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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, 1999
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 INCORPORATION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OR ORGANIZATION)
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21255 CALIFA STREET, WOODLAND HILLS, CALIFORNIA 91367-5021
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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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. [ ]
The aggregate market value of the voting stock of the registrant held by
non-affiliates of Zenith on March 17, 2000 was approximately $189,927,000 (based
on the closing sale price of such stock on such date).
At March 17, 2000, there were 17,148,000 shares of Zenith National Insurance
Corp. common stock outstanding, net of 8,009,000 shares of treasury stock.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Annual Report to Stockholders for fiscal year ended
December 31, 1999 -- Part I and Part II.
(2) Portions of the Proxy Statement in connection with the 2000 Annual
Meeting of Stockholders -- Part III.
Total number of pages __37__
Exhibit index located on pages __19-25__
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PART I
ITEM 1. BUSINESS.
GENERAL
Zenith National Insurance Corp. ("Zenith National"), 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") (through March 31, 1999, the date of its sale),
ZNAT Insurance Company ("ZNAT Insurance") and Zenith Star Insurance Company
("Zenith Star") (collectively, the "P&C Operations"), in the property-casualty
insurance business. Zenith National and its subsidiaries (collectively,
"Zenith") also conducts Real Estate Operations through wholly-owned subsidiaries
which develop land and construct private residences for sale in Las Vegas,
Nevada.
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 the sale of all of the issued and outstanding capital stock of
CalFarm, for $273.0 million in cash to Nationwide Mutual Insurance Company.
The 1999 edition of Best's Key Rating Guide ("Best's") assigns the P&C
Operations ratings of A+ (superior). Moody's Investors Service ("Moody's") has
assigned insurance financial strength ratings of Baa1 (adequate) to the P&C
Operations. Standard & Poor's Corporation ("S&P") has assigned an insurer
financial strength rating to the P&C Operations of A (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.
At December 31, 1999, Zenith had approximately 1,200 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-casualty insurance business.
Development The amount by which losses, measured subsequently by
reference to payments and additional estimates, differ from
those originally reported for a period. Development is
favorable when losses ultimately settle for less than
levels at which they were reserved or subsequent estimates
indicate a basis for reserve decreases on open claims.
Development is unfavorable when losses ultimately settle
for more than levels at which they were reserved or
subsequent estimates indicate a basis for reserve increases
on open claims.
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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 Claims relating to insured events that have 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 The amount remaining after all liabilities are 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 practices Accounting practices prescribed or permitted by 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.
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 classifies its business into six segments: Workers' Compensation,
Other Property-Casualty (through March 31, 1999, the date of sale of CalFarm),
Reinsurance, Real Estate Operations, Investment and Parent. Segments are
designated based on the types of products and
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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. Prior to its sale, CalFarm
operated Zenith's Other Property-Casualty business, which represented multiple
product line direct insurance other than workers' compensation. Reinsurance
represents the book of assumed reinsurance of principally property losses from
catastrophes and the reinsurance of large property risks. Results of such
operations for the three years ended December 31, 1999 are set forth in the
tables in the section Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations--"Overview" on page 26 of Zenith's
1999 Annual Report to Stockholders, which table is hereby incorporated by
reference. The Investment segment represents investment income and realized
gains on investments, primarily from debt securities. Real Estate Operations are
conducted through wholly-owned subsidiaries that develop land and construct
private residences for sale in Las Vegas, Nevada. Parent represents the holding
company operations of Zenith National which owns, directly or indirectly, all of
the capital stock of the property-casualty insurance and non-insurance
companies. Zenith's business segments are described in Notes to Consolidated
Financial Statements -- Note 18 -- "Segment Information" on pages 63-64 of
Zenith's 1999 Annual Report to Stockholders, which note is hereby incorporated
by reference.
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 the P&C Operations 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. In 1998, Zenith expanded its presence in Florida and other
states through the RISCORP Acquisition (see page 5 for a discussion of the
RISCORP Acquisition). During 1999, the P&C Operations wrote workers'
compensation insurance in 40 states.
Net premiums earned in 1999 by state are set forth in the table below:
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(DOLLARS IN THOUSANDS) 1999 %
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California................................................ $107,929 38.7%
Florida................................................... 92,562 33.2
Texas..................................................... 17,560 6.3
North Carolina............................................ 16,301 5.8
Alabama................................................... 7,687 2.8
Arkansas.................................................. 6,731 2.4
Pennsylvania.............................................. 5,639 2.0
Other..................................................... 24,445 8.8
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$278,854 100.0%
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Excluding the impact of the RISCORP-Related Adjustment (see page 5),
Zenith's low, five-year Workers' Compensation loss ratio was 59.8% through 1999,
which was attributed to Zenith's pricing and underwriting strategies managed
care efforts, return-to-work strategies, and safety and health, anti-fraud and
litigation efforts. During the past 10 years, Zenith's Workers' Compensation
combined ratio was 107.2% excluding the RISCORP-Related Adjustment.
Results of operations of Zenith's Workers' Compensation Operations are being
adversely impacted by severe competition and inadequate pricing. Industry
results in California are at historic
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unprofitable levels and national results are deteriorating. Except in its
Southeast Operations, which principally consists of the former operations of
RISCORP, Workers' Compensation premium revenues are declining as Zenith
endeavors to maintain rate adequacy.
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 in 1995, insurance companies file and use
their own, actuarially determined rates for workers' compensation insurance in
California. Companies must file such rates with the California Department of
Insurance, but the use of scheduled rating credits allows companies considerable
flexibility in determining the amount of premium to be charged to a policyholder
or potential policyholder, resulting in intense competition. Results of January
2000 renewals and new business applications in California were favorable with
Zenith renewing a substantial percentage of its maturing policies at higher
rates and writing some new business. In November of 1999, the California
Insurance Commissioner adopted an average 18.4% increase in the pure premium
advisory rates recommended by the Workers' Compensation Insurance Rating Bureau
of California -- a preliminary indication of possible changes in the California
workers' compensation market. In any event, in 2000 Zenith has raised its rates
by an appropriate amount, together with other actions, with a goal to improve
its profitability.
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. As part of the
RISCORP Acquisition, Zenith Insurance assumed approximately $32.0 million 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, Zenith Insurance completed the RISCORP Acquisition. The
total purchase price for such acquired assets and liabilities was determined by
a three-step process in which RISCORP and its external accounting and actuarial
consultants and Zenith Insurance and its external accounting and actuarial
consultants made and presented their estimates of the generally accepted
accounting principles ("GAAP") basis values of the assets and liabilities
acquired by Zenith Insurance to an independent third-party, acting as a Neutral
Auditor and Neutral Actuary. Such estimates varied considerably, particularly
with respect to the value of premiums receivable and the liability for unpaid
losses and loss adjustment expenses. On March 19, 1999, the Neutral Auditor and
Neutral Actuary issued its report determining the disputes between the parties.
That report indicated that the value of the assets transferred to Zenith
Insurance exceeded the value of the liabilities assumed by Zenith Insurance by
$92.3 million.
In October of 1999, Zenith Insurance completed a review of the liabilities
for unpaid losses and loss adjustment expenses in its Southeast Operations,
which principally consists of the operations acquired from RISCORP. The review
was conducted with assistance from independent actuarial consultants. As a
result of the review, Zenith Insurance recorded, in the third quarter of 1999,
an increase of $46.0 million before tax in the estimated net liabilities for
unpaid losses and loss adjustment expenses acquired from RISCORP. The increase
results primarily from the adjustments to reserves for the years 1994 through
1997. Certain related receivables, principally contingent commissions receivable
under reinsurance contracts assumed from RISCORP, were reduced by $19.0 million
as a result of such increase in net liabilities. Such adjustments to the values
of the net assets acquired and liabilities assumed were offset by (a) the net
benefit of $34.0 million associated
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with reinsurance protection for adverse loss development and (b) $6.0 million
recovered from RISCORP to settle certain litigation (see Item 3. Legal
Proceedings on page 14).
The adjustments associated with the increase in the liabilities for unpaid
loss and loss adjustment expenses acquired from RISCORP, net of the benefit of
reinsurance protection and the effect of the Settlement Agreement, in the
aggregate (collectively, the "RISCORP-Related Adjustment"), reduced income by
$32.5 million after tax, or $1.89 per share in the third quarter of 1999.
Deferred reinsurance benefits will be recognized over approximately the next
four years and net income is expected to increase by $15.0 million.
OTHER PROPERTY-CASUALTY
Zenith, through CalFarm, offered a comprehensive line of property-casualty
insurance for individual and commercial customers, including automobile,
farmowners, commercial coverages, group health and homeowners coverage,
primarily in the rural and suburban areas of California, through March 31, 1999,
the effective date of the sale of CalFarm to Nationwide Mutual Insurance
Company. Automobile insurance included coverage for automobile bodily injury,
property damage and physical damage. Automobile bodily injury and property
damage insurance provided coverage for third party liability, bodily injury and
property damage arising from the ownership, maintenance or use of an automobile.
Automobile physical damage coverage insured against physical loss of the
insured's own vehicle. Farmowners and homeowners insurance included 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 provided coverage for businesses against
property damage and general liability. Health insurance premiums were written
under a program sponsored by the California Farm Bureau Federation which
included a preferred provider organization plan and a Medicare supplement
product. For the 14 years since CalFarm was acquired by Zenith, the average
combined ratio of the Other Property-Casualty Operations was 100.1%.
Effective March 31, 1999, Zenith Insurance completed the sale of all of the
issued and outstanding capital stock of CalFarm for $273.0 million in cash to
Nationwide Mutual Insurance Company. The gain on the sale after tax was
$104.3 million. After accounting for applicable taxes, expenses and certain
intercompany transactions, the net proceeds from the sale that were available to
Zenith Insurance for investment were $211.0 million, compared to cash and
investments of $226.4 million that were excluded from Zenith's Consolidated
Balance Sheet upon the sale of CalFarm. As a result of the sale of CalFarm, the
capitalization of the P&C Operations improved significantly and Zenith Insurance
paid a dividend of $100.0 million to Zenith National which added considerably to
the invested assets of Zenith National.
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 Operations 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 world-wide property losses
from catastrophes and large property risks. By diversifying its geographical
spread, Zenith's assumed reinsurance business is written so as to limit exposure
to losses from any one event in a worst-case scenario to a maximum of
approximately 5% of consolidated stockholders' equity. Since the
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inception of this operation in 1985, the average combined ratio of Zenith's
Reinsurance Operations was 94.3%.
REAL ESTATE OPERATIONS
Zenith's Real Estate Operations develop, build and sell single-family
residences in Las Vegas, Nevada. In 1999, these Operations closed and delivered
366 homes at an average selling price of $158,000, compared to 275 homes at an
average selling price of $137,000 the prior year. Sales in 1999 were
$58.7 million and pre-tax income was $3.6 million, compared to sales of
$37.7 million and pre-tax income of $1.4 million the previous year. Construction
in progress, including undeveloped land, was $87.9 million and $69.4 million at
December 31, 1999 and 1998, respectively. In addition to continuing home
construction, Zenith may use some land presently owned for commercial and
multi-family dwelling construction. Changes in interest rates or other factors
could affect future home sales (we have not seen any impact so far), but Zenith
believes 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 are established by the 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 goals are 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 31-33 of Zenith's 1999 Annual
Report to Stockholders, which discussion is hereby incorporated by reference. At
December 31, 1999, 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 5.7 years at December 31, 1999.
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 96% of the investments in debt securities at December 31, 1999, as
available-for-sale. In 1999, stockholders' equity decreased by $25.7 million,
net of deferred tax, as a result of changes in the fair values of such
investments.
PARENT
Zenith is a holding company which owns directly or indirectly all of the
capital stock of certain property-casualty insurance and non-insurance
companies.
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YEAR 2000
The Year 2000 Problem refers to the inability of information technology
("IT") systems 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, such as elevators, security systems
and HVAC systems that incorporate embedded micro controllers. 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 could also be a
negative impact on the economic and social infrastructure on which Zenith
depends.
At the end of 1999, Zenith was prepared for the date change from 1999 to
2000. Zenith systematically replaced and modified its internal non-IT and IT
systems to function correctly with dates from 1999 forward, thereby rendering
them "Year 2000 Compliant." Zenith also had in place contingency plans to
substantially reduce material business disruptions from failures of Zenith's
internal systems, a failure of one or more critical third parties upon which
Zenith relies in its business operations ("Key External Dependencies") and/or
the contamination of Zenith's IT systems due to receipt of corrupted data.
Zenith did not suffer any disruption of its business due to any impact of
the date change from 1999 to 2000 on its internal non-IT systems, its internal
IT systems or its Key External Dependencies. However, at the end of 1999, Zenith
was cautious about the state of readiness of its Key External Dependencies and
also recognized that despite its Year 2000-related efforts negative impact on
its operations from Year 2000-related failures was possible. Accordingly, as a
precaution, Zenith did implement elements of its contingency plans prior to the
end of 1999. Those elements are no longer in effect.
Although the date change from 1999 to 2000 occurred without disruption to
Zenith's business, Zenith remains alert both as to potential issues in its
internal systems and the state of readiness of its Key External Dependencies.
All companies were, and to a lesser extent are still, faced with unknown risks
arising from Year 2000 issues that may impact them negatively. Zenith believes,
at this time, that the most reasonably-likely, worst-case, Year 2000 scenarios
could include a failure of a part of Zenith's internal IT systems, the isolated
inability of one or more of its critical Key External Dependencies, such as
financial institutions, agents/brokers or reinsurers, to respond to Zenith's
needs, 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 effect on its financial
condition and results of operations. However, nothing has come to Zenith's
attention leading it to conclude that there would be future Year 2000-related
failures having a material adverse impact on Zenith. Further, because of the
general nature of the Year 2000 Problem and how it may manifest itself, Zenith
will continue to monitor its internal systems and its Key External Dependencies
for Year 2000-related anomalies. Monitoring of some situations will extend into
2001, so as to cover twelve months of Year 2000 processes. However, it is
expected that substantially all monitoring will decrease over the next few
months and end by the second quarter of 2000. Contingency plans remain in place,
ready to be implemented.
The majority of Zenith's Year 2000 compliance efforts were staffed
internally, although Zenith engaged technical consultants to assist its internal
staff, as well as to assist Zenith in reviewing its progress. All Year
2000-related costs were funded from internal sources. The costs associated with
non-IT systems and contingency planning were not significant. The costs
associated with IT systems (namely, core information technology systems;
computer network and communications infrastructure; and personal and laptop
computers, including applications) was $11.1 million, of which $5.9 million,
$2.7 million and $2.5 million were expended in 1999, 1998 and 1997,
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respectively. The following table shows the portions of the $11.1 million that
were expended for repairing Zenith's IT systems ("IT Repair Costs") and
replacing them ("IT Replacement Costs").
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(DOLLARS IN THOUSANDS) TOTAL IT EXPENDITURE
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IT Repair Costs............................................. $ 7,562
IT Replacement Costs:
Software.................................................. 881
Hardware.................................................. 2,234
Related Expenditures...................................... 417
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Total................................................... $11,094
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The above table includes $1.8 million incurred for the Other Property--Casualty
Operations through March 31, 1999, the date on which such operations were
disposed of through the sale of the capital stock of CalFarm.
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 "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." The internal cost of user participation
in acceptance testing was not measured and is not included. In addition to the
amounts shown in the table, Zenith will be expending funds in the first quarter
of 2000 to close out and refine its Year 2000 efforts. This amount is not
expected to be material. Zenith had been planning to upgrade its computer
network and communications infrastructure, as well as its personal and laptop
computers (including applications), for some time; however, because of the Year
2000 Problem, certain components of those plans were accelerated and completed
by mid-1999. No planned information technology projects were deferred because of
Year 2000-related efforts.
LOSS AND LOSS EXPENSE RESERVES AND CLAIMS, AND LOSS DEVELOPMENTS
The P&C Operations 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 Operations' claims departments, with
actuarial review. The estimate of unreported claims arising from accidents which
have not yet been reported to the P&C Operations, commonly known in the industry
as "incurred but not reported," is based upon the experience of the P&C
Operations and statistical information with respect to the probable number and
nature of such claims. The P&C Operations monitor these factors and revise their
reserves as they deem appropriate. Reserves are based on estimates, and no
assurance can be given that the ultimate liability will not be more or less than
such estimates.
Reference is made to Property-Casualty Loss Development on pages 40-41 of
Zenith's 1999 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 16 -- "Loss and Loss Adjustment
Expense Reserves" on page 62 of Zenith's 1999 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 48-51 of Zenith's 1999
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
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Operations on page 27 of Zenith's 1999 Annual Report to Stockholders, which
table is hereby incorporated by reference.
WORKERS' COMPENSATION
Zenith's Workers' Compensation reserves, on the average, are paid within
3 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 three 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.
In 1999, loss and loss adjustment expense reserves in the former RISCORP
operations were strengthened by $46.0 million as part of the RISCORP-Related
Adjustment. The 1998 underwriting results include $2.0 million before tax 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.
In Florida, the Special Disability Trust Fund (the "Fund") 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, 1999 and 1998,
the receivable from the Fund was $37.0 million and $39.1 million, respectively,
related to the pre-January 1, 1998 claims, of which $5.6 million was collected
in 1999.
OTHER PROPERTY-CASUALTY
Zenith's Other Property-Casualty business was operated primarily by CalFarm,
which was sold effective March 31, 1999. Zenith retained no liabilities with
respect to the unpaid loss and loss adjustment expenses of CalFarm. In 1998 and
1997, CalFarm sustained losses before tax of $5.0 million and $1.5 million,
respectively, in conjunction with California wind and storm damage.
REINSURANCE
Zenith expects that, on the average, its Reinsurance reserves related to
casualty business will be paid in 4 years and reserves related to its property
business will be paid within 1 year. 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
1999 and 1998 Reinsurance underwriting results include catastrophe losses before
tax of $18.9 million and $4.5 million, respectively. The major events of 1999
and 1998 were hurricane "Georges" and other Caribbean storms, earthquakes in
Turkey and Taiwan and French storms in December of 1999. There were no
catastrophes reported in Reinsurance in 1997.
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
9
<PAGE>
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
Operations 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 (through March 31, 1999), which wrote
liability coverage under farmowners' and small commercial policies, however such
losses are substantially excluded from all such coverage. Any such liabilities
associated with CalFarm were retained by CalFarm when it was sold in 1999 and
Zenith retains no exposure to any such liabilities. 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 coverage decisions, plaintiff's expanded theories of
liability, the risks inherent in major litigation and other uncertainties, the
ultimate exposure from these claims may vary from the amounts currently
reserved.
REINSURANCE CEDED
In accordance with general industry practices, the P&C Operations 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
the P&C Operations from uncollected reinsurance. The purpose of such reinsurance
is to protect Zenith from the impact of large, irregularly occuring losses. Such
reinsurance reduces the magnitude of sudden and unpredictable changes in net
income and the capitalization of the P&C 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.
Insurance premiums ceded by the P&C Operations amounted to $16.3 million,
$54.5 million and $26.2 million in 1999, 1998 and 1997, respectively, or 4.2%,
9.3% and 5.3% of gross earned premiums in 1999, 1998 and 1997, respectively.
Recoverable from reinsurers on unpaid losses amounted to $233.1 million and
$245.6 million at December 31, 1999 and 1998, respectively, or 26.5% and 24.6%
of gross reserves for unpaid losses and loss adjustment expenses in 1999 and
1998, respectively. The P&C Operations maintained reinsurance arrangements as
follows during 1999:
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 covered an additional
$40,000,000 in excess of $60,000,000 and was placed with UNUM Life Insurance
Company, ReliaStar Life Insurance Company and Connecticut General Life.
10
<PAGE>
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. Reinsurance recoverable from Inter-Ocean
Reinsurance Company is secured by a trust account and an irrevocable letter of
credit.
Also, in connection with the RISCORP Acquisition, Zenith Insurance acquired
approximately $244.3 million of reinsurance recoverables from principally quota
share arrangements entered into 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.
Reinsurance -- Catastrophe reinsurance covered losses of approximately
$20,000,000 in excess of approximately $4,000,000 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.
Pooling Agreement -- The P&C Operations are parties to a pooling agreement.
Under such 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 the companies. At December 31,
1999, the proportions of the pooling were as follows: Zenith Insurance, 97.5%;
ZNAT Insurance, 2.0%; and Zenith Star, 0.5%. Transactions pursuant to the
pooling agreement are eliminated on consolidation and have no impact on Zenith's
consolidated financial statements.
MARKETING AND STAFF
The business in the Workers' Compensation Operations is produced by
approximately 2,600 independent licensed insurance agents and brokers throughout
California, Florida, Texas and other states in which Zenith conducts its
Workers' Compensation Operations. Zenith Insurance's assumed reinsurance
premiums are generated nationally by brokers and reinsurance intermediaries.
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. The P&C Operations, as opposed to their
agents and brokers, retain authority over underwriting, claims processing,
safety engineering and auditing.
COMPETITION
Competition in the insurance business is based upon price, product design
and quality of service. The insurance industry is highly competitive, and
competition is particularly intense in the California workers' compensation
market which was deregulated with respect to prices in 1995. The P&C Operations
compete not only with other stock companies, but with mutual companies and other
underwriting organizations such as the State Compensation Insurance Fund in
California. Competition also exists with self-insurance and captive insurers.
Many companies in competition with the P&C Operations 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.
11
<PAGE>
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. The P&C Operations
are primarily subject to regulation and supervision by the California Department
of Insurance, except for Zenith Star, which is primarily subject to regulation
and supervision by the Texas Department of Insurance. 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 and ZNAT Insurance are required 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 are required to be filed by the P&C
Operations with the Departments of Insurance 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 and ZNAT Insurance were examined by the California 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.
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 Codification provides guidance for the areas
where statutory accounting has been silent and changes current statutory
accounting in some areas. The NAIC is now considering amendments to the
Codification that would also be effective upon implementation. The NAIC has
established January 1, 2001 as the effective date of the Codification. The
California Department of Insurance has adopted the Codification. Implementation
of the Codification may affect the surplus level and the capitalization
requirements of the P&C Operations on a statutory basis. Zenith has not
determined the impact of the Codification.
12
<PAGE>
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. At December 31, 1999, adjusted capital
under the RBC regulations for the Zenith Insurance Group (consisting of the P&C
Operations) was 250%, 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-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 1999 IRIS results for the P&C Operations showed three results
outside the "normal" range for such ratios, as such range is determined by the
NAIC. These results were mainly due to decreased premium volume due to the sale
of CalFarm, operating losses in the Workers' Compensation Operations and the
impact of the RISCORP-Related Adjustment.
INSURANCE HOLDING COMPANY SYSTEM REGULATORY ACT
The P&C Operations 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 the P&C Operations. See Item 5. for a
discussion of dividend restrictions related to the Holding Company Acts.
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 National, Zenith
Insurance and ZNAT Insurance. Zenith Insurance also owns a 176,000 square foot
branch office facility in Sarasota, Florida.
In the regular conduct of business, Zenith Insurance, leases offices in
various cities. See Notes to Consolidated Financial Statements -- Note 11 --
"Commitments and Contingent Liabilities" on pages 57-58 of Zenith's 1999 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.
Zenith Insurance and RISCORP entered into a settlement agreement, dated
July 7, 1999 (the "Settlement Agreement"), providing for the resolution of
certain claims arising out of the RISCORP Acquisition. Pursuant to the
Settlement Agreement, Zenith Insurance and RISCORP (i) dismissed litigation
pending between them in the United States District Courts for the Middle
District of Florida, Tampa Division, and the Southern District of New York;
(ii) agreed that RISCORP may request that the Neutral Auditor and Neutral
Actuary (a) review an alleged error concerning the proper treatment of certain
reinsurance treaties in its determinations with respect to the purchase price
for the RISCORP Acquisition, without waiving whatever rights RISCORP may have to
litigation of such issue, (b) determine whether the issue was properly in
dispute before the Neutral Auditor and Neutral Actuary and (c), if so, determine
the merits of the issue and whether a correction is appropriate; (iii) agreed
that any other disputes arising under the Asset Purchase Agreement or the
Settlement Agreement, including any future claims for indemnification by either
Zenith Insurance or RISCORP, are to be resolved by binding arbitration;
(iv) agreed that Zenith Insurance receives $6.0 million from an escrow account
established pursuant to the Asset Purchase Agreement, and RISCORP receives the
balance of the escrow account; and (v) agreed to an allocation between them of
any recovery received as a result of refund claims that RISCORP has made to the
Florida
13
<PAGE>
Department of Labor and Employment Security, Division of Workers' Compensation.
In a submission made to the Neutral Auditor and Neutral Actuary, RISCORP claimed
that the purchase price for the RISCORP Acquisition should be adjusted by either
$5.9 million or $23.4 million as a result of alleged errors in the original
determination of the Neutral Auditor and Neutral Actuary with respect to the
purchase price. On October 7, 1999, the Neutral Auditor and Neutral Actuary
advised Zenith and RISCORP that they would not consider the additional issue
raised by RISCORP because the issue had not previously been raised as a dispute
pursuant to the procedures set forth in their engagement letter. On January 13,
2000, RISCORP filed a complaint against Zenith Insurance and the Neutral Auditor
and Neutral Actuary in the Superior Court of Fulton County in the State of
Georgia. The complaint alleges breach of contract against both Zenith Insurance
and the Neutral Auditor and Neutral Actuary and seeks recovery of the amounts
previously described to have resulted from the alleged errors by the Neutral
Auditor and Neutral Actuary. Zenith is unable to predict the outcome of this
litigation.
Zenith National 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.
14
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Zenith National'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 1999 1998
- ------- ---------- ----------
<S> <C> <C>
First
High...................................................... $26 $29 1/16
Low....................................................... 20 5/16 24 1/2
Second
High...................................................... 26 11/16 30 1/2
Low....................................................... 22 1/4 28
Third
High...................................................... 26 28 1/2
Low....................................................... 21 1/8 23 9/16
Fourth
High...................................................... 22 13/16 25 7/8
Low....................................................... 19 1/4 22 7/8
</TABLE>
As of March 17, 2000, there were 292 registered holders of record of Zenith
National common stock.
The table below sets forth information with respect to the amount and
frequency of dividends declared on Zenith National 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 24, 2000............ $.25 cash per share April 28, 2000 May 12, 2000
December 2, 1999............. $.25 cash per share January 31, 2000 February 15, 2000
September 2, 1999............ $.25 cash per share October 29, 1999 November 15, 1999
May 20, 1999................. $.25 cash per share July 30, 1999 August 13, 1999
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
</TABLE>
The Holding Company Acts limit the ability of Zenith Insurance to pay
dividends to Zenith National, and of 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
1999, Zenith Insurance paid $130.0 million of dividends to Zenith National,
including a $100.0 million dividend from the proceeds of the sale of CalFarm for
which it received prior approval from the California Department of Insurance.
During 2000, Zenith Insurance will be able to pay $29.8 million in dividends to
Zenith National without prior approval. In 2000, ZNAT
15
<PAGE>
Insurance and Zenith Star, together, will be able to pay $1.0 million in
dividends to Zenith Insurance without prior approval.
ITEM 6. SELECTED FINANCIAL DATA.
The 5-Year Summary of Selected Financial Information, included in Zenith's
1999 Annual Report to Stockholders on pages 38-39, 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 1999 Annual Report to Stockholders
on pages 24-37 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 1999 Annual Report to Stockholders on page 33 is
hereby incorporated by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Reference is made to the Property-Casualty Loss Development data on
pages 40-41 of Zenith's 1999 Annual Report to Stockholders for information
setting forth the loss and loss adjustment expense liability development for
1989 through 1999 and to the consolidated financial statements and notes thereto
on pages 42-65 of Zenith's 1999 Annual Report to Stockholders, which are hereby
incorporated by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
16
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information set forth under the captions "Section 16(a) Beneficial
Ownership Reporting Compliance" and "Election of Directors" in the Proxy
Statement distributed to stockholders in connection with Zenith's 2000 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 62 Chairman of the Board and President(1) Annual 1977
Fredricka Taubitz 56 Executive Vice President and Annual 1985
Chief Financial Officer (1)(6)
Jack D. Miller 54 Executive Vice President (2) Annual 1997
Robert E. Meyer 51 Senior Vice President and Annual 1997
Actuary (2)(4)
William J. Owen 42 Senior Vice President, Chief Financial Annual 1997
Officer, Treasurer and Assistant
Secretary (1)(5)
James P. Ross 53 Senior Vice President (1)(3) Annual 1978
John J. Tickner 61 Senior Vice President and Secretary (1) Annual 1985
</TABLE>
- ------------------------
(1) Officer of Zenith National and its subsidiaries.
(2) Officer of Zenith National's subsidiaries only.
(3) Ceased being an executive officer on July 9, 1999.
(4) Designated as an executive officer on February 24, 2000.
(5) Designated as an executive officer on February 24, 2000, effective March 1,
2000.
(6) Ceased being an executive officer on March 1, 2000.
Each of the executive officers has occupied an executive position with
Zenith National or a subsidiary of Zenith National for more than five years,
except for:
Jack D. Miller - Served as the President and Chief Executive Officer of
Industrial Indemnity Company, a property-casualty insurance company, from 1995
to 1997; as 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 Executive Officer
Robert E. Meyer - Served as Senior Vice President and Actuary of Industrial
Indemnity Company, a property-casualty insurance company, from 1992 to 1997,
prior to that served as Senior Vice President and Actuary of the Workers'
Compensation Insurance Rating Bureau of California.
William J. Owen - Served as Vice President of Finance for Zenith Insurance
from 1997 to 1999, previously served as Vice President of Finance from 1996 to
1997 with Blue Cross of California, a subsidiary of WellPoint Health Networks,
Inc., and prior to that held various positions in Zenith Insurance culminating
in Vice President of Finance.
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,"
17
<PAGE>
"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 1 to the table set forth under the
caption "Election of Directors" in the Proxy Statement is hereby incorporated by
reference.
18
<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 1999
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, 1999 and 1998
Consolidated Statement of Operations for the year ended
December 31, 1999,
1998 and 1997
Consolidated Statement of Cash Flows for the year ended
December 31, 1999,
1998 and 1997
Consolidated Statement of Stockholders' Equity for the three
years ended
December 31, 1999
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, 1999:
I -- Summary of Investments -- Other Than Investments in
Related Parties
For the years ended December 31, 1999, 1998 and 1997:
III -- Supplementary Insurance Information
IV -- Reinsurance
Zenith National Insurance Corp.:
As of December 31, 1999 and 1998 and for the years ended
December 31, 1999,
1998 and 1997:
II -- Condensed Financial Information of Registrant
The information on Property-Casualty Loss Development is on pages 40-41
of Zenith's 1999 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.
19
<PAGE>
3. EXHIBITS
The Exhibits listed below are filed in a separate Exhibit Volume to
this Report.
<TABLE>
<CAPTION>
<C> <S>
2.1 Amended and Restated Agreement and Plan of Merger by and
among Zenith AGC Acquisition Insurance Company, Zenith
Insurance Company, Zenith National Insurance Corp.,
Associated General Commerce Self-Insurers' Trust Fund and
AGC Risk Management Group Inc. dated as of October 7, 1996.
(Incorporated herein by reference to Exhibit 2.1 to Zenith's
Annual Report on Form 10-K for the year ended December 31,
1996.)
2.2 Stock Acquisition Agreement, dated as of September 19, 1995,
between Anchor National Life Insurance Company and Zenith
National Insurance Corp. (Incorporated herein by reference
to Exhibit 2.1 to Zenith's Report on Form 8-K dated
October 6, 1995.)
2.3 Amendment No. 1 to Stock Acquisition Agreement dated as of
December 27, 1995, by and among Anchor National Life
Insurance Company, SunAmerica Life Insurance Company and
Zenith National Insurance Corp. (Incorporated herein by
reference to Exhibit 2.1 to Zenith's Report on Form 8-K
dated January 9, 1996.)
3.1 Certificate of Incorporation of Zenith as in effect
immediately prior to November 22, 1985. (Incorporated
herein by reference to Exhibit 3 to Zenith's Amendment on
Form 8, date of amendment October 10, 1985, to Zenith's
Current Report on Form 8-K, dated July 26, 1985.)
3.2 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, dated
November 22, 1985.)
3.3 By-Laws of Zenith National Insurance Corp., as currently in
effect.
4.1 Indenture, dated as of May 1, 1992, between Zenith National
Insurance Corp. 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 as trustee, pursuant to which Zenith issued its
8.55% Subordinated Deferrable Interest Debentures.
(Incorporated herein by reference to Exhibit 10.6 to
Zenith's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1998.)
4.3 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.)
10.1 Purchase Agreement, dated February 4, 1981, among Reliance
Insurance Company, Zenith National Insurance Corp., 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 National Insurance Corp.)
</TABLE>
20
<PAGE>
<TABLE>
<C> <S>
10.2 Asset Purchase Agreement, dated 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, dated June 17, 1997.)
10.3 First Amendment, entered into June 26, 1997, to the Asset
Purchase Agreement, dated 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, dated April 1, 1998.)
10.4 Second Amendment, entered into July 11, 1997, to the Asset
Purchase Agreement dated 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, dated April 1, 1998.)
10.5 Amendment No. 3 entered into March 30, 1998, to the Asset
Purchase Agreement dated 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, dated April 1, 1998.)
</TABLE>
21
<PAGE>
<TABLE>
<C> <S>
10.6 Settlement Agreement, dated July 7, 1999, between Zenith
Insurance Company, 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 by reference to Exhibit 10.4 to Zenith's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1999).
10.7 Assumption and Indemnity Reinsurance Agreement, dated
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.)
10.8 Assumption and Indemnity Reinsurance Agreement, dated
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,
dated April 1, 1998.)
10.9 Assumption and Indemnity Reinsurance Agreement, dated
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, dated April 1, 1998.)
10.10 Stock Purchase Agreement, dated 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, dated March 9, 1999.)
*10.11 Zenith National Insurance Corp.'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).)
*10.12 Amendment No. 2 to the Zenith National Insurance Corp.
Amended and Restated Non-Qualified Stock Option Plan, dated
April 9, 1996. (Incorporated herein by reference to
Exhibit 10.4 to Zenith's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1996.)
*10.13 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.)
*10.14 Amendment No. 1, dated December 8, 1998, to Zenith National
Insurance Corp. 1996 Employee Stock Option Plan.
(Incorporated herein by reference to Exhibit 10.1 to
Zenith's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1999).
*10.15 Employment Agreement, dated December 11, 1997, between
Zenith National Insurance Corp. 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.)
*10.16 Employment Agreement, dated January 5, 1998, between Zenith
National Insurance Corp. 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.)
</TABLE>
22
<PAGE>
<TABLE>
<C> <S>
*10.17 Amendment to Employment Agreement, dated March 1, 2000,
between Zenith National Insurance Corp. and John J. Tickner.
*10.18 Employment Agreement, dated December 11, 1997, between
Zenith National Insurance Corp. 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
Insurance Company 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 Amendment to Employment Agreement, dated March 1, 2000,
between Zenith Insurance Company and Jack D. Miller.
*10.21 Employment Agreement, dated October 20, 1997, between Zenith
Insurance Company and Robert E. Meyer.
*10.22 Amendment to Employment Agreement, dated March 1, 2000,
between Zenith Insurance Company and Robert E. Meyer.
*10.23 Stock Option Agreement, dated 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.)
*10.24 Zenith National Insurance Corp. Executive Officer Bonus
Plan, dated 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.)
10.25 Aggregate Excess of Loss Reinsurance Agreement between
Associated General Contractors Self Insurers Trust Fund (now
part of Zenith Insurance Company) and Reliance Insurance
Company effective December 31, 1991. (Incorporated herein by
reference to Exhibit 10.24 to Zenith's Annual Report on
Form 10-K for the year ended December 31, 1996.)
10.26 Specific Excess Workers' Compensation and Employers'
Liability Policy between Planet Insurance Company (now
Reliance National Indemnity Company) and Associated General
Contractors of Florida Self Insurance Fund (now part of
Zenith Insurance Company) effective January 1, 1993.
(Incorporated herein by reference to Exhibit 10.25 to
Zenith's Annual Report on Form 10-K for the year ended
December 31, 1996.)
10.27 Aggregate Excess of Loss Reinsurance Agreement, dated
August 1, 1998, between Zenith National Insurance Group and
Inter-Ocean Reinsurance Company LTD. (Incorporated herein by
reference to Exhibit 10.32 to Zenith's Annual Report on
Form 10-K for the year ended December 31, 1998.)
10.28 Special Endorsement to Retrocessional Agreement, dated
August 1, 1998, between American Re-Insurance Company,
Inter-Ocean Reinsurance Company LTD., and Zenith Insurance
Company, CalFarm Insurance Company, ZNAT Insurance Company
and Zenith Star Insurance Company.
10.29 Termination Endorsement Number 1 to Retrocessional
Agreement, dated December 22, 1999, between American
Re-Insurance Company, Inter-Ocean Reinsurance Company, LTD,
and Zenith Insurance Company, CalFarm Insurance Company,
ZNAT Insurance Company and Zenith Star Insurance Company.
10.30 Endorsement Number 1 to Aggregate Excess of Loss Reinsurance
Agreement, dated December 22, 1999, between Zenith National
Insurance Group, CalFarm Insurance Company, ZNAT Insurance
Company and Zenith Star Insurance Company and Inter-Ocean
Reinsurance Company LTD.
</TABLE>
23
<PAGE>
<TABLE>
<C> <S>
10.31 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. (Incorporated herein by
reference to Exhibit 10.34 to Zenith's Annual Report on
Form 10-K for the year ended December 31, 1998.)
10.32 Agreement of Reinsurance #8051 between General Reinsurance
Corporation and Zenith Insurance Company, ZNAT Insurance
Company, Zenith Star Insurance Company and CalFarm Insurance
Company, dated 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.)
10.33 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.)
10.34 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.)
10.35 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.)
10.36 Loan Revision Agreement, dated June 30, 1999, to the
promissory note, dated July 1, 1997, between Zenith National
Insurance Corp. and 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, 1999).
10.37 Credit Agreement, dated 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.)
10.38 Restated Tranche A Note, dated July 22, 1999 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, 1999.)
10.39 Amendment No. 1, dated January 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 10.31 to Zenith's Annual Report on Form 10-K for the
year ended December 31, 1997).
10.40 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.)
10.41 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.)
</TABLE>
24
<PAGE>
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10.42 Fourth Amendment to Credit Agreement, dated July 22, 1999,
between Zenith National Insurance Corp. and Bank of America
National Trust and Savings Association. (Incorporated herein
by reference to Exhibit 10.1 to Zenith's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1999).
10.43 Fifth Amendment to Credit Agreement, dated August 9, 1999,
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, 1999.)
10.44 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.)
10.45 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.)
10.46 Standstill Agreement, dated June 30, 1999, between Zenith
National Corp. and Fairfax Financial Holdings Limited.
(Incorporated herein by reference to Exhibit 10.3 to
Zenith's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1999.)
11 Statements re computation of per share earnings.
(Incorporated herein by reference to Notes to Consolidated
Financial Statements -- Note 17 -- "Earnings and Dividends
Per Share" on page 63 of Zenith's 1999 Annual Report to
Stockholders.)
13 Zenith's Annual Report to Stockholders for the year ended
December 31, 1999, 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.
23 Consent of PricewaterhouseCoopers LLP, dated March 27, 2000.
(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, 1999.
</TABLE>
- --------------------------
*Management contract or compensatory plan or arrangement
(b) Reports on Form 8-K
Zenith filed a Current Report on Form 8-K, dated February 25, 2000, in
connection with the repurchase of $12.5 million aggregate principal
amount of its 9% Senior Notes due 2002 and $8.0 million aggregate
liquidation amount of 8.55% Capital Securities due 2028.
25
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on March 27, 2000.
<TABLE>
<S> <C> <C>
ZENITH NATIONAL INSURANCE CORP.
By: /s/ STANLEY R. ZAX
-----------------------------------------
Stanley R. Zax
Chairman of the Board and President
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated, on March 27, 2000.
<TABLE>
<C> <S>
/s/ STANLEY R. ZAX
--------------------------------------------- Chairman of the Board, President and
Stanley R. Zax Director (Principal Executive Officer)
/s/ MAX M. KAMPELMAN
--------------------------------------------- Director
Max M. Kampelman
/s/ MICHAEL WM. ZAVIS
--------------------------------------------- Director
Michael Wm. Zavis
/s/ WILLIAM S. SESSIONS
--------------------------------------------- Director
William S. Sessions
--------------------------------------------- Director
Harvey L. Silbert
/s/ GERALD TSAI, JR.
--------------------------------------------- Director
Gerald Tsai, Jr.
/s/ ROBERT J. MILLER
--------------------------------------------- Director
Robert J. Miller
/s/ WILLIAM J. OWEN Senior Vice President and Chief Financial
--------------------------------------------- Officer (Principal Financial and Accounting
William J. Owen Officer)
</TABLE>
26
<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 February 10, 2000 on our audits of the consolidated financial statements
and financial statement schedules of Zenith National Insurance Corp. and
subsidiaries as of December 31, 1999 and 1998, and for each of the three years
in the period ended December 31, 1999, which is included in this Annual Report
on Form 10-K.
PricewaterhouseCoopers LLP
Los Angeles, California
March 27, 2000
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 February 10, 2000 appearing on page 66 of the 1999 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
February 10, 2000
F-2
<PAGE>
SCHEDULE I -- SUMMARY OF INVESTMENTS --
OTHER THAN INVESTMENTS IN RELATED PARTIES
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
DECEMBER 31, 1999
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D
-------- -------- -------- --------
AMOUNT AT WHICH
FAIR SHOWN IN THE
TYPE OF INVESTMENT COST(1) VALUE BALANCE SHEET(2)
------------------ ---------- ---------- ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Fixed maturities:
Bonds:
United States Government and government agencies
and authorities............................... $ 213,149 $ 210,942 $ 211,155
Public utilities................................ 35,062 34,623 34,623
Industrial and miscellaneous.................... 422,565 396,594 396,721
Redeemable preferred stocks....................... 13,879 12,402 12,402
---------- ---------- ----------
Total fixed maturities...................... 684,655 654,561 654,901
Equity securities:
Floating rate preferred stocks.................... 6,799 6,420 6,420
Convertible and nonredeemable preferred stocks.... 4,300 3,405 3,405
Common stocks, industrial......................... 25,428 25,634 25,634
---------- ---------- ----------
Total equity securities..................... 36,527 35,459 35,459
Short-term investments.............................. 179,748 179,748 179,748
Other investments................................... 31,626 31,626 31,626
---------- ---------- ----------
Total investments........................... $ 932,556 $ 901,394 $ 901,734
========== ========== ==========
</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,
---------------------
1999 1998
(DOLLARS AND SHARES IN THOUSANDS) --------- ---------
<S> <C> <C>
Investments:
Common stocks, at fair value (cost $1,430 in 1999 and $606
in 1998)................................................ $ 1,464 $ 968
Short-term investments (at cost, which approximates fair
value).................................................. 96,033 5,543
Other investments......................................... 4,736
--------- ---------
Total investments........................................... 97,497 11,247
Cash........................................................ 148
Investment in subsidiaries (Note A)......................... 347,372 447,311
Receivable from subsidiaries (Note A)....................... 56,747 43,919
Other assets................................................ 16,560 12,115
--------- ---------
Total assets........................................ $ 518,176 $ 514,740
========= =========
LIABILITIES
Payable to banks............................................ $ 5,000
Senior notes payable, less unamortized issue cost of $283 in
1999 and $404 in 1998 (Note B)............................ $ 74,717 74,596
8.55% Subordinated Deferrable Interest Debentures, less
unamortized issue cost of $269 in 1999 and $278 in 1998
(Note C).................................................. 77,051 77,042
Cash dividends payable to stockholders...................... 4,287 4,338
Federal income tax payable (Note A)......................... 1,192 583
Other liabilities........................................... 6,370 6,229
--------- ---------
Total liabilities................................... 163,617 167,788
--------- ---------
STOCKHOLDERS' EQUITY
Preferred stock, $1 par--shares authorized 1,000; issued and
outstanding, none in 1999 and 1998........................
Common stock, $1 par--shares authorized 50,000; issued
25,157, outstanding 17,150 in 1999; issued 24,970,
outstanding 17,148 in 1998................................ 25,157 24,970
Additional paid-in capital.................................. 274,897 270,679
Retained earnings........................................... 225,229 188,243
Accumulated other comprehensive (loss) income--net
unrealized (depreciation) appreciation on investments, net
of deferred tax (benefit) expense of $(10,768) in 1999 and
$5,167 in 1998............................................ (19,998) 9,596
--------- ---------
505,285 493,488
Less treasury stock at cost (8,007 shares in 1999 and 7,822
shares in 1998)........................................... (150,726) (146,536)
--------- ---------
Total stockholders' equity.......................... 354,559 346,952
--------- ---------
Total liabilities and stockholders' equity.......... $ 518,176 $ 514,740
========= =========
</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,
----------------------------------
1999 1998 1997
(DOLLARS IN THOUSANDS) ---------- --------- ---------
<S> <C> <C> <C>
Net investment income (expense)............................. $ 2,520 $ (801) $ 1,196
Realized gains (losses) on investments...................... 828 22 (446)
-------- -------- -------
Total revenue............................................... 3,348 (779) 750
-------- -------- -------
Operating expense........................................... 4,155 3,835 3,557
Interest expense............................................ 8,416 6,011 3,980
-------- -------- -------
Total expenses.............................................. 12,571 9,846 7,537
Loss before federal income tax benefit and equity in income
of subsidiaries........................................... (9,223) (10,625) (6,787)
Federal income tax benefit.................................. 3,175 3,496 2,097
-------- -------- -------
Loss before equity in income of subsidiaries................ (6,048) (7,129) (4,690)
Equity in income of subsidiaries (Note A)................... 60,148 26,229 32,790
-------- -------- -------
Net income.................................................. $ 54,100 $ 19,100 $28,100
======== ======== =======
</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,
----------------------------------
1999 1998 1997
(DOLLARS IN THOUSANDS) ---------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Investment income received................................ $ 1,372 $ 445 $ 903
Operating expenses paid................................... (3,808) (4,587) (1,465)
Interest paid............................................. (10,017) (5,468) (3,648)
Income tax recovered...................................... 3,974 4,563 2,505
--------- -------- --------
Net cash used in operating activities................... (8,479) (5,047) (1,705)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments:
Equity securities available-for-sale.................... (10,315) (4,652) (19)
Other debt and equity securities and other
investments........................................... 4,793
Proceeds from sales of investments:
Equity securities available-for-sale.................... 9,412 11,631
Other investments....................................... 5,675 5,423
Net change in short-term investments...................... (89,146) 33,457 (8,274)
Capital expenditures and other, net....................... (5,271) (1,408) (10,545)
--------- -------- --------
Net cash (used in) provided by investing activities..... (89,645) 32,190 (1,784)
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash advanced from bank line of credit.................... 7,400 7,000
Cash repaid on bank line of credit........................ (12,400) (2,000)
Cash dividends paid to common stockholders................ (17,165) (17,010) (17,695)
Net proceeds from issuance of subordinated debt (Note
C)...................................................... 77,038
Proceeds from exercise of stock options................... 4,322 6,527 4,940
Purchase of treasury shares............................... (4,190) (24,023) (482)
Dividends received from subsidiaries (Note A)............. 130,000 22,750
Capital contribution to Zenith Insurance (Note C)......... (65,000)
Net cash to subsidiary (Note A)........................... (9,991) (10,257) (6,757)
--------- -------- --------
Net cash provided by (used in) financing activities..... 97,976 (27,725) 2,756
Net decrease in cash........................................ (148) (582) (733)
Cash at beginning of year................................... 148 730 1,463
--------- -------- --------
Cash at end of year......................................... $ $ 148 $ 730
========= ======== ========
RECONCILIATION OF NET INCOME TO NET CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income................................................ $ 54,100 $ 19,100 $ 28,100
Income from subsidiaries (Note A)......................... (60,148) (26,229) (32,790)
Other..................................................... (2,431) 2,082 2,985
--------- -------- --------
Net cash used in operating activities................... $ (8,479) $ (5,047) $ (1,705)
========= ======== ========
</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 National") and subsidiaries.
Certain 1998 amounts have been restated to conform to the 1999 presentation.
A. Investment In Subsidiaries
Zenith National owns, directly or indirectly, 100% of the outstanding
stock of Zenith Insurance Company ("Zenith Insurance"); CalFarm Insurance
Company (through March 31, 1999, the date of its sale to Nationwide Mutual
Insurance Company); ZNAT Insurance Company; Zenith Star Insurance Company;
Perma-Bilt, A Nevada Corporation ("Perma-Bilt"); Zenith Development Corp.
("ZDC"); 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 $2.0
million 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 National partially funds the cash flow requirements of its Real
Estate Operations. Intercompany interest charges to such subsidiaries reduce
Zenith National's interest expense. The receivable from subsidiaries mainly
comprises principal and capitalized interest on loans to Perma-Bilt and ZDC
of $56.8 million and $45.0 million in 1999 and 1998, respectively.
Zenith National files a consolidated federal income tax return. The
equity in the income of subsidiaries is net of a provision for federal
income tax expense of $32.2 million in 1999, $13.2 million in 1998 and
$17.5 million in 1997. Zenith has formulated tax allocation procedures with
its subsidiaries and the 1999, 1998 and 1997 condensed financial information
reflect Zenith's portion of the consolidated tax.
Zenith Insurance paid $130.0 million of dividends to Zenith National in
1999 including a dividend of $100.0 million for which prior approval was
obtained from the California Department of Insurance. Zenith Insurance paid
no dividends to Zenith National in 1998 and paid dividends to Zenith
National of $22.8 million in 1997.
B. Senior Notes Payable
Zenith National had $75.0 million of its 9% Senior Notes due 2002 (the
"9% Notes") issued and outstanding as of December 31, 1999 and 1998.
Interest on the 9% Notes is payable semi-annually. The 9% Notes are general
unsecured obligations of Zenith National. Issue costs of $1.2 million are
being amortized over the term of the 9% Notes. In each of the three years
ended December 31, 1999, 1998 and 1997, $6.9 million of interest and issue
costs were expended.
C. Subordinated Debentures
On July 30, 1998, Zenith National sold $77.3 million of 8.55%
Subordinated Deferrable Interest Debentures due 2028 (the "Subordinated
Debentures") to the Zenith National Insurance Capital Trust 1 (the "Trust").
The semi-annual interest payments on the Subordinated Debentures may be
deferred by Zenith National 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.
In 1998 Zenith used $65.0 million from the net proceeds to make a capital
contribution to Zenith Insurance and used $2.3 million to acquire all of the
issued voting stock of the Trust. The remaining net proceeds were used for
general corporate purposes. The issue cost on the Subordinated Debentures of
$0.3 million is being amortized over the term of the Subordinated
Debentures. During 1999 and 1998, $6.7 million and $2.7 million,
respectively, of interest and issue cost were expensed.
F-7
<PAGE>
Zenith National's guarantee of the Subordinated Debentures is
subordinated to all other indebtedness of Zenith National.
D. Subsequent Event (unaudited)
On February 25, 2000, Zenith National paid $18.8 million to repurchase
$12.5 million aggregate principal amount of the outstanding 9% Notes and
$8.0 million aggregate liquidation amount of the outstanding 8.55% Capital
Securities of the Zenith National Insurance Capital Trust I, a Delaware
statutory business trust, all of the voting securities of which are owned by
Zenith National. Zenith National used its available cash balances to fund
these purchases.
F-8
<PAGE>
SCHEDULE III -- SUPPLEMENTARY INSURANCE INFORMATION
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F COLUMN G COLUMN H
-------- ----------- -------------- --------- ------------ --------- ---------- ----------
FUTURE POLICY BENEFITS,
DEFERRED BENEFITS, OTHER POLICY CLAIMS,
POLICY LOSSES, CLAIMS CLAIMS AND NET LOSSES AND
ACQUISITION AND LOSS UNEARNED BENEFITS PREMIUM INVESTMENT SETTLEMENT
SEGMENT COSTS EXPENSES PREMIUMS PAYABLE REVENUE INCOME EXPENSES
------- ----------- -------------- --------- ------------ --------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
1999
- ----
Property and Casualty
Workers' Compensation......... $ 6,633 $516,941 $ 42,630 $278,854 $285,864
Other Property-Casualty....... 54,108 36,029
Reinsurance................... 1,259 88,309 7,496 36,441 38,279
------- -------- -------- ------- -------- ------- --------
7,892 605,250 50,126 369,403 360,172
Reinsurance ceded............... 275,679 780
Investment...................... $53,662
Parent..........................
------- -------- -------- ------- -------- ------- --------
Total......................... $ 7,892 $880,929 $ 50,906 $ $369,403 $53,662 $360,172
======= ======== ======== ======= ======== ======= ========
1998
- ----
Property and Casualty
Workers' Compensation......... $ 6,157 $524,183 $ 48,363 $278,660 $220,983
Other Property-Casualty....... 16,432 110,855 89,202 222,045 148,712
Reinsurance................... 1,352 73,646 8,005 29,150 13,195
------- -------- -------- ------- -------- ------- --------
23,941 708,684 145,570 529,855 382,890
Reinsurance ceded............... 288,963 12,395
Investment...................... $53,593
Parent..........................
------- -------- -------- ------- -------- ------- --------
Total......................... $23,941 $997,647 $157,965 $ $529,855 $53,593 $382,890
======= ======== ======== ======= ======== ======= ========
1997
- ----
Property and Casualty
Workers' Compensation......... $ 4,034 $339,215 $ 25,230 $242,064 $197,450
Other Property-Casualty....... 15,575 109,003 89,093 214,406 139,832
Reinsurance................... 1,231 77,383 7,299 32,251 10,883
------- -------- -------- ------- -------- ------- --------
20,840 525,601 121,622 488,721 348,165
Reinsurance ceded............... 87,665 6,847
Investment...................... $52,332
Parent..........................
------- -------- -------- ------- -------- ------- --------
Total......................... $20,840 $613,266 $128,469 $ $488,721 $52,332 $348,165
======= ======== ======== ======= ======== ======= ========
<CAPTION>
COLUMN A COLUMN I COLUMN J COLUMN K
-------- ------------ --------- ---------
AMORTIZATION
OF POLICY OTHER
ACQUISITION OPERATING PREMIUMS
SEGMENT COSTS EXPENSES WRITTEN
------- ------------ --------- ---------
<S> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
1999
- ----
Property and Casualty
Workers' Compensation......... $47,502 $68,031 $272,326
Other Property-Casualty....... 12,764 5,337 49,976
Reinsurance................... 5,000 486 35,930
------- ------- --------
65,266 73,854 358,232
Reinsurance ceded...............
Investment......................
Parent.......................... 6,236
------- ------- --------
Total......................... $65,266 $80,090 $358,232
======= ======= ========
1998
- ----
Property and Casualty
Workers' Compensation......... $43,182 $60,608 $277,191
Other Property-Casualty....... 49,028 19,896 215,452
Reinsurance................... 4,727 960 29,856
------- ------- --------
96,937 81,464 522,499
Reinsurance ceded...............
Investment......................
Parent.......................... 3,835
------- ------- --------
Total......................... $96,937 $85,299 $522,499
======= ======= ========
1997
- ----
Property and Casualty
Workers' Compensation......... $41,225 $40,188 $238,963
Other Property-Casualty....... 44,514 23,551 218,370
Reinsurance................... 6,474 707 29,780
------- ------- --------
92,213 64,446 487,113
Reinsurance ceded...............
Investment......................
Parent.......................... 3,557
------- ------- --------
Total......................... $92,213 $68,003 $487,113
======= ======= ========
</TABLE>
F-9
<PAGE>
SCHEDULE IV -- REINSURANCE
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
<TABLE>
<CAPTION>
COLUMN F
COLUMN C COLUMN D --------
COLUMN B -------- -------- COLUMN E PERCENTAGE
-------- CEDED TO ASSUMED -------- OF AMOUNT
COLUMN A GROSS OTHER FROM OTHER NET ASSUMED
- -------- AMOUNT COMPANIES COMPANIES AMOUNT TO NET
(DOLLARS IN THOUSANDS) -------- --------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C>
DECEMBER 31, 1999
Premiums earned............................................. $345,085 $16,349 $40,667 $369,403 11.0%
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%
</TABLE>
F-10
<PAGE>
Amended and Restated as of February 25, 1999
BYLAWS
OF
ZENITH NATIONAL INSURANCE CORP.
(A Delaware Corporation)
ARTICLE I. OFFICES
Section 1. REGISTERED OFFICE. The registered office shall be established
and maintained at the office of the UNITED STATES CORPORATION COMPANY, located
at 306 South State Street, City of Dover, County of Kent, State of Delaware
19901, and said UNITED STATES CORPORATION COMPANY shall be the registered agent
of this Corporation in charge thereof.
Section 2. OTHER OFFICES. The Corporation may establish other offices,
within or without the State of Delaware, at such place or places as the Board of
Directors from time to time may designate or the business of the Corporation may
require.
ARTICLE II. STOCKHOLDERS
Section 1. ANNUAL MEETINGS. Annual meetings of stockholders shall be
held at Los Angeles, California, on the last Wednesday in May of each year,
commencing with 1972, at the hour stated in the notice, or said meetings may
be held at such time and place, within or without the State of Delaware, as
the Board of Directors by resolution shall determine, and as set forth in the
notice of the meeting.
If the date of the annual meeting shall fall on a legal
1
<PAGE>
holiday of the state in which the meeting is to be held, the meeting shall be
held on the next succeeding business day.
At each annual meeting, the stockholders entitled to vote shall elect a
Board of Directors, and they may transact such other corporate business as shall
be stated in the notice of the meeting.
Section 2. SPECIAL MEETINGS. Special meetings of the stockholders, for any
purpose or purposes, may be called by the President or the Secretary, or by
resolution of the Board of Directors, and may be held at such time and place as
shall be stated in the notice of the meeting.
Section 3. NOTICE OF MEETINGS. Written notice, stating the place, date and
time of the meeting, and the general nature of the business to be considered,
shall be given to each stockholder entitled to vote thereat, at his address as
it appears on the records of the Corporation, not less than ten (10) nor more
than fifty (50) days prior to the date of the meeting. No business other than
that stated in the notice shall be transacted at any meeting without the
unanimous consent of all of the stockholders entitled to vote thereat.
Section 4. VOTING. Each stockholder entitled to vote in accordance with the
terms of the Certificate of Incorporation, the provisions of these Bylaws, and
the laws of the State of Delaware, shall be entitled to one vote, in person or
by
2
<PAGE>
proxy, for each share of stock entitled to vote held by such stockholder, but no
proxy shall be voted after three (3) years from its date unless such proxy
provides for a longer period. Upon the demand of any stockholder, the vote for
Directors and the vote upon any question before the meeting shall be by written
ballot. All elections for Directors shall be decided by plurality vote; all
other questions shall be decided by majority vote, except as otherwise provided
by the Certificate of Incorporation or the laws of the State of Delaware.
A complete list of the stockholders entitled to vote at a meeting, arranged
in alphabetical order, with the address of each, and the number of shares held
by each, shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours for a period of at least
ten (10) days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the registered office of the Corporation in
the State of Delaware. The list shall also be produced and kept available at the
time and place of the meeting, during the entire time thereof, and may be
inspected by any stockholder or his proxy who may be present.
Section 5. QUORUM. Except as otherwise required by law, by the Certificate
of Incorporation, or by these Bylaws,
3
<PAGE>
the presence, in person or by proxy, of stockholders holding a majority of the
stock of the Corporation issued and outstanding and entitled to vote, shall
constitute a quorum at all meetings of stockholders. In case a quorum shall not
be present at any meeting, a majority in interest of the stockholders entitled
to vote thereat, present either in person or by proxy, shall have power to
adjourn the meeting, from time to time, without notice other than an
announcement at the meeting, until the requisite amount of stock entitled to
vote shall be present. At any such adjourned meeting at which the requisite
amount of stock entitled to vote shall be represented, any business may be
transacted which might have been transacted at the meeting as originally
noticed; but only those stockholders entitled to vote at the meeting as
originally noticed shall be entitled to vote at any adjournment or adjournments
thereof.
Section 6. ACTION WITHOUT MEETING. Any action to be taken by the
stockholders may be taken without a meeting if, prior to such action, all
stockholders entitled to vote thereon shall consent to the action by a writing
filed with the records of the meetings of stockholders, and such consent shall
be treated for all purposes as a vote at a meeting.
ARTICLE II. DIRECTORS
Section 1. NUMBER AND TERM. The number of directors shall be not less than
five (5) nor more than ten (10), the exact number of which shall be fixed from
time to time by the Board of Directors.
4
<PAGE>
Except as provided in Article VI hereof directors shall be elected at the
annual meeting of stockholders, and each Director shall hold office until the
next annual meeting of stockholders and until his successor is duly elected and
qualified, or until his earlier resignation or removal.
Section 2. QUORUM. A majority of the Directors shall constitute a quorum,
for the transaction of business. If, at any meeting of the Board, there shall be
less than a quorum present, a majority of those present may adjourn the meeting
from time to time until a quorum is obtained, and no further notice thereof need
be given other than by announcement at the meeting which shall be so adjourned.
Section 3. FIRST MEETING. The newly elected Directors may hold their first
meeting for the purpose of organization and the transaction of business, if a
quorum be present, immediately after the annual meeting of the stockholders; or
the time and place of such meeting may fixed by consent in writing of all the
Directors.
Section 4. ELECTION OF OFFICERS. At the first meeting, or at any subsequent
meeting called for that purpose, the Directors shall elect the officers of the
Corporation, as more specifically set forth in Article V of these Bylaws. Such
officers shall hold office until the next annual election of
5
<PAGE>
officers, or until their successors are elected and shall have qualified.
Section 5. REGULAR MEETINGS. Regular meetings of the Directors may be held,
without notice, at such places and times as from time to time shall be
determined by resolution of the Board of Directors.
Section 6. SPECIAL MEETINGS. Special meetings of the Board of Directors may
be called by the President, or by the Secretary on the written request of any
two Directors on at least two (2) days' notice to each Director.
Section 7. PLACE OF MEETING. The Directors may hold their meetings, and
have one or more offices outside the State of Delaware, at such places as from
time to time may be determined by resolution of the Board.
Section 8. ACTION WITHOUT MEETING. Any action required or permitted to be
taken at any meeting of the Board of Directors, or any committees thereof, may
be taken without a meeting if, prior to such action, a written consent thereto
is signed by all members of the Board or of such committee, as the case may be,
and such written consent is filed with the minutes of proceedings of the Board
of committee.
Section 9. POWERS. The Board of Directors shall exercise all of the powers
of the Corporation, except such as are by law, by the Certificate of
Incorporation, or by these Bylaws conferred upon or reserved to the
stockholders.
6
<PAGE>
Section 10. COMPENSATION. The Board of Directors shall have authority to
fix the compensation of Directors for services to the Corporation in any
capacity. Such compensation may be in any form designated by the Board,
including (without limitation) an annual payment or a fixed sum for attendance
at meetings of the Board and committees thereof, or both, and reimbursement of
expenses for attendance at such meetings. Nothing herein contained shall be
construed to preclude any Director from serving the Corporation, its
subsidiaries or affiliates in any capacity as an officer, agent or otherwise,
and receiving compensation therefor.
Section 11. CHAIRMAN OF THE BOARD. The Board of Directors shall elect a
Chairman of the Board who shall preside at all Board of Directors and
Shareholders meetings. The Chairman of the Board shall not be deemed to be an
officer of the Corporation, notwithstanding anything contained in Article V
hereof to the contrary, unless designated as an officer by resolution of the
Board of Directors.
Section 12. INDEMNIFICATION OF DIRECTORS, OFFICERS AND EMPLOYEES. Every
person who is or was a director, officer or employee of the Corporation, or any
other corporation which he served as such at the request of the Corporation
shall be indemnified by the Corporation against any and all liability and
reasonable expense that may be incurred by him in connection with or resulting
from any claim, action, suit or proceeding (whether brought by or in the right
of the Corporation
7
<PAGE>
or such other corporation or otherwise), civil or criminal, or in connection
with an appeal relating thereto, in which he may be involved, as a party or
otherwise, by reason of his being or having been a director, officer or employee
of the Corporation or such other corporation, or by reason of any action taken
or not taken in his capacity as such director, officer or employee, whether or
not he continues to be such at the time such liability or expense shall have
been incurred, provided such person acted, in good faith, in a manner he
reasonably believed to be in or not opposed to the best interests of the
Corporation, or such other corporation, as the case may be, and in addition, in
any criminal action or proceeding, had no reasonable cause to believe that his
conduct was unlawful. As used in this Section 12, the terms "liability" and
"expense" shall include, but shall not be limited to, counsel fees and
disbursements and amounts of judgments, fines or penalties against, and amounts
paid in settlement by, a director, officer, or employee. The termination of any
claim, action, suit or proceeding, civil or criminal, by judgement, settlement
(whether with or without court approval), conviction or upon a plea of guilty or
nolo contendere, or its equivalent, shall not create a presumption that a
director, officer or employee did not meet the standards of conduct set forth in
this Section 12.
8
<PAGE>
Expenses incurred with respect to any claim, action, suit or proceeding of
the character described in this Section 12 may be advanced by the Corporation
prior to the final disposition thereof upon receipt of an undertaking by or on
behalf of the recipient to repay such amount unless it shall ultimately be
determined that he is entitled to indemnification hereunder.
The rights of indemnification provided in this Section 12 shall be in
addition to any other rights to which any such director, officer or employee may
otherwise be entitled by contract or as a matter of law; and in the event of any
such person's death, such rights shall extend to his heirs and legal
representatives. The provisions of this Section 12 are separable, and if any
provision be held invalid, all other provisions are fully in effect and such
invalid provision shall only be curtailed to the extent necessary to make such
provision enforceable, it being the intent of this Section that the Corporation
indemnify each of the directors, officers and employees of the Corporation to
the maximum extent permitted by law.
Notwithstanding the foregoing provision of this Section, the Corporation
shall not indemnify persons seeking indemnity in connection with any threatened,
pending or completed action, suit or proceeding voluntarily brought or
threatened by such person unless such action, suit or proceeding was authorized
by a majority of the entire Board of Directors.
9
<PAGE>
ARTICLE IV. COMMITTEES
Section 1. The Board of Directors may, by resolution or resolutions passed
by a majority of the whole Board, designate one or more committees, each
committee to consist of one or more Directors of the Corporation. Each such
committee, to the extent provided in said resolution or resolutions, or in these
Bylaws, shall have and may exercise the powers of the Board in the management of
the business and affairs of the Corporation, and may authorize the seal of the
Corporation to be affixed to any an all papers that may require it. Unless the
Board of Directors shall provide otherwise, a majority of the members of any
such committee may fix the time and place of its meetings. The Board of
Directors shall have the power at any time to fill vacancies in, change the
membership of, or dissolve any such committee. Nothing herein shall be deemed to
prevent to the Board of Directors from appointing committees consisting in whole
or in part of persons who are not directors of the Corporation, provided,
however, that no such committee shall have or exercise any authority of the
Board of Directors.
Section 2. Committees shall keep regular minutes of their proceedings, and
report the same to the Board of Directors when required.
ARTICLE V. OFFICERS
Section 1. OFFICERS. The officers shall be elected at the first meeting of
the Board of Directors after each annual
10
<PAGE>
meeting of stockholders. The Directors shall elect a President, a Secretary and
a Treasurer; they may also elect a Chairman of the Board, one or more Vice
Presidents, and such Assistant Secretaries and Assistant Treasurers, as they may
deem proper. None of the officers of the Corporation, with the exception of the
Chairman of the Board and the President, need be a Director. Any one person may
hold two or more offices, except those of President and Secretary. However, any
person holding two or more offices shall not sign any instrument in the capacity
of more than one office.
The Board of Directors may appoint such other officers and agents as it may
deem advisable, who shall hold office for such terms and shall exercise such
powers an perform such duties as from time to time shall be determined by the
Board of Directors.
Section 2. CHAIRMAN OF THE BOARD. The Chairman of the Board of Directors,
if one be elected, shall preside at all meetings of the Board of Directors, and
he shall have and perform such other duties as from time to time may be assigned
to him by the Board of Directors.
Section 3. PRESIDENT. The President shall be the chief executive officer of
the Corporation, and shall have the general powers and duties of supervision and
management usually vested in the office of President of a corporation. He shall
preside at all meetings of the stockholders, if present there-
11
<PAGE>
at, and, in the absence or non-election of the Chairman of the Board, at all
meetings of the Board of Directors. He shall have general supervision, direction
and control of the business of the Corporation. Except as the Board of Directors
shall authorize the execution thereof in some other manner, he shall execute
bond, mortgages and other contracts on behalf of the Corporation, and he shall
cause the corporate seal to be affixed to any instrument requiring it, and when
so affixed, the seal shall be attested by the Secretary or the Treasurer, or an
Assistant Secretary or an Assistant Treasurer.
Section 4. VICE PRESIDENTS. Each Vice President shall have such powers and
shall perform such duties as shall be assigned to him by the Directors, and, in
the absence of the President, or in the event of his inability to act, the Vice
Presidents, in the order of their seniority, shall perform the functions of
President.
Section 5. SECRETARY. The Secretary shall give, or cause to be given,
notice of all meetings of stockholders and Directors, and all other notices
required by law or by these Bylaws, and, in case of his absence or refusal or
neglect so to do, any such notice may be given by any person thereunto directed
by the President, the Board of Directors, or the stockholders, upon whose
requisition the meeting is called as provided in these Bylaws. He shall record
all the proceedings of the meetings of the stockholders and of the Board of
12
<PAGE>
Directors in a book to be kept for that purpose, and shall perform such other
duties as may be assigned to him by the Directors of the President. He shall
have custody of the corporate seal, and shall affix the same to all instruments
requiring it, when authorized by the President or the Board of Directors, and
shall attest the same.
Section 6. TREASURER. The Treasurer shall have the custody of the Corporate
funds and securities, and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the Corporation. He shall deposit all moneys
and other valuables in the name and to the credit of the Corporation in such
depositories as may be designated by the Board of Directors.
The Treasurer shall disburse the funds of the Corporation as may be ordered
by the Board of Directors or the President, taking proper vouchers for such
disbursements. He shall render to the President and the Board of Directors, at
the regular meetings of the Board, or whenever they may request it, an
accounting of all his transactions as Treasurer, and of the financial condition
of the Corporation.
If required by the Board of Directors, the Treasurer shall give the
Corporation a bond for the faithful discharge of his duties, in such amount and
with such surety as the Board shall prescribe.
13
<PAGE>
Section 7. ASSISTANT SECRETARIES AND ASSISTANT TREASURERS. Assistant
Secretaries and Assistant Treasurers, if any, shall be elected and shall have
such powers and shall perform such duties as shall be assigned to them,
respectively, by the Board of Directors.
ARTICLE VI. RESIGNATIONS; FILLING
OF VACANCIES; INCREASE IN NUMBER
OF DIRECTORS; REMOVAL FROM OFFICE
Section 1. RESIGNATIONS. Any Director, member of a committee, or other
officer may resign at any time. Such resignation shall be made in writing, and
shall take effect at the time specified therein, and, if no time be specified,
at the time of its receipt by the President or the Secretary. The acceptance of
a resignation shall not be necessary to make it effective.
Section 2. FILLING OF VACANCIES. If the office of any officer, Director or
member of a committee becomes vacant, the remaining Directors in office,
although less than a quorum, may appoint, by a majority vote, any qualified
person to fill such vacancy, who shall hold office for the unexpired term of his
predecessor, or until his successor shall be duly chosen and shall have
qualified.
14
<PAGE>
Any vacancy occurring by reason of an increase in the number of Directors
may be filled by action of a majority of the entire Board, for the term of
office continuing only until the next election of Directors by the stockholders,
or it may be filled by the affirmative vote of the holders of a majority of the
shares then entitled to vote at an election of Directors.
Section 3. INCREASE IN NUMBER OF DIRECTORS. The number of Directors may
be increased at any time by the affirmative vote of a majority of the entire
Board, or by the affirmative vote of a majority in interest of the stockholders,
at a special meeting called for that purpose, and, by like vote, pursuant to
Section 2 above, the additional Directors may be chosen at such meeting to hold
office until the next annual election or until their successors are elected and
shall have qualified.
Section 4. REMOVAL. At a meeting of stockholders expressly called for such
purpose, any or all of the members of the Board of Directors may be removed,
with or without cause, by vote of the holders of a majority of the shares then
entitled to vote at an election of Directors, and said stockholders may elect,
at the meeting called for the purpose of removal, a successor or successors to
fill any resulting vacancies for the unexpired terms of the removed Directors.
15
<PAGE>
Any officer, agent or member of a committee, elected or appointed by the
Board of Directors, may be removed by a majority vote of the entire Board
whenever, in its judgment, the best interests of the Corporation will be served
thereby.
ARTICLE VII. CAPITAL STOCK
Section 1. CERTIFICATES OF STOCK. Certificates of stock, numbered, and
sealed with the seal of the Corporation, and signed by the Chairman of the Board
of Directors or the Vice Chairman of the Board of Directors, or the President or
a Vice President, and the Secretary or an Assistant Secretary, or the Treasurer
or an Assistant Treasurer, shall be issued to each stockholder certifying to the
number of shares owned by him in the Corporation. When such certificates are
countersigned by (1) a transfer agent other than the Corporation or its
employee, or (2) by a registrar other than the Corporation or its employee; any
other signatures on the certificates may be facsimiles.
In case any officer, transfer agent, or registrar who has signed or whose
facsimile signature has been placed upon a certificate shall have ceased to be
such officer, transfer agent or registrar before such certificate is issued, it
may be issued by the Corporation with the same effect as if he were such
officer, transfer agent or registrar at the date of issue.
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Section 2. LOST CERTIFICATES. A new certificate of stock may be issued in
place of any certificate theretofore issued by the Corporation and alleged to
have been lost or destroyed, and the Directors may, at their discretion, request
the owner of the lost or destroyed certificates, or his legal representative, to
give the Corporation a bond in such sum as they may direct, but not exceeding
double the value of the stock, to indemnify the Corporation against any claim
that may be made against it on account of the alleged loss of any such
certificate.
Section 3. TRANSFER OF SHARES. The shares of stock of the Corporation
shall be transferable on its books only by the holders thereof in person or by
their duly authorized attorneys or legal representatives, and upon such
transfer, the old certificates shall be surrendered to the Corporation by the
delivery thereof to the person in charge of the stock transfer books and
ledgers, or to any such other person as the Directors may designate, by whom
they shall be canceled, and new certificates shall thereupon be issued. A record
shall be made of each transfer, and whenever a transfer shall be made for
collateral security, and not absolutely, it shall be so expressed in the entry
of the transfer.
Section 4. DETERMINATION OF STOCKHOLDERS OF RECORD. In order that the
Corporation may determine the stockholders entitled to notice of or to vote at
any meeting of stockholders
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or any adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect to any change, conversion or exchange of stock or for the purpose of any
other lawful action, the Board of Directors may fix, in advance, a record date,
which shall be not more than sixty (60) nor less than ten (10) days prior to the
date of such meeting, nor more than sixty (60) days prior to any other action. A
determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting; provided,
however, that the Board of Directors may fix a new record date for the adjourned
meeting.
Section 5. DIVIDENDS. Subject to the provisions of the Certificate of
Incorporation and the laws of the State of Delaware, the Board of Directors, at
any regular or special meeting, may declare dividends upon the capital stock of
the Corporation, as and when they may deem expedient.
ARTICLE VIII. MISCELLANEOUS PROVISIONS
Section 1. CORPORATE SEAL. The Board of Directors shall adopt and may alter
a common seal of the Corporation. Said seal shall be circular in form and shall
contain the name of the Corporation, the year of its creation, and the words:
"CORPORATE SEAL DELAWARE". It may be used by causing it or a
18
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facsimile thereof to be impressed, affixed or otherwise reproduced.
Section 2. FISCAL YEAR. The fiscal year of the Corporation shall be the
calendar year.
Section 3. CHECKS, DRAFTS, NOTES. All checks, drafts, or other orders for
the payment of money, notes or other evidences of indebtedness issued in the
name of the Corporation, shall be signed by such officer or officers, agent or
agents of the Corporation, and in such manner as shall from time to time be
determined by resolution of the Board of Directors.
Section 4. CORPORATE RECORDS. The Corporation shall keep correct and
complete books of account and minutes of the proceedings of its stockholders and
Directors, as well as an original stock ledger or list of stockholders,
containing the names and addresses of the stockholders, the number of shares
held by them, and the date of issuance of said certificates of stock.
Any stockholder of record, in person or by attorney or other agent, upon
written demand under oath stating the purpose thereof, shall have the right,
during the usual hours for business, to inspect for any proper purpose the books
and records of the Corporation, as well as its stock ledger and/or list of
stockholders, and to make copies or extracts therefrom. Such demand under oath
shall be directed to the Corporation at its registered office in the State of
Delaware or at its principal place of business.
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<PAGE>
Section 5. NOTICE AND WAIVER OF NOTICE. Whenever, pursuant to the laws of
the State of Delaware or these Bylaws, any notice is required to be given,
personal notice is not meant unless expressly so stated, and any notice so
required shall be deemed to be sufficient if given by depositing the same in the
United States mail, postage prepaid, addressed to the person entitled thereto at
his address as it appears on the records of the Corporation, and such notice
shall be deemed to have been given on the day of such mailing. Stockholders not
entitled to vote shall not be entitled to receive notice of any meetings except
as otherwise provided by statute.
Any notice required to be given may be waived, in writing, by the person or
persons entitled to such notice, whether before or after the time stated
therein.
ARTICLE IX. AMENDMENTS
Section 1. AMENDMENTS OF BYLAWS. These Bylaws may be altered or repealed,
and Bylaws may be made at any annual meeting of stockholders, or at any special
meeting thereof, if notice of the proposed alteration or repeal, or Bylaw or
Bylaws to be made, be contained in the notice of such special meeting, by the
affirmative vote of a majority of the stock issued and outstanding and entitled
to vote thereat; or by the affirmative vote of a majority of the entire Board of
Directors, at any regular meeting of the Board, or at any special meeting
thereof if notice of the proposed alteration or repeal, or Bylaw or
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Bylaws to be made, be contained in the notice of such special meeting.
ARTICLE X
Section 1. This Corporation shall not be governed by the provisions of
Section 203 of the General Corporation Law of the State of Delaware concerning
"Business Combinations with Interested Stockholders."
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AMENDMENT TO EMPLOYMENT AGREEMENT
This Amendment dated as of March 1, 2000 amends the Employment Agreement
(the "Agreement") dated and effective as of January 5, 1998 between Zenith
National Insurance Corp. (the "Company") and John J. Tickner (the "Employee")
Whereas, the parties desire to amend the Agreement, it is therefore agreed
as follows:
1. Section 2 - TERM - is deleted and the following substituted therefore:
"2. TERM. This Agreement shall be in effect for a term commencing on
the Effective Date and expiring on March 1, 2003, and such period
shall be referred to herein as the "Term" of this Agreement, and such
Term shall not be affected by the termination of the Employee's
employment hereunder."
2. Section 3 - SALARY - is deleted and the following substituted
therefore:
"3. SALARY. Employee's minimum annual base salary shall be as
follows: $311,163, effective March 1, 2000; $349,376, effective
March 1, 2001; $387,589 effective March 1, 2002. Employee's annual
base salary shall be payable in installments in conformity with
the Company's policy relating to salaried employees. The
Employee's base salary may be subject to annual adjustment (but
not below the then current amount) in the sole discretion of the
Board.
3. Section 8(c)(i) - TERMINATION (CONSTRUCTIVE TERMINATION) - is deleted
and the following substituted therefore:
(i) Mr. Stanley R. Zax ceases to be full-time Chairman of the
Board and President of the Company and Zenith other than by
reason of death or disability or by reason of retirement on or
after December 31, 2002; provided, however, this clause (i) shall
in any event be deleted and of no further force or effect after
December 31, 2002.
<PAGE>
4. In all other respects, the Agreement remains unchanged.
In Witness Whereof, the parties have executed this Amendment as of the date
first written above.
Zenith National Insurance Corp. Employee
By: /s/ Stanley R. Zax By: /s/ John J. Tickner
---------------------------- --------------------------------
Stanley R. Zax John J. Tickner
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<PAGE>
AMENDMENT TO EMPLOYMENT AGREEMENT
This Amendment dated as of March 1, 2000 amends the Employment Agreement
(the "Agreement") dated and effective as of October 20, 1997 between Zenith
Insurance Company (the "Company") and Jack D. Miller (the "Employee").
Whereas, the parties desire to amend the Agreement, it is therefore
agreed as follows:
1. Section 2 - TERM - is deleted and the following substituted
therefore:
"2. TERM. This Agreement shall be in effect for a term commencing on
the Effective Date and expiring on October 31, 2004, and such period
shall be referred to herein as the "Term" of this Agreement, and such
Term shall not be affected by the termination of the Employee's
employment hereunder."
2. Section 3 - SALARY - is deleted and the following substituted
therefore:
"3. SALARY. Employees minimum annual base salary ("Base Salary")
shall be as follows: $453,200, effective March 1, 2000; $494,400,
effective March 1, 2001; $535,600 effective March 1, 2002; $618,000
effective March 1, 2003; and $700,400 effective March 1, 2004.
Employee's Base Salary shall be payable in installments in
conformity with the Company's policy relating to salaried employees.
The Employee's Base Salary may be subject to annual adjustment (but
not below the then current amount) in the sole discretion of the
Board.
3. In all other respects, the Agreement remains unchanged.
In Witness Whereof, the parties have executed this Amendment as of the
date first written above.
Zenith Insurance Company Employee
By: /s/ Stanley R. Zax By: /s/ Jack D. Miller
------------------------------ ------------------------------
Stanley R. Zax Jack D. Miller
<PAGE>
EXECUTION COPY
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is entered into effective as of
the 20 of October, 1997 ("Effective Date"), on this 22 day of October, 1997
between ZENITH INSURANCE COMPANY, a California corporation (the "Company")
and wholly owned subsidiary of Zenith National Insurance Corp., a Delaware
corporation ("Zenith"), and ROBERT E. MEYER (hereinafter referred to as
"Executive").
WHEREAS, Executive has substantial experience as an executive in the
field of workers compensation insurance; and
WHEREAS, Company and Executive deem it in their respective best interests
to enter into an employment relationship and to enter into this Agreement
setting forth the terms and conditions of their relationship;
NOW, THEREFORE, it is AGREED as follows:
1. EMPLOYMENT.
(a) Subject to earlier termination as provided herein, the
Executive is employed as Senior Vice and President Chief Actuary of the
workers compensation business of the Company from the Effective Date through
the Term of this Agreement
<PAGE>
(as defined below). In this capacity, Executive shall devote his full
business time and energy to the business, affairs and interests of the
Company and matters related thereto. During the Term of the Agreement the
Executive shall have no other employment other than with Zenith or a
subsidiary or an affiliate of the Company, except with the prior written
approval of the Board of Directors of the Company (the "Board"). The
Executive shall have such duties and responsibilities and such executive
power and authority as is customary for an officer in his position and as
shall be allocated to him in such capacity and such other duties and
responsibilities as the Board or the President of the Company, or the
designee of either, shall assign from time to time provided such assignments
shall not be inconsistent with the Executive's position with the Company. The
Company hereby acknowledges and agrees that the Executive shall have the
right to serve in any capacity with civic, educational, charitable and
professional organizations and to make and manage personal business
investments that do not violate the noncompetition provisions of Section 11
of this Agreement so long as such activities do not interfere with the
discharge of his duties to the Company hereunder.
(b) The Executive shall not be required to relocate outside of
Southern California in order to perform the services hereunder, without the
Executive's consent, except for travel reasonably required in the performance
of his duties hereunder. The Company shall pay reasonable expenses in
connection with Executive's relocation from Northern California to Southern
California.
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<PAGE>
2. TERM. This Agreement shall be in effect for a term commencing on the
Effective Date and expiring on October 31, 2002 ("Expiration Date"), and such
period shall be referred to herein as the "Term" of this Agreement, and such
Term shall not be affected by a termination of employment as elsewhere
provided herein.
3. SALARY. Executive shall be paid the sum of Two Hundred and Fifty
Thousand Dollars per year, subject to such other increases as the Board of
Directors of Company may from time to time determine ("Base Salary").
4. DISCRETIONARY BONUSES. During the Term of this Agreement, the
Executive shall be entitled to such discretionary bonuses as may be
authorized, declared, and paid by the Board in its sole discretion.
5. DEFERRED COMPENSATION. In advance of the annual period for which
earned, the Executive shall have the right to defer all or any portion of his
salary and bonus to a specified date or event. Any such deferred compensation
shall not be forfeitable and shall bear interest at a rate to be determined
by the Board. Any election to defer compensation shall be disregarded, and
any compensation so deferred shall be added back, in the calculation of
those of Executive's rights and benefits under this Agreement that are based
upon Executive's salary or bonus or the sum thereof.
6. PARTICIPATION IN RETIREMENT AND EXECUTIVE BENEFIT PLANS. During his
employment hereunder, the Executive shall be entitled to participate in any
plan of the
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<PAGE>
Company relating to stock options, stock purchases, pension, thrift, profit
sharing, life insurance, medical coverage, disability insurance, education,
and other retirement or employee benefits that the Company has adopted or may
adopt for the benefit of its executive employees, and the Company shall
provide the Executive with such insurance or other provisions for
indemnification, defense or hold-harmless of officers that are generally in
effect for other senior executive officers of the Company. Notwithstanding
the foregoing, nothing contained in this Agreement shall prohibit or limit
the right of the Company to discontinue, modify or amend any plan or benefit
in its absolute discretion at any time; provided, however, that any such
discontinuance, modification or amendment shall apply to employees of the
Company generally, or to a defined group of such employees and shall not apply
solely to the Executive.
7. FRINGE BENEFITS; AUTOMOBILE. In addition to the benefit plans
referred to in Section 6 hereof, the Executive shall be entitled to
participate in any other fringe benefits that are now or may be or become
applicable to the Company's executive employees, including the payment of
reasonable expenses for attending annual and periodic meetings of trade or bar
associations, and any other benefits that are commensurate with the duties and
responsibilities to be performed by the Executive under this Agreement and
reimbursement for reasonable expenses incurred in the course of his duties
hereunder in accordance with the Company's policy with respect thereto.
In addition, the Company shall provide the Executive with a monthly car
allowance in the amount of $1,300. The benefits provided under this Section
7 shall cease upon the Executive's Date of Termination (as defined below).
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<PAGE>
8. VACATION; MEMBERSHIPS. During his employment hereunder, the
Executive shall be entitled to an annual paid vacation in accordance with
the Company's standard employment practices; provided, however, Executive
shall be treated for purposes of vacation as an employee with more than 120
months of service. Upon termination of the Executive's employment for any
reason, the Executive shall be entitled to payment for any accrued but
unused vacation time based upon his then current salary. The timing of paid
vacations shall be scheduled in a reasonable manner by the Executive.
During his employment hereunder, the Executive shall be entitled to
appropriate professional association and business club memberships, including
reimbursement of payment of dues and assessments pertaining thereto.
9. TERMINATION.
(a) DISABILITY. If, as a result of the Executive's incapacity due
to physical or mental illness, injury or similar incapacity, he shall have
been absent from the full-time performance of his duties with the Company for
six months within any eighteen-month period, and have exhausted his Family
Medical Leave and its California equivalent, his employment may be terminated
by written notice (as provided below) from the Company for "Disability".
(b) CAUSE. Subject to the notice provisions set forth below, the
Company may terminate the Executive's employment for "Cause" at any time.
Termination for "Cause" shall mean termination upon (1) the Executive's
continued
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<PAGE>
willful failure to substantially perform his duties with the Company or his
other willful breach of this Agreement (other than any such failure or breach
resulting from his incapacity due to physical or mental illness, injury or
similar incapacity) after a written demand for substantial performance is
delivered to him by the President or the Board, which demand specifically
identifies the manner in which the President or the Board believes that he
has failed to substantially perform his duties, or has otherwise breached
this Agreement, (2) the Executive's conviction of a felony, (3) the
Executive's willful misconduct that is materially and demonstrably injurious
to the Company (4) the Executive's violation of Section 11 hereof; provided,
however, that the Executive shall not be terminated for "Cause" unless and
until the President or the Board has given the Executive reasonable notice of
its intended actions and the alleged events or activities giving rise thereto
and with respect to those events or activities for which a cure is possible,
a reasonable opportunity to cure such breach, and there shall have been
delivered to him a written notice from the President or a copy of a
resolution duly adopted by the Board regarding such actions.
(c) CONSTRUCTIVE TERMINATION. If at any time during the Term of
this Agreement, any of the following events shall occur, the Executive shall
be entitled to terminate his employment hereunder and be treated as if his
employment had been terminated by the Company other than for Cause:
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(i) The Executive is removed or otherwise prohibited or
restricted in the performance of his duties as set forth in Section 1
hereof, other than through fault of the Executive;
(ii) Any payment due under this Agreement shall remain unpaid
for more than 60 days, after notice of non-payment and request for
payment have been given to Company by Executive pursuant to Section 13;
(iii) A Change in Control of the Company (as defined below)
shall occur during the Term of this Agreement and, within 180 days
after the effective date of any such Change in Control, the Executive
delivers to the Company a written notice of his election to terminate
the Agreement effective as of the date set forth in such notice,
which effective date shall not be less than 30 days nor more than 90
days after the date of delivery of such written notice.
For purposes of this paragraph, a Change in Control shall mean either
(i) a merger or consolidation of the Company with or into another company in
which the Company does not survive; or (ii) an assignment of this Agreement
by the Company under the provisions of Section 12(b) hereof; or (iii) the
sale of all or substantially all of the Company's assets; or (iv) a change in
the identities of a majority of the members of the Board within a one-year
period or less; or (v) any other transaction that would
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<PAGE>
require a party or affiliated group of parties to obtain approval from or
require such transactions to be presented for approval by, the California
Insurance Commissioner (assuming there is no preemption of California
insurance laws by federal law).
(d) NOTICE OF TERMINATION. Any purported termination of the
Executive's employment by the Company or by him shall be communicated by a
written notice ("Notice of Termination") that shall indicate the specific
termination provision in this Agreement relied upon and shall set forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination of the Executive's employment under the provision so indicated.
(e) DATE OF TERMINATION, ETC. "Date of Termination" shall mean (1)
if the Executive's employment is terminated by his death, the date of his
death; (2) if the Executive's employment is terminated for Disability, thirty
days after Notice of Termination is given; (3) if the Executive's employment is
terminated for Cause, the date specified in the Notice of Termination; and
(4) if the Executive's employment is terminated for any other reason, the
date specified in the Notice of Termination.
10. COMPENSATION UPON TERMINATION OR DURING DISABILITY. The Executive
shall be entitled to the following benefits during a period of disability,
or upon termination of his employment, as the case may be, if such period or
termination occurs prior to Executive's termination:
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<PAGE>
(a) During any period that the Executive fails to perform his
full-time duties with the Company as a result of incapacity due to physical
or mental illness, injury or similar incapacity, he shall continue to
receive his compensation and other benefits payable to him under this
Agreement at the rate in effect at the commencement of any such period, less
any amounts payable to him under the Company's disability plan or program or
other similar plan during such period, or under any governmental program,
until his employment is terminated pursuant to Section 9(a) hereof. If,
during any period of disability, the Executive's employment shall be
terminated by reason of his death, disability or the expiration of this
Agreement, not withstanding the provisions of Section 20, his pay shall cease
and his benefits, if any, shall, be determined solely under the Company's
retirement, insurance and other compensation programs then in effect in
accordance with the terms of such programs, and the Company shall have no
further obligations to him under this Agreement.
(b) If at any time the Executive's employment shall be terminated
(i) by reason of his death, (ii) by the Company for Cause or Disability or
(iii) by him (other than by reason of a constructive termination pursuant to
Section 9(c) hereof), the Company shall pay him (or his appropriate payee, as
determined in accordance with Section 12(c) hereof) his full base salary
through the Date of Termination at the rate in effect at the time Notice of
Termination is given, plus all other amounts, if any, to which he is entitled
from the Company through the Date of Termination under any compensation plan
in each case at the time such payments are due, and the Company shall have no
further obligations to him under this Agreement. In addition, in the event
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<PAGE>
the Executive's employment is terminated by reason of the Executive's death
or Disability, the Executive (or his appropriate payee) shall be entitled to
receive a pro rata portion of any bonus that would otherwise have been
payable to the Executive with respect to the year in which the Executive's
employment is terminated. For purposes of this provision, if the Executive's
bonus for such year has not been determined, the Executive shall be deemed to
have been entitled to a bonus equal to the bonus paid or payable to the
Executive with respect to the immediately preceding year.
(c) If the Executive's employment should be terminated by the
Company other than for Cause or Disability or by the Executive by reason of a
constructive termination pursuant to Section 9(c) hereof, he shall be
entitled, in exchange for a release of the Company, Zenith and any
subsidiaries and affiliates of the Company and their respective officers,
directors, shareholders employees and agents, to the benefits provided below
("Severance Payments"):
(i) The Company shall pay to the Executive his full base
salary through the Date of Termination, at the rate in effect at the
time Notice of Termination is given, plus all other amounts to which
he is entitled under any compensation plan of the Company, in each
case at the time such payments are due;
(ii) The Company shall pay the Executive, at the time such
payments would have been made had the Executive's employment not
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<PAGE>
been terminated hereunder, all salary payments that would have been
payable to the Executive pursuant to this Agreement had the
Executive continued to be employed for the greater of (x) the
remaining Term of this Agreement or (y) two years (the "Severance
Period") (assuming for the purpose of such continuing payments that
the Executive's salary for each year of such period is equal to his
salary at the Date of Termination), plus any bonus that would
otherwise have been payable to the Executive with respect to the
Severance Period; provided, however, that to the extent the
Executive's bonus for any portion of such Severance Period had not
been determined, the Executive shall be deemed to have been
entitled to a bonus equal to the bonus paid or payable to the
Executive with respect to the immediately preceding year;
(iii) All stock option rights, stock appreciation rights, and
any and all other similar rights theretofore granted to the
Executive, including, but not limited to, the Executive's right to
receive cash in lieu of exercising stock options, as may be
provided in his stock option agreements, shall vest and shall then
be exercisable in full, and the Executive shall have 90 days
following his termination within which to exercise any and all such
rights and the restrictions on any and all shares of restricted stock
granted to the Executive that are outstanding on the Date of
Termination shall lapse as of the Date of Termination;
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<PAGE>
(iv) During the Severance Period the Company shall, at its
cost, arrange to provide the Executive with life, disability, dental,
accident and group health insurance benefits substantially similar to
those that he was receiving immediately prior to the Notice of
Termination plus an additional amount necessary to reimburse the
Executive for any taxes imposed solely by reason of his receipt of
such benefits following his termination of employment. Notwithstanding
the foregoing, the Company shall not provide any benefit otherwise
receivable by the Executive pursuant to this subparagraph if an
equivalent benefit is actually received by him from another employer
or source at any time during the Severance Period. Executive agrees to
report any such benefit actually received by him.
(d) The Company shall continue in effect for the benefit of the
Executive all insurance or other provisions for indemnification, defense or
hold-harmless of officers or directors of the Company that are in effect on
the date the Notice of Termination is sent to the Executive or the Company
with respect to all of his acts and omissions while an officer or director
(if applicable) as fully and completely as if such termination had not
occurred, and until the final expiration or running of all periods of
limitation against actions that may be applicable to such acts or omissions.
(e) Notwithstanding anything to the contrary in this Agreement, in
the event that Executive becomes entitled to the Severance Payments, if any
of the
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<PAGE>
Severance Payments will be subject to the tax (the "Excise Tax") imposed by
section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"),
Company shall pay to Executive an additional amount (the "Gross-Up Payment")
such that the net amount retained by the Executive, after deduction of any
Excise Tax on the Total Payments (as hereinafter defined) and any federal,
state and local income and other tax and Excise Tax upon the payment provided
for by this Paragraph 10(f), shall be equal to the Total Payments. For purposes
of determining whether any of the Total Payments will be subject to the Excise
Tax and the amount of such Excise Tax, (i) any other payments or benefits
received or to be received by Executive in connection with a Change in Control
or Executive's termination of employment (whether pursuant to the terms of this
Agreement or any other plan, arrangement or agreement with Company, any person
whose actions result in a change in control or any person affiliated with
Company or such person (which, together with Severance Payments, shall
constitute "Total Payments"), shall be treated as "parachute payments" within
the meaning of section 280G(b)(2) of the Code, and all "excess parachute
payments" within the meaning of section 280G(b)(1) shall be treated as subject
to the Excise Tax, unless in the opinion of tax counsel selected by Company's
independent auditors and acceptable to Executive, such other payments or
benefits (in whole or in part) do not constitute parachute payments, or such
excess parachute payments (in whole or in part) represent reasonable
compensation for services actually rendered within the meaning of section
280G(b)(4) of the Code in excess of the base amount, within the meaning of
section 280G(b)(3) of the Code, or are otherwise not subject to the Excise Tax,
(ii) the amount of the Total Payments which shall be treated as subject to the
Excise Tax shall be equal to the lesser
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<PAGE>
of (A) the total amount of the Total Payments or (B) the amount of excess
parachute payments within the meaning of section 280G(b)(1) (after applying
clause (i), above), and (iii) the value of any non-cash benefits or any deferred
payment or benefit shall be determined by Company's independent auditors in
accordance with the principles of sections 280G(d)(3) and (4) of the Code. For
purposes of determining the amount of the Gross-Up Payment, Executive shall be
deemed to pay federal income taxes at the highest marginal rate of federal
income taxation in the calendar year in which the Gross-Up Payment is to be made
and state and local income taxes at the highest marginal rate of taxation in the
state and locality of Executive's residence on the date of termination of
employment, net of the maximum reduction in federal income taxes which could be
obtained from deduction of such state and local taxes. In the event that the
Excise Tax is subsequently determined to be less than the amount taken into
account hereunder at the time of termination of Executive's employment,
Executive shall repay to Company, at the time that the amount of such reduction
in Excise Tax is finally determined, the portion of the Gross-Up Payment
attributable to such reduction (plus that portion of the Gross-Up Payment
attributable to the Excise Tax and federal, state and local income tax imposed
on the Gross-Up Payment being repaid by the Executive to the extent that such
repayment results in a reduction in Excise Tax and/or a federal, state or local
income tax deduction) plus interest on the amount of such repayment at the rate
provided in section 1274(b)(2)(B) of the Code. In the event that the Excise Tax
is determined to exceed the amount taken into account hereunder at the time of
the termination of Executive's employment (including by reason of any payment
the existence or amount of which cannot be determined at the time of the
Gross-Up Payment), Company shall make an
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<PAGE>
additional Gross-Up Payment in respect of such excess (plus any interest,
penalties or additions payable by the Executive with respect to such excess) at
the time that the amount of such excess is finally determined.
11. CONFIDENTIAL INFORMATION AND NON-COMPETITION
(a) During the Term of this Agreement and thereafter, the
Executive shall not, except as may be required to perform his duties hereunder
or as required by applicable law, disclose to others or use, whether directly
or indirectly, any Confidential Information regarding the Company. "Confidential
Information" shall mean information about the Company, its subsidiaries and
affiliates, and their respective clients and customers that is not available to
the general public and that was learned by the Executive in the course of his
employment by the Company, including (without limitation) any data, formulae,
information, proprietary knowledge, trade secrets and client and customer lists
and all papers, resumes, records and the documents containing such Confidential
Information. The Executive acknowledges that such Confidential Information is
specialized, unique in nature and of great value to the Company, and that such
information gives the Company a competitive advantage. Upon the termination of
his employment for any reason whatsoever, the Executive shall promptly deliver
to the Company all documents (and all copies hereof) containing any Confidential
Information.
(b) During the term of this Agreement and any period the
Executive is entitled to benefits hereunder, the Executive shall not, directly
or indirectly, without prior written consent of the Company, provide
consultative service (with or without pay)
-15-
<PAGE>
to, own, manage, operate, join, control, participate in, or be connected (as
a stockholder, partner, or otherwise) with, any business, individual,
partner, firm, corporation, or other entity that is then in competition with
the Company or any of its subsidiaries or affiliates (a "Competitor of the
Company"); provided, however, that the "beneficial ownership" by the
Executive, either individually or as a member of a "group", as such terms are
used in Rule 13d of the General Rules and Regulations under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), of not more than one
percent (1% of the voting stock of any publicly held corporation shall not be
a violation of this Agreement. It is further expressly agreed that the
Company will or would suffer irreparable injury if the Executive were to
compete with the Company or any subsidiary or affiliate of the Company in
violation of this Agreement.
(c) During the Term of this Agreement or for the period ending on the
last day of the one year period following termination of his employment, the
Executive shall not, directly or indirectly, influence or attempt to influence
customers or suppliers of the Company or any of its subsidiaries or affiliates,
to divert their business to any Competitor of the Company.
(d) Executive recognizes that he will possess confidential information
about other employees of Company relating to their education, experience,
skills, abilities, compensation and benefits, and interpersonal relationships
with customers of Company. The Executive recognizes that the information he will
possess about these other employees is not generally known, is of substantial
value to Company in
-16-
<PAGE>
developing its products and in securing and retaining customers, and will be
acquired by him because of his business position with Company. Executive agrees
that, during the Term of this Agreement and for the period ending on the last
day of the one-year period following termination of his employment, Executive
will not, directly or indirectly, solicit or recruit any employee of Company for
the purpose of being employed by his, or any business, individual, partner,
firm, corporation or other entity that is then in competition with Company
("Competitor"). The Executive further agrees that he will not convey any such
confidential information or trade secrets about other employees of Company to
anyone affiliated with him or to any Competitor.
(e) Executive further acknowledges that the remedy at law for any
breach by him of the covenants contained in this Paragraph 11 will be
inadequate and that in the event of a breach, or threatened breach, by
Executive of the covenants contained therein, Company shall be entitled to an
injunction restraining Executive from using, for his own benefit, and/or from
disclosing, in whole or in part, the list of Company's customers, and/or
Company's trade secrets or other confidential information, and/or from
rendering any services to any person, firm, corporation, association or other
entity to whom such a list, and/or such trade secrets or other confidential
information, in whole or in part, have been disclosed, or are threatened to
be disclosed and such other declaratory relief as is proper to cause
Executive to return to Company any and all memoranda, specifications,
documents and all other material relating to Company's business that he may
have under his possession or control. Nothing herein shall be construed as
prohibiting Executive from pursuing professional employment or
-17-
<PAGE>
investments utilizing his own skills and knowledge or Company from pursuing
any other remedies available to Company from such breach or threatened
breach, including the recovery of damages from Executive. The provisions of
this Paragraph 11 shall survive the expiration or termination, for any
reason, of this Agreement and of Executive's employment.
12. ASSIGNMENTS/MITIGATION
(a) This Agreement and the rights, interest and benefits hereunder are
personal to the Executive and shall not be assigned, transferred, pledged, or
hypothecated in any way by the Executive, and shall not be subject to
execution, attachment or similar process. Any attempted assignment, transfer,
pledge, or hypothecation, or the levy of any execution, attachment or similar
process thereon, shall be null and void and without effect.
(b) The Company shall have the right to assign this Agreement and to
delegate all of its rights, duties and obligations hereunder, whether in
whole or in part, to any parent, affiliate, successor, or subsidiary
organization of the Company or corporation with which the Company may merge
or consolidate or which acquires by purchase or otherwise all or
substantially all of the Company's consolidated assets, but such assignment
shall not release the Company from its obligations under this Agreement, and
in the event of any such assignment by the Company, the Executive may, at his
sole option, exercise his termination rights under the provisions of Section
9(c)(iv) of this Agreement.
-18-
<PAGE>
(c) This Agreement shall inure to the benefit of and be
enforceable by the Executive and his personal or legal representatives,
executors, administrators, successors, heirs, distributees, devisees and
legatees. If the Executive should die while any amount would still be payable
to him hereunder had he continued to live, all such amounts, unless otherwise
provided herein, shall be pain in accordance with the terms of this Agreement
to his devisee, legatee or other designee or, if there is no such designee,
to his estate.
(d) The Executive shall have no duty to mitigate the Company's
obligations hereunder by seeking other employment or by becoming
self-employed; provided, however, that compensation including life,
disability, dental, accident, group health insurance and other health and
welfare benefits as well as salary, wage or other compensation received by
the Executive during or with respect to the Severance Period and attributable
to services rendered during such period by the Executive to persons or
entities other than the Company shall be applied to reduce the Company's
obligation to provide compensation and benefits under this Agreement. The
Executive shall promptly notify the Company of his securing other employment
or his become self-employed and shall account to the Company as to the amount
of such compensation and benefits; if the Company has paid amounts in excess
of those to which the Executive was entitled (after giving effect to the
offsets provided above), the Executive shall reimburse the Company promptly
thereafter for such excess.
-19-
<PAGE>
13. NOTICE. Notices and all other communications provided for in this
Agreement shall be in writing and shall be deemed to have been duly given
when delivered or five business days after being mailed by United States
certified or registered mail, return receipt requested, postage prepaid,
addressed (a) if to the Executive, to ______________________ and (b) if to
the Company, to 21255 Califa Street, Woodland Hills, California 91367,
Attention: Stanley R. Zax, with a copy to the Secretary of the Company; or to
such other address as either party may have furnished to the other in writing
in accordance herewith, except that notice of change of address shall be
effective only upon receipt thereof.
14. SECTION HEADINGS. The Section headings used in this Agreement are
included solely for convenience and shall not affect, or be used in
connection with, the interpretation of this Agreement.
15. SEVERABILITY. Any provision of this Agreement which is deemed
invalid, illegal or unenforceable in any jurisdiction shall, as to that
jurisdiction and subject to this paragraph be ineffective to the extent of
such invalidity, illegality or unenforceability, without affecting in any way
the remaining provisions hereof in such jurisdiction or rendering that or
any other provisions of this Agreement invalid, illegal, or unenforceable in
any other jurisdiction. Moreover, if any provision should be deemed invalid,
illegal or unenforceable because its scope is considered excessive, such
provision shall be modified so that the scope of the provision is reduced
only to the minimum extent necessary to render the modified provision valid,
legal and enforceable.
-20-
<PAGE>
16. COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original but all of
which together will constitute one and the same instrument.
17. ARBITRATION. In the event there is any dispute between Executive
and Company which the parties are unable to resolve themselves, including any
dispute with regard to the application, interpretation or validity of this
Agreement or any dispute with regard to any aspect of Executive's employment
or the termination of Executive's employment, both Executive and Company
agree by entering into this Agreement that the exclusive remedy for
determining any such dispute, regardless of its nature, will be by
arbitration in accordance with the then most applicable rules of the American
Arbitration Association; provided, however, the breach of the obligation to
provide services under this Agreement or of the obligations of Paragraph 11
may be enforced by an action for injunctive relief and damages in a court of
competent jurisdiction.
In the event the parties are unable to agree upon an arbitrator, the
parties shall select a single arbitrator from a list designated by the Los
Angeles office of the American Arbitration Association of seven arbitrators
all of whom shall be retired judges who have had experience in the employment
law, who are actively involved in hearing private cases and who are resident
in the greater Los Angeles area. If the parties are unable to select an
arbitrator from the list provided by the American Arbitration Association,
then the parties shall each strike names alternatively from the list, with
the first to strike being determined by lot. After each party has used three
strikes, the
-21-
<PAGE>
remaining name on the list shall be the arbitrator. Any arbitration shall be
administered by the American Arbitration Association only if both parties so
agree.
This agreement to resolve any disputes by binding arbitration shall
extend to claims against any shareholder or partner of the Company, any
brother-sister company, parent, subsidiary or affiliate of the Company, any
officer, director, employee, or agent of the Company, or of any of the above,
and shall apply as well to claims arising out of state and federal statutes
and local ordinances as well as to claims arising under the common law. The
arbitrator shall apply the same substantive law as would be applied by a
court having jurisdiction over the parties and their dispute and the
remedial authority of the arbitrator shall be the same as, but no greater
than, would be the remedial power of a court having jurisdiction over the
parties and their dispute. The arbitrator shall, upon an appropriate motion,
dismiss any claim brought in arbitration if the arbitrator determines that
the claim does not state a claim or a cause of action which could have been
properly pursued through court litigation. In the event of a conflict between
the then most-applicable rules of the American Arbitration Association and
these procedures, the provisions of these procedures shall govern.
Each party may be represented by counsel or other representative of the
party's choice and each party shall initially be responsible for the costs
and fees of its counsel or other representative. Any filing or administrative
fees shall be borne by the party incurring such fees. The fees and costs of
the arbitrator shall be borne equally between the parties. The prevailing
party in such arbitration proceeding, as determined by the
-22-
<PAGE>
arbitrator, and in any enforcement or other court proceedings, shall be
entitled to the extent permitted by law, to reimbursement from the other
party for all of the prevailing party's costs (including but not limited to
the arbitrator's compensation), expenses and attorney's fees.
The arbitrator shall render an award and opinion in the form typical of
that rendered in labor arbitrations and the award of the arbitrator shall be
final and binding upon the parties. If any of the provisions of this
paragraph are determined to be unlawful or otherwise unenforceable, in whole
or in part, such determination shall not affect the validity of the remainder
of these provisions and this paragraph shall be reformed to the extent
necessary to insure that the resolution of all conflicts between you and the
Company including those arising out of statutory claims, shall be resolved by
neutral, binding arbitration. In the event a court finds that the arbitration
procedure set forth herein is not absolutely binding, then it is the intent
of the parties that any arbitration decision should be fully admissible in
evidence, given great weight by any finder of fact and treated as
determinative to the maximum extent permitted by law.
Unless mutually agreed by the parties otherwise, any arbitration shall
take place in Los Angeles. In the event the parties are unable to agree upon
a location for the arbitration, the location within Los Angeles shall be
determined by the arbitrator.
In the event of a good faith dispute regarding the payment of salary or
benefits under this Agreement, the Company shall make the disputed payments
to the Executive
-23-
<PAGE>
as if such dispute did not exist during the pendency of such good faith
dispute, and, following the resolution of such dispute, the Executive shall
reimburse the Company for any overpayments.
18. COMPANY PROPERTY. The Executive agrees that at the time he leaves the
employment of the Company he will deliver to the Company, and will not keep
or deliver to anyone else, all notebooks, memoranda, documents, computer
discs, and any and all other material relating to the Company's business or
constituting the Company's property, whether or not the Executive was the
author or recipient of such material.
19. MISCELLANEOUS.
(a) No provision of this Agreement may be modified, waived or
discharged unless such waiver, modification or discharge is agreed to in
writing and signed by the Executive and such officer as may be specifically
designated by the Board. No waiver by either party hereto at any time of any
breach by the other party hereto of, or compliance with, any condition or
provision of this Agreement to be performed by such other party shall be
deemed a waiver of similar or dissimilar provisions or conditions at the same
or at any prior or subsequent time.
(b) This instrument contains the entire agreement of the parties
hereto relating to the subject matter hereof and it replaces and supersedes
all prior agreements and understandings, oral and written, between parties
hereto. No agreements or representations, oral or otherwise, express or
implied, with respect to the subject matter
-24-
<PAGE>
hereof have been made by either party which are not expressly set forth in this
Agreement.
(c) The validity, interpretation, construction and performance of this
Agreement shall be governed by the laws of the State of California without
regard to its conflicts of law principles.
(d) All references to Sections of the Exchange Act or the Code shall be
deemed also to refer to any successor provisions to such Sections.
(e) Any payments provided for hereunder shall be paid net of any
applicable withholding required under federal, state or local law.
(f) The obligations created under the provisions of Sections 5, 8, 10,
11, 12, 17 and 18 shall survive the expiration, suspension or termination,
for any reason, of this Agreement or the Executive's employment hereunder
until such obligations created thereunder are fully satisfied. This
provision is not intended to create additional rights
-25-
<PAGE>
or obligations or to expand or otherwise alter rights and obligations created
by this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
ZENITH INSURANCE COMPANY
By: /s/ Stanley R. Zax, Chairman
----------------------------
STANLEY R. ZAX, Chairman
EMPLOYEE:
/s/ Robert E. Meyer
------------------------
ROBERT E. MEYER
-26-
<PAGE>
AMENDMENT TO EMPLOYMENT AGREEMENT
This Amendment dated as of March 1, 2000 amends the Employment
Agreement (the "Agreement") dated and effective as of October 20, 1997
between Zenith Insurance Company (the "Company") and Robert E. Meyer (the
"Employee").
Whereas, the parties desire to amend the Agreement, it is therefore
agreed as follows:
1. Section 2 - TERM - is deleted and the following substituted
therefore:
"2. TERM. This Agreement shall be in effect for a term
commencing on the Effective Date and expiring on October 31,
2004, and such period shall be referred to herein as the
"Term" of this Agreement, and such Term shall not be affected
by the termination of the Employee's employment hereunder."
2. Section 3 - SALARY - is deleted and the following substituted
therefore:
"3. SALARY. Employee's minimum annual base salary ("Base
Salary") shall be as follows: $283,250, effective March 1,
2000; $309,000, effective March 1, 2001; $334,750 effective
March 1, 2002; $386,250 effective March 1, 2003; and $437,750
effective March 1, 2004. Employee's Base Salary shall be
payable in installments in conformity with the Company's
policy relating to salaried employees. The Employee's Base
Salary may be subject to annual adjustment (but not below the
then current amount) in the sole discretion of the Board.
3. In all other respects, the Agreement remains unchanged.
In Witness Whereof, the parties have executed this Amendment as of
the date first written above.
Zenith Insurance Company Employee
By: /s/ Stanley R.Zax By: /s/ Robert E. Meyer
------------------ --------------------
Stanley R. Zax Robert E. Meyer
<PAGE>
EXHIBIT 10.28
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.
[Logo of INTER-OCEAN REINSURANCE COMPANY LTD.]
<PAGE>
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
- -------------------
[Logo of INTER OCEAN REINSURANCE COMPANY LTD.]
<PAGE>
TERMINATION ENDORSEMENT NO. 1
attached to and made part of the
RETROCESSIONAL AGREEMENT NO. 8DDDR01-C122
(HEREINAFTER "ENDORSEMENT")
between
AMERICAN RE-INSURANCE COMPANY,
INTER-OCEAN REINSURANCE COMPANY, LTD., AND
ZENITH INSURANCE COMPANY,
CALFARM INSURANCE COMPANY,
ZNAT INSURANCE COMPANY AND
ZENITH STAR INSURANCE COMPANY
- --------------------------------------------------------------------------------
It is noted and agreed that the Special Endorsement to the Retrocessional
Agreement No. 8DDDR01-C122 effective on August 1, 1998 is cancelled as of
December 31, 1999. This Termination Endorsement becomes effective
concurrently with the effective date of the treaty Endorsement No. 1.
Signed for and on behalf of
INTER-OCEAN REINSURANCE COMPANY LTD.
/s/ Desmond Nash
- ------------------------------------
SIGNATURE
VICE PRESIDENT 12-22-99
- ------------------------------------ -------------------------------
TITLE DATE
<PAGE>
and for and on behalf of
ZENITH INSURANCE COMPANY,
CALFARM INSURANCE COMPANY,
ZNAT INSURANCE COMPANY AND
ZENITH STAR INSURANCE COMPANY
/s/ Jack D. Miller
- ------------------------------------
Dated this 22nd day of December, 1999
<PAGE>
EXHIBIT 10.30
ENDORSEMENT NUMBER 1
Attaching to and forming part of Contract Number 8DDD999-A122
(hereinafter "Agreement")
between
ZENITH NATIONAL INSURANCE GROUP,
CALFARM INSURANCE COMPANY,
ZNAT INSURANCE COMPANY AND
ZENITH STAR INSURANCE COMPANY
and
INTER-OCEAN REINSURANCE COMPANY LTD.
--------------------------------------
It is hereby noted and agreed that effective December 31, 1999, any Letter of
Credit required under the Agreement shall be issued in a form acceptable to
the insurance regulatory authorities in the State of California, in the
United States of America and shall be governed by California law.
All other terms, clauses and conditions of the Agreement remain unchanged.
For and on behalf of
INTER-OCEAN REINSURANCE COMPANY LTD.
/s/ Desmond Nash
- -----------------------------------
Dated this 22nd day of December, 1999
<PAGE>
Signed for and on behalf of
ZENITH INSURANCE COMPANY,
CALFARM INSURANCE COMPANY,
ZNAT INSURANCE COMPANY AND
ZENITH STAR INSURANCE COMPANY
/s/ Jack D. Miller
- -----------------------------------
SIGNATURE
Executive Vice President, Chief
Operating Officer December 22, 1999
- ----------------------------------- -----------------------------------
TITLE DATE
<PAGE>
<TABLE>
<S> <C>
ANNUAL REPORT / 1999
-----------------------------------
ZENITH NATIONAL INSURANCE CORP.
----------------------------------------------------------
</TABLE>
----------------------------------------------------------
TheZenith
<PAGE>
FINANCIAL HIGHLIGHTS
-------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------
Operating Results: (Dollars in thousands, except per share data)
Revenues $492,108 $636,779 $600,480
======== ======== ========
(Loss) income after tax and before realized
gains and RISCORP-Related Adjustment (22,728) 11,559 19,669
RISCORP-Related Adjustment after tax** (32,500)
Realized gains after tax:
On investments 4,993 7,541 8,431
On sale of CalFarm Insurance Company*** 104,335
-------- -------- --------
Net income $ 54,100 $ 19,100 $ 28,100
======== ======== ========
Per Share Data:
(Loss) income after tax and before realized
gains and RISCORP-Related Adjustment $ (1.33) $ 0.67 $ 1.10
RISCORP-Related Adjustment after tax** (1.89)
Realized gains after tax:
On investments 0.29 0.44 0.47
On sale of CalFarm Insurance Company*** 6.08
-------- -------- --------
Net income $ 3.15 $ 1.11 $ 1.57
======== ======== ========
Stockholders' dividends $ 1.00 $ 1.00 $ 1.00
Key Statistics:
Combined ratio:
Including catastrophes and RISCORP-Related
Adjustment 135.2% 105.3% 103.4%
Excluding RISCORP-Related Adjustment 122.0% 105.3% 103.4%
Excluding catastrophes and RISCORP-Related
Adjustment 116.8% 103.1% 103.1%
Stockholders' equity $354,559 $346,952 $361,866
Stockholders' equity per share* 20.67 20.23 20.31
Closing common stock price 20 5/8 23 1/8 25 3/4
- --------------------------------------------------------------------------------------------------
</TABLE>
* Excluding the effect of Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities,"
stockholders' equity per share was $21.80, $19.86 and $20.03 in 1999, 1998 and
1997, respectively. See Note 1 to the consolidated financial statements on
pages 48-49.
** Results of operations for the year ended December 31, 1999 include
$50.0 million before tax ($32.5 million after tax, or
$1.89 per share) of net charges in the third quarter associated with an
increase in the net liabilities for unpaid losses and loss adjustment expenses
in the Southeast Operations, which principally consists of the operations
acquired from RISCORP (the "RISCORP-Related Adjustment").
*** Zenith completed the sale of CalFarm Insurance Company to Nationwide Mutual
Insurance Company effective March 31, 1999 resulting in a gain of
$104.3 million after tax, or $6.08 per share, in the first quarter of 1999.
TheZenith
1
<PAGE>
CONTENTS
- ---------------
<TABLE>
<S> <C> <C>
Financial Highlights 1
Letter to Stockholders 3
Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations 24
5-Year Summary of Selected Financial Information 38
Property-Casualty Loss Development 40
Consolidated Balance Sheet 42
Consolidated Statement of Operations 44
Consolidated Statement of Cash Flows 45
Consolidated Statement of Stockholders' Equity 46
Notes to Consolidated Financial Statements 48
Report of Independent Accountants 66
Corporate Directory
Zenith National Insurance Corp. 67
Zenith Insurance Company 68
Perma-Bilt, a Nevada Corporation 69
</TABLE>
TheZenith
2
<PAGE>
TO OUR STOCKHOLDERS
-------------------------------------
The beginning of a new century is a good time to look back at what we have
accomplished and to focus on the future.
Current management assumed leadership of Zenith Insurance Company in 1977
when the company was exclusively in the California Workers' Compensation
market. Today, two decades later, we sell Workers' Compensation insurance in
40 states, participate in the worldwide reinsurance business, and operate a
homebuilding operation in Las Vegas, Nevada. Other insurance operations during
this period were the purchase of CalFarm Life and CalFarm Insurance in 1985,
which we sold in 1995 and 1999, respectively, at a substantial profit.
Financial comparisons from 1977 to 1999 are summarized as follows:
<TABLE>
- ---------------------------------------------------------------------------------
1977 1999
- ---------------------------------------------------------------------------------
<S> <C> <C>
(Dollars in
thousands)
Revenues $68,143 $492,108
Net income 4,990 54,100
Stockholders' equity 12,663 354,559
Stockholders' equity per share 1.28 20.67
- ---------------------------------------------------------------------------------
</TABLE>
During the 23-year period, our combined ratio has averaged 102.2% and
stockholder equity per share has grown at a rate of 17.7% including dividends
paid to our common shareholders of $284.2 million. We have repurchased 8,007,000
shares of our common stock at a cost of $150.7 million, or an average of
$18.82 per share. At the end of the 20th century, we are in excellent financial
condition with $96.0 million of cash equivalents on hand in the holding company.
TheZenith
3
<PAGE>
DURING THE PAST 23 YEARS, OUR COMBINED RATIO HAS
- --------------------------------------------------------------------------------
AVERAGED 102.2% COMPARED TO 107.1% FOR THE INDUSTRY.
- --------------------------------------------------------------------------------
Historic accomplishments notwithstanding, our investors and management are
unsatisfied with TheZenith's current operating results, however all recognize a
risk business does not always deliver short-term results consistent with
long-term goals in a timely fashion. Current operations are losing money, with
Zenith common stock selling below book value. This report will discuss the
changing marketplace, and our strategies to improve our results while
continuing to add value for long-term investors.
Summary of Financial Highlights:
Premiums declined 30.3% to $369.4 million.
Operating losses after tax and before net realized gains and the
RISCORP-Related Adjustment were $22.7 million, or $1.33 per share, in 1999
compared to income of $11.6 million, or $0.67 per share, in 1998.
Investment income after tax was $35.6 million, or $2.07 per share, in 1999
compared to $35.9 million, or $2.09 per share, in 1998.
The RISCORP-Related Adjustment, which represents net charges in 1999
associated with an increase in net liabilities in the operations acquired from
RISCORP, was a loss of $32.5 million after tax, or $1.89 per share. The
adjustment was principally due to a difference of opinion between our experts
and the expert who determined the final purchase price. (See RISCORP-Related
Adjustment on page 18).
Realized capital gains on investments after tax were $5.0 million, or $0.29 per
share, compared to $7.5 million, or $0.44 per share, in 1998. The gain on the
sale of CalFarm Insurance after tax was $104.3 million, or $6.08 per share.
Unrealized losses on fixed maturities and equity securities recorded as a
reduction of
TheZenith
4
<PAGE>
STOCKHOLDERS' EQUITY PER SHARE
--------------------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
'95 $18.58
'96 $19.17
'97 $20.31
'98 $20.23
</TABLE>
<TABLE>
<S> <C>
'99 $20.67
</TABLE>
stockholder's equity after tax were $20.0 million, compared to $9.6 million of
unrealized gains in 1998.
Net income was a record $54.1 million, or $3.15 per share, compared to
$19.1 million, or $1.11 per share, in 1998.
The combined ratio for the property casualty operations was 122.0% for 1999,
excluding the RISCORP-Related Adjustment, compared to 105.3% in 1998.
Stockholders' equity per share at December 31, 1999 was $20.67, compared to
$20.23 at December 31, 1998. At December 31, 1999, book value was reduced by
$19.3 million, or $1.13 per share, of unrealized losses on fixed maturity
investments (we can hold the bonds to maturity) and will be increased by
$15.0 million, or $0.87 per share, of reinsurance recoverable in the next
approximately four years.
In summary, we are financially strong, but currently operating
unprofitably. Charles Dickens in "A Tale of Two Cities" expressed it well: "It
was the best of times, it was the worst of times, it was the age of wisdom, it
was the age of foolishness..." Our mission for the new century is to leverage
our wisdom and financial strength, and continue to build long-term shareholder
value.
Analysis
Net income was a record $54.1 million, or $3.15 per share, in 1999
despite the poorest operating results in our history.
Operating results consisting of investment income and insurance underwriting
results combined after tax and excluding the RISCORP-Related Adjustment were a
loss of $17.1 million, or $0.99 per share, in 1999, compared to a profit of
$17.2 million, or $1.00 per share, the prior year.
TheZenith
5
<PAGE>
OUR STOCKHOLDERS' EQUITY PER SHARE HAS INCREASED
- --------------------------------------------------------------------------------
FROM $1.28 TO $20.67 PER SHARE DURING THE PAST 23 YEARS,
- --------------------------------------------------------------------------------
A GROWTH RATE OF 17.7% INCLUDING DIVIDENDS.
- -----------------------------------------------------------------------
The following table summarizes pre-tax underwriting performance during the
past three years.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Underwriting Results 1997 1998 1999
- --------------------------------------------------------------------------------------------------
(Dollars in thousands)
Workers' Compensation $(37,157) $(42,638) $ (72,543)
RISCORP-Related Adjustment (50,000)
Other Property-Casualty 6,509 4,410 (22)
Reinsurance 14,189 10,268 (7,324)
- --------------------------------------------------------------------------------------------------
Underwriting loss $(16,459) $(27,960) $(129,889)
- --------------------------------------------------------------------------------------------------
</TABLE>
The 1999 results were significantly below our goals, due primarily to
continuing substantial underwriting losses in the Workers' Compensation
operations, and Reinsurance losses due to a number of large non-U.S.
catastrophes. Industry results were also poor in these lines of business.
The combined ratio for the Workers' Compensation operations, excluding the
RISCORP-Related Adjustment, was composed of a 67.0% accident year loss ratio,
and a 59.6% loss adjustment and underwriting expense ratio. Of note,
$27.7 million of the total underwriting loss excluding the RISCORP-Related
Adjustment was
TheZenith
6
<PAGE>
STOCK PRICES
----------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C> <C> <C> <C> <C>
'95 '96 '97 '98 '99
First Qtr. High 22 3/4 24 7/8 27 7/8 29 1/16 26
First Qtr. Low 19 3/8 21 1/8 25 7/8 24 1/2 20 5/16
Second Qtr. High 22 28 7/8 27 1/2 30 1/2 26 11/16
Second Qtr. Low 20 23 7/8 24 5/8 28 22 1/4
Third Qtr. High 24 1/4 28 1/2 28 5/8 28 1/2 26
Third Qtr. Low 20 26 1/4 26 5/16 23 9/16 21 1/8
Fourth Qtr. High 24 5/8 28 28 3/4 25 7/8 22 13/16
Fourth Qtr. Low 20 25 1/4 25 7/16 22 7/8 19 1/4
</TABLE>
<TABLE>
<S> <C>
'95 24 5/8
'96 28 7/8
'97 28 3/4
'98 30 1/2
'99 26 11/16
</TABLE>
related to the operating results in the Southeast region, which mainly
comprises the business acquired from RISCORP. Since the beginning of
California's open-rating in 1995, our California loss ratio has averaged 64.0%,
compared to 84.2% for California industry. Our 20.2-point advantage is
consistent with TheZenith's comparative results prior to open rating and
demonstrates the discipline of our pricing and underwriting strategy during a
period of significant market turmoil.
Continuing expansion of our national operations resulted in California and
Florida premiums being 71.9% of our total Workers' Compensation business.
Despite increasing competition and inadequate pricing in many states, we
expanded and built important relationships at a reasonable cost. Our 1999
accident year loss ratio was 67.0%, excluding the RISCORP-Related Adjustment,
compared to 63.6% the prior year. These are excellent results considering the
market conditions. Our high expense ratio of 59.6% for 1999 reflects volume
reductions due to the competitive climate, costs for Year 2000 compliance and
other RISCORP Acquisition and integration expenses. Also we kept our services
fully operational while we awaited the anticipated turn in market conditions.
Our Reinsurance operations were impacted by hurricane losses in the
Carribean, earthquakes in Turkey and Taiwan, and French windstorm losses on
December 26, 27 and 28, 1999.
TheZenith
7
<PAGE>
AT THE END OF THE 20TH CENTURY, WE ARE IN EXCELLENT
- --------------------------------------------------------------------------------
FINANCIAL CONDITION WITH $96.0 MILLION OF CASH
- -----------------------------------------------------------------------------
EQUIVALENTS IN THE HOLDING COMPANY.
- -------------------------------------------------------------
During the five years ended 1999, our average combined ratio for all
operations excluding the RISCORP-Related Adjustment was 106.7% (as evidenced in
the following table), compared to the industry average of 105.4%. Our average
combined ratio for all operations for the past 10 years excluding the RISCORP-
Related Adjustment was 103.7%.
<TABLE>
<S> <C> <C>
- ---------------------------
Zenith Combined Ratios
Versus Industry
- ---------------------------
Year Zenith Industry*
- ---------------------------
1995 103.1% 106.4%
1996 99.8 105.8
1997 103.4 101.6
1998 105.3 105.6
1999 122.0 107.5**
Average 106.7% 105.4%
- ---------------------------
*Source: A.M. Best
Company **Estimated
</TABLE>
The above table shows a deteriorating combined ratio over the past five years
due primarily to unprecedented poor Workers' Compensation industry results and
1999 reinsurance losses.
Investment income after tax decreased slightly to $35.6 million, or $2.07 per
share, in 1999 from $35.9 million, or $2.09 per share, in 1998.
Net income in 1999 was $54.1 million, or $3.15 per share, compared to
$19.1 million, or $1.11 per share, in 1998. Net income in 1999 included capital
gains on investments after tax of $5.0 million, or $0.29 per share, compared to
capital gains on investments of $7.5 million, or $0.44 per share, for the prior
year. Also, the gain on the sale of CalFarm Insurance of $104.3 million, or
$6.08 per share, was recorded in 1999 net income.
TheZenith
8
<PAGE>
INVESTMENT INCOME AFTER TAX PER SHARE
----------------------------------------------------------------------
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
'95 $1.67
'96 $1.92
'97 $1.94
'98 $2.09
'99 $2.07
</TABLE>
Stockholders' equity at December 31, 1999 was a record $354.6 million,
compared to $347.0 million at December 31, 1998. The increase was primarily due
to the gain on the sale of CalFarm Insurance reduced by unrealized losses (due
to market declines in the fixed maturity portion of our investment portfolio)
and our operating losses.
Cash used in operating activities was $51.6 million in 1999 compared to
$47.1 million in 1998; this was due primarily to payment of claim liabilities
acquired from the former RISCORP operations and declining new business.
We repurchased 186,000 shares of Zenith common stock during 1999, leaving
authority to purchase an additional 940,000 shares. Since 1987, we have
repurchased 8,007,000 shares, or an estimated 38.1% of the total shares then
issued for an aggregate cost of $150.7 million, or an average of $18.82 per
share. Share repurchases have been accomplished patiently and without
jeopardizing our various high-quality ratings.
At December 31, 1999, Zenith had long-term debt of $74.7 million compared to
$74.6 million at December 31, 1998, with a total debt-to-equity position of
21.1% compared to 21.3% at December 31, 1998. Also outstanding was
$75.0 million of 8.55% Capital Trust Securities issued in July 1998, maturing
in 29 years. Zenith had $70.0 million of bank lines of credit available and
$96.0 million of cash equivalents.
Zenith's subsidiaries are rated A+ (superior) by A.M. Best Company. Moody's
Investors Service has assigned an insurance financial strength rating of Baa1
(adequate) to the insurance operations. Standard & Poor's has assigned an
insurer financial strength rating to the insurance operations of A (strong).
TheZenith
9
<PAGE>
STOCKHOLDERS' EQUITY PER SHARE AT DECEMBER 31, 1999
- --------------------------------------------------------------------------------
WAS $20.67, COMPARED TO $20.23 AT DECEMBER 31, 1998.
- -------------------------------------------------------------------------------
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 our reserve estimates as well as providing a guide to
the setting of fair prices and rates. The increase in estimated incurred losses
between 1997 and 1998 is mainly attributable to the business acquired from
RISCORP and the increase from 1998 to 1999 is mainly attributable to the
reserve increase that was part of the RISCORP-Related Adjustment.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Accident Year Reserve Development From Operations
- -----------------------------------------------------------------------------------------------------------------------
Net incurred losses and loss adjustment expenses reported at end of year
- -----------------------------------------------------------------------------------------------------------------------
Years in which losses were incurred 1994 1995 1996 1997 1998 1999
- -----------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Prior to 1994 $1,876,649 $1,865,388 $1,862,648 $1,855,543 $2,256,746 $2,256,637
1994 170,999 177,819 169,222 168,016 345,006 348,121
Cumulative 2,047,648 2,043,207 2,031,870 2,023,559 2,601,752 2,604,758
1995 180,170 187,517 196,335 341,708 351,292
Cumulative 2,223,377 2,219,387 2,219,894 2,943,460 2,956,050
1996 181,844 238,635 429,335 443,443
Cumulative 2,401,231 2,458,529 3,372,795 3,399,493
1997 204,502 333,818 339,907
Cumulative 2,663,031 3,706,613 3,739,400
1998 258,000 271,317
Cumulative 3,964,613 4,010,717
1999 278,054
Ratios:
1994 66.92% 69.59% 66.22% 65.75% 65.95% 66.55%
1995 73.12% 76.10% 79.68% 73.11% 75.16%
1996 73.36% 79.35% 80.08% 82.71%
1997 75.04% 72.56% 73.88%
1998 74.76% 78.62%
1999 86.91%
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
- -This analysis displays the accident year net incurred losses and loss adjustment expenses development on a statutory
basis for accident years 1994-1999 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.
- -The data prior to 1999 has been restated to exclude the results of CalFarm Insurance Company, which was sold effective
March 31, 1999.
</TABLE>
TheZenith
10
<PAGE>
OUR MISSION FOR THE NEW CENTURY IS TO APPLY
- --------------------------------------------------------------------------------
OUR PROVEN EXPERTISE AND FINANCIAL STRENGTH
- --------------------------------------------------------------------------------
TO BUILD LONG-TERM SHAREHOLDER VALUE.
- -----------------------------------------------------------------------
Investments
Investment activities are a major part of our revenues and earnings; we
believe our portfolio is 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.
Consolidated investment income after tax and after interest expense was
$30.3 million, or $1.76 per share, in 1999, compared to $32.1 million, or
$1.87 per share, in 1998. Average yields on this portfolio in 1999 were 5.5%
before tax and 3.7% after tax, respectively, compared to 5.7% and 3.8%
respectively, in 1998.
During 1999, we recorded net realized capital gains before tax from our
investment portfolio of $7.7 million, compared to $11.6 million the prior year.
Pre-tax income during 1999 from our real estate activities was $3.6 million
compared to $1.4 million the prior year.
Unrealized losses in our portfolio of fixed maturity investments were
$30.1 million before tax in 1999, compared to gains of $11.5 million before
tax the prior year.
Our investment portfolio is recorded in the financial statements primarily at
market value. Average life of the bond portfolio was 6.2 years at December 31,
1999, compared to 5.7 years at December 31, 1998. Our portfolio quality is high
with 95% and 96% rated investment grade at December 31, 1999 and 1998,
respectively.
TheZenith
11
<PAGE>
SINCE THE BEGINNING OF CALIFORNIA OPEN-RATING IN
- --------------------------------------------------------------------------------
1995, OUR CALIFORNIA LOSS RATIO HAS AVERAGED 64.0%
- --------------------------------------------------------------------------------
COMPARED TO 84.2% FOR THE CALIFORNIA INDUSTRY.
- --------------------------------------------------------------------------------
The major developments in the U.S. bond markets were continued low inflation
and increased interest rates with 30-year Treasury Bonds declining in market
value by about 15%. In comparison, our portfolio of fixed maturities excluding
short-terms declined in value by about 5%. Since we are capable of holding these
investments to maturity and the average maturities are relatively short,
fluctuations in bond values do not significantly impact our operations.
Short-term investments remained high as we search for intelligent investment
opportunities. At the very least, new note or bond investments will provide
increased yields compared to those available a year ago.
<TABLE>
<S> <C> <C> <C> <C>
Securities Portfolio At December 31, 1998 At December 31, 1999
--------------------------------------------------------
Amortized Cost* Market Value Amortized Cost* Market Value
--------------------------------------------------------
(Dollars in thousands)
Short-term investments $187,123 $187,123 $179,748 $179,748
U.S. Government Bonds 180,064 181,466 218,158 215,936
Taxable Bonds:
Investment grade 537,176 546,448 411,674 389,512
Non-investment grade 29,255 29,735 40,944 36,711
Redeemable preferred stocks 14,045 14,347 13,879 12,402
Other preferred stocks 24,293 24,674 11,099 9,825
Common stocks 22,402 26,935 25,428 25,634
- ----------------------------------------------------------------------------------------------------
* Equity securities at cost
</TABLE>
TheZenith
12
<PAGE>
CONTINUING EXPANSION OF OUR NATIONAL OPERATIONS
- --------------------------------------------------------------------------------
RESULTED IN CALIFORNIA AND FLORIDA PREMIUMS BEING
- --------------------------------------------------------------------------------
71.9% OF OUR TOTAL WORKERS' COMPENSATION BUSINESS.
- --------------------------------------------------------------------------------
In 1993, we started a home-building operation in order to participate in the
growth of the Las Vegas, Nevada housing market. During 1999, we closed and
delivered 366 homes at an average selling price of $158,000, compared to 275
homes at an average selling price of $137,000 the prior year. Sales of
$58.7 million and $3.6 million of pre-tax income were recorded during 1999,
compared to sales of $37.7 million and $1.4 million of pre-tax income the
previous year. Land presently owned at a cost of $29.7 million will support the
construction of an estimated 1,025 homes over the next several years and
potentially commercial and/or apartment development. Changes in interest rates
or other factors could affect future home sales (we have not seen any impact so
far), but we believe 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.
Insurance Operations
During 1999 we concluded the sale of CalFarm Insurance, which we owned
since 1985. This business provided excellent results over a long period, however
the price we were offered was extremely attractive and motivated our decision to
sell. As previously mentioned, we reported a gain of $104.3 million after tax
and dividended $100.0 million to the holding company with the prior approval of
the Insurance Commissioner of California. As a result, we have significantly
improved our financial strength and refocused our emphasis on our Workers'
Compensation and Reinsurance operations. Absent CalFarm, we are less
diversified, however we can obtain diversification by investing in high quality
insurance equities, if we
TheZenith
13
<PAGE>
ZENITH PRIMARILY INVESTS IN DEBT SECURITIES
- ------------------------------------------------------------------------------
AS COMPARED TO EQUITIES AND OUR LARGEST
- --------------------------------------------------------------------------
HOLDINGS ARE U.S. GOVERNMENT SECURITIES.
- --------------------------------------------------------------------------
choose. Furthermore, we benefit from less insurance exposure at possibly
inadequate rates and no exposure to reserve deficiencies, if any.
With respect to our insurance operations, we recognize we are in the risk
business competing against larger companies with significant amounts of capital.
We do not write business with a view of distributing the risk to others, rather
we are disciplined underwriters and purchase reinsurance in the traditional
sense to protect against large losses. Our objective is to make underwriting
profits by delivering quality services at fair prices.
Workers' Compensation
TheZenith is a specialty insurer with primary operations in California,
Florida, Texas and 37 other states. Premiums written in 1999 were
$268.7 million, about the same as the prior year. Underwriting losses,
excluding the RISCORP-Related Adjustment, were $72.5 million in 1999 and
$42.6 million in 1998. At year-end, there were 33,000 policies in force.
During the last several years, our underwriting results have been
significantly below our 23-year combined ratio of 104.3% (excluding the
RISCORP-Related Adjustment). Specifically, our combined ratio for the last
three years has averaged 119.2% (excluding the RISCORP-Related Adjustment).
Although better than the industry in the areas where we compete, we are
committed to substantially improving our results.
The primary factors leading to our operating performance are:
1. Intense rate and price competition affecting our volume.
2. Additional expenses and investment to upgrade our computer systems and
address the Year 2000 challenge.
TheZenith
14
<PAGE>
IN 1999 WE CONCLUDED THE SALE OF CALFARM INSURANCE
- --------------------------------------------------------------------------------
AND REPORTED A GAIN OF $104.3 MILLION AFTER TAX.
- -------------------------------------------------------------------------------
3. Costs incurred in connection with the RISCORP Acquisition, including
costs to upgrade the quality of their operations, recruit and train new
claims personnel and integrate operations with TheZenith.
4. Unsatisfactory underwriting results of inforce business outside of
Florida acquired as a part of the former RISCORP operations.
5. Increases in expenses to adjust claims due to inflationary changes in
many Workers' Compensation jurisdictions.
6. Higher average costs per claim, including increases in health care
expense.
7. Creative reinsurance supporting competitors' low-ball pricing strategies.
Our prediction last year of the short-term consequences of creative
reinsurance has turned out to be correct. Although we are not familiar with the
details, it appears all participants will pay a price in dollars or stock price
reductions and a decline in underwriting discipline from participation in these
transactions. Litigation, arbitration and amounts involved are unprecedented
and whether all of the disputes are resolved promptly or not, the important
point is premiums are no longer ceded to these plans or any others at perceived
losses. In other words, underwriting losses or artificially low selling prices
of competitors are not being subsidized by others. As a result, competitors,
particularly in California, are raising rates, sometimes significantly, to
restore profitability on an accident year net basis. Even though TheZenith did
not purchase this type of reinsurance, we also suffered from predatory pricing
resulting in our prices being undercut and customers shopping elsewhere.
However, we maintained our financial strength and intellectual capability by
continuing to operate in a consistent and professional manner, which will serve
us well in the long-term. With respect to our own
TheZenith
15
<PAGE>
OUR OBJECTIVE IS TO MAKE UNDERWRITING PROFITS
- --------------------------------------------------------------------------------
BY DELIVERING QUALITY SERVICES AT FAIR PRICES.
- --------------------------------------------------------------------------------
reinsurance, we have excellent, long-standing relationships with many reinsurers
where we purchase coverage to protect against losses in excess of $550,000 up to
$100,000,000.
Despite continued declines in loss claim frequency, average Workers'
Compensation claim costs continue to increase. California and U.S. results
indicate combined ratios in the 150% and 125% ranges, respectively. As a
result, we are modestly raising our rates (8% in California and differing
amounts in other states) as we endeavor to maintain a responsible market and to
continue charging the proper premium for the risk insured. In addition to rate
changes, changes in experience modification factors, credits for excellent loss
results and changes in wages, all will impact new and renewal selling prices,
account by account. Obviously, accounts with unsatisfactory experience will
receive higher than average increases. Many of our competitors will adjust
prices and underwriting more significantly than TheZenith in order to restore
financial strength. There is evidence these changes have begun (large price
increases and refusals to write particular types of businesses in certain
geographic areas), and we expect these changes will gain momentum, allowing
TheZenith to write more business at the proper prices.
We are positioned to service new and existing customers responsibly while
delivering quality services. With our concentration on California, Florida and
Texas, we will participate in three of the states with the greatest projected
job growth in the U.S.
Of interest, we have received more business submissions and written more new
policies in January, 2000 than in the prior several years; tangible evidence of
TheZenith
16
<PAGE>
WE ARE MODESTLY RAISING OUR RATES TO MAINTAIN
- --------------------------------------------------------------------------------
A RESPONSIBLE MARKET AND TO CONTINUE CHARGING
- --------------------------------------------------------------------------------
FAIR AND PROPER PREMIUMS FOR THE RISK INSURED.
- --------------------------------------------------------------------------------
changing market conditions. Further indication: we are renewing a large
percentage of our maturing policies at average increases of 18% in California.
Recently, one of the largest Workers' Compensation insurers in California was
taken over by the California Insurance Commissioner. Improvement to TheZenith's
combined ratio will be a result of more total business, modest rate adjustments
already implemented, and continued control of expenses.
Quality services that reduce loss ratios and ultimately the long-term cost of
insurance for our policyholders are our hallmark. Value-added services consist
of expert Claims, Medical and Disability Management; Special Investigation Unit
and Legal Services; and Premium Audit for the proper classifications of
payrolls. All of which function on a partnership basis with the employer. For
example, returning an injured employee to transitional duty during recovery,
which improves morale and productivity while containing costs. Protection of
Zenith's capital is another dimension of the partnership.
With respect to the RISCORP Acquisition, we have made progress in improving
management, underwriting and quality of service to customers and reducing
expenses. The Southeast operations continue with favorable loss ratios and there
are indications of additional business development opportunity, despite
aggressive competition in the region.
Politically, there were not many significant changes affecting our
operations. In California, a major benefit increase bill was vetoed by the
Governor and it is likely any changes to be enacted will be modest and fair to
all parties concerned. Although this outcome was contrary to the conventional
political wisdom of a year ago, we believe the result will aid in growing the
California economy. Certain
TheZenith
17
<PAGE>
MANY OF OUR COMPETITORS WILL ADJUST PRICES AND
- --------------------------------------------------------------------------------
UNDERWRITING MORE SIGNIFICANTLY THAN THEZENITH
- --------------------------------------------------------------------------------
IN ORDER TO RESTORE FINANCIAL STRENGTH.
- -------------------------------------------------------------------------
desirable system reforms were contained in the bill, such as management for the
Workers' Compensation Appeals Board and modification of the treating physician
presumption; these reforms are essential to speeding up benefit payments and
improving equity for all concerned. Additional reforms may be desired by
employers or insurers, but they may not be obtainable without massive benefit
increases which are politically unacceptable.
In California, litigation for third party bad faith was restored, excluding
Workers' Compensation. Interestingly, a major initiative referendum will be
voted on March 7, 2000 to determine whether this legislation becomes effective.
The initiative is a well-funded campaign primarily between lawyers and auto
insurers. Depending on the outcome, the politics of future insurance issues may
be affected, including Workers' Compensation matters.
RISCORP-Related Adjustment
As we announced during the year, after receiving the report from the
Neutral Auditor and Neutral Actuary who determined the RISCORP purchase price,
we reviewed this result with three independent actuaries. The result of this
review indicated a pre-tax charge of $50.0 million was necessary and
appropriate to properly record the liabilities for losses and loss adjustment
expenses acquired from RISCORP. We, of course, are disappointed that the
Neutral Auditor and Neutral Actuary opinion proved materially wrong in such a
short period of time, but we are hopeful the current estimates prove realistic
in the years ahead. In this connection, a $34.0 million benefit of the
reinsurance purchased has been recorded including a deferred benefit of
$23.0 million before tax that will be recognized over the next approximately
four years.
TheZenith
18
<PAGE>
CALIFORNIA, FLORIDA AND TEXAS ARE THREE STATES WITH
- --------------------------------------------------------------------------------
THE GREATEST PROJECTED JOB GROWTH IN THE U.S. AND
- --------------------------------------------------------------------------------
WHERE ZENITH INSURANCE HAS SIZEABLE OPERATIONS.
- --------------------------------------------------------------------------------
Accident Year Loss Ratios
The following is a four-year comparison of our current estimates of our
Workers' Compensation accident year loss ratios, excluding the RISCORP-Related
Adjustment:
<TABLE>
- -----------------------------------------------------------------------------------------------
1996 1997 1998 1999
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
California 61.4% 63.0% 65.0% 68.9%
Southeast states (Florida and others) 53.0 63.4 63.5
Texas and states other than Southeast 46.6 48.9 60.7 71.8
- -----------------------------------------------------------------------------------------------
Accident year loss ratios 57.1 57.3 63.6 67.0
- -----------------------------------------------------------------------------------------------
</TABLE>
As is apparent from the table, our loss ratios have been increasing, but
they are still excellent results, considering market conditions.
Reinsurance
For the past 14 years, Zenith Insurance has been selectively underwriting
assumed treaty and facultative reinsurance. Reinsurance represents 10.0% of our
property-casualty volume, while reinsurance reserves represent 14.6% of our
total property-casualty reserves.
During 1999, the net written premium of this operation was $35.9 million
compared to $29.9 million in 1998. Earned premium was $36.4 million compared to
$29.2 million in 1998. Underwriting losses of $7.3 million were recorded in
1999, resulting in a combined ratio of 120.1% compared to underwriting profits
of $10.3 million and a combined ratio of 64.8% the prior year. Since the
inception of this operation in 1985, the combined ratio has averaged 94.3%.
During 1998
TheZenith
19
<PAGE>
WITH RESPECT TO THE RISCORP ACQUISITION, WE HAVE
- --------------------------------------------------------------------------------
MADE PROGRESS IN IMPROVING MANAGEMENT, UNDERWRITING,
- --------------------------------------------------------------------------------
QUALITY CUSTOMER SERVICES AND EXPENSE REDUCTION.
- --------------------------------------------------------------------------------
and 1999, 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 business. At the end of each reporting
period, income is recognized without reserves being established if no major
catastrophe has occurred. In our other businesses, reserves are mandated based
upon actual events as well as expected loss patterns. As a result, there may be
large fluctuations (positive or negative) in underwriting results for the
property catastrophe reinsurance business in the short-term since only actual
events are considered. The major event in 1998 was Hurricane Georges where we
have estimated our pre-tax loss to date at $10.2 million, of which
$5.7 million was incurred in 1999. In 1999, the largest storm impacts were
Oklahoma tornadoes, Typhoon Bart in Japan, and French windstorm losses on
December 26, 27 and 28, 1999. We expect gradual premium increases and more
favorable terms to result from these losses, particularly in the retrocession
market where we are active.
Information Technology
So far we have not experienced major difficulty from Y2K. We spent a lot
of time and money on planning, testing and remediating our systems in order to
achieve this objective at an estimated a total cost of $11.1 million, of which
$5.9 million was expended in 1999. Contrary to certain published reports
relating to industry in general we had no reasonable alternative to undertaking
this effort.
TheZenith's information technology challenges relate to two areas: expanding
our internet, extranet and intranet capabilities; and further integration of our
TheZenith
20
<PAGE>
IN JANUARY 2000 ZENITH INSURANCE HAS RECEIVED
- --------------------------------------------------------------------------------
MORE BUSINESS SUBMISSIONS AND WRITTEN MORE
- --------------------------------------------------------------------------------
NEW POLICIES THAN IN THE PRIOR SEVERAL YEARS.
- --------------------------------------------------------------------------------
business platforms on a national basis. Since we are in the planning stages for
these initiatives, we are unable to estimate the cost or time requirements.
However, we will proceed intelligently and incrementally to make sure we are
competitive and are able to improve our productivity. Internet distribution of
Workers' Compensation policies may assist sales, however we are not convinced
profitability is a reasonable prospect. Therefore, we will experiment
judiciously.
Directors and Officers
Our board of directors was reduced by the resignation of three members,
Messrs. Saul Steinberg, Robert Steinberg and George Bello, upon consummation of
the sale of Reliance Insurance Company's investment in Zenith. We wish to thank
these individuals for about 20 years of service during which they made many
contributions to the growth and profitability of our business.
Two long-time officers, Jim Ross and Fredricka Taubitz, have retired. They
both contributed significantly to our long-term results, but we are fortunate
that additional talent within the corporation is available to carry on their
activities.
Conclusion
We have emphasized to our employees and shareholders that our company is
run for the long-term. Our shareholders' return from the business has compounded
at 17.7% for the past 23 years. Although our recent operating earnings have been
poor due to market conditions and the RISCORP Acquisition, we are optimistic
about our long-term prospects for the following reasons:
Zenith's financial position is the strongest in our history; excess capital
continues to be returned to shareholders through dividends and stock
repurchases.
TheZenith
21
<PAGE>
WE CONTINUE TO RENEW A LARGE PERCENTAGE OF OUR
- --------------------------------------------------------------------------------
MATURING POLICIES.
- ---------------------------------
Excellent management consists of long-term insurance professionals, focused on
pricing and underwriting discipline, claims fundamentals, quality customer
service, and most importantly, reaching our goal of a 100% combined ratio.
Continuing education and the pursuit of excellence support our reputation as
the Workers' Compensation specialist of choice.
Customers number 33,000, many of whom are long-term; all benefiting from the
value we add through our specialist services.
Geographic diversification has been achieved; California premiums earned now
represent 38.7% of our total Workers' Compensation operations, compared to
53.6% two years ago.
Market conditions, including unbelievable predatory pricing, are gradually
beginning to change which will permit premium growth at our prices in many
regions of the U.S.
Information technology is enhancing the quality and accessibility of our data,
assisting the claims process, and delivering cost efficiencies.
Zenith's investment portfolio consists largely of high-quality bonds,
buffering us from the speculative frenzy in the U.S. equity markets. We can
invest additional funds in equities if and when valuations become more
attractive.
Acquisition opportunities are being evaluated regularly, however we are mindful
many seemingly desirable candidates are suspect due to substantial unrecorded
liabilities on their balance sheets.
TheZenith
22
<PAGE>
QUALITY SERVICES THAT REDUCE LOSS RATIOS AND
- --------------------------------------------------------------------------------
ULTIMATELY THE LONG-TERM COST OF INSURANCE FOR
- --------------------------------------------------------------------------------
THEZENITH'S POLICYHOLDERS ARE OUR HALLMARK.
- --------------------------------------------------------------------------------
Internet sales and service potentials, and private label relationships may well
open new markets for TheZenith.
Confidence in our future was demonstrated by a Canadian domiciled insurance
group who purchased 38.4% of our then outstanding common stock at $28 per
share, above market at that time and today.
Long-term shareholders will continue to benefit as we repurchase our common
stock at below book value and improve our operating results.
We appreciate the assistance and confidence of our stockholders, directors and
reinsurers as we pursue change necessary to restore operating profitability and
enhance shareholder value.
/s/ Stanley R. Zax
Stanley R. Zax
Chairman of the Board and President
Woodland Hills, California, March, 2000
TheZenith
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
- --------------------------------------------------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
Forward-Looking Information
The Private Securities Litigation Reform Act of 1995 provides a safe harbor
for forward-looking statements if accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to
differ materially from those discussed. Forward-looking statements include those
related to the plans and objectives of management for future operations, future
economic performance, or projections of revenues, income, earnings per share,
capital expenditures, dividends, capital structure, or other financial items.
Statements containing words such as EXPECT, ANTICIPATE, BELIEVE, or similar
words that are used in Management's Discussion and Analysis of Financial
Condition and Results of Operations, in other parts of this report or in other
written or oral information conveyed by or on behalf of Zenith National
Insurance Corp. and subsidiaries (collectively, "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 fluctuations of investment income and fair values of
investments; (4) changes in the frequency and severity of claims and
catastrophic events; (5) adequacy of loss reserves; (6) changing environment for
controlling medical, legal and rehabilitation costs, as well as fraud and abuse;
and (7) 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
("P&C Operations") comprise Workers' Compensation, Other Property-Casualty
(through March 31, 1999) and Reinsurance. Effective March 31, 1999, Zenith sold
CalFarm Insurance Company ("CalFarm"), formerly a wholly-owned subsidiary of
Zenith Insurance Company ("Zenith Insurance"), a wholly-owned subsidiary of
Zenith National Insurance Corp. ("Zenith National"), which operated Zenith's
Other Property-Casualty Operations, principally in California. Results of the
P&C Operations for the three years ended December 31, 1999 are set forth in the
table on page 26. In 1998, Zenith expanded its Workers' Compensation business in
Florida through 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 (the "RISCORP
Acquisition") (see page 29). During 1999, 38.7% and 33.2%, respectively, of the
Workers' Compensation premiums earned were in California and Florida. The
balance of the Workers Compensation premiums earned was in 38 states, with the
greatest concentration in Texas. Reinsurance business assumed by Zenith provides
principally property insurance coverage 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 National owns directly or indirectly all
of the capital stock of its subsidiaries.
TheZenith
24
<PAGE>
Results of operations of Zenith's Workers' Compensation Operations are being
adversely impacted by severe competition and inadequate pricing. Industry
results in California are at historic unprofitable levels and national results
are poor and deteriorating. Except in its Southeast Operations, which
principally consists of the former operations of RISCORP, Zenith's Workers'
Compensation premium revenues declined in each of the three years ended
December 31, 1999 as the company endeavored to maintain rate adequacy. However,
as a result of the sale of CalFarm, the capitalization of the P&C Operations
improved significantly and an extraordinary dividend of $100.0 million to Zenith
National added considerably to the invested assets of Zenith National. Zenith's
investment portfolio is conservative, consisting principally of
investment-grade, fixed maturity securities. Early in November of 1999, the
Insurance Commissioner of the State of California (the "Insurance Commissioner")
adopted an average 18.4% increase in the pure premium advisory rates recommended
by the Workers' Compensation Insurance Rating
Bureau of California -- a preliminary indication of possible changes in the
California workers' compensation market. Zenith has raised its rates by an
appropriate amount, together with other actions, with a goal to improve its
profitability. Results of January 2000 renewals and new business applications in
California were favorable with Zenith renewing a substantial percentage of its
maturing policies at higher rates and writing some new business.
The comparability of the results of operations for the year ended
December 31, 1999 compared to the corresponding periods in 1998 and 1997 is
affected by (a) the RISCORP Acquisition effective April 1, 1998; (b) net charges
in the third quarter of 1999 of $50.0 million before tax ($32.5 million after
tax, or $1.89 per share) associated with an increase in the net liabilities for
unpaid losses and loss adjustment expenses in the Southeast Operations, which
principally consists of the operations acquired from RISCORP (the
"RISCORP-Related Adjustment"); and (c) the sale of CalFarm to Nationwide Mutual
Insurance Company effective
March 31, 1999.
The comparative results of the P&C Operations after tax are set forth in the
following table:
<TABLE>
- ----------------------------------------------------------------------------------------------
(Dollars in thousands) 1999 1998 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net investment income $35,632 $35,907 $34,655
Realized gains on investments 4,993 7,541 8,431
- ----------------------------------------------------------------------------------------------
Subtotal 40,625 43,448 43,086
Property-casualty underwriting results:
Loss excluding catastrophes and RISCORP-Related Adjustment (40,404) (11,230) (10,217)
Catastrophe losses (12,285) (7,475) (975)
RISCORP-Related Adjustment (32,500)
- ----------------------------------------------------------------------------------------------
Property-casualty underwriting loss (85,189) (18,705) (11,192)
Income from Real Estate Operations 2,372 868 1,079
Interest expense (5,342) (3,824) (2,587)
Parent expenses (2,701) (2,687) (2,286)
- ----------------------------------------------------------------------------------------------
Net (loss) income before gain on sale of CalFarm (50,235) 19,100 28,100
Gain on sale of CalFarm 104,335
- ----------------------------------------------------------------------------------------------
Net income $54,100 $19,100 $28,100
- ----------------------------------------------------------------------------------------------
</TABLE>
TheZenith
25
<PAGE>
Premiums earned and underwriting results of the P&C Operations for the three
years ended December 31, 1999 were as follows:
<TABLE>
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------
(Dollars in thousands) 1999* 1999** 1998 1997
- --------------------------------------------------------------------------------------------------
Premiums earned:
Workers' Compensation $272,254 $ 278,854 $278,660 $242,064
Other Property-Casualty 54,108 54,108 222,045 214,406
Reinsurance 36,441 36,441 29,150 32,251
- --------------------------------------------------------------------------------------------------
Total $362,803 $ 369,403 $529,855 $488,721
- --------------------------------------------------------------------------------------------------
Underwriting (loss) income before tax:
Workers' Compensation $(72,543) $(122,543) $(42,638) $(37,157)
Other Property-Casualty (22) (22) 4,410 6,509
Reinsurance (7,324) (7,324) 10,268 14,189
- --------------------------------------------------------------------------------------------------
Total $(79,889) $(129,889) $(27,960) $(16,459)
- --------------------------------------------------------------------------------------------------
</TABLE>
*Excluding RISCORP-Related Adjustment
**Including RISCORP-Related Adjustment
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.
<TABLE>
<CAPTION>
The combined ratios for the three years ended December 31, 1999 were as follows:
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------
1999* 1999** 1998 1997
- ---------------------------------------------------------------------------------------------------
Combined loss and expense ratios:
Workers' Compensation:
Loss and loss adjustment expenses 89.2% 102.5% 79.3% 81.6%
Underwriting expenses 37.4 41.4 36.0 33.7
- ---------------------------------------------------------------------------------------------------
Combined ratio 126.6% 143.9% 115.3% 115.3%
- ---------------------------------------------------------------------------------------------------
Other Property-Casualty:
Loss and loss adjustment expenses 66.5% 66.5% 67.0% 65.2%
Underwriting expenses 33.5 33.5 31.0 31.7
- ---------------------------------------------------------------------------------------------------
Combined ratio 100.0% 100.0% 98.0% 96.9%
- ---------------------------------------------------------------------------------------------------
Reinsurance:
Loss and loss adjustment expenses 105.0% 105.0% 45.3% 33.7%
Underwriting expenses 15.1 15.1 19.5 22.3
- ---------------------------------------------------------------------------------------------------
Combined ratio 120.1% 120.1% 64.8% 56.0%
- ---------------------------------------------------------------------------------------------------
Total combined ratio 122.0% 135.2% 105.3% 103.4%
- ---------------------------------------------------------------------------------------------------
</TABLE>
*Excluding RISCORP-Related Adjustment
**Including RISCORP-Related Adjustment
TheZenith
26
<PAGE>
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 catastrophes.
The profitability of the P&C Operations is principally dependent upon the
adequacy of rates charged to the insured for insurance protection; the frequency
and severity of claims and catastrophes; 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. 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 frequency and severity of claims and catastrophes; the expansion
of the Workers' Compensation Operations outside of California; the resolution by
others in the industry of creative reinsurance arrangements; 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, related trends and uncertainties could have a material effect on
Zenith's future operations and financial condition.
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 the
P&C Operations:
<TABLE>
- ----------------------------------------------------------------------------
Other
(Dollars in Workers' Property-
thousands) Compensation Casualty Reinsurance Total
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
One-year loss
development in:
1999 $38,767 $(1,279) $ 7,336 $ 44,824
1998 (75) (3,754) (7,538) (11,367)
1997 11,837 (5,316) (6,870) (349)
- ----------------------------------------------------------------------------
Favorable development is shown in brackets.
</TABLE>
The unfavorable development in 1997 for the Workers' Compensation Operations
is due to loss and loss adjustment expense reserve strengthening for the 1995
and 1996 accident years. The reserve strengthening in 1999 is attributable to
the RISCORP-Related Adjustment. Adverse development in 1999 in the Reinsurance
Operations is attributable to increases during 1999 of estimates for
catastrophes that occurred in 1998, principally estimates of the loss
attributable to hurricane "Georges."
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
TheZenith
27
<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
Operations 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 (through March 31, 1999),
which wrote liability coverage under farmowners' and small commercial policies,
however such losses are substantially excluded from all such coverage. Any such
liabilities associated with CalFarm were retained by CalFarm when it was sold in
1999 and Zenith retains no exposure to any such liabilities. 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.
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 the P&C Operations' 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.
Sale of CalFarm Insurance Company
Effective March 31, 1999, Zenith Insurance completed the sale of all of the
issued and outstanding capital stock of CalFarm for $273.0 million in cash to
Nationwide Mutual Insurance Company. The gain on the sale after tax was
$104.3 million. After accounting for applicable taxes, expenses, and
intercompany transactions, the net proceeds from the sale that were available to
Zenith Insurance for investment were $211.0 million, compared to cash and
investments of $226.4 million that were excluded from Zenith's Consolidated
Balance Sheet upon the sale of CalFarm.
TheZenith
28
<PAGE>
Acquisition of Zenith National's Common Stock by Fairfax Financial Holdings
Limited
Pursuant to a Stock Purchase Agreement, dated June 25, 1999 (the "Stock
Purchase Agreement"), between Fairfax Financial Holdings Limited, a Canada
corporation ("Fairfax"), and Reliance Insurance Company ("Reliance"), Fairfax
agreed to purchase the 6,574,000 shares of common stock of Zenith National owned
by Reliance and its affiliates for $28 per share (the "Transaction"). In an
amendment to its Statement on Schedule 13D, dated October 25, 1999 and filed
with the Securities and Exchange Commission, Reliance Financial Services
Corporation reported that the consummation of the Transaction occurred on
October 25, 1999. Effective upon consummation of the Transaction, Saul P.
Steinberg, Robert M. Steinberg and George E. Bello resigned from Zenith's Board
of Directors.
Resolution of Contingencies Surrounding Fair Values of RISCORP Assets Acquired
and Liabilities Assumed and the RISCORP-Related Adjustment
In October of 1999, Zenith Insurance completed a review of the liabilities
for unpaid losses and loss adjustment expenses in its Southeast Operations,
which principally consists of the operations acquired from RISCORP. The review
was conducted with assistance from independent actuarial consultants. As a
result of the review, Zenith Insurance recorded, in the third quarter of 1999,
the RISCORP-Related Adjustment, which mainly comprises an increase of
$46.0 million before tax ($29.9 million after tax) in the estimated net
liabilities for unpaid losses and loss adjustment expenses acquired from
RISCORP. The increase results primarily from the adjustments to reserves for the
years 1994 through 1997. As a result, certain related receivables, principally
contingent commissions receivable under reinsurance contracts assumed from
RISCORP, were reduced by $19.0 million. As previously reported, Zenith Insurance
purchased reinsurance protection relating to development of the unpaid loss and
loss adjustment expense reserves acquired from RISCORP.
Note 11 to the Consolidated Financial Statements on pages 58-59 describes
certain litigation between Zenith Insurance and RISCORP, including a settlement
agreement, dated July 7, 1999 (the "Settlement Agreement"), providing for the
resolution of certain claims arising out of the RISCORP Acquisition. Under the
Settlement Agreement, Zenith Insurance received $6.0 million from the escrow
account.
The adjustments associated with the increase in the liabilities for unpaid
loss and loss adjustment expenses acquired from RISCORP, net of the benefit of
reinsurance protection and the effect of the Settlement Agreement, in the
aggregate, reduced income by $32.5 million after tax, or $1.89 per share.
Deferred reinsurance benefits will be recognized over approximately the next
four years and net income is expected to increase by $15.0 million.
The foregoing RISCORP-Related Adjustment, after the benefit of the
reinsurance protection for adverse development of the unpaid loss and loss
adjustment expense reserves acquired from RISCORP, decreased the statutory
surplus of Zenith Insurance by $25.0 million after tax in 1999.
Workers' Compensation
The following is a discussion of results of the Workers' Compensation
Operations as set forth on page 26 excluding the impact of the RISCORP-Related
Adjustment.
Competition in the national workers' compensation insurance industry
continues to be intense. In 1998 and 1997, Zenith continued its geographic
diversification through the RISCORP Acquisition, 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, the loss ratio of Zenith's
Workers' Compensation Operations,
TheZenith
29
<PAGE>
which were 64.6%, 61.5% and 68.4% in 1999, 1998 and 1997, respectively, indicate
that it has maintained its disciplined approach to pricing in spite of the
competitive pressures.
Premiums earned in the Workers' Compensation Operations remained relatively
constant in 1999 compared to 1998 and increased in 1998 compared to 1997,
principally as a result of the RISCORP Acquisition. Excluding the impact of the
RISCORP Acquisition, premiums earned in the Workers' Compensation Operations
decreased in the years ended December 31, 1999 and 1998 compared to the
corresponding periods in 1998 and 1997, principally as a result of Zenith's
endeavors to maintain rate adequacy in the face of intense competition in the
national workers' compensation insurance industry.
Underwriting losses in the Workers' Compensation Operations increased in the
years ended December 31, 1999 and 1998 compared to the corresponding periods in
1998 and 1997. The increase in such underwriting losses was attributable,
principally, to an increase in the severity of claims and to the claims
operating expenses that have not been reduced commensurately with premium
revenues. The underwriting results for the year ended December 31, 1998 included
$2.0 million of losses before tax related to catastrophic workers' compensation
claims. Included in 1999 and 1998 underwriting results were increased expenses
from the RISCORP Acquisition. The 1997 underwriting loss in the Workers'
Compensation Operations includes $11.8 million of adverse development on prior
years loss and loss adjustment expense reserves in the fourth quarter.
Excluding the impact of the RISCORP Acquisition, Zenith has reduced expenses
during 1999 and 1998 throughout its Workers' Compensation Operations,
principally through reductions in the number of employees. However, the effects
of such reductions have been mitigated by a reduction of premium income for the
year ended December 31, 1999 compared to the corresponding periods in 1998 and
1997.
In Florida, the Special Disability Trust Fund (the "Fund") 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, 1999 and 1998,
the receivable from the Fund was $37.0 million and $39.1 million, respectively,
related to the pre-January 1, 1998 claims, of which $5.6 million was collected
in 1999.
The outlook for the future profitability of the Workers' Compensation
Operations is dependent upon the ability to maintain adequate rates and to write
business at such rates, manage claims costs and to keep operating expenses in
line with premium volume. Zenith is unable to predict when its Workers'
Compensation Operations will return to underwriting profitability.
Other Property-Casualty
Zenith's Other Property-Casualty Operations were operated primarily by
CalFarm, which was sold effective March 31, 1999. Other Property-Casualty
Operations served individual and commercial customers, primarily in the rural
and suburban areas of California. The major lines of business were automobile,
farmowners, commercial coverages, homeowners and group health.
Underwriting results for 1999, 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. Catastrophe losses attributable to California storm damage
were
TheZenith
30
<PAGE>
$5.0 million and $1.5 million before tax in 1998 and 1997, respectively. The
Other Property-Casualty Operations underwriting results in 1999 and 1998 were
also adversely impacted by losses in the Health line of business because of
higher health care costs and increased utilization.
Reinsurance
Zenith's Reinsurance Operations emphasize the asssumption of world-wide
reinsurance of property losses from catastrophes and the reinsurance of large
property risks.
Reinsurance premiums earned increased in the year ended December 31, 1999,
compared to the corresponding period in 1998, due principally to additional
premiums in 1999 for reinstatement of treaties impacted by catastrophes during
1999 and 1998. Premiums earned in the Reinsurance Operations decreased in the
year ended December 31, 1998 as compared to the corresponding period in 1997 due
to selected non-renewal by Zenith of certain reinsurance treaties and a general
softening of such rates in the industry.
The underwriting results for the years ended December 31, 1999 and 1998 were
adversely impacted by $18.9 million and $4.5 million, respectively, of
catastrophe losses before tax. Of the 1999 catastrophe losses, $8.0 million
before tax was incurred in the fourth quarter of 1999. The principal events
impacting 1999 and 1998 were hurricane "Georges" and other Carribean storms,
earthquakes in Turkey and Taiwan, and French storms in December of 1999.
Underwriting results were favorable during 1997 as a result of the absence of
catastrophes.
Real Estate Operations
Zenith's Real Estate Operations develop land and primarily construct
single-family residences for sale in Las Vegas, Nevada.
Zenith recognized total revenues from its Real Estate Operations of
$58.7 million, $37.7 million and $45.4 million for the years ended December 31,
1999, 1998 and 1997, respectively. The results of operations for the year ended
December 31, 1999 benefited from an increase in home sales compared to the
corresponding periods in 1998 and 1997 (number of closings were 366, 275 and 305
for the years ended December 31, 1999, 1998 and 1997, respectively).
Construction in progress, including undeveloped land, was $87.9 million and
$69.4 million at December 31, 1999 and 1998, respectively. In addition to
continuing home construction, the Real Estate Operations may use some land
presently owned for commercial and multi-family dwelling construction. Changes
in interest rates or other factors could affect future home sales (we have not
seen any impact so far), but Zenith believes the land it has acquired is
strategically located and will have long-term value.
Investments
At December 31, 1999 and 1998, Zenith's consolidated investment portfolio
emphasized high quality, liquid bonds and short-term investments. Bonds
constituted 71% and 73%, and short-term investments constituted 20% and 18% of
the carrying value of Zenith's consolidated investment portfolio at
December 31, 1999 and 1998, respectively. Bonds with an investment grade rating
represented 95% and 96% of the consolidated carrying values of fixed maturities
at December 31, 1999 and 1998, respectively. The average maturity of the
investment portfolio was 5.7 years and 4.2 years at December 31, 1999 and 1998,
respectively.
Investment income during the three years ended December 31, 1999 was as
follows:
<TABLE>
- ---------------------------------------------------
(Dollars in thousands) 1999 1998 1997
- ---------------------------------------------------
<S> <C> <C> <C>
Before tax $53,662 $53,593 $52,332
After tax 35,632 35,907 34,655
- ---------------------------------------------------
</TABLE>
TheZenith
31
<PAGE>
The yields on invested assets, which vary with the general level of interest
rates, the average life of invested assets and the amount of funds available for
investment, for the three years ended December 31, 1999 were as follows:
<TABLE>
- --------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------
<S> <C> <C> <C>
Before tax 5.5% 5.7% 6.0%
After tax 3.7 3.8 3.9
- --------------------------------------------------------
</TABLE>
The total fair value of fixed maturity investments, including short-term
investments, was $834.3 million and $959.1 million at December 31, 1999 and
1998, repectively. The unrealized (loss) gain on held-to-maturity and
available-for-sale fixed maturity investments, were as follows:
<TABLE>
- --------------------------------------------------------
Held-to-
Maturity Available-for-Sale
-------- -------------------
Before Before After
(Dollars in thousands) Tax Tax Tax
- --------------------------------------------------------
<S> <C> <C> <C>
December 31, 1999 $ (340) $(29,698) $(19,304)
December 31, 1998 1,569 9,864 6,412
- --------------------------------------------------------
</TABLE>
At December 31, 1999 and 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 change in fair value of fixed maturity investments
classified as available-for-sale resulted in a decrease in stockholders' equity
of $25.7 million after deferred tax from December 31, 1998 to December 31, 1999
compared to an increase of $1.4 million from 1997 to 1998.
Zenith's primary investment goals are 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 1999 was as follows:
<TABLE>
- ------------------------------------------------------------------------------------
(Dollars in thousands)
- ------------------------------------------------------------------------------------
<S> <C> <C>
Carrying value at beginning of year $1,048,681
Purchases at cost 375,899
Investments of CalFarm at date of sale (170,050)
Maturities and redemptions (103,168)
Proceeds from sales of investments:
Debt and equity securities available-for-sale (233,742)
Other investments (21,922)
---------
Total proceeds from sales of investments (255,664)
Net realized gains:
Debt and equity securities available-for-sale 2,651
Other investments 5,031
---------
Total net realized gains 7,682
Change in unrealized gains and losses, net (45,529)
Net change in short-term investments 41,746
Net accretion of bonds and preferred stocks and other
changes 2,137
- ------------------------------------------------------------------------------------
Carrying value at end of year $ 901,734
- ------------------------------------------------------------------------------------
</TABLE>
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.
TheZenith
32
<PAGE>
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. During the fourth quarter and for the year ended
December 31, 1999, there were writedowns of $1.0 million and $1.7 million,
respectively.
Market Risk of Financial Instruments
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 mitigate the effects of market 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. 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. 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.
The table below provides information about Zenith's financial instruments as
of December 31, 1999 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 redeemable preferred stocks,
corporate bonds, municipal bonds, government bonds and mortgage-backed
securities. For debt obligations, the table presents principal cash flows by
expected maturity dates (including interest).
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------
Expected Maturity Date
-------------------------------------------------------------------------
(Dollars in thousands) 2000 2001 2002 2003 2004 Thereafter Total
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed maturity investments:
Held-to-maturity and available-for-sale
securities:
Fixed rate $ 60,140 $160,525 $36,881 $49,629 $35,132 $309,325 $651,632
Weighted average interest rate 6.0% 6.2% 6.8% 9.6% 7.8% 8.5% 7.6%
Trading securities:
Fixed rate $ 2,929 $ 2,929
Weighted average interest rate 7.0% 7.0%
Short-term investments $179,748 $179,748
Debt and interest obligations:
Payable to banks and other notes payable
9% senior notes payable 6,750 $ 6,750 $78,375 91,875
8.55% redeemable securities 6,413 6,413 6,413 $ 6,413 $ 6,413 $228,912 260,977
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
TheZenith
33
<PAGE>
Liquidity and Capital Resources
The P&C Operations generally create liquidity because insurance premiums are
collected prior to disbursements for claims and benefits. These net cash flows,
as set forth on page 45 in the Consolidated Financial Statements, are invested
as described in "Investments" on pages 31-33. However, in the years ended
December 31, 1999 and 1998, net cash was used in operations of $51.6 million and
$47.1 million, respectively, to pay loss and loss adjustment expenses related to
previous years, including loss reserves from the RISCORP Acquisition. Also,
Zenith had less cash due to reduced premium revenues. Net cash flows from
operations will be affected by fluctuations in premium income.
Net cash flows provided by operating activities were $27.0 million for 1997.
Zenith National'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 fund its liquidity requirements.
On April 1, 1998, in connection with the closing of the RISCORP Acquisition,
Zenith Insurance paid $35.0 million to RISCORP and repaid $15.0 million of
indebtedness assumed from RISCORP. On March 26, 1999, Zenith Insurance paid the
remaining balance of $53.7 million, including interest, due to RISCORP pursuant
to the RISCORP Acquisition.
On April 1, 1999, Zenith Insurance received net proceeds of $213.8 million
from Nationwide Mutual Insurance Company in connection with the sale of the
capital stock of CalFarm.
At December 31, 1999, Zenith National had two revolving, unsecured lines of
credit in an aggregate amount of $70.0 million, all of which was available at
December 31, 1999. A $30.0 million line of credit was not renewed when it
expired November 30, 1999. Under these agreements certain restrictive covenants
apply including the maintence of a specific level of net worth.
At December 31, 1999, Zenith National was authorized to repurchase up to
940,000 shares of its common stock pursuant to a share purchase program
authorized by its Board of Directors. These purchases are discretionary and can
be adequately funded from Zenith National's existing sources of liquidity. In
1999 and 1998, respectively, Zenith National repurchased 185,000 and
960,000 shares on the open market for a total purchase price of $4.2 million and
$24.0 million.
Zenith's Real Estate Operations maintain certain bank credit facilities to
provide financing for development and construction of
single-family residences for sale. These loans bear interest at the rates of
prime plus 1.0% and prime plus 0.75% and mature between February 2000 and
November 2001. Each agreement pertains to a separate residential housing project
and the maximum credit available was $27.1 million and $32.3 million at
December 31, 1999 and 1998, respectively. 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, 1999 and 1998,
$19.1 million and $12.3 million, respectively, was outstanding with respect to
the borrowing.
In July of 1999, Zenith Insurance paid a dividend of $100.0 million to Zenith
National. The dividend was approved by the California
TheZenith
34
<PAGE>
Department of Insurance on June 24, 1999. Zenith National added such funds to,
and invested them as part of, its investment portfolio. Zenith has been informed
by A.M. Best Company ("Best") that the payment of the dividend may result in a
downgrade of Best's rating of the P&C Operations from A+ to A.
The P&C Operations are subject to insurance regulations which restrict their
ability to distribute dividends. Such dividend capabilities are set forth in
Note 13 to the Consolidated Financial Statements on page 61. Such restrictions
have not had, and under current regulations are not expected to have, a material
adverse impact on Zenith. Zenith National received $130.0 million of dividends
from Zenith Insurance in 1999, including the extraordinary dividend of
$100.0 million. Zenith National received no dividends from Zenith Insurance in
1998 and received dividends from Zenith Insurance amounting to $22.8 million in
1997. The maximum dividend which can be paid to Zenith National without prior
approval of the California Department of Insurance in 2000 is $29.8 million.
Insurance companies are required to have securities on deposit for the
protection of policyholders in accordance with various states' regulations. At
December 31, 1999 and 1998, investments carried at their fair value of
$205.5 million and $262.0 million, respectively, were on deposit to comply with
such regulations.
On July 30, 1998, Zenith National issued $75.0 million 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 National. 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 $75.0 million of
Zenith National'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 National for up to ten consecutive semi-annual periods. The
Subordinated Debentures are redeemable at any time by Zenith National 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 National used
$65.0 million from the net proceeds to make a capital contribution to Zenith
Insurance. The remaining net proceeds were used for general corporate purposes.
On February 25, 2000, Zenith National paid $18.8 million to repurchase $12.5
million aggregate principal amount of the outstanding 9% Senior Notes due 2002
and $8.0 million aggregate liquidation amount of the outstanding 8.55% Capital
Securities issued by the Trust. Zenith National used its available cash balances
to fund these purchases.
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
Codification provides guidance for the areas where statutory accounting has been
silent and changes current statutory accounting in some areas. The NAIC is now
considering amendments to the Codification that would also be effective upon
implementation. The NAIC has established January 1, 2001 as the effective date
of the Codification.
TheZenith
35
<PAGE>
The California Department of Insurance has adopted the Codification.
Implementation of the Codification may affect the surplus level and the
capitalization requirements of the P&C Operations on a statutory basis. Zenith
has not determined the impact of the Codification.
Year 2000
The Year 2000 Problem refers to the inability of information technology
("IT") systems 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, such as elevators, security systems
and HVAC systems that incorporate embedded micro controllers. 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 could also be a
negative impact on the economic and social infrastructure on which Zenith
depends.
At the end of 1999, Zenith was prepared for the date change from 1999 to
2000. Zenith systematically replaced and modified its internal non-IT and IT
systems to function correctly with dates from 1999 forward, thereby rendering
them "Year 2000 Compliant." Zenith also had in place contingency plans to
substantially reduce material business disruptions from failures of Zenith's
internal systems, a failure of one or more critical third parties upon which
Zenith relies in its business operations ("Key External Dependencies") and/or
the contamination of Zenith's IT systems due to receipt of corrupted data.
Zenith did not suffer any disruption of its business due to any impact of the
date change from 1999 to 2000 on its internal non-IT systems, its internal IT
systems or its Key External Dependencies. However, at the end of 1999, Zenith
was cautious about the state of readiness of its Key External Dependencies and
also recognized that despite its Year 2000-related efforts negative impact on
its operations from Year 2000-related failures was possible. Accordingly, as a
precaution, Zenith did implement elements of its contingency plans prior to the
end of 1999. Those elements are no longer in effect.
Although the date change from 1999 to 2000 occurred without disruption to
Zenith's business, Zenith remains alert both as to potential issues in its
internal systems and the state of readiness of its Key External Dependencies.
All companies were, and to a lesser extent are still, faced with unknown risks
arising from Year 2000 issues that may impact them negatively. Zenith believes,
at this time, that the most reasonably-likely, worst-case, Year 2000 scenarios
could include a failure of a part of Zenith's internal IT systems, the isolated
inability of one or more of its critial Key External Dependencies, such as
financial institutions, agents/brokers or reinsurers, to respond to Zenith's
needs, 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 effect on its financial
condition and results of operations. However, nothing has come to Zenith's
attention leading it to conclude that there would be future Year 2000-related
failures having a material adverse impact on Zenith. Further, because of the
general nature of the Year 2000 Problem and how it may manifest itself, Zenith
will continue to monitor its internal systems and its Key External Dependencies
for Year 2000-related anomalies.
TheZenith
36
<PAGE>
Monitoring of some situations will extend into 2001, so as to cover twelve
months of Year 2000 processes. However, it is expected that substantially all
monitoring will decrease over the next few months and end by the second quarter
of 2000. Contingency plans remain in place, ready to be implemented.
The majority of Zenith's Year 2000 compliance efforts were staffed
internally, although Zenith engaged technical consultants to assist its internal
staff, as well as to assist Zenith in reviewing its progress. All
Year 2000-related costs were funded from internal sources. The costs associated
with non-IT systems and contingency planning were not significant. The costs
associated with IT systems (namely, core information technology systems;
computer network and communications infrastructure; and personal and laptop
computers, including applications) were $11.1 million, of which $5.9 million,
$2.7 million and $2.5 million were expended in 1999, 1998 and 1997,
respectively. This following table shows the portions of the $11.1 million, that
were expended for repairing Zenith's IT systems ("IT Repair Costs") and
replacing them ("IT Replacement Costs").
<TABLE>
- ----------------------------------------------------------
(Dollars in thousands) Total IT Expenditure
- ----------------------------------------------------------
<S> <C>
IT Repair Costs $ 7,562
IT Replacement Costs:
Software 881
Hardware 2,234
Related Expenditures 417
- ----------------------------------------------------------
Total $11,094
- ----------------------------------------------------------
</TABLE>
The above table includes $1.8 million incurred for the Other Property-Casualty
Operations through March 31, 1999, the date on which such operations were
disposed of through the sale of the capital stock of CalFarm.
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 "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." The internal cost of user participation
in acceptance testing was not measured and is not included. In addition to the
amounts shown in the table, Zenith will be expending funds in the first quarter
of 2000 to close out and refine its Year 2000 efforts. This amount is not
expected to be material. Zenith had been planning to upgrade its computer
network and communications infrastructure, as well as its personal and laptop
computers (including applications), for some time; however, because of the Year
2000 problem, certain components of those plans were accelerated and completed
by mid-1999. No planned information technology projects were deferred because of
Year 2000-related efforts.
Recently Issued Accounting Standards
On June 15, 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133 ("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 June 15,
2000. SFAS No. 133 requires that companies record all derivative instruments on
the balance sheet at 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.
TheZenith
37
<PAGE>
5-YEAR SUMMARY OF SELECTED FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
Zenith National Insurance Corp. and Subsidiaries
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended December 31, Note 1999 1998
<S> <C> <C> <C>
- --------------------------------------------------------------------
(Dollars and shares in thousands,
except per share data)
Revenues: 2, 6
Premiums earned $ 369,403 $ 529,855
Investment income 53,662 53,593
Realized gains on investments 7,682 11,602
Real estate sales 58,670 37,737
Service fee income 2,691 3,992
- --------------------------------------------------------------------
Total revenues 492,108 636,779
- --------------------------------------------------------------------
(Loss) income from continuing
operations after tax, and before
RISCORP-Related Adjustment and
before realized gains 2, 3, 6 (22,728) 11,559
Per common share 1 (1.33) 0.67
- --------------------------------------------------------------------
RISCORP-Related Adjustment after
tax 5 (32,500)
Per common share (1.89)
- --------------------------------------------------------------------
Gain on sale of CalFarm after tax 6 104,335
Per common share 6.08
- --------------------------------------------------------------------
Components of net (loss) income: 2, 6
Underwriting (loss) income:
(Loss) income excluding
catastrophe losses and
RISCORP-Related Adjustment 5 (40,404) (11,230)
Catastrophe losses (12,285) (7,475)
RISCORP-Related Adjustment 5 (32,500)
Net investment income 35,632 35,907
Realized gains on investments 4,993 7,541
Income from real estate
operations 2,372 868
Parent expenses and interest
expense (8,043) (6,511)
Gain on sale of CalFarm 6 104,335
(Loss) from discontinued life and
annuity operations 3
- --------------------------------------------------------------------
Net income 54,100 19,100
Per common share 1 3.15 1.11
- --------------------------------------------------------------------
Cash dividends per share to common
stockholders 1.00 1.00
- --------------------------------------------------------------------
Weighted average common shares
outstanding 17,172 17,158
- --------------------------------------------------------------------
Financial condition: 2, 6
Total assets $1,573,786 $1,818,726
Investments 901,734 1,048,681
Unpaid loss and loss adjustment
expenses 880,929 997,647
Senior notes, bank debt and other
notes payable 94,955 93,851
Redeemable securities 73,397 73,341
Total stockholders' equity 354,559 346,952
Stockholders' equity per share 20.67 20.23
Stockholders' equity per share,
excluding effect of Statement of
Financial Accounting Standards
No. 115 21.80 19.86
Return on average equity 13.9% 5.4%
- --------------------------------------------------------------------
Property-casualty insurance
statistics (GAAP): 2, 6
Paid loss and loss adjustment
expense ratio 96.0% 82.9%
Combined ratio including
RISCORP-Related Adjustment: 5
Loss and loss adjustment expense
ratio 97.5% 72.3%
Underwriting expense ratio 37.7% 33.0%
--------- ---------
Combined ratio 135.2% 105.3%
Combined ratio excluding
RISCORP-Related Adjustment: 5
Loss and loss adjustment expense
ratio 87.4% 72.3%
Underwriting expense ratio 34.6% 33.0%
--------- ---------
Combined ratio 122.0% 105.3%
Net premiums earned-to-surplus
ratio 1.1 1.2
Loss and loss adjustment expense
reserves-to-surplus ratio (net of
reinsurance) 4 1.8 1.6
- --------------------------------------------------------------------
</TABLE>
(1) Amounts prior to 1997 have been restated as required to comply with
Statement of Financial Accounting Standards No. 128 "Earnings per Share" and
represent diluted amounts per share and weighted average shares assuming
exercise of stock options.
(2) On April 1, 1998, Zenith acquired substantially all assets and certain
liabilities from RISCORP, Inc and subsidiaries (collectively, "RISCORP")
(See Notes 9 and 11 to the Consolidated Financial Statements on pages 56-57
and 58-59)
(3) In 1995, Zenith sold CalFarm Life.
(4) Includes Associated General Commerce Self-Insurers' Trust Fund net reserves
of $65.4 million acquired through merger on December 31, 1996.
TheZenith
38
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------
(Dollars and shares in thousands,
except per share data)
Revenues:
Premiums earned $ 488,721 $ 452,856 $ 437,513
Investment income 52,332 51,154 46,150
Realized gains on investments 14,008 10,807 3,621
Real estate sales 45,419 41,554 31,736
Service fee income
- -----------------------------------------------------------------------------
Total revenues 600,480 556,371 519,020
- -----------------------------------------------------------------------------
(Loss) income from continuing
operations after tax, and before
RISCORP-Related Adjustment and
before realized gains 19,669 30,575 17,368
Per common share 1.10 1.72 0.95
- -----------------------------------------------------------------------------
RISCORP-Related Adjustment after
tax
Per common share
- -----------------------------------------------------------------------------
Gain on sale of CalFarm after tax
Per common share
- -----------------------------------------------------------------------------
Components of net (loss) income:
Underwriting (loss) income:
(Loss) income excluding
catastrophe losses and
RISCORP-Related Adjustment (10,217) 356 (226)
Catastrophe losses (975) (8,710)
RISCORP-Related Adjustment
Net investment income 34,655 34,069 30,690
Realized gains on investments 8,431 7,025 2,354
Income from real estate
operations 1,079 1,251 1,349
Parent expenses and interest
expense (4,873) (5,101) (5,735)
Gain on sale of CalFarm
(Loss) from discontinued life and
annuity operations (13,122)
- -----------------------------------------------------------------------------
Net income 28,100 37,600 6,600
Per common share 1.57 2.12 0.36
- -----------------------------------------------------------------------------
Cash dividends per share to common
stockholders 1.00 1.00 1.00
- -----------------------------------------------------------------------------
Weighted average common shares
outstanding 17,886 17,752 18,334
- -----------------------------------------------------------------------------
Financial condition:
Total assets $1,252,156 $1,242,724 $1,115,433
Investments 879,973 852,799 835,214
Unpaid loss and loss adjustment
expenses 613,266 620,078 517,552
Senior notes, bank debt and other
notes payable 88,216 88,861 83,135
Redeemable securities
Total stockholders' equity 361,866 337,503 330,432
Stockholders' equity per share 20.31 19.17 18.58
Stockholders' equity per share,
excluding effect of Statement of
Financial Accounting Standards No.
115 20.03 19.28 18.18
Return on average equity 8.3% 11.4% 2.0%
- -----------------------------------------------------------------------------
Property-casualty insurance
statistics (GAAP):
Paid loss and loss adjustment
expense ratio 66.9% 69.9% 74.3%
Combined ratio including
RISCORP-Related Adjustment:
Loss and loss adjustment expense
ratio 71.2% 69.5% 74.4%
Underwriting expense ratio 32.2% 30.3% 28.7%
--------- --------- ---------
Combined ratio 103.4% 99.8% 103.1%
Combined ratio excluding
RISCORP-Related Adjustment:
Loss and loss adjustment expense
ratio 71.2% 69.5% 74.4%
Underwriting expense ratio 32.2% 30.3% 28.7%
--------- --------- ---------
Combined ratio 103.4% 99.8% 103.1%
Net premiums earned-to-surplus
ratio 1.4 1.4 1.4
Loss and loss adjustment expense
reserves-to-surplus ratio (net of
reinsurance) 1.5 1.6 1.5
- -----------------------------------------------------------------------------
</TABLE>
(5) The RISCORP-Related Adjustment represents net charges of $50.0 million
before tax ($32.5 million after tax, or $1.89 per share) associated with an
increase in the net liabilities for unpaid losses and loss adjustment
expenses in the Southeast Operations, which principally consists of the
operations acquired from RISCORP, recorded in the third quarter of 1999.
(See Note 11 to the Consolidated Financial Statements on pages 58-59)
(6) Zenith completed the sale of CalFarm Insurance Company to Nationwide Mutual
Insurance Company effective March 31, 1999 resulting in a gain of
$104.3 million after tax, or $6.08 per share, in the first quarter of 1999.
(See Note 10 to the Consolidated Financial Statements on page 57.)
TheZenith
39
<PAGE>
PROPERTY-CASUALTY LOSS DEVELOPMENT
- -----------------------------------------------------------------
Zenith National Insurance Corp. and Subsidiaries
The table that follows shows 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 pages 49-50.
Analysis of Loss and Loss Adjustment Expense Liability Development
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended December 31, 1999 1998
<S> <C> <C>
- -----------------------------------------------------------------------------------------
(Dollars in thousands)
Liability for unpaid loss and loss adjustment expenses, net $605,250 $599,357
- -----------------------------------------------------------------------------------------
Paid, net (cumulative) as of:
One year later 244,402
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 645,460
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 $(46,103)
- -----------------------------------------------------------------------------------------
Net Liability -- December 31, $605,250 $599,357
Receivable from reinsurers and state trust funds
on paid and unpaid losses 275,679 276,526
- -----------------------------------------------------------------------------------------
Gross liability -- December 31, 880,929 875,883
Re-estimated liability, net of reinsurance 645,460
Re-estimated receivable from reinsurers and state
trust funds on paid and unpaid losses 307,088
- -----------------------------------------------------------------------------------------
Re-estimated liability, gross 952,548
- -----------------------------------------------------------------------------------------
Favorable (deficient) development, gross $(76,665)
- -----------------------------------------------------------------------------------------
</TABLE>
The analysis above presents the development of Zenith National Insurance
Corp. and subsidiaries' balance sheet liabilities for 1989 through 1999. 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 were paid during subsequent
annual periods. The second section shows 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 1999, 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. 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.
Information for 1998 includes the results of the acquisition of substantially
all assets and certain liabilities from RISCORP, Inc. and subsidiaries (See
Notes 9 and 11 to the Consolidated Financial Statements on pages 56-57 and
58-59). The data prior to 1999 has been restated to exclude the results of
CalFarm Insurance Company, which was sold effective March 31, 1999 (See Note 10
to the Consolidated financial statements on page 57).
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.
TheZenith
40
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------
(Dollars
in
thousands)
Liability
for
unpaid
loss
and
loss
adjustment
expenses,
net $418,529 $419,451 $357,652 $365,296 $385,629 $380,388 $354,789 $330,678 $303,069
- ----------------------------------------------------------------------------------------------------
Paid,
net
(cumulative)
as of:
One
year
later 137,681 149,195 127,428 116,193 119,158 124,303 124,186 108,230 82,180
Two
years
later 226,165 238,809 208,452 189,086 193,815 206,332 202,060 181,610 138,113
Three
years
later 289,673 250,865 236,623 238,268 257,922 252,011 225,615 177,029
Four
years
later 278,760 262,775 271,090 288,034 284,734 253,841 200,887
Five
years
later 280,005 287,806 312,352 304,198 273,078 217,474
Six
years
later 298,976 323,555 323,213 286,033 228,997
Seven
years
later 331,914 330,371 299,507 237,366
Eight
years
later 336,626 304,090 246,018
Nine
years
later 308,691 249,197
Ten
years
later 252,419
- ----------------------------------------------------------------------------------------------------
Liability,
net
re-estimated
as of:
One
year
later 402,551 423,327 358,249 359,658 371,537 381,758 369,480 335,588 299,166
Two
years
later 399,660 414,854 358,264 347,845 359,665 380,057 378,978 342,180 287,823
Three
years
later 410,924 351,831 339,076 356,475 378,383 377,713 347,537 285,188
Four
years
later 348,226 332,834 348,916 382,382 379,440 347,146 288,579
Five
years
later 330,097 342,608 376,917 380,672 346,558 288,265
Six
years
later 340,001 370,165 377,166 347,087 287,190
Seven
years
later 368,173 370,720 342,728 286,577
Eight
years
later 368,921 336,467 281,047
Nine
years
later 334,437 275,047
Ten
years
later 273,091
- ----------------------------------------------------------------------------------------------------
Favorable
(deficient)
development $ 18,869 $ 8,527 $ 9,426 $ 35,199 $ 45,628 $ 12,215 $(14,132) $ (3,759) $ 29,978
- ----------------------------------------------------------------------------------------------------
Net
Liability
--
December
31, $418,529 $419,451 $357,652 $365,296 $385,629 $380,388
Receivable
from
reinsurers
and
state
trust
funds
on
paid
and
unpaid
losses 74,313 82,869 40,419 37,561 38,543 26,822
- -------------------------------------------------------------------
Gross
liability
--
December
31, 492,842 502,320 398,071 402,857 424,172 407,210
Re-estimated
liability,
net of
reinsurance 399,660 410,924 348,226 330,097 340,001 368,173
Re-estimated
receivable
from
reinsurers
and state
trust
funds
on
paid
and
unpaid
losses 80,099 88,922 44,189 40,121 48,963 63,018
- -------------------------------------------------------------------
Re-estimated
liability,
gross 479,759 499,846 392,415 370,218 388,964 431,191
- -------------------------------------------------------------------
Favorable
(deficient)
development,
gross $ 13,083 $ 2,474 $ 5,656 $ 32,639 $ 35,208 $(23,981)
- -------------------------------------------------------------------
</TABLE>
TheZenith
41
<PAGE>
CONSOLIDATED BALANCE SHEET
- --------------------------------------------------
Zenith National Insurance Corp. and Subsidiaries
<TABLE>
- -----------------------------------------------------------------------------------------------
December 31, Note 1999 1998
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(Dollars in thousands)
Assets:
Investments
Fixed maturities:
At amortized cost (fair value $27,186 in 1999 and $36,712
in 1998) $ 27,526 $ 35,143
At fair value (cost $657,129 in 1999 and $725,397 in 1998) 627,375 735,284
Floating rate preferred stocks, at fair value (cost $6,799
in 1999 and $16,614 in 1998) 6,420 17,324
Convertible and non-redeemable preferred stocks, at fair
value (cost $4,300 in 1999
and $7,679 in 1998) 3,405 7,350
Common stocks, at fair value (cost $25,428 in 1999 and
$22,402 in 1998) 25,634 26,935
Short-term investments (at cost, which approximates fair
value) 179,748 187,123
Other investments 31,626 39,522
- -----------------------------------------------------------------------------------------------
Total investments 1, 2 901,734 1,048,681
Cash 15,714 1,998
Accrued investment income 11,832 13,646
Premiums receivable, less allowance for doubtful accounts of
$10,172 in 1999
and $9,760 in 1998 74,586 133,631
Receivable from reinsurers and state trust funds on paid and
unpaid losses and prepaid reinsurance premiums 1 343,671 373,045
Deferred policy acquisition costs 7,892 23,941
Properties and equipment, less accumulated depreciation 3 54,981 79,908
Net deferred tax asset 7 34,601 22,611
Federal income tax receivable 7 2,740
Intangible assets 1, 9 23,207 25,744
Other assets 1 105,568 92,781
- -----------------------------------------------------------------------------------------------
Total assets $1,573,786 $1,818,726
- -----------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of this statement.
TheZenith
42
<PAGE>
<TABLE>
- ----------------------------------------------------------------------------------------------------
December 31, Note 1999 1998
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(Dollars and shares in thousands)
Liabilities:
Policy liabilities and accruals:
Unpaid loss and loss adjustment expenses 16 $ 880,929 $ 997,647
Unearned premiums 50,906 157,965
Policyholders' dividends accrued 3,375 4,763
Reserves on loss portfolio transfers 17,658 9,689
Payable to banks and other notes payable 4 20,238 19,255
Senior notes payable, less unamortized issue costs of $283
in 1999 and $404 in 1998 5, 22 74,717 74,596
Federal income tax payable 7 23,793
Payable to RISCORP 52,952
Other liabilities 11 74,214 81,566
- ----------------------------------------------------------------------------------------------------
Total liabilities 1,145,830 1,398,433
- ----------------------------------------------------------------------------------------------------
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 $1,603 in 1999 and
$1,659 in 1998 6, 22 73,397 73,341
- ----------------------------------------------------------------------------------------------------
Commitments and contingent liabilities 11
Stockholders' equity:
Preferred stock, $1 par -- shares authorized 1,000; issued
and outstanding,
none in 1999 and 1998
Common stock, $1 par -- shares authorized 50,000; issued
25,157, outstanding 17,150 in 1999; issued 24,970,
outstanding 17,148 in 1998 25,157 24,970
Additional paid-in capital 274,897 270,679
Retained earnings 225,229 188,243
Accumulated other comprehensive (loss) income -- net
unrealized (depreciation) appreciation on investments, net
of deferred tax (benefit) expense of $(10,768) in 1999 and
$5,167 in 1998 1, 2 (19,998) 9,596
- ----------------------------------------------------------------------------------------------------
505,285 493,488
Less treasury stock at cost (8,007 shares in 1999 and 7,822
shares in 1998) 12 (150,726) (146,536)
- ----------------------------------------------------------------------------------------------------
Total stockholders' equity 354,559 346,952
- ----------------------------------------------------------------------------------------------------
Total liabilities, redeemable securities and stockholders'
equity $1,573,786 $1,818,726
- ----------------------------------------------------------------------------------------------------
</TABLE>
TheZenith
43
<PAGE>
CONSOLIDATED STATEMENT OF OPERATIONS
- ----------------------------------------------------------------------
Zenith National Insurance Corp. and Subsidiaries
<TABLE>
- ------------------------------------------------------------------------------------------------------------------
Year ended December 31, Note 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(Dollars and shares in thousands, except per share data)
Revenues:
Premiums earned 8 $369,403 $529,855 $488,721
Net investment income 2 53,662 53,593 52,332
Realized gains on investments 2 7,682 11,602 14,008
Real estate sales 58,670 37,737 45,419
Service fee income 2,691 3,992
- ------------------------------------------------------------------------------------------------------------------
Total revenues 492,108 636,779 600,480
- ------------------------------------------------------------------------------------------------------------------
Expenses:
Loss and loss adjustment expenses incurred 8, 16 360,172 382,890 348,165
Policy acquisition costs 65,266 96,937 92,213
Other underwriting and operating expenses 80,090 85,299 68,003
Policyholders' dividends and participation 610 516 355
Real estate construction and operating costs 55,020 36,374 44,286
Interest expense 4, 5, 6 8,218 5,928 3,980
- ------------------------------------------------------------------------------------------------------------------
Total expenses 569,376 607,944 557,002
- ------------------------------------------------------------------------------------------------------------------
Gain on sale of CalFarm Insurance Company 10 160,335
- ------------------------------------------------------------------------------------------------------------------
Income before federal income tax expense 83,067 28,835 43,478
Federal income tax expense, including expense of $56,000
related to the sale of CalFarm Insurance Company in 1999 7, 10 28,967 9,735 15,378
- ------------------------------------------------------------------------------------------------------------------
Net income $ 54,100 $ 19,100 $ 28,100
- ------------------------------------------------------------------------------------------------------------------
Net income per common share -- basic 17 $ 3.15 $ 1.12 $ 1.59
- ------------------------------------------------------------------------------------------------------------------
Net income per common share -- diluted 17 $ 3.15 $ 1.11 $ 1.57
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of this statement.
TheZenith
44
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
----------------------------------------------------------------------
Zenith National Insurance Corp. and Subsidiaries
<TABLE>
- -------------------------------------------------------------------------------------------------------------
Year ended December 31, Note 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
(Dollars in thousands)
Cash flows from operating activities:
Premiums and service fee income collected $394,564 $580,945 $521,588
Investment income received 51,170 54,970 52,242
Proceeds from sales of real estate 58,670 37,737 45,964
Loss and loss adjustment expenses paid (321,510) (434,610) (342,461)
Underwriting and other operating expenses paid (132,505) (182,235) (161,722)
Real estate construction costs paid (66,462) (47,423) (47,565)
Reinsurance premiums paid (24,126) (41,429) (27,336)
Interest paid (13,467) (10,513) (6,910)
Income taxes recovered (paid) 2,084 (4,580) (8,242)
Net proceeds from sales of trading portfolio investments 1,416
- -------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities (51,582) (47,138) 26,974
- -------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of investments:
Debt and equity securities available-for-sale (366,567) (390,373) (82,734)
Other investments (9,332) (12,894) (8,510)
Proceeds from maturities and exchanges of investments:
Fixed maturities held-to-maturity 7,500 11,583 6,258
Debt and equity securities available-for-sale 95,668 96,362 48,338
Other investments 15,483
Proceeds from sales of investments:
Debt and equity securities available-for-sale 233,742 302,648 104,809
Other investments 21,922 13,145 15,211
Net change in short-term investments (41,746) 14,916 (103,115)
Capital expenditures and other, net (15,189) (11,356) (5,304)
Cash payment to RISCORP 9 (54,308) (35,000)
RISCORP acquisition costs 9 (11,035) (2,804)
Cash acquired in RISCORP Acquisition 9 29,309
Net proceeds from sale of CalFarm Insurance Company 10 211,068
- -------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 82,758 7,305 (12,368)
- -------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Repayment of note assumed from RISCORP (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 7,400 7,000
Cash repaid on bank line of credit 4 (12,400) (2,000)
Cash advanced from bank loans and other notes payable 56,970 35,431 39,729
Cash repaid on bank loans and other notes payable (52,397) (34,918) (40,719)
Cash dividends paid to common stockholders (17,165) (17,010) (17,695)
Proceeds from exercise of stock options 4,322 6,527 4,940
Purchase of treasury shares (4,190) (24,023) (482)
- -------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (17,460) 29,327 (14,227)
- -------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 13,716 (10,506) 379
Cash at beginning of year 1,998 12,504 12,125
- -------------------------------------------------------------------------------------------------------------
Cash at end of year $ 15,714 $ 1,998 $ 12,504
- -------------------------------------------------------------------------------------------------------------
Reconciliation of net income to net cash flows from
operating activities:
Net income $ 54,100 $ 19,100 $ 28,100
Adjustments to reconcile net income to net cash flows (used
in) provided by operating activities:
Depreciation and amortization 8,369 9,096 5,716
Realized gain on sale of CalFarm Insurance Company (160,335)
Realized gains on investments (7,682) (11,602) (14,008)
Net cash from trading portfolio 1,416
Amortization of deferred credit on reinsurance 9 (11,000)
Decrease (increase) in:
Premiums receivable 22,528 25,757 7,732
Receivable from reinsurers and state trust funds and
prepaid reinsurance premiums 44,507 30,549 13,457
Real estate construction in progress and land held
for development (20,041) (16,266) (8,038)
Increase (decrease) in:
Unpaid loss and loss adjustment expenses 8,823 (97,601) (6,812)
Unearned premiums (16,095) (13,681) 1,260
Policyholders' dividends accrued (1,388) (597) (2,310)
Federal income tax 31,062 5,019 6,385
Other (4,430) 3,088 (5,924)
- -------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities $(51,582) $(47,138) $ 26,974
- -------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of this statement.
TheZenith
45
<PAGE>
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
Zenith National Insurance Corp. and Subsidiaries
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common
shares Preferred
Three years ended December 31, 1999 Note outstanding stock $1 par
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------
(Dollars and shares in thousands, except per share data)
Balance at December 31, 1996 17,604
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 stock options 12 234
Tax benefit on options exercised in 1997
Purchase of treasury shares at cost (19)
Cash dividends declared to common stockholders ($1.00 per
share,
paid quarterly)
- -------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 17,819
Net income for 1998
Other comprehensive income -- net unrealized appreciation
on investments, net of deferred tax expense of $142 2
Comprehensive income
Exercise of stock options 12 289
Tax benefit on options exercised in 1998
Purchase of treasury shares at cost (960)
Cash dividends declared to common stockholders ($1.00 per
share,
paid quarterly)
- -------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 17,148
Net income for 1999
Other comprehensive (loss) income -- net unrealized
depreciation on investments, net of deferred tax benefit
of $15,935 2
Comprehensive income
Exercise of stock options 12 187
Tax benefit on options exercised in 1999
Purchase of treasury shares at cost (185)
Cash dividends declared to common stockholders ($1.00 per
share,
paid quarterly)
- -------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 17,150
- -------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of this statement.
TheZenith
46
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Accumulated other
Common comprehensive (loss) income -
stock $1 Additional Retained net unrealized (depreciation) Treasury
par paid-in capital earnings appreciation on investments stock Total
<S> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------
(Dollars
and
shares
in
thousands,
except per
share
data)
Balance
at
December 31,
1996 $ 24,447 $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
stock
options 234 4,706 4,940
Tax
benefit
on
options
exercised
in 1997 517 517
Purchase
of
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 24,681 264,098 186,268 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
stock
options 289 6,238 6,527
Tax
benefit
on
options
exercised
in 1998 343 343
Purchase
of
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 24,970 270,679 188,243 9,596 (146,536) 346,952
Net
income
for
1999 54,100 54,100
Other
comprehensive
(loss)
income --
net
unrealized
depreciation
on
investments,
net of
deferred tax
benefit of
$15,935 (29,594) (29,594)
-------
Comprehensive
income 24,506
Exercise
of
stock
options 187 4,135 4,322
Tax
benefit
on
options
exercised
in 1999 83 83
Purchase
of
treasury
shares
at
cost (4,190) (4,190)
Cash
dividends
declared
to
common
stockholders
($1.00 per
share,
paid
quarterly) (17,114) (17,114)
- ----------------------------------------------------------------------------------------------------
Balance
at
December
31, 1999 $ 25,157 $274,897 $225,229 $(19,998) $(150,726) $354,559
- ----------------------------------------------------------------------------------------------------
</TABLE>
TheZenith
47
<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 National") is engaged through its
wholly-owned property-casualty insurance subsidiaries (the "P&C Operations") in
Workers' Compensation insurance; Other Property-Casualty insurance (through
March 31, 1999, the date of sale of CalFarm Insurance Company ("CalFarm"), and
Reinsurance, principally of world-wide property and catastrophe risks. The P&C
Operations sell insurance and reinsurance through agents and brokers and not
directly to consumers. Other Property-Casualty, principally automobile,
homeowners, farmowners, commercial coverages and health insurance and other
coverages written primarily in the rural and suburban areas of California, was
operated primarily by CalFarm, formerly a wholly-owned subsidiary of Zenith
Insurance Company ("Zenith Insurance"), a wholly owned subsidiary of Zenith
National. The Real Estate Operations develop single-family residences for sale
in Las Vegas, Nevada. 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") (see Note 9).
The financial statements have been prepared in accordance with generally
accepted accounting principles ("GAAP") in the United States and include Zenith
National and its subsidiaries (collectively, "Zenith"). 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. The comparability of the results of operations for the year ended
December 31, 1999 compared to the corresponding periods in 1998 and 1997 is
affected by (a) the RISCORP Acquisition effective April 1, 1998; (b) net charges
in the third quarter of 1999 of $50.0 million before tax ($32.5 million after
tax, or $1.89 per share) associated with an increase in the net liabilities for
unpaid losses and loss adjustment expenses in the Southeast Operations, which
principally consists of the operations acquired from RISCORP (the
"RISCORP-Related Adjustment"); and (c) the sale of CalFarm to Nationwide Mutual
Insurance Company effective March 31, 1999 (see Note 10).
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 regarding the fair
value of financial instruments have been derived using external market sources
or estimates using present value and other valuation techniques.
The following summarizes the carrying amounts and fair value of Zenith's
financial instruments:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
1999 1998
December 31, ----------------------- -----------------------
(Dollars in Carrying Fair Carrying Fair
thousands) Note amount value amount value
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------
Assets:
Investments:
Trading securities 2 $ 2,955 $ 2,955 $ 3,041 $ 3,041
Other investments 2 898,779 898,439 1,045,640 1,047,209
---------- ---------- ---------- ----------
901,734 901,394 1,048,681 1,050,250
Liabilities:
Payable to banks and
other
notes payable 4 20,238 20,238 19,255 19,255
Senior notes payable 5 74,717 76,082 74,596 80,881
Redeemable securities 6 73,397 69,055 73,341 66,312
- -----------------------------------------------------------------------------------
</TABLE>
TheZenith
48
<PAGE>
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 Zenith 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
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 tax. 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. During the fourth quarter and for the year ended
December 31, 1999, there were writedowns of $1.0 million and $1.7 million,
respectively.
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 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.
The P&C Operations make provisions for the settlement of all incurred claims,
both reported and unreported. The liabilities for unpaid loss and loss
adjustment expenses are estimates of 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
TheZenith
49
<PAGE>
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. Catastrophes may cause significant
contemporaneous financial statement losses since catastrophe losses may not be
accrued in advance of the event.
Approximately 38.7% and 33.2% of Zenith's Workers' Compensation business is
written in California and Florida, respectively. The concentration of Zenith's
business in these states makes the results of operations highly dependent upon
the states' economies, social and cultural trends, legislative and regulatory
changes, and catastrophic events such as windstorms and earthquakes.
Reinsurance
In accordance with general industry practices, the P&C Operations 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, irregularly occurring losses. Such
reinsurance reduces the magnitude of sudden and unpredictable changes in net
income and the capitalization supporting insurance operations.
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
receivable from reinsurers even though amounts due on unpaid losses are not
recoverable from the reinsurer until such losses are paid. The unearned portion
of premiums due to reinsurers is also included in receivable from reinsurers. In
connection with the RISCORP Acquisition (see Note 11), Zenith Insurance acquired
$244.3 million of recoverable from reinsurers on paid and unpaid losses from
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, 1999, 51.3% is attributable to
reinsurance arrangements with three large United States reinsurance companies.
No material amounts due from reinsurers have been written off as uncollectable
in the three years ended December 31, 1999.
Real Estate Operations
Land, land development costs and construction costs, including costs of
acquisition and development, property taxes and related interest, are
capitalized. Such costs, and an estimate of the costs to complete a project, are
recognized pro rata against sales of completed units. Such capitalized costs are
included in other assets (see Note 5).
Profitable Real Estate Operations are dependent upon real estate values,
interest rates, construction costs, competition and management ability.
Included in other assets is land and real estate construction in progress
carried at a cost of $87.9 million and $69.4 million at December 31, 1999 and
1998, respectively.
TheZenith
50
<PAGE>
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; and furniture, fixtures 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 RISCORP Acquisition
discussed in Note 9. The amounts assigned to assets acquired since 1970 are
being amortized on a straight-line basis over 20 to 25 years. Amortization
expense was $0.9 million, $1.1 million and $0.4 million in 1999, 1998 and 1997,
respectively. Accumulated amortization was $1.9 million and $7.6 million at
December 31, 1999 and 1998, respectively. Of the intangible assets at
December 31, 1999 and 1998, $21.2 million and $23.7 million, respectively, were
amortizable. Management periodically assesses the recoverability of these
intangible assets based on a review of projected, undiscounted cash flows of the
operations acquired.
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
Codification provides guidance for the areas where statutory accounting has been
silent and changes current statutory accounting in some areas. The NAIC is now
considering amendments to the Codification that would also be effective upon
implementation. The NAIC has established January 1, 2001 as the effective date
of the Codification.
The California Department of Insurance has adopted the Codification.
Implementation of the Codification may affect the surplus level and the
capitalization requirements of the P&C Operations on a statutory basis. Zenith
has not determined the impact of the Codification.
Recently Issued Accounting Standards
On June 15, 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133 ("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 June 15,
2000. SFAS No. 133 requires that companies record all derivative instruments on
the balance sheet at 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.
Reclassifications and Restatements
Certain 1998 and 1997 amounts have been reclassified to conform to the 1999
presentation.
TheZenith
51
<PAGE>
Note 2
Investments
The amortized cost and fair values of investments were as follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Gross unrealized
December 31, 1999
(Dollars in Amortized ----------------- Fair Carrying
thousands) cost gains (losses) value value
- ---------------------------------------------------------------------------
Held-to-maturity:
Corporate debt $ 5,325 $ (127) $ 5,198 $ 5,325
Mortgage-backed 22,201 (213) 21,988 22,201
- ---------------------------------------------------------------------------
Total
held-to-maturity $ 27,526 $ (340) $ 27,186 $ 27,526
- ---------------------------------------------------------------------------
Available-for-sale:
U.S. Treasuries $190,466 $ (1,985) $188,481 $188,481
Corporate debt 444,308 $1,054 (27,266) 418,096 418,096
Mortgage-backed 5,491 (24) 5,467 5,467
Redeemable preferred
stocks 13,879 (1,477) 12,402 12,402
Equities 36,501 3,601 (4,669) 35,433 35,433
Short-term
investments 179,748 179,748 179,748
- ---------------------------------------------------------------------------
Total available-
for-sale $870,393 $4,655 $(35,421) $839,627 $839,627
- ---------------------------------------------------------------------------
Trading:
Corporate debt $ 2,985 $ (56) $ 2,929 $ 2,929
Equities 26 26 26
- ---------------------------------------------------------------------------
Total trading $ 3,011 $ (56) $ 2,955 $ 2,955
- ---------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Gross unrealized
December 31, 1998
(Dollars in Amortized ------------------ Fair Carrying
thousands) cost gains (losses) value value
- ----------------------------------------------------------------------------
Held-to-maturity:
Corporate debt $ 5,330 $ 740 $ 6,070 $ 5,330
Mortgage-backed 29,813 829 30,642 29,813
- ----------------------------------------------------------------------------
Total
held-to-maturity $ 35,143 $ 1,569 $ 36,712 $ 35,143
- ----------------------------------------------------------------------------
Available-for-sale:
U.S. Treasuries $161,548 $ 962 $ (295) $162,215 $162,215
Corporate debt 529,888 12,904 (3,924) 538,868 538,868
Mortgage-backed 16,938 45 (130) 16,853 16,853
Redeemable preferred
stocks 14,045 332 (30) 14,347 14,347
Equities 46,670 6,771 (1,872) 51,569 51,569
Short-term
investments 187,123 187,123 187,123
- ----------------------------------------------------------------------------
Total available-
for-sale $956,212 $21,014 $(6,251) $970,975 $970,975
- ----------------------------------------------------------------------------
Trading:
Corporate debt $ 2,978 $ 23 $ 3,001 $ 3,001
Equities 25 15 40 40
- ----------------------------------------------------------------------------
Total trading $ 3,003 $ 38 $ 3,041 $ 3,041
- ----------------------------------------------------------------------------
</TABLE>
Debt securities, including short-term investments, at December 31, 1999 by
contractual maturity were as follows:
<TABLE>
- ----------------------------------------------------------
December 31, 1999 Amortized Fair
(Dollars in thousands) cost value
- ----------------------------------------------------------
<S> <C> <C>
Held-to-maturity:
Due after ten years $ 27,526 $ 27,186
- ----------------------------------------------------------
Total held-to-maturity $ 27,526 $ 27,186
- ----------------------------------------------------------
Available-for-sale:
Due in one year or less $240,068 $239,888
Due after one year through
five years 288,217 282,168
Due after five years through
ten years 204,862 190,256
Due after ten years 100,745 91,882
- ----------------------------------------------------------
Total available-for-sale $833,892 $804,194
- ----------------------------------------------------------
Trading:
Due after one year through
five years $ 2,985 $ 2,929
- ----------------------------------------------------------
Total trading $ 2,985 $ 2,929
- ----------------------------------------------------------
</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 1999, 1998 and 1997 were $8.2 million, $9.9 million
and $5.1 million, respectively, and the gross realized losses were
$5.5 million, $3.0 million and $1.0 million, respectively.
At December 31, 1999 and 1998, 96% and 95%, respectively, of Zenith's
consolidated portfolio of fixed maturity investments were
TheZenith
52
<PAGE>
classified as available-for-sale with the unrealized appreciation or
depreciation recorded as a separate component of stockholders' equity. The
change in fair value of fixed maturity investments classified as
available-for-sale resulted in a decrease in stockholders' equity of
$25.7 million after deferred tax from December 31, 1998 to December 31, 1999,
compared to an increase of $1.4 million from 1997 to 1998.
Investment income is summarized as follows:
<TABLE>
- -------------------------------------------------------------
Year ended December 31,
(Dollars in thousands) 1999 1998 1997
- -------------------------------------------------------------
<S> <C> <C> <C>
Fixed maturities:
Bonds $45,080 $44,460 $42,837
Redeemable
preferred stocks 1,362 1,113 1,289
Equity securities:
Floating rate
preferred stocks 777 977 872
Convertible and
nonredeemable
preferred stocks 350 477 337
Common stocks 984 717 595
Short-term investments 8,327 8,265 8,090
Other 756 1,088 1,489
- -------------------------------------------------------------
57,636 57,097 55,509
Less investment expenses 3,974 3,504 3,177
- -------------------------------------------------------------
Net investment income $53,662 $53,593 $52,332
- -------------------------------------------------------------
</TABLE>
Investments carried at their fair value of $205.5 million and $262.0 million
at December 31, 1999 and 1998, respectively, were on deposit with regulatory
authorities in compliance with insurance company regulations.
The change in holding (losses) gains on trading securities, which is included
in realized gains, was $(56,000), $39,000 and $(15,000) for the years ended
December 31, 1999, 1998 and 1997, respectively.
Note 3
Properties and Equipment
Properties and equipment consist of the following:
<TABLE>
- ----------------------------------------------------
December 31,
(Dollars in thousands) 1999 1998
- ----------------------------------------------------
<S> <C> <C>
Land $ 9,650 $16,536
Buildings 31,103 44,203
Furniture, fixtures and equipment 45,430 57,368
- ----------------------------------------------------
86,183 118,107
Accumulated depreciation (31,202) (38,199)
- ----------------------------------------------------
Total $54,981 $79,908
- ----------------------------------------------------
</TABLE>
Depreciation expense amounted to $9.9 million, $8.8 million and $5.8 million
in 1999, 1998 and 1997, respectively.
Note 4
Payable to Banks and Other Notes Payable
At December 31, 1999, Zenith National had two revolving, unsecured lines of
credit in an aggregate amount of $70.0 million, all of which was available at
December 31, 1999. A $30.0 million line of credit was not renewed when it
expired November 30, 1999. Interest on funds borrowed under one of these lines
of credit is payable at either (a) the bank's reference rate less 0.55% OR
(b) LIBOR plus 0.40%. Interest under the other line of credit is payable
at 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 0.475%. The prime interest rates were 8.50%, 7.75%
and 8.50% at December 31, 1999, 1998 and 1997, respectively.
Under these agreements, certain restrictive covenants apply including the
maintenance of a specific level of net worth.
Zenith's Real Estate Operations maintain certain bank credit facilities to
provide financing for development and construction of single-family residences
for sale. These loans bear interest at the rates of prime plus 1.0% and prime
plus 0.75% and mature between February
TheZenith
53
<PAGE>
2000 and November 2001. Each agreement pertains to a separate residential
housing project and the maximum credit available was $27.1 million and
$32.3 million at December 31, 1999 and 1998, respectively. 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, 1999 and 1998, $19.1 million and $12.3 million, respectively, was
outstanding with respect to the borrowing.
The 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 10%, with a
maximum maturity of August 2004. The balance outstanding with respect to these
notes was $1.1 million and $2.0 million at December 31, 1999 and 1998,
respectively.
Note 5
Senior Notes Payable
Zenith National has $75.0 million of its 9% Senior Notes due 2002 (the "9%
Notes") issued and outstanding at December 31, 1999 and 1998. Interest on the 9%
Notes is payable semi-annually. The 9% Notes are general unsecured obligations
of Zenith National. Issue costs of $1.2 million are being amortized over the
term of the 9% Notes. In each of the years ended December 31, 1999, 1998 and
1997, $6.9 million of interest and issue costs were expended. Covenants
contained in the indenture include restrictions on the ability of Zenith
National to incur secured debt and the right of holders of the 9% Notes to
require Zenith National 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 National common stock; (b) 10% or more of Zenith National common stock
is acquired by Zenith National 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
National common stock by Zenith National during a 12-month period is 30% or more
of the fair market value of outstanding Zenith National common stock.
Interest incurred on borrowings is summarized as follows:
<TABLE>
- ----------------------------------------------------------
Year ended December 31,
(Dollars in thousands) 1999 1998 1997
- ----------------------------------------------------------
<S> <C> <C> <C>
Interest capitalized for
Real Estate Operations $7,048 $4,922 $4,343
Interest expense not related
to Real Estate Operations 8,218 5,784 3,755
- ----------------------------------------------------------
Total interest incurred $15,266 $10,706 $8,098
- ----------------------------------------------------------
</TABLE>
Interest expense not related to Real Estate Operations includes $6.4 million
and $2.7 million of interest on the Redeemable Securities (see Note 6) for the
years ended December 31, 1999 and 1998, respectively.
Note 6
Redeemable Securities
On July 30, 1998, Zenith issued $75.0 million 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 National. 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 $75.0 million of
Zenith National'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 National for up to ten consecutive semi-annual periods. The
TheZenith
54
<PAGE>
Subordinated Debentures are redeemable at any time by Zenith National 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 National used
$65.0 million 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 $1.7 million are
being amortized over the term of the Subordinated Debentures. During the years
ended December 31, 1999 and 1998, $6.5 million and $2.7 million, respectively,
of interest, issue costs and discount were expensed.
Zenith National 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 National's guarantee of
the Capital Securities, as well as the Subordinated Debentures, are subordinated
to all other indebtedness of Zenith National.
Note 7
Federal Income Tax
The components of the provision (benefit) for tax on income are:
<TABLE>
- -----------------------------------------------------------
Year ended December 31,
(Dollars in thousands) 1999 1998 1997
- -----------------------------------------------------------
<S> <C> <C> <C>
Current $29,488 $ 6,458 $10,989
Deferred (521) 3,277 4,389
- -----------------------------------------------------------
Federal income tax expense $28,967 $ 9,735 $15,378
- -----------------------------------------------------------
</TABLE>
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>
- ---------------------------------------------------------------
Year ended December 31,
(Dollars in thousands) 1999 1998 1997
- ---------------------------------------------------------------
<S> <C> <C> <C>
Statutory federal income
tax expense $29,074 $10,092 $15,217
Increase (reduction) in
tax:
Dividend received
deduction and tax-
exempt interest (765) (1,062) (693)
Other 658 705 854
- ---------------------------------------------------------------
Federal income tax expense $28,967 $ 9,735 $15,378
- ---------------------------------------------------------------
</TABLE>
Deferred tax is 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>
- ----------------------------------------------------------------------
Year ended 1999
December 31, Deferred Tax 1998
(Dollars in Deferred Tax
thousands) Assets Liabilities Assets Liabilities
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------
Investments* $10,768 $ 6,116
Deferred policy
acquisition costs $ 2,762 8,379
Purchased intangibles 3,133 1,658
Properties and
equipment 5,658 8,409
Earned but unbilled
premiums 1,570 1,772
Property-casualty
loss reserve
discount 27,536 $32,159
Limitation on
deduction for
unearned premiums 3,782 10,190
Policyholders'
dividends accrued 1,181 1,667
Deferred income on
ceded reinsurance 8,050 2,979
Other 2,508 6,101 3,091 1,141
- ----------------------------------------------------------------------
53,825 19,224 50,086 27,475
- ----------------------------------------------------------------------
Net deferred tax
asset $34,601 $22,611
- ----------------------------------------------------------------------
*Differences between the tax basis and carrying value of investments,
principally unrealized depreciation/appreciation of available-for-sale
investments.
</TABLE>
Zenith's net deferred tax asset is expected to be fully recoverable because
all future deductible amounts can be offset by reversing deferred tax
liabilities or recovery of federal income taxes paid within the statutory
carryback period.
TheZenith
55
<PAGE>
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.
Zenith files a consolidated federal income tax return. The P&C Operations 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 were as
follows:
<TABLE>
- ------------------------------------------------------------
Year ended December 31,
(Dollars in thousands) 1999 1998 1997
- ------------------------------------------------------------
<S> <C> <C> <C>
Direct premiums earned $345,085 $545,573 $477,527
Assumed premiums earned 40,667 38,769 37,385
Ceded premiums earned (16,349) (54,487) (26,191)
- ------------------------------------------------------------
Net premiums earned $369,403 $529,855 $488,721
- ------------------------------------------------------------
Ceded loss and loss
adjustment expenses
incurred $ 58,948 $ 26,456 $ 10,491
- ------------------------------------------------------------
</TABLE>
Zenith Insurance (in its Workers' Compensation Operations) maintains excess
of loss and catastrophic reinsurance protection, which varies based on the type
of coverage, as follows: excess of loss reinsurance per occurrence in excess of
$550,000 and catastrophe reinsurance coverage against aggregate losses per event
up to $100,000,000. Assumed reinsurance is covered by approximately $20,000,000
in excess of approximately $4,000,000 for non-United States catastrophes. 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.
Note 9
Acquisition of 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").
The excess of the purchase price, including acquisition expenses, over the
estimated fair value of net assets acquired was $20.4 million, which is net of a
deferred tax asset of $10.2 million, and is being amortized over 25 years.
Amortization expense was $0.8 million in 1999 and $0.6 million from April 1,
1998 through December 31, 1998.
The following table summarizes the estimated fair value of assets acquired
and liabilities assumed from RISCORP at April 1, 1998 and the final purchase
price determined by the Neutral Auditor and Neutral Actuary at the end of the
three-step determination process described in Note 11.
<TABLE>
- ---------------------------------------------------------
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 on paid and unpaid losses and
prepaid reinsurance premiums 288,483
Intangible assets 7,707
Other assets 46,962
- ---------------------------------------------------------
Total assets 649,496
- ---------------------------------------------------------
Liabilities:
Unpaid loss and loss adjustment expense 482,518
Unearned premium reserve 43,177
Other liabilities 31,465
- ---------------------------------------------------------
Total liabilities 557,160
- ---------------------------------------------------------
Purchase price $ 92,336
- ---------------------------------------------------------
</TABLE>
In the third quarter of 1999, as described in Note 11, Zenith Insurance
decreased the fair values of the net assets acquired from RISCORP by
approximately $65.0 million. Such decrease was partially offset by (a) the net
benefit of $34.0 million associated with reinsurance protection for adverse loss
development included in other liabilities and (b) $6.0 million
TheZenith
56
<PAGE>
recovered from RISCORP to settle certain litigation.
Note 10
Sale of CalFarm Insurance Company
Effective March 31, 1999, Zenith Insurance completed the sale of all of the
issued and outstanding capital stock of CalFarm for $273.0 million in cash to
Nationwide Mutual Insurance Company. CalFarm wrote Zenith's Other
Property-Casualty business, principally in California. The gain on the sale
after tax was $104.3 million. After accounting for applicable taxes, expenses
and certain intercompany transactions, the net proceeds from the sale that were
available to Zenith Insurance for investment were $211.0 million, compared to
cash and investments of $226.4 million that were excluded from Zenith's
Consolidated Balance Sheet upon the sale of CalFarm.
The following table summarizes the assets and liabilities of CalFarm at
March 31, 1999:
<TABLE>
- ---------------------------------------------------------
March 31,
(Dollars in thousands) 1999
- ---------------------------------------------------------
<S> <C>
Assets:
Investments $170,050
Cash 1,904
Receivable from Zenith Insurance 59,256
Premiums receivable 36,517
Receivable from reinsurers on paid and
unpaid losses and prepaid reinsurance
premiums 23,002
Deferred policy acquisition costs 15,620
Properties and equipment 20,505
Other assets 6,874
- ---------------------------------------------------------
Total assets $333,728
- ---------------------------------------------------------
Liabilities:
Unpaid loss and loss adjustment expenses $125,589
Unearned premiums 90,964
Other liabilities 10,617
- ---------------------------------------------------------
Total liabilities $227,170
- ---------------------------------------------------------
</TABLE>
Pro forma total revenues for Zenith for the year ended December 31, 1999 and
1998 (after giving effect to the sale of CalFarm as if it had been consummated
at the beginning of the respective periods) would have been $435.0 million and
$402.0 million, respectively. Pro forma results of operations after tax for such
periods would have been a net loss of $52.2 million and net income of
$7.9 million, respectively. Pro forma earnings per share for such periods would
have been a net loss of $3.04 (basic and diluted) and net income of $0.46 (basic
and diluted), respectively.
Since CalFarm was acquired by Zenith Insurance in 1985, CalFarm's cumulative
combined ratio was 100.1% and its cumulative underwriting income was
approximately zero. In addition to the loss of any underwriting income and cash
flow provided by CalFarm, Zenith's annual consolidated net income would be
reduced by the investment income associated with the net reduction of
approximately $15.0 million of consolidated investments caused by the sale of
CalFarm. Estimated investment income after tax on such decrease would have been
$0.2 million and $0.6 million for the years ended December 31, 1999 and 1998,
respectively. Using such change in investment income, the underwriting income
previously reported by CalFarm and the gain on the sale of CalFarm, pro forma
net (loss) income would be as follows:
<TABLE>
<S> <C> <C>
- -----------------------------------------------------
Year Ended December 31,
(Dollars in thousands) 1999 1998
- -----------------------------------------------------
Net income as reported $ 54,100 $ 19,100
Less after tax adjustments:
Underwriting (income) loss of
CalFarm 74 (2,844)
Gain on sale of CalFarm (104,335)
Change in investment income (139) (556)
- -----------------------------------------------------
Pro forma net (loss) income $ (50,300) $ 15,700
- -----------------------------------------------------
Pro forma net (loss) income per
common share (basic and
diluted) $ (2.93) $ 0.92
- -----------------------------------------------------
</TABLE>
Note 11
Commitments and Contingent Liabilities
Zenith has office space leases, equipment leases and automobile leases
expiring through
TheZenith
57
<PAGE>
2004. The minimum rentals on these operating leases as of December 31, 1999 were
as follows:
<TABLE>
- ------------------------------------------------------------
Equipment
(Dollars in thousands) and
auto
Year fleet Offices Total
- ------------------------------------------------------------
<S> <C> <C> <C>
2000 $ 829 $3,532 $ 4,361
2001 665 2,805 3,470
2002 327 1,762 2,089
2003 82 564 646
2004 16 107 123
Thereafter
- ------------------------------------------------------------
Total $1,919 $8,770 $10,689
- ------------------------------------------------------------
</TABLE>
Rental expenses for 1999, 1998 and 1997 amounted to $5.7 million,
$5.8 million and $5.9 million, respectively.
Other than the RISCORP litigation described below, Zenith National 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.
Resolution of Contingencies Surrounding Fair Values of RISCORP Assets Acquired
and Liabilities Assumed and the RISCORP-Related Adjustment
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"). The total purchase price for such acquired
assets and liabilities was determined by a three-step process in which RISCORP
and its external accounting and actuarial consultants and Zenith Insurance and
its external accounting and actuarial consultants made and presented their
estimates of the GAAP values of the assets and liabilities acquired by Zenith
Insurance to an independent third-party, acting as a Neutral Auditor and Neutral
Actuary. Such estimates varied considerably, particularly with respect to the
value of premiums receivable and the liability for unpaid losses and loss
adjustment expenses. On March 19, 1999, the Neutral Auditor and Neutral Actuary
issued its report determining the disputes between the parties. As previously
announced, Zenith Insurance recorded the assets and liabilities acquired from
RISCORP at their estimated fair values consistent with the values determined by
the Neutral Auditor and Neutral Actuary. Previously reported consolidated
financial statements for June 30, 1998 and September 30, 1998 were restated to
reflect the resolution of the disputes between the parties. Zenith Insurance
indicated that any new information that might become available with respect to
certain assets and liabilities acquired from RISCORP may change the estimates of
the carrying values of such amounts and such changes, if any, would be reflected
in the results of operations for the period in which they occur.
In October of 1999, Zenith Insurance completed a review of the liabilities
for unpaid losses and loss adjustment expenses in its Southeast Operations,
which principally consists of the operations acquired from RISCORP. The review
was conducted with assistance from independent actuarial consultants. As a
result of the review, Zenith Insurance recorded, in the third quarter of 1999
the RISCORP-Related Adjustment, which mainly comprises an increase of
$46.0 million before tax ($29.9 million after tax) in the estimated net
liabilities for unpaid losses and loss adjustment expenses acquired from
RISCORP. The increase results primarily from the adjustments to reserves for the
years 1994 through 1997. Certain related receivables, principally contingent
commissions receivable under reinsurance contracts assumed from RISCORP, were
reduced by $19.0 million net ($12.4 million after tax) as a result of such
increase in net liabilities. As previously reported, Zenith Insurance purchased
reinsurance protection relating to development of the unpaid loss and loss
adjustment expense reserves acquired from RISCORP. Such
TheZenith
58
<PAGE>
reinsurance allows Zenith Insurance to recover up to $50.0 million in excess of
$182.0 million for net unpaid losses and allocated loss adjustment expenses
acquired from RISCORP. In the third quarter of 1999, Zenith Insurance recorded
an increase in the amount recoverable to $50.0 million and a benefit of $9.0
million ($5.9 million after tax) associated with such reinsurance. An additional
benefit of $23.0 million ($15.0 million after tax) included in other liabilities
associated with such reinsurance has been deferred and will be recognized over
approximately the next four years, the settlement period of the reinsurance
recoverable.
The adjustments associated with the increase in the liabilities for unpaid
loss and loss adjustment expenses acquired from RISCORP, net of the benefit of
reinsurance protection and the effect of the "settlement agreement" (see
"RISCORP Litigation" below), in the aggregate, reduced income by $50.0 million
($32.5 million after tax, or $1.89 per share), in 1999.
The foregoing RISCORP-Related Adjustment, after the benefit of the
reinsurance protection for adverse development of the unpaid loss and loss
adjustment expense reserves acquired from RISCORP, decreased the statutory
surplus of Zenith Insurance by $25.0 million after tax in 1999.
RISCORP Litigation
Zenith Insurance and RISCORP entered into a settlement agreement, dated
July 7, 1999 (the "Settlement Agreement"), providing for the resolution of
certain claims arising out of the RISCORP Acquisition. Pursuant to the
Settlement Agreement, Zenith Insurance and RISCORP (i) dismissed litigation
pending between them in the United States District Courts for the Middle
District of Florida, Tampa Division, and the Southern District of New York;
(ii) agreed that RISCORP may request that the Neutral Auditor and Neutral
Actuary (a) review an alleged error concerning the proper treatment of certain
reinsurance treaties in its determinations with respect to the purchase price
for the RISCORP Acquisition, without waiving whatever rights RISCORP may have to
litigation of such issue, (b) determine whether the issue was properly in
dispute before the Neutral Auditor and Neutral Actuary and (c), if so, determine
the merits of the issue and whether a correction is appropriate; (iii) agreed
that any other disputes arising under the Asset Purchase Agreement or the
Settlement Agreement, including any future claims for indemnification by either
Zenith Insurance or RISCORP, are to be resolved by binding arbitration;
(iv) agreed that Zenith Insurance receives $6.0 million from an escrow account
established pursuant to the Asset Purchase Agreement, and RISCORP receives the
balance of the escrow account; and (v) agreed to an allocation between them of
any recovery received as a result of refund claims that RISCORP has made to the
Florida Department of Labor and Employment Security, Division of Workers'
Compensation. In a submission made to the Neutral Auditor and Neutral Actuary,
RISCORP claimed that the purchase price for the RISCORP Acquisition should be
adjusted by either $5.9 million or $23.4 million as a result of alleged errors
in the original determination of the Neutral Auditor and Neutral Actuary with
respect to the purchase price. On October 7, 1999, the Neutral Auditor and
Neutral Actuary advised Zenith and RISCORP that they would not consider the
additional issue raised by RISCORP because the issue had not previously been
raised as a dispute pursuant to the procedures set forth in their engagement
letter. On January 13, 2000, RISCORP filed a complaint against Zenith Insurance
and the Neutral Auditor and Neutral Actuary in the Superior Court of Fulton
County in the State of Georgia. The complaint alleges breach of contract against
both Zenith Insurance and the Neutral Auditor and Neutral Actuary and seeks
recovery of the amounts previously described to have resulted from the alleged
errors by the Neutral Auditor and Neutral Actuary. Zenith is unable to predict
the outcome of this litigation.
TheZenith
59
<PAGE>
Contingencies Surrounding
Recoverability of State Disability
Trust Fund Receivables
In Florida, the Special Disability Trust Fund (the "Fund") 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 following table details the
change in the receivable from the Fund, which was included in receivable from
reinsurers and state trust funds:
<TABLE>
<S> <C>
- -----------------------------------------------------
(Dollars in thousands)
- -----------------------------------------------------
Balance as of December 31, 1998 $39,078
Cash recoveries (5,584)
Change in estimate 3,539
- -----------------------------------------------------
Balance as of December 31, 1999 $37,033
- -----------------------------------------------------
</TABLE>
Note 12
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 National's common stock at
100% of the market price at the date of grant. The majority of options
outstanding at December 31, 1999 and 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 Statement of Financial
Accounting Standards No. 123 ("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 1999, 1998
and 1997 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>
- ---------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
------------------- ------------------- -------------------
Year ended December 31, As Pro- As Pro- As Pro-
(Dollars in thousands, except per share data) Reported forma Reported forma Reported forma
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net income $54,100 $52,600 $19,100 $17,703 $28,100 $26,583
Net income per common share
-- basic 3.15 3.06 1.12 1.04 1.59 1.50
-- diluted 3.15 3.06 1.11 1.03 1.57 1.49
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The pro-forma effect on net income for 1999, 1998 and 1997 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.
TheZenith
60
<PAGE>
The fair value of each option grant was estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions:
<TABLE>
- --------------------------------------------------------------------
1999 Grants 1998 Grants 1997 Grants
- --------------------------------------------------------------------
<S> <C> <C> <C>
Risk-free interest
rates 5.36% - 6.30% 4.52% - 5.66% 5.70%
Dividend yields 4.34% - 5.08% 3.75% 4.10%
Volatility factors 20.30% - 20.56% 19.83% 16.94%
Weighted average
expected life (five-
year term options) 4.5 yrs. 4.5 yrs. 5 yrs.
Weighted average
fair value
per share $3.49 $4.40 $4.07
- --------------------------------------------------------------------
</TABLE>
Additional information with respect to stock options was as follows:
<TABLE>
- -----------------------------------------------------------
Weighted
average
Number exercise
(Shares in thousands) of shares price
- -----------------------------------------------------------
<S> <C> <C>
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
Granted 154 21.95
Exercised (187) 23.11
Expired or cancelled (385) 26.02
-----
Outstanding at December 31, 1999 2,115 24.76
- -----------------------------------------------------------
</TABLE>
Certain information on outstanding options at December 31, 1999 was as
follows:
<TABLE>
- ----------------------------------------------------------------
Range of Weighted Outstanding
exercise price average options weighted
(Shares in Number remaining life average exercise
thousands) outstanding in years price
- ----------------------------------------------------------------
<S> <C> <C> <C>
$23.63 1,000 6.2 $23.63
19.72 - 28.34 1,115 2.8 25.77
- ----------------------------------------------------------------
</TABLE>
Options exercisable at December 31, 1999, 1998, and 1997 were 1,127,000,
877,000 and 737,000, respectively. Certain information on exercisable options at
December 31, 1999 was as follows:
<TABLE>
- -----------------------------------------------------
Exercisable
Range of exercise options weighted
prices Number average exercise
(Shares in thousands) exercisable price
- -----------------------------------------------------
<S> <C> <C>
$23.63 600 $23.63
19.72 - 28.34 527 25.72
- -----------------------------------------------------
</TABLE>
At December 31, 1999, Zenith had authority from its Board of Directors to
repurchase up to 940,000 of Zenith National's common shares at prevailing market
prices.
Note 13
Dividend Restrictions
State insurance regulations limit the maximum dividends that may be paid to
Zenith National by its insurance subsidiary during any 12-month period without
prior regulatory approval. Stockholder's equity of the P&C Operations, in
accordance with GAAP, amounted to $334.6 million as of December 31, 1999, of
which $29.8 million can be paid in 2000 to Zenith National in dividends without
prior approval.
Note 14
Statutory Financial Data
Capital stock and surplus and net income of the P&C Operations on a statutory
basis, as reported to regulatory authorities, were as follows:
<TABLE>
- --------------------------------------------------------------
Year ended December 31,
(Dollars in thousands) 1999 1998 1997
- --------------------------------------------------------------
<S> <C> <C> <C>
Capital stock and surplus $297,969 $345,042 $279,993
Net income 74,310 21,959 31,820
- --------------------------------------------------------------
</TABLE>
The insurance business is subject to state-by-state regulation and
legislation focused on solvency, pricing, market conduct, claims practices,
underwriting, accounting, investment criteria and other areas. Such regulation
and legislation is constantly changing and compliance is essential and is an
inherent risk of the business.
TheZenith
61
<PAGE>
Note 15
Quarterly Financial Data (Unaudited)
<TABLE>
- -------------------------------------------------------------------
(Dollars in 1999 Period Ended
thousands, ---------------------------------------------
except per share March June September December
data) 31 30 30 31
- -------------------------------------------------------------------
<S> <C> <C> <C> <C>
Premiums earned $135,577 $ 75,977 $ 87,110 $ 70,739
Net investment
income 13,325 12,946 14,229 13,162
Realized gains
on investments 1,534 2,531 2,322 1,295
Real estate sales 10,768 14,438 14,034 19,430
Service fee income 959 585 802 345
Gain on sale of
CalFarm 160,335
Net income (loss) 104,400 (3,400) (37,300) (9,600)
Net income per common
share
-- basic 6.09 (0.20) (2.17) (0.56)
-- diluted 6.09 (0.20) (2.17) (0.56)
- -------------------------------------------------------------------
</TABLE>
<TABLE>
- -------------------------------------------------------------------
(Dollars in 1998 Period Ended
thousands, ---------------------------------------------
except per share March June September December
data) 31 30 30 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
-- diluted 0.42 0.42 0.20 0.08
- -------------------------------------------------------------------
</TABLE>
Underwriting results for the year ended December 31, 1999 include catastrophe
losses of $12.3 million after tax, or $0.72 per share, of which $1.3 million,
$2.7 million, $3.1 million and $5.2 million were incurred in the first, second,
third and fourth quarters, respectively. Underwriting results for the year ended
December 31, 1998 include catastrophe losses of $7.5 million after tax, or $0.44
per share, of which $3.3 million, $2.6 million and $1.6 million were incurred in
the first, third and fourth quarters, respectively.
Note 16
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:
<TABLE>
- ------------------------------------------------------------------
Year ended December 31,
(Dollars in thousands) 1999 1998 1997
- ------------------------------------------------------------------
<S> <C> <C> <C>
Beginning of year, net of
reinsurance recoverable $708,684 $525,601 $526,427
Acquisition of RISCORP as of
April 1, 1998 242,760
Sale of CalFarm as of
March 31, 1999 (109,150)
Incurred claims:
Current year 315,348 394,257 348,514
Prior years 44,824 (11,367) (349)
- ------------------------------------------------------------------
Total incurred claims 360,172 382,890 348,165
- ------------------------------------------------------------------
Payments:
Current year (83,437) (176,678) (138,393)
Prior years (271,019) (265,889) (210,598)
- ------------------------------------------------------------------
Total payments (354,456) (442,567) (348,991)
- ------------------------------------------------------------------
End of year, net of
reinsurance 605,250 708,684 525,601
Recoverable from reinsurers
and state trust funds on
paid and unpaid losses 275,679 288,963 87,665
- ------------------------------------------------------------------
End of year $880,929 $997,647 $613,266
- ------------------------------------------------------------------
</TABLE>
Statutory reserves differ from GAAP by the amount of the deposit receivable from
Reliance, which is treated as reinsurance recoverable for statutory purposes.
TheZenith
62
<PAGE>
Note 17
Earnings and Dividends Per Share
The following table sets forth the computation of basic and diluted net
income per common share.
<TABLE>
- ------------------------------------------------------------
(Dollars In thousands, except
per share data) 1999 1998 1997
- ------------------------------------------------------------
<S> <C> <C> <C>
(A) Net income $54,100 $19,100 $28,100
- ------------------------------------------------------------
(B) Weighted average
outstanding shares
during the period 17,161 17,035 17,716
Additional common shares
issuable under employee
stock option plans using
the treasury stock method 11 123 170
- ------------------------------------------------------------
(C) Weighted average number of
common shares outstanding
assuming exercise of stock
options 17,172 17,158 17,886
- ------------------------------------------------------------
Net income per common share:
(A)/(B) -- basic $ 3.15 $ 1.12 $ 1.59
(A)/(C) -- diluted 3.15 1.11 1.57
- ------------------------------------------------------------
Dividends per common share $ 1.00 $ 1.00 $ 1.00
- ------------------------------------------------------------
</TABLE>
Options to purchase 2,053,000 shares and 1,290,000 shares, respectively, of
common stock at an average price of $24.90 and $26.69, respectively, per share
were outstanding as of December 31, 1999 and 1998 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 18
Segment Information
Effective January 1, 1998, Zenith adopted Statement of Financial Accounting
Standards No. 131. ("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,
Other Property-Casualty (through March 31, 1999, the date of the sale of
CalFarm), Reinsurance, Real Estate, 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. Other Property-Casualty represents multiple product line direct
insurance other than workers' compensation, primarily in California which was
operated primarily by CalFarm. Reinsurance represents the book of assumed,
world-wide reinsurance of losses from catastrophes and the reinsurance of large
property risks. Real Estate Operations develop land and primarily construct
single-family residences in Las Vegas, Nevada. Investment provides investment
income and realized gains on investments, primarily from investments in debt
securities. Parent represents Zenith National owning directly or indirectly all
of the capital stock of the P&C Operations 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 tax, and not including
investment income or realized gains or losses.
TheZenith
63
<PAGE>
Information as to the operations of the segments is set forth below:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Other
Workers' Property- Real
(Dollars in thousands) Compensation Casualty Reinsurance Estate Investment Parent Total
- -----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
For the Year Ended December 31, 1999
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Premiums earned $ 278,854 $ 54,108 $36,441 $ 369,403
Net investment income $ 53,662 53,662
Realized gains on investments 7,682 7,682
Real estate sales $58,670 58,670
Service fee income 2,691 2,691
- -----------------------------------------------------------------------------------------------------------------------------
Total revenues $ 281,545 $ 54,108 $36,441 $58,670 $ 61,344 $ 492,108
- -----------------------------------------------------------------------------------------------------------------------------
Segment (loss) income before tax $(122,543) $ (22) $(7,324) $ 3,649 $ 61,344 $(12,372) $ (77,268)
Gain on sale of CalFarm before tax 160,335 160,335
Combined ratios 143.9% 100.0% 120.1% 135.2%
Interest expense before tax (8,218) (8,218)
Income tax benefit (expense) $ 42,199 $(55,993) $ 2,494 $(1,277) $ (20,719) $ 4,329 $ (28,967)
- -----------------------------------------------------------------------------------------------------------------------------
Segment assets $ 520,544 $27,701 $85,731 $ 929,280 $ 10,530 $1,573,786
- -----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
For the Year Ended December 31, 1998
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Premiums earned $ 278,660 $222,045 $29,150 $ 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 $222,045 $29,150 $37,737 $ 65,195 $ 636,779
- -----------------------------------------------------------------------------------------------------------------------------
Segment (loss) income before tax $ (42,638) $ 4,410 $10,268 $ 1,363 $ 65,195 $ (9,763) $ 28,835
Combined ratios 115.3% 98.0% 64.8% 105.3%
Interest expense before tax (5,928) (5,928)
Income tax benefit (expense) $ 14,003 $ (1,426) $(3,322) $ (495) $ (21,747) 3,252 $ (9,735)
- -----------------------------------------------------------------------------------------------------------------------------
Segment assets $ 554,650 $102,667 $20,484 $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 $214,406 $32,251 $ 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 $214,406 $32,251 $45,964 $ 65,795 $ 600,480
- -----------------------------------------------------------------------------------------------------------------------------
Segment (loss) income before tax $ (37,157) $ 6,509 $14,189 $ 1,678 $ 65,795 $ (7,536) $ 43,478
Combined ratios 115.3% 96.9% 56.0% 103.4%
Interest expense before tax (3,980) $ (3,980)
Income tax benefit (expense) $ 11,891 $ (2,083) $(4,541) $ (599) $ (22,709) 2,663 (15,378)
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Note 19
Employee Benefit and Retirement Plans
Zenith offers a tax deferred savings plan organized under Section 401(k) of
the Internal Revenue Code for all of its subsidiaries' eligible employees who
have been employed for at least one year. Zenith matches up to one third of the
first 6% of employee contributions on a current basis and is not liable for any
future payments under the plan. For the years ended December 31, 1999, 1998 and
1997, Zenith contributed $1.2 million, $1.1 million and $0.6 million,
respectively.
Zenith also offers a stock purchase plan, under which all employees are able
to purchase
TheZenith
64
<PAGE>
shares of Zenith National common stock at market value. Zenith matches 25% of
all employee purchases. For the years ended December 31, 1999, 1998 and 1997,
Zenith contributed $0.3 million, $0.4 million and
$0.4 million, respectively.
Note 20
Related Parties
Pursuant to a Stock Purchase Agreement, dated June 25, 1999 (the "Stock
Purchase Agreement"), between Fairfax Financial Holdings Limited, a Canada
corporation ("Fairfax"), and Reliance Insurance Company ("Reliance"), Fairfax
agreed to purchase the 6,574,000 shares of common stock of Zenith National owned
by Reliance and its affiliates for $28 per share (the "Transaction"). In an
amendment to its Statement on Schedule 13D, dated October 25, 1999 and filed
with the Securities and Exchange Commission, Reliance Financial Services
Corporation reported that the consummation of the Transaction occurred on
October 25, 1999.
The P&C Operations conduct assumed and ceded reinsurance transactions with
subsidiaries of Fairfax. The following table summarizes the reinsurance
transactions with the subsidiaries of Fairfax:
<TABLE>
- ------------------------------------------------------------
(Dollars in thousands) 1999
- ------------------------------------------------------------
<S> <C>
Assumed Reinsurance:
Premiums earned $ 177
Other underwriting and operating expenses 277
Premiums receivable 8
Unpaid loss and loss adjustment expenses 220
Ceded Reinsurance:
Receivable from reinsurers on paid and unpaid
losses 388
Unpaid losses and loss adjustment expenses 2,019
Unearned premiums 37
- ------------------------------------------------------------
</TABLE>
At December 31, 1999, Zenith owned $5.1 million at fair value of securities
issued by Fairfax. In addition, at December 31, 1999, Zenith owned $4.5 million
at fair value of securities issued by TIG Capital Trust 1, a subsidiary of
Fairfax.
At December 31, 1998, Zenith owned $6.2 million at fair value of securities
issued by Reliance Group Holdings Inc., which owned Reliance.
Zenith Insurance has an assumed reinsurance agreement with Reliance.
Estimated costs paid to Reliance relating to this arrangement amounted to
$53,000 and $97,000 for the years ended December 31, 1998 and 1997,
respectively. Zenith Insurance also maintains aggregate and specific excess of
loss reinsurance agreements with Reliance. Included in receivable from
reinsurers and state trust and prepaid reinsurance premiums as of
December 31, 1998 was $14.5 million relating to this reinsurance arrangement.
Note 21
Common Stock Market Prices (Unaudited)
The following table shows the high and low common stock prices during each
quarter for the past two years.
<TABLE>
- ----------------------------------------------------------------------------------
1999 1998
--------------------------- ---------------------------
High Low High Low
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
March 31 $ 26 $ 20 5/16 $ 29 1/16 $ 24 1/2
June 30 26 11/16 22 1/4 30 1/2 28
September 30 26 21 1/8 28 1/2 23 9/16
December 31 22 13/16 19 1/4 25 7/8 22 7/8
- ----------------------------------------------------------------------------------
</TABLE>
Note 22
Subsequent Event (Unaudited)
On February 25, 2000, Zenith National paid $18.8 million to repurchase
$12.5 million aggregate principal amount of the outstanding 9% Notes and $8.0
million aggregate liquidation amount of the outstanding 8.55% Capital
Securities. Zenith National used its available cash balances to fund these
purchases.
TheZenith
65
<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, 1999
and 1998, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States. 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
auditing standards generally accepted in the United States, 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
February 10, 2000
TheZenith
66
<PAGE>
CORPORATE DIRECTORY
-------------------------------------
Zenith National Insurance Corp.
Directors
Also Directors of Zenith
Insurance Company
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
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
Michael W. Jacobson
Senior Vice President
William J. Owen
Senior Vice President
& Chief Financial Officer
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 year ended
December 31, 1999
and our quarterly reports
may be obtained
at our website or
free of charge upon
written request to:
Chief Financial Officer
Zenith National
Insurance Corp.
21255 Califa Street
Woodland Hills, CA
91367-5021
TheZenith
67
<PAGE>
CORPORATE DIRECTORY
- -------------------------------------
Zenith Insurance Company
Officers
Stanley R. Zax
Chairman of the
Board and President
Jack D. Miller
Executive Vice President,
and Chief Operating Officer
William J. Owen
Senior Vice President &
Chief Financial Officer
John J. Tickner
Senior Vice President,
General Counsel and Secretary
Stephen J. Albers
Senior Vice President
James T. Braun
Senior Vice President
Dan M. Hair
Senior Vice President
John C. Hasbrouck
Senior Vice President
Robert L. Hernandez
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
Kenneth R. Solomon
Senior Vice President
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
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
Ron Cordova
Vice President
Mark T. Cross
Vice President
Gerald D. Curtin
Vice President
Charles J. Davis
Vice President
Bradley C. Eastwood
Vice President
Jesse R. Farese
Vice President
F. Stephen Fetchet
Vice President
Carolyn N. Hinson
Vice President
David G. Hoppen
Vice President
Mark M. Jansen
Vice President
Diane L. Kinney
Vice President
Lisa A. Krouse
Vice President and General
Counsel-Southeast
Hyman J. Lee Jr.
Vice President and Assistant Secretary
Jonathan W. Lindsay
Vice President
Andrew M. Lyman
Vice President
Linda K. Mangone
Vice President
Colin S. Mitchell
Vice President
David A. O'Connor
Vice President
Michael J. Paladino
Vice President
Angela Parmelee
Vice President
Stephen D. Petrula
Vice President
Diane E. Schaefer
Vice President
Alan I. Steinhardt
Vice President
John A. Swift
Vice President
Jessica Ann Vasquez
Vice President
John H. Weber
Vice President
Norman C. Winters
Vice President
Laura F. Yamanaka
Vice President
William M. Zachry
Vice President
TheZenith
68
<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
Perma-Bilt, a Nevada Corporation
Officers
Daniel Schwartz
President
Robert M. Beville
Executive Vice President
David R. 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
TheZenith
69
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