-----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, KHKsChC2+Rl3kyTadlHSAuLVrduDI+s17HKPOhb4lsvCwQdKHEuuF5CfESJhxlaW iLafN49OosNdWePdrKqkjw== 0000912057-01-008519.txt : 20010328 0000912057-01-008519.hdr.sgml : 20010328 ACCESSION NUMBER: 0000912057-01-008519 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010327 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: 1580814 BUSINESS ADDRESS: STREET 1: 21255 CALIFA ST CITY: WOODLAND HILLS STATE: CA ZIP: 91367 BUSINESS PHONE: 8187131000 10-K 1 a2034311z10-k.txt FORM 10K 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, 2000 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 National Insurance Corp. on March 22, 2001 was $230,040,000 (based on the closing sale price of such stock on such date). At March 22, 2001, there were 17,492,000 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, 2000 -- Part I and Part II. (2) Portions of the Proxy Statement in connection with the 2001 Annual Meeting of Stockholders -- Part III. Total number of pages 37 Exhibit index located on pages 17-24 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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"), 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 conduct 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 its wholly-owned subsidiary, CalFarm Insurance Company ("CalFarm"), for $273.0 million in cash to Nationwide Mutual Insurance Company. The 2000 edition of Best's Key Rating Guide ("Best's") assigns the P&C Operations ratings of A (Excellent). Moody's Investors Service ("Moody's") has assigned insurance financial strength ratings of Baa1 (Adequate) to the P&C Operations. Standard & Poor's ("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, 2000, Zenith had approximately 1,100 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 net incurred losses, loss adjustment expenses, underwriting 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 estimated 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.
2 DESCRIPTION OF THE BUSINESS Zenith classifies its business into the following segments: Workers' Compensation, Reinsurance, Other Property-Casualty (through March 31, 1999, the date of the sale of CalFarm) Real Estate, Investment and Parent. Segments are designated based on the types of products and services provided. The P&C Operations comprise the Workers' Compensation, Reinsurance and Other Property-Casualty (through March 31, 1999) Operations. Zenith's business segments are also described in Notes to Consolidated Financial Statements -- Note 20 --"Segment Information" on pages 63-64 of Zenith's 2000 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 policy issued by the Workers' Compensation 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. Generally, premiums for workers' compensation insurance policies are a function of: the applicable premium rate, which varies with the nature of the employees duties and the business of the employer; 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. Except in Florida, where minimum rates for workers' compensation insurance are set by the Department of Insurance, Zenith's rates for workers' compensation are actuarially determined in each state in which it does business. Rates are continually reviewed for adequacy using actuarial analysis of current and anticipated trends in costs. Competition, based on price, in the national workers' compensation insurance industry is intense, even in Florida where dividend plans and retrospectively rated policies form the basis for competition. In addition to seeking adequate pricing, Zenith's long-term strategy in the national workers' compensation industry is to provide value-added services that, over the long run, reduce its policyholders' net workers compensation costs. Loss prevention services focus on work place safety and accident and illness prevention. Claims management services include return to work programs, nurse case management for serious injuries and management of medical provider services and billings. Investigation and legal services help policyholders to prevent fraud and assist them to favorably resolve litigated claims. During 2000, the P&C Operations wrote workers' compensation insurance in 43 states. Prior to 1992, Zenith's Workers' Compensation Operations were concentrated principally in California. Such Workers' Compensation Operations expanded to Texas in 1992 with other states following shortly thereafter. Florida operations commenced with the acquisition of the Associated General Contractors' Self-Insurance Fund on December 31, 1996. On April 1, 1998, the RISCORP Acquisition added additional business in Florida and other states in the Southeast, principally in 3 North Carolina and Alabama. Net premiums earned for the year ended December 31, 2000 by state are set forth in the table below:
(DOLLARS IN THOUSANDS) 2000 % - ---------------------- --------- -------- California.................................................. $137,497 45.7% Florida..................................................... 84,696 28.2 Texas....................................................... 16,990 5.6 North Carolina.............................................. 16,762 5.6 Pennsylvania................................................ 6,348 2.1 Illinois.................................................... 6,211 2.1 Arkansas.................................................... 5,066 1.7 Alabama..................................................... 4,229 1.4 Other....................................................... 23,034 7.6 -------- ----- Net Premiums Earned......................................... $300,833 100.0% ======== =====
In the three years ended December 31, 2000, intense competition and inadequate premium rates adversely affected the national workers' compensation industry. Industry data indicates a national trend of increasing claims severity, and premium rates have not kept pace with the trend of increasing severity. Industry organizations such as the National Council on Compensation Insurance, Inc. and the California Workers' Compensation Insurance Rating Bureau have reported that their analyses of the data show that the liabilities for unpaid loss and loss adjustment expenses as estimated and reported by the industry are significantly inadequate. The estimated accident year combined ratio in 1999 was about 135% for the national workers' compensation industry and about 156% for the California workers' compensation industry, including a 1999 accident year loss ratio of about 118%. Zenith's inforce Workers' Compensation premiums decreased consistently in the several years ended December 31, 1999 as a result of Zenith's endeavors during that period to maintain rate adequacy in the face of intense competition in the national workers' compensation insurance industry. In the year ended December 31, 2000, competitive pricing conditions improved somewhat in California and Zenith increased its inforce premiums in California by about 50% at December 31, 2000 compared to December 31, 1999. Outside of California, where competition and pricing are improving only moderately and only in certain states, Zenith's inforce premiums increased by about 11% at December 31, 2000 compared to December 31, 1999. In January 2001, Zenith continued to increase its inforce premiums in California and other selected states. Zenith continually monitors loss development trends and data to establish adequate premium rates and loss reserves. Zenith increased its Workers' Compensation premium rates in California by about 8% effective January 1, 2000 and by about 9% effective September 1, 2000. Rates were increased again in California by about 8% effective January 1, 2001 and Zenith implemented other rate increases in most of the states in which it does business. Minimum rates in Florida, which are set by the Department of Insurance, were unchanged at January 1, 2001. Zenith expects that the profitability of its Workers' Compensation Operations will be dependent upon general levels of competition, industry pricing and management's ability to estimate the impact of claim frequency and severity trends on the adequacy of loss reserves and premium rates. Zenith is unable to predict when its Workers' Compensation Operations will return to underwriting profitability, although it anticipates improvement in the short run with increases in volume and prices. REINSURANCE The Reinsurance Operations principally consist of world-wide, assumed reinsurance of property losses from catastrophes and large property risks. Treaties come in a variety of forms, but the 4 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. The Reinsurance Operations participate 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. 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. Results of the Reinsurance Operations may be adversely impacted in years when large catastrophes occur. However, since its inception in 1985, the combined ratio of the Reinsurance Operations through December 31, 2000 was 97.4%. In the three years ended December 31, 2000, the Reinsurance Operations were adversely impacted by catastrophe losses. Catastrophe losses were $22.6 million, $18.9 million and $11.5 million before tax in 2000, 1999 and 1998, respectively. Catastrophe losses in 2000 were attributable to additional estimates of the impact of the events in 1999, but there do not appear to have been any major catastrophes in 2000. There were frequent catastrophes of a moderate size culminating in severe storms in Europe at the end of 1999. Catastrophes in 1998 were attributable principally to a single large event -- Hurricane Georges. Estimates of the impact of catastrophes on the Reinsurance Operations are based on the information that is currently available and such estimates could change based on new information that becomes available or based upon reinterpretation of existing information. OTHER PROPERTY-CASUALTY The Other Property-Casualty Operations offered automobile, farmowners, commercial coverages, group health and homeowners coverage, primarily in California, and were operated by CalFarm through March 31, 1999, the effective date of its sale. For the 14 years that Zenith owned CalFarm, the average combined ratio of the Other Property-Casualty Operations was 100.1%. The gain on the sale of CalFarm after tax was $104.3 million. REAL ESTATE OPERATIONS The Real Estate Operations develop land and primarily construct single-family residences in Las Vegas, Nevada. Total revenues recognized in the Real Estate Operations in 2000 were $84.5 million and pre-tax income was $5.5 million. Land presently owned at a cost of $34.0 million will support the construction of an estimated 1,300 homes over the next several years. Changes in interest rates and 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 The Investment operations provide 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. At December 31, 2000, Zenith's consolidated investment portfolio emphasized high quality, taxable bonds and short-term investments, supplemented by smaller portfolios of redeemable and 5 other preferred and common stocks. Bonds constituted 68% and short-term investments constituted 19% of the carrying value of Zenith's consolidated investment portfolio at December 31, 2000. Bonds with an investment grade rating represented 94% of the consolidated carrying values of bonds at December 31, 2000. The average life of the consolidated portfolio was 5.1 years at December 31, 2000. Zenith has identified certain securities, amounting to 96% of the investments in debt securities at December 31, 2000, as "available-for-sale." Stockholders' equity increased by $9.6 million after deferred tax from December 31, 1999 to December 31, 2000 as a result of changes in the fair values of such investments. Stockholders' equity will fluctuate with any changes in the fair values of "available-for-sale" securities. PARENT The Parent operations represent Zenith National, a holding company which owns, directly or indirectly, all of the capital stock of the P&C Operations, non-insurance companies and securities. Parent expenses in 2000 include $1.8 million before tax of severance costs associated with the termination provisions of an employment contract of a company officer. 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 Zenith's 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. Zenith continually monitors loss development trends and data to establish adequate premium rates and loss reserves. 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 2000 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 6 -- "Loss and Loss Adjustment Expense Reserves" on page 55 of Zenith's 2000 Annual Report to Stockholders, which is hereby incorporated by reference. These tables show the development of loss and loss adjustment expense liabilities as originally estimated under generally accepted accounting principles ("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 49-50 of Zenith's 2000 Annual Report to Stockholders, which note is hereby incorporated by reference. The one year loss and loss adjustment expense reserve development for the P&C Operations is set forth in the table in the Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations on page 28 of Zenith's 2000 Annual Report to Stockholders, which table is hereby incorporated by reference. WORKERS' COMPENSATION Zenith expects that, on the average, its Workers' Compensation reserves will be paid within approximately 2 years. Zenith regards the timely settlement of its Workers' Compensation claims as important to its profitability and makes use of compromises and releases, where possible, for claim settlements to expedite this process. Zenith maintains four regional offices in California and offices 6 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 to detail claims payment histories and policy loss experience reports. In 2000, as part of its ongoing monitoring of loss development trends and data, Zenith increased its estimate of losses for the 1999 accident year by about $8.0 million. In October of 1999, Zenith completed a review of the liabilities for unpaid losses and loss adjustment expenses 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 approximately $46.0 million before tax in the estimated net liabilities for unpaid losses and loss adjustment expenses acquired from RISCORP. For a full description of the "RISCORP Purchase Adjustment" in 1999, see Notes to Consolidated Financial Statements -- Note 14 - --"RISCORP Acquisition and the RISCORP Purchase Adjustment" on pages 58-59 of Zenith's 2000 Annual Report to Stockholders, which note is hereby incorporated by reference. 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 Insurance 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, 2000, the receivable from the Fund was $31.1 million related to pre-January 1, 1998 claims. REINSURANCE Zenith expects that, on the average, its Reinsurance reserves related to its casualty business will be paid in approximately 4 years and reserves related to its property business will be paid within approximately 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 Reinsurance Operations were adversely impacted by $22.6 million, $18.9 million and $4.5 million of catastrophe losses before tax in 2000, 1999 and 1998. Catastrophe losses in 2000 were attributable to additional estimates of the impact of the events in 1999, but there do not appear to have been any major catastrophes in 2000. There were frequent catastrophes of a moderate size culminating in severe storms in Europe at the end of 1999. Catastrophes in 1998 were attributable principally to a single large event -- Hurricane Georges. Estimates of the impact of catastrophes on the Reinsurance Operations are based on the information that is currently available and such estimates could change based on new information that becomes available or based upon reinterpretation of existing information. 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, CalFarm sustained catastrophe losses before tax of $5.0 million in conjunction with California wind and storm damage. 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 7 historical data, long reporting delays, uncertainty as to the number and identity of insureds with potential exposure and unresolved legal issues regarding policy coverage. The legal issues concerning the interpretations of various insurance policy provisions and whether environmental and asbestos losses are, or were ever intended to be, covered are complex. Courts have reached different and sometimes inconsistent conclusions regarding such issues as: when the loss occurred and which policies provide coverage, how policy limits and exclusions are applied and determined, 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 workers' compensation- related 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 Operations but the business reinsured by Zenith in its Reinsurance Operations contains exclusion clauses for environmental and asbestos losses. CalFarm (through March 31, 1999) wrote liability coverage under farmowners' and small commercial policies, however, 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. All claims for damages resulting from 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, principally from large United States reinsurance companies, excess of loss reinsurance to protect Zenith against the impact of large, irregularly occurring losses. Such reinsurance reduces the magnitude of sudden and unpredictable changes in net income and the capitalization of the P&C Operations. 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. 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. Historically, no material amounts due from reinsurers have been written off as uncollectible. At December 31, 2000, Reliance Insurance Company ("Reliance") owed Zenith Insurance approximately $6.3 million in reinsurance recoverables for paid and unpaid losses in connection with reinsurance arrangements assumed by Zenith Insurance in the 1996 acquisition of the Associated General Contractors Self-Insurance Fund. On January 29, 2001, Reliance entered into an Order of Supervision with the Pennsylvania Insurance Department under which its business and operations will be monitored and reviewed by the Department. Zenith Insurance considered its receivables from Reliance in the normal course of assessing the collectability of reinsurance recoverables. Zenith Insurance believes this matter will not have a material adverse effect on its financial condition or results of operations. The P&C Operations maintained reinsurance arrangements as follows during 2000: Workers' Compensation -- Reinsurance covered all claims between $0.6 million and $100.0 million per occurrence. The coverage from $0.6 million to $5.0 million is placed with General 8 Reinsurance Corporation, the coverage from $5.0 million to $10.0 million with Employers Reinsurance Corporation and the remaining three layers from $10.0 million to $60.0 million primarily with NAC Reinsurance Corporation, Transatlantic Reinsurance Company, GE Reinsurance Corporation and the London reinsurance market (primarily Lloyd's syndicates and certain United Kingdom reinsurance companies). Catastrophe reinsurance covered an additional $40.0 million in excess of $60.0 million and was placed with Life Insurance Company of North America, American United Life Insurance Company and ReliaStar Life Insurance Company. 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 $50.0 million in excess of $182.0 million. Reinsurance recoverable from Inter-Ocean Reinsurance Company is secured by a trust account and an irrevocable letter of credit. Insurance premiums ceded by the P&C Operations amounted to $10.6 million, $16.3 million and $54.5 million in 2000, 1999 and 1998, respectively, or 3.0%, 4.2% and 9.3% of gross earned premiums in the years ended December 31, 2000, 1999 and 1998, respectively. Receivable from reinsurers on unpaid losses amounted to $264.6 million and $292.8 million at December 31, 2000 and 1999, respectively, of which approximately $185.4 million and $216.2 million, respectively, were reinsurance recoverables relating to reinsurance arrangements entered into by RISCORP. The principal reinsurers from which such RISCORP-related 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 -- 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 companies in the P&C Operations are parties to an intercompany 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, 2000, 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 2,300 independent licensed insurance agents and brokers throughout California, Florida, Texas and other states in which Zenith conducts its business. Zenith Insurance's assumed reinsurance premiums are generated nationally by brokers and reinsurance intermediaries. Applications for insurance and reinsurance 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, not their agents and brokers, retain authority over underwriting, claims processing, safety engineering and auditing. 9 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 national workers' compensation industry. 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. 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' workers' compensation 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 workers' compensation 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 California Department of Insurance has informed Zenith that it intends to conduct an examination of Zenith Insurance and ZNAT Insurance as of December 31, 2000, commencing in the first quarter of 2001. 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. 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 10 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 for insurance companies 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 established January 1, 2001 as the effective date of the Codification and the California and Texas Departments of Insurance have adopted the Codification. Zenith believes that the Codification, as currently constituted, will not have a material impact on the statutory capital and surplus of the P&C Operations. Under NAIC Model Laws, 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, 2000, adjusted capital under the RBC regulations for Zenith Insurance was 242% of the required level of capital under the regulations. The NAIC Insurance Regulatory Information System ("IRIS") key financial ratios, 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 2000 IRIS results for Zenith Insurance showed three results outside the "normal" range for such ratios, as such range is determined by the NAIC. These three results were impacted by intercompany reinsurance transactions associated with the sale of CalFarm in 1999, the RISCORP Purchase Adjustment in 1999, catastrophe losses in the Reinsurance Operations in 2000 and 1999 and operating losses in the Workers' Compensation Operations in 2000 and 1999. 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 15 -- "Commitments and Contingent Liabilities" on pages 59-60 of Zenith's 2000 Annual Report to Stockholders, which note is hereby incorporated by reference. Zenith considers its owned and leased facilities to be adequate for the needs of the organization. ITEM 3. LEGAL PROCEEDINGS. On 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 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 11 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. 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. 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 agreed, among other things, 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. Zenith Insurance and RISCORP also agreed that Zenith Insurance would receive $6.0 million from an escrow account established pursuant to the Asset Purchase Agreement, and RISCORP would receive the balance of the escrow account. 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 Insurance and RISCORP that they would not consider the issue raised by RISCORP because the issue had not previously been raised as a dispute pursuant to the procedures set forth in the 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. On October 9, 2000, RISCORP filed a First Amended Complaint in the Superior Court of Fulton County. RISCORP's First Amended Complaint alleges causes of action for breach of contract against the Neutral Auditor and Neutral Actuary and, in conjunction, seeks a declaration that could have the effect of requiring Zenith to pay either $18.1 million (and related charges) or $5.9 million. RISCORP also has asserted causes of action for professional negligence solely against the Neutral Auditor and Neutral Actuary in which it seeks damages of either $18.1 million (and related charges) or $5.9 million. 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. 12 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 2000 1999 - ------- ------------ ------------ First: High...................................................... $22 3/16 $26 Low....................................................... 18 3/4 20 5/16 Second: High...................................................... 24 15/16 26 11/16 Low....................................................... 20 1/2 22 1/4 Third: High...................................................... 23 7/8 26 Low....................................................... 20 13/16 21 1/8 Fourth: High...................................................... 29 3/4 22 13/16 Low....................................................... 20 19 1/4
As of March 22, 2001, there were 268 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 13, 2001........... $0.25 cash per share April 30, 2001 May 15, 2001 December 11, 2000........... $0.25 cash per share January 31, 2001 February 14, 2001 September 7, 2000........... $0.25 cash per share October 31, 2000 November 14, 2000 May 18, 2000................ $0.25 cash per share July 31, 2000 August 14, 2000 February 24, 2000........... $0.25 cash per share April 28, 2000 May 12, 2000 December 2, 1999............ $0.25 cash per share January 31, 2000 February 15, 2000 September 2, 1999........... $0.25 cash per share October 29, 1999 November 15, 1999 May 20, 1999................ $0.25 cash per share July 30, 1999 August 13, 1999 February 25, 1999........... $0.25 cash per share April 30, 1999 May 14, 1999
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 2000, Zenith Insurance paid $10.0 million of dividends to Zenith National. 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 2001, Zenith Insurance will be able to 13 pay $26.2 million in dividends to Zenith National without prior approval. In 2001, ZNAT Insurance and Zenith Star, together, will be able to pay $0.5 million in dividends to Zenith Insurance without prior approval. Zenith National made a contribution of $25.0 million in 2000 to the capital and surplus of Zenith Insurance. ITEM 6. SELECTED FINANCIAL DATA. The 5-Year Summary of Selected Financial Information, included in Zenith's 2000 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 2000 Annual Report to Stockholders on pages 25-36, 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 2000 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 2000 Annual Report to Stockholders for information setting forth the loss and loss adjustment expense liability development for 1990 through 2000 and to the Consolidated Financial Statements and Notes thereto on pages 42-65 of Zenith's 2000 Annual Report to Stockholders, which are hereby incorporated by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 14 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 2001 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
EXECUTIVE OFFICER NAME AGE POSITION TERM SINCE - ---- --- -------- ---- --------- Stanley R. Zax 63 Chairman of the Board and Annual 1977 President Jack D. Miller 55 Executive Vice President Annual 1998 Robert E. Meyer.. 52 Senior Vice President and Actuary Annual 2000 William J. Owen.. 43 Senior Vice President, Chief Financial Annual 2000 Officer, Treasurer and Assistant Secretary John J. Tickner 62 Senior Vice President and Secretary Annual 1985
Each of the executive officers is an officer of Zenith National and certain of its subsidiaries and each 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," "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. 15 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 footnotes 1 and 2 to the table set forth under the caption "Election of Directors" in the Proxy Statement is hereby incorporated by reference. 16 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 incorporated herein by reference from Zenith's 2000 Annual Report to Stockholders Consolidated Financial Statements and notes thereto incorporated herein by reference from Zenith's 2000 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, 2000 and 1999 Consolidated Statement of Operations for the years ended December 31, 2000, 1999 and 1998 Consolidated Statement of Cash Flows for the years ended December 31, 2000, 1999 and 1998 Consolidated Statement of Stockholders' Equity for the three years ended December 31, 2000 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, 2000: I -- Summary of Investments -- Other Than Investments in Related Parties For the years ended December 31, 2000, 1999 and 1998: III -- Supplementary Insurance Information IV -- Reinsurance Zenith National Insurance Corp.: As of December 31, 2000 and 1999 and for the years ended December 31, 2000, 1999 and 1998: II -- Condensed Financial Information of Registrant The information on Property-Casualty Loss Development is on pages 40-41 of Zenith's 2000 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. 17 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 National Insurance Corp., dated May 28, 1971. (Incorporated herein by reference to Exhibit 3.1 to Zenith's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.) 3.2 Certificate of Amendment of Certificate of Incorporation of Zenith National Insurance Corp., dated September 12, 1977. (Incorporated herein by reference to Exhibit 3.2 to Zenith's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.) 3.3 Certificate of Amendment of Certificate of Incorporation of Zenith National Insurance Corp., dated May 31, 1979. (Incorporated herein by reference to Exhibit 3.3 to Zenith's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.) 3.4 Certificate of Amendment of Certificate of Incorporation of Zenith National Insurance Corp., dated September 6, 1983. (Incorporated herein by reference to Exhibit 3.4 to Zenith's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.) 3.5 Certificate of Designation of Zenith National Insurance Corp., dated September 10, 1985. (Incorporated herein by reference to Exhibit 3.5 to Zenith's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.) 3.6 Certificate of Amendment of Certificate of Incorporation of Zenith National Insurance Corp., dated November 22, 1985. (Incorporated herein by reference to Exhibit 3.6 to Zenith's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.) 3.7 Certificate of Amendment of Certificate of Incorporation of Zenith National Insurance Corp., dated May 19, 1987. (Incorporated herein by reference to Exhibit 3.7 to Zenith's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.) 3.8 Certificate of Change of Address of Registered Office and of Registered Agent of Zenith National Insurance Corp., dated October 10, 1989. (Incorporated herein by reference to Exhibit 3.8 to Zenith's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.)
18 3.9 By-laws of Zenith National Insurance Corp., as currently in effect (Incorporated herein by reference to Exhibit 3.3 to Zenith National Insurance Corp.'s Annual Report on Form 10-K for the year ended December 31, 1999.) 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.) 4.4 Certificate of Amendment to Certificate of Trust of Zenith National Insurance Capital Trust I, dated March 1, 2000. (Incorporated herein by reference to Exhibit 10.1 to Zenith's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000). 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.) 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.)
19 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.) 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 herein 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.)
20 *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.) *10.17 Amendment to Employment Agreement, dated March 1, 2000, between Zenith National Insurance Corp. and John J. Tickner. (Incorporated herein by reference to Exhibit 10.17 to Zenith's Annual Report on Form 10-K for the year ended December 31, 1999.) *10.18 Restated and Amended Employment Agreement, executed March 13, 2001, between Zenith National Insurance Corp. and Stanley R. Zax. *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. (Incorporated herein by reference to Exhibit 10.20 to Zenith's Annual Report on Form 10-K for the year ended December 31, 1999.) *10.21 Employment Agreement, dated October 20, 1997, between Zenith Insurance Company and Robert E. Meyer. (Incorporated herein by reference to Exhibit 10.21 to Zenith's Annual Report on Form 10-K for the year ended December 31, 1999.) *10.22 Amendment to Employment Agreement, dated March 1, 2000, between Zenith Insurance Company and Robert E. Meyer. (Incorporated herein by reference to Exhibit 10.22 to Zenith's Annual Report on Form 10-K for the year ended December 31, 1999.) *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.)
21 *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. (Incorporated herein by reference to Exhibit 10.28 to Zenith's Annual Report on Form 10-K for the year ended December 31, 1999.) 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. (Incorporated herein by reference to Exhibit 10.29 to Zenith's Annual Report on Form 10-K for the year ended December 31, 1999.) 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. (Incorporated herein by reference to Exhibit 10.30 to Zenith's Annual Report on Form 10-K for the year ended December 31, 1999.) 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.)
22 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 Qua rterly 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 Promissory Note, dated July 3, 2000, 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, 2000.) 10.38 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.) 10.39 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.) 10.40 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.) 10.41 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.) 10.42 Third Amendment, dated August 21, 1998, to the Credit Agreement, dated July 24, 1997, between Zenith National Insurance Corp. and Bank of America National Trust and Savings Association. (Incorporated herein by reference to Exhibit 10.4 to Zenith's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998.) 10.43 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.) 10.44 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.) 10.45 Sixth Amendment to Credit Agreement, dated as of July 18, 2000, between Zenith National Insurance Corp. and Bank of America, N. A. (Incorporated herein by reference to Exhibit 10.3 to Zenith's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.)
23 10.46 Seventh Amendment to Credit Agreement, dated September 19, 2000, between Zenith National Insurance Corp. and Bank of America, N. A. (Incorporated herein by reference to Exhibit 10.1 to Zenith's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000.) 10.47 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.) 10.48 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.) 10.49 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 19 --"Earnings and Dividends Per Share" on page 62 of Zenith's 2000 Annual Report to Stockholders.) 13 Zenith's Annual Report to Stockholders for the year ended December 31, 2000, 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, 2001. (Incorporated herein by reference to page F-1 of this Annual Report on Form 10-K.)
- -------------------------- *Management contract or compensatory plan or arrangement (b) Reports on Form 8-K Zenith filed no Current Reports on Form 8-K during the quarter ended December 31, 2000. 24 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, 2001. 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, 2001. /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/ ROBERT J. MILLER --------------------------------------------- Director Robert J. Miller /s/ LEON E. PANETTA --------------------------------------------- Director Leon E. Panetta /s/ WILLIAM S. SESSIONS --------------------------------------------- Director William S. Sessions /s/ HARVEY L. SILBERT --------------------------------------------- Director Harvey L. Silbert /s/ GERALD TSAI, JR. --------------------------------------------- Director Gerald Tsai, Jr. /s/ MICHAEL WM. ZAVIS --------------------------------------------- Director Michael Wm. Zavis /s/ WILLIAM J. OWEN Senior Vice President and Chief Financial --------------------------------------------- Officer (Principal Financial and Accounting William J. Owen Officer)
25 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (File Nos. 33-8948, 33-22219, 333-04399 and 333-79199) of our report dated February 7, 2001 relating to the consolidated financial statements as of December 31, 2000 and 1999, and for each of the three years in the period ended December 31, 2000, which appears in the 2000 Annual Report to Stockholders of Zenith National Insurance Corp. (the "Company"), which is included in the Company's Annual Report on Form 10-K for the year ended December 31, 2000. We also consent to the incorporation by reference of our report dated February 7, 2001 relating to the financial statement schedules, which appears in such Annual Report on Form 10-K. PricewaterhouseCoopers LLP Los Angeles, California March 27, 2001 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 7, 2001 appearing in the 2000 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 7, 2001 F-2 SCHEDULE I -- SUMMARY OF INVESTMENTS -- OTHER THAN INVESTMENTS IN RELATED PARTIES ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES DECEMBER 31, 2000
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............................... $ 142,593 $ 142,786 $ 142,786 Public utilities................................ 25,560 25,600 25,600 Industrial and miscellaneous.................... 428,077 414,204 413,836 Redeemable preferred stocks....................... 13,644 12,752 12,752 ---------- ---------- ---------- Total fixed maturities...................... 609,874 595,342 594,974 Equity securities: Floating rate preferred stocks.................... 6,799 5,699 5,699 Convertible and nonredeemable preferred stocks.... 3,733 3,391 3,391 Common stocks, industrial......................... 23,630 27,301 27,301 ---------- ---------- ---------- Total equity securities..................... 34,162 36,391 36,391 Short-term investments.............................. 158,438 158,438 158,438 Other investments................................... 62,931 62,931 62,931 ---------- ---------- ---------- Total investments........................... $ 865,405 $ 853,102 $ 852,734 ========== ========== ==========
- ------------------------ (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, --------------------- 2000 1999 (DOLLARS AND SHARES IN THOUSANDS) --------- --------- Investments: Fixed maturities, at fair value (cost $480 in 2000)....... $ 444 Common stocks, at fair value (cost $1,214 in 2000 and $1,430 in 1999)......................................... 1,390 $ 1,464 Short-term investments (at cost, which approximates fair value).................................................. 58,145 96,033 --------- --------- Total investments........................................... 59,979 97,497 Cash........................................................ 1,076 Investment in subsidiaries (Note A)......................... 331,056 347,372 Receivable from subsidiaries (Note A)....................... 54,879 56,747 Other assets................................................ 18,261 16,560 --------- --------- Total assets........................................ $ 465,251 $ 518,176 ========= ========= LIABILITIES Senior notes payable, less unamortized issue cost of $126 in 2000 and $283 in 1999 (Notes B and D)..................... $ 58,374 $ 74,717 8.55% Subordinated Deferrable Interest Debentures, less unamortized issue cost of $259 in 2000 and $269 in 1999 (Note C).................................................. 77,061 77,051 Dividend payable to stockholders............................ 4,361 4,287 Federal income tax (Note A)................................. 9,534 1,192 Other liabilities........................................... 6,145 6,370 --------- --------- Total liabilities................................... 155,475 163,617 --------- --------- STOCKHOLDERS' EQUITY Preferred stock, $1 par--shares authorized 1,000; issued and outstanding, none in 2000 and 1999........................ Common stock, $1 par--shares authorized 50,000; issued 25,452, outstanding 17,443 in 2000; issued 25,157, outstanding 17,150 in 1999................................ 25,452 25,157 Additional paid-in capital.................................. 282,120 274,897 Retained earnings........................................... 161,174 225,229 Accumulated other comprehensive loss--net unrealized depreciation on investments, net of deferred tax benefit of $4,419 in 2000 and $10,768 in 1999..................... (8,206) (19,998) --------- --------- 460,540 505,285 Treasury stock, at cost (8,009 shares in 2000 and 8,007 shares in 1999)........................................... (150,764) (150,726) --------- --------- Total stockholders' equity.......................... 309,776 354,559 --------- --------- Total liabilities and stockholders' equity.......... $ 465,251 $ 518,176 ========= =========
See notes to condensed financial information. F-4 SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT ZENITH NATIONAL INSURANCE CORP. STATEMENT OF OPERATIONS
YEARS ENDED DECEMBER 31, ------------------------------- 2000 1999 1998 (DOLLARS IN THOUSANDS) --------- -------- -------- Net investment income (expense)............................. $ 4,258 $ 2,520 $ (801) Realized (losses) gains on investments...................... (869) 828 22 -------- -------- ------- Total revenues.............................................. 3,389 3,348 (779) Operating expenses.......................................... 6,042 4,155 3,835 Interest expense............................................ 5,839 8,416 6,011 -------- -------- ------- Total expenses.............................................. 11,881 12,571 9,846 Loss before federal income tax benefit and equity in (loss) income of subsidiaries and extraordinary item............. (8,492) (9,223) (10,625) Federal income tax benefit.................................. 2,631 3,175 3,496 -------- -------- ------- Loss before equity in income of subsidiaries and extraordinary item........................................ (5,861) (6,048) (7,129) Equity in (loss) income of subsidiaries (Note A)............ (41,932) 60,148 26,229 -------- -------- ------- (Loss) income before extraordinary item..................... (47,793) 54,100 19,100 Extraordinary item--gain on extinguishment of debt, net of federal income tax expense of $534 (Note D)............... 993 -------- -------- ------- Net (loss) income........................................... $(46,800) $ 54,100 $19,100 ======== ======== =======
See notes to condensed financial information. F-5 SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT ZENITH NATIONAL INSURANCE CORP. STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, ------------------------------- 2000 1999 1998 (DOLLARS IN THOUSANDS) --------- -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Investment income received................................ $ 721 $ 1,372 $ 445 Operating expenses paid................................... (4,694) (3,808) (4,587) Interest paid............................................. (8,963) (10,017) (5,468) Income tax recovered...................................... 10,675 3,974 4,563 --------- -------- -------- Net cash used in operating activities................... (2,261) (8,479) (5,047) CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of investments: Equity securities available-for-sale.................... (888) (10,315) (4,652) Other debt and equity securities and other investments........................................... 4,793 Proceeds from sales of investments: Equity securities available-for-sale.................... 9,412 Other investments....................................... 5,675 Net change in short-term investments...................... 41,485 (89,146) 33,457 Other, net................................................ 6,367 (5,271) (1,408) --------- -------- -------- Net cash provided by (used in) investing activities..... 46,964 (89,645) 32,190 CASH FLOWS FROM FINANCING ACTIVITIES: Repurchase of redeemable securities (Notes B and D) (6,164) Repurchase of 9% Notes (Notes B and D).................... (16,585) Cash advanced from bank lines of credit................... 7,400 7,000 Cash repaid on bank lines of credit....................... (12,400) (2,000) Cash dividends paid to common stockholders................ (17,183) (17,165) (17,010) Net proceeds from issuance of subordinated debt (Note C)...................................................... 77,038 Proceeds from exercise of stock options................... 7,246 4,322 6,527 Purchase of treasury shares............................... (38) (4,190) (24,023) Dividends received from subsidiaries (Note A)............. 10,000 130,000 Capital contribution to Zenith Insurance (Notes A and C)...................................................... (25,000) (65,000) Net cash from (to) subsidiary (Note A).................... 4,097 (9,991) (10,257) --------- -------- -------- Net cash (used in) provided by financing activities..... (43,627) 97,976 (27,725) Net increase (decrease) in cash............................. 1,076 (148) (582) Cash at beginning of year................................... 148 730 --------- -------- -------- Cash at end of year......................................... $ 1,076 $ $ 148 ========= ======== ======== RECONCILIATION OF NET (LOSS) INCOME TO NET CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income......................................... $ (46,800) $ 54,100 $ 19,100 Gain on extinguishment of debt (Notes B and D)............ (1,527) Loss (income) from subsidiaries (Note A).................. 41,932 (60,148) (26,229) Other..................................................... 4,134 (2,431) 2,082 --------- -------- -------- Net cash used in operating activities................... $ (2,261) $ (8,479) $ (5,047) ========= ======== ========
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. A. Investment In Subsidiaries Zenith National owns, directly or indirectly, 100% of the outstanding stock of Zenith Insurance Company ("Zenith Insurance"); 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. Included in investment in subsidiaries at December 31, 2000 and 1999 was $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 funds the land acquisitions of its Real Estate Operations through intercompany loans. The receivable from subsidiaries mainly comprises principal and capitalized interest on loans to Perma-Bilt and ZDC of $55.4 million and $56.8 million at December 31, 2000 and 1999, respectively, for which interest is charged at the rate of prime plus 2% (11.5% at December 31, 2000 and 10.5% at December 31, 1999). Zenith National files a consolidated federal income tax return. The equity in (loss) income of subsidiaries is net of a provision for federal income tax benefit of $21.9 million in 2000 and a federal income tax expense of $32.2 million in 1999 and $13.2 million in 1998. Zenith has tax allocation procedures with its subsidiaries and the 2000, 1999 and 1998 condensed financial information reflect Zenith's portion of the consolidated tax. Zenith Insurance paid dividends to Zenith National of $10.0 million in 2000 and $130.0 million in 1999 including a dividend of $100.0 million for which prior approval was obtained from the California Department of Insurance in 1999. Zenith Insurance paid no dividends to Zenith National in 1998. Zenith National made contributions of $25.0 million in 2000 and $65.0 million in 1998 to the capital and surplus of Zenith Insurance. B. Senior Notes Payable Zenith National had $58.5 million and $75.0 million of the $75.0 million issued of its 9% Senior Notes due 2002 (the "9% Notes") at December 31, 2000 and 1999, respectively. 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 the years ended December 31, 2000, 1999 and 1998, $5.8 million, $6.9 million and $6.9 million, respectively, 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 Trust, a Delaware statutory business trust, all of the voting securities of which are owned by Zenith National. 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 F-7 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 2000, 1999 and 1998, $6.7 million, $6.7 million and $2.7 million, respectively, of interest and issue cost were expensed. Zenith National's guarantee of the Subordinated Debentures is subordinated to all other indebtedness of Zenith National. D. Extraordinary Item--Gain on Extinguishment of Debt In 2000, Zenith National paid $22.8 million to repurchase $16.5 million aggregate principal amount of the outstanding 9% Notes and $8.0 million aggregate liquidation amount of the outstanding 8.55% Capital Securities issued through the Trust. The repurchases resulted in an extraordinary gain before tax of $1.5 million. E. Commitments and Contingent Liabilities 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, Inc. and certain of its subsidiaries (collectively, "RISCORP"), Zenith Insurance acquired substantially all of the assets and certain liabilities of RISCORP related to RISCORP's workers' compensation business (the "RISCORP Acquisition"). The total purchase price for such acquired assets and liabilities was determined by a three-step process in which RISCORP and its external accounting and actuarial consultants and Zenith Insurance and its external accounting and actuarial consultants made and presented their estimates of the GAAP values of the assets and liabilities acquired by Zenith Insurance to an independent third party, acting as a Neutral Auditor and Neutral Actuary. Such estimates varied considerably, particularly with respect to the value of 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. 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 agreed, among other things, 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. Zenith Insurance and RISCORP also agreed that Zenith Insurance would receive $6.0 million from an escrow account established pursuant to the Asset Purchase Agreement, and RISCORP would receive the balance of the escrow account. 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 Insurance and RISCORP that they would not consider the issue raised by RISCORP because the issue had not previously been raised as a dispute pursuant to the procedures set forth in the 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. On October 9, 2000, RISCORP filed a First Amended Complaint in the Superior F-8 Court of Fulton County. RISCORP's First Amended Complaint alleges causes of action for breach of contract against the Neutral Auditor and Neutral Actuary and, in conjunction, seeks a declaration that could have the effect of requiring Zenith to pay either $18.1 million (and related charges) or $5.9 million. RISCORP also has asserted causes of action for professional negligence solely against the Neutral Auditor and Neutral Actuary in which it seeks damages of either $18.1 million (and related charges) or $5.9 million. 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. F-9 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 - -------- ----------- -------------- --------- ------------ --------- ---------- FUTURE POLICY DEFERRED BENEFITS, OTHER POLICY POLICY LOSSES, CLAIMS CLAIMS AND NET ACQUISITION AND LOSS UNEARNED BENEFITS PREMIUM INVESTMENT SEGMENT COSTS EXPENSES PREMIUMS PAYABLE REVENUE INCOME - ------- ----------- -------------- --------- ------------ --------- ---------- (DOLLARS IN THOUSANDS) Years Ended December 31, 2000 - ---- Property and Casualty Workers' Compensation................... $ 8,610 $542,173 $ 49,928 $300,833 Reinsurance............................. 1,700 97,514 8,896 37,919 ------- -------- -------- ------- -------- ------- 10,310 639,687 58,824 338,752 Reinsurance ceded......................... 238,196 83 Investment................................ $51,766 Parent.................................... ------- -------- -------- ------- -------- ------- Total................................... $10,310 $877,883 $ 58,907 $338,752 $51,766 ======= ======== ======== ======= ======== ======= 1999 - ---- Property and Casualty Workers' Compensation................... $ 6,633 $516,941 $ 42,630 $278,854 Reinsurance............................. 1,259 88,309 7,496 36,441 Other Property-Casualty................. 54,108 ------- -------- -------- ------- -------- ------- 7,892 605,250 50,126 369,403 Reinsurance ceded......................... 275,679 780 Investment................................ $53,662 Parent.................................... ------- -------- -------- ------- -------- ------- Total................................... $ 7,892 $880,929 $ 50,906 $369,403 $53,662 ======= ======== ======== ======= ======== ======= 1998 - ---- Property and Casualty Workers' Compensation................... $ 6,157 $524,183 $ 48,363 $278,660 Reinsurance............................. 1,352 73,646 8,005 29,150 Other Property-Casualty................. 16,432 110,855 89,202 222,045 ------- -------- -------- ------- -------- ------- 23,941 708,684 145,570 529,855 Reinsurance ceded......................... 288,963 12,395 Investment................................ $53,593 Parent.................................... ------- -------- -------- ------- -------- ------- Total................................... $23,941 $997,647 $157,965 $529,855 $53,593 ======= ======== ======== ======= ======== ======= COLUMN A COLUMN H COLUMN I COLUMN J COLUMN K - -------- ---------- ------------ --------- --------- BENEFITS, CLAIMS, AMORTIZATION LOSSES AND OF POLICY OTHER SETTLEMENT ACQUISITION OPERATING PREMIUMS SEGMENT EXPENSES COSTS EXPENSES WRITTEN - ------- ---------- ------------ --------- --------- (DOLLARS IN THOUSANDS) Years Ended December 31, 2000 - ---- Property and Casualty Workers' Compensation................... $289,923 $57,979 $39,241 $308,131 Reinsurance............................. 47,039 4,912 504 39,320 -------- ------- ------- -------- 336,962 62,891 39,745 347,451 Reinsurance ceded......................... Investment................................ Parent.................................... 6,042 -------- ------- ------- -------- Total................................... $336,962 $62,891 $45,787 $347,451 ======== ======= ======= ======== 1999 - ---- Property and Casualty Workers' Compensation................... $285,864 $47,502 $70,112 $272,326 Reinsurance............................. 38,279 5,000 486 35,930 Other Property-Casualty................. 36,029 12,764 5,337 49,976 -------- ------- ------- -------- 360,172 65,266 75,935 358,232 Reinsurance ceded......................... Investment................................ Parent.................................... 4,155 -------- ------- ------- -------- Total................................... $360,172 $65,266 $80,090 $358,232 ======== ======= ======= ======== 1998 - ---- Property and Casualty Workers' Compensation................... $220,983 $43,182 $60,609 $277,191 Reinsurance............................. 13,195 4,727 960 29,856 Other Property-Casualty................. 148,712 49,028 19,895 215,452 -------- ------- ------- -------- 382,890 96,937 81,464 522,499 Reinsurance ceded......................... Investment................................ Parent.................................... 3,835 -------- ------- ------- -------- Total................................... $382,890 $96,937 $85,299 $522,499 ======== ======= ======= ========
F-10 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) -------- --------- ---------- -------- ---------- YEARS ENDED DECEMBER 31, 2000 Premiums earned....................... $307,514 $10,610 $41,848 $338,752 12.4% 1999 Premiums earned....................... 345,085 16,349 40,667 369,403 11.0% 1998 Premiums earned....................... 545,573 54,487 38,769 529,855 7.3%
F-11 EX-10.18 2 a2034311zex-10_18.txt EXHIBIT 10.18 EXHIBIT 10.18 EMPLOYMENT AGREEMENT THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT ("Agreement") between ZENITH NATIONAL INSURANCE CORP., a Delaware corporation (hereinafter referred to as "Zenith"), and STANLEY R. ZAX (hereinafter referred to as "Employee") is hereby amended and restated in its entirety effective December 11, 1997 (the "Effective Date"). RECITALS WHEREAS, Employee is presently employed as Chairman of the Board and President of Zenith Insurance Company, a subsidiary of Zenith, pursuant to a written Employment Agreement originally dated as of December 9, 1981, which agreement has been extended and modified from time to time, and is also employed as Chairman of the Board and President of Zenith and certain of its other subsidiaries (Zenith and all of its subsidiaries collectively referred to hereinafter as "Employer"); and WHEREAS, Zenith and Employee deem it in their respective best interests to extend the term of said Employment Agreement at the present time and modify certain other provisions thereof; NOW, THEREFORE, it is agreed as follows: 1. AMENDED AND RESTATED EMPLOYMENT AGREEMENT. The Agreement is hereby amended and restated in its entirety and the term thereof is hereby extended as hereinafter provided. 2. ENGAGEMENT AND DUTIES. During the Term of Employment as defined in Paragraph 3 of this Agreement: 2.1 Employer hereby employs Employee and Employee does hereby agree to be employed by Employer as Chairman of the Board, President, and Chief Executive Officer of Zenith and in such other capacities at Zenith and at each of the corporations which comprise Employer as shall hereafter be agreed upon by Employee, the Board of Directors of Zenith and the boards of directors of such other corporations. 2.2 Employee shall perform the normal duties of such offices and such other executive duties as may from time to time be assigned to him by and in accordance with instructions and directions of the Board of Directors of Zenith. Both Employee and Employer hereby expressly recognize that the services described herein shall be performed to the reasonable satisfaction of the Board of Directors of Zenith. 2.3 Employee shall perform the duties contemplated hereunder at his principal office located in Los Angeles County, California; provided, however, Employee shall travel outside Los Angeles County to the extent he reasonably deems it necessary or appropriate in the performance of his duties hereunder. 2.4 Employee, during the Term of Employment, shall devote his time, attention, energies, skill and best efforts to the performance of his duties for and on behalf of Employer. 3. TERM OF EMPLOYMENT. The term of employment hereunder shall be a period commencing on the Effective Date and terminating December 31, 2006 ("Expiration Date"), unless sooner terminated as elsewhere provided herein ("Term of Employment"). 4. COMPENSATION. As full and complete consideration for the performance of his duties and the rendition of any and all services under this Agreement, Employee shall be compensated as follows: 4.1 Employee shall be paid the following amounts, subject to such other increases as the Board of Directors of Zenith may from time to time determine ("Base Compensation"): (a) From the Effective Date through December 31, 2000: $1,000,000 per year; (b) From January 1, 2001 through December 31, 2002: $1,200,000 per year; (c) From January 1, 2003 through December 31, 2004: $1,350,000 per year; and (d) From January 1, 2005 through December 31, 2006: $1,500,000 per year. 4.2 In addition to the Base Compensation, Employee shall be a participant in the Executive Officer Bonus Plan of Zenith. 4.3 All compensation hereunder shall be paid by Employer, as allocated from time to time among the different corporations which comprise Employer by the Audit Committee of Zenith, and shall comply with all relevant governmental directives, rules and regulations which may be in effect from time to time. All Base Compensation shall be payable ratably twice each month, or more or less often in accordance with the normal payroll practices of Employer. 5. BUSINESS EXPENSES. Employee shall be reimbursed for reasonable and necessary expenses duly incurred in connection with the duties to be performed and the services to be rendered by Employee to Employer under and pursuant to this Agreement, upon submission of itemized expense statements in the manner and at times specified by Employer for officers of Employer. In addition, Employee shall be entitled to the exclusive full time use of one deluxe automobile of his choice, to be replaced from time to time at Employee's discretion. 2 6. EMPLOYEE BENEFITS. 6.1 Employee shall be entitled to participate in all employee insurance, retirement and other benefit plans for which he qualifies and which may be in effect from time to time. Notwithstanding the foregoing, nothing contained in this Agreement shall prohibit or limit the right of Employer 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 Employer generally, or to a defined group of such employees, and shall not apply solely to Employee. 6.2 Employee shall be entitled each year to a vacation in accordance with standard employment practices, during which time his compensation shall be paid in full. Each vacation shall be taken during a period mutually satisfactory to both Employer and Employee. 6.3 During the Term of Employment, Zenith shall provide Employee with life insurance coverage with an aggregate face amount equal to at least $6,125,000 of which $5 million shall be term life insurance. 7. DEATH DURING EMPLOYMENT. If Employee shall die during the Term of Employment, Employer shall pay the compensation which could otherwise be payable to Employee pursuant to Paragraphs 4.1 and 4.2 of this Agreement, up to the end of the twelfth month following the month in which his death occurred (a) to Employee's spouse, if living, (b) if his spouse is not then living, to his then living issue by right of representation, and (c) if none of the above are then living, to his estate. 8. ACKNOWLEDGMENT OF PECULIAR VALUE OF SERVICES. 8.1 Employee acknowledges that the services which he has agreed to render during the Term of Employment under this Agreement are special, unique, unusual, extraordinary, and of an intellectual character, and therefore are of peculiar value to Employer. 8.2 Employee further acknowledges that because of the character of said services the remedy at law for any breach by him of this Agreement may be enforced by an injunction in a suit in equity, without the necessity of proving actual damage, and that a temporary injunction may be granted immediately upon the commencement of any such suit, and without notice. Nothing herein contained shall be construed as prohibiting Employer from pursuing any other remedies available to Employer from such breach or threatened breach, including the recovery of damages from Employee. 9. DISCLOSURE OF INFORMATION. 9.1 Employee acknowledges that the list of Employer's customers, as they may exist from time to time, and Employer's trade secrets and other confidential information are valuable, special and unique assets of Employer's business. Employee will not, during or after the Term of Employment, disclose to any person, firm, 3 corporation, association, or any other entity or use for his own benefit, any list of Employer's customers, or any part thereof, or any of Employer's trade secrets or other confidential information, for any reason or purpose whatsoever. 9.2 Employee agrees that upon leaving the employ of Employer he will deliver to Employer and not keep or deliver to anyone else, any and all memoranda, specifications, documents and in general any and all material relating to Employer's business that he may have under his possession or control. 9.3 Employee recognizes that he will possess confidential information about other employees of Employer relating to their education, experience, skills, abilities, compensation and benefits, and interpersonal relationships with customers of Employer. The Employee recognizes that the information he will possess about these other employees is not generally known, is of substantial value to Employer in developing its products and in securing and retaining customers, and will be acquired by him because of his business position with Employer. Employee agrees that, during the period ending on the last day of the one-year period following his termination of employment, he will not, directly or indirectly, solicit or recruit any employee of Employer for the purpose of being employed by him, or any business, individual, partner, firm, corporation or other entity that is then in competition with Employer ("Competitor") on whose behalf he is acting as an agent, representative or employee. The Employee further agrees that he will not convey any such confidential information or trade secrets about other employees of Employer to anyone affiliated with him or to any Competitor. 9.4 Employee further acknowledges that the remedy at law for any breach by him of the covenants contained in Paragraphs 9.1 and 9.2 will be inadequate and that in the event of a breach, or threatened breach, by Employee of the covenants contained therein, Employer shall be entitled to an injunction restraining Employee from using, for his own benefit, and/or from disclosing, in whole or in part, the list of Employer's customers, and/or Employer'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 Employee to return to Employer any and all memoranda, specifications, documents and all other material relating to Employer's business that he may have under his possession or control. Nothing herein shall be construed as prohibiting Employer from pursuing any other remedies available to Employer from such breach or threatened breach, including the recovery of damages from Employee. The provisions of this Paragraph 9 shall survive the expiration or termination, for any reason, of this Agreement and of Employee's employment. 10. TERMINATION OF AGREEMENT BY EMPLOYER. Should any of the following events occur, Employer may terminate this Agreement by giving written notice thereof to Employee, which notice shall be effective immediately: (a) Employee is physically or mentally incapacitated for a period of one hundred eighty (180) consecutive days. Employee shall be deemed to be 4 physically or mentally incapacitated if he is unable for any reason whatsoever to devote his full time and efforts to the business of Employer. (b) Employee breaches any of his material obligations under this Agreement. 10.1 Should Employer terminate the Term of Employment prior to the Expiration Date pursuant to Paragraph 10(a) hereof, Employer shall thereupon pay to Employee, in complete satisfaction of its obligations under this Agreement, the compensation which would otherwise be payable to him pursuant to Paragraphs 4.1 and 4.2 of this Agreement up to the end of the twelfth month following the month in which such termination occurred (less any amounts payable to Employee pursuant to any long-term disability plan in effect at the time of such termination). Should Employer terminate the Term of Employment prior to the Expiration Date pursuant to Paragraph 10(b) hereof, Employer shall pay to Employee in complete satisfaction of its obligations under this Agreement and without waiving any rights which it or its subsidiaries may have against Employee, the compensation which would otherwise be payable to him pursuant to Paragraph 4.1 of this Agreement up to the end of the month in which such termination occurs and Employer shall not be obligated to make any payments to Employee pursuant to Paragraph 4.2 of the Agreement. 10.2 Subject to the provisions of Paragraph 11.2 hereof, should Employer terminate the Term of Employment prior to the Expiration Date for any reason other than as set forth in Paragraphs 10(a) and 10(b) hereof, Employer shall thereupon pay to Employee, in complete satisfaction of its obligations under this Agreement, the compensation which would otherwise be payable to him pursuant to Paragraphs 4.1 and 4.2 of this Agreement had Employee continued to be employed through the Expiration Date, assuming, for purposes of this Paragraph 10.2, that the annual bonus payable to Employee pursuant to Paragraph 4.2 of this Agreement for each year of the remaining term is equal to the highest annual bonus paid or payable to Employee during the three consecutive years immediately preceding his termination of employment. 11. CHANGE IN CONTROL; TERMINATION OF AGREEMENT BY EMPLOYEE OR EMPLOYER. In the event of a Change in Control (as defined below) at any time during the Term of Employment, all stock option rights, stock appreciation rights, and any and all other similar rights theretofore granted to Employee, including, but not limited to, the Stock Option Agreement entered into with Zenith, effective as of March 15, 1996 (the "Option"), shall vest and shall then be exercisable in full. In the event Employee ceases to be an employee of Zenith within 270 days following a Change in Control of Zenith, in lieu of exercise of the Option, Employee (or Employee's executors or administrators or the person or persons who acquire Employee's rights to exercise the Option by bequest or inheritance) may, in his or their sole discretion, elect, by giving notice of such election to Zenith at its principal corporate headquarters within 90 days following Employee's termination of employment, to receive cash equal in value to the excess of the fair market value on the date of such election of the remaining shares subject to the Option over the purchase price of such shares. Such payment shall be made to Employee not less than five (5) nor more than fourteen (14) days after Zenith's receipt of such notice. 5 11.1 Employee may, within 180 days after the effective date of any such Change in Control, deliver to Zenith a written notice of his election to terminate the Term of Employment, effective as of a date set forth in said notice, which effective date shall be not less than 30 days nor more than 90 days after the date of delivery of such written notice. 11.2 Notwithstanding anything in this Agreement to the contrary, in the event of a Change in Control, should Employee terminate the Term of Employment prior to the Expiration Date pursuant to Paragraph 11.1 hereof, or should Employer terminate the Term of Employment prior to the Expiration Date for any reason other than as set forth in Paragraphs 10(a) and 10(b) hereof, then, effective as of the date set forth in Employee's or Employer's notice to terminate the Term of Employment, Employee shall be entitled to the benefits provided below (hereinafter referred to as "Severance Payments"): (i) Zenith shall pay to Employee his Base Compensation through the effective date of the notice to terminate the Term of Employment, at the rate in effect at the time such notice of termination is given, plus all other amounts to which he is entitled under any compensation plan of Employer, in each case at the time such payments are due; (ii) Zenith shall pay to Employee a cash lump sum payment, no later than the fifteenth day following the effective date of the notice to terminate the Term of Employment, equal to the greater of (a) two times the sum of (x) his Base Compensation at the rate in effect as of the effective date of the notice to terminate the Term of Employment and (y) the highest annual bonus paid or payable to Employee during the three consecutive years immediately preceding his termination of employment, or (b) the "actuarial equivalent" of all Base Compensation and bonus payments that would have been payable to Employee pursuant to Paragraphs 4.1 and 4.2 of this Agreement had Employee continued to be employed through the Expiration Date, assuming, for purposes of this Paragraph, that the annual bonus payable to Employee pursuant to Paragraph 4.2 of this Agreement for each year of such remaining term is equal to the highest annual bonus paid or payable to Employee during the three consecutive years immediately preceding his termination of employment. For purposes of this subparagraph 11.2(ii), "actuarial equivalent" shall be determined by an actuary selected by Zenith, subject to approval by Employee, and calculated in accordance with the actuarial assumptions used by the Pension Benefit Guaranty Corporation to value liabilities for pension plans terminating as of the effective date of Employee's or Employer's notice to terminate the Term of Employment; (iii) During the period beginning as of the effective date of Employee's or Employer's notice to terminate the Term of Employment until the Expiration Date, Zenith shall, at its cost, arrange to provide Employee with life, disability, dental, accident and group health insurance benefits substantially similar to those that he was receiving immediately prior to the effective date of the notice to terminate the Term of Employment plus an additional amount necessary to reimburse Employee for any taxes imposed solely by reason of his receipt of such benefits 6 following his termination of employment. Notwithstanding the foregoing, Zenith shall not provide any benefit otherwise receivable by Employee pursuant to this subparagraph 11.2(iii) if an equivalent benefit actually received by him at any time during the period of coverage, and any such benefit actually received by him shall be reported to Zenith. 11.3 For purposes of this Agreement, a Change in Control shall mean either (i) a merger or consolidation of Zenith with or into another company or corporation, other than (a) a merger or consolidation which would result in the voting securities of Zenith outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least 75% of the combined voting power of the voting securities of Zenith or such surviving entity outstanding immediately after such merger or consolidation or (b) a merger or consolidation effected to implement a recapitalization of Zenith (or similar transaction) in which no "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) acquires Zenith more than 50% of the combined voting power of Zenith's then outstanding securities; or (ii) an assignment of this Agreement by Zenith under the provisions of Paragraph 15.2 hereof; or (iii) the sale of all or substantially all of Zenith's assets; or (iv) a change in the identities of a majority of the members of the Board of Directors of Zenith within a one-year period or less; or (v) any other transaction which would require any 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). 11.4 Notwithstanding anything to the contrary in this Agreement, in the event that Employee becomes entitled to the Severance Payments, if any of the 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"), Zenith shall pay to Employee an additional amount (the "Gross-Up Payment") such that the net amount retained by Employee, 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 11.4, 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 Employee in connection with a Change in Control or Employee's termination of employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with Employer, any person whose actions result in a change in control or any person affiliated with Employer 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 Zenith's independent auditors and acceptable to Employee, 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 7 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 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 Zenith'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, Employee 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 Employee'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 Employee's employment, Employee shall repay to Zenith, 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 Employee 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 Employee'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), Zenith shall make an additional Gross-Up Payment in respect of such excess (plus any interest, penalties or additions payable by the Employee with respect to such excess) at the time that the amount of such excess is finally determined. 11.5 The payments provided for in Paragraphs 11.2 (other than subparagraph 11.2(iii)) and 11.4 hereof shall be made not later than the fifth day following the date of termination of employment, provided, however, that if the amounts of such payments cannot be finally determined on or before such day, Zenith shall pay to Employee on such day an estimate, as determined in good faith by Zenith, of the minimum amount of such payments to which Employee is clearly entitled and shall pay the remainder of such payments (together with interest at the rate provided in section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined but in no event later than the thirtieth (30th) day after the date of termination of employment. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by Zenith to Employee, payable on the fifth (5th) business day after demand by Zenith (together with interest at the rate provided in section 1274(b)(2)(B) of the Code). At the time that payments are made under this Paragraph, Zenith shall provide Employee with a written statement setting forth the manner in which such payments were calculated and the basis for such calculations including, without limitation, any opinions or other advice Zenith has received from outside counsel, auditors or consultants (and any such opinions or advice which are in writing shall be attached to the statement). 8 11A. POST-RETIREMENT CONSULTING AGREEMENT. Notwithstanding anything in this agreement to the contrary, in the event Employee's employment with the Employer is terminated (i) pursuant to Sections 10.2 or 11.2 of this Agreement or (ii) upon expiration of the Term of Employment, such termination shall be deemed to be by reason of his retirement and Employee and the Company shall enter into a consulting agreement substantially in the form attached hereto effective as of the date of such retirement. Except as necessary in order to avoid duplication of benefits (e.g., in connection with the provision of health care benefits) the benefits provided under the consulting agreement shall be in addition to and not in lieu of the benefits (including severance benefits) otherwise provided under this Agreement. 12. ATTORNEY'S FEES. In the event that any action at law or in equity, for injunctive or declaratory relief, is brought to enforce or interpret the provisions of this Agreement, if Employee is the prevailing party, he shall be entitled to reasonable attorney's fees in addition to any other relief to which he may be entitled. 13. APPLICABLE LAW. This Agreement and the rights and obligations of the parties hereunder shall be construed, interpreted and enforced in accordance with, and governed by, the laws of the State of California applicable to agreements executed and fully to be performed thereunder. 14. NOTICES. Any notice required to be given hereunder shall be in writing sent by registered or certified mail, return receipt requested, to either Zenith or employee at the addresses listed below, or at such other addresses as either Zenith or Employee may hereafter designate in writing to the other: To Zenith: Zenith National Insurance Corp. 21255 California Street Woodland Hills, California 91367 Attention: Corporate Secretary To Employee: 813 North Bedford Drive Beverly Hills, California 90210 15. ASSIGNMENT. 15.1 This Agreement and the rights, interests, and benefits hereunder are personal to Employee and shall not be assigned, transferred, pledged, or hypothecated in any way by Employee, 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. 15.2 Zenith shall have the right to assign this Agreement and to delegate all of its rights, duties and obligation hereunder, whether in whole or in part, to any parent, affiliate, successor, or subsidiary organization or company of Zenith or corporation with which Zenith may merge or consolidate or which acquires by purchase 9 or otherwise all or substantially all of Zenith's consolidated assets, but such assignment shall not release Employer from its obligations under this Agreement, and in the event of any such assignment by Zenith, Employee may, at his sole option, exercise his termination rights under the provisions of Paragraph 11 of this Agreement. 16. ENTIRE AGREEMENT. This Agreement constitutes the entire understanding of the parties hereto and supersedes any and all prior agreements and understanding whether oral or written between the parties. This Agreement may only be modified by an agreement in writing executed by one of Zenith's duly authorized officers (other than Employee), with the approval of Zenith's Board of Directors, and by Employee. 17. WAIVER OF BREACH. The waiver by Employee of a breach of any provision of this Agreement by Employee shall not operate or be construed as a waiver of any subsequent breach by Employee. 18. MISCELLANEOUS. 18.1 The titles of the paragraphs of this Agreement are for convenience of reference only, and are not to be considered in construing this Agreement. 18.2 The unenforceability or invalidity of any paragraph or subparagraph of this Agreement shall not affect the enforceability and validity of the balance of this Agreement. 18.3 Each party hereto shall make, execute and deliver such other instruments or documents as may be reasonable required in order to effectuate the purpose of this Agreement. 10 IN WITNESS WHEREOF, the parties hereto have executed this Agreement in Woodland Hills, California, on the date indicated below. ZENITH NATIONAL INSURANCE CORP. ("Zenith") By: /s/ Bill Owen As agent for and on behalf of Zenith and each and all of its subsidiaries ("Employer") Date: 3/13/01 By: /s/ Stanley R. Zax STANLEY R. ZAX ("Employee") Date: 3/13/01 11 [FORM OF] POST-RETIREMENT CONSULTING AGREEMENT This POST-RETIREMENT CONSULTING AGREEMENT (the "Agreement") is entered into as of the date set forth below by and between Zenith National Insurance Corp., a Delaware corporation ("Company"), and Stanley R. Zax ("Consultant"). WHEREAS, Company acknowledges that Consultant has unique talents, knowledge and information that will be valuable to the Company in connection with the management of the Company following Consultant's retirement and believes that it would be in the best interests of the stockholders of the Company following such retirement to continue to secure the services of Consultant during the period of this Agreement; and WHEREAS, Company and Consultant acknowledge and understand the terms and conditions of the retention of Consultant as set forth herein, including the condition that Consultant agree to adhere to each of the various covenants and agreements contained herein and in consideration of the Company's establishing a consulting relationship with Consultant, providing Consultant with continuing compensation for the purposes and in the manner set forth herein, Consultant has decided to enter into, and agree to be bound by, this Agreement. NOW, THEREFORE, in consideration of the premises and the respective covenants and agreements of the parties herein contained, and intending to be legally bound hereby, the parties hereto agree as follows: 1. ENGAGEMENT AS CONSULTANT. The Company hereby engages Consultant, and Consultant hereby agrees to serve the Company, as an independent contractor, on the terms and conditions set forth herein. 2. CONSULTING PERIOD. The term (the "Term") of this Agreement shall commence on the date Consultant ceases to be an employee of the Company for any reason (other than death or Disability as defined in this Agreement) on or after his attainment of age 65 (the "Effective Date") and shall expire at the close of business on the fifth (5th) anniversary thereof (such expiration date being hereinafter referred to as the "Termination Date"), unless earlier terminated in accordance with Section 6 hereof; provided, that the provisions set forth in Sections 7 through 9 hereof shall remain in full force and effect for the Term. 3. DUTIES. During the Term, Consultant will make himself available to the Company and shall provide such consulting services to the Company as the Board of Directors of the Company or the Chief Executive Officer of the Company may from time to time request. Except as the parties may otherwise agree, for each twelve-month period during the Term commencing on the Effective Date, Consultant shall not be required to provide consulting services in excess of the following: Year 1 - 100 hours per quarter Year 2 - 75 hours per quarter Year 3 - 50 hours per quarter Year 4 - 25 hours per quarter Year 5 - 10 hours per quarter 4. PLACE OF PERFORMANCE. Consultant may provide his consulting services hereunder by telephone consultation, written communication and/or fax as appropriate or at such locations as are acceptable to the Company; provided, however, Consultant shall not, without his prior consent, be required to render such services at any location more distant than thirty (30) miles from his residence or his principal place of business. 5. COMPENSATION AND RELATED MATTERS. As compensation for the services to be rendered by the Consultant hereunder, the Company shall make the following payments and provide the following benefits to the Consultant: (a) CONSULTING FEE. As compensation for the services to be rendered by Consultant herein, the Company shall pay Consultant an annual fee in the following amounts, which amount shall be paid in accordance with the Company's normal payroll policy (the "Consulting Fee"): Year 1 - $750,000 Year 2 - $600,000 Year 3 - $500,000 Year 4 - $400,000 Year 5 - $300,000 2 (b) REIMBURSEMENT OF EXPENSES. During the Term, the Company shall provide Consultant with (i) an office located in Los Angeles and commensurate in size and stature with the office provided to him pursuant to his employment with the Company as the Chairman of the Board, President and Chief Executive Officer, which office shall be subject to the approval of Consultant, (ii) a secretary, (iii) a car allowance in accordance with the Company's policy with respect to senior executive officers of the Company, and (iv) continued coverage under the Company's health insurance in accordance with the Company's policy with respect to senior executive officers of the Company. The Company shall reimburse Consultant for reasonable and necessary business expenses of Consultant incurred in connection with the performance of Consultant's duties, and which are consistent with such guidelines as the Company may from time to time establish with respect to senior executive officers of the Company. All payments for reimbursement of such expenses shall be made to Consultant upon the presentation to the Company of appropriate receipts or other documentation in accordance with the Company's normal reimbursement procedures. 6. TERMINATION. Upon termination of Consultant's engagement on the Termination Date (unless earlier terminated pursuant to this Section 6), this Agreement shall terminate, and the Company shall have no further obligation to Consultant except as set forth herein. (a) TERMINATION BY THE COMPANY OTHER THAN FOR CAUSE, DEATH OR DISABILITY. The Company shall not be entitled to terminate this Agreement or terminate the services of Consultant at any time other than for Cause (defined below) or due to Consultant's death or Disability (as defined below). In the event the Company terminates this Agreement for any reason other than for Cause or due to Consultant's death or Disability, the Company shall continue to provide Consultant with all the benefits set forth in the Agreement through the Term of the Agreement. (b) TERMINATION FOR CAUSE, DEATH, DISABILITY, OR BY CONSULTANT FOR ANY REASON. The Company shall be entitled to terminate this Agreement at any time for Cause or due to Consultant's death or Disability. The Consultant may terminate this Agreement only upon 90 days notice. In the event of termination of this Agreement by the Company for Cause or due to Consultant's death or by Consultant, Consultant (or his estate) shall be entitled to payment of any earned but unpaid Consulting Fee accrued through such termination; provided, however, in the event that Consultant fails or refuses to perform services under this Agreement (or, in the event of 3 a Consultant's breach of any or all of the covenants and agreements contained herein), the Company's obligations pursuant to this Agreement shall terminate. Following any such termination, Consultant shall not be entitled to receive any Consulting Fee or other payment provided for hereunder other than earned but unpaid Consulting Fees through the date of such termination. Notwithstanding anything herein to the contrary, in the event of termination of this Agreement by the Company due to Consultant's Disability, the Company shall continue to provide Consultant with all the benefits set forth in the Agreement through the Term of the Agreement. (c) DEFINITIONS. (1) "Cause" shall mean Consultant's breach of any of his material obligations under this Agreement. (2) "Disability" shall mean Consultant is determined by the Board of Directors to be physically or mentally incapacitated such that he is unable to perform the services required to be performed under this Agreement. 7. SEVERABILITY. If any provision of this Agreement is determined to be invalid or unenforceable, such provision shall be construed to be enforceable to the full extent permitted by law. In any event, the validity and enforceability of the other provisions of this Agreement shall not be affected. 8. NOTICES. All notices and other communications under this Agreement shall be in writing and shall be given by fax or first class mail, certified or registered with return receipt requested, and shall be deemed to have been duly given three (3) days after mailing or twenty-four (24) hours after transmission of a fax to the respective persons named below: If to Company: Zenith National Insurance Corp. 21255 Califa Street Woodland Hills, California 91367 Attention: Corporate Secretary If to Consultant: 813 North Bedford Drive Beverly Hills, California 90210 4 Either party may change such party's address for notices by notice duly given pursuant hereto. 9. ATTORNEY'S FEES. In the event that nay action at law or in equity, for injunctive or declaratory relief, is brought to enforce or interpret the provisions of this Agreement, if Consultant is the prevailing party, he shall be entitled to reasonable attorney's fees in addition to any other relief to which he may be entitled. 10. GOVERNING LAW. This Agreement and the rights and obligations of the parties hereunder shall be construed, interpreted and enforced in accordance with, and governed by, the laws of the state of California applicable to agreements executed and fully to be performed thereunder. 11. ENTIRE AGREEMENT; MODIFICATION; WAIVER. This Agreement (along with the employment agreement of which it is a part) constitutes the entire understanding between the parties hereto regarding the subject matter hereof, and may not be modified without the express written consent of the parties. This Agreement supersedes all prior written and/or oral and all contemporaneous oral agreements, understandings and negotiations regarding the subject matter hereof. This Agreement and Consultant's rights and obligations hereunder may not be modified, released, terminated or waived, in whole or in part, except by an instrument in writing signed by an executive officer of the Company. The Company's failure to assert, delay in asserting, or waiver of any right or remedy under this Agreement shall not impair, waive, or otherwise affect such right or remedy, or any other right or remedy. 12. ASSIGNMENT. This Agreement shall be binding upon Consultant and Consultant's heirs, executors, personal representatives, and successors and assigns. Consultant's duties and obligations under this Agreement shall not be assigned without the Company's prior written approval of such assignment. The Company shall have the right freely to assign this Agreement in its sole discretion and without Consultant's prior approval of such assignment. 13. VOLUNTARY AGREEMENT. Consultant acknowledges and agrees that, prior to signing this Agreement, Consultant (i) received a copy of this Agreement, read such Agreement, and understood each of the terms and conditions of such Agreement; and (ii) had sufficient opportunity to consult with legal counsel of 5 Consultant's choice prior to signing this Agreement. Consultant represents and warrants that Consultant does not rely and have not relied on any fact, representation, statement or assumption other than as specifically set forth in this Agreement, and Consultant enters into this Agreement freely, voluntarily, and without coercion. 14. INDEPENDENT CONTRACTOR. During the Consulting Period, Consultant shall be an independent contractor and not an employee of the Company and except as set forth herein, is not entitled to the benefits provided by the Company or its affiliates to its employees as an employee, including but not limited to coverage under any tax-qualified retirement plan. Accordingly, Consultant shall be responsible for payment of all taxes, including Federal and State income tax, Social Security tax, Unemployment Insurance tax and any other taxes or business license fees as required by virtue of Consultant's activities hereunder. 15. COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall be deemed to be an original but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Agreement in Woodland Hills, California, on the date indicated below. ZENITH NATIONAL INSURANCE CORP. ("Company") FORM ONLY By: -------------------------------------- As agent for and on behalf of the Company and each and all of its Subsidiaries Date: ------------------------------------ FORM ONLY By: -------------------------------------- STANLEY R. ZAX ("Consultant") Date: ------------------------------------ 6 EX-13 3 a2034311zex-13.txt EXHIBIT 13 [THEZENITH] - -------------------------------------------------------------------------------- ZENITH NATIONAL INSURANCE CORP. A N N U A L 2 0 0 0 R E P O R T FINANCIAL HIGHLIGHTS
Years ended December 31, 2000 1999 1998 - -------------------------------------------------------------------------------------------- OPERATING RESULTS: (Dollars in thousands, except per share data) Revenues(1) $459,569 $492,108 $636,779 ======== ======== ======== Operating (loss) income after tax(2) (37,739) (55,228) 11,559 Realized (losses) gains after tax: On investments (10,054) 4,993 7,541 On sale of CalFarm Insurance Company(1) 104,335 -------- -------- -------- (Loss) income before extraordinary item (47,793) 54,100 19,100 Extraordinary item -- gain on extinguishment of debt after tax(3) 993 -------- -------- -------- Net (loss) income $(46,800) $ 54,100 $ 19,100 ======== ======== ======== PER SHARE DATA: Operating (loss) income after tax(2) $ (2.19) $ (3.22) $ 0.67 Realized (losses) gains after tax: On investments (0.58) 0.29 0.44 On sale of CalFarm Insurance Company(1) 6.08 -------- -------- -------- (Loss) income before extraordinary item (2.77) 3.15 1.11 Extraordinary item -- gain on extinguishment of debt after tax(3) 0.06 -------- -------- -------- Net (loss) income $ (2.71) $ 3.15 $ 1.11 ======== ======== ======== Stockholders' dividends $ 1.00 $ 1.00 $ 1.00 KEY STATISTICS: Combined ratio: Including catastrophes(2) 130.2% 135.2% 105.3% Excluding catastrophes(2) 123.6% 130.0% 103.1% Stockholders' equity $309,776 $354,559 $346,952 Stockholders' equity per share(4) 17.76 20.67 20.23 Closing common stock price 29 3/8 20 5/8 23 1/8 - --------------------------------------------------------------------------------------------
(1) Zenith completed the sale of CalFarm Insurance Company effective March 31, 1999 for a gain of $104.3 million after tax, or $6.08 per share. (2) The year ended December 31, 1999 includes $50.0 million before tax ($32.5 million after tax, or $1.89 per share) of net charges associated with an increase in the purchase price of RISCORP. (3) In 2000, Zenith repurchased a total of $16.5 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. (4) Excluding the effect of Statement of Financial Accounting Standards No. 115, stockholders' equity per share was $18.31, $21.80 and $19.86 at December 31, 2000, 1999 and 1998, respectively. TheZenith 1 TABLE OF CONTENTS / / Financial Highlights 1 / / Letter to Stockholders 3 / / Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations 25 / / 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 67 Zenith National Insurance Corp. 68 Zenith Insurance Company 69 TheZenith Marketing, Underwriting and Claims Offices 70 Perma-Bilt, a Nevada Corporation 70
2 TO OUR STOCKHOLDERS Workers' Compensation markets nationally, and specifically in California (where we write approximately half our business), have been an industry pricing, expense and reserving disaster for the past several years. Even though our strategy has been significantly different from most of our competitors, we have been impacted to some extent. However, we began experiencing positive change in 2000 which has continued into 2001; our operating losses not withstanding. As a transaction-based Company, we have never believed in growth for growth's sake, rather we have held steadfast to our customer service and profit culture. And, throughout this difficult period, we have never wavered in our resolve to support our four fundamental business objectives: 1. Deliver value-added Workers' Compensation services with underwriting discipline and at adequate rates to help our policyholders protect the safety and health of their employees, and to reduce their ultimate cost of insurance. Consistently-favorable loss ratios, regularly out-performing the industry, and a high rate of renewal customers are evidence of meeting this goal. 2. Attract and train a professionally managed employee team, with an understanding of our strategies, and the resolve and courage to execute our plan. 3. Maintain financial strength, documented by an excellent balance sheet and cash and securities in the holding company, and high quality ratings from rating agencies. TheZenith 3 THE LONG PERIOD OF INADEQUATE PRICING IS APPARENTLY COMING TO AN END; WE HAVE EXPERIENCED AN INCREASE IN BUSINESS FOR THE FIRST TIME IN SEVEN YEARS AT OUR ACTUARIAL PRICES. 4. Provide long-term investor value as reflected by growth in our stock price and stockholders' equity. A PERIOD OF CHARACTER BUILDING The current period of adverse industry results has its roots in the Workers' Compensation markets of the early 1990's. On the one hand, there was a degree of positive legislative reform, some rate improvement in various states and reserve adequacy. Plus, the industry's and employers' surprisingly effective assault on fraud and abuse in the system saved hundreds of millions of dollars, resulting in favorable frequency trends and underwriting results. On the other hand, there was the advent of open rating in California in 1995, and adverse insurer pricing trends elsewhere, resulting in plunging employer costs and unsatisfactory insurer results. As I reported last year, it was the best of times and the worst of times. But, the major trend of inadequate pricing was escalating and the foreseeable catastrophic damage to insurers was becoming evident. Operating as if oblivious to escalating benefits and increased healthcare and claims costs, masked, in part, by declines in claim frequency, numerous opportunistic competitors attacked the market with selling prices below cost as if there was no tomorrow. Market shares were built with inadequate pricing, de-engineered policyholder services, naive reinsurance and unrealistic reserving. It was growth for growth's sake at the expense of solvency and financial strength, with adverse ramifications, as well, to 4 STOCKHOLDERS' EQUITY PER SHARE [GRAPH] carriers committed to customer service and profitability like TheZenith. As could reasonably be anticipated, the competitors' strategies did not work, and negative financial and regulatory consequences have become apparent. More specifically: - - Industry combined ratios grew to 130-135%; more than 150% in California. - - Healthcare and claims management costs increased at a rate of 5%-6%; double-digit in California. - - California's "treating physician presumption," for example, was intended to reduce the number of medical reports required to evaluate an injury. Unintended result: we are now limited in our ability to rebut a medical analysis that may not be accurate, leading to substantial increases in the cost of an average claim. - - Industry has estimated under-reserving of $18 billion; $5 billion in California as prior-period loss development continues to escalate. - - Unprecedented underwriting losses and diminishing balance sheets forced the California regulators to takeover a large competitor, require the sale of another, and restrict operations of others. - - Competitors, fighting to survive their sins of the past, answered with pricing and reserving increases significantly in excess of ours; especially in the California marketplace. TheZenith 5 AS A TRANSACTION-BASED COMPANY, WE HAVE NEVER BELIEVED IN GROWTH FOR GROWTH'S SAKE, RATHER WE HAVE HELD STEADFAST TO OUR CUSTOMER SERVICE AND PROFIT CULTURE. During this period, we responded with acquisition and geographic diversification, the sale of CalFarm at an attractive profit, recruiting an improved management team, and substantial investment in information technology to cost-reduce our G&A (primarily in claims management where the majority of premium is spent). Tough-minded value propositions were applied to every expense factor throughout our operations. We gradually reduced our employee census, held firm to transaction-based pricing, and maintained underwriting and reserving discipline. Of interest, we were the only company to reduce premiums in California for six consecutive years. To say it was a time of character building is an understatement. With tens of thousand of applications submitted to us throughout our national network of offices over the years, can you imagine the frustration of our people almost always having to say "no?" No to unprofitable pricing. No to unrealistic underwriting. No to inadequate reserving. No to dismantling our policyholder services. In essence, "no" to a substantial percentage of our new business development and renewal opportunities, but in a professional manner so that agents and employers would continue to do business with us when markets changed. As a result, we reduced premium volume and market share. Our expenses, as expected, were disproportionate to our revenues resulting in operating losses. But, what if we had followed the unrealistic pricing of the market? Our operating losses would have been far more serious and our underwriting discipline would have been damaged. As 6 STOCK PRICES [GRAPH] [GRAPH]
a result, our loss ratios continue to be substantially better than industry averages, and now provide a favorable starting point for future performance. In summary, there are indications the long period of inadequate pricing is apparently coming to an end. During 2000, and so far in 2001, TheZenith has experienced an increase in business for the first time in seven years at our actuarial prices. Of significance, our value-added service strategy is more in demand at appropriate prices in several regions of the country. Although unrealistic pricing and underwriting continues in various markets, it is to a lesser extent than in the past. Lastly, we hold firmly to our fundamental belief that operating with an eye to the long term is the correct strategy. TheZenith is stronger in many ways than at any time during this Management's 23-year tenure. Our 2000 Report will discuss in detail the major issues impacting our current and future operations, and our efforts to return to profitability. SUMMARY OF FINANCIAL HIGHLIGHTS: - - Workers' Compensation premiums earned increased 10% to $300.8 million. - - Operating losses after tax were $37.7 million, or $2.19 per share in 2000, compared to $55.2 million, or $3.22 per share in 1999. - - Investment income after tax was $34.2 million, or $1.98 per share in 2000, compared to $35.6 million, or $2.07 per share in 1999. - - Realized losses on investments after tax were $10.1 million, or $0.58 per share, compared to gains of $5.0 million, or $0.29 per share in 1999. TheZenith 7 OUR RECENT RESULTS ARE UNSATISFACTORY, BUT IF WE HAD FOLLOWED THE UNREALISTIC PRICING OF THE MARKET, OUR OPERATING LOSSES WOULD HAVE BEEN FAR MORE SERIOUS. Unrealized losses on fixed maturities and equity securities, recorded as a reduction of stockholders' equity after tax, were $8.2 million, compared to $20.0 million in 1999. Also, we have a deferred gain after tax of $3.3 million, or $0.19 per share, in connection with an installment sale of real estate. - - Net loss was $46.8 million, or $2.71 per share in 2000, compared to net income of $54.1 million, or $3.15 per share for 1999. - - The combined ratio for the property-casualty operations was 130.2% for 2000, compared to 135.2% for 1999. - - Stockholders' equity per share at December 31, 2000 was $17.76, compared to $20.67 at December 31, 1999. ANALYSIS Net loss was $46.8 million, or $2.71 per share in 2000, compared to net income of $54.1 million, or $3.15 per share the prior year. The following table summarizes pre-tax underwriting performance during the past three years. - ------------------------------------------------------------------------------------------- 1998 1999 2000 UNDERWRITING RESULTS - ------------------------------------------------------------------------------------------- (Dollars in thousands) Workers' Compensation $(42,638) $(122,543) $ (87,854) Other Property-Casualty 4,410 (22) Reinsurance 10,268 (7,324) (14,536) - ------------------------------------------------------------------------------------------- Underwriting loss $(27,960) $(129,889) $(102,390) - -------------------------------------------------------------------------------------------
8 INVESTMENT INCOME AFTER TAX PER SHARE [GRAPH] 2000 results were significantly below our goals, due primarily to continuing underwriting losses in the Workers' Compensation operations, and adverse reserve development of 1999 reinsurance losses. The 1999 results were impacted by the $50.0 million purchase price adjustment in connection with the RISCORP acquisition coupled with underwriting losses in the Workers' Compensation operations. Our combined ratio for the Workers' Compensation operations was 129%, composed of a 70% accident year loss ratio (compared to 71% for the current estimate of last year), a 57% loss adjustment and underwriting expense ratio and a 2% ratio of prior years' reserve strengthening. Since the beginning of California's open-rating in 1995, our California loss ratio has averaged 68%, compared to 101% for the California industry. Our 33-point advantage is better than 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. 2000 accident year Reinsurance operations were excellent, but were impacted by adverse loss development on the large losses of prior years. Investment income after tax decreased slightly to $34.2 million, or $1.98 per share in 2000, from $35.6 million, or $2.07 per share in 1999. Stockholders' equity at December 31, 2000 was $309.8 million, compared to $354.6 million at December 31, 1999. Cash used in operating activities was $47.0 million in 2000, compared to $51.6 million in 1999; primarily due to payment of claim liabilities. TheZenith 9 QUARTERLY RESERVING REVIEWS AND RATE ADJUSTMENTS WILL KEEP US FOCUSED ON CHANGING TRENDS. We purchased 2,000 shares of Zenith common stock during 2000, leaving authority to purchase an additional 938,000 shares. Since 1987, we have repurchased 8,009,000 shares, or an estimated 38% of the shares then issued, for an aggregate cost of $150.8 million, or an average of $18.82 per share. At December 31, 2000, Zenith had long-term debt of $58.4 million, compared to $74.7 million at December 31, 1999, with a total debt-to-equity position of 19.3%, compared to 21.1% at December 31, 1999. Also outstanding was $65.6 million of 8.55% Capital Trust Securities issued in July 1998, maturing in 28 years. We repurchased $24.5 million of debt securities in 2000. TheZenith's parent company had $70.0 million of bank lines of credit available, and $135.7 million of investments. In order to maintain the financial strength of our insurance subsidiaries, we contributed $25.0 million to capital in the fourth quarter of 2000. Zenith's subsidiaries are rated A (Excellent) by A.M. Best Company. Moody's Investor's Service and Standard & Poor's have assigned an insurance financial strength rating of Baa1 (Adequate) and A (Strong), respectively. 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. These data are of critical importance in judging the 10 LOSS RESERVE DEVELOPMENT MEASURES THE ACCURACY OF OUR ESTIMATES. 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 primarily a result of the reserve increase that was part of the RISCORP purchase price adjustment referred to in prior reports. Our reserves are not discounted.
- ----------------------------------------------------------------------------------------------------------------------------- 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 2000 - ----------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) Prior to 1994 $1,876,649 $1,865,388 $1,862,648 $1,855,543 $2,256,746 $2,256,637 $2,261,370 1994 170,999 177,819 169,222 168,016 345,006 348,121 349,071 Cumulative 2,047,648 2,043,207 2,031,870 2,023,559 2,601,752 2,604,758 2,610,441 1995 180,170 187,517 196,335 341,708 351,292 342,839 Cumulative 2,223,377 2,219,387 2,219,894 2,943,460 2,956,050 2,953,280 1996 181,844 238,635 429,335 443,443 434,315 Cumulative 2,401,231 2,458,529 3,372,795 3,399,493 3,387,595 1997 204,502 333,818 339,907 346,276 Cumulative 2,663,031 3,706,613 3,739,400 3,733,871 1998 258,000 271,317 276,768 Cumulative 3,964,613 4,010,717 4,010,639 1999 278,054 309,012 Cumulative 4,288,771 4,319,651 2000 306,082 Ratios: 1994 66.92% 69.59% 66.22% 65.75% 65.95% 66.55% 66.73% 1995 73.12% 76.10% 79.68% 73.11% 75.16% 73.35% 1996 73.36% 79.35% 80.08% 82.71% 81.01% 1997 75.04% 72.56% 73.88% 75.26% 1998 74.76% 78.62% 80.20% 1999 86.91% 96.58% 2000 88.76% - ----------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------- - -This analysis displays the accident year net incurred losses and loss adjustment expenses development for accident years 1994-2000 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, which was sold effective March 31, 1999.
TheZenith 11 ZENITH'S SUBSIDIARIES ARE RATED A (EXCELLENT) BY A.M. BEST; MOODY'S AND S&P HAVE ASSIGNED INSURANCE FINANCIAL STRENGTH RATINGS OF Baa1 (ADEQUATE) AND A (STRONG), RESPECTIVELY. 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. In comparison to other insurers, we believe that our portfolio contains a smaller percentage of equities to total assets and a larger percentage of cash or short-term securities. - - Consolidated investment income after tax and after interest expense was $30.6 million, or $1.77 per share in 2000, compared to $30.3 million, or $1.76 per share in 1999. Average yields on this portfolio in 2000 were 5.9% before tax and 3.9% after tax, respectively, compared to 5.5% and 3.7%, respectively, in 1999. - - During 2000, we recorded net losses before tax from our investment portfolio of $15.5 million, compared to $7.7 million of gains the prior year. The losses were primarily a result of write downs of bonds originally acquired as investment grade securities, most of which continue to pay interest. - - Pre-tax income during 2000 from our real estate activities was $5.5 million, compared to $3.6 million the prior year. 12 THEZENITH IS POSITIONED TO PROVIDE COVERAGE FOR NEW AND EXISTING CUSTOMERS, RESPONSIBLY AND PROFITABLY, WHILE DELIVERING QUALITY, VALUE-ADDED POLICYHOLDER SERVICES. - - Unrealized losses in our portfolio of fixed maturity investments were $14.5 million before tax in 2000, compared to $30.1 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 5.3 years at December 31, 2000, compared to 6.2 years at December 31, 1999. Portfolio quality is high with 94% and 95% rated investment grade at December 31, 2000 and 1999, respectively. The major developments in the U.S. bond markets were continued low inflation and declining interest rates on Treasury Securities. Corporate bond spreads in relation to Treasury Securities increased, notwithstanding most high-quality corporate categories gained in price. 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 and liquidity remained high as we searched for intelligent investment opportunities, and avoided large losses in certain equity markets. TheZenith 13 SHORT-TERM INVESTMENTS AND LIQUIDITY REMAINED HIGH AS WE SEARCHED FOR INTELLIGENT INVESTMENT OPPORTUNITIES, AND AVOIDED LARGE LOSSES IN CERTAIN EQUITY MARKETS.
- ---------------------------------------------------------------------------------------- SECURITIES PORTFOLIO At December 31, 1999 At December 31, 2000 - ---------------------------------------------------------------------------------------- Amortized Cost* Market Value Amortized Cost* Market Value - ---------------------------------------------------------------------------------------- (Dollars in thousands) Short-term investments $ 179,748 $ 179,748 $ 158,438 $ 158,438 U.S. Government bonds 218,158 215,936 161,796 162,262 Taxable bonds: Investment grade 411,674 389,512 392,218 385,044 Non-investment grade 40,944 36,711 42,216 35,284 Redeemable preferred stocks 13,879 12,402 13,644 12,752 Other preferred stocks* 11,099 9,825 10,532 9,090 Common stocks* 25,428 25,634 23,630 27,301 - ---------------------------------------------------------------------------------------- *Equity securities at cost
In 1993, we started a home-building operation in order to participate in the growth of the Las Vegas, Nevada housing market. During 2000, we closed and delivered 469 homes at an average selling price of $177,000, compared to 366 homes at an average selling price of $158,000 the prior year. Sales of $84.5 million and $5.5 million of pre-tax income were recorded during 2000, compared to sales of $58.7 million and $3.6 million of pre-tax income the previous year. Land presently owned at a cost of $34.5 million will support the construction of an estimated 1,300 homes over the next several years. 14 OUR VALUE-ADDED SERVICE STRATEGY IS MORE IN DEMAND AT APPROPRIATE PRICES IN SEVERAL REGIONS OF THE COUNTRY. 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 has long-term value. An agreement was consummated to sell our Las Vegas strip property for a gain of $6.0 million, of which $5.1 million will be deferred until additional payments are received. At the closing we received $7.3 million in cash and first mortgage notes for the balance, of which $7.7 million has been adequately guaranteed. We will own a 25% interest in the joint venture owner of the property which will be managed by a successful developer. WORKERS' COMPENSATION TheZenith is a specialty insurer with primary operations in California, Florida, Texas and 40 other states. Premiums written in 2000 were $308.1 million, an increase of 15% from the prior year. Underwriting losses were $87.9 million in 2000 and $122.5 million in 1999. At year-end 2000, there were 32,400 policies in force. Even though our underwriting losses are significant and unacceptable, they are not a result of either inadequate rates or a lack of underwriting discipline. In our case, TheZenith's strategy, compared to the competition, resulted in less revenue than needed to achieve a reasonable expense ratio. TheZenith 15 OUR ACCIDENT YEAR LOSS RATIOS ARE SUBSTANTIALLY BELOW INDUSTRY AVERAGES AND WILL ASSIST COMBINED RATIO IMPROVEMENT AS VOLUME INCREASES. Our accident year loss ratios, as currently estimated, continue to be substantially below industry averages, as follows:
- --------------------------------------------------------------------------------------------------- California Outside of California ACCIDENT YEAR --------------------------------- --------------------------------- LOSS RATIOS TheZenith Industry TheZenith Industry - --------------------------------------------------------------------------------------------------- 1996 63% 94% 46% 63% 1997 67% 101% 49% 72% 1998 67% 110% 59% 80% 1999 76% 118% 67% 81% 2000 74% -- 66% --
One of the many reasons why our loss ratios outperform the industry is that we rely upon our actuaries to establish adequate rates. Except in Florida, where minimum rates are established by the Insurance Commissioner, most of our business is written at rates we establish and adjust based upon sound actuarial data and judgment which includes estimates of future cost trends. This strategy penalizes volume when competitors ignore data and trends, and price for growth, but assists us in producing low loss ratios and maintaining our discipline. As we wrote in last year's Report, competitors (particularly in California) began raising rates and adjusting underwriting to improve their profitability at substantially higher prices than TheZenith. We expected these changes to gain momentum and allow us to write more business. Our predictions were 16 REDUCING EMPLOYER LOSS RATIOS, EXPERIENCE MODIFICATIONS, AND ULTIMATELY THE LONG-TERM COST OF THEIR INSURANCE IS OUR HALLMARK AND OUR MISSION. correct, with our 2000 inforce California volume increasing 50%, from $98.1 million to $146.7 million. Markets outside California were not as favorable, however, we increased premium from $145.8 million to $162.4 million. Along with the pricing changes, the most significant development last year was the continued deterioration in the estimated 1999 results of the industry. At the beginning of last year, California and U.S. indications were combined ratios in the 150% and 125% ranges, respectively, for 1999. Today these estimates have been increased to 156% and 135%, respectively. From a historical point of view, these are large changes in a very short period of time and are the worst combined ratio increases on record. As a result, continuing and significant price increases will be required to restore the industry's financial health, and individual companies will need to be vigilant as to pricing, underwriting and loss reserve adequacy. Firmer pricing will also be supported by lower interest rates. Pricing wars, naive reinsurance capacity, and escalating claims costs of recent years have taken their toll. Substantial increases in estimating prior- accident-year loss reserves are commonplace. California regulators have initiated the following actions against three large Workers' Compensation carriers: a take-over, restrictions and reduced mandated writings, and pricing activity intervention. Two other California competitors have ceased business, as well as Reliance Insurance Co., a large writer in the marketplace. But, soft-market problems may be far from over. Continuing TheZenith 17 WE ARE WORKING ON LEGISLATIVE REFORM OF CALIFORNIA'S "TREATING PHYSICIAN PRESUMPTION" IN ORDER TO IMPACT CLAIM COSTS. price increases, upward loss reserve adjustments, and financial difficulties will persist. Add to this a major unknown: claim frequency trends. While they were favorable during the first nine months of 2000, what if they increase before the industry returns to financial stability? We are not aware of any definitive data as to why claim frequency trends have been favorable for the last several years. It is possible that the positive economy is one of the reasons. If so, we are mindful that it is slowing and, in California, current energy problems may impact jobs and the economy. TheZenith is positioned to provide coverage for new and existing customers, responsibly and profitably, while delivering quality, value-added policyholder services. Compare January 2001 with 2000: we wrote approximately $40.0 million of new business, compared to approximately $18.0 million the prior year, and renewed a large percentage of existing policies at our actuarial prices. In California, where pricing flexibility exists, we increased our sales in all regions of the state at prices averaging 25% more than the prior year. Combined ratio improvement will be a result of volume and price increases in concert with continuing expense control. Profit improvement should be augmented by increases in cash flow and investable assets. Quarterly reserving reviews and rate adjustments (versus annual reviews as practiced by many competitors), will keep us focused on rising healthcare and indemnity claims costs. Again, the frequency and severity of new claims, along with reserve adequacy estimates, will determine the timing and magnitude of our on-going performance improvement. 18 EMPLOYERS WANT TO KEEP THEIR COSTS TO A MINIMUM AND OUR SERVICES, TOGETHER WITH SAFETY PRACTICES, ARE ESSENTIAL. Incredibly, there are still a number of competitors significantly under- pricing accounts, with managing general agents, reinsurers and not-for-profit companies the major discounters. While their impact will be far less than in recent years, one would think the "message" would have been received by now. Unfortunately, it is easy to predict the discounters will continue to erode their financial performance, and their ability to provide needed services to assist employers in controlling their costs. Reducing employer loss ratios, experience modifications, and ultimately the long-term cost of their insurance is our hallmark and our mission. TheZenith's value-added services, implemented in partnership with our policyholders, have an excellent record of delivering against these objectives, and constitute the Company's most valuable asset along with our highly-professional staff. - - Expert Safety and Health programs assist with accident and illness prevention, incident investigation and remediation, and safe-work practices education for management and employees. - - Claims and Medical/Disability Management procedures facilitate prompt injury reporting, the use of recommended physicians (where permitted state-by-state), nurse case management of serious claims, analysis and negotiation of hospital and medical bills, and continuing communications and reviews to monitor and manage recoveries, costs and reserving. - - Special Investigation Unit and specialized Workers' Compensation Legal personnel protect employers from fraud and abuse, negotiate settlements where prudent, and represent policyholders throughout the litigation process as appropriate. TheZenith 19 WE DO NOT FORECAST FUTURE FINANCIAL RESULTS AS A MATTER OF POLICY, BUT IT WOULD APPEAR REASONABLE TO SEE IMPROVED OPERATING RESULTS IN THE SHORT TERM. - - Return to Work programs place recovering employees in transitional duties with physician approval, improving employer morale and productivity, while containing costs. - - Premium Auditors provide proper payroll classifications to assure accuracy and avoid unanticipated retroactive billing. Politically, significant changes affecting our operations were minimal. In California, a major benefit increase bill with sorely needed reforms was understandably vetoed by the Governor for the second year in a row. Future efforts towards reform of the system will be made this year, hopefully with the cooperation of the Governor. We are mindful this task has been made more difficult by the enactment of musculoskeletal regulations and ergonomic standards by the Occupational Safety and Health Association (OSHA) in Washington. These regulations add significant costs to employers over and above the price of Workers' Compensation, and it is anticipated until the legality and costs of these regulations is determined, it may be difficult for labor and business to negotiate with the politicians for needed Workers' Compensation changes. Obviously, employers are sensitive to the cost of any benefit package; we too are concerned with the need for a gradual phase-in of benefits and its equitable distribution among disability ratings in order that claim frequency not be increased. We continue to be active in these negotiations because it is essential to eliminate the treating physician presumption from the California system in order to control 20 THEZENITH'S VALUE-ADDED SERVICES AND OUR PEOPLE CONSTITUTE THE COMPANY'S MOST VALUABLE ASSETS. escalating costs. Also, we desire changes that will speed up the dispute resolution process and make it less costly. Lastly, legislative consideration should be given to the role played by the State Fund in the California marketplace. The State Fund is the largest writer, a fierce competitor in certain risks, and during this past year, seems to be the most growth-oriented participant. Since the spread between their rates and the general market rates is so large, it is quite likely they are not in compliance with statutes requiring them to be "fairly competitive." These statutes predate open rating in California, and at the least the Legislature should provide some objective criteria of "fairly competitive," since it is the legislative intent that the State Fund "become neither more nor less than self-supporting." At present the State Fund continues to report operating losses, and if this continues or escalates, there will be an adverse impact on the California market. Our concerns are not about competing with the State Fund, but about the rules under which they operate and are regulated. As a result of the large insolvency of one of the competitors, it is expected that the California Insurance Guarantee Association will be required to fund hundreds of millions of dollars of losses. Each of our policyholders (all policyholders in the State) will be assessed, under current law, at 1% of their premiums for these losses. Furthermore, we expect there will be efforts to obtain an increase in the assessment amount. Obviously, if other companies become insolvent there will be additional serious financial and political problems. TheZenith 21 REINSURANCE PREMIUM INCREASES AND MORE FAVORABLE TERMS ARE OCCURRING FROM THE 1999 LOSSES, PARTICULARLY IN THE RETROCESSION MARKET WHERE WE ARE ACTIVE. REINSURANCE For the past 15 years, Zenith Insurance has been selectively underwriting assumed treaty and facultative reinsurance. Reinsurance represents 11% of our property-casualty volume, while Reinsurance reserves represent 15% of our total property-casualty reserves. During 2000, the net written premium of this operation was $39.3 million, compared to $35.9 million in 1999. Earned premium was $37.9 million, compared to $36.4 million in 1999. Underwriting losses of $14.5 million were recorded in 2000, resulting in a combined ratio of 138.3%, compared to an underwriting loss of $7.3 million and a combined ratio of 120.1% the prior year. Since the inception of this operation in 1985, the combined ratio has averaged 97.4%. During 2000 and 1999, the majority of written premium was derived from worldwide 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. In 1999, the largest storm impacts were Hurricanes Floyd and Anatol, Typhoon Bart in Japan, 22 TECHNOLOGY INVESTMENTS IMPROVE PRODUCTIVITY AND THE QUALITY OF OUR SERVICES. and French windstorm losses on December 26, 27 and 28, 1999. It was difficult to evaluate our losses from these events in 1999 and, therefore, additional losses were recorded this past year. Fortunately in 2000, there do not appear to have been significant events causing losses. Nevertheless, premium increases and more favorable terms are occurring from the 1999 losses, particularly in the retrocession market where we are active. INFORMATION TECHNOLOGY We focused on two areas this past year: first, improving the functionality of our claims systems with technology and second, our Intranet capability. Additionally, we are making progress toward consolidating our three separate systems into a single national network. Work in all these areas will continue in 2001 and beyond as we insist on improving productivity. DIRECTORS AND OFFICERS Significant strength was added to our Board of Directors and management team this past year. Leon Panetta, Founder and Director of the Leon & Sylvia Panetta Institute for Public Policy, and formerly White House Chief of Staff, joined our Board. His wisdom and judgement, along with all of our Directors, have already made valuable contributions. Wes Heyward and Kari Van Gundy, formerly President and Financial Senior Vice President, respectively, of CalFarm Insurance, have re-joined us in senior management positions. Also, Steve Pratt was appointed as Senior Vice President, Claims to supervise our claims operation nationwide. TheZenith 23 WE HAVE THE FINANCIAL AND INTELLECTUAL STRENGTH TO TAKE ADVANTAGE OF THE CURRENT MORE POSITIVE PRICING TRENDS. CONCLUSION We are optimistic about the opportunities available in the Workers' Compensation market at our actuarial prices after many years of significantly inadequate pricing and turmoil. Our intellectual and financial strengths are excellent and we are benefiting from the patience and discipline we demonstrated during the last several years. And, we are constantly focused on improving the quality of the services provided to our customers and improving our productivity, since both are essential to our continued success. While it is not our policy to forecast future financial results, it would appear reasonable to predict improved operating results in the short term. We appreciate the confidence of our long-term investors and welcome our new Shareholders as we navigate through the more favorable market conditions to restore profitability. The support, guidance and good judgment of our distinguished Directors provide assistance and confidence to our management team in our efforts to enhance Shareholder value. /s/ Stanley R. Zax Stanley R. Zax Chairman of the Board and President Woodland Hills, California, March 2001 24 MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING INFORMATION The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements if accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those discussed. Forward-looking statements include those related to the plans and objectives of management for future operations, future economic performance, or projections of revenues, income, earnings per share, capital expenditures, dividends, capital structure, or other financial items. Statements containing words such as EXPECT, ANTICIPATE, BELIEVE, or similar words that are used in the Management's Discussion and Analysis of 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 catastrophes; (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 long-term source of consolidated earnings is principally the income and investment income from the operation of its property-casualty insurance businesses ("P&C Operations") and its investment portfolio. The P&C Operations comprise Workers' Compensation, Reinsurance and Other Property-Casualty (through March 31, 1999). 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. During 2000, the P&C Operations wrote workers' compensation insurance in 43 states but the largest concentrations, 45.7% and 28.2% of the Workers' Compensation premiums earned during 2000, were in California and Florida, respectively. Reinsurance principally consists of world-wide, assumed reinsurance of property losses from catastrophes and large property risks. Results of the Reinsurance Operations can be adversely impacted in periods that sustain large catastrophe losses. Other Property-Casualty, which was operated by 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"), represents multiple product line direct insurance other than workers' compensation, principally in California. Effective March 31, 1999, Zenith sold CalFarm. Results of the P&C Operations for the three years ended December 31, 2000 are set forth in the table on page 27. The Real Estate Operations develop land and primarily construct single-family residences in Las Vegas, Nevada. Investment operations provide income and realized gains on investments, primarily in debt securities. The Parent operations represent Zenith National, a holding company which owns, directly or indirectly, all of the capital stock of TheZenith 25 the P&C Operations, non-insurance companies and securities. The comparability of the results of operations between each of the three years ended December 31, 2000, 1999 and 1998 is affected by several items. First, 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"-- for a full description of the RISCORP Acquisition, see Note 14 to the Consolidated Financial Statements on pages 58-59). Second, in the third quarter of 1999, Zenith recorded net charges of $50.0 million before tax ($32.5 million after tax, or $1.89 per share) associated with an increase in the estimated net liabilities for unpaid losses and loss adjustment expenses acquired from RISCORP (the "RISCORP Purchase Adjustment"-- for a full description of the RISCORP Purchase Adjustment, see Note 14 to the Consolidated Financial Statements on pages 58-59). Third, effective March 31, 1999, Zenith sold CalFarm which had previously operated Zenith's Other Property-Casualty Operations. The sale of CalFarm resulted in a gain of $104.3 million after tax (see Note 13 to the Consolidated Financial Statements on pages 57-58). The comparative components of net (loss) income after tax for the three years ended December 31, 2000 are set forth in the following table:
- ------------------------------------------------------------------------------------------------- (Dollars in thousands) 2000 1999 1998 - ------------------------------------------------------------------------------------------------- Net investment income $ 34,243 $ 35,632 $ 35,907 Realized (losses) gains on investments (10,054) 4,993 7,541 - ------------------------------------------------------------------------------------------------- Subtotal 24,189 40,625 43,448 Property-casualty underwriting results: Loss excluding catastrophes and RISCORP Purchase Adjustment (53,251) (40,404) (11,230) Catastrophe losses (14,690) (12,285) (7,475) RISCORP Purchase Adjustment (32,500) - ------------------------------------------------------------------------------------------------- Property-casualty underwriting loss (67,941) (85,189) (18,705) Income from Real Estate Operations 3,552 2,372 868 Interest expense (3,666) (5,342) (3,824) Parent expenses (3,927) (2,701) (2,687) - ------------------------------------------------------------------------------------------------- (Loss) income before gain on sale of CalFarm and extraordinary item (47,793) (50,235) 19,100 Gain on sale of CalFarm 104,335 Extraordinary item-gain on extinguishment of debt 993 - ------------------------------------------------------------------------------------------------- Net (loss) income $(46,800) $ 54,100 $ 19,100 - -------------------------------------------------------------------------------------------------
26 The comparative results of the P&C Operations before tax and combined ratios for the three years ended December 31, 2000 are set forth in the table below. 1999 is presented both including and excluding the RISCORP Purchase Adjustment.
- ------------------------------------------------------------------------------------------------ (Dollars in thousands) 2000 1999(1) 1999(2) 1998 - ------------------------------------------------------------------------------------------------ Premiums earned: Workers' Compensation: California $ 137,497 $107,929 $ 107,929 $123,173 Outside California 163,336 164,325 170,925 155,487 - ------------------------------------------------------------------------------------------------ Total Workers' Compensation 300,833 272,254 278,854 278,660 Reinsurance 37,919 36,441 36,441 29,150 Other Property-Casualty(3) 54,108 54,108 222,045 - ------------------------------------------------------------------------------------------------ Total $ 338,752 $362,803 $ 369,403 $529,855 - ------------------------------------------------------------------------------------------------ Underwriting (loss) income before tax: Workers' Compensation $ (87,854) $(72,543) $(122,543) $(42,638) Reinsurance (14,536) (7,324) (7,324) 10,268 Other Property-Casualty(3) (22) (22) 4,410 - ------------------------------------------------------------------------------------------------ Total $(102,390) $(79,889) $(129,889) $(27,960) - ------------------------------------------------------------------------------------------------ Combined loss and expense ratios: Workers' Compensation: Loss and loss adjustment expenses 96.4% 89.2% 102.5% 79.3% Underwriting expenses 32.8 37.4 41.4 36.0 - ------------------------------------------------------------------------------------------------ Combined ratio 129.2% 126.6% 143.9% 115.3% - ------------------------------------------------------------------------------------------------ Reinsurance: Loss and loss adjustment expenses 124.0% 105.0% 105.0% 45.3% Underwriting expenses 14.3 15.1 15.1 19.5 - ------------------------------------------------------------------------------------------------ Combined ratio 138.3% 120.1% 120.1% 64.8% - ------------------------------------------------------------------------------------------------ Other Property-Casualty(3): Loss and loss adjustment expenses 66.5% 66.5% 67.0% Underwriting expenses 33.5 33.5 31.0 - ------------------------------------------------------------------------------------------------ Combined ratio 100.0% 100.0% 98.0% - ------------------------------------------------------------------------------------------------ Total: Loss and loss adjustment expenses 99.4% 87.4% 97.5% 72.3% Underwriting expenses 30.8 34.6 37.7 33.0 - ------------------------------------------------------------------------------------------------ Combined ratio 130.2% 122.0% 135.2% 105.3% - ------------------------------------------------------------------------------------------------
(1) Excluding RISCORP Purchase Adjustment (2) Including RISCORP Purchase Adjustment (3) CalFarm was sold effective March 31, 1999 Zenith's key operating goal for the P&C Operations 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 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 TheZenith 27 unreported losses in the correct period; and the ability to manage claim costs and keep operating expenses in line with premium volume. Some of the factors that continue to impact the business and economic environment in which Zenith operates include: intense price competition; poor operating results and reports of substantial under estimation of reported loss reserves in the national workers' compensation insurance industry; 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; and the changing environment for controlling medical, legal and rehabilitation costs, as well as fraud and abuse. Fluctuations in interest rates cause fluctuations in Zenith's investment income and the fair values of its investments. 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 estimated 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 P&C Operations:
- ---------------------------------------------------------------------- Other (Dollars in Workers' Property- thousands) Compensation Reinsurance Casualty(1) Total - ---------------------------------------------------------------------- One-year loss development in: 2000 $ 8,251 $ 22,629 $ 30,880 1999 38,767 7,336 $(1,279) 44,824 1998 (75) (7,538) (3,754) (11,367) - ---------------------------------------------------------------------- Favorable development is shown in brackets.
(1) CalFarm was sold effective March 31, 1999 Zenith continually monitors loss development trends and data to establish adequate premium rates and loss reserves. In 2000, Zenith increased its estimate of unpaid Workers' Compensation losses for principally the 1999 accident year by about $8.0 million. The Workers' Compensation reserve strengthening in 1999 is attributable to the RISCORP Purchase Adjustment. Adverse development in 2000 in the Reinsurance Operations is attributable to additional estimates of the impact of the events in 1999 but there do not appear to be any major catastrophic events in 2000. Adverse development in the Reinsurance Operations in 1999 was principally attributable to increased estimates in 1999 of the loss associated with Hurricane Georges, the principal catastrophe in 1998. The process of evaluating an insurance company's exposure to the cost of environmental and asbestos damage is subject to significant uncertainties. Among the complications are lack of historical data, long reporting delays, uncertainty as to the number and identity of insureds with potential exposure and unresolved legal issues regarding policy coverage. The legal issues concerning the interpretations of various insurance policy provisions and whether environmental and asbestos losses are, or were ever intended to be, covered are complex. Courts have reached different and sometimes inconsistent conclusions regarding such issues as: when the loss occurred and which policies provide coverage, how policy limits and exclusions are applied and determined, whether clean-up costs are covered as insured property damage and whether site assessment costs are either indemnity payments or adjusting costs. 28 Zenith has exposure to asbestos losses in the 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 workers' compensation-related 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 Operations but the business reinsured by Zenith in its Reinsurance Operations contains exclusion clauses for environmental and asbestos losses. CalFarm (through March 31, 1999) wrote liability coverage under farmowners' and small commercial policies, however any such liabilities associated with CalFarm were retained by CalFarm when it was sold and Zenith retains no exposure to any such liabilities. All claims for damages resulting from 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 may 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 care 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. WORKERS' COMPENSATION The following is a discussion of results of the Workers' Compensation Operations as set forth on page 27 excluding the impact of the RISCORP Purchase Adjustment in 1999. In the three years ended December 31, 2000, intense competition and inadequate premium rates adversely affected the national workers' compensation industry. Industry data indicates a national trend of increasing claims severity, and premium rates have not kept pace with the trend of increasing severity. Industry organizations such as the National Council on Compensation Insurance, Inc. and the California Workers' Compensation Insurance Rating Bureau have reported that their analyses of the data show that the liabilities for unpaid loss and loss adjustment expenses as estimated and reported by the industry are significantly inadequate. The estimated accident year combined ratio in 1999 was about 135% for the national workers' compensation industry and about 156% for the California workers' compensation industry, including a 1999 accident year loss ratio of about 118%. TheZenith 29 Zenith's inforce Workers' Compensation premiums decreased consistently in the several years ended December 31, 1999 as a result of Zenith's endeavors during that period to maintain rate adequacy in the face of intense competition in the national workers' compensation insurance industry and, as a result, premiums earned in the Workers' Compensation Operations decreased in 1999 compared to 1998. In the year ended December 31, 2000, competitive pricing conditions improved somewhat in California and Zenith increased its inforce premiums in California by about 50% at December 31, 2000 compared to December 31, 1999. Outside of California, where competition and pricing are improving only moderately and only in certain states, Zenith's inforce premiums increased by about 11% at December 31, 2000 compared to December 31, 1999. As a result, Zenith's Workers' Compensation premiums earned increased in 2000 compared to 1999. In January 2001, Zenith continued to increase its inforce premiums in California and other selected states. Zenith increased its premium rates in California by about 8% effective January 1, 2000 and by about 9% effective September 1, 2000. Rates were increased again in California by about 8% effective January 1, 2001 and Zenith implemented other rate increases in most of the states in which it does business. Minimum rates in Florida, which are set by the Department of Insurance, were unchanged at January 1, 2001. Underwriting losses in the Workers' Compensation Operations increased in 2000 compared to 1999 principally because of a higher loss ratio in 2000. The increase in the loss ratio is due to the trend of increasing severity of claims in Zenith's Workers' Compensation Operations offset partially by a decrease in frequency of claims and by rate increases in California. Zenith continually monitors loss development trends and data to establish adequate rates and loss reserves. Zenith also increased its estimate of California losses for prior years, principally for 1999, and about $8.0 million of reserve strengthening is included in the loss ratio and underwriting loss in 2000. Underwriting losses in the Workers' Compensation Operations increased in 1999 compared to 1998 principally because of a higher loss ratio in 1999 and the impact of reduced premium volumes in 1999 relative to operating expenses. Zenith expects that the profitability of its Workers' Compensation Operations will be dependent upon general levels of competition, industry pricing and management's ability to estimate the impact of claim frequency and severity trends on the adequacy of loss reserves and premium rates. Zenith is unable to predict when its Workers' Compensation Operations will return to underwriting profitability, although it anticipates improvement in the short-run with increases in volume and prices. 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 Insurance 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, 2000 and 1999, the receivable from the Fund was $31.1 million and $37.0 million, respectively, related to the pre-January 1, 1998 claims. 30 REINSURANCE Results of the Reinsurance Operations may be adversely impacted in years when large catastrophes occur. However, since its inception in 1985, the combined ratio of the Reinsurance Operations through December 31, 2000 was 97.4%. In the three years ended December 31, 2000, the Reinsurance Operations were adversely impacted by catastrophe losses. Catastrophe losses were $22.6 million, $18.9 million and $11.5 million before tax in 2000, 1999 and 1998, respectively. Catastrophe losses in 2000 were attributable to additional estimates of the impact of the events in 1999, but there do not appear to have been any major catastrophes in 2000. There were frequent catastrophes of a moderate size culminating in severe storms in Europe at the end of 1999. Catastrophe losses in 1998 were attributable principally to a single large event--Hurricane Georges. Estimates of the impact of catastrophes on the Reinsurance Operations are based on the information that is currently available and such estimates could change based on new information that becomes available or based upon reinterpretation of existing information. OTHER PROPERTY-CASUALTY The Other Property-Casualty Operations, through CalFarm, offered automobile, farmowners, commercial coverages, group health and homeowners coverage, primarily in California. CalFarm was sold, effective March 31, 1999, to Nationwide Mutual Insurance Company resulting in a gain of $104.3 million after tax. Underwriting results for 1999 and 1998 were impacted by intense competition and increased expenses, primarily due to computer upgrade costs. In 1998, CalFarm sustained catastrophe losses before tax of $5.0 million in conjunction with California wind and storm damage. The Other Property-Casualty Operations underwriting results in 1999 and 1998 were also adversely impacted by losses in the group health line of business because of higher health care costs and increased utilization. REAL ESTATE OPERATIONS Total revenues recognized in the Real Estate Operations in 2000, 1999 and 1998 were $84.5 million, $58.7 million and $37.7 million, respectively, and pre-tax income was $5.5 million, $3.6 million and $1.4 million, respectively. Revenues and operating income increased in 2000 compared to 1999 and in 1999 compared to 1998 due to an increase in the number of home sales (number of sales were 469, 366 and 275 for the years ended December 31, 2000, 1999 and 1998, respectively). Revenues also increased in 2000 compared to 1999 and in 1999 compared to 1998 because of an increase in the average selling price per home (average selling price was $177,000, $158,000 and $137,000 for the years ended December 31, 2000, 1999 and 1998, respectively). Land presently owned at a cost of $34.5 million will support the construction of an estimated 1,300 homes over the next several years. Changes in interest rates and 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, 2000 and 1999, Zenith's consolidated investment portfolio emphasized high quality, taxable bonds and short-term investments, supplemented by smaller portfolios of redeemable and other preferred and common stocks. Bonds constituted 68% and 71%, and short-term investments constituted 19% and 20% of the carrying value of Zenith's consolidated investment portfolio at December 31, 2000 and 1999, respectively. Bonds with an investment grade rating represented 94% and 95% of the consolidated carrying values of bonds at December 31, 2000 and 1999, respectively. The average life of the consolidated portfolio was 5.1 and 5.7 years at December 31, 2000 and 1999, respectively. TheZenith 31 The change in the carrying value of Zenith's consolidated investment portfolio in 2000 was as follows:
- ---------------------------------------------------------------------------------- (Dollars in thousands) - ---------------------------------------------------------------------------------- Carrying value at beginning of year $901,734 Purchases at cost 168,737 Maturities and redemptions (51,281) Proceeds from sales of investments (182,297) Net realized losses (15,467) Change in unrealized gains and losses, net 18,141 Net change in short-term investments (25,026) Net accretion of bonds and preferred stocks and other changes 38,193 - ---------------------------------------------------------------------------------- Carrying value at end of year $852,734 - ----------------------------------------------------------------------------------
Zenith's investment portfolio decreased in the year ended December 31, 2000 principally to fund the use of cash in operations and the repurchases of outstanding debt described in the Liquidity and Capital Resources section on page 35. Zenith has identified certain securities, amounting to 96% of the investments in debt securities at December 31, 2000 and 1999, as "available-for-sale." Stockholders' equity increased by $9.6 million after deferred tax from December 31, 1999 to December 31, 2000 and decreased by $25.7 million after deferred tax from December 31, 1998 to December 31, 1999 as a result of changes in the fair values of such investments. Stockholders' equity will fluctuate with changes in the fair values of "available-for-sale" securities. The total fair value of fixed maturity investments, including short-term investments, was $753.8 million and $834.3 million at December 31, 2000 and 1999, repectively. The unrealized gain (loss) on held-to-maturity and available-for-sale fixed maturity investments were as follows:
- ------------------------------------------------------------ Held-to- Maturity Available-for-Sale -------- ------------------- (Dollars in thousands) Before Before After Tax Tax Tax - ------------------------------------------------------------ December 31, 2000 $ 368 $(14,877) $ (9,670) December 31, 1999 (340) (29,698) (19,304) - ------------------------------------------------------------
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, 2000 were as follows:
- --------------------------------------------------- 2000 1999 1998 - --------------------------------------------------- Investment yield: Before tax 5.9% 5.5% 5.7% After tax 3.9 3.7 3.8 - ---------------------------------------------------
When, in the opinion of management, a decline in market value of investments is considered to be "other than temporary," such investment is written down to its net realizable value. The determination of "other than temporary" includes, in addition to other relevant factors, a presumption that if the market value is below cost by a significant amount for a period of time, a write down is necessary. During the years ended December 31, 2000 and 1999, there were $22.5 million and $1.7 million, respectively, of such write downs, including $7.3 million during the fourth quarter of 2000. In December 2000, Zenith sold approximately 183 acres of land located in Las Vegas, Nevada. The gain on the sale was $6.0 million, of which $5.1 million was deferred at December 31, 2000. 32 PARENT Parent expenses in 2000 include $1.8 million before tax of severance costs associated with the termination provisions of an employment contract of a company officer. MARKET RISK OF FINANCIAL INSTRUMENTS The fair value of the fixed maturity 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. However, Zenith has the ability to hold fixed maturity 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, 2000 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 stock, 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) ------------------------------------------------------------------------ 2001 2002 2003 2004 2005 Thereafter Total - ----------------------------------------------------------------------------------------------------------------------------- Fixed maturities: Held-to-maturity and available-for-sale securities: Fixed rate $120,642 $63,715 $35,902 $35,928 $34,498 $301,687 $592,372 Weighted average interest rate 5.8% 5.9% 7.9% 7.1% 7.0% 8.5% 7.4% Trading securities: Fixed rate $ 2,970 $ 2,970 Weighted average interest rate 6.9% 6.9% Short-term investments $158,438 $158,438 Debt and interest obligations: Payable to banks and other notes payable $ 9,480 $ 7,556 $ 17,036 Senior notes payable 5,265 61,133 66,398 Redeemable securities 5,729 5,729 $ 5,729 $ 5,729 $ 5,729 $198,767 227,412 - -----------------------------------------------------------------------------------------------------------------------------
TheZenith 33 LIQUIDITY AND CAPITAL RESOURCES The P&C Operations generally create liquidity because insurance premiums are collected prior to disbursements for claims and other policy benefits. Collected premiums may be invested, principally in fixed maturity securities, prior to their use in such disbursements, and investment income provides additional cash receipts. Claim payments may take place many years after the collection of premiums. In periods in which disbursements for claims and benefits, current acquisition costs and current operating and other expenses exceed operating cash receipts, cash flow is negative. Such negative cash flow is offset by cash flow from investments, principally from short-term investments and maturities of longer-term investments. The exact timing of the payment of claims and benefits cannot be predicted with certainty. The P&C Operations maintain portfolios of invested assets with varying maturities and a substantial amount of short-term investments to provide adequate cash for the payment of claims. At December 31, 2000 and 1999, cash and short-term investments in the P&C Operations amounted to $112.6 million and $92.1 million, respectively. In the year ended December 31, 2000, payment of income taxes for 1999, including $56.0 million associated with the gain on sale of CalFarm, reduced cash flow from operations. In the year ended December 31, 1999, $54.3 million of cash was used to pay the balance of the purchase price for the RISCORP Acquisition and net proceeds of approximately $211.0 million were received in connection with the sale of CalFarm. Zenith National requires cash to pay any dividends declared to its stockholders, make interest and principal payments on its outstanding debt obligations and fund its operating expenses. Such cash requirements are generally funded in the long run by dividends received from Zenith Insurance and financing or refinancing activities by Zenith National. Investment income from its investment portfolio also provides a current source of cash to Zenith National. The P&C Operations are subject to insurance regulations which restrict their ability to distribute dividends. Such dividend capabilities are set forth in Note 17 to the Consolidated Financial Statements on page 62. Such restrictions have not had, and under current regulations are not expected to have, a material adverse impact on Zenith. The maximum dividend which can be paid to Zenith National without prior approval of the California Department of Insurance in 2001 is $26.2 million. In 2000, Zenith National received $10.0 million of dividend payments from Zenith Insurance. In 1999, Zenith National received $130.0 million of such dividend payments, including a dividend of $100.0 million paid from the gain on the sale of CalFarm and with the prior approval of the California Department of Insurance. Zenith National has available cash, short-term investments and other investments, which currently significantly exceed its short-term cash requirements. Cash, short-term investments and other investments in Zenith National amounted to $135.7 million and $171.7 million at December 31, 2000 and 1999, respectively. At December 31, 2000, 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, 2000. Under these agreements certain restrictive covenants apply including the maintenance of certain financial ratios. The amount of capital in the P&C Operations is maintained relative to standardized capital adequacy measures such as risk based capital where ratios such as net premiums written to statutory surplus measure capital adequacy. Risk based capital is used by regulators for regulatory financial surveillance purposes and by rating agencies 34 to assign financial strength ratings to the P&C Operations and ratings for the debt issued by Zenith National. From time to time, the level of capitalization of the P&C Operations may be increased by contributions from Zenith National. Zenith National made contributions of $25.0 million and $65.0 million in 2000 and 1998, respectively, to the capital and surplus of Zenith Insurance. In the first quarter of 2000, Zenith's financial strength and debt ratings were reduced by Moody's Investors Service ("Moody's") and by Standard & Poor's ("S&P"), principally over concerns about continuing operating losses in the P&C Operations. In August 2000, S&P affirmed its ratings of Zenith, but changed its outlook for Zenith to "negative" and Moody's also changed its outlook for Zenith to "negative" at the same time making no changes to Zenith's ratings. Both rating agencies cited continuing concerns about the operating performance of the P&C Operations. In the second quarter of 2000, A. M. Best Company reduced the rating of the P&C Operations from A+ (Superior) to A (Excellent). The actions of such rating agencies have had no material impact on Zenith's operations. Because of the available invested assets and available lines of credit in Zenith National, Zenith National has the flexibility, if necessary, to contribute capital to the P&C Operations. From time to time, Zenith may make repurchases of its outstanding common shares or outstanding debt. At December 31, 2000, Zenith National was authorized to repurchase up to 938,000 shares of its common stock at prevailing market prices 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 2000, Zenith National paid $22.8 million to repurchase $16.5 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 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 (the "Trust"). The repurchases resulted in an extraordinary gain before tax of $1.5 million. Zenith National used its available cash balances to fund these purchases. The Real Estate Operations maintain certain bank credit facilities to provide financing for development and construction of single-family residences for sale. Each agreement pertains to a separate residential housing project. 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, 2000 and 1999, the maximum credit available was $29.7 million and $37.1 million, respectively. At December 31, 2000 and 1999, $15.7 million and $19.1 million, respectively, was outstanding under these facilities. Zenith National also finances the land acquisitions of its Real Estate Operations through inter-company loans. Insurance companies are required to have securities on deposit for the protection of policyholders in accordance with various states' regulations. At December 31, 2000 and 1999, investments carried at their fair value of $235.9 million and $205.5 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 the Trust. (See Note 10 to the Consolidated Financial Statements on pages 56-57 for a full description of the Capital Securities). TheZenith 35 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 for insurance companies 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 established January 1, 2001 as the effective date of the Codification and the California and Texas Departments of Insurance have adopted the Codification. Zenith believes that the Codification, as currently constituted, will not have a material impact on the statutory capital and surplus of the P&C Operations. 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 all fiscal years beginning after June 15, 2000. SFAS No. 133 requires, among other things, that companies record all derivative instruments on the balance sheet at fair value. Changes in the fair value of derivatives will be required to be recorded each period in current earnings or other comprehensive income, depending on the nature of the derivative. Zenith believes that adoption of SFAS No. 133 will not have a material effect on its results of operations or its financial position. 36 FINANCIAL STATEMENTS TheZenith 37 5-YEAR SUMMARY OF SELECTED FINANCIAL INFORMATION ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES - -------------------------------------------------------------------------------- Years ended December 31, Note 2000 1999 - -------------------------------------------------------------------- (Dollars and shares in thousands, except per share data) Revenues: 1, 2 Premiums earned $ 338,752 $ 369,403 Net investment income 51,766 53,662 Realized (losses) gains on investments (15,467) 7,682 Real estate sales 84,518 58,670 Service fee income 2,691 - -------------------------------------------------------------------- Total revenues 459,569 492,108 - -------------------------------------------------------------------- (Loss) income after tax and before realized (losses) gains and extraordinary item 1, 2 (37,739) (55,228) Per common share 3 (2.19) (3.22) - -------------------------------------------------------------------- Components of net (loss) income: Underwriting (loss) income: (Loss) income excluding catastrophes 1, 2 (53,251) (72,904) Catastrophe losses (14,690) (12,285) Net investment income 34,243 35,632 Realized (losses) gains on investments (10,054) 4,993 Income from real estate operations 3,552 2,372 Parent expenses and interest expense (7,593) (8,043) Gain on sale of CalFarm 2 104,335 Extraordinary item-gain on extinguishment of debt 4 993 - -------------------------------------------------------------------- Net (loss) income (46,800) 54,100 Per common share 3 (2.71) 3.15 - -------------------------------------------------------------------- Cash dividends per share to common stockholders 1.00 1.00 - -------------------------------------------------------------------- Weighted average common shares outstanding 17,269 17,172 - -------------------------------------------------------------------- Financial condition: 1, 2 Total assets $1,472,190 $1,573,786 Investments 852,734 901,734 Unpaid loss and loss adjustment expenses 877,883 880,929 Senior notes, bank debt and other notes payable 4 74,048 94,955 Redeemable securities 4 65,618 73,397 Total stockholders' equity 309,776 354,559 Stockholders' equity per share 5 17.76 20.67 Return on average equity (14.3)% 13.9% - -------------------------------------------------------------------- Insurance statistics (GAAP): 1, 2 Paid loss and loss adjustment expense ratio 90.9% 96.0% Combined ratio: Loss and loss adjustment expense ratio 99.4% 97.5% Underwriting expense ratio 30.8% 37.7% ---------- ---------- Combined ratio 130.2% 135.2% Net premiums earned-to-surplus ratio 1.1 1.1 Loss and loss adjustment expense reserves-to-surplus ratio (net of reinsurance) 2.0 1.8 - --------------------------------------------------------------------
(1) On April 1, 1998, Zenith acquired substantially all of the assets and certain liabilities of RISCORP, Inc. and subsidiaries (collectively, "RISCORP"). In 1999, Zenith recorded $50.0 million before tax ($32.5 million after tax, or $1.89 per share) of net charges associated with an increase in the purchase price of RISCORP (See Note 14 to the Consolidated Financial Statements on pages 58-59). (2) Zenith completed the sale of CalFarm Insurance Company ("CalFarm") 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 13 to the Consolidated Financial Statements on pages 57-58.) (3) 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. 38 - --------------------------------------------------------------------------------
1998 1997 1996 - -------------------------------------------------------------------------------------- (Dollars and shares in thousands, except per share data) Revenues: Premiums earned $ 529,855 $ 488,721 $ 452,856 Net investment income 53,593 52,332 51,154 Realized (losses) gains on investments 11,602 14,008 10,807 Real estate sales 37,737 45,419 41,554 Service fee income 3,992 - -------------------------------------------------------------------------------------- Total revenues 636,779 600,480 556,371 - -------------------------------------------------------------------------------------- (Loss) income after tax and before realized (losses) gains and extraordinary item 11,559 19,669 30,575 Per common share 0.67 1.10 1.72 - -------------------------------------------------------------------------------------- Components of net (loss) income: Underwriting (loss) income: (Loss) income excluding catastrophes (11,230) (10,217) 356 Catastrophe losses (7,475) (975) Net investment income 35,907 34,655 34,069 Realized (losses) gains on investments 7,541 8,431 7,025 Income from real estate operations 868 1,079 1,251 Parent expenses and interest expense (6,511) (4,873) (5,101) Gain on sale of CalFarm Extraordinary item-gain on extinguishment of debt - -------------------------------------------------------------------------------------- Net (loss) income 19,100 28,100 37,600 Per common share 1.11 1.57 2.12 - -------------------------------------------------------------------------------------- Cash dividends per share to common stockholders 1.00 1.00 1.00 - -------------------------------------------------------------------------------------- Weighted average common shares outstanding 17,158 17,886 17,752 - -------------------------------------------------------------------------------------- Financial condition: Total assets $ 1,818,726 $ 1,252,156 $ 1,242,724 Investments 1,048,681 879,973 852,799 Unpaid loss and loss adjustment expenses 997,647 613,266 620,078 Senior notes, bank debt and other notes payable 93,851 88,216 88,861 Redeemable securities 73,341 Total stockholders' equity 346,952 361,866 337,503 Stockholders' equity per share 20.23 20.31 19.17 Return on average equity 5.4% 8.3% 11.4% - -------------------------------------------------------------------------------------- Insurance statistics (GAAP): Paid loss and loss adjustment expense ratio 82.9% 66.9% 69.9% Combined ratio: Loss and loss adjustment expense ratio 72.3% 71.2% 69.5% Underwriting expense ratio 33.0% 32.2% 30.3% ----------- ----------- ----------- Combined ratio 105.3% 103.4% 99.8% Net premiums earned-to-surplus ratio 1.2 1.4 1.4 Loss and loss adjustment expense reserves-to-surplus ratio (net of reinsurance) 1.6 1.5 1.6 - --------------------------------------------------------------------------------------
(4) In 2000, Zenith repurchased a total of $16.5 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. (5) Excluding the effect of Statement of Financial Accounting Standards No. 115, stockholders' equity per share was $18.31, $21.80, $19.86, $20.03 and $19.28 at December 31, 2000, 1999, 1998, 1997 and 1996, respectively. 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 - -------------------------------------------------------------------------------- Years ended December 31, 2000 1999 1998 - --------------------------------------------------------------------- (Dollars in thousands) Liability for unpaid loss and loss adjustment expenses, net $ 634,172 $ 605,250 $ 599,357 - --------------------------------------------------------------------- Paid, net (cumulative) as of: One year later 235,968 244,402 Two years later 387,815 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 636,130 645,460 Two years later 645,463 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 $ (30,880) $ (46,106) - --------------------------------------------------------------------- Net Liability -- December 31, $ 634,172 $ 605,250 $ 599,357 Receivable from reinsurers and state trust funds on paid and unpaid losses 243,711 275,679 276,526 - --------------------------------------------------------------------- Gross liability -- December 31, 877,883 880,929 875,883 Re-estimated liability, net of reinsurance 636,130 645,463 Re-estimated receivable from reinsurers and state trust funds on paid and unpaid losses 269,395 299,589 - --------------------------------------------------------------------- Re-estimated liability, gross 905,525 945,052 - --------------------------------------------------------------------- Favorable (deficient) development, gross $ (24,596) $ (69,169) - ---------------------------------------------------------------------
The analysis above presents the development of Zenith National Insurance Corp. and subsidiaries' balance sheet liabilities for 1990 through 2000. 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, 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 Note 14 to the Consolidated Financial Statements on pages 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 13 to the Consolidated Financial Statements on pages 57-58). 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. Adverse development in 2000 on the reserves established at December 31, 1999 is attributable, principally, to additional estimates of 1999 catastrophe losses. Adverse development in 1999 on the reserves established at December 31, 1998 is attributable, principally, to an increase in the reserves acquired from RISCORP (see Note 14 to the Consolidated Financial Statements on pages 58-59). 40 - --------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 - ----------------------------------------------------------------------------------------------------------------------------------- (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 - ----------------------------------------------------------------------------------------------------------------------------------- Paid, net (cumulative) as of: One year later 137,681 149,195 127,428 116,193 119,158 124,303 124,186 108,230 Two years later 226,165 238,809 208,452 189,086 193,815 206,332 202,060 181,610 Three years later 280,615 289,673 250,865 236,623 238,268 257,922 252,011 225,615 Four years later 322,887 278,760 262,775 271,090 288,034 284,734 253,841 Five years later 299,537 280,005 287,806 312,352 304,198 273,078 Six years later 294,969 298,976 323,555 323,213 286,033 Seven years later 309,829 331,914 330,371 299,507 Eight years later 340,990 336,626 304,090 Nine years later 349,155 308,691 Ten years later 314,181 - ----------------------------------------------------------------------------------------------------------------------------------- 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 Two years later 399,660 414,854 358,264 347,845 359,665 380,057 378,978 342,180 Three years later 392,001 410,924 351,831 339,076 356,475 378,383 377,713 347,537 Four years later 398,561 348,226 332,834 348,916 382,382 379,440 347,146 Five years later 345,132 330,097 342,608 376,917 380,672 346,558 Six years later 335,489 340,001 370,165 377,166 347,087 Seven years later 344,442 368,173 370,720 342,728 Eight years later 372,922 368,921 336,467 Nine years later 372,834 334,437 Ten years later 337,365 - ----------------------------------------------------------------------------------------------------------------------------------- Favorable (deficient) development $ 26,528 $ 20,890 $ 12,520 $ 29,807 $ 41,187 $ 7,466 $ (18,045) $ (6,687) - ----------------------------------------------------------------------------------------------------------------------------------- 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 392,001 398,561 345,132 335,489 344,442 372,922 Re-estimated receivable from reinsurers and state trust funds on paid and unpaid losses 82,082 89,783 47,398 43,006 51,698 65,984 - ----------------------------------------------------------------------------------------------------------- Re-estimated liability, gross 474,083 488,344 392,530 378,495 396,140 438,906 - ----------------------------------------------------------------------------------------------------------- Favorable (deficient) development, gross $ 18,759 $ 13,976 $ 5,541 $ 24,362 $ 28,032 $ (31,696) - -----------------------------------------------------------------------------------------------------------
TheZenith 41 CONSOLIDATED BALANCE SHEET ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES - ----------------------------------------------------------------------------------------------- December 31, Note 2000 1999 - ----------------------------------------------------------------------------------------------- (Dollars in thousands) Assets: Investments: Fixed maturities: At amortized cost (fair value $24,891 in 2000 and $27,186 in 1999) $ 24,523 $ 27,526 At fair value (cost $585,351 in 2000 and $657,129 in 1999) 570,451 627,375 Floating rate preferred stocks, at fair value (cost $6,799 in 2000 and 1999) 5,699 6,420 Convertible and non-redeemable preferred stocks, at fair value (cost $3,733 in 2000 and $4,300 in 1999) 3,391 3,405 Common stocks, at fair value (cost $23,630 in 2000 and $25,428 in 1999) 27,301 25,634 Short-term investments (at cost, which approximates fair value) 158,438 179,748 Other investments 62,931 31,626 - ----------------------------------------------------------------------------------------------- Total investments 2, 3 852,734 901,734 Cash 16,026 15,714 Accrued investment income 11,883 11,832 Premiums receivable, less allowance for doubtful accounts of $7,596 in 2000 and $10,172 in 1999 76,405 74,586 Receivable from reinsurers and state trust funds for paid and unpaid losses 6 305,341 343,671 Deferred policy acquisition costs 10,310 7,892 Properties and equipment, less accumulated depreciation 4 49,827 54,981 Deferred tax asset 5 35,123 34,601 Current federal income tax receivable 5 17,746 Intangible assets 1 22,410 23,207 Other assets 1 74,385 105,568 - ----------------------------------------------------------------------------------------------- Total assets $1,472,190 $1,573,786 - -----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of this statement. 42 - ------------------------------------------------------------------------------------------------------- December 31, Note 2000 1999 - ------------------------------------------------------------------------------------------------------- (Dollars and shares in thousands) Liabilities: Policy liabilities and accruals: Unpaid loss and loss adjustment expenses 6 $ 877,883 $ 880,929 Unearned premiums 58,907 50,906 Policyholders' dividends accrued 2,773 3,375 Reserves on loss portfolio transfers 14,471 17,658 Payable to banks and other notes payable 3, 7 15,674 20,238 Senior notes payable, less unamortized issue costs of $126 in 2000 and $283 in 1999 3, 8, 11 58,374 74,717 Current federal income tax payable 5 23,793 Other liabilities 68,714 74,214 - ------------------------------------------------------------------------------------------------------- Total liabilities 1,096,796 1,145,830 - ------------------------------------------------------------------------------------------------------- Redeemable securities: Company-obligated, mandatorily redeemable 8.55% 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 $1,382 in 2000 and $1,603 in 1999 3, 10, 11 65,618 73,397 - ------------------------------------------------------------------------------------------------------- Commitments and contingent liabilities 15 Stockholders' equity: Preferred stock, $1 par -- shares authorized 1,000; issued and outstanding, none in 2000 and 1999 Common stock, $1 par -- shares authorized 50,000; issued 25,452, outstanding 17,443 in 2000; issued 25,157, outstanding 17,150 in 1999 25,452 25,157 Additional paid-in capital 282,120 274,897 Retained earnings 161,174 225,229 Accumulated other comprehensive loss -- net unrealized depreciation on investments, net of deferred tax benefit of $4,419 in 2000 and $10,768 in 1999 2 (8,206) (19,998) - ------------------------------------------------------------------------------------------------------- 460,540 505,285 Treasury stock, at cost (8,009 shares in 2000 and 8,007 shares in 1999) 16 (150,764) (150,726) - ------------------------------------------------------------------------------------------------------- Total stockholders' equity 309,776 354,559 - ------------------------------------------------------------------------------------------------------- Total liabilities, redeemable securities and stockholders' equity $1,472,190 $1,573,786 - -------------------------------------------------------------------------------------------------------
TheZenith 43 CONSOLIDATED STATEMENT OF OPERATIONS ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES - ------------------------------------------------------------------------------------------------------------------ Years ended December 31, Note 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------ (Dollars and shares in thousands, except per share data) Revenues: Premiums earned 12 $338,752 $369,403 $529,855 Net investment income 2 51,766 53,662 53,593 Realized (losses) gains on investments 2 (15,467) 7,682 11,602 Real estate sales 84,518 58,670 37,737 Service fee income 2,691 3,992 - ------------------------------------------------------------------------------------------------------------------ Total revenues 459,569 492,108 636,779 - ------------------------------------------------------------------------------------------------------------------ Expenses: Loss and loss adjustment expenses incurred 6, 12 336,962 360,172 382,890 Policy acquisition costs 62,891 65,266 96,937 Other underwriting and operating expenses 45,787 80,090 85,299 Policyholders' dividends and participation 1,544 610 516 Real estate construction and operating costs 79,054 55,020 36,374 Interest expense 7, 8, 9, 10 5,640 8,218 5,928 - ------------------------------------------------------------------------------------------------------------------ Total expenses 531,878 569,376 607,944 - ------------------------------------------------------------------------------------------------------------------ Gain on sale of CalFarm Insurance Company 13 160,335 - ------------------------------------------------------------------------------------------------------------------ (Loss) income before federal income tax (benefit) expense and extraordinary item (72,309) 83,067 28,835 Federal income tax (benefit) expense, including expense of $56,000 related to the sale of CalFarm Insurance Company in 1999 5, 13 (24,516) 28,967 9,735 - ------------------------------------------------------------------------------------------------------------------ (Loss) income before extraordinary item (47,793) 54,100 19,100 Extraordinary item -- gain on extinguishment of debt, net of federal income tax expense of $534 11 993 - ------------------------------------------------------------------------------------------------------------------ Net (loss) income $(46,800) $ 54,100 $ 19,100 - ------------------------------------------------------------------------------------------------------------------ Net (loss) income per common share: Basic: (Loss) income before extraordinary item 19 $ (2.78) $ 3.15 $ 1.12 Extraordinary item -- gain on extinguishment of debt, net of federal income tax expense 11 0.06 - ------------------------------------------------------------------------------------------------------------------ Net (loss) income 19 $ (2.72) $ 3.15 $ 1.12 - ------------------------------------------------------------------------------------------------------------------ Diluted: (Loss) income before extraordinary item 19 $ (2.77) $ 3.15 $ 1.11 Extraordinary item -- gain on extinguishment of debt, net of federal income tax expense 11 0.06 - ------------------------------------------------------------------------------------------------------------------ Net (loss) income 19 $ (2.71) $ 3.15 $ 1.11 - ------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of this statement. 44 CONSOLIDATED STATEMENT OF CASH FLOWS ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES - --------------------------------------------------------------------------------------------------------------- Years ended December 31, Note 2000 1999 1998 - --------------------------------------------------------------------------------------------------------------- (Dollars in thousands) Cash flows from operating activities: Premiums and service fee income collected $ 355,538 $ 394,564 $ 580,945 Investment income received 48,802 51,170 54,970 Proceeds from sales of real estate 84,518 58,670 37,737 Loss and loss adjustment expenses paid (298,777) (321,510) (434,610) Underwriting and other operating expenses paid (114,790) (132,505) (182,235) Real estate construction costs paid (74,524) (66,462) (47,423) Reinsurance premiums paid (10,138) (24,126) (41,429) Interest paid (13,512) (13,467) (10,513) Income taxes (paid) recovered 5 (24,155) 2,084 (4,580) - --------------------------------------------------------------------------------------------------------------- Net cash used in operating activities (47,038) (51,582) (47,138) - --------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Purchases of investments: Debt and equity securities available-for-sale (164,485) (366,567) (390,373) Other investments (4,252) (9,332) (12,894) Proceeds from maturities and redemptions of investments: Fixed maturities held-to-maturity 2,962 7,500 11,583 Debt and equity securities available-for-sale 48,319 95,668 96,362 Proceeds from sales of investments: Debt and equity securities available-for-sale 173,490 233,742 302,648 Other investments 8,807 21,922 13,145 Net change in short-term investments 25,026 (41,746) 14,916 Cash payment to RISCORP 14 (54,308) (35,000) RISCORP acquisition costs 14 (11,035) Cash acquired in RISCORP Acquisition 14 29,309 Net proceeds from sale of CalFarm Insurance Company 13 211,068 Capital expenditures and other, net (5,789) (15,189) (11,356) - --------------------------------------------------------------------------------------------------------------- Net cash provided by investing activities 84,078 82,758 7,305 - --------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Repurchase of redeemable securities 11 (6,164) Repurchase of 9% Notes 11 (16,585) Repayment of note assumed from RISCORP 14 (15,000) Net cash received from the sale of Zenith National Insurance Capital Trust I 8.55% Capital Securities 10 73,320 Cash advanced from bank lines of credit 7 7,400 7,000 Cash repaid on bank lines of credit 7 (12,400) (2,000) Cash advanced from bank construction loans 7 73,988 56,970 35,431 Cash repaid on bank construction loans 7 (77,992) (52,397) (34,918) Cash dividends paid to common stockholders (17,183) (17,165) (17,010) Proceeds from exercise of stock options 16 7,246 4,322 6,527 Purchase of treasury shares 16 (38) (4,190) (24,023) - --------------------------------------------------------------------------------------------------------------- Net cash (used in) provided by financing activities (36,728) (17,460) 29,327 - --------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash 312 13,716 (10,506) Cash at beginning of year 15,714 1,998 12,504 - --------------------------------------------------------------------------------------------------------------- Cash at end of year $ 16,026 $ 15,714 $ 1,998 - --------------------------------------------------------------------------------------------------------------- Reconciliation of net (loss) income to net cash flows from operating activities: Net (loss) income $ (46,800) $ 54,100 $ 19,100 Adjustments to reconcile net (loss) income to net cash flows (used in) provided by operating activities: Depreciation and amortization 5,588 8,369 9,096 Realized gain on sale of CalFarm Insurance Company 13 (160,335) Realized losses (gains) on investments 2 15,467 (7,682) (11,602) Gain on extinguishment of debt 11 (1,527) Amortization of deferred gain on retroactive reinsurance contract 14 (8,340) (11,000) Decrease (increase) in: Premiums receivable (1,819) 22,528 25,757 Receivable from reinsurers and state trust funds for paid and unpaid losses 36,184 44,507 30,549 Real estate construction in progress and land held for development (4,408) (20,041) (16,266) Increase (decrease) in: Unpaid loss and loss adjustment expenses (3,046) 8,823 (97,601) Unearned premiums 8,001 (16,095) (13,681) Policyholders' dividends accrued (602) (1,388) (597) Federal income tax 5 (48,136) 31,062 5,019 Other 2,400 (4,430) 3,088 - --------------------------------------------------------------------------------------------------------------- Net cash used in operating activities $ (47,038) $ (51,582) $ (47,138) - ---------------------------------------------------------------------------------------------------------------
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, 2000 Note outstanding stock $1 par - ------------------------------------------------------------------------------------ (Dollars and shares in thousands, except per share data) 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 16 289 Tax benefit on options exercised in 1998 Purchase of treasury shares at cost 16 (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 -- net unrealized depreciation on investments, net of deferred tax benefit of $15,935 2 Comprehensive income Exercise of stock options 16 187 Tax benefit on options exercised in 1999 Purchase of treasury shares at cost 16 (185) Cash dividends declared to common stockholders ($1.00 per share, paid quarterly) - ------------------------------------------------------------------------------------ Balance at December 31, 1999 17,150 Net loss for 2000 Other comprehensive income -- net unrealized appreciation on investments, net of deferred tax expense of $6,349 2 Comprehensive loss Exercise of stock options 16 295 Tax benefit on options exercised in 2000 Purchase of treasury shares at cost 16 (2) Cash dividends declared to common stockholders ($1.00 per share, paid quarterly) - ------------------------------------------------------------------------------------ Balance at December 31, 2000 17,443 - ------------------------------------------------------------------------------------
The accompanying notes are an integral part of this statement. 46 - --------------------------------------------------------------------------------
Accumulated other comprehensive income (loss) - net unrealized appreciation Common Additional Retained (depreciation) Treasury stock $1 par paid-in capital earnings on investments stock Total - ------------------------------------------------------------------------------------------------------------------------------ (Dollars and shares in thousands, except per share data) 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 -- 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 Net loss for 2000 (46,800) (46,800) Other comprehensive income -- net unrealized appreciation on investments, net of deferred tax expense of $6,349 11,792 11,792 ---------- Comprehensive loss (35,008) Exercise of stock options 295 6,951 7,246 Tax benefit on options exercised in 2000 272 272 Purchase of treasury shares at cost (38) (38) Cash dividends declared to common stockholders ($1.00 per share, paid quarterly) (17,255) (17,255) - ------------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 2000 $ 25,452 $ 282,120 $ 161,174 $ (8,206) $ (150,764) $ 309,776 - ------------------------------------------------------------------------------------------------------------------------------
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; Reinsurance, principally of world-wide, assumed reinsurance of property losses from catastrophes and large property risks; and Other Property-Casualty insurance, consisting of automobile, farmowners, commercial coverages, group health and homeowners coverage, primarily in California, operated by CalFarm Insurance Company ("CalFarm"), which was sold effective March 31, 1999 by Zenith Insurance Company ("Zenith Insurance"), a wholly owned subsidiary of Zenith National. The P&C Operations sell insurance and reinsurance through agents and brokers and not directly to consumers. The Real Estate Operations develop land and primarily construct single-family residences in Las Vegas, Nevada. Investment operations provide income and realized gains on investments, primarily from debt securities. The Parent operations represent Zenith National, a holding company which owns, directly or indirectly, all of the capital stock of the P&C Operations, non-insurance companies and securities. 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 between each of the three years ended December 31, 2000, 1999, 1998 is affected by several items. First, 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 14). Second, in the third quarter of 1999, Zenith recorded net charges of $50.0 million before tax ($32.5 million after tax or $1.89 per share) associated with an increase in the estimated net liabilities for unpaid losses and loss adjustment expenses acquired from RISCORP (the "RISCORP Purchase Adjustment"-- see Note 14). Third, effective March 31, 1999, Zenith sold CalFarm which had previously operated Zenith's Other Property-Casualty Operations (see Note 13). The sale of CalFarm resulted in a gain of $104.3 million after tax. 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. 48 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 amortized cost is a reasonable estimate of fair value. Investment income is recorded when earned. Realized capital gains and losses are calculated based on the cost of securities sold, which is determined by the "identified cost" method. Cash Cash includes currency on hand and demand deposits with financial institutions. Recognition of Property-Casualty Revenue and Expense 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 premiums are determined based upon the payroll of the insured and applicable premium rates and are recorded as written when billed. 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 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. Zenith's policyholder dividends have not been material in the three years ended December 31, 2000 due to competitive conditions in the workers' compensation industry. 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 45.7% and 28.2% of the premiums earned in the Workers' Compensation Operations in 2000 was 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. TheZenith 49 Reinsurance In accordance with general industry practices, the P&C Operations annually purchase, principally from large United States reinsurance companies, excess of loss reinsurance to protect Zenith against the impact of large, irregularly occurring losses. Such reinsurance reduces the magnitude of sudden and unpredictable changes in net income and the capitalization of the P&C Operations. 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. 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. Historically, no material amounts due from reinsurers have been written off as uncollectable. At December 31, 2000, Reliance Insurance Company ("Reliance") owed Zenith Insurance approximately $6.3 million in reinsurance recoverables for paid and unpaid losses in connection with reinsurance arrangements assumed by Zenith Insurance in the 1996 acquisition of the Associated General Contractors Self-Insurance Fund. On January 29, 2001, Reliance entered into an Order of Supervision with the Pennsylvania Insurance Department under which its business and operations will be monitored and reviewed by the Department. Zenith Insurance considered its receivables from Reliance in the normal course of assessing the collectibility of reinsurance recoverables. Zenith Insurance believes this matter will not have a material adverse effect on its financial condition or results of operations. Earned premiums and loss and loss adjustment expenses incurred are stated in the Consolidated Statement of Operations after deduction of amounts ceded to reinsurers. 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. Receivable from reinsurers on unpaid losses amounted to $264.6 million and $292.8 million at December 31, 2000 and 1999, respectively, of which approximately $185.4 million and $216.2 million, respectively, were reinsurance recoverables relating to reinsurance arrangements entered into by RISCORP. Such RISCORP-related amounts are primarily recoverable from large United States reinsurance companies. Also included in reinsurance recoverable on unpaid losses is $50.0 million of reinsurance recoverable under reinsurance entered into by Zenith Insurance in connection with the RISCORP Acquisition (see Note 14). Such reinsurance recoverable is secured by a trust account and an irrevocable letter of credit. Real Estate Operations Land, land development costs and construction costs, including costs of acquisition and development, property taxes and related interest, are capitalized. Such costs, and an estimate of the costs to complete a project, are recognized pro rata against sales of completed units (see Note 9). Such capitalized costs are included in other assets. The profitability of the Real Estate Operations is 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 $61.1 million and $87.9 million at December 31, 2000 and 1999, respectively. 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 the costs in excess of tangible assets acquired, including those related to the RISCORP Acquisition discussed in Note 14. The amounts assigned to assets acquired since 1970 are being amortized on a straight-line basis over 25 years. Amortization expense was $0.8 million, $0.9 million and $1.1 million in 2000, 1999 and 1998, respectively. Accumulated amortization was $2.7 million and $1.9 million at December 31, 2000 and 1999, respectively. Of the intangible assets at December 31, 2000 and 1999, $20.4 million and $21.2 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 for insurance companies 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 established January 1, 2001 as the effective date of the Codification and the California and Texas Departments of Insurance have adopted the Codification. Zenith believes that the Codification, as currently constituted, will not have a material impact on the statutory capital and surplus of the P&C Operations. 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 all fiscal years beginning after June 15, 2000. SFAS No. 133 requires, among other things, that companies record all derivative instruments on the balance sheet at fair value. Changes in the fair value of derivatives will be required to be recorded each period in current earnings or other comprehensive income, depending on the nature of the derivative. Zenith believes that adoption of SFAS No. 133 will not have a material effect on its results of operations or its financial position. TheZenith 51 NOTE 2 INVESTMENTS The amortized cost and fair values of investments were as follows:
- ----------------------------------------------------------------------------- Gross unrealized December 31, 2000 Amortized ----------------- Fair Carrying (Dollars in thousands) cost gains (losses) value value - ----------------------------------------------------------------------------- Held-to-maturity: Corporate debt $ 5,320 $ 95 $ 5,415 $ 5,320 Mortgage-backed 19,203 273 19,476 19,203 - ----------------------------------------------------------------------------- Total held-to-maturity $ 24,523 $ 368 $ 24,891 $ 24,523 - ----------------------------------------------------------------------------- Available-for-sale: U.S. government debt $128,423 $ 346 $ (63) $128,706 $128,706 State and local government debt 14,170 (90) 14,080 14,080 Corporate debt 402,523 2,758 (16,932) 388,349 388,349 Mortgage-backed 23,598 (4) 23,594 23,594 Redeemable preferred stocks 13,644 (892) 12,752 12,752 Equities 34,137 5,307 (3,055) 36,389 36,389 Short-term investments 158,438 158,438 158,438 - ----------------------------------------------------------------------------- Total available- for-sale $774,933 $8,411 $(21,036) $762,308 $762,308 - ----------------------------------------------------------------------------- Trading: Corporate debt $ 2,993 $ (23) $ 2,970 $ 2,970 Equities 25 (23) 2 2 - ----------------------------------------------------------------------------- Total trading $ 3,018 $ (46) $ 2,972 $ 2,972 - -----------------------------------------------------------------------------
- ----------------------------------------------------------------------------- Gross unrealized December 31, 1999 Amortized ----------------- Fair Carrying (Dollars in 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. government debt $163,971 $ (1,660) $162,311 $162,311 State and local government debt 26,495 (325) 26,170 26,170 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 - -----------------------------------------------------------------------------
Debt securities, including short-term investments, by contractual maturity were as follows:
- ----------------------------------------------------- December 31, 2000 Amortized Fair (Dollars in thousands) cost value - ----------------------------------------------------- Held-to-maturity: Due after ten years $ 24,523 $ 24,891 - ----------------------------------------------------- Total held-to-maturity $ 24,523 $ 24,891 - ----------------------------------------------------- Available-for-sale: Due in one year or less $279,156 $279,080 Due after one year through five years 172,226 170,043 Due after five years through ten years 187,913 178,328 Due after ten years 101,501 98,468 - ----------------------------------------------------- Total available-for-sale $740,796 $725,919 - ----------------------------------------------------- Trading: Due in one year or less $ 2,993 $ 2,970 - ----------------------------------------------------- Total trading $ 2,993 $ 2,970 - -----------------------------------------------------
Fluctuating interest rates will impact stockholders' equity, profitability and maturities of certain debt and preferred securities. Expected maturities may 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. 52 When, in the opinion of management, a decline in market value of an investment is considered to be "other than temporary," such investment is written down to its net realizable value. The determination of "other than temporary" includes, in addition to other relevant factors, a presumption that if the market value is below cost by a significant amount for a period of time, a write down is necessary. Such write downs are reflected as a reduction of net realized gains on investments. During the years ended December 31, 2000 and 1999, there were $22.5 million and $1.7 million, respectively, of such write downs. The gross realized gains on sales of investments classified as available-for-sale during 2000, 1999 and 1998 were $8.7 million, $8.2 million and $9.9 million, respectively, and the gross realized losses were $2.4 million, $5.5 million and $3.0 million, respectively. The change in net unrealized holding (losses) gains on trading securities, which is included in realized gains, was $10,000, $(96,000) and $54,000 for the years ended December 31, 2000, 1999 and 1998, respectively. At December 31, 2000 and 1999, 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 an increase in stockholders' equity of $9.6 million after deferred tax from December 31, 1999 to December 31, 2000, compared to a decrease of $25.7 million from 1998 to 1999. Realized and unrealized investment gains and losses on fixed maturity investments and equity securities are summarized as follows:
- ----------------------------------------------------------- Years ended December 31, (Dollars in thousands) 2000 1999 1998 - ----------------------------------------------------------- Realized (losses) gains: Fixed maturities $(19,063) $ (503) $ 4,355 Equity securities 2,733 3,059 2,568 Change in fair value over (under) cost: Fixed maturities 15,562 (41,549) 2,429 Equity securities 3,297 (5,984) (1,719) - -----------------------------------------------------------
Net investment income is detailed as follows:
- ---------------------------------------------------------- Years ended December 31, (Dollars in thousands) 2000 1999 1998 - ---------------------------------------------------------- Fixed maturities: Bonds $43,415 $45,080 $44,460 Redeemable preferred stocks 1,165 1,362 1,113 Equity securities: Floating rate preferred stocks 401 777 977 Convertible and non- redeemable preferred stocks 254 350 477 Common stocks 862 984 717 Short-term investments 9,355 8,327 8,265 Other 677 756 1,088 - ---------------------------------------------------------- Subtotal 56,129 57,636 57,097 Investment expenses (4,363) (3,974) (3,504) - ---------------------------------------------------------- Net investment income $51,766 $53,662 $53,593 - ----------------------------------------------------------
Investments carried at their fair value of $235.9 million and $205.5 million at December 31, 2000 and 1999, respectively, were on deposit with regulatory authorities in compliance with insurance company regulations. TheZenith 53 NOTE 3 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. For financial instruments not discussed below, the carrying amount is a reasonable estimate of the fair value.
- ----------------------------------------------------------------------- 2000 1999 December 31, ------------------- ------------------- (Dollars in Carrying Fair Carrying Fair thousands) Note amount value amount value - ----------------------------------------------------------------------- Assets: Investments: Trading securities 2 $ 2,972 $ 2,972 $ 2,955 $ 2,955 Other investments 2 849,762 850,130 898,779 898,439 -------- -------- -------- -------- 852,734 853,102 901,734 901,394 Liabilities: Payable to banks and other notes payable 7 15,674 15,674 20,238 20,238 Senior notes payable 8 58,374 58,374 74,717 76,082 Redeemable securities 10 65,618 45,518 73,397 69,055 - -----------------------------------------------------------------------
Fair values of investments are further detailed in Note 2. The fair values for investments were supplied by the Merrill Lynch pricing service, with the exception of 44 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. NOTE 4 PROPERTIES AND EQUIPMENT Properties and equipment consist of the following:
- ------------------------------------------------------- December 31, (Dollars in thousands) 2000 1999 - ------------------------------------------------------- Land $ 9,650 $ 9,650 Buildings 31,751 31,103 Furniture, fixtures and equipment 46,688 45,430 - ------------------------------------------------------- Subtotal 88,089 86,183 Accumulated depreciation (38,262) (31,202) - ------------------------------------------------------- Total $49,827 $54,981 - -------------------------------------------------------
Depreciation expense amounted to $7.8 million, $9.9 million and $8.8 million in 2000, 1999 and 1998, respectively. NOTE 5 FEDERAL INCOME TAX The components of the (benefit) provision for tax on income are:
- ------------------------------------------------------- Years ended December 31, (Dollars in thousands) 2000 1999 1998 - ------------------------------------------------------- Current $(18,007) $29,488 $ 6,458 Deferred (6,509) (521) 3,277 - ------------------------------------------------------- Federal income tax (benefit) expense $(24,516) $28,967 $ 9,735 - -------------------------------------------------------
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:
- ------------------------------------------------------- Years ended December 31, (Dollars in thousands) 2000 1999 1998 - ------------------------------------------------------- Statutory federal income tax (benefit) expense $(25,308) $29,074 $10,092 Increase (reduction) in tax: Dividend received deduction and tax- exempt interest (596) (765) (1,062) Other 1,388 658 705 - ------------------------------------------------------- Federal income tax (benefit) expense $(24,516) $28,967 $ 9,735 - -------------------------------------------------------
54 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:
- --------------------------------------------------------------------------- 2000 1999 Years ended December 31, Deferred Tax Deferred Tax (Dollars in thousands) Assets Liabilities Assets Liabilities - --------------------------------------------------------------------------- Investments $ 12,701 $10,768 Deferred policy acquisition costs $ 3,609 $ 2,762 Intangible assets 2,199 3,133 Properties and equipment 3,742 5,658 Property-casualty loss reserve discount 26,501 27,536 Limitation on deduction for unearned premiums 4,583 3,782 Policyholders' dividends accrued 971 1,181 Deferred income on retroactive reinsurance 5,131 8,050 Other 1,686 6,900 2,508 7,671 - --------------------------------------------------------------------------- 51,573 16,450 53,825 19,224 - --------------------------------------------------------------------------- Net deferred tax asset $ 35,123 $34,601 - ---------------------------------------------------------------------------
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, recovery of federal income taxes paid within the statutory carryback period or anticipated future taxable income, including investment income. 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 6 LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES The following table represents a reconciliation of changes in liabilities for unpaid loss and loss adjustment expenses:
- --------------------------------------------------------------- Years ended December 31, (Dollars in thousands) 2000 1999 1998 - --------------------------------------------------------------- Beginning of year, net of reinsurance recoverable $ 605,250 $ 708,684 $ 525,601 Acquisition of RISCORP as of April 1, 1998 242,760 Sale of CalFarm as of March 31, 1999 (109,150) Incurred claims: Current year 306,082 315,348 394,257 Prior years 30,880 44,824 (11,367) - --------------------------------------------------------------- Total incurred claims 336,962 360,172 382,890 - --------------------------------------------------------------- Payments: Current year (72,072) (83,437) (176,678) Prior years (235,968) (271,019) (265,889) - --------------------------------------------------------------- Total payments (308,040) (354,456) (442,567) - --------------------------------------------------------------- End of year, net of reinsurance 634,172 605,250 708,684 Receivable from reinsurers and state trust funds for paid and unpaid losses 243,711 275,679 288,963 - --------------------------------------------------------------- End of year $ 877,883 $ 880,929 $ 997,647 - ---------------------------------------------------------------
NOTE 7 PAYABLE TO BANKS At December 31, 2000, 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, 2000. Under these agreements, certain restrictive covenants apply including the maintenance of certain financial ratios. The Real Estate Operations maintain certain bank credit facilities to provide financing for development and construction of single-family residences for sale. At December 31, 2000, these loans bear interest at the rates of prime plus 0.75% or prime plus 1.0% and mature between June 2001 and April TheZenith 55 2002. Each agreement pertains to a separate residential housing project and the maximum credit available was $29.7 million and $27.1 million at December 31, 2000 and 1999, 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, 2000 and 1999, $15.7 million and $19.1 million, respectively, was outstanding under these facilities. Zenith National also finances the land acquisitions of its Real Estate Operations through inter-company loans. NOTE 8 SENIOR NOTES PAYABLE Zenith National had $58.5 million and $75.0 million of the $75.0 million issued of its 9% Senior Notes due 2002 (the "9% Notes") at December 31, 2000 and 1999, respectively (see Note 11). 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 the years ended December 31, 2000, 1999 and 1998, $5.8 million, $6.9 million and $6.9 million, respectively, 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. NOTE 9 INTEREST INCURRED Interest incurred on borrowings was as follows:
- --------------------------------------------------------- Years ended December 31, (Dollars in thousands) 2000 1999 1998 - --------------------------------------------------------- Interest capitalized for Real Estate Operations $ 8,364 $ 7,048 $ 4,922 Interest expense not related to Real Estate Operations 5,640 8,218 5,784 - --------------------------------------------------------- Total interest incurred $14,004 $15,266 $10,706 - ---------------------------------------------------------
NOTE 10 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 Subordinated Debentures 56 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. 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 therefor. Zenith National's guarantee of the Capital Securities, as well as the Subordinated Debentures, are subordinated to all other indebtedness of Zenith National. At December 31, 2000 and 1999, $67.0 million and $75.0 million, respectively, was outstanding (see Note 11). 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, 2000, 1999 and 1998, $5.9 million, $6.5 million and $2.7 million, respectively, of interest, issue costs and discount were expensed. NOTE 11 EXTRAORDINARY ITEM--GAIN ON EXTINGUISHMENT OF DEBT In 2000, Zenith National paid $22.8 million to repurchase $16.5 million aggregate principal amount of the outstanding 9% Notes and $8.0 million aggregate liquidation amount of the outstanding 8.55% Capital Securities. The repurchases resulted in an extraordinary gain before tax of $1.5 million. Zenith National used its available cash balances to fund these purchases. NOTE 12 REINSURANCE Reinsurance transactions reflected in the financial statements were as follows:
- --------------------------------------------------------- Years ended December 31, (Dollars in thousands) 2000 1999 1998 - --------------------------------------------------------- Direct premiums earned $307,514 $345,085 $545,573 Assumed premiums earned 41,848 40,667 38,769 Ceded premiums earned (10,610) (16,349) (54,487) - --------------------------------------------------------- Net premiums earned $338,752 $369,403 $529,855 - --------------------------------------------------------- Ceded loss and loss adjustment expenses incurred $ 8,186 $ 58,948 $ 26,456 - ---------------------------------------------------------
Zenith Insurance (in its Workers' Compensation Operations) maintains excess of loss and catastrophe reinsurance protection, which varies based on the type of coverage, as follows: excess of loss reinsurance per occurrence in excess of $0.6 million and catastrophe reinsurance coverage against aggregate losses per event up to $100.0 million. NOTE 13 SALE OF CALFARM INSURANCE COMPANY Effective March 31, 1999, Zenith Insurance completed the sale 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. TheZenith 57 The following table summarizes the assets and liabilities of CalFarm at March 31, 1999:
- ----------------------------------------------- (Dollars in thousands) March 31, 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 - -----------------------------------------------
NOTE 14 RISCORP ACQUISITION AND THE RISCORP PURCHASE 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 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 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. 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. 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 Purchase 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 resulted primarily from 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. Zenith Insurance purchased reinsurance protection relating to adverse development of the unpaid loss and loss adjustment expense reserves acquired from RISCORP. Such reinsurance allows Zenith Insurance to recover up to $50.0 million in excess of $182.0 million for net unpaid losses and allocated loss adjustment expenses acquired from RISCORP. In the third quarter of 1999, Zenith Insurance recorded an increase in the amount recoverable to $50.0 58 million and a benefit of $9.0 million ($5.9 million after tax) associated with such reinsurance. The RISCORP Purchase Adjustment, net of the benefit of reinsurance protection and the recovery of $6.0 million pursuant to the "settlement agreement" (see "RISCORP Litigation" in Note 15), in the aggregate, reduced income by $50.0 million ($32.5 million after tax, or $1.89 per share) in 1999. The remaining deferred benefit associated with the reinsurance relating to the RISCORP reserves before tax was $14.7 million and $23.0 million at December 31, 2000 and 1999, respectively. NOTE 15 COMMITMENTS AND CONTINGENT LIABILITIES Zenith has office space leases, equipment leases and automobile leases expiring through 2005. The minimum rentals on these operating leases as of December 31, 2000 were as follows:
- ------------------------------------------------------ Equipment (Dollars in thousands) and Years auto fleet Offices Total - ------------------------------------------------------ 2001 $ 925 $3,317 $ 4,242 2002 620 2,232 2,852 2003 292 1,054 1,346 2004 157 603 760 2005 and thereafter 60 469 529 - ------------------------------------------------------ Total $2,054 $7,675 $ 9,729 - ------------------------------------------------------
Rental expenses for 2000, 1999 and 1998 amounted to $5.2 million, $5.7 million and $5.8 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. 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 agreed, among other things, 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. Zenith Insurance and RISCORP also agreed that Zenith Insurance would receive $6.0 million from an escrow account established pursuant to the Asset Purchase Agreement, and RISCORP would receive the balance of the escrow account. 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 informed Zenith Insurance and RISCORP that it would not consider the issue raised by RISCORP because the issue had not previously been raised as a dispute pursuant to the procedures set forth in the 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. On October 9, 2000, RISCORP filed a First Amended Complaint in the Superior Court of TheZenith 59 Fulton County. RISCORP's First Amended Complaint alleges causes of action for breach of contract against the Neutral Auditor and Neutral Actuary and, in conjunction, seeks a declaration that could have the effect of requiring Zenith to pay either $18.1 million (and related charges) or $5.9 million. RISCORP also has asserted causes of action for professional negligence solely against the Neutral Auditor and Neutral Actuary in which it seeks damages of either $18.1 million (and related charges) or $5.9 million. Zenith is unable to predict the outcome of this litigation. Contingencies Surrounding Recoverability of Special Disability Trust Fund Receivable 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 Insurance 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, 2000 and 1999, the receivable from the Fund was $31.1 million and $37.0 million, respectively, related to the pre-January 1, 1998 claims. NOTE 16 COMMON STOCK Under employee non-qualified stock option plans adopted by the Board of Directors and Stockholders of Zenith National 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 the options outstanding at December 31, 2000 and 1999 expire five years after the date of the 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 2000, 1999 and 1998 consistent with the provisions of SFAS No. 123, Zenith's net (loss) income and per share amounts would have been reduced to the pro-forma amounts indicated as follows:
- -------------------------------------------------------------------------------------------------------------------- 2000 1999 1998 -------------------- ------------------ ------------------ Years ended December 31, As Pro- As Pro- As Pro- (Dollars in thousands, except per share data) Reported forma Reported forma Reported forma - -------------------------------------------------------------------------------------------------------------------- Net (loss) income $(46,800) $(48,300) $54,100 $52,600 $19,100 $17,700 Net (loss) income per common share -- basic (2.72) (2.80) 3.15 3.06 1.12 1.04 -- diluted (2.71) (2.80) 3.15 3.06 1.11 1.03 - --------------------------------------------------------------------------------------------------------------------
The pro-forma effect on net income for 2000, 1999 and 1998 is not representative of the pro-forma effect on net income in future years because the presented disclosure does 60 not take into consideration pro-forma compensation expense related to grants made prior to 1995. 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:
- ----------------------------------------------------------------------------------------------------------------- 2000 Grants 1999 Grants 1998 Grants - ----------------------------------------------------------------------------------------------------------------- Risk-free interest rates 5.45% - 6.85% 5.36% - 6.30% 4.52% - 5.66% Dividend yields 3.55% 4.34% - 5.08% 3.75% Volatility factors 20.87% - 22.97% 20.30% - 20.56% 19.83% Weighted average expected life (five-year term options) 4.5 yrs. 4.5 yrs. 4.5 yrs. Weighted average fair value per share $4.44 $3.49 $4.40 - -----------------------------------------------------------------------------------------------------------------
Additional information with respect to stock options was as follows:
- ---------------------------------------------------------- Weighted average Number exercise (Shares in thousands) of shares price - ---------------------------------------------------------- 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 Granted 537 21.15 Exercised (295) 24.54 Expired or cancelled (209) 25.76 ----- Outstanding at December 31, 2000 2,148 24.03 - ----------------------------------------------------------
Certain information on outstanding options at December 31, 2000 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 4.8 $23.63 19.16 - 29.47 1,148 3.1 24.39 - ----------------------------------------------------------------
Options exercisable at December 31, 2000, 1999 and 1998 were 1,205,000, 1,127,000 and 877,000, respectively. Certain information on exercisable options at December 31, 2000 was as follows:
- -------------------------------------------------------- Exercisable options weighted Range of exercise prices Number average exercise (Shares in thousands) exercisable price - -------------------------------------------------------- $23.63 800 $23.63 19.16 - 29.47 405 24.30 - --------------------------------------------------------
From time to time, Zenith may make repurchases of its outstanding common shares or outstanding debt. At December 31, 2000, Zenith National was authorized to repurchase up to 938,000 shares of its common stock at prevailing market prices 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. TheZenith 61 NOTE 17 DIVIDEND RESTRICTIONS The California and Texas Insurance Holding Company System Regulatory Acts limit the ability of Zenith Insurance to pay dividends to Zenith National, and of the insurance subsidiaries of Zenith Insurance 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 2000, Zenith Insurance paid $10.0 million of dividends to Zenith National. 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. Stockholder's equity of the P&C Operations, in accordance with GAAP, amounted to $315.0 million as of December 31, 2000, of which $26.2 million can be paid in 2001 to Zenith National in dividends without prior approval. NOTE 18 STATUTORY FINANCIAL DATA Capital stock and surplus and net (loss) income of the P&C Operations on a statutory basis, as reported to regulatory authorities, were as follows:
- ------------------------------------------------------------------ Years ended December 31, (Dollars in thousands) 2000 1999 1998 - ------------------------------------------------------------------ Capital stock and surplus $262,315 $297,969 $345,041 Net (loss) income (60,737) 68,507 21,959 - ------------------------------------------------------------------
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. NOTE 19 EARNINGS AND DIVIDENDS PER SHARE The following table sets forth the computation of basic and diluted net (loss) income per common share.
- ---------------------------------------------------------- Years Ended December 31, (Dollars in thousands, except per share data) 2000 1999 1998 - ---------------------------------------------------------- (A) Net (loss) income $(46,800) $54,100 $19,100 - ---------------------------------------------------------- (B) Weighted average outstanding shares during the period 17,212 17,161 17,035 Additional common shares issuable under employee stock option plans using the treasury stock method 57 11 123 - ---------------------------------------------------------- (C) Weighted average number of common shares outstanding assuming exercise of stock options 17,269 17,172 17,158 - ---------------------------------------------------------- Net (loss) income per common share: (A)/(B) -- basic $ (2.72) $ 3.15 $ 1.12 (A)/(C) -- diluted (2.71) 3.15 1.11 - ---------------------------------------------------------- Dividends per common share $ 1.00 $ 1.00 $ 1.00 - ----------------------------------------------------------
Options to purchase 589,000 shares and 2,053,000 shares, respectively, of common stock at an average price of $27.64 and $24.90 per share, respectively, were outstanding as of December 31, 2000 and 1999 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. 62 NOTE 20 SEGMENT INFORMATION Zenith classifies its business into the following segments: Workers' Compensation, Reinsurance, Other Property-Casualty (through March 31, 1999, the date of the sale of CalFarm), Real Estate, Investment and Parent. Segments are designated based on the types of products and services provided. Workers' Compensation represents insurance coverage for the statutorily prescribed benefits that employers are required to pay to their employees injured in the course of employment. Reinsurance principally consists of world-wide, assumed reinsurance of property losses from catastrophes and large property risks. Other Property-Casualty, which was operated by CalFarm and was sold effective March 31, 1999, represented multiple product line direct insurance other than workers' compensation primarily in California. The Real Estate Operations develop land and primarily construct single-family residences in Las Vegas, Nevada. Investment operations provide income and realized gains on investments, primarily from debt securities. The Parent operations represent Zenith National, a holding company which owns, directly or indirectly, all of the capital stock of the P&C Operations, non-insurance companies and securities. 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. Information as to the operations of the segments is set forth below:
- ------------------------------------------------------------------------------------------------------------------------------ Other Workers' Property- Real (Dollars in thousands) Compensation Reinsurance Casualty(1) Estate Investment Parent Total - ------------------------------------------------------------------------------------------------------------------------------ Year Ended December 31, 2000 - ------------------------------------------------------------------------------------------------------------------------------ Revenues: Premiums earned $ 300,833 $37,919 $ 338,752 Net investment income $ 51,766 51,766 Realized losses on investments (15,467) (15,467) Real estate sales $84,518 84,518 - ------------------------------------------------------------------------------------------------------------------------------ Total revenues $ 300,833 $37,919 $84,518 $ 36,299 $ 459,569 - ------------------------------------------------------------------------------------------------------------------------------ Interest expense $ (5,640) $ (5,640) - ------------------------------------------------------------------------------------------------------------------------------ (Loss) income before tax and extraordinary item $ (87,854) $(14,536) $ 5,464 $ 36,299 $(11,682) $ (72,309) Federal income tax (benefit) expense (29,558) (4,891) 1,912 12,110 (4,089) (24,516) - ------------------------------------------------------------------------------------------------------------------------------ (Loss) income before extraordinary item (58,296) (9,645) 3,552 24,189 (7,593) (47,793) Extraordinary item(2) 993 993 - ------------------------------------------------------------------------------------------------------------------------------ Net (loss) income $ (58,296) $(9,645) $ 3,552 $ 24,189 $ (6,600) $ (46,800) - ------------------------------------------------------------------------------------------------------------------------------ Combined ratios 129.2% 138.3% 130.2% - ------------------------------------------------------------------------------------------------------------------------------ Total assets $ 500,167 $30,733 $59,133 $ 880,643 $ 1,514 $1,472,190 - ------------------------------------------------------------------------------------------------------------------------------ (1) CalFarm was sold effective March 31, 1999 (2) Gain on extinguishment of debt (net of income tax)
TheZenith 63
- ------------------------------------------------------------------------------------------------------------------------------ Other Workers' Property- Real (Dollars in thousands) Compensation Reinsurance Casualty(1) Estate Investment Parent Total - ------------------------------------------------------------------------------------------------------------------------------ Year Ended December 31, 1999 - ------------------------------------------------------------------------------------------------------------------------------ Revenues: Premiums earned $ 278,854 $36,441 $ 54,108 $ 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 $36,441 $ 54,108 $58,670 $ 61,344 $ 492,108 - ------------------------------------------------------------------------------------------------------------------------------ Interest expense $ (8,218) $ (8,218) - ------------------------------------------------------------------------------------------------------------------------------ (Loss) income before tax $(122,543) $(7,324) $ (22) $ 3,649 $ 61,344 $(12,372) $ (77,268) Gain on sale of CalFarm before tax 160,335 160,335 Federal income tax (benefit) expense (42,199) (2,494) 55,993 1,277 20,719 (4,329) 28,967 - ------------------------------------------------------------------------------------------------------------------------------ Net (loss) income $ (80,344) $(4,830) $104,320 $ 2,372 $ 40,625 $ (8,043) $ 54,100 - ------------------------------------------------------------------------------------------------------------------------------ Combined ratios 143.9% 120.1% 100.0% 135.2% - ------------------------------------------------------------------------------------------------------------------------------ Total assets $ 520,544 $27,701 $85,731 $ 929,280 $ 10,530 $1,573,786 - ------------------------------------------------------------------------------------------------------------------------------ Year Ended December 31, 1998 - ------------------------------------------------------------------------------------------------------------------------------ Revenues: Premiums earned $ 278,660 $29,150 $222,045 $ 529,855 Net investment income $ 53,593 53,593 Realized gains on investments 11,602 11,602 Real estate sales $37,737 37,737 Service fee income 3,992 3,992 - ------------------------------------------------------------------------------------------------------------------------------ Total revenues $ 282,652 $29,150 $222,045 $37,737 $ 65,195 $ 636,779 - ------------------------------------------------------------------------------------------------------------------------------ Interest expense $ (5,928) $ (5,928) - ------------------------------------------------------------------------------------------------------------------------------ (Loss) income before tax $ (42,638) $10,268 $ 4,410 $ 1,363 $ 65,195 $ (9,763) $ 28,835 Federal income tax (benefit) expense (14,003) 3,322 1,426 495 21,747 (3,252) 9,735 - ------------------------------------------------------------------------------------------------------------------------------ Net (loss) income $ (28,635) $ 6,946 $ 2,984 $ 868 $ 43,448 $ (6,511) $ 19,100 - ------------------------------------------------------------------------------------------------------------------------------ Combined ratios 115.3% 64.8% 98.0% 105.3% - ------------------------------------------------------------------------------------------------------------------------------
NOTE 21 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. 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, 2000, 1999 and 1998, Zenith contributed $0.8 million, $1.2 million and $1.1 million, respectively. Zenith also offers a stock purchase plan, under which all employees are able to purchase shares of Zenith National common stock at market value. Zenith matches 25% of all employee purchases. For the years ended December 31, 2000, 1999 and 1998, Zenith contributed $0.3 million, $0.3 million and $0.4 million, respectively. NOTE 22 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, 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. At December 31, 64 2000, Fairfax, through its subsidiaries, owned 6,816,000 shares of common stock of Zenith National. 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:
- ---------------------------------------------------------- Years ended December 31, (Dollars in thousands) 2000 1999 - ---------------------------------------------------------- Assumed Reinsurance: Premiums earned $ 177 Other underwriting and operating expenses 277 Premiums receivable 8 Unpaid loss and loss adjustment expenses $ 118 220 Ceded Reinsurance: Receivable from reinsurers on paid and unpaid losses 4,480 2,407 Unearned premiums 37 - ----------------------------------------------------------
At December 31, 2000 and 1999, Zenith owned $12.8 million and $5.1 million, respectively, at fair value of securities issued by Fairfax. In addition, at December 31, 2000 and 1999, Zenith owned $3.0 million and $4.5 million, respectively, at fair value of securities issued by TIG Capital Trust 1, a subsidiary of Fairfax. NOTE 23 QUARTERLY FINANCIAL DATA (UNAUDITED)
- -------------------------------------------------------------------- 2000 Quarter Ended ----------------------------------------- (Dollars in thousands, March June September December except per share data) 31 30 30 31 - -------------------------------------------------------------------- Premiums earned $77,139 $ 78,306 $ 87,692 $ 95,615 Net investment income 13,561 13,000 12,861 12,344 Realized gains (losses) on investments 3,255 (2,589) (10,913) (5,220) Real estate sales 16,434 22,099 23,278 22,707 Extraordinary item(1) 973 20 Net loss (4,400) (19,600) (12,200) (10,600) Net loss per common share -- basic (0.26) (1.14) (0.71) (0.61) -- diluted (0.26) (1.14) (0.71) (0.61) - --------------------------------------------------------------------
(1) Gain on extinguishment of debt after tax (see Note 11)
- ------------------------------------------------------------------- 1999 Quarter Ended ------------------------------------------ (Dollars in thousands, March June September December except per share 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 (loss) per common share -- basic 6.09 (0.20) (2.17) (0.56) -- diluted 6.09 (0.20) (2.17) (0.56) - -------------------------------------------------------------------
The net loss for the year ended December 31, 2000 includes catastrophe losses of $14.7 million after tax, or $0.85 per share, of which $3.6 million, $8.5 million, $1.3 million and $1.4 million were incurred in the first, second, third and fourth quarters, respectively. Net income for the year ended December 31, 1999 includes 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. During the quarter ended December 31, 2000, there were write downs for "other than temporary" declines in market value of investments (see Note 2) of $4.7 million after tax. NOTE 24 COMMON STOCK MARKET PRICES (UNAUDITED) The following table shows the high and low common stock prices during each quarter for the past two years.
- -------------------------------------------------------------------------------- 2000 1999 --------------------------- --------------------------- Quarter ended High Low High Low - -------------------------------------------------------------------------------- March 31 $ 22 3/16 $ 18 3/4 $ 26 $ 20 5/16 June 30 24 15/16 20 1/2 26 11/16 22 1/4 September 30 23 7/8 20 13/16 26 21 1/8 December 31 29 3/4 20 22 13/16 19 1/4 - --------------------------------------------------------------------------------
As of March 7, 2001, there were 267 registered holders of record of Zenith National common stock. 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, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. 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 of America, 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 our opinion. PricewaterhouseCoopers LLP Los Angeles, California February 7, 2001 66 CORPORATE DIRECTORY TheZenith 67 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 Leon E. Panetta Founder and Director, The Leon and Sylvia Panetta Institute for Public Policy William S. Sessions Attorney, Holland & Knight LLP and Security Consultant Harvey L. Silbert Attorney, Of Counsel, Christensen, Miller, Fink, Jacobs, Glazer, Weil & Shapiro LLP Gerald Tsai, Jr. Management of Private Investments Michael Wm. Zavis Attorney, Co-Managing Partner, Katten, Muchin & Zavis Stanley R. Zax Chairman of the Board and President Executive Officers Stanley R. Zax Chairman of the Board and President Jack D. Miller Executive Vice President Robert E. Meyer Senior Vice President William J. Owen Senior Vice President & Chief Financial Officer John J. Tickner Senior Vice President and Secretary Officer Hyman J. Lee Jr. Vice President Transfer Agent- Common Stock Mellon Investor Services LLC Los Angeles, CA www.mellon-investor.com Transfer Agent- 9% Senior Notes and 8.55% Capital Securities Wells Fargo Corporate Trust Services Wells Fargo Bank Minnesota, N.A. Minneapolis, MN Corporate Headquarters 21255 Califa Street Woodland Hills, CA 91367 (818) 713-1000 www.thezenith.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, 2000 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 68 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 and Treasurer John J. Tickner Senior Vice President, General Counsel and Secretary Stephen J. Albers Senior Vice President James T. Braun Senior Vice President Ron R. Cordova Senior Vice President Dan M. Hair Senior Vice President John C. Hasbrouck Senior Vice President Robert L. Hernandez Senior Vice President Westley M. Heyward Senior Vice President Fred A. Hunt Senior Vice President Corey A. Ingber Senior Vice President Michael W. Jacobson Senior Vice President Edward G. Krisak Senior Vice President Robert E. Meyer Senior Vice President and Actuary Stephen M. Pratt Senior Vice President William J. Saake Senior Vice President Keith E. Trotman Senior Vice President Chris L. Uselton Senior Vice President Kari L. Van Gundy Senior Vice President Glen R. Zepnick Senior Vice President Bryan A. Anderson Vice President Jeffrey J. Beaudoin Vice President Everett M. Brookhart Vice President Richard V. Caligiuri Vice President Suzanne M. Chapan Vice President Duane H. Chernow Vice President Douglas A. Claman Vice President Ronald W. Crabtree 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 Eden C. Feder Vice President F. Stephen Fetchet Vice President James C. Guidos Vice President Diane H. Heidenreich Vice President and Assistant General Counsel Carolyn N. Hinson Vice President David G. Hoppen Vice President Mark M. Jansen 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 Michael R. McFadden Vice President Colin S. Mitchell Vice President David A. O'Connor Vice President Michael J. Paladino Vice President Stephen D. Petrula Vice President Alan I. Steinhardt Vice President John A. Swift Vice President Jesse J. Thomas Vice President John H. Weber Vice President Norman C. Winters Vice President TheZenith 69 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 San Francisco, CA 425 California Street Suite 1010 San Francisco, CA 94104 415/646-0230 Pleasanton, CA 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 N. Hotel Circle Drive Suite 400 San Diego, CA 92108 619/299-6252 Salt Lake City, UT 3 Triad Center 345 W. North Temple Suite 175 Salt Lake City, UT 84180 801/741-4900 Austin, TX 1101 Capital of Texas Hwy South Bldg. J Austin, TX 78746 512/306-1700 Dallas, TX 17304 Preston Rd. 8th floor Dallas, TX 75252 972/701-5700 Little Rock, AR 900 S. Shackleford Rd. Suite 300 Little Rock, AR 72211 877/200-8600 Harrisburg, PA 4400 Deer Path Way Suite 200 Harrisburg, PA 17110 717/221-7000 Springfield, IL 2105 W. White Oaks Drive Springfield, IL 62704 217/726-2900 Sarasota, FL 1390 Main St. Sarasota, FL 34236 941/906-2000 Orlando, FL 3504 Lake Lynda Drive Ste 400 Orlando, FL 32817 407/206-8200 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 www.permabilthomes.com 70 -----END PRIVACY-ENHANCED MESSAGE-----