-----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, nzKqGq340FmtC0Hp7LrVuLFhaE4Y6O7wJvrZBi+8XyP02aUjjxE/7IRNzpiaW122 jl64TLWCbEM9EHR7wKcRZQ== 0000912057-95-005058.txt : 199507030000912057-95-005058.hdr.sgml : 19950703 ACCESSION NUMBER: 0000912057-95-005058 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19941231 FILED AS OF DATE: 19950629 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ZENITH NATIONAL INSURANCE CORP CENTRAL INDEX KEY: 0000109261 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 952702776 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-09627 FILM NUMBER: 95551130 BUSINESS ADDRESS: STREET 1: 21255 CALIFA ST CITY: WOODLAND HILLS STATE: CA ZIP: 91367 BUSINESS PHONE: 8187131000 10-K/A 1 10-K/A - COVER, FOLIO 1-22, F-1 THRU F-9, EX. COV [LOGO] - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Form 10-K/A 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, 1994 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. [ ] The aggregate market value of the voting stock of the registrant held by non-affiliates of the registrant on March 23, 1995 was approximately $210,941,000 (based on the closing sale price of such stock on such date). At March 23, 1995, 18,860,869 shares of Common Stock were outstanding, net of 5,190,175 shares of treasury stock. DOCUMENTS INCORPORATED BY REFERENCE (1) Portions of the Annual Report to Stockholders for fiscal year ended December 31, 1994 -- Part I and Part II. (2) Portions of the Proxy Statement in connection with the 1995 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 and Texas; 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 1994 edition of Best's Key Rating Guide ("Best's") gives Zenith Insurance, CalFarm Insurance, ZNAT Insurance and Zenith Star, collectively, ratings of A+ (superior). CalFarm Life is rated A (excellent) by Best's. Standard & Poor's Corporation ("S&P") has rated the claims-paying ability of Zenith Insurance, CalFarm Insurance, ZNAT Insurance and Zenith Star 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, 1994, Zenith and its subsidiaries had approximately 1,500 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 52 and 53 of the 1994 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 53% of consolidated property and casualty premium earned for 1994 and is the largest line of Zenith's property and casualty business. Historically, Zenith's workers' 2 compensation business was produced exclusively in California with minor incidental coverages out of state for its larger policyholders. Commencing in 1992, Zenith began operations in the Texas workers' compensation market and in 1994 approximately 13% of its total premium writings were produced in Texas compared to 87% in California. Zenith is currently examining the feasibility of developing workers' compensation operations in other states. Specifically, licenses have been obtained in Florida and Illinois. Regulation, rate adequacy and the feasibility of containing the elements of the cost of claims are among the key factors in determining the favorability of a given workers' compensation market. Regulation is principally a matter for state legislatures. In California, workers' compensation legislation was enacted in 1993 which, together with private initiatives undertaken by Zenith and other insurers, produced significant improvements in a theretofore runaway claims cost environment. However, the California Insurance Commissioner reduced minimum rates on three separate occasions in 1993 and 1994 in response. Rates were de-regulated effective January 1, 1995 and insurance companies may now file and use their own, actuarially determined, rates in California for workers' compensation insurance. The rates filed and which are in use by Zenith in 1995 were determined to provide, in conjunction with other policy features, a margin for underwriting profits. However, future profitability of Zenith's workers' compensation operation will be dependent upon its ability to compete in an open rating environment in California, the outlook for economic growth in California and Zenith's continuing efforts to control medical and indemnity costs. At present, competition is intense and Zenith is quoting on large numbers of policies in accordance with its pricing models and is endeavoring to achieve the goal of a combined ratio of 100%. In Texas, significant workers' compensation reform legislation was enacted in 1989 which created a more favorable environment for workers' compensation insurers. The constitutionality of such legislation was upheld by the Texas Supreme Court in February 1995. The Texas workers' compensation environment remains favorable with flexible rating and a reasonable claims environment, although increased competition among insurers may result. Generally, premiums for workers' compensation insurance policies are a function of the applicable premium rate, which includes the insured employer's experience modification factor (where applicable) and the amount of the insured employer's payroll. Payrolls may be affected significantly by changes in employment and wage levels. A deposit premium is paid at the beginning of the policy period, periodic installments are paid during the period and the final amount of the premium is generally determined as of the end of the policy period after the policyholder's payroll records are audited. Additional policy features may be added to enhance the outcome for the policyholder in the event of favorable claims experience. Predominant among such features has been, historically, the participating policy in which a dividend has been paid after policy expiration. With open rating and an emphasis on, among other things, overall pricing at inception, dividends are likely to become relatively insignificant in the future as an element in workers' compensation insurance. Conversely, de-regulation may serve to enhance other policy features such as deductible thresholds retained by the insured. In 1994, Zenith developed plans to selectively combine the sale of its workers' compensation insurance with other insurance products purchased by employers for the benefit of their employees. The idea is to combine workers' compensation insurance with disability insurance and group health insurance in a plan that is generically known as "24 hour coverage". In 1995, Zenith expects to commence sales of such coverage on a limited basis in San Diego, with a view to future expansion in the rest of California. This activity is being undertaken in concert with UNUM Corporation, a leading disability insurance carrier. 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 3 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 1994. CalFarm Insurance insured approximately 22,000 private passenger automobiles and 71,000 commercial and farm vehicles in 1994. Farmowners business is the second largest line of CalFarm Insurance's business, representing approximately 10% of Zenith's property and casualty premiums earned in 1994. Zenith's Automobile and Other Property and Casualty operations are subject to the regulatory provisions of California Initiative Proposition 103 ("Proposition 103"). 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 of premium, fraud or material misrepresentation, or a substantial increase in 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 50 of Zenith's 1994 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 pending rate applications on affected lines of business subsequent to the rollback period. Rate increases of 8.0% and 15.4%, respectively, on farmowners and homeowners policies were implemented effective July 1, 1993. During 1994, the Department approved a rate increase for commercial auto of 7.5% and a rate decrease for personal auto of 6.3%, both effective September 1, 1994. The Department has also approved rate increases for homeowners (8.0%), farmowners (8.5%), earthquake (15.1%) and commercial property and liability coverages (5.6%). These rates will be effective in early 1995. PROPERTY AND CASUALTY -- REINSURANCE ASSUMED Zenith Insurance is selectively underwriting a book of assumed reinsurance. Reinsurance contracts, or treaties, come in a variety of forms, but the principal arrangements are either proportional in nature, in which the assuming company shares pro-rata in the premiums and losses of the cedant, or arrangements under which the assuming company pays losses in excess of a certain limit in return for a premium, usually determined as a percentage of the cedant's primary insurance premiums. Zenith operates its reinsurance activity as a participant in treaties in which, typically, the reinsurance coverage is syndicated to a number of assuming companies. Depending upon market conditions and other factors, the volume of premiums written fluctuates from year to year. Zenith's current participation in the reinsurance market is limited principally to participation in the reinsurance of large individual property risks and property catastrophe reinsurance. Major property losses and catastrophes in recent years have served to increase the premiums paid for such reinsurance and to increase the amount of risk retained by insurers and reinsurers. These developments have created a market which management believes presents reasonable, acceptable 4 opportunities to produce favorable underwriting results. 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. Because reinsurance pricing is unregulated, an important element in such pricing is the supply of reinsurance capacity (i.e. capital) relative to demand. As reinsurance rates have increased in recent years new capital has been made available to provide world-wide reinsurance capacity. Most notably, such capital has been contributed by new companies in Bermuda and by contributions to Lloyd's syndicates by corporations with limited liability. As a result, reinsurance rates in 1995 do not appear to have increased over 1994. In November 1994, Zenith Insurance became a corporate underwriting member of Lloyd's through the formation of a 100% wholly owned subsidiary, ZIC Lloyd's Underwriting Limited ("ZIC Lloyd's"). ZIC Lloyd's has committed funds of $5 million to support the 1995 underwriting year of a certain syndicate. Such funds were made available by a deposit of $2.5 million and a $2.5 million letter of credit in favor of Lloyd's expiring January 31, 2000. All of the funds committed by ZIC Lloyd's are available to satisfy claims in the event of underwriting losses for 1995 by the syndicate. However, such commitment is limited to $5 million. HEALTH AND LIFE CalFarm Life offers a varied portfolio of life, health and annuity products. 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. 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 1994, CalFarm Life continued its sales of tax sheltered annuity products, specifically, those designed for school teachers and administrators. Total annuity deposits of $41,924,000, $56,764,000 and $83,600,000 were collected for 1994, 1993 and 1992, 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. During 1994, the Company experienced higher than expected policy surrenders on its annuity business. Increased personal federal income tax rates may increase the desire to accumulate retirement income on a tax deferred basis, however the profitability of future operations could be adversely affected if tax laws are changed with respect to income accumulation within life insurance and annuity products. Health insurance is the largest line of insurance written by CalFarm Life, accounting for $36,904,000 or approximately 60% of its total premium income in 1994. Health premiums are written under a program sponsored by the California Farm Bureau Federation (the "Farm Bureau"). CalFarm Life's deposits for Universal Life contracts were $13 million, $19 million, and $13 million in 1994, 1993, and 1992, respectively. Significant terms of CalFarm's life insurance products include minimum guaranteed credited interest rates ranging from 3% to 6%, mortality charges and surrender (termination) charges which generally diminish over 15 years. 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 -------------------------------------- 1994 1993 1992 ---------- ---------- ---------- (DOLLARS IN THOUSANDS) In force -- beginning of year..................... $2,976,178 $2,951,649 $2,686,030 Issued for new policies........................... 192,889 605,201 500,084 Reinstated policies............................... 2,288 1,514 2,066 Net additions (reductions) to policies............ (1,789) (316,477) 32,921 Additions by dividend............................. 1,421 2,223 2,265 Reduction due to: Death claims.................................... 7,427 6,159 6,974 Expirations and maturities...................... 2,338 2,665 2,770 Surrenders and lapses........................... 279,535 237,307 231,100 Conversions..................................... 17,592 21,801 30,873 ---------- ---------- ---------- In force -- end of year........................... 2,864,095 2,976,178 2,951,649 Less reinsurance ceded.......................... 438,775 453,025 287,980 ---------- ---------- ---------- Net retained in force -- end of year.............. $2,425,320 $2,523,153 $2,663,669 ---------- ---------- ---------- ---------- ---------- ----------
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, for the purpose of building private residences in Las Vegas, Nevada. In 1994, sales revenues of $30,220,000 were recognized on 228 completed sales contracts. Income before taxes attributable to real estate operations was $2,189,000 in 1994. At December 31, 1994, Perma-Bilt owned land at a cost of approximately $10 million with a capacity to develop a further 1,100 units. 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 -- Casualty Loss Development" on pages 36 and 37, the table setting forth statutory loss and loss adjustment expense development by accident year on page 8 and the table setting forth the reconciliation of changes in the liabilities for losses and loss adjustment expenses included in Note 14 -- "Loss and Loss Adjustment Expense Reserves" on page 52 of the 1994 Annual Report to Stockholders, all of which are hereby incorporated by reference. These tables show the development of loss and loss adjustment expense liabilities as 6 originally estimated under generally accepted accounting principles at December 31 of each year presented, as well as the development of statutory 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 44 through 46 of the 1994 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 compromises and releases for claim settlements to expedite this process. Workers' compensation loss and loss development trends in California were unfavorable in 1992, a year which saw the culmination of an increasing amount of fraud and abuse in the California workers' compensation system. Legislative reform of the California workers' compensation system was enacted in 1993. In addition, Zenith undertook significant additional expenditures on the loss adjustment process in recent years with a view to mitigating the effect of adverse claim trends, particularly the effect of fraud and abuse. In 1994, the one year loss development on reserves showed favorable development of $12,944,000. The one year development on reserves for unpaid losses and loss adjustment expenses in 1993 and 1992 showed unfavorable development of $4,704,000 and $13,502,000, due principally to development of prior year reserves for unpaid loss adjustment expenses caused by increased expenditures on the loss adjustment process. 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 $4,051,000, $4,657,000 and $5,177,000 in 1994, 1993 and 1992, respectively. Such unfavorable development 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. Losses attributable to the Northridge earthquake in 1994 were $3,200,000, of which $800,000 was assessed by the California Fair Plan. 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 policies written by CalFarm Insurance contain exclusion clauses for damages resulting from pollution, and such losses are thereby substantially excluded 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. 7 CalFarm Insurance maintains three claims and 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 ASSUMED Zenith expects that, on the average, its Reinsurance reserves will be paid in approximately 6-7 years. Zenith's Reinsurance reserves constitute approximately 21% of its total reserves, net of reinsurance, for property and casualty unpaid losses and loss adjustment expenses at December 31, 1994, reflecting the longer average life of such reserves relative to Zenith's 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. The one year development of Reinsurance reserves showed favorable development of $827,000 in 1994 and $290,000 in 1993 and adverse development of $1,255,000 in 1992. Losses attributable to the Northridge earthquake in 1994 were $9,300,000. In 1992, Zenith Insurance incurred losses of approximately $9,800,000 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 29 and 30 of Zenith's 1994 Annual Report to Stockholders which is hereby incorporated by reference). At December 31, 1994 the investment portfolios of Zenith and the P&C Companies consisted primarily of taxable bonds and short-term investments supplemented by smaller portfolios of redeemable and other preferred stocks and common stocks. At December 31, 1994 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 8.0 years; the portfolio of all companies excluding CalFarm Life had an average life of 2.5 years; and the portfolio of CalFarm Life had an average life of 12.8 years. Investment income by segment is set forth in Note 15 -- "Segment Information" on pages 52 and 53 of the 1994 Annual Report to Stockholders which note is hereby incorporated by reference. Stockholders' equity will fluctuate as interest rates fluctuate due to the implementation of Statement of Financial Accounting Standards No. 115 -- Accounting for Investments in Certain Debt and Equity Securities. In accordance with its provisions, Zenith has identified certain securities, amounting to approximately 66% of the investments in debt securities at December 31, 1994, as available-for-sale. In 1994 stockholders' equity decreased by $58.5 million, net of limited deferred tax benefits, as a result of changes in the fair values of such investments. 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 its policyholders 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 $21,801,000, $22,457,000 and $22,231,000 in 1994, 1993 and 1992, respectively or 4.6%, 4.6% and 4.8% of earned premiums in 1994, 1993 and 1992, respectively. Reinsurance reserves amounted to $47,332,000, $44,552,000 and $32,701,000 in 1994, 1993 and 1992, respectively, or 9.4%, 8.7% and 6.6% of gross reserves for unpaid losses and loss adjustment expenses in 1994, 1993 and 1992, 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 1994 were as follows: Zenith Insurance -- Workers' Compensation reinsurance covered all claims between $550,000 and $100,000,000 per occurrence. The coverage from $550,000 to $5,000,000 is placed with General Reinsurance Corporation, the coverage from $5,000,000 to $10,000,000 with Employers Reinsurance Corporation and the remaining three layers from $10,000,000 to $60,000,000 primarily with Prudential Reinsurance Company, NAC Reinsurance Corporation, Transatlantic Reinsurance Company, The St. Paul Companies 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's Reinsurance division did not purchase any reinsurance protection on its assumed business in the three years ended December 31, 1994. 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 and commercial property lines of business, 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 $5,000,000 per occurrence, subject to a retention of $500,000. This reinsurance coverage is all placed with General Reinsurance Corporation. CalFarm Insurance has property catastrophe reinsurance that provides for recovery of losses of 95% of $20,000,000, excess of a retention of $5,000,000, for which the lead reinsurer is General Reinsurance Corporation. In addition, CalFarm Insurance has property catastrophe reinsurance for the recovery of fire related losses of 95% of $5,000,000, excess of a retention of $25,000,000 and for earthquake and fire following earthquake related losses of 95% of $10,000,000 in excess of a retention of $30,000,000. CalFarm Insurance participates in a quota share contract whereby it 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 for commercial lines and up to $5,000,000 for personal lines ceded to General Reinsurance Corporation. Facultative reinsurance is placed on property coverage in excess of $4,000,000 on all property lines, and on umbrella limits in excess of $10,000,000 for commercial lines and $5,000,000 for personal lines. Facultative reinsurance is used 9 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. CalFarm Life -- Yearly renewable term insurance treaties are maintained with seven life insurers, through which CalFarm Life ceded 16% of its ordinary life insurance in force as of year end 1994 and 1993. 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. 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 206 agents who sell insurance products exclusively for CalFarm Insurance and CalFarm Life, primarily in rural and suburban areas. These agents operate out of 118 offices throughout the State of California, including 32 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 general agent and approximately 670 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 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 68,000 member families in 56 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 68,000 member families, approximately 64% 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 41% of Farm Bureau members (and CalFarm Insurance and CalFarm Life insureds) are non-farmers and over 62% of CalFarm Insurance and CalFarm Life premium volume is generated by non-farm business. Total revenues in CalFarm 10 Insurance and CalFarm Life attributable to sales that were sponsored by the Farm Bureau constituted approximately 25%, 26% and 27% of Zenith's total consolidated revenues for the years 1994, 1993 and 1992, 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 1994, 1993 and 1992. 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 STATES' DEPARTMENTS OF INSURANCE Insurance companies are primarily subject to regulation and supervision by the Department of Insurance in the state in which they are domiciled. Zenith's insurance subsidiaries are primarily subject to regulation and supervision by the California Department of Insurance, except for Zenith Star which is primarily subject to regulation and supervision in the State of Texas. These states have broad regulatory, supervisory and administrative powers. Such 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. In California, Zenith Insurance, CalFarm Insurance and ZNAT Insurance are required, with respect to their workers' compensation line of business, to maintain on deposit investments meeting specified standards that have an aggregate market value equal to the companies' loss 11 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. 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 and Texas Departments of Insurance, and with other states in which they are licensed to transact business, and their businesses and accounts are subject to periodic examination by such agencies, usually at three year intervals. Zenith Insurance, CalFarm Insurance, ZNAT Insurance and CalFarm Life Insurance, were examined by the California Department of Insurance as of December 31, 1990, and the report on such examination contained no material findings. The triennial examination of these companies as of December 31, 1993 is not yet complete. Zenith Star was examined by the Texas Department of Insurance as of June 30, 1994 and the results of 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. 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 and 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, 1994, adjusted capital under the RBC regulations was 450% and 427% of the RBC control, or required, level of capital under the regulations for the Zenith Insurance Group (consisting of Zenith Insurance, CalFarm Insurance, ZNAT Insurance and Zenith Star) and CalFarm Life, respectively. 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 1994 IRIS results for the Zenith Insurance Group showed no results outside the "normal range" for such ratios, as such range is determined by the NAIC. At December 31, 1994 two such ratios for CalFarm Life were considered outside the "normal range", "change in premium" and "change in reserving ratio", primarily because of the decrease in universal life and annuity deposits in 1994 as compared to 1993. In 1995, the NAIC approved an actuarial guideline for determining minimum statutory reserves for annuity policies for life insurance companies. This guideline is effective in 1995 and requires an increase to statutory reserves which will defer the recognition of statutory profits to future periods. The guideline allows CalFarm Life to seek approval from the California Department of Insurance to 12 increase current reserves over a three year phase-in period. Management is currently evaluating alternatives to minimize the impact of this guideline on CalFarm Life. Under a three year phase-in period, preliminary estimates indicate the maximum increase to statutory reserves will not exceed $10 million each year and implementation is not expected to adversely affect CalFarm Life's capital ratios or operations. INSURANCE HOLDING COMPANY SYSTEM REGULATORY ACT Zenith's insurance subsidiaries are also subject to the California and Texas Insurance Holding Company System Regulatory Acts ("Holding Company Acts"), which contain certain reporting requirements, including the requirement that such subsidiaries file information relating to capital structure, ownership, financial condition and general business operation, and limit dividend payments and material transactions by Zenith's insurance subsidiaries. See "Liquidity and Inflation" under "Management's Discussion and Analysis of Consolidated Financial Condition and Result of Operations" on pages 32 and 33 of Zenith's 1994 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. 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 63% of Zenith's property and casualty earned premiums in 1994. ITEM 2. PROPERTIES Zenith Insurance owns a 120,000 square foot office facility in Woodland Hills, California 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, lease offices in various cities. See Note 9 of the Notes to Consolidated Financial Statements of Zenith on page 50 of the 1994 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 leases and occupies, 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 1994 1993 - ------------------------------------------------------------ ------- ------- First High...................................................... 24 1/4 29 1/4 Low....................................................... 20 3/4 19 5/8 Second High...................................................... 25 1/2 27 1/4 Low....................................................... 20 5/8 23 1/4 Third High...................................................... 27 3/8 29 1/8 Low....................................................... 22 23 1/2 Fourth High...................................................... 24 1/2 28 3/4 Low....................................................... 20 3/4 21 1/4
As of March 23, 1995, there were 456 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 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 March 17, 1994...................... $.25 cash per share April 29, 1994 May 13, 1994 May 25, 1994........................ $.25 cash per share July 29, 1994 August 12, 1994 September 7, 1994................... $.25 cash per share October 31, 1994 November 14, 1994 December 6, 1994.................... $.25 cash per share January 31, 1995 February 15, 1995
The Holding Company Acts limit 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 or Texas 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 net investment income in the case of Zenith Star, and 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 1994, Zenith Insurance paid dividends of $15,000,000 to Zenith. During 1995, Zenith Insurance and CalFarm Life will be able to pay $25,643,000 and $9,512,000, respectively, in dividends to Zenith without prior approval. In addition, in 1995, CalFarm Insurance, ZNAT Insurance and Zenith Star, together, can pay $7,328,000 to Zenith Insurance which would be available to Zenith in 1996. ITEM 6. SELECTED FINANCIAL DATA. The five-year summary of selected financial information and accompanying notes, included in Zenith's 1994 Annual Report to Stockholders on pages 34 and 35, 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 1994 Annual Report to Stockholders on pages 25 to 33 is hereby incorporated by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Reference is made to pages 36 and 37 of Zenith's 1994 Annual Report to Stockholders for information setting forth the loss and loss adjustment expense liability development for 1984 through 1994 and page 8 of Zenith's 1994 Annual Report to Stockholders for incurred loss and loss adjustment expense development for 1989 through 1994, and to the consolidated financial statements and notes thereto on pages 38 to 54 of Zenith's 1994 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 "Compliance with Section 16(a) of the Exchange Act" and "Election of Directors" in the Proxy Statement in connection with Zenith's 1995 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 57 Chairman of the Board, President (1) Annual 1977 Fredricka Taubitz 51 Executive Vice President and Annual 1985 Chief Financial Officer (1) James P. Ross 48 Senior Vice President and Actuary (1) Annual 1978 John J. Tickner 56 Senior Vice President and Secretary (1) Annual 1985 Keith E. Trotman 58 Senior Vice President (2) Annual 1988 Philip R. Hunt 52 Senior Vice President (2) Annual 1988 - ------------------------ (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 "Directors' Compensation," "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," and "Compensation Committee Interlocks and Insider Participation" 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, "Investment in Delta Life" 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 1994 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, 1994 and 1993 Consolidated Statement of Operations for the years ended December 31, 1994, 1993 and 1992 Consolidated Statement of Cash Flows for the years ended December 31, 1994, 1993 and 1992 Consolidated Statement of Stockholders' Equity for the years ended December 31, 1994, 1993 and 1992 Notes to Consolidated Financial Statements Table setting forth incurred loss and loss adjustment expense development on a statutory basis on page 8 of the 1994 Annual Report to Stockholders 2.FINANCIAL STATEMENT SCHEDULES Zenith National Insurance Corp. and Subsidiaries As of December 31, 1994. I -- Summary of Investments -- Other Than Investments in Related Parties For the years ended December 31, 1994, 1993 and 1992. III -- Supplementary Insurance Information IV -- Reinsurance Zenith National Insurance Corp. As of December 31, 1994 and 1993 and for the years ended December 31, 1994, 1993 and 1992. II -- Condensed Financial Information of Registrant Property and Casualty Loss Developments on pages 36 and 37 and on page 8 of the 1994 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 February 8, 1995, between Zenith and Fredricka Taubitz. *10.7 Employment Agreement, dated February 16, 1995, between Zenith and John J. Tickner. *10.8 Employment Agreement, dated February 2, 1995, between Zenith and Stanley R. Zax. *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 Credit Agreement, dated as of December 15, 1994 between Zenith and Sanwa Bank of California. 10.11 Revolving Note Agreement, dated September 30, 1994, between Zenith and City National Bank. 10.12 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.) 10.13 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.) 10.14 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.) 10.15 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.) 10.16 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.)
19 10.17 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.) 10.18 Agreement of Reinsurance No. 7832 between General Reinsurance Corporation and CalFarm Insurance, Zenith Insurance and ZNAT Insurance, effective September 1, 1993. (Incorporated herein by reference to Exhibit 10.21 to Zenith's Annual Report on Form 10K for the year ended December 31, 1993.) 10.19 Agreement of Reinsurance No. 623-0005 between American Re-Insurance Company and CalFarm Insurance, Zenith Insurance and ZNAT Insurance, effective September 1, 1993. (Incorporated herein by reference to Exhibit 10.22 to Zenith's Annual Report on Form 10K for the year ended December 31, 1993.) 10.20 Agreement of Reinsurance No. 0079460 between Employers Reinsurance Corporation and CalFarm Insurance, Zenith Insurance and ZNAT Insurance, effective September 1, 1993. (Incorporated herein by reference to Exhibit 10.23 to Zenith's Annual Report on Form 10K for the year ended December 31, 1993.) 10.21 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.) 10.22 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.) 10.23 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.) 10.24 Excess Major Medical Reinsurance Agreement (No. 0076820/Specific and Aggregate Retentions) between CalFarm Life Insurance Company and Employers Reinsurance Corporation, effective January 1, 1993. (Incorporated herein by reference to Exhibit 10.27 to Zenith's Annual Report on Form 10K for the year ended December 31, 1993.) 10.25 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.) 10.26 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.) 10.27 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.)
20 11 Computation of Earnings Per Share for the three (3) years ended December 31, 1994 13 Zenith's Annual Report to Stockholders for the year ended December 31, 1994, 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 L.L.P., dated March 24, 1995. (Incorporated herein by reference to page F-1 of this Annual Report on Form 10-K). 27 Financial Data Schedule 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, 1994 for the Zenith Investment Partnership 401(k) Plan. - ------------------------ *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 24, 1995. 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 24, 1995. 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 1, 1995 on our audits of the consolidated financial statements and financial statement schedules of Zenith National Insurance Corp. and subsidiaries as of December 31, 1994 and 1993, and for each of the three years in the period ended December 31, 1994, which is included in this Annual Report on Form 10-K. COOPERS & LYBRAND L.L.P. Los Angeles, California March 24, 1995 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, 1994 and 1993, and for each of the three years in the period ended December 31, 1994, which financial statements are included on pages 38 through 53 of the Company's 1994 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 audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. 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, 1994 and 1993, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, 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 and its method of accounting for income taxes in 1992. COOPERS & LYBRAND L.L.P. Los Angeles, California February 1, 1995 F-2 SCHEDULE I -- SUMMARY OF INVESTMENTS -- OTHER THAN INVESTMENTS IN RELATED PARTIES ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES DECEMBER 31, 1994
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.................... $ 569,519 $ 534,075 $ 537,283 Public utilities.............................. 93,473 88,962 91,531 Industrial and miscellaneous.................. 593,212 573,162 577,410 Redeemable preferred stocks..................... 18,918 18,405 18,405 ---------- ---------- --------------- Total fixed maturities.................... 1,275,122 1,214,604 1,224,629 ---------- ---------- --------------- Equity securities Floating rate preferred stocks.................. 19,618 18,506 18,506 Convertible and nonredeemable preferred stocks........................................ 8,684 8,153 8,153 Common stocks, industrial....................... 19,628 19,355 19,355 ---------- ---------- --------------- Total equity securities................... 47,930 46,014 46,014 ---------- ---------- --------------- Mortgage loans on real estate..................... 3,503 3,503 3,503 Policy loans...................................... 41,753 41,753 41,753 Short-term investments............................ 127,594 127,594 127,594 Other investments................................. 19,496 19,496 19,496 ---------- ---------- --------------- Total investments......................... $1,515,398 $1,452,964 $ 1,462,989 ---------- ---------- --------------- ---------- ---------- ---------------
F-3 SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT ZENITH NATIONAL INSURANCE CORP. BALANCE SHEET ASSETS
DECEMBER 31, ---------------------------- 1994 1993 ------------ ------------ Investments Common stocks, at market (cost $606,000, 1994 and $607,000, 1993)....................... $ 424,000 $ 637,000 Short-term investments (at cost which approximates market).............................. 2,129,000 14,996,000 Cash...................................................................................... 2,334,000 1,869,000 Investment in subsidiaries (Note A)....................................................... 373,323,000 405,982,000 Federal income taxes receivable (Note A).................................................. 764,000 Other assets.............................................................................. 14,974,000 13,716,000 ------------ ------------ Total assets...................................................................... $393,948,000 $437,200,000 ------------ ------------ ------------ ------------ LIABILITIES Senior notes payable, less unamortized discount of $889,000, 1994 and $1,011,000, 1993.... $ 74,111,000 $ 73,989,000 Cash dividends payable to stockholders.................................................... 4,736,000 4,711,000 Federal income taxes payable.............................................................. 3,925,000 Other liabilities......................................................................... 5,241,000 5,110,000 ------------ ------------ Total liabilities................................................................. 84,088,000 87,735,000 ------------ ------------ STOCKHOLDERS' EQUITY Preferred stock, $1 par--shares authorized 1,000,000; issued and outstanding, none in 1994 and 1993................................................................................ Common stock, $1 par--shares authorized 50,000,000; issued 24,034,000, outstanding 18,950,000, 1994; issued 23,910,000, outstanding 18,841,000, 1993....................... 24,034,000 23,910,000 Additional paid-in capital................................................................ 251,363,000 249,092,000 Retained earnings......................................................................... 167,025,000 148,043,000 Net unrealized appreciation (depreciation) on investments net of $3,969,000 deferred tax benefit in 1994 and $7,093,000 deferred tax expense in 1993............................. (47,460,000) 13,176,000 ------------ ------------ 394,962,000 434,221,000 Less treasury stock at cost (5,084,000 shares, 1994 and 5,069,000 shares, 1993)........... (85,102,000) (84,756,000) ------------ ------------ Total stockholders' equity........................................................ 309,860,000 349,465,000 ------------ ------------ Total liabilities and stockholders' equity........................................ $393,948,000 $437,200,000 ------------ ------------ ------------ ------------
See notes to condensed financial information. F-4 SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT ZENITH NATIONAL INSURANCE CORP. STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, ---------------------------------------------- 1994 1993 1992 ------------ ------------- ------------- Investment income, net of expenses of $7,000, 1994, $51,000, 1993 and $51,000, 1992........................................................................... $ 457,000 $ 492,000 $ 852,000 Realized gains (losses) on investments.......................................... 11,000 895,000 (1,447,000) Lawsuit settlement.............................................................. 1,910,000 7,561,000 ------------ ------------- ------------- Total revenue................................................................... 2,378,000 8,948,000 (595,000) Operating expense............................................................... 4,059,000 3,478,000 3,222,000 Interest expense................................................................ 5,937,000 6,658,000 6,472,000 ------------ ------------- ------------- Loss from operations before federal income tax benefit, equity in net income of subsidiaries, extraordinary item and cumulative effect of accounting change... (7,618,000) (1,188,000) (10,289,000) Federal income tax benefit...................................................... 2,678,000 516,000 3,128,000 ------------ ------------- ------------- Loss from operations before equity in net income of subsidiaries, extraordinary item and cumulative effect of accounting change............................... (4,940,000) (672,000) (7,161,000) 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 subsidiaries (Note A)................................... 42,840,000 53,872,000 37,403,000 ------------ ------------- ------------- Net income...................................................................... $ 37,900,000 $ 53,200,000 $ 28,700,000 ------------ ------------- ------------- ------------ ------------- -------------
See notes to condensed financial information. F-5 SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT ZENITH NATIONAL INSURANCE CORP. STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, ----------------------------------------------- 1994 1993 1992 ------------- ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Investment income received.................................................... $ 477,000 $ 485,000 $ 846,000 Recovery from lawsuit settlement.............................................. 6,036,000 4,094,000 Operating expenses paid....................................................... (4,099,000) (3,309,000) (3,674,000) Interest paid................................................................. (5,842,000) (6,552,000) (6,073,000) Income taxes (paid) refunded.................................................. (1,471,000) 8,524,000 1,206,000 ------------- ------------- ------------- Net cash flows from operating activities.................................... (4,899,000) 3,242,000 (7,695,000) CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of investments: Other debt and equity securities and other investments...................... (2,597,000) Proceeds from sales of investments: Other debt and equity securities and other investments...................... 4,243,000 1,219,000 Net change in short-term investments.......................................... 12,867,000 (7,264,000) (7,716,000) Cash received from note receivable............................................ 2,300,000 500,000 ------------- ------------- ------------- Net cash flows from investing activities.................................... 12,867,000 (721,000) (8,594,000) CASH FLOWS FROM FINANCING ACTIVITIES: Cash received from bank line of credit........................................ 2,100,000 1,000,000 6,350,000 Cash paid on bank line of credit.............................................. (2,100,000) (1,000,000) (40,150,000) Cash dividends paid to common stockholders.................................... (18,894,000) (19,018,000) (18,927,000) Retirement of Senior Notes payable............................................ (17,740,000) Net proceeds from issuance of Senior Notes payable 2002....................... 73,787,000 Proceeds from exercise of stock options....................................... 2,093,000 6,261,000 4,526,000 Purchase of treasury shares................................................... (346,000) (7,367,000) (5,686,000) Dividends received from subsidiaries.......................................... 15,000,000 25,000,000 15,000,000 Capital contribution to subsidiary............................................ (250,000) Loan to subsidiary............................................................ (5,356,000) (7,538,000) ------------- ------------- ------------- Net cash flows from financing activities.................................... (7,503,000) (2,912,000) 17,160,000 Net increase (decrease) in cash................................................. 465,000 (391,000) 871,000 Cash at beginning of year....................................................... 1,869,000 2,260,000 1,389,000 ------------- ------------- ------------- Cash at end of year............................................................. $ 2,334,000 $ 1,869,000 $ 2,260,000 ------------- ------------- ------------- ------------- ------------- ------------- RECONCILIATION OF NET INCOME TO NET CASH FLOWS FROM OPERATING ACTIVITIES: Net income.................................................................... $ 37,900,000 $ 53,200,000 $ 28,700,000 Net income of subsidiaries.................................................... (42,840,000) (53,872,000) (37,403,000) Realized (gains)/losses on investments........................................ (11,000) (895,000) 1,447,000 Amortization of discount and issue costs on senior notes...................... 122,000 121,000 1,822,000 Federal income taxes.......................................................... (4,149,000) 8,007,000 (2,433,000) Decrease (increase) in receivable from lawsuit settlement..................... 3,467,000 (3,467,000) Other......................................................................... 612,000 148,000 172,000 ------------- ------------- ------------- Net cash flow from operating activities..................................... $ (4,899,000) $ 3,242,000 $ (7,695,000) ------------- ------------- ------------- ------------- ------------- -------------
See notes to condensed financial information. F-6 SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT ZENITH NATIONAL INSURANCE CORP. NOTES TO CONDENSED FINANCIAL INFORMATION The accompanying condensed financial statements 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 subsidiaries of $42,840,000 in 1994, $53,872,000 in 1993 and $37,403,000 in 1992 is net of a provision for federal income tax expense of $22,349,000 in 1994, $20,795,000 in 1993 and $3,498,000 in 1992. Zenith has formulated tax allocation procedures with its subsidiaries and the 1994, 1993 and 1992 condensed financial information reflect Zenith's portion of the consolidated taxes. Zenith Insurance Company paid dividends to Zenith of $15,000,000 in 1994, $25,000,000 in 1993 and $15,000,000 in 1992. CalFarm Insurance Company paid a dividend of $5,000,000 to Zenith Insurance Company in 1992. F-7 SCHEDULE III -- 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 - ------------------------------ ------------ ------------- ------------ ------------ ------------ ----------- 1994 - ------------------------------ Property and Casualty Workers' compensation....... $ 4,430,000 $264,665,000 $34,123,000 $216,030,000 Automobile and other property/casualty......... 12,598,000 95,951,000 72,645,000 149,757,000 Reinsurance................. 1,478,000 96,430,000 10,491,000 36,138,000 ------------ ------------- ------------ ------------ ------------ ----------- 18,506,000 457,046,000 117,259,000 401,925,000 $37,573,000 Health and Life............... 90,553,000 159,252,000 4,608,000 $ 6,054,000 61,270,000 60,012,000 Reinsurance ceded............. 47,923,000 Registrant.................... 457,000 ------------ ------------- ------------ ------------ ------------ ----------- Total....................... $109,059,000 $664,221,000 $121,867,000 $ 6,054,000 $463,195,000 $98,042,000 ------------ ------------- ------------ ------------ ------------ ----------- ------------ ------------- ------------ ------------ ------------ ----------- 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 ------------ ------------- ------------ ------------ ------------ ----------- ------------ ------------- ------------ ------------ ------------ ----------- 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 - ------------------------------ ------------- ------------ ----------- ------------ 1994 - ------------------------------ Property and Casualty Workers' compensation....... $129,352,000 $ 32,336,000 $24,779,000 $218,044,000 Automobile and other property/casualty......... 108,534,000 28,727,000 19,436,000 154,187,000 Reinsurance................. 25,571,000 6,135,000 110,000 39,674,000 ------------- ------------ ----------- ------------ 263,457,000 67,198,000 44,325,000 411,905,000 Health and Life............... 80,104,000 7,917,000 18,402,000 Reinsurance ceded............. Registrant.................... 4,059,000 ------------- ------------ ----------- ------------ Total....................... $343,561,000 $ 75,115,000 $66,786,000 $411,905,000 ------------- ------------ ----------- ------------ ------------- ------------ ----------- ------------ 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 ------------- ------------ ----------- ------------ ------------- ------------ ----------- ------------
F-8 SCHEDULE IV -- 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, 1994 Life insurance in force................................ $2,864,095,000 $438,775,000 $2,425,320,000 -------------- ------------ -------------- -------------- ------------ -------------- Premiums earned Life insurance....................................... $ 24,647,000 $ 280,000 $ 24,367,000 Accident and health insurance........................ 37,393,000 490,000 36,903,000 Property and casualty insurance...................... 385,169,000 21,031,000 37,787,000 401,925,000 9.4% -------------- ------------ ----------- -------------- ---------- Total premiums earned............................ $ 447,209,000 $ 21,801,000 $37,787,000 $ 463,195,000 8.2% -------------- ------------ ----------- -------------- ---------- -------------- ------------ ----------- -------------- ---------- 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% -------------- ------------ ----------- -------------- ---------- -------------- ------------ ----------- -------------- ----------
F-9 [LOGO] - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ EXHIBITS TO FORM 10-K/A ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994 ------------------------ ZENITH NATIONAL INSURANCE CORP. (Exact name of registrant as specified in its charter) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- EXHIBIT LIST
EXHIBIT NUMBER DESCRIPTION - --------- -------------------------------------------------------------------------------------- 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).
EXHIBIT NUMBER DESCRIPTION - --------- -------------------------------------------------------------------------------------- (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 February 8, 1995, between Zenith and Fredricka Taubitz. *10.7 Employment Agreement, dated February 16, 1995, between Zenith and John J. Tickner. *10.8 Employment Agreement, dated February 2, 1995, between Zenith and Stanley R. Zax. *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 Credit Agreement, dated as of December 15, 1994 between Zenith and Sanwa Bank of California. 10.11 Revolving Note Agreement, dated September 30, 1994, between Zenith and City National Bank. 10.12 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.) 10.13 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.) 10.14 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.) 10.15 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.) 10.16 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.) 10.17 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.)
EXHIBIT NUMBER DESCRIPTION - --------- -------------------------------------------------------------------------------------- 10.18 Agreement of Reinsurance No. 7832 between General Reinsurance Corporation and CalFarm Insurance, Zenith Insurance and ZNAT Insurance, effective September 1, 1993. (Incorporated herein by reference to Exhibit 10.21 to Zenith's Annual Report on Form 10K for the year ended December 31, 1993.) 10.19 Agreement of Reinsurance No. 623-0005 between American Re-Insurance Company and CalFarm Insurance, Zenith Insurance and ZNAT Insurance, effective September 1, 1993. (Incorporated herein by reference to Exhibit 10.22 to Zenith's Annual Report on Form 10K for the year ended December 31, 1993.) 10.20 Agreement of Reinsurance No. 0079460 between Employers Reinsurance Corporation and CalFarm Insurance, Zenith Insurance and ZNAT Insurance, effective September 1, 1993. (Incorporated herein by reference to Exhibit 10.23 to Zenith's Annual Report on Form 10K for the year ended December 31, 1993.) 10.21 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.) 10.22 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.) 10.23 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.) 10.24 Excess Major Medical Reinsurance Agreement (No. 0076820/Specific and Aggregate Retentions) between CalFarm Life Insurance Company and Employers Reinsurance Corporation, effective January 1, 1993. (Incorporated herein by reference to Exhibit 10.27 to Zenith's Annual Report on Form 10K for the year ended December 31, 1993.) 10.25 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.) 10.26 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.) 10.27 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, 1994. 13 Zenith's Annual Report to Stockholders for the year ended December 31, 1994, 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.
EXHIBIT NUMBER DESCRIPTION - --------- -------------------------------------------------------------------------------------- 23 Consent of Coopers & Lybrand L.L.P., dated March 24, 1995. (Incorporated herein by reference to page F-1 of this Annual Report on Form 10-K). 27 Financial Data Schedule. 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, 1994 for the Zenith Investment Partnership 401(k) Plan. - ------------------------ *Management contract or compensatory plan or arrangement
EX-10.6 2 EMPLOYMENT AGREEMENT FOLIO 1-13 Execution Copy EMPLOYMENT AGREEMENT This Employment Agreement ("Agreement") is entered into effective as of the 6th day of December, 1994 ("Effective Date"), on this 8th day of February, 1995 between ZENITH NATIONAL INSURANCE CORP., a Delaware corporation (hereinafter referred to as "Company"), and FREDRICKA TAUBITZ (hereinafter referred to as "Employee"). WHEREAS, Employee is presently employed as Executive Vice President and Chief Financial Officer of Zenith National Insurance Corp. pursuant to a written Employment Agreement originally effective as of October 1, 1985 for a term of five years, which agreement was extended and modified pursuant to a written Employment Agreement dated as of February 28, 1990 for a term of five years expiring on October 1, 1995; and WHEREAS, Company and Employee deem it in their respective best interests to extend the term of said Employment Agreement at the present time and modify certain other provisions thereof; NOW, THEREFORE, it is AGREED as follows: 1. EMPLOYMENT. (a) Subject to earlier termination as provided herein, the Employee is employed as Executive Vice President and Chief Financial Officer of the Company from the Effective Date through the Term of this Agreement (as defined below). In this capacity the Employee shall devote her full business time and energy to the business, affairs and interests of the Company and matters related thereto. During the Term of the Agreement, the Employee shall have no other employment other than with a subsidiary of the Company, except with the prior written approval of the Board of Directors of the Company (the "Board"). The Employee shall have such duties and responsibilities and such executive power and authority as is customary for an officer in her position and as shall be allocated to her in such capacity and such other duties and responsibilities as the Board or the President of the Company shall designate that are not inconsistent with the Employee's position with the Company. Without limiting the foregoing, the Employee shall have such duties and responsibilities with respect to any subsidiaries of the Company as may be requested by the Board, including (without limitation) as Executive Vice President of Zenith Insurance Company, a wholly owned subsidiary of the Company. The Company hereby acknowledges and agrees that the Employee shall have the right to serve in any capacity with civic, educational, charitable and professional organizations and to make and manage personal business investments that do not violate the noncompetition provisions of Section 11 of this Agreement so long as such activities do not interfere with the discharge of her duties to the Company hereunder. (b) During her employment hereunder, the Employee shall report to the Company's Chief Executive Officer. (c) The Company agrees to reappoint the Employee to the board of directors of CalFarm Insurance Company ("CalFarm"), which appointment shall continue throughout the Employee's period of employment hereunder; provided, however, that the Company's obligation to make such appointment shall expire on the date the Company ceases to own a controlling interest in CalFarm. If elected, the Employee agrees to serve on the board of CalFarm so long as the Company owns a controlling interest in CalFarm. (d) The Employee shall not be required to relocate outside of Southern California in order to perform the services hereunder, without the Employee's consent, except for travel reasonably required in the performance of her duties hereunder. 2. TERM. This Agreement shall be in effect for a term commencing on the Effective Date and expiring on October 1, 1998 ("Expiration Date"), and such period shall be referred to herein as the "Term" of this Agreement, and such Term shall not be affected by a termination of employment as elsewhere provided herein. 3. SALARY. Effective as of the Effective Date, Employee shall be paid the sum of Three Hundred and Sixty-Five Thousand Dollars per year, subject to such other increases as the Board of Directors of Company may from time to time determine ("Base Salary"). 4. BONUSES. In addition to the Base Salary, Employee shall be a participant in the Executive Officers Bonus Plan of the Company. 5. DEFERRED COMPENSATION. In advance of the annual period for which earned, the Employee shall have the right to defer all or any portion of her salary and bonus to a specified date or event. Any such deferred compensation shall not be forfeitable and shall bear interest at a rate to be determined by the Board. Any election to defer compensation shall be disregarded, and any compensation so deferred shall be added back, in the calculation of those of Employee's rights and benefits under this Agreement that are based upon Employee's salary or bonus or the sum thereof. 6. PARTICIPATION IN RETIREMENT AND EMPLOYEE BENEFIT PLANS. During her employment hereunder, the Employee shall be entitled to participate in any plan 2 of the Company relating to stock options, stock purchases, pension, thrift, profit sharing, life insurance, medical coverage, disability insurance, education, and other retirement or employee benefits that the Company has adopted or may adopt for the benefit of its executive employees, and the Company shall provide the Employee with such insurance or other provisions for indemnification, defense or hold-harmless of officers that are generally in effect for other senior executive officers of the Company. Notwithstanding the foregoing, nothing contained in this Agreement shall prohibit or limit the right of the Company to discontinue, modify or amend any plan or benefit in its absolute discretion at any time; provided, however, that any such discontinuance, modification or amendment shall apply to employees of the Company generally, or to a defined group of such employees and shall not apply solely to the Employee. 7. FRINGE BENEFITS; AUTOMOBILE. In addition to the benefit plans referred to in Section 6 hereof, the Employee shall be entitled to participate in any other fringe benefits that are now or may be or become applicable to the Company's executive employees, including the payment of reasonable expenses for attending annual and periodic meetings of trade associations, and any other benefits that are commensurate with the duties and responsibilities to be performed by the Employee under this Agreement and reimbursement for reasonable expenses incurred in the course of her duties hereunder in accordance with the Company's policy with respect thereto. In addition, the Company shall provide the Employee with a deluxe car or car allowance of her choice. The benefits provided under this Section 7 shall cease upon the Employee's Date of Termination (as defined below). 8. VACATION; CLUB MEMBERSHIPS. During her employment hereunder, the Employee shall be entitled to an annual paid vacation in accordance with the Company's standard employment practices of at least four weeks per year or such longer period as the Board may approve (prorated on a daily basis for any period that is less than one calendar year). Up to four weeks of accrued vacation time that is not used in a calendar year may be carried over into the following calendar year. Upon termination of the Employee's employment for any reason, the Employee shall be entitled to payment for any accrued but unused vacation time based upon her then current salary. The time of paid vacations shall be scheduled in a reasonable manner by the Employee. During her employment hereunder, the Employee shall be entitled to appropriate professional association and business club memberships, including reimbursement of payment of dues and assessments pertaining thereto. 9. TERMINATION. (a) DISABILITY. If, as a result of the Employee's incapacity due to physical or mental illness, injury or similar incapacity, she shall have been absent from the full-time performance of her duties with the Company for six 3 months within any eighteen-month period, her employment may be terminated by written notice (as provided below) from the Company for "Disability". (b) CAUSE. Subject to the notice provisions set forth below, the Company may terminate the Employee's employment for "Cause" at any time. Termination for "Cause" shall mean termination upon (1) the continued willful failure by the Employee to substantially perform her duties with the Company or her other willful breach of this Agreement (other than any such failure or breach resulting from her incapacity due to physical or mental illness, injury or similar incapacity) after a written demand for substantial performance is delivered to her by the Board, which demand specifically identifies the manner in which the Board believes that she has failed to substantially perform her duties, or has otherwise breached this Agreement, (2) the Employee's conviction of a felony, (3) the Employee's willful misconduct that is materially and demonstrably injurious to the Company or (4) the violation by the Employee of Section 11 hereof; provided, however, that the Employee shall not be terminated for "Cause" unless and until the Board has given the Employee reasonable notice of its intended actions and the alleged events or activities giving rise thereto and with respect to those events or activities for which a cure is possible, a reasonable opportunity to cure such breach and there shall have been delivered to her a copy of a resolution duly adopted by the Board regarding such actions. (c) CONSTRUCTIVE TERMINATION. If at any time during the Term of this Agreement, any of the following events shall occur, the Employee shall be entitled to terminate her employment hereunder and be treated as if her employment had been terminated by the Company other than for Cause: (i) Mr. Stanley R. Zax ceases to be full-time Chairman of the Board and President of the Company other than by reason of death or disability; (ii) The Employee is removed or otherwise prohibited or restricted in the performance of her duties as set forth in Section 1 hereof; (iii) Any payment due under this Agreement shall remain unpaid for more than 60 days; (iv) A Change in Control of the Company (as defined below) shall occur during the Term of this Agreement and, within 180 days after the effective date of any such Change in Control, the Employee delivers to the Company a written notice of her election to terminate the Agreement effective as of the date set forth in such notice, which effective date shall not be less than 30 days nor more than 90 days after the date 4 of delivery of such written notice. For purposes of this paragraph, a Change in Control shall mean either (i) a merger or consolidation of the Company with or into another company in which the Company does not survive; or (ii) an assignment of this Agreement by the Company under the provisions of Section 12(b) hereof; or (iii) the sale of all or substantially all of the Company's assets; or (iv) a change in the identities of a majority of the members of the Board within a one-year period or less; or (v) any other transaction that would require a party or affiliated group of parties to obtain approval from or require such transactions to be presented for approval by, the California Insurance Commissioner (assuming there is no preemption of California insurance laws by federal law). (d) NOTICE OF TERMINATION. Any purported termination of the Employee's employment by the Company or by her shall be communicated by a written notice ("Notice of Termination") that shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Employee's employment under the provision so indicated. (e) DATE OF TERMINATION, ETC. "Date of Termination" shall mean (1) if the Employee's employment is terminated by her death, the date of her death; (2) if the Employee's employment is terminated for Disability, thirty days after Notice of Termination is given; (3) if the Employee's employment is terminated for Cause, the date specified in the Notice of Termination, which shall not be less than thirty days from the date such Notice of Termination is given; and (4) if the Employee's employment is terminated for any other reason, the date specified in the Notice of Termination. 10. COMPENSATION UPON TERMINATION OR DURING DISABILITY. The Employee shall be entitled to the following benefits during a period of disability, or upon termination of her employment, as the case may be, if such period or termination occurs during the Term of this Agreement: (a) During any period that the Employee fails to perform her full-time duties with the Company as a result of incapacity due to physical or mental illness, injury or similar incapacity, she shall continue to receive her compensation and other benefits payable to her under this Agreement at the rate in effect at the commencement of any such period, together with all compensation payable to her under the Company's disability plan or program or other similar plan during such period, until her employment is terminated pursuant to Section 9(a) hereof. Thereafter, or in the event the Employee's employment shall be terminated by reason of her death, her benefits shall be determined under the Company's retirement, insurance and other compensation 5 programs then in effect in accordance with the terms of such programs, and the Company shall have no further obligations to her under this Agreement. (b) If at any time the Employee's employment shall be terminated (i) by reason of her death, (ii) by the Company for Cause or Disability or (iii) by her (other than by reason of a constructive termination pursuant to Section 9(c) hereof), the Company shall pay her (or her appropriate payee, as determined in accordance with Section 12 (c) hereof) her full base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given, plus all other amounts to which she is entitled under any compensation plan of the Company at the time such payments are due, and the Company shall have no further obligations to her under this Agreement. In addition, in the event the Employee's employment is terminated by reason of the Employee's death or Disability, the Employee (or her appropriate payee) shall be entitled to receive a pro rata portion of any bonus that would otherwise have been payable to the Employee with respect to the year in which the Employee's employment is terminated. For purposes of this provision, if the Employee's bonus for such year has not been determined, the Employee shall be deemed to have been entitled to a bonus equal to the highest annual bonus paid or payable to the Employee during the three consecutive years immediately preceding her termination. (c) If the Employee's employment should be terminated by the Company other than for Cause or Disability or by the Employee by reason of a constructive termination pursuant to Section 9(c) hereof, she shall be entitled to the benefits provided below ("Severance Payments"): (i) The Company shall pay to the Employee her full base salary through the Date of Termination, at the rate in effect at the time Notice of Termination is given, plus all other amounts to which she is entitled under any compensation plan of the Company, in each case at the time such payments are due; (ii) Company shall pay to Employee a cash lump sum payment, no later than the fifteenth day following the effective date of the Notice of Termination, equal to the greater of (a) two times the sum of (x) her Base Salary at the rate in effect as of the effective date of the Notice of Termination and (y) the highest annual bonus paid or payable to Employee during the three consecutive years immediately preceding her termination of employment, or (b) the "actuarial equivalent" of all Base Salary and bonus payments that would have been payable to Employee pursuant to Paragraphs 3 and 4 of this Agreement had Employee continued to be employed through the Expiration Date (the "Severance Period"), assuming, for 6 purposes of this Paragraph, that the annual bonus payable to Employee pursuant to Paragraph 4 of this Agreement for each year of such remaining term is equal to the highest annual bonus paid or payable to Employee during the three consecutive years immediately preceding her termination of employment. For purposes of this subparagraph 10(c)(ii), "actuarial equivalent" shall be determined by an actuary selected by Company, subject to approval by Employee, and calculated in accordance with the actuarial assumptions used by the Pension Benefit Guaranty Corporation to value liabilities for pension plans terminating as of the effective date of Employee's or Company's Notice of Termination; (iii) All stock option rights, stock appreciation rights, and any and all other similar rights theretofore granted to the Employee, including, but not limited to, the Employee's right to receive cash in lieu of exercising stock options, as may be provided in her stock option agreements, shall vest and shall then be exercisable in full, and the Employee shall have 90 days following her termination within which to exercise any and all such rights and the restrictions on any and all shares of restricted stock granted to the Employee that are outstanding on the Date of Termination shall lapse as of the Date of Termination; (iv) During the Severance Period the Company shall, at its cost, arrange to provide the Employee with life, disability, dental, accident and group health insurance benefits substantially similar to those that she was receiving immediately prior to the Notice of Termination plus an additional amount necessary to reimburse the Employee for any taxes imposed solely by reason of her receipt of such benefits following her termination of employment. Notwithstanding the foregoing, the Company shall not provide any benefit otherwise receivable by the Employee pursuant to this subparagraph if an equivalent benefit is actually received by her at any time during the Severance Period and any such benefit actually received by her shall be reported to the Company. (d) The Company shall continue in effect for the benefit of the Employee all insurance or other provisions for indemnification, defense or hold- harmless of officers or directors of the Company that are in effect on the date the Notice of Termination is sent to the Employee or the Company with respect to all of her acts and omissions while an officer or director as fully and completely as if such termination had not occurred, and until the final expiration or running of all 7 periods of limitation against actions that may be applicable to such acts or omissions. (e) The Employee shall have the right to terminate her employment under this Agreement upon thirty (30) days notice to the Company without liability to the Company for damages incurred solely by reason of such termination. (f) Nothwithstanding anything to the contrary in this Agreement, in the event that Employee becomes entitled to the Severance Payments, if any of the Severance Payments will be subject to the tax (the "Excise Tax") imposed by section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), Company shall pay to Employee an additional amount (the "Gross-Up Payment") such that the net amount retained by Employee, after deduction of any Excise Tax on the Total Payments (as hereinafter defined) and any federal, state and local income and other tax and Excise Tax upon the payment provided for by this Paragraph 10(f), shall be equal to the Total Payments. For purposes of determining whether any of the Total Payments will be subject to the Excise Tax and the amount of such Excise Tax, (i) any other payments or benefits received or to be received by Employee in connection with a Change in Control or Employee's termination of employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with Company, any person whose actions result in a change in control or any person affiliated with Company or such person (which, together with Severance Payments, shall constitute "Total Payments"), shall be treated as "parachute payments" within the meaning of section 280G(b)(2) of the Code, and all "excess parachute payments" within the meaning of section 280G(b)(1) shall be treated as subject to the Excise Tax, unless in the opinion of tax counsel selected by Company's independent auditors and acceptable to Employee, such other payments or benefits (in whole or in part) do not constitute parachute payments, or such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered within the meaning of section 280G(b)(4) of the Code in excess of the base amount, within the meaning of section 280G(b)(3) of the Code, or are otherwise not subject to the Excise Tax, (ii) the amount of the Total Payments which shall be treated as subject to the Excise Tax shall be equal to the lesser of (A) the total amount of the Total Payments or (B) the amount of excess parachute payments within the meaning of section 280G(b)(1) (after applying clause (i), above), and (iii) the value of any non-cash benefits or any deferred payment or benefit shall be determined by Company's independent auditors in accordance with the principles of sections 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, Employee shall be deemed to pay federal income taxes at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of Employee's 8 residence on the date of termination of employment, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes. In the event that the Excise Tax is subsequently determined to be less than the amount taken into account hereunder at the time of termination of Employee's employment, Employee shall repay to Company, at the time that the amount of such reduction in Excise Tax is finally determined, the portion of the Gross-Up Payment attributable to such reduction (plus that portion of the Gross- Up Payment attributable to the Excise Tax and federal, state and local income tax imposed on the Gross-Up Payment being repaid by the Employee to the extent that such repayment results in a reduction in Excise Tax and/or a federal, state or local income tax deduction) plus interest on the amount of such repayment at the rate provided in section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is determined to exceed the amount taken into account hereunder at the time of the termination of Employee's employment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), Company shall make an additional Gross-Up Payment in respect of such excess (plus any interest, penalties or additions payable by the Employee with respect to such excess) at the time that the amount of such excess is finally determined. 11. DISCLOSURE OF INFORMATION. (a) Employee acknowledges that the list of Company's customers, as they may exist from time to time, and Company's trade secrets and other confidential information are valuable, special and unique assets of Company's business. Employee will not, during or after the Term of Employment, disclose to any person, firm, corporation, association, or any other entity or use for her own benefit, any list of Company's customers, or any part thereof, or any of Company's trade secrets or other confidential information, for any reason or purpose whatsoever. (b) Employee agrees that upon leaving the employ of Company she will deliver to Company and not keep or deliver to anyone else, any and all memoranda, specifications, documents and in general any and all material relating to Company's business that she may have under her possession or control. (c) Employee recognizes that she will possess confidential information about other employees of Company relating to their education, experience, skills, abilities, compensation and benefits, and interpersonal relationships with customers of Company. The Employee recognizes that the information she will possess about these other employees is not generally known, is of substantial value to Company in developing its products and in securing and retaining customers, and will be acquired by her because of her business position with Company. Employee agrees that, during the period ending on the last day of the one-year period following her termination of 9 employment, she will not, directly or indirectly, solicit or recruit any employee of Company for the purpose of being employed by her, or any business, individual, partner, firm, corporation or other entity that is then in competition with Company ("Competitor") on whose behalf she is acting as an agent, representative or employee. The Employee further agrees that she will not convey any such confidential information or trade secrets about other employees of Company to anyone affiliated with her or to any Competitor. (d) Employee further acknowledges that the remedy at law for any breach by her of the covenants contained in Paragraphs 11(a) and (b) will be inadequate and that in the event of a breach, or threatened breach, by Employee of the covenants contained therein, Company shall be entitled to an injunction restraining Employee from using, for her own benefit, and/or from disclosing, in whole or in part, the list of Company's customers, and/or Company's trade secrets or other confidential information, and/or from rendering any services to any person, firm, corporation, association or other entity to whom such a list, and/or such trade secrets or other confidential information, in whole or in part, have been disclosed, or are threatened to be disclosed and such other declaratory relief as is proper to cause Employee to return to Company any and all memoranda, specifications, documents and all other material relating to Company's business that she may have under her possession or control. Nothing herein shall be construed as prohibiting Employee from pursuing professional employment or investments utilizing her own skills and knowledge or Company from pursuing any other remedies available to Company from such breach or threatened breach, including the recovery of damages from Employee. The provisions of this Paragraph 11 shall survive the expiration or termination, for any reason, of this Agreement and of Employee's employment. 12. ASSIGNMENTS/MITIGATION. (a) This Agreement and the rights, interest and benefits hereunder are personal to the Employee and shall not be assigned, transferred, pledged, or hypothecated in any way by the Employee, and shall not be subject to execution, attachment or similar process. Any attempted assignment, transfer, pledge, or hypothecation, or the levy of any execution, attachment or similar process thereon, shall be null and void and without effect. (b) The Company shall have the right to assign this Agreement and to delegate all of its rights, duties and obligations hereunder, whether in whole or in part, to any parent, affiliate, successor, or subsidiary organization of the Company or corporation with which the Company may merge or consolidate or which acquires by purchase or otherwise all or substantially all of the Company's consolidated assets, but such assignment shall not release the Company from its obligations under this Agreement, and in the event of any such assignment by the Company, the Employee may, at her sole option, exercise her termination rights under the provisions of Section 9(c)(iv) of this Agreement. 10 (c) This Agreement shall inure to the benefit of and be enforceable by the Employee and her personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Employee should die while any amount would still be payable to her hereunder had she continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to her devisee, legatee or other designee or, if there is no such designee, to her estate. (d) The Employee shall have no duty to mitigate the Company's obligations hereunder by seeking other employment or by becoming self-employed; provided, however, that life, disability, dental, accident, group health insurance and other health and welfare benefits received by the Employee during or with respect to the Severance Period and attributable to services rendered during such period by the Employee to persons or entities other than the Company shall be applied to reduce the Company's obligation to provide such benefits hereunder. Not less frequently than annually (by the end of the month of the month next following the month in which the Effective Date occurs), the Employee shall account to the Company as to the amount of such benefits; if the Company has paid amounts in excess of those to which the Employee was entitled (after giving effect to the offsets provided above), the Employee shall reimburse the Company promptly thereafter for such excess. 13. NOTICE. Notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or five business days after being mailed by United States certified or registered mail, return receipt requested, postage prepaid, addressed (a) if to the Employee, to P. O. Box 2001, La Jolla, California 92038 and (b) if to the Company, to 21255 Califa Street, Woodland Hills, California 91367, Attention: Stanley R. Zax, with a copy to the Secretary of the Company; or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt thereof. 14. SECTION HEADINGS. The Section headings used in this Agreement are included solely for convenience and shall not affect, or be used in connection with, the interpretation of this Agreement. 15. SEVERABILITY. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof. 11 16. COUNTERPARTS. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 17. ARBITRATION. Any dispute or controversy arising under or in connection with this Agreement (other than an action for injuctive relief pursuant to Section 11 hereof) shall be settled exclusively by arbitration, conducted before a panel of three arbitrators in Los Angeles, California in accordance with the rules of the American Arbitration Association then in effect. Such arbitrators shall only have jurisdiction to award contract damages. Judgment may be entered on the arbitrators' award in any court having jurisdiction. The Employee, if prevailing, shall be entitled to reimbursement of all of her reasonable expenses in arbitration, including reasonable attorneys' fees. In the event of a good faith dispute regarding the payment of salary or benefits under this Agreement, the Company shall make the disputed payments to the Employee as if such dispute did not exist during the pendency of such good faith dispute, and, following the resolution of such dispute, the Employee shall reimburse the Company for any overpayments. 18. LEGAL FEES. The Company agrees to reimburse the Employee for all reasonable legal fees and other reasonable expenses incurred in connection with the negotiation and preparation of this Agreement. 19. COMPANY PROPERTY. The Employee agrees that at the time she leaves the employment of the Company she will deliver to the Company, and will not keep or deliver to anyone else, all notebooks, memoranda, documents, computer discs, and any and all other material relating to the Company's business or constituting the Company's property, whether or not the Employee was the author or recipient of such material. 20. MISCELLANEOUS. (a) No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Employee and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. (b) This instrument contains the entire agreement of the parties hereto relating to the subject matter hereof and it replaces and supersedes all prior agreements and understandings, oral and written, between the parties hereto. No agreements or representations, oral or otherwise, express or implied, 12 with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. (c) The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of California without regard to its conflicts of law principles. (d) All references to Sections of the Exchange Act or the Code shall be deemed also to refer to any successor provisions to such Sections. (e) Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law. (f) The obligations created under the provisions of Sections 5, 8, 10, 11, 12, 17, 18 and 19 shall survive the expiration, suspension or termination, for any reason, of this Agreement or the Employee's employment hereunder until such obligations created thereunder are fully satisfied. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. ZENITH NATIONAL INSURANCE CORP. By: /s/ Stanley R. Zax ----------------------------- STANLEY R. ZAX, Chairman EMPLOYEE: /s/ Fredricka Taubitz -------------------------------- FREDRICKA TAUBITZ 13 EX-10.7 3 EMPLOYMENT AGREEMENT FOLIO 1-12 JOHN J. TICKNER EMPLOYMENT AGREEMENT This EMPLOYMENT AGREEMENT (the "Agreement") is dated effective as of February 16, 1995 (the "Effective Date), between ZENITH NATIONAL INSURANCE CORP., a Delaware corporation (the "Company"), and JOHN J. TICKNER (the "Employee"); WHEREAS, the parties desire to enter into this Agreement setting forth the terms and conditions for the employment relationships of the Employee with the Company. NOW, THEREFORE, it is AGREED as follows: 1. EMPLOYMENT. (a) Subject to earlier termination as provided herein, the Employee is employed as a Senior Vice President and Secretary of the Company, and Senior Vice President, General Counsel and Secretary of its insurance subsidiaries from the Effective Date through the Term of this Agreement (as defined below). In this capacity the Employee shall devote his full business time and energy to the business, affairs and interests of the Company and matters related thereto. During the Term of this Agreement, the Employee shall have no other employment other than with a subsidiary of the Company, except with the prior written approval of the Board of Directors of the Company (the "Board"). The Employee shall have such duties and responsibilities and such executive power and authority as is customary for an officer in his position and as shall be allocated to him in such capacity and such other duties and responsibilities as the Board or the President of the Company shall designate that are not inconsistent with the Employee's position with the Company. (b) During his employment hereunder, the Employee shall report to the Company's Chief Executive Officer. 2. TERM. This Agreement shall be in effect for a term commencing on the Effective Date and expiring on October 1, 1998, and such period shall be referred to herein as the "Term" of this Agreement, and such Term shall not be affected by the termination of the Employee's employment hereunder. 3. SALARY. Commencing as of the Effective Date, the Company shall pay the employee an annual base salary at the minimum rate of $242,000, which shall be payable in installments in conformity with the Company's policy relating to salaried employees. The Employee's base salary may be sub- ject to annual adjustment (but not below the then current amount) in the sole discretion of the Board. 4. DISCRETIONARY BONUSES. During the Term of this Agreement, the Employee shall be entitled to such discretionary bonuses as may be authorized, declared, and paid by the Board in its sole discretion. 5. PARTICIPATION IN RETIREMENT AND EMPLOYEE BENEFIT PLANS. During his employment hereunder, the Employee shall be entitled to participate in any plan of the Company relating to stock options, stock purchases, pension, thrift, profit sharing, life insurance, medical coverage, disability insurance, education, and other retirement or employee benefits that the Company has adopted or may adopt for the benefit of its executive employees, and the Company shall provide the Employee with such insurance or other provisions for indemnification, defense or hold-harmless of officers that are generally in effect for other senior executive officers of the Company. Notwithstanding the foregoing, nothing contained in this Agreement shall prohibit or limit the right of the Company to discontinue, modify or amend any plan or benefit in its absolute discretion at any time; provided, however, that any such discontinuance, modification or amendment shall apply to employees of the Company generally, or to a defined group of such employees and shall not apply solely to the Employee. 6. FRINGE BENEFITS; AUTOMOBILE. In addition to the benefit plans referred to in Section 5 hereof, the Employee shall be entitled to participate in any other fringe benefits that are now or may be or become applicable to the Company's executive employees, and any other benefits that are commensurate with the duties and responsibilities to be performed by the Employee under this Agreement and reimbursement for reasonable expenses incurred in the course of his duties hereunder in accordance with the Company's policy with respect thereto. In addition, the Company shall provide Employee with a Company-leased vehicle. The benefits provided under this Section 6 shall cease upon the Employee's Date of Termination (as defined below). 7. VACATION. During his employment hereunder, the Employee shall be entitled to an annual paid vacation in accordance with the Company's standard employment practices of at least four weeks per year or such longer period as the Board may approve (pro-rated on a daily basis for any period that is less than one calendar year). Up to four weeks of accrued vacation time that is not used in a calendar year may be carried over into the following calendar year. Upon termination of the Employee's employment for any reason, the Employee shall be entitled to payment for any accrued but unused vacation time based upon his then current salary. 2 The timing of paid vacations shall be scheduled in a reasonable manner by the Employee. 8. TERMINATION. (a). DISABILITY. If, as a result of the Employee's incapacity due to physical or mental illness, injury or similar incapacity, he shall have been absent from the full-time performance of his duties with the Company for six months within any eighteen-month period, his employment may be terminated by written notice (as provided below) from the Company for "Disability." (b) CAUSE. Subject to the notice provisions set forth below, the Company may terminate the Employee's employment for "Cause" at any time. Termination for "Cause" shall mean termination upon (1) the continued willful failure by the Employee to substantially perform his duties with the Company or his other willful breach of this Agreement (other than any such failure or breach resulting from his incapacity due to the physical or mental illness, injury or similar incapacity) after a written demand for substantial performance is delivered to him by the Board, which demand specifically identifies the manner in which the Board believes that he has failed to substantially perform his duties, or has otherwise breached this Agreement, (2) the Employee's conviction of a felony, (3) the Employee's willful misconduct that is materially and demonstrably injurious to the Company, or (4) the violation by the Employee of Section 10 hereof; provided, however, that the Employee shall not be terminated for "Cause" unless and until the Board has given the Employee reasonable notice of its intended actions and the alleged events or activities giving rise thereto and with respect to those events or activities for which a cure is possible, a reasonable opportunity to cure such breach and there shall have been delivered to him a copy of a resolution duly adopted by the Board regarding such action. (c) CONSTRUCTIVE TERMINATION. If at any time during the Term of this Agreement, any of the following events shall occur, the Employee shall be entitled to terminate his employment hereunder and be treated as if his employment had been terminated by the Company other than for Cause: (i) Mr. Stanley R. Zax ceases to be full-time Chairman of the Board and President of the Company other than by reason of death or disability; (ii) The Employee is removed or otherwise prohibited or restricted in the performance of his duties as set forth in Section 1 hereof; 3 (iii) Any payment due under this Agreement shall remain unpaid for more than 60 days; (iv) A Change in Control of the Company (as defined below) shall occur during the Term of his Agreement, and within 180 days after the effective date of any such Change in Control, the Employee delivers to the Company a written notice of his election to terminate the Agreement effective as of the date set forth in such notice, which effective date shall not be less than 30 days nor more than 90 days after the date of delivery of any such written notice. For purposes of this paragraph, a Change in Control shall mean either (i) a merger or consolidation of the Company with or into another company in which the Company does not survive; or (ii) an assignment of this Agreement by the Company under the provisions of Section 11(b) hereof; or (iii) the sale of all or substantially all of the Company's assets; or (iv) a change in the identities of a majority of the members of the Board within a one-year period or less; or (v) any other transaction that would require a party or affiliated group of parties to obtain approval from, or require such transactions to be presented for approval by, the California Insurance Commissioner (assuming there is no preemption of California insurance laws by federal law). (d) NOTICE OF TERMINATION. Any purported termination of the Employee's employment by the Company of by him shall be communicated by a written notice ("Notice of Termination") that shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Employee's employment under the provision so indicated. (e) DATE OF TERMINATION, ETC. "Date of Termination" shall mean (1) if the Employee's employment is terminated by his death, the date of his death; (2) if the Employee's employment is terminated for Disability, thirty days after Notice of Termination is given; (3) if the Employee's employment is terminated for Cause, the date specified in the Notice of Termination, which shall not be less than thirty days from the date such Notice of Termination is given; and (4) if the Employee's employment is terminated for any other reason, the date specified in the Notice of Termination. 9. COMPENSATION UPON TERMINATION OR DURING DISABILITY. The Employee shall be entitled to the following benefits during a period of disability, or upon termination of his employment, as the case may be, if such period or termination occurs during the Term of this Agreement: 4 (a) During any period that the Employee fails to perform his full- time duties with the Company as a result of incapacity due to physical or mental illness, injury or similar incapacity, he shall continue to receive his compensation and other benefits payable to him under this Agreement at the rate in effect at the commencement of any such period, together with all compensation payable to him under the Company's disability plan or program or other similar plan during such period, until his employment is terminated pursuant to Section 8(a) hereof. Thereafter, or in the event the Employee's employment shall be terminated by reason of his death, his benefits shall be determined under the Company's retirement, insurance and other compensation programs then in effect in accordance with the terms of such programs, and the Company shall have no further obligations to him under this Agreement. (b) If at any time the Employee's employment shall be terminated (i) by reason of his death, (ii) by the Company for Cause or Disability, or (iii) by him (other than by reason of a constructive termination pursuant to Section 8(c) hereof), the Company shall pay him (or his appropriate payee, as determined in accordance with Section 11(c) hereof) his full base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given, plus all other amounts to which he is entitled under any compensation plan of the Company at the time such payments are due, and the Company shall have no further obligations to him under this Agreement. In addition, in the event the Employee's employment is terminated by reason of the Employee's death or Disability, the Employee (or his appropriate payee) shall be entitled to receive a pro rata portion of any bonus that would otherwise have been payable to the Employee with respect to the year in which the Employee's employment is terminated. For purposes of this provision, if the Employee's bonus for such year has not been determined, the Employee shall be deemed to have been entitled to a bonus equal to the bonus paid or payable to the Employee with respect to the immediately preceding year. (c) If the Employee's employment should be terminated by the Company other than for Cause or Disability or by the Employee by reason of a constructive termination pursuant to Section 8(c) hereof, he shall be entitled to the benefits provided below: (i) The Company shall pay to the Employee his full base salary through the Date of Termination, at the rate in effect at the time Notice of Termination is given, plus all other amounts to which he is entitled under any compensation plan of the Company, in each case at the time such payments are due; 5 (ii) The Company shall pay the Employee, at the time such payments would have been made had the Employee's employment not been terminated hereunder, all salary payments that would have been payable to the Employee pursuant to this Agreement had the Employee continued to be employed for the greater of (x) the remaining Term of this Agreement, or (y) one year (the "Severance Period") (assuming for the purpose of such continuing payments that the Employee's salary for each year of such period is equal to his salary at the Date of Termination), plus a pro rata portion of any bonus that would otherwise have been payable to the Employee with respect to the year in which the Employee's employment is terminated; provided, however, that if the Employee's bonus for such year has not been determined, the Employee shall be deemed to have been entitled to a bonus equal to the bonus paid or payable to the Employee with respect to the immediately preceding year; (iii) All stock option rights, stock appreciation rights, and any and all other similar rights theretofore granted to the Employee, including, but not limited to, the Employee's right to receive cash in lieu of exercising stock options, as may be provided in his stock option agreements, shall vest and shall then be exercisable in full, and the Employee shall have 90 days following his termination within which to exercise any and all such rights and the restrictions on any and all shares of restricted stock granted to the Employee that are outstanding on the Date of Termination shall lapse as of the Date of Termination; (iv) During the Severance Period the Company shall, at its cost, arrange to provide the Employee with life, disability, dental, accident and group health insurance benefits substantially similar to those that he was receiving immediately prior to the Notice of Termination plus an additional amount necessary to reimburse the Employee for any taxes imposed solely by reason of his receipt of such benefits following his termination of employment. Notwithstanding the foregoing, the Company shall not provide any benefit otherwise receivable by the Employee pursuant to this subparagraph if an equivalent benefits is actually received by him at any time during the Severance Period and any such benefit actually received by him shall be reported to the Company. (d) The Company shall continue in effect for the benefit of the employee all insurance or other provisions for the indemnification, defense of hold-harmless of officers or directors of the Company that are in effect on the date the Notice of Termination is sent to the Employee or the Company with respect to all of his acts and omissions while an officer or director as fully and completely as if such termination had not occurred, and until the final expi- 6 ration or running of all periods of limitation against actions that may be applicable to such acts or omissions. (e) The Employee shall have the right to terminate his employment under this Agreement upon thirty (30) days notice to the Company without liability to the Company for damages incurred solely by reason of such termination. (f) Notwithstanding anything to the contrary in this Agreement, in the event that, in the opinion of counsel for the Company, it is more likely than not that any payment or benefit under this Agreement or under any other plan or agreement would not be deemed to be deductible in whole or in part in the calculation of the federal income tax of the Company, or of any other person making such payment or providing such benefit, by reason of Section 280G of the Internal Revenue Code of 1986, including the rules and regulations promulgated thereunder, as amended from time to time and including any successor legislation thereto (the "Code"), the aggregate payments and benefits provided by this Agreement shall be reduced (if necessary, to zero) (with the cash payments provided by this Agreement being the first reduced) to the minimum extent necessary so that no portion of such aggregate payments and benefits is not deductible for federal income tax purposes by reason of Section 280G of the Code. The Company shall hold such portions not paid to the Employee in escrow. At the end of each calendar quarter during the term of such escrow, the Company shall deposit into escrow an amount equal to interest accrued during such calendar quarter on the amount held in escrow during such calendar quarter at a rate equal to the rate than payable on judgments in California. If it shall be determined at any point in time, by counsel selected by the Company and the Employee, that it is more likely than not that the payment to the Employee of any or all of such amount held in escrow would be deductible for tax purposes, such amount shall be paid out of escrow to the Employee. In the event of a final determination by the Internal Revenue Service or of an arbitration aware pursuant to Section 16 hereof, that any such amount held in escrow would not be deductible for tax purposes under the then applicable provisions of the Code if paid to the Employee, or if it shall be determined at any point in time, by counsel selected by the company and the Employee, that it is more likely than not that the payment to the Employee of any such amount held in escrow would not be deductible for tax purposes under the then applicable provisions of the Code, such amount shall be paid out of escrow to the Company. For purposes of this Subsection 9(f),(i) the value of any non-cash benefits or any deferred or contingent payment or benefit shall be determined by the company's independent public accountants in accordance with the principles of Section 280G of the Code, (ii) no payment or benefit not constituting, in the opinion of such accountants, a "parachute payment" within 7 the meaning of Section 280G of the code shall be included in determining the aggregate amount of such payments and benefits, and (iii) no payment or benefit the receipt or enjoyment of which has been waived in writing by the Employee shall be included in determining the aggregate amount of such payments and benefits. 10. CONFIDENTIAL INFORMATION AND NON-COMPETITION. (a) During the Term of this Agreement and thereafter, the Employee shall not, except as may be required to perform his duties hereunder or as required by applicable law, disclose to others or use, whether directly or indirectly any Confidential Information regarding the Company. "Confidential Information" shall mean information about the Company, its subsidiaries and affiliates, and their respective clients and customers that is not available to the general public and that was learned by the Employee in the course of his employment by the Company, including (without limitation) any data, formulae, information, proprietary knowledge, trade secrets and client and customer lists and all papers, resumes, records and the documents containing such Confidential Information. The Employee acknowledges that such Confidential Information is specialized, unique in nature and of great value to the company, and that such information gives the Company a competitive advantage. Upon the termination of this employment for any reason whatsoever, the Employee shall promptly deliver to the Company all documents (and all copies thereof) containing any Confidential Information. (b) During the term of his employment hereunder, the Employee shall not, directly or indirectly, without the prior written consent of the Company, provide consultative service (with or without pay) to, own, manage, operate, join, control, participate in, or be connected (as a stockholder, partner, or otherwise) with, any business, individual, partner, form, corporation, or other entity that is then in competition with the Company, any of its subsidiaries or affiliates (a "Competitor of the Company"), PROVIDED, however, that the "beneficial ownership" by the Employee, either individually or as a member of a "group", as such terms are used in Rule 13d of the General Rules and Regulations under the Securities Exchange Act of 9134, as amended (the "Exchange Act"), of not more than one percent (1%) of the voting stock of any publicly held corporation shall not be a violation of this Agreement. It is further expressly agreed that the Company will or would suffer irreparable injury if the Employee were to compete with the Company or any subsidiary or affiliate of the company in violation of this Agreement and that the company would by reason of such competition be entitled to injunctive relief in a court of appropriate jurisdiction, and the Employee further consents and stipulates to the entry of such injunctive relief in 8 such a court prohibiting the Employee from competing with the Company or any subsidiary or affiliate of the Company in violation of this Agreement. (c) During the Term of this Agreement, the Employee shall not directly or indirectly, influence or attempt to influence customers or suppliers of the Company or any of its subsidiaries or affiliates, to divert their business to any Competitor of the Company. (d) The Employee recognizes that he will possess confidential information about other employees of the Company relating to their education, experience, skills, abilities, compensation and benefits, and interpersonal relationships with customers of the Company. The Employee recognizes that the information he will possess about these other employees is not generally known, is of substantial value to the Company in developing its products and in securing and retaining Customers, and will be acquired by him because of his business position with the Company. The Employee agrees that, during the period ending on the last day of the three-year period following his Date of Termination, he will not, directly or indirectly, solicit or recruit any employee of the Company for the purpose of being employed by him, or any Competitor of the Company on whose behalf he is acting as an agent, representative or employee. The Employee further agrees that he will not convey any such confidential information or trade secrets about other employees of the Company to anyone affiliated with him or to any Competitor of the Company. (e) If it is determined by a court of competent jurisdiction in any state or applicable arbitration proceeding in accordance with Section 16, that any restriction in this Section 10 is excessive in duration or scope or is unreasonable or unenforceable under the laws of that state, it is the intention of the parties that such restriction may be modified or amended by the court to render it enforceable to the maximum extent permitted by the law of that state. 11. ASSIGNMENTS/MITIGATION. (a) This Agreement and the rights, interest and benefits hereunder are personal to the Employee and shall not be assigned, transferred, pledged, or hypothecated in any way by the Employee, and shall not be subject to execution, attachment or similar process. Any attempted assignment, transfer, pledge, or hypothecation, or the levy of any execution, attachment or similar process thereon, shall be null and void and without effect. (b) The Company shall have the right to assign this Agreement and to delegate all of its rights, duties and obligations hereunder, whether in whole or in part, to any 9 parent, affiliate, successor or subsidiary organization of the Company or corporation with which the Company may merge or consolidate or which acquires by purchase or otherwise all or substantially all of the Company's consolidated assets, but such assignment shall not release the Company from its obligations under this Agreement, and in the event of any such assignment by the Company, the Employee may, at his sole option, exercise his termination rights under the provisions of Section 8(c)(iv) of this Agreement. (c) This Agreement shall inure to the benefit of and be enforceable by the Employee and his personal or legal representatives, executors, administrators, successors, heirs, distributes, devisees and legatees. If the Employee should die while any amount would still be payable to him hereunder had he continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to his devisee, legatee or other designees, or, if there is no such designee, to his estate. (d) The Employee shall have no duty to mitigate the Company's obligations hereunder by seeking other employment or by becoming self-employed; provided, however, that life, disability, dental, accident, group health insurance and other health and welfare benefits received by the Employee during or with respect to the Severance Period and attributable to services rendered during such period by the Employee to persons or entities other than the Company shall be applied to reduce the Company's obligation to provide such benefits hereunder. Not less frequently than annually (by the end of the month of the month next following the month in which the Effective Date occurs), the Employee shall account to the Company as to the amount of such benefits; if the Company has paid amounts in excess of those to which the Employee was entitled (after giving effect to the offsets provided above), the Employee shall reimburse the Company promptly thereafter for such excess. 12. NOTICE. Notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or five business days after being mailed by United States certified or registered mail, return receipt requested, postage prepaid, addressed (a) if to the Employee, to 3 Dapplegray Road, Bell Canyon, CA 91307, and (b) if to the Company, to 21255 Califa Street, Woodland Hills, CA 91367, Attention: Stanley R. Zax, with a copy to the Secretary of the Company; or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt thereof. 13. SECTION HEADINGS. The Section headings used in this Agreement are included solely for convenience and shall 10 not affect, or be used in connection with, the interpretation of this Agreement. 14. SEVERABILITY. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof. 15. COUNTERPARTS. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 16. ARBITRATION. Any dispute or controversy arising under or in connection with this Agreement (other than an action for injunctive relief pursuant to Section 10 hereof) shall be settled exclusively by arbitration, conducted before a panel of three arbitrators in Los Angeles, California, in accordance with the rules of the American Arbitration Association then in effect. Such arbitrators shall only have jurisdiction to award contract damages. Judgment may be entered on the arbitrator's award in any court having jurisdiction. The prevailing party shall be entitled to reimbursement of all of its reasonable expenses in arbitration, including reasonable attorney's fees. In the event of a good faith dispute regarding the payment of salary or benefits under this Agreement, the Company shall make the disputed payments to the Employee as if such dispute did not exist during the pendency of such good faith dispute, and, following the resolution of such dispute, the Employee shall reimburse the Company for any overpayments. 17. COMPANY PROPERTY. The Employee agrees that at the time he leaves the employment of the Company he will deliver to the Company, and will not keep or deliver to anyone else, all notebooks, memoranda, documents, computer discs, and any and all other material relating to the Company's business or constituting the Company's property, whether or not the Employee was the author or recipient of such material. 18. MISCELLANEOUS. (a) No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Employee and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the time or at any prior or subsequent time. 11 (b) This instrument contains the entire agreement of the parties hereto relating to the subject matter hereof and it replaces and supersedes all prior agreements and understandings, oral and written, between the parties hereto. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. (c) The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of California without regard to its conflicts of law principles. (d) All references to Sections of the Exchange Act or the Code shall be deemed also to refer to any successor provisions to such Sections. (e) Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law. (f) The obligations created under the provisions of Sections 7, 9, 10, 11, 16 and 17 shall survive the expiration, suspension or termination, for any reason, of this Agreement or the Employee's employment hereunder until such obligations created thereunder are fully satisfied. 19. PRIOR AGREEMENT. This Agreement replaces and supercedes the Employment Agreement dated October 1, 1990 between the parties. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. ZENITH NATIONAL INSURANCE CORP. ATTEST: /s/ Fredricka Taubitz By: /s/ Stanley R. Zax - ---------------------- --------------------------- Fredricka Taubitz STANLEY R. ZAX Ass't Secretary Chairman and President EMPLOYEE /s/ John J. Tickner ------------------------------ JOHN J. TICKNER 12 EX-10.8 4 EMPLOYMENT AGREEMENT FOLIO 1-23 Execution Copy EMPLOYMENT AGREEMENT This Employment Agreement ("Agreement") is entered into effective as of the 6th day of December, 1994 ("Effective Date"), on this 2ND day of February, 1995 between ZENITH NATIONAL INSURANCE CORP., a Delaware corporation (hereinafter referred to as "Zenith"), and STANLEY R. ZAX (hereinafter referred to as "Employee"). WHEREAS, Employee is presently employed as Chairman of the Board and President of Zenith Insurance Company, a subsidiary of Zenith, pursuant to a written Employment Agreement originally dated as of December 9, 1981, for a term of five years ending December 8, 1986, which agreement was extended and modified pursuant to a written Employment Agreement dated as of December 5, 1985 for a term of five years ending December 31, 1990, which agreement was extended and modified pursuant to a written Employment Agreement dated as of February 28, 1990 for a term of five years ending December 31, 1995, and is also employed as Chairman of the Board and President of Zenith and certain of its other subsidiaries (Zenith and all of its subsidiaries collectively referred to hereinafter as "Employer"); and WHEREAS, Zenith and Employee deem it in their respective best interests to extend the term of said Employment Agreement at the present time and modify certain other provisions thereof; NOW, THEREFORE, it is agreed as follows: 1. AMENDED AND RESTATED EMPLOYMENT AGREEMENT. The Agreement is hereby amended and restated in its entirety and the term thereof is hereby extended as hereinafter provided. 2. ENGAGEMENT AND DUTIES. During the Term of Employment as defined in Paragraph 3 of this Agreement: 2.1 Employer hereby employs Employee and Employee does hereby agree to be employed by Employer as Chairman of the Board, President, and Chief Executive Officer of Zenith and in such other capacities at Zenith and at each of the corporations which comprise Employer as shall hereafter be agreed upon by Employee, the Board of Directors of Zenith and the boards of directors of such other corporations. 2.2 Employee shall perform the normal duties of such offices and such other executive duties as may from time to time be assigned to him by and in accordance with instructions and directions of the Board of Directors of Zenith. Both Employee and Employer hereby expressly recognize that the services described herein shall be 2 performed to the reasonable satisfaction of the Board of Directors of Zenith. 2.3 Employee shall perform the duties contemplated hereunder at his principal office located in Los Angeles County, California; provided, however, Employee shall travel outside Los Angeles County to the extent he reasonably deems it necessary or appropriate in the performance of his duties hereunder. 2.4 Employee, during the Term of Employment, shall devote his time, attention, energies, skill and best efforts to the performance of his duties for and on behalf of Employer. 3. TERM OF EMPLOYMENT. The term of employment hereunder shall be a period commencing on the Effective Date and terminating December 31, 1998 ("Expiration Date"), unless sooner terminated as elsewhere provided herein ("Term of Employment"). 4. COMPENSATION. As full and complete consideration for the performance of his duties and the rendition of any and all services under this Agreement, Employee shall be compensated as follows: 4.1 Effective as of the Effective Date, Employee shall be paid the sum One Million Dollars ($1,000,000) per 3 year, subject to such other increases as the Board of Directors of Zenith may from time to time determine ("Base Compensation"). 4.2 In addition to the Base Compensation, Employee shall be a participant in the Executive Officer Bonus Plan of Zenith. 4.3 All compensation hereunder shall be paid by Employer, as allocated from time to time among the different corporations which comprise Employer by the Audit Committee of Zenith, and shall comply with all relevant governmental directives, rules and regulations which may be in effect from time to time. All Base Compensation shall be payable ratably twice each month, or more or less often in accordance with the normal payroll practices of Employer. 5. BUSINESS EXPENSES. Employee shall be reimbursed for reasonable and necessary expenses duly incurred in connection with the duties to be performed and the services to be rendered by Employee to Employer under and pursuant to this Agreement, upon submission of itemized expense statements in the manner and at times specified by Employer for officers of Employer. In addition, Employee shall be entitiled to the exclusive full time use of one deluxe automobile of his 4 choice, to be replaced from time to time at Employee's discretion. 6. EMPLOYEE BENEFITS. 6.1 Employee shall be entitled to participate in all employee insurance, retirement and other benefit plans for which he qualifies and which may be in effect from time to time. Notwithstanding the foregoing, nothing contained in this Agreement shall prohibit or limit the right of Employer to discontinue, modify, or amend any plan or benefit in its absolute discretion at any time, provided, however, that any such discontinuance, modification or amendment shall apply to employees of Employer generally, or to a defined group of such employees, and shall not apply solely to Employee. 6.2 Employee shall be entitled each year to a vacation in accordance with standard employment practices, during which time his compensation shall be paid in full. Each vacation shall be taken during a period mutually satisfactory to both Employer and Employee. 7. DEATH DURING EMPLOYMENT. If Employee shall die during the Term of Employment, Employer shall pay the compensation which could otherwise be payable to Employee pursuant to Paragraphs 4.1 and 4.2 of this Agreement, up to the end of the twelfth month following the month in which his death occurred (a) 5 to Employee's spouse, if living, (b) if his spouse is not then living, to his then living issue by right of representation, and (c) if none of the above are then living, to his estate. 8. ACKNOWLEDGMENT OF PECULIAR VALUE OF SERVICES. 8.1 Employee acknowledges that the services which he has agreed to render during the Term of Employment under this Agreement are special, unique, unusual, extraordinary, and of an intellectual character, and therefore are of peculiar value to Employer. 8.2 Employee further acknowledges that because of the character of said services the remedy at law for any breach by him of this Agreement may be enforced by an injunction in a suit in equity, without the necessity of proving actual damage, and that a temporary injunction may be granted immediately upon the commencement of any such suit, and without notice. Nothing herein contained shall be construed as prohibiting Employer from pursuing any other remedies available to Employer from such breach or threatened breach, including the recovery of damages from Employee. 9. DISCLOSURE OF INFORMATION. 9.1 Employee acknowledges that the list of Employer's customers, as they may exist from time to time, 6 and Employer's trade secrets and other confidential information are valuable, special and unique assets of Employer's business. Employee will not, during or after the Term of Employment, disclose to any person, firm, corporation, association, or any other entity or use for his own benefit, any list of Employer's customers, or any part thereof, or any of Employer's trade secrets or other confidential information, for any reason or purpose whatsoever. 9.2 Employee agrees that upon leaving the employ of Employer he will deliver to Employer and not keep or deliver to anyone else, any and all memoranda, specifications, documents and in general any and all material relating to Employer's business that he may have under his possession or control. 9.3 Employee recognizes that he will possess confidential information about other employees of Employer relating to their education, experience, skills, abilities, compensation and benefits, and interpersonal relationships with customers of Employer. The Employee recognizes that the information he will possess about these other employees is not generally known, is of substantial value to Employer in developing its products and in securing and retaining customers, and will be acquired by him because of his business position with Employer. Employee agrees that, 7 during the period ending on the last day of the one-year period following his termination of employment, he will not, directly or indirectly, solicit or recruit any employee of Employer for the purpose of being employed by him, or any business, individual, partner, firm, corporation or other entity that is then in competition with Employer ("Competitor") on whose behalf he is acting as an agent, representative or employee. The Employee further agrees that he will not convey any such confidential information or trade secrets about other employees of Employer to anyone affiliated with him or to any Competitor. 9.4 Employee further acknowledges that the remedy at law for any breach by him of the covenants contained in Paragraphs 9.1 and 9.2 will be inadequate and that in the event of a breach, or threatened breach, by Employee of the covenants contained therein, Employer shall be entitled to an injunction restraining Employee from using, for his own benefit, and/or from disclosing, in whole or in part, the list of Employer's customers, and/or Employer's trade secrets or other confidential information, and/or from rendering any services to any person, firm, corporation, association or other entity to whom such a list, and/or such trade secrets or other confidential information, in whole or in part, have been disclosed, or are threatened to 8 be disclosed and such other declaratory relief as is proper to cause Employee to return to Employer any and all memoranda, specifications, documents and all other material relating to Employer's business that he may have under his possession or control. Nothing herein shall be construed as prohibiting Employer from pursuing any other remedies available to Employer from such breach or threatened breach, including the recovery of damages from Employee. The provisions of this Paragraph 9 shall survive the expiration or termination, for any reason, of this Agreement and of Employee's employment. 10. TERMINATION OF AGREEMENT BY EMPLOYER. Should any of the following events occur, Employer may terminate this Agreement by giving written notice thereof to Employee, which notice shall be effective immediately: (a) Employee is physically or mentally incapacitated for a period of one hundred eighty (180) consecutive days. Employee shall be deemed to be physically or mentally incapacitated if he is unable for any reason whatsoever to devote his full time and efforts to the business of Employer. (b) Employee breaches any of his material obligations under this Agreement. 9 10.1 Should Employer terminate the Term of Employment prior to the Expiration Date pursuant to Paragraph 10(a) hereof, Employer shall thereupon pay to Employee, in complete satisfaction of its obligations under this Agreement, the compensation which would otherwise be payable to him pursuant to Paragraphs 4.1 and 4.2 of this Agreement up to the end of the sixth month following the month in which such termination occurred. Should Employer terminate the Term of Employment prior to the Expiration Date pursuant to Paragraph 10(b) hereof, Employer shall pay to Employee in complete satisfaction of its obligations under this Agreement and without waiving any rights which it or its subsidiaries may have against Employee, the compensation which would otherwise be payable to him pursuant to Paragraph 4.1 of this Agreement up to the end of the month in which such termination occurs and Employer shall not be obligated to make any payments to Employee pursuant to Paragraph 4.2 of the Agreement. 10.2 Subject to the provisions of Paragraph 11.2 hereof, should Employer terminate the Term of Employment prior to the Expiration Date for any reason other than as set forth in Paragraphs 10(a) and 10(b) hereof, Employer shall thereupon pay to Employee, in complete satisfaction of its obligations under this Agreement, the compensation which would otherwise be payable to him pursuant to 10 Paragraphs 4.1 and 4.2 of this Agreement had Employee continued to be employed through the Expiration Date, assuming, for purposes of this Paragraph 10.2, that the annual bonus payable to Employee pursuant to Paragraph 4.2 of this Agreement for each year of the remaining term is equal to the highest annual bonus paid or payable to Employee during the three consecutive years immediately preceding his termination of employment. 11. CHANGE IN CONTROL; TERMINATION OF AGREEMENT BY EMPLOYEE OR EMPLOYER. In the event of a Change in Control (as defined below) at any time during the Term of Employment, all stock option rights, stock appreciation rights, and any and all other similar rights theretofore granted to Employee, including, but not limited to, Employee's right to receive cash in lieu of exercising stock options, as provided in Section 9 of his Stock Option Agreements entered into with Zenith as of December 6, 1985 and December 9, 1987, shall vest and shall then be exercisable in full. 11.1 Employee may, within 180 days after the effective date of any such Change in Control, deliver to Zenith a written notice of his election to terminate the Term of Employment, effective as of a date set forth in said notice, which effective date shall be not less than 11 30 days nor more than 90 days after the date of delivery of such written notice. 11.2 Notwithstanding anything in this Agreement to the contrary, in the event of a Change in Control, should Employee terminate the Term of Employment prior to the Expiration Date pursuant to Paragraph 11.1 hereof, or should Employer terminate the Term of Employment prior to the Expiration Date for any reason other than as set forth in Paragraphs 10(a) and 10(b) hereof, then, effective as of the date set forth in Employee's or Employer's notice to terminate the Term of Employment, Employee shall be entitled to the benefits provided below (hereinafter referred to as "Severance Payments"): (i) Zenith shall pay to Employee his Base Compensation through the effective date of the notice to terminate the Term of Employment, at the rate in effect at the time such notice of termination is given, plus all other amounts to which he is entitled under any compensation plan of Employer, in each case at the time such payments are due; (ii) Zenith shall pay to Employee a cash lump sum payment, no later than the fifteenth day following the effective date of the notice to terminate the Term of Employment, 12 equal to the greater of (a) two times the sum of (x) his Base Compensation at the rate in effect as of the effective date of the notice to terminate the Term of Employment and (y) the highest annual bonus paid or payable to Employee during the three consecutive years immediately preceding his termination of employment, or (b) the "actuarial equivalent" of all Base Compensation and bonus payments that would have been payable to Employee pursuant to Paragraphs 4.1 and 4.2 of this Agreement had Employee continued to be employed through the Expiration Date, assuming, for purposes of this Paragraph, that the annual bonus payable to Employee pursuant to Paragraph 4.2 of this Agreement for each year of such remaining term is equal to the highest annual bonus paid or payable to Employee during the three consecutive years immediately preceding his termination of employment. For purposes of this subparagraph 11.2(ii), "actuarial equivalent" shall be determined by an actuary selected by Zenith, subject to approval by Employee, and calculated in accordance with the actuarial assumptions used by the Pension Benefit Guaranty Corporation to value 13 liabilities for pension plans terminating as of the effective date of Employee's or Employer's notice to terminate the Term of Employment; (iii) During the period beginning as of the effective date of Employee's or Employer's notice to terminate the Term of Employment until the Expiration Date, Zenith shall, at its cost, arrange to provide Employee with life, disability, dental, accident and group health insurance benefits substantially similar to those that he was receiving immediately prior to the effective date of the notice to terminate the Term of Employment plus an additional amount necessary to reimburse Employee for any taxes imposed solely by reason of his receipt of such benefits following his termination of employment. Notwithstanding the foregoing, Zenith shall not provide any benefit otherwise receivable by Employee pursuant to this subparagraph 11.2(iii) if an equivalent benefit actually received by him at any time during the period of coverage, and any such benefit actually received by him shall be reported to Zenith. 14 11.3 For purposes of this Agreement, a Change in Control shall mean either (i) a merger or consolidation of Zenith with or into another company or corporation, other than (a) a merger or consolidation which would result in the voting securities of Zenith outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least 75% of the combined voting power of the voting securities of Zenith or such surviving entity outstanding immediately after such merger or consolidation or (b) a merger or consolidation effected to implement a recapitalization of Zenith (or similar transaction) in which no "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) acquires Zenith more than 50% of the combined voting power of Zenith's then outstanding securities; or (ii) an assignment of this Agreement by Zenith under the provisions of Paragraph 15.2 hereof; or (iii) the sale of all or substantially all of Zenith's assets; or (iv) a change in the identities of a majority of the members of the Board of Directors of Zenith within a one-year period or less; or (v) any other transaction which would require any party or affiliated group of parties to obtain approval from, or require such transactions to be presented for approval by, the California Insurance 15 Commissioner (assuming there is no preemption of California insurance laws by Federal Law). 11.4 Notwithstanding anything to the contrary in this Agreement, in the event that Employee becomes entitled to the Severance Payments, if any of the Severance Payments will be subject to the tax (the "Excise Tax") imposed by section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), Zenith shall pay to Employee an additional amount (the "Gross-Up Payment") such that the net amount retained by Employee, after deduction of any Excise Tax on the Total Payments (as hereinafter defined) and any federal, state and local income and other tax and Excise Tax upon the payment provided for by this Paragraph 11.4, shall be equal to the Total Payments. For purposes of determining whether any of the Total Payments will be subject to the Excise Tax and the amount of such Excise Tax, (i) any other payments or benefits received or to be received by Employee in connection with a Change in Control or Employee's termination of employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with Employer, any person whose actions result in a change in control or any person affiliated with Employer or such person (which, together with Severance Payments, shall constitute "Total Payments"), shall be treated as "parachute payments" within 16 the meaning of section 280G(b)(2) of the Code, and all "excess parachute payments" within the meaning of section 280G(b)(1) shall be treated as subject to the Excise Tax, unless in the opinion of tax counsel selected by Zenith's independent auditors and acceptable to Employee, such other payments or benefits (in whole or in part) do not constitute parachute payments, or such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered within the meaning of section 280G(b)(4) of the Code in excess of the base amount, within the meaning of section 280G(b)(3) of the Code, or are otherwise not subject to the Excise Tax, (ii) the amount of the Total Payments which shall be treated as subject to the Excise Tax shall be equal to the lesser of (A) the total amount of the Total Payments or (B) the amount of excess parachute payments within the meaning of section 280G(b)(1) (after applying clause (i), above), and (iii) the value of any non-cash benefits or any deferred payment or benefit shall be determined by Zenith's independent auditors in accordance with the principles of sections 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, Employee shall be deemed to pay federal income taxes at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state 17 and local income taxes at the highest marginal rate of taxation in the state and locality of Employee's residence on the date of termination of employment, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes. In the event that the Excise Tax is subsequently determined to be less than the amount taken into account hereunder at the time of termination of Employee's employment, Employee shall repay to Zenith, at the time that the amount of such reduction in Excise Tax is finally determined, the portion of the Gross-Up Payment attributable to such reduction (plus that portion of the Gross-Up Payment attributable to the Excise Tax and federal, state and local income tax imposed on the Gross-Up Payment being repaid by the Executive to the extent that such repayment results in a reduction in Excise Tax and/or a federal, state or local income tax deduction) plus interest on the amount of such repayment at the rate provided in section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is determined to exceed the amount taken into account hereunder at the time of the termination of Employee's employment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), Zenith shall make an additional Gross-Up Payment in respect of such excess (plus any interest, penalties or additions 18 payable by the Executive with respect to such excess) at the time that the amount of such excess is finally determined. 11.5 The payments provided for in Paragraphs 11.2 (other than subparagraph 11.2(iii)) and 11.4 hereof shall be made not later than the fifth day following the date of termination of employment, provided, however, that if the amounts of such payments cannot be finally determined on or before such day, Zenith shall pay to Employee on such day an estimate, as determined in good faith by Zenith, of the minimum amount of such payments to which Employee is clearly entitled and shall pay the remainder of such payments (together with interest at the rate provided in section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined but in no event later than the thirtieth (30th) day after the date of termination of employment. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by Zenith to Employee, payable on the fifth (5th) business day after demand by Zenith (together with interest at the rate provided in section 1274(b)(2)(B) of the Code). At the time that payments are made under this Paragraph, Zenith shall provide Employee with a written statement setting forth the manner in which such payments were calculated and 19 the basis for such calculations including, without limitation, any opinions or other advice Zenith has received from outside counsel, auditors or consultants (and any such opinions or advice which are in writing shall be attached to the statement). 12. ATTORNEY'S FEES. In the event that any action at law or in equity, for injunctive or declaratory relief, is brought to enforce or interpret the provisions of this Agreement, if Employee is the prevailing party, he shall be entitled to reasonable attorney's fees in addition to any other relief to which he may be entitled. 13. APPLICABLE LAW. This Agreement and the rights and obligations of the parties hereunder shall be construed, interpreted and enforced in accordance with, and governed by, the laws of the State of California applicable to agreements executed and fully to be performed thereunder. 14. NOTICES. Any notice required to be given hereunder shall be in writing sent by registered or certified mail, return receipt requested, to either Zenith or Employee at the addresses listed below, or at such other addresses as 20 either Zenith or Employee may hereafter designate in writing to the other: To Zenith: Zenith National Insurance Corp. 21255 Califa Street Woodland Hills, California 91367 Attention: Corporate Secretary To Employee: 813 North Bedford Drive Beverly Hills, California 90210 15. ASSIGNMENT. 15.1 This Agreement and the rights, interests, and benefits hereunder are personal to Employee and shall not be assigned, transferred, pledged, or hypothecated in any way by Employee, and shall not be subject to execution, attachment or similar process. Any attempted assignment, transfer, pledge, or hypothecation, or the levy of any execution, attachment or similar process thereon, shall be null and void and without effect. 15.2 Zenith shall have the right to assign this Agreement and to delegate all of its rights, duties and obligation hereunder, whether in whole or in part, to any parent, affiliate, successor, or subsidiary organization or company of Zenith or corporation with which Zenith may merge or consolidate or which acquires by purchase or otherwise all or substantially all of Zenith's consolidated assets, but such assignment shall not release Employer from 21 its obligations under this Agreement, and in the event of any such assignment by Zenith, Employee may, at his sole option, exercise his termination rights under the provisions of Paragraph 11 of this Agreement. 16. ENTIRE AGREEMENT. This Agreement constitutes the entire understanding of the parties hereto and supersedes any and all prior agreements and understanding whether oral or written between the parties. This Agreement may only be modified by an agreement in writing executed by one of Zenith's duly authorized officers (other than Employee), with the approval of Zenith's Board of Directors, and by Employee. 17. WAIVER OF BREACH. The waiver by Employee of a breach of any provision of this Agreement by Employee shall not operate or be construed as a waiver of any subsequent breach by Employee. 18. MISCELLANEOUS. 18.1 The titles of the paragraphs of this Agreement are for convenience of reference only, and are not to be considered in construing this Agreement. 18.2 The unenforceability or invalidity of any paragraph or subparagraph of this Agreement shall not affect the enforceability and validity of the balance of this Agreement. 22 18.3 Each party hereto shall make, execute and deliver such other instruments or documents as may be reasonable required in order to effectuate the purpose of this Agreement. IN WITNESS WHEREOF, the parties hereto have executed this Agreement in Woodland Hills, California, on the date indicated below. ZENITH NATIONAL INSURANCE CORP. ("Zenith") Date: Feb 2, 1995 By /s/ Fredricka Taubitz --------------------------------- As agent for and on behalf of Zenith and each and all of its Subsidiaries ("Employer") Date: Feb 2, 1995 By /s/ Stanley R. Zax --------------------------------- STANLEY R. ZAX ("Employee") 23 EX-10.10 5 CREDIT AGREEMENT FOLIO 1-10 LINE OF CREDIT AGREEMENT THIS LINE OF CREDIT AGREEMENT (the "Agreement") is made and entered into this 15th day of December, 1994 by and between SANWA BANK CALIFORNIA (the "Bank") and ZENITH NATIONAL INSURANCE CORP. (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 LINE OF CREDIT. The Bank agrees to make loans and advances ("Advances") to the Borrower, upon the Borrower's telephonic, written or facsimile request therefor made prior to the Expiration Date, up to a total principal amount from time to time outstanding of not more than $30,000,000.00 (the "Line of Credit"); provided that any sums repaid under the Line of Credit may be reborrowed. The Borrower may permanently reduce the amount of the Line of Credit by notice in writing to the Bank provided such reductions are in increments of $1,000,000.00. A. PURPOSE. Advances made under the Line of Credit shall be used for general corporate purposes. B. LINE ACCOUNT. The Bank shall maintain on its books a record of account in which the Bank shall make entries for each Advance and such other debits and credits as shall be appropriate in connection with the Line of Credit (the "Line Account"). The Bank shall provide the Borrower with a monthly statement of the Borrower's Line Account, which statement shall be considered to be correct and conclusively binding on the Borrower unless the Borrower notifies the Bank to the contrary within 30 days after the Borrower's receipt of any such statement which it deems to be incorrect. C. INTEREST. Interest shall accrue from the date of each Advance under the Line of Credit at one of the following rates, as quoted by the Bank and as elected by the Borrower pursuant to paragraph 1.02F or 1.02G below: 1. REFERENCE RATE ADVANCES. A variable rate equivalent to an index for a variable interest rate which is quoted, published or announced from time to time by the Bank as its reference rate and as to which loans may be made by the Bank at, below or above such reference rate (the "Reference Rate") minus .25% per annum (the "Variable Rate"). Interest shall be adjusted concurrently with any change in the Reference Rate. An Advance based upon the Variable Rate is hereinafter referred to as a "Reference Rate Advance." Each such Reference Rate Advance shall be a minimum of $100,000. 2. FED FUNDS ADVANCES. A variable rate per annum (the "Federal Funds Rate"), for each day in which the Advance is based upon the Federal Funds Rate (a "Fed Funds Advance"), equivalent to 1.00% in excess of the interest rate equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System, quoted to the Bank on such day by Federal funds brokers of recognized standing which are selected by the Bank in its sole discretion or, if such day is not a business day, for the immediately preceding business day. With respect to this section 1.02(C)(2), a business day means a day in which banks are open generally in Chicago and New York for the conduct of substantially all of their commercial lending activities. Fed Funds Advances must be in the minimum amount of $250,000.00. 3. EURODOLLAR ADVANCES. A fixed rate quoted by the Bank for 30, 60, 90, 120, 180 or 360 days or for such other period of time that the Bank may quote and offer (provided that any such period of time does not extend beyond the Expiration Date) [the "Interest Period"] for Advances in the minimum amount of $250,000.00. Such interest rate shall be a percentage equivalent to .75% in excess of the Bank's Eurodollar Rate which is that rate determined by the Bank's Treasury Desk as being the approximate rate at which the Bank could purchase offshore U.S. dollar deposits in an amount approximately equal to the amount of the relevant Advance and for a period of time approximately equal to the relevant Interest Period (adjusted for any and all assessments, surcharges and reserve requirements pertaining to the purchase by the Bank of such U.S. dollar deposits) [the "Eurodollar Rate"]. An Advance based upon the Eurodollar Rate is hereinafter referred to as a "Eurodollar Advance." Interest on any advance shall be computed on the basis of 360 days per year, but charged on the actual number of days elapsed. -1- Interest on any Reference Rate Advance or Fed Funds Advance (hereinafter referred to as "Variable Rate Advances") shall be paid in monthly installments commencing on the last day of the month following the date of the first such Advance and continuing on the last day of each month thereafter. Interest on any Eurodollar Advance with an Interest Period of 90 or less days shall be paid on the last day of the Interest Period pertaining to such Eurodollar Rate Advance. Interest on any Eurodollar Rate Advance with an Interest Period in excess of 90 days shall be paid quarterly (i.e., on the last day of each 90 day period occurring in such Interest Period) and on the last day of the Interest Period pertaining to such Eurodollar Rate Advance. If interest is not paid as and when it is due, it shall be added to the principal, become and be treated as a part thereof, and shall thereafter bear like interest. D. PRINCIPAL. Unless sooner due in accordance with the terms of this Agreement, the Borrower hereby promises and agrees to pay to the Bank in full the aggregate unpaid principal amount of all Advances then outstanding, together with all accrued and unpaid interest thereon on the Expiration Date. E. EXPIRATION OF LINE OF CREDIT. Unless earlier terminated in accordance with the terms of this Agreement, the Bank's commitment to make Advances to the Borrower hereunder shall automatically expire on November 30, 1999 (the "Expiration Date"). F. NOTICE OF BORROWING. Upon telephonic, written or facsimile notice which shall be received by the Bank at or before 10:00 a.m. (California time) on a business day, the Borrower may borrow under the Line of Credit by requesting: 1. A VARIABLE RATE ADVANCE. A Variable Rate Advance may be made on the day notice is received by the Bank; provided, however, that if the Bank shall not have received notice at or before 11:00 a.m. on the day such Advance is requested to be made, such Variable Rate Advance may, at the Bank's option, be made on the next business day. 2. A EURODOLLAR RATE ADVANCE. Notice of any Eurodollar Rate Advance shall be received by the Bank no later than two business days prior to the day (which shall be a business day) on which the Borrower requests such Eurodollar Rate Advance to be made. G. NOTICE OF ELECTION TO ADJUST INTEREST RATE. Upon telephonic, written or facsimile notice which shall be received by the Bank at or before 10:00 a.m. (California time) on a business day, the Borrower may elect: 1. That interest on a Variable Rate Advance, which continues to remain a Variable Rate Advance, shall accrue at the sole discretion of the Borrower at either the Federal Funds Rate or at the Variable Rate; 2. That interest on a Variable Rate Advance shall be adjusted to accrue at the Eurodollar Rate; provided, however, that such notice shall be received by the Bank no later than two business days prior to the day (which shall be a business day) on which the Borrower requests that interest be adjusted to accrue at the Eurodollar Rate. 3. That interest on a Eurodollar Rate Advance shall continue to accrue at a newly quoted Eurodollar Rate or shall be adjusted to commence to accrue at the Variable Rate or the Federal Funds Rate; provided, however, that such notice shall be received by the Bank no later than two business days prior to the last day of the Interest Period pertaining to such Eurodollar Rate Advance. If the Bank shall not have received notice (as prescribed herein) of the Borrower's election that interest on any Eurodollar Rate Advance shall continue to accrue at the newly quoted Eurodollar Rate, the Borrower shall be deemed to have elected that interest thereon shall be adjusted to accrue at the Variable Rate upon the expiration of the Interest Period pertaining to such Advance. H. PREPAYMENT. The Borrower may prepay any Advance in whole or in part, at any time and without penalty, provided, however, that: (i) any partial prepayment shall first be applied to accrued and unpaid interest and next to the outstanding principal balance; and (ii) during any period of time in which interest is accruing on any Advance on the basis of the Eurodollar Rate, no prepayment shall be made except on a day which is the last day of the Interest Period pertaining thereto. If the whole or any part of any Eurodollar Advance is prepaid by reason of acceleration or otherwise, the Borrower shall, upon the Bank's request, promptly pay to and indemnify the Bank for all costs and any loss (including interest) actually incurred by the Bank as a consequence of such prepayment. -2- I. INDEMNIFICATION FOR EURODOLLAR RATE COSTS. During any period of time in which interest on any Advance is accruing on the basis of the Eurodollar Rate, the Borrower shall, upon the Bank's request, 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 funds used by the Bank in quoting and determining the Eurodollar Rate. J. CONVERSION FROM EURODOLLAR RATE TO VARIABLE RATE. In the event that the Bank shall at any time reasonably determine that the accrual of interest on the basis of the Eurodollar Rate (i) is infeasible because the Bank is unable to determine the Eurodollar Rate due to the unavailability of U.S. dollar deposits or contracts in an amount approximately equal to the amount of the relevant Advance and for a period of time approximately equal to relevant Interest Period or (ii) is or has become unlawful or infeasible by reason of the Bank's compliance with any new law, rule, regulation, guideline or order, or any new interpretation of any present law, rule, regulation, guideline or order, then the Bank shall give telephonic notice thereof (confirmed in writing) to the Borrower, in which event the Eurodollar Advance shall be deemed to be a Reference Rate Advance and interest shall thereupon immediately accrue at the Variable Rate. 1.03 DISBURSEMENT OF PROCEEDS FROM ADVANCES. Any Advance made hereunder shall be conclusively presumed to have been made to and for the Borrower's benefit when the proceeds of such Advance are disbursed in accordance with the Borrower's instructions or deposited into a checking account of the Borrower maintained at the Bank. 1.04 LOAN FEE; COMMITMENT FEE. The Borrower agrees to pay to the Bank (i) no later than thirty (30) days after the date of this Agreement, a non- refundable loan fee in the amount of $37,500.00 and (ii) from the date hereof to the termination of this Agreement a fee equal to 0.25% per annum of the average daily amount of the Line of Credit, payable in arrears for the immediately preceding calendar quarter on the 15th day of each January, April, July and October of each year and payable at the termination date of this Agreement for the immediately preceding calendar quarter, if not previously paid, and for the then current calendar quarter. With respect to the first and last fee payments as required under this section 1.04(ii), such fees shall be calculated pro rata with respect to the number of days during the applicable time periods for which the Line of Credit has been in effect. SECTION II CONDITIONS PRECEDENT 2.01 CONDITIONS PRECEDENT TO FIRST ADVANCE. Prior to the first Advance hereunder, the Borrower shall deliver or cause to be delivered to the Bank, in form and substance satisfactory to the Bank: A. AUTHORITY TO BORROW. 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. B. LOAN DOCUMENTS. All documents, instruments and agreements required or necessary to consummate the transactions contemplated under this Agreement (collectively the "Loan Documents"), all fully executed. C. MISCELLANEOUS DOCUMENTS. Such other documents and opinions as the Bank may require with respect to the transactions described in this Agreement. 2.02 CONDITIONS PRECEDENT TO ALL ADVANCES. The obligation of the Bank to make each Advance (including the first Advance) is subject to the further conditions precedent that, as of the date of each Advance and after the making of such Advance: A. REPRESENTATIONS AND WARRANTIES. The representations and warranties set forth herein 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, with the lapse of time or giving of notice or both, would constitute an Event of Default as defined in Section V hereof. For the purposes hereof, the Borrower's acceptance of the proceeds of any Advance shall be deemed to constitute the Borrower's representation and warranty that the statements set forth in sections 2.02 A. and 2.02 B above are true and correct. -3- 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 and each of its subsidiaries is a corporation duly organized and validly existing under the laws of the state of its incorporation and is properly licensed, qualified to do business and in good standing in, and, where necessary to maintain its rights and privileges, has complied with the fictitious name statute of every jurisdiction in which it is doing business. 3.02 AUTHORITY. The execution, delivery and performance by the Borrower of this Agreement and the Loan Documents 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 and 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 of affected; or (iii) require any consent or approval of its stockholders or violate any provision of its certificate 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. 3.04 FICTITIOUS TRADE STYLES. All fictitious trade styles used by the Borrower in connection with its business operations and each state in which each such fictitious trade style is used are listed below. The Borrower shall notify the Bank not less than 30 days prior to effecting any change in the matters described below or prior to using any other fictitious trade style at any future date, indicating the trade style and state(s) of its use. TRADE STYLE STATE OF USE THE ZENITH CALIFORNIA - ------------------------------------------------------------------------------- 3.05 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 principles) 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 has occurred which has not been fully disclosed to the Bank in writing. 3.06 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. 3.07 GOVERNMENTAL APPROVALS. The Borrower and its subsidiaries have obtained all permits and approvals from the California Department of Insurance and any other state regulatory authority that may be required to conduct its respective business as presently conducted. 3.08 TITLE TO ASSETS; PERMITTED LIENS. The Borrower and its subsidiaries have 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 yet 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; (vi) any liens on the assets of Perma-Bilt, A Nevada Corporation ("Perma-Bilt"); and (vii) 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"). -4- 3.09 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. 3.10 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. 3.11 NO EXERCISED PUT RIGHT OF HOLDERS OF NOTES UNDER INDENTURE. The holders of the 9.00% senior notes due May 1,2002 covered by that certain Zenith National Insurance Corp. to Norwest Bank Minnesota, National Association, Trustee, Indenture Dated as of May 1, 1992 (the "Indenture") have not exercised, or given notice of their intention to exercise their Put Right under Section 3.05 of the Indenture. 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 and its subsidiaries shall maintain and preserve its existence and all rights and privileges now enjoyed; not liquidate or dissolve, merge or consolidate with or into an entity (which would be 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 reasonably 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, Senior Vice President of Finance, Vice President of Finance, Treasurer or Assistant Treasurer, or those employees designated by any of the preceding officers, of the Borrower or any of its subsidiaries. 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 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 120 days after the end of each of the Borrower's fiscal years, a copy of the audited consolidated annual financial report of the Borrower for such year. B. QUARTERLY STATEMENTS. Not later than 75 days after the end of the first three quarters of each fiscal year of the Borrower, the Borrower's consolidated financial statement as of the end of such quarter. C. TRIANNUAL AUDIT. Not later than 30 days after the Borrower receives it, a copy of the triannual audit of Zenith Insurance Company and CalFarm Life Insurance Company prepared by the Department of Insurance. D. QUARTERLY STATUTORY STATEMENTS. Not later than 75 days after the end of the first three quarters of each fiscal year of the Borrower, the quarterly statutory statement of Zenith Insurance Company and its consolidated subsidiaries and the quarterly statutory statement of CalFarm Life Insurance Company. -5- E. ANNUAL STATUTORY STATEMENTS. Not later than 120 days after the end of each of the Borrower's fiscal years, copies of the annual statutory statements of Zenith Insurance Company and its consolidated subsidiaries and the annual statutory statements of CalFarm Life Insurance Company. F. COMPLIANCE CERTIFICATE. Not later than 75 days after the end of the first three quarters and 120 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 forth in Section 2.02A and 2.02B herein are true as of the date of such certificate. G. CREDIT RATING CHANGES. Promptly, and in any event within three business days after a senior officer of the Borrower obtains knowledge thereof, notice of any change in the credit rating assigned by Moody's or S&P to any long-term debt of the Borrower (including without limitation, any change in the Moody's Credit Rating or the S&P Credit Rating). H. OTHER INFORMATION. Promptly upon transmission thereof, copies of any filings and registrations with and reports to, the SEC by the Borrower or any of its subsidiaries (other than any registration statement on Form S-8) and copies of all financial statements, proxy statements, notices and reports as the Borrower or any of its subsidiaries shall send to analysts generally or to the holders (other than the Borrower and its subsidiaries) of their capital stock in their capacity as such holders (in each case to the extent not theretofore delivered to the Bank pursuant to this Agreement) and, with reasonable promptness, such other information or documents, financial or otherwise) as the Bank may reasonably request from time to time. 4.06 ADDITIONAL INDEBTEDNESS OF INSURANCE SUBSIDIARIES. Borrower's consolidated property and casualty insurance subsidiaries shall not, after the date hereof, create, incur or assume, directly or indirectly, any indebtedness exceeding in the aggregate the amount of $20,000,000.00. CalFarm Life Insurance Company shall not, after the date hereof, create, incur or assume, directly or indirectly, any indebtedness exceeding in the aggregate the amount of $10,000,000.00. The term indebtedness ("Indebtedness") for any borrower as used in this Agreement shall mean, at any date, the aggregate amount, excluding in all cases the amount of indebtedness owed to a corporate affiliate, of, without duplication, (a) all obligations for borrowed money from banks including, but not limited to, guaranties and letters of credit, (b) all obligations evidenced by bonds, debentures, notes or similar instruments, (c) all obligations to pay the deferred purchase price of property or services, (d) capitalized lease obligations, (e) all obligations or liabilities of others secured by a lien on any asset, 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. 4.07 LIENS AND ENCUMBRANCES. 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, or execute or allow to be filed any financing statement or continuation thereof affecting any such properties, except for Permitted Liens and 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. NET WORTH. A minimum consolidated tangible net worth of not less than $275,000,000.00, provided, however, that: (i) the minimum consolidated tangible net worth on or after the effective date of this Agreement shall automatically be reduced by an amount equal to the cumulative purchase amounts (net of any transaction costs and commissions) paid by the Borrower for the repurchase of its common stock with the restriction that all such reductions to the minimum consolidated tangible net worth resulting from the repurchases of the Borrower's common stock shall not exceed $30,000,000.00 for the purpose of this section 4.10(A); and (ii) inclusive of the reductions to the consolidated tangible net worth permitted under section 4.10(A)(i), the consolidated tangible net worth of the Borrower shall not be less than $245,000,000.00 at any time during the term of this Agreement. B. TOTAL INDEBTEDNESS TO NET WORTH RATIO. An aggregate consolidated Indebtedness to consolidated tangible net worth ratio of not more than 0.5 to 1. -6- For purposes of the foregoing, the term "Consolidated Tangible Net Worth" shall mean, at any time, the net worth of the Borrower and its subsidiaries determined on a consolidated basis in accordance with generally accepted accounting principles after appropriate deduction for any minority interests in subsidiaries and less all intangible assets (which term shall exclude deferred policy acquisition costs and purchased intangibles). The term "Net Worth" shall mean the sum of the Borrower's capital stock, capital in excess of par or stated value of shares of its capital stock, retained earnings and any other account which, in accordance with generally accepted accounting principles, constitutes stockholders' equity, but excluding the effect, if any, of unrealized capital gains and losses. The term "Consolidated Indebtedness" shall mean all of the Borrower's and its subsidiaries' Indebtedness, excluding all Indebtedness of Perma-Bilt and provided that such Indebtedness of Perma-Bilt is not guaranteed by the Borrower or one of its subsidiaries. C. AGGREGATE STATUTORY SURPLUS. Zenith Insurance Company (and its consolidated subsidiaries) and CalFarm Life Insurance Company shall maintain an aggregate statutory surplus of at least $175,000,000.00 D. NET PREMIUMS WRITTEN TO POLICYHOLDERS' SURPLUS. Zenith Insurance Company and its consolidated insurance subsidiaries shall maintain a consolidated ratio of net premiums written to policyholders' surplus of no more than 3.0:1 on a rolling four quarter basis. E. CONSOLIDATED INDEBTEDNESS. An aggregate Consolidated Indebtedness of no more than $200,000,000.00. F. ADVANCES TO PERMA-BILT. Advances and loans extended to Perma-Bilt of no more than $25,000,000.00. 4.11 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 $15,000,000.00 and (iii) other matters which resulted in or may result in a material adverse change in the financial conditions or business operation of the Borrower. 4.12 KEY EMPLOYEE. Continue to employ Stanley R. Zax as its chief executive officer with the degree of authority and responsibility he presently exercises in his capacity as President and Chairman of the Board. 4.13 CORPORATE RATING. Zenith Insurance Company (on a pooled or individual basis) and CalFarm Life Insurance Company shall maintain at all times an A.M. Best rating of no lower than B+. 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) 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 material term, covenant or agreement contained in this Agreement or in any material document, instrument or agreement evidencing or relating to any material indebtedness of the Borrower (whether owed to the Bank or third persons), and any such failure (exclusive of the payment of money to the Bank under this Agreement or under any other document, instrument or agreement, which failure shall constitute and be an immediate 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 but less than ninety (90) days to correct, the Borrower does not commence material corrective action within thirty (30) days and actively pursues 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 shall prove to have been incorrect in any material respect when made or given or when deemed to have been made or given. -7- 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. 5.06 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. 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 indebtedness, immediately due and payable, whether or not otherwise due and payable. 6.02 CEASE EXTENDING CREDIT. Cease making Advances or otherwise extending credit to or 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 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 indebtedness. 6.04 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 indebtedness, or otherwise. SECTION VII MISCELLANEOUS PROVISIONS 7.01 AMOUNTS PAYABLE ON DEMAND. If the Borrower fails to pay on demand any amount so payable under this Agreement, the Bank may, at its option and without any obligation to do so and without waiving any default occasioned by the Borrower's failure to pay such amount, create an Advance in an amount equal to the amount so payable, which Advance shall thereafter bear interest as provided under the Line of Credit. 7.02 DEFAULT INTEREST RATE. If an Event of Default, or an event which, with notice or passage of time could become an Event of Default, has occurred or is continuing, the Borrower shall pay to the Bank interest on any indebtedness or amount payable under this Agreement at a rate which is 2% in excess of the rate or rates then in effect under this Agreement. -8- 7.03 APPLICATION OF PAYMENTS: All amounts received by the Bank whether as payments or as proceeds from the disposition or liquidation of collateral, if any, shall be applied to the Borrower's indebtedness to the Bank as follows: first, to the costs and expenses of collection, enforcement, protection and preservation, including but not limited to the Bank's lien in the collateral and including court costs and reasonable attorneys' fees, whether or not suit is commenced by the Bank; next, to those costs and expenses incurred by the Bank in enforcing and collecting this Agreement including protecting, preserving, liquidating, selling or disposing of the collateral, if any; next, to the payment of accrued and unpaid interest on all of the Obligations; next, to the payment of the outstanding principal balance of the Obligations; and last, to the payment of any other indebtedness owed by the Borrower to the Bank. Any excess existing after the payment of the foregoing will be returned or paid by the Bank to the Borrower. 7.04 WAIVER OF JURY TRIAL. THE BORROWER AND THE BANK EACH WAIVE THEIR RESPECTIVE RIGHTS TO A TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF OR RELATED TO THIS AGREEMENT, THE OTHER LOAN DOCUMENTS, OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY, IN ANY ACTION, PROCEEDING OR OTHER LITIGATION OF ANY TYPE BROUGHT BY ANY OF THE PARTIES AGAINST ANY OTHER PARTY OR PARTIES, WHETHER WITH RESPECT TO CONTRACT CLAIMS, TORT CLAIMS, OR OTHERWISE. THE BORROWER AND THE BANK EACH AGREE THAT ANY SUCH CLAIM OR CAUSE OF ACTION SHALL BE TRIED BY A COURT TRIAL WITHOUT A JURY. WITHOUT LIMITING THE FOREGOING, THE PARTIES FURTHER AGREE THAT THEIR RESPECTIVE RIGHT TO A TRIAL BY JURY IS WAIVED BY OPERATION OF THIS SECTION AS TO ANY ACTION, COUNTERCLAIM OR OTHER PROCEEDING WHICH SEEKS, IN WHOLE OR IN PART, TO CHALLENGE THE VALIDITY OR ENFORCEABILITY OF THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS OR ANY PROVISION HEREOF OR THEREOF. THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS. 7.05 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. 7.06 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. 7.07 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. 7.08 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, 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. 7.09 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. 7.10 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. -9- 7.11 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. 7.12 JURISDICTION. This Agreement, any notes issued hereunder, 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, to the jurisdiction of whose courts the parties hereby submit. 7.13 HEADINGS. The headings set forth herein are solely for the purpose of identification and have no legal significance. 7.14 ENTIRE AGREEMENT. This Agreement and the Loan Documents 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 incorporate or referenced in this Agreement or the Loan Documents are superseded hereby. IN WITNESS WHEREOF, this Agreement has been executed by the parties hereto as of the date first hereinabove written. BANK: SANWA BANK CALIFORNIA By: /s/ Richard H. Palmer - ---------------------------------------------------- Richard H. Palmer, Vice President - ---------------------------------------------------- (Name/Title) Address: Insurance & Financial Services, LA CBC 601 S. Figueroa Street, W8-6 Los Angeles, California 90017 BORROWER: ZENITH NATIONAL INSURANCE CORP. By: /s/ Stanley R. Zax - ---------------------------------------------------- Stanley R. Zax, President and Chairman of the Board - ---------------------------------------------------- (Name/Title) Address: 21255 Califa Street Woodland Hills, California 91367 -10- EX-10.11 6 REVOLVING NOTE [LOGO] CITY NATIONAL BANK REVOLVING NOTE (INTEREST TIED TO PRIME) ________Note No. $20,000,000.00 Head Office Beverly Hills, California September 30, 1994 On July 1, 1995, the undersigned, Zenith 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 ($20,000,000.00), 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 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 January 1, 1995. A facility fee equal to $56,250.00 shall be payable in three (3) equal consecutive installments, each in the amount of $18,750.00 on November 15, 1994, February 15, 1995, and May 15, 1995. 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 from 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 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 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. 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 thereto, shall be governed by the laws of the State of California. Zenith National Insurance Corp., a Delaware corporation By: /s/ Stanley R. Zax ----------------------------------------- Stanley R. Zax, Chairman of the Board/President EX-11 7 COMPUTATION OF EARNINGS EXHIBIT 11 ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE
YEAR ENDED DECEMBER 31, ---------------------------------------------- 1994 1993 1992 -------------- -------------- -------------- (A) Net income................................................. $ 37,900,000 $ 53,200,000 $ 28,700,000 -------------- -------------- -------------- -------------- -------------- -------------- Number of shares used in calculating primary earnings per share: Weighted average outstanding shares during the period.... 18,906,000 18,998,000 18,914,000 Additional common shares issuable under employee stock options using the treasury stock method (Note 1):...... 184,000 299,000 4,000 -------------- -------------- -------------- (B) Average outstanding shares................................. 19,090,000 19,297,000 18,918,000 -------------- -------------- -------------- -------------- -------------- -------------- Primary earnings per share (A) / (B).................................................. $1.99 $2.76 $1.52 ---- ---- ---- ---- ---- ---- Number of shares used in calculating fully diluted earnings per share: Weighted average outstanding shares during the period.... 18,906,000 18,998,000 18,914,000 Additional common shares issuable under employee stock options using the treasury stock method (Note 2):...... 191,000 326,000 37,000 -------------- -------------- -------------- 19,097,000 19,324,000 18,951,000 (C) Average outstanding shares................................. -------------- -------------- -------------- -------------- -------------- -------------- Fully diluted earnings per share (A) / (C).................................................. $1.98 $2.75 $1.51 ---- ---- ---- ---- ---- ---- - ------------------------ NOTES: (1) Based on the average quarterly market price of each period. (2) Based on the higher of the average market price or price at the end of each period.
EX-13 8 PORTIONS OF THE A/R 31 PAGES The information in the following table provides estimates of incurred losses by accident year, evaluated in the year they were incurred and as they were subsequently evaluated in succeeding years.
- -------------------------------------------------------------------------------------- Incurred loss and loss adjustment expense (1) Years in which ---------------------------------------------------------------------- losses were reported at end of year (dollars in thousands) incurred 1989 1990 1991 1992 1993 1994 - -------------------------------------------------------------------------------------- Prior to 1989 $1,315,802 $1,306,122 $1,301,039 $1,301,497 $1,304,442 $1,304,670 1989 231,956 234,878 229,121 234,481 238,051 238,547 Cumulative 1,547,758 1,541,000 1,530,160 1,535,978 1,542,493 1,543,217 1990 246,088 258,356 269,321 274,281 274,505 Cumulative 1,787,088 1,788,516 1,805,299 1,816,774 1,817,722 1991 264,243 267,488 273,817 273,300 Cumulative 2,052,759 2,072,787 2,090,591 2,091,022 1992 270,162 261,510 263,543 Cumulative 2,342,949 2,352,101 2,354,565 1993 266,316 254,208 Cumulative 2,618,417 2,608,773 1994 273,358 Ratios: 1989 65.02% 65.83% 64.22% 65.72% 66.72% 66.86% 1990 65.94 69.23 72.17 73.50 73.56 1991 70.05 70.91 72.59 72.45 1992 70.73 68.47 69.00 1993 65.23 62.27 1994 67.63 - -------------------------------------------------------------------------------------- (1) This analysis displays the accident year incurred loss and loss adjustment expense development on a statutory basis for accident years 1989-1994 for all property-casualty 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.
8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview The following discussion presents our past results and our expectations for the near future. The tables below clearly show the impact of lower interest rates during the last three years as well as the change in underwriting results with and without catastrophes. A year to year comparison is also significantly influenced by realized gains on investments. The process of establishing loss reserves is an imprecise science involving significant judgement factors. The table on page 27 clearly shows the significant impact of loss reserve estimation on yearly comparisons of results.
- --------------------------------------------------------------------------------------------------- (Dollars in thousands) 1994 1993 1992 - --------------------------------------------------------------------------------------------------- Investment income, after tax, excluding health and life $ 25,670 $ 25,475 $ 31,402 Realized gains on investments, after tax 1,590 17,932 10,847 - --------------------------------------------------------------------------------------------------- Sub-total 27,260 43,407 42,249 - --------------------------------------------------------------------------------------------------- Property-casualty underwriting, after tax: Income (loss) excluding catastrophes and Proposition 103 15,669 8,652 (4,208) Catastrophe losses (9,945) (1,365) (9,900) - --------------------------------------------------------------------------------------------------- Property-casualty underwriting income (loss) excluding Proposition 103 5,724 7,287 (14,108) - --------------------------------------------------------------------------------------------------- Health and life income after tax, excluding CLIGA assessments 9,204 7,424 8,205 Income from real estate operations, after tax 1,423 Interest expense, after tax (3,859) (4,328) (4,273) Parent expenses, after tax (2,638) (2,176) (2,126) Other items, after tax: Proposition 103 rollback refund (10,611) CLIGA assessments (455) (3,328) Lawsuit settlement 1,241 4,914 Cumulative effect of change in accounting for income taxes 10,719 Extraordinary item (1,355) - --------------------------------------------------------------------------------------------------- Net income $ 37,900 $ 53,200 $ 28,700 - ---------------------------------------------------------------------------------------------------
25 Property-Casualty Insurance Operations Premiums earned and underwriting results of Zenith's property-casualty subsidiaries were as follows:
- --------------------------------------------------------------------------------------------- (Dollars in thousands) 1994 1993 1992 - --------------------------------------------------------------------------------------------- Premiums earned Workers' Compensation $ 216,030 $ 244,661 $ 221,652 Reinsurance 36,138 23,295 18,382 Automobile and other Property-Casualty 149,757 137,945 137,392 - --------------------------------------------------------------------------------------------- Total $ 401,925 $ 405,901 $ 377,426 - --------------------------------------------------------------------------------------------- Underwriting income (loss) before taxes Workers' Compensation $ 12,151 $ 11,618 $ (1,495) Reinsurance 4,322 5,337 (14,002) Automobile and other Property-Casualty excluding Proposition 103 rollback refund (6,940) (5,704) (5,124) - --------------------------------------------------------------------------------------------- Total excluding Proposition 103 rollback refund 9,533 11,251 (20,621) Proposition 103 rollback refund (16,078) - --------------------------------------------------------------------------------------------- Total including Proposition 103 rollback refund $ 9,533 $ 11,251 $ (36,699) - --------------------------------------------------------------------------------------------- Our key operating goal is to achieve a combined ratio of 100%. The combined ratio, expressed as a percentage, is the key measure of underwriting profitability traditionally used in the property-casualty insurance business. It is the sum of underwriting expenses, net incurred losses, loss adjustment expenses and policyholders' dividends, expressed as a percentage of net premiums earned. Combined ratios were as follows: - --------------------------------------------------------------------------------------------- 1994 1993 1992 - --------------------------------------------------------------------------------------------- Combined loss and expense ratios Workers' Compensation Losses 32.3% 38.9% 53.6% Loss adjustment expenses 27.6% 28.5% 21.4% Underwriting expenses 26.4% 21.7% 24.4% Dividends to policyholders 8.1% 6.2% 1.3% - --------------------------------------------------------------------------------------------- Combined ratio 94.4% 95.3% 100.7% - --------------------------------------------------------------------------------------------- Reinsurance Losses and loss adjustment expenses 70.7% 58.7% 149.3% Underwriting expenses 17.3% 18.4% 26.9% - --------------------------------------------------------------------------------------------- Combined ratio 88.0% 77.1% 176.2% - --------------------------------------------------------------------------------------------- Automobile and other Property-Casualty Losses and loss adjustment expenses 72.5% 70.1% 70.0% Underwriting expenses 32.1% 34.0% 33.7% - --------------------------------------------------------------------------------------------- Combined ratio excluding Prop. 103 rollback refund 104.6% 104.1% 103.7% Proposition 103 rollback refund 11.7% - --------------------------------------------------------------------------------------------- Combined ratio including Prop. 103 rollback refund 104.6% 104.1% 115.4% - --------------------------------------------------------------------------------------------- Total combined ratio excluding Prop. 103 rollback refund 97.6% 97.2% 105.5% Proposition 103 rollback refund 4.2% - --------------------------------------------------------------------------------------------- Total combined ratio including Prop. 103 rollback refund 97.6% 97.2% 109.7% - ---------------------------------------------------------------------------------------------
26 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. 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. Most notably, the Northridge earthquake in 1994 and hurricane "Andrew" in 1992 had significant adverse effects on the results of operations as discussed below. 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 the amount reserved or subsequent estimates indicate a basis for reducing reserves on open claims. The following shows the one year loss reserve development for loss and loss expenses for the three main lines of property- casualty business:
- --------------------------------------------------------------------------------- Automobile (Dollars in Workers' and other thousands) Compensation Property-Casualty Reinsurance Total - --------------------------------------------------------------------------------- One year loss development in 1994 $ (12,944) $ 4,051 $ (827) $ (9,720) 1993 4,704 4,657 (290) 9,071 1992 13,502 5,177 1,255 19,934 Favorable development is shown in brackets. - ---------------------------------------------------------------------------------
Favorable development in 1994 in the Workers' Compensation reserves reflects an overall improvement in California workers' compensation loss trends, discussed below. Adverse development in 1993 and 1992 was due principally to development of prior year loss adjustment expense reserves which was caused by increased expenditures on the loss adjustment process. The exposure of the insurance industry to losses arising out of the cost of pollution damage 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 farmowners' and small commercial policies through CalFarm Insurance and through its reinsurance operation. These policies written or reinsured since 1985 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. Some of the factors that continue to impact the environment in which Zenith operates include: an uncertain political and regulatory environment, both state and federal; proposals relating to national health insurance; the 1993 workers' compensation legislation in California and other areas; the uncertain outlook for economic growth in parts of California; a highly competitive insurance industry; and the changing environment for controlling medical, legal and rehabilitation costs, as well as fraud and abuse. Although management is currently unable to predict the effect of any of the foregoing, these trends and uncertainties could have a material effect on Zenith's future operations and financial condition. Workers' Compensation Loss frequency and development trends in the California workers' compensation industry, which had deteriorated in 1991 and 1992, showed significant improvement in 1993 and 1994. These improvements reflect, among other things, major initiatives undertaken by Zenith, and others, to combat fraud and abuse and to control costs in the workers' compensation system. In addition, workers' compensation reform legislation was enacted in 1993. Workers' Compensation premiums earned decreased in 1994 compared to 1993 principally as a result of decreases of 7.0% at July 16, 1993, 12.7% at January 1, 1994 and 16.0% at October 1, 1994, in the statutory minimum rates for workers' compensation in California and also as a result of a decrease in the amount of policies written in California with surcharges. These decreases were offset in part by an increase in new business in Texas. Premiums earned increased in 1993 compared to 1992 principally because of an increase in premiums attributable to policies written with surcharges and, to a lesser extent, premiums written in Texas. Premiums written on policies with surcharges were $41,372,000 in 1994 compared to $54,945,000 in 1993 and $42,971,000 in 1992. Premiums written in Texas were $28,884,000 in 1994 compared to $10,174,000 in 1993 and $3,925,000 in 1992. The decline in surcharged business reflects the improvement in California workers' compensation loss trends. In 27 addition, statutory minimum rates in California were increased by 1.2% at January 1, 1992 and by 6.7% at July 1, 1992. Underwriting results improved in 1994 and 1993 compared to 1992 principally as a result of improved loss experience, referred to above, offset, in part, by increased operating costs, including approximately $2.8 million of such expenses attributable to the Northridge earthquake in January 1994. Effective January 1, 1995, statutory minimum rates for workers' compensation policies in California were replaced by an open rating plan under which insurers file and use their own actuarially determined rates. The rates filed and which are in use by Zenith in 1995 were determined to provide, in conjunction with other policy features, a margin for underwriting profits. However, future profitability of Zenith's workers' compensation operation will be dependent upon its ability to compete in an open rating environment in California, the outlook for economic growth in California and Zenith's continuing efforts to control medical and indemnity costs. At present, competition is intense and Zenith is quoting on large numbers of policies in accordance with its pricing models and is endeavoring to achieve the goal of a combined ratio of 100%. Automobile and Other Property-Casualty Premiums earned increased in 1994 compared to 1993 due primarily to new business and rate increases for Farmowners' and Homeowners' policies. Results of operations during 1994 were adversely affected by $3.2 million of losses (of which $0.8 million was assumed from the California Fair Plan described below) attributable to claims arising out of the Northridge earthquake. 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-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 pending rate applications on affected lines of business and approved certain rate increases on Farmowners and Homeowners policies effective July 1, 1993. Rates were increased effective July 1, 1993, by 8.0% 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. During 1994, the Department approved a rate increase for Commercial Auto of 7.5% and a rate decrease for Personal Auto of 6.3%, both effective September 1, 1994. The Department has also approved rate increases for Homeowners (8%), Farmowners (8.5%), Earthquake (15.1%) and Commercial Property and Liability coverages (5.6%). These rates will be effective in early 1995. Management is unable to predict whether requests for future rate increases, if any, will be granted by the Department but failure by the Department to act upon such requests would 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. The California Legislature and the Insurance Commissioner continue to debate the need to expand insurance coverages, including earthquake, for these organizations. 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 $1.8 million in 1994, $1.6 million in 1993, and $1.4 million in 1992. In January, 1995, unusually severe storms affected large areas of California which resulted in an increased number of claims being received by CalFarm. Management estimates that such claims will adversely affect results of operations by approximately $3.0 million in the first quarter of 1995. 28 Reinsurance Zenith's participation in assumed reinsurance is principally comprised of participation in the reinsurance of accumulated losses from catastrophes and the reinsurance of large property risks. Because of the severity of losses in recent years, the rates for such reinsurance increased through 1994. These increases, together with participation in selected additional contracts, resulted in increased premiums earned in 1994 compared to 1993 and in 1993 compared to 1992. Underwriting results were adversely impacted in 1994 by $9.3 million of losses attributable to the Northridge earthquake of January 1994. In 1992, losses of approximately $9.8 million were sustained in conjunction with hurricanes "Andrew" and "Iniki", as well as other large, worldwide property losses. The outlook for profitability in the Reinsurance operation is dependent upon, among other things, the level of rates for property and catastrophe reinsurance and the frequency and severity of world-wide property losses. Renewals in 1995 suggest that rates for such reinsurance are no longer increasing, partly as a result of an increase in the number of companies willing to participate in such reinsurance. In January 1995, a major earthquake caused extensive damage to the Japanese port city of Kobe. Zenith anticipates that it will incur some losses in the first quarter of 1995 from the Kobe earthquake. Although management is currently unable to quantify the impact of such losses, the information currently available indicates that the effect of the Kobe earthquake on Zenith's Reinsurance operation will be substantially less than the effect of the Northridge earthquake in 1994. Federal Income Taxes Deferred tax assets and liabilities (set forth in Note 7 to the Consolidated Financial Statements) are established at the currently established statutory federal income tax rate to reflect temporary differences between the financial statement values of assets and liabilities and their respective tax values. Deferred tax assets attributable to policy and loss reserves, unearned premiums and accrued policyholder dividends are considered to be fully realizable because of the historic profitability of Zenith's property-casualty and health and life operations. The temporary difference associated with investments is principally attributable to the unrealized depreciation on investments which are classified as Available-for-Sale. A gross deferred tax asset has been established at the current capital gains tax rate of 35%. However, management believes that the criteria for the realization of this asset, as set forth in Statement of Financial Accounting Standards No. 109 -- Accounting for Income Taxes, have not been met and a valuation allowance of $14.0 million was established at December 31, 1994. Investments Effective December 31, 1993, Zenith adopted Statement of Financial Accounting Standards No. 115--Accounting for Certain Investments in Debt and Equity Securities ("SFAS No. 115"). Among other provisions, SFAS No. 115 sets forth certain classifications for debt and equity securities and the respective criteria for those classifications (see Notes 1 and 2 to the Consolidated Financial Statements). At December 31, 1994, approximately 66% of Zenith's consolidated portfolio of fixed maturity investments were classified as Available-for-Sale including substantially all of such investments in the property-casualty companies' portfolios. The unrealized appreciation or depreciation on investments which are classified as Available-for-Sale is recorded as a separate component of stockholders' equity. The increase in interest rates in 1994 caused a significant decline in the values of fixed maturity investments, including those held by Zenith. The effect on consolidated stockholders' equity of the decline in the value of fixed maturities classified as Available-for-Sale was a decrease of $58.5 million, net of limited deferred tax benefits. Under current market conditions, management has no intention to dispose of any material amount of its Available-for-Sale portfolio, nor does it anticipate any circumstances in the foreseeable future that might give rise to the involuntary sale of a material amount of these investments. Any future changes in interest rates will impact stockholders' equity through changes in the values of fixed maturity investments which are classified as Available-for-Sale. For example, since the end of 1994, through February 28, 1995, the market value of such investments increased by $21,958,000 relative to their amortized cost. Zenith's principal investment goal is to maintain safety and liquidity, enhance principal values and achieve increased rates of return consistent with regulatory constraints. The allocation amongst various types of securities is adjusted from time to time based on market conditions, credit conditions, tax policy, fluctuations in interest rates and other factors. 29 At December 31, 1994, and December 31, 1993, Zenith's consolidated investment portfolio emphasized high quality, taxable bonds and short-term investments. Bonds constituted 82.5% and 71.5% of the consolidated carrying value of Zenith's consolidated investment portfolio at December 31, 1994 and 1993, respectively. Short-term investments constituted 8.7% and 18.4%, respectively. At December 31, 1994 and 1993, 97.9% and 98.3% of the consolidated carrying values of investments in bonds were rated investment grade. The change in the carrying value of Zenith's consolidated investment portfolio in 1994 was as follows:
- ------------------------------------------------------------------------------------------------- (Dollars in thousands) - ------------------------------------------------------------------------------------------------- Carrying value at beginning of year $1,500,397 Purchases at cost 716,157 Maturities and exchanges of investments (72,913) Proceeds from sales of investments: Available-for-sale $(345,176) Trading portfolio (112,207) Held-to-maturity None Other investments (2,770) --------- Total proceeds from disposal of investments (460,153) Realized gains from maturities and exchanges of investments: Held-to-maturity 425 Available-for-sale 146 Realized gains from sales of investments: Available-for-sale 2,024 Trading portfolio 122 Other investments 443 Realized losses from writedowns of investments (714) --------- Total net realized gains on investments 2,446 Unrealized losses on investments (71,698) Decrease in short-term investments (150,589) Net amortization of bonds and preferred stocks and other changes (658) - ------------------------------------------------------------------------------------------------- Carrying value at end of year $1,462,989 - -------------------------------------------------------------------------------------------------
Investment income during the years ended December 31, was as follows:
- ---------------------------------------------------- (Dollars in thousands) 1994 1993 1992 - ---------------------------------------------------- Property-Casualty (incl. Parent) Before tax $ 38,030 $ 37,135 $ 43,128 After tax 25,670 25,475 31,402 Health and Life Before tax 60,012 55,339 53,486 After tax 39,008 35,970 35,301 Consolidated Before tax 98,042 92,474 96,614 After tax 64,678 61,445 66,703 - ----------------------------------------------------
The yields on invested assets vary with the general level of interest rates and for the years ended December 31 were as follows:
- ---------------------------------------------------- 1994 1993 1992 - ---------------------------------------------------- Property-Casualty (incl. Parent) Before tax 5.2% 5.1% 6.2% After tax 3.5% 3.5% 4.5% Health and Life Before tax 7.7% 7.7% 8.6% After tax 5.0% 5.0% 5.7% - ----------------------------------------------------
Realized gains on investments for the years ended December 31 were as follows:
- ------------------------------------------------------- (Dollars in thousands) 1994 1993 1992 - ------------------------------------------------------- Before tax $ 2,446 $ 21,045 $ 10,847 After tax 1,590 17,932 10,847 - -------------------------------------------------------
Taxes on net realized gains in 1992 and 1993 were reduced by the benefit associated with losses carried forward from 1990. 30 Health and Life Results of the Health and Life operations for the years ended December 31 were as follows:
- --------------------------------------------------- (Dollars in thousands) 1994 1993 1992 - --------------------------------------------------- Premium income and other policy charges $ 61,270 $ 63,921 $ 64,448 Income before tax and before realized gains on investments 13,459 6,623 12,124 Income after taxes 9,433 12,932 10,354 Invested assets at December 31, 774,241 767,337 682,896 Deposits on deferred annuity contracts at December 31, 569,484 545,956 485,096 Stockholder's equity at December 31, 103,862 124,610 103,944 - ---------------------------------------------------
Results for the health and life operation improved in 1994 over 1993 principally because of reduced operating costs and estimated retroactive assessments for Executive Life Insurance Company ("Executive Life") from the California Life and Health Insurance Guarantee Association ("CLIGA"). CLIGA protects policyholders against the impairment or insolvency of life insurance companies. A total projected assessment of $5,120,000 was reflected in 1993 results. This was increased by $700,000 in 1994 based on revised data received from the National Organization of Life and Health Insurance Guarantee Associations. 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"). Health premiums are written under a program sponsored by the Farm Bureau and account for approximately 80%, 81% and 81% of the total Health, Life and Annuity premium income in 1994, 1993, and 1992, respectively. Health premium rates increased 3% in 1994 and 10% in 1993 to cover increasing costs of health care and increased utilization. An additional 3% premium rate increase was implemented effective January 1, 1995. Results of the health operations may be impacted by possible Federal and State health care reform, however, it is not possible to predict this impact until definitive legislation, if any, emerges. CalFarm Life's deposits from Universal Life Contracts were approximately $13 million in 1994, $19 million in 1993 and $13 million in 1992. Higher or lower than expected lapse rates, mortality rates, and continuing premium payments will affect operating income in the period in which they occur. Results in 1994 were impacted by lower than expected continuing premium payments for business written in late 1992 and 1993. CalFarm Life continued its marketing program of tax sheltered annuity products during 1994, specifically those designed for school teachers and administrators and received deposits on fixed annuities of $42 million in 1994 compared to $56 million in 1993 and $83 million in 1992. Approximately 90% of these deposits were tax-qualified annuities. These deposits primarily account for the increase in investments and related investment income between 1992, 1993 and 1994. The amount of deposits received by CalFarm Life on deferred annuity contracts is influenced by prevailing interest rates and by competition in the market for such products. CalFarm Life's annuity products are designed to provide profits primarily from the excess of the investment yield on invested assets over the interest credited to contractholders. 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 risks in its investment portfolio. During 1994, CalFarm Life experienced higher than expected surrenders on its annuity business resulting in surrender charge income partially offset by more rapid amortization of deferred acquisition costs. Reduced investment yields between 1992 and 1993 on CalFarm Life's investment portfolio did not materially affect the profitability of its fixed deferred annuities and life insurance contracts because of CalFarm Life's ability to manage the spread between the interest earned on investments and the interest credited to contractholder funds, and because of CalFarm Life's ability to adjust dividends to contractholders. Effective October 1, 1993, the guaranteed interest rates were decreased on new business to 4% on Universal Life contracts and 3% on Annuities and Single Premium Whole Life contracts. CalFarm Life has the flexibility to decrease credited interest rates, but not below the guaranteed policy minimum interest rates 31 that range from 3% to 6%. There is recurring discussion about the tax-preferred status of life and annuity products and the profitability of future operations could be adversely affected if tax laws are changed with respect to life insurance and annuity products. Policyholders and agents are influenced by, among other things, the ratings given to CalFarm Life by rating agencies such as A.M. Best Company and Weiss Research, Inc. CalFarm Life's rating by A.M. Best was changed from A+ (Superior) to A (Excellent) in 1994. A key factor considered in the rating process is the adequacy of statutory capital and surplus in relation to risks assumed by CalFarm Life. CalFarm Life's risk based capital percentage is 427%, well above minimums recommended by the National Association of Insurance Commissioners ("NAIC"). Fluctuations in interest rates and the adoption of SFAS No. 115 have caused, and may continue to cause, fluctuations in the values of CalFarm Life's investments in debt securities and stockholder's equity. CalFarm Life owned debt securities carried at an amortized cost of $410,989,000 at December 31, 1994 that were classified as Held-to-Maturity. The balance of CalFarm Life's debt securities were carried at their fair values and the decline in value of such securities in 1994 caused a decrease of $30.2 million, net of limited deferred tax benefits, in the stockholder's equity of CalFarm Life from December 31, 1993 to December 31, 1994. Real Estate Real estate operations are included in the Parent business segment. In 1994, Zenith recognized $30,220,000 of revenue related to its real estate operations which commenced in 1993 through a newly formed subsidiary. Income from real estate operations before taxes was $2,189,000 in 1994. Construction in progress, including undeveloped land, was $19,886,000 at December 31, 1994 compared to $7,215,000 at December 31, 1993. Sales continue favorable despite fluctuations in interest rates. 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 41 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 $134,583,000, $56,599,000, and $53,929,000, for 1994, 1993, and 1992, respectively. Net cash flows from operations in 1994 include $105,925,000 of net cash received from sales of trading securities. Zenith maintains cash and short-term investments which amounted to $134,708,000 and $285,401,000 at December 31, 1994 and 1993, respectively. These balances, or "short-term liquidity," are supplemented by lines of credit available to Zenith of up to $50,000,000, all of which was available at December 31, 1994. Zenith's principal liquidity requirements in the long-term and the short-term are the funds needed to pay its expenses, service its outstanding debt, pay any cash dividends which may be declared to its stockholders and fund the land acquisitions of its real estate subsidiary, Perma-Bilt. 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. Zenith's insurance subsidiaries are subject to California insurance regulations which restrict their ability to distribute dividends. Such dividend capabilities are set forth in Note 11 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 $15,000,000 in 1994, $25,000,000 in 1993, and $15,000,000 in 1992. Maximum dividend capability, without prior approval of the Department, of Zenith's subsidiaries in 1995 is $35,155,000. Risk-based capital guidelines issued by the NAIC in 1993 for life insurance companies and in 1994 for property-casualty companies are not expected to have any material adverse consequences for Zenith's insurance subsidiaries. The NAIC is currently reviewing a proposed guideline for determining minimum statutory reserves for annuity business in life insurance companies. Such a guideline, if adopted, would reduce the statutory surplus of CalFarm Life. Management is currently evaluating alternatives to minimize the impact of this guideline and does not expect the ultimate outcome of its 32 implementation, if required, to have a material adverse effect on CalFarm Life's risk based capital ratios or its operations. In 1994, Zenith's real estate construction subsidiary obtained $11,000,000 in construction loans from a bank to provide for future real estate development. At December 31, 1994, the outstanding balance on such loans was $2,471,000. 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, 1994, investments carried at their fair value of $298,536,000 were on deposit to comply with such regulations. At December 31, 1994, Zenith was authorized to purchase up to 794,000 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 and annuity insurance products, however, policy provisions for termination charges act to partially reduce such negative impact. A significant 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 economic trends that are adverse to the Company. 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. 33 FIVE-YEAR SUMMARY OF SELECTED FINANCIAL INFORMATION Zenith National Insurance Corp. and Subsidiaries
- ------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, Note 1994 1993 - ------------------------------------------------------------------------------------------------------- REVENUES Property-casualty operations Premiums earned $ 401,925,000 $ 405,901,000 Investment income 38,030,000 37,135,000 Health and life operations Premiums and policy charges 61,270,000 63,921,000 Investment income 60,012,000 55,339,000 Realized gains (losses) on investments 2,446,000 21,045,000 Real estate operations 30,220,000 Net other income 1 1,210,000 2,441,000 - ------------------------------------------------------------------------------------------------------- TOTAL REVENUE 595,113,000 585,782,000 - ------------------------------------------------------------------------------------------------------- INCOME AFTER TAX AND BEFORE REALIZED GAINS (LOSSES) 2 35,524,000 33,682,000 Per share 2 1.86 1.75 - ------------------------------------------------------------------------------------------------------- COMPONENTS OF NET INCOME (LOSS) Property-casualty Underwriting 3, 4 5,724,000 7,287,000 Net investment income 25,670,000 25,475,000 Health and life income 5 8,749,000 4,096,000 Realized gains (losses) on investments 6 1,590,000 17,932,000 Parent operations 7 (3,833,000) (1,590,000) Cumulative effect of change in accounting and extraordinary items 8, 9 - ------------------------------------------------------------------------------------------------------- NET INCOME (LOSS) 37,900,000 53,200,000 Per share 1.99 2.76 - ------------------------------------------------------------------------------------------------------- CASH DIVIDENDS PER SHARE TO COMMON STOCKHOLDERS 1.00 1.00 WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 19,090,000 19,297,000 - ------------------------------------------------------------------------------------------------------- FINANCIAL CONDITION Total assets 1,840,758,000 1,857,790,000 Investments Property-casualty 688,748,000 733,060,000 Health and life 774,241,000 767,337,000 Property-casualty unpaid claims 10 504,379,000 513,270,000 Health and life policy liabilities 10 751,379,000 723,248,000 Senior notes and bank debt 76,582,000 73,989,000 Total stockholders' equity 309,860,000 349,465,000 Stockholders' equity per share 16.35 18.55 Stockholders' equity per share, excluding effect of SFAS No. 115 11 18.79 17.90 Return on average equity 11.7% 16.3% - ------------------------------------------------------------------------------------------------------- INSURANCE STATISTICS (GAAP) PROPERTY-CASUALTY Paid loss and loss expense ratio 68.5% 66.7% Loss and loss expense ratio 65.6% 67.8% Underwriting expense ratio 27.7% 25.7% Policyholder dividends ratio 4.3% 3.7% Combined ratio before Proposition 103 rollback refund 97.6% 97.2% Combined ratio after Proposition 103 rollback refund 3 97.6% 97.2% Net premiums earned-to-surplus ratio 1.5 1.5 Loss and loss expense reserves-to-surplus ratio (net of reinsurance) 1.7 1.7 HEALTH AND LIFE Life insurance in force, net of reinsurance 2,425,320,000 2,523,153,000 - ------------------------------------------------------------------------------------------------------- 34 - ------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 1992 1991 1990 - ------------------------------------------------------------------------------------------------------- REVENUES Property-casualty operations Premiums earned $ 377,426,000 $ 376,068,000 $ 373,043,000 Investment income 43,128,000 46,127,000 49,693,000 Health and life operations Premiums and policy charges 64,448,000 61,556,000 57,848,000 Investment income 53,486,000 49,558,000 40,283,000 Realized gains (losses) on investments 10,847,000 12,999,000 (52,539,000) Real estate operations Net other income - ------------------------------------------------------------------------------------------------------- TOTAL REVENUE 549,335,000 546,308,000 468,328,000 - ------------------------------------------------------------------------------------------------------- INCOME AFTER TAX AND BEFORE REALIZED GAINS (LOSSES) 19,100,000 32,902,000 41,388,000 Per share 1.01 1.73 2.10 - ------------------------------------------------------------------------------------------------------- COMPONENTS OF NET INCOME (LOSS) Property-casualty Underwriting (24,719,000) (3,915,000) 148,000 Net investment income 31,402,000 35,624,000 39,744,000 Health and life income 8,205,000 6,913,000 6,198,000 Realized gains (losses) on investments 10,847,000 10,399,000 (50,544,000) Parent operations (6,399,000) (5,720,000) (4,702,000) Cumulative effect of change in accounting and extraordinary items 9,364,000 2,600,000 - ------------------------------------------------------------------------------------------------------- NET INCOME (LOSS) 28,700,000 45,901,000 (9,156,000) Per share 1.52 2.42 (0.47) - ------------------------------------------------------------------------------------------------------- CASH DIVIDENDS PER SHARE TO COMMON STOCKHOLDERS 1.00 1.00 .90 WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 18,918,000 18,981,000 19,685,000 - ------------------------------------------------------------------------------------------------------- FINANCIAL CONDITION Total assets 1,703,553,000 1,505,766,000 1,340,328,000 Investments Property-casualty 692,200,000 630,954,000 592,740,000 Health and life 682,896,000 570,872,000 470,333,000 Property-casualty unpaid claims 496,850,000 468,136,000 428,373,000 Health and life policy liabilities 645,224,000 547,527,000 447,822,000 Senior notes and bank debt 73,868,000 49,799,000 53,642,000 Total stockholders' equity 301,598,000 281,234,000 241,295,000 Stockholders' equity per share 16.03 14.93 12.62 Stockholders' equity per share, excluding effect of SFAS No. 115 16.03 14.93 12.62 Return on average equity 9.7% 17.3% (3.3%) - ------------------------------------------------------------------------------------------------------- INSURANCE STATISTICS (GAAP) PROPERTY-CASUALTY Paid loss and loss expense ratio 70.4% 63.9% 54.0% Loss and loss expense ratio 76.8% 70.4% 64.1% Underwriting expense ratio 27.9% 29.6% 29.2% Policyholder dividends ratio 0.8% 2.2% 7.3% Combined ratio before Proposition 103 rollback refund 105.5% 102.2% 100.6% Combined ratio after Proposition 103 rollback refund 109.7% 102.2% 100.6% Net premiums earned-to-surplus ratio 1.5 1.6 1.8 Loss and loss expense reserves-to-surplus ratio (net of reinsurance) 1.8 1.8 2.0 HEALTH AND LIFE Life insurance in force, net of reinsurance 2,663,669,000 2,438,036,000 2,233,081,000 - ------------------------------------------------------------------------------------------------------- (1) Other income consists of income from legal settlement, which is net of expense of $700,000 in 1994 and $5,120,000 in 1993 for assessments from the California Life Insurance Guarantee Association ("CLIGA"). (2) Excludes extraordinary items, cumulative effect of accounting change and $786,000, or $.04 per share, in 1994 and $1,586,000, or $.08 per share, in 1993 for the net effect of legal settlement and CLIGA assessment. In 1992, also excludes $10,611,000, or $.56 per share, for the effect of Proposition 103 rollback refund, after taxes. (3) Includes Proposition 103 rollback refund of $16,078,000, net of reinsurance, before tax or $10,611,000 ($.56 per share) after tax in 1992. (4) After tax benefit for "fresh start" of $531,000 ($.03 per share) in 1991 and $1,803,000 ($.09 per share) in 1990. (5) Net of $455,000 and $3,328,000 of expense, after tax, for assessments from CLIGA in 1994 and 1993, respectively. (6) Taxes on realized gains were reduced in 1992 and 1993 for the tax benefit associated with capital losses carried forward from 1990. (7) Includes income from real estate operation of $1,423,000, after tax, in 1994. (8) 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. (9) Net income in 1992 includes an increase of $10,719,000 for the cumulative effect of adoption of SFAS No. 109, Accounting for Income Taxes. (10) Prior year amounts have been restated to reflect the accounting changes prescribed by Statement of Financial Accounting Standards No. 113, Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts which was adopted at December 31, 1992. (11) Effective December 31, 1993, Zenith adopted Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities (SFAS No. 115), under which the unrealized appreciation or depreciation on debt securities classified as available-for-sale is recorded in stockholders' equity.
35 PROPERTY-CASUALTY LOSS DEVELOPMENT Zenith National Insurance Corp. and Subsidiaries The table that follows shows analysis of development of loss and loss adjustment expense liabilities as originally estimated on a 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, 1994 1993 - -------------------------------------------------------------------------------------------------------------------------- LIABILITY FOR UNPAID LOSS AND LOSS ADJUSTMENT EXPENSES, NET OF REINSURANCE $457,046,000 $468,718,000 - -------------------------------------------------------------------------------------------------------------------------- PAID NET OF REINSURANCE (CUMULATIVE) AS OF: One year later 167,918,000 Two years later Three years later Four years later Five years later Six years later Seven years later Eight years later Nine years later Ten years later - -------------------------------------------------------------------------------------------------------------------------- LIABILITY NET OF REINSURANCE RE-ESTIMATED AS OF: One year later 458,998,000 Two years later Three years later Four years later Five years later Six years later Seven years later Eight years later Nine years later Ten years later - -------------------------------------------------------------------------------------------------------------------------- FAVORABLE (DEFICIENT) DEVELOPMENT $ 9,720,000 - -------------------------------------------------------------------------------------------------------------------------- NET LIABILITY -- DECEMBER 31, $457,046,000 $468,718,000 Reinsurance recoverables 47,333,000 44,552,000 - -------------------------------------------------------------------------------------------------------------------------- GROSS LIABILITY -- DECEMBER 31, $504,379,000 513,270,000 Re-estimated liability, net of reinsurance 458,998,000 Re-estimated reinsurance recoverables 49,415,000 - -------------------------------------------------------------------------------------------------------------------------- Re-estimated liability, gross 508,413,000 - -------------------------------------------------------------------------------------------------------------------------- FAVORABLE (DEFICIENT) DEVELOPMENT, GROSS $ 4,857,000 - --------------------------------------------------------------------------------------------------------------------------
The analysis above presents the development of Zenith's balance sheet liabilities for 1984 through 1994. The first line in the table 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 the original unpaid amounts, net of reinsurance, including the subsequent payments. The next line shows the favorable or deficient developments of the original estimates for each year through 1994, net of reinsurance. The liability at the end of each year includes an estimate of the amount yet unpaid and still due at the subsequent re-evaluation date for all previously estimated liabilities. For example, the liability at the end of 1993 includes an estimate of the amount still due on the 1992 and prior liabilities. 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. 36
- -------------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 1992 1991 1990 1989 1988 - -------------------------------------------------------------------------------------------------------------------------- LIABILITY FOR UNPAID LOSS AND LOSS ADJUSTMENT EXPENSES, NET OF REINSURANCE $464,149,000 $440,180,000 $415,645,000 $377,891,000 $337,979,000 - -------------------------------------------------------------------------------------------------------------------------- PAID NET OF REINSURANCE (CUMULATIVE) AS OF: One year later 176,815,000 177,071,000 153,914,000 121,051,000 108,423,000 Two years later 285,231,000 283,706,000 256,176,000 196,578,000 169,332,000 Three years later 344,686,000 314,957,000 250,078,000 206,412,000 Four years later 348,505,000 281,409,000 235,720,000 Five years later 300,970,000 254,062,000 Six years later 266,074,000 Seven years later Eight years later Nine years later Ten years later - -------------------------------------------------------------------------------------------------------------------------- LIABILITY NET OF REINSURANCE RE-ESTIMATED AS OF: One year later 473,220,000 460,114,000 418,730,000 372,542,000 331,770,000 Two years later 475,651,000 477,877,000 433,604,000 362,718,000 322,632,000 Three years later 478,294,000 445,074,000 365,901,000 318,052,000 Four years later 446,016,000 372,429,000 315,548,000 Five years later 373,149,000 318,506,000 Six years later 318,731,000 Seven years later Eight years later Nine years later Ten years later - -------------------------------------------------------------------------------------------------------------------------- FAVORABLE (DEFICIENT) DEVELOPMENT $(11,502,000) $(38,114,000) $(30,371,000) $ 4,742,000 $19,248,000 - -------------------------------------------------------------------------------------------------------------------------- NET LIABILITY -- DECEMBER 31, $464,149,000 Reinsurance recoverables 32,701,000 - ------------------------------------------------------------------ GROSS LIABILITY -- DECEMBER 31, 496,850,000 Re-estimated liability, net of reinsurance 475,651,000 Re-estimated reinsurance recoverables 64,066,000 - ------------------------------------------------------------------ Re-estimated liability, gross 539,717,000 - -------------------------------------------------------------------------------------------------------------------------- FAVORABLE (DEFICIENT) DEVELOPMENT, GROSS $(42,867,000) - ------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------ YEAR ENDED DECEMBER 31, 1987 1986 1985 1984 - ------------------------------------------------------------------------------------------------------------ LIABILITY FOR UNPAID LOSS AND LOSS ADJUSTMENT EXPENSES, NET OF REINSURANCE $286,844,000 $217,161,000 $153,483,000 $113,567,000 - ------------------------------------------------------------------------------------------------------------ PAID NET OF REINSURANCE (CUMULATIVE) AS OF: One year later 98,802,000 83,511,000 70,725,000 50,376,000 Two years later 152,609,000 128,998,000 107,104,000 82,783,000 Three years later 182,843,000 156,705,000 127,532,000 98,991,000 Four years later 200,753,000 172,261,000 139,188,000 107,850,000 Five years later 218,712,000 181,708,000 146,031,000 114,529,000 Six years later 230,337,000 193,759,000 150,892,000 118,206,000 Seven years later 238,292,000 201,313,000 154,879,000 121,377,000 Eight years later 207,004,000 158,339,000 123,546,000 Nine years later 160,513,000 126,046,000 Ten years later 127,602,000 - ------------------------------------------------------------------------------------------------------------ LIABILITY NET OF REINSURANCE RE-ESTIMATED AS OF: One year later 286,389,000 213,884,000 154,027,000 126,553,000 Two years later 282,865,000 219,691,000 156,736,000 125,900,000 Three years later 281,937,000 221,401,000 160,791,000 124,876,000 Four years later 278,664,000 222,532,000 164,164,000 127,532,000 Five years later 273,723,000 222,122,000 164,090,000 129,793,000 Six years later 274,248,000 223,622,000 164,685,000 129,714,000 Seven years later 275,361,000 226,059,000 166,594,000 129,956,000 Eight years later 228,605,000 169,008,000 131,289,000 Nine years later 172,411,000 133,723,000 Ten years later 136,819,000 - ------------------------------------------------------------------------------------------------------------ FAVORABLE (DEFICIENT) DEVELOPMENT $ 11,483,000 $(11,444,000) $(18,928,000) $(23,252,000) - ------------------------------------------------------------------------------------------------------------
37 CONSOLIDATED BALANCE SHEET Zenith National Insurance Corp. and Subsidiaries
- ------------------------------------------------------------------------------------------------------------------------------- DECEMBER 31, Note 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------- ASSETS Investments Fixed maturities: At amortized cost (fair value $400,964,000, 1994 and $438,705,000, 1993) $ 410,989,000 $ 401,337,000 At fair value (cost $864,133,000, 1994 and $687,075,000, 1993) 813,640,000 705,682,000 Floating rate preferred stocks, at fair value (cost $19,618,000, 1994 and $30,582,000, 1993) 18,506,000 31,495,000 Convertible and non-redeemable preferred stocks, at fair value (cost $8,684,000, 1994 and $11,545,000, 1993) 8,153,000 11,246,000 Common stocks, at fair value (cost $19,628,000, 1994 and $14,485,000, 1993) 19,355,000 15,575,000 Mortgage loans on real estate 3,503,000 4,515,000 Policy loans 41,753,000 39,609,000 Short-term investments (at cost, which approximates market) 127,594,000 276,841,000 Other investments 19,496,000 14,097,000 - ------------------------------------------------------------------------------------------------------------------------------- Total investments 1, 2 1,462,989,000 1,500,397,000 Cash 7,114,000 8,560,000 Accrued investment income 22,429,000 21,635,000 Premiums receivable, less allowance for doubtful accounts of $912,000 in 1994 and $887,000 in 1993 66,898,000 65,421,000 Receivable from reinsurers and prepaid reinsurance premiums 58,873,000 57,426,000 Deferred policy acquisition costs 109,059,000 108,416,000 Properties and equipment, less accumulated depreciation 3 48,581,000 47,042,000 Federal income taxes 7 7,637,000 Purchased intangibles and other assets 1 21,887,000 23,216,000 Excess of cost over net assets acquired 1 2,009,000 2,009,000 Other assets 1 33,282,000 23,668,000 - ------------------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $1,840,758,000 $1,857,790,000 - -------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of this statement. 38
- ------------------------------------------------------------------------------------------------------------------------------- DECEMBER 31, Note 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------- LIABILITIES Policy liabilities and accruals Unpaid losses and loss expenses 14 $ 504,379,000 $ 513,270,000 Future policy benefits for life insurance contracts 4 159,842,000 154,501,000 Deposits on deferred annuity contracts 569,484,000 545,956,000 Policy and contract claims 6,054,000 5,934,000 Unearned premiums 121,867,000 111,896,000 Policyholders' dividends accrued and accumulated 30,171,000 30,378,000 Other policyholder funds 15,999,000 16,857,000 Reserves on loss portfolio transfers 9,972,000 11,119,000 Payable to banks 5 2,471,000 Senior notes payable, less unamortized issue costs of $889,000, 1994 and $1,011,000, 1993 6 74,111,000 73,989,000 Federal income taxes 7 14,255,000 Other liabilities 36,548,000 30,170,000 - ------------------------------------------------------------------------------------------------------------------------------- Total liabilities 1,530,898,000 1,508,325,000 - ------------------------------------------------------------------------------------------------------------------------------- Commitments and contingent liabilities 9 STOCKHOLDERS' EQUITY Preferred stock, $1 par--shares authorized 1,000,000; issued and outstanding, none in 1994 and 1993 Common stock, $1 par--shares authorized 50,000,000; issued 24,034,000, outstanding 18,950,000, 1994; issued 23,910,000, outstanding 18,841,000, 1993 10 24,034,000 23,910,000 Additional paid-in capital 251,363,000 249,092,000 Retained earnings 167,025,000 148,043,000 Net unrealized appreciation (depreciation) on investments, net of $3,969,000 deferred tax benefit in 1994 and $7,093,000 deferred tax expense in 1993 1, 2 (47,460,000) 13,176,000 - ------------------------------------------------------------------------------------------------------------------------------- 394,962,000 434,221,000 Less treasury stock at cost (5,084,000 shares, 1994 and 5,069,000 shares, 1993) 10 (85,102,000) (84,756,000) - ------------------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 309,860,000 349,465,000 - ------------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $1,840,758,000 $1,857,790,000 - -------------------------------------------------------------------------------------------------------------------------------
39 CONSOLIDATED STATEMENT OF OPERATIONS Zenith National Insurance Corp. and Subsidiaries
- ----------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, Note 1994 1993 1992 - ----------------------------------------------------------------------------------------------------------------------- CONSOLIDATED REVENUES: Property-casualty premium income 8 $401,925,000 $405,901,000 $377,426,000 Health and life premium income and other policy charges 61,270,000 63,921,000 64,448,000 Net investment income 2 98,042,000 92,474,000 96,614,000 Realized gains on investments 2 2,446,000 21,045,000 10,847,000 Real estate sales 30,220,000 Other income, net 9 1,210,000 2,441,000 - -----------------------------------------------------------------------------------------------------------------------
Total revenues 595,113,000 585,782,000 549,335,000 - ----------------------------------------------------------------------------------------------------------------------- EXPENSES: Property-casualty losses and loss expenses incurred 8, 14 263,457,000 275,208,000 289,732,000 Health and life benefits and other policy credits 80,104,000 84,448,000 85,493,000 Policy acquisition costs 83,653,000 73,942,000 71,787,000 Other underwriting and operating expenses 57,548,000 55,152,000 55,200,000 Policyholders' dividends and participation 18,812,000 16,895,000 4,867,000 Special policyholders' dividend--Proposition 103 rollback refund 9 16,078,000 Real estate construction and operating costs 28,031,000 Interest expense 5, 6 5,937,000 6,658,000 6,472,000 - ----------------------------------------------------------------------------------------------------------------------- Total expenses 537,542,000 512,303,000 529,629,000 - ----------------------------------------------------------------------------------------------------------------------- Income from operations before federal income taxes, extraordinary item and cumulative effect of change in accounting 57,571,000 73,479,000 19,706,000 Federal income taxes 7 19,671,000 20,279,000 370,000 - ----------------------------------------------------------------------------------------------------------------------- NET INCOME BEFORE EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING 37,900,000 53,200,000 19,336,000 Extraordinary item--debt retirement cost, net of $698,000 tax benefit 6 (1,355,000) Cumulative effect of change in accounting for income taxes 1, 7 10,719,000 - ----------------------------------------------------------------------------------------------------------------------- NET INCOME $ 37,900,000 $ 53,200,000 $ 28,700,000 - ----------------------------------------------------------------------------------------------------------------------- EARNINGS PER SHARE: Net income before extraordinary item and cumulative effect of change in accounting $ 1.99 $ 2.76 $ 1.02 Extraordinary item (.07) Cumulative effect of change in accounting .57 - ----------------------------------------------------------------------------------------------------------------------- NET INCOME PER COMMON SHARE $ 1.99 $ 2.76 $ 1.52 - ----------------------------------------------------------------------------------------------------------------------- WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 19,090,000 19,297,000 18,918,000 - -----------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of this statement. 40 CONSOLIDATED STATEMENT OF CASH FLOWS Zenith National Insurance Corp. and Subsidiaries
- ---------------------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 1994 1993 1992 - ---------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Premiums collected $ 479,415,000 $ 492,758,000 $ 459,247,000 Deposits on universal life type contracts 12,508,000 21,142,000 14,761,000 Investment income received 98,107,000 95,324,000 98,192,000 Proceeds from sales of real estate 30,220,000 Losses and loss adjustment expenses paid (274,581,000) (270,854,000) (266,345,000) Health claims paid (29,046,000) (31,305,000) (33,597,000) Death and surrender benefits paid (12,501,000) (11,659,000) (11,655,000) Underwriting and other operating expenses paid (126,234,000) (131,082,000) (130,458,000) Real estate construction costs paid (36,133,000) (7,285,000) Reinsurance premiums paid (23,251,000) (21,429,000) (22,797,000) Dividends paid to policyholders, including Proposition 103 refund in 1993 (19,698,000) (33,167,000) (10,307,000) Interest paid (6,949,000) (6,914,000) (6,073,000) Interest on deferred annuity contracts (33,002,000) (33,752,000) (33,593,000) Income taxes paid (30,197,000) (5,178,000) (3,446,000) - ---------------------------------------------------------------------------------------------------------------------------------- Net cash flows from operating activities, excluding cash from trading portfolio 28,658,000 56,599,000 53,929,000 Net proceeds from sales of trading portfolio investments 105,925,000 - ---------------------------------------------------------------------------------------------------------------------------------- Net cash flows from operating activities including cash from trading portfolio 134,583,000 56,599,000 53,929,000 - ---------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of investments: Debt securities Held-to-Maturity (40,039,000) Debt and equity securities Available-for-Sale (657,009,000) Other debt and equity securities and other investments (12,827,000) (620,044,000) (638,854,000) Proceeds from maturities and exchanges of investments: Debt securities Held-to-Maturity 29,955,000 Debt and equity securities Available-for-Sale 37,512,000 Other debt and equity securities and other investments 5,446,000 201,420,000 124,158,000 Proceeds from sales of investments: Debt and equity securities Available-for-Sale 345,176,000 Other debt and equity securities and other investments 2,770,000 450,487,000 354,922,000 Capital expenditures (5,805,000) (3,568,000) (4,168,000) Cash received under portfolio transfers 7,628,000 Losses and adjustment expenses paid under portfolio transfers (1,395,000) (1,656,000) (2,187,000) Net change in short-term investments 150,589,000 (116,953,000) 6,683,000 Other -- principally cash received through notes receivable in 1993 (101,000) 2,309,000 128,000 - ---------------------------------------------------------------------------------------------------------------------------------- Net cash flows from investing activities (145,728,000) (88,005,000) (151,690,000) - ---------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Cash advanced from banks 13,416,000 1,000,000 6,350,000 Cash repaid to banks (10,945,000) (1,000,000) (40,150,000) Cash dividends paid to common stockholders (18,894,000) (19,018,000) (18,927,000) Proceeds from exercise of stock options 2,093,000 6,261,000 4,526,000 Deposits on deferred annuity contracts 41,924,000 56,764,000 83,600,000 Acquisition costs of deferred annuity contracts, deferred (4,105,000) (5,925,000) (9,104,000) Annuitization and return of contractholders' balances on deferred annuity contracts (46,446,000) (26,357,000) (20,279,000) Retirement of Senior Notes (17,740,000) Net proceeds from issuance of Senior Notes payable 2002 73,787,000 Interest on deferred annuity contracts 33,002,000 33,752,000 33,593,000 Purchase of treasury shares (346,000) (7,367,000) (5,686,000) - ---------------------------------------------------------------------------------------------------------------------------------- Net cash flows from financing activities 9,699,000 38,110,000 89,970,000 - ---------------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash (1,446,000) 6,704,000 (7,791,000) Cash at beginning of year 8,560,000 1,856,000 9,647,000 - ---------------------------------------------------------------------------------------------------------------------------------- CASH AT END OF YEAR $ 7,114,000 $ 8,560,000 $ 1,856,000 - ---------------------------------------------------------------------------------------------------------------------------------- RECONCILIATION OF NET INCOME TO NET CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 37,900,000 $ 53,200,000 $ 28,700,000 Adjustments to reconcile net income to net cash flows from operating activities: Depreciation and amortization 5,718,000 6,264,000 7,824,000 Net amortization of bonds and preferred stocks 595,000 1,683,000 1,885,000 Realized gains on investments (2,446,000) (21,045,000) (10,847,000) Net cash from trading portfolio 105,925,000 Decrease (increase) in: Accrued investment income (794,000) 855,000 (542,000) Premiums receivable (1,477,000) 1,698,000 3,634,000 Receivable from reinsurers (1,447,000) (10,237,000) (41,384,000) Deferred policy acquisition costs 3,462,000 (11,472,000) (5,305,000) Real estate construction in progress (12,671,000) (7,215,000) Increase (decrease) in: Unpaid losses and loss expenses (8,891,000) 16,420,000 56,670,000 Future policy benefits for life insurance contracts 5,274,000 15,815,000 12,917,000 Unearned premiums 9,971,000 10,097,000 6,220,000 Policyholders' dividends accrued and accumulated (207,000) (16,037,000) 13,349,000 Federal income taxes (10,526,000) 15,101,000 (14,493,000) Other 4,197,000 1,472,000 (4,699,000) - ---------------------------------------------------------------------------------------------------------------------------------- Net cash flows from operating activities $ 134,583,000 $ 56,599,000 $ 53,929,000 - ----------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of this statement. 41 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY Zenith National Insurance Corp. and Subsidiaries
- -------------------------------------------------------------------------------------------------------------------------- PREFERRED COMMON THREE YEARS ENDED DECEMBER 31, 1994 NOTE STOCK $1 PAR STOCK $1 PAR - -------------------------------------------------------------------------------------------------------------------------- BALANCE AT JANUARY 1, 1992 $ 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 tax expense of $543,000 1,2 Cumulative effect of change in accounting for investments, net of deferred tax expense 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 Net income for 1994 Net unrealized (depreciation) on investments, net of deferred tax benefit of $11,062,000 2 Exercise of 124,000 stock options 10 124,000 Tax benefit on options exercised in 1994 Purchase of 15,000 treasury shares at cost Cash dividends declared to common stockholders ($1.00 per share, paid quarterly) - -------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1994 $ 24,034,000 - --------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of this statement. 42
- ------------------------------------------------------------------------------------------------------------------------------------ NET UNREALIZED ADDITIONAL APPRECIATION PAID-IN RETAINED (DEPRECIATION) TREASURY THREE YEARS ENDED DECEMBER 31, 1994 CAPITAL EARNINGS ON INVESTMENTS STOCK TOTAL - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE AT JANUARY 1, 1992 $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 tax expense of $543,000 1,681,000 1,681,000 Cumulative effect of change in accounting for investments, net of deferred tax expense 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 Net income for 1994 37,900,000 37,900,000 Net unrealized (depreciation) on investments, net of deferred tax benefit of $11,062,000 (60,636,000) (60,636,000) Exercise of 124,000 stock options 1,969,000 2,093,000 Tax benefit on options exercised in 1994 302,000 302,000 Purchase of 15,000 treasury shares at cost (346,000) (346,000) Cash dividends declared to common stockholders ($1.00 per share, paid quarterly) (18,918,000) (18,918,000) - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE AT DECEMBER 31, 1994 $251,363,000 $167,025,000 $(47,460,000) $(85,102,000) $309,860,000 - ------------------------------------------------------------------------------------------------------------------------------------
43 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"), 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. 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 transactions and balances have been eliminated in consolidation. Fair Values of Financial Instruments Financial instruments are contractual obligations that ultimately end 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. The following summarizes the carrying amounts and fair value of Zenith's financial instruments as of December 31:
- ------------------------------------------------------------------------------- 1994 1993 CARRYING FAIR CARRYING FAIR (Dollars in thousands) NOTE AMOUNT VALUE AMOUNT VALUE - ------------------------------------------------------------------------------- ASSETS: Investments: 2 Trading securities $ 12,904 $ 12,904 $ 119,679 $ 119,679 Other investments 1,450,085 1,440,060 1,380,718 1,418,086 --------- --------- --------- --------- 1,462,989 1,452,964 1,500,397 1,537,765 LIABILITIES: Deposits on deferred annuity contracts 569,484 569,484 545,956 545,956 Payable to banks 5 2,471 2,471 Senior notes payable 6 74,111 75,848 73,989 86,250 - -------------------------------------------------------------------------------
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 and 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. 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 22 items whose values were obtained from other brokers making a market in the investment, the Bloomberg and Quotron 44 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 cost" 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 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-Casualty Revenue and Expense Property-casualty premiums are earned on a pro rata basis over the terms of the policies. Premiums applicable to the unexpired terms of policies in force are recorded as unearned premiums. 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 3.0% to 7.0% in 1994 except for indexed deferred annuity contracts where rates ranged from 4.5% to 5.9% in 1994. 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. 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 contractholder account balances consisting of the premiums received plus credited interest, less contractholder assessments. Amounts included in expense represent benefits in excess of contractholder account balances. Interest credited rates ranged from 3.75% to 6.5% in 1994. 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 45 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, unforeseen 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 65% of amounts recoverable from reinsurers at December 31, 1994 are attributable to reinsurance arrangements with one large United States reinsurance company. No material amounts due from reinsurers have been written off as uncollectible in the three years ended December 31, 1994. Deferred Policy Acquisition Costs Property-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, land development costs and construction costs, including costs of acquisition and development, property taxes and related interest are capitalized. Such costs, and an estimate of the costs to complete a project, are recognized pro rata against sales of completed units. Such capitalized costs are included in other assets. 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. The cost of purchased software for internal use is capitalized and amortized over the useful life of the software. The cost of internally-developed software for internal use is expensed as incurred. 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 1994, 1993 and 1992 was $1,329,000, $1,166,000, and $1,147,000, respectively, and accumulated amortization was $13,647,000 at December 31, 1994 and $12,318,000 at December 31, 1993. 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 1993 and 1992 amounts have been reclassified to conform to the 1994 presentation. 46 Note 2 Investments The amortized cost and fair values of investments held-to-maturity, available-for-sale and trading securities were as follows:
- -------------------------------------------------------------------- TYPE OF SECURITY (Dollars in GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS (LOSSES) VALUE thousands) DECEMBER 31, 1994 - -------------------------------------------------------------------- HELD-TO-MATURITY
U.S. Treasuries $ 2,106 $ 4 $ 2,110 Corporate debt 361,823 5,184 $ (12,000) 355,007 Mortgage backed 47,060 (3,213) 43,847 - -------------------------------------------------------------------- Total, held-to- maturity $ 410,989 $ 5,188 $ (15,213) $ 400,964 - -------------------------------------------------------------------- AVAILABLE-FOR-SALE U.S. Treasuries $ 351,404 $ (14,825) $ 336,579 Foreign government debt 2,139 (324) 1,815 Corporate debt 318,557 $ 1,505 (18,377) 301,685 Mortgage backed 161,559 (17,135) 144,424 Redeemable preferred stocks 18,918 190 (703) 18,405 Equities 45,602 1,042 (2,802) 43,842 Short-term investments 127,594 127,594 - -------------------------------------------------------------------- Total, available- for-sale $1,025,773 $ 2,737 $ (54,166) $ 974,344 - -------------------------------------------------------------------- TRADING U.S. Treasuries $ 7,390 $ (275) $ 7,115 Corporate debt 4,166 (549) 3,617 Equities 2,328 $ 26 (182) 2,172 - -------------------------------------------------------------------- Total, trading $ 13,884 $ 26 $ (1,006) $ 12,904 - -------------------------------------------------------------------- - --------------------------------------------------------------------
TYPE OF SECURITY (Dollars in GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS (LOSSES) VALUE thousands) DECEMBER 31, 1993 - -------------------------------------------------------------------- HELD-TO-MATURITY U.S. Treasuries $ 248 $ 7 $ 255 Corporate debt 340,931 36,532 $ (347) 377,116 Mortgage backed 60,158 1,176 61,334 - -------------------------------------------------------------------- Total, held-to- maturity $ 401,337 $ 37,715 $ (347) $ 438,705 - -------------------------------------------------------------------- AVAILABLE-FOR-SALE U.S. Treasuries $ 215,945 $ 444 $ (509) $ 215,880 Foreign government debt 5,612 79 5,691 Corporate debt 262,003 19,287 (894) 280,396 Mortgage backed 58,446 598 (8) 59,036 Redeemable preferred stocks 33,217 753 (995) 32,975 Equities 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 U.S. Treasuries $ 107,747 $ 27 $ (140) $ 107,634 Corporate debt 4,105 57 (92) 4,070 Equities 7,785 228 (38) 7,975 - -------------------------------------------------------------------- Total, trading $ 119,637 $ 312 $ (270) $ 119,679 - --------------------------------------------------------------------
Debt securities at December 31, 1994, are due as follows:
- ------------------------------------------------------- (Dollars in thousands) AMORTIZED FAIR DECEMBER 31, 1994 COST VALUE - ------------------------------------------------------- HELD-TO-MATURITY: Due in one year or less $ 8,249 $ 8,349 Due after one year through five years 103,296 104,480 Due after five years through ten years 123,138 118,384 Due after ten years 176,306 169,751 - ------------------------------------------------------- Total $ 410,989 $ 400,964 - ------------------------------------------------------- AVAILABLE-FOR-SALE: Due in one year or less $ 184,156 $ 183,872 Due after one year through five years 401,538 388,076 Due after five years through ten years 183,934 166,704 Due after ten years 210,543 191,850 - ------------------------------------------------------- Total $ 980,171 $ 930,502 - -------------------------------------------------------
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. The gross realized gains on sales of investments classified as available-for-sale during 1994 were $4,310,000 and the gross realized losses were $2,140,000. Proceeds from sales of debt securities were $377,021,000 and $290,326,000 during 1993 and 1992, respectively. Gross gains on such sales were $14,189,000 and $11,949,000 in 1993 and 1992, respectively and gross losses were $588,000 and $2,142,000. Investment income is summarized as follows:
- ---------------------------------------------------------------- (Dollars in thousands) YEAR ENDED DECEMBER 31, 1994 1993 1992 - ----------------------------------------------------------------
Fixed maturities Bonds $ 85,187 $ 79,384 $ 78,197 Redeemable preferred stocks 2,199 3,205 6,382 Equity securities Floating rate preferred stocks 1,439 2,181 2,972 Convertible and nonredeemable preferred stocks 484 715 1,155 Common stocks 446 325 486 Mortgage loans on real estate 301 572 980 Policy loans 2,810 2,562 2,129 Short-term investments 7,588 6,775 5,023 Other 2,280 1,555 3,358 - ---------------------------------------------------------------- 102,734 97,274 100,682 Less investment expenses 4,692 4,800 4,068 - ---------------------------------------------------------------- Net investment income $ 98,042 $ 92,474 $ 96,614 - ----------------------------------------------------------------
Investments carried at their fair value of $298,536,000 at December 31, 1994 and $313,700,000 at December 31, 1993 were on deposit with regulatory authorities in compliance with insurance company regulations. 47 As of December 31, 1994, Zenith and its subsidiaries own $10,398,000, at fair value, 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, 1994 1993 - ------------------------------------------------------ Land $ 14,836 $ 14,836 Buildings 33,806 32,360 Furniture, fixtures and equipment 35,088 32,450 - ------------------------------------------------------ 83,730 79,646 Less accumulated depreciation 35,149 32,604 - ------------------------------------------------------ Total $ 48,581 $ 47,042 - ------------------------------------------------------
Depreciation expense amounted to $4,267,000, $4,978,000, and $4,855,000 in 1994, 1993 and 1992, respectively. 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 - -----------------------------------------------------------------------
1994 Universal life contracts $1,733,560 $ 92,157 6.6% Traditional life contracts 613,076 49,270 9.9% Other 78,684 18,415 7.4% - ----------------------------------------------------------------------- 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% - -----------------------------------------------------------------------
Reinsurance recoverable on future policy benefits amounting to $590,000 and $730,000 at December 31, 1994 and 1993, 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, 1994 and 1993, 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 bank's prime rate, less .55%, and at the bank's prime rate, less .25% 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. 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 1994, 1993 and 1992 was 8.5%, 5.5% and 6.2%, respectively. At December 31, 1994 and 1993 the prime interest rate was 8.5% and 6%, respectively. During 1994, Perma-Bilt entered into two construction loan agreements with essentially the same terms. The agreements provide for a maximum borrowing of $11,000,000. The loans bear interest at the bank's reference rate plus 1.25%. At December 31, 1994 $2,471,000 was outstanding with respect to these loans. Both loans mature on April 1, 1996. The carrying value of these variable-rate loans approximates fair value at December 31, 1994. 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 $122,000, $121,000 and $81,000 of such costs were amortized during 1994, 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 48 common stock; (b) 10% or more of Zenith common stock is acquired by Zenith within any 12 month period; or (c) the sum of the fair market value of distributions (other than regular dividends or distributions of capital stock) and the consideration for purchases of Zenith common stock by Zenith during a 12 month period is thirty percent or more of the fair market value of outstanding Zenith common stock. The fair value at December 31, 1994 of the 9% Notes is $75,848,000 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. Interest incurred on all borrowing is summarized as follows:
- ------------------------------------------------------------------ (Dollars in thousands) YEAR ENDED DECEMBER 31, 1994 1993 1992 - ------------------------------------------------------------------ Interest capitalized for real estate operations $ 1,219 $ 407 Interest not related to real estate operations 5,937 6,658 $ 6,472 - ------------------------------------------------------------------ Total interest incurred $ 7,156 $ 7,065 $ 6,472 - ------------------------------------------------------------------
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, 1994 1993 1992 - --------------------------------------------------------------- Current $ 23,406 $ 11,982 $ 5,146 Deferred (3,735) 8,297 (4,776) - --------------------------------------------------------------- Total federal income taxes $ 19,671 $ 20,279 $ 370 - ---------------------------------------------------------------
The difference between the statutory federal income tax rate (35% in 1994 and 1993 and 34% in 1992) 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, 1994 1993 1992
- --------------------------------------------------------------- Statutory federal income tax $ 20,150 $ 25,718 $ 6,700 Increase (reduction) in taxes: Dividend received deduction (1,086) (1,537) (2,577) Tax exempt interest (812) Proration of dividend exclusion and tax exempt interest to loss reserves 138 204 449 Tax benefit of capital loss carryforward (4,253) (3,688) Other 469 147 298 - --------------------------------------------------------------- Total federal income taxes $ 19,671 $ 20,279 $ 370 - ---------------------------------------------------------------
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 of adoption 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. 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:
- -------------------------------------------------------------------------- 1994 1993 (Dollars in thousands) DEFERRED TAX Deferred Tax YEAR ENDED DECEMBER 31, ASSETS LIABILITIES Assets Liabilities - -------------------------------------------------------------------------- Differences between the tax basis and carrying value of investments $ 16,771 $ 7,725 Deferred policy acquisition costs $ 36,785 36,586 Purchased intangibles 15,136 15,601 Properties and equipment 2,592 2,597 Property and casualty loss reserve discount 25,663 $ 25,727 Difference in computing life policy reserves 17,551 17,044 Limitation on deduction for unearned premiums 7,988 7,243 Policyholders' dividends accrued 7,183 7,464 Other 2,821 4,293 2,083 6,711 - -------------------------------------------------------------------------- 77,977 58,806 59,561 69,220 Valuation allowance (14,031) - -------------------------------------------------------------------------- Net deferred tax assets and liabilities $ 5,140 $ 9,659 - --------------------------------------------------------------------------
Property-casualty loss reserves are not discounted for book purposes, however the Tax Reform Act of 1986 requires property-casualty loss reserves to be discounted for tax purposes.
Current taxes receivable (payable) and deferred taxes were as follows: - ---------------------------------------------------------- (Dollars in thousands) YEAR ENDED DECEMBER 31, 1994 1993 - ---------------------------------------------------------- Current taxes $ 2,497 $ (4,596) Deferred taxes 5,140 (9,659) - ---------------------------------------------------------- Federal income taxes $ 7,637 $ (14,255) - ----------------------------------------------------------
Zenith files a consolidated federal income tax return. Zenith's insurance subsidiaries pay premium taxes on gross premiums written in lieu of state income or franchise tax. The tax rate in California was 2.35% and 6.06% in Texas in 1994, 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. 49 Note 8 Reinsurance Reinsurance transactions reflected in the financial statements are as follows: - ------------------------------------------------------------- (Dollars in thousands) 1994 1993 1992 - ------------------------------------------------------------- Ceded reinsurance netted against earned premiums for the year $ 21,801 $ 22,457 $ 22,231 Ceded reinsurance netted against property and casualty losses and loss adjustment expenses incurred 17,133 38,716 11,350 Net assumed reinsurance included in earned premiums for the year 37,787 26,094 19,357 - -------------------------------------------------------------
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 $370,078, $578,000 and $420,000 for 1994, 1993 and 1992, 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, 1994 are as follows:
- ----------------------------------------------------------------- (Dollars in thousands) EQUIPMENT AND YEAR AUTO FLEET OFFICES TOTAL - ----------------------------------------------------------------- 1995 $ 480 $ 3,436 $ 3,916 1996 262 2,895 3,157 1997 25 1,536 1,561 1998 1,267 1,267 1999 1,148 1,148 Thereafter 3,496 3,496 - ----------------------------------------------------------------- Total $ 767 $ 13,778 $ 14,545 - -----------------------------------------------------------------
Rental expenses for 1994, 1993, and 1992 amounted to $5,612,000, $5,717,000 and $4,774,000, respectively. In November 1994, Zenith Insurance became a corporate underwriting member of Lloyd's through the formation of a 100% wholly owned subsidiary, ZIC Lloyd's Underwriting Limited which has committed funds of $5 million to support the 1995 underwriting year of a certain syndicate. 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 of $1,210,000 and $2,441,000 was recognized in 1994 and 1993, respectively, relating to certain events which were associated with the non-investment grade securities market and Zenith's related write-downs of investments in 1990. Zenith settled litigation in 1993 which resulted in $1,910,000 and $7,561,000 of income in 1994 and 1993, respectively. Also, CalFarm Life recognized approximately $700,000 in 1994 and $5,120,000 in 1993 for its estimated share of the cost associated with the failure of Executive Life Insurance Company which will be assessed by the California Life Insurance Guarantee Association. Resolution of Contingencies Surrounding Proposition 103 In January 1993, Zenith reached an agreement with the California Department of Insurance to resolve the rollback refund issue with respect to its subsidiaries. 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. 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. 50 Additional information with respect to stock options is as follows:
- ----------------------------------------------------------------- (SHARES AND TOTAL DOLLARS OPTION PRICE IN THOUSANDS) NUMBER ----------------------- OPTIONS OF SHARES PER SHARE TOTAL - ----------------------------------------------------------------- Outstanding at December 31, 1992 1,385 $11.94-$21.02 $ 24,945 Granted 332 22.56-28.19 8,198 Exercised 348 11.94-19.81 6,261 Expired or cancelled 65 11.94-19.81 1,137 - ----------------------------------------------------------------- Outstanding at December 31, 1993 1,304 11.94-28.19 25,745 Granted 190 21.88-25.06 4,464 Exercised 124 11.94-19.09 2,093 Expired or cancelled 75 11.94-23.25 1,415 - ----------------------------------------------------------------- Outstanding at December 31, 1994 1,295 $11.94-$28.19 $ 26,701 - -----------------------------------------------------------------
The 1,295,000 outstanding options are exercisable: 1995, 953,000; 1996, 177,000; 1997, 124,000; and 41,000, 1998. At December 31, 1994, 1993 and 1992, respectively, 336,000, 454,000 and 721,000 shares were available to be granted. At December 31, 1994 and 1993, respectively, 764,000 and 704,000 options could have been exercised. In 1992, 303,000 options were exercised for a total amount of $4,527,000 with an option price of $11.94-$19.09 per share. At December 31, 1994 Zenith had authority from its Board of Directors to purchase 794,000 additional treasury shares at prevailing market prices. Note 11 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, 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 can only 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 $263,150,000 and $103,862,000, respectively, as of December 31, 1994 of which Zenith Insurance and CalFarm Life can pay $25,643,000 and $9,512,000, respectively, in 1995, to Zenith in dividends without prior approval, leaving a restricted balance of $237,507,000 and $94,350,000, respectively. In addition, in 1995, $7,328,000 can be paid to Zenith Insurance by its insurance subsidiaries which would be available for dividend payments to Zenith in the following year. Note 12 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, 1994 1993 1992 - ----------------------------------------------------- Capital stock and surplus: Property-casualty, consolidated $ 230,040 $ 228,093 $ 203,479 Life insurance 66,236 59,241 54,769 Net income: Property-casualty, consolidated 32,856 49,698 7,562 Life insurance 9,164 4,966 8,253 - -----------------------------------------------------
Note 13 Unaudited Quarterly Financial Data - -------------------------------------------------------------------- (Dollars in thousands except per share data)
YEAR ENDED MARCH JUNE SEPTEMBER DECEMBER DECEMBER 31, 1994 31 30 30 31 - -------------------------------------------------------------------- Premium income and other policy charges $ 113,923 $ 115,906 $ 121,519 $ 111,847 Net investment income 23,143 24,455 25,178 25,266 Realized gains (losses) on investments 1,816 431 (628) 827 Real estate sales 8,773 7,079 14,368 Other income (loss), net 1,760 71 (621) Net income 8,200 10,900 10,100 8,700 Net income per share .43 .57 .53 .46 - --------------------------------------------------------------------
- --------------------------------------------------------------------- (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 - ---------------------------------------------------------------------
51 Note 14 Loss and Loss Adjustment Expense Reserves The following table represents a reconciliation of changes in liabilities for unpaid property-casualty losses and loss adjustment expenses for the three
years ended December 31, 1994. - ---------------------------------------------------- (Dollars in thousands) 1994 1993 1992 - ---------------------------------------------------- Beginning of year, net of reinsurance recoverable $ 468,718 $ 464,149 $ 440,180 Incurred claims: Current year 273,177 266,137 269,798 Prior years (9,720) 9,071 19,934 - ---------------------------------------------------- Total incurred claims 263,457 275,208 289,732 - ---------------------------------------------------- Payments: Current year (107,211) (93,824) (88,692) Prior years (167,918) (176,815) (177,071) - ---------------------------------------------------- Total payments (275,129) (270,639) (265,763) - ---------------------------------------------------- End of year, net of reinsurance 457,046 468,718 464,149 Reinsurance recoverable on unpaid losses 47,333 44,552 32,701 - ---------------------------------------------------- End of year $ 504,379 $ 513,270 $ 496,850 - ----------------------------------------------------
Statutory reserves are not materially different from GAAP reserves, net of reinsurance, presented above. 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, Perma-Bilt. Property-Casualty Operations Zenith's property-casualty insurance operations offer multiple product line insurance and reinsurance. Investments and related income of the property-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. 52 The following table is a summary of results by major segments:
- ------------------------------------------------------------------------------------------------------ (Dollars in thousands except per share data) YEAR ENDED DECEMBER 31 1994 1993 1992 - ------------------------------------------------------------------------------------------------------ PROPERTY-CASUALTY Net written premiums $ 411,905 $ 415,947 $ 378,178 Net earned premiums 401,925 405,901 377,426 Investment income 37,573 36,643 42,276 Underwriting income (loss) before Proposition 103 rollback refund(1)(8) 9,533 11,251 (20,621) Underwriting income (loss)(1) 9,533 11,251 (36,699) Income after taxes and before realized gains and Proposition 103 rollback refund(3)(8) 31,097 32,425 16,674 Income after taxes and before realized gains(3) 31,097 32,425 6,063 Income after taxes 31,996 40,939 16,208 Identifiable assets 935,761 946,219 912,928 - ------------------------------------------------------------------------------------------------------ HEALTH AND LIFE Premium income and other policy charges(2) 61,270 63,921 64,448 Investment income 60,012 55,339 53,486 Income after taxes and before realized gains(3) 8,749 4,096 8,205 Income after taxes 9,433 12,932 10,354 Identifiable assets 900,029 897,157 789,664 - ------------------------------------------------------------------------------------------------------ PARENT Real estate sales 30,220 Investment income 457 492 852 (Loss) after taxes and before realized gains (losses) (3) (3,536) (1,253) (5,779) (Loss) after taxes (3,529) (671) (7,226) Identifiable assets 29,262 32,409 22,928 - ------------------------------------------------------------------------------------------------------ CONSOLIDATED TOTAL Premium income and other policy charges 463,195 469,822 441,874 Real estate sales 30,220 Investment income 98,042 92,474 96,614 Underwriting income (loss) before Proposition 103 rollback refund(1)(8) 9,533 11,251 (20,621) Underwriting income (loss)(1)(8) 9,533 11,251 (36,699) Income after taxes and before realized gains and Proposition 103 rollback refund(4)(3)(8) 35,524 33,682 19,100 Per share 1.86 1.75 1.01 Income after taxes and before realized gains(3) 36,310 35,268 8,489 Income after taxes 37,900 53,200 19,336 Net income(5)(6) 37,900 53,200 28,700 Per share 1.99 2.76 1.52 Total assets(7) $1,840,758 $1,857,790 $1,703,553 - ------------------------------------------------------------------------------------------------------
(1) After policyholders' dividends of $17,412,000, $15,175,000 and $2,954,000 for 1994, 1993 and 1992, respectively. (2) Of total health and life premium income and other policy charges, 59%, 62% and 62% for 1994, 1993 and 1992, respectively, is represented by one group health plan. (3) Realized gains on investments after taxes were as follows: 1994 1993 1992 -------------------------------- Property-Casualty $ 899 $ 8,514 $ 10,145 Health and Life 684 8,836 2,149 Parent 7 582 (1,447) -------------------------------- Consolidated Total $ 1,590 $ 17,932 $ 10,847
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) Excludes $786,000 and $1,586,000 in 1994 and 1993, respectively, 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. (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 $24,294,000, $17,995,000 and $21,967,000 in 1994, 1993 and 1992, respectively. (8) Proposition 103 rollback refund in 1992 was $16,078,000, net of reinsurance, or $10,611,000 ($.56 per share) after tax. 53 INDEPENDENT ACCOUNTANT'S REPORT To the Stockholders and Board of Directors of Zenith National Insurance Corp. We have audited the accompanying consolidated balance sheet of Zenith National Insurance Corp. and subsidiaries as of December 31, 1994 and 1993, and the related consolidated statements of operations, cash flows, and stockholders' equity for each of the three years in the period ended December 31, 1994. 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 audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. 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, 1994 and 1993, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, 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 and its method of accounting for income taxes in 1992. Coopers & Lybrand L.L.P. Los Angeles, California February 1, 1995 54 EX-21 9 SUBSIDIARIES OF ZENITH 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 ZIC Lloyd's Underwriting Limited England
EX-27 10 FDS ARTICLE 7
7 12-MOS DEC-31-1994 JAN-01-1994 DEC-31-1994 930,502,000 410,989,000 400,964,000 46,014,000 3,503,000 0 1,462,989,000 7,114,000 58,873,000 109,059,000 1,840,758,000 504,379,000 121,867,000 735,380,000 15,999,000 76,582,000 24,034,000 0 0 285,826,000 1,840,758,000 463,195,000 98,042,000 2,446,000 31,430,000 343,561,000 83,653,000 57,548,000 57,571,000 19,671,000 37,900,000 0 0 0 37,900,000 1.99 0 468,718,000 273,177,000 (9,720,000) 107,211,000 167,918,000 457,046,000 (9,720,000)
EX-99.1 11 401 K PLAN FINANCIAL STATEMENTS Exhibit 99.1 __________________________________ Financial Statements Required by Form 11-K in accordance with Rule 15d-21 under the Securities Exchange Act of 1934 ____________________________________ For the Fiscal Year Ended December 31, 1994 of The Zenith Investment Partnership 401(k) Plan ZENITH NATIONAL INSURANCE CORP. The principal executive offices of Zenith National Insurance Corp. are located at 21255 Califa Street, Woodland Hills, California 91367-5021. ITEM 1. NOT APPLICABLE ITEM 2. NOT APPLICABLE ITEM 3. NOT APPLICABLE ITEM 4. FINANCIAL STATEMENTS AND SCHEDULES PREPARTED IN ACCORDANCE WITH THE FINANCIAL REPORTING REQUIREMENTS OF ERISA Page ---- Report of Independent Accountants 2 Statements of Net Assets Available for Benefits As Of December 31, 1994 and 1993 3 Statements Of Changes In Net Assets Available For Benefits For Years Ended December 31, 1994 and 1993 4 Notes To Financial Statements 5 Supplemental Schedules: Item 27a- Schedule of Assets Held For Investment As Of December 31, 1994 12 Item 27d- Schedule of Reportable Transactions For The Year Ended December 31, 1994 13 Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this amendment to be signed on its behalf by the undersigned, thereunto duly authorized. ZENITH NATIONAL INSURANCE CORP. ------------------------------- (Registrant) Date: June 29, 1995 By: /s/ Fredricka Taubitz ----------------- ---------------------------- (Signature) Fredricka Taubitz Executive Vice President & Chief Financial Officer THE ZENITH INVESTMENT PARTNERSHIP 401(k) PLAN ___________________ REPORT ON AUDITED FINANCIAL STATEMENTS AND SUPPLEMENTAL SCHEDULES FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1993 ___________________ THE ZENITH INVESTMENT PARTNERSHIP 401(k) PLAN INDEX OF FINANCIAL STATEMENTS AND SUPPLEMENTAL SCHEDULES _____________ PAGE ---- Report of Independent Accountants 2 Financial Statements: Statements of Net Assets Available for Benefits as of December 31, 1994 and 1993 3 Statements of Changes in Net Assets Available for Benefits for the years ended December 31, 1994 and 1993 4 Notes to Financial Statements 5 Supplemental Schedules: Item 27a - Schedule of Assets Held for Investment Purposes as of December 31, 1994 12 Item 27d - Schedule of Reportable Transactions for the year ended December 31, 1994 13 REPORT OF INDEPENDENT ACCOUNTANTS ______________ To the Administrative Committee of The Zenith Investment Partnership 401(k) Plan We have audited the accompanying statements of net assets available for benefits of The Zenith Investment Partnership 401(k) Plan (the "Plan") as of December 31, 1994 and 1993 and the related statements of changes in net assets available for benefits for the years then ended. These financial statements are the responsibility of the Plan'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 audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. 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 net assets available for benefits of The Zenith Investment Partnership 401(k) Plan as of December 31, 1994 and 1993 and the changes in net assets available for benefits for the years then ended in conformity with generally accepted accounting principles. Our audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplemental schedules of the Plan, listed in the index on page 1, are presented for purposes of additional analysis and are not a required part of the basic financial statements, but are supplementary information required by the Department of Labor's Rules and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of 1974. The supplemental schedules have been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion are fairly stated in all material respects, in relation to the basic financial statements taken as a whole. Coopers & Lybrand L.L.P. Los Angeles, California June 16, 1995 2 THE ZENITH INVESTMENT PARTNERSHIP 401(k) PLAN STATEMENTS OF NET ASSETS AVAILABLE FOR BENEFITS AS OF DECEMBER 31, 1994 AND 1993 ____________________
Assets: 1994 1993 ---- ---- Investments: Zenith National Insurance Corp. Common stock, at market (330,908 shares, $6,609,792 cost for 1994 and 296,037 shares, $5,461,841 cost for 1993) $ 7,528,157 $ 6,623,915 Short-Term Investment Fund 7,816,842 5,508,150 Invested cash 55,997 346,581 ----------- ----------- Total investments 15,400,996 12,478,646 Accrued investment income 34,976 14,755 ----------- ----------- Net assets available for benefits $15,435,972 $12,493,401 =========== ===========
The accompanying notes are an integral part of these financial statements. 3 THE ZENITH INVESTMENT PARTNERSHIP 401(k) PLAN STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1993 __________________
Additions: 1994 1993 ---- ---- Contributions: Employer $ 707,921 $ 654,639 Participants 2,689,340 2,494,364 ----------- ----------- Total contributions 3,397,261 3,149,003 ----------- ----------- Rollovers from other plans 137,394 25,685 ----------- ----------- Investment income: Dividends Zenith National Insurance Corp common stock 322,909 272,505 Short Term Investment Fund 274,056 152,875 Net appreciation in fair value of investment in Zenith National Insurance Corp. Common Stock 22,100 478,673 ----------- ----------- Total investment income 619,065 904,053 ----------- ----------- Total additions 4,153,720 4,078,741 ----------- ----------- Deductions: Withdrawals by participants 1,211,249 689,276 ----------- ----------- Net additions 2,942,571 3,389,465 Net assets available for benefits: Beginning of year 12,493,401 9,103,936 ------------ ----------- End of year $15,435,972 $12,493,401 ============ ===========
The accompanying notes are an integral part of these financial statements. 4 THE ZENITH INVESTMENT PARTNERSHIP 401(k) PLAN NOTES TO FINANCIAL STATEMENTS ____________ 1. THE PLAN: The following is a general description of The Zenith Investment Partnership 401(k) Plan (the "Plan"). GENERAL The Plan is a qualified stock bonus plan offered to all eligible employees of Zenith National Insurance Corp. ("ZNIC") and its affiliates ("the Company"), who are age twenty-one or older as of the enrollment dates. The Plan is subject to the provisions of the Employee Retirement Income Security Act of 1974 ("ERISA") and Section 401(a) and Section 401(k) of the Internal Revenue Code of 1986, as amended ("IRC"). All assets of the Plan are held by a trustee ("Trustee") in a trust ("Trust") created by a trust agreement dated as of August 1, 1988 ("Trust Agreement"). At December 31, 1994 and December 31, 1993 there were, respectively, 925 and 1,004 participants in the Plan. CONTRIBUTIONS Participants may elect to contribute between 1% to 12% of their basic compensation up to a maximum of $9,240 for 1994 and $8,994 for 1993 (Salary Reduction Contributions). The maximum is adjusted each year for increases in the cost of living as provided in applicable regulations. This annual amount is an aggregate limitation that applies to all of an individual's Salary Reduction Contributions and similar contributions under other plans. The Company contributes 33-1/3% of the participant's "matched" contribution amount (matched contributions are defined as the first 6% of each participant's monthly contributions). The Company's contribution is invested exclusively in the common stock of ZNIC ("Company Stock"). The Salary Reduction Contributions, made on behalf of each participant, are paid to the Trustee on or immediately after the last day of each month. Through March 31, 1994, the Salary Reduction Contributions were deposited into either or both of two investment funds at the discretion of the participant. Effective after March 31, 1994, the Plan was amended whereby all Salary Reduction Contributions are deposited into the Short-Term Investment Fund. 5 THE ZENITH INVESTMENT PARTNERSHIP 401(k) PLAN NOTES TO FINANCIAL STATEMENTS, CONTINUED ________________ 1. THE PLAN, CONTINUED: PARTICIPANT ACCOUNTS Each participant's account is credited with: (1) the participant's contributions, (2) participant rollover contributions from non-Company plans, (3) the related Company matching contributions, and (4) fund earnings. Allocations of earnings are based on account balance as defined in the Plan Agreement. These accounts are summarized in the accompanying financial statements as net assets available for benefits. VESTING Each participant has an immediate, fully vested right to receive all Salary Reduction Contributions, all Company matching contributions made prior to January 1, 1991, and earnings thereon, upon termination from the Company, or upon separation caused by death of the participant. All Company matching contributions made after January 1, 1991 are subject to a five year graduated vesting schedule with respect to participants who became employed by the Company on or after April 1, 1988. However, irrespective of the vesting schedule, a participant is fully vested upon his death, disability or attainment of Normal Retirement Age. FORFEITURES Upon termination of service, a participant forfeits any non-vested Company contributions. Such forfeitures are used first to reinstate participant account balances previously forfeited which are subject to reinstatement under the terms of the Plan. Any remaining unused forfeitures are used to reduce current or future years contributions to the Plan by the Company. WITHDRAWALS PRIOR TO TERMINATION OF EMPLOYMENT Except in limited circumstances, withdrawals may not be made by a participant while employed by the Company. Hardship withdrawals of a participant's Salary Reduction Contributions are permitted where a participant has an 6 THE ZENITH INVESTMENT PARTNERSHIP 401(k) PLAN NOTES TO FINANCIAL STATEMENTS, CONTINUED __________________ 1. THE PLAN, CONTINUED: immediate and heavy financial need (as determined under Section 401(k)(2)(B)(IV) of the IRC) and that need cannot be satisfied from other resources of the participant. In addition, participants who are 59-1/2 years old may withdraw their Salary Reduction Contributions and Rollover balances plus applicable earnings under certain restrictions. INVESTMENTS Through March 31, 1994, each participant was able to direct that Salary Reduction Contributions for the participant's benefit and any earnings thereon be invested in one or both of the following funds: a. The Short-Term Investment Fund which invests in a no-load diversified open-end management investment company whose objective is maximum current income consistent with liquidity and the maintenance of a portfolio of high quality, short-term "money-market" instruments; or b. The Company Stock Fund which invests solely in Company stock. Effective after March 31, 1994, all Salary Reduction Contributions and any earnings thereon are only to be invested in the Short-Term Investment Fund. Also effective after March 31, 1994, participants may, at the end of any calendar quarter, cause the liquidation of all or part of the shares of Company Stock representing their Plan contributions (and earnings thereon) and transfer the proceeds to the Short-Term Investment Fund. The Company's contributions and any earnings thereon continue to be invested in the Company Stock Fund and are not subject to participant direction until such participant reaches age fifty-five (55). PAYMENT OF BENEFITS Upon termination of employment, if a distribution is made, a participant (1) receives cash with respect to the Short-Term Investment Fund and (2) may elect to receive cash or shares of Company Stock plus cash in lieu of any fractional shares, with respect to the Company Stock Fund. 7 THE ZENITH INVESTMENT PARTNERSHIP 401(k) PLAN NOTES TO FINANCIAL STATEMENTS, CONTINUED __________________ 1. THE PLAN, CONTINUED: EXPENSES Expenses in connection with the purchase or sale of stock or other securities are charged to the fund for which such purchase or sale is made. The Trust Agreement stipulates that expenses incurred by the Trustee in the performance of its duties shall be paid from the funds held in the Trust unless paid by the Company at its sole discretion. During 1994 and 1993, the Company elected to pay the Trustee's expenses in excess of the interest earned during the year on temporarily invested cash. The total Trustee expenses for 1994 and 1993 were $25,951 and $24,197, of which $4,944 and $959 respectively, were offset by income on unallocated cash temporarily invested. The balances of $21,007 and $23,238 were paid by the Company. In addition, certain administrative expenses such as accounting, legal and recordkeeping fees, were paid by the Company during 1994 and 1993. TERMINATION While the Company has not expressed an intent to terminate the Plan, it may do so at any time. Upon such termination, each participant shall be fully (100%) vested in his account balances, determined as of the date of such termination. ADMINISTRATION The Plan is administered by an Administrative Committee appointed by the Board of Directors of ZNIC. The Administrative Committee has responsibility for administration of the Plan, including supervision of the collection of contributions, delivery of such contributions to the Trustee, and maintenance of necessary records. The Trustee is City National Bank, Beverly Hills, California. The Trustee's responsibilities include receipt of Plan contributions, investment and maintenance of trust assets in the available funds, and distributions under the Plan of such amounts as the Committee shall direct from time to time. 8 THE ZENITH INVESTMENT PARTNERSHIP 401(k) PLAN NOTES TO FINANCIAL STATEMENTS, CONTINUED __________________ 1. THE PLAN, CONTINUED: PLAN AMENDMENTS A plan amendment was adopted by the Board of Directors of ZNIC on March 17, 1994 with an effective date of March 31, 1994. The amendment provides that after March 31, 1994 no future additions to any Participant Matched Contributions or Unmatched Contributions Account are to be invested in Company Stock, except that dividends on shares of Company Stock comprising March 31, 1994 balances shall continue to be reinvested in Company Stock. The amendment also provides that participants may, at the end of any calendar quarter, cause the liquidation of all or part of the shares of Company Stock representing their Plan contributions (and earnings thereon) and transfer the proceeds to the Short-Term Investment Fund. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: INVESTMENTS Investments are stated at fair value. The value ("net asset value") of a share of the no-load diversified open- end management investment company ("Management Company") in which the Short-Term Investment Fund invests is determined by adding the value of all securities and other assets in the Management Company's portfolio, deducting the Management Company's liabilities and dividing by the number of shares outstanding. The Management Company intends to use its best efforts to maintain a constant net asset value of $1 per share. The value of the Company Stock is determined using the December 31, 1994 and 1993 closing price on the New York Stock Exchange. Purchases and sales of securities are reflected on a trade date basis (the date when the order to buy or sell is executed). Gains or losses on sales of securities are computed on an average cost basis. 9 THE ZENITH INVESTMENT PARTNERSHIP 401(k) PLAN NOTES TO FINANCIAL STATEMENTS, CONTINUED _________________ 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED: Dividend income is accrued on the ex-dividend date. The net appreciation (depreciation) in the fair value of the Plan's investments disclosed in the Statement of Changes in Net Assets Available For Benefits consists of realized gains or losses and unrealized appreciation (depreciation) on investments. CONTRIBUTIONS Company and participant contributions are recorded in the period that a participant's payroll deduction is made. 3. TAX STATUS: The Plan was designed to qualify under Sections 401(a) and 401(k) of the IRC and for the Trust to be exempt from federal income taxes under Section 501(a) of the IRC. The Plan has received a favorable determination letter from the Internal Revenue Service as to the above. The Plan has applied for an updated Determination Letter that the Plan, as amended, continues to be qualified under Section 401 of the IRC and that the Trust continues to be exempt from federal income tax under Section 501(a) of the IRC. 10 THE ZENITH INVESTMENT PARTNERSHIP 401(k) PLAN NOTES TO FINANCIAL STATEMENTS, CONTINUED _________________ 4. RECONCILIATION OF FINANCIAL STATEMENTS TO FORM 5500: Amounts allocated to withdrawing participants for benefit claims that have been processed and approved for payment prior to December 31, but not yet paid are included in net assets available for plan benefits. For reporting to the Department of Labor, these amounts are reported as a liability on the Form 5500. The following is a reconciliation of net assets available for plan benefits at December 31, 1994 as shown in the accompanying financial statements to those shown in the Form 5500:
Net assets available for plan benefits per the accompanying financial statements $15,435,972 Amounts allocated to withdrawing participants 342,160 ----------- Net assets available for plan benefits per the Form 5500 $15,093,812 ----------- ----------- The following is a reconciliation of benefits paid to participants for the year ended December 31, 1994 as shown in the accompanying financial statements to those shown in the Form 5500: Benefits paid to participants per the accompanying financial statements $ 1,211,249 Add: Amounts allocated to withdrawing participants at end of year 342,160 ----------- Benefits paid to participants per the Form 5500 $ 1,553,409 ----------- -----------
11 THE ZENITH INVESTMENT PARTNERSHIP 401(k) PLAN NOTES TO FINANCIAL STATEMENTS, CONTINUED _________________ 5. FEDERAL INCOME TAXES APPLICABLE TO PARTICIPANTS: The income tax rules affecting Plan participation are complex, subject to interpretation by the Secretary of the Treasury and subject to change. A general summary of the Federal tax consequences of participation in the Plan follows. An expanded discussion of tax consequences is available in the prospectus dated June 26, 1988, as amended March 18, 1994 related to the Plan. In general, 401(k) Company and Salary Reduction Contributions are not subject to tax when made. In addition, earnings and gains on a participant's account are not subject to tax when credited. Generally, distributions from the Plan are subject to tax in the year received from the Plan. However, under certain circumstances, a distribution, or part thereof, may not be taxed if rolled over to an Individual Retirement Account or other qualified plan. If taxable, a distribution may be eligible for special tax treatment under the IRC. In addition to regular taxes, most distributions received before a participant is age 59-1/2 will be subject to a 10% additional tax. Under limited circumstances, distributions in excess of IRC determined limits will be subject to a 15% excise tax. 12 THE ZENITH INVESTMENT PARTNERSHIP 401(k) PLAN ITEM 27A SCHEDULE OF ASSETS HELD FOR INVESTMENT PURPOSES AS OF DECEMBER 31, 1994 ___________
CURRENT DESCRIPTION COST VALUE - ----------- ---- ----- Zenith National Insurance Corp. Common Stock, 330,908 shares, $1 par value per share $6,609,792 $7,528,157 Merrill Lynch Institutional Fund 7,816,842 shares, $1 par value per share 7,816,842 7,816,842 City National Bank Money Market Investment Account* 55,997 shares, $1 par value per share 55,997 55,997
*Indicates party in interest 13 THE ZENITH INVESTMENT PARTNERSHIP 401(k) PLAN ITEM 27d SCHEDULE OF REPORTABLE TRANSACTIONS for the year ended December 31, 1994 ___________________________________________
Current value of Asset Net Gain Description Purchase Price Selling Price Cost on Transaction Date or (Loss) - ----------- -------------- ------------- ---- ------------------- --------- Purchases: Zenith National Insurance Corp. common stock $1,688,392 $1,688,392 Merrill Lynch Institutional Fund 3,067,360 3,067,360 City National Bank Money Market Investment Account 4,153,456 4,153,456 Sales: Zenith National Insurance Corp. common stock $806,250 $ 540,441 806,250 $265,809 Merrill Lynch Institutional Fund 758,668 758,668 758,668 -0- City National Bank Money Market Investment Account 4,444,040 4,444,040 4,444,040 -0-
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