-----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, AR61YHLRGmOCwLB7FxU3+8d3v1AfnXHeClSlWobCBvQhgJxF28YjhGzBZwQn1lj/ hzEa2vMbZKZgJtRtk49l1g== 0001047469-98-010771.txt : 19980323 0001047469-98-010771.hdr.sgml : 19980323 ACCESSION NUMBER: 0001047469-98-010771 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980320 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: SEC FILE NUMBER: 001-09627 FILM NUMBER: 98570026 BUSINESS ADDRESS: STREET 1: 21255 CALIFA ST CITY: WOODLAND HILLS STATE: CA ZIP: 91367 BUSINESS PHONE: 8187131000 10-K 1 10-K THE ZENITH - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 OR [ ] TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM .............. TO .............. COMMISSION FILE NUMBER 1-9627 ZENITH NATIONAL INSURANCE CORP. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 95-2702776 (STATE OR OTHER JURISDICTION OF (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 9, 1998 was approximately $248,495,000 (based on the closing sale price of such stock on such date). At March 9, 1998, 16,981,000 shares of Common Stock were outstanding, net of 7,792,000 shares of treasury stock. DOCUMENTS INCORPORATED BY REFERENCE (1) Portions of the Annual Report to Stockholders for fiscal year ended December 31, 1997 -- Part I and Part II. (2) Portions of the Proxy Statement in connection with the 1998 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 (as defined below) for the 10 years ended December 31, 1997 of Zenith's property-casualty operations was 100.9%. 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. 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. On October 10, 1997, Zenith Insurance Company of Florida ("ZIC of Florida") was incorporated in Florida with a capitalization of $6 million. ZIC of Florida has no direct business, but has assumed business from Zenith Insurance. See "Reinsurance Ceded -- Pooling Agreement." On June 17, 1997, Zenith Insurance entered into an agreement with RISCORP, Inc. and certain of its subsidiaries (collectively "RISCORP") to purchase all of the assets of RISCORP related to its workers' compensation business and to assume certain liabilities related to RISCORP's insurance businesses. See "Pending RISCORP Acquisition" on page 31 of "Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations" and Notes to Consolidated Financial Statements -- Note 14 -- "Acquisitions" on pages 54 and 55 of Zenith's 1997 Annual Report to Stockholders, which are hereby incorporated by reference. The 1997 edition of Best's Key Rating Guide ("Best's") assigns 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. Zenith is currently under review by A.M. Best Company and Standard & Poor's. At December 31, 1997, Zenith and its subsidiaries had approximately 1,400 full-time employees. The principal executive offices of Zenith are located at 21255 Califa Street, Woodland Hills, California 91367-5021, telephone (818) 713-1000. GLOSSARY OF SELECTED INSURANCE TERMS The following terms when used herein have the following meanings: Assume To receive from a ceding company all or a portion of a risk in consideration of receipt of a premium. Cede To transfer to a reinsurer all or a portion of a risk in consideration of payment of a premium.
1 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. 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. Retrocession A reinsurance of reinsurance assumed. Statutory accounting Accounting practices 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.
2 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 (49% of 1997 consolidated net premiums earned); other property-casualty, principally automobile, homeowners, farmowners, commercial coverages and health insurance (44% of 1997 consolidated net premiums earned); and reinsurance (7% of 1997 consolidated net premiums earned). Results of such operations for the three years ended December 31, 1997 are set forth in the table on page 25 of Zenith's 1997 Annual Report to Stockholders, which table is hereby incorporated by reference. The earnings of Zenith's property-casualty operations are supplemented by the generation of investment income discussed under "Investments." 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 Notes to Consolidated Financial Statements -- Note 17 -- "Segment Information" on pages 55 and 56 of Zenith's 1997 Annual Report to Stockholders, which note is hereby incorporated by reference. PROPERTY-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. On December 31, 1996, Zenith completed the acquisition of AGC-SIF in Florida. Net premiums earned in 1997 by state are set forth in the table below:
(DOLLARS IN THOUSANDS) 1997 PREMIUMS EARNED % ----------------------- --------- California.................... $ 129,791 53.6% Florida....................... 47,214 19.5 Texas......................... 28,045 11.6 Arkansas...................... 12,377 5.1 Illinois...................... 9,844 4.1 Other......................... 14,793 6.1 ----------------------- --------- $ 242,064 100.0% ----------------------- --------- ----------------------- ---------
3 Premiums earned from Florida are expected to further increase upon closing of the pending RISCORP acquisition. See "General." According to A.M. Best, Zenith's five-year loss ratio of 45.1% through 1996 (latest available statistics) was the lowest loss ratio of the top 50 property-casualty 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 101.9%. Zenith Insurance is licensed to conduct business in 43 states and the District of Columbia. 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, although the California workers' compensation market has been impacted by intense price competition and a decline in industry premium volume since 1995. Zenith's non-California underwriting results in 1997 were more favorable than its California results, and management intends to proceed with its national expansion. However, increased national competition is expected to follow from these favorable trends. 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 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. Companies must file such rates with the California Department of Insurance, but the use of scheduled rating credits allow companies considerable flexibility in determining the amount of premium to be charged to a policyholder or potential policyholder. 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 success of Zenith's geographic expansion outside of California, the economic outlook for area in which Zenith operates, Zenith's continuing efforts to control medical and indemnity costs through return-to-work and managed care strategies and the ability to keep operating expenses in line with premium volume. 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% or lower. 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 became insignificant as an element in workers' compensation insurance in California. Zenith continued to market its integrated workers' compensation, health and disability insurance products in California and Arkansas 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. The policies are sold on an integrated basis in 4 California and Arkansas under the name "SinglePoint." SinglePoint did not have a significant impact on the 1997 operations of Zenith. PROPERTY-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. For the 12 years since CalFarm was acquired by Zenith, the combined ratio of Zenith's Other Property-Casualty operation was 100.6%. 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 1997. CalFarm Insurance insured approximately 19,300 personal automobiles and 64,200 commercial and farm vehicles in 1997. Farmowners business is the second largest line of CalFarm Insurance's business, representing approximately 11% of Zenith's property and casualty premiums written in 1997. 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 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 were implemented during 1997 which further limit the impact of territorial rating on automobile insurance rates. In January 1997, the mandatory proof of insurance law and Proposition 213, which created the Personal Responsibility Act of 1996, became effective in California. Proposition 213 limits non-economic recoveries by uninsured motorists in motor vehicle accidents. 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 provides limited earthquake coverage throughout California. Participation in the CEA is voluntary and Zenith 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. During 1997, Zenith continued to write homeowners and associated earthquake exposures. Earthquake exposure is monitored 5 through the use of earthquake modeling software and simulation techniques and through the use of industry experts. Catastrophe reinsurance is used to protect Zenith from excessive catastrophe losses. See "Reinsurance Ceded." PROPERTY-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 1998 and premium income in 1998 may be reduced compared to 1997. Since the inception of this operation in 1985, the combined ratio of Zenith's Reinsurance operation was 94.1%. On January 1, 1995, Zenith Insurance became a corporate underwriting member of Lloyd's through a 100% wholly-owned subsidiary, ZIC Lloyd's Underwriting Limited, which had committed funds to support the underwriting of a certain syndicate. During the fourth quarter of 1997, this subsidiary was sold at a profit. 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 1997, Perma-Bilt closed and delivered 305 homes at an average selling price of $149,000, compared to 287 homes at an average selling price of $145,000, the prior year. Sales in 1997 were $45,419,000 and pre-tax income was $1,678,000 compared to sales of $41,554,000 and pre-tax income of $1,909,000 the previous year. Land acquired by Perma-Bilt at a cost of about $33,466,000 will support the construction and sale of an estimated 1,150 homes over the next several years and possibly some commercial and/or apartment development. Increased interest rates may impact the rate of home sales, but Zenith believes that the land it has acquired is strategically located and will have long-term value. YEAR 2000 In the spring of 1996, Zenith began replacing and modifying its computer and business systems to be Year 2000 compliant. Zenith has established a central team to evaluate and implement the changes to computer systems, applications and business processes necessary to 6 achieve Year 2000 conversion with no disruption to business operations. Even though Zenith has been communicating with third parties with whom it does business to assure that they are Year 2000 compliant, Zenith may be adversely impacted if such third parties do not address this issue successfully. Through December 31, 1997, Zenith has incurred about $2.5 million on the Year 2000 efforts and anticipates an additional $2.0 million will be incurred through 1999. All of the significant internal insurance computer systems, applications and business processes are expected to be fully compliant by the end of 1998. Management of RISCORP has informed Zenith that it is currently in the process of identifying and evaluating its computer and business systems with respect to Year 2000 issues. At this time, however, management of RISCORP has neither informed Zenith of the total cost of achieving Year 2000 compliance for its systems nor presented a plan for doing so. If the transaction closes, Zenith may be adversely impacted if substantial changes are required after the closing for RISCORP's computer and business systems to achieve Year 2000 compliance, and if such changes are not covered by indemnification rights contained in the purchase agreement. 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 36 and 37 of Zenith's 1997 Annual Report to Stockholders, which is hereby incorporated by reference, and the table setting forth the reconciliation of changes in the liabilities for loss and loss adjustment expenses included in Notes to Consolidated Financial Statements -- Note 13 -- "Loss and Loss Adjustment Expense Reserves" on page 53, of Zenith's 1997 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 Notes to Consolidated Financial Statements -- Note 1 -- "Summary of Accounting Policies, Operations, and Principles of Consolidation" on pages 44 through 47 of Zenith's 1997 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 insurance business is set forth in the table on page 26 of Zenith's 1997 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 four regional offices in California and offices outside of California in Texas, Arkansas, Pennsylvania, Utah, Illinois and Florida, each of which is fully staffed to conduct all 7 workers' compensation claims operations, including review of initial reports of work injury, assignment of appropriate field investigation and determination of whether subrogation should be pursued. Workers' Compensation claims operations are supported by computer systems that provide immediate access to policy coverage verification and claims records and enable Zenith Insurance to detail claims payment histories and policy loss experience reports. Legislative reform of the California workers' compensation system was enacted in 1993. In addition, Zenith undertook significant additional expenditures to improve the loss adjustment process in recent years with a view to mitigating the effect of adverse claim trends, particularly the effect of fraud and abuse. In 1995, Zenith's new workers' compensation computer system ("system") became operational. Management observed certain unusual claim reserving trends and patterns in 1995 and 1996, and to a much lesser degree, during the first three quarters of 1997. Based on currently available data, these claim reserving trends and patterns have stabilized. Any subsequent re-interpretation of new information that becomes available from the system which may change the estimate of such liabilities in future periods is not considered to have a material impact on the financial position or results of operations. In 1997, loss and loss adjustment expense reserves were strengthened by approximately $12 million for accident years 1995 and 1996. Additionally, the 1997 accident year loss ratio was increased. OTHER PROPERTY-CASUALTY Other Property-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." In 1997, CalFarm Insurance sustained losses of $1,500,000 in conjunction with California storms. 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. 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 3 years. Zenith's Reinsurance reserves constitute approximately 13% of its total reserves, net of ceded reinsurance, for property and casualty unpaid losses and loss adjustment expenses at December 31, 1997, 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." There were no catastrophes in 1996 and 1997. 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 8 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. 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." 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 among various types of securities is adjusted from time to time based on market conditions, credit conditions, tax policy, fluctuations in interest rates and other factors. See "Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations -- Investments" on pages 30 and 31 of Zenith's 1997 Annual Report to Stockholders, which discussion is hereby incorporated by reference. At December 31, 1997 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 9 common stocks. The average life of the consolidated portfolio was 4.2 years at December 31, 1997. Investment income by segment is set forth in Notes to Consolidated Financial Statements -- Note 17 -- "Segment Information" on pages 55 and 56 of Zenith's 1997 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 SFAS No. 115, Zenith has identified certain securities, amounting to approximately 92% of the investments in debt securities at December 31, 1997, as available-for-sale. In 1997 stockholders' equity increased by $5.0 million, net of deferred taxes, as a result of changes in the fair values of such investments. 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 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, unforeseen 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 $26,191,000, $24,642,000 and $21,112,000 in 1997, 1996 and 1995, respectively, or 5.3%, 5.4% and 4.9% of earned premiums in 1997, 1996 and 1995, respectively. Reinsurance recoverable on unpaid losses amounted to $87,665,000, $93,651,000 and $54,429,000 in 1997, 1996 and 1995, respectively, or 14.3%, 15.1% and 10.5% of gross reserves for unpaid losses and loss adjustment expenses in 1997, 1996 and 1995, respectively. Each insurance subsidiary maintains separate reinsurance arrangements, which were as follows during 1997: 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, Everest Reinsurance Company and the London reinsurance market (primarily Lloyds' syndicates and certain United Kingdom reinsurance companies). Catastrophe reinsurance covers an additional $40,000,000 in excess of $60,000,000 and is placed with UNUM Life Insurance Company, ReliaStar 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, 1997. 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. Beginning in 1997, reinsurance for business written in Florida was 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 10 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 $80,000,000, excess of a retention of $5,000,000, for which the principal reinsurers are General Reinsurance Corporation and Centre Cat Ltd. The catastrophe reinsurance was increased to 95% of $110,000,000, excess of a retention of $5,000,000 effective February 1, 1998. CalFarm Insurance also maintains reinsurance agreements with Employers Reinsurance Corporation and Duncanson & Holt for excess risks on its accident and health contracts. Employers 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, American Reinsurance Company and other reinsurers rated A+ by A.M. Best Company. Pooling Agreement -- Zenith Insurance, CalFarm Insurance, ZNAT Insurance, ZIC of Florida and Zenith Star are parties to a pooling agreement. Under the pooling 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 four companies in the following proportions: Zenith Insurance, 77.5%; CalFarm Insurance, 18%; ZNAT Insurance, 2%; ZIC of Florida, 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 1,400 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 policies. Zenith Insurance's assumed reinsurance premiums are generated nationally by brokers and reinsurance intermediaries. CalFarm Insurance maintains a sales force of approximately 160 agents who primarily sell insurance products for CalFarm Insurance, principally in rural and suburban areas. In addition, 210 independent agents market CalFarm Insurance products and 1,285 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. 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 and health insurance. The Farm Bureau is California's 11 largest general farm organization, and represents more than 75,000 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 75,000 member families, approximately 60% are insured by CalFarm Insurance. The business of CalFarm Insurance is closely tied to the California farm economy. However, approximately 46% of Farm Bureau 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%, 31% and 30% of Zenith's total written premium for the years 1997, 1996 and 1995, respectively. The agreement of CalFarm Insurance with the Farm Bureau, which is subject to cancellation by either party on six months' notice, requires CalFarm Insurance to make 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 by CalFarm Insurance to the Farm Bureau were approximately $1 million in each of 1997, 1996 and 1995. CalFarm Insurance continues to be the largest writer of farmowners policies in the state and benefits from its sponsorship by 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 12 supervision by the California Department of Insurance, except for Zenith Star and ZIC of Florida, which are primarily subject to regulation and supervision in the State of Texas and the State of Florida, respectively. These states have broad regulatory, supervisory and administrative powers. Such powers relate to, among other things, the granting and revocation of licenses to transact business; the licensing of agents; the standards of solvency to be met and maintained; the nature of and limitations on investments; approval of policy forms and rates; periodic examination of the affairs of insurance companies; and the form and content of required financial statements. In California, Zenith Insurance, CalFarm Insurance and ZNAT Insurance are required, with respect to their workers' compensation line of business, to maintain on deposit investments meeting specified standards that have an aggregate market value equal to the companies' loss 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, 1996. Although the final Report of Examination has not yet been issued, Management does not expect any material findings. Zenith Star was examined by the Texas Department of Insurance as of December 31, 1996. Although the final Report of Examination has not yet been issued, Management does not expect any material findings. THE NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS The National Association of Insurance Commissioners ("NAIC") is a group formed by state Insurance Commissioners to discuss issues and formulate policy with respect to regulation, reporting and accounting of insurance companies. Although the NAIC has no legislative authority and insurance companies are at all times subject to the laws of their respective domiciliary states and, to a lesser extent, other states in which they conduct business, the NAIC is influential in determining the form in which such laws are enacted. In particular, Model Insurance Laws, Regulations and Guidelines (the "Model Laws") have been promulgated by the NAIC as a minimum standard by which state regulatory systems and regulations are measured. Adoption of state laws which provide for substantially similar regulations to those described in the Model Laws is a requirement for accreditation by the NAIC. 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. At December 31, 1997, adjusted capital under the RBC regulations for the Zenith Insurance Group (consisting of Zenith Insurance, CalFarm Insurance, ZIC of Florida, ZNAT Insurance and Zenith Star) was 332%, significantly above the RBC control, or required, level of capital under the regulations. The NAIC Insurance Regulatory Information System ("IRIS") was developed to assist insurance departments in overseeing the financial condition of insurance companies. Annually, IRIS key financial ratios (11 ratios for property and casualty companies) 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 1997 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. 13 The NAIC is in the process of codifying statutory accounting principles to provide a comprehensive basis of statutory accounting and reporting for use by insurance departments, insurers, and auditors. The codified principles have not yet been finalized, therefore, the effective date has not been determined. Implementation of the codified statutory accounting principles may affect the surplus level and the capitalization requirement of Zenith's insurance subsidiaries on a statutory basis. Zenith has not determined the impact of this codification. INSURANCE HOLDING COMPANY SYSTEM REGULATORY ACT Zenith's insurance subsidiaries are also subject to the California, Florida and Texas Insurance Holding Company System Regulatory Acts ("Holding Company Acts"), which contain certain reporting requirements, including the requirement that such subsidiaries file information relating to capital structure, ownership, financial condition and general business operation. The Holding Company Acts also limit dividend payments and material transactions by Zenith's insurance subsidiaries. See "Management's Discussion and Analysis of Consolidated Financial Condition and Result of Operations -- Liquidity and Capital Resources" on page 32 of Zenith's 1997 Annual Report to Stockholders, which discussion is hereby incorporated by reference. OTHER REGULATION Property and casualty insurance coverage is subject to certain regulation as described herein under "Description of Business -- Property-Casualty -- Other," and Zenith's other property-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 64.5% of Zenith's property-casualty earned premiums in 1997. 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 Notes to Consolidated Financial Statements -- Note 8 -- "Commitments and Contingent Liabilities" on page 51 of Zenith's 1997 Annual Report to Stockholders, which note is hereby incorporated by reference. CalFarm Insurance owns its home office building consisting of 133,000 square feet (and surrounding property of approximately 4 acres) in Sacramento, California. 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. 14 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 under the symbol ZNT. The table below sets forth the high and low sales prices of the Common Stock for each quarterly period during the last two fiscal years.
QUARTER 1997 1996 - ------------------------------------------------------------ ------- ------- First High...................................................... 27 7/8 24 7/8 Low....................................................... 25 7/8 21 1/8 Second High...................................................... 27 1/2 28 7/8 Low....................................................... 24 5/8 23 7/8 Third High...................................................... 28 5/8 28 1/2 Low....................................................... 26 5/16 26 1/4 Fourth High...................................................... 28 3/4 28 Low....................................................... 25 7/16 25 1/4
As of March 9, 1998, there were 353 registered 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 - ------------------------------------ ----------------------- --------------------- ------------------------ 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 February 27, 1997................... $.25 cash per share April 30, 1997 May 15, 1997 May 15, 1997........................ $.25 cash per share July 31, 1997 August 15, 1997 September 4, 1997................... $.25 cash per share October 31, 1997 November 14, 1997 December 11, 1997................... $.25 cash per share January 30, 1998 February 13, 1998 February 24, 1998................... $.25 cash per share April 30, 1998 May 15, 1998
The Holding Company Acts limit the ability of Zenith Insurance to pay dividends to Zenith, and of CalFarm Insurance, ZNAT Insurance, ZIC of Florida and Zenith Star to pay dividends to Zenith Insurance, by providing that the appropriate insurance regulatory authorities in the State of California, Texas or Florida 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 1997, Zenith Insurance paid dividends of $22,750,000 to Zenith. During 1998, Zenith Insurance will be able to pay $27,841,000 in dividends to Zenith without prior approval. In 1998, CalFarm Insurance, ZNAT Insurance, ZIC of Florida and Zenith Star, together, will be able to pay $9,317,000 in dividends to Zenith Insurance without prior approval. 15 ITEM 6. SELECTED FINANCIAL DATA. The five-year summary of selected financial information and accompanying notes, included in Zenith's 1997 Annual Report to Stockholders on pages 34 and 35, is hereby incorporated by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS. "Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations," included in Zenith's 1997 Annual Report to Stockholders on pages 24 to 33 is hereby incorporated by reference. ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Not applicable for the year ended December 31, 1997. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Reference is made to pages 36 and 37 of Zenith's 1997 Annual Report to Stockholders for information setting forth the loss and loss adjustment expense liability development for 1987 through 1997 and to the consolidated financial statements and notes thereto on pages 38 to 56 of Zenith's 1997 Annual Report to Stockholders, which are hereby incorporated by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 16 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information set forth under the captions "Section 16(a) Beneficial Ownership Reporting Compliance" and "Election of Directors" in the Proxy Statement distributed to stockholders in connection with Zenith's 1998 Annual Meeting of Stockholders which is to be filed by Zenith after the date this Report on Form 10-K is filed (the "Proxy Statement") is hereby incorporated by reference. EXECUTIVE OFFICERS OF THE REGISTRANT
OFFICER NAME AGE POSITION TERM SINCE - ----------------- --- ---------------------------------------- ------ -------- Stanley R. Zax 60 Chairman of the Board and President (1) Annual 1977 Fredricka Taubitz 54 Executive Vice President and Annual 1985 Chief Financial Officer (1) Jack D. Miller 52 Executive Vice President (2) Annual (3) James P. Ross 51 Senior Vice President (1) Annual 1978 John J. Tickner 59 Senior Vice President and Secretary (1) Annual 1985 Keith E. Trotman 61 Senior Vice President (4) Annual 1988 Philip R. Hunt 55 Senior Vice President (2) Annual 1988
- ------------------------ (1) Officer of Zenith and its subsidiaries. (2) Officer of Zenith's subsidiaries only. (3) Designated as an executive officer of the registrant on February 24, 1998. (4) Ceased being an executive officer of the registrant on February 24, 1998. Each of the executive officers has occupied an executive position with Zenith or a subsidiary of Zenith for more than five years, except for Mr. Jack D. Miller who was previously with Industrial Indemnity Company, a Property-casualty insurance company, serving as the President and Chief Executive Officer from 1995 to 1997; acting President and Chief Executive Officer from 1994 to 1995; and in various other positions from 1987 to 1994, culminating in Executive Vice President and Chief Operating Officer. There are no family relationships between any of the executive officers, and there are no arrangements or understandings pursuant to which any of them were selected as officers. ITEM 11. EXECUTIVE COMPENSATION. The information set forth under the headings "Directors' Compensation," "Executive Compensation," "Summary Compensation Table," "Option/SAR Grants in Last Fiscal Year," "Aggregated Option/SAR Exercises in Last Fiscal Year And Fiscal Year End Option/SAR Values," "Employment Agreements and Termination of Employment and Change in Control Arrangements," "Compensation Committee Interlocks and Insider Participation" and "Board of Directors' Report on Executive Compensation, Performance Bonus Committee Report on Performance Based Compensation Plans for Executive Officers" in the Proxy Statement is hereby incorporated by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information set forth under the caption "Security Ownership of Certain Beneficial Owners and Management" in the Proxy Statement is hereby incorporated by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information set forth in footnote 3 to the table set forth under the caption "Election of Directors" in the Proxy Statement is hereby incorporated by reference. 17 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 Zenith's 1997 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, 1997 and 1996 Consolidated Statement of Operations for the years ended December 31, 1997, 1996 and 1995 Consolidated Statement of Cash Flows for the years ended December 31, 1997, 1996 and 1995 Consolidated Statement of Stockholders' Equity for the years ended December 31, 1997, 1996 and 1995 Notes to Consolidated Financial Statements 2.FINANCIAL STATEMENT SCHEDULES Zenith National Insurance Corp. and Subsidiaries As of December 31, 1997. I -- Summary of Investments -- Other Than Investments in Related Parties For the years ended December 31, 1997, 1996 and 1995. III -- Supplementary Insurance Information IV -- Reinsurance Zenith National Insurance Corp. As of December 31, 1997 and 1996 and for the years ended December 31, 1997, 1996 and 1995. II -- Condensed Financial Information of Registrant Property and Casualty Loss Development on pages 36 and 37 of Zenith's 1997 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. 18 3. EXHIBITS The Exhibits listed below are filed in a separate Exhibit Volume to this Report. 2.1 Amended and Restated Agreement and Plan of Merger by and among Zenith AGC Acquisition Insurance Company, Zenith Insurance Company, Zenith National Insurance Corp., Associated General Commerce Self-Insurers' Trust Fund and AGC Risk Management Group Inc. dated as of October 7, 1996. (Incorporated herein by reference to Exhibit 2.1 to Zenith's Annual Report on Form 10-K for the year ended December 31, 1996.) 2.2 Stock Acquisition Agreement, dated as of September 19, 1995, between Anchor National Life Insurance Company and Zenith National Insurance Corp. (Incorporated herein by reference to Exhibit 2.1 to Zenith's Report on Form 8-K dated October 6, 1995.) 2.3 Amendment No. 1 to Stock Acquisition Agreement dated as of December 27, 1995, by and among Anchor National Life Insurance Company, SunAmerica Life Insurance Company and Zenith National Insurance Corp. (Incorporated herein by reference to Exhibit 2.1 to Zenith's Report on Form 8-K dated January 9, 1996.) 3.1 Certificate of Incorporation of Zenith as in effect immediately prior to November 22, 1985. (Incorporated herein by reference to Exhibit 3 to Zenith's Amendment on Form 8, date of amendment October 10, 1985, to Zenith's Current Report on Form 8-K, 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.)
19 (b) Exhibit B -- Bill of Sale, dated as of July 26, 1985, by the Commissioner in favor of Zenith Insurance. (Incorporated herein by reference to Exhibit 10.6 to Zenith's Annual Report on Form 10-K for the year ended December 31, 1985.) (c) Exhibit C -- Assignment of Assets and Assumption of Liabilities, dated as of July 26, 1985, between the Commissioner and Zenith Insurance. (Incorporated herein by reference to Exhibit 10.6 to Zenith's Annual Report on Form 10-K for the year ended December 31, 1985.) (d) Exhibit D -- Noncompetition Agreement, dated as of July 26, 1985, between the Commissioner and Zenith Insurance. (Incorporated herein by reference to Exhibit 28.3 to Zenith's Current Report on Form 8-K, date of report July 26, 1985.) (e) Exhibit E -- First Assignment Separate from Certificate, dated July 26, 1985, by the Commissioner in favor of Zenith. (Incorporated herein by reference to Exhibit 10.6 to Zenith's Annual Report on Form 10-K for the year ended December 31, 1985.) (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 10-Q 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 10-Q for the quarter ended June 30, 1996.) *10.8 Employment Agreement, dated December 11, 1997, between Zenith and Fredricka Taubitz. *10.9 Employment Agreement, dated January 5, 1998, between Zenith and John J. Tickner. *10.10 Employment Agreement, dated December 11, 1997, between Zenith and Stanley R. Zax. *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 10-Q for the quarter ended June 30, 1996.) *10.12 Zenith National Insurance Corp. Executive Officer Bonus Plan, dated as of March 21, 1994. (Incorporated herein by reference to Exhibit 10.12 to Zenith's Annual Report on Form 10-K for the year ended December 31, 1996.) 10.13 Line of Credit Agreement, dated as of December 15, 1994, between Zenith and Sanwa Bank of California. (Incorporated herein by reference to Exhibit 10.10 to Zenith's Annual Report on Form 10-K for the year ended December 31, 1994.)
20 10.14 Amendment dated as of December 28, 1995 to Line of Credit Agreement, dated as of December 15, 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.) 10.15 Second Amendment, dated June 28, 1996, to Line of Credit Agreement, dated December 15, 1994 between Zenith and Sanwa Bank California. (Incorporated by reference to Exhibit 10.2 to Zenith's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996.) 10.16 Third Amendment, effective as of January 2, 1998, to Line of Credit Agreement, dated December 15, 1994 between Zenith and Sanwa Bank California. 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 10-K 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 10-K 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 10-K 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 10-K 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 10-K 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 10-K for the year ended December 31, 1991.) 10.23 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 10-K for the year ended December 31, 1991.) 10.24 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. (Incorporated herein by reference to Exhibit 10.23 to Zenith's Annual Report on Form 10-K for the year ended December 31, 1996.) 10.25 Aggregate Excess of Loss Reinsurance Agreement between Associated General Contractors Self Insurers Trust Fund and Reliance Insurance Company effective December 31, 1991. (Incorporated herein by reference to
21 Exhibit 10.24 to Zenith's Annual Report on Form 10-K for the year ended December 31, 1996.) 10.26 Specific Excess Workers' Compensation and Employers' Liability Policy between Planet Insurance Company (now Reliance National Indemnity Company) and Associated General Contractors of Florida Self Insurance Fund effective January 1, 1993. (Incorporated herein by reference to Exhibit 10.25 to Zenith's Annual Report on Form 10-K for the year ended December 31, 1996.) 10.27 Interim Reinsurance Agreement by and among Zenith Insurance Company, RISCORP Insurance Company and RISCORP Property & Casualty Insurance Company dated as June 18, 1997, together with (1) related Trust Agreement by and among RISCORP Insurance Company, as guarantor, Zenith Insurance Company, as beneficiary, and First Union National Bank, as trustee, dated as of June 18, 1997 (with amendment no. 1 thereto), and (2) related Trust Agreement by and among RISCORP Property & Casualty Insurance Company, as guarantor, Zenith Insurance Company, as beneficiary, and First Union National Bank, as trustee, dated as of June 18, 1997 (with amendment no. 1 thereto.) (Incorported herein by reference to Exhibit 10.1 to Zenith's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.) 10.28 Revolving Note dated July 1, 1997, from Zenith National Insurance Corp. to City National Bank. (Incorporated herein by reference to Exhibit 10.2 to Zenith's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.) 10.29 Modification of Note dated October 10, 1997 modifying the original Revolving Note dated July 1, 1997 between Zenith National Insurance Corp. and City National Bank. (Incorporated herein by reference to Exhibit 10.5 to Zenith's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997.) 10.30 Credit Agreement dated as of July 24, 1997 between Zenith National Insurance Corp. and Bank of America National Trust and Savings Association, together with Tranche A and Tranche B Promissory Notes referenced therein. (Incorporated herein by reference to Exhibit 10.3 to Zenith's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.) 10.31 Amendment No. 1 to Credit Agreement dated January 21, 1998 amending the original Credit Agreement dated July 24, 1997 between Zenith National Insurance Corp. and Bank of America. 10.32 Asset Purchase Agreement, dated as of June 17, 1997, by and among Zenith Insurance Company and RISCORP, Inc., RISCORP Management Services, Inc., RISCORP of Illinois, Inc., Independent Association Administrators Incorporated, RISCORP Insurance Services, Inc., RISCORP Managed Care Services, Inc., CompSource, Inc., RISCORP Real Estate Holdings, Inc., RISCORP Acquisition, Inc., RISCORP West, Inc., RISCORP of Florida, Inc., RISCORP Insurance Company, RISCORP Property & Casualty Insurance Company, RISCORP National Insurance Company, RISCORP Services, Inc., RISCORP Staffing Solutions Holding, Inc., RISCORP Staffing Solutions, Inc. I and RISCORP Staffing Solutions, Inc. II. (Incorporated herein by reference to Exhibit 10.1 to Zenith's Current Report on Form 8-K/A, date of report June 17, 1997.) 11 Statements re computation of per share earnings. (Incorporated herein by reference to Notes to Consolidated Financial Statements -- Note 16 -- "Earnings Per Share" on page 55 of Zenith's 1997 Annual Report to Stockholders.) 13 Zenith's Annual Report to Stockholders for the year ended December 31, 1997, but only to the extent such report is expressly
22 incorporated by reference herein, and such report is not otherwise to be deemed "filed" as a part of this Annual Report on Form 10-K. 21 Subsidiaries of Zenith. 23 Consent of Coopers & Lybrand L.L.P., dated March 20, 1998. (Incorporated herein by reference to page F-1 of this Annual Report on Form 10-K.) 27.1 Financial Data Schedule for year ended December 31, 1997. 27.2 Restated Financial Data Schedule for years ended December 31, 1996 and 1995, and periods ended March 31, 1996, June 30, 1996, and September 30, 1996. 27.3 Restated Financial Data Schedule for periods ended March 31, 1997, June 30, 1997, and September 30, 1997. 99.1 Information required by rule 15d-21 under the Securities Exchange Act of 1934 for the year ended December 31, 1997 for The Zenith 401(k) Plan (to be filed by amendment on Form 10-K/A within 180 days of December 31, 1997).
- ------------------------ *Management contract or compensatory plan or arrangement (b)REPORTS ON FORM 8-K No Reports on Form 8-K were filed by the Registrant for the quarter ended December 31, 1997. 23 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 20, 1998. ZENITH NATIONAL INSURANCE CORP. By: /s/ STANLEY R. ZAX ----------------------------------------- Stanley R. Zax Chairman of the Board and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated, on March 20, 1998. /s/ STANLEY R. ZAX - --------------------------------------------- Chairman of the Board, President and Stanley R. Zax Director (Principal Executive Officer) /s/ GEORGE E. BELLO - --------------------------------------------- Director George E. Bello - --------------------------------------------- Director Max M. Kampelman /s/ JACK M. OSTROW - --------------------------------------------- Director Jack M. Ostrow /s/ WILLIAM S. SESSIONS - --------------------------------------------- Director William S. Sessions /s/ HARVEY L. SILBERT - --------------------------------------------- Director Harvey L. Silbert /s/ ROBERT M. STEINBERG - --------------------------------------------- Director Robert M. Steinberg /s/ SAUL P. STEINBERG - --------------------------------------------- Director Saul P. Steinberg /s/ GERALD TSAI, JR. - --------------------------------------------- Director Gerald Tsai, Jr. /s/ FREDRICKA TAUBITZ Executive Vice President and Chief Financial - --------------------------------------------- Officer (Principal Financial and Accounting Fredricka Taubitz Officer)
24 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 4, 1998 on our audits of the consolidated financial statements and financial statement schedules of Zenith National Insurance Corp. and subsidiaries as of December 31, 1997 and 1996, and for each of the three years in the period ended December 31, 1997, which is included in this Annual Report on Form 10-K. COOPERS & LYBRAND L.L.P. Los Angeles, California March 20, 1998 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, 1997 and 1996, and for each of the three years in the period ended December 31, 1997, which financial statements are included on pages 38 through 56 of the Company's 1997 Annual Report to Stockholders and incorporated by reference herein. We have also audited the financial statement schedules listed in the index on page 18 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, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, 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 4, 1998 F-2 SCHEDULE I -- SUMMARY OF INVESTMENTS -- OTHER THAN INVESTMENTS IN RELATED PARTIES ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES DECEMBER 31, 1997
COLUMN D COLUMN C --------------- COLUMN A COLUMN B ---------- AMOUNT AT WHICH - -------------------------------------------------- ---------- FAIR SHOWN IN THE TYPE OF INVESTMENT COST(1) VALUE BALANCE SHEET - -------------------------------------------------- ---------- ---------- --------------- (DOLLARS IN THOUSANDS) Fixed maturities Bonds: United States Government and government agencies and authorities.................... $ 243,346 $ 244,921 $ 243,974 Public utilities.............................. 31,088 31,515 31,515 Industrial and miscellaneous.................. 291,245 297,592 297,221 Redeemable preferred stocks..................... 16,040 16,717 16,717 ---------- ---------- --------------- Total fixed maturities.................... 581,719 590,745 589,427 ---------- ---------- --------------- Equity securities Floating rate preferred stocks.................. 14,614 15,670 15,670 Convertible and nonredeemable preferred stocks........................................ 6,672 6,602 6,602 Common stocks, industrial....................... 17,790 23,439 23,439 ---------- ---------- --------------- Total equity securities................... 39,076 45,711 45,711 ---------- ---------- --------------- Short-term investments............................ 209,827 209,827 209,827 Other investments................................. 35,008 35,008 35,008 ---------- ---------- --------------- Total investments......................... $ 865,630 $ 881,291 $ 879,973 ---------- ---------- --------------- ---------- ---------- ---------------
- ------------------------ (1) Original cost of equity securities and, as to fixed maturities, original cost reduced by repayments and adjusted for amortization of premiums or accrual of discounts. F-3 SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT ZENITH NATIONAL INSURANCE CORP. BALANCE SHEET ASSETS
DECEMBER 31, ---------------------- (DOLLARS AND SHARES IN THOUSANDS) 1997 1996 --------- --------- Investments Bonds, at fair value (cost $9,896, 1996)................................................ $ 9,803 Common stocks, at fair value (cost $676, 1997 and $2,182, 1996)......................... $ 1,088 2,318 Short-term investments (at cost, which approximates fair value)......................... 38,994 30,720 Other invested assets................................................................... 4,736 10,000 Cash...................................................................................... 730 1,463 Investment in subsidiaries (Note A)....................................................... 353,462 334,227 Federal income taxes receivable (Note A).................................................. 154 138 Other assets.............................................................................. 45,041 30,164 --------- --------- Total assets...................................................................... $ 444,205 $ 418,833 --------- --------- --------- --------- LIABILITIES Senior notes payable, less unamortized discount of $526, 1997 and $647, 1996 (Note B)..... $ 74,474 $ 74,353 Cash dividends payable to stockholders.................................................... 4,222 4,401 Other liabilities......................................................................... 3,643 2,576 --------- --------- Total liabilities................................................................. 82,339 81,330 --------- --------- STOCKHOLDERS' EQUITY Preferred stock, $1 par--shares authorized 1,000; issued and outstanding, none in 1997 and 1996.................................................................................... Common stock, $1 par--shares authorized 50,000; issued 24,681, outstanding 17,819, 1997; issued 24,447, outstanding 17,604, 1996................................................. 24,681 24,447 Additional paid-in capital................................................................ 264,098 258,875 Retained earnings......................................................................... 186,268 175,684 Net unrealized appreciation on investments, net of deferred tax expense of $5,025, 1997 and $284, 1996.......................................................................... 9,332 528 --------- --------- 484,379 459,534 Less treasury stock at cost (6,862 shares, 1997 and 6,843 shares, 1996)................... (122,513) (122,031) --------- --------- Total stockholders' equity........................................................ 361,866 337,503 --------- --------- Total liabilities and stockholders' equity........................................ $ 444,205 $ 418,833 --------- --------- --------- ---------
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) 1997 1996 1995 ------------ ------------- ------------- Investment income............................................................... $ 1,196 $ 2,697 $ 219 Realized gains (losses) on investments.......................................... (446) 43 ------------ ------------- ------------- Total revenues.................................................................. 750 2,697 262 Operating expense............................................................... 3,557 2,970 1,863 Interest expense................................................................ 3,980 4,877 6,960 ------------ ------------- ------------- Loss from continuing operations before federal income tax benefit and equity in income from continuing operations of subsidiaries............................. (6,787) (5,150) (8,561) Federal income tax benefit...................................................... 2,097 1,845 3,123 ------------ ------------- ------------- Loss from continuing operations before equity in income from continuing operations of subsidiaries.................................................... (4,690) (3,305) (5,438) Equity in income from continuing operations of subsidiaries (Note A)............ 32,790 40,905 25,160 ------------ ------------- ------------- Income from continuing operations............................................... 28,100 37,600 19,722 Loss from discontinued operations (Note C)...................................... (13,122) ------------ ------------- ------------- Net income...................................................................... $ 28,100 $ 37,600 $ 6,600 ------------ ------------- ------------- ------------ ------------- -------------
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, ----------------------------------------------- (DOLLARS IN THOUSANDS) 1997 1996 1995 ------------- ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Investment income received.................................................... $ 903 $ 612 $ 193 Operating expenses paid....................................................... (1,465) (3,651) (1,455) Interest paid................................................................. (3,648) (4,908) (6,596) Income taxes (paid) refunded.................................................. 2,505 (616) 3,571 ------------- ------------- ------------- Net cash used in continuing operating activities............................ (1,705) (8,563) (4,287) Net cash used in expenses of discontinued operations.......................... (2,274) ------------- ------------- ------------- Net cash used in operating activities....................................... (1,705) (8,563) (6,561) CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of investments: Debt and equity securities available-for-sale............................... (19) (11,446) Other debt and equity securities and other investments...................... (10,000) Proceeds from sale of securities available-for-sale......................... 11,631 Proceeds from sale of other investments..................................... 5,423 Net change in short-term investments.......................................... (8,274) 55,865 (82,549) Capital expenditures.......................................................... (11,014) Other......................................................................... 469 (3,151) Proceeds from the sale of CalFarm Life........................................ 120,000 ------------- ------------- ------------- Net cash provided by (used in) investing activities......................... (1,784) 31,268 37,451 CASH FLOWS FROM FINANCING ACTIVITIES: Cash received from bank line of credit........................................ 43,400 Cash paid on bank line of credit.............................................. (43,400) Cash dividends paid to common stockholders.................................... (17,695) (17,605) (18,273) Proceeds from exercise of stock options....................................... 4,940 2,572 4,405 Purchase of treasury shares................................................... (482) (7,611) (29,318) Dividends received from subsidiaries.......................................... 22,750 15,000 10,500 Net cash from (to) subsidiary................................................. (6,757) (14,594) 458 ------------- ------------- ------------- Net cash provided by (used in) financing activities......................... 2,756 (22,238) (32,228) Net increase (decrease) in cash................................................. (733) 467 (1,338) Cash at beginning of year....................................................... 1,463 996 2,334 ------------- ------------- ------------- Cash at end of year............................................................. $ 730 $ 1,463 $ 996 ------------- ------------- ------------- ------------- ------------- ------------- RECONCILIATION OF INCOME FROM CONTINUING OPERATIONS TO NET CASH FLOWS FROM OPERATING ACTIVITIES: Income from continuing operations............................................. 28,100 $ 37,600 $ 19,722 Income from continuing operations of subsidiaries............................. (32,790) (40,905) (25,160) Cash flow from expenses of discontinued operations............................ (2,274) Federal income taxes.......................................................... 371 (2,461) 511 Other......................................................................... 2,614 (2,797) 640 ------------- ------------- ------------- Net cash used in operating activities....................................... $ (1,705) $ (8,563) $ (6,561) ------------- ------------- ------------- ------------- ------------- -------------
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, ZIC of Florida, Zenith Star Insurance Company (a Texas 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 $32,790,000 in 1997, $40,905,000 in 1996 and $25,160,000 in 1995 is net of a provision for federal income tax expense of $17,475,000 in 1997, $21,362,000 in 1996, and $12,823,000 in 1995. Zenith has formulated tax allocation procedures with its subsidiaries and the 1997, 1996 and 1995 condensed financial information reflect Zenith's portion of the consolidated taxes. Zenith Insurance Company paid dividends to Zenith of $22,750,000 in 1997, $15,000,000 in 1996 and $10,000,000 in 1995. 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 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 taxes. The life and annuity operations of CalFarm Life are presented as discontinued operations. 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) 1997 - ------------------------------ Property and Casualty Workers' compensation....... $ 4,034 $ 339,215 $ 25,229 $ 242,064 Other property-casualty..... 15,575 109,003 95,636 214,406 Reinsurance................. 1,231 77,383 7,604 32,251 ----------- ----------- ----------- ----------- ----------- ----------- 20,840 525,601 128,469 488,721 $ 51,136 Reinsurance ceded............. 87,665 Registrant.................... 1,196 ----------- ----------- ----------- ----------- ----------- ----------- Total....................... $ 20,840 $ 613,266 $ 128,469 $ -- $ 488,721 $ 52,332 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- 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 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- 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) 1997 - ------------------------------ Property and Casualty Workers' compensation....... $ 197,450 $ 41,225 $ 40,188 $ 238,963 Other property-casualty..... 139,832 44,514 23,551 218,370 Reinsurance................. 10,883 6,474 707 29,780 ----------- ----------- ----------- ----------- 348,165 92,213 64,446 487,113 Reinsurance ceded............. Registrant.................... 3,557 ----------- ----------- ----------- ----------- Total....................... $ 348,165 $ 92,213 $ 68,003 $ 487,113 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- 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 ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
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, 1997 Premiums earned........................................ $ 477,527 $ 26,191 $ 37,385 $ 488,721 7.6% -------------- ------------ ----------- -------------- ---------- -------------- ------------ ----------- -------------- ---------- 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% -------------- ------------ ----------- -------------- ---------- -------------- ------------ ----------- -------------- ----------
F-9 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION - ----------- ----------------------------------------------------------------------------------------------------- 2.1 Amended and Restated Agreement and Plan of Merger by and among Zenith AGC Acquisition Insurance Company, Zenith Insurance Company, Zenith National Insurance Corp., Associated General Commerce Self-Insurers' Trust Fund and AGC Risk Management Group Inc. dated as of October 7, 1996. (Incorporated herein by reference to Exhibit 2.1 to Zenith's Annual Report on Form 10-K for the year ended December 31, 1996.) 2.2 Stock Acquisition Agreement, dated as of September 19, 1995, between Anchor National Life Insurance Company and Zenith National Insurance Corp. (Incorporated herein by reference to Exhibit 2.1 to Zenith's Report on Form 8-K dated October 6, 1995.) 2.3 Amendment No. 1 to Stock Acquisition Agreement dated as of December 27, 1995, by and among Anchor National Life Insurance Company, SunAmerica Life Insurance Company and Zenith National Insurance Corp. (Incorporated herein by reference to Exhibit 2.1 to Zenith's Report on Form 8-K dated January 9, 1996.) 3.1 Certificate of Incorporation of Zenith as in effect immediately prior to November 22, 1985. (Incorporated herein by reference to Exhibit 3 to Zenith's Amendment on Form 8, date of amendment October 10, 1985, to Zenith's Current Report on Form 8-K, 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.)
EXHIBIT NO. DESCRIPTION - ----------- ----------------------------------------------------------------------------------------------------- (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 10-Q 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 10-Q for the quarter ended June 30, 1996.) *10.8 Employment Agreement, dated December 11, 1997, between Zenith and Fredricka Taubitz. *10.9 Employment Agreement, dated January 5, 1998, between Zenith and John J. Tickner. *10.10 Employment Agreement, dated December 11, 1997, between Zenith and Stanley R. Zax. *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 10-Q for the quarter ended June 30, 1996.) *10.12 Zenith National Insurance Corp. Executive Officer Bonus Plan, dated as of March 21, 1994. (Incorporated herein by reference to Exhibit 10.12 to Zenith's Annual Report on Form 10-K for the year ended December 31, 1996.) 10.13 Line of Credit Agreement, dated as of December 15, 1994, between Zenith and Sanwa Bank of California. (Incorporated herein by reference to Exhibit 10.10 to Zenith's Annual Report on Form 10-K for the year ended December 31, 1994.) 10.14 Amendment dated as of December 28, 1995 to Line of Credit Agreement, dated as of December 15, 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.) 10.15 Second Amendment, dated June 28, 1996, to Line of Credit Agreement, dated December 15, 1994 between Zenith and Sanwa Bank California. (Incorporated by reference to Exhibit 10.2 to Zenith's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996.)
EXHIBIT NO. DESCRIPTION - ----------- ----------------------------------------------------------------------------------------------------- 10.16 Third Amendment, dated January 2, 1998, to Line of Credit Agreement, dated December 15, 1994 between Zenith and Sanwa Bank California. 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 10-K 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 10-K 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 10-K 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 10-K 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 10-K 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 10-K for the year ended December 31, 1991.) 10.23 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 10-K for the year ended December 31, 1991.) 10.24 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. (Incorporated herein by reference to Exhibit 10.23 to Zenith's Annual Report on Form 10-K for the year ended December 31, 1996.) 10.25 Aggregate Excess of Loss Reinsurance Agreement between Associated General Contractors Self Insurers Trust Fund and Reliance Insurance Company effective December 31, 1991. (Incorporated herein by reference to Exhibit 10.24 to Zenith's Annual Report on Form 10-K for the year ended December 31, 1996.) 10.26 Specific Excess Workers' Compensation and Employers' Liability Policy between Planet Insurance Company (now Reliance National Indemnity Company) and Associated General Contractors of Florida Self Insurance Fund effective January 1, 1993. (Incorporated herein by reference to Exhibit 10.25 to Zenith's Annual Report on Form 10-K for the year ended December 31, 1996.)
EXHIBIT NO. DESCRIPTION - ----------- ----------------------------------------------------------------------------------------------------- 10.27 Interim Reinsurance Agreement by and among Zenith Insurance Company, RISCORP Insurance Company and RISCORP Property & Casualty Insurance Company dated as June 18, 1997, together with (1) related Trust Agreement by and among RISCORP Insurance Company, as guarantor, Zenith Insurance Company, as beneficiary, and First Union National Bank, as trustee, dated as of June 18, 1997 (with amendment no. 1 thereto), and (2) related Trust Agreement by and among RISCORP Property & Casualty Insurance Company, as guarantor, Zenith Insurance Company, as beneficiary, and First Union National Bank, as trustee, dated as of June 18, 1997 (with amendment no. 1 thereto). (Incorported herein by reference to Exhibit 10.1 to Zenith's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.) 10.28 Revolving Note dated July 1, 1997, from Zenith National Insurance Corp. to City National Bank. (Incorporated herein by reference to Exhibit 10.2 to Zenith's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.) 10.29 Modification of Note dated October 10, 1997 modifying the original Revolving Note dated July 1, 1997 between Zenith National Insurance Corp. and City National Bank. (Incorporated herein by reference to Exhibit 10.5 to Zenith's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997.) 10.30 Credit Agreement dated as of July 24, 1997 between Zenith National Insurance Corp. and Bank of America National Trust and Savings Association, together with Tranche A and Tranche B Promissory Notes referenced therein. (Incorporated herein by reference to Exhibit 10.3 to Zenith's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.) 10.31 Amendment No. 1 to Credit Agreement dated January 21, 1998 amending the original Credit Agreement dated July 24, 1997 between Zenith National Insurance Corp. and Bank of America. 10.32 Asset Purchase Agreement, dated as of June 17, 1997, by and among Zenith Insurance Company and RISCORP, Inc., RISCORP Management Services, Inc., RISCORP of Illinois, Inc., Independent Association Administrators Incorporated, RISCORP Insurance Services, Inc., RISCORP Managed Care Services, Inc., CompSource, Inc., RISCORP Real Estate Holdings, Inc., RISCORP Acquisition, Inc., RISCORP West, Inc., RISCORP of Florida, Inc., RISCORP Insurance Company, RISCORP Property & Casualty Insurance Company, RISCORP National Insurance Company, RISCORP Services, Inc., RISCORP Staffing Solutions Holding, Inc., RISCORP Staffing Solutions, Inc. I and RISCORP Staffing Solutions, Inc. II. (Incorporated herein by reference to Exhibit 10.1 to Zenith's Current Report on Form 8-K/A, date of report June 17, 1997.) 11 Statements re computation of per share earnings. (Incorporated herein by reference to Notes to Consolidated Financial Statements -- Note 16 -- "Earnings Per Share" on page 55 of Zenith's 1997 Annual Report to Stockholders.) 13 Zenith's Annual Report to Stockholders for the year ended December 31, 1997, but only to the extent such report is expressly incorporated by reference herein, and such report is not otherwise to be deemed "filed" as a part of this Annual Report on Form 10-K. 21 Subsidiaries of Zenith. 23 Consent of Coopers & Lybrand L.L.P., dated March 20, 1998. (Incorporated herein by reference to page F-1 of this Annual Report on Form 10-K.) 27.1 Financial Data Schedule for year ended December 31, 1997. 27.2 Restated Financial Data Schedule for years ended December 31, 1996 and 1995, and periods ended March 31, 1996, June 30, 1996, and September 30, 1996. 27.3 Restated Financial Data Schedule for periods ended March 31, 1997, June 30, 1997, and September 30, 1997.
EXHIBIT NO. DESCRIPTION - ----------- ----------------------------------------------------------------------------------------------------- 99.1 Information required by rule 15d-21 under the Securities Exchange Act of 1934 for the year ended December 31, 1997 for The Zenith 401(k) Plan (to be filed by amendment on Form 10-K/A within 180 days of December 31, 1997).
- ------------------------ *Management contract or compensatory plan or arrangement EX-10.8 2 EXHIBIT 10.8 EXECUTION COPY EMPLOYMENT AGREEMENT This Employment Agreement ("Agreement") is entered into effective as of the 11th day of December, 1997 ("Effective Date"), on this 8th day of January, 1998 between ZENITH NATIONAL INSURANCE CORP., a Delaware corporation (hereinafter referred to as "Company"), and FREDRICKA TAUBITZ (hereinafter referred to as "Employee"). WHEREAS, Employee is presently employed as Executive Vice President and Chief Financial Officer of Zenith National Insurance Corp. pursuant to a written Employment Agreement originally effective as of October 1, 1985 for a term of five years, which agreement was extended and modified pursuant to a written Employment Agreement dated as of February 28, 1990 for a term of five years expiring on October 1, 1995 and further extended and modified pursuant to a written Employment Agreement dated as of December 6, 1994 for a term of three years expiring on October 1, 1998; and WHEREAS, Company and Employee deem it in their respective best interests to extend the term of said Employment Agreement at the present time and modify certain other provisions thereof; NOW, THEREFORE, it is AGREED as follows: 1. EMPLOYMENT. (a) Subject to earlier termination as provided herein, the Employee is employed as Executive Vice President and Chief Financial Officer of the Company from the Effective Date through the Term of this Agreement (as defined below). In this capacity the Employee shall devote her full business time and energy to the business, affairs and interests of the Company and matters related thereto. During the Term of the Agreement, the Employee shall have no other employment other than with a subsidiary of the Company, except with the prior written approval of the Board of Directors of the Company (the "Board"). The Employee shall have such duties and responsibilities and such executive power and authority as is customary for an officer in her position and as shall be allocated to her in such capacity and such other duties and responsibilities as the Board or the President of the Company shall designate that are not inconsistent with the Employee's position with the Company. Without limiting the foregoing, the Employee shall have such duties and responsibilities with respect to any subsidiaries of the Company as may be requested by the Board, including (without limitation) as Executive Vice President of Zenith Insurance Company, a wholly owned subsidiary of the Company The Company hereby acknowledges and agrees that the Employee shall have the right to serve in any capacity with civic, educational, charitable and professional organizations and to make and manage personal business investments that do not violate the noncompetition provisions of Section 11 of this Agreement so long as such activities do not interfere with the discharge of her duties to the Company hereunder. (b) During her employment hereunder, the Employee shall report to the Company's Chief Executive Officer. (c) The Company agrees to reappoint the Employee to the board of directors of CalFarm Insurance Company ("CalFarm"), which appointment shall continue throughout the Employee's period of employment hereunder; provided, however, that the Company's obligation to make such appointment shall expire on the date the Company ceases to own a controlling interest in CalFarm. If elected, the Employee agrees to serve on the board of CalFarm so long as the Company owns a controlling interest in CalFarm. (d) The Employee shall not be required to relocate outside of Southern California in order to perform the services hereunder, without the Employee's consent, except for travel reasonably required in the performance of her duties hereunder. 2. TERM. This Agreement shall be in effect for a term commencing on the Effective Date and expiring on December 31, 2002 ("Expiration Date"), and such period shall be referred to herein as the "Term" of this Agreement, and such Term shall not be affected by a termination of employment as elsewhere provided herein. 3. SALARY. Effective January 1, 1998, Employee shall be paid the sum of Three Hundred and Ninety One Thousand Dollars per year, subject to such other increases as the Board of Directors of Company may from time to time determine ("Base Salary"). 4. BONUSES. In addition to the Base Salary, Employee shall be a participant in the Executive Officers Bonus Plan of the Company. 5. DEFERRED COMPENSATION. In advance of the annual period for which earned, the Employee shall have the right to defer all or any portion of her salary and bonus to a specified date or event. Any such deferred compensation shall not be forfeitable and shall bear interest at a rate to be determined by the Board. Any election to defer compensation shall be disregarded, and any compensation so deferred shall be added back, in the calculation of those of Employee's rights and benefits under this Agreement that are based upon Employee's salary or bonus or the sum thereof. 6. PARTICIPATION IN RETIREMENT AND EMPLOYEE BENEFIT PLANS. During her employment hereunder, the Employee shall be entitled to participate in any plan of the Company relating to stock options, stock purchases, pension, thrift, profit sharing, life insurance, medical coverage, disability insurance, education, and other retirement or employee benefits that the Company has adopted or may adopt for the benefit of its executive employees, and the Company shall provide the Employee with such insurance or other provisions for indemnification, defense or hold-harmless of officers that are generally in effect for other senior executive officers of the Company. Notwithstanding the foregoing, nothing contained in this Agreement shall prohibit or limit the right of the Company to discontinue, modify or amend any plan or benefit in its absolute discretion at any time; provided, however, that any such discontinuance, modification or amendment shall apply to employees of the Company generally, or to a defined group of such employees and shall not apply solely to the Employee. 7. FRINGE BENEFITS; AUTOMOBILE. In addition to the benefit plans referred to in Section 6 hereof, the Employee shall be entitled to participate in any other fringe benefits that are now or may be or become applicable to the Company's executive employees, including the payment of reasonable expenses for attending annual and periodic meetings of trade associations, and any other benefits that are commensurate with the duties and responsibilities to be performed by the Employee under this Agreement and reimbursement for reasonable expenses incurred in the course of her duties hereunder in accordance with the Company's policy with respect thereto. In addition, the Company shall provide the Employee with a deluxe car or car allowance of her choice. The benefits provided under this Section 7 shall cease upon the Employee's Date of Termination (as defined below). 8. VACATION; CLUB MEMBERSHIPS. During her employment hereunder, the Employee shall be entitled to an annual paid vacation in accordance with the Company's standard employment practices of at least four weeks per year or such longer period as the Board may approve (prorated on a daily basis for any period that is less than one calendar year). Up to four weeks of accrued vacation time that is not used in a calendar year may be carried over into the following calendar year. Upon termination of the Employee's employment for any reason, the Employee shall be entitled to payment for any accrued but unused vacation time based upon her then current salary. The time of paid vacations shall be scheduled in a reasonable manner by the Employee. During her employment hereunder, the Employee shall be entitled to appropriate professional association and business club memberships, including reimbursement of payment of dues and assessments pertaining thereto. 9. TERMINATION. (a) DISABILITY. If, as a result of the Employee's incapacity due to physical or mental illness, injury or similar incapacity, she shall have been absent from the full-time performance of her duties with the Company for six months within any eighteen-month period, her employment may be terminated by written notice (as provided below) from the Company for "Disability". (b) CAUSE. Subject to the notice provisions set forth below, the Company may terminate the Employee's employment for "Cause" at any time. Termination for "Cause" shall mean termination upon (1) the continued willful failure by the Employee to substantially perform her duties with the Company or her other willful breach of this Agreement (other than any such failure or breach resulting from her incapacity due to physical or mental illness, injury or similar incapacity) after a written demand for substantial performance is delivered to her by the Board, which demand specifically identifies the manner in which the Board believes that she has failed to substantially perform her duties, or has otherwise breached this Agreement, (2) the Employee's conviction of a felony, (3) the Employee's willful misconduct that is materially and demonstrably injurious to the Company or (4) the violation by the Employee of Section 11 hereof; provided, however, that the Employee shall not be terminated for "Cause" unless and until the Board has given the Employee reasonable notice of its intended actions and the alleged events or activities giving rise thereto and with respect to those events or activities for which a cure is possible, a reasonable opportunity to cure such breach and there shall have been delivered to her a copy of a resolution duly adopted by the Board regarding such actions. (c) CONSTRUCTIVE TERMINATION. If at any time during the Term of this Agreement, any of the following events shall occur, the Employee shall be entitled to terminate her employment hereunder and be treated as if her employment had been terminated by the Company other than for Cause: (i) Mr. Stanley R. Zax ceases to be full-time Chairman of the Board and President of the Company other than by reason of death or disability; (ii) The Employee is removed or otherwise prohibited or restricted in the performance of her duties as set forth in Section 1 hereof; (iii) Any payment due under this Agreement shall remain unpaid for more than 60 days; (iv) A Change in Control of the Company (as defined below) shall occur during the Term of this Agreement and, within 180 days after the effective date of any such Change in Control, the Employee delivers to the Company a written notice of her election to terminate the Agreement effective as of the date set forth in such notice, which effective date shall not be less than 30 days nor more than 90 days after the date of delivery of such written notice. For purposes of this paragraph, a Change in Control shall mean either (i) a merger or consolidation of the Company with or into another company in which the Company does not survive; or (ii) an assignment of this Agreement by the Company under the provisions of Section 12(b) hereof; or (iii) the sale of all or substantially all of the Company's assets; or (iv) a change in the identities of a majority of the members of the Board within a one-year period or less; or (v) any other transaction that would require a party or affiliated group of parties to obtain approval from or require such transactions to be presented for approval by, the California Insurance Commissioner (assuming there is no preemption of California insurance laws by federal law). (d) NOTICE OF TERMINATION. Any purported termination of the Employee's employment by the Company or by her shall be communicated by a written notice ("Notice of Termination") that shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Employee's employment under the provision so indicated. (e) DATE OF TERMINATION, ETC. "Date of Termination" shall mean (1) if the Employee's employment is terminated by her death, the date of her death; (2) if the Employee's employment is terminated for Disability, thirty days after Notice of Termination is given; (3) if the Employee's employment is terminated for Cause, the date specified in the Notice of Termination, which shall not be less than thirty days from the date such Notice of Termination is given; and (4) if the Employee's employment is terminated for any other reason, the date specified in the Notice of Termination. 10. COMPENSATION UPON TERMINATION OR DURING DISABILITY. The Employee shall be entitled to the following benefits during a period of disability, or upon termination of her employment, as the case may be, if such period or termination occurs during the Term of this Agreement: (a) During any period that the Employee fails to perform her full-time duties with the Company as a result of incapacity due to physical or mental illness, injury or similar incapacity, she shall continue to receive her compensation and other benefits payable to her under this Agreement at the rate in effect at the commencement of any such period, together with all compensation payable to her under the Company's disability plan or program or other similar plan during such period, until her employment is terminated pursuant to Section 9(a) hereof. Thereafter, or in the event the Employee's employment shall be terminated by reason of her death, her benefits shall be determined under the Company's retirement, insurance and other compensation programs then in effect in accordance with the terms of such programs, and the Company shall have no further obligations to her under this Agreement. (b) If at any time the Employee's employment shall be terminated (i) by reason of her death, (ii) by the Company for Cause or Disability or (iii) by her (other than by reason of a constructive termination pursuant to Section 9(c) hereof), the Company shall pay her (or her appropriate payee, as determined in accordance with Section 12 (c) hereof) her full base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given, plus all other amounts to which she is entitled under any compensation plan of the Company at the time such payments are due, and the Company shall have no further obligations to her under this Agreement. In addition, in the event the Employee's employment is terminated by reason of the Employee's death or Disability, the Employee (or her appropriate payee) shall be entitled to receive a pro rata portion of any bonus that would otherwise have been payable to the Employee with respect to the year in which the Employee's employment is terminated. For purposes of this provision, if the Employee's bonus for such year has not been determined, the Employee shall be deemed to have been entitled to a bonus equal to the highest annual bonus paid or payable to the Employee during the three consecutive years immediately preceding her termination. (c) If the Employee's employment should be terminated by the Company other than for Cause or Disability or by the Employee by reason of a constructive termination pursuant to Section 9(c) hereof, she shall be entitled to the benefits provided below ("Severance Payments"): (i) The Company shall pay to the Employee her full base salary through the Date of Termination, at the rate in effect at the time Notice of Termination is given, plus all other amounts to which she is entitled under any compensation plan of the Company, in each case at the time such payments are due; (ii) Company shall pay to Employee a cash lump sum payment, no later than the fifteenth day following the effective date of the Notice of Termination, equal to the greater of (a) two times the sum of (x) her Base Salary at the rate in effect as of the effective date of the Notice of Termination and (y) the highest annual bonus paid or payable to Employee during the three consecutive years immediately preceding her termination of employment, or (b) the "actuarial equivalent" of all Base Salary and bonus payments that would have been payable to Employee pursuant to Paragraphs 3 and 4 of this Agreement had Employee continued to be employed through the Expiration Date (the "Severance Period"), assuming, for purposes of this Paragraph, that the annual bonus payable to Employee pursuant to Paragraph 4 of this Agreement for each year of such remaining term is equal to the highest annual bonus paid or payable to Employee during the three consecutive years immediately preceding her termination of employment. For purposes of this subparagraph 10(c)(ii), "actuarial equivalent" shall be determined by an actuary selected by Company, subject to approval by Employee, and calculated in accordance with the actuarial assumptions used by the Pension Benefit Guaranty Corporation to value liabilities for pension plans terminating as of the effective date of Employee's or Company's Notice of Termination; (iii) All stock option rights, stock appreciation rights, and any and all other similar rights theretofore granted to the Employee, including, but not limited to, the Employee's right to receive cash in lieu of exercising stock options, as may be provided in her stock option agreements, shall vest and shall then be exercisable in full, and the Employee shall have 90 days following her termination within which to exercise any and all such rights and the restrictions on any and all shares of restricted stock granted to the Employee that are outstanding on the Date of Termination shall lapse as of the Date of Termination; (iv) During the Severance Period the Company shall, at its cost, arrange to provide the Employee with life, disability, dental, accident and group health insurance benefits substantially similar to those that she was receiving immediately prior to the Notice of Termination plus an additional amount necessary to reimburse the Employee for any taxes imposed solely by reason of her receipt of such benefits following her termination of employment. Notwithstanding the foregoing, the Company shall not provide any benefit otherwise receivable by the Employee pursuant to this subparagraph if an equivalent benefit is actually received by her at any time during the Severance Period and any such benefit actually received by her shall be reported to the Company. (d) The Company shall continue in effect for the benefit of the Employee all insurance or other provisions for indemnification, defense or hold- harmless of officers or directors of the Company that are in effect on the date the Notice of Termination is sent to the Employee or the Company with respect to all of her acts and omissions while an officer or director as fully and completely as if such termination had not occurred, and until the final expiration or running of all periods of limitation against actions that may be applicable to such acts or omissions. (e) The Employee shall have the right to terminate her employment under this Agreement upon thirty (30) days notice to the Company without liability to the Company for damages incurred solely by reason of such termination. (f) Nothwithstanding anything to the contrary in this Agreement, in the event that Employee becomes entitled to the Severance Payments, if any of the Severance Payments will be subject to the tax (the "Excise Tax") imposed by section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), Company shall pay to Employee an additional amount (the "Gross-Up Payment") such that the net amount retained by Employee, after deduction of any Excise Tax on the Total Payments (as hereinafter defined) and any federal, state and local income and other tax and Excise Tax upon the payment provided for by this Paragraph 10(f), shall be equal to the Total Payments. For purposes of determining whether any of the Total Payments will be subject to the Excise Tax and the amount of such Excise Tax, (i) any other payments or benefits received or to be received by Employee in connection with a Change in Control or Employee's termination of employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with Company, any person whose actions result in a change in control or any person affiliated with Company or such person (which, together with Severance Payments, shall constitute "Total Payments"), shall be treated as "parachute payments" within the meaning of section 280G(b)(2) of the Code, and all "excess parachute payments" within the meaning of section 280G(b)(1) shall be treated as subject to the Excise Tax, unless in the opinion of tax counsel selected by Company's independent auditors and acceptable to Employee, such other payments or benefits (in whole or in part) do not constitute parachute payments, or such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered within the meaning of section 280G(b)(4) of the Code in excess of the base amount, within the meaning of section 280G(b)(3) of the Code, or are otherwise not subject to the Excise Tax, (ii) the amount of the Total Payments which shall be treated as subject to the Excise Tax shall be equal to the lesser of (A) the total amount of the Total Payments or (B) the amount of excess parachute payments within the meaning of section 280G(b)(1) (after applying clause (i), above), and (iii) the value of any non-cash benefits or any deferred payment or benefit shall be determined by Company's independent auditors in accordance with the principles of sections 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, Employee shall be deemed to pay federal income taxes at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of Employee's residence on the date of termination of employment, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes. In the event that the Excise Tax is subsequently determined to be less than the amount taken into account hereunder at the time of termination of Employee's employment, Employee shall repay to Company, at the time that the amount of such reduction in Excise Tax is finally determined, the portion of the Gross-Up Payment attributable to such reduction (plus that portion of the Gross-Up Payment attributable to the Excise Tax and federal, state and local income tax imposed on the Gross-Up Payment being repaid by the Employee to the extent that such repayment results in a reduction in Excise Tax and/or a federal, state or local income tax deduction) plus interest on the amount of such repayment at the rate provided in section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is determined to exceed the amount taken into account hereunder at the time of the termination of Employee's employment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), Company shall make an additional Gross-Up Payment in respect of such excess (plus any interest, penalties or additions payable by the Employee with respect to such excess) at the time that the amount of such excess is finally determined. 11. DISCLOSURE OF INFORMATION. (a) Employee acknowledges that the list of Company's customers, as they may exist from time to time, and Company's trade secrets and other confidential information are valuable, special and unique assets of Company's business. Employee will not, during or after the Term of Employment, disclose to any person, firm, corporation, association, or any other entity or use for her own benefit, any list of Company's customers, or any part thereof, or any of Company's trade secrets or other confidential information, for any reason or purpose whatsoever. (b) Employee agrees that upon leaving the employ of Company she will deliver to Company and not keep or deliver to anyone else, any and all memoranda, specifications, documents and in general any and all material relating to Company's business that she may have under her possession or control. (c) Employee recognizes that she will possess confidential information about other employees of Company relating to their education, experience, skills, abilities, compensation and benefits, and interpersonal relationships with customers of Company. The Employee recognizes that the information she will possess about these other employees is not generally known, is of substantial value to Company in developing its products and in securing and retaining customers, and will be acquired by her because of her business position with Company. Employee agrees that, during the period ending on the last day of the one-year period following her termination of employment, she will not, directly or indirectly, solicit or recruit any employee of Company for the purpose of being employed by her, or any business, individual, partner, firm, corporation or other entity that is then in competition with Company ("Competitor") on whose behalf she is acting as an agent, representative or employee. The Employee further agrees that she will not convey any such confidential information or trade secrets about other employees of Company to anyone affiliated with her or to any Competitor. (d) Employee further acknowledges that the remedy at law for any breach by her of the covenants contained in Paragraphs 11(a) and (b) will be inadequate and that in the event of a breach, or threatened breach, by Employee of the covenants contained therein, Company shall be entitled to an injunction restraining Employee from using, for her own benefit, and/or from disclosing, in whole or in part, the list of Company's customers, and/or Company's trade secrets or other confidential information, and/or from rendering any services to any person, firm, corporation, association or other entity to whom such a list, and/or such trade secrets or other confidential information, in whole or in part, have been disclosed, or are threatened to be disclosed and such other declaratory relief as is proper to cause Employee to return to Company any and all memoranda, specifications, documents and all other material relating to Company's business that she may have under her possession or control. Nothing herein shall be construed as prohibiting Employee from pursuing professional employment or investments utilizing her own skills and knowledge or Company from pursuing any other remedies available to Company from such breach or threatened breach, including the recovery of damages from Employee. The provisions of this Paragraph 11 shall survive the expiration or termination, for any reason, of this Agreement and of Employee's employment. 12. ASSIGNMENTS/MITIGATION. (a) This Agreement and the rights, interest and benefits hereunder are personal to the Employee and shall not be assigned, transferred, pledged, or hypothecated in any way by the Employee, and shall not be subject to execution, attachment or similar process. Any attempted assignment, transfer, pledge, or hypothecation, or the levy of any execution, attachment or similar process thereon, shall be null and void and without effect. (b) The Company shall have the right to assign this Agreement and to delegate all of its rights, duties and obligations hereunder, whether in whole or in part, to any parent, affiliate, successor, or subsidiary organization of the Company or corporation with which the Company may merge or consolidate or which acquires by purchase or otherwise all or substantially all of the Company's consolidated assets, but such assignment shall not release the Company from its obligations under this Agreement, and in the event of any such assignment by the Company, the Employee may, at her sole option, exercise her termination rights under the provisions of Section 9(c)(iv) of this Agreement. (c) This Agreement shall inure to the benefit of and be enforceable by the Employee and her personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If the Employee should die while any amount would still be payable to her hereunder had she continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to her devisee, legatee or other designee or, if there is no such designee, to her estate. (d) The Employee shall have no duty to mitigate the Company's obligations hereunder by seeking other employment or by becoming self-employed; provided, however, that life, disability, dental, accident, group health insurance and other health and welfare benefits received by the Employee during or with respect to the Severance Period and attributable to services rendered during such period by the Employee to persons or entities other than the Company shall be applied to reduce the Company's obligation to provide such benefits hereunder. Not less frequently than annually (by the end of the month of the month next following the month in which the Effective Date occurs), the Employee shall account to the Company as to the amount of such benefits; if the Company has paid amounts in excess of those to which the Employee was entitled (after giving effect to the offsets provided above), the Employee shall reimburse the Company promptly thereafter for such excess. 13. NOTICE. Notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or five business days after being mailed by United States certified or registered mail, return receipt requested, postage prepaid, addressed (a) if to the Employee, to P. O. Box 2001, La Jolla, California 92038 and (b) if to the Company, to 21255 Califa Street, Woodland Hills, California 91367, Attention: Stanley R. Zax, with a copy to the Secretary of the Company; or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt thereof. 14. SECTION HEADINGS. The Section headings used in this Agreement are included solely for convenience and shall not affect, or be used in connection with, the interpretation of this Agreement. 15. SEVERABILITY. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof. 16. COUNTERPARTS. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 17. ARBITRATION. Any dispute or controversy arising under or in connection with this Agreement (other than an action for injuctive relief pursuant to Section 11 hereof) shall be settled exclusively by arbitration, conducted before a panel of three arbitrators in Los Angeles, California in accordance with the rules of the American Arbitration Association then in effect. Such arbitrators shall only have jurisdiction to award contract damages. Judgment may be entered on the arbitrators' award in any court having jurisdiction. The Employee, if prevailing, shall be entitled to reimbursement of all of her reasonable expenses in arbitration, including reasonable attorneys' fees. In the event of a good faith dispute regarding the payment of salary or benefits under this Agreement, the Company shall make the disputed payments to the Employee as if such dispute did not exist during the pendency of such good faith dispute, and, following the resolution of such dispute, the Employee shall reimburse the Company for any overpayments. 18. LEGAL FEES. The Company agrees to reimburse the Employee for all reasonable legal fees and other reasonable expenses incurred in connection with the negotiation and preparation of this Agreement. 19. COMPANY PROPERTY. The Employee agrees that at the time she leaves the employment of the Company she will deliver to the Company, and will not keep or deliver to anyone else, all notebooks, memoranda, documents, computer discs, and any and all other material relating to the Company's business or constituting the Company's property, whether or not the Employee was the author or recipient of such material. 20. MISCELLANEOUS. (a) No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Employee and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. (b) This instrument contains the entire agreement of the parties hereto relating to the subject matter hereof and it replaces and supersedes all prior agreements and understandings, oral and written, between the parties hereto. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. (c) The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of California without regard to its conflicts of law principles. (d) All references to Sections of the Exchange Act or the Code shall be deemed also to refer to any successor provisions to such Sections. (e) Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law. (f) The obligations created under the provisions of Sections 5, 8, 10, 11, 12, 17, 18 and 19 shall survive the expiration, suspension or termination, for any reason, of this Agreement or the Employee's employment hereunder until such obligations created thereunder are fully satisfied. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. ZENITH NATIONAL INSURANCE CORP. By:/s/ Stanley R. Zax ------------------- STANLEY R. ZAX, Chairman EMPLOYEE: /s/ Fredricka Taubitz ----------------- FREDRICKA TAUBITZ EX-10.9 3 EXHIBIT 10.9 JOHN J. TICKNER EMPLOYMENT AGREEMENT This EMPLOYMENT AGREEMENT (the "Agreement") is dated effective as of January 5, 1998 (the "Effective Date), between ZENITH NATIONAL INSURANCE CORP., a Delaware corporation (the "Company"), and JOHN J. TICKNER (the "Employee"); WHEREAS, the parties desire to enter into this Agreement setting forth the terms and conditions for the employment relationships of the Employee with the Company. NOW, THEREFORE, it is AGREED as follows: 1. EMPLOYMENT. (a) Subject to earlier termination as provided herein, the Employee is employed as a Senior Vice President and Secretary of the Company, and Senior Vice President, General Counsel and Secretary of its insurance subsidiaries from the Effective Date through the Term of this Agreement (as defined below). In this capacity the Employee shall devote his full business time and energy to the business, affairs and interests of the Company and matters related thereto. During the Term of this Agreement, the Employee shall have no other employment other than with a subsidiary of the Company, except with the prior written approval of the Board of Directors of the Company (the "Board"). The Employee shall have such duties and responsibilities and such executive power and authority as is customary for an officer in his position and as shall be allocated to him in such capacity and such other duties and responsibilities as the Board or the President of the Company shall designate that are not inconsistent with the Employee's position with the Company. (b) During his employment hereunder, the Employee shall report to the Company's Chief Executive Officer. 2. TERM. This Agreement shall be in effect for a term commencing on the Effective Date and expiring on March 1, 2001, and such period shall be referred to herein as the "Term" of this Agreement, and such Term shall not be affected by the termination of the Employee's employment hereunder. 3. SALARY. Commencing as of the Effective Date, the Company shall pay the employee an annual base salary at the minimum rate of $265,000, which shall be payable in installments in conformity with the Company's policy relating to salaried employees. The Employee's base salary may be subject to annual adjustment (but not below the then current amount) in the sole discretion of the Board. 4. DISCRETIONARY BONUSES. During the Term of this Agreement, the Employee shall be entitled to such discretionary bonuses as may be authorized, declared, and paid by the Board in its sole discretion. 5. PARTICIPATION IN RETIREMENT AND EMPLOYEE BENEFIT PLANS. During his employment hereunder, the Employee shall be entitled to participate in any plan of the Company relating to stock options, stock purchases, pension, thrift, profit sharing, life insurance, medical coverage, disability insurance, education, and other retirement or employee benefits that the Company has adopted or may adopt for the benefit of its executive employees, and the Company shall provide the Employee with such insurance or other provisions for indemnification, defense or hold-harmless of officers that are generally in effect for other senior executive officers of the Company. Notwithstanding the foregoing, nothing contained in this Agreement shall prohibit or limit the right of the Company to discontinue, modify or amend any plan or benefit in its absolute discretion at any time; provided, however, that any such discontinuance, modification or amendment shall apply to employees of the Company generally, or to a defined group of such employees and shall not apply solely to the Employee. 6. FRINGE BENEFITS; AUTOMOBILE. In addition to the benefit plans referred to in Section 5 hereof, the Employee shall be entitled to participate in any other fringe benefits that are now or may be or become applicable to the Company's executive employees, and any other benefits that are commensurate with the duties and responsibilities to be performed by the Employee under this Agreement and reimbursement for reasonable expenses incurred in the course of his duties hereunder in accordance with the Company's policy with respect thereto. In addition, the Company shall provide Employee with a Company-leased vehicle. The benefits provided under this Section 6 shall cease upon the Employee's Date of Termination (as defined below). 7. VACATION. During his employment hereunder, the Employee shall be entitled to an annual paid vacation in accordance with the Company's standard employment practices of at least four weeks per year or such longer period as the 2 Board may approve (pro-rated on a daily basis for any period that is less than one calendar year). Up to four weeks of accrued vacation time that is not used in a calendar year may be carried over into the following calendar year. Upon termination of the Employee's employment for any reason, the Employee shall be entitled to payment for any accrued but unused vacation time based upon his then current salary. The timing of paid vacations shall be scheduled in a reasonable manner by the Employee. 8. TERMINATION. (a). DISABILITY. If, as a result of the Employee's incapacity due to physical or mental illness, injury or similar incapacity, he shall have been absent from the full-time performance of his duties with the Company for six months within any eighteen-month period, his employment may be terminated by written notice (as provided below) from the Company for "Disability." (b) CAUSE. Subject to the notice provisions set forth below, the Company may terminate the Employee's employment for "Cause" at any time. Termination for "Cause" shall mean termination upon (1) the continued willful failure by the Employee to substantially perform his duties with the Company or his other willful breach of this Agreement (other than any such failure or breach resulting from his incapacity due to the physical or mental illness, injury or similar incapacity) after a written demand for substantial performance is delivered to him by the Board, which demand specifically identifies the manner in which the Board believes that he has failed to substantially perform his duties, or has otherwise breached this Agreement, (2) the Employee's conviction of a felony, (3) the Employee's willful misconduct that is materially and demonstrably injurious to the Company, or (4) the violation by the Employee of Section 10 hereof; provided, however, that the Employee shall not be terminated for "Cause" unless and until the Board has given the Employee reasonable notice of its intended actions and the alleged events or activities giving rise thereto and with respect to those events or activities for which a cure is possible, a reasonable opportunity to cure such breach and there shall have been delivered to him a copy of a resolution duly adopted by the Board regarding such action. (c) CONSTRUCTIVE TERMINATION. If at any time during the Term of this Agreement, any of the following events shall occur, the Employee shall be entitled to terminate his employment hereunder and be treated as if his employment had been terminated by the Company other than for Cause: 3 (i) Mr. Stanley R. Zax ceases to be full-time Chairman of the Board and President of the Company other than by reason of death or disability; (ii) The Employee is removed or otherwise prohibited or restricted in the performance of his duties as set forth in Section 1 hereof; (iii) Any payment due under this Agreement shall remain unpaid for more than 60 days; (iv) A Change in Control of the Company (as defined below) shall occur during the Term of his Agreement, and within 180 days after the effective date of any such Change in Control, the Employee delivers to the Company a written notice of his election to terminate the Agreement effective as of the date set forth in such notice, which effective date shall not be less than 30 days nor more than 90 days after the date of delivery of any such written notice. For purposes of this paragraph, a Change in Control shall mean either (i) a merger or consolidation of the Company with or into another company in which the Company does not survive; or (ii) an assignment of this Agreement by the Company under the provisions of Section 11(b) hereof; or (iii) the sale of all or substantially all of the Company's assets; or (iv) a change in the identities of a majority of the members of the Board within a one-year period or less; or (v) any other transaction that would require a party or affiliated group of parties to obtain approval from, or require such transactions to be presented for approval by, the California Insurance Commissioner (assuming there is no preemption of California insurance laws by federal law). (d) NOTICE OF TERMINATION. Any purported termination of the Employee's employment by the Company of by him shall be communicated by a written notice ("Notice of Termination") that shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Employee's employment under the provision so indicated. (e) DATE OF TERMINATION, ETC. "Date of Termination" shall mean (1) if the Employee's employment is terminated by his death, the date of his death; (2) if the Employee's employment is terminated for Disability, thirty days after Notice of Termination is given; (3) if the Employee's employment is terminated for Cause, the date specified in the Notice of Termination, which shall not be less than thirty days from the date such Notice of Termination is given; and (4) if the 4 Employee's employment is terminated for any other reason, the date specified in the Notice of Termination. 9. COMPENSATION UPON TERMINATION OR DURING DISABILITY. The Employee shall be entitled to the following benefits during a period of disability, or upon termination of his employment, as the case may be, if such period or termination occurs during the Term of this Agreement: (a) During any period that the Employee fails to perform his full-time duties with the Company as a result of incapacity due to physical or mental illness, injury or similar incapacity, he shall continue to receive his compensation and other benefits payable to him under this Agreement at the rate in effect at the commencement of any such period, together with all compensation payable to him under the Company's disability plan or program or other similar plan during such period, until his employment is terminated pursuant to Section 8(a) hereof. Thereafter, or in the event the Employee's employment shall be terminated by reason of his death, his benefits shall be determined under the Company's retirement, insurance and other compensation programs then in effect in accordance with the terms of such programs, and the Company shall have no further obligations to him under this Agreement. (b) If at any time the Employee's employment shall be terminated (i) by reason of his death, (ii) by the Company for Cause or Disability, or (iii) by him (other than by reason of a constructive termination pursuant to Section 8(c) hereof), the Company shall pay him (or his appropriate payee, as determined in accordance with Section 11(c) hereof) his full base salary through the Date of Termination at the rate in effect at the time Notice of Termination is given, plus all other amounts to which he is entitled under any compensation plan of the Company at the time such payments are due, and the Company shall have no further obligations to him under this Agreement. In addition, in the event the Employee's employment is terminated by reason of the Employee's death or Disability, the Employee (or his appropriate payee) shall be entitled to receive a pro rata portion of any bonus that would otherwise have been payable to the Employee with respect to the year in which the Employee's employment is terminated. For purposes of this provision, if the Employee's bonus for such year has not been determined, the Employee shall be deemed to have been entitled to a bonus equal to the bonus paid or payable to the Employee with respect to the immediately preceding year. (c) If the Employee's employment should be terminated by the Company other than for Cause or Disability or by the Employee by reason of a 5 constructive termination pursuant to Section 8(c) hereof, he shall be entitled to the benefits provided below: (i) The Company shall pay to the Employee his full base salary through the Date of Termination, at the rate in effect at the time Notice of Termination is given, plus all other amounts to which he is entitled under any compensation plan of the Company, in each case at the time such payments are due; (ii) The Company shall pay the Employee, at the time such payments would have been made had the Employee's employment not been terminated hereunder, all salary payments that would have been payable to the Employee pursuant to this Agreement had the Employee continued to be employed for the greater of (x) the remaining Term of this Agreement, or (y) one year (the "Severance Period") (assuming for the purpose of such continuing payments that the Employee's salary for each year of such period is equal to his salary at the Date of Termination), plus a pro rata portion of any bonus that would otherwise have been payable to the Employee with respect to the year in which the Employee's employment is terminated; provided, however, that if the Employee's bonus for such year has not been determined, the Employee shall be deemed to have been entitled to a bonus equal to the bonus paid or payable to the Employee with respect to the immediately preceding year; (iii) All stock option rights, stock appreciation rights, and any and all other similar rights theretofore granted to the Employee, including, but not limited to, the Employee's right to receive cash in lieu of exercising stock options, as may be provided in his stock option agreements, shall vest and shall then be exercisable in full, and the Employee shall have 90 days following his termination within which to exercise any and all such rights and the restrictions on any and all shares of restricted stock granted to the Employee that are outstanding on the Date of Termination shall lapse as of the Date of Termination; (iv) During the Severance Period the Company shall, at its cost, arrange to provide the Employee with life, disability, dental, accident and group health insurance benefits substantially similar to those that he was receiving immediately prior to the Notice of Termination plus an additional amount necessary to reimburse the Employee for any taxes imposed solely by reason of his receipt of such benefits following his termination of employment. Notwithstanding the foregoing, the Company shall not provide any benefit otherwise receivable by the Employee pursuant to this subparagraph if an equivalent benefits is actually received by him at any time during the Severance 6 Period and any such benefit actually received by him shall be reported to the Company. (d) The Company shall continue in effect for the benefit of the employee all insurance or other provisions for the indemnification, defense of hold-harmless of officers or directors of the Company that are in effect on the date the Notice of Termination is sent to the Employee or the Company with respect to all of his acts and omissions while an officer or director as fully and completely as if such termination had not occurred, and until the final expiration or running of all periods of limitation against actions that may be applicable to such acts or omissions. (e) The Employee shall have the right to terminate his employment under this Agreement upon thirty (30) days notice to the Company without liability to the Company for damages incurred solely by reason of such termination. (f) Notwithstanding anything to the contrary in this Agreement, in the event that, in the opinion of counsel for the Company, it is more likely than not that any payment or benefit under this Agreement or under any other plan or agreement would not be deemed to be deductible in whole or in part in the calculation of the federal income tax of the Company, or of any other person making such payment or providing such benefit, by reason of Section 280G of the Internal Revenue Code of 1986, including the rules and regulations promulgated thereunder, as amended from time to time and including any successor legislation thereto (the "Code"), the aggregate payments and benefits provided by this Agreement shall be reduced (if necessary, to zero) (with the cash payments provided by this Agreement being the first reduced) to the minimum extent necessary so that no portion of such aggregate payments and benefits is not deductible for federal income tax purposes by reason of Section 280G of the Code. The Company shall hold such portions not paid to the Employee in escrow. At the end of each calendar quarter during the term of such escrow, the Company shall deposit into escrow an amount equal to interest accrued during such calendar quarter on the amount held in escrow during such calendar quarter at a rate equal to the rate than payable on judgments in California. If it shall be determined at any point in time, by counsel selected by the Company and the Employee, that it is more likely than not that the payment to the Employee of any or all of such amount held in escrow would be deductible for tax purposes, such amount shall be paid out of escrow to the Employee. In the event of a final determination by the Internal Revenue Service or of an arbitration aware pursuant to Section 16 hereof, that any such amount held in escrow would not be deductible for tax purposes under the 7 then applicable provisions of the Code if paid to the Employee, or if it shall be determined at any point in time, by counsel selected by the company and the Employee, that it is more likely than not that the payment to the Employee of any such amount held in escrow would not be deductible for tax purposes under the then applicable provisions of the Code, such amount shall be paid out of escrow to the Company. For purposes of this Subsection 9(f),(i) the value of any non-cash benefits or any deferred or contingent payment or benefit shall be determined by the company's independent public accountants in accordance with the principles of Section 280G of the Code, (ii) no payment or benefit not constituting, in the opinion of such accountants, a "parachute payment" within the meaning of Section 280G of the code shall be included in determining the aggregate amount of such payments and benefits, and (iii) no payment or benefit the receipt or enjoyment of which has been waived in writing by the Employee shall be included in determining the aggregate amount of such payments and benefits. 10. CONFIDENTIAL INFORMATION AND NON-COMPETITION. (a) During the Term of this Agreement and thereafter, the Employee shall not, except as may be required to perform his duties hereunder or as required by applicable law, disclose to others or use, whether directly or indirectly any Confidential Information regarding the Company. "Confidential Information" shall mean information about the Company, its subsidiaries and affiliates, and their respective clients and customers that is not available to the general public and that was learned by the Employee in the course of his employment by the Company, including (without limitation) any data, formulae, information, proprietary knowledge, trade secrets and client and customer lists and all papers, resumes, records and the documents containing such Confidential Information. The Employee acknowledges that such Confidential Information is specialized, unique in nature and of great value to the company, and that such information gives the Company a competitive advantage. Upon the termination of this employment for any reason whatsoever, the Employee shall promptly deliver to the Company all documents (and all copies thereof) containing any Confidential Information. (b) During the term of his employment hereunder, the Employee shall not, directly or indirectly, without the prior written consent of the Company, provide consultative service (with or without pay) to, own, manage, operate, join, control, participate in, or be connected (as a stockholder, partner, or otherwise) with, any business, individual, partner, form, corporation, or other entity that is then in competition with the Company, any of its subsidiaries or affiliates (a "Competitor of the Company"), PROVIDED, however, that the "beneficial ownership" 8 by the Employee, either individually or as a member of a "group", as such terms are used in Rule 13d of the General Rules and Regulations under the Securities Exchange Act of 9134, as amended (the "Exchange Act"), of not more than one percent (1%) of the voting stock of any publicly held corporation shall not be a violation of this Agreement. It is further expressly agreed that the Company will or would suffer irreparable injury if the Employee were to compete with the Company or any subsidiary or affiliate of the company in violation of this Agreement and that the company would by reason of such competition be entitled to injunctive relief in a court of appropriate jurisdiction, and the Employee further consents and stipulates to the entry of such injunctive relief in such a court prohibiting the Employee from competing with the Company or any subsidiary or affiliate of the Company in violation of this Agreement. (c) During the Term of this Agreement, the Employee shall not directly or indirectly, influence or attempt to influence customers or suppliers of the Company or any of its subsidiaries or affiliates, to divert their business to any Competitor of the Company. (d) The Employee recognizes that he will possess confidential information about other employees of the Company relating to their education, experience, skills, abilities, compensation and benefits, and interpersonal relationships with customers of the Company. The Employee recognizes that the information he will possess about these other employees is not generally known, is of substantial value to the Company in developing its products and in securing and retaining Customers, and will be acquired by him because of his business position with the Company. The Employee agrees that, during the period ending on the last day of the three-year period following his Date of Termination, he will not, directly or indirectly, solicit or recruit any employee of the Company for the purpose of being employed by him, or any Competitor of the Company on whose behalf he is acting as an agent, representative or employee. The Employee further agrees that he will not convey any such confidential information or trade secrets about other employees of the Company to anyone affiliated with him or to any Competitor of the Company. (e) If it is determined by a court of competent jurisdiction in any state or applicable arbitration proceeding in accordance with Section 16, that any restriction in this Section 10 is excessive in duration or scope or is unreasonable or unenforceable under the laws of that state, it is the intention of the parties that such restriction may be modified or amended by the court to render it enforceable to the maximum extent permitted by the law of that state. 9 11. ASSIGNMENTS/MITIGATION. (a) This Agreement and the rights, interest and benefits hereunder are personal to the Employee and shall not be assigned, transferred, pledged, or hypothecated in any way by the Employee, and shall not be subject to execution, attachment or similar process. Any attempted assignment, transfer, pledge, or hypothecation, or the levy of any execution, attachment or similar process thereon, shall be null and void and without effect. (b) The Company shall have the right to assign this Agreement and to delegate all of its rights, duties and obligations hereunder, whether in whole or in part, to any parent, affiliate, successor or subsidiary organization of the Company or corporation with which the Company may merge or consolidate or which acquires by purchase or otherwise all or substantially all of the Company's consolidated assets, but such assignment shall not release the Company from its obligations under this Agreement, and in the event of any such assignment by the Company, the Employee may, at his sole option, exercise his termination rights under the provisions of Section 8(c)(iv) of this Agreement. (c) This Agreement shall inure to the benefit of and be enforceable by the Employee and his personal or legal representatives, executors, administrators, successors, heirs, distributes, devisees and legatees. If the Employee should die while any amount would still be payable to him hereunder had he continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to his devisee, legatee or other designees, or, if there is no such designee, to his estate. (d) The Employee shall have no duty to mitigate the Company's obligations hereunder by seeking other employment or by becoming self-employed; provided, however, that life, disability, dental, accident, group health insurance and other health and welfare benefits received by the Employee during or with respect to the Severance Period and attributable to services rendered during such period by the Employee to persons or entities other than the Company shall be applied to reduce the Company's obligation to provide such benefits hereunder. Not less frequently than annually (by the end of the month of the month next following the month in which the Effective Date occurs), the Employee shall account to the Company as to the amount of such benefits; if the Company has paid amounts in excess of those to which the Employee was entitled (after giving effect to the offsets provided above), the Employee shall reimburse the Company promptly thereafter for such excess. 10 12. NOTICE. Notices and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered or five business days after being mailed by United States certified or registered mail, return receipt requested, postage prepaid, addressed (a) if to the Employee, to 3 Dapplegray Road, Bell Canyon, CA 91307, and (b) if to the Company, to 21255 Califa Street, Woodland Hills, CA 91367, Attention: Stanley R. Zax, with a copy to the Secretary of the Company; or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt thereof. 13. SECTION HEADINGS. The Section headings used in this Agreement are included solely for convenience and shall not affect, or be used in connection with, the interpretation of this Agreement. 14. SEVERABILITY. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof. 15. COUNTERPARTS. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 16. ARBITRATION. Any dispute or controversy arising under or in connection with this Agreement (other than an action for injunctive relief pursuant to Section 10 hereof) shall be settled exclusively by arbitration, conducted before a panel of three arbitrators in Los Angeles, California, in accordance with the rules of the American Arbitration Association then in effect. Such arbitrators shall only have jurisdiction to award contract damages. Judgment may be entered on the arbitrator's award in any court having jurisdiction. The prevailing party shall be entitled to reimbursement of all of its reasonable expenses in arbitration, including reasonable attorney's fees. In the event of a good faith dispute regarding the payment of salary or benefits under this Agreement, the Company shall make the disputed payments to the Employee as if such dispute did not exist during the pendency of such good faith dispute, and, following the resolution of such dispute, the Employee shall reimburse the Company for any overpayments. 17. COMPANY PROPERTY. The Employee agrees that at the time he leaves the employment of the Company he will deliver to the Company, and will not keep or deliver to anyone else, all notebooks, memoranda, documents, computer discs, and any and all other material relating to the Company's business or constituting 11 the Company's property, whether or not the Employee was the author or recipient of such material. 18. MISCELLANEOUS. (a) No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by the Employee and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the time or at any prior or subsequent time. (b) This instrument contains the entire agreement of the parties hereto relating to the subject matter hereof and it replaces and supersedes all prior agreements and understandings, oral and written, between the parties hereto. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. (c) The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of California without regard to its conflicts of law principles. (d) All references to Sections of the Exchange Act or the Code shall be deemed also to refer to any successor provisions to such Sections. (e) Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law. (f) The obligations created under the provisions of Sections 7, 9, 10, 11, 16 and 17 shall survive the expiration, suspension or termination, for any reason, of this Agreement or the Employee's employment hereunder until such obligations created thereunder are fully satisfied. 19. PRIOR AGREEMENT. This Agreement replaces and supercedes the Employment Agreement dated February 16, 1995 between the parties. 12 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. ZENITH NATIONAL INSURANCE CORP. By: /s/ Stanley R. Zax ---------------------- STANLEY R. ZAX Chairman and President EMPLOYEE /s/ John J. Tickner ---------------------- JOHN J. TICKNER 13 EX-10.10 4 EXHIBIT 10.10 EXECUTION COPY EMPLOYMENT AGREEMENT This Employment Agreement ("Agreement") is entered into effective as of the 11th day of December, 1997 ("Effective Date"), on this 8th day of January, 1998 between ZENITH NATIONAL INSURANCE CORP., a Delaware corporation (hereinafter referred to as "Zenith"), and STANLEY R. ZAX (hereinafter referred to as "Employee"). WHEREAS, Employee is presently employed as Chairman of the Board and President of Zenith Insurance Company, a subsidiary of Zenith, pursuant to a written Employment Agreement originally dated as of December 9, 1981, for a term of five years ending December 8, 1986, which agreement was extended and modified pursuant to a written Employment Agreement dated as of December 5, 1985 for a term of five years ending December 31, 1990, which agreement was extended and modified pursuant to a written Employment Agreement dated as of February 28, 1990 for a term of five years ending December 31, 1995 and further extended and modified pursuant to a written Employment Agreement dated December 6, 1994 for a term of four year expiring on December 31, 1998, and is also employed as Chairman of the Board and President of Zenith and certain of its other subsidiaries (Zenith and all of its subsidiaries collectively referred to hereinafter as "Employer"); and WHEREAS, Zenith and Employee deem it in their respective best interests to extend the term of said Employment Agreement at the present time and modify certain other provisions thereof; NOW, THEREFORE, it is agreed as follows: 1. AMENDED AND RESTATED EMPLOYMENT AGREEMENT. The Agreement is hereby amended and restated in its entirety and the term thereof is hereby extended as hereinafter provided. 2. ENGAGEMENT AND DUTIES. During the Term of Employment as defined in Paragraph 3 of this Agreement: 2.1 Employer hereby employs Employee and Employee does hereby agree to be employed by Employer as Chairman of the Board, President, and Chief Executive Officer of Zenith and in such other capacities at Zenith and at each of the corporations which comprise Employer as shall hereafter be agreed upon by Employee, the Board of Directors of Zenith and the boards of directors of such other corporations. 2.2 Employee shall perform the normal duties of such offices and such other executive duties as may from time to time be assigned to him by and in accordance with instructions and directions of the Board of Directors of Zenith. Both Employee and Employer hereby expressly recognize that the services described herein shall be performed to the reasonable satisfaction of the Board of Directors of Zenith. 2.3 Employee shall perform the duties contemplated hereunder at his principal office located in Los Angeles County, California; provided, however, Employee shall travel outside Los Angeles County to the extent he reasonably deems it necessary or appropriate in the performance of his duties hereunder. 2.4 Employee, during the Term of Employment, shall devote his time, attention, energies, skill and best efforts to the performance of his duties for and on behalf of Employer. 3. TERM OF EMPLOYMENT. The term of employment hereunder shall be a period commencing on the Effective Date and terminating December 31, 2002 ("Expiration Date"), unless sooner terminated as elsewhere provided herein ("Term of Employment"). 4. COMPENSATION. As full and complete consideration for the performance of his duties and the rendition of any and all services under this Agreement, Employee shall be compensated as follows: 4.1 Effective as of the Effective Date, Employee shall be paid the sum One Million Dollars ($1,000,000) per year, subject to such other increases as the Board of Directors of Zenith may from time to time determine ("Base Compensation"). 4.2 In addition to the Base Compensation, Employee shall be a participant in the Executive Officer Bonus Plan of Zenith. 4.3 All compensation hereunder shall be paid by Employer, as allocated from time to time among the different corporations which comprise Employer by the Audit Committee of Zenith, and shall comply with all relevant governmental directives, rules and regulations which may be in effect from time to time. All Base Compensation shall be payable ratably twice each month, or more or less often in accordance with the normal payroll practices of Employer. 5. BUSINESS EXPENSES. Employee shall be reimbursed for reasonable and necessary expenses duly incurred in connection with the duties to be performed and the services to be rendered by Employee to Employer under and pursuant to this Agreement, upon submission of itemized expense statements in the manner and at times specified by Employer for officers of Employer. In addition, Employee shall be entitiled to the exclusive full time use of one deluxe automobile of his choice, to be replaced from time to time at Employee's discretion. 6. EMPLOYEE BENEFITS. 6.1 Employee shall be entitled to participate in all employee insurance, retirement and other benefit plans for which he qualifies and which may be in effect from time to time. Notwithstanding the foregoing, nothing contained in this Agreement shall prohibit or limit the right of Employer to discontinue, modify, or amend any plan or benefit in its absolute discretion at any time, provided, however, that any such discontinuance, modification or amendment shall apply to employees of Employer generally, or to a defined group of such employees, and shall not apply solely to Employee. 6.2 Employee shall be entitled each year to a vacation in accordance with standard employment practices, during which time his compensation shall be paid in full. Each vacation shall be taken during a period mutually satisfactory to both Employer and Employee. 7. DEATH DURING EMPLOYMENT. If Employee shall die during the Term of Employment, Employer shall pay the compensation which could otherwise be payable to Employee pursuant to Paragraphs 4.1 and 4.2 of this Agreement, up to the end of the twelfth month following the month in which his death occurred (a) to Employee's spouse, if living, (b) if his spouse is not then living, to his then living issue by right of representation, and (c) if none of the above are then living, to his estate. 8. ACKNOWLEDGMENT OF PECULIAR VALUE OF SERVICES. 8.1 Employee acknowledges that the services which he has agreed to render during the Term of Employment under this Agreement are special, unique, unusual, extraordinary, and of an intellectual character, and therefore are of peculiar value to Employer. 8.2 Employee further acknowledges that because of the character of said services the remedy at law for any breach by him of this Agreement may be enforced by an injunction in a suit in equity, without the necessity of proving actual damage, and that a temporary injunction may be granted immediately upon the commencement of any such suit, and without notice. Nothing herein contained shall be construed as prohibiting Employer from pursuing any other remedies available to Employer from such breach or threatened breach, including the recovery of damages from Employee. 9. DISCLOSURE OF INFORMATION. 9.1 Employee acknowledges that the list of Employer's customers, as they may exist from time to time, and Employer's trade secrets and other confidential information are valuable, special and unique assets of Employer's business. Employee will not, during or after the Term of Employment, disclose to any person, firm, corporation, association, or any other entity or use for his own benefit, any list of Employer's customers, or any part thereof, or any of Employer's trade secrets or other confidential information, for any reason or purpose whatsoever. 9.2 Employee agrees that upon leaving the employ of Employer he will deliver to Employer and not keep or deliver to anyone else, any and all memoranda, specifications, documents and in general any and all material relating to Employer's business that he may have under his possession or control. 9.3 Employee recognizes that he will possess confidential information about other employees of Employer relating to their education, experience, skills, abilities, compensation and benefits, and interpersonal relationships with customers of Employer. The Employee recognizes that the information he will possess about these other employees is not generally known, is of substantial value to Employer in developing its products and in securing and retaining customers, and will be acquired by him because of his business position with Employer. Employee agrees that, during the period ending on the last day of the one-year period following his termination of employment, he will not, directly or indirectly, solicit or recruit any employee of Employer for the purpose of being employed by him, or any business, individual, partner, firm, corporation or other entity that is then in competition with Employer ("Competitor") on whose behalf he is acting as an agent, representative or employee. The Employee further agrees that he will not convey any such confidential information or trade secrets about other employees of Employer to anyone affiliated with him or to any Competitor. 9.4 Employee further acknowledges that the remedy at law for any breach by him of the covenants contained in Paragraphs 9.1 and 9.2 will be inadequate and that in the event of a breach, or threatened breach, by Employee of the covenants contained therein, Employer shall be entitled to an injunction restraining Employee from using, for his own benefit, and/or from disclosing, in whole or in part, the list of Employer's customers, and/or Employer's trade secrets or other confidential information, and/or from rendering any services to any person, firm, corporation, association or other entity to whom such a list, and/or such trade secrets or other confidential information, in whole or in part, have been disclosed, or are threatened to be disclosed and such other declaratory relief as is proper to cause Employee to return to Employer any and all memoranda, specifications, documents and all other material relating to Employer's business that he may have under his possession or control. Nothing herein shall be construed as prohibiting Employer from pursuing any other remedies available to Employer from such breach or threatened breach, including the recovery of damages from Employee. The provisions of this Paragraph 9 shall survive the expiration or termination, for any reason, of this Agreement and of Employee's employment. 10. TERMINATION OF AGREEMENT BY EMPLOYER. Should any of the following events occur, Employer may terminate this Agreement by giving written notice thereof to Employee, which notice shall be effective immediately: (a) Employee is physically or mentally incapacitated for a period of one hundred eighty (180) consecutive days. Employee shall be deemed to be physically or mentally incapacitated if he is unable for any reason whatsoever to devote his full time and efforts to the business of Employer. (b) Employee breaches any of his material obligations under this Agreement. 10.1 Should Employer terminate the Term of Employment prior to the Expiration Date pursuant to Paragraph 10(a) hereof, Employer shall thereupon pay to Employee, in complete satisfaction of its obligations under this Agreement, the compensation which would otherwise be payable to him pursuant to Paragraphs 4.1 and 4.2 of this Agreement up to the end of the sixth month following the month in which such termination occurred. Should Employer terminate the Term of Employment prior to the Expiration Date pursuant to Paragraph 10(b) hereof, Employer shall pay to Employee in complete satisfaction of its obligations under this Agreement and without waiving any rights which it or its subsidiaries may have against Employee, the compensation which would otherwise be payable to him pursuant to Paragraph 4.1 of this Agreement up to the end of the month in which such termination occurs and Employer shall not be obligated to make any payments to Employee pursuant to Paragraph 4.2 of the Agreement. 10.2 Subject to the provisions of Paragraph 11.2 hereof, should Employer terminate the Term of Employment prior to the Expiration Date for any reason other than as set forth in Paragraphs 10(a) and 10(b) hereof, Employer shall thereupon pay to Employee, in complete satisfaction of its obligations under this Agreement, the compensation which would otherwise be payable to him pursuant to Paragraphs 4.1 and 4.2 of this Agreement had Employee continued to be employed through the Expiration Date, assuming, for purposes of this Paragraph 10.2, that the annual bonus payable to Employee pursuant to Paragraph 4.2 of this Agreement for each year of the remaining term is equal to the highest annual bonus paid or payable to Employee during the three consecutive years immediately preceding his termination of employment. 11. CHANGE IN CONTROL; TERMINATION OF AGREE-MENT BY EMPLOYEE OR EMPLOYER. In the event of a Change in Control (as defined below) at any time during the Term of Employment, all stock option rights, stock appreciation rights, and any and all other similar rights theretofore granted to Employee, including, but not limited to, Employee's right to receive cash in lieu of exercising stock options, as provided in Section 9 of his Stock Option Agreements entered into with Zenith as of December 6, 1985 and December 9, 1987, shall vest and shall then be exercisable in full. 11.1 Employee may, within 180 days after the effective date of any such Change in Control, deliver to Zenith a written notice of his election to terminate the Term of Employment, effective as of a date set forth in said notice, which effective date shall be not less than 30 days nor more than 90 days after the date of delivery of such written notice. 11.2 Notwithstanding anything in this Agreement to the contrary, in the event of a Change in Control, should Employee terminate the Term of Employment prior to the Expiration Date pursuant to Paragraph 11.1 hereof, or should Employer terminate the Term of Employment prior to the Expiration Date for any reason other than as set forth in Paragraphs 10(a) and 10(b) hereof, then, effective as of the date set forth in Employee's or Employer's notice to terminate the Term of Employment, Employee shall be entitled to the benefits provided below (hereinafter referred to as "Severance Payments"): (i) Zenith shall pay to Employee his Base Compensation through the effective date of the notice to terminate the Term of Employment, at the rate in effect at the time such notice of termination is given, plus all other amounts to which he is entitled under any compensation plan of Employer, in each case at the time such payments are due; (ii) Zenith shall pay to Employee a cash lump sum payment, no later than the fifteenth day following the effective date of the notice to terminate the Term of Employment, equal to the greater of (a) two times the sum of (x) his Base Compensation at the rate in effect as of the effective date of the notice to terminate the Term of Employment and (y) the highest annual bonus paid or payable to Employee during the three consecutive years immediately preceding his termination of employment, or (b) the "actuarial equivalent" of all Base Compensation and bonus payments that would have been payable to Employee pursuant to Paragraphs 4.1 and 4.2 of this Agreement had Employee continued to be employed through the Expiration Date, assuming, for purposes of this Paragraph, that the annual bonus payable to Employee pursuant to Paragraph 4.2 of this Agreement for each year of such remaining term is equal to the highest annual bonus paid or payable to Employee during the three consecutive years immediately preceding his termination of employment. For purposes of this subparagraph 11.2(ii), "actuarial equivalent" shall be determined by an actuary selected by Zenith, subject to approval by Employee, and calculated in accordance with the actuarial assumptions used by the Pension Benefit Guaranty Corporation to value liabilities for pension plans terminating as of the effective date of Employee's or Employer's notice to terminate the Term of Employment; (iii) During the period beginning as of the effective date of Employee's or Employer's notice to terminate the Term of Employment until the Expiration Date, Zenith shall, at its cost, arrange to provide Employee with life, disability, dental, accident and group health insurance benefits substantially similar to those that he was receiving immediately prior to the effective date of the notice to terminate the Term of Employment plus an additional amount necessary to reimburse Employee for any taxes imposed solely by reason of his receipt of such benefits following his termination of employment. Notwithstanding the foregoing, Zenith shall not provide any benefit otherwise receivable by Employee pursuant to this subparagraph 11.2(iii) if an equivalent benefit actually received by him at any time during the period of coverage, and any such benefit actually received by him shall be reported to Zenith. 11.3 For purposes of this Agreement, a Change in Control shall mean either (i) a merger or consolidation of Zenith with or into another company or corporation, other than (a) a merger or consolidation which would result in the voting securities of Zenith outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least 75% of the combined voting power of the voting securities of Zenith or such surviving entity outstanding immediately after such merger or consolidation or (b) a merger or consolidation effected to implement a recapitalization of Zenith (or similar transaction) in which no "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended) acquires Zenith more than 50% of the combined voting power of Zenith's then outstanding securities; or (ii) an assignment of this Agreement by Zenith under the provisions of Paragraph 15.2 hereof; or (iii) the sale of all or substantially all of Zenith's assets; or (iv) a change in the identities of a majority of the members of the Board of Directors of Zenith within a one-year period or less; or (v) any other transaction which would require any party or affiliated group of parties to obtain approval from, or require such transactions to be presented for approval by, the California Insurance Commissioner (assuming there is no preemption of California insurance laws by Federal Law). 11.4 Notwithstanding anything to the contrary in this Agreement, in the event that Employee becomes entitled to the Severance Payments, if any of the Severance Payments will be subject to the tax (the "Excise Tax") imposed by section 4999 of the Internal Revenue Code of 1986, as amended (the "Code"), Zenith shall pay to Employee an additional amount (the "Gross-Up Payment") such that the net amount retained by Employee, after deduction of any Excise Tax on the Total Payments (as hereinafter defined) and any federal, state and local income and other tax and Excise Tax upon the payment provided for by this Paragraph 11.4, shall be equal to the Total Payments. For purposes of determining whether any of the Total Payments will be subject to the Excise Tax and the amount of such Excise Tax, (i) any other payments or benefits received or to be received by Employee in connection with a Change in Control or Employee's termination of employment (whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement with Employer, any person whose actions result in a change in control or any person affiliated with Employer or such person (which, together with Severance Payments, shall constitute "Total Payments"), shall be treated as "parachute payments" within the meaning of section 280G(b)(2) of the Code, and all "excess parachute payments" within the meaning of section 280G(b)(1) shall be treated as subject to the Excise Tax, unless in the opinion of tax counsel selected by Zenith's independent auditors and acceptable to Employee, such other payments or benefits (in whole or in part) do not constitute parachute payments, or such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered within the meaning of section 280G(b)(4) of the Code in excess of the base amount, within the meaning of section 280G(b)(3) of the Code, or are otherwise not subject to the Excise Tax, (ii) the amount of the Total Payments which shall be treated as subject to the Excise Tax shall be equal to the lesser of (A) the total amount of the Total Payments or (B) the amount of excess parachute payments within the meaning of section 280G(b)(1) (after applying clause (i), above), and (iii) the value of any non-cash benefits or any deferred payment or benefit shall be determined by Zenith's independent auditors in accordance with the principles of sections 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, Employee shall be deemed to pay federal income taxes at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of Employee's residence on the date of termination of employment, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes. In the event that the Excise Tax is subsequently determined to be less than the amount taken into account hereunder at the time of termination of Employee's employment, Employee shall repay to Zenith, at the time that the amount of such reduction in Excise Tax is finally determined, the portion of the Gross-Up Payment attributable to such reduction (plus that portion of the Gross-Up Payment attributable to the Excise Tax and federal, state and local income tax imposed on the Gross-Up Payment being repaid by the Executive to the extent that such repayment results in a reduction in Excise Tax and/or a federal, state or local income tax deduction) plus interest on the amount of such repayment at the rate provided in section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is determined to exceed the amount taken into account hereunder at the time of the termination of Employee's employment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), Zenith shall make an additional Gross-Up Payment in respect of such excess (plus any interest, penalties or additions payable by the Executive with respect to such excess) at the time that the amount of such excess is finally determined. 11.5 The payments provided for in Paragraphs 11.2 (other than subparagraph 11.2(iii)) and 11.4 hereof shall be made not later than the fifth day following the date of termination of employment, provided, however, that if the amounts of such payments cannot be finally determined on or before such day, Zenith shall pay to Employee on such day an estimate, as determined in good faith by Zenith, of the minimum amount of such payments to which Employee is clearly entitled and shall pay the remainder of such payments (together with interest at the rate provided in section 1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined but in no event later than the thirtieth (30th) day after the date of termination of employment. In the event that the amount of the estimated payments exceeds the amount subsequently determined to have been due, such excess shall constitute a loan by Zenith to Employee, payable on the fifth (5th) business day after demand by Zenith (together with interest at the rate provided in section 1274(b)(2)(B) of the Code). At the time that payments are made under this Paragraph, Zenith shall provide Employee with a written statement setting forth the manner in which such payments were calculated and the basis for such calculations including, without limitation, any opinions or other advice Zenith has received from outside counsel, auditors or consultants (and any such opinions or advice which are in writing shall be attached to the statement). 12. ATTORNEY'S FEES. In the event that any action at law or in equity, for injunctive or declaratory relief, is brought to enforce or interpret the provisions of this Agreement, if Employee is the prevailing party, he shall be entitled to reasonable attorney's fees in addition to any other relief to which he may be entitled. 13. APPLICABLE LAW. This Agreement and the rights and obligations of the parties hereunder shall be construed, interpreted and enforced in accordance with, and governed by, the laws of the State of California applicable to agreements executed and fully to be performed thereunder. 14. NOTICES. Any notice required to be given hereunder shall be in writing sent by registered or certified mail, return receipt requested, to either Zenith or Employee at the addresses listed below, or at such other addresses as either Zenith or Employee may hereafter designate in writing to the other: To Zenith: Zenith National Insurance Corp. 21255 Califa Street Woodland Hills, California 91367 Attention: Corporate Secretary To Employee: 813 North Bedford Drive Beverly Hills, California 90210 15. ASSIGNMENT. 15.1 This Agreement and the rights, interests, and benefits hereunder are personal to Employee and shall not be assigned, transferred, pledged, or hypothecated in any way by Employee, and shall not be subject to execution, attachment or similar process. Any attempted assignment, transfer, pledge, or hypothecation, or the levy of any execution, attachment or similar process thereon, shall be null and void and without effect. 15.2 Zenith shall have the right to assign this Agreement and to delegate all of its rights, duties and obligation hereunder, whether in whole or in part, to any parent, affiliate, successor, or subsidiary organization or company of Zenith or corporation with which Zenith may merge or consolidate or which acquires by purchase or otherwise all or substantially all of Zenith's consolidated assets, but such assignment shall not release Employer from its obligations under this Agreement, and in the event of any such assignment by Zenith, Employee may, at his sole option, exercise his termination rights under the provisions of Paragraph 11 of this Agreement. 16. ENTIRE AGREEMENT. This Agreement constitutes the entire understanding of the parties hereto and supersedes any and all prior agreements and understanding whether oral or written between the parties. This Agreement may only be modified by an agreement in writing executed by one of Zenith's duly authorized officers (other than Employee), with the approval of Zenith's Board of Directors, and by Employee. 17. WAIVER OF BREACH. The waiver by Employee of a breach of any provision of this Agreement by Employee shall not operate or be construed as a waiver of any subsequent breach by Employee. 18. MISCELLANEOUS. 18.1 The titles of the paragraphs of this Agreement are for convenience of reference only, and are not to be considered in construing this Agreement. 18.2 The unenforceability or invalidity of any paragraph or subparagraph of this Agreement shall not affect the enforceability and validity of the balance of this Agreement. 18.3 Each party hereto shall make, execute and deliver such other instruments or documents as may be reasonable required in order to effectuate the purpose of this Agreement. IN WITNESS WHEREOF, the parties hereto have executed this Agreement in Woodland Hills, California, on the date indicated below. ZENITH NATIONAL INSURANCE CORP. ("Zenith") Date: By /s/ Fredricka Taubitz As agent for and on behalf of Zenith and each and all of its Subsidiaries ("Employer") Date: By /s/ Stanley R. Zax STANLEY R. ZAX ("Employee") EX-10.16 5 EXHIBIT 10.16 [LOGO] THIRD AMENDMENT TO LINE OF CREDIT AGREEMENT This Third Amendment to Line of Credit Agreement (the "Amendment") is effective as of January 2, 1998, by and between SANWA BANK CALIFORNIA (the "Bank") and ZENITH NATIONAL INSURANCE CORP. (the "Borrower") with respect to the following: This Amendment shall be deemed to be a part of and subject to that certain Line of Credit Agreement dated as of December 15, 1994, as heretofore amended, and any and all addenda and riders heretofore made (collectively the "Agreement"). Unless otherwise defined herein, all terms used in this Amendment shall have the same meanings as in the Agreement. To the extent that any of the terms or provisions of this Amendment conflict with those contained in the Agreement, the terms and provisions contained herein shall control. WHEREAS, the Borrower and the Bank mutually desire to extend and/or modify the Agreement. NOW THEREFORE, for value received and hereby acknowledged, the Borrower and the Bank agree as follows: 1. CERTAIN DEFINED TERMS. Unless elsewhere defined in this Third Amendment, the following terms shall have the following meaning: "AMOUNTS AVAILABLE FOR DIVIDENDS" shall mean, without duplication, the amount that is paid or may be paid by Zenith Insurance Company as a dividend at any time during the then current calendar year without being an "extraordinary dividend" under Section 1215.5(c) of the California Insurance Code. "CONTINGENT OBLIGATIONS" shall mean any agreement, undertaking or arrangement (other than insurance and reinsurance obligations and surety bonds, in each case entered into in the ordinary course of business) by which any Person guarantees, endorses or otherwise becomes or is contingently liable for (by direct or indirect agreement, contingent or otherwise, to provide funds for payment, to supply funds to, or otherwise to invest in, a debtor, or otherwise to assure a creditor against loss but excluding the Borrower's agreement to subordinate debt owed to it by Perma- Bilt, a Nevada corporation, to amounts owed to others) the debt, obligation or other liability of any other Person (other than by endorsements of instruments in the course of collection), or guarantees the payment of dividends or other distributions upon the shares of any other Person. The amount of any Person's obligation under any Contingent Obligation shall (subject to any limitation set forth therein) be deemed to be the outstanding principal amount of the debt, obligation of other liability guaranteed thereby. "DEBT" shall mean the outstanding principal for which Borrower is either directly liable or indirectly liable as a Contingent Obligation for (a) all indebtedness for borrowed money (b) all obligations evidenced by notes, bonds, debentures or similar instruments, including obligations so evidenced incurred in connection with the acquisition of property, assets or business, and (c) all obligations with respect to capital leases. 1 "FIXED INTEREST CHARGES" shall mean interest paid, or without duplication, accrued but unpaid on (i) the Line of Credit, (ii) all indebtedness for borrowed money , and (iii) all obligations evidenced by notes, bonds, debentures or similar instruments, including obligations so evidenced incurred in connection with the acquisition of property, assets, or businesses, which shall be determined at the end of each fiscal quarter for the four consecutive fiscal quarters then ended." "GOVERNMENTAL AUTHORITY" means any nation or government, any state or other political subdivision thereof, any central bank (or similar monetary or regulatory authority) thereof, any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, and any corporation or other entity owned or controlled, through stock or capital ownership or otherwise, by any of the foregoing. "INSURANCE SUBSIDIARY" shall mean any Subsidiary of the Borrower (other than Zenith Insurance Management Services, Inc., Zenith Risk Management, Inc., and CalFarm Insurance Agency or any other Subsidiary which does not issue or underwrite insurance or reinsurance) that is authorized or admitted to carry on or transact one or more aspects of the business of selling, issuing or underwriting insurance or reinsurance. "INTEREST COVERAGE RATIO" shall mean the ratio of (a) (i) Amounts Available for Dividends, plus (ii) pre-tax income from the Non- Insurance Subsidiaries as of the end of each fiscal quarter for the four quarters then ended, plus (iii) without duplication, pre-tax, pre-interest income of the Borrower as of the end of each fiscal quarter for the four quarters then ended to (b) Fixed Interest Charges. "NON-INSURANCE SUBSIDIARY" means any Subsidiary which is not an Insurance Subsidiary. "PERSON" shall mean an individual, partnership, corporation, limited liability company, business trust, joint stock company, trust, unincorporated association or Governmental Authority. "SUBSIDIARY" of a person means any corporation, association, partnership, limited liability company, joint venture or other business entity of which more than 50% of the voting stock, membership interests or other equity interests (in case of Persons other than corporations), is owned or controlled directly or indirectly by the Person, or one or more of the Subsidiaries of the Person, or a combination thereof. Unless the context otherwise clearly requires, references herein to a "Subsidiary" refer to a Subsidiary of the Borrower. "SURETY INSTRUMENTS" means all letters of credit (including standby and commercial), banker's acceptances, surety bonds and similar instruments but excluding insurance and reinsurance obligations and surety obligations, in each case entered into in the ordinary course of business. "TOTAL CAPITALIZATION" shall be defined as (a) Debt plus (b) Total Shareholder's Equity of the Borrower. "TOTAL SHAREHOLDER'S EQUITY" shall mean the total shareholder's equity as determined in accordance with generally accepted accounting principles (calculated excluding unrealized gains (losses) of securities as determined in accordance with FASB 115). 2. CHANGE IN INTEREST RATE. Sections 1.02 C. 1, 2 and 3 of the Agreement are deleted in their entirety and the following is substituted in lieu thereof: "1. REFERENCE RATE ADVANCES. A variable rate equivalent to an index for a variable interest rate which is quoted, published or announced from time to time by the Bank as its reference rate and as to 2 which loans may be made by the Bank at, below or above such reference rate (the "Reference Rate"). Interest shall be adjusted concurrently with any change in the Reference Rate. An Advance based upon the Reference Rate is hereinafter referred to as a "Reference Rate Advance." Each such Reference Rate Advance must be in the minimum amount of $100,000.00. 2. FED FUNDS ADVANCES. A variable rate per annum (the "Federal Funds Rate"), for each day in which the Advance is based upon the Federal Funds Rate (a "Fed Funds Advance"), equivalent to 0.40% in excess of the interest rate equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System, quoted to the Bank on such day by Federal Funds brokers of recognized standing which are selected by the Bank in its sole discretion or, if such day is not a business day, for the immediately preceding business day. With respect to this section 1.02(C)(2), a business day means a day in which banks are open generally in Chicago and New York for the conduct of substantially all of their commercial lending activities. Fed Funds Advances must be in the minimum amount of $250,000.00. 3. EURODOLLAR ADVANCES. A fixed rate quoted by the Bank for 30, 60, 90, 120, 180 or 360 days or for such other period of time that the Bank may quote and offer (provided that any such period of time does not extend beyond the Expiration Date) [the "Interest Period"] for Advances in the minimum amount of $250,000.00. Such interest rate shall be a percentage equivalent to 0.40% in excess of the Bank's Eurodollar Rate (rounded upward, if necessary, to the nearest 1/16th of one per cent (0.0625%) which is that rate determined by the Bank's Treasury Desk as being the approximate rate at which the Bank could purchase offshore U.S. dollar deposits in an amount approximately equal to the amount of the relevant Advance and for a period of time approximately equal to the relevant Interest Period (adjusted for any and all assessments, surcharges and reserve requirements pertaining to the purchase by the Bank of such U.S. dollar deposits) [the "Eurodollar Rate"]. An Advance based upon the Eurodollar Rate is hereinafter referred to as a "Eurodollar Advance" or Eurodollar Rate Advance". Interest shall be computed on the basis of 360 days per year, but charged on the actual number of days elapsed. 3. MODIFICATION OF COMMITMENT FEE. Section 1.04(ii). of the Agreement is deleted in its entirety and the following is inserted in lieu thereof: "(ii) from the effective date of this Amendment to the termination of this Agreement a fee equal to 0.125% per annum of the daily unused portion of the line, payable in arrears for the immediately preceding calendar quarter on the 15th day of each January, April, July and October of each year, and payable at the termination date of this Agreement for the immediately preceding calendar quarter, if not previously paid, and for the then current calendar quarter, to be computed on the basis of 360 days per year, but charged on the actual number of days elapsed during the applicable time period for which the Line of Credit has been in effect." 4. SUBSTITUTION OF FINANCIAL COVENANT. Section 4.10 B is deleted and a new covenant is inserted to read as follows: "4.10 B DEBT TO TOTAL CAPITALIZATION. Borrower shall not permit the Debt to Total Capitalization Ratio to exceed 0.40 to 1.00 as of the end of any fiscal quarter. 5. NEW FINANCIAL COVENANT. Section 4.10 E is deleted and a new subsection is to be added to read as follows: 3 "4.10 E. INTEREST COVERAGE RATIO. Borrower shall not permit the Interest Coverage Ratio to be less than 2.00 to 1.00 as of the end of any fiscal quarter. 6. EVENTS OF DEFAULT. Section 5.02 of the Agreement is deleted in its entirety and the following is inserted in lieu thereof: "5.02. a) Performance under this Agreement. The Borrower shall fail in any material respect to perform or observe any material term, covenant or agreement contained in this Agreement or any material document, instrument or agreement evidencing or relating to any material indebtedness of the Borrower to the Bank and any such failure (exclusive of the payment of money to the Bank under this Agreement or any other document, instrument or agreement, which failure shall constitute an immediate Event of Default if not paid within five (5) business days after notice from the Bank that the same is past due) shall continue for more than 30 days after written notice from the Bank to the Borrower of the existence and character of such Event of Default or should the default require more than (30) days but less than ninety (90) days to correct, the Borrower does not commence material corrective action within thirty (30) days and actively pursues such corrective action. b) Performance With Other Third Parties. The Borrower shall: (1) fail to make any payment in respect of (a) all indebtedness of Borrower for borrowed money (b) all obligations of Borrower evidenced by notes, bonds, debentures or similar instruments, including obligations so evidenced incurred in connection with the acquisition of property, assets or businesses or (c) all non- contingent reimbursement or payment obligations of Borrower with respect to Surety Instruments and (d) all obligations of Borrower with respect to capital leases or any Contingent Obligations of Borrower related to (a), (b), (c), and (d), having an aggregate principal amount (including undrawn committed or available amounts and including amounts owing to all creditors under any combined or syndicated credit agreement) of more than $10,000,000 when due (whether by scheduled maturity, required prepayment, acceleration, demand, or otherwise) and such failure continues after the applicable grace or notice period, if any, specified in the relevant document on the date of such failure; or (2) fail to perform or observe any other condition or covenant, or any other event shall occur or condition exist, under any agreement or instrument relating to any such indebtedness or Contingent Obligation, and such failure continues after the applicable grace or notice period, if any, specified in the relevant document on the date of such failure if the effect of such failure, event or condition is to cause such indebtedness to be declared to be due and payable prior to its stated maturity, or such Contingent Obligation to become payable or cash collateral in respect thereof to be demanded. 7. CONFIRMATION OF OTHER TERMS AND CONDITIONS OF THE AGREEMENT. Except as specifically provided in this Amendment, all other terms, conditions and covenants of the Agreement unaffected by this Amendment shall remain unchanged and shall continue in full force and effect and the Borrower hereby covenants and agrees to perform and observe all terms, covenants and agreements provided for in the Agreement, as hereby amended. 4 IN WITNESS WHEREOF, this Amendment has been executed by the parties hereto as of the date first hereinabove written. BANK: BORROWER: SANWA BANK CALIFORNIA ZENITH NATIONAL INSURANCE CORP. By: /s/ DIRK A. PRICE By: /s/ STANLEY R. ZAX ---------------------------------- ------------------------------------ Dirk A. Price, Vice President Stanley R. Zax, President & Chairman 5 EX-10.31 6 EXHIBIT 10.31 January 21, 1998 VIA FEDERAL EXPRESS Zenith National Insurance Corp. 21255 Califa Street Woodland Hills, CA 91367-5021 Attention: Mr. Hyman J. Lee, Jr. Re: AMENDMENT NO. 1 TO CREDIT AGREEMENT Dear Hyman: Zenith National Insurance Corp. (the "Borrower") has requested that Bank of America National Trust and Savings Association (the "Bank") amend the definition of "Risk-Based Capital" contained in the Credit Agreement, dated as of July 24, 1997, between the Borrower and the Bank (the "Credit Agreement"). The Bank has agreed to amend the Credit Agreement to the extent and on the terms and conditions contained herein. Capitalized terms used herein without definition shall have the meanings provided therefor in the Credit Agreement. The definition of Risk-Based Capital contained in the Credit Agreement is hereby amended to add the following after the first sentence of the definition thereof: "With respect to each quarter other than the fiscal year end, the amount used in such ratio for the Company Action Level shall be that which was calculated as of the prior year end." Except as amended hereby, the Credit Agreement and all Loan Documents shall remain in full force and effect without amendment or modification. The amendment contained herein is specifically limited to the terms hereof. Zenith National Insurance Corp. January 21, 1998 Page 2 Please evidence your agreement with the foregoing by executing this letter and returning it to the Bank. Very truly yours, BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION By: /s/ Michael T. Ernst -------------------------------- Its: Michael T. Ernst ------------------------------- Accepted and agreed to this 22 day Managing Director of January, 1998. ZENITH NATIONAL INSURANCE CORP. By: /s/ Fredricka Taubitz ------------------------------ Its: Exec. Vice Pres & Chief Financial Officer ------------------------------------------ EX-13 7 EXHIBIT 13 ANNUAL REPORT 1997 ZENITH NATIONAL INSURANCE CORP. CalFarm The Zenith INSURANCE PRODUCTS AND SERVICES AUTOMOBILE . BUSINESS . EARTHQUAKE . FARMOWNERS . HEALTH . HOMEOWNERS . REINSURANCE . SINGLEPOINT INTEGRATED 24-HOUR HEALTH & DISABILITY . WORKERS' COMPENSATION CalFarm The Zenith CONTENTS FINANCIAL HIGHLIGHTS..................................................................... 3 LETTER TO STOCKHOLDERS................................................................... 4 MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS........................................ 24 FIVE-YEAR SUMMARY OF SELECTED FINANCIAL INFORMATION...................................... 34 PROPERTY-CASUALTY LOSS DEVELOPMENT....................................................... 36 CONSOLIDATED BALANCE SHEET............................................................... 38 CONSOLIDATED STATEMENT OF OPERATIONS..................................................... 40 CONSOLIDATED STATEMENT OF CASH FLOWS..................................................... 41 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY........................................... 42 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS............................................... 44 INDEPENDENT ACCOUNTANT'S REPORT.......................................................... 57 CORPORATE DIRECTORY ZENITH NATIONAL INSURANCE CORP....................................................... 59 ZENITH INSURANCE COMPANY............................................................. 60 CALFARM INSURANCE COMPANY............................................................ 61 CALFARM INSURANCE AGENCY............................................................. 62 PERMA-BILT, A NEVADA CORPORATION..................................................... 62
CalFarm 2 The Zenith FINANCIAL HIGHLIGHTS
OPERATING RESULTS PER SHARE DATA KEY STATISTICS 1997 1996 1995 - ------------------------------------------------------------------------------------- (Dollars in thousands, except per share data) OPERATING RESULTS CONSOLIDATED REVENUES $660,480 $556,371 $519,020 INCOME FROM CONTINUING OPERATIONS AFTER TAXES AND BEFORE REALIZED GAINS 19,669 30,575 17,368 REALIZED GAINS ON INVESTMENTS AFTER TAXES 8,431 7,025 2,354 INCOME FROM CONTINUING OPERATIONS AFTER TAXES 28,100 37,600 19,722 NET INCOME 28,100 37,600 6,600 PER SHARE DATA INCOME FROM CONTINUING OPERATIONS AFTER TAXES AND BEFORE REALIZED GAINS* 1.10 1.72 .95 REALIZED GAINS ON INVESTMENTS AFTER TAXES* .47 .40 .13 INCOME FROM CONTINUING OPERATIONS* 1.57 2.12 1.08 NET INCOME* 1.57 2.12 .36 STOCKHOLDERS' DIVIDENDS 1.00 1.00 1.00 KEY STATISTICS COMBINED RATIO INCLUDING CATASTROPHES 103.4% 99.8% 103.1% EXCLUDING CATASTROPHES 103.1% 99.8% 100.0% STATUTORY RISK-BASED CAPITAL RATIO** 332% 364% 377% STOCKHOLDERS' EQUITY $361,866 $337,503 $330,432 STOCKHOLDERS' EQUITY PER SHARE*** $ 20.31 $ 19.17 $ 18.58 CLOSING COMMON STOCK PRICE $ 25 3/4 $ 27 3/8 $ 21 3/8 - -------------------------------------------------------------------------------------
*1997 amounts are presented on a diluted basis. 1996 and 1995 amounts are presented on a diluted basis and have been restated as required to comply with Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128"). For further discussion of earnings per share and the impact of SFAS No. 128, see Notes 1 and 16 to the consolidated financial statements on pages 46 and 55. **The computation of statutory risk-based capital in 1996 compared to 1995 is different because of phase-in adjustments in the prescribed calculation. On a comparable basis, the risk-based capital ratio in 1995 was 339%. ***Excluding the effect of Statement of Financial Accounting Standards No. 115, stockholders' equity per share was $20.03, $19.28 and $18.18 in 1997, 1996, and 1995, respectively. CalFarm The Zenith 3 TO OUR STOCKHOLDERS DESPITE SOME SIGNIFICANT ACHIEVEMENTS WITH LONG-TERM POTENTIAL BENEFITS, AND EXCELLENT RESULTS IN SEVERAL AREAS OF OUR OPERATIONS, 1997 EARNINGS PER SHARE DECLINED 25.9% FROM 1996 DUE PRIMARILY TO OUR WORKERS' COMPENSATION PERFORMANCE IN CALIFORNIA. KEY ACHIEVEMENTS 1. INCREASED INVESTMENT INCOME AND REALIZED GAINS ON INVESTMENTS. 2. FAVORABLE PERFORMANCE FROM OUR CALFARM, REINSURANCE AND PERMA-BILT BUSINESSES. 3. SENIOR MANAGEMENT ADDITIONS AND ORGANIZATIONAL REFINEMENTS IN OUR WORKERS' COMPENSATION DIVISION, INCLUDING A 10% WORKFORCE REDUCTION IN CALIFORNIA. 4. CONTINUING NATIONAL DIVERSIFICATION OF OUR WORKERS' COMPENSATION OPERATIONS, WITH ABOUT 46% OF WORKERS' COMPENSATION PREMIUMS EARNED FROM OPERATIONS CONDUCTED OUTSIDE CALIFORNIA. 5. PENDING RISCORP ACQUISITION TO BOLSTER OUR SOUTHEASTERN WORKERS' COMPENSATION MARKETS IN CONJUNCTION WITH THE 1996 ACQUISITION OF AGC-SIF IN FLORIDA. SUMMARY OF FINANCIAL HIGHLIGHTS / / INCOME FROM CONTINUING OPERATIONS AFTER TAXES AND BEFORE NET REALIZED GAINS ON INVESTMENTS WAS $19,669,000, OR $1.10 PER SHARE, COMPARED TO $30,575,000, OR $1.72 PER SHARE, IN 1996. / / INVESTMENT INCOME AFTER TAXES WAS $34,655,000, OR $1.94 PER SHARE, COMPARED TO $34,069,000, OR $1.92 PER SHARE, IN 1996. / / NET INCOME WAS $28,100,000, OR $1.57 PER SHARE, COMPARED TO $37,600,000, OR $2.12 PER SHARE, IN 1996. / / REALIZED GAINS ON INVESTMENTS AFTER TAXES WERE $8,431,000, OR $.47 PER SHARE, COMPARED TO $7,025,000, OR $.40 PER SHARE, IN 1996. UNREALIZED GAINS ON FIXED MATURITIES AFTER TAXES WERE $5,890,000, COMPARED TO AN AFTER TAXES UNREALIZED LOSS OF $2,123,000, IN 1996. / / COMBINED RATIO FOR THE PROPERTY-CASUALTY OPERATIONS WAS 103.4%, COMPARED TO 99.8%, IN 1996. / / BOOK VALUE PER SHARE AT 1997 YEAR-END WAS $20.31, COMPARED TO $19.17, AT 1996 YEAR-END. CalFarm 4 The Zenith
93 94 95 96 97 STOCKHOLDERS' EQUITY PER SHARE EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC $18.55 $16.35 $18.58 $19.17 $20.31
WE CONTINUE TO FOCUS ON EDUCATION AND LEADERSHIP TRAINING FOR OUR MANAGEMENT AND EMPLOYEES TO POSITION ZENITH FOR THE STRONG ORGANIZATIONAL FOOTING REQUIRED TO FACE THE COMPETITIVE AND COMPLEX CHALLENGES AHEAD. AT THE SAME TIME, WE HAVE STRENGTHENED OUR WORKERS' COMPENSATION MANAGEMENT TEAM WITH PROVEN AND EXPERIENCED PROFESSIONALS. AS A STOCKHOLDER-ORIENTED COMPANY, WE ARE MINDFUL THAT OUR COMMON STOCK UNDER-PERFORMED IN THE 1997 MARKET AND WE ARE COMMITTED TO TAKING THE NECESSARY STEPS TO IMPROVE STOCKHOLDER VALUE. TO THIS END, WE REPURCHASED ABOUT 5% OF OUR OUTSTANDING SHARES IN THE FIRST FEW TRADING DAYS OF 1998. ANALYSIS OPERATING EARNINGS CONSIST OF INVESTMENT INCOME AND INSURANCE UNDERWRITING RESULTS; THE FOLLOWING TABLE SUMMARIZES PRE-TAX UNDERWRITING PERFORMANCE DURING THE PAST THREE YEARS:
- --------------------------------------------------------------------------------- UNDERWRITING RESULTS 1997 1996 1995 - --------------------------------------------------------------------------------- (Dollars in thousands) WORKERS' COMPENSATION $ (37,157) $ (19,462) $ (14,548) OTHER PROPERTY-CASUALTY 6,509 8,076 (12,007) REINSURANCE 14,189 12,479 12,955 - --------------------------------------------------------------------------------- UNDERWRITING INCOME (LOSS) $ (16,459) $ 1,093 $ (13,600) - ---------------------------------------------------------------------------------
OUR RESULTS WERE SIGNIFICANTLY BELOW OUR GOALS, DUE ENTIRELY TO CONTINUED DECLINES IN THE WORKERS' COMPENSATION OPERATIONS. THE COMBINED RATIO FOR WORKERS' COMPENSATION OF 115.3% WAS COMPOSED OF A 57.3% LOSS RATIO FOR THE 1997 ACCIDENT YEAR, A 53.1% LOSS ADJUSTMENT AND UNDERWRITING EXPENSE RATIO, AND 4.9% STRENGTHENING FOR THE 1995 AND 1996 ACCIDENT YEARS LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES. THE EXPENSE RATIO REFLECTS THE LARGE DROP IN THE CALIFORNIA PREMIUM LEVEL SINCE OPEN RATING COMMENCED IN 1995, AND WE CONTINUE TO WORK TO BRING OUR CalFarm The Zenith 5 PROPERTY-CASUALTY COMBINED RATIO [CHART] EXPENSES IN LINE WITH OUR CURRENT PREMIUM LEVEL. HOWEVER, OUR ULTIMATE LOSS RATIOS, EVEN AFTER THE STRENGTHENING FOR THE 1995 AND 1996 YEARS, AND HIGHER INITIAL RESERVES IN THE 1997 YEAR, ARE STILL QUITE ACCEPTABLE. SINCE THE BEGINNING OF OPEN RATING, OUR CALIFORNIA LOSS RATIO HAS AVERAGED 61%, WHILE THE ENTIRE CALIFORNIA INDUSTRY HAS AVERAGED APPROXIMATELY 82%. THIS 21 POINT ADVANTAGE IS CONSISTENT WITH OUR RELATIVE RESULTS PRIOR TO OPEN RATING. EXPANSION OF OUR WORKERS' COMPENSATION OPERATIONS OUTSIDE OF CALIFORNIA CONTINUES TO BE A PRIMARY MISSION WITH THE 1996 ACQUISITION OF AGC-SIF IN FLORIDA AND THE PENDING ACQUISITION OF RISCORP. ZENITH IS APPROACHING THE TIME WHEN OUR NON-CALIFORNIA PREMIUMS WILL APPROXIMATE OR EXCEED OUR CALIFORNIA BUSINESS. DESPITE THE INCREASING COMPETITIVENESS OF MANY STATE MARKETS, WE HAVE BEEN ABLE TO GROW AT A REASONABLE COST. WE ESTIMATE OUR 1997 ACCIDENT YEAR LOSS RATIO FOR ALL STATES OUTSIDE OF CALIFORNIA IS 54.0%. OUR REINSURANCE OPERATIONS HAD ANOTHER SUCCESSFUL YEAR, THEIR FIFTH CONSECUTIVE. FURTHERMORE, WE CONDUCTED A DETAILED REVIEW OF THE RUNOFF FOR TREATIES 10 YEARS OR OLDER AND DETERMINED THAT OUR HELD RESERVES WERE MODESTLY REDUNDANT AND HAVE REDUCED RESERVES FOR INCURRED BUT NOT REPORTED LOSSES BY APPROXIMATELY $4 MILLION. HOWEVER, WE SHOULD BE MINDFUL THAT THE REINSURANCE RESULTS REFLECT AN ABSENCE OF MAJOR CATASTROPHES AND THE RESULTING CONTINUED DECLINE IN RATES. CALFARM HAD OUTSTANDING UNDERWRITING PERFORMANCE FOR THE SECOND CONSECUTIVE YEAR. MANAGEMENT HAS WORKED HARD TO ACHIEVE THESE RESULTS AND IS TO BE CONGRATULATED. DURING THE FIVE YEARS ENDED 1997, OUR TOTAL AVERAGE COMBINED RATIO WAS 100.4%, COMPARED TO THE ESTIMATED INDUSTRY AVERAGE OF 105.9%, AND FOR THE PAST 10 YEARS WAS 100.9%. SINCE MANAGEMENT ASSUMED OPERATING RESPONSIBILITY IN 1977, THE COMBINED RATIO HAS AVERAGED 100.7%. CalFarm 6 The Zenith STOCKHOLDERS' EQUITY PER SHARE REACHED $20.31 AT THE END OF 1997, AN ALL TIME HIGH, COMPARED TO $19.17 AT DECEMBER 31, 1996. ZENITH COMBINED RATIOS VERSUS INDUSTRY
YEAR ZENITH INDUSTRY* - -------------------------------- 1993 97.4% 106.9% 1994 97.8 108.5 1995 103.1 106.5 1996 99.8 105.8 1997 103.4 101.8** AVERAGE 100.4 105.9** - -------------------------------- *Source A.M. Best Company **Estimate
THE ABOVE TABLE CLEARLY SHOWS THAT WE HAVE OUTPERFORMED THE INDUSTRY COMBINED RATIO OVER THE PAST FIVE YEARS, BUT 1997 WAS THE FIRST YEAR WHERE OUR COMBINED RATIO WAS HIGHER THAN INDUSTRY AVERAGES. AS PREVIOUSLY DISCUSSED, THE WORKERS' COMPENSATION RESULTS, PRIMARILY IN CALIFORNIA, ARE THE CAUSE OF THE BELOW-AVERAGE 1997 RESULTS. INVESTMENT INCOME AFTER TAXES INCREASED 1.7% FROM $34,069,000, OR $1.92 PER SHARE, IN 1996 TO $34,655,000, OR $1.94 PER SHARE, IN 1997. INCOME FROM OPERATIONS AFTER TAXES AND BEFORE NET REALIZED GAINS ON INVESTMENTS IN 1997 WAS $19,669,000, OR $1.10 PER SHARE, COMPARED TO $30,575,000, OR $1.72 PER SHARE, IN 1996. THE DECREASE WAS A RESULT OF A LARGER UNDERWRITING LOSS IN THE WORKERS' COMPENSATION BUSINESS. NET INCOME IN 1997 WAS $28,100,000, OR $1.57 PER SHARE, COMPARED TO $37,600,000, OR $2.12 PER SHARE, IN 1996. NET INCOME IN 1997 INCLUDED CAPITAL GAINS AFTER TAXES OF $8,431,000, OR $.47 PER SHARE, COMPARED TO CAPITAL GAINS OF $7,025,000, OR $.40 PER SHARE, FOR THE PRIOR YEAR. STOCKHOLDERS' EQUITY AT DECEMBER 31, 1997 WAS $361,866,000, COMPARED TO $337,503,000 AT DECEMBER 31, 1996. STOCKHOLDERS' EQUITY PER SHARE WAS $20.31 AT DECEMBER 31, 1997, AN ALL TIME CalFarm The Zenith 7 DURING THE PAST 10 YEARS, WE HAVE REPURCHASED 28% OF OUR OUTSTANDING STOCK AT AN AVERAGE PRICE OF $17.85 PER SHARE. HIGH, COMPARED TO $19.17 AT DECEMBER 31, 1996. STATUTORY CAPITAL OF OUR INSURANCE COMPANIES INCREASED FROM $265,341,000 AT DECEMBER 31, 1996, TO $279,993,000 AT YEAR-END 1997. CASH PROVIDED BY OPERATING ACTIVITIES WAS $26,974,000 IN 1997, COMPARED TO $9,749,000, IN 1996. ZENITH REPURCHASED ABOUT 19,000 SHARES OF ZENITH COMMON STOCK DURING 1997, AND 930,000 SHARES IN JANUARY 1998, LEAVING AUTHORITY TO PURCHASE AN ADDITIONAL 1,155,000 SHARES AS OF FEBRUARY 1998. DURING THE PAST 10 YEARS, WE HAVE REPURCHASED 6,862,000 SHARES, OR APPROXIMATELY 28% OF THE TOTAL SHARES ISSUED AT AN AGGREGATE COST OF $122,513,000, OR AN AVERAGE OF $17.85 PER SHARE. AT DECEMBER 31, 1997, ZENITH HAD LONG-TERM DEBT OF $74,474,000, WITH A TOTAL DEBT-TO-EQUITY POSITION OF 20% DEBT AND 80% EQUITY. ZENITH HAD $100 MILLION OF BANK LINES OF CREDIT AVAILABLE AT DECEMBER 31, 1997. ZENITH INSURANCE, CALFARM INSURANCE, ZNAT INSURANCE AND ZENITH STAR INSURANCE (THE TEXAS-BASED COMPANY) COLLECTIVELY, ARE RATED A+ (SUPERIOR) BY A.M. BEST COMPANY. STANDARD & POOR'S HAS RATED THE CLAIMS-PAYING ABILITY OF THE PROPERTY-CASUALTY OPERATIONS AA- (EXCELLENT). ZENITH IS CURRENTLY UNDER REVIEW BY A.M. BEST COMPANY AND STANDARD & POOR'S. RISK-BASED CAPITAL OF THE PROPERTY-CASUALTY GROUP WAS 332% IN 1997, COMPARED TO 364%, IN 1996. PROPERTY-CASUALTY INCURRED LOSS AND LOSS ADJUSTMENT EXPENSES FOR THE PRIOR YEARS SHOW NO FURTHER DEVELOPMENT IN 1997. THE UNFAVORABLE DEVELOPMENT IN OUR WORKERS' COMPENSATION BUSINESS WAS OFFSET BY FAVORABLE RESERVE DEVELOPMENT IN OUR REINSURANCE AND OTHER PROPERTY-CASUALTY BUSINESSES. THE TABLE ON PAGE 53 IN NOTE 13 TO THE CONSOLIDATED FINANCIAL STATEMENTS SETS FORTH DATA CONCERNING OUR PROPERTY-CASUALTY LOSS AND LOSS ADJUSTMENT EXPENSES FOR THREE YEARS ENDED DECEMBER 31, 1997, AND ONE-YEAR LOSS RESERVE DEVELOPMENT BY LINES OF BUSINESS IS SET FORTH ON PAGE 26. LOSS RESERVES ARE NOT DISCOUNTED FOR FINANCIAL STATEMENT PURPOSES. CalFarm 8 The Zenith STOCK PRICES [CHART] THE INFORMATION IN THE FOLLOWING TABLE PROVIDES ESTIMATES OF ZENITH'S NET INCURRED LOSS AND LOSS ADJUSTMENT EXPENSES BY ACCIDENT YEAR, EVALUATED IN THE YEAR THEY WERE INCURRED AND AS THEY WERE SUBSEQUENTLY RE-EVALUATED IN SUCCEEDING YEARS: ACCIDENT YEAR RESERVE DEVELOPMENT
NET INCURRED LOSS AND LOSS ADJUSTMENT EXPENSES REPORTED AT END OF YEAR YEARS IN WHICH ---------------------------------------------------------------------- LOSSES WERE INCURRED 1992 1993 1994 1995 1996 1997 - -------------------------------------------------------------------------------------------- (Dollars in thousands) PRIOR TO 1992 $2,277,331 $2,295,135 $2,295,566 $2,298,478 $2,300,972 $2,298,585 1992 305,525 296,873 298,906 294,691 297,627 295,865 CUMULATIVE 2,582,856 2,592,008 2,594,472 2,593,169 2,598,599 2,594,450 1993 297,652 285,544 275,591 269,003 267,576 CUMULATIVE 2,889,660 2,880,016 2,868,760 2,867,602 2,862,026 1994 303,749 312,953 304,246 301,550 CUMULATIVE 3,183,765 3,181,713 3,171,848 3,163,576 1995 327,503 333,667 347,501 CUMULATIVE 3,509,216 3,505,515 3,511,077 1996 318,843 365,908 CUMULATIVE 3,876,985 1997 348,849 RATIOS: 1992 71.71% 69.67% 70.15% 69.16% 69.85% 69.44% 1993 66.20% 63.51% 61.29% 59.83% 59.51% 1994 68.87% 70.95% 68.98% 68.37% 1995 74.67% 76.08% 79.23% 1996 70.48% 72.42% 1997 71.67% - --------------------------------------------------------------------------------------------
This analysis displays the accident year net incurred loss and loss adjustment expenses development for accident years 1992-1997 for all property-casualty business. The total of net loss and loss adjustment expenses for all claims occurring within each annual period is shown first at the end of that year and then annually thereafter. The total cost includes both payments made and the estimate of future payments as of each year-end. Past development may not be an accurate indicator of future development since trends and conditions change. Net incurred loss and loss adjustment expenses and loss ratios prior to 1995 have been restated to include health insurance. On December 31, 1996, Zenith acquired through merger the outstanding reserves for net loss and loss adjustment expenses of Associated General Commerce Self-Insurers' Trust Fund of $65,429,000. The development of these reserves is included in future operating results of Zenith and is reflected as development of the 1996 year. CalFarm The Zenith 9 INVESTMENT INCOME AFTER TAXES PER SHARE [CHART] INVESTMENTS INVESTMENT ACTIVITIES ARE A MAJOR PART OF OUR REVENUES AND EARNINGS; WE BELIEVE OUR PORTFOLIOS ARE DIVERSIFIED TO ACHIEVE A REASONABLE BALANCE OF RISK AND A STABLE SOURCE OF EARNINGS. ZENITH PRIMARILY INVESTS IN DEBT SECURITIES AS COMPARED TO EQUITIES AND OUR LARGEST HOLDINGS ARE IN U.S. GOVERNMENT SECURITIES. / / CONSOLIDATED INVESTMENT INCOME, BEFORE TAXES, WAS $52,332,000 IN 1997, COMPARED TO $51,154,000, IN 1996. / / CONSOLIDATED INVESTMENT INCOME AFTER TAXES AND AFTER INTEREST EXPENSE WAS $32,068,000, OR $1.79 PER SHARE IN 1997, COMPARED TO $30,899,000, OR $1.74 PER SHARE, IN 1996. AVERAGE YIELDS ON THIS PORTFOLIO IN 1997 WERE 6.0% BEFORE TAXES AND 4.0% AFTER TAXES; ABOUT THE SAME AS 1996. / / DURING 1997, WE RECORDED NET REALIZED CAPITAL GAINS BEFORE TAXES FROM OUR INVESTMENT PORTFOLIO OF $14,008,000, COMPARED TO $10,807,000, THE PRIOR YEAR. A SUBSTANTIAL PORTION OF OUR INVESTMENT PORTFOLIO IS RECORDED IN THE FINANCIAL STATEMENTS AT MARKET VALUE WITH OUR CONSOLIDATED INVESTMENT PORTFOLIO CARRYING VALUE TOTALING $879,973,000 AT DECEMBER 31, 1997, COMPARED TO $852,799,000, AT THE END OF 1996. AVERAGE LIFE OF THE PORTFOLIO WAS 4.2 YEARS AT DECEMBER 31, 1997, COMPARED TO 5.1 YEARS AT DECEMBER 31, 1996. OUR PORTFOLIO QUALITY IS HIGH, WITH 96% RATED INVESTMENT GRADE. THE MAJOR DEVELOPMENTS IN THE U.S. BOND MARKETS WERE CONTINUED LOW INFLATION AND LOWER INTEREST RATES WITH LONG-TERM GOVERNMENT BONDS TRADING BELOW 6.0%. AS A RESULT, OUR PORTFOLIO OF FIXED MATURITIES INCREASED IN VALUE, RELATIVE TO AMORTIZED COST, BY $9,026,000 BEFORE TAXES FROM 1996 TO 1997. SHORT-TERM INVESTMENTS INCREASED IN 1997 IN ORDER TO PROVIDE THE NECESSARY LIQUIDITY TO FUND THE PURCHASE OF RISCORP. CalFarm 10 The Zenith OUR INVESTMENT PORTFOLIO IS LIQUID AND OF HIGH QUALITY; OUR BOND PORTFOLIO HAS AN AVERAGE LIFE OF ABOUT FOUR YEARS. THE AMORTIZED COST AND FAIR VALUES OF ZENITH'S SECURITIES PORTFOLIO ARE SUMMARIZED IN THE FOLLOWING TABLE:
AT DECEMBER 31, 1997 AT DECEMBER 31, 1996 --------------------- ---------------------- AMORTIZED FAIR AMORTIZED FAIR SECURITIES PORTFOLIO COST* VALUE COST* VALUE - ----------------------------------------------------------------------------- (Dollars in thousands) SHORT-TERM INVESTMENTS $209,827 $209,827 $106,712 $106,712 U.S. GOVERNMENT BONDS 243,346 244,921 299,447 297,278 TAXABLE BONDS: INVESTMENT GRADE 305,251 311,553 322,182 320,577 NON-INVESTMENT GRADE 17,083 17,554 21,013 21,168 REDEEMABLE PREFERRED STOCKS 16,040 16,717 19,467 19,720 OTHER PREFERRED STOCKS* 21,286 22,272 15,364 14,855 COMMON STOCKS* 17,790 23,439 18,030 22,771 - -----------------------------------------------------------------------------
*Equity securities at cost IN 1993, WE STARTED A HOME-BUILDING SUBSIDIARY (PERMA-BILT) IN ORDER TO PARTICIPATE IN THE GROWTH OF THE LAS VEGAS, NEVADA HOUSING MARKET. DURING 1997, WE CLOSED AND DELIVERED 305 HOMES AT AN AVERAGE SELLING PRICE OF $149,000, COMPARED TO 287 HOMES AT AN AVERAGE SELLING PRICE OF $145,000, THE PRIOR YEAR. AS A RESULT, SALES OF $45,419,000 AND $1,678,000 OF PRE-TAX INCOME WERE RECORDED DURING 1997, COMPARED TO SALES OF $41,554,000 AND $1,909,000 OF PRE-TAX INCOME, THE PREVIOUS YEAR. LAND PRESENTLY OWNED, AT A COST OF ABOUT $33,466,000, WILL SUPPORT THE CalFarm The Zenith 11 SINCE MANAGEMENT ASSUMED OPERATING RESPONSIBILITY IN 1977, THE COMBINED RATIO HAS AVERAGED 100.7%. CONSTRUCTION OF AN ESTIMATED 1,150 HOMES OVER THE NEXT SEVERAL YEARS AND POSSIBLY SOME COMMERCIAL AND/OR APARTMENT DEVELOPMENT. INCREASED INTEREST RATES AND OTHER FACTORS MAY IMPACT THE RATE OF HOME SALES, BUT WE ARE CONFIDENT THE LAND WE HAVE ACQUIRED IS STRATEGICALLY LOCATED AND WILL HAVE LONG-TERM VALUE. FOR EXAMPLE, WE OWN ABOUT 175 ACRES ON LAS VEGAS BOULEVARD SOUTH OF THE AIRPORT, ONE OF THE LARGEST UNDEVELOPED HOLDINGS ON THE STRIP. WORKERS' COMPENSATION WORKERS' COMPENSATION BUSINESS REPRESENTS APPROXIMATELY 50% OF OUR PROPERTY-CASUALTY VOLUME. DURING 1997, 54% OF THE BUSINESS WAS IN CALIFORNIA, WITH THE BALANCE IN 29 STATES, THE GREATEST CONCENTRATIONS OF WHICH ARE IN FLORIDA AND TEXAS. WORKERS' COMPENSATION OPERATIONS RECORDED AN UNDERWRITING LOSS, BEFORE DIVIDENDS TO POLICYHOLDERS, OF $36,802,000 IN 1997, COMPARED TO A LOSS OF $16,936,000, FOR THE PRIOR YEAR. AFTER POLICYHOLDER DIVIDENDS, RESULTS WERE AN UNDERWRITING LOSS OF $37,157,000 IN 1997, COMPARED TO AN UNDERWRITING LOSS OF $19,462,000, IN THE PRIOR YEAR. OUR WORKERS' COMPENSATION COMBINED RATIO WAS 115.3% IN 1997, COMPARED TO 109.2%, THE PRIOR YEAR. DURING 1997, EARNED PREMIUMS INCREASED ABOUT $31,148,000, OR 15%, PRIMARILY DUE TO THE FLORIDA EXPANSION. AT YEAR-END 1997, THERE WERE 26,730 POLICIES IN FORCE COUNTRYWIDE. DURING THE LAST SEVERAL YEARS OUR RESULTS HAVE BEEN SIGNIFICANTLY BELOW OUR 20-YEAR COMBINED RATIO OF ABOUT 100%. SPECIFICALLY, OUR COMBINED RATIO FOR THE LAST THREE YEARS HAS AVERAGED 110.8%. THE FOLLOWING TABLE COMPARES THE COMPONENTS OF OUR AVERAGE COMBINED RATIOS FOR THE THREE YEARS ENDED 1997 AND FOR THE 10 YEARS ENDED 1997: CalFarm 12 The Zenith DURING THE FIVE YEARS ENDED 1996 (THE LATEST PUBLISHED FIGURES) ZENITH INSURANCE ACHIEVED THE LOWEST AVERAGE LOSS RATIO OF THE TOP 50 WRITERS OF WORKERS' COMPENSATION IN THE U.S.
THREE-YEAR AVERAGE 10-YEAR AVERAGE COMBINED RATIO ANALYSIS TO DECEMBER 1997 TO DECEMBER 1997 ACCIDENT YEAR LOSS RATIO 53.4% 50.7% LOSS RESERVE DEVELOPMENT 4.7 (0.1) UNDERWRITING AND LOSS ADJUSTMENT EXPENSES 51.4 45.3 POLICYHOLDER DIVIDENDS 1.3 6.0 COMBINED RATIO 110.8% 101.9% - --------------------------------------------------------------------------------
THE TABLE CLEARLY SHOWS THE UNDERWRITING AND LOSS ADJUSTMENT EXPENSE PERCENTAGES MADE UP MOST OF THE DIFFERENCE IN THE COMBINED RATIO. SPECIFICALLY, THE COMBINED RATIO IS 8.9 POINTS HIGHER WITH EXPENSES CONTRIBUTING 6.1 POINTS OF THIS AMOUNT. ALSO, THE ACCIDENT YEAR LOSS RATIO IS 2.7 POINTS HIGHER WHILE THE ESTIMATE OF RESERVE ACCURACY HAS DETERIORATED 4.8 POINTS. FROM AN ANALYTICAL PERSPECTIVE, THE COMBINATION OF ACCIDENT YEAR LOSS RATIO AND POLICYHOLDER DIVIDENDS IS FAVORABLE BY 2.0 POINTS, A GOOD INDICATION THAT WE CONTINUE TO MANAGE RISK REALISTICALLY. THERE ARE MANY CHANGING FACTORS CURRENTLY AFFECTING OUR WORKERS' COMPENSATION PERFORMANCE AS SUMMARIZED NUMERICALLY IN THE TABLE. AS WE REPORTED, THE CALIFORNIA SYSTEM CHANGED FROM ADMINISTERED PRICING TO FREE COMPETITION ON JANUARY 1, 1995. THREE YEARS PRIOR, IN ANTICIPATION OF OPEN RATING IN CALIFORNIA, AND TO TAKE ADVANTAGE OF PERCEIVED MARKET OPPORTUNITIES, WE BEGAN GEOGRAPHIC EXPANSION OUTSIDE OF CALIFORNIA. OF INTEREST, OUR NON-CALIFORNIA MARKETS HAVE DELIVERED BETTER RESULTS THAN CALIFORNIA IN SPITE OF DETERIORATING COMBINED RATIOS THROUGHOUT THE COUNTRY. CLEARLY, AS SHOWN IN THE ABOVE TABLE, THE DECLINE IN OUR OVERALL RESULTS IS NOT ASSOCIATED WITH POOR LOSS RATIOS, BUT IS PRIMARILY A REFLECTION OF OUR COST OF DOING BUSINESS IN RELATION TO OUR VOLUME. CalFarm The Zenith 13 SINCE THE BEGINNING OF OPEN RATING, OUR WORKERS' COMPENSATION LOSS RATIO IN CALIFORNIA HAS AVERAGED 61% COMPARED TO THE INDUSTRY AVERAGE OF APPROXIMATELY 82%. WITH RESPECT TO THE CALIFORNIA WORKERS' COMPENSATION MARKET, OUR PERFORMANCE IN 1997 REFLECTED A NUMBER OF FACTORS: 1. INTENSE RATE COMPETITION AND A DECLINE IN INDUSTRY PREMIUM VOLUME OF ABOUT 45% SINCE 1995. 2. CONTINUATION OF 17,500 POLICIES IN FORCE COMPARED TO 20,000 AT YEAR-END 1996, WITH LOSS RATIOS DURING THIS PERIOD ABOUT 21 PERCENTAGE POINTS BETTER THAN INDUSTRY AVERAGES. 3. ADDITIONAL EXPENSES OR INVESTMENTS TO UPGRADE OUR COMPUTER SYSTEMS AND ADDRESS THE YEAR 2000 CHALLENGE. 4. AGENTS OBTAINING MORE COMPETITIVE BIDS THAN IN THE PAST, RESULTING IN HIGHER COSTS TO WRITE A LOWER DOLLAR VOLUME OF BUSINESS. 5. COMPETITION'S WILLINGNESS TO BUY MARKET SHARE AT INADEQUATE RATES, WITH NEGATIVE FINANCIAL RESULTS. 6. INCREASE IN EXPENSES TO ADJUST CLAIMS DUE TO CHANGES IN THE WORKERS' COMPENSATION SYSTEM. 7. INCREASE IN AVERAGE COSTS PER CLAIM, NOTWITHSTANDING A TREND OF DECLINING CLAIM FREQUENCY FOR OUR COMPANY AND THE INDUSTRY AS A WHOLE. 8. RESERVES FOR ACCIDENT YEARS 1995 AND 1996 WERE STRENGTHENED BY APPROXIMATELY $12 MILLION; THE 1997 ACCIDENT YEAR LOSS RATIO WAS INCREASED. 9. CONTINUED QUALITY SERVICES IN ORDER TO ACHIEVE LOW LOSS RATIOS WITH THE CHALLENGE TO DO SO AT LOWER COSTS. WHAT IS THE CURRENT SITUATION? DURING THE PAST SEVERAL MONTHS, WE HAVE REDUCED OUR CALIFORNIA WORKFORCE BY ABOUT 10%, WHICH SHOULD BRING COSTS BETTER IN LINE WITH REVENUES WHILE CONTINUING OUR STRONG SERVICE CAPABILITY. THERE ARE CONFUSING SIGNS IN THE MARKETPLACE. CERTAIN COMPETITORS ARE WITHDRAWING OR ADJUSTING THEIR UNDERWRITING AND PRICING POLICIES AND OTHERS CONTINUE TO SELL AT PRICES SUBSTANTIALLY BELOW APPARENT LOSS COSTS. EMPLOYERS WITH POOR LOSS RESULTS ARE EXPERIENCING INCREASED PRICES. IN VIEW OF OUR RESULTS AND THE TREND OF RISING AVERAGE COSTS PER CLAIM, WE MUST MAINTAIN PRICE AND RATE ADEQUACY AND MORE AGGRESSIVELY MERCHANDISE CalFarm 14 The Zenith THROUGH OUR GEOGRAPHIC EXPANSION, WE ARE APPROACHING THE TIME WHEN OUR NON-CALIFORNIA PREMIUMS WILL APPROXIMATE OR EXCEED OUR CALIFORNIA WORKERS' COMPENSATION BUSINESS. OUR SPECIALIST CAPABILITIES. AT THE SAME TIME, WE WILL CONTINUE ENHANCING OUR MANAGED CARE, CLAIMS HANDLING, LITIGATION AND RETURN-TO-WORK STRATEGIES TO ASSIST US IN SUPPORTING OUR LONG-STANDING RECORD OF LOW PURE LOSS RATIOS. LASTLY, WE WILL CONTINUE REDUCING OUR OPERATING EXPENSES WHILE PROVIDING THE NECESSARY SERVICES TO OUR CUSTOMERS. WE ARE INVESTING IN OUR COMPUTER SYSTEMS SO ALL OPERATIONS ULTIMATELY ARE SERVED BY ONE PLATFORM ON A NATIONAL BASIS. IN THE LONG RUN, THIS WILL PROVIDE THE MOST EFFICIENT AND COST EFFECTIVE OPERATION. UNDER CURRENT ACCOUNTING RULES MOST OF THE INTERNAL COSTS HAVE BEEN EXPENSED AGAINST CURRENT EARNINGS. BASED ON A RECENTLY APPROVED ACCOUNTING STANDARD, IT IS EXPECTED THAT SOME OF THE EXPENDITURES WILL BE CAPITALIZED IN THE FUTURE. DURING THE FIVE YEARS ENDED 1996 (THE LATEST PUBLISHED FIGURES), ZENITH ACHIEVED THE LOWEST AVERAGE LOSS RATIO OF THE TOP 50 WRITERS OF WORKERS' COMPENSATION IN THE UNITED STATES. COMPARED TO THE CALIFORNIA MARKET AVERAGE, OUR FIVE-YEAR AVERAGE LOSS RATIO FOR CALIFORNIA WAS BETTER BY 19 POINTS. OUR ENTIRE ORGANIZATION IS PROUD OF THESE ACCOMPLISHMENTS AND IS FOCUSED ON THE NECESSARY ADJUSTMENTS TO CONTINUE THIS FAVORABLE RECORD UNDER CHANGING CONDITIONS. THERE ARE PENDING LEGISLATIVE CHANGES THAT MAY INCREASE STATUTORY BENEFITS IN CALIFORNIA AND MAKE OTHER CHANGES TO THE SYSTEM. HOWEVER, WE ARE SKEPTICAL THAT REFORMS NEEDED TO REDUCE THE TREND OF INCREASING CLAIM COSTS WILL BE GIVEN SERIOUS CONSIDERATION. THE TIMING OF ANY CHANGES IS DIFFICULT TO PREDICT DUE TO THE IMPACT OF TERM LIMITS AND POLITICAL ACTIVITY SURROUNDING THE SELECTION OF A NEW GOVERNOR. MANAGED CARE IS UNDER INTENSE POLITICAL SCRUTINY THROUGHOUT THE UNITED STATES, AND IF CHANGES ARE MADE THEY WILL UNDOUBTEDLY IMPACT THE WORKERS' COMPENSATION SYSTEMS. WE BELIEVE THE WORKERS' COMPENSATION INSURANCE INDUSTRY NEEDS TO DEVELOP A FACT-BASED STRATEGY TO DEAL WITH THIS POTENTIAL ISSUE AND, THEREFORE, WE ARE SUPPORTING RESEARCH BEING CONDUCTED BY THE WORKERS' COMPENSATION RESEARCH INSTITUTE OF CAMBRIDGE, MASSACHUSETTS RELATING TO THIS AREA. WE ARE ALSO TRYING TO STIMULATE THE INDUSTRY TO FOCUS ON THIS EMERGING ISSUE. CalFarm The Zenith 15 OUR CHALLENGE: ENHANCE OUR MANAGED CARE, CLAIMS HANDLING, LITIGATION AND RETURN-TO-WORK STRATEGIES AT LOWER COSTS. CONSIDERING THE EXTREMELY COMPETITIVE MARKET CONDITIONS, OUR FOCUS HAS AND CONTINUES TO BE ON THE TWO SEGMENTS OF THE BUSINESS IN WHICH WE HAVE MANAGED RISK SUCCESSFULLY FOR MANY YEARS: SMALLER EMPLOYERS AND INSUREDS WHERE QUALITY SERVICES IMPACT RESULTS. WE CAN CLEARLY DEMONSTRATE THAT OUR SERVICE CAPABILITIES REDUCE EMPLOYER EXPERIENCE MODIFICATIONS SIGNIFICANTLY AND, THEREFORE, SAVE EMPLOYERS MONEY OVER MANY YEARS. AS WE OBTAIN MORE OPPORTUNITIES TO SERVICE EMPLOYERS AT MORE ADEQUATE PRICES AND CONTINUE TO CONTROL COSTS, WE ARE CONFIDENT THAT OUR OPERATING RESULTS WILL IMPROVE. SINGLEPOINT WE HAVE CONTINUED TO MARKET AN INTEGRATED DISABILITY PROGRAM IN PARTNERSHIP WITH UNUM IN CERTAIN PARTS OF CALIFORNIA AND ARKANSAS. ALTHOUGH THE RESULTS ARE NOT SIGNIFICANT TO DATE, SINGLEPOINT IS EXPERIMENTING AND IMPROVING ITS CAPABILITY IN A MARKET SEGMENT THAT MAY HAVE VALUE FOR CERTAIN EMPLOYERS. PENDING RISCORP ACQUISITION ON JUNE 17, 1997, ZENITH ENTERED INTO AN AGREEMENT WITH RISCORP, INC. TO PURCHASE ALL OF THE ASSETS OF RISCORP RELATED TO ITS WORKERS' COMPENSATION BUSINESS, INCLUDING RISCORP'S EXISTING IN-FORCE INSURANCE BUSINESS AS WELL AS THE RIGHT TO ALL NEW AND RENEWAL POLICIES. ZENITH WILL ALSO PURCHASE RISCORP'S "FIRST CALL" MANAGED CARE WORKERS' COMPENSATION SYSTEM. AFTER THE TRANSACTION CLOSES, RISCORP WILL NO LONGER ENGAGE IN ITS EXISTING BUSINESSES. ZENITH WILL ASSUME CERTAIN LIABILITIES RELATED TO RISCORP'S INSURANCE BUSINESSES IN CONNECTION WITH THE TRANSACTION. IN ADDITION, ZENITH WILL EITHER ASSUME OR REPAY $15 MILLION IN INDEBTEDNESS OF RISCORP. THE PURCHASE PRICE TO BE PAID BY ZENITH TO RISCORP WILL BE THE DIFFERENCE BETWEEN THE BOOK VALUE OF THE ASSETS PURCHASED AND THE BOOK VALUE OF THE LIABILITIES ASSUMED BY ZENITH ON THE CLOSING DATE, SUBJECT TO A MINIMUM PURCHASE PRICE OF $35 MILLION. AS OF THIS DATE, IT IS NOT POSSIBLE TO ESTIMATE THE PURCHASE PRICE. CalFarm 16 The Zenith ZENITH CAN CLEARLY DEMONSTRATE THAT OUR SERVICE CAPABILITIES REDUCE EMPLOYER EXPERIENCE MODIFICATIONS SIGNIFICANTLY AND, THEREFORE, SAVE EMPLOYERS MONEY OVER MANY YEARS. ZENITH AND RISCORP ALSO ENTERED INTO AN AGREEMENT UNDER WHICH ALL RISCORP'S FLORIDA IN-FORCE, AND NEW AND RENEWAL POLICIES ISSUED AFTER JUNE 17, 1997 ARE REINSURED BY ZENITH IN THE EVENT OF RISCORP'S INSOLVENCY PRIOR TO THE CLOSING. IF THE ACQUISITION IS CONSUMMATED, THE EXPOSURE UNDER THE REINSURANCE AGREEMENT WILL BE REPLACED BY THE LIABILITIES ASSUMED. ZENITH WILL NOT BE PURCHASING THE STOCK OF RISCORP OR ITS AFFILIATES OR ASSUMING THE LIABILITIES THAT ARE UNRELATED TO THE INSURANCE BUSINESS, INCLUDING LIABILITIES RELATED TO ANY PRESENT OR FUTURE LITIGATION AGAINST THOSE COMPANIES. THE CLOSING OF THE PURCHASE IS SUBJECT TO CERTAIN CONDITIONS, INCLUDING THE REVIEW AND APPROVAL BY APPROPRIATE REGULATORY AGENCIES AND RISCORP'S SHAREHOLDERS, AND COMPLIANCE WITH CONTRACT PROVISIONS. RISCORP HAS OBTAINED THE NECESSARY APPROVALS FROM THE SECURITIES AND EXCHANGE COMMISSION TO SOLICIT ITS SHAREHOLDERS AND THE PROXY SOLICITATION PROCESS IS EXPECTED TO COMMENCE THE FIRST WEEK OF MARCH 1998. WE ANTICIPATE THAT THE TRANSACTION WILL BE CONSUMMATED AS SOON AS PRACTICABLE AFTER ALL APPROVALS ARE OBTAINED. WE BELIEVE THE CONSUMMATION OF THIS STRATEGIC ACQUISITION WILL ADD ADDITIONAL WORKERS' COMPENSATION BUSINESS, EXPANDED GEOGRAPHIC DIVERSIFICATION, STATE-OF-THE ART MANAGED CARE AND AGENT INTERNET COMMUNICATION CAPABILITIES TO OUR OPERATION. RISCORP HAD ABOUT 22,000 POLICIES IN FORCE AT DECEMBER 31, 1997. UNFORTUNATELY, PROGRESS IN CLOSING THIS TRANSACTION HAS BEEN SLOWER THAN ANTICIPATED WITH NEGATIVE SHORT-TERM IMPACTS ON THE BUSINESS, EMPLOYEES AND AGENCY FORCE OF RISCORP. AS A RESULT, WE RECOGNIZE THE TIME, EFFORT AND COST REQUIRED TO INTEGRATE RISCORP AND ZENITH WILL BE GREATER THAN ANTICIPATED, BUT WE BELIEVE A STRONGER COMPANY OVERALL WILL EMERGE. CalFarm The Zenith 17 THE PENDING STRATEGIC ACQUISITION OF RISCORP WILL RESULT IN ADDED WORKERS' COMPENSATION BUSINESS, EXPANDED GEOGRAPHIC DIVERSIFICATION, AND STATE-OF-THE-ART MANAGED CARE CAPABILITIES. SELECTED CONSOLIDATED FINANCIAL DATA FOR RISCORP, INC. ARE SHOWN IN THE FOLLOWING TABLE:
- ------------------------------------------------------------------------------------ NINE MONTHS ENDED YEAR ENDED SELECTED FINANCIAL DATA* SEPTEMBER 30, DECEMBER 31, - ------------------------------------------------------------------------------------ (Dollars in thousands) 1997 1996 1996 1995 ----------- --------- --------- ----------- OPERATING RESULTS PREMIUMS EARNED $ 133,882 $ 131,855 $ 173,557 $ 135,887 FEE AND OTHER INCOME 17,969 23,079 31,838 23,413 NET INVESTMENT INCOME 12,557 7,592 12,194 6,708 TOTAL REVENUES 164,408 162,526 217,589 166,008 NET INCOME 3,810 9,301 2,398 13,683 BALANCE SHEET INVESTED ASSETS 209,134 241,143 255,656 69,365 TOTAL ASSETS 769,276 741,135 828,442 443,242 TOTAL LIABILITIES 607,328 579,801 671,134 427,085 STOCKHOLDERS' EQUITY 161,948 161,334 157,308 16,157 - ------------------------------------------------------------------------------------
*The above selected consolidated financial data with respect to RISCORP and its subsidiaries have been excerpted from the information contained in RISCORP'S Annual Report on Form 10-K for the year ended December 31, 1996 and RISCORP'S Quarterly Report on Form 10-Q for the quarter ended September 30, 1997 filed with the Securities and Exchange Commission. We do not take any responsibility for the accuracy or completeness of this information. THE PURCHASE PRICE WILL BE DETERMINED AS OF THE CLOSING DATE BASED UPON AN AUDITED STATEMENT OF TRANSFERRED ASSETS AND LIABILITIES, WITH THE PURCHASE AGREEMENT PROVIDING FOR A DISPUTE RESOLUTION PROCESS IN THE EVENT ZENITH HAS ANY DISAGREEMENTS WITH SUCH STATEMENT. AS OF THIS DATE, WE ARE UNABLE TO ESTIMATE THE PURCHASE PRICE OR THE IMPACT THE CONSUMMATION OF THE TRANSACTION WILL HAVE ON OUR OPERATING RESULTS. CalFarm 18 The Zenith FOR THE 12 YEARS SINCE CALFARM WAS ACQUIRED BY ZENITH, THE COMBINED RATIO HAS AVERAGED 100.6%, EXCLUDING THE EFFECT OF PROPOSITION 103 ROLLBACK REFUNDS IN 1992. MANAGEMENT CHANGES AS PREVIOUSLY ANNOUNCED, WE ADDED SIGNIFICANT MANAGEMENT CAPABILITY TO OUR WORKERS' COMPENSATION OPERATIONS DURING THIS PAST YEAR. JACK MILLER, FORMERLY PRESIDENT OF INDUSTRIAL INDEMNITY, JOINED US AS PRESIDENT DESIGNATE OF THE INSURANCE BUSINESS TO BE ACQUIRED FROM RISCORP AND CHIEF OPERATING OFFICER OF OUR WORKERS' COMPENSATION DIVISION. BOB MEYER, FORMERLY CHIEF ACTUARY OF THE CALIFORNIA WORKERS' COMPENSATION RATING BUREAU AND INDUSTRIAL INDEMNITY, JOINED US AS CHIEF WORKERS' COMPENSATION ACTUARY, AND, COREY INGBER, SENIOR PARTNER OF HIS OWN LAW FIRM, JOINED US TO SUPERVISE ALL WORKERS' COMPENSATION CLAIM LITIGATION. THESE INDIVIDUALS, TOGETHER WITH OUR EXISTING MANAGEMENT, PROVIDE THE NECESSARY CAPABILITIES TO OPERATE AND GROW A NATIONAL SPECIALTY INSURANCE BUSINESS. AS 1998 BEGAN, THE OFFICE OF THE CHAIRMAN WAS FORMED CONSISTING OF MYSELF, JIM ROSS AND JACK MILLER TO BETTER SUPERVISE OUR EXPANDING WORKERS' COMPENSATION BUSINESS. THIS COMBINATION OF EXPERIENCE WILL PROVIDE THE NECESSARY LEADERSHIP TO THE ORGANIZATION. CALFARM INSURANCE COMPANY CALFARM INSURANCE COMPANY ("CALFARM") IS A SACRAMENTO, CALIFORNIA-BASED PROPERTY-CASUALTY COMPANY THAT OFFERS COMPREHENSIVE COVERAGES WRITTEN FOR INDIVIDUAL AND COMMERCIAL CUSTOMERS, PRIMARILY IN THE RURAL AND SUBURBAN AREAS OF CALIFORNIA. AUTOMOBILE, FARMOWNERS, COMMERCIAL PACKAGE POLICIES AND HOMEOWNERS ARE THE MAJOR LINES OF BUSINESS WITH ABOUT 108,000 POLICIES IN FORCE. CALFARM ALSO OFFERS HEALTH INSURANCE PRODUCTS, PREVIOUSLY WRITTEN BY CALFARM LIFE INSURANCE COMPANY, WITH ABOUT 20,000 POLICIES IN FORCE. THROUGHOUT THE YEAR, CALFARM CONTINUED ITS EFFORTS TO STRENGTHEN ITS WORKING RELATIONSHIPS WITH THOSE AGENTS WHO PLAY AN IMPORTANT ROLE IN THE SUCCESSFUL SALE OF ITS PRODUCTS, MAKING AGENT "PARTNERSHIPS" AND SUPERIOR SERVICE ITS HIGHEST PRIORITIES. CALFARM'S CUSTOMERS RELY ON OUR AGENTS TO DEVELOP SPECIALIZED PROTECTION PROGRAMS AND TAILOR COVERAGE TO INDIVIDUAL NEEDS. CALFARM'S GOAL IS TO BE A "FIRST CHOICE" PROVIDER OF INSURANCE PRODUCTS WITHIN THE RURAL AND CalFarm The Zenith 19 CALFARM IS INVESTING SUBSTANTIAL SUMS IN IMPROVED COMPUTER SYSTEMS IN ORDER TO IMPROVE ITS SERVICE CAPABILITY. SUBURBAN MARKETPLACE. CALFARM'S SUCCESS IS BASED ON OPERATING THE BUSINESS THROUGH STRONG AGENCY RELATIONSHIPS. DURING 1997, CALFARM CONTINUED TO IMPROVE ITS SERVICE PROCESSES FOR REPORTING AND SETTLING CLAIMS. CLAIMS MANAGEMENT PERSONNEL PARTICIPATED IN EXTENSIVE LEADERSHIP DEVELOPMENT PROGRAMS, AND TRAINING WAS INTRODUCED TO IMPROVE THE CLAIMS STAFF'S MEDICAL KNOWLEDGE. CALFARM ADDED MEDICAL ADVISORS, INTRODUCED NEW TOOLS TO ANALYZE MEDICAL INFORMATION, AND ENHANCED THE WORKFLOW AND THE STAFF'S DECISION-MAKING CAPABILITIES. IN 1997, CALFARM HIRED ADDITIONAL PROFESSIONAL STAFF AND MADE PROGRESS TOWARD CREATING A CULTURE THAT NURTURES AND SUPPORTS CONTINUOUS, LIFELONG LEARNING FOR ITS EMPLOYEES. CALFARM ALSO MADE SIZEABLE INVESTMENTS IN AND PROGRESS TOWARD ADVANCING ITS SYSTEMS AND INFORMATION CAPABILITIES. MANAGEMENT'S FOCUS IS TO REDUCE ITS LONG-TERM OPERATING COSTS AND TRANSACT BUSINESS WITH ITS AGENTS IN AN EFFICIENT MANNER USING NEWER TECHNOLOGIES AND MARKETING MODERN PRODUCTS. CALFARM HAS CONTINUED TO PROVIDE A RELIABLE MARKET FOR HIGHER-QUALITY HOMEOWNERS BY OFFERING TO INCLUDE COMPREHENSIVE EARTHQUAKE COVERAGE AT FULL RATES, IN CONTRAST TO THE SEVERELY RESTRICTED CALIFORNIA EARTHQUAKE AUTHORITY (CEA) "MINI POLICY" COVERAGE. THE CEA'S FIRST FULL YEAR OF OPERATIONS WAS 1997, AND CALFARM CHOSE NOT TO PARTICIPATE IN THE STATE-RUN CEA (MOST SMALL MARKET SHARE COMPETITORS REACHED THE SAME DECISION). CALFARM ACTIVELY MANAGES ITS CATASTROPHE EXPOSURES AND ENGAGES THE SERVICES OF PROMINENT OUTSIDE EXPERTS TO ASSIST IN GEOGRAPHIC MODELING AND SIMULATION TECHNIQUES TO MITIGATE RISK AND ACHIEVE DESIRED OBJECTIVES. CALFARM ALSO PURCHASES QUALITY REINSURANCE AT LEVELS REASONABLY EXPECTED TO PROTECT OUR CAPITAL FROM LARGE DISASTERS. 1997 WAS AN ACTIVE YEAR POLITICALLY FOR THE CALIFORNIA PERSONAL AUTOMOBILE MARKET. THE YEAR BEGAN WITH THE IMPLEMENTATION OF THE MANDATORY PROOF OF INSURANCE LAW AND A REQUIREMENT TO CONSIDER THE BENEFICIAL EFFECTS OF PROPOSITION 213, WHICH LIMITS NON-ECONOMIC RECOVERIES BY CalFarm 20 The Zenith SINCE THE INCEPTION OF OUR REINSURANCE DIVISION IN 1985, THE CUMULATIVE COMBINED RATIO IS 94.1%. UNINSURED MOTORISTS IN MOTOR VEHICLE ACCIDENTS. THE VALIDITY OF PROPOSITION 213 WAS CHALLENGED, BUT IT WAS UPHELD BY THE CALIFORNIA COURT OF APPEALS IN OCTOBER 1997. LATER IN THE YEAR, THE CALIFORNIA INSURANCE DEPARTMENT MANDATED THAT COMPANIES FILE AND IMPLEMENT A NEW PERSONAL AUTO CLASS PLAN AND RATES IN ACCORDANCE WITH A REVISED INTERPRETATION OF PROPOSITION 103. PROPOSITION 103 SPECIFIES THAT AN INDIVIDUAL'S DRIVING SAFETY RECORD, ANNUAL MILEAGE, AND YEARS LICENSED ARE TO BE THE THREE PRIMARY DETERMINANTS OF INSURANCE PREMIUMS. CALFARM HAS FILED, RECEIVED APPROVAL FOR, AND IMPLEMENTED ITS PROPOSITIONS 103 AND 213 AUTO RATING PLANS. CALFARM IS THE LARGEST WRITER OF FARMOWNERS POLICIES IN CALIFORNIA WITH AN ESTIMATED MARKET SHARE OF 42%. IT HAS FIRST-HAND KNOWLEDGE OF THE DIVERSE BUSINESS AND PERSONAL INSURANCE NEEDS OF THE FARMERS OF CALIFORNIA AND ENJOYS THE SPONSORSHIP OF THE CALIFORNIA FARM BUREAU, THE STATE'S LARGEST GENERAL AGRICULTURE ORGANIZATION. CALFARM IS COMMITTED TO SEEKING NEW AND PROFITABLE OPPORTUNITIES IN CALIFORNIA'S AGRICULTURAL SECTOR, WHICH HAS LED THE NATION IN FARM PRODUCTION AND INCOME FOR 50 YEARS. THE LOSS RATIO FOR CALFARM WAS 51.4% IN 1997, COMPARED TO 53.6%, IN 1996, AND THE COMBINED RATIO WAS 96.9% IN 1997, COMPARED TO 96.1%, IN 1996. THE RESULTS FOR 1997 INCLUDE CATASTROPHE LOSSES FROM THE 1997 NEW YEAR'S FLOOD OF $1.5 MILLION, COMPARED WITH NO CATASTROPHES IN 1996, AND $4,500,000 OF INCREASED TECHNOLOGY EXPENDITURES FOR SYSTEM IMPROVEMENTS AND YEAR 2000 COMPLIANCE. FOR THE 12 YEARS SINCE CALFARM WAS ACQUIRED BY ZENITH, THE COMBINED RATIO HAS AVERAGED 100.6%, EXCLUDING THE EFFECT OF PROPOSITION 103 ROLLBACK REFUNDS IN 1992. CALFARM IS PLEASED WITH ITS OPERATING RESULTS GIVEN THE FIERCELY COMPETITIVE CLIMATE AND IS FOCUSED ON MAINTAINING APPROPRIATE UNDERWRITING MARGINS. DURING THE FIRST QUARTER OF 1998, CALIFORNIA EXPERIENCED WIDE-SPREAD WIND AND STORM DAMAGE. MANAGEMENT IS NOT ABLE AT THIS TIME TO ESTIMATE THE IMPACT ON OUR OPERATIONS OF THESE STORMS. CalFarm The Zenith 21 COMPLIANCE WITH YEAR 2000 INTERNAL SOFTWARE ISSUES IS PROCEEDING ACCORDING TO SCHEDULE AND WE EXPECT SUBSTANTIAL COMPLETION BY THE END OF 1998. REINSURANCE FOR THE PAST 12 YEARS, ZENITH HAS BEEN SELECTIVELY UNDERWRITING ASSUMED TREATY AND FACULTATIVE REINSURANCE AS WELL AS COMMERCIAL PACKAGE POLICIES FOR TARGETED INDUSTRY GROUPS. REINSURANCE REPRESENTS ABOUT 7% OF OUR PROPERTY-CASUALTY VOLUME WHILE REINSURANCE RESERVES REPRESENT APPROXIMATELY 13% OF OUR TOTAL PROPERTY-CASUALTY RESERVES. DURING 1997, THE NET WRITTEN PREMIUM OF THIS OPERATION WAS $29,780,000, COMPARED TO $35,359,000, IN 1996. EARNED PREMIUM WAS $32,251,000, COMPARED TO $37,473,000, IN 1996. UNDERWRITING PROFITS OF $14,189,000 WERE RECORDED IN 1997 RESULTING IN A COMBINED RATIO OF 56.0%, COMPARED TO UNDERWRITING PROFITS OF $12,500,000 AND A COMBINED RATIO OF 66.6%, THE PRIOR YEAR. SINCE THE INCEPTION OF THIS OPERATION IN 1985, THE COMBINED RATIO IS 94.1%. DURING 1997, THE MAJORITY OF WRITTEN PREMIUM WAS WORLD-WIDE PROPERTY CATASTROPHE BUSINESS. WE EXPECT THE TREND OF LOWER PREMIUM VOLUMES TO CONTINUE AS RATES DECLINE DUE TO FAVORABLE EXPERIENCE AND INCREASED CAPITAL AVAILABLE IN THE MARKETPLACE. ACCOUNTING FOR THE PROPERTY CATASTROPHE REINSURANCE BUSINESS HAS A DIFFERENT RESULT FROM OUR OTHER PROPERTY-CASUALTY BUSINESSES. AT THE END OF EACH REPORTING PERIOD, INCOME IS RECOGNIZED WITHOUT RESERVES BEING ESTABLISHED IF NO MAJOR CATASTROPHE HAS OCCURRED. IN OUR OTHER BUSINESSES, RESERVES ARE MANDATED BASED UPON ACTUAL EVENTS AS WELL AS EXPECTED LOSS PATTERNS. AS A RESULT, THERE MAY BE LARGE FLUCTUATIONS (POSITIVE OR NEGATIVE) IN UNDERWRITING RESULTS FOR THE PROPERTY CATASTROPHE REINSURANCE BUSINESS IN THE SHORT TERM SINCE ONLY ACTUAL EVENTS ARE CONSIDERED. WE BECAME A CORPORATE MEMBER OF LLOYD'S ON JANUARY 1, 1995 SUPPORTING ONE SYNDICATE WHERE WE HAD LONG-TERM TIES AND CONFIDENCE IN THE MANAGEMENT. DURING THE LATTER PART OF 1997, WE SOLD OUR INTEREST AT A PROFIT. CalFarm 22 The Zenith MANAGEMENT IS FOCUSED ON THE DUAL CHALLENGES OF IMPROVING OPERATING RESULTS AND THE PRICE OF OUR COMMON STOCK. YEAR 2000 WE HAVE MADE SUBSTANTIAL PROGRESS IN PREPARING OUR COMPUTER AND BUSINESS SYSTEMS TO FUNCTION PROPERLY IN VIEW OF THE YEAR 2000 PROBLEM. TO DATE, WE HAVE SPENT $2,500,000, AND WE ESTIMATE THAT WITH AN ADDITIONAL COST OF $1,500,000, WE WILL COMPLETE THE NECESSARY WORK ON OUR INTERNAL COMPUTER AND BUSINESS SYSTEMS BY THE END OF 1998. WITH RESPECT TO THIRD PARTIES WITH WHOM WE DO BUSINESS, A PROCESS AND A SCHEDULE ARE IN PLACE TO MONITOR THEIR TIMELY COMPLIANCE. CONCLUSION CONSUMMATION OF THE PENDING RISCORP TRANSACTION AND PLANNING FOR FUTURE OPERATIONS WILL DOMINATE OUR SHORT-TERM ACTIVITIES. UPON COMPLETION, OUR BUSINESS WILL BE STRENGTHENED AND DIVERSIFIED. WE WILL BE POSITIONED AS A SPECIALTY COMPANY WITH A STRONG BALANCE SHEET, A LONG HISTORY OF EFFECTIVE RISK MANAGEMENT AND APPROPRIATE GEOGRAPHIC DIVERSIFICATION. SIMULTANEOUSLY, WE ARE FOCUSED ON IMPROVING THE PROFITABILITY OF OUR EXISTING OPERATIONS IN A VERY COMPETITIVE ENVIRONMENT. WE BELIEVE THAT POOR FINANCIAL RESULTS IN THE CALIFORNIA WORKERS' COMPENSATION MARKET WILL CAUSE CERTAIN COMPETITORS TO RE-PRICE AND RE-UNDERWRITE THEIR BUSINESS IN THE FORESEEABLE FUTURE. OUR CALFARM OPERATIONS CONTINUE TO SERVICE THE AGRICULTURAL AND RURAL REGIONS OF CALIFORNIA WITH NEEDED PRODUCTS AND SERVICES, AND OUR REINSURANCE ACTIVITIES PROVIDE ADDITIONAL WORLD-WIDE PREMIUMS AND UNDERWRITING PROFITS PRIMARILY IN THE PROPERTY CATASTROPHE MARKET. MANAGEMENT UNDERSTANDS AND IS FOCUSED ON THE DUAL CHALLENGES OF IMPROVING OUR OPERATING RESULTS AND THE PRICE OF OUR COMMON STOCK. WE APPRECIATE THE ASSISTANCE AND CONFIDENCE OF OUR EMPLOYEES, AGENTS, STOCKHOLDERS AND DIRECTORS AS WE DEAL WITH THE CHALLENGES AND OPPORTUNITIES AHEAD. THE CONTINUED SUPPORT OF OUR POLICYHOLDERS AND EXCEPTIONAL EFFORTS OF OUR PEOPLE PROVIDE CONFIDENCE FOR THE FUTURE. [SIG] STANLEY R. ZAX, CHAIRMAN OF THE BOARD AND PRESIDENT WOODLAND HILLS, CALIFORNIA, FEBRUARY 1998 CalFarm The Zenith 23 MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING INFORMATION The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements if accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those discussed. Forward-looking statements include those related to the plans and objectives of management for future operations, future economic performance, or projections of revenues, income, earnings per share, capital expenditures, dividends, capital structure, or other financial items. Statements containing words such as EXPECT, ANTICIPATE, BELIEVE, or similar words that are used in Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations, in other parts of Zenith's Annual Report on Form 10-K pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 1997, in other parts of Zenith's 1997 Annual Report to Stockholders 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; (8) ability to timely and accurately complete the Year 2000 conversion process; (9) impact of any failure of third parties with whom Zenith does business to be Year 2000 compliant and (10) other risks detailed herein and from time to time in Zenith's other reports and filings with the Securities and Exchange Commission. OVERVIEW Zenith's principal source of consolidated earnings is the income from operation of its property-casualty insurance businesses. Property-Casualty operations comprise Workers' Compensation (49% of 1997 consolidated net premiums earned); Other Property-Casualty, principally automobile, homeowners, farmowners and commercial coverages and health insurance (44% of 1997 consolidated net premiums earned); and Reinsurance (7% of 1997 consolidated net premiums earned). Results of such operations for the three years ended December 31, 1997 are set forth in the table on page 25. Historically, Zenith's Workers' Compensation operation has been focused almost entirely in California. In each of the three years ended December 31, 1997 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 primarily 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, which added earned premium of $47 million to the 1997 operations. 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. CalFarm 24 The Zenith 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, 1997:
- -------------------------------------------------------------------------------------------------- (Dollars in thousands) 1997 1996 1995 - -------------------------------------------------------------------------------------------------- Investment income, after taxes $ 34,655 $ 34,069 $ 30,690 Realized gains on investments, after taxes 8,431 7,025 2,354 - -------------------------------------------------------------------------------------------------- Sub-total 43,086 41,094 33,044 - -------------------------------------------------------------------------------------------------- Property-Casualty underwriting results, after taxes: Income (loss) excluding catastrophes (10,217) 356 (226) Catastrophe losses (975) (8,710) - -------------------------------------------------------------------------------------------------- Property-Casualty underwriting income (loss), after taxes (11,192) 356 (8,936) - -------------------------------------------------------------------------------------------------- Income from real estate operations, after taxes 1,079 1,251 1,349 Interest expense, after taxes (2,587) (3,170) (4,524) Parent net expenses, after taxes (2,286) (1,931) (1,211) Loss from discontinued life and annuity operations, after taxes (13,122) - -------------------------------------------------------------------------------------------------- Net income $ 28,100 $ 37,600 $ 6,600 - --------------------------------------------------------------------------------------------------
PROPERTY-CASUALTY INSURANCE OPERATIONS Premiums earned and underwriting results of Zenith's Property-Casualty subsidiaries for the three years ended December 31, 1997 were as follows:
- ---------------------------------------------------------------------------------- (Dollars in thousands) 1997 1996 1995 - ---------------------------------------------------------------------------------- Premiums earned Workers' Compensation $242,064 $210,916 $203,252 Other Property-Casualty 214,406 204,778 192,276 Reinsurance 32,251 37,162 41,985 - ---------------------------------------------------------------------------------- Total $488,721 $452,856 $437,513 - ---------------------------------------------------------------------------------- Underwriting income (loss), before taxes Workers' Compensation $(37,157) $(19,462) $(14,548) Other Property-Casualty 6,509 8,076 (12,007) Reinsurance 14,189 12,479 12,955 - ---------------------------------------------------------------------------------- Total $(16,459) $ 1,093 $(13,600) - ----------------------------------------------------------------------------------
Zenith's key operating goal is to achieve a combined ratio of 100% or lower. The combined ratio, expressed as a percentage, is the key measure of underwriting profitability traditionally used in the Property-Casualty insurance business. It is the sum of net incurred loss and loss adjustment expenses, underwriting expenses and policyholders' dividends, expressed as a percentage of net premiums earned. CalFarm The Zenith 25
The combined ratios for the three years ended December 31, 1997 were as follows: - ------------------------------------------------------------------------------------------------------ 1997 1996 1995 - ------------------------------------------------------------------------------------------------------ Combined loss and expense ratios Workers' Compensation Loss and loss adjustment expenses 81.6% 75.4% 75.6% Underwriting expenses 33.6 32.6 28.8 Dividends to policyholders 0.1 1.2 2.8 - ------------------------------------------------------------------------------------------------------ Combined ratio 115.3 109.2 107.2 - ------------------------------------------------------------------------------------------------------ Other Property-Casualty Loss and loss adjustment expenses 65.2 67.1 77.9 Underwriting expenses 31.7 29.0 28.3 - ------------------------------------------------------------------------------------------------------ Combined ratio 96.9 96.1 106.2 - ------------------------------------------------------------------------------------------------------ Reinsurance Loss and loss adjustment expenses 33.7 49.0 52.6 Underwriting expenses 22.3 17.4 16.5 - ------------------------------------------------------------------------------------------------------ Combined ratio 56.0 66.4 69.1 - ------------------------------------------------------------------------------------------------------ Total combined ratio 103.4% 99.8% 103.1% - ------------------------------------------------------------------------------------------------------
The profitability of property-casualty insurance underwriting operations is principally dependent upon 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 loss and loss adjustment expense for the three main lines of property-casualty business:
- ----------------------------------------------------------------------------- Other (Dollars in Workers' Property- thousands) Compensation Casualty Reinsurance Total - ----------------------------------------------------------------------------- One-year loss development in: 1997 $ 11,837 $ (5,316) $ (6,870) $ (349) 1996 (869) (224) (2,716) (3,809) 1995 (517) 1,337 (2,955) (2,135) Favorable development is shown in brackets. - -----------------------------------------------------------------------------
The unfavorable development in 1997 for Workers' Compensation operation is due to loss and loss adjustment expense reserve strengthening for prior accident years, principally 1995 and 1996 accident years. 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. CalFarm 26 The Zenith 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-containing materials. Most of these claims date back to the 1970's and early 1980's and Zenith's exposure is generally limited to a pro-rata share of the loss for the period of time coverage was provided. Zenith also has potential exposure to environmental and asbestos losses and loss adjustment expenses beginning in 1985 through its Reinsurance operation and through CalFarm 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. In the spring of 1996, Zenith began replacing and modifying its computer and business systems to be Year 2000 compliant. Zenith has established a central team to evaluate and implement the changes to computer systems, applications and business processes necessary to achieve Year 2000 conversion with no disruption to business operations. Even though Zenith has been communicating with third parties with whom it does business to assure that they are Year 2000 compliant, Zenith may be adversely impacted if such third parties do not address this issue successfully. Through December 31, 1997, Zenith has incurred about $2.5 million on the Year 2000 efforts and anticipates an additional $2.0 million will be incurred through 1999. All of the significant internal insurance computer systems, applications and business processes are expected to be fully compliant by the end of 1998. Some of the factors that continue to impact the business and economic environment in which Zenith operates include: an uncertain political and regulatory environment, both state and federal; the outlook for economic growth in geographic areas where Zenith operates; the expansion itself 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 effect of any of the foregoing, these factors and related trends and uncertainties could have a material effect on Zenith's future operations and financial condition. 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' continual review of property-casualty reserve estimates. Actuarial account of increased costs is considered in setting adequate rates, and this is particularly important in the health insurance area where hospital and medical inflation rates have exceeded general inflation rates. 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. CalFarm The Zenith 27 WORKERS' COMPENSATION Underwriting results in the Workers' Compensation operation deteriorated significantly in 1997, 1996 and 1995 compared to prior years. The underwriting losses in 1997, 1996 and 1995, were the result of intense competition, lower premium income, the inability of Zenith to adjust operating expenses commensurate with the decrease in premiums, and additional operating costs associated with a new computer system which became operational in mid-1995. In 1997, Workers' Compensation results were also impacted by loss and loss adjustment expense reserve strengthening of about $12 million for prior accident years, and higher reserves for the current accident year. 1996 results were affected by increased claim costs attributable to 1994 and 1995 accident years which were offset by improvements in claim handling costs for the same periods. Effective January 1, 1995, the minimum rate law in California was repealed with the adoption of an open rating system in which insurers were allowed to charge their own rates for Workers' Compensation coverage. Companies must file such rates with the California Department of Insurance, but the use of scheduled rating credits allow companies considerable flexibility in determining the amount of premium to be charged to a policyholder or potential policyholder. Competition in the industry based on price has become intense, negatively impacting overall industry volume. Since open rating began, the interrelationship of Zenith's actuarially-determined rates, underwriting and agents' commission in comparison to the industry has resulted in the loss of some business to competitors. The number of California policies in-force decreased approximately 13% from 1996 to 1997 and 8% from 1995 to 1996. The strategic geographic diversification in non-California markets primarily offsets the decreasing premium in the California market. Zenith's non-California Workers' Compensation operations include Texas, Arkansas, Illinois, Pennsylvania, Utah and, effective January 1, 1997, Florida. During 1997, 1996 and 1995, approximately 46%, 29% and 22%, respectively, of earned premiums were attributable to Zenith's non-California Workers' Compensation operations. The increase in 1997 is primarily the result of the AGC-SIF acquisition effective December 31, 1996. AGC-SIF's 1997 earned premiums contributed $47 million to the 1997 operations. National results for Workers' Compensation insurers in recent years continue to be favorable by recent historic standards and Zenith's non-California underwriting results in 1997, 1996, and 1995 were more favorable than its California results. Management will continue to monitor the national expansion of its Workers' Compensation operation. 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 continued to market its integrated Workers' Compensation, Health and Disability insurance products in California and Arkansas 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 1997, this program did not have a material impact on Zenith's 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 1997, 1996, and 1995 was approximately $3.3 million, $3.6 million, and $1.4 million, respectively. The underwriting results for NWCRP did not materially impact Workers' Compensation underwriting results in 1997, 1996, or 1995. Florida has created the Special Disability Trust Fund ("the Fund") which assesses Workers' Compensation insurers to pay for what are commonly referred to as "Second Injuries". Historic assessments have been inadequate to completely fund obligations of the Fund. In late 1997, the Florida statute was amended so that the Fund will not be liable for and will not reimburse employers or carriers for Second Injuries occurring on or after January 1, 1998. Zenith has recorded its receivable from the Fund for Second Injuries based on specific claims and historical experience prior to January 1, 1998. Management believes that the remaining balance of the receivable at December 31, 1997 of $5,094,000 will be recovered. CalFarm 28 The Zenith In 1995, Zenith's new workers' compensation computer system ("system") became operational. Management observed certain unusual claim reserving trends and patterns in 1995 and 1996, and to a much lesser degree, during the first three quarters of 1997. Based on currently available data, these claim reserving trends and patterns have stabilized. Any subsequent re-interpretation of new information that becomes available from the system which may change the estimate of such liabilities in future periods is not considered to have a material impact on the financial position or results of operations. OTHER PROPERTY-CASUALTY Underwriting results in the Other Property-Casualty operation were favorable for both 1997 and 1996. 1997 underwriting results declined, compared to 1996, due primarily to upgrades to the existing computer systems and computer costs incurred for Year 2000 compliance, partially offset by favorable loss experience in both current and prior accident years. 1997 results include $1.5 million of catastrophe losses attributable to California storm damage. The 1996 underwriting results improved significantly compared to 1995 primarily due to the absence of catastrophes in 1996 versus 1995 catastrophe losses of $10.7 million from California storm damage. Premiums earned increased in 1997 and 1996 compared to 1995, primarily due to new business and rate increases for homeowners, earthquake, farmowners, commercial coverages and health. The increase in premium was limited by the competitive insurance market and pricing pressures for all lines of business in California. All rate increases, except health, 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 provides limited earthquake coverage throughout California. Participation in the CEA is voluntary and Zenith elected not to participate. Zenith can elect to participate in the CEA at a later date subject to meeting the participation requirements at that time. During 1997, Zenith continued to write homeowners and associated earthquake with broader coverages than available through the CEA. Zenith will continue to offer broader earthquake coverage as long as private reinsurance is available and affordable. 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 ("Fair Plan"). CAARP, CAIP and the Fair Plan are organizations that were established by statute in California but are serviced by the insurance industry. The 1997, 1996, and 1995 underwriting results for CAARP, CAIP and the 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. Both the mandatory insurance law and the "Personal Responsibility Act of 1996" created by Proposition 213 were effective January 1997. During 1997, Zenith implemented the new rating factor regulations which further limit the impact of territorial rating on automobile insurance rates. During 1998, the California legislature is expected to continue its debate on providing a low-cost auto policy to the uninsured drivers in California. During the first quarter of 1998, California experienced wide-spread wind and storm damage. Management is not able at this time to estimate the impact of the storms on the results of operations of Zenith. REINSURANCE Zenith's assumed reinsurance operation emphasizes the reinsurance of accumulated losses from catastrophes and the reinsurance of large property risks. Whereas the number and severity of losses culminating with Hurricane "Andrew" in 1992 pressured rates up followed by creation of additional industry capacity, the absence of severe catastrophes in 1996 and 1997 CalFarm The Zenith 29 and available capacity have pressured prices down. Underwriting results were favorable during 1997 and 1996 as a result of absence of catastrophes. In spite of losses incurred in 1995 of $2.5 million principally attributable to Hurricane "Marilyn", the 1995 underwriting results were profitable. For the past three years, the decrease in loss and loss adjustment expenses was primarily due to favorable development of certain treaties, however, the 1997 underwriting results were partially reduced by contingent profit commission paid as a result of such favorable development. The outlook for profitability in the reinsurance operation continues to be dependent upon, among other things, the level of rates for property and catastrophe reinsurance and the frequency and severity of world-wide property losses. Premiums earned in the reinsurance operation decreased in 1996 and 1997 due to selected non-renewal by Zenith of certain reinsurance treaties and generally softening of such rates in the industry. If rates do not improve, premiums may continue to decrease in 1998. INVESTMENTS At December 31, 1997, approximately 92% 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." 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 increase in the value of fixed maturities classified as available-for-sale in 1997 compared to 1996 was an increase of $5.0 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 among various types of securities is adjusted from time to time based on market conditions, credit conditions, tax policy, fluctuations in interest rates and other factors. The change in the carrying value of Zenith's consolidated investment portfolio in 1997 was as follows:
- ------------------------------------------------------------------------------------------------- (Dollars in thousands) - ------------------------------------------------------------------------------------------------- Carrying value at beginning of year $ 852,799 Purchases at cost 91,244 Maturities and redemptions (70,079) Proceeds from sales of investments: Available-for-sale ($104,809) Other (16,627) --------- Total proceeds from sales of investments (121,436) Net realized gains: Available-for-sale 4,108 Other 9,900 --------- Total net realized gains 14,008 Unrealized gains 13,545 Increase in short-term investments 103,115 Net amortization of bonds and preferred stocks and other changes (3,223) - ------------------------------------------------------------------------------------------------- Carrying value at end of year $ 879,973 - -------------------------------------------------------------------------------------------------
At December 31, 1997, and 1996, Zenith's consolidated investment portfolio emphasized high-quality, taxable bonds and short-term investments. Bonds constituted 67% and 77%, and short-term investments constituted 24% and 13%, of the carrying value of Zenith's consolidated investment portfolio at December 31, 1997 and 1996, respectively. At December 31, 1997 and 1996, 96% and 97%, respectively, of the consolidated carrying values CalFarm 30 The Zenith of investments in bonds were rated investment grade. Investment income during the years ended December 31, was as follows:
- ---------------------------------------------------- (Dollars in thousands) 1997 1996 1995 - ---------------------------------------------------- Before taxes $ 52,332 $ 51,154 $ 46,150 After taxes 34,655 34,069 30,690 - ----------------------------------------------------
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:
- ---------------------------------------------------- 1997 1996 1995 - ---------------------------------------------------- Before taxes 6.0% 6.1% 6.0% After taxes 4.0% 4.0% 4.0% - ----------------------------------------------------
REAL ESTATE Zenith recognized total revenues of $46.0 million, $41.6 million, and $31.7 million in 1997, 1996, and 1995, respectively, related to its real estate operations which commenced in 1993. Total revenues include other realized gains of $0.5 million in 1997 and none for 1996 and 1995. Income from real estate operations before taxes was $1.7 million, $1.9 million, and $2.1 million in 1997, 1996 and 1995, respectively. Construction in progress, including undeveloped land, was $53.1 million at December 31, 1997 compared to $45.1 million at December 31, 1996. In addition to continuing home construction, Zenith may use some land presently owned for commercial construction. PENDING RISCORP ACQUISITION On June 17, 1997, Zenith entered into an agreement with RISCORP Inc. and certain of its subsidiaries (collectively "RISCORP") to purchase all of the assets of RISCORP related to its workers' compensation business, including RISCORP's existing in-force insurance business as well as the right to all new and renewal policies. Zenith will also purchase RISCORP's "First Call" managed care workers' compensation system. After the transaction closes, RISCORP will no longer engage in workers' compensation or managed care businesses. Zenith will assume certain liabilities related to RISCORP's insurance business in connection with the transaction. In addition, Zenith will assume or repay $15 million in indebtedness of RISCORP. The purchase price paid by Zenith to RISCORP will be the difference between the book value of the assets purchased and the book value of the liabilities assumed by Zenith on the closing date, subject to a minimum purchase price of $35 million, payable in cash. The ultimate purchase price, however, cannot be determined at this time. Zenith and RISCORP also entered into an agreement under which all RISCORP's Florida in-force, and new and renewal policies issued after June 17, 1997 are reinsured by Zenith in the event that RISCORP is declared insolvent prior to the closing, at which time the related liabilities will be assumed. The closing of the purchase is subject to certain conditions, including the review and approval by appropriate regulatory agencies, compliance with contract provisions and approval by RISCORP's shareholders. RISCORP has obtained the necessary approvals from the Securities and Exchange Commission to solicit its shareholders. The closing date cannot be determined at this time. However, if closing does not occur by March 31, 1998, either party may terminate the agreement. Management of RISCORP has informed Zenith that it is currently in the process of identifying and evaluating its computer and business systems with respect to Year 2000 issues. At this time, however, management of RISCORP has neither informed Zenith of the total cost of achieving Year 2000 compliance for its systems nor presented a plan for doing so. If the transaction closes, Zenith may be adversely impacted if substantial changes are required after the closing for RISCORP's computer and business systems to achieve Year 2000 compliance, and if such changes are not covered by indemnification rights contained in the purchase agreement. LIQUIDITY AND CAPITAL RESOURCES 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 41 in the Consolidated Financial Statements, are invested as described in "Investments" above. Net cash flows from continuing operating activities were CalFarm The Zenith 31 $27.0 million, $9.7 million and $9.6 million, for 1997, 1996 and 1995, 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 and development of its real estate subsidiary, Perma-Bilt. Zenith is principally dependent upon its portfolio of marketable securities and the investment yields thereon; dividends from its insurance subsidiaries, whose operations are supported by their own cash flows; and available lines of credit to pay its expenses, service debt and pay any cash dividends which may be declared to its stockholders. Currently, Zenith has three revolving lines of credit in place. These lines provide Zenith with $100 million of revolving credit, all of which is currently available, along with internal funds, to fund the closing of the pending acquisition of certain assets and liabilities from RISCORP. The closing date and ultimate purchase price cannot be determined at this time, although the purchase agreement calls for a minimum purchase price of $35 million. In the opinion of management, Zenith's sources of funding are sufficient for 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 insurance subsidiaries amounting to $22.75 million in 1997, $15.0 million in 1996 and $10.5 million in 1995. Maximum dividend capability, without prior approval of the Department, of Zenith's subsidiaries in 1998 is $27.8 million. Perma-Bilt maintains certain bank credit facilities to provide financing for its development and construction of private residences for sale. At December 31, 1997, maximum permitted borrowing under the facilities was $25.3 million, with a balance outstanding of $11.4 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, 1997 was $2.3 million. Insurance companies are required to have securities on deposit for the protection of policyholders in accordance with various states' regulations. At December 31, 1997, investments carried at their fair value of $294.3 million were on deposit to comply with such regulations. At December 31, 1997, Zenith was authorized to purchase up to 1,085,000 shares of Zenith common stock pursuant to a share purchase program authorized by its Board of Directors. These purchases, which are made at prevailing market prices, are discretionary and can be adequately funded from Zenith's existing sources of liquidity. As previously announced, on January 6, 1998, Zenith repurchased 930,000 shares at $25 per share in the open market. PROPOSED CODIFICATION OF STATUTORY ACCOUNTING PRINCIPLES The National Association of Insurance Commissioners is in the process of codifying statutory accounting principles to provide a comprehensive basis of statutory accounting and reporting for use by insurance departments, insurers, and auditors. The codified principles have not yet been finalized; therefore, the effective date has not been determined. Implementation of the codified statutory accounting principles may affect the surplus level and the capitalization requirement of Zenith's insurance subsidiaries on a statutory basis. Zenith has not determined the impact of this codification. RECENT DEVELOPMENTS IN FASB ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130 is effective for periods beginning after December 15, 1997. SFAS No. 130 requires companies to report comprehensive income and its components in a financial statement which would include net income in addition to unrealized appreciation (depreciation) on investments that are currently presented as components of stockholders' equity. In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131 is effective for periods beginning CalFarm 32 The Zenith after December 15, 1997. SFAS No. 131 specifies revised guidelines for determining an entity's operating segments and the type and level of financial information to be disclosed. Zenith has not determined the final presentation impact of SFAS No. 131 but does believe that additional segments will be reported in 1998. CalFarm The Zenith 33 FIVE-YEAR SUMMARY OF SELECTED FINANCIAL INFORMATION ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES - --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, Note 1997 1996 - ----------------------------------------------------------------- (Dollars and shares in thousands, except per share data) REVENUES 1 Property-Casualty insurance operations Premiums earned $ 488,721 $ 452,856 Investment income 52,332 51,154 Realized gains on investments 14,008 10,807 Real estate operations 45,419 41,554 Income from legal settlement - ----------------------------------------------------------------- TOTAL REVENUES 1 600,480 556,371 - ----------------------------------------------------------------- INCOME FROM CONTINUING OPERATIONS AFTER TAXES AND BEFORE REALIZED GAINS 1, 2 19,669 30,575 Per share* 1, 2 1.10 1.72 - ----------------------------------------------------------------- INCOME FROM CONTINUING OPERATIONS AFTER TAXES 5 28,100 37,600 Per share* 5 1.57 2.12 - ----------------------------------------------------------------- COMPONENTS OF NET INCOME 1 Underwriting income (loss) Excluding catastrophe losses (10,217) 356 Including catastrophe losses (11,192) 356 Net investment income 34,655 34,069 Realized gains on investments 3 8,431 7,025 Real estate operations 1,079 1,251 Parent operations (4,873) (5,101) Income (loss) from discontinued life and annuity operations 5 - ----------------------------------------------------------------- NET INCOME 28,100 37,600 Per share* 1.57 2.12 - ----------------------------------------------------------------- CASH DIVIDENDS PER SHARE TO COMMON STOCKHOLDERS 1.00 1.00 WEIGHTED AVERAGE COMMON SHARES OUTSTANDING* 17,886 17,752 - ----------------------------------------------------------------- FINANCIAL CONDITION 1 Total assets 1,252,156 1,242,724 Investments 879,973 852,799 Property-Casualty unpaid claims 613,266 620,078 Senior notes, bank debt and other notes payable 88,216 88,861 Total stockholders' equity 361,866 337,503 Stockholders' equity per share 20.31 19.17 Stockholders' equity per share, excluding effect of SFAS No. 115 4 20.03 19.28 Return on average equity 8.3% 11.4% - ----------------------------------------------------------------- PROPERTY-CASUALTY INSURANCE STATISTICS (GAAP) 1 Paid loss and loss adjustment expense ratio 66.9% 69.9% Loss and loss adjustment expense ratio 71.2% 69.5% Underwriting expense ratio 32.1% 29.7% Policyholder dividends ratio 0.1% .6% Combined ratio 103.4% 99.8% Net premiums earned-to-surplus ratio 1.4 1.4 Loss and loss adjustment expense reserves-to-surplus ratio (net of reinsurance) 6 1.5 1.6 - -----------------------------------------------------------------
*Amounts prior to 1997 have been restated as required to comply with SFAS No. 128 and represent diluted amounts per share and weighted average shares assuming exercise of stock options. For further discussion of earnings per share and the impact of SFAS No. 128, see Notes 1 and 16 to the consolidated financial statements on pages 46 and 55, respectively. CalFarm 34 The Zenith - --------------------------------------------------------------------------------
1995 1994 1993 - --------------------------------------------------------------------------------------------------------------- (Dollars and shares in thousands, except per share data) REVENUES Property-Casualty insurance operations Premiums earned $ 437,513 $ 438,829 $ 447,270 Investment income 46,150 40,068 39,309 Realized gains on investments 3,621 1,428 14,272 Real estate operations 31,736 30,220 Income from legal settlement 1,910 7,561 - --------------------------------------------------------------------------------------------------------------- TOTAL REVENUES 519,020 512,455 508,412 - --------------------------------------------------------------------------------------------------------------- INCOME FROM CONTINUING OPERATIONS AFTER TAXES AND BEFORE REALIZED GAINS 17,368 27,628 27,820 Per share* .95 1.45 1.44 - --------------------------------------------------------------------------------------------------------------- INCOME FROM CONTINUING OPERATIONS AFTER TAXES 19,722 29,798 42,177 Per share* 1.08 1.56 2.19 - --------------------------------------------------------------------------------------------------------------- COMPONENTS OF NET INCOME Underwriting income (loss) Excluding catastrophe losses (226) 15,652 8,801 Including catastrophe losses (8,936) 5,707 7,436 Net investment income 30,690 26,995 26,888 Realized gains on investments 2,354 929 9,443 Real estate operations 1,349 1,423 Parent operations (5,735) (5,256) (1,590) Income (loss) from discontinued life and annuity operations (13,122) 8,102 11,023 - --------------------------------------------------------------------------------------------------------------- NET INCOME 6,600 37,900 53,200 Per share* .36 1.99 2.77 - --------------------------------------------------------------------------------------------------------------- CASH DIVIDENDS PER SHARE TO COMMON STOCKHOLDERS 1.00 1.00 1.00 WEIGHTED AVERAGE COMMON SHARES OUTSTANDING* 18,334 19,029 19,196 - --------------------------------------------------------------------------------------------------------------- FINANCIAL CONDITION Total assets 1,115,433 1,093,675 1,125,211 Investments 835,214 709,030 754,107 Property-Casualty unpaid claims 517,552 510,406 519,418 Senior notes, bank debt and other notes payable 83,135 76,582 73,989 Total stockholders' equity 330,432 309,860 349,465 Stockholders' equity per share 18.58 16.35 18.55 Stockholders' equity per share, excluding effect of SFAS No. 115 18.18 18.79 17.90 Return on average equity 2.0% 11.7% 16.3% - --------------------------------------------------------------------------------------------------------------- PROPERTY-CASUALTY INSURANCE STATISTICS (GAAP) Paid loss and loss adjustment expense ratio 74.3% 69.6% 67.9% Loss and loss adjustment expense ratio 74.4% 66.9% 68.5% Underwriting expense ratio 27.4% 26.9% 25.5% Policyholder dividends ratio 1.3% 4.0% 3.4% Combined ratio 103.1% 97.8% 97.4% Net premiums earned-to-surplus ratio 1.4 1.7 1.6 Loss and loss adjustment expense reserves-to-surplus ratio (net of reinsurance) 1.5 1.7 1.7 - ---------------------------------------------------------------------------------------------------------------
(1) 1993 and 1994 have been restated to include health insurance included in property-casualty insurance operations. (2)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. (3) Taxes on realized gains were reduced in 1993 for the tax benefit associated with capital losses carried forward from 1990. (4) 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. (5) In 1995, Zenith sold CalFarm Life (see Note 15 to the Consolidated Financial Statements). (6) 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 35 PROPERTY-CASUALTY LOSS DEVELOPMENT ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES The table that follows shows analysis of development of loss and loss adjustment expense liabilities as originally estimated on a GAAP basis at December 31 of each year presented. The accounting policies used to estimate these liabilities are described in Note 1 to the Consolidated Financial Statements. Amounts represent all property-casualty operations. 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 - --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1997 1996 - ------------------------------------------------------- (Dollars in thousands) LIABILITY FOR UNPAID LOSS AND LOSS ADJUSTMENT EXPENSES, NET $525,601 $526,427 - ------------------------------------------------------- PAID, NET (CUMULATIVE) AS OF: One year later 209,346 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 526,078 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 $349 - ------------------------------------------------------- NET LIABILITY -- DECEMBER 31, $525,601 $526,427 Receivable from reinsurers and state trust funds 87,665 93,651 - ------------------------------------------------------- GROSS LIABILITY -- DECEMBER 31, $613,266 620,078 Re-estimated liability, net of reinsurance 526,078 Re-estimated receivable from reinsurers 95,570 - ------------------------------------------------------- Re-estimated liability, gross 621,648 - ------------------------------------------------------- FAVORABLE (DEFICIENT) DEVELOPMENT, GROSS $(1,570) - -------------------------------------------------------
The analysis above presents the development of Zenith's balance sheet liabilities for 1987 through 1997. 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 loss and loss adjustment 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 1997, 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 1996 includes an estimate of the amount still due on the 1995 and prior liabilities. The loss and loss adjustment expense data prior to 1995 have been restated to include health insurance. 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 36 The Zenith - --------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 1987 - ----------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) LIABILITY FOR UNPAID LOSS AND LOSS ADJUSTMENT EXPENSES, NET $463,123 $462,710 $474,499 $471,832 $447,702 $424,373 $386,445 $347,888 $293,981 - ----------------------------------------------------------------------------------------------------------------------------- PAID, NET (CUMULATIVE) AS OF: One year later 185,764 175,488 173,699 184,498 184,593 162,642 129,605 118,332 105,939 Two years later 295,872 274,560 272,221 292,914 291,228 264,904 205,132 179,241 159,746 Three years later 331,532 325,916 355,710 352,208 323,685 258,632 216,321 189,980 Four years later 364,420 389,417 390,459 357,233 289,963 245,629 207,890 Five years later 416,297 412,600 380,524 309,524 263,971 225,849 Six years later 433,322 394,741 323,041 275,983 237,474 Seven years later 409,190 332,239 284,877 245,429 Eight years later 341,520 290,126 251,801 Nine years later 295,039 256,423 Ten years later 260,196 - ----------------------------------------------------------------------------------------------------------------------------- LIABILITY, NET RE-ESTIMATED AS OF: One year later 459,314 460,575 464,779 480,903 467,636 427,458 381,096 341,679 293,526 Two years later 464,830 450,675 453,497 483,334 485,399 442,332 371,272 332,541 290,002 Three years later 442,391 452,330 482,019 485,816 453,802 374,455 327,961 289,074 Four years later 446,746 487,447 488,723 454,744 380,983 325,457 285,801 Five years later 483,294 491,216 455,971 381,703 328,415 280,860 Six years later 488,826 456,860 382,280 328,640 281,385 Seven years later 453,475 382,219 329,058 282,498 Eight years later 377,410 328,465 282,882 Nine years later 322,236 282,454 Ten years later 279,103 - ----------------------------------------------------------------------------------------------------------------------------- FAVORABLE (DEFICIENT) DEVELOPMENT $ (1,707) $ 20,319 $ 27,753 $(11,462) $(41,124) $(29,102) $ 9,035 $ 25,652 $ 14,878 - ----------------------------------------------------------------------------------------------------------------------------- NET LIABILITY -- DECEMBER 31, $463,123 $462,710 $474,499 $471,832 Receivable from reinsurers and state trust funds 54,429 47,696 44,919 33,070 - --------------------------------------------------------------------------- GROSS LIABILITY -- DECEMBER 31, 517,552 510,406 519,418 504,902 Re-estimated liability, net of reinsurance 464,830 442,391 446,746 483,294 Re-estimated receivable from reinsurers 54,725 45,045 54,280 70,526 - --------------------------------------------------------------------------- Re-estimated liability, gross 519,555 487,436 501,026 553,820 - --------------------------------------------------------------------------- FAVORABLE (DEFICIENT) DEVELOPMENT, GROSS $ (2,003) $ 22,970 $ 18,392 $(48,918) - ---------------------------------------------------------------------------
CalFarm The Zenith 37 CONSOLIDATED BALANCE SHEET ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES - --------------------------------------------------------------------------------------------------------------
DECEMBER 31, Note 1997 1996 - -------------------------------------------------------------------------------------------------------------- (Dollars in thousands) ASSETS Investments Fixed maturities: At amortized cost (fair value $48,266, 1997 and $53,113, 1996) $ 46,948 $ 53,353 At fair value (cost $534,771, 1997 and $608,756, 1996) 542,479 605,630 Floating rate preferred stocks, at fair value (cost $14,614, 1997 and 1996) 15,670 14,071 Convertible and non-redeemable preferred stocks, at fair value (cost $6,672, 1997 and $750, 1996) 6,602 784 Common stocks, at fair value (cost $17,790, 1997 and $18,030, 1996) 23,439 22,771 Short-term investments (at cost, which approximates fair value) 209,827 106,712 Other investments 35,008 49,478 - -------------------------------------------------------------------------------------------------------------- Total investments 1, 2 879,973 852,799 Cash 12,504 12,125 Accrued investment income 9,523 10,973 Premiums receivable, less allowance for doubtful accounts of $1,575 in 1997 and $3,725 in 1996 72,813 80,545 Receivable from reinsurers, state trust funds and prepaid reinsurance premiums 8 106,067 119,524 Deferred policy acquisition costs 20,840 20,752 Properties and equipment, less accumulated depreciation 3 54,531 49,179 Federal income taxes 6 19,940 29,939 Other assets 1 75,965 66,888 - -------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $1,252,156 $1,242,724 - --------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of this statement. CalFarm 38 The Zenith
- ----------------------------------------------------------------------------------------------------------------------------- DECEMBER 31, Note 1997 1996 - ----------------------------------------------------------------------------------------------------------------------------- (Dollars and shares in thousands) LIABILITIES Policy liabilities and accruals Unpaid loss and loss adjustment expenses 13 $ 613,266 $ 620,078 Unearned premiums 128,469 127,209 Policyholders' dividends accrued 5,360 7,670 Other policyholder funds 6,407 9,109 Reserves on loss portfolio transfers 11,054 8,359 Payable to banks and other notes payable 4 13,742 14,508 Senior notes payable, less unamortized issue costs of $526, 1997 and $647, 1996 5 74,474 74,353 Other liabilities 37,518 43,935 - ----------------------------------------------------------------------------------------------------------------------------- Total liabilities 890,290 905,221 - ----------------------------------------------------------------------------------------------------------------------------- Commitments and contingent liabilities 8 STOCKHOLDERS' EQUITY Preferred stock, $1 par -- shares authorized 1,000; issued and outstanding, none in 1997 and 1996 Common stock, $1 par -- shares authorized 50,000; issued 24,681, outstanding 17,819, 1997; issued 24,447, outstanding 17,604, 1996 9 24,681 24,447 Additional paid-in capital 264,098 258,875 Retained earnings 186,268 175,684 Net unrealized appreciation on investments, net of deferred tax expense of $5,025, 1997 and $284, 1996 1, 2 9,332 528 - ----------------------------------------------------------------------------------------------------------------------------- 484,379 459,534 Less treasury stock at cost (6,862 shares, 1997 and 6,843 shares, 1996) 9 (122,513) (122,031) - ----------------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 361,866 337,503 - ----------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,252,156 $ 1,242,724 - -----------------------------------------------------------------------------------------------------------------------------
CalFarm The Zenith 39 CONSOLIDATED STATEMENT OF OPERATIONS ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES - ---------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, Note 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------------- (Dollars and shares in thousands, except per share data) CONSOLIDATED REVENUES: Premiums earned 7 $ 488,721 $ 452,856 $ 437,513 Net investment income 2 52,332 51,154 46,150 Realized gains on investments 2 14,008 10,807 3,621 Real estate sales 45,419 41,554 31,736 - --------------------------------------------------------------------------------------------------------------------------------- Total revenues 600,480 556,371 519,020 - --------------------------------------------------------------------------------------------------------------------------------- EXPENSES: Loss and loss adjustment expenses incurred 7, 13 348,165 314,700 325,589 Policy acquisition costs 92,213 84,093 81,846 Other underwriting and operating expenses 68,003 53,413 39,882 Policyholders' dividends and participation 355 2,526 5,660 Real estate construction and operating costs 44,286 39,645 29,661 Interest expense 4, 5 3,980 4,877 6,960 - --------------------------------------------------------------------------------------------------------------------------------- Total expenses 557,002 499,254 489,598 - --------------------------------------------------------------------------------------------------------------------------------- Income from continuing operations before federal income tax expense 43,478 57,117 29,422 Federal income tax expense 6 15,378 19,517 9,700 - --------------------------------------------------------------------------------------------------------------------------------- INCOME FROM CONTINUING OPERATIONS 28,100 37,600 19,722 - --------------------------------------------------------------------------------------------------------------------------------- Income from life and annuity operations of CalFarm Life (less income tax expense of $3,463) 15 6,431 Loss on disposal of CalFarm Life, including income tax expense of $4,099 15 (19,553) - --------------------------------------------------------------------------------------------------------------------------------- LOSS FROM DISCONTINUED OPERATIONS (13,122) - --------------------------------------------------------------------------------------------------------------------------------- NET INCOME $ 28,100 $ 37,600 $ 6,600 - --------------------------------------------------------------------------------------------------------------------------------- EARNINGS PER COMMON SHARE: Income from continuing operations 16 $ 1.59 $ 2.14 $ 1.08 Loss from discontinued operations (.72) - --------------------------------------------------------------------------------------------------------------------------------- NET INCOME PER COMMON SHARE $ 1.59 $ 2.14 $ 0.36 - --------------------------------------------------------------------------------------------------------------------------------- EARNINGS PER COMMON SHARE - ASSUMING DILUTION: Income from continuing operations 16 $ 1.57 $ 2.12 $ 1.08 Loss from discontinued operations (.72) - --------------------------------------------------------------------------------------------------------------------------------- Net income per common share - assuming dilution $ 1.57 $ 2.12 $ .36 - ---------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of this statement. CalFarm 40 The Zenith CONSOLIDATED STATEMENT OF CASH FLOWS ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES - ---------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) CASH FLOWS FROM OPERATING ACTIVITIES: Premiums collected $ 521,588 $ 474,831 $ 457,907 Investment income received 52,242 46,167 45,606 Proceeds from sales of real estate 45,964 41,554 31,736 Loss and loss adjustment expenses paid (342,461) (316,949) (325,200) Underwriting and other operating expenses paid (160,438) (127,975) (120,533) Real estate construction costs paid (47,565) (54,480) (34,307) Reinsurance premiums paid (27,336) (23,748) (21,586) Dividends paid to policyholders (1,284) (5,985) (13,744) Interest paid (6,910) (7,626) (8,390) Income taxes paid (8,242) (23,090) (4,578) - --------------------------------------------------------------------------------------------------------------------------------- Net cash provided by continuing operating activities, excluding cash from trading portfolio 25,558 2,699 6,911 Net proceeds from sales of trading portfolio investments 1,416 7,050 2,677 - --------------------------------------------------------------------------------------------------------------------------------- Net cash provided by continuing operating activities, including cash from trading portfolio 26,974 9,749 9,588 Net cash from discontinued operating activities, including cash from trading portfolio 12,655 - --------------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 26,974 9,749 22,243 - --------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of investments: Debt securities held-to-maturity (5,342) (141,531) Debt and equity securities available-for-sale (82,734) (447,251) (210,600) Other debt and equity securities and other investments (8,510) (13,295) (13,885) Proceeds from maturities and exchanges of investments: Debt securities held-to-maturity 6,258 8,460 4,284 Debt and equity securities available-for-sale 48,338 173,287 16,869 Other debt and equity securities and other investments 15,483 2,085 Proceeds from sales of investments: Debt and equity securities available-for-sale 104,809 261,410 293,024 Other debt and equity securities and other investments 15,211 9,656 5,086 Proceeds from the sale of CalFarm Life Insurance Company 120,000 Net change in short-term investments (103,115) 34,716 (38,522) Other (8,108) (5,784) (6,289) Net cash used in investing activities of discontinued operations (30,093) - --------------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) investing activities (12,368) 15,857 428 - --------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Cash advanced from bank line of credit 43,400 Cash repaid on bank line of credit (43,400) Cash advanced from bank loans and other notes payable 39,729 27,935 30,657 Cash repaid on bank loans and other notes payable (40,719) (25,691) (24,225) Cash dividends paid to common stockholders (17,695) (17,605) (18,273) Proceeds from exercise of stock options 4,940 2,572 4,405 Purchase of treasury shares (482) (7,611) (29,318) Net cash provided by financing activities of discontinued operations 15,644 - --------------------------------------------------------------------------------------------------------------------------------- Net cash used in financing activities (14,227) (20,400) (21,110) - --------------------------------------------------------------------------------------------------------------------------------- Net increase in cash 379 5,206 1,561 Cash at beginning of year 12,125 6,919 5,358 - --------------------------------------------------------------------------------------------------------------------------------- CASH AT END OF YEAR $ 12,504 $ 12,125 $ 6,919 - --------------------------------------------------------------------------------------------------------------------------------- RECONCILIATION OF INCOME FROM CONTINUING OPERATIONS TO NET CASH FLOWS FROM OPERATING ACTIVITIES: Income from continuing operations $ 28,100 $ 37,600 $ 19,722 Adjustments to reconcile income from continuing operations to net cash flows from operating activities: Depreciation and amortization 5,716 3,081 4,975 Realized gains on investments (14,008) (10,807) (3,621) Net cash from trading portfolio 1,416 7,050 2,677 Net cash flow from discontinued operations 12,655 Decrease (increase) in: Premiums receivable 7,732 (3,467) (3,243) Receivable from reinsurers 13,457 (1,824) (6,168) Deferred policy acquisition costs (88) (413) (1,833) Real estate construction in progress and land held for development (8,038) (19,601) (5,596) Increase (decrease) in: Unpaid loss and loss adjustment expenses (6,812) (164) 7,416 Unearned premiums 1,260 7,618 2,234 Policyholders' dividends accrued (2,310) (5,570) (8,422) Federal income taxes 6,385 (3,574) 4,946 Other (5,836) (180) (3,499) - --------------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities $ 26,974 $ 9,749 $ 22,243 - ---------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of this statement. CalFarm The Zenith 41 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES - --------------------------------------------------------------------------------
PREFERRED COMMON THREE YEARS ENDED DECEMBER 31, 1997 NOTE STOCK $1 PAR STOCK $1 PAR - --------------------------------------------------------------------------- (Dollars in thousands, except per share data) BALANCE AT JANUARY 1, 1995 $ 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 Net income for 1997 Net unrealized appreciation on investments, net of deferred tax expense of $4,741 2 Exercise of 234,000 stock options 9 234 Tax benefit on options exercised in 1997 Purchase of 19,000 treasury shares at cost Cash dividends declared to common stockholders ($1.00 per share, paid quarterly) - --------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1997 $ 24,681 - ---------------------------------------------------------------------------
The accompanying notes are an integral part of this statement. CalFarm 42 The Zenith - --------------------------------------------------------------------------------
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, 1995 $ 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 Net income for 1997 28,100 28,100 Net unrealized appreciation on investments, net of deferred tax expense of $4,741 8,804 8,804 Exercise of 234,000 stock options 4,706 4,940 Tax benefit on options exercised in 1997 517 517 Purchase of 19,000 treasury shares at cost (482) (482) Cash dividends declared to common stockholders ($1.00 per share, paid quarterly) (17,516) (17,516) - --------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1997 $ 264,098 $ 186,268 $ 9,332 $(122,513) $ 361,866 - ---------------------------------------------------------------------------------------------------------------------
CalFarm The Zenith 43 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES NOTE 1 SUMMARY OF ACCOUNTING POLICIES, OPERATIONS AND PRINCIPLES OF CONSOLIDATION Zenith National Insurance Corp. ("Zenith") is engaged through its wholly-owned property-casualty insurance subsidiaries in the business of writing workers' compensation insurance, approximately 54% of which is in California; reinsurance, principally of world-wide property and catastrophe risks; and automobile, homeowners, farmowners, commercial coverages and health insurance and other coverages primarily in the rural and suburban 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:
- -------------------------------------------------------------------------------------- 1997 1996 ---------------------- ---------------------- CARRYING FAIR Carrying Fair (Dollars in thousands) NOTE AMOUNT VALUE amount value - -------------------------------------------------------------------------------------- ASSETS: Investments: Trading securities 2 $ 2,982 $ 2,982 $ 4,149 $ 4,149 Other investments 2 876,991 878,309 848,650 848,410 ---------- ---------- ---------- ---------- 879,973 881,291 852,799 852,559 LIABILITIES: Other notes payable 4 2,334 2,334 3,361 3,361 Payable to banks 4 11,408 11,408 11,147 11,147 Senior notes payable 5 74,474 82,365 74,353 82,406 - --------------------------------------------------------------------------------------
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, net of deferred taxes. 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 32 items whose values were obtained from other brokers making a market in the investment, the Bloomberg financial news service, and analytical pricing CalFarm 44 The Zenith 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 debt securities with maturities of less than one year at the time of purchase. For these short-term investments, the carrying amount is a reasonable estimate of fair value. CASH Cash includes currency on hand and demand deposits with financial institutions. RECOGNITION OF PROPERTY-CASUALTY REVENUE AND EXPENSE Property-Casualty premiums are earned on a pro rata basis over the terms of the policies. Premiums applicable to the unexpired terms of policies in force are recorded as unearned premiums. 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 loss and loss adjustment 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 currently reserved. An estimated provision for workers' compensation policyholders' dividends is accrued as the related premiums are earned. Such dividends do not become a fixed liability unless and until declared by the respective Boards of Directors of Zenith's insurance subsidiaries. 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 earthquakes. In addition, premium revenues for most property and casualty insurance coverages written in California (except workers' compensation and health) 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 supporting 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 52% of amounts recoverable from reinsurers at December 31, 1997 CalFarm The Zenith 45 are attributable to reinsurance arrangements with one large United States reinsurance company. No material amounts due from reinsurers have been written off as uncollectable in the three years ended December 31, 1997. 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. Beginning in 1998, certain costs of computer software developed or obtained for internal use will be capitalized and amortized over the useful life of the software. 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 $405,000 in 1997, $412,000 in 1996 and $487,000 in 1995, and accumulated amortization was $6,573,000 at December 31, 1997 and $6,168,000 at December 31, 1996. At December 31, 1997, intangible assets were $7,001,000, of which $4,992,000 are amortizable. EARNINGS PER SHARE In 1997, the FASB issued Statement No. 128, "Earnings per Share" ("SFAS No. 128"). SFAS No. 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented, and where appropriate, restated to conform to the SFAS No. 128 requirements. RECENTLY ISSUED ACCOUNTING STANDARDS In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130 is effective for periods beginning after December 15, 1997. SFAS No. 130 requires companies to report comprehensive income and its components in a financial statement which would include net income in addition to unrealized appreciation (depreciation) on available-for-sale securities that are currently presented as components of stockholders' equity. In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131 is effective for periods beginning after December 15, 1997. SFAS No. 131 specifies revised guidelines for determining an entity's operating segments and the type and level of financial information to be disclosed. Zenith has not determined the final presentation impact of SFAS No. 131 but does believe that additional segments will be reported in 1998. PROPOSED CODIFICATION OF STATUTORY ACCOUNTING PRINCIPLES The National Association of Insurance Commissioners is in the process of codifying statutory accounting principles to provide a comprehensive basis of statutory accounting and reporting for use by insurance departments, CalFarm 46 The Zenith insurers, and auditors. The codified principles have not yet been finalized; therefore, the effective date has not been determined. Implementation of the codified statutory accounting principles may affect the surplus level and the capitalization requirement of Zenith's insurance subsidiaries on a statutory basis. Zenith has not determined the impact of the codification. RECLASSIFICATIONS AND RESTATEMENTS Certain 1995 and 1996 amounts have been reclassified to conform to the 1997 presentation. All 1996 and 1995 earnings per share data have been restated in accordance with SFAS No. 128. See EARNINGS PER SHARE above and Note 16. 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, 1997 COST GAINS (LOSSES) VALUE - -------------------------------------------------------------------------- HELD-TO-MATURITY Corporate debt $ 5,335 $ 371 $ 5,706 Mortgage-backed 41,613 947 42,560 - -------------------------------------------------------------------------- Total, held-to- maturity $ 46,948 $ 1,318 $ 48,266 - -------------------------------------------------------------------------- AVAILABLE-FOR-SALE U.S. Treasuries $ 131,929 $ 424 $ 132,353 Corporate debt 313,641 7,443 $ (954) 320,130 Mortgage-backed 70,190 788 (634) 70,344 Redeemable preferred stocks 16,040 729 (52) 16,717 Equities 39,051 7,012 (399) 45,664 Short-term investments 209,827 209,827 - -------------------------------------------------------------------------- Total, available- for-sale $ 780,678 $ 16,396 $ (2,039) $ 795,035 - -------------------------------------------------------------------------- TRADING Corporate debt $ 2,971 $ (36) $ 2,935 Equities 25 $ 22 47 - -------------------------------------------------------------------------- Total, trading $ 2,996 $ 22 $ (36) $ 2,982 - -------------------------------------------------------------------------- - -------------------------------------------------------------------------- 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 - --------------------------------------------------------------------------
Debt securities at December 31, 1997, are due as follows:
- ------------------------------------------------------ (Dollars in thousands) AMORTIZED FAIR DECEMBER 31, 1997 COST VALUE - ------------------------------------------------------ HELD-TO-MATURITY: Due after ten years $ 46,948 $ 48,266 - ------------------------------------------------------ Total $ 46,948 $ 48,266 - ------------------------------------------------------ AVAILABLE-FOR-SALE: Due in one year or less $ 267,594 $ 267,630 Due after one year through five years 221,609 224,428 Due after five years through ten years 136,128 138,853 Due after ten years 116,296 118,460 - ------------------------------------------------------ Total $ 741,627 $ 749,371 - ------------------------------------------------------ TRADING: Due after one year through five years $ 2,971 $ 2,935 - ------------------------------------------------------ Total $ 2,971 $ 2,935 - ------------------------------------------------------
CalFarm The Zenith 47 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 1997, 1996 and 1995 were $5,067,000, $8,564,000, and $4,161,000, respectively and the gross realized losses were $959,000, $2,355,000, and $1,604,000, respectively. Investment income is summarized as follows:
- ------------------------------------------------------------------- (Dollars in thousands) YEAR ENDED DECEMBER 31, 1997 1996 1995 - ------------------------------------------------------------------- Fixed maturities Bonds $ 42,837 $ 37,968 $ 37,019 Redeemable preferred stocks 1,289 1,578 1,143 Equity securities Floating rate preferred stocks 872 876 1,229 Convertible and nonredeemable preferred stocks 337 402 281 Common stocks 595 758 571 Short-term investments 8,090 9,257 6,555 Other 1,489 3,608 1,703 - ------------------------------------------------------------------- 55,509 54,447 48,501 Less investment expenses 3,177 3,293 2,351 - ------------------------------------------------------------------- Net investment income $ 52,332 $ 51,154 $ 46,150 - -------------------------------------------------------------------
Investments carried at their fair value of $294,309,000 at December 31, 1997 and $305,440,000 at December 31, 1996 were on deposit with regulatory authorities in compliance with insurance company regulations. At December 31, 1997, Zenith and its subsidiaries owned $6,370,000, at fair value, of securities issued by Reliance Insurance Company, its parent and affiliates. Reliance Insurance Company is a major stockholder of Zenith. During the fourth quarter of 1997, Zenith and its subsidiaries sold $12,500,000 of securities in Delta Life Corporation for $17,944,000 in cash resulting in $5,444,000 pretax realized gain. The former 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, 1997 1996 - ------------------------------------------------------ Land $ 14,836 $ 14,836 Buildings 31,852 31,642 Furniture, fixtures and equipment 37,627 32,249 - ------------------------------------------------------ 84,315 78,727 Less accumulated depreciation 29,784 29,548 - ------------------------------------------------------ Total $ 54,531 $ 49,179 - ------------------------------------------------------
Depreciation expense amounted to $5,788,000, $5,503,000, and $4,949,000 in 1997, 1996 and 1995, respectively. NOTE 4 PAYABLE TO BANKS AND OTHER NOTES PAYABLE Zenith has three lines of credit available with aggregate availability of $100 million. As of December 31, 1997 and 1996, there were no outstanding balances on these unsecured lines of credit. Interest on funds borrowed through these three lines of credit is payable at the bank's prime rate, less .55%, or a fixed rate chosen by Zenith; at the bank's prime rate, less .50%, or a fixed rate chosen by Zenith; and at the bank's prime rate or IBOR plus a margin of 0.375%. 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 1997 and 1996. The prime interest rate was 8.50% and 8.25% at December 31, 1997 and 1996, respectively. Perma-Bilt has two construction loan agreements, each providing for a subdivision lot CalFarm 48 The Zenith development loan and a construction revolving line of credit loan, bearing interest at prime plus 1.0% and prime plus 0.75%, respectively. Each agreement pertains to a separate residential housing project and the maximum that may be borrowed under the two agreements combined is $25,275,000. At December 31, 1997, $11,408,000 was outstanding with respect to these loans. The loans mature between April 20, 1998 and June 5, 1999. The carrying value of these variable-rate loans approximates fair value at December 31, 1997. 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 August 2004. The balance outstanding with respect to these notes was $2,334,000 at December 31, 1997. 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 are being amortized over the term of the notes and $121,000 of such costs were amortized each year for the three years ended December 31, 1997. 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, 1997 of the 9% Notes is $82,365,000 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, 1997 1996 1995 - --------------------------------------------------------------------- Interest capitalized for real estate operations $3,755 $3,127 $1,572 Interest not related to real estate operations 3,980 4,877 6,960 - --------------------------------------------------------------------- Total interest incurred $7,735 $8,004 $8,532 - ---------------------------------------------------------------------
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, 1997 1996 1995 - ------------------------------------------------------------ Current $ 10,989 $ 19,979 $5,947 Deferred 4,389 (462) 3,753 - ------------------------------------------------------------ Total federal income taxes $ 15,378 $ 19,517 $9,700 - ------------------------------------------------------------
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, 1997 1996 1995 - ------------------------------------------------------------------- Statutory federal income tax $15,217 $19,991 $10,298 Increase (reduction) in taxes: Dividend received deduction and tax- exempt interest (693) (846) (710) Other 854 372 112 - ------------------------------------------------------------------- Total federal income taxes $15,378 $19,517 $ 9,700 - -------------------------------------------------------------------
CalFarm The Zenith 49 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: - ------------------------------------------------------------------------------
1997 1996 (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 $ 5,521 $ 602 Deferred policy acquisition costs 7,294 7,263 Purchased intangibles 1,747 1,991 Properties and equipment 4,371 2,385 Property-Casualty loss reserve discount $ 27,039 $ 28,070 Limitation on deduction for unearned premiums 8,513 8,515 Policyholders' dividends accrued 1,876 2,286 Other 2,538 5,230 2,272 5,348 - ------------------------------------------------------------------------------ 39,966 24,163 41,143 17,589 - ------------------------------------------------------------------------------ Net deferred tax assets $ 15,803 $ 23,554 - ------------------------------------------------------------------------------
Zenith's deferred tax assets will be fully realized because all future deductible amounts can be offset by future taxable amounts or recovery of federal income taxes paid within the statutory carryback period. Property-Casualty loss reserves are not discounted for book purposes, however the Tax Reform Act of 1986 requires property and casualty loss reserves to be discounted for tax purposes. Current taxes receivable and deferred taxes were as follows:
- -------------------------------------------------------- (Dollars in thousands) YEAR ENDED DECEMBER 31, 1997 1996 - -------------------------------------------------------- Current taxes receivable $ 4,137 $ 6,385 Net deferred tax asset 15,803 23,554 - -------------------------------------------------------- Federal income taxes $ 19,940 $ 29,939 - --------------------------------------------------------
Zenith files a consolidated federal income tax return. Zenith's insurance subsidiaries pay premium taxes on gross premiums written in lieu of most state income or franchise taxes. NOTE 7 REINSURANCE Reinsurance transactions reflected in the financial statements are as follows:
- ------------------------------------------------------------ (Dollars in thousands) 1997 1996 1995 - ------------------------------------------------------------ Ceded reinsurance netted against earned premiums for the year $ 26,191 $ 24,642 $ 21,112 Ceded reinsurance netted against property and casualty loss and loss adjustment expenses incurred 10,491 12,396 15,532 Net assumed reinsurance included in earned premiums for the year 37,385 41,930 45,367 - ------------------------------------------------------------
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 $97,000, $181,000, and $460,000 for 1997, 1996 and 1995, respectively. Zenith Insurance (through AGC-SIF) also maintains aggregate and specific excess of loss reinsurance agreements with Reliance Insurance Company. Included in receivable from reinsurers is $14,872,000 relating to this reinsurance arrangement. 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 $80,000,000 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. CalFarm 50 The Zenith NOTE 8 COMMITMENTS AND CONTINGENT LIABILITIES Zenith and its subsidiaries lease space for some of its offices expiring through 2003, 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, 1997 are as follows:
- --------------------------------------------------------------- (Dollars in thousands) EQUIPMENT AND YEAR AUTO FLEET OFFICES TOTAL - --------------------------------------------------------------- 1998 $ 939 $ 3,026 $ 3,965 1999 474 2,237 2,711 2000 114 1,771 1,885 2001 1,388 1,388 2002 1,156 1,156 Thereafter 352 352 - --------------------------------------------------------------- Total $ 1,527 $ 9,930 $ 11,457 - ---------------------------------------------------------------
Rental expenses for 1997, 1996 and 1995 amounted to $5,925,000, $5,358,000, and $5,397,000, respectively. Zenith and its subsidiaries are involved in certain litigation. In the opinion of management and legal counsel, such litigation is either without merit or the ultimate liability, if any, will not have a material effect on the consolidated financial condition of Zenith. CONTINGENCIES SURROUNDING RECOVERABILITY OF STATE DISABILITY TRUST FUND RECEIVABLES Florida has created the Special Disability Trust Fund ("the Fund") which assesses Workers' Compensation insurers to pay for what are commonly referred to as "Second Injuries". Historic assessments have been inadequate to completely fund obligations of the Fund. In late 1997, the Florida statute was amended so that the Fund will not be liable for and will not reimburse employers or carriers for Second Injuries occurring on or after January 1, 1998. Zenith has recorded its receivable from the fund for Second Injuries based on specific claims and historical experience prior to January 1, 1998. Management believes that this receivable will be substantially recovered. At December 31, 1997 and 1996, the receivable from the Fund was $5,094,000 and $8,096,000, respectively. During 1997, $3,053,000 was collected. CONTINGENCIES SURROUNDING ESTIMATES OF LIABILITIES FOR UNPAID LOSS AND LOSS ADJUSTMENT EXPENSES In 1995, Zenith's new workers' compensation computer system ("system") became operational. Management observed certain unusual claim reserving trends and patterns in 1995 and 1996, and to a much lesser degree, during the first three quarters of 1997. Based on currently available data, these claim reserving trends and patterns have stabilized. Any subsequent re-interpretation of new information that becomes available from the system which may change the estimate of such liabilities in future periods is not considered to have a material impact on the financial position or results of operations. 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, 1997 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 1997, 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 as follows: CalFarm The Zenith 51
- ------------------------------------------------------------------------------------------------------------------------------------ (Dollars in thousands except per share data) 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------------ AS REPORTED PRO FORMA As Reported Pro forma As Reported Pro forma - ------------------------------------------------------------------------------------------------------------------------------------ Net income $ 28,100 $ 26,583 $ 37,600 $ 36,647 $ 6,600 $ 6,541 Net income per common share 1.59 1.50 2.14 2.08 0.36 0.36 Net income per common share - assuming dilution 1.57 1.49 2.12 2.06 0.36 0.36 - ------------------------------------------------------------------------------------------------------------------------------------
1996 and 1995 earnings per share data have been restated in accordance with SFAS No. 128. The pro-forma effect on net income for 1997, 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:
- -------------------------------------------------------------------------------------- 1997 1996 1995 GRANTS Grants Grants - -------------------------------------------------------------------------------------- Risk-free interest rates 5.70% 6.50% 6.20% Dividend yields 4.10% 4.20% 4.20% Volatility factors 16.94% 27.40% 27.40% Weighted average expected life Five-year term options 5 YEARS 4 years 4 years Ten-year term options -- 10 years -- Weighted average fair value per share $4.07 $6.16 $4.43 - --------------------------------------------------------------------------------------
Additional information with respect to stock options is as follows:
- ------------------------------------------------------------------- WEIGHTED NUMBER AVERAGE OF EXERCISE (Options in thousands) SHARES PRICE - ------------------------------------------------------------------- Outstanding at January 1, 1995 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 Granted 590 26.95 Exercised 234 21.12 Expired or cancelled 74 25.31 - ------------------------------------------------------------------- Outstanding at December 31, 1997 2,630 $24.58 - -------------------------------------------------------------------
Options exercisable at December 31, 1997, 1996, and 1995 were 737,000, 474,000 and 335,000, respectively. Certain information on outstanding options is as follows:
- ------------------------------------------------------------------ (Options in thousands) WEIGHTED RANGE OF AVERAGE OUTSTANDING OPTIONS EXERCISE NUMBER REMAINING LIFE WEIGHTED AVERAGE PRICE OUTSTANDING IN YEARS EXERCISE PRICE - ------------------------------------------------------------------ $23.63 1,000 8.2 $ 23.63 $20.94 - $28.19 1,630 3.4 25.16 - ------------------------------------------------------------------
Certain information on exercisable options is as follows:
- ------------------------------------------------ (Options in EXERCISABLE thousands) OPTIONS WEIGHTED RANGE OF NUMBER AVERAGE EXERCISE EXERCISE PRICES EXERCISABLE PRICE - ------------------------------------------------ $23.63 200 $ 23.63 $20.94 - $28.19 537 23.96 - ------------------------------------------------
At December 31, 1997, Zenith had authority from its Board of Directors to repurchase 1,085,000 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 $346,097,000 as of December 31, 1997, of which $27,841,000 can be paid in 1998 to Zenith in dividends without prior approval, leaving a restricted balance of $318,256,000. NOTE 11 STATUTORY FINANCIAL DATA Capital stock and surplus and net income of Zenith's insurance subsidiaries on a statutory CalFarm 52 The Zenith basis as reported to regulatory authorities were as follows:
- ------------------------------------------------------ (Dollars in thousands) YEAR ENDED DECEMBER 31, 1997 1996 1995 - ------------------------------------------------------ Capital stock and surplus $ 279,993 $ 265,341 $ 223,019 Net income 31,820 33,384 17,157 - ------------------------------------------------------
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, 1997 31 30 30 31 - ----------------------------------------------------------------------- Premium earned $ 122,363 $ 125,831 $ 120,475 $ 120,052 Net investment income 12,448 13,406 13,272 13,206 Realized gains on investments 1,876 1,996 1,861 8,275 Real estate sales 9,963 11,174 11,480 12,802 Net income 7,100 7,900 8,000 5,100 Net income per common share .40 .45 .45 .29 Net income per common share -- assuming dilution .40 .44 .45 .28 - -----------------------------------------------------------------------
The first three quarters of 1997 have been restated in accordance with SFAS No. 128. The fourth quarter of 1997 net income reflects an approximate $12,000,000 loss and expense reserve strengthening for prior accident years.
- --------------------------------------------------------------------------------- (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 common share .70 .61 .52 .31 Net income per common share -- assuming dilution .70 .60 .51 .30 - ---------------------------------------------------------------------------------
The 1996 quarterly earnings per share amounts have been restated to comply with SFAS No. 128. NOTE 13 LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES The following table represents a reconciliation of changes in liabilities for unpaid property-casualty loss and loss adjustment expenses for the three years ended December 31, 1997.
- --------------------------------------------------------------- (Dollars in thousands) 1997 1996 1995 - --------------------------------------------------------------- Beginning of year, net of reinsurance recoverable $526,427 $463,123 $462,710 Incurred claims: Current year 348,514 318,509 327,724 Prior years (349) (3,809) (2,135) - --------------------------------------------------------------- Total incurred claims 348,165 314,700 325,589 - --------------------------------------------------------------- Payments: Current year (138,393) (131,061) (149,688) Prior years (209,346) (185,764) (175,488) - --------------------------------------------------------------- Total payments (347,739) (316,825) (325,176) - --------------------------------------------------------------- End of year, net of reinsurance 526,853 460,998 463,123 Reinsurance recoverable 87,665 56,390 54,429 - --------------------------------------------------------------- End of year, before AGC-SIF 517,388 517,552 - --------------------------------------------------------------- AGC-SIF December 31, 1996 balances acquired: Reserves, net 65,429 Recoverable from reinsurers and state trust funds 37,261 Change in net reserves and recoverables from reinsurers and state trust funds (1,252) - --------------------------------------------------------------- End of year, after AGC-SIF $613,266 $620,078 $517,552 - ---------------------------------------------------------------
Statutory reserves differ from GAAP in 1997 and 1996 by the amount of the deposit receivable from Reliance, which is treated as reinsurance recoverable for statutory purposes. Subsequent development of AGC-SIF net reserves acquired at December 31, 1996 is included in the Member distribution formula under the terms of the acquisition. (See Note 14). NOTE 14 ACQUISITIONS ACQUISITION OF AGC-SIF On December 31, 1996, Zenith completed the 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 CalFarm The Zenith 53 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 acquisition 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. PENDING ACQUISITION OF RISCORP On June 17, 1997, Zenith announced that its wholly-owned subsidiary, Zenith Insurance Company ("Zenith Insurance"), had entered into an agreement with RISCORP, Inc. ("RISCORP") to purchase all of the assets of RISCORP related to its workers' compensation business, including RISCORP's existing in-force business, as well as the right to all new and renewal policies. Zenith Insurance will also purchase RISCORP's "First Call" managed care workers' compensation system. After the transaction closes, RISCORP will no longer engage in the workers' compensation or managed care businesses. In connection with the transaction, Zenith Insurance will assume certain liabilities related to RISCORP's insurance businesses. In addition, Zenith Insurance will assume or repay $15 million in indebtedness of RISCORP. The purchase price, which will be in cash, will be the difference between the book value of the assets purchased and the book value of the liabilities assumed by Zenith Insurance on the closing date, subject to a minimum purchase price of $35 million. Zenith intends to fund the closing of this transaction with bank financing and internal funds. Effective June 18, 1997, Zenith Insurance entered into a reinsurance agreement with RISCORP. Under the reinsurance agreement, Zenith Insurance has reinsured all of RISCORP's liabilities on or after June 18, 1997 in respect of new, renewal, and in-force Florida workers' compensation policies in the event RISCORP is declared insolvent under applicable insurance law pursuant to court order prior to the closing. RISCORP has assigned to Zenith Insurance its right to receive certain payments from other reinsurers in respect of the business Zenith Insurance has reinsured. In addition, RISCORP has established a trust account of approximately $50 million to reimburse Zenith Insurance for any amounts paid under the reinsurance agreement. The assets in such RISCORP trust account are not included in Zenith's consolidated balance sheet. Although there can be no assurance that such amount ultimately would be sufficient to reimburse Zenith fully for such payments, Zenith believes that any contingent liability under this agreement as of December 31, 1997 would not be material. The closing of the purchase of RISCORP's assets and liabilities is subject to certain conditions, including compliance with contract provisions, the review and approval by appropriate regulatory agencies and approval by RISCORP's shareholders. The agreement has been approved by the Boards of Directors of Zenith, Zenith Insurance, and RISCORP. The purchase price will be determined based on an audited statement of transferred assets and liabilities of the business as of the closing date, after agreement by Zenith or, if necessary, determination by neutral auditors and actuaries of any disputed items in the statement. As a result, management is currently unable to determine the purchase price. Zenith will not be purchasing the stock of RISCORP or its affiliates or assuming the liabilities that are unrelated to the insurance business, including liabilities related to any present or future litigation against those companies. CalFarm 54 The Zenith Set forth below is certain summary consolidated financial information with respect to RISCORP and its subsidiaries excerpted from the information contained in RISCORP's Annual Report on Form 10-K for the year ended December 31, 1996 and RISCORP's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997. Neither Zenith nor its independent accountants take any responsibility for the accuracy or completeness of this information. Selected Consolidated Financial Information of RISCORP
- ---------------------------------------------------------------- Nine Months Ended Year Ended (Dollars in September 30, December 31, thousands) 1997 1996 1996 1995 - ---------------------------------------------------------------- Operating results: Premiums earned $ 133,882 $ 131,855 $ 173,557 $ 135,887 Fee and other income 17,969 23,079 31,838 23,413 Net investment income 12,557 7,592 12,194 6,708 Total revenues 164,408 162,526 217,589 166,008 Net income 3,810 9,301 2,398 13,683 Balance sheet: Invested assets 209,134 241,143 255,656 69,365 Receivable from reinsurers, state trust funds and other 349,105 320,378 363,957 257,013 Total assets 769,276 741,135 828,442 443,242 Unpaid loss and loss adjustment expenses 460,428 406,354 458,239 261,700 Total liabilities 607,328 579,801 671,134 427,085 Stockholders' equity 161,948 161,334 157,308 16,157 - ----------------------------------------------------------------
Audits of RISCORP's financial statements were performed by an independent accounting firm, other than Zenith's independent accounting firm, whose 1996 report included an explanatory paragraph describing several adverse developments and uncertainties. NOTE 15 DISCONTINUED OPERATIONS During 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 taxes. The life and annuity operations of CalFarm Life are presented as discontinued operations in the financial statements. Group health insurance operations are included in the property-casualty business segment. Revenues for the discontinued operation were $88,610,000 for 1995. NOTE 16 EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share.
- --------------------------------------------------------------- (In thousands, except per share data) 1997 1996 1995 - --------------------------------------------------------------- (A)Income from continuing operations $ 28,100 $ 37,600 $ 19,722 - --------------------------------------------------------------- (B)Weighted average outstanding shares during the period 17,716 17,594 18,273 Additional common shares issuable under employee stock option plans using the treasury stock method 170 158 61 - --------------------------------------------------------------- (C)Weighted average number of common shares outstanding assuming exercise of stock options 17,886 17,752 18,334 - --------------------------------------------------------------- (A)/(B) Income from continuing operations per share $ 1.59 $ 2.14 $ 1.08 (A)/(C) Income from continuing operations per share assuming dilution $ 1.57 $ 2.12 $ 1.08 - ---------------------------------------------------------------
Options to purchase 407,000 shares of common stock at an average price of $28 per share were outstanding as of December 31, 1997 but were not included in the computation of diluted earnings per share because the options' exercise prices were greater than the average market price of the common shares, and, therefore, the effect would be antidilutive. NOTE 17 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 and casualty insurance operations offer multiple product line direct insurance and reinsurance. Investments and related income of the property and casualty insurance companies are available for payment of claims and benefits and have not been identified with individual product lines. CalFarm The Zenith 55 The following table is a summary of results by major segments:
- ----------------------------------------------------------------------------------------------------- (Dollars in thousands except per share data) YEAR ENDED DECEMBER 31 1997 1996 1995 - ----------------------------------------------------------------------------------------------------- PROPERTY-CASUALTY Net written premiums $ 487,113 $ 458,061 $ 439,882 Net earned premiums 488,721 452,856 437,513 Investment income 51,136 48,457 45,931 Underwriting income (loss) (16,459) 1,093 (13,600) Income from continuing operations after taxes and before realized gains(1) 24,929 32,629 21,608 Income from continuing operations after taxes 33,296 39,654 23,934 Identifiable assets 1,137,385 1,137,520 1,005,133 - ----------------------------------------------------------------------------------------------------- PARENT Real estate sales 45,419 41,554 31,736 Investment income 1,196 2,697 219 (Loss) from continuing operations after taxes and before realized gains(1) (5,260) (2,054) (4,240) (Loss) from continuing operations after taxes (5,196) (2,054) (4,212) Identifiable assets 117,877 108,350 115,429 - ----------------------------------------------------------------------------------------------------- CONSOLIDATED TOTAL Net earned premiums 488,721 452,856 437,513 Real estate sales 45,419 41,554 31,736 Investment income 52,332 51,154 46,150 Underwriting income (loss) (16,459) 1,093 (13,600) Income from continuing operations after taxes and before realized gains(1) 19,669 30,575 17,368 Income from continuing operations 28,100 37,600 19,722 Loss from discontinued life and annuity operations, net of taxes (13,122) Net income(2) 28,100 37,600 6,600 Per share 1.59 2.14 .36 Per share-assuming dilution 1.57 2.12 .36 Total assets(3) $ 1,252,156 $ 1,242,724 $ 1,115,433 - ----------------------------------------------------------------------------------------------------- (1) Realized gains on investments after taxes were as follows: 1997 1996 1995 --------------------------------------- Property-Casualty $ 8,367 $ 7,025 $ 2,326 Parent 64 28 --------------------------------------- Consolidated Total $ 8,431 $ 7,025 $ 2,354 (2) 1996 and 1995 amounts have been restated in accordance with SFAS No. 128. (3) Reflects elimination entry of $3,106,000, $3,146,000, and $5,129,000 in 1997, 1996 and 1995, respectively.
NOTE 18 UNAUDITED COMMON STOCK MARKET PRICES The following table shows the high and low common stock prices during each quarter for the past two years.
- ----------------------------------------------------------------------------------- 1997 1996 ------------------ ------------------ HIGH LOW High Low - ----------------------------------------------------------------------------------- March 31 27 7/8 25 7/8 24 7/8 21 1/8 June 30 27 1/2 24 5/8 28 7/8 23 7/8 September 30 28 5/8 26 5/16 28 1/2 26 1/4 December 31 28 3/4 25 7/16 28 25 1/4 - -----------------------------------------------------------------------------------
NOTE 19 SUBSEQUENT EVENT As previously announced, on January 6, 1998, Zenith repurchased 930,000 shares of its common stock on the open market at $25 per share, reducing the outstanding shares to 16,889,000. CalFarm 56 The Zenith 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, 1997 AND 1996, AND THE RELATED CONSOLIDATED STATEMENTS OF OPERATIONS, CASH FLOWS, AND STOCKHOLDERS' EQUITY FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997. 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, 1997 AND 1996, AND THE CONSOLIDATED RESULTS OF THEIR OPERATIONS AND THEIR CASH FLOWS FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997, IN CONFORMITY WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES. COOPERS & LYBRAND L.L.P. LOS ANGELES, CALIFORNIA, FEBRUARY 4, 1998 CalFarm The Zenith 57 CORPORATE DIRECTORY CalFarm The Zenith CORPORATE DIRECTORY ZENITH NATIONAL INSURANCE CORP. DIRECTORS Also Directors of Zenith Insurance Company GEORGE E. BELLO Executive Vice President and Controller of Reliance Group Holdings, Inc. MAX M. KAMPELMAN Attorney, Of Counsel, Fried, Frank, Harris, Shriver & Jacobson JACK M. OSTROW Attorney and Certified Public Accountant WILLIAM S. SESSIONS Attorney Sessions & Sessions, L.C., Security Consultant HARVEY L. SILBERT Attorney, Of Counsel, Loeb & Loeb LLP ROBERT M. STEINBERG President and Chief Operating Officer of Reliance Group Holdings, Inc. SAUL P. STEINBERG Chairman of the Board and Chief Executive Officer of Reliance Group Holdings, Inc. GERALD TSAI, JR. Management of Private Investments STANLEY R. ZAX Chairman of the Board and President OFFICERS STANLEY R. ZAX Chairman of the Board and President FREDRICKA TAUBITZ Executive Vice President & Chief Financial Officer WESTLEY M. HEYWARD Senior Vice President MICHAEL W. JACOBSON Senior Vice President JAMES P. ROSS Senior Vice President JOHN J. TICKNER Senior Vice President and Secretary HYMAN J. LEE, JR. Vice President TRANSFER AGENT- COMMON STOCK ChaseMellon Shareholder Services, L.L.C. Los Angeles, CA Internet Address: www.chasemellon.com TRANSFER AGENT- SENIOR NOTES Norwest Bank Minnesota, N.A. Minneapolis, MN CORPORATE HEADQUARTERS 21255 Califa Street Woodland Hills, CA 91367-5021 Internet Address: www.zenithnational.com NYSE TRADING SYMBOL Common stock -- ZNT INDEPENDENT ACCOUNTANT Coopers & Lybrand L.L.P. Los Angeles, CA THE ANNUAL REPORT on Form 10-K, for the fiscal year ended December 31, 1997 may be obtained free of charge upon written request to: Chief Financial Officer Zenith National Insurance Corp. 21255 Califa Street Woodland Hills, CA 91367-5021 CalFarm The Zenith 59 CORPORATE DIRECTORY ZENITH INSURANCE COMPANY OFFICERS STANLEY R. ZAX Chairman of the Board and President FREDRICKA TAUBITZ Executive Vice President & Chief Financial Officer JACK D. MILLER Executive Vice President JAMES P. ROSS Senior Vice President, President of Workers' Compensation Division STEPHEN J. ALBERS Senior Vice President JOHN E. BRODERICK Senior Vice President JOHN V. D'ALUSIO Senior Vice President DAN M. HAIR Senior Vice President JOHN C. HASBROUCK Senior Vice President WESTLEY M. HEYWARD Senior Vice President PHILIP R. HUNT Senior Vice President COREY A. INGBER Senior Vice President MICHAEL W. JACOBSON Senior Vice President EDWARD G. KRISAK Senior Vice President ROBERT E. MEYER Senior Vice President and Actuary TERRY D. MOORE Senior Vice President WILLIAM J. SAAKE Senior Vice President DOUGLAS L. SYMES Senior Vice President JOHN J. TICKNER Senior Vice President, General Regulatory Counsel and Secretary KEITH E. TROTMAN Senior Vice President CHRIS L. USELTON Senior Vice President GLEN R. ZEPNICK Senior Vice President BRYAN A. ANDERSON Vice President NORMAN H. BAKER Vice President JEFFREY J. BEAUDOIN Vice President JOHN P. BENSON Vice President SUZANNE M. CHAPAN Vice President RONALD W. CRABTREE Vice President CHARLES R. CRONIN, JR. Vice President GERALD D. CURTIN Vice President F. STEPHEN FETCHET Vice President ROBERT L. HERNANDEZ Vice President CAROLYN HINSON Vice President DAVID G. HOPPEN Vice President FRED A. HUNT Vice President MARK M. JANSEN Vice President HYMAN J. LEE, JR. Vice President ALLAN T. LENO Vice President LINDA K. MANGONE Vice President COLIN S. MITCHELL Vice President DORIS M. OBERHARDT Vice President DAVID A. O'CONNOR Vice President WILLIAM J. OWEN Vice President MICHAEL J. PALADINO Vice President ANGELA PARMALEE Vice President STEPHEN D. PETRULA Vice President S. ROBIN REEVES Vice President DIANE E. SCHAEFER Vice President ALAN I. STEINHARDT Vice President JOHN A. SWIFT Vice President TERRY B. THOMPSON Vice President JESSICA ANN VASQUEZ Vice President DAVID A. WEISMAN Vice President PAUL M. WILLIAMS Vice President NORMAN C. WINTERS Vice President LAURA F. YAMANAKA Vice President CalFarm 60 The Zenith CORPORATE DIRECTORY THEZENITH MARKETING, UNDERWRITING AND CLAIMS OFFICES LOS ANGELES Corporate Headquarters 21255 Califa Street Woodland Hills, CA 91367 818/713-1000 Internet Address: www.thezenith.com PLEASANTON, CA (San Francisco Bay Area) 4309 Hacienda Drive Suite 200 Pleasanton, CA 94588 510/460-0600 FRESNO, CA 575 E. Locust Avenue Suite 101 Fresno, CA 93720 209/432-6660 SAN DIEGO, CA 1660 N. Hotel Circle Drive Suite 400 San Diego, CA 92108 619/299-6252 AUSTIN, TX 1101 Capital of Texas Hwy, South, Bldg. J Austin, TX 78746 512/306-1700 DALLAS, TX 5430 LBJ Freeway Suite 270 Dallas, TX 75240 972/701-5700 HARRISBURG, PA 4400 Deer Path Way Suite 200 Harrisburg, PA 17110 717/221-7000 ORLANDO, FL 3504 Lake Lynda Drive Orlando, FL 32817 407/380-9144 SALT LAKE CITY, UT 4 Triad Center Suite 150 Salt Lake City, UT 84180 801/741-4900 SPRINGFIELD, IL 2105 West White Oaks Drive Springfield, IL 62704 217/726-2900 CONWAY, AR 824 Front Street Conway, AR 72032 501/450-6884 CALFARM INSURANCE COMPANY OFFICERS WESTLEY M. HEYWARD President FRANKLIN V. ADAMS Executive Vice President PHILIP M. JOFFE Executive Vice President and Chief Operating Officer JOHN P. O'BRIEN Executive Vice President KARI L. VAN GUNDY Senior Vice President, Finance and Treasurer MICHAEL W. JACOBSON Senior Vice President SUSAN J. MCGINNESS Senior Vice President ROBERT E. MEYER Senior Vice President STANLEY K. MIYAO Senior Vice President and Actuary JAMES P. ROSS Senior Vice President FREDRICKA TAUBITZ Senior Vice President JOHN J. TICKNER Senior Vice President, General Regulatory Counsel and Secretary KEITH E. TROTMAN Senior Vice President JAMES R. ZUEHL Senior Vice President LARRY W. BROGAN Vice President THOMAS F. CARROLL Vice President SUZANNE M. CHAPAN Vice President PHILIP S. COLE Vice President DIANE F. HARVELL Vice President WALTER P. KRAUSE Vice President RICHARD J. KRUGMAN Vice President HYMAN J. LEE, JR. Vice President DONALD C. MARSHALL Vice President SARA E. MARTIN Vice President CRAIG G. MCINTOSH Vice President PETER M. OCCHIALINI Vice President STEPHEN D. PETRULA Vice President CRAIG C. THOMSON Vice President PAUL M. WILLIAMS Vice President HEADQUARTERS CalFarm Insurance Company 1601 Exposition Boulevard Sacramento, CA 95815 916/924-4000 Internet Address: www.calfarm.com CLAIMS/LEGAL OFFICES Fresno Sacramento Santa Ana CalFarm The Zenith 61 CORPORATE DIRECTORY CALFARM INSURANCE AGENCY OFFICERS WESTLEY M. HEYWARD Chairman of the Board and President KELLY S. MILLER Executive Vice President FREDRICKA TAUBITZ Senior Vice President JOHN J. TICKNER Senior Vice President, General Regulatory Counsel and Secretary PHILIP M. JOFFE Vice President WILLIAM S. TAYLOR Vice President JOHN P. VALENTINE Vice President KARI L. VAN GUNDY Vice President, Treasurer and Assistant Secretary GARY L. WOOLSEY Vice President PERMA-BILT, A NEVADA CORPORATION OFFICERS DANIEL SCHWARTZ President JOHN M. LOBROVICH Executive Vice President FRED W. LESSMAN Vice President RUTH E. OCHOA Vice President HEADQUARTERS 7150 Pollock Drive Suite 104 Las Vegas, NV 89119 702/896-9100 CalFarm 62 The Zenith EX-21 8 EXHIBIT 21 ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES (AS OF DECEMBER 31, 1997) Zenith National Insurance Corp. CalFarm Insurance Agency Cal-Ag Insurance Services, Inc. Perma Bilt, a Nevada Corporation Zenith Insurance Company CalFarm Insurance Company CalRehab Services, Inc. Zenith Star Insurance Company ZNAT Insurance Company Zenith Risk Management Zenith Insurance Company of Florida Zenith Insurance Management Services, Inc. - --------------- Each subsidiary is one hundred per cent owned by the subsidiary shown in the tier above it. EX-27.1 9 EXHIBIT 27.1
7 1,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 752,306 46,948 48,266 45,711 0 0 879,973 12,504 6,786 20,840 1,252,156 613,266 128,469 0 6,407 88,216 0 0 24,681 337,185 1,252,156 488,721 52,332 14,008 45,419 348,165 92,213 68,003 43,478 15,378 28,100 0 0 0 28,100 1.59 1.57 526,427 348,514 (349) 138,393 209,346 526,853 (349)
EX-27.2 10 EXHIBIT 27.2
7 YEAR YEAR 3-MOS 6-MOS 9-MOS DEC-31-1996 DEC-31-1995 DEC-31-1996 DEC-31-1996 DEC-31-1996 JAN-01-1996 JAN-01-1995 JAN-01-1996 JAN-01-1996 JAN-01-1996 DEC-31-1996 DEC-31-1995 MAR-31-1996 JUN-30-1996 SEP-30-1996 712,342 693,961 674,651 657,237 667,587 53,353 56,674 58,503 56,076 54,390 53,113 57,816 58,154 54,854 53,489 37,626 36,525 35,028 31,493 38,652 0 0 0 0 0 0 0 0 0 0 852,799 835,214 816,321 783,679 799,113 12,125 6,919 1,515 8,091 8,001 0 70,155 64,579 66,545 64,255 20,752 20,339 20,587 21,313 21,870 1,242,724 1,115,433 1,100,770 1,100,952 1,118,729 620,078 517,552 506,934 504,149 502,683 127,209 119,591 122,772 129,926 134,810 0 0 0 10,125 9,215 9,109 15,491 13,965 13,060 11,486 88,861 83,135 83,487 81,675 86,597 0 0 0 0 0 0 0 0 0 0 24,447 24,310 24,332 24,365 24,415 313,056 306,122 300,823 300,254 306,650 1,242,724 1,115,433 1,100,770 1,100,952 1,118,729 452,856 437,513 112,237 220,492 332,984 51,154 46,150 12,054 24,890 37,464 10,807 3,621 4,272 8,050 8,228 41,554 31,736 5,985 14,795 26,617 314,700 325,589 73,415 147,844 225,772 84,093 81,846 22,364 42,251 62,692 53,413 39,882 12,126 25,373 37,358 57,117 29,422 18,914 35,065 48,811 19,517 9,700 6,514 11,965 16,611 37,600 19,722 12,400 23,100 32,200 0 (13,122) 0 0 0 0 0 0 0 0 0 0 0 0 0 37,600 6,600 12,400 23,100 32,200 2.14 0.36 0.70 1.31 1.83 2.12 0.36 0.70 1.30 1.81 463,123 462,710 0 0 0 318,509 327,724 0 0 0 (3,809) (2,135) 0 0 0 131,061 149,688 0 0 0 185,764 175,488 0 0 0 526,427 463,123 0 0 0 (3,809) (2,135) 0 0 0
EX-27.3 11 EXHIBIT 27.3
7 1,000 3-MOS 6-MOS 9-MOS DEC-31-1997 DEC-31-1997 DEC-31-1997 JAN-01-1997 JAN-01-1997 JAN-01-1997 MAR-31-1997 JUN-30-1997 SEP-30-1997 706,601 729,442 738,532 52,015 50,668 48,962 50,891 50,717 49,700 36,123 31,683 34,199 0 0 0 0 0 0 843,890 856,838 872,151 11,826 10,968 12,315 0 0 7,241 20,772 21,778 22,129 1,232,398 1,254,461 1,266,600 621,826 827,431 619,396 128,818 135,017 138,349 0 0 0 8,250 6,288 6,402 87,975 87,547 88,439 0 0 0 0 0 0 24,525 24,542 24,627 310,371 320,985 335,234 334,896 1,254,461 1,266,600 122,363 248,194 368,669 12,448 25,854 39,126 1,876 3,872 5,733 9,963 21,137 32,617 87,767 176,947 258,051 23,114 46,362 69,196 15,176 31,619 49,088 10,721 22,944 35,454 3,621 7,944 12,454 7,100 15,000 23,000 0 0 0 0 0 0 0 0 0 7,100 15,000 23,000 0.40 0.85 1.30 0.40 0.84 1.29 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
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