-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MPdSqL708h2E94ack/vNxNJZ7JxzMZz2nfftZ2wQ64Qf9vkcqS5xRFQHXjJjy1N0 XykvDdKYUI/MCv4vy7ofkg== 0000912057-97-010904.txt : 19970401 0000912057-97-010904.hdr.sgml : 19970401 ACCESSION NUMBER: 0000912057-97-010904 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970331 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 SEC ACT: 1934 Act SEC FILE NUMBER: 001-09627 FILM NUMBER: 97568351 BUSINESS ADDRESS: STREET 1: 21255 CALIFA ST CITY: WOODLAND HILLS STATE: CA ZIP: 91367 BUSINESS PHONE: 8187131000 10-K 1 FORM 10-K THE ZENITH - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Form 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 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 (I.R.S. EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION)
21255 CALIFA STREET, WOODLAND HILLS, 91367-5021 CALIFORNIA (ZIP CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
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 26, 1997 was approximately $257,651,000 (based on the closing sale price of such stock on such date). At March 26, 1997, 17,681,444 shares of Common Stock were outstanding, net of 6,842,690 shares of treasury stock. DOCUMENTS INCORPORATED BY REFERENCE (1) Portions of the Annual Report to Stockholders for fiscal year ended December 31, 1996 -- Part I and Part II. (2) Portions of the Proxy Statement in connection with the 1997 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 wholly-owned insurance subsidiaries, Zenith Insurance Company ("Zenith Insurance"), CalFarm Insurance Company ("CalFarm Insurance"), ZNAT Insurance Company ("ZNAT Insurance") and Zenith Star Insurance Company ("Zenith Star"), in the property-casualty insurance business. The average combined ratio for the 10 years ended December 31, 1996 of Zenith's property-casualty operations was 100.3%. 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"). In 1995, Zenith sold its wholly-owned subsidiary, CalFarm Life Insurance Company ("CalFarm Life"), to a subsidiary of SunAmerica Inc. for approximately $120 million in cash, with Zenith retaining the group health insurance business previously written by CalFarm Life. The results of operations and net assets of CalFarm Life's life and annuity business are included in Zenith's consolidated financial statements as discontinued operations and results of the health insurance operation are included in Other Property-Casualty results which have been restated. Net income in 1995 includes a loss of $19.5 million associated with the sale of CalFarm Life. On December 31, 1996, Zenith completed the acquisition of Associated General Commerce Self-Insurers' Trust Fund ("AGC-SIF"), a Florida workers' compensation self-insurers' fund by merging it with and into Zenith Insurance. The 1996 edition of Best's Key Rating Guide ("Best's") gives Zenith Insurance, CalFarm Insurance, ZNAT Insurance and Zenith Star, collectively, ratings of A+ (superior). Standard & Poor's Corporation ("S&P") has rated the claims-paying ability of Zenith Insurance, CalFarm Insurance, ZNAT Insurance and Zenith Star AA- (excellent). Best's ratings and S&P's ratings of claims-paying ability are based upon factors of concern to policyholders and insurance agents and are not directed toward the protection of investors. At December 31, 1996, 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. The combined ratio is the key measure of underwriting profitability used in the property and casualty insurance business. Development The amount by which losses, measured subsequently by reference to payments and additional estimates, differ from those originally reported for a period. Development is favorable when losses ultimately settle for less than levels at which they were reserved or subsequent estimates indicate a basis for reserve decreases on open claims. Development is unfavorable when losses ultimately settle for more than levels at which they were reserved or subsequent estimates indicate a basis for reserve increases on open claims.
1 Excess of loss reinsurance A form of reinsurance in which the reinsurer pays all or a specified percentage of a loss caused by a particular occurrence or event in excess of a fixed amount and up to a stipulated limit. Incurred but not reported Claims relating to insured events that have claims occurred but have not yet been reported to the insurer or reinsurer. Loss adjustment expenses The expenses of investigating and settling claims, including legal and other fees, and general expenses of administering the claims adjustment process. 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 statutory capital subtracted from all admitted assets, as determined in accordance with statutory accounting practices. This amount is regarded as financial protection to policyholders in the event an insurance company suffers unexpected or catastrophic losses. Reinsurance A transaction in which an original insurer, or cedant, remits a portion of the premium to a reinsurer, or assuming company, as payment for the reinsurer's assumption of a portion of the risk. Reserves or loss reserves The balance sheet liability representing estimates of amounts needed to pay reported and unreported claims and related loss adjustment expenses (stated without reduction for reinsurance ceded after 1992). Retrocession A reinsurance of reinsurance assumed. Statutory accounting Accounting principles prescribed or permitted by practices the states' departments of insurance. In general, statutory accounting practices address policyholder protection and solvency and are more conservative in presentation of earnings, surplus and assets than generally accepted accounting principles. Treaty A contract of reinsurance. Underwriting The process whereby an insurer reviews applications submitted for insurance coverage and determines whether it will accept all or part, and at what premium, of the coverage being requested. Underwriting expenses The aggregate of policy acquisition costs and the portion of administrative, general and other expenses attributable to the underwriting process as they are accrued and expensed.
DESCRIPTION OF THE BUSINESS Zenith and its subsidiaries conduct business principally in the property and casualty insurance industry. Property-casualty operations comprise Workers' Compensation (47% of 1996 consolidated net premiums earned); other property-casualty, principally automobile, homeowners, farmowners, commercial coverages and health insurance (45% of 1996 consolidated net premiums earned); and reinsurance (8% of 1996 consolidated net premiums earned). Results of such operations for the three years ended December 31, 1996 are set forth in the table on page 22 of the 1996 Annual Report to Stockholders, which table is hereby incorporated by reference. The earnings of Zenith's property and casualty operations are supplemented by the generation of investment income discussed under "Investments." 2 Zenith also conducts real estate operations through a wholly-owned subsidiary that develops land and constructs private residences for sale in Las Vegas, Nevada. Zenith's business segments are described in Note 16 -- "Segment Information" on pages 50 and 51 of the 1996 Annual Report to Stockholders, which note is hereby incorporated by reference. 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 by state and with the nature and severity of the injury or disease and the wages, occupation and age of the employee. Historically, Zenith's workers' compensation business was produced exclusively in California with minor incidental coverages out of state for its larger policyholders. In 1992, Zenith began workers' compensation operations in the Texas workers' compensation market. Since then, Zenith has further expanded its national workers' compensation operations. Net premiums earned in 1996 by state are set forth in the table below:
1996 PREMIUMS EARNED % ----------------------- --------- California.................... $ 148,810,000 70.5% Texas......................... 33,899,000 16.1 Arkansas...................... 9,480,000 4.5 Illinois...................... 9,045,000 4.3 Other......................... 9,682,000 4.6 ----------------------- --------- $ 210,916,000 100.0% ----------------------- --------- ----------------------- ---------
According to A.M. Best, Zenith's 5 year loss ratio of 45.3% through 1995 (latest available statistics) was the lowest loss ratio of the top 50 insurers. These statistics are attributed to Zenith's managed care efforts, return to work strategies, safety and health, fraud and litigation efforts. During the past 10 years, the Zenith's workers' compensation combined ratio was 100.0%. Zenith Insurance is licensed to conduct business in 39 states and the District of Columbia and has applications pending throughout most of the nation. Zenith's goal is to be a specialist risk-oriented national workers' compensation insurer. National results for workers' compensation insurers in recent years have been favorable by recent historic standards and Zenith's non-California underwriting results in 1996 were more favorable than its California results. However, increased competition, nationally, is expected to follow from these favorable trends and management intends to proceed cautiously with its national expansion. On December 31, 1996, Zenith completed the acquisition of AGC-SIF. AGC-SIF's 1996 earned premium was approximately $43 million. Zenith anticipates that non-California premium income will increase significantly in 1997 as a result of this acquisition. Competition, 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. 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 to such improvements. Rates in California were deregulated effective January 1, 1995. Insurance companies now file and use their own, actuarially determined rates for workers' compensation insurance in California. Zenith decreased its rates 2.5% on January 1, 1997 following an increase of 8% on January 1, 1996. The 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, the success of Zenith's geographic expansion outside of California 3 and Zenith's continuing efforts to control medical and indemnity costs through return to work and managed care strategies. At present competition is intense and Zenith is focused on returning the workers' compensation operation to profitability and achieving the overall goal of a combined ratio of 100%. 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 the advent of open rating in California and an emphasis on, among other things, overall pricing at inception, dividends decreased significantly in 1995 and 1996, and are likely to become relatively insignificant in the future as an element in workers' compensation insurance in California. Zenith is continuing to market integrated workers' compensation, health and disability insurance products ("24-Hour Coverage") through alliances with selected health insurers, health maintenance organizations and UNUM Life Insurance Company of America, one of the nation's largest disability insurance companies. Beginning in the second quarter of 1997, Zenith plans to expand its alliances to include United HealthCare of California, Inc. and MetraHealth Care Plan. The policies are sold on an integrated basis in California and Arkansas under the name "SinglePoint." At this time, it is too early for management to predict the likely outcome of 24-Hour Coverage on the future results of its operations. PROPERTY AND CASUALTY -- OTHER Zenith, through CalFarm Insurance, offers a comprehensive line of property and casualty insurance, including automobile, farmowners, commercial multiple peril packages and homeowners coverage, primarily in California. Additionally, CalFarm Insurance has assumed the group health insurance business that was previously written by CalFarm Life. Automobile insurance includes coverage for automobile bodily injury, property damage and physical damage. Automobile bodily injury and property damage insurance provide coverage for third party liability, bodily injury and property damage arising from the ownership, maintenance or use of an automobile. Automobile physical damage coverage insures against physical loss of the insured's own vehicle. Farmowners and homeowners insurance includes coverage for direct physical damage to real and personal property, loss of personal property by theft and legal liability for injury to others and damage to property of others. Commercial multiple peril insures businesses against property damage and general liability. Health insurance premiums are written under a program sponsored by the California Farm Bureau Federation (the "Farm Bureau") which includes a preferred provider organization plan and a Medicare supplement product. During the past 11 years, the combined ratio of Zenith's Other Property-Casualty operation was 101.1%. Automobile insurance (both commercial and personal) is the largest line of CalFarm Insurance's business, representing 14% of Zenith's property and casualty premiums written in 1996. CalFarm Insurance insured approximately 19,500 personal automobiles and 65,500 commercial and farm vehicles in 1996. Farmowners business is the second largest line of CalFarm Insurance's business, representing approximately 11% of Zenith's property and casualty premiums written in 1996. Zenith's Other Property-Casualty operations are subject to the regulatory provisions of California Initiative Proposition 103 ("Proposition 103"). The principal effects of Proposition 103 on Zenith's Other Property-Casualty business are as follows: rates must be approved by the California Insurance Commissioner prior to use; rates on personal automobile policies must be offered to "good drivers" (as defined) at a discount of at least 20% from rates otherwise charged and an 4 insurer cannot refuse to sell a "good driver" policy to a qualified applicant; personal automobile insurance policies cannot be cancelled or non-renewed except for non-payment of premium, fraud or material misrepresentation, or a substantial increase in hazard; and personal 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 California Insurance Commissioner. New automobile rating factor regulations pertaining to the implementation of Proposition 103 are expected to be implemented during 1997 which will further limit the impact of territorial rating on automobile insurance rates. The California Legislature passed legislation in September 1996 which created the California Earthquake Authority ("CEA"). The CEA became operational in December 1996 and is a privately financed, publicly managed state agency, which will provide limited earthquake coverage throughout California. Participation in the CEA is voluntary and Zenith has elected not to participate. Zenith will continue to offer broader earthquake coverages than are available through the CEA as long as private reinsurance is available and affordable. Zenith can elect to participate in the CEA at a later date subject to meeting the participation requirements at that time. 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 emphasizes the reinsurance of large individual property risks and property catastrophe reinsurance. By diversifying its geographical spread, Zenith's assumed reinsurance business is written so as to limit the company's exposure to losses from any one event in a worst-case scenario to a maximum of approximately 5% of consolidated stockholders' equity. An important element in the pricing of reinsurance is the supply of reinsurance capacity (i.e. capital) relative to demand. 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. Zenith has observed decreases in catastrophe reinsurance rates for 1997 and premium income in 1997 may be reduced compared to 1996. During the past 11 years, the combined ratio of Zenith's Reinsurance operation was 96.8% Commencing January 1, 1995, Zenith Insurance became a corporate underwriting member of Lloyd's through a 100% wholly-owned subsidiary, ZIC Lloyd's Underwriting Limited ("ZIC Lloyd's"). ZIC Lloyd's has committed funds of $6.4 million to support the underwriting of a certain syndicate. All of the funds committed by ZIC Lloyd's are available to satisfy claims in the event of underwriting losses by the syndicate. PARENT Zenith is a holding company owning directly or indirectly all of the capital stock of certain property and casualty insurance and insurance-related companies. In 1993, Zenith commenced a real estate operation through a newly-formed subsidiary, Perma-Bilt, for the purpose of developing, building and selling private residences in Las Vegas, Nevada. In 1996, Perma-Bilt closed and delivered 287 homes at an average selling price of $145,000, compared to 240 homes the prior year. Revenues in 1996 were $41,554,000 and pre-tax income was $1,909,000 compared to sales of $31,736,000 and $2,075,000 of pre-tax income, the previous year. Land presently owned at a cost of about $27,382,000 will support the construction and sale of an estimated 1,561 homes over the 5 next several years and possibly some commercial construction. Increased interest rates may impact the rate of home sales, but Zenith is confident that the land it has acquired is strategically located and will have long-term value. Zenith and its subsidiaries are currently in the process of modifying or replacing its computer systems for year 2000 compliance. Such activity is expected to continue through 1999. LOSS AND LOSS EXPENSE RESERVES AND CLAIMS, AND LOSS DEVELOPMENTS Zenith's property and casualty insurance 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 and reinsurance contracts. The amount of such reserves, as related to reported claims, is based upon periodic case-by-case evaluation and judgment by the P&C 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 32 and 33, and the table setting forth the reconciliation of changes in the liabilities for losses and loss adjustment expenses included in Note 13 -- "Loss and Loss Adjustment Expense Reserves" on page 49 of the 1996 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 originally estimated under generally accepted accounting principles at December 31 of each year presented. 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 40 through 42 of the 1996 Annual Report to Stockholders, which note is hereby incorporated by reference. The one year loss and loss adjustment expense reserve development for Zenith's three main lines of business is set forth in the table on page 23 of the 1996 Annual Report to Stockholders, which table is hereby incorporated by reference. WORKERS' COMPENSATION Zenith's Workers' Compensation reserves, on the average, are paid within approximately 2.5 years. Zenith regards the timely settlement of its Workers' Compensation claims as important to its profitability and makes use of compromises and releases for claim settlements to expedite this process. Zenith Insurance maintains five regional offices in California and offices outside of California in Texas, Arkansas, Pennsylvania, Utah, Illinois and effective December 31, 1996, Orlando, Florida, each of which is fully staffed to conduct all workers' compensation claims operations, including review of initial reports of work injury, assignment of appropriate field investigation and determination of whether subrogation should be pursued. Workers' Compensation claims operations are supported by computer systems that provide immediate access to policy coverage verification and claims records and enables Zenith Insurance to detail claims payment histories and policy loss experience reports. 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. On July 5, 1995, Zenith's new client-server based computer system became operational, replacing its previous mainframe computer for workers' compensation operations in California. In addition to enhancing data processing, the new system is designed, among other things, to 6 improve work flow in the workers' compensation claims handling process and to support expansion outside of California. Management observed certain unusual claim reserving trends and patterns in 1995 and 1996, possibly related to disruption of normal work flows due to implementation of the new system. Work flows in the future may continue to be impacted as training and optimization of the new system continues. Management believes that its estimate for liabilities for unpaid workers' compensation losses and loss adjustment expenses (amounting to $409,138,000 of total reserves for unpaid losses and loss adjustment expenses of $620,078,000) at December 31, 1996 included in the consolidated financial statements is adequate. However, subsequent re-interpretation of currently available data or any new information that becomes available may change the estimate of such liabilities in future periods and such changes, if any, will be reflected in the financial statements of the period in which they occur. OTHER PROPERTY AND CASUALTY Other Property and Casualty loss reserves are paid, on the average, within approximately 3.5 years. Property insurance coverages and CalFarm Insurance's concentration of business in California expose Zenith to catastrophe losses from events in California. Reinsurance ceded by CalFarm Insurance protects against losses in excess of $5,000,000 from any one event -- see "Reinsurance Ceded." 1996 results benefited from the absence of catastrophe losses. In 1995, CalFarm Insurance sustained losses of $10,700,000 in conjunction with three major California storms. In 1994, losses attributable to the Northridge earthquake were $3,200,000, of which $800,000 was assessed by the California Fair Plan. 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. Health claims is a separate operation located in the home office. REINSURANCE ASSUMED Zenith expects that, on the average, its Reinsurance reserves will be paid in approximately 4.0 years. Zenith's Reinsurance reserves constitute approximately 18% of its total reserves, net of ceded reinsurance, for property and casualty unpaid losses and loss adjustment expenses at December 31, 1996, 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. Losses attributable to catastrophes were $2,500,000 in 1995, principally from Hurricane "Marilyn". 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. ENVIRONMENTAL AND ASBESTOS LOSSES The exposure of the insurance industry to losses arising out of the cost of environmental and asbestos damage has been the focus of attention of a number of interested parties in recent years. The process of evaluating an insurance company's exposure is subject to significant uncertainties. 7 Among the complications are lack of historical data, long reporting delays, uncertainty as to the number and identity of insureds with potential exposure and unresolved legal issues regarding policy coverage. The legal issues concerning the interpretations of various insurance policy provisions and whether environmental and asbestos losses are or were ever intended to be covered are complex. Courts have reached different and sometimes inconsistent conclusions regarding such issues as: when the loss occurred and what policies provide coverage, how policy limits are determined, how policy exclusions are applied and interpreted, whether clean-up costs are covered as insured property damage, and whether site assessment costs are either indemnity payments or adjusting costs. Zenith has exposure to asbestos losses in its Workers' Compensation operation for medical, indemnity and loss adjustment expenses associated with insureds' long-term exposure to asbestos or asbestos-contained materials. Most of these claims date back to the 1970's and early 1980's and Zenith's exposure is generally limited to a pro-rata share of the loss for the period of time coverage was provided. Zenith also has potential exposure to environmental and asbestos losses and loss adjustment expenses beginning in 1985 through its Reinsurance operation and through CalFarm Insurance, which writes liability coverage under farmowners' and small commercial policies, however such losses are substantially excluded from all such coverage. The business reinsured by Zenith contains exclusion clauses for environmental and asbestos losses, and in 1988 an absolute pollution exclusion was incorporated into CalFarm Insurance's policy forms. All claims for damages resulting from environmental or asbestos losses are identified and handled by Zenith's most experienced claims/legal professionals. Environmental and asbestos losses have not been material and Zenith believes that its reserves for environmental and asbestos losses are appropriately established based on currently available facts, technology, laws and regulations. However, due to the long-term nature of these claims, the inconsistencies of court coverage decisions, plaintiff's expanded theories of liability, the risks inherent in major litigation and other uncertainties, the ultimate exposure from these claims may vary from the amounts currently reserved. INVESTMENTS Investment policies of Zenith and its insurance subsidiaries are established by their respective Boards of Directors, taking into consideration state regulatory restrictions with respect to investments in connection with reserve obligations as well as the nature and amount of various kinds of investments. (See "Business -- Regulation.") 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 (see "Investments" under Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations on pages 26 and 27 of Zenith's 1996 Annual Report to Stockholders which is hereby incorporated by reference). At December 31, 1996 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. The average life of the consolidated portfolio was 5.1 years at December 31, 1996. Investment income by segment is set forth in Note 16 -- "Segment Information" on pages 50 and 51 of the 1996 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 91% of the investments in debt securities at December 31, 1996, as available-for-sale. In 1996 stockholders' equity decreased by $9.1 million, net of deferred taxes, 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. 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 credit risk through its ceded reinsurance arrangements. Zenith believes that its ceded reinsurance arrangements are adequate and consistent with industry practice. Reinsurance premiums ceded by Zenith's insurance subsidiaries amounted to $24,642,000, $21,112,000 and $21,521,000 in 1996, 1995 and 1994, respectively, or 5.4%, 4.9% and 4.9% of earned premiums in 1996, 1995 and 1994, respectively. Reinsurance recoverable amounted to $93,651,000, $54,429,000 and $47,696,000 in 1996, 1995 and 1994, respectively, or 15.1%, 10.5% and 9.3% of gross reserves for unpaid losses and loss adjustment expenses in 1996, 1995 and 1994, respectively. Included in the December 31, 1996 balance is $37,261,000 of reinsurance recoverable, including state disability trust funds, which is 36.3% of the gross reserve for loss and loss adjustment expenses acquired from AGC-SIF on December 31, 1996. Each insurance subsidiary maintains separate reinsurance arrangements, which during 1996 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 UNUM Life Insurance Company and Connecticut General Life. Zenith's Reinsurance division did not purchase any reinsurance protection on its assumed business in the three years ended December 31, 1996. 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. Prior to Zenith's acquisition of AGC-SIF, AGC-SIF purchased aggregate excess and specific excess reinsurance for protection against losses in excess of stated retentions in each year of coverage. Such retention for 1996 was $750,000 per occurrence and the maximum coverage was the statutory limit. Such coverage for 1996 was placed with National Union Fire Insurance Company. Beginning in 1997, reinsurance for business written in Florida will be combined with Zenith's existing reinsurance arrangements. CalFarm Insurance -- For personal and commercial property lines of business, reinsurance is maintained for claims in excess of $350,000 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 95% of $45,000,000, excess of a retention of $5,000,000, for which the principal reinsurers are General Reinsurance Corporation and Cat. Ltd. The catastrophe reinsurance was increased to 95% of $55,000,000, excess of a retention of $5,000,000 effective January 1, 1997. CalFarm Insurance also maintains reinsurance agreements with Employers Reinsurance Corporation and Duncanson & Holt for excess risks on its accident and health contracts. Employers 9 Reinsurance Corporation provides coverage for CalFarm's Farm Bureau health insurance program for aggregate losses in excess of $2,000,000 on those individual health policy claims that exceed $120,000 for each insured in each calendar year. Duncanson & Holt provides coverage on other group health policy claims that exceed $100,000 in each calendar year. 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 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. 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 1,300 independent licensed insurance agents and brokers throughout California, Texas, Florida and other areas in which Zenith conducts workers' compensation operations. Certain CalFarm Insurance agents referred to below also sell workers' compensation. Zenith Insurance's assumed reinsurance premiums are generated nationally by brokers and reinsurance intermediaries. CalFarm Insurance, through its affiliate CalFarm Insurance Agency, maintains a sales force of approximately 180 agents who sell insurance products exclusively for CalFarm Insurance, primarily in rural and suburban areas. These agents operate out of 112 offices throughout the State of California, including 30 offices shared with the Farm Bureau. In addition, 193 independent agents market CalFarm Insurance products and 511 independent agents market the CalFarm Insurance health insurance products. 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. CalFarm Insurance uses earthquake modeling software to monitor earthquake exposures related to its homeowners and farmowners business. Catastrophe reinsurance is used to protect CalFarm Insurance from excessive catastrophe losses -- see "Reinsurance Ceded." 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 insurance. The Farm Bureau is California's largest general farm organization, and represents more than 71,000 member families in 58 counties. The Farm Bureau continues to work actively to encourage its membership to place their insurance with CalFarm Insurance. Farm Bureau membership is a prerequisite to the purchase of farmowners, automobile and health insurance from CalFarm Insurance. Of the estimated 71,000 member families, approximately 61% are insured by CalFarm Insurance. The business of CalFarm Insurance is closely tied to the California farm economy, however approximately 42% of Farm Bureau 10 members (and CalFarm Insurance insureds) are non-farmers and approximately 60% of CalFarm Insurance premium volume is generated by non-farm business. Total written premium in CalFarm Insurance attributable to sales that were sponsored by the Farm Bureau constituted approximately 31%, 30% and 32% of Zenith's total written premium for the years 1996, 1995 and 1994, respectively. The agreement of CalFarm Insurance 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 1996, 1995 and 1994. CalFarm Insurance continues to be the largest writer of farmowners policies in the state and benefits from its sponsorship of the Farm Bureau. Such benefit is derived from the use of the CalFarm name and the Farm Bureau membership lists. Further, CalFarm Insurance's ability to sell 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 from CalFarm Insurance, which generates membership and revenues for the Farm Bureau. If the relationship between CalFarm Insurance 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 as an attractive feature of Farm Bureau membership. COMPETITION Competition in the insurance business is based upon price, product design and quality of service. The insurance industry is highly competitive and competition is particularly intense in the California workers' compensation market which was deregulated with respect to prices in 1995. Zenith's subsidiaries compete not only with other stock companies, but with mutual companies, and other underwriting organizations such as 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 and, to a lesser extent, other states in which they conduct business. 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 11 meeting specified standards that have an aggregate market value equal to the companies' loss reserves. For this purpose, loss reserves are defined as the current estimate of reported and unreported claims net of reinsurance plus a statutory formula reserve based on a minimum of 65% of earned premiums for the latest three years. Zenith Insurance and ZNAT Insurance are subject to similar deposit requirements in certain other states based on those states' retaliatory statutes. Detailed annual and quarterly reports must be filed by Zenith's insurance subsidiaries with the California Department of Insurance and the Texas Department 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 and ZNAT Insurance, were examined by the California Department of Insurance as of December 31, 1993, and the report on such examination contained no material findings. Zenith Star was examined by the Texas Department of Insurance as of June 30, 1995 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 property and casualty insurers in 1994. Zenith has not experienced any adverse effects of such requirements because of the strong capitalization of its insurance operations. At December 31, 1996, adjusted capital under the RBC regulations was 364% 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). 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) 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 1996 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. 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 27 and 28 of Zenith's 1996 Annual Report to Stockholders, which is hereby incorporated by reference. 12 OTHER REGULATION Property and casualty insurance coverage is subject to certain regulation as described herein under "Property and Casualty -- Other" and 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, Health insurance or Reinsurance, which combined to account for 63% of Zenith's property and casualty earned premiums in 1996. 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 and CalFarm Insurance, in the regular conduct of their business, lease offices in various cities. See Note 8 of the Notes to Consolidated Financial Statements of Zenith on page 46 of the 1996 Annual Report to Stockholders, which note is hereby incorporated by reference. CalFarm Insurance owns its home office building (and surrounding property of approximately 4 acres) in Sacramento, California, consisting of 133,000 square feet. Approximately 20% of the building is leased to the Farm Bureau and its affiliates. 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 1996 1995 - ------------------------------------------------------------ ------- ------- First High...................................................... 24 7/8 22 3/4 Low....................................................... 21 1/8 19 3/8 Second High...................................................... 28 7/8 22 Low....................................................... 23 7/8 20 Third High...................................................... 28 1/2 24 1/4 Low....................................................... 26 1/4 20 Fourth High...................................................... 28 24 5/8 Low....................................................... 25 1/4 20
As of March 26, 1997, there were 375 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 6, 1994.................... $.25 cash per share January 31, 1995 February 15, 1995 March 1, 1995....................... $.25 cash per share April 28, 1995 May 12, 1995 May 24, 1995........................ $.25 cash per share July 31, 1995 August 16, 1995 September 14, 1995.................. $.25 cash per share October 31, 1995 November 15, 1995 November 30, 1995................... $.25 cash per share January 31, 1996 February 15, 1996 March 7, 1996....................... $.25 cash per share April 30, 1996 May 15, 1996 May 22, 1996........................ $.25 cash per share July 31, 1996 August 15, 1996 September 5, 1996................... $.25 cash per share October 31, 1996 November 15, 1996 December 10, 1996................... $.25 cash per share January 31, 1997 February 14, 1997
The Holding Company Acts limit the ability of Zenith Insurance 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 for the preceding year. In addition, any such dividend must be paid from policyholders' surplus attributable to accumulated earnings. During 1996, Zenith Insurance paid dividends of $15,000,000 to Zenith. During 1997, Zenith Insurance will be able to pay $26,534,000 in dividends to Zenith without prior approval. In 1997, CalFarm Insurance, ZNAT Insurance and Zenith Star, together, can pay $7,832,000 to Zenith Insurance. ITEM 6. SELECTED FINANCIAL DATA. The five-year summary of selected financial information and accompanying notes, included in Zenith's 1996 Annual Report to Stockholders on pages 30 and 31, is hereby incorporated by reference. 14 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS. FORWARD-LOOKING INFORMATION The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements if accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those discussed. Forward-looking statements include those related to the plans and objectives of management for future operations, future economic performance, or projections of revenues, income, earnings per share, capital expenditures, dividends, capital structure, or other financial items. Statements containing words such as EXPECT, ANTICIPATE, BELIEVE, or similar words that are used in Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations, in other parts of this Report or in other written or oral information conveyed by or on behalf of Zenith are intended to identify forward-looking statements. Zenith undertakes no obligation to update such forward-looking statements, which are subject to a number of risks and uncertainties that could cause actual results to differ materially from those projected. These risks and uncertainties include but are not limited to the following: (1) heightened competition, particularly intense price competition; (2) adverse state and federal legislation and regulations; (3) changes in interest rates causing a reduction of investment income; (4) general economic and business conditions which are less favorable than expected; (5) unanticipated changes in industry trends; (6) adequacy of loss reserves; (7) catastrophic events or the occurrence of a significant number of storms and wind and hail losses; and (8) other risks detailed herein and from time to time in Zenith's other reports and filings with the Securities and Exchange Commission. "Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations," included in Zenith's 1996 Annual Report to Stockholders on pages 21 to 28 is hereby incorporated by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Reference is made to pages 32 and 33 of Zenith's 1996 Annual Report to Stockholders for information setting forth the loss and loss adjustment expense liability development for 1986 through 1996 and to the consolidated financial statements and notes thereto on pages 34 to 51 of Zenith's Annual Report to Stockholders, 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 "Section 16(a) Beneficial Ownership Reporting Compliance" and "Election of Directors" in the Proxy Statement in connection with Zenith's 1997 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 59 Chairman of the Board, President (1) Annual 1977 Fredricka Taubitz 53 Executive Vice President and Annual 1985 Chief Financial Officer (1) James P. Ross 50 Senior Vice President and Actuary (1) Annual 1978 John J. Tickner 58 Senior Vice President and Secretary (1) Annual 1985 Keith E. Trotman 60 Senior Vice President (2) Annual 1988 Philip R. Hunt 54 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 footnotes 3 and 6 to the table set forth under the caption "Election of Directors" in the Proxy Statement is hereby incorporated by reference. 16 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) Documents filed as part of the report: 1. FINANCIAL STATEMENTS Independent Accountant's Report Financial Statements and notes thereto incorporated by reference from the 1996 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, 1996 and 1995 Consolidated Statement of Operations for the years ended December 31, 1996, 1995 and 1994 Consolidated Statement of Cash Flows for the years ended December 31, 1996, 1995 and 1994 Consolidated Statement of Stockholders' Equity for the years ended December 31, 1996, 1995 and 1994 Notes to Consolidated Financial Statements 2.FINANCIAL STATEMENT SCHEDULES Zenith National Insurance Corp. and Subsidiaries As of December 31, 1996. I -- Summary of Investments -- Other Than Investments in Related Parties For the years ended December 31, 1996, 1995 and 1994. III -- Supplementary Insurance Information IV -- Reinsurance Zenith National Insurance Corp. As of December 31, 1996 and 1995 and for the years ended December 31, 1996, 1995 and 1994. II -- Condensed Financial Information of Registrant Property and Casualty Loss Development on pages 32 and 33 of the 1996 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. 2.1 Amended and Restated Agreement and Plan of Merger by and among Zenith AGC Acquisition Insurance Company, Zenith Insurance Company, Zenith National Insurance Corp., Associated General Commerce Self-Insurers' Trust Fund and AGC Risk Management Group Inc. dated as of October 7, 1996. 2.2 Stock Acquisition Agreement, dated as of September 19, 1995, between Anchor National Life Insurance Company and Zenith National Insurance Corp. (Incorporated herein by reference to Exhibit 2.1 to Zenith's Report on Form 8-K dated October 6, 1995.) 2.3 Amendment No. 1 to Stock Acquisition Agreement dated as of December 27, 1995, by and among Anchor National Life Insurance Company, SunAmerica Life Insurance Company and Zenith National Insurance Corp. (Incorporated herein by reference to Exhibit 2.1 to Zenith's Report on Form 8-K dated January 9, 1996.) 3.1 Certificate of Incorporation of Zenith as in effect immediately prior to November 22, 1985. (Incorporated herein by reference to Exhibit 3 to Zenith's Amendment on Form 8, date of amendment October 10, 1985, to Zenith's Current Report on Form 8-K, 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).
18 (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). (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 Amendment No. 2 to the Zenith National Insurance Corp. Amended and Restated Non-Qualified Stock Option Plan, dated as of April 9, 1996. (Incorporated herein by reference to Exhibit 10.4 to Zenith's Quarterly Report on Form 10Q for the quarter ended June 30, 1996.) *10.7 Zenith National Insurance Corp. 1996 Employee Stock Option Plan, approved by the Stockholders on May 22, 1996. (Incorporated herein by reference to Exhibit 10.5 to Zenith Quarterly report on Form 10Q for the quarter ended June 30, 1996. (SEC File No. 333-04399)). *10.8 Employment Agreement, dated February 8, 1995, between Zenith and Fredricka Taubitz. (Incorporated herein by reference to Exhibit 10.6 to Zenith's Annual Report on Form 10K for the year ended December 31, 1994). *10.9 Employment Agreement, dated February 16, 1995, between Zenith and John J. Tickner. (Incorporated herein by reference to Exhibit 10.7 to Zenith's Annual Report on Form 10K for the year ended December 31, 1994). *10.10 Employment Agreement, dated February 2, 1995, between Zenith and Stanley R. Zax. (Incorporated herein by reference to Exhibit 10.8 to Zenith's Annual Report on Form 10K for the year ended December 31, 1994). *10.11 Stock Option Agreement, dated as of March 15, 1996, between Zenith and Stanley R. Zax. (Incorporated herein by reference to Exhibit 10.3 to Zenith's Quarterly Report on Form 10Q for the quarter ended June 30, 1996). *10.12 Zenith National Insurance Corp. Executive Officer Bonus Plan, dated as of March 21, 1994. 10.13 Credit Agreement, dated as of December 14, 1994, between Zenith and Sanwa Bank of California. (Incorporated herein by reference to Exhibit 10.10 to Zenith's Annual Report on Form 10K for the year ended December 31, 1994.) 10.14 Amendment dated as of December 28, 1995 to Credit Agreement, dated as of December 14, 1994, between Zenith and Sanwa Bank of California. (Incorporated herein by reference to Exhibit 10.11 to Zenith's Annual Report on Form 10K for the year ended December 31, 1995.)
19 10.15 Second Amendment, dated June 28, 1996, to Revolving Note Agreement, dated December 14, 1994 between Zenith and Sanwa Bank California. (Incorporated by reference to Exhibit 10.2 to Zenith's Quarterly Report of Form 10Q for the quarter ended June 30, 1996.) 10.16 Revolving Note Agreement, dated July 1, 1996, between Zenith and City National Bank. (Incorporated herein by reference to Exhibit 10.1 to Zenith's Quarterly Report on Form 10Q for the quarter ended June 30, 1996.) 10.17 Agreement of Reinsurance #8051 between General Reinsurance Corporation and Zenith Insurance Company, ZNAT Insurance Company, Zenith Star Insurance Company and CalFarm Insurance Company, dated as of May 22, 1995. (Incorporated herein by reference to Exhibit 10.13 to Zenith's Annual Report on Form 10K for the year ended December 31, 1995.) 10.18 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.) 10.19 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.) 10.20 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.) 10.21 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.) 10.22 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.) 10.23 Agreement of Reinsurance No. 420 among General Reinsurance Corporation, American Reinsurance Company, Cat Limited, Renaissance Reinsurance Company and Vesta Fire Insurance Company and CalFarm Insurance, Zenith Insurance and ZNAT Insurance, effective September 1, 1996. 10.24 Aggregate Excess of Loss Reinsurance Agreement between Associated General Contractors Self Insurers Trust Fund and Reliance Insurance Company effective December 31, 1991. 10.25 Specific Excess Workers' Compensation and Employers' Liability Policy between Planet Insurance Company (now Reliance National Indemnity Company) and Associated General Contractors of Florida Self Insurance Fund effective January 1, 1993. 10.26 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.) 11 Computation of Earnings Per Share for the three (3) years ended December 31, 1996 13 Zenith's Annual Report to Stockholders for the year ended December 31, 1996, 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 10K.
20 21 Subsidiaries of Zenith. 23 Consent of Coopers & Lybrand L.L.P., dated March 28, 1997. (Incorporated herein by reference to page F-1 of this Annual Report on Form 10K). 27 Financial Data Schedule 99.1 Information required by rule 15d-21 under the Securities Exchange Act of 1934 for the year ended December 31, 1996 for the Zenith Investment Partnership 401(k) Plan (to be filed by amendment on Form 10-K/A within 180 days of December 31, 1996).
- ------------------------ *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 28, 1997. 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 28, 1997. 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 - --------------------------------------------- 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, 33-22219 and 333-04399) of our report dated February 14, 1997 on our audits of the consolidated financial statements and financial statement schedules of Zenith National Insurance Corp. and subsidiaries as of December 31, 1996 and 1995, and for each of the three years in the period ended December 31, 1996, which is included in this Annual Report on Form 10-K. COOPERS & LYBRAND L.L.P. Los Angeles, California March 28, 1997 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, 1996 and 1995, and for each of the three years in the period ended December 31, 1996, which financial statements are included on pages 34 through 51 of the Company's 1996 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, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, 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. COOPERS & LYBRAND L.L.P. Los Angeles, California February 14, 1997 F-2 SCHEDULE I -- SUMMARY OF INVESTMENTS -- OTHER THAN INVESTMENTS IN RELATED PARTIES ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES DECEMBER 31, 1996
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.................... $ 299,447 $ 297,278 $ 297,248 Public utilities.............................. 19,292 19,168 19,168 Industrial and miscellaneous.................. 323,903 322,577 322,847 Redeemable preferred stocks..................... 19,467 19,720 19,720 ---------- ---------- --------------- Total fixed maturities.................... 662,109 658,743 658,983 ---------- ---------- --------------- Equity securities Floating rate preferred stocks.................. 14,614 14,071 14,071 Convertible and nonredeemable preferred stocks........................................ 750 784 784 Common stocks, industrial....................... 18,030 22,771 22,771 ---------- ---------- --------------- Total equity securities................... 33,394 37,626 37,626 ---------- ---------- --------------- Short-term investments............................ 106,712 106,712 106,712 Other investments................................. 49,478 49,478 49,478 ---------- ---------- --------------- Total investments......................... $ 851,693 $ 852,559 $ 852,799 ---------- ---------- --------------- ---------- ---------- ---------------
F-3 SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT ZENITH NATIONAL INSURANCE CORP. BALANCE SHEET ASSETS
DECEMBER 31, -------------------- (DOLLARS AND SHARES IN THOUSANDS) 1996 1995 -------- -------- Investments Bonds, at market (cost $9,896, 1996).................................................... $ 9,803 Common stocks, at market (cost $2,182, 1996 and $668, 1995)............................. 2,318 $ 709 Short-term investments (at cost which approximates market).............................. 30,720 84,678 Other invested assets................................................................... 10,000 Cash...................................................................................... 1,463 996 Investment in subsidiaries (Note A)....................................................... 334,227 318,620 Federal income taxes receivable (Note A).................................................. 138 Other assets.............................................................................. 30,164 12,116 -------- -------- Total assets...................................................................... $418,833 $417,119 -------- -------- -------- -------- LIABILITIES Senior notes payable, less unamortized discount of $647, 1996 and $768, 1995 (Note B)..................................................................... $ 74,353 $ 74,232 Cash dividends payable to stockholders.................................................... 4,401 4,455 Federal income taxes payable (Note A)..................................................... 4,676 Other liabilities......................................................................... 2,576 3,324 -------- -------- Total liabilities................................................................. 81,330 86,687 -------- -------- STOCKHOLDERS' EQUITY Preferred stock, $1 par--shares authorized 1,000; issued and outstanding, none in 1996 and 1995.................................................................................... Common stock, $1 par--shares authorized 50,000; issued 24,447, outstanding 17,604, 1996; issued 24,310, outstanding 17,784, 1995................................................. 24,447 24,310 Additional paid-in capital................................................................ 258,875 256,083 Retained earnings......................................................................... 175,684 155,634 Net unrealized appreciation on investments, net of deferred tax expense of $284, 1996 and $4,752, 1995............................................................................ 528 8,825 -------- -------- 459,534 444,852 Less treasury stock at cost (6,843 shares, 1996 and 6,526 shares, 1995)................... (122,031) (114,420) -------- -------- Total stockholders' equity........................................................ 337,503 330,432 -------- -------- Total liabilities and stockholders' equity........................................ $418,833 $417,119 -------- -------- -------- --------
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, ---------------------------------------------- (DOLLARS IN THOUSANDS) 1996 1995 1994 ------------ ------------- ------------- Investment income............................................................... $ 2,697 $ 219 $ 457 Realized gains on investments................................................... 43 11 Income from legal settlement.................................................... 1,910 ------------ ------------- ------------- Total revenue................................................................... 2,697 262 2,378 Operating expense............................................................... 2,970 1,863 4,059 Interest expense................................................................ 4,877 6,960 5,937 ------------ ------------- ------------- Loss from continuing operations before federal income tax benefit and equity in income from continuing operations of subsidiaries............................. (5,150) (8,561) (7,618) Federal income tax benefit...................................................... 1,845 3,123 2,678 ------------ ------------- ------------- Loss from continuing operations before equity in income from continuing operations of subsidiaries.................................................... (3,305) (5,438) (4,940) Equity in income from continuing operations of subsidiaries (Note A)............ 40,905 25,160 34,738 ------------ ------------- ------------- Income from continuing operations............................................... 37,600 19,722 29,798 Income (loss) from discontinued operations (Note C)............................. (13,122) 8,102 ------------ ------------- ------------- Net income...................................................................... $ 37,600 $ 6,600 $ 37,900 ------------ ------------- ------------- ------------ ------------- -------------
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, ----------------------------------------------- (AMOUNTS IN THOUSANDS) 1996 1995 1994 ------------- ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Investment income received.................................................... $ 612 $ 193 $ 477 Recovery from lawsuit settlement.............................................. 6,036 Operating expenses paid....................................................... (3,651) (1,455) (4,099) Interest paid................................................................. (4,908) (6,596) (5,842) Income taxes (paid) refunded.................................................. (616) 3,571 (1,471) ------------- ------------- ------------- Net cash flows from continuing operating activities......................... (8,563) (4,287) (4,899) Net cash flow from expenses of discontinued operations........................ (2,274) ------------- ------------- ------------- Net cash flows from operating activities.................................... (8,563) (6,561) (4,899) CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of investments: Debt and equity securities Available-for-Sale............................... (11,446) Other debt and equity securities and other investments...................... (10,000) Net change in short-term investments.......................................... 55,865 (82,549) 12,867 Other......................................................................... (3,151) Proceeds from the sale of CalFarm Life........................................ 120,000 ------------- ------------- ------------- Net cash flows from investing activities.................................... 31,268 37,451 12,867 CASH FLOWS FROM FINANCING ACTIVITIES: Cash received from bank line of credit........................................ 43,400 2,100 Cash paid on bank line of credit.............................................. (43,400) (2,100) Cash dividends paid to common stockholders.................................... (17,605) (18,273) (18,894) Proceeds from exercise of stock options....................................... 2,572 4,405 2,093 Purchase of treasury shares................................................... (7,611) (29,318) (346) Dividends received from subsidiaries.......................................... 15,000 10,500 15,000 Net cash from (to) subsidiary................................................. (14,594) 458 (5,356) ------------- ------------- ------------- Net cash flows from financing activities.................................... (22,238) (32,228) (7,503) Net increase (decrease) in cash................................................. 467 (1,338) 465 Cash at beginning of year....................................................... 996 2,334 1,869 ------------- ------------- ------------- Cash at end of year............................................................. $ 1,463 $ 996 $ 2,334 ------------- ------------- ------------- ------------- ------------- ------------- RECONCILIATION OF INCOME FROM CONTINUING OPERATIONS TO NET CASH FLOWS FROM OPERATING ACTIVITIES: Income from continuing operations............................................. $ 37,600 $ 19,722 $ 29,798 Income from continuing operations of subsidiaries............................. (40,905) (25,160) (34,738) Cash flow from expenses of discontinued operations............................ (2,274) Federal income taxes.......................................................... (2,461) 511 (4,149) Decrease in receivable from lawsuit settlement................................ 3,467 Other......................................................................... (2,797) 640 723 ------------- ------------- ------------- Net cash flow from operating activities..................................... $ (8,563) $ (6,561) $ (4,899) ------------- ------------- ------------- ------------- ------------- -------------
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 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 partially funds the cash flow requirements of its real estate construction subsidiary. Intercompany interest charges to such subsidiary reduce Zenith's interest expense. Zenith files a consolidated federal income tax return. The equity in the income from continuing operations of subsidiaries of $40,905,000 in 1996, $25,160,000 in 1995 and $34,738,000 in 1994 is net of a provision for federal income tax expense of $21,362,000 in 1996, $12,823,000 in 1995 and $17,986,000 in 1994. Zenith has formulated tax allocation procedures with its subsidiaries and the 1996, 1995 and 1994 condensed financial information reflect Zenith's portion of the consolidated taxes. Zenith Insurance Company paid dividends to Zenith of $15,000,000 in 1996, $10,000,000 in 1995 and $15,000,000 in 1994. CalFarm Life Insurance paid a dividend to Zenith of $500,000 prior to its sale in the fourth quarter of 1995. B. Senior Notes Payable Zenith issued $75,000,000 of 9% Senior Notes due 2002 (the "9% Notes") at par in May 1992. Interest on the 9% Note is payable semi-annually. The 9% Notes are general unsecured obligations of Zenith. C. Discontinued Operations: During the fourth quarter of 1995, Zenith completed the sale of its wholly-owned subsidiary, CalFarm Life Insurance Company ("CalFarm Life"), to a subsidiary of SunAmerica Inc. for approximately $120 million in cash. The group health insurance business of CalFarm Life was retained by Zenith. The sale resulted in a loss of approximately $19.5 million, after tax, which was recognized by Zenith principally in the third quarter of 1995. The life and annuity operations of CalFarm Life are presented as discontinued operations and prior-year financial statements have been restated. After tax income for the discontinued operation from the measurement date to the disposal date was $3,960,000. F-7 SCHEDULE III -- SUPPLEMENTARY INSURANCE INFORMATION ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
COLUMN C ----------- FUTURE COLUMN E COLUMN B POLICY ----------- ----------- BENEFITS, OTHER COLUMN G DEFERRED LOSSES, COLUMN D POLICY COLUMN F ----------- COLUMN A POLICY CLAIMS ----------- CLAIMS AND ----------- NET - ------------------------------ ACQUISITION AND LOSS UNEARNED BENEFITS PREMIUM INVESTMENT SEGMENT COSTS EXPENSES PREMIUMS PAYABLE REVENUE INCOME - ------------------------------ ----------- ----------- ----------- ----------- ----------- ----------- (AMOUNTS IN THOUSANDS) 1996 - ------------------------------ Property and Casualty Workers' compensation....... $ 4,870 $ 329,670 $ 28,330 $ 210,916 Other property/casualty..... 14,422 108,899 88,884 204,778 Reinsurance................. 1,460 87,858 9,995 37,162 ----------- ----------- ----------- ----------- ----------- ----------- 20,752 526,427 127,209 452,856 $ 48,457 Reinsurance ceded............. 93,651 Registrant.................... 2,697 ----------- ----------- ----------- ----------- ----------- ----------- Total....................... $ 20,752 $ 620,078 $ 127,209 $ -- $ 452,856 $ 51,154 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- 1995 - ------------------------------ Property and Casualty Workers' compensation....... $ 5,001 $ 262,738 $ 28,644 $ 203,252 Other property/casualty..... 13,802 107,995 78,760 192,276 Reinsurance................. 1,536 92,390 12,187 41,985 ----------- ----------- ----------- ----------- ----------- ----------- 20,339 463,123 119,591 437,513 $ 45,931 Reinsurance ceded............. 54,429 Registrant.................... 219 ----------- ----------- ----------- ----------- ----------- ----------- Total....................... $ 20,339 $ 517,552 $ 119,591 $ -- $ 437,513 $ 46,150 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- 1994 - ------------------------------ Property and Casualty Workers' compensation....... $ 4,430 $ 264,665 $ 34,123 $ 216,030 Other property/casualty..... 12,598 101,615 77,211 186,661 Reinsurance................. 1,478 96,430 10,491 36,138 ----------- ----------- ----------- ----------- ----------- ----------- 18,506 462,710 121,825 438,829 $ 39,611 Reinsurance ceded............. 47,696 Registrant.................... 457 ----------- ----------- ----------- ----------- ----------- ----------- Total....................... $ 18,506 $ 510,406 $ 121,825 $ -- $ 438,829 $ 40,068 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- 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 - ------------------------------ ----------- ----------- ----------- ----------- (AMOUNTS IN THOUSANDS) 1996 - ------------------------------ Property and Casualty Workers' compensation....... $ 159,047 $ 35,921 $ 32,704 $ 210,603 Other property/casualty..... 137,423 43,247 16,031 212,399 Reinsurance................. 18,230 4,925 1,709 35,059 ----------- ----------- ----------- ----------- 314,700 84,093 50,444 458,061 Reinsurance ceded............. Registrant.................... 2,969 ----------- ----------- ----------- ----------- Total....................... $ 314,700 $ 84,093 $ 53,413 $ 458,061 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- 1995 - ------------------------------ Property and Casualty Workers' compensation....... $ 153,692 $ 36,358 $ 22,090 $ 197,773 Other property/casualty..... 149,797 39,621 14,865 198,676 Reinsurance................. 22,100 5,867 1,063 43,433 ----------- ----------- ----------- ----------- 325,589 81,846 38,018 439,882 Reinsurance ceded............. Registrant.................... 1,863 ----------- ----------- ----------- ----------- Total....................... $ 325,589 $ 81,846 $ 39,881 $ 439,882 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- 1994 - ------------------------------ Property and Casualty Workers' compensation....... $ 129,352 $ 32,336 $ 24,779 $ 218,044 Other property/casualty..... 138,925 38,782 15,920 190,922 Reinsurance................. 25,571 6,135 110 39,674 ----------- ----------- ----------- ----------- 293,848 77,253 40,809 448,640 Reinsurance ceded............. Registrant.................... 4,059 ----------- ----------- ----------- ----------- Total....................... $ 293,848 $ 77,253 $ 44,868 $ 448,640 ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
F-8 SCHEDULE IV -- REINSURANCE ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
COLUMN F COLUMN C COLUMN D ---------- COLUMN B ------------ ----------- PERCENTAGE COLUMN A -------------- CEDED TO ASSUMED COLUMN E OF AMOUNT - ------------------------------------------------------- GROSS OTHER FROM OTHER -------------- ASSUMED (AMOUNTS IN THOUSANDS) AMOUNT COMPANIES COMPANIES NET AMOUNT TO NET -------------- ------------ ----------- -------------- ---------- DECEMBER 31, 1996 Premiums earned........................................ $ 435,568 $ 24,642 $ 41,930 $ 452,856 9.3% -------------- ------------ ----------- -------------- ---------- -------------- ------------ ----------- -------------- ---------- DECEMBER 31, 1995 Premiums earned........................................ $ 413,258 $ 21,112 $ 45,367 $ 437,513 10.4% -------------- ------------ ----------- -------------- ---------- -------------- ------------ ----------- -------------- ---------- DECEMBER 31, 1994 Premiums earned........................................ $ 422,563 $ 21,521 $ 37,787 $ 438,829 8.6% -------------- ------------ ----------- -------------- ---------- -------------- ------------ ----------- -------------- ----------
F-9 EX-2.1 2 EX 2.1 AMENDED & RESTATED AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER BY AND AMONG ZENITH AGC ACQUISITION INSURANCE COMPANY, ZENITH INSURANCE COMPANY, ZENITH NATIONAL INSURANCE CORP., ASSOCIATED GENERAL COMMERCE SELF-INSURERS' TRUST FUND and AGC RISK MANAGEMENT GROUP INC. As of October 7, 1996 TABLE OF CONTENTS
Page ---- ARTICLE I THE MERGER; EFFECTIVE TIME; CLOSING 1.1 The Merger. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.2 Effective Time. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.3 Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 ARTICLE II SURVIVING CORPORATION 2.1 Articles of Incorporation . . . . . . . . . . . . . . . . . . . . . . . . 2 2.2 By-Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2.3 Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2.4 Officers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 ARTICLE III MERGER CONSIDERATION 3.1 Right to Receive Merger Consideration . . . . . . . . . . . . . . . . . . 2 3.2 Determination of Adjusted GAAP Net Worth. . . . . . . . . . . . . . . . . .3 3.3 Payment of Merger Consideration . . . . . . . . . . . . . . . . . . . . . .3 3.4 Assumption of Liability for Assessments . . . . . . . . . . . . . . . . . .4 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE FUND 4.1 Organization and Qualification. . . . . . . . . . . . . . . . . . . . . . 4 4.2 Subsidiaries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 4.3 Authority Relative to This Agreement. . . . . . . . . . . . . . . . . . . 5 4.4 Consents and Approvals; No Violation. . . . . . . . . . . . . . . . . . . 5 4.5 Financial Statements and Reports. . . . . . . . . . . . . . . . . . . . . 6 4.6 Reserves. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 4.7 Absence of Certain Changes or Events. . . . . . . . . . . . . . . . . . . 7 4.8 Litigation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 4.9 No Regulatory Disqualifications . . . . . . . . . . . . . . . . . . . . . 9 4.10 Proxy Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 4.11 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 4.12 Employee Benefit Plans; Labor Matters . . . . . . . . . . . . . . . . . . 10 4.13 Intentionally Omitted . . . . . . . . . . . . . . . . . . . . . . . . . . 11 4.14 Intellectual Property . . . . . . . . . . . . . . . . . . . . . . . . . . 12 4.15 Brokers and Finders . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 4.16 Fairness Opinion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 4.17 Title to Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 4.18 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 i 4.19 No Default. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 4.20 Noncompliance with Laws . . . . . . . . . . . . . . . . . . . . . . . . . 13 4.21 Management and Service Agreements.. . . . . . . . . . . . . . . . . . . . 13 4.22 Investment Portfolio and Other Assets . . . . . . . . . . . . . . . . . . 14 4.23 Intercompany and Affiliate Transactions; Insider Interests. . . . . . . . 14 4.24 Officers, Directors, Trustees and Employees . . . . . . . . . . . . . . . 14 4.25 No Material Adverse Change. . . . . . . . . . . . . . . . . . . . . . . . 14 4.26 No Undisclosed Liabilities. . . . . . . . . . . . . . . . . . . . . . . . 14 4.27 Full Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 ARTICLE V REPRESENTATIONS AND WARRANTIES OF ZENITH, ZENITH INSURANCE AND ZENITH NATIONAL 5.1 Corporate Organization and Qualification. . . . . . . . . . . . . . . . . 15 5.2 Authority Relative to This Agreement. . . . . . . . . . . . . . . . . . . 15 5.3 Consents and Approvals; No Violation. . . . . . . . . . . . . . . . . . . 16 5.4 Proxy Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 5.5 Brokers and Finders . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 ARTICLE VI ADDITIONAL COVENANTS AND AGREEMENTS 6.1 Conduct of Business of the Fund . . . . . . . . . . . . . . . . . . . . . 16 6.2 Alternative Proposals . . . . . . . . . . . . . . . . . . . . . . . . . . 18 6.3 Members' Approval; Proxy Statement. . . . . . . . . . . . . . . . . . . . 19 6.4 Satisfaction of Conditions, Receipt of Necessary Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 6.5 Access to Information . . . . . . . . . . . . . . . . . . . . . . . . . . 20 6.6 Publicity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 6.7 Indemnification of Trustees and Officers. . . . . . . . . . . . . . . . . 21 6.8 Guaranty by Zenith Insurance and Zenith National. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 6.9 Merger of Zenith and Zenith Insurance.. . . . . . . . . . . . . . . . . . 21 6.10 Termination of RMG Management Agreements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 6.11 Dividend Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 6.12 Financial Statements and Reports. . . . . . . . . . . . . . . . . . . . . 22 ARTICLE VII CONDITIONS PRECEDENT TO CONSUMMATION OF THE MERGER 7.1 Conditions to Each Party's Obligations to Effect the Merger . . . . . . . 22 7.2 Additional Conditions to the Obligations of Zenith. . . . . . . . . . . . 23 7.3 Additional Conditions to the Obligations of the Fund. . . . . . . . . . . 25 ii ARTICLE VIII TERMINATION 8.1 Termination by Mutual Consent . . . . . . . . . . . . . . . . . . . . . . 26 8.2 Termination by Either Zenith or the Fund. . . . . . . . . . . . . . . . . 26 8.3 Termination by Zenith . . . . . . . . . . . . . . . . . . . . . . . . . . 26 8.4 Termination by the Fund . . . . . . . . . . . . . . . . . . . . . . . . . 26 8.5 Effect of Termination . . . . . . . . . . . . . . . . . . . . . . . . . . 27 ARTICLE IX MISCELLANEOUS AND GENERAL 9.1 Payment of Expenses and Other Payments. . . . . . . . . . . . . . . . . . 27 9.2 Survival of Representations and Warranties. . . . . . . . . . . . . . . . 28 9.3 Modification or Amendment . . . . . . . . . . . . . . . . . . . . . . . . 28 9.4 Waiver and Extension. . . . . . . . . . . . . . . . . . . . . . . . . . . 28 9.5 Counterparts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 9.6 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 9.7 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 9.8 Entire Agreement; Assignment. . . . . . . . . . . . . . . . . . . . . . . 30 9.9 Parties in Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 9.10 Certain Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 9.11 Validity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 9.12 Captions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 9.13 Further Assurances. . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
iii EXHIBITS Exhibit 7.2(e) Form of Opinion of Gerald S. Livingston, Esq., Counsel to the Fund Exhibit 7.2(f) Form of Consulting Agreement Exhibit 7.2(g) Form of Transfer Agreement Exhibit 7.3(d) Form of Opinion of Counsel to Zenith Exhibit 7.3(f) Form of Management Agreement iv AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated as of October 7, 1996, by and among ZENITH AGC ACQUISITION INSURANCE COMPANY, a Florida corporation (together with its successors and assigns, "Zenith"), ZENITH INSURANCE COMPANY, a California corporation ("Zenith Insurance"), ZENITH NATIONAL INSURANCE CORP., a Delaware corporation ("Zenith National"), ASSOCIATED GENERAL COMMERCE SELF-INSURERS' TRUST FUND, a qualified Florida self-insurers fund f/k/a Associated General contractors Self-Insurers' Trust Fund (the "Fund"), and AGC RISK MANAGEMENT GROUP INC., a Florida not-for-profit corporation ("RMG"). RECITALS WHEREAS, the respective Boards of Directors of Zenith, Zenith Insurance and Zenith National, and the Board of Trustees of the Fund have, subject to the conditions of this Agreement, determined that the Merger (as defined in Section 1.1) and the other transactions contemplated by this Agreement are in the best interests of their stockholders and policyholders, respectively, and have approved this Agreement and the transactions contemplated hereby; and WHEREAS, Zenith, Zenith Insurance and Zenith National, on one hand, and the Fund, on the other hand, require (each from the other) certain representations, warranties, covenants and agreements in connection with the Merger; WHEREAS, on October 7, 1996 the parties hereto signed the original Agreement and Plan of Merger and such parties desire to amend and restate such Agreement as of such date; and WHEREAS, this Amended and Restated Agreement and Plan of Merger is being executed on December 17, 1996 as of October 7, 1996. NOW, THEREFORE, in consideration of the foregoing and the mutual representations, warranties, covenants and agreements set forth herein, Zenith, Zenith Insurance, Zenith National, the Fund and RMG hereby agree as follows: ARTICLE I THE MERGER; EFFECTIVE TIME; CLOSING 1.1 THE MERGER. Subject to the terms and conditions of this Agreement, at the Effective Time, the Fund shall be merged with and into Zenith and the separate existence of the Fund shall thereupon cease (the "Merger"). Zenith shall be the successor or surviving corporation in the Merger and shall continue to be governed by the Laws of the State of Florida under the name "Zenith AGC Acquisition Insurance Company," and the separate corporate existence of Zenith with all its rights, privileges, immunities, powers and franchises shall continue unaffected by the Merger. The corporation surviving the Merger is sometimes hereinafter referred to as the "Surviving Corporation." The Merger shall have the effects set forth herein and in the FBCA and the FIL. From and after the Effective Time, the Surviving Corporation shall possess all of the assets and other rights, privileges, immunities, powers and purposes of Zenith and the Fund, and shall be liable for all of the liabilities of each of Zenith and the Fund. 1.2 EFFECTIVE TIME. As soon as practicable after the satisfaction or waiver of the conditions to the Merger set forth in this Agreement, Zenith and the Fund will cause appropriate articles of merger (the "Articles of Merger") to be executed and filed with the Secretary of State of the State of Florida, as provided in the FBCA. Subject to the approval of the Articles of Merger by the Secretary of State of the State of Florida, the Merger will become effective as of 10:00 a.m. on December 31, 1996 or, if later, the date and time of the filing of the Articles of Merger (the "Effective Time"). 1.3 CLOSING. The Fund shall as promptly as practicable notify Zenith, and Zenith shall as promptly as practicable notify the Fund, when the conditions to such party's or parties' obligation to effect the Merger contained in Section 7.1 have been satisfied or waived. The Closing shall take place (a) at the offices of RMG, 3504 Lake Lynda Drive, Suite 400, Orlando, Florida, at 10:00 a.m., Florida time, on the Closing Date or (b) at such other place, time and date as Zenith and the Fund may agree. ARTICLE II SURVIVING CORPORATION 2.1 ARTICLES OF INCORPORATION. The Articles of Incorporation of Zenith shall be the Articles of Incorporation of the Surviving Corporation until thereafter amended as provided by Law and the Articles of Incorporation. 2.2 BY-LAWS. The By-Laws of Zenith, as in effect immediately prior to the Effective Time, shall be the By-Laws of the Surviving Corporation until htereafter amended as provided by Law, the Articles of Incorporation and the By-Laws. 2.3 DIRECTORS. The directors of Zenith at the Effective Time shall, from and after the Effective Time, be the directors of the Surviving Corporation until their successors have been duly elected or appointed and qualified or until their earlier death, resignation or removal in accordance with the Articles of Incorporation and Surviving Corporation's By-laws. 2.4 OFFICERS. The officers of Zenith at the Effective Time shall, from and after the Effective Time, be the initial officers of the Surviving Corporation until their successors have been duly elected or appointed and qualified or until their earlier death, resignation or removal in accordance with the Articles of Incorporation and the By-Laws. ARTICLE III MERGER CONSIDERATION 2 3.1 RIGHT TO RECEIVE MERGER CONSIDERATION. As of the Effective Time, each Member Distributee shall, by virtue of the Merger and without any action on the part of such Member Distributee, be entitled to receive, in accordance with the Plan of Distribution, its pro rata portion (based on premiums paid during the five-year period ending on the Effective Date) of the cash payments to be made pursuant to Section 3.3 (collectively, the "Merger Consideration"). 3.2 DETERMINATION OF ADJUSTED GAAP NET WORTH. (a) Prior to the Closing Date, Zenith Insurance shall retain a "big six" accounting firm selected by the Management Group (the "Accountant") to perform the audits and prepare the reports required pursuant to this Section 3.2; provided, however, that if the Management Group fails to select an accounting firm within 3 business days prior to the Closing Date, Zenith Insurance may select the accounting firm that will act as the Accountant. (b) Within sixty (60) days after the Effective Date, the Accountant shall conduct and complete an audit of the Fund's statement of financial position as of the Effective Date, which shall be prepared in accordance with GAAP without giving effect to the Merger (the "Closing Balance Sheet"). The Accountant shall deliver its audit report on the Closing Balance Sheet to Zenith, Zenith Insurance, Zenith Insurance's auditors and the Management Group. RMG shall cooperate with the Accountant in connection with such audit, including the provision of customary representation letters. The Accountant's audit report on the Closing Balance Sheet shall be final and binding on all of the parties hereto. (c) From time to time after the Effective Date, but prior to each payment required pursuant to Section 3.3 (b), (c) and (d), the Accountant shall audit a revised statement of financial position of the Fund as of the Effective Date, prepared in accordance with GAAP without giving effect to the Merger (each, a "Revised Closing Balance Sheet"). The Accountant shall issue, and deliver to Zenith, Zenith Insurance, Zenith Insurance's auditors and the Management Group, a special report on each Revised Closing Balance Sheet, in accordance with the American Institute of Certified Public Accountants' Statements on Auditing Standards. Each of the Accountant's special reports shall be final and binding on all of the parties hereto. (d) "Adjusted GAAP Net Worth" shall mean, as of any date, (i) the amount reflected as "member distribution payable" on the most recently prepared Revised Closing Balance Sheet, plus (ii) $1,600,000, minus (iii) 50% of the Accountant's fees and expenses for auditing the Closing Balance Sheet and any Revised Closing Balance Sheet that has been prepared, minus (iv) payments made to Members after the Effective Date in respect of Loss Sensitive Policies to the extent that the amount reflected as "member distribution payable" on the most recently prepared Revised Closing Balance Sheet represents an accrual for such payments. 3.3 PAYMENT OF MERGER CONSIDERATION. Zenith shall pay the Merger Consideration to the Member Distributees, as follows: (a) As soon as practical after the Effective Time, Zenith shall make payments to Member Distributees equal, in the aggregate, to $1,140,000; 3 (b) On or before December 31, 1997, Zenith shall make payments to Member Distributees equal, in the aggregate, to 50% of the amount by which (i) the Fund's Adjusted GAAP Net Worth, as of the date of payment, net of any amounts included therein that represent accruals for payments due to Members under Loss Sensitive Policies, exceeds (ii) the amount paid pursuant to paragraph (a) hereof; (c) On or before December 31, 1998, Zenith shall make payments to Member Distributees equal, in the aggregate, to 50% of the amount by which (i) the Fund's Adjusted GAAP Net Worth, as of the date of payment, net of any amounts included therein that represent accruals for payments due to Members under Loss Sensitive Policies, exceeds (ii) the sum of the amounts paid pursuant to paragraphs (a) and (b) hereof; and (d) On or before December 31, 1999, Zenith shall make payments to Member Distributees equal, in the aggregate, to the sum of: (i) 100% of the amount by which the Fund's Adjusted GAAP Net Worth, as of the date of payment, exceeds the sum of the amounts paid pursuant to paragraphs (a), (b) and (c) hereof; (ii) interest accrued at the rate of 7% per annum on each of the amounts paid pursuant to the foregoing paragraphs (a), (b) and (c) and clause (d)(i) hereof, in each case, from the Effective Date until the respective date of payment of such amounts pursuant to this Section 3.3 (each, a "Payment Date"); (iii) interest accrued at the rate of 7% per annum on the interest calculated pursuant to the foregoing clause (ii) from the respective Payment Date until the date of payment pursuant to this clause (d). 3.4 ASSUMPTION OF LIABILITY FOR ASSESSMENTS. From and after the Effective Time, Zenith hereby assumes all Liability for Assessments and Zenith shall indemnify and hold harmless the Members against any Liability for Assessments. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE FUND AND RMG Except as described in the appropriate sections of the Disclosure Schedule, the Fund and RMG represent and warrant to Zenith, Zenith Insurance and Zenith National that: 4.1 ORGANIZATION AND QUALIFICATION. (a) The Fund is a self-insurance trust fund duly organized, validly existing and in good standing under the Laws of the State of Florida. RMG is a not-for profit corporation duly organized, validly existing and in good standing under the Laws of the State of Florida. Each of the Fund and RMG has all requisite power and authority and all necessary governmental Consents to 4 own, lease and operate its properties and to carry on its business as it is now being conducted. The Fund and RMG have heretofore made available to Zenith complete and correct copies of the Fund's Declaration of Trust and RMG's Articles of Incorporation and By-Laws, respectively, each in effect as of the date hereof. (b) The Fund is (i) duly licensed or authorized as a self-insurance trust fund in the State of Florida, (ii) not required to be licensed or authorized as a self-insurance trust fund or insurance company in any jurisdiction other than the State of Florida, and (iii) duly authorized in the State of Florida to write the line of business reported as being written in the SAP Statements. (c) RMG is (i) duly licensed or authorized as a managing general agent and was previously licensed as a service company in the State of Florida, and (ii) not required to be licensed or authorized as a managing general agent or service company in any jurisdiction other than the State of Florida. 4.2 SUBSIDIARIES. The Fund has no Subsidiaries. Except for RMG, the Fund does not directly or indirectly have any equity or similar interest in, or any interest convertible into or exchangeable or exercisable for any equity or similar interest in, any corporation, partnership, joint venture or other business association or entity that directly or indirectly conducts any activity which is material to the Fund. RMG has one member, which member is the Fund. 4.3 AUTHORITY RELATIVE TO THIS AGREEMENT. The Fund and RMG have the requisite power and authority to execute and deliver this Agreement and, subject to approval of this Agreement by the Requisite Percentage of Voting Members in accordance with the FIL as contemplated by Section 6.3 of this Agreement, to consummate the transactions contemplated hereby. This Agreement and the consummation by the Fund and RMG of the transactions contemplated hereby have been duly and validly authorized by the Board of Trustees of the Fund and the Board of Directors of RMG, respectively, and no other proceedings on the part of the Fund or RMG are necessary to authorize this Agreement or to consummate the transactions contemplated hereby (other than the approval of this Agreement by the Requisite Percentage of Voting Members in accordance with the FIL). This Agreement has been duly and validly executed and delivered by the Fund and RMG and, assuming this Agreement constitutes the valid and binding agreement of Zenith, Zenith Insurance and Zenith National, constitutes the valid and binding agreement of the Fund and RMG, enforceable against the Fund and RMG in accordance with its terms, except that the enforcement hereof may be limited by (a) bankruptcy, insolvency, reorganization, moratorium or other similar Laws now or hereafter in effect relating to creditors' rights generally and (b) general principles of equity (regardless of whether enforceability is considered in a proceeding in equity or at law). 4.4 CONSENTS AND APPROVALS; NO VIOLATION. Neither the execution, delivery or performance of this Agreement by the Fund or RMG nor the consummation by the Fund or RMG of the transactions contemplated hereby nor compliance by the Fund or RMG with any of the provisions hereof will (a) conflict with or result in any breach of any provision of the Declaration of Trust of the Fund, or the Articles of Incorporation or By-Laws of RMG; (b) require any Consent of any governmental or regulatory authority, except (i) the filing of the Articles of Merger pursuant to the FBCA and appropriate documents with other relevant authorities, (ii) the filing of appropriate documents with, and approval of, the Florida Commissioner; (c) result in a Default under any of the terms, conditions or provisions of any Contract to which the Fund or RMG may be a party, or Permit by 5 which the Fund or RMG or any of their assets may be bound, except for such Defaults as to which requisite waivers or consents have been obtained; or (d) assuming the Consents and Permits referred to in this Section 4.4 are duly and timely obtained or made and the approval of this Agreement by the Requisite Percentage of Voting Members has been obtained, violate any Order or Law applicable to the Fund or RMG or any of their assets. 4.5 FINANCIAL STATEMENTS AND REPORTS. (a) SAP STATEMENTS. The Fund has delivered to Zenith complete and correct copies of all SAP Statements relating to periods ending, or prepared as of any date, on or after December 31, 1993. Each SAP Statement (and the exhibits and schedules relating thereto) was prepared in accordance with SAP applied on a consistent basis (except for changes, if any, disclosed therein) and is complete in all material respects, and each SAP Statement fairly presents (in accordance with SAP) the financial position of the Fund, as of the respective dates thereof, or its earnings and changes in surplus or cash flows, as the case may be, for and during the respective periods covered thereby. There were no material liabilities affecting the Fund as of December 31, 1995 required in accordance with SAP to be reflected or disclosed in the SAP Statements for the period then ended, or as of June 30, 1996 required in accordance with SAP to be reflected or disclosed in the SAP Statements for the period then ended, which are not so reflected or disclosed. (b) GAAP STATEMENTS. (i) The Fund has delivered to Zenith the Interim Statements and the GAAP Statements. The GAAP Statements and Interim Statements (including the notes thereto) have been prepared in accordance with GAAP applied on a consistent basis throughout the period indicated and present fairly the financial position of the Fund, as of the respective dates thereof, and the results of its operations and cash flows for the periods then ended, subject, in the case of the Interim Statements, to normal year-end adjustments which will not, in the aggregate, in the opinion of the Trustees of the Fund, be material. (ii) RMG has delivered to Zenith its audited financial statements for the fiscal year ended September 30, 1995, together with the notes related thereto. Such financial statements (including the notes thereto) have been prepared in accordance with GAAP applied on a consistent basis throughout the period indicated and present fairly the financial position of RMG as of the respective dates thereof and the results of its operations and cash flows for the periods then ended. (c) The Fund has filed all SAP Statements, together with all exhibits and schedules thereto, required to be filed with or submitted to the appropriate regulatory authorities of the State of Florida on forms prescribed or permitted by such authority. The Fund has filed all other required forms, reports and documents with the Florida Commissioner required to be filed or submitted by it pursuant to the FIL and the rules and regulations thereunder, all of which have complied in all material respects with all applicable requirements of such laws and the rules promulgated thereunder. None of such forms, reports or documents, including, without limitation, any financial statements or schedules included therein at the time filed, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. 6 4.6 RESERVES. (a) Section 4.6 of the Disclosure Schedule sets forth the methodology used by the Fund in developing the reserves for incurred losses, incurred loss adjustment expenses, incurred but not reported losses and loss adjustment expenses for incurred but not reported losses as set forth in the SAP Statements. All such reserves in respect of insurance or reinsurance treaties or agreements established or reflected in the SAP Statements were determined in accordance with commonly accepted actuarial standards applied on a consistent basis and are in compliance, in all material respects, with the requirements of the FIL, as well as those of any other applicable insurance laws. (b) All reserves and accrued liabilities for estimated losses, settlements, costs and expenses from pending suits, actions and proceedings included in each SAP Statement were determined in accordance with SAP and generally accepted actuarial assumptions and Statement of Financial Accounting Standards No. 5 issued by the Financial Accounting Standards Board. 4.7 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as specifically provided for in this Agreement and except as set forth in Section 4.7 of the Disclosure Schedule, since December 31, 1995, the Fund and RMG have operated their respective businesses only in the ordinary course of business and consistent with past practice, and except in the ordinary course of business and consistent with past practice, neither the Fund nor RMG has: (i) declared, set aside or paid any dividends or declared or made any other distributions of any kind to its policyholders; (ii) incurred any obligation or liability (fixed or contingent), or series of related obligations or liabilities, other than ordinary course obligations arising pursuant to the terms of its insurance or reinsurance treaties and contracts; (iii) made any change in its accounting or reserving methods or practices, other than those required to be made by regulatory agencies or by the Financial Accounting Standards Board, or made any change in depreciation or amortization policies or rates adopted by it which change materially affects any financial statement item (without giving effect to any offsetting change); (iv) made any change in the underwriting, establishment of reserves, investment or claims adjustment policies and practices or change in any activity which (A) has had the effect of accelerating the recording and billing of premiums or accounts receivable or delaying the payment of expenses or establishing loss reserves in connection with any accounts or business of the Fund, or (B) has had the effect of materially altering, modifying or changing the historic, financial or accounting practices or policies of the Fund, including accruals of, and reserves for, tax liabilities; (v) amended its Declaration of Trust or By-laws or merged with or into or consolidated with any other person, or changed or agreed to change in any manner the character of its business; 7 (vi) suffered any material damage, destruction or loss, whether or not covered by insurance; (vii) entered into any agreement, commitment or transaction (including, without limitation, any capital expenditure, capital financing or sale of assets) for any material amount, other than ordinary course obligations pursuant to the terms of its insurance or reinsurance treaties and contracts; (viii) allowed any Lien on any tangible or intangible asset, or any sale, transfer, assignment or lease of any tangible or intangible asset; (ix) effected any cancellation of any debt or waiver or release of any material right or claim other than under its insurance or reinsurance treaties and contracts; (x) made any payment, discharge or satisfaction of any claim, liability or obligation (absolute, accrued, contingent or otherwise), other than ordinary course payments pursuant to the terms of its insurance or reinsurance treaties and contracts; (xi) been subjected to any labor dispute, litigation or governmental investigation material to their business or their financial condition; (xii) made any loan or advance to any person; (xiii) purchased, leased or acquired any assets or properties of any person; (xiv) increased or agreed to increase any salary, wages, benefits or other forms of compensation payable or to become payable to any of its current or former officers, directors, trustees or employees, or any bonus or severance payments or arrangements made to, for or with any of its officers, directors, trustees or employees, or any supplemental retirement plan or other program or special remuneration or compensation for any of its officers, directors, trustees or employees, other than those which have been approved by Zenith; (xv) terminated or amended or failed to perform its obligations or caused the occurrence of any default under any agreement the result of which had, or in the future can reasonably be expected to have, a Material Adverse Effect; (xvi) entered into any agreement, whether in writing or otherwise, to do any of the foregoing; or (xvii) entered into any material transaction or commitment of any kind other than in the ordinary course of business. 4.8 LITIGATION. Except as disclosed in the financial statements delivered pursuant to Section 4.5 or as set forth in Section 4.8 of the Disclosure Schedule, there is no Litigation pending or, to the knowledge of the Fund, threatened against or affecting the business operations or financial condition of the Fund or RMG. Neither the Fund nor RMG is in default with respect to any judgement, 8 order, writ, injunction or decree of any court or any Federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality. 4.9 NO REGULATORY DISQUALIFICATIONS. To the knowledge of the Fund, no event has occurred and no condition exists or, to the extent it is within the reasonable control of the Fund, will occur or exist with respect to the Fund or RMG that, in connection with obtaining any regulatory Consents required for the Merger, would cause the Fund or RMG to fail to satisfy on its face any applicable statute or written regulation of any applicable insurance regulatory authority, which is reasonably likely to adversely affect the Fund's or RMG's ability to consummate the transactions contemplated hereby. 4.10 PROXY STATEMENT. The Proxy Statement will comply with the FIL, except that no representation is made by the Fund with respect to information supplied in writing by Zenith or any affiliate of Zenith specifically for inclusion in the Proxy Statement. None of the information as to the Fund or RMG contained in the Proxy Statement will contain, and none of the information heretofore furnished to Zenith or its representatives by the Fund contains, any untrue statement of a material fact required to be stated therein or omits to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. 4.11 TAXES. Except as disclosed in Section 4.11 of the Disclosure Schedule (with paragraph reference corresponding to those set forth below) or in the SAP Statements or the GAAP Statements or as disclosed in writing to Zenith prior to the date hereof: (a) All Tax Returns required to be filed with respect to the Fund and RMG have been duly and timely filed, and all such Tax Returns are true, correct and complete. All Taxes that are due and payable by the Fund and RMG have been paid or adequate provision has been made on the Fund's and RMG's books and records in accordance with GAAP or SAP, as the case may be, for the payment of such Taxes. There are no Liens on any of the assets of the Fund except for statutory Liens for current Taxes. (b) With respect to any period for which Tax Returns have not yet been filed, or for which Taxes are not yet due or owing, the Fund or RMG, as the case may be, has made due and sufficient current accruals for such Taxes in accordance with SAP and GAAP, and such current accruals are duly and fully provided for in the GAAP Statements of the Fund or RMG, as the case may be. (c) The Fund and RMG have complied (and until the Effective Time will comply) with all applicable Laws relating to information reporting and the withholding of Taxes in connection with amounts paid or owing to any third party. (d) Neither the Fund nor RMG have been audited or examined by the Internal Revenue Service. Except as set forth in Section 4.11(d) of the Disclosure Schedule, the Fund and RMG have not been required to file any state, local or foreign income or franchise Tax Returns. There are no outstanding agreements, waivers or arrangements extending the statutory period of limitations applicable to any claim for, or the period for the collection or assessment of, Taxes due from the Fund or RMG for any taxable period. The Fund has delivered to Zenith copies, which are true, 9 correct and complete, of each of the federal income and state premium Tax Returns, for each of the last three taxable years, filed by the Fund and RMG. (e) No audit or other proceeding by any court, governmental or regulatory authority, or similar person is pending or to the knowledge of the Fund, threatened with respect to any Taxes due from the Fund or RMG or any Tax Return filed by or relating to the Fund or RMG. No assessment of Tax has been proposed, orally or in writing, against the Fund or RMG. (f) Neither the Fund nor RMG is a party to, nor is either of them bound by, nor does either have any obligation under, any tax sharing contract, and neither the Fund nor RMG has any liability for indemnification of third parties with respect to Taxes or liabilities for Taxes as a transferee. (g) For all tax years for which the applicable statute of limitations has not yet expired, the Fund's and RMG's respective tax reserves have been computed in accordance with the requirements of the Code. 4.12 EMPLOYEE BENEFIT PLANS; LABOR MATTERS. (a) GENERAL COMPLIANCE WITH LAW. Each Plan has been operated in accordance with its terms and the requirements of ERISA, the Code, and all other applicable Laws. All reports and disclosures relating to the Plans required to be filed or furnished to any governmental entity, participants or beneficiaries prior to the Closing have been filed in a timely manner and in accordance in all material respects with applicable Law, except as set forth in Section 4.12(a) of the Disclosure Schedule. Section 4.12 of the Disclosure Schedule contains a true and complete list of each Plan and ERISA Affiliate Plan. (b) ERISA TITLE IV LIABILITY; DEFINED BENEFIT PLANS. (i) Neither the Fund nor RMG, nor any ERISA Affiliate of the Fund or RMG has incurred any direct or indirect liability under, arising out of, or by operation of Title IV of ERISA that has not been satisfied in full, and no fact or event exists that could reasonably be expected to give rise to any such liability, other than liability for premiums due the PBGC (which premiums have been paid when due); (ii) for each Plan and ERISA Affiliate Plan which is subject to Title IV of ERISA, the aggregate accumulated benefit obligation (as determined under Statement of Financial Accounting Standards No. 87) of such Plan or ERISA Affiliate Plan does not exceed the fair market value of the assets of such Plan or ERISA Affiliate Plan; (iii) no Plan or any trust established thereunder that is subject to Section 302 of ERISA and Section 412 of the Code has incurred any "accumulated funding deficiency" (as defined in Section 302 of ERISA and Section 412 of the Code), whether or not waived; (iv) all contributions required to be made with respect thereto (whether pursuant to the terms of any Plan or otherwise) have been timely made; (v) no Lien exists under Section 412(n) of the Code or Section 4068 of ERISA with respect to any assets of the Fund or RMG; (vi) no tax under Section 4971 of the Code has been incurred with respect to any Plan; and (vii) the Fund and RMG and each ERISA Affiliate of the Fund and RMG does not sponsor, maintain, contribute to, or is required to contribute (and has not within the past six (6) years contributed) to a "multiemployer pension plan," as defined in Section 3(37) of ERISA, or a plan described in Section 4063(a) of ERISA. 10 (c) PROHIBITED TRANSACTIONS; FIDUCIARY DUTIES. (i) Neither the Fund, RMG, nor any Plan, nor any trust created thereunder and any trustee or administrator thereof has engaged in a transaction in connection with which the Fund or any ERISA Affiliate, any Plan, any such trust, or any trustee or administrator thereof, or any party dealing with any Plan or any such trust, which could result in a civil penalty assessed pursuant to Section 409 or 502(i) of ERISA or a tax imposed pursuant to Section 4975 of the Code; and (ii) the Fund and all fiduciaries (as defined in Section 3(21) of ERISA) with respect to the Plans, have complied in all respects with Section 404 of ERISA. (d) DETERMINATION LETTERS. (i) Each Plan intended to be qualified under Section 401(a) of the Code has received a favorable determination letter from the Internal Revenue Service with respect to the Tax Reform Act of 1986 and other applicable Laws, or an application was filed for such determination letter on a timely basis, and (ii) nothing has occurred from the date of such letter or such filing that could reasonably be expected to affect the qualified status of such Plan. (e) NO ACCELERATION OF LIABILITY. The consummation of the transactions contemplated by this Agreement will not (i) entitle any current or former employee, trustee, director or officer of the Fund or RMG to severance pay, unemployment compensation or any other payment, except as expressly provided in this Agreement or (ii) accelerate the time of payment or vesting, or increase the amount of compensation or benefit due any such employee, trustee, director or officer. (f) ABILITY TO TERMINATE PLANS; POST-RETIREMENT PLANS. Each Plan is terminable in accordance with the terms expressly set forth therein, except as may be limited by applicable Law. No Plan provides death, medical or other benefits with respect to current or former employees after retirement or other termination of service, other than coverage mandated by applicable Law. (g) EMPLOYEE RELATIONS. Except to the extent set forth in Section 4.12(g) of the Disclosure Schedule, (i) there is no labor strike, dispute, slowdown, stoppage or lockout actually pending or threatened against or affecting the Fund or RMG and during the past three years there has not been any such action; (ii) no union claims to represent the employees of the Fund or RMG; (iii) neither the Fund nor RMG is a party to or bound by any collective bargaining or similar agreement with any labor organization, or work rules or practices agreed to with any labor organization or employee association applicable to employees of the Fund or RMG; (iv) none of the employees of the Fund or RMG are represented by any labor organization and the Fund and RMG do not have any knowledge of any current union organizing activities among the employees of the Fund or RMG, nor does any question concerning representation exist concerning such employees; (v) true and correct copies of all written personnel policies, rules and procedures applicable to employees of the Fund or RMG have heretofore been delivered to Zenith by the Fund and RMG; (vi) there is no grievance arising out of any collective bargaining agreement or other grievance procedure pending against the Fund or RMG; (vii) neither the Fund nor RMG has received notice of the intent of any federal, state, local or foreign agency responsible for the enforcement of labor or employment laws to conduct an investigation of the Fund or RMG, nor is such an investigation in progress; (viii) there are no employment contracts or severance agreements with any employees of the Fund or RMG; and (ix) no employee of the Fund or RMG has suffered an "employment loss" (as defined in the Worker Adjustment and Retraining Notification Act) during the three (3) month period prior to the Closing. 4.13 INTENTIONALLY OMITTED. 11 4.14 INTELLECTUAL PROPERTY. (a) Each of the Fund and RMG is the owner of, or a licensee under a valid license for, all items of intellectual property which are material to its business as currently conducted, including, without limitation, (i) copyrights, patents, trademarks, logos, service marks, trade names, service names, all applications therefor and all registrations thereof, and (ii) rights and licenses, computer software, trade secrets, know-how, inventions, processes, formulae and other intellectual property rights (collectively, the "Intellectual Property"); (b) with respect to all Intellectual Property owned by the Fund or RMG, the Fund or RMG, as the case may be, is the sole owner and has the exclusive right to use such Intellectual Property, and such owned Intellectual Property is not subject to any Liens; (c) there is no infringement or other adverse claim against the rights of the Fund or RMG with respect to any of the Intellectual Property; and (d) neither the Fund nor RMG has not been charged with, nor to the knowledge of the Fund or RMG, is the Fund or RMG threatened to be charged with nor is there any basis for any such charge of, infringement or other violation of, nor has the Fund or RMG infringed, nor is it infringing upon, any unexpired rights of any third party in any of the Intellectual Property. 4.15 BROKERS AND FINDERS. Neither the Fund nor RMG has employed any investment banker, broker, finder, consultant or intermediary in connection with the transactions contemplated by this Agreement which would be entitled to any investment banking, brokerage, finder's or similar fee or commission in connection with this Agreement or the transactions contemplated hereby. 4.16 FAIRNESS OPINION. The Fund has engaged Raymond James, as financial advisor to the Fund, to render a fairness opinion with respect to the consideration to be received by the Members in the Merger. Upon receipt of such opinion, a copy thereof will be provided to Zenith. 4.17 TITLE TO PROPERTY. (a) Each of the Fund and RMG (i) has good, valid and marketable title to all of its properties, assets and other rights that do not constitute real property, free and clear of all Liens, and (ii) owns, or has valid leasehold interests in or valid contractual rights to use, all of the assets, tangible and intangible, used by, or necessary for the conduct of, its business. (b) Each of the Fund and RMG: (i) is in peaceful and undisturbed possession of the space and/or estate under each real property lease under which it is a tenant, and there are no defaults by it as tenant thereunder; and (ii) has good and valid rights of ingress and egress to and from all the real property leased by it from and to the public street systems for all usual street, road and utility purposes. 4.18 INSURANCE. Section 4.18 of the Disclosure Schedule is a complete and accurate list of all primary, excess and umbrella policies of general liability, fire, products liability, employers' liability, directors' and officers' liability, workers' compensation, bonds and any other form of insurance owned or held by or on behalf of or providing insurance coverage to the Fund and RMG, including the following information for each such policy: type(s) of insurance coverage provided; 12 name of insurer; effective dates of the oplicy; policy number; per occurrence and annual aggregate deductibles or self-insured retention; and per occurrence and annual aggregate limits of liability; and the extent, if any, to which the limits of liability of any products liability or general liability insurance have been invaded or exhausted. The Fund and RMG are, and have been continuously since January 1, 1995, insured with financially responsible insurers in such amounts and against such risks and losses as are customary for companies conducting the business as conducted by the Fund and RMG during such time period. Neither the Fund nor RMG is in Default under, nor have they received any notice of cancellation or termination with respect to, any insurance policy of the Fund or RMG. The insurance policies of the Fund and RMG are valid and enforceable policies. The Fund and RMG maintain all insurance coverage required to be maintained pursuant to the FIL, including, without limitation, excess insurance in accordance with Florida Administration Code Rule 4-190.061. 4.19 NO DEFAULT. Neither the Fund nor RMG is in Default under any term, condition or provision of (a) its Declaration of Trust, or Articles of Incorporation, respectively, (b) any Contract or other instrument or obligation to which it is a party or by which it or any of its properties or assets may be bound or affected; (c) any Order applicable to it or any of its properties or assets; or (d) any Permit necessary for it to conduct its business as currently conducted. 4.20 NONCOMPLIANCE WITH LAWS. The businesses of the Fund and RMG are being conducted in compliance with all applicable Laws. Except as set forth in Section 4.20 of the Disclosure Schedule, since January 1, 1993, neither the Fund nor RMG has received any written notification or written communication from any agency or department of federal, state, or local government (a) asserting that the Fund or RMG is not in compliance with any of the Laws, Orders or Permits of any governmental agency or authority or that any such agency or authority enforces, or (b) requiring the Fund or RMG to enter into or consent to the issuance of a cease and desist order, formal agreement, directive or commitment which restricts the conduct of its business or which affects its capital, its credit or reserve policies, its management, or the payment of dividends. 4.21 MANAGEMENT AND SERVICE AGREEMENTS. (a) All management and/or service agreements entered into by the Fund as now in force are set forth in Section 4.21 of the Disclosure Schedule, and to the extent required under applicable Law, are in a form acceptable to applicable regulatory authorities or, to the extent required by Law, have been filed and not objected to by such authorities within the period provided for objection. (b) Except as set forth in Section 4.21 of the Disclosure Schedule, each agreement set forth in Section 4.21 of the Disclosure Schedule is valid and binding against the Fund and each other party thereto, and is in full force and effect in accordance with its terms. Except as set forth in Section 4.21 of the Disclosure Schedule, the Fund and each other party thereto is and has been in compliance with the terms of such agreements. There are no defaults (or circumstances or events that, with the giving of notice or lapse of time or both, would become defaults) with respect to any such contract or other agreement and no such contract or other agreement contains any provisions providing that the other party thereto may terminate the same by reason of the transactions contemplated by this Agreement or any other provision which would be altered or otherwise become applicable by reason of such transactions. 13 4.22 INVESTMENT PORTFOLIO AND OTHER ASSETS. Section 4.22 of the Disclosure Schedule contains the Fund's investment guidelines and a list of the securities and other investments in the Fund's investment portfolio, as of June 30, 1996, with information included thereon as to the amortized cost of each such investment and the market value thereof as of such date. None of such investments included in the investment portfolio is in default in the payment of principal or interest or dividends or materially impaired. All such investments included in such portfolio comply with all insurance laws and regulations of each of the states to which the Fund is subject relating thereto including, without limitation, Florida Administrative Code Rule 4-190.071. 4.23 INTERCOMPANY AND AFFILIATE TRANSACTIONS; INSIDER INTERESTS. Section 4.23 of the Disclosure Schedule lists all intercompany agreements or arrangements of any kind between or among the Fund, RMG or their officers, directors, trustees or policyholders. 4.24 OFFICERS, DIRECTORS, TRUSTEES AND EMPLOYEES. The Fund and RMG have previously delivered to Zenith true and correct information as to (a) the name of each of the Fund's officers, directors, trustees and employees, (b) the name of each of RMG's officers, directors and employees as of September 30, 1996, and (c) the total compensation of all such officers, directors, employees and trustees. 4.25 NO MATERIAL ADVERSE CHANGE. Since December 31, 1995, there has been no change in the business, properties, assets, condition (financial or otherwise), liabilities or operations of the Fund or RMG which, individually or in the aggregate has had, or is reasonably likely to have, a Material Adverse Effect. The Fund is not aware of any fact or facts which, individually or in the aggregate, is or are reasonably likely to have a Material Adverse Effect. 4.26 NO UNDISCLOSED LIABILITIES. Except for liabilities and obligations (x) incurred in the ordinary course of business and consistent with past practice or (y) pursuant to the terms of this Agreement, since December 31, 1995 to the date hereof, neither the Fund nor RMG has incurred any liabilities or obligations of any nature, whether or not accrued, contingent or otherwise, that have, or would be reasonably likely to have, individually or in the aggregate a Material Adverse Effect or would be required by GAAP or SAP to be reflected on a balance sheet of the Fund or RMG (including the notes thereto). 4.27 FULL DISCLOSURE. The representations and warranties made by the Fund in this Agreement, or in any documents referenced or delivered pursuant hereto or thereto, do not, and will not, contain any untrue statement of a material fact or omit to state a material fact required to be stated herein or therein, or necessary to make the statements and facts contained herein or therein, in light of the circumstances in which they are made, not false or misleading. Copies of all documents heretofore or hereafter delivered or made available to Zenith pursuant hereto were or will be complete and accurate copies of such documents. 14 ARTICLE V REPRESENTATIONS AND WARRANTIES OF ZENITH, ZENITH INSURANCE AND ZENITH NATIONAL Each of Zenith, Zenith Insurance and Zenith National represents and warrants to the Fund that: 5.1 CORPORATE ORGANIZATION AND QUALIFICATION. (a) Zenith, Zenith Insurance and Zenith National are corporations duly organized, validly existing and in good standing under the Laws of the States of Florida, California and Delaware, respectively, and each is qualified and in good standing as a foreign corporation in each jurisdiction where the properties owned, leased or operated, or the business conducted, by it require such qualification. Zenith is a wholly owned subsidiary of Zenith Insurance, and Zenith Insurance is a wholly owned subsidiary of Zenith National. Zenith, Zenith Insurance, Zenith National, and each Subsidiary of Zenith Insurance has all requisite corporate power and authority and all necessary governmental Consents to own, lease and operate its properties and to carry on its business as it is now being conducted. (b) Zenith Insurance is (i) duly licensed or authorized as an insurance company in its jurisdiction of incorporation, (ii) duly licensed or authorized as an insurance company in each other jurisdiction where it is required to be so licensed or authorized, and (iii) duly authorized in its jurisdiction of incorporation and each other applicable jurisdiction to write each line of business reported as being written in Zenith's Annual Statement for the year ended December 31, 1995. Zenith, Zenith Insurance and Zenith National have heretofore provided to the Fund complete and correct copies of their charters and bylaws, each as in effect as of the date hereof. (c) Prior to the Effective Time, Zenith will be duly licensed or authorized as an insurance company in the State of Florida and duly authorized in the State of Florida to write workers' compensation insurance business. 5.2 AUTHORITY RELATIVE TO THIS AGREEMENT. Each of Zenith, Zenith Insurance and Zenith National has the requisite corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. This Agreement and the consummation by Zenith, Zenith Insurance and Zenith National of the transactions contemplated hereby have been duly and validly authorized by the Boards of Directors of Zenith, Zenith Insurance and Zenith National, and no other corporate proceedings on the part of Zenith, Zenith Insurance or Zenith National are necessary to authorize this Agreement or to consummate the transactions contemplated hereby. This Agreement has been duly and validly executed and delivered by Zenith, Zenith Insurance and Zenith National and, assuming this Agreement constitutes the valid and binding agreement of the Fund and RMG, constitutes the valid and binding agreement of Zenith, Zenith Insurance and Zenith National, enforceable against Zenith, Zenith Insurance and Zenith National in accordance with its terms, except that the enforcement hereof may be limited by (a) bankruptcy, insolvency, reorganization, moratorium or other similar Laws now or hereafter in effect relating to creditors' rights generally and (b) general principles of equity (regardless of whether enforceability is considered in a proceeding at law or in equity). 15 5.3 CONSENTS AND APPROVALS; NO VIOLATION. Neither the execution, delivery or performance of this Agreement by Zenith or Zenith Insurance nor the consummation by Zenith or Zenith Insurance of the transactions contemplated hereby nor compliance by Zenith or Zenith Insurance with any of the provisions hereof will (a) conflict with or result in any breach of any provision of the Articles of Incorporation or By-Laws of Zenith or Zenith Insurance; (b) require any Consent of any governmental or regulatory authority, except (i) in connection with the applicable requirements of the HSR Act, (ii) the filing of the Articles of Merger pursuant to the laws of the State of Florida, the filing of an agreement of merger pursuant to the laws of the State of California, and the filing of appropriate documents with the relevant authorities of other states in which Zenith Insurance or any of its Subsidiaries is authorized to do business, (iii) the filing of appropriate documents with, or approval of, the respective Commissioners of Insurance of the states of Florida, California and other states in which Zenith Insurance conducts business; (c) result in a Default under any of the terms, conditions or provisions of any Contract to which Zenith, Zenith Insurance or any of its Subsidiaries or any of their respective assets may be bound, except for such Defaults as to which requisite waivers or consents have been obtained; or (d) assuming the Consents referred to in this Section 5.3 are duly and timely obtained or made, violate any Order or Law applicable to Zenith, Zenith Insurance or any of its Subsidiaries or to any of their respective assets. 5.4 PROXY STATEMENT. None of the information supplied by Zenith or its affiliates in writing specifically for inclusion in the Proxy Statement will, at the time the Proxy Statement is mailed, at the time of the Special Meeting, or at the Effective Time, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. 5.5 BROKERS AND FINDERS. Zenith and its affiliates have not employed any investment banker, broker, finder, or intermediary in connection with the transactions contemplated by this Agreement which would be entitled to any investment banking, brokerage, finder's or similar fee or commission in connection with this Agreement or the transactions contemplated hereby. ARTICLE VI ADDITIONAL COVENANTS AND AGREEMENTS 6.1 CONDUCT OF BUSINESS OF THE FUND. During the period from the date of this Agreement to the Effective Time (unless Zenith shall otherwise agree in writing and except as otherwise contemplated by this Agreement), the Fund will conduct its operations according to its ordinary and usual course of business consistent with past practice and shall use all reasonable efforts to preserve intact its current business organization, keep available the services of its current officers and employees, maintain its Permits and Contracts and preserve its relationships with customers, suppliers and others having business dealings with it. Without limiting the generality of the foregoing, and except as otherwise contemplated by this Agreement, the Fund will not, without the prior written consent of Zenith: 16 (i) adopt a plan of complete or partial liquidation, dissolution, merger, consolidation, restructuring, recapitalization or other reorganization of the Fund (other than the Merger); (ii) except as set forth in Section 6.1(ii) of the Disclosure Schedule, adopt any amendments to its Declaration of Trust; (iii) make any acquisition, by means of merger, consolidation or otherwise, or enter into any agreement for the disposition, of assets or securities; (iv) other than in the ordinary course of business consistent with past practice, incur any indebtedness for borrowed money or guarantee any such indebtedness or make any loans, advances or capital contributions to, or investments in any other person other than the Fund; (v) grant any increases in the compensation of any of its directors or trustees or, except in the ordinary course of business and in accordance with past practice, grant any increases in the compensation of any of its officers, employees or agents; (vi) except in connection with the transactions contemplated by this Agreement, enter into any new or amend any existing employment agreement or, except as may be consistent with Fund policies in effect as of the date of this Agreement, enter into any new or amend any existing severance or termination agreement with any officer or employee of the Fund; (vii) except as may be required to comply with applicable Law, become obligated under any new pension plan, welfare plan, multiemployer plan, employee benefit plan, severance plan or similar plan, which was not in existence on the date hereof, or amend any Plan; (viii) amend, increase, accelerate the payment or vesting of the amount payable or to become payable under or fail to make any required contribution to, any benefit plan or increase any non-salary benefits payable to any employee or former employee, except in the ordinary course of business consistent with past practice; (ix) change any method of accounting or accounting practice by the Fund, except for any such required change in GAAP or applicable statutory accounting principles; (x) change its investment guidelines or policies or conduct transactions in investments except in compliance with its investment guidelines and policies and approved programs or transactions and all applicable insurance Laws; (xi) enter into any Contract to purchase, or to lease for a term in excess of one year, any real property, provided that the Fund may as a tenant renew any existing lease for a term not to exceed two years; 17 (xii) enter into any insurance, reinsurance, coinsurance or similar Contract, whether as insurer, reinsurer or reinsured, except in the ordinary course of business consistent with past practice; (xiii) enter into any Contract with any insurance agent or broker that provides, by its terms, for exclusivity (including, without limitation, by territory, product, or distribution) or that is not terminable by its terms within 180 days by the Fund without substantial premium or penalty or, in the case of career agents, without commission renewal liability, except to the extent that the Contract provides for vesting commissions; (xiv) (x) take, or agree or commit to take any action that would make any representation and warranty of the Fund hereunder inaccurate at the Effective Time (except for representations and warranties which speak as of a particular date, which need be accurate only as of such date), (y) omit, or agree or commit to omit, to take any action necessary to prevent any such representation or warranty from being inaccurate at the Effective Time (except for representations and warranties which speak as of a particular date, which need be accurate only as of such date), or (z) take, or agree or commit to take, any action that would result in, or is reasonably likely to result in, any of the conditions of the Merger set forth in Article VII not being satisfied; (xv) authorize, recommend, propose or announce an intention to do any of the foregoing, or enter into any contract, agreement, commitment or arrangement to do any of the foregoing; or (xvi) settle any tax audit, or make or change any tax election or file amended Tax Returns. 6.2 ALTERNATIVE PROPOSALS. The Fund will not authorize, and will use its best efforts to cause its officers, trustees, directors, employees or agents not to, directly or indirectly, solicit, initiate or encourage any inquiries relating to, or the making of any proposal which constitutes, an Alternative Proposal, or recommend or endorse any Alternative Proposal, or participate in any discussions or negotiations, or provide third parties with any nonpublic information, relating to any such inquiry or proposal or otherwise facilitate any effort or attempt to make or implement an Alternative Proposal; provided, however, that the Fund may, and may authorize and permit its officers, trustees, directors, employees or agents to provide third parties with nonpublic information reasonably necessary to facilitate an Alternative Proposal, recommend or endorse any Alternative Proposal with or by any third party, and participate in discussions and negotiations with any third party relating to any Alternative Proposal, if the Fund's Board of Trustees, after having consulted with and considered the advice of outside counsel, has reasonably determined in good faith that the failure to do so would be inconsistent with its fiduciary duties to the Fund's Members under applicable Law. If the Fund enters into a definitive agreement with respect to any Alternative Proposal, it shall concurrently with entering into such agreement pay, or cause to be paid to Zenith the expenses outlined in Section 9.1(b). The Fund will immediately cease and cause to be terminated any activities, discussions or negotiations conducted prior to the date of this Agreement with any parties other than Zenith with respect to any of the foregoing. The Fund shall immediately advise Zenith following the receipt by it of any Alternative Proposal and the material terms and conditions thereof, and the identity of the 18 person making any such Alternative Proposal, and advise Zenith of any developments with respect to such Alternative Proposal immediately upon the occurrence thereof. 6.3 MEMBERS' APPROVAL; PROXY STATEMENT. The Fund shall duly call, give notice of, convene and hold the Members' Meeting as soon as practicable following the execution of this Agreement for the purpose of obtaining the approval of the Requisite Percentage of the Voting Members with respect to this Agreement and the Merger. The Fund shall use its best efforts to obtain and furnish the information required to be included by it in the Proxy Statement to be furnished to the Fund's Members regarding the Merger. Zenith shall have the right to approve the form and contents of the Proxy Statement and any preliminary versions thereof prior to the time it is filed with the Florida Commissioner. After consultation with Zenith, the Fund shall respond promptly to any comments made by the Florida Commissioner with respect to the Proxy Statement and any preliminary version thereof, and cause the Proxy Statement to be mailed to its Voting Members, at the earliest practicable time following the execution of this Agreement. The Fund shall use its best efforts to obtain the approval of the Requisite Percentage of the Voting Members with respect to this Agreement and the Merger, and the Fund shall, through its Board of Trustees, subject to its fiduciary duties under applicable Law, recommend to its Members approval of this Agreement, unless, in each case, the members of the Board of Trustees of the Fund, after having consulted with and considered the advice of outside counsel, reasonably determine in good faith that under the circumstances the foregoing actions would be reasonably likely to result in a breach of their fiduciary duties to the Members under applicable Law. Notwithstanding the foregoing, the Board of Trustees of the Fund may at any time prior to the Effective Time withdraw, modify, or change any recommendation and declaration regarding this Agreement, or recommend and declare advisable any other offer or proposal, if the Board of Trustees, after consultation with its outside counsel, has reasonably determined in good faith that the making of such recommendation, or the failure to withdraw, modify or change its recommendation, would be reasonably likely to result in a breach of their fiduciary duties to the Members under applicable Law. Additionally, the Board of Trustees of the Fund may withdraw, modify or change any recommendation or declaration regarding this Agreement if the fairness opinion rendered by Raymond James in connection with this Agreement and the Related Documents determines the value of the consideration to be received by the Members of the Fund not to be fair to the Members, from a financial point of view. 6.4 SATISFACTION OF CONDITIONS, RECEIPT OF NECESSARY APPROVALS. Subject to the terms and conditions herein provided, each of the parties hereto agrees to (i) promptly effect all necessary registrations, submissions and filings, including, but not limited to, filings under the HSR Act and submissions of information requested by governmental authorities, which may be necessary or required in connection with the consummation of the transactions contemplated by this Agreement, (ii) to use its best efforts to secure federal and state antitrust clearance (including taking steps to avoid or set aside any preliminary or permanent injunction or other order of any federal or state court of competent jurisdiction or other governmental authority), (iii) use its best efforts to take all other action and to do all other things necessary, proper or advisable to consummate and make effective as promptly as practicable the transactions contemplated by this Agreement and (iv) use its best efforts to obtain all other necessary or appropriate Consents (including but not limited to any required Consents of the Commissioners). Each of the parties hereto acknowledges that certain actions may be necessary with respect to the foregoing in making notifications and obtaining Consents which are material to the consummation of the transactions contemplated hereby, and each of the parties hereto agrees to take such action as is necessary to complete such notifications and obtain such Consents, 19 provided, however, that nothing in this Section 6.4 or elsewhere in this Agreement shall require any party hereto to hold separate or make any divestiture of any asset or otherwise agree to any restriction on their operations which would in any such case be material to the assets, liabilities or business of, (a) in the case of the Fund or RMG, the Fund, and (b) in the case of Zenith, Zenith Insurance or Zenith National, Zenith National and its Subsidiaries, taken as a whole, in order to obtain any Consent required by this Agreement. All necessary registrations, submissions and filings under the HSR Act or in connection with securing federal or state antitrust clearance, shall be at the cost of Zenith, provided, however, that the HSR Act filing fee shall be shared equally by Zenith and the Fund. Additionally, Zenith shall be primarily responsible for all filings required hereunder, unless such filings are specifically required of the Fund or RMG, in which case the Fund or RMG, as the case may be, shall promptly make such filings following receipt of written notification of the requirement for such filings. 6.5 ACCESS TO INFORMATION. (a) Upon reasonable notice, the Fund shall afford to officers, employees, counsel, accountants and other authorized representatives of Zenith ("Representatives"), in order to evaluate the transactions contemplated by this Agreement, reasonable access, during normal business hours throughout the period prior to the Effective Time, to its properties, books and records and, during such period, shall furnish promptly to such Representatives all information concerning its business, properties and personnel as may reasonably be requested. (b) Zenith agrees that it will not, and will cause its Representatives not to, use any information obtained pursuant to this Section 6.5 for any purpose unrelated to the consummation of the transactions contemplated by this Agreement. (c) Zenith will hold, and will use its best efforts to cause its Representatives to hold, in strictest confidence, unless compelled to disclose by judicial or administrative process, or, in the opinion of its counsel, by other requirements of Law, all documents and information concerning the Fund furnished to Zenith or its Representatives in connection with the transactions contemplated by this Agreement (except to the extent that such information can be shown to have been (i) previously known by Zenith or its Representatives, (ii) in the public domain through no fault of Zenith or its Representatives, or (iii) later lawfully acquired by Zenith or its Representatives from other sources (unless Zenith knows that such other sources are not entitled to disclose such information)) and will not release or disclose such information to any other person, except its Representatives in connection with this Agreement, provided that such Representative shall have first been advised by Zenith of the confidentiality provision of this Section 6.5. (d) Notwithstanding the provisions hereof, during the period prior to the Effective Time, the parties shall take appropriate precautions to ensure that competitively sensitive information is not exchanged in a manner which is inconsistent with applicable Law. 6.6 PUBLICITY. Zenith and the Fund will consult with each other and will mutually agree upon any press releases or public announcements pertaining to the Merger and shall not issue any such press releases or make any such public announcements prior to such consultation and agreement, except as may be required by applicable Law or by obligations pursuant to any listing agreement with any national securities exchange, in which case the party proposing to issue such press 20 release or make such public announcement shall use its best efforts to consult in good faith with the other party before issuing any such press releases or making any such public announcements. 6.7 INDEMNIFICATION OF TRUSTEES AND OFFICERS. Zenith shall indemnify and hold harmless the Indemnified Parties from and against all costs, damages, judgments, attorney's fees, expenses, obligations and liabilities of whatsoever kind or nature, without limitation as to time, amount or otherwise, which the Indemnified Parties may incur or sustain in connection with any claim, action, suit, proceeding or investigation arising out of or pertaining to any action or omission in their capacity as trustee, fiduciary, officer, employee or agent of the Fund or RMG (including, without limitation, any which arise out of or relate to actions or omissions which relate to the Merger and the transactions contemplated by this Agreement); provided, however, that Zenith shall not be obligated to indemnify the Indemnified Parties if and to the extent that such costs, damages, judgments, attorney's fees, expenses, obligations or liabilities arise as a result of (a) a violation of criminal law resulting in a conviction, (b) any deliberately dishonest or fraudulent act or omission, or (c) any act or omission committed in bad faith or with malicious purpose or constituting gross negligence, and, in the case of any claim, action, suit, proceeding or investigation arising out of or pertaining to the Merger or any transaction contemplated by this Agreement or the Related Documents, Zenith shall not be obligated to indemnify the Indemnified Parties if and to the extent that all material aspects of the Merger and the transactions contemplated by this Agreement and the Related Documents were not fully described and disclosed in the Proxy Statement. At its option, Zenith may provide insurance policies of its choosing which insure and cover Zenith's obligation of indemnification to the Indemnified Parties as contained herein; provided, however, that the provision of such insurance polices by Zenith shall not relieve Zenith from its obligation of indemnification to the Indemnified Parties; and provided further, that any deductibles required under any such insurance policies shall be the sole responsibility of Zenith. 6.8 GUARANTY BY ZENITH INSURANCE AND ZENITH NATIONAL. Zenith Insurance and Zenith National hereby jointly and severally guarantee the performance by Zenith of its covenants and obligations under this Agreement and the Related Documents. The parties acknowledge and agree that this guaranty by Zenith Insurance and Zenith National constitutes an important inducement to the Fund to execute this Agreement and, consequently, constitutes an essential part of the consideration to be received by the Fund hereunder. This guaranty by Zenith National shall survive the merger of Zenith and Zenith Insurance, and shall continue in full force until all obligations of Zenith (and all obligations of Zenith Insurance acquired pursuant to the merger of Zenith and Zenith Insurance) under this Agreement and the Related Documents have been satisfied and discharged. Zenith Insurance and Zenith National shall not be discharged from liability under this guaranty so long as any obligation of Zenith existing under this Agreement or the Related Documents remains outstanding and unperformed. This guaranty by Zenith Insurance and Zenith National shall inure to the benefit of the Fund, its Members, the Indemnified Parties and the parties to the Related Documents. 6.9 MERGER OF ZENITH AND ZENITH INSURANCE. As soon as practical after the Effective Time, Zenith, Zenith Insurance and Zenith National shall cause Zenith to be merged with and into Zenith Insurance, with (a) Zenith Insurance as the surviving corporation in such merger, (b) the outstanding shares of Zenith being cancelled and no shares of Zenith Insurance being issued in exchange therefor, and (c) the outstanding shares of Zenith Insurance remaining outstanding and unaffected by such merger, all in accordance with the GCL and the FBCA. The merger of Zenith and Zenith Insurance shall have the effect set forth in the GCL, including (i) the separate existence 21 of Zenith shall cease, (ii) Zenith Insurance shall succeed, without other transfer, to all the rights and property of Zenith, and (iii) Zenith Insurance shall be subject to all the debts and liabilities of Zenith in the same manner as if Zenith Insurance had itself incurred them. 6.10 TERMINATION OF RMG MANAGEMENT AGREEMENTS. The Fund and RMG hereby agree that, from and after the Effective Time, all management agreements between RMG and the Fund are hereby terminated and of no further force or effect. 6.11 DIVIDEND PAYMENTS. As soon as practical after the Effective Time, Zenith shall, subject to the approval of the Florida Department, pay dividends on the Fund's Loss Sensitive Policies equal to $1,381,583. 6.12 FINANCIAL STATEMENTS AND REPORTS. (a) As promptly as practicable after the date hereof, but in no event later than five business days prior to the Closing Date, the Fund and RMG shall prepare and deliver to Zenith financial statements of the Fund that present fairly the financial position of the Fund as of September 30, 1996, and the results of its operations and cash flows for the period then ended in accordance with GAAP (the "September Financial Statements"). (b) As promptly as practicable after the date hereof, but in no event later than five business days prior to the Closing Date, the Fund and RMG shall cause Milliman & Robertson, Inc. to prepare and deliver to Zenith an actuarial review of the Fund's reserves as of September 30, 1996. (c) As promptly as practicable after the Fund or RMG files or submits any financial statement or other report to the insurance regulatory authorities of the State of Florida (but in no event later than five business days thereafter), the Fund and RMG shall deliver to Zenith a true and correct copy of each such statement and report, together with all exhibits and schedules thereto. (d) After the date hereof, the Fund and RMG shall continue to prepare in the ordinary course and shall deliver, as soon as available, to Zenith, true and complete copies of such financial statements (including, but not limited to, annual and quarterly financial statements prepared in accordance with GAAP and SAP), reports or analyses as may be prepared or received by the Fund or RMG and as relate to any of the business, operations or affairs of the Fund or RMG, including, without limitation, normal internal reports which the Fund or RMG prepares and special reports (such as those of financial consultants). ARTICLE VII CONDITIONS PRECEDENT TO CONSUMMATION OF THE MERGER 7. 1 CONDITIONS TO EACH PARTY'S OBLIGATIONS TO EFFECT THE MERGER. The respective obligations of each party to effect the Merger are subject to the satisfaction or, where permissible, waiver at or prior to the Closing Date of the following conditions (provided that any such condition may not be waived without the consent of the Florida Commissioner): 22 (a) MEMBER APPROVAL. This Agreement shall have been duly approved by the Requisite Percentage of the Voting Members in accordance with applicable Law. (b) FAIRNESS OPINION. Raymond James shall have delivered to the Fund and Zenith its written opinion that the transactions contemplated by this Agreement and the Related Documents are fair, from a financial point of view, to the Members. (c) NO INJUNCTIONS. There shall not be in effect any Law or Order of a court or governmental or regulatory agency of competent jurisdiction directing that the transactions contemplated herein not be consummated; PROVIDED, HOWEVER, that, subject to the terms and provisions herein provided, prior to invoking this condition each party shall use its reasonable efforts to have any such Order vacated. (d) GOVERNMENTAL FILINGS AND CONSENTS. Subject to the terms and provisions herein provided all governmental Consents legally required for the consummation of the Merger and the transactions contemplated hereby shall have been obtained and be in effect on the Closing Date (including but not limited to the approval of the Commissioners and any Consents which may be required under the insurance Laws of any state in which Zenith Insurance conducts any business or owns any assets), without any limitations unacceptable to Zenith, and the waiting periods under the HSR Act shall have expired or been terminated. 7.2 ADDITIONAL CONDITIONS TO THE OBLIGATIONS OF ZENITH. The obligation of Zenith to effect the Merger is subject to the satisfaction at or prior to the Closing Date of the following conditions, any or all of which may be waived in whole or in part by Zenith, to the extent permitted by applicable Law: (a) REPRESENTATIONS AND WARRANTIES. For purposes of this Section 7.2(a), the accuracy of the representations and warranties of the Fund and RMG set forth in Article IV of this Agreement shall be assessed as of the date of this Agreement and as of the Closing Date with the same effect as though all such representations and warranties had been made on and as of the Closing Date (provided that representations and warranties which are confined to a specified date shall speak only as of such date). All representations and warranties set forth in Article IV which are qualified by reference to materiality shall be true and correct as qualified and all other representations and warranties set forth in Article IV of this Agreement shall be true and correct in all material respects. (b) PERFORMANCE. Each of the Fund and RMG shall have performed, in all material respects, all covenants and agreements herein required to be performed by it prior to the Closing Date. (c) OFFICER'S CERTIFICATE. Zenith shall have received on the Closing Date a certificate, dated the Closing Date and executed by the Chairman of the Board of Trustees of the Fund, certifying as to the fulfillment of the conditions specified in Sections 7.2(a) and (b) hereof. (d) DOCUMENTS. Zenith and its counsel shall have received all such documents and instruments, or copies thereof, certified, if requested, as may be reasonably requested in connection with the compliance with the conditions precedent to Zenith's obligations hereunder. 23 (e) OPINION. Zenith shall have received an opinion prepared in accordance with the Florida Opinion Standards established by the business section of the Florida Bar Association, dated the Closing Date, from Gerald S. Livingston, Esq., counsel to the Fund, in form and substance satisfactory to it and its counsel and substantially in the form of Exhibit 7.2(e) hereto. (f) CONSULTING AGREEMENT. The Management Group shall have entered into an agreement with Zenith, substantially in the form annexed hereto as Exhibit 7.2(f) (the "Consulting Agreement"), pursuant to which the Management Group shall, for five years after the Effective Date, provide consulting services to Zenith in connection with insurance business written by the Fund prior to the Effective Date and the development of Zenith's workers' compensation business in Florida, as required by Zenith as a condition to entering into this Agreement. The Consulting Agreement shall provide, among other things, that (i) each member of the Management Group shall be compensated by Zenith for his or her services in the amount of $25,000 per year, and (ii) the Management Group (other than Doris Oberhardt) shall not engage in or undertake any workers compensation insurance business beginning on the date of the Effective Time and ending July 31, 2006. (g) TRANSFER AGREEMENT. RMG and ZRM shall have entered into an agreement, substantially in the form annexed hereto as Exhibit 7.2(g) (the "Transfer Agreement"), pursuant to which (i) RMG shall transfer all of its assets to ZRM, and ZRM shall assume all of the liabilities of RMG, (ii) ZRM may seek to hire any employees of RMG that ZRM deems to be necessary or useful in the operation or management of ZRM's business, and (iii) as soon as practical after the Effective Time, RMG shall take all appropriate action to effect its dissolution and liquidation in accordance with Florida law. (h) ACCOUNTANT'S LETTER. Shores & Company, P.A. shall have delivered to Zenith a letter, dated the Closing Date, in form and substance reasonably satisfactory to Zenith, containing statements and information of the type customarily included in accountants "comfort letters" with respect to the September Financial Statements, including, without limitation, the following: (i) Shores & Company, P.A. are independent with respect to the Fund; (ii) with respect to the nine-month period ended September 30, 1996, they have (A) performed the procedures specified by the American Institute of Certified Public Accountants for a review of the interim financial information as described in SAS No. 71, "Interim Financial Information," on the September Financial Statements, and (B) inquired of certain officials of the Fund and RMG who have responsibility for financial and accounting matters; and (iii) nothing came to their attention as a result of the foregoing procedures that caused them to believe that (A) any material modifications should be made to the September Financial Statements for them to be in conformity with generally accepted accounting principles, or (B) there has been any decrease in the Fund's "member distribution payable" as compared with the amount shown in the September Financial Statements. 24 (i) TERMINATION OF PENSION PLAN. The Fund shall have taken all appropriate action to effect the termination of the Associated General Contractors Self-Insurers' Fund Pension Plan in accordance with applicable Law, and Zenith shall have received evidence reasonably satisfactory to it of such action. (j) OPINION REGARDING GUARANTY FUND LIABILITY. Zenith shall have received an opinion, dated the Closing Date, from counsel to Zenith, in form and substance satisfactory to Zenith, to the effect that from and after the Effective Time, none of Zenith National, Zenith or Zenith Insurance shall have any liability under the Florida Self-Insurance Fund Guaranty Association Act, FIL Section 631.90 ET. SEQ. ("FIGA"), except for liability of the Fund under FIGA with respect to adjustments, if any, to the assessment of the Fund for the 1996 calendar year. 7.3 ADDITIONAL CONDITIONS TO THE OBLIGATIONS OF THE FUND. The obligation of the Fund to effect the Merger is subject to the satisfaction at or prior to the Closing Date of the following conditions, any and all of which may be waived in whole or in part by the Fund to the extent permitted by applicable Law: (a) REPRESENTATIONS AND WARRANTIES. For purposes of this Section 7.3(a), the accuracy of the representations and warranties set forth in Article V of this Agreement shall be assessed as of the date of this Agreement and as of the Closing Date with the same effect as though all such representations and warranties had been made on and as of the Closing Date (provided that representations and warranties which are confined to a specified date shall speak only as of such date). All representations and warranties set forth in Article V of this Agreement which are qualified by reference to materiality shall be true and correct and all other representations and warranties set forth in Article V of this Agreement shall be true and correct in all material respects. (b) PERFORMANCE. Zenith, Zenith Insurance and Zenith National shall have performed, in all material respects, all covenants and agreements herein that are required to be performed by Zenith, Zenith Insurance and Zenith National prior to the Closing Date. (c) OFFICER'S CERTIFICATE. The Fund shall have received at the Closing Date a certificate dated the Closing Date and executed by the Chief Executive Officer or the Chief Financial Officer of Zenith certifying to the fulfillment of the conditions specified in Sections 7.3(a) and (b) hereof. (d) OPINION. The Fund shall have received an opinion, dated the Closing Date, from counsel to Zenith, in form and substance satisfactory to it and its counsel and substantially in the form of Exhibit 7.3(d) hereto. (e) FORMATION OF ZRM. Zenith Insurance shall have formed ZRM and appointed each of the members of the Management Group as a director of ZRM. (f) MANAGEMENT AGREEMENT. Zenith shall have entered into an agreement with ZRM, substantially in the form of Exhibit 7.3(f) hereto (the "Management Agreement"), pursuant to which ZRM shall provide management services to Zenith after the Merger. 25 ARTICLE VIII TERMINATION 8.1 TERMINATION BY MUTUAL CONSENT. This Agreement may be terminated and the Merger may be abandoned at any time prior to the Closing Date, before or after the approval by Members of the Fund, by the mutual written consent of Zenith and the Fund. 8.2 TERMINATION BY EITHER ZENITH OR THE FUND. This Agreement may be terminated and the Merger may be abandoned by Zenith or the Fund, before or after the approval by Members of the Fund, if (i) any court of competent jurisdiction in the United States or some other governmental body or regulatory authority shall have issued an Order permanently restraining, enjoining or otherwise prohibiting the Merger and such Order shall have become final and nonappealable, PROVIDED, that the party seeking to terminate this Agreement pursuant to this clause (i) shall have used all reasonable efforts to remove such Order, (ii) the Merger shall not have been consummated by December 31, 1996; PROVIDED that the right to terminate this Agreement pursuant to this clause (ii) shall not be available to any party whose failure to fulfill any of its obligations under this Agreement results in the failure of the Merger to occur on or prior to such date, or (iii) this Agreement shall have been voted on by Voting Members of the Fund and the vote shall not have been sufficient to satisfy the condition set forth in Section 7.1(a). 8.3 TERMINATION BY ZENITH. This Agreement may be terminated by Zenith and the Merger may be abandoned prior to the Closing Date, before or after the approval by Members of the Fund, (i) in the event of a breach by the Fund or RMG of any covenant or agreement contained in this Agreement which, by its nature, cannot be cured prior to the Closing or which has not been cured within 30 days after the giving of written notice to the Fund of such breach, (ii) in the event of an inaccuracy of any representation or warranty of the Fund or RMG contained in this Agreement which, by its nature, cannot be cured prior to the Closing or which has not been cured within 30 days after the giving of written notice to the Fund of such inaccuracy and which inaccuracy, in either case, would cause the conditions set forth in Section 7.2(a) not to be satisfied, (iii) in the event that any of the conditions precedent to the obligations of Zenith to consummate the Merger cannot be satisfied or fulfilled by the date set forth in Section 8.2(ii) of this Agreement, provided that the failure of such conditions to be so satisfied shall not be as a result of Zenith's failure to fulfill its obligations under this Agreement, or (iv) the Board of Trustees of the Fund withdraws or materially modifies or changes its recommendation or approval of this Agreement in a manner adverse to Zenith or Zenith Insurance. 8.4 TERMINATION BY THE FUND. This Agreement may be terminated by the Fund and the Merger may be abandoned at any time prior to the Closing Date, before or after the approval by Members of the Fund, (i) in the event of a breach by Zenith, Zenith Insurance or Zenith National of any covenant or agreement contained in this Agreement which, by its nature, cannot be cured prior to the Closing or which has not been cured within 30 days after the giving of written notice to Zenith of such breach, (ii) in the event of an inaccuracy of any representation or warranty of Zenith, Zenith Insurance or Zenith National contained in this Agreement which, by its nature, cannot be cured prior to the Closing or which has not been cured within 30 days after the giving of written notice to Zenith of such inaccuracy and which inaccuracy, in either case, would cause the conditions set forth in Section 7.3(a) not to be satisfied, (iii) in the event that any of the conditions precedent to the obliga- 26 tions of the Fund to consummate the Merger cannot be satisfied or fulfilled by the date set forth in Section 8.2(ii) of this Agreement, provided that the failure of such conditions to be so satisfied shall not be as a result of the Fund's failure to fulfill its obligations under this Agreement, or (iv) prior to the Members Meeting, the Board of Trustees of the Fund has (y) withdrawn or modified or changed its recommendation or approval of this Agreement in a manner adverse to Zenith or Zenith Insurance in order to approve and permit the Fund to execute a definitive agreement relating to an Alternative Proposal and (z) determined, based on the advice of outside legal counsel to the Fund, that the failure to take such action as set forth in the preceding clause (y) would be reasonably likely to result in breach of the Board of Trustees' fiduciary duties under applicable Law; provided, however, that the Board of Trustees of the Fund shall have been advised by such outside counsel that notwithstanding a binding commitment to consummate transactions of the nature contemplated by this Agreement entered into in the proper exercise of their applicable fiduciary duties, such fiduciary duties would also be reasonably likely to require the trustees to terminate this Agreement as a result of such Alternative Proposal; provided, further, that the Fund shall immediately advise Zenith following the receipt by it of any Alternative Proposal and the details thereof, and advise Zenith of any developments with respect to such Alternative Proposal immediately upon the occurrence thereof. 8.5 EFFECT OF TERMINATION. In the event of termination of this Agreement and the abandonment of the Merger pursuant to this Article VIII, written notice thereof shall as promptly as practicable be given to the other party to this Agreement, and this Agreement shall terminate and the transactions contemplated hereby shall be abandoned, without further action by any of the parties hereto. If this Agreement is terminated as provided herein: (i) there shall be no liability or obligation on the part of Zenith, Zenith Insurance, Zenith National, the Fund, RMG or their respective trustees, officers and directors, and all obligations of the parties shall terminate, except (A) for the obligations of the parties pursuant to this Section 8.5, (B) for the provisions of Section 9.1, and (C) that a party who is in breach of any of its representations, warranties, covenants or agreements set forth in this Agreement shall be liable for damages occasioned by such breach, including, without limitation, any expenses incurred by the other party in connection with this Agreement, and (ii) all filings, applications and other submissions made pursuant to the transactions contemplated by this Agreement shall, to the extent practicable, be withdrawn from the agency or person to which it has been made. ARTICLE IX MISCELLANEOUS AND GENERAL 9.1 PAYMENT OF EXPENSES AND OTHER PAYMENTS. (a) Except as otherwise expressly provided herein, whether or not the Merger shall be consummated and except as otherwise provided in this Agreement, each party hereto shall pay its own expenses incident to preparing for, entering into and carrying out this Agreement and the consummation of the transactions contemplated hereby. (b) The Fund shall pay, or cause to be paid, in same day funds to Zenith the sum of all Expenses upon demand, if (i) Zenith terminates this Agreement under Section 8.3(iv), (ii) the Fund terminates this Agreement under Section 8.4(iv), or (iii) prior to any termination of this Agreement, an Alternative Proposal shall have been made and within nine months of the termination of this 27 Agreement a transaction constituting an Alternative Proposal is consummated with respect to, or the Fund enters into an agreement with respect to, or approves or recommends an Alternative Proposal, in each case made prior to any termination of this Agreement; provided, however, that in the case of (iii) above in this paragraph (b), no payment shall be made if this Agreement has been terminated pursuant to Sections 8.4(i) and (ii) hereof. The amount of Expenses so payable shall be the amount set forth in an estimate delivered by Zenith, subject to upward or downward adjustment (not to be in excess of the amount set forth in the definition of Expenses) upon delivery of reasonable documentation therefor. 9.2 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The respective representations and warranties of the parties made in Articles IV and V hereof shall not survive beyond the earlier of termination of this Agreement or the Effective Time. 9.3 MODIFICATION OR AMENDMENT. Subject to the applicable provisions of the FBCA, the GCL, the FIL and the California Insurance Code, at any time prior to the Effective Time, the parties hereto may modify or amend this Agreement, by written agreement executed and delivered by duly authorized officers of the respective parties; PROVIDED, HOWEVER, that after approval of this Agreement by the Members of the Fund, no amendment shall be made which changes the consideration payable pursuant to the Merger or adversely affects the rights of the Fund's Members hereunder without the approval of such Members. 9.4 WAIVER AND EXTENSION. At any time prior to the Effective Time, the parties hereto may (a) extend the time for the performance of any of the obligations or other acts of the other parties hereto, (b) waive any inaccuracies in the representations and warranties contained herein or in any document delivered pursuant hereto or (c) except to the extent prohibited by Law, waive compliance with any of the agreements or conditions contained herein. Any agreement on the part of a party hereto to any such extension or waiver shall be valid only if set forth in an instrument in writing signed on behalf of such party. The failure of any party to this Agreement to assert any of its rights under this Agreement or otherwise shall not constitute a waiver of those rights. 9.5 COUNTERPARTS. For the convenience of the parties hereto, this Agreement may be executed in any number of counterparts, each such counterpart being deemed to be an original instrument, and all such counterparts shall together constitute the same agreement. 9.6 GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the Laws of the State of Florida without giving effect to the principles of conflicts of law thereof. Venue for the purposes of any cause of action, of whatsoever kind or nature, by any party against any other hereunder, shall be Orange County, Florida. 9.7 NOTICES. Any notice, request, instruction or other document to be given hereunder by any party to the other parties shall be in writing and shall be deemed given when delivered personally, upon receipt of a transmission confirmation (with a confirming copy sent by overnight courier) if sent by telecopy or like transmission, and on the next business day when sent by Federal Express, Express Mail, or other reputable overnight courier, as follows: 28 (a) If to the Fund or RMG, to Doris Oberhardt Associated General Commerce Self-Insurers' Trust Fund 1363B Lafayette Street Tallahassee, Florida 32301 (904) 878-4261 (telephone) (904) 656-3237 (telecopier) with a copy to: Gerald S. Livingston, Esq. 255 South Orange Avenue Suite 850 Orlando, Florida 32801 (407) 422-2524 (telephone) (407) 422-2529 (telecopier) (b) If to Zenith, Zenith Insurance or Zenith National, to John J. Tickner, Esq. Zenith Insurance Company 21255 Califa Street Woodland Hills, CA 91367-5021 (818) 594-5564 (telephone) (818) 594-7269 (telecopier) with a copy to: Skadden, Arps, Slate, Meagher & Flom 919 Third Avenue New York, New York 10019 Attention: Bertil Lundqvist, Esq. (212) 735-3000 (telephone) (212) 735-2000 (telecopier) and 29 Skadden, Arps, Slate, Meagher & Flom 300 South Grand Avenue Los Angeles, CA 90071 Attention: Jerome L. Coben, Esq. (312) 687-5010 (telephone) (312) 687-5600 (telecopier) or to such other persons or addresses as may be designated in writing by the party to receive such notice. Nothing in this Section 9.7 shall be deemed to constitute consent to the manner and address for service of process in connection with any legal proceeding (including litigation arising out of or in connection with this Agreement), which service shall be effected as required by applicable Law. 9.8 ENTIRE AGREEMENT; ASSIGNMENT. This Agreement (a) constitutes the entire agreement among the parties with respect to the subject matter hereof and supersedes all other prior agreements and understandings, both written and oral, among the parties or any of them with respect to the subject matter hereof and (b) shall not be assigned by operation of law or otherwise. 9.9 PARTIES IN INTEREST. This Agreement shall be binding upon and inure solely to the benefit of each party hereto and their respective successors and permitted assigns. Nothing in this Agreement, express or implied, other than the right to receive the consideration payable in the Merger pursuant to Article III hereof, is intended to or shall confer upon any other person any rights, benefits or remedies of any nature whatsoever under or by reason of this Agreement; PROVIDED, HOWEVER, that the provisions of Section 6.7 shall inure to the benefit of and be enforceable by the Indemnified Parties or Fund Indemnified Parties, as the case may be. 9.10 CERTAIN DEFINITIONS. As used herein: "Accountant" shall have the meaning specified in Section 3.2. "Adjusted GAAP Net Worth" shall have the meaning specified in Section 3.2. "Alternative Proposal" shall mean (i) any proposal or offer for a merger, consolidation, asset acquisition, assumption reinsurance transaction, or other business combination involving the Fund or any proposal or offer to acquire a significant equity interest in, or a significant portion of the assets of, the Fund, other than the transactions contemplated by this Agreement, or (ii) any other transaction the consummation of which would reasonably be expected to impede, interfere with, prevent or materially delay the Merger. "Articles of Merger" shall have the meaning specified in Section 1.2. "Business of the Fund" shall mean workers' compensation insurance business written by the Fund prior to the Effective Time and acquired by Zenith. "California Commissioner" shall mean the Commissioner of Insurance of the State of California. 30 "Closing" shall mean the closing of the transactions contemplated by Article I of this Agreement. "Closing Balance Sheet" shall have the meaning specified in Section 3.2. "Closing Date" shall mean the date on which the Closing occurs. "Code" shall mean the Internal Revenue Code of 1986, as amended, and the rules and regulations promulgated thereunder. "Commissioners" shall mean the California Commissioner and the Florida Commissioner. "Consent" shall mean any consent, approval, authorization, clearance, exemption, waiver, or similar affirmation by, or filing with or notification to, a person pursuant to any Contract, Law, Order, or Permit. "Consulting Agreement" shall have the meaning specified in Section 7.2(f). "Contract" shall mean any written or oral agreement, arrangement, commitment, contract, indenture, instrument, lease or other obligation of any kind or character, or other obligation that is binding on any person or its capital stock, properties or business. "Default" shall mean (i) any breach or violation of or default under any Contract, Order or Permit, (ii) any occurrence of any event that with the passage of time or the giving of notice or both would constitute a breach or violation of or default under any Contract, Order or Permit, or (iii) any occurrence of any event that with or without the passage of time or the giving of notice would give rise to a right to terminate or revoke, change the current terms of, or renegotiate, or to accelerate, increase, or impose any liability under, or create any Lien in Connection with, any Contract, Order or Permit. "Disclosure Schedule" shall mean the disclosure schedule attached hereto. "Effective Date" shall mean the date on which the Effective Time occurs. "Effective Time" shall have the meaning assigned thereto in Section 1.2. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. "ERISA Affiliate" shall mean any corporation or trade or business, whether or not incorporated, that together with an entity or any Subsidiary of such entity would be deemed a "single employer" within the meaning of Section 4001 of ERISA, or considered as being members of a controlled group of corporations, under common control, or members of an affiliated service group within the meaning of Subsections 414(b), (c), (m) or (o) of the Code or Section 4001(a)(14) of ERISA. 31 "ERISA Affiliate Plan" shall mean each employee benefit, welfare and compensation plan maintained, sponsored or contributed to be any ERISA Affiliate. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. "Expenses" shall mean the out-of-pocket expenses of Zenith, Zenith Insurance and Zenith National, in an amount not to exceed $150,000, payable in accordance with Section 9.1(b). "FBCA" shall mean the Florida Business Corporations Act. "FIL" shall mean the Florida Insurance Laws and the related rules and regulations thereunder as contained in the Florida Administrative Code, Rule Section 4-190.56 et. seq., F.A.C. "Florida Commissioner" shall mean the Commissioner of Insurance of the State of Florida. "GAAP" shall mean generally accepted accounting principles, consistently applied throughout the specified period and in the immediately prior comparable period. "GAAP Statements" shall mean the audited financial statements of the Fund as of, and for the fiscal years ended, December 31, 1993, 1994 and 1995, together with the notes related thereto. "GCL" shall mean the California General Corporation Law. "Governmental Authority" shall mean the government of the United States or any foreign country, any state or political subdivision thereof, or any entity, body or authority exercising executive, legislative, judicial, regulatory, administrative or other governmental functions or any court, department, commission, board, agency, instrumentality or administrative body of any of the foregoing. "HSR Act" shall mean the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. "Indemnified Parties" shall mean the Fund's present or former trustees, officers, employees or agents covered by the Funds directors' and officers' liability insurance prior to the Effective Time. "Interim Statements" shall mean the financial statements that present the financial position of the Fund as of June 30, 1996, and the results of its operations and cash flows for the six months then ended in accordance with GAAP. "Law" shall mean any law, ordinance, regulation, rule, or statute of any governmental authority (Federal, state, local or otherwise) applicable to a person or its properties, liabilities or business. 32 "Liability for Assessments" shall mean the amount of contingent liability for which Members of the Fund are either jointly and severally liable, or jointly and proportionately liable, by reason of their participation as Members of the Fund. "Lien" shall mean any conditional sale agreement, default of title, easement, encroachment, encumbrance, hypothecation, infringement, lien, mortgage, option, pledge, reservation, restriction, security interest, title retention or other security arrangement, or any adverse right or interest, charge, or claim of any nature whatsoever of, on, or with respect to any property or property interest. "Litigation" shall mean any action, arbitration, cause of action, claim, complaint, criminal prosecution, demand letter, governmental or other administrative or other proceeding, whether at law or at equity, before or by any federal, state or foreign court, tribunal, or agency or before any arbitrator. "Loss Sensitive Policy" shall mean a Retrospectively Rated Policy, including the policies written by the Fund known as Deluxe Retention Plan, Regular Retention Plan, Sliding Scale Plan and Retention Dividend Plan. "Management Agreement" shall have the meaning set forth in Section 7.3(f). "Management Group" shall mean, collectively, Howard Hice, John G. Martin, Ronald Morrick, Armand Mouw, Ronald Shafer, Jr., and Doris Oberhardt. "Material Adverse Effect" shall mean any change or effect (or any development that, insofar as can reasonably be foreseen, is likely to result in any change or effect) that has a material adverse effect on (i) the business, properties, assets, financial condition, or results of operations or prospects of the Fund or RMG or (ii) the ability of the Fund or RMG to perform its obligations under this Agreement. "Member(s)" or "Member(s) of the Fund" shall mean each employer member of the Fund who has executed an agreement to participate in the Fund and who has agreed to become bound by an indemnity agreement, which binds such member to individual, several, or proportionate liability as set forth in Sections 624.472 and 624.474 of the FIL, and as set forth in the indemnity agreement and/or amendments thereto filed with the Florida Department of Insurance, or previously filed with the Division of Workers Compensation, Florida Department of Labor and Employment Security, and who have further agreed to assume all obligations imposed upon them as set forth in the Florida Worker's Compensation Act, the rules and regulations adopted from time to time by the trustees of the Fund and the conditions of the application to the Department of Labor and Employment Security for membership in the Fund. "Member Distributee" shall mean each corporation, partnership, person or other legal entity who was a Member of the Fund at any time during the five-year period ending on the date of the Effective Time. "Members' Meeting" shall mean the special meeting of the Members contemplated by Section 6.3. 33 "Merger" shall have the meaning specified in Section 1.1. "Merger Consideration" shall have the meaning specified in Section 3.1. "Order" shall mean any administrative decision or award, decree, injunction, judgment, order, quasi-judicial decision or award, ruling, or writ of any federal, state, local or foreign or other court, arbitrator, mediator, tribunal, administrative agency or authority. "PBGC" shall mean the Pension Benefit Guaranty Corporation. "Permit" shall mean any federal, state, local or foreign governmental approval, authorization, certificate, declaration, easement, filing, franchise, license, notice, permit, variance, clearance, exemption, closure or right to which any person is a party or that is or may be binding upon or inure to the benefit of any person or its securities, properties or business. "Plan of Distribution" shall mean the plan of distribution relating to the payment of the Merger consideration to the Member Distributees that has been approved by the Florida Department of Insurance. "Plans" shall mean the employee benefit, welfare and compensation plans, programs, policies and arrangements maintained, sponsored or contributed to or required to be contributed to by the Fund or RMG. "Proxy Statement" shall mean, collectively, the letter to policyholders, notice of meeting, proxy statement and form of proxy, or the information statement, as the case may be, to be distributed to Members in connection with the Merger, or any schedules required to be filed with the Florida Commissioner in connection therewith. "Raymond James" shall mean Raymond James & Associates, Inc. "Related Documents" shall mean the Consulting Agreement, the Management Agreement, the Transfer Agreement and the Proxy Statement. "Requisite Percentage" shall mean 66 2/3%. "Reserve Liabilities" shall mean all reserves and other liabilities with respect to insurance and reinsurance and for claims and benefits incurred but not reported, as established or reflected in the SAP Statements. "Retrospectively Rated Policy" shall mean a policy whose premium is established based on a review of policy experience subsequent to the expiration of the policy period. "Revised Closing Balance Sheet" shall have the meaning specified in Section 3.2. "RMG" shall mean AGC Risk Management Group, Inc., a not-for-profit corporation organized under the Business Corporation Law of the State of Florida. 34 "SAP" shall mean the accounting practices required or permitted by the insurance regulatory authorities of the State of Florida, consistently applied throughout the specified period. "SAP Statements" shall mean all of the Funds' annual and quarterly financial statements, together with all exhibits and schedules thereto, required to be filed with or submitted to the appropriate insurance regulatory authorities of the State of Florida on forms prescribed or permitted by such authorities utilizing such accounting methods as have been required from time to time by such authorities. "September Financial Statements" shall have the meaning specified in Section 6.12. "Surviving Corporation" shall mean Zenith, as the corporation surviving the Merger. "Subsidiary" shall mean, when used with reference to any entity, any corporation with a majority of the outstanding voting securities owned directly or indirectly by such former entity. "Tax Return" shall mean any report, return or other information required to be supplied to a Governmental Authority in connection with any Taxes. "Taxes" shall mean all taxes, charges, fees, duties (including customs duties), levies or other assessments, including without limitation, income, gross receipts, net proceeds, ad valorem, turnover, real and personal property (tangible and intangible), sales, use, franchise, excise, value added, stamp, leasing, lease, user, transfer, fuel, excess profits, occupational, interest equalization, windfall profits, severance, license, payroll, environmental, capital stock, disability, employee's income withholding, other withholding, unemployment and Social Security taxes, which are imposed by an Governmental Authority, and such term shall include any interest, penalties or additions to tax attributable thereto. "Transfer Agreement" shall have the meaning set forth in Section 7.2(g). "Voting Member" shall mean each Member who (i) as reflected on the records of the Fund, was an owner of an in-force policy at the close of business on the record date for determining Members entitled to vote at the Members' Meeting, and (ii) casts a vote at the Members' Meeting. "ZRM" shall mean a newly-formed Florida corporation, 100% of the stock of which will be owned by Zenith Insurance or Zenith National. "Date of this Agreement" and words of similar import (such as "date hereof") shall mean October 7, 1996. 9.11 VALIDITY. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provisions of this Agreement each of which shall remain in full force and effect. 35 9.12 CAPTIONS. The Article, Section and paragraph captions herein are for convenience of reference only, do not constitute part of this Agreement and shall not be deemed to limit or otherwise affect any of the provisions hereof. 9.13 FURTHER ASSURANCES. Each of the Fund and RMG agrees that, upon the reasonable request of Zenith, Zenith Insurance or Zenith National, it shall cooperate and cause its affiliates, employees and agents to cooperate with Zenith, Zenith Insurance and Zenith National to effect the orderly transition of the business, operations and affairs of the Fund and RMG to Zenith and ZRM, respectively. Without limiting the generality of the foregoing, RMG will (a) give, and cause its affiliates, employees and agents to give, Zenith, Zenith Insurance and Zenith National reasonable access to all books and records of the Fund and RMG, (b) cooperate with Zenith, Zenith Insurance and Zenith National in the preparation of any financial statements, reports or tax returns and in making any filings or claims for refund or responding to any audit or inquiry of any governmental or regulatory body, and (c) allow Zenith, Zenith Insurance and Zenith National to control (i) the preparation of any tax return or amended tax return to be filed by, or which includes, the Fund after the Closing Date, and (ii) any contest with any taxing authority concerning taxes of the Fund. (THE NEXT PAGE IS THE SIGNATURE PAGE) 36 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective duly authorized officers as of the date first above written. Attest: ZENITH AGC ACQUISITION INSURANCE COMPANY [seal] ____________________________ By:_______________________ Name: Title: Attest: ZENITH INSURANCE COMPANY [seal] ____________________________ By:_______________________ Name: Title: Attest: ZENITH NATIONAL INSURANCE CORP. [seal] ____________________________ By:_______________________ Name: Title: Attest: ASSOCIATED GENERAL COMMERCE SELF INSURERS' TRUST FUND [seal] ____________________________ By:_______________________ Name: Title: Attest: AGC RISK MANAGEMENT GROUP, INC. [seal] ____________________________ By:_______________________ Name: Title: 37 EXHIBIT 7.2(e) OPINION OF GERALD S. LIVINGSTON, ESQ., COUNSEL TO THE FUND Gerald S. Livingston, Esq. will deliver an opinion, subject to customary assumptions, exceptions and conditions, to the effect that: 1. The Fund is a self-insurance trust fund duly organized, validly existing and in good standing under the Laws of the State of Florida. RMG is a not-for-profit corporation duly organized, validly existing and in good standing under the Laws of the State of Florida. Each of the Fund and RMG has all requisite power and authority and all necessary governmental Consents to own, lease and operate its properties and to carry on its business as it is now being conducted. The Fund and RMG have heretofore made available to Zenith complete and correct copies of their Declaration of Trust and Articles of Incorporation, respectively, and, in the case of RMG, its By-Laws, each in effect as of the date hereof. 2. The Fund is (a) duly licensed or authorized as a self-insurance trust fund in the State of Florida,(b) not required to be licensed or authorized as a self-insurance trust fund or insurance company in any jurisdiction other than the State of Florida, and (c) duly authorized in the State of Florida to write the line of business reported as being written in the SAP Statements. 3. RMG is (a) duly licensed or authorized as a managing general agent and was previously licensed as a service company in the State of Florida, and (b) not required to be licensed or authorized as a managing general agent or service company in any jurisdiction other than the State of Florida. 4. The Fund has no Subsidiaries. Except as set forth in Section 4.2 of the Disclosure Schedule, the Fund does not directly or indirectly have any equity or similar interest in, or any interest convertible into or exchangeable or exercisable for any equity or similar interest in, any corporation, partnership, joint venture or other business association or entity that directly or indirectly conducts any activity which is material to the Fund. RMG has one member, which member is the Fund. 5. Each of the Fund and RMG has the requisite power and authority to execute and deliver the Agreement and to consummate the transactions contemplated thereby. The Agreement and the consummation by the Fund and RMG of the transactions contemplated thereby have been duly and validly authorized by the Board of Trustees of the Fund and the Board of Directors of RMG, and no other proceedings on the part of the Fund or RMG are necessary to authorize the Agreement or to consummate the transactions contemplated thereby. The Agreement has been duly and validly executed and delivered by the Fund and RMG and, assuming the Agreement constitutes the valid and binding agreement of Zenith, Zenith Insurance and Zenith National, constitutes the valid and binding agreement of the Fund and RMG, enforceable against the Fund and RMG in accordance with its terms, except that the enforcement hereof may be limited by (a) bankruptcy, insolvency, reorganization, moratorium or other similar Laws now or hereafter in effect relating to creditors' rights generally and (b) general principles of equity (regardless of whether enforceability is considered in a proceeding in equity or at law). 6. Neither the execution, delivery or performance of the Agreement by the Fund or RMG, nor the consummation by the Fund or RMG of the transactions contemplated thereby nor compliance by the Fund or RMG with any of the provisions thereof will (a) conflict with or result in any breach of any 1 provision of the Declaration of Trust of the Fund, or the Articles of Incorporation or By-Laws of RMG;(b) require any Consent of any governmental or regulatory authority, except the filing of Articles of Merger pursuant to the FBCA;(c) result in a Default under any of the terms, conditions or provisions of any Contract to which the Fund or RMG may be a party, or Permit by which the Fund or RMG or any of their assets may be bound, except for such Defaults as to which requisite waivers or consents have been obtained; or (d) violate any Order or Law applicable to the Fund or RMG or any of their assets. 7. Except as disclosed in the financial statements delivered pursuant to Section 4.5 of the Agreement or as set forth in Section 4.8 of the Disclosure Schedule, there is no Litigation pending or, to my knowledge, threatened against or affecting the business operations or financial condition of the Fund or RMG. Neither the Fund nor RMG is in default with respect to any judgement, order, writ, injunction or decree of any court or any Federal, state, municipal or other governmental department, commission, board, bureau, agency or instrumentality. 8. The Proxy Statement complies with the FIL. None of the information as to the Fund or RMG contained in the Proxy Statement contains any untrue statement of a material fact required to be stated therein or omits to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. Such counsel's opinion shall be limited to the laws of the State of Florida and the federal laws of the United States of America, to the extent specifically referred to in such opinion. 2 EXHIBIT 7.2(f) CONSULTING AGREEMENT CONSULTING AGREEMENT (this "Agreement"), dated as of December 18, 1996 by and among Howard Hice, John G. Martin, Ronald Morrick, Armand Mouw, Ron Shafer, Jr., and Doris Oberhardt (hereinafter collectively referred to as the "Management Group") and ZENITH AGC ACQUISITION INSURANCE COMPANY, a Florida corporation (together with its successors and assigns, "Zenith"). W I T N E S S E T H: WHEREAS, Zenith, Zenith Insurance Company, Zenith National Insurance Corp., Associated General Commerce Self-Insurers' Trust Fund (the "Fund") and AGC Risk Management Group, Inc. have heretofore entered into an Agreement and Plan of Merger, dated as of October 7, 1996 (as the same may be amended from time to time, the "Merger Agreement"), providing for, among other things, the merger of the Fund with and into Zenith (the "Merger"); WHEREAS, pursuant to Section 7.2(f) of the Merger Agreement, the obligation of Zenith to consummate the Merger is conditioned upon, among other things, the Management Group and Zenith entering into this Consulting Agreement; and WHEREAS, Zenith desires to retain the Management Group's services as independent contractors and consultants in order to procure for itself the benefits of the extensive familiarity of the Management Group with the business and operations of the Fund, and the Management Group desires to make such services available to Zenith on the terms and conditions set forth in this Agreement. NOW, THEREFORE, in consideration of the mutual covenants of the parties hereto and other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged and intending to be legally bound hereby, the parties hereto hereby agree as follows: FIRST: The Management Group and Zenith agree that the Management Group will be retained as consultants for the period beginning at the Effective Time (as defined in the Merger Agreement) and ending on the fifth anniversary thereof (hereinafter referred to as the "Period"). The Management Group agrees to provide Zenith, its subsidiaries and affiliates with consulting services as requested by Zenith. Such consulting services shall be provided at mutually convenient times as Zenith may reasonably request during the Period. There will be no established schedule for the Management Group's services, and Zenith agrees to provide the Management Group with reasonable notice of the dates, times and places where the Management Group is or are to be available for consultation. Except as expressly provided herein, Zenith acknowledges that the services to be provided hereunder by the Management Group shall not require the full-time services of the Management Group and shall not preclude the Management Group from engaging in any other full-time or part-time activity or employment in any business except for the Workers' Compensation Insurance Business (as hereinafter defined). The Management Group (except Doris Oberhardt) agrees that they shall not engage in or undertake any Workers' Compensation Insurance Business beginning on the date of this Agreement and for a period of five (5) years following the end of the Period. Notwithstanding anything to the contrary contained herein, it is expressly agreed and understood that Doris Oberhardt shall not engage 1 in any other full-time or part-time activity or employment during the Period other than employment with Zenith Risk Management, Inc. It is the expectation of the parties that the amount of time devoted by the Management Group (except Doris Oberhardt) to consulting services hereunder will decrease during the Period as Zenith becomes more familiar with the business and operations of the Fund. For purposes of this Agreement, "Workers' Compensation Insurance Business" shall mean the business of providing insurance coverage for income, medical, death, disability and/or rehabilitation benefits to employers for employee job-related injuries or diseases, and shall include any management, administration, or consulting services relating thereto. SECOND: In consideration of the foregoing services, Zenith agrees to compensate each member of the Management Group in the amount of $25,000 per year. Payment shall be made by Zenith within ten (10) days of the beginning of each payment period, except that payment for the first payment period will be made on the date of this Agreement. THIRD: The Management Group agrees that, during the Period, the Management Group (except Doris Oberhardt) will be independent contractors and therefore will be responsible for the payment of all taxes with respect to payments made under this Agreement. All payments under this Agreement will be made free and clear of, and without deduction or withholding for, any taxes. In the event that applicable law requires that any withholding be made in respect of the payments to be made hereunder, Zenith agrees to withhold such amounts as may be required, pay such withheld amounts over to the applicable taxing authority and pay to the Management Group the remainder of the amount specified in paragraph SECOND hereof after deducting such withholding. FOURTH: This Agreement may not be assigned by either party, other than by Zenith to a subsidiary or affiliate of Zenith, at any time during the Period without the prior written consent of the other party. FIFTH: Any notice, request, instruction or other document to be given hereunder by any party to the other parties shall be in writing and shall be deemed given when delivered personally, upon receipt of a transmission confirmation (with a confirming copy sent by overnight courier) if sent by telecopy or like transmission, and on the next business day when sent by Federal Express, Express Mail, or other reputable overnight courier as follows: (a) If to the Management Group, to: Howard Hice Park Square, Suite 15 2105 Park Avenue Orange Park, Florida 32073 Telephone: (904) 269-1141 Telecopy: (904) 269-1572 John G. Martin 906 West Main Street Pensacola, Florida 32501 Telephone: (904) 438-5491 Telecopier: (904) 434-9344 2 Ronald Morrick 730 S. Sterling Avenue, Suite 200 Tampa, Florida 33609 Telephone: (813) 253-2271 Telecopy: (813) 354-1702 Armand Mouw 409 N. E. 3rd Street Delray Beach, Florida 33483 Telephone: (561) 276-9640 Telecopy: (561) 265-3886 Ron C. Shafer, Jr. 6855 S. W. 81st Street Miami, Florida 33143 Telephone: (305) 333-7107 Telecopy: (305) 665-5299 and Doris Oberhardt 1363 East Lafayette Tallahassee, Florida 32302 Telephone: (904) 878-4261 Telecopy: (904) 656-3237 with a copy to: Gerald S. Livingston, Esq. 255 South Orange Avenue Suite 850 Orlando, Florida 32801 (407) 422-2524 (telephone) (407) 422-2529 (telecopier) (b) If to Zenith, to it at: Zenith AGC Acquisition Insurance Company c/o Zenith Insurance Company 21255 Califa Street Woodland Hills, CA 91367-5021 Attention: John J. Tickner, Esq. Telephone: (818) 594-5564 Telecopy: (818) 594-7269 3 with a copy to: Bertil Lundqvist, Esq. Skadden, Arps, Slate, Meagher & Flom 919 Third Avenue New York, NY 10028 Telephone: (212) 735-3000 Telecopy: (212) 735-2000 and Jerome L. Coben, Esq. Skadden, Arps, Slate, Meagher & Flom 300 South Grand Avenue Los Angeles, CA 90071 Telephone: (312) 687-5010 Telecopy: (312) 687-5600 or to such other persons or addresses as may be designated in writing by the party to receive such notice. Nothing in this Section FIFTH shall be deemed to constitute consent to the manner and address for service of process in connection with any legal proceeding (including litigation arising out of or in connection with this Agreement), which service shall be effected as required by applicable law. SIXTH: This Agreement will be governed by, and construed in accordance with, the laws of the State of Florida without giving effect to the principles of conflicts of law thereof. Venue for the purposes of any cause of action, of whatsoever kind or nature, by any party against any other hereunder, shall be Orange County, Florida. SEVENTH: This Agreement constitutes the entire agreement among the parties with respect to the subject matter hereof and supersedes all other prior agreements and understandings, both written and oral, among the parties or any of them with respect to the subject matter hereof. EIGHTH: All information disclosed by any party to the other party in connection with this Agreement or the services to be provided hereunder shall be kept confidential by the party receiving such information and no public statements shall be issued by any party relating to such information without the other party's prior written consent. The obligations contained in this Paragraph EIGHTH shall survive the termination of this Agreement. NINTH: This Agreement shall be binding upon and inure solely to the benefit of each party hereto and their respective successors and permitted assigns. Nothing in this Agreement, express or implied, is intended to or shall confer upon any other person any rights, benefits or remedies of any nature whatsoever under or by reason of this Agreement. TENTH: For the convenience of the parties hereto, this Agreement may be executed in any number of counterparts, each such counterpart being deemed to be an original instrument, and all such counterparts shall together constitute the same agreement. 4 ELEVENTH: The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement each of which shall remain in full force and effect. TWELFTH: Zenith agrees to indemnify and hold harmless the Management Group from and against all costs, damages, judgments, attorney's fees, expenses, obligations and liabilities of whatsoever kind or nature, which, in good faith, the Management Group may incur or sustain in connection with or arising from the Management Group's performance hereunder, except such costs, damages, judgments, attorney's fees, expenses, obligations or liabilities which may be incurred by the Management Group as a result of (a) a violation of a criminal law resulting in a conviction, (b) any deliberately dishonest or fraudulent act or omission, or (c) any act or omission committed in bad faith or with malicious purpose or constituting gross negligence. THIRTEENTH: This Agreement shall terminate in the event that the Merger Agreement is terminated, in which case the parties hereto shall have no liability to each other under this Agreement (except as expressly provided in the Merger Agreement). In the event that any member of the Management Group shall die or become incapacitated such that he or she is unable to perform his or her duties under this Agreement, then Zenith's obligation to compensate such member of the Management Group pursuant to paragraph SECOND shall terminate. (THE NEXT PAGE IS THE SIGNATURE PAGE) 5 IN WITNESS WHEREOF, the parties hereto have each executed this Agreement as of the date first written above. ZENITH AGC ACQUISITION INSURANCE COMPANY By:___________________________ Name: Title: ______________________________ Howard Hice ______________________________ John G. Martin ______________________________ Ronald Morrick ______________________________ Armand Mouw ______________________________ Ronald Shafer, Jr. ______________________________ Doris Oberhardt EXHIBIT 7.2(g) TRANSFER AGREEMENT TRANSFER AGREEMENT (this "Agreement"), dated as of December 18, 1996, by and between AGC RISK MANAGEMENT GROUP, INC., a Florida not-for-profit corporation ("RMG"), and ZENITH RISK MANAGEMENT, INC., a Florida corporation ("ZRM"). Terms used but not otherwise defined herein shall have the respective meanings ascribed to them in the Agreement and Plan of Merger dated as of October 7, 1996, by and among Zenith AGC Acquisition Insurance Company, a Florida corporation ("Zenith"), Zenith Insurance Company, a California corporation ("Zenith Insurance"), Zenith National Insurance Corp., a Delaware corporation ("Zenith National"), Associated General Commerce Self-Insurers' Trust Fund, a qualified Florida self-insurers fund (the "Fund"), and AGC Risk Management Group, Inc., a Florida not-for-profit corporation ("RMG") (as the same may be amended from time to time, the "Merger Agreement"). W I T N E S S E T H: WHEREAS, Zenith, Zenith Insurance, Zenith National, the Fund and RMG have heretofore entered into the Merger Agreement providing for the merger of the Fund with and into Zenith pursuant to the terms and conditions of the Merger Agreement (the "Merger"), and the subsequent merger of Zenith with and into Zenith Insurance; and WHEREAS, pursuant to section 7.2(g) of the Merger Agreement, the obligation of Zenith to consummate the Merger is conditioned upon, among other things, the execution and delivery by RMG and ZRM of this Agreement. NOW, THEREFORE, in consideration of the mutual covenants of the parties hereto and other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto, intending to be legally bound, hereby agree as follows: 1. As of the Effective Time, RMG hereby assigns, sells, transfers, conveys and delivers to ZRM, its successors and assigns all of RMG's right, title and interest in and to all of RMG's assets, including the assets identified in SCHEDULE A hereto (collectively, the "Assets"). 2. As of the Effective Time, ZRM hereby purchases and accepts the assignment and transfer of all of RMG's right, title and interest in and to the Assets, and hereby assumes the liabilities and obligations of RMG set forth on SCHEDULE B hereto. 3. RMG hereby represents and warrants that (a) the Assets constitute all of the assets currently being used by RMG in its business,(b) RMG has good and marketable title to the Assets, with the free and unencumbered right to transfer the same, and that the Assets are free and clear of all liens and encumbrances, and (c) ZRM and its successors and assigns will have all right, title and interest in and to the Assets upon the delivery of this Agreement. 4. RMG hereby agrees and acknowledges that ZRM may hire any employees of RMG that ZRM deems to be necessary or useful in the operation or management of ZRM's business. 1 RMG waives any and all claims it may have against ZRM or any former employee of RMG which may be hired by ZRM, whether such claims are based on written employment agreements with such employees or otherwise. RMG's waiver of its rights pursuant to this paragraph shall be deemed to be for the benefit of both ZRM and any such employee. RMG shall take any and all actions, consistent with applicable law, as ZRM may request with respect to the Plans, including but not limited to actions concerning the termination of any Plan and/or the transfer, distribution and/or other disposition of the assets of any Plan. 5. As soon as practical after the Effective Time, RMG shall take all appropriate action to effect its dissolution and liquidation in accordance with Florida law. 6. For the convenience of the parties hereto, this Agreement may be executed in any number of counterparts, each such counterpart being deemed to be an original instrument, and all such counterparts shall together constitute the same agreement. 7. This Agreement shall be governed by, and construed in accordance with the laws of the State of Florida without giving effect to the principles of conflicts of law thereof. Venue for the purposes of any cause of action, of whatsoever kind or nature by any party against any other hereunder, shall be Orange County, Florida. 8. RMG and ZRM, as reasonably requested to do so by the other party from time to time, shall, at their own expense, do, execute, acknowledge and deliver any and all such other further acts, transfers and any instruments or further assurances, approvals and consents as are necessary or proper in order to accomplish and complete the transactions contemplated hereby and the purposes hereof. 9. Any notice, request, instruction or other document to be given hereunder by any party to the other parties shall be in writing and shall be deemed given when delivered personally, upon receipt of the transmission confirmation (with a confirming copy sent by overnight courier) if sent by telecopy or like transmission, and on the next business day when sent by Federal Express, Express Mail, or other reputable overnight courier, as follows: (a) If to RMG, to: Doris Oberhardt Associated General Commerce Self-Insurers' Trust Fund 1363 East Lafayette Street Tallahassee, Florida 32301 Telephone: (904) 878-4261 Telecopy: (904) 656-3237 2 with a copy to: Gerald S. Livingston, Esq. 255 South Orange Avenue Suite 850 Orlando, Florida 32801 Telephone: (407) 422-2524 Telecopy: (407) 422-2529 (b) If to ZRM, to: John J. Tickner, Esq. Zenith Risk Management, Inc. c/o Zenith Insurance Company 21255 Califa Street Woodland Hills, California 91367 Telephone: (818) 594-5564 Telecopy: (818) 594-7269 with a copy to: Bertil Lundqvist, Esq. Skadden, Arps, Slate, Meagher & Flom 919 Third Avenue New York, NY 10028 Telephone: (212) 735-3000 Telecopy: (212) 735-2000 and Jerome L. Coben, Esq. Skadden, Arps, Slate, Meagher & Flom 300 South Grand Avenue, Suite 3400 Los Angeles, California 90071 Telephone: (213) 687-5010 Telecopy: (213) 687-5600 or to such other persons or addresses as may be designated in writing by the party to receive such notice. Nothing in this paragraph 9 shall be deemed to constitute consent to the manner and address for service of process in connection with any legal proceeding (including litigation arising out of or in connection with this Agreement), which service shall be effected as required by applicable law. 10. This Agreement (a) constitutes the entire agreement among the parties with respect to the subject matter hereof and supersedes all other prior agreements and understandings, both written and oral, among the parties or any of them with respect to the subject matter hereof and (b) shall not be assigned by operation of law or otherwise. 3 11. This Agreement shall be binding upon and inure solely to the benefit of each party hereto and their respective successors and permitted assigns. Nothing in this Agreement, express or implied, is intended to or shall confer upon any other person any rights, benefits or remedies of any nature whatsoever under or by reason of this Agreement. 12. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provisions of this Agreement each of which shall remain in full force and effect. (THE NEXT PAGE IS THE SIGNATURE PAGE) 4 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective duly authorized officers as of the date first above written. AGC RISK MANAGEMENT GROUP, INC. By:___________________________ Name: Title: ZENITH RISK MANAGEMENT, INC. By:___________________________ Name: Title: SCHEDULE A ASSETS SCHEDULE B ASSUMED LIABILITIES EXHIBIT 7.3(d) OPINION OF COUNSEL TO ZENITH Counsel to Zenith will deliver one or more opinions, subject to customary assumptions, exceptions and conditions, to the effect that: 1. Each of Zenith, Zenith Insurance and Zenith National (collectively, the "Companies") has been duly incorporated and is validly existing and in good standing under the laws of the States of Florida, California and Delaware, respectively. Each of the Companies is qualified to do business and is in good standing as a foreign corporation under the laws of the States of _________. 2. Each of Zenith and Zenith Insurance is duly licensed as an insurance company in the State of Florida, authorized to write workers' compensation insurance. 3. Zenith Insurance is duly licensed or authorized as an insurance company in the State of California, authorized to write the following lines of business: _________. 4. Each of the Companies has the corporate power and corporate authority to execute, deliver and perform all of its obligations under the Agreement. The execution and delivery of the Agreement and the consummation by the Companies of the transactions contemplated thereby have been duly authorized by all requisite corporate action on the part of the Companies. The Agreement has been duly executed and delivered by the Companies. 5. The Agreement constitutes the valid and binding obligation of the Companies, enforceable against the Companies in accordance with its terms. 6. The execution and delivery by the Companies of the Agreement, and the performance by the Companies of their obligations under the Agreement, in accordance with its terms, do not conflict with the articles of incorporation, the certificate of incorporation or the bylaws of any of the Companies. 7. Neither the execution, delivery or performance by the Companies of the Agreement, nor the compliance by the Companies with the terms and provisions thereof will contravene any provision of any Applicable Law (as hereinafter defined). "Applicable Laws" shall mean those laws, rules and regulations of the States of California and Florida, the general corporate law of the State of Delaware and of the United States of America which, in our experience, are normally applicable to transactions of the type contemplated by the Agreement. 8. No Governmental Approval (as hereinafter defined), which has not been obtained or taken and is not in full force and effect, is required to authorize or is required in connection with the execution, delivery or performance of the Agreement by the Companies except (a) in connection with the applicable requirements of the HSR Act, (b) the filing of articles of merger pursuant to the FBCA, and the filing of an agreement of merger pursuant to the laws of the State of California, (c) the filing of appropriate documents with the relevant authorities of each state in which Zenith, Zenith Insurance or any of their Subsidiaries is authorized to do business, (d) the filing of appropriate documents with, and the approval of, the insurance regulatory authorities of the states of Florida, California, and other states in which Zenith Insurance conducts its business. "Governmental Approval" means any consent, approval, license, authorization or validation of, or filing, recording or registration with, any Governmental Authority pursuant to Applicable Laws. 2 EXHIBIT 7.3(f) MANAGEMENT AGREEMENT MANAGEMENT AGREEMENT (this "Agreement"), dated as of December 18, 1996, by and between ZENITH INSURANCE COMPANY, a California corporation acting by and through its authorized Board of Directors (hereinafter referred to as the "Insurer"), and ZENITH RISK MANAGEMENT, INC., a Florida corporation ("ZRM"). I. PURPOSE OF AGREEMENT The Insurer hereby appoints ZRM, and ZRM hereby acknowledges its appointment, as the Insurer's manager, for the purpose of providing, subject to the provisions of applicable statutes and rules, all services which are necessary and required in the planning, management and administration of the day-to-day operations, business and affairs of the Insurer with respect to the workers' compensation insurance business acquired from Associated General Commerce Self-Insurers Trust Fund ("AGC-SIF"). For purposes of this Agreement, all references to the business, operations, or affairs of the Insurer shall mean the business, operations or affairs of the Insurer transacted in the State of Florida and consisting of workers' compensation insurance business acquired from AGC-SIF and any other insurance business mutually agreed upon by the parties hereto. II. DUTIES AND RESPONSIBILITIES OF ZRM ZRM shall be responsible for managing and administering the affairs of the Insurer as set forth in Article I, including, but not limited to, marketing, underwriting, billing, claims administration, termination, reinstatement, safety and loss prevention, policy issuance, accounting, regulatory reporting, and general administration. Specifically, but without limitation, ZRM shall be responsible for the following: A. ERRORS AND OMISSIONS AND FIDELITY COVERAGE. 1. ZRM shall secure, place and provide on behalf of the Insurer, errors and omissions coverage and fidelity coverage in an amount sufficient to comply with applicable regulations which may be adopted from time to time by the Florida Department of Insurance, hereinafter referred to as "Department." 2. ZRM with the concurrence of the Insurer, shall secure and place on behalf of the Insurer, such additional errors and omissions coverage and fidelity coverage as may be reasonably required from time to time to sufficiently protect and ensure the integrity and continued sound operation of the Insurer. B. CLAIMS ADMINISTRATION. 1. All claims shall be reported to the Insurer in a timely manner and all claims shall be adjusted by properly licensed persons. 1 2. Notice shall be sent by ZRM to the Insurer as soon as it becomes known that the claim: (a) Exceeds the limit set by the Insurer; (b) Involves a coverage dispute; (c) Exceeds ZRM's claims settlement authority; (d) Is open for more than 6 months; or (e) Is closed by payment of an amount set by the Department or an amount set by the Insurer, whichever is less. 3. All paper and electronic claims files shall be the joint property of the Insurer and ZRM. However, upon an order of liquidation of the Insurer, the paper and electronic claims and related application files shall become the sole property of the Insurer or its estate. ZRM shall have reasonable access to and the right to copy the claims files on a timely basis. 4. Any settlement authority granted to ZRM may be terminated for cause upon the Insurer's written notice to ZRM or upon the termination of this agreement. The Insurer may suspend the settlement authority during the pendency of any dispute regarding the cause for termination. 5. ZRM shall provide timely magnetic media transfer of data, as required by the Insurer or the Department. C. MARKETING. ZRM shall provide a state-wide marketing program directed to licensed insurance agents, and shall furnish state-wide marketing services designed and tailored to ensure continued and orderly growth in both the number of policyholders of the Insurer and the annual premium of the Insurer. D. UNDERWRITING. ZRM shall strictly adhere to the underwriting guidelines established by the Insurer. Said guidelines are more specifically set forth in ADDENDUM "A" and made part of this Agreement. The Insurer may suspend the underwriting authority of ZRM during the pendency of any dispute regarding the cause for termination as set forth in Article IV. The Insurer or ZRM must fulfill all obligations on policies regardless of any disputes. E. LOSS CONTROL. 1. ZRM shall be responsible for development of all safety programs, safety rules and regulations as are required by the Florida Insurance Laws and applicable provisions of the Florida Administrative Code, and shall further be responsible for the submittal of such safety programs, rules and regulations. 2 2. ZRM shall be responsible for securing approval of safety programs submitted in compliance with the Florida Insurance Laws and applicable provisions of the Florida Administrative Code. 3. ZRM shall be responsible for the coordination and implementation of approved loss control programs. F. DATA PROCESSING AND REPORTING. ZRM shall provide comprehensive data processing and reporting, on a timely basis, all reports, statistical data, and information necessary to ensure that all operations of the Insurer are conducted on a sound businesslike basis, including, but not limited to, claims processing, billing, termination, reinstatement, policy issuance, and disaster recovery capability in accordance with the Insurer's disaster recovery program adopted by ZRM. G. AUDIT, ACCOUNTING AND ADMINISTRATION. 1. ZRM shall require that all funds and/or remittances received from agents and/or insureds be payable directly to the Insurer. All funds collected for the account of the Insurer shall be held by ZRM in a fiduciary capacity in a bank which is a member of the Federal Reserve System. This account shall be used for all payments as directed by the Insurer. ZRM may retain no more than sixty (60) days of estimated claims payments and allocated loss adjustment expenses. 2. ZRM shall provide such audit, accounting and administrative services as may be required from time to time to ensure the efficient and cost-effective operations of the Insurer. 3. ZRM shall render accounts to the Insurer detailing all transactions under the terms of this Agreement to the Insurer on a monthly or more frequent basis, as determined from time to time by the Insurer. 4. Separate records of business written by ZRM shall be maintained by ZRM. The Insurer shall have access and the right to audit and to copy all electronic and paper books, bank accounts and records related to its business, and such bank accounts and records shall be maintained in a form usable by the Insurer. The Department shall have access to all books, bank accounts, and records of ZRM, and such books, bank accounts and records shall be maintained in a form usable to the Department. The records shall be retained according to Section 626.561, Florida Insurance Laws. H. REGULATORY REPORTING. ZRM shall provide comprehensive regulatory reporting, on a periodic basis and upon prescribed forms, as required by Florida Statutes and applicable provisions of the Florida Administrative Code. I. GENERAL ADMINISTRATION AND MISCELLANEOUS. 3 1. ZRM shall: (a) At the request of the Insurer, represent the Insurer at all hearings, meetings, conventions and administrative inquiries involving the interests of the Insurer, and before any agency of the State of Florida, except those requiring representation by an attorney-at-law. (b) Provide such services as may be necessary in the development of gross premiums, standard premiums, normal premiums, loss reserves and loss funds. (c) Coordinate and facilitate provision of rehabilitative services to injured employees pursuant to the Florida Insurance Laws and applicable provisions of the Florida Administrative Code. Any rehabilitation services provided hereunder shall be from the approved list of providers of such services maintained by the appropriate state agencies. (d) File with the Department such reports as are required from time to time, including, but not limited to: payroll records, accident experience and compensation payments, summary loss reports and reports of outstanding workers' compensation liabilities. (e) Timely, routinely and as directed by the Insurer, provide to the Insurer and its actuaries and certified public accountants, the data necessary for a full, complete and ongoing evaluation of the Insurer's business which is the subject of this Agreement. (f) Attend management meetings of the Insurer as requested. (g) As directed by the Insurer, make such reports as are requested relating to matters of concern or general interest with respect to the Insurer. (h) Provide sufficient personnel to perform ZRM's duties and obligations pursuant to this Agreement and maintain a sufficient number of experienced and qualified personnel, employed on a full-time basis, to meet the needs of the Insurer. (i) Implement any managed care options required by Florida law. 2. ZRM shall not: (a) Bind reinsurance or retrocessions on behalf of the Insurer. (b) Commit the Insurer to participate in insurance or reinsurance syndicates. (c) Appoint any producer without assuring that the producer is lawfully licensed to transact the type of insurance for which he is appointed. (d) Without prior approval of the Insurer, pay or commit the Insurer to pay a claim over a specified amount, net of reinsurance, which exceeds $125,000. 4 (e) Collect any payment from a reinsurer or commit the Insurer to any claims settlement with a reinsurer without prior approval of the Insurer. If prior approval is given, a report must be promptly forwarded to the Insurer. (f) Permit a producer or subproducer to serve on its Board of Directors. (g) Appoint a submanaging general agent. (h) Enter into any contract or arrangement other than those necessary to perform the services contemplated hereunder, without the approval of the Insurer. (i) Implement the hiring or firing of any senior officer of ZRM except as reasonably and jointly determined by ZRM and the Insurer. III. DUTIES, RESPONSIBILITIES AND RIGHTS OF THE INSURER 1. In consideration for the services provided under this Agreement, the Insurer shall pay or advance funds to ZRM for all costs, fees and expenses (as reasonably and jointly determined by the Insurer and ZRM) incurred by ZRM in providing the services described under this Agreement. The Insurer shall pay the costs of reinsurance as provided in any reinsurance contract and shall pay the costs of any other insurance purchased in the name of, and for the protection of, the Insurer. It is the intent of the Insurer and ZRM that payment or advancement of funds shall be limited to the actual fair and reasonable cost of the operations of ZRM. 2. All funds received by the Insurer shall be held by said Insurer in a bank which is a member of the Federal Reserve System. 3. ZRM shall not share in interim profits. 4. The Insurer shall have ultimate control and responsibility over the functions delegated to ZRM under this Agreement. IV. TERM AND TERMINATION A. This Agreement shall become effective as of the Effective Time (as defined in the Agreement and Plan of Merger, dated as of October 7, 1996, by and among the Insurer, Zenith Insurance Company, Zenith National Insurance Corp., AGC-SIF and AGC Risk Management Group, Inc.) and shall remain in force for a period of five (5) years thereafter unless terminated earlier pursuant to the following sentence. This Agreement may be terminated: 1. By mutual agreement of the parties hereto; 2. Upon dissolution of the Insurer, whether voluntary or due to cessation of the Insurer's authority to operate within the State of Florida; 5 3. Upon dissolution of the Insurer due to insolvency or bankruptcy; 4. Upon ten (10) days' written notice by either party if the other party is in material breach of any term, covenant or condition contained herein; provided, however, that as a condition precedent to termination under this clause, the terminating party shall give written notice to the other party, who shall have thirty (30) days from the date of such notice to cure or correct the grounds for termination. If the grounds for termination are not corrected or cured during the thirty (30) day period, this Agreement may be terminated on the termination date specified in the notice, but not prior to the expiration of the thirty (30) day period described herein. B. Should this Agreement be terminated, ZRM will cease providing services, turn over to the Insurer all paper and electronic records and files of the Insurer in the custody of ZRM, which shall include loss control records, reports, surveys and correspondence, underwriting surveys and premium calculations, all active and closed claims files, Insured's files, and readable form copies of all regulatory filings. Notwithstanding the termination of this Agreement, ZRM will, at the request and expense of the Insurer, continue to: 1. Provide continued administration of the open claims files; 2. Assist in the preparation of a payroll audit and any regulatory audit, including but not limited to an annual financial audit, for the final year this Agreement is in effect; 3. Cooperate with any successor manager or the Insurer in the orderly transfer of all functions; and 4. Provide timely magnetic media transfer of data, as required by the Insurer or the Department. C. Unless canceled earlier, ZRM and the Insurer mutually agree to a renegotiation and extension of this Agreement at the end of its initial five year term. V. ENTIRE AGREEMENT; ASSIGNMENT This Agreement (a) constitutes the entire agreement among the parties with respect to the subject matter hereof and supersedes all other prior agreements and understandings, both written and oral, among the parties or any of them with respect to the subject matter hereof and (b) may not be assigned in whole or in part by ZRM. VI. INDEMNIFICATION The Insurer agrees to indemnify and hold ZRM harmless from and against all costs, damages, judgments, attorney's fees, expenses, obligations and liabilities of whatsoever kind or nature, which, in good faith, ZRM may incur or sustain in connection with or arising from ZRM's performance hereunder, except such costs, damages, judgments, attorney's fees, expenses, obligations or liabilities which may be incurred by ZRM as a result of (a) a violation of a criminal law resulting in a conviction, 6 (b) any deliberately dishonest or fraudulent act or omission, or (c) any act or omission committed in bad faith or with malicious purpose or constituting gross negligence. ZRM agrees to indemnify and hold the Insurer harmless from and against all costs, damages, judgments, attorney's fees, expenses, obligations and liabilities of whatsoever kind or nature, which the Insurer may incur or sustain as a result of any acts or omissions within the scope of clauses (a), (b) or (c) of the immediately preceding paragraph. VII. EXCLUSIVITY AND OWNERSHIP OF PROPERTY A. ZRM covenants that the Insurer shall be the only client of ZRM. B. The Insurer shall be the owner of all computer hardware and software (including software licenses) and any other property and property rights acquired or developed by ZRM for purposes of this Agreement and the Insurer shall have title to all such hardware, software, media, property and property rights. The compensation payable to ZRM as provided for in Article III above shall be deemed to include fair compensation for all such hardware, software, property and property rights. ZRM shall execute all documents and take all actions necessary in the Insurer's opinion to perfect title in the Insurer as provided for herein. VIII. EXPERIENCE AND QUALIFICATION OF ZRM; FIDUCIARY DUTY. 1. ZRM represents and warrants that its principals and employees have the experience and qualifications to meet the needs of the Insurer, including, without limitation, claims administration, overall planning and coordination of the business of the Insurer, providing summary data relating to the Insurer's costs of providing benefits, and the skill and experience to prevent and correct deficiencies which may arise in the operation of the Insurer. 2. ZRM acknowledges its fiduciary duty to the Insurer and agrees to exercise good faith in all transactions on behalf of the Insurer and agrees to fully, completely and promptly inform the Insurer of all of its material communications (both oral and written) to and from the Department or other regulatory authorities. IX. NOTICES Any notice, request, instruction or other document to be given hereunder by any party to the other parties shall be in writing and shall be deemed given when delivered personally, upon receipt of a transmission confirmation (with a confirming copy sent by overnight courier) if sent by telecopy or like transmission, and on the next business day when sent by Federal Express, Express Mail, or other reputable overnight courier, as follows: (a) If to ZRM, to: 7 Zenith Risk Management, Inc. _________________ _________________ Telephone: ______________ Telecopy: ______________ (b) If to the Insurer, to: John J. Tickner, Esq. Zenith Insurance Company 21255 Califa Street Woodland Hills, CA 91367-5021 Telephone: (818) 594-5564 Telecopy: (818) 594-7269 with a copy to: Bertil Lundqvist, Esq. Skadden, Arps, Slate, Meagher & Flom 919 Third Avenue New York, NY 10019 Telephone: (212) 735-3000 Telecopy: (212) 735-2000 and Jerome L. Coben, Esq. Skadden, Arps, Slate, Meagher & Flom 300 South Grand Avenue Los Angeles, CA 90071 Telephone: (312) 687-5010 Telecopy: (312) 687-5600 X. CONSTRUCTION This Agreement shall be governed by, and construed in accordance with, the laws of the State of Florida without giving effect to the principles of conflicts of laws thereof. Venue for the purposes of any cause of action, of whatsoever kind or nature, by either party against the other hereunder, shall be Orange County, Florida. XI. COUNTERPARTS For the convenience of the parties hereto, this Agreement may be executed in any number of counterparts, each such counterpart being deemed to be an original instrument, and all such counterparts shall together constitute the same agreement. 8 XII. PARTIES IN INTEREST This Agreement shall be binding upon and inure solely to the benefit of each party hereto and their respective successors and permitted assigns. Nothing in this Agreement, express or implied, is intended to or shall confer upon any other person any rights, benefits or remedies of any nature whatsoever under or by reason of this Agreement. XIII. VALIDITY The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, each of which shall remain in full force and effect. XIV. CAPTIONS The Section captions herein are for convenience of reference only, do not constitute part of this Agreement and shall not be deemed to limit or otherwise affect any of the provisions hereof. 9 IN WITNESS WHEREOF, the above-named parties have hereunto set their hands and seals on the day above written for themselves, their assigns and successors, and do hereby agree to fully perform the covenants and agreements as hereinabove set forth. ZENITH INSURANCE COMPANY By: ------------------------ Name: Title: Attest: By: ------------------------ Name: Title: Secretary ZENITH RISK MANAGEMENT, INC. By: ------------------------- Name: Title: Attest: By: -------------------------- Name: Title: Secretary ADDENDUM A UNDERWRITING GUIDELINES Maximum annual premium volume: $60 million. Basis of the rates to be charged: Standard workers' compensation in accordance with the insurance laws of the State of Florida. Types of risks which may be written: Any risk except those excluded from time to time under Zenith reinsurance treaties. Maximum limits of liability: Statutory workers' compensation and $2 million employers' liability. Applicable exclusions: None. Territorial limitations: United States, subject to required licenses. Policy cancellation provisions: Statutory as per policy. Maximum policy periods: One year. EX-10.12 3 EXHIBIT 10.12 - EXEC. OFFICER BONUS PLAN Zenith National Insurance Corp. Executive Officer Bonus Plan 1. DEFINED TERMS "Company" shall mean Zenith National Insurance Corp. and any successor thereto. "Company Combined Ratio" for any fiscal year shall mean the total combined ratio of the Zenith National Insurance Group for such fiscal year as determined from the consolidated statutory financial statements of the property and casualty insurance subsidiaries of the Zenith National Insurance Group. "Industry Combined Ratio" for any fiscal year shall mean the combined ratio for the insurance industry, as a whole, based on statutory financial statements for such fiscal year. "executive officer" shall have the meaning given thereto in Regulation S-K promulgated under the Securities Act of 1933, as amended. 2. AMOUNT OF BONUS If the Company Combined Ratio is at least three percentage points, but less than five percentage points below the Industry Combined Ratio (as published or announced by any independent organization prior to the last day of the third month of the following year) for any fiscal year, then each executive officer shall be paid a bonus for such fiscal year in an amount equal to 100% of such executive officer's base salary in effect at the beginning of such fiscal year, which bonus amount shall, on a case by case basis, be subject to reduction or elimination in the sole discretion of the Performance Bonus Committee of the Board of Directors of the Company. If the Company Combined Ratio is at least five percentage points below the Industry Combined Ratio (as published or announced by any independent organization prior to the last day of the third month of the following year) for any fiscal year, then each executive officer shall be paid a bonus for such fiscal year in an amount equal to 150% of such executive officer's base salary in effect at the beginning of such fiscal year, which bonus amount shall, on a case by case basis, be subject to reduction or elimination in the sole discretion of the Performance Bonus Committee of the Board of Directors of the Company. EX-10.23 4 EXHIBIT 10.23 - AGREEMENT OF REINSURANCE NO. 420 EXHIBIT 10.23 [LOGO] HCI AGREEMENT NO. 420 PROPERTY CATASTROPHE EXCESS OF LOSS REINSURANCE AGREEMENT (hereinafter referred to as "Agreement") between CALFARM INSURANCE COMPANY Sacramento, California ZENITH INSURANCE COMPANY Woodland Hills, California ZNAT INSURANCE COMPANY Woodland Hills, California ZENITH STAR INSURANCE COMPANY Woodland Hills, California And Their Quota Share Reinsurers (hereinafter collectively referred to as the "Company") and The Subscribing Reinsurers executing the Interests and Liabilities Agreements attached to this Agreement (hereinafter collectively referred to as the "Reinsurers") ______________________________________________________________________________ In consideration of the promises set forth in this Agreement, the parties agree as follows: ARTICLE I - SCOPE OF AGREEMENT As a condition precedent to the Reinsurers' obligations under this Agreement, the Company shall cede to the Reinsurers the property business described in this Agreement, and the Reinsurers shall accept such business as reinsurance from the Company. This Agreement is comprised of Articles I through XXII and the Exhibits listed below. The terms of the Articles and of the Exhibits shall determine the rights and obligations of the parties. The terms of the Articles shall apply to each Exhibit unless specifically amended therein. [LOGO] EXHIBIT A - FIRST EXCESS OF LOSS REINSURANCE (CATASTROPHE) of PROPERTY BUSINESS EXHIBIT B - SECOND EXCESS OF LOSS REINSURANCE (CATASTROPHE) of PROPERTY BUSINESS EXHIBIT C -THIRD EXCESS OF LOSS REINSURANCE (CATASTROPHE) of PROPERTY BUSINESS EXHIBIT D - FOURTH EXCESS OF LOSS REINSURANCE (CATASTROPHE) of PROPERTY BUSINESS ARTICLE II - PARTIES TO THE AGREEMENT This Agreement is solely between the Company and the Reinsurers. When more than one Company is named as a party to this Agreement, the first Company named shall be the agent of the other companies as to all matters pertaining to this Agreement. Performance of the obligations of each party under this Agreement shall be rendered solely to the other party. However, if the Company becomes insolvent, the liability of the Reinsurers shall be modified to the extent set forth in the article entitled INSOLVENCY OF THE COMPANY. In no instance shall any insured of the Company or any claimant against an insured of the Company have any rights under this Agreement . ARTICLE III - TERM This Agreement shall apply to loss events which commence during the period from September 1, 1996 to August 31, 1997, both dates inclusive, at the place of the loss event. This Agreement shall not apply to loss events which commence prior to the effective date of this Agreement and continue during any part of the term of this Agreement. However, this Agreement shall apply to loss events which commence during and continue beyond the term of this Agreement and in the computation of the liability of the Reinsurers the entire ultimate net loss resulting from each such loss event shall be included, subject to the limitations set forth in paragraph (f) of the article entitled DEFINITIONS. -2- HCI REFERENCE DNB/DNC/DND/DPG [LOGO] The Company shall have the option to cancel and rewrite this Agreement up to and including January 1, 1997. If such option is exercised and, subject to no known or reported losses at such date, and subject to terms for the ongoing reinsurance to be agreed, the premium for the period hereon shall be pro-rata of the reinsurance premium set forth in the Premium Section of the Exhibit. Alternatively, the Company shall have the sole option to cancel this Agreement up to and including January 1, 1997 at terms to be mutually agreed. ARTICLE IV - DEFINITIONS (a) PROPERTY BUSINESS This term shall mean direct property business written by the Company, as defined, and classified in its Association Edition of Annual Statement for Fire and Casualty Companies as: (l) Fire; (2) Allied lines (including extended coverage); (3) Farmowners multiple peril (applicable property and inland marine lines only); (4) Blanket personal property; (5) Homeowners multiple peril (applicable property and inland marine lines only); (6) Commercial multiple peril (applicable property lines only); (7) Inland marine; (8) Earthquake; (9) Garagekeepers legal liability (comprehensive only), on risks located in the United States of America. (b) COMPANY RETENTION This term shall mean the amount the Company shall retain for its own account; however, this requirement shall be satisfied if this -3- HCI REFERENCE DNB/DNC/DND/DPG [LOGO] amount is retained by the Company or its affiliated companies under common management or common ownership. (c) ULTIMATE NET LOSS This term shall mean all payments by the Company in settlement of claims and losses, within the limits of liability or amounts of insurance of the policies of the Company, and adjustment expense, after deduction of salvage and other recoveries and after deduction of amounts due from all other reinsurance, other than the reinsurance pooling arrangement between Zenith Insurance Company, CalFarm Insurance Company, ZNAT Insurance Company and Zenith Star Insurance Company, whether collectible or not. If the Company becomes insolvent, this definition shall be modified to the extent set forth in the article entitled INSOLVENCY OF THE COMPANY. (d) ADJUSTMENT EXPENSE This term shall mean expenditures by the Company in the direct defense of claims and as allocated to an individual claim or loss, other than for office expenses and for the salaries and expenses of employees of the Company or of any subsidiary or related or wholly owned company of the Company, made in connection with the disposition of a claim, loss, or legal proceeding including investigation, negotiation, and legal expenses; court costs; prejudgment interest or delayed damages; and interest on any judgment or award. (e) PREJUDGMENT INTEREST OR DELAYED DAMAGES This term shall mean interest or damages added to a settlement, verdict, award, or judgment based on the amount of time prior to the settlement, verdict, award, or judgment whether or not made part of the settlement, verdict, award, or judgment. (f) LOSS EVENT This term shall mean an occurrence or series of occurrences arising out of one event, provided that only the claims and losses sustained by the Company during the continuous period of 168 hours selected by the Company shall be used in the determination of the ultimate net loss; and only one such continuous period of 168 hours shall apply with respect to one event. -4- HCI REFERENCE DNB/DNC/DND/DPG [LOGO] Additionally, with respect to riot or civil commotion and other causes of loss resultant therefrom only claims and losses sustained by the Company on risks within the limits of one city, town, or village or immediately adjacent thereto shall be used in the determination of ultimate net loss. (g) SUBJECT NET EARNED PREMIUM This term shall mean the direct premium earned by the Company during the term of the Agreement on the business reinsured hereunder, after deduction of return premiums and after deduction of premiums paid for reinsurance which inures to the benefit of the Reinsurer. For the purposes of this Agreement, subject net earned premium shall be deemed to be 100% of the premiums on the lines of business reinsured hereunder. However, on the following lines, which are the so-called package policies (only when written on an indivisible premium basis) subject net earned premium shall be determined as: (1) 88% of the total homeowners and boatowners policy premiums; (2) 65% of the total farmowners and commercial multiple peril policy premiums. When any of the above policies is written on a divisible premium basis, the actual premium for the lines of business included in this Agreement shall be used rather than the percentage stated above. ARTICLE V - EXCLUSIONS This Agreement shall not apply to: (a) All lines of business not specifically covered hereunder; (b) Reinsurance assumed by the Company other than reinsurance assumed by Zenith Insurance Company from CalFarm Insurance Company, ZNAT Insurance Company or Zenith Star Insurance Company; all liability assumed under excess of loss insurance or reinsurance contracts; -5- HCI REFERENCE DNB/DNC/DND/DPG [LOGO] (c) All business excluded by the Pools, Associations and Syndicates Exclusion Clause attached hereto and made a part hereof; (d) Policies issued under retrospectively rated plans; policies issued with a deductible of more than $100,000, provided this exclusion shall not apply to policies which customarily provide a percentage deductible on the perils of earthquake or windstorm; (e) Liability coverages under homeowners, farmowners and commercial package policies; i.e., comprehensive personal, farm or commercial liability, medical payments and physical damage to property of others; (f) All casualty, fidelity, surety, forgery, boiler and machinery, burglary or glass business or coverages (not applicable to Section I coverages of multiple peril policies); (g) The following risks, coverages and kinds of insurance: (l) Accident and health; (2) Animal or livestock mortality policies; however, this exclusion shall not apply to fowl; (3) Automobile; however, this exclusion shall not apply with respect to garagekeepers legal liability coverages; (4) Aviation; (5) Commercial hulls or hulls other than outboard motorboat and sailboat coverages; (6) Credit warranty, financial guarantees; (7) First class or registered mail; (8) Gas or oil drilling risks; (9) Growing or standing crops, other than fire insurance; all crop hail insurance or any other coverages provided in connection therewith; (10) Jewelers and furriers block; (11) Negative film syndicates; -6- HCI REFERENCE DNB/DNC/DND/DPG [LOGO] (12) Ocean marine; (13) Railroad Property; (h) Flood, surface water, waves, tidal water or tidal waves, overflow of streams or other bodies of water or spray from any of the foregoing, all whether driven by wind or not, unless written in conjunction with the peril of fire of similar amount; (i) Mortgage impairment insurance and similar kinds of insurance, howsoever styled, providing coverage to an insured with respect to its mortgagee interest in property or its owner interest in foreclosed property; (j) Difference in conditions insurance and similar kinds of insurance, howsoever styled; (k) Consequential, punitive, exemplary or compensatory damages resulting from an action taken by any policyholder, insured or assignee, against the Company for alleged or actual bad faith, fraud or negligence in the settlement of a claim; (l) Risks which have a total insurable value of more than $250,000,000; (m) War risk, bombardment, invasion, insurrection, rebellion, revolution, military or usurped power, or confiscation by order of any government or public authority, as excluded under a standard policy containing a standard war exclusion clause; (n) Nuclear incident per the Nuclear Incident Exclusion - Physical Damage - Reinsurance (NMA 1119) attached hereto; (o) Liability of the Company arising from its participation or membership, whether voluntary or involuntary, in any insolvency fund, including any guarantee fund, association, pool, plan or other facility which provides for the assessment of, payment by, or assumption by the Company of a part or the whole of any claim, debt, charge, fee or other obligations of an insurer, or its successors or assigns, which has been declared insolvent by any authority having jurisdiction; (p) Loss of, damage to, or failure of, or consequential loss resulting therewith (including but not limited to earnings and extra expense) of satellites, spacecraft, and launch vehicles, including cargo and -7- HCI REFERENCE DNB/DNC/DND/DPG [LOGO] freight carried therein, in all phases of operation (including but not limited to manufacturing, transit, pre-launch, launch, and in-orbit); (q) Coverage afforded by ISO Pollutant Clean Up and Removal Additional Aggregate Limit of Insurance Endorsement CP 04 07 (Ed. 4/86) or as subsequently amended or by any similar endorsement affording such coverage; (r) Pollutant clean up or removal under any commercial property policy or any inland marine policy written by the Company which does not contain ISO Changes-Pollutants Endorsement CP 01 86 (Ed. 4/86) or as subsequently amended; however, this exclusion does not apply to any risk located in a jurisdiction which has not approved the Insurance Services Office exclusion or where other regulatory constraints prohibit the Company from attaching such endorsement. If the Company elects to file an endorsement independent of ISO, such endorsement will be deemed a suitable substitute provided the Company has submitted the wording to the Reinsurers and received the Reinsurers' prior approval. ARTICLE VI - AUTOMATIC REINSTATEMENT The Limit of Liability of the Reinsurers under each Exhibit with respect to each loss event shall be reduced by an amount equal to the amount of liability paid by the Reinsurers, but that part of the liability of the Reinsurers that is so reduced shall be automatically reinstated from the commencement of the loss event for which payment is made; however, the Limit of Liability of the Reinsurers with respect to all loss events commencing during the term of this Agreement shall not exceed the amount set forth in the section entitled LIMIT AND RETENTION of each Exhibit. In consideration of this automatic reinstatement, the Company shall pay to the Reinsurers for each amount reinstated an additional reinsurance premium that shall be pro rata of the reinsurance premium set forth in the section entitled REINSURANCE PREMIUM of each Exhibit. The additional reinsurance premium shall be the product of the reinsurance premium set forth in the section entitled REINSURANCE PREMIUM of the applicable Exhibit, multiplied by the amount of the reinstated Limit of Liability of the Reinsurers divided by the total Limit of Liability of the Reinsurers for each loss event irrespective of the time of the commencement of the loss event. The reinsurance premium so developed for each amount reinstated shall be in addition to the reinsurance premium set forth in the section entitled REINSURANCE PREMIUM. -8- HCI REFERENCE DNB/DNC/DND/DPG [LOGO] ARTICLE VII - MANAGEMENT OF CLAIMS AND LOSSES The Company shall investigate and settle or defend all claims and losses. When requested by the Reinsurers, the Company shall permit the Reinsurers, at the expense of the Reinsurers, to be associated with the Company in the defense or control of any claim, loss, or legal proceeding which involves or is likely to involve the Reinsurers. All payments of claims or losses by the Company within the limits of its policies which are within the limits set forth in this Agreement shall be binding on the Reinsurers, subject to the terms of this Agreement. ARTICLE VIII - RECOVERIES The Company shall pay to or credit the Reinsurers with the Reinsurers' portion of any recovery obtained from salvage, subrogation, or other insurance. Adjustment expenses for recoveries shall be deducted from the amount recovered. The Reinsurers shall be subrogated to the rights of the Company to the extent of their loss payments to the Company. The Company agrees to enforce its rights of salvage, subrogation, and its rights against insurers or to assign these rights to the Reinsurers. Recoveries shall be distributed to the parties in an order inverse to that in which their liabilities accrued. ARTICLE IX - ERRORS AND OMISSIONS The Reinsurers shall not be relieved of liability because of an error or accidental omission of the Company in reporting any claim or loss or any business reinsured under this Agreement, provided that the error or omission is rectified promptly after discovery. The Reinsurers shall be obligated only for the return of the premium paid for business reported but not reinsured under this Agreement. ARTICLE X - REPORTS AND REMITTANCES (a) CLAIMS AND LOSSES The Company shall report to the Reinsurers as soon as possible but within 60 days of each loss event, which in the Company's opinion, may involve the reinsurance afforded by this Agreement. The Company shall advise the Reinsurers of the estimated amount of ultimate net loss in connection with each loss event and of any subsequent changes in such estimates. -9- HCI REFERENCE DNB/DNC/DND/DPG [LOGO] As soon as possible but within 45 days after receipt of a definitive statement of ultimate net loss from the Company, the Reinsurers shall pay to the Company the Reinsurers' portion of ultimate net loss. Any subsequent changes in the amount of ultimate net loss shall be reported by the Company to the Reinsurers and the amount due either party shall be remitted as soon as possible but within 45 days after receipt of such report. (b) P.C.S. CATASTROPHE BULLETINS The Company shall furnish to the Reinsurers, upon request, the following information with respect to each catastrophe set forth in the Catastrophe Bulletins published by the Property Claim Services: (l) The preliminary estimate of the amount recoverable from the Reinsurers; (2) The Reinsurers' portion of claims, losses, and adjustment expense paid less salvage recovered during each calendar quarter; (3) The Reinsurers' portion of reserves for claims, losses, and adjustment expense at the end of each calendar quarter. (c) GENERAL In addition to the reports required by (a) and (b) above and by the Exhibits, the Company shall furnish such other information as may be required by the Reinsurers for the completion of the Reinsurers' quarterly and annual statements and internal records. All reports shall be rendered on forms acceptable to the Company and the Reinsurers. ARTICLE XI - CURRENCY Wherever the sign "$" is used in this Agreement it shall mean United States Dollars. Premiums due the Reinsurers and loss payments due the Company shall be remitted in United States Dollars. ARTICLE XII - REINSURANCE OVER THIS AGREEMENT The Company shall advise the Reinsurers of any reinsurance of the Company that -10- HCI REFERENCE DNB/DNC/DND/DPG [LOGO] would apply over and beyond the Limit of Liability of the Reinsurers under Exhibit D of this Agreement. ARTICLE XIII - SPECIAL ACCEPTANCES Business not within the terms of this Agreement may be submitted to the Reinsurers for special acceptance and, if accepted by the Reinsurers, shall be subject to all of the terms of this Agreement except as modified by the special acceptance. ARTICLE XIV - RESERVES AND TAXES The Reinsurers shall maintain the required reserves as to the Reinsurers' portion of unearned premium, if any, claims, losses, and adjustment expense. The Company shall be liable for all premium taxes on premium ceded to the Reinsurers under this Agreement. If the Reinsurers are obligated to pay any premium taxes on this premium, the Company shall reimburse the Reinsurers; however, the Company shall not be required to pay taxes twice on the same premium. ARTICLE XV - OFFSET The Company or the Reinsurers may offset any balance, whether on account of premium, commission, claims or losses, adjustment expense, salvage, or otherwise, due from one party to the other under this Agreement. ARTICLE XVI - INSPECTION OF RECORDS The Company shall allow the Reinsurers to inspect, at reasonable times, the records of the Company relevant to the business reinsured under this Agreement, including Company files concerning claims, losses, or legal proceedings which involve or are likely to involve the Reinsurers. ARTICLE XVII - ARBITRATION Any unresolved difference of opinion between any of the Reinsurers and the Company shall be submitted to arbitration by three arbitrators. If more than one Reinsurer is involved in the same dispute, all such Reinsurers shall constitute and act as one party for purposes of this Article and communications shall be made by the Company to each of the Reinsurers constituting the one party; provided, however, that nothing herein shall impair the rights of such Reinsurers to assert several, rather than joint, defenses of claims, nor be construed as changing the liability of the Reinsurers -11- HCI REFERENCE DNB/DNC/DND/DPG [LOGO] under the terms of this Agreement from several to joint. One arbitrator shall be chosen by the Reinsurer(s), and one shall be chosen by the Company. The third arbitrator shall be chosen by the other two arbitrators within ten (10) days after they have been appointed. If the two arbitrators cannot agree upon a third arbitrator, each arbitrator shall nominate three persons of whom the other shall reject two. The third arbitrator shall then be chosen by drawing lots. If either party fails to choose an arbitrator within thirty (30) days after receiving the written request of the other party to do so, the latter shall choose both arbitrators, who shall choose the third arbitrator. The arbitrators shall be impartial and shall be persons who are or have been employed or engaged in a senior position in the insurance or reinsurance business. The party requesting arbitration (the "Petitioner") shall submit its brief to the arbitrators within thirty (30) days after notice of the selection of the third arbitrator. Upon receipt of the Petitioner's brief, the other party (the "Respondent") shall have thirty (30) days to file a reply brief. On receipt of the Respondent's brief, the Petitioner shall have twenty (20) days to file a rebuttal brief. Respondent shall have twenty (20) days from the receipt of Petitioner's rebuttal brief to file its rebuttal brief. The arbitrators may extend the time for filing of briefs at the request of either party. The arbitrators are relieved from judicial formalities and, in addition to considering the rules of law and the customs and practices of the insurance and reinsurance business, shall make their award with a view to effecting the intent of this Agreement. The decision of the majority shall be final and binding upon the parties. The costs of arbitration, including the fees of the arbitrators, shall be shared equally unless the arbitrators decide otherwise. The arbitration shall be held at the times and places agreed upon by the arbitrators. ARTICLE XVIII - INSOLVENCY OF THE COMPANY In the event of the insolvency of the Company, the reinsurance proceeds will be paid to the Company or the liquidator immediately upon demand, with reasonable provision for verification, on the basis of the amount of the claim allowed in the insolvency proceeding without diminution by reason of the inability of the Company to pay all or part of the claim. The Reinsurers shall be given written notice of the pendency of each claim against the Company on the policy(ies) reinsured hereunder within a reasonable time after such claim is filed in the insolvency proceedings. The Reinsurers shall have the right to investigate each such claim and to interpose, at their own expense, in the proceeding where such claim is to be adjudicated, any defenses which they may deem available to the Company or its liquidator. The expense thus incurred by the Reinsurers shall be chargeable, subject to court approval, against the insolvent Company as part of the expense of liquidation to the extent of a proportionate share of the benefit which may accrue to the Company solely as a result of the defense undertaken by the Reinsurers. -12- HCI REFERENCE DNB/DNC/DND/DPG [LOGO] ARTICLE XIX - LOSS RESERVES (U.S. DOLLAR REINSURANCE LETTERS OF CREDIT) (This Article applies only to those Reinsurers who cannot qualify for credit in any State or any other governmental body having jurisdiction over the Company's loss reserves.) As regards all business coming within the scope of this Agreement, the Company agrees that when it shall file with the Insurance Department or set up on its books reserves for losses covered hereunder which it shall be required to set up by law, it will forward to the Reinsurers a statement showing the proportion of such loss reserves which is applicable to them. These reserves will consist solely of known outstanding losses that have been reported to the Reinsurers and allocated adjustment expense relating thereto. Each such Reinsurer hereby agrees it will apply for and secure delivery to the Company of a clean, unconditional, irrevocable Letter of Credit issued by Citibank, New York, New York, in an amount equal to such Reinsurer's proportion of said loss reserves or, at the option of such Reinsurer, provide a cash advance in an amount equal to such Reinsurer's proportion of said loss reserves. No reserves established in accordance with the foregoing shall include or be applied towards security for losses incurred but not reported. The Company undertakes to use and apply any amounts which it may draw upon such Irrevocable Letter of Credit pursuant to the terms of this Agreement, if any, under which the Letter of Credit is held, and for the following purposes only: (a) To pay such Reinsurer's share or to reimburse the Company for such Reinsurer's share of any ultimate net loss reinsured by this Agreement. (b) To make refund of any sum which is in excess of the actual amount required to pay such Reinsurer's share of any ultimate net loss reinsured by this Agreement. Citibank, New York, New York shall have no responsibility whatsoever in connection with the propriety of withdrawals made by the Company or the disposition of funds withdrawn, except to see that withdrawals are made only upon the order of properly authorized representatives of the Company. ARTICLE XX - SERVICE OF SUIT (This Article applies only to those Reinsurers who are domiciled outside the United States of America and also to Reinsurers unauthorized in the State of New York.) -13- HCI REFERENCE DNB/DNC/DND/DPG [LOGO] In the event of the failure of the Reinsurers to whom this Article applies, or any one of them, to pay any amount claimed to be due hereunder, such Reinsurers, at the request of the Company, will submit to the jurisdiction of any court of competent jurisdiction within the United States and will comply with all requirements necessary to give such court jurisdiction, and all matters arising hereunder shall be determined in accordance with the law and practice of such court. Service of process in such suit may be made upon Messrs. Mendes and Mount, 750 Seventh Avenue, New York, New York 10010-6829, and in any suit instituted against any one of them upon this Agreement, the Reinsurers will abide by the final decision of such court or any appellate court in the event of an appeal. The above named are authorized and directed to accept service of process on behalf of the Reinsurers in any such suit and/or upon the request of the Company to give a written undertaking to the Company that they will enter a general appearance on behalf of Reinsurers or any one of them in the event such a suit shall be instituted. Further, pursuant to any statute of any state, territory, or district of the United States which makes provisions therefor, the Reinsurers to whom this Article applies hereby designate the Superintendent, Commissioner or Director of Insurance or other officer specified for that purpose in the statute, or his successor or successors in office, as their true and lawful attorney upon whom may be served any lawful process in any action, suit, or proceeding instituted by or on behalf of the Company or any beneficiary hereunder arising out of this Agreement, and hereby designate the above named Mendes and Mount as the firm to whom the said officer is authorized to mail such process or a true copy thereof. ARTICLE XXI - FEDERAL EXCISE TAX (This Article applies only to those Reinsurers domiciled outside the United States of America, excepting Reinsurers exempt from the Federal Excise Tax.) The Reinsurers have agreed to allow for the purpose of paying Federal Excise Tax 1% of the premium payable hereon to the extent such premium is subject to Federal Excise Tax. In the event of any return of premium becoming due hereon the Reinsurers will deduct 1% from the amount of the return and the Company or its Agent should take steps to recover the tax from the United States Government. ARTICLE XXII - INTERMEDIARY Herbert Clough Inc. is hereby recognized as the Intermediary negotiating this Agreement for all business hereunder. All communications (including but not limited to -14- HCI REFERENCE DNB/DNC/DND/DPG [LOGO] notices, statements, premiums, return premiums, commissions, taxes, losses, loss adjustment expense, salvages, and loss settlements) relating thereto shall be transmitted to the Company or the Reinsurers through Herbert Clough Inc., Financial Centre, P.O. Box 10216, Stamford, Connecticut 06904-2216. Payments by the Company to the Intermediary shall be deemed to constitute payment to the Reinsurers. Payments by the Reinsurers to the Intermediary shall be deemed only to constitute payment to the Company to the extent that such payments are actually received by the Company. -15- HCI REFERENCE DNB/DNC/DND/DPG [LOGO] Effective: September 1, 1996 EXHIBIT A Attached to and made a part of HCI Agreement No. 420 PROPERTY CATASTROPHE EXCESS OF LOSS REINSURANCE AGREEMENT FIRST EXCESS OF LOSS REINSURANCE (CATASTROPHE) of PROPERTY BUSINESS _______________________________________________________________________________ SECTION 1 - LIABILITY OF THE REINSURERS The Reinsurers shall pay to the Company, with respect to each loss event, 95% of the amount of ultimate net loss in excess of the Company Retention of $5,000,000, but not exceeding the Limit of Liability of the Reinsurers of 95% of the next $10,000,000 of ultimate net loss with respect to such loss event nor 95% of $20,000,000 with respect to all loss events commencing during the term of this Agreement. The Company shall retain net for its own account, with respect to each loss event, the remaining 5% of such ultimate net loss. SECTION 2 - REINSURANCE PREMIUM As a condition precedent to the Reinsurers' obligations hereunder, the Company shall pay to the Reinsurers 1.96% of the Company's subject net earned premium during the term of the Agreement, subject to a minimum reinsurance premium of $1,291,500 and a deposit reinsurance premium of $1,614,400. SECTION 3 - REINSURANCE PREMIUM REPORTS AND REMITTANCES The Company shall pay to the Reinsurers the deposit reinsurance premium stipulated in the section entitled REINSURANCE PREMIUM in equal quarterly installments of $403,600 each on or before each on or before September 1, 1996, December 1, 1996, March 1, 1997 and June 1, 1997. Within 60 days after the expiration of this Agreement, the Company shall render to the Reinsurers a report of the Company's subject net earned premium during the term of the Agreement. The Company shall calculate the reinsurance premium thereon, shall balance such amount against the deposit reinsurance premium previously paid, and the amount due either party, subject to the minimum reinsurance premium, shall be remitted within 60 days. HCI REFERENCE DNB [LOGO] Effective: September 1, 1996 EXHIBIT B Attached to and made a part of HCI Agreement No. 420 PROPERTY CATASTROPHE EXCESS OF LOSS REINSURANCE AGREEMENT SECOND EXCESS OF LOSS REINSURANCE (CATASTROPHE) of PROPERTY BUSINESS _______________________________________________________________________________ SECTION 1 - LIABILITY OF THE REINSURERS The Reinsurers shall pay to the Company, with respect to each loss event, 95% of the amount of ultimate net loss in excess of the sum of: (a) The Company Retention of $5,000,000; and (b) The First Excess Cover of $10,000,000, but not exceeding the Limit of Liability of the Reinsurers of 95% of the next $10,000,000 of ultimate net loss with respect to such loss event nor 95% of $20,000,000 with respect to all loss events commencing during the term of this Agreement. The Company shall retain net for its own account, with respect to each loss event, the remaining 5% of such ultimate net loss. SECTION 2 - REINSURANCE PREMIUM As a condition precedent to the Reinsurers' obligations hereunder, the Company shall pay to the Reinsurers 1.18% of the Company's subject net earned premium during the term of the Agreement, subject to a minimum reinsurance premium of $777,500 and a deposit reinsurance premium of $971,900. SECTION 3 - REINSURANCE PREMIUM REPORTS AND REMITTANCES The Company shall pay to the Reinsurers the deposit reinsurance premium stipulated in the section entitled REINSURANCE PREMIUM in equal quarterly installments of $242,975 each on or before each on or before September 1, 1996, December 1, 1996, March 1, 1997 and June 1, 1997. HCI REFERENCE DNC [LOGO] Within 60 days after the expiration of this Agreement, the Company shall render to the Reinsurers a report of the Company's subject net earned premium during the term of the Agreement. The Company shall calculate the reinsurance premium thereon, shall balance such amount against the deposit reinsurance premium previously paid, and the amount due either party, subject to the minimum reinsurance premium, shall be remitted within 60 days. B-2 HCI REFERENCE DNC [LOGO] Effective: September 1, 1996 EXHIBIT C Attached to and made a part of HCI Agreement No. 420 PROPERTY CATASTROPHE EXCESS OF LOSS REINSURANCE AGREEMENT THIRD EXCESS OF LOSS REINSURANCE (CATASTROPHE) of PROPERTY BUSINESS _______________________________________________________________________________ SECTION 1 - LIABILITY OF THE REINSURERS The Reinsurers shall pay to the Company, with respect to each loss event, 95% of the amount of ultimate net loss in excess of the sum of: (a) The Company Retention of $5,000,000; and (b) The First Excess Cover of $10,000,000; and (c) The Second Excess Cover of $10,000,000, but not exceeding the Limit of Liability of the Reinsurers of 95% of the next $15,000,000 of ultimate net loss with respect to such loss event nor 95% of $30,000,000 with respect to all loss events commencing during the term of this Agreement. The Company shall retain net for its own account, with respect to each loss event, the remaining 5% of such ultimate net loss. SECTION 2 - REINSURANCE PREMIUM As a condition precedent to the Reinsurers' obligations hereunder, the Company shall pay to the Reinsurers 1.25% of the Company's subject net earned premium during the term of the Agreement, subject to a minimum reinsurance premium of $823,600 and a deposit reinsurance premium of $1,029,600. SECTION 3 - REINSURANCE PREMIUM REPORTS AND REMITTANCES The Company shall pay to the Reinsurers the deposit reinsurance premium stipulated in the section entitled REINSURANCE PREMIUM in equal quarterly HCI REFERENCE DND [LOGO] installments of $257,400 each on or before September 1, 1996, December 1, 1996, March 1, 1997 and June 1, 1997. Within 60 days after the expiration of this Agreement, the Company shall render to the Reinsurers a report of the Company's subject net earned premium during the term of the Agreement. The Company shall calculate the reinsurance premium thereon, shall balance such amount against the deposit reinsurance premium previously paid, and the amount due either party, subject to the minimum reinsurance premium, shall be remitted within 60 days. C-2 HCI REFERENCE DND [LOGO] Effective: September 1, 1996 EXHIBIT D Attached to and made a part of HCI Agreement No. 420 PROPERTY CATASTROPHE EXCESS OF LOSS REINSURANCE AGREEMENT FOURTH EXCESS OF LOSS REINSURANCE (CATASTROPHE) of PROPERTY BUSINESS _______________________________________________________________________________ SECTION 1 - LIABILITY OF THE REINSURERS The Reinsurers shall pay to the Company, with respect to each loss event, 95% of the amount of ultimate net loss in excess of the sum of: (a) The Company Retention of $5,000,000; and (b) The First Excess Cover of $10,000,000; and (c) The Second Excess Cover of $10,000,000, (d) The Third Excess Cover of $15,000,000, but not exceeding the Limit of Liability of the Reinsurers of 95% of the next $10,000,000 of ultimate net loss with respect to such loss event nor 95% of $20,000,000 with respect to all loss events commencing during the term of this Agreement. The Company shall retain net for its own account, with respect to each loss event, the remaining 5% of such ultimate net loss. SECTION 2 - REINSURANCE PREMIUM As a condition precedent to the Reinsurers' obligations hereunder, the Company shall pay to the Reinsurers 0.61% of the Company's subject net earned premium during the term of the Agreement, subject to a minimum reinsurance premium of $401,900 and a deposit reinsurance premium of $502,400. HCI REFERENCE DPG [LOGO] SECTION 3 - REINSURANCE PREMIUM REPORTS AND REMITTANCES The Company shall pay to the Reinsurers the deposit reinsurance premium stipulated in the section entitled REINSURANCE PREMIUM in equal quarterly installments of $125,600 each on or before September 1, 1996, December 1, 1996, March 1, 1997 and June 1, 1997. Within 60 days after the expiration of this Agreement, the Company shall render to the Reinsurers a report of the Company's subject net earned premium during the term of the Agreement. The Company shall calculate the reinsurance premium thereon, shall balance such amount against the deposit reinsurance premium previously paid, and the amount due either party, subject to the minimum reinsurance premium, shall be remitted within 60 days. D-2 HCI REFERENCE DPG [LOGO] POOLS, ASSOCIATIONS AND SYNDICATES EXCLUSION CLAUSE SECTION A Excluding: (a) All Business derived directly or indirectly from any Pool, Association or Syndicate which maintains its own reinsurance facilities. (b) Any Pool or Scheme (whether voluntary or mandatory) formed after March 1, 1968 for the purpose of insuring Property whether on a country-wide basis or in the respect of designated areas. This exclusion shall not apply to so-called Automobile Insurance Plans or other pools formed to provide coverage for Automobile Physical damage. SECTION B It is agreed that business written by the Company for the same perils, which is known at the time to be insured by, or in excess of underlying amounts placed in the following Pools, Associations or Syndicates, whether by way of insurance or reinsurance, is excluded hereunder: Industrial Risk Insurers (formerly Factory Insurance Association and Oil Insurance Association), including Underwriters Grain Division. Associated Factory Mutuals. Improved Risk Mutuals. Any Pool, Association or Syndicate formed for the purpose of writing Oil, Gas or Petro-Chemical Plants and/or Oil or Gas Drilling Rigs. Nuclear Energy Property Insurance Association. Nuclear Energy Liability Insurance Association. Mutual Atomic Energy Reinsurance Pool. Mutual Atomic Energy Liability Underwriters. United States Aircraft Insurance Group. Canadian Aircraft Insurance Group. Associated Aviation Underwriters. American Aviation Underwriters. Section B does not apply: (a) Where the Total Insured value over all interests of the risk in question is less than $250,000,000. (b) To interests traditionally underwritten as Inland Marine or Stock and/or Contents written on a Blanket basis. [LOGO] (c) To Contingent Business Interruption, except when the Company is aware that the key location is known at the time to be insured in any Pool, Association or Syndicate named above, other than as provided for under Section B (a). (d) To risks as follows: Offices, Hotels, Apartments, Hospitals, Educational Establishments, Public Utilities (other than Railroad Schedules) and Builders Risks on the classes of risks specified in this subsection (d) only. Where this Clause attaches to Catastrophe Excesses, the following SECTIONS C and D are added: SECTION C NEVERTHELESS the Reinsurers specifically agree that liability accruing to the Company from its participation in residual market mechanisms including but not limited to: (1) The following so-called "Coastal Pools" ALABAMA INSURANCE UNDERWRITING ASSOCIATION FLORIDA WINDSTORM UNDERWRITING ASSOCIATION LOUISIANA INSURANCE UNDERWRITING ASSOCIATION MISSISSIPPI WINDSTORM UNDERWRITING ASSOCIATION NORTH CAROLINA INSURANCE UNDERWRITING ASSOCIATION SOUTH CAROLINA WINDSTORM AND HAIL UNDERWRITING ASSOCIATION TEXAS CATASTROPHE PROPERTY INSURANCE ASSOCIATION and (2) All "Fair Plan" and "Rural Risk Plan" Business, including but not limited to: Florida Windstorm Underwriting Association (FWUA) Florida Property and Casualty Joint Underwriting Association (FPCJUA) Residential Property and Casualty Joint Underwriting Association (RPCJUA) for all perils otherwise protected hereunder shall not be excluded, except that this reinsurance does not include any increase in such liability resulting from: (i) The inability of any other participant in such Residual Market Mechanism including but not limited to "Coastal Pool" and/or "Fair Plan" and/or "Rural Risk Plan" to meet its liability. [LOGO] (ii) Any claim against such Residual Market Mechanism including but not limited to "Coastal Pool" and/or "Fair Plan" and/or "Rural Risk Plan" or any participant therein, including the Company, whether by way of subrogation or otherwise, brought by or on behalf of any insolvency fund. SECTION D NOTWITHSTANDING Section C above, in respect of the FWUA, FPCJUA, and RPCJUA, where an assessment is made against the Company by the FWUA, the FPCJUA, the RPCJUA, or any combination thereof, the maximum loss that the Company may include in the Ultimate Net Loss in respect of any loss occurrence hereunder shall nor exceed the lesser of: 1. The Company's assessment from the relevant entity (FWUA, FPCJUA and/or RPCJUA) for the accounting year in which the loss occurrence commenced, or 2. The product of the following: a) The Company's percentage participation in the relevant entity for the accounting year in which the loss occurrence commenced, and b) The relevant entity's total losses in such loss occurrence. Any assessments for accounting years subsequent to that in which the loss occurrence commenced may not be included in the Ultimate Net Loss hereunder. Moreover, notwithstanding Section C above, in respect of the FWUA, the FPCJUA and/or the RPCJUA, the Ultimate Net Loss hereunder shall not include any monies expended to purchase or retire bonds as a consequence of being a member of the FWUA, the FPCJUA and/or the RPCJUA. For the purposes of this Agreement, the Company may not include in the Ultimate Net Loss any assessment or any percentage assessment levied by the FWUA, the FPCJUA and/or the RPCJUA to meet the obligations of any insolvent insurer member or other party, or to meet any obligations arising from the deferment by the FWUA, FPCJUA and/or RPCJUA of the collection of monies. - -------------------------------------------------------------------------------- NOTES: Wherever used herein the terms: "Company" shall be understood to mean "Reinsured", "Reassured" or whatever other term is used in the attached reinsurance document to designate the reinsured company or companies. "Contract" shall be understood to mean "Agreement", "Policy" or whatever other term is used to designate the attached reinsurance document. "Reinsurers" shall be understood to mean "Underwriters" or whatever other term is used in the attached reinsurance document to designate the reinsurer or reinsurers. [LOGO] NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE - REINSURANCE - USA (1) This Agreement does not cover any loss or liability accruing to the Company directly or indirectly and whether as Insurer or Reinsurer, from any Pool of Insurers or Reinsurers formed for the purpose of covering Atomic or Nuclear Energy risks. (2) Without in any way restricting the operation of paragraph (1) of this Clause, this Agreement does not cover any loss or liability accruing to the Company, directly or indirectly and whether as Insurer or Reinsurer, from any insurance against Physical Damage (including business interruption or consequential loss arising out of such Physical Damage) to: (i) Nuclear reactor power plants including all auxiliary property on the site, or (ii) Any other nuclear reactor installation, including laboratories handling radioactive materials in connection with reactor installations, and "critical facilities" as such, or (iii) Installations for fabricating complete fuel elements or for processing substantial quantities of "special nuclear material", and for reprocessing, salvaging, chemically separating, storing or disposing of "spent" nuclear fuel or waste materials, or (iv) Installations other than those listed in paragraph (2)(iii) above using substantial quantities of radioactive isotopes or other products of nuclear fission. (3) Without in any way restricting the operations of paragraphs (1) and (2) hereof, this Agreement does not cover any loss or liability by radioactive contamination accruing to the Company, directly or indirectly, and whether as Insurer or Reinsurer, from any insurance on property which is on the same site as a nuclear reactor power plant or other nuclear installation and which normally would be insured therewith except that this paragraph (3) shall not operate: (a) where the Company does not have knowledge of such nuclear reactor power plant or nuclear installation, or (b) where said insurance contains a provision excluding coverage for damage to property caused by or resulting from radioactive contamination, however caused. However on and after 1st January 1960 this sub-paragraph (b) shall only apply provided the said radioactive contamination exclusion provision has been approved by the Governmental Authority having jurisdiction thereof. (4) Without in any way restricting the operations of paragraphs (1),(2) and (3) hereof, this Agreement does not cover any loss or liability by radioactive contamination accruing to the Company, directly or indirectly, and whether as Insurer or Reinsurer, when such radioactive contamination is a named hazard specifically insured against. (5) It is understood and agreed that this Clause shall not extend to risks using radioactive isotopes in any form where the nuclear exposure is not considered by the Company to be the primary hazard. (6) The term "special nuclear material" shall have the meaning given it in the Atomic Energy Act of 1954 or by any law amendatory thereof. (7) The Company to be sole judge of what constitutes: (a) substantial quantities, and (b) the extent of installation, plant or site. Note: Without in any way restricting the operation of paragraph (1) hereof, it is understood and agreed that: (a) all policies issued by the Company on or before 31st December 1957 shall be free from the application of the other provisions of this Clause until expiry date or 31st December 1960 whichever first occurs whereupon all the provisions of this Clause shall apply. (b) with respect to any risk located in Canada policies issued by the Company on or before 31st December 1958 shall be free from the application of the other provisions of this Clause until expiry date or 31st December 1960 whichever first occurs whereupon all the provisions of this Clause shall apply. EX-10.24 5 EXHIBIT 10.24 - AGGREGATE EXCESS OF LOSS REINSURAN AGGREGATE EXCESS OF LOSS REINSURANCE AGREEMENT BETWEEN ASSOCIATED GENERAL CONTRACTORS SELF INSURERS TRUST FUND (FUND ID #59-2445257) (the Company) AND RELIANCE INSURANCE COMPANY (the Reinsurer) TYPE: Aggregate Excess of Loss Reinsurance REINSURER'S SHARE: One-hundred percent (100%). EFFECTIVE DATE: December 31, 1991. COVERAGE: In consideration of the premium payment from the Company, the Reinsurer agrees to indemnify the Company for Ultimate Net Loss in the Subject Business in excess of the Company's Retention occurring in the Coverage Period, regardless of when reported, for which the Company is or becomes obligated to pay. SUBJECT BUSINESS: Workers' Compensation and Employers' Liability coverages provided by the Company effective during the Coverage Period. COVERAGE PERIOD: January 1, 1985, through December 31, 1991. COMPANY'S The Company's Retention is the Company's liabilities for RETENTION: Ultimate Net Loss, whether or not paid or payable by the Company, less the Aggregate Limit of the reinsurance. The Company's Retention as of December 31, 1991 shall be * . The Company's Retention shall be adjusted annually thereafter to reflect loss development and a new Retention shall be established. Adjustments shall be made in accordance with the Settlement Account to reflect changes in the Company's Retention as it may affect payment made or due in accordance with Remittances. Any adjustment to the Company's Retention will be used in settling losses hereunder in accordance with the provision for Remittances. * As reflected per Shores and Company's final audited financial statements. AGGREGATE LIMIT: Twenty-one million dollars ($21,000,000). REINSURANCE Thirteen million, nine hundred twenty-five thousand dollars PREMIUM: ($13,925,000), including commissions and applicable taxes, payable no later than July 31, 1992. The Company shall pay to the Reinsurer accrued interest at the rate of one percent (1%) per month from Page 1 of 13 December 31, 1991 to the date the Reinsurance Premium is paid. ULTIMATE NET LOSS: The Company's Ultimate Net Loss includes all claims arising from occurrences in the Subject Business during the Coverage Period, and expenses directly related to the adjustment of claims incurred, regardless of when reported, during the coverage period. Such expenses shall include, but not to be limited to, expenses and costs associated with policy coverage disputes, pre-judgment interest, and expenses incurred in connection with subrogation. Ultimate Net Loss shall be adjusted to reflect recoverables, either collected or uncollected, under specific excess insurance, and subrogation recoveries, but shall not be adjusted to include recoverables, either collected or uncollected, under the Special Disability Fund (SDF). Judgments in Excess of Policy Limits and Extra Contractual Obligations are included in determining the Company's Ultimate Net Loss. COMMUTATION: At any time the Company has the option to commute the Reinsurers' liability and relieve the Reinsurer of all further liability. In the event the Company elects to commute this Agreement, the Reinsurer shall pay to the Company the balance in the Experience Account. EXPERIENCE ACCOUNT: An Experience Account shall be established by the Reinsurer and maintained during the term of this Agreement. The Experience Account shall consist of (a) ninety percent (90%) of the Reinsurance Premium received, less (b) actual losses paid by the Reinsurer, plus (c) interest on the average account balance calculated and credited at each December 31 at the rate of ninety percent (90%) of the last published One Year U.S. Treasury Bill Rate (as published in The Wall Street Journal) on the date the Reinsurance Premium is received by the Reinsurer and annually thereafter. REPORTS: The Company shall report monthly to the Reinsurer the Company's account of losses and expenses paid and outstanding, under the Subject Business coverage. Such account statement shall include a Summary Report by policy year on a monthly basis and a detailed report by policy year on a quarterly basis, containing all relevant information as per the attached CRIMS Reports. The Company shall furnish to the Reinsurer within statutory filing time after the close of each calendar year an actuarially-certified projection of the Company's Ultimate Net Loss. This projection must be certified by an Associate of the Casualty Actuarial Society. The Ultimate Net Loss must be based on paid and incurred loss data valued through December 31st of the most recent year. REMITTANCES: The Reinsurers' payments under this Agreement will be made within forty-five (45) days of the receipt of the calendar quarterly account statements once the Company's Retention has been exceeded. Page 2 of 13 ADJUSTMENTS TO Any remittances determined by the projection of Ultimate REMITTANCES: Net Loss made hereunder shall not be final as regards future Company Retention levels. Such remittances shall be reconciled through the Settlement Account. SETTLEMENT ACCOUNT: An account shall be maintained by the Reinsurer for the purpose of reconciling adjustments to the Company's Retention subsequent to reinsurance remittances. Adjustments shall be made as follows: (1) Additional remittance payments plus interest credit shall be made at the next remittance payment period; (2) Over-remittance to date plus interest credit shall offset subsequent reinsurance payments. The interest applied to (1) or (2) above shall be based on the average prime rate plus 200 basis points for that payment period. DISCLOSURES With respect to this Agreement and the transactions AND APPROVALS: hereunder, the Company represents and agrees that it has made or obtained, or will make or obtain, all disclosures and approvals that are, in the opinion of its counsel, necessary and appropriate under applicable law. INSOLVENCY: The Insolvency Clause attached hereto (Exhibit 1) is incorporated herein. EXCLUSIONS: A. Reinsurance Assumed (Exhibit 2) B. Pools, Syndicates and Associations C. Insolvency Funds D. Medical Malpractice Liability E. War F. Member Assessments OTHER: A. Access to Records (Exhibit 3) B. Agreement not assignable C. Arbitration D. Choice of Law: Florida E. Entire Agreement F. Errors and Omissions G. Right of Offset H. Headings Page 3 of 13 IN WITNESS WHEREOF, the parties hereto have caused this Binder of Reinsurance to be executed by their duly authorized representatives in Orlando, Florida this 27th day of JULY, 1992. ASSOCIATED GENERAL CONTRACTORS SELF INSURERS TRUST FUND (FUND ID #59-2445257) BY: /s/ Ronald J. Morrick BY: /s/ Doris M. Oberhardt -------------------------- -------------------------- NAME: Ronald J. Morrick NAME: Doris M. Oberhardt ------------------------ ------------------------ TITLE: Chairman TITLE: Administrator ----------------------- ----------------------- This 27th day of July, 1992. RELIANCE INSURANCE COMPANY ATTEST: /s/ (illegible) BY: /s/ Jeffrey DiTieri ---------------------- -------------------------- NAME: (illegible) NAME: Jeffrey DiTieri ------------------------ ------------------------ TITLE: Asst Gen Counsel TITLE: Vice President ----------------------- ----------------------- Page 4 of 13 EXHIBIT 1 INSOLVENCY In the event of the insolvency of the Company, this reinsurance shall be payable directly to the Company, or to its liquidator, receiver, conservator or statutory successor on the basis of the liability of the Reinsurer to the Company, within the timing and terms of this Agreement, and without diminution because of the insolvency of the Company or without diminution because the liquidator, receiver, conservator or statutory successor of the Company has failed to pay all or a portion of any claim, not withstanding any provisions of this Agreement to the contrary. The liquidator, receiver, conservator or statutory successor of the Company shall give written notice to the Reinsurer of the pendency of a claim against the Company which would involve a possible liability on the part of the Reinsurer, such notice to be given within a reasonable time after such claim is filed in the conservation or liquidation proceeding or in the receivership, and that during the pendency of such claim, the Reinsurer may investigate such claim and interpose, at its own expense, in the proceeding where such claim is to be adjudicated, any defense or defenses that the Reinsurer deems available to the Company, or its liquidator, receiver, conservator or statutory successor. The expense thus incurred by the Reinsurer shall be chargeable, subject to the approval of the court, against the Company as part of the expense of conservation or liquidation to the extent of a pro rata share of the benefit which may accrue to the Company solely as a result of the defense undertaken by the Reinsurer. Where two or more reinsurers are involved in the same claim and a majority in interest elect to interpose defense to such claim, the expense shall be apportioned in accordance with the terms of the reinsurance Agreement as though such expense had been incurred by the Company. The reinsurance shall be payable by the Reinsurer to the Company or to its liquidator, receiver, conservator or statutory successor, (except as provided by applicable Insurance Law or) except (a) where the Agreement specifically provides another payee of such reinsurance in the event of the insolvency of the Company, and (b) where the Reinsurer with the consent of the direct insured or insureds has assumed such policy obligations of the Company as direct obligations of the Reinsurer to the payees under such policies and in substitution for the obligations of the Company to such payees. Page 5 of 13 EXHIBIT 2 EXCLUSIONS A. REINSURANCE ASSUMED BY THE COMPANY This Agreement does not apply to any reinsurance assumed by the Company whether directly or indirectly. B. POOLS, SYNDICATES AND ASSOCIATIONS This Agreement does not apply to any liabilities assumed (whether voluntarily or involuntarily) from any Pool, Association, Syndicate or other facility (other than the liabilities of the Company itself) that maintain their own underwriting facilities. C. INSOLVENCY FUNDS This Agreement does not apply to any liabilities arising by contract, operation of law, or otherwise, from the Company's participation in any Insolvency Fund. "Insolvency Fund" shall mean any guarantee fund, insolvency fund, plan, pool, association or other arrangement however denominated or established that provides for any assessment of or payment or assumption by the Company of all or part of any claim, debt, charge, fee, or other obligation of an insurer, fund or employer, or any of their successors or assigns, that is unable to meet any claim, debt, charge, fee or other obligation in whole or in part due to its insolvency or due to it having been declared insolvent or bankrupt. D. MEDICAL MALPRACTICE LIABILITY This Agreement shall not apply to any liabilities arising out of the rendering or failing to render any medical services by a physician or other providers of medical services, or arising out of any error or omission in the performance thereof by a physician or other providers of medical services. E. WAR This Agreement shall not apply to any claim which is occasioned by war, invasion, hostilities, acts of foreign enemies, civil war, rebellion, insurrection, military or usurped power, or martial law. This shall not apply to riots, strikes, civil commotion, vandalism, or malicious mischief. F. MEMBER ASSESSMENTS This Agreement does not apply to member assessments under Section 38F-5.065 (5) of the Rules for Self-Insurers under the Workers' Compensation Act in the State of Florida. Page 6 of 13 EXHIBIT 3 OTHER A. ACCESS TO RECORDS Reinsurer shall have the right at any reasonable time upon five (5) working days prior notice during or at any time after the expiration of this Agreement, and as frequently as deemed reasonably necessary by Reinsurer, to visit the offices of Company to inspect, examine, audit, and verify any of the policy or claim files ("records") relating to the business reinsured under this Agreement. Reinsurer shall have the right to make, at its own expense, copies or extracts of any records. Notwithstanding the above, Reinsurer shall not have any right of access to the records of Company if it is not current in all payments due to Company and Company shall have no right to reimbursement under this Agreement if it fails or refuses to provide the reasonable access required by this section other than by reason of Reinsurer's failure to pay. Reinsurer shall keep confidential all information and reports derived from the records of Company to which it has received access and shall not publish or communicate that information or report(s) to any other person or reinsurer without Company's express prior written consent. Reinsurer shall promptly upon Company's request deliver a complete copy of any report(s) concerning the records and information to which it has received access. B. AGREEMENT NOT ASSIGNABLE This Agreement shall be binding upon and inure to the benefit of Company and Reinsurer and their respective successors and assigns provided, however, that this Agreement may not be assigned by either Company or Reinsurer without the prior written consent of the other which consent may be withheld by either party in its sole unfettered discretion. Except as expressly provided for in the Clause entitled INSOLVENCY, the provisions of this Agreement are intended solely for the benefit of Company and Reinsurer. Nothing in this Agreement shall in any manner create or be construed to create any obligations to or establish any rights against any party to this Agreement in favor of any other persons not party to this Agreement. C. ARBITRATION As a condition precedent to any cause of action, any and all disputes between Company and Reinsurer arising out of, relating to, or concerning this Agreement, whether sounding in contract or tort and whether arising during or after termination of this Agreement, shall be submitted to the decision of a board of arbitration composed of two arbitrators and an umpire ("Board") meeting at a site in Orange County, Florida. The arbitration shall be conducted under the Federal Arbitration Act and shall proceed as follows: Page 7 of 13 1. SUBMISSION TO ARBITRATION. A notice requesting arbitration, or any other notice made in connection therewith, shall be in writing and shall be sent certified or registered mail, return receipt requested to the affected parties. The notice requesting arbitration shall state in particulars all issues to be resolved in the view of the claimant, shall appoint the arbitrator selected by the claimant and shall set a tentative date for the hearing, which date shall be no sooner than ninety (90) days and no later than one hundred fifty (150) days from the date that the notice requesting arbitration is mailed. Within thirty (30) days of receipt of claimant's notice, the respondent shall notify claimant of any additional issues to be resolved in the arbitration and of the name of its appointed arbitrator. 2. ARBITRATION BOARD MEMBERSHIP. Unless otherwise mutually agreed, the members of the Board shall be impartial and disinterested and shall be active or retired lawyers, familiar with insurance and reinsurance, or active or retired officers of property-casualty insurance companies, reinsurance companies, or Lloyds Underwriters. Company and Reinsurer as aforesaid shall each appoint an arbitrator and the two (2) arbitrators shall choose an umpire before instituting the hearing. As time is of the essence, if the respondent fails to appoint its arbitrator within thirty (30) days after having received claimant's written request for arbitration, the claimant is authorized to and shall appoint the second arbitrator if the two arbitrators fail to agree upon the appointment of an umpire within thirty (30) days after notification of the appointment of the second arbitrator, within ten (10) days thereof, the two (2) arbitrators shall request the American Arbitration Association ("AAA") to appoint an umpire for the arbitration with the qualifications set forth above in this Article. If the AAA fails to name an umpire, either party may apply to the court named below to appoint an umpire with the above required qualifications. The umpire shall promptly notify in writing all parties to the arbitration of his selection and of the scheduled date for the hearing. Upon resignation or death of any member of the Board, a replacement shall be appointed in the same fashion as the resigning or decreased member was appointed. 3. SUBMISSION OF BRIEFS. The claimant and respondent shall each submit initial briefs to the Board outlining the issues in dispute and the basis, authority, and reasons for their respective positions within thirty (30) days of the date of notice of appointment of the umpire. The claimant and the respondent may submit reply briefs to the Board within ten (10) days after filing of the initial briefs(s). Initial and reply briefs may be amended by the submitting party at any time, but not later than ten (10) days prior to the date of commencement of the arbitration hearing. Reasonable responses shall be allowed at the arbitration hearing to new material contained in any amendments filed to the briefs but not previously responded to. 4. ARBITRATION AWARD. The Board shall make a decision and award with regard to the terms of this Agreement, the original intentions of the parties to the extent reasonably ascertainable, and the custom and usage of the property and casualty insurance and reinsurance business which decision and award shall be in writing and shall state the factual and legal basis for the decision and award. The decision and award shall be based upon a hearing in which evidence shall be allowed and which the formal rules of evidence shall not strictly apply but in which cross examination and rebuttal shall be allowed. At its own election or at Page 8 of 13 the request of the Board, either party may submit a post-hearing brief for consideration of the Board within twenty (20) days of the close of the hearing. The Board shall make its decision and award within thirty (30) days following the close of the hearing or the submission of post-hearing briefs, whichever is later, unless the parties consent to an extension. Every decision by the Board shall be by a majority of the members of the Board and each decision and award by the majority of the members of the board shall be final and binding upon all parties to the proceeding. Either party may apply to the Circuit Court in and for Orange County, Florida for an order confirming any decision and the award; a judgment of that Court shall thereupon be entered on any decision or award. If such an order is issued, the attorneys' fees of the party so applying and court costs will be paid by the party against whom confirmation is sought. The Board may award interest at a rate of two hundred (200) basis points above the prime rate as published in The Wall Street Journal on the date of the award of the Board calculated from the date the Board determines that any amounts due the prevailing party should have been paid to the prevailing party should have been paid to the prevailing party but may not award punitive, exemplary, or treble damages. 5. ARBITRATION EXPENSE. Each party shall bear the expense of the one arbitrator appointed by it and shall jointly and equally bear with the other party the expense of any stenographer requested, and of the umpire. The remaining costs of the arbitration proceedings shall be finally allocated by the Board. 6. EVIDENCE. Subject to customary and recognized legal rules of privilege, each party participating in the arbitration shall have the obligation to produce those documents and as witnesses to the arbitration those of its employees, those of its affiliates, and those of any intermediary or underwriting manager as any other participating party reasonably requests providing always that the same witnesses and documents be obtainable and relevant to the issues before the arbitration and not be unduly burdensome or excessive. The parties may mutually agree as to pre-hearing discovery prior to the arbitration hearing and in the absence of agreement, upon the request of any party, pre-hearing discovery may be conducted as the umpire shall determine in his/her sole discretion to be in the interest of fairness, full disclosure, and a prompt hearing, decision and award by the Board. The umpire shall be the final judge of the procedures of the Board, the conduct of the arbitration, of the rules of evidence, the rules of privilege and production and of excessiveness and relevancy of any witnesses and documents upon the petition of any participating party. To the extent permitted by law, the Board and the umpire shall have the authority to issue subpoenas and other orders to enforce their decisions. 7. EQUITABLE RELIEF. Nothing herein shall be construed to prevent any participating party from applying to the Circuit Court in and for Orange County, Florida to issue a restraining order or other equitable relief to maintain the "status quo" of the parties participating in the arbitration pending the decision and award by the Board or to prevent any party from incurring irreparable harm or damage at any time prior to the decision and award of the Board. The Board shall also have the authority to issue interim decisions or awards in the interest of fairness, full disclosure, and a prompt and orderly hearing and decision and award by the Board. Page 9 of 13 D. CHOICE OF LAW This Agreement shall be construed according to the laws of the State of Florida with venue in Orange County, Florida. E. ENTIRE AGREEMENT This Agreement supersedes and merges with any and all previous agreements, whether written or oral, between Company and Reinsurer, or their predecessors with respect to this reinsurance of Company by Reinsurer effective December 31, 1991 and constitutes the full and complete Agreement between the parties with respect to that reinsurance. No amendment to this Agreement shall be valid unless in writing and signed by both parties. F. ERRORS OR OMISSIONS Any inadvertent act, neglect, delay, omission, or error by either party to this Agreement, including its representatives, will not be held to relieve either party to this Agreement from any liability that would attach to it under this Agreement if that act, neglect, delay, omission, or error had not been made, providing that act, neglect, delay, omission, or error is sought to be rectified immediately upon discovery. G. RIGHT OF OFFSET All amounts due either Company or Reinsurer, whether by reason of premium, commission, loss, ultimate net loss or allocated loss expense, or otherwise, under this Agreement or any other Agreement later in force between Reinsurer and Company, whether as ceding company, reinsurer or otherwise, shall be subject to the right of recoupment and offset and upon the exercise of the same, only the net balance shall be due. All claims for amounts of premium, commission, loss, ultimate net loss or allocated loss expense, whether or not fixed in amount at the time of the insolvency of any party to this Agreement, arising from coverage placed in effect under this Agreement prior to the insolvency of any party to this Agreement shall be deemed pre-liquidation debts and subject to this Article. In the event of insolvency of Company, offset shall be in accord with applicable law. H. HEADINGS The headings preceding the text of the Clauses and paragraphs of this Agreement are intended and inserted solely for the convenience of references and shall not affect the meaning, interpretation, construction or effect of this Agreement. Page 10 of 13
CRIMS 1 UNDERWRITING REPORT FUND: 880 ASSOCIATED GENERAL CONTRACTORS SELF INSURERS FUND FUND YEAR: 1989 - ---------------------------------------------------------------------------------------------------------------------------------- OUT- IN- IN- STAND- JURY JURY CODES LOST DATE COMPEN- TOTAL TOTAL ING EMPLR DIV CASE CLAIMANT SOC SEC DATE O/C NAT PRT CAU TIME RECEIVED SATION MEDICAL OTHER PAID INCURRED RES - ---------------------------------------------------------------------------------------------------------------------------------- 419 507202 BULMER, MICHAEL ###-##-#### 9/28/89 C 81 32 11 N 10/04/89 .00 .00 .00 .00 .00 .00 - ---------------------------------------------------------------------------------------------------------------------------------- 1444 507767 STADFELD ###-##-#### 10/18/89 C 81 32 11 N 11/20/89 .00 165.09 .00 165.09 165.09 .00 - ----------------------------------------------------------------------------------------------------------------------------------
1 Report information to be reconciled by Agreement. Page 11 of 13
CRIMS 1 REFUND REPORT FUND: 880 ASSOCIATED GENERAL CONTRACTORS SELF INSURERS FUND FUND YEAR: 1989 - ---------------------------------------------------------------------------------------------------------------------------------- ACCEPTED CLAIMS ----------------------------------- REIM- UNFILED UNFILED DATE BURSEMENTS FROM EST. EST. ACCIDENT TOTAL NOTIFIED/ REFUND STATUS REIM- REIM- AMOUNT AMOUNT EMPLR DIV CASE NAME DATE INCURRED ACCEPTED CODE SDF ATTORNEY BURSEMENT BURSEMENT UNCOLLECTED COLLECTED - ---------------------------------------------------------------------------------------------------------------------------------- 630 507602 BRYANT, JOHNNY 10/30/89 127,000.00 0/00/00 09 SPECIAL DISA- 50,800.00 .00 BILITY FUND MERGER - ---------------------------------------------------------------------------------------------------------------------------------- 106 506453 CARROLL, ROGER 7/27/89 94,677.37 2/22/91 05 SPECIAL DISA- 75,000.00 BILITY FUND AFFIDAVIT/ MERGER - ----------------------------------------------------------------------------------------------------------------------------------
1 Report information to be reconciled by Agreement Page 12 of 13 1 SPECIFIC EXCESS CLAIMS AGC 1/1/89 - 1/1/90 AS OF DEC 31, 1991
Individual Excess Over Claimant Paid Reserve Total Retention Retention J. DANIELS 379,840.92 1,150,159.08 1,530,000.00 500,000.00 1,030,000.00 505474 D/A 5/3/89 R. HOFFMAN 356,819.76 227,180.24 584,000.00 500,000.00 84,000.00 508187 D/A 10/16/89 ---------- ------------ ------------ ---------- ------------ 379,840.92 1,150,159.08 1,530,000.00 500,000.00 SPECIFIC EXCESS OVER RETENTION 1,114,000.00
1 Report information to be reconciled by Agreement Page 13 of 13 EX-10.25 6 EXHIBIT 10.25 - WORKERS' COMP. & EMP. LIAB. POLICY [LOGO] RELIANCE A RELIANCE GROUP HOLDINGS COMPANY SPECIFIC EXCESS WORKERS' COMPENSATION AND EMPLOYERS' LIABILITY POLICY PLANET INSURANCE COMPANY A Stock Insurance Company, herein called the Company, agrees with the Insured, named in the Declarations made a part hereof, in consideration of the payment of the premium and in reliance upon the statements in the Declarations and subject to the limit of liability, exclusions, conditions and other terms of this policy: - -------------------------------------------------------------------------------- INSURING AGREEMENTS - -------------------------------------------------------------------------------- I. APPLICATION OF This policy applies to loss sustained by the Insured on POLICY. account of: (A) compensation and other benefits required of the Insured by the workers' compensation law; and (B) sums which the Insured shall become legally obligated to pay as damages because of bodily injury by accident or disease, including death at any time resulting therefrom, sustained in the United States of America, its territories or possessions, or Canada by any employee of the Insured arising out of and in the course of his employment by the Insured either in operations in a state designated in Item 5 of the Declarations or in operations necessary or incidental thereto, as a result of injury(1) by accident occurring during the policy period, or (2) by disease caused or aggravated by exposure of which the last day of the last exposure, in the employment of the Insured, to conditions causing the disease occurs during the policy period. II. RETENTION AND The Insured shall retain as its own retention in the amount INDEMNITY. stated in Item 6 of the Declarations and the Company hereby agrees to indemnify the Insured against loss in excess of such retention, subject to the limit of indemnity stated in Item 7 of the Declarations; provided, that the retention and limit of indemnity apply as respects: (A) bodily injury by accident, including death resulting therefrom, sustained by one or more employees in each accident; or (B) bodily injury by disease, including death resulting therefrom, sustained by each employee. The inclusion herein of more than one Insured shall not operate to increase the retention or the limit of indemnity. III. CLAIM As respects each such accident and each such disease for EXPENSES. which indemnity against loss is afforded by this policy, the Company will indemnify the Insured against that proportion of claim expenses (other than appeal claim expenses handled as hereinafter provided) paid by the Insured that the amount of the loss ultimately borne by the Company bears to the total amount of the loss. As respects claim expenses connected with appeal taken by the Insured from an award, verdict or judgment which is in excess of the Insured's retention hereunder, if the Company consents to such appeal the Company shall indemnify the Insured against that proportion of the claim expenses paid by the Insured in connection with such appeal that the amount of such award, verdict or judgment in excess of the Insured's retention bears to the total amount of such award, verdict or judgment. Claim expenses are payable by the Company in addition to the limit of indemnity of this policy. IV. DEFINITIONS. (A) WORKERS' COMPENSATION LAW. The unqualified term "workers' compensation law" means the workers' compensation law and any occupational disease law of a state designated in Item 5 of the Declarations, while the Insured is a duly qualified self-insurer under such law, but does not include those provisions of any such law which provide non-occupational disability benefits. (B) STATE. The word "state" means any state or territory of the United States of America and the District of Columbia. (C) BODILY INJURY BY ACCIDENT. An event or circumstance, other than bodily injury by disease, which is unexpected and unintended from the standpoint of the Insured and results in injury or impairment to bodily or mental function. The contraction of disease is not an accident within the meaning of the word "accident" in the term "bodily injury by accident" and only such disease as results directly from a bodily injury by accident is included within the term "bodily injury by accident". (D) BODILY INJURY BY DISEASE. An illness or sickness, other than bodily injury by accident, resulting in injury or impairment to the bodily or mental functions. The term "bodily injury by disease" includes only such disease as is not included within the term "bodily injury by accident". (E) ASSAULT AND BATTERY. Under Section I B. of the of Insuring Agreements, assault and battery shall be deemed an accident unless committed by or at the direction of the Insured. (F) DAMAGES BECAUSE OF BODILY INJURY BY ACCIDENT OR DISEASE, INCLUDING DEATH AT ANY TIME RESULTING THEREFROM. The words "damages because of bodily injury by accident or disease, including death at any time resulting therefrom", in Section I B. of Insuring Agreements, includes damages for care and loss of services and damages for which the Insured is liable by reason of suits or claims brought against the Insured by others to recover the damages obtained from such others because of such bodily injury sustained by employees of the Insured arising out of and in the course of their employment. (G) LOSS. The word "loss" shall mean only such amounts as are actually paid in cash by the Insured in payment of benefits under the workers' compensation law, in settlement of claims or in satisfaction of awards of judgments; but the word "loss" shall not include claim expenses, salaries paid to employees of the Insured, nor annual retainers. (H) CLAIMS EXPENSES. The term "claims expenses" shall mean court costs, interest upon awards and judgments, and allocated investigation, adjustment and legal expenses; but the term "claim expenses" shall not include salaries paid to employees of the Insured nor annual retainers. (I) REMUNERATION. When used as a premium basis, "remuneration" means the entire remuneration, computed in accordance with the excess manuals and rating plans in use by the Company, earned during the policy period by (a) all executive officers and other employees of the Insured engaged in operations covered by this policy, and (b) any other person performing work which may render the Insured liable for injury to or death of such person in accordance with the workers' compensation law. "Remuneration" shall not include the remuneration of any person within division (b) foregoing if the Insured maintains evidence satisfactory to the Company that the payment of compensation and other benefits under such law to such person is secured by other valid and collectible insurance or by any other undertaking approved by the governmental agency having jurisdiction thereof. - -------------------------------------------------------------------------------- EXCLUSIONS - -------------------------------------------------------------------------------- This policy does not apply: I. to loss arising out of operations (A) as respects to which the Insured carries a full coverage workers' compensation or employers' liability policy, or (B) as respect to which any workers' compensation law has been rejected; II. unless required by law or described in the Declarations, to domestic employment or to farm or agricultural employment; III. to any payments required on the Insured under the workers' compensation law, in excess of the benefits regularly provided by such law, solely because of injury to (A) any employee by reason of the serious and willful misconduct of the Insured; or (B) any employee employed by the Insured in violation of law with the knowledge or acquiescence of the Insured or any executive officer thereof; IV. under Subsection I B. of the Insuring Agreements, to liability assumed by the Insured under any contract or agreement; V. under Subsection I B. of the Insuring Agreements, (A) to punitive or exemplary damages on account of bodily injury to or death of any employee in violation of law, or (B) with respect to any employee employed in violation of law with the knowledge or acquiescense of the Insured or any executive officer thereof; VI. under Subsection I B. of the Insuring Agreements, to bodily injury by disease unless prior to thirty-six months after the end of the policy period written claim is made or suit is brought against the Insured for damages because of such injury or death resulting therefrom; VII. under Subsection I B. of the Insuring Agreements, to any obligation for which the Insured or any carrier as his insurer may be held liable under any workers' compensation or occupational disease law of a state designated in Item 5 of the Declarations, any other workers' compensation or occupational disease law, any unemployment compensation or disability benefits law, or under any similar law. - -------------------------------------------------------------------------------- CONDITIONS - -------------------------------------------------------------------------------- I. QUALIFIED The Insured, by the acceptance of this policy, warrants that SELF-INSURER. it has qualified as a self-insurer as provided in the workers' compensation law and will continue to maintain such qualification during the period of this policy. In the event the Insurer should at any time while this policy is in force terminate its qualifications as a self-insurer or if such qualification should be cancelled or revoked, this policy, to the extent of such termination, cancellation or revocation, shall automatically terminate at the same time. II. PREMIUM. (A) The premium bases and rates for the classifications of operations described in the Declarations are as stated therein and for classifications not so described are those applicable in accordance with the excess manuals and rating plans in use by the Company. The policy is issued by the Company and accepted by the Insured with the agreement that if any change in classifications, rates or rating plans is or becomes applicable to this policy under any law regulating this insurance or because of any amendments affecting the benefits provided by the workers' compensation law, such change with the effective date thereof shall be stated in an endorsement issued to form a part of this policy. (B) If the Declarations provide for adjustment of premium on other than an annual basis, the Insured shall pay the deposit premium to the Company upon the inception of this policy and thereafter in interim premiums shall be computed in accordance with the excess manuals and rating plans in use by the Company and paid by the Insured promptly after the end of each interval specified in the Declarations. The deposit premium shall be retained by the Company until termination of this policy and credited to the final premium adjustment. (C) The Insured shall maintain records of the information necessary for premium computation on the bases stated in the Declarations, and shall send copies of such records to the Company at the end of the policy period and at such times during the policy period as the Company may direct. If the Insured does not furnish records of the remuneration of persons within divisions (b) of the definition of remuneration foregoing, the remuneration of such persons shall be computed in accordance with the excess manuals and rating plans in use by the Company. (D) The premium stated in the Declarations is an estimated premium only. Upon termination of this policy, the earned premium shall be computed in accordance with the rules, rates, premiums and minimum premium applicable to this insurance in accordance with the excess manuals and rating plans in use by the Company. If the earned premium exceeds the premium previously paid, the Insured shall pay the excess to the Company; if less, the Company shall return to the Insured the unearned portion paid by the Insured. All premiums shall be fully earned whether any workers' compensation law, or any part thereof, is or shall be declared invalid or unconstitutional. III. LONG-TERM If this policy is written for a period longer than one year, POLICY. all the provisions of this policy shall apply separately to each consecutive twelve-month period, or, if the first or last consecutive period is less than twelve months, to such period of less than twelve months, in the same manner as if a separate policy had been written for each consecutive period. The earned premium for each such period shall be computed as provided by Section II under Conditions, subject, except as otherwise provided in the excess manuals and rating plans in use by the Company with respect to classifications of of operations for which this policy provides a per capita premium basis, to the following provisions: (A) The premium rates for the first consecutive period shall be those stated in the Declarations and those applicable for such period in accordance with the excess manuals and rating plans in use by the Company; (B) The premium bases, classification of operations, rates, rating plans, premiums and minimum premiums for each such subsequent period shall be those applicable for such period in accordance with the excess manuals and rating plans in use by the Company. IV. PARTNERSHIP If the Insured is a partnership or joint venture, such OR JOINT insurance as is afforded by this policy applies to each VENTURE partner or member thereof as an Insured only while he AS INSURED. is acting within the scope of his duties as such partner or member. V. INSPECTION The Company and any rating authority having jurisdiction by AND AUDIT. law shall each be permitted to inspect the workplaces, machinery and equipment covered by this policy and to examine and audit the Insured's books, vouchers, contracts, documents and records of any and every kind at any reasonable time during the policy period and any extension thereof and within three years after termination of this policy, as far as they relate to the premium bases or the subject matter of this insurance. VI. NOTICE OF When an injury occurs that appears reasonably likely to INJURY. involve liability on the part of the Company, written notice shall be given by or on behalf of the Insured to the Company or any of its authorized agent as soon as practicable, except that immediate notice shall be given to the Company where an injury of the following type occurs: (A) any claim, award or judgment or the reopening of any claim which exceeds 50% of the retention specified in Item 6 of the policy applicable to the occurrence which gives rise to such claim, award or judgment, and any action, suit or proceeding which might result in such an award or judgment; (B) any case involving: (1) death; (2) disability for a period of nine months or more; (3) spinal cord injury; (4) amputation of a major extremity; (5) a permanent, total disability as defined in the workers' compensation law of the applicable state named in Item 5 of the Declarations; (C) any occurrence which causes serious injury to two or more employees; Such notice shall contain particulars sufficient to identify the Insured and also the fullest information obtainable at the time. The Insured shall give like notice, with full particulars, of any claim made on account of such injury. If thereafter suit or other proceeding is instituted against the insured to enforce such claim, the Insured shall, when requested by the Company, forward to the Company every demand, notice, summons, or other process or true copies thereof, received by the insured or the Insured's representative together with copies of reports of investigations made by the Insured with respect to such claim, suit or proceeding. The Insured shall not make any voluntary settlement involving loss to the Company hereunder except with the written consent of the Company. The Company, at its own election and expense, shall have the right to participate with the Insured in the settlement, defense or appeal of any claim, suit or proceeding which might involve liability of the Company. VII. COOPERATION The Company shall not be called upon to assume charge of the OF THE settlement of defense of any claim made or suit or proceeding INSURED. instituted against the Insured, but shall have the right and shall be given the opportunity to associate with the Insured in the defense and control of any claim, suit or proceeding where the claim or suit involves, or appears reasonably likely to involve the Company, in which event the Insured and the Company shall cooperate in all things in the defense of such claim, suit or proceeding. VIII. LOSS The Company shall pay any loss for which it may be liable PAYABLE. under this policy in the following manner: (A) if a loss is payable under the workers' compensation law of the applicable state, payment therefor shall first be made by the Insured in accordance with the provisions of the law, and the Company shall reimburse the Insured for such loss periodically, at intervals of not less than one month, upon receipt from the Insured of proper proofs of payment. No voluntary commutation of compensation awards to a lump sum basis shall be made by the Insured without the consent of the Company. (B) if a loss is not payable under the workers' compensation law of the applicable state, and damages are recovered against the Insured, payment therefor shall be made by the Company within thirty (30) days after proper proof of payment by the Insured shall have been received by the Company. IX. ACTION No action shall lie against the Company unless, as a condition AGAINST precendent thereto, the Insured shall have fully complied with COMPANY all the terms of this policy, nor until the amount of the INSURING Insured's obligation to pay shall have been finally determined AGREEMENTS either by judgment against the Insured after actual trial or SECTION I B. by written agreement of the Insured, the claimant and the Company. Any person or organization or the legal representative thereof who has secured such judgment or written agreement shall thereafter be entitled to recover under this policy to the extent of the insurance afforded by this policy. Nothing contained in this policy shall give any person or organization any right to join the Company as a co-defendant in any action against the Insured to determine the Insured's liability. Bankruptcy or insolvency of the Insured or of the Insured's estate shall not relieve the Company of any of its obligations under Insuring Agreements Section I B. X. OTHER If the Insured carries other valid and collectible insurance INSURANCE. covering a loss also covered by this policy (other than insurance that is purchased to apply in excess of the sum of the retention and the limit of liability hereunder of policies of coinsurance within the limits of this policy), the insurance afforded by this contract shall apply in excess of and shall not contribute with such other insurance or reinsurance. XI. SUBROGATION. In the event of any payment under this policy, the Company shall be subrogated of all rights of recovery therefor of the Insured and any person entitled to the benefits of this policy against any person or organization, and the Insured shall execute and deliver instruments and papers and do whatever else is necessary to secure such rights. The Insured shall do nothing after a loss to prejudice such rights. XII. CHANGES. Notice to any agent or knowledge possessed by any agent or by any other person shall not effect a waiver or a change in any part of this policy or estop the Company from asserting any right under the terms of this policy; nor shall the terms of this policy be waived or changed, except by endorsement issued to form a part of this policy, signed by a duly authorized representative of the Company. XIII. ASSIGNMENT. Assignment of interest under this policy shall not bind the Company until its consent is endorsed hereon. XIV. CANCELLATION. This policy may be cancelled by the Insured by mailing to the Company written notice stating when thereafter the cancellation shall be effective. The policy may be cancelled by the Company by mailing to the Insured at the address shown in this policy written notice stating when not less than ten days thereafter such cancellation shall be effective. The mailing of notice as aforesaid shall be sufficient proof of notice. The effective date of cancellation stated in the notice shall become the end of the policy period. Delivery of such written notice either by the Insured or by the Company shall be equivalent to mailing. If the Insured cancels, unless the excess manuals and rating plans in use by the Company otherwise provide, earned premium shall be (A) computed in accordance with the customary short rate table and procedure; and (B) not less than the minimum premium stated in the Declarations. If the Company cancels, earned premium shall be computed pro rata. Premium adjustment may be made at the time cancellation is effected and, if not then made, shall be made as soon as practicable after cancellation becomes effective. The Company's check or the check of its representative mailed or delivered as aforesaid shall be sufficient tender of any refund or premium due to the Insured. When excess insurance under the workers' compensation law may not be cancelled except in accordance with such law, this condition so far as it applies to the insurance under this policy with respect to such law, is amended to conform to such law. XV. CONFORMITY TO Terms of this policy which are in conflict with the STATUTE. provisions of the workers' compensation law are hereby amended to conform to such law. XVI. WARRANTY. By acceptance of this policy, the Insured warrants that the statements in the Declarations are the Insured's agreements and representations, that this policy is issued in reliance upon the truth of such representations and that this policy embodies all agreements existing between himself and the Company or any of its agent relating to this insurance. SPECIFIC EXCESS WORKERS COMPENSATION AND EMPLOYERS' LIABILITY POLICY NXC 0105918 PLANET INSURANCE COMPANY - --------------- Home 0ffice-Sun Prairie, Renewal of NEW RELIANCE [LOGO] Wisconsin Administrative 0ffices- Philadelphia, Pennsylvania Agency Code, Name and Address DECLARATIONS 80-971 ITEM 1. NAME INSURED AND P. 0. ADDRESS BRENTWOOD SERVICES, INC. (No., Street, Town, County, State) 213-A WARD CIRCLE ASSOCIATED GENERAL CONSTRUCTORS OF BRENTWOOD, TN FLORIDA SELF INSURANCE FUND P.O. BOX 678148 ORLANDO, FL. 32867 ITEM 2. POLICY PERIOD: From 1/1/93 To 1/1/94 12:01 a.m., standard time at the address of the insured as stated herein. ITEM 3. The Named Insured is: / / Individual / / Partnership / / Corporation /X/ Other ITEM 4. Locations--All usual workplaces of the insured at or from which operations covered by this policy are conducted are located at the above address unless otherwise stated herein: ALL LOCATIONS ------------------------------------------------------------------------ ITEM 5. Subsection I (A) under Insuring Agreements applies to the workers' compensation law and any occupational disease law of each of the following states: FLORIDA ------------------------------------------------------------------------ ITEM 6. Retention $750,000 ITEM 7. Limit of Indemnity $ SEE END'T. #1 -------- ---------------- ITEM 8. - -------------------------------------------------------------------------------- ESTIMATED RATES PER ESTIMATED CODE TOTAL ANNUAL $100 OF ANNUAL CLASSIFICATION OF OPERATIONS NUMBER REMUNERATION REMUNERATION PREMIUMS - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- AS ON FILE WITH THE COMPANY - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Minimum Premium $943,800 TOTAL ESTIMATED -------- ANNUAL PREMIUM $ ---------- Deposit Premium $1,048,668 - SEE END'T. #2 -------------------------- RATE - .3703 PER $100 OF PAYROLL If indicated below, interim adjustments of premium shall be made: / / Semi-Annually / / Quarterly / / Monthly ITEM 9. The insured is not conducting other operations at or from the locations described herein or any operation at or from any other location in a state designated in Item 5; exception, if any NOT APPLICABLE ----------------------------------------------------------------------- Countersigned by /s/ R. Villafane -------------------------------------------------------------- Authorized Representative In Witness Whereof, the Company issuing this policy has cause this policy to be signed by its authorized officers, but this policy shall not be valid unless signed by a duly authorized representative of the Company. PLANET INSURANCE COMPANY /s/ Linda C. Hohn /s/ Robert M. Stanley Secretary President Company Numbers If this endorsement is issued concurrently with the policy, the Attaching Clause Endt. No. 1 need to be completed 1=RELIANCE INSURANCE ----------------------------------------------------------------------------------------------- COMPANY Issued by Co. No. Insured ASSOCIATED GENERAL CONSTRUCTORS OF FLORIDA SELF Policy No. 2 INSURANCE FUND NXC 0105918 2=PLANET INSURANCE ----------------------------------------------------------------------------------------------- COMPANY Effective Date Policy Period Addt'l Premium Return Premium Premium subject 1/1/93 1/1/93 TO 1/1/94 / / to audit 3=UNITED PACIFIC ----------------------------------------------------------------------------------------------- INSURANCE COMPANY Unearned Premium Factor All terms and conditions of the policy remain Countersigned unchanged except as amended by this endorsement. 4=RELIANCE INSURANCE ----------------------------------------------------------------------------------------------- CO. OF ILLINOIS Item 7, Limit of Liability, of the Declarations (Form # 32-003 ed. 1/92) is completed as follows: 1. Coverage A - Workers' Compensation - Statutory. 2. Coverage B - Employers' Liability - $2,000,000. - -------------------------------------------------------------------------------------------- / / THE PREMIUM FOR THIS ENDORSEMENT IF ON INSTALLMENTS IS PAYABLE AS FOLLOWS: - -------------------------------------------------------------------------------------------- ADDITIONAL RETURN REVISED ANNIVERSARY PREMIUM - -------------------------------------------------------------------------------------------- AT DATE OF ENDORSEMENT $ $ (NOT APPLICABLE) - -------------------------------------------------------------------------------------------- FIRST ANNIVERSARY $ $ $ - -------------------------------------------------------------------------------------------- SECOND ANNIVERSARY $ $ $ - -------------------------------------------------------------------------------------------- GEN-47c Ed. 03/87
Company Numbers If this endorsement is issued concurrently with the policy, the Attaching Clause Endt. No. 2 need to be completed 1=RELIANCE INSURANCE ----------------------------------------------------------------------------------------------- COMPANY Issued by Co. No. Insured ASSOCIATED GENERAL CONSTRUCTORS OF FLORIDA SELF Policy No. 2 INSURANCE FUND NXC 0105918 2=PLANET INSURANCE ----------------------------------------------------------------------------------------------- COMPANY Effective Date Policy Period Addt'l Premium Return Premium Premium subject 1/1/93 1/1/93 TO 1/1/94 / / to audit 3=UNITED PACIFIC ----------------------------------------------------------------------------------------------- INSURANCE COMPANY Unearned Premium Factor All terms and conditions of the policy remain Countersigned unchanged except as amended by this endorsement. 4=RELIANCE INSURANCE ----------------------------------------------------------------------------------------------- CO. OF ILLINOIS INSTALLMENT SCHEDULE In consideration of the premium charged, it is agreed that the deposit premium is payable as follows: Due AMOUNT --- ------ 1/1/93 $262,167 3/1/93 $262,167 7/1/93 $262,167 10/1/93 $262,167 - -------------------------------------------------------------------------------------------- / / THE PREMIUM FOR THIS ENDORSEMENT IF ON INSTALLMENTS IS PAYABLE AS FOLLOWS: - -------------------------------------------------------------------------------------------- ADDITIONAL RETURN REVISED ANNIVERSARY PREMIUM - -------------------------------------------------------------------------------------------- AT DATE OF ENDORSEMENT $ $ (NOT APPLICABLE) - -------------------------------------------------------------------------------------------- FIRST ANNIVERSARY $ $ $ - -------------------------------------------------------------------------------------------- SECOND ANNIVERSARY $ $ $ - -------------------------------------------------------------------------------------------- GEN-47c Ed. 03/87
Company Numbers If this endorsement is issued concurrently with the policy, the Attaching Clause Endt. No. 3 need to be completed 1=RELIANCE INSURANCE ----------------------------------------------------------------------------------------------- COMPANY Issued by Co. No. Insured ASSOCIATED GENERAL CONSTRUCTORS OF FLORIDA SELF Policy No. 2 INSURANCE FUND NXC 0105918 2=PLANET INSURANCE ----------------------------------------------------------------------------------------------- COMPANY Effective Date Policy Period Addt'l Premium Return Premium Premium subject 1/1/93 1/1/93 TO 1/1/94 / / to audit 3=UNITED PACIFIC ----------------------------------------------------------------------------------------------- INSURANCE COMPANY Unearned Premium Factor All terms and conditions of the policy remain Countersigned unchanged except as amended by this endorsement. 4=RELIANCE INSURANCE ----------------------------------------------------------------------------------------------- CO. OF ILLINOIS AVIATION WORKER'S COMPENSATION ENDORSEMENT IN CONSIDERATION OF THE PREMIUM CHARGED IT IS AGREED THAT COVERAGE FOR INDUSTRIAL AID AIRCRAFT IS LIMITED TO THE AIRCRAFT LISTED BELOW:: YEAR AND MAKE HANGARED ------------- -------- (1) 1970 GULFSTREAM MARIANNA, FL. (2) 1978 CESSNA 210 VAN AIR NEWLY ACQUIRED AIRCRAFT WILL BE COVERED FOR A THIRTY DAY PERIOD DURING WHICH THE AIRCRAFT MUST BE REPORTED TO THE COMPANY. ALL COVERAGE WILL CEASE AUTOMATICALLY AT THE END OF THIRTY DAYS FROM THE DATE THE MEMBER OF THE ASSOCIATED GENERAL CONTRACTORS SELF INSURANCE FUND ACQUIRED THE AIRCRAFT. - -------------------------------------------------------------------------------------------- / / THE PREMIUM FOR THIS ENDORSEMENT IF ON INSTALLMENTS IS PAYABLE AS FOLLOWS: - -------------------------------------------------------------------------------------------- ADDITIONAL RETURN REVISED ANNIVERSARY PREMIUM - -------------------------------------------------------------------------------------------- AT DATE OF ENDORSEMENT $ $ (NOT APPLICABLE) - -------------------------------------------------------------------------------------------- FIRST ANNIVERSARY $ $ $ - -------------------------------------------------------------------------------------------- SECOND ANNIVERSARY $ $ $ - -------------------------------------------------------------------------------------------- GEN-47c Ed. 03/87
Company Numbers If this endorsement is issued concurrently with the policy, the Attaching Clause Endt. No. 4 need to be completed 1=RELIANCE INSURANCE ----------------------------------------------------------------------------------------------- COMPANY Issued by Co. No. Insured ASSOCIATED GENERAL CONSTRUCTORS OF FLORIDA SELF Policy No. 2 INSURANCE FUND NXC 0105918 2=PLANET INSURANCE ----------------------------------------------------------------------------------------------- COMPANY Effective Date Policy Period Addt'l Premium Return Premium Premium subject 1/1/93 1/1/93 TO 1/1/94 / / to audit 3=UNITED PACIFIC ----------------------------------------------------------------------------------------------- INSURANCE COMPANY Unearned Premium Factor All terms and conditions of the policy remain Countersigned unchanged except as amended by this endorsement. 4=RELIANCE INSURANCE ----------------------------------------------------------------------------------------------- CO. OF ILLINOIS ALL STATES ENDORSEMENT It is agreed that: A. In the event the Insured undertakes operations in any state not designated in item 5 of the Declarations, other than North Dakota, or Wyoming, the Company agrees as follows: 1. To indemnify the Insured excess of the Insured's Retention for all compensation and other benefits under the Workers' Compensation law of such State. 2. Such insurance as afforded by the policy under coverage I.(B) also applies to Bodily Injury by Accident or Disease, including Death at any time resulting therefrom, sustained by any employee of the Insured arising out of and in the course of his employment in operations in such State or in operations incidental thereto. The limit of liability for Bodily Injury by Disease including Death resulting therefrom, applies as though each State in which such operations are conducted were designated in Item 5 of the Declarations. 3. Such insurance as is afforded by the policy by virtue of this endorsement does not apply to such operations if the Insured has, under any Workers' Compensation or Occupational Disease law, other insurance or is a qualified self insurer or has rejected the Workers' Compensation or Occupational Disease law applicable to such operations. B. The agreements in paragraph A forgoing are subject to the following Conditions: 1. The Insured shall give notice to the Company before or as soon as practicable after the commencement of such operations but failure to give such notice shall not invalidate the insurance afforded by this endorsement. - -------------------------------------------------------------------------------------------- / / THE PREMIUM FOR THIS ENDORSEMENT IF ON INSTALLMENTS IS PAYABLE AS FOLLOWS: - -------------------------------------------------------------------------------------------- ADDITIONAL RETURN REVISED ANNIVERSARY PREMIUM - -------------------------------------------------------------------------------------------- AT DATE OF ENDORSEMENT $ $ (NOT APPLICABLE) - -------------------------------------------------------------------------------------------- FIRST ANNIVERSARY $ $ $ - -------------------------------------------------------------------------------------------- SECOND ANNIVERSARY $ $ $ - -------------------------------------------------------------------------------------------- GEN-47c Ed. 03/87
Company Numbers If this endorsement is issued concurrently with the policy, the Attaching Clause Endt. No. 4 need to be completed CONT'D 1=RELIANCE INSURANCE ----------------------------------------------------------------------------------------------- COMPANY Issued by Co. No. Insured ASSOCIATED GENERAL CONSTRUCTORS OF FLORIDA SELF Policy No. 2 INSURANCE FUND NXC 0105918 2=PLANET INSURANCE ----------------------------------------------------------------------------------------------- COMPANY Effective Date Policy Period Addt'l Premium Return Premium Premium subject 1/1/93 1/1/93 TO 1/1/94 / / to audit 3=UNITED PACIFIC ----------------------------------------------------------------------------------------------- INSURANCE COMPANY Unearned Premium Factor All terms and conditions of the policy remain Countersigned unchanged except as amended by this endorsement. 4=RELIANCE INSURANCE ----------------------------------------------------------------------------------------------- CO. OF ILLINOIS Page - 2 - 2. The Insured shall take whatever action is necessary to bring themselves into compliance with the Workers' Compensation or Occupational Disease laws of such State with respects to such operations. If the Insured becomes a qualified self insurer in the State, the Company shall thereupon endorse this policy to include the State under item 5 at a retention to be mutually agreed to. 3. The premium bases and rates for the classifications of operations in such State or operations necessary or incidental thereto shall be those which would have been applicable under the excess manuals in use by the Company had coverage A of the policy applied to such operations and the premium for the insurance afforded by this endorsement with respect to such operations shall be computed accordingly and in accordance to the provisions of Condition II of the policy. 4. The word "State" as used in this endorsement means any State of the United States of America and the District of Columbia. C. Such insurance as is afforded by the policy by virtue of this endorsement shall not apply to: 1. To Injury or Death of the master or a member of the crew of vessel;or, 2. Any fines or penalties levied against the Insured for not being a qualified self insurer in the State and/or for failure to comply with the requirements of any Workers' Compensation law. D. The insurance afforded the policy by virtue of this endorsement shall not constitute Workers' Compensation insurance as required of an employer under the laws of any State. - -------------------------------------------------------------------------------------------- / / THE PREMIUM FOR THIS ENDORSEMENT IF ON INSTALLMENTS IS PAYABLE AS FOLLOWS: - -------------------------------------------------------------------------------------------- ADDITIONAL RETURN REVISED ANNIVERSARY PREMIUM - -------------------------------------------------------------------------------------------- AT DATE OF ENDORSEMENT $ $ (NOT APPLICABLE) - -------------------------------------------------------------------------------------------- FIRST ANNIVERSARY $ $ $ - -------------------------------------------------------------------------------------------- SECOND ANNIVERSARY $ $ $ - -------------------------------------------------------------------------------------------- GEN-47c Ed. 03/87
Company Numbers If this endorsement is issued concurrently with the policy, the Attaching Clause Endt. No. 5 need to be completed 1=RELIANCE INSURANCE ----------------------------------------------------------------------------------------------- COMPANY Issued by Co. No. Insured ASSOCIATED GENERAL CONSTRUCTORS OF FLORIDA SELF Policy No. 2 INSURANCE FUND NXC 0105918 2=PLANET INSURANCE ----------------------------------------------------------------------------------------------- COMPANY Effective Date Policy Period Addt'l Premium Return Premium Premium subject 1/1/93 1/1/93 TO 1/1/94 / / to audit 3=UNITED PACIFIC ----------------------------------------------------------------------------------------------- INSURANCE COMPANY Unearned Premium Factor All terms and conditions of the policy remain Countersigned unchanged except as amended by this endorsement. 4=RELIANCE INSURANCE ----------------------------------------------------------------------------------------------- CO. OF ILLINOIS VOLUNTARY COMPENSATION AND EMPLOYERS' LIABILITY COVERAGE ENDORSEMENT In consideration of the premium charged, it is agreed that the Specific Excess Workers' Compensation and Employers' Liability Policy (form 32-005) IS extended as follows: In the event that any of the Insured's employees are exempt from the Workers' Compensation Law(s) of the State designated on item 5 of the Declarations and the Insured Voluntary agrees to cover them, this policy is extended to cover said employees as if they were subject to the Worker's Compensation Law(s) of the Covered State(s). - -------------------------------------------------------------------------------------------- / / THE PREMIUM FOR THIS ENDORSEMENT IF ON INSTALLMENTS IS PAYABLE AS FOLLOWS: - -------------------------------------------------------------------------------------------- ADDITIONAL RETURN REVISED ANNIVERSARY PREMIUM - -------------------------------------------------------------------------------------------- AT DATE OF ENDORSEMENT $ $ (NOT APPLICABLE) - -------------------------------------------------------------------------------------------- FIRST ANNIVERSARY $ $ $ - -------------------------------------------------------------------------------------------- SECOND ANNIVERSARY $ $ $ - -------------------------------------------------------------------------------------------- GEN-47c Ed. 03/87
Company Numbers If this endorsement is issued concurrently with the policy, the Attaching Clause Endt. No. 6 need to be completed 1=RELIANCE INSURANCE ----------------------------------------------------------------------------------------------- COMPANY Issued by Co. No. Insured ASSOCIATED GENERAL CONSTRUCTORS OF FL S.I.F. Policy No. 2 NXC 0105918 2=PLANET INSURANCE ----------------------------------------------------------------------------------------------- COMPANY Effective Date Policy Period Addt'l Premium Return Premium Premium subject 1/1/93 1/1/93 TO 1/1/94 / / to audit 3=UNITED PACIFIC ----------------------------------------------------------------------------------------------- INSURANCE COMPANY Unearned Premium Factor All terms and conditions of the policy remain Countersigned unchanged except as amended by this endorsement. 4=RELIANCE INSURANCE ----------------------------------------------------------------------------------------------- CO. OF ILLINOIS BANKRUPTCY OR INSOLVENCY ENDORSEMENT In consideration of the premium charged, it is agreed that the following additional Condition is added to the Specific Excess Workers' Compensation and Employers' Liability Policy (form 32-005) In the event that the Insured is unable to pay part or all of the Insured's Retention, as shown in Item 6 of the Declarations, by reason of Bankruptcy or Insolvency, the coverage afforded by this policy shall continue in effect but only excess of the amount shown in Item 6, Insured's Retention. - -------------------------------------------------------------------------------------------- / / THE PREMIUM FOR THIS ENDORSEMENT IF ON INSTALLMENTS IS PAYABLE AS FOLLOWS: - -------------------------------------------------------------------------------------------- ADDITIONAL RETURN REVISED ANNIVERSARY PREMIUM - -------------------------------------------------------------------------------------------- AT DATE OF ENDORSEMENT $ $ (NOT APPLICABLE) - -------------------------------------------------------------------------------------------- FIRST ANNIVERSARY $ $ $ - -------------------------------------------------------------------------------------------- SECOND ANNIVERSARY $ $ $ - -------------------------------------------------------------------------------------------- GEN-47c Ed. 03/87
EX-11 7 EXHIBIT 11 EXHIBIT 11 ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE
YEAR ENDED DECEMBER 31, ---------------------------------------------- 1996 1995 1994 -------------- -------------- -------------- A) Net income................................................... $ 37,600,000 $ 6,600,000 $ 37,900,000 Number of shares used in calculating primary earnings per share: Weighted average outstanding shares during the period..... 17,594,000 18,273,000 18,906,000 Additional common shares issuable under employee stock options using the treasury stock method (Note 1)......... 240,000 91,000 184,000 -------------- -------------- -------------- B) Average outstanding shares................................... 17,834,000 18,364,000 19,090,000 -------------- -------------- -------------- -------------- -------------- -------------- Primary earnings per share (A)/(B).......................... $ 2.11 $ 0.36 $ 1.99 -------------- -------------- -------------- -------------- -------------- -------------- Number of shares used in calculating fully diluted earnings per share: Weighted average outstanding shares during the period..... 17,594,000 18,273,000 18,906,000 Additional common shares issuable under employee stock options using the treasury stock method (Note 2)......... 278,000 106,000 191,000 -------------- -------------- -------------- C) Average outstanding shares................................... 17,872,000 18,379,000 19,097,000 -------------- -------------- -------------- -------------- -------------- -------------- Fully diluted earnings per share (A)/(C).................... $ 2.10 $ 0.36 $ 1.98 -------------- -------------- -------------- -------------- -------------- --------------
- ------------------------ (1) Based on the average quarterly market price of each period. (2) Based on the higher of the average market price at the end of each period. EX-13 8 EXHIBIT 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Zenith's principal source of consolidated earnings is the income from operations of its property-casualty insurance businesses. Property- casualty operations are comprised of: Workers' Compensation (47% of 1996 consolidated net premiums earned); Other Property-Casualty, principally automobile, homeowners, farmowners and commercial coverages and health insurance (45% of 1996 consolidated net premiums earned); and Reinsurance (8% of 1996 consolidated net premiums earned). Results of such operations for the three years ended December 31, 1996 are set forth in the table on page 22. Historically, Zenith's Workers' Compensation operation has been focused almost entirely in California. In each of the three years ended December 31, 1996 an increasing volume of business has been generated outside of California. Substantially all of Zenith's Other Property-Casualty business is written in California. Reinsurance business assumed by Zenith provides reinsurance coverage for world- wide exposures with a particular emphasis on catastrophe losses and large property risks. Property insurance and reinsurance coverages expose Zenith to the risk of significant loss in the event of major adverse natural phenomena, known in the insurance industry as catastrophes. These catastrophes may cause significant contemporaneous financial statement losses since catastrophe losses may not be accrued in advance of the event. Zenith also conducts real estate operations through Perma-Bilt, a Nevada Corporation ("Perma-Bilt"), a wholly-owned subsidiary that develops land and constructs private residences for sale in Las Vegas, Nevada. On December 31, 1996, Zenith completed the purchase of Associated General Commerce Self-Insurers' Trust Fund ("AGC-SIF"), a Florida workers' compensation self-insurers' fund. AGC-SIF's 1996 earned premium was approximately $43 million. In 1995, Zenith sold its wholly-owned subsidiary, CalFarm Life Insurance Company ("CalFarm Life"), to a subsidiary of SunAmerica Inc. for approximately $120 million in cash, with Zenith retaining the group health insurance business previously written by CalFarm Life. The results of operations and net assets of CalFarm Life's life and annuity business are included as discontinued operations and results of the health insurance operation are included in restated Other Property-Casualty results in the accompanying consolidated financial statements. Net income in 1995 includes a loss of $19.5 million associated with the sale of CalFarm Life. The table below sets forth the components of net income for the three years ended December 31, 1996:
- ----------------------------------------------------------------------------------------------------- (Dollars in thousands) 1996 1995 1994 - ----------------------------------------------------------------------------------------------------- Investment income, after tax $ 34,069 $ 30,690 $ 26,995 Realized gains on investments, after tax 7,025 2,354 929 - ----------------------------------------------------------------------------------------------------- Sub-total 41,094 33,044 27,924 - ----------------------------------------------------------------------------------------------------- Property-casualty underwriting, after tax: Income (loss) excluding catastrophes 356 (226) 15,652 Catastrophe losses (8,710) (9,945) - ----------------------------------------------------------------------------------------------------- Property-casualty underwriting income (loss) 356 (8,936) 5,707 - ----------------------------------------------------------------------------------------------------- Income from real estate operations, after tax 1,251 1,349 1,423 Interest expense, after tax (3,170) (4,524) (3,859) Parent net expenses, after tax (1,931) (1,211) (2,638) Other items, after tax: Lawsuit settlement 1,241 Income (loss) from discontinued life and annuity operations (13,122) 8,102 - ----------------------------------------------------------------------------------------------------- Net income $ 37,600 $ 6,600 $ 37,900 - -----------------------------------------------------------------------------------------------------
CalFarm [THE ZENITH] 21 PROPERTY-CASUALTY INSURANCE OPERATIONS Premiums earned and underwriting results of Zenith's property-casualty subsidiaries were as follows:
- ---------------------------------------------------------------------------------- (Dollars in thousands) 1996 1995 1994 - ---------------------------------------------------------------------------------- Premiums earned Workers' Compensation $210,916 $203,252 $216,030 Other Property-Casualty 204,778 192,276 186,661 Reinsurance 37,162 41,985 36,138 - ---------------------------------------------------------------------------------- Total $452,856 $437,513 $438,829 - ---------------------------------------------------------------------------------- Underwriting income (loss) before taxes Workers' Compensation $(19,462) $(14,548) $ 12,151 Other Property-Casualty 8,076 (12,007) (6,966) Reinsurance 12,479 12,955 4,322 - ---------------------------------------------------------------------------------- Total $ 1,093 $(13,600) $ 9,507 - ----------------------------------------------------------------------------------
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 net incurred losses, loss adjustment expenses, underwriting expenses and policyholders' dividends, expressed as a percentage of net premiums earned. Combined ratios were as follows:
- ----------------------------------------------------------------------------------------------- 1996 1995 1994 - ----------------------------------------------------------------------------------------------- Combined loss and expense ratios Workers' Compensation Losses 55.2% 48.8% 32.3% Loss adjustment expenses 20.2% 26.8% 27.6% Underwriting expenses 32.6% 28.8% 26.4% Dividends to policyholders 1.2% 2.8% 8.1% - ----------------------------------------------------------------------------------------------- Combined ratio 109.2% 107.2% 94.4% - ----------------------------------------------------------------------------------------------- Other Property-Casualty Losses and loss adjustment expenses 67.1% 77.9% 74.4% Underwriting expenses 29.0% 28.3% 29.3% - ----------------------------------------------------------------------------------------------- Combined ratio 96.1% 106.2% 103.7% - ----------------------------------------------------------------------------------------------- Reinsurance Losses and loss adjustment expenses 49.0% 52.6% 70.7% Underwriting expenses 17.4% 16.5% 17.3% - ----------------------------------------------------------------------------------------------- Combined ratio 66.4% 69.1% 88.0% - ----------------------------------------------------------------------------------------------- Total combined ratio 99.8% 103.1% 97.8% - -----------------------------------------------------------------------------------------------
22 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 to accurately estimate and accrue reported and unreported losses in the correct period, the level of dividends paid to policyholders, and the ability to service claims, maintain policies and acquire business efficiently. 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 losses and loss expenses for the three main lines of property-casualty business:
- --------------------------------------------------------------------------- (Dollars in Workers' Other thousands) Compensation Property-Casualty Reinsurance Total - --------------------------------------------------------------------------- One-year loss development in: 1996 $ (869) $ (2,716) $ (224) $ (3,809) 1995 (517) 1,337 (2,955) (2,135) 1994 (12,944) 4,051 (827) (9,720) Favorable development is shown in brackets. - ---------------------------------------------------------------------------
The exposure of the insurance industry to losses arising out of the cost of environmental and asbestos damage has been the focus of attention of a number of interested parties in recent years. The process of evaluating an insurance company's exposure is subject to significant uncertainties. Among the complications are lack of historical data, long reporting delays, uncertainty as to the number and identity of insureds with potential exposure and unresolved legal issues regarding policy coverage. The legal issues concerning the interpretations of various insurance policy provisions and whether environmental and asbestos losses are or were ever intended to be covered are complex. Courts have reached different and sometimes inconsistent conclusions regarding such issues as: when the loss occurred and what policies provide coverage, how policy limits are applied and determined, how policy exclusions are applied and interpreted, whether clean-up costs are covered as insured property damage and whether site assessment costs are either indemnity payments or adjusting costs. Zenith has exposure to asbestos losses in its Workers' Compensation operation for medical, indemnity and loss adjustment expenses associated with insureds' long-term exposure to asbestos or asbestos-contained materials. Most of these claims date back to the 1970's and early 1980's and Zenith's exposure is generally limited to a pro-rata share of the loss for the period of time coverage was provided. Zenith also has potential exposure to environmental and asbestos losses and loss adjustment expenses beginning in 1985 through its Reinsurance operation and through CalFarm Insurance, which writes liability coverage under farmowners' and small commercial policies, however such losses are substantially excluded from all such coverage. The business reinsured by Zenith contains exclusion clauses for environmental and asbestos losses, and in 1988 an absolute pollution exclusion was incorporated into CalFarm Insurance's policy forms. All claims for damages resulting from environmental or asbestos losses are identified and handled by Zenith's most experienced claims/legal professionals. Environmental and asbestos losses have not been material and Zenith believes that its reserves for environmental and asbestos losses are appropriately established based on currently available facts, technology, laws and regulations. However, due to the long-term nature of these claims, the inconsistencies of court coverage decisions, plaintiffs' expanded theories of liability, the risks inherent in major litigation and other uncertainties, the ultimate exposure from these claims may vary from the amounts currently reserved. Zenith is currently in the process of modifying or replacing its computer systems for year 2000 compliance. This activity is expected to continue through 1999 and the costs of modifications are being expensed as incurred. Some of the factors that continue to impact the business and economic environment in which Zenith operates include: an uncertain political and regulatory environment, both state and federal; the outlook for economic growth in parts of California; the expansion of Zenith's Workers' Compensation business outside 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 CalFarm [THE ZENITH] 23 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 Underwriting results in the Workers' Compensation operation deteriorated significantly in 1996 and 1995 compared to 1994. In 1996, the decreased results were due to higher severity of reported claims in California as well as continued high operating costs, although somewhat improved from 1995. In 1996, increased claim costs attributable to 1994 and 1995 accident years were offset by improvements in claim handling costs for the same periods. The decline in 1995 is the result of lower premium income and the inability of Zenith to adjust operating expenses commensurate with the decrease in premiums and additional operating costs associated with the computer system which became operational in mid-1995. Effective January 1, 1995, the minimum rate law in California was repealed and insurers were allowed to charge their own rates for Workers' Compensation coverage. Competition in the industry based on price became intense, negatively impacting overall industry rates in 1995 and 1996. Zenith began using its own actuarially-determined rates in 1995, which were substantially similar to those in effect at the end of 1994, but raised its rates January 1, 1996, based on increased costs of adjusting claims. The number of California policies in force decreased approximately 8% from 1995 to 1996. Premium income in 1995 was negatively impacted by rate decreases of 12.7% at January 1, 1994 and 16.0% at October 1, 1994, in the California minimum statutory rates. Zenith has partially mitigated the impact of decreasing premium and profitability in its California Workers' Compensation business by diversifying outside of the state. Zenith's non- California Workers' Compensation operations include Texas, Arkansas, Illinois, Pennsylvania, Utah and, effective January 1, 1997, Florida. During 1996, 1995 and 1994, approximately 29%, 22% and 11%, respectively, of earned premiums were attributable to Zenith's non-California Workers' Compensation operations. Zenith expects this percentage to increase beginning in the first quarter of 1997 as a result of the AGC-SIF acquisition. AGC-SIF's 1996 earned premium was approximately $43 million. National results for Workers' Compensation insurers in recent years have been favorable by recent historic standards and Zenith's non- California underwriting results in 1996 and 1995 were more favorable than its California results. However, increased competition, nationally, is expected to follow from these favorable trends and management intends to proceed cautiously with its national expansion. The outlook for future profitability in the Workers' Compensation operation is dependent upon the ability to maintain adequate rates, manage claims costs and to keep operating expenses in line with premium volume. Zenith is continuing to develop integrated Workers' Compensation, Health and Disability insurance products in alliances with selected health insurers, health maintenance organizations and UNUM Life Insurance Company of America, one of the nation's largest disability insurance companies, in California and, beginning in 1996, Arkansas. In addition to enhancing the marketability of its Workers' Compensation policies, Zenith also expects to derive the benefit of applying managed care techniques to the medical component of Workers' Compensation claims. Beginning in the second quarter of 1997, Zenith will expand its alliances to include United HealthCare of California, Inc. and MetraHealth Care Plan. At this time, it is too early for management to predict the likely outcome of these initiatives on the future results of its operations. Zenith is required to participate in the National Workers' Compensation Reinsurance Pool ("NWCRP"), which is an involuntary assigned risk pool that covers several states in which Zenith conducts business. Zenith's participation in NWCRP premiums earned in 1996 and 1995 was approximately $3.6 million and $1.4 million, respectively. The underwriting results for NWCRP did not materially impact Workers' Compensation underwriting results in 1996 or 1995. Florida, as distinguished from other states, has created a trust Fund and assesses workers' compensation insurers to pay for what is commonly referred to as "Second Injuries". Assessments have been inadequate to completely fund obligations of the Fund and the present balance of the Fund is probably insufficient to 24 pay all current Second Injury liabilities. Zenith expects future political changes, the nature of which cannot be determined at this time. Zenith has recorded its receivable from the Fund based on specific Second Injury claims and historical experience, the recoverability of which is dependent upon such political activity, if any. OTHER PROPERTY-CASUALTY Results for the Other Property-Casualty operation in 1994 have been restated to include group health insurance, previously written by CalFarm Life, which was sold in 1995. Health insurance premiums earned were $36.0 million, $34.1 million, and $36.9 million in 1996, 1995 and 1994, respectively. The improved 1996 Other Property-Casualty underwriting results were primarily due to favorable loss experience, including the absence of any catastrophes. Underwriting results in 1995 and 1994 were adversely impacted by catastrophe losses as follows: in 1995, losses of $10.7 million were incurred in conjunction with California storm damage; and in 1994, losses of $3.2 million were sustained from claims arising out of the Northridge earthquake. Premiums earned increased in 1996 and 1995 compared to 1994 due primarily to new business writings and rate increases for homeowners, earthquake, farmowners and commercial coverages. Rate increases are subject to prior approval by the California Department of Insurance (the "Department"). Management is unable to predict whether requests for future rate increases, if any, will be granted by the Department. Failure by the Department to act upon such requests would adversely affect the adequacy of such rates and the profitability of operations in the associated lines of business. The California Legislature passed legislation in September 1996 which created the California Earthquake Authority (CEA). The CEA became operational in December 1996 and is a privately financed, publicly managed state agency, which will provide limited earthquake coverage throughout California. Participation in the CEA is voluntary and Zenith has elected not to participate. Zenith will continue to offer broader earthquake coverages than available through the CEA as long as private reinsurance is available and affordable. Zenith can elect to participate in the CEA at a later date subject to meeting the participation requirements at that time. Zenith 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. The 1996, 1995 and 1994 underwriting results for CAARP, CAIP and the California Fair Plan together did not materially impact the Other Property-Casualty underwriting results. The private passenger automobile insurance market continues to be affected by legislative actions, including the mandatory insurance law and the "Personal Responsibility Act of 1996" created by Proposition 213, both of which were effective in January 1997, and new rating factor regulations with expected implementation in late 1997. The new rating factor regulations pertain to the implementation of Proposition 103 and will further limit the impact of territorial rating on automobile insurance rates. At this time, it is too early for management to predict how these regulations will affect the future results of the private passenger automobile insurance operations and the level of involuntary automobile assignments from CAARP. In January, 1997, California experienced wide-spread flooding, primarily in Northern California. Management estimates that losses will not significantly affect results of operations in the first quarter of 1997. REINSURANCE Zenith's assumed reinsurance operation emphasizes the reinsurance of accumulated losses from catastrophes and the reinsurance of large property risks. Because of the severity of losses, culminating with Hurricane "Andrew" in 1992, rates for such reinsurance increased significantly in 1993. Zenith's premium revenue from reinsurance increased in 1994 with an increase in the number of treaties in which it participated and in 1995, Zenith increased its premium revenues with increased participation in some casualty-oriented treaties. CalFarm [THE ZENITH] 25 Underwriting results were favorable during the last three years even though losses were incurred in 1995 of approximately $2.5 million principally attributable to Hurricane "Marilyn" and in 1994 losses of $9.3 million were incurred attributable to the Northridge earthquake of January 1994. 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. Premium earned in our reinsurance operation decreased in 1996 due to selected non-renewal of certain reinsurance treaties and generally softening of such rates in the industry. If rates do not improve, premiums may continue to decrease in 1997. INVESTMENTS At December 31, 1996, approximately 91% of Zenith's consolidated portfolio of fixed maturity investments were classified as Available-for-Sale under the provisions of Statement of Financial Accounting Standards No. 115 -- Accounting for Certain Investments in Debt and Equity Securities. In 1995, Zenith reclassified certain investments previously classified as "Held-to-Maturity" -- See Note 2 to the Consolidated Financial Statements. The unrealized appreciation or depreciation on investments which are classified as Available-for-Sale is recorded as a separate component of stockholders' equity. The effect on consolidated stockholders' equity of the decrease in the value of fixed maturities classified as Available-for-Sale in 1996 compared to 1995 was a decrease of $9.1 million, net of deferred taxes. 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. Zenith's primary 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. The change in the carrying value of Zenith's consolidated investment portfolio in 1996 was as follows:
- ------------------------------------------------------------------------------------------------ (Dollars in thousands) - ------------------------------------------------------------------------------------------------ Carrying value at beginning of year $ 835,214 Purchases at cost 465,888 Investments acquired in AGC-SIF merger 44,528 Maturities and exchanges of investments (188,797) Proceeds from sales of investments: Available-for-sale $(261,410) Other investments (9,656) --------- Total proceeds from disposal of investments (271,066) Realized losses from maturities and exchanges of investments: Available-for-sale (10) Realized gains from sales of investments: Available-for-sale 6,209 Trading portfolio 242 Other investments 4,445 Realized losses from writedowns of investments (79) --------- Total net realized gains on investments 10,807 Unrealized losses on investments (12,765) Decrease in short-term investments (34,716) Net amortization of bonds and preferred stocks and other changes 3,706 - ------------------------------------------------------------------------------------------------ Carrying value at end of year $ 852,799 - ------------------------------------------------------------------------------------------------
26 At December 31, 1996, and 1995, Zenith's consolidated investment portfolio emphasized high-quality, taxable bonds and short-term investments. Bonds constituted 75% and 72%, and short-term investments constituted 13% and 16%, of the carrying value of Zenith's consolidated investment portfolio at December 31, 1996 and 1995, respectively. At December 31, 1996 and 1995, 97% and 96% of the consolidated carrying values of investments in bonds were rated investment grade. Investment income during the years ended December 31, was as follows:
- ---------------------------------------------------- (Dollars in thousands) 1996 1995 1994 - ---------------------------------------------------- Before tax $ 51,154 $ 46,150 $ 40,068 After tax 34,069 30,690 26,995 - ----------------------------------------------------
The yields on invested assets vary with the general level of interest rates, the average life of invested assets and the amount of funds available for investment, and for the years ended December 31 were as follows:
- ---------------------------------------------------- 1996 1995 1994 - ---------------------------------------------------- Before tax 6.1% 6.0% 5.2% After tax 4.0% 4.0% 3.5% - ----------------------------------------------------
REAL ESTATE Zenith recognized revenue of $41.6 million, $31.7 million and $30.2 million in 1996, 1995 and 1994, respectively, related to its real estate operations which commenced in 1993. Income from real estate operations before taxes was $1.9 million, $2.1 million and $2.2 million in 1996, 1995 and 1994, respectively. Construction in progress, including undeveloped land, was $45.1 million at December 31, 1996 compared to $25.5 million at December 31, 1995. In addition to its continuing home construction, land presently owned may be used for some commercial construction. LIQUIDITY AND INFLATION Zenith's property-casualty insurance subsidiaries create liquidity because insurance premiums are generally collected prior to disbursements for claims and benefits. These net cash flows, as set forth on page 37 in the Consolidated Financial Statements, are invested as described in "Investments" above. Net cash flows from continuing operating activities were $9.7 million, $9.6 million and $15.9 million, for 1996, 1995 and 1994, respectively. 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 has been principally dependent upon its lines of credit of up to $50.0 million, all of which was available at December 31, 1996, and dividends from Zenith Insurance. 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 insurance regulations which restrict their ability to distribute dividends. Such dividend capabilities are set forth in Note 10 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 $15.0 million in 1996, $10.5 million in 1995 and $15.0 million in 1994. Maximum dividend capability, without prior approval of the Department, of Zenith's subsidiaries in 1997 is $26.5 million. Risk-based capital guidelines issued by the National Association of Insurance Commissioners in 1994 for property-casualty companies are not expected to have any material adverse consequences for Zenith's insurance subsidiaries. Perma-Bilt maintains certain bank credit facilities to provide financing for its development and construction of private residences for sale. At December 31, 1996, maximum permitted borrowing under the facilities was $20.0 million, with a balance outstanding of $11.1 million. Perma-Bilt is obligated under various notes arising from its purchase of several parcels of land. The amount outstanding for such notes at December 31, 1996 was $3.4 million. Workers' compensation insurers are required to have securities on deposit for the protection of policyholders in accordance with various states' regulations. At December 31, 1996, investments carried at their fair value of $305.4 million were on deposit to comply with such regulations. CalFarm [THE ZENITH] 27 At December 31, 1996, Zenith was authorized to purchase up to 1,104,000 shares of Zenith common stock pursuant to resolutions from its Board of Directors under a 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 which are fixed by statute. 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. RECENT DEVELOPMENTS IN FASB ACCOUNTING PRONOUNCEMENTS In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 128 Earnings per Share ("SFAS No. 128"). SFAS No. 128 requires dual presentation of newly defined basic and diluted earnings per share on the face of the income statement for all entities with complex capital structures. The accounting standard is effective for fiscal years ending after December 15, 1997, including interim periods, and Zenith has not yet determined the impact of SFAS No. 128. 28 FINANCIAL RECORD CalFarm [THE ZENITH] FIVE-YEAR SUMMARY OF SELECTED FINANCIAL INFORMATION ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES - --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, Note 1996 1995 - ----------------------------------------------------------------- (Dollars and shares in thousands, except per share data) REVENUES 1 Property-casualty insurance operations Premiums earned $ 452,856 $ 437,513 Investment income 51,154 46,150 Realized gains on investments 10,807 3,621 Real estate operations 41,554 31,736 Income from legal settlement - ----------------------------------------------------------------- TOTAL REVENUES 1 556,371 519,020 - ----------------------------------------------------------------- INCOME FROM CONTINUING OPERATIONS AFTER TAX AND BEFORE REALIZED GAINS 1, 2 30,575 17,368 Per share 1, 2 1.72 .95 - ----------------------------------------------------------------- INCOME FROM CONTINUING OPERATIONS AFTER TAX 8 37,600 19,722 Per share 8 2.11 1.08 - ----------------------------------------------------------------- COMPONENTS OF NET INCOME 1 Underwriting income (loss) 3 Excluding catastrophe losses 356 (226) Including catastrophe losses 356 (8,936) Net investment income 34,069 30,690 Realized gains on investments 4 7,025 2,354 Real estate operations 1,251 1,349 Parent operations (5,101) (5,735) Income (loss) from discontinued life and annuity operations 8 (13,122) Cumulative effect of change in accounting and extraordinary items 5, 6 - ----------------------------------------------------------------- NET INCOME 37,600 6,600 Per share 2.11 .36 - ----------------------------------------------------------------- CASH DIVIDENDS PER SHARE TO COMMON STOCKHOLDERS 1.00 1.00 WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 17,834 18,364 - ----------------------------------------------------------------- FINANCIAL CONDITION 1 Total assets 1,242,724 1,115,433 Investments 852,799 835,214 Property-casualty unpaid claims 620,078 517,552 Senior notes, bank debt and other notes payable 88,861 83,135 Total stockholders' equity 337,503 330,432 Stockholders' equity per share 19.17 18.58 Stockholders' equity per share, excluding effect of SFAS No. 115 7 19.28 18.18 Return on average equity 11.4% 2.0% - ----------------------------------------------------------------- PROPERTY-CASUALTY INSURANCE STATISTICS (GAAP) 1 Paid loss and loss expense ratio 69.9% 74.3% Loss and loss expense ratio 69.5% 74.4% Underwriting expense ratio 29.7% 27.4% Policyholder dividends ratio .6% 1.3% Combined ratio before Proposition 103 rollback refund 99.8% 103.1% Combined ratio after Proposition 103 rollback refund 3 99.8% 103.1% Net premiums earned-to-surplus ratio 1.4 1.4 Loss and loss expense reserves-to-surplus ratio (net of reinsurance) 9 1.6 1.5 - -----------------------------------------------------------------
30 - --------------------------------------------------------------------------------
1994 1993 1992 - ---------------------------------------------------------------------------------------------------------- (Dollars and shares in thousands, except per share data) REVENUES Property-casualty insurance operations Premiums earned $ 438,829 $ 447,270 $421,557 Investment income 40,068 39,309 45,478 Realized gains on investments 1,428 14,272 9,977 Real estate operations 30,220 Income from legal settlement 1,910 7,561 - ---------------------------------------------------------------------------------------------------------- TOTAL REVENUES 512,455 508,412 477,012 - ---------------------------------------------------------------------------------------------------------- INCOME FROM CONTINUING OPERATIONS AFTER TAX AND BEFORE REALIZED GAINS 27,628 27,820 13,204 Per share 1.45 1.44 .70 - ---------------------------------------------------------------------------------------------------------- INCOME FROM CONTINUING OPERATIONS AFTER TAX 29,798 42,177 20,749 Per share 1.56 2.19 1.10 - ---------------------------------------------------------------------------------------------------------- COMPONENTS OF NET INCOME Underwriting income (loss) Excluding catastrophe losses 15,652 8,801 (14,061) Including catastrophe losses 5,707 7,436 (23,961) Net investment income 26,995 26,888 32,953 Realized gains on investments 929 9,443 8,792 Real estate operations 1,423 Parent operations (5,256) (1,590) (6,399) Income (loss) from discontinued life and annuity operations 8,102 11,023 7,951 Cumulative effect of change in accounting and extraordinary items 9,364 - ---------------------------------------------------------------------------------------------------------- NET INCOME 37,900 53,200 28,700 Per share 1.99 2.76 1.52 - ---------------------------------------------------------------------------------------------------------- CASH DIVIDENDS PER SHARE TO COMMON STOCKHOLDERS 1.00 1.00 1.00 WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 19,090 19,297 18,918 - ---------------------------------------------------------------------------------------------------------- FINANCIAL CONDITION Total assets 1,093,675 1,125,211 1,060,545 Investments 709,030 754,107 713,579 Property-casualty unpaid claims 510,406 519,418 504,902 Senior notes, bank debt and other notes payable 76,582 73,989 73,868 Total stockholders' equity 309,860 349,465 301,598 Stockholders' equity per share 16.35 18.55 16.03 Stockholders' equity per share, excluding effect of SFAS No. 115 18.79 17.90 16.03 Return on average equity 11.7% 16.3% 9.7% - ---------------------------------------------------------------------------------------------------------- PROPERTY-CASUALTY INSURANCE STATISTICS (GAAP) Paid loss and loss expense ratio 69.6% 67.9% 71.4% Loss and loss expense ratio 66.9% 68.5% 77.1% Underwriting expense ratio 26.9% 25.5% 26.8% Policyholder dividends ratio 4.0% 3.4% 0.7% Combined ratio before Proposition 103 rollback refund 97.8% 97.4% 104.6% Combined ratio after Proposition 103 rollback refund 97.8% 97.4% 108.4% Net premiums earned-to-surplus ratio 1.7 1.6 1.7 Loss and loss expense reserves-to-surplus ratio (net of reinsurance) 1.7 1.7 1.9 - ----------------------------------------------------------------------------------------------------------
(1) 1992 through 1994 restated for health insurance included in property-casualty operations. (2) Excludes extraordinary items and cumulative effect of accounting change. Excludes $1,241,000, or $.06 per share, in 1994 and $4,914,000, or $.26 per share, in 1993 for the effect of legal settlement. 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) Taxes on realized gains were reduced in 1992 and 1993 for the tax benefit associated with capital losses carried forward from 1990. (5) 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. (6) 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. (7) 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, net of deferred taxes, on debt securities classified as available-for-sale is recorded in stockholders' equity. (8) In 1995, Zenith sold CalFarm Life (see Note 15 to the Consolidated Financial Statements). (9) Computed including AGC-SIF net reserves of $65,429,000 acquired through merger on December 31, 1996 (see Note 14 to the Consolidated Financial Statements). CalFarm [THE ZENITH] 31 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. Information for 1994 and prior years has been restated to include the health insurance business previously written by CalFarm Life Insurance Company. ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE LIABILITY DEVELOPMENT - -------------------------------------------------------------------------------- 32 - --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1996* 1995 - ------------------------------------------------------- (Dollars in thousands) LIABILITY FOR UNPAID LOSS AND LOSS ADJUSTMENT EXPENSES, NET $526,427 $463,123 - ------------------------------------------------------- PAID, NET (CUMULATIVE) AS OF: One year later 185,764 Two years later Three years later Four years later Five years later Six years later Seven years later Eight years later Nine years later Ten years later - ------------------------------------------------------- LIABILITY, NET RE-ESTIMATED AS OF: One year later 459,314 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 $ 3,809 - ------------------------------------------------------- NET LIABILITY -- DECEMBER 31, $526,427 $463,123 Receivable from reinsurers and state trust funds 93,651 54,429 - ------------------------------------------------------- GROSS LIABILITY -- DECEMBER 31, $620,078 517,552 Re-estimated liability, net of reinsurance 459,314 Re-estimated receivable from reinsurers 55,692 - ------------------------------------------------------- Re-estimated liability, gross 515,006 - ------------------------------------------------------- FAVORABLE (DEFICIENT) DEVELOPMENT, GROSS $ 2,546 - -------------------------------------------------------
* On December 31, 1996, Zenith acquired through merger the liabilities for unpaid loss and loss adjustment expenses of Associated General Commerce Self-Insurers' Trust Fund (AGC-SIF). The AGC-SIF balances included in the December 31, 1996 amounts were: $65,429,000 net liability for loss and loss adjustment expenses, $37,261,000 receivable from reinsurers and state trust funds and $102,690,000 gross liability for loss and loss adjustment expenses. Zenith's prior year reserves and development have not been restated. All subsequent development of AGC-SIF's acquired reserves will be reflected as development of the 1996 year. The analysis above presents the development of Zenith's balance sheet liabilities for 1986 through 1996. 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 1996, net of reinsurance. This loss reserve development table is cumulative and, therefore, ending balances should not be added since the amount at the end of each calendar year includes activity for both the current and prior years. Hence, 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 1995 includes an estimate of the amount still due on the 1994 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. CalFarm [THE ZENITH] 33
1994 1993 1992 1991 1990 1989 1988 1987 1986 - ----------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) LIABILITY FOR UNPAID LOSS AND LOSS ADJUSTMENT EXPENSES, NET $462,710 $474,499 $471,832 $447,702 $424,373 $386,445 $347,888 $293,981 $223,011 - ----------------------------------------------------------------------------------------------------------------------------- PAID, NET (CUMULATIVE) AS OF: One year later 175,488 173,699 184,498 184,593 162,642 129,605 118,332 105,939 89,361 Two years later 274,560 272,221 292,914 291,228 264,904 205,132 179,241 159,746 134,848 Three years later 325,916 355,710 352,208 323,685 258,632 216,321 189,980 162,555 Four years later 389,417 390,459 357,233 289,963 245,629 207,890 178,111 Five years later 412,600 380,524 309,524 263,971 225,849 187,558 Six years later 394,741 323,041 275,983 237,474 199,609 Seven years later 332,239 284,877 245,429 207,163 Eight years later 290,126 251,801 212,854 Nine years later 256,423 217,881 Ten years later 221,142 - ----------------------------------------------------------------------------------------------------------------------------- LIABILITY, NET RE-ESTIMATED AS OF: One year later 460,575 464,779 480,903 467,636 427,458 381,096 341,679 293,526 219,734 Two years later 450,675 453,497 483,334 485,399 442,332 371,272 332,541 290,002 225,541 Three years later 452,330 482,019 485,816 453,802 374,455 327,961 289,074 227,251 Four years later 487,447 488,723 454,744 380,983 325,457 285,801 228,382 Five years later 491,216 455,971 381,703 328,415 280,860 227,972 Six years later 456,860 382,280 328,640 281,385 229,472 Seven years later 382,219 329,058 282,498 231,909 Eight years later 328,465 282,882 234,455 Nine years later 282,454 235,045 Ten years later 236,165 - ----------------------------------------------------------------------------------------------------------------------------- FAVORABLE (DEFICIENT) DEVELOPMENT $ 12,035 $ 22,169 $(15,615) $(43,514) $(32,487) $ 4,226 $ 19,423 $ 11,527 $(13,154) - ----------------------------------------------------------------------------------------------------------------------------- NET LIABILITY -- DECEMBER 31, $462,710 $474,499 $471,832 Receivable from reinsurers and state trust funds 47,696 44,919 33,070 - ----------------------------------------------------------------- GROSS LIABILITY -- DECEMBER 31, 510,406 519,418 504,902 Re-estimated liability, net of reinsurance 450,675 452,330 487,447 Re-estimated receivable from reinsurers 46,318 54,487 70,264 - ----------------------------------------------------------------- Re-estimated liability, gross 496,993 506,817 557,711 - ----------------------------------------------------------------- FAVORABLE (DEFICIENT) DEVELOPMENT, GROSS $ 13,413 $ 12,601 $(52,809) - -----------------------------------------------------------------
34 CONSOLIDATED BALANCE SHEET ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES - --------------------------------------------------------------------------------------------------------------
DECEMBER 31, Note 1996 1995 - -------------------------------------------------------------------------------------------------------------- (Dollars in thousands) ASSETS Investments Fixed maturities: At amortized cost (fair value $53,113, 1996 and $57,816, 1995) $ 53,353 $ 56,674 At fair value (cost $608,756, 1996 and $555,922, 1995) 605,630 566,826 Floating rate preferred stocks, at fair value (cost $14,614, 1996 and 1995) 14,071 13,588 Convertible and non-redeemable preferred stocks, at fair value (cost $750, 1996 and $250, 1995) 784 281 Common stocks, at fair value (cost $18,030, 1996 and $18,937, 1995) 22,771 22,656 Short-term investments (at cost, which approximates market) 106,712 137,083 Other investments 49,478 38,106 - -------------------------------------------------------------------------------------------------------------- Total investments 1, 2 852,799 835,214 Cash 12,125 6,919 Accrued investment income 10,973 8,810 Premiums receivable, less allowance for doubtful accounts of $3,725 in 1996 and $612 in 1995 80,545 70,155 Receivable from reinsurers, state trust funds and prepaid reinsurance premiums 8 104,748 64,781 Deposit receivable 14 14,776 Deferred policy acquisition costs 20,752 20,339 Properties and equipment, less accumulated depreciation 3 49,179 48,702 Federal income taxes 6 29,939 14,609 Other assets 1 66,888 45,904 - -------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $1,242,724 $1,115,433 - --------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of this statement. 34
- ----------------------------------------------------------------------------------------------------------------------------- DECEMBER 31, Note 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------- (Dollars and shares in thousands) LIABILITIES Policy liabilities and accruals Unpaid losses and loss expenses 13 $ 620,078 $ 517,552 Unearned premiums 127,209 119,591 Policyholders' dividends accrued 7,670 12,100 Other policyholder funds 9,109 15,491 Reserves on loss portfolio transfers 8,359 9,073 Payable to banks and other notes payable 4 14,508 8,903 Senior notes payable, less unamortized issue costs of $647, 1996 and $768, 1995 5 74,353 74,232 Other liabilities 43,935 28,059 - ----------------------------------------------------------------------------------------------------------------------------- Total liabilities 905,221 785,001 - ----------------------------------------------------------------------------------------------------------------------------- Commitments and contingent liabilities 8 STOCKHOLDERS' EQUITY Preferred stock, $1 par -- shares authorized 1,000; issued and outstanding, none in 1996 and 1995 Common stock, $1 par -- shares authorized 50,000; issued 24,447, outstanding 17,604, 1996; issued 24,310, outstanding 17,784, 1995 9 24,447 24,310 Additional paid-in capital 258,875 256,083 Retained earnings 175,684 155,634 Net unrealized appreciation on investments, net of deferred tax expense of $284, 1996 and $4,752, 1995 1, 2 528 8,825 - ----------------------------------------------------------------------------------------------------------------------------- 459,534 444,852 Less treasury stock at cost (6,843 shares, 1996 and 6,526 shares, 1995) 9 (122,031) (114,420) - ----------------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 337,503 330,432 - ----------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,242,724 $ 1,115,433 - -----------------------------------------------------------------------------------------------------------------------------
CalFarm [THE ZENITH] 35 CONSOLIDATED STATEMENT OF OPERATIONS ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES - ---------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, Note 1996 1995 1994 - --------------------------------------------------------------------------------------------------------------------------------- (Dollars and shares in thousands, except per share data) CONSOLIDATED REVENUES: Premium earned 7 $ 452,856 $ 437,513 $ 438,829 Net investment income 2 51,154 46,150 40,068 Realized gains on investments 2 10,807 3,621 1,428 Real estate sales 41,554 31,736 30,220 Income from legal settlement 8 1,910 - --------------------------------------------------------------------------------------------------------------------------------- Total revenues 556,371 519,020 512,455 - --------------------------------------------------------------------------------------------------------------------------------- EXPENSES: Losses and loss expenses incurred 7, 13 314,700 325,589 293,848 Policy acquisition costs 84,093 81,846 77,253 Other underwriting and operating expenses 53,413 39,882 44,868 Policyholders' dividends and participation 2,526 5,660 17,412 Real estate construction and operating costs 39,645 29,661 28,031 Interest expense 4, 5 4,877 6,960 5,937 - --------------------------------------------------------------------------------------------------------------------------------- Total expenses 499,254 489,598 467,349 - --------------------------------------------------------------------------------------------------------------------------------- Income from continuing operations before federal income tax expense 57,117 29,422 45,106 Federal income tax expense 6 19,517 9,700 15,308 - --------------------------------------------------------------------------------------------------------------------------------- INCOME FROM CONTINUING OPERATIONS 37,600 19,722 29,798 - --------------------------------------------------------------------------------------------------------------------------------- Income from life and annuity operations of CalFarm Life (less income tax expense of $3,463 and $4,363) 15 6,431 8,102 Loss on disposal of CalFarm Life, including income tax expense of $4,099 15 (19,553) - --------------------------------------------------------------------------------------------------------------------------------- INCOME (LOSS) FROM DISCONTINUED OPERATIONS (13,122) 8,102 - --------------------------------------------------------------------------------------------------------------------------------- NET INCOME $ 37,600 $ 6,600 $ 37,900 - --------------------------------------------------------------------------------------------------------------------------------- EARNINGS PER SHARE: Income from continuing operations $ 2.11 $ 1.08 $ 1.56 Income (loss) from discontinued operations (.72) .43 - --------------------------------------------------------------------------------------------------------------------------------- NET INCOME PER COMMON SHARE $ 2.11 $ .36 $ 1.99 - --------------------------------------------------------------------------------------------------------------------------------- WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 17,834 18,364 19,090 - ---------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of this statement. 36 CONSOLIDATED STATEMENT OF CASH FLOWS ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES - -------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Premiums collected $ 474,831 $ 457,907 $ 469,151 Investment income received 46,167 45,606 37,819 Proceeds from sales of real estate 41,554 31,736 30,220 Losses and loss adjustment expenses paid (316,949) (325,200) (305,142) Underwriting and other operating expenses paid (127,975) (120,533) (111,275) Real estate construction costs paid (54,480) (34,307) (36,133) Reinsurance premiums paid (23,748) (21,586) (21,995) Dividends paid to policyholders (5,985) (13,744) (18,171) Interest paid (7,626) (8,390) (6,949) Income taxes paid (23,090) (4,578) (25,953) - ------------------------------------------------------------------------------------------------------------------------------- Net cash flows from continuing operating activities, excluding cash from trading portfolio 2,699 6,911 11,572 Net proceeds from sales of trading portfolio investments 7,050 2,677 4,363 - ------------------------------------------------------------------------------------------------------------------------------- Net cash flows from continuing operating activities, including cash from trading portfolio 9,749 9,588 15,935 Net cash from discontinued operating activities, including cash from trading portfolio 12,655 118,644 - ------------------------------------------------------------------------------------------------------------------------------- Net cash flows from operating activities 9,749 22,243 134,579 - ------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of investments: Debt securities Held-to-Maturity (5,342) (141,531) Debt and equity securities Available-for-Sale (447,251) (210,600) (478,179) Other debt and equity securities and other investments (13,295) (13,885) (5,571) Proceeds from maturities and exchanges of investments: Debt securities Held-to-Maturity 8,460 4,284 Debt and equity securities Available-for-Sale 173,287 16,869 30,556 Other debt and equity securities and other investments 2,085 1,839 Proceeds from sales of investments: Debt and equity securities Available-for-Sale 261,410 293,024 333,949 Other debt and equity securities and other investments 9,656 5,086 238 Proceeds from the sale of CalFarm Life Insurance Company 120,000 Net change in short-term investments 34,716 (38,522) 123,055 Other (5,784) (6,289) (7,301) Net cash used in investing activities of discontinued operations (30,093) (144,314) - ------------------------------------------------------------------------------------------------------------------------------- Net cash flows from investing activities 15,857 428 (145,728) - ------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Cash advanced from bank line of credit 43,400 2,100 Cash repaid on bank line of credit (43,400) (2,100) Cash advanced from bank loans and other notes payable 27,935 30,657 11,316 Cash repaid on bank loans and other notes payable (25,691) (24,225) (8,845) Cash dividends paid to common stockholders (17,605) (18,273) (18,894) Proceeds from exercise of stock options 2,572 4,405 2,093 Purchase of treasury shares (7,611) (29,318) (346) Net cash provided by financing activities of discontinued operations 15,644 24,375 - ------------------------------------------------------------------------------------------------------------------------------- Net cash flows from financing activities (20,400) (21,110) 9,699 - ------------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash 5,206 1,561 (1,450) Cash at beginning of year 6,919 5,358 6,808 - ------------------------------------------------------------------------------------------------------------------------------- CASH AT END OF YEAR $ 12,125 $ 6,919 $ 5,358 - ------------------------------------------------------------------------------------------------------------------------------- RECONCILIATION OF INCOME FROM CONTINUING OPERATIONS TO NET CASH FLOWS FROM OPERATING ACTIVITIES: Income from continuing operations $ 37,600 $ 19,722 $ 29,798 Adjustments to reconcile income from continuing operations to net cash flows from operating activities: Depreciation and amortization 3,081 4,975 4,001 Realized gains on investments (10,807) (3,621) (1,428) Net cash from trading portfolio 7,050 2,677 4,363 Net cash flow from discontinued operations 12,655 118,644 Change in assets and liabilities excluding effects from merger of AGC-SIF on December 31, 1996 (See Note 14): Decrease (increase) in: Premiums receivable (3,467) (3,243) (1,518) Receivable from reinsurers (1,824) (6,168) (1,980) Deferred policy acquisition costs (413) (1,833) (1,490) Real estate construction in progress (19,601) (5,596) (12,671) Increase (decrease) in: Unpaid losses and loss expenses (164) 7,416 (8,906) Unearned premiums 7,618 2,234 9,962 Policyholders' dividends accrued and accumulated (5,570) (8,422) (80) Federal income taxes (3,574) 4,946 (10,644) Other (180) (3,499) 6,528 - ------------------------------------------------------------------------------------------------------------------------------- Net cash flows from operating activities $ 9,749 $ 22,243 $ 134,579 - -------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of this statement. CalFarm [THE ZENITH] 37 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES - --------------------------------------------------------------------------------
PREFERRED COMMON THREE YEARS ENDED DECEMBER 31, 1996 NOTE STOCK $1 PAR STOCK $1 PAR - -------------------------------------------------------------------------- (Dollars in thousands, except per share data) BALANCE AT JANUARY 1, 1994 $ 23,910 Net income for 1994 Net unrealized (depreciation) on investments, net of deferred tax benefit of $11,062 2 Exercise of 124,000 stock options 9 124 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 Net income for 1995 Net unrealized appreciation on investments, net of deferred tax expense of $8,721 2 Exercise of 276,000 stock options 9 276 Tax benefit on options exercised in 1995 Purchase of 1,442,000 treasury shares at cost Cash dividends declared to common stockholders ($1.00 per share, paid quarterly) - -------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1995 24,310 Net income for 1996 Net unrealized (depreciation) on investments, net of deferred tax benefit of $4,468 2 Exercise of 137,000 stock options 9 137 Tax benefit on options exercised in 1996 Purchase of 317,000 treasury shares at cost Cash dividends declared to common stockholders ($1.00 per share, paid quarterly) - -------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1996 $ 24,447 - --------------------------------------------------------------------------
The accompanying notes are an integral part of this statement. 38 - --------------------------------------------------------------------------------
NET UNREALIZED APPRECIATION ADDITIONAL RETAINED (DEPRECIATION) ON TREASURY PAID-IN CAPITAL EARNINGS INVESTMENTS STOCK TOTAL - --------------------------------------------------------------------------------------------------------------------- (Dollars in thousands, except per share data) BALANCE AT JANUARY 1, 1994 $ 249,092 $ 148,043 $ 13,176 $ (84,756) $ 349,465 Net income for 1994 37,900 37,900 Net unrealized (depreciation) on investments, net of deferred tax benefit of $11,062 (60,636) (60,636) Exercise of 124,000 stock options 1,969 2,093 Tax benefit on options exercised in 1994 302 302 Purchase of 15,000 treasury shares at cost (346) (346) Cash dividends declared to common stockholders ($1.00 per share, paid quarterly) (18,918) (18,918) - --------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1994 251,363 167,025 (47,460) (85,102) 309,860 Net income for 1995 6,600 6,600 Net unrealized appreciation on investments, net of deferred tax expense of $8,721 56,285 56,285 Exercise of 276,000 stock options 4,129 4,405 Tax benefit on options exercised in 1995 591 591 Purchase of 1,442,000 treasury shares at cost (29,318) (29,318) Cash dividends declared to common stockholders ($1.00 per share, paid quarterly) (17,991) (17,991) - --------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1995 256,083 155,634 8,825 (114,420) 330,432 Net income for 1996 37,600 37,600 Net unrealized (depreciation) on investments, net of deferred tax benefit of $4,468 (8,297) (8,297) Exercise of 137,000 stock options 2,435 2,572 Tax benefit on options exercised in 1996 357 357 Purchase of 317,000 treasury shares at cost (7,611) (7,611) Cash dividends declared to common stockholders ($1.00 per share, paid quarterly) (17,550) (17,550) - --------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1996 $ 258,875 $ 175,684 $ 528 $(122,031) $ 337,503 - ---------------------------------------------------------------------------------------------------------------------
CalFarm [THE ZENITH] 39 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 property- casualty insurance subsidiaries in the business of writing workers' compensation insurance, approximately 71% of which is in California; Reinsurance, principally of world-wide property and catastrophe risks; and auto, homeowners, farmowners, health and other coverages primarily in the rural areas of California. Zenith's subsidiaries sell insurance and reinsurance through agents and brokers and not directly to consumers. The market for insurance products and services is highly competitive. 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"). On December 31, 1996, Zenith acquired through merger the assets and liabilities of Associated General Commerce Self-Insurers' Trust Fund ("AGC-SIF"), a Florida workers' compensation self-insurers' fund (See Note 14). In 1995, Zenith sold its wholly- owned life insurance subsidiary, CalFarm Life Insurance Company (See Note 15). The financial statements have been prepared in accordance with generally accepted accounting principles ("GAAP") and include Zenith and its subsidiaries. GAAP requires the use of assumptions and estimates in reporting certain assets and liabilities and related disclosures and actual results could differ from those estimates. All significant intercompany transactions and balances have been eliminated in consolidation. FAIR VALUES OF FINANCIAL INSTRUMENTS Financial instruments are contractual obligations that result in the delivery of cash or an ownership interest in an entity. Disclosures, 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:
- -------------------------------------------------------------------------------------- 1996 1995 ---------------------- ---------------------- CARRYING FAIR Carrying Fair (Dollars in thousands) NOTE AMOUNT VALUE amount value - -------------------------------------------------------------------------------------- ASSETS: Investments: Trading securities 2 $ 4,149 $ 4,149 $ 10,944 $ 10,944 Other investments 2 848,650 848,410 824,270 825,412 ---------- ---------- ---------- ---------- 852,799 852,559 835,214 836,356 LIABILITIES: Other notes payable 4 3,361 3,361 Payable to banks 4 11,147 11,147 8,903 8,903 Senior notes payable 5 74,353 82,406 74,232 85,853 - --------------------------------------------------------------------------------------
INVESTMENTS Zenith accounts for its investment portfolio in accordance with the provisions of Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities ("SFAS No. 115") which requires investments in debt and equity securities to be identified in 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. 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 39 items whose values were obtained from other brokers making a market in the investment, the Bloomberg 40 financial news service, 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. 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. Policy acquisition costs, consisting of commissions, premium taxes and certain other underwriting costs, are deferred and amortized as the related premiums are earned. Zenith's insurance subsidiaries 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 experience with respect to the probable number and nature of such claims. The methods for making such estimates and for establishing the resulting liabilities are continually reviewed and updated and any adjustments resulting therefrom are reflected in earnings currently. Estimates of losses from environmental and asbestos related claims are included in overall loss reserves and to date have not been material. Due to the significant uncertainties inherent in establishing such reserves, the ultimate exposure may vary from the amounts currrently reserved. An estimated provision for workers' compensation policyholders' dividends is accrued as the related premiums are earned. Such dividends do not become a fixed liability unless and until declared by the respective Boards of Directors of Zenith's insurance subsidiaries. Due to deregulation in California, policyholders' dividends are not anticipated to be material in the foreseeable future. Property insurance and reinsurance coverages expose Zenith to the risk of significant loss in the event of major adverse natural phenomena, known in the insurance industry as catastrophes. These catastrophes may cause significant contemporaneous financial statement losses since catastrophe losses may not be accrued in advance of the event. The concentration of Zenith's business in California makes the results of operations highly dependent upon the State's economy, social and cultural trends, legislative and regulatory changes, and catastrophic events such as windstorms and the Northridge earthquake. In addition, premium revenues for most property-casualty insurance coverages written in California (except workers' compensation) are subject to prior approval of rates by the California Department of Insurance. REINSURANCE In accordance with general industry practices, Zenith's insurance subsidiaries annually purchase reinsurance to protect themselves 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 reserves for incurred but not reported losses, are reported as assets and are included in receivables from reinsurers. Earned premiums are stated in the consolidated financial statements after deduction of amounts ceded to reinsurers. Approximately 53% of amounts recoverable from reinsurers at December 31, 1996 are attributable to reinsurance arrangements with one large United States reinsurance CalFarm [THE ZENITH] 41 company. No material amounts due from reinsurers have been written off as uncollectible in the three years ended December 31, 1996. 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. Profitable real estate operations are dependent upon real estate values, interest rates, construction costs, competition and management ability. 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. The cost of modifying software for year 2000 compliance is expensed as incurred. INTANGIBLE ASSETS Purchased intangibles and the costs in excess of tangible assets acquired, including those related to the acquisition of AGC-SIF discussed in Note 14, are included in Other Assets. The amounts assigned to such assets acquired since 1970 are being amortized on a straight-line basis over 20 to 25 years. Amortization expense was $412,000 in 1996 and $487,000 in 1995 and 1994, and accumulated amortization was $6,168,000 at December 31, 1996 and $5,756,000 at December 31, 1995. At December 31, 1996, intangible assets were $8,343,000, of which $6,334,000 are amortizable. RECLASSIFICATIONS AND RESTATEMENTS Certain 1995 amounts have been reclassified to conform to the 1996 presentation. Financial information with respect to Life and Annuity operations for 1994 has been restated as discontinued operations (see Note 15). Health insurance for 1994 has been reclassified to property-casualty operations. 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 thousands) AMORTIZED UNREALIZED UNREALIZED FAIR DECEMBER 31, 1996 COST GAINS (LOSSES) VALUE - ------------------------------------------------------------------------- HELD-TO-MATURITY Corporate debt $ 5,339 $ (270) $ 5,069 Mortgage-backed 48,014 $ 36 (6) 48,044 - ------------------------------------------------------------------------- Total, held-to-maturity $ 53,353 $ 36 $ (276) $ 53,113 - ------------------------------------------------------------------------- AVAILABLE-FOR-SALE U.S. Treasuries $ 173,971 $ 57 $ (694) $ 173,334 Corporate debt 334,448 4,018 (5,036) 333,430 Mortgage-backed 77,906 197 (1,821) 76,282 Redeemable preferred stocks 19,467 449 (196) 19,720 Equities 32,503 5,027 (1,189) 36,341 Short-term investments 106,712 106,712 - ------------------------------------------------------------------------- Total, available- for-sale $ 745,007 $ 9,748 $ (8,936) $ 745,819 - ------------------------------------------------------------------------- TRADING Corporate debt $ 2,964 $ (100) $ 2,864 Equities 891 $ 394 1,285 - ------------------------------------------------------------------------- Total, trading $ 3,855 $ 394 $ (100) $ 4,149 - -------------------------------------------------------------------------
42 - -------------------------------------------------------------------------
TYPE OF SECURITY (Dollars in GROSS GROSS thousands) AMORTIZED UNREALIZED UNREALIZED FAIR DECEMBER 31, 1995 COST GAINS (LOSSES) VALUE - ------------------------------------------------------------------------- HELD-TO-MATURITY Mortgage-backed $ 56,674 $ 1,142 $ 57,816 - ------------------------------------------------------------------------- Total, held-to-maturity $ 56,674 $ 1,142 $ 57,816 - ------------------------------------------------------------------------- AVAILABLE-FOR-SALE U.S. Treasuries $ 176,997 $ 641 $ (251) $ 177,387 Corporate debt 231,198 10,485 (126) 241,557 Mortgage-backed 117,876 427 (861) 117,442 Redeemable preferred stocks 19,849 643 20,492 Equities 32,910 4,185 (1,566) 35,529 Short-term investments 137,083 137,083 - ------------------------------------------------------------------------- Total, available- for-sale $ 715,913 $ 16,381 $ (2,804) $ 729,490 - ------------------------------------------------------------------------- TRADING U.S. Treasuries $ 7,044 $ (17) $ 7,027 Corporate debt 2,958 (37) 2,921 Equities 891 $ 105 996 - ------------------------------------------------------------------------- Total, trading $ 10,893 $ 105 $ (54) $ 10,944 - -------------------------------------------------------------------------
In 1995, Zenith owned certain debt securities issued by ITT Corporation ("ITT") with an amortized cost of $7,302,000 and a market value of $8,089,000. In June of 1995, Zenith received information from ITT and other sources concerning the proposed treatment of its debt securities, including those owned by Zenith, in connection with a plan of reorganization of ITT into three new companies. Management concluded from this information that a significant deterioration in creditworthiness, as described in SFAS No. 115, would occur with respect to Zenith's investments in ITT debt securities upon consummation of the reorganization. Accordingly, these securities were transferred from the held-to-maturity portfolio to the available-for-sale portfolio and unrealized appreciation on these securities amounting to $787,000 was recorded as an adjustment to stockholders' equity in the second quarter of 1995. On December 28, 1995, under the guidance of FASB Special Report, A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities -- Questions and Answers, Zenith re-evaluated its portfolio of held-to-maturity securities. As a result, Zenith reclassified certain held-to-maturity securities, with an amortized cost of $76,029,000 and an unrealized gain of $6,651,000 at the date of transfer, to available- for-sale. Debt securities at December 31, 1996, are due as follows:
- ------------------------------------------------------ (Dollars in thousands) AMORTIZED FAIR DECEMBER 31, 1996 COST VALUE - ------------------------------------------------------ HELD-TO-MATURITY: Due after ten years $ 53,353 $ 53,113 - ------------------------------------------------------ Total $ 53,353 $ 53,113 - ------------------------------------------------------ AVAILABLE-FOR-SALE: Due in one year or less $ 136,372 $ 136,435 Due after one year through five years 222,680 222,836 Due after five years through ten years 186,933 187,040 Due after ten years 166,519 163,167 - ------------------------------------------------------ Total $ 712,504 $ 709,478 - ------------------------------------------------------
Fluctuating interest rates will impact stockholders' equity, profitability and maturities of certain debt and preferred securities. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Mortgage-backed securities are shown as being due at their average expected maturity dates. Redeemable preferred stocks with sinking fund redemption periods are shown as being due at the mid- point of the sinking fund period. During the past three years, Zenith has not incurred any material losses due to the credit quality of its investments and has not included in its financial statements any allowance for possible future losses. The gross realized gains on sales of investments classified as available-for-sale during 1996, 1995 and 1994 were $8,564,000, $4,161,000 and $4,310,000, respectively and the gross realized losses were $2,355,000, $1,604,000 and $2,140,000, respectively. CalFarm [THE ZENITH] 43 Investment income is summarized as follows:
- --------------------------------------------------------------- (Dollars in thousands) YEAR ENDED DECEMBER 31, 1996 1995 1994 - --------------------------------------------------------------- Fixed maturities Bonds $ 37,968 $ 37,019 $ 29,391 Redeemable preferred stocks 1,578 1,143 2,199 Equity securities Floating rate preferred stocks 876 1,229 1,439 Convertible and nonredeemable preferred stocks 402 281 484 Common stocks 758 571 441 Short-term investments 9,257 6,555 6,931 Other 3,608 1,703 2,112 - --------------------------------------------------------------- 54,447 48,501 42,997 Less investment expenses 3,293 2,351 2,929 - --------------------------------------------------------------- Net investment income $ 51,154 $ 46,150 $ 40,068 - ---------------------------------------------------------------
Investments carried at their fair value of $305,440,000 at December 31, 1996 and $310,107,000 at December 31, 1995 were on deposit with regulatory authorities in compliance with insurance company regulations. At December 31, 1996, Zenith and its subsidiaries owned $5,886,000, at fair value, of securities issued by Reliance Insurance Company, its parent and affiliates. Reliance Insurance Company is a major stockholder of Zenith. At December 31, 1996, Zenith and its subsidiaries owned $12,500,000, at fair value, of securities in Delta Life Corporation. The Chairman, President and Chief Executive Officer of Delta Life Corporation is also a Director of Zenith. NOTE 3 PROPERTIES AND EQUIPMENT Properties and equipment consist of the following:
- ------------------------------------------------------ (Dollars in thousands) DECEMBER 31, 1996 1995 - ------------------------------------------------------ Land $ 14,836 $ 14,836 Buildings 31,642 31,142 Furniture, fixtures and equipment 32,249 26,218 - ------------------------------------------------------ 78,727 72,196 Less accumulated depreciation 29,548 23,494 - ------------------------------------------------------ Total $ 49,179 $ 48,702 - ------------------------------------------------------
Depreciation expense amounted to $5,503,000, $4,949,000 and $4,267,000 in 1996, 1995 and 1994, respectively. NOTE 4 PAYABLE TO BANKS AND OTHER NOTES PAYABLE Zenith has lines of credit available of $50 million. As of December 31, 1996 and 1995, 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%, or a fixed rate chosen by Zenith, and at the bank's prime rate, less .50%, or a fixed rate chosen by Zenith on the other line of credit. Under these agreements, certain restrictive covenants apply including the maintenance of a specific level of net worth for Zenith and its insurance subsidiaries. There were no borrowings on the lines of credit in 1996. The weighted average interest rate for 1995 and 1994 was 6.8% and 8.5%, respectively. The prime interest rate was 8.25% and 8.5% at December 31, 1996 and 1995, respectively. Perma-Bilt has two construction loan agreements, each providing for a subdivision lot development loan and a construction revolving line of credit loan, bearing interest at prime plus 1.5% and prime plus 1.25%, respectively. Each agreement pertains to a separate residential housing project and the maximum that may be borrowed under the two agreements combined is $20,048,000. At December 31, 1996, $11,147,000 was outstanding with respect to these loans. The loans mature between June 20, 1997 and January 10, 1998. The carrying value of these variable-rate loans approximates fair value at December 31, 1996. Perma-Bilt is also obligated under various notes payable arising from its purchase of several parcels of property. Such notes are collateralized by the land parcels and bear interest at rates between 8% and 12%, with a maximum maturity of September 2001. The balance outstanding with respect to these notes was $3,361,000 at December 31, 1996. NOTE 5 SENIOR NOTES PAYABLE Zenith issued $75,000,000 of 9% Senior Notes due 2002 (the "9% Notes") 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 44 are being amortized over the term of the notes and $121,000, $121,000 and $122,000 of such costs were amortized during 1996, 1995 and 1994, respectively. Covenants contained in the indenture include restrictions on the ability of Zenith and its subsidiaries to incur secured debt and the right of holders of the 9% Notes to require Zenith to repurchase the 9% Notes upon a decline in the rating of the 9% Notes within ninety days after the occurrence of certain events. Those events are: (a) a person or group becomes the beneficial owner of more than 50% of Zenith common stock; (b) 10% or more of Zenith common stock is acquired by Zenith within any 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 30% or more of the fair market value of outstanding Zenith common stock. The fair value at December 31, 1996 of the 9% Notes is $82,406,000 based on a price published by a rating agency. Interest incurred on all borrowing is summarized as follows:
- --------------------------------------------------------------------- (Dollars in thousands) YEAR ENDED DECEMBER 31, 1996 1995 1994 - --------------------------------------------------------------------- Interest capitalized for real estate operations $3,127 $1,572 $1,219 Interest not related to real estate operations 4,877 6,960 5,937 - --------------------------------------------------------------------- Total interest incurred $8,004 $8,532 $7,156 - ---------------------------------------------------------------------
NOTE 6 FEDERAL INCOME TAXES The components of the provision (benefit) for taxes on income from continuing operations are:
- ------------------------------------------------------------ (Dollars in thousands) YEAR ENDED DECEMBER 31, 1996 1995 1994 - ------------------------------------------------------------ Current $ 19,979 $ 5,947 $ 16,716 Deferred (462) 3,753 (1,408) - ------------------------------------------------------------ Total federal income taxes $ 19,517 $ 9,700 $ 15,308 - ------------------------------------------------------------
The difference between the statutory federal income tax rate of 35% and Zenith's effective tax rate on income from continuing operations, as reflected in the financial statements, is explained as follows:
- ------------------------------------------------------------------- (Dollars in thousands) YEAR ENDED DECEMBER 31, 1996 1995 1994 - ------------------------------------------------------------------- Statutory federal income tax $19,991 $10,298 $15,787 Increase (reduction) in taxes: Dividend received deduction (846) (710) (944) Other 372 112 465 - ------------------------------------------------------------------- Total federal income taxes $19,517 $ 9,700 $15,308 - -------------------------------------------------------------------
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: - ------------------------------------------------------------------------------
1996 1995 (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, principally unrealized appreciation on available-for-sale investments $ 602 $ 6,291 Deferred policy acquisition costs 7,263 7,119 Purchased intangibles 1,991 5,372 Properties and equipment 2,385 2,224 Property-casualty loss reserve discount $ 28,070 $ 25,408 Limitation on deduction for unearned premiums 8,515 7,921 Policyholders' dividends accrued 2,286 4,235 Other 2,272 5,348 1,711 4,079 - ------------------------------------------------------------------------------ 41,143 17,589 39,275 25,085 - ------------------------------------------------------------------------------ Net deferred tax assets $ 23,554 $ 14,190 - ------------------------------------------------------------------------------
Zenith's deferred tax assets are considered fully realizable because of the historic profitability of Zenith's property-casualty operations, therefore no valuation allowance was recorded at December 31, 1996 and 1995. 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 and deferred taxes were as follows:
- -------------------------------------------------------- (Dollars in thousands) YEAR ENDED DECEMBER 31, 1996 1995 - -------------------------------------------------------- Current taxes $ 6,385 $ 419 Deferred taxes 23,554 14,190 - -------------------------------------------------------- Federal income taxes $ 29,939 $ 14,609 - --------------------------------------------------------
CalFarm [THE ZENITH] 45 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. NOTE 7 REINSURANCE Reinsurance transactions reflected in the financial statements are as follows:
- ------------------------------------------------------------ (Dollars in thousands) 1996 1995 1994 - ------------------------------------------------------------ Ceded reinsurance netted against earned premiums for the year $ 24,642 $ 21,112 $ 21,521 Ceded reinsurance netted against property and casualty losses and loss adjustment expenses incurred 12,396 15,532 17,133 Net assumed reinsurance included in earned premiums for the year 41,930 45,367 37,787 - ------------------------------------------------------------
Zenith Insurance has an assumed reinsurance agreement with Reliance Insurance Company, a major stockholder of Zenith. Estimated costs paid to Reliance relating to this arrangement amounted to $181,000, $460,000 and $370,000 for 1996, 1995 and 1994, respectively. Such costs are unrelated to the business conducted between AGC-SIF and Reliance Insurance Company discussed in Note 14. Zenith maintains excess of loss and catastrophic reinsurance protection which varies based on the type of coverage. Excess of loss reinsurance covers losses per occurrence in excess of $350,000 for property, $550,000 for workers' compensation and $700,000 for liability and umbrella. Zenith's catastrophic reinsurance coverage provides protection against aggregate losses per event up to $45,000,000 for property and $100,000,000 for workers' compensation. Assumed reinsurance business is not covered by such catastrophe reinsurance. Credit quality of reinsurers may impact profitability and stockholders' equity. No losses have been incurred from uncollectible reinsurance during the past three years and no allowances are carried on the financial statements for unrecoverable reinsurance. NOTE 8 COMMITMENTS AND CONTINGENT LIABILITIES Zenith and its subsidiaries lease space for some of its offices expiring through 2002, equipment on leases expiring through 1998 and automobiles on two through five-year leases. The minimum rentals on these operating leases as of December 31, 1996 are as follows:
- ------------------------------------------------------------ (Dollars in thousands) EQUIPMENT AND YEAR AUTO FLEET OFFICES TOTAL - ------------------------------------------------------------ 1997 $ 799 $ 2,680 $ 3,479 1998 374 2,675 3,049 1999 64 2,336 2,400 2000 1,912 1,912 2001 1,437 1,437 Thereafter 1,463 1,463 - ------------------------------------------------------------ Total $ 1,237 $ 12,503 $ 13,740 - ------------------------------------------------------------
Rental expenses for 1996, 1995 and 1994 amounted to $5,358,000, $5,397,000 and $5,033,000, respectively. Zenith is a corporate underwriting member of Lloyd's and has committed funds of $6.4 million to support the underwriting 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. CONTINGENCIES SURROUNDING RECOVERABILITY OF STATE DISABILITY TRUST FUND RECEIVABLES Florida has created a trust fund ("SDTF") and assesses workers' compensation insurers to pay for what is commonly referred to as "Second Injuries". Assessments, based upon premium written, have been inadequate to completely fund obligations of SDTF. Zenith expects future political changes to affect SDTF, the nature of which cannot be determined at this time. Zenith has recorded a receivable from SDTF at December 31, 1996 based on specific claims identified by AGC-SIF and its historical recovery experience, the recoverability of which is dependent upon such political changes, if any. Zenith has not recorded a liability for any future assessments from SDTF. 46 CONTINGENCIES SURROUNDING ESTIMATES OF LIABILITIES FOR UNPAID LOSSES AND LOSS EXPENSES On July 5, 1995, Zenith's new workers' compensation computer system became operational. In addition to enhancing data processing, the new system is designed, among other things, to improve work flow in the workers' compensation claims handling process. Management observed certain unusual claim reserving trends and patterns in 1995 and 1996, possibly related to disruption of normal work flows due to implementation of the new system. Work flows in the future may continue to be impacted as training and optimization of the new system continues. Management believes that its estimate for liabilities for unpaid workers' compensation losses and loss adjustment expenses (amounting to $409,138,000 of total reserves for unpaid losses and loss adjustment expenses of $620,078,000) at December 31, 1996 included in these financial statements is adequate. However, subsequent re-interpretation of currently available data or any new information that becomes available may change the estimate of such liabilities in future periods and such changes, if any, will be reflected in the financial statements of the period in which they occur. RESOLUTION OF CONTINGENCIES SURROUNDING CERTAIN LITIGATION Other income of $1,910,000 was recognized in 1994 relating to the settlement in 1993 of litigation associated with Zenith's write-down of non-investment grade securities in 1990. NOTE 9 COMMON STOCK Under employee non-qualified stock option plans adopted by the Board of Directors and Stockholders in 1978 and in 1996, options are granted to 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 outstanding at December 31, 1996 expire five years after the date of grant or three months after termination of employment. Options granted vest one-fourth per year after the first year. One grant for one million shares is for a term of ten years and vests one-fifth per year after the first year. Zenith has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS No. 123") effective for the year ended December 31, 1996. Accordingly, no compensation cost has been recognized for the stock option plans. Had compensation cost for Zenith's stock option plans been determined based on the fair value at the grant date for awards in 1996 and 1995 consistent with the provisions of SFAS No. 123, Zenith's net income and net income per share would have been reduced to the pro-forma amounts indicated below:
- --------------------------------------------------------------- (Dollars in thousands except per share data) 1996 1995 - --------------------------------------------------------------- Net income -- as reported $ 37,600 $ 6,600 Net income -- pro-forma 36,647 6,541 Earnings per share -- as reported 2.11 .36 Earnings per share -- pro-forma 2.00 .36 - ---------------------------------------------------------------
The pro-forma effect on net income for 1996 and 1995 is not representative of the pro-forma effect on net income in future years because it does not take into consideration pro-forma compensation expense related to grants made prior to 1995. The fair value of each option grant is estimated on the date of grant using the Black- Scholes option pricing model with the following weighted average assumptions used for grants in 1996: dividend yield of 4.2%; expected volatility of 27.4%; risk-free interest rate of 6.5% and expected lives of 4 years for options with a five-year term and 10 years for options with a ten-year term. The weighted average grant date fair value of options granted during 1996 and 1995 was $6.16 and $4.43, respectively. CalFarm [THE ZENITH] 47 Additional information with respect to stock options is as follows:
- ---------------------------------------------------------------- WEIGHTED AVERAGE NUMBER EXERCISE (Options in thousands) OF SHARES PRICE - ---------------------------------------------------------------- Outstanding at January 1, 1994 1,304 $19.74 Granted 190 23.49 Exercised 124 16.88 Expired or cancelled 75 18.87 - ---------------------------------------------------------------- Outstanding at December 31, 1994 1,295 20.62 Granted 509 21.52 Exercised 276 15.96 Expired or cancelled 394 21.24 - ---------------------------------------------------------------- Outstanding at December 31, 1995 1,134 21.94 Granted 1,422 24.51 Exercised 136 18.90 Expired or cancelled 72 22.56 - ---------------------------------------------------------------- Outstanding at December 31, 1996 2,348 $23.65 - ----------------------------------------------------------------
The number of shares exercisable and the weighted average exercise price of options outstanding at December 31, 1996, 1995 and 1994 were 474,000 and $22.44, 335,000 and $21.40 and 764,000 and $19.19, respectively. The range of exercise price of options outstanding at December 31, 1996 was $16.68-$28.19 per share. The weighted average remaining contractual life of the options with a five-year term was 3.3 years. Such life for the options with a ten-year term was 9.2 years. At December 31, 1996, Zenith had authority from its Board of Directors to purchase 1,104,000 common shares at prevailing market prices. NOTE 10 DIVIDEND RESTRICTIONS State insurance regulations limit the maximum dividends that may be paid to Zenith by its insurance company subsidiaries during any 12-month period without prior regulatory approval. Stockholder's equity of Zenith's insurance subsidiaries, in accordance with generally accepted accounting principles, amounted to $327,948,000 as of December 31, 1996, of which $26,534,000 can be paid in 1997 to Zenith in dividends without prior approval, leaving a restricted balance of $301,414,000. NOTE 11 STATUTORY FINANCIAL DATA Capital stock and surplus and net income of Zenith's insurance subsidiaries on a statutory basis as reported to regulatory authorities were as follows:
- ------------------------------------------------------ (Dollars in thousands) YEAR ENDED DECEMBER 31, 1996 1995 1994 - ------------------------------------------------------ Capital stock and surplus $ 265,341 $ 223,019 $ 230,040 Net income 33,384 17,157 32,856 - ------------------------------------------------------
The insurance business is subject to state-by- state regulation and legislation focused on solvency, pricing, market conduct, claims practices, underwriting, accounting, investment criteria and other areas. Such regulation and legislation is constantly changing and compliance is essential and is an inherent risk of the business. NOTE 12 UNAUDITED QUARTERLY FINANCIAL DATA
- ---------------------------------------------------------------------- (Dollars in thousands except per share data) YEAR ENDED MARCH JUNE SEPTEMBER DECEMBER DECEMBER 31, 1996 31 30 30 31 - ---------------------------------------------------------------------- Premium earned $ 112,237 $ 108,255 $ 112,492 $ 119,872 Net investment income 12,054 12,836 12,574 13,690 Realized gains on investments 4,272 3,778 178 2,579 Real estate sales 5,985 8,810 11,822 14,937 Net income 12,400 10,700 9,100 5,400 Net income per share .70 .60 .51 .30 - ----------------------------------------------------------------------
- ----------------------------------------------------------------- (Dollars in thousands except per share data) YEAR ENDED MARCH JUNE SEPTEMBER DECEMBER DECEMBER 31, 1995 31 30 30 31 - ----------------------------------------------------------------- Premium earned $ 107,059 $ 106,439 $ 108,401 $ 115,614 Net investment income 11,291 11,949 11,510 11,400 Realized gains on investments 166 1,013 1,548 894 Real estate sales 8,820 11,273 8,859 2,784 Income from continuing operations 4,358 7,511 6,000 1,853 Income from continuing operations per share .23 .40 .34 .10 Net income (loss) 6,900 10,200 (11,800) 1,300 Net income (loss) per share .36 .54 (.66) .07 - -----------------------------------------------------------------
Amounts for the first two quarters of 1995 have been restated to reflect the life and annuity operations of CalFarm Life Insurance Company as discontinued operations. 48 NOTE 13 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, 1996.
- --------------------------------------------------------------- (Dollars in thousands) 1996 1995 1994 - --------------------------------------------------------------- Beginning of year, net of reinsurance recoverable $ 463,123 $ 462,710 $ 474,499 Incurred claims: Current year 318,509 327,724 303,568 Prior years (3,809) (2,135) (9,720) - --------------------------------------------------------------- Total incurred claims 314,700 325,589 293,848 - --------------------------------------------------------------- Payments: Current year (131,061) (149,688) (131,938) Prior years (185,764) (175,488) (173,699) - --------------------------------------------------------------- Total payments (316,825) (325,176) (305,637) - --------------------------------------------------------------- End of year, net of reinsurance 460,998 463,123 462,710 Reinsurance recoverable 56,390 54,429 47,696 - --------------------------------------------------------------- End of year, before AGC-SIF 517,388 517,552 510,406 - --------------------------------------------------------------- AGC-SIF reserves acquired on December 31, 1996, net 65,429 AGC-SIF recoverable from reinsurers & state trust funds 37,261 - --------------------------------------------------------------- End of year $ 620,078 $ 517,552 $ 510,406 - ---------------------------------------------------------------
Statutory reserves differ from GAAP in 1996 by the amount of the deposit receivable from Reliance, which is treated as reinsurance recoverable for statutory purposes. NOTE 14 ACQUISITION On December 31, 1996, Zenith completed the previously-announced acquisition of AGC-SIF. Under the terms of the acquisition, Zenith acquired by merger all of AGC-SIF's assets and assumed its liabilities, including the liabilities of the insured Members of AGC-SIF for future assessments. Over a three-year period, Zenith will distribute to AGC-SIF's Members a minimum amount of $1.14 million to a maximum amount equal to AGC-SIF's Adjusted GAAP Net Worth, as defined in the Agreement, based on a formula and audited by an independent certified public accounting firm. The acquisition was accounted for as a purchase and the assets and liabilities of AGC-SIF at December 31, 1996 were merged into Zenith's wholly-owned subsidiary, Zenith Insurance Company, and are included in Zenith's December 31, 1996 consolidated balance sheet. The following table summarizes the fair value of AGC-SIF's assets acquired and liabilities assumed at the date of acquisition.
- ----------------------------------------------------------- (Dollars in thousands) DECEMBER 31, 1996 - ----------------------------------------------------------- Assets Invested assets, primarily U.S. Government issues $ 44,527 Cash 2,662 Premiums receivable 6,923 Receivable from reinsurers and state trust funds 38,143 Deposit receivable 14,776 Other assets, including intangible assets 8,137 - ----------------------------------------------------------- Total assets $ 115,168 - ----------------------------------------------------------- Liabilities Unpaid losses and loss expenses $ 102,690 Other liabilities 12,478 - ----------------------------------------------------------- Total liabilities $ 115,168 - -----------------------------------------------------------
Intangible assets arising from the merger amounted to approximately $2,889,000 which will be amortized over 20 years. The purchase price allocation has been prepared on a preliminary basis, subject to adjustment should new or additional facts become known. The following pro-forma financial information combines Zenith and AGC-SIF's results of operations assuming that the acquisition took place at the beginning of 1995. These pro- forma results are not necessarily indicative of future operations of the combined company.
- -------------------------------------------------------- (Dollars in thousands except per share data) 1996 1995 - -------------------------------------------------------- Total revenues $ 600,469 $ 564,114 Income from continuing operations 35,932 18,837 Net income 35,932 5,715 Earnings per share: Income from continuing operations 2.01 1.03 Net income 2.01 .31 - --------------------------------------------------------
AGC-SIF purchased aggregate excess and specific excess reinsurance for protection against losses in excess of stated retentions in each year of coverage. The maximum coverage varies by year. For the three years ended December 31, 1996, the retention was $750,000 per occurrence and the maximum coverage was the statutory limit. Beginning in 1997, reinsurance for business written in Florida will be combined with Zenith's existing reinsurance arrangements as described in Note 7. AGC-SIF maintained certain reinsurance agreements with Reliance Insurance Company, which is a major stockholder of Zenith. On December 31, 1996, Zenith acquired balances relating to these contracts of $20,215,000, of which $14,776,000 is included as a deposit receivable in CalFarm [THE ZENITH] 49 Zenith's consolidated balance sheet. The remainder is included in receivable from reinsurers. NOTE 15 DISCONTINUED OPERATIONS During the fourth quarter of 1995, Zenith completed the sale of its wholly-owned subsidiary, CalFarm Life Insurance Company ("CalFarm Life"), to a subsidiary of SunAmerica, Inc. for approximately $120 million in cash. The group health insurance business of CalFarm Life was retained by Zenith. The sale resulted in a loss of approximately $19.5 million, after tax, which was recognized by Zenith principally in the third quarter of 1995. The life and annuity operations of CalFarm Life are presented as discontinued operations and prior-year financial statements have been restated. The unrealized loss associated with investments classified as available-for-sale in the life and annuity operation at December 31, 1994 was $22,539,000 net of deferred taxes. Group health insurance operations are included in the property-casualty business segment. Revenues for the discontinued operation were $88,610,000 and $83,357,000 for 1995 and 1994, respectively. After tax income for the discontinued operation from the measurement date to the disposal date was $3,960,000. NOTE 16 SEGMENT INFORMATION Zenith's operations are conducted through two 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 direct 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. 50 The following table is a summary of results by major segments:
- ----------------------------------------------------------------------------------------------------- (Dollars in thousands except per share data) YEAR ENDED DECEMBER 31 1996 1995 1994 - ----------------------------------------------------------------------------------------------------- PROPERTY-CASUALTY Net written premiums $ 458,061 $ 439,882 $ 448,640 Net earned premiums 452,856 437,513 438,829 Investment income 48,457 45,931 39,611 Underwriting income (loss) 1,093 (13,600) 9,507 Income from continuing operations after taxes and before realized gains(1) 32,629 21,608 32,405 Income from continuing operations after taxes 39,654 23,934 33,327 Identifiable assets 1,137,520 1,005,133 961,212 - ----------------------------------------------------------------------------------------------------- PARENT Real estate sales 41,554 31,736 30,220 Investment income 2,697 219 457 (Loss) from continuing operations after taxes and before realized gains(1) (2,054) (4,240) (3,536) (Loss) from continuing operations after taxes (2,054) (4,212) (3,529) Identifiable assets 108,350 115,429 28,752 - ----------------------------------------------------------------------------------------------------- CONSOLIDATED TOTAL Net earned premiums 452,856 437,513 438,829 Real estate sales 41,554 31,736 30,220 Investment income 51,154 46,150 40,068 Underwriting income (loss) 1,093 (13,600) 9,507 Income from continuing operations after taxes and before realized gains(1)(2) 30,575 17,368 27,628 Income from continuing operations 37,600 19,722 29,798 Income (loss) from discontinued life and annuity operations, net of tax (13,122) 8,102 Net income 37,600 6,600 37,900 Per share 2.11 .36 1.99 Total assets(3) $ 1,242,724 $ 1,115,433 $ 1,093,675 - ----------------------------------------------------------------------------------------------------- (1) Realized gains on investments after taxes were as follows: 1996 1995 1994 --------------------------------------- Property-Casualty $ 7,025 $ 2,326 $ 922 Parent 28 7 --------------------------------------- Consolidated Total $ 7,025 $ 2,354 $ 929 (2) Excludes $1,241,000 in 1994 for effect of legal settlement. (3) Reflects elimination entry of $3,146,000, $5,129,000 and $661,000 in 1996, 1995 and 1994, respectively and net assets of discontinued operations of $104,372,000 in 1994.
NOTE 17 UNAUDITED COMMON STOCK MARKET PRICES The following table shows the high and low common stock prices during each quarter for the past two years.
- ---------------------------------------------------------------------------------- 1996 1995 ---------------------- ---------------------- HIGH LOW High Low - ---------------------------------------------------------------------------------- March 31 247/8 211/8 223/4 193/8 June 30 287/8 237/8 22 20 September 30 281/2 261/4 241/4 20 December 31 28 251/4 245/8 20 - ----------------------------------------------------------------------------------
CalFarm [THE ZENITH] 51 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, 1996 and 1995, and the related consolidated statements of operations, cash flows, and stockholders' equity for each of the three years in the period ended December 31, 1996. 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, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Coopers & Lybrand L.L.P. Los Angeles, California, February 14, 1997 52 EX-21 9 EXHIBIT 21 EXHIBIT 21 SUBSIDIARIES OF ZENITH Set forth below are the names of certain subsidiaries of Zenith. Certain subsidiaries, which considered in the aggregate would not constitute a significant subsidiary, are omitted from the listing below.
JURISDICTION OF NAME ORGANIZATION - ----------------------------------------------------------------- --------------------------- Zenith Insurance Company California CalFarm Insurance Company California ZNAT Insurance Company California CalFarm Insurance Agency California Zenith Star Insurance Company Texas Perma-Bilt, a Nevada Corporation Nevada ZIC Lloyd's Underwriting Limited England
EX-27 10 FINANCIAL DATA SCHEDULE
7 1,000 YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 712,342 53,353 53,113 37,626 0 0 852,799 12,125 0 20,752 1,242,724 620,078 127,209 0 9,109 88,861 0 0 24,447 313,056 1,242,724 452,856 51,154 10,807 41,554 314,700 84,093 53,413 57,117 19,517 37,600 0 0 0 37,600 2.11 0 463,123 318,509 (3,809) 131,061 185,764 526,427 (3,809)
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