ITEM 1. BUSINESS GENERAL
Zenith National Insurance Corp. ("Zenith"), a Delaware corporation incorporated in 1971, is a holding company. Zenith is engaged through its wholly-owned insurance subsidiaries, Zenith Insurance Company ("Zenith Insurance"), CalFarm Insurance Company ("CalFarm Insurance"), ZNAT Insurance Company ("ZNAT Insurance") and Zenith Star Insurance Company ("Zenith Star"), in the property-casualty insurance business. The average combined ratio (as defined below) for the 10 years ended December 31, 1997 of Zenith's property-casualty operations was 100.9%. In 1993, Zenith commenced real estate operations, developing private residences for sale in Las Vegas, Nevada, through its wholly-owned subsidiary, Perma-Bilt, a Nevada Corporation ("Perma-Bilt"). In 1995, Zenith sold its wholly-owned subsidiary, CalFarm Life Insurance Company ("CalFarm Life"), to a subsidiary of SunAmerica Inc. for approximately $120 million in cash, with Zenith retaining the group health insurance business previously written by CalFarm Life. Net income in 1995 includes a loss of $19.5 million associated with the sale of CalFarm Life. On December 31, 1996, Zenith completed the acquisition of Associated General Commerce Self-Insurers' Trust Fund ("AGC-SIF"), a Florida workers' compensation self-insurers' fund by merging it with and into Zenith Insurance. On October 10, 1997, Zenith Insurance Company of Florida ("ZIC of Florida") was incorporated in Florida with a capitalization of $6 million. ZIC of Florida has no direct business, but has assumed business from Zenith Insurance. See "Reinsurance Ceded -- Pooling Agreement."
On June 17, 1997, Zenith Insurance entered into an agreement with RISCORP, Inc. and certain of its subsidiaries (collectively "RISCORP") to purchase all of the assets of RISCORP related to its workers' compensation business and to assume certain liabilities related to RISCORP's insurance businesses. See "Pending RISCORP Acquisition" on page 31 of "Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations" and Notes to Consolidated Financial Statements -- Note 14 -- "Acquisitions" on pages 54 and 55 of Zenith's 1997 Annual Report to Stockholders, which are hereby incorporated by reference.
The 1997 edition of Best's Key Rating Guide ("Best's") assigns Zenith Insurance, CalFarm Insurance, ZNAT Insurance and Zenith Star, collectively, ratings of A+ (superior). Standard & Poor's Corporation ("S&P") has rated the claims-paying ability of Zenith Insurance, CalFarm Insurance, ZNAT Insurance and Zenith Star AA- (excellent). Best's ratings and S&P's ratings of claims-paying ability are based upon factors of concern to policyholders and insurance agents and are not directed toward the protection of investors. Zenith is currently under review by A.M. Best Company and Standard & Poor's.
At December 31, 1997, Zenith and its subsidiaries had approximately 1,400 full-time employees.
The principal executive offices of Zenith are located at 21255 Califa Street, Woodland Hills, California 91367-5021, telephone (818) 713-1000.
GLOSSARY OF SELECTED INSURANCE TERMS
The following terms when used herein have the following meanings:
DESCRIPTION OF THE BUSINESS
Zenith and its subsidiaries conduct business principally in the property and casualty insurance industry. Property-casualty operations comprise Workers' Compensation (49% of 1997 consolidated net premiums earned); other property-casualty, principally automobile, homeowners, farmowners, commercial coverages and health insurance (44% of 1997 consolidated net premiums earned); and reinsurance (7% of 1997 consolidated net premiums earned). Results of such operations for the three years ended December 31, 1997 are set forth in the table on page 25 of Zenith's 1997 Annual Report to Stockholders, which table is hereby incorporated by reference. The earnings of Zenith's property-casualty operations are supplemented by the generation of investment income discussed under "Investments."
Zenith also conducts real estate operations through a wholly-owned subsidiary that develops land and constructs private residences for sale in Las Vegas, Nevada. Zenith's business segments are described in Notes to Consolidated Financial Statements -- Note 17 -- "Segment Information" on pages 55 and 56 of Zenith's 1997 Annual Report to Stockholders, which note is hereby incorporated by reference.
PROPERTY-CASUALTY -- WORKERS' COMPENSATION INSURANCE
Workers' compensation insurance provides coverage for the statutorily prescribed benefits that employers are required to pay to their employees injured in the course of employment. The standard workers' compensation policy issued by Zenith Insurance provides payments for, among other things, temporary or permanent disability benefits, death benefits, medical and hospital expenses and expenses of vocational rehabilitation. The benefits payable and the duration of such benefits are set by statute, and vary by state and with the nature and severity of the injury or disease and the wages, occupation and age of the employee. Historically, Zenith's workers' compensation business was produced exclusively in California with minor incidental coverages out of state for its larger policyholders. In 1992, Zenith began workers' compensation operations in the Texas workers' compensation market. Since then, Zenith has further expanded its national workers' compensation operations. On December 31, 1996, Zenith completed the acquisition of AGC-SIF in Florida.
Net premiums earned in 1997 by state are set forth in the table below:
Premiums earned from Florida are expected to further increase upon closing of the pending RISCORP acquisition. See "General."
According to A.M. Best, Zenith's five-year loss ratio of 45.1% through 1996 (latest available statistics) was the lowest loss ratio of the top 50 property-casualty insurers. These statistics are attributed to Zenith's managed care efforts, return-to-work strategies, safety and health, fraud and litigation efforts. During the past 10 years, the Zenith's workers' compensation combined ratio was 101.9%.
Zenith Insurance is licensed to conduct business in 43 states and the District of Columbia. Zenith's goal is to be a specialist risk-oriented national workers' compensation insurer. National results for workers' compensation insurers in recent years have been favorable by recent historic standards, although the California workers' compensation market has been impacted by intense price competition and a decline in industry premium volume since 1995. Zenith's non-California underwriting results in 1997 were more favorable than its California results, and management intends to proceed with its national expansion. However, increased national competition is expected to follow from these favorable trends.
Competition, regulation, rate adequacy and the feasibility of containing the elements of the cost of claims are among the key factors in determining the favorability of a given workers' compensation market. In California, workers' compensation legislation was enacted in 1993 which, together with private initiatives undertaken by Zenith and other insurers, produced significant improvements in a runaway claims cost environment. However, the California Insurance Commissioner reduced minimum rates on three separate occasions in 1993 and 1994 in response to such improvements. Rates in California were deregulated effective January 1, 1995. Insurance companies now file and use their own, actuarially determined rates for workers' compensation insurance in California. Companies must file such rates with the California Department of Insurance, but the use of scheduled rating credits allow companies considerable flexibility in determining the amount of premium to be charged to a policyholder or potential policyholder. The future profitability of Zenith's workers' compensation operation will be dependent upon its ability to compete in an open rating environment in California, the success of Zenith's geographic expansion outside of California, the economic outlook for area in which Zenith operates, Zenith's continuing efforts to control medical and indemnity costs through return-to-work and managed care strategies and the ability to keep operating expenses in line with premium volume. At present, competition is intense and Zenith is focused on returning the workers' compensation operation to profitability and achieving the overall goal of a combined ratio of 100% or lower.
Generally, premiums for workers' compensation insurance policies are a function of the applicable premium rate, which includes the insured employer's experience modification factor (where applicable) and the amount of the insured employer's payroll. Payrolls may be affected significantly by changes in employment and wage levels. A deposit premium is paid at the beginning of the policy period, periodic installments are paid during the period and the final amount of the premium is generally determined as of the end of the policy period after the policyholder's payroll records are audited. Additional policy features may be added to enhance the outcome for the policyholder in the event of favorable claims experience. Predominant among such features has been, historically, the participating policy in which a dividend has been paid after policy expiration. With the advent of open rating in California and an emphasis on, among other things, overall pricing at inception, dividends became insignificant as an element in workers' compensation insurance in California.
Zenith continued to market its integrated workers' compensation, health and disability insurance products in California and Arkansas through alliances with selected health insurers, health maintenance organizations and UNUM Life Insurance Company of America, one of the nation's largest disability insurance companies. The policies are sold on an integrated basis in
California and Arkansas under the name "SinglePoint." SinglePoint did not have a significant impact on the 1997 operations of Zenith.
PROPERTY-CASUALTY -- OTHER
Zenith, through CalFarm Insurance, offers a comprehensive line of property and casualty insurance, including automobile, farmowners, commercial multiple peril packages and homeowners coverage, primarily in California. Additionally, CalFarm Insurance has assumed the group health insurance business that was previously written by CalFarm Life. Automobile insurance includes coverage for automobile bodily injury, property damage and physical damage. Automobile bodily injury and property damage insurance provide coverage for third party liability, bodily injury and property damage arising from the ownership, maintenance or use of an automobile. Automobile physical damage coverage insures against physical loss of the insured's own vehicle. Farmowners and homeowners insurance includes coverage for direct physical damage to real and personal property, loss of personal property by theft and legal liability for injury to others and damage to property of others. Commercial multiple peril insures businesses against property damage and general liability. Health insurance premiums are written under a program sponsored by the California Farm Bureau Federation (the "Farm Bureau") which includes a preferred provider organization plan and a Medicare supplement product. For the 12 years since CalFarm was acquired by Zenith, the combined ratio of Zenith's Other Property-Casualty operation was 100.6%.
Automobile insurance (both commercial and personal) is the largest line of CalFarm Insurance's business, representing 14% of Zenith's property and casualty premiums written in 1997. CalFarm Insurance insured approximately 19,300 personal automobiles and 64,200 commercial and farm vehicles in 1997. Farmowners business is the second largest line of CalFarm Insurance's business, representing approximately 11% of Zenith's property and casualty premiums written in 1997.
Zenith's Other Property-Casualty operations are subject to the regulatory provisions of California Initiative Proposition 103 ("Proposition 103"). The principal effects of Proposition 103 on Zenith's Other Property-Casualty business are as follows: rates must be approved by the California Insurance Commissioner prior to use; rates on personal automobile policies must be offered to "good drivers" (as defined) at a discount of at least 20% from rates otherwise charged and an insurer cannot refuse to sell a "good driver" policy to a qualified applicant; personal automobile insurance policies cannot be cancelled or non-renewed except for non-payment of premium, fraud or material misrepresentation, or a substantial increase in hazard; and personal automobile insurance rates must be based on the following factors in decreasing order of importance: driving record, number of miles driven, number of years of driving experience, and other factors which may be adopted by the California Insurance Commissioner. New automobile rating factor regulations pertaining to the implementation of Proposition 103 were implemented during 1997 which further limit the impact of territorial rating on automobile insurance rates.
In January 1997, the mandatory proof of insurance law and Proposition 213, which created the Personal Responsibility Act of 1996, became effective in California. Proposition 213 limits non-economic recoveries by uninsured motorists in motor vehicle accidents.
The California Legislature passed legislation in September 1996 which created the California Earthquake Authority ("CEA"). The CEA became operational in December 1996 and is a privately financed, publicly managed state agency, which provides limited earthquake coverage throughout California. Participation in the CEA is voluntary and Zenith elected not to participate. Zenith will continue to offer broader earthquake coverages than are available through the CEA as long as private reinsurance is available and affordable. Zenith can elect to participate in the CEA at a later date subject to meeting the participation requirements at that time. During 1997, Zenith continued to write homeowners and associated earthquake exposures. Earthquake exposure is monitored
through the use of earthquake modeling software and simulation techniques and through the use of industry experts. Catastrophe reinsurance is used to protect Zenith from excessive catastrophe losses. See "Reinsurance Ceded."
PROPERTY-CASUALTY -- REINSURANCE ASSUMED
Zenith Insurance is selectively underwriting a book of assumed reinsurance. Reinsurance contracts, or treaties, come in a variety of forms, but the principal arrangements are either proportional in nature, in which the assuming company shares pro-rata in the premiums and losses of the cedant, or arrangements under which the assuming company pays losses in excess of a certain limit in return for a premium, usually determined as a percentage of the cedant's primary insurance premiums. Zenith operates its reinsurance activity as a participant in treaties in which, typically, the reinsurance coverage is syndicated to a number of assuming companies. Depending upon market conditions and other factors, the volume of premiums written fluctuates from year to year. Zenith's current participation in the reinsurance market emphasizes the reinsurance of large individual property risks and property catastrophe reinsurance. By diversifying its geographical spread, Zenith's assumed reinsurance business is written so as to limit the company's exposure to losses from any one event in a worst-case scenario to a maximum of approximately 5% of consolidated stockholders' equity.
An important element in the pricing of reinsurance is the supply of reinsurance capacity (i.e. capital) relative to demand. In recent years, new capital has been made available to provide world-wide reinsurance capacity. Most notably, such capital has been contributed by new companies in Bermuda and by contributions to Lloyd's syndicates by corporations with limited liability. Zenith has observed decreases in catastrophe reinsurance rates for 1998 and premium income in 1998 may be reduced compared to 1997. Since the inception of this operation in 1985, the combined ratio of Zenith's Reinsurance operation was 94.1%.
On January 1, 1995, Zenith Insurance became a corporate underwriting member of Lloyd's through a 100% wholly-owned subsidiary, ZIC Lloyd's Underwriting Limited, which had committed funds to support the underwriting of a certain syndicate. During the fourth quarter of 1997, this subsidiary was sold at a profit.
PARENT
Zenith is a holding company owning directly or indirectly all of the capital stock of certain property and casualty insurance and insurance-related companies. In 1993, Zenith commenced a real estate operation through a newly-formed subsidiary, Perma-Bilt, for the purpose of developing, building and selling private residences in Las Vegas, Nevada. In 1997, Perma-Bilt closed and delivered 305 homes at an average selling price of $149,000, compared to 287 homes at an average selling price of $145,000, the prior year. Sales in 1997 were $45,419,000 and pre-tax income was $1,678,000 compared to sales of $41,554,000 and pre-tax income of $1,909,000 the previous year. Land acquired by Perma-Bilt at a cost of about $33,466,000 will support the construction and sale of an estimated 1,150 homes over the next several years and possibly some commercial and/or apartment development. Increased interest rates may impact the rate of home sales, but Zenith believes that the land it has acquired is strategically located and will have long-term value.
YEAR 2000
In the spring of 1996, Zenith began replacing and modifying its computer and business systems to be Year 2000 compliant. Zenith has established a central team to evaluate and implement the changes to computer systems, applications and business processes necessary to
achieve Year 2000 conversion with no disruption to business operations. Even though Zenith has been communicating with third parties with whom it does business to assure that they are Year 2000 compliant, Zenith may be adversely impacted if such third parties do not address this issue successfully. Through December 31, 1997, Zenith has incurred about $2.5 million on the Year 2000 efforts and anticipates an additional $2.0 million will be incurred through 1999. All of the significant internal insurance computer systems, applications and business processes are expected to be fully compliant by the end of 1998.
Management of RISCORP has informed Zenith that it is currently in the process of identifying and evaluating its computer and business systems with respect to Year 2000 issues. At this time, however, management of RISCORP has neither informed Zenith of the total cost of achieving Year 2000 compliance for its systems nor presented a plan for doing so. If the transaction closes, Zenith may be adversely impacted if substantial changes are required after the closing for RISCORP's computer and business systems to achieve Year 2000 compliance, and if such changes are not covered by indemnification rights contained in the purchase agreement.
LOSS AND LOSS EXPENSE RESERVES AND CLAIMS, AND LOSS DEVELOPMENTS
Zenith's property and casualty insurance subsidiaries (the "P&C Companies") maintain reserves for the payment of losses and for the expenses of settling both reported and unreported claims that have been incurred under their insurance policies and reinsurance contracts. The amount of such reserves, as related to reported claims, is based upon periodic case-by-case evaluation and judgment by the P&C Companies' claims departments, with actuarial review. The estimate of unreported claims arising from accidents which have not yet been reported to the P&C Companies, commonly known in the industry as "incurred but not reported," is based upon the P&C Companies' experience and statistical information with respect to the probable number and nature of such claims. The P&C Companies monitor these factors and revise their reserves as they deem appropriate. Reserves are based on estimates, and no assurance can be given that the ultimate liability will not be more or less than such estimates.
Reference is made to "Property-Casualty Loss Development" on pages 36 and 37 of Zenith's 1997 Annual Report to Stockholders, which is hereby incorporated by reference, and the table setting forth the reconciliation of changes in the liabilities for loss and loss adjustment expenses included in Notes to Consolidated Financial Statements -- Note 13 -- "Loss and Loss Adjustment Expense Reserves" on page 53, of Zenith's 1997 Annual Report to Stockholders, all of which are hereby incorporated by reference. These tables show the development of loss and loss adjustment expense liabilities as originally estimated under generally accepted accounting principles at December 31 of each year presented. The accounting methods used to estimate these liabilities are described in Notes to Consolidated Financial Statements -- Note 1 -- "Summary of Accounting Policies, Operations, and Principles of Consolidation" on pages 44 through 47 of Zenith's 1997 Annual Report to Stockholders, which note is hereby incorporated by reference. The one year loss and loss adjustment expense reserve development for Zenith's three main lines of insurance business is set forth in the table on page 26 of Zenith's 1997 Annual Report to Stockholders, which table is hereby incorporated by reference.
WORKERS' COMPENSATION
Zenith's Workers' Compensation reserves, on the average, are paid within approximately 2.5 years. Zenith regards the timely settlement of its Workers' Compensation claims as important to its profitability and makes use of compromises and releases for claim settlements to expedite this process.
Zenith Insurance maintains four regional offices in California and offices outside of California in Texas, Arkansas, Pennsylvania, Utah, Illinois and Florida, each of which is fully staffed to conduct all
workers' compensation claims operations, including review of initial reports of work injury, assignment of appropriate field investigation and determination of whether subrogation should be pursued. Workers' Compensation claims operations are supported by computer systems that provide immediate access to policy coverage verification and claims records and enable Zenith Insurance to detail claims payment histories and policy loss experience reports.
Legislative reform of the California workers' compensation system was enacted in 1993. In addition, Zenith undertook significant additional expenditures to improve the loss adjustment process in recent years with a view to mitigating the effect of adverse claim trends, particularly the effect of fraud and abuse.
In 1995, Zenith's new workers' compensation computer system ("system") became operational. Management observed certain unusual claim reserving trends and patterns in 1995 and 1996, and to a much lesser degree, during the first three quarters of 1997. Based on currently available data, these claim reserving trends and patterns have stabilized. Any subsequent re-interpretation of new information that becomes available from the system which may change the estimate of such liabilities in future periods is not considered to have a material impact on the financial position or results of operations.
In 1997, loss and loss adjustment expense reserves were strengthened by approximately $12 million for accident years 1995 and 1996. Additionally, the 1997 accident year loss ratio was increased.
OTHER PROPERTY-CASUALTY
Other Property-Casualty loss reserves are paid, on the average, within approximately 3.5 years.
Property insurance coverages and CalFarm Insurance's concentration of business in California expose Zenith to catastrophe losses from events in California. Reinsurance ceded by CalFarm Insurance protects against losses in excess of $5,000,000 from any one event. See "Reinsurance Ceded." In 1997, CalFarm Insurance sustained losses of $1,500,000 in conjunction with California storms. 1996 results benefited from the absence of catastrophe losses. In 1995, CalFarm Insurance sustained losses of $10,700,000 in conjunction with three major California storms.
CalFarm Insurance maintains three claims and legal offices in California to conduct all claims operations of the other property and casualty business. All claims operations of CalFarm Insurance are supervised by its home office claims department. Health claims is a separate operation located in the home office.
REINSURANCE ASSUMED
Zenith expects that, on the average, its Reinsurance reserves will be paid in approximately 3 years.
Zenith's Reinsurance reserves constitute approximately 13% of its total reserves, net of ceded reinsurance, for property and casualty unpaid losses and loss adjustment expenses at December 31, 1997, reflecting the longer average life of such reserves relative to Zenith's other principal lines of business. In addition to information supplied by ceding companies, Zenith makes use of industry experience in arriving at estimates of ultimate losses for certain reinsurance assumed arrangements.
Losses attributable to catastrophes were $2,500,000 in 1995, principally from Hurricane "Marilyn." There were no catastrophes in 1996 and 1997.
Zenith Insurance has participated, to a limited extent, in the reinsurance arrangements of ceding companies that have written both directors' and officers' liability coverage ("D & O") policies and professional indemnity policies, including such coverage written for practicing certified public
accountants. Actions alleging negligence against directors, officers or accountants by parties suffering financial losses in savings and loan failures give rise to claims under D & O policies or professional indemnity policies which, in turn, give rise to claims against Zenith Insurance. Such claims have not had, and are not expected to have in the future, a material adverse effect on Zenith's consolidated financial condition.
ENVIRONMENTAL AND ASBESTOS LOSSES
The exposure of the insurance industry to losses arising out of the cost of environmental and asbestos damage has been the focus of attention of a number of interested parties in recent years. The process of evaluating an insurance company's exposure is subject to significant uncertainties. Among the complications are lack of historical data, long reporting delays, uncertainty as to the number and identity of insureds with potential exposure and unresolved legal issues regarding policy coverage. The legal issues concerning the interpretations of various insurance policy provisions and whether environmental and asbestos losses are or were ever intended to be covered are complex. Courts have reached different and sometimes inconsistent conclusions regarding such issues as: when the loss occurred and what policies provide coverage, how policy limits are determined, how policy exclusions are applied and interpreted, whether clean-up costs are covered as insured property damage, and whether site assessment costs are either indemnity payments or adjusting costs.
Zenith has exposure to asbestos losses in its Workers' Compensation operation for medical, indemnity and loss adjustment expenses associated with insureds' long-term exposure to asbestos or asbestos-contained materials. Most of these claims date back to the 1970's and early 1980's and Zenith's exposure is generally limited to a pro-rata share of the loss for the period of time coverage was provided. Zenith also has potential exposure to environmental and asbestos losses and loss adjustment expenses beginning in 1985 through its Reinsurance operation and through CalFarm Insurance, which writes liability coverage under farmowners' and small commercial policies, however such losses are substantially excluded from all such coverage. The business reinsured by Zenith contains exclusion clauses for environmental and asbestos losses, and in 1988 an absolute pollution exclusion was incorporated into CalFarm Insurance's policy forms. All claims for damages resulting from environmental or asbestos losses are identified and handled by Zenith's most experienced claims/legal professionals. Environmental and asbestos losses have not been material and Zenith believes that its reserves for environmental and asbestos losses are appropriately established based on currently available facts, technology, laws and regulations. However, due to the long-term nature of these claims, the inconsistencies of court coverage decisions, plaintiff's expanded theories of liability, the risks inherent in major litigation and other uncertainties, the ultimate exposure from these claims may vary from the amounts currently reserved.
INVESTMENTS
Investment policies of Zenith and its insurance subsidiaries are established by their respective Boards of Directors, taking into consideration state regulatory restrictions with respect to investments in connection with reserve obligations, as well as the nature and amount of various kinds of investments. See "Business." Zenith's principal investment goal is to maintain safety and liquidity, enhance principal values and achieve increased rates of return consistent with regulatory constraints. The allocation among various types of securities is adjusted from time to time based on market conditions, credit conditions, tax policy, fluctuations in interest rates and other factors. See "Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations -- Investments" on pages 30 and 31 of Zenith's 1997 Annual Report to Stockholders, which discussion is hereby incorporated by reference. At December 31, 1997 the investment portfolios of Zenith and the P&C Companies consisted primarily of taxable bonds and short-term investments supplemented by smaller portfolios of redeemable and other preferred stocks and
common stocks. The average life of the consolidated portfolio was 4.2 years at December 31, 1997. Investment income by segment is set forth in Notes to Consolidated Financial Statements -- Note 17 -- "Segment Information" on pages 55 and 56 of Zenith's 1997 Annual Report to Stockholders, which note is hereby incorporated by reference.
Stockholders' equity will fluctuate as interest rates fluctuate due to the implementation of Statement of Financial Accounting Standards No. 115 -- "Accounting for Investments in Certain Debt and Equity Securities". In accordance with SFAS No. 115, Zenith has identified certain securities, amounting to approximately 92% of the investments in debt securities at December 31, 1997, as available-for-sale. In 1997 stockholders' equity increased by $5.0 million, net of deferred taxes, as a result of changes in the fair values of such investments.
REINSURANCE CEDED
In accordance with general industry practices, Zenith's insurance subsidiaries annually purchase excess of loss reinsurance. Reinsurance makes the assuming reinsurer liable to the ceding company to the extent of the reinsurance. It does not, however, discharge the ceding company from its primary liability to its policyholders in the event the reinsurer is unable to meet its obligations under such reinsurance treaty. Historically, no material costs have been incurred by Zenith or its subsidiaries from uncollected reinsurance. The purpose of such reinsurance is to protect Zenith from the impact of large, unforeseen losses, and such reinsurance reduces the magnitude of sudden and unpredictable changes in net income and the capitalization of insurance operations. Zenith monitors the financial condition of its reinsurers and does not believe that it is exposed to any material credit risk through its ceded reinsurance arrangements. Zenith believes that its ceded reinsurance arrangements are adequate and consistent with industry practice.
Reinsurance premiums ceded by Zenith's insurance subsidiaries amounted to $26,191,000, $24,642,000 and $21,112,000 in 1997, 1996 and 1995, respectively, or 5.3%, 5.4% and 4.9% of earned premiums in 1997, 1996 and 1995, respectively. Reinsurance recoverable on unpaid losses amounted to $87,665,000, $93,651,000 and $54,429,000 in 1997, 1996 and 1995, respectively, or 14.3%, 15.1% and 10.5% of gross reserves for unpaid losses and loss adjustment expenses in 1997, 1996 and 1995, respectively. Each insurance subsidiary maintains separate reinsurance arrangements, which were as follows during 1997:
Zenith Insurance -- Workers' Compensation reinsurance covered all claims between $550,000 and $100,000,000 per occurrence. The coverage from $550,000 to $5,000,000 is placed with General Reinsurance Corporation, the coverage from $5,000,000 to $10,000,000 with Employers Reinsurance Corporation and the remaining three layers from $10,000,000 to $60,000,000 primarily with Prudential Reinsurance Company, NAC Reinsurance Corporation, Transatlantic Reinsurance Company, Everest Reinsurance Company and the London reinsurance market (primarily Lloyds' syndicates and certain United Kingdom reinsurance companies). Catastrophe reinsurance covers an additional $40,000,000 in excess of $60,000,000 and is placed with UNUM Life Insurance Company, ReliaStar Life Insurance Company and Connecticut General Life. Zenith's Reinsurance division did not purchase any reinsurance protection on its assumed business in the three years ended December 31, 1997. However, Zenith's exposure to losses from assumed reinsurance is limited by the terms upon which it is written to a maximum probable loss from any one event of approximately 5% of Zenith's consolidated stockholders' equity.
Prior to Zenith's acquisition of AGC-SIF, AGC-SIF purchased aggregate excess and specific excess reinsurance for protection against losses in excess of stated retentions in each year of coverage. Beginning in 1997, reinsurance for business written in Florida was combined with Zenith's existing reinsurance arrangements.
CalFarm Insurance -- For personal and commercial property lines of business, reinsurance is maintained for claims in excess of $350,000 up to $4,000,000 per occurrence. On liability coverages
for both personal and commercial lines, reinsurance covers losses up to $5,000,000 per occurrence, subject to a retention of $500,000. This reinsurance coverage is all placed with General Reinsurance Corporation. CalFarm Insurance has property catastrophe reinsurance that provides for recovery of 95% of $80,000,000, excess of a retention of $5,000,000, for which the principal reinsurers are General Reinsurance Corporation and Centre Cat Ltd. The catastrophe reinsurance was increased to 95% of $110,000,000, excess of a retention of $5,000,000 effective February 1, 1998. CalFarm Insurance also maintains reinsurance agreements with Employers Reinsurance Corporation and Duncanson & Holt for excess risks on its accident and health contracts. Employers Reinsurance Corporation provides coverage for CalFarm's Farm Bureau health insurance program for aggregate losses in excess of $2,000,000 on those individual health policy claims that exceed $120,000 for each insured in each calendar year. Duncanson & Holt provides coverage on other group health policy claims that exceed $100,000 in each calendar year.
CalFarm Insurance participates in a quota share contract whereby it retains 20% of the first $1,000,000 on most umbrella risks (comprehensive coverage in excess of primary policy limits) underwritten, with the remainder of up to $10,000,000 for commercial lines and up to $5,000,000 for personal lines ceded to General Reinsurance Corporation. Facultative reinsurance is placed on property coverage in excess of $4,000,000 on all property lines, and on umbrella limits in excess of $10,000,000 for commercial lines and $5,000,000 for personal lines. Facultative reinsurance is used on fewer than 5% of CalFarm Insurance's policies. Facultative coverage is placed primarily with General Reinsurance Corporation. Other companies used are Employers Reinsurance Corporation, American Reinsurance Company and other reinsurers rated A+ by A.M. Best Company.
Pooling Agreement -- Zenith Insurance, CalFarm Insurance, ZNAT Insurance, ZIC of Florida and Zenith Star are parties to a pooling agreement. Under the pooling agreement, the results of underwriting operations are ceded (the risks are transferred) to Zenith Insurance and are then reapportioned, or retro-ceded (the risks are transferred back), to those four companies in the following proportions: Zenith Insurance, 77.5%; CalFarm Insurance, 18%; ZNAT Insurance, 2%; ZIC of Florida, 2%; and Zenith Star, 0.5%. Transactions pursuant to the pooling agreement are eliminated on consolidation and have no impact on Zenith's consolidated financial statements.
MARKETING AND STAFF
Zenith Insurance's workers' compensation business is produced by approximately 1,400 independent licensed insurance agents and brokers throughout California, Texas, Florida and other areas in which Zenith conducts workers' compensation operations. Certain CalFarm Insurance agents referred to below also sell workers' compensation policies. Zenith Insurance's assumed reinsurance premiums are generated nationally by brokers and reinsurance intermediaries.
CalFarm Insurance maintains a sales force of approximately 160 agents who primarily sell insurance products for CalFarm Insurance, principally in rural and suburban areas. In addition, 210 independent agents market CalFarm Insurance products and 1,285 independent agents market the CalFarm Insurance health insurance products.
Applications for insurance submitted by all agents and brokers are evaluated by professional underwriters based upon numerous factors, including underwriting criteria and standards, geographic areas of underwriting concentration, actuarial judgments of rate adequacy, economic considerations, and review of known data on the particular risk. Zenith's insurance subsidiaries, as opposed to their agents and brokers, retain authority over underwriting, claims processing, safety engineering and auditing.
CALIFORNIA FARM BUREAU FEDERATION
The Farm Bureau was formed to provide its members with a variety of agriculture-related services, including property and casualty and health insurance. The Farm Bureau is California's
largest general farm organization, and represents more than 75,000 member families in 58 counties. The Farm Bureau continues to work actively to encourage its membership to place their insurance with CalFarm Insurance. Farm Bureau membership is a prerequisite to the purchase of farmowners, automobile and health insurance from CalFarm Insurance. Of the estimated 75,000 member families, approximately 60% are insured by CalFarm Insurance. The business of CalFarm Insurance is closely tied to the California farm economy. However, approximately 46% of Farm Bureau members (and CalFarm Insurance insureds) are non-farmers, and approximately 60% of CalFarm Insurance premium volume is generated by non-farm business. Total written premium in CalFarm Insurance attributable to sales that were sponsored by the Farm Bureau constituted approximately 31%, 31% and 30% of Zenith's total written premium for the years 1997, 1996 and 1995, respectively. The agreement of CalFarm Insurance with the Farm Bureau, which is subject to cancellation by either party on six months' notice, requires CalFarm Insurance to make annual payments to the Farm Bureau of $240,000 plus 2% of the gross written premium under the Farm Bureau group health insurance program. Pursuant to such provisions, total payments by CalFarm Insurance to the Farm Bureau were approximately $1 million in each of 1997, 1996 and 1995.
CalFarm Insurance continues to be the largest writer of farmowners policies in the state and benefits from its sponsorship by the Farm Bureau. Such benefit is derived from the use of the CalFarm name and the Farm Bureau membership lists. Further, CalFarm Insurance's ability to sell products to Farm Bureau members is enhanced by the Farm Bureau relationship. The Farm Bureau benefits since Farm Bureau membership is required to obtain automobile, farmowners and health insurance policies from CalFarm Insurance, which generates membership and revenues for the Farm Bureau. If the relationship between CalFarm Insurance and the Farm Bureau were terminated, Zenith believes that it could retain a significant amount of the business it currently has with Farm Bureau members because of the quality and tailored features of the products it offers in what it regards as its "niche market" and the long-term relationships established between its agents and these policyholders. In the event of such termination, however, Zenith expects that there would be an increased risk of nonrenewal of existing insurance coverage as well as a possible adverse effect on new policy revenues, but it cannot estimate the financial impact of any such termination. Zenith anticipates the continuation of a close working relationship with the Farm Bureau and the promotion among its membership of the purchase of insurance products from CalFarm Insurance as an attractive feature of Farm Bureau membership.
COMPETITION
Competition in the insurance business is based upon price, product design and quality of service. The insurance industry is highly competitive, and competition is particularly intense in the California workers' compensation market which was deregulated with respect to prices in 1995. Zenith's subsidiaries compete not only with other stock companies, but with mutual companies and other underwriting organizations such as the State Compensation Insurance Fund. Competition also exists from self-insurance and captive insurers. Over the years there has been increased competition from direct-writing companies and, in the property and casualty field, from affiliates of large life insurance companies. Many companies in competition with Zenith's subsidiaries have been in business for a much longer time, have a larger volume of business, are more widely known, and/or possess substantially greater financial resources.
REGULATION
STATES' DEPARTMENTS OF INSURANCE
Insurance companies are primarily subject to regulation and supervision by the Department of Insurance in the state in which they are domiciled and, to a lesser extent, other states in which they conduct business. Zenith's insurance subsidiaries are primarily subject to regulation and
supervision by the California Department of Insurance, except for Zenith Star and ZIC of Florida, which are primarily subject to regulation and supervision in the State of Texas and the State of Florida, respectively. These states have broad regulatory, supervisory and administrative powers. Such powers relate to, among other things, the granting and revocation of licenses to transact business; the licensing of agents; the standards of solvency to be met and maintained; the nature of and limitations on investments; approval of policy forms and rates; periodic examination of the affairs of insurance companies; and the form and content of required financial statements.
In California, Zenith Insurance, CalFarm Insurance and ZNAT Insurance are required, with respect to their workers' compensation line of business, to maintain on deposit investments meeting specified standards that have an aggregate market value equal to the companies' loss reserves. For this purpose, loss reserves are defined as the current estimate of reported and unreported claims net of reinsurance, plus a statutory formula reserve based on a minimum of 65% of earned premiums for the latest three years. Zenith Insurance and ZNAT Insurance are subject to similar deposit requirements in certain other states based on those states' retaliatory statutes.
Detailed annual and quarterly reports must be filed by Zenith's insurance subsidiaries with the California Department of Insurance and the Texas Department of Insurance, and with other states in which they are licensed to transact business, and their businesses and accounts are subject to periodic examination by such agencies, usually at three year intervals. Zenith Insurance, CalFarm Insurance and ZNAT Insurance, were examined by the California Department of Insurance as of December 31, 1996. Although the final Report of Examination has not yet been issued, Management does not expect any material findings. Zenith Star was examined by the Texas Department of Insurance as of December 31, 1996. Although the final Report of Examination has not yet been issued, Management does not expect any material findings.
THE NATIONAL ASSOCIATION OF INSURANCE COMMISSIONERS
The National Association of Insurance Commissioners ("NAIC") is a group formed by state Insurance Commissioners to discuss issues and formulate policy with respect to regulation, reporting and accounting of insurance companies. Although the NAIC has no legislative authority and insurance companies are at all times subject to the laws of their respective domiciliary states and, to a lesser extent, other states in which they conduct business, the NAIC is influential in determining the form in which such laws are enacted. In particular, Model Insurance Laws, Regulations and Guidelines (the "Model Laws") have been promulgated by the NAIC as a minimum standard by which state regulatory systems and regulations are measured. Adoption of state laws which provide for substantially similar regulations to those described in the Model Laws is a requirement for accreditation by the NAIC.
The NAIC has adopted model regulations to require insurers to maintain minimum levels of capital based on their investments and operations, known as "risk based capital" ("RBC") requirements. At December 31, 1997, adjusted capital under the RBC regulations for the Zenith Insurance Group (consisting of Zenith Insurance, CalFarm Insurance, ZIC of Florida, ZNAT Insurance and Zenith Star) was 332%, significantly above the RBC control, or required, level of capital under the regulations.
The NAIC Insurance Regulatory Information System ("IRIS") was developed to assist insurance departments in overseeing the financial condition of insurance companies. Annually, IRIS key financial ratios (11 ratios for property and casualty companies) are calculated from data supplied in annual statutory statements of insurance companies. These ratios are reviewed by experienced financial examiners of the NAIC to select those companies that merit highest priority in the allocation of the regulators' resources. The 1997 IRIS results for the Zenith Insurance Group showed no results outside the "normal" range for such ratios, as such range is determined by the NAIC.
The NAIC is in the process of codifying statutory accounting principles to provide a comprehensive basis of statutory accounting and reporting for use by insurance departments, insurers, and auditors. The codified principles have not yet been finalized, therefore, the effective date has not been determined. Implementation of the codified statutory accounting principles may affect the surplus level and the capitalization requirement of Zenith's insurance subsidiaries on a statutory basis. Zenith has not determined the impact of this codification.
INSURANCE HOLDING COMPANY SYSTEM REGULATORY ACT
Zenith's insurance subsidiaries are also subject to the California, Florida and Texas Insurance Holding Company System Regulatory Acts ("Holding Company Acts"), which contain certain reporting requirements, including the requirement that such subsidiaries file information relating to capital structure, ownership, financial condition and general business operation. The Holding Company Acts also limit dividend payments and material transactions by Zenith's insurance subsidiaries. See "Management's Discussion and Analysis of Consolidated Financial Condition and Result of Operations -- Liquidity and Capital Resources" on page 32 of Zenith's 1997 Annual Report to Stockholders, which discussion is hereby incorporated by reference.
OTHER REGULATION
Property and casualty insurance coverage is subject to certain regulation as described herein under "Description of Business -- Property-Casualty -- Other," and Zenith's other property-casualty rates are subject to prior approval by the California Department of Insurance. The provisions of Proposition 103 do not apply to Workers' Compensation, Health insurance or Reinsurance, which combined to account for 64.5% of Zenith's property-casualty earned premiums in 1997.
ITEM 2.
ITEM 2. PROPERTIES
Zenith Insurance owns a 120,000 square foot office facility in Woodland Hills, California which, since November of 1987, has been the corporate home office of Zenith, Zenith Insurance and ZNAT Insurance.
In addition, Zenith Insurance and CalFarm Insurance, in the regular conduct of their business, lease offices in various cities. See Notes to Consolidated Financial Statements -- Note 8 -- "Commitments and Contingent Liabilities" on page 51 of Zenith's 1997 Annual Report to Stockholders, which note is hereby incorporated by reference.
CalFarm Insurance owns its home office building consisting of 133,000 square feet (and surrounding property of approximately 4 acres) in Sacramento, California.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
Zenith and its subsidiaries are involved in certain litigation. In the opinion of management, after consultation with legal counsel, such litigation in which Zenith is a defendant is either without merit or the ultimate liability, if any, will not have a material adverse effect on the consolidated financial condition of Zenith.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Zenith's Common Stock, par value $1.00 per share, is traded on the New York Stock Exchange under the symbol ZNT. The table below sets forth the high and low sales prices of the Common Stock for each quarterly period during the last two fiscal years.
As of March 9, 1998, there were 353 registered holders of record of Zenith Common Stock.
The table below sets forth information with respect to the amount and frequency of dividends declared on Zenith Common Stock. Based upon Zenith's financial condition, it is currently expected that cash dividends will continue to be paid in the future.
The Holding Company Acts limit the ability of Zenith Insurance to pay dividends to Zenith, and of CalFarm Insurance, ZNAT Insurance, ZIC of Florida and Zenith Star to pay dividends to Zenith Insurance, by providing that the appropriate insurance regulatory authorities in the State of California, Texas or Florida must approve any dividend that, together with all other such dividends paid during the preceding twelve months, exceeds the greater of: (a) 10% of the paying company's statutory surplus as regards policyholders at the preceding December 31; or (b) 100% of the net income for the preceding year. In addition, any such dividend must be paid from policyholders' surplus attributable to accumulated earnings. During 1997, Zenith Insurance paid dividends of $22,750,000 to Zenith. During 1998, Zenith Insurance will be able to pay $27,841,000 in dividends to Zenith without prior approval. In 1998, CalFarm Insurance, ZNAT Insurance, ZIC of Florida and Zenith Star, together, will be able to pay $9,317,000 in dividends to Zenith Insurance without prior approval.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
The five-year summary of selected financial information and accompanying notes, included in Zenith's 1997 Annual Report to Stockholders on pages 34 and 35, is hereby incorporated by reference.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
"Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations," included in Zenith's 1997 Annual Report to Stockholders on pages 24 to 33 is hereby incorporated by reference.
ITEM 7a.
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable for the year ended December 31, 1997.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Reference is made to pages 36 and 37 of Zenith's 1997 Annual Report to Stockholders for information setting forth the loss and loss adjustment expense liability development for 1987 through 1997 and to the consolidated financial statements and notes thereto on pages 38 to 56 of Zenith's 1997 Annual Report to Stockholders, which are hereby incorporated by reference.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information set forth under the captions "Section 16(a) Beneficial Ownership Reporting Compliance" and "Election of Directors" in the Proxy Statement distributed to stockholders in connection with Zenith's 1998 Annual Meeting of Stockholders which is to be filed by Zenith after the date this Report on Form 10-K is filed (the "Proxy Statement") is hereby incorporated by reference.
EXECUTIVE OFFICERS OF THE REGISTRANT
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(1) Officer of Zenith and its subsidiaries. (2) Officer of Zenith's subsidiaries only. (3) Designated as an executive officer of the registrant on February 24, 1998. (4) Ceased being an executive officer of the registrant on February 24, 1998.
Each of the executive officers has occupied an executive position with Zenith or a subsidiary of Zenith for more than five years, except for Mr. Jack D. Miller who was previously with Industrial Indemnity Company, a Property-casualty insurance company, serving as the President and Chief Executive Officer from 1995 to 1997; acting President and Chief Executive Officer from 1994 to 1995; and in various other positions from 1987 to 1994, culminating in Executive Vice President and Chief Operating Officer.
There are no family relationships between any of the executive officers, and there are no arrangements or understandings pursuant to which any of them were selected as officers.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
The information set forth under the headings "Directors' Compensation," "Executive Compensation," "Summary Compensation Table," "Option/SAR Grants in Last Fiscal Year," "Aggregated Option/SAR Exercises in Last Fiscal Year And Fiscal Year End Option/SAR Values," "Employment Agreements and Termination of Employment and Change in Control Arrangements," "Compensation Committee Interlocks and Insider Participation" and "Board of Directors' Report on Executive Compensation, Performance Bonus Committee Report on Performance Based Compensation Plans for Executive Officers" in the Proxy Statement is hereby incorporated by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information set forth under the caption "Security Ownership of Certain Beneficial Owners and Management" in the Proxy Statement is hereby incorporated by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information set forth in footnote 3 to the table set forth under the caption "Election of Directors" in the Proxy Statement is hereby incorporated by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Documents filed as part of the report:
1. FINANCIAL STATEMENTS
Independent Accountant's Report
Financial Statements and notes thereto incorporated by reference from Zenith's 1997 Annual Report to Stockholders in Item 8 of Part II above:
Consolidated Financial Statements of Zenith National Insurance Corp. and Subsidiaries:
Consolidated Balance Sheet as of December 31, 1997 and 1996
Consolidated Statement of Operations for the years ended December 31, 1997, 1996 and 1995
Consolidated Statement of Cash Flows for the years ended December 31, 1997, 1996 and 1995
Consolidated Statement of Stockholders' Equity for the years ended December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
2.FINANCIAL STATEMENT SCHEDULES
Zenith National Insurance Corp. and Subsidiaries
As of December 31, 1997.
I -- Summary of Investments -- Other Than Investments in Related Parties
For the years ended December 31, 1997, 1996 and 1995.
III -- Supplementary Insurance Information
IV -- Reinsurance
Zenith National Insurance Corp.
As of December 31, 1997 and 1996 and for the years ended December 31, 1997, 1996 and 1995.
II -- Condensed Financial Information of Registrant
Property and Casualty Loss Development on pages 36 and 37 of Zenith's 1997 Annual Report to Stockholders.
Schedules other than those listed above are omitted since they are not applicable, not required, or the information required to be set forth therein is included in the consolidated financial statements, or in notes thereto.
3. EXHIBITS
The Exhibits listed below are filed in a separate Exhibit Volume to this Report.
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*Management contract or compensatory plan or arrangement
(b)REPORTS ON FORM 8-K
No Reports on Form 8-K were filed by the Registrant for the quarter ended December 31, 1997.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 20, 1998.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated, on March 20, 1998.
CONSENT OF INDEPENDENT ACCOUNTANT
We consent to the incorporation by reference in the Registration Statements on Form S-8 (File Nos. 33-8948, 33-22219 and 333-04399) of our report dated February 4, 1998 on our audits of the consolidated financial statements and financial statement schedules of Zenith National Insurance Corp. and subsidiaries as of December 31, 1997 and 1996, and for each of the three years in the period ended December 31, 1997, which is included in this Annual Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
Los Angeles, California
March 20, 1998
INDEPENDENT ACCOUNTANT'S REPORT
To the Stockholders and Board of Directors of Zenith National Insurance Corp.
We have audited the consolidated financial statements of Zenith National Insurance Corp. and subsidiaries as of December 31, 1997 and 1996, and for each of the three years in the period ended December 31, 1997, which financial statements are included on pages 38 through 56 of the Company's 1997 Annual Report to Stockholders and incorporated by reference herein. We have also audited the financial statement schedules listed in the index on page 18 of this Form 10-K. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Zenith National Insurance Corp. and subsidiaries as of December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein.
COOPERS & LYBRAND L.L.P.
Los Angeles, California
February 4, 1998
SCHEDULE I -- SUMMARY OF INVESTMENTS -- OTHER THAN INVESTMENTS IN RELATED PARTIES ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES DECEMBER 31, 1997
- ------------------------ (1) Original cost of equity securities and, as to fixed maturities, original cost reduced by repayments and adjusted for amortization of premiums or accrual of discounts.
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT ZENITH NATIONAL INSURANCE CORP. BALANCE SHEET ASSETS
See notes to condensed financial information.
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT ZENITH NATIONAL INSURANCE CORP. STATEMENT OF OPERATIONS
See notes to condensed financial information.
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT ZENITH NATIONAL INSURANCE CORP. STATEMENT OF CASH FLOWS
See notes to condensed financial information.
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT ZENITH NATIONAL INSURANCE CORP. NOTES TO CONDENSED FINANCIAL INFORMATION
The accompanying condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto of Zenith National Insurance Corp. (Zenith) and subsidiaries.
A. Investment In Subsidiaries:
Zenith owns, directly or indirectly, 100% of the outstanding stock of Zenith Insurance Company, CalFarm Insurance Company, ZNAT Insurance Company, ZIC of Florida, Zenith Star Insurance Company (a Texas company) and Perma-Bilt, a Nevada Corporation. These investments are included in the financial statements on the equity basis of accounting. Temporary advances in the ordinary course of business are included in other assets. The excess of cost over net assets acquired of $2,009,000 represents the unamortized excess of cost over underlying net tangible assets of companies acquired prior to 1970, which is considered to have continuing value.
Zenith partially funds the cash flow requirements of its real estate construction subsidiary. Intercompany interest charges to such subsidiary reduce Zenith's interest expense.
Zenith files a consolidated federal income tax return. The equity in the income from continuing operations of subsidiaries of $32,790,000 in 1997, $40,905,000 in 1996 and $25,160,000 in 1995 is net of a provision for federal income tax expense of $17,475,000 in 1997, $21,362,000 in 1996, and $12,823,000 in 1995. Zenith has formulated tax allocation procedures with its subsidiaries and the 1997, 1996 and 1995 condensed financial information reflect Zenith's portion of the consolidated taxes.
Zenith Insurance Company paid dividends to Zenith of $22,750,000 in 1997, $15,000,000 in 1996 and $10,000,000 in 1995. CalFarm Life Insurance paid a dividend to Zenith of $500,000 prior to its sale in the fourth quarter of 1995.
B. Senior Notes Payable
Zenith issued $75,000,000 of 9% Senior Notes due 2002 (the "9% Notes") at par in May 1992. Interest on the 9% Note is payable semi-annually. The 9% Notes are general unsecured obligations of Zenith.
C. Discontinued Operations:
During 1995, Zenith completed the sale of its wholly-owned subsidiary, CalFarm Life Insurance Company ("CalFarm Life"), to a subsidiary of SunAmerica Inc. for approximately $120 million in cash. The group health insurance business of CalFarm Life was retained by Zenith. The sale resulted in a loss of approximately $19.5 million, after taxes. The life and annuity operations of CalFarm Life are presented as discontinued operations.
SCHEDULE III -- SUPPLEMENTARY INSURANCE INFORMATION ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
SCHEDULE IV -- REINSURANCE ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
EXHIBIT INDEX
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*Management contract or compensatory plan or arrangement