agreement which the Reassured, acting in accordance with their
established practices, retain nett for their own account. Reinsurers' liability
hereunder shall not be increased due to an error or omission which results in an
increase in the Reassured's normal nett retention nor by the Reassured's failure
to reinsure in accordance with their normal practice, nor by the inability of
the Reassured to collect from any other reinsurer any amounts which may have
become due from them whether such inability arises from the insolvency of such
other reinsurer or otherwise.
ARTICLE 7
EXTRA CONTRACTUAL OBLIGATIONS CLAUSE (NMX 100)
This Agreement shall exclude all cover in respect of Extra Contractual
Obligations howsoever arising, such Extra Contractual Obligations being defined
as any award made by a court of competent jurisdiction against an insurer or
reinsurer, which award is not within the coverage granted by any insurance
and/or reinsurance policy and/or contract made between the parties in dispute.
Notwithstanding the foregoing, this Agreement shall extend to cover any loss
arising from a "Claims Related Extra Contractual Obligation":-
<PAGE>
5
(a)
awarded against the Reassured or
(b)
incurred by the Reassured where they have paid their share of a "Claims Related
Extra Contractual Obligation" awarded against one or more of their Co-Insurers.
It is warranted that any recovery under this Agreement in respect of a "Claims
Related Extra Contractual Obligation" shall only be for that part of any award
which corresponds to the Reassured's share of the insurance and/or reinsurance
policy and/or contract giving rise to the award and all proportional protection
effected by the Reassured shall provide or shall be deemed to provide pro-rata
coverage for such obligations.
This Agreement shall also extend to cover all loss from Extra Contractual
Obligations howsoever arising where the loss is incurred by the Reassured as a
result of their participation in any insurance and/or reinsurance which provides
cover for such loss, it being understood and agreed that such loss results from
a contractual liability incurred by the Reassured.
A "Claims Related Extra Contractual Obligation" shall be defined as the amount
awarded against an insurer or reinsurer found liable by a court of competent
jurisdiction to pay damages to an insured or reinsured in respect of the conduct
of a claim made under an insurance and/or reinsurance policy and/or contract,
where such liability has arisen because of:-
(A)
the failure of the insurer or reinsurer to agree or pay a claim within the
policy and/or contract limits or to provide a defense against such claims as
required by law or
(B)
bad faith or negligence in rejecting an offer of settlement or
(C)
negligence or breach of duty in the preparation of the defense or the conduct
of a trial or the preparation or prosecution of any appeal and/or subrogation
and/or any subsequent action resulting therefrom.
There shall be no liability under this Agreement in respect of:-
(i)
any assumption of liability by way of or participation in any mutual scheme
designed specifically to cover Extra Contractual Obligation; or
(ii)
any Extra Contractual Obligation arising from the fraud of a director,
officer or employee of the Reassured acting individually or collectively or
in collusion with an individual or corporation or with any other organization
or party involved in the presentation defence or settlement of any claim.
<PAGE>
6
Any loss arising under this Agreement in respect of "Claims Related Extra
Contractual Obligations" shall be deemed to be a loss arising from the same
event as that giving rise to the claim to which the Extra Contractual
Obligation is related; but recovery hereunder is subject to the insurance
and/or reinsurance policy and/or contract which gives rise to the Extra
Contractual Obligation falling within the scope of this Agreement.
ARTICLE 8
INSOLVENCY CLAUSE (LIRMA G86)
Where an Insolvency Event occurs in relation to the Reassured the following
terms shall apply (and, in the event of any inconsistency between these terms
and any other terms of Agreement, these terms shall prevail):
1. Notwithstanding any requirements in this Agreement that the Reassured
shall actually make payment in discharge of its liability to its
policyholder before becoming entitled to payment from the Reinsurers:
a. the Reinsurers shall be liable to pay the Reassured even though
the Reassured is unable actually to pay, or discharge its
liability to, its policyholder; but
b. nothing in this clause shall operate to accelerate the date for
payment by the Reinsurers of any sum which may be payable to the
Reassured, which sum shall only become payable as and when the
Reassured would have discharged, by actual payment, its liability
for its current net loss but for it being the subject of any
Insolvency Event.
2. The existence, quantum, valuation and date for payment of any sum which
the Reinsurers are liable to pay the Reassured under this Agreement
shall be those and only those for which the Reinsurers would be liable
to the Reassured if the liability of the Reassured to its policyholders
had been determined without reference to any term in any composition or
scheme of arrangement or any similar such arrangement, entered into
between the Reassured and all or any part of its policyholders, unless
and until the Reinsurers serve written notice to the contrary on the
Reassured in relation to any composition or scheme of arrangement.
3. The Reinsurers shall be entitled (but not obliged) to set-off, against
any sum which they may be liable to pay the Reassured, any sum for which
the Reassured is liable to pay the Reinsurers.
An Insolvency Event shall occur if:
A. i. (in relation to (1), (2) and (3) above) a winding up petition is
presented in respect of the Reassured or a provisional liquidator
is appointed over it or if the Reassured goes into
administration, administrative receivership or if the Reassured
has a scheme of arrangement or voluntary arrangement proposed in
relation to all or any part of its affairs; or
ii. (in relation to (1) above) if the Reassured goes into compulsory
or voluntary liquidation;
or, in each case, if the Reassured becomes subject to any other similar
insolvency process (whether under the laws of England and Wales or
elsewhere) and
<PAGE>
7
B. the Reassured is unable to pay its debts as and when they fall due
within the meaning of section 123 of the Insolvency Act 1986 (or any
statutory amendment or re-enactment of that section).
ARTICLE 9
EXCLUSIONS
Notwithstanding anything contained herein to the contrary, it is hereby
understood and agreed that the following is excluded from the protection
afforded by this Agreement:-
(1)
Loss or damage directly or indirectly occasioned by, happening through or in
consequence of war, invasion, acts of foreign enemies, hostilities (whether war
be declared or not), civil war, rebellion, revolution, insurrection, military or
usurped power, or confiscation or nationalisation or requisition or destruction
of or damage to property by or under the order of any Government or Public or
Local Authority, but this exclusion shall not apply to business written in
accordance with the Market War and Civil War Risks Exclusion Agreement nor to
business outside the scope of such Agreement;
Furthermore, as regards Terrorism this Agreement shall not cover:-
(i) loss destruction or damage in United Kingdom by fire or explosion
occasioned by or happening through or in consequence directly or
indirectly of Terrorism;
(ii) loss destruction or damage in Northern Ireland within the meaning of the
Northern Ireland (Emergency Provisions) Act 1973 or successors thereof.
For the purposes of this exclusion:-
(a) "United Kingdom" shall mean Great Britain, being England, Scotland and
Wales other than Isle of Man and Channel Islands.
(b) "Terrorism" shall mean any act of any person acting on behalf of or in
connection with any organization with activities directed towards the
overthrowing or influencing of any government de jure or de facto by
force or violence.
In the event of an occurrence giving rise to a loss or losses payable by the
Reassured not being certified by the Secretary of State for Trade and Industry
of Her Majesty's Government to have been an 'act of terrorism' and the Reassured
obtaining a Tribunal ruling confirming the Secretary of State's
non-certification and solely by reason thereof the Reassured and/or Original
Insurer(s) are unable to recover such loss or losses in whole or in part from
Pool Reinsurance Company Limited, the Reinsurers accept that exclusion (i) does
not apply to such loss or losses.
(2)
The Reassured's interest whether direct or by way of reinsurance in losses
arising from claim or claims against an Insured by another party or parties.
<PAGE>
8
Notwithstanding the foregoing this Reinsurance shall not exclude:-
1) Worker's Compensation and/or Employers' Liability losses arising from
the following perils:-
Fire, Lightning, Explosion, Structural Collapse, Windstorm, Hail, Flood,
Seismic Activity, Volcanic Eruption, Collision, Riots, Strikes, Civil
Commotion, Malicious Damage.
2) Any Physical Damage and/or Consequential loss coverage contingent
thereon effected by an Insured on behalf of another party.
It is further understood and agreed that this Agreement is subject to the
following Nuclear Energy Risks and Nuclear Incident Exclusion Clauses which are
attached hereto and shall form an integral part hereof:-
(i) NUCLEAR ENERGY RISKS EXCLUSION CLAUSE (REINSURANCE)(1994) (WORLDWIDE
EXCLUDING U.S.A & CANADA) - NMA 1975a (10/3/94) (JAPANESE AMENDMENT);
(ii) NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY - REINSURANCE U.S.A &
CANADA - N.M.A. 1590 & N.M.A. 1979a;
(iii) NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE - REINSURANCE U.S.A
& CANADA - N.M.A. 1119 & N.M.A. 1980a;
(iv) NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE AND LIABILITY
(BOILER AND MACHINERY POLICIES) - REINSURANCE U.S.A & CANADA - N.M.A.
1166 & N.M.A. 1251.
As regards loss or liability provided for in the attached N.M.A. clause(s),
applicable to the United States of America and/or Canadian business, it is
understood that wherever relevant therein the word "Reinsurance" shall be taken
and read as "Agreement" and that the word "Reinsured" shall be taken and read as
"Reassured".
ARTICLE 10
PREMIUM
SECTION 1
The Reassured shall pay to the Reinsurers a Deposit Premium of GBP300,000
payable in three installments, 25% at the 12th February 1998, 50% at 12th July
1998 and 25% at 1st October 1998 and the Deposit Premium shall be subsequently
adjusted to amounts equal to 5.04% calculated upon the Gross Nett Written
Premium Income derived from the business coming within the scope of this
Agreement and accounted for by the Reassured during the period of this
Agreement.
As soon as may be reasonably practicable after the expiry of this Agreement the
Reassured shall submit a statement of their actual Gross Nett Written Premium
Income (as defined herein) for the period of this Agreement for the purposes of
Premium adjustment between the parties hereto, subject however, to the
Reinsurers receiving not less than GBP300,000 which is deemed to be a Minimum
Premium for this Agreement.
<PAGE>
9
SECTION 2
The Reassured shall pay to the Reinsurers a Deposit Premium of GBP360,000
payable in three installments, 25% at 12th February 1998, 50% at 12th July
1998 and 25% at 1st October 1998 and the Deposit Premium shall be
subsequently adjusted to amounts equal to 6.048% calculated upon the Gross
Nett Written Premium Income derived from the business coming within the scope
of this Agreement and accounted for by the Reassured during the period of
this Agreement.
As soon as may be reasonably practicable after the expiry of this Agreement the
Reassured shall submit a statement of their actual Gross Nett Written Premium
Income (as defined herein) for the period of this Agreement for the purposes of
Premium adjustment between the parties hereto, subject however, to the
Reinsurers receiving not less than GBP360,000 which is deemed to be a Minimum
Premium for this Agreement.
SECTION 3
The Reassured shall pay to the Reinsurers a Deposit Premium of GBP340,000
payable in three installments, 25% at 12th February 1998, 50% at 12th July
1998 and 25% at 12th October 1998 and the Deposit Premium shall be
subsequently adjusted to amounts equal to 5.71% calculated upon the Gross
Nett Written Premium Income derived from the business coming within the scope
of this Agreement and accounted for by the Reassured during the period of
this Agreement.
As soon as may be reasonably practicable after the expiry of this Agreement the
Reassured shall submit a statement of their actual Gross Nett Written Premium
Income (as defined herein) for the period of this Agreement for the purposes of
Premium adjustment between the parties hereto, subject however, to the
Reinsurers receiving not less than GBP340,000 which is deemed to be a Minimum
Premium for this Agreement.
SECTION 4
The Reassured shall pay to the Reinsurers a Deposit Premium of GBP225,000
payable in three installments, 25% at 12th February 1998, 50% at 12th July
1998 and 25% at 12th October 1998 and the Deposit Premium shall be
subsequently adjusted to amounts equal to 3.78% calculated upon the Gross
Nett Written Premium Income derived from the business coming within the scope
of this Agreement and accounted for by the Reassured during the period of
this Agreement.
As soon as may be reasonably practicable after the expiry of this Agreement the
Reassured shall submit a statement of their actual Gross Nett Written Premium
Income (as defined herein) for the period of this Agreement for the purposes of
Premium adjustment between the parties hereto, subject however, to the
Reinsurers receiving not less than GBP225,000 which is deemed to be a Minimum
Premium for this Agreement.
APPLICABLE TO ALL SECTIONS
Provisional Adjustment to be calculated at 1st July, 1999 with final adjustment
at 31st December, 2000.
The term "Gross Nett Written Premium Income" shall be understood to mean gross
premiums, excluding Reinstatement Premiums, less only return premiums and
cancellations and premiums paid for reinsurance, recoveries under which inure to
the benefit of the Reinsurers hereon.
<PAGE>
10
ARTICLE 11
NO CLAIMS BONUS CLAUSE
SECTION 1
In the event that this Agreement is loss free, the Reinsurers agree to return to
the Reassured a No Claims Bonus equivalent to 25% of the premium finally earned
hereunder, provisionally calculated at 1st July 1999 with final calculation at
31st December 2000 or at a date thereafter at the Reassured's sole discretion,
by way of a full and final rebate.
The No Claims Bonus will become effective upon written confirmation from the
Reassured that there are no claims being recovered under this Agreement.
For the purposes of the foregoing, it shall be at the Reassured's sole
discretion whether or not to present a valid claim or claims for collection
hereunder (any potential claims hereunder shall, nevertheless, be advised to
Reinsurers in accordance with the terms and conditions of this Agreement).
Collection of the No Claims Bonus will constitute a full and final discharge of
liability under this Agreement, particularly, as regards any provisional claims
already advised.
SECTION 2
In the event that this Agreement is loss free, the Reinsurers agree to return to
the Reassured a No Claims Bonus equivalent to 25% of the premium finally earned
hereunder, provisionally calculated at 1st July 1999 with final calculation at
31st December 2000 or at a date thereafter at the Reassured's sole discretion,
by way of a full and final rebate.
The No Claims Bonus will become effective upon written confirmation from the
Reassured that there are no claims being recovered under this Agreement.
For the purposes of the foregoing, it shall be at the Reassured's sole
discretion whether or not to present a valid claim or claims for collection
hereunder (any potential claims hereunder shall, nevertheless, be advised to
Reinsurers in accordance with the terms and conditions of this Agreement).
Collection of the No Claims Bonus will constitute a full and final discharge of
liability under this Agreement, particularly, as regards any provisional claims
already advised.
SECTION 3
In the event that this Agreement is loss free, the Reinsurers agree to return to
the Reassured a No Claims Bonus equivalent to 5% of the premium finally earned
hereunder, provisionally calculated at 1st July 1999 with final calculation at
31st December 2000 or at a date thereafter at the Reassured's sole discretion,
by way of a full and final rebate.
The No Claims Bonus will become effective upon written confirmation from the
Reassured that there are no claims being recovered under this Agreement.
<PAGE>
11
For the purposes of the foregoing, it shall be at the Reassured's sole
discretion whether or not to present a valid claim or claims for collection
hereunder (any potential claims hereunder shall, nevertheless, be advised to
Reinsurers in accordance with the terms and conditions of this Agreement).
Collection of the No Claims Bonus will constitute a full and final discharge of
liability under this Agreement, particularly, as regards any provisional claims
already advised.
SECTION 4
In the event that this Agreement is loss free, the Reinsurers agree to return to
the Reassured a No Claims Bonus equivalent to 5% of the premium finally earned
hereunder, provisionally calculated at 1st July 1999 with final calculation at
31st December 2000 or at a date thereafter at the Reassured's sole discretion,
by way of a full and final rebate.
The No Claims Bonus will become effective upon written confirmation from the
Reassured that there are no claims being recovered under this Agreement.
For the purposes of the foregoing, it shall be at the Reassured's sole
discretion whether or not to present a valid claim or claims for collection
hereunder (any potential claims hereunder shall, nevertheless, be advised to
Reinsurers in accordance with the terms and conditions of this Agreement).
Collection of the No Claims Bonus will constitute a full and final discharge of
liability under this Agreement, particularly, as regards any provisional claims
already advised.
ARTICLE 12
REINSTATEMENT
SECTION 1
In the event of loss or losses occurring under this Agreement, it is hereby
mutually agreed to reinstate this Agreement to its full amount from the time of
the occurrence of such loss or losses to the expiry hereof, in consideration for
which the Reassured shall pay to the Reinsurers when such loss or losses are
settled an additional premium calculated at Pro Rata of the entire Premium
finally earned hereunder, for the period of this Agreement, in accordance with
the provisions of ARTICLE 10 (PREMIUM), but nevertheless, the Reinsurers shall
never be liable for more than the limit of liability, in respect of each Loss
Occurrence, nor more than twice such limit of liability in respect of aggregated
losses during the period of this Agreement, representing one (1) reinstatement
only of the abovementioned limit of liability for the period of this Agreement.
SECTION 2
In the event of loss or losses occurring under this Agreement, it is hereby
mutually agreed to reinstate this Agreement to its full amount from the time of
the occurrence of such loss or losses to the expiry hereof, in consideration for
which the Reassured shall pay to the Reinsurers when such loss or losses are
settled an additional premium calculated at Pro Rata of the entire Premium
finally earned hereunder, for the period of this Agreement, in accordance with
the provisions of ARTICLE 10 (PREMIUM), but nevertheless, the Reinsurers shall
never be liable for more than the limit of liability, in respect of each Loss
Occurrence, nor more than twice such limit of liability in respect of aggregated
losses during the period of this Agreement, representing one (1) reinstatement
only of the abovementioned limit of liability for the period of this Agreement.
<PAGE>
12
SECTION 3
In the event of loss or losses occurring under this Agreement, it is hereby
mutually agreed to reinstate this Agreement to its full amount from the time
of the occurrence of such loss or losses to the expiry hereof, in
consideration for which the Reassured shall pay to the Reinsurers when such
loss or losses are settled an additional premium calculated at Pro Rata of
the entire Premium finally earned hereunder, for the period of this
Agreement, in accordance with the provisions of ARTICLE 10 (PREMIUM), but
nevertheless, the Reinsurers shall never be liable for more than the limit of
liability, in respect of each Loss Occurrence, nor more than twice such limit
of liability in respect of aggregated losses during the period of this
Agreement, representing one (1) reinstatement only of the abovementioned
limit of liability for the period of this Agreement.
SECTION 4
In the event of loss or losses occurring under this Agreement, it is hereby
mutually agreed to reinstate this Agreement to its full amount from the time of
the occurrence of such loss or losses to the expiry hereof, in consideration for
which the Reassured shall pay to the Reinsurers when such loss or losses are
settled an additional premium calculated at Pro Rata of the entire Premium
finally earned hereunder, for the period of this Agreement, in accordance with
the provisions of ARTICLE 10 (PREMIUM), but nevertheless, the Reinsurers shall
never be liable for more than the limit of liability, in respect of each Loss
Occurrence, nor more than twice such limit of liability in respect of aggregated
losses during the period of this Agreement, representing one (1) reinstatement
only of the abovementioned limit of liability for the period of this Agreement.
APPLICABLE TO ALL SECTIONS
The term "Pro Rata" shall mean Pro Rata as to the fraction of the limit of one
Loss Occurrence indemnity reinstated only.
In the event of a loss settlement being made hereunder prior to the rendering
of the relative statement of Nett Premium Income, then reinstatement premium
shall be provisionally calculated on One Hundred Per Cent (100%) of the
Deposit Premium, subject to adjustment when the entire Premium finally earned
hereunder is established.
For the purposes of this Agreement losses shall be considered in chronological
date order of their occurrence but this shall not preclude the Reassured from
making provisional collections in respect of losses which may ultimately not be
recoverable hereon.
ARTICLE 13
RUN OFF CLAUSE
In the event of this Agreement not being renewed, it is agreed to indemnify the
Reassured for losses occurring during the period of Twelve (12) months from the
expiry date hereof in respect of policies and/or contracts written on or prior
to such expiry date at terms to be agreed.
It is understood and agreed that the Reassured must elect to accept the "run
off" provision before the effective date if such "run off" is required, each
annual period being deemed a separate reinsurance.
<PAGE>
13
ARTICLE 14
RATES OF EXCHANGE
For the purpose of this Agreement currencies other than the currency in which
this Agreement is written shall be converted into such currency at the rates of
exchange used in the Reassured's books or where there is a specific remittance
for a loss settlement at the rates of exchange used in making such remittance.
ARTICLE 15
NOTIFICATION OF CLAIMS
The Reassured undertake to advise the Reinsurers as soon as possible of any
circumstances likely to give rise to a claim hereunder together with an estimate
of the Reinsurers' liability and thereafter keep the Reinsurers fully informed
of any developments regarding the claim.
ARTICLE 16
LOSS SETTLEMENT
All loss settlements made by the Reassured, provided the same are within the
terms of the original policies and/or contracts (or within the provisions of the
EXTRA CONTRACTUAL OBLIGATIONS CLAUSE (NMX100) hereof) and within the terms of
this Agreement, shall be binding upon the Reinsurers and amounts falling to the
share of the Reinsurers shall be payable by them upon reasonable evidence of the
amount paid being given by the Reassured.
ARTICLE 17
INSPECTION
The Reinsurers may by a duly appointed representative inspect, at any reasonable
time at the head office of the Reassured, or at the place where they may be
kept, any records or documents which relate to business covered under this
Agreement, provided always that the Reinsurers shall have given to the Reassured
not less than Forty Eight (48) hours prior notice of their intention so to do.
The said representative may arrange for copies to be made at the Reinsurers'
expense of any of the records or documents containing the information as they
may require.
It is agreed that the Reinsurers' right of inspection shall continue as long as
either party remains under any liability arising out of this Agreement.
ARTICLE 18
MODIFICATIONS TO AGREEMENT
Any mutually agreed modification of the terms and conditions of this Agreement,
whether by Addendum, revised Schedule or correspondence, shall be deemed to be
binding upon the parties hereto, and to form an integral part of this Agreement.
<PAGE>
14
ARTICLE 19
INTERMEDIARY
AON GROUP LIMITED,
CUTLERS GARDENS,
8 DEVONSHIRE SQUARE,
LONDON EC2M 4PL,
is recognised as the Intermediary negotiating this Agreement, through whom
all communications relating thereto shall be transmitted to both parties.
ARTICLE 20
ARIAS ARBITRATION CLAUSE
All disputes and differences arising under or in connection with this Agreement
shall be referred to arbitration under ARIAS Arbitration Rules.
The Arbitration Tribunal shall consist of Three (3) arbitrators, one to be
appointed by the Claimant, one to be appointed by the Respondent and the third
to be appointed by the two appointed arbitrators.
The third member of the Tribunal shall be appointed as soon as practicable (and
no later than Twenty Eight (28) days) after the appointment of the two party -
appointed arbitrators. The Tribunal shall be constituted upon the appointment of
the third arbitrator.
The Arbitrators shall be persons (including those who have retired) with not
less than Ten (10) years' experience of insurance or reinsurance within the
industry or as lawyers or other professional advisers serving the industry.
Where a party fails to appoint an arbitrator within Fourteen (14) days of
being called upon to do so or where the two party - appointed arbitrators
fail to appoint a third within Twenty Eight (28) days of their appointment,
then upon application ARIAS will appoint an arbitrator to fill the vacancy.
At any time prior to the appointment by ARIAS the party or arbitrators in
default may make such appointment.
The Tribunal may in its sole discretion make such orders and directions as it
considers to be necessary for the final determination of the matters in dispute.
The Tribunal shall have the widest discretion permitted under the law governing
the arbitral procedure when making such orders or directions.
The seat of arbitration shall be California, United States of America.
The proper law of this Agreement shall be the law of California.
ARTICLE 21
SERVICE OF SUIT (1998 - MENDES & MOUNT, CALIFORNIA)
(This Article is applicable only to an unauthorized Reinsurer in the State of
New York or to the Reinsurer who is domiciled outside the United States of
America.)
<PAGE>
15
It is agreed that in the event of the failure of the Reinsurer hereon to pay
any amount claimed to be due hereunder, the Reinsurer hereon, at the request
of the Company, will submit to the jurisdiction of a court of competent
jurisdiction within the United States of America.
Nothing in this clause constitutes or should be understood to constitute a
waiver of the Reinsurer's rights to commence an action in any Court of
competent jurisdiction in the United States, to remove an action to a United
States District Court, or to seek a transfer of a case to another Court as
permitted by the laws of the United States or of any State in the United
States.
It is further agreed that service of process in such suit may be made upon
Messrs. Mendes and Mount, Citicorp Plaza, 725 South Figueroa Street, Suite
1990, 19th Floor, Los Angeles, California 90017, and that in any suit
instituted against any one of them upon this contract, the Reinsurer will
abide by the final decision of the Court or of any Appellate Court in the
event of an appeal.
The above named are authorized and directed to accept service of process on
behalf of the Reinsurer in any such suit and/or upon and request of the
Company to give a written undertaking to the Company that they will enter a
general appearance upon the Reinsurer's behalf in the event such a suit shall
be instituted.
Further, pursuant to any statute of any state, territory or district of the
United States which makes provision therefore, the Reinsurer hereby designates
the Superintendent, Commissioner or Director of Insurance or other officer
specified for that purpose in the statute, or his successor or successors in
office, as his true and lawful attorney upon whom may be served any lawful
process in any action, suit or proceeding instituted by or on behalf of the
Company or any beneficiary hereunder arising out of this Agreement, and
hereby designates the above named as the firm to whom the said officer is
authorized to mail such process or a true copy thereof.
ARTICLE 22
PROPER LAW AND JURISDICTION
The validity, construction and performance of this Agreement shall be
governed by the laws of California and the Californian Courts shall have sole
jurisdiction in any dispute hereunder.
IN WITNESS WHEREOF this Agreement has been signed in duplicate on behalf of and
by the authority of each contracting party.
Signed for and on behalf of the Reassured:-
/s/ [ILLEGIBLE]
-----------------------
ZENITH INSURANCE COMPANY
In California, this 18th day of March 1998
and on behalf of the Reinsurers as indicated in the Signing Schedule(s) attached
hereto.
<PAGE>
[LOGO]
ZENITH INSURANCE COMPANY
Schedule of Pro-Rata Treaties
<TABLE>
<CAPTION>
Attaching to and forming part of Policy No. BA9822901
- ----------------------------------------------------------------------------------------------------------------------------------
TREATY ZENITH TYPE DESCRIPTION TERRITORIAL SCOPE P.I. USA-P.I. NON-USA P.I.
REF No GBP GBP
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
A 373 Q/S Direct Cat/Risk x1 WW 928,937 - 928,937
B 597 Surplus Fac & Treaty (Cat, Risk & PR) WW ex. USA 586,640 - 586,640
C 586 Surplus Cat, Risk, D&F, & PA WW ex. USA 200,000 - 200,000
D 372 Surplus Cat, Risk, D&F etc. WW (ex US Cat) 231,500 53,245 178,255
E 578 Surplus Cat, Risk, D&F etc. WW 781,250 210,938 570,313
F 574 Surplus Cat & Risk XL WW 125,000 80,000 45,000
G 785 Q/S Cat XL, Stop Loss & Risk XL WW ex. USA 367,486 - 367,486
H 848 Surplus Cat, Risk, D&F etc. WW 153,825 46,148 107,678
I 564 Surplus Property XL, primarily Cat. WW 75,000 34,500 40,500
J 391 Q/S Cat XL WW 23,224 - 23,224
K 854 Q/S High Layer XL (Cat, Risk, D&F) WW (ex. US Wind/EQ & Jap EQ.) 138,750 67,988 70,763
L 859 Surplus Facultative Property WW ex USA, mainly Europe 177,407 - 177,407
M 558 Surplus Risk & Cat XL WW ex. USA 1,732,500 - 1,732,500
N 954 Surplus Cat/Risk/Stop Loss/Agg Europe (ex. Nordic), Asia 172,112 - 172,112
& Australia
O 865 Q/S Property Cat XL WW (UK & Eire Cedants) 312,500 - 312,500
P 853 Q/S Property Cat XL Europe 155,172 - 155,172
Q 870 Surplus Facultative Property WW 283,851 - 283,851
- ----------------------------------------------------------------------------------------------------------------------------------
1.6407 US$=L1 TOTAL NON-USA P.I. - GBP 5,952,335
2.9593 DEM=L1 ---------
13.0729 SEK=L1
<CAPTION>
- ----------------------------------------------
TREATY COMMENTS
- ----------------------------------------------
<S> <C>
A
B Ex USA
C Ex USA
D 23% US, 14% WW
E 27% US, 51% WW Inc, 22% WW Ex.
F 64% US, 2% WW Inc, 34% WW Ex.
G Ex USA
H 30% US Cat, 40% ROW Cat, 20% Risk
10% specific classes (Dir/PA/Med)
I 46% US, 1% WW
J Unable to split by premium
K 49% Cat (US Wind/EQ not covered)
Risk & Fac largely US
L Ex USA
M Ex USA
N Ex USA
O Non-UK/Irish exposure "remote"
P Ex USA
Q Unable to split by premium
- ----------------------------------------------
</TABLE>
<PAGE>
[LOGO]
ZENITH INSURANCE COMPANY
Attaching to and forming part of Policy No. BA9822901
EUROPE
[MAP]
<PAGE>
SIGNING SCHEDULE
ATTACHING TO AND FORMING PART OF REINSURANCE AGREEMENT NO. BA9822901
REASSURED ZENITH INSURANCE COMPANY
- -------------------------------------------------------------------------------
IN WITNESS WHEREOF this Agreement has been signed.
In Bermuda this 5th day of August 1998
For and on behalf of
/s/ David Eklund
-------------------
RENAISSANCE
REINSURANCE
RENAISSANCE REINSURANCE
Ref: 5-10718-01/02/03/04
In respect of their participation of 100.00% of the premium and liability under
this Agreement.
AON GROUP LIMITED
CUTLERS GARDENS,
8 DEVONSHIRE SQUARE,
LONDON EC2M 4PL
---------------
NON-MARINE DIVISION
SEVERAL LIABILITY NOTICE
The subscribing reinsurers' obligations under contracts of reinsurance to which
they subscribe are several and not joint and are limited solely to the extent of
their individual subscriptions. The subscribing reinsurers are not responsible
for the subscriptions of any co-subscribing reinsurer who for any reason does
not satisfy all or part of its obligations.
LSW 1001 (Reinsurance)
<PAGE>
FIFTH AMENDMENT TO LINE OF CREDIT AGREEMENT
This Fifth Amendment to Line of Credit Agreement (the "Amendment") is
effective as of March 8, 1999, by and between SANWA BANK CALIFORNIA (the
"Bank") and ZENITH NATIONAL INSURANCE CORP. (the "Borrower") with respect to
the following:
This Amendment shall be deemed to be a part of and subject to that
certain Line of Credit Agreement dated as of December 15, 1994, as heretofore
amended, and any and all addenda and riders heretofore made (collectively the
"Agreement"). Unless otherwise defined herein, all terms used in this
Amendment shall have the same meanings as in the Agreement. To the extent
that any of the terms or provisions of this Amendment conflict with those
contained in the Agreement, the terms and provisions contained herein shall
control.
WHEREAS, the Borrower and the Bank mutually desire to extend and/or
modify the Agreement.
NOW THEREFORE, for value received and hereby acknowledged, the Borrower
and the Bank agree as follows:
1. CHANGE IN INTEREST RATE. Sections 1.02 C. 1, 2 and 3 of the
Agreement are deleted in their entirety and the following is substituted in
lieu thereof:
"1. REFERENCE RATE ADVANCES. A variable rate equivalent to an
index for a variable interest rate which is quoted, published or
announced from time to time by the Bank as its reference rate and as to
which loans may be made by the Bank at, below or above such reference
rate (the "Reference Rate"). Interest shall be adjusted concurrently
with any change in the Reference Rate. An Advance based upon the
Reference Rate is hereinafter referred to as a "Reference Rate Advance."
Each such Reference Rate Advance must be in the minimum amount of
$100,000.00.
2. FED FUNDS ADVANCES. A variable rate per annum (the "Federal
Funds Rate"), for each day in which the Advance is based upon the
Federal Funds Rate (a "Fed Funds Advance"), equivalent to 0.40% in
excess of the interest rate equal to the weighted average of the rates
on overnight, 1, 2, or 3-week Federal funds transactions with members
of the Federal Reserve System, quoted to the Bank on such day by Federal
Funds brokers of recognized standing which are selected by the Bank in
its sole discretion or, if such day is not a business day, for the
immediately preceding business day. With respect to this section
1.02(C)(2), a business day means a day in which banks are open generally
in Chicago and New York for the conduct of substantially all of their
commercial lending activities. Fed Funds Advances must be in the
minimum amount of $250,000.00.
3. EURODOLLAR ADVANCES. A fixed rate quoted by the Bank for 30,
60, 90, 120, 180 or 360 days or for such other period of time that the
Bank may quote and offer (provided that any such period of time does not
extend beyond the Expiration Date) [the "Interest Period"] for Advances
in the minimum amount of $250,000.00. Such interest rate shall be a
percentage equivalent to 0.40% in excess of the Bank's Eurodollar Rate
(rounded upward, if necessary, to the nearest 1/16th of one per cent
(0.0625%) which is that rate determined by the Bank's Treasury Desk as
being the approximate rate at which the Bank could
1
<PAGE>
purchase offshore U.S. dollar deposits in an amount approximately equal
to the amount of the relevant Advance and for a period of time
approximately equal to the relevant Interest Period (adjusted for any
and all assessments, surcharges and reserve requirements pertaining to
the purchase by the Bank of such U.S. dollar deposits)
[the "Eurodollar Rate"]. An Advance based upon the Eurodollar Rate is
hereinafter referred to as a "Eurodollar Advance" or Eurodollar Rate
Advance".
4. LIBOR ADVANCES. A fixed rate quoted by the Bank for 1, 2, 3 or
6 months or for such other period of time that the Bank may quote and
offer (provided that any such period of time does not extend beyond the
Expiration Date) [the "LIBOR Interest Period"] for Advances in the
minimum amount of $250,000.00. Such interest rate shall be a percentage
approximately equivalent to 0.40% in excess of the Bank's LIBOR Rate
which is that rate determined by the Bank's Treasury Desk as being the
arithmetic mean (rounded upwards, if necessary, to the nearest whole
multiple of one-sixteenth of one percent (1/16%)) of the U. S. dollar
London Interbank Offered Rates for such period appearing on page 3750
(or such other page as may replace page 3750) of the Telerate screen at
or about 11:00 a.m. (London time) on the second Business Day prior to
the first day of such period (adjusted for any and all assessments,
surcharges and reserve requirements) [the "LIBOR Rate"]. An Advance
based upon the LIBOR Rate is hereinafter referred to as a "LIBOR
Advance"."
2. SUPPLEMENTAL INTEREST PAYMENT DATE FOR LIBOR RATE ADVANCES. An
additional unnumbered paragraph is to be inserted as the penultimate
paragraph of Section 1.02 C of the Agreement, as follows:
"Interest on any LIBOR Advance with a LIBOR Interest Period of 3
months or less shall be paid on the last day of the LIBOR Interest
Period. Interest on any LIBOR Rate Advance with an Interest Period in
excess of three months shall be paid quarterly (i.e., on the last day of
each three month period occurring in such Interest Period) and on the
last day of the Interest Period pertaining to such LIBOR Rate Advance."
3. AMENDED NOTICE OF BORROWING. A new sub-section 3 is added to
Paragraph 1.02F of the Agreement, as follows:
"3. A LIBOR RATE ADVANCE. Notice of any LIBOR Rate Advance shall
be received by the Bank no later than two business days prior to the day
(which shall be a business day) on which the Borrower requests a LIBOR
Rate Advance to be made."
4. AMENDED PARAGRAPHS 1.02 G, H, I, AND J. Paragraphs 1.02 G, H, I,
and J, of the Agreement are amended to insert the words "or LIBOR Rate"
after the words "Eurodollar Rate".
5. CONFIRMATION OF OTHER TERMS AND CONDITIONS OF THE AGREEMENT. Except
as specifically provided in this Amendment, all other terms, conditions and
covenants of the Agreement unaffected by this Amendment shall remain
unchanged and shall continue in full force and effect and the Borrower hereby
covenants and agrees to perform and observe all terms, covenants and
agreements provided for in the Agreement, as hereby amended.
2
<PAGE>
IN WITNESS WHEREOF, this Amendment has been executed by the parties
hereto as of the date first hereinabove written.
BANK: BORROWER:
SANWA BANK CALIFORNIA ZENITH NATIONAL INSURANCE CORP.
By: /s/ Dirk A. Price By: /s/ Stanley R. Zax
----------------------------- ------------------------------------
Dirk A. Price, Vice President Stanley R. Zax, President & Chairman
3
<PAGE>
ANNUAL REPORT 1998
ZENITH NATIONAL INSURANCE CORP.
CALFARM
THEZENITH
<PAGE>
INSURANCE PRODUCTS AND SERVICES
Automobile
Business
Earthquake
Farmowners
Health
Homeowners
Reinsurance
SinglePoint
Integrated 24-Hour Health & Disability
Workers' Compensation
CALFARM
THEZENITH
<PAGE>
CONTENTS
<TABLE>
<S> <C>
Financial Highlights....................................................... 3
Letter to Stockholders..................................................... 4
Management's Discussion and Analysis of
Consolidated Financial Condition and Results of Operations............... 30
Five-Year Summary of Selected Financial Information........................ 44
Property-Casualty Loss Development......................................... 46
Consolidated Balance Sheet................................................. 48
Consolidated Statement of Operations....................................... 50
Consolidated Statement of Cash Flows....................................... 51
Consolidated Statement of Stockholders' Equity............................. 52
Notes to Consolidated Financial Statements................................. 54
Report of Independent Accountants.......................................... 71
Corporate Directory
Zenith National Insurance Corp........................................... 72
Zenith Insurance Company................................................. 73
TheZenith Marketing, Underwriting and Claims Offices..................... 74
CalFarm Insurance Company................................................ 75
Perma-Bilt, a Nevada Corporation......................................... 76
</TABLE>
2
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
1998 1997 1996
----------------------------
(Dollars in thousands,
OPERATING RESULTS except per share data)
<S> <C> <C> <C>
Revenues $636,779 $600,480 $556,371
Income after taxes and before realized
gains 11,559 19,669 30,575
Realized gains on investments after taxes 7,541 8,431 7,025
Net income 19,100 28,100 37,600
PER SHARE DATA
Income after taxes and before realized
gains* $ 0.67 $ 1.10 $ 1.72
Realized gains on investments after
taxes* 0.44 0.47 0.40
Net income* 1.11 1.57 2.12
Stockholders' dividends 1.00 1.00 1.00
KEY STATISTICS
Combined ratio
Including catastrophes 105.3% 103.4% 99.8%
Excluding catastrophes 103.1% 103.1% 99.8%
Statutory risk-based capital ratio** 332% 364%
Stockholders' equity $346,952 $361,866 $337,503
Stockholders' equity per share*** $ 20.23 $ 20.31 $ 19.17
Closing common stock price $ 23 1/8 $ 25 3/4 $ 27 3/8
</TABLE>
*Amounts are presented on a diluted basis. 1996 amounts have been
restated as required to comply with Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share". See
Note 16 to the consolidated financial statements on page 68.
**The computation of the statutory risk-based capital ("RBC")
ratio for 1998 has not yet been completed. The previously filed
statutory financial information of Zenith's insurance
subsidiaries is being re-stated following the determination of
the RISCORP purchase price on March 19, 1999. Although the RBC
ratio for 1998 is expected to be lower than the 1997 RBC ratio,
it is expected that such ratio will substantially exceed the
Company and Regulatory Action Levels.
***Excluding the effect of SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," stockholders' equity
per share was $19.86, $20.03 and $19.28 in 1998, 1997 and 1996,
respectively. See Notes 1 and 2 to the consolidated financial
statements on pages 54-59.
CALFARM
THEZENITH 3
<PAGE>
TO OUR STOCKHOLDERS
Two significant events occurred during the first quarter of 1999:
the sale of our CalFarm Insurance operations in California and the
decision with respect to the final purchase price to be paid for
the acquisition of substantially all of the assets and certain
liabilities of the RISCORP Florida-based Workers' Compensation
business acquired on April 1, 1998.
SALE OF CALFARM
Effective March 31, 1999 we completed the sale of CalFarm
Insurance, including the health business, to Nationwide Mutual
Insurance Company. The price is $275 million in cash, subject to
post-closing adjustment in certain circumstances. We estimate a
gain of approximately $100 million from the transaction. Investable
assets will not change materially.
CalFarm is an excellent company with expertise in the
California agricultural industry, the most important in the United
States. We received an attractive offer from Nationwide, also a
company rooted with agricultural involvement, and considered what
would be in the best interest of our company, CalFarm and its
employees, agents and policyholders, and our shareholders.
Specifically, we believe this transaction will provide attractive
opportunities to agricultural and rural insurance customers in
California and a broader market for insurance agents. As a result
of the transaction, our book value will increase by about $5.84 per
share, or 28.9%, thereby strengthening the company as we search for
profitable insurance niches.
4
<PAGE>
WE ARE HOPEFUL THE FINAL PURCHASE PRICE
OF THE RISCORP ACQUISITION REPRESENTS
A FAIR COMPUTATION OF BOOK VALUE.
RISCORP PURCHASE PRICE
On March 19, 1999 we received a report determining the final
purchase price of the RISCORP Acquisition. This report, prepared by
a nationally recognized accounting firm, indicated that the GAAP
net book value of the assets transferred over the liabilities
assumed as of April 1, 1998 in the RISCORP Acquisition was
$92,336,000. On March 26, 1999 we paid $53,688,000 to RISCORP, the
balance of the purchase price payable including interest from April
1, 1998, less an amount for assets not transferred by RISCORP.
The report indicated that there was considerable value in
the former RISCORP operations. We are hopeful that the final
purchase price represents a fair computation of book value.
Reinsurance acquired in 1998 will provide protection for adverse
loss reserve development for up to $50,000,000 in excess of the
reserves originally booked by RISCORP at April 1, 1998. After
recognizing additional reserves in line with the final purchase
price we have approximately $24,500,000 of this reinsurance
protection that will cover future adverse development, if any.
CALFARM
THEZENITH 5
<PAGE>
STOCKHOLDERS' EQUITY PER SHARE
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
'94 $16.35
'95 $18.58
'96 $19.17
'97 $20.31
'98 $20.23
</TABLE>
1998 ANNUAL REPORT
Despite less than satisfactory underwriting performance, investment
results continue to be positive. The sale of CalFarm will enhance
our financial strength and flexibility. Also, the determination of
the RISCORP purchase price removes a major uncertainty from our
balance sheet. Our management has focused their efforts to improve
the underwriting profitability of our nationally-diversified
Workers' Compensation operations with California now representing
less than half our business for the first time.
SUMMARY OF FINANCIAL HIGHLIGHTS
- Premiums increased 8.4% to $529,855,000.
- Income after tax before net realized gains on investments was
$11,559,000, or $0.67 per share, compared to $19,669,000, or
$1.10 per share in 1997.
- Investment income after tax was $35,907,000, or $2.09 per share,
compared to $34,655,000, or $1.94 per share in 1997.
- Net income was $19,100,000, or $1.11 per share, compared to
$28,100,000, or $1.57 per share in 1997.
- Realized capital gains on investments after taxes were
$7,541,000, or $0.44 per share, compared to $8,431,000, or $0.47
per share in 1997. Unrealized gains on fixed maturities after
taxes were $7,431,000, compared to $5,890,000 in 1997.
- The combined ratio for the property-casualty insurance operations
was 105.3%, compared to 103.4% in 1997.
- Book value per share at 1998 year-end was $20.23, compared to
$20.31 at 1997 year-end.
6
<PAGE>
THE CALFARM SALE WILL RESULT IN A GAIN OF
ABOUT $100 MILLION AND AN INCREASE IN
BOOK VALUE OF ABOUT $5.84 PER SHARE.
ANALYSIS
Operating earnings, which consist of investment income and
insurance underwriting results, after taxes were $17,202,000, or
$1.00 per share in 1998, compared to $23,463,000, or $1.31 per
share the prior year. The RISCORP Acquisition reduced 1998
operating earnings after taxes by an estimated $7,542,000, or $0.44
per share.
The following table summarizes pre-tax underwriting
performance during the past three years.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------
UNDERWRITING RESULTS 1998 1997 1996
----------------------------
(Dollars in thousands)
<S> <C> <S> <C> <C> <C>
Workers' Compensation $(42,638) $(37,157) $(19,462)
CalFarm Health (2,991) 125 42
CalFarm Property-Casualty 7,401 6,384 8,034
Reinsurance 10,268 14,189 12,479
-----------------------------------------------------------------------
Underwriting (Loss) Income $(27,960) $(16,459) $ 1,093
-----------------------------------------------------------------------
</TABLE>
1998 results were significantly below our goals, due
primarily to continuing substantial underwriting losses in the
Workers' Compensation operations, losses in the CalFarm health
business and reduced reinsurance profits due to Hurricane Georges.
CALFARM
THEZENITH 7
<PAGE>
1998 SHAREHOLDERS' EQUITY PER SHARE WAS
$20.23, COMPARED TO $20.31 THE PRIOR YEAR.
The combined ratio for Workers' Compensation of 115.3% was
composed of a 61.5% loss ratio, and a 53.8% loss adjustment and
underwriting expense ratio. Prior accident years' loss and loss
adjustment expense remained unchanged during 1998. Significantly,
$15,018,000 of the total underwriting loss was related to the
RISCORP Acquisition while the California underwriting loss was
reduced. Since the beginning of California open rating in 1995, our
California loss ratio has averaged 61%, while the entire California
industry has averaged approximately 87%. This 26-point advantage is
consistent with our relative results prior to open rating and
demonstrates the rationality of our pricing and underwriting
strategy, and the absence of creative reinsurance.
Expansion of our national Workers' Compensation operations
through the RISCORP Acquisition resulted in California premiums
being less than 50% of our total Workers' Compensation business for
the first time. Despite the increasing competition in many state
markets, we expanded and built important relationships at a
reasonable cost. Our 1998 loss ratio estimate for all states
outside of California is 62.7% compared to 55.6% the prior year.
The loss ratio related to the business acquired from RISCORP
commencing April 1, 1998 is estimated at 70.0%. Our expense ratio
reflects volume reductions due to the competitive climate, costs
for Year 2000 compliance and other expenses related to the RISCORP
Acquisition and integration.
Our Reinsurance operations had another successful year,
their sixth since 1992, despite $4,500,000 of losses from Hurricane
Georges.
8
<PAGE>
OUR REINSURANCE OPERATION RECORDED ITS
SIXTH CONSECUTIVE SUCCESSFUL YEAR.
CalFarm delivered outstanding underwriting performance for
the third consecutive year in the property-casualty business, but
incurred significant losses for the first time in the health
business. The combined ratio in the health business was 105.7% in
1998, compared to 99.7% the prior year.
During the five years ended 1998, our average combined ratio
was 102.0%, compared to the industry average of 105.5%, and for the
past 10 years was 101.7%. Since management assumed operating
responsibility in 1977, the combined ratio has averaged 101.0%, an
excellent result, however slightly higher than our goal of 100%.
<TABLE>
<CAPTION>
ZENITH COMBINED RATIOS VERSUS INDUSTRY
---------------------------------------
Year Zenith Industry*
---------------------------------------
<S> <C> <C>
1994 97.8% 108.5%
1995 103.1 106.5
1996 99.8 105.8
1997 103.4 101.6
1998 105.3 105.0
AVERAGE 102.0% 105.5%
---------------------------------------
* Source A.M. Best Company
</TABLE>
The above table clearly shows we have outperformed the
industry combined ratio over the past five years.
Investment income after tax increased 3.6% from $34,655,000,
or $1.94 per share in 1997, to $35,907,000, or $2.09 per share in
1998.
CALFARM
THEZENITH 9
<PAGE>
SINCE MANAGEMENT ASSUMED OPERATING
RESPONSIBILITY IN 1977, THE COMBINED
RATIO HAS AVERAGED 101.0%, SLIGHTLY
HIGHER THAN OUR GOAL OF 100%.
Net income in 1998 was $19,100,000, or $1.11 per share,
compared to $28,100,000, or $1.57 per share in 1997. Net income in
1998 included capital gains after taxes of $7,541,000, or $0.44 per
share, compared to capital gains of $8,431,000, or $0.47 per share
for the prior year.
Stockholders' equity at December 31, 1998 was $346,952,000,
compared to $361,866,000 at December 31, 1997. The decline was due
to the repurchase of $24,023,000 worth of Zenith Common Stock.
Stockholders' equity per share was $20.23, compared to $20.31 at
December 31, 1997. Estimated statutory capital of our insurance
companies increased to approximately $350,000,000 at year-end 1998
from $279,993,000 at December 31, 1997.
Cash used in operating activities was $47,138,000 in 1998,
compared to cash provided of $26,974,000 in 1997. The increased use
of cash was due primarily to payment of claim liabilities acquired
from the former RISCORP operations.
We repurchased about 960,000 shares of Zenith Common Stock
during 1998 and 33,000 shares in March 1999, leaving authority to
purchase an additional 1,092,000 shares as of March 1999. During
the 10 years through 1998, we repurchased 6,188,000 shares, or an
estimated 24.8% of the total shares then issued for an aggregate
cost of $119,069,000, or an average of $19.19 per share.
10
<PAGE>
STOCK PRICES
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C> <C> <C> <C> <C>
'94 '95 '96 '97 '98
First Qtr. High 24 1/4 22 3/4 24 7/8 27 7/8 29 1/16
First Qtr. Low 20 3/4 19 3/8 21 1/8 25 7/8 24 1/2
Second Qtr. High 25 1/2 22 28 7/8 27 1/2 30 1/2
Second Qtr. Low 20 5/8 20 23 7/8 24 5/8 28
Third Qtr. High 27 3/8 24 1/4 28 1/2 28 5/8 28 1/2
Third Qtr. Low 22 20 26 1/4 26 5/16 23 9/16
Fourth Qtr. High 24 1/2 24 5/8 28 28 3/4 25 7/8
Fourth Qtr. Low 20 3/4 20 25 1/4 25 7/16 22 7/8
</TABLE>
At December 31, 1998, Zenith had long-term debt of
$74,596,000, with a total debt-to-equity position of 21.3% debt and
78.7% equity. Also outstanding was $75,000,000 of 8.55% Capital
Securities issued in July 1998 and maturing in 30 years. Zenith had
$100,000,000 of bank lines of credit with aggregate availability at
December 31, 1998 of $95,000,000.
Zenith Insurance, CalFarm Insurance, ZNAT Insurance and
Zenith Star (the Texas-based company) collectively are rated A+
(Superior) by A.M. Best Company. Moody's Investors Service has
assigned insurance financial strength ratings of A3 (Good) to
Zenith Insurance, CalFarm Insurance, ZNAT Insurance and Zenith
Star. Standard & Poor's has rated the financial strength of the
property-casualty operations AA- (Very Strong).
The information in the following table provides estimates of
Zenith's net incurred losses and loss adjustment expenses by
accident year, evaluated in the year they were incurred and as they
were subsequently evaluated in succeeding years. The information
set forth in this table is of critical importance in judging the
accuracy of reserve estimates as well as providing a guide to the
setting of fair prices and rates.
CALFARM
THEZENITH 11
<PAGE>
RESERVING ACCURACY IS A CRUCIAL SKILL IN
ACHIEVING OUR GOAL OF A COMBINED RATIO
OF 100%.
<TABLE>
<CAPTION>
ACCIDENT YEAR RESERVE DEVELOPMENT
----------------------------------------------------------------------------------------
Net incurred losses and loss adjustment expenses reported at end of year
----------------------------------------------------------------------------------------
Years in which
losses were incurred 1993 1994 1995 1996 1997 1998
-----------------------------------------------------------
(Dollars in without
thousands) RISCORP
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Prior to 1993 $2,592,008 $2,594,472 $2,593,169 $2,598,599 $2,594,450 $2,588,802
1993 297,652 285,544 275,591 269,003 267,576 268,535
Cumulative 2,889,660 2,880,016 2,868,760 2,867,602 2,862,026 2,857,337
1994 303,749 312,953 304,246 301,550 301,068
Cumulative 3,183,765 3,181,713 3,171,848 3,163,576 3,158,405
1995 327,503 333,667 347,501 348,629
Cumulative 3,509,216 3,505,515 3,511,077 3,507,034
1996 318,843 365,908 365,006
Cumulative 3,824,358 3,876,985 3,872,040
1997 348,849 342,343
Cumulative 4,225,834 4,214,383
1998 336,245
Ratios:
1993 66.20% 63.51% 61.29% 59.83% 59.51% 59.72%
1994 68.87% 70.95% 68.98% 68.37% 68.26%
1995 74.67% 76.08% 79.23% 79.13%
1996 70.48% 72.42% 72.24%
1997 71.67% 70.33%
1998 73.46%
--------------------------------------------------------------------------------------------------------
- This analysis displays the accident year net incurred losses and loss adjustment
expenses development on a statutory basis for accident years 1993-1998 for all property-casualty
business. The total of net loss and loss adjustment expenses for all claims occurring within each
annual period is shown first at the end of that year and then annually thereafter. The total cost
includes both payments made and the estimate of future payments as of each year-end. Past
development may not be an accurate indicator of future development since trends and conditions
change. Net incurred loss and loss adjustment expenses and loss ratios prior to 1995 have been
restated to include health insurance.
- Effective April 1, 1998, Zenith acquired substantially all of the assets and certain
liabilities, including unpaid loss and loss adjustment expenses, of RISCORP's workers' compensation
business. To facilitate comparison between years, estimates of net incurred losses and loss
adjustment expenses at the end of 1998 are presented with the business acquired in the RISCORP
Acquisition excluded.
- On December 31, 1996, Zenith acquired through merger the outstanding reserves for net
loss and loss adjustment expenses of the Associated General Commerce Self-Insurers' Trust Fund of
$65,429,000. The development of these reserves will be included in future operating results of
Zenith and will be reflected as development of the 1996 year.
</TABLE>
12
<PAGE>
INVESTMENT INCOME AFTER TAXES PER SHARE
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C> <C> <C> <C> <C>
94 95 96 97 98
$1.42 $1.67 $1.92 $1.94 $2.09
</TABLE>
INVESTMENTS
Investment activities are a major part of our revenues and
earnings; we believe our portfolios are diversified to achieve a
reasonable balance of risk and a stable source of earnings. Zenith
primarily invests in debt securities as compared to equities and
our largest holdings are U.S. Government securities.
Our portfolio increased this year as a result of the RISCORP
Acquisition and the proceeds from the sale of $75,000,000 of 8.55%
Capital Securities.
- Consolidated investment income before tax was $53,593,000 in
1998, compared to $52,332,000 in 1997. The increase in investment
income is primarily due to the investment of the assets acquired
in the RISCORP Acquisition and the proceeds of the sale of 8.55%
Capital Securities.
- Consolidated investment income after taxes and after interest
expense was $32,083,000, or $1.87 per share in 1998, compared to
$32,068,000, or $1.79 per share in 1997. Average yields on this
portfolio in 1998 were 5.7% before taxes and 3.8% after taxes,
compared to 6.0% and 3.9%, respectively in 1997.
- During 1998, we recorded net realized capital gains before taxes
from our investment portfolio of $11,602,000, compared to
$14,008,000 the prior year.
A substantial portion of our investment portfolio is now
recorded in the financial statements at market value, with our
consolidated investment portfolio carrying value totaling
$1,048,681,000 at December 31, 1998, compared to
$879,973,000 at the end of 1997. Average life of the bond portfolio
was 5.7 years at
December 31, 1998, compared to 5.3 years at December 31, 1997. Our
portfolio quality is high with 96% rated investment grade.
CALFARM
THEZENITH 13
<PAGE>
OUR PORTFOLIO INCREASED THIS YEAR AS A
RESULT OF THE RISCORP ACQUISITION AND THE
PROCEEDS FROM THE SALE OF CAPITAL SECURITIES.
The major development in the U.S. bond markets was continued
low inflation and reduced interest rates with long-term government
bonds often trading below 5%. Also, spreads between corporate and
government bonds fluctuated significantly. As a result, our
portfolio of fixed maturities increased in value, relative to
amortized cost, by $2,430,000 before taxes from 1997 to 1998.
Short-term investments remained high to provide the
necessary liquidity for funding any additional consideration in
connection with the RISCORP Acquisition.
<TABLE>
<CAPTION>
SECURITIES PORTFOLIO AT DECEMBER 31, 1998 At December 31, 1997
-----------------------------------------------------
-----------------------------------------------------
AMORTIZED Amortized
COST* MARKET VALUE Cost* Market Value
-----------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Short-term investments $ 187,123 $ 187,123 $ 209,827 $ 209,827
U.S. Government bonds 180,064 181,466 243,346 244,921
Taxable bonds:
Investment grade 537,176 546,448 305,250 311,553
Non-investment grade 29,255 29,735 17,083 17,554
Redeemable preferred stocks 14,045 14,347 16,040 16,717
Other preferred stocks* 24,293 24,674 21,286 22,272
Common stocks* 22,402 26,935 17,790 23,439
- -------------------------------------------------------------------------------
*Equity securities at cost
</TABLE>
In 1993, we started a home-building subsidiary (Perma-Bilt),
in order to participate in the growth of the Las Vegas, Nevada
housing market. During 1998, we closed and delivered 275 homes at
an average selling price of $137,000, compared to 305 homes at an
average selling price of $149,000 the prior year. As a result,
sales of
14
<PAGE>
CALIFORNIA REPRESENTED LESS THAN 50% OF
WORKERS' COMPENSATION PREMIUMS FOR THE
FIRST TIME.
$37,737,000 and $1,363,000 of pre-tax income were recorded during
1998, compared to sales of $45,419,000 and $1,678,000 of pre-tax
income the previous year. Land presently owned at a cost of about
$42,142,000 will support the construction of an estimated 1,125
homes over the next several years and possibly some commercial
and/or apartment development. Increased interest rates and other
factors may impact the volume of home sales, but we are confident
the land we have acquired is strategically located and will have
long-term value. For example, we own about 170 acres on Las Vegas
Boulevard south-west of the airport, one of the largest undeveloped
holdings on The Strip.
WORKERS' COMPENSATION
Workers' Compensation business represents 52.6% of our
property-casualty volume. During 1998, 44.2% of this business was
in California and the balance in 36 states, with the greatest
concentrations in Florida and Texas.
Workers' Compensation operations recorded an underwriting
loss, after dividends to policyholders, of $42,638,000 in 1998,
compared to a loss of $37,157,000 for the prior year. Our Workers'
Compensation combined ratio was 115.3% in both 1998 and 1997.
During 1998, as compared to the prior year, earned premium
increased $36,596,000, or 15.1%, primarily due to the RISCORP
Acquisition. There were about 38,600 policies in force nation-wide
at year-end 1998, compared to about 26,700 the prior year. During
the last several years, our underwriting results have been
significantly below our 20-year combined ratio of 102.8%.
Specifically, our combined ratio for the last three years has
averaged 113.6%.
CALFARM
THEZENITH 15
<PAGE>
LOW LOSS RATIOS WITHOUT CREATIVE REINSURANCE
PROVIDE CUSTOMER CONFIDENCE IN OUR SERVICES
AND PRICING STABILITY.
We estimate our underwriting loss during the past two years
on a geographic basis as follows:
<TABLE>
<CAPTION>
Underwriting Loss 1998 1997
--------------------
<S> <C> <C>
(Dollars in
thousands)
California $ (18,536) $ (27,218)
RISCORP Acquisition (15,018)
Other states (9,084) (9,939)
</TABLE>
As the above chart indicates, we are beginning to work
effectively to improve our California underwriting results, despite
poor market conditions. Although loss ratios outside of Florida in
the Southeast were unsatisfactory, the RISCORP Acquisition data is
more a reflection of our substantial investment in strengthened
management and systems, than it is in underwriting performance.
The following table compares the components of our combined
ratio for the three years ended 1998 to the prior 10 years ended
1998:
<TABLE>
<CAPTION>
Three-Year Average 10-Year Average
Combined Ratio Analysis to December 1998 to December 1998
--------------------------------------
<S> <C> <C>
Accident year loss ratio 57.0% 52.1%
Loss reserve and expense
development 5.0 (0.1)
Underwriting and loss
adjustment expenses 51.1 47.3
Policyholder dividends 0.5 4.7
----- -----
Combined ratio 113.6% 104.0%
---------------------------------------------------------------------
</TABLE>
The table shows that underwriting and loss adjustment
expense percentages made up a significant part of the difference in
the combined ratio. Specifically, the combined ratio is 9.6 points
higher with expenses accounting for 3.8 points of this
16
<PAGE>
CHANGING CIRCUMSTANCES MOTIVATE OUR
EMPLOYEES TO PARTICIPATE IN CONTINUING
EDUCATION TO IMPROVE SERVICES AND SKILLS.
amount. Also, reserving was less accurate than over the prior 10
years. From an analytical perspective, the combination of accident
year loss ratio and policyholder dividends is about the same, a
good indication that we are managing risks realistically and
effectively. Management of controllable expenses is a high
priority, and during 1998 we reduced the number of employees by
about 12%.
There are many factors currently affecting our Workers'
Compensation performance:
1. Intense rate and price competition affecting our volume but not
our loss ratios in areas other than the business from the
RISCORP Acquisition outside of Florida.
2. Increased rates and prices for insureds with high loss ratios
and high experience
modifications.
3. Additional expenses or investments to upgrade our computer
systems and address the Year 2000 challenge while focusing on
managing controllable expenses.
4. Additional expenses incurred in connection with the RISCORP
Acquisition and in order to upgrade the quality of their
operations, hire and train new claims personnel and integrate
with TheZenith.
5. Unsatisfactory underwriting results in former RISCORP operations
outside of Florida.
6. Increases in expenses to adjust claims due to changes in the
Workers' Compensation systems.
7. Higher average costs per claim, including increases in health
care costs.
8. Declining claim frequencies.
9. Creative reinsurance supporting competitors' low-ball pricing
strategies; this form of reinsurance will probably be
short-term.
CALFARM
THEZENITH 17
<PAGE>
WE ARE COMMITTED TO PROVIDING VALUE-ADDED
POLICYHOLDER SERVICES TO REDUCE CUSTOMER
LOSS RATIOS, AND TO DO SO AT LOWER COST.
10. Our commitment to continue delivering value-added services to
our policyholders, helping them reduce their loss ratios, and
the challenge to provide these services at a lower cost.
Considering the persistence of the extremely competitive
market conditions, our focus is on the two segments of the business
where we have managed risk successfully for many years: smaller
employers and insureds where quality services impact results. We
can clearly demonstrate our service capabilities reduce employer
experience modifications significantly and, therefore, lower
policyholder net costs over many years. As we obtain more
opportunities to service employers at adequate prices, and continue
to control costs, we are confident our operating results will
improve. In the meantime, we are unwilling to reduce prices or
underwriting standards to the unrealistic levels of certain
competitors and we will continue to focus on managing controllable
expenses.
When we published our annual report last year, we clearly
expected improvement in market conditions by this time, primarily
in California. Unfortunately, this has not been the case; the
latest estimates project a 93% accident year loss ratio and an
accident year combined ratio of 131% for the California industry.
Zenith's Workers' Compensation accident year loss ratio is 61.5%
and combined ratio is 115.3%, demonstrating we outperform the
industry in these most critical areas. Also, our underwriting loss
improved significantly in California despite the environment.
Average costs for indemnity claims continue to increase as a result
of growing health
18
<PAGE>
WE HAVE MANAGED WORKERS' COMPENSATION
RISK SUCCESSFULLY IN TWO SEGMENTS: SMALLER
EMPLOYERS AND INSUREDS WHERE QUALITY
SERVICES IMPACT RESULTS.
care costs and other factors. Investment income is declining due to
lower interest rates, although capital gains augment returns. Some
competitors have already left the marketplace due to poor results,
and many of the remaining insurers have a low pricing strategy
based on creative reinsurance. We do not participate in creative
reinsurance. We believe that any changes in the market will be
directly related to circumstances surrounding this type of
reinsurance. Also, we expect continued opportunities to obtain
reasonable prices on policies with a history of unfavorable
results, as we are focused on continuing to improve our
underwriting results.
With the recent change of political leadership in
California, we expect comprehensive legislative reform of the
Workers' Compensation system to be a major topic in 1999. Labor
interests will advocate benefit increases, while our agenda will be
focused on simplifying and speeding up the system while correcting
certain abuses inherent in the last round of reforms. Achieving a
balanced program will be a challenge, but we are hopeful the needs
of the California economy and fairness to all parties involved will
prevail over short-term political strategies.
In Florida, there is discussion of the potential for
reducing the role government plays in pricing Workers' Compensation
insurance. Minimum rates increased 1.6% in 1999 and decreased 3.2%
and 11.3% during 1998 and 1997, respectively. During this period,
the Florida residual market share has shrunk significantly and
today represents less than 1% of the total market. We are not able
to predict legislative changes, if any, to the various state
Workers' Compensation systems; this is one of the risks inherent in
our operations.
CALFARM
THEZENITH 19
<PAGE>
WE DO NOT PARTICIPATE IN CREATIVE
REINSURANCE.
SINGLEPOINT
We continue to market an integrated disability program in
partnership with UNUM in Arkansas, but have ceased this operation
in California due to poor performance. Although the results are not
meaningful to date, SinglePoint is experimenting and improving its
capabilities in a market segment that may have future value for
certain employers.
RISCORP ACQUISITION
On June 17, 1997, Zenith entered into an agreement with RISCORP,
Inc. to purchase substantially all of the assets of RISCORP related
to its Workers' Compensation business, including RISCORP's existing
in-force insurance business as well as the rights to all new and
renewal policies. Zenith also purchased RISCORP's "First Call"
managed care Workers' Compensation system.
Zenith assumed certain liabilities related to RISCORP's
insurance business in connection with the transaction, including
$15 million in indebtedness of RISCORP which Zenith immediately
repaid. The transaction closed on April 1, 1998, and the final
purchase price was paid by Zenith to RISCORP on March 26, 1999.
There is litigation pending with respect to compliance with the
purchase agreement. The RISCORP Acquisition reduced 1998 operating
earnings after taxes by an estimated $7,542,000, or $0.44 per
share. Underwriting losses from the business acquired from RISCORP
were about $15,018,000. We view these losses in the context of the
acquisition as a part of the purchase price even though not
permitted by accounting rules.
20
<PAGE>
WE ARE UNWILLING TO REDUCE OUR PRICES OR
UNDERWRITING STANDARDS TO THE UNREALISTIC
LEVELS OF CERTAIN COMPETITORS.
Unfortunately, progress in closing the transaction was
slower than anticipated with negative short-term impacts on the
business, employees and RISCORP's agency force. As a result,
significant time, effort and cost have been required to integrate
RISCORP and TheZenith, and rebuild certain aspects of the business
that were not up to professional standards. The purchased in-force
business consisted of about 17,600 policies, 82% of which were in
Florida. To date, the Florida policies appear to produce loss
ratios as anticipated, but the business outside of Florida is
producing unsatisfactory results. We purchased $50 million of
reinsurance to protect against adverse development of the acquired
loss reserves and no benefit has yet been recognized in results of
operations. The number of employees has been reduced from about 550
as of the closing to about 440 at the present time. Under the able
leadership of Jack Miller, we continue to build a professional
specialty operation and a profit culture that we believe will
produce long-term favorable results.
CALFARM INSURANCE COMPANY
CalFarm Insurance Company is a Sacramento, California-based
property-casualty company that offers comprehensive coverages
written for individual and commercial customers, primarily in the
rural and suburban areas of California. Automobile, Farmowners,
Commercial coverages and Homeowners are the major lines of business
with about 105,000 policies in-force. CalFarm also offers group
health insurance products previously written by CalFarm Life
Insurance Company with about 24,000 certificates in-force.
In 1998, CalFarm continued its focus on building better
relationships with those agents who play an important role in the
successful sale of its products.
CALFARM
THEZENITH 21
<PAGE>
WE ARE FOCUSED ON CONTINUING TO IMPROVE
OUR WORKERS' COMPENSATION UNDERWRITING
PERFORMANCE.
Numerous initiatives and programs were delivered to our agents
including aggressive field support and training, more efficient and
automated interfaces, new competitive products, and financial
support to assist agents in expanding their CalFarm business.
CalFarm is strategically working to be a "First Choice"
provider of insurance products within the rural and suburban
marketplace. CalFarm's customers rely on our agents to develop
specialized protection programs and tailor coverage to individual
needs. In the highly competitive California marketplace, CalFarm
was able to achieve profitable underwriting results by establishing
agent "partnerships" and making it easy for such agents to do
business with CalFarm. Responsive customer service is our highest
priority.
During 1998, CalFarm continued to improve its service
processes for reporting and settling claims. Through ongoing
investments in claims leadership and training programs, CalFarm has
been able to reduce the time between claim reporting and
settlement. The benefits of an early claim management intervention
and resolution program are demonstrated by CalFarm's low inventory
of open claims. In addition to an expedient settlement process,
CalFarm continued to emphasize fraud prevention by committing the
resources of its Special Investigation Unit to the rapid
identification of questionable cases and immediate response to
major losses. CalFarm also expanded the use of medical advisors in
its three regional claims locations to enhance the staff's
decision-making capabilities.
In 1998, CalFarm progressed toward creating a culture that
nurtures and supports lifelong learning for its employees with
underwriting and claims management personnel participating in
extensive leadership development courses.
22
<PAGE>
IN 1998, OUR CALIFORNIA WORKERS'
COMPENSATION UNDERWRITING LOSS IMPROVED
SIGNIFICANTLY, DESPITE THE ENVIRONMENT.
CalFarm also supported sizable investments in, and progress toward,
advancing its information systems and service capabilities.
Examples of such investments are a flexible billing system
implemented in 1998, emphasis on e-commerce strategies, including
the further development of a data warehouse and an Agency intranet
to meet our customers' and CalFarm's information needs, and the
installation of a new processing system for our Home and Auto
programs. CalFarm's Farmowners package product was improved, and
two programs targeted at small food service and auto service
employers were expanded. These small employer programs were
developed with coverages necessary and unique to these segments,
with competitive prices, simplified pricing, and new promotional
materials. As an example, the "Country Lifestyle" program was
introduced to offer a convenient, comprehensive package policy for
rural customers who appreciate an agricultural way of life but do
not make their principal source of income from farming. CalFarm's
success depends on its ability to develop its people and systems,
and to transact business with agents in an easy and efficient
manner using newer technologies and by marketing modern products.
CalFarm actively manages its earthquake catastrophe
exposures and engages the services of prominent outside experts to
assist in geographic modeling and simulation techniques to mitigate
risk and achieve desired objectives. In 1998, CalFarm expanded the
scope of its catastrophe management efforts outside of earthquake
peril to include an analysis of brush fire exposures. With the use
of specialized mapping software, CalFarm is able to monitor
aggregations of exposures in areas of potential conflagration.
CalFarm also purchases quality reinsurance at levels expected to
protect our capital from large disasters.
CALFARM
THEZENITH 23
<PAGE>
IN FLORIDA, WE CONTINUE TO BUILD A
PROFESSIONAL SPECIALTY OPERATION WE
BELIEVE WILL PRODUCE LONG-TERM
FAVORABLE RESULTS.
CalFarm is the largest writer of Farmowners policies in
California with an estimated market share of 41%. Its specialists
have first-hand knowledge of the diverse business and personal
insurance needs of California farmers. CalFarm enjoys the
sponsorship of the California Farm Bureau Federation, the state's
largest general agricultural organization. The Farm Bureau
relationship has existed since 1985, although either party has six
months contractual termination rights. CalFarm is committed to
seeking new and profitable opportunities in the California
agricultural sector, which has led the nation in farm production
and income for 50 years.
CalFarm's loss ratio was 53.9% in 1998, compared to 51.4% in
1997, and the combined ratio was 98.0% in 1998, compared to 96.9%
in 1997. Results for 1998 include $5,000,000 of catastrophe losses
from El Nino-related wind and storm damage in February 1998,
compared with $1,500,000 catastrophe losses from the 1997 New
Year's flood, and $3,500,000 of technology expenditures for system
improvements and Year 2000 compliance.
CalFarm's Health insurance results, written under a plan
sponsored by the California Farm Bureau Federation, were adversely
affected by higher medical costs and greater utilization. For the
year ended December 31, 1998, pre-tax losses amounted to $2.6
million, compared to pre-tax income of $1.2 million the prior year.
Most of the losses were incurred in the fourth quarter and reserves
were increased by $2.4 million. This is the first year since the
acquisition of CalFarm by Zenith in 1985 that the health operations
were significantly unprofitable. A new health management team was
put into place in December 1998 charged with the mission to improve
network containment controls, medical management, and operating
results. Also, rates were increased about 24% to offset the abrupt
industry-wide increase in health care costs.
24
<PAGE>
SINCE THE INCEPTION OF OUR REINSURANCE
OPERATIONS, THE COMBINED RATIO HAS
AVERAGED 92.3%.
For the 13 years since CalFarm was acquired by Zenith, the
combined ratio has averaged 100.1%, excluding the effect of
Proposition 103 rollback refunds in 1992. Management of CalFarm is
pleased with its 1998 operating results in view of the fiercely
competitive climate, and is committed to maintaining appropriate
underwriting margins, including a rapid turnaround in the results
of the Health operations.
REINSURANCE
For the past 13 years, Zenith Insurance has been selectively
underwriting assumed treaty and facultative reinsurance as well as
commercial package policies for targeted industry groups.
Reinsurance represents 5.5% of our property-casualty volume, while
reinsurance reserves represent 10.0% of our total property-casualty
reserves.
During 1998, the net written premium of this operation was
$29,856,000, compared to $29,780,000 in 1997. Earned premium was
$29,150,000, compared to $32,251,000 in 1997. Underwriting profits
of $10,268,000 were recorded in 1998, resulting in a combined ratio
of 64.8%, compared to underwriting profits of $14,189,000 and a
combined ratio of 56.0% the prior year. Since the inception of this
operation in 1985, the combined ratio has averaged 92.3%. During
1997 and 1998, the majority of written premium was derived from
world-wide property catastrophe business.
Accounting for the property catastrophe reinsurance business
has a different result from our other property-casualty businesses.
At the end of each reporting period, income is recognized without
reserves being established if no major catastrophe has occurred. In
our other businesses, reserves are mandated based upon actual
events as well as expected loss patterns. As a result, there may be
large
CALFARM
THEZENITH 25
<PAGE>
ZENITH HAS MADE SUBSTANTIAL PROGRESS
IN PREPARING AND TESTING OUR SYSTEMS
TO FUNCTION PROPERLY IN THE YEAR 2000.
fluctuations (positive or negative) in underwriting results for the
property catastrophe reinsurance business in the short-term since
only actual events are considered. The major event in 1998 was
Hurricane Georges where we have estimated our loss at $4,500,000.
Industry experts indicate 1998 was the third worst storm year on
record.
YEAR 2000
Zenith has made substantial progress in preparing and testing its
computer and business systems to function properly in view of the
Year 2000 problem. To date, we have spent $4,522,000, and we
estimate an additional cost of $1,100,000 will complete the
necessary work and testing of our internal computer and business
systems. In addition to the remediation and testing of our systems,
we will purchase $3,724,000 of new PCs and related equipment which
are Y2K compliant and spend an additional $500,000 to upgrade and
make our Florida imaging system Y2K compliant. Lastly, a process
and schedule are in place to monitor timely compliance of third
parties with whom we conduct business.
Although we do not have all contingency plans in place to
address the possibility that either we or third parties may not be
Y2K ready, we have started a process to develop such plans and
expect such plans to evolve throughout this year. We also have
hired outside lawyers and consultants to advise and critique all
our activities in the Y2K area.
DIRECTORS
During this past year, our friend, Jack Ostrow, Director and
Chairman of the Audit Committee for 20 years, passed away. We miss
the judgment and integrity of our learned colleague and continue to
adhere to the principles he stood for and taught us at every
opportunity.
26
<PAGE>
WE HAVE A HIGH-QUALITY, LIQUID INVESTMENT
PORTFOLIO THAT CONTRIBUTES A STEADY STREAM
OF INVESTMENT INCOME.
As previously announced, Michael Wm. Zavis, a founding and
Co-Managing Partner of the national law firm of Katten, Muchen &
Zavis, Chicago, Illinois, was elected to the Board and as Chairman
of the Audit Committee.
On March 1, 1999, we also announced the election to the
Board of Robert J. Miller, former Governor of Nevada and Senior
Partner of Jones Vargas, a law firm with offices in Las Vegas and
Reno, Nevada.
CONCLUSION
With the closing of the sale of CalFarm, our financial condition
will be strengthened with a substantial estimated increase in book
value of $100,000,000, or $5.84 per share. We have not made any
decisions as to the use of the proceeds, although we continue with
an active stock repurchase program. Our focus will be as a
specialty Workers' Compensation insurer with geographic
diversification and a long history of effective risk management and
as a selective reinsurance underwriter. Also, our high-quality,
liquid investment portfolio will provide a steady stream of
investment income.
We continue to focus on internal growth of our operations at
appropriate actuarial prices to maintain reasonable loss ratios and
to provide quality services to our customers. From time to time,
acquisition opportunities present themselves as in the case of
CalFarm in 1985 and RISCORP in 1997. Both acquisitions were
available due to serious business or financial problems created by
prior managements and required an investment of time and money to
improve results. We are always looking for other intelligent
transactions and believe that our improved financial strength will
provide assistance in this regard.
CALFARM
THEZENITH 27
<PAGE>
THE CONSUMMATION OF THE CALFARM SALE
HAS IMPROVED OUR FINANCIAL STRENGTH
AND FLEXIBILITY.
Continued integration and further strengthening of
operations acquired from RISCORP will dominate our short-term
activities. Managing controllable expenses continues to be a high
priority.
We continue to focus on stockholder value in a
property-casualty insurance world of inadequate pricing and
profits, and increasing excess capacity. In our judgment, the best
strategies under these circumstances are to improve our management,
customer services and operational capabilities; integrate our
Southeast operations; refine our underwriting, pricing and claim
disciplines; reduce expenses; and continue to build professional
relationships with our customers. Although short-term profitability
has been impacted by the RISCORP Acquisition, Year 2000 expenses
and Workers' Compensation underwriting losses, we believe long-term
investors will benefit from our strategies, financial strength and
experience in managing insurance risk successfully over a long
period of time. The recent disclosure of substantial losses in the
Workers' Compensation reinsurance market should improve market
conditions.
Predicting losses and charging premiums proportionate to the
exposures is a difficult task. It is one thing to understand what
risks are, and quite another to persuade customers of the need to
pay appropriate premiums in an extremely competitive environment.
However, we are fortunate to have many knowledgeable policyholders,
employees and agents who recognize the value of what we deliver; we
intend to amplify this message to an expanding customer base.
28
<PAGE>
WE CONTINUE TO FOCUS ON STOCKHOLDERS'
VALUE IN A WORLD OF INADEQUATE PRICING
AND INCREASING EXCESS CAPACITY.
We appreciate the assistance and confidence of our
employees, agents, stockholders and directors as we deal with the
challenges and opportunities ahead. The continued support of our
policyholders and exceptional efforts of our people provide
confidence for the future. In closing, we believe our people are
Zenith's most important asset, for which no number on our balance
sheet can begin to quantify their value to the company and our
customers.
/s/ Stanley R. Zax
Stanley R. Zax
Chairman of the Board and President
Woodland Hills, California, March 1999
Note: While it has never been our policy to produce "slick" Annual
Reports, regular readers of this document will no doubt be aware of
the de-engineered production values compared to prior years. Our
objective was to cover all of the information of interest which was
not fully available until late in March, and therefore, we
fast-tracked this year's production.
CALFARM
THEZENITH 29
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING INFORMATION
The Private Securities Litigation Reform Act of 1995 provides a safe harbor
for forward-looking statements if accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to
differ materially from those discussed. Forward-looking statements include those
related to the plans and objectives of management for future operations, future
economic performance, or projections of revenues, income, earnings per share,
capital expenditures, dividends, capital structure, or other financial items.
Statements containing words such as EXPECT, ANTICIPATE, BELIEVE, or similar
words that are used in the Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations, in other parts of the Zenith
National Insurance Corp. ("Zenith") Annual Report on Form 10-K pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year
ended December 31, 1998, in other parts of Zenith's 1998 Annual Report to
Stockholders or in other written or oral information conveyed by or on behalf of
Zenith are intended to identify forward-looking statements. Zenith undertakes no
obligation to update such forward-looking statements, which are subject to a
number of risks and uncertainties that could cause actual results to differ
materially from those projected. These risks and uncertainties include but are
not limited to the following: (1) heightened competition, particularly intense
price competition; (2) adverse state and federal legislation and 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
acquisition of substantially all of the assets and certain liabilities of
RISCORP, Inc. and certain of its subsidiaries (collectively, "RISCORP") related
to RISCORP's workers' compensation business, 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.
OVERVIEW
Zenith's principal source of consolidated earnings is the income, including
investment income, from the operations of its property-casualty insurance
businesses and its investment portfolio. Property-casualty operations comprise
Workers' Compensation (52.6% of 1998 consolidated net premiums earned); Other
Property-Casualty, principally automobile, homeowners, farmowners and commercial
coverages and group health insurance (41.9% of 1998 consolidated net premiums
earned); and Reinsurance (5.5% of 1998 consolidated net premiums earned).
Results of such operations for the three years ended December 31, 1998 are set
forth in the table on page 32. The Workers' Compensation business has grown over
the past three years with an expanding presence in Florida through the
acquisition of Associated General Commerce Self-Insurers' Trust Fund
("AGC-SIF"), a Florida workers' compensation self-insurers' fund, in 1996 and
the acquisition of substantially all of the assets and certain liabilities of
RISCORP related to its worker's compensation business (see RISCORP Acquisition
on pages 31-32) in 1998. During 1998, approximately 44.2% of the Workers'
Compensation business was in California and the balance in 36 states, with the
greatest concentration in Florida and Texas. Substantially all of Zenith's Other
Property-Casualty business is written in California. Reinsurance business
assumed by Zenith provides insurance coverage
30
<PAGE>
for world-wide exposures with a particular emphasis on catastrophe losses and
large property risks. Zenith's Real Estate Operations develop land and primarily
construct private residences for sale in Las Vegas, Nevada. Zenith, as a holding
company, owns directly or indirectly all of the capital stock of its
subsidiaries.
Property insurance and reinsurance coverages expose Zenith to the risk of
significant loss in the event of major adverse natural phenomena, known in the
insurance industry as catastrophes. These catastrophes may cause significant
contemporaneous financial statement losses since catastrophe losses may not be
accrued in advance of the event. Zenith manages its exposure to the risk of
catastrophe losses through a combination of the purchase of reinsurance and the
application of underwriting and actuarial techniques to control the amount and
number of risks that are underwritten with an exposure to possible catastrophe
losses.
Effective March 31, 1999, Zenith Insurance Company ("Zenith Insurance"), a
wholly-owned subsidiary of Zenith, sold its wholly-owned subsidiary, CalFarm
Insurance Company ("CalFarm"), for $275,000,000 in cash, subject to post-closing
adjustment in certain circumstances to Nationwide Mutual Insurance Company. The
net change in Zenith's consolidated invested assets as a result of the
transaction is estimated to be a decrease of approximately $15,000,000. The
transaction will result in an estimated after-tax gain of $100,000,000, or $5.84
per share. CalFarm writes Zenith's Other Property-Casualty business principally
in California.
The table below sets forth the components of net income for the three years
ended December 31, 1998:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
(Dollars in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net investment income, after taxes $ 35,907 $ 34,655 $ 34,069
Realized gains on investments, after taxes 7,541 8,431 7,025
- --------------------------------------------------------------------------------------------------
Sub-total 43,448 43,086 41,094
- --------------------------------------------------------------------------------------------------
Property-casualty underwriting results, after taxes:
(Loss) income excluding catastrophes (11,230) (10,217) 356
Catastrophe losses (7,475) (975)
- --------------------------------------------------------------------------------------------------
Property-casualty underwriting (loss) income, after taxes (18,705) (11,192) 356
- --------------------------------------------------------------------------------------------------
Income from real estate operations, after taxes 868 1,079 1,251
Interest expense, after taxes (3,824) (2,587) (3,170)
Parent net expenses, after taxes (2,687) (2,286) (1,931)
- --------------------------------------------------------------------------------------------------
Net income $ 19,100 $ 28,100 $ 37,600
- --------------------------------------------------------------------------------------------------
</TABLE>
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 and 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 15 to the Consolidated Financial Statements on pages 66-67 ("Note
15") 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 fair values of the assets acquired and liabilities assumed are
set forth in Note 15. The total purchase price for such assets acquired and
liabilities assumed is 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 $92,336,000.
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 a Neutral Auditor and Neutral Actuary, made certain estimates
of the GAAP values of the assets and liabilities acquired by
CALFARM
THEZENITH 31
<PAGE>
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 December 31, 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
December 31, 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 ceded 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
$50,000,000 in excess of $182,000,000 for net unpaid losses and allocated loss
adjustment expenses acquired from RISCORP. After deducting reinsurance premiums
of $16,000,000, Zenith has recorded reinsurance recoverable of $24,510,000 and a
deferred benefit of $8,510,000 at December 31, 1998. Future adverse loss
development, if any, of the reserves acquired from RISCORP would be recoverable
up to the $50,000,000 limit, although the benefit of such reinsurance
recoverable would be deferred and recognized over the recovery period of such
reinsurance.
PROPERTY-CASUALTY INSURANCE OPERATIONS
Premiums earned and underwriting results of Zenith's property-casualty
subsidiaries for the three years ended December 31, 1998, 1997 and 1996 were as
follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
(Dollars in thousands) 1998 1997 1996
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Premiums earned:
Workers' Compensation $278,660 $242,064 $210,916
Other Property-Casualty 222,045 214,406 204,778
Reinsurance 29,150 32,251 37,162
- ----------------------------------------------------------------------------------
Total $529,855 $488,721 $452,856
- ----------------------------------------------------------------------------------
Underwriting (loss) income, before taxes:
Workers' Compensation $(42,638) $(37,157) $(19,462)
Other Property-Casualty 4,410 6,509 8,076
Reinsurance 10,268 14,189 12,479
- ----------------------------------------------------------------------------------
Total $(27,960) $(16,459) $ 1,093
- ----------------------------------------------------------------------------------
</TABLE>
Zenith's key operating goal is to achieve a combined ratio of 100% or lower.
The combined ratio, expressed as a percentage, is the key measure of
underwriting profitability traditionally used in the property-casualty insurance
business. It is the sum of net incurred loss and loss adjustment expenses,
underwriting expenses and policyholders' dividends, expressed as a percentage of
net premiums earned.
32
<PAGE>
<TABLE>
<CAPTION>
The combined ratios for the three years ended December 31, 1998 were as follows:
- ------------------------------------------------------------------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------
Combined loss and expense ratios:
Workers' Compensation:
Loss and loss adjustment expenses 79.3% 81.6% 75.4%
Underwriting expenses 35.8 33.6 32.6
Dividends to policyholders 0.2 0.1 1.2
- ------------------------------------------------------------------------------------------------------
Combined ratio 115.3 115.3 109.2
- ------------------------------------------------------------------------------------------------------
Other Property-Casualty:
Loss and loss adjustment expenses 67.0 65.2 67.1
Underwriting expenses 31.0 31.7 29.0
- ------------------------------------------------------------------------------------------------------
Combined ratio 98.0 96.9 96.1
- ------------------------------------------------------------------------------------------------------
Reinsurance:
Loss and loss adjustment expenses 45.3 33.7 49.0
Underwriting expenses 19.5 22.3 17.4
- ------------------------------------------------------------------------------------------------------
Combined ratio 64.8 56.0 66.4
- ------------------------------------------------------------------------------------------------------
Total combined ratio 105.3% 103.4% 99.8%
- ------------------------------------------------------------------------------------------------------
</TABLE>
The profitability of property-casualty insurance operations is principally
dependent upon the adequacy of rates charged to the insured for insurance
protection; the frequency and severity of claims; the ability to accurately
estimate and accrue reported and unreported losses in the correct period; the
level of dividends paid to policyholders; the ability to manage claim costs and
keep operating expenses in line with premium volume; and the ability to service
claims, maintain policies and acquire business efficiently.
The amount by which losses, measured subsequently by reference to payments
and additional estimates, differ from those originally reported for a period is
known as "development". Development is favorable when losses ultimately settle
for less than the amount reserved or subsequent estimates indicate a basis for
reducing reserves on open claims. The following shows the one-year loss reserve
development for loss and loss adjustment expense for the three segments of
property-casualty business:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
Other
(Dollars in Workers' Property-
thousands) Compensation Casualty Reinsurance Total
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
One-year loss
development
in:
1998 $ (75) $ (3,754) $ (7,538) $ (11,367)
1997 11,837 (5,316) (6,870) (349)
1996 (869) (224) (2,716) (3,809)
- ----------------------------------------------------------------------------
Favorable development is shown in brackets.
</TABLE>
The unfavorable development in 1997 for the Workers' Compensation operation
is due to loss and loss adjustment expense reserve strengthening for the 1995
and 1996 accident years.
The process of evaluating an insurance company's exposure to the cost of
environmental and asbestos damage is subject to significant uncertainties. Among
the complications are lack of historical data, long reporting delays,
uncertainty as to the number and identity of insureds with potential exposure
and unresolved legal issues regarding policy coverage. The legal issues
concerning the interpretations of various insurance policy provisions and
whether environmental and asbestos losses are, or were ever intended to be,
covered are complex. Courts have reached different and sometimes inconsistent
conclusions regarding such issues as: when the loss occurred
CALFARM
THEZENITH 33
<PAGE>
and which policies provide coverage, how policy limits are applied and
determined, how policy exclusions are applied and interpreted, whether clean-up
costs are covered as insured property damage and whether site assessment costs
are either indemnity payments or adjusting costs.
Zenith has exposure to asbestos losses in its Workers' Compensation operation
for medical, indemnity and loss adjustment expenses associated with covered
workers' long-term exposure to asbestos or asbestos-containing materials. Most
of these claims date back to the 1970's and early 1980's and Zenith's exposure
is generally limited to a pro rata share of the loss for the period of time
coverage was provided. Zenith also has potential exposure to environmental and
asbestos losses and loss adjustment expenses beginning in 1985 through its
Reinsurance operation and through CalFarm, which writes liability coverage under
farmowners' and small commercial policies, however such losses are substantially
excluded from all such coverage. The business reinsured by Zenith contains
exclusion clauses for environmental and asbestos losses, and in 1988 an absolute
pollution exclusion was incorporated into CalFarm's policy forms. All claims for
damages resulting from environmental or asbestos losses are identified and
handled by Zenith's most experienced claims/legal professionals. Environmental
and asbestos losses have not been material and Zenith believes that its reserves
for environmental and asbestos losses are appropriately established based on
currently available facts, technology, laws and regulations. However, due to the
long-term nature of these claims, the inconsistencies of court decisions on
coverage, plaintiffs' expanded theories of liability, the risks inherent in
major litigation and other uncertainties, the ultimate exposure from these
claims may vary from the amounts currently reserved.
Some of the factors that continue to impact the business and economic
environment in which Zenith operates include: an uncertain political and
regulatory environment, both state and federal; the outlook for economic growth
in geographic areas where Zenith operates; the expansion of Zenith's Workers'
Compensation business outside of California; the use in the industry of creative
reinsurance by competitors; a highly competitive insurance industry; and the
changing environment for controlling medical, legal and rehabilitation costs, as
well as fraud and abuse. Although management is currently unable to predict the
effect of any of the foregoing, these factors and related trends and
uncertainties could have a material effect on Zenith's future operations and
financial condition.
Inflation rates impact the financial statements and operating results in
several areas. Fluctuations in inflation rates impact the market value of the
investment portfolio and yields on new investments. Inflation also impacts the
portion of the loss reserves that relates to hospital and medical expenses and
property claims and loss adjustment expenses, but not the portion of loss
reserves that relates to workers' compensation indemnity payments for lost wages
which are fixed by statute. Adjustments for inflationary impacts are implicitly
included as part of Zenith's subsidiaries' continual review of property-casualty
reserve estimates. Actuarial account of increased costs is considered in setting
adequate rates, and this is particularly important in the health insurance area
where hospital and medical inflation rates have exceeded general inflation
rates. Operating expenses, including payrolls, are impacted to a certain degree
by the inflation rate. Social inflation affects the loss reserves for other
property-casualty liability claims for which settlements are determined in court
proceedings.
WORKERS' COMPENSATION
Premiums earned in the Workers' Compensation operation increased in 1998 and
1997 compared to their respective prior years. The RISCORP Acquisition added
$73,828,000 of earned premiums in 1998 and the AGC-SIF acquisition added
$26,144,000 and $47,214,000 of earned premiums in 1998 and 1997, respectively.
Excluding the impact of the RISCORP and AGC-SIF acquisitions, Zenith's workers'
compensation premiums earned decreased in 1998 and 1997 compared to their
respective prior years, principally as a result of intense competition in the
national workers' compensation insurance industry.
34
<PAGE>
Underwriting losses in the Workers' Compensation operation increased in 1998
and 1997 compared to their respective prior years principally as a result of
approximately $2,000,000 of catastrophic workers' compensation losses incurred
in 1998, the 1998 RISCORP Acquisition and reduced premium income acting in
conjunction with fixed expenses for underwriting and loss adjusting that have
not been reduced commensurably with premium income in 1998 and 1997. The 1997
underwriting loss in Workers' Compensation also includes $11.8 million of
adverse development on prior years loss and loss adjustment expense reserves in
the fourth quarter. Fixed expenses increased significantly in 1998 with the
RISCORP Acquisition and such expenses will continue to impact Zenith's Workers'
Compensation operations adversely until the former RISCORP operations are
integrated into Zenith's other Workers' Compensation operations. In 1998, the
underwriting loss from the former RISCORP operation was $15,018,000.
Competition in the national workers' compensation insurance industry
continues to be intense. In 1998 and 1997 Zenith continued its geographic
diversification through the RISCORP and AGC-SIF acquisitions, thereby reducing
Zenith's former concentration in the California workers' compensation insurance
market. Zenith continues to adhere to its underwriting philosophy of requiring
adequate pricing for the risks that are being underwritten. Although earned
premiums have declined through some resulting loss of business, Zenith's workers
compensation loss ratios, which were 61.5%, 68.4% and 55.2% in 1998, 1997 and
1996, respectively, indicate that it has maintained its disciplined approach in
spite of the pressures to underprice.
The outlook for future profitability in the Workers' Compensation operation
is dependent upon the ability to maintain adequate rates, manage claims costs
and to keep operating expenses in line with premium volume. Zenith is unable to
predict when its Workers' Compensation operation will return to underwriting
profitability that is consistent with Zenith's historical experience.
Zenith is required to participate in the National Workers' Compensation
Reinsurance Pool ("NWCRP"), which is an involuntary assigned risk pool that
covers several states in which Zenith conducts business. Zenith's participation
in NWCRP premiums earned in 1998, 1997 and 1996 was $1.9 million, $3.3 million
and $3.6 million, respectively. The underwriting results for NWCRP did not
materially impact Workers' Compensation underwriting results in 1998, 1997 or
1996.
Florida has created the Special Disability Trust Fund (the "Fund") which
assesses workers' compensation insurers to pay for what are commonly referred to
as "Second Injuries". Historic assessments have been inadequate to completely
fund obligations of the Fund. In late 1997, the Florida statute was amended so
that the Fund will not be liable for and will not reimburse employers or
carriers for Second Injuries occurring on or after January 1, 1998. Zenith has
recorded its receivable from the Fund for Second Injuries based on specific
claims and historical experience prior to January 1, 1998. The receivable at
December 31, 1998 of $39,077,000, which relates to pre-January 1, 1998 claims,
is primarily related to the RISCORP Acquisition.
OTHER PROPERTY-CASUALTY
Other Property-Casualty reflects the results of the property-casualty
business written through CalFarm for individual and commercial customers,
primarily in the rural and suburban areas of California. The major lines of
business are automobile, farmowners, commercial coverages and homeowners, with
about 105,000 policies in-force. Other Property-Casualty also includes the
results of the health line of business which offers individually underwritten
comprehensive medical coverage to California Farm Bureau members with about
24,000 certificates in-force.
The business of CalFarm is closely tied to the California farm economy.
CalFarm benefits from the endorsement of the California Farm Bureau Federation
and is the largest writer of farmowner policies in California with an estimated
market share of 41%. Farm Bureau membership is a prerequisite to the purchase of
farmowners, automobile insurance at discounted rates (preferred), and health
insurance coverages from CalFarm.
CALFARM
THEZENITH 35
<PAGE>
Underwriting results in the Other Property-Casualty operation were profitable
for 1998, 1997 and 1996 as a result of favorable loss and loss adjustment
expense ratios for both current and prior accident years. Underwriting results
for 1998 and 1997 were impacted by catastrophe losses, intense competition,
increased expenses primarily due to computer costs for Year 2000 compliance and
the continuing investment to upgrade existing computer systems. Both 1998 and
1997 results include catastrophe losses attributable to California storm damage,
amounting to $5,000,000 in 1998 and $1,500,000 in 1997. The 1996 results
benefited from the absence of catastrophe losses. Underwriting results in 1998
were adversely impacted by the health line of business because of higher health
care costs and increased utilization. Underwriting losses attributable to the
health line of business were $2,991,000 in 1998, including $2,361,000 in the
fourth quarter, as compared to income of $125,000 in 1997 and $42,000 in 1996.
Premiums earned increased in 1998 and 1997 as compared to their respective
prior years primarily due to new business writings and rate increases in the
health line of business. Premium growth in other property-casualty lines of
business was limited by the intense pricing pressures and rate decreases in
automobile insurance. All rate changes, except for the health line of business,
are subject to prior approval by the state of California Department of Insurance
(the "Department of Insurance"). Management is unable to predict whether
requests for future rate increases, if any, will be granted by the Department of
Insurance. Failure by the Department of Insurance to act upon such requests
would adversely affect the adequacy of such rates and the profitability of
operations in the associated lines of business.
The California Legislature passed legislation in September 1996 which created
the California Earthquake Authority ("CEA"). The CEA, which became operational
in December 1996, is a privately financed, publicly managed state agency, which
provides limited earthquake coverage throughout California. Participation in the
CEA is voluntary and CalFarm elected not to participate. CalFarm can elect to
participate in the CEA at a later date subject to meeting the participation
requirements at that time.
CalFarm continues to write homeowners and associated earthquake insurance
with broader coverages than available through the CEA. CalFarm expects to
continue offering earthquake coverage as long as private reinsurance is
available and affordable. Earthquake exposure is closely monitored through the
use of earthquake modeling software and simulation techniques and through the
use of industry experts. In 1998, CalFarm expanded the scope of its catastrophe
management efforts to include an analysis of brush fire exposures. Catastrophe
reinsurance is used to protect CalFarm from excessive catastrophe losses.
CalFarm is required to participate in involuntary market plans, including the
California Automobile Assigned Risk Plan ("CAARP"), the Commercial Automobile
Insurance Procedure ("CAIP") and the California Fair Plan ("Fair Plan"). The
CAARP, the CAIP and the Fair Plan are organizations that were established by
statute in California but are serviced by the insurance industry. The 1998, 1997
and 1996 underwriting results for the CAARP, the CAIP, and the Fair Plan
together did not materially impact the Other Property-Casualty underwriting
results.
The private passenger automobile insurance market continues to be affected by
legislative actions. Both the mandatory proof of insurance law and the "Personal
Responsibility Act of 1996" created by Proposition 213 were effective January
1997. During 1997, CalFarm implemented the new rating factor regulations which
further limit the impact of territorial rating on automobile insurance rates.
During 1999, the legislature is expected to continue their debate on a way to
provide a low-cost auto policy to the uninsured drivers in California.
REINSURANCE
Zenith's assumed reinsurance operation emphasizes the reinsurance of
accumulated losses from catastrophes and the reinsurance of large property
risks.
The underwriting results for the year ended December 31, 1998 include
catastrophe losses related to Hurricane Georges of $4,500,000, including
$2,000,000 in the fourth quarter. Underwriting results were favorable during
1997 and 1996 as a result of absence of catastrophes.
36
<PAGE>
The outlook for profitability in the reinsurance operation continues to be
dependent upon, among other things, the level of rates for property and
catastrophe reinsurance and the frequency and severity of world-wide property
losses. Premiums earned in the reinsurance operation decreased in 1998 and 1997
due to selected non-renewal by Zenith of certain reinsurance treaties and
general softening of such rates in the industry. If rates do not improve,
premiums may continue to decrease in 1999.
REAL ESTATE OPERATIONS
Zenith's Real Estate Operations develop land and primarily construct private
residences for sale in Las Vegas, Nevada. Zenith recognized total revenues of
$37,737,000, $45,419,000 and $41,554,000 in 1998, 1997, and 1996, respectively,
related to its Real Estate Operations. Income from Real Estate Operations before
taxes was $1,363,000, $1,678,000 and $1,909,000 in 1998, 1997 and 1996,
respectively. Construction in progress, including undeveloped land, was
$42,142,000 at December 31, 1998 compared to $53,121,000 at December 31, 1997.
In addition to continuing home construction, Zenith may use some land presently
owned for commercial construction. Increased interest rates or other factors
could affect the rate of home sales.
INVESTMENTS
At December 31, 1998, 96% of Zenith's consolidated portfolio of fixed
maturity investments were classified as available-for-sale with the unrealized
appreciation or depreciation recorded as a separate component of stockholders'
equity. The effect on consolidated stockholders' equity of the change in the
value of fixed maturities classified as available-for-sale in 1998 compared to
1997 was an increase of $1,378,000, net of deferred taxes, as compared to an
increase of $7,001,000 from 1996 to 1997.
Zenith's primary investment goal is to maintain safety and liquidity, enhance
principal values and achieve increased rates of return consistent with
regulatory constraints. The allocation among various types of securities is
adjusted from time to time based on market conditions, credit conditions, tax
policy, fluctuations in interest rates and other factors.
The change in the carrying value of Zenith's consolidated investment
portfolio in 1998 was as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
(Dollars in thousands)
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Carrying value at beginning of year $ 879,973
Purchases at cost 403,267
Investments acquired in RISCORP Acquisition 190,460
Maturities and redemptions (107,945)
Proceeds from sales of investments:
Available-for-sale (302,648)
Other (13,145)
---------
Total proceeds from sales of investments (315,793)
Net realized gains:
Available-for-sale 6,817
Other 4,785
---------
Total net realized gains 11,602
Change in unrealized gains 406
Change in short-term investments (14,916)
Net amortization of bonds and preferred stocks and other changes 1,627
- -----------------------------------------------------------------------------------------------
Carrying value at end of year $1,048,681
- -----------------------------------------------------------------------------------------------
</TABLE>
CALFARM
THEZENITH 37
<PAGE>
At December 31, 1998 and 1997, Zenith's consolidated investment portfolio
emphasized high quality, liquid bonds and short-term investments. Bonds
constituted 72% and 67%, and short-term investments constituted 18% and 24%, of
the carrying value of Zenith's consolidated investment portfolio at December 31,
1998 and 1997, respectively. At December 31, 1998 and 1997, 96% of the
consolidated carrying values of investments in bonds were rated investment
grade. The average maturity of the investment portfolio was 4.2 years at
December 31, 1998 and 4.2 years at December 31, 1997.
Zenith's invested assets and cash increased 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.
Investment income during the three years ended December 31, 1998 was as
follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------
(Dollars in thousands) 1998 1997 1996
- -------------------------------------------------------
<S> <C> <C> <C>
Before taxes $ 53,593 $ 52,332 $ 51,154
After taxes 35,907 34,655 34,069
- -------------------------------------------------------
</TABLE>
The yields on invested assets vary with the general level of interest rates,
the average life of invested assets and the amount of funds available for
investment. Such yields for the three years ended December 31, 1998 were as
follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------
1998 1997 1996
- ---------------------------------------------------------
<S> <C> <C> <C>
Before taxes 5.7% 6.0% 6.1%
After taxes 3.8 3.9 4.0
- ---------------------------------------------------------
</TABLE>
The total fair value of fixed maturity investments, and the unrealized gain
on held-to-maturity and available-for-sale fixed maturity investments, were as
follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Unrealized Gain on Fixed Maturities
-------------------------------------------
Total Fair Value Held-to-Maturity Available-for-Sale
of Fixed ----------------- ------------------------
(Dollars in thousands) Maturities* Before Tax Before Tax After Tax
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1998 $ 959,119 $ 1,569 $ 9,864 $ 6,412
December 31, 1997 $ 800,572 $ 1,318 $ 7,744 $ 5,034
- ----------------------------------------------------------------------------------------------------
</TABLE>
* Includes short-term investments
Stockholders' equity will continue to be affected by volatility in the fixed
maturity securities market and changes in interest rates through changes in the
values of fixed maturity investments which are classified as available-for-sale.
MARKET RISK OF FINANCIAL INSTRUMENTS
Approximately 96% of the carrying value of fixed maturity investments are
categorized as available-for-sale, for which category changes in fair value are
reflected in stockholders' equity. The fair value of the fixed income investment
portfolio is exposed to interest rate risk -- the risk of loss in fair value
resulting from changes in prevailing market rates of interest for similar
financial instruments. In addition, certain mortgage-backed securities are
exposed to accelerated prepayment risk in that a decline in interest rates could
prompt mortgage holders to refinance existing mortgages at lower rates. However,
Zenith has the ability to hold fixed income investments to maturity.
Zenith relies on the experience and judgment of senior management to monitor
and control interest rate risk. Zenith does not utilize financial instrument
hedges or derivative financial instruments to manage risks, nor does it enter
into any swap, forward or options contracts, but will attempt to mitigate its
exposure through active portfolio management. Allocation among various types of
securities is adjusted from time to time based on market conditions, credit
conditions, tax policy, fluctuations in interest rates and other factors. In
addition, Zenith places the majority of its investments in high quality, liquid
securities and limits the amount of credit exposure to any one issuer.
38
<PAGE>
The table below provides information about Zenith's financial instruments as
of December 31, 1998 for which fair values are subject to changes in interest
rates. For fixed maturity investments, the table presents fair value of
investments held and weighted average interest rates on such investments by
expected maturity dates. Such investments include sinking fund preferreds,
redeemable preferreds, corporate bonds, municipal bonds, government bonds and
mortgage-backed securities. For debt obligations, the table presents principal
cash flows by expected maturity dates.
<TABLE>
<CAPTION>
Expected Maturity Date
-----------------------------------------------------------------------------
(Dollars in thousands) 1999 2000 2001 2002 2003 Thereafter Total
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed maturities:
Held-to-maturity and available-for-sale
securities:
Fixed rate $ 92,213 $ 105,376 $ 83,529 $ 72,838 $ 52,425 $ 362,614 $ 768,995
Weighted average interest rate 4.9% 4.9% 5.3% 5.8% 6.3% 6.7%
Trading securities:
Fixed rate $ 3,001 $ 3,001
Weighted average interest rate 5.6%
Short-term investments $ 187,123 $ 187,123
Debt obligations:
9% senior notes payable 6,750 $ 6,750 $ 6,750 $ 77,250 97,500
8.55% redeemable securities 6,413 6,413 6,413 6,413 $ 6,413 $ 232,638 264,703
Payable to banks and other notes payable 14,817 5,123 130 34 34 406 20,544
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
Zenith's property-casualty insurance subsidiaries create liquidity because
insurance premiums are generally collected prior to disbursements for claims and
benefits. These net cash flows, as set forth on page 51 in the Consolidated
Financial Statements, are invested as described in "Investments" above. Net cash
used in operations was $47,138,000 in 1998. Such cash was used principally to
pay loss and loss adjustment expense reserves in the former RISCORP operation.
Net cash flows from operations will continue to be adversely affected by the
payment of such acquired reserves.
Net cash flows from operating activities were $26,974,000 and $9,749,000 for
1997 and 1996, respectively.
Zenith's principal liquidity requirements in the long-term and the short-term
are the funds needed to pay its expenses, service its outstanding debt, pay any
cash dividends which may be declared to its stockholders and fund the land
acquisitions and development by its real estate operations. 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, unsecured lines of credit amounting to
$100,000,000 with aggregate availability at December 31, 1998 of $95,000,000.
Zenith's insurance subsidiaries are subject to insurance regulations which
restrict their ability to distribute dividends. Such dividend capabilities are
set forth in Note 11 to the Consolidated Financial Statements on page 64. Such
restrictions have not had, and under current regulations are not expected to
have, a material adverse impact on Zenith. Zenith received no dividends from its
insurance subsidiaries in 1998 and received dividends from its insurance
subsidiaries amounting to $22,750,000 and $15,000,000 in 1997 and 1996,
respectively. Maximum dividend capability, without prior approval of the
Department, of Zenith's insurance subsidiary in 1999 is $32,975,000, of which
$30,000,000 was paid to Zenith on March 12, 1999.
Zenith's Real Estate Operations maintain certain bank credit facilities to
provide financing for development and construction of private residences for
sale. At December 31, 1998, maximum permitted borrowing under the facilities was
$32,315,000, with a balance outstanding of $12,245,000 and $11,408,000 as of
December 31, 1998 and 1997, respectively.
CALFARM
THEZENITH 39
<PAGE>
Although a maximum of $32,315,000 is available to be borrowed, in practice, such
amount will not be outstanding. The agreements provide that funding and
repayment of development and construction loans are made in tandem for each
project. A development loan will always precede a construction loan loan for a
project and the proceeds of the construction loan are required to first be used
to pay off the respective development loan. Zenith's Real Estate Operations are
obligated under various notes arising from its purchase of several parcels of
land. The amount outstanding for such notes at December 31, 1998 and 1997 was
$2,010,000 and $2,334,000, respectively.
Insurance companies are required to have securities on deposit for the
protection of policyholders in accordance with various states' regulations. At
December 31, 1998 and 1997, investments carried at their fair value of
$261,986,000 and $294,309,000, respectively, were on deposit to comply with such
regulations.
At December 31, 1998, Zenith was authorized to repurchase up to 1,125,000
shares of Zenith common stock pursuant to a share purchase program authorized by
its Board of Directors. These purchases, which are made at prevailing market
prices, are discretionary and can be adequately funded from Zenith's existing
sources of liquidity.
In 1998, Zenith repurchased 960,000 shares on the open market for a total
purchase price of $24,023,000. On March 3, 1999, Zenith repurchased 33,000
shares on the open market for a total purchase price of $811,000.
On July 30, 1998, Zenith issued $75,000,000 of 8.55% Capital Securities at a
price of $996.24 per security through Zenith National Insurance Capital Trust I,
a Delaware statutory business trust (the "Trust"), all of the voting securities
of which are owned by Zenith. Each Capital Security pays semi-annual cumulative
cash distributions at the annual rate of 8.55% of the $1,000 liquidation amount
per security.
The Trust used the proceeds from its offering to purchase $75,000,000 of
Zenith's 8.55% Subordinated Deferrable Interest Debentures due 2028 (the
"Subordinated Debentures"), which constitute the principal asset of the Trust.
The semi-annual interest payments on the Subordinated Debentures 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. Zenith used $65,000,000 from the net proceeds to make a
capital contribution to Zenith Insurance. The remaining net proceeds were used
for general corporate purposes.
The net proceeds from the Capital Securities were primarily invested by
Zenith in various short-term securities which, in the aggregate, yield less than
the interest cost of the Subordinated Debenture.
On April 1, 1998, in connection with the closing of the RISCORP Acquisition,
Zenith Insurance paid $35,000,000 to RISCORP and repaid $15,000,000 in
indebtedness assumed from RISCORP, Inc. On March 26, 1999, Zenith Insurance paid
the balance of the purchase price payable, plus interest, of $53,689,000, after
deducting $6,765,000 for assets not transferred by RISCORP.
CODIFICATION OF
STATUTORY ACCOUNTING PRINCIPLES
In 1998, the National Association of Insurance Commissioners ("NAIC") adopted
the Codification of Statutory Accounting Principles guidance (the
"Codification"), which will replace the current Accounting Practices and
Procedures manual as the NAIC's primary guidance on statutory accounting
(statutory accounting is a comprehensive basis of accounting based on prescribed
accounting practices, which include state laws, regulations and general
administrative rules, as well as a variety of publications of the NAIC). The
NAIC is now considering amendments to the Codification that would also be
effective upon implementation. The NAIC has recommended an effective date of
January 1, 2001. The Codification provides guidance for areas where statutory
accounting has been silent and changes current statutory accounting in some
areas.
40
<PAGE>
It is not known whether the Department of Insurance will adopt the
Codification, and whether the Department of Insurance will make any changes to
that guidance. Implementation of the Codification may affect the surplus level
and capitalization requirements of Zenith's insurance subsidiaries on a
statutory basis. Zenith has not determined the potential impact of the
Codification.
RECENT DEVELOPMENTS IN
ACCOUNTING PRONOUNCEMENTS
On June 15, 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 is effective for Zenith for
all fiscal quarters of all fiscal years beginning after January 1, 2000. SFAS
No. 133 requires that all derivative instruments be recorded on the balance
sheet at their fair value. Changes in the fair value of derivatives are recorded
each period in current earnings or other comprehensive income, depending on
whether a derivative is designated as part of a hedge transaction and, if it is,
the type of hedge transaction. Zenith does not invest in derivative instruments,
and therefore adoption of SFAS No. 133 is not expected to have any effect on
Zenith's results of operations or its financial position.
YEAR 2000
The Year 2000 Problem refers to the inability of information technology
("IT") and non-information technology ("non-IT") systems to accurately process
dates during and after 1999. IT systems include computer hardware and software.
Non-IT systems include equipment that incorporates embedded micro controllers
such as elevators, security systems and HVAC systems. If not corrected, the
processes of IT and non-IT systems that are date sensitive could fail or
miscalculate data resulting in disruptions of operations such as a temporary
inability to process transactions, send and receive electronic data with third
parties or otherwise engage in normal business activities. There may also be a
negative impact on the economic and social infrastructure on which Zenith
depends.
In early 1996, Zenith formed a Year 2000 team consisting of staff familiar
with Zenith's IT and non-IT systems to coordinate the elimination, to the extent
possible, of Zenith's exposure to the Year 2000 Problem. Reports of the Year
2000 team's efforts are presented to Zenith's Board of Directors periodically.
Since 1996, Zenith has been systematically replacing and modifying its
internal systems to function correctly with dates from 1999 forward, thereby
rendering them "Year 2000 Compliant." Internal systems ("Internal Systems")
consist of (1) core information technology systems supporting corporate level
accounting and financial reporting processes ("Core Corporate IT Systems"); (2)
core information technology systems supporting operational processes involving
(a) underwriting, premium collection and claims processes in Zenith's insurance
operations (including those systems acquired in the RISCORP Acquisition) and (b)
land acquisitions, development, construction, sales and escrow
tracking/monitoring in the real estate operations ("Core Operational IT
Systems"); (3) computer networks and communications infrastructure ("IT
Infrastructure"); (4) personal and laptop computers including applications
("Other IT Equipment"); and (5) owned facility systems which rely on
non-computer equipment incorporating embedded microprocessors, such as
elevators, HVAC and security as well as office equipment such as facsimile and
copy machines and postage meters ("Facilities and Other Non-IT Systems"). The
majority of Zenith's Year 2000 compliance efforts have been staffed internally,
although Zenith has engaged and will continue to engage technical consultants to
assist its internal staff, as well as to assist Zenith in reviewing its
progress.
The Internal Systems are being corrected through a process with five phases,
some of which are concurrent: (1) Inventory (listing IT and non-IT systems and
their components); (2) Assessment (identifying possible Year 2000-related
failures and developing strategies to repair, replace, or eliminate them); (3)
Remediation (creating or acquiring corrections to identified deficiencies); (4)
Validation (confirming whether corrections would be successful); and (5)
Implementation (installing corrections into the business operations for general
use).
CALFARM
THEZENITH 41
<PAGE>
The status and scheduled completion dates of efforts to make the Internal
Systems supporting Zenith's operations Year 2000 Compliant are as follows:
<TABLE>
<CAPTION>
Inventory Assessment Remediation Validation Implementation
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------
Core Corporate IT Systems Completed Completed Completed Completed Completed
- ----------------------------------------------------------------------------------------------
Core Operational IT
Systems:
Workers' Compensation Completed Completed 4/30/99 5/31/99 5/31/99
Other Property-Casualty Completed Completed Completed 4/30/99 4/30/99
Reinsurance Completed Completed Completed Completed Completed
Real Estate Operations Completed Completed Completed 5/31/99 5/31/99
- ----------------------------------------------------------------------------------------------
IT Infrastructure:
Workers' Compensation Completed Completed 6/30/99 7/31/99 7/31/99
Other Property-Casualty Completed Completed 6/30/99 7/31/99 7/31/99
Reinsurance Completed Completed 6/30/99 7/31/99 7/31/99
Real Estate Operations Completed Completed Completed Completed Completed
- ----------------------------------------------------------------------------------------------
Other IT Equipment:
Workers' Compensation Completed Completed 5/31/99 7/31/99 7/31/99
Other Property-Casualty Completed Completed 5/31/99 7/31/99 7/31/99
Reinsurance Completed Completed 5/31/99 7/31/99 7/31/99
Real Estate Operations Completed Completed Completed Completed Completed
- ----------------------------------------------------------------------------------------------
Facilities and Other
Non-IT Systems:
Woodland Hills, CA Completed Completed Completed Completed Completed
Sarasota, FL Completed Completed 5/31/99 8/31/99 8/31/99
Sacramento, CA Completed Completed Completed Completed Completed
- ----------------------------------------------------------------------------------------------
</TABLE>
Zenith plans to further test and refine the Internal Systems during the
second half of 1999, to assure that they all function in Zenith's operating
environment on an interconnected basis.
Zenith's Year 2000 efforts also include a systematic assessment of the Year
2000 Compliant status of third parties upon which Zenith relies in its business
operations, including major suppliers of services and products, owners of its
leased facilities and principal business partners (collectively, "Key External
Dependencies"). Zenith has used letters, questionnaires, surveys and interviews
to determine whether these Key External Dependencies will achieve Year 2000
Compliant status. To date, Zenith has been unable, in most cases, to obtain
reliable information, and is therefore uncertain about the state of readiness of
many of its Key External Dependencies. Although none of the Key External
Dependencies has informed Zenith that it has a Year 2000 issue that would have a
material impact on Zenith, few have provided definitive statements, written
assurances or warranties that they will be Year 2000 Compliant. Zenith intends
to continue its systematic assessment, including follow-ups of its Key External
Dependencies.
All companies are faced with certain unknown risks arising from Year 2000
issues that may impact them negatively. Zenith's Year 2000 efforts have been
designed to mitigate to the extent possible its risks from Year 2000-related
failures faced by Zenith. Despite Zenith's Year 2000-related efforts, Zenith
recognizes the possibility of some negative impact on its operations resulting
from Year 2000-related failures. Zenith believes that the most reasonably likely
worst-case, Year 2000 scenarios could include failures of Zenith's Internal
Systems, a failure of one or more of its critical Key External Dependencies,
such as financial institutions, agents/brokers or
42
<PAGE>
reinsurers, and/or the contamination of Zenith's IT systems due to receipt of
corrupted data. Such a scenario could result in a disruption of Zenith's normal
business activities and could have a material adverse impact on its financial
condition and results of operations. In the quarter ended September 30, 1998,
Zenith began developing contingency plans to substantially reduce material
business disruptions from such risks. Zenith intends such plans to include
measures, such as 1) acceleration into the last quarter of 1999 the performance
of obligations and duties otherwise owed in the first quarter of 2000; 2)
identification of alternatives to Key External Dependencies that may not be Year
2000 Compliant and therefore unable to meet Zenith's needs; and 3) certain
activities in Zenith's pre-existing Business Recovery/ Resumption Plan designed
for Zenith to operate during, and to recover from, catastrophes. All contingency
plans are expected to be in place by September 30, 1999.
Zenith has been planning to upgrade its IT Infrastructure and its other IT
equipment for some time; however, because of the Year 2000 Problem, certain
components of those plans will be accelerated and completed by mid-1999. The
table below sets out the costs for either repairing Zenith's IT systems ("IT
Repair Costs") or for replacing them ("IT Replacement Costs").
<TABLE>
<CAPTION>
Expenditures Percent Expended Estimate Total
as of as of to Estimated
(Dollars in thousands) December 31, 1998 December 31, 1998 Complete IT Expenditure
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------
IT Repair Costs $4,522 80% $1,100 $ 5,622
IT Replacement Costs:
Software 197 13% 1,277 1,474
Hardware 191 8% 2,125 2,316
Related Expenditures 341 51% 322 663
- -------------------------------------------------------------------------------------------------
Total $5,251 52% $4,824 $10,075
- -------------------------------------------------------------------------------------------------
</TABLE>
IT Repair Costs and IT Replacement Costs include external costs and the cost
of dedicated information technology personnel. IT Repair Costs are expensed as
they are incurred; IT Replacement Costs are capitalized in accordance with
Statement of Position 98-1. (See Note 1 to the Consolidated Financial Statements
on pages 54-57.) The internal cost of user participation in acceptance testing
has not been measured and is not included in the foregoing estimates. Although
not quantified at this time, costs associated with non-IT systems and
contingency planning are not expected to be significant. All Year 2000-related
costs have been, and will continue to be, funded from internal sources. No
planned information technology projects were deferred because of Year
2000-related efforts.
The reader is directed to the section of this Report entitled
"Forward-Looking Information" on page 30 and cautioned that the foregoing
discussion on the Year 2000 Problem must be read in conjunction with such
section. The forward looking information on the Year 2000 Problem, including its
impact on Zenith, future costs, scheduled completion dates, and the success of
Zenith's efforts in preparing for it are based on management's best estimates of
future events. Such estimates, however, are subject to the inherent uncertainty
of the ultimate effect and the extent of the Year 2000 Problem and the
availability of technical resources and hardware.
CALFARM
THEZENITH 43
<PAGE>
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL INFORMATION
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, Note 1998 1997
<S> <C> <C> <C>
- -----------------------------------------------------------------
(Dollars and shares in thousands,
except per share data)
REVENUES: 1
Property-Casualty insurance
operations:
Premiums earned $ 529,855 $ 488,721
Investment income 53,593 52,332
Realized gains on investments 11,602 14,008
Real estate operations 37,737 45,419
Service fee income 3,992
Income from legal settlement
- -----------------------------------------------------------------
TOTAL REVENUES 636,779 600,480
- -----------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS
AFTER TAXES AND BEFORE REALIZED
GAINS 1, 2 11,559 19,669
Per common share* 1, 2 0.67 1.10
- -----------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS
AFTER TAXES 19,100 28,100
Per common share* 1.11 1.57
- -----------------------------------------------------------------
COMPONENTS OF NET INCOME: 1
Underwriting (loss) income:
Excluding catastrophe losses (11,230) (10,217)
Including catastrophe losses (18,705) (11,192)
Net investment income 35,907 34,655
Realized gains on investments 7,541 8,431
Real estate operations 868 1,079
Parent operations (6,511) (4,873)
Income (loss) from discontinued
life and annuity operations 3
- -----------------------------------------------------------------
NET INCOME 19,100 28,100
Per common share* 1.11 1.57
- -----------------------------------------------------------------
CASH DIVIDENDS PER SHARE TO COMMON
STOCKHOLDERS 1.00 1.00
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING* 17,158 17,886
- -----------------------------------------------------------------
FINANCIAL CONDITION: 1
Total assets 1,818,726 1,252,156
Investments 1,048,681 879,973
Property-casualty unpaid claims 997,647 613,266
Senior notes, bank debt and other
notes payable 93,851 88,216
Redeemable securities 73,341
Total stockholders' equity 346,952 361,866
Stockholders' equity per share 20.23 20.31
Stockholders' equity per share,
excluding effect of SFAS No. 115 19.86 20.03
Return on average equity 5.4% 8.3%
- -----------------------------------------------------------------
PROPERTY-CASUALTY INSURANCE
STATISTICS (GAAP): 1
Paid loss and loss adjustment
expense ratio 82.9% 66.9%
Loss and loss adjustment expense
ratio 72.3% 71.2%
Underwriting expense ratio 32.9% 32.1%
Policyholder dividends ratio 0.1% 0.1%
--------- ---------
Combined ratio 105.3% 103.4%
Net premiums earned-to-surplus
ratio 1.2 1.4
Loss and loss adjustment expense
reserves-to-surplus ratio (net
of reinsurance) 4 1.6 1.5
- -----------------------------------------------------------------
</TABLE>
*Amounts prior to 1997 have been restated as required to comply with SFAS No.
128 and represent diluted amounts per share and weighted average shares
assuming exercise of stock options. For further discussion of earnings per
share and the impact of SFAS No. 128, see Note 16 to the Consolidated Financial
Statements on page 68.
44
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
(Dollars and shares in thousands,
except per share data)
REVENUES:
Property-Casualty insurance
operations:
Premiums earned $ 452,856 $ 437,513 $ 438,829
Investment income 51,154 46,150 40,068
Realized gains on investments 10,807 3,621 1,428
Real estate operations 41,554 31,736 30,220
Service fee income
Income from legal settlement 1,910
- ---------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 556,371 519,020 512,455
- ---------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS
AFTER TAXES AND BEFORE REALIZED
GAINS 30,575 17,368 27,628
Per common share* 1.72 0.95 1.45
- ---------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS
AFTER TAXES 37,600 19,722 29,798
Per common share* 2.12 1.08 1.56
- ---------------------------------------------------------------------------------------------------------------
COMPONENTS OF NET INCOME:
Underwriting (loss) income:
Excluding catastrophe losses 356 (226) 15,652
Including catastrophe losses 356 (8,936) 5,707
Net investment income 34,069 30,690 26,995
Realized gains on investments 7,025 2,354 929
Real estate operations 1,251 1,349 1,423
Parent operations (5,101) (5,735) (5,256)
Income (loss) from discontinued
life and annuity operations (13,122) 8,102
- ---------------------------------------------------------------------------------------------------------------
NET INCOME 37,600 6,600 37,900
Per common share* 2.12 0.36 1.99
- ---------------------------------------------------------------------------------------------------------------
CASH DIVIDENDS PER SHARE TO COMMON
STOCKHOLDERS 1.00 1.00 1.00
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING* 17,752 18,334 19,029
- ---------------------------------------------------------------------------------------------------------------
FINANCIAL CONDITION:
Total assets 1,242,724 1,115,433 1,093,675
Investments 852,799 835,214 709,030
Property-casualty unpaid claims 620,078 517,552 510,406
Senior notes, bank debt and other
notes payable 88,861 83,135 76,582
Redeemable securities
Total stockholders' equity 337,503 330,432 309,860
Stockholders' equity per share 19.17 18.58 16.35
Stockholders' equity per share,
excluding effect of SFAS No. 115 19.28 18.18 18.79
Return on average equity 11.4% 2.0% 11.7%
- ---------------------------------------------------------------------------------------------------------------
PROPERTY-CASUALTY INSURANCE
STATISTICS (GAAP):
Paid loss and loss adjustment
expense ratio 69.9% 74.3% 69.6%
Loss and loss adjustment expense
ratio 69.5% 74.4% 66.9%
Underwriting expense ratio 29.7% 27.4% 26.9%
Policyholder dividends ratio 0.6% 1.3% 4.0%
--------- --------- ---------
Combined ratio 99.8% 103.1% 97.8%
Net premiums earned-to-surplus
ratio 1.4 1.4 1.7
Loss and loss adjustment expense
reserves-to-surplus ratio (net
of reinsurance) 1.6 1.5 1.7
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
(1) 1994 has been restated to include health insurance in property-casualty
insurance operations. 1998 amounts include the assets acquired and
liabilities assumed from RISCORP on April 1, 1998 and the results of
operations of RISCORP for the nine months ended December 31, 1998 (See Note
15 to the Consolidated Financial Statements on pages 66-67).
(2) Excludes $1,241,000, or $0.06 per share, in 1994 for the effect of legal
settlement.
(3) In 1995, Zenith sold CalFarm Life.
(4) Computed including AGC-SIF net reserves of $65,429,000 acquired through
merger on December 31, 1996 (See Note 15 to the Consolidated Financial
Statements on page 67).
CALFARM
THEZENITH 45
<PAGE>
PROPERTY-CASUALTY LOSS DEVELOPMENT
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
The table that follows shows analysis of development of loss and loss
adjustment expense liabilities as originally estimated on a generally accepted
accounting principles basis at December 31 of each year presented. The
accounting policies used to estimate these liabilities are described in Note 1
to the Consolidated Financial Statements on page 54. Amounts represent all
property-casualty operations.
ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE LIABILITY DEVELOPMENT
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998 1997
<S> <C> <C>
- -------------------------------------------------------
(Dollars in thousands)
LIABILITY FOR UNPAID LOSS AND LOSS
ADJUSTMENT EXPENSES, NET $708,684 $525,601
- -------------------------------------------------------
PAID, NET (CUMULATIVE) AS OF:
One year later 195,596
Two years later
Three years later
Four years later
Five years later
Six years later
Seven years later
Eight years later
Nine years later
Ten years later
- -------------------------------------------------------
LIABILITY, NET RE-ESTIMATED AS OF:
One year later 514,234
Two years later
Three years later
Four years later
Five years later
Six years later
Seven years later
Eight years later
Nine years later
Ten years later
- -------------------------------------------------------
FAVORABLE (DEFICIENT) DEVELOPMENT $11,367
- -------------------------------------------------------
NET LIABILITY -- DECEMBER 31, $708,684 $525,601
Receivable from reinsurers and
state trust funds 288,963 87,665
- -------------------------------------------------------
GROSS LIABILITY -- DECEMBER 31, 997,647 613,266
Re-estimated liability, net of
reinsurance 514,234
Re-estimated receivable from
reinsurers 84,541
- -------------------------------------------------------
Re-estimated liability, gross 598,775
- -------------------------------------------------------
FAVORABLE (DEFICIENT) DEVELOPMENT,
GROSS $14,491
- -------------------------------------------------------
</TABLE>
The analysis above presents the development of Zenith's balance sheet
liabilities for 1988 through 1998. The first line in the table shows the
liability for unpaid loss and loss adjustment expense, net of reinsurance, as
estimated at the end of each calendar year. The first section shows the actual
payments of loss and loss adjustment expenses that relate to each year-end
liability as they are paid during subsequent annual periods. The second section
includes revised estimates of the original unpaid amounts, net of reinsurance,
including the subsequent payments. The next line shows the favorable or
deficient developments of the original estimates for each year through 1998, net
of reinsurance. This loss reserve development table is cumulative and,
therefore, ending balances should not be added since the amount at the end of
each calendar year includes activity for both the current and prior years.
Hence, the liability at the end of each year includes an estimate of the amount
yet unpaid and still due at the subsequent re-evaluation date for all previously
estimated liabilities. For example, the liability at the end of 1997 includes an
estimate of the amount still due on the 1996 and prior liabilities. The loss and
loss adjustment expense data prior to 1995 have been restated to include health
insurance business previously written by CalFarm Life Insurance Company. 1996
and subsequent includes the AGC-SIF net reserves acquired through merger on
December 31, 1996 as described in Note 15 to the Consolidated Financial
Statements on page 66. Information for 1998 includes the results of the
acquisition of RISCORP as described in Note 15 to the Consolidated Financial
Statements on pages 66-67.
Since conditions and trends that have affected loss and loss adjustment
expense development in the past may not occur in the future in exactly the same
manner, if at all, future results may not be reliably predicted by extrapolation
of the data presented.
46
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992 1991 1990 1989 1988
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
LIABILITY FOR UNPAID LOSS AND LOSS
ADJUSTMENT EXPENSES, NET $526,427 $463,123 $462,710 $474,499 $471,832 $447,702 $424,373 $386,445 $347,888
- -----------------------------------------------------------------------------------------------------------------------------
PAID, NET (CUMULATIVE) AS OF:
One year later 209,346 185,764 175,488 173,699 184,498 184,593 162,642 129,605 118,332
Two years later 322,519 295,872 274,560 272,221 292,914 291,228 264,904 205,132 179,241
Three years later 350,279 331,532 325,916 355,710 352,208 323,685 258,632 216,321
Four years later 362,287 364,420 389,417 390,459 357,233 289,963 245,629
Five years later 384,303 416,297 412,600 380,524 309,524 263,971
Six years later 429,715 433,322 394,741 323,041 275,983
Seven years later 442,258 409,190 332,239 284,877
Eight years later 415,176 341,520 290,126
Nine years later 345,971 295,039
Ten years later 297,945
- -----------------------------------------------------------------------------------------------------------------------------
LIABILITY, NET RE-ESTIMATED AS OF:
One year later 526,078 459,314 460,575 464,779 480,903 467,636 427,458 381,096 341,679
Two years later 520,114 464,830 450,675 453,497 483,334 485,399 442,332 371,272 332,541
Three years later 460,782 442,391 452,330 482,019 485,816 453,802 374,455 327,961
Four years later 437,216 446,746 487,447 488,723 454,744 380,983 325,457
Five years later 442,053 483,294 491,216 455,971 381,703 328,415
Six years later 477,642 488,826 456,860 382,280 328,640
Seven years later 483,433 453,475 382,219 329,058
Eight years later 448,191 377,410 328,465
Nine years later 372,415 322,236
Ten years later 317,581
- -----------------------------------------------------------------------------------------------------------------------------
FAVORABLE (DEFICIENT) DEVELOPMENT $ 6,313 $ 2,341 $ 25,494 $ 32,446 $ (5,810) $(35,731) $(23,818) $ 14,030 $ 30,307
- -----------------------------------------------------------------------------------------------------------------------------
NET LIABILITY -- DECEMBER 31, $526,427 $463,123 $462,710 $474,499 $471,832
Receivable from reinsurers and
state trust funds 93,651 54,429 47,696 44,919 33,070
- -------------------------------------------------------------------------------------
GROSS LIABILITY -- DECEMBER 31, 620,078 517,552 510,406 519,418 504,902
Re-estimated liability, net of
reinsurance 520,114 460,782 437,216 442,053 477,642
Re-estimated receivable from
reinsurers 91,256 52,764 43,607 51,186 68,084
- -------------------------------------------------------------------------------------
Re-estimated liability, gross 611,370 513,546 480,823 493,239 545,726
- -------------------------------------------------------------------------------------
FAVORABLE (DEFICIENT) DEVELOPMENT,
GROSS $ 8,708 $ 4,006 $ 29,583 $ 26,179 $(40,824)
- -------------------------------------------------------------------------------------
</TABLE>
CALFARM
THEZENITH 47
<PAGE>
CONSOLIDATED BALANCE SHEET
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
DECEMBER 31, Note 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(Dollars in thousands)
ASSETS:
Investments
Fixed maturities:
At amortized cost (fair value $36,712 in 1998 and $48,266 in 1997) $ 35,143 $ 46,948
At fair value (cost $725,397 in 1998 and $534,771 in 1997) 735,284 542,479
Floating rate preferred stocks, at fair value (cost $16,614 in 1998 and $14,614
in 1997) 17,324 15,670
Convertible and non-redeemable preferred stocks, at fair value (cost $7,679 in
1998
and $6,672 in 1997) 7,350 6,602
Common stocks, at fair value (cost $22,402 in 1998 and $17,790 in 1997) 26,935 23,439
Short-term investments (at cost, which approximates fair value) 187,123 209,827
Other investments 39,522 35,008
- ---------------------------------------------------------------------------------------------------------------------
Total investments 1, 2 1,048,681 879,973
Cash 1,998 12,504
Accrued investment income 13,646 9,523
Premiums receivable, less allowance for doubtful accounts of $9,760 in 1998
and $1,575 in 1997 133,631 72,813
Receivable from reinsurers, state trust funds and prepaid reinsurance premiums 1, 15 373,045 106,067
Deferred policy acquisition costs 23,941 20,840
Properties and equipment, less accumulated depreciation 3 79,908 54,531
Federal income taxes 7 25,351 19,940
Intangible assets 1, 15 25,744 11,609
Other assets 1 92,781 64,356
- ---------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 1,818,726 $ 1,252,156
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of this statement.
48
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, Note 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(Dollars and shares in thousands)
LIABILITIES:
Policy liabilities and accruals
Unpaid loss and loss adjustment expenses 14, 15 $ 997,647 $ 613,266
Unearned premiums 157,965 128,469
Policyholders' dividends accrued 4,763 5,360
Other policyholder funds 6,407
Reserves on loss portfolio transfers 9,689 11,054
Payable to banks and other notes payable 4 19,255 13,742
Senior notes payable, less unamortized issue costs of $404 in 1998 and $526 in 1997 5 74,596 74,474
Payable to RISCORP 15 52,952
Other liabilities 15 81,566 37,518
- -----------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,398,433 890,290
- -----------------------------------------------------------------------------------------------------------------------------
REDEEMABLE SECURITIES:
Company-obligated, mandatorily redeemable capital securities of Zenith National
Insurance Capital Trust I, holding solely 8.55% Subordinated Deferrable Interest
Debentures due 2028, of Zenith National Insurance Corp., less unamortized issue cost
and discount of $1,659 in 1998 6 73,341
- -----------------------------------------------------------------------------------------------------------------------------
Commitments and contingent liabilities 9
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 24,970, outstanding 17,148 in
1998; issued 24,681, outstanding 17,819 in 1997 10 24,970 24,681
Additional paid-in capital 270,679 264,098
Retained earnings 188,243 186,268
Accumulated other comprehensive income -- net unrealized appreciation on investments,
net of deferred tax expense of $5,167 in 1998 and $5,025 in 1997 1, 2 9,596 9,332
- -----------------------------------------------------------------------------------------------------------------------------
493,488 484,379
Less treasury stock at cost (7,822 shares in 1998 and 6,862 shares in 1997) 10 (146,536) (122,513)
- -----------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 346,952 361,866
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES, REDEEMABLE SECURITIES AND STOCKHOLDERS' EQUITY $ 1,818,726 $ 1,252,156
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
CALFARM
THEZENITH 49
<PAGE>
CONSOLIDATED STATEMENT OF OPERATIONS
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, Note 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(Dollars and shares in thousands, except per share data)
REVENUES:
Premiums earned 8 $ 529,855 $ 488,721 $ 452,856
Net investment income 2 53,593 52,332 51,154
Realized gains on investments 2 11,602 14,008 10,807
Real estate sales 37,737 45,419 41,554
Service fee income 3,992
- ----------------------------------------------------------------------------------------------------------------------
Total revenues 636,779 600,480 556,371
- ----------------------------------------------------------------------------------------------------------------------
EXPENSES:
Loss and loss adjustment expenses incurred 8, 14 382,890 348,165 314,700
Policy acquisition costs 96,937 92,213 84,093
Other underwriting and operating expenses 85,299 68,003 53,413
Policyholders' dividends and participation 516 355 2,526
Real estate construction and operating costs 36,374 44,286 39,645
Interest expense 4, 5, 6 5,928 3,980 4,877
- ----------------------------------------------------------------------------------------------------------------------
Total expenses 607,944 557,002 499,254
- ----------------------------------------------------------------------------------------------------------------------
Income before federal income tax expense 28,835 43,478 57,117
Federal income tax expense 7 9,735 15,378 19,517
- ----------------------------------------------------------------------------------------------------------------------
NET INCOME $ 19,100 $ 28,100 $ 37,600
- ----------------------------------------------------------------------------------------------------------------------
Net income per common share -- basic 16 $ 1.12 $ 1.59 $ 2.14
- ----------------------------------------------------------------------------------------------------------------------
Net income per common share -- diluted 16 $ 1.11 $ 1.57 $ 2.12
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of this statement.
50
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, Note 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Premiums and service fee income collected $ 580,945 $ 521,588 $ 474,831
Investment income received 54,970 52,242 46,167
Proceeds from sales of real estate 37,737 45,964 41,554
Loss and loss adjustment expenses paid (434,610) (342,461) (316,949)
Underwriting and other operating expenses paid (181,877) (160,438) (127,975)
Real estate construction costs paid (47,423) (47,565) (54,480)
Reinsurance premiums paid (41,429) (27,336) (23,748)
Dividends paid to policyholders (358) (1,284) (5,985)
Interest paid (10,513) (6,910) (7,626)
Income taxes paid (4,580) (8,242) (23,090)
Net proceeds from sales of trading portfolio investments 1,416 7,050
- ---------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities (47,138) 26,974 9,749
- ---------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments:
Debt securities held-to-maturity (5,342)
Debt and equity securities available-for-sale (390,373) (82,734) (447,251)
Other debt and equity securities and other investments (12,894) (8,510) (13,295)
Proceeds from maturities and exchanges of investments:
Debt securities held-to-maturity 11,583 6,258 8,460
Debt and equity securities available-for-sale 96,362 48,338 173,287
Other debt and equity securities and other investments 15,483
Proceeds from sales of investments:
Debt and equity securities available-for-sale 302,648 104,809 261,410
Other debt and equity securities and other investments 13,145 15,211 9,656
Net change in short-term investments 14,916 (103,115) 34,716
Capital expenditures and other, net (11,356) (5,304) (5,784)
Cash payment to RISCORP 15 (35,000)
RISCORP acquisition costs 15 (11,035) (2,804)
Cash acquired in RISCORP Acquisition 15 29,309
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 7,305 (12,368) 15,857
- ---------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of note assumed from RISCORP 15 (15,000)
Net cash received from the sale of Zenith National Insurance Capital
Trust I
8.55% Capital Securities 6 73,320
Cash advanced from bank line of credit 4 7,000
Cash repaid on bank line of credit 4 (2,000)
Cash advanced from bank loans and other notes payable 35,431 39,729 27,935
Cash repaid on bank loans and other notes payable (34,918) (40,719) (25,691)
Cash dividends paid to common stockholders (17,010) (17,695) (17,605)
Proceeds from exercise of stock options 6,527 4,940 2,572
Purchase of treasury shares (24,023) (482) (7,611)
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 29,327 (14,227) (20,400)
- ---------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash (10,506) 379 5,206
Cash at beginning of year 12,504 12,125 6,919
- ---------------------------------------------------------------------------------------------------------------------
CASH AT END OF YEAR $ 1,998 $ 12,504 $ 12,125
- ---------------------------------------------------------------------------------------------------------------------
RECONCILIATION OF NET INCOME TO NET CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 19,100 $ 28,100 $ 37,600
Adjustments to reconcile net income to net cash flows (used in) provided
by operating activities:
Depreciation and amortization 9,096 5,716 3,081
Realized gains on investments (11,602) (14,008) (10,807)
Net cash from trading portfolio 1,416 7,050
Decrease (increase) in:
Premiums receivable 25,757 7,732 (3,467)
Receivable from reinsurers, state trust funds and prepaid
reinsurance premiums 22,039 13,457 (1,824)
Deferred policy acquisition costs (3,101) (88) (413)
Real estate construction in progress and land held for
development (16,266) (8,038) (19,601)
Increase (decrease) in:
Unpaid loss and loss adjustment expenses (97,601) (6,812) (164)
Unearned premiums (13,681) 1,260 7,618
Policyholders' dividends accrued (597) (2,310) (5,570)
Federal income taxes 5,019 6,385 (3,574)
Deferred credit on reinsurance 15 8,510
Other 6,189 (5,836) (180)
- ---------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities $ (47,138) $ 26,974 $ 9,749
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of this statement.
See Note 15 to the Consolidated Financial Statements on pages 66-67 for non-cash
activities related to the RISCORP Acquisition.
CALFARM
THEZENITH 51
<PAGE>
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PREFERRED COMMON
THREE YEARS ENDED DECEMBER 31, 1998 NOTE STOCK $1 PAR STOCK $1 PAR
<S> <C> <C> <C>
- ---------------------------------------------------------------------------
(Dollars in thousands, except per
share data)
BALANCE AT DECEMBER 31, 1995 $ 24,310
Net income for 1996
Other comprehensive income -- net
unrealized (depreciation) on
investments, net of deferred
tax benefit of $4,468 2
Comprehensive income
Exercise of 137,000 stock options 10 137
Tax benefit on options exercised in
1996
Purchase of 317,000 treasury shares
at cost
Cash dividends declared to common
stockholders ($1.00 per share,
paid quarterly)
- ---------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 24,447
Net income for 1997
Other comprehensive income -- net
unrealized appreciation on
investments, net of deferred
tax expense of $4,741 2
Comprehensive income
Exercise of 234,000 stock options 10 234
Tax benefit on options exercised in
1997
Purchase of 19,000 treasury shares
at cost
Cash dividends declared to common
stockholders ($1.00 per share,
paid quarterly)
- ---------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 24,681
NET INCOME FOR 1998
OTHER COMPREHENSIVE INCOME -- NET
UNREALIZED APPRECIATION
ON INVESTMENTS, NET OF DEFERRED
TAX EXPENSE OF $142 2
COMPREHENSIVE INCOME
EXERCISE OF 289,000 STOCK OPTIONS 10 289
TAX BENEFIT ON OPTIONS EXERCISED IN
1998
PURCHASE OF 960,000 TREASURY SHARES
AT COST
CASH DIVIDENDS DECLARED TO COMMON
STOCKHOLDERS ($1.00 PER SHARE,
PAID QUARTERLY)
- ---------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998 $ 24,970
- ---------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of this statement.
52
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ACCUMULATED OTHER
COMPREHENSIVE INCOME -
ADDITIONAL RETAINED NET UNREALIZED APPRECIATION TREASURY
PAID-IN CAPITAL EARNINGS (DEPRECIATION) ON INVESTMENTS STOCK TOTAL
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per
share data)
BALANCE AT DECEMBER 31, 1995 $ 256,083 $ 155,634 $ 8,825 $(114,420) $ 330,432
Net income for 1996 37,600 37,600
Other comprehensive income -- net
unrealized (depreciation) on
investments, net of deferred
tax benefit of $4,468 (8,297) (8,297)
-------
Comprehensive income 29,303
Exercise of 137,000 stock options 2,435 2,572
Tax benefit on options exercised in
1996 357 357
Purchase of 317,000 treasury shares
at cost (7,611) (7,611)
Cash dividends declared to common
stockholders ($1.00 per share,
paid quarterly) (17,550) (17,550)
- ----------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 258,875 175,684 528 (122,031) 337,503
Net income for 1997 28,100 28,100
Other comprehensive income -- net
unrealized appreciation on
investments, net of deferred
tax expense of $4,741 8,804 8,804
-------
Comprehensive income 36,904
Exercise of 234,000 stock options 4,706 4,940
Tax benefit on options exercised in
1997 517 517
Purchase of 19,000 treasury shares
at cost (482) (482)
Cash dividends declared to common
stockholders ($1.00 per share,
paid quarterly) (17,516) (17,516)
- ----------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 264,098 186,268 9,332 (122,513) 361,866
NET INCOME FOR 1998 19,100 19,100
OTHER COMPREHENSIVE INCOME -- NET
UNREALIZED APPRECIATION
ON INVESTMENTS, NET OF DEFERRED
TAX EXPENSE OF $142 264 264
-------
COMPREHENSIVE INCOME 19,364
EXERCISE OF 289,000 STOCK OPTIONS 6,238 6,527
TAX BENEFIT ON OPTIONS EXERCISED IN
1998 343 343
PURCHASE OF 960,000 TREASURY SHARES
AT COST (24,023) (24,023)
CASH DIVIDENDS DECLARED TO COMMON
STOCKHOLDERS ($1.00 PER SHARE,
PAID QUARTERLY) (17,125) (17,125)
- ----------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998 $ 270,679 $ 188,243 $ 9,596 $(146,536) $ 346,952
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
CALFARM
THEZENITH 53
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
NOTE 1
SUMMARY OF ACCOUNTING POLICIES,
OPERATIONS AND PRINCIPLES OF CONSOLIDATION
Zenith National Insurance Corp. ("Zenith") is engaged through its
wholly-owned property-casualty insurance subsidiaries in the business of writing
Workers' Compensation insurance, 44.2% of which is in California; Reinsurance,
principally of world-wide property and catastrophe risks; and Other
Property-Casualty, principally automobile, homeowners, farmowners, commercial
coverages and health insurance and other coverages primarily in the rural and
suburban areas of California. Zenith's subsidiaries sell insurance and
reinsurance through agents and brokers and not directly to consumers. Zenith
also conducts real estate operations, developing private residences for sale in
Las Vegas, Nevada. On April 1, 1998, Zenith Insurance Company ("Zenith
Insurance"), a wholly owned subsidiary of Zenith, acquired substantially all of
the assets and certain liabilities of RISCORP, Inc. and certain of its
subsidiaries (collectively, "RISCORP"), related to RISCORP's workers'
compensation business (see Note 15). On December 31, 1996, Zenith acquired
through merger the assets and liabilities of Associated General Commerce
Self-Insurers' Trust Fund ("AGC-SIF"), a Florida workers' compensation
self-insurers' fund (See Note 15).
The financial statements have been prepared in accordance with generally
accepted accounting principles ("GAAP") and include Zenith and its subsidiaries.
GAAP requires the use of assumptions and estimates in reporting certain assets
and liabilities and related disclosures and actual results could differ from
those estimates. All significant intercompany transactions and balances have
been eliminated in consolidation.
FAIR VALUES OF FINANCIAL INSTRUMENTS
Financial instruments are contractual obligations that result in the delivery
of cash or an ownership interest in an entity. Disclosures included in these
notes regarding the fair value of financial instruments have been derived using
external market sources, estimates using present value or other valuation
techniques.
The following summarizes the carrying amounts and fair value of Zenith's
financial instruments as of December 31:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
1998 1997
---------------------- ----------------------
CARRYING FAIR Carrying Fair
(Dollars in thousands) NOTE AMOUNT VALUE amount value
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Investments:
Trading securities 2 $ 3,041 $ 3,041 $ 2,982 $ 2,982
Other investments 2 1,045,640 1,047,209 876,991 878,309
---------- ---------- ---------- ----------
1,048,681 1,050,250 879,973 881,291
LIABILITIES:
Other notes payable 4 2,010 2,010 2,334 2,334
Payable to banks 4 17,245 17,245 11,408 11,408
Senior notes payable 5 74,596 80,881 74,474 82,365
Redeemable securities 6 73,341 66,312
- --------------------------------------------------------------------------------------
</TABLE>
INVESTMENTS
Zenith's investments in debt and equity securities are identified in three
categories as follows: held-to-maturity -- those securities, which by their
terms must be redeemed by the issuing company and that the enterprise has the
positive intent and ability to hold to maturity, and are reported at amortized
cost; trading -- those securities that are held principally for the purpose of
selling them in the near term and are reported at fair value with unrealized
gains and losses included in earnings; and available-for-sale -- those
securities not classified as either held-to-maturity or trading and are reported
at fair value with unrealized gains and losses excluded from earnings and
reported as a separate component of stockholders' equity, net of deferred taxes.
Other investments and receivables, which are classified as other investments,
are carried at cost.
When, in the opinion of management, a decline in market value of investments
is considered to be "other than temporary," such investments are written down to
their net realizable value. The determination of "other than temporary"
includes, in addition to consideration of other relevant factors, a presumption
that if the market value is below cost by a significant amount for a period of
time, a writedown is necessary.
The market value of investments was supplied by the Merrill Lynch pricing
service, with the exception of 43 items whose values were obtained from other
brokers making a market in the investment, the Bloomberg
54
<PAGE>
financial news service and the use of analytical pricing methods for issues for
which there is no ready market. The pricing for municipal bonds is provided by
Muller Data. These market values are considered fair value.
The cost of securities sold is determined by the "identified cost" method.
Short-term investments include debt securities such as corporate, municipal and
treasury securities with maturities of less than one year at the time of
purchase. For these short-term investments, the carrying amount is a reasonable
estimate of fair value.
CASH
Cash includes currency on hand and demand deposits with financial
institutions.
RECOGNITION OF PROPERTY-CASUALTY
REVENUE AND EXPENSE
Property-casualty premiums are earned on a pro rata basis over the terms of
the policies. Premiums applicable to the unexpired terms of policies in force
are recorded as unearned premiums. Included with premiums earned is an estimate
for earned but unbilled audit premiums. Workers' compensation insurance premiums
are determined based upon the payroll of the insured and applicable premium
rates. Premiums for retrospectively-rated policies are also determined by the
loss experience incurred by the policyholder.
Policy acquisition costs, consisting of commissions, premium taxes and
certain other underwriting costs, are deferred and amortized as the related
premiums are earned.
Zenith's insurance subsidiaries make provisions for the settlement of all
incurred claims, both reported and unreported. The liabilities for unpaid loss
and loss adjustment expenses are estimates for the eventual costs of claims
incurred but not settled, less estimates of salvage and subrogation. Estimates
for reported claims are primarily determined by evaluation of individual
reported claims and amounts reported by ceding companies. Estimates for claims
incurred but not reported are based on experience with respect to the probable
number and nature of such claims. The methods for making such estimates and for
establishing the resulting liabilities are continually reviewed and updated and
any adjustments resulting therefrom are reflected in earnings currently.
Estimates of losses from environmental and asbestos-related claims are included
in overall loss reserves and to date have not been material. Due to the
significant uncertainties inherent in establishing such reserves, the ultimate
exposure may vary from the amounts currently reserved.
An estimated provision for Workers' Compensation policyholders' dividends is
accrued as the related premiums are earned. Such dividends do not become a fixed
liability unless and until declared by the respective Boards of Directors of
Zenith's insurance subsidiaries. California policyholders' dividends are not
anticipated to be material in the foreseeable future due to deregulation,
Florida policyholders' dividends are also immaterial.
Property insurance and reinsurance coverages expose Zenith to the risk of
significant loss in the event of major adverse natural phenomena, known in the
insurance industry as catastrophes. These catastrophes may cause significant
contemporaneous financial statement losses since catastrophe losses may not be
accrued in advance of the event.
Zenith's business, although concentrated in California, has expanded to other
states, primarily Florida and Texas. However, the concentration of Zenith's
business in California makes the results of operations highly dependent upon the
state's economy, social and cultural trends, legislative and regulatory changes,
and catastrophic events such as windstorms and earthquakes. In addition, premium
revenues for most property and casualty insurance coverages written in
California (except workers' compensation and health) are subject to prior
approval of rates by the State of California Department of Insurance (the
"Department of Insurance").
REINSURANCE
In accordance with general industry practices, Zenith's insurance
subsidiaries annually purchase reinsurance to protect against liabilities in
excess of certain limits on insurance risks they have underwritten. Such
arrangements are known in the industry as "excess of loss" protection. The
purpose of such reinsurance is to protect Zenith from the impact of large,
unforeseen losses. Such reinsurance reduces the magnitude of sudden and
unpredictable changes in net income and the capitalization supporting insurance
operations.
CALFARM
THEZENITH 55
<PAGE>
The ceding of insurance liabilities does not discharge the original insurer
from primary liability to its policyholder. Balances due from reinsurers on
unpaid losses, including an estimate of such recoverables related to reserves
for incurred but not reported losses, are reported as assets and are included in
receivables from reinsurers. The unearned portion of premiums due to reinsurers
is also included in receivable from reinsurers. In connection with the RISCORP
Acquisition (see Note 15), Zenith acquired approximately $244,305,000 of
reinsurance recoverables associated with ceded reinsurance arrangements entered
into by RISCORP. All of such reinsurance is recoverable from large United States
reinsurers. Earned premiums and loss and loss adjustment expenses incurred are
stated in the Consolidated Statement of Operations after deduction of amounts
ceded to reinsurers. Of amounts recoverable from reinsurers at December 31,
1998, 62.2% is attributable to reinsurance arrangements with four large United
States reinsurance companies. No material amounts due from reinsurers have been
written off as uncollectable in the three years ended December 31, 1998.
REAL ESTATE OPERATIONS
Land, land development costs and construction costs, including costs of
acquisition and development, property taxes and related interest, are
capitalized. Such costs, and an estimate of the costs to complete a project, are
recognized pro rata against sales of completed units (see Note 5). Such
capitalized costs are included in other assets.
Profitable real estate operations are dependent upon real estate values,
interest rates, construction costs, competition and management ability.
Included in other assets is land carried at a cost of $42,142,000 which is
held to support future construction by the Real Estate Operations.
PROPERTIES AND EQUIPMENT
Properties and equipment are stated at cost less accumulated depreciation.
Depreciation is calculated principally on a straight-line basis using the
following useful lives: buildings, 10 to 40 years; furniture, fixture and
equipment, 3 to 10 years.
Expenditures for maintenance and repairs are charged to operations as
incurred. Additions and improvements to buildings and other fixed assets are
capitalized and depreciated over the useful lives of the properties and
equipment. Upon disposition, the asset cost and related depreciation are removed
from the accounts and the resulting gain or loss is included in income.
INTANGIBLE ASSETS
Intangible assets include purchased intangibles and the costs in excess of
tangible assets acquired, including those related to the acquisitions of RISCORP
and AGC-SIF discussed in Note 15. The amounts assigned to such assets acquired
since 1970 are being amortized on a straight-line basis over 20 to 25 years.
Amortization expense was $1,058,000, $405,000 and $412,000 in 1998, 1997 and
1996, respectively. Accumulated amortization was $7,631,000 and $6,573,000 at
December 31, 1998 and 1997, respectively. Intangible assets were $25,744,000 and
$11,609,000 at December 31, 1998 and 1997, respectively, of which $23,735,000
and $9,600,000, respectively, are amortizable. Management periodically assesses
the recoverability of these purchased intangibles based on a review of
projected, undiscounted cash flows of the operations acquired.
COMPREHENSIVE INCOME
As of January 1, 1998, Zenith adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income" which establishes
standards for reporting and presenting comprehensive income and its components
in a full set of financial statements. Comprehensive income includes net income
and all changes in stockholders' equity (except those arising from transactions
with stockholders) including 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.
56
<PAGE>
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" effective January
1, 1998. SOP 98-1 requires capitalization of certain internal and external costs
associated with computer software developed or obtained for internal use. For
the year ended December 31, 1998, capitalized costs under SOP 98-1 were
$6,404,000. During the year ended December 31, 1998, $86,000 of such costs were
amortized.
The cost of purchased software for internal use is capitalized and amortized
over the useful life of the software. The cost of software developed or obtained
for internal use is either capitalized and amortized over the useful life of the
software or expensed as incurred, depending on the type of software and the work
performed to develop the software. The cost of modifying software for Year 2000
compliance is expensed as incurred.
INSURANCE-RELATED ASSESSMENTS
On January 1, 1998, Zenith adopted SOP 97-3, "Accounting by Insurance and
Other Enterprises for Insurance-Related Assessments." SOP 97-3 provides guidance
for the determination of when a liability for insurance-related assessments
should be recognized and how to measure that liability. As of December 31, 1998
the impact of adoption of the SOP was immaterial to the accrual for guaranty
fund and other insurance-related assessments and to the results of operations,
which reflects the cumulative effect of this accounting change.
RECENTLY ISSUED ACCOUNTING STANDARDS
On June 15, 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities".
SFAS No. 133 is effective for Zenith for all fiscal quarters of all fiscal years
beginning after January 1, 2000. SFAS No. 133 requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in the
fair value of derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as part of
a hedge transaction and, if it is, the type of hedge transaction. Zenith does
not invest in derivative instruments, and therefore adoption of SFAS No. 133 is
not expected to have any effect on Zenith's results of operations or its
financial position.
CODIFICATION OF STATUTORY ACCOUNTING PRINCIPLES
In 1998, the National Association of Insurance Commissioners ("NAIC") adopted
the Codification of Statutory Accounting Principles guidance (the
"Codification"), which will replace the current Accounting Practices and
Procedures manual as the NAIC's primary guidance on statutory accounting
(statutory accounting is a comprehensive basis of accounting based on prescribed
accounting practices, which include state laws, regulations and general
administrative rules, as well as a variety of publications of the NAIC). The
NAIC is now considering amendments to the Codification that would also be
effective upon implementation. The NAIC has recommended an effective date of
January 1, 2001. The Codification provides guidance for areas where statutory
accounting has been silent and changes current statutory accounting in some
areas.
It is not known whether the Department of Insurance will adopt the
Codification, and whether the Department of Insurance will make any changes to
that guidance. Implementation of the Codification may affect the surplus level
and capitalization requirements of Zenith's insurance subsidiaries on a
statutory basis. Zenith has not determined the potential impact of the
Codification.
RECLASSIFICATIONS AND RESTATEMENTS
Certain 1997 and 1996 amounts have been reclassified to conform to the 1998
presentation.
All 1996 earnings per share data have been restated in accordance with SFAS
No. 128, "Earnings per Share" (See Note 16).
CALFARM
THEZENITH 57
<PAGE>
NOTE 2
INVESTMENTS
The amortized cost and fair values of investments were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
TYPE OF SECURITY
(DOLLARS IN GROSS GROSS
THOUSANDS) AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31, 1998 COST GAINS (LOSSES) VALUE
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------
HELD-TO-MATURITY:
CORPORATE DEBT $ 5,330 $ 740 $ 6,070
MORTGAGE-BACKED 29,813 829 30,642
- -------------------------------------------------------------------------
TOTAL, HELD-TO-
MATURITY $ 35,143 $ 1,569 $ 36,712
- -------------------------------------------------------------------------
AVAILABLE-FOR-SALE:
U.S. TREASURIES $ 161,548 $ 962 $ (295) $ 162,215
CORPORATE DEBT 529,888 12,904 (3,924) 538,868
MORTGAGE-BACKED 16,938 45 (130) 16,853
REDEEMABLE PREFERRED
STOCKS 14,045 332 (30) 14,347
EQUITIES 46,670 6,771 (1,872) 51,569
SHORT-TERM INVESTMENTS 187,123 187,123
- -------------------------------------------------------------------------
TOTAL, AVAILABLE-
FOR-SALE $ 956,212 $ 21,014 $ (6,251) $ 970,975
- -------------------------------------------------------------------------
TRADING:
CORPORATE DEBT $ 2,978 $ 23 $ 3,001
EQUITIES 25 15 40
- -------------------------------------------------------------------------
TOTAL, TRADING $ 3,003 $ 38 $ 3,041
- -------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
Type of Security
(Dollars in Gross Gross
thousands) Amortized unrealized unrealized Fair
December 31, 1997 cost gains (losses) value
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Held-to-maturity:
Corporate debt $ 5,335 $ 371 $ 5,706
Mortgage-backed 41,613 947 42,560
- -------------------------------------------------------------------------
Total, held-to-
maturity $ 46,948 $ 1,318 $ 48,266
- -------------------------------------------------------------------------
Available-for-sale:
U.S. Treasuries $ 131,929 $ 424 $ 132,353
Corporate debt 313,641 7,443 $ (954) 320,130
Mortgage-backed 70,190 788 (634) 70,344
Redeemable preferred
stocks 16,040 729 (52) 16,717
Equities 39,051 7,012 (399) 45,664
Short-term investments 209,827 209,827
- -------------------------------------------------------------------------
Total, available-
for-sale $ 780,678 $ 16,396 $ (2,039) $ 795,035
- -------------------------------------------------------------------------
Trading:
Corporate debt $ 2,971 $ (36) $ 2,935
Equities 25 $ 22 47
- -------------------------------------------------------------------------
Total, trading $ 2,996 $ 22 $ (36) $ 2,982
- -------------------------------------------------------------------------
</TABLE>
Debt securities, including short-term investments, at December 31, 1998 by
contractual maturity were as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------
(Dollars in thousands) AMORTIZED FAIR
DECEMBER 31, 1998 COST VALUE
- -----------------------------------------------------
<S> <C> <C>
HELD-TO-MATURITY:
Due after ten years $ 35,143 $ 36,712
- -----------------------------------------------------
Total, held-to-maturity $ 35,143 $ 36,712
- -----------------------------------------------------
AVAILABLE-FOR-SALE:
Due in one year or less $ 270,526 $ 270,973
Due after one year through
five years 301,681 307,295
Due after five years through
ten years 226,516 229,460
Due after ten years 110,819 111,678
- -----------------------------------------------------
Total, available-for-sale $ 909,542 $ 919,406
- -----------------------------------------------------
TRADING:
Due after one year through
five years $ 2,978 $ 3,001
- -----------------------------------------------------
Total, trading $ 2,978 $ 3,001
- -----------------------------------------------------
</TABLE>
Fluctuating interest rates will impact stockholders' equity, profitability
and maturities of certain debt and preferred securities. Expected maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
Mortgage-backed securities are shown as being due at their average expected
maturity dates. Redeemable preferred stocks with sinking fund redemption periods
are shown as being due at the mid-point of the sinking fund period. During the
past three years, Zenith has not incurred any material losses due to the credit
quality of its investments and has not included in its financial statements any
allowance for possible future losses.
The gross realized gains on sales of investments classified as
available-for-sale during 1998, 1997 and 1996 were $9,863,000, $5,067,000, and
$8,564,000, respectively, and the gross realized losses were $3,046,000,
$959,000, and $2,355,000, respectively.
The effect on consolidated stockholders' equity of the increase in the value
of fixed maturity securities classified as available-for-sale in 1998 compared
to 1997 was an increase of $1,378,000, net of deferred taxes, as compared to an
increase of $7,001,000 from 1996 to 1997.
58
<PAGE>
Investment income is summarized as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------
(Dollars in thousands)
YEAR ENDED DECEMBER 31, 1998 1997 1996
- ---------------------------------------------------------------
<S> <C> <C> <C>
Fixed maturities:
Bonds $ 44,460 $ 42,837 $ 37,968
Redeemable
preferred stocks 1,113 1,289 1,578
Equity securities:
Floating rate
preferred stocks 977 872 876
Convertible and
nonredeemable
preferred stocks 477 337 402
Common stocks 717 595 758
Short-term investments 8,265 8,090 9,257
Other 1,088 1,489 3,608
- ---------------------------------------------------------------
57,097 55,509 54,447
Less investment expenses 3,504 3,177 3,293
- ---------------------------------------------------------------
Net investment income $ 53,593 $ 52,332 $ 51,154
- ---------------------------------------------------------------
</TABLE>
Investments carried at their fair value of $261,986,000 at December 31, 1998
and $294,309,000 at December 31, 1997 were on deposit with regulatory
authorities in compliance with insurance company regulations.
At December 31, 1998 and 1997, Zenith and its subsidiaries owned $6,185,000
and $6,370,000, respectively, at fair value, of securities issued by Reliance
Group Holdings Inc. Reliance Insurance Company ("Reliance"), a subsidiary of
Reliance Group Holdings Inc., is a major stockholder of Zenith.
NOTE 3
PROPERTIES AND EQUIPMENT
Properties and equipment consist of the following:
<TABLE>
<CAPTION>
- ------------------------------------------------------
(Dollars in thousands)
DECEMBER 31, 1998 1997
- ------------------------------------------------------
<S> <C> <C>
Land $ 16,536 $ 14,836
Buildings 44,203 31,852
Furniture, fixtures and
equipment 57,368 37,627
- ------------------------------------------------------
118,107 84,315
Less accumulated depreciation 38,199 29,784
- ------------------------------------------------------
Total $ 79,908 $ 54,531
- ------------------------------------------------------
</TABLE>
Depreciation expense amounted to $8,804,000, $5,788,000, and $5,503,000 in
1998, 1997 and 1996, respectively.
NOTE 4
PAYABLE TO BANKS AND OTHER NOTES PAYABLE
Zenith has three revolving, unsecured lines of credit amounting to
$100,000,000 with aggregate availability at December 31, 1998 of $95,000,000. As
of December 31, 1997, there were no outstanding balances on these unsecured
lines of credit. Interest on funds borrowed on each of these three lines of
credit is payable, respectively, at: (1) either (a) the bank's reference rate
less 0.55% OR (b) LIBOR plus 0.40%; (2) either (a) the bank's reference rate, OR
(b) the Federal Funds Rate plus 0.40% OR (c) the Eurodollar Rate plus .40%; and
(3) either (a) the higher of the bank's reference rate or the Federal Funds Rate
plus 0.50% OR (b) the bank's offered rate to prime international banks in the
offshore dollar market plus either 0.375% or 0.475%.
Under these agreements, certain restrictive covenants apply including the
maintenance of a specific level of net worth for Zenith and its insurance
subsidiaries.
Zenith drew down $7,000,000 and repaid $2,000,000 on the lines of credit
during 1998. There were no borrowings on the lines of credit in 1997 and 1996.
The prime interest rate was 7.75%, 8.50% and 8.25% at December 31, 1998, 1997
and 1996, respectively.
Zenith's Real Estate Operations have seven development and construction loan
agreements outstanding as of December 31, 1998, each providing for either
subdivision lot development or construction. These loans bear interest at prime
plus 1.0% and prime plus 0.75% and mature between June 1999 and April 2000. Each
agreement pertains to a separate residential housing project and the maximum
that may be borrowed under the seven agreements combined is $32,315,000.
Although a maximum of $32,315,000 is available to be borrowed, in practice, such
amount will not be outstanding. The agreements provide that funding and
repayment of development and construction loans are made in tandem for each
project. A development loan will always precede a construction loan for a
project and the proceeds of the construction loan are required to first be used
to pay off the respective development loan. At December 31, 1998 and 1997,
$12,244,000 and $11,408,000, respectively, was outstanding with
CALFARM
THEZENITH 59
<PAGE>
respect to the development and construction loans.
Zenith's Real Estate Operations are obligated under various notes payable
arising from the purchase of several parcels of property. Such notes are
collateralized by the land parcels and bear interest at rates between 8% and
12%, with a maximum maturity of August 2004. The balance outstanding with
respect to these notes was $2,011,000 and $2,334,000 at December 31, 1998 and
1997, respectively.
NOTE 5
SENIOR NOTES PAYABLE
Zenith has $75,000,000 of its 9% Senior Notes due 2002 (the "9% Notes")
issued and outstanding at December 31, 1998 and 1997. Interest on the 9% Notes
is payable semi-annually. The 9% Notes are general unsecured obligations of
Zenith. Issue costs of $1,213,000 are being amortized over the term of the 9%
Notes. In each of the three years ended December 31, 1998, 1997 and 1996,
$6,871,000 of interest and issue costs were expended. Covenants contained in the
indenture include restrictions on the ability of Zenith and its subsidiaries to
incur secured debt and the right of holders of the 9% Notes to require Zenith to
repurchase the 9% Notes upon a decline in the rating of the 9% Notes within
ninety days after the occurrence of certain events. Those events are: (a) a
person or group becomes the beneficial owner of more than 50% of Zenith common
stock; (b) 10% or more of Zenith common stock is acquired by Zenith within any
12-month period; or (c) the sum of the fair market value of distributions (other
than regular dividends or distributions of capital stock) and the consideration
for purchases of Zenith common stock by Zenith during a 12-month period is 30%
or more of the fair market value of outstanding Zenith common stock.
Interest incurred on borrowings is summarized as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
(Dollars in thousands)
YEAR ENDED DECEMBER 31, 1998 1997 1996
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Interest capitalized for real estate
operations $3,971 $3,755 $3,127
Interest expense not related to real estate
operations 5,928 3,980 4,877
- ---------------------------------------------------------------------
Total interest incurred $9,899 $7,735 $8,004
- ---------------------------------------------------------------------
</TABLE>
NOTE 6
REDEEMABLE SECURITIES
On July 30, 1998, Zenith issued $75,000,000 of 8.55% Capital Securities at a
price of $996.24 per security through Zenith National Insurance Capital Trust I,
a Delaware statutory business trust (the "Trust"), all of the voting securities
of which are owned by Zenith. Each Capital Security pays semi-annual cumulative
cash distributions at the annual rate of 8.55% of the $1,000 liquidation amount
per security.
The Trust used the proceeds from its offering to purchase $75,000,000 of
Zenith's 8.55% Subordinated Deferrable Interest Debentures due 2028 (the
"Subordinated Debentures"), which constitute the principal asset of the Trust.
The semi-annual interest payments on the Subordinated Debentures 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. Zenith used $65,000,000 from the net proceeds to make a
capital contribution to Zenith Insurance. The remaining net proceeds were used
for general corporate purposes. The issue cost and discount on the Subordinated
Debentures of $1,680,000 are being amortized over the term of the Subordinated
Debentures. During the year ended December 31, 1998, $2,695,000 of interest,
issue costs and discount were expensed.
Zenith fully and unconditionally guaranteed the distributions on, and the
liquidation amount generally of, the Capital Securities to the extent the Trust
has funds legally available therefore. Zenith's guarantee of the Capital
Securities, as well as the Subordinated Debentures, are subordinated to all
other indebtedness of Zenith.
NOTE 7
FEDERAL INCOME TAXES
The components of the provision (benefit) for taxes on net income are:
<TABLE>
<CAPTION>
- -------------------------------------------------------------
(Dollars in thousands)
YEAR ENDED DECEMBER 31, 1998 1997 1996
- -------------------------------------------------------------
<S> <C> <C> <C>
Current $ 6,458 $ 10,989 $ 19,979
Deferred 3,277 4,389 (462)
- -------------------------------------------------------------
Federal income tax expense $ 9,735 $ 15,378 $ 19,517
- -------------------------------------------------------------
</TABLE>
60
<PAGE>
The difference between the statutory federal income tax rate of 35% and
Zenith's effective tax rate on income, as reflected in the financial statements,
is explained as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
(Dollars in thousands)
YEAR ENDED DECEMBER 31, 1998 1997 1996
- -------------------------------------------------------------------
<S> <C> <C> <C>
Statutory federal income tax expense $10,092 $15,217 $19,991
Increase (reduction) in taxes:
Dividend received
deduction and tax-
exempt interest (1,062) (693) (846)
Other 705 854 372
- -------------------------------------------------------------------
Federal income tax expense $ 9,735 $15,378 $19,517
- -------------------------------------------------------------------
</TABLE>
Deferred taxes are provided based upon temporary differences between the tax
and book basis of assets and liabilities. The components of the deferred tax
assets and liabilities were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
1998 1997
(Dollars in thousands) DEFERRED TAX Deferred Tax
YEAR ENDED DECEMBER 31, ASSETS LIABILITIES Assets Liabilities
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Differences between the tax
basis and carrying value of
investments* $ 6,116 $ 5,521
Deferred policy acquisition
costs 8,379 7,294
Purchased intangibles 1,658 1,747
Properties and equipment 8,409 4,371
Property-casualty loss reserve
discount $ 32,159 $ 27,039
Limitation on deduction for
unearned premiums 10,190 8,513
Policyholders' dividends
accrued 1,667 1,876
Deferred income on ceded
reinsurance 2,979
Other 3,091 2,913 2,538 5,230
- ------------------------------------------------------------------------------
50,086 27,475 39,966 24,163
- ------------------------------------------------------------------------------
Net deferred tax asset $ 22,611 $ 15,803
- ------------------------------------------------------------------------------
*principally unrealized appreciation on available-for-sale investments
</TABLE>
Zenith's net deferred tax asset will be fully recoverable because all future
deductible amounts can be offset by future taxable amounts or recovery of
federal income taxes paid within the statutory carryback period.
Property-Casualty loss reserves are not discounted for book purposes, however
the Tax Reform Act of 1986 requires property and casualty loss reserves to be
discounted for tax purposes.
Federal income taxes receivable was as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------
(Dollars in thousands)
YEAR ENDED DECEMBER 31, 1998 1997
- --------------------------------------------------------
<S> <C> <C>
Current taxes receivable $ 2,740 $ 4,137
Net deferred tax asset 22,611 15,803
- --------------------------------------------------------
Federal income taxes $ 25,351 $ 19,940
- --------------------------------------------------------
</TABLE>
Zenith files a consolidated federal income tax return. Zenith's insurance
subsidiaries pay premium taxes on gross premiums written in lieu of most state
income or franchise taxes.
NOTE 8
REINSURANCE
Reinsurance transactions reflected in the financial statements are as
follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------
(Dollars in thousands)
Year ended December 31, 1998 1997 1996
- -----------------------------------------------------------
<S> <C> <C> <C>
Direct premiums earned $ 545,573 $ 477,527 $ 435,568
Assumed premiums earned 38,769 37,385 41,930
Ceded premiums earned 54,487 26,191 24,642
- -----------------------------------------------------------
Net premiums earned $ 529,855 $ 488,721 $ 452,856
- -----------------------------------------------------------
Ceded loss and loss
adjustment expenses
incurred $ 26,456 $ 10,491 $ 12,396
- -----------------------------------------------------------
</TABLE>
Zenith Insurance has an assumed reinsurance agreement with Reliance.
Estimated costs paid to Reliance relating to this arrangement amounted to
$53,000, $97,000, and $181,000 for 1998, 1997 and 1996, respectively. Zenith
Insurance (through AGC-SIF) also maintains aggregate and specific excess of loss
reinsurance agreements with Reliance. Included in receivable from reinsurers as
of December 31, 1998 and 1997 is $14,461,000 and $14,872,000, respectively,
relating to this reinsurance arrangement.
Zenith maintains excess of loss and catastrophic reinsurance protection which
varies based on the type of coverage. Excess of loss reinsurance covers losses
per occurrence in excess of $350,000 for property, $550,000 for workers'
compensation, $500,000 for liability and $200,000 for umbrella (20% of the first
$1,000,000). CalFarm Insurance Company ("CalFarm"), an indirect, wholly-owned
subsidiary of Zenith, has property catastrophe reinsurance that provides for
recovery of 95% of $105,000,000, excess of a retention of $5,000,000. Zenith's
catastrophe reinsurance coverage provides protection against aggregate losses
per event up to $100,000,000 for workers' compensation. Assumed reinsurance
business is not covered by such catastrophe reinsurance. Credit quality of
reinsurers may impact profitability and stockholders' equity. No losses have
been incurred from uncollectible reinsurance during the past three years and no
allowances are carried on the financial statements for unrecoverable
reinsurance.
CALFARM
THEZENITH 61
<PAGE>
NOTE 9
COMMITMENTS AND CONTINGENT LIABILITIES
Zenith and its subsidiaries have office space on leases expiring through
2003, equipment on leases expiring through 2003 and automobiles on two through
three-year leases. The minimum rentals on these operating leases as of December
31, 1998 were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------
(Dollars in thousands) EQUIPMENT
AND
YEAR AUTO FLEET OFFICES TOTAL
- ------------------------------------------------------------
<S> <C> <C> <C>
1999 $ 1,341 $ 3,329 $ 4,670
2000 799 2,791 3,590
2001 534 2,104 2,638
2002 139 1,342 1,481
2003 58 352 410
Thereafter
- ------------------------------------------------------------
Total $ 2,871 $ 9,918 $ 12,789
- ------------------------------------------------------------
</TABLE>
Rental expenses for 1998, 1997 and 1996 amounted to $5,765,000, $5,925,000
and $5,358,000, respectively.
See Note 15 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 ultimate liability, if any, will not
have a material adverse effect on the consolidated financial condition or
results of operations of Zenith.
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 (the "RISCORP Acquisition"). See Note 15 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 15.
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 a 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 December 31, 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 December
31, 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 $50,000,000 in excess
of $182,000,000 for net unpaid losses and allocated loss adjustment expenses
acquired from RISCORP. After deducting reinsurance premiums of $16,000,000,
Zenith has recorded reinsurance recoverable of $24,510,000 and a deferred
benefit of $8,510,000 at December 31, 1998. Future adverse loss development, if
any, of the reserves acquired from RISCORP would be recoverable up to the
$50,000,000 limit although, the benefit of such reinsurance recoverable
62
<PAGE>
would be deferred and recognized over the recovery period of such reinsurance.
CONTINGENCIES SURROUNDING
RECOVERABILITY OF STATE DISABILITY
TRUST FUND RECEIVABLES
Florida has created the Special Disability Trust Fund (the "Fund") which
assesses workers' compensation insurers to pay for what are commonly referred to
as "Second Injuries". Historic assessments have been inadequate to completely
fund obligations of the Fund. In late 1997, the Florida statute was amended so
that the Fund will not be liable for and will not reimburse employers or
carriers for Second Injuries occurring on or after January 1, 1998.
Zenith has recorded its receivable from the fund for Second Injuries based on
specific claims and historical experience prior to January 1, 1998.
At December 31, 1998 and 1997, the receivable from the Fund was $39,077,000
and $5,094,000, respectively, related to pre-January 1, 1998 claims. The
December 31, 1998 receivable includes $34,709,000 from the RISCORP Acquisition
of which $3,287,000 was collected in 1998.
NOTE 10
COMMON STOCK
Under employee non-qualified stock option plans adopted by the Board of
Directors and Stockholders in 1978 and in 1996, options are granted to certain
officers and key employees for the purchase of Zenith's common stock at 100% of
the market price at the date of grant. The majority of options outstanding at
December 31, 1998 expire five years after the date of grant or three months
after termination of employment and vest one-fourth per year after the first
year. One grant for 1,000,000 shares is for a term of ten years and vests one-
fifth per year after the first year.
Zenith has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation". Accordingly, no compensation cost has
been recognized for the stock option plans. Had compensation cost for Zenith's
stock option plans been determined based on the fair value at the grant date for
awards in 1998, 1997 and 1996 consistent with the provisions of SFAS No. 123,
Zenith's net income and net income per share would have been reduced to the
pro-forma amounts indicated as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
PRO- Pro- Pro-
(Dollars in thousands, except per share data) AS REPORTED FORMA As Reported forma As Reported forma
<S> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
Net income $ 19,100 $ 17,703 $ 28,100 $ 26,583 $ 37,600 $ 36,647
Net income per common share -- basic 1.12 1.04 1.59 1.50 2.14 2.08
Net income per common share -- diluted 1.11 1.03 1.57 1.49 2.12 2.06
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
1996 earnings per share data have been restated in accordance with SFAS No. 128.
The pro-forma effect on net income for 1998, 1997 and 1996 is not
representative of the pro-forma effect on net income in future years because the
presented disclosure does not take into consideration pro-forma compensation
expense related to grants made prior to 1995.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
1997 1996
1998 GRANTS Grants Grants
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Risk-free interest rates 4.52% - 5.66% 5.70% 6.50%
Dividend yields 3.75% 4.10% 4.20%
Volatility factors 19.83% 16.94% 27.40%
Weighted average expected life
Five-year term options 4.5 YRS. 5 yrs. 4 yrs.
Ten-year term options -- -- 10 yrs.
Weighted average fair value per share $4.40 $4.07 $6.16
- -----------------------------------------------------------------------------------------
</TABLE>
CALFARM
THEZENITH 63
<PAGE>
Additional information with respect to stock options is as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
WEIGHTED
NUMBER AVERAGE
OF EXERCISE
(Options in thousands) SHARES PRICE
- -------------------------------------------------------------------
<S> <C> <C>
Outstanding at December 31, 1995 1,134 $21.94
Granted 1,422 24.51
Exercised 136 18.90
Expired or cancelled 72 22.56
- -------------------------------------------------------------------
Outstanding at December 31, 1996 2,348 23.65
Granted 590 26.95
Exercised 234 21.12
Expired or cancelled 74 25.31
- -------------------------------------------------------------------
Outstanding at December 31, 1997 2,630 24.58
GRANTED 460 26.74
EXERCISED 289 22.56
EXPIRED OR CANCELLED 268 26.43
- -------------------------------------------------------------------
OUTSTANDING AT DECEMBER 31, 1998 2,533 $25.00
- -------------------------------------------------------------------
</TABLE>
Options exercisable at December 31, 1998, 1997, and 1996 were 877,000,
737,000 and 474,000, respectively.
Certain information on outstanding options is as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
(Options in WEIGHTED
thousands) AVERAGE OUTSTANDING OPTIONS
RANGE OF NUMBER REMAINING LIFE WEIGHTED AVERAGE
EXERCISE PRICE OUTSTANDING IN YEARS EXERCISE PRICE
- -------------------------------------------------------------------
<S> <C> <C> <C>
$23.63 1,000 7.2 $ 23.63
$20.94 -
$28.34 1,533 1.8 25.90
- -------------------------------------------------------------------
</TABLE>
Certain information on exercisable options is as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------
(Options in EXERCISABLE
thousands) OPTIONS WEIGHTED
RANGE OF NUMBER AVERAGE EXERCISE
EXERCISE PRICES EXERCISABLE PRICE
- ------------------------------------------------
<S> <C> <C>
$23.63 400 $ 23.63
$20.94 - $28.34 477 24.89
- ------------------------------------------------
</TABLE>
At December 31, 1998, Zenith had authority from its Board of Directors to
repurchase up to 1,125,000 of Zenith's common shares at prevailing market
prices.
NOTE 11
DIVIDEND RESTRICTIONS
State insurance regulations limit the maximum dividends that may be paid to
Zenith by its insurance subsidiary during any 12-month period without prior
regulatory approval. Stockholder's equity of Zenith's insurance subsidiaries, in
accordance with generally accepted accounting principles, amounted to
$448,765,000 as of December 31, 1998, of which $32,974,000 can be paid in 1999
to Zenith in dividends without prior approval.
NOTE 12
STATUTORY FINANCIAL DATA
Capital stock and surplus and net income of Zenith's insurance subsidiaries
on a statutory basis as reported, except for 1998, to regulatory authorities,
were as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------
(Dollars in
thousands)
YEAR ENDED 1998
DECEMBER 31, (ESTIMATED) 1997 1996
- ------------------------------------------------------
<S> <C> <C> <C>
Capital stock and
surplus $ 350,000 $ 279,993 $ 265,341
Net income 22,100 31,820 33,384
- ------------------------------------------------------
</TABLE>
Capital stock and surplus and net income for 1998, previously filed with
regulatory authorities will be restated to incorporate the determination of the
RISCORP purchase price included in the above estimate.
The insurance business is subject to state-by-state regulation and
legislation focused on solvency, pricing, market conduct, claims practices,
underwriting, accounting, investment criteria and other areas. Such regulation
and legislation is constantly changing and compliance is essential and is an
inherent risk of the business.
64
<PAGE>
NOTE 13
UNAUDITED QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
1998 PERIOD ENDED
(DOLLARS IN --------------------------------------------------
THOUSANDS, JUNE SEPTEMBER
EXCEPT PER SHARE MARCH 30 30 DECEMBER
DATA) 31 (RESTATED) (RESTATED) 31
- ----------------------------------------------------------------------
<S> <C> <C> <C> <C>
PREMIUMS EARNED $ 118,784 $ 137,554 $ 136,151 $ 137,366
NET INVESTMENT
INCOME 12,343 13,583 14,198 13,469
REALIZED GAINS
ON INVESTMENTS 2,420 3,754 2,164 3,264
REAL ESTATE SALES 11,748 8,684 8,398 8,907
SERVICE FEE INCOME 1,392 1,206 1,394
NET INCOME 7,100 7,300 3,400 1,300
NET INCOME PER
COMMON SHARE --
BASIC 0.42 0.43 0.20 0.08
NET INCOME PER
COMMON SHARE --
DILUTED 0.42 0.42 0.20 0.08
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
(Dollars in 1997 Period Ended
thousands, --------------------------------------------------
except per share March June September December
data) 31 30 30 31
- ------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Premiums earned $ 122,363 $ 125,831 $ 120,475 $ 120,052
Net investment
income 12,448 13,406 13,272 13,206
Realized gains
on investments 1,876 1,996 1,861 8,275
Real estate sales 9,963 11,174 11,480 12,802
Net income 7,100 7,900 8,000 5,100
Net income per
common share --
basic 0.40 0.45 0.45 0.29
Net income per
common share --
diluted 0.40 0.44 0.45 0.28
- ------------------------------------------------------------------------
</TABLE>
- --The second and third quarters of 1998 have been restated to reflect the
determination of the final RISCORP purchase price which changed from that
originally used to record the acquisition in the second quarter (see Note 15).
As a result of this restatement, the previously reported net income for the
second and third quarters of 1998 decreased by $0.3 million, or $0.02 per share,
and $0.1 million, or $.00 per share, respectively, primarily due to additional
interest on the balance of the purchase price and a reduction in the
amortization of intangible assets.
- --The first three quarters of 1997 earnings per share have been restated in
accordance with SFAS No. 128.
- --The fourth quarter of 1998 net income includes catastrophe losses of $1.6
million and underwriting losses of $1.5 million in the group health business.
- --The fourth quarter of 1997 net income reflects a $7.8 million loss and expense
reserve strengthening for prior accident years.
NOTE 14
LOSS AND LOSS ADJUSTMENT
EXPENSE RESERVES
The following table represents a reconciliation of changes in liabilities for
unpaid property-casualty loss and loss adjustment expenses for the three years
ended December 31, 1998.
<TABLE>
<CAPTION>
- --------------------------------------------------------------
(Dollars in thousands) 1998 1997 1996
- --------------------------------------------------------------
<S> <C> <C> <C>
Beginning of year, net of
reinsurance recoverable $525,601 $526,427 $463,123
Acquisition of RISCORP as of
April 1, 1998 242,760
Incurred claims:
Current year 394,257 348,514 318,509
Prior years (11,367) (349) (3,809)
- --------------------------------------------------------------
Total incurred claims 382,890 348,165 314,700
- --------------------------------------------------------------
Payments:
Current year (176,678) (138,393) (131,061)
Prior years (262,361) (209,346) (185,764)
- --------------------------------------------------------------
Total payments (439,039) (347,739) (316,825)
- --------------------------------------------------------------
End of year, net of
reinsurance 712,212 526,853 460,998
Reinsurance recoverable 288,963 87,665 56,390
AGC-SIF December 31, 1996
balances acquired:
Reserves, net 65,429
Recoverable from reinsurers
and state trust funds 37,261
Change in net reserves and
recoverables from
reinsurers and state
trust funds (3,528) (1,252)
- --------------------------------------------------------------
End of year $997,647 $613,266 $620,078
- --------------------------------------------------------------
</TABLE>
Statutory reserves differ from GAAP by the amount of the deposit receivable from
Reliance, which is treated as reinsurance recoverable for statutory purposes.
Subsequent development of AGC-SIF net reserves acquired at December 31, 1996
is included in the Member distribution formula under the terms of the
acquisition for three years. (See Note 15).
CALFARM
THEZENITH 65
<PAGE>
NOTE 15
ACQUISITIONS
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 and 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 an audited
"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 with assistance from 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 $92,336,000 and that Zenith Insurance owed an additional
$57,336,000 above the $35,000,000 already paid to RISCORP. On March 26, 1999,
after deducting $6,765,000 for the value of assets not transferred to Zenith
Insurance by RISCORP, Zenith Insurance paid $53,689,000 to RISCORP including
interest in the amount of $3,118,000 computed from April 1, 1998. Of this
amount, $50,853,000 was paid directly to RISCORP and $2,836,000 was paid into an
escrow account. The escrow account has a balance of $12,836,000 and is available
to satisfy RISCORP's indemnification obligations to Zenith under the Asset
Purchase Agreement. Although the determination of "Final Purchase 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.
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 financial
statements as of and for the year ended December 31, 1998.
The excess of the purchase price, including acquisition expenses, over the
estimated fair value of net assets acquired is $19,851,000, which is net of a
deferred tax asset of $10,228,000, and is being amortized over 25 years.
Amortization expense from April 1, 1998 through December 31, 1998 was $595,000.
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
66
<PAGE>
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.
The following table summarizes the estimated fair value of assets acquired
and liabilities assumed from RISCORP at April 1, 1998.
<TABLE>
<CAPTION>
- ---------------------------------------------------------
APRIL 1,
(Dollars in thousands) 1998
- ---------------------------------------------------------
<S> <C>
Assets:
Invested assets* $ 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
- ---------------------------------------------------------
*primarily U.S. Government issues
</TABLE>
Included in intangible assets is $1,694,000 of costs associated with
termination of employees from the former RISCORP operations.
Pro forma total revenues for Zenith (after giving effect to the RISCORP
Acquisition as if it had been consummated at the beginning of the respective
periods) were $669,155,000 and $808,339,000, respectively, for years ended
December 31, 1998 and 1997. Pro forma net income was $11,100,000 and
$37,200,000, respectively, for years ended December 31, 1998 and 1997. Net
income per common share was $0.65 (basic) and $0.65 (diluted) and $2.19 (basic)
and $2.17 (diluted), respectively, for years ended December 31, 1998 and 1997.
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 year ended December 31, 1997. 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.
ACQUISITION OF AGC-SIF
On December 31, 1996, Zenith Insurance completed the acquisition of AGC-SIF.
Under the terms of the acquisition, Zenith Insurance acquired by merger all of
AGC-SIF's assets and assumed its liabilities, including the liabilities of the
insured policyholders (members) of AGC-SIF for future assessments. The
acquisition was accounted for as a purchase. Over a three-year period, Zenith
Insurance will distribute to AGC-SIF's members a minimum amount of $1,140,000 to
a maximum amount equal to AGC-SIF's adjusted GAAP "Net Worth," as defined in the
acquisition agreement, based on a formula and audited by an independent
certified public accounting firm. As of December 31, 1998 and 1997, the payable
to the AGC-SIF members was $1,495,000 and zero, respectively.
CALFARM
THEZENITH 67
<PAGE>
NOTE 16
EARNINGS AND DIVIDENDS PER SHARE
The following table sets forth the computation of basic and diluted net
income per common share.
<TABLE>
<CAPTION>
- --------------------------------------------------------------
(In thousands, except per
share data) 1998 1997 1996
- --------------------------------------------------------------
<S> <C> <C> <C>
(A) Net income $ 19,100 $ 28,100 $ 37,600
- --------------------------------------------------------------
(B) Weighted average
outstanding shares
during the period 17,035 17,716 17,594
Additional common shares
issuable under employee
stock option plans using
the treasury stock
method 123 170 158
- --------------------------------------------------------------
(C) Weighted average number
of common shares
outstanding assuming
exercise of stock options 17,158 17,886 17,752
- --------------------------------------------------------------
Net income per common share:
(A)/(B) -- basic $ 1.12 $ 1.59 $ 2.14
(A)/(C) -- diluted 1.11 1.57 2.12
- --------------------------------------------------------------
Dividends per common share $ 1.00 $ 1.00 $ 1.00
- --------------------------------------------------------------
</TABLE>
Options to purchase 1,290,000 shares and 407,000 shares, respectively, of
common stock at an average price of $26.69 and $28.00, respectively, per share
were outstanding as of December 31, 1998 and 1997 but were not included in the
computation of diluted earnings per share because the options' exercise prices
were greater than the average market price of the common shares, and, therefore,
the effect would be anti-dilutive.
NOTE 17
SEGMENT INFORMATION
Effective January 1, 1998, Zenith adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." The statement establishes
standards for disclosures by public companies about operating segments.
Zenith classifies its business into six segments: Workers' Compensation,
Reinsurance, Other Property-Casualty, Real Estate Operations, Investment and
Parent. Segments are designated based on the types of products and services
provided and based on the risks associated with the products and services.
Workers' Compensation represents insurance coverage for the statutorily
prescribed benefits that employers are required to pay to their employees
injured in the course of employment. Reinsurance represents the book of assumed
reinsurance of accumulated losses from catastrophes and the reinsurance of large
property risks. Other Property-Casualty represents multiple product line direct
insurance other than workers' compensation, primarily in California. Real Estate
Operations develop land and primarily construct private residences in Las Vegas,
Nevada. Investment provides investment income and realized gains on investments,
primarily from investments in debt securities. Parent represents the holding
company operations of Zenith owning directly or indirectly all of the capital
stock of the property and casualty insurance and non-insurance companies.
The accounting policies of the segments are the same as those described in
Note 1. Zenith evaluates insurance segment performance based on the combined
ratios and income or loss from operations before income taxes, and not including
investment income or realized gains or losses.
The operating results of the Workers' Compensation segment include the
results of operations of RISCORP for the nine months ended December 31, 1998.
Information as to the operations of the segments is set forth on page 70.
68
<PAGE>
NOTE 18
UNAUDITED COMMON STOCK MARKET PRICES
The following table shows the high and low common stock prices during each
quarter for the past two years.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
1998 1997
------------------ ------------------
HIGH LOW High Low
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
March 31 29 1/16 24 1/2 27 7/8 25 7/8
June 30 30 1/2 28 27 1/2 24 5/8
September 30 28 1/2 23 9/16 28 5/8 26 5/16
December 31 25 7/8 22 7/8 28 3/4 25 7/16
- -----------------------------------------------------------------------------------
</TABLE>
NOTE 19
SUBSEQUENT EVENT (UNAUDITED)
Effective March 31, 1999, Zenith Insurance completed its sale of CalFarm
Insurance Company for $275,000,000 in cash, subject to post-closing adjustment
in certain circumstances, to Nationwide Mutual Insurance Company. CalFarm
contributed $221,814,000, $214,128,000 and $204,467,000 of premiums earned and
$4,410,000, $6,506,000 and $8,055,000 of net underwriting income before taxes in
1998, 1997 and 1996, respectively. The net change in Zenith's consolidated
invested assets as a result of the transaction is estimated to be a decrease of
approximately $15,000,000.
The transaction will result in an estimated after tax gain of approximately
$100,000,000, or $5.84 per share.
CALFARM
THEZENITH 69
<PAGE>
Information as to the operations of the segments is set forth below:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
OTHER
WORKERS' PROPERTY- REAL ESTATE
(DOLLARS IN THOUSANDS) COMPENSATION REINSURANCE CASUALTY OPERATIONS INVESTMENT PARENT TOTAL
- ---------------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1998
<S> <C> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
REVENUES:
PREMIUMS EARNED $ 278,660 $ 29,150 $ 222,045 $ 529,855
NET INVESTMENT INCOME $ 53,593 53,593
REALIZED GAINS ON INVESTMENTS 11,602 11,602
REAL ESTATE SALES $ 37,737 37,737
SERVICE FEE INCOME 3,992 3,992
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 282,652 29,150 222,045 37,737 65,195 636,779
- ---------------------------------------------------------------------------------------------------------------------------
SEGMENT (LOSS) INCOME, BEFORE
TAXES (42,638) 10,268 4,410 1,363 65,195 $ (9,763) 28,835
COMBINED RATIOS 115.3% 64.8% 98.0% 105.3%
INTEREST EXPENSE (5,928) (5,928)
INCOME TAX BENEFIT (EXPENSE) 14,003 (3,322) (1,426) (495) (21,747) 3,252 (9,735)
- ---------------------------------------------------------------------------------------------------------------------------
SEGMENT ASSETS 554,650 20,484 102,667 66,098 1,064,325 10,502 1,818,726
- ---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
For the Year Ended December 31, 1997
<S> <C> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
Revenues:
Premiums earned $ 242,064 $ 32,251 $ 214,406 $ 488,721
Net investment income $ 52,332 52,332
Realized gains on investments $ 545 13,463 14,008
Real estate sales 45,419 45,419
- ---------------------------------------------------------------------------------------------------------------------------
Total revenues 242,064 32,251 214,406 45,964 65,795 600,480
- ---------------------------------------------------------------------------------------------------------------------------
Segment (loss) income, before
taxes (37,157) 14,189 6,509 1,678 65,795 $ (7,536) 43,478
Combined ratios 115.3% 56.0% 96.9% 103.4%
Interest expense (3,980) (3,980)
Income tax benefit (expense) 11,891 (4,541) (2,083) (599) (22,709) 2,663 (15,378)
- ---------------------------------------------------------------------------------------------------------------------------
Segment assets 164,236 20,591 98,628 53,593 902,000 13,108 1,252,156
- ---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
For the Year Ended December 31, 1996
<S> <C> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
Revenues:
Premiums earned $ 210,916 $ 37,162 $ 204,778 $ 452,856
Net investment income $ 51,154 51,154
Realized gains on investments 10,807 10,807
Real estate sales $ 41,554 41,554
- ---------------------------------------------------------------------------------------------------------------------------
Total revenues 210,916 37,162 204,778 41,554 61,961 556,371
- ---------------------------------------------------------------------------------------------------------------------------
Segment (loss) income, before
taxes (19,462) 12,479 8,076 1,909 61,961 $ (7,846) 57,117
Combined ratios 109.2% 66.4% 96.1% 99.8%
Interest expense (4,877) (4,877)
Income tax benefit (expense) 13,142 (8,426) (5,453) (658) (20,867) 2,745 (19,517)
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
70
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of
Zenith National Insurance Corp.:
In our opinion, the accompanying consolidated balance sheets and
the related consolidated statements of operations, cash flows, and
stockholders' equity present fairly, in all material respects, the
financial position of Zenith National Insurance Corp. and
subsidiaries (the "Company") at December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Los Angeles, California
March 26, 1999
CALFARM
THEZENITH 71
<PAGE>
CORPORATE DIRECTORY
ZENITH NATIONAL INSURANCE CORP.
Directors
Also Directors of Zenith
Insurance Company
George E. Bello
Executive Vice President
and Controller of Reliance
Group Holdings, Inc.
Max M. Kampelman
Attorney, Of Counsel,
Fried, Frank, Harris,
Shriver & Jacobson
Robert J. Miller
Attorney, Senior Partner,
Jones Vargas
William S. Sessions
Attorney
Sessions & Sessions, L.C.,
Security Consultant
Harvey L. Silbert
Attorney, Of Counsel,
Loeb & Loeb LLP
Robert M. Steinberg
President and Chief
Operating Officer
of Reliance Group
Holdings, Inc.
Saul P. Steinberg
Chairman of the
Board and Chief
Executive Officer
of Reliance
Group Holdings, Inc.
Gerald Tsai, Jr.
Management of
Private Investments
Michael Wm. Zavis
Attorney
Katten, Muchin & Zavis
Stanley R. Zax
Chairman of the
Board and President
Officers
Stanley R. Zax
Chairman of the
Board and President
Fredricka Taubitz
Executive Vice President
& Chief Financial Officer
Westley M. Heyward
Senior Vice President
Michael W. Jacobson
Senior Vice President
James P. Ross
Senior Vice President
John J. Tickner
Senior Vice President
and Secretary
Hyman J. Lee, Jr.
Vice President
Transfer Agent-
Common Stock
ChaseMellon Shareholder Services, L.L.C.
Los Angeles, CA
www.chasemellon.com
Transfer Agent-
9% Senior Notes and
Redeemable Securities
(8.55% Capital Securities)
Norwest Bank
Minnesota, N.A.
Minneapolis, MN
Corporate
Headquarters
21255 Califa Street
Woodland Hills, CA
91367-5021
www.zenithnational.com
NYSE Trading Symbol
Common stock -- ZNT
Independent
Accountants
PricewaterhouseCoopers LLP
Los Angeles, CA
The Annual Report
on Form 10-K, for
the fiscal year ended
December 31, 1998
may be obtained
free of charge upon
written request to:
Chief Financial Officer
Zenith National
Insurance Corp.
21255 Califa Street
Woodland Hills, CA
91367-5021
72
<PAGE>
CORPORATE DIRECTORY
ZENITH INSURANCE COMPANY
Officers
Stanley R. Zax
Chairman of the
Board and President
Fredricka Taubitz
Executive Vice President &
Chief Financial Officer
Jack D. Miller
Executive Vice President,
President of Southeast Division
James P. Ross
Senior Vice President,
President of Workers'
Compensation Division
Stephen J. Albers
Senior Vice President
John V. D'Alusio
Senior Vice President
Gary J. Ferguson
Senior Vice President
Dan M. Hair
Senior Vice President
John C. Hasbrouck
Senior Vice President
Westley M. Heyward
Senior Vice President
Fred A. Hunt
Senior Vice President
Corey A. Ingber
Senior Vice President
Michael W. Jacobson
Senior Vice President
Edward G. Krisak
Senior Vice President
Robert E. Meyer
Senior Vice President
and Actuary
William J. Saake
Senior Vice President
Douglas L. Symes
Senior Vice President
John J. Tickner
Senior Vice President,
General Regulatory
Counsel and Secretary
Keith E. Trotman
Senior Vice President
Chris L. Uselton
Senior Vice President
Kenneth L. Wuelfing
Senior Vice President
Glen R. Zepnick
Senior Vice President
Bryan A. Anderson
Vice President
Norman H. Baker
Vice President
Jeffrey J. Beaudoin
Vice President
Steen Brydum
Vice President
Richard V. Caligiuri
Vice President
Suzanne M. Chapan
Vice President
Duane H. Chernow
Vice President
Ronald W. Crabtree
Vice President
Gerald D. Curtin
Vice President
Charles J. Davis
Vice President
Bradley C. Eastwood
Vice President
F. Stephen Fetchet
Vice President
Robert L. Hernandez
Vice President
Carolyn N. Hinson
Vice President
David G. Hoppen
Vice President
Mark M. Jansen
Vice President
Diane L. Kinney
Vice President
Hyman J. Lee, Jr.
Vice President
Jonathan W. Lindsay
Vice President
Andrew M. Lyman
Vice President
Linda K. Mangone
Vice President
Richard H. McMurry
Vice President
Colin S. Mitchell
Vice President
Doris M. Oberhardt
Vice President
David A. O'Connor
Vice President
William J. Owen
Vice President
Michael J. Paladino
Vice President
Angela Parmelee
Vice President
Stephen D. Petrula
Vice President
S. Robin Reeves
Vice President
Diane E. Schaefer
Vice President
Alan I. Steinhardt
Vice President
John A. Swift
Vice President
Jessica Ann Vasquez
Vice President
Paul M. Williams
Vice President
Philip S. Wilson
Vice President
Norman C. Winters
Vice President
Laura F. Yamanaka
Vice President
William M. Zachry
Vice President
CALFARM
THEZENITH 73
<PAGE>
CORPORATE DIRECTORY
THEZENITH MARKETING, UNDERWRITING AND CLAIMS OFFICES
Los Angeles, CA
Corporate Headquarters
21255 Califa Street
Woodland Hills, CA 91367
818/713-1000
www.thezenith.com
Pleasanton, CA
(San Francisco Bay Area)
4309 Hacienda Drive
Suite 200
Pleasanton, CA 94588
925/460-0600
Fresno, CA
575 E. Locust Avenue
Suite 101
Fresno, CA 93720
209/432-6660
San Diego, CA
1660 Hotel Circle Drive North
Suite 400
San Diego, CA 92108
619/299-6252
Austin, TX
1101 Capital of Texas
Hwy, South, Bldg. J
Austin, TX 78746
512/306-1700
Dallas, TX
5430 LBJ Freeway
Suite 270
Dallas, TX 75240
972/701-5700
Conway, AR
824 Front Street
Conway, AR 72032
501/450-6884
Harrisburg, PA
4400 Deer Path Way
Suite 200
Harrisburg, PA 17110
717/221-7000
Springfield, IL
2105 West White Oaks Drive
Springfield, IL 62704
217/726-2900
Salt Lake City, UT
4 Triad Center
Suite 150
Salt Lake City, UT 84180
801/741-4900
Orlando, FL
3504 Lake Lynda Drive Ste 400
Orlando, FL 32817
407/380-9144
Sarasota, FL
South East Region
Sarasota Office
1390 Main St.
Sarasota, FL 34236-5642
800/226-2324
Charlotte, NC
5832 Farm Pond Lane
Suite 300
Charlotte, NC 28212
800/200-2667
Birmingham, AL
10 Iverness Center Parkway
Suite 220
Birmingham, AL 35242
800/355-0708
74
<PAGE>
CORPORATE DIRECTORY
CALFARM INSURANCE COMPANY
Officers
Westley M. Heyward
President
and Chief
Executive Officer
Franklin V. Adams
Executive Vice President
Philip M. Joffe
Executive Vice President
and Chief
Operating Officer
Frank J. Kotarba
President,
Property & Casualty
Division
John P. O'Brien
Executive Vice President
James H. Townsend
Executive Vice President,
Health Division
Kari L. Van Gundy
Senior Vice President, Finance
and Treasurer
Michael W. Jacobson
Senior Vice President
Susan J. McGinness
Senior Vice President
Robert E. Meyer
Senior Vice President
Stanley K. Miyao
Senior Vice President
and Actuary
James P. Ross
Senior Vice President
Fredricka Taubitz
Senior Vice President
John J. Tickner
Senior Vice President,
General Regulatory
Counsel and Secretary
Keith E. Trotman
Senior Vice President
James R. Zuehl
Senior Vice President
Larry W. Brogan
Vice President
Thomas F. Carroll
Vice President
Suzanne M. Chapan
Vice President
Philip S. Cole
Vice President
Nancy J. Friedhoff
Vice President
Diane F. Harvell
Vice President
Walter P. Krause
Vice President
Hyman J. Lee, Jr.
Vice President
Donald C. Marshall
Vice President
Sara E. Martin
Vice President
Craig G. McIntosh
Vice President
Peter M. Occhialini
Vice President
Stephen D. Petrula
Vice President
Craig C. Thomson
Vice President
James J. Tiffany
Vice President
Paul M. Williams
Vice President
Headquarters
CalFarm Insurance Company
1601 Exposition Boulevard
Sacramento, CA 95815
916/924-4000
www.calfarm.com
Claims/Legal Offices
Fresno
Sacramento
Santa Ana
CALFARM
THEZENITH 75
<PAGE>
CORPORATE DIRECTORY
PERMA-BILT, A NEVADA CORPORATION
Officers
Daniel Schwartz
President
David Durant
Vice President
Craig A. Hardy
Vice President
Fred W. Lessman
Vice President
Ruth E. Ochoa
Vice President
Headquarters
7150 Pollock Drive
Suite 104
Las Vegas, NV 89119
702/896-9100
76
<PAGE>
EXHIBIT 21
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
(As of March 8, 1999)
Zenith National Insurance Corp.
Perma-Bilt, A Nevada Corporation
Zenith National Insurance Capital Trust I
Zenith Development Corp.
CalFarm Insurance Agency
Cal-Ag Insurance Services, Inc.
Zenith Insurance Company
CalFarm Insurance Company
CalRehab Services, Inc.
Zenith Star Insurance Company
ZNAT Insurance Company
Zenith Risk Management, Inc.
Zenith Insurance Management Services, Inc.
1390 Main Street LLC
Each subsidiary shown is wholly-owned by the subsidiary shown in
the tier above it.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<DEBT-HELD-FOR-SALE> 735,284
<DEBT-CARRYING-VALUE> 770,427
<DEBT-MARKET-VALUE> 771,996
<EQUITIES> 51,609
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,048,681
<CASH> 1,998
<RECOVER-REINSURE> 373,045
<DEFERRED-ACQUISITION> 23,941
<TOTAL-ASSETS> 1,818,726
<POLICY-LOSSES> 997,647
<UNEARNED-PREMIUMS> 157,965
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 93,851
0
0
<COMMON> 24,970
<OTHER-SE> 321,982
<TOTAL-LIABILITY-AND-EQUITY> 1,818,726
529,855
<INVESTMENT-INCOME> 53,593
<INVESTMENT-GAINS> 11,602
<OTHER-INCOME> 41,729
<BENEFITS> 382,890
<UNDERWRITING-AMORTIZATION> 96,937
<UNDERWRITING-OTHER> 85,815
<INCOME-PRETAX> 28,835
<INCOME-TAX> 9,735
<INCOME-CONTINUING> 19,100
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,100
<EPS-PRIMARY> 1.12
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</TABLE>