THE ZENITH
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES AND EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM .............. TO ..............
COMMISSION FILE NUMBER 1-9627
ZENITH NATIONAL INSURANCE CORP.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-2702776
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION
OR ORGANIZATION)
21255 CALIFA STREET, WOODLAND HILLS, 91367-5021
CALIFORNIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (818) 713-1000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
---------------------------------------- --------------------------------------
Common Stock, $1.00 Par Value New York Stock Exchange
(TITLE OF CLASS)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
(TITLE OF CLASS)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes __X__ No ______
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock of the registrant held by
non-affiliates of the registrant on March 9, 1998 was approximately $248,495,000
(based on the closing sale price of such stock on such date).
At March 9, 1998, 16,981,000 shares of Common Stock were outstanding, net of
7,792,000 shares of treasury stock.
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Annual Report to Stockholders for fiscal year ended
December 31, 1997 -- Part I and Part II.
(2) Portions of the Proxy Statement in connection with the 1998 Annual
Meeting of Stockholders -- Part III.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PART I
ITEM 1. BUSINESS
GENERAL
Zenith National Insurance Corp. ("Zenith"), a Delaware corporation
incorporated in 1971, is a holding company. Zenith is engaged through its
wholly-owned insurance subsidiaries, Zenith Insurance Company ("Zenith
Insurance"), CalFarm Insurance Company ("CalFarm Insurance"), ZNAT Insurance
Company ("ZNAT Insurance") and Zenith Star Insurance Company ("Zenith Star"), in
the property-casualty insurance business. The average combined ratio (as defined
below) for the 10 years ended December 31, 1997 of Zenith's property-casualty
operations was 100.9%. In 1993, Zenith commenced real estate operations,
developing private residences for sale in Las Vegas, Nevada, through its
wholly-owned subsidiary, Perma-Bilt, a Nevada Corporation ("Perma-Bilt"). In
1995, Zenith sold its wholly-owned subsidiary, CalFarm Life Insurance Company
("CalFarm Life"), to a subsidiary of SunAmerica Inc. for approximately $120
million in cash, with Zenith retaining the group health insurance business
previously written by CalFarm Life. Net income in 1995 includes a loss of $19.5
million associated with the sale of CalFarm Life. On December 31, 1996, Zenith
completed the acquisition of Associated General Commerce Self-Insurers' Trust
Fund ("AGC-SIF"), a Florida workers' compensation self-insurers' fund by merging
it with and into Zenith Insurance. On October 10, 1997, Zenith Insurance Company
of Florida ("ZIC of Florida") was incorporated in Florida with a capitalization
of $6 million. ZIC of Florida has no direct business, but has assumed business
from Zenith Insurance. See "Reinsurance Ceded -- Pooling Agreement."
On June 17, 1997, Zenith Insurance entered into an agreement with RISCORP,
Inc. and certain of its subsidiaries (collectively "RISCORP") to purchase all of
the assets of RISCORP related to its workers' compensation business and to
assume certain liabilities related to RISCORP's insurance businesses. See
"Pending RISCORP Acquisition" on page 31 of "Management's Discussion and
Analysis of Consolidated Financial Condition and Results of Operations" and
Notes to Consolidated Financial Statements -- Note 14 -- "Acquisitions" on pages
54 and 55 of Zenith's 1997 Annual Report to Stockholders, which are hereby
incorporated by reference.
The 1997 edition of Best's Key Rating Guide ("Best's") assigns Zenith
Insurance, CalFarm Insurance, ZNAT Insurance and Zenith Star, collectively,
ratings of A+ (superior). Standard & Poor's Corporation ("S&P") has rated the
claims-paying ability of Zenith Insurance, CalFarm Insurance, ZNAT Insurance and
Zenith Star AA- (excellent). Best's ratings and S&P's ratings of claims-paying
ability are based upon factors of concern to policyholders and insurance agents
and are not directed toward the protection of investors. Zenith is currently
under review by A.M. Best Company and Standard & Poor's.
At December 31, 1997, Zenith and its subsidiaries had approximately 1,400
full-time employees.
The principal executive offices of Zenith are located at 21255 Califa
Street, Woodland Hills, California 91367-5021, telephone (818) 713-1000.
GLOSSARY OF SELECTED INSURANCE TERMS
The following terms when used herein have the following meanings:
Assume To receive from a ceding company all or a portion
of a risk in consideration of receipt of a
premium.
Cede To transfer to a reinsurer all or a portion of a
risk in consideration of payment of a premium.
1
Combined ratio The sum of underwriting expenses, net incurred
losses, loss adjustment expenses and
policyholders' dividends, expressed as a
percentage of net premiums earned. The combined
ratio is the key measure of underwriting
profitability used in the property and casualty
insurance business.
Development The amount by which losses, measured subsequently
by reference to payments and additional estimates,
differ from those originally reported for a
period. Development is favorable when losses
ultimately settle for less than levels at which
they were reserved or subsequent estimates
indicate a basis for reserve decreases on open
claims. Development is unfavorable when losses
ultimately settle for more than levels at which
they were reserved or subsequent estimates
indicate a basis for reserve increases on open
claims.
Excess of loss reinsurance A form of reinsurance in which the reinsurer pays
all or a specified percentage of a loss caused by
a particular occurrence or event in excess of a
fixed amount and up to a stipulated limit.
Incurred but not reported Claims relating to insured events that have
claims occurred but have not yet been reported to the
insurer or reinsurer.
Loss adjustment expenses The expenses of investigating and settling claims,
including legal and other fees, and general
expenses of administering the claims adjustment
process.
Net premiums earned The portion of net premiums written applicable to
the expired period of policies.
Participating policy A policy upon which dividends may be paid after
expiration.
Policyholders' surplus or The amount remaining after all liabilities are
statutory capital subtracted from all admitted assets, as determined
in accordance with statutory accounting practices.
This amount is regarded as financial protection to
policyholders in the event an insurance company
suffers unexpected or catastrophic losses.
Reinsurance A transaction in which an original insurer, or
cedant, remits a portion of the premium to a
reinsurer, or assuming company, as payment for the
reinsurer's assumption of a portion of the risk.
Reserves or loss reserves The balance sheet liability representing estimates
of amounts needed to pay reported and unreported
claims and related loss adjustment expenses.
Retrocession A reinsurance of reinsurance assumed.
Statutory accounting Accounting practices prescribed or permitted by
practices the states' departments of insurance. In general,
statutory accounting practices address
policyholder protection and solvency and are more
conservative in presentation of earnings, surplus
and assets than generally accepted accounting
principles.
Treaty A contract of reinsurance.
2
Underwriting The process whereby an insurer reviews
applications submitted for insurance coverage and
determines whether it will accept all or part, and
at what premium, of the coverage being requested.
Underwriting expenses The aggregate of policy acquisition costs and the
portion of administrative, general and other
expenses attributable to the underwriting process
as they are accrued and expensed.
DESCRIPTION OF THE BUSINESS
Zenith and its subsidiaries conduct business principally in the property and
casualty insurance industry. Property-casualty operations comprise Workers'
Compensation (49% of 1997 consolidated net premiums earned); other
property-casualty, principally automobile, homeowners, farmowners, commercial
coverages and health insurance (44% of 1997 consolidated net premiums earned);
and reinsurance (7% of 1997 consolidated net premiums earned). Results of such
operations for the three years ended December 31, 1997 are set forth in the
table on page 25 of Zenith's 1997 Annual Report to Stockholders, which table is
hereby incorporated by reference. The earnings of Zenith's property-casualty
operations are supplemented by the generation of investment income discussed
under "Investments."
Zenith also conducts real estate operations through a wholly-owned
subsidiary that develops land and constructs private residences for sale in Las
Vegas, Nevada. Zenith's business segments are described in Notes to Consolidated
Financial Statements -- Note 17 -- "Segment Information" on pages 55 and 56 of
Zenith's 1997 Annual Report to Stockholders, which note is hereby incorporated
by reference.
PROPERTY-CASUALTY -- WORKERS' COMPENSATION INSURANCE
Workers' compensation insurance provides coverage for the statutorily
prescribed benefits that employers are required to pay to their employees
injured in the course of employment. The standard workers' compensation policy
issued by Zenith Insurance provides payments for, among other things, temporary
or permanent disability benefits, death benefits, medical and hospital expenses
and expenses of vocational rehabilitation. The benefits payable and the duration
of such benefits are set by statute, and vary by state and with the nature and
severity of the injury or disease and the wages, occupation and age of the
employee. Historically, Zenith's workers' compensation business was produced
exclusively in California with minor incidental coverages out of state for its
larger policyholders. In 1992, Zenith began workers' compensation operations in
the Texas workers' compensation market. Since then, Zenith has further expanded
its national workers' compensation operations. On December 31, 1996, Zenith
completed the acquisition of AGC-SIF in Florida.
Net premiums earned in 1997 by state are set forth in the table below:
(DOLLARS IN THOUSANDS) 1997 PREMIUMS EARNED %
----------------------- ---------
California.................... $ 129,791 53.6%
Florida....................... 47,214 19.5
Texas......................... 28,045 11.6
Arkansas...................... 12,377 5.1
Illinois...................... 9,844 4.1
Other......................... 14,793 6.1
----------------------- ---------
$ 242,064 100.0%
----------------------- ---------
----------------------- ---------
3
Premiums earned from Florida are expected to further increase upon closing
of the pending RISCORP acquisition. See "General."
According to A.M. Best, Zenith's five-year loss ratio of 45.1% through 1996
(latest available statistics) was the lowest loss ratio of the top 50
property-casualty insurers. These statistics are attributed to Zenith's managed
care efforts, return-to-work strategies, safety and health, fraud and litigation
efforts. During the past 10 years, the Zenith's workers' compensation combined
ratio was 101.9%.
Zenith Insurance is licensed to conduct business in 43 states and the
District of Columbia. Zenith's goal is to be a specialist risk-oriented national
workers' compensation insurer. National results for workers' compensation
insurers in recent years have been favorable by recent historic standards,
although the California workers' compensation market has been impacted by
intense price competition and a decline in industry premium volume since 1995.
Zenith's non-California underwriting results in 1997 were more favorable than
its California results, and management intends to proceed with its national
expansion. However, increased national competition is expected to follow from
these favorable trends.
Competition, regulation, rate adequacy and the feasibility of containing the
elements of the cost of claims are among the key factors in determining the
favorability of a given workers' compensation market. In California, workers'
compensation legislation was enacted in 1993 which, together with private
initiatives undertaken by Zenith and other insurers, produced significant
improvements in a runaway claims cost environment. However, the California
Insurance Commissioner reduced minimum rates on three separate occasions in 1993
and 1994 in response to such improvements. Rates in California were deregulated
effective January 1, 1995. Insurance companies now file and use their own,
actuarially determined rates for workers' compensation insurance in California.
Companies must file such rates with the California Department of Insurance, but
the use of scheduled rating credits allow companies considerable flexibility in
determining the amount of premium to be charged to a policyholder or potential
policyholder. The future profitability of Zenith's workers' compensation
operation will be dependent upon its ability to compete in an open rating
environment in California, the success of Zenith's geographic expansion outside
of California, the economic outlook for area in which Zenith operates, Zenith's
continuing efforts to control medical and indemnity costs through return-to-work
and managed care strategies and the ability to keep operating expenses in line
with premium volume. At present, competition is intense and Zenith is focused on
returning the workers' compensation operation to profitability and achieving the
overall goal of a combined ratio of 100% or lower.
Generally, premiums for workers' compensation insurance policies are a
function of the applicable premium rate, which includes the insured employer's
experience modification factor (where applicable) and the amount of the insured
employer's payroll. Payrolls may be affected significantly by changes in
employment and wage levels. A deposit premium is paid at the beginning of the
policy period, periodic installments are paid during the period and the final
amount of the premium is generally determined as of the end of the policy period
after the policyholder's payroll records are audited. Additional policy features
may be added to enhance the outcome for the policyholder in the event of
favorable claims experience. Predominant among such features has been,
historically, the participating policy in which a dividend has been paid after
policy expiration. With the advent of open rating in California and an emphasis
on, among other things, overall pricing at inception, dividends became
insignificant as an element in workers' compensation insurance in California.
Zenith continued to market its integrated workers' compensation, health and
disability insurance products in California and Arkansas through alliances with
selected health insurers, health maintenance organizations and UNUM Life
Insurance Company of America, one of the nation's largest disability insurance
companies. The policies are sold on an integrated basis in
4
California and Arkansas under the name "SinglePoint." SinglePoint did not have a
significant impact on the 1997 operations of Zenith.
PROPERTY-CASUALTY -- OTHER
Zenith, through CalFarm Insurance, offers a comprehensive line of property
and casualty insurance, including automobile, farmowners, commercial multiple
peril packages and homeowners coverage, primarily in California. Additionally,
CalFarm Insurance has assumed the group health insurance business that was
previously written by CalFarm Life. Automobile insurance includes coverage for
automobile bodily injury, property damage and physical damage. Automobile bodily
injury and property damage insurance provide coverage for third party liability,
bodily injury and property damage arising from the ownership, maintenance or use
of an automobile. Automobile physical damage coverage insures against physical
loss of the insured's own vehicle. Farmowners and homeowners insurance includes
coverage for direct physical damage to real and personal property, loss of
personal property by theft and legal liability for injury to others and damage
to property of others. Commercial multiple peril insures businesses against
property damage and general liability. Health insurance premiums are written
under a program sponsored by the California Farm Bureau Federation (the "Farm
Bureau") which includes a preferred provider organization plan and a Medicare
supplement product. For the 12 years since CalFarm was acquired by Zenith, the
combined ratio of Zenith's Other Property-Casualty operation was 100.6%.
Automobile insurance (both commercial and personal) is the largest line of
CalFarm Insurance's business, representing 14% of Zenith's property and casualty
premiums written in 1997. CalFarm Insurance insured approximately 19,300
personal automobiles and 64,200 commercial and farm vehicles in 1997. Farmowners
business is the second largest line of CalFarm Insurance's business,
representing approximately 11% of Zenith's property and casualty premiums
written in 1997.
Zenith's Other Property-Casualty operations are subject to the regulatory
provisions of California Initiative Proposition 103 ("Proposition 103"). The
principal effects of Proposition 103 on Zenith's Other Property-Casualty
business are as follows: rates must be approved by the California Insurance
Commissioner prior to use; rates on personal automobile policies must be offered
to "good drivers" (as defined) at a discount of at least 20% from rates
otherwise charged and an insurer cannot refuse to sell a "good driver" policy to
a qualified applicant; personal automobile insurance policies cannot be
cancelled or non-renewed except for non-payment of premium, fraud or material
misrepresentation, or a substantial increase in hazard; and personal automobile
insurance rates must be based on the following factors in decreasing order of
importance: driving record, number of miles driven, number of years of driving
experience, and other factors which may be adopted by the California Insurance
Commissioner. New automobile rating factor regulations pertaining to the
implementation of Proposition 103 were implemented during 1997 which further
limit the impact of territorial rating on automobile insurance rates.
In January 1997, the mandatory proof of insurance law and Proposition 213,
which created the Personal Responsibility Act of 1996, became effective in
California. Proposition 213 limits non-economic recoveries by uninsured
motorists in motor vehicle accidents.
The California Legislature passed legislation in September 1996 which
created the California Earthquake Authority ("CEA"). The CEA became operational
in December 1996 and is a privately financed, publicly managed state agency,
which provides limited earthquake coverage throughout California. Participation
in the CEA is voluntary and Zenith elected not to participate. Zenith will
continue to offer broader earthquake coverages than are available through the
CEA as long as private reinsurance is available and affordable. Zenith can elect
to participate in the CEA at a later date subject to meeting the participation
requirements at that time. During 1997, Zenith continued to write homeowners and
associated earthquake exposures. Earthquake exposure is monitored
5
through the use of earthquake modeling software and simulation techniques and
through the use of industry experts. Catastrophe reinsurance is used to protect
Zenith from excessive catastrophe losses. See "Reinsurance Ceded."
PROPERTY-CASUALTY -- REINSURANCE ASSUMED
Zenith Insurance is selectively underwriting a book of assumed reinsurance.
Reinsurance contracts, or treaties, come in a variety of forms, but the
principal arrangements are either proportional in nature, in which the assuming
company shares pro-rata in the premiums and losses of the cedant, or
arrangements under which the assuming company pays losses in excess of a certain
limit in return for a premium, usually determined as a percentage of the
cedant's primary insurance premiums. Zenith operates its reinsurance activity as
a participant in treaties in which, typically, the reinsurance coverage is
syndicated to a number of assuming companies. Depending upon market conditions
and other factors, the volume of premiums written fluctuates from year to year.
Zenith's current participation in the reinsurance market emphasizes the
reinsurance of large individual property risks and property catastrophe
reinsurance. By diversifying its geographical spread, Zenith's assumed
reinsurance business is written so as to limit the company's exposure to losses
from any one event in a worst-case scenario to a maximum of approximately 5% of
consolidated stockholders' equity.
An important element in the pricing of reinsurance is the supply of
reinsurance capacity (i.e. capital) relative to demand. In recent years, new
capital has been made available to provide world-wide reinsurance capacity. Most
notably, such capital has been contributed by new companies in Bermuda and by
contributions to Lloyd's syndicates by corporations with limited liability.
Zenith has observed decreases in catastrophe reinsurance rates for 1998 and
premium income in 1998 may be reduced compared to 1997. Since the inception of
this operation in 1985, the combined ratio of Zenith's Reinsurance operation was
94.1%.
On January 1, 1995, Zenith Insurance became a corporate underwriting member
of Lloyd's through a 100% wholly-owned subsidiary, ZIC Lloyd's Underwriting
Limited, which had committed funds to support the underwriting of a certain
syndicate. During the fourth quarter of 1997, this subsidiary was sold at a
profit.
PARENT
Zenith is a holding company owning directly or indirectly all of the capital
stock of certain property and casualty insurance and insurance-related
companies. In 1993, Zenith commenced a real estate operation through a
newly-formed subsidiary, Perma-Bilt, for the purpose of developing, building and
selling private residences in Las Vegas, Nevada. In 1997, Perma-Bilt closed and
delivered 305 homes at an average selling price of $149,000, compared to 287
homes at an average selling price of $145,000, the prior year. Sales in 1997
were $45,419,000 and pre-tax income was $1,678,000 compared to sales of
$41,554,000 and pre-tax income of $1,909,000 the previous year. Land acquired by
Perma-Bilt at a cost of about $33,466,000 will support the construction and sale
of an estimated 1,150 homes over the next several years and possibly some
commercial and/or apartment development. Increased interest rates may impact the
rate of home sales, but Zenith believes that the land it has acquired is
strategically located and will have long-term value.
YEAR 2000
In the spring of 1996, Zenith began replacing and modifying its computer and
business systems to be Year 2000 compliant. Zenith has established a central
team to evaluate and implement the changes to computer systems, applications and
business processes necessary to
6
achieve Year 2000 conversion with no disruption to business operations. Even
though Zenith has been communicating with third parties with whom it does
business to assure that they are Year 2000 compliant, Zenith may be adversely
impacted if such third parties do not address this issue successfully. Through
December 31, 1997, Zenith has incurred about $2.5 million on the Year 2000
efforts and anticipates an additional $2.0 million will be incurred through
1999. All of the significant internal insurance computer systems, applications
and business processes are expected to be fully compliant by the end of 1998.
Management of RISCORP has informed Zenith that it is currently in the
process of identifying and evaluating its computer and business systems with
respect to Year 2000 issues. At this time, however, management of RISCORP has
neither informed Zenith of the total cost of achieving Year 2000 compliance for
its systems nor presented a plan for doing so. If the transaction closes, Zenith
may be adversely impacted if substantial changes are required after the closing
for RISCORP's computer and business systems to achieve Year 2000 compliance, and
if such changes are not covered by indemnification rights contained in the
purchase agreement.
LOSS AND LOSS EXPENSE RESERVES AND CLAIMS, AND LOSS DEVELOPMENTS
Zenith's property and casualty insurance subsidiaries (the "P&C Companies")
maintain reserves for the payment of losses and for the expenses of settling
both reported and unreported claims that have been incurred under their
insurance policies and reinsurance contracts. The amount of such reserves, as
related to reported claims, is based upon periodic case-by-case evaluation and
judgment by the P&C Companies' claims departments, with actuarial review. The
estimate of unreported claims arising from accidents which have not yet been
reported to the P&C Companies, commonly known in the industry as "incurred but
not reported," is based upon the P&C Companies' experience and statistical
information with respect to the probable number and nature of such claims. The
P&C Companies monitor these factors and revise their reserves as they deem
appropriate. Reserves are based on estimates, and no assurance can be given that
the ultimate liability will not be more or less than such estimates.
Reference is made to "Property-Casualty Loss Development" on pages 36 and 37
of Zenith's 1997 Annual Report to Stockholders, which is hereby incorporated by
reference, and the table setting forth the reconciliation of changes in the
liabilities for loss and loss adjustment expenses included in Notes to
Consolidated Financial Statements -- Note 13 -- "Loss and Loss Adjustment
Expense Reserves" on page 53, of Zenith's 1997 Annual Report to Stockholders,
all of which are hereby incorporated by reference. These tables show the
development of loss and loss adjustment expense liabilities as originally
estimated under generally accepted accounting principles at December 31 of each
year presented. The accounting methods used to estimate these liabilities are
described in Notes to Consolidated Financial Statements -- Note 1 -- "Summary of
Accounting Policies, Operations, and Principles of Consolidation" on pages 44
through 47 of Zenith's 1997 Annual Report to Stockholders, which note is hereby
incorporated by reference. The one year loss and loss adjustment expense reserve
development for Zenith's three main lines of insurance business is set forth in
the table on page 26 of Zenith's 1997 Annual Report to Stockholders, which table
is hereby incorporated by reference.
WORKERS' COMPENSATION
Zenith's Workers' Compensation reserves, on the average, are paid within
approximately 2.5 years. Zenith regards the timely settlement of its Workers'
Compensation claims as important to its profitability and makes use of
compromises and releases for claim settlements to expedite this process.
Zenith Insurance maintains four regional offices in California and offices
outside of California in Texas, Arkansas, Pennsylvania, Utah, Illinois and
Florida, each of which is fully staffed to conduct all
7
workers' compensation claims operations, including review of initial reports of
work injury, assignment of appropriate field investigation and determination of
whether subrogation should be pursued. Workers' Compensation claims operations
are supported by computer systems that provide immediate access to policy
coverage verification and claims records and enable Zenith Insurance to detail
claims payment histories and policy loss experience reports.
Legislative reform of the California workers' compensation system was
enacted in 1993. In addition, Zenith undertook significant additional
expenditures to improve the loss adjustment process in recent years with a view
to mitigating the effect of adverse claim trends, particularly the effect of
fraud and abuse.
In 1995, Zenith's new workers' compensation computer system ("system")
became operational. Management observed certain unusual claim reserving trends
and patterns in 1995 and 1996, and to a much lesser degree, during the first
three quarters of 1997. Based on currently available data, these claim reserving
trends and patterns have stabilized. Any subsequent re-interpretation of new
information that becomes available from the system which may change the estimate
of such liabilities in future periods is not considered to have a material
impact on the financial position or results of operations.
In 1997, loss and loss adjustment expense reserves were strengthened by
approximately $12 million for accident years 1995 and 1996. Additionally, the
1997 accident year loss ratio was increased.
OTHER PROPERTY-CASUALTY
Other Property-Casualty loss reserves are paid, on the average, within
approximately 3.5 years.
Property insurance coverages and CalFarm Insurance's concentration of
business in California expose Zenith to catastrophe losses from events in
California. Reinsurance ceded by CalFarm Insurance protects against losses in
excess of $5,000,000 from any one event. See "Reinsurance Ceded." In 1997,
CalFarm Insurance sustained losses of $1,500,000 in conjunction with California
storms. 1996 results benefited from the absence of catastrophe losses. In 1995,
CalFarm Insurance sustained losses of $10,700,000 in conjunction with three
major California storms.
CalFarm Insurance maintains three claims and legal offices in California to
conduct all claims operations of the other property and casualty business. All
claims operations of CalFarm Insurance are supervised by its home office claims
department. Health claims is a separate operation located in the home office.
REINSURANCE ASSUMED
Zenith expects that, on the average, its Reinsurance reserves will be paid
in approximately 3 years.
Zenith's Reinsurance reserves constitute approximately 13% of its total
reserves, net of ceded reinsurance, for property and casualty unpaid losses and
loss adjustment expenses at December 31, 1997, reflecting the longer average
life of such reserves relative to Zenith's other principal lines of business. In
addition to information supplied by ceding companies, Zenith makes use of
industry experience in arriving at estimates of ultimate losses for certain
reinsurance assumed arrangements.
Losses attributable to catastrophes were $2,500,000 in 1995, principally
from Hurricane "Marilyn." There were no catastrophes in 1996 and 1997.
Zenith Insurance has participated, to a limited extent, in the reinsurance
arrangements of ceding companies that have written both directors' and officers'
liability coverage ("D & O") policies and professional indemnity policies,
including such coverage written for practicing certified public
8
accountants. Actions alleging negligence against directors, officers or
accountants by parties suffering financial losses in savings and loan failures
give rise to claims under D & O policies or professional indemnity policies
which, in turn, give rise to claims against Zenith Insurance. Such claims have
not had, and are not expected to have in the future, a material adverse effect
on Zenith's consolidated financial condition.
ENVIRONMENTAL AND ASBESTOS LOSSES
The exposure of the insurance industry to losses arising out of the cost of
environmental and asbestos damage has been the focus of attention of a number of
interested parties in recent years. The process of evaluating an insurance
company's exposure is subject to significant uncertainties. Among the
complications are lack of historical data, long reporting delays, uncertainty as
to the number and identity of insureds with potential exposure and unresolved
legal issues regarding policy coverage. The legal issues concerning the
interpretations of various insurance policy provisions and whether environmental
and asbestos losses are or were ever intended to be covered are complex. Courts
have reached different and sometimes inconsistent conclusions regarding such
issues as: when the loss occurred and what policies provide coverage, how policy
limits are determined, how policy exclusions are applied and interpreted,
whether clean-up costs are covered as insured property damage, and whether site
assessment costs are either indemnity payments or adjusting costs.
Zenith has exposure to asbestos losses in its Workers' Compensation
operation for medical, indemnity and loss adjustment expenses associated with
insureds' long-term exposure to asbestos or asbestos-contained materials. Most
of these claims date back to the 1970's and early 1980's and Zenith's exposure
is generally limited to a pro-rata share of the loss for the period of time
coverage was provided. Zenith also has potential exposure to environmental and
asbestos losses and loss adjustment expenses beginning in 1985 through its
Reinsurance operation and through CalFarm Insurance, which writes liability
coverage under farmowners' and small commercial policies, however such losses
are substantially excluded from all such coverage. The business reinsured by
Zenith contains exclusion clauses for environmental and asbestos losses, and in
1988 an absolute pollution exclusion was incorporated into CalFarm Insurance's
policy forms. All claims for damages resulting from environmental or asbestos
losses are identified and handled by Zenith's most experienced claims/legal
professionals. Environmental and asbestos losses have not been material and
Zenith believes that its reserves for environmental and asbestos losses are
appropriately established based on currently available facts, technology, laws
and regulations. However, due to the long-term nature of these claims, the
inconsistencies of court coverage decisions, plaintiff's expanded theories of
liability, the risks inherent in major litigation and other uncertainties, the
ultimate exposure from these claims may vary from the amounts currently
reserved.
INVESTMENTS
Investment policies of Zenith and its insurance subsidiaries are established
by their respective Boards of Directors, taking into consideration state
regulatory restrictions with respect to investments in connection with reserve
obligations, as well as the nature and amount of various kinds of investments.
See "Business." Zenith's principal investment goal is to maintain safety and
liquidity, enhance principal values and achieve increased rates of return
consistent with regulatory constraints. The allocation among various types of
securities is adjusted from time to time based on market conditions, credit
conditions, tax policy, fluctuations in interest rates and other factors. See
"Management's Discussion and Analysis of Consolidated Financial Condition and
Results of Operations -- Investments" on pages 30 and 31 of Zenith's 1997 Annual
Report to Stockholders, which discussion is hereby incorporated by reference. At
December 31, 1997 the investment portfolios of Zenith and the P&C Companies
consisted primarily of taxable bonds and short-term investments supplemented by
smaller portfolios of redeemable and other preferred stocks and
9
common stocks. The average life of the consolidated portfolio was 4.2 years at
December 31, 1997. Investment income by segment is set forth in Notes to
Consolidated Financial Statements -- Note 17 -- "Segment Information" on pages
55 and 56 of Zenith's 1997 Annual Report to Stockholders, which note is hereby
incorporated by reference.
Stockholders' equity will fluctuate as interest rates fluctuate due to the
implementation of Statement of Financial Accounting Standards No. 115 --
"Accounting for Investments in Certain Debt and Equity Securities". In
accordance with SFAS No. 115, Zenith has identified certain securities,
amounting to approximately 92% of the investments in debt securities at December
31, 1997, as available-for-sale. In 1997 stockholders' equity increased by $5.0
million, net of deferred taxes, as a result of changes in the fair values of
such investments.
REINSURANCE CEDED
In accordance with general industry practices, Zenith's insurance
subsidiaries annually purchase excess of loss reinsurance. Reinsurance makes the
assuming reinsurer liable to the ceding company to the extent of the
reinsurance. It does not, however, discharge the ceding company from its primary
liability to its policyholders in the event the reinsurer is unable to meet its
obligations under such reinsurance treaty. Historically, no material costs have
been incurred by Zenith or its subsidiaries from uncollected reinsurance. The
purpose of such reinsurance is to protect Zenith from the impact of large,
unforeseen losses, and such reinsurance reduces the magnitude of sudden and
unpredictable changes in net income and the capitalization of insurance
operations. Zenith monitors the financial condition of its reinsurers and does
not believe that it is exposed to any material credit risk through its ceded
reinsurance arrangements. Zenith believes that its ceded reinsurance
arrangements are adequate and consistent with industry practice.
Reinsurance premiums ceded by Zenith's insurance subsidiaries amounted to
$26,191,000, $24,642,000 and $21,112,000 in 1997, 1996 and 1995, respectively,
or 5.3%, 5.4% and 4.9% of earned premiums in 1997, 1996 and 1995, respectively.
Reinsurance recoverable on unpaid losses amounted to $87,665,000, $93,651,000
and $54,429,000 in 1997, 1996 and 1995, respectively, or 14.3%, 15.1% and 10.5%
of gross reserves for unpaid losses and loss adjustment expenses in 1997, 1996
and 1995, respectively. Each insurance subsidiary maintains separate reinsurance
arrangements, which were as follows during 1997:
Zenith Insurance -- Workers' Compensation reinsurance covered all claims
between $550,000 and $100,000,000 per occurrence. The coverage from $550,000 to
$5,000,000 is placed with General Reinsurance Corporation, the coverage from
$5,000,000 to $10,000,000 with Employers Reinsurance Corporation and the
remaining three layers from $10,000,000 to $60,000,000 primarily with Prudential
Reinsurance Company, NAC Reinsurance Corporation, Transatlantic Reinsurance
Company, Everest Reinsurance Company and the London reinsurance market
(primarily Lloyds' syndicates and certain United Kingdom reinsurance companies).
Catastrophe reinsurance covers an additional $40,000,000 in excess of
$60,000,000 and is placed with UNUM Life Insurance Company, ReliaStar Life
Insurance Company and Connecticut General Life. Zenith's Reinsurance division
did not purchase any reinsurance protection on its assumed business in the three
years ended December 31, 1997. However, Zenith's exposure to losses from assumed
reinsurance is limited by the terms upon which it is written to a maximum
probable loss from any one event of approximately 5% of Zenith's consolidated
stockholders' equity.
Prior to Zenith's acquisition of AGC-SIF, AGC-SIF purchased aggregate excess
and specific excess reinsurance for protection against losses in excess of
stated retentions in each year of coverage. Beginning in 1997, reinsurance for
business written in Florida was combined with Zenith's existing reinsurance
arrangements.
CalFarm Insurance -- For personal and commercial property lines of business,
reinsurance is maintained for claims in excess of $350,000 up to $4,000,000 per
occurrence. On liability coverages
10
for both personal and commercial lines, reinsurance covers losses up to
$5,000,000 per occurrence, subject to a retention of $500,000. This reinsurance
coverage is all placed with General Reinsurance Corporation. CalFarm Insurance
has property catastrophe reinsurance that provides for recovery of 95% of
$80,000,000, excess of a retention of $5,000,000, for which the principal
reinsurers are General Reinsurance Corporation and Centre Cat Ltd. The
catastrophe reinsurance was increased to 95% of $110,000,000, excess of a
retention of $5,000,000 effective February 1, 1998. CalFarm Insurance also
maintains reinsurance agreements with Employers Reinsurance Corporation and
Duncanson & Holt for excess risks on its accident and health contracts.
Employers Reinsurance Corporation provides coverage for CalFarm's Farm Bureau
health insurance program for aggregate losses in excess of $2,000,000 on those
individual health policy claims that exceed $120,000 for each insured in each
calendar year. Duncanson & Holt provides coverage on other group health policy
claims that exceed $100,000 in each calendar year.
CalFarm Insurance participates in a quota share contract whereby it retains
20% of the first $1,000,000 on most umbrella risks (comprehensive coverage in
excess of primary policy limits) underwritten, with the remainder of up to
$10,000,000 for commercial lines and up to $5,000,000 for personal lines ceded
to General Reinsurance Corporation. Facultative reinsurance is placed on
property coverage in excess of $4,000,000 on all property lines, and on umbrella
limits in excess of $10,000,000 for commercial lines and $5,000,000 for personal
lines. Facultative reinsurance is used on fewer than 5% of CalFarm Insurance's
policies. Facultative coverage is placed primarily with General Reinsurance
Corporation. Other companies used are Employers Reinsurance Corporation,
American Reinsurance Company and other reinsurers rated A+ by A.M. Best Company.
Pooling Agreement -- Zenith Insurance, CalFarm Insurance, ZNAT Insurance,
ZIC of Florida and Zenith Star are parties to a pooling agreement. Under the
pooling agreement, the results of underwriting operations are ceded (the risks
are transferred) to Zenith Insurance and are then reapportioned, or retro-ceded
(the risks are transferred back), to those four companies in the following
proportions: Zenith Insurance, 77.5%; CalFarm Insurance, 18%; ZNAT Insurance,
2%; ZIC of Florida, 2%; and Zenith Star, 0.5%. Transactions pursuant to the
pooling agreement are eliminated on consolidation and have no impact on Zenith's
consolidated financial statements.
MARKETING AND STAFF
Zenith Insurance's workers' compensation business is produced by
approximately 1,400 independent licensed insurance agents and brokers throughout
California, Texas, Florida and other areas in which Zenith conducts workers'
compensation operations. Certain CalFarm Insurance agents referred to below also
sell workers' compensation policies. Zenith Insurance's assumed reinsurance
premiums are generated nationally by brokers and reinsurance intermediaries.
CalFarm Insurance maintains a sales force of approximately 160 agents who
primarily sell insurance products for CalFarm Insurance, principally in rural
and suburban areas. In addition, 210 independent agents market CalFarm Insurance
products and 1,285 independent agents market the CalFarm Insurance health
insurance products.
Applications for insurance submitted by all agents and brokers are evaluated
by professional underwriters based upon numerous factors, including underwriting
criteria and standards, geographic areas of underwriting concentration,
actuarial judgments of rate adequacy, economic considerations, and review of
known data on the particular risk. Zenith's insurance subsidiaries, as opposed
to their agents and brokers, retain authority over underwriting, claims
processing, safety engineering and auditing.
CALIFORNIA FARM BUREAU FEDERATION
The Farm Bureau was formed to provide its members with a variety of
agriculture-related services, including property and casualty and health
insurance. The Farm Bureau is California's
11
largest general farm organization, and represents more than 75,000 member
families in 58 counties. The Farm Bureau continues to work actively to encourage
its membership to place their insurance with CalFarm Insurance. Farm Bureau
membership is a prerequisite to the purchase of farmowners, automobile and
health insurance from CalFarm Insurance. Of the estimated 75,000 member
families, approximately 60% are insured by CalFarm Insurance. The business of
CalFarm Insurance is closely tied to the California farm economy. However,
approximately 46% of Farm Bureau members (and CalFarm Insurance insureds) are
non-farmers, and approximately 60% of CalFarm Insurance premium volume is
generated by non-farm business. Total written premium in CalFarm Insurance
attributable to sales that were sponsored by the Farm Bureau constituted
approximately 31%, 31% and 30% of Zenith's total written premium for the years
1997, 1996 and 1995, respectively. The agreement of CalFarm Insurance with the
Farm Bureau, which is subject to cancellation by either party on six months'
notice, requires CalFarm Insurance to make annual payments to the Farm Bureau of
$240,000 plus 2% of the gross written premium under the Farm Bureau group health
insurance program. Pursuant to such provisions, total payments by CalFarm
Insurance to the Farm Bureau were approximately $1 million in each of 1997, 1996
and 1995.
CalFarm Insurance continues to be the largest writer of farmowners policies
in the state and benefits from its sponsorship by the Farm Bureau. Such benefit
is derived from the use of the CalFarm name and the Farm Bureau membership
lists. Further, CalFarm Insurance's ability to sell products to Farm Bureau
members is enhanced by the Farm Bureau relationship. The Farm Bureau benefits
since Farm Bureau membership is required to obtain automobile, farmowners and
health insurance policies from CalFarm Insurance, which generates membership and
revenues for the Farm Bureau. If the relationship between CalFarm Insurance and
the Farm Bureau were terminated, Zenith believes that it could retain a
significant amount of the business it currently has with Farm Bureau members
because of the quality and tailored features of the products it offers in what
it regards as its "niche market" and the long-term relationships established
between its agents and these policyholders. In the event of such termination,
however, Zenith expects that there would be an increased risk of nonrenewal of
existing insurance coverage as well as a possible adverse effect on new policy
revenues, but it cannot estimate the financial impact of any such termination.
Zenith anticipates the continuation of a close working relationship with the
Farm Bureau and the promotion among its membership of the purchase of insurance
products from CalFarm Insurance as an attractive feature of Farm Bureau
membership.
COMPETITION
Competition in the insurance business is based upon price, product design
and quality of service. The insurance industry is highly competitive, and
competition is particularly intense in the California workers' compensation
market which was deregulated with respect to prices in 1995. Zenith's
subsidiaries compete not only with other stock companies, but with mutual
companies and other underwriting organizations such as the State Compensation
Insurance Fund. Competition also exists from self-insurance and captive
insurers. Over the years there has been increased competition from
direct-writing companies and, in the property and casualty field, from
affiliates of large life insurance companies. Many companies in competition with
Zenith's subsidiaries have been in business for a much longer time, have a
larger volume of business, are more widely known, and/or possess substantially
greater financial resources.
REGULATION
STATES' DEPARTMENTS OF INSURANCE
Insurance companies are primarily subject to regulation and supervision by
the Department of Insurance in the state in which they are domiciled and, to a
lesser extent, other states in which they conduct business. Zenith's insurance
subsidiaries are primarily subject to regulation and
12
supervision by the California Department of Insurance, except for Zenith Star
and ZIC of Florida, which are primarily subject to regulation and supervision in
the State of Texas and the State of Florida, respectively. These states have
broad regulatory, supervisory and administrative powers. Such powers relate to,
among other things, the granting and revocation of licenses to transact
business; the licensing of agents; the standards of solvency to be met and
maintained; the nature of and limitations on investments; approval of policy
forms and rates; periodic examination of the affairs of insurance companies; and
the form and content of required financial statements.
In California, Zenith Insurance, CalFarm Insurance and ZNAT Insurance are
required, with respect to their workers' compensation line of business, to
maintain on deposit investments meeting specified standards that have an
aggregate market value equal to the companies' loss reserves. For this purpose,
loss reserves are defined as the current estimate of reported and unreported
claims net of reinsurance, plus a statutory formula reserve based on a minimum
of 65% of earned premiums for the latest three years. Zenith Insurance and ZNAT
Insurance are subject to similar deposit requirements in certain other states
based on those states' retaliatory statutes.
Detailed annual and quarterly reports must be filed by Zenith's insurance
subsidiaries with the California Department of Insurance and the Texas
Department of Insurance, and with other states in which they are licensed to
transact business, and their businesses and accounts are subject to periodic
examination by such agencies, usually at three year intervals. Zenith Insurance,
CalFarm Insurance and ZNAT Insurance, were examined by the California Department
of Insurance as of December 31, 1996. Although the final Report of Examination
has not yet been issued, Management does not expect any material findings.
Zenith Star was examined by the Texas Department of Insurance as of December 31,
1996. Although the final Report of Examination has not yet been issued,
Management does not expect any material findings.
THE NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS
The National Association of Insurance Commissioners ("NAIC") is a group
formed by state Insurance Commissioners to discuss issues and formulate policy
with respect to regulation, reporting and accounting of insurance companies.
Although the NAIC has no legislative authority and insurance companies are at
all times subject to the laws of their respective domiciliary states and, to a
lesser extent, other states in which they conduct business, the NAIC is
influential in determining the form in which such laws are enacted. In
particular, Model Insurance Laws, Regulations and Guidelines (the "Model Laws")
have been promulgated by the NAIC as a minimum standard by which state
regulatory systems and regulations are measured. Adoption of state laws which
provide for substantially similar regulations to those described in the Model
Laws is a requirement for accreditation by the NAIC.
The NAIC has adopted model regulations to require insurers to maintain
minimum levels of capital based on their investments and operations, known as
"risk based capital" ("RBC") requirements. At December 31, 1997, adjusted
capital under the RBC regulations for the Zenith Insurance Group (consisting of
Zenith Insurance, CalFarm Insurance, ZIC of Florida, ZNAT Insurance and Zenith
Star) was 332%, significantly above the RBC control, or required, level of
capital under the regulations.
The NAIC Insurance Regulatory Information System ("IRIS") was developed to
assist insurance departments in overseeing the financial condition of insurance
companies. Annually, IRIS key financial ratios (11 ratios for property and
casualty companies) are calculated from data supplied in annual statutory
statements of insurance companies. These ratios are reviewed by experienced
financial examiners of the NAIC to select those companies that merit highest
priority in the allocation of the regulators' resources. The 1997 IRIS results
for the Zenith Insurance Group showed no results outside the "normal" range for
such ratios, as such range is determined by the NAIC.
13
The NAIC is in the process of codifying statutory accounting principles to
provide a comprehensive basis of statutory accounting and reporting for use by
insurance departments, insurers, and auditors. The codified principles have not
yet been finalized, therefore, the effective date has not been determined.
Implementation of the codified statutory accounting principles may affect the
surplus level and the capitalization requirement of Zenith's insurance
subsidiaries on a statutory basis. Zenith has not determined the impact of this
codification.
INSURANCE HOLDING COMPANY SYSTEM REGULATORY ACT
Zenith's insurance subsidiaries are also subject to the California, Florida
and Texas Insurance Holding Company System Regulatory Acts ("Holding Company
Acts"), which contain certain reporting requirements, including the requirement
that such subsidiaries file information relating to capital structure,
ownership, financial condition and general business operation. The Holding
Company Acts also limit dividend payments and material transactions by Zenith's
insurance subsidiaries. See "Management's Discussion and Analysis of
Consolidated Financial Condition and Result of Operations -- Liquidity and
Capital Resources" on page 32 of Zenith's 1997 Annual Report to Stockholders,
which discussion is hereby incorporated by reference.
OTHER REGULATION
Property and casualty insurance coverage is subject to certain regulation as
described herein under "Description of Business -- Property-Casualty -- Other,"
and Zenith's other property-casualty rates are subject to prior approval by the
California Department of Insurance. The provisions of Proposition 103 do not
apply to Workers' Compensation, Health insurance or Reinsurance, which combined
to account for 64.5% of Zenith's property-casualty earned premiums in 1997.
ITEM 2. PROPERTIES
Zenith Insurance owns a 120,000 square foot office facility in Woodland
Hills, California which, since November of 1987, has been the corporate home
office of Zenith, Zenith Insurance and ZNAT Insurance.
In addition, Zenith Insurance and CalFarm Insurance, in the regular conduct
of their business, lease offices in various cities. See Notes to Consolidated
Financial Statements -- Note 8 -- "Commitments and Contingent Liabilities" on
page 51 of Zenith's 1997 Annual Report to Stockholders, which note is hereby
incorporated by reference.
CalFarm Insurance owns its home office building consisting of 133,000 square
feet (and surrounding property of approximately 4 acres) in Sacramento,
California.
ITEM 3. LEGAL PROCEEDINGS
Zenith and its subsidiaries are involved in certain litigation. In the
opinion of management, after consultation with legal counsel, such litigation in
which Zenith is a defendant is either without merit or the ultimate liability,
if any, will not have a material adverse effect on the consolidated financial
condition of Zenith.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Zenith's Common Stock, par value $1.00 per share, is traded on the New York
Stock Exchange under the symbol ZNT. The table below sets forth the high and low
sales prices of the Common Stock for each quarterly period during the last two
fiscal years.
QUARTER 1997 1996
- ------------------------------------------------------------ ------- -------
First
High...................................................... 27 7/8 24 7/8
Low....................................................... 25 7/8 21 1/8
Second
High...................................................... 27 1/2 28 7/8
Low....................................................... 24 5/8 23 7/8
Third
High...................................................... 28 5/8 28 1/2
Low....................................................... 26 5/16 26 1/4
Fourth
High...................................................... 28 3/4 28
Low....................................................... 25 7/16 25 1/4
As of March 9, 1998, there were 353 registered holders of record of Zenith
Common Stock.
The table below sets forth information with respect to the amount and
frequency of dividends declared on Zenith Common Stock. Based upon Zenith's
financial condition, it is currently expected that cash dividends will continue
to be paid in the future.
DATE OF DECLARATION TYPE AND AMOUNT OF RECORD DATE FOR
BY ZENITH BOARD DIVIDEND PAYMENT PAYMENT DATE
- ------------------------------------ ----------------------- --------------------- ------------------------
March 7, 1996....................... $.25 cash per share April 30, 1996 May 15, 1996
May 22, 1996........................ $.25 cash per share July 31, 1996 August 15, 1996
September 5, 1996................... $.25 cash per share October 31, 1996 November 15, 1996
December 10, 1996................... $.25 cash per share January 31, 1997 February 14, 1997
February 27, 1997................... $.25 cash per share April 30, 1997 May 15, 1997
May 15, 1997........................ $.25 cash per share July 31, 1997 August 15, 1997
September 4, 1997................... $.25 cash per share October 31, 1997 November 14, 1997
December 11, 1997................... $.25 cash per share January 30, 1998 February 13, 1998
February 24, 1998................... $.25 cash per share April 30, 1998 May 15, 1998
The Holding Company Acts limit the ability of Zenith Insurance to pay
dividends to Zenith, and of CalFarm Insurance, ZNAT Insurance, ZIC of Florida
and Zenith Star to pay dividends to Zenith Insurance, by providing that the
appropriate insurance regulatory authorities in the State of California, Texas
or Florida must approve any dividend that, together with all other such
dividends paid during the preceding twelve months, exceeds the greater of: (a)
10% of the paying company's statutory surplus as regards policyholders at the
preceding December 31; or (b) 100% of the net income for the preceding year. In
addition, any such dividend must be paid from policyholders' surplus
attributable to accumulated earnings. During 1997, Zenith Insurance paid
dividends of $22,750,000 to Zenith. During 1998, Zenith Insurance will be able
to pay $27,841,000 in dividends to Zenith without prior approval. In 1998,
CalFarm Insurance, ZNAT Insurance, ZIC of Florida and Zenith Star, together,
will be able to pay $9,317,000 in dividends to Zenith Insurance without prior
approval.
15
ITEM 6. SELECTED FINANCIAL DATA.
The five-year summary of selected financial information and accompanying
notes, included in Zenith's 1997 Annual Report to Stockholders on pages 34 and
35, is hereby incorporated by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
"Management's Discussion and Analysis of Consolidated Financial Condition
and Results of Operations," included in Zenith's 1997 Annual Report to
Stockholders on pages 24 to 33 is hereby incorporated by reference.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable for the year ended December 31, 1997.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Reference is made to pages 36 and 37 of Zenith's 1997 Annual Report to
Stockholders for information setting forth the loss and loss adjustment expense
liability development for 1987 through 1997 and to the consolidated financial
statements and notes thereto on pages 38 to 56 of Zenith's 1997 Annual Report to
Stockholders, which are hereby incorporated by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
16
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information set forth under the captions "Section 16(a) Beneficial
Ownership Reporting Compliance" and "Election of Directors" in the Proxy
Statement distributed to stockholders in connection with Zenith's 1998 Annual
Meeting of Stockholders which is to be filed by Zenith after the date this
Report on Form 10-K is filed (the "Proxy Statement") is hereby incorporated by
reference.
EXECUTIVE OFFICERS OF THE REGISTRANT
OFFICER
NAME AGE POSITION TERM SINCE
- ----------------- --- ---------------------------------------- ------ --------
Stanley R. Zax 60 Chairman of the Board and President (1) Annual 1977
Fredricka Taubitz 54 Executive Vice President and Annual 1985
Chief Financial Officer (1)
Jack D. Miller 52 Executive Vice President (2) Annual (3)
James P. Ross 51 Senior Vice President (1) Annual 1978
John J. Tickner 59 Senior Vice President and Secretary (1) Annual 1985
Keith E. Trotman 61 Senior Vice President (4) Annual 1988
Philip R. Hunt 55 Senior Vice President (2) Annual 1988
- ------------------------
(1) Officer of Zenith and its subsidiaries.
(2) Officer of Zenith's subsidiaries only.
(3) Designated as an executive officer of the registrant on February 24, 1998.
(4) Ceased being an executive officer of the registrant on February 24, 1998.
Each of the executive officers has occupied an executive position with
Zenith or a subsidiary of Zenith for more than five years, except for Mr. Jack
D. Miller who was previously with Industrial Indemnity Company, a
Property-casualty insurance company, serving as the President and Chief
Executive Officer from 1995 to 1997; acting President and Chief Executive
Officer from 1994 to 1995; and in various other positions from 1987 to 1994,
culminating in Executive Vice President and Chief Operating Officer.
There are no family relationships between any of the executive officers, and
there are no arrangements or understandings pursuant to which any of them were
selected as officers.
ITEM 11. EXECUTIVE COMPENSATION.
The information set forth under the headings "Directors' Compensation,"
"Executive Compensation," "Summary Compensation Table," "Option/SAR Grants in
Last Fiscal Year," "Aggregated Option/SAR Exercises in Last Fiscal Year And
Fiscal Year End Option/SAR Values," "Employment Agreements and Termination of
Employment and Change in Control Arrangements," "Compensation Committee
Interlocks and Insider Participation" and "Board of Directors' Report on
Executive Compensation, Performance Bonus Committee Report on Performance Based
Compensation Plans for Executive Officers" in the Proxy Statement is hereby
incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information set forth under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Proxy Statement is hereby incorporated
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information set forth in footnote 3 to the table set forth under the
caption "Election of Directors" in the Proxy Statement is hereby incorporated by
reference.
17
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Documents filed as part of the report:
1. FINANCIAL STATEMENTS
Independent Accountant's Report
Financial Statements and notes thereto incorporated by reference
from Zenith's 1997 Annual Report to Stockholders in Item 8 of
Part II above:
Consolidated Financial Statements of Zenith National Insurance
Corp. and Subsidiaries:
Consolidated Balance Sheet as of December 31, 1997 and 1996
Consolidated Statement of Operations for the years ended
December 31, 1997, 1996 and 1995
Consolidated Statement of Cash Flows for the years ended
December 31, 1997, 1996 and 1995
Consolidated Statement of Stockholders' Equity for the
years ended December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
2.FINANCIAL STATEMENT SCHEDULES
Zenith National Insurance Corp. and Subsidiaries
As of December 31, 1997.
I -- Summary of Investments -- Other Than Investments in Related
Parties
For the years ended December 31, 1997, 1996 and 1995.
III -- Supplementary Insurance Information
IV -- Reinsurance
Zenith National Insurance Corp.
As of December 31, 1997 and 1996 and for the years ended December
31, 1997, 1996 and 1995.
II -- Condensed Financial Information of Registrant
Property and Casualty Loss Development on pages 36 and 37 of Zenith's
1997 Annual Report to Stockholders.
Schedules other than those listed above are omitted since they are not
applicable, not required, or the information required to be set forth
therein is included in the consolidated financial statements, or in notes
thereto.
18
3. EXHIBITS
The Exhibits listed below are filed in a separate Exhibit Volume to this
Report.
2.1 Amended and Restated Agreement and Plan of Merger by and among Zenith AGC Acquisition
Insurance Company, Zenith Insurance Company, Zenith National Insurance Corp., Associated
General Commerce Self-Insurers' Trust Fund and AGC Risk Management Group Inc. dated as
of October 7, 1996. (Incorporated herein by reference to Exhibit 2.1 to Zenith's Annual
Report on Form 10-K for the year ended December 31, 1996.)
2.2 Stock Acquisition Agreement, dated as of September 19, 1995, between Anchor National
Life Insurance Company and Zenith National Insurance Corp. (Incorporated herein by
reference to Exhibit 2.1 to Zenith's Report on Form 8-K dated October 6, 1995.)
2.3 Amendment No. 1 to Stock Acquisition Agreement dated as of December 27, 1995, by and
among Anchor National Life Insurance Company, SunAmerica Life Insurance Company and
Zenith National Insurance Corp. (Incorporated herein by reference to Exhibit 2.1 to
Zenith's Report on Form 8-K dated January 9, 1996.)
3.1 Certificate of Incorporation of Zenith as in effect immediately prior to November 22,
1985. (Incorporated herein by reference to Exhibit 3 to Zenith's Amendment on Form 8,
date of amendment October 10, 1985, to Zenith's Current Report on Form 8-K, date of
report July 26, 1985.) Certificate of Amendment to Certificate of Incorporation of
Zenith, effective November 22, 1985. (Incorporated herein by reference to Zenith's
Current Report on Form 8-K, date of report November 22, 1985.)
3.2 By-Laws of Zenith, as currently in effect. (Incorporated herein by reference to Exhibit
3.2 to Zenith's Annual Report on Form 10-K for the year ended December 31, 1988.)
4.1 Indenture dated as of May 1, 1992 entered into between Zenith and Norwest Bank
Minnesota, National Association, as trustee, pursuant to which Zenith issued its 9%
Senior Notes due May 1, 2002. (Incorporated herein by reference to Exhibit 4 to Zenith's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1992.)
10.1 Purchase Agreement, dated as of February 4, 1981, among Reliance Insurance Company,
Zenith, the Selling Stockholders referred to therein, and Eugene V. Klein, Daniel
Schwartz and Harvey L. Silbert as agents for the Selling Stockholders. (Incorporated
herein by reference to the exhibit to the Schedule 13D filed by Reliance Financial
Services Corporation on March 9, 1981 with respect to the common stock of Zenith.)
10.2 Asset and Liability Assumption Agreement, dated as of June 4, 1985, between Zenith
Insurance and the Insurance Commissioner of the State of California (the
"Commissioner"). (Incorporated herein by reference to Exhibit 1 to Zenith's Current
Report on Form 8-K, date of report July 26, 1985.)
10.3 Memorandum and Agreement of Closing dated as of July 26, 1985, among Zenith Insurance,
Zenith and the Commissioner (Incorporated herein by reference to Exhibit 10.6 to
Zenith's Annual Report on Form 10-K for the year ended December 31, 1985), together with
the following exhibits:
(a) Exhibit A -- Grant Deed, dated July 25, 1985, by the Commissioner in favor of Zenith
Insurance. (Incorporated herein by reference to Exhibit 10.6 to Zenith's Annual
Report on Form 10-K for the year ended December 31, 1985.)
19
(b) Exhibit B -- Bill of Sale, dated as of July 26, 1985, by the Commissioner in favor
of Zenith Insurance. (Incorporated herein by reference to Exhibit 10.6 to Zenith's
Annual Report on Form 10-K for the year ended December 31, 1985.)
(c) Exhibit C -- Assignment of Assets and Assumption of Liabilities, dated as of July
26, 1985, between the Commissioner and Zenith Insurance. (Incorporated herein by
reference to Exhibit 10.6 to Zenith's Annual Report on Form 10-K for the year ended
December 31, 1985.)
(d) Exhibit D -- Noncompetition Agreement, dated as of July 26, 1985, between the
Commissioner and Zenith Insurance. (Incorporated herein by reference to Exhibit 28.3
to Zenith's Current Report on Form 8-K, date of report July 26, 1985.)
(e) Exhibit E -- First Assignment Separate from Certificate, dated July 26, 1985, by the
Commissioner in favor of Zenith. (Incorporated herein by reference to Exhibit 10.6
to Zenith's Annual Report on Form 10-K for the year ended December 31, 1985.)
(f) Exhibit F -- Engagement and Reimbursement Agreement, dated as of July 26, 1985,
between Zenith Insurance and the Commissioner. (Incorporated herein by reference to
Exhibit 28.2 to Zenith's Current Report on Form 8-K, date of report July 26, 1985.)
*10.4 Zenith's Non-Qualified Stock Option Plan, as in effect immediately prior to December 6,
1985. (Incorporated herein by reference to Zenith's Registration Statement on Form S-8
(SEC File No. 2-97962).)
*10.5 Zenith's Amended and Restated Non-Qualified Stock Option Plan, adopted by Zenith's Board
of Directors on December 6, 1985. (Incorporated herein by reference to Zenith's
Registration Statement on Form S-8
(SEC File No. 33-8948).)
*10.6 Amendment No. 2 to the Zenith National Insurance Corp. Amended and Restated
Non-Qualified Stock Option Plan, dated as of April 9, 1996. (Incorporated herein by
reference to Exhibit 10.4 to Zenith's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1996.)
*10.7 Zenith National Insurance Corp. 1996 Employee Stock Option Plan, approved by the
Stockholders on May 22, 1996. (Incorporated herein by reference to Exhibit 10.5 to
Zenith Quarterly report on Form 10-Q for the quarter ended June 30, 1996.)
*10.8 Employment Agreement, dated December 11, 1997, between Zenith and Fredricka Taubitz.
*10.9 Employment Agreement, dated January 5, 1998, between Zenith and John J. Tickner.
*10.10 Employment Agreement, dated December 11, 1997, between Zenith and Stanley R. Zax.
*10.11 Stock Option Agreement, dated as of March 15, 1996, between Zenith and Stanley R. Zax.
(Incorporated herein by reference to Exhibit 10.3 to Zenith's Quarterly Report on Form
10-Q for the quarter ended June 30, 1996.)
*10.12 Zenith National Insurance Corp. Executive Officer Bonus Plan, dated as of March 21,
1994. (Incorporated herein by reference to Exhibit 10.12 to Zenith's Annual Report on
Form 10-K for the year ended December 31, 1996.)
10.13 Line of Credit Agreement, dated as of December 15, 1994, between Zenith and Sanwa Bank
of California. (Incorporated herein by reference to Exhibit 10.10 to Zenith's Annual
Report on Form 10-K for the year ended December 31, 1994.)
20
10.14 Amendment dated as of December 28, 1995 to Line of Credit Agreement, dated as of
December 15, 1994, between Zenith and Sanwa Bank of California. (Incorporated herein by
reference to Exhibit 10.11 to Zenith's Annual Report on Form 10K for the year ended
December 31, 1995.)
10.15 Second Amendment, dated June 28, 1996, to Line of Credit Agreement, dated December 15,
1994 between Zenith and Sanwa Bank California. (Incorporated by reference to Exhibit
10.2 to Zenith's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996.)
10.16 Third Amendment, effective as of January 2, 1998, to Line of Credit Agreement, dated
December 15, 1994 between Zenith and Sanwa Bank California.
10.17 Agreement of Reinsurance #8051 between General Reinsurance Corporation and Zenith
Insurance Company, ZNAT Insurance Company, Zenith Star Insurance Company and CalFarm
Insurance Company, dated as of May 22, 1995. (Incorporated herein by reference to
Exhibit 10.13 to Zenith's Annual Report on Form 10-K for the year ended December 31,
1995.)
10.18 Workers' Compensation and Employers' Liability Reinsurance Agreement between Zenith
Insurance Company and Employers Reinsurance Corporation, effective January 1, 1986.
(Incorporated herein by reference to Exhibit 10.14 to Zenith's Annual Report on Form
10-K for the year ended December 31, 1991.)
10.19 Agreement of Reinsurance No. 7276 between CalFarm Insurance Company and General
Reinsurance Corporation, dated as of February 5, 1988. (Incorporated herein by reference
to Exhibit 10.15 to Zenith's Annual Report on Form 10-K for the year ended December 31,
1991.)
10.20 Agreement of Reinsurance No. B226 between CalFarm Insurance Company and General
Reinsurance Corporation, dated as of January 13, 1988. (Incorporated herein by reference
to Exhibit 10.16 to Zenith's Annual Report on Form 10-K for the year ended December 31,
1991.)
10.21 Agreement of Reinsurance No. B197-A between CalFarm Insurance Company and General
Reinsurance Corporation, dated as of January 13, 1988. (Incorporated herein by reference
to Exhibit 10.17 to Zenith's Annual Report on Form 10-K for the year ended December 31,
1991.)
10.22 Agreement of Reinsurance No. B196-A between CalFarm Insurance Company and General
Reinsurance Corporation, dated as of January 13, 1988. (Incorporated herein by reference
to Exhibit 10.18 to Zenith's Annual Report on Form 10-K for the year ended December 31,
1991.)
10.23 Life, Disability and Accidental Death Facultive Reinsurance Agreement between CalFarm
Insurance Company and Occidental Life Insurance Company of California, effective April
1, 1971. (Incorporated herein by reference to Exhibit 10.21 to Zenith's Annual Report on
Form 10-K for the year ended December 31, 1991.)
10.24 Agreement of Reinsurance No. 420 among General Reinsurance Corporation, American
Reinsurance Company, Cat Limited, Renaissance Reinsurance Company and Vesta Fire
Insurance Company and CalFarm Insurance, Zenith Insurance and ZNAT Insurance, effective
September 1, 1996. (Incorporated herein by reference to Exhibit 10.23 to Zenith's Annual
Report on Form 10-K for the year ended December 31, 1996.)
10.25 Aggregate Excess of Loss Reinsurance Agreement between Associated General Contractors
Self Insurers Trust Fund and Reliance Insurance Company effective December 31, 1991.
(Incorporated herein by reference to
21
Exhibit 10.24 to Zenith's Annual Report on Form 10-K for the year ended December 31,
1996.)
10.26 Specific Excess Workers' Compensation and Employers' Liability Policy between Planet
Insurance Company (now Reliance National Indemnity Company) and Associated General
Contractors of Florida Self Insurance Fund effective January 1, 1993. (Incorporated
herein by reference to Exhibit 10.25 to Zenith's Annual Report on Form 10-K for the year
ended December 31, 1996.)
10.27 Interim Reinsurance Agreement by and among Zenith Insurance Company, RISCORP Insurance
Company and RISCORP Property & Casualty Insurance Company dated as June 18, 1997,
together with (1) related Trust Agreement by and among RISCORP Insurance Company, as
guarantor, Zenith Insurance Company, as beneficiary, and First Union National Bank, as
trustee, dated as of June 18, 1997 (with amendment no. 1 thereto), and (2) related Trust
Agreement by and among RISCORP Property & Casualty Insurance Company, as guarantor,
Zenith Insurance Company, as beneficiary, and First Union National Bank, as trustee,
dated as of June 18, 1997 (with amendment no. 1 thereto.) (Incorported herein by
reference to Exhibit 10.1 to Zenith's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1997.)
10.28 Revolving Note dated July 1, 1997, from Zenith National Insurance Corp. to City National
Bank. (Incorporated herein by reference to Exhibit 10.2 to Zenith's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1997.)
10.29 Modification of Note dated October 10, 1997 modifying the original Revolving Note dated
July 1, 1997 between Zenith National Insurance Corp. and City National Bank.
(Incorporated herein by reference to Exhibit 10.5 to Zenith's Quarterly Report on Form
10-Q for the quarter ended September 30, 1997.)
10.30 Credit Agreement dated as of July 24, 1997 between Zenith National Insurance Corp. and
Bank of America National Trust and Savings Association, together with Tranche A and
Tranche B Promissory Notes referenced therein. (Incorporated herein by reference to
Exhibit 10.3 to Zenith's Quarterly Report on Form 10-Q for the quarter ended June 30,
1997.)
10.31 Amendment No. 1 to Credit Agreement dated January 21, 1998 amending the original Credit
Agreement dated July 24, 1997 between Zenith National Insurance Corp. and Bank of
America.
10.32 Asset Purchase Agreement, dated as of June 17, 1997, by and among Zenith Insurance
Company and RISCORP, Inc., RISCORP Management Services, Inc., RISCORP of Illinois, Inc.,
Independent Association Administrators Incorporated, RISCORP Insurance Services, Inc.,
RISCORP Managed Care Services, Inc., CompSource, Inc., RISCORP Real Estate Holdings,
Inc., RISCORP Acquisition, Inc., RISCORP West, Inc., RISCORP of Florida, Inc., RISCORP
Insurance Company, RISCORP Property & Casualty Insurance Company, RISCORP National
Insurance Company, RISCORP Services, Inc., RISCORP Staffing Solutions Holding, Inc.,
RISCORP Staffing Solutions, Inc. I and RISCORP Staffing Solutions, Inc. II.
(Incorporated herein by reference to Exhibit 10.1 to Zenith's Current Report on Form
8-K/A, date of report June 17, 1997.)
11 Statements re computation of per share earnings. (Incorporated herein by reference to
Notes to Consolidated Financial Statements -- Note 16 -- "Earnings Per Share" on page 55
of Zenith's 1997 Annual Report to Stockholders.)
13 Zenith's Annual Report to Stockholders for the year ended
December 31, 1997, but only to the extent such report is expressly
22
incorporated by reference herein, and such report is not otherwise to be deemed "filed"
as a part of this Annual Report on Form 10-K.
21 Subsidiaries of Zenith.
23 Consent of Coopers & Lybrand L.L.P., dated March 20, 1998. (Incorporated herein by
reference to page F-1 of this Annual Report on Form 10-K.)
27.1 Financial Data Schedule for year ended December 31, 1997.
27.2 Restated Financial Data Schedule for years ended December 31, 1996 and 1995, and periods
ended March 31, 1996, June 30, 1996, and September 30, 1996.
27.3 Restated Financial Data Schedule for periods ended March 31, 1997, June 30, 1997, and
September 30, 1997.
99.1 Information required by rule 15d-21 under the Securities Exchange Act of 1934 for the
year ended December 31, 1997 for The Zenith 401(k) Plan (to be filed by amendment on
Form 10-K/A within 180 days of December 31, 1997).
- ------------------------
*Management contract or compensatory plan or arrangement
(b)REPORTS ON FORM 8-K
No Reports on Form 8-K were filed by the Registrant for the quarter ended
December 31, 1997.
23
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on March 20, 1998.
ZENITH NATIONAL INSURANCE CORP.
By: /s/ STANLEY R. ZAX
-----------------------------------------
Stanley R. Zax
Chairman of the Board and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated, on March 20, 1998.
/s/ STANLEY R. ZAX
- --------------------------------------------- Chairman of the Board, President and
Stanley R. Zax Director (Principal Executive Officer)
/s/ GEORGE E. BELLO
- --------------------------------------------- Director
George E. Bello
- --------------------------------------------- Director
Max M. Kampelman
/s/ JACK M. OSTROW
- --------------------------------------------- Director
Jack M. Ostrow
/s/ WILLIAM S. SESSIONS
- --------------------------------------------- Director
William S. Sessions
/s/ HARVEY L. SILBERT
- --------------------------------------------- Director
Harvey L. Silbert
/s/ ROBERT M. STEINBERG
- --------------------------------------------- Director
Robert M. Steinberg
/s/ SAUL P. STEINBERG
- --------------------------------------------- Director
Saul P. Steinberg
/s/ GERALD TSAI, JR.
- --------------------------------------------- Director
Gerald Tsai, Jr.
/s/ FREDRICKA TAUBITZ Executive Vice President and Chief Financial
- --------------------------------------------- Officer (Principal Financial and Accounting
Fredricka Taubitz Officer)
24
CONSENT OF INDEPENDENT ACCOUNTANT
We consent to the incorporation by reference in the Registration Statements on
Form S-8 (File Nos. 33-8948, 33-22219 and 333-04399) of our report dated
February 4, 1998 on our audits of the consolidated financial statements and
financial statement schedules of Zenith National Insurance Corp. and
subsidiaries as of December 31, 1997 and 1996, and for each of the three years
in the period ended December 31, 1997, which is included in this Annual Report
on Form 10-K.
COOPERS & LYBRAND L.L.P.
Los Angeles, California
March 20, 1998
F-1
INDEPENDENT ACCOUNTANT'S REPORT
To the Stockholders and Board of Directors
of Zenith National Insurance Corp.
We have audited the consolidated financial statements of Zenith National
Insurance Corp. and subsidiaries as of December 31, 1997 and 1996, and for each
of the three years in the period ended December 31, 1997, which financial
statements are included on pages 38 through 56 of the Company's 1997 Annual
Report to Stockholders and incorporated by reference herein. We have also
audited the financial statement schedules listed in the index on page 18 of this
Form 10-K. These financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedules based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Zenith National
Insurance Corp. and subsidiaries as of December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles. In addition, in our opinion, the financial
statement schedules referred to above, when considered in relation to the basic
financial statements taken as a whole, present fairly, in all material respects,
the information required to be included therein.
COOPERS & LYBRAND L.L.P.
Los Angeles, California
February 4, 1998
F-2
SCHEDULE I -- SUMMARY OF INVESTMENTS --
OTHER THAN INVESTMENTS IN RELATED PARTIES
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
DECEMBER 31, 1997
COLUMN D
COLUMN C ---------------
COLUMN A COLUMN B ---------- AMOUNT AT WHICH
- -------------------------------------------------- ---------- FAIR SHOWN IN THE
TYPE OF INVESTMENT COST(1) VALUE BALANCE SHEET
- -------------------------------------------------- ---------- ---------- ---------------
(DOLLARS IN THOUSANDS)
Fixed maturities
Bonds:
United States Government and government
agencies and authorities.................... $ 243,346 $ 244,921 $ 243,974
Public utilities.............................. 31,088 31,515 31,515
Industrial and miscellaneous.................. 291,245 297,592 297,221
Redeemable preferred stocks..................... 16,040 16,717 16,717
---------- ---------- ---------------
Total fixed maturities.................... 581,719 590,745 589,427
---------- ---------- ---------------
Equity securities
Floating rate preferred stocks.................. 14,614 15,670 15,670
Convertible and nonredeemable preferred
stocks........................................ 6,672 6,602 6,602
Common stocks, industrial....................... 17,790 23,439 23,439
---------- ---------- ---------------
Total equity securities................... 39,076 45,711 45,711
---------- ---------- ---------------
Short-term investments............................ 209,827 209,827 209,827
Other investments................................. 35,008 35,008 35,008
---------- ---------- ---------------
Total investments......................... $ 865,630 $ 881,291 $ 879,973
---------- ---------- ---------------
---------- ---------- ---------------
- ------------------------
(1) Original cost of equity securities and, as to fixed maturities, original
cost reduced by repayments and adjusted for amortization of premiums or
accrual of discounts.
F-3
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
ZENITH NATIONAL INSURANCE CORP.
BALANCE SHEET
ASSETS
DECEMBER 31,
----------------------
(DOLLARS AND SHARES IN THOUSANDS) 1997 1996
--------- ---------
Investments
Bonds, at fair value (cost $9,896, 1996)................................................ $ 9,803
Common stocks, at fair value (cost $676, 1997 and $2,182, 1996)......................... $ 1,088 2,318
Short-term investments (at cost, which approximates fair value)......................... 38,994 30,720
Other invested assets................................................................... 4,736 10,000
Cash...................................................................................... 730 1,463
Investment in subsidiaries (Note A)....................................................... 353,462 334,227
Federal income taxes receivable (Note A).................................................. 154 138
Other assets.............................................................................. 45,041 30,164
--------- ---------
Total assets...................................................................... $ 444,205 $ 418,833
--------- ---------
--------- ---------
LIABILITIES
Senior notes payable, less unamortized discount of $526, 1997 and $647, 1996 (Note B)..... $ 74,474 $ 74,353
Cash dividends payable to stockholders.................................................... 4,222 4,401
Other liabilities......................................................................... 3,643 2,576
--------- ---------
Total liabilities................................................................. 82,339 81,330
--------- ---------
STOCKHOLDERS' EQUITY
Preferred stock, $1 par--shares authorized 1,000; issued and outstanding, none in 1997 and
1996....................................................................................
Common stock, $1 par--shares authorized 50,000; issued 24,681, outstanding 17,819, 1997;
issued 24,447, outstanding 17,604, 1996................................................. 24,681 24,447
Additional paid-in capital................................................................ 264,098 258,875
Retained earnings......................................................................... 186,268 175,684
Net unrealized appreciation on investments, net of deferred tax expense of $5,025, 1997
and $284, 1996.......................................................................... 9,332 528
--------- ---------
484,379 459,534
Less treasury stock at cost (6,862 shares, 1997 and 6,843 shares, 1996)................... (122,513) (122,031)
--------- ---------
Total stockholders' equity........................................................ 361,866 337,503
--------- ---------
Total liabilities and stockholders' equity........................................ $ 444,205 $ 418,833
--------- ---------
--------- ---------
See notes to condensed financial information.
F-4
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
ZENITH NATIONAL INSURANCE CORP.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------
(DOLLARS IN THOUSANDS) 1997 1996 1995
------------ ------------- -------------
Investment income............................................................... $ 1,196 $ 2,697 $ 219
Realized gains (losses) on investments.......................................... (446) 43
------------ ------------- -------------
Total revenues.................................................................. 750 2,697 262
Operating expense............................................................... 3,557 2,970 1,863
Interest expense................................................................ 3,980 4,877 6,960
------------ ------------- -------------
Loss from continuing operations before federal income tax benefit and equity in
income from continuing operations of subsidiaries............................. (6,787) (5,150) (8,561)
Federal income tax benefit...................................................... 2,097 1,845 3,123
------------ ------------- -------------
Loss from continuing operations before equity in income from continuing
operations of subsidiaries.................................................... (4,690) (3,305) (5,438)
Equity in income from continuing operations of subsidiaries (Note A)............ 32,790 40,905 25,160
------------ ------------- -------------
Income from continuing operations............................................... 28,100 37,600 19,722
Loss from discontinued operations (Note C)...................................... (13,122)
------------ ------------- -------------
Net income...................................................................... $ 28,100 $ 37,600 $ 6,600
------------ ------------- -------------
------------ ------------- -------------
See notes to condensed financial information.
F-5
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
ZENITH NATIONAL INSURANCE CORP.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------
(DOLLARS IN THOUSANDS) 1997 1996 1995
------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Investment income received.................................................... $ 903 $ 612 $ 193
Operating expenses paid....................................................... (1,465) (3,651) (1,455)
Interest paid................................................................. (3,648) (4,908) (6,596)
Income taxes (paid) refunded.................................................. 2,505 (616) 3,571
------------- ------------- -------------
Net cash used in continuing operating activities............................ (1,705) (8,563) (4,287)
Net cash used in expenses of discontinued operations.......................... (2,274)
------------- ------------- -------------
Net cash used in operating activities....................................... (1,705) (8,563) (6,561)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments:
Debt and equity securities available-for-sale............................... (19) (11,446)
Other debt and equity securities and other investments...................... (10,000)
Proceeds from sale of securities available-for-sale......................... 11,631
Proceeds from sale of other investments..................................... 5,423
Net change in short-term investments.......................................... (8,274) 55,865 (82,549)
Capital expenditures.......................................................... (11,014)
Other......................................................................... 469 (3,151)
Proceeds from the sale of CalFarm Life........................................ 120,000
------------- ------------- -------------
Net cash provided by (used in) investing activities......................... (1,784) 31,268 37,451
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash received from bank line of credit........................................ 43,400
Cash paid on bank line of credit.............................................. (43,400)
Cash dividends paid to common stockholders.................................... (17,695) (17,605) (18,273)
Proceeds from exercise of stock options....................................... 4,940 2,572 4,405
Purchase of treasury shares................................................... (482) (7,611) (29,318)
Dividends received from subsidiaries.......................................... 22,750 15,000 10,500
Net cash from (to) subsidiary................................................. (6,757) (14,594) 458
------------- ------------- -------------
Net cash provided by (used in) financing activities......................... 2,756 (22,238) (32,228)
Net increase (decrease) in cash................................................. (733) 467 (1,338)
Cash at beginning of year....................................................... 1,463 996 2,334
------------- ------------- -------------
Cash at end of year............................................................. $ 730 $ 1,463 $ 996
------------- ------------- -------------
------------- ------------- -------------
RECONCILIATION OF INCOME FROM CONTINUING OPERATIONS TO NET CASH FLOWS FROM
OPERATING ACTIVITIES:
Income from continuing operations............................................. 28,100 $ 37,600 $ 19,722
Income from continuing operations of subsidiaries............................. (32,790) (40,905) (25,160)
Cash flow from expenses of discontinued operations............................ (2,274)
Federal income taxes.......................................................... 371 (2,461) 511
Other......................................................................... 2,614 (2,797) 640
------------- ------------- -------------
Net cash used in operating activities....................................... $ (1,705) $ (8,563) $ (6,561)
------------- ------------- -------------
------------- ------------- -------------
See notes to condensed financial information.
F-6
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
ZENITH NATIONAL INSURANCE CORP.
NOTES TO CONDENSED FINANCIAL INFORMATION
The accompanying condensed financial statements should be read in
conjunction with the consolidated financial statements and notes thereto of
Zenith National Insurance Corp. (Zenith) and subsidiaries.
A. Investment In Subsidiaries:
Zenith owns, directly or indirectly, 100% of the outstanding stock of
Zenith Insurance Company, CalFarm Insurance Company, ZNAT Insurance Company,
ZIC of Florida, Zenith Star Insurance Company (a Texas company) and
Perma-Bilt, a Nevada Corporation. These investments are included in the
financial statements on the equity basis of accounting. Temporary advances
in the ordinary course of business are included in other assets. The excess
of cost over net assets acquired of $2,009,000 represents the unamortized
excess of cost over underlying net tangible assets of companies acquired
prior to 1970, which is considered to have continuing value.
Zenith partially funds the cash flow requirements of its real estate
construction subsidiary. Intercompany interest charges to such subsidiary
reduce Zenith's interest expense.
Zenith files a consolidated federal income tax return. The equity in the
income from continuing operations of subsidiaries of $32,790,000 in 1997,
$40,905,000 in 1996 and $25,160,000 in 1995 is net of a provision for
federal income tax expense of $17,475,000 in 1997, $21,362,000 in 1996, and
$12,823,000 in 1995. Zenith has formulated tax allocation procedures with
its subsidiaries and the 1997, 1996 and 1995 condensed financial information
reflect Zenith's portion of the consolidated taxes.
Zenith Insurance Company paid dividends to Zenith of $22,750,000 in
1997, $15,000,000 in 1996 and $10,000,000 in 1995. CalFarm Life Insurance
paid a dividend to Zenith of $500,000 prior to its sale in the fourth
quarter of 1995.
B. Senior Notes Payable
Zenith issued $75,000,000 of 9% Senior Notes due 2002 (the "9% Notes")
at par in May 1992. Interest on the 9% Note is payable semi-annually. The 9%
Notes are general unsecured obligations of Zenith.
C. Discontinued Operations:
During 1995, Zenith completed the sale of its wholly-owned subsidiary,
CalFarm Life Insurance Company ("CalFarm Life"), to a subsidiary of
SunAmerica Inc. for approximately $120 million in cash. The group health
insurance business of CalFarm Life was retained by Zenith. The sale resulted
in a loss of approximately $19.5 million, after taxes. The life and annuity
operations of CalFarm Life are presented as discontinued operations.
F-7
SCHEDULE III -- SUPPLEMENTARY INSURANCE INFORMATION
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
COLUMN C
-----------
FUTURE COLUMN E
COLUMN B POLICY -----------
----------- BENEFITS, OTHER COLUMN G
DEFERRED LOSSES, COLUMN D POLICY COLUMN F -----------
COLUMN A POLICY CLAIMS ----------- CLAIMS AND ----------- NET
- ------------------------------ ACQUISITION AND LOSS UNEARNED BENEFITS PREMIUM INVESTMENT
SEGMENT COSTS EXPENSES PREMIUMS PAYABLE REVENUE INCOME
- ------------------------------ ----------- ----------- ----------- ----------- ----------- -----------
(AMOUNTS IN THOUSANDS)
1997
- ------------------------------
Property and Casualty
Workers' compensation....... $ 4,034 $ 339,215 $ 25,229 $ 242,064
Other property-casualty..... 15,575 109,003 95,636 214,406
Reinsurance................. 1,231 77,383 7,604 32,251
----------- ----------- ----------- ----------- ----------- -----------
20,840 525,601 128,469 488,721 $ 51,136
Reinsurance ceded............. 87,665
Registrant.................... 1,196
----------- ----------- ----------- ----------- ----------- -----------
Total....................... $ 20,840 $ 613,266 $ 128,469 $ -- $ 488,721 $ 52,332
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
1996
- ------------------------------
Property and Casualty
Workers' compensation....... $ 4,870 $ 329,670 $ 28,330 $ 210,916
Other property-casualty..... 14,422 108,899 88,884 204,778
Reinsurance................. 1,460 87,858 9,995 37,162
----------- ----------- ----------- ----------- ----------- -----------
20,752 526,427 127,209 452,856 $ 48,457
Reinsurance ceded............. 93,651
Registrant.................... 2,697
----------- ----------- ----------- ----------- ----------- -----------
Total....................... $ 20,752 $ 620,078 $ 127,209 $ -- $ 452,856 $ 51,154
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
1995
- ------------------------------
Property and Casualty
Workers' compensation....... $ 5,001 $ 262,738 $ 28,644 $ 203,252
Other property-casualty..... 13,802 107,995 78,760 192,276
Reinsurance................. 1,536 92,390 12,187 41,985
----------- ----------- ----------- ----------- ----------- -----------
20,339 463,123 119,591 437,513 $ 45,931
Reinsurance ceded............. 54,429
Registrant.................... 219
----------- ----------- ----------- ----------- ----------- -----------
Total....................... $ 20,339 $ 517,552 $ 119,591 $ -- $ 437,513 $ 46,150
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
COLUMN H COLUMN I
----------- -----------
BENEFITS, AMORTIZATION COLUMN J
CLAIMS, OF DEFERRED ----------- COLUMN K
COLUMN A LOSSES AND POLICY OTHER -----------
- ------------------------------ SETTLEMENT ACQUISITION OPERATING PREMIUMS
SEGMENT EXPENSES COSTS EXPENSES WRITTEN
- ------------------------------ ----------- ----------- ----------- -----------
(AMOUNTS IN THOUSANDS)
1997
- ------------------------------
Property and Casualty
Workers' compensation....... $ 197,450 $ 41,225 $ 40,188 $ 238,963
Other property-casualty..... 139,832 44,514 23,551 218,370
Reinsurance................. 10,883 6,474 707 29,780
----------- ----------- ----------- -----------
348,165 92,213 64,446 487,113
Reinsurance ceded.............
Registrant.................... 3,557
----------- ----------- ----------- -----------
Total....................... $ 348,165 $ 92,213 $ 68,003 $ 487,113
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
1996
- ------------------------------
Property and Casualty
Workers' compensation....... $ 159,047 $ 35,921 $ 32,704 $ 210,603
Other property-casualty..... 137,423 43,247 16,031 212,399
Reinsurance................. 18,230 4,925 1,709 35,059
----------- ----------- ----------- -----------
314,700 84,093 50,444 458,061
Reinsurance ceded.............
Registrant.................... 2,969
----------- ----------- ----------- -----------
Total....................... $ 314,700 $ 84,093 $ 53,413 $ 458,061
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
1995
- ------------------------------
Property and Casualty
Workers' compensation....... $ 153,692 $ 36,358 $ 22,090 $ 197,773
Other property-casualty..... 149,797 39,621 14,865 198,676
Reinsurance................. 22,100 5,867 1,063 43,433
----------- ----------- ----------- -----------
325,589 81,846 38,018 439,882
Reinsurance ceded.............
Registrant.................... 1,863
----------- ----------- ----------- -----------
Total....................... $ 325,589 $ 81,846 $ 39,881 $ 439,882
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
F-8
SCHEDULE IV -- REINSURANCE
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
COLUMN F
COLUMN C COLUMN D ----------
COLUMN B ------------ ----------- PERCENTAGE
COLUMN A -------------- CEDED TO ASSUMED COLUMN E OF AMOUNT
- ------------------------------------------------------- GROSS OTHER FROM OTHER -------------- ASSUMED
(AMOUNTS IN THOUSANDS) AMOUNT COMPANIES COMPANIES NET AMOUNT TO NET
-------------- ------------ ----------- -------------- ----------
DECEMBER 31, 1997
Premiums earned........................................ $ 477,527 $ 26,191 $ 37,385 $ 488,721 7.6%
-------------- ------------ ----------- -------------- ----------
-------------- ------------ ----------- -------------- ----------
DECEMBER 31, 1996
Premiums earned........................................ $ 435,568 $ 24,642 $ 41,930 $ 452,856 9.3%
-------------- ------------ ----------- -------------- ----------
-------------- ------------ ----------- -------------- ----------
DECEMBER 31, 1995
Premiums earned........................................ $ 413,258 $ 21,112 $ 45,367 $ 437,513 10.4%
-------------- ------------ ----------- -------------- ----------
-------------- ------------ ----------- -------------- ----------
F-9
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
2.1 Amended and Restated Agreement and Plan of Merger by and among Zenith AGC Acquisition Insurance
Company, Zenith Insurance Company, Zenith National Insurance Corp., Associated General Commerce
Self-Insurers' Trust Fund and AGC Risk Management Group Inc. dated as of October 7, 1996.
(Incorporated herein by reference to Exhibit 2.1 to Zenith's Annual Report on Form 10-K for the year
ended December 31, 1996.)
2.2 Stock Acquisition Agreement, dated as of September 19, 1995, between Anchor National Life Insurance
Company and Zenith National Insurance Corp. (Incorporated herein by reference to Exhibit 2.1 to
Zenith's Report on Form 8-K dated October 6, 1995.)
2.3 Amendment No. 1 to Stock Acquisition Agreement dated as of December 27, 1995, by and among Anchor
National Life Insurance Company, SunAmerica Life Insurance Company and Zenith National Insurance
Corp. (Incorporated herein by reference to Exhibit 2.1 to Zenith's Report on Form 8-K dated January
9, 1996.)
3.1 Certificate of Incorporation of Zenith as in effect immediately prior to November 22, 1985.
(Incorporated herein by reference to Exhibit 3 to Zenith's Amendment on Form 8, date of amendment
October 10, 1985, to Zenith's Current Report on Form 8-K, date of report July 26, 1985.) Certificate
of Amendment to Certificate of Incorporation of Zenith, effective November 22, 1985. (Incorporated
herein by reference to Zenith's Current Report on Form 8-K, date of report November 22, 1985.)
3.2 By-Laws of Zenith, as currently in effect. (Incorporated herein by reference to Exhibit 3.2 to
Zenith's Annual Report on Form 10-K for the year ended December 31, 1988.)
4.1 Indenture dated as of May 1, 1992 entered into between Zenith and Norwest Bank Minnesota, National
Association, as trustee, pursuant to which Zenith issued its 9% Senior Notes due May 1, 2002.
(Incorporated herein by reference to Exhibit 4 to Zenith's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1992.)
10.1 Purchase Agreement, dated as of February 4, 1981, among Reliance Insurance Company, Zenith, the
Selling Stockholders referred to therein, and Eugene V. Klein, Daniel Schwartz and Harvey L. Silbert
as agents for the Selling Stockholders. (Incorporated herein by reference to the exhibit to the
Schedule 13D filed by Reliance Financial Services Corporation on March 9, 1981 with respect to the
common stock of Zenith.)
10.2 Asset and Liability Assumption Agreement, dated as of June 4, 1985, between Zenith Insurance and the
Insurance Commissioner of the State of California (the "Commissioner"). (Incorporated herein by
reference to Exhibit 1 to Zenith's Current Report on Form 8-K, date of report July 26, 1985.)
10.3 Memorandum and Agreement of Closing dated as of July 26, 1985, among Zenith Insurance, Zenith and the
Commissioner (Incorporated herein by reference to Exhibit 10.6 to Zenith's Annual Report on Form 10-K
for the year ended December 31, 1985), together with the following exhibits:
(a) Exhibit A -- Grant Deed, dated July 25, 1985, by the Commissioner in favor of Zenith Insurance.
(Incorporated herein by reference to Exhibit 10.6 to Zenith's Annual Report on Form 10-K for the
year ended December 31, 1985.)
(b) Exhibit B -- Bill of Sale, dated as of July 26, 1985, by the Commissioner in favor of Zenith
Insurance. (Incorporated herein by reference to Exhibit 10.6 to Zenith's Annual Report on Form
10-K for the year ended December 31, 1985.)
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
(c) Exhibit C -- Assignment of Assets and Assumption of Liabilities, dated as of July 26, 1985,
between the Commissioner and Zenith Insurance. (Incorporated herein by reference to Exhibit 10.6
to Zenith's Annual Report on Form 10-K for the year ended December 31, 1985.)
(d) Exhibit D -- Noncompetition Agreement, dated as of July 26, 1985, between the Commissioner and
Zenith Insurance. (Incorporated herein by reference to Exhibit 28.3 to Zenith's Current Report on
Form 8-K, date of report July 26, 1985.)
(e) Exhibit E -- First Assignment Separate from Certificate, dated July 26, 1985, by the Commissioner
in favor of Zenith. (Incorporated herein by reference to Exhibit 10.6 to Zenith's Annual Report
on Form 10-K for the year ended December 31, 1985.)
(f) Exhibit F -- Engagement and Reimbursement Agreement, dated as of July 26, 1985, between Zenith
Insurance and the Commissioner. (Incorporated herein by reference to Exhibit 28.2 to Zenith's
Current Report on Form 8-K, date of report July 26, 1985.)
*10.4 Zenith's Non-Qualified Stock Option Plan, as in effect immediately prior to December 6, 1985.
(Incorporated herein by reference to Zenith's Registration Statement on Form S-8 (SEC File No.
2-97962).)
*10.5 Zenith's Amended and Restated Non-Qualified Stock Option Plan, adopted by Zenith's Board of Directors
on December 6, 1985. (Incorporated herein by reference to Zenith's Registration Statement on Form S-8
(SEC File No. 33-8948).)
*10.6 Amendment No. 2 to the Zenith National Insurance Corp. Amended and Restated Non-Qualified Stock
Option Plan, dated as of April 9, 1996. (Incorporated herein by reference to Exhibit 10.4 to Zenith's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1996.)
*10.7 Zenith National Insurance Corp. 1996 Employee Stock Option Plan, approved by the Stockholders on May
22, 1996. (Incorporated herein by reference to Exhibit 10.5 to Zenith Quarterly report on Form 10-Q
for the quarter ended June 30, 1996.)
*10.8 Employment Agreement, dated December 11, 1997, between Zenith and Fredricka Taubitz.
*10.9 Employment Agreement, dated January 5, 1998, between Zenith and John J. Tickner.
*10.10 Employment Agreement, dated December 11, 1997, between Zenith and Stanley R. Zax.
*10.11 Stock Option Agreement, dated as of March 15, 1996, between Zenith and Stanley R. Zax. (Incorporated
herein by reference to Exhibit 10.3 to Zenith's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1996.)
*10.12 Zenith National Insurance Corp. Executive Officer Bonus Plan, dated as of March 21, 1994.
(Incorporated herein by reference to Exhibit 10.12 to Zenith's Annual Report on Form 10-K for the
year ended December 31, 1996.)
10.13 Line of Credit Agreement, dated as of December 15, 1994, between Zenith and Sanwa Bank of California.
(Incorporated herein by reference to Exhibit 10.10 to Zenith's Annual Report on Form 10-K for the
year ended December 31, 1994.)
10.14 Amendment dated as of December 28, 1995 to Line of Credit Agreement, dated as of December 15, 1994,
between Zenith and Sanwa Bank of California. (Incorporated herein by reference to Exhibit 10.11 to
Zenith's Annual Report on Form 10K for the year ended December 31, 1995.)
10.15 Second Amendment, dated June 28, 1996, to Line of Credit Agreement, dated December 15, 1994 between
Zenith and Sanwa Bank California. (Incorporated by reference to Exhibit 10.2 to Zenith's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1996.)
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
10.16 Third Amendment, dated January 2, 1998, to Line of Credit Agreement, dated December 15, 1994 between
Zenith and Sanwa Bank California.
10.17 Agreement of Reinsurance #8051 between General Reinsurance Corporation and Zenith Insurance Company,
ZNAT Insurance Company, Zenith Star Insurance Company and CalFarm Insurance Company, dated as of May
22, 1995. (Incorporated herein by reference to Exhibit 10.13 to Zenith's Annual Report on Form 10-K
for the year ended December 31, 1995.)
10.18 Workers' Compensation and Employers' Liability Reinsurance Agreement between Zenith Insurance Company
and Employers Reinsurance Corporation, effective January 1, 1986. (Incorporated herein by reference
to Exhibit 10.14 to Zenith's Annual Report on Form 10-K for the year ended December 31, 1991.)
10.19 Agreement of Reinsurance No. 7276 between CalFarm Insurance Company and General Reinsurance
Corporation, dated as of February 5, 1988. (Incorporated herein by reference to Exhibit 10.15 to
Zenith's Annual Report on Form 10-K for the year ended December 31, 1991.)
10.20 Agreement of Reinsurance No. B226 between CalFarm Insurance Company and General Reinsurance
Corporation, dated as of January 13, 1988. (Incorporated herein by reference to Exhibit 10.16 to
Zenith's Annual Report on Form 10-K for the year ended December 31, 1991.)
10.21 Agreement of Reinsurance No. B197-A between CalFarm Insurance Company and General Reinsurance
Corporation, dated as of January 13, 1988. (Incorporated herein by reference to Exhibit 10.17 to
Zenith's Annual Report on Form 10-K for the year ended December 31, 1991.)
10.22 Agreement of Reinsurance No. B196-A between CalFarm Insurance Company and General Reinsurance
Corporation, dated as of January 13, 1988. (Incorporated herein by reference to Exhibit 10.18 to
Zenith's Annual Report on Form 10-K for the year ended December 31, 1991.)
10.23 Life, Disability and Accidental Death Facultive Reinsurance Agreement between CalFarm Insurance
Company and Occidental Life Insurance Company of California, effective April 1, 1971. (Incorporated
herein by reference to Exhibit 10.21 to Zenith's Annual Report on Form 10-K for the year ended
December 31, 1991.)
10.24 Agreement of Reinsurance No. 420 among General Reinsurance Corporation, American Reinsurance Company,
Cat Limited, Renaissance Reinsurance Company and Vesta Fire Insurance Company and CalFarm Insurance,
Zenith Insurance and ZNAT Insurance, effective September 1, 1996. (Incorporated herein by reference
to Exhibit 10.23 to Zenith's Annual Report on Form 10-K for the year ended December 31, 1996.)
10.25 Aggregate Excess of Loss Reinsurance Agreement between Associated General Contractors Self Insurers
Trust Fund and Reliance Insurance Company effective December 31, 1991. (Incorporated herein by
reference to Exhibit 10.24 to Zenith's Annual Report on Form 10-K for the year ended December 31,
1996.)
10.26 Specific Excess Workers' Compensation and Employers' Liability Policy between Planet Insurance
Company (now Reliance National Indemnity Company) and Associated General Contractors of Florida Self
Insurance Fund effective January 1, 1993. (Incorporated herein by reference to Exhibit 10.25 to
Zenith's Annual Report on Form 10-K for the year ended December 31, 1996.)
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
10.27 Interim Reinsurance Agreement by and among Zenith Insurance Company, RISCORP Insurance Company and
RISCORP Property & Casualty Insurance Company dated as June 18, 1997, together with (1) related Trust
Agreement by and among RISCORP Insurance Company, as guarantor, Zenith Insurance Company, as
beneficiary, and First Union National Bank, as trustee, dated as of June 18, 1997 (with amendment no.
1 thereto), and (2) related Trust Agreement by and among RISCORP Property & Casualty Insurance
Company, as guarantor, Zenith Insurance Company, as beneficiary, and First Union National Bank, as
trustee, dated as of June 18, 1997 (with amendment no. 1 thereto). (Incorported herein by reference
to Exhibit 10.1 to Zenith's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.)
10.28 Revolving Note dated July 1, 1997, from Zenith National Insurance Corp. to City National Bank.
(Incorporated herein by reference to Exhibit 10.2 to Zenith's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997.)
10.29 Modification of Note dated October 10, 1997 modifying the original Revolving Note dated July 1, 1997
between Zenith National Insurance Corp. and City National Bank. (Incorporated herein by reference to
Exhibit 10.5 to Zenith's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997.)
10.30 Credit Agreement dated as of July 24, 1997 between Zenith National Insurance Corp. and Bank of
America National Trust and Savings Association, together with Tranche A and Tranche B Promissory
Notes referenced therein. (Incorporated herein by reference to Exhibit 10.3 to Zenith's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1997.)
10.31 Amendment No. 1 to Credit Agreement dated January 21, 1998 amending the original Credit Agreement
dated July 24, 1997 between Zenith National Insurance Corp. and Bank of America.
10.32 Asset Purchase Agreement, dated as of June 17, 1997, by and among Zenith Insurance Company and
RISCORP, Inc., RISCORP Management Services, Inc., RISCORP of Illinois, Inc., Independent Association
Administrators Incorporated, RISCORP Insurance Services, Inc., RISCORP Managed Care Services, Inc.,
CompSource, Inc., RISCORP Real Estate Holdings, Inc., RISCORP Acquisition, Inc., RISCORP West, Inc.,
RISCORP of Florida, Inc., RISCORP Insurance Company, RISCORP Property & Casualty Insurance Company,
RISCORP National Insurance Company, RISCORP Services, Inc., RISCORP Staffing Solutions Holding, Inc.,
RISCORP Staffing Solutions, Inc. I and RISCORP Staffing Solutions, Inc. II. (Incorporated herein by
reference to Exhibit 10.1 to Zenith's Current Report on Form 8-K/A, date of report June 17, 1997.)
11 Statements re computation of per share earnings. (Incorporated herein by reference to Notes to
Consolidated Financial Statements -- Note 16 -- "Earnings Per Share" on page 55 of Zenith's 1997
Annual Report to Stockholders.)
13 Zenith's Annual Report to Stockholders for the year ended
December 31, 1997, but only to the extent such report is expressly incorporated by reference herein,
and such report is not otherwise to be deemed "filed" as a part of this Annual Report on Form 10-K.
21 Subsidiaries of Zenith.
23 Consent of Coopers & Lybrand L.L.P., dated March 20, 1998. (Incorporated herein by reference to page
F-1 of this Annual Report on Form 10-K.)
27.1 Financial Data Schedule for year ended December 31, 1997.
27.2 Restated Financial Data Schedule for years ended December 31, 1996 and 1995, and periods ended March
31, 1996, June 30, 1996, and September 30, 1996.
27.3 Restated Financial Data Schedule for periods ended March 31, 1997, June 30, 1997, and September 30,
1997.
EXHIBIT NO. DESCRIPTION
- ----------- -----------------------------------------------------------------------------------------------------
99.1 Information required by rule 15d-21 under the Securities Exchange Act of 1934 for the year ended
December 31, 1997 for The Zenith 401(k) Plan (to be filed by amendment on Form 10-K/A within 180 days
of December 31, 1997).
- ------------------------
*Management contract or compensatory plan or arrangement