ITEM 1. BUSINESS. GENERAL
Zenith National Insurance Corp. ("Zenith National"), a Delaware corporation incorporated in 1971, is a holding company engaged through its wholly-owned insurance subsidiaries, Zenith Insurance Company ("Zenith Insurance"), ZNAT Insurance Company ("ZNAT Insurance") and Zenith Star Insurance Company ("Zenith Star") (collectively, the "P&C Operations"), in the property-casualty insurance business. Zenith National and its subsidiaries (collectively, "Zenith") also conduct Real Estate Operations through wholly-owned subsidiaries which develop land and construct private residences for sale in Las Vegas, Nevada. On April 1, 1998, Zenith Insurance acquired substantially all of the assets and certain liabilities of RISCORP, Inc. and certain of its subsidiaries (collectively, "RISCORP") related to RISCORP's workers' compensation business (the "RISCORP Acquisition"). Effective March 31, 1999, Zenith Insurance completed the sale of all of the issued and outstanding capital stock of its wholly-owned subsidiary, CalFarm Insurance Company ("CalFarm"), for $273.0 million in cash to Nationwide Mutual Insurance Company.
The 2000 edition of Best's Key Rating Guide ("Best's") assigns the P&C Operations ratings of A (Excellent). Moody's Investors Service ("Moody's") has assigned insurance financial strength ratings of Baa1 (Adequate) to the P&C Operations. Standard & Poor's ("S&P") has assigned an insurer financial strength rating to the P&C Operations of A (Strong). These Best's, Moody's and S&P ratings are based upon factors of concern to policyholders and insurance agents and are not directed toward the protection of investors.
At December 31, 2000, Zenith had approximately 1,100 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 classifies its business into the following segments: Workers' Compensation, Reinsurance, Other Property-Casualty (through March 31, 1999, the date of the sale of CalFarm) Real Estate, Investment and Parent. Segments are designated based on the types of products and services provided. The P&C Operations comprise the Workers' Compensation, Reinsurance and Other Property-Casualty (through March 31, 1999) Operations. Zenith's business segments are also described in Notes to Consolidated Financial Statements -- Note 20 --"Segment Information" on pages 63-64 of Zenith's 2000 Annual Report to Stockholders, which note is hereby incorporated by reference.
WORKERS' COMPENSATION
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 policy issued by the Workers' Compensation Operations 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.
Generally, premiums for workers' compensation insurance policies are a function of: the applicable premium rate, which varies with the nature of the employees duties and the business of the employer; 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 policy 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. Except in Florida, where minimum rates for workers' compensation insurance are set by the Department of Insurance, Zenith's rates for workers' compensation are actuarially determined in each state in which it does business. Rates are continually reviewed for adequacy using actuarial analysis of current and anticipated trends in costs. Competition, based on price, in the national workers' compensation insurance industry is intense, even in Florida where dividend plans and retrospectively rated policies form the basis for competition.
In addition to seeking adequate pricing, Zenith's long-term strategy in the national workers' compensation industry is to provide value-added services that, over the long run, reduce its policyholders' net workers compensation costs. Loss prevention services focus on work place safety and accident and illness prevention. Claims management services include return to work programs, nurse case management for serious injuries and management of medical provider services and billings. Investigation and legal services help policyholders to prevent fraud and assist them to favorably resolve litigated claims.
During 2000, the P&C Operations wrote workers' compensation insurance in 43 states. Prior to 1992, Zenith's Workers' Compensation Operations were concentrated principally in California. Such Workers' Compensation Operations expanded to Texas in 1992 with other states following shortly thereafter. Florida operations commenced with the acquisition of the Associated General Contractors' Self-Insurance Fund on December 31, 1996. On April 1, 1998, the RISCORP Acquisition added additional business in Florida and other states in the Southeast, principally in
North Carolina and Alabama. Net premiums earned for the year ended December 31, 2000 by state are set forth in the table below:
In the three years ended December 31, 2000, intense competition and inadequate premium rates adversely affected the national workers' compensation industry. Industry data indicates a national trend of increasing claims severity, and premium rates have not kept pace with the trend of increasing severity. Industry organizations such as the National Council on Compensation Insurance, Inc. and the California Workers' Compensation Insurance Rating Bureau have reported that their analyses of the data show that the liabilities for unpaid loss and loss adjustment expenses as estimated and reported by the industry are significantly inadequate. The estimated accident year combined ratio in 1999 was about 135% for the national workers' compensation industry and about 156% for the California workers' compensation industry, including a 1999 accident year loss ratio of about 118%.
Zenith's inforce Workers' Compensation premiums decreased consistently in the several years ended December 31, 1999 as a result of Zenith's endeavors during that period to maintain rate adequacy in the face of intense competition in the national workers' compensation insurance industry. In the year ended December 31, 2000, competitive pricing conditions improved somewhat in California and Zenith increased its inforce premiums in California by about 50% at December 31, 2000 compared to December 31, 1999. Outside of California, where competition and pricing are improving only moderately and only in certain states, Zenith's inforce premiums increased by about 11% at December 31, 2000 compared to December 31, 1999. In January 2001, Zenith continued to increase its inforce premiums in California and other selected states.
Zenith continually monitors loss development trends and data to establish adequate premium rates and loss reserves. Zenith increased its Workers' Compensation premium rates in California by about 8% effective January 1, 2000 and by about 9% effective September 1, 2000. Rates were increased again in California by about 8% effective January 1, 2001 and Zenith implemented other rate increases in most of the states in which it does business. Minimum rates in Florida, which are set by the Department of Insurance, were unchanged at January 1, 2001.
Zenith expects that the profitability of its Workers' Compensation Operations will be dependent upon general levels of competition, industry pricing and management's ability to estimate the impact of claim frequency and severity trends on the adequacy of loss reserves and premium rates. Zenith is unable to predict when its Workers' Compensation Operations will return to underwriting profitability, although it anticipates improvement in the short run with increases in volume and prices.
REINSURANCE
The Reinsurance Operations principally consist of world-wide, assumed reinsurance of property losses from catastrophes and large property risks. 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. The Reinsurance Operations participate 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. By diversifying its geographical spread, Zenith's assumed reinsurance business is written so as to limit exposure to losses from any one event in a worst-case scenario to a maximum of approximately 5% of consolidated stockholders' equity.
Results of the Reinsurance Operations may be adversely impacted in years when large catastrophes occur. However, since its inception in 1985, the combined ratio of the Reinsurance Operations through December 31, 2000 was 97.4%. In the three years ended December 31, 2000, the Reinsurance Operations were adversely impacted by catastrophe losses. Catastrophe losses were $22.6 million, $18.9 million and $11.5 million before tax in 2000, 1999 and 1998, respectively. Catastrophe losses in 2000 were attributable to additional estimates of the impact of the events in 1999, but there do not appear to have been any major catastrophes in 2000. There were frequent catastrophes of a moderate size culminating in severe storms in Europe at the end of 1999. Catastrophes in 1998 were attributable principally to a single large event -- Hurricane Georges. Estimates of the impact of catastrophes on the Reinsurance Operations are based on the information that is currently available and such estimates could change based on new information that becomes available or based upon reinterpretation of existing information.
OTHER PROPERTY-CASUALTY
The Other Property-Casualty Operations offered automobile, farmowners, commercial coverages, group health and homeowners coverage, primarily in California, and were operated by CalFarm through March 31, 1999, the effective date of its sale. For the 14 years that Zenith owned CalFarm, the average combined ratio of the Other Property-Casualty Operations was 100.1%. The gain on the sale of CalFarm after tax was $104.3 million.
REAL ESTATE OPERATIONS
The Real Estate Operations develop land and primarily construct single-family residences in Las Vegas, Nevada. Total revenues recognized in the Real Estate Operations in 2000 were $84.5 million and pre-tax income was $5.5 million. Land presently owned at a cost of $34.0 million will support the construction of an estimated 1,300 homes over the next several years. Changes in interest rates and other factors could affect future home sales (we have not seen any impact so far), but Zenith believes the land it has acquired is strategically located and will have long term value.
INVESTMENTS
The Investment operations provide income and realized gains on investments, primarily from investments in debt securities. Investment policies of Zenith are established by the 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. Zenith's principal investment goals are to maintain safety and liquidity, enhance principal values and achieve increased rates of return consistent with regulatory constraints. The allocation among various types of securities is adjusted from time to time based on market conditions, credit conditions, tax policy, fluctuations in interest rates and other factors.
At December 31, 2000, Zenith's consolidated investment portfolio emphasized high quality, taxable bonds and short-term investments, supplemented by smaller portfolios of redeemable and
other preferred and common stocks. Bonds constituted 68% and short-term investments constituted 19% of the carrying value of Zenith's consolidated investment portfolio at December 31, 2000. Bonds with an investment grade rating represented 94% of the consolidated carrying values of bonds at December 31, 2000. The average life of the consolidated portfolio was 5.1 years at December 31, 2000.
Zenith has identified certain securities, amounting to 96% of the investments in debt securities at December 31, 2000, as "available-for-sale." Stockholders' equity increased by $9.6 million after deferred tax from December 31, 1999 to December 31, 2000 as a result of changes in the fair values of such investments. Stockholders' equity will fluctuate with any changes in the fair values of "available-for-sale" securities.
PARENT
The Parent operations represent Zenith National, a holding company which owns, directly or indirectly, all of the capital stock of the P&C Operations, non-insurance companies and securities. Parent expenses in 2000 include $1.8 million before tax of severance costs associated with the termination provisions of an employment contract of a company officer.
LOSS AND LOSS EXPENSE RESERVES AND CLAIMS, AND LOSS DEVELOPMENTS
The P&C Operations 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 Zenith's claims departments, with actuarial review. The estimate of unreported claims arising from accidents which have not yet been reported to the P&C Operations, commonly known in the industry as "incurred but not reported," is based upon the experience of the P&C Operations and statistical information with respect to the probable number and nature of such claims. Zenith continually monitors loss development trends and data to establish adequate premium rates and loss reserves. 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 40-41 of Zenith's 2000 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 6 -- "Loss and Loss Adjustment Expense Reserves" on page 55 of Zenith's 2000 Annual Report to Stockholders, which is hereby incorporated by reference. These tables show the development of loss and loss adjustment expense liabilities as originally estimated under generally accepted accounting principles ("GAAP") 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 49-50 of Zenith's 2000 Annual Report to Stockholders, which note is hereby incorporated by reference. The one year loss and loss adjustment expense reserve development for the P&C Operations is set forth in the table in the Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations on page 28 of Zenith's 2000 Annual Report to Stockholders, which table is hereby incorporated by reference.
WORKERS' COMPENSATION
Zenith expects that, on the average, its Workers' Compensation reserves will be paid within approximately 2 years. Zenith regards the timely settlement of its Workers' Compensation claims as important to its profitability and makes use of compromises and releases, where possible, for claim settlements to expedite this process. Zenith maintains four regional offices in California and offices
in Florida, Texas, Arkansas, Pennsylvania, Utah, Illinois, North Carolina and Alabama, 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 to detail claims payment histories and policy loss experience reports.
In 2000, as part of its ongoing monitoring of loss development trends and data, Zenith increased its estimate of losses for the 1999 accident year by about $8.0 million. In October of 1999, Zenith completed a review of the liabilities for unpaid losses and loss adjustment expenses acquired from RISCORP. The review was conducted with assistance from independent actuarial consultants. As a result of the review, Zenith Insurance recorded, in the third quarter of 1999, an increase of approximately $46.0 million before tax in the estimated net liabilities for unpaid losses and loss adjustment expenses acquired from RISCORP. For a full description of the "RISCORP Purchase Adjustment" in 1999, see Notes to Consolidated Financial Statements -- Note 14 - --"RISCORP Acquisition and the RISCORP Purchase Adjustment" on pages 58-59 of Zenith's 2000 Annual Report to Stockholders, which note is hereby incorporated by reference.
In Florida, the Special Disability Trust Fund (the "Fund") assesses workers' compensation insurers to pay for what are commonly referred to as "Second Injuries." Historic assessments have been inadequate to completely fund obligations of the Fund. In late 1997, the Florida statute was amended so that the Fund will not be liable for and will not reimburse employers or carriers for Second Injuries occurring on or after January 1, 1998. Zenith Insurance has recorded its receivable from the Fund for Second Injuries based on specific claims and historical experience prior to January 1, 1998. At December 31, 2000, the receivable from the Fund was $31.1 million related to pre-January 1, 1998 claims.
REINSURANCE
Zenith expects that, on the average, its Reinsurance reserves related to its casualty business will be paid in approximately 4 years and reserves related to its property business will be paid within approximately 1 year. 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. The Reinsurance Operations were adversely impacted by $22.6 million, $18.9 million and $4.5 million of catastrophe losses before tax in 2000, 1999 and 1998. Catastrophe losses in 2000 were attributable to additional estimates of the impact of the events in 1999, but there do not appear to have been any major catastrophes in 2000. There were frequent catastrophes of a moderate size culminating in severe storms in Europe at the end of 1999. Catastrophes in 1998 were attributable principally to a single large event -- Hurricane Georges. Estimates of the impact of catastrophes on the Reinsurance Operations are based on the information that is currently available and such estimates could change based on new information that becomes available or based upon reinterpretation of existing information.
OTHER PROPERTY-CASUALTY
Zenith's Other Property-Casualty business was operated primarily by CalFarm, which was sold effective March 31, 1999. Zenith retained no liabilities with respect to the unpaid loss and loss adjustment expenses of CalFarm. In 1998, CalFarm sustained catastrophe losses before tax of $5.0 million in conjunction with California wind and storm damage.
ENVIRONMENTAL AND ASBESTOS LOSSES
The process of evaluating an insurance company's exposure to the cost of environmental and asbestos damage is subject to significant uncertainties. Among the complications are lack of
historical data, long reporting delays, uncertainty as to the number and identity of insureds with potential exposure and unresolved legal issues regarding policy coverage. The legal issues concerning the interpretations of various insurance policy provisions and whether environmental and asbestos losses are, or were ever intended to be, covered are complex. Courts have reached different and sometimes inconsistent conclusions regarding such issues as: when the loss occurred and which policies provide coverage, how policy limits and exclusions are applied and determined, whether clean-up costs are covered as insured property damage and whether site assessment costs are either indemnity payments or adjusting costs.
Zenith has exposure to asbestos losses in its Workers' Compensation Operations for medical, indemnity and loss adjustment expenses associated with covered workers' long-term exposure to asbestos or asbestos-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 workers' compensation- related 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 Operations but the business reinsured by Zenith in its Reinsurance Operations contains exclusion clauses for environmental and asbestos losses. CalFarm (through March 31, 1999) wrote liability coverage under farmowners' and small commercial policies, however, any such liabilities associated with CalFarm were retained by CalFarm when it was sold in 1999 and Zenith retains no exposure to any such liabilities. All claims for damages resulting from 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.
REINSURANCE CEDED
In accordance with general industry practices, the P&C Operations annually purchase, principally from large United States reinsurance companies, excess of loss reinsurance to protect Zenith against the impact of large, irregularly occurring losses. Such reinsurance reduces the magnitude of sudden and unpredictable changes in net income and the capitalization of the P&C Operations. 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. 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. Historically, no material amounts due from reinsurers have been written off as uncollectible. At December 31, 2000, Reliance Insurance Company ("Reliance") owed Zenith Insurance approximately $6.3 million in reinsurance recoverables for paid and unpaid losses in connection with reinsurance arrangements assumed by Zenith Insurance in the 1996 acquisition of the Associated General Contractors Self-Insurance Fund. On January 29, 2001, Reliance entered into an Order of Supervision with the Pennsylvania Insurance Department under which its business and operations will be monitored and reviewed by the Department. Zenith Insurance considered its receivables from Reliance in the normal course of assessing the collectability of reinsurance recoverables. Zenith Insurance believes this matter will not have a material adverse effect on its financial condition or results of operations.
The P&C Operations maintained reinsurance arrangements as follows during 2000:
Workers' Compensation -- Reinsurance covered all claims between $0.6 million and $100.0 million per occurrence. The coverage from $0.6 million to $5.0 million is placed with General
Reinsurance Corporation, the coverage from $5.0 million to $10.0 million with Employers Reinsurance Corporation and the remaining three layers from $10.0 million to $60.0 million primarily with NAC Reinsurance Corporation, Transatlantic Reinsurance Company, GE Reinsurance Corporation and the London reinsurance market (primarily Lloyd's syndicates and certain United Kingdom reinsurance companies). Catastrophe reinsurance covered an additional $40.0 million in excess of $60.0 million and was placed with Life Insurance Company of North America, American United Life Insurance Company and ReliaStar Life Insurance Company.
In connection with the RISCORP Acquisition, Zenith Insurance entered into an aggregate excess of loss reinsurance agreement with Inter-Ocean Reinsurance Company, Ltd. which provides ceded reinsurance for unpaid loss and allocated loss adjustment expenses assumed by Zenith from RISCORP at April 1, 1998 up to $50.0 million in excess of $182.0 million. Reinsurance recoverable from Inter-Ocean Reinsurance Company is secured by a trust account and an irrevocable letter of credit.
Insurance premiums ceded by the P&C Operations amounted to $10.6 million, $16.3 million and $54.5 million in 2000, 1999 and 1998, respectively, or 3.0%, 4.2% and 9.3% of gross earned premiums in the years ended December 31, 2000, 1999 and 1998, respectively. Receivable from reinsurers on unpaid losses amounted to $264.6 million and $292.8 million at December 31, 2000 and 1999, respectively, of which approximately $185.4 million and $216.2 million, respectively, were reinsurance recoverables relating to reinsurance arrangements entered into by RISCORP. The principal reinsurers from which such RISCORP-related amounts are recoverable are: American Re-Insurance Company, Chartwell Reinsurance Company, Continental Casualty Co., Swiss Re-Insurance Company, Trenwick Reinsurance Company and TIG Reinsurance Company.
Reinsurance -- 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.
Pooling Agreement -- The companies in the P&C Operations are parties to an intercompany pooling agreement. Under such 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 the companies. At December 31, 2000, the proportions of the pooling were as follows: Zenith Insurance, 97.5%; ZNAT Insurance, 2.0%; 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
The business in the Workers' Compensation Operations is produced by approximately 2,300 independent licensed insurance agents and brokers throughout California, Florida, Texas and other states in which Zenith conducts its business. Zenith Insurance's assumed reinsurance premiums are generated nationally by brokers and reinsurance intermediaries.
Applications for insurance and reinsurance 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. The P&C Operations, not their agents and brokers, retain authority over underwriting, claims processing, safety engineering and auditing.
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 national workers' compensation industry. The P&C Operations compete not only with other stock companies, but with mutual companies and other underwriting organizations such as the State Compensation Insurance Fund in California. Competition also exists with self-insurance and captive insurers. Many companies in competition with the P&C Operations 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
STATE 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. The P&C Operations are primarily subject to regulation and supervision by the California Department of Insurance, except for Zenith Star, which is primarily subject to regulation and supervision by the Texas Department of Insurance. These states have broad regulatory, supervisory and administrative powers. Such powers relate to, among other things, the grant 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 and ZNAT Insurance are required to maintain on deposit investments meeting specified standards that have an aggregate market value equal to the companies' workers' compensation 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 workers' compensation 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 are required to be filed by the P&C Operations with the Departments of Insurance 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 and ZNAT Insurance were examined by the California Department of Insurance as of December 31, 1996, and the Report of Examination contained no material findings. Zenith Star was examined by the Texas Department of Insurance as of December 31, 1996, and the Report of Examination contained no material findings. The California Department of Insurance has informed Zenith that it intends to conduct an examination of Zenith Insurance and ZNAT Insurance as of December 31, 2000, commencing in the first quarter of 2001.
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. 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.
In 1998, the NAIC adopted the Codification of Statutory Accounting Principles guidance (the "Codification"), which will replace the current Accounting Practices and Procedures manual as the NAIC's primary guidance on statutory accounting. (Statutory accounting is a comprehensive basis of accounting for insurance companies based on prescribed accounting practices, which include state laws, regulations and general administrative rules, as well as a variety of publications of the NAIC.) The Codification provides guidance for the areas where statutory accounting has been silent and changes current statutory accounting in some areas. The NAIC established January 1, 2001 as the effective date of the Codification and the California and Texas Departments of Insurance have adopted the Codification. Zenith believes that the Codification, as currently constituted, will not have a material impact on the statutory capital and surplus of the P&C Operations.
Under NAIC Model Laws, insurers are required to maintain minimum levels of capital based on their investments and operations, known as "risk based capital" ("RBC") requirements. At December 31, 2000, adjusted capital under the RBC regulations for Zenith Insurance was 242% of the required level of capital under the regulations.
The NAIC Insurance Regulatory Information System ("IRIS") key financial ratios, developed to assist insurance departments in overseeing the financial condition of insurance companies, 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 2000 IRIS results for Zenith Insurance showed three results outside the "normal" range for such ratios, as such range is determined by the NAIC. These three results were impacted by intercompany reinsurance transactions associated with the sale of CalFarm in 1999, the RISCORP Purchase Adjustment in 1999, catastrophe losses in the Reinsurance Operations in 2000 and 1999 and operating losses in the Workers' Compensation Operations in 2000 and 1999.
INSURANCE HOLDING COMPANY SYSTEM REGULATORY ACT
The P&C Operations are subject to the California and Texas Insurance Holding Company System Regulatory Acts ("Holding Company Acts"), which contain certain reporting requirements, including the requirement that such subsidiaries file information relating to capital structure, ownership, financial condition and general business operation. The Holding Company Acts also limit dividend payments and material transactions by the P&C Operations. See Item 5. for a discussion of dividend restrictions related to the Holding Company Acts.
ITEM 2.
ITEM 2. PROPERTIES.
Zenith Insurance owns a 120,000 square foot office facility in Woodland Hills, California which is the corporate home office of Zenith National, Zenith Insurance and ZNAT Insurance. Zenith Insurance also owns a 176,000 square foot branch office facility in Sarasota, Florida. In the regular conduct of business, Zenith Insurance leases offices in various cities. See Notes to Consolidated Financial Statements -- Note 15 -- "Commitments and Contingent Liabilities" on pages 59-60 of Zenith's 2000 Annual Report to Stockholders, which note is hereby incorporated by reference. Zenith considers its owned and leased facilities to be adequate for the needs of the organization.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
On April 1, 1998, pursuant to an Asset Purchase Agreement dated June 17, 1997 (as amended from time to time, the "Asset Purchase Agreement"), between Zenith Insurance and RISCORP, Zenith Insurance completed the RISCORP Acquisition. The total purchase price for such acquired assets and liabilities was determined by a three-step process in which RISCORP and its external
accounting and actuarial consultants and Zenith Insurance and its external accounting and actuarial consultants made and presented their estimates of the GAAP values of the assets and liabilities acquired by Zenith Insurance to an independent third party, acting as a Neutral Auditor and Neutral Actuary. Such estimates varied considerably, particularly with respect to the value of premiums receivable and the liability for unpaid losses and loss adjustment expenses. On March 19, 1999, the Neutral Auditor and Neutral Actuary issued its report determining the disputes between the parties. That report indicated that the value of the assets transferred to Zenith Insurance exceeded the value of the liabilities assumed by Zenith Insurance by $92.3 million.
Zenith Insurance and RISCORP entered into a settlement agreement dated July 7, 1999 (the "Settlement Agreement"), providing for the resolution of certain claims arising out of the RISCORP Acquisition. Pursuant to the Settlement Agreement, Zenith Insurance and RISCORP agreed, among other things, that RISCORP may request that the Neutral Auditor and Neutral Actuary (a) review an alleged error concerning the proper treatment of certain reinsurance treaties in its determinations with respect to the purchase price for the RISCORP Acquisition, without waiving whatever rights RISCORP may have to litigation of such issue, (b) determine whether the issue was properly in dispute before the Neutral Auditor and Neutral Actuary and (c), if so, determine the merits of the issue and whether a correction is appropriate. Zenith Insurance and RISCORP also agreed that Zenith Insurance would receive $6.0 million from an escrow account established pursuant to the Asset Purchase Agreement, and RISCORP would receive the balance of the escrow account. In a submission made to the Neutral Auditor and Neutral Actuary, RISCORP claimed that the purchase price for the RISCORP Acquisition should be adjusted by either $5.9 million or $23.4 million as a result of alleged errors in the original determination of the Neutral Auditor and Neutral Actuary with respect to the purchase price. On October 7, 1999, the Neutral Auditor and Neutral Actuary advised Zenith Insurance and RISCORP that they would not consider the issue raised by RISCORP because the issue had not previously been raised as a dispute pursuant to the procedures set forth in the engagement letter. On January 13, 2000, RISCORP filed a complaint against Zenith Insurance and the Neutral Auditor and Neutral Actuary in the Superior Court of Fulton County in the State of Georgia. On October 9, 2000, RISCORP filed a First Amended Complaint in the Superior Court of Fulton County. RISCORP's First Amended Complaint alleges causes of action for breach of contract against the Neutral Auditor and Neutral Actuary and, in conjunction, seeks a declaration that could have the effect of requiring Zenith to pay either $18.1 million (and related charges) or $5.9 million. RISCORP also has asserted causes of action for professional negligence solely against the Neutral Auditor and Neutral Actuary in which it seeks damages of either $18.1 million (and related charges) or $5.9 million. Zenith is unable to predict the outcome of this litigation.
Zenith National and its subsidiaries are defendants in various other litigation. In the opinion of management, after consultation with legal counsel, such litigation is either without merit or the ultimate liability, if any, will not have a material adverse effect on the consolidated financial condition or results of operations of Zenith.
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 National'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 22, 2001, there were 268 registered holders of record of Zenith National common stock.
The table below sets forth information with respect to the amount and frequency of dividends declared on Zenith National 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 National, and of ZNAT Insurance and Zenith Star to pay dividends to Zenith Insurance, by providing that the appropriate insurance regulatory authorities in the states of California and Texas 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 2000, Zenith Insurance paid $10.0 million of dividends to Zenith National. During 1999, Zenith Insurance paid $130.0 million of dividends to Zenith National, including a $100.0 million dividend from the proceeds of the sale of CalFarm for which it received prior approval from the California Department of Insurance. During 2001, Zenith Insurance will be able to
pay $26.2 million in dividends to Zenith National without prior approval. In 2001, ZNAT Insurance and Zenith Star, together, will be able to pay $0.5 million in dividends to Zenith Insurance without prior approval. Zenith National made a contribution of $25.0 million in 2000 to the capital and surplus of Zenith Insurance.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
The 5-Year Summary of Selected Financial Information, included in Zenith's 2000 Annual Report to Stockholders on pages 38-39, 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 2000 Annual Report to Stockholders on pages 25-36, is hereby incorporated by reference.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The "Market Risk of Financial Instruments" section of the Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations included in Zenith's 2000 Annual Report to Stockholders on page 33, is hereby incorporated by reference.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Reference is made to the Property-Casualty Loss Development data on pages 40-41 of Zenith's 2000 Annual Report to Stockholders for information setting forth the loss and loss adjustment expense liability development for 1990 through 2000 and to the Consolidated Financial Statements and Notes thereto on pages 42-65 of Zenith's 2000 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 2001 Annual Meeting of Stockholders (the "Proxy Statement"), which is to be filed by Zenith after the date this Report on Form 10-K is filed, is hereby incorporated by reference.
EXECUTIVE OFFICERS OF THE REGISTRANT
Each of the executive officers is an officer of Zenith National and certain of its subsidiaries and each has occupied an executive position with Zenith National or a subsidiary of Zenith National for more than five years, except for:
Jack D. Miller - Served as the President and Chief Executive Officer of Industrial Indemnity Company, a property-casualty insurance company, from 1995 to 1997; as 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 Executive Officer.
Robert E. Meyer - Served as Senior Vice President and Actuary of Industrial Indemnity Company, a property-casualty insurance company, from 1992 to 1997, prior to that served as Senior Vice President and Actuary of the Workers' Compensation Insurance Rating Bureau of California.
William J. Owen - Served as Vice President of Finance for Zenith Insurance from 1997 to 1999, previously served as Vice President of Finance from 1996 to 1997 with Blue Cross of California, a subsidiary of WellPoint Health Networks, Inc., and prior to that held various positions in Zenith Insurance culminating in Vice President of Finance.
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 footnotes 1 and 2 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:
Report of Independent Accountants incorporated herein by reference from Zenith's 2000 Annual Report to Stockholders
Consolidated Financial Statements and notes thereto incorporated herein by reference from Zenith's 2000 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, 2000 and 1999
Consolidated Statement of Operations for the years ended December 31, 2000, 1999 and 1998
Consolidated Statement of Cash Flows for the years ended December 31, 2000, 1999 and 1998
Consolidated Statement of Stockholders' Equity for the three years ended December 31, 2000
Notes to Consolidated Financial Statements
2. FINANCIAL STATEMENT SCHEDULES:
Report of Independent Accountants on Financial Statement Schedules
Zenith National Insurance Corp. and Subsidiaries:
As of December 31, 2000:
I -- Summary of Investments -- Other Than Investments in Related Parties
For the years ended December 31, 2000, 1999 and 1998:
III -- Supplementary Insurance Information
IV -- Reinsurance
Zenith National Insurance Corp.:
As of December 31, 2000 and 1999 and for the years ended December 31, 2000, 1999 and 1998:
II -- Condensed Financial Information of Registrant
The information on Property-Casualty Loss Development is on pages 40-41 of Zenith's 2000 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 the notes thereto.
3. EXHIBITS
The Exhibits listed below are filed in a separate Exhibit Volume to this Report.
- --------------------------
*Management contract or compensatory plan or arrangement
(b) Reports on Form 8-K Zenith filed no Current Reports on Form 8-K during the quarter ended December 31, 2000.
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 27, 2001.
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 27, 2001.
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (File Nos. 33-8948, 33-22219, 333-04399 and 333-79199) of our report dated February 7, 2001 relating to the consolidated financial statements as of December 31, 2000 and 1999, and for each of the three years in the period ended December 31, 2000, which appears in the 2000 Annual Report to Stockholders of Zenith National Insurance Corp. (the "Company"), which is included in the Company's Annual Report on Form 10-K for the year ended December 31, 2000. We also consent to the incorporation by reference of our report dated February 7, 2001 relating to the financial statement schedules, which appears in such Annual Report on Form 10-K.
PricewaterhouseCoopers LLP
Los Angeles, California March 27, 2001
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES
To the Board of Directors of Zenith National Insurance Corp.:
Our audits of the consolidated financial statements referred to in our report dated February 7, 2001 appearing in the 2000 Annual Report to Stockholders of Zenith National Insurance Corp. (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the financial statement schedules listed in Item 14(a)(2) of this Form 10-K. In our opinion, these financial statement schedules present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.
PricewaterhouseCoopers LLP
Los Angeles, California
February 7, 2001
SCHEDULE I -- SUMMARY OF INVESTMENTS --
OTHER THAN INVESTMENTS IN RELATED PARTIES
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
DECEMBER 31, 2000
- ------------------------
(1) Original cost for equity securities. Original cost reduced by repayments and adjusted for amortization of premiums or accrual of discounts for fixed maturities.
(2) Amount at which shown in the balance sheet may differ from Cost or Fair Value for fixed maturities depending on the classification of the underlying securities in accordance with Statement of Financial Accounting Standards No. 115 -- "Accounting for Investments in Certain Debt and Equity Securities."
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 and the related notes should be read in conjunction with the consolidated financial statements and notes thereto of Zenith National Insurance Corp. ("Zenith National") and subsidiaries.
A. Investment In Subsidiaries
Zenith National owns, directly or indirectly, 100% of the outstanding stock of Zenith Insurance Company ("Zenith Insurance"); ZNAT Insurance Company; Zenith Star Insurance Company; Perma-Bilt, a Nevada Corporation ("Perma-Bilt"); Zenith Development Corp. ("ZDC"); and Zenith National Insurance Capital Trust I (the "Trust"). These investments are included in the financial statements on the equity basis of accounting. Included in investment in subsidiaries at December 31, 2000 and 1999 was $2.0 million of the unamortized excess of cost over underlying net tangible assets of companies acquired prior to 1970, which is considered to have continuing value.
Zenith National funds the land acquisitions of its Real Estate Operations through intercompany loans. The receivable from subsidiaries mainly comprises principal and capitalized interest on loans to Perma-Bilt and ZDC of $55.4 million and $56.8 million at December 31, 2000 and 1999, respectively, for which interest is charged at the rate of prime plus 2% (11.5% at December 31, 2000 and 10.5% at December 31, 1999).
Zenith National files a consolidated federal income tax return. The equity in (loss) income of subsidiaries is net of a provision for federal income tax benefit of $21.9 million in 2000 and a federal income tax expense of $32.2 million in 1999 and $13.2 million in 1998. Zenith has tax allocation procedures with its subsidiaries and the 2000, 1999 and 1998 condensed financial information reflect Zenith's portion of the consolidated tax.
Zenith Insurance paid dividends to Zenith National of $10.0 million in 2000 and $130.0 million in 1999 including a dividend of $100.0 million for which prior approval was obtained from the California Department of Insurance in 1999. Zenith Insurance paid no dividends to Zenith National in 1998. Zenith National made contributions of $25.0 million in 2000 and $65.0 million in 1998 to the capital and surplus of Zenith Insurance.
B. Senior Notes Payable
Zenith National had $58.5 million and $75.0 million of the $75.0 million issued of its 9% Senior Notes due 2002 (the "9% Notes") at December 31, 2000 and 1999, respectively. Interest on the 9% Notes is payable semi-annually. The 9% Notes are general unsecured obligations of Zenith National. Issue costs of $1.2 million are being amortized over the term of the 9% Notes. In the years ended December 31, 2000, 1999 and 1998, $5.8 million, $6.9 million and $6.9 million, respectively, of interest and issue costs were expended.
C. Subordinated Debentures
On July 30, 1998, Zenith National sold $77.3 million of 8.55% Subordinated Deferrable Interest Debentures due 2028 (the "Subordinated Debentures") to the Trust, a Delaware statutory business trust, all of the voting securities of which are owned by Zenith National. The semi-annual interest payments on the Subordinated Debentures may be deferred by Zenith National for up to ten consecutive semi-annual periods. The Subordinated Debentures are redeemable at any time by Zenith at the then present value of the remaining scheduled payments of principal and interest. In 1998 Zenith used $65.0 million from the net proceeds to make a capital contribution to Zenith Insurance and used $2.3 million to acquire all of the
issued voting stock of the Trust. The remaining net proceeds were used for general corporate purposes. The issue cost on the Subordinated Debentures of $0.3 million is being amortized over the term of the Subordinated Debentures. During 2000, 1999 and 1998, $6.7 million, $6.7 million and $2.7 million, respectively, of interest and issue cost were expensed.
Zenith National's guarantee of the Subordinated Debentures is subordinated to all other indebtedness of Zenith National.
D. Extraordinary Item--Gain on Extinguishment of Debt
In 2000, Zenith National paid $22.8 million to repurchase $16.5 million aggregate principal amount of the outstanding 9% Notes and $8.0 million aggregate liquidation amount of the outstanding 8.55% Capital Securities issued through the Trust. The repurchases resulted in an extraordinary gain before tax of $1.5 million.
E. Commitments and Contingent Liabilities
On April 1, 1998, pursuant to an Asset Purchase Agreement dated June 17, 1997 (as amended from time to time, the "Asset Purchase Agreement"), between Zenith Insurance and RISCORP, Inc. and certain of its subsidiaries (collectively, "RISCORP"), Zenith Insurance acquired substantially all of the assets and certain liabilities of RISCORP related to RISCORP's workers' compensation business (the "RISCORP Acquisition"). The total purchase price for such acquired assets and liabilities was determined by a three-step process in which RISCORP and its external accounting and actuarial consultants and Zenith Insurance and its external accounting and actuarial consultants made and presented their estimates of the GAAP values of the assets and liabilities acquired by Zenith Insurance to an independent third party, acting as a Neutral Auditor and Neutral Actuary. Such estimates varied considerably, particularly with respect to the value of premiums receivable and the liability for unpaid losses and loss adjustment expenses. On March 19, 1999, the Neutral Auditor and Neutral Actuary issued its report determining the disputes between the parties. That report indicated that the value of the assets transferred to Zenith Insurance exceeded the value of the liabilities assumed by Zenith Insurance by $92.3 million.
Zenith Insurance and RISCORP entered into a settlement agreement dated July 7, 1999 (the "Settlement Agreement"), providing for the resolution of certain claims arising out of the RISCORP Acquisition. Pursuant to the Settlement Agreement, Zenith Insurance and RISCORP agreed, among other things, that RISCORP may request that the Neutral Auditor and Neutral Actuary (a) review an alleged error concerning the proper treatment of certain reinsurance treaties in its determinations with respect to the purchase price for the RISCORP Acquisition, without waiving whatever rights RISCORP may have to litigation of such issue, (b) determine whether the issue was properly in dispute before the Neutral Auditor and Neutral Actuary and (c), if so, determine the merits of the issue and whether a correction is appropriate. Zenith Insurance and RISCORP also agreed that Zenith Insurance would receive $6.0 million from an escrow account established pursuant to the Asset Purchase Agreement, and RISCORP would receive the balance of the escrow account. In a submission made to the Neutral Auditor and Neutral Actuary, RISCORP claimed that the purchase price for the RISCORP Acquisition should be adjusted by either $5.9 million or $23.4 million as a result of alleged errors in the original determination of the Neutral Auditor and Neutral Actuary with respect to the purchase price. On October 7, 1999, the Neutral Auditor and Neutral Actuary advised Zenith Insurance and RISCORP that they would not consider the issue raised by RISCORP because the issue had not previously been raised as a dispute pursuant to the procedures set forth in the engagement letter. On January 13, 2000, RISCORP filed a complaint against Zenith Insurance and the Neutral Auditor and Neutral Actuary in the Superior Court of Fulton County in the State of Georgia. On October 9, 2000, RISCORP filed a First Amended Complaint in the Superior
Court of Fulton County. RISCORP's First Amended Complaint alleges causes of action for breach of contract against the Neutral Auditor and Neutral Actuary and, in conjunction, seeks a declaration that could have the effect of requiring Zenith to pay either $18.1 million (and related charges) or $5.9 million. RISCORP also has asserted causes of action for professional negligence solely against the Neutral Auditor and Neutral Actuary in which it seeks damages of either $18.1 million (and related charges) or $5.9 million. Zenith is unable to predict the outcome of this litigation.
Zenith National and its subsidiaries are defendants in various other litigation. In the opinion of management, after consultation with legal counsel, such litigation is either without merit or the ultimate liability, if any, will not have a material adverse effect on the consolidated financial condition or results of operations of Zenith.
SCHEDULE III -- SUPPLEMENTARY INSURANCE INFORMATION ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
SCHEDULE IV -- REINSURANCE ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES