ANNUAL REPORT / 1999
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ZENITH NATIONAL INSURANCE CORP.
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TheZenith
FINANCIAL HIGHLIGHTS
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1999 1998 1997
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Operating Results: (Dollars in thousands, except per share data)
Revenues $492,108 $636,779 $600,480
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(Loss) income after tax and before realized
gains and RISCORP-Related Adjustment (22,728) 11,559 19,669
RISCORP-Related Adjustment after tax** (32,500)
Realized gains after tax:
On investments 4,993 7,541 8,431
On sale of CalFarm Insurance Company*** 104,335
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Net income $ 54,100 $ 19,100 $ 28,100
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Per Share Data:
(Loss) income after tax and before realized
gains and RISCORP-Related Adjustment $ (1.33) $ 0.67 $ 1.10
RISCORP-Related Adjustment after tax** (1.89)
Realized gains after tax:
On investments 0.29 0.44 0.47
On sale of CalFarm Insurance Company*** 6.08
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Net income $ 3.15 $ 1.11 $ 1.57
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Stockholders' dividends $ 1.00 $ 1.00 $ 1.00
Key Statistics:
Combined ratio:
Including catastrophes and RISCORP-Related
Adjustment 135.2% 105.3% 103.4%
Excluding RISCORP-Related Adjustment 122.0% 105.3% 103.4%
Excluding catastrophes and RISCORP-Related
Adjustment 116.8% 103.1% 103.1%
Stockholders' equity $354,559 $346,952 $361,866
Stockholders' equity per share* 20.67 20.23 20.31
Closing common stock price 20 5/8 23 1/8 25 3/4
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* Excluding the effect of Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities,"
stockholders' equity per share was $21.80, $19.86 and $20.03 in 1999, 1998 and
1997, respectively. See Note 1 to the consolidated financial statements on
pages 48-49.
** Results of operations for the year ended December 31, 1999 include
$50.0 million before tax ($32.5 million after tax, or
$1.89 per share) of net charges in the third quarter associated with an
increase in the net liabilities for unpaid losses and loss adjustment expenses
in the Southeast Operations, which principally consists of the operations
acquired from RISCORP (the "RISCORP-Related Adjustment").
*** Zenith completed the sale of CalFarm Insurance Company to Nationwide Mutual
Insurance Company effective March 31, 1999 resulting in a gain of
$104.3 million after tax, or $6.08 per share, in the first quarter of 1999.
TheZenith
1
CONTENTS
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Financial Highlights 1
Letter to Stockholders 3
Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations 24
5-Year Summary of Selected Financial Information 38
Property-Casualty Loss Development 40
Consolidated Balance Sheet 42
Consolidated Statement of Operations 44
Consolidated Statement of Cash Flows 45
Consolidated Statement of Stockholders' Equity 46
Notes to Consolidated Financial Statements 48
Report of Independent Accountants 66
Corporate Directory
Zenith National Insurance Corp. 67
Zenith Insurance Company 68
Perma-Bilt, a Nevada Corporation 69
TheZenith
2
TO OUR STOCKHOLDERS
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The beginning of a new century is a good time to look back at what we have
accomplished and to focus on the future.
Current management assumed leadership of Zenith Insurance Company in 1977
when the company was exclusively in the California Workers' Compensation
market. Today, two decades later, we sell Workers' Compensation insurance in
40 states, participate in the worldwide reinsurance business, and operate a
homebuilding operation in Las Vegas, Nevada. Other insurance operations during
this period were the purchase of CalFarm Life and CalFarm Insurance in 1985,
which we sold in 1995 and 1999, respectively, at a substantial profit.
Financial comparisons from 1977 to 1999 are summarized as follows:
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1977 1999
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(Dollars in
thousands)
Revenues $68,143 $492,108
Net income 4,990 54,100
Stockholders' equity 12,663 354,559
Stockholders' equity per share 1.28 20.67
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During the 23-year period, our combined ratio has averaged 102.2% and
stockholder equity per share has grown at a rate of 17.7% including dividends
paid to our common shareholders of $284.2 million. We have repurchased 8,007,000
shares of our common stock at a cost of $150.7 million, or an average of
$18.82 per share. At the end of the 20th century, we are in excellent financial
condition with $96.0 million of cash equivalents on hand in the holding company.
TheZenith
3
DURING THE PAST 23 YEARS, OUR COMBINED RATIO HAS
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AVERAGED 102.2% COMPARED TO 107.1% FOR THE INDUSTRY.
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Historic accomplishments notwithstanding, our investors and management are
unsatisfied with TheZenith's current operating results, however all recognize a
risk business does not always deliver short-term results consistent with
long-term goals in a timely fashion. Current operations are losing money, with
Zenith common stock selling below book value. This report will discuss the
changing marketplace, and our strategies to improve our results while
continuing to add value for long-term investors.
Summary of Financial Highlights:
Premiums declined 30.3% to $369.4 million.
Operating losses after tax and before net realized gains and the
RISCORP-Related Adjustment were $22.7 million, or $1.33 per share, in 1999
compared to income of $11.6 million, or $0.67 per share, in 1998.
Investment income after tax was $35.6 million, or $2.07 per share, in 1999
compared to $35.9 million, or $2.09 per share, in 1998.
The RISCORP-Related Adjustment, which represents net charges in 1999
associated with an increase in net liabilities in the operations acquired from
RISCORP, was a loss of $32.5 million after tax, or $1.89 per share. The
adjustment was principally due to a difference of opinion between our experts
and the expert who determined the final purchase price. (See RISCORP-Related
Adjustment on page 18).
Realized capital gains on investments after tax were $5.0 million, or $0.29 per
share, compared to $7.5 million, or $0.44 per share, in 1998. The gain on the
sale of CalFarm Insurance after tax was $104.3 million, or $6.08 per share.
Unrealized losses on fixed maturities and equity securities recorded as a
reduction of
TheZenith
4
STOCKHOLDERS' EQUITY PER SHARE
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EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
'95 $18.58
'96 $19.17
'97 $20.31
'98 $20.23
'99 $20.67
stockholder's equity after tax were $20.0 million, compared to $9.6 million of
unrealized gains in 1998.
Net income was a record $54.1 million, or $3.15 per share, compared to
$19.1 million, or $1.11 per share, in 1998.
The combined ratio for the property casualty operations was 122.0% for 1999,
excluding the RISCORP-Related Adjustment, compared to 105.3% in 1998.
Stockholders' equity per share at December 31, 1999 was $20.67, compared to
$20.23 at December 31, 1998. At December 31, 1999, book value was reduced by
$19.3 million, or $1.13 per share, of unrealized losses on fixed maturity
investments (we can hold the bonds to maturity) and will be increased by
$15.0 million, or $0.87 per share, of reinsurance recoverable in the next
approximately four years.
In summary, we are financially strong, but currently operating
unprofitably. Charles Dickens in "A Tale of Two Cities" expressed it well: "It
was the best of times, it was the worst of times, it was the age of wisdom, it
was the age of foolishness..." Our mission for the new century is to leverage
our wisdom and financial strength, and continue to build long-term shareholder
value.
Analysis
Net income was a record $54.1 million, or $3.15 per share, in 1999
despite the poorest operating results in our history.
Operating results consisting of investment income and insurance underwriting
results combined after tax and excluding the RISCORP-Related Adjustment were a
loss of $17.1 million, or $0.99 per share, in 1999, compared to a profit of
$17.2 million, or $1.00 per share, the prior year.
TheZenith
5
OUR STOCKHOLDERS' EQUITY PER SHARE HAS INCREASED
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FROM $1.28 TO $20.67 PER SHARE DURING THE PAST 23 YEARS,
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A GROWTH RATE OF 17.7% INCLUDING DIVIDENDS.
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The following table summarizes pre-tax underwriting performance during the
past three years.
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Underwriting Results 1997 1998 1999
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(Dollars in thousands)
Workers' Compensation $(37,157) $(42,638) $ (72,543)
RISCORP-Related Adjustment (50,000)
Other Property-Casualty 6,509 4,410 (22)
Reinsurance 14,189 10,268 (7,324)
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Underwriting loss $(16,459) $(27,960) $(129,889)
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The 1999 results were significantly below our goals, due primarily to
continuing substantial underwriting losses in the Workers' Compensation
operations, and Reinsurance losses due to a number of large non-U.S.
catastrophes. Industry results were also poor in these lines of business.
The combined ratio for the Workers' Compensation operations, excluding the
RISCORP-Related Adjustment, was composed of a 67.0% accident year loss ratio,
and a 59.6% loss adjustment and underwriting expense ratio. Of note,
$27.7 million of the total underwriting loss excluding the RISCORP-Related
Adjustment was
TheZenith
6
STOCK PRICES
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EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
'95 '96 '97 '98 '99
First Qtr. High 22 3/4 24 7/8 27 7/8 29 1/16 26
First Qtr. Low 19 3/8 21 1/8 25 7/8 24 1/2 20 5/16
Second Qtr. High 22 28 7/8 27 1/2 30 1/2 26 11/16
Second Qtr. Low 20 23 7/8 24 5/8 28 22 1/4
Third Qtr. High 24 1/4 28 1/2 28 5/8 28 1/2 26
Third Qtr. Low 20 26 1/4 26 5/16 23 9/16 21 1/8
Fourth Qtr. High 24 5/8 28 28 3/4 25 7/8 22 13/16
Fourth Qtr. Low 20 25 1/4 25 7/16 22 7/8 19 1/4
'95 24 5/8
'96 28 7/8
'97 28 3/4
'98 30 1/2
'99 26 11/16
related to the operating results in the Southeast region, which mainly
comprises the business acquired from RISCORP. Since the beginning of
California's open-rating in 1995, our California loss ratio has averaged 64.0%,
compared to 84.2% for California industry. Our 20.2-point advantage is
consistent with TheZenith's comparative results prior to open rating and
demonstrates the discipline of our pricing and underwriting strategy during a
period of significant market turmoil.
Continuing expansion of our national operations resulted in California and
Florida premiums being 71.9% of our total Workers' Compensation business.
Despite increasing competition and inadequate pricing in many states, we
expanded and built important relationships at a reasonable cost. Our 1999
accident year loss ratio was 67.0%, excluding the RISCORP-Related Adjustment,
compared to 63.6% the prior year. These are excellent results considering the
market conditions. Our high expense ratio of 59.6% for 1999 reflects volume
reductions due to the competitive climate, costs for Year 2000 compliance and
other RISCORP Acquisition and integration expenses. Also we kept our services
fully operational while we awaited the anticipated turn in market conditions.
Our Reinsurance operations were impacted by hurricane losses in the
Carribean, earthquakes in Turkey and Taiwan, and French windstorm losses on
December 26, 27 and 28, 1999.
TheZenith
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AT THE END OF THE 20TH CENTURY, WE ARE IN EXCELLENT
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FINANCIAL CONDITION WITH $96.0 MILLION OF CASH
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EQUIVALENTS IN THE HOLDING COMPANY.
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During the five years ended 1999, our average combined ratio for all
operations excluding the RISCORP-Related Adjustment was 106.7% (as evidenced in
the following table), compared to the industry average of 105.4%. Our average
combined ratio for all operations for the past 10 years excluding the RISCORP-
Related Adjustment was 103.7%.
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Zenith Combined Ratios
Versus Industry
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Year Zenith Industry*
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1995 103.1% 106.4%
1996 99.8 105.8
1997 103.4 101.6
1998 105.3 105.6
1999 122.0 107.5**
Average 106.7% 105.4%
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*Source: A.M. Best
Company **Estimated
The above table shows a deteriorating combined ratio over the past five years
due primarily to unprecedented poor Workers' Compensation industry results and
1999 reinsurance losses.
Investment income after tax decreased slightly to $35.6 million, or $2.07 per
share, in 1999 from $35.9 million, or $2.09 per share, in 1998.
Net income in 1999 was $54.1 million, or $3.15 per share, compared to
$19.1 million, or $1.11 per share, in 1998. Net income in 1999 included capital
gains on investments after tax of $5.0 million, or $0.29 per share, compared to
capital gains on investments of $7.5 million, or $0.44 per share, for the prior
year. Also, the gain on the sale of CalFarm Insurance of $104.3 million, or
$6.08 per share, was recorded in 1999 net income.
TheZenith
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INVESTMENT INCOME AFTER TAX PER SHARE
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EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
'95 $1.67
'96 $1.92
'97 $1.94
'98 $2.09
'99 $2.07
Stockholders' equity at December 31, 1999 was a record $354.6 million,
compared to $347.0 million at December 31, 1998. The increase was primarily due
to the gain on the sale of CalFarm Insurance reduced by unrealized losses (due
to market declines in the fixed maturity portion of our investment portfolio)
and our operating losses.
Cash used in operating activities was $51.6 million in 1999 compared to
$47.1 million in 1998; this was due primarily to payment of claim liabilities
acquired from the former RISCORP operations and declining new business.
We repurchased 186,000 shares of Zenith common stock during 1999, leaving
authority to purchase an additional 940,000 shares. Since 1987, we have
repurchased 8,007,000 shares, or an estimated 38.1% of the total shares then
issued for an aggregate cost of $150.7 million, or an average of $18.82 per
share. Share repurchases have been accomplished patiently and without
jeopardizing our various high-quality ratings.
At December 31, 1999, Zenith had long-term debt of $74.7 million compared to
$74.6 million at December 31, 1998, with a total debt-to-equity position of
21.1% compared to 21.3% at December 31, 1998. Also outstanding was
$75.0 million of 8.55% Capital Trust Securities issued in July 1998, maturing
in 29 years. Zenith had $70.0 million of bank lines of credit available and
$96.0 million of cash equivalents.
Zenith's subsidiaries are rated A+ (superior) by A.M. Best Company. Moody's
Investors Service has assigned an insurance financial strength rating of Baa1
(adequate) to the insurance operations. Standard & Poor's has assigned an
insurer financial strength rating to the insurance operations of A (strong).
TheZenith
9
STOCKHOLDERS' EQUITY PER SHARE AT DECEMBER 31, 1999
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WAS $20.67, COMPARED TO $20.23 AT DECEMBER 31, 1998.
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The information in the following table provides estimates of Zenith's net
incurred losses and loss adjustment expenses by accident year, evaluated in the
year they were incurred and as they were subsequently evaluated in succeeding
years. The information set forth in this table is of critical importance in
judging the accuracy of our reserve estimates as well as providing a guide to
the setting of fair prices and rates. The increase in estimated incurred losses
between 1997 and 1998 is mainly attributable to the business acquired from
RISCORP and the increase from 1998 to 1999 is mainly attributable to the
reserve increase that was part of the RISCORP-Related Adjustment.
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Accident Year Reserve Development From Operations
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Net incurred losses and loss adjustment expenses reported at end of year
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Years in which losses were incurred 1994 1995 1996 1997 1998 1999
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(Dollars in thousands)
Prior to 1994 $1,876,649 $1,865,388 $1,862,648 $1,855,543 $2,256,746 $2,256,637
1994 170,999 177,819 169,222 168,016 345,006 348,121
Cumulative 2,047,648 2,043,207 2,031,870 2,023,559 2,601,752 2,604,758
1995 180,170 187,517 196,335 341,708 351,292
Cumulative 2,223,377 2,219,387 2,219,894 2,943,460 2,956,050
1996 181,844 238,635 429,335 443,443
Cumulative 2,401,231 2,458,529 3,372,795 3,399,493
1997 204,502 333,818 339,907
Cumulative 2,663,031 3,706,613 3,739,400
1998 258,000 271,317
Cumulative 3,964,613 4,010,717
1999 278,054
Ratios:
1994 66.92% 69.59% 66.22% 65.75% 65.95% 66.55%
1995 73.12% 76.10% 79.68% 73.11% 75.16%
1996 73.36% 79.35% 80.08% 82.71%
1997 75.04% 72.56% 73.88%
1998 74.76% 78.62%
1999 86.91%
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- -This analysis displays the accident year net incurred losses and loss adjustment expenses development on a statutory
basis for accident years 1994-1999 for all property-casualty business. The total of net loss and loss adjustment
expenses for all claims occurring within each annual period is shown first at the end of that year and then annually
thereafter. The total cost includes both payments made and the estimate of future payments as of each year-end. Past
development may not be an accurate indicator of future development since trends and conditions change.
- -The data prior to 1999 has been restated to exclude the results of CalFarm Insurance Company, which was sold effective
March 31, 1999.
TheZenith
10
OUR MISSION FOR THE NEW CENTURY IS TO APPLY
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OUR PROVEN EXPERTISE AND FINANCIAL STRENGTH
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TO BUILD LONG-TERM SHAREHOLDER VALUE.
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Investments
Investment activities are a major part of our revenues and earnings; we
believe our portfolio is diversified to achieve a reasonable balance of risk
and a stable source of earnings. Zenith primarily invests in debt securities as
compared to equities and our largest holdings are U.S. Government securities.
Consolidated investment income after tax and after interest expense was
$30.3 million, or $1.76 per share, in 1999, compared to $32.1 million, or
$1.87 per share, in 1998. Average yields on this portfolio in 1999 were 5.5%
before tax and 3.7% after tax, respectively, compared to 5.7% and 3.8%
respectively, in 1998.
During 1999, we recorded net realized capital gains before tax from our
investment portfolio of $7.7 million, compared to $11.6 million the prior year.
Pre-tax income during 1999 from our real estate activities was $3.6 million
compared to $1.4 million the prior year.
Unrealized losses in our portfolio of fixed maturity investments were
$30.1 million before tax in 1999, compared to gains of $11.5 million before
tax the prior year.
Our investment portfolio is recorded in the financial statements primarily at
market value. Average life of the bond portfolio was 6.2 years at December 31,
1999, compared to 5.7 years at December 31, 1998. Our portfolio quality is high
with 95% and 96% rated investment grade at December 31, 1999 and 1998,
respectively.
TheZenith
11
SINCE THE BEGINNING OF CALIFORNIA OPEN-RATING IN
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1995, OUR CALIFORNIA LOSS RATIO HAS AVERAGED 64.0%
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COMPARED TO 84.2% FOR THE CALIFORNIA INDUSTRY.
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The major developments in the U.S. bond markets were continued low inflation
and increased interest rates with 30-year Treasury Bonds declining in market
value by about 15%. In comparison, our portfolio of fixed maturities excluding
short-terms declined in value by about 5%. Since we are capable of holding these
investments to maturity and the average maturities are relatively short,
fluctuations in bond values do not significantly impact our operations.
Short-term investments remained high as we search for intelligent investment
opportunities. At the very least, new note or bond investments will provide
increased yields compared to those available a year ago.
Securities Portfolio At December 31, 1998 At December 31, 1999
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Amortized Cost* Market Value Amortized Cost* Market Value
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(Dollars in thousands)
Short-term investments $187,123 $187,123 $179,748 $179,748
U.S. Government Bonds 180,064 181,466 218,158 215,936
Taxable Bonds:
Investment grade 537,176 546,448 411,674 389,512
Non-investment grade 29,255 29,735 40,944 36,711
Redeemable preferred stocks 14,045 14,347 13,879 12,402
Other preferred stocks 24,293 24,674 11,099 9,825
Common stocks 22,402 26,935 25,428 25,634
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* Equity securities at cost
TheZenith
12
CONTINUING EXPANSION OF OUR NATIONAL OPERATIONS
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RESULTED IN CALIFORNIA AND FLORIDA PREMIUMS BEING
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71.9% OF OUR TOTAL WORKERS' COMPENSATION BUSINESS.
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In 1993, we started a home-building operation in order to participate in the
growth of the Las Vegas, Nevada housing market. During 1999, we closed and
delivered 366 homes at an average selling price of $158,000, compared to 275
homes at an average selling price of $137,000 the prior year. Sales of
$58.7 million and $3.6 million of pre-tax income were recorded during 1999,
compared to sales of $37.7 million and $1.4 million of pre-tax income the
previous year. Land presently owned at a cost of $29.7 million will support the
construction of an estimated 1,025 homes over the next several years and
potentially commercial and/or apartment development. Changes in interest rates
or other factors could affect future home sales (we have not seen any impact so
far), but we believe the land we have acquired is strategically located and
will have long-term value. For example, we own about 170 acres on Las Vegas
Boulevard south-west of the airport, one of the largest undeveloped holdings on
The Strip.
Insurance Operations
During 1999 we concluded the sale of CalFarm Insurance, which we owned
since 1985. This business provided excellent results over a long period, however
the price we were offered was extremely attractive and motivated our decision to
sell. As previously mentioned, we reported a gain of $104.3 million after tax
and dividended $100.0 million to the holding company with the prior approval of
the Insurance Commissioner of California. As a result, we have significantly
improved our financial strength and refocused our emphasis on our Workers'
Compensation and Reinsurance operations. Absent CalFarm, we are less
diversified, however we can obtain diversification by investing in high quality
insurance equities, if we
TheZenith
13
ZENITH PRIMARILY INVESTS IN DEBT SECURITIES
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AS COMPARED TO EQUITIES AND OUR LARGEST
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HOLDINGS ARE U.S. GOVERNMENT SECURITIES.
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choose. Furthermore, we benefit from less insurance exposure at possibly
inadequate rates and no exposure to reserve deficiencies, if any.
With respect to our insurance operations, we recognize we are in the risk
business competing against larger companies with significant amounts of capital.
We do not write business with a view of distributing the risk to others, rather
we are disciplined underwriters and purchase reinsurance in the traditional
sense to protect against large losses. Our objective is to make underwriting
profits by delivering quality services at fair prices.
Workers' Compensation
TheZenith is a specialty insurer with primary operations in California,
Florida, Texas and 37 other states. Premiums written in 1999 were
$268.7 million, about the same as the prior year. Underwriting losses,
excluding the RISCORP-Related Adjustment, were $72.5 million in 1999 and
$42.6 million in 1998. At year-end, there were 33,000 policies in force.
During the last several years, our underwriting results have been
significantly below our 23-year combined ratio of 104.3% (excluding the
RISCORP-Related Adjustment). Specifically, our combined ratio for the last
three years has averaged 119.2% (excluding the RISCORP-Related Adjustment).
Although better than the industry in the areas where we compete, we are
committed to substantially improving our results.
The primary factors leading to our operating performance are:
1. Intense rate and price competition affecting our volume.
2. Additional expenses and investment to upgrade our computer systems and
address the Year 2000 challenge.
TheZenith
14
IN 1999 WE CONCLUDED THE SALE OF CALFARM INSURANCE
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AND REPORTED A GAIN OF $104.3 MILLION AFTER TAX.
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3. Costs incurred in connection with the RISCORP Acquisition, including
costs to upgrade the quality of their operations, recruit and train new
claims personnel and integrate operations with TheZenith.
4. Unsatisfactory underwriting results of inforce business outside of
Florida acquired as a part of the former RISCORP operations.
5. Increases in expenses to adjust claims due to inflationary changes in
many Workers' Compensation jurisdictions.
6. Higher average costs per claim, including increases in health care
expense.
7. Creative reinsurance supporting competitors' low-ball pricing strategies.
Our prediction last year of the short-term consequences of creative
reinsurance has turned out to be correct. Although we are not familiar with the
details, it appears all participants will pay a price in dollars or stock price
reductions and a decline in underwriting discipline from participation in these
transactions. Litigation, arbitration and amounts involved are unprecedented
and whether all of the disputes are resolved promptly or not, the important
point is premiums are no longer ceded to these plans or any others at perceived
losses. In other words, underwriting losses or artificially low selling prices
of competitors are not being subsidized by others. As a result, competitors,
particularly in California, are raising rates, sometimes significantly, to
restore profitability on an accident year net basis. Even though TheZenith did
not purchase this type of reinsurance, we also suffered from predatory pricing
resulting in our prices being undercut and customers shopping elsewhere.
However, we maintained our financial strength and intellectual capability by
continuing to operate in a consistent and professional manner, which will serve
us well in the long-term. With respect to our own
TheZenith
15
OUR OBJECTIVE IS TO MAKE UNDERWRITING PROFITS
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BY DELIVERING QUALITY SERVICES AT FAIR PRICES.
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reinsurance, we have excellent, long-standing relationships with many reinsurers
where we purchase coverage to protect against losses in excess of $550,000 up to
$100,000,000.
Despite continued declines in loss claim frequency, average Workers'
Compensation claim costs continue to increase. California and U.S. results
indicate combined ratios in the 150% and 125% ranges, respectively. As a
result, we are modestly raising our rates (8% in California and differing
amounts in other states) as we endeavor to maintain a responsible market and to
continue charging the proper premium for the risk insured. In addition to rate
changes, changes in experience modification factors, credits for excellent loss
results and changes in wages, all will impact new and renewal selling prices,
account by account. Obviously, accounts with unsatisfactory experience will
receive higher than average increases. Many of our competitors will adjust
prices and underwriting more significantly than TheZenith in order to restore
financial strength. There is evidence these changes have begun (large price
increases and refusals to write particular types of businesses in certain
geographic areas), and we expect these changes will gain momentum, allowing
TheZenith to write more business at the proper prices.
We are positioned to service new and existing customers responsibly while
delivering quality services. With our concentration on California, Florida and
Texas, we will participate in three of the states with the greatest projected
job growth in the U.S.
Of interest, we have received more business submissions and written more new
policies in January, 2000 than in the prior several years; tangible evidence of
TheZenith
16
WE ARE MODESTLY RAISING OUR RATES TO MAINTAIN
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A RESPONSIBLE MARKET AND TO CONTINUE CHARGING
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FAIR AND PROPER PREMIUMS FOR THE RISK INSURED.
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changing market conditions. Further indication: we are renewing a large
percentage of our maturing policies at average increases of 18% in California.
Recently, one of the largest Workers' Compensation insurers in California was
taken over by the California Insurance Commissioner. Improvement to TheZenith's
combined ratio will be a result of more total business, modest rate adjustments
already implemented, and continued control of expenses.
Quality services that reduce loss ratios and ultimately the long-term cost of
insurance for our policyholders are our hallmark. Value-added services consist
of expert Claims, Medical and Disability Management; Special Investigation Unit
and Legal Services; and Premium Audit for the proper classifications of
payrolls. All of which function on a partnership basis with the employer. For
example, returning an injured employee to transitional duty during recovery,
which improves morale and productivity while containing costs. Protection of
Zenith's capital is another dimension of the partnership.
With respect to the RISCORP Acquisition, we have made progress in improving
management, underwriting and quality of service to customers and reducing
expenses. The Southeast operations continue with favorable loss ratios and there
are indications of additional business development opportunity, despite
aggressive competition in the region.
Politically, there were not many significant changes affecting our
operations. In California, a major benefit increase bill was vetoed by the
Governor and it is likely any changes to be enacted will be modest and fair to
all parties concerned. Although this outcome was contrary to the conventional
political wisdom of a year ago, we believe the result will aid in growing the
California economy. Certain
TheZenith
17
MANY OF OUR COMPETITORS WILL ADJUST PRICES AND
- --------------------------------------------------------------------------------
UNDERWRITING MORE SIGNIFICANTLY THAN THEZENITH
- --------------------------------------------------------------------------------
IN ORDER TO RESTORE FINANCIAL STRENGTH.
- -------------------------------------------------------------------------
desirable system reforms were contained in the bill, such as management for the
Workers' Compensation Appeals Board and modification of the treating physician
presumption; these reforms are essential to speeding up benefit payments and
improving equity for all concerned. Additional reforms may be desired by
employers or insurers, but they may not be obtainable without massive benefit
increases which are politically unacceptable.
In California, litigation for third party bad faith was restored, excluding
Workers' Compensation. Interestingly, a major initiative referendum will be
voted on March 7, 2000 to determine whether this legislation becomes effective.
The initiative is a well-funded campaign primarily between lawyers and auto
insurers. Depending on the outcome, the politics of future insurance issues may
be affected, including Workers' Compensation matters.
RISCORP-Related Adjustment
As we announced during the year, after receiving the report from the
Neutral Auditor and Neutral Actuary who determined the RISCORP purchase price,
we reviewed this result with three independent actuaries. The result of this
review indicated a pre-tax charge of $50.0 million was necessary and
appropriate to properly record the liabilities for losses and loss adjustment
expenses acquired from RISCORP. We, of course, are disappointed that the
Neutral Auditor and Neutral Actuary opinion proved materially wrong in such a
short period of time, but we are hopeful the current estimates prove realistic
in the years ahead. In this connection, a $34.0 million benefit of the
reinsurance purchased has been recorded including a deferred benefit of
$23.0 million before tax that will be recognized over the next approximately
four years.
TheZenith
18
CALIFORNIA, FLORIDA AND TEXAS ARE THREE STATES WITH
- --------------------------------------------------------------------------------
THE GREATEST PROJECTED JOB GROWTH IN THE U.S. AND
- --------------------------------------------------------------------------------
WHERE ZENITH INSURANCE HAS SIZEABLE OPERATIONS.
- --------------------------------------------------------------------------------
Accident Year Loss Ratios
The following is a four-year comparison of our current estimates of our
Workers' Compensation accident year loss ratios, excluding the RISCORP-Related
Adjustment:
- -----------------------------------------------------------------------------------------------
1996 1997 1998 1999
- -----------------------------------------------------------------------------------------------
California 61.4% 63.0% 65.0% 68.9%
Southeast states (Florida and others) 53.0 63.4 63.5
Texas and states other than Southeast 46.6 48.9 60.7 71.8
- -----------------------------------------------------------------------------------------------
Accident year loss ratios 57.1 57.3 63.6 67.0
- -----------------------------------------------------------------------------------------------
As is apparent from the table, our loss ratios have been increasing, but
they are still excellent results, considering market conditions.
Reinsurance
For the past 14 years, Zenith Insurance has been selectively underwriting
assumed treaty and facultative reinsurance. Reinsurance represents 10.0% of our
property-casualty volume, while reinsurance reserves represent 14.6% of our
total property-casualty reserves.
During 1999, the net written premium of this operation was $35.9 million
compared to $29.9 million in 1998. Earned premium was $36.4 million compared to
$29.2 million in 1998. Underwriting losses of $7.3 million were recorded in
1999, resulting in a combined ratio of 120.1% compared to underwriting profits
of $10.3 million and a combined ratio of 64.8% the prior year. Since the
inception of this operation in 1985, the combined ratio has averaged 94.3%.
During 1998
TheZenith
19
WITH RESPECT TO THE RISCORP ACQUISITION, WE HAVE
- --------------------------------------------------------------------------------
MADE PROGRESS IN IMPROVING MANAGEMENT, UNDERWRITING,
- --------------------------------------------------------------------------------
QUALITY CUSTOMER SERVICES AND EXPENSE REDUCTION.
- --------------------------------------------------------------------------------
and 1999, the majority of written premium was derived from world-wide property
catastrophe business.
Accounting for the property catastrophe reinsurance business has a different
result from our other property-casualty business. At the end of each reporting
period, income is recognized without reserves being established if no major
catastrophe has occurred. In our other businesses, reserves are mandated based
upon actual events as well as expected loss patterns. As a result, there may be
large fluctuations (positive or negative) in underwriting results for the
property catastrophe reinsurance business in the short-term since only actual
events are considered. The major event in 1998 was Hurricane Georges where we
have estimated our pre-tax loss to date at $10.2 million, of which
$5.7 million was incurred in 1999. In 1999, the largest storm impacts were
Oklahoma tornadoes, Typhoon Bart in Japan, and French windstorm losses on
December 26, 27 and 28, 1999. We expect gradual premium increases and more
favorable terms to result from these losses, particularly in the retrocession
market where we are active.
Information Technology
So far we have not experienced major difficulty from Y2K. We spent a lot
of time and money on planning, testing and remediating our systems in order to
achieve this objective at an estimated a total cost of $11.1 million, of which
$5.9 million was expended in 1999. Contrary to certain published reports
relating to industry in general we had no reasonable alternative to undertaking
this effort.
TheZenith's information technology challenges relate to two areas: expanding
our internet, extranet and intranet capabilities; and further integration of our
TheZenith
20
IN JANUARY 2000 ZENITH INSURANCE HAS RECEIVED
- --------------------------------------------------------------------------------
MORE BUSINESS SUBMISSIONS AND WRITTEN MORE
- --------------------------------------------------------------------------------
NEW POLICIES THAN IN THE PRIOR SEVERAL YEARS.
- --------------------------------------------------------------------------------
business platforms on a national basis. Since we are in the planning stages for
these initiatives, we are unable to estimate the cost or time requirements.
However, we will proceed intelligently and incrementally to make sure we are
competitive and are able to improve our productivity. Internet distribution of
Workers' Compensation policies may assist sales, however we are not convinced
profitability is a reasonable prospect. Therefore, we will experiment
judiciously.
Directors and Officers
Our board of directors was reduced by the resignation of three members,
Messrs. Saul Steinberg, Robert Steinberg and George Bello, upon consummation of
the sale of Reliance Insurance Company's investment in Zenith. We wish to thank
these individuals for about 20 years of service during which they made many
contributions to the growth and profitability of our business.
Two long-time officers, Jim Ross and Fredricka Taubitz, have retired. They
both contributed significantly to our long-term results, but we are fortunate
that additional talent within the corporation is available to carry on their
activities.
Conclusion
We have emphasized to our employees and shareholders that our company is
run for the long-term. Our shareholders' return from the business has compounded
at 17.7% for the past 23 years. Although our recent operating earnings have been
poor due to market conditions and the RISCORP Acquisition, we are optimistic
about our long-term prospects for the following reasons:
Zenith's financial position is the strongest in our history; excess capital
continues to be returned to shareholders through dividends and stock
repurchases.
TheZenith
21
WE CONTINUE TO RENEW A LARGE PERCENTAGE OF OUR
- --------------------------------------------------------------------------------
MATURING POLICIES.
- ---------------------------------
Excellent management consists of long-term insurance professionals, focused on
pricing and underwriting discipline, claims fundamentals, quality customer
service, and most importantly, reaching our goal of a 100% combined ratio.
Continuing education and the pursuit of excellence support our reputation as
the Workers' Compensation specialist of choice.
Customers number 33,000, many of whom are long-term; all benefiting from the
value we add through our specialist services.
Geographic diversification has been achieved; California premiums earned now
represent 38.7% of our total Workers' Compensation operations, compared to
53.6% two years ago.
Market conditions, including unbelievable predatory pricing, are gradually
beginning to change which will permit premium growth at our prices in many
regions of the U.S.
Information technology is enhancing the quality and accessibility of our data,
assisting the claims process, and delivering cost efficiencies.
Zenith's investment portfolio consists largely of high-quality bonds,
buffering us from the speculative frenzy in the U.S. equity markets. We can
invest additional funds in equities if and when valuations become more
attractive.
Acquisition opportunities are being evaluated regularly, however we are mindful
many seemingly desirable candidates are suspect due to substantial unrecorded
liabilities on their balance sheets.
TheZenith
22
QUALITY SERVICES THAT REDUCE LOSS RATIOS AND
- --------------------------------------------------------------------------------
ULTIMATELY THE LONG-TERM COST OF INSURANCE FOR
- --------------------------------------------------------------------------------
THEZENITH'S POLICYHOLDERS ARE OUR HALLMARK.
- --------------------------------------------------------------------------------
Internet sales and service potentials, and private label relationships may well
open new markets for TheZenith.
Confidence in our future was demonstrated by a Canadian domiciled insurance
group who purchased 38.4% of our then outstanding common stock at $28 per
share, above market at that time and today.
Long-term shareholders will continue to benefit as we repurchase our common
stock at below book value and improve our operating results.
We appreciate the assistance and confidence of our stockholders, directors and
reinsurers as we pursue change necessary to restore operating profitability and
enhance shareholder value.
/s/ Stanley R. Zax
Stanley R. Zax
Chairman of the Board and President
Woodland Hills, California, March, 2000
TheZenith
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 Financial
Condition and Results of Operations, in other parts of this report or in other
written or oral information conveyed by or on behalf of Zenith National
Insurance Corp. and subsidiaries (collectively, "Zenith") are intended to
identify forward-looking statements. Zenith undertakes no obligation to update
such forward-looking statements, which are subject to a number of risks and
uncertainties that could cause actual results to differ materially from those
projected. These risks and uncertainties include but are not limited to the
following: (1) heightened competition, particularly intense price competition;
(2) adverse state and federal legislation and regulation; (3) changes in
interest rates causing fluctuations of investment income and fair values of
investments; (4) changes in the frequency and severity of claims and
catastrophic events; (5) adequacy of loss reserves; (6) changing environment for
controlling medical, legal and rehabilitation costs, as well as fraud and abuse;
and (7) other risks detailed herein and from time to time in Zenith's other
reports and filings with the Securities and Exchange Commission.
Overview
Zenith's principal source of consolidated earnings is the income, including
investment income, from the operations of its property-casualty insurance
businesses and its investment portfolio. Property-casualty operations
("P&C Operations") comprise Workers' Compensation, Other Property-Casualty
(through March 31, 1999) and Reinsurance. Effective March 31, 1999, Zenith sold
CalFarm Insurance Company ("CalFarm"), formerly a wholly-owned subsidiary of
Zenith Insurance Company ("Zenith Insurance"), a wholly-owned subsidiary of
Zenith National Insurance Corp. ("Zenith National"), which operated Zenith's
Other Property-Casualty Operations, principally in California. Results of the
P&C Operations for the three years ended December 31, 1999 are set forth in the
table on page 26. In 1998, Zenith expanded its Workers' Compensation business in
Florida through the acquisition of substantially all of the assets and certain
liabilities of RISCORP, Inc. and certain of its subsidiaries (collectively,
"RISCORP") related to RISCORP's workers' compensation business (the "RISCORP
Acquisition") (see page 29). During 1999, 38.7% and 33.2%, respectively, of the
Workers' Compensation premiums earned were in California and Florida. The
balance of the Workers Compensation premiums earned was in 38 states, with the
greatest concentration in Texas. Reinsurance business assumed by Zenith provides
principally property insurance coverage for world-wide exposures with a
particular emphasis on catastrophe losses and large property risks. Zenith's
Real Estate Operations develop land and primarily construct private residences
for sale in Las Vegas, Nevada. Zenith National owns directly or indirectly all
of the capital stock of its subsidiaries.
TheZenith
24
Results of operations of Zenith's Workers' Compensation Operations are being
adversely impacted by severe competition and inadequate pricing. Industry
results in California are at historic unprofitable levels and national results
are poor and deteriorating. Except in its Southeast Operations, which
principally consists of the former operations of RISCORP, Zenith's Workers'
Compensation premium revenues declined in each of the three years ended
December 31, 1999 as the company endeavored to maintain rate adequacy. However,
as a result of the sale of CalFarm, the capitalization of the P&C Operations
improved significantly and an extraordinary dividend of $100.0 million to Zenith
National added considerably to the invested assets of Zenith National. Zenith's
investment portfolio is conservative, consisting principally of
investment-grade, fixed maturity securities. Early in November of 1999, the
Insurance Commissioner of the State of California (the "Insurance Commissioner")
adopted an average 18.4% increase in the pure premium advisory rates recommended
by the Workers' Compensation Insurance Rating
Bureau of California -- a preliminary indication of possible changes in the
California workers' compensation market. Zenith has raised its rates by an
appropriate amount, together with other actions, with a goal to improve its
profitability. Results of January 2000 renewals and new business applications in
California were favorable with Zenith renewing a substantial percentage of its
maturing policies at higher rates and writing some new business.
The comparability of the results of operations for the year ended
December 31, 1999 compared to the corresponding periods in 1998 and 1997 is
affected by (a) the RISCORP Acquisition effective April 1, 1998; (b) net charges
in the third quarter of 1999 of $50.0 million before tax ($32.5 million after
tax, or $1.89 per share) associated with an increase in the net liabilities for
unpaid losses and loss adjustment expenses in the Southeast Operations, which
principally consists of the operations acquired from RISCORP (the
"RISCORP-Related Adjustment"); and (c) the sale of CalFarm to Nationwide Mutual
Insurance Company effective
March 31, 1999.
The comparative results of the P&C Operations after tax are set forth in the
following table:
- ----------------------------------------------------------------------------------------------
(Dollars in thousands) 1999 1998 1997
- ----------------------------------------------------------------------------------------------
Net investment income $35,632 $35,907 $34,655
Realized gains on investments 4,993 7,541 8,431
- ----------------------------------------------------------------------------------------------
Subtotal 40,625 43,448 43,086
Property-casualty underwriting results:
Loss excluding catastrophes and RISCORP-Related Adjustment (40,404) (11,230) (10,217)
Catastrophe losses (12,285) (7,475) (975)
RISCORP-Related Adjustment (32,500)
- ----------------------------------------------------------------------------------------------
Property-casualty underwriting loss (85,189) (18,705) (11,192)
Income from Real Estate Operations 2,372 868 1,079
Interest expense (5,342) (3,824) (2,587)
Parent expenses (2,701) (2,687) (2,286)
- ----------------------------------------------------------------------------------------------
Net (loss) income before gain on sale of CalFarm (50,235) 19,100 28,100
Gain on sale of CalFarm 104,335
- ----------------------------------------------------------------------------------------------
Net income $54,100 $19,100 $28,100
- ----------------------------------------------------------------------------------------------
TheZenith
25
Premiums earned and underwriting results of the P&C Operations for the three
years ended December 31, 1999 were as follows:
- --------------------------------------------------------------------------------------------------
(Dollars in thousands) 1999* 1999** 1998 1997
- --------------------------------------------------------------------------------------------------
Premiums earned:
Workers' Compensation $272,254 $ 278,854 $278,660 $242,064
Other Property-Casualty 54,108 54,108 222,045 214,406
Reinsurance 36,441 36,441 29,150 32,251
- --------------------------------------------------------------------------------------------------
Total $362,803 $ 369,403 $529,855 $488,721
- --------------------------------------------------------------------------------------------------
Underwriting (loss) income before tax:
Workers' Compensation $(72,543) $(122,543) $(42,638) $(37,157)
Other Property-Casualty (22) (22) 4,410 6,509
Reinsurance (7,324) (7,324) 10,268 14,189
- --------------------------------------------------------------------------------------------------
Total $(79,889) $(129,889) $(27,960) $(16,459)
- --------------------------------------------------------------------------------------------------
*Excluding RISCORP-Related Adjustment
**Including RISCORP-Related Adjustment
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.
The combined ratios for the three years ended December 31, 1999 were as follows:
- ---------------------------------------------------------------------------------------------------
1999* 1999** 1998 1997
- ---------------------------------------------------------------------------------------------------
Combined loss and expense ratios:
Workers' Compensation:
Loss and loss adjustment expenses 89.2% 102.5% 79.3% 81.6%
Underwriting expenses 37.4 41.4 36.0 33.7
- ---------------------------------------------------------------------------------------------------
Combined ratio 126.6% 143.9% 115.3% 115.3%
- ---------------------------------------------------------------------------------------------------
Other Property-Casualty:
Loss and loss adjustment expenses 66.5% 66.5% 67.0% 65.2%
Underwriting expenses 33.5 33.5 31.0 31.7
- ---------------------------------------------------------------------------------------------------
Combined ratio 100.0% 100.0% 98.0% 96.9%
- ---------------------------------------------------------------------------------------------------
Reinsurance:
Loss and loss adjustment expenses 105.0% 105.0% 45.3% 33.7%
Underwriting expenses 15.1 15.1 19.5 22.3
- ---------------------------------------------------------------------------------------------------
Combined ratio 120.1% 120.1% 64.8% 56.0%
- ---------------------------------------------------------------------------------------------------
Total combined ratio 122.0% 135.2% 105.3% 103.4%
- ---------------------------------------------------------------------------------------------------
*Excluding RISCORP-Related Adjustment
**Including RISCORP-Related Adjustment
TheZenith
26
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 manages its exposure to the risk of
catastrophe losses through a combination of the purchase of reinsurance and the
application of underwriting and actuarial techniques to control the amount and
number of risks that are underwritten with an exposure to possible catastrophes.
The profitability of the P&C Operations is principally dependent upon the
adequacy of rates charged to the insured for insurance protection; the frequency
and severity of claims and catastrophes; the ability to accurately estimate and
accrue reported and unreported losses in the correct period; the level of
dividends paid to policyholders; the ability to manage claim costs and keep
operating expenses in line with premium volume; and the ability to service
claims, maintain policies and acquire business efficiently. 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 frequency and severity of claims and catastrophes; the expansion
of the Workers' Compensation Operations outside of California; the resolution by
others in the industry of creative reinsurance arrangements; 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, related trends and uncertainties could have a material effect on
Zenith's future operations and financial condition.
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". Development is favorable when losses ultimately settle
for less than the amount reserved or subsequent estimates indicate a basis for
reducing reserves on open claims. The following shows the one-year loss reserve
development for loss and loss adjustment expense for the three segments of the
P&C Operations:
- ----------------------------------------------------------------------------
Other
(Dollars in Workers' Property-
thousands) Compensation Casualty Reinsurance Total
- ----------------------------------------------------------------------------
One-year loss
development in:
1999 $38,767 $(1,279) $ 7,336 $ 44,824
1998 (75) (3,754) (7,538) (11,367)
1997 11,837 (5,316) (6,870) (349)
- ----------------------------------------------------------------------------
Favorable development is shown in brackets.
The unfavorable development in 1997 for the Workers' Compensation Operations
is due to loss and loss adjustment expense reserve strengthening for the 1995
and 1996 accident years. The reserve strengthening in 1999 is attributable to
the RISCORP-Related Adjustment. Adverse development in 1999 in the Reinsurance
Operations is attributable to increases during 1999 of estimates for
catastrophes that occurred in 1998, principally estimates of the loss
attributable to hurricane "Georges."
The process of evaluating an insurance company's exposure to the cost of
environmental and asbestos damage is subject to significant uncertainties. Among
the complications are lack of historical data, long reporting delays,
uncertainty as to the number and identity of insureds with potential exposure
and unresolved legal issues regarding policy coverage. The legal issues
concerning the interpretations of various insurance policy provisions and
whether environmental and asbestos losses are, or were ever intended to be,
covered are complex. Courts have reached different and sometimes inconsistent
conclusions regarding such issues as: when the loss occurred
TheZenith
27
and which policies provide coverage, how policy limits are applied and
determined, how policy exclusions are applied and interpreted, whether clean-up
costs are covered as insured property damage and whether site assessment costs
are either indemnity payments or adjusting costs.
Zenith has exposure to asbestos losses in its Workers' Compensation
Operations for medical, indemnity and loss adjustment expenses associated with
covered workers' long-term exposure to asbestos or asbestos-containing
materials. Most of these claims date back to the 1970's and early 1980's and
Zenith's exposure is generally limited to a pro rata share of the 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 (through March 31, 1999),
which wrote liability coverage under farmowners' and small commercial policies,
however such losses are substantially excluded from all such coverage. Any such
liabilities associated with CalFarm were retained by CalFarm when it was sold in
1999 and Zenith retains no exposure to any such liabilities. The business
reinsured by Zenith contains exclusion clauses for environmental and asbestos
losses, and in 1988 an absolute pollution exclusion was incorporated into
CalFarm'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 decisions on coverage, plaintiffs' expanded
theories of liability, the risks inherent in major litigation and other
uncertainties, the ultimate exposure from these claims may vary from the amounts
currently reserved.
Inflation rates impact the financial statements and operating results in
several areas. Fluctuations in inflation rates impact the market value of the
investment portfolio and yields on new investments. Inflation also impacts the
portion of the loss reserves that relates to hospital and medical expenses and
property claims and loss adjustment expenses, but not the portion of loss
reserves that relates to workers' compensation indemnity payments for lost wages
which are fixed by statute. Adjustments for inflationary impacts are implicitly
included as part of the P&C Operations' continual review of property-casualty
reserve estimates. Actuarial account of increased costs is considered in setting
adequate rates, and this is particularly important in the health insurance area
where hospital and medical inflation rates have exceeded general inflation
rates. Operating expenses, including payrolls, are impacted to a certain degree
by the inflation rate.
Sale of CalFarm Insurance Company
Effective March 31, 1999, Zenith Insurance completed the sale of all of the
issued and outstanding capital stock of CalFarm for $273.0 million in cash to
Nationwide Mutual Insurance Company. The gain on the sale after tax was
$104.3 million. After accounting for applicable taxes, expenses, and
intercompany transactions, the net proceeds from the sale that were available to
Zenith Insurance for investment were $211.0 million, compared to cash and
investments of $226.4 million that were excluded from Zenith's Consolidated
Balance Sheet upon the sale of CalFarm.
TheZenith
28
Acquisition of Zenith National's Common Stock by Fairfax Financial Holdings
Limited
Pursuant to a Stock Purchase Agreement, dated June 25, 1999 (the "Stock
Purchase Agreement"), between Fairfax Financial Holdings Limited, a Canada
corporation ("Fairfax"), and Reliance Insurance Company ("Reliance"), Fairfax
agreed to purchase the 6,574,000 shares of common stock of Zenith National owned
by Reliance and its affiliates for $28 per share (the "Transaction"). In an
amendment to its Statement on Schedule 13D, dated October 25, 1999 and filed
with the Securities and Exchange Commission, Reliance Financial Services
Corporation reported that the consummation of the Transaction occurred on
October 25, 1999. Effective upon consummation of the Transaction, Saul P.
Steinberg, Robert M. Steinberg and George E. Bello resigned from Zenith's Board
of Directors.
Resolution of Contingencies Surrounding Fair Values of RISCORP Assets Acquired
and Liabilities Assumed and the RISCORP-Related Adjustment
In October of 1999, Zenith Insurance completed a review of the liabilities
for unpaid losses and loss adjustment expenses in its Southeast Operations,
which principally consists of the operations acquired from RISCORP. The review
was conducted with assistance from independent actuarial consultants. As a
result of the review, Zenith Insurance recorded, in the third quarter of 1999,
the RISCORP-Related Adjustment, which mainly comprises an increase of
$46.0 million before tax ($29.9 million after tax) in the estimated net
liabilities for unpaid losses and loss adjustment expenses acquired from
RISCORP. The increase results primarily from the adjustments to reserves for the
years 1994 through 1997. As a result, certain related receivables, principally
contingent commissions receivable under reinsurance contracts assumed from
RISCORP, were reduced by $19.0 million. As previously reported, Zenith Insurance
purchased reinsurance protection relating to development of the unpaid loss and
loss adjustment expense reserves acquired from RISCORP.
Note 11 to the Consolidated Financial Statements on pages 58-59 describes
certain litigation between Zenith Insurance and RISCORP, including a settlement
agreement, dated July 7, 1999 (the "Settlement Agreement"), providing for the
resolution of certain claims arising out of the RISCORP Acquisition. Under the
Settlement Agreement, Zenith Insurance received $6.0 million from the escrow
account.
The adjustments associated with the increase in the liabilities for unpaid
loss and loss adjustment expenses acquired from RISCORP, net of the benefit of
reinsurance protection and the effect of the Settlement Agreement, in the
aggregate, reduced income by $32.5 million after tax, or $1.89 per share.
Deferred reinsurance benefits will be recognized over approximately the next
four years and net income is expected to increase by $15.0 million.
The foregoing RISCORP-Related Adjustment, after the benefit of the
reinsurance protection for adverse development of the unpaid loss and loss
adjustment expense reserves acquired from RISCORP, decreased the statutory
surplus of Zenith Insurance by $25.0 million after tax in 1999.
Workers' Compensation
The following is a discussion of results of the Workers' Compensation
Operations as set forth on page 26 excluding the impact of the RISCORP-Related
Adjustment.
Competition in the national workers' compensation insurance industry
continues to be intense. In 1998 and 1997, Zenith continued its geographic
diversification through the RISCORP Acquisition, thereby reducing Zenith's
former concentration in the California workers' compensation insurance market.
Zenith continues to adhere to its underwriting philosophy of requiring adequate
pricing for the risks that are being underwritten. Although earned premiums have
declined through some resulting loss of business, the loss ratio of Zenith's
Workers' Compensation Operations,
TheZenith
29
which were 64.6%, 61.5% and 68.4% in 1999, 1998 and 1997, respectively, indicate
that it has maintained its disciplined approach to pricing in spite of the
competitive pressures.
Premiums earned in the Workers' Compensation Operations remained relatively
constant in 1999 compared to 1998 and increased in 1998 compared to 1997,
principally as a result of the RISCORP Acquisition. Excluding the impact of the
RISCORP Acquisition, premiums earned in the Workers' Compensation Operations
decreased in the years ended December 31, 1999 and 1998 compared to the
corresponding periods in 1998 and 1997, principally as a result of Zenith's
endeavors to maintain rate adequacy in the face of intense competition in the
national workers' compensation insurance industry.
Underwriting losses in the Workers' Compensation Operations increased in the
years ended December 31, 1999 and 1998 compared to the corresponding periods in
1998 and 1997. The increase in such underwriting losses was attributable,
principally, to an increase in the severity of claims and to the claims
operating expenses that have not been reduced commensurately with premium
revenues. The underwriting results for the year ended December 31, 1998 included
$2.0 million of losses before tax related to catastrophic workers' compensation
claims. Included in 1999 and 1998 underwriting results were increased expenses
from the RISCORP Acquisition. The 1997 underwriting loss in the Workers'
Compensation Operations includes $11.8 million of adverse development on prior
years loss and loss adjustment expense reserves in the fourth quarter.
Excluding the impact of the RISCORP Acquisition, Zenith has reduced expenses
during 1999 and 1998 throughout its Workers' Compensation Operations,
principally through reductions in the number of employees. However, the effects
of such reductions have been mitigated by a reduction of premium income for the
year ended December 31, 1999 compared to the corresponding periods in 1998 and
1997.
In Florida, the Special Disability Trust Fund (the "Fund") assesses workers'
compensation insurers to pay for what are commonly referred to as "Second
Injuries". Historic assessments have been inadequate to completely fund
obligations of the Fund. In late 1997, the Florida statute was amended so that
the Fund will not be liable for and will not reimburse employers or carriers for
Second Injuries occurring on or after January 1, 1998. Zenith has recorded its
receivable from the Fund for Second Injuries based on specific claims and
historical experience prior to January 1, 1998. At December 31, 1999 and 1998,
the receivable from the Fund was $37.0 million and $39.1 million, respectively,
related to the pre-January 1, 1998 claims, of which $5.6 million was collected
in 1999.
The outlook for the future profitability of the Workers' Compensation
Operations is dependent upon the ability to maintain adequate rates and to write
business at such rates, manage claims costs and to keep operating expenses in
line with premium volume. Zenith is unable to predict when its Workers'
Compensation Operations will return to underwriting profitability.
Other Property-Casualty
Zenith's Other Property-Casualty Operations were operated primarily by
CalFarm, which was sold effective March 31, 1999. Other Property-Casualty
Operations served individual and commercial customers, primarily in the rural
and suburban areas of California. The major lines of business were automobile,
farmowners, commercial coverages, homeowners and group health.
Underwriting results for 1999, 1998 and 1997 were impacted by catastrophe
losses; intense competition; increased expenses, primarily due to computer costs
for Year 2000 compliance; and the continuing investment to upgrade existing
computer systems. Catastrophe losses attributable to California storm damage
were
TheZenith
30
$5.0 million and $1.5 million before tax in 1998 and 1997, respectively. The
Other Property-Casualty Operations underwriting results in 1999 and 1998 were
also adversely impacted by losses in the Health line of business because of
higher health care costs and increased utilization.
Reinsurance
Zenith's Reinsurance Operations emphasize the asssumption of world-wide
reinsurance of property losses from catastrophes and the reinsurance of large
property risks.
Reinsurance premiums earned increased in the year ended December 31, 1999,
compared to the corresponding period in 1998, due principally to additional
premiums in 1999 for reinstatement of treaties impacted by catastrophes during
1999 and 1998. Premiums earned in the Reinsurance Operations decreased in the
year ended December 31, 1998 as compared to the corresponding period in 1997 due
to selected non-renewal by Zenith of certain reinsurance treaties and a general
softening of such rates in the industry.
The underwriting results for the years ended December 31, 1999 and 1998 were
adversely impacted by $18.9 million and $4.5 million, respectively, of
catastrophe losses before tax. Of the 1999 catastrophe losses, $8.0 million
before tax was incurred in the fourth quarter of 1999. The principal events
impacting 1999 and 1998 were hurricane "Georges" and other Carribean storms,
earthquakes in Turkey and Taiwan, and French storms in December of 1999.
Underwriting results were favorable during 1997 as a result of the absence of
catastrophes.
Real Estate Operations
Zenith's Real Estate Operations develop land and primarily construct
single-family residences for sale in Las Vegas, Nevada.
Zenith recognized total revenues from its Real Estate Operations of
$58.7 million, $37.7 million and $45.4 million for the years ended December 31,
1999, 1998 and 1997, respectively. The results of operations for the year ended
December 31, 1999 benefited from an increase in home sales compared to the
corresponding periods in 1998 and 1997 (number of closings were 366, 275 and 305
for the years ended December 31, 1999, 1998 and 1997, respectively).
Construction in progress, including undeveloped land, was $87.9 million and
$69.4 million at December 31, 1999 and 1998, respectively. In addition to
continuing home construction, the Real Estate Operations may use some land
presently owned for commercial and multi-family dwelling construction. Changes
in interest rates or other factors could affect future home sales (we have not
seen any impact so far), but Zenith believes the land it has acquired is
strategically located and will have long-term value.
Investments
At December 31, 1999 and 1998, Zenith's consolidated investment portfolio
emphasized high quality, liquid bonds and short-term investments. Bonds
constituted 71% and 73%, and short-term investments constituted 20% and 18% of
the carrying value of Zenith's consolidated investment portfolio at
December 31, 1999 and 1998, respectively. Bonds with an investment grade rating
represented 95% and 96% of the consolidated carrying values of fixed maturities
at December 31, 1999 and 1998, respectively. The average maturity of the
investment portfolio was 5.7 years and 4.2 years at December 31, 1999 and 1998,
respectively.
Investment income during the three years ended December 31, 1999 was as
follows:
- ---------------------------------------------------
(Dollars in thousands) 1999 1998 1997
- ---------------------------------------------------
Before tax $53,662 $53,593 $52,332
After tax 35,632 35,907 34,655
- ---------------------------------------------------
TheZenith
31
The yields on invested assets, which vary with the general level of interest
rates, the average life of invested assets and the amount of funds available for
investment, for the three years ended December 31, 1999 were as follows:
- --------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------
Before tax 5.5% 5.7% 6.0%
After tax 3.7 3.8 3.9
- --------------------------------------------------------
The total fair value of fixed maturity investments, including short-term
investments, was $834.3 million and $959.1 million at December 31, 1999 and
1998, repectively. The unrealized (loss) gain on held-to-maturity and
available-for-sale fixed maturity investments, were as follows:
- --------------------------------------------------------
Held-to-
Maturity Available-for-Sale
-------- -------------------
Before Before After
(Dollars in thousands) Tax Tax Tax
- --------------------------------------------------------
December 31, 1999 $ (340) $(29,698) $(19,304)
December 31, 1998 1,569 9,864 6,412
- --------------------------------------------------------
At December 31, 1999 and 1998, 96% of Zenith's consolidated portfolio of
fixed maturity investments were classified as available-for-sale with the
unrealized appreciation or depreciation recorded as a separate component of
stockholders' equity. The change in fair value of fixed maturity investments
classified as available-for-sale resulted in a decrease in stockholders' equity
of $25.7 million after deferred tax from December 31, 1998 to December 31, 1999
compared to an increase of $1.4 million from 1997 to 1998.
Zenith's primary investment goals are to maintain safety and liquidity,
enhance principal values and achieve increased rates of return consistent with
regulatory constraints. The allocation among various types of securities is
adjusted from time to time based on market conditions, credit conditions, tax
policy, fluctuations in interest rates and other factors.
The change in the carrying value of Zenith's consolidated investment
portfolio in 1999 was as follows:
- ------------------------------------------------------------------------------------
(Dollars in thousands)
- ------------------------------------------------------------------------------------
Carrying value at beginning of year $1,048,681
Purchases at cost 375,899
Investments of CalFarm at date of sale (170,050)
Maturities and redemptions (103,168)
Proceeds from sales of investments:
Debt and equity securities available-for-sale (233,742)
Other investments (21,922)
---------
Total proceeds from sales of investments (255,664)
Net realized gains:
Debt and equity securities available-for-sale 2,651
Other investments 5,031
---------
Total net realized gains 7,682
Change in unrealized gains and losses, net (45,529)
Net change in short-term investments 41,746
Net accretion of bonds and preferred stocks and other
changes 2,137
- ------------------------------------------------------------------------------------
Carrying value at end of year $ 901,734
- ------------------------------------------------------------------------------------
Stockholders' equity will continue to be affected by volatility in the fixed
maturity securities market and changes in interest rates through changes in the
values of fixed maturity investments which are classified as available-for-
sale.
TheZenith
32
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. During the fourth quarter and for the year ended
December 31, 1999, there were writedowns of $1.0 million and $1.7 million,
respectively.
Market Risk of Financial Instruments
The fair value of the fixed income investment portfolio is exposed to
interest rate risk -- the risk of loss in fair value resulting from changes in
prevailing market rates of interest for similar financial instruments. In
addition, certain mortgage-backed securities are exposed to accelerated
prepayment risk in that a decline in interest rates could prompt mortgage
holders to refinance existing mortgages at lower rates. However, Zenith has the
ability to hold fixed income investments to maturity.
Zenith relies on the experience and judgment of senior management to monitor
and mitigate the effects of market risk. Zenith does not utilize financial
instrument hedges or derivative financial instruments to manage risks, nor does
it enter into any swap, forward or options contracts, but will attempt to
mitigate its exposure through active portfolio management. The allocation among
various types of securities is adjusted from time to time based on market
conditions, credit conditions, tax policy, fluctuations in interest rates and
other factors. In addition, Zenith places the majority of its investments in
high quality, liquid securities and limits the amount of credit exposure to any
one issuer.
The table below provides information about Zenith's financial instruments as
of December 31, 1999 for which fair values are subject to changes in interest
rates. For fixed maturity investments, the table presents fair value of
investments held and weighted average interest rates on such investments by
expected maturity dates. Such investments include redeemable preferred stocks,
corporate bonds, municipal bonds, government bonds and mortgage-backed
securities. For debt obligations, the table presents principal cash flows by
expected maturity dates (including interest).
- ------------------------------------------------------------------------------------------------------------------------
Expected Maturity Date
-------------------------------------------------------------------------
(Dollars in thousands) 2000 2001 2002 2003 2004 Thereafter Total
- ------------------------------------------------------------------------------------------------------------------------
Fixed maturity investments:
Held-to-maturity and available-for-sale
securities:
Fixed rate $ 60,140 $160,525 $36,881 $49,629 $35,132 $309,325 $651,632
Weighted average interest rate 6.0% 6.2% 6.8% 9.6% 7.8% 8.5% 7.6%
Trading securities:
Fixed rate $ 2,929 $ 2,929
Weighted average interest rate 7.0% 7.0%
Short-term investments $179,748 $179,748
Debt and interest obligations:
Payable to banks and other notes payable
9% senior notes payable 6,750 $ 6,750 $78,375 91,875
8.55% redeemable securities 6,413 6,413 6,413 $ 6,413 $ 6,413 $228,912 260,977
- ------------------------------------------------------------------------------------------------------------------------
TheZenith
33
Liquidity and Capital Resources
The P&C Operations generally create liquidity because insurance premiums are
collected prior to disbursements for claims and benefits. These net cash flows,
as set forth on page 45 in the Consolidated Financial Statements, are invested
as described in "Investments" on pages 31-33. However, in the years ended
December 31, 1999 and 1998, net cash was used in operations of $51.6 million and
$47.1 million, respectively, to pay loss and loss adjustment expenses related to
previous years, including loss reserves from the RISCORP Acquisition. Also,
Zenith had less cash due to reduced premium revenues. Net cash flows from
operations will be affected by fluctuations in premium income.
Net cash flows provided by operating activities were $27.0 million for 1997.
Zenith National'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 by its Real Estate Operations. 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 fund its liquidity requirements.
On April 1, 1998, in connection with the closing of the RISCORP Acquisition,
Zenith Insurance paid $35.0 million to RISCORP and repaid $15.0 million of
indebtedness assumed from RISCORP. On March 26, 1999, Zenith Insurance paid the
remaining balance of $53.7 million, including interest, due to RISCORP pursuant
to the RISCORP Acquisition.
On April 1, 1999, Zenith Insurance received net proceeds of $213.8 million
from Nationwide Mutual Insurance Company in connection with the sale of the
capital stock of CalFarm.
At December 31, 1999, Zenith National had two revolving, unsecured lines of
credit in an aggregate amount of $70.0 million, all of which was available at
December 31, 1999. A $30.0 million line of credit was not renewed when it
expired November 30, 1999. Under these agreements certain restrictive covenants
apply including the maintence of a specific level of net worth.
At December 31, 1999, Zenith National was authorized to repurchase up to
940,000 shares of its common stock pursuant to a share purchase program
authorized by its Board of Directors. These purchases are discretionary and can
be adequately funded from Zenith National's existing sources of liquidity. In
1999 and 1998, respectively, Zenith National repurchased 185,000 and
960,000 shares on the open market for a total purchase price of $4.2 million and
$24.0 million.
Zenith's Real Estate Operations maintain certain bank credit facilities to
provide financing for development and construction of
single-family residences for sale. These loans bear interest at the rates of
prime plus 1.0% and prime plus 0.75% and mature between February 2000 and
November 2001. Each agreement pertains to a separate residential housing project
and the maximum credit available was $27.1 million and $32.3 million at
December 31, 1999 and 1998, respectively. The agreements provide that funding
and repayment of development and construction loans are made in tandem for each
project. A development loan will always precede a construction loan for a
project and the proceeds of the construction loan are required to first be used
to pay off the respective development loan. At December 31, 1999 and 1998,
$19.1 million and $12.3 million, respectively, was outstanding with respect to
the borrowing.
In July of 1999, Zenith Insurance paid a dividend of $100.0 million to Zenith
National. The dividend was approved by the California
TheZenith
34
Department of Insurance on June 24, 1999. Zenith National added such funds to,
and invested them as part of, its investment portfolio. Zenith has been informed
by A.M. Best Company ("Best") that the payment of the dividend may result in a
downgrade of Best's rating of the P&C Operations from A+ to A.
The P&C Operations are subject to insurance regulations which restrict their
ability to distribute dividends. Such dividend capabilities are set forth in
Note 13 to the Consolidated Financial Statements on page 61. Such restrictions
have not had, and under current regulations are not expected to have, a material
adverse impact on Zenith. Zenith National received $130.0 million of dividends
from Zenith Insurance in 1999, including the extraordinary dividend of
$100.0 million. Zenith National received no dividends from Zenith Insurance in
1998 and received dividends from Zenith Insurance amounting to $22.8 million in
1997. The maximum dividend which can be paid to Zenith National without prior
approval of the California Department of Insurance in 2000 is $29.8 million.
Insurance companies are required to have securities on deposit for the
protection of policyholders in accordance with various states' regulations. At
December 31, 1999 and 1998, investments carried at their fair value of
$205.5 million and $262.0 million, respectively, were on deposit to comply with
such regulations.
On July 30, 1998, Zenith National issued $75.0 million of 8.55% Capital
Securities at a price of $996.24 per security through Zenith National Insurance
Capital Trust I, a Delaware statutory business trust (the "Trust"), all of the
voting securities of which are owned by Zenith National. Each Capital Security
pays semi-annual cumulative cash distributions at the annual rate of 8.55% of
the $1,000 liquidation amount per security.
The Trust used the proceeds from its offering to purchase $75.0 million of
Zenith National's 8.55% Subordinated Deferrable Interest Debentures due 2028
(the "Subordinated Debentures"), which constitute the principal asset of the
Trust. The semi-annual interest payments on the Subordinated Debentures may be
deferred by Zenith National for up to ten consecutive semi-annual periods. The
Subordinated Debentures are redeemable at any time by Zenith National at the
then present value of the remaining scheduled payments of principal and
interest. Payments on the Capital Securities, including distributions and
redemptions, follow those of the Subordinated Debentures. Zenith National used
$65.0 million from the net proceeds to make a capital contribution to Zenith
Insurance. The remaining net proceeds were used for general corporate purposes.
On February 25, 2000, Zenith National paid $18.8 million to repurchase $12.5
million aggregate principal amount of the outstanding 9% Senior Notes due 2002
and $8.0 million aggregate liquidation amount of the outstanding 8.55% Capital
Securities issued by the Trust. Zenith National used its available cash balances
to fund these purchases.
Codification of Statutory Accounting Principles
In 1998, the National Association of Insurance Commissioners ("NAIC") adopted
the Codification of Statutory Accounting Principles guidance (the
"Codification"), which will replace the current Accounting Practices and
Procedures manual as the NAIC's primary guidance on statutory accounting.
(Statutory accounting is a comprehensive basis of accounting based on prescribed
accounting practices, which include state laws, regulations and general
administrative rules, as well as a variety of publications of the NAIC.) The
Codification provides guidance for the areas where statutory accounting has been
silent and changes current statutory accounting in some areas. The NAIC is now
considering amendments to the Codification that would also be effective upon
implementation. The NAIC has established January 1, 2001 as the effective date
of the Codification.
TheZenith
35
The California Department of Insurance has adopted the Codification.
Implementation of the Codification may affect the surplus level and the
capitalization requirements of the P&C Operations on a statutory basis. Zenith
has not determined the impact of the Codification.
Year 2000
The Year 2000 Problem refers to the inability of information technology
("IT") systems and non-information technology ("non-IT") systems to accurately
process dates during and after 1999. IT systems include computer hardware and
software. Non-IT systems include equipment, such as elevators, security systems
and HVAC systems that incorporate embedded micro controllers. If not corrected,
the processes of IT and non-IT systems that are date sensitive could fail or
miscalculate data resulting in disruptions of operations, such as a temporary
inability to process transactions, send and receive electronic data with third
parties or otherwise engage in normal business activities. There could also be a
negative impact on the economic and social infrastructure on which Zenith
depends.
At the end of 1999, Zenith was prepared for the date change from 1999 to
2000. Zenith systematically replaced and modified its internal non-IT and IT
systems to function correctly with dates from 1999 forward, thereby rendering
them "Year 2000 Compliant." Zenith also had in place contingency plans to
substantially reduce material business disruptions from failures of Zenith's
internal systems, a failure of one or more critical third parties upon which
Zenith relies in its business operations ("Key External Dependencies") and/or
the contamination of Zenith's IT systems due to receipt of corrupted data.
Zenith did not suffer any disruption of its business due to any impact of the
date change from 1999 to 2000 on its internal non-IT systems, its internal IT
systems or its Key External Dependencies. However, at the end of 1999, Zenith
was cautious about the state of readiness of its Key External Dependencies and
also recognized that despite its Year 2000-related efforts negative impact on
its operations from Year 2000-related failures was possible. Accordingly, as a
precaution, Zenith did implement elements of its contingency plans prior to the
end of 1999. Those elements are no longer in effect.
Although the date change from 1999 to 2000 occurred without disruption to
Zenith's business, Zenith remains alert both as to potential issues in its
internal systems and the state of readiness of its Key External Dependencies.
All companies were, and to a lesser extent are still, faced with unknown risks
arising from Year 2000 issues that may impact them negatively. Zenith believes,
at this time, that the most reasonably-likely, worst-case, Year 2000 scenarios
could include a failure of a part of Zenith's internal IT systems, the isolated
inability of one or more of its critial Key External Dependencies, such as
financial institutions, agents/brokers or reinsurers, to respond to Zenith's
needs, and/or the contamination of Zenith's IT systems due to receipt of
corrupted data. Such a scenario could result in a disruption of Zenith's normal
business activities and could have a material adverse effect on its financial
condition and results of operations. However, nothing has come to Zenith's
attention leading it to conclude that there would be future Year 2000-related
failures having a material adverse impact on Zenith. Further, because of the
general nature of the Year 2000 Problem and how it may manifest itself, Zenith
will continue to monitor its internal systems and its Key External Dependencies
for Year 2000-related anomalies.
TheZenith
36
Monitoring of some situations will extend into 2001, so as to cover twelve
months of Year 2000 processes. However, it is expected that substantially all
monitoring will decrease over the next few months and end by the second quarter
of 2000. Contingency plans remain in place, ready to be implemented.
The majority of Zenith's Year 2000 compliance efforts were staffed
internally, although Zenith engaged technical consultants to assist its internal
staff, as well as to assist Zenith in reviewing its progress. All
Year 2000-related costs were funded from internal sources. The costs associated
with non-IT systems and contingency planning were not significant. The costs
associated with IT systems (namely, core information technology systems;
computer network and communications infrastructure; and personal and laptop
computers, including applications) were $11.1 million, of which $5.9 million,
$2.7 million and $2.5 million were expended in 1999, 1998 and 1997,
respectively. This following table shows the portions of the $11.1 million, that
were expended for repairing Zenith's IT systems ("IT Repair Costs") and
replacing them ("IT Replacement Costs").
- ----------------------------------------------------------
(Dollars in thousands) Total IT Expenditure
- ----------------------------------------------------------
IT Repair Costs $ 7,562
IT Replacement Costs:
Software 881
Hardware 2,234
Related Expenditures 417
- ----------------------------------------------------------
Total $11,094
- ----------------------------------------------------------
The above table includes $1.8 million incurred for the Other Property-Casualty
Operations through March 31, 1999, the date on which such operations were
disposed of through the sale of the capital stock of CalFarm.
IT Repair Costs and IT Replacement Costs include external costs and the cost
of dedicated information technology personnel. IT Repair Costs are expensed as
they are incurred; IT Replacement Costs are capitalized in accordance with
Statement of Position 98-1 "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." The internal cost of user participation
in acceptance testing was not measured and is not included. In addition to the
amounts shown in the table, Zenith will be expending funds in the first quarter
of 2000 to close out and refine its Year 2000 efforts. This amount is not
expected to be material. Zenith had been planning to upgrade its computer
network and communications infrastructure, as well as its personal and laptop
computers (including applications), for some time; however, because of the Year
2000 problem, certain components of those plans were accelerated and completed
by mid-1999. No planned information technology projects were deferred because of
Year 2000-related efforts.
Recently Issued Accounting Standards
On June 15, 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133 ("SFAS No. 133") "Accounting
for Derivative Instruments and Hedging Activities". SFAS No. 133 is effective
for Zenith for all fiscal quarters of all fiscal years beginning after June 15,
2000. SFAS No. 133 requires that companies record all derivative instruments on
the balance sheet at fair value. Changes in the fair value of derivatives are
recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge transaction
and, if it is, the type of hedge transaction. Zenith does not invest in
derivative instruments, and therefore adoption of SFAS No. 133 is not expected
to have any effect on Zenith's results of operations or its financial position.
TheZenith
37
5-YEAR SUMMARY OF SELECTED FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
Zenith National Insurance Corp. and Subsidiaries
- --------------------------------------------------------------------------------
Year ended December 31, Note 1999 1998
- --------------------------------------------------------------------
(Dollars and shares in thousands,
except per share data)
Revenues: 2, 6
Premiums earned $ 369,403 $ 529,855
Investment income 53,662 53,593
Realized gains on investments 7,682 11,602
Real estate sales 58,670 37,737
Service fee income 2,691 3,992
- --------------------------------------------------------------------
Total revenues 492,108 636,779
- --------------------------------------------------------------------
(Loss) income from continuing
operations after tax, and before
RISCORP-Related Adjustment and
before realized gains 2, 3, 6 (22,728) 11,559
Per common share 1 (1.33) 0.67
- --------------------------------------------------------------------
RISCORP-Related Adjustment after
tax 5 (32,500)
Per common share (1.89)
- --------------------------------------------------------------------
Gain on sale of CalFarm after tax 6 104,335
Per common share 6.08
- --------------------------------------------------------------------
Components of net (loss) income: 2, 6
Underwriting (loss) income:
(Loss) income excluding
catastrophe losses and
RISCORP-Related Adjustment 5 (40,404) (11,230)
Catastrophe losses (12,285) (7,475)
RISCORP-Related Adjustment 5 (32,500)
Net investment income 35,632 35,907
Realized gains on investments 4,993 7,541
Income from real estate
operations 2,372 868
Parent expenses and interest
expense (8,043) (6,511)
Gain on sale of CalFarm 6 104,335
(Loss) from discontinued life and
annuity operations 3
- --------------------------------------------------------------------
Net income 54,100 19,100
Per common share 1 3.15 1.11
- --------------------------------------------------------------------
Cash dividends per share to common
stockholders 1.00 1.00
- --------------------------------------------------------------------
Weighted average common shares
outstanding 17,172 17,158
- --------------------------------------------------------------------
Financial condition: 2, 6
Total assets $1,573,786 $1,818,726
Investments 901,734 1,048,681
Unpaid loss and loss adjustment
expenses 880,929 997,647
Senior notes, bank debt and other
notes payable 94,955 93,851
Redeemable securities 73,397 73,341
Total stockholders' equity 354,559 346,952
Stockholders' equity per share 20.67 20.23
Stockholders' equity per share,
excluding effect of Statement of
Financial Accounting Standards
No. 115 21.80 19.86
Return on average equity 13.9% 5.4%
- --------------------------------------------------------------------
Property-casualty insurance
statistics (GAAP): 2, 6
Paid loss and loss adjustment
expense ratio 96.0% 82.9%
Combined ratio including
RISCORP-Related Adjustment: 5
Loss and loss adjustment expense
ratio 97.5% 72.3%
Underwriting expense ratio 37.7% 33.0%
--------- ---------
Combined ratio 135.2% 105.3%
Combined ratio excluding
RISCORP-Related Adjustment: 5
Loss and loss adjustment expense
ratio 87.4% 72.3%
Underwriting expense ratio 34.6% 33.0%
--------- ---------
Combined ratio 122.0% 105.3%
Net premiums earned-to-surplus
ratio 1.1 1.2
Loss and loss adjustment expense
reserves-to-surplus ratio (net of
reinsurance) 4 1.8 1.6
- --------------------------------------------------------------------
(1) Amounts prior to 1997 have been restated as required to comply with
Statement of Financial Accounting Standards No. 128 "Earnings per Share" and
represent diluted amounts per share and weighted average shares assuming
exercise of stock options.
(2) On April 1, 1998, Zenith acquired substantially all assets and certain
liabilities from RISCORP, Inc and subsidiaries (collectively, "RISCORP")
(See Notes 9 and 11 to the Consolidated Financial Statements on pages 56-57
and 58-59)
(3) In 1995, Zenith sold CalFarm Life.
(4) Includes Associated General Commerce Self-Insurers' Trust Fund net reserves
of $65.4 million acquired through merger on December 31, 1996.
TheZenith
38
- --------------------------------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------
(Dollars and shares in thousands,
except per share data)
Revenues:
Premiums earned $ 488,721 $ 452,856 $ 437,513
Investment income 52,332 51,154 46,150
Realized gains on investments 14,008 10,807 3,621
Real estate sales 45,419 41,554 31,736
Service fee income
- -----------------------------------------------------------------------------
Total revenues 600,480 556,371 519,020
- -----------------------------------------------------------------------------
(Loss) income from continuing
operations after tax, and before
RISCORP-Related Adjustment and
before realized gains 19,669 30,575 17,368
Per common share 1.10 1.72 0.95
- -----------------------------------------------------------------------------
RISCORP-Related Adjustment after
tax
Per common share
- -----------------------------------------------------------------------------
Gain on sale of CalFarm after tax
Per common share
- -----------------------------------------------------------------------------
Components of net (loss) income:
Underwriting (loss) income:
(Loss) income excluding
catastrophe losses and
RISCORP-Related Adjustment (10,217) 356 (226)
Catastrophe losses (975) (8,710)
RISCORP-Related Adjustment
Net investment income 34,655 34,069 30,690
Realized gains on investments 8,431 7,025 2,354
Income from real estate
operations 1,079 1,251 1,349
Parent expenses and interest
expense (4,873) (5,101) (5,735)
Gain on sale of CalFarm
(Loss) from discontinued life and
annuity operations (13,122)
- -----------------------------------------------------------------------------
Net income 28,100 37,600 6,600
Per common share 1.57 2.12 0.36
- -----------------------------------------------------------------------------
Cash dividends per share to common
stockholders 1.00 1.00 1.00
- -----------------------------------------------------------------------------
Weighted average common shares
outstanding 17,886 17,752 18,334
- -----------------------------------------------------------------------------
Financial condition:
Total assets $1,252,156 $1,242,724 $1,115,433
Investments 879,973 852,799 835,214
Unpaid loss and loss adjustment
expenses 613,266 620,078 517,552
Senior notes, bank debt and other
notes payable 88,216 88,861 83,135
Redeemable securities
Total stockholders' equity 361,866 337,503 330,432
Stockholders' equity per share 20.31 19.17 18.58
Stockholders' equity per share,
excluding effect of Statement of
Financial Accounting Standards No.
115 20.03 19.28 18.18
Return on average equity 8.3% 11.4% 2.0%
- -----------------------------------------------------------------------------
Property-casualty insurance
statistics (GAAP):
Paid loss and loss adjustment
expense ratio 66.9% 69.9% 74.3%
Combined ratio including
RISCORP-Related Adjustment:
Loss and loss adjustment expense
ratio 71.2% 69.5% 74.4%
Underwriting expense ratio 32.2% 30.3% 28.7%
--------- --------- ---------
Combined ratio 103.4% 99.8% 103.1%
Combined ratio excluding
RISCORP-Related Adjustment:
Loss and loss adjustment expense
ratio 71.2% 69.5% 74.4%
Underwriting expense ratio 32.2% 30.3% 28.7%
--------- --------- ---------
Combined ratio 103.4% 99.8% 103.1%
Net premiums earned-to-surplus
ratio 1.4 1.4 1.4
Loss and loss adjustment expense
reserves-to-surplus ratio (net of
reinsurance) 1.5 1.6 1.5
- -----------------------------------------------------------------------------
(5) The RISCORP-Related Adjustment represents net charges of $50.0 million
before tax ($32.5 million after tax, or $1.89 per share) associated with an
increase in the net liabilities for unpaid losses and loss adjustment
expenses in the Southeast Operations, which principally consists of the
operations acquired from RISCORP, recorded in the third quarter of 1999.
(See Note 11 to the Consolidated Financial Statements on pages 58-59)
(6) Zenith completed the sale of CalFarm Insurance Company to Nationwide Mutual
Insurance Company effective March 31, 1999 resulting in a gain of
$104.3 million after tax, or $6.08 per share, in the first quarter of 1999.
(See Note 10 to the Consolidated Financial Statements on page 57.)
TheZenith
39
PROPERTY-CASUALTY LOSS DEVELOPMENT
- -----------------------------------------------------------------
Zenith National Insurance Corp. and Subsidiaries
The table that follows shows development of loss and loss adjustment
expense liabilities as originally estimated on a generally accepted accounting
principles basis at December 31 of each year presented. The accounting policies
used to estimate these liabilities are described in Note 1 to the Consolidated
Financial Statements on pages 49-50.
Analysis of Loss and Loss Adjustment Expense Liability Development
- --------------------------------------------------------------------------------
Year ended December 31, 1999 1998
- -----------------------------------------------------------------------------------------
(Dollars in thousands)
Liability for unpaid loss and loss adjustment expenses, net $605,250 $599,357
- -----------------------------------------------------------------------------------------
Paid, net (cumulative) as of:
One year later 244,402
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 645,460
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 $(46,103)
- -----------------------------------------------------------------------------------------
Net Liability -- December 31, $605,250 $599,357
Receivable from reinsurers and state trust funds
on paid and unpaid losses 275,679 276,526
- -----------------------------------------------------------------------------------------
Gross liability -- December 31, 880,929 875,883
Re-estimated liability, net of reinsurance 645,460
Re-estimated receivable from reinsurers and state
trust funds on paid and unpaid losses 307,088
- -----------------------------------------------------------------------------------------
Re-estimated liability, gross 952,548
- -----------------------------------------------------------------------------------------
Favorable (deficient) development, gross $(76,665)
- -----------------------------------------------------------------------------------------
The analysis above presents the development of Zenith National Insurance
Corp. and subsidiaries' balance sheet liabilities for 1989 through 1999. The
first line in the table shows the liability for unpaid loss and loss adjustment
expense, net of reinsurance, as estimated at the end of each calendar year. The
first section shows the actual payments of loss and loss adjustment expenses
that relate to each year-end liability as they were paid during subsequent
annual periods. The second section shows revised estimates of the original
unpaid amounts, net of reinsurance, including the subsequent payments. The next
line shows the favorable or deficient developments of the original estimates for
each year through 1999, net of reinsurance. This loss reserve development table
is cumulative and, therefore, ending balances should not be added since the
amount at the end of each calendar year includes activity for both the current
and prior years. The liability at the end of each year includes an estimate of
the amount yet unpaid and still due at the subsequent re-evaluation date for all
previously estimated liabilities. For example, the liability at the end of 1997
includes an estimate of the amount still due on the 1996 and prior liabilities.
Information for 1998 includes the results of the acquisition of substantially
all assets and certain liabilities from RISCORP, Inc. and subsidiaries (See
Notes 9 and 11 to the Consolidated Financial Statements on pages 56-57 and
58-59). The data prior to 1999 has been restated to exclude the results of
CalFarm Insurance Company, which was sold effective March 31, 1999 (See Note 10
to the Consolidated financial statements on page 57).
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.
TheZenith
40
- --------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989
- ----------------------------------------------------------------------------------------------------
(Dollars
in
thousands)
Liability
for
unpaid
loss
and
loss
adjustment
expenses,
net $418,529 $419,451 $357,652 $365,296 $385,629 $380,388 $354,789 $330,678 $303,069
- ----------------------------------------------------------------------------------------------------
Paid,
net
(cumulative)
as of:
One
year
later 137,681 149,195 127,428 116,193 119,158 124,303 124,186 108,230 82,180
Two
years
later 226,165 238,809 208,452 189,086 193,815 206,332 202,060 181,610 138,113
Three
years
later 289,673 250,865 236,623 238,268 257,922 252,011 225,615 177,029
Four
years
later 278,760 262,775 271,090 288,034 284,734 253,841 200,887
Five
years
later 280,005 287,806 312,352 304,198 273,078 217,474
Six
years
later 298,976 323,555 323,213 286,033 228,997
Seven
years
later 331,914 330,371 299,507 237,366
Eight
years
later 336,626 304,090 246,018
Nine
years
later 308,691 249,197
Ten
years
later 252,419
- ----------------------------------------------------------------------------------------------------
Liability,
net
re-estimated
as of:
One
year
later 402,551 423,327 358,249 359,658 371,537 381,758 369,480 335,588 299,166
Two
years
later 399,660 414,854 358,264 347,845 359,665 380,057 378,978 342,180 287,823
Three
years
later 410,924 351,831 339,076 356,475 378,383 377,713 347,537 285,188
Four
years
later 348,226 332,834 348,916 382,382 379,440 347,146 288,579
Five
years
later 330,097 342,608 376,917 380,672 346,558 288,265
Six
years
later 340,001 370,165 377,166 347,087 287,190
Seven
years
later 368,173 370,720 342,728 286,577
Eight
years
later 368,921 336,467 281,047
Nine
years
later 334,437 275,047
Ten
years
later 273,091
- ----------------------------------------------------------------------------------------------------
Favorable
(deficient)
development $ 18,869 $ 8,527 $ 9,426 $ 35,199 $ 45,628 $ 12,215 $(14,132) $ (3,759) $ 29,978
- ----------------------------------------------------------------------------------------------------
Net
Liability
--
December
31, $418,529 $419,451 $357,652 $365,296 $385,629 $380,388
Receivable
from
reinsurers
and
state
trust
funds
on
paid
and
unpaid
losses 74,313 82,869 40,419 37,561 38,543 26,822
- -------------------------------------------------------------------
Gross
liability
--
December
31, 492,842 502,320 398,071 402,857 424,172 407,210
Re-estimated
liability,
net of
reinsurance 399,660 410,924 348,226 330,097 340,001 368,173
Re-estimated
receivable
from
reinsurers
and state
trust
funds
on
paid
and
unpaid
losses 80,099 88,922 44,189 40,121 48,963 63,018
- -------------------------------------------------------------------
Re-estimated
liability,
gross 479,759 499,846 392,415 370,218 388,964 431,191
- -------------------------------------------------------------------
Favorable
(deficient)
development,
gross $ 13,083 $ 2,474 $ 5,656 $ 32,639 $ 35,208 $(23,981)
- -------------------------------------------------------------------
TheZenith
41
CONSOLIDATED BALANCE SHEET
- --------------------------------------------------
Zenith National Insurance Corp. and Subsidiaries
- -----------------------------------------------------------------------------------------------
December 31, Note 1999 1998
- -----------------------------------------------------------------------------------------------
(Dollars in thousands)
Assets:
Investments
Fixed maturities:
At amortized cost (fair value $27,186 in 1999 and $36,712
in 1998) $ 27,526 $ 35,143
At fair value (cost $657,129 in 1999 and $725,397 in 1998) 627,375 735,284
Floating rate preferred stocks, at fair value (cost $6,799
in 1999 and $16,614 in 1998) 6,420 17,324
Convertible and non-redeemable preferred stocks, at fair
value (cost $4,300 in 1999
and $7,679 in 1998) 3,405 7,350
Common stocks, at fair value (cost $25,428 in 1999 and
$22,402 in 1998) 25,634 26,935
Short-term investments (at cost, which approximates fair
value) 179,748 187,123
Other investments 31,626 39,522
- -----------------------------------------------------------------------------------------------
Total investments 1, 2 901,734 1,048,681
Cash 15,714 1,998
Accrued investment income 11,832 13,646
Premiums receivable, less allowance for doubtful accounts of
$10,172 in 1999
and $9,760 in 1998 74,586 133,631
Receivable from reinsurers and state trust funds on paid and
unpaid losses and prepaid reinsurance premiums 1 343,671 373,045
Deferred policy acquisition costs 7,892 23,941
Properties and equipment, less accumulated depreciation 3 54,981 79,908
Net deferred tax asset 7 34,601 22,611
Federal income tax receivable 7 2,740
Intangible assets 1, 9 23,207 25,744
Other assets 1 105,568 92,781
- -----------------------------------------------------------------------------------------------
Total assets $1,573,786 $1,818,726
- -----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of this statement.
TheZenith
42
- ----------------------------------------------------------------------------------------------------
December 31, Note 1999 1998
- ----------------------------------------------------------------------------------------------------
(Dollars and shares in thousands)
Liabilities:
Policy liabilities and accruals:
Unpaid loss and loss adjustment expenses 16 $ 880,929 $ 997,647
Unearned premiums 50,906 157,965
Policyholders' dividends accrued 3,375 4,763
Reserves on loss portfolio transfers 17,658 9,689
Payable to banks and other notes payable 4 20,238 19,255
Senior notes payable, less unamortized issue costs of $283
in 1999 and $404 in 1998 5, 22 74,717 74,596
Federal income tax payable 7 23,793
Payable to RISCORP 52,952
Other liabilities 11 74,214 81,566
- ----------------------------------------------------------------------------------------------------
Total liabilities 1,145,830 1,398,433
- ----------------------------------------------------------------------------------------------------
Redeemable securities:
Company-obligated, mandatorily redeemable capital securities
of Zenith National Insurance Capital Trust I, holding
solely 8.55% Subordinated Deferrable Interest Debentures
due 2028, of Zenith National Insurance Corp., less
unamortized issue cost and discount of $1,603 in 1999 and
$1,659 in 1998 6, 22 73,397 73,341
- ----------------------------------------------------------------------------------------------------
Commitments and contingent liabilities 11
Stockholders' equity:
Preferred stock, $1 par -- shares authorized 1,000; issued
and outstanding,
none in 1999 and 1998
Common stock, $1 par -- shares authorized 50,000; issued
25,157, outstanding 17,150 in 1999; issued 24,970,
outstanding 17,148 in 1998 25,157 24,970
Additional paid-in capital 274,897 270,679
Retained earnings 225,229 188,243
Accumulated other comprehensive (loss) income -- net
unrealized (depreciation) appreciation on investments, net
of deferred tax (benefit) expense of $(10,768) in 1999 and
$5,167 in 1998 1, 2 (19,998) 9,596
- ----------------------------------------------------------------------------------------------------
505,285 493,488
Less treasury stock at cost (8,007 shares in 1999 and 7,822
shares in 1998) 12 (150,726) (146,536)
- ----------------------------------------------------------------------------------------------------
Total stockholders' equity 354,559 346,952
- ----------------------------------------------------------------------------------------------------
Total liabilities, redeemable securities and stockholders'
equity $1,573,786 $1,818,726
- ----------------------------------------------------------------------------------------------------
TheZenith
43
CONSOLIDATED STATEMENT OF OPERATIONS
- ----------------------------------------------------------------------
Zenith National Insurance Corp. and Subsidiaries
- ------------------------------------------------------------------------------------------------------------------
Year ended December 31, Note 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------
(Dollars and shares in thousands, except per share data)
Revenues:
Premiums earned 8 $369,403 $529,855 $488,721
Net investment income 2 53,662 53,593 52,332
Realized gains on investments 2 7,682 11,602 14,008
Real estate sales 58,670 37,737 45,419
Service fee income 2,691 3,992
- ------------------------------------------------------------------------------------------------------------------
Total revenues 492,108 636,779 600,480
- ------------------------------------------------------------------------------------------------------------------
Expenses:
Loss and loss adjustment expenses incurred 8, 16 360,172 382,890 348,165
Policy acquisition costs 65,266 96,937 92,213
Other underwriting and operating expenses 80,090 85,299 68,003
Policyholders' dividends and participation 610 516 355
Real estate construction and operating costs 55,020 36,374 44,286
Interest expense 4, 5, 6 8,218 5,928 3,980
- ------------------------------------------------------------------------------------------------------------------
Total expenses 569,376 607,944 557,002
- ------------------------------------------------------------------------------------------------------------------
Gain on sale of CalFarm Insurance Company 10 160,335
- ------------------------------------------------------------------------------------------------------------------
Income before federal income tax expense 83,067 28,835 43,478
Federal income tax expense, including expense of $56,000
related to the sale of CalFarm Insurance Company in 1999 7, 10 28,967 9,735 15,378
- ------------------------------------------------------------------------------------------------------------------
Net income $ 54,100 $ 19,100 $ 28,100
- ------------------------------------------------------------------------------------------------------------------
Net income per common share -- basic 17 $ 3.15 $ 1.12 $ 1.59
- ------------------------------------------------------------------------------------------------------------------
Net income per common share -- diluted 17 $ 3.15 $ 1.11 $ 1.57
- ------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of this statement.
TheZenith
44
CONSOLIDATED STATEMENT OF CASH FLOWS
----------------------------------------------------------------------
Zenith National Insurance Corp. and Subsidiaries
- -------------------------------------------------------------------------------------------------------------
Year ended December 31, Note 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Cash flows from operating activities:
Premiums and service fee income collected $394,564 $580,945 $521,588
Investment income received 51,170 54,970 52,242
Proceeds from sales of real estate 58,670 37,737 45,964
Loss and loss adjustment expenses paid (321,510) (434,610) (342,461)
Underwriting and other operating expenses paid (132,505) (182,235) (161,722)
Real estate construction costs paid (66,462) (47,423) (47,565)
Reinsurance premiums paid (24,126) (41,429) (27,336)
Interest paid (13,467) (10,513) (6,910)
Income taxes recovered (paid) 2,084 (4,580) (8,242)
Net proceeds from sales of trading portfolio investments 1,416
- -------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities (51,582) (47,138) 26,974
- -------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of investments:
Debt and equity securities available-for-sale (366,567) (390,373) (82,734)
Other investments (9,332) (12,894) (8,510)
Proceeds from maturities and exchanges of investments:
Fixed maturities held-to-maturity 7,500 11,583 6,258
Debt and equity securities available-for-sale 95,668 96,362 48,338
Other investments 15,483
Proceeds from sales of investments:
Debt and equity securities available-for-sale 233,742 302,648 104,809
Other investments 21,922 13,145 15,211
Net change in short-term investments (41,746) 14,916 (103,115)
Capital expenditures and other, net (15,189) (11,356) (5,304)
Cash payment to RISCORP 9 (54,308) (35,000)
RISCORP acquisition costs 9 (11,035) (2,804)
Cash acquired in RISCORP Acquisition 9 29,309
Net proceeds from sale of CalFarm Insurance Company 10 211,068
- -------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 82,758 7,305 (12,368)
- -------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Repayment of note assumed from RISCORP (15,000)
Net cash received from the sale of Zenith National
Insurance Capital Trust I
8.55% Capital Securities 6 73,320
Cash advanced from bank line of credit 4 7,400 7,000
Cash repaid on bank line of credit 4 (12,400) (2,000)
Cash advanced from bank loans and other notes payable 56,970 35,431 39,729
Cash repaid on bank loans and other notes payable (52,397) (34,918) (40,719)
Cash dividends paid to common stockholders (17,165) (17,010) (17,695)
Proceeds from exercise of stock options 4,322 6,527 4,940
Purchase of treasury shares (4,190) (24,023) (482)
- -------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (17,460) 29,327 (14,227)
- -------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 13,716 (10,506) 379
Cash at beginning of year 1,998 12,504 12,125
- -------------------------------------------------------------------------------------------------------------
Cash at end of year $ 15,714 $ 1,998 $ 12,504
- -------------------------------------------------------------------------------------------------------------
Reconciliation of net income to net cash flows from
operating activities:
Net income $ 54,100 $ 19,100 $ 28,100
Adjustments to reconcile net income to net cash flows (used
in) provided by operating activities:
Depreciation and amortization 8,369 9,096 5,716
Realized gain on sale of CalFarm Insurance Company (160,335)
Realized gains on investments (7,682) (11,602) (14,008)
Net cash from trading portfolio 1,416
Amortization of deferred credit on reinsurance 9 (11,000)
Decrease (increase) in:
Premiums receivable 22,528 25,757 7,732
Receivable from reinsurers and state trust funds and
prepaid reinsurance premiums 44,507 30,549 13,457
Real estate construction in progress and land held
for development (20,041) (16,266) (8,038)
Increase (decrease) in:
Unpaid loss and loss adjustment expenses 8,823 (97,601) (6,812)
Unearned premiums (16,095) (13,681) 1,260
Policyholders' dividends accrued (1,388) (597) (2,310)
Federal income tax 31,062 5,019 6,385
Other (4,430) 3,088 (5,924)
- -------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities $(51,582) $(47,138) $ 26,974
- -------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of this statement.
TheZenith
45
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
Zenith National Insurance Corp. and Subsidiaries
- --------------------------------------------------------------------------------
Common
shares Preferred
Three years ended December 31, 1999 Note outstanding stock $1 par
- -------------------------------------------------------------------------------------------------------------
(Dollars and shares in thousands, except per share data)
Balance at December 31, 1996 17,604
Net income for 1997
Other comprehensive income -- net unrealized appreciation
on investments, net of deferred tax expense of $4,741 2
Comprehensive income
Exercise of stock options 12 234
Tax benefit on options exercised in 1997
Purchase of treasury shares at cost (19)
Cash dividends declared to common stockholders ($1.00 per
share,
paid quarterly)
- -------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 17,819
Net income for 1998
Other comprehensive income -- net unrealized appreciation
on investments, net of deferred tax expense of $142 2
Comprehensive income
Exercise of stock options 12 289
Tax benefit on options exercised in 1998
Purchase of treasury shares at cost (960)
Cash dividends declared to common stockholders ($1.00 per
share,
paid quarterly)
- -------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 17,148
Net income for 1999
Other comprehensive (loss) income -- net unrealized
depreciation on investments, net of deferred tax benefit
of $15,935 2
Comprehensive income
Exercise of stock options 12 187
Tax benefit on options exercised in 1999
Purchase of treasury shares at cost (185)
Cash dividends declared to common stockholders ($1.00 per
share,
paid quarterly)
- -------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 17,150
- -------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of this statement.
TheZenith
46
- --------------------------------------------------------------------------------
Accumulated other
Common comprehensive (loss) income -
stock $1 Additional Retained net unrealized (depreciation) Treasury
par paid-in capital earnings appreciation on investments stock Total
- ----------------------------------------------------------------------------------------------------
(Dollars
and
shares
in
thousands,
except per
share
data)
Balance
at
December 31,
1996 $ 24,447 $258,875 $175,684 $ 528 $(122,031) $337,503
Net
income
for
1997 28,100 28,100
Other
comprehensive
income --
net
unrealized
appreciation
on
investments,
net of
deferred
tax
expense
of $4,741 8,804 8,804
-------
Comprehensive
income 36,904
Exercise
of
stock
options 234 4,706 4,940
Tax
benefit
on
options
exercised
in 1997 517 517
Purchase
of
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 24,681 264,098 186,268 9,332 (122,513) 361,866
Net
income
for
1998 19,100 19,100
Other
comprehensive
income --
net
unrealized
appreciation
on
investments,
net of
deferred
tax
expense
of $142 264 264
-------
Comprehensive
income 19,364
Exercise
of
stock
options 289 6,238 6,527
Tax
benefit
on
options
exercised
in 1998 343 343
Purchase
of
treasury
shares
at
cost (24,023) (24,023)
Cash
dividends
declared
to
common
stockholders
($1.00 per
share,
paid
quarterly) (17,125) (17,125)
- ----------------------------------------------------------------------------------------------------
Balance
at
December
31, 1998 24,970 270,679 188,243 9,596 (146,536) 346,952
Net
income
for
1999 54,100 54,100
Other
comprehensive
(loss)
income --
net
unrealized
depreciation
on
investments,
net of
deferred tax
benefit of
$15,935 (29,594) (29,594)
-------
Comprehensive
income 24,506
Exercise
of
stock
options 187 4,135 4,322
Tax
benefit
on
options
exercised
in 1999 83 83
Purchase
of
treasury
shares
at
cost (4,190) (4,190)
Cash
dividends
declared
to
common
stockholders
($1.00 per
share,
paid
quarterly) (17,114) (17,114)
- ----------------------------------------------------------------------------------------------------
Balance
at
December
31, 1999 $ 25,157 $274,897 $225,229 $(19,998) $(150,726) $354,559
- ----------------------------------------------------------------------------------------------------
TheZenith
47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Zenith National Insurance Corp. and Subsidiaries
Note 1
Summary of Accounting Policies,
Operations and Principles of Consolidation
Zenith National Insurance Corp. ("Zenith National") is engaged through its
wholly-owned property-casualty insurance subsidiaries (the "P&C Operations") in
Workers' Compensation insurance; Other Property-Casualty insurance (through
March 31, 1999, the date of sale of CalFarm Insurance Company ("CalFarm"), and
Reinsurance, principally of world-wide property and catastrophe risks. The P&C
Operations sell insurance and reinsurance through agents and brokers and not
directly to consumers. Other Property-Casualty, principally automobile,
homeowners, farmowners, commercial coverages and health insurance and other
coverages written primarily in the rural and suburban areas of California, was
operated primarily by CalFarm, formerly a wholly-owned subsidiary of Zenith
Insurance Company ("Zenith Insurance"), a wholly owned subsidiary of Zenith
National. The Real Estate Operations develop single-family residences for sale
in Las Vegas, Nevada. On April 1, 1998, Zenith Insurance acquired substantially
all of the assets and certain liabilities of RISCORP, Inc. and certain of its
subsidiaries (collectively, "RISCORP"), related to RISCORP's workers'
compensation business (the "RISCORP Acquisition") (see Note 9).
The financial statements have been prepared in accordance with generally
accepted accounting principles ("GAAP") in the United States and include Zenith
National and its subsidiaries (collectively, "Zenith"). GAAP requires the use of
assumptions and estimates in reporting certain assets and liabilities and
related disclosures and actual results could differ from those estimates. All
significant intercompany transactions and balances have been eliminated in
consolidation. The comparability of the results of operations for the year ended
December 31, 1999 compared to the corresponding periods in 1998 and 1997 is
affected by (a) the RISCORP Acquisition effective April 1, 1998; (b) net charges
in the third quarter of 1999 of $50.0 million before tax ($32.5 million after
tax, or $1.89 per share) associated with an increase in the net liabilities for
unpaid losses and loss adjustment expenses in the Southeast Operations, which
principally consists of the operations acquired from RISCORP (the
"RISCORP-Related Adjustment"); and (c) the sale of CalFarm to Nationwide Mutual
Insurance Company effective March 31, 1999 (see Note 10).
Fair Values of Financial Instruments
Financial instruments are contractual obligations that result in the delivery
of cash or an ownership interest in an entity. Disclosures regarding the fair
value of financial instruments have been derived using external market sources
or estimates using present value and other valuation techniques.
The following summarizes the carrying amounts and fair value of Zenith's
financial instruments:
- -----------------------------------------------------------------------------------
1999 1998
December 31, ----------------------- -----------------------
(Dollars in Carrying Fair Carrying Fair
thousands) Note amount value amount value
- -----------------------------------------------------------------------------------
Assets:
Investments:
Trading securities 2 $ 2,955 $ 2,955 $ 3,041 $ 3,041
Other investments 2 898,779 898,439 1,045,640 1,047,209
---------- ---------- ---------- ----------
901,734 901,394 1,048,681 1,050,250
Liabilities:
Payable to banks and
other
notes payable 4 20,238 20,238 19,255 19,255
Senior notes payable 5 74,717 76,082 74,596 80,881
Redeemable securities 6 73,397 69,055 73,341 66,312
- -----------------------------------------------------------------------------------
TheZenith
48
Investments
Zenith's investments in debt and equity securities are identified in three
categories as follows: held-to-maturity -- those securities, which by their
terms must be redeemed by the issuing company and that Zenith has the positive
intent and ability to hold to maturity, and are reported at amortized cost;
trading -- those securities that are held principally for the purpose of selling
in the near term and are reported at fair value with unrealized gains and losses
included in earnings; and available-for-sale -- those securities not classified
as either held-to-maturity or trading and are reported at fair value with
unrealized gains and losses excluded from earnings and reported as a separate
component of stockholders' equity, net of deferred tax. Other investments are
carried at cost.
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. During the fourth quarter and for the year ended
December 31, 1999, there were writedowns of $1.0 million and $1.7 million,
respectively.
The market value of investments was supplied by the Merrill Lynch pricing
service, with the exception of 43 items whose values were obtained from other
brokers making a market in the investment, the Bloomberg financial news service
and the use of analytical pricing methods for issues for which there is no ready
market. The pricing for municipal bonds is provided by Muller Data. These market
values are considered fair value.
The cost of securities sold is determined by the "identified cost" method.
Short-term investments include debt securities such as corporate, municipal and
treasury securities with maturities of less than one year at the time of
purchase. For these short-term investments, the 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. Included with premiums earned is an estimate
for earned but unbilled audit premiums. Workers' compensation insurance premiums
are determined based upon the payroll of the insured and applicable premium
rates. Premiums for retrospectively-rated policies are also determined by the
loss experience incurred by the policyholder.
Policy acquisition costs, consisting of commissions, premium taxes and
certain other underwriting costs, are deferred and amortized as the related
premiums are earned.
The P&C Operations make provisions for the settlement of all incurred claims,
both reported and unreported. The liabilities for unpaid loss and loss
adjustment expenses are estimates of the eventual costs of claims incurred but
not settled, less estimates of salvage and subrogation. Estimates for reported
claims are primarily determined by evaluation of individual reported claims and
amounts reported by ceding companies. Estimates for claims incurred but not
reported are based on experience with respect to the probable number and nature
of such claims. The methods for making such estimates and for establishing the
resulting liabilities are continually reviewed and updated and any adjustments
resulting therefrom are reflected in earnings currently. Estimates of losses
from environmental and asbestos-related claims are included in overall loss
reserves and to date have not been material. Due to the significant
uncertainties inherent in
TheZenith
49
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. California policyholders' dividends are not
anticipated to be material in the foreseeable future due to deregulation,
Florida policyholders' dividends are also immaterial.
Property insurance and reinsurance coverages expose Zenith to the risk of
significant loss in the event of major adverse natural phenomena, known in the
insurance industry as catastrophes. Catastrophes may cause significant
contemporaneous financial statement losses since catastrophe losses may not be
accrued in advance of the event.
Approximately 38.7% and 33.2% of Zenith's Workers' Compensation business is
written in California and Florida, respectively. The concentration of Zenith's
business in these states makes the results of operations highly dependent upon
the states' economies, social and cultural trends, legislative and regulatory
changes, and catastrophic events such as windstorms and earthquakes.
Reinsurance
In accordance with general industry practices, the P&C Operations annually
purchase reinsurance to protect against liabilities in excess of certain limits
on insurance risks they have underwritten. Such arrangements are known in the
industry as "excess of loss" protection. The purpose of such reinsurance is to
protect Zenith from the impact of large, irregularly occurring losses. Such
reinsurance reduces the magnitude of sudden and unpredictable changes in net
income and the capitalization supporting insurance operations.
The ceding of insurance liabilities 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
receivable from reinsurers even though amounts due on unpaid losses are not
recoverable from the reinsurer until such losses are paid. The unearned portion
of premiums due to reinsurers is also included in receivable from reinsurers. In
connection with the RISCORP Acquisition (see Note 11), Zenith Insurance acquired
$244.3 million of recoverable from reinsurers on paid and unpaid losses from
reinsurance arrangements entered into by RISCORP. All of such reinsurance is
recoverable from large United States reinsurers. Earned premiums and loss and
loss adjustment expenses incurred are stated in the Consolidated Statement of
Operations after deduction of amounts ceded to reinsurers. Of amounts
recoverable from reinsurers at December 31, 1999, 51.3% is attributable to
reinsurance arrangements with three large United States reinsurance companies.
No material amounts due from reinsurers have been written off as uncollectable
in the three years ended December 31, 1999.
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 (see Note 5).
Profitable Real Estate Operations are dependent upon real estate values,
interest rates, construction costs, competition and management ability.
Included in other assets is land and real estate construction in progress
carried at a cost of $87.9 million and $69.4 million at December 31, 1999 and
1998, respectively.
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50
Properties and Equipment
Properties and equipment are stated at cost less accumulated depreciation.
Depreciation is calculated principally on a straight-line basis using the
following useful lives: buildings, 10 to 40 years; and furniture, fixtures and
equipment, 3 to 10 years.
Expenditures for maintenance and repairs are charged to operations as
incurred. Additions and improvements to buildings and other fixed assets are
capitalized and depreciated over the useful lives of the properties and
equipment. Upon disposition, the asset cost and related depreciation are removed
from the accounts and the resulting gain or loss is included in income.
Intangible Assets
Intangible assets include purchased intangibles and the costs in excess of
tangible assets acquired, including those related to the RISCORP Acquisition
discussed in Note 9. The amounts assigned to assets acquired since 1970 are
being amortized on a straight-line basis over 20 to 25 years. Amortization
expense was $0.9 million, $1.1 million and $0.4 million in 1999, 1998 and 1997,
respectively. Accumulated amortization was $1.9 million and $7.6 million at
December 31, 1999 and 1998, respectively. Of the intangible assets at
December 31, 1999 and 1998, $21.2 million and $23.7 million, respectively, were
amortizable. Management periodically assesses the recoverability of these
intangible assets based on a review of projected, undiscounted cash flows of the
operations acquired.
Codification of Statutory Accounting Principles
In 1998, the National Association of Insurance Commissioners ("NAIC") adopted
the Codification of Statutory Accounting Principles guidance (the
"Codification"), which will replace the current Accounting Practices and
Procedures manual as the NAIC's primary guidance on statutory accounting.
(Statutory accounting is a comprehensive basis of accounting based on prescribed
accounting practices, which include state laws, regulations and general
administrative rules, as well as a variety of publications of the NAIC.) The
Codification provides guidance for the areas where statutory accounting has been
silent and changes current statutory accounting in some areas. The NAIC is now
considering amendments to the Codification that would also be effective upon
implementation. The NAIC has established January 1, 2001 as the effective date
of the Codification.
The California Department of Insurance has adopted the Codification.
Implementation of the Codification may affect the surplus level and the
capitalization requirements of the P&C Operations on a statutory basis. Zenith
has not determined the impact of the Codification.
Recently Issued Accounting Standards
On June 15, 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133 ("SFAS No. 133") "Accounting
for Derivative Instruments and Hedging Activities". SFAS No. 133 is effective
for Zenith for all fiscal quarters of all fiscal years beginning after June 15,
2000. SFAS No. 133 requires that companies record all derivative instruments on
the balance sheet at fair value. Changes in the fair value of derivatives are
recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designated as part of a hedge transaction
and, if it is, the type of hedge transaction. Zenith does not invest in
derivative instruments, and therefore adoption of SFAS No. 133 is not expected
to have any effect on Zenith's results of operations or its financial position.
Reclassifications and Restatements
Certain 1998 and 1997 amounts have been reclassified to conform to the 1999
presentation.
TheZenith
51
Note 2
Investments
The amortized cost and fair values of investments were as follows:
- ---------------------------------------------------------------------------
Gross unrealized
December 31, 1999
(Dollars in Amortized ----------------- Fair Carrying
thousands) cost gains (losses) value value
- ---------------------------------------------------------------------------
Held-to-maturity:
Corporate debt $ 5,325 $ (127) $ 5,198 $ 5,325
Mortgage-backed 22,201 (213) 21,988 22,201
- ---------------------------------------------------------------------------
Total
held-to-maturity $ 27,526 $ (340) $ 27,186 $ 27,526
- ---------------------------------------------------------------------------
Available-for-sale:
U.S. Treasuries $190,466 $ (1,985) $188,481 $188,481
Corporate debt 444,308 $1,054 (27,266) 418,096 418,096
Mortgage-backed 5,491 (24) 5,467 5,467
Redeemable preferred
stocks 13,879 (1,477) 12,402 12,402
Equities 36,501 3,601 (4,669) 35,433 35,433
Short-term
investments 179,748 179,748 179,748
- ---------------------------------------------------------------------------
Total available-
for-sale $870,393 $4,655 $(35,421) $839,627 $839,627
- ---------------------------------------------------------------------------
Trading:
Corporate debt $ 2,985 $ (56) $ 2,929 $ 2,929
Equities 26 26 26
- ---------------------------------------------------------------------------
Total trading $ 3,011 $ (56) $ 2,955 $ 2,955
- ---------------------------------------------------------------------------
- ----------------------------------------------------------------------------
Gross unrealized
December 31, 1998
(Dollars in Amortized ------------------ Fair Carrying
thousands) cost gains (losses) value value
- ----------------------------------------------------------------------------
Held-to-maturity:
Corporate debt $ 5,330 $ 740 $ 6,070 $ 5,330
Mortgage-backed 29,813 829 30,642 29,813
- ----------------------------------------------------------------------------
Total
held-to-maturity $ 35,143 $ 1,569 $ 36,712 $ 35,143
- ----------------------------------------------------------------------------
Available-for-sale:
U.S. Treasuries $161,548 $ 962 $ (295) $162,215 $162,215
Corporate debt 529,888 12,904 (3,924) 538,868 538,868
Mortgage-backed 16,938 45 (130) 16,853 16,853
Redeemable preferred
stocks 14,045 332 (30) 14,347 14,347
Equities 46,670 6,771 (1,872) 51,569 51,569
Short-term
investments 187,123 187,123 187,123
- ----------------------------------------------------------------------------
Total available-
for-sale $956,212 $21,014 $(6,251) $970,975 $970,975
- ----------------------------------------------------------------------------
Trading:
Corporate debt $ 2,978 $ 23 $ 3,001 $ 3,001
Equities 25 15 40 40
- ----------------------------------------------------------------------------
Total trading $ 3,003 $ 38 $ 3,041 $ 3,041
- ----------------------------------------------------------------------------
Debt securities, including short-term investments, at December 31, 1999 by
contractual maturity were as follows:
- ----------------------------------------------------------
December 31, 1999 Amortized Fair
(Dollars in thousands) cost value
- ----------------------------------------------------------
Held-to-maturity:
Due after ten years $ 27,526 $ 27,186
- ----------------------------------------------------------
Total held-to-maturity $ 27,526 $ 27,186
- ----------------------------------------------------------
Available-for-sale:
Due in one year or less $240,068 $239,888
Due after one year through
five years 288,217 282,168
Due after five years through
ten years 204,862 190,256
Due after ten years 100,745 91,882
- ----------------------------------------------------------
Total available-for-sale $833,892 $804,194
- ----------------------------------------------------------
Trading:
Due after one year through
five years $ 2,985 $ 2,929
- ----------------------------------------------------------
Total trading $ 2,985 $ 2,929
- ----------------------------------------------------------
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 1999, 1998 and 1997 were $8.2 million, $9.9 million
and $5.1 million, respectively, and the gross realized losses were
$5.5 million, $3.0 million and $1.0 million, respectively.
At December 31, 1999 and 1998, 96% and 95%, respectively, of Zenith's
consolidated portfolio of fixed maturity investments were
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52
classified as available-for-sale with the unrealized appreciation or
depreciation recorded as a separate component of stockholders' equity. The
change in fair value of fixed maturity investments classified as
available-for-sale resulted in a decrease in stockholders' equity of
$25.7 million after deferred tax from December 31, 1998 to December 31, 1999,
compared to an increase of $1.4 million from 1997 to 1998.
Investment income is summarized as follows:
- -------------------------------------------------------------
Year ended December 31,
(Dollars in thousands) 1999 1998 1997
- -------------------------------------------------------------
Fixed maturities:
Bonds $45,080 $44,460 $42,837
Redeemable
preferred stocks 1,362 1,113 1,289
Equity securities:
Floating rate
preferred stocks 777 977 872
Convertible and
nonredeemable
preferred stocks 350 477 337
Common stocks 984 717 595
Short-term investments 8,327 8,265 8,090
Other 756 1,088 1,489
- -------------------------------------------------------------
57,636 57,097 55,509
Less investment expenses 3,974 3,504 3,177
- -------------------------------------------------------------
Net investment income $53,662 $53,593 $52,332
- -------------------------------------------------------------
Investments carried at their fair value of $205.5 million and $262.0 million
at December 31, 1999 and 1998, respectively, were on deposit with regulatory
authorities in compliance with insurance company regulations.
The change in holding (losses) gains on trading securities, which is included
in realized gains, was $(56,000), $39,000 and $(15,000) for the years ended
December 31, 1999, 1998 and 1997, respectively.
Note 3
Properties and Equipment
Properties and equipment consist of the following:
- ----------------------------------------------------
December 31,
(Dollars in thousands) 1999 1998
- ----------------------------------------------------
Land $ 9,650 $16,536
Buildings 31,103 44,203
Furniture, fixtures and equipment 45,430 57,368
- ----------------------------------------------------
86,183 118,107
Accumulated depreciation (31,202) (38,199)
- ----------------------------------------------------
Total $54,981 $79,908
- ----------------------------------------------------
Depreciation expense amounted to $9.9 million, $8.8 million and $5.8 million
in 1999, 1998 and 1997, respectively.
Note 4
Payable to Banks and Other Notes Payable
At December 31, 1999, Zenith National had two revolving, unsecured lines of
credit in an aggregate amount of $70.0 million, all of which was available at
December 31, 1999. A $30.0 million line of credit was not renewed when it
expired November 30, 1999. Interest on funds borrowed under one of these lines
of credit is payable at either (a) the bank's reference rate less 0.55% OR
(b) LIBOR plus 0.40%. Interest under the other line of credit is payable
at either (a) the higher of the bank's reference rate or the Federal Funds Rate
plus 0.50% OR (b) the bank's offered rate to prime international banks in the
offshore dollar market plus 0.475%. The prime interest rates were 8.50%, 7.75%
and 8.50% at December 31, 1999, 1998 and 1997, respectively.
Under these agreements, certain restrictive covenants apply including the
maintenance of a specific level of net worth.
Zenith's Real Estate Operations maintain certain bank credit facilities to
provide financing for development and construction of single-family residences
for sale. These loans bear interest at the rates of prime plus 1.0% and prime
plus 0.75% and mature between February
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53
2000 and November 2001. Each agreement pertains to a separate residential
housing project and the maximum credit available was $27.1 million and
$32.3 million at December 31, 1999 and 1998, respectively. The agreements
provide that funding and repayment of development and construction loans are
made in tandem for each project. A development loan will always precede a
construction loan for a project and the proceeds of the construction loan are
required to first be used to pay off the respective development loan. At
December 31, 1999 and 1998, $19.1 million and $12.3 million, respectively, was
outstanding with respect to the borrowing.
The Real Estate Operations are obligated under various notes payable arising
from the purchase of several parcels of property. Such notes are collateralized
by the land parcels and bear interest at rates between 8% and 10%, with a
maximum maturity of August 2004. The balance outstanding with respect to these
notes was $1.1 million and $2.0 million at December 31, 1999 and 1998,
respectively.
Note 5
Senior Notes Payable
Zenith National has $75.0 million of its 9% Senior Notes due 2002 (the "9%
Notes") issued and outstanding at December 31, 1999 and 1998. Interest on the 9%
Notes is payable semi-annually. The 9% Notes are general unsecured obligations
of Zenith National. Issue costs of $1.2 million are being amortized over the
term of the 9% Notes. In each of the years ended December 31, 1999, 1998 and
1997, $6.9 million of interest and issue costs were expended. Covenants
contained in the indenture include restrictions on the ability of Zenith
National to incur secured debt and the right of holders of the 9% Notes to
require Zenith National to repurchase the 9% Notes upon a decline in the rating
of the 9% Notes within ninety days after the occurrence of certain events. Those
events are: (a) a person or group becomes the beneficial owner of more than 50%
of Zenith National common stock; (b) 10% or more of Zenith National common stock
is acquired by Zenith National within any 12-month period; or (c) the sum of the
fair market value of distributions (other than regular dividends or
distributions of capital stock) and the consideration for purchases of Zenith
National common stock by Zenith National during a 12-month period is 30% or more
of the fair market value of outstanding Zenith National common stock.
Interest incurred on borrowings is summarized as follows:
- ----------------------------------------------------------
Year ended December 31,
(Dollars in thousands) 1999 1998 1997
- ----------------------------------------------------------
Interest capitalized for
Real Estate Operations $7,048 $4,922 $4,343
Interest expense not related
to Real Estate Operations 8,218 5,784 3,755
- ----------------------------------------------------------
Total interest incurred $15,266 $10,706 $8,098
- ----------------------------------------------------------
Interest expense not related to Real Estate Operations includes $6.4 million
and $2.7 million of interest on the Redeemable Securities (see Note 6) for the
years ended December 31, 1999 and 1998, respectively.
Note 6
Redeemable Securities
On July 30, 1998, Zenith issued $75.0 million of 8.55% Capital Securities at
a price of $996.24 per security through Zenith National Insurance Capital Trust
I, a Delaware statutory business trust (the "Trust"), all of the voting
securities of which are owned by Zenith National. Each Capital Security pays
semi-annual cumulative cash distributions at the annual rate of 8.55% of the
$1,000 liquidation amount per security.
The Trust used the proceeds from its offering to purchase $75.0 million of
Zenith National's 8.55% Subordinated Deferrable Interest Debentures due 2028
(the "Subordinated Debentures"), which constitute the principal asset of the
Trust. The semi-annual interest payments on the Subordinated Debentures may be
deferred by Zenith National for up to ten consecutive semi-annual periods. The
TheZenith
54
Subordinated Debentures are redeemable at any time by Zenith National at the
then present value of the remaining scheduled payments of principal and
interest. Payments on the Capital Securities, including distributions and
redemptions, follow those of the Subordinated Debentures. Zenith National used
$65.0 million from the net proceeds to make a capital contribution to Zenith
Insurance. The remaining net proceeds were used for general corporate purposes.
The issue cost and discount on the Subordinated Debentures of $1.7 million are
being amortized over the term of the Subordinated Debentures. During the years
ended December 31, 1999 and 1998, $6.5 million and $2.7 million, respectively,
of interest, issue costs and discount were expensed.
Zenith National fully and unconditionally guaranteed the distributions on,
and the liquidation amount generally of, the Capital Securities to the extent
the Trust has funds legally available therefore. Zenith National's guarantee of
the Capital Securities, as well as the Subordinated Debentures, are subordinated
to all other indebtedness of Zenith National.
Note 7
Federal Income Tax
The components of the provision (benefit) for tax on income are:
- -----------------------------------------------------------
Year ended December 31,
(Dollars in thousands) 1999 1998 1997
- -----------------------------------------------------------
Current $29,488 $ 6,458 $10,989
Deferred (521) 3,277 4,389
- -----------------------------------------------------------
Federal income tax expense $28,967 $ 9,735 $15,378
- -----------------------------------------------------------
The difference between the statutory federal income tax rate of 35% and
Zenith's effective tax rate on income, as reflected in the financial statements,
is explained as follows:
- ---------------------------------------------------------------
Year ended December 31,
(Dollars in thousands) 1999 1998 1997
- ---------------------------------------------------------------
Statutory federal income
tax expense $29,074 $10,092 $15,217
Increase (reduction) in
tax:
Dividend received
deduction and tax-
exempt interest (765) (1,062) (693)
Other 658 705 854
- ---------------------------------------------------------------
Federal income tax expense $28,967 $ 9,735 $15,378
- ---------------------------------------------------------------
Deferred tax is provided based upon temporary differences between the tax and
book basis of assets and liabilities. The components of the deferred tax assets
and liabilities were as follows:
- ----------------------------------------------------------------------
Year ended 1999
December 31, Deferred Tax 1998
(Dollars in Deferred Tax
thousands) Assets Liabilities Assets Liabilities
- ----------------------------------------------------------------------
Investments* $10,768 $ 6,116
Deferred policy
acquisition costs $ 2,762 8,379
Purchased intangibles 3,133 1,658
Properties and
equipment 5,658 8,409
Earned but unbilled
premiums 1,570 1,772
Property-casualty
loss reserve
discount 27,536 $32,159
Limitation on
deduction for
unearned premiums 3,782 10,190
Policyholders'
dividends accrued 1,181 1,667
Deferred income on
ceded reinsurance 8,050 2,979
Other 2,508 6,101 3,091 1,141
- ----------------------------------------------------------------------
53,825 19,224 50,086 27,475
- ----------------------------------------------------------------------
Net deferred tax
asset $34,601 $22,611
- ----------------------------------------------------------------------
*Differences between the tax basis and carrying value of investments,
principally unrealized depreciation/appreciation of available-for-sale
investments.
Zenith's net deferred tax asset is expected to be fully recoverable because
all future deductible amounts can be offset by reversing deferred tax
liabilities or recovery of federal income taxes paid within the statutory
carryback period.
TheZenith
55
Property-casualty loss reserves are not discounted for book purposes, however
the Tax Reform Act of 1986 requires property and casualty loss reserves to be
discounted for tax purposes.
Zenith files a consolidated federal income tax return. The P&C Operations pay
premium taxes on gross premiums written in lieu of most state income or
franchise taxes.
Note 8
Reinsurance
Reinsurance transactions reflected in the financial statements were as
follows:
- ------------------------------------------------------------
Year ended December 31,
(Dollars in thousands) 1999 1998 1997
- ------------------------------------------------------------
Direct premiums earned $345,085 $545,573 $477,527
Assumed premiums earned 40,667 38,769 37,385
Ceded premiums earned (16,349) (54,487) (26,191)
- ------------------------------------------------------------
Net premiums earned $369,403 $529,855 $488,721
- ------------------------------------------------------------
Ceded loss and loss
adjustment expenses
incurred $ 58,948 $ 26,456 $ 10,491
- ------------------------------------------------------------
Zenith Insurance (in its Workers' Compensation Operations) maintains excess
of loss and catastrophic reinsurance protection, which varies based on the type
of coverage, as follows: excess of loss reinsurance per occurrence in excess of
$550,000 and catastrophe reinsurance coverage against aggregate losses per event
up to $100,000,000. Assumed reinsurance is covered by approximately $20,000,000
in excess of approximately $4,000,000 for non-United States catastrophes. Credit
quality of reinsurers may impact profitability and stockholders' equity. No
losses have been incurred from uncollectible reinsurance during the past three
years and no allowances are carried on the financial statements for
unrecoverable reinsurance.
Note 9
Acquisition of RISCORP
On April 1, 1998 Zenith Insurance acquired substantially all of the assets
and certain liabilities of RISCORP related to RISCORP's workers' compensation
business (the "RISCORP Acquisition").
The excess of the purchase price, including acquisition expenses, over the
estimated fair value of net assets acquired was $20.4 million, which is net of a
deferred tax asset of $10.2 million, and is being amortized over 25 years.
Amortization expense was $0.8 million in 1999 and $0.6 million from April 1,
1998 through December 31, 1998.
The following table summarizes the estimated fair value of assets acquired
and liabilities assumed from RISCORP at April 1, 1998 and the final purchase
price determined by the Neutral Auditor and Neutral Actuary at the end of the
three-step determination process described in Note 11.
- ---------------------------------------------------------
April 1,
(Dollars in thousands) 1998
- ---------------------------------------------------------
Assets:
Invested assets $190,460
Cash 29,309
Premiums receivable 86,575
Receivable from reinsurers and state trust
funds on paid and unpaid losses and
prepaid reinsurance premiums 288,483
Intangible assets 7,707
Other assets 46,962
- ---------------------------------------------------------
Total assets 649,496
- ---------------------------------------------------------
Liabilities:
Unpaid loss and loss adjustment expense 482,518
Unearned premium reserve 43,177
Other liabilities 31,465
- ---------------------------------------------------------
Total liabilities 557,160
- ---------------------------------------------------------
Purchase price $ 92,336
- ---------------------------------------------------------
In the third quarter of 1999, as described in Note 11, Zenith Insurance
decreased the fair values of the net assets acquired from RISCORP by
approximately $65.0 million. Such decrease was partially offset by (a) the net
benefit of $34.0 million associated with reinsurance protection for adverse loss
development included in other liabilities and (b) $6.0 million
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56
recovered from RISCORP to settle certain litigation.
Note 10
Sale of CalFarm Insurance Company
Effective March 31, 1999, Zenith Insurance completed the sale of all of the
issued and outstanding capital stock of CalFarm for $273.0 million in cash to
Nationwide Mutual Insurance Company. CalFarm wrote Zenith's Other
Property-Casualty business, principally in California. The gain on the sale
after tax was $104.3 million. After accounting for applicable taxes, expenses
and certain intercompany transactions, the net proceeds from the sale that were
available to Zenith Insurance for investment were $211.0 million, compared to
cash and investments of $226.4 million that were excluded from Zenith's
Consolidated Balance Sheet upon the sale of CalFarm.
The following table summarizes the assets and liabilities of CalFarm at
March 31, 1999:
- ---------------------------------------------------------
March 31,
(Dollars in thousands) 1999
- ---------------------------------------------------------
Assets:
Investments $170,050
Cash 1,904
Receivable from Zenith Insurance 59,256
Premiums receivable 36,517
Receivable from reinsurers on paid and
unpaid losses and prepaid reinsurance
premiums 23,002
Deferred policy acquisition costs 15,620
Properties and equipment 20,505
Other assets 6,874
- ---------------------------------------------------------
Total assets $333,728
- ---------------------------------------------------------
Liabilities:
Unpaid loss and loss adjustment expenses $125,589
Unearned premiums 90,964
Other liabilities 10,617
- ---------------------------------------------------------
Total liabilities $227,170
- ---------------------------------------------------------
Pro forma total revenues for Zenith for the year ended December 31, 1999 and
1998 (after giving effect to the sale of CalFarm as if it had been consummated
at the beginning of the respective periods) would have been $435.0 million and
$402.0 million, respectively. Pro forma results of operations after tax for such
periods would have been a net loss of $52.2 million and net income of
$7.9 million, respectively. Pro forma earnings per share for such periods would
have been a net loss of $3.04 (basic and diluted) and net income of $0.46 (basic
and diluted), respectively.
Since CalFarm was acquired by Zenith Insurance in 1985, CalFarm's cumulative
combined ratio was 100.1% and its cumulative underwriting income was
approximately zero. In addition to the loss of any underwriting income and cash
flow provided by CalFarm, Zenith's annual consolidated net income would be
reduced by the investment income associated with the net reduction of
approximately $15.0 million of consolidated investments caused by the sale of
CalFarm. Estimated investment income after tax on such decrease would have been
$0.2 million and $0.6 million for the years ended December 31, 1999 and 1998,
respectively. Using such change in investment income, the underwriting income
previously reported by CalFarm and the gain on the sale of CalFarm, pro forma
net (loss) income would be as follows:
- -----------------------------------------------------
Year Ended December 31,
(Dollars in thousands) 1999 1998
- -----------------------------------------------------
Net income as reported $ 54,100 $ 19,100
Less after tax adjustments:
Underwriting (income) loss of
CalFarm 74 (2,844)
Gain on sale of CalFarm (104,335)
Change in investment income (139) (556)
- -----------------------------------------------------
Pro forma net (loss) income $ (50,300) $ 15,700
- -----------------------------------------------------
Pro forma net (loss) income per
common share (basic and
diluted) $ (2.93) $ 0.92
- -----------------------------------------------------
Note 11
Commitments and Contingent Liabilities
Zenith has office space leases, equipment leases and automobile leases
expiring through
TheZenith
57
2004. The minimum rentals on these operating leases as of December 31, 1999 were
as follows:
- ------------------------------------------------------------
Equipment
(Dollars in thousands) and
auto
Year fleet Offices Total
- ------------------------------------------------------------
2000 $ 829 $3,532 $ 4,361
2001 665 2,805 3,470
2002 327 1,762 2,089
2003 82 564 646
2004 16 107 123
Thereafter
- ------------------------------------------------------------
Total $1,919 $8,770 $10,689
- ------------------------------------------------------------
Rental expenses for 1999, 1998 and 1997 amounted to $5.7 million,
$5.8 million and $5.9 million, respectively.
Other than the RISCORP litigation described below, Zenith National and its
subsidiaries are defendants in various other litigation. In the opinion of
management, after consultation with legal counsel, such litigation is either
without merit or the ultimate liability, if any, will not have a material
adverse effect on the consolidated financial condition or results of operations
of Zenith.
Resolution of Contingencies Surrounding Fair Values of RISCORP Assets Acquired
and Liabilities Assumed and the RISCORP-Related Adjustment
On April 1, 1998, pursuant to an Asset Purchase Agreement dated June 17, 1997
(as amended from time to time, the "Asset Purchase Agreement") between Zenith
Insurance and RISCORP, Zenith Insurance acquired substantially all of the assets
and certain liabilities of RISCORP related to RISCORP's workers' compensation
business (the "RISCORP Acquisition"). The total purchase price for such acquired
assets and liabilities was determined by a three-step process in which RISCORP
and its external accounting and actuarial consultants and Zenith Insurance and
its external accounting and actuarial consultants made and presented their
estimates of the GAAP values of the assets and liabilities acquired by Zenith
Insurance to an independent third-party, acting as a Neutral Auditor and Neutral
Actuary. Such estimates varied considerably, particularly with respect to the
value of premiums receivable and the liability for unpaid losses and loss
adjustment expenses. On March 19, 1999, the Neutral Auditor and Neutral Actuary
issued its report determining the disputes between the parties. As previously
announced, Zenith Insurance recorded the assets and liabilities acquired from
RISCORP at their estimated fair values consistent with the values determined by
the Neutral Auditor and Neutral Actuary. Previously reported consolidated
financial statements for June 30, 1998 and September 30, 1998 were restated to
reflect the resolution of the disputes between the parties. Zenith Insurance
indicated that any new information that might become available with respect to
certain assets and liabilities acquired from RISCORP may change the estimates of
the carrying values of such amounts and such changes, if any, would be reflected
in the results of operations for the period in which they occur.
In October of 1999, Zenith Insurance completed a review of the liabilities
for unpaid losses and loss adjustment expenses in its Southeast Operations,
which principally consists of the operations acquired from RISCORP. The review
was conducted with assistance from independent actuarial consultants. As a
result of the review, Zenith Insurance recorded, in the third quarter of 1999
the RISCORP-Related Adjustment, which mainly comprises an increase of
$46.0 million before tax ($29.9 million after tax) in the estimated net
liabilities for unpaid losses and loss adjustment expenses acquired from
RISCORP. The increase results primarily from the adjustments to reserves for the
years 1994 through 1997. Certain related receivables, principally contingent
commissions receivable under reinsurance contracts assumed from RISCORP, were
reduced by $19.0 million net ($12.4 million after tax) as a result of such
increase in net liabilities. As previously reported, Zenith Insurance purchased
reinsurance protection relating to development of the unpaid loss and loss
adjustment expense reserves acquired from RISCORP. Such
TheZenith
58
reinsurance allows Zenith Insurance to recover up to $50.0 million in excess of
$182.0 million for net unpaid losses and allocated loss adjustment expenses
acquired from RISCORP. In the third quarter of 1999, Zenith Insurance recorded
an increase in the amount recoverable to $50.0 million and a benefit of $9.0
million ($5.9 million after tax) associated with such reinsurance. An additional
benefit of $23.0 million ($15.0 million after tax) included in other liabilities
associated with such reinsurance has been deferred and will be recognized over
approximately the next four years, the settlement period of the reinsurance
recoverable.
The adjustments associated with the increase in the liabilities for unpaid
loss and loss adjustment expenses acquired from RISCORP, net of the benefit of
reinsurance protection and the effect of the "settlement agreement" (see
"RISCORP Litigation" below), in the aggregate, reduced income by $50.0 million
($32.5 million after tax, or $1.89 per share), in 1999.
The foregoing RISCORP-Related Adjustment, after the benefit of the
reinsurance protection for adverse development of the unpaid loss and loss
adjustment expense reserves acquired from RISCORP, decreased the statutory
surplus of Zenith Insurance by $25.0 million after tax in 1999.
RISCORP Litigation
Zenith Insurance and RISCORP entered into a settlement agreement, dated
July 7, 1999 (the "Settlement Agreement"), providing for the resolution of
certain claims arising out of the RISCORP Acquisition. Pursuant to the
Settlement Agreement, Zenith Insurance and RISCORP (i) dismissed litigation
pending between them in the United States District Courts for the Middle
District of Florida, Tampa Division, and the Southern District of New York;
(ii) agreed that RISCORP may request that the Neutral Auditor and Neutral
Actuary (a) review an alleged error concerning the proper treatment of certain
reinsurance treaties in its determinations with respect to the purchase price
for the RISCORP Acquisition, without waiving whatever rights RISCORP may have to
litigation of such issue, (b) determine whether the issue was properly in
dispute before the Neutral Auditor and Neutral Actuary and (c), if so, determine
the merits of the issue and whether a correction is appropriate; (iii) agreed
that any other disputes arising under the Asset Purchase Agreement or the
Settlement Agreement, including any future claims for indemnification by either
Zenith Insurance or RISCORP, are to be resolved by binding arbitration;
(iv) agreed that Zenith Insurance receives $6.0 million from an escrow account
established pursuant to the Asset Purchase Agreement, and RISCORP receives the
balance of the escrow account; and (v) agreed to an allocation between them of
any recovery received as a result of refund claims that RISCORP has made to the
Florida Department of Labor and Employment Security, Division of Workers'
Compensation. In a submission made to the Neutral Auditor and Neutral Actuary,
RISCORP claimed that the purchase price for the RISCORP Acquisition should be
adjusted by either $5.9 million or $23.4 million as a result of alleged errors
in the original determination of the Neutral Auditor and Neutral Actuary with
respect to the purchase price. On October 7, 1999, the Neutral Auditor and
Neutral Actuary advised Zenith and RISCORP that they would not consider the
additional issue raised by RISCORP because the issue had not previously been
raised as a dispute pursuant to the procedures set forth in their engagement
letter. On January 13, 2000, RISCORP filed a complaint against Zenith Insurance
and the Neutral Auditor and Neutral Actuary in the Superior Court of Fulton
County in the State of Georgia. The complaint alleges breach of contract against
both Zenith Insurance and the Neutral Auditor and Neutral Actuary and seeks
recovery of the amounts previously described to have resulted from the alleged
errors by the Neutral Auditor and Neutral Actuary. Zenith is unable to predict
the outcome of this litigation.
TheZenith
59
Contingencies Surrounding
Recoverability of State Disability
Trust Fund Receivables
In Florida, the Special Disability Trust Fund (the "Fund") assesses workers'
compensation insurers to pay for what are commonly referred to as "Second
Injuries". Historic assessments have been inadequate to completely fund
obligations of the Fund. In late 1997, the Florida statute was amended so that
the Fund will not be liable for and will not reimburse employers or carriers for
Second Injuries occurring on or after January 1, 1998. Zenith has recorded its
receivable from the Fund for Second Injuries based on specific claims and
historical experience prior to January 1, 1998. The following table details the
change in the receivable from the Fund, which was included in receivable from
reinsurers and state trust funds:
- -----------------------------------------------------
(Dollars in thousands)
- -----------------------------------------------------
Balance as of December 31, 1998 $39,078
Cash recoveries (5,584)
Change in estimate 3,539
- -----------------------------------------------------
Balance as of December 31, 1999 $37,033
- -----------------------------------------------------
Note 12
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 certain
officers and key employees for the purchase of Zenith National's common stock at
100% of the market price at the date of grant. The majority of options
outstanding at December 31, 1999 and 1998 expire five years after the date of
grant or three months after termination of employment and vest one-fourth per
year after the first year. One grant for 1,000,000 shares is for a term of ten
years and vests one-fifth per year after the first year.
Zenith has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123 ("SFAS No. 123") "Accounting for Stock-Based
Compensation". Accordingly, no compensation cost has been recognized for the
stock option plans. Had compensation cost for Zenith's stock option plans been
determined based on the fair value at the grant date for awards in 1999, 1998
and 1997 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:
- ---------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
------------------- ------------------- -------------------
Year ended December 31, As Pro- As Pro- As Pro-
(Dollars in thousands, except per share data) Reported forma Reported forma Reported forma
- ---------------------------------------------------------------------------------------------------------------------------
Net income $54,100 $52,600 $19,100 $17,703 $28,100 $26,583
Net income per common share
-- basic 3.15 3.06 1.12 1.04 1.59 1.50
-- diluted 3.15 3.06 1.11 1.03 1.57 1.49
- ---------------------------------------------------------------------------------------------------------------------------
The pro-forma effect on net income for 1999, 1998 and 1997 is not
representative of the pro-forma effect on net income in future years because the
presented disclosure does not take into consideration pro-forma compensation
expense related to grants made prior to 1995.
TheZenith
60
The fair value of each option grant was estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions:
- --------------------------------------------------------------------
1999 Grants 1998 Grants 1997 Grants
- --------------------------------------------------------------------
Risk-free interest
rates 5.36% - 6.30% 4.52% - 5.66% 5.70%
Dividend yields 4.34% - 5.08% 3.75% 4.10%
Volatility factors 20.30% - 20.56% 19.83% 16.94%
Weighted average
expected life (five-
year term options) 4.5 yrs. 4.5 yrs. 5 yrs.
Weighted average
fair value
per share $3.49 $4.40 $4.07
- --------------------------------------------------------------------
Additional information with respect to stock options was as follows:
- -----------------------------------------------------------
Weighted
average
Number exercise
(Shares in thousands) of shares price
- -----------------------------------------------------------
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
Granted 460 26.74
Exercised (289) 22.56
Expired or cancelled (268) 26.43
-----
Outstanding at December 31, 1998 2,533 25.00
Granted 154 21.95
Exercised (187) 23.11
Expired or cancelled (385) 26.02
-----
Outstanding at December 31, 1999 2,115 24.76
- -----------------------------------------------------------
Certain information on outstanding options at December 31, 1999 was as
follows:
- ----------------------------------------------------------------
Range of Weighted Outstanding
exercise price average options weighted
(Shares in Number remaining life average exercise
thousands) outstanding in years price
- ----------------------------------------------------------------
$23.63 1,000 6.2 $23.63
19.72 - 28.34 1,115 2.8 25.77
- ----------------------------------------------------------------
Options exercisable at December 31, 1999, 1998, and 1997 were 1,127,000,
877,000 and 737,000, respectively. Certain information on exercisable options at
December 31, 1999 was as follows:
- -----------------------------------------------------
Exercisable
Range of exercise options weighted
prices Number average exercise
(Shares in thousands) exercisable price
- -----------------------------------------------------
$23.63 600 $23.63
19.72 - 28.34 527 25.72
- -----------------------------------------------------
At December 31, 1999, Zenith had authority from its Board of Directors to
repurchase up to 940,000 of Zenith National's common shares at prevailing market
prices.
Note 13
Dividend Restrictions
State insurance regulations limit the maximum dividends that may be paid to
Zenith National by its insurance subsidiary during any 12-month period without
prior regulatory approval. Stockholder's equity of the P&C Operations, in
accordance with GAAP, amounted to $334.6 million as of December 31, 1999, of
which $29.8 million can be paid in 2000 to Zenith National in dividends without
prior approval.
Note 14
Statutory Financial Data
Capital stock and surplus and net income of the P&C Operations on a statutory
basis, as reported to regulatory authorities, were as follows:
- --------------------------------------------------------------
Year ended December 31,
(Dollars in thousands) 1999 1998 1997
- --------------------------------------------------------------
Capital stock and surplus $297,969 $345,042 $279,993
Net income 74,310 21,959 31,820
- --------------------------------------------------------------
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.
TheZenith
61
Note 15
Quarterly Financial Data (Unaudited)
- -------------------------------------------------------------------
(Dollars in 1999 Period Ended
thousands, ---------------------------------------------
except per share March June September December
data) 31 30 30 31
- -------------------------------------------------------------------
Premiums earned $135,577 $ 75,977 $ 87,110 $ 70,739
Net investment
income 13,325 12,946 14,229 13,162
Realized gains
on investments 1,534 2,531 2,322 1,295
Real estate sales 10,768 14,438 14,034 19,430
Service fee income 959 585 802 345
Gain on sale of
CalFarm 160,335
Net income (loss) 104,400 (3,400) (37,300) (9,600)
Net income per common
share
-- basic 6.09 (0.20) (2.17) (0.56)
-- diluted 6.09 (0.20) (2.17) (0.56)
- -------------------------------------------------------------------
- -------------------------------------------------------------------
(Dollars in 1998 Period Ended
thousands, ---------------------------------------------
except per share March June September December
data) 31 30 30 31
- -------------------------------------------------------------------
Premiums earned $118,784 $137,554 $136,151 $137,366
Net investment
income 12,343 13,583 14,198 13,469
Realized gains
on investments 2,420 3,754 2,164 3,264
Real estate sales 11,748 8,684 8,398 8,907
Service fee income 1,392 1,206 1,394
Net income 7,100 7,300 3,400 1,300
Net income per common
share
-- basic 0.42 0.43 0.20 0.08
-- diluted 0.42 0.42 0.20 0.08
- -------------------------------------------------------------------
Underwriting results for the year ended December 31, 1999 include catastrophe
losses of $12.3 million after tax, or $0.72 per share, of which $1.3 million,
$2.7 million, $3.1 million and $5.2 million were incurred in the first, second,
third and fourth quarters, respectively. Underwriting results for the year ended
December 31, 1998 include catastrophe losses of $7.5 million after tax, or $0.44
per share, of which $3.3 million, $2.6 million and $1.6 million were incurred in
the first, third and fourth quarters, respectively.
Note 16
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:
- ------------------------------------------------------------------
Year ended December 31,
(Dollars in thousands) 1999 1998 1997
- ------------------------------------------------------------------
Beginning of year, net of
reinsurance recoverable $708,684 $525,601 $526,427
Acquisition of RISCORP as of
April 1, 1998 242,760
Sale of CalFarm as of
March 31, 1999 (109,150)
Incurred claims:
Current year 315,348 394,257 348,514
Prior years 44,824 (11,367) (349)
- ------------------------------------------------------------------
Total incurred claims 360,172 382,890 348,165
- ------------------------------------------------------------------
Payments:
Current year (83,437) (176,678) (138,393)
Prior years (271,019) (265,889) (210,598)
- ------------------------------------------------------------------
Total payments (354,456) (442,567) (348,991)
- ------------------------------------------------------------------
End of year, net of
reinsurance 605,250 708,684 525,601
Recoverable from reinsurers
and state trust funds on
paid and unpaid losses 275,679 288,963 87,665
- ------------------------------------------------------------------
End of year $880,929 $997,647 $613,266
- ------------------------------------------------------------------
Statutory reserves differ from GAAP by the amount of the deposit receivable from
Reliance, which is treated as reinsurance recoverable for statutory purposes.
TheZenith
62
Note 17
Earnings and Dividends Per Share
The following table sets forth the computation of basic and diluted net
income per common share.
- ------------------------------------------------------------
(Dollars In thousands, except
per share data) 1999 1998 1997
- ------------------------------------------------------------
(A) Net income $54,100 $19,100 $28,100
- ------------------------------------------------------------
(B) Weighted average
outstanding shares
during the period 17,161 17,035 17,716
Additional common shares
issuable under employee
stock option plans using
the treasury stock method 11 123 170
- ------------------------------------------------------------
(C) Weighted average number of
common shares outstanding
assuming exercise of stock
options 17,172 17,158 17,886
- ------------------------------------------------------------
Net income per common share:
(A)/(B) -- basic $ 3.15 $ 1.12 $ 1.59
(A)/(C) -- diluted 3.15 1.11 1.57
- ------------------------------------------------------------
Dividends per common share $ 1.00 $ 1.00 $ 1.00
- ------------------------------------------------------------
Options to purchase 2,053,000 shares and 1,290,000 shares, respectively, of
common stock at an average price of $24.90 and $26.69, respectively, per share
were outstanding as of December 31, 1999 and 1998 but were not included in the
computation of diluted earnings per share because the options' exercise prices
were greater than the average market price of the common shares, and, therefore,
the effect would be anti-dilutive.
Note 18
Segment Information
Effective January 1, 1998, Zenith adopted Statement of Financial Accounting
Standards No. 131. ("SFAS No. 131") "Disclosures about Segments of an Enterprise
and Related Information." The statement establishes standards for disclosures by
public companies about operating segments.
Zenith classifies its business into six segments: Workers' Compensation,
Other Property-Casualty (through March 31, 1999, the date of the sale of
CalFarm), Reinsurance, Real Estate, Investment and Parent. Segments are
designated based on the types of products and services provided and based on the
risks associated with the products and services. Workers' Compensation
represents insurance coverage for the statutorily prescribed benefits that
employers are required to pay to their employees injured in the course of
employment. Other Property-Casualty represents multiple product line direct
insurance other than workers' compensation, primarily in California which was
operated primarily by CalFarm. Reinsurance represents the book of assumed,
world-wide reinsurance of losses from catastrophes and the reinsurance of large
property risks. Real Estate Operations develop land and primarily construct
single-family residences in Las Vegas, Nevada. Investment provides investment
income and realized gains on investments, primarily from investments in debt
securities. Parent represents Zenith National owning directly or indirectly all
of the capital stock of the P&C Operations and non-insurance companies.
The accounting policies of the segments are the same as those described in
Note 1. Zenith evaluates insurance segment performance based on the combined
ratios and income or loss from operations before income tax, and not including
investment income or realized gains or losses.
TheZenith
63
Information as to the operations of the segments is set forth below:
- -----------------------------------------------------------------------------------------------------------------------------
Other
Workers' Property- Real
(Dollars in thousands) Compensation Casualty Reinsurance Estate Investment Parent Total
- -----------------------------------------------------------------------------------------------------------------------------
For the Year Ended December 31, 1999
- -----------------------------------------------------------------------------------------------------------------------------
Revenues:
Premiums earned $ 278,854 $ 54,108 $36,441 $ 369,403
Net investment income $ 53,662 53,662
Realized gains on investments 7,682 7,682
Real estate sales $58,670 58,670
Service fee income 2,691 2,691
- -----------------------------------------------------------------------------------------------------------------------------
Total revenues $ 281,545 $ 54,108 $36,441 $58,670 $ 61,344 $ 492,108
- -----------------------------------------------------------------------------------------------------------------------------
Segment (loss) income before tax $(122,543) $ (22) $(7,324) $ 3,649 $ 61,344 $(12,372) $ (77,268)
Gain on sale of CalFarm before tax 160,335 160,335
Combined ratios 143.9% 100.0% 120.1% 135.2%
Interest expense before tax (8,218) (8,218)
Income tax benefit (expense) $ 42,199 $(55,993) $ 2,494 $(1,277) $ (20,719) $ 4,329 $ (28,967)
- -----------------------------------------------------------------------------------------------------------------------------
Segment assets $ 520,544 $27,701 $85,731 $ 929,280 $ 10,530 $1,573,786
- -----------------------------------------------------------------------------------------------------------------------------
For the Year Ended December 31, 1998
- -----------------------------------------------------------------------------------------------------------------------------
Revenues:
Premiums earned $ 278,660 $222,045 $29,150 $ 529,855
Net investment income $ 53,593 53,593
Realized gains on investments 11,602 11,602
Real estate sales $37,737 37,737
Service fee income 3,992 3,992
- -----------------------------------------------------------------------------------------------------------------------------
Total revenues $ 282,652 $222,045 $29,150 $37,737 $ 65,195 $ 636,779
- -----------------------------------------------------------------------------------------------------------------------------
Segment (loss) income before tax $ (42,638) $ 4,410 $10,268 $ 1,363 $ 65,195 $ (9,763) $ 28,835
Combined ratios 115.3% 98.0% 64.8% 105.3%
Interest expense before tax (5,928) (5,928)
Income tax benefit (expense) $ 14,003 $ (1,426) $(3,322) $ (495) $ (21,747) 3,252 $ (9,735)
- -----------------------------------------------------------------------------------------------------------------------------
Segment assets $ 554,650 $102,667 $20,484 $66,098 $1,064,325 $ 10,502 $1,818,726
- -----------------------------------------------------------------------------------------------------------------------------
For the Year Ended December 31, 1997
- -----------------------------------------------------------------------------------------------------------------------------
Revenues:
Premiums earned $ 242,064 $214,406 $32,251 $ 488,721
Net investment income $ 52,332 52,332
Realized gains on investments $ 545 13,463 14,008
Real estate sales 45,419 45,419
- -----------------------------------------------------------------------------------------------------------------------------
Total revenues $ 242,064 $214,406 $32,251 $45,964 $ 65,795 $ 600,480
- -----------------------------------------------------------------------------------------------------------------------------
Segment (loss) income before tax $ (37,157) $ 6,509 $14,189 $ 1,678 $ 65,795 $ (7,536) $ 43,478
Combined ratios 115.3% 96.9% 56.0% 103.4%
Interest expense before tax (3,980) $ (3,980)
Income tax benefit (expense) $ 11,891 $ (2,083) $(4,541) $ (599) $ (22,709) 2,663 (15,378)
- -----------------------------------------------------------------------------------------------------------------------------
Note 19
Employee Benefit and Retirement Plans
Zenith offers a tax deferred savings plan organized under Section 401(k) of
the Internal Revenue Code for all of its subsidiaries' eligible employees who
have been employed for at least one year. Zenith matches up to one third of the
first 6% of employee contributions on a current basis and is not liable for any
future payments under the plan. For the years ended December 31, 1999, 1998 and
1997, Zenith contributed $1.2 million, $1.1 million and $0.6 million,
respectively.
Zenith also offers a stock purchase plan, under which all employees are able
to purchase
TheZenith
64
shares of Zenith National common stock at market value. Zenith matches 25% of
all employee purchases. For the years ended December 31, 1999, 1998 and 1997,
Zenith contributed $0.3 million, $0.4 million and
$0.4 million, respectively.
Note 20
Related Parties
Pursuant to a Stock Purchase Agreement, dated June 25, 1999 (the "Stock
Purchase Agreement"), between Fairfax Financial Holdings Limited, a Canada
corporation ("Fairfax"), and Reliance Insurance Company ("Reliance"), Fairfax
agreed to purchase the 6,574,000 shares of common stock of Zenith National owned
by Reliance and its affiliates for $28 per share (the "Transaction"). In an
amendment to its Statement on Schedule 13D, dated October 25, 1999 and filed
with the Securities and Exchange Commission, Reliance Financial Services
Corporation reported that the consummation of the Transaction occurred on
October 25, 1999.
The P&C Operations conduct assumed and ceded reinsurance transactions with
subsidiaries of Fairfax. The following table summarizes the reinsurance
transactions with the subsidiaries of Fairfax:
- ------------------------------------------------------------
(Dollars in thousands) 1999
- ------------------------------------------------------------
Assumed Reinsurance:
Premiums earned $ 177
Other underwriting and operating expenses 277
Premiums receivable 8
Unpaid loss and loss adjustment expenses 220
Ceded Reinsurance:
Receivable from reinsurers on paid and unpaid
losses 388
Unpaid losses and loss adjustment expenses 2,019
Unearned premiums 37
- ------------------------------------------------------------
At December 31, 1999, Zenith owned $5.1 million at fair value of securities
issued by Fairfax. In addition, at December 31, 1999, Zenith owned $4.5 million
at fair value of securities issued by TIG Capital Trust 1, a subsidiary of
Fairfax.
At December 31, 1998, Zenith owned $6.2 million at fair value of securities
issued by Reliance Group Holdings Inc., which owned Reliance.
Zenith Insurance has an assumed reinsurance agreement with Reliance.
Estimated costs paid to Reliance relating to this arrangement amounted to
$53,000 and $97,000 for the years ended December 31, 1998 and 1997,
respectively. Zenith Insurance also maintains aggregate and specific excess of
loss reinsurance agreements with Reliance. Included in receivable from
reinsurers and state trust and prepaid reinsurance premiums as of
December 31, 1998 was $14.5 million relating to this reinsurance arrangement.
Note 21
Common Stock Market Prices (Unaudited)
The following table shows the high and low common stock prices during each
quarter for the past two years.
- ----------------------------------------------------------------------------------
1999 1998
--------------------------- ---------------------------
High Low High Low
- ----------------------------------------------------------------------------------
March 31 $ 26 $ 20 5/16 $ 29 1/16 $ 24 1/2
June 30 26 11/16 22 1/4 30 1/2 28
September 30 26 21 1/8 28 1/2 23 9/16
December 31 22 13/16 19 1/4 25 7/8 22 7/8
- ----------------------------------------------------------------------------------
Note 22
Subsequent Event (Unaudited)
On February 25, 2000, Zenith National paid $18.8 million to repurchase
$12.5 million aggregate principal amount of the outstanding 9% Notes and $8.0
million aggregate liquidation amount of the outstanding 8.55% Capital
Securities. Zenith National used its available cash balances to fund these
purchases.
TheZenith
65
REPORT OF INDEPENDENT ACCOUNTANTS
- ----------------------------------------------------------------
To the Stockholders and Board of Directors of
Zenith National Insurance Corp.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, cash flows, and stockholders' equity
present fairly, in all material respects, the financial position of Zenith
National Insurance Corp. and subsidiaries (the "Company") at December 31, 1999
and 1998, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers LLP
Los Angeles, California
February 10, 2000
TheZenith
66
CORPORATE DIRECTORY
-------------------------------------
Zenith National Insurance Corp.
Directors
Also Directors of Zenith
Insurance Company
Max M. Kampelman
Attorney, Of Counsel,
Fried, Frank, Harris,
Shriver & Jacobson
Robert J. Miller
Attorney, Senior Partner,
Jones Vargas
William S. Sessions
Attorney
Sessions & Sessions, L.C.,
Security Consultant
Harvey L. Silbert
Attorney, Of Counsel,
Loeb & Loeb LLP
Gerald Tsai, Jr.
Management of
Private Investments
Michael Wm. Zavis
Attorney
Katten, Muchin & Zavis
Stanley R. Zax
Chairman of the
Board and President
Officers
Stanley R. Zax
Chairman of the
Board and President
Michael W. Jacobson
Senior Vice President
William J. Owen
Senior Vice President
& Chief Financial Officer
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
www.chasemellon.com
Transfer Agent-
9% Senior Notes and
Redeemable Securities
(8.55% Capital Securities)
Norwest Bank
Minnesota, N.A.
Minneapolis, MN
Corporate
Headquarters
21255 Califa Street
Woodland Hills, CA
91367-5021
www.zenithnational.com
NYSE Trading Symbol
Common stock -- ZNT
Independent
Accountants
PricewaterhouseCoopers LLP
Los Angeles, CA
The Annual Report
on Form 10-K, for
the year ended
December 31, 1999
and our quarterly reports
may be obtained
at our website or
free of charge upon
written request to:
Chief Financial Officer
Zenith National
Insurance Corp.
21255 Califa Street
Woodland Hills, CA
91367-5021
TheZenith
67
CORPORATE DIRECTORY
- -------------------------------------
Zenith Insurance Company
Officers
Stanley R. Zax
Chairman of the
Board and President
Jack D. Miller
Executive Vice President,
and Chief Operating Officer
William J. Owen
Senior Vice President &
Chief Financial Officer
John J. Tickner
Senior Vice President,
General Counsel and Secretary
Stephen J. Albers
Senior Vice President
James T. Braun
Senior Vice President
Dan M. Hair
Senior Vice President
John C. Hasbrouck
Senior Vice President
Robert L. Hernandez
Senior Vice President
Fred A. Hunt
Senior Vice President
Corey A. Ingber
Senior Vice President
Michael W. Jacobson
Senior Vice President
Edward G. Krisak
Senior Vice President
Robert E. Meyer
Senior Vice President
and Actuary
William J. Saake
Senior Vice President
Kenneth R. Solomon
Senior Vice President
Keith E. Trotman
Senior Vice President
Chris L. Uselton
Senior Vice President
Kenneth L. Wuelfing
Senior Vice President
Glen R. Zepnick
Senior Vice President
Bryan A. Anderson
Vice President
Jeffrey J. Beaudoin
Vice President
Steen Brydum
Vice President
Richard V. Caligiuri
Vice President
Suzanne M. Chapan
Vice President
Duane H. Chernow
Vice President
Ronald W. Crabtree
Vice President
Ron Cordova
Vice President
Mark T. Cross
Vice President
Gerald D. Curtin
Vice President
Charles J. Davis
Vice President
Bradley C. Eastwood
Vice President
Jesse R. Farese
Vice President
F. Stephen Fetchet
Vice President
Carolyn N. Hinson
Vice President
David G. Hoppen
Vice President
Mark M. Jansen
Vice President
Diane L. Kinney
Vice President
Lisa A. Krouse
Vice President and General
Counsel-Southeast
Hyman J. Lee Jr.
Vice President and Assistant Secretary
Jonathan W. Lindsay
Vice President
Andrew M. Lyman
Vice President
Linda K. Mangone
Vice President
Colin S. Mitchell
Vice President
David A. O'Connor
Vice President
Michael J. Paladino
Vice President
Angela Parmelee
Vice President
Stephen D. Petrula
Vice President
Diane E. Schaefer
Vice President
Alan I. Steinhardt
Vice President
John A. Swift
Vice President
Jessica Ann Vasquez
Vice President
John H. Weber
Vice President
Norman C. Winters
Vice President
Laura F. Yamanaka
Vice President
William M. Zachry
Vice President
TheZenith
68
CORPORATE DIRECTORY
-------------------------------------
TheZenith Marketing, Underwriting and Claims Offices
Los Angeles, CA
Corporate Headquarters
21255 Califa Street
Woodland Hills, CA 91367
818/713-1000
www.thezenith.com
Pleasanton, CA
(San Francisco Bay Area)
4309 Hacienda Drive
Suite 200
Pleasanton, CA 94588
925/460-0600
Fresno, CA
575 E. Locust Avenue
Suite 101
Fresno, CA 93720
209/432-6660
San Diego, CA
1660 Hotel Circle Drive North
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
Conway, AR
824 Front Street
Conway, AR 72032
501/450-6884
Harrisburg, PA
4400 Deer Path Way
Suite 200
Harrisburg, PA 17110
717/221-7000
Springfield, IL
2105 West White Oaks Drive
Springfield, IL 62704
217/726-2900
Salt Lake City, UT
4 Triad Center
Suite 150
Salt Lake City, UT 84180
801/741-4900
Orlando, FL
3504 Lake Lynda Drive Ste 400
Orlando, FL 32817
407/380-9144
Sarasota, FL
South East Region
Sarasota Office
1390 Main St.
Sarasota, FL 34236-5642
800/226-2324
Charlotte, NC
5832 Farm Pond Lane
Suite 300
Charlotte, NC 28212
800/200-2667
Birmingham, AL
10 Iverness Center Parkway
Suite 220
Birmingham, AL 35242
800/355-0708
Perma-Bilt, a Nevada Corporation
Officers
Daniel Schwartz
President
Robert M. Beville
Executive Vice President
David R. Durant
Vice President
Craig A. Hardy
Vice President
Fred W. Lessman
Vice President
Ruth E. Ochoa
Vice President
Headquarters
7150 Pollock Drive
Suite 104
Las Vegas, NV 89119
702/896-9100
TheZenith
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