-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, rh6iM7qa+hKoSz8fO28Opz44dv8q9lI0/Y40l363dqD2TS2ORl/RBJRreOS+hbUo wDD6DNWf1UpW2J2wPQ2zcQ== 0000912057-94-001118.txt : 19940330 0000912057-94-001118.hdr.sgml : 19940330 ACCESSION NUMBER: 0000912057-94-001118 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19931231 FILED AS OF DATE: 19940329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ZENITH NATIONAL INSURANCE CORP CENTRAL INDEX KEY: 0000109261 STANDARD INDUSTRIAL CLASSIFICATION: 6331 IRS NUMBER: 952702776 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 34 SEC FILE NUMBER: 001-09627 FILM NUMBER: 94518718 BUSINESS ADDRESS: STREET 1: 21255 CALIFA ST CITY: WOODLAND HILLS STATE: CA ZIP: 91367 BUSINESS PHONE: 8187131000 10-K 1 10-K [LOGO] - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Form 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1993 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES 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 (TITLE OF CLASS)
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None (TITLE OF CLASS) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] The aggregate market value of the voting stock of the registrant held by non-affiliates of the registrant on March 25, 1994 was approximately $238,222,000 (based on the closing sale price of such stock on such date). At March 25, 1994, 18,866,000 shares of Common Stock were outstanding, net of 5,069,000 shares of treasury stock. DOCUMENTS INCORPORATED BY REFERENCE (1) Portions of the Annual Report to Stockholders for fiscal year ended December 31, 1993 -- Part I and Part II. (2) Portions of the Proxy Statement in connection with the 1994 Annual Meeting of Stockholders -- Part III. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART I ITEM 1. BUSINESS GENERAL Zenith National Insurance Corp. ("Zenith"), a Delaware corporation incorporated in 1971, is a holding company. Zenith is engaged through its directly and indirectly wholly-owned insurance subsidiaries, Zenith Insurance Company ("Zenith Insurance"), CalFarm Insurance Company ("CalFarm Insurance"), ZNAT Insurance Company ("ZNAT Insurance"), Zenith Star Insurance Company ("Zenith Star") and CalFarm Life Insurance Company ("CalFarm Life"), in the business of writing workers' compensation insurance primarily in California; reinsurance; annuities; health and life insurance coverages; and auto, homeowners, farmowners and other coverages primarily in the rural areas of California. In 1993, Zenith commenced real estate operations, developing private residences for sale in Las Vegas, Nevada, through its wholly owned subsidiary, Perma-Bilt, a Nevada Corporation ("Perma-Bilt"). The 1993 edition of Best's Key Rating Guide ("Best's") gives Zenith Insurance, CalFarm Insurance and ZNAT Insurance, collectively, and CalFarm Life ratings of A+ (superior). Standard & Poor's Corporation ("S&P") has rated the claims-paying ability of Zenith Insurance, CalFarm Insurance and ZNAT Insurance AA-(excellent) and the solvency of CalFarm Life BBBq (above average). Best's ratings and S&P's ratings of claims-paying ability and solvency are based upon factors of concern to policyholders and insurance agents and are not directed toward the protection of investors. At December 31, 1993, Zenith and its subsidiaries had approximately 1,600 employees. The principal executive offices of Zenith are located at 21255 Califa Street, Woodland Hills, California 91367-5021, telephone (818) 713-1000. GLOSSARY OF SELECTED INSURANCE TERMS The following terms when used herein have the following meanings: Assume To receive from a ceding company all or a portion of a risk in consideration of receipt of a premium. Cede To transfer to a reinsurer all or a portion of a risk in consideration of payment of a premium. Combined ratio The sum of underwriting expenses, net incurred losses, loss adjustment expenses and policyholders' dividends, expressed as a percentage of net premiums earned. Development The amount by which losses, measured subsequently by reference to payments and additional estimates, differ from those originally reported for a period. Development is favorable when losses ultimately settle for less than levels at which they were reserved or subsequent estimates indicate a basis for reserve decreases on open claims. Development is unfavorable when losses ultimately settle for more than levels at which they were reserved or subsequent estimates indicate a basis for reserve increases on open claims. Excess of loss reinsurance A form of reinsurance in which the reinsurer pays all or a specified percentage of a loss caused by a particular occurrence or event in excess of a fixed amount and up to a stipulated limit. Incurred but not reported Claims relating to insured events that have occurred but claims have not yet been reported to the insurer or reinsurer.
1 Loss adjustment expenses The expenses of investigating and settling claims, including legal and other fees, and general expenses of administering the claims adjustment process. Net premiums earned The portion of net premiums written applicable to the expired period of policies. Participating policy A policy upon which dividends may be paid after expiration. Policyholders' surplus or The amount remaining after all liabilities are subtracted statutory capital 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 (stated without reduction for reinsurance ceded after 1992). Retrocession A reinsurance of reinsurance assumed. Statutory accounting Accounting principles prescribed or permitted by the practices California Department of Insurance. In general, statutory accounting practices address policyholder protection and solvency and are more conservative in presentation of earnings, surplus and assets than generally accepted accounting principles. Treaty A contract of reinsurance. Underwriting The process whereby an insurer reviews applications submitted for insurance coverage and determines whether it will accept all or part, and at what premium, of the coverage being requested. Underwriting expenses The aggregate of policy acquisition costs and the portion of administrative, general and other expenses attributable to the underwriting process as they are accrued and expensed.
DESCRIPTION OF BUSINESS SEGMENTS Zenith and its subsidiaries conduct business through a property and casualty segment, health and life segment and a parent or holding company segment as described in Note 15 -- "Segment Information" on pages 67 and 68 of the 1993 Annual Report to Stockholders, which note is hereby incorporated by reference. The earnings of Zenith's property and casualty operations and its health and life business are supplemented by the generation of investment income discussed under "Investments." PROPERTY AND CASUALTY -- WORKERS' COMPENSATION INSURANCE Workers' compensation insurance provides coverage for the statutorily prescribed benefits that employers are required to pay to their employees injured in the course of employment. The standard workers' compensation policy issued by Zenith Insurance 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 with the nature and severity of the injury or disease and the wages, occupation and age of the employee. Zenith Insurance writes workers' compensation insurance which represents 60% of consolidated property and casualty premium earned for 1993 2 and is the largest line of Zenith's property and casualty business. In 1993, 96.6% of Zenith's workers' compensation written premium was written in California, Zenith's principal workers' compensation insurance market. Premiums for workers' compensation insurance are a function of the applicable minimum premium rate, which includes the insured employer's experience modification factor (where applicable), surcharges (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 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. In California, minimum premium rates for workers' compensation insurance are established by the California Insurance Commissioner (the "Commissioner") and through December 31, 1994, competition on the basis of rates lower than the approved minimum is not permitted. Such rates vary with the approximately 450 categories of employment and among different employers, depending upon actual loss experience, within any one employment category. Adverse loss experience, which persisted until the latter part of 1992, in conjunction with minimum rates that were inadequate, particularly in the Los Angeles area, served to create a market for policies written at rates in excess of minimum rates. Zenith wrote $54,945,000, $42,971,000 and $15,048,000 of surcharged business in 1993, 1992 and 1991, respectively. Favorable loss experience trends in 1993 have increased the competition for such business. Zenith Insurance issues participating policies to qualifying policyholders. Policyholder dividends serve a twofold purpose: an economic incentive to employers for safe operations, and an important step in ensuring equitable pricing. Dividends may not legally be guaranteed and are paid after policy expiration. The payment of participating dividends to policyholders is limited by law to accumulated earned surplus from California workers' compensation premiums. Zenith Insurance and its subsidiaries have approximately $185,000,000 of such accumulated earned surplus as of December 31, 1993. In July, 1993, certain significant workers' compensation legislation was signed into law in California. Among other things, the new laws affect the California workers' compensation industry as follows: Rating -- Effective January 1, 1995, the minimum rate law will be abolished and companies will charge their own, actuarially determined rates. Minimum rates were reduced by 7% from those in effect on July 16, 1993. Benefits -- Maximum weekly benefits for temporary disability will be increased on July 1, 1994, July 1, 1995 and July 1, 1996, from the current level of $336 to $490 on July 1, 1996. Maximum weekly benefits for permanent disability will be subject to increases on these same dates. Permanent partial disability weekly benefits will increase from a maximum of $148 to $230 with the greatest increases in cases where disability ratings exceed 70%. Death benefits will be increased on July 1, 1994 and again on July 1, 1996. At July 1, 1996, death benefits will amount to $125,000, $145,000 and $160,000 for a worker with one, two and three total dependents, respectively. Cost containment -- Major changes will provide a tougher standard for compensability of stress claims, limit the number of medical-legal evaluations, limit post termination claims, provide certain managed care flexibility, limit medical self-referrals where there is a financial interest and provide limits on vocational rehabilitation costs. Management is unable to predict the impact that the above legislative changes will have on its business. Historically, analysis and estimates of the impact of legislative changes have been difficult to predict with any reasonable degree of accuracy. 3 In 1992, Zenith opened an office in Austin, Texas and commenced writing workers' compensation business in the state of Texas. Premiums written in Texas were $10,174,000 and $3,925,000 in 1993 and 1992, respectively. Certain aspects of workers' compensation reform legislation enacted in Texas in 1992 have been challenged with respect to their constitutionality. The matter is currently before the Texas Supreme Court and the ultimate outcome is uncertain. PROPERTY AND CASUALTY -- REINSURANCE Zenith Insurance is selectively underwriting a book of assumed reinsurance. Reinsurance transactions, or contracts, come in a variety of forms, but the principal arrangements are either proportional in nature, in which the assuming company shares pro-rata in the premiums and losses of the cedant, or arrangements under which the assuming company pays losses in excess of a certain limit in return for a premium, usually determined as a percentage of the cedant's primary insurance premiums. Zenith operates its reinsurance activity as a participant in contracts or 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 widely from year to year. Zenith's current participation in the reinsurance market is limited principally to participation in the reinsurance of large individual property risks and property catastrophe reinsurance. Events in recent years have served to increase the premiums paid for such reinsurance and to increase the amount of such risk retained by insurers and reinsurers. These developments have created a market which management believes presents reasonable, acceptable opportunities to produce favorable underwriting results. However, Zenith's assumed reinsurance business is written with a view to limiting the company's exposure to losses from any one event to a maximum of approximately 5% of stockholders' equity. In the early years of Zenith Insurance's Reinsurance operations, property business accounted for approximately 20% of reinsurance premiums earned and, in 1993, property business accounted for approximately 79% of reinsurance premiums earned. PROPERTY AND CASUALTY -- OTHER, PRINCIPALLY AUTOMOBILE Zenith, through CalFarm Insurance, offers a comprehensive line of property and casualty insurance, including automobile, farmowners, commercial multiple peril packages and homeowners coverage. Automobile insurance includes coverage for automobile bodily injury, property damage and physical damage. Automobile bodily injury and property damage insurance provide coverage for third party liability, bodily injury and property damage arising from the ownership, maintenance or use of an automobile. Automobile physical damage coverage insures against physical loss of the insured's own vehicle. Farmowners and homeowners insurance includes coverage for direct physical damage to real and personal property, loss of personal property by theft and legal liability for injury to others and damage to property of others. Commercial multiple peril insures businesses against property damage and general liability. Automobile insurance (both commercial and private passenger) is the largest line of CalFarm Insurance's business, representing 16% of Zenith's property and casualty premiums earned in 1993. CalFarm Insurance insured approximately 25,000 private passenger automobiles and 69,000 commercial and farm vehicles in 1993. Farmowners business is the second largest line of CalFarm Insurance's business, representing approximately 9% of Zenith's property and casualty premiums earned in 1993. Zenith's Automobile and Other Property and Casualty operations are subject to the regulatory provisions of California Initiative Proposition 103 ("Proposition 103") which was approved by California voters in 1988. The principal effects of Proposition 103 on Zenith's Automobile and Other Property and Casualty business are as follows: rates must be approved by the Insurance Commissioner prior to use; rates on auto policies must be offered to "good drivers" (as defined) at a discount of at least 20% from rates otherwise charged and an insurer cannot refuse to sell a "good driver" policy to a qualified applicant; automobile insurance policies on the books as of November 9, 1988 and new and renewal policies written thereafter cannot be cancelled or non-renewed except for non-payment, fraud or material misrepresentation, or a substantial increase in 4 hazard; and automobile insurance rates must be based on the following factors in decreasing order of importance: driving record, number of miles driven, number of years of driving experience, and other factors which may be adopted by the Insurance Commissioner. In January 1993, Zenith announced that it had reached an agreement with the California Department of Insurance (the "Department") to resolve its Proposition 103 rollback refund contingency (see "Resolution of Contingencies Surrounding Proposition 103" in Note 9 on page 66 of Zenith's 1993 Annual Report to Stockholders, which note is hereby incorporated by reference). Under the agreement, Zenith's subsidiaries refunded to each holder of an affected policy issued or renewed between November 1988 and November 1989 an amount equal to approximately 9.5 percent of the premium paid plus interest. The net cost of the refund, after reinsurance, reduced income before taxes in 1992 by $16,078,000. As part of the agreement, the Department gave final approval to all of Zenith's rate applications on affected lines of business subsequent to the rollback period. Rate increases of 8.0% and 15.0%, respectively, on farmowners and homeowners policies were implemented effective July 1, 1993. HEALTH AND LIFE CalFarm Life offers a varied portfolio of life, health and annuity products, and is not directly impacted by Proposition 103. The portfolio includes a competitive line of Term Life, Universal Life and Interest Sensitive Life insurance, Group Health insurance, and Single and Flexible Premium Annuity products for both qualified and non-qualified markets. Less than 8% of CalFarm Life's life insurance is written on substandard risks. The significant terms of the life insurance products include credited interest rates (which are guaranteed for 12 months from the date of issue and have minimum guarantees ranging from 3% to 6%), mortality charges, and surrender (termination) charges which generally diminish over 15 years. CalFarm Life's interest sensitive life insurance products and annuity products contain features to minimize the effect of inflation and interest rate fluctuations. As a result, management does not believe the impact of inflation on these products will be material. In 1993, CalFarm Life continued its sales of tax sheltered annuity products, specifically, those designed for school teachers and administrators. Total annuity deposits of $56,764,000, $83,600,000, and $80,203,000 were collected for 1993, 1992 and 1991, respectively. Zenith's ability to profit from its annuity business depends upon its ability to manage the spread between the interest it earns on its investment portfolio and the interest credited to the annuity deposits; policy and premium persistency; the efficiency of operations; and the limiting of its risk of defaults on its investment portfolio. CalFarm Life's annuity products are primarily sold to school teachers in California and recent (and future) budgetary actions with respect to education, in addition to the weak California economy, may reduce annuity sales in the future. However, increased personal federal income tax rates may increase the desire to accumulate retirement income on a tax deferred basis. Health insurance is the largest line of insurance written by CalFarm Life, accounting for $41,370,000 or approximately 81% of its total premium income in 1993. Prior to July 1, 1993 health premiums were written under two group health insurance programs sponsored by the California Farm Bureau Federation (the "Farm Bureau"). Effective July 1, 1993, one of the Farm Bureau plans was discontinued by CalFarm Life. Insureds under this plan were offered membership in the remaining Farm Bureau-sponsored plan. Life insurance premium rates are based on pricing assumptions as to future mortality, investment yields, expenses, and persistency. Although a margin for profit is included, the actual profitability of the products can be significantly affected by the deviation of actual experience from the assumptions. The actual experience in recent years on investment yields has been more favorable than anticipated, while the experience on premium persistency on new business has been less favorable than anticipated; experience with respect to expenses and mortality rates have been in line with pricing assumptions. 5 Life insurance in force is a measure of the total commitment of CalFarm Life to pay benefits under the policies it has written that are currently in effect or, "in force." Changes in life insurance in force are summarized in the following table for all classes of insurance.
FOR THE YEARS ENDED DECEMBER 31 -------------------------------------- 1993 1992 1991 ---------- ---------- ---------- (DOLLARS IN THOUSANDS) In force -- beginning of year..................... $2,951,649 $2,686,030 $2,447,958 Issued for new policies........................... 605,201 500,084 374,691 Reinstated policies............................... 1,514 2,066 915 Net additions (reductions) to policies............ (316,477) 32,921 90,869 Additions by dividend............................. 2,223 2,265 2,409 Reduction due to: Death claims.................................... 6,159 6,974 6,128 Expirations and maturities...................... 2,665 2,770 2,679 Surrenders and lapses........................... 237,307 231,100 204,820 Conversions..................................... 21,801 30,873 17,185 ---------- ---------- ---------- In force -- end of year........................... 2,976,178 2,951,649 2,686,030 Less reinsurance ceded.......................... 453,025 287,980 247,994 ---------- ---------- ---------- Net retained in force -- end of year.............. $2,523,153 $2,663,669 $2,438,036 ---------- ---------- ---------- ---------- ---------- ----------
The results of operations of CalFarm Life reflect the effect of purchase accounting adjustments including policy liabilities and accruals and the value of life insurance in force based on actuarial estimates. These actuarial estimates were based on then current assumptions applied in calculating policy reserves, policyholder dividend amounts and related policy acquisition costs to be incurred, discounted to provide an appropriate rate of return. PARENT Zenith is a holding company owning directly or indirectly all of the capital stock of certain California insurance and insurance related-companies. In 1993, Zenith commenced a real estate operation through a newly formed subsidiary, Perma-Bilt. Perma-Bilt has expended approximately $7.2 million through December 31, 1993 to acquire land in Las Vegas, Nevada and develop private residences for sale in 1994. LOSS AND LOSS EXPENSE RESERVES AND CLAIMS, AND LOSS DEVELOPMENTS Zenith's property and casualty subsidiaries (the "P&C Companies") maintain reserves for the payment of losses and for the expenses of settling both reported and unreported claims that have been incurred under their insurance policies. The amount of such reserves, as related to reported claims, is based upon periodic case-by-case evaluation and judgment by the P&C Companies' claims departments, with actuarial review. The estimate of unreported claims arising from accidents which have not yet been reported to the P&C Companies, commonly known in the industry as "incurred but not reported," is based upon the P&C Companies' experience and statistical information with respect to the probable number and nature of such claims. The P&C Companies monitor these factors and revise their reserves as they deem appropriate. Reserves are based on estimates and no assurance can be given that the ultimate liability will not be more or less than such estimates. Reference is made to "Property and Casualty Loss Development" on pages 50 and 51, the table setting forth statutory loss and loss adjustment expense development by accident year on page 10 and the table setting forth the reconciliation of changes in the liabilities for losses and loss adjustment expenses on page 9 of the 1993 Annual Report to Stockholders, all of which are hereby incorporated by reference. These tables and the reconciliation show analysis of development of loss and loss adjustment expense liabilities as originally estimated under generally accepted accounting principles at December 31 of each year presented, as well as analysis of development of statutory 6 incurred loss and loss adjustment expense by accident year. The accounting methods used to estimate these liabilities are described in Note 1 of the Notes to Consolidated Financial Statements of Zenith as set forth on pages 58 through 61 of the 1993 Annual Report to Stockholders which note is hereby incorporated by reference. WORKERS' COMPENSATION Zenith's Workers' Compensation reserves, on the average, are paid within approximately 2 1/2-3 years. Zenith regards the timely settlement of its Workers' Compensation claims as important to its profitability and makes extensive use of compromise and releases for claim settlements to expedite this process. In recent years, the California workers' compensation industry has experienced a relative increase in fraud and abuse including fraudulent claims for psychological and continuous trauma types of injuries, often alleged after the claimant has terminated his or her employment, and abusive billing practices by medical-legal providers. Zenith Insurance has invested additional resources in recent years to try to mitigate the effect of these adverse claims trends. Loss adjustment expenses as a percentage of earned premium, increased to 28.5% in 1993 from 21.4% and 13.2% for 1992 and 1991, respectively. Zenith believes that the significant increase in expenditures on the loss adjustment process, including measures to combat fraudulent claims and abuses of the workers' compensation system, ultimately may cause the total loss and loss adjustment expenses to be lower than would otherwise be the case although there can be no assurance that total loss and loss adjustment expenses will be lower. In 1993 the one year loss development on reserves showed unfavorable development of $4,704,000, due principally to development of prior year reserves for unpaid loss adjustment expenses caused by increased expenditures on the loss adjustment process. The one year development on reserves for unpaid losses and loss adjustment expenses in 1992 showed unfavorable development of $13,502,000 and favorable development of $464,000, in 1991. Zenith Insurance maintains five regional offices in California and an office in Texas, 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 a computer system that provides immediate access to policy coverage verification and claims records and enables Zenith Insurance to detail claims payment histories and policy loss experience reports. AUTOMOBILE AND OTHER PROPERTY AND CASUALTY Automobile and Other Property and Casualty loss reserves are paid, on the average, within approximately 1 1/2-2 years. In addition to inflated medical and hospital costs, an increase in the incidence of fraudulent and questionable claims in recent years has given rise to a steady increase in the cost of adjusting claims. The one year development of Automobile and Other Property and Casualty reserves for unpaid losses and loss adjustment expenses showed unfavorable development of $4,657,000 in 1993 and $5,177,000 in 1992 but showed favorable development of $1,741,000 for 1991. Unfavorable development in 1993 was attributable to development of prior year reserves for unpaid loss adjustment expenses caused by an increase in expenditures on the loss adjustment process, particularly for legal expenses of claims servicing. Property losses in 1993 and 1992 were impacted by an adverse frequency of weather and fire related losses. Losses in 1993 included $1,600,000, of which $1,000,000 was assessed by the California Fair Plan, attributable to the Southern California brush fires in the fall. Commercial General Liability ("C.G.L.") policies written by CalFarm Insurance contain exclusion clauses for damages resulting from pollution, and such losses are thereby substantially excluded 7 from coverage. Although such claims have been received by CalFarm Insurance, management believes that such claims will not have a material adverse effect on Zenith's consolidated financial condition either individually or in the aggregate. CalFarm Insurance maintains three claims offices and four legal offices in California to conduct all claims operations of the other property and casualty business. All claims operations of CalFarm Insurance are supervised by its home office claims department. REINSURANCE Zenith expects that, on the average, its Reinsurance reserves will be paid in approximately 6-7 years. Zenith's Reinsurance reserves constitute approximately 20% of its total reserves, net of reinsurance, for property and casualty unpaid losses and loss adjustment expenses at December 31, 1993, reflecting the longer average life of such reserves relative to its other principal lines of business. 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. Reserve adequacy in 1992 and prior years was adversely affected by development on property losses associated with catastrophes and other large, worldwide property losses. The one year development of Reinsurance reserves showed favorable development of $290,000 in 1993 and adverse development of $1,255,000 and $5,290,000 in 1992 and 1991, respectively. In 1992, Zenith Insurance incurred losses of approximately $9.8 million associated with Hurricanes "Andrew" and "Iniki." Zenith Insurance has participated, to a limited extent, in the reinsurance arrangements of ceding companies that have written both directors' and officers' liability coverage ("D & O") policies and professional indemnity policies, including such coverage written for practicing certified public accountants. Actions alleging negligence against directors, officers or accountants by parties suffering financial losses in savings and loan failures give rise to claims under D & O policies or professional indemnity policies which, in turn, give rise to claims against Zenith Insurance. Such claims have not had, and are not expected to have in the future, a material adverse effect on Zenith's consolidated financial condition. INVESTMENTS Investment policies of Zenith and its insurance subsidiaries are established by their respective Boards of Directors, taking into consideration California legal restrictions with respect to investments in connection with reserve obligations as well as the nature and amount of various kinds of investments. (See "Business -- Regulation.") Zenith adjusts its investment strategy to reflect the needs of Zenith's different businesses, changes in the economic environment and tax laws and its objective of maximizing the rate of return with consideration for maintaining principal values (see "Investments" under Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations on pages 41 through 44 of Zenith's 1993 Annual Report to Stockholders which is hereby incorporated by reference). Historic declines in interest rates during the three years ended December 31, 1993 have reduced investment income while increasing the fair values of certain investments. Partly as a result of concern over the volatility of interest rates, Zenith has elected to maintain a relatively short average life and substantial liquidity in its investment portfolio. At December 31, 1993 the investment portfolios of Zenith, Zenith Insurance and CalFarm Insurance consisted primarily of intermediate-term, taxable bonds, redeemable preferred stocks and short-term investments. At December 31, 1993 CalFarm Life's investment portfolio consisted primarily of taxable long-term, intermediate-term and short-term securities. The average life of the consolidated portfolio was 6.8 years; the portfolio of all companies excluding CalFarm Life had an average life of 2.4 years; and the portfolio of CalFarm Life had an average life of 11.1 years. Investment income by segment is set forth in Note 15 -- "Segment Information" on pages 67 and 68 of the 1993 Annual Report to Stockholders which note is hereby incorporated by reference. 8 REINSURANCE CEDED In accordance with general industry practices, Zenith's insurance subsidiaries annually purchase excess of loss reinsurance. Reinsurance makes the assuming reinsurer liable to the ceding company to the extent of the reinsurance. It does not, however, discharge the ceding company from its primary liability to insureds in the event that the reinsurer is unable to meet its obligations under such reinsurance treaty. Historically, no material costs have been incurred by Zenith or its subsidiaries from uncollected reinsurance. Reinsurance premiums ceded by Zenith's insurance subsidiaries amounted to $22,457,000, $22,231,000 and $21,498,000 in 1993, 1992 and 1991, respectively or 4.6%, 4.8% and 4.7% of earned premiums in 1993, 1992 and 1991, respectively. Reinsurance reserves amounted to $44,552,000, $32,701,000 and $27,956,000 in 1993, 1992 and 1991, respectively, or 8.7%, 6.6% and 5.9% of gross reserves for unpaid losses and loss adjustment expenses in 1993, 1992 and 1991, respectively. The purpose of such reinsurance is to protect Zenith from the impact of large, unforseen losses and such reinsurance reduces the magnitude of sudden and unpredictable changes in net income and the capitalization of insurance operations. Zenith monitors the financial condition of its reinsurers and does not believe that it is exposed to any material risk of loss through its ceded reinsurance arrangements. Zenith believes that its ceded reinsurance arrangements are adequate and consistent with industry practice. Each insurance subsidiary maintains separate reinsurance arrangements, which during 1993 were as follows: Zenith Insurance -- Workers' Compensation reinsurance covered all claims between $500,000 and $100,000,000 per occurrence. The coverage from $500,000 to $5,000,000 is placed with General Reinsurance Corporation, the coverage from $5,000,000 to $10,000,000 with Employers Reinsurance Corporation and the remaining three layers from $10,000,000 to $60,000,000 primarily with Cigna Reinsurance Company, NAC Reinsurance Corporation, Prudential Reinsurance Company and the London reinsurance market (primarily Lloyds' syndicates and certain United Kingdom reinsurance companies). Catastrophe reinsurance covers an additional $40,000,000 in excess of $60,000,000 and is placed with Northwestern National Life Insurance Company, Cigna Reinsurance Company and Pinehurst Accident Reinsurance Group. Zenith Insurance has never experienced a loss in excess of $6,900,000. Zenith's Reinsurance division did not purchase any reinsurance protection on its assumed business for 1991, 1992 or 1993. However, 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. CalFarm Insurance -- For personal property lines of business, reinsurance is maintained for claims in excess of $200,000 up to $2,000,000 per occurrence. For commercial property lines, reinsurance is maintained for claims in excess of $200,000, up to $4,000,000 per occurrence. On liability coverages for both personal and commercial lines, reinsurance covers losses up to $2,500,000 per occurrence, subject to a retention of $500,000. This reinsurance coverage is all placed with General Reinsurance Corporation. CalFarm Insurance also has property catastrophe reinsurance, for which the lead reinsurer is General Reinsurance Corporation, that provides for recovery of losses of 95% of $20,000,000, excess of a retention of $5,000,000. In addition, there is a quota share contract whereby CalFarm Insurance retains 20% of the first $1,000,000 on most umbrella risks (comprehensive coverage in excess of primary policy limits) underwritten, with the remainder of up to $10,000,000 ceded to General Reinsurance Corporation. Facultative reinsurance is placed on property coverage in excess of $2,000,000 on personal lines and $4,000,000 on all other property lines, and on umbrella limits in excess of $10,000,000. Facultative reinsurance is used on fewer than 5% of CalFarm Insurance's policies. Facultative coverage is placed primarily with General Reinsurance Corporation. Other companies used are Employers Reinsurance Corporation, Munich American Reinsurance Company and other reinsurers rated A+ by A.M. Best Company. 9 CalFarm Life -- Yearly renewable term insurance treaties are maintained with eight life insurers, through which CalFarm Life ceded 16% and 11% of its ordinary life insurance in force as of year end 1993 and 1992, respectively. Its principal reinsurers are American United Life Insurance Company, Indiana; Frankona America Life Reassurance Company, Missouri; Munich American Reassurance Company, Georgia; North American Reassurance Company, New York; Gerling Global Life Insurance Company, Canada; and Transamerica Occidental Life Insurance Company, California. Maximum net retention on any one life is $250,000. CalFarm Life also maintains reinsurance agreements with Employers Reinsurance Corporation for excess risks on its accident and health contracts. This excess risk reinsurance provides coverage for aggregate losses in excess of $2,400,000 on those claims that exceed $120,000 for each insured in each calendar year. Pooling Agreement -- Zenith Insurance, CalFarm Insurance, ZNAT Insurance and Zenith Star are parties to a pooling agreement. Under the agreement, the results of underwriting operations are ceded (the risks are transferred) to Zenith Insurance and are then reapportioned, or retro-ceded (the risks are transferred back), to those three companies in the following proportions: Zenith Insurance, 79.5%; CalFarm Insurance, 18%; ZNAT Insurance, 2%; and Zenith Star, 0.5%. Transactions pursuant to the pooling agreement are eliminated on consolidation and have no impact on Zenith's Consolidated Financial Statements. As of December 31, 1993 no direct premiums have been written by Zenith Star. MARKETING AND STAFF Zenith Insurance's workers' compensation business is produced by approximately 500 independent licensed insurance agents and brokers throughout California and Texas along with the CalFarm agents referred to below. Zenith Insurance's assumed reinsurance premiums are generated nationally by brokers and reinsurance intermediaries. CalFarm Insurance and CalFarm Life, through their affiliate CalFarm Insurance Agency, maintain a sales force of approximately 240 agents who sell insurance products exclusively for CalFarm Insurance and CalFarm Life, primarily in rural and suburban areas. These agents operate out of 106 offices throughout the State of California, including 37 offices shared with the Farm Bureau. In addition, in certain areas, independent agents market CalFarm Insurance products. CalFarm Life also markets a tax sheltered annuity product through a managing general agent and approximately 750 appointed sub-agents. Applications for insurance submitted by all agents and brokers are evaluated by professional underwriters based upon numerous factors, including underwriting criteria and standards, geographic areas of underwriting concentration, actuarial judgments of rate adequacy, economic considerations, and review of known data on the particular risk. Zenith's insurance subsidiaries, as opposed to their agents and brokers, retain authority over underwriting, claims processing, safety engineering and auditing. CALIFORNIA FARM BUREAU FEDERATION Prior to the acquisition by Zenith Insurance of its property and casualty business, C-F Insurance Company (and its wholly-owned subsidiary CalFarm Life) was owned by the Farm Bureau, a federation of each county farm bureau in the State of California. The Farm Bureau was formed to provide its members with a variety of agriculture-related services, including property and casualty, health and life insurance. The Farm Bureau is California's largest general farm organization, and represents more than 70,000 member families in 53 counties. The Farm Bureau continues to work actively to encourage its membership to place their insurance with CalFarm Life and CalFarm Insurance. Farm Bureau membership is a prerequisite to the purchase of farmowners, automobile and health insurance from CalFarm Life and CalFarm Insurance. Of the estimated 70,000 member families, approximately 63% are insured by CalFarm Insurance or CalFarm Life. The businesses of CalFarm Life and CalFarm Insurance are closely tied to the California farm economy, however over 42% of Farm Bureau members (and CalFarm Insurance and CalFarm Life insureds) are non-farmers and over 64% of CalFarm Insurance and CalFarm Life premium volume is 10 generated by non-farm business. Total revenues in CalFarm Insurance and CalFarm Life attributable to sales that were sponsored by the Farm Bureau constituted approximately 26%, 27% and 28% of Zenith's total consolidated revenues for the years 1993, 1992 and 1991, respectively. The agreement of CalFarm Insurance and CalFarm Life with the Farm Bureau, which is subject to cancellation by either party on six months' notice, requires annual payments to the Farm Bureau of $240,000 plus 2% of the gross written premium under the Farm Bureau group health insurance program. Pursuant to such provisions, total payments to the Farm Bureau were approximately $1 million in each of 1993, 1992 and 1991. Zenith believes that its relationship with the Farm Bureau is mutually beneficial. CalFarm Insurance and CalFarm Life benefit from the use of the CalFarm name and the Farm Bureau membership lists, and their ability to sell their products to Farm Bureau members is enhanced by the Farm Bureau relationship. The Farm Bureau benefits since Farm Bureau membership is required to obtain automobile, farmowners and health insurance policies (but not life insurance) from CalFarm Insurance and CalFarm Life, which generates membership and revenues for the Farm Bureau. If the relationship between CalFarm Insurance and CalFarm Life and the Farm Bureau were terminated, Zenith believes that it could retain a significant amount of the business it currently has with Farm Bureau members because of the quality and tailored features of the products it offers in what it regards as its "niche market" and the long-term relationships established between its agents and these policyholders. In the event of such termination, however, Zenith expects that there would be an increased risk of nonrenewal of existing insurance coverage as well as a possible adverse effect on new policy revenues, but it cannot estimate the financial impact of any such termination. Zenith anticipates the continuation of a close working relationship with the Farm Bureau and the promotion among its membership of the purchase of insurance products from CalFarm Insurance and CalFarm Life as an attractive feature of Farm Bureau membership. COMPETITION Competition in the insurance business is based upon price, product design and quality of service. After December 31, 1994, the repeal of minimum rate laws in California will introduce price as a basis of competition for California workers' compensation policies. The insurance industry is highly competitive and Zenith's subsidiaries compete not only with other stock companies, but with mutual companies, other underwriting organizations and the State Compensation Insurance Fund. Competition also exists from self-insurance and captive insurers. Over the years there has been increased competition from direct-writing companies and, in the property and casualty field, from affiliates of large life insurance companies. Many companies in competition with Zenith's subsidiaries have been in business for a much longer time, have a larger volume of business, are more widely known, and/or possess substantially greater financial resources. REGULATION CALIFORNIA DEPARTMENT OF INSURANCE Zenith's insurance subsidiaries are subject to regulation and supervision by the California Department of Insurance, which has broad regulatory, supervisory and administrative powers. These powers relate, among other things, to the granting 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. Zenith Insurance, CalFarm Insurance, ZNAT Insurance and Zenith Star are required, with respect to their workers' compensation line of business, to maintain on deposit investments meeting specified standards that have an aggregate market value equal to the companies' loss reserves. For this purpose, loss reserves are defined as the current estimate of reported and unreported claims plus a statutory formula reserve based on a minimum of 65% of earned premiums for the latest three years. 11 CalFarm Life is required to establish, as liabilities, actuarial reserves on life insurance policies and annuities as prescribed by regulatory authorities. Statutory reserves are calculated at amounts that are, together with premiums or annuity considerations to be received on outstanding policies or annuity contracts, and with interest on such reserves compounded annually at certain assumed rates, deemed sufficient to meet the policy obligations at death or maturity or to meet the annuity obligations pursuant to the contract, each in accordance with mortality tables used when the policy or contract was issued. Detailed annual and quarterly reports must be filed by Zenith's insurance subsidiaries with the California Department of Insurance, and their businesses and accounts are subject to periodic examination by such agency, usually at three year intervals. Zenith Insurance, CalFarm Insurance, ZNAT Insurance and CalFarm Life Insurance, were examined as of December 31, 1990, and the report on such examination contained no material findings. THE NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS The National Association of Insurance Commissioners ("NAIC") is a group formed by state Insurance Commissioners to discuss issues and formulate policy with respect to regulation, reporting and accounting of insurance companies. Although the NAIC has no legislative authority and insurance companies are at all times subject to the laws of their respective domiciliary states, and to a lesser extent other states in which they conduct business, the NAIC is influential in determining the form in which such laws are enacted. In particular, the Model Insurance Laws, Regulations and Guidelines of the NAIC (the "Model Laws") have been promulgated by the NAIC as a minimum standard by which state regulatory systems and regulations are measured. Adoption of state laws which provide for substantially similar regulations to those described in the Model Laws is a requirement for the accreditation by the NAIC of a state's insurance regulations. The NAIC has adopted model regulations to require insurers to maintain minimum levels of capital based on their investments and operations, known as "risk based capital" ("RBC") requirements. Such requirements were adopted by California for Life Insurance companies in 1993. Such regulations are expected to be adopted for property and casualty insurers in 1994. Zenith does not anticipate any adverse effects of such requirements because of the strong capitalization of its insurance operations. At December 31, 1993, CalFarm Life's adjusted capital under the RBC regulations was 375% of the RBC control, or required, level of capital under the regulations. The NAIC Insurance Regulatory Information System ("IRIS") was developed to assist insurance departments in overseeing the financial condition of insurance companies. Annually, IRIS key financial ratios (11 ratios for property and casualty companies and 12 ratios for life companies) are calculated from data supplied in annual statutory statements of insurance companies. These ratios 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 1993 IRIS results for the Zenith Insurance Group (consisting of Zenith Insurance, CalFarm Insurance, ZNAT Insurance and Zenith Star) showed no results outside the "normal range" for such ratios, as such range is determined by the NAIC. At December 31, 1993, one such ratio for CalFarm Life, "change in premium", was outside such "normal range" because of a decrease in the volume of annuity receipts in 1993 compared to 1992. CalFarm Life's annuity receipts decreased from $83 million in 1992 to $56 million in 1993, partly because of economic and tax uncertainties and because of competition for such products. INSURANCE HOLDING COMPANY SYSTEM REGULATORY ACT Zenith's insurance subsidiaries are also subject to the California Insurance Holding Company System Regulatory Act ("Holding Company Act"), which contains certain reporting requirements, including the requirement that such subsidiaries file information relating to capital structure, ownership, financial condition and general business operation, and limits dividend payments by 12 Zenith's insurance subsidiaries. See "Liquidity and Inflation" under "Management's Discussion and Analysis of Consolidated Financial Condition and Result of Operations" on pages 46 through 47 of Zenith's 1993 Annual Report to Stockholders, which is hereby incorporated by reference. HEALTH CARE REFORM The federal and state executive branches and legislatures and the health insurance industry continue to debate the level of responsibility of private carriers to provide universal insurance for all American citizens, including the uninsured and the uninsurable. Health care reform legislation was introduced into the U.S. Congess in 1993. It is not possible to predict the impact of this debate on CalFarm Life's business until definitive legislation, if any, emerges. OTHER REGULATION Property and casualty insurance coverage is subject to certain regulation as described herein under "Property and Casualty -- Other, Principally Automobile" under which Zenith's other property and casualty rates are subject to prior approval by the California Department of Insurance. The provisions of Proposition 103 do not apply to Workers' Compensation insurance or Reinsurance, which combined to account for 66% of Zenith's property and casualty earned premiums in 1993. ITEM 2. PROPERTIES Zenith Insurance owns a 120,000 square foot office facility in the Warner Center area of Los Angeles which, since November of 1987, has been the corporate home office of Zenith, Zenith Insurance, and ZNAT Insurance. In addition, Zenith Insurance, CalFarm Insurance and CalFarm Life, in the regular conduct of their business, are lessees of offices in various cities. See Note 9 of the Notes to Consolidated Financial Statements of Zenith on pages 65 and 66 of the 1993 Annual Report to Stockholders, which note is hereby incorporated by reference. CalFarm Life owns 25% and CalFarm Insurance owns 75% of the home office building (and surrounding property of approximately 4 acres) occupied by those companies in Sacramento, California, consisting of 133,000 square feet. Approximately 20% of the building is leased to the Farm Bureau and affiliates. In addition, CalFarm Life and CalFarm Insurance Agency lease and occupy, in a nearby building in Sacramento, California, approximately 30,000 square feet under a lease expiring January 31, 1997. ITEM 3. LEGAL PROCEEDINGS Zenith and its subsidiaries are involved in certain litigation. In the opinion of management, after consultation with legal counsel, such litigation in which Zenith is a defendant is either without merit or the ultimate liability, if any, will not have a material adverse effect on the consolidated financial condition of Zenith. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 13 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Zenith's Common Stock, par value $1.00 per share, is traded on the New York Stock Exchange. 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 1993 1992 - ------------------------------------------------------------ ------- ------- First High...................................................... 29 1/4 17 1/4 Low....................................................... 19 5/8 14 1/2 Second High...................................................... 27 1/4 19 1/4 Low....................................................... 23 1/4 15 1/2 Third High...................................................... 29 1/8 19 1/2 Low....................................................... 23 1/2 16 1/2 Fourth High...................................................... 28 3/4 20 Low....................................................... 21 1/4 16 3/8
As of March 25, 1994, there were 476 holders of record of Zenith Common Stock. The table below sets forth information with respect to the amount and frequency of dividends declared on Zenith Common Stock. Based upon Zenith's financial condition, it is currently expected that cash dividends will continue to be paid in the future.
DATE OF DECLARATION TYPE AND AMOUNT OF RECORD DATE FOR BY ZENITH BOARD DIVIDEND PAYMENT PAYMENT DATE - ------------------------------------ ----------------------- --------------------- ------------------------ December 5, 1991.................... $.25 cash per share January 31, 1992 February 14, 1992 March 5, 1992....................... $.25 cash per share April 30, 1992 May 15, 1992 May 21, 1992........................ $.25 cash per share July 31, 1992 August 14, 1992 September 10, 1992.................. $.25 cash per share October 30, 1992 November 13, 1992 December 10, 1992................... $.25 cash per share January 29, 1993 February 12, 1993 March 11, 1993...................... $.25 cash per share April 30, 1993 May 14, 1993 May 26, 1993........................ $.25 cash per share July 30, 1993 August 13, 1993 September 8, 1993................... $.25 cash per share October 29, 1993 November 12, 1993 December 9, 1993.................... $.25 cash per share January 31, 1994 February 14, 1994
The Holding Company Act limits the ability of Zenith Insurance and CalFarm Life to pay dividends to Zenith, and of CalFarm Insurance, ZNAT Insurance and Zenith Star to pay dividends to Zenith Insurance, by providing that the California Department of Insurance 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 (or in the case of CalFarm Life, net gain from operations) for the preceding year. In addition, any such dividend must be paid from policyholders' surplus attributable to accumulated earnings. During 1993, Zenith Insurance paid dividends of $25,000,000 to Zenith. During 1994, Zenith Insurance and CalFarm Life will be able to pay $40,969,000 and $5,924,000, respectively, in dividends to Zenith without prior approval. In addition, in 1994, $1,117,000 can be paid by ZNAT Insurance and Zenith Star to Zenith Insurance which would be available to Zenith in 1995. ITEM 6. SELECTED FINANCIAL DATA. The five-year record of operations and accompanying notes, included in Zenith's 1993 Annual Report to Stockholders on pages 48 and 49, is hereby incorporated by reference. 14 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 1993 Annual Report to Stockholders on pages 36 to 47 is hereby incorporated by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Reference is made to pages 50 and 51 of Zenith's 1993 Annual Report to Stockholders for information setting forth the loss and loss adjustment expense liability development for 1983 through 1993 and page 10 for incurred loss and loss adjustment expense development for 1988 through 1993, and to the consolidated financial statements and notes thereto on pages 52 to 69 of Zenith's 1993 Annual Report to Stockholders, all of which are hereby incorporated by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 15 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information set forth under the captions "Election of Directors" and "Compliance with Section 16(a) of the Exchange Act" in the Proxy Statement in connection with Zenith's 1994 Annual Meeting of Stockholders (the "Proxy Statement") is hereby incorporated by reference. EXECUTIVE OFFICERS OF THE REGISTRANT
OFFICER NAME AGE POSITION TERM SINCE - ----------------- --- ---------------------------------------- ------ ------- Stanley R. Zax 56 Chairman of the Board, President(1) Annual 1977 Fredricka Taubitz 50 Executive Vice President and Annual 1985 Chief Financial Officer(1) William L. Gentz 53 Senior Vice President(1) Annual 1989 James P. Ross 47 Senior Vice President and Actuary(1) Annual 1978 John J. Tickner 55 Senior Vice President and Secretary(1) Annual 1985 Keith E. Trotman 57 Senior Vice President(2) Annual 1988 Philip R. Hunt 51 Vice President, Finance(2) Annual 1988 Philip M. Joffe 39 President, CalFarm Life(2) Annual 1986 - ------------------------ (1) Officer of Zenith and subsidiaries. (2) Officer of subsidiaries only.
Each of the executive officers has, for more than five years, occupied an executive position with Zenith or a subsidiary of Zenith. 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 "Summary Compensation Table," "Option/SAR Grants in Last Fiscal Year," and "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 the last paragraph under the heading "Election of Directors" in the Proxy Statement is hereby incorporated by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information set forth under the caption "Security Ownership of Certain Beneficial Owners and Management" in the Proxy Statement is hereby incorporated by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information set forth in footnote 3 to the table set forth under the caption "Election of Directors" and under the heading, "Loan to Executive Officer" 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 Independent Accountant's Report Financial Statements and notes thereto incorporated by reference from the 1993 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, 1993 and 1992 Consolidated Statement of Operations for the years ended December 31, 1993, 1992 and 1991 Consolidated Statement of Cash Flows for the years ended December 31, 1993, 1992 and 1991 Consolidated Statement of Stockholders' Equity for the years ended December 31, 1993, 1992 and 1991 Notes to Consolidated Financial Statements Table setting forth the reconciliation of changes in the liabilities for losses and loss adjustment expenses on page 9 of the 1993 Annual Report to Stockholders Table setting forth incurred loss and loss adjustment expense development on a statutory basis on page 10 of the 1993 Annual Report to Stockholders 2.FINANCIAL STATEMENT SCHEDULES Zenith National Insurance Corp. and Subsidiaries As of December 31, 1993. I -- Summary of Investments -- Other Than Investments in Related Parties As of December 31, 1993 and 1992 II -- Amounts Receivable From Related Parties and Underwriters, Promoters and Employees Other Than Related Parties For the years ended December 31, 1993, 1992 and 1991. V -- Supplementary Insurance Information VI -- Reinsurance IX -- Short-term Borrowings Zenith National Insurance Corp. As of December 31, 1993 and 1992 and for the years ended December 31, 1993, 1992 and 1991. III -- Condensed Financial Information of Registrant Property and Casualty Loss Developments on pages 50 and 51 and on page 10 of the 1993 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 notes thereto. 17 3. EXHIBITS The Exhibits listed below are filed in a separate Exhibit Volume to this Report. 3.1 Certificate of Incorporation of Zenith as in effect immediately prior to November 22, 1985. (Incorporated herein by reference to Exhibit 3 to Zenith's Amendment on Form 8, date of amendment October 10, 1985, to Zenith's Current Report on Form 8-K, date of report July 26, 1985). Certificate of Amendment to Certificate of Incorporation of Zenith, effective November 22, 1985. (Incorporated herein by reference to Zenith's Current Report on Form 8-K, date of report November 22, 1985). 3.2 By-Laws of Zenith, as currently in effect. (Incorporated herein by reference to Exhibit 3.2 to Zenith's Annual Report on Form 10-K for the year ended December 31, 1988.) 4.1 Indenture dated as of May 1, 1992 entered into between Zenith and Norwest Bank Minnesota, National Association, as trustee, pursuant to which Zenith issued its 9% Senior Notes due May 1, 2002. (Incorporated herein by reference to Exhibit 4 to Zenith's Quarterly Report on Form 10-Q for the quarter ended March 31, 1992.) 10.1 Purchase Agreement, dated as of February 4, 1981, among Reliance Insurance Company, Zenith, the Selling Stockholders referred to therein, and Eugene V. Klein, Daniel Schwartz and Harvey L. Silbert as agents for the Selling Stockholders. (Incorporated herein by reference to the exhibit to the Schedule 13D filed by Reliance Financial Services Corporation on March 9, 1981 with respect to the common stock of Zenith). 10.2 Asset and Liability Assumption Agreement, dated as of June 4, 1985, between Zenith Insurance and the Insurance Commissioner of the State of California (the "Commissioner"). (Incorporated herein by reference to Exhibit 1 to Zenith's Current Report on Form 8-K, date of report July 26, 1985). 10.3 Memorandum and Agreement of Closing dated as of July 26, 1985, among Zenith Insurance, Zenith and the Commissioner (Incorporated herein by reference to Exhibit 10.6 to Zenith's Annual Report on Form 10-K for the year ended December 31, 1985), together with the following exhibits: (a) Exhibit A -- Grant Deed, dated July 25, 1985, by the Commissioner in favor of Zenith Insurance. (Incorporated herein by reference to Exhibit 10.6 to Zenith's Annual Report on Form 10-K for the year ended December 31, 1985). (b) Exhibit B -- Bill of Sale, dated as of July 26, 1985, by the Commissioner in favor of Zenith Insurance. (Incorporated herein by reference to Exhibit 10.6 to Zenith's Annual Report on Form 10-K for the year ended December 31, 1985). (c) Exhibit C -- Assignment of Assets and Assumption of Liabilities, dated as of July 26, 1985, between the Commissioner and Zenith Insurance. (Incorporated herein by reference to Exhibit 10.6 to Zenith's Annual Report on Form 10-K for the year ended December 31, 1985). (d) Exhibit D -- Noncompetition Agreement, dated as of July 26, 1985, between the Commissioner and Zenith Insurance. (Incorporated herein by reference to Exhibit 28.3 to Zenith's Current Report on Form 8-K, date of report July 26, 1985).
18 (e) Exhibit E -- First Assignment Separate from Certificate, dated July 26, 1985, by the Commissioner in favor of Zenith. (Incorporated herein by reference to Exhibit 10.6 to Zenith's Annual Report on Form 10-K for the year ended December 31, 1985). (f) Exhibit F -- Engagement and Reimbursement Agreement, dated as of July 26, 1985, between Zenith Insurance and the Commissioner. (Incorporated herein by reference to Exhibit 28.2 to Zenith's Current Report on Form 8-K, date of report July 26, 1985). *10.4 Zenith's Non-Qualified Stock Option Plan, as in effect immediately prior to December 6, 1985. (Incorporated herein by reference to Zenith's Registration Statement on Form S-8 (SEC File No. 2-97962)). *10.5 Zenith's Amended and Restated Non-Qualified Stock Option Plan, adopted by Zenith's Board of Directors on December 6, 1985. (Incorporated herein by reference to Zenith's Registration Statement on Form S-8 (SEC File No. 33-8948)). *10.6 Employment Agreement, dated May 24, 1990, between Zenith and Fredricka Taubitz. (Incorporated herein by reference to Exhibit 10.6 to Zenith's Annual Report on Form 10K for the year ended December 31, 1990). *10.7 Employment Agreement, dated October 1, 1990, between Zenith and John J. Tickner. (Incorporated herein by reference to Exhibit 10.7 to Zenith's Annual Report on Form 10K for the year ended December 31, 1990). *10.8 Employment Agreement, dated as of February 28, 1990, between Zenith and Stanley R. Zax. (Incorporated herein by reference to Exhibit 10.8 to Zenith's Annual Report on Form 10K for the year ended December 31, 1990). *10.9 Stock Option Agreement, dated as of May 19, 1987, between Zenith and Stanley R. Zax. (Incorporated herein by reference to Exhibit 10.15 to Zenith's Annual Report on Form 10-K for the year ended December 31, 1987). 10.10 Promissory Note, dated January 9, 1991, in an original principal amount of $3,000,000, by Stanley R. Zax in favor of Zenith. (Incorporated herein by reference to Exhibit 10.10 to Zenith's Annual Report on Form 10K for the year ended December 31, 1990). 10.11 Credit Agreement, as amended, dated as of November 30, 1988 between Zenith and Sanwa Bank of California. (Incorporated herein by reference to Exhibit 10.11 to Zenith's Annual Report on Form 10-K for the year ended December 31, 1992). 10.12 Revolving Note Agreement, dated July 1, 1993, between Zenith and City National Bank. 10.13 Revolving Note Agreement, dated August 15, 1993 between Zenith and City National Bank. 10.14 Letter of Credit Facility Agreement, dated December 1, 1993, between Sanwa Bank of California and Zenith Insurance. 10.15 Agreement of Reinsurance #6966 between Zenith Insurance Company and General Reinsurance Corporation, dated as of December 21, 1984. (Incorporated herein by reference to Exhibit 10.13 to Zenith's Annual Report on Form 10K for the year ended December 31, 1991.) 10.16 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 10K for the year ended December 31, 1991.)
19 10.17 Agreement of Reinsurance No. 7276 between CalFarm Insurance Company and General Reinsurance Corporation, dated as of February 5, 1988. (Incorporated herein by reference to Exhibit 10.15 to Zenith's Annual Report on Form 10K for the year ended December 31, 1991.) 10.18 Agreement of Reinsurance No. B226 between CalFarm Insurance Company and General Reinsurance Corporation, dated as of January 13, 1988. (Incorporated herein by reference to Exhibit 10.16 to Zenith's Annual Report on Form 10K for the year ended December 31, 1991.) 10.19 Agreement of Reinsurance No. B197-A between CalFarm Insurance Company and General Reinsurance Corporation, dated as of January 13, 1988. (Incorporated herein by reference to Exhibit 10.17 to Zenith's Annual Report on Form 10K for the year ended December 31, 1991.) 10.20 Agreement of Reinsurance No. B196-A between CalFarm Insurance Company and General Reinsurance Corporation, dated as of January 13, 1988. (Incorporated herein by reference to Exhibit 10.18 to Zenith's Annual Report on Form 10K for the year ended December 31, 1991.) 10.21 Agreement of Reinsurance No. 7832 between General Reinsurance Corporation and CalFarm Insurance, Zenith Insurance and ZNAT Insurance, effective September 1, 1993. 10.22 Agreement of Reinsurance No. 623-0005 between American Re-Insurance Company and CalFarm Insurance, Zenith Insurance and ZNAT Insurance, effective September 1, 1993. 10.23 Agreement of Reinsurance No. 0079460 between Employers Reinsurance Corporation and CalFarm Insurance, Zenith Insurance and ZNAT Insurance, effective September 1, 1993. 10.24 Life, Disability and Accidental Death Automatic Reinsurance Agreement between CalFarm Life Insurance Company and Transamerica Occidental Life Insurance Company, effective June 1, 1983. (Incorporated herein by reference to Exhibit 10.20 to Zenith's Annual Report on Form 10K for the year ended December 31, 1991.) 10.25 Life, Disability and Accidental Death Facultive Reinsurance Agreement between CalFarm Insurance Company and Occidental Life Insurance Company of California, effective April 1, 1971. (Incorporated herein by reference to Exhibit 10.21 to Zenith's Annual Report on Form 10K for the year ended December 31, 1991.) 10.26 Reinsurance Agreement between CalFarm Life Insurance Company and American United Life Insurance Company, effective August 1, 1983. (Incorporated herein by reference to Exhibit 10.22 to Zenith's Annual Report on Form 10K for the year ended December 31, 1991.) 10.27 Excess Major Medical Reinsurance Agreement (No. 0076820/Specific and Aggregate Retentions) between CalFarm Life Insurance Company and Employers Reinsurance Corporation, effective January 1, 1993. 10.28 Automatic Reinsurance Agreement between CalFarm Life Insurance Company and North American Reassurance Company, effective June 1, 1991. (Incorporated herein by reference to Exhibit 10.24 to Zenith's Annual Report on Form 10-K for the year ended December 31, 1992.) 10.29 Automatic Reinsurance Agreement between CalFarm Life Insurance Company and North American Reassurance Company, effective February 21, 1991. (Incorporated herein by reference to Exhibit 10.25 to Zenith's Annual Report on Form 10-K for the year ended December 31, 1992.)
20 10.30 Yearly Renewable Term Reinsurance Agreement between CalFarm Life Insurance Company and Gerling Global Life Insurance Company, effective March 1, 1992. (Incorporated herein by reference to Exhibit 10.26 to Zenith's Annual Report on Form 10-K for the year ended December 31, 1992.) 11 Computation of Earnings Per Share for the three (3) years ended December 31, 1993 13 Zenith's Annual Report to Stockholders for the year ended December 31, 1993, but only to the extent such report is expressly incorporated by reference herein, and such report is not otherwise to be deemed "filed" as a part of this Annual Report on Form 10-K. 21 Subsidiaries of Zenith. 23 Consent of Coopers & Lybrand, dated March 29, 1994. (Incorporated herein by reference to page F-1 of this Annual Report on Form 10-K). 28 Property and Casualty Loss Statistics. 99.1 Information required by rule 15d-21 under the Securities Exchange Act of 1934 for the year ended December 31, 1993 for the Zenith Investment Partnership 401(k) Plan (to be filed by amendment on Form 10-K/A within 180 days of December 31, 1993). - ------------------------ *Management contract or compensatory plan or arrangement
(b) REPORTS ON FORM 8-K None 21 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 29, 1994. ZENITH NATIONAL INSURANCE CORP. By 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 29, 1994. STANLEY R. ZAX Chairman of the Board, President and - --------------------------------------------- Director (Principal Executive Officer) Stanley R. Zax GEORGE E. BELLO Director - --------------------------------------------- George E. Bello MAX M. KAMPELMAN Director - --------------------------------------------- Max M. Kampelman JACK M. OSTROW Director - --------------------------------------------- Jack M. Ostrow WILLIAM S. SESSIONS Director - --------------------------------------------- William S. Sessions HARVEY L. SILBERT Director - --------------------------------------------- Harvey L. Silbert ROBERT M. STEINBERG Director - --------------------------------------------- Robert M. Steinberg SAUL P. STEINBERG Director - --------------------------------------------- Saul P. Steinberg GERALD TSAI, JR. Director - --------------------------------------------- Gerald Tsai, Jr. FREDRICKA TAUBITZ Executive Vice President and Chief Financial - --------------------------------------------- Officer (Principal Financial and Accounting Fredricka Taubitz Officer)
22 CONSENT OF INDEPENDENT ACCOUNTANT We consent to the incorporation by reference in the Registration Statements on Form S-8 (File Nos. 33-8948 and 33-22219) of our report dated February 17, 1994 on our audits of the consolidated financial statements and financial statement schedules of Zenith National Insurance Corp. and subsidiaries as of December 31, 1993 and 1992, and for each of the three years in the period ended December 31, 1993, which is included in this Annual Report on Form 10-K. COOPERS & LYBRAND Los Angeles, California March 29, 1994 F-1 - -------------------------------------------------------------------------------- INDEPENDENT ACCOUNTANT'S REPORT To the Stockholders and Board of Directors of Zenith National Insurance Corp. We have audited the consolidated financial statements of Zenith National Insurance Corp. and subsidiaries as of December 31, 1993 and 1992, and for each of the three years in the period ended December 31, 1993, which financial statements are included on pages 52 through 68 of the Company's 1993 Annual Report to Stockholders and incorporated by reference herein. We have also audited the financial statement schedules listed in the index on page 17 of this Form 10-K. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Zenith National Insurance Corp. and subsidiaries as of December 31, 1993 and 1992, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein. As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for investments as of December 31, 1993. COOPERS & LYBRAND Los Angeles, California February 17, 1994 F-2 SCHEDULE I -- SUMMARY OF INVESTMENTS -- OTHER THAN INVESTMENTS IN RELATED PARTIES ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES DECEMBER 31, 1993
COLUMN D COLUMN C --------------- COLUMN A COLUMN B ---------- AMOUNT AT WHICH - -------------------------------------------------- ---------- FAIR SHOWN IN THE TYPE OF INVESTMENT COST VALUE BALANCE SHEET - -------------------------------------------------- ---------- ---------- --------------- (DOLLARS IN THOUSANDS) Fixed maturities Bonds: United States Government and government agencies and authorities.................... $ 441,946 $ 443,551 $ 442,369 Public utilities.............................. 71,438 75,849 73,178 Industrial and miscellaneous.................. 541,811 592,012 558,497 Redeemable preferred stocks..................... 33,217 32,975 32,975 ---------- ---------- --------------- Total fixed maturities.................... 1,088,412 1,144,387 1,107,019 ---------- ---------- --------------- Equity securities Floating rate preferred stocks.................. 30,582 31,495 31,495 Convertible and nonredeemable preferred stocks........................................ 11,545 11,246 11,246 Common stocks, industrial....................... 14,485 15,575 15,575 ---------- ---------- --------------- Total equity securities................... 56,612 58,316 58,316 ---------- ---------- --------------- Mortgage loans on real estate..................... 4,515 4,515 4,515 Policy loans...................................... 39,609 39,609 39,609 Short-term investments............................ 276,841 276,841 276,841 Other investments................................. 14,097 14,097 14,097 ---------- ---------- --------------- Total investments......................... $1,480,086 $1,537,765 $ 1,500,397 ---------- ---------- --------------- ---------- ---------- ---------------
F-3 SCHEDULE II -- AMOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITERS, PROMOTERS AND EMPLOYEES OTHER THAN RELATED PARTIES ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
COLUMN D ------------------------- COLUMN E -------------------------- COLUMN B DEDUCTIONS ---------- ------------------------- BALANCE AT END OF PERIOD COLUMN A BALANCE AT COLUMN C (1) (2) -------------------------- - ------------------------------ BEGINNING ---------- AMOUNTS AMOUNTS (1) (2) NAME OF DEBTOR OF PERIOD ADDITIONS COLLECTED WRITTEN OFF CURRENT NOT CURRENT - ------------------------------ ---------- ---------- ---------- ----------- ---------- ------------ 1993 Stanley R. Zax $2,300,000 -0- $2,300,000 -0- -0- -0- 1992 Stanley R. Zax $2,800,000 -0- $ 500,000 -0- $2,300,000 -0- 1991 Stanley R. Zax -0- $3,000,000 $ 200,000 -0- $2,800,000 -0-
In January 1991, Zenith loaned the sum of $3,000,000 to Mr. Zax. The loan was evidenced by a promissory note which was payable on January 9, 1994, with interest, payable each quarter until maturity, at a rate equal to the Prime Rate. The loan was unsecured. Under the terms of the loan, Mr. Zax was able to prepay, without penalty, all or any portion of the principal indebtedness, together with accrued and unpaid interest. The note was repaid in full on September 23, 1993. F-4 SCHEDULE III -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT ZENITH NATIONAL INSURANCE CORP. BALANCE SHEET ASSETS
DECEMBER 31, ---------------------------- 1993 1992 ------------ ------------ Investments Common stocks, at market (cost $607,000, 1993 and $3,955,000, 1992)..................... $ 637,000 $ 4,015,000 Short-term investments (at cost which approximates market).............................. 14,996,000 9,192,000 Cash...................................................................................... 1,869,000 2,260,000 Investment in subsidiaries (Note A)....................................................... 405,982,000 362,975,000 Federal income taxes receivable from subsidiaries (Note A)................................ 3,139,000 Other assets.............................................................................. 13,716,000 5,084,000 ------------ ------------ Total assets...................................................................... $437,200,000 $386,665,000 ------------ ------------ ------------ ------------ LIABILITIES Senior notes payable, less unamortized discount of $1,011,000, 1993 and $1,132,000, 1992.................................................................................... $ 73,989,000 $ 73,868,000 Cash dividends payable to stockholders.................................................... 4,711,000 4,704,000 Federal income taxes payable.............................................................. 3,925,000 Other liabilities......................................................................... 5,110,000 6,495,000 ------------ ------------ Total liabilities................................................................. 87,735,000 85,067,000 ------------ ------------ STOCKHOLDERS' EQUITY Preferred stock, $1 par--shares authorized 1,000,000; issued and outstanding, none in 1993 and 1992................................................................................ Common stock, $1 par--shares authorized 50,000,000; issued 23,910,000, outstanding 18,841,000, 1993; issued 23,562,000, outstanding 18,813,000, 1992....................... 23,910,000 23,562,000 Additional paid-in capital................................................................ 249,092,000 242,226,000 Retained earnings......................................................................... 148,043,000 113,867,000 Net unrealized appreciation (depreciation) on investments net of $7,093,000 deferred taxes in 1993................................................................................. 13,176,000 (668,000) ------------ ------------ 434,221,000 378,987,000 Less treasury stock at cost (5,069,000 shares, 1993 and 4,749,000 shares, 1992)........... (84,756,000) (77,389,000) ------------ ------------ Total stockholders' equity........................................................ 349,465,000 301,598,000 ------------ ------------ Total liabilities and stockholders' equity........................................ $437,200,000 $386,665,000 ------------ ------------ ------------ ------------
See notes to condensed financial information. F-5 SCHEDULE III -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT ZENITH NATIONAL INSURANCE CORP. STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, ---------------------------------------------- 1993 1992 1991 ------------ ------------- ------------- Investment income, net of expenses of $51,000, 1993, $51,000, 1992 and $35,000, 1991........................................................................... $ 492,000 $ 852,000 $ 400,000 Realized gains (losses) on investments.......................................... 895,000 (1,447,000) (1,754,000) Lawsuit settlement.............................................................. 7,561,000 ------------ ------------- ------------- Total revenue................................................................... 8,948,000 (595,000) (1,354,000) Operating expense............................................................... 3,478,000 3,222,000 3,236,000 Interest expense................................................................ 6,658,000 6,472,000 5,430,000 ------------ ------------- ------------- Loss from operations before federal income tax benefit, equity in net income of insurance subsidiaries, extraordinary item and cumulative effect of accounting change........................................................................ (1,188,000) (10,289,000) (10,020,000) Federal income tax benefit...................................................... 516,000 3,128,000 2,857,000 ------------ ------------- ------------- Loss from operations before equity in net income of insurance subsidiaries, extraordinary item and cumulative effect of accounting change................. (672,000) (7,161,000) (7,163,000) Extraordinary item -- debt retirement cost, net of tax benefit of $698,000...... (1,355,000) Cumulative effect of change in accounting for income taxes...................... (187,000) Equity in net income of insurance subsidiaries (Note A)...................................................................... 53,872,000 37,403,000 53,064,000 ------------ ------------- ------------- Net income...................................................................... $ 53,200,000 $ 28,700,000 $ 45,901,000 ------------ ------------- ------------- ------------ ------------- -------------
See notes to condensed financial information. F-6 SCHEDULE III -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT ZENITH NATIONAL INSURANCE CORP. STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, ----------------------------------------------- 1993 1992 1991 ------------- ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Investment income received.................................................... $ 485,000 $ 846,000 $ 400,000 Recovery from lawsuit settlement.............................................. 4,094,000 Operating expenses paid....................................................... (3,309,000) (3,674,000) (2,616,000) Interest paid................................................................. (6,552,000) (6,073,000) (5,128,000) Income taxes refunded......................................................... 8,524,000 1,206,000 5,104,000 ------------- ------------- ------------- Net cash flows from operating activities.................................... 3,242,000 (7,695,000) (2,240,000) CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of invested assets................................................... (2,597,000) Proceeds from sales of invested assets........................................ 4,243,000 1,219,000 Net change in short-term investments.......................................... (7,264,000) (7,716,000) (145,000) Cash received (advanced) received from note receivable........................ 2,300,000 500,000 (2,800,000) ------------- ------------- ------------- Net cash flows from investing activities.................................... (721,000) (8,594,000) (2,945,000) CASH FLOWS FROM FINANCING ACTIVITIES: Cash received from bank line of credit........................................ 1,000,000 6,350,000 32,300,000 Cash paid on bank line of credit.............................................. (1,000,000) (40,150,000) (36,600,000) Cash dividends paid to common stockholders.................................... (19,018,000) (18,927,000) (19,012,000) Retirement of Senior Notes payable 1994....................................... (17,740,000) Net proceeds from issuance of Senior Notes payable 2002....................... 73,787,000 Proceeds from exercise of stock options....................................... 6,261,000 4,526,000 599,000 Purchase of treasury shares................................................... (7,367,000) (5,686,000) (4,954,000) Dividends received from subsidiaries.......................................... 25,000,000 15,000,000 33,000,000 Capital contribution to subsidiary............................................ (250,000) Loan to subsidiary............................................................ (7,538,000) ------------- ------------- ------------- Net cash flows from financing activities.................................... (2,912,000) 17,160,000 5,333,000 Net increase (decrease) in cash................................................. (391,000) 871,000 148,000 Cash at beginning of year....................................................... 2,260,000 1,389,000 1,241,000 ------------- ------------- ------------- Cash at end of year............................................................. $ 1,869,000 $ 2,260,000 $ 1,389,000 ------------- ------------- ------------- ------------- ------------- ------------- RECONCILIATION OF NET INCOME TO NET CASH FLOWS FROM OPERATING ACTIVITIES: Net income.................................................................... $ 53,200,000 $ 28,700,000 $ 45,901,000 Net income of insurance subsidiaries.......................................... (53,872,000) (37,403,000) (53,064,000) Realized (gains)/losses on investments........................................ (895,000) 1,447,000 1,754,000 Amortization of discount and issue costs on senior notes...................... 121,000 1,822,000 457,000 Federal income taxes.......................................................... 8,007,000 (2,433,000) 2,247,000 Increase in receivable from lawsuit settlement................................ (3,467,000) Other......................................................................... 148,000 172,000 465,000 ------------- ------------- ------------- Net cash flow from operating activities..................................... $ 3,242,000 $ (7,695,000) $ (2,240,000) ------------- ------------- ------------- ------------- ------------- -------------
See notes to condensed financial information. F-7 SCHEDULE III -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT ZENITH NATIONAL INSURANCE CORP. NOTES TO CONDENSED FINANCIAL INFORMATION The accompanying condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto of Zenith National Insurance Corp. (Zenith) and subsidiaries. A. Investment In Subsidiaries: Zenith owns, directly or indirectly, 100% of the outstanding stock of Zenith Insurance Company, CalFarm Insurance Company, ZNAT Insurance Company, Zenith Star Insurance Company, CalFarm Life Insurance Company and Perma-Bilt, a Nevada Corporation. These investments are included in the financial statements on the equity basis of accounting. Temporary advances in the ordinary course of business are included in other assets. The excess of cost over net assets acquired of $2,009,000 represents the unamortized excess of cost over underlying net tangible assets of companies acquired prior to 1970, which is considered to have continuing value. Zenith files a consolidated federal income tax return. The equity in the income of insurance subsidiaries of $53,872,000 in 1993, $37,403,000 in 1992 and $53,064,000 in 1991 is net of a provision for federal income tax expense of $20,795,000 in 1993, $3,498,000 in 1992 and $9,476,000 in 1991. Zenith has formulated tax allocation procedures with its subsidiaries and the 1993, 1992 and 1991 condensed financial information reflect Zenith's portion of the consolidated taxes. Zenith Insurance Company paid dividends to Zenith of $25,000,000 in 1993, $15,000,000 in 1992 and $33,000,000 in 1991. CalFarm Insurance Company paid a dividend of $5,000,000 to Zenith Insurance Company in 1992. F-8 SCHEDULE V -- SUPPLEMENTARY INSURANCE INFORMATION ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
COLUMN C ------------- COLUMN B FUTURE POLICY COLUMN E ------------ BENEFITS, ------------ COLUMN G DEFERRED LOSSES, COLUMN D OTHER POLICY COLUMN F ----------- COLUMN A POLICY CLAIMS ------------ CLAIMS AND ------------ NET - ------------------------------ ACQUISITION AND LOSS UNEARNED BENEFITS PREMIUM INVESTMENT SEGMENT COSTS EXPENSES PREMIUMS PAYABLE REVENUE INCOME - ------------------------------ ------------ ------------- ------------ ------------ ------------ ----------- 1993 - ------------------------------ Property and Casualty Workers' compensation....... $ 4,264,000 $286,452,000 $32,109,000 $244,661,000 Automobile and other property/casualty......... 11,704,000 87,418,000 68,182,000 137,945,000 Reinsurance................. 1,048,000 94,848,000 6,889,000 23,295,000 ------------ ------------- ------------ ------------ ------------ ----------- 17,016,000 468,718,000 107,180,000 405,901,000 $36,643,000 Health and Life............... 91,400,000 153,771,000 4,716,000 $ 5,934,000 63,921,000 55,339,000 Reinsurance ceded............. 45,282,000 Registrant.................... 492,000 ------------ ------------- ------------ ------------ ------------ ----------- Total....................... $108,416,000 $667,771,000 $111,896,000 $ 5,934,000 $469,822,000 $92,474,000 ------------ ------------- ------------ ------------ ------------ ----------- ------------ ------------- ------------ ------------ ------------ ----------- 1992 - ------------------------------ Property and Casualty Workers' compensation....... $ 4,647,000 $266,092,000 $30,853,000 $221,652,000 Automobile and other property/casualty......... 10,460,000 90,262,000 56,663,000 137,392,000 Reinsurance................. 620,000 107,795,000 3,378,000 18,382,000 ------------ ------------- ------------ ------------ ------------ ----------- 15,727,000 464,149,000 90,894,000 377,426,000 $42,276,000 Health and Life............... 75,292,000 138,000,000 5,502,000 $ 7,041,000 64,448,000 53,486,000 Reinsurance ceded............. 33,387,000 5,403,000 Registrant.................... 852,000 ------------ ------------- ------------ ------------ ------------ ----------- Total....................... $ 91,019,000 $635,536,000 $101,799,000 $ 7,041,000 $441,874,000 $96,614,000 ------------ ------------- ------------ ------------ ------------ ----------- ------------ ------------- ------------ ------------ ------------ ----------- 1991 - ------------------------------ Property and Casualty Workers' compensation....... $ 3,726,000 $241,439,000 $24,295,000 $208,989,000 Automobile and other property/casualty......... 11,220,000 90,848,000 58,010,000 140,732,000 Reinsurance................. 1,637,000 107,893,000 7,868,000 26,347,000 ------------ ------------- ------------ ------------ ------------ ----------- 16,583,000 440,180,000 90,173,000 376,068,000 $45,727,000 Health and Life............... 60,027,000 134,308,000 5,406,000 $ 7,209,000 61,556,000 49,558,000 Registrant.................... 400,000 ------------ ------------- ------------ ------------ ------------ ----------- Total....................... $ 76,610,000 $574,488,000 $95,579,000 $ 7,209,000 $437,624,000 $95,685,000 ------------ ------------- ------------ ------------ ------------ ----------- ------------ ------------- ------------ ------------ ------------ ----------- COLUMN H COLUMN I ------------- ------------ BENEFITS, AMORTIZATION COLUMN J CLAIMS, OF DEFERRED ----------- COLUMN K COLUMN A LOSSES AND POLICY OTHER ------------ - ------------------------------ SETTLEMENT ACQUISITION OPERATING PREMIUMS SEGMENT EXPENSES COSTS EXPENSES WRITTEN - ------------------------------ ------------- ------------ ----------- ------------ 1993 - ------------------------------ Property and Casualty Workers' compensation....... $164,815,000 $ 33,317,000 $19,736,000 $245,917,000 Automobile and other property/casualty......... 96,715,000 26,598,000 20,336,000 143,223,000 Reinsurance................. 13,678,000 3,384,000 896,000 26,807,000 ------------- ------------ ----------- ------------ 275,208,000 63,299,000 40,968,000 415,947,000 Health and Life............... 84,448,000 2,202,000 24,267,000 Reinsurance ceded............. Registrant.................... 3,478,000 ------------- ------------ ----------- ------------ Total....................... $359,656,000 $ 65,501,000 $68,713,000 $415,947,000 ------------- ------------ ----------- ------------ ------------- ------------ ----------- ------------ 1992 - ------------------------------ Property and Casualty Workers' compensation....... $166,065,000 $ 33,868,000 $20,260,000 $228,209,000 Automobile and other property/casualty......... 96,224,000 26,231,000 20,061,000 136,077,000 Reinsurance................. 27,443,000 3,674,000 1,267,000 13,892,000 ------------- ------------ ----------- ------------ 289,732,000 63,773,000 41,588,000 378,178,000 Health and Life............... 85,493,000 (494,000) 18,898,000 Reinsurance ceded............. Registrant.................... 3,222,000 ------------- ------------ ----------- ------------ Total....................... $375,225,000 $ 63,279,000 $63,708,000 $378,178,000 ------------- ------------ ----------- ------------ ------------- ------------ ----------- ------------ 1991 - ------------------------------ Property and Casualty Workers' compensation....... $145,961,000 $ 33,856,000 $22,491,000 $213,956,000 Automobile and other property/casualty......... 92,599,000 27,278,000 20,163,000 143,257,000 Reinsurance................. 26,291,000 7,033,000 691,000 23,195,000 ------------- ------------ ----------- ------------ 264,851,000 68,167,000 43,345,000 380,408,000 Health and Life............... 79,924,000 88,000 18,634,000 Registrant.................... 3,236,000 ------------- ------------ ----------- ------------ Total....................... $344,775,000 $ 68,255,000 $65,215,000 $380,408,000 ------------- ------------ ----------- ------------ ------------- ------------ ----------- ------------
F-9 SCHEDULE VI -- REINSURANCE ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
COLUMN F COLUMN C COLUMN D ---------- COLUMN B ------------ ----------- PERCENTAGE -------------- CEDED TO ASSUMED COLUMN E OF AMOUNT GROSS OTHER FROM OTHER -------------- ASSUMED COLUMN A AMOUNT COMPANIES COMPANIES NET AMOUNT TO NET - ------------------------------------------------------- -------------- ------------ ----------- -------------- ---------- DECEMBER 31, 1993 Life insurance in force................................ $2,976,178,000 $453,025,000 $2,523,153,000 -------------- ------------ -------------- -------------- ------------ -------------- Premiums earned Life insurance....................................... $ 22,707,000 $ 156,000 $ 22,551,000 Accident and health insurance........................ 42,667,000 1,297,000 41,370,000 Property and casualty insurance...................... 400,811,000 21,004,000 $26,094,000 405,901,000 6.4% -------------- ------------ ----------- -------------- ---------- Total premiums earned............................ $ 466,185,000 $ 22,457,000 $26,094,000 $ 469,822,000 5.6% -------------- ------------ ----------- -------------- ---------- -------------- ------------ ----------- -------------- ---------- DECEMBER 31, 1992 Life insurance in force................................ $2,951,649,000 $287,980,000 $2,663,669,000 -------------- ------------ -------------- -------------- ------------ -------------- Premiums earned Life insurance....................................... $ 20,891,000 $ 574,000 $ 20,317,000 Accident and health insurance........................ 44,935,000 804,000 44,131,000 Property and casualty insurance...................... 378,922,000 20,853,000 $19,357,000 377,426,000 5.1% -------------- ------------ ----------- -------------- ---------- Total premiums earned............................ $ 444,748,000 $ 22,231,000 $19,357,000 $ 441,874,000 4.4% -------------- ------------ ----------- -------------- ---------- -------------- ------------ ----------- -------------- ---------- DECEMBER 31, 1991 Life insurance in force................................ $2,686,030,000 $247,994,000 $2,438,036,000 -------------- ------------ -------------- -------------- ------------ -------------- Premiums earned Life insurance....................................... $ 18,850,000 $ 428,000 $ 18,422,000 Accident and health insurance........................ 43,770,000 636,000 43,134,000 Property and casualty insurance...................... 368,971,000 20,434,000 $27,531,000 376,068,000 7.3% -------------- ------------ ----------- -------------- ---------- Total premiums earned............................ $ 431,591,000 $ 21,498,000 $27,531,000 $ 437,624,000 6.3% -------------- ------------ ----------- -------------- ---------- -------------- ------------ ----------- -------------- ----------
F-10 SCHEDULE IX -- SHORT-TERM BORROWINGS ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
COLUMN A COLUMN D COLUMN E COLUMN F - ---------------------------------------- ----------- ----------- ------------- CATEGORY COLUMN B COLUMN C MAXIMUM AVERAGE WEIGHTED OF ----------- -------------- AMOUNT AMOUNT AVERAGE AGGREGATE BALANCE WEIGHTED OUTSTANDING OUTSTANDING INTEREST RATE SHORT-TERM AT END OF AVERAGE DURING THE DURING THE DURING THE BORROWINGS PERIOD INTEREST RATE PERIOD PERIOD (1) PERIOD (2) - ---------------------------------------- ----------- -------------- ----------- ----------- ------------- Amounts payable to banks (3) 1993.................................. -0- -0- $ 1,000,000 $ 83,000 5.45% 1992.................................. -0- -0- $20,000,000 $ 5,883,000 5.95% 1991.................................. $16,900,000 5.95% $26,350,000 $18,133,000 7.9% - ------------------------ (1) Computed on the average of month-end balances. (2) Computed using actual daily amount charged when line was drawn, divided by the number of days outstanding. (3) Amounts payable to banks are borrowed under a line of credit borrowing arrangement which is subject to renewal, annually, on July 1.
F-11 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ EXHIBITS TO FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1993 ------------------------ ZENITH NATIONAL INSURANCE CORP. (Exact name of registrant as specified in its charter) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- EXHIBIT LIST
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE - --------- -------------------------------------------------------------------------------------- ----------------- 3.1 Certificate of Incorporation of Zenith as in effect immediately prior to November 22, 1985. (Incorporated herein by reference to Exhibit 3 to Zenith's Amendment on Form 8, date of amendment October 10, 1985, to Zenith's Current Report on Form 8-K, date of report July 26, 1985). Certificate of Amendment to Certificate of Incorporation of Zenith, effective November 22, 1985. (Incorporated herein by reference to Zenith's Current Report on Form 8-K, date of report November 22, 1985). 3.2 By-Laws of Zenith, as currently in effect. (Incorporated herein by reference to Exhibit 3.2 to Zenith's Annual Report on Form 10-K for the year ended December 31, 1988.) 4.1 Indenture dated as of May 1, 1992 entered into between Zenith and Norwest Bank Minnesota, National Association, as trustee, pursuant to which Zenith issued its 9% Senior Notes due May 1, 2002. (Incorporated herein by reference to Exhibit 4 to Zenith's Quarterly Report on Form 10-Q for the quarter ended March 31, 1992.) 10.1 Purchase Agreement, dated as of February 4, 1981, among Reliance Insurance Company, Zenith, the Selling Stockholders referred to therein, and Eugene V. Klein, Daniel Schwartz and Harvey L. Silbert as agents for the Selling Stockholders. (Incorporated herein by reference to the exhibit to the Schedule 13D filed by Reliance Financial Services Corporation on March 9, 1981 with respect to the common stock of Zenith). 10.2 Asset and Liability Assumption Agreement, dated as of June 4, 1985, between Zenith Insurance and the Insurance Commissioner of the State of California (the "Commissioner"). (Incorporated herein by reference to Exhibit 1 to Zenith's Current Report on Form 8-K, date of report July 26, 1985). 10.3 Memorandum and Agreement of Closing dated as of July 26, 1985, among Zenith Insurance, Zenith and the Commissioner (Incorporated herein by reference to Exhibit 10.6 to Zenith's Annual Report on Form 10-K for the year ended December 31, 1985), together with the following exhibits: (a) Exhibit A -- Grant Deed, dated July 25, 1985, by the Commissioner in favor of Zenith Insurance. (Incorporated herein by reference to Exhibit 10.6 to Zenith's Annual Report on Form 10-K for the year ended December 31, 1985). (b) Exhibit B -- Bill of Sale, dated as of July 26, 1985, by the Commissioner in favor of Zenith Insurance. (Incorporated herein by reference to Exhibit 10.6 to Zenith's Annual Report on Form 10-K for the year ended December 31, 1985). (c) Exhibit C -- Assignment of Assets and Assumption of Liabilities, dated as of July 26, 1985, between the Commissioner and Zenith Insurance. (Incorporated herein by reference to Exhibit 10.6 to Zenith's Annual Report on Form 10-K for the year ended December 31, 1985). (d) Exhibit D -- Noncompetition Agreement, dated as of July 26, 1985, between the Commissioner and Zenith Insurance. (Incorporated herein by reference to Exhibit 28.3 to Zenith's Current Report on Form 8-K, date of report July 26, 1985). (e) Exhibit E -- First Assignment Separate from Certificate, dated July 26, 1985, by the Commissioner in favor of Zenith. (Incorporated herein by reference to Exhibit 10.6 to Zenith's Annual Report on Form 10-K for the year ended December 31, 1985).
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE - --------- -------------------------------------------------------------------------------------- ----------------- (f) Exhibit F -- Engagement and Reimbursement Agreement, dated as of July 26, 1985, between Zenith Insurance and the Commissioner. (Incorporated herein by reference to Exhibit 28.2 to Zenith's Current Report on Form 8-K, date of report July 26, 1985). *10.4 Zenith's Non-Qualified Stock Option Plan, as in effect immediately prior to December 6, 1985. (Incorporated herein by reference to Zenith's Registration Statement on Form S-8 (SEC File No. 2-97962)). *10.5 Zenith's Amended and Restated Non-Qualified Stock Option Plan, adopted by Zenith's Board of Directors on December 6, 1985. (Incorporated herein by reference to Zenith's Registration Statement on Form S-8 (SEC File No. 33-8948)). *10.6 Employment Agreement, dated May 24, 1990, between Zenith and Fredricka Taubitz. (Incorporated herein by reference to Exhibit 10.6 to Zenith's Annual Report on Form 10K for the year ended December 31, 1990). *10.7 Employment Agreement, dated October 1, 1990, between Zenith and John J. Tickner. (Incorporated herein by reference to Exhibit 10.7 to Zenith's Annual Report on Form 10K for the year ended December 31, 1990). *10.8 Employment Agreement, dated as of February 28, 1990, between Zenith and Stanley R. Zax. (Incorporated herein by reference to Exhibit 10.8 to Zenith's Annual Report on Form 10K for the year ended December 31, 1990). *10.9 Stock Option Agreement, dated as of May 19, 1987, between Zenith and Stanley R. Zax. (Incorporated herein by reference to Exhibit 10.15 to Zenith's Annual Report on Form 10-K for the year ended December 31, 1987). 10.10 Promissory Note, dated January 9, 1991, in an original principal amount of $3,000,000, by Stanley R. Zax in favor of Zenith. (Incorporated herein by reference to Exhibit 10.10 to Zenith's Annual Report on Form 10K for the year ended December 31, 1990). 10.11 Credit Agreement, as amended, dated as of November 30, 1988 between Zenith and Sanwa Bank of California. (Incorporated herein by reference to Exhibit 10.11 to Zenith's Annual Report on Form 10-K for the year ended December 31, 1992). 10.12 Revolving Note Agreement, dated July 1, 1993, between Zenith and City National Bank. 10.13 Revolving Note Agreement, dated August 15, 1993 between Zenith and City National Bank. 10.14 Letter of Credit Facility Agreement, dated December 1, 1993, between Sanwa Bank of California and Zenith Insurance. 10.15 Agreement of Reinsurance #6966 between Zenith Insurance Company and General Reinsurance Corporation, dated as of December 21, 1984. (Incorporated herein by reference to Exhibit 10.13 to Zenith's Annual Report on Form 10K for the year ended December 31, 1991.) 10.16 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 10K for the year ended December 31, 1991.) 10.17 Agreement of Reinsurance No. 7276 between CalFarm Insurance Company and General Reinsurance Corporation, dated as of February 5, 1988. (Incorporated herein by reference to Exhibit 10.15 to Zenith's Annual Report on Form 10K for the year ended December 31, 1991.)
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE - --------- -------------------------------------------------------------------------------------- ----------------- 10.18 Agreement of Reinsurance No. B226 between CalFarm Insurance Company and General Reinsurance Corporation, dated as of January 13, 1988. (Incorporated herein by reference to Exhibit 10.16 to Zenith's Annual Report on Form 10K for the year ended December 31, 1991.) 10.19 Agreement of Reinsurance No. B197-A between CalFarm Insurance Company and General Reinsurance Corporation, dated as of January 13, 1988. (Incorporated herein by reference to Exhibit 10.17 to Zenith's Annual Report on Form 10K for the year ended December 31, 1991.) 10.20 Agreement of Reinsurance No. B196-A between CalFarm Insurance Company and General Reinsurance Corporation, dated as of January 13, 1988. (Incorporated herein by reference to Exhibit 10.18 to Zenith's Annual Report on Form 10K for the year ended December 31, 1991.) 10.21 Agreement of Reinsurance No. 7832 between General Reinsurance Corporation and CalFarm Insurance, Zenith Insurance and ZNAT Insurance, effective September 1, 1993. 10.22 Agreement of Reinsurance No. 623-0005 between American Re-Insurance Company and CalFarm Insurance, Zenith Insurance and ZNAT Insurance, effective September 1, 1993. 10.23 Agreement of Reinsurance No. 0079460 between Employers Reinsurance Corporation and CalFarm Insurance, Zenith Insurance and ZNAT Insurance, effective September 1, 1993. 10.24 Life, Disability and Accidental Death Automatic Reinsurance Agreement between CalFarm Life Insurance Company and Transamerica Occidental Life Insurance Company, effective June 1, 1983. (Incorporated herein by reference to Exhibit 10.20 to Zenith's Annual Report on Form 10K for the year ended December 31, 1991.) 10.25 Life, Disability and Accidental Death Facultive Reinsurance Agreement between CalFarm Insurance Company and Occidental Life Insurance Company of California, effective April 1, 1971. (Incorporated herein by reference to Exhibit 10.21 to Zenith's Annual Report on Form 10K for the year ended December 31, 1991.) 10.26 Reinsurance Agreement between CalFarm Life Insurance Company and American United Life Insurance Company, effective August 1, 1983. (Incorporated herein by reference to Exhibit 10.22 to Zenith's Annual Report on Form 10K for the year ended December 31, 1991.) 10.27 Excess Major Medical Reinsurance Agreement (No. 0076820/Specific and Aggregate Retentions) between CalFarm Life Insurance Company and Employers Reinsurance Corporation, effective January 1, 1993. 10.28 Automatic Reinsurance Agreement between CalFarm Life Insurance Company and North American Reassurance Company, effective June 1, 1991. (Incorporated herein by reference to Exhibit 10.24 to Zenith's Annual Report on Form 10-K for the year ended December 31, 1992.) 10.29 Automatic Reinsurance Agreement between CalFarm Life Insurance Company and North American Reassurance Company, effective February 21, 1991. (Incorporated herein by reference to Exhibit 10.25 to Zenith's Annual Report on Form 10-K for the year ended December 31, 1992.)
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE - --------- -------------------------------------------------------------------------------------- ----------------- 10.30 Yearly Renewable Term Reinsurance Agreement between CalFarm Life Insurance Company and Gerling Global Life Insurance Company, effective March 1, 1992. (Incorporated herein by reference to Exhibit 10.26 to Zenith's Annual Report on Form 10-K for the year ended December 31, 1992.) 11 Computation of Earnings Per Share for the three (3) years ended December 31, 1993. 13 Zenith's Annual Report to Stockholders for the year ended December 31, 1993, but only to the extent such report is expressly incorporated by reference herein, and such report is not otherwise to be deemed "filed" as a part of this Annual Report on Form 10-K. 21 Subsidiaries of Zenith 23 Consent of Coopers & Lybrand, dated March 29, 1994. (Incorporated herein by reference to page F-1 of this Annual Report on Form 10-K). 28 Property and Casualty Loss Statistics. 99.1 Information required by rule 15d-21 under the Securities Exchange Act of 1934 for the year ended December 31, 1993 for the Zenith Investment Partnership 401(k) Plan (to be filed by amendment on Form 10-K/A within 180 days of December 31, 1993). - ------------------------ *Management contract or compensatory plan or arrangement
EX-10.12 2 EXHIBIT 10.12 CITY NATIONAL BANK REVOLVING NOTE (INTEREST TIED TO PRIME) 11552 Note No. ----- $20,000,000.00 Head Office Beverly Hills, California July 1, 1993 On September 1, 1993, the undersigned, ZENITH NATIONAL INSURANCE CORP., a Delaware corporation ("Borrower"), promises to pay to the order of CITY NATIONAL BANK, a national banking association ("CNB"), at its office in this city, in lawful money of the United States of America and in immediately available funds, the principal sum of Twenty Million Dollars ($20,000,000), or so much thereof as may be advanced and be outstanding, with interest thereon to be computed on each advance from the date of its disbursement at a rate computed on the basis of a 360-day year, actual days elapsed, equal to the Prime Rate of CNB, as it exists from time to time, minus fifty-five one hundredths of one percent (0.55%) per year. Any change in the Prime Rate shall become effective on the same business day on which the Prime Rate shall change, without prior notice to Borrower. All or any portion of the principal of this Note may be borrowed, repaid and reborrowed from time to time prior to maturity, provided at the time of any borrowing no Event of Default (as herein defined) exists, and provided further that the total borrowings outstanding at any one time shall not exceed the principal amount stated above. Each borrowing and repayment hereunder shall be noted in the books and records of CNB. The excess of borrowings over repayments shall evidence the principal balance due hereon from time to time and at any time. Borrowings hereunder shall be conclusively presumed to have been made to or for the benefit of Borrower when made as noted in such books and records. Interest accrued on this Note shall be payable on September 1, 1993. The occurrence of any of the following with respect to Borrower or any guarantor of this Note or any general partner of such Borrower or guarantor, shall constitute an "Event of Default" hereunder: 1. The failure to make any payment of principal or interest when due under this Note; 2. The filing of a petition by or against any of such parties under any provisions of the BANKRUPTCY CODE; 3. The appointment of a receiver or an assignee for the benefit of creditors; 4. The commencement of dissolution or liquidation proceedings or the disqualification of any such parties, which is a corporation, partnership, joint venture or any other type of entity; 5. The death or incapacity of any of such parties who is an individual; 6. The revocation of any guaranty of this Note; 7. Any financial statement provided by any of such parties to CNB is false or misleading; 8. Any material default in the payment or performance of any obligation, or any material default under any provisions of any contract or instrument pursuant to which any of such parties has incurred any obligation for borrowed money, any purchase obligation or any other liability of any kind to any person or entity, including CNB; 9. Any sale or transfer of all or a substantial or material part of the assets of any of such parties other than in the ordinary course of business; or 10. Any violation, breach or default under any letter agreement, guaranty, security agreement, deed of trust or any other contract or instrument executed in connection with this Note or securing this Note. Upon the occurrence of any Event of Default, CNB, at its option, may declare all sums of principal and interest outstanding hereunder to be immediately due and payable without presentment, demand, protest or notice of dishonor all of which are expressly waived by Borrower, and CNB shall have no obligation to make any further advances hereunder. Each Borrower agrees to pay all costs and expenses, including reasonable attorneys' fees, expended or incurred by the holder (or allocable to the holder's in-house counsel) in connection with the enforcement of this Note or the collection of any sums due hereunder and irrespective of whether suit is filed. Any principal or interest not paid when due hereunder shall thereafter bear additional interest from its due date at a rate of two percent (2.0%) per year higher than the interest rate as determined and computed above, and continuing thereafter until paid. Should more than one person or entity execute this Note as a Borrower, the obligations of each such Borrower shall be joint and several. This Note and all matters relating hereto, shall be governed by the laws of the State of California. ZENITH NATIONAL INSURANCE CORP., a Delaware corporation By: /s/ ------------------------------- Stanley R. Zax, Chairman of the Board/President EX-10.13 3 EXHIBIT 10.13 CITY NATIONAL BANK REVOLVING NOTE (INTEREST TIED TO PRIME) ____ Note No. $20,000,000.00 Head Office Beverly Hills, California August 15, 1993 On July 1, 1994, the undersigned, ZENITH NATIONAL INSURANCE CORP., a Delaware corporation ("Borrower"), promises to pay to the order of CITY NATIONAL BANK, a national banking association ("CNB"), at its office in this city, in lawful money of the United States of America and in immediately available funds, the principal sum of Twenty Million Dollars ($20,000,000), or so much thereof as may be advanced and be outstanding, with interest thereon to be computed on each advance from the date of its disbursement at a rate computed on the basis of a 360-day year, actual days elapsed, equal to the Prime Rate of CNB, as it exists from time to time, minus fifty-five one hundredths of one percent (0.55%) per year. Any change in the Prime Rate shall become effective on the same business day on which the Prime Rate shall change, without prior notice to Borrower. All or any portion of the principal of this Note may be borrowed, repaid and reborrowed from time to time prior to maturity, provided at the time of any borrowing no Event of Default (as herein defined) exists, and provided further that the total borrowings outstanding at any one time shall not exceed Twenty Million Dollars ($20,000,000.00). Each borrowing and repayment hereunder shall be noted in the books and records of CNB. The excess of borrowings over repayments shall evidence the principal balance due hereon from time to time and at any time. Borrowings hereunder shall be conclusively presumed to have been made to or for the benefit of Borrower when made as noted in such books and records. Interest accrued on this Note shall be payable on the first day of each calendar quarter, commencing October 1, 1993. A facility fee equal to $75,000.00 shall be payable in four (4) equal consecutive installments, each in the amount of $18,750.00, on August 15, 1993, November 15, 1993, February 15, 1994, and May 15, 1994. The occurrence of any of the following with respect to Borrower shall constitute an "Event of Default" hereunder: 1. The failure to make any payment of principal or interest when due under this Note, when such failure continues for ten (10) days after notice form CNB; 2. The filing of a petition by or against Borrower under any provisions of the BANKRUPTCY CODE; 3. The appointment of a receiver or an assignee for the benefit of Borrower's creditors; 4. The commencement of dissolution or liquidation proceedings or the disqualification of Borrower, whether a corporation, partnership, joint venture or any other type of entity; 5. Any financial statement provided by Borrower to CNB is false or misleading; 6. Any material default in the payment or performance of any obligation, or any material default under any provisions of any material contract or instrument pursuant to which Borrower has incurred any obligation for borrowed money, any purchase obligation or any other liability of any kind to any person or entity; including CNB; 7. Any sale or transfer of all or a substantial or material part of the assets of Borrower other than in the ordinary course of business; or 8. Any material violation, breach or default under any letter agreement or any other contract or instrument executed in connection with this Note of securing this Note. Upon the occurrence of any Event of Default, CNB, at its option, may declare all sums of principal and interest outstanding hereunder to be immediately due and payable without presentment, demand, protest or notice of dishonor all of which are expressly waived by Borrower, and CNB shall have no obligation to make any further advances hereunder. Borrower agrees to pay all costs and expenses, including reasonable attorneys' fees, expended or incurred by the holder (or allocable to the holder's in-house counsel) in connection with the enforcement of this Note or the collection any sums due hereunder and irrespective of whether suit is filed. Any principal or interest not paid when due hereunder shall thereafter bear additional interest from its due date at a rate of two percent (2.0%) per year higher than the interest rate as determined and computed above, and continuing thereafter until paid. Should more than one person or entity execute this Note as a Borrower, the obligations of each such Borrower shall be joint and several. This Note and all matters relating hereto, shall be governed by the laws of the State of California. ZENITH NATIONAL INSURANCE CORP., a Delaware corporation By: /s/ ---------------------------------- Stanley R. Zax, Chairman of the Board/President EX-10.14 4 EXHIBIT 10.14 LETTER OF CREDIT FACILITY AGREEMENT THIS LETTER OF CREDIT FACILITY AGREEMENT (the "Agreement") is made and entered into this 1st day of December 1993 by and between SANWA BANK CALIFORNIA (the "Bank") and ZENITH INSURANCE COMPANY (the "Borrower"). SECTION I AGREEMENT TO LEND 1.01 COMMITMENT TO LEND. Subject to the terms and conditions of this Agreement and so long as no Event of Default occurs, the Bank agrees to extend to the Borrower the credit accommodations that follow. 1.02 LETTER OF CREDIT FACILITY. The Bank agrees to issue standby letters of credit (each a "Letter of Credit") on behalf of the Borrower upon the Borrower's application therefor which application shall be in the Bank's standard form and to which an attachment in the form of Exhibit "A" (or in such form as the parties mutually agree) may at Borrower's option be attached [the "Application"]. At no time, however, shall the total available amount of all Letters of Credit outstanding (plus any unpaid draws paid by the Bank) exceed the sum of $3,000,000; provided that any sums repaid hereunder may be reborrowed. Each Letter of Credit shall be in form and substance satisfactory to the Bank, provided that the Bank may refuse to issue a Letter of Credit due to the nature of the transaction or its terms or in connection with any transaction where the Bank, due to the beneficiary or the nationality or residence of the beneficiary, would be prohibited by any applicable law, regulation or order from issuing such Letter of Credit. 1.03 LETTER OF CREDIT FEES; COSTS The Borrower hereby agrees to pay to the Bank on the date of issuance and each calendar quarter thereafter (in advance), a Letter of Credit Fee in the amount of .25% per quarter of the face amount of each Letter of Credit outstanding and upon the Bank's request, the Borrower shall promptly pay to the Bank issuance fees and such other fees, commissions, costs and any out-of-pocket expenses charged or incurred by the Bank with respect to any Letter of Credit. The Letter of Credit Fee and other costs and fees, where applicable, shall be computed on the basis of 360 days per year, but charged on the actual number of days elapsed. 1.04 INDEMNIFICATION. In the event that the Bank agrees to issue any Letter of Credit wherein the Letter of Credit is subject to and governed by the laws of a state other than the State of California and the Uniform Customs and Practice for Documentary Credits (1983 Revision), International Chamber of Commerce Publication No. 400 or subsequent revisions ("UCP 400") and, further providing that in the event of any conflict between the laws of a state other than the State of California and UCP 400, the laws of the state other than the State of California will control, the Borrower hereby indemnifies and holds the Bank, including, without limitation, its directors, officers, agents, employees, successors and assigns, harmless from and against any and all liability, loss, claims, demands, causes of action, judgments, damages and expenses, including without limitation, reasonable attorneys fees, in connection with the Bank making: (i) any payment pursuant to the Letter of Credit where such payment is legal, authorized or otherwise appropriate under the other state's version of the Uniform Commercial Code or UCP 400 (ii) any payment after the expiry date of the Letter of Credit where a draw was made prior to the expiry date which the Bank did not honor but which the Bank or any court or other finder of fact determines should have been honored. In the event that the Bank agrees to issue any Letter of Credit wherein: (a) the Bank agrees to make payment to any successor by operation of law of the named beneficiary including, without limitation, any liquidator, rehabilitator, receiver or conservator; and (b) the Bank agrees to make payment following the expiration of the Letter of Credit during an interruption of business as described in Article 19 of UCP 400 or Article 17 of the Uniform Customs and Practice for Documentary Credits (1993 Revision), International Chamber of Commerce Publication No. 500 ("UCP 500") if the Letter of Credit is drawn against within 30 days after the resumption of business, the Borrower hereby indemnifies and holds the Bank harmless including, without limitation, its directors, officers, agents, employees, successor and assigns , from and against any and all liability, loss, claims, demands, causes of action, judgments, damages and expenses, including without limitation, reasonable attorney fees, in connection with the Bank making payment to any successor in interest, liquidator, rehabilitator, receiver or conservator of the beneficiary or any party that purports to be any successor in interest, liquidator, rehabilitator, receiver or conservator of the beneficiary and in connection with any payment made after the expiration date of the Letter of Credit as a result of interruption of business as described in Article 19 of UCP 400 or Article 17 of UCP 500. -1- 1.05 REPAYMENT OF DRAWINGS. The Borrower hereby promises and agrees to pay to the Bank immediately upon the Bank's demand, the amount of each drawing under each Letter of Credit issued hereunder (each, a "Drawing"). 1.06 EXPIRATION DATE. Unless earlier terminated in accordance with the terms of this Agreement, the commitment by the Bank to issue Letters of Credit shall automatically terminate on December 31, 1994 (the "Expiration Date") and no Letter of Credit shall expire on a date which is after the Expiration Date. SECTION II CONDITIONS PRECEDENT 2.01 CONDITIONS PRECEDENT TO FIRST LETTER OF CREDIT. Prior to issuance of the first Letter of Credit hereunder, the Borrower shall deliver or cause to be delivered to the Bank, in form and substance satisfactory to the Bank, evidence relating to the duly given approval and authorization of the execution, delivery and performance of this Agreement, all other documents, instruments and agreements required under this Agreement and all other actions to be taken by the Borrower hereunder or thereunder. 2.02 CONDITIONS PRECEDENT TO EACH LETTER OF CREDIT. The obligation of the Bank to issue each Letter of Credit (including the first Letter of Credit) is subject to the further conditions precedent that, as of the date of the issuance of each Letter of Credit and thereafter: A. REPRESENTATIONS AND WARRANTIES. The representations and warranties set forth below and in any other document, instrument, agreement or certificate delivered to the Bank hereunder are true and correct. B. EVENT OF DEFAULT. No event has occurred and is continuing which constitutes, or, which with the lapse of time or giving of notice or both, would constitute an Event of Default as defined below. C. APPLICATION. The Borrower shall deliver to the Bank no later than 10:00 a.m. one day prior to the day such Letter of Credit is to be issued, a duly executed form of the Application. D. MISCELLANEOUS DOCUMENTS. Such other documents and opinions as the Bank may reasonably require with respect to the transactions described in this Agreement. For the purposes hereof, the Borrower's delivery to the Bank of an Application shall be deemed to constitute the Borrower's representation and warranty that the statements set forth in Section 2.02A and 2.02B above are true and correct. SECTION III REPRESENTATIONS AND WARRANTIES The Borrower hereby makes the following representations and warranties to the Bank, which representations and warranties are continuing: 3.01 STATUS. The Borrower is a corporation duly organized and validly existing under the laws of the State of California, and is properly licensed, qualified to do business and in good standing in, and, where necessary to maintain the Borrower's rights and privileges, has complied with the fictitious name statute of, every jurisdiction in which the Borrower is doing business. 3.02 AUTHORITY. The execution, delivery and performance by the Borrower of this Agreement and any documents referred to or required hereunder have been duly authorized and do not and will not: (i) violate any provision of any law, rule, regulation, writ, judgment or injunction presently in effect materially affecting the Borrower; (ii) result in a material breach of or constitute a material default under any material agreement to which the Borrower is a party or by which it or its properties may be bound or affected; or (iii) require any consent or approval of its stockholders or violate any provision of its articles of incorporation or by-laws. 3.03 LEGAL EFFECT. This Agreement constitutes, and any document, instrument or agreement required hereunder when delivered will constitute, legal, valid and binding obligations of the Borrower enforceable against the Borrower in accordance with their respective terms. -2- 3.04 FINANCIAL STATEMENTS. All financial statements, information and other data which may have been or which may hereafter be submitted by the Borrower to the Bank are true, accurate and correct and have been or will be prepared in accordance with generally accepted accounting principles consistently applied (or, as appropriate, in accordance with statutory accounting practices) and accurately represent the Borrower's financial condition or, as applicable, the other information disclosed therein. Since the most recent submission of any such financial statement, information or other data to the Bank, the Borrower represents and warrants that no material adverse change in the Borrower's financial condition or operations have occurred which have not been fully disclosed to the Bank in writing. 3.05 LITIGATION. Except as have been disclosed to the Bank in writing, there are no actions, suits or proceedings pending or, to the knowledge of the Borrower, threatened against or affecting the Borrower or the Borrower's properties before any court or administrative agency which, if determined adversely to the Borrower, would have a material adverse effect on the Borrower's financial condition or operations. 3.06 TITLE TO ASSETS; PERMITTED LIENS. The Borrower has title to all of its assets subject only to security interests, encumbrances, liens or claims of any third person as follows: (i) liens and security interests securing indebtedness owed by the Borrower to the Bank; (ii) liens for taxes, assessments or similar charges either not yet due and payable or being duly contested in good faith; (iii) liens of mechanics, materialmen, warehousemen or other like liens arising in the ordinary course of business and securing obligations which are not delinquent; (iv) liens and security interests which, as of the date of this Agreement, have been disclosed to and approved by the Bank in writing; (v) purchase money liens or purchase money security interests upon or in any property acquired or held by the Borrower in the ordinary course of business to secure indebtedness outstanding on the date hereof or permitted to be incurred hereunder; and (vi) those liens and security interests which in the aggregate constitute an immaterial and insignificant monetary amount with respect to the value of the Borrower's assets (collectively "Permitted Liens"). 3.07 GOVERNMENTAL APPROVALS. The Borrower has obtained all permits and approvals from the California Department of Insurance and any other state regulatory authority that may be required to conduct its business as presently conducted. 3.08 ERISA. If the Borrower has a pension, profit sharing or retirement plan subject to the Employee Retirement Income Security Act of 1974, as amended from time to time, including any rules and regulations promulgated thereunder ("ERISA"), such plan has been and will continue to be funded in accordance with its terms and otherwise complies with and continues to comply with the requirements of ERISA. 3.09 TAXES. The Borrower has filed all tax returns required to be filed and paid all taxes shown thereon to be due, including interest and penalties, other than taxes which are not currently due or those which are being duly contested in good faith. SECTION IV COVENANTS The Borrower covenants and agrees that, during the term of this Agreement, and so long thereafter as the Borrower is indebted to the Bank under this Agreement, the Borrower shall, unless the Bank otherwise consents in writing: 4.01 PRESERVATION OF EXISTENCE; COMPLIANCE WITH APPLICABLE LAWS. Borrower shall maintain and preserve its existence and all rights and privileges now enjoyed; not liquidate or dissolve, merge or consolidate into an entity (which would be the survivor) and conduct its business in accordance with all applicable laws, rules and regulations. 4.02 MAINTENANCE OF INSURANCE. Maintain insurance in such amounts and covering such risks as is usually carried by companies engaged in similar businesses and owning similar properties in the same general areas in which the Borrower operates and maintain such other insurance and coverages as may be required by the Bank. 4.03 PAYMENT OF OBLIGATIONS AND TAXES. Make timely payment of all assessments and taxes and all of its liabilities and obligations unless the same are being contested in good faith. 4.04 INSPECTION RIGHTS. At any reasonable time and from time to time permit the Bank or any representative thereof to examine and make copies of the pertinent records and visit the properties of the Borrower and to discuss the business and operations of the Borrower with the President and Chairman of the Board, Executive Vice President, Vice President Finance, Treasurer, Assistant Treasurer, or those employees designated by them. If the Borrower now or at any time hereafter maintains any records (including, but not limited to, computer generated records and computer programs for the generation of such records) in the possession -3- of a third party, the Borrower hereby agrees to notify such third party to permit the Bank free access to such pertinent records at all reasonable times and to provide the Bank with copies of any pertinent records it may request, all at the Borrower's expense, the amount of which shall be payable immediately upon demand. 4.05 REPORTING REQUIREMENTS. Deliver or cause to be delivered to the Bank in form and detail satisfactory to the Bank: A. Annual Statements. Not later than 95 days after the end of each of the fiscal years of Zenith National Insurance Corp., a copy of the audited consolidated annual financial report of Zenith National Insurance Corp. for such year. B. Quarterly Statements. Not later than 50 days after the end of the first three quarters of each fiscal year of Zenith National Insurance Corp., Zenith National Insurance Corp.'s consolidated financial statement as of the end of such quarter. C. Triennial Audit. Not later than 30 days after Borrower receives it, a copy of its triennial audit and the triennial audit of CalFarm Insurance Company, and ZNAT Insurance Company prepared by the Department of Insurance. D. Statutory Statements. Not later than 30 days after its submission to the Department of Insurance, the annual and quarterly statutory statements of the Borrower, CalFarm Insurance Company and ZNAT Insurance Company. E. Compliance Certificate. Not later than 50 days after the end of the first three fiscal quarters and 95 days after the end of each fiscal year of the Borrower, a certificate signed by the President and Chairman of the Board stating that the statements set other in Section 2.02A and 2.02B herein are true as of the date of such certificate. F. Other Information. Promptly upon the Bank's request, such other information pertaining to the Borrower as the Bank may reasonable request. 4.06 CORPORATE RATING. Maintain at all times an A.M. Best rating no lower than B+. 4.07 LIENS AND ENCUMBRANCES. Borrower shall not create, assume or permit to exist any security interest, encumbrance, mortgage, deed of trust or other lien (including, but not limited to, a lien of attachment, judgment or execution) affecting any of the Borrower's properties, nor execute or allow to be filed any financing statement or continuation thereof affecting any of such properties, except for Permitted Liens or as otherwise provided in this Agreement. 4.08 TRANSFER ASSETS. Not sell, contract for sale, transfer, convey, assign, lease or sublet any of its assets except in the ordinary course of business as presently conducted by the Borrower and except for real property, and then, only for full, fair and reasonable consideration. 4.09 CHANGE IN THE NATURE OF BUSINESS. Not make any material change in its corporate structure or in the nature of its business as existing or conducted as of the date of this Agreement. 4.10 FINANCIAL CONDITION. Maintain at all times: A. MAXIMUM TOTAL INDEBTEDNESS. The aggregate debt of the Borrower and its subsidiaries, including the aggregate available amount of all Letters of Credit outstanding (plus any unpaid draws paid by the Bank), shall not exceed at any time the sum of $20,000,000.00. The term "debt" shall mean, at any date, the aggregate amount of, without duplication, (a) all obligations of the Borrower for borrowed money from banks, (b) all obligations of the Borrower evidenced by bonds, debentures, notes or similar instruments, (c) all obligations of the Borrower to pay the deferred purchase price of property or services, (d) all capitalized lease obligations of the Borrower, (e) all obligations or liabilities of others secured by a lien on any asset of the Borrower, whether or not such obligation or liability is assumed, and (f) any other obligations or liabilities which are required by generally accepted accounting principles to be shown as debt on the balance sheet of the Borrower. B. MAXIMUM NET PREMIUMS WRITTEN TO POLICYHOLDERS' SURPLUS. The Borrower and its subsidiaries shall maintain a consolidated ratio of net premiums written to policyholders' surplus of not more than 3:1. -4- C. MINIMUM CONSOLIDATED POLICYHOLDERS' SURPLUS. The minimum consolidated statutory policyholders' surplus of the Borrower, CalFarm Insurance Company and ZNAT Insurance Company shall be no less than $125,000,000.00. 4.11 KEY EMPLOYEE. Continue to employ Stanley R. Zax as its President and Chairman of the Board. 4.12 NOTICES. Give prompt written notice to the Bank of any and all (i) Events of Default; (ii) litigation, arbitration or administrative proceedings to which the Borrower is a defendant and in which the claim or liability exceeds $15,000,000 and (iii) other matters which have resulted or might result in, a material adverse change in the financial conditions or business operations of the Borrower. 4.13 OTHER AGREEMENTS. Except to the extent permitted hereunder, not commit, do or fail to commit or do any act or thing which constitutes or, with the giving of notice or lapse of time or both, would constitute an Event of Default. 4.14 REIMBURSE FEES, ETC. Promptly pay to and reimburse the Bank for all costs incurred and payments made by the Bank by reason of any future assessment, reserve, deposit or similar requirement or any surcharge, tax or fee imposed upon the Bank or as a result of the Bank's compliance with any directive or requirement of any regulatory authority pertaining or relating to any Letter of Credit. SECTION V EVENTS OF DEFAULT Any one or more of the following described events shall constitute an event of default (an "Event of Default") under this Agreement: 5.01 NON-PAYMENT. The Borrower shall fail to pay any payment of principal or interest or any other sum referred to in this Agreement within five (5) business days after notice from the Bank that the same is past due. 5.02 PERFORMANCE UNDER THIS AND OTHER AGREEMENTS. The Borrower shall fail in any material respect to perform or observe any term, covenant or agreement contained in this Agreement or in any document, instrument or agreement evidencing or relating to borrowed money owed to the Bank by the Borrower, including Letter of Credit obligations, and any such failure (exclusive of the payment of money to the Bank under this Agreement or under any other document, instrument or agreement evidencing or relating to borrowed money owed to the Bank by the Borrower, including Letter of Credit obligations, which failure shall constitute and be an Event of Default if not paid within five (5) business days after notice from the Bank that the same is past due) shall continue for more than 30 days after written notice from the Bank to the Borrower of the existence and character of such Event of Default or should the default require more than thirty (30) days to correct, the Borrower does not commence corrective action within the thirty (30) days and actively pursue such corrective action. 5.03 REPRESENTATIONS AND WARRANTIES; FINANCIAL STATEMENTS. Any representation or warranty made by the Borrower under or in connection with this Agreement or any financial statement given by the Borrower or any Guarantor shall prove to have been incorrect in any material respect when made or given or when deemed to have been made or given. 5.04 INSOLVENCY. The Borrower shall: (i) become insolvent or be unable to pay its debts as they mature; (ii) make an assignment for the benefit of creditors or to an agent authorized to liquidate any substantial amount of its properties or assets; (iii) file a voluntary petition in bankruptcy or seeking reorganization or to effect a plan or other arrangement with creditors; (iv) file an answer admitting the material allegations of an involuntary petition relating to bankruptcy or reorganization or join in any such petition; (v) become or be adjudicated a bankrupt; (vi) apply for or consent to the appointment of, or consent that an order be made, appointing any receiver, custodian or trustee for itself or any of its properties, assets or businesses; or (vii) any receiver, custodian or trustee shall have been appointed for all or a substantial part of its properties, assets or businesses and shall not be discharged within 30 days after the date of such appointment. 5.05 EXECUTION. Any writ of execution or attachment or any judgment lien shall be issued against any property of the Borrower and shall not be discharged or bonded against or released within 30 days after the issuance or attachment of such writ or lien. -5- 5.06 SUSPENSION. The Borrower shall voluntarily suspend the transaction of business or allow to be suspended, terminated, revoked or expired any permit, license or approval of any governmental body necessary to conduct the Borrower's business as now conducted. 5.07 CHANGE IN OWNERSHIP. There shall occur a sale, transfer, disposition or encumbrance (whether voluntary or involuntary), or an agreement shall be entered into to do so, with respect to more than 10% of the issued and outstanding capital stock of the Borrower. SECTION VI REMEDIES ON DEFAULT Upon the occurrence of any Event of Default, the Bank may, at its sole election, without demand and upon only such notice as may be required by law: 6.01 ACCELERATION. Declare any or all of the Borrower's indebtedness owing to the Bank, whether under this Agreement or under any other document, instrument or agreement for borrowed money, immediately due and payable, whether or not otherwise due and payable. 6.02 CEASE EXTENDING CREDIT. Cease issuing Letters of Credit for the account of the Borrower under this Agreement or under any other agreement now existing or hereafter entered into between the Borrower and the Bank. 6.03 REQUIRE PAYMENT. Require the Borrower to pay immediately to the Bank, for application against drawings under any outstanding Letters of Credit, the outstanding principal amount of any such Letters of Credit which have not expired. Any portion of the amount so paid to the Bank which is not applied to satisfy draws under any such Letters of Credit or any other obligations of the Borrower to the Bank shall be repaid to the Borrower without interest. 6.04 TERMINATION. Terminate this Agreement as to any future obligation of the Bank without affecting the Borrower's obligations to the Bank or the Bank's rights and remedies under this Agreement or under any other document, instrument or agreement for borrowed money. 6.05 NON-EXCLUSIVITY OF REMEDIES. Exercise one or more of the Bank's rights set forth herein or seek such other rights or pursue such other remedies as may be provided by law, in equity or in any other agreement now existing or hereafter entered into between the Borrower and the Bank for borrowed money, or otherwise. SECTION VII MISCELLANEOUS PROVISIONS 7.01 DEFAULT INTEREST RATE. The Borrower shall pay to the Bank interest on any indebtedness or amount payable under this Agreement and pursuant to the terms of the Application, from the date that such indebtedness was demanded to be due until paid in full, at a rate which is 2% in excess of the Bank's Reference Rate, which is defined as, a variable rate equivalent to an index for a variable interest rate which is quoted, published or announced from time to time by Bank as its reference rate (and as to which loans may be made by Bank, at, below or above such reference rate). 7.02 ACCOUNTING AND OTHER TERMS. All references to financial statements, assets, liabilities and similar accounting terms not specifically defined in this Agreement shall mean such financial statements prepared and such terms determined in accordance with generally accepted accounting principles consistently applied or in accordance with statutory accounting principles where appropriate. Except where otherwise specified in this Agreement, all financial data submitted or to be submitted to the Bank pursuant to this Agreement shall be prepared in accordance with generally accepted accounting principles consistently applied or in accordance with statutory accounting principles where appropriate. Terms not otherwise defined in this Agreement shall have the meanings attributed to such terms in the California Uniform Commercial Code. 7.03 RELIANCE. Each warranty, representation, covenant and agreement contained in this Agreement shall be conclusively presumed to have been relied upon by the Bank regardless of any investigation made or information possessed by the Bank and shall be cumulative and in addition to any other warranties, representations, covenants or agreements which the Borrower shall now or hereafter give, or cause to be given, to the Bank. -6- 7.04 ATTORNEY'S FEES. In the event of any action in relation to this Agreement or any document, instrument or agreement executed with respect to, evidencing or securing the indebtedness hereunder, the prevailing party, in addition to all other sums to which it may be entitled, shall be entitled to reasonable attorneys' fees. 7.05 NOTICES. All notices, payments, requests, information and demands which either party hereto may desire, or may be required to give or make to the other party shall be given or made to such party by hand delivery or through deposit in the United States mail, postage prepaid, by overnight courier, or by Western Union telegram, addressed to the address set forth below such party's signature to this Agreement or to such other address as may be specified from time to time in writing by either party to the other. 7.06 WAIVER. Neither the failure nor delay by the Bank in exercising any right hereunder or under any document, instrument or agreement mentioned herein shall operate as a waiver thereof, nor shall any single or partial exercise of any right hereunder or under any document, instrument or agreement mentioned herein preclude other or further exercise thereof or the exercise of any other right; nor shall any waiver of any right or default hereunder or under any other document, instrument or agreement mentioned herein constitute a waiver of any other right or default or constitute a waiver of any other default of the same or any other term or provision. 7.07 CONFLICTING PROVISIONS. To the extent that any of the terms or provisions contained in this Agreement are inconsistent with those contained in any other document, instrument or agreement executed pursuant hereto, the terms and provisions contained herein shall control. Otherwise, such provisions shall be considered cumulative. 7.08 BINDING EFFECT; ASSIGNMENT. This Agreement shall be binding upon and inure to the benefit of the Borrower and the Bank and their respective successors and assigns, except that the Borrower shall not have the right to assign its rights hereunder or any interest herein without the Bank's prior written consent. The Bank may sell, assign or grant participations in all or any portion of its rights and benefits hereunder. The Borrower agrees that, in connection with any such sale, grant or assignment, the Bank may deliver to the prospective buyer, participant or assignee financial statements and other relevant information relating to the Borrower. 7.09 JURISDICTION. This Agreement, the Application, and any documents, instruments or agreements mentioned or referred to herein shall be governed by and construed according to the laws of the State of California except as otherwise specifically provided herein with respect to certain Letters of Credit. 7.10 HEADINGS. The headings set forth herein are solely for the purpose of identification and have no legal significance. 7.11 ENTIRE AGREEMENT. This Agreement and any applications for the Letters of Credit shall constitute the entire and complete understanding of the parties with respect to the transactions contemplated hereunder. All previous conversations, memoranda and writings between the parties or pertaining to the transactions contemplated hereunder that are not / / / / / / / / / / / / / / / / / / -7- incorporated or referenced in this Agreement or any applications for the Letters of Credit are superseded hereby. IN WITNESS WHEREOF, this Agreement has been executed by the parties hereto as of the date first hereinabove written. BANK: BORROWER: SANWA BANK CALIFORNIA ZENITH INSURANCE COMPANY By: \John C. Hyche\ By: \Stanley R. Zax\ ---------------------------------- ------------------------------------ Title: Vice President Title: Chairman of the Board and ----------------------------- President -------------------------------- Address: Insurance and Financial Services W8-6 601 S. Figueroa Street 21255 Califa Street Los Angeles, CA 90017 Woodland Hills, CA 91367 -8- EXHIBIT A: ATTACHMENT TO LETTER OF CREDIT APPLICATION (ID-100S) (Any State Except California & Louisiana) Applicant : Zenith Insurance Company Amount: ____________________________* LETTER OF CREDIT WHEN ISSUED TO BE WORDED AS FOLLOWS, QUOTE: ------ Date: _______________________ Sanwa Bank California International Department #3560 Irrevocable Clean Standby Letter 601 S. Figueroa Street (W6-1) of Credit No. ________________ Los Angeles, CA 90017 Beneficiary: ________________________________________________________________________* _________________________________________________________________________ _________________________________________________________________________ _________________________________________________________________________ Expiry Date / Place: __________________________________________* / in Los Angeles at our counters We have established this clean, irrevocable, and unconditional Standby Letter of Credit in your favor as beneficiary for drawings up to U.S. $ __________________ _____________________________* , effective immediately. This letter of credit is issued, presentable and payable at our office at Sanwa Bank California, International Department #3560, 601 South Figueroa St.(W6-1), Los Angeles, California 90017 and expires with our close of business on _____________________ ____________________________________________________*. Except when the amount of this letter of credit is increased, this credit can not be modified or revoked without your consent. The term "Beneficiary" includes any successor by operation of law of the named Beneficiary including without limitation any such liquidator, rehabilitator, receiver or conservator. Drawings by any liquidator, rehabilitator, receiver, or conservator shall be for the benefit of all the Beneficiary's policyholders. We hereby undertake with you to honor your sight draft(s) drawn on us under and in compliance with this credit, indicating our Credit No.___________________, for all or any part of this credit upon presentation of your draft drawn on us at our office specified in paragraph one on or before the expiration date hereof or any automatically extended expiration date when accompanied by this original Letter of Credit. Except as expressly stated herein, this undertaking is not subject to any agreement, requirement, or qualification. The obligation of Sanwa Bank California under this Credit is the individual obligation of Sanwa Bank California and is in on way contingent upon reimbursement with respect thereto, or upon our ability to perfect any lien, security interest or any other reimbursement. This Letter of Credit is deemed to be automatically extended without amendment for one year from the expiration date or any future expiration date, unless thirty (30) or more days prior to any such expiration date, Sanwa Bank California notifies you at the above addresses by registered mail, certified mail, or courier service that this letter of credit will not be renewed for any such additional period. This Letter of Credit is subject to and governed by the Laws of the State of ______________________* and the Uniform Customs and Practice for Documentary Credits ("UCP") of the International Chamber of Commerce in effect on the date of the issuance hereof and in the event of any conflict the laws of _______________________* will control. If this credit expires during an interruption of business as described in Article 19 of UCP 400 or Article 17 of UCP 500, the Bank hereby specifically agrees to effect payment if this Credit is drawn against within 30 days after bank's resumption of business. For identification/information purposes only without affecting the terms of the Letter of Credit, beneficiary's state of Domicile is ______________________ _________________________________________* . UNQUOTE. _________________________________ ___________________________________________ Account Officer - Sanwa Bank Authorized Signature - Zenith Insurance California Company * Must be completed and in agreement with Application for Standby Letter of Credit (ID-100S) -9- EX-10.21 5 EXHIBIT 10.21 AGREEMENT OF REINSURANCE NO. 7832 between GENERAL REINSURANCE CORPORATION a Delaware corporation having its principal offices at Financial Centre 695 East Main Street P.O. Box 10350 Stamford, Connecticut 06904-2350 (herein referred to as the "Reinsurer") and CALFARM INSURANCE COMPANY Sacramento, California ZENITH INSURANCE COMPANY Woodland Hills, California ZNAT INSURANCE COMPANY Woodland Hills, California Their Quota Share Reinsurers (herein referred to as the "Company") - ------------------------------------------------------------------------------- In consideration of the promises set forth in this Agreement, the parties agree as follows: ARTICLE I - SCOPE OF AGREEMENT As a condition precedent to the Reinsurer's obligations under this Agreement, the Company shall cede to the Reinsurer the business described in this Agreement, and the Reinsurer shall accept such business as reinsurance from the Company. ARTICLE II - PARTIES TO THE AGREEMENT This Agreement is solely between the Company and the Reinsurer. When more than one Company is named as a party to this Agreement, the first Company named shall be the agent of the other companies as to all matters pertaining to this Agreement. Performance of the obligations of each party under this Agreement shall be rendered solely to the other party. However, if the Company becomes insolvent, the liability of the Reinsurer shall be modified to the extent set forth in the article entitled INSOLVENCY OF THE COMPANY. In no instance shall any insured of the Company or any claimant against an insured of the Company have any rights under this Agreement. ARTICLE III - LIMIT AND RETENTION The Reinsurer shall pay to the Company, with respect to each loss event, 95% of the amount of ultimate net loss in excess of the Company Retention of $5,000,000, but not exceeding the Limit of Liability of the Reinsurer of 95% of the next $10,000,000 of ultimate net loss with respect to such loss event nor 95% of $20,000,000 with respect to all loss events commencing during the term of this Agreement. The Company shall retain for its own account, with respect to each loss event, the entire amount of the Company Retention plus 5% of the next $10,000,000 ultimate net loss in excess of the Company Retention. ARTICLE IV - TERM This Agreement shall apply to loss events which commence during the period from September 1, 1993, to August 31, 1994, both dates inclusive, at the place of the loss event. This Agreement shall not apply to loss events which commence prior to the effective date of this Agreement and continue during any part of the term of this Agreement. However, this Agreement shall apply to loss events which commence during and continue beyond the term of this Agreement and in the computation of the liability of the Reinsurer the entire ultimate net loss resulting from each such loss event shall be included, subject to the limitations set forth in paragraph (f) of the article entitled DEFINITIONS. - 2 - ARTICLE V - DEFINITIONS (a) PROPERTY BUSINESS This term shall mean direct property business written by the Company, as defined, and classified in its Association Edition of Annual Statement for Fire and Casualty Companies as: (1) Fire; (2) Allied lines (including extended coverage); (3) Farmowners multiple peril (applicable property and inland marine lines only); (4) Homeowners multiple peril (applicable property and inland marine lines only); (5) Commercial multiple peril (applicable property lines only); (6) Blanket personal property; (7) Inland marine; (8) Earthquake; (9) Garagekeepers legal liability (comprehensive only); on risks located in the United States of America. (b) COMPANY RETENTION This term shall mean the amount the Company shall retain for its own account; however, this requirement shall be satisfied if this amount is retained by the Company or its affiliated companies under common management or common ownership. (c) ULTIMATE NET LOSS This term shall mean all payments by the Company of claims and losses, within the limits of liability or amounts of insurance of the policies of the Company, and adjustment expense, after deduction of salvage and other recoveries and after deduction of amounts due from all other reinsurance other than the reinsurance pooling arrangement between Zenith Insurance Company, CalFarm Insurance Company and ZNAT Insurance Company, - 3 - whether collectible or not. If the Company becomes insolvent, this definition shall be modified to the extent set forth in the article entitled INSOLVENCY OF THE COMPANY. (d) ADJUSTMENT EXPENSE This term shall mean expenditures by the Company in the direct defense of claims and as allocated to an individual claim or loss, other than for office expenses and for the salaries and expenses of employees of the Company or of any subsidiary or related or wholly owned company of the Company, made in connection with the disposition of a claim, loss, or legal proceeding including investigation, negotiation, and legal expenses; court costs; statutory penalties; prejudgment interest or delayed damages; and interest on any judgment or award. (e) PREJUDGMENT INTEREST OR DELAYED DAMAGES This term shall mean interest or damages added to a settlement, verdict, award, or judgment based on the amount of time prior to the settlement, verdict, award, or judgment whether or not made part of the settlement, verdict, award, or judgment. (f) LOSS EVENT This term shall mean an occurrence or series of occurrences arising out of one event, provided that only the claims and losses sustained by the Company during the continuous period of 168 hours selected by the Company shall be used in the determination of the ultimate net loss; and only one such continuous period of 168 hours shall apply with respect to one event. Additionally, with respect to riot or civil commotion and other causes of loss resultant therefrom, only claims and losses sustained by the Company on risks within the limits of one city, town, or village or immediately adjacent thereto shall be used in the determination of ultimate net loss. (g) SUBJECT NET EARNED PREMIUM This term shall mean the direct premium earned by the Company during the term of the Agreement on the business reinsured hereunder, after deduction of return premiums and after deduction of premiums paid for reinsurance which inures to the benefit of the Reinsurer. For purposes of this Agreement, subject net earned premium shall be deemed to be 100% of the premiums on the lines of business reinsured - 4 - hereunder. However, on the following lines, which are the so-called package policies (only when written on an indivisible premium basis) subject net earned premium shall be determined as: (1) 88% of the total homeowners and boatowners policy premiums; (2) 80% of the total farmowners and commercial multiple peril policy premiums. When any of the above policies is written on a divisible premium basis, the actual premium for the lines of business included in this Agreement shall be used rather than the percentage stated above. ARTICLE VI - EXCLUSIONS This Agreement shall not apply to: (a) All lines of business not specifically covered hereunder; (b) Reinsurance assumed by the Company other than reinsurance assumed by Zenith Insurance Company from CalFarm Insurance Company or ZNAT Insurance Company; all liability assumed under excess of loss insurance or reinsurance contracts; (c) All business excluded by the Pools, Associations and Syndicates Exclusion Clause attached hereto and made a part hereof, (d) Policies issued under retrospectively rated plans; policies issued with a deductible of more than $100,000, provided this exclusion shall not apply to policies which customarily provide a percentage deductible on the perils of earthquake or windstorm; (e) Liability coverages under homeowners, farmowners and commercial package policies; i.e., comprehensive personal, farm or commercial liability, medical payments and physical damage to property of others; (f) All casualty, fidelity, surety, forgery, boiler and machinery, burglary or glass business or coverages (not applicable to Section I coverages of multiple peril policies); (g) The following risks, coverages and kinds of insurance: (1) Accident and health; - 5 - (2) Animal or livestock mortality policies; however, this exclusion shall not apply to fowl; (3) Automobile; however, this exclusion shall not apply with respect to garagekeepers legal liability coverages; (4) Aviation; (5) Commercial hulls or hulls other than outboard motorboat and sail- boat coverages; (6) Credit warranty, financial guarantees; (7) First class or registered mail; (8) Gas or oil drilling risks; (9) Growing or standing crops, other than fire insurance; all crop hail insurance or any other coverages provided in connection therewith; (10) Jewelers and furriers block; (11) Negative film syndicates; (12) Ocean marine; (13) Railroad Property; (h) Flood, surface water, waves, tidal water or tidal waves, overflow of streams or other bodies of water or spray from any of the foregoing, all whether driven by wind or not, unless written in conjunction with the peril of fire of similar amount; (i) Mortgage impairment insurance and similar kinds of insurance, howsoever styled, providing coverage to an insured with respect to its mortgagee interest in property or its owner interest in foreclosed property; (j) Difference in conditions insurance and similar kinds of insurance, howsoever styled; (k) Consequential, punitive, exemplary or compensatory damages resulting from an action taken by any policyholder, insured or assignee, against the Company for alleged or actual bad faith, fraud or negligence in the settlement of a claim; - 6 - (l) Risks which have a total insurable value of more than $250,000,000; (m) War risk, bombardment, invasion, insurrection, rebellion, revolution, military or usurped power, or confiscation by order of any government or public authority, as excluded under a standard policy containing a standard war exclusion clause; (n) Nuclear incident per the Nuclear Incident Exclusion - Physical Damage Reinsurance (NMA 1119) attached hereto; (o) Liability of the Company arising from its participation or membership, whether voluntary or involuntary, in any insolvency fund, including any guarantee fund, association, pool, plan or other facility which provides for the assessment of, payment by, or assumption by the Company of a part or the whole of any claim, debt, charge, fee or other obligations of an insurer, or its successors or assigns, which has been declared insolvent by any authority having jurisdiction; (p) Loss of, damage to, or failure of, or consequential loss resulting therewith (including but not limited to earnings and extra expense) of satellites, spacecraft, and launch vehicles, including cargo and freight carried therein, in all phases of operation (including but not limited to manufacturing, transit, pre-launch, launch, and in-orbit); (q) Coverage afforded by ISO Pollutant Clean Up and Removal Additional Aggregate Limit of Insurance Endorsement CP 04 07 (Ed. 4/86) or as subse- quently amended or by any similar endorsement affording such coverage; (r) Pollutant clean up or removal under any commercial property policy or any inland marine policy written by the Company which does not contain ISO Changes-Pollutants Endorsement CP 01 86 (Ed. 4/86) or as subsequently amended; however, this exclusion does not apply to any risk located in a jurisdiction which has not approved the Insurance Services Office exclusion or where other regulatory constraints prohibit the Company from attaching such endorsement. If the Company elects to file an endorsement independent of ISO, such endorsement will be deemed a suitable substitute provided the Company has submitted the wording to the Reinsurers and received the Reinsurers' prior approval. ARTICLE VII - REINSURANCE PREMIUM As a condition precedent to the Reinsurer's obligations hereunder, the Company shall pay to the Reinsurer 2.30% of the subject net earned premium during the term of the Agree- - 7 - ment, subject to a minimum reinsurance premium of $880,000 and deposit reinsurance premium of $1,100,000. ARTICLE VIII - AUTOMATIC REINSTATEMENT The Limit of Liability of the Reinsurer under this Agreement with respect to each loss event shall be reduced by an amount equal to the amount of liability paid by the Reinsurer, but that part of the liability of the Reinsurer that is so reduced shall be automatically reinstated from the commencement of the loss event for which payment is made; however, the Limit of Liability of the Reinsurer with respect to all loss events commencing during the term of this Agreement shall not exceed the amount set forth in the article entitled LIMIT AND RETENTION. In consideration of this automatic reinstatement, the Company shall pay to the Reinsurer for each amount reinstated an additional reinsurance premium that shall be pro rata of the reinsurance premium set forth in the article entitled REINSURANCE PREMIUM. The additional reinsurance premium shall be the product of the reinsurance premium set forth in the article entitled REINSURANCE PREMIUM, multiplied by the amount of the reinstated Limit of Liability of the Reinsurer divided by the total Limit of Liability of the Reinsurer for each loss event irrespective of the time of the commencement of the loss event. The reinsurance premium so developed for each amount reinstated shall be in addition to the reinsurance premium set forth in the article entitled REINSURANCE PREMIUM. ARTICLE IX - MANAGEMENT OF CLAIMS AND LOSSES The Company shall investigate and settle or defend all claims and losses. When requested by the Reinsurer, the Company shall permit the Reinsurer, at the expense of the Reinsurer, to be associated with the Company in the defense or control of any claim, loss, or legal proceeding which involves or is likely to involve the Reinsurer. All payments of claims or losses by the Company within the terms and limits of its policies which are within the limits - 8 - set forth in the applicable Agreement shall be binding on the Reinsurer, subject to the terms of this Agreement. ARTICLE X - RECOVERIES The Company shall pay to or credit the Reinsurer with the Reinsurer's portion of any recovery obtained from salvage, subrogation, or other insurance. Adjustment expenses for recoveries shall be deducted from the amount recovered. The Reinsurer shall be subrogated to the rights of the Company to the extent of its loss payments to the Company. The Company agrees to enforce its rights of salvage, subrogation, and its rights against insurers or to assign these rights to the Reinsurer. Recoveries shall be distributed to the parties in an order inverse to that in which their liabilities accrued. ARTICLE XI - ERRORS AND OMISSIONS The Reinsurer shall not be relieved of liability because of an error or accidental omission of the Company in reporting any claim or loss or any business reinsured under this Agreement, provided that the error or omission is rectified promptly after discovery. The Reinsurer shall be obligated only for the return of the premium paid for business reported but not reinsured under this Agreement. ARTICLE XI - REPORTS AND REMITTANCES (a) REINSURANCE PREMIUM On or before the beginning of each calendar quarter, the Company shall pay to the Reinsurer one quarter of the deposit reinsurance premium stipulated in the article entitled REINSURANCE PREMIUM. On or before October 15, 1994, the Company shall render to the Rein- surer a report of the subject net earned premium by the Company during the term of this Agreement. The Company shall calculate the reinsurance - 9 - premium thereon, shall balance such amount against the deposit reinsurance premium previously paid, and the difference due either party, subject to the minimum reinsurance premium, shall be remitted promptly. (b) CLAIMS AND LOSSES The Company shall report promptly to the Reinsurer each loss event which, in the Company's opinion, may involve the reinsurance afforded by this Agreement. The Company shall advise the Reinsurer of the estimated amount of ultimate net loss in connection with each loss event and of any subsequent changes in such estimate. Upon receipt of a definitive statement of ultimate net loss from the Company, the Reinsurer shall promptly pay to the Company the Reinsurer's portion of ultimate net loss. Any subsequent changes in the amount of ultimate net loss shall be reported by the Company to the Reinsurer and the amount due either party shall be remitted promptly. (c) P.C.S. CATASTROPHE BULLETINS The Company shall furnish to the Reinsurer, upon request, the following information with respect to each catastrophe set forth in the Catastrophe Bulletins published by the Property Claim Services: (1) The preliminary estimate of the amount recoverable from the Reinsurer; (2) The Reinsurer's portion of claims, losses, and adjustment expense paid less salvage recovered during each calendar quarter; (3) The Reinsurer's portion of reserves for claims, losses, and adjustment expense at the end of each calendar quarter. (d) GENERAL In addition to the reports required by (a), (b), and (c) above, the Company shall furnish such other information as may be required by the Reinsurer for the completion of the Reinsurer's quarterly and annual statements and internal records. All reports shall be rendered on forms or in format acceptable to the Company and the Reinsurer. - 10- ARTICLE XIII - REINSURANCE OVER THIS AGREEMENT The Company shall advise the Reinsurer of any reinsurance of the Company that would apply over and beyond the Limit of Liability of the Reinsurer under this Agreement. ARTICLE XIV - SPECIAL ACCEPTANCES Business not within the terms of this Agreement may be submitted to the Reinsurer for special acceptance and, if accepted by the Reinsurer, shall be subject to all of the terms of this Agreement except as modified by the special acceptance. ARTICLE XV - RESERVES AND TAXES The Reinsurer shall maintain the required reserves as to the Reinsurer's portion of unearned premium, claims, losses, and adjustment expense. The Company shall be liable for all premium taxes on premium ceded to the Reinsurer under this Agreement. If the Reinsurer is obligated to pay any premium taxes on this premium, the Company shall reimburse the Reinsurer; however, the Company shall not be required to pay taxes twice on the same premium. ARTICLE XVI - OFFSET The Company or the Reinsurer may offset any balance, whether on account of premium, commission, claims or losses, adjustment expense, salvage, or otherwise, due from one party to the other under this Agreement or under any other agreement heretofore or hereafter entered into between the Company and the Reinsurer. ARTICLE XVII - INSPECTION OF RECORDS The Company shall allow the Reinsurer to inspect, at reasonable times, the records of the Company relevant to the business reinsured under this Agreement, including Company - 11 - files concerning claims, losses, or legal proceedings which involve or are likely to involve the Reinsurer. Article XVIII - ARBITRATION Any unresolved difference of opinion between the Reinsurer and the Company shall be submitted to arbitration by three arbitrators. One arbitrator shall be chosen by the Reinsurer, and one shall be chosen by the Company. The third arbitrator shall be chosen by the other two arbitrators within ten (10) days after they have been appointed. If the two arbitrators cannot agree upon a third arbitrator, each arbitrator shall nominate three persons of whom the other shall reject two. The third arbitrator shall then be chosen by drawing lots. If either party fails to choose an arbitrator within thirty (30) days after receiving the written request of the other party to do so, the latter shall choose both arbitrators, who shall choose the third arbitrator. The arbitrators shall be impartial and shall be active or retired persons whose principal occupation is or was as an officer of property and casualty insurance or reinsurance companies. The party requesting arbitration (the "Petitioner") shall submit its brief to the arbitrators within thirty (30) days after notice of the selection of the third arbitrator. Upon receipt of the Petitioner's brief, the other party (the "Respondent") shall have thirty (30) days to file a reply brief. On receipt of the Respondent's brief, the Petitioner shall have twenty (20) days to file a rebuttal brief. Respondent shall have twenty (20) days from the receipt of Petitioner's rebuttal brief to file its rebuttal brief. The arbitrators may extend the time for filing of briefs at the request of either party. The arbitrators are relieved from judicial formalities and, in addition to considering the rules of law and the customs and practices of the insurance and reinsurance business, shall make their award with a view to effecting the intent of this Agreement. The decision of the majority shall be final and binding upon the parties. The costs of arbitration, including the fees - 12 - of the arbitrators, shall be shared equally unless the arbitrators decide other- wise. The arbitration shall be held at the times and places agreed upon by the arbitrators. Article XIX - INSOLVENCY OF THE COMPANY In the event of the insolvency of the Company, the reinsurance proceeds will be paid to the Company or the liquidator immediately upon demand, with reasonable provision for verification, on the basis of the amount of the claim allowed in the insolvency proceeding without diminution by reason of the inability of the Company to pay all or part of the claim. The Reinsurer shall be given written notice of the pendency of each claim against the Company on the policy(ies) reinsured hereunder within a reasonable time after such claim is filed in the insolvency proceedings. The Reinsurer shall have the right to investigate each such claim and to interpose, at its own expense, in the proceeding where such claim is to be adjudicated, any defenses which it may deem available to the Company or its liquidator. The expense thus incurred by the Reinsurer shall be chargeable, subject to court approval, against the insolvent Company as part of the expense of liquidation to the extent of a proportionate share of the benefit which may accrue to the Company solely as a result of the defense undertaken by the Reinsurer. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be - 13 - executed in duplicate, this 30th day of August, 1993, GENERAL REINSURANCE CORPORATION /s/ Vice President Attest /s/ and this day of , 19 . CALFARM INSURANCE COMPANY ZENITH INSURANCE COMPANY ZNAT INSURANCE COMPANY Attest: /s/ - 14 - Agreement No. 7832 NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE - REINSURANCE - USA (1) This Agreement does not cover any loss or liability accruing to the Company directly or indirectly and whether as Insurer or Reinsurer, from any Pool of Insurers or Reinsurers formed for the purpose of covering Atomic or Nuclear Energy risks. (2) Without in any way restricting the operation of paragraph (1) of this Clause, this Agreement does not cover any loss or liability accruing to the Company, directly or indirectly and whether as insurer or Reinsurer, from any insurance against Physical Damage (including business interruption or consequential loss arising out of such Physical Damage) to: (i) Nuclear reactor power plants including all auxiliary property on the site, or (ii) Any other nuclear reactor installation, including laboratories handling radioactive materials in connection with reactor installations, and "critical facilities" as such, or (iii) Installations for fabricating complete fuel elements or for processing substantial quantities of "special nuclear material", and for reprocessing, salvaging, chemically separating, storing or disposing of "spent" nuclear fuel or waste materials, or (iv) Installations other than those listed in paragraph (2) (iii) above using substantial quantities of radioactive isotopes or other products of nuclear fission. (3) Without in any way restricting the operations of paragraphs (1) and (2) hereof, this Agreement does not cover any loss or liability by radioactive contamination accruing to the Company, directly or indirectly, and whether as Insurer or Reinsurer, from any insurance on property which is on the same site as a nuclear reactor power plant or other nuclear installation and which normally would be insured therewith except that this paragraph (3) shall not operate: (a) where the Company does not have knowledge of such nuclear reactor power plant or nuclear installation, or (b) where said insurance contains a provision excluding coverage for damage to property caused by or resulting from radioactive contamination, however caused. However on and after 1st January 1960 this sub-paragraph (b) shall only apply provided the said radioactive contamination exclusion provision has been approved by the Governmental Authority having jurisdiction thereof. (4) Without in any way restricting the operations of paragraphs (1),(2) and (3) hereof, this Agreement does not cover any loss or liability by radioactive contamination accruing to the Company, directly or indirectly, and whether as Insurer or Reinsurer, when such radioactive contamination is a named hazard specifically insured against. (5) It is understood and agreed that this Clause shall not extend to risks using radioactive isotopes in any form where the nuclear exposure is not considered by the Company to be the primary hazard. (6) The term "special nuclear material" shall have the meaning given it in the Atomic Energy Act of 1954 or by any law amendatory thereof. (7) The Company to be sole judge of what constitutes: (a) substantial quantities, and (b) the extent of installation, plant or site. Note: Without in any way restricting the operation of paragraph (1) hereof, it is understood and agreed that: (a) all policies issued by the Company on or before 31st December 1957 shall be free from the application of the other provisions of this Clause until expiry date or 31st December 1960 whichever first occurs whereupon all the provisions of this Clause shall apply. (b) with respect to any risk located in Canada policies issued by the Company on or before 31st December 1958 shall be free from the application of the other provisions of this Clause until expiry date or 31st December 1960 whichever first occurs whereupon all the provisions of this Clause shall apply. N.M.A. 1119 POOLS, ASSOCIATIONS, AND SYNDICATES EXCLUSION CLAUSE SECTION A Excluding: All business derived directly or indirectly from any Pool, Association, or Syndicate which maintains its own reinsurance facilities. Any Pool or Scheme (whether voluntary or mandatory) formed after March 1, 1968, for the purpose of insuring Property whether on a country-wide basis or in respect of designated areas. This exclusion shall not apply to so-called Automobile Insurance Plans or other Pools formed to provide coverage for Automobile Physical Damage. SECTION B It is agreed that business written by the Company for the same perils, which is known at the time to be insured by, or in excess of underlying amounts placed in the following Pools, Associations, or Syndicates, whether by way of insurance or reinsurance, is excluded hereunder. Industrial Risk Insurers, Associated Factory Mutuals, Improved Risk Mutuals. Any Pool, Association, or Syndicate formed for the purpose of writing Oil, Gas, or Petro-Chemical Plants and/or Oil or Gas Drilling Pigs. United States Aircraft Insurance Group, Canadian Aircraft Insurance Group, Associated Aviation Underwriters, American Aviation Underwriters. Section B does not apply: (a) Where the Total Insured Value over all interests of the risk in question is less than $250,000,000. (b) To interests traditionally underwritten as Inland Marine or Stock and/or Contents written on a Blanket basis. (c) To Contingent Business Interruption, except when the Company is aware that the key location is known at the time to be insured in any Pool, Association, or Syndicate named above, other than as provided for under Section B(a). (d) To risks as follows: Offices, Hotels, Apartments, Hospitals, Educational Establishments, Public Utilities (Other than Railroad Schedules) and Builders Risks on the classes of risks specified in the subsection (d) only. SECTION C NEVERTHELESS the Reinsurer specifically agrees that liability accruing to the Company for its participation in: The Florida Residential Property and Casualty Joint Underwriting Association shall not be excluded or: (1) The following so-called "Coastal Pools" ALABAMA INSURANCE UNDERWRITING ASSOCIATION FLORIDA WINDSTORM UNDERWRITING ASSOCIATION LOUISIANA INSURANCE UNDERWRITING ASSOCIATION MISSISSIPPI WINDSTORM UNDERWRITING ASSOCIATION NORTH CAROLINA INSURANCE UNDERWRITING ASSOCIATION SOUTH CAROLINA WINDSTORM AND HAIL UNDERWRITING ASSOCIATION TEXAS CATASTROPHE PROPERTY INSURANCE ASSOCIATION and (2) All "Fair Plan" and "Rural Risk Plan" business, for all perils otherwise protected hereunder shall not be excluded herefrom, except that this Agreement does not include any increase in such liability resulting from (1) the inability of any other participant in such "Coastal Pool" and/or "Fair Plan" and/or "Rural Risk Plan" to meet its liability; or (2) any claim against such "Coastal Pool" and/or "Fair Plan" and/or "Rural Risk Plan", or any participant therein, including the Company, whether by way of subrogation or otherwise, brought by or on behalf of any insolvency fund. ENDORSEMENT NO 1 Attached to and made a part of AGREEMENT NO. 7832 between GENERAL REINSURANCE CORPORATION and CALFARM INSURANCE COMPANY ZENITH INSURANCE COMPANY ZNAT INSURANCE COMPANY IT IS MUTUALLY AGREED that, retroactive to the inception of this Agreement sub-paragraph (g) of Article V - DEFINITIONS is amended to read as follows: "(g) SUBJECT NET EARNED PREMIUM This term shall mean the direct premium earned by the Company during the term of the Agreement on the business reinsured hereunder, after deduction of return premiums and after deduction of premiums paid for reinsurance which inures to the benefit of the Reinsurer. For purposes of this Agreement, subject net earned premium shall be deemed to be 100% of the premiums on the lines of business reinsured hereunder. However, on the following lines, which are the so-called package policies (only when written on an indivisible premium basis) subject net earned premium shall be determined as: (1) 88% of the total homeowners and boatowners policy premiums; (2) 65% of the total farmowners and commercial multiple peril policy premiums. When any of the above policies is written on a divisible premium basis, the actual premium for the lines of business included in this Agreement shall be used rather than the percentage stated above." IN WITNESS WHEREOF, the parties hereto have caused this Endorsement to be executed in duplicate, this 24th day of February , 19 , GENERAL REINSURANCE CORPORATION /s/ Vice President Attest: /s/ and this 7th day of March ,19 CALFARM INSURANCE COMPANY ZENITH INSURANCE COMPANY ZNAT INSURANCE COMPANY Attest: /s/ - 2 - Endorsement No. 1 Agreement No. 7832 EX-10.22 6 EXHIBIT 10.22 AGREEMENT OF REINSURANCE No. 623-0005 between AMERICAN RE-INSURANCE COMPANY (herein referred to as the "Reinsurer") and CALFARM INSURANCE COMPANY Sacramento, California ZENITH INSURANCE COMPANY Woodland Hills, California ZNAT INSURANCE COMPANY Woodland Hills, California Their Quota Share Reinsurers (herein referred to as the "Company") In consideration of the promises set forth in this Agreement, the parties agree as follows: ARTICLE I - SCOPE OF AGREEMENT As a condition precedent to the Reinsurer's obligations under this Agreement, the Company shall cede to the Reinsurer the business described in this Agreement, and the Reinsurer shall accept such business as reinsurance from the Company. ARTICLE II - PARTIES TO THE AGREEMENT This Agreement is solely between the Company and the Reinsurer. When more than one Company is named as a party to this Agreement, the first Company named shall be the agent of the other companies as to all matters pertaining to this Agreement. Performance of the obligations of each party under this Agreement shall be rendered solely to the other party. However, if the Company becomes insolvent, the liability of the Reinsurer shall be modified to the extent set forth in the article entitled INSOLVENCY OF THE COMPANY. In no instance shall any insured of the Company or any claimant against an insured of the Company have any rights under this Agreement. ARTICLE III - LIMIT AND RETENTION The Reinsurer shall pay to the Company, with respect to each loss event, 95% of the amount of ultimate net loss in excess of the sum of- (a) The Company Retention of $5,000,000; and (b) The Fist Excess Cover of $10,000,000; but not exceeding the Limit of Liability of the Reinsurer of 95% of the next $5, 000, 000 of ultimate net loss with respect to such loss event nor 95% of $10,000,000 with respect to all loss events commencing during the term of this Agreement. The Company shall retain net for its own account, with respect to each loss event, the entire amount of the Company Retention plus 5% of such ultimate net loss ARTICLE IV - TERM This Agreement shall apply to loss events which commence during the period from September 1, 1993 to August 31, 1994, both dates inclusive, at the place of the loss event. This Agreement shall not apply to loss events which commence prior to the effective date of this Agreement and continue during any part of the term of this Agreement. However, this Agreement shall apply to loss events which commence during and continue beyond the term of this Agreement and in the computation of the liability of the Reinsurer the entire ultimate net loss resulting from each such loss event shall be included, subject to the limitations set forth in paragraph (f) of the article entitled DEFINITIONS. 2 ARTICLE V - DEFINITIONS (a) Property Business This term shall mean direct property business written by the Company, as defined, and classified in its Association Edition of Annual Statement for Fire and Casualty Companies as: (1) Fire; (2) Allied lines (including extended coverage); (3) Farmowners multiple peril (applicable property and inland marine lines only); (4) Homeowners multiple peril (applicable property and inland marine lines only); (5) Commercial multiple peril (applicable property lines only); (6) Blanket personal property; (7) Inland marine; (8) Earthquake; (9) Garagekeepers legal liability (comprehensive only); on risks located in the United States of America. (b) COMPANY RETENTION This term shall mean the amount the Company shall retain for its own account; however, this requirement shall be satisfied if this amount is retained by the Company or its affiliated companies under common management or common ownership. (c) ULTIMATE NET LOSS This term shall mean all payments by the Company of claims and losses, within the limits of liability or amounts of insurance of the policies of the Company, and adjustment expense, after deduction of salvage and other recoveries and after deduction of amounts due from all other reinsurance other than the reinsurance pooling arrangement between Zenith Insurance Company, CalFarm Insurance Company and ZNAT Insurance Company, -3- whether collectible or not. If the Company becomes insolvent, this definition shall be modified to the extent set forth in the article entitled INSOLVENCY OF THE COMPANY. (d) ADJUSTMENT EXPENSE This term shall mean expenditures by the Company in the direct defense of claims and as allocated to an individual claim or loss, other than for office expenses and for the salaries and expenses of employees of the Company or of any subsidiary or related or wholly owned company of the Company, made in connection with the disposition of a claim, loss, or legal proceeding including investigation, negotiation, and legal expenses; court costs, statutory penalties; prejudgment interest or delayed damages; and interest on any judgment or award. (e) PREJUDGMENT INTEREST OR DELAYED DAMAGES This term shall mean interest or damages added to a settlement, verdict, award, or judgment based on the amount of time prior to the settlement, verdict, award, or judgment whether or not made part of the settlement, verdict, award, or judgment. (f) LOSS EVENT This term shall mean an occurrence or series of occurrences arising out of one event, provided that only the claims and losses sustained by the Company during the continuous period of 168 hours selected by the Company shall be used in the determination of the ultimate net loss; and only one such continuous period of 168 hours shall apply with respect to one event. Additionally, with respect to riot or civil commotion and other causes of loss resultant therefrom, only claims and losses sustained by the Company on risks within the limits of one city, town, or village immediately adjacent thereto shall be used in the determination of ultimate net loss. (g) SUBJECT NET EARNED PREMIUM This term shall mean the direct premium earned by the Company during the term of the Agreement on the business reinsured hereunder after deduction of return premiums and after deduction of premiums paid for reinsurance which inures to the benefit of the Reinsurer. For purposes of this Agreement, subject net earned premium shall be deemed to be 100% of the premiums on the lines of business reinsured 4 hereunder. However, on the following lines, which are the so-called package policies (only when written on an indivisible premium basis) subject net earned premium shall be determined as: (1) 88% of the total homeowners and boatowners policy premiums; (2) 80% of the total farmowners and commercial multiple peril policy premiums. When any of the above policies is written on a divisible premium basis, the actual premium for the lines of business included in this Agreement shall be used rather than the percentage stated above. ARTICLE VI - EXCLUSIONS This Agreement shall not apply to: (a) All lines of business not specifically covered hereunder; (b) Reinsurance assumed by the Company other than reinsurance assumed by Zenith Insurance Company from CalFarm Insurance Company or ZNAT Insurance Company; all liability assumed under excess of loss insurance or reinsurance contracts; (c) All business excluded by the Pools, Associations and Syndicates Exclusion Clause attached hereto and made a part hereof; (d) Policies issued under retrospectively rated plans; policies issued with a deductible of more than $100,000, provided this exclusion shall not apply to policies which customarily provide a percentage deductible on the perils of earthquake or windstorm; (e) Liability coverages under homeowners, farmowners and commercial package policies; i.e., comprehensive personal, farm or commercial liability, medical payments and physical damage to property of others; (f) All casualty, fidelity, surety, forgery, boiler and machinery, burglary or glass business or coverages (not applicable to Section I coverages of multiple peril policies); (g) The following risks, coverages and kinds of insurance: (1) Accident and health; - 5 - (2) Animal or livestock mortality policies; however, this exclusion shall not apply to fowl; (3) Automobile; however, this exclusion shall not apply with respect to garagekeepers legal liability coverages; (4) Aviation; (5) Commercial hulls or hulls other than outboard motorboat and sailboat coverages; (6) Credit warranty, financial guarantees; (7) First class or registered mail; (8) Gas or oil drilling risks; (9) Growing or standing crops, other than fire insurance; all crop hail insurance or any other coverages provided in connection therewith; (10) Jewelers and furriers block; (11) Negative film syndicates; (12) Ocean marine; (13) Railroad Property; (h) Flood, surface water, waves, tidal water or tidal waves, overflow of streams or other bodies of water or spray from any of the foregoing, all whether driven by wind or not, unless written in conjunction with the peril of fire of similar amount; (i) Mortgage impairment insurance and similar kinds of insurance, howsoever styled, providing coverage to an insured with respect to its mortgagee interest in property or its owner interest in foreclosed property; (j) Difference in conditions insurance and similar kinds of insurance, howsoever styled; (k) Consequential, punitive, exemplary or compensatory damages resulting from an action taken by any policyholder, insured or assignee, against the Company for alleged or actual bad faith, fraud or negligence in the settlement of a claim; - 6 - (l) Risks which have a total insurable value of more than $250,000,000; (m) War risk, bombardment, invasion, insurrection, rebellion, revolution, military or usurped power, or confiscation by order of any government or public authority, as excluded under a standard of policy containing a standard war exclusion clause; (n) Nuclear incident per the Nuclear Incident Exclusion - Physical Damage Reinsurance (NMA 1119) attached hereto; (o) Liability of the Company arising from its participation or membership, whether voluntary or involuntary, in any insolvency fund, including any guarantee fund, association, pool, plan or other facility which provides for the assessment of, payment by, or assumption by the company of a part or the whole of any claim, debt, charge, fee or other obligations of an insurer, or its successors or assigns, which has been declared insolvent by any authority having jurisdiction; (p) Loss of, damage to, or failure of, or consequential loss resulting therewith (including but not limited to earnings and extra expense) of satellites, spacecraft, and launch vehicles, including cargo and freight carried therein, in all phases of operation (including but not limited to manufacturing, transit, prelaunch, launch, and in-orbit); (q) Coverage afforded by ISO Pollutant Clean Up and Removal Additional Aggregate Limit of Insurance Endorsement CP 04 07 (Ed. 4/86) or as subsequently amended or by any similar endorsement affording such coverage; (r) Pollutant clean up or removal under any commercial property policy or any inland marine policy written by the Company which does not contain ISO Changes-Pollutants Endorsement CP 01 86 (Ed. 4/86) or as subsequently amended; however, this exclusion does not apply to any risk located in a jurisdiction which has not approved the Insurance Services Office exclusion or where other regulatory constraints prohibit the Company from attaching such endorsement. If the Company elects to file an endorsement independent of ISO, such endorsement will be deemed a suitable substitute provided the company has submitted the wording to the Reinsurers and received the Reinsurer's prior approval. ARTICLE VII - REINSURANCE PREMIUM As a condition precedent to the Reinsurer's obligations hereunder, the Company shall pay to the Reinsurer .695% of the subject net earned premium during the term of the Agree- -7- ment, subject to a minimum reinsurance premium of $265,000 and deposit reinsurance premium of $332,000. ARTICLE VIII - AUTOMATIC REINSTATEMENT The Limit of Liability of the Reinsurer under this Agreement with respect to each loss event shall be reduced by an amount equal to the amount of liability paid by the Reinsurer, but that part of the liability of the Reinsurer that is so reduced shall be automatically reinstated from the commencement of the loss event for which payment is made; however, the Limit of Liability of the Reinsurer with respect to all loss events commencing during the term of this Agreement shall not exceed the amount set forth in the article entitled LIMIT AND RETENTION. In consideration of this automatic reinstatement, the Company shall pay to the Reinsurer for each amount reinstated an additional reinsurance premium that shall be pro rata of the reinsurance premium set forth in the article entitled REINSURANCE PREMIUM. The additional reinsurance premium shall be the product of the reinsurance premium set forth in the article entitled REINSURANCE PREMIUM, multiplied by the amount of the reinstated Limit of Liability of the Reinsurer divided by the total Limit of Liability of the reinsurer for each loss event irrespective of the time of the commencement of this loss event. The reinsurance premium so developed for each amount reinstated shall be in addition to the reinsurance premium set forth in the article entitled REINSURANCE PREMIUM. ARTICLE IX - MANAGEMENT OF CLAIMS AND LOSSES The Company shall investigate and settle or defend all claims and losses. When requested by the Reinsurer, the Company shall permit the Reinsurer, at the expense of the Reinsurer, to be associated with the Company in the defense or control of any claim, loss, or legal proceeding which involves or is likely to involve the Reinsurer. All payments of claims or losses of the Company within the terms and limits of its policies which are within the limits - 8 - set forth in the applicable Agreement shall be binding on the Reinsurer, subject to the terms of this Agreement. ARTICLE X - RECOVERIES The Company shall pay to or credit the Reinsurer with the Reinsurer's portion of any recovery obtained from salvage, subrogation, or other insurance. Adjustment expenses for recoveries shall be deducted from the amount recovered. The Reinsurer shall be subrogated to the rights of the Company to the extent of its loss payments to the Company. The Company agrees to enforce its rights of salvage, subrogation, and its rights against insurers or to assign these rights to the Reinsurer. Recoveries shall be distributed to the parties in an order inverse to that in which their liabilities accrued. ARTICLE XI - ERRORS AND OMISSIONS The Reinsurer shall not be relieved of liability because of an error or accidental omission of the Company in reporting any claim or loss or any business reinsured under this Agreement, provided that the error or omission is rectified promptly after discovery. The Reinsurer shall be obligated only for the return of the premium paid for business reported but not reinsured under this Agreement. ARTICLE XII - REPORTS AND REMITTANCES (a) REINSURANCE PREMIUM On or before the beginning of each calendar quarter, the Company shall pay to the Reinsurer one quarter of the deposit reinsurance premium stipulated in the article entitled REINSURANCE PREMIUM On or before October 15, 1994, the Company shall render to the Reinsurer a report of the subject net earned premium by the Company during the term of this Agreement. The Company shall calculate the reinsurance -9- premium thereon, shall balance such amount against the deposit reinsurance premium previously paid, and the difference due either party, subject to the minimum reinsurance premium, shall be remitted promptly. (b) CLAIMS AND LOSSES The Company shall report promptly to the Reinsurer each loss event which, in the Company's opinion, may involve the reinsurance afforded by this Agreement. The Company shall advise the Reinsurer of the estimated amount of ultimate net loss in connection with each loss event and of any subsequent changes in such estimate. Upon receipt of a definitive statement of ultimate net loss from the Company, the Reinsurer shall promptly pay to the Company the Reinsurer's portion of ultimate net loss. Any subsequent changes in the amount of ultimate net loss shall be reported by the Company to the Reinsurer and the amount due either party shall be remitted promptly. (c) P.C.S. CATASTROPHE BULLETINS The Company shall furnish to the Reinsurer, upon request, the following information with respect to each catastrophe set forth in the Catastrophe Bulletins published by the Property Claim Services: (1) The preliminary estimate of the amount recoverable from the Reinsurer; (2) The Reinsurer's portion of claims, losses, and adjustment expense paid less salvage recovered during each calendar quarter; (3) The Reinsurer's portion of reserves for claims, losses, and adjustment expense at the end of each calendar quarter. (d) GENERAL In addition to the reports required by (a), (b), and (c) above, the Company shall furnish such other information as may be required by the Reinsurer for the completion of the Reinsurer's quarterly and annual statements and internal records. All reports shall be rendered on forms or in format acceptable to the Company and the Reinsurer. - 10 - ARTICLE XIII - REINSURANCE OVER THIS AGREEMENT The Company shall advise the Reinsurer of any reinsurance of the Company that would apply over and beyond the Limit of Liability of the Reinsurer under this Agreement. ARTICLE XIV - SPECIAL ACCEPTANCES Business not within the terms of this Agreement may be submitted to the Reinsurer for special acceptance and, if accepted by the Reinsurer, shall be subject to all of the terms of this Agreement except as modified by the special acceptance. ARTICLE XV - RESERVES AND TAXES The Reinsurer shall maintain the required reserves as to the Reinsurer's portion of unearned premium, claims, losses, and adjustment expense. The Company shall be liable for all premium taxes on premium ceded to the Reinsurer under this Agreement. If the Reinsurer is obligated to pay any premium taxes on this premium the Company shall reimburse the Reinsurer; however, the Company shall not be required to pay taxes twice on the same premium. ARTICLE XVI - OFFSET The Company or the Reinsurer may offset any balance, whether on account of premium, commission, claims or losses, adjustment expense, salvage, or otherwise, due from one party to the other under this Agreement or under any other agreement heretofore or hereafter entered into between the Company and the Reinsurer. ARTICLE XVII - INSPECTION OF RECORDS The Company shall allow the Reinsurer to inspect, at reasonable times, the records of the Company relevant to the business reinsured under this Agreement, including Company - 11 - files concerning claims, losses, or legal proceedings which involve or are likely to involve the Reinsurer. ARTICLE XVIII - ARBITRATION Any unresolved difference of opinion between the Reinsurer and the Company shall be submitted to arbitration by three arbitrators. One arbitrator shall be chosen by the Reinsurer, and one shall be chosen by the Company. The third arbitrator shall be chosen by the other two arbitrators within ten (10) days after they have been appointed. If the two arbitrators cannot agree upon a third arbitrator, each arbitrator shall nominate three persons of whom the other shall reject two. The third arbitrator shall then be chosen by drawing lots. If either party fails to choose an arbitrator within thirty (30) days after receiving the written request of the other party to do so, the latter shall choose both arbitrators, who shall choose the third arbitrator. The arbitrators shall be impartial and shall be active or retired persons whose principal occupation is or was as an officer of property and casualty insurance or reinsurance companies. The party requesting arbitration (the "Petitioner") shall submit its brief to the arbitrators within thirty (30) days after notice of the selection of the third arbitrator. Upon receipt of the Petitioner's brief, the other party (the "Respondent") shall have thirty (30) days to file a reply brief On receipt of the Respondent's brief, the Petitioner shall have twenty (20) days to file a rebuttal brief. Respondent shall have twenty (20) days from the receipt of Petitioner's rebuttal brief to file its rebuttal brief. The arbitrators may extend the time for filing of briefs at the request of either party. The arbitrators are relieved from judicial formalities and, in addition to considering the rules of law and the customs and practices of the insurance and reinsurance business, shall make their award with a view to effecting the intent of this Agreement. The decision of the majority shall be final and binding upon the parties. The costs of arbitration, including the fees - 12 - of the arbitrators, shall be shared equally unless the arbitrators decide otherwise. The arbitration shall be held at the times and places agreed upon by the arbitrators. ARTICLE XIX - INSOLVENCY OF THE COMPANY In the event of the insolvency of the Company, the reinsurance proceeds will be paid to the Company or the liquidator immediately upon demand, with reasonable provision for verification, on the basis of the amount of the claim allowed in the insolvency proceeding without diminution by reason of the inability of the Company to pay all or part of the claim. The Reinsurer shall be given written notice of the pendency of each claim against the Company on the policy(ies) reinsured hereunder within a reasonable time after such claim is filed in the insolvency proceedings. The Reinsurer shall have the right to investigate each such claim and to interpose, at its own expense, in the proceeding where such claim is to be adjudicated, any defenses which it may deem available to the Company or its liquidator. The expense thus incurred by the Reinsurer shall be chargeable, subject to court approval, against the insolvent Company as part of the expense of liquidation to the extent of a proportionate share of the benefit which may accrue to the Company solely as a result of the defense undertaken by the Reinsurer. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be - 13 - executed in duplicate, this 1st day of Sept., 1993 AMERICAN RE-INSURANCE COMPANY By:_______________________ Stephen C. Pogue Vice President ATTEST: _______________________ Michael E. Shevlin, Vice President and this 1st day of Sept., 1993 CALFARM INSURANCE COMPANY ZENITH INSURANCE COMPANY ZNAT INSURANCE COMPANY By:______________________ John J. Tickner ATTEST Senior Vice President _______________________ -14- NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE - REINSURANCE - USA (1) This Agreement does not cover any loss or liability accruing to the Company directly or indirectly and whether as Insurer or Reinsurer, from any Pool of Insurers or Reinsurers formed for the purpose of covering Atomic or Nuclear Energy risks. (2) Without in any way restricting the operation of paragraph (1) of this Clause, this Agreement does not cover any loss or liability accruing to the Company, directly or indirectly and whether as Insurer or Reinsurer, from any insurance against Physical Damage (including business interruption or consequential loss arising out of such Physical Damage) to: (i) Nuclear reactor power plants including all auxiliary property on the site, or (ii) Any other nuclear reactor installation, including laboratories handling radioactive materials in connection with reactor installations, and "critical facilities" as such, or (iii) Installations for fabricating complete fuel elements or for processing substantial quantities of "special nuclear material", and for reprocessing, salvaging, chemically separating, storing or disposing of "spent" nuclear fuel or waste materials, or (iv) Installations other than those listed in paragraph (2) (iii) above using substantial quantities of radioactive isotopes or other products of nuclear fission. (3) Without in any way restricting the operations of paragraphs (1) and (2) hereof, this Agreement does not cover any loss or liability by radioactive contamination accruing to the Company, directly or indirectly, and whether as Insurer or Reinsurer, from any r,e on property which is on the same site as a nuclear reactor power plant or other nuclear installation and which normally would be filed therewith except that this paragraph (3) shall not operate: (a) where the Company does not have knowledge of such nuclear reactor power plant or nuclear installation, or (b) where said insurance contains a provision excluding coverage for damage to property caused by or resulting from radioactive contamination, however caused. However on and after 1st January 1960 this sub-paragraph (b) shall only apply provided the said radioactive contamination exclusion provision has been approved by the Government, Authority having jurisdiction thereof. (4) Without in any way restricting the operations of paragraphs (1),(2) and (3) hereof, this Agreement does not cover any loss or liability by radioactive contamination accruing to the Company, directly or indirectly, and whether as Insurer or Reinsurer, when such radioactive contamination is a named hazard specifically insured against. (5) It is understood and agreed that this Clause shall not extend to risks using radioactive isotopes in any form where the nuclear exposure is not considered by the Company to be the primary hazard. (6) The term "special nuclear material" shall have the meaning given it in the Atomic Energy Act of 1954 or by any law amendatory thereof. (7) The Company to be sole judge of what constitutes: (a) substantial quantities, and (b) the extent of installation, plant or site. Note: Without in any way restricting the operation of paragraph (1) hereof, it is understood and agreed that: (a) all policies issued by the Company on or before 31st December 1957 shall be free from the application of the other provisions of this Clause until expiry date or 31st December 1960 whichever first occurs whereupon all the provisions of this Clause shall apply. (b) with respect to any risk located in Canada policies issued by the Company on or before 31st December 1958 shall be free from the application of the other provisions of this Clause until expiry date or 31st December 1960 whichever first occurs whereupon all the provisions of this Clause shall apply. POOLS, ASSOCIATIONS, AND SYNDICATES EXCLUSION CLAUSE SECTION A Excluding: All business derived directly or indirectly from any Pool, Association, or Syndicate which maintains its own reinsurance facilities. Any Pool or Scheme (whether voluntary or mandatory) formed after March 1, 1968, for the purpose of insuring Property whether on a country-wide basis or in respect of designated areas. This exclusion shall not apply to so-called Automobile Insurance Plans or other Pools formed to provide coverage for Automobile Physical Damage. SECTION B It is agreed that business written by the Company for the same perils, which is known at the time to be insured by, or in excess of underlying amounts placed in the following Pools, Associations, or Syndicates, whether by way of insurance or reinsurance, is excluded hereunder. Industrial Risk Insurers, Associated Factory Mutuals, Improved Risk Mutuals. Any Pool, Association, or Syndicate formed for the purpose of writing Oil, Gas, or Petro-Chemical Plants and/or Oil or Gas Drilling Rigs. United States Aircraft Insurance Group, Canadian Aircraft Insurance Group, Associated Aviation Underwriters, American Aviation Underwriters. Section B does not apply: (a) Where the Total Insured Value over all interests of the risk in question is less than $250,000,000. (b) To interests traditionally underwritten as Inland Marine or Stock and/or Contents written on a Blanket basis. (c) To Contingent Business Interruption, except when the Company is aware that the key location is known at the time to be insured in any Pool, Association or Syndicate named above, other than as provided for under Section B(a). (d) To risks as follows: Offices, Hotels, Apartments, Hospitals, Educational Establishments, Public Utilities (Other than Railroad Schedules) and Builders Risks on the classes of risks specified in the subsection (d) only. SECTION C NEVERTHELESS the Reinsurer specifically agrees that liability accruing to the Company for its participation in: The Florida Residential Property and Casualty Joint Underwriting Association shall not be excluded or: (1) The following so-called "Coastal Pools" ALABAMA INSURANCE UNDERWRITING ASSOCIATION FLORIDA WINDSTORM UNDERWRITING ASSOCIATION LOUISIANA INSURANCE UNDERWRITING ASSOCIATION MISSISSIPPI WINDSTORM UNDERWRITING ASSOCIATION NORTH CAROLINA INSURANCE UNDERWRITING ASSOCIATION SOUTH CAROLINA WINDSTORM AND HAIL UNDERWRITING ASSOCIATION TEXAS CATASTROPHE PROPERTY INSURANCE ASSOCIATION and (2) All "Fair Plan" and "Rural Risk Plan" business, for all perils otherwise protected hereunder shall not be excluded herefrom, except that this Agreement does not include any increase in such liability resulting from (1) the inability of any other participant in such "Coastal Pool" and/or "Fair Plan" and/or "Rural Risk Plan" to meet its liability; or (2) any claim against such "Coastal Pool" and/or "Fair Plan" and/or "Rural Risk Plan", or any participant therein, including the Company, whether by way of subrogation or otherwise, brought by or on behalf of any insolvency fund. EX-10.23 7 EXHIBIT 10.23 AGREEMENT OF REINSURANCE No. 0079460 between EMPLOYERS REINSURANCE CORPORATION (herein referred to as the "Reinsurer") and CALFARM INSURANCE COMPANY Sacramento, California ZENITH INSURANCE COMPANY Woodland Hills, California ZNAT INSURANCE COMPANY Woodland Hills, California Their Quota Share Reinsurers (herein referred to as the "Company") ------------------------------------------------------------------------------- In consideration of the promises set forth in this Agreement, the parties agree as follows: ARTICLE I - SCOPE OF AGREEMENT As a condition precedent to the Reinsurer's obligations under this Agreement, the Company shall cede to the Reinsurer the business described in this Agreement, and the Reinsurer shall accept such business as reinsurance from the Company. ARTICLE II - PARTIES TO THE AGREEMENT This Agreement is solely between the Company and the Reinsurer. When more than one Company is named as a party to this Agreement, the first Company named shall be the agent of the other companies as to all matters pertaining to this Agreement. Performance of the obligations of each party under this Agreement shall be rendered solely to the other party. However, if the Company becomes insolvent, the liability of the Reinsurer shall be modified to the extent set forth in the article entitled INSOLVENCY OF THE COMPANY. In no instance shall any insured of the Company or any claimant against an insured of the Company have any rights under this Agreement. ARTICLE III - LIMIT AND RETENTION The Reinsurer shall pay to the Company, with respect to each loss event, 95% of the amount of ultimate net loss in excess of the sum of: (a) The Company Retention of $5,000,000; and (b) The First Excess Cover of $10,000,000; and (c) The Second Excess Cover of $5,000,000, but not exceeding the Limit of Liability of the Reinsurer of 95% of the next $5,000,000 of ultimate net loss with respect to such loss event nor 95% of $10,000,000 with respect to all loss events commencing during the term of this Agreement. The Company shall retain net for its own account, with respect to each loss event, the entire amount of the Company Retention plus the remaining 5% of such ultimate net loss. ARTICLE IV - TERM This Agreement shall apply to loss events which commence during the period from September 1, 1993 to August 31, 1994, both dates inclusive, at the place of the loss event. This Agreement shall not apply to loss events which commence prior to the effective date of this Agreement and continue during any part of the term of this Agreement. However, this Agreement shall apply to loss events which commence during and continue beyond the term of this Agreement and in the computation of the liability of the Reinsurer the entire ultimate net loss resulting from each such loss event shall be included, subject to the limitations set forth in paragraph (f) of the article entitled DEFINITIONS. 2 ARTICLE V - DEFINITIONS (a) PROPERTY BUSINESS This term shall mean direct property business written by the Company, as defined, and classified in its Association Edition of Annual Statement for Fire and Casualty Companies as: (1) Fire; (2) Allied lines (including extended coverage); (3) Farmowners multiple peril (applicable property and inland marine lines only); (4) Homeowners multiple peril (applicable property and inland marine lines only); (5) Commercial multiple peril (applicable property lines only); (6) Blanket personal property; (7) Inland marine; (8) Earthquake; (9) Garagekeepers legal liability (comprehensive only); on risks located in the United States of America. (b) COMPANY RETENTION This term shall mean the amount the Company shall retain for its own account; however, this requirement shall be satisfied if this amount is retained by the Company or its affiliated companies under common management or common ownership. (c) ULTIMATE NET LOSS This term shall mean all payments by the Company of claims and losses, within the limits of liability or amounts of insurance of the policies of the Company, and adjustment expense, after deduction of salvage and other recoveries and after deduction of amounts due from all other reinsurance other than the reinsurance pooling arrangement between Zenith Insurance Company, CalFarm Insurance Company and ZNAT Insurance Company, - 3 - whether collectible or not. If the Company becomes insolvent, this definition shall be modified to the extent set forth in the article entitled INSOLVENCY OF THE COMPANY. (d) ADJUSTMENT EXPENSE This term shall mean expenditures by the Company in the direct defense of claims and as allocated to an individual claim or loss, other than for office expenses and for the salaries and expenses of employees of the Company or of any subsidiary or related or wholly owned company of the Company, made in connection with the disposition of a claim, loss, or legal proceeding including investigation, negotiation, and legal expenses; court costs, statutory penalties; prejudgment interest or delayed damages; and interest on any judgment or award. (e) PREJUDGMENT INTEREST OR DELAYED DAMAGES This term shall mean interest or damages added to a settlement, verdict, award, or judgment based on the amount of time prior to the settlement, verdict, award, or judgment whether or not made part of the settlement, verdict, award, or judgment. (f) LOSS EVENT This term shall mean an occurrence or series of occurrences arising out of one event, provided that only the claims and losses sustained by the Company during the continuous period of 168 hours selected by the Company shall be used in the determination of the ultimate net loss; and only one such continuous period of 168 hours shall apply with respect to one event. Additionally, with respect to riot or civil commotion and other causes of loss resultant therefrom, only claims and losses sustained by the Company on risks within the limits of one city, town, or village immediately adjacent thereto shall be used in the determination of ultimate net loss. (g) SUBJECT NET EARNED PREMIUM This term shall mean the direct premium earned by the Company during the term of the Agreement on the business reinsured hereunder after deduction of return premiums and after deduction of premiums paid for reinsurance which inures to the benefit of the Reinsurer. For purposes of this Agreement, subject net earned premium shall be deemed to be 100% of the premiums on the lines of business reinsured 4 hereunder. However, on the following lines, which are the so-called package policies (only when written on an indivisible premium basis) subject net earned premium shall be determined as: (1) 88% of the total homeowners and boatowners policy premiums; (2) 80% of the total farmowners and commercial multiple peril policy premiums. When any of the above policies is written on a divisible premium basis, the actual premium for the lines of business included in this Agreement shall be used rather than the percentage stated above. ARTICLE VI - EXCLUSIONS This Agreement shall not apply to: (a) All lines of business not specifically covered hereunder; (b) Reinsurance assumed by the Company other than reinsurance assumed by Zenith Insurance Company from CalFarm Insurance Company or ZNAT Insurance Company; all liability assumed under excess of loss insurance or reinsurance contracts; (c) All business excluded by the Pools, Associations and Syndicates Exclusion Clause attached hereto and made a part hereof; (d) Policies issued under retrospectively rated plans; policies issued with a deductible of more than $100,000, provided this exclusion shall not apply to policies which customarily provide a percentage deductible on the perils of earthquake or windstorm; (e) Liability coverages under homeowners, farmowners and commercial package policies; i.e., comprehensive personal, farm or commercial liability, medical payments and physical damage to property of others; (f) All casualty, fidelity, surety, forgery, boiler and machinery, burglary or glass business or coverages (not applicable to Section I coverages of multiple peril policies); (g) The following risks, coverages and kinds of insurance: (1) Accident and health; - 5 - (2) Animal or livestock mortality policies; however, this exclusion shall not apply to fowl; (3) Automobile; however, this exclusion shall not apply with respect to garagekeepers legal liability coverages; (4) Aviation; (5) Commercial hulls or hulls other than outboard motorboat and sailboat coverages; (6) Credit warranty, financial guarantees; (7) First class or registered mail; (8) Gas or oil drilling risks; (9) Growing or standing crops, other than fire insurance; all crop hail insurance or any other coverages provided in connection therewith; (10) Jewelers and furriers block; (11) Negative film syndicates; (12) Ocean marine; (13) Railroad Property; (h) Flood, surface water, waves, tidal water or tidal waves, overflow of streams or other bodies of water or spray from any of the foregoing, all whether driven by wind or not, unless written in conjunction with the peril of fire of similar amount; (i) Mortgage impairment insurance and similar kinds of insurance, howsoever styled, providing coverage to an insured with respect to its mortgagee interest in property or its owner interest in foreclosed property; (j) Difference in conditions insurance and similar kinds of insurance, howsoever styled; (k) Consequential, punitive, exemplary or compensatory damages resulting from an action taken by any policyholder, insured or assignee, against the Company for alleged or actual bad faith, fraud or negligence in the settlement of a claim; - 6 - (l) Risks which have a total insurable value of more than $250,000,000; (m) War risk, bombardment, invasion, insurrection, rebellion, revolution, military or usurped power, or confiscation by order of any government or public authority, as excluded under a standard of policy containing a standard war exclusion clause; (n) Nuclear incident per the Nuclear Incident Exclusion - Physical Damage - Reinsurance (NMA 1119) attached hereto; (o) Liability of the Company arising from its participation or membership, whether voluntary or involuntary, in any insolvency fund, including any guarantee fund, association, pool, plan or other facility which provides for the assessment of, payment by, or assumption by the company of a part or the whole of any claim, debt, charge, fee or other obligations of an insurer, or its successors or assigns, which has been declared insolvent by any authority having jurisdiction; (p) Loss of, damage to, or failure of, or consequential loss resulting therewith (including but not limited to earnings and extra expense) of satellites, spacecraft, and launch vehicles, including cargo and freight carried therein, in all phases of operation (including but not limited to manufacturing, transit, prelaunch, launch, and in-orbit); (q) Coverage afforded by ISO Pollutant Clean Up and Removal Additional Aggregate Limit of Insurance Endorsement CP 04 07 (Ed. 4/86) or as subsequently amended or by any similar endorsement affording such coverage; (r) Pollutant clean up or removal under any commercial property policy or any inland marine policy written by the Company which does not contain ISO Changes-Pollutants Endorsement CP 01 86 (Ed. 4/86) or as subsequently amended; however, this exclusion does not apply to any risk located in a jurisdiction which has not approved the Insurance Services Office exclusion or where other regulatory constraints prohibit the Company from attaching such endorsement. If the Company elects to file an endorsement independent of ISO, such endorsement will be deemed a suitable substitute provided the company has submitted the wording to the Reinsurers and received the Reinsurer's prior approval. ARTICLE VII - REINSURANCE PREMIUMS As a condition precedent to the Reinsurer's obligations hereunder, the Company shall pay to the Reinsurer .407% of the subject net earned premium during the term of the Agree- 7 ment, subject to a minimum reinsurance premium of $175,500 and deposit reinsurance premium of $195,000. ARTICLE VIII - AUTOMATIC REINSTATEMENT The Limit of Liability of the Reinsurer under this Agreement with respect to each loss event shall be reduced by an amount equal to the amount of liability paid by the Reinsurer, but that part of the liability of the Reinsurer that is so reduced shall be automatically reinstated from the commencement of the loss event for which payment is made; however, the Limit of Liability of the Reinsurer with respect to all loss events commencing during the term of this Agreement shall not exceed the amount set forth in the article entitled LIMIT AND RETENTION. In consideration of this automatic reinstatement, the Company shall pay to the Reinsurer for each amount reinstated an additional reinsurance premium that shall be pro rata of the reinsurance premium set forth in the article entitled REINSURANCE PREMIUM. The additional reinsurance premium shall be the product of the reinsurance premium set forth in the article entitled REINSURANCE PREMIUM, multiplied by the amount of the reinstated Limit of Liability of the Reinsurer divided by the total Limit of Liability of the reinsurer for each loss event irrespective of the time of the commencement of this loss event. The reinsurance premium so developed for each amount reinstated shall be in addition to the reinsurance premium set forth in the article entitled REINSURANCE PREMIUM. ARTICLE IX - MANAGEMENT OF CLAIMS AND LOSSES The Company shall investigate and settle or defend all claims and losses. When requested by the Reinsurer, the Company shall permit the Reinsurer, at the expense of the Reinsurer, to be associated with the Company in the defense or control of any claim, loss, or legal proceeding which involves or is likely to involve the Reinsurer. All payments of claims or losses of the Company within the terms and limits of its policies which are within the limits 8 set forth in the applicable Agreement shall be binding on the Reinsurer, subject to the terms of this Agreement. ARTICLE X - RECOVERIES The Company shall pay to or credit the Reinsurer with the Reinsurees portion of any recovery obtained from salvage, subrogation, or other insurance. Adjustment expenses for recoveries shall be deducted from the amount recovered. The Reinsurer shall be subrogated to the rights of the Company to the extent of its loss payments to the Company. The Company agrees to enforce its rights of salvage, subrogation, and its rights against insurers or to assign these rights to the Reinsurer. Recoveries shall be distributed to the parties in an order inverse to that in which their liabilities accrued. ARTICLE XI - ERRORS AND OMISSIONS The Reinsurer shall not be relieved of liability because of an error or accidental omission of the Company in reporting any claim or loss or any business reinsured under this Agreement, provided that the error or omission is rectified promptly after discovery. The Reinsurer shall be obligated only for the return of the premium paid for business reported but not reinsured under this Agreement. ARTICLE XII - REPORTS AND REMITTANCES (a) REINSURANCE PREMIUM On or before the beginning of each calendar quarter, the Company shall pay to the Reinsurer one quarter of the deposit reinsurance premium stipulated in the article entitled REINSURANCE PREMIUM. On or before October 15, 1994, the Company shall render to the Reinsurer a report of the subject net earned premium by the Company during the term of this Agreement. The Company shall calculate the reinsurance - 9 - premium thereon, shall balance such amount against the deposit reinsurance premium previously paid, and the difference due either party, subject to the minimum reinsurance premium, shall be remitted promptly. (b) CLAIMS AND LOSSES The Company shall report promptly to the Reinsurer each loss event which, in the Company's opinion, may involve the reinsurance afforded by this Agreement. The Company shall advise the Reinsurer of the estimated amount of ultimate net loss in connection with each loss event and of any subsequent changes in such estimate. Upon receipt of a definitive statement of ultimate net loss from the Company, the Reinsurer shall promptly pay to the Company the Reinsurer's portion of ultimate net loss. Any subsequent changes in the amount of ultimate net loss shall be reported by the Company to the Reinsurer and the amount due either party shall be remitted promptly. (c) P.C.S. CATASTROPHE BULLETINS The Company shall furnish to the Reinsurer, upon request, the following information with respect to each catastrophe set forth in the Catastrophe Bulletins published by the Property Claim Services: (1) The preliminary estimate of the amount recoverable from the Reinsurer; (2) The Reinsurer's portion of claims, losses, and adjustment expense paid less salvage recovered during each calendar quarter; (3) The Reinsurer's portion of reserves for claims, losses, and adjustment expense at the end of each calendar quarter. (d) GENERAL In addition to the reports required by (a), (b), and (c) above, the Company shall furnish such other information as may be required by the Reinsurer for the completion of the Reinsurer's quarterly and annual statements and internal records. All reports shall be rendered on forms or in format acceptable to the Company and the Reinsurer. -10- ARTICLE XIII - REINSURANCE OVER THIS AGREEMENT The Company shall advise the Reinsurer of any reinsurance of the Company that would apply over and beyond the Limit of Liability of the Reinsurer under this Agreement. ARTICLE XIV - SPECIAL ACCEPTANCES Business not within the terms of this Agreement may be submitted to the Reinsurer for special acceptance and, if accepted by the Reinsurer, shall be subject to all of the terms of this Agreement except as modified by the special acceptance. ARTICLE XV - RESERVES AND TAXES The Reinsurer shall maintain the required reserves as to the Reinsurer's portion of unearned premium, claims, losses, and adjustment expense. The Company shall be liable for all premium taxes on premium ceded to the Reinsurer under this Agreement. If the Reinsurer is obligated to pay any premium taxes on this premium, the Company shall reimburse the Reinsurer; however, the Company shall not be required to pay taxes twice on the same premium. ARTICLE XVI - OFFSET The Company or the Reinsurer may offset any balance, whether on account of premium, commission, claims or losses, adjustment expense, salvage, or otherwise, due from one party to the other under this Agreement or under any other agreement heretofore or hereafter entered into between the Company and the Reinsurer. ARTICLE XVII - INSPECTION OF RECORDS The Company shall allow the Reinsurer to inspect, at reasonable times, the records of the Company relevant to the business reinsured under this Agreement, including Company - 11 - files concerning claims, losses, or legal proceedings which involve or are likely to involve the Reinsurer. ARTICLE XVIII - ARBITRATION Any unresolved difference of opinion between the Reinsurer and the Company shall be submitted to arbitration by three arbitrators. One arbitrator shall be chosen by the Reinsurer, and one shall be chosen by the Company. The third arbitrator shall be chosen by the other two arbitrators within ten (10) days after they have been appointed. If the two arbitrators cannot agree upon a third arbitrator, each arbitrator shall nominate three persons of whom the other shall reject two. The third arbitrator shall then be chosen by drawing lots. If either party fails to choose an arbitrator within thirty (30) days after receiving the written request of the other party to do so, the latter shall choose both arbitrators, who shall choose the third arbitrator. The arbitrators shall be impartial and shall be active or retired persons whose principal occupation is or was as an officer of property and casualty insurance or reinsurance companies. The party requesting arbitration (the "Petitioner") shall submit its brief to the arbitrators within thirty (30) days after notice of the selection of the third arbitrator. Upon receipt of the Petitioner's brief, the other party (the "Respondent") shall have thirty (30) days to file a reply brief. On receipt of the Respondent's brief, the Petitioner shall have twenty (20) days to file a rebuttal brief. Respondent shall have twenty (20) days from the receipt of Petitioner's rebuttal brief to file its rebuttal brief. The arbitrators may extend the time for filing of briefs at the request of either party. The arbitrators are relieved from judicial formalities and, in addition to considering the rules of law and the customs and practices of the insurance and reinsurance business, shall make their award with a view to effecting the intent of this Agreement. The decision of the majority shall be final and binding upon the parties. The costs of arbitration, including the fees - 12 - of the arbitrators, shall be shared equally unless the arbitrators decide otherwise. The arbitration shall be held at the times and places agreed upon by the arbitrators. ARTICLE XIX - INSOLVENCY OF THE COMPANY In the event of the insolvency of the Company, the reinsurance proceeds will be paid to the Company or the liquidator immediately upon demand, with reasonable provision for verification, on the basis of the amount of the claim allowed in the insolvency proceeding without diminution by reason of the inability of the Company to pay all or part of the claim. The Reinsurer shall be given written notice of the pendency of each claim against the Company on the policy(ies) reinsured hereunder within a reasonable time after such claim is filed in the insolvency proceedings. The Reinsurer shall have the right to investigate each such claim and to interpose, at its own expense, in the proceeding where such claim is to be adjudicated, any defenses which it may deem available to the Company or its liquidator. The expense thus incurred by the Reinsurer shall be chargeable, subject to court approval, against the insolvent Company as part of the expense of liquidation to the extent of a proportionate share of the benefit which may accrue to the Company solely as a result of the defense undertaken by the Reinsurer. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be - 13 - executed in duplicate, this 8th day of March ,1994 EMPLOYERS REINSURANCE CORPORATION By:______________________________ SECOND VICE PRESIDENT Attest: ______________________ Vice President and this 16th day of March, 1994 CALFARM INSURANCE COMPANY ZENITH INSURANCE COMPANY ZNAT INSURANCE COMPANY By:________________________ SR VICE-PRES. Attest: ______________________ 14 NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE - REINSURANCE - USA (1) This Agreement does not cover any loss or liability accruing to the Company directly or indirectly and whether as Insurer or Reinsurer, from any Pool of Insurers or Reinsurers formed for the purpose of covering Atomic or Nuclear Energy risks. (2) Without in any way restricting the operation of paragraph (1) of this Clause, this Agreement does not cover any loss or liability accruing to the Company, directly or indirectly and whether as Insurer or Reinsurer, from any insurance against Physical Damage (including business interruption or consequential loss arising out of such Physical Damage) to: (i) Nuclear reactor power plants including all auxiliary property on the site, or (ii) Any other nuclear reactor installation, including laboratories handling radioactive materials in connection with reactor installations, and "critical facilities" as such or (iii) Installations for fabricating complete fuel elements or for processing substantial quantities of "special nuclear material", and for reprocessing, salvaging, chemically separating, storing or disposing of "spent" nuclear fuel or waste materials, or (iv) Installations other than those listed in paragraph (2) (iii) above using substantial quantities of radioactive isotopes or other products of nuclear fission. (3) Without in any way restricting the operations of paragraphs (1) and (2) hereof, this Agreement does not cover any loss or liability by radioactive contamination accruing to the Company, directly or indirectly, and whether as Insurer or Reinsurer, from any insurance on property which is on the same site as a nuclear reactor power plant or other nuclear installation and which normally would be insured therewith except that this paragraph (3) shall not operate: (a) where the Company does not have knowledge of such nuclear reactor power plant or nuclear installation, or (b) where said insurance contains a provision excluding coverage for damage to property caused by or resulting from radioactive contamination, however caused. However on and after 1st January 1960 this sub-paragraph (b) shall only apply provided the said radioactive contamination exclusion provision has been approved by the Governmental Authority having jurisdiction thereof. (4) Without in any way restricting the operations of paragraphs (1),(2) and (3) hereof, this Agreement does not cover any loss or liability by radioactive contamination accruing to the Company, directly or indirectly, and whether as Insurer or Reinsurer, when such radioactive contamination is a named hazard specifically insured against. (5) It is understood and agreed that this Clause shall not extend to risks using radioactive isotopes in any form where the nuclear exposure is not considered by the Company to be the primary hazard. (6) The term "special nuclear material" shall have the meaning given it in the Atomic Energy Act of 1954 or by any law amendatory thereof (7) The Company to be sole judge of what constitutes: (a) substantial quantities, and (b) the extent of installation, plant or site. Note: Without in any way restricting the operation of paragraph (1) hereof, it is understood and agreed that: (a) all policies issued by the Company on or before 31st December 1957 shall be free from the application of the other provisions of this Clause until expiry date or 31st December 1960 whichever first occurs whereupon all the provisions of this Clause shall apply. (b) with respect to any risk located in Canada policies issued by the Company on or before 31st December 1958 shall be free from the application of the other provisions of this Clause until expiry date or 31st December 1960 whichever first occurs whereupon all the provisions of this Clause shall apply. POOLS, ASSOCIATIONS, AND SYNDICATES EXCLUSION CLAUSE SECTION A Excluding: All business derived directly or indirectly from any Pool, Association, or Syndicate which maintains its own reinsurance facilities. Any Pool or Scheme (whether voluntary or mandatory) formed after March 1, 1968, for the purpose of insuring Property whether on a country-wide basis or in respect of designated areas. This exclusion shall not apply to so- called Automobile Insurance Plans or other Pools formed to provide coverage for Automobile Physical Damage. SECTION B It is agreed that business written by the Company for the same perils, which is known at the time to be insured by, or in excess of underlying amounts placed in the following Pools, Associations, or Syndicates, whether by way of insurance or reinsurance, is excluded hereunder. Industrial Risk Insurers, Associated Factory Mutuals, Improved Risk Mutuals. Any Pool, Association, or Syndicate formed for the purpose of writing Oil, Gas, or Petro-Chemical Plants and/or Oil or Gas Drilling Rigs. United States Aircraft Insurance Group, Canadian Aircraft Insurance Group, Associated Aviation Underwriters, American Aviation Underwriters. Section B does not apply: (a) Where the Total Insured Value over all interests of the risk in question is less than $250,000,000. (b) To interests traditionally underwritten as Inland Marine or Stock and/or Contents written on a Blanket basis. (c) To Contingent Business Interruption, except when the Company is aware that the key location is known at the time to be insured in any Pool, Association, or Syndicate named above, other than as provided for under Section B(a). (d) To risks as follows: Offices, Hotels, Apartments, Hospitals, Educational Establishments, Public Utilities (Other than Railroad Schedules) and Builders Risks on the classes of risks specified in the subsection (d) only. SECTION C NEVERTHELESS the Reinsurer specifically agrees that liability accruing to the Company for its participation in: The Florida Residential Property and Casualty Joint Underwriting Association shall not be excluded or: (1) The following so-called "Coastal Pools" ALABAMA INSURANCE UNDERWRITING ASSOCIATION FLORIDA WINDSTORM UNDERWRITING ASSOCIATION LOUISIANA INSURANCE UNDERWRITING ASSOCIATION MISSISSIPPI WINDSTORM UNDERWRITING ASSOCIATION NORTH CAROLINA INSURANCE UNDERWRITING ASSOCIATION SOUTH CAROLINA WINDSTORM AND HAIL UNDERWRITING ASSOCIATION TEXAS CATASTROPHE PROPERTY INSURANCE ASSOCIATION and (2) All "Fair Plan" and "Rural Risk Plan" business, for all perils otherwise protected hereunder shall not be excluded herefrom, except that this Agreement does not include any increase in such liability resulting from (1) the inability of any other participant in such "Coastal Pool" and/or "Fair Plan" and/or "Rural Risk Plan" to meet its liability; or (2) any claim against such "Coastal Pool" and/or "Fair Plan" and/or "Rural Risk Plan", or any participant therein, including the Company, whether by way of subrogation or otherwise, brought by or on behalf of any insolvency fund. EX-10.27 8 EXHIBIT 10.27 EXCESS MAJOR MEDICAL REINSURANCE AGREEMENT (No. 0076820/Specific and Aggregate Retentions) January 1, 1993 CALFARM LIFE INSURANCE COMPANY Sacramento, California EXCESS MAJOR MEDICAL REINSURANCE AGREEMENT (No. 0076820/Specific and Aggregate Retentions) SCHEDULE 1. Reinsured: CalFarm Life Insurance Company 2. Address: Sacramento, California 3. Effective date: January 1, 1993 4. Liability period: (a) First: Calendar year 1993 (b) Thereafter: Each calendar year with respect to which this agreement is renewed in accordance with Article XII 5. Reinsured's policies to which this agreement applies: (a) Group Health Master Policy No. GH-1000 (Revised 4/93) and certificates issued thereunder covering members of California County Farm Bureaus of the California Farm Bureau Federation, but this reinsurance agreement does not apply to the medicare coverage provided under said policy. (b) Group Health Master Policy No. GH-1001 (Revised 9/89) and certificates issued thereunder covering employees of the California County Farm Bureau Federation and employees of the California County Farm Bureaus. (c) Group Health Master Policy No. GH-1100 and certificates issued thereunder covering employees of employers affiliated with the California County Farm Bureaus of the California Farm Bureau Federation. (d) Group Health Master Policy No. GH-1150 and certificates issued thereunder covering members of California County Farm Bureaus of the California Farm Bureau Federation. 6. Retention each liability period: (a) Specific retention each person: The first $120,000 of loss paid by the Reinsured during the liability period (b) Aggregate retention all persons: $2,400,000 7. Reinsurance (in excess of specific and aggregate retentions) pertaining to each person each liability period: 100% of loss paid by the Reinsured during the liability period with respect to the person in excess of the total amount of loss retained by the Reinsured with respect to the person under Section A and Section B of Article II of this agreement 8. Maximum reinsurance limit each person: An amount equal to the maximum lifetime benefit for the person provided by the policy less the total amount of the loss pertaining to the person retained by the Reinsured under Section A and Section B of Article II of this agreement and under Section A and Section B of Article II of the 1985 medical treaty between the parties hereto, and less the Corporation's indemnity with respect to the person under the 1985 medical treaty between the parties hereto, but in no event more than $2,900,000, even though the person may be covered under more than one policy 9. Reinsurance premium rates:
Monthly Rate Policy Maximum Each Certificate -------------- ---------------- $1,000,000 $3.49 $2,500,000 $3.73 $3,000,000 $3.80
The agreement of which this Schedule is a part is hereby executed in duplicate by the parties hereto. CALFARM LIFE INSURANCE EMPLOYERS REINSURANCE COMPANY CORPORATION /s/ SRZ /s/ - --------------------------------- --------------------------------- Title: Pres. Title: Second Vice President /s/ JJT /s/ - --------------------------------- --------------------------------- Title: Sr. VP Title: Assistant Secretary EXCESS MAJOR MEDICAL REINSURANCE AGREEMENT EMPLOYERS REINSURANCE CORPORATION of Overland Park, Kansas (herein called the Corporation) agrees with the Reinsured named in the Schedule made a part hereof, in consideration of the mutual covenants hereinafter contained, as follows: ARTICLE I APPLICATION OF AGREEMENT. This agreement applies to loss paid by the Reinsured during the liability period(s) of this agreement under its policies specified in Item 5 of the Schedule in force on or issued by the Reinsured to become effective on or after the effective date of this agreement (hereinafter called policies), and retained by the Reinsured after cession of all other reinsurance whether collectible or not. The attached Insolvency Clause is hereby made a part of this agreement. ARTICLE II RETENTION AND REINSURANCE. SECTION A. SPECIFIC RETENTION EACH PERSON EACH LIABILITY PERIOD. As respects loss paid by the Reinsured during each liability period pertaining to each person, the Reinsured shall retain under this Section A the amount thereof indicated in Item 6(a) of the Schedule. Loss paid during each liability period pertaining to each person in excess of the amount specified in Item 6(a) of the Schedule shall be retained by the Reinsured under Section B of this Article until the retention for Section B is satisfied, whereupon such loss shall be subject to indemnity under Section C of this Article. SECTION B. AGGREGATE RETENTION ALL PERSONS EACH LIABILITY PERIOD. As respects loss paid by the Reinsured during each liability period pertaining to all persons in excess of the retention applicable to each liability period for each person required by Section A of this Article, the Reinsured shall retain under this Section B the amount thereof indicated in Item 6(b) of the Schedule. SECTION C. REINSURANCE. As respects loss paid by the Reinsured during each liability period pertaining to each person in excess of the retentions required under Section A and Section B of this Article II, the Corporation hereby agrees to indemnify the Reinsured against the percentage thereof specified in Item 7 of the Schedule, subject to the reinsurance limit indicated in Item 8 of the Schedule with respect to loss paid by the Reinsured during all liability periods as pertaining to each person. ARTICLE III DEFINITIONS. As used in this agreement: (a) The term "liability period" shall mean a period of time as specified in Item 4 of the Schedule. (b) The word "loss" shall mean only such amounts as are actually paid by the Reinsured for medical benefits afforded under the policies, in settlement of claims for medical benefits under the policies or in satisfaction of judgments for medical benefits under the policies; but the word "loss" shall not include: (1) claim expenses or salaries paid to employees of the Reinsured; (2) any amount paid by the Reinsured for: (i) punitive or exemplary damages, or (ii) compensatory damages awarded to any person, arising out of the conduct of the Reinsured in the investigation, trial or settlement of any claim or failure to pay or delay in payment of any benefits under any policy; provided that, this subparagraph (2) shall not apply if the Corporation has, in advance of any such conduct by the Reinsured, counseled with the Reinsured and concurred in the Reinsured's course of conduct; (3) any statutory penalty imposed upon the Reinsured on account of any unfair trade practice or any unfair claim practice. (c) The word "person" shall mean any one individual who is entitled to benefits under the policies. - 2 - ARTICLE IV REINSURANCE PREMIUM. The reinsurance premium due the Corporation under this agreement shall be computed in accordance with the reinsurance premium rate(s) specified in the Schedule. Such reinsurance premium shall not be subject to a ceding commission to the Reinsured but shall be subject to profit commission as hereinafter provided in Article V. ARTICLE V PROFIT COMMISSION. The Corporation does hereby agree to pay to the Reinsured 50% of the net profit, if any, accruing hereunder to the Corporation, calculated with respect to each liability period in accordance with the following Schedule. CREDITS 1. The reinsurance premium earned by the Corporation during the period, determined in accordance with the rates specified in the Schedule. 2. Unpaid reinsurance losses at the end of the previous period. CHARGES 1. The amount of losses paid by the Corporation pertaining to the period. 2. Unpaid reinsurance losses at the end of the period. 3. As respects the first period only, the amount of $________________ (carried forward from the 1985 medical treaty between the parties hereto). 4. The Corporation's basic operating margin equal to 15% of Item 1 of Credits. 5. The deficit, if any, at the end of the previous period. The computation of profit commission for each liability period shall be made six months after the end of the period, provided that, if losses are reported to the Corporation more than six months after the end of the liability period in which paid by the Reinsured, the profit commission for that liability period and all liability periods thereafter shall be recomputed. "Net profit" means the excess of Credits over Charges for any one liability period. - 3 - "Deficit" means the excess of Charges over Credits for any one liability period. "Unpaid reinsurance losses" shall be established in accordance with the Corporation's current actuarial formula for medical loss reserves. If the computation for the final liability period produces a deficit which is wholly or in part due to inadequacy or absence of loss reserves in connection with any previous liability period, the profit commission for each liability period will be recomputed, and losses paid shall be a charge to profits in the liability period during which each accident took place or sickness commenced, and the Reinsured will refund to the Corporation profit commission previously paid by reason of such inadequacy or absence of loss reserves. ARTICLE VI REPORTING AND ACCOUNTING. Within 20 days after the close of each calendar month, the Reinsured shall furnish the Corporation with a report (in a form satisfactory to the Corporation) showing reinsurance premium due the Corporation. The report shall also contain such other information as may be required by the Corporation. The reinsurance premium due the Corporation shall accompany the report. ARTICLE VII CLAIMS. The Reinsured agrees that it will cause to be investigated and settled or defended all claims arising under the policies and that it will give prompt notice to the Corporation of any event or development which, in the judgment of the Reinsured, might result in a claim upon the Corporation hereunder, and will forward promptly to the Corporation copies of such claim documentation as may be requested by the Corporation. The Corporation shall have the right, at its own expense, to participate jointly with the Reinsured in the investigation, adjustment or defense of any claim which, in the judgment of the Corporation, it is or might become exposed. The Corporation shall reimburse the Reinsured or its legal representative promptly for loss against which indemnity is herein provided, upon receipt in the home office of the Corporation of satisfactory evidence of payment of such loss. - 4 - Within 35 days after the end of each calendar quarter, the Reinsured shall mail to the Corporation a summary of the estimated values for the outstanding claims reinsured by this agreement as of the last day of the quarter. ARTICLE VIII INSPECTION OF RECORDS. The Corporation may inspect the records of the Reinsured pertaining to the policies reinsured hereunder. ARTICLE IX PREMIUM TAXES. The Corporation shall be under no obligation to reimburse the Reinsured for any premium taxes paid by the Reinsured. ARTICLE X OFFSET. The Reinsured or the Corporation may offset any balance, whether on account of premiums, commissions, loss or claim expenses due from one party to the other under this agreement or under any other reinsurance agreement heretofore or hereafter entered into between the Reinsured and the Corporation, whether acting as assuming reinsurer or ceding company. ARTICLE XI ASSIGNMENTS AND CHANGES OF INTEREST. No assignment or change of the Reinsured's interest hereunder, whether voluntary or involuntary and whether by merger or reinsurance or its entire business with another company or otherwise, shall be binding upon the Corporation. ARTICLE XII TERMINATION. This agreement shall continue in effect until January 1, 1994, which shall be the termination date. This agreement may be renewed by amendment executed by both parties. This agreement does not apply to loss paid by the Reinsured on or after the termination date of this agreement. - 5 - INSOLVENCY CLAUSE The ceding insurer and the reinsurer agree that, in the event of the insolvency of the ceding insurer, as to all reinsurance made, ceded, renewed or otherwise becoming effective after the effective date of this agreement, the reinsurance shall be payable by the reinsurer on the basis of the amount of liability of the ceding insurer under the contract or contracts reinsured without diminution because of the insolvency of the ceding insurer; furthermore, that such amount shall be paid directly to the ceding insurer or its liquidator, receiver or other statutory successor, except as provided by Section 4118 of the Insurance Law of New York, or except (a) where the contract specifically provides another payee of such insurance in the event of the insolvency of the ceding insurer, and 1b) where the reinsurer, with the consent of the direct insured or insureds, has assumed such policy obligations of the ceding insurer as direct obligations of the reinsurer to the payees under such policies and in substitution for the obligations of the ceding insurer to such payee. It is understood and agreed, however, that the obligations of the ceding company as set forth in this reinsurance contract, including, among others, the duty to investigate, settle and defend all claims arising under policies with respect to which reinsurance is afforded by this agreement, shall remain unimpaired and unaffected by the insolvency of the ceding insurer and shall be assumed by the liquidator, receiver or statutory successor of the ceding insurer in the liquidation or receivership proceeding and that such liquidator, receiver or statutory successor shall give written notice to the reinsurer of the pendency of a claim against the ceding insurer on the policy or bond reinsured within a reasonable time after such claim is filed in the insolvency proceeding and that during the pendency of such claim the reinsurer may investigate such claim and interpose, at its own expense, in the proceeding where such claim is to be adjudicated, any defense or defenses which it may deem available to the ceding insurer, its liquidator, receiver or statutory successor. The expense thus incurred by the reinsurer shall be chargeable, subject to court approval, against the insolvent ceding insurer as part of the expense of liquidation to the extent of a proportionate share of the benefit which may accrue to the ceding insurer solely as the result of the defense undertaken or asserted by the reinsurer. Where two or more reinsurers are involved in the same claim and a majority in interest elect to interpose a defense to such claim, the expense shall be apportioned in accordance with the terms of this reinsurance agreement as though such expense been incurred by the ceding insurer. Nothing hereinabove set forth in this insolvency clause shall in anywise change the relationship or status of the parties hereto, to wit, that of ceding insurer and reinsurer, nor enlarge the obligations of either party to each other, except as specifically hereinabove provided, to wit, to pay the statutory successor on the basis of the amount of liability of the ceding insurer under the contract or contracts reinsured, rather than on the basis of the actual amount of loss (dividends) paid by the liquidator, receiver or statutory successor to allowed claimants, nor, except as hereinabove specifically provided, shall anything in this insolvency clause in any manner create any obligations or establish any rights against the reinsurer in favor of any third parties or any persons not parties to this reinsurance contract. EX-11 9 EXHIBIT 11 EXHIBIT 11 ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE
YEAR ENDED DECEMBER 31, ---------------------------------------------- 1993 1992 1991 -------------- -------------- -------------- (A) Net income................................................. $ 53,200,000 $ 28,700,000 $ 45,901,000 -------------- -------------- -------------- -------------- -------------- -------------- Number of shares used in calculating primary earnings per share: Weighted average outstanding shares during the period.... 18,998,000 18,914,000 18,981,000 Additional common shares issuable under employee stock options using the treasury stock method (Note 1):...... 299,000 4,000 -------------- -------------- -------------- (B) Average outstanding shares................................. 19,297,000 18,918,000 18,981,000 -------------- -------------- -------------- -------------- -------------- -------------- Primary earnings per share (A) / (B).................................................. $2.76 $1.52 $2.42 Number of shares used in calculating fully diluted earnings per share: Weighted average outstanding shares during the period.... 18,998,000 18,914,000 18,981,000 Additional common shares issuable under employee stock options using the treasury stock method (Note 2):...... 326,000 37,000 1,000 -------------- -------------- -------------- 19,324,000 18,951,000 18,982,000 (C) Average outstanding shares................................. -------------- -------------- -------------- -------------- -------------- -------------- Fully diluted earnings per share (A) / (C).................................................. $2.75 $1.51 $2.42 - ------------------------ Notes: (1) Based on the average quarterly market price of each period. Optioned shares were anti-dilutive in 1991. (2) Based on the higher of the average market price or price at the end of each period.
EX-13 10 EXHIBIT 13 The following table presents a reconciliation of changes in liabilities for property-casualty losses and loss adjustment expenses for the three years ended December 31, 1993. Additional information relating to reserve development appears on page 38.
- -------------------------------------------------------------------------- (Dollars in thousands) 1993 1992 1991 - -------------------------------------------------------------------------- Beginning of year, net of reinsurance recoverable $ 464,149 $ 440,180 $ 415,645 Incurred claims: Current year 266,137 269,798 261,766 Prior years 9,071 19,934 3,085 --------- --------- --------- Total incurred claims 275,208 289,732 264,851 Payments: Current year (93,824) (88,692) (86,402) Prior years (176,815) (177,071) (153,914) --------- --------- --------- Total payments (270,639) (265,763) (240,316) --------- --------- --------- End of year, net of reinsurance 468,718 464,149 440,180 Reinsurance recoverable on unpaid losses 44,552 32,701 --------- --------- --------- End of year (1) (2) $ 513,270 $ 496,850 $ 440,180 - -------------------------------------------------------------------------- (1) Statutory reserves are not materially different from GAAP reserves presented above. (2) Financial statement reserves are shown gross of reinsurance recoverable at December 31, 1992 and 1993.
1 The following table represents statutory loss and expense development by accident year.
- ---------------------------------------------------------------------------------------- Incurred loss and loss adjustment expense (1) Years in which reported at end of year (000 omitted) losses were ---------------------------------------------------------------- incurred 1988 1989 1990 1991 1992 1993 - ----------------------------------------------------------------------------------------- Prior to 1988 $1,100,207 $1,096,427 $1,095,266 $1,091,857 $1,090,025 $1,090,537 1988 223,146 219,375 210,856 209,182 211,472 213,905 Cumulative 1,323,353 1,315,802 1,306,122 1,301,039 1,301,497 1,304,442 1989 231,956 234,878 229,121 234,481 238,051 Cumulative 1,547,758 1,541,000 1,530,160 1,535,978 1,542,493 1990 246,088 258,356 269,321 274,281 Cumulative 1,787,088 1,788,516 1,805,299 1,816,774 1991 264,243 267,488 273,817 Cumulative 2,052,759 2,072,787 2,090,591 1992 270,162 261,510 Cumulative 2,342,949 2,352,101 1993 266,316 Ratios: 1988 63.47% 62.39% 59.97% 59.50% 60.15% 60.84% 1989 65.02 65.83 64.22 65.72 66.72 1990 65.94 69.23 72.17 73.50 1991 70.05 70.91 72.59 1992 70.73 68.47 1993 65.23 - ---------------------------------------------------------------------------------------------- (1) This analysis displays the accident year incurred loss and loss adjustment expense development on a statutory basis for accident years 1988-1993 for all property-casualty business. Data for 1985-1988 have been restated to reflect subrogation, previously excluded in the old schedule "O" lines of business. The total cost 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.
2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The consolidated results of operations were as follows:
- --------------------------------------------------------------------------------------------------- (Dollars in thousands) 1993 1992 1991 - --------------------------------------------------------------------------------------------------- Investment income, after tax, excluding health and life $ 25,475 $ 31,402 $ 35,624 Realized gains on investments, after tax 17,932 10,847 10,399 - --------------------------------------------------------------------------------------------------- Sub-total 43,407 42,249 46,023 - --------------------------------------------------------------------------------------------------- Property and casualty underwriting, after tax: Income (loss) excluding catastrophes and Proposition 103 8,652 (4,208) 3,015 Catastrophes (1,365) (9,900) (6,930) - --------------------------------------------------------------------------------------------------- Property and casualty underwriting income (loss) excluding Proposition 103 7,287 (14,108) (3,915) - --------------------------------------------------------------------------------------------------- Health and life income after tax, excluding CLIGA assessment 7,424 8,205 6,913 Interest expense, after tax (4,328) (4,273) (3,584) Parent expenses, after tax (2,176) (2,126) (2,136) Other non-recurring items, after tax: Proposition 103 rollback refund (10,611) CLIGA assessment (3,328) Lawsuit settlement 4,914 Cumulative effect of change in accounting for income taxes 10,719 Extraordinary items (1,355) 2,600 - --------------------------------------------------------------------------------------------------- Net income $ 53,200 $ 28,700 $ 45,901 - ---------------------------------------------------------------------------------------------------
Declining interest rates in the three years ended December 31, 1993 have reduced investment income. This decline has been offset, in part, by the effect of realized gains from sales and early redemptions of securities. Reduced investment income earned in the health and life operation has been offset by the effect of managing the spread between the interest earned on invested assets and the interest credited to policyholders. In addition to the impact of fewer catastrophe losses in 1993, property-casualty underwriting results benefited from a significant improvement in the results of the Workers' Compensation operation. 3 PROPERTY AND CASUALTY INSURANCE OPERATIONS Premiums earned and underwriting results of Zenith's property-casualty subsidiaries were as follows:
- ------------------------------------------------------------------------------------------------ (Dollars in thousands) 1993 1992 1991 - ------------------------------------------------------------------------------------------------ Premiums earned Workers' Compensation $ 244,661 $ 221,652 $ 208,989 Reinsurance 23,295 18,382 26,347 Automobile and other Property and Casualty 137,945 137,392 140,732 - ------------------------------------------------------------------------------------------------ Total $ 405,901 $ 377,426 $ 376,068 - ------------------------------------------------------------------------------------------------ Underwriting income (loss) before taxes Workers' Compensation $ 11,618 $ (1,495) $ (1,477) Reinsurance 5,337 (14,002) (7,668) Automobile and other Property and Casualty excluding Proposition 103 rollback refund (5,704) (5,124) 692 - ------------------------------------------------------------------------------------------------ Total excluding Proposition 103 rollback refund 11,251 (20,621) (8,453) Proposition 103 rollback refund (16,078) - ------------------------------------------------------------------------------------------------ Total including Proposition 103 rollback refund $ 11,251 $ (36,699) $ (8,453) - ------------------------------------------------------------------------------------------------ Operating ratios Workers' Compensation Losses 38.9% 53.6% 56.6% Loss adjustment expenses 28.5% 21.4% 13.2% Underwriting expenses 21.7% 24.4% 27.0% Dividends to policyholders 6.2% 1.3% 3.9% - ------------------------------------------------------------------------------------------------ Combined ratio 95.3% 100.7% 100.7% - ------------------------------------------------------------------------------------------------ Reinsurance Losses and loss adjustment expenses 58.7% 149.3% 99.8% Underwriting expenses 18.4% 26.9% 29.3% - ------------------------------------------------------------------------------------------------ Combined ratio 77.1% 176.2% 129.1% - ------------------------------------------------------------------------------------------------ Automobile and other Property and Casualty Losses and loss adjustment expenses 70.1% 70.0% 65.8% Underwriting expenses 34.0% 33.7% 33.7% - ------------------------------------------------------------------------------------------------ Combined ratio excluding Prop. 103 rollback refund 104.1% 103.7% 99.5% Proposition 103 rollback refund 11.7% - ------------------------------------------------------------------------------------------------ Combined ratio including Prop. 103 rollback refund 104.1% 115.4% 99.5% - ------------------------------------------------------------------------------------------------ Total combined ratio excluding Prop. 103 rollback refund 97.2% 105.5% 102.2% Proposition 103 rollback refund 4.2% - ------------------------------------------------------------------------------------------------ Total combined ratio including Prop. 103 rollback refund 97.2% 109.7% 102.2% - ------------------------------------------------------------------------------------------------
4 In general, the profitability of property-casualty insurance underwriting operations is dependent upon, principally, the adequacy of rates charged to the insured for insurance protection, the frequency and severity of claims, the ability of the Company to accurately accrue reported and unreported losses in the correct period, the level of dividends paid to policyholders, and the Company's ability to service claims, maintain policies and acquire business efficiently. The cost of defending claims, particularly claims involving fraud and abuse, has increased substantially in recent years. Property insurance exposes Zenith to the risk of significant loss in the event of major adverse natural phenomena, known in the insurance industry as catastrophes. These catastrophes may cause significant contemporaneous financial statement losses since catastrophe losses may not be accrued in advance of the event. The amount by which losses, measured subsequently by reference to payments and additional estimates, differ from those originally reported for a period is known as development. This is favorable when losses ultimately settle for less than that for which they were 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 expenses for the three main lines of property-casualty business:
- -------------------------------------------------------------------------------- Automobile Workers' and other (Dollars in thousands) Compensation Property/Casualty Reinsurance Total - -------------------------------------------------------------------------------- One year loss development in 1993 $ 4,704 $ 4,657 $ (290) $ 9,071 1992 13,502 5,177 1,255 19,934 1991 (464) (1,741) 5,290 3,085 - --------------------------------------------------------------------------------
Favorable development is shown in brackets in the table above. Adverse development in 1993 and 1992 was due principally to development of prior year reserves for loss adjustment expenses which was caused by increased expenditures on the loss adjustment process, discussed below. The exposure of the insurance industry to losses arising out of the cost of pollution damage and savings and loan bankruptcies has been the focus of attention of a number of interested parties in recent years. Zenith's potential exposure to losses arising out of pollution clean-up costs began in 1985 when it commenced the writing of liability coverage under small commercial policies through CalFarm Insurance and through its reinsurance operation. The policies written or reinsured by Zenith's subsidiaries contain exclusion clauses for pollution related losses and such losses are thereby substantially excluded from all such coverage written by Zenith's subsidiaries. While Zenith has from time to time received claims for damages resulting from pollution, Zenith believes that many of these claims will be excluded from coverage and that these claims will not have a material adverse effect on Zenith's financial condition. Zenith has also participated, to a limited extent, through assumed reinsurance, in casualty coverages with some exposure to liability for the costs of savings and loan bankruptcies. Such participation is limited and although Zenith has been advised of some claims related thereto, the ultimate outcome is not expected to have a material adverse effect on Zenith's financial condition. An uncertain political and regulatory environment, both state and federal, including proposals relating to national health insurance and the possibilities of initiatives impacting auto insurance and other areas; the lack of economic growth in California; a highly competitive insurance industry; and the changing environment for controlling medical, legal and rehabilitation costs, as well as fraud and abuse, are all factors that continue to create a challenging operating environment in the property-casualty industry. Also, lower interest rates reduce investment income while increasing the market value of certain securities. Although management is currently unable to predict the effect of any of the foregoing, these trends and uncertainties could have a material effect on Zenith's future operations and financial condition. On January 17, 1994 an earthquake centered in Northridge, California caused widespread property damage throughout the Los Angeles area, including damage to Zenith's corporate offices. The risk of earthquakes in California is taken into consideration in determining rates for insurance and reinsurance and earthquake insurance is characterized by a high retention 5 of risk by policyholders. Accordingly, even though estimates of the damage caused by the Northridge earthquake run as high as $30 billion, insured losses are not expected to exceed $3 billion. Zenith anticipates that it will suffer some losses as a result of the Northridge earthquake which will be reported in the first quarter of 1994. WORKERS' COMPENSATION Underwriting results improved considerably in 1993 compared to 1992 and 1991 principally because of favorable changes in loss frequency trends. Loss adjustment expenses increased from $27,634,000 to $47,376,000 to $69,625,000 or, as a percentage of earned premiums, increased from 13.2% to 21.4% to 28.5% from 1991 to 1992 to 1993. Loss adjustment expenses include the expenses of servicing, analyzing, investigating and defending claims. These increased expenditures on the loss adjustment process were undertaken with a view to decreasing the total outlay for losses, particularly cases involving fraud and abuse. Management believes that these actions have had, and will continue to have, a favorable effect on the results of the Workers' Compensation operation. Premiums charged for workers' compensation insurance in the State of California are based on, and until December 31, 1994 will continue to be based on, minimum rates set by the California Insurance Commissioner (the "Commissioner"). These minimum rates are applied in conjunction with an experience modification factor, risk-based surcharges and a dividend plan to arrive at the net cost of insurance to the policyholder. Minimum rates have been adjusted as follows: January 1, 1991 +3.9%; January 1, 1992 +1.2%; July 1, 1992 +6.7%; July 16, 1993 -7.0%; and January 1, 1994 -12.7%. These changes have consistently fallen short of the increases that were recommended by the Workers' Compensation Rating Bureau during this time, however, the recommendations did not anticipate the recent favorable changes in loss frequency trends. In the event that rates as constituted after January 1, 1994 prove to be inadequate, the profitability of Zenith's Workers' Compensation operations may be adversely affected. Earned premiums increased during the three years ended December 31, 1993 principally because of an increase in premiums attributable to policies written with surcharges and, to a lesser extent, premiums attributable to policies written in Texas, an operation which Zenith commenced in 1992. Premiums written on non-standard policies were $54,945,000 in 1993 compared to $42,971,000 in 1992 and $15,048,000 in 1991. Premiums written in Texas in 1993 were $10,174,000 compared to $3,925,000 in 1992. In July, 1993, certain significant workers' compensation legislation was signed into law in California. Among other things, the new laws will affect the California workers' compensation industry as follows: Rating -- Minimum rates were reduced by 7% from those in effect on July 16, 1993. Effective January 1, 1995, the minimum rate law will be abolished and companies will charge their own, actuarially determined rates. Benefits -- Maximum weekly benefits for temporary disability will be increased on July 1, 1994, July 1, 1995 and July 1, 1996, from the current level of $336 to $490 on July 1, 1996. Maximum weekly benefits for permanent disability will be subject to increases on these same dates. Permanent partial disability weekly benefits will increase from a maximum of $148 to $230 with the greatest increases in cases where disability ratings exceed 70%. Death benefits will be increased on July 1, 1994 and again on July 1, 1996. At July 1, 1996, death benefits will amount to $125,000, $145,000 and $160,000 for a worker with one, two and three total dependents, respectively. Cost containment -- Major changes will provide a tougher standard for compensability of stress claims, limit the number of medical-legal evaluations, limit post termination claims, provide certain managed care flexibility, limit medical self-referrals where there is a financial interest and provide limits on vocational rehabilitation costs. Management is unable to predict the impact that the above legislative changes will have on its business. Historically, analysis and estimates of the impact of legislative changes have been difficult to predict with any reasonable degree of accuracy. 6 AUTOMOBILE AND OTHER PROPERTY AND CASUALTY Results of operations during 1993 and 1992 were adversely affected by unfavorable weather and fire related losses. Such losses in 1993 included $1.6 million (of which $1.0 million was assumed from the California Fair Plan, described below) related to the Southern California brush fires in the fall. Results of operations in 1992 were reduced when Zenith's subsidiaries refunded approximately $14 million, with interest of approximately $4.6 million, to certain affected policyholders to settle the rollback contingency under Proposition 103. The net cost of the refund after reinsurance reduced underwriting income in the Automobile and Other Property and Casualty operation in 1992 by $16.1 million or $10.6 million ($.56 per share) after tax. As part of the agreement, the California Department of Insurance (the "Department") gave final approval to all of the Company's rate applications on affected lines of business subsequent to the rollback period and approved certain rate increases on farmowners and homeowners policies effective July 1, 1993. Rates were increased effective July 1, 1993, by 8% for farmowners' policies and by 15.4% for homeowners' policies. Rate increases, if requested, beyond those subject to such agreement are subject to prior approval by the Department. Management is unable to predict whether any such requests for future rate increases, if any, will be granted by the Department but failure by the Department to act upon such requests will adversely affect the adequacy of such rates and the profitability of operations in the lines of business so affected. CalFarm is required to participate in involuntary market plans, including the California Automobile Assigned Risk Plan ("CAARP"), the Commercial Automobile Insurance Procedure ("CAIP") and the California Fair Plan. CAARP, CAIP and the California Fair Plan are organizations that were established by statute in California but are serviced by the insurance industry. These organizations provide private passenger automobile coverage for bodily injury and property damage, commercial automobile coverage and property coverage to risks that would not otherwise be accepted in the ordinary course of business by private insurance carriers. Participation in these organizations by private carriers in California is mandatory. CAARP, CAIP and the California Fair Plan together result in additional involuntary assumptions of insurance premiums and losses which resulted in underwriting losses before taxes of approximately $1.6 million in 1993, $1.4 million in 1992, and $2.5 million in 1991. REINSURANCE Reinsurance is an insurance transaction between two insurance companies, in which one company buys protection from losses sustained under its own insurance policies which exceed the level it can prudently sustain. Zenith's current participation in the reinsurance market is highly selective and is limited principally to participation in the reinsurance of large individual property losses and the accumulation of losses caused by catastrophes. Events in recent years have served to increase the premiums paid for such reinsurance and to increase the amount of such risk retained by insurers and reinsurers. These developments have created a market which management believes presents reasonable, acceptable opportunities to produce favorable underwriting results. However, Zenith's assumed reinsurance business is written with a view to limiting the company's exposure to losses from any one event to a maximum of approximately 5% of stockholders' equity. Underwriting results in 1993 were impacted favorably by the absence of the type of large catastrophe losses that were characteristic of earlier years. Even though 1993 was punctuated by certain notable property catastrophe losses, for the most part, these events did not, individually, cause significant losses to Zenith because of the higher retention of risk by insurers and reinsurers referred to above. In 1992, losses of approximately $9.8 million were sustained in conjunction with Hurricanes "Andrew" and "Iniki". In addition to these losses, the results of the Reinsurance operation in 1992 were adversely affected by other large, worldwide property losses. In 1991, catastrophe losses incurred by the Reinsurance operation amounted to approximately $10.0 million and were attributable primarily to adverse development of losses associated with Hurricane "Hugo", the 1990 European 7 windstorms, the Exxon Valdez oil spill and the Phillips Petroleum disaster and, to a lesser extent, 1991 losses attributable to typhoon damage in Japan and the Oakland Fire. During 1993, substantial new capital was drawn into the reinsurance market in the form of new companies which were formed to write, among other things, property reinsurance and in the form of new capital subscriptions to Lloyd's underwriting entities in London, some of which capital was subscribed by corporations for the first time. Although such new capital does not appear to have significantly impacted reinsurance premium rates for 1994, management is unable to predict what impact, if any, such a substantial increase in capital will have on Zenith's assumed reinsurance business in the future. FEDERAL INCOME TAXES In 1992, Zenith adopted Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes ("SFAS No. 109") under which deferred income tax assets and liabilities are established, at the currently enacted statutory rate to reflect temporary differences between the financial statement values of assets and liabilities and their respective tax values. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amounts expected to be realized. The provision for deferred tax in the consolidated statement of operations represents the change for the period in the net deferred tax asset or liability. In addition, SFAS No. 109 sets forth the standard for the recognition of the tax benefit of a capital or operating loss and no longer requires the presentation of such tax benefit as an extraordinary item when such loss carryforward is utilized. At December 31, 1993 Zenith did not establish a valuation reserve since it believes that all of its deferred tax assets are fully realizable. In particular, deferred tax assets which arise from differences between insurance reserves on a tax and book basis are fully realizable because of the historical profitability of Zenith's property and casualty and health and life operations. Zenith had previously established a valuation allowance for deferred tax assets which were related to future capital loss deductions since management believed that future capital gains could not be predicted with sufficient certainty to satisfy the criteria for asset recognition under SFAS 109. During 1993 and 1992 realized gains were recognized and these capital loss tax benefits were realized and the related valuation allowance was reduced to zero. In August, 1993, the Revenue Reconciliation Act of 1993 ("the Act") was enacted. Among other provisions, the Act provides for an increase of 1% in the rate of income tax on corporations effective January 1, 1993, an increase in limitations on the deductibility of certain business expenses, an increase in the cost of payroll taxes and increases in the marginal tax rates of higher income individuals. The increase in personal tax rates may impact the savings behavior of individuals through the reduction of disposable income and/or by the enhancement of tax deferred savings vehicles such as deferred annuities. Management is currently unable to predict the effect of the changes in personal taxation contained in the Act on its operations. INVESTMENTS Fluctuations in interest rates impact investment income, realized and unrealized capital gains, the market value of investments and stockholders' equity. During the last several years, interest rates have declined and reached relatively low levels by recent historical measures. Subsequent to year end, interest rates have risen providing opportunities for increased investment income due to Zenith's larger cash and short-term investment position, while at the same time reducing the market value of investments and stockholders' equity. Since fluctuations in interest rates are probably the norm, management is unable to predict the impact on Zenith's operations or balance sheet of such changes at any point in time. Effective December 31, 1993, Zenith implemented Statement of Financial Accounting Standards No. 115 "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS No. 115") which sets forth rules for the accounting treatment of investments. Among other provisions, SFAS No. 115 sets forth criteria for the classification of debt securities among three categories. These criteria include the existence of a "positive intent" and ability to hold a debt security to maturity for such a security to be 8 classified as "held-to-maturity" and to be accounted for at amortized cost. Investments classified as "available-for-sale" are reported at fair value with unrealized gains and losses reported as a separate component of stockholders' equity and investments classified as "trading securities" are reported at fair value with unrealized gains and losses included in earnings. The effect of implementing SFAS No. 115 was an increase in stockholders' equity of $12,163,000, net of deferred taxes, from the change in carrying value of Zenith's securities identified as "available-for-sale." Zenith maintains a diversified investment portfolio consisting of common stock, preferred stock, investment grade and non-investment grade bonds and other investments. The goal is to maintain safety and liquidity, enhance principal values and achieve increased rates of return consistent with regulatory constraints. The allocation amongst these types of securities is adjusted from time to time based on market conditions, credit conditions, tax policy and other factors. The distribution of Zenith's consolidated investment portfolio is shown in the table below:
- ----------------------------------------------------------------------------------------------------------- At December 31, 1993 1992 - ----------------------------------------------------------------------------------------------------------- Carrying % of Fair Carrying % of Fair (Dollars in thousands) value total value value total value - ----------------------------------------------------------------------------------------------------------- Bonds: Investment grade: U.S. Government securities $ 442,369 29.4% $ 443,551 $ 383,913 27.9% $ 387,862 Other 613,680 40.9% 649,866 626,515 45.6% 656,703 Non-investment grade 17,995 1.2% 17,995 23,463 1.7% 22,565 Stocks: Redeemable preferred: Investment grade 30,589 2.0% 30,589 53,786 3.9% 52,565 Non-investment grade 2,386 0.2% 2,386 1,758 0.1% 1,847 Other preferred 42,741 2.9% 42,741 47,259 3.4% 47,259 Common 15,575 1.0% 15,575 29,656 2.2% 29,656 Short-term investments: U.S. Government securities 124,306 8.3% 124,306 19,977 1.5% 19,977 Other 152,535 10.2% 152,535 138,721 10.1% 138,721 Other investments 58,221 3.9% 50,048 3.6% - ----------------------------------------------------------------------------------------------------------- Total investments $ 1,500,397 100.0% $ 1,375,096 100.0% - -----------------------------------------------------------------------------------------------------------
The carrying value of non-investment grade bonds and preferred stocks owned by Zenith's property-casualty subsidiaries was 6.2% and 6.5% of statutory surplus at December 31, 1993 and 1992, respectively. The carrying value of non-investment grade bonds owned by Zenith's life insurance subsidiary was 34.8% and 56.2% of statutory surplus at December 31, 1993 and 1992, respectively. Carrying values of non-investment grade bonds and preferred stocks for this comparison are based upon values and ratings used by the Securities Valuation Office of the National Association of Insurance Commissioners ("NAIC"). The NAIC may assign a non-investment grade rating to a security that is rated investment grade by one or more rating agency. 9 The change in the GAAP carrying value of Zenith's consolidated investment portfolio in 1993 and 1992 was as follows:
- -------------------------------------------------------------------------------------------------- (Dollars in thousands) 1993 1992 - -------------------------------------------------------------------------------------------------- Carrying value at beginning of year $ 1,375,096 $ 1,201,826 Purchases at cost 620,044 638,854 Maturities and exchanges of fixed maturities (196,611) (124,158) Proceeds from sales of fixed maturity investments: Held for investment (11,528) (248,591) Held for sale (224,729) (41,735) Trading portfolio (140,764) Proceeds from sales of other investments (78,275) (64,596) Realized gains from sales of investments: Held for investment 370 8,623 Held for sale 5,948 1,184 Other investments 9,591 3,193 Realized gains from maturities and exchanges of investments: Held for investment 4,737 Held for sale 399 Realized losses from writedowns of investments (2,153) Unrealized gains on investments 20,937 11,405 Increase (decrease) in short-term investments 116,953 (6,683) Net amortization of bonds and preferred stocks and other changes (1,771) (2,073) - -------------------------------------------------------------------------------------------------- Carrying value at end of year $ 1,500,397 $ 1,375,096 - --------------------------------------------------------------------------------------------------
The information concerning the activity in Zenith's investment portfolio described in the table above is presented for periods prior to the implementation of SFAS No. 115. In 1992, proceeds from sales of fixed maturities held for investment include $76,622,000 from the sale of municipal bonds, of which $45,341,000 related to municipal bonds that would otherwise have matured within two years of the date of sale. In addition, the proceeds from sales of fixed maturities held for investment include $17,596,000 related to sales of taxable bonds that would otherwise have matured within two years of the date of sale. Such sales of tax-exempt and other bonds with short maturities were made to take advantage of prices at the short end of the yield curve, particularly for tax-exempt securities, and to utilize tax loss carry forwards. During the three years ended December 31, 1993, investment income was as follows:
- --------------------------------------------------- Investment income (Dollars in thousands) 1993 1992 1991 - --------------------------------------------------- Property and Casualty portfolio (incl. Parent) Before tax $ 37,135 $ 43,128 $ 46,127 After tax 25,475 31,402 35,624 Health and Life portfolio Before tax 55,339 53,486 49,558 After tax 35,970 35,301 32,708 Consolidated Before tax 92,474 96,614 95,685 After tax 61,445 66,703 68,332 - ---------------------------------------------------
10 The yields on invested assets for the three years ended December 31, 1993 were as follows:
- --------------------------------------------------- Investment yields 1993 1992 1991 - --------------------------------------------------- Property and Casualty Portfolio (incl. Parent) Before tax 5.1% 6.2% 7.2% After tax 3.5% 4.5% 5.6% Health and Life Portfolio Before tax 7.7% 8.6% 9.4% After tax 5.0% 5.7% 6.2% - ---------------------------------------------------
The decrease in yields was attributable to a general decrease in interest rates, shorter average maturities and higher average quality of invested assets during the three years ended December 31, 1993. The profitability of property-casualty and health and life operations is partially dependent upon Zenith's ability to generate investment income from its cash flows. The reduction in yields from 1991 to 1993 has reduced the profitability of the property-casualty operations and future profitability will be similarly related to the level of such yields. The profitability of the health and life operation is also dependent upon the spread between interest earned on invested assets and interest credited to policyholders as discussed below under "Health and Life." Realized gains on investments for the three years ended December 31, 1993 were as follows:
- ---------------------------------------------------- Realized gains (Dollars in thousands) 1993 1992 1991 - ---------------------------------------------------- Before tax $ 21,045 $ 10,847 $ 12,999 After tax 17,932 10,847 10,399 - ----------------------------------------------------
Taxes on net realized gains during the three years ended December 31, 1993 were reduced by the benefit associated with losses carried forward from 1990, however, in 1991 such tax benefit was recorded as an extraordinary item. HEALTH AND LIFE Results of the Health and Life operations for the three years ended December 31, 1993 were as follows:
- ------------------------------------------------- (Dollars in thousands) 1993 1992 1991 - ------------------------------------------------- Premium income and other policy charges $ 63,921 $ 64,448 $ 61,556 Income before tax and before realized gains on investments 6,623 12,124 10,513 Income after taxes 12,932 10,354 8,325 Invested assets at December 31, 767,337 682,896 570,872 Deposits on deferred annuity contracts at December 31, 545,956 485,096 391,194 Stockholder's equity at December 31, 124,610 103,944 87,738 - -------------------------------------------------
Results of the Health and Life operation for 1993 were relatively unchanged compared to 1992 and 1991, prior to the retroactive assessment from the California Life Insurance Guarantee Association ("CLIGA"). CLIGA was established by the California Life Insurance Guarantee Association Act effective January 1, 1991 to protect life insurance and annuity policyholders against impairment or insolvency of life insurance companies by creating an association of insurers to pay benefits and continue coverage. CLIGA assesses member insurers separately for each impairment or insolvency based on each insurer's proportion of its premium to the total premiums in California for the three years prior to impairment or insolvency. In December 1991, CalFarm Life was first notified of the insolvency of Executive Life Insurance Company ("Executive Life"). In March 1992, CalFarm Life received the first assessment for Executive Life, based on a premium definition that excluded "annuity and fund deposits". This resulted in an immaterial assessment for CalFarm Life. In 11 August 1993, CLIGA retroactively adjusted prior and future years' assessments to include "annuity and fund deposits" as premiums. Based on this new definition, CalFarm Life received its first revised assessment and paid $1,277,000 in September 1993. Using this assessment, information contained in the court-approved plan to sell the assets of Executive Life, and data provided by the National Organization of Life and Health Insurance Guarantee Associations, CalFarm Life has estimated its liability for the Executive Life and other liquidations not yet billed to be approximately $3,843,000. The total estimated assessment of $5,120,000 is reflected in the 1993 results. Results of the health operations continue to benefit from CalFarm Life's mutually beneficial, long-standing relationship with the California Farm Bureau Federation (the "Farm Bureau"). Prior to July 1, 1993 health premiums were written under two group health insurance programs sponsored by the Farm Bureau. Effective July 1, 1993, one of the Farm Bureau plans was discontinued by CalFarm Life. Insureds under this plan were offered membership in the remaining Farm Bureau sponsored plan. Health premium accounted for approximately 81%, 81% and 82% of the Health, Life and Annuity premium income in 1993, 1992, and 1991, respectively. Health premium rates were on average 10% higher in 1993 over 1992 to cover escalating costs of health care and increased utilization. It is not possible to predict the impact of the Clinton Administration's health care reform bill or possible state law changes on CalFarm Life's business until definitive legislation, if any, emerges. CalFarm Life's performance has not been adversely affected by AIDS claims, however, any significant proliferation of AIDS claims could impact future premium rates. CalFarm Life's deposits from Universal Life contracts were approximately $19 million in 1993 compared to approximately $13 million in 1992 and approximately $11 million in 1991. The costs of acquiring the new universal life business, primarily commission, policy issue and underwriting expenses, are the primary cause of the increase in deferred policy acquisition costs between 1992 and 1993. The profitability of this business is significantly dependent on continuing periodic premium payments. Higher than expected lapse and mortality rates will affect operating income in the period in which they occur. CalFarm Life continued its marketing program of tax sheltered annuity products during 1993, specifically those designed for school teachers and administrators. The Company's annuity products are designed to provide profits from the investment spread earned on invested assets. The investment spread is the amount by which the investment yield on invested assets exceeds the interest credited to policyholders. During 1993, CalFarm Life continued to increase the interest rate spreads, which improved current operating results. In addition, CalFarm Life's ability to maximize profits on its annuity business is determined by policy and premium persistency; the efficiency of operations; and the limiting of its risks of defaults on its investment portfolio. CalFarm Life received deposits on fixed annuities of approximately $56 million in 1993, of which approximately $50 million were tax qualified compared to approximately $83 million in 1992, of which approximately $75 million were tax-qualified annuities and approximately $80 million in 1991, of which approximately $72 million were tax-qualified annuities. These deposits were the primary cause of the increase in investments and investment income between 1991, 1992 and 1993. The amount of deposits received in 1993 by CalFarm Life on deferred annuity contracts was influenced by economic and tax uncertainties and by competition in the market for such products. CalFarm Life's annuity products are primarily sold to school teachers and recent budgetary actions with respect to education, in addition to the weak California economy, may continue to impact sales in the future. However, recent increases in personal rates of income tax may increase the desire to accumulate retirement income on a tax deferred basis. CalFarm Life minimizes the effect of inflation and interest rate fluctuations through the design of its interest sensitive life insurance and annuity products. A significant 12 pricing component of these products includes an annual inflation rate adjustment factor for administrative expenses. In addition, products with mortality risk contain mortality and expense margins which can be used to offset negative economic trends. Interest rate margins are reviewed continuously by management and adjusted based on financial and economic conditions. Interest rates credited to interest sensitive life insurance products are guaranteed for the first 12 months from the date of issue and interest rates credited to annuity products are guaranteed for 12 month periods. Reduced investment yields on CalFarm Life's investment portfolio (discussed under "Investments") did not materially affect the profitability of its fixed deferred annuities and life insurance contracts because of the Company's ability to manage the spread between the interest earned on investments and the interest credited to policyholder funds, and dividends to policyholders. Effective October 1, 1993, the guaranteed interest rates were decreased on new business to 4% on Universal Life contracts and 3% on Single Premium Whole Life and annuity contracts. CalFarm Life has the flexibility to decrease credited interest rates, but not below the guaranteed policy minimum interest rates that range from 3% to 6%. All products include surrender charges to minimize any negative financial impact upon termination. The acceptability of CalFarm Life to its policyholders and agents is influenced by among other things, the ratings given to it by rating agencies such as A.M. Best Company and Weiss Research, Inc. One of the factors considered in the rating process is adequacy of statutory capital and surplus in relation to policyholder obligations. CalFarm Life's risk based capital percentage is 375% which is higher than the NAIC's guidelines. REAL ESTATE Results of operations have not yet been impacted by Zenith's real estate operation which commenced in the second quarter of 1993 through a newly formed subsidiary. Approximately $7.2 million was expended through December 31, 1993 to acquire and develop land in Las Vegas, Nevada for private residences. Management anticipates that a total commitment of approximately $12 million will be made toward such development before sales of these residences begin, possibly by the end of the first quarter of 1994. LIQUIDITY AND INFLATION Zenith's property-casualty insurance operations and health and life insurance operations create liquidity because insurance premiums are generally collected prior to disbursements for claims and benefits. These net cash flows, as set forth on page 55 in the Consolidated Financial Statements, are invested as described in "investments" above. Zenith plans to match the expected payout pattern of its liabilities with a suitable maturity profile of its investment portfolio. Net cash flows from operations were $56,599,000, $53,929,000 and $68,966,000, for 1993, 1992 and 1991, respectively. Net cash flows from operations in 1993 include the payment of approximately $16,000,000, net of reinsurance, for Proposition 103 rollback refunds. Zenith maintains cash and short-term investments which amounted to $285,401,000 and $160,554,000 at December 31, 1993 and 1992, respectively. These balances, or "short-term liquidity," are supplemented by lines of credit available to Zenith of up to $50,000,000, of which $50,000,000 was available at December 31, 1993. Zenith's principal liquidity requirements in the long-term and the short-term are the funds needed to pay its expenses, service its outstanding debt, and pay any cash dividends which may be declared to its stockholders. To meet these requirements, Zenith is principally dependent upon its lines of credit and dividends from Zenith Insurance and CalFarm Life. In the opinion of management, Zenith's sources of liquidity are sufficient to fund its short-term and long-term requirements for liquidity. The insurance subsidiaries are subject to California insurance regulations which restrict their ability to distribute dividends. The California Insurance Code has been amended effective January 1, 1994 to revise the method of calculating the maximum dividends payable 13 by the subsidiaries without prior approval of the Department. Such dividend capabilities are set forth in Note 12 to the Consolidated Financial Statements. Such restrictions have not had, and under current regulations are not expected to have, a material adverse impact on Zenith. Zenith received dividends from its subsidiaries amounting to $25,000,000 in 1993, $15,000,000 in 1992, and $33,000,000 in 1991. Maximum dividend capability, without prior approval of the Department, of Zenith's subsidiaries in 1994 is $46,893,000. Risk-based capital guidelines issued by the NAIC in 1993 for property-casualty and life insurance companies are not expected to have any material adverse consequences for Zenith's insurance subsidiaries. On May 4, 1992 Zenith completed its offering of 9% Senior Notes due 2002, which were issued at par. The net proceeds of the offering were $73,787,000, part of which were used to repay in full Zenith's previously outstanding bank borrowings and to redeem Zenith's previously outstanding 10 1/4% Senior Notes due 1994. The remainder of the proceeds have been used and are available for working capital and other general corporate purposes, including repurchases of common stock of Zenith. The premium to call the 10 1/4% Senior Notes and the unamortized discount thereon reduced net income in 1992 by $1,355,000 after tax ($.07 per share). Workers' compensation insurers are required to have securities on deposit for the protection of policyholders in accordance with regulations of the California Department of Insurance. At December 31, 1993, investments carried at $314,400,000 (market value of $313,700,000) were on deposit to comply with such regulations. At December 31, 1993, Zenith was authorized to purchase up to 809,000 additional shares of Zenith common stock pursuant to its share repurchase program. These purchases, which are made at prevailing market prices, are discretionary and can be adequately funded from Zenith's existing sources of liquidity. Inflation rates impact the financial statements and operating results in several areas. Fluctuations in inflation rates impact the market value of the investment portfolio and yields on new investments. Inflation also impacts the portion of the loss reserves that relates to hospital and medical expenses and property claims and loss adjustment expenses, but not the portion of loss reserves that relates to workers' compensation indemnity payments for lost wages due to statutorily defined fixed payments. Adjustments for inflationary impacts are implicitly included as part of Zenith's subsidiaries' continuous review of property-casualty reserve estimates. Actuarial account of increased costs is considered in setting adequate rates, and this is particularly important in the health insurance area where hospital and medical inflation rates have exceeded general inflation rates. Workers' compensation premium income is determined primarily by applying a rate to payrolls, and as inflation increases, average wage rates are generally adjusted resulting in decreases in premium rates. Operating expenses, including payrolls, are impacted to a certain degree by the inflation rate. Social inflation affects the loss reserves for other property-casualty liability claims for which settlements are determined in court proceedings. Inflation and fluctuations in interest rates also impact our interest sensitive life insurance products, however, policy provisions for termination charges act to partially reduce such negative impact. See "Health and Life" above. 14 FIVE-YEAR RECORD Zenith National Insurance Corp. and Subsidiaries
- ------------------------------------------------------------------------------------------------------------------- Year ended December 31, Note 1993 1992 - ------------------------------------------------------------------------------------------------------------------- Consolidated revenues $ 585,782,000 $ 549,335,000 - ------------------------------------------------------------------------------------------------------------------- Property and Casualty underwriting Net premiums earned 405,901,000 377,426,000 Underwriting income (loss) Before Proposition 103 rollback refund, dividends to policyholders and taxes 6 26,426,000 (17,667,000) Before Proposition 103 rollback refund and taxes 6 11,251,000 (20,621,000) Before taxes 1 11,251,000 (36,699,000) After taxes, before Proposition 103 rollback refund 6 7,287,000 (14,108,000) After taxes 5 7,287,000 (24,719,000) Per share .38 (1.31) - ------------------------------------------------------------------------------------------------------------------- Health and Life Premium income and other policy charges 63,921,000 64,448,000 Investment income Before taxes 55,339,000 53,486,000 After taxes 35,970,000 35,301,000 Tax rate on investment income 35.0% 34% Income after taxes, before realized gains (losses) 3 4,096,000 8,205,000 Per share .21 .43 Realized gains (losses) Before taxes 7,050,000 910,000 After taxes 8 8,836,000 2,149,000 Per share .46 .11 Income (loss) after taxes 12,932,000 10,354,000 Per share .67 .55 - ------------------------------------------------------------------------------------------------------------------- Investments, excluding Health and Life Investment income Before taxes 37,135,000 43,128,000 After taxes 25,475,000 31,402,000 After taxes, net of interest expense 4 21,147,000 27,129,000 Per share 1.10 1.43 Tax rate on investment income 31.4% 27.2% Average yield on investment income Before taxes 5.1% 6.2% After taxes 3.5% 4.5% Realized gains (losses) Before taxes 13,995,000 9,937,000 After taxes 9,096,000 8,698,000 Per share .47 .46 - ------------------------------------------------------------------------------------------------------------------- Income after taxes, before realized gains (losses) 4, 5, 6, 7, 9 33,682,000 19,100,000 Net income (loss) 2, 4, 5, 7 53,200,000 28,700,000 - ------------------------------------------------------------------------------------------------------------------- Earnings per common share Net income (loss) 2, 4, 5, 7 2.76 1.52 Cash dividends per share to common stockholders 1.00 1.00 Weighted average common shares outstanding 19,297,000 18,918,000 - ------------------------------------------------------------------------------------------------------------------- Financial Condition Total assets 1,857,790,000 1,703,553,000 Investments 1,500,397,000 1,375,096,000 Senior notes and bank debt 73,989,000 73,868,000 Total stockholders' equity 349,465,000 301,598,000 Stockholders' equity per share 18.55 16.03 Return on average equity 16.3% 9.7% - ------------------------------------------------------------------------------------------------------------------- Insurance statistics (GAAP) Property and Casualty Paid loss and loss expense ratio 66.7% 70.4% Loss and loss expense ratio 67.8% 76.8% Underwriting expense ratio 25.7% 27.9% Policyholder dividends ratio 6 3.7% 0.8% Combined ratio before Proposition 103 rollback refund 6 97.2% 105.5% Combined ratio after Proposition 103 rollback refund 97.2% 109.7% Net premiums earned-to-surplus ratio 1.5 1.5 Loss and loss expense reserves-to-surplus ratio (net of reinsurance) 1.7 1.8 Health and Life Life insurance in force, net of reinsurance 2,523,153,000 2,663,669,000 - ------------------------------------------------------------------------------------------------------------------- (1) Excludes parent company operating expenses of $3,478,000, $3,222,000, $3,236,000, $3,277,000 and $2,925,000 or $2,176,000, $2,126,000, $2,136,000, $2,163,000, and $1,930,000, net of tax for 1993, 1992, 1991, 1990 and 1989, respectively. (2) Debt redemption costs of $1,355,000, net of $698,000 of tax benefit, (or $.07 per share) were recognized as an extraordinary item in 1992. The tax benefit of $2,600,000 (or $.14 per share) associated with capital losses carried forward was recognized as an extraordinary item in 1991. (3) Income is net of income taxes of $2,527,000, in 1993, $3,919,000 in 1992, $3,600,000 in 1991, $3,199,000 in 1990 and $3,350,000 in 1989. (4) Includes holding company's interest expense of $6,658,000, in 1993, $6,472,000 in 1992, $5,430,000 in 1991, $3,847,000 in 1990 and $3,377,000 in 1989.
15
- ------------------------------------------------------------------------------------------------------------------- Year ended December 31, 1991 1990 1989 - ------------------------------------------------------------------------------------------------------------------- Consolidated revenues $ 546,308,000 $ 468,328,000 $ 483,886,000 - ------------------------------------------------------------------------------------------------------------------- Property and Casualty underwriting Net premiums earned 376,068,000 373,043,000 356,957,000 Underwriting income (loss) Before Proposition 103 rollback refund, dividends to policyholders and taxes (295,000) 25,065,000 29,072,000 Before Proposition 103 rollback refund and taxes (8,453,000) (2,083,000) 4,987,000 Before taxes (8,453,000) (2,083,000) 4,987,000 After taxes, before Proposition 103 rollback refund (3,915,000) 148,000 4,816,000 After taxes (3,915,000) 148,000 4,816,000 Per share (.21) .01 .23 - ------------------------------------------------------------------------------------------------------------------- Health and Life Premium income and other policy charges 61,556,000 57,848,000 56,259,000 Investment income Before taxes 49,558,000 40,283,000 30,174,000 After taxes 32,708,000 26,587,000 19,915,000 Tax rate on investment income 34% 34% 34% Income after taxes, before realized gains (losses) 6,913,000 6,198,000 6,454,000 Per share .36 .31 .31 Realized gains (losses) Before taxes 2,162,000 (21,578,000) (6,934,000) After taxes 1,412,000 (21,409,000) (4,875,000) Per share .07 (1.09) (.23) Income (loss) after taxes 8,325,000 (15,211,000) 1,579,000 Per share .44 (.77) .08 - ------------------------------------------------------------------------------------------------------------------- Investments, excluding Health and Life Investment income Before taxes 46,127,000 49,693,000 47,728,000 After taxes 35,624,000 39,744,000 39,045,000 After taxes, net of interest expense 32,040,000 37,205,000 36,816,000 Per share 1.69 1.89 1.77 Tax rate on investment income 22.8% 20.0% 18.2% Average yield on investment income Before taxes 7.2% 8.0% 8.3% After taxes 5.6% 6.4% 6.8% Realized gains (losses) Before taxes 10,837,000 (30,961,000) (298,000) After taxes 8,987,000 (29,135,000) (196,000) Per share .47 (1.48) (.01) - ------------------------------------------------------------------------------------------------------------------- Income after taxes, before realized gains (losses) 32,902,000 41,388,000 46,156,000 Net income (loss) 45,901,000 (9,156,000) 41,085,000 - ------------------------------------------------------------------------------------------------------------------- Earnings per common share Net income (loss) 2.42 (.47) 1.98 Cash dividends per share to common stockholders 1.00 .90 .83 Weighted average common shares outstanding 18,981,000 19,685,000 20,785,000 - ------------------------------------------------------------------------------------------------------------------- Financial Condition Total assets 1,477,571,000 1,327,332,000 1,182,286,000 Investments 1,201,826,000 1,063,073,000 938,365,000 Senior notes and bank debt 49,799,000 53,642,000 26,692,000 Total stockholders' equity 281,234,000 241,295,000 298,868,000 Stockholders' equity per share 14.93 12.62 14.74 Return on average equity 17.3% (3.3%) 13.7% - ------------------------------------------------------------------------------------------------------------------- Insurance statistics (GAAP) Property and Casualty Paid loss and loss expense ratio 63.9% 54.0% 51.6% Loss and loss expense ratio 70.4% 64.1% 62.7% Underwriting expense ratio 29.6% 29.2% 29.2% Policyholder dividends ratio 2.2% 7.3% 6.7% Combined ratio before Proposition 103 rollback refund 102.2% 100.6% 98.6% Combined ratio after Proposition 103 rollback refund 102.2% 100.6% 98.6% Net premiums earned-to-surplus ratio 1.6 1.8 1.5 Loss and loss expense reserves-to-surplus ratio (net of reinsurance) 1.8 2.0 1.6 Health and Life Life insurance in force, net of reinsurance 2,438,036,000 2,233,081,000 2,115,700,000 - ------------------------------------------------------------------------------------------------------------------- (5) After benefit for "fresh start" of $531,000 ($.03 per share) in 1991, $1,803,000 ($.09 per share) in 1990 and $1,561,000 ($.08 per share) in 1989. (6) Excludes Proposition 103 rollback refund of $16,078,000, net of reinsurance, before tax or $10,611,000 ($.56 per share) after tax in 1992. (7) Net income in 1992 includes increase of $10,719,000 for the cumulative effect of adoption of SFAS No. 109, Accounting for Income Taxes. Income, after taxes, before realized gains (losses) excludes such item. (8) Reflects tax benefit of $1,786,000 and $1,239,000 in 1993 and 1992, respectively for utilization of capital losses carried forward in Zenith's consolidated federal income tax return. (9) Excludes $1,586,000 or $0.08 per share for net effect of legal settlement and CLIGA assessment in 1993.
16 PROPERTY AND CASUALTY LOSS DEVELOPMENT Zenith National Insurance Corp. and Subsidiaries The table that follows shows analysis of development of loss and loss adjustment expense liabilities as originally estimated on a GAAP 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. Amounts represent all property-casualty operations including CalFarm Insurance losses since its acquisition June 4, 1985. Statutory reserves are not materially different from GAAP reserves presented in this table. ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE LIABILITY DEVELOPMENT
- ------------------------------------------------------------------------------------------------------------------------ Year ended December 31, 1993 1992 1991 1990 - ------------------------------------------------------------------------------------------------------------------------ Liability for unpaid loss and loss adjustment expenses(1) $468,718,000 $464,149,000 $440,180,000 $415,645,000 - ------------------------------------------------------------------------------------------------------------------------ Paid net of reinsurance (cumulative) as of: One year later 176,815,000 177,071,000 153,914,000 Two years later 283,706,000 256,176,000 Three years later 314,957,000 Four years later Five years later Six years later Seven years later Eight years later Nine years later Ten years later - ------------------------------------------------------------------------------------------------------------------------- Liability net of reinsurance reestimated as of: One year later (2) 473,220,000 460,114,000 418,730,000 Two years later 477,877,000 433,604,000 Three years later 445,074,000 Four years later Five years later Six years later Seven years later Eight years later Nine years later Ten years later - ------------------------------------------------------------------------------------------------------------------------- Favorable (deficient) development $ 9,071,000 $(37,697,000 ) $(29,429,000) - -------------------------------------------------------------------------------------------------------------------------
The analysis above presents the development of Zenith's balance sheet liabilities for 1983 through 1993. The first line shows the liability for loss and loss adjustment expense as estimated at the end of each calendar year. The first section shows the actual payments of losses and expenses that relate to each year end liability as they are paid during subsequent annual periods. The second section includes revised estimates of unpaid amounts as well as the payments. The final line shows the favorable or deficient developments of the original estimates through 1993. 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. (1) Net of receivable from reinsurers on unpaid losses and loss adjustment expenses of $44,552,000 in 1993 and $32,701,000 in 1992. (2) Net of re-estimated receivable from reinsurers of $55,055,000. 17
- --------------------------------------------------------------------------------------------------------------------------------- Year ended December 31, 1989 1988 1987 1986 1985 1984 1983 - --------------------------------------------------------------------------------------------------------------------------------- Liability for unpaid loss and loss adjustment expenses(1) $377,891,000 $337,979,000 $286,844,000 $217,161,000 $153,483,000 $113,567,000 $89,526,000 - --------------------------------------------------------------------------------------------------------------------------------- Paid net of reinsurance (cumulative) as of: One year later 121,051,000 108,423,000 98,802,000 83,511,000 70,725,000 50,376,000 37,032,000 Two years later 196,578,000 169,332,000 152,609,000 128,998,000 107,104,000 82,783,000 61,902,000 Three years later 250,078,000 206,412,000 182,843,000 156,705,000 127,532,000 98,991,000 76,073,000 Four years later 281,409,000 235,720,000 200,753,000 172,261,000 139,188,000 107,850,000 83,194,000 Five years later 254,062,000 218,712,000 181,708,000 146,031,000 114,529,000 88,053,000 Six years later 230,337,000 193,759,000 150,892,000 118,206,000 91,979,000 Seven years later 201,313,000 154,879,000 121,377,000 94,110,000 Eight years later 158,339,000 123,546,000 95,967,000 Nine years later 126,046,000 97,498,000 Ten years later 99,246,000 - --------------------------------------------------------------------------------------------------------------------------------- Liability net of reinsurance reestimated as of: One year later 372,542,000 331,770,000 286,389,000 213,884,000 154,027,000 126,553,000 92,847,000 Two year later 362,718,000 322,632,000 282,865,000 219,691,000 156,736,000 125,900,000 99,197,000 Three year later 365,901,000 318,052,000 281,937,000 221,401,000 160,791,000 124,876,000 99,886,000 Four year later 372,429,000 315,548,000 278,664,000 222,532,000 164,164,000 127,532,000 98,674,000 Five year later 318,506,000 273,723,000 222,122,000 164,090,000 129,793,000 100,268,000 Six year later 274,248,000 223,622,000 164,685,000 129,714,000 101,700,000 Seven year later 226,059,000 166,594,000 129,956,000 101,676,000 Eight year later 169,008,000 131,289,000 102,058,000 Nine year later 133,723,000 103,230,000 Ten year later 105,185,000 - --------------------------------------------------------------------------------------------------------------------------------- Favorable (deficient) development $ 5,462,000 $19,473,000 $12,596,000 $(8,898,000)$(15,525,000)$(20,156,000)$(15,659,000) - ---------------------------------------------------------------------------------------------------------------------------------
18 CONSOLIDATED BALANCE SHEET Zenith National Insurance Corp. and Subsidiaries
- ------------------------------------------------------------------------------------------------------------------------------- December 31, Note 1993 1992 - ------------------------------------------------------------------------------------------------------------------------------- Assets Investments Fixed maturities: At amortized cost (fair value $438,705,000, 1993, $1,063,235,000, 1992) $ 401,337,000 $1,031,128,000 At fair value (cost $687,075,000, 1993, $58,296,000, 1992) 705,682,000 58,307,000 Floating rate preferred stocks, at fair value (cost $30,582,000, 1993 and $34,743,000, 1992) 31,495,000 32,923,000 Convertible and non-redeemable preferred stocks, at fair value (cost $11,545,000, 1993 and $14,096,000, 1992) 11,246,000 14,336,000 Common stocks, at fair value (cost $14,485,000, 1993 and $28,755,000, 1992) 15,575,000 29,656,000 Mortgage loans on real estate 4,515,000 4,960,000 Policy loans 39,609,000 34,308,000 Short-term investments (at cost, which approximates market) 276,841,000 158,698,000 Other investments 14,097,000 10,780,000 - ------------------------------------------------------------------------------------------------------------------------------- Total investments 1, 2 1,500,397,000 1,375,096,000 Cash 8,560,000 1,856,000 Accrued investment income 21,635,000 22,490,000 Premiums receivable, less allowance for doubtful accounts of $887,000, 1993 and $400,000, 1992 59,188,000 58,381,000 Premium notes receivable, collateralized by letters of credit 1,647,000 1,858,000 Receivable from reinsurers and prepaid reinsurance premiums 57,426,000 47,189,000 Earned but unbilled premiums receivable 4,586,000 6,880,000 Deferred policy acquisition costs 108,416,000 91,019,000 Properties and equipment, less accumulated depreciation 3 47,042,000 48,443,000 Federal income taxes 7 6,987,000 Purchased intangibles and other assets 1 23,216,000 24,382,000 Excess of cost over net assets acquired 1 2,009,000 2,009,000 Other assets 23,668,000 16,963,000 - ------------------------------------------------------------------------------------------------------------------------------- Total assets $1,857,790,000 $1,703,553,000 - -------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of this statement. 19
- ------------------------------------------------------------------------------------------------------------------------------- December 31, Note 1993 1992 - ------------------------------------------------------------------------------------------------------------------------------- Liabilities Policy liabilities and accruals Unpaid losses and loss expenses $ 513,270,000 $ 496,850,000 Future policy benefits for life insurance contracts 4 154,501,000 138,686,000 Deposits on deferred annuity contracts 545,956,000 485,096,000 Policy and contract claims 5,934,000 7,041,000 Unearned premiums 111,896,000 101,799,000 Policyholders' dividends accrued and accumulated 30,378,000 28,304,000 Other policyholder funds 16,857,000 14,401,000 Reserves on loss portfolio transfers 11,119,000 12,792,000 Senior notes payable, less unamortized issue costs of $1,011,000, 1993 and $1,132,000, 1992 6 73,989,000 73,868,000 Federal income taxes 7 14,255,000 Special policyholders' dividend--Proposition 103 rollback refund 9 18,111,000 Other liabilities 30,170,000 25,007,000 - ------------------------------------------------------------------------------------------------------------------------------- Total liabilities 1,508,325,000 1,401,955,000 - ------------------------------------------------------------------------------------------------------------------------------- Commitments and contingent liabilities 9 Stockholders' equity Preferred stock, $1 par--shares authorized 1,000,000; issued and outstanding, none in 1993 and 1992 Common stock, $1 par--shares authorized 50,000,000; issued 23,910,000, outstanding 18,841,000, 1993; issued 23,562,000, outstanding 18,813,000, 1992 10 23,910,000 23,562,000 Additional paid-in capital 249,092,000 242,226,000 Retained earnings 148,043,000 113,867,000 Net unrealized appreciation (depreciation) on investments, net of $7,093,000 deferred taxes in 1993 1, 2 13,176,000 (668,000) - ------------------------------------------------------------------------------------------------------------------------------- 434,221,000 378,987,000 Less treasury stock at cost (5,069,000 shares, 1993 and 4,749,000 shares, 1992) 10 (84,756,000) (77,389,000) - ------------------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 349,465,000 301,598,000 - ------------------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity $1,857,790,000 $1,703,553,000 - -------------------------------------------------------------------------------------------------------------------------------
20 CONSOLIDATED STATEMENT OF OPERATIONS Zenith National Insurance Corp. and Subsidiaries
- ----------------------------------------------------------------------------------------------------------------------- Year ended December 31, Note 1993 1992 1991 - ----------------------------------------------------------------------------------------------------------------------- Consolidated revenues: Property and casualty premium income 8 $405,901,000 $377,426,000 $376,068,000 Health and life premium income and other policy charges 63,921,000 64,448,000 61,556,000 Net investment income 2 92,474,000 96,614,000 95,685,000 Realized gains on investments 2 21,045,000 10,847,000 12,999,000 Other income, net 9 2,441,000 - ----------------------------------------------------------------------------------------------------------------------- Total revenues 585,782,000 549,335,000 546,308,000 - ----------------------------------------------------------------------------------------------------------------------- Expenses: Property and casualty losses and loss expenses incurred 8 275,208,000 289,732,000 264,851,000 Health and life benefits and other policy credits 84,448,000 85,493,000 79,924,000 Policy acquisition costs 73,942,000 71,787,000 76,183,000 Other underwriting and operating expenses 55,152,000 55,200,000 57,287,000 Policyholders' dividends and participation 16,895,000 4,867,000 10,113,000 Special policyholders' dividend--Proposition 103 rollback refund 9 16,078,000 Interest expense 5, 6 6,658,000 6,472,000 5,430,000 - ----------------------------------------------------------------------------------------------------------------------- Total expenses 512,303,000 529,629,000 493,788,000 - ----------------------------------------------------------------------------------------------------------------------- Income from operations before federal income taxes, extraordinary items and cumulative effect of accounting change 73,479,000 19,706,000 52,520,000 Federal income taxes 7 20,279,000 370,000 9,219,000 - ----------------------------------------------------------------------------------------------------------------------- Net income before extraordinary items and cumulative effect of accounting change 53,200,000 19,336,000 43,301,000 Extraordinary item--debt retirement cost, net of tax benefit of $698,000 6 (1,355,000) Extraordinary item--tax benefit associated with utilization of capital losses carried forward 7 2,600,000 Cumulative effect of change in accounting for income taxes 1, 7 10,719,000 - ----------------------------------------------------------------------------------------------------------------------- Net income $ 53,200,000 $ 28,700,000 $ 45,901,000 - ----------------------------------------------------------------------------------------------------------------------- Earnings per share: Net income before extraordinary items and cumulative effect of accounting change $ 2.76 $ 1.02 $ 2.28 Extraordinary items (.07) .14 Cumulative effect of change in accounting for income taxes .57 - ----------------------------------------------------------------------------------------------------------------------- Net income per common share 11 $ 2.76 $ 1.52 $ 2.42 - -----------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of this statement. 21 CONSOLIDATED STATEMENT OF CASH FLOWS Zenith National Insurance Corp. and Subsidiaries
- ------------------------------------------------------------------------------------------------------------------ Year ended December 31, 1993 1992 1991 - ------------------------------------------------------------------------------------------------------------------ Cash flows from operating activities: Premiums collected $ 492,758,000 $ 459,247,000 $ 461,330,000 Deposits on universal life type contracts 21,142,000 14,761,000 12,084,000 Investment income received 95,324,000 98,192,000 94,692,000 Losses and loss adjustment expenses paid (270,854,000) (266,345,000) (244,799,000) Health claims paid (31,305,000) (33,597,000) (31,996,000) Death and surrender benefits paid (11,659,000) (11,655,000) (10,588,000) Underwriting and other operating expenses paid (131,082,000) (130,458,000) (132,837,000) Real estate construction costs paid (7,285,000) Reinsurance premiums paid (21,429,000) (22,797,000) (22,765,000) Dividends paid to policyholders (14,720,000) (10,307,000) (19,008,000) Special policyholders' dividend--Proposition 103 rollback refund (18,447,000) Interest paid (6,914,000) (6,073,000) (5,128,000) Interest on deferred annuity contracts (33,752,000) (33,593,000) (29,014,000) Income taxes paid (5,178,000) (3,446,000) (3,005,000) - ------------------------------------------------------------------------------------------------------------------ Net cash flows from operating activities 56,599,000 53,929,000 68,966,000 - ------------------------------------------------------------------------------------------------------------------ Cash flows from investing activities: Purchases of invested assets (620,044,000) (638,854,000) (1,009,210,000) Proceeds from sales of invested assets 651,907,000 479,080,000 842,752,000 Capital expenditures (3,568,000) (4,168,000) (3,347,000) Cash received under portfolio transfers 7,628,000 174,000 Losses and adjustment expenses paid under portfolio transfers (1,656,000) (2,187,000) (3,267,000) Net change in short-term investments (116,953,000) 6,683,000 57,756,000 Other -- principally cash received (advanced) through notes receivable 2,309,000 128,000 (2,910,000) - ------------------------------------------------------------------------------------------------------------------ Net cash flows from investing activities (88,005,000) (151,690,000) (118,052,000) - ------------------------------------------------------------------------------------------------------------------ Cash flows from financing activities: Cash received from bank line of credit 1,000,000 6,350,000 32,300,000 Cash paid on bank line of credit (1,000,000) (40,150,000) (36,600,000) Cash dividends paid to common stockholders (19,018,000) (18,927,000) (19,012,000) Proceeds from exercise of stock options 6,261,000 4,526,000 599,000 Deposits on deferred annuity contracts 56,764,000 83,600,000 80,203,000 Acquisition costs of deferred annuity contracts, deferred (5,925,000) (9,104,000) (9,104,000) Annuitization and return of policyholders' balances on deferred annuity contracts (26,357,000) (20,279,000) (18,280,000) Retirement of Senior Notes payable 1994 (17,740,000) Net proceeds from issuance of Senior Notes payable 2002 73,787,000 Interest on deferred annuity contracts 33,752,000 33,593,000 29,014,000 Purchase of treasury shares (7,367,000) (5,686,000) (4,954,000) - ------------------------------------------------------------------------------------------------------------------ Net cash flows from financing activities 38,110,000 89,970,000 54,166,000 - ------------------------------------------------------------------------------------------------------------------ Net increase (decrease) in cash 6,704,000 (7,791,000) 5,080,000 Cash at beginning of year 1,856,000 9,647,000 4,567,000 - ------------------------------------------------------------------------------------------------------------------ Cash at end of year $ 8,560,000 $ 1,856,000 $ 9,647,000 - ------------------------------------------------------------------------------------------------------------------ Reconciliation of net income to net cash flows from operating activities: Net income $ 53,200,000 $ 28,700,000 $ 45,901,000 Adjustments to reconcile net income to net cash flows from operating activities: Depreciation 4,978,000 4,855,000 4,832,000 Amortization of intangibles and costs on notes payable 1,286,000 2,969,000 1,575,000 Net amortization of bonds and preferred stocks 1,683,000 1,885,000 269,000 Realized gains on investments (21,045,000) (10,847,000) (12,999,000) Decrease (increase) in: Accrued investment income 855,000 (542,000) (1,484,000) Premiums receivable 1,698,000 3,634,000 5,340,000 Receivable from reinsurers (10,237,000) (41,384,000) (4,301,000) Deferred policy acquisition costs (11,472,000) (5,305,000) (3,602,000) Increase (decrease) in: Unpaid losses and loss expenses 16,420,000 56,670,000 24,535,000 Future policy benefits for life insurance contracts 15,815,000 12,917,000 9,637,000 Policy and contract claims (1,107,000) (168,000) (150,000) Unearned premiums 10,097,000 6,220,000 5,116,000 Policyholders' dividends accrued and accumulated (16,037,000) 13,349,000 (9,113,000) Other policyholder funds 2,456,000 (176,000) 2,234,000 Federal income taxes 15,101,000 (14,493,000) 3,614,000 Other (7,092,000) (4,355,000) (2,438,000) - ------------------------------------------------------------------------------------------------------------------ Net cash flows from operating activities $ 56,599,000 $ 53,929,000 $ 68,966,000 - ------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of this statement. 22 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY Zenith National Insurance Corp. and Subsidiaries
aa - --------------------------------------------------------------------------------------------------------------------------- Preferred Common Three years ended December 31, 1993 Note stock $1 par stock $1 par - --------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1990 $23,215,000 Net income for 1991 Net unrealized appreciation on investments in equity securities 2 Exercise of 44,000 stock options 10 44,000 Tax benefit on options exercised in 1991 Purchase of 336,000 treasury shares at cost Cash dividends declared to common stockholders ($1.00 per share, paid quarterly) - --------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1991 23,259,000 Net income for 1992 Net unrealized appreciation on investments 2 Exercise of 303,000 stock options 10 303,000 Tax benefit on options exercised in 1992 Purchase of 323,000 treasury shares at cost Cash dividends declared to common stockholders ($1.00 per share, paid quarterly) - --------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1992 23,562,000 Net income for 1993 Net unrealized appreciation on investments, net of deferred taxes of $543,000 1,2 Cumulative effect of change in accounting for investments, net of deferred taxes of $6,550,000 1 Exercise of 348,000 stock options 10 348,000 Tax benefit on options exercised in 1993 Purchase of 320,000 treasury shares at cost Cash dividends declared to common stockholders ($1.00 per share, paid quarterly) - --------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1993 $23,910,000 - ---------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of this statement. 23
- ---------------------------------------------------------------------------------------------------------------------------------- Additional Net unrealized appreciation paid-in Retained (depreciation) on Treasury Three years ended December 31, 1993 capital earnings investments stock Total - ---------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1990 $237,095,000 $ 77,128,000 $ (29,394,000) $ (66,749,000) $ 241,295,000 Net income for 1991 45,901,000 45,901,000 Net unrealized appreciation on investments in equity securities 17,321,000 17,321,000 Exercise of 44,000 stock options 555,000 599,000 Tax benefit on options exercised in 1991 48,000 48,000 Purchase of 336,000 treasury shares at cost (4,954,000) (4,954,000) Cash dividends declared to common stockholders ($1.00 per share, paid quarterly) (18,976,000) (18,976,000) - ---------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1991 237,698,000 104,053,000 (12,073,000) (71,703,000) 281,234,000 Net income for 1992 28,700,000 28,700,000 Net unrealized appreciation on investments 11,405,000 11,405,000 Exercise of 303,000 stock options 4,223,000 4,526,000 Tax benefit on options exercised in 1992 305,000 305,000 Purchase of 323,000 treasury shares at cost (5,686,000) (5,686,000) Cash dividends declared to common stockholders ($1.00 per share, paid quarterly) (18,886,000) (18,886,000) - ---------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1992 242,226,000 113,867,000 (668,000) (77,389,000) 301,598,000 Net income for 1993 53,200,000 53,200,000 Net unrealized appreciation on investments, net of deferred taxes of $543,000 1,681,000 1,681,000 Cumulative effect of change in accounting for investments, net of deferred taxes of $6,550,000 12,163,000 12,163,000 Exercise of 348,000 stock options 5,913,000 6,261,000 Tax benefit on options exercised in 1993 953,000 953,000 Purchase of 320,000 treasury shares at cost (7,367,000) (7,367,000) Cash dividends declared to common stockholders ($1.00) per share, paid quarterly) (19,024,000) (19,024,000) - ---------------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1993 $249,092,000 $ 148,043,000 $ 13,176,000 $ (84,756,000) $ 349,465,000 - ----------------------------------------------------------------------------------------------------------------------------------
24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Zenith National Insurance Corp. and Subsidiaries NOTE 1--SUMMARY OF ACCOUNTING POLICIES, OPERATIONS AND PRINCIPLES OF CONSOLIDATION Zenith National Insurance Corp. ("Zenith") is engaged through its wholly- owned insurance subsidiaries, Zenith Insurance Company ("Zenith Insurance"), CalFarm Insurance Company ("CalFarm Insurance"), ZNAT Insurance Company ("ZNAT"), and CalFarm Life Insurance Company ("CalFarm Life"), in the business of writing workers' compensation insurance primarily in California; reinsurance; annuities; health and life insurance coverages; and auto, homeowners, farmowners and other coverages primarily in the rural areas of California. Zenith also conducts real estate operations, developing private residences for sale in Las Vegas, Nevada, through its wholly owned subsidiary, Perma-Bilt, a Nevada Corporation ("Perma-Bilt"). The financial statements have been prepared in accordance with generally accepted accounting principles and include Zenith and its subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. FAIR VALUES OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards No. 107, Disclosures about Fair Value of Financial Instruments ("SFAS No. 107"), requires disclosure of fair value information about most financial instruments, both on and off the balance sheet, if it is practicable to estimate. SFAS No. 107 excludes certain financial instruments, such as certain insurance contracts, and all non-financial instruments from its disclosure requirements. A financial instrument is defined as a contractual obligation that ultimately ends with the delivery of cash or an ownership interest in an entity. Disclosures, included in these notes, regarding the fair value of financial instruments have been derived using external market sources, estimates using present value or other valuation techniques. INVESTMENTS AND CHANGE IN ACCOUNTING PRINCIPLE At December 31, 1993 Zenith adopted Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities ("SFAS No. 115"); prior periods have not been restated. SFAS No. 115 requires investments in debt and equity securities to be identified to three categories as follows: Held-to-maturity -- those securities, which by their terms must be redeemed by the issuing company, that the enterprise has the positive intent and ability to hold to maturity, are reported at amortized cost. Trading securities -- those securities that are held principally for the purpose of selling them in the near term and are reported at fair value with unrealized gains and losses included in earnings. Available-for-sale -- those securities not classified as either held-to-maturity or trading securities and are reported at fair value with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders' equity. The cumulative effect of such adoption has been reported separately in the consolidated statement of stockholders' equity and was insignificant to the consolidated statement of operations. Prior to the implementation of SFAS No. 115, and since September 1992, investments in fixed maturities which might, under certain circumstances, be sold prior to their dates of maturity were classified as investments "held for sale" and such portfolio was recorded at the lower of cost or market value. Unrealized losses, net of deferred taxes, on such investments, if any, were recorded as a charge directly to stockholders' equity. In addition, Zenith identified certain investments in fixed maturities held for trading purposes. Such investments were recorded at market value and unrealized gains or losses on such investments, net of deferred taxes, were credited or charged directly to stockholders' equity. 25 Mortgage loans on real estate are carried at amortized cost. Policy loans and other investments are stated at cost. Although the policy loans generally have no stated maturity, the majority of these loans have interest rates that fluctuate directly with credited interest rates on related deferred annuity contracts and, accordingly, the carrying value approximates fair value. When, in the opinion of management, a decline in market value of investments is considered to be "other than temporary," such investments are written down to their net realizable value. The determination of "other than temporary" includes, in addition to consideration of other relevant factors, a presumption that if the market value is below cost, by a significant amount for a period of time, a writedown is necessary. The market value of investments was supplied by the Merrill Lynch pricing service, with the exception of 50 items whose values were obtained from other brokers making a market in the investment, the Bloomberg and Quotron financial news services, and analytical pricing methods for issues for which there is no market. These market values are considered fair value. The cost of securities sold is determined by the "identified certificate" method. Short-term investments include, certificates of deposit, commercial paper and U.S. Treasury securities with maturities of less than one year at the time of purchase. For these short-term investments, the carrying amount is a reasonable estimate of fair value. FEDERAL INCOME TAXES AND CHANGE IN ACCOUNTING PRINCIPLE The federal income tax provision for 1993 and 1992 was prepared in accordance with Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes ("SFAS No. 109"), adopted in 1992 effective from the beginning of 1992 and prior periods have not been restated. The cumulative effect of such adoption was $10,719,000 in 1992 and is reported in the consolidated statement of operations. This standard replaced the deferred method of accounting for deferred income taxes with the liability method, in which deferred assets and liabilities are established for temporary differences between the financial statement values of assets and liabilities and their tax bases. The effects of temporary differences are set forth in Note 7. RECOGNITION OF PROPERTY AND CASUALTY REVENUE AND EXPENSE Property and casualty premiums are earned on a pro rata basis over the terms of the policies. Premiums applicable to the unexpired terms of policies in force are recorded as unearned premiums. Premiums earned reflect an estimate for earned but unbilled audit premiums. Workers' compensation insurance premiums are based upon the payroll of the insured. 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 Board of Directors. Zenith Insurance and CalFarm Insurance make provision for the settlement of all incurred claims, both reported and unreported. The liabilities for unpaid losses and loss expenses are estimates for the eventual costs of claims incurred but not settled, less estimates of salvage and subrogation. Estimates for reported claims are primarily determined by evaluation of individual reported claims. Estimates for claims incurred but not reported are based on Zenith Insurance's and CalFarm Insurance's 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. RECOGNITION OF REVENUE AND BENEFITS FOR DEFERRED ANNUITY CONTRACTS Revenues earned from deferred annuity contracts represent amounts assessed against contract balances during the period, principally for surrenders. Deposits on deferred annuities represent the amounts received plus credited interest, less applicable administrative fees. Interest credited rates ranged from 3.25% to 8.25% in 1993 except for indexed deferred annuity contracts where rates ranged from 4.5% to 5.5% in 1993. The fair value of Zenith's liabilities for deposits on deferred annuity contracts is based on amounts received plus credited interest rates adjusted on the contract anniversary date to current market rates for these instruments, less applicable fees, which approximates the carrying amount reported in the consolidated balance sheet. 26 RECOGNITION OF REVENUE AND BENEFITS FOR UNIVERSAL LIFE, SINGLE PREMIUM LIFE, AND OTHER INTEREST-SENSITIVE LIFE CONTRACTS Revenues from universal life, single premium life, and other interest-sensitive life contracts represent amounts assessed against policy account balances during the period for mortality charges, surrender charges and policy administration charges earned. Future policy benefits for universal life, single premium life and other interest-sensitive life contracts represent policyholder account balances consisting of the premiums received plus credited interest, less policyholder assessments. Amounts included in expense represent benefits in excess of policyholder account balances. Interest credited rates ranged from 3.75% to 7.0% in 1993. RECOGNITION OF REVENUE AND RELATED BENEFITS AND EXPENSES FOR TRADITIONAL LIFE CONTRACTS AND HEALTH CONTRACTS Revenues from traditional life insurance contracts represent premiums which are recognized as income when due. Health insurance premiums are recognized as income over the related contract period. Benefits and expenses are associated with earned premiums so as to result in recognition of profits over the life of the contracts. This association is accomplished through the provision for future policy benefits and the deferral and amortization of policy acquisition costs for traditional life contracts and through the policy and contract liability for health contracts. Future policy benefits for traditional life contracts have been computed using primarily the net level premium reserve method based upon estimated future investment yield, mortality, morbidity and withdrawals. REINSURANCE In accordance with general industry practices, Zenith's insurance subsidiaries annually purchase reinsurance to protect against liabilities in excess of certain limits on insurance risks they have underwritten. Such arrangements are known, in the industry, as "excess of loss" protection. The purpose of such reinsurance is to protect Zenith from the impact of large, unforseen losses and such reinsurance reduces the magnitude of sudden and unpredictable changes in net income and the capitalization of insurance operations. The ceding of reinsurance does not discharge the original insurer from primary liability to its policyholder. Balances due from reinsurers on unpaid losses, including an estimate of such recoverables related to revenues for incurred but not reported losses are reported as assets and are included in receivable from reinsurers. Earned premiums are stated in the consolidated financial statements after deduction of amounts ceded to reinsurers. Approximately 61% of amounts recoverable from reinsurers at December 31, 1993 are attributable to reinsurance arrangements with one large United States reinsurance company. No amounts due from reinsurers have been written off as uncollectible in the three years ended December 31, 1993. DEFERRED POLICY ACQUISITION COSTS Property and Casualty Insurance -- Policy acquisition costs, consisting of commissions, premium taxes and certain other underwriting costs, are deferred and amortized as the related premiums are earned. Life Insurance -- The costs of acquiring new business, principally commission and certain policy issuance and underwriting expenses, have been deferred to the extent that such costs are recoverable from future revenues. Costs deferred on deferred annuities, universal life, single premium life and other interest-sensitive contracts are amortized in relationship to the present value of expected future gross profits. Costs deferred on traditional life policies are amortized over the premium paying period of the contracts in proportion to future anticipated premiums. The assumptions underlying this amortization schedule are continually reviewed and updated and any adjustments resulting therefrom are reflected in earnings currently. REAL ESTATE OPERATIONS Land and land development costs, including costs of acquisition and development, property taxes and related interest are capitalized and recognized pro rata against sales of completed units. 27 PROPERTIES AND EQUIPMENT Properties and equipment are stated at cost less accumulated depreciation. Depreciation is calculated principally on a straight-line basis using the following useful lives: buildings, 10 to 40 years; furniture, fixture and equipment, 3 to 10 years. Expenditures for maintenance and repairs are charged to operations as incurred. Additions and improvements to buildings and other fixed assets are capitalized and depreciated. Upon disposition, the asset cost and related depreciation are removed from the accounts and the resulting gain or loss is included in income. PURCHASED INTANGIBLES AND OTHER ASSETS Purchased intangibles and other assets represent the total amount of the cost in excess of net tangible assets acquired through the CalFarm acquisition. This amount has been assigned to various intangibles and other amortizable assets and the assigned values are being amortized actuarially, or on a straight-line basis over 25 years. Amortization expense for 1993, 1992 and 1991 was $1,166,000, $1,147,000, and $1,118,000, respectively, and accumulated amortization was $12,318,000 at December 31, 1993 and $11,152,000 at December 31, 1992. EXCESS OF COST OVER NET ASSETS ACQUIRED The excess of cost over net assets acquired of $2,009,000 represents the unamortized excess of cost over underlying net tangible assets of companies acquired prior to 1970, which is considered to have continuing value, and is not being amortized. RECLASSIFICATIONS Certain 1992 and 1991 amounts have been reclassified to conform to the 1993 presentation. NOTE 2--INVESTMENTS The amortized cost and fair values of investments held-to-maturity, available-for-sale and trading securities were as follows:
- -------------------------------------------------------------------- (Dollars in Gross Gross thousands) Amortized unrealized unrealized Fair December 31, 1993 cost gains (losses) value - -------------------------------------------------------------------- Held-to-maturity U.S. Treasury securities $ 248 $ 7 $ 255 Corporate debt securities 340,931 36,532 $ (347) 377,116 Mortgage backed securities 60,158 1,176 61,334 - -------------------------------------------------------------------- Total, held- to-maturity $ 401,337 $ 37,715 $ (347) $ 438,705 - -------------------------------------------------------------------- - -------------------------------------------------------------------- (Dollars in Gross Gross thousands) Amortized unrealized unrealized Fair December 31, 1993 cost gains (losses) value - -------------------------------------------------------------------- Available-for-sale U.S. Treasury securities $ 215,945 $ 444 $ (509) $ 215,880 Foreign government debt securities 5,612 79 5,691 Corporate debt securities 262,003 19,287 (894) 280,396 Mortgage backed securities 58,446 598 (8) 59,036 Redeemable preferred stocks 33,217 753 (995) 32,975 Equity securities 48,827 1,861 (347) 50,341 Short-term investments 276,841 276,841 - -------------------------------------------------------------------- Total, available- for-sale $ 900,891 $ 23,022 $ (2,753) $ 921,160 - -------------------------------------------------------------------- Trading securities U.S. Treasury securities $ 107,747 $ 27 $ (140) $ 107,634 Corporate debt securities 4,105 57 (92) 4,070 Equity securities 7,785 228 (38) 7,975 - -------------------------------------------------------------------- Total, trading securities $ 119,637 $ 312 $ (270) $ 119,679 - --------------------------------------------------------------------
Fixed maturity investments at December 31, 1993, are due as follows:
- ------------------------------------------------------- (Dollars in thousands) Amortized Fair December 31, 1993 cost value - ------------------------------------------------------- Held-to-maturity: Due in one year or less $ 8,495 $ 8,977 Due after one year through five years 78,499 85,879 Due after five years through ten years 151,725 164,829 Due after ten years 162,618 179,020 - ------------------------------------------------------- Total $ 401,337 $ 438,705 - ------------------------------------------------------- Available-for-sale: Due in one year or less $ 368,538 $ 368,994 Due after one year through five years 286,188 290,121 Due after five years through ten years 112,205 118,641 Due after ten years 85,133 93,063 - ------------------------------------------------------- Total $ 852,064 $ 870,819 - -------------------------------------------------------
Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Mortgage-backed securities are shown as being due at their average expected maturity dates. Redeemable preferred stocks with sinking fund redemption periods are shown as being due at the mid-point of the sinking fund period. 28 The amortized cost and market values of investments in fixed maturities and short-term investments were as follows:
- ------------------------------------------------------------ (Dollars in thousands) Gross Gross December 31, Amortized unrealized unrealized Market 1992 cost gains (losses) value - ------------------------------------------------------------ U.S. Treasury securities and obligations of U.S. government corporations and agencies: Held for investment $ 256,927 $ 2,570 $ (501) $ 258,996 Held for sale 71,601 1,908 (6) 73,503 Trading portfolio 55,374 94 (105) 55,363 Short-term investments 19,977 19,977 - -------------------------------------------------------------- Total $ 403,879 $ 4,572 $ (612) $ 407,839 - -------------------------------------------------------------- Obligations of states and political subdivisions: Held for investment $ 1,339 $ 1,339 Corporate securities: Held for investment $ 654,497 $ 31,506 $ (2,743) $ 683,260 Held for sale 46,764 1,099 (1,726) 46,137 Trading portfolio 2,922 22 2,944 Short-term investments 138,721 138,721 - -------------------------------------------------------------- Total $ 842,904 $ 32,627 $ (4,469) $ 871,062 - -------------------------------------------------------------- Total: Held for investment $ 912,763 $ 34,076 $ (3,244) $ 943,595 Held for sale 118,365 3,007 (1,732) 119,640 Trading portfolio 58,296 116 (105) 58,307 Short-term investments 158,698 158,698 - -------------------------------------------------------------- Total $1,248,122 $ 37,199 $ (5,081) $1,280,240 - --------------------------------------------------------------
Proceeds from sales of fixed maturities were $377,021,000, $290,326,000 and $754,548,000 during 1993, 1992 and 1991, respectively. Gross gains of $14,189,000 and gross losses of $588,000 were realized on such sales in 1993. Gross gains of $11,949,000 and gross losses of $2,142,000 were realized on such sales in 1992. Gross gains of $17,221,000 and gross losses of $4,258,000 were realized on such sales in 1991. Gross unrealized appreciation and gross unrealized depreciation were:
- --------------------------------------------------------- (Dollars in thousands) December 31, 1993 1992 - --------------------------------------------------------- Fixed maturities Unrealized appreciation $ 21,161 $ 116 Unrealized (depreciation) (2,406) (105) - --------------------------------------------------------- Net unrealized appreciation $ 18,755 $ 11 - --------------------------------------------------------- Equity securities Unrealized appreciation $ 1,861 $ 3,320 Unrealized (depreciation) (347) (3,999) - --------------------------------------------------------- Net unrealized appreciation (depreciation) $ 1,514 $ (679) - --------------------------------------------------------- Total $ 20,269 $ (668) - ---------------------------------------------------------
Net realized gains (losses) on investments and net unrealized appreciation (depreciation) on total investments before taxes are summarized as follows:
- ----------------------------------------------------------------- (Dollars in thousands) Fixed Equity Year Ended December 31, maturities securities Total - ----------------------------------------------------------------- 1993 Net realized investment gains: Held for investment $ 5,107 Held for sale 6,347 Trading portfolio 2,147 ----------- Total net realized investment gains 13,601 $ 7,444 $ 21,045 Net unrealized appreciation (depreciation) during the year: Held for investment 6,536 Held for sale 17,480 Trading portfolio (159) ----------- Total net unrealized appreciation during the year 23,857 2,383 26,240 - ----------------------------------------------------------------- Total $ 37,458 $ 9,827 $ 47,285 - ----------------------------------------------------------------- 1992 Net realized investment gains (losses): Held for investment $ 8,488 Held for sale (111) Short-term investments 162 ----------- Total net realized investment gains 8,539 $ 2,308 $ 10,847 Net unrealized appreciation (depreciation) during the year: Held for investment 4,071 Held for sale (940) Trading portfolio 11 ----------- Total net unrealized appreciation during the year 3,142 11,394 14,536 - ----------------------------------------------------------------- Total $ 11,681 $ 13,702 $ 25,383 - ----------------------------------------------------------------- 1991 Net realized investment gains $ 9,812 $ 3,187 $ 12,999 Net unrealized appreciation during the year 78,250 17,321 95,571 - ----------------------------------------------------------------- Total $ 88,062 $ 20,508 $ 108,570 - -----------------------------------------------------------------
29 Investment income is summarized as follows:
- ---------------------------------------------------------------- (Dollars in thousands) Year ended December 31, 1993 1992 1991 - ---------------------------------------------------------------- Fixed maturities Bonds $ 79,384 $ 78,197 $ 68,462 Redeemable preferred stocks 3,205 6,382 10,515 Equity securities Floating rate preferred stocks 2,181 2,972 4,183 Convertible and nonredeemable preferred stocks 715 1,155 1,058 Common stocks 325 486 680 Mortgage loans on real estate 572 980 973 Policy loans 2,562 2,129 1,733 Short-term investments 6,775 5,023 8,445 Notes receivable 101 195 425 Other 1,454 3,163 3,238 - ---------------------------------------------------------------- 97,274 100,682 99,712 Less investment expenses 4,800 4,068 4,027 - ---------------------------------------------------------------- Net investment income $ 92,474 $ 96,614 $ 95,685 - ----------------------------------------------------------------
Investments carried at $314,400,000 at December 31, 1993 and $302,400,000 at December 31, 1992 (market value $313,700,000 and $304,800,000, respectively) are on deposit with regulatory authorities in compliance with insurance company regulations. Zenith maintains a diversified investment portfolio as described in Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations. There were no securities in the investment portfolio which exceeded 10% of stockholders' equity at either December 31, 1993 or 1992. As of December 31, 1993, Zenith and its subsidiaries own $11,613,000 of securities in Reliance Insurance Company, its parent and affiliates. Reliance Insurance Company is a major stockholder of Zenith. NOTE 3--PROPERTIES AND EQUIPMENT Properties and equipment consists of the following:
- ------------------------------------------------------ (Dollars in thousands) December 31, 1993 1992 - ------------------------------------------------------ Land $ 14,836 $ 14,836 Buildings 32,360 31,060 Furniture, fixtures and equipment 32,450 30,204 - ------------------------------------------------------ 79,646 76,100 Less accumulated depreciation 32,604 27,657 - ------------------------------------------------------ Total $ 47,042 $ 48,443 - ------------------------------------------------------
NOTE 4--FUTURE POLICY BENEFITS Future policy benefits and life insurance in force consist of:
- -------------------------------------------------------------------- Life Future Interest (Dollars in thousands) Insurance policy rate December 31, in force benefits assumptions - -------------------------------------------------------------------- 1993 Universal life contracts $ 2,151,874 $ 88,165 7.0% Traditional life contracts 750,750 48,969 9.9% Other 73,554 17,367 7.9% - -------------------------------------------------------------------- 1992 Universal life contracts $ 1,799,056 $ 74,076 7.3% Traditional life contracts 796,722 47,755 9.6% Other 355,871 16,855 8.6% - --------------------------------------------------------------------
Reinsurance recoverable on future policy benefits amounting to $730,000 and $686,000 at December 31, 1993 and 1992, respectively, is recorded as an asset. Traditional life and group life mortality assumptions are based upon multiples, ranging from 70% to 120%, applied to the 1967-70 Select and Ultimate Mortality Tables. Individual and group accident and health morbidity assumptions are based upon CalFarm Life experience. Withdrawal assumptions are based upon either CalFarm Life experience or industry tables modified, where appropriate, for CalFarm Life experience. Mortality, morbidity and withdrawal assumptions for other lines of insurance (including paid up and reinsurance assumed) are calculated using various statutory assumptions. Assumptions with regard to interest rates, mortality, morbidity and withdrawals for reinsurance ceded approximate the assumptions used in calculating the related direct reserves. For deferred annuity contracts, universal life, single premium life, and other interest-sensitive life insurance contracts, it is assumed that the earned interest rate would exceed the rate credited to account values by the amount of the target interest spreads established for each product. NOTE 5--PAYABLE TO BANKS Zenith has lines of credit available of $50 million. As of December 31, 1993 and 1992, there were no outstanding balances on these unsecured lines of credit. Interest on funds borrowed through one of these lines of credit is payable at the banks' prime rate, less .55%, and at a published prime or a fixed rate chosen by Zenith on the other line of credit. Zenith Insurance has a line of credit available of $3 million to enable it to issue letters of credit in favor of ceding companies in certain states where such ceding companies would not otherwise be allowed to take credit for reinsurance ceded to Zenith Insurance. 30 Under these agreements certain restrictive covenants apply including the maintenance of a specific level of net worth for Zenith and its insurance subsidiaries. The weighted average interest rate for 1993, 1992 and 1991 was 5.5%, 6.2% and 8.2%, respectively. At December 31, 1993 and 1992 the prime interest rate was 6%. NOTE 6--SENIOR NOTES PAYABLE $75,000,000 of 9% Senior Notes due 2002 (the "9% Notes") were issued at par in May 1992. Interest on the notes is payable semi-annually. The notes are general unsecured obligations of Zenith. Issue costs of $1,213,000 are being amortized over the term of the notes and $121,000 and $81,000 of such costs were amortized during 1993 and 1992, respectively. Covenants contained in the indenture include restrictions on the ability of Zenith and its subsidiaries to incur secured debt and the right of holders of the 9% Notes to require Zenith to repurchase the 9% Notes upon a decline in the rating of the 9% Notes within ninety days after the occurrence of certain events. Those events are: (a) a person or group becomes the beneficial owner of more than 50% of Zenith common stock; (b) 10% or more of Zenith common stock is acquired by Zenith within any twelve month period; or (c) the sum of the fair market value of distributions (other than regular dividends or distributions of capital stock) and the consideration for purchases of Zenith common stock by Zenith during a 12 month period is thirty percent or more of the fair market value of outstanding Zenith common stock. The fair value at December 31, 1993 of the 9% Notes is $86,250,000 based on a price published by a rating agency. In June 1992, Zenith called its previously outstanding 10 1/4% Senior Notes due 1994 utilizing a portion of the proceeds of the 9% Notes. The premium to call the 10 1/4% Senior Notes and the unamortized discount thereon reduced net income in 1992 by $1,355,000, net of a tax benefit of $698,000. NOTE 7--FEDERAL INCOME TAXES The components of the provision (benefit) for taxes on income from operations are:
- ------------------------------------------------------------- (Dollars in thousands) Year Ended December 31, 1993 1992 1991 - ------------------------------------------------------------- Current $ 11,982 $ 5,146 $ 5,707 Deferred 8,297 (4,776) 912 Charge in lieu of taxes 2,600 - ------------------------------------------------------------- Total federal income taxes $ 20,279 $ 370 $ 9,219 - -------------------------------------------------------------
The charge in lieu of taxes in 1991 represents the additional taxes that would have been incurred without the capital loss carryforward, the benefit of which was reflected as an extraordinary item. The difference between the statutory federal income tax rate (35% in 1993 and 34% in 1992 and 1991) and Zenith's effective tax rate on income from operations, as reflected in the financial statements, is explained as follows:
- ------------------------------------------------------------ (Dollars in thousands) Year ended December 31, 1993 1992 1991 - ------------------------------------------------------------ Statutory federal income tax: $ 25,718 $ 6,700 $ 17,857 Increase (reduction) in taxes: Dividend received deduction (1,537) (2,577) (3,841) Tax exempt interest (812) (2,159) "Fresh start" benefits (902) Proration of dividend exclusion and tax exempt interest to loss reserves 204 449 812 Rate differential associated with AMT (1,820) Utilization of AMT credit carryforward (775) Tax benefit of capital loss carryforward (4,253) (3,688) Other 147 298 47 - ------------------------------------------------------------ Total federal income taxes $ 20,279 $ 370 $ 9,219 - ------------------------------------------------------------
In 1992 Zenith adopted SFAS No. 109 retroactive to the beginning of 1992 (see Note 1). The cumulative effect of such adoption was an increase in income of $10,719,000 from the adjustment of deferred taxes at the beginning of the year, net of a valuation allowance of $11,947,000. The effect on the provision for federal income taxes in 1992 increased net income by $881,000. In addition, the tax effect of purchased life insurance reserves was reclassified to deferred taxes. In 1993 and 1992, deferred taxes are provided based upon temporary differences between the tax and book basis of assets and liabilities. The components of the net deferred tax assets and liabilities were as follows: 31
- -------------------------------------------------------------- Deferred tax assets (Dollars in thousands) (liabilities) -------------------- Year ended December 31, 1993 1992 - -------------------------------------------------------------- Differences between the tax basis and book basis of investments $ (7,725) $ 2,286 Earned but unbilled premiums receivable (1,605) (2,160) Deferred policy acquisition costs (36,586) (29,943) Purchased intangibles (15,601) (14,835) Properties and equipment (2,597) (2,576) Capital loss carryover 1,346 AMT credit carryover 2,381 Property and casualty loss reserve discount 25,727 23,790 Difference in computing life policy reserves 17,044 12,745 Limitation on deduction for unearned premiums 7,243 6,344 Policyholders' dividends accrued 7,464 6,318 Accrued cost of Proposition 103 rollback refund 5,468 Other (3,023) (947) - -------------------------------------------------------------- (9,659) 10,217 Valuation allowance (4,484) - -------------------------------------------------------------- Net deferred tax asset (liability) $ (9,659) $ 5,733 - --------------------------------------------------------------
Property and 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. In 1991 deferred taxes are the result of timing differences in the recognition of revenue and expense for tax and financial statement purposes. The sources of timing differences, and tax effect of each are:
- ------------------------------------------------------------ (Dollars in thousands) Year ended December 31, 1991 - ------------------------------------------------------------ Deferred policy acquisition costs $ 4,092 Undeclared policyholders' dividends accrued and accumulated 2,610 Discount on loss and loss expense reserves (2,219) Amortization of purchased intangibles 2,148 Difference in computing policy reserves (3,474) Subrogation receivable (25) Amortization of January 1, 1987 unearned premium reduction (1,024) Market discount not recognized for tax purposes currently 655 Depreciation 160 Effect of AMT (1,038) Other (973) - ------------------------------------------------------------ Total deferred tax $ 912 - ------------------------------------------------------------
Current taxes receivable (payable) and deferred taxes were as follows:
- -------------------------------------------------------- (Dollars in thousands) Year Ended December 31, 1993 1992 - -------------------------------------------------------- Current taxes $ (4,596) $ 1,254 Deferred taxes (9,659) 5,733 - -------------------------------------------------------- Federal income taxes $ (14,255) $ 6,987 - --------------------------------------------------------
Zenith files a consolidated federal income tax return. As California insurance companies, Zenith's subsidiaries pay premium taxes to the State of California on gross premiums written in lieu of state income or franchise tax. The tax rate was 2.35% in 1993 and 1992. The policyholders' surplus account of CalFarm Life which permitted a deferral of tax became taxable in 1986 as a result of an election to adjust the tax basis of assets under Internal Revenue Code Section 338. Accordingly, CalFarm Life does not have a policyholders' surplus account. NOTE 8--REINSURANCE Reinsurance transactions reflected in the financial statements are as follows:
- ---------------------------------------------------------- (Dollars in thousands) 1993 1992 1991 - ---------------------------------------------------------- Ceded reinsurance netted against earned premiums for the year $ 22,457 $ 22,231 $ 21,498 Ceded reinsurance netted against property and casualty losses and loss adjustment expenses incurred 38,716 11,350 18,986 Net assumed reinsurance included in earned premiums for the year 26,094 19,357 27,531 - ----------------------------------------------------------
Zenith Insurance has an assumed reinsurance agreement with Reliance Insurance Company, a major stockholder of Zenith. Three of Zenith's directors are also directors of Reliance Insurance Company. Reimbursed estimated costs paid to Reliance relating to this arrangement amounted to $578,000, $420,000 and $211,000 for 1993, 1992 and 1991, respectively. Zenith's reinsurance arrangements provide protection against claims in excess of between $200,000 and $700,000 per occurrence depending upon the type of coverage. Zenith's catastrophe reinsurance provides protection against aggregate losses per event on property and workers' compensation coverages with limits ranging from $20,000,000 to $100,000,000. Assumed reinsurance business is not covered by such catastrophe reinsurance. NOTE 9--COMMITMENTS AND CONTINGENT LIABILITIES Zenith and its subsidiaries lease space for some of its offices expiring through 2002, equipment on leases expiring through 1996 and automobiles on two through five year leases. The minimum rentals on these operating leases as of December 31, 1993 are as follows:
- ------------------------------------------------------------- (Dollars in thousands) Year Equipment Auto fleet Offices Total - ------------------------------------------------------------- 1994 $ 66 $ 731 $ 3,687 $ 4,484 1995 37 301 3,133 3,471 1996 20 49 2,347 2,416 1997 1,072 1,072 1998 and thereafter 5,789 5,789 - ------------------------------------------------------------- Total $ 123 $ 1,081 $ 16,028 $ 17,232 - -------------------------------------------------------------
32 Rental expenses for 1993, 1992, and 1991 amounted to $5,717,000, $4,774,000 and $4,009,000, respectively. Zenith and its subsidiaries are involved in certain litigation. In the opinion of management and legal counsel, such litigation is either without merit or the ultimate liability, if any, will not have a material effect on the consolidated financial condition of Zenith. RESOLUTION OF CONTINGENCIES SURROUNDING CERTAIN LITIGATION AND OTHER MATTERS Other income in the amount of $2,441,000 recognized in 1993 relates to certain events which were resolved in 1993 associated with the non-investment grade securities market and Zenith's related write-downs of investments in 1990. Zenith settled litigation which will result in the receipt of approximately $7,561,000. Also, the California Life Insurance Guarantee Association ("CLIGA") assessed CalFarm Life approximately $5,120,000 for its share of the cost associated with the failure of Executive Life Insurance Company. RESOLUTION OF CONTINGENCIES SURROUNDING PROPOSITION 103 In January 1993, Zenith entered into discussions with the California Department of Insurance (the "Department") to resolve the rollback refund issue with respect to its subsidiaries. In this context, and without admitting that Zenith would owe any refunds or that its rates would require a refund under a correct application of the California Supreme Court's directive of May 1989, management came to the conclusion that in the best interests of Zenith's stockholders and customers, a fair settlement would be better than the continued uncertainty and the costs and risks associated with the litigation of this issue. Accordingly, on January 27, 1993, Zenith announced that it had reached an agreement with the Department to resolve Zenith's Proposition 103 rollback refund contingency. During 1993, under the agreement, Zenith's subsidiaries refunded to each holder of an affected policy issued or renewed during the rollback period an amount equal to approximately 9.5% of the premium paid plus interest from May 8, 1989 to the date of payment. The net cost of the refund, after reinsurance, reduced income in 1992 by $16,078,000 before income taxes. NOTE 10--COMMON STOCK Under an employee non-qualified stock option plan adopted by the Board of Directors in 1978, as amended, options are issued to officers and key employees for the purchase of Zenith's common stock at 100% of the market price at the date of grant. The options expire between five and ten years after the date of grant or three months after termination of employment. Zenith makes no charges to earnings in connection with stock options. Additional information with respect to stock options is as follows:
- --------------------------------------------------------------- Option Price Number ---------------------------- Options of shares Per share Total - --------------------------------------------------------------- Outstanding at December 31, 1991 1,720,000 $11.94-$ 21.02 $ 30,638,000 Granted 335,000 17.13-17.44 5,781,000 Exercised 303,000 11.94-19.09 4,527,000 Expired or cancelled 367,000 17.84-20.11 6,947,000 ----------- ------------ Outstanding at December 31, 1992 1,385,000 11.94-21.02 24,945,000 Granted 332,000 22.56-28.19 8,198,000 Exercised 348,000 11.94-19.81 6,261,000 Expired or cancelled 65,000 11.94-19.81 1,137,000 ----------- ------------ Outstanding at December 31, 1993 1,304,000 $11.94-$ 28.19 $ 25,745,000 - ---------------------------------------------------------------
The 1,304,000 outstanding options are exercisable: 1994, 895,000; 1995, 173,000; 1996, 153,000; and 83,000, 1997. At December 31, 1993, 1992 and 1991, respectively, 454,000, 721,000 and 689,000 shares were available to be granted. At December 31, 1993 and 1992, respectively, 704,000 and 912,000 options could have been exercised. In 1991, 43,000 options were exercised for a total amount of $598,000 with an option price of $13.38-15.13 per share. At December 31, 1993 Zenith had authority from its Board of Directors to purchase 809,000 additional treasury shares at prevailing market prices. NOTE 11--EARNINGS PER COMMON SHARE Earnings per common share are computed on the basis of the weighted average of common shares outstanding. The number of shares used in 1993, 1992 and 1991 in the computation of earnings per common share was 19,297,000, 18,918,000 and 18,981,000, respectively. NOTE 12--DIVIDEND RESTRICTIONS Under insurance company regulations of the State of California, the maximum dividends that may be paid to Zenith by its insurance company subsidiaries during any 12 month period without prior approval of the Department of Insurance is limited to the greater of 10% of statutory surplus as regards policyholders at the preceding December 31, 33 or 100% of net income for the preceding year for Zenith Insurance, and the greater of 10% of statutory surplus as regards policyholders at the preceding December 31, or statutory net gain from operations for the preceding year for CalFarm Life. In addition, any such dividend must be paid out of earned surplus. Zenith Insurance's stockholder's equity and CalFarm Life's stockholder's equity in accordance with generally accepted accounting principles amounted to $279,117,000 and $124,610,000, respectively, as of December 31, 1993 of which Zenith Insurance and CalFarm Life could pay $40,969,000 and $5,924,000, respectively, in 1994, to Zenith in dividends without prior approval, leaving a restricted balance of $238,148,000 and $118,686,000, respectively. In addition, in 1994, $1,117,000 can be paid to Zenith Insurance by its insurance subsidiaries which would be available for dividend payments to Zenith in the following year. NOTE 13--STATUTORY FINANCIAL DATA Capital stock and surplus and net income on a statutory basis as reported to regulatory authorities were as follows:
- -------------------------------------------------- (Dollars in thousands) Year ended December 31, 1993 1992 1991 - -------------------------------------------------- Capital stock and surplus: Property and casualty, consolidated $ 228,097 $ 203,479 $ 186,806 Life insurance 59,241 54,769 45,247 Net income: Property and casualty, consolidated 49,698 7,562 35,984 Life insurance 4,966 8,253 10,434 - --------------------------------------------------
NOTE 14--UNAUDITED QUARTERLY FINANCIAL DATA
- ------------------------------------------------------------------- (Dollars in thousands except per share data) Year ended March June September December December 31, 1993 31 30 30 31 - ------------------------------------------------------------------- Premium income and other policy charges $ 113,935 $ 120,192 $ 119,992 $ 115,703 Net investment income 24,324 23,683 22,872 21,595 Realized gains on investments 4,997 5,659 3,841 6,548 Other income, net 2,441 Net income 12,600 15,100 13,500 12,000 Net income per share .66 .78 .70 .63 - -------------------------------------------------------------------
- --------------------------------------------------------------------- (Dollars in thousands except per share data) Year ended March June September December December 31, 1992 31 30 30 31 - --------------------------------------------------------------------- Premium income and other policy charges $ 104,877 $ 108,068 $ 111,686 $ 117,243 Net investment income 23,646 24,707 24,923 23,338 Realized gains on investments 1,845 3,266 4,527 1,209 Income (loss) from operations before income taxes, extraordinary item and cumulative effect of accounting change 11,647 12,139 1,702 (5,782) Extraordinary item--debt retirement cost (1,355) Cumulative effect of accounting change 10,719 Net income (loss) 19,644 7,818 2,734 (1,496) Net income (loss) per share 1.04 .41 .14 (.08) - ---------------------------------------------------------------------
Quarterly data for 1992 have been restated for the adoption of SFAS No. 109, retroactive to January 1, 1992 and to present debt retirement costs in the second quarter as an extraordinary item. In the fourth quarter of 1992 Zenith recognized $16,078,000 of expense associated with Proposition 103 rollback refunds (see Note 9). NOTE 15--SEGMENT INFORMATION Zenith's operations are conducted through three business segments. These segments and their respective operations are as follows: PARENT Zenith is a holding company owning directly or indirectly all of the capital stock of certain California insurance and insurance related companies. In 1993, Zenith commenced a real estate operation through a newly formed subsidiary. PROPERTY AND CASUALTY OPERATIONS Zenith's property and casualty insurance operations offer multiple product line insurance and reinsurance. Investments and related income of the property and casualty insurance companies are available for payment of claims and benefits and have not been identified with individual product lines. HEALTH AND LIFE INSURANCE OPERATIONS Zenith's life insurance operations offer individual and group life, annuity and accident and health policies. Identifiable assets for the health and life insurance segment are those assets which are used in the life insurance company. 34 The following table is a summary of results by major segments:
- ------------------------------------------------------------------------------------------------------ (Dollars in thousands except per share data) Year ended December 31 1993 1992 1991 - ------------------------------------------------------------------------------------------------------ Property and Casualty Net written premiums $ 415,947 $ 378,178 $ 380,408 Net earned premiums 405,901 377,426 376,068 Investment income 36,643 42,276 45,727 Underwriting income (loss) before Proposition 103 rollback refund(1)(8) 11,251 (20,621) (8,453) Underwriting income (loss)(1) 11,251 (36,699) (8,453) Income after taxes and before realized gains and Proposition 103 rollback refund(3)(8) 32,425 16,674 31,400 Income after taxes and before realized gains(3) 32,425 6,063 31,400 Income after taxes 40,939 16,208 41,841 Identifiable assets 946,219 912,928 815,255 - ------------------------------------------------------------------------------------------------------ Health and Life Premium income and other policy charges(2) 63,921 64,448 61,556 Investment income 55,339 53,486 49,558 Income after taxes and before realized gains(3) 4,096 8,205 6,913 Income after taxes 12,932 10,354 8,325 Identifiable assets 897,157 789,664 669,434 - ------------------------------------------------------------------------------------------------------ Parent Investment income 492 852 400 (Loss) after taxes and before realized gains (losses) (3) (1,253) (5,779) (5,411) (Loss) after taxes (671) (7,226) (6,865) Identifiable assets 32,409 22,928 9,226 - ------------------------------------------------------------------------------------------------------ Consolidated total Premium income and other policy charges 469,822 441,874 437,624 Investment income 92,474 96,614 95,685 Underwriting income (loss) before Proposition 103 rollback refund(1)(8) 11,251 (20,621) (8,453) Underwriting income (loss)(1)(8) 11,251 (36,699) (8,453) Income after taxes and before realized gains and Proposition 103 rollback refund(4)(3)(8) 33,682 19,100 32,902 Per share 1.75 1.01 1.73 Income after taxes and before realized gains(3) 35,268 8,489 32,902 Income after taxes 53,200 19,336 43,301 Net income(5)(6) 53,200 28,700 45,901 Per share 2.76 1.52 2.42 Total assets(7) $1,857,790 $1,703,553 $1,477,571 - ------------------------------------------------------------------------------------------------------ (1) After policyholders' dividends of $15,175,000, $2,954,000 and $8,158,000 for 1993, 1992 and 1991, respectively. (2) Of total health and life premium income and other policy charges, 62%, 62% and 63% for 1993, 1992 and 1991, respectively, is represented by one group health plan. (3) Realized gains on investments after taxes were as follows: 1993 1992 1991 ---------------------------------- Property and Casualty $ 8,514 $ 10,145 $ 10,441 Health and Life 8,836 2,149 1,412 Parent 582 (1,447) (1,454) ---------------------------------- Consolidated Total $ 17,932 $ 10,847 $ 10,399 Realized gains in the Health and Life segment reflect $1,786,000, and $1,239,000 tax benefit for capital loss carryover utilized in the consolidated federal income tax return in 1993 and 1992, respectively. (4) In 1993, excludes $1,586,000 for net effect of legal settlement and CLIGA assessment. (5) Net income in 1992 includes an extraordinary item of $1,355,000, net of tax benefit, for debt redemption costs and in 1991 includes $2,600,000 for the tax benefit associated with utilization of capital losses carried forward from prior years. (6) Net income in 1992 includes $10,719,000 for the cumulative effect of the change in accounting for income taxes. (7) Reflects elimination entry of $17,995,000, $21,967,000 and $16,344,000 in 1993, 1992 and 1991, respectively. (8) Proposition 103 rollback refund in 1992 was $16,078,000, net of reinsurance, or $10,611,000 ($.56 per share) after tax.
35 INDEPENDENT ACCOUNTANT'S To the Stockholders and Board of Directors REPORT of Zenith National Insurance Corp. We have audited the accompanying consolidated balance sheet of Zenith National Insurance Corp. and subsidiaries as of December 31, 1993 and 1992, and the related consolidated statements of operations, cash flows, and stockholders' equity for each of the three years in the period ended December 31, 1993. 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 in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Zenith National Insurance Corp. and subsidiaries as of December 31, 1993 and 1992, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for investments as of December 31, 1993. Coopers & Lybrand Los Angeles, California February 17, 1994 CalFarm 36 TheZenith EX-21 11 EXHIBIT 21 EXHIBIT 21 SUBSIDIARIES OF ZENITH Set forth below are the names of certain subsidiaries of Zenith. Certain subsidiaries, which considered in the aggregate would not constitute a significant subsidiary, are omitted from the listing below.
JURISDICTION OF NAME ORGANIZATION - ----------------------------------------------------------------- --------------------------- Zenith Insurance Company California CalFarm Insurance Company California ZNAT Insurance Company California CalFarm Life Insurance Company California CalFarm Insurance Agency California Zenith Star Insurance Company Texas Perma-Bilt, a Nevada Corporation Nevada
EX-28 12 EXHIBIT 28 IN ACCORDANCE WITH RULE 202 OF REGULATION S-T, THIS EXHIBIT 28 IS BEING FILED IN PAPER PURSUANT TO A CONTINUING HARDSHIP EXEMPTION. -----END PRIVACY-ENHANCED MESSAGE-----