-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Dl8PirjuQjFpISLkvSEdkIDGaQywQBScW/mNzwPwPY4fF/1vL1cXsnmo2OCgVMWr lOehrLPP3w7k20UwLGuIHQ== 0000912057-00-013779.txt : 20000328 0000912057-00-013779.hdr.sgml : 20000328 ACCESSION NUMBER: 0000912057-00-013779 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000327 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ZENITH NATIONAL INSURANCE CORP CENTRAL INDEX KEY: 0000109261 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 952702776 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-09627 FILM NUMBER: 579894 BUSINESS ADDRESS: STREET 1: 21255 CALIFA ST CITY: WOODLAND HILLS STATE: CA ZIP: 91367 BUSINESS PHONE: 8187131000 10-K 1 FORM 10-K THE ZENITH - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ 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) DELAWARE 95-2702776 (STATE OR OTHER JURISDICTION OF INCORPORATION (I.R.S. EMPLOYER IDENTIFICATION NO.) OR ORGANIZATION)
21255 CALIFA STREET, WOODLAND HILLS, CALIFORNIA 91367-5021 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (818) 713-1000 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE ON TITLE OF EACH CLASS WHICH REGISTERED ------------------- ------------------------ Common Stock, $1.00 Par Value New York Stock Exchange
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__ - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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: 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.
1 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.
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 2 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:
(DOLLARS IN THOUSANDS) 1999 % - ---------------------- --------- -------- 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 -------- ----- $278,854 100.0% ======== =====
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 3 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 4 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 5 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. 6 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, 7 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").
(DOLLARS IN THOUSANDS) TOTAL IT EXPENDITURE - ---------------------- -------------------- IT Repair Costs............................................. $ 7,562 IT Replacement Costs: Software.................................................. 881 Hardware.................................................. 2,234 Related Expenditures...................................... 417 ------- Total................................................... $11,094 =======
- ------------------------ 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 8 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 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 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 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 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 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 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.
QUARTER 1999 1998 - ------- ---------- ---------- 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
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.
DATE OF DECLARATION TYPE AND AMOUNT OF RECORD DATE FOR BY ZENITH BOARD DIVIDEND PAYMENT PAYMENT DATE ------------------- ------------------ --------------- ------------ 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
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 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 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
OFFICER NAME AGE POSITION TERM SINCE - ---- --- -------- ---- ------- 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
- ------------------------ (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 "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 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 3. EXHIBITS The Exhibits listed below are filed in a separate Exhibit Volume to this Report.
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.)
20 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.)
21 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.)
22 *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.
23 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.)
24 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.
- -------------------------- *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 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. ZENITH NATIONAL INSURANCE CORP. By: /s/ STANLEY R. ZAX ----------------------------------------- Stanley R. Zax Chairman of the Board and President
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. /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)
26 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 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 SCHEDULE I -- SUMMARY OF INVESTMENTS -- OTHER THAN INVESTMENTS IN RELATED PARTIES ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES DECEMBER 31, 1999
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) 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 ========== ========== ==========
- ------------------------ (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 SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT ZENITH NATIONAL INSURANCE CORP. BALANCE SHEET ASSETS
DECEMBER 31, --------------------- 1999 1998 (DOLLARS AND SHARES IN THOUSANDS) --------- --------- 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 ========= =========
See notes to condensed financial information. F-4 SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT ZENITH NATIONAL INSURANCE CORP. STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, ---------------------------------- 1999 1998 1997 (DOLLARS IN THOUSANDS) ---------- --------- --------- 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 ======== ======== =======
See notes to condensed financial information. F-5 SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT ZENITH NATIONAL INSURANCE CORP. STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, ---------------------------------- 1999 1998 1997 (DOLLARS IN THOUSANDS) ---------- --------- --------- 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) ========= ======== ========
See notes to condensed financial information. F-6 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 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 SCHEDULE III -- SUPPLEMENTARY INSURANCE INFORMATION ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
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 ------- ----------- -------------- --------- ------------ --------- ---------- ---------- (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 ======= ======== ======== ======= ======== ======= ======== COLUMN A COLUMN I COLUMN J COLUMN K -------- ------------ --------- --------- AMORTIZATION OF POLICY OTHER ACQUISITION OPERATING PREMIUMS SEGMENT COSTS EXPENSES WRITTEN ------- ------------ --------- --------- (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 ======= ======= ========
F-9 SCHEDULE IV -- REINSURANCE ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
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) -------- --------- ---------- -------- ---------- 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%
F-10 EX-3.3 2 EXHIBIT 3.3 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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 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. 16 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 17 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 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. 19 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 20 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." 21 EX-10.17 3 EXHIBIT 10.17 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. 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 -2- EX-10.20 4 EXHIBIT 10.20 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 EX-10.21 5 EXHIBIT 10.21 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 (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. -2- 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 -3- Company relating to stock options, stock purchases, pension, thrift, profit sharing, life insurance, medical coverage, disability insurance, education, and other retirement or employee benefits that the Company has adopted or may adopt for the benefit of its executive employees, and the Company shall provide the Executive with such insurance or other provisions for indemnification, defense or hold-harmless of officers that are generally in effect for other senior executive officers of the Company. Notwithstanding the foregoing, nothing contained in this Agreement shall prohibit or limit the right of the Company to discontinue, modify or amend any plan or benefit in its absolute discretion at any time; provided, however, that any such discontinuance, modification or amendment shall apply to employees of the Company generally, or to a defined group of such employees and shall not apply solely to the Executive. 7. FRINGE BENEFITS; AUTOMOBILE. In addition to the benefit plans referred to in Section 6 hereof, the Executive shall be entitled to participate in any other fringe benefits that are now or may be or become applicable to the Company's executive employees, including the payment of reasonable expenses for attending annual and periodic meetings of trade or bar associations, and any other benefits that are commensurate with the duties and responsibilities to be performed by the Executive under this Agreement and reimbursement for reasonable expenses incurred in the course of his duties hereunder in accordance with the Company's policy with respect thereto. In addition, the Company shall provide the Executive with a monthly car allowance in the amount of $1,300. The benefits provided under this Section 7 shall cease upon the Executive's Date of Termination (as defined below). -4- 8. VACATION; MEMBERSHIPS. During his employment hereunder, the Executive shall be entitled to an annual paid vacation in accordance with the Company's standard employment practices; provided, however, Executive shall be treated for purposes of vacation as an employee with more than 120 months of service. Upon termination of the Executive's employment for any reason, the Executive shall be entitled to payment for any accrued but unused vacation time based upon his then current salary. The timing of paid vacations shall be scheduled in a reasonable manner by the Executive. During his employment hereunder, the Executive shall be entitled to appropriate professional association and business club memberships, including reimbursement of payment of dues and assessments pertaining thereto. 9. TERMINATION. (a) DISABILITY. If, as a result of the Executive's incapacity due to physical or mental illness, injury or similar incapacity, he shall have been absent from the full-time performance of his duties with the Company for six months within any eighteen-month period, and have exhausted his Family Medical Leave and its California equivalent, his employment may be terminated by written notice (as provided below) from the Company for "Disability". (b) CAUSE. Subject to the notice provisions set forth below, the Company may terminate the Executive's employment for "Cause" at any time. Termination for "Cause" shall mean termination upon (1) the Executive's continued -5- willful failure to substantially perform his duties with the Company or his other willful breach of this Agreement (other than any such failure or breach resulting from his incapacity due to physical or mental illness, injury or similar incapacity) after a written demand for substantial performance is delivered to him by the President or the Board, which demand specifically identifies the manner in which the President or the Board believes that he has failed to substantially perform his duties, or has otherwise breached this Agreement, (2) the Executive's conviction of a felony, (3) the Executive's willful misconduct that is materially and demonstrably injurious to the Company (4) the Executive's violation of Section 11 hereof; provided, however, that the Executive shall not be terminated for "Cause" unless and until the President or the Board has given the Executive reasonable notice of its intended actions and the alleged events or activities giving rise thereto and with respect to those events or activities for which a cure is possible, a reasonable opportunity to cure such breach, and there shall have been delivered to him a written notice from the President or a copy of a resolution duly adopted by the Board regarding such actions. (c) CONSTRUCTIVE TERMINATION. If at any time during the Term of this Agreement, any of the following events shall occur, the Executive shall be entitled to terminate his employment hereunder and be treated as if his employment had been terminated by the Company other than for Cause: -6- (i) The Executive is removed or otherwise prohibited or restricted in the performance of his duties as set forth in Section 1 hereof, other than through fault of the Executive; (ii) Any payment due under this Agreement shall remain unpaid for more than 60 days, after notice of non-payment and request for payment have been given to Company by Executive pursuant to Section 13; (iii) A Change in Control of the Company (as defined below) shall occur during the Term of this Agreement and, within 180 days after the effective date of any such Change in Control, the Executive delivers to the Company a written notice of his election to terminate the Agreement effective as of the date set forth in such notice, which effective date shall not be less than 30 days nor more than 90 days after the date of delivery of such written notice. For purposes of this paragraph, a Change in Control shall mean either (i) a merger or consolidation of the Company with or into another company in which the Company does not survive; or (ii) an assignment of this Agreement by the Company under the provisions of Section 12(b) hereof; or (iii) the sale of all or substantially all of the Company's assets; or (iv) a change in the identities of a majority of the members of the Board within a one-year period or less; or (v) any other transaction that would -7- require a party or affiliated group of parties to obtain approval from or require such transactions to be presented for approval by, the California Insurance Commissioner (assuming there is no preemption of California insurance laws by federal law). (d) NOTICE OF TERMINATION. Any purported termination of the Executive's employment by the Company or by him shall be communicated by a written notice ("Notice of Termination") that shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated. (e) DATE OF TERMINATION, ETC. "Date of Termination" shall mean (1) if the Executive's employment is terminated by his death, the date of his death; (2) if the Executive's employment is terminated for Disability, thirty days after Notice of Termination is given; (3) if the Executive's employment is terminated for Cause, the date specified in the Notice of Termination; and (4) if the Executive's employment is terminated for any other reason, the date specified in the Notice of Termination. 10. COMPENSATION UPON TERMINATION OR DURING DISABILITY. The Executive shall be entitled to the following benefits during a period of disability, or upon termination of his employment, as the case may be, if such period or termination occurs prior to Executive's termination: -8- (a) During any period that the Executive fails to perform his full-time duties with the Company as a result of incapacity due to physical or mental illness, injury or similar incapacity, he shall continue to receive his compensation and other benefits payable to him under this Agreement at the rate in effect at the commencement of any such period, less any amounts payable to him under the Company's disability plan or program or other similar plan during such period, or under any governmental program, until his employment is terminated pursuant to Section 9(a) hereof. If, during any period of disability, the Executive's employment shall be terminated by reason of his death, disability or the expiration of this Agreement, not withstanding the provisions of Section 20, his pay shall cease and his benefits, if any, shall, be determined solely under the Company's retirement, insurance and other compensation programs then in effect in accordance with the terms of such programs, and the Company shall have no further obligations to him under this Agreement. (b) If at any time the Executive's employment shall be terminated (i) by reason of his death, (ii) by the Company for Cause or Disability or (iii) by him (other than by reason of a constructive termination pursuant to Section 9(c) hereof), the Company shall pay him (or his appropriate payee, as determined in accordance with Section 12(c) hereof) his full base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given, plus all other amounts, if any, to which he is entitled from the Company through the Date of Termination under any compensation plan in each case at the time such payments are due, and the Company shall have no further obligations to him under this Agreement. In addition, in the event -9- the Executive's employment is terminated by reason of the Executive's death or Disability, the Executive (or his appropriate payee) shall be entitled to receive a pro rata portion of any bonus that would otherwise have been payable to the Executive with respect to the year in which the Executive's employment is terminated. For purposes of this provision, if the Executive's bonus for such year has not been determined, the Executive shall be deemed to have been entitled to a bonus equal to the bonus paid or payable to the Executive with respect to the immediately preceding year. (c) If the Executive's employment should be terminated by the Company other than for Cause or Disability or by the Executive by reason of a constructive termination pursuant to Section 9(c) hereof, he shall be entitled, in exchange for a release of the Company, Zenith and any subsidiaries and affiliates of the Company and their respective officers, directors, shareholders employees and agents, to the benefits provided below ("Severance Payments"): (i) The Company shall pay to the Executive his full base salary through the Date of Termination, at the rate in effect at the time Notice of Termination is given, plus all other amounts to which he is entitled under any compensation plan of the Company, in each case at the time such payments are due; (ii) The Company shall pay the Executive, at the time such payments would have been made had the Executive's employment not -10- been terminated hereunder, all salary payments that would have been payable to the Executive pursuant to this Agreement had the Executive continued to be employed for the greater of (x) the remaining Term of this Agreement or (y) two years (the "Severance Period") (assuming for the purpose of such continuing payments that the Executive's salary for each year of such period is equal to his salary at the Date of Termination), plus any bonus that would otherwise have been payable to the Executive with respect to the Severance Period; provided, however, that to the extent the Executive's bonus for any portion of such Severance Period had not been determined, the Executive shall be deemed to have been entitled to a bonus equal to the bonus paid or payable to the Executive with respect to the immediately preceding year; (iii) All stock option rights, stock appreciation rights, and any and all other similar rights theretofore granted to the Executive, including, but not limited to, the Executive's right to receive cash in lieu of exercising stock options, as may be provided in his stock option agreements, shall vest and shall then be exercisable in full, and the Executive shall have 90 days following his termination within which to exercise any and all such rights and the restrictions on any and all shares of restricted stock granted to the Executive that are outstanding on the Date of Termination shall lapse as of the Date of Termination; -11- (iv) During the Severance Period the Company shall, at its cost, arrange to provide the Executive with life, disability, dental, accident and group health insurance benefits substantially similar to those that he was receiving immediately prior to the Notice of Termination plus an additional amount necessary to reimburse the Executive for any taxes imposed solely by reason of his receipt of such benefits following his termination of employment. Notwithstanding the foregoing, the Company shall not provide any benefit otherwise receivable by the Executive pursuant to this subparagraph if an equivalent benefit is actually received by him from another employer or source at any time during the Severance Period. Executive agrees to report any such benefit actually received by him. (d) The Company shall continue in effect for the benefit of the Executive all insurance or other provisions for indemnification, defense or hold-harmless of officers or directors of the Company that are in effect on the date the Notice of Termination is sent to the Executive or the Company with respect to all of his acts and omissions while an officer or director (if applicable) as fully and completely as if such termination had not occurred, and until the final expiration or running of all periods of limitation against actions that may be applicable to such acts or omissions. (e) Notwithstanding anything to the contrary in this Agreement, in the event that Executive becomes entitled to the Severance Payments, if any of the -12- 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 -13- of (A) the total amount of the Total Payments or (B) the amount of excess parachute payments within the meaning of section 280G(b)(1) (after applying clause (i), above), and (iii) the value of any non-cash benefits or any deferred payment or benefit shall be determined by Company's independent auditors in accordance with the principles of sections 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, Executive shall be deemed to pay federal income taxes at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of Executive's residence on the date of termination of employment, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes. In the event that the Excise Tax is subsequently determined to be less than the amount taken into account hereunder at the time of termination of Executive's employment, Executive shall repay to Company, at the time that the amount of such reduction in Excise Tax is finally determined, the portion of the Gross-Up Payment attributable to such reduction (plus that portion of the Gross-Up Payment attributable to the Excise Tax and federal, state and local income tax imposed on the Gross-Up Payment being repaid by the Executive to the extent that such repayment results in a reduction in Excise Tax and/or a federal, state or local income tax deduction) plus interest on the amount of such repayment at the rate provided in section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is determined to exceed the amount taken into account hereunder at the time of the termination of Executive's employment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), Company shall make an -14- 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- 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- 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- 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- (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- 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- 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- 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- 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- 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- 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- 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- EX-10.22 6 EXHIBIT 10.22 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 EX-10.28 7 EXHIBIT 10.28 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.] 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.] EX-10.29 8 EXHIBIT 10.29 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 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 EX-10.30 9 EXHIBIT 10.30 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 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 EX-13 10 EXHIBIT 13 ANNUAL REPORT / 1999 ----------------------------------- ZENITH NATIONAL INSURANCE CORP. ----------------------------------------------------------
---------------------------------------------------------- TheZenith FINANCIAL HIGHLIGHTS -------------------------------------
1999 1998 1997 - -------------------------------------------------------------------------------------------------- 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 - --------------------------------------------------------------------------------------------------
* 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 CONTENTS - --------------- 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
TheZenith 2 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: - --------------------------------------------------------------------------------- 1977 1999 - --------------------------------------------------------------------------------- (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 - ---------------------------------------------------------------------------------
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 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 STOCKHOLDERS' EQUITY PER SHARE -------------------------------------------------------- EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC '95 $18.58 '96 $19.17 '97 $20.31 '98 $20.23
'99 $20.67
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 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.
- -------------------------------------------------------------------------------------------------- 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) - --------------------------------------------------------------------------------------------------
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 STOCK PRICES ---------------------- EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC '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
'95 24 5/8 '96 28 7/8 '97 28 3/4 '98 30 1/2 '99 26 11/16
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 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%. - --------------------------- 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
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 INVESTMENT INCOME AFTER TAX PER SHARE ---------------------------------------------------------------------- EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC '95 $1.67 '96 $1.92 '97 $1.94 '98 $2.09 '99 $2.07
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 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.
- ----------------------------------------------------------------------------------------------------------------------- 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.
TheZenith 10 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 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. 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
TheZenith 12 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 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 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 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 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 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 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: - ----------------------------------------------------------------------------------------------- 1996 1997 1998 1999 - ----------------------------------------------------------------------------------------------- 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 - -----------------------------------------------------------------------------------------------
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 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 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 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 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 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 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: - ---------------------------------------------------------------------------------------------- (Dollars in thousands) 1999 1998 1997 - ---------------------------------------------------------------------------------------------- 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 - ----------------------------------------------------------------------------------------------
TheZenith 25 Premiums earned and underwriting results of the P&C Operations for the three years ended December 31, 1999 were as follows: - -------------------------------------------------------------------------------------------------- (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) - --------------------------------------------------------------------------------------------------
*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.
The combined ratios for the three years ended December 31, 1999 were as follows: - --------------------------------------------------------------------------------------------------- 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% - ---------------------------------------------------------------------------------------------------
*Excluding RISCORP-Related Adjustment **Including RISCORP-Related Adjustment TheZenith 26 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: - ---------------------------------------------------------------------------- Other (Dollars in Workers' Property- thousands) Compensation Casualty Reinsurance Total - ---------------------------------------------------------------------------- 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.
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 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 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 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 $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: - --------------------------------------------------- (Dollars in thousands) 1999 1998 1997 - --------------------------------------------------- Before tax $53,662 $53,593 $52,332 After tax 35,632 35,907 34,655 - ---------------------------------------------------
TheZenith 31 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: - -------------------------------------------------------- 1999 1998 1997 - -------------------------------------------------------- Before tax 5.5% 5.7% 6.0% After tax 3.7 3.8 3.9 - --------------------------------------------------------
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: - -------------------------------------------------------- Held-to- Maturity Available-for-Sale -------- ------------------- Before Before After (Dollars in thousands) Tax Tax Tax - -------------------------------------------------------- December 31, 1999 $ (340) $(29,698) $(19,304) December 31, 1998 1,569 9,864 6,412 - --------------------------------------------------------
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: - ------------------------------------------------------------------------------------ (Dollars in thousands) - ------------------------------------------------------------------------------------ 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 - ------------------------------------------------------------------------------------
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 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). - ------------------------------------------------------------------------------------------------------------------------ Expected Maturity Date ------------------------------------------------------------------------- (Dollars in thousands) 2000 2001 2002 2003 2004 Thereafter Total - ------------------------------------------------------------------------------------------------------------------------ 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 - ------------------------------------------------------------------------------------------------------------------------
TheZenith 33 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 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 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 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"). - ---------------------------------------------------------- (Dollars in thousands) Total IT Expenditure - ---------------------------------------------------------- IT Repair Costs $ 7,562 IT Replacement Costs: Software 881 Hardware 2,234 Related Expenditures 417 - ---------------------------------------------------------- Total $11,094 - ----------------------------------------------------------
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 5-YEAR SUMMARY OF SELECTED FINANCIAL INFORMATION - -------------------------------------------------------------------------------- Zenith National Insurance Corp. and Subsidiaries - --------------------------------------------------------------------------------
Year ended December 31, Note 1999 1998 - -------------------------------------------------------------------- (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 - --------------------------------------------------------------------
(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 - --------------------------------------------------------------------------------
1997 1996 1995 - ----------------------------------------------------------------------------- (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 - -----------------------------------------------------------------------------
(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 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 - --------------------------------------------------------------------------------
Year ended December 31, 1999 1998 - ----------------------------------------------------------------------------------------- (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) - -----------------------------------------------------------------------------------------
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 - --------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 - ---------------------------------------------------------------------------------------------------- (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) - -------------------------------------------------------------------
TheZenith 41 CONSOLIDATED BALANCE SHEET - -------------------------------------------------- Zenith National Insurance Corp. and Subsidiaries - ----------------------------------------------------------------------------------------------- December 31, Note 1999 1998 - ----------------------------------------------------------------------------------------------- (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 - -----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of this statement. TheZenith 42 - ---------------------------------------------------------------------------------------------------- December 31, Note 1999 1998 - ---------------------------------------------------------------------------------------------------- (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 - ----------------------------------------------------------------------------------------------------
TheZenith 43 CONSOLIDATED STATEMENT OF OPERATIONS - ---------------------------------------------------------------------- Zenith National Insurance Corp. and Subsidiaries - ------------------------------------------------------------------------------------------------------------------ Year ended December 31, Note 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------ (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 - ------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of this statement. TheZenith 44 CONSOLIDATED STATEMENT OF CASH FLOWS ---------------------------------------------------------------------- Zenith National Insurance Corp. and Subsidiaries - ------------------------------------------------------------------------------------------------------------- Year ended December 31, Note 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------- (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 - -------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of this statement. TheZenith 45 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY - -------------------------------------------------------------------------------- Zenith National Insurance Corp. and Subsidiaries - --------------------------------------------------------------------------------
Common shares Preferred Three years ended December 31, 1999 Note outstanding stock $1 par - ------------------------------------------------------------------------------------------------------------- (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 - -------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of this statement. TheZenith 46 - --------------------------------------------------------------------------------
Accumulated other Common comprehensive (loss) income - stock $1 Additional Retained net unrealized (depreciation) Treasury par paid-in capital earnings appreciation on investments stock Total - ---------------------------------------------------------------------------------------------------- (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 - ----------------------------------------------------------------------------------------------------
TheZenith 47 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:
- ----------------------------------------------------------------------------------- 1999 1998 December 31, ----------------------- ----------------------- (Dollars in Carrying Fair Carrying Fair thousands) Note amount value amount value - ----------------------------------------------------------------------------------- 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 - -----------------------------------------------------------------------------------
TheZenith 48 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 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 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 Note 2 Investments The amortized cost and fair values of investments were as follows:
- --------------------------------------------------------------------------- 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 - ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------- 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 - ----------------------------------------------------------------------------
Debt securities, including short-term investments, at December 31, 1999 by contractual maturity were as follows: - ---------------------------------------------------------- December 31, 1999 Amortized Fair (Dollars in thousands) cost value - ---------------------------------------------------------- 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 - ----------------------------------------------------------
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 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: - ------------------------------------------------------------- Year ended December 31, (Dollars in thousands) 1999 1998 1997 - ------------------------------------------------------------- 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 - -------------------------------------------------------------
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: - ---------------------------------------------------- December 31, (Dollars in thousands) 1999 1998 - ---------------------------------------------------- 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 - ----------------------------------------------------
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 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: - ---------------------------------------------------------- Year ended December 31, (Dollars in thousands) 1999 1998 1997 - ---------------------------------------------------------- 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 - ----------------------------------------------------------
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 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: - ----------------------------------------------------------- Year ended December 31, (Dollars in thousands) 1999 1998 1997 - ----------------------------------------------------------- Current $29,488 $ 6,458 $10,989 Deferred (521) 3,277 4,389 - ----------------------------------------------------------- Federal income tax expense $28,967 $ 9,735 $15,378 - -----------------------------------------------------------
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: - --------------------------------------------------------------- Year ended December 31, (Dollars in thousands) 1999 1998 1997 - --------------------------------------------------------------- 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 - ---------------------------------------------------------------
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:
- ---------------------------------------------------------------------- Year ended 1999 December 31, Deferred Tax 1998 (Dollars in Deferred Tax thousands) Assets Liabilities Assets Liabilities - ---------------------------------------------------------------------- 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.
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 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: - ------------------------------------------------------------ Year ended December 31, (Dollars in thousands) 1999 1998 1997 - ------------------------------------------------------------ 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 - ------------------------------------------------------------
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. - --------------------------------------------------------- April 1, (Dollars in thousands) 1998 - --------------------------------------------------------- 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 - ---------------------------------------------------------
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 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: - --------------------------------------------------------- March 31, (Dollars in thousands) 1999 - --------------------------------------------------------- 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 - ---------------------------------------------------------
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: - ----------------------------------------------------- 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 - -----------------------------------------------------
Note 11 Commitments and Contingent Liabilities Zenith has office space leases, equipment leases and automobile leases expiring through TheZenith 57 2004. The minimum rentals on these operating leases as of December 31, 1999 were as follows: - ------------------------------------------------------------ Equipment (Dollars in thousands) and auto Year fleet Offices Total - ------------------------------------------------------------ 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 - ------------------------------------------------------------
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 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 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: - ----------------------------------------------------- (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 - -----------------------------------------------------
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: - --------------------------------------------------------------------------------------------------------------------------- 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 - --------------------------------------------------------------------------------------------------------------------------- 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 - ---------------------------------------------------------------------------------------------------------------------------
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 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: - -------------------------------------------------------------------- 1999 Grants 1998 Grants 1997 Grants - -------------------------------------------------------------------- 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 - --------------------------------------------------------------------
Additional information with respect to stock options was as follows: - ----------------------------------------------------------- Weighted average Number exercise (Shares in thousands) of shares price - ----------------------------------------------------------- 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 - -----------------------------------------------------------
Certain information on outstanding options at December 31, 1999 was as follows: - ---------------------------------------------------------------- Range of Weighted Outstanding exercise price average options weighted (Shares in Number remaining life average exercise thousands) outstanding in years price - ---------------------------------------------------------------- $23.63 1,000 6.2 $23.63 19.72 - 28.34 1,115 2.8 25.77 - ----------------------------------------------------------------
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: - ----------------------------------------------------- Exercisable Range of exercise options weighted prices Number average exercise (Shares in thousands) exercisable price - ----------------------------------------------------- $23.63 600 $23.63 19.72 - 28.34 527 25.72 - -----------------------------------------------------
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: - -------------------------------------------------------------- Year ended December 31, (Dollars in thousands) 1999 1998 1997 - -------------------------------------------------------------- Capital stock and surplus $297,969 $345,042 $279,993 Net income 74,310 21,959 31,820 - --------------------------------------------------------------
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 Note 15 Quarterly Financial Data (Unaudited) - ------------------------------------------------------------------- (Dollars in 1999 Period Ended thousands, --------------------------------------------- except per share March June September December data) 31 30 30 31 - ------------------------------------------------------------------- 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) - -------------------------------------------------------------------
- ------------------------------------------------------------------- (Dollars in 1998 Period Ended thousands, --------------------------------------------- except per share March June September December data) 31 30 30 31 - ------------------------------------------------------------------- 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 - -------------------------------------------------------------------
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: - ------------------------------------------------------------------ Year ended December 31, (Dollars in thousands) 1999 1998 1997 - ------------------------------------------------------------------ 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 - ------------------------------------------------------------------
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 Note 17 Earnings and Dividends Per Share The following table sets forth the computation of basic and diluted net income per common share. - ------------------------------------------------------------ (Dollars In thousands, except per share data) 1999 1998 1997 - ------------------------------------------------------------ (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 - ------------------------------------------------------------
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 Information as to the operations of the segments is set forth below:
- ----------------------------------------------------------------------------------------------------------------------------- Other Workers' Property- Real (Dollars in thousands) Compensation Casualty Reinsurance Estate Investment Parent Total - ----------------------------------------------------------------------------------------------------------------------------- For the Year Ended December 31, 1999 - ----------------------------------------------------------------------------------------------------------------------------- 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 - ----------------------------------------------------------------------------------------------------------------------------- For the Year Ended December 31, 1998 - ----------------------------------------------------------------------------------------------------------------------------- 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 - ----------------------------------------------------------------------------------------------------------------------------- For the Year Ended December 31, 1997 - ----------------------------------------------------------------------------------------------------------------------------- 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) - -----------------------------------------------------------------------------------------------------------------------------
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 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: - ------------------------------------------------------------ (Dollars in thousands) 1999 - ------------------------------------------------------------ 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 - ------------------------------------------------------------
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. - ---------------------------------------------------------------------------------- 1999 1998 --------------------------- --------------------------- High Low High Low - ---------------------------------------------------------------------------------- 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 - ----------------------------------------------------------------------------------
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 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 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 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 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 EX-27 11 EXHIBIT 27
7 1,000 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 627,375 654,901 654,561 35,459 0 0 901,734 15,714 343,671 7,892 1,573,786 880,929 50,906 0 0 94,955 0 0 25,157 329,402 1,573,786 369,403 53,662 7,682 61,361 360,172 65,266 80,700 83,067 28,967 54,100 0 0 0 54,100 3.15 3.15 0 0 0 0 0 0 0
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