THE ZENITH - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Form 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM .............. TO .............. COMMISSION FILE NUMBER 1-9627 ZENITH NATIONAL INSURANCE CORP. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 95-2702776 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) 21255 CALIFA STREET, WOODLAND HILLS, 91367-5021 CALIFORNIA (ZIP CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (818) 713-1000 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NAME OF EACH EXCHANGE ON TITLE OF EACH CLASS WHICH REGISTERED ---------------------------------------- -------------------------------------- Common Stock, $1.00 Par Value New York Stock Exchange (TITLE OF CLASS) SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None (TITLE OF CLASS) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes __X__ No ______ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock of the registrant held by non-affiliates of the registrant on March 27, 1996 was approximately $227,866,000 (based on the closing sale price of such stock on such date). At March 27, 1996, 17,657,004 shares of Common Stock were outstanding, net of 6,671,190 shares of treasury stock. DOCUMENTS INCORPORATED BY REFERENCE (1) Portions of the Annual Report to Stockholders for fiscal year ended December 31, 1995 -- Part I and Part II. (2) Portions of the Proxy Statement in connection with the 1996 Annual Meeting of Stockholders -- Part III. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART I ITEM 1. BUSINESS GENERAL Zenith National Insurance Corp. ("Zenith"), a Delaware corporation incorporated in 1971, is a holding company. Zenith is engaged through its wholly-owned insurance subsidiaries, Zenith Insurance Company ("Zenith Insurance"), CalFarm Insurance Company ("CalFarm Insurance"), ZNAT Insurance Company ("ZNAT Insurance") and Zenith Star Insurance Company ("Zenith Star"), in the property-casualty insurance business. The average combined ratio for the 10 years ended December 31, 1995 of Zenith's property-casualty operations was 100.4%. In 1993, Zenith commenced real estate operations, developing private residences for sale in Las Vegas, Nevada, through its wholly-owned subsidiary, Perma-Bilt, a Nevada Corporation ("Perma-Bilt"). In 1995, Zenith sold its wholly-owned subsidiary, CalFarm Life Insurance Company ("CalFarm Life"), to a subsidiary of SunAmerica Inc. for approximately $120 million in cash, with Zenith retaining the group health insurance business previously written by CalFarm Life. The results of operations and net assets of CalFarm Life's life and annuity business are included in Zenith's consolidated financial statements as discontinued operations and results of the health insurance operation are included in Other Property-Casualty results which have been restated. Net income in 1995 includes a loss of $19.5 million associated with the sale of CalFarm Life. The 1995 edition of Best's Key Rating Guide ("Best's") gives Zenith Insurance, CalFarm Insurance, ZNAT Insurance and Zenith Star, collectively, ratings of A+ (superior). Standard & Poor's Corporation ("S&P") has rated the claims-paying ability of Zenith Insurance, CalFarm Insurance, ZNAT Insurance and Zenith Star AA- (excellent). Best's ratings and S&P's ratings of claims-paying ability are based upon factors of concern to policyholders and insurance agents and are not directed toward the protection of investors. At December 31, 1995, Zenith and its subsidiaries had approximately 1,400 employees. The principal executive offices of Zenith are located at 21255 Califa Street, Woodland Hills, California 91367-5021, telephone (818) 713-1000. GLOSSARY OF SELECTED INSURANCE TERMS The following terms when used herein have the following meanings: Assume To receive from a ceding company all or a portion of a risk in consideration of receipt of a premium. Cede To transfer to a reinsurer all or a portion of a risk in consideration of payment of a premium. Combined ratio The sum of underwriting expenses, net incurred losses, loss adjustment expenses and policyholders' dividends, expressed as a percentage of net premiums earned. The combined ratio is the key measure of underwriting profitability used in the property and casualty insurance business. Development The amount by which losses, measured subsequently by reference to payments and additional estimates, differ from those originally reported for a period. Development is favorable when losses ultimately settle for less than levels at which they were reserved or subsequent estimates indicate a basis for reserve decreases on open claims. Development is unfavorable when losses ultimately settle for more than levels at which they were reserved or subsequent estimates indicate a basis for reserve increases on open claims. 1 Excess of loss reinsurance A form of reinsurance in which the reinsurer pays all or a specified percentage of a loss caused by a particular occurrence or event in excess of a fixed amount and up to a stipulated limit. Incurred but not reported Claims relating to insured events that have claims occurred but have not yet been reported to the insurer or reinsurer. Loss adjustment expenses The expenses of investigating and settling claims, including legal and other fees, and general expenses of administering the claims adjustment process. Net premiums earned The portion of net premiums written applicable to the expired period of policies. Participating policy A policy upon which dividends may be paid after expiration. Policyholders' surplus or The amount remaining after all liabilities are statutory capital subtracted from all admitted assets, as determined in accordance with statutory accounting practices. This amount is regarded as financial protection to policyholders in the event an insurance company suffers unexpected or catastrophic losses. Reinsurance A transaction in which an original insurer, or cedant, remits a portion of the premium to a reinsurer, or assuming company, as payment for the reinsurer's assumption of a portion of the risk. Reserves or loss reserves The balance sheet liability representing estimates of amounts needed to pay reported and unreported claims and related loss adjustment expenses (stated without reduction for reinsurance ceded after 1992). Retrocession A reinsurance of reinsurance assumed. Statutory accounting Accounting principles prescribed or permitted by practices the states' departments of insurance. In general, statutory accounting practices address policyholder protection and solvency and are more conservative in presentation of earnings, surplus and assets than generally accepted accounting principles. Treaty A contract of reinsurance. Underwriting The process whereby an insurer reviews applications submitted for insurance coverage and determines whether it will accept all or part, and at what premium, of the coverage being requested. Underwriting expenses The aggregate of policy acquisition costs and the portion of administrative, general and other expenses attributable to the underwriting process as they are accrued and expensed. DESCRIPTION OF THE BUSINESS Zenith and its subsidiaries conduct business principally in the property and casualty insurance industry. Property-casualty operations are comprised of: Workers' Compensation (46% of 1995 consolidated net premiums earned); other property-casualty principally automobile, homeowners, farmowners, commercial coverages and health insurance (44% of 1995 consolidated net premiums earned); and reinsurance (10% of 1995 consolidated net premiums earned). Results of such operations for the three years ended December 31, 1995 are set forth in the table on page 29 of the 1995 Annual Report to Stockholders, which table is hereby incorporated by reference. The earnings of Zenith's property and casualty operations are supplemented by the generation of investment income discussed under "Investments." 2 Zenith also conducts real estate operations through a wholly-owned subsidiary that develops land and constructs private residences for sale in Las Vegas, Nevada. Zenith's business segments are described in Note 15 -- "Segment Information" on page 54 of the 1995 Annual Report to Stockholders, which note is hereby incorporated by reference. PROPERTY AND CASUALTY -- WORKERS' COMPENSATION INSURANCE Workers' compensation insurance provides coverage for the statutorily prescribed benefits that employers are required to pay to their employees injured in the course of employment. The standard workers' compensation policy issued by Zenith Insurance provides payments for, among other things, temporary or permanent disability benefits, death benefits, medical and hospital expenses and expenses of vocational rehabilitation. The benefits payable and the duration of such benefits are set by statute, and vary with the nature and severity of the injury or disease and the wages, occupation and age of the employee. Historically, Zenith's workers' compensation business was produced exclusively in California with minor incidental coverages out of state for its larger policyholders. In 1992, Zenith began workers' compensation operations in the Texas workers' compensation market. Since then, Zenith has further expanded its national workers' compensation operations. Net premiums earned in 1995 by state are set forth in the table below: 1995 PREMIUMS EARNED % ----------------------- --------- California.................... $ 159,356,000 78.4% Texas......................... 32,298,000 15.9 Arkansas...................... 8,584,000 4.2 Other......................... 3,014,000 1.5 ----------------------- --------- $ 203,252,000 100.0% ----------------------- --------- ----------------------- --------- Zenith's managed care efforts, return to work strategies, safety and health, fraud and litigation efforts resulted in the lowest workers' compensation loss ratio in the United States. According to A.M. Best, Zenith's 5 year loss ratio of 45.9% through 1994 (latest available statistics) was the lowest loss ratio of the top 50 insurers. During the past 10 years, the Zenith's workers compensation combined ratio was 99.2%. Zenith Insurance is licensed to conduct business in 30 states and the District of Columbia and has applications pending throughout most of the nation. Zenith's goal is to be a specialist risk-oriented national workers' compensation insurer. National results for workers' compensation insurers in recent years have been favorable by recent historic standards and Zenith's non-California underwriting results in 1995 were more favorable than its California results. However, increased competition, nationally, is expected to follow from these favorable trends and management intends to progress cautiously with its national expansion. Competition, regulation, rate adequacy and the feasibility of containing the elements of the cost of claims are among the key factors in determining the favorability of a given workers' compensation market. Regulation is principally a matter for state legislatures. In California, workers' compensation legislation was enacted in 1993 which, together with private initiatives undertaken by Zenith and other insurers, produced significant improvements in a theretofore runaway claims cost environment. However, the California Insurance Commissioner reduced minimum rates on three separate occasions in 1993 and 1994 in response. Rates were deregulated effective January 1, 1995 and thereafter insurance companies file and use their own, actuarially determined, rates in California for workers' compensation insurance. The rates filed and used by Zenith in California are determined to provide a margin for underwriting profits. Zenith increased its California rates by 8% effective January 1, 1996. Future profitability of Zenith's workers' compensation operation will be dependent upon its ability to compete in an open rating environment in California, the outlook for economic growth in California and Zenith's continuing efforts to control medical and indemnity costs through return to work and managed care strategies. At present, competition is intense and Zenith is quoting on large numbers of policies focused on achieving the goal of a combined ratio of 100%. 3 Generally, premiums for workers' compensation insurance policies are a function of the applicable premium rate, which includes the insured employer's experience modification factor (where applicable) and the amount of the insured employer's payroll. Payrolls may be affected significantly by changes in employment and wage levels. A deposit premium is paid at the beginning of the policy period, periodic installments are paid during the period and the final amount of the premium is generally determined as of the end of the policy period after the policyholder's payroll records are audited. Additional policy features may be added to enhance the outcome for the policyholder in the event of favorable claims experience. Predominant among such features has been, historically, the participating policy in which a dividend has been paid after policy expiration. With the advent of open rating in California and an emphasis on, among other things, overall pricing at inception, dividends decreased significantly in 1995 and are likely to become relatively insignificant in the future as an element in workers' compensation insurance. Zenith is continuing to market integrated workers' compensation, health and disability insurance products ("24-Hour Coverage") in alliances with selected health insurers, health maintenance organizations and UNUM Corporation, the nation's largest disability insurance company. The policies are sold on an integrated basis in California under the name "SinglePoint." At this time, it is too early for management to predict the likely outcome of 24-Hour Coverage on the future results of its operations. PROPERTY AND CASUALTY -- OTHER Zenith, through CalFarm Insurance, offers a comprehensive line of property and casualty insurance, including automobile, farmowners, commercial multiple peril packages and homeowners coverage. Additionally, CalFarm Insurance has assumed the group health insurance business that was previously written by CalFarm Life. Automobile insurance includes coverage for automobile bodily injury, property damage and physical damage. Automobile bodily injury and property damage insurance provide coverage for third party liability, bodily injury and property damage arising from the ownership, maintenance or use of an automobile. Automobile physical damage coverage insures against physical loss of the insured's own vehicle. Farmowners and homeowners insurance includes coverage for direct physical damage to real and personal property, loss of personal property by theft and legal liability for injury to others and damage to property of others. Commercial multiple peril insures businesses against property damage and general liability. Health insurance premiums are written under a program sponsored by the California Farm Bureau Federation (the "Farm Bureau"). During the past 10 years, the combined ratio of Zenith's Other Property-Casualty operation was 101.9%. Automobile insurance (both commercial and personal) is the largest line of CalFarm Insurance's business, representing 15% of Zenith's property and casualty premiums earned in 1995. CalFarm Insurance insured approximately 21,000 personal automobiles and 68,000 commercial and farm vehicles in 1995. Farmowners business is the second largest line of CalFarm Insurance's business, representing approximately 11% of Zenith's property and casualty premiums earned in 1995. Zenith's Other Property and Casualty operations are subject to the regulatory provisions of California Initiative Proposition 103 ("Proposition 103"). The principal effects of Proposition 103 on Zenith's Automobile and Other Property and Casualty business are as follows: rates must be approved by the Insurance Commissioner prior to use; rates on personal automobile policies must be offered to "good drivers" (as defined) at a discount of at least 20% from rates otherwise charged and an insurer cannot refuse to sell a "good driver" policy to a qualified applicant; personal automobile insurance policies cannot be cancelled or non-renewed except for non-payment of premium, fraud or material misrepresentation, or a substantial increase in hazard; and personal automobile insurance rates must be based on the following factors in decreasing order of importance: driving record, number of miles driven, number of years of driving experience, and other factors which may be adopted by the Insurance Commissioner. 4 PROPERTY AND CASUALTY -- REINSURANCE ASSUMED Zenith Insurance is selectively underwriting a book of assumed reinsurance. Reinsurance contracts, or treaties, come in a variety of forms, but the principal arrangements are either proportional in nature, in which the assuming company shares pro-rata in the premiums and losses of the cedant, or arrangements under which the assuming company pays losses in excess of a certain limit in return for a premium, usually determined as a percentage of the cedant's primary insurance premiums. Zenith operates its reinsurance activity as a participant in treaties in which, typically, the reinsurance coverage is syndicated to a number of assuming companies. Depending upon market conditions and other factors, the volume of premiums written fluctuates from year to year. Zenith's current participation in the reinsurance market emphasizes the reinsurance of large individual property risks and property catastrophe reinsurance. By diversifying its geographical spread, Zenith's assumed reinsurance business is written so as to limit the company's exposure to losses from any one event in a worst-case scenario to a maximum of approximately 5% of consolidated stockholders' equity. An important element in the pricing of reinsurance is the supply of reinsurance capacity (i.e. capital) relative to demand. In recent years, new capital has been made available to provide world-wide reinsurance capacity. Most notably, such capital has been contributed by new companies in Bermuda and by contributions to Lloyd's syndicates by corporations with limited liability. Zenith has observed decreases in catastrophe reinsurance rates for 1996 and premium income in 1996 may be reduced compared to 1995. During the past 10 years, the combined ratio of Zenith's Reinsurance operation was 100.3% Commencing January 1, 1995 Zenith Insurance became a corporate underwriting member of Lloyd's through a 100% wholly-owned subsidiary, ZIC Lloyd's Underwriting Limited ("ZIC Lloyd's"). ZIC Lloyd's has committed funds of $5 million to support the underwriting of a certain syndicate. All of the funds committed by ZIC Lloyd's are available to satisfy claims in the event of underwriting losses by the syndicate. PARENT Zenith is a holding company owning directly or indirectly all of the capital stock of certain property and casualty insurance and insurance-related companies. In 1993, Zenith commenced a real estate operation through a newly-formed subsidiary, Perma-Bilt, for the purpose of building private residences in Las Vegas, Nevada. In 1995, Perma-Bilt closed and delivered 240 homes at an average selling price of $132,000, compared to 228 homes the prior year. Revenues in 1995 were $31,736,000 and pre-tax income was $2,075,000 compared to $30,220,000 of sales and $2,189,000 of pre-tax income, respectively, the previous year. Land presently owned at a cost of about $10,142,000 will support the construction and sale of an estimated 926 homes over the next several years. Increased interest rates may impact the rate of home sales, but Zenith is confident that the land it has acquired is strategically located and will have long-term value. Perma-Bilt continues to search for additional land for development or resale. In 1995, Zenith sold CalFarm Life for approximately $120,000,000 in cash, with Zenith retaining the health insurance business previously written by CalFarm Life. After repaying outstanding bank lines of credit, Zenith had cash and short-term investments of approximately $80,000,000 at December 31, 1995. Zenith is continuing its stock repurchase plan and searching for suitable investments. LOSS AND LOSS EXPENSE RESERVES AND CLAIMS, AND LOSS DEVELOPMENTS Zenith's property and casualty insurance subsidiaries (the "P&C Companies") maintain reserves for the payment of losses and for the expenses of settling both reported and unreported claims that have been incurred under their insurance policies and reinsurance contracts. The amount of such reserves, as related to reported claims, is based upon periodic case-by-case evaluation and judgment by the P&C Companies' claims departments, with actuarial review. The estimate of unreported claims arising from accidents which have not yet been reported to the P&C Companies, commonly known in the industry as "incurred but not reported," is based upon the 5 P&C Companies' experience and statistical information with respect to the probable number and nature of such claims. The P&C Companies monitor these factors and revise their reserves as they deem appropriate. Reserves are based on estimates and no assurance can be given that the ultimate liability will not be more or less than such estimates. Reference is made to "Property -- Casualty Loss Development" on pages 38 and 39, the table setting forth statutory loss and loss adjustment expense development by accident year on page 9 and the table setting forth the reconciliation of changes in the liabilities for losses and loss adjustment expenses included in Note 13 -- "Loss and Loss Adjustment Expense Reserves" on page 53 of the 1995 Annual Report to Stockholders, all of which are hereby incorporated by reference. These tables show the development of loss and loss adjustment expense liabilities as originally estimated under generally accepted accounting principles at December 31 of each year presented, as well as the development of statutory incurred loss and loss adjustment expense by accident year. The accounting methods used to estimate these liabilities are described in Note 1 of the Notes to Consolidated Financial Statements of Zenith as set forth on pages 46 through 48 of the 1995 Annual Report to Stockholders which note is hereby incorporated by reference. The one year loss and loss adjustment expense reserve development for Zenith's three main lines of business is set forth in the table on page 30 of the 1995 Annual Report to Stockholders which table is hereby incorporated by reference. WORKERS' COMPENSATION Zenith's Workers' Compensation reserves, on the average, are paid within approximately 2.5 years. Zenith regards the timely settlement of its Workers' Compensation claims as important to its profitability and makes use of compromises and releases for claim settlements to expedite this process. Zenith Insurance maintains five regional offices in California and offices outside of California in Texas, Arkansas and Illinois, each of which is fully staffed to conduct all workers' compensation claims operations, including review of initial reports of work injury, assignment of appropriate field investigation and determination of whether subrogation should be pursued. Workers' Compensation claims operations are supported by computer systems that provide immediate access to policy coverage verification and claims records and enables Zenith Insurance to detail claims payment histories and policy loss experience reports. Legislative reform of the California workers' compensation system was enacted in 1993. In addition, Zenith undertook significant additional expenditures on the loss adjustment process in recent years with a view to mitigating the effect of adverse claim trends, particularly the effect of fraud and abuse. On July 5, 1995, Zenith's new client-server based computer system became operational, replacing its previous mainframe computer for workers' compensation operations. In addition to enhancing data processing, the new system is designed, among other things, to improve work flow in the workers' compensation claims handling process and to support expansion outside of California. Management observed certain unusual claim reserving trends and patterns in 1995, possibly related to disruption of normal work flows due to implementation of the new system. Work flows in the future may continue to be impacted as training and optimization of the new system continues. Management believes that its estimate for liabilities for unpaid workers' compensation losses and loss adjustment expenses (amounting to $297,354,000 of total reserves for unpaid losses and loss adjustment expenses of $517,552,000) at December 31, 1995 included in these consolidated financial statements is adequate. However, subsequent re-interpretation of currently available data or any new information that becomes available may change the estimate of such liabilities in future periods and such changes, if any, will be reflected in the financial statements of the period in which they occur. OTHER PROPERTY AND CASUALTY Automobile and Other Property and Casualty loss reserves are paid, on the average, within approximately 3.5 years. 6 Property insurance coverages and CalFarm's concentration of business in California expose Zenith to catastrophe losses from events in California. Reinsurance ceded by CalFarm Insurance protects against losses in excess of $5,000,000 from any one event -- see "Reinsurance Ceded" on page 8. In 1995, CalFarm sustained losses of $10,700,000 in conjunction with three major California storms. Losses attributable to the Northridge earthquake in 1994 were $3,200,000, of which $800,000 was assessed by the California Fair Plan. Losses in 1993 included $1,600,000, of which $1,000,000 was assessed by the California Fair Plan, attributable to the Southern California brush fires. Liability policies written by CalFarm Insurance contain exclusion clauses for damages resulting from pollution, and such losses are thereby substantially excluded from coverage. Although such claims have been received by CalFarm Insurance, management believes that such claims will not have a material adverse effect on Zenith's consolidated financial condition either individually or in the aggregate. CalFarm Insurance maintains four claims and legal offices in California to conduct all claims operations of the other property and casualty business. All claims operations of CalFarm Insurance are supervised by its home office claims department. Health claims is a separate operation located in the home office. REINSURANCE ASSUMED Zenith expects that, on the average, its Reinsurance reserves will be paid in approximately 4.0 years. Zenith's Reinsurance reserves constitute approximately 20% of its total reserves, net of ceded reinsurance, for property and casualty unpaid losses and loss adjustment expenses at December 31, 1995, reflecting the longer average life of such reserves relative to Zenith's other principal lines of business. In addition to information supplied by ceding companies, Zenith makes use of industry experience in arriving at estimates of ultimate losses for certain reinsurance assumed arrangements. Losses attributable to catastrophes were $2,500,000 in 1995, principally from Hurricane "Marilyn" and $9,300,000 in 1994 from the Northridge Earthquake. Zenith Insurance has participated, to a limited extent, in the reinsurance arrangements of ceding companies that have written both directors' and officers' liability coverage ("D & O") policies and professional indemnity policies, including such coverage written for practicing certified public accountants. Actions alleging negligence against directors, officers or accountants by parties suffering financial losses in savings and loan failures give rise to claims under D & O policies or professional indemnity policies which, in turn, give rise to claims against Zenith Insurance. Such claims have not had, and are not expected to have in the future, a material adverse effect on Zenith's consolidated financial condition. INVESTMENTS Investment policies of Zenith and its insurance subsidiaries are established by their respective Boards of Directors, taking into consideration state regulatory restrictions with respect to investments in connection with reserve obligations as well as the nature and amount of various kinds of investments. (See "Business -- Regulation.") Zenith's principal investment goal is to maintain safety and liquidity, enhance principal values and achieve increased rates of return consistent with regulatory constraints. The allocation amongst various types of securities is adjusted from time to time based on market conditions, credit conditions, tax policy, fluctuations in interest rates and other factors (see "Investments" under Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations on pages 32 and 33 of Zenith's 1995 Annual Report to Stockholders which is hereby incorporated by reference). At December 31, 1995 the investment portfolios of Zenith and the P&C Companies consisted primarily of taxable bonds and short-term investments supplemented by smaller portfolios of redeemable and other preferred stocks and common stocks. The average life of the consolidated portfolio was 3.9 years at 7 December 31, 1995. Investment income by segment is set forth in Note 15 -- "Segment Information" on page 54 of the 1995 Annual Report to Stockholders which note is hereby incorporated by reference. Stockholders' equity will fluctuate as interest rates fluctuate due to the implementation of Statement of Financial Accounting Standards No. 115 -- Accounting for Investments in Certain Debt and Equity Securities. In accordance with its provisions, Zenith has identified certain securities, amounting to approximately 90% of the investments in debt securities at December 31, 1995, as available-for-sale. In 1995 stockholders' equity increased by $53.4 million, net of deferred tax expense, as a result of changes in the fair values of such investments. REINSURANCE CEDED In accordance with general industry practices, Zenith's insurance subsidiaries annually purchase excess of loss reinsurance. Reinsurance makes the assuming reinsurer liable to the ceding company to the extent of the reinsurance. It does not, however, discharge the ceding company from its primary liability to its policyholders in the event that the reinsurer is unable to meet its obligations under such reinsurance treaty. Historically, no material costs have been incurred by Zenith or its subsidiaries from uncollected reinsurance. The purpose of such reinsurance is to protect Zenith from the impact of large, unforseen losses and such reinsurance reduces the magnitude of sudden and unpredictable changes in net income and the capitalization of insurance operations. Zenith monitors the financial condition of its reinsurers and does not believe that it is exposed to any material credit risk through its ceded reinsurance arrangements. Zenith believes that its ceded reinsurance arrangements are adequate and consistent with industry practice. Reinsurance premiums ceded by Zenith's insurance subsidiaries amounted to $21,112,000, $21,521,000 and $22,301,000 in 1995, 1994 and 1993, respectively or 4.9%, 4.9%, and 4.8% of earned premiums in 1995, 1994 and 1993, respectively. Reinsurance reserves amounted to $54,429,000, $47,696,000 and $44,919,000 in 1995, 1994 and 1993, respectively, or 10.5%, 9.3% and 8.6% of gross reserves for unpaid losses and loss adjustment expenses in 1995, 1994 and 1993, respectively. Each insurance subsidiary maintains separate reinsurance arrangements, which during 1995 were as follows: Zenith Insurance -- Workers' Compensation reinsurance covered all claims between $550,000 and $100,000,000 per occurrence. The coverage from $550,000 to $5,000,000 is placed with General Reinsurance Corporation, the coverage from $5,000,000 to $10,000,000 with Employers Reinsurance Corporation and the remaining three layers from $10,000,000 to $60,000,000 primarily with Prudential Reinsurance Company, NAC Reinsurance Corporation, Transatlantic Reinsurance Company, The St. Paul Companies and the London reinsurance market (primarily Lloyds' syndicates and certain United Kingdom reinsurance companies). Catastrophe reinsurance covers an additional $40,000,000 in excess of $60,000,000 and is placed with Northwestern National Life Insurance Company, Cigna Reinsurance Company and Pinehurst Accident Reinsurance Group. Zenith's Reinsurance division did not purchase any reinsurance protection on its assumed business in the three years ended December 31, 1995. However, Zenith's exposure to losses from assumed reinsurance is limited by the terms upon which it is written to a maximum probable loss from any one event of approximately 5% of Zenith's consolidated stockholders' equity. CalFarm Insurance -- For personal and commercial property lines of business, reinsurance is maintained for claims in excess of $350,000 up to $4,000,000 per occurrence. On liability coverages for both personal and commercial lines, reinsurance covers losses up to $5,000,000 per occurrence, subject to a retention of $500,000. This reinsurance coverage is all placed with General Reinsurance Corporation. CalFarm Insurance has property catastrophe reinsurance that provides for recovery of 95% of $35,000,000, excess of a retention of $5,000,000, for which the principal reinsurers are General Reinsurance Corporation and Centre Cat. Ltd. CalFarm also maintains reinsurance agreements with Employers Reinsurance Corporation and Duncanson & Holt for excess risks on its accident and health contracts. Employers Reinsurance Corporation provides coverage 8 for aggregate losses in excess of $2,000,000 on those individual health policy claims that exceed $120,000 for each insured in each calendar year. Duncanson & Holt provides coverage on group health policy claims that exceed $100,000 in each calendar year subject to a lifetime maximum of $3 million for any individual. CalFarm Insurance participates in a quota share contract whereby it retains 20% of the first $1,000,000 on most umbrella risks (comprehensive coverage in excess of primary policy limits) underwritten, with the remainder of up to $10,000,000 for commercial lines and up to $5,000,000 for personal lines ceded to General Reinsurance Corporation. Facultative reinsurance is placed on property coverage in excess of $4,000,000 on all property lines, and on umbrella limits in excess of $10,000,000 for commercial lines and $5,000,000 for personal lines. Facultative reinsurance is used on fewer than 5% of CalFarm Insurance's policies. Facultative coverage is placed primarily with General Reinsurance Corporation. Other companies used are Employers Reinsurance Corporation, Munich American Reinsurance Company and other reinsurers rated A+ by A.M. Best Company. Pooling Agreement -- Zenith Insurance, CalFarm Insurance, ZNAT Insurance and Zenith Star are parties to a pooling agreement. Under the agreement, the results of underwriting operations are ceded (the risks are transferred) to Zenith Insurance and are then reapportioned, or retro-ceded (the risks are transferred back), to those three companies in the following proportions: Zenith Insurance, 79.5%; CalFarm Insurance, 18%; ZNAT Insurance, 2%; and Zenith Star, 0.5%. Transactions pursuant to the pooling agreement are eliminated on consolidation and have no impact on Zenith's Consolidated Financial Statements. MARKETING AND STAFF Zenith Insurance's workers' compensation business is produced by approximately 700 independent licensed insurance agents and brokers throughout California, Texas and other areas in which Zenith conducts workers' compensation operations. The CalFarm agents referred to below also sell workers' compensation. Zenith Insurance's assumed reinsurance premiums are generated nationally by brokers and reinsurance intermediaries. CalFarm Insurance, through its affiliate CalFarm Insurance Agency, maintains a sales force of approximately 190 agents who sell insurance products exclusively for CalFarm Insurance, primarily in rural and suburban areas. These agents operate out of 116 offices throughout the State of California, including 31 offices shared with the Farm Bureau. In addition, in certain areas, independent agents market CalFarm Insurance products. Applications for insurance submitted by all agents and brokers are evaluated by professional underwriters based upon numerous factors, including underwriting criteria and standards, geographic areas of underwriting concentration, actuarial judgments of rate adequacy, economic considerations, and review of known data on the particular risk. Zenith's insurance subsidiaries, as opposed to their agents and brokers, retain authority over underwriting, claims processing, safety engineering and auditing. CALIFORNIA FARM BUREAU FEDERATION The Farm Bureau was formed to provide its members with a variety of agriculture-related services, including property and casualty insurance. The Farm Bureau is California's largest general farm organization, and represents more than 69,000 member families in 58 counties. The Farm Bureau continues to work actively to encourage its membership to place their insurance with CalFarm Insurance. Farm Bureau membership is a prerequisite to the purchase of farmowners, automobile and health insurance from CalFarm Insurance. Of the estimated 69,000 member families, approximately 63% are insured by CalFarm Insurance. The business of CalFarm Insurance is closely tied to the California farm economy, however over 41% of Farm Bureau members (and CalFarm Insurance insureds) are non-farmers and over 59% of CalFarm Insurance premium volume is generated by non-farm business. Total revenues in CalFarm Insurance attributable to sales that were sponsored by the Farm Bureau constituted approximately 27%, 25% and 26% of Zenith's total consolidated revenues for the years 1995, 1994 and 1993, respectively. The agreement of CalFarm 9 Insurance with the Farm Bureau, which is subject to cancellation by either party on six months' notice, requires annual payments to the Farm Bureau of $240,000 plus 2% of the gross written premium under the Farm Bureau group health insurance program. Pursuant to such provisions, total payments to the Farm Bureau were approximately $1 million in each of 1995, 1994 and 1993. Zenith believes that its relationship with the Farm Bureau is mutually beneficial. CalFarm Insurance benefits from the use of the CalFarm name and the Farm Bureau membership lists, and its ability to sell products to Farm Bureau members is enhanced by the Farm Bureau relationship. The Farm Bureau benefits since Farm Bureau membership is required to obtain automobile, farmowners and health insurance policies from CalFarm Insurance, which generates membership and revenues for the Farm Bureau. If the relationship between CalFarm Insurance and the Farm Bureau were terminated, Zenith believes that it could retain a significant amount of the business it currently has with Farm Bureau members because of the quality and tailored features of the products it offers in what it regards as its "niche market" and the long-term relationships established between its agents and these policyholders. In the event of such termination, however, Zenith expects that there would be an increased risk of nonrenewal of existing insurance coverage as well as a possible adverse effect on new policy revenues, but it cannot estimate the financial impact of any such termination. Zenith anticipates the continuation of a close working relationship with the Farm Bureau and the promotion among its membership of the purchase of insurance products from CalFarm Insurance as an attractive feature of Farm Bureau membership. COMPETITION Competition in the insurance business is based upon price, product design and quality of service. The insurance industry is highly competitive and competition is particularly intense in the California workers' compensation market which was deregulated with respect to prices in 1995. Zenith's subsidiaries compete not only with other stock companies, but with mutual companies, and other underwriting organizations such as the State Compensation Insurance Fund. Competition also exists from self-insurance and captive insurers. Over the years there has been increased competition from direct-writing companies and, in the property and casualty field, from affiliates of large life insurance companies. Many companies in competition with Zenith's subsidiaries have been in business for a much longer time, have a larger volume of business, are more widely known, and/or possess substantially greater financial resources. REGULATION STATES' DEPARTMENTS OF INSURANCE Insurance companies are primarily subject to regulation and supervision by the Department of Insurance in the state in which they are domiciled and, to a lesser extent, other states in which they conduct business. Zenith's insurance subsidiaries are primarily subject to regulation and supervision by the California Department of Insurance, except for Zenith Star which is primarily subject to regulation and supervision in the State of Texas. These states have broad regulatory, supervisory and administrative powers. Such powers relate, among other things, to the granting and revocation of licenses to transact business; the licensing of agents; the standards of solvency to be met and maintained; the nature of and limitations on investments; approval of policy forms and rates; periodic examination of the affairs of insurance companies; and the form and content of required financial statements. In California, Zenith Insurance, CalFarm Insurance and ZNAT Insurance are required, with respect to their workers' compensation line of business, to maintain on deposit investments meeting specified standards that have an aggregate market value equal to the companies' loss reserves. For this purpose, loss reserves are defined as the current estimate of reported and unreported claims plus a statutory formula reserve based on a minimum of 65% of earned premiums for the latest three years. Detailed annual and quarterly reports must be filed by Zenith's insurance subsidiaries with the California and Texas Departments of Insurance, and with other states in which they are licensed to 10 transact business, and their businesses and accounts are subject to periodic examination by such agencies, usually at three year intervals. Zenith Insurance, CalFarm Insurance and ZNAT Insurance, were examined by the California Department of Insurance as of December 31, 1993, and the report on such examination contained no material findings. Zenith Star was examined by the Texas Department of Insurance as of June 30, 1995 and the results of such examination contained no material findings. THE NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS The National Association of Insurance Commissioners ("NAIC") is a group formed by state Insurance Commissioners to discuss issues and formulate policy with respect to regulation, reporting and accounting of insurance companies. Although the NAIC has no legislative authority and insurance companies are at all times subject to the laws of their respective domiciliary states, and to a lesser extent other states in which they conduct business, the NAIC is influential in determining the form in which such laws are enacted. In particular, the Model Insurance Laws, Regulations and Guidelines of the NAIC (the "Model Laws") have been promulgated by the NAIC as a minimum standard by which state regulatory systems and regulations are measured. Adoption of state laws which provide for substantially similar regulations to those described in the Model Laws is a requirement for the accreditation by the NAIC. The NAIC has adopted model regulations to require insurers to maintain minimum levels of capital based on their investments and operations, known as "risk based capital" ("RBC") requirements. Such requirements were adopted by California for property and casualty insurers in 1994. Zenith has not experienced any adverse effects of such requirements because of the strong capitalization of its insurance operations. At December 31, 1995, adjusted capital under the RBC regulations was 377% of the RBC control, or required, level of capital under the regulations for the Zenith Insurance Group (consisting of Zenith Insurance, CalFarm Insurance, ZNAT Insurance and Zenith Star). The NAIC Insurance Regulatory Information System ("IRIS") was developed to assist insurance departments in overseeing the financial condition of insurance companies. Annually, IRIS key financial ratios (11 ratios for property and casualty companies) are calculated from data supplied in annual statutory statements of insurance companies. These ratios are reviewed by experienced financial examiners of the NAIC to select those companies that merit highest priority in the allocation of the regulators' resources. The 1995 IRIS results for the Zenith Insurance Group showed no results outside the "normal range" for such ratios, as such range is determined by the NAIC. INSURANCE HOLDING COMPANY SYSTEM REGULATORY ACT Zenith's insurance subsidiaries are also subject to the California and Texas Insurance Holding Company System Regulatory Acts ("Holding Company Acts"), which contain certain reporting requirements, including the requirement that such subsidiaries file information relating to capital structure, ownership, financial condition and general business operation, and limit dividend payments and material transactions by Zenith's insurance subsidiaries. See "Liquidity and Inflation" under "Management's Discussion and Analysis of Consolidated Financial Condition and Result of Operations" on pages 33 and 34 of Zenith's 1995 Annual Report to Stockholders, which is hereby incorporated by reference. OTHER REGULATION Property and casualty insurance coverage is subject to certain regulation as described herein under "Property and Casualty -- Other" under which Zenith's other property and casualty rates are subject to prior approval by the California Department of Insurance. The provisions of Proposition 103 do not apply to Workers' Compensation, Health insurance or Reinsurance, which combined to account for 64% of Zenith's property and casualty earned premiums in 1995. 11 ITEM 2. PROPERTIES Zenith Insurance owns a 120,000 square foot office facility in Woodland Hills, California which, since November of 1987, has been the corporate home office of Zenith, Zenith Insurance, and ZNAT Insurance. In addition, Zenith Insurance and CalFarm Insurance, in the regular conduct of their business, lease offices in various cities. See Note 8 of the Notes to Consolidated Financial Statements of Zenith on pages 51 and 52 of the 1995 Annual Report to Stockholders, which note is hereby incorporated by reference. CalFarm Insurance owns its home office building (and surrounding property of approximately 4 acres) in Sacramento, California, consisting of 133,000 square feet. Approximately 20% of the building is leased to the Farm Bureau and its affiliates. ITEM 3. LEGAL PROCEEDINGS Zenith and its subsidiaries are involved in certain litigation. In the opinion of management, after consultation with legal counsel, such litigation in which Zenith is a defendant is either without merit or the ultimate liability, if any, will not have a material adverse effect on the consolidated financial condition of Zenith. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 12 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. Zenith's Common Stock, par value $1.00 per share, is traded on the New York Stock Exchange. The table below sets forth the high and low sales prices of the Common Stock for each quarterly period during the last two fiscal years. QUARTER 1995 1994 - ------------------------------------------------------------ ------- ------- First High...................................................... 22 3/4 24 1/4 Low....................................................... 19 3/8 20 3/4 Second High...................................................... 22 25 1/2 Low....................................................... 20 20 5/8 Third High...................................................... 24 1/4 27 3/8 Low....................................................... 20 22 Fourth High...................................................... 24 5/8 24 1/2 Low....................................................... 20 20 3/4 As of March 27, 1996, there were 420 holders of record of Zenith Common Stock. The table below sets forth information with respect to the amount and frequency of dividends declared on Zenith Common Stock. Based upon Zenith's financial condition, it is currently expected that cash dividends will continue to be paid in the future. DATE OF DECLARATION TYPE AND AMOUNT OF RECORD DATE FOR BY ZENITH BOARD DIVIDEND PAYMENT PAYMENT DATE - ------------------------------------ ----------------------- --------------------- ------------------------ December 9, 1993.................... $.25 cash per share January 31, 1994 February 14, 1994 March 17, 1994...................... $.25 cash per share April 29, 1994 May 13, 1994 May 25, 1994........................ $.25 cash per share July 29, 1994 August 12, 1994 September 7, 1994................... $.25 cash per share October 31, 1994 November 14, 1994 December 6, 1994.................... $.25 cash per share January 31, 1995 February 15, 1995 March 1, 1995....................... $.25 cash per share April 28, 1995 May 12, 1995 May 24, 1995........................ $.25 cash per share July 31, 1995 August 16, 1995 September 14, 1995.................. $.25 cash per share October 31, 1995 November 15, 1995 November 30, 1995................... $.25 cash per share January 31, 1996 February 15, 1996 The Holding Company Acts limit the ability of Zenith Insurance to pay dividends to Zenith, and of CalFarm Insurance, ZNAT Insurance and Zenith Star to pay dividends to Zenith Insurance, by providing that the California or Texas Department of Insurance must approve any dividend that, together with all other such dividends paid during the preceding twelve months, exceeds the greater of: (a) 10% of the paying company's statutory surplus as regards policyholders at the preceding December 31; or (b) 100% of the net income for the preceding year. In addition, any such dividend must be paid from policyholders' surplus attributable to accumulated earnings. During 1995, Zenith Insurance paid dividends of $10,000,000 to Zenith. During 1996, Zenith Insurance will be able to pay $22,301,000 in dividends to Zenith without prior approval. In addition, in 1996, CalFarm Insurance, ZNAT Insurance and Zenith Star, together, can pay $6,459,000 to Zenith Insurance which would be available to Zenith in 1997. ITEM 6. SELECTED FINANCIAL DATA. The five-year summary of selected financial information and accompanying notes, included in Zenith's 1995 Annual Report to Stockholders on pages 36 and 37, is hereby incorporated by reference. 13 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS. "Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations," included in Zenith's 1995 Annual Report to Stockholders on pages 28 to 34 is hereby incorporated by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Reference is made to pages 38 and 39 of Zenith's 1995 Annual Report to Stockholders for information setting forth the loss and loss adjustment expense liability development for 1985 through 1995 and page 9 of Zenith's 1995 Annual Report to Stockholders for incurred loss and loss adjustment expense development for 1990 through 1995, and to the consolidated financial statements and notes thereto on pages 40 to 54 of Zenith's 1995 Annual Report to Stockholders, all of which are hereby incorporated by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 14 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information set forth under the captions "Compliance with Section 16(a) of the Securities Exchange Act of 1934" and "Election of Directors" in the Proxy Statement in connection with Zenith's 1996 Annual Meeting of Stockholders (the "Proxy Statement") is hereby incorporated by reference. EXECUTIVE OFFICERS OF THE REGISTRANT OFFICER NAME AGE POSITION TERM SINCE - ----------------- --- ---------------------------------------- ------ ------- Stanley R. Zax 58 Chairman of the Board, President (1) Annual 1977 Fredricka Taubitz 52 Executive Vice President and Annual 1985 Chief Financial Officer (1) James P. Ross 49 Senior Vice President and Actuary (1) Annual 1978 John J. Tickner 57 Senior Vice President and Secretary (1) Annual 1985 Keith E. Trotman 59 Senior Vice President (2) Annual 1988 Philip R. Hunt 53 Senior Vice President (2) Annual 1988 - ------------------------ (1) Officer of Zenith and subsidiaries. (2) Officer of subsidiaries only. Each of the executive officers has, for more than five years, occupied an executive position with Zenith or a subsidiary of Zenith. There are no family relationships between any of the executive officers and there are no arrangements or understandings pursuant to which any of them were selected as officers. ITEM 11. EXECUTIVE COMPENSATION. The information set forth under the headings "Directors' Compensation," "Summary Compensation Table," "Option/SAR Grants in Last Fiscal Year," and "Aggregated Option/SAR Exercises in Last Fiscal Year And Fiscal Year End Option/SAR Values," "Employment Agreements and Termination of Employment and Change in Control Arrangements," and "Compensation Committee Interlocks and Insider Participation" in the Proxy Statement is hereby incorporated by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information set forth under the caption "Security Ownership of Certain Beneficial Owners and Management" in the Proxy Statement is hereby incorporated by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information set forth in footnote 3 to the table set forth under the caption "Election of Directors" and under the heading, "Investment in Delta Life Corporation" in the Proxy Statement is hereby incorporated by reference. 15 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) Documents filed as part of the report: 1. FINANCIAL STATEMENTS Independent Accountant's Report Financial Statements and notes thereto incorporated by reference from the 1995 Annual Report to Stockholders in Item 8 of Part II above: Consolidated Financial Statements of Zenith National Insurance Corp. and Subsidiaries: Consolidated Balance Sheet as of December 31, 1995 and 1994 Consolidated Statement of Operations for the years ended December 31, 1995, 1994 and 1993 Consolidated Statement of Cash Flows for the years ended December 31, 1995, 1994 and 1993 Consolidated Statement of Stockholders' Equity for the years ended December 31, 1995, 1994 and 1993 Notes to Consolidated Financial Statements Table setting forth incurred loss and loss adjustment expense development on a statutory basis on page 9 of the 1995 Annual Report to Stockholders 2.FINANCIAL STATEMENT SCHEDULES Zenith National Insurance Corp. and Subsidiaries As of December 31, 1995. I -- Summary of Investments -- Other Than Investments in Related Parties For the years ended December 31, 1995, 1994 and 1993. III -- Supplementary Insurance Information IV -- Reinsurance Zenith National Insurance Corp. As of December 31, 1995 and 1994 and for the years ended December 31, 1995, 1994 and 1993. II -- Condensed Financial Information of Registrant Property and Casualty Loss Developments on pages 38 and 39 and on page 9 of the 1995 Annual Report to Stockholders. Schedules other than those listed above are omitted since they are not applicable, not required, or the information required to be set forth therein is included in the consolidated financial statements, or in notes thereto. 16 3. EXHIBITS The Exhibits listed below are filed in a separate Exhibit Volume to this Report. 2.1 Stock Acquisition Agreement, dated as of September 19, 1995, between Anchor National Life Insurance Company and Zenith National Insurance Corp. (Incorporated herein by reference to Exhibit 2.1 to Zenith's Report on Form 8-K dated October 6, 1995.) 2.2 Amendment No. 1 to Stock Acquisition Agreement dated as of December 27, 1995, by and among Anchor National Life Insurance Company, SunAmerica Life Insurance Company and Zenith National Insurance Corp. (Incorporated herein by reference to Exhibit 2.1 to Zenith's Report on Form 8-K dated January 9, 1996.) 3.1 Certificate of Incorporation of Zenith as in effect immediately prior to November 22, 1985. (Incorporated herein by reference to Exhibit 3 to Zenith's Amendment on Form 8, date of amendment October 10, 1985, to Zenith's Current Report on Form 8-K, date of report July 26, 1985). Certificate of Amendment to Certificate of Incorporation of Zenith, effective November 22, 1985. (Incorporated herein by reference to Zenith's Current Report on Form 8-K, date of report November 22, 1985). 3.2 By-Laws of Zenith, as currently in effect. (Incorporated herein by reference to Exhibit 3.2 to Zenith's Annual Report on Form 10-K for the year ended December 31, 1988.) 4.1 Indenture dated as of May 1, 1992 entered into between Zenith and Norwest Bank Minnesota, National Association, as trustee, pursuant to which Zenith issued its 9% Senior Notes due May 1, 2002. (Incorporated herein by reference to Exhibit 4 to Zenith's Quarterly Report on Form 10-Q for the quarter ended March 31, 1992.) 10.1 Purchase Agreement, dated as of February 4, 1981, among Reliance Insurance Company, Zenith, the Selling Stockholders referred to therein, and Eugene V. Klein, Daniel Schwartz and Harvey L. Silbert as agents for the Selling Stockholders. (Incorporated herein by reference to the exhibit to the Schedule 13D filed by Reliance Financial Services Corporation on March 9, 1981 with respect to the common stock of Zenith). 10.2 Asset and Liability Assumption Agreement, dated as of June 4, 1985, between Zenith Insurance and the Insurance Commissioner of the State of California (the "Commissioner"). (Incorporated herein by reference to Exhibit 1 to Zenith's Current Report on Form 8-K, date of report July 26, 1985). 10.3 Memorandum and Agreement of Closing dated as of July 26, 1985, among Zenith Insurance, Zenith and the Commissioner (Incorporated herein by reference to Exhibit 10.6 to Zenith's Annual Report on Form 10-K for the year ended December 31, 1985), together with the following exhibits: (a) Exhibit A -- Grant Deed, dated July 25, 1985, by the Commissioner in favor of Zenith Insurance. (Incorporated herein by reference to Exhibit 10.6 to Zenith's Annual Report on Form 10-K for the year ended December 31, 1985). (b) Exhibit B -- Bill of Sale, dated as of July 26, 1985, by the Commissioner in favor of Zenith Insurance. (Incorporated herein by reference to Exhibit 10.6 to Zenith's Annual Report on Form 10-K for the year ended December 31, 1985). (c) Exhibit C -- Assignment of Assets and Assumption of Liabilities, dated as of July 26, 1985, between the Commissioner and Zenith Insurance. (Incorporated herein by reference to Exhibit 10.6 to Zenith's Annual Report on Form 10-K for the year ended December 31, 1985). 17 (d) Exhibit D -- Noncompetition Agreement, dated as of July 26, 1985, between the Commissioner and Zenith Insurance. (Incorporated herein by reference to Exhibit 28.3 to Zenith's Current Report on Form 8-K, date of report July 26, 1985). (e) Exhibit E -- First Assignment Separate from Certificate, dated July 26, 1985, by the Commissioner in favor of Zenith. (Incorporated herein by reference to Exhibit 10.6 to Zenith's Annual Report on Form 10-K for the year ended December 31, 1985). (f) Exhibit F -- Engagement and Reimbursement Agreement, dated as of July 26, 1985, between Zenith Insurance and the Commissioner. (Incorporated herein by reference to Exhibit 28.2 to Zenith's Current Report on Form 8-K, date of report July 26, 1985). *10.4 Zenith's Non-Qualified Stock Option Plan, as in effect immediately prior to December 6, 1985. (Incorporated herein by reference to Zenith's Registration Statement on Form S-8 (SEC File No. 2-97962)). *10.5 Zenith's Amended and Restated Non-Qualified Stock Option Plan, adopted by Zenith's Board of Directors on December 6, 1985. (Incorporated herein by reference to Zenith's Registration Statement on Form S-8 (SEC File No. 33-8948)). *10.6 Employment Agreement, dated February 8, 1995, between Zenith and Fredricka Taubitz. (Incorporated herein by reference to Exhibit 10.6 to Zenith's Annual Report on Form 10-K for the year ended December 31, 1994). *10.7 Employment Agreement, dated February 16, 1995, between Zenith and John J. Tickner. (Incorporated herein by reference to Exhibit 10.7 to Zenith's Annual Report on Form 10-K for the year ended December 31, 1994). *10.8 Employment Agreement, dated February 2, 1995, between Zenith and Stanley R. Zax. (Incorporated herein by reference to Exhibit 10.8 to Zenith's Annual Report on Form 10-K for the year ended December 31, 1994). *10.9 Stock Option Agreement, dated as of May 19, 1987, between Zenith and Stanley R. Zax. (Incorporated herein by reference to Exhibit 10.15 to Zenith's Annual Report on Form 10-K for the year ended December 31, 1987). 10.10 Credit Agreement, dated as of December 14, 1994, between Zenith and Sanwa Bank of California. (Incorporated herein by reference to Exhibit 10.10 to Zenith's Annual Report on Form 10K for the year ended December 31, 1994.) 10.11 Amendment dated as of December 28, 1995 to Credit Agreement, dated as of December 14, 1994, between Zenith and Sanwa Bank of California. 10.12 Revolving Note Agreement, dated July 1, 1995, between Zenith and City National Bank. (Incorporated herein by reference to Exhibit 10 to Zenith's Quarterly Report on Form 10Q for the quarter ended June 30, 1995.) 10.13 Agreement of Reinsurance #8051 between General Reinsurance Corporation and Zenith Insurance Company, ZNAT Insurance Company, Zenith Star Insurance Company and CalFarm Insurance Company, dated as of May 22, 1995. 10.14 Workers' Compensation and Employers' Liability Reinsurance Agreement between Zenith Insurance Company and Employers Reinsurance Corporation, effective January 1, 1986. (Incorporated herein by reference to Exhibit 10.14 to Zenith's Annual Report on Form 10K for the year ended December 31, 1991.) 10.15 Agreement of Reinsurance No. 7276 between CalFarm Insurance Company and General Reinsurance Corporation, dated as of February 5, 1988. (Incorporated herein by reference to Exhibit 10.15 to Zenith's Annual Report on Form 10K for the year ended December 31, 1991.) 18 10.16 Agreement of Reinsurance No. B226 between CalFarm Insurance Company and General Reinsurance Corporation, dated as of January 13, 1988. (Incorporated herein by reference to Exhibit 10.16 to Zenith's Annual Report on Form 10K for the year ended December 31, 1991.) 10.17 Agreement of Reinsurance No. B197-A between CalFarm Insurance Company and General Reinsurance Corporation, dated as of January 13, 1988. (Incorporated herein by reference to Exhibit 10.17 to Zenith's Annual Report on Form 10K for the year ended December 31, 1991.) 10.18 Agreement of Reinsurance No. B196-A between CalFarm Insurance Company and General Reinsurance Corporation, dated as of January 13, 1988. (Incorporated herein by reference to Exhibit 10.18 to Zenith's Annual Report on Form 10K for the year ended December 31, 1991.) 10.19 Agreement of Reinsurance No. 7832 between General Reinsurance Corporation and CalFarm Insurance, Zenith Insurance and ZNAT Insurance, effective September 1, 1993. (Incorporated herein by reference to Exhibit 10.21 to Zenith's Annual Report on Form 10K for the year ended December 31, 1993.) 10.20 Agreement of Reinsurance No. 623-0005 between American Re-Insurance Company and CalFarm Insurance, Zenith Insurance and ZNAT Insurance, effective September 1, 1993. (Incorporated herein by reference to Exhibit 10.22 to Zenith's Annual Report on Form 10K for the year ended December 31, 1993.) 10.21 Agreement of Reinsurance No. 0079460 between Employers Reinsurance Corporation and CalFarm Insurance, Zenith Insurance and ZNAT Insurance, effective September 1, 1993. (Incorporated herein by reference to Exhibit 10.23 to Zenith's Annual Report on Form 10K for the year ended December 31, 1993.) 10.22 Life, Disability and Accidental Death Facultive Reinsurance Agreement between CalFarm Insurance Company and Occidental Life Insurance Company of California, effective April 1, 1971. (Incorporated herein by reference to Exhibit 10.21 to Zenith's Annual Report on Form 10K for the year ended December 31, 1991.) 11 Computation of Earnings Per Share for the three (3) years ended December 31, 1995 13 Zenith's Annual Report to Stockholders for the year ended December 31, 1995, but only to the extent such report is expressly incorporated by reference herein, and such report is not otherwise to be deemed "filed" as a part of this Annual Report on Form 10-K. 21 Subsidiaries of Zenith. 23 Consent of Coopers & Lybrand L.L.P., dated March 29, 1996. (Incorporated herein by reference to page F-1 of this Annual Report on Form 10-K). 27 Financial Data Schedule 28 Property and Casualty Loss Statistics. 99.1 Information required by rule 15d-21 under the Securities Exchange Act of 1934 for the year ended December 31, 1995 for the Zenith Investment Partnership 401(k) Plan (to be filed by amendment on Form 10-K/A within 180 days of December 31, 1995). - ------------------------ *Management contract or compensatory plan or arrangement (b) REPORTS ON FORM 8-K The registrant filed a Form 8K Current Report dated on October 6, 1995 in connection with the sale of CalFarm Life Insurance Company. 19 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 29, 1996. ZENITH NATIONAL INSURANCE CORP. By STANLEY R. ZAX ------------------------------------ Stanley R. Zax Chairman of the Board and President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated, on March 29, 1996. STANLEY R. ZAX Chairman of the Board, President and - --------------------------------------------- Director (Principal Executive Officer) Stanley R. Zax GEORGE E. BELLO Director - --------------------------------------------- George E. Bello MAX M. KAMPELMAN Director - --------------------------------------------- Max M. Kampelman JACK M. OSTROW Director - --------------------------------------------- Jack M. Ostrow WILLIAM S. SESSIONS Director - --------------------------------------------- William S. Sessions HARVEY L. SILBERT Director - --------------------------------------------- Harvey L. Silbert ROBERT M. STEINBERG Director - --------------------------------------------- Robert M. Steinberg SAUL P. STEINBERG Director - --------------------------------------------- Saul P. Steinberg GERALD TSAI, JR. Director - --------------------------------------------- Gerald Tsai, Jr. FREDRICKA TAUBITZ Executive Vice President and Chief Financial - --------------------------------------------- Officer (Principal Financial and Accounting Fredricka Taubitz Officer) 20 CONSENT OF INDEPENDENT ACCOUNTANT We consent to the incorporation by reference in the Registration Statements on Form S-8 (File Nos. 33-8948 and 33-22219) of our report dated February 14, 1996 on our audits of the consolidated financial statements and financial statement schedules of Zenith National Insurance Corp. and subsidiaries as of December 31, 1995 and 1994, and for each of the three years in the period ended December 31, 1995, which is included in this Annual Report on Form 10-K. COOPERS & LYBRAND L.L.P. Los Angeles, California March 29, 1996 F-1 INDEPENDENT ACCOUNTANT'S REPORT To the Stockholders and Board of Directors of Zenith National Insurance Corp. We have audited the consolidated financial statements of Zenith National Insurance Corp. and subsidiaries as of December 31, 1995 and 1994, and for each of the three years in the period ended December 31, 1995, which financial statements are included on pages 40 through 54 of the Company's 1995 Annual Report to Stockholders and incorporated by reference herein. We have also audited the financial statement schedules listed in the index on page 16 of this Form 10-K. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Zenith National Insurance Corp. and subsidiaries as of December 31, 1995 and 1994, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein. As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for investments as of December 31, 1993. COOPERS & LYBRAND L.L.P. Los Angeles, California February 14, 1996 F-2 SCHEDULE I -- SUMMARY OF INVESTMENTS -- OTHER THAN INVESTMENTS IN RELATED PARTIES ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES DECEMBER 31, 1995 COLUMN D COLUMN C --------------- COLUMN A COLUMN B ---------- AMOUNT AT WHICH - -------------------------------------------------- ---------- FAIR SHOWN IN THE TYPE OF INVESTMENT COST VALUE BALANCE SHEET - -------------------------------------------------- ---------- ---------- --------------- (DOLLARS IN THOUSANDS) Fixed maturities Bonds: United States Government and government agencies and authorities.................... $ 358,590 $ 359,669 $ 358,527 Public utilities.............................. 4,931 4,869 4,869 Industrial and miscellaneous.................. 229,226 239,612 239,612 Redeemable preferred stocks..................... 19,849 20,492 20,492 ---------- ---------- --------------- Total fixed maturities.................... 612,596 624,642 623,500 ---------- ---------- --------------- Equity securities Floating rate preferred stocks.................. 14,614 13,588 13,588 Convertible and nonredeemable preferred stocks........................................ 250 281 281 Common stocks, industrial....................... 18,937 22,656 22,656 ---------- ---------- --------------- Total equity securities................... 33,801 36,525 36,525 ---------- ---------- --------------- Short-term investments............................ 137,083 137,083 137,083 Other investments................................. 38,106 38,106 38,106 ---------- ---------- --------------- Total investments......................... $ 821,586 $ 836,356 $ 835,214 ---------- ---------- --------------- ---------- ---------- --------------- F-3 SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT ZENITH NATIONAL INSURANCE CORP. BALANCE SHEET ASSETS DECEMBER 31, -------------------- (DOLLARS AND SHARES IN THOUSANDS) 1995 1994 -------- -------- Investments Common stocks, at market (cost $668, 1995 and $606, 1994)............................... $ 709 $ 424 Short-term investments (at cost which approximates market).............................. 84,678 2,129 Cash...................................................................................... 996 2,334 Investment in subsidiaries (Note A)....................................................... 318,620 268,951 Investment in discontinued operations (Note B)............................................ 104,372 Federal income taxes receivable (Note A).................................................. 764 Other assets.............................................................................. 12,116 14,974 -------- -------- Total assets...................................................................... $417,119 $393,948 -------- -------- -------- -------- LIABILITIES Senior notes payable, less unamortized discount of $768, 1995 and $889, 1994.............. $ 74,232 $ 74,111 Cash dividends payable to stockholders.................................................... 4,455 4,736 Federal income taxes payable (Note A)..................................................... 4,676 Other liabilities......................................................................... 3,324 5,241 -------- -------- Total liabilities................................................................. 86,687 84,088 -------- -------- STOCKHOLDERS' EQUITY Preferred stock, $1 par--shares authorized 1,000; issued and outstanding, none in 1995 and 1994.................................................................................... Common stock, $1 par--shares authorized 50,000; issued 24,310, outstanding 17,784, 1995; issued 24,034, outstanding 18,950, 1994................................................. 24,310 24,034 Additional paid-in capital................................................................ 256,083 251,363 Retained earnings......................................................................... 155,634 167,025 Net unrealized appreciation (depreciation) on investments, net of $4,752 deferred tax expense in 1995 and $3,969 deferred tax benefit in 1994................................. 8,825 (47,460) -------- -------- 444,852 394,962 Less treasury stock at cost (6,526 shares, 1995 and 5,084 shares, 1994)................... (114,420) (85,102) -------- -------- Total stockholders' equity........................................................ 330,432 309,860 -------- -------- Total liabilities and stockholders' equity........................................ $417,119 $393,948 -------- -------- -------- -------- See notes to condensed financial information. F-4 SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT ZENITH NATIONAL INSURANCE CORP. STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, ---------------------------------------------- (DOLLARS IN THOUSANDS) 1995 1994 1993 ------------ ------------- ------------- Investment income............................................................... $ 219 $ 457 $ 492 Realized gains on investments................................................... 43 11 895 Income from legal settlement.................................................... 1,910 7,561 ------------ ------------- ------------- Total revenue................................................................... 262 2,378 8,948 Operating expense............................................................... 1,863 4,059 3,478 Interest expense................................................................ 6,960 5,937 6,658 ------------ ------------- ------------- Loss from continuing operations before federal income tax benefit and equity in net income of subsidiaries.................................................... (8,561) (7,618) (1,188) Federal income tax benefit...................................................... 3,123 2,678 516 ------------ ------------- ------------- Loss from continuing operations before equity in income from continuing operations of subsidiaries.................................................... (5,438) (4,940) (672) Equity in income from continuing operations of subsidiaries (Note A)............ 25,160 34,738 42,849 ------------ ------------- ------------- Income from continuing operations............................................... 19,722 29,798 42,177 Income (loss) from discontinued operations (Note B)............................. (13,122) 8,102 11,023 ------------ ------------- ------------- Net income...................................................................... $ 6,600 $ 37,900 $ 53,200 ------------ ------------- ------------- ------------ ------------- ------------- See notes to condensed financial information. F-5 SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT ZENITH NATIONAL INSURANCE CORP. STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, ----------------------------------------------- (AMOUNTS IN THOUSANDS) 1995 1994 1993 ------------- ------------- ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Investment income received.................................................... $ 193 $ 477 $ 485 Recovery from lawsuit settlement.............................................. 6,036 4,094 Operating expenses paid....................................................... (1,455) (4,099) (3,309) Interest paid................................................................. (6,596) (5,842) (6,552) Income taxes (paid) refunded.................................................. 3,571 (1,471) 8,524 ------------- ------------- ------------- Net cash flows from continuing operating activities......................... (4,287) (4,899) 3,242 Net cash flow from expenses of discontinued operations........................ (2,274) ------------- ------------- ------------- Net cash flows from operating activities.................................... (6,561) (4,899) 3,242 CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sales of investments: Other debt and equity securities and other investments...................... 4,243 Net change in short-term investments.......................................... (82,549) 12,867 (7,264) Cash received from note receivable............................................ 2,300 Proceeds from the sale of CalFarm Life........................................ 120,000 ------------- ------------- ------------- Net cash flows from investing activities.................................... 37,451 12,867 (721) CASH FLOWS FROM FINANCING ACTIVITIES: Cash received from bank line of credit........................................ 43,400 2,100 1,000 Cash paid on bank line of credit.............................................. (43,400) (2,100) (1,000) Cash dividends paid to common stockholders.................................... (18,273) (18,894) (19,018) Proceeds from exercise of stock options....................................... 4,405 2,093 6,261 Purchase of treasury shares................................................... (29,318) (346) (7,367) Dividends received from subsidiaries.......................................... 10,500 15,000 25,000 Capital contribution to subsidiary............................................ (250) Net cash from (to) subsidiary................................................. 458 (5,356) (7,538) ------------- ------------- ------------- Net cash flows from financing activities.................................... (32,228) (7,503) (2,912) Net increase (decrease) in cash................................................. (1,338) 465 (391) Cash at beginning of year....................................................... 2,334 1,869 2,260 ------------- ------------- ------------- Cash at end of year............................................................. $ 996 $ 2,334 $ 1,869 ------------- ------------- ------------- ------------- ------------- ------------- RECONCILIATION OF INCOME FROM CONTINUING OPERATIONS TO NET CASH FLOWS FROM OPERATING ACTIVITIES: Income from continuing operations............................................. $ 19,722 $ 29,798 $ 42,177 Income from continuing operations of subsidiaries............................. (25,160) (34,738) (42,849) Cash flow from expenses of discontinued operations............................ (2,274) Federal income taxes.......................................................... 511 (4,149) 8,007 Decrease (increase) in receivable from lawsuit settlement..................... 3,467 (3,467) Other......................................................................... 640 723 (626) ------------- ------------- ------------- Net cash flow from operating activities..................................... $ (6,561) $ (4,899) $ 3,242 ------------- ------------- ------------- ------------- ------------- ------------- See notes to condensed financial information. F-6 SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT ZENITH NATIONAL INSURANCE CORP. NOTES TO CONDENSED FINANCIAL INFORMATION The accompanying condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto of Zenith National Insurance Corp. (Zenith) and subsidiaries. A. Investment In Subsidiaries: Zenith owns, directly or indirectly, 100% of the outstanding stock of Zenith Insurance Company, CalFarm Insurance Company, ZNAT Insurance Company, Zenith Star Insurance Company and Perma-Bilt, a Nevada Corporation. These investments are included in the financial statements on the equity basis of accounting. Temporary advances in the ordinary course of business are included in other assets. The excess of cost over net assets acquired of $2,009,000 represents the unamortized excess of cost over underlying net tangible assets of companies acquired prior to 1970, which is considered to have continuing value. Zenith files a consolidated federal income tax return. The equity in the income from continuing operations of subsidiaries of $25,160,000 in 1995, $34,738,000 in 1994 and $42,849,000 in 1993 is net of a provision for federal income tax expense of $12,823,000 in 1995, $17,986,000 in 1994 and $20,825,000 in 1993. Zenith has formulated tax allocation procedures with its subsidiaries and the 1995, 1994 and 1993 condensed financial information reflect Zenith's portion of the consolidated taxes. Zenith Insurance Company paid dividends to Zenith of $10,000,000 in 1995, $15,000,000 in 1994 and $25,000,000 in 1993. CalFarm Life Insurance paid a dividend to Zenith of $500,000 prior to its sale in the fourth quarter of 1995. B. Discontinued Operations: During the fourth quarter of 1995, Zenith completed the sale of its wholly-owned subsidiary, CalFarm Life Insurance Company ("CalFarm Life"), to a subsidiary of SunAmerica Inc. for approximately $120 million in cash. The group health insurance business of CalFarm Life was retained by Zenith. The sale resulted in a loss of approximately $19.5 million, after tax, which was recognized by Zenith principally in the third quarter of 1995. The life and annuity operations of CalFarm Life are presented as discontinued operations and prior-year financial statements have been restated. Zenith's investment attributable to discontinued operations at December 31, 1994 has been presented separately from its investment in continuing operating activities. The unrealized loss associated with investments classified as available-for-sale in the life and annuity operation at December 31, 1994 was $22,539,000 net of deferred taxes. After tax income for the discontinued operation from the measurement date to the disposal date was $3,960,000. F-7 SCHEDULE III -- SUPPLEMENTARY INSURANCE INFORMATION ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES COLUMN C ----------- FUTURE COLUMN E COLUMN B POLICY ----------- ----------- BENEFITS, OTHER COLUMN G DEFERRED LOSSES, COLUMN D POLICY COLUMN F ----------- COLUMN A POLICY CLAIMS ----------- CLAIMS AND ----------- NET - ------------------------------ ACQUISITION AND LOSS UNEARNED BENEFITS PREMIUM INVESTMENT SEGMENT COSTS EXPENSES PREMIUMS PAYABLE REVENUE INCOME - ------------------------------ ----------- ----------- ----------- ----------- ----------- ----------- (AMOUNTS IN THOUSANDS) 1995 - ------------------------------ Property and Casualty Workers' compensation....... $ 5,001 $ 262,738 $ 28,644 $ 203,252 Other property/casualty..... 13,802 107,995 78,760 192,276 Reinsurance................. 1,536 92,390 12,187 41,985 ----------- ----------- ----------- ----------- ----------- ----------- 20,339 463,123 119,591 437,513 $ 45,931 Reinsurance ceded............. 54,429 Registrant.................... 219 ----------- ----------- ----------- ----------- ----------- ----------- Total....................... $ 20,339 $ 517,552 $ 119,591 $ -- $ 437,513 $ 46,150 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- 1994 - ------------------------------ Property and Casualty Workers' compensation....... $ 4,430 $ 264,665 $ 34,123 $ 216,030 Other property/casualty..... 12,598 101,615 77,211 186,661 Reinsurance................. 1,478 96,430 10,491 36,138 ----------- ----------- ----------- ----------- ----------- ----------- 18,506 462,710 121,825 438,829 $ 39,611 Reinsurance ceded............. 47,696 Registrant.................... 457 ----------- ----------- ----------- ----------- ----------- ----------- Total....................... $ 18,506 $ 510,406 $ 121,825 $ -- $ 438,829 $ 40,068 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- 1993 - ------------------------------ Property and Casualty Workers' compensation....... $ 4,264 $ 286,452 $ 32,109 $ 244,661 Other property/casualty..... 11,704 93,199 72,855 179,314 Reinsurance................. 1,048 94,848 6,889 23,295 ----------- ----------- ----------- ----------- ----------- ----------- 17,016 474,499 111,853 447,270 $ 38,817 Reinsurance ceded............. 44,919 10 Registrant.................... 492 ----------- ----------- ----------- ----------- ----------- ----------- Total....................... $ 17,016 $ 519,418 $ 111,863 $ -- $ 447,270 $ 39,309 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- COLUMN H COLUMN I ----------- ----------- BENEFITS, AMORTIZATION COLUMN J CLAIMS, OF DEFERRED ----------- COLUMN K COLUMN A LOSSES AND POLICY OTHER ----------- - ------------------------------ SETTLEMENT ACQUISITION OPERATING PREMIUMS SEGMENT EXPENSES COSTS EXPENSES WRITTEN - ------------------------------ ----------- ----------- ----------- ----------- (AMOUNTS IN THOUSANDS) 1995 - ------------------------------ Property and Casualty Workers' compensation....... $ 153,692 $ 36,358 $ 22,090 $ 197,773 Other property/casualty..... 149,797 39,621 14,865 198,676 Reinsurance................. 22,100 5,867 1,063 43,433 ----------- ----------- ----------- ----------- 325,589 81,846 38,018 439,882 Reinsurance ceded............. Registrant.................... 1,863 ----------- ----------- ----------- ----------- Total....................... $ 325,589 $ 81,846 $ 39,881 $ 439,882 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- 1994 - ------------------------------ Property and Casualty Workers' compensation....... $ 129,352 $ 32,336 $ 24,779 $ 218,044 Other property/casualty..... 138,925 38,782 15,920 190,922 Reinsurance................. 25,571 6,135 110 39,674 ----------- ----------- ----------- ----------- 293,848 77,253 40,809 448,640 Reinsurance ceded............. Registrant.................... 4,059 ----------- ----------- ----------- ----------- Total....................... $ 293,848 $ 77,253 $ 44,868 $ 448,640 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- 1993 - ------------------------------ Property and Casualty Workers' compensation....... $ 164,815 $ 33,317 $ 19,736 $ 245,917 Other property/casualty..... 128,051 36,345 20,393 183,876 Reinsurance................. 13,678 3,384 896 26,807 ----------- ----------- ----------- ----------- 306,544 73,046 41,025 456,600 Reinsurance ceded............. Registrant.................... 3,478 ----------- ----------- ----------- ----------- Total....................... $ 306,544 $ 73,046 $ 44,503 $ 456,600 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- F-8 SCHEDULE IV -- REINSURANCE ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES COLUMN F COLUMN C COLUMN D ---------- COLUMN B ------------ ----------- PERCENTAGE COLUMN A -------------- CEDED TO ASSUMED COLUMN E OF AMOUNT - ------------------------------------------------------- GROSS OTHER FROM OTHER -------------- ASSUMED (AMOUNTS IN THOUSANDS) AMOUNT COMPANIES COMPANIES NET AMOUNT TO NET -------------- ------------ ----------- -------------- ---------- DECEMBER 31, 1995 Premiums earned........................................ $ 413,258 $ 21,112 $ 45,367 $ 437,513 10.4% -------------- ------------ ----------- -------------- ---------- -------------- ------------ ----------- -------------- ---------- DECEMBER 31, 1994 Premiums earned........................................ $ 422,563 $ 21,521 $ 37,787 $ 438,829 8.6% -------------- ------------ ----------- -------------- ---------- -------------- ------------ ----------- -------------- ---------- DECEMBER 31, 1993 Premiums earned........................................ $ 443,477 $ 22,301 $ 26,094 $ 447,270 5.8% -------------- ------------ ----------- -------------- ---------- -------------- ------------ ----------- -------------- ---------- F-9 THE ZENITH - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ EXHIBITS TO FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995 ------------------------ ZENITH NATIONAL INSURANCE CORP. (Exact name of registrant as specified in its charter) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- EXHIBIT LIST EXHIBIT NUMBER DESCRIPTION - --------- -------------------------------------------------------------------------------------- 2.1 Stock Acquisition Agreement, dated as of September 19, 1995, between Anchor National Life Insurance Company and Zenith National Insurance Corp. (Incorporated herein by reference to Exhibit 2.1 to Zenith's Report on Form 8-K dated October 6, 1995.) 2.2 Amendment No. 1 to Stock Acquisition Agreement dated as of December 27, 1995, by and among Anchor National Life Insurance Company, SunAmerica Life Insurance Company and Zenith National Insurance Corp. (Incorporated herein by reference to Exhibit 2.1 to Zenith's Report on Form 8-K dated January 9, 1996.) 3.1 Certificate of Incorporation of Zenith as in effect immediately prior to November 22, 1985. (Incorporated herein by reference to Exhibit 3 to Zenith's Amendment on Form 8, date of amendment October 10, 1985, to Zenith's Current Report on Form 8-K, date of report July 26, 1985). Certificate of Amendment to Certificate of Incorporation of Zenith, effective November 22, 1985. (Incorporated herein by reference to Zenith's Current Report on Form 8-K, date of report November 22, 1985). 3.2 By-Laws of Zenith, as currently in effect. (Incorporated herein by reference to Exhibit 3.2 to Zenith's Annual Report on Form 10-K for the year ended December 31, 1988.) 4.1 Indenture dated as of May 1, 1992 entered into between Zenith and Norwest Bank Minnesota, National Association, as trustee, pursuant to which Zenith issued its 9% Senior Notes due May 1, 2002. (Incorporated herein by reference to Exhibit 4 to Zenith's Quarterly Report on Form 10-Q for the quarter ended March 31, 1992.) 10.1 Purchase Agreement, dated as of February 4, 1981, among Reliance Insurance Company, Zenith, the Selling Stockholders referred to therein, and Eugene V. Klein, Daniel Schwartz and Harvey L. Silbert as agents for the Selling Stockholders. (Incorporated herein by reference to the exhibit to the Schedule 13D filed by Reliance Financial Services Corporation on March 9, 1981 with respect to the common stock of Zenith). 10.2 Asset and Liability Assumption Agreement, dated as of June 4, 1985, between Zenith Insurance and the Insurance Commissioner of the State of California (the "Commissioner"). (Incorporated herein by reference to Exhibit 1 to Zenith's Current Report on Form 8-K, date of report July 26, 1985). 10.3 Memorandum and Agreement of Closing dated as of July 26, 1985, among Zenith Insurance, Zenith and the Commissioner (Incorporated herein by reference to Exhibit 10.6 to Zenith's Annual Report on Form 10-K for the year ended December 31, 1985), together with the following exhibits: (a) Exhibit A -- Grant Deed, dated July 25, 1985, by the Commissioner in favor of Zenith Insurance. (Incorporated herein by reference to Exhibit 10.6 to Zenith's Annual Report on Form 10-K for the year ended December 31, 1985). (b) Exhibit B -- Bill of Sale, dated as of July 26, 1985, by the Commissioner in favor of Zenith Insurance. (Incorporated herein by reference to Exhibit 10.6 to Zenith's Annual Report on Form 10-K for the year ended December 31, 1985). (c) Exhibit C -- Assignment of Assets and Assumption of Liabilities, dated as of July 26, 1985, between the Commissioner and Zenith Insurance. (Incorporated herein by reference to Exhibit 10.6 to Zenith's Annual Report on Form 10-K for the year ended December 31, 1985). EXHIBIT NUMBER DESCRIPTION - --------- -------------------------------------------------------------------------------------- (d) Exhibit D -- Noncompetition Agreement, dated as of July 26, 1985, between the Commissioner and Zenith Insurance. (Incorporated herein by reference to Exhibit 28.3 to Zenith's Current Report on Form 8-K, date of report July 26, 1985). (e) Exhibit E -- First Assignment Separate from Certificate, dated July 26, 1985, by the Commissioner in favor of Zenith. (Incorporated herein by reference to Exhibit 10.6 to Zenith's Annual Report on Form 10-K for the year ended December 31, 1985). (f) Exhibit F -- Engagement and Reimbursement Agreement, dated as of July 26, 1985, between Zenith Insurance and the Commissioner. (Incorporated herein by reference to Exhibit 28.2 to Zenith's Current Report on Form 8-K, date of report July 26, 1985). *10.4 Zenith's Non-Qualified Stock Option Plan, as in effect immediately prior to December 6, 1985. (Incorporated herein by reference to Zenith's Registration Statement on Form S-8 (SEC File No. 2-97962)). *10.5 Zenith's Amended and Restated Non-Qualified Stock Option Plan, adopted by Zenith's Board of Directors on December 6, 1985. (Incorporated herein by reference to Zenith's Registration Statement on Form S-8 (SEC File No. 33-8948)). *10.6 Employment Agreement, dated February 8, 1995, between Zenith and Fredricka Taubitz. (Incorporated herein by reference to Exhibit 10.6 to Zenith's Annual Report on Form 10-K for the year ended December 31, 1994). *10.7 Employment Agreement, dated February 16, 1995, between Zenith and John J. Tickner. (Incorporated herein by reference to Exhibit 10.7 to Zenith's Annual Report on Form 10-K for the year ended December 31, 1994). *10.8 Employment Agreement, dated February 2, 1995, between Zenith and Stanley R. Zax. (Incorporated herein by reference to Exhibit 10.8 to Zenith's Annual Report on Form 10-K for the year ended December 31, 1994). *10.9 Stock Option Agreement, dated as of May 19, 1987, between Zenith and Stanley R. Zax. (Incorporated herein by reference to Exhibit 10.15 to Zenith's Annual Report on Form 10-K for the year ended December 31, 1987). 10.10 Credit Agreement dated as of December 14, 1994, between Zenith and Sanwa Bank of California. (Incorporated herein by reference to Exhibit 10.10 to Zenith's Annual Report on Form 10K for the year ended December 31, 1994.) 10.11 Amendment dated as of December 28, 1995 to Credit Agreement, dated as of December 14, 1994, between Zenith and Sanwa Bank of California. 10.12 Revolving Note Agreement, dated July 1, 1995, between Zenith and City National Bank. (Incorporated herein by reference to Exhibit 10 to Zenith's Quarterly Report on Form 10Q for the quarter ended June 30, 1995.) 10.13 Agreement of Reinsurance #8051 between General Reinsurance Corporation and Zenith Insurance Company, ZNAT Insurance Company, Zenith Star Insurance Company and CalFarm Insurance Company, dated as of May 22, 1995. 10.14 Workers' Compensation and Employers' Liability Reinsurance Agreement between Zenith Insurance Company and Employers Reinsurance Corporation, effective January 1, 1986. (Incorporated herein by reference to Exhibit 10.14 to Zenith's Annual Report on Form 10K for the year ended December 31, 1991.) EXHIBIT NUMBER DESCRIPTION - --------- -------------------------------------------------------------------------------------- 10.15 Agreement of Reinsurance No. 7276 between CalFarm Insurance Company and General Reinsurance Corporation, dated as of February 5, 1988. (Incorporated herein by reference to Exhibit 10.15 to Zenith's Annual Report on Form 10K for the year ended December 31, 1991.) 10.16 Agreement of Reinsurance No. B226 between CalFarm Insurance Company and General Reinsurance Corporation, dated as of January 13, 1988. (Incorporated herein by reference to Exhibit 10.16 to Zenith's Annual Report on Form 10K for the year ended December 31, 1991.) 10.17 Agreement of Reinsurance No. B197-A between CalFarm Insurance Company and General Reinsurance Corporation, dated as of January 13, 1988. (Incorporated herein by reference to Exhibit 10.17 to Zenith's Annual Report on Form 10K for the year ended December 31, 1991.) 10.18 Agreement of Reinsurance No. B196-A between CalFarm Insurance Company and General Reinsurance Corporation, dated as of January 13, 1988. (Incorporated herein by reference to Exhibit 10.18 to Zenith's Annual Report on Form 10K for the year ended December 31, 1991.) 10.19 Agreement of Reinsurance No. 7832 between General Reinsurance Corporation and CalFarm Insurance, Zenith Insurance and ZNAT Insurance, effective September 1, 1993. (Incorporated herein by reference to Exhibit 10.21 to Zenith's Annual Report on Form 10K for the year ended December 31, 1993.) 10.20 Agreement of Reinsurance No. 623-0005 between American Re-Insurance Company and CalFarm Insurance, Zenith Insurance and ZNAT Insurance, effective September 1, 1993. (Incorporated herein by reference to Exhibit 10.22 to Zenith's Annual Report on Form 10K for the year ended December 31, 1993.) 10.21 Agreement of Reinsurance No. 0079460 between Employers Reinsurance Corporation and CalFarm Insurance, Zenith Insurance and ZNAT Insurance, effective September 1, 1993. (Incorporated herein by reference to Exhibit 10.23 to Zenith's Annual Report on Form 10K for the year ended December 31, 1993.) 10.22 Life, Disability and Accidental Death Facultive Reinsurance Agreement between CalFarm Insurance Company and Occidental Life Insurance Company of California, effective April 1, 1971. (Incorporated herein by reference to Exhibit 10.21 to Zenith's Annual Report on Form 10K for the year ended December 31, 1991.) 11 Computation of Earnings Per Share for the three (3) years ended December 31, 1995. 13 Zenith's Annual Report to Stockholders for the year ended December 31, 1995, but only to the extent such report is expressly incorporated by reference herein, and such report is not otherwise to be deemed "filed" as a part of this Annual Report on Form 10-K. 21 Subsidiaries of Zenith. 23 Consent of Coopers & Lybrand L.L.P., dated March 29, 1996. (Incorporated herein by reference to page F-1 of this Annual Report on Form 10-K). 27 Financial Data Schedule. 28 Property and Casualty Loss Statistics. 99.1 Information required by rule 15d-21 under the Securities Exchange Act of 1934 for the year ended December 31, 1995 for the Zenith Investment Partnership 401(k) Plan (to be filed by amendment on Form 10-K/A within 180 days of December 31, 1995). - ------------------------ *Management contract or compensatory plan or arrangement