ANNUAL REPORT
1997
ZENITH NATIONAL INSURANCE CORP.
CalFarm
The Zenith
INSURANCE PRODUCTS AND SERVICES
AUTOMOBILE
.
BUSINESS
.
EARTHQUAKE
.
FARMOWNERS
.
HEALTH
.
HOMEOWNERS
.
REINSURANCE
.
SINGLEPOINT
INTEGRATED 24-HOUR
HEALTH & DISABILITY
.
WORKERS' COMPENSATION
CalFarm
The Zenith
CONTENTS
FINANCIAL HIGHLIGHTS..................................................................... 3
LETTER TO STOCKHOLDERS................................................................... 4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS........................................ 24
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL INFORMATION...................................... 34
PROPERTY-CASUALTY LOSS DEVELOPMENT....................................................... 36
CONSOLIDATED BALANCE SHEET............................................................... 38
CONSOLIDATED STATEMENT OF OPERATIONS..................................................... 40
CONSOLIDATED STATEMENT OF CASH FLOWS..................................................... 41
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY........................................... 42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS............................................... 44
INDEPENDENT ACCOUNTANT'S REPORT.......................................................... 57
CORPORATE DIRECTORY
ZENITH NATIONAL INSURANCE CORP....................................................... 59
ZENITH INSURANCE COMPANY............................................................. 60
CALFARM INSURANCE COMPANY............................................................ 61
CALFARM INSURANCE AGENCY............................................................. 62
PERMA-BILT, A NEVADA CORPORATION..................................................... 62
CalFarm
2 The Zenith
FINANCIAL HIGHLIGHTS
OPERATING RESULTS
PER SHARE DATA
KEY STATISTICS 1997 1996 1995
- -------------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
OPERATING RESULTS
CONSOLIDATED REVENUES $660,480 $556,371 $519,020
INCOME FROM CONTINUING OPERATIONS AFTER
TAXES AND BEFORE REALIZED GAINS 19,669 30,575 17,368
REALIZED GAINS ON INVESTMENTS AFTER TAXES 8,431 7,025 2,354
INCOME FROM CONTINUING OPERATIONS
AFTER TAXES 28,100 37,600 19,722
NET INCOME 28,100 37,600 6,600
PER SHARE DATA
INCOME FROM CONTINUING OPERATIONS AFTER
TAXES AND BEFORE REALIZED GAINS* 1.10 1.72 .95
REALIZED GAINS ON INVESTMENTS AFTER TAXES* .47 .40 .13
INCOME FROM CONTINUING OPERATIONS* 1.57 2.12 1.08
NET INCOME* 1.57 2.12 .36
STOCKHOLDERS' DIVIDENDS 1.00 1.00 1.00
KEY STATISTICS
COMBINED RATIO
INCLUDING CATASTROPHES 103.4% 99.8% 103.1%
EXCLUDING CATASTROPHES 103.1% 99.8% 100.0%
STATUTORY RISK-BASED CAPITAL RATIO** 332% 364% 377%
STOCKHOLDERS' EQUITY $361,866 $337,503 $330,432
STOCKHOLDERS' EQUITY PER SHARE*** $ 20.31 $ 19.17 $ 18.58
CLOSING COMMON STOCK PRICE $ 25 3/4 $ 27 3/8 $ 21 3/8
- -------------------------------------------------------------------------------------
*1997 amounts are presented on a diluted basis. 1996 and 1995 amounts are
presented on a diluted basis and have been restated as required to comply with
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("SFAS No. 128"). For further discussion of earnings per share and the impact
of SFAS No. 128, see Notes 1 and 16 to the consolidated financial statements
on pages 46 and 55.
**The computation of statutory risk-based capital in 1996 compared to 1995 is
different because of phase-in adjustments in the prescribed calculation. On a
comparable basis, the risk-based capital ratio in 1995 was 339%.
***Excluding the effect of Statement of Financial Accounting Standards No. 115,
stockholders' equity per share was $20.03, $19.28 and $18.18 in 1997, 1996,
and 1995, respectively.
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The Zenith 3
TO OUR STOCKHOLDERS
DESPITE SOME SIGNIFICANT ACHIEVEMENTS WITH LONG-TERM POTENTIAL BENEFITS, AND
EXCELLENT RESULTS IN SEVERAL AREAS OF OUR OPERATIONS, 1997 EARNINGS PER SHARE
DECLINED 25.9% FROM 1996 DUE PRIMARILY TO OUR WORKERS' COMPENSATION PERFORMANCE
IN CALIFORNIA.
KEY ACHIEVEMENTS
1. INCREASED INVESTMENT INCOME AND REALIZED GAINS ON INVESTMENTS.
2. FAVORABLE PERFORMANCE FROM OUR CALFARM, REINSURANCE AND PERMA-BILT
BUSINESSES.
3. SENIOR MANAGEMENT ADDITIONS AND ORGANIZATIONAL REFINEMENTS IN OUR WORKERS'
COMPENSATION DIVISION, INCLUDING A 10% WORKFORCE REDUCTION IN CALIFORNIA.
4. CONTINUING NATIONAL DIVERSIFICATION OF OUR WORKERS' COMPENSATION OPERATIONS,
WITH ABOUT 46% OF WORKERS' COMPENSATION PREMIUMS EARNED FROM OPERATIONS
CONDUCTED OUTSIDE CALIFORNIA.
5. PENDING RISCORP ACQUISITION TO BOLSTER OUR SOUTHEASTERN WORKERS' COMPENSATION
MARKETS IN CONJUNCTION WITH THE 1996 ACQUISITION OF AGC-SIF IN FLORIDA.
SUMMARY OF FINANCIAL HIGHLIGHTS
/ / INCOME FROM CONTINUING OPERATIONS AFTER TAXES AND BEFORE NET REALIZED GAINS
ON INVESTMENTS WAS $19,669,000, OR $1.10 PER SHARE, COMPARED TO $30,575,000,
OR $1.72 PER SHARE, IN 1996.
/ / INVESTMENT INCOME AFTER TAXES WAS $34,655,000, OR $1.94 PER SHARE, COMPARED
TO $34,069,000, OR $1.92 PER SHARE, IN 1996.
/ / NET INCOME WAS $28,100,000, OR $1.57 PER SHARE, COMPARED TO $37,600,000, OR
$2.12 PER SHARE, IN 1996.
/ / REALIZED GAINS ON INVESTMENTS AFTER TAXES WERE $8,431,000, OR $.47 PER
SHARE, COMPARED TO $7,025,000, OR $.40 PER SHARE, IN 1996. UNREALIZED GAINS
ON FIXED MATURITIES AFTER TAXES WERE $5,890,000, COMPARED TO AN AFTER TAXES
UNREALIZED LOSS OF $2,123,000, IN 1996.
/ / COMBINED RATIO FOR THE PROPERTY-CASUALTY OPERATIONS WAS 103.4%, COMPARED TO
99.8%, IN 1996.
/ / BOOK VALUE PER SHARE AT 1997 YEAR-END WAS $20.31, COMPARED TO $19.17, AT
1996 YEAR-END.
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4 The Zenith
93 94 95 96 97
STOCKHOLDERS' EQUITY PER SHARE
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
$18.55 $16.35 $18.58 $19.17 $20.31
WE CONTINUE TO FOCUS ON EDUCATION AND LEADERSHIP TRAINING FOR OUR MANAGEMENT
AND EMPLOYEES TO POSITION ZENITH FOR THE STRONG ORGANIZATIONAL FOOTING REQUIRED
TO FACE THE COMPETITIVE AND COMPLEX CHALLENGES AHEAD. AT THE SAME TIME, WE HAVE
STRENGTHENED OUR WORKERS' COMPENSATION MANAGEMENT TEAM WITH PROVEN AND
EXPERIENCED PROFESSIONALS.
AS A STOCKHOLDER-ORIENTED COMPANY, WE ARE MINDFUL THAT OUR COMMON STOCK
UNDER-PERFORMED IN THE 1997 MARKET AND WE ARE COMMITTED TO TAKING THE NECESSARY
STEPS TO IMPROVE STOCKHOLDER VALUE. TO THIS END, WE REPURCHASED ABOUT 5% OF OUR
OUTSTANDING SHARES IN THE FIRST FEW TRADING DAYS OF 1998.
ANALYSIS
OPERATING EARNINGS CONSIST OF INVESTMENT INCOME AND INSURANCE UNDERWRITING
RESULTS; THE FOLLOWING TABLE SUMMARIZES PRE-TAX UNDERWRITING PERFORMANCE DURING
THE PAST THREE YEARS:
- ---------------------------------------------------------------------------------
UNDERWRITING RESULTS 1997 1996 1995
- ---------------------------------------------------------------------------------
(Dollars in thousands)
WORKERS' COMPENSATION $ (37,157) $ (19,462) $ (14,548)
OTHER PROPERTY-CASUALTY 6,509 8,076 (12,007)
REINSURANCE 14,189 12,479 12,955
- ---------------------------------------------------------------------------------
UNDERWRITING INCOME (LOSS) $ (16,459) $ 1,093 $ (13,600)
- ---------------------------------------------------------------------------------
OUR RESULTS WERE SIGNIFICANTLY BELOW OUR GOALS, DUE ENTIRELY TO CONTINUED
DECLINES IN THE WORKERS' COMPENSATION OPERATIONS. THE COMBINED RATIO FOR
WORKERS' COMPENSATION OF 115.3% WAS COMPOSED OF A 57.3% LOSS RATIO FOR THE 1997
ACCIDENT YEAR, A 53.1% LOSS ADJUSTMENT AND UNDERWRITING EXPENSE RATIO, AND 4.9%
STRENGTHENING FOR THE 1995 AND 1996 ACCIDENT YEARS LOSS AND LOSS ADJUSTMENT
EXPENSE RESERVES. THE EXPENSE RATIO REFLECTS THE LARGE DROP IN THE CALIFORNIA
PREMIUM LEVEL SINCE OPEN RATING COMMENCED IN 1995, AND WE CONTINUE TO WORK TO
BRING OUR
CalFarm
The Zenith 5
PROPERTY-CASUALTY COMBINED RATIO [CHART]
EXPENSES IN LINE WITH OUR CURRENT PREMIUM LEVEL. HOWEVER, OUR ULTIMATE LOSS
RATIOS, EVEN AFTER THE STRENGTHENING FOR THE 1995 AND 1996 YEARS, AND HIGHER
INITIAL RESERVES IN THE 1997 YEAR, ARE STILL QUITE ACCEPTABLE. SINCE THE
BEGINNING OF OPEN RATING, OUR CALIFORNIA LOSS RATIO HAS AVERAGED 61%, WHILE THE
ENTIRE CALIFORNIA INDUSTRY HAS AVERAGED APPROXIMATELY 82%. THIS 21 POINT
ADVANTAGE IS CONSISTENT WITH OUR RELATIVE RESULTS PRIOR TO OPEN RATING.
EXPANSION OF OUR WORKERS' COMPENSATION OPERATIONS OUTSIDE OF CALIFORNIA
CONTINUES TO BE A PRIMARY MISSION WITH THE 1996 ACQUISITION OF AGC-SIF IN
FLORIDA AND THE PENDING ACQUISITION OF RISCORP. ZENITH IS APPROACHING THE TIME
WHEN OUR NON-CALIFORNIA PREMIUMS WILL APPROXIMATE OR EXCEED OUR CALIFORNIA
BUSINESS. DESPITE THE INCREASING COMPETITIVENESS OF MANY STATE MARKETS, WE HAVE
BEEN ABLE TO GROW AT A REASONABLE COST. WE ESTIMATE OUR 1997 ACCIDENT YEAR LOSS
RATIO FOR ALL STATES OUTSIDE OF CALIFORNIA IS 54.0%.
OUR REINSURANCE OPERATIONS HAD ANOTHER SUCCESSFUL YEAR, THEIR FIFTH
CONSECUTIVE. FURTHERMORE, WE CONDUCTED A DETAILED REVIEW OF THE RUNOFF FOR
TREATIES 10 YEARS OR OLDER AND DETERMINED THAT OUR HELD RESERVES WERE MODESTLY
REDUNDANT AND HAVE REDUCED RESERVES FOR INCURRED BUT NOT REPORTED LOSSES BY
APPROXIMATELY $4 MILLION. HOWEVER, WE SHOULD BE MINDFUL THAT THE REINSURANCE
RESULTS REFLECT AN ABSENCE OF MAJOR CATASTROPHES AND THE RESULTING CONTINUED
DECLINE IN RATES.
CALFARM HAD OUTSTANDING UNDERWRITING PERFORMANCE FOR THE SECOND CONSECUTIVE
YEAR. MANAGEMENT HAS WORKED HARD TO ACHIEVE THESE RESULTS AND IS TO BE
CONGRATULATED.
DURING THE FIVE YEARS ENDED 1997, OUR TOTAL AVERAGE COMBINED RATIO WAS 100.4%,
COMPARED TO THE ESTIMATED INDUSTRY AVERAGE OF 105.9%, AND FOR THE PAST 10 YEARS
WAS 100.9%. SINCE MANAGEMENT ASSUMED OPERATING RESPONSIBILITY IN 1977, THE
COMBINED RATIO HAS AVERAGED 100.7%.
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6 The Zenith
STOCKHOLDERS' EQUITY PER SHARE REACHED $20.31 AT THE END OF 1997,
AN ALL TIME HIGH, COMPARED TO $19.17 AT DECEMBER 31, 1996.
ZENITH COMBINED RATIOS VERSUS INDUSTRY
YEAR ZENITH INDUSTRY*
- --------------------------------
1993 97.4% 106.9%
1994 97.8 108.5
1995 103.1 106.5
1996 99.8 105.8
1997 103.4 101.8**
AVERAGE 100.4 105.9**
- --------------------------------
*Source A.M. Best
Company **Estimate
THE ABOVE TABLE CLEARLY SHOWS THAT WE HAVE OUTPERFORMED THE INDUSTRY COMBINED
RATIO OVER THE PAST FIVE YEARS, BUT 1997 WAS THE FIRST YEAR WHERE OUR COMBINED
RATIO WAS HIGHER THAN INDUSTRY AVERAGES. AS PREVIOUSLY DISCUSSED, THE WORKERS'
COMPENSATION RESULTS, PRIMARILY IN CALIFORNIA, ARE THE CAUSE OF THE
BELOW-AVERAGE 1997 RESULTS.
INVESTMENT INCOME AFTER TAXES INCREASED 1.7% FROM $34,069,000, OR $1.92 PER
SHARE, IN 1996 TO $34,655,000, OR $1.94 PER SHARE, IN 1997.
INCOME FROM OPERATIONS AFTER TAXES AND BEFORE NET REALIZED GAINS ON
INVESTMENTS IN 1997 WAS $19,669,000, OR $1.10 PER SHARE, COMPARED TO
$30,575,000, OR $1.72 PER SHARE, IN 1996. THE DECREASE WAS A RESULT OF A LARGER
UNDERWRITING LOSS IN THE WORKERS' COMPENSATION BUSINESS.
NET INCOME IN 1997 WAS $28,100,000, OR $1.57 PER SHARE, COMPARED TO
$37,600,000, OR $2.12 PER SHARE, IN 1996. NET INCOME IN 1997 INCLUDED CAPITAL
GAINS AFTER TAXES OF $8,431,000, OR $.47 PER SHARE, COMPARED TO CAPITAL GAINS OF
$7,025,000, OR $.40 PER SHARE, FOR THE PRIOR YEAR.
STOCKHOLDERS' EQUITY AT DECEMBER 31, 1997 WAS $361,866,000, COMPARED TO
$337,503,000 AT DECEMBER 31, 1996. STOCKHOLDERS' EQUITY PER SHARE WAS $20.31 AT
DECEMBER 31, 1997, AN ALL TIME
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The Zenith 7
DURING THE PAST 10 YEARS, WE HAVE REPURCHASED 28% OF OUR
OUTSTANDING STOCK AT AN AVERAGE PRICE OF $17.85 PER SHARE.
HIGH, COMPARED TO $19.17 AT DECEMBER 31, 1996. STATUTORY CAPITAL OF OUR
INSURANCE COMPANIES INCREASED FROM $265,341,000 AT DECEMBER 31, 1996, TO
$279,993,000 AT YEAR-END 1997.
CASH PROVIDED BY OPERATING ACTIVITIES WAS $26,974,000 IN 1997, COMPARED TO
$9,749,000, IN 1996.
ZENITH REPURCHASED ABOUT 19,000 SHARES OF ZENITH COMMON STOCK DURING 1997, AND
930,000 SHARES IN JANUARY 1998, LEAVING AUTHORITY TO PURCHASE AN ADDITIONAL
1,155,000 SHARES AS OF FEBRUARY 1998. DURING THE PAST 10 YEARS, WE HAVE
REPURCHASED 6,862,000 SHARES, OR APPROXIMATELY 28% OF THE TOTAL SHARES ISSUED AT
AN AGGREGATE COST OF $122,513,000, OR AN AVERAGE OF $17.85 PER SHARE.
AT DECEMBER 31, 1997, ZENITH HAD LONG-TERM DEBT OF $74,474,000, WITH A TOTAL
DEBT-TO-EQUITY POSITION OF 20% DEBT AND 80% EQUITY. ZENITH HAD $100 MILLION OF
BANK LINES OF CREDIT AVAILABLE AT DECEMBER 31, 1997.
ZENITH INSURANCE, CALFARM INSURANCE, ZNAT INSURANCE AND ZENITH STAR INSURANCE
(THE TEXAS-BASED COMPANY) COLLECTIVELY, ARE RATED A+ (SUPERIOR) BY A.M. BEST
COMPANY. STANDARD & POOR'S HAS RATED THE CLAIMS-PAYING ABILITY OF THE
PROPERTY-CASUALTY OPERATIONS AA- (EXCELLENT). ZENITH IS CURRENTLY UNDER REVIEW
BY A.M. BEST COMPANY AND STANDARD & POOR'S.
RISK-BASED CAPITAL OF THE PROPERTY-CASUALTY GROUP WAS 332% IN 1997, COMPARED
TO 364%, IN 1996.
PROPERTY-CASUALTY INCURRED LOSS AND LOSS ADJUSTMENT EXPENSES FOR THE PRIOR
YEARS SHOW NO FURTHER DEVELOPMENT IN 1997. THE UNFAVORABLE DEVELOPMENT IN OUR
WORKERS' COMPENSATION BUSINESS WAS OFFSET BY FAVORABLE RESERVE DEVELOPMENT IN
OUR REINSURANCE AND OTHER PROPERTY-CASUALTY BUSINESSES. THE TABLE ON PAGE 53 IN
NOTE 13 TO THE CONSOLIDATED FINANCIAL STATEMENTS SETS FORTH DATA CONCERNING OUR
PROPERTY-CASUALTY LOSS AND LOSS ADJUSTMENT EXPENSES FOR THREE YEARS ENDED
DECEMBER 31, 1997, AND ONE-YEAR LOSS RESERVE DEVELOPMENT BY LINES OF BUSINESS IS
SET FORTH ON PAGE 26. LOSS RESERVES ARE NOT DISCOUNTED FOR FINANCIAL STATEMENT
PURPOSES.
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8 The Zenith
STOCK PRICES [CHART]
THE INFORMATION IN THE FOLLOWING TABLE PROVIDES ESTIMATES OF ZENITH'S NET
INCURRED LOSS AND LOSS ADJUSTMENT EXPENSES BY ACCIDENT YEAR, EVALUATED IN THE
YEAR THEY WERE INCURRED AND AS THEY WERE SUBSEQUENTLY RE-EVALUATED IN SUCCEEDING
YEARS:
ACCIDENT YEAR RESERVE DEVELOPMENT
NET INCURRED LOSS AND LOSS ADJUSTMENT EXPENSES REPORTED AT END OF YEAR
YEARS IN WHICH ----------------------------------------------------------------------
LOSSES WERE INCURRED 1992 1993 1994 1995 1996 1997
- --------------------------------------------------------------------------------------------
(Dollars in thousands)
PRIOR TO 1992 $2,277,331 $2,295,135 $2,295,566 $2,298,478 $2,300,972 $2,298,585
1992 305,525 296,873 298,906 294,691 297,627 295,865
CUMULATIVE 2,582,856 2,592,008 2,594,472 2,593,169 2,598,599 2,594,450
1993 297,652 285,544 275,591 269,003 267,576
CUMULATIVE 2,889,660 2,880,016 2,868,760 2,867,602 2,862,026
1994 303,749 312,953 304,246 301,550
CUMULATIVE 3,183,765 3,181,713 3,171,848 3,163,576
1995 327,503 333,667 347,501
CUMULATIVE 3,509,216 3,505,515 3,511,077
1996 318,843 365,908
CUMULATIVE 3,876,985
1997 348,849
RATIOS:
1992 71.71% 69.67% 70.15% 69.16% 69.85% 69.44%
1993 66.20% 63.51% 61.29% 59.83% 59.51%
1994 68.87% 70.95% 68.98% 68.37%
1995 74.67% 76.08% 79.23%
1996 70.48% 72.42%
1997 71.67%
- --------------------------------------------------------------------------------------------
This analysis displays the accident year net incurred loss and loss adjustment
expenses development for accident years 1992-1997 for all property-casualty
business. The total of net loss and loss adjustment expenses for all claims
occurring within each annual period is shown first at the end of that year and
then annually thereafter. The total cost includes both payments made and the
estimate of future payments as of each year-end. Past development may not be an
accurate indicator of future development since trends and conditions change. Net
incurred loss and loss adjustment expenses and loss ratios prior to 1995 have
been restated to include health insurance.
On December 31, 1996, Zenith acquired through merger the outstanding reserves
for net loss and loss adjustment expenses of Associated General Commerce
Self-Insurers' Trust Fund of $65,429,000. The development of these reserves is
included in future operating results of Zenith and is reflected as development
of the 1996 year.
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The Zenith 9
INVESTMENT INCOME AFTER TAXES PER SHARE
[CHART]
INVESTMENTS
INVESTMENT ACTIVITIES ARE A MAJOR PART OF OUR REVENUES AND EARNINGS; WE
BELIEVE OUR PORTFOLIOS ARE DIVERSIFIED TO ACHIEVE A REASONABLE BALANCE OF RISK
AND A STABLE SOURCE OF EARNINGS. ZENITH PRIMARILY INVESTS IN DEBT SECURITIES AS
COMPARED TO EQUITIES AND OUR LARGEST HOLDINGS ARE IN U.S. GOVERNMENT SECURITIES.
/ / CONSOLIDATED INVESTMENT INCOME, BEFORE TAXES, WAS $52,332,000 IN 1997,
COMPARED TO $51,154,000, IN 1996.
/ / CONSOLIDATED INVESTMENT INCOME AFTER TAXES AND AFTER INTEREST EXPENSE WAS
$32,068,000, OR $1.79 PER SHARE IN 1997, COMPARED TO $30,899,000, OR $1.74
PER SHARE, IN 1996. AVERAGE YIELDS ON THIS PORTFOLIO IN 1997 WERE 6.0% BEFORE
TAXES AND 4.0% AFTER TAXES; ABOUT THE SAME AS 1996.
/ / DURING 1997, WE RECORDED NET REALIZED CAPITAL GAINS BEFORE TAXES FROM OUR
INVESTMENT PORTFOLIO OF $14,008,000, COMPARED TO $10,807,000, THE PRIOR
YEAR.
A SUBSTANTIAL PORTION OF OUR INVESTMENT PORTFOLIO IS RECORDED IN THE FINANCIAL
STATEMENTS AT MARKET VALUE WITH OUR CONSOLIDATED INVESTMENT PORTFOLIO CARRYING
VALUE TOTALING $879,973,000 AT DECEMBER 31, 1997, COMPARED TO $852,799,000, AT
THE END OF 1996. AVERAGE LIFE OF THE PORTFOLIO WAS 4.2 YEARS AT DECEMBER 31,
1997, COMPARED TO 5.1 YEARS AT DECEMBER 31, 1996. OUR PORTFOLIO QUALITY IS HIGH,
WITH 96% RATED INVESTMENT GRADE.
THE MAJOR DEVELOPMENTS IN THE U.S. BOND MARKETS WERE CONTINUED LOW INFLATION
AND LOWER INTEREST RATES WITH LONG-TERM GOVERNMENT BONDS TRADING BELOW 6.0%. AS
A RESULT, OUR PORTFOLIO OF FIXED MATURITIES INCREASED IN VALUE, RELATIVE TO
AMORTIZED COST, BY $9,026,000 BEFORE TAXES FROM 1996 TO 1997.
SHORT-TERM INVESTMENTS INCREASED IN 1997 IN ORDER TO PROVIDE THE NECESSARY
LIQUIDITY TO FUND THE PURCHASE OF RISCORP.
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10 The Zenith
OUR INVESTMENT PORTFOLIO IS LIQUID AND OF HIGH QUALITY; OUR BOND
PORTFOLIO HAS AN AVERAGE LIFE OF ABOUT FOUR YEARS.
THE AMORTIZED COST AND FAIR VALUES OF ZENITH'S SECURITIES PORTFOLIO ARE
SUMMARIZED IN THE FOLLOWING TABLE:
AT DECEMBER 31, 1997 AT DECEMBER 31, 1996
--------------------- ----------------------
AMORTIZED FAIR AMORTIZED FAIR
SECURITIES PORTFOLIO COST* VALUE COST* VALUE
- -----------------------------------------------------------------------------
(Dollars in thousands)
SHORT-TERM INVESTMENTS $209,827 $209,827 $106,712 $106,712
U.S. GOVERNMENT BONDS 243,346 244,921 299,447 297,278
TAXABLE BONDS:
INVESTMENT GRADE 305,251 311,553 322,182 320,577
NON-INVESTMENT GRADE 17,083 17,554 21,013 21,168
REDEEMABLE PREFERRED STOCKS 16,040 16,717 19,467 19,720
OTHER PREFERRED STOCKS* 21,286 22,272 15,364 14,855
COMMON STOCKS* 17,790 23,439 18,030 22,771
- -----------------------------------------------------------------------------
*Equity securities at cost
IN 1993, WE STARTED A HOME-BUILDING SUBSIDIARY (PERMA-BILT) IN ORDER TO
PARTICIPATE IN THE GROWTH OF THE LAS VEGAS, NEVADA HOUSING MARKET. DURING 1997,
WE CLOSED AND DELIVERED 305 HOMES AT AN AVERAGE SELLING PRICE OF $149,000,
COMPARED TO 287 HOMES AT AN AVERAGE SELLING PRICE OF $145,000, THE PRIOR YEAR.
AS A RESULT, SALES OF $45,419,000 AND $1,678,000 OF PRE-TAX INCOME WERE RECORDED
DURING 1997, COMPARED TO SALES OF $41,554,000 AND $1,909,000 OF PRE-TAX INCOME,
THE PREVIOUS YEAR. LAND PRESENTLY OWNED, AT A COST OF ABOUT $33,466,000, WILL
SUPPORT THE
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The Zenith 11
SINCE MANAGEMENT ASSUMED OPERATING RESPONSIBILITY IN 1977, THE
COMBINED RATIO HAS AVERAGED 100.7%.
CONSTRUCTION OF AN ESTIMATED 1,150 HOMES OVER THE NEXT SEVERAL YEARS AND
POSSIBLY SOME COMMERCIAL AND/OR APARTMENT DEVELOPMENT. INCREASED INTEREST RATES
AND OTHER FACTORS MAY IMPACT THE RATE OF HOME SALES, BUT WE ARE CONFIDENT THE
LAND WE HAVE ACQUIRED IS STRATEGICALLY LOCATED AND WILL HAVE LONG-TERM VALUE.
FOR EXAMPLE, WE OWN ABOUT 175 ACRES ON LAS VEGAS BOULEVARD SOUTH OF THE AIRPORT,
ONE OF THE LARGEST UNDEVELOPED HOLDINGS ON THE STRIP.
WORKERS' COMPENSATION
WORKERS' COMPENSATION BUSINESS REPRESENTS APPROXIMATELY 50% OF OUR
PROPERTY-CASUALTY VOLUME. DURING 1997, 54% OF THE BUSINESS WAS IN CALIFORNIA,
WITH THE BALANCE IN 29 STATES, THE GREATEST CONCENTRATIONS OF WHICH ARE IN
FLORIDA AND TEXAS.
WORKERS' COMPENSATION OPERATIONS RECORDED AN UNDERWRITING LOSS, BEFORE
DIVIDENDS TO POLICYHOLDERS, OF $36,802,000 IN 1997, COMPARED TO A LOSS OF
$16,936,000, FOR THE PRIOR YEAR. AFTER POLICYHOLDER DIVIDENDS, RESULTS WERE AN
UNDERWRITING LOSS OF $37,157,000 IN 1997, COMPARED TO AN UNDERWRITING LOSS OF
$19,462,000, IN THE PRIOR YEAR. OUR WORKERS' COMPENSATION COMBINED RATIO WAS
115.3% IN 1997, COMPARED TO 109.2%, THE PRIOR YEAR.
DURING 1997, EARNED PREMIUMS INCREASED ABOUT $31,148,000, OR 15%, PRIMARILY
DUE TO THE FLORIDA EXPANSION. AT YEAR-END 1997, THERE WERE 26,730 POLICIES IN
FORCE COUNTRYWIDE. DURING THE LAST SEVERAL YEARS OUR RESULTS HAVE BEEN
SIGNIFICANTLY BELOW OUR 20-YEAR COMBINED RATIO OF ABOUT 100%. SPECIFICALLY, OUR
COMBINED RATIO FOR THE LAST THREE YEARS HAS AVERAGED 110.8%.
THE FOLLOWING TABLE COMPARES THE COMPONENTS OF OUR AVERAGE COMBINED RATIOS FOR
THE THREE YEARS ENDED 1997 AND FOR THE 10 YEARS ENDED 1997:
CalFarm
12 The Zenith
DURING THE FIVE YEARS ENDED 1996 (THE LATEST PUBLISHED FIGURES)
ZENITH INSURANCE ACHIEVED THE LOWEST AVERAGE LOSS RATIO OF THE
TOP 50 WRITERS OF WORKERS' COMPENSATION IN THE U.S.
THREE-YEAR AVERAGE 10-YEAR AVERAGE
COMBINED RATIO ANALYSIS TO DECEMBER 1997 TO DECEMBER 1997
ACCIDENT YEAR LOSS RATIO 53.4% 50.7%
LOSS RESERVE DEVELOPMENT 4.7 (0.1)
UNDERWRITING AND LOSS ADJUSTMENT EXPENSES 51.4 45.3
POLICYHOLDER DIVIDENDS 1.3 6.0
COMBINED RATIO 110.8% 101.9%
- --------------------------------------------------------------------------------
THE TABLE CLEARLY SHOWS THE UNDERWRITING AND LOSS ADJUSTMENT EXPENSE
PERCENTAGES MADE UP MOST OF THE DIFFERENCE IN THE COMBINED RATIO. SPECIFICALLY,
THE COMBINED RATIO IS 8.9 POINTS HIGHER WITH EXPENSES CONTRIBUTING 6.1 POINTS OF
THIS AMOUNT. ALSO, THE ACCIDENT YEAR LOSS RATIO IS 2.7 POINTS HIGHER WHILE THE
ESTIMATE OF RESERVE ACCURACY HAS DETERIORATED 4.8 POINTS. FROM AN ANALYTICAL
PERSPECTIVE, THE COMBINATION OF ACCIDENT YEAR LOSS RATIO AND POLICYHOLDER
DIVIDENDS IS FAVORABLE BY 2.0 POINTS, A GOOD INDICATION THAT WE CONTINUE TO
MANAGE RISK REALISTICALLY.
THERE ARE MANY CHANGING FACTORS CURRENTLY AFFECTING OUR WORKERS' COMPENSATION
PERFORMANCE AS SUMMARIZED NUMERICALLY IN THE TABLE. AS WE REPORTED, THE
CALIFORNIA SYSTEM CHANGED FROM ADMINISTERED PRICING TO FREE COMPETITION ON
JANUARY 1, 1995. THREE YEARS PRIOR, IN ANTICIPATION OF OPEN RATING IN
CALIFORNIA, AND TO TAKE ADVANTAGE OF PERCEIVED MARKET OPPORTUNITIES, WE BEGAN
GEOGRAPHIC EXPANSION OUTSIDE OF CALIFORNIA. OF INTEREST, OUR NON-CALIFORNIA
MARKETS HAVE DELIVERED BETTER RESULTS THAN CALIFORNIA IN SPITE OF DETERIORATING
COMBINED RATIOS THROUGHOUT THE COUNTRY. CLEARLY, AS SHOWN IN THE ABOVE TABLE,
THE DECLINE IN OUR OVERALL RESULTS IS NOT ASSOCIATED WITH POOR LOSS RATIOS, BUT
IS PRIMARILY A REFLECTION OF OUR COST OF DOING BUSINESS IN RELATION TO OUR
VOLUME.
CalFarm
The Zenith 13
SINCE THE BEGINNING OF OPEN RATING, OUR WORKERS' COMPENSATION
LOSS RATIO IN CALIFORNIA HAS AVERAGED 61% COMPARED TO THE
INDUSTRY AVERAGE OF APPROXIMATELY 82%.
WITH RESPECT TO THE CALIFORNIA WORKERS' COMPENSATION MARKET, OUR PERFORMANCE
IN 1997 REFLECTED A NUMBER OF FACTORS:
1. INTENSE RATE COMPETITION AND A DECLINE IN INDUSTRY PREMIUM VOLUME OF ABOUT
45% SINCE 1995.
2. CONTINUATION OF 17,500 POLICIES IN FORCE COMPARED TO 20,000 AT YEAR-END 1996,
WITH LOSS RATIOS DURING THIS PERIOD ABOUT 21 PERCENTAGE POINTS BETTER THAN
INDUSTRY AVERAGES.
3. ADDITIONAL EXPENSES OR INVESTMENTS TO UPGRADE OUR COMPUTER SYSTEMS AND
ADDRESS THE YEAR 2000 CHALLENGE.
4. AGENTS OBTAINING MORE COMPETITIVE BIDS THAN IN THE PAST, RESULTING IN HIGHER
COSTS TO WRITE A LOWER DOLLAR VOLUME OF BUSINESS.
5. COMPETITION'S WILLINGNESS TO BUY MARKET SHARE AT INADEQUATE RATES, WITH
NEGATIVE FINANCIAL RESULTS.
6. INCREASE IN EXPENSES TO ADJUST CLAIMS DUE TO CHANGES IN THE WORKERS'
COMPENSATION SYSTEM.
7. INCREASE IN AVERAGE COSTS PER CLAIM, NOTWITHSTANDING A TREND OF DECLINING
CLAIM FREQUENCY FOR OUR COMPANY AND THE INDUSTRY AS A WHOLE.
8. RESERVES FOR ACCIDENT YEARS 1995 AND 1996 WERE STRENGTHENED BY APPROXIMATELY
$12 MILLION; THE 1997 ACCIDENT YEAR LOSS RATIO WAS INCREASED.
9. CONTINUED QUALITY SERVICES IN ORDER TO ACHIEVE LOW LOSS RATIOS WITH THE
CHALLENGE TO DO SO AT LOWER COSTS.
WHAT IS THE CURRENT SITUATION? DURING THE PAST SEVERAL MONTHS, WE HAVE REDUCED
OUR CALIFORNIA WORKFORCE BY ABOUT 10%, WHICH SHOULD BRING COSTS BETTER IN LINE
WITH REVENUES WHILE CONTINUING OUR STRONG SERVICE CAPABILITY. THERE ARE
CONFUSING SIGNS IN THE MARKETPLACE. CERTAIN COMPETITORS ARE WITHDRAWING OR
ADJUSTING THEIR UNDERWRITING AND PRICING POLICIES AND OTHERS CONTINUE TO SELL AT
PRICES SUBSTANTIALLY BELOW APPARENT LOSS COSTS. EMPLOYERS WITH POOR LOSS RESULTS
ARE EXPERIENCING INCREASED PRICES. IN VIEW OF OUR RESULTS AND THE TREND OF
RISING AVERAGE COSTS PER CLAIM, WE MUST MAINTAIN PRICE AND RATE ADEQUACY AND
MORE AGGRESSIVELY MERCHANDISE
CalFarm
14 The Zenith
THROUGH OUR GEOGRAPHIC EXPANSION, WE ARE APPROACHING THE TIME
WHEN OUR NON-CALIFORNIA PREMIUMS WILL APPROXIMATE OR EXCEED OUR
CALIFORNIA WORKERS' COMPENSATION BUSINESS.
OUR SPECIALIST CAPABILITIES. AT THE SAME TIME, WE WILL CONTINUE ENHANCING OUR
MANAGED CARE, CLAIMS HANDLING, LITIGATION AND RETURN-TO-WORK STRATEGIES TO
ASSIST US IN SUPPORTING OUR LONG-STANDING RECORD OF LOW PURE LOSS RATIOS.
LASTLY, WE WILL CONTINUE REDUCING OUR OPERATING EXPENSES WHILE PROVIDING THE
NECESSARY SERVICES TO OUR CUSTOMERS.
WE ARE INVESTING IN OUR COMPUTER SYSTEMS SO ALL OPERATIONS ULTIMATELY ARE
SERVED BY ONE PLATFORM ON A NATIONAL BASIS. IN THE LONG RUN, THIS WILL PROVIDE
THE MOST EFFICIENT AND COST EFFECTIVE OPERATION. UNDER CURRENT ACCOUNTING RULES
MOST OF THE INTERNAL COSTS HAVE BEEN EXPENSED AGAINST CURRENT EARNINGS. BASED ON
A RECENTLY APPROVED ACCOUNTING STANDARD, IT IS EXPECTED THAT SOME OF THE
EXPENDITURES WILL BE CAPITALIZED IN THE FUTURE.
DURING THE FIVE YEARS ENDED 1996 (THE LATEST PUBLISHED FIGURES), ZENITH
ACHIEVED THE LOWEST AVERAGE LOSS RATIO OF THE TOP 50 WRITERS OF WORKERS'
COMPENSATION IN THE UNITED STATES. COMPARED TO THE CALIFORNIA MARKET AVERAGE,
OUR FIVE-YEAR AVERAGE LOSS RATIO FOR CALIFORNIA WAS BETTER BY 19 POINTS. OUR
ENTIRE ORGANIZATION IS PROUD OF THESE ACCOMPLISHMENTS AND IS FOCUSED ON THE
NECESSARY ADJUSTMENTS TO CONTINUE THIS FAVORABLE RECORD UNDER CHANGING
CONDITIONS.
THERE ARE PENDING LEGISLATIVE CHANGES THAT MAY INCREASE STATUTORY BENEFITS IN
CALIFORNIA AND MAKE OTHER CHANGES TO THE SYSTEM. HOWEVER, WE ARE SKEPTICAL THAT
REFORMS NEEDED TO REDUCE THE TREND OF INCREASING CLAIM COSTS WILL BE GIVEN
SERIOUS CONSIDERATION. THE TIMING OF ANY CHANGES IS DIFFICULT TO PREDICT DUE TO
THE IMPACT OF TERM LIMITS AND POLITICAL ACTIVITY SURROUNDING THE SELECTION OF A
NEW GOVERNOR. MANAGED CARE IS UNDER INTENSE POLITICAL SCRUTINY THROUGHOUT THE
UNITED STATES, AND IF CHANGES ARE MADE THEY WILL UNDOUBTEDLY IMPACT THE WORKERS'
COMPENSATION SYSTEMS. WE BELIEVE THE WORKERS' COMPENSATION INSURANCE INDUSTRY
NEEDS TO DEVELOP A FACT-BASED STRATEGY TO DEAL WITH THIS POTENTIAL ISSUE AND,
THEREFORE, WE ARE SUPPORTING RESEARCH BEING CONDUCTED BY THE WORKERS'
COMPENSATION RESEARCH INSTITUTE OF CAMBRIDGE, MASSACHUSETTS RELATING TO THIS
AREA. WE ARE ALSO TRYING TO STIMULATE THE INDUSTRY TO FOCUS ON THIS EMERGING
ISSUE.
CalFarm
The Zenith 15
OUR CHALLENGE: ENHANCE OUR MANAGED CARE, CLAIMS HANDLING,
LITIGATION AND RETURN-TO-WORK STRATEGIES AT LOWER COSTS.
CONSIDERING THE EXTREMELY COMPETITIVE MARKET CONDITIONS, OUR FOCUS HAS AND
CONTINUES TO BE ON THE TWO SEGMENTS OF THE BUSINESS IN WHICH WE HAVE MANAGED
RISK SUCCESSFULLY FOR MANY YEARS: SMALLER EMPLOYERS AND INSUREDS WHERE QUALITY
SERVICES IMPACT RESULTS. WE CAN CLEARLY DEMONSTRATE THAT OUR SERVICE
CAPABILITIES REDUCE EMPLOYER EXPERIENCE MODIFICATIONS SIGNIFICANTLY AND,
THEREFORE, SAVE EMPLOYERS MONEY OVER MANY YEARS. AS WE OBTAIN MORE OPPORTUNITIES
TO SERVICE EMPLOYERS AT MORE ADEQUATE PRICES AND CONTINUE TO CONTROL COSTS, WE
ARE CONFIDENT THAT OUR OPERATING RESULTS WILL IMPROVE.
SINGLEPOINT
WE HAVE CONTINUED TO MARKET AN INTEGRATED DISABILITY PROGRAM IN PARTNERSHIP
WITH UNUM IN CERTAIN PARTS OF CALIFORNIA AND ARKANSAS. ALTHOUGH THE RESULTS ARE
NOT SIGNIFICANT TO DATE, SINGLEPOINT IS EXPERIMENTING AND IMPROVING ITS
CAPABILITY IN A MARKET SEGMENT THAT MAY HAVE VALUE FOR CERTAIN EMPLOYERS.
PENDING RISCORP ACQUISITION
ON JUNE 17, 1997, ZENITH ENTERED INTO AN AGREEMENT WITH RISCORP, INC. TO
PURCHASE ALL OF THE ASSETS OF RISCORP RELATED TO ITS WORKERS' COMPENSATION
BUSINESS, INCLUDING RISCORP'S EXISTING IN-FORCE INSURANCE BUSINESS AS WELL AS
THE RIGHT TO ALL NEW AND RENEWAL POLICIES. ZENITH WILL ALSO PURCHASE RISCORP'S
"FIRST CALL" MANAGED CARE WORKERS' COMPENSATION SYSTEM. AFTER THE TRANSACTION
CLOSES, RISCORP WILL NO LONGER ENGAGE IN ITS EXISTING BUSINESSES.
ZENITH WILL ASSUME CERTAIN LIABILITIES RELATED TO RISCORP'S INSURANCE
BUSINESSES IN CONNECTION WITH THE TRANSACTION. IN ADDITION, ZENITH WILL EITHER
ASSUME OR REPAY $15 MILLION IN INDEBTEDNESS OF RISCORP. THE PURCHASE PRICE TO BE
PAID BY ZENITH TO RISCORP WILL BE THE DIFFERENCE BETWEEN THE BOOK VALUE OF THE
ASSETS PURCHASED AND THE BOOK VALUE OF THE LIABILITIES ASSUMED BY ZENITH ON THE
CLOSING DATE, SUBJECT TO A MINIMUM PURCHASE PRICE OF $35 MILLION. AS OF THIS
DATE, IT IS NOT POSSIBLE TO ESTIMATE THE PURCHASE PRICE.
CalFarm
16 The Zenith
ZENITH CAN CLEARLY DEMONSTRATE THAT OUR SERVICE CAPABILITIES
REDUCE EMPLOYER EXPERIENCE MODIFICATIONS SIGNIFICANTLY AND,
THEREFORE, SAVE EMPLOYERS MONEY OVER MANY YEARS.
ZENITH AND RISCORP ALSO ENTERED INTO AN AGREEMENT UNDER WHICH ALL RISCORP'S
FLORIDA IN-FORCE, AND NEW AND RENEWAL POLICIES ISSUED AFTER JUNE 17, 1997 ARE
REINSURED BY ZENITH IN THE EVENT OF RISCORP'S INSOLVENCY PRIOR TO THE CLOSING.
IF THE ACQUISITION IS CONSUMMATED, THE EXPOSURE UNDER THE REINSURANCE AGREEMENT
WILL BE REPLACED BY THE LIABILITIES ASSUMED.
ZENITH WILL NOT BE PURCHASING THE STOCK OF RISCORP OR ITS AFFILIATES OR
ASSUMING THE LIABILITIES THAT ARE UNRELATED TO THE INSURANCE BUSINESS, INCLUDING
LIABILITIES RELATED TO ANY PRESENT OR FUTURE LITIGATION AGAINST THOSE COMPANIES.
THE CLOSING OF THE PURCHASE IS SUBJECT TO CERTAIN CONDITIONS, INCLUDING THE
REVIEW AND APPROVAL BY APPROPRIATE REGULATORY AGENCIES AND RISCORP'S
SHAREHOLDERS, AND COMPLIANCE WITH CONTRACT PROVISIONS. RISCORP HAS OBTAINED THE
NECESSARY APPROVALS FROM THE SECURITIES AND EXCHANGE COMMISSION TO SOLICIT ITS
SHAREHOLDERS AND THE PROXY SOLICITATION PROCESS IS EXPECTED TO COMMENCE THE
FIRST WEEK OF MARCH 1998. WE ANTICIPATE THAT THE TRANSACTION WILL BE CONSUMMATED
AS SOON AS PRACTICABLE AFTER ALL APPROVALS ARE OBTAINED.
WE BELIEVE THE CONSUMMATION OF THIS STRATEGIC ACQUISITION WILL ADD ADDITIONAL
WORKERS' COMPENSATION BUSINESS, EXPANDED GEOGRAPHIC DIVERSIFICATION,
STATE-OF-THE ART MANAGED CARE AND AGENT INTERNET COMMUNICATION CAPABILITIES TO
OUR OPERATION. RISCORP HAD ABOUT 22,000 POLICIES IN FORCE AT DECEMBER 31, 1997.
UNFORTUNATELY, PROGRESS IN CLOSING THIS TRANSACTION HAS BEEN SLOWER THAN
ANTICIPATED WITH NEGATIVE SHORT-TERM IMPACTS ON THE BUSINESS, EMPLOYEES AND
AGENCY FORCE OF RISCORP. AS A RESULT, WE RECOGNIZE THE TIME, EFFORT AND COST
REQUIRED TO INTEGRATE RISCORP AND ZENITH WILL BE GREATER THAN ANTICIPATED, BUT
WE BELIEVE A STRONGER COMPANY OVERALL WILL EMERGE.
CalFarm
The Zenith 17
THE PENDING STRATEGIC ACQUISITION OF RISCORP WILL RESULT IN ADDED
WORKERS' COMPENSATION BUSINESS, EXPANDED GEOGRAPHIC DIVERSIFICATION,
AND STATE-OF-THE-ART MANAGED CARE CAPABILITIES.
SELECTED CONSOLIDATED FINANCIAL DATA FOR RISCORP, INC. ARE SHOWN IN THE
FOLLOWING TABLE:
- ------------------------------------------------------------------------------------
NINE MONTHS ENDED YEAR ENDED
SELECTED FINANCIAL DATA* SEPTEMBER 30, DECEMBER 31,
- ------------------------------------------------------------------------------------
(Dollars in thousands) 1997 1996 1996 1995
----------- --------- --------- -----------
OPERATING RESULTS
PREMIUMS EARNED $ 133,882 $ 131,855 $ 173,557 $ 135,887
FEE AND OTHER INCOME 17,969 23,079 31,838 23,413
NET INVESTMENT INCOME 12,557 7,592 12,194 6,708
TOTAL REVENUES 164,408 162,526 217,589 166,008
NET INCOME 3,810 9,301 2,398 13,683
BALANCE SHEET
INVESTED ASSETS 209,134 241,143 255,656 69,365
TOTAL ASSETS 769,276 741,135 828,442 443,242
TOTAL LIABILITIES 607,328 579,801 671,134 427,085
STOCKHOLDERS' EQUITY 161,948 161,334 157,308 16,157
- ------------------------------------------------------------------------------------
*The above selected consolidated financial data with respect to RISCORP and its
subsidiaries have been excerpted from the information contained in RISCORP'S
Annual Report on Form 10-K for the year ended December 31, 1996 and RISCORP'S
Quarterly Report on Form 10-Q for the quarter ended September 30, 1997 filed
with the Securities and Exchange Commission. We do not take any responsibility
for the accuracy or completeness of this information.
THE PURCHASE PRICE WILL BE DETERMINED AS OF THE CLOSING DATE BASED UPON AN
AUDITED STATEMENT OF TRANSFERRED ASSETS AND LIABILITIES, WITH THE PURCHASE
AGREEMENT PROVIDING FOR A DISPUTE RESOLUTION PROCESS IN THE EVENT ZENITH HAS ANY
DISAGREEMENTS WITH SUCH STATEMENT. AS OF THIS DATE, WE ARE UNABLE TO ESTIMATE
THE PURCHASE PRICE OR THE IMPACT THE CONSUMMATION OF THE TRANSACTION WILL HAVE
ON OUR OPERATING RESULTS.
CalFarm
18 The Zenith
FOR THE 12 YEARS SINCE CALFARM WAS ACQUIRED BY ZENITH, THE COMBINED
RATIO HAS AVERAGED 100.6%, EXCLUDING THE EFFECT OF PROPOSITION 103
ROLLBACK REFUNDS IN 1992.
MANAGEMENT CHANGES
AS PREVIOUSLY ANNOUNCED, WE ADDED SIGNIFICANT MANAGEMENT CAPABILITY TO OUR
WORKERS' COMPENSATION OPERATIONS DURING THIS PAST YEAR. JACK MILLER, FORMERLY
PRESIDENT OF INDUSTRIAL INDEMNITY, JOINED US AS PRESIDENT DESIGNATE OF THE
INSURANCE BUSINESS TO BE ACQUIRED FROM RISCORP AND CHIEF OPERATING OFFICER OF
OUR WORKERS' COMPENSATION DIVISION. BOB MEYER, FORMERLY CHIEF ACTUARY OF THE
CALIFORNIA WORKERS' COMPENSATION RATING BUREAU AND INDUSTRIAL INDEMNITY, JOINED
US AS CHIEF WORKERS' COMPENSATION ACTUARY, AND, COREY INGBER, SENIOR PARTNER OF
HIS OWN LAW FIRM, JOINED US TO SUPERVISE ALL WORKERS' COMPENSATION CLAIM
LITIGATION. THESE INDIVIDUALS, TOGETHER WITH OUR EXISTING MANAGEMENT, PROVIDE
THE NECESSARY CAPABILITIES TO OPERATE AND GROW A NATIONAL SPECIALTY INSURANCE
BUSINESS.
AS 1998 BEGAN, THE OFFICE OF THE CHAIRMAN WAS FORMED CONSISTING OF MYSELF, JIM
ROSS AND JACK MILLER TO BETTER SUPERVISE OUR EXPANDING WORKERS' COMPENSATION
BUSINESS. THIS COMBINATION OF EXPERIENCE WILL PROVIDE THE NECESSARY LEADERSHIP
TO THE ORGANIZATION.
CALFARM INSURANCE COMPANY
CALFARM INSURANCE COMPANY ("CALFARM") IS A SACRAMENTO, CALIFORNIA-BASED
PROPERTY-CASUALTY COMPANY THAT OFFERS COMPREHENSIVE COVERAGES WRITTEN FOR
INDIVIDUAL AND COMMERCIAL CUSTOMERS, PRIMARILY IN THE RURAL AND SUBURBAN AREAS
OF CALIFORNIA. AUTOMOBILE, FARMOWNERS, COMMERCIAL PACKAGE POLICIES AND
HOMEOWNERS ARE THE MAJOR LINES OF BUSINESS WITH ABOUT 108,000 POLICIES IN FORCE.
CALFARM ALSO OFFERS HEALTH INSURANCE PRODUCTS, PREVIOUSLY WRITTEN BY CALFARM
LIFE INSURANCE COMPANY, WITH ABOUT 20,000 POLICIES IN FORCE.
THROUGHOUT THE YEAR, CALFARM CONTINUED ITS EFFORTS TO STRENGTHEN ITS WORKING
RELATIONSHIPS WITH THOSE AGENTS WHO PLAY AN IMPORTANT ROLE IN THE SUCCESSFUL
SALE OF ITS PRODUCTS, MAKING AGENT "PARTNERSHIPS" AND SUPERIOR SERVICE ITS
HIGHEST PRIORITIES. CALFARM'S CUSTOMERS RELY ON OUR AGENTS TO DEVELOP
SPECIALIZED PROTECTION PROGRAMS AND TAILOR COVERAGE TO INDIVIDUAL NEEDS.
CALFARM'S GOAL IS TO BE A "FIRST CHOICE" PROVIDER OF INSURANCE PRODUCTS WITHIN
THE RURAL AND
CalFarm
The Zenith 19
CALFARM IS INVESTING SUBSTANTIAL SUMS IN IMPROVED COMPUTER SYSTEMS
IN ORDER TO IMPROVE ITS SERVICE CAPABILITY.
SUBURBAN MARKETPLACE. CALFARM'S SUCCESS IS BASED ON OPERATING THE BUSINESS
THROUGH STRONG AGENCY RELATIONSHIPS.
DURING 1997, CALFARM CONTINUED TO IMPROVE ITS SERVICE PROCESSES FOR REPORTING
AND SETTLING CLAIMS. CLAIMS MANAGEMENT PERSONNEL PARTICIPATED IN EXTENSIVE
LEADERSHIP DEVELOPMENT PROGRAMS, AND TRAINING WAS INTRODUCED TO IMPROVE THE
CLAIMS STAFF'S MEDICAL KNOWLEDGE. CALFARM ADDED MEDICAL ADVISORS, INTRODUCED NEW
TOOLS TO ANALYZE MEDICAL INFORMATION, AND ENHANCED THE WORKFLOW AND THE STAFF'S
DECISION-MAKING CAPABILITIES.
IN 1997, CALFARM HIRED ADDITIONAL PROFESSIONAL STAFF AND MADE PROGRESS TOWARD
CREATING A CULTURE THAT NURTURES AND SUPPORTS CONTINUOUS, LIFELONG LEARNING FOR
ITS EMPLOYEES. CALFARM ALSO MADE SIZEABLE INVESTMENTS IN AND PROGRESS TOWARD
ADVANCING ITS SYSTEMS AND INFORMATION CAPABILITIES. MANAGEMENT'S FOCUS IS TO
REDUCE ITS LONG-TERM OPERATING COSTS AND TRANSACT BUSINESS WITH ITS AGENTS IN AN
EFFICIENT MANNER USING NEWER TECHNOLOGIES AND MARKETING MODERN PRODUCTS.
CALFARM HAS CONTINUED TO PROVIDE A RELIABLE MARKET FOR HIGHER-QUALITY
HOMEOWNERS BY OFFERING TO INCLUDE COMPREHENSIVE EARTHQUAKE COVERAGE AT FULL
RATES, IN CONTRAST TO THE SEVERELY RESTRICTED CALIFORNIA EARTHQUAKE AUTHORITY
(CEA) "MINI POLICY" COVERAGE. THE CEA'S FIRST FULL YEAR OF OPERATIONS WAS 1997,
AND CALFARM CHOSE NOT TO PARTICIPATE IN THE STATE-RUN CEA (MOST SMALL MARKET
SHARE COMPETITORS REACHED THE SAME DECISION). CALFARM ACTIVELY MANAGES ITS
CATASTROPHE EXPOSURES AND ENGAGES THE SERVICES OF PROMINENT OUTSIDE EXPERTS TO
ASSIST IN GEOGRAPHIC MODELING AND SIMULATION TECHNIQUES TO MITIGATE RISK AND
ACHIEVE DESIRED OBJECTIVES. CALFARM ALSO PURCHASES QUALITY REINSURANCE AT LEVELS
REASONABLY EXPECTED TO PROTECT OUR CAPITAL FROM LARGE DISASTERS.
1997 WAS AN ACTIVE YEAR POLITICALLY FOR THE CALIFORNIA PERSONAL AUTOMOBILE
MARKET. THE YEAR BEGAN WITH THE IMPLEMENTATION OF THE MANDATORY PROOF OF
INSURANCE LAW AND A REQUIREMENT TO CONSIDER THE BENEFICIAL EFFECTS OF
PROPOSITION 213, WHICH LIMITS NON-ECONOMIC RECOVERIES BY
CalFarm
20 The Zenith
SINCE THE INCEPTION OF OUR REINSURANCE DIVISION IN 1985, THE
CUMULATIVE COMBINED RATIO IS 94.1%.
UNINSURED MOTORISTS IN MOTOR VEHICLE ACCIDENTS. THE VALIDITY OF PROPOSITION 213
WAS CHALLENGED, BUT IT WAS UPHELD BY THE CALIFORNIA COURT OF APPEALS IN OCTOBER
1997. LATER IN THE YEAR, THE CALIFORNIA INSURANCE DEPARTMENT MANDATED THAT
COMPANIES FILE AND IMPLEMENT A NEW PERSONAL AUTO CLASS PLAN AND RATES IN
ACCORDANCE WITH A REVISED INTERPRETATION OF PROPOSITION 103. PROPOSITION 103
SPECIFIES THAT AN INDIVIDUAL'S DRIVING SAFETY RECORD, ANNUAL MILEAGE, AND YEARS
LICENSED ARE TO BE THE THREE PRIMARY DETERMINANTS OF INSURANCE PREMIUMS. CALFARM
HAS FILED, RECEIVED APPROVAL FOR, AND IMPLEMENTED ITS PROPOSITIONS 103 AND 213
AUTO RATING PLANS.
CALFARM IS THE LARGEST WRITER OF FARMOWNERS POLICIES IN CALIFORNIA WITH AN
ESTIMATED MARKET SHARE OF 42%. IT HAS FIRST-HAND KNOWLEDGE OF THE DIVERSE
BUSINESS AND PERSONAL INSURANCE NEEDS OF THE FARMERS OF CALIFORNIA AND ENJOYS
THE SPONSORSHIP OF THE CALIFORNIA FARM BUREAU, THE STATE'S LARGEST GENERAL
AGRICULTURE ORGANIZATION. CALFARM IS COMMITTED TO SEEKING NEW AND PROFITABLE
OPPORTUNITIES IN CALIFORNIA'S AGRICULTURAL SECTOR, WHICH HAS LED THE NATION IN
FARM PRODUCTION AND INCOME FOR 50 YEARS.
THE LOSS RATIO FOR CALFARM WAS 51.4% IN 1997, COMPARED TO 53.6%, IN 1996, AND
THE COMBINED RATIO WAS 96.9% IN 1997, COMPARED TO 96.1%, IN 1996. THE RESULTS
FOR 1997 INCLUDE CATASTROPHE LOSSES FROM THE 1997 NEW YEAR'S FLOOD OF $1.5
MILLION, COMPARED WITH NO CATASTROPHES IN 1996, AND $4,500,000 OF INCREASED
TECHNOLOGY EXPENDITURES FOR SYSTEM IMPROVEMENTS AND YEAR 2000 COMPLIANCE. FOR
THE 12 YEARS SINCE CALFARM WAS ACQUIRED BY ZENITH, THE COMBINED RATIO HAS
AVERAGED 100.6%, EXCLUDING THE EFFECT OF PROPOSITION 103 ROLLBACK REFUNDS IN
1992. CALFARM IS PLEASED WITH ITS OPERATING RESULTS GIVEN THE FIERCELY
COMPETITIVE CLIMATE AND IS FOCUSED ON MAINTAINING APPROPRIATE UNDERWRITING
MARGINS.
DURING THE FIRST QUARTER OF 1998, CALIFORNIA EXPERIENCED WIDE-SPREAD WIND AND
STORM DAMAGE. MANAGEMENT IS NOT ABLE AT THIS TIME TO ESTIMATE THE IMPACT ON OUR
OPERATIONS OF THESE STORMS.
CalFarm
The Zenith 21
COMPLIANCE WITH YEAR 2000 INTERNAL SOFTWARE ISSUES IS PROCEEDING
ACCORDING TO SCHEDULE AND WE EXPECT SUBSTANTIAL COMPLETION BY
THE END OF 1998.
REINSURANCE
FOR THE PAST 12 YEARS, ZENITH HAS BEEN SELECTIVELY UNDERWRITING ASSUMED TREATY
AND FACULTATIVE REINSURANCE AS WELL AS COMMERCIAL PACKAGE POLICIES FOR TARGETED
INDUSTRY GROUPS. REINSURANCE REPRESENTS ABOUT 7% OF OUR PROPERTY-CASUALTY VOLUME
WHILE REINSURANCE RESERVES REPRESENT APPROXIMATELY 13% OF OUR TOTAL
PROPERTY-CASUALTY RESERVES.
DURING 1997, THE NET WRITTEN PREMIUM OF THIS OPERATION WAS $29,780,000,
COMPARED TO $35,359,000, IN 1996. EARNED PREMIUM WAS $32,251,000, COMPARED TO
$37,473,000, IN 1996. UNDERWRITING PROFITS OF $14,189,000 WERE RECORDED IN 1997
RESULTING IN A COMBINED RATIO OF 56.0%, COMPARED TO UNDERWRITING PROFITS OF
$12,500,000 AND A COMBINED RATIO OF 66.6%, THE PRIOR YEAR. SINCE THE INCEPTION
OF THIS OPERATION IN 1985, THE COMBINED RATIO IS 94.1%. DURING 1997, THE
MAJORITY OF WRITTEN PREMIUM WAS WORLD-WIDE PROPERTY CATASTROPHE BUSINESS. WE
EXPECT THE TREND OF LOWER PREMIUM VOLUMES TO CONTINUE AS RATES DECLINE DUE TO
FAVORABLE EXPERIENCE AND INCREASED CAPITAL AVAILABLE IN THE MARKETPLACE.
ACCOUNTING FOR THE PROPERTY CATASTROPHE REINSURANCE BUSINESS HAS A DIFFERENT
RESULT FROM OUR OTHER PROPERTY-CASUALTY BUSINESSES. AT THE END OF EACH REPORTING
PERIOD, INCOME IS RECOGNIZED WITHOUT RESERVES BEING ESTABLISHED IF NO MAJOR
CATASTROPHE HAS OCCURRED. IN OUR OTHER BUSINESSES, RESERVES ARE MANDATED BASED
UPON ACTUAL EVENTS AS WELL AS EXPECTED LOSS PATTERNS. AS A RESULT, THERE MAY BE
LARGE FLUCTUATIONS (POSITIVE OR NEGATIVE) IN UNDERWRITING RESULTS FOR THE
PROPERTY CATASTROPHE REINSURANCE BUSINESS IN THE SHORT TERM SINCE ONLY ACTUAL
EVENTS ARE CONSIDERED.
WE BECAME A CORPORATE MEMBER OF LLOYD'S ON JANUARY 1, 1995 SUPPORTING ONE
SYNDICATE WHERE WE HAD LONG-TERM TIES AND CONFIDENCE IN THE MANAGEMENT. DURING
THE LATTER PART OF 1997, WE SOLD OUR INTEREST AT A PROFIT.
CalFarm
22 The Zenith
MANAGEMENT IS FOCUSED ON THE DUAL CHALLENGES OF IMPROVING
OPERATING RESULTS AND THE PRICE OF OUR COMMON STOCK.
YEAR 2000
WE HAVE MADE SUBSTANTIAL PROGRESS IN PREPARING OUR COMPUTER AND BUSINESS
SYSTEMS TO FUNCTION PROPERLY IN VIEW OF THE YEAR 2000 PROBLEM. TO DATE, WE HAVE
SPENT $2,500,000, AND WE ESTIMATE THAT WITH AN ADDITIONAL COST OF $1,500,000, WE
WILL COMPLETE THE NECESSARY WORK ON OUR INTERNAL COMPUTER AND BUSINESS SYSTEMS
BY THE END OF 1998. WITH RESPECT TO THIRD PARTIES WITH WHOM WE DO BUSINESS, A
PROCESS AND A SCHEDULE ARE IN PLACE TO MONITOR THEIR TIMELY COMPLIANCE.
CONCLUSION
CONSUMMATION OF THE PENDING RISCORP TRANSACTION AND PLANNING FOR FUTURE
OPERATIONS WILL DOMINATE OUR SHORT-TERM ACTIVITIES. UPON COMPLETION, OUR
BUSINESS WILL BE STRENGTHENED AND DIVERSIFIED. WE WILL BE POSITIONED AS A
SPECIALTY COMPANY WITH A STRONG BALANCE SHEET, A LONG HISTORY OF EFFECTIVE RISK
MANAGEMENT AND APPROPRIATE GEOGRAPHIC DIVERSIFICATION. SIMULTANEOUSLY, WE ARE
FOCUSED ON IMPROVING THE PROFITABILITY OF OUR EXISTING OPERATIONS IN A VERY
COMPETITIVE ENVIRONMENT. WE BELIEVE THAT POOR FINANCIAL RESULTS IN THE
CALIFORNIA WORKERS' COMPENSATION MARKET WILL CAUSE CERTAIN COMPETITORS TO
RE-PRICE AND RE-UNDERWRITE THEIR BUSINESS IN THE FORESEEABLE FUTURE.
OUR CALFARM OPERATIONS CONTINUE TO SERVICE THE AGRICULTURAL AND RURAL REGIONS
OF CALIFORNIA WITH NEEDED PRODUCTS AND SERVICES, AND OUR REINSURANCE ACTIVITIES
PROVIDE ADDITIONAL WORLD-WIDE PREMIUMS AND UNDERWRITING PROFITS PRIMARILY IN THE
PROPERTY CATASTROPHE MARKET.
MANAGEMENT UNDERSTANDS AND IS FOCUSED ON THE DUAL CHALLENGES OF IMPROVING OUR
OPERATING RESULTS AND THE PRICE OF OUR COMMON STOCK. WE APPRECIATE THE
ASSISTANCE AND CONFIDENCE OF OUR EMPLOYEES, AGENTS, STOCKHOLDERS AND DIRECTORS
AS WE DEAL WITH THE CHALLENGES AND OPPORTUNITIES AHEAD. THE CONTINUED SUPPORT OF
OUR POLICYHOLDERS AND EXCEPTIONAL EFFORTS OF OUR PEOPLE PROVIDE CONFIDENCE FOR
THE FUTURE.
[SIG]
STANLEY R. ZAX, CHAIRMAN OF THE BOARD AND PRESIDENT
WOODLAND HILLS, CALIFORNIA, FEBRUARY 1998
CalFarm
The Zenith 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING INFORMATION
The Private Securities Litigation Reform Act of 1995 provides a safe harbor
for forward-looking statements if accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to
differ materially from those discussed. Forward-looking statements include those
related to the plans and objectives of management for future operations, future
economic performance, or projections of revenues, income, earnings per share,
capital expenditures, dividends, capital structure, or other financial items.
Statements containing words such as EXPECT, ANTICIPATE, BELIEVE, or similar
words that are used in Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations, in other parts of Zenith's Annual
Report on Form 10-K pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 1997, in other parts of
Zenith's 1997 Annual Report to Stockholders or in other written or oral
information conveyed by or on behalf of Zenith are intended to identify
forward-looking statements. Zenith undertakes no obligation to update such
forward-looking statements, which are subject to a number of risks and
uncertainties that could cause actual results to differ materially from those
projected. These risks and uncertainties include but are not limited to the
following: (1) heightened competition, particularly intense price competition;
(2) adverse state and federal legislation and regulations; (3) changes in
interest rates causing a reduction of investment income; (4) general economic
and business conditions which are less favorable than expected; (5)
unanticipated changes in industry trends; (6) adequacy of loss reserves; (7)
catastrophic events or the occurrence of a significant number of storms and wind
and hail losses; (8) ability to timely and accurately complete the Year 2000
conversion process; (9) impact of any failure of third parties with whom Zenith
does business to be Year 2000 compliant and (10) other risks detailed herein and
from time to time in Zenith's other reports and filings with the Securities and
Exchange Commission.
OVERVIEW
Zenith's principal source of consolidated earnings is the income from
operation of its property-casualty insurance businesses. Property-Casualty
operations comprise Workers' Compensation (49% of 1997 consolidated net premiums
earned); Other Property-Casualty, principally automobile, homeowners, farmowners
and commercial coverages and health insurance (44% of 1997 consolidated net
premiums earned); and Reinsurance (7% of 1997 consolidated net premiums earned).
Results of such operations for the three years ended December 31, 1997 are set
forth in the table on page 25. Historically, Zenith's Workers' Compensation
operation has been focused almost entirely in California. In each of the three
years ended December 31, 1997 an increasing volume of business has been
generated outside of California. Substantially all of Zenith's Other
Property-Casualty business is written in California. Reinsurance business
assumed by Zenith provides reinsurance coverage for world-wide exposures with a
particular emphasis on catastrophe losses and large property risks. Property
insurance and reinsurance coverages expose Zenith to the risk of significant
loss in the event of major adverse natural phenomena, known in the insurance
industry as catastrophes. These catastrophes may cause significant
contemporaneous financial statement losses since catastrophe losses may not be
accrued in advance of the event. Zenith also conducts real estate operations
through Perma-Bilt, a Nevada Corporation ("Perma-Bilt"), a wholly-owned
subsidiary that develops land and primarily constructs private residences for
sale in Las Vegas, Nevada.
On December 31, 1996, Zenith completed the purchase of Associated General
Commerce Self-Insurers' Trust Fund ("AGC-SIF"), a Florida workers' compensation
self-insurers' fund, which added earned premium of $47 million to the 1997
operations.
In 1995, Zenith sold its wholly-owned subsidiary, CalFarm Life Insurance
Company ("CalFarm Life"), to a subsidiary of SunAmerica Inc. for approximately
$120 million in cash, with Zenith retaining the group health insurance business
previously written by CalFarm Life.
CalFarm
24 The Zenith
The results of operations and net assets of CalFarm Life's life and annuity
business are included as discontinued operations and results of the health
insurance operation are included in restated Other Property-Casualty results in
the accompanying consolidated financial statements. Net income in 1995 includes
a loss of $19.5 million associated with the sale of CalFarm Life.
The table below sets forth the components of net income for the three years
ended December 31, 1997:
- --------------------------------------------------------------------------------------------------
(Dollars in thousands) 1997 1996 1995
- --------------------------------------------------------------------------------------------------
Investment income, after taxes $ 34,655 $ 34,069 $ 30,690
Realized gains on investments, after taxes 8,431 7,025 2,354
- --------------------------------------------------------------------------------------------------
Sub-total 43,086 41,094 33,044
- --------------------------------------------------------------------------------------------------
Property-Casualty underwriting results, after taxes:
Income (loss) excluding catastrophes (10,217) 356 (226)
Catastrophe losses (975) (8,710)
- --------------------------------------------------------------------------------------------------
Property-Casualty underwriting income (loss), after taxes (11,192) 356 (8,936)
- --------------------------------------------------------------------------------------------------
Income from real estate operations, after taxes 1,079 1,251 1,349
Interest expense, after taxes (2,587) (3,170) (4,524)
Parent net expenses, after taxes (2,286) (1,931) (1,211)
Loss from discontinued life and annuity operations, after taxes (13,122)
- --------------------------------------------------------------------------------------------------
Net income $ 28,100 $ 37,600 $ 6,600
- --------------------------------------------------------------------------------------------------
PROPERTY-CASUALTY INSURANCE OPERATIONS
Premiums earned and underwriting results of Zenith's Property-Casualty
subsidiaries for the three years ended December 31, 1997 were as follows:
- ----------------------------------------------------------------------------------
(Dollars in thousands) 1997 1996 1995
- ----------------------------------------------------------------------------------
Premiums earned
Workers' Compensation $242,064 $210,916 $203,252
Other Property-Casualty 214,406 204,778 192,276
Reinsurance 32,251 37,162 41,985
- ----------------------------------------------------------------------------------
Total $488,721 $452,856 $437,513
- ----------------------------------------------------------------------------------
Underwriting income (loss), before taxes
Workers' Compensation $(37,157) $(19,462) $(14,548)
Other Property-Casualty 6,509 8,076 (12,007)
Reinsurance 14,189 12,479 12,955
- ----------------------------------------------------------------------------------
Total $(16,459) $ 1,093 $(13,600)
- ----------------------------------------------------------------------------------
Zenith's key operating goal is to achieve a combined ratio of 100% or lower.
The combined ratio, expressed as a percentage, is the key measure of
underwriting profitability traditionally used in the Property-Casualty insurance
business. It is the sum of net incurred loss and loss adjustment expenses,
underwriting expenses and policyholders' dividends, expressed as a percentage of
net premiums earned.
CalFarm
The Zenith 25
The combined ratios for the three years ended December 31, 1997 were as follows:
- ------------------------------------------------------------------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------------------------------
Combined loss and expense ratios
Workers' Compensation
Loss and loss adjustment expenses 81.6% 75.4% 75.6%
Underwriting expenses 33.6 32.6 28.8
Dividends to policyholders 0.1 1.2 2.8
- ------------------------------------------------------------------------------------------------------
Combined ratio 115.3 109.2 107.2
- ------------------------------------------------------------------------------------------------------
Other Property-Casualty
Loss and loss adjustment expenses 65.2 67.1 77.9
Underwriting expenses 31.7 29.0 28.3
- ------------------------------------------------------------------------------------------------------
Combined ratio 96.9 96.1 106.2
- ------------------------------------------------------------------------------------------------------
Reinsurance
Loss and loss adjustment expenses 33.7 49.0 52.6
Underwriting expenses 22.3 17.4 16.5
- ------------------------------------------------------------------------------------------------------
Combined ratio 56.0 66.4 69.1
- ------------------------------------------------------------------------------------------------------
Total combined ratio 103.4% 99.8% 103.1%
- ------------------------------------------------------------------------------------------------------
The profitability of property-casualty insurance underwriting operations is
principally dependent upon the adequacy of rates charged to the insured for
insurance protection, the frequency and severity of claims, the ability to
accurately estimate and accrue reported and unreported losses in the correct
period, the level of dividends paid to policyholders, and the ability to service
claims, maintain policies and acquire business efficiently.
The amount by which losses, measured subsequently by reference to payments
and additional estimates, differ from those originally reported for a period is
known as development. This is favorable when losses ultimately settle for less
than the amount reserved or subsequent estimates indicate a basis for reducing
reserves on open claims. The following shows the one-year loss reserve
development for loss and loss adjustment expense for the three main lines of
property-casualty business:
- -----------------------------------------------------------------------------
Other
(Dollars in Workers' Property-
thousands) Compensation Casualty Reinsurance Total
- -----------------------------------------------------------------------------
One-year loss
development in:
1997 $ 11,837 $ (5,316) $ (6,870) $ (349)
1996 (869) (224) (2,716) (3,809)
1995 (517) 1,337 (2,955) (2,135)
Favorable development is shown in brackets.
- -----------------------------------------------------------------------------
The unfavorable development in 1997 for Workers' Compensation operation is
due to loss and loss adjustment expense reserve strengthening for prior accident
years, principally 1995 and 1996 accident years.
The exposure of the insurance industry to losses arising out of the cost of
environmental and asbestos damage has been the focus of attention of a number of
interested parties in recent years. The process of evaluating an insurance
company's exposure is subject to significant uncertainties. Among the
complications are lack of historical data, long reporting delays, uncertainty as
to the number and identity of insureds with potential exposure and unresolved
legal issues regarding policy coverage. The legal issues concerning the
interpretations of various insurance policy provisions and whether environmental
and asbestos losses are or were ever intended to be covered are complex. Courts
have reached different and sometimes inconsistent conclusions regarding such
issues as: when the loss occurred and what policies provide coverage, how policy
limits are applied and determined, how policy exclusions are applied and
interpreted, whether clean-up costs are covered as insured property damage and
whether site assessment costs are either indemnity payments or adjusting costs.
CalFarm
26 The Zenith
Zenith has exposure to asbestos losses in its Workers' Compensation operation
for medical, indemnity and loss adjustment expenses associated with insureds'
long-term exposure to asbestos or asbestos-containing materials. Most of these
claims date back to the 1970's and early 1980's and Zenith's exposure is
generally limited to a pro-rata share of the loss for the period of time
coverage was provided. Zenith also has potential exposure to environmental and
asbestos losses and loss adjustment expenses beginning in 1985 through its
Reinsurance operation and through CalFarm Insurance, which writes liability
coverage under farmowners' and small commercial policies; however, such losses
are substantially excluded from all such coverage. The business reinsured by
Zenith contains exclusion clauses for environmental and asbestos losses, and in
1988 an absolute pollution exclusion was incorporated into CalFarm Insurance's
policy forms. All claims for damages resulting from environmental or asbestos
losses are identified and handled by Zenith's most experienced claims/legal
professionals. Environmental and asbestos losses have not been material and
Zenith believes that its reserves for environmental and asbestos losses are
appropriately established based on currently available facts, technology, laws
and regulations. However, due to the long-term nature of these claims, the
inconsistencies of court coverage decisions, plaintiffs' expanded theories of
liability, the risks inherent in major litigation and other uncertainties, the
ultimate exposure from these claims may vary from the amounts currently
reserved.
In the spring of 1996, Zenith began replacing and modifying its computer and
business systems to be Year 2000 compliant. Zenith has established a central
team to evaluate and implement the changes to computer systems, applications and
business processes necessary to achieve Year 2000 conversion with no disruption
to business operations. Even though Zenith has been communicating with third
parties with whom it does business to assure that they are Year 2000 compliant,
Zenith may be adversely impacted if such third parties do not address this issue
successfully. Through December 31, 1997, Zenith has incurred about $2.5 million
on the Year 2000 efforts and anticipates an additional $2.0 million will be
incurred through 1999. All of the significant internal insurance computer
systems, applications and business processes are expected to be fully compliant
by the end of 1998.
Some of the factors that continue to impact the business and economic
environment in which Zenith operates include: an uncertain political and
regulatory environment, both state and federal; the outlook for economic growth
in geographic areas where Zenith operates; the expansion itself of Zenith's
Workers' Compensation business outside of California; a highly competitive
insurance industry; and the changing environment for controlling medical, legal
and rehabilitation costs, as well as fraud and abuse. Although management is
currently unable to predict the effect of any of the foregoing, these factors
and related trends and uncertainties could have a material effect on Zenith's
future operations and financial condition.
Inflation rates impact the financial statements and operating results in
several areas. Fluctuations in inflation rates impact the market value of the
investment portfolio and yields on new investments. Inflation also impacts the
portion of the loss reserves that relates to hospital and medical expenses and
property claims and loss adjustment expenses, but not the portion of loss
reserves that relates to workers' compensation indemnity payments for lost wages
which are fixed by statute. Adjustments for inflationary impacts are implicitly
included as part of Zenith's subsidiaries' continual review of property-casualty
reserve estimates. Actuarial account of increased costs is considered in setting
adequate rates, and this is particularly important in the health insurance area
where hospital and medical inflation rates have exceeded general inflation
rates. Workers' compensation premium income is determined primarily by applying
a rate to payrolls, and as inflation increases, average wage rates are generally
adjusted, resulting in decreases in premium rates. Operating expenses, including
payrolls, are impacted to a certain degree by the inflation rate. Social
inflation affects the loss reserves for other property-casualty liability claims
for which settlements are determined in court proceedings.
CalFarm
The Zenith 27
WORKERS' COMPENSATION
Underwriting results in the Workers' Compensation operation deteriorated
significantly in 1997, 1996 and 1995 compared to prior years. The underwriting
losses in 1997, 1996 and 1995, were the result of intense competition, lower
premium income, the inability of Zenith to adjust operating expenses
commensurate with the decrease in premiums, and additional operating costs
associated with a new computer system which became operational in mid-1995. In
1997, Workers' Compensation results were also impacted by loss and loss
adjustment expense reserve strengthening of about $12 million for prior accident
years, and higher reserves for the current accident year. 1996 results were
affected by increased claim costs attributable to 1994 and 1995 accident years
which were offset by improvements in claim handling costs for the same periods.
Effective January 1, 1995, the minimum rate law in California was repealed
with the adoption of an open rating system in which insurers were allowed to
charge their own rates for Workers' Compensation coverage. Companies must file
such rates with the California Department of Insurance, but the use of scheduled
rating credits allow companies considerable flexibility in determining the
amount of premium to be charged to a policyholder or potential policyholder.
Competition in the industry based on price has become intense, negatively
impacting overall industry volume. Since open rating began, the
interrelationship of Zenith's actuarially-determined rates, underwriting and
agents' commission in comparison to the industry has resulted in the loss of
some business to competitors. The number of California policies in-force
decreased approximately 13% from 1996 to 1997 and 8% from 1995 to 1996.
The strategic geographic diversification in non-California markets primarily
offsets the decreasing premium in the California market. Zenith's non-California
Workers' Compensation operations include Texas, Arkansas, Illinois,
Pennsylvania, Utah and, effective January 1, 1997, Florida. During 1997, 1996
and 1995, approximately 46%, 29% and 22%, respectively, of earned premiums were
attributable to Zenith's non-California Workers' Compensation operations. The
increase in 1997 is primarily the result of the AGC-SIF acquisition effective
December 31, 1996. AGC-SIF's 1997 earned premiums contributed $47 million to the
1997 operations. National results for Workers' Compensation insurers in recent
years continue to be favorable by recent historic standards and Zenith's
non-California underwriting results in 1997, 1996, and 1995 were more favorable
than its California results. Management will continue to monitor the national
expansion of its Workers' Compensation operation.
The outlook for future profitability in the Workers' Compensation operation
is dependent upon the ability to maintain adequate rates, manage claims costs
and to keep operating expenses in line with premium volume.
Zenith continued to market its integrated Workers' Compensation, Health and
Disability insurance products in California and Arkansas in alliances with
selected health insurers, health maintenance organizations and UNUM Life
Insurance Company of America, one of the nation's largest disability insurance
companies. In 1997, this program did not have a material impact on Zenith's
operations.
Zenith is required to participate in the National Workers' Compensation
Reinsurance Pool ("NWCRP"), which is an involuntary assigned risk pool that
covers several states in which Zenith conducts business. Zenith's participation
in NWCRP premiums earned in 1997, 1996, and 1995 was approximately $3.3 million,
$3.6 million, and $1.4 million, respectively. The underwriting results for NWCRP
did not materially impact Workers' Compensation underwriting results in 1997,
1996, or 1995.
Florida has created the Special Disability Trust Fund ("the Fund") which
assesses Workers' Compensation insurers to pay for what are commonly referred to
as "Second Injuries". Historic assessments have been inadequate to completely
fund obligations of the Fund. In late 1997, the Florida statute was amended so
that the Fund will not be liable for and will not reimburse employers or
carriers for Second Injuries occurring on or after January 1, 1998. Zenith has
recorded its receivable from the Fund for Second Injuries based on specific
claims and historical experience prior to January 1, 1998. Management believes
that the remaining balance of the receivable at December 31, 1997 of $5,094,000
will be recovered.
CalFarm
28 The Zenith
In 1995, Zenith's new workers' compensation computer system ("system") became
operational. Management observed certain unusual claim reserving trends and
patterns in 1995 and 1996, and to a much lesser degree, during the first three
quarters of 1997. Based on currently available data, these claim reserving
trends and patterns have stabilized. Any subsequent re-interpretation of new
information that becomes available from the system which may change the estimate
of such liabilities in future periods is not considered to have a material
impact on the financial position or results of operations.
OTHER PROPERTY-CASUALTY
Underwriting results in the Other Property-Casualty operation were favorable
for both 1997 and 1996. 1997 underwriting results declined, compared to 1996,
due primarily to upgrades to the existing computer systems and computer costs
incurred for Year 2000 compliance, partially offset by favorable loss experience
in both current and prior accident years. 1997 results include $1.5 million of
catastrophe losses attributable to California storm damage.
The 1996 underwriting results improved significantly compared to 1995
primarily due to the absence of catastrophes in 1996 versus 1995 catastrophe
losses of $10.7 million from California storm damage.
Premiums earned increased in 1997 and 1996 compared to 1995, primarily due to
new business and rate increases for homeowners, earthquake, farmowners,
commercial coverages and health. The increase in premium was limited by the
competitive insurance market and pricing pressures for all lines of business in
California. All rate increases, except health, are subject to prior approval by
the California Department of Insurance (the "Department"). Management is unable
to predict whether requests for future rate increases, if any, will be granted
by the Department. Failure by the Department to act upon such requests would
adversely affect the adequacy of such rates and the profitability of operations
in the associated lines of business.
The California Legislature passed legislation in September 1996 which created
the California Earthquake Authority ("CEA"). The CEA became operational in
December 1996 and is a privately financed, publicly managed state agency, which
provides limited earthquake coverage throughout California. Participation in the
CEA is voluntary and Zenith elected not to participate. Zenith can elect to
participate in the CEA at a later date subject to meeting the participation
requirements at that time.
During 1997, Zenith continued to write homeowners and associated earthquake
with broader coverages than available through the CEA. Zenith will continue to
offer broader earthquake coverage as long as private reinsurance is available
and affordable.
Zenith is required to participate in involuntary market plans, including the
California Automobile Assigned Risk Plan ("CAARP"), the Commercial Automobile
Insurance Procedure ("CAIP"), and the California Fair Plan ("Fair Plan"). CAARP,
CAIP and the Fair Plan are organizations that were established by statute in
California but are serviced by the insurance industry. The 1997, 1996, and 1995
underwriting results for CAARP, CAIP and the Fair Plan together did not
materially impact the Other Property-Casualty underwriting results.
The private passenger automobile insurance market continues to be affected by
legislative actions. Both the mandatory insurance law and the "Personal
Responsibility Act of 1996" created by Proposition 213 were effective January
1997. During 1997, Zenith implemented the new rating factor regulations which
further limit the impact of territorial rating on automobile insurance rates.
During 1998, the California legislature is expected to continue its debate on
providing a low-cost auto policy to the uninsured drivers in California.
During the first quarter of 1998, California experienced wide-spread wind and
storm damage. Management is not able at this time to estimate the impact of the
storms on the results of operations of Zenith.
REINSURANCE
Zenith's assumed reinsurance operation emphasizes the reinsurance of
accumulated losses from catastrophes and the reinsurance of large property
risks. Whereas the number and severity of losses culminating with Hurricane
"Andrew" in 1992 pressured rates up followed by creation of additional industry
capacity, the absence of severe catastrophes in 1996 and 1997
CalFarm
The Zenith 29
and available capacity have pressured prices down.
Underwriting results were favorable during 1997 and 1996 as a result of
absence of catastrophes. In spite of losses incurred in 1995 of $2.5 million
principally attributable to Hurricane "Marilyn", the 1995 underwriting results
were profitable. For the past three years, the decrease in loss and loss
adjustment expenses was primarily due to favorable development of certain
treaties, however, the 1997 underwriting results were partially reduced by
contingent profit commission paid as a result of such favorable development.
The outlook for profitability in the reinsurance operation continues to be
dependent upon, among other things, the level of rates for property and
catastrophe reinsurance and the frequency and severity of world-wide property
losses. Premiums earned in the reinsurance operation decreased in 1996 and 1997
due to selected non-renewal by Zenith of certain reinsurance treaties and
generally softening of such rates in the industry. If rates do not improve,
premiums may continue to decrease in 1998.
INVESTMENTS
At December 31, 1997, approximately 92% of Zenith's consolidated portfolio of
fixed maturity investments were classified as available-for-sale under the
provisions of Statement of Financial Accounting Standards No. 115 -- "Accounting
for Certain Investments in Debt and Equity Securities." The unrealized
appreciation or depreciation on investments which are classified as
available-for-sale is recorded as a separate component of stockholders' equity.
The effect on consolidated stockholders' equity of the increase in the value of
fixed maturities classified as available-for-sale in 1997 compared to 1996 was
an increase of $5.0 million, net of deferred taxes. Any future changes in
interest rates will impact stockholders' equity through changes in the values of
fixed maturity investments which are classified as available-for-sale.
Zenith's primary investment goal is to maintain safety and liquidity, enhance
principal values and achieve increased rates of return consistent with
regulatory constraints. The allocation among various types of securities is
adjusted from time to time based on market conditions, credit conditions, tax
policy, fluctuations in interest rates and other factors.
The change in the carrying value of Zenith's consolidated investment
portfolio in 1997 was as follows:
- -------------------------------------------------------------------------------------------------
(Dollars in thousands)
- -------------------------------------------------------------------------------------------------
Carrying value at beginning of year $ 852,799
Purchases at cost 91,244
Maturities and redemptions (70,079)
Proceeds from sales of investments:
Available-for-sale ($104,809)
Other (16,627)
---------
Total proceeds from sales of investments (121,436)
Net realized gains:
Available-for-sale 4,108
Other 9,900
---------
Total net realized gains 14,008
Unrealized gains 13,545
Increase in short-term investments 103,115
Net amortization of bonds and preferred stocks and other changes (3,223)
- -------------------------------------------------------------------------------------------------
Carrying value at end of year $ 879,973
- -------------------------------------------------------------------------------------------------
At December 31, 1997, and 1996, Zenith's consolidated investment portfolio
emphasized high-quality, taxable bonds and short-term investments. Bonds
constituted 67% and 77%, and short-term investments constituted 24% and 13%, of
the carrying value of Zenith's consolidated investment portfolio at December 31,
1997 and 1996, respectively. At December 31, 1997 and 1996, 96% and 97%,
respectively, of the consolidated carrying values
CalFarm
30 The Zenith
of investments in bonds were rated investment grade.
Investment income during the years ended December 31, was as follows:
- ----------------------------------------------------
(Dollars in
thousands) 1997 1996 1995
- ----------------------------------------------------
Before taxes $ 52,332 $ 51,154 $ 46,150
After taxes 34,655 34,069 30,690
- ----------------------------------------------------
The yields on invested assets vary with the general level of interest rates,
the average life of invested assets and the amount of funds available for
investment; and for the years ended December 31 were as follows:
- ----------------------------------------------------
1997 1996 1995
- ----------------------------------------------------
Before taxes 6.0% 6.1% 6.0%
After taxes 4.0% 4.0% 4.0%
- ----------------------------------------------------
REAL ESTATE
Zenith recognized total revenues of $46.0 million, $41.6 million, and $31.7
million in 1997, 1996, and 1995, respectively, related to its real estate
operations which commenced in 1993. Total revenues include other realized gains
of $0.5 million in 1997 and none for 1996 and 1995. Income from real estate
operations before taxes was $1.7 million, $1.9 million, and $2.1 million in
1997, 1996 and 1995, respectively. Construction in progress, including
undeveloped land, was $53.1 million at December 31, 1997 compared to $45.1
million at December 31, 1996. In addition to continuing home construction,
Zenith may use some land presently owned for commercial construction.
PENDING RISCORP ACQUISITION
On June 17, 1997, Zenith entered into an agreement with RISCORP Inc. and
certain of its subsidiaries (collectively "RISCORP") to purchase all of the
assets of RISCORP related to its workers' compensation business, including
RISCORP's existing in-force insurance business as well as the right to all new
and renewal policies. Zenith will also purchase RISCORP's "First Call" managed
care workers' compensation system. After the transaction closes, RISCORP will no
longer engage in workers' compensation or managed care businesses.
Zenith will assume certain liabilities related to RISCORP's insurance
business in connection with the transaction. In addition, Zenith will assume or
repay $15 million in indebtedness of RISCORP. The purchase price paid by Zenith
to RISCORP will be the difference between the book value of the assets purchased
and the book value of the liabilities assumed by Zenith on the closing date,
subject to a minimum purchase price of $35 million, payable in cash. The
ultimate purchase price, however, cannot be determined at this time.
Zenith and RISCORP also entered into an agreement under which all RISCORP's
Florida in-force, and new and renewal policies issued after June 17, 1997 are
reinsured by Zenith in the event that RISCORP is declared insolvent prior to the
closing, at which time the related liabilities will be assumed.
The closing of the purchase is subject to certain conditions, including the
review and approval by appropriate regulatory agencies, compliance with contract
provisions and approval by RISCORP's shareholders. RISCORP has obtained the
necessary approvals from the Securities and Exchange Commission to solicit its
shareholders. The closing date cannot be determined at this time. However, if
closing does not occur by March 31, 1998, either party may terminate the
agreement.
Management of RISCORP has informed Zenith that it is currently in the process
of identifying and evaluating its computer and business systems with respect to
Year 2000 issues. At this time, however, management of RISCORP has neither
informed Zenith of the total cost of achieving Year 2000 compliance for its
systems nor presented a plan for doing so. If the transaction closes, Zenith may
be adversely impacted if substantial changes are required after the closing for
RISCORP's computer and business systems to achieve Year 2000 compliance, and if
such changes are not covered by indemnification rights contained in the purchase
agreement.
LIQUIDITY AND CAPITAL RESOURCES
Zenith's property-casualty insurance subsidiaries create liquidity because
insurance premiums are generally collected prior to disbursements for claims and
benefits. These net cash flows, as set forth on page 41 in the Consolidated
Financial Statements, are invested as described in "Investments" above. Net cash
flows from continuing operating activities were
CalFarm
The Zenith 31
$27.0 million, $9.7 million and $9.6 million, for 1997, 1996 and 1995,
respectively.
Zenith's principal liquidity requirements in the long-term and the short-term
are the funds needed to pay its expenses, service its outstanding debt, pay any
cash dividends which may be declared to its stockholders and fund the land
acquisitions and development of its real estate subsidiary, Perma-Bilt. Zenith
is principally dependent upon its portfolio of marketable securities and the
investment yields thereon; dividends from its insurance subsidiaries, whose
operations are supported by their own cash flows; and available lines of credit
to pay its expenses, service debt and pay any cash dividends which may be
declared to its stockholders.
Currently, Zenith has three revolving lines of credit in place. These lines
provide Zenith with $100 million of revolving credit, all of which is currently
available, along with internal funds, to fund the closing of the pending
acquisition of certain assets and liabilities from RISCORP. The closing date and
ultimate purchase price cannot be determined at this time, although the purchase
agreement calls for a minimum purchase price of $35 million. In the opinion of
management, Zenith's sources of funding are sufficient for its short-term and
long-term requirements for liquidity.
Zenith's insurance subsidiaries are subject to insurance regulations which
restrict their ability to distribute dividends. Such dividend capabilities are
set forth in Note 10 to the Consolidated Financial Statements. Such restrictions
have not had, and under current regulations are not expected to have, a material
adverse impact on Zenith. Zenith received dividends from its insurance
subsidiaries amounting to $22.75 million in 1997, $15.0 million in 1996 and
$10.5 million in 1995. Maximum dividend capability, without prior approval of
the Department, of Zenith's subsidiaries in 1998 is $27.8 million.
Perma-Bilt maintains certain bank credit facilities to provide financing for
its development and construction of private residences for sale. At December 31,
1997, maximum permitted borrowing under the facilities was $25.3 million, with a
balance outstanding of $11.4 million. Perma-Bilt is obligated under various
notes arising from its purchase of several parcels of land. The amount
outstanding for such notes at December 31, 1997 was $2.3 million.
Insurance companies are required to have securities on deposit for the
protection of policyholders in accordance with various states' regulations. At
December 31, 1997, investments carried at their fair value of $294.3 million
were on deposit to comply with such regulations.
At December 31, 1997, Zenith was authorized to purchase up to 1,085,000
shares of Zenith common stock pursuant to a share purchase program authorized by
its Board of Directors. These purchases, which are made at prevailing market
prices, are discretionary and can be adequately funded from Zenith's existing
sources of liquidity. As previously announced, on January 6, 1998, Zenith
repurchased 930,000 shares at $25 per share in the open market.
PROPOSED CODIFICATION OF
STATUTORY ACCOUNTING PRINCIPLES
The National Association of Insurance Commissioners is in the process of
codifying statutory accounting principles to provide a comprehensive basis of
statutory accounting and reporting for use by insurance departments, insurers,
and auditors. The codified principles have not yet been finalized; therefore,
the effective date has not been determined. Implementation of the codified
statutory accounting principles may affect the surplus level and the
capitalization requirement of Zenith's insurance subsidiaries on a statutory
basis. Zenith has not determined the impact of this codification.
RECENT DEVELOPMENTS IN
FASB ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). SFAS No. 130 is
effective for periods beginning after December 15, 1997. SFAS No. 130 requires
companies to report comprehensive income and its components in a financial
statement which would include net income in addition to unrealized appreciation
(depreciation) on investments that are currently presented as components of
stockholders' equity.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131 is effective
for periods beginning
CalFarm
32 The Zenith
after December 15, 1997. SFAS No. 131 specifies revised guidelines for
determining an entity's operating segments and the type and level of financial
information to be disclosed. Zenith has not determined the final presentation
impact of SFAS No. 131 but does believe that additional segments will be
reported in 1998.
CalFarm
The Zenith 33
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL INFORMATION
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, Note 1997 1996
- -----------------------------------------------------------------
(Dollars and shares in thousands,
except per share data)
REVENUES 1
Property-Casualty insurance
operations
Premiums earned $ 488,721 $ 452,856
Investment income 52,332 51,154
Realized gains on investments 14,008 10,807
Real estate operations 45,419 41,554
Income from legal settlement
- -----------------------------------------------------------------
TOTAL REVENUES 1 600,480 556,371
- -----------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS
AFTER TAXES AND
BEFORE REALIZED GAINS 1, 2 19,669 30,575
Per share* 1, 2 1.10 1.72
- -----------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS
AFTER TAXES 5 28,100 37,600
Per share* 5 1.57 2.12
- -----------------------------------------------------------------
COMPONENTS OF NET INCOME 1
Underwriting income (loss)
Excluding catastrophe losses (10,217) 356
Including catastrophe losses (11,192) 356
Net investment income 34,655 34,069
Realized gains on investments 3 8,431 7,025
Real estate operations 1,079 1,251
Parent operations (4,873) (5,101)
Income (loss) from discontinued
life and annuity operations 5
- -----------------------------------------------------------------
NET INCOME 28,100 37,600
Per share* 1.57 2.12
- -----------------------------------------------------------------
CASH DIVIDENDS PER SHARE TO COMMON
STOCKHOLDERS 1.00 1.00
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING* 17,886 17,752
- -----------------------------------------------------------------
FINANCIAL CONDITION 1
Total assets 1,252,156 1,242,724
Investments 879,973 852,799
Property-Casualty unpaid claims 613,266 620,078
Senior notes, bank debt and other
notes payable 88,216 88,861
Total stockholders' equity 361,866 337,503
Stockholders' equity per share 20.31 19.17
Stockholders' equity per share,
excluding effect of SFAS No. 115 4 20.03 19.28
Return on average equity 8.3% 11.4%
- -----------------------------------------------------------------
PROPERTY-CASUALTY INSURANCE
STATISTICS (GAAP) 1
Paid loss and loss adjustment
expense ratio 66.9% 69.9%
Loss and loss adjustment expense
ratio 71.2% 69.5%
Underwriting expense ratio 32.1% 29.7%
Policyholder dividends ratio 0.1% .6%
Combined ratio 103.4% 99.8%
Net premiums earned-to-surplus
ratio 1.4 1.4
Loss and loss adjustment expense
reserves-to-surplus ratio (net
of reinsurance) 6 1.5 1.6
- -----------------------------------------------------------------
*Amounts prior to 1997 have been restated as required to comply with SFAS No.
128 and represent diluted amounts per share and weighted average shares
assuming exercise of stock options. For further discussion of earnings per
share and the impact of SFAS No. 128, see Notes 1 and 16 to the consolidated
financial statements on pages 46 and 55, respectively.
CalFarm
34 The Zenith
- --------------------------------------------------------------------------------
1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------
(Dollars and shares in thousands,
except per share data)
REVENUES
Property-Casualty insurance
operations
Premiums earned $ 437,513 $ 438,829 $ 447,270
Investment income 46,150 40,068 39,309
Realized gains on investments 3,621 1,428 14,272
Real estate operations 31,736 30,220
Income from legal settlement 1,910 7,561
- ---------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 519,020 512,455 508,412
- ---------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS
AFTER TAXES AND
BEFORE REALIZED GAINS 17,368 27,628 27,820
Per share* .95 1.45 1.44
- ---------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS
AFTER TAXES 19,722 29,798 42,177
Per share* 1.08 1.56 2.19
- ---------------------------------------------------------------------------------------------------------------
COMPONENTS OF NET INCOME
Underwriting income (loss)
Excluding catastrophe losses (226) 15,652 8,801
Including catastrophe losses (8,936) 5,707 7,436
Net investment income 30,690 26,995 26,888
Realized gains on investments 2,354 929 9,443
Real estate operations 1,349 1,423
Parent operations (5,735) (5,256) (1,590)
Income (loss) from discontinued
life and annuity operations (13,122) 8,102 11,023
- ---------------------------------------------------------------------------------------------------------------
NET INCOME 6,600 37,900 53,200
Per share* .36 1.99 2.77
- ---------------------------------------------------------------------------------------------------------------
CASH DIVIDENDS PER SHARE TO COMMON
STOCKHOLDERS 1.00 1.00 1.00
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING* 18,334 19,029 19,196
- ---------------------------------------------------------------------------------------------------------------
FINANCIAL CONDITION
Total assets 1,115,433 1,093,675 1,125,211
Investments 835,214 709,030 754,107
Property-Casualty unpaid claims 517,552 510,406 519,418
Senior notes, bank debt and other
notes payable 83,135 76,582 73,989
Total stockholders' equity 330,432 309,860 349,465
Stockholders' equity per share 18.58 16.35 18.55
Stockholders' equity per share,
excluding effect of SFAS No. 115 18.18 18.79 17.90
Return on average equity 2.0% 11.7% 16.3%
- ---------------------------------------------------------------------------------------------------------------
PROPERTY-CASUALTY INSURANCE
STATISTICS (GAAP)
Paid loss and loss adjustment
expense ratio 74.3% 69.6% 67.9%
Loss and loss adjustment expense
ratio 74.4% 66.9% 68.5%
Underwriting expense ratio 27.4% 26.9% 25.5%
Policyholder dividends ratio 1.3% 4.0% 3.4%
Combined ratio 103.1% 97.8% 97.4%
Net premiums earned-to-surplus
ratio 1.4 1.7 1.6
Loss and loss adjustment expense
reserves-to-surplus ratio (net
of reinsurance) 1.5 1.7 1.7
- ---------------------------------------------------------------------------------------------------------------
(1) 1993 and 1994 have been restated to include health insurance included in
property-casualty insurance operations.
(2)Excludes $1,241,000, or $.06 per share, in 1994 and $4,914,000, or $.26 per
share, in 1993 for the effect of legal settlement.
(3) Taxes on realized gains were reduced in 1993 for the tax benefit associated
with capital losses carried forward from 1990.
(4) Effective December 31, 1993, Zenith adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt
and Equity Securities" ("SFAS No. 115"), under which the unrealized
appreciation or depreciation, net of deferred taxes, on debt securities
classified as available-for-sale is recorded in stockholders' equity.
(5) In 1995, Zenith sold CalFarm Life (see Note 15 to the Consolidated Financial
Statements).
(6) Computed including AGC-SIF net reserves of $65,429,000 acquired through
merger on December 31, 1996 (See Note 14 to the Consolidated Financial
Statements).
CalFarm
The Zenith 35
PROPERTY-CASUALTY LOSS DEVELOPMENT
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
The table that follows shows analysis of development of loss and loss
adjustment expense liabilities as originally estimated on a GAAP basis at
December 31 of each year presented. The accounting policies used to estimate
these liabilities are described in Note 1 to the Consolidated Financial
Statements. Amounts represent all property-casualty operations. Information for
1994 and prior years has been restated to include the health insurance business
previously written by CalFarm Life Insurance Company.
ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE LIABILITY DEVELOPMENT
- --------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1997 1996
- -------------------------------------------------------
(Dollars in thousands)
LIABILITY FOR UNPAID LOSS AND LOSS
ADJUSTMENT EXPENSES, NET $525,601 $526,427
- -------------------------------------------------------
PAID, NET (CUMULATIVE) AS OF:
One year later 209,346
Two years later
Three years later
Four years later
Five years later
Six years later
Seven years later
Eight years later
Nine years later
Ten years later
- -------------------------------------------------------
LIABILITY, NET RE-ESTIMATED AS OF:
One year later 526,078
Two years later
Three years later
Four years later
Five years later
Six years later
Seven years later
Eight years later
Nine years later
Ten years later
- -------------------------------------------------------
FAVORABLE (DEFICIENT) DEVELOPMENT $349
- -------------------------------------------------------
NET LIABILITY -- DECEMBER 31, $525,601 $526,427
Receivable from reinsurers and
state trust funds 87,665 93,651
- -------------------------------------------------------
GROSS LIABILITY -- DECEMBER 31, $613,266 620,078
Re-estimated liability, net of
reinsurance 526,078
Re-estimated receivable from
reinsurers 95,570
- -------------------------------------------------------
Re-estimated liability, gross 621,648
- -------------------------------------------------------
FAVORABLE (DEFICIENT) DEVELOPMENT,
GROSS $(1,570)
- -------------------------------------------------------
The analysis above presents the development of Zenith's balance sheet
liabilities for 1987 through 1997. The first line in the table shows the
liability for loss and loss adjustment expense as estimated at the end of each
calendar year. The first section shows the actual payments of loss and loss
adjustment expenses that relate to each year-end liability as they are paid
during subsequent annual periods. The second section includes revised estimates
of the original unpaid amounts, net of reinsurance, including the subsequent
payments. The next line shows the favorable or deficient developments of the
original estimates for each year through 1997, net of reinsurance. This loss
reserve development table is cumulative and, therefore, ending balances should
not be added since the amount at the end of each calendar year includes activity
for both the current and prior years. Hence, the liability at the end of each
year includes an estimate of the amount yet unpaid and still due at the
subsequent re-evaluation date for all previously estimated liabilities. For
example, the liability at the end of 1996 includes an estimate of the amount
still due on the 1995 and prior liabilities. The loss and loss adjustment
expense data prior to 1995 have been restated to include health insurance.
Since conditions and trends that have affected loss and loss adjustment
expense development in the past may not occur in the future in exactly the same
manner, if at all, future results may not be reliably predicted by extrapolation
of the data presented.
CalFarm
36 The Zenith
- --------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 1987
- -----------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
LIABILITY FOR UNPAID LOSS AND LOSS
ADJUSTMENT EXPENSES, NET $463,123 $462,710 $474,499 $471,832 $447,702 $424,373 $386,445 $347,888 $293,981
- -----------------------------------------------------------------------------------------------------------------------------
PAID, NET (CUMULATIVE) AS OF:
One year later 185,764 175,488 173,699 184,498 184,593 162,642 129,605 118,332 105,939
Two years later 295,872 274,560 272,221 292,914 291,228 264,904 205,132 179,241 159,746
Three years later 331,532 325,916 355,710 352,208 323,685 258,632 216,321 189,980
Four years later 364,420 389,417 390,459 357,233 289,963 245,629 207,890
Five years later 416,297 412,600 380,524 309,524 263,971 225,849
Six years later 433,322 394,741 323,041 275,983 237,474
Seven years later 409,190 332,239 284,877 245,429
Eight years later 341,520 290,126 251,801
Nine years later 295,039 256,423
Ten years later 260,196
- -----------------------------------------------------------------------------------------------------------------------------
LIABILITY, NET RE-ESTIMATED AS OF:
One year later 459,314 460,575 464,779 480,903 467,636 427,458 381,096 341,679 293,526
Two years later 464,830 450,675 453,497 483,334 485,399 442,332 371,272 332,541 290,002
Three years later 442,391 452,330 482,019 485,816 453,802 374,455 327,961 289,074
Four years later 446,746 487,447 488,723 454,744 380,983 325,457 285,801
Five years later 483,294 491,216 455,971 381,703 328,415 280,860
Six years later 488,826 456,860 382,280 328,640 281,385
Seven years later 453,475 382,219 329,058 282,498
Eight years later 377,410 328,465 282,882
Nine years later 322,236 282,454
Ten years later 279,103
- -----------------------------------------------------------------------------------------------------------------------------
FAVORABLE (DEFICIENT) DEVELOPMENT $ (1,707) $ 20,319 $ 27,753 $(11,462) $(41,124) $(29,102) $ 9,035 $ 25,652 $ 14,878
- -----------------------------------------------------------------------------------------------------------------------------
NET LIABILITY -- DECEMBER 31, $463,123 $462,710 $474,499 $471,832
Receivable from reinsurers and
state trust funds 54,429 47,696 44,919 33,070
- ---------------------------------------------------------------------------
GROSS LIABILITY -- DECEMBER 31, 517,552 510,406 519,418 504,902
Re-estimated liability, net of
reinsurance 464,830 442,391 446,746 483,294
Re-estimated receivable from
reinsurers 54,725 45,045 54,280 70,526
- ---------------------------------------------------------------------------
Re-estimated liability, gross 519,555 487,436 501,026 553,820
- ---------------------------------------------------------------------------
FAVORABLE (DEFICIENT) DEVELOPMENT,
GROSS $ (2,003) $ 22,970 $ 18,392 $(48,918)
- ---------------------------------------------------------------------------
CalFarm
The Zenith 37
CONSOLIDATED BALANCE SHEET
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
- --------------------------------------------------------------------------------------------------------------
DECEMBER 31, Note 1997 1996
- --------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
ASSETS
Investments
Fixed maturities:
At amortized cost (fair value $48,266, 1997 and $53,113, 1996) $ 46,948 $ 53,353
At fair value (cost $534,771, 1997 and $608,756, 1996) 542,479 605,630
Floating rate preferred stocks, at fair value (cost $14,614, 1997 and 1996) 15,670 14,071
Convertible and non-redeemable preferred stocks, at fair value (cost $6,672,
1997 and $750, 1996) 6,602 784
Common stocks, at fair value (cost $17,790, 1997 and $18,030, 1996) 23,439 22,771
Short-term investments (at cost, which approximates fair value) 209,827 106,712
Other investments 35,008 49,478
- --------------------------------------------------------------------------------------------------------------
Total investments 1, 2 879,973 852,799
Cash 12,504 12,125
Accrued investment income 9,523 10,973
Premiums receivable, less allowance for doubtful accounts of $1,575 in 1997
and $3,725 in 1996 72,813 80,545
Receivable from reinsurers, state trust funds and prepaid reinsurance premiums 8 106,067 119,524
Deferred policy acquisition costs 20,840 20,752
Properties and equipment, less accumulated depreciation 3 54,531 49,179
Federal income taxes 6 19,940 29,939
Other assets 1 75,965 66,888
- --------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $1,252,156 $1,242,724
- --------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of this statement.
CalFarm
38 The Zenith
- -----------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, Note 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
(Dollars and shares in thousands)
LIABILITIES
Policy liabilities and accruals
Unpaid loss and loss adjustment expenses 13 $ 613,266 $ 620,078
Unearned premiums 128,469 127,209
Policyholders' dividends accrued 5,360 7,670
Other policyholder funds 6,407 9,109
Reserves on loss portfolio transfers 11,054 8,359
Payable to banks and other notes payable 4 13,742 14,508
Senior notes payable, less unamortized issue costs
of $526, 1997 and $647, 1996 5 74,474 74,353
Other liabilities 37,518 43,935
- -----------------------------------------------------------------------------------------------------------------------------
Total liabilities 890,290 905,221
- -----------------------------------------------------------------------------------------------------------------------------
Commitments and contingent liabilities 8
STOCKHOLDERS' EQUITY
Preferred stock, $1 par -- shares authorized 1,000; issued and outstanding,
none in 1997 and 1996
Common stock, $1 par -- shares authorized 50,000; issued 24,681, outstanding 17,819,
1997; issued 24,447, outstanding 17,604, 1996 9 24,681 24,447
Additional paid-in capital 264,098 258,875
Retained earnings 186,268 175,684
Net unrealized appreciation on investments, net of deferred tax expense of $5,025,
1997 and $284, 1996 1, 2 9,332 528
- -----------------------------------------------------------------------------------------------------------------------------
484,379 459,534
Less treasury stock at cost (6,862 shares, 1997 and 6,843 shares, 1996) 9 (122,513) (122,031)
- -----------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 361,866 337,503
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,252,156 $ 1,242,724
- -----------------------------------------------------------------------------------------------------------------------------
CalFarm
The Zenith 39
CONSOLIDATED STATEMENT OF OPERATIONS
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
- ---------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, Note 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
(Dollars and shares in thousands, except per share data)
CONSOLIDATED REVENUES:
Premiums earned 7 $ 488,721 $ 452,856 $ 437,513
Net investment income 2 52,332 51,154 46,150
Realized gains on investments 2 14,008 10,807 3,621
Real estate sales 45,419 41,554 31,736
- ---------------------------------------------------------------------------------------------------------------------------------
Total revenues 600,480 556,371 519,020
- ---------------------------------------------------------------------------------------------------------------------------------
EXPENSES:
Loss and loss adjustment expenses incurred 7, 13 348,165 314,700 325,589
Policy acquisition costs 92,213 84,093 81,846
Other underwriting and operating expenses 68,003 53,413 39,882
Policyholders' dividends and participation 355 2,526 5,660
Real estate construction and operating costs 44,286 39,645 29,661
Interest expense 4, 5 3,980 4,877 6,960
- ---------------------------------------------------------------------------------------------------------------------------------
Total expenses 557,002 499,254 489,598
- ---------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations before federal income tax expense 43,478 57,117 29,422
Federal income tax expense 6 15,378 19,517 9,700
- ---------------------------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS 28,100 37,600 19,722
- ---------------------------------------------------------------------------------------------------------------------------------
Income from life and annuity operations of CalFarm Life (less income tax
expense of $3,463) 15 6,431
Loss on disposal of CalFarm Life, including income tax expense of $4,099 15 (19,553)
- ---------------------------------------------------------------------------------------------------------------------------------
LOSS FROM DISCONTINUED OPERATIONS (13,122)
- ---------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 28,100 $ 37,600 $ 6,600
- ---------------------------------------------------------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE:
Income from continuing operations 16 $ 1.59 $ 2.14 $ 1.08
Loss from discontinued operations (.72)
- ---------------------------------------------------------------------------------------------------------------------------------
NET INCOME PER COMMON SHARE $ 1.59 $ 2.14 $ 0.36
- ---------------------------------------------------------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE - ASSUMING DILUTION:
Income from continuing operations 16 $ 1.57 $ 2.12 $ 1.08
Loss from discontinued operations (.72)
- ---------------------------------------------------------------------------------------------------------------------------------
Net income per common share - assuming dilution $ 1.57 $ 2.12 $ .36
- ---------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of this statement.
CalFarm
40 The Zenith
CONSOLIDATED STATEMENT OF CASH FLOWS
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
- ---------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Premiums collected $ 521,588 $ 474,831 $ 457,907
Investment income received 52,242 46,167 45,606
Proceeds from sales of real estate 45,964 41,554 31,736
Loss and loss adjustment expenses paid (342,461) (316,949) (325,200)
Underwriting and other operating expenses paid (160,438) (127,975) (120,533)
Real estate construction costs paid (47,565) (54,480) (34,307)
Reinsurance premiums paid (27,336) (23,748) (21,586)
Dividends paid to policyholders (1,284) (5,985) (13,744)
Interest paid (6,910) (7,626) (8,390)
Income taxes paid (8,242) (23,090) (4,578)
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash provided by continuing operating activities, excluding cash from trading portfolio 25,558 2,699 6,911
Net proceeds from sales of trading portfolio investments 1,416 7,050 2,677
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash provided by continuing operating activities, including cash from trading portfolio 26,974 9,749 9,588
Net cash from discontinued operating activities, including cash from trading portfolio 12,655
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 26,974 9,749 22,243
- ---------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments:
Debt securities held-to-maturity (5,342) (141,531)
Debt and equity securities available-for-sale (82,734) (447,251) (210,600)
Other debt and equity securities and other investments (8,510) (13,295) (13,885)
Proceeds from maturities and exchanges of investments:
Debt securities held-to-maturity 6,258 8,460 4,284
Debt and equity securities available-for-sale 48,338 173,287 16,869
Other debt and equity securities and other investments 15,483 2,085
Proceeds from sales of investments:
Debt and equity securities available-for-sale 104,809 261,410 293,024
Other debt and equity securities and other investments 15,211 9,656 5,086
Proceeds from the sale of CalFarm Life Insurance Company 120,000
Net change in short-term investments (103,115) 34,716 (38,522)
Other (8,108) (5,784) (6,289)
Net cash used in investing activities of discontinued operations (30,093)
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (12,368) 15,857 428
- ---------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash advanced from bank line of credit 43,400
Cash repaid on bank line of credit (43,400)
Cash advanced from bank loans and other notes payable 39,729 27,935 30,657
Cash repaid on bank loans and other notes payable (40,719) (25,691) (24,225)
Cash dividends paid to common stockholders (17,695) (17,605) (18,273)
Proceeds from exercise of stock options 4,940 2,572 4,405
Purchase of treasury shares (482) (7,611) (29,318)
Net cash provided by financing activities of discontinued operations 15,644
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (14,227) (20,400) (21,110)
- ---------------------------------------------------------------------------------------------------------------------------------
Net increase in cash 379 5,206 1,561
Cash at beginning of year 12,125 6,919 5,358
- ---------------------------------------------------------------------------------------------------------------------------------
CASH AT END OF YEAR $ 12,504 $ 12,125 $ 6,919
- ---------------------------------------------------------------------------------------------------------------------------------
RECONCILIATION OF INCOME FROM CONTINUING OPERATIONS TO NET CASH FLOWS
FROM OPERATING ACTIVITIES:
Income from continuing operations $ 28,100 $ 37,600 $ 19,722
Adjustments to reconcile income from continuing operations to net cash flows from operating
activities:
Depreciation and amortization 5,716 3,081 4,975
Realized gains on investments (14,008) (10,807) (3,621)
Net cash from trading portfolio 1,416 7,050 2,677
Net cash flow from discontinued operations 12,655
Decrease (increase) in:
Premiums receivable 7,732 (3,467) (3,243)
Receivable from reinsurers 13,457 (1,824) (6,168)
Deferred policy acquisition costs (88) (413) (1,833)
Real estate construction in progress and land held for development (8,038) (19,601) (5,596)
Increase (decrease) in:
Unpaid loss and loss adjustment expenses (6,812) (164) 7,416
Unearned premiums 1,260 7,618 2,234
Policyholders' dividends accrued (2,310) (5,570) (8,422)
Federal income taxes 6,385 (3,574) 4,946
Other (5,836) (180) (3,499)
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities $ 26,974 $ 9,749 $ 22,243
- ---------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of this statement.
CalFarm
The Zenith 41
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
PREFERRED COMMON
THREE YEARS ENDED DECEMBER 31, 1997 NOTE STOCK $1 PAR STOCK $1 PAR
- ---------------------------------------------------------------------------
(Dollars in thousands, except per
share data)
BALANCE AT JANUARY 1, 1995 $ 24,034
Net income for 1995
Net unrealized appreciation on
investments,
net of deferred tax expense of
$8,721 2
Exercise of 276,000 stock options 9 276
Tax benefit on options exercised in
1995
Purchase of 1,442,000 treasury
shares at cost
Cash dividends declared to common
stockholders ($1.00 per share,
paid quarterly)
- ---------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 24,310
Net income for 1996
Net unrealized (depreciation) on
investments, net of deferred tax
benefit of $4,468 2
Exercise of 137,000 stock options 9 137
Tax benefit on options exercised in
1996
Purchase of 317,000 treasury shares
at cost
Cash dividends declared to common
stockholders ($1.00 per share,
paid quarterly)
- ---------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 24,447
Net income for 1997
Net unrealized appreciation on
investments, net of deferred tax
expense of $4,741 2
Exercise of 234,000 stock options 9 234
Tax benefit on options exercised in
1997
Purchase of 19,000 treasury shares
at cost
Cash dividends declared to common
stockholders ($1.00 per share,
paid quarterly)
- ---------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 $ 24,681
- ---------------------------------------------------------------------------
The accompanying notes are an integral part of this statement.
CalFarm
42 The Zenith
- --------------------------------------------------------------------------------
NET UNREALIZED APPRECIATION
ADDITIONAL RETAINED (DEPRECIATION) ON TREASURY
PAID-IN CAPITAL EARNINGS INVESTMENTS STOCK TOTAL
- ---------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per
share data)
BALANCE AT JANUARY 1, 1995 $ 251,363 $ 167,025 $ (47,460) $ (85,102) $ 309,860
Net income for 1995 6,600 6,600
Net unrealized appreciation on
investments,
net of deferred tax expense of
$8,721 56,285 56,285
Exercise of 276,000 stock options 4,129 4,405
Tax benefit on options exercised in
1995 591 591
Purchase of 1,442,000 treasury
shares at cost (29,318) (29,318)
Cash dividends declared to common
stockholders ($1.00 per share,
paid quarterly) (17,991) (17,991)
- ---------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 256,083 155,634 8,825 (114,420) 330,432
Net income for 1996 37,600 37,600
Net unrealized (depreciation) on
investments, net of deferred tax
benefit of $4,468 (8,297) (8,297)
Exercise of 137,000 stock options 2,435 2,572
Tax benefit on options exercised in
1996 357 357
Purchase of 317,000 treasury shares
at cost (7,611) (7,611)
Cash dividends declared to common
stockholders ($1.00 per share,
paid quarterly) (17,550) (17,550)
- ---------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 258,875 175,684 528 (122,031) 337,503
Net income for 1997 28,100 28,100
Net unrealized appreciation on
investments, net of deferred tax
expense of $4,741 8,804 8,804
Exercise of 234,000 stock options 4,706 4,940
Tax benefit on options exercised in
1997 517 517
Purchase of 19,000 treasury shares
at cost (482) (482)
Cash dividends declared to common
stockholders ($1.00 per share,
paid quarterly) (17,516) (17,516)
- ---------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 $ 264,098 $ 186,268 $ 9,332 $(122,513) $ 361,866
- ---------------------------------------------------------------------------------------------------------------------
CalFarm
The Zenith 43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
NOTE 1
SUMMARY OF ACCOUNTING POLICIES,
OPERATIONS AND PRINCIPLES OF CONSOLIDATION
Zenith National Insurance Corp. ("Zenith") is engaged through its
wholly-owned property-casualty insurance subsidiaries in the business of writing
workers' compensation insurance, approximately 54% of which is in California;
reinsurance, principally of world-wide property and catastrophe risks; and
automobile, homeowners, farmowners, commercial coverages and health insurance
and other coverages primarily in the rural and suburban areas of California.
Zenith's subsidiaries sell insurance and reinsurance through agents and brokers
and not directly to consumers. The market for insurance products and services is
highly competitive. Zenith also conducts real estate operations, developing
private residences for sale in Las Vegas, Nevada, through its wholly-owned
subsidiary, Perma-Bilt, a Nevada Corporation ("Perma-Bilt"). On December 31,
1996, Zenith acquired through merger the assets and liabilities of Associated
General Commerce Self-Insurers' Trust Fund ("AGC-SIF"), a Florida workers'
compensation self-insurers' fund (See Note 14). In 1995, Zenith sold its
wholly-owned life insurance subsidiary, CalFarm Life Insurance Company (See Note
15).
The financial statements have been prepared in accordance with generally
accepted accounting principles ("GAAP") and include Zenith and its subsidiaries.
GAAP requires the use of assumptions and estimates in reporting certain assets
and liabilities and related disclosures and actual results could differ from
those estimates. All significant intercompany transactions and balances have
been eliminated in consolidation.
FAIR VALUES OF FINANCIAL INSTRUMENTS
Financial instruments are contractual obligations that result in the delivery
of cash or an ownership interest in an entity. Disclosures, included in these
notes, regarding the fair value of financial instruments have been derived using
external market sources, estimates using present value or other valuation
techniques.
The following summarizes the carrying amounts and fair value of Zenith's
financial instruments as of December 31:
- --------------------------------------------------------------------------------------
1997 1996
---------------------- ----------------------
CARRYING FAIR Carrying Fair
(Dollars in thousands) NOTE AMOUNT VALUE amount value
- --------------------------------------------------------------------------------------
ASSETS:
Investments:
Trading securities 2 $ 2,982 $ 2,982 $ 4,149 $ 4,149
Other investments 2 876,991 878,309 848,650 848,410
---------- ---------- ---------- ----------
879,973 881,291 852,799 852,559
LIABILITIES:
Other notes payable 4 2,334 2,334 3,361 3,361
Payable to banks 4 11,408 11,408 11,147 11,147
Senior notes payable 5 74,474 82,365 74,353 82,406
- --------------------------------------------------------------------------------------
INVESTMENTS
Zenith accounts for its investment portfolio in accordance with the
provisions of Statement of Financial Accounting Standards No. 115, "Accounting
for Certain Investments in Debt and Equity Securities" ("SFAS No. 115") which
requires investments in debt and equity securities to be identified in three
categories as follows: held-to-maturity -- those securities, which by their
terms must be redeemed by the issuing company and that the enterprise has the
positive intent and ability to hold to maturity, are reported at amortized cost;
trading securities -- those securities that are held principally for the purpose
of selling them in the near term and are reported at fair value with unrealized
gains and losses included in earnings; available-for-sale -- those securities
not classified as either held-to-maturity or trading securities and are reported
at fair value with unrealized gains and losses excluded from earnings and
reported as a separate component of stockholders' equity, net of deferred taxes.
When, in the opinion of management, a decline in market value of investments
is considered to be "other than temporary," such investments are written down to
their net realizable value. The determination of "other than temporary"
includes, in addition to consideration of other relevant factors, a presumption
that if the market value is below cost by a significant amount for a period of
time, a writedown is necessary.
The market value of investments was supplied by the Merrill Lynch pricing
service, with the exception of 32 items whose values were obtained from other
brokers making a market in the investment, the Bloomberg financial news service,
and analytical pricing
CalFarm
44 The Zenith
methods for issues for which there is no market. These market values are
considered fair value.
The cost of securities sold is determined by the "identified cost" method.
Short-term investments include certificates of deposit, commercial paper and
debt securities with maturities of less than one year at the time of purchase.
For these short-term investments, the carrying amount is a reasonable estimate
of fair value.
CASH
Cash includes currency on hand and demand deposits with financial
institutions.
RECOGNITION OF PROPERTY-CASUALTY
REVENUE AND EXPENSE
Property-Casualty premiums are earned on a pro rata basis over the terms of
the policies. Premiums applicable to the unexpired terms of policies in force
are recorded as unearned premiums. Premiums earned reflect an estimate for
earned but unbilled audit premiums. Workers' compensation insurance premiums are
based upon the payroll of the insured.
Policy acquisition costs, consisting of commissions, premium taxes and
certain other underwriting costs, are deferred and amortized as the related
premiums are earned.
Zenith's insurance subsidiaries make provision for the settlement of all
incurred claims, both reported and unreported. The liabilities for unpaid loss
and loss adjustment expenses are estimates for the eventual costs of claims
incurred but not settled, less estimates of salvage and subrogation. Estimates
for reported claims are primarily determined by evaluation of individual
reported claims. Estimates for claims incurred but not reported are based on
experience with respect to the probable number and nature of such claims. The
methods for making such estimates and for establishing the resulting liabilities
are continually reviewed and updated and any adjustments resulting therefrom are
reflected in earnings currently. Estimates of losses from environmental and
asbestos-related claims are included in overall loss reserves and to date have
not been material. Due to the significant uncertainties inherent in establishing
such reserves, the ultimate exposure may vary from the amounts currently
reserved.
An estimated provision for workers' compensation policyholders' dividends is
accrued as the related premiums are earned. Such dividends do not become a fixed
liability unless and until declared by the respective Boards of Directors of
Zenith's insurance subsidiaries. Due to deregulation in California,
policyholders' dividends are not anticipated to be material in the foreseeable
future.
Property insurance and reinsurance coverages expose Zenith to the risk of
significant loss in the event of major adverse natural phenomena, known in the
insurance industry as catastrophes. These catastrophes may cause significant
contemporaneous financial statement losses since catastrophe losses may not be
accrued in advance of the event.
The concentration of Zenith's business in California makes the results of
operations highly dependent upon the State's economy, social and cultural
trends, legislative and regulatory changes, and catastrophic events such as
windstorms and earthquakes. In addition, premium revenues for most property and
casualty insurance coverages written in California (except workers' compensation
and health) are subject to prior approval of rates by the California Department
of Insurance.
REINSURANCE
In accordance with general industry practices, Zenith's insurance
subsidiaries annually purchase reinsurance to protect themselves against
liabilities in excess of certain limits on insurance risks they have
underwritten.
Such arrangements are known in the industry as "excess of loss" protection. The
purpose of such reinsurance is to protect Zenith from the impact of large,
unforeseen losses and such reinsurance reduces the magnitude of sudden and
unpredictable changes in net income and the capitalization supporting insurance
operations.
The ceding of reinsurance does not discharge the original insurer from
primary liability to its policyholder. Balances due from reinsurers on unpaid
losses, including an estimate of such recoverables related to reserves for
incurred but not reported losses, are reported as assets and are included in
receivables from reinsurers. Earned premiums are stated in the consolidated
financial statements after deduction of amounts ceded to reinsurers.
Approximately 52% of amounts recoverable from reinsurers at December 31, 1997
CalFarm
The Zenith 45
are attributable to reinsurance arrangements with one large United States
reinsurance company. No material amounts due from reinsurers have been written
off as uncollectable in the three years ended December 31, 1997.
REAL ESTATE OPERATIONS
Land, land development costs and construction costs, including costs of
acquisition and development, property taxes and related interest are
capitalized. Such costs, and an estimate of the costs to complete a project, are
recognized pro rata against sales of completed units. Such capitalized costs are
included in other assets.
Profitable real estate operations are dependent upon real estate values,
interest rates, construction costs, competition and management ability.
PROPERTIES AND EQUIPMENT
Properties and equipment are stated at cost less accumulated depreciation.
Depreciation is calculated principally on a straight-line basis using the
following useful lives: buildings, 10 to 40 years; furniture, fixture and
equipment, 3 to 10 years.
Expenditures for maintenance and repairs are charged to operations as
incurred. Additions and improvements to buildings and other fixed assets are
capitalized and depreciated. Upon disposition, the asset cost and related
depreciation are removed from the accounts and the resulting gain or loss is
included in income.
The cost of purchased software for internal use is capitalized and amortized
over the useful life of the software. The cost of internally-developed software
for internal use is expensed as incurred. Beginning in 1998, certain costs of
computer software developed or obtained for internal use will be capitalized and
amortized over the useful life of the software. The cost of modifying software
for Year 2000 compliance is expensed as incurred.
INTANGIBLE ASSETS
Purchased intangibles and the costs in excess of tangible assets acquired,
including those related to the acquisition of AGC-SIF discussed in Note 14, are
included in Other Assets. The amounts assigned to such assets acquired since
1970 are being amortized on a straight-line basis over 20 to 25 years.
Amortization expense was $405,000 in 1997, $412,000 in 1996 and $487,000 in
1995, and accumulated amortization was $6,573,000 at December 31, 1997 and
$6,168,000 at December 31, 1996. At December 31, 1997, intangible assets were
$7,001,000, of which $4,992,000 are amortizable.
EARNINGS PER SHARE
In 1997, the FASB issued Statement No. 128, "Earnings per Share" ("SFAS No.
128"). SFAS No. 128 replaced the calculation of primary and fully diluted
earnings per share with basic and diluted earnings per share. Unlike primary
earnings per share, basic earnings per share excludes any dilutive effects of
options, warrants and convertible securities. Diluted earnings per share is very
similar to the previously reported fully diluted earnings per share. All
earnings per share amounts for all periods have been presented, and where
appropriate, restated to conform to the SFAS No. 128 requirements.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income"
("SFAS No. 130"). SFAS No. 130 is effective for periods beginning after December
15, 1997. SFAS No. 130 requires companies to report comprehensive income and its
components in a financial statement which would include net income in addition
to unrealized appreciation (depreciation) on available-for-sale securities that
are currently presented as components of stockholders' equity.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131 is effective
for periods beginning after December 15, 1997. SFAS No. 131 specifies revised
guidelines for determining an entity's operating segments and the type and level
of financial information to be disclosed. Zenith has not determined the final
presentation impact of SFAS No. 131 but does believe that additional segments
will be reported in 1998.
PROPOSED CODIFICATION OF STATUTORY ACCOUNTING PRINCIPLES
The National Association of Insurance Commissioners is in the process of
codifying statutory accounting principles to provide a comprehensive basis of
statutory accounting and reporting for use by insurance departments,
CalFarm
46 The Zenith
insurers, and auditors. The codified principles have not yet been finalized;
therefore, the effective date has not been determined. Implementation of the
codified statutory accounting principles may affect the surplus level and the
capitalization requirement of Zenith's insurance subsidiaries on a statutory
basis. Zenith has not determined the impact of the codification.
RECLASSIFICATIONS AND RESTATEMENTS
Certain 1995 and 1996 amounts have been reclassified to conform to the 1997
presentation.
All 1996 and 1995 earnings per share data have been restated in accordance
with SFAS No. 128. See EARNINGS PER SHARE above and Note 16.
NOTE 2
INVESTMENTS
The amortized cost and fair values of investments held-to-maturity,
available-for-sale and trading securities were as follows:
- --------------------------------------------------------------------------
TYPE OF SECURITY
(Dollars in GROSS GROSS
thousands) AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31, 1997 COST GAINS (LOSSES) VALUE
- --------------------------------------------------------------------------
HELD-TO-MATURITY
Corporate debt $ 5,335 $ 371 $ 5,706
Mortgage-backed 41,613 947 42,560
- --------------------------------------------------------------------------
Total, held-to-
maturity $ 46,948 $ 1,318 $ 48,266
- --------------------------------------------------------------------------
AVAILABLE-FOR-SALE
U.S. Treasuries $ 131,929 $ 424 $ 132,353
Corporate debt 313,641 7,443 $ (954) 320,130
Mortgage-backed 70,190 788 (634) 70,344
Redeemable preferred
stocks 16,040 729 (52) 16,717
Equities 39,051 7,012 (399) 45,664
Short-term investments 209,827 209,827
- --------------------------------------------------------------------------
Total, available-
for-sale $ 780,678 $ 16,396 $ (2,039) $ 795,035
- --------------------------------------------------------------------------
TRADING
Corporate debt $ 2,971 $ (36) $ 2,935
Equities 25 $ 22 47
- --------------------------------------------------------------------------
Total, trading $ 2,996 $ 22 $ (36) $ 2,982
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
TYPE OF SECURITY
(Dollars in GROSS GROSS
thousands) AMORTIZED UNREALIZED UNREALIZED FAIR
DECEMBER 31, 1996 COST GAINS (LOSSES) VALUE
- --------------------------------------------------------------------------
HELD-TO-MATURITY
Corporate debt $ 5,339 $ (270) $ 5,069
Mortgage-backed 48,014 $ 36 (6) 48,044
- --------------------------------------------------------------------------
Total, held-to-
maturity $ 53,353 $ 36 $ (276) $ 53,113
- --------------------------------------------------------------------------
AVAILABLE-FOR-SALE
U.S. Treasuries $ 173,971 $ 57 $ (694) $ 173,334
Corporate debt 334,448 4,018 (5,036) 333,430
Mortgage-backed 77,906 197 (1,821) 76,282
Redeemable preferred
stocks 19,467 449 (196) 19,720
Equities 32,503 5,027 (1,189) 36,341
Short-term investments 106,712 106,712
- --------------------------------------------------------------------------
Total, available-
for-sale $ 745,007 $ 9,748 $ (8,936) $ 745,819
- --------------------------------------------------------------------------
TRADING
Corporate debt $ 2,964 $ (100) $ 2,864
Equities 891 $ 394 1,285
- --------------------------------------------------------------------------
Total, trading $ 3,855 $ 394 $ (100) $ 4,149
- --------------------------------------------------------------------------
Debt securities at December 31, 1997, are due as follows:
- ------------------------------------------------------
(Dollars in thousands) AMORTIZED FAIR
DECEMBER 31, 1997 COST VALUE
- ------------------------------------------------------
HELD-TO-MATURITY:
Due after ten years $ 46,948 $ 48,266
- ------------------------------------------------------
Total $ 46,948 $ 48,266
- ------------------------------------------------------
AVAILABLE-FOR-SALE:
Due in one year or less $ 267,594 $ 267,630
Due after one year through
five years 221,609 224,428
Due after five years through
ten years 136,128 138,853
Due after ten years 116,296 118,460
- ------------------------------------------------------
Total $ 741,627 $ 749,371
- ------------------------------------------------------
TRADING:
Due after one year through
five years $ 2,971 $ 2,935
- ------------------------------------------------------
Total $ 2,971 $ 2,935
- ------------------------------------------------------
CalFarm
The Zenith 47
Fluctuating interest rates will impact stockholders' equity, profitability
and maturities of certain debt and preferred securities. Expected maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
Mortgage-backed securities are shown as being due at their average expected
maturity dates. Redeemable preferred stocks with sinking fund redemption periods
are shown as being due at the mid-point of the sinking fund period. During the
past three years, Zenith has not incurred any material losses due to the credit
quality of its investments and has not included in its financial statements any
allowance for possible future losses.
The gross realized gains on sales of investments classified as
available-for-sale during 1997, 1996 and 1995 were $5,067,000, $8,564,000, and
$4,161,000, respectively and the gross realized losses were $959,000,
$2,355,000, and $1,604,000, respectively.
Investment income is summarized as follows:
- -------------------------------------------------------------------
(Dollars in thousands)
YEAR ENDED DECEMBER 31, 1997 1996 1995
- -------------------------------------------------------------------
Fixed maturities
Bonds $ 42,837 $ 37,968 $ 37,019
Redeemable
preferred stocks 1,289 1,578 1,143
Equity securities
Floating rate
preferred stocks 872 876 1,229
Convertible and
nonredeemable preferred
stocks 337 402 281
Common stocks 595 758 571
Short-term investments 8,090 9,257 6,555
Other 1,489 3,608 1,703
- -------------------------------------------------------------------
55,509 54,447 48,501
Less investment expenses 3,177 3,293 2,351
- -------------------------------------------------------------------
Net investment income $ 52,332 $ 51,154 $ 46,150
- -------------------------------------------------------------------
Investments carried at their fair value of $294,309,000 at December 31, 1997
and $305,440,000 at December 31, 1996 were on deposit with regulatory
authorities in compliance with insurance company regulations.
At December 31, 1997, Zenith and its subsidiaries owned $6,370,000, at fair
value, of securities issued by Reliance Insurance
Company, its parent and affiliates. Reliance Insurance Company is a major
stockholder of Zenith. During the fourth quarter of 1997, Zenith and its
subsidiaries sold $12,500,000 of securities in Delta Life Corporation for
$17,944,000 in cash resulting in $5,444,000 pretax realized gain. The former
Chairman, President and Chief Executive Officer of Delta Life Corporation is
also a Director of Zenith.
NOTE 3
PROPERTIES AND EQUIPMENT
Properties and equipment consist of the following:
- ------------------------------------------------------
(Dollars in thousands)
DECEMBER 31, 1997 1996
- ------------------------------------------------------
Land $ 14,836 $ 14,836
Buildings 31,852 31,642
Furniture, fixtures and
equipment 37,627 32,249
- ------------------------------------------------------
84,315 78,727
Less accumulated depreciation 29,784 29,548
- ------------------------------------------------------
Total $ 54,531 $ 49,179
- ------------------------------------------------------
Depreciation expense amounted to $5,788,000, $5,503,000, and $4,949,000 in
1997, 1996 and 1995, respectively.
NOTE 4
PAYABLE TO BANKS AND OTHER NOTES PAYABLE
Zenith has three lines of credit available with aggregate availability of
$100 million. As of December 31, 1997 and 1996, there were no outstanding
balances on these unsecured lines of credit. Interest on funds borrowed through
these three lines of credit is payable at the bank's prime rate, less .55%, or a
fixed rate chosen by Zenith; at the bank's prime rate, less .50%, or a fixed
rate chosen by Zenith; and at the bank's prime rate or IBOR plus a margin of
0.375%.
Under these agreements, certain restrictive covenants apply including the
maintenance of a specific level of net worth for Zenith and its insurance
subsidiaries.
There were no borrowings on the lines of credit in 1997 and 1996. The prime
interest rate was 8.50% and 8.25% at December 31, 1997 and 1996, respectively.
Perma-Bilt has two construction loan agreements, each providing for a
subdivision lot
CalFarm
48 The Zenith
development loan and a construction revolving line of credit loan, bearing
interest at prime plus 1.0% and prime plus 0.75%, respectively. Each agreement
pertains to a separate residential housing project and the maximum that may be
borrowed under the two agreements combined is $25,275,000. At December 31, 1997,
$11,408,000 was outstanding with respect to these loans. The loans mature
between April 20, 1998 and June 5, 1999. The carrying value of these
variable-rate loans approximates fair value at December 31, 1997.
Perma-Bilt is also obligated under various notes payable arising from its
purchase of several parcels of property. Such notes are collateralized by the
land parcels and bear interest at rates between 8% and 12%, with a maximum
maturity of August 2004. The balance outstanding with respect to these notes was
$2,334,000 at December 31, 1997.
NOTE 5
SENIOR NOTES PAYABLE
Zenith issued $75,000,000 of 9% Senior Notes due 2002 (the "9% Notes") at par
in May 1992. Interest on the notes is payable semi-annually. The notes are
general unsecured obligations of Zenith. Issue costs of $1,213,000 are being
amortized over the term of the notes and $121,000 of such costs were amortized
each year for the three years ended December 31, 1997. Covenants contained in
the indenture include restrictions on the ability of Zenith and its subsidiaries
to incur secured debt and the right of holders of the 9% Notes to require Zenith
to repurchase the 9% Notes upon a decline in the rating of the 9% Notes within
ninety days after the occurrence of certain events. Those events are: (a) a
person or group becomes the beneficial owner of more than 50% of Zenith common
stock; (b) 10% or more of Zenith common stock is acquired by Zenith within any
12-month period; or (c) the sum of the fair market value of distributions (other
than
regular dividends or distributions of capital stock) and the consideration for
purchases of Zenith common stock by Zenith during a 12-month period is 30% or
more of the fair market value of outstanding Zenith common stock. The fair value
at December 31, 1997 of the 9% Notes is $82,365,000 based on a price published
by a rating agency.
Interest incurred on all borrowing is summarized as follows:
- ---------------------------------------------------------------------
(Dollars in thousands)
YEAR ENDED DECEMBER 31, 1997 1996 1995
- ---------------------------------------------------------------------
Interest capitalized for real estate
operations $3,755 $3,127 $1,572
Interest not related to real estate
operations 3,980 4,877 6,960
- ---------------------------------------------------------------------
Total interest incurred $7,735 $8,004 $8,532
- ---------------------------------------------------------------------
NOTE 6
FEDERAL INCOME TAXES
The components of the provision (benefit) for taxes on income from continuing
operations are:
- ------------------------------------------------------------
(Dollars in thousands)
YEAR ENDED DECEMBER 31, 1997 1996 1995
- ------------------------------------------------------------
Current $ 10,989 $ 19,979 $5,947
Deferred 4,389 (462) 3,753
- ------------------------------------------------------------
Total federal income taxes $ 15,378 $ 19,517 $9,700
- ------------------------------------------------------------
The difference between the statutory federal income tax rate of 35% and
Zenith's effective tax rate on income from continuing operations, as reflected
in the financial statements, is explained as follows:
- -------------------------------------------------------------------
(Dollars in thousands)
YEAR ENDED DECEMBER 31, 1997 1996 1995
- -------------------------------------------------------------------
Statutory federal income tax $15,217 $19,991 $10,298
Increase (reduction) in taxes:
Dividend received
deduction and tax-
exempt interest (693) (846) (710)
Other 854 372 112
- -------------------------------------------------------------------
Total federal income taxes $15,378 $19,517 $ 9,700
- -------------------------------------------------------------------
CalFarm
The Zenith 49
Deferred taxes are provided based upon temporary differences between the tax
and book basis of assets and liabilities. The components of the net deferred tax
assets and liabilities were as follows:
- ------------------------------------------------------------------------------
1997 1996
(Dollars in thousands) DEFERRED TAX Deferred Tax
YEAR ENDED DECEMBER 31, ASSETS LIABILITIES Assets Liabilities
- ------------------------------------------------------------------------------
Differences between the tax
basis and carrying value of
investments, principally
unrealized appreciation on
available-for-sale
investments $ 5,521 $ 602
Deferred policy acquisition
costs 7,294 7,263
Purchased intangibles 1,747 1,991
Properties and equipment 4,371 2,385
Property-Casualty loss reserve
discount $ 27,039 $ 28,070
Limitation on deduction for
unearned premiums 8,513 8,515
Policyholders' dividends
accrued 1,876 2,286
Other 2,538 5,230 2,272 5,348
- ------------------------------------------------------------------------------
39,966 24,163 41,143 17,589
- ------------------------------------------------------------------------------
Net deferred tax assets $ 15,803 $ 23,554
- ------------------------------------------------------------------------------
Zenith's deferred tax assets will be fully realized because all future
deductible amounts can be offset by future taxable amounts or recovery of
federal income taxes paid within the statutory carryback period.
Property-Casualty loss reserves are not discounted for book purposes, however
the Tax Reform Act of 1986 requires property and casualty loss reserves to be
discounted for tax purposes.
Current taxes receivable and deferred taxes were as follows:
- --------------------------------------------------------
(Dollars in thousands)
YEAR ENDED DECEMBER 31, 1997 1996
- --------------------------------------------------------
Current taxes receivable $ 4,137 $ 6,385
Net deferred tax asset 15,803 23,554
- --------------------------------------------------------
Federal income taxes $ 19,940 $ 29,939
- --------------------------------------------------------
Zenith files a consolidated federal income tax return. Zenith's insurance
subsidiaries pay premium taxes on gross premiums written in lieu of most state
income or franchise taxes.
NOTE 7
REINSURANCE
Reinsurance transactions reflected in the financial statements are as
follows:
- ------------------------------------------------------------
(Dollars in thousands) 1997 1996 1995
- ------------------------------------------------------------
Ceded reinsurance netted
against earned premiums
for the year $ 26,191 $ 24,642 $ 21,112
Ceded reinsurance netted
against property and
casualty loss and loss
adjustment expenses
incurred 10,491 12,396 15,532
Net assumed reinsurance
included in earned
premiums for the year 37,385 41,930 45,367
- ------------------------------------------------------------
Zenith Insurance has an assumed reinsurance agreement with Reliance Insurance
Company, a major stockholder of Zenith. Estimated costs paid to Reliance
relating to this arrangement amounted to $97,000, $181,000, and $460,000 for
1997, 1996 and 1995, respectively. Zenith Insurance (through AGC-SIF) also
maintains aggregate and specific excess of loss reinsurance agreements with
Reliance Insurance Company. Included in receivable from reinsurers is
$14,872,000 relating to this reinsurance arrangement.
Zenith maintains excess of loss and catastrophic reinsurance protection which
varies based on the type of coverage. Excess of loss reinsurance covers losses
per occurrence in excess of $350,000 for property, $550,000 for workers'
compensation and $700,000 for liability and umbrella. Zenith's catastrophic
reinsurance coverage provides protection against aggregate losses per event up
to $80,000,000 for property and $100,000,000 for workers' compensation. Assumed
reinsurance business is not covered by such catastrophe reinsurance. Credit
quality of reinsurers may impact profitability and stockholders' equity. No
losses have been incurred from uncollectible reinsurance during the past three
years and no allowances are carried on the financial statements for
unrecoverable reinsurance.
CalFarm
50 The Zenith
NOTE 8
COMMITMENTS AND CONTINGENT LIABILITIES
Zenith and its subsidiaries lease space for some of its offices expiring
through 2003, equipment on leases expiring through 1998 and automobiles on two
through five-year leases. The minimum rentals on these operating leases as of
December 31, 1997 are as follows:
- ---------------------------------------------------------------
(Dollars in thousands) EQUIPMENT
AND
YEAR AUTO FLEET OFFICES TOTAL
- ---------------------------------------------------------------
1998 $ 939 $ 3,026 $ 3,965
1999 474 2,237 2,711
2000 114 1,771 1,885
2001 1,388 1,388
2002 1,156 1,156
Thereafter 352 352
- ---------------------------------------------------------------
Total $ 1,527 $ 9,930 $ 11,457
- ---------------------------------------------------------------
Rental expenses for 1997, 1996 and 1995 amounted to $5,925,000, $5,358,000,
and $5,397,000, respectively.
Zenith and its subsidiaries are involved in certain litigation. In the
opinion of management and legal counsel, such litigation is either without merit
or the ultimate liability, if any, will not have a material effect on the
consolidated financial condition of Zenith.
CONTINGENCIES SURROUNDING
RECOVERABILITY OF STATE DISABILITY
TRUST FUND RECEIVABLES
Florida has created the Special Disability Trust Fund ("the Fund") which
assesses Workers' Compensation insurers to pay for what are commonly referred to
as "Second Injuries". Historic assessments have been inadequate to completely
fund obligations of the Fund. In late 1997, the Florida statute was amended so
that the Fund will not be liable for and will not reimburse employers or
carriers for Second Injuries occurring on or after January 1, 1998.
Zenith has recorded its receivable from the fund for Second Injuries based on
specific claims and historical experience prior to January 1, 1998. Management
believes that this receivable will be substantially recovered.
At December 31, 1997 and 1996, the receivable from the Fund was $5,094,000
and $8,096,000, respectively. During 1997, $3,053,000 was collected.
CONTINGENCIES SURROUNDING ESTIMATES OF
LIABILITIES FOR UNPAID LOSS AND
LOSS ADJUSTMENT EXPENSES
In 1995, Zenith's new workers' compensation computer system ("system") became
operational. Management observed certain unusual claim reserving trends and
patterns in 1995 and 1996, and to a much lesser degree, during the first three
quarters of 1997. Based on currently available data, these claim reserving
trends and patterns have stabilized. Any subsequent re-interpretation of new
information that becomes available from the system which may change the estimate
of such liabilities in future periods is not considered to have a material
impact on the financial position or results of operations.
NOTE 9
COMMON STOCK
Under employee non-qualified stock option plans adopted by the Board of
Directors and Stockholders in 1978 and in 1996, options are granted to officers
and key employees for the purchase of Zenith's common stock at 100% of the
market price at the date of grant. The options outstanding at December 31, 1997
expire five years after the date of grant or three months after termination of
employment. Options granted vest one-fourth per year after the first year. One
grant for one million shares is for a term of ten years and vests one-fifth per
year after the first year.
Zenith has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
No. 123") effective for the year ended December 31, 1996. Accordingly, no
compensation cost has been recognized for the stock option plans. Had
compensation cost for Zenith's stock option plans been determined based on the
fair value at the grant date for awards in 1997, 1996 and 1995 consistent with
the provisions of SFAS No. 123, Zenith's net income and net income per share
would have been reduced to the pro-forma amounts indicated as follows:
CalFarm
The Zenith 51
- ------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands except per share data) 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
AS REPORTED PRO FORMA As Reported Pro forma As Reported Pro forma
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 28,100 $ 26,583 $ 37,600 $ 36,647 $ 6,600 $ 6,541
Net income per common share 1.59 1.50 2.14 2.08 0.36 0.36
Net income per common share - assuming dilution 1.57 1.49 2.12 2.06 0.36 0.36
- ------------------------------------------------------------------------------------------------------------------------------------
1996 and 1995 earnings per share data have been restated in accordance with SFAS
No. 128.
The pro-forma effect on net income for 1997, 1996 and 1995 is not
representative of the pro-forma effect on net income in future years because it
does not take into consideration pro-forma compensation expense related to
grants made prior to 1995.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions:
- --------------------------------------------------------------------------------------
1997 1996 1995
GRANTS Grants Grants
- --------------------------------------------------------------------------------------
Risk-free interest rates 5.70% 6.50% 6.20%
Dividend yields 4.10% 4.20% 4.20%
Volatility factors 16.94% 27.40% 27.40%
Weighted average expected life
Five-year term options 5 YEARS 4 years 4 years
Ten-year term options -- 10 years --
Weighted average fair value per share $4.07 $6.16 $4.43
- --------------------------------------------------------------------------------------
Additional information with respect to stock options is as follows:
- -------------------------------------------------------------------
WEIGHTED
NUMBER AVERAGE
OF EXERCISE
(Options in thousands) SHARES PRICE
- -------------------------------------------------------------------
Outstanding at January 1, 1995 1,295 $20.62
Granted 509 21.52
Exercised 276 15.96
Expired or cancelled 394 21.24
- -------------------------------------------------------------------
Outstanding at December 31, 1995 1,134 21.94
Granted 1,422 24.51
Exercised 136 18.90
Expired or cancelled 72 22.56
- -------------------------------------------------------------------
Outstanding at December 31, 1996 2,348 23.65
Granted 590 26.95
Exercised 234 21.12
Expired or cancelled 74 25.31
- -------------------------------------------------------------------
Outstanding at December 31, 1997 2,630 $24.58
- -------------------------------------------------------------------
Options exercisable at December 31, 1997, 1996, and 1995 were 737,000,
474,000 and 335,000, respectively.
Certain information on outstanding options is as follows:
- ------------------------------------------------------------------
(Options in
thousands) WEIGHTED
RANGE OF AVERAGE OUTSTANDING OPTIONS
EXERCISE NUMBER REMAINING LIFE WEIGHTED AVERAGE
PRICE OUTSTANDING IN YEARS EXERCISE PRICE
- ------------------------------------------------------------------
$23.63 1,000 8.2 $ 23.63
$20.94 -
$28.19 1,630 3.4 25.16
- ------------------------------------------------------------------
Certain information on exercisable options is as follows:
- ------------------------------------------------
(Options in EXERCISABLE
thousands) OPTIONS WEIGHTED
RANGE OF NUMBER AVERAGE EXERCISE
EXERCISE PRICES EXERCISABLE PRICE
- ------------------------------------------------
$23.63 200 $ 23.63
$20.94 - $28.19 537 23.96
- ------------------------------------------------
At December 31, 1997, Zenith had authority from its Board of Directors to
repurchase 1,085,000 common shares at prevailing market prices.
NOTE 10
DIVIDEND RESTRICTIONS
State insurance regulations limit the maximum dividends that may be paid to
Zenith by its insurance company subsidiaries during any 12-month period without
prior regulatory approval. Stockholder's equity of Zenith's insurance
subsidiaries, in accordance with generally accepted accounting principles,
amounted to $346,097,000 as of December 31, 1997, of which $27,841,000 can be
paid in 1998 to Zenith in dividends without prior approval, leaving a restricted
balance of $318,256,000.
NOTE 11
STATUTORY FINANCIAL DATA
Capital stock and surplus and net income of Zenith's insurance subsidiaries
on a statutory
CalFarm
52 The Zenith
basis as reported to regulatory authorities were as follows:
- ------------------------------------------------------
(Dollars in
thousands)
YEAR ENDED
DECEMBER 31, 1997 1996 1995
- ------------------------------------------------------
Capital stock and
surplus $ 279,993 $ 265,341 $ 223,019
Net income 31,820 33,384 17,157
- ------------------------------------------------------
The insurance business is subject to state-by-state regulation and
legislation focused on solvency, pricing, market conduct, claims practices,
underwriting, accounting, investment criteria and other areas. Such regulation
and legislation is constantly changing and compliance is essential and is an
inherent risk of the business.
NOTE 12
UNAUDITED QUARTERLY FINANCIAL DATA
- -----------------------------------------------------------------------
(Dollars in
thousands
except per share
data)
YEAR ENDED MARCH JUNE SEPTEMBER DECEMBER
DECEMBER 31, 1997 31 30 30 31
- -----------------------------------------------------------------------
Premium earned $ 122,363 $ 125,831 $ 120,475 $ 120,052
Net investment
income 12,448 13,406 13,272 13,206
Realized gains
on investments 1,876 1,996 1,861 8,275
Real estate sales 9,963 11,174 11,480 12,802
Net income 7,100 7,900 8,000 5,100
Net income per
common share .40 .45 .45 .29
Net income per
common share --
assuming dilution .40 .44 .45 .28
- -----------------------------------------------------------------------
The first three quarters of 1997 have been restated in accordance with SFAS No.
128.
The fourth quarter of 1997 net income reflects an approximate $12,000,000 loss
and expense reserve strengthening for prior accident years.
- ---------------------------------------------------------------------------------
(Dollars in thousands
except per share data)
YEAR ENDED MARCH JUNE SEPTEMBER DECEMBER
DECEMBER 31, 1996 31 30 30 31
- ---------------------------------------------------------------------------------
Premium earned $ 112,237 $ 108,255 $ 112,492 $ 119,872
Net investment
income 12,054 12,836 12,574 13,690
Realized gains on
investments 4,272 3,778 178 2,579
Real estate sales 5,985 8,810 11,822 14,937
Net income 12,400 10,700 9,100 5,400
Net income per common
share .70 .61 .52 .31
Net income per common
share -- assuming
dilution .70 .60 .51 .30
- ---------------------------------------------------------------------------------
The 1996 quarterly earnings per share amounts have been restated to comply with
SFAS No. 128.
NOTE 13
LOSS AND LOSS ADJUSTMENT
EXPENSE RESERVES
The following table represents a reconciliation of changes in liabilities for
unpaid property-casualty loss and loss adjustment expenses for the three years
ended December 31, 1997.
- ---------------------------------------------------------------
(Dollars in thousands) 1997 1996 1995
- ---------------------------------------------------------------
Beginning of year, net of
reinsurance recoverable $526,427 $463,123 $462,710
Incurred claims:
Current year 348,514 318,509 327,724
Prior years (349) (3,809) (2,135)
- ---------------------------------------------------------------
Total incurred claims 348,165 314,700 325,589
- ---------------------------------------------------------------
Payments:
Current year (138,393) (131,061) (149,688)
Prior years (209,346) (185,764) (175,488)
- ---------------------------------------------------------------
Total payments (347,739) (316,825) (325,176)
- ---------------------------------------------------------------
End of year, net of
reinsurance 526,853 460,998 463,123
Reinsurance recoverable 87,665 56,390 54,429
- ---------------------------------------------------------------
End of year, before AGC-SIF 517,388 517,552
- ---------------------------------------------------------------
AGC-SIF December 31, 1996
balances acquired:
Reserves, net 65,429
Recoverable from reinsurers
and state trust funds 37,261
Change in net reserves and
recoverables from
reinsurers and state trust
funds (1,252)
- ---------------------------------------------------------------
End of year, after AGC-SIF $613,266 $620,078 $517,552
- ---------------------------------------------------------------
Statutory reserves differ from GAAP in 1997 and 1996 by the amount of the
deposit receivable from Reliance, which is treated as reinsurance recoverable
for statutory purposes.
Subsequent development of AGC-SIF net reserves acquired at December 31, 1996
is included in the Member distribution formula under the terms of the
acquisition. (See Note 14).
NOTE 14
ACQUISITIONS
ACQUISITION OF AGC-SIF
On December 31, 1996, Zenith completed the acquisition of AGC-SIF. Under the
terms of the acquisition, Zenith acquired by merger all of AGC-SIF's assets and
assumed its liabilities, including the liabilities of the insured Members of
AGC-SIF for future assessments. Over a three-year period, Zenith will distribute
to AGC-SIF's
CalFarm
The Zenith 53
Members a minimum amount of $1.14 million to a maximum amount equal to AGC-SIF's
Adjusted GAAP Net Worth, as defined in the acquisition agreement, based on a
formula and audited by an independent certified public accounting firm.
The acquisition was accounted for as a purchase and the assets and
liabilities of AGC-SIF at December 31, 1996 were merged into Zenith's
wholly-owned subsidiary, Zenith Insurance Company, and are included in Zenith's
December 31, 1996 consolidated balance sheet.
PENDING ACQUISITION OF RISCORP
On June 17, 1997, Zenith announced that its wholly-owned subsidiary, Zenith
Insurance Company ("Zenith Insurance"), had entered into an agreement with
RISCORP, Inc. ("RISCORP") to purchase all of the assets of RISCORP related to
its workers' compensation business, including RISCORP's existing in-force
business, as well as the right to all new and renewal policies. Zenith Insurance
will also purchase RISCORP's "First Call" managed care workers' compensation
system. After the transaction closes, RISCORP will no longer engage in the
workers' compensation or managed care businesses. In connection with the
transaction, Zenith Insurance will assume certain liabilities related to
RISCORP's insurance businesses. In addition, Zenith Insurance will assume or
repay $15 million in indebtedness of RISCORP. The purchase price, which will be
in cash, will be the difference between the book value of the assets purchased
and the book value of the liabilities assumed by Zenith Insurance on the closing
date, subject to a minimum purchase price of $35 million. Zenith intends to fund
the closing of this transaction with bank financing and internal funds.
Effective June 18, 1997, Zenith Insurance entered into a reinsurance
agreement with RISCORP. Under the reinsurance agreement,
Zenith Insurance has reinsured all of RISCORP's liabilities on or after June 18,
1997 in respect of new, renewal, and in-force Florida workers' compensation
policies in the event RISCORP is declared insolvent under applicable insurance
law pursuant to court order prior to the closing. RISCORP has assigned to Zenith
Insurance its right to receive certain payments from other reinsurers in respect
of the business Zenith Insurance has reinsured. In addition, RISCORP has
established a trust account of approximately $50 million to reimburse Zenith
Insurance for any amounts paid under the reinsurance agreement. The assets in
such RISCORP trust account are not included in Zenith's consolidated balance
sheet. Although there can be no assurance that such amount ultimately would be
sufficient to reimburse Zenith fully for such payments, Zenith believes that any
contingent liability under this agreement as of December 31, 1997 would not be
material.
The closing of the purchase of RISCORP's assets and liabilities is subject to
certain conditions, including compliance with contract provisions, the review
and approval by appropriate regulatory agencies and approval by RISCORP's
shareholders. The agreement has been approved by the Boards of Directors of
Zenith, Zenith Insurance, and RISCORP.
The purchase price will be determined based on an audited statement of
transferred assets and liabilities of the business as of the closing date, after
agreement by Zenith or, if necessary, determination by neutral auditors and
actuaries of any disputed items in the statement. As a result, management is
currently unable to determine the purchase price.
Zenith will not be purchasing the stock of RISCORP or its affiliates or
assuming the liabilities that are unrelated to the insurance business, including
liabilities related to any present or future litigation against those companies.
CalFarm
54 The Zenith
Set forth below is certain summary consolidated financial information with
respect to RISCORP and its subsidiaries excerpted from the information contained
in RISCORP's Annual Report on Form 10-K for the year ended December 31, 1996 and
RISCORP's Quarterly Report on Form 10-Q for the quarter ended September 30,
1997. Neither Zenith nor its independent accountants take any responsibility for
the accuracy or completeness of this information.
Selected Consolidated Financial Information of RISCORP
- ----------------------------------------------------------------
Nine Months Ended Year Ended
(Dollars in September 30, December 31,
thousands) 1997 1996 1996 1995
- ----------------------------------------------------------------
Operating results:
Premiums earned $ 133,882 $ 131,855 $ 173,557 $ 135,887
Fee and other
income 17,969 23,079 31,838 23,413
Net investment
income 12,557 7,592 12,194 6,708
Total revenues 164,408 162,526 217,589 166,008
Net income 3,810 9,301 2,398 13,683
Balance sheet:
Invested assets 209,134 241,143 255,656 69,365
Receivable from
reinsurers,
state trust
funds and other 349,105 320,378 363,957 257,013
Total assets 769,276 741,135 828,442 443,242
Unpaid loss and
loss adjustment
expenses 460,428 406,354 458,239 261,700
Total liabilities 607,328 579,801 671,134 427,085
Stockholders'
equity 161,948 161,334 157,308 16,157
- ----------------------------------------------------------------
Audits of RISCORP's financial statements were performed by an independent
accounting firm, other than Zenith's independent accounting firm, whose 1996
report included an explanatory paragraph describing several adverse developments
and uncertainties.
NOTE 15
DISCONTINUED OPERATIONS
During 1995, Zenith completed the sale of its wholly-owned subsidiary,
CalFarm Life Insurance Company ("CalFarm Life"), to a subsidiary of SunAmerica,
Inc. for approximately $120 million in cash. The group health insurance business
of CalFarm Life was retained by Zenith. The sale resulted in a loss of
approximately $19.5 million, after taxes. The life and annuity operations of
CalFarm Life are presented as discontinued operations in the financial
statements. Group health insurance operations are included in the
property-casualty business segment.
Revenues for the discontinued operation were $88,610,000 for 1995.
NOTE 16
EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share.
- ---------------------------------------------------------------
(In thousands, except per
share data) 1997 1996 1995
- ---------------------------------------------------------------
(A)Income from continuing
operations $ 28,100 $ 37,600 $ 19,722
- ---------------------------------------------------------------
(B)Weighted average
outstanding shares during
the period 17,716 17,594 18,273
Additional common shares
issuable under employee stock
option plans using the
treasury stock method 170 158 61
- ---------------------------------------------------------------
(C)Weighted average number of
common shares outstanding
assuming exercise of stock
options 17,886 17,752 18,334
- ---------------------------------------------------------------
(A)/(B) Income from continuing
operations per share $ 1.59 $ 2.14 $ 1.08
(A)/(C) Income from continuing
operations per share
assuming dilution $ 1.57 $ 2.12 $ 1.08
- ---------------------------------------------------------------
Options to purchase 407,000 shares of common stock at an average price of $28
per share were outstanding as of December 31, 1997 but were not included in the
computation of diluted earnings per share because the options' exercise prices
were greater than the average market price of the common shares, and, therefore,
the effect would be antidilutive.
NOTE 17
SEGMENT INFORMATION
Zenith's operations are conducted through two business segments. These
segments and their respective operations are as follows:
PARENT
Zenith is a holding company owning directly or indirectly all of the capital
stock of certain California insurance and insurance-related companies. In 1993,
Zenith commenced a real estate operation through a newly formed subsidiary,
Perma-Bilt.
PROPERTY-CASUALTY OPERATIONS
Zenith's property and casualty insurance operations offer multiple product
line direct insurance and reinsurance. Investments and related income of the
property and casualty insurance companies are available for payment of claims
and benefits and have not been identified with individual product lines.
CalFarm
The Zenith 55
The following table is a summary of results by major segments:
- -----------------------------------------------------------------------------------------------------
(Dollars in thousands except per share data)
YEAR ENDED DECEMBER 31 1997 1996 1995
- -----------------------------------------------------------------------------------------------------
PROPERTY-CASUALTY
Net written premiums $ 487,113 $ 458,061 $ 439,882
Net earned premiums 488,721 452,856 437,513
Investment income 51,136 48,457 45,931
Underwriting income (loss) (16,459) 1,093 (13,600)
Income from continuing operations after taxes and before
realized gains(1) 24,929 32,629 21,608
Income from continuing operations after taxes 33,296 39,654 23,934
Identifiable assets 1,137,385 1,137,520 1,005,133
- -----------------------------------------------------------------------------------------------------
PARENT
Real estate sales 45,419 41,554 31,736
Investment income 1,196 2,697 219
(Loss) from continuing operations after taxes and before
realized gains(1) (5,260) (2,054) (4,240)
(Loss) from continuing operations after taxes (5,196) (2,054) (4,212)
Identifiable assets 117,877 108,350 115,429
- -----------------------------------------------------------------------------------------------------
CONSOLIDATED TOTAL
Net earned premiums 488,721 452,856 437,513
Real estate sales 45,419 41,554 31,736
Investment income 52,332 51,154 46,150
Underwriting income (loss) (16,459) 1,093 (13,600)
Income from continuing operations after taxes and before
realized gains(1) 19,669 30,575 17,368
Income from continuing operations 28,100 37,600 19,722
Loss from discontinued life and annuity operations, net
of taxes (13,122)
Net income(2) 28,100 37,600 6,600
Per share 1.59 2.14 .36
Per share-assuming dilution 1.57 2.12 .36
Total assets(3) $ 1,252,156 $ 1,242,724 $ 1,115,433
- -----------------------------------------------------------------------------------------------------
(1) Realized gains on investments after taxes were as
follows:
1997 1996 1995
---------------------------------------
Property-Casualty $ 8,367 $ 7,025 $ 2,326
Parent 64 28
---------------------------------------
Consolidated Total $ 8,431 $ 7,025 $ 2,354
(2) 1996 and 1995 amounts have been restated in accordance with SFAS No. 128.
(3) Reflects elimination entry of $3,106,000, $3,146,000, and $5,129,000 in 1997, 1996 and 1995,
respectively.
NOTE 18
UNAUDITED COMMON STOCK MARKET PRICES
The following table shows the high and low common stock prices during each
quarter for the past two years.
- -----------------------------------------------------------------------------------
1997 1996
------------------ ------------------
HIGH LOW High Low
- -----------------------------------------------------------------------------------
March 31 27 7/8 25 7/8 24 7/8 21 1/8
June 30 27 1/2 24 5/8 28 7/8 23 7/8
September 30 28 5/8 26 5/16 28 1/2 26 1/4
December 31 28 3/4 25 7/16 28 25 1/4
- -----------------------------------------------------------------------------------
NOTE 19
SUBSEQUENT EVENT
As previously announced, on January 6, 1998, Zenith repurchased 930,000
shares of its common stock on the open market at $25 per share, reducing the
outstanding shares to 16,889,000.
CalFarm
56 The Zenith
INDEPENDENT ACCOUNTANT'S REPORT
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS
OF ZENITH NATIONAL INSURANCE CORP.
WE HAVE AUDITED THE ACCOMPANYING CONSOLIDATED BALANCE SHEET OF ZENITH NATIONAL
INSURANCE CORP. AND SUBSIDIARIES AS OF DECEMBER 31, 1997 AND 1996, AND THE
RELATED CONSOLIDATED STATEMENTS OF OPERATIONS, CASH FLOWS, AND STOCKHOLDERS'
EQUITY FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997. THESE
FINANCIAL STATEMENTS ARE THE RESPONSIBILITY OF THE COMPANY'S MANAGEMENT. OUR
RESPONSIBILITY IS TO EXPRESS AN OPINION ON THESE FINANCIAL STATEMENTS BASED ON
OUR AUDITS.
WE CONDUCTED OUR AUDITS IN ACCORDANCE WITH GENERALLY ACCEPTED AUDITING
STANDARDS. THOSE STANDARDS REQUIRE THAT WE PLAN AND PERFORM THE AUDIT TO OBTAIN
REASONABLE ASSURANCE ABOUT WHETHER THE FINANCIAL STATEMENTS ARE FREE OF MATERIAL
MISSTATEMENT. AN AUDIT INCLUDES EXAMINING, ON A TEST BASIS, EVIDENCE SUPPORTING
THE AMOUNTS AND DISCLOSURES IN THE FINANCIAL STATEMENTS. AN AUDIT ALSO INCLUDES
ASSESSING THE ACCOUNTING PRINCIPLES USED AND SIGNIFICANT ESTIMATES MADE BY
MANAGEMENT, AS WELL AS EVALUATING THE OVERALL FINANCIAL STATEMENT PRESENTATION.
WE BELIEVE THAT OUR AUDITS PROVIDE A REASONABLE BASIS FOR OUR OPINION.
IN OUR OPINION, THE FINANCIAL STATEMENTS REFERRED TO ABOVE PRESENT FAIRLY, IN
ALL MATERIAL RESPECTS, THE CONSOLIDATED FINANCIAL POSITION OF ZENITH NATIONAL
INSURANCE CORP. AND SUBSIDIARIES AS OF DECEMBER 31, 1997 AND 1996, AND THE
CONSOLIDATED RESULTS OF THEIR OPERATIONS AND THEIR CASH FLOWS FOR EACH OF THE
THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997, IN CONFORMITY WITH GENERALLY
ACCEPTED ACCOUNTING PRINCIPLES.
COOPERS & LYBRAND L.L.P.
LOS ANGELES, CALIFORNIA, FEBRUARY 4, 1998
CalFarm
The Zenith 57
CORPORATE DIRECTORY
CalFarm
The Zenith
CORPORATE DIRECTORY
ZENITH NATIONAL INSURANCE CORP.
DIRECTORS
Also Directors of Zenith
Insurance Company
GEORGE E. BELLO
Executive Vice President
and Controller of Reliance
Group Holdings, Inc.
MAX M. KAMPELMAN
Attorney, Of Counsel,
Fried, Frank, Harris,
Shriver & Jacobson
JACK M. OSTROW
Attorney and Certified
Public Accountant
WILLIAM S. SESSIONS
Attorney
Sessions & Sessions, L.C.,
Security Consultant
HARVEY L. SILBERT
Attorney, Of Counsel,
Loeb & Loeb LLP
ROBERT M. STEINBERG
President and Chief
Operating Officer
of Reliance Group
Holdings, Inc.
SAUL P. STEINBERG
Chairman of the
Board and Chief
Executive Officer
of Reliance
Group Holdings, Inc.
GERALD TSAI, JR.
Management of
Private Investments
STANLEY R. ZAX
Chairman of the
Board and President
OFFICERS
STANLEY R. ZAX
Chairman of the
Board and President
FREDRICKA TAUBITZ
Executive Vice President
& Chief Financial Officer
WESTLEY M. HEYWARD
Senior Vice President
MICHAEL W. JACOBSON
Senior Vice President
JAMES P. ROSS
Senior Vice President
JOHN J. TICKNER
Senior Vice President
and Secretary
HYMAN J. LEE, JR.
Vice President
TRANSFER AGENT-
COMMON STOCK
ChaseMellon Shareholder Services, L.L.C.
Los Angeles, CA
Internet Address:
www.chasemellon.com
TRANSFER AGENT-
SENIOR NOTES
Norwest Bank
Minnesota, N.A.
Minneapolis, MN
CORPORATE
HEADQUARTERS
21255 Califa Street
Woodland Hills, CA 91367-5021
Internet Address:
www.zenithnational.com
NYSE TRADING SYMBOL
Common stock -- ZNT
INDEPENDENT
ACCOUNTANT
Coopers & Lybrand L.L.P.
Los Angeles, CA
THE ANNUAL REPORT
on Form 10-K, for
the fiscal year ended
December 31, 1997
may be obtained
free of charge upon
written request to:
Chief Financial Officer
Zenith National
Insurance Corp.
21255 Califa Street
Woodland Hills, CA 91367-5021
CalFarm
The Zenith 59
CORPORATE DIRECTORY
ZENITH INSURANCE COMPANY
OFFICERS
STANLEY R. ZAX
Chairman of the
Board and President
FREDRICKA TAUBITZ
Executive Vice President &
Chief Financial Officer
JACK D. MILLER
Executive Vice President
JAMES P. ROSS
Senior Vice President,
President of Workers'
Compensation Division
STEPHEN J. ALBERS
Senior Vice President
JOHN E. BRODERICK
Senior Vice President
JOHN V. D'ALUSIO
Senior Vice President
DAN M. HAIR
Senior Vice President
JOHN C. HASBROUCK
Senior Vice President
WESTLEY M. HEYWARD
Senior Vice President
PHILIP R. HUNT
Senior Vice President
COREY A. INGBER
Senior Vice President
MICHAEL W. JACOBSON
Senior Vice President
EDWARD G. KRISAK
Senior Vice President
ROBERT E. MEYER
Senior Vice President
and Actuary
TERRY D. MOORE
Senior Vice President
WILLIAM J. SAAKE
Senior Vice President
DOUGLAS L. SYMES
Senior Vice President
JOHN J. TICKNER
Senior Vice President,
General Regulatory
Counsel and Secretary
KEITH E. TROTMAN
Senior Vice President
CHRIS L. USELTON
Senior Vice President
GLEN R. ZEPNICK
Senior Vice President
BRYAN A. ANDERSON
Vice President
NORMAN H. BAKER
Vice President
JEFFREY J. BEAUDOIN
Vice President
JOHN P. BENSON
Vice President
SUZANNE M. CHAPAN
Vice President
RONALD W. CRABTREE
Vice President
CHARLES R. CRONIN, JR.
Vice President
GERALD D. CURTIN
Vice President
F. STEPHEN FETCHET
Vice President
ROBERT L. HERNANDEZ
Vice President
CAROLYN HINSON
Vice President
DAVID G. HOPPEN
Vice President
FRED A. HUNT
Vice President
MARK M. JANSEN
Vice President
HYMAN J. LEE, JR.
Vice President
ALLAN T. LENO
Vice President
LINDA K. MANGONE
Vice President
COLIN S. MITCHELL
Vice President
DORIS M. OBERHARDT
Vice President
DAVID A. O'CONNOR
Vice President
WILLIAM J. OWEN
Vice President
MICHAEL J. PALADINO
Vice President
ANGELA PARMALEE
Vice President
STEPHEN D. PETRULA
Vice President
S. ROBIN REEVES
Vice President
DIANE E. SCHAEFER
Vice President
ALAN I. STEINHARDT
Vice President
JOHN A. SWIFT
Vice President
TERRY B. THOMPSON
Vice President
JESSICA ANN VASQUEZ
Vice President
DAVID A. WEISMAN
Vice President
PAUL M. WILLIAMS
Vice President
NORMAN C. WINTERS
Vice President
LAURA F. YAMANAKA
Vice President
CalFarm
60 The Zenith
CORPORATE DIRECTORY
THEZENITH MARKETING, UNDERWRITING AND CLAIMS OFFICES
LOS ANGELES
Corporate Headquarters
21255 Califa Street
Woodland Hills, CA 91367
818/713-1000
Internet Address:
www.thezenith.com
PLEASANTON, CA
(San Francisco Bay Area)
4309 Hacienda Drive
Suite 200
Pleasanton, CA 94588
510/460-0600
FRESNO, CA
575 E. Locust Avenue
Suite 101
Fresno, CA 93720
209/432-6660
SAN DIEGO, CA
1660 N. Hotel Circle Drive
Suite 400
San Diego, CA 92108
619/299-6252
AUSTIN, TX
1101 Capital of Texas
Hwy, South, Bldg. J
Austin, TX 78746
512/306-1700
DALLAS, TX
5430 LBJ Freeway
Suite 270
Dallas, TX 75240
972/701-5700
HARRISBURG, PA
4400 Deer Path Way
Suite 200
Harrisburg, PA 17110
717/221-7000
ORLANDO, FL
3504 Lake Lynda Drive
Orlando, FL 32817
407/380-9144
SALT LAKE CITY, UT
4 Triad Center
Suite 150
Salt Lake City, UT 84180
801/741-4900
SPRINGFIELD, IL
2105 West White Oaks Drive
Springfield, IL 62704
217/726-2900
CONWAY, AR
824 Front Street
Conway, AR 72032
501/450-6884
CALFARM INSURANCE COMPANY
OFFICERS
WESTLEY M. HEYWARD
President
FRANKLIN V. ADAMS
Executive Vice President
PHILIP M. JOFFE
Executive Vice President
and Chief
Operating Officer
JOHN P. O'BRIEN
Executive Vice President
KARI L. VAN GUNDY
Senior Vice President, Finance
and Treasurer
MICHAEL W. JACOBSON
Senior Vice President
SUSAN J. MCGINNESS
Senior Vice President
ROBERT E. MEYER
Senior Vice President
STANLEY K. MIYAO
Senior Vice President
and Actuary
JAMES P. ROSS
Senior Vice President
FREDRICKA TAUBITZ
Senior Vice President
JOHN J. TICKNER
Senior Vice President,
General Regulatory
Counsel and Secretary
KEITH E. TROTMAN
Senior Vice President
JAMES R. ZUEHL
Senior Vice President
LARRY W. BROGAN
Vice President
THOMAS F. CARROLL
Vice President
SUZANNE M. CHAPAN
Vice President
PHILIP S. COLE
Vice President
DIANE F. HARVELL
Vice President
WALTER P. KRAUSE
Vice President
RICHARD J. KRUGMAN
Vice President
HYMAN J. LEE, JR.
Vice President
DONALD C. MARSHALL
Vice President
SARA E. MARTIN
Vice President
CRAIG G. MCINTOSH
Vice President
PETER M. OCCHIALINI
Vice President
STEPHEN D. PETRULA
Vice President
CRAIG C. THOMSON
Vice President
PAUL M. WILLIAMS
Vice President
HEADQUARTERS
CalFarm Insurance Company
1601 Exposition Boulevard
Sacramento, CA 95815
916/924-4000
Internet Address:
www.calfarm.com
CLAIMS/LEGAL OFFICES
Fresno
Sacramento
Santa Ana
CalFarm
The Zenith 61
CORPORATE DIRECTORY
CALFARM INSURANCE AGENCY
OFFICERS
WESTLEY M. HEYWARD
Chairman of the Board
and President
KELLY S. MILLER
Executive Vice President
FREDRICKA TAUBITZ
Senior Vice President
JOHN J. TICKNER
Senior Vice President,
General Regulatory
Counsel and Secretary
PHILIP M. JOFFE
Vice President
WILLIAM S. TAYLOR
Vice President
JOHN P. VALENTINE
Vice President
KARI L. VAN GUNDY
Vice President, Treasurer
and Assistant Secretary
GARY L. WOOLSEY
Vice President
PERMA-BILT, A NEVADA CORPORATION
OFFICERS
DANIEL SCHWARTZ
President
JOHN M. LOBROVICH
Executive Vice President
FRED W. LESSMAN
Vice President
RUTH E. OCHOA
Vice President
HEADQUARTERS
7150 Pollock Drive
Suite 104
Las Vegas, NV 89119
702/896-9100
CalFarm
62 The Zenith