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EX-32 - EX-32 - ZENITH NATIONAL INSURANCE CORPa09-30794_1ex32.htm
EX-31.2 - EX-31.2 - ZENITH NATIONAL INSURANCE CORPa09-30794_1ex31d2.htm
EX-99.1 - EX-99.1 - ZENITH NATIONAL INSURANCE CORPa09-30794_1ex99d1.htm
EX-10.2 - EX-10.2 - ZENITH NATIONAL INSURANCE CORPa09-30794_1ex10d2.htm
EX-10.1 - EX-10.1 - ZENITH NATIONAL INSURANCE CORPa09-30794_1ex10d1.htm
EX-31.1 - EX-31.1 - ZENITH NATIONAL INSURANCE CORPa09-30794_1ex31d1.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 

FORM 10-Q

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2009

 

OR

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                to                

 

Commission file number 1-9627

 

ZENITH NATIONAL INSURANCE CORP.

 

Incorporated in Delaware

 

I.R.S. Employer Identification No.

21255 Califa Street, Woodland Hills, California

 

95-2702776

91367-5021

 

 

(818) 713-1000

 

 

 

Indicate by check mark whether the registrant: 1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and 2) has been subject to such filing requirements for the past 90 days.

 

Yes  x

No  o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

Yes  o

No  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one).

 

Large accelerated filer

x

Accelerated filer

o

 

 

 

 

Non-accelerated filer (do not check

 

 

 

if a smaller reporting company)

o

Smaller reporting company

o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes  o

No  x

 

At October 15, 2009, there were 37,367,000 shares of Zenith National Insurance Corp. common stock outstanding.

 

 

 



 

Zenith National Insurance Corp. and Subsidiaries

Form 10-Q

For the Quarter Ended September 30, 2009

Table of Contents

 

 

 

Page

 

 

 

Part I – Financial Information

 

 

 

 

Item 1.

Financial Statements (unaudited):

 

 

 

 

 

Consolidated Balance Sheets – September 30, 2009 and December 31, 2008

3

 

 

 

 

Consolidated Statements of Operations – Three and Nine Months Ended September 30, 2009 and 2008

4

 

 

 

 

Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2009 and 2008

5

 

 

 

 

Consolidated Statements of Stockholders’ Equity and Comprehensive Income - Nine Months Ended September 30, 2009 and 2008

7

 

 

 

 

Notes to Consolidated Financial Statements

8

 

 

 

Item 2.

Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations

24

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

44

 

 

 

Item 4.

Controls and Procedures

45

 

 

 

Part II – Other Information

 

 

 

 

Item 6.

Exhibits

46

 

 

 

Signatures

47

 

2



 

Part I – FINANCIAL INFORMATION

Item 1. Financial Statements

 

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

 

 

September 30,

 

December 31,

 

(Dollars and shares in thousands)

 

2009

 

2008

 

Assets:

 

 

 

 

 

Investments:

 

 

 

 

 

Fixed maturity securities:

 

 

 

 

 

At fair value (amortized cost $1,427,505 in 2009 and $1,479,295 in 2008)

 

$

1,478,914

 

$

1,406,891

 

At amortized cost (fair value $211,128 in 2008)

 

 

 

203,349

 

Equity securities, at fair value (cost $28,450 in 2009 and $52,888 in 2008)

 

32,639

 

47,742

 

Short-term investments, at fair value (amortized cost $479,333 in 2009 and $241,452 in 2008)

 

479,352

 

241,715

 

Other investments

 

62,063

 

58,297

 

Total investments

 

2,052,968

 

1,957,994

 

Cash

 

15,981

 

10,478

 

Accrued investment income

 

21,346

 

23,147

 

Premiums receivable

 

10,619

 

14,815

 

Reinsurance recoverables

 

259,316

 

285,269

 

Deferred policy acquisition costs

 

7,285

 

7,274

 

Deferred tax asset

 

17,180

 

70,469

 

Income tax receivable

 

9,905

 

33,448

 

Goodwill

 

20,985

 

20,985

 

Other assets

 

93,194

 

102,143

 

Total assets

 

$

2,508,779

 

$

2,526,022

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

Unpaid losses and loss adjustment expenses

 

$

1,214,571

 

$

1,274,586

 

Unearned premiums

 

46,112

 

45,226

 

Policyholders’ dividends accrued

 

25,644

 

37,253

 

Redeemable securities payable

 

58,362

 

58,357

 

Other liabilities

 

82,883

 

87,163

 

Total liabilities

 

1,427,572

 

1,502,585

 

 

 

 

 

 

 

Commitments and contingencies (see Note 11)

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Preferred stock, $1 par value, 1,000 shares authorized; none issued or outstanding in 2009 and 2008

 

 

 

 

 

Common stock, $1 par value, 100,000 shares authorized; issued 37,367 in 2009 and 45,019 in 2008; outstanding 37,367 in 2009 and 37,324 in 2008

 

37,367

 

45,019

 

Additional paid-in capital

 

359,861

 

472,312

 

Retained earnings

 

647,827

 

722,996

 

Accumulated other comprehensive income (loss)

 

36,152

 

(50,238

)

Treasury stock, at cost (7,695 shares in 2008) (see Note 7)

 

 

 

(166,652

)

Total stockholders’ equity

 

1,081,207

 

1,023,437

 

Total liabilities and stockholders’ equity

 

$

2,508,779

 

$

2,526,022

 

 

The accompanying notes are an integral part of these financial statements.

 

3



 

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

(Dollars in thousands, except per share data)

 

2009

 

2008

 

2009

 

2008

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

Net premiums earned

 

$

115,702

 

$

152,962

 

$

350,308

 

$

466,362

 

Net investment income

 

20,541

 

22,873

 

68,108

 

68,405

 

Net realized gains (losses) on investments

 

20,645

 

(8,883

)

26,162

 

(6,695

)

Total revenues

 

156,888

 

166,952

 

444,578

 

528,072

 

 

 

 

 

 

 

 

 

 

 

Expenses:

 

 

 

 

 

 

 

 

 

Losses and loss adjustment expenses incurred

 

80,310

 

75,297

 

249,791

 

195,618

 

Underwriting and other operating expenses:

 

 

 

 

 

 

 

 

 

Policy acquisition costs

 

22,151

 

27,543

 

67,426

 

83,296

 

Underwriting and other costs

 

28,832

 

31,146

 

89,323

 

93,422

 

Policyholders’ dividends

 

(5,328

)

5,604

 

(1,514

)

17,641

 

Interest expense

 

1,284

 

1,284

 

3,852

 

3,870

 

Total expenses

 

127,249

 

140,874

 

408,878

 

393,847

 

Income before tax

 

29,639

 

26,078

 

35,700

 

134,225

 

Income tax expense

 

10,439

 

9,478

 

12,100

 

47,325

 

Net income

 

$

19,200

 

$

16,600

 

$

23,600

 

$

86,900

 

 

 

 

 

 

 

 

 

 

 

Net income per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.51

 

$

0.45

 

$

0.62

 

$

2.34

 

Diluted

 

0.51

 

0.44

 

0.62

 

2.32

 

 

 

 

 

 

 

 

 

 

 

Cash dividends declared per common share

 

$

0.50

 

$

0.50

 

$

1.50

 

$

1.50

 

 

 

 

 

 

 

 

 

 

 

Net realized gains (losses) on investments, before tax

 

 

 

 

 

 

 

 

 

Other-than-temporary impairment losses:

 

 

 

 

 

 

 

 

 

Total impairment losses on fixed maturity securities

 

 

 

 

 

$

(19,424

)

 

 

Non-credit portion of impairment losses on fixed maturity securities recognized in other comprehensive income

 

 

 

 

 

8,762

 

 

 

Other-than-temporary impairment losses on fixed maturity securities

 

 

 

$

(10,352

)

(10,662

)

$

(13,224

)

Other-than-temporary impairment losses on equity securities

 

 

 

(4,939

)

(8,418

)

(10,606

)

Other net realized gains

 

$

20,645

 

6,408

 

45,242

 

17,135

 

Net realized gains (losses) on investments, before tax

 

$

20,645

 

$

(8,883

)

$

26,162

 

$

(6,695

)

 

The accompanying notes are an integral part of these financial statements.

 

4



 

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

 

 

Nine Months Ended September 30,

 

(Dollars in thousands)

 

2009

 

2008

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

Premiums collected

 

$

368,148

 

$

483,579

 

Investment income received

 

70,228

 

64,191

 

Losses and loss adjustment expenses paid

 

(285,586

)

(297,046

)

Underwriting and other operating expenses paid

 

(162,581

)

(188,040

)

Interest paid

 

(5,069

)

(5,107

)

Income taxes refunded (paid)

 

18,200

 

(56,694

)

Net cash provided by operating activities

 

3,340

 

883

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of investments:

 

 

 

 

 

Fixed maturity securities available-for-sale

 

(794,566

)

(696,311

)

Equity securities available-for-sale

 

(27,613

)

(104,354

)

Other investments

 

(5,434

)

(37,190

)

Proceeds from maturities and redemptions of investments:

 

 

 

 

 

Fixed maturity securities held-to-maturity

 

 

 

20,997

 

Fixed maturity securities available-for-sale

 

73,121

 

70,508

 

Other investments

 

2,790

 

1,528

 

Proceeds from sales of investments:

 

 

 

 

 

Fixed maturity securities available-for-sale

 

950,850

 

719,552

 

Equity securities available-for-sale

 

44,449

 

105,131

 

Net increase in short-term investments

 

(180,326

)

(20,408

)

Capital expenditures and other

 

(4,424

)

(5,299

)

Net cash provided by investing activities

 

58,847

 

54,154

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Cash dividends paid to common stockholders

 

(56,695

)

(56,420

)

Excess tax benefit on stock-based compensation

 

11

 

340

 

Net cash used in financing activities

 

(56,684

)

(56,080

)

 

 

 

 

 

 

Net increase (decrease) in cash

 

5,503

 

(1,043

)

Cash at beginning of period

 

10,478

 

6,933

 

Cash at end of period

 

$

15,981

 

$

5,890

 

 

The accompanying notes are an integral part of these financial statements.

 

5



 

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(UNAUDITED)

 

 

 

Nine Months Ended September 30,

 

(Dollars in thousands)

 

2009

 

2008

 

 

 

 

 

 

 

Reconciliation of net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

23,600

 

$

86,900

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Depreciation expense

 

6,108

 

6,369

 

Net amortization (accretion)

 

244

 

(5,037

)

Net realized (gains) losses on investments

 

(26,162

)

6,695

 

Decrease (increase) in:

 

 

 

 

 

Accrued investment income

 

1,751

 

1,425

 

Premiums receivable

 

4,114

 

4,830

 

Reinsurance recoverables

 

25,938

 

46,524

 

Net income tax

 

30,300

 

(10,569

)

(Decrease) increase in:

 

 

 

 

 

Unpaid losses and loss adjustment expenses

 

(60,015

)

(147,574

)

Unearned premiums

 

886

 

(1,838

)

Policyholders’ dividends accrued

 

(11,609

)

8,139

 

Other

 

8,185

 

5,019

 

Net cash provided by operating activities

 

$

3,340

 

$

883

 

 

The accompanying notes are an integral part of these financial statements.

 

6



 

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

(UNAUDITED)

 

 

 

Nine Months Ended September 30,

 

(Dollars in thousands, except per share data)

 

2009

 

2008

 

 

 

 

 

 

 

Preferred stock, $1 par value

 

None

 

None

 

 

 

 

 

 

 

Common stock, $1 par value:

 

 

 

 

 

Beginning of period

 

$

45,019

 

$

44,802

 

Treasury stock retirement (see Note 7)

 

(7,695

)

 

 

Restricted stock vested

 

43

 

78

 

Conversion of Convertible Senior Notes Payable

 

 

 

69

 

End of period

 

37,367

 

44,949

 

 

 

 

 

 

 

Additional paid-in capital:

 

 

 

 

 

Beginning of period

 

472,312

 

464,932

 

Treasury stock retirement (see Note 7)

 

(116,890

)

 

 

Recognition of stock-based compensation expense

 

4,446

 

4,504

 

Conversion of Convertible Senior Notes Payable

 

 

 

1,223

 

Excess tax (short-fall) benefit on stock-based compensation

 

(7

)

283

 

End of period

 

359,861

 

470,942

 

 

 

 

 

 

 

Retained earnings:

 

 

 

 

 

Beginning of period

 

722,996

 

718,175

 

Treasury stock retirement (see Note 7)

 

(42,067

)

 

 

Net income

 

23,600

 

86,900

 

Cash dividends declared to common stockholders

 

(56,702

)

(56,465

)

End of period

 

647,827

 

748,610

 

 

 

 

 

 

 

Accumulated other comprehensive (loss) income:

 

 

 

 

 

Beginning of period

 

(50,238

)

12,100

 

Net change in unrealized gains (losses) on available-for-sale investments, net of tax and reclassification adjustment

 

85,721

 

(65,394

)

Net change in other-than-temporary impairments for which the credit related portion was recognized in net realized gains, net of tax

 

669

 

 

 

End of period

 

36,152

 

(53,294

)

 

 

 

 

 

 

Treasury stock:

 

 

 

 

 

Beginning of period

 

(166,652

)

(166,652

)

Treasury stock retirement (see Note 7)

 

166,652

 

 

 

End of period

 

 

 

(166,652

)

 

 

 

 

 

 

Total stockholders’ equity

 

$

1,081,207

 

$

1,044,555

 

 

 

 

 

 

 

Stockholders’ equity per outstanding common share

 

$

28.93

 

$

28.04

 

 

 

 

Nine Months Ended September 30,

 

(Dollars in thousands)

 

2009

 

2008

 

Comprehensive income:

 

 

 

 

 

Net income

 

$

23,600

 

$

86,900

 

Net change in unrealized gains (losses) on available-for-sale investments, net of tax and reclassification adjustment

 

85,721

 

(65,394

)

Net change in other-than-temporary impairments for which the credit related portion was recognized in net realized gains, net of tax

 

669

 

 

 

Comprehensive income

 

$

109,990

 

$

21,506

 

 

The accompanying notes are an integral part of these financial statements.

 

7



 

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Note 1.  Basis of Presentation

 

Zenith National Insurance Corp. (“Zenith National”) is a holding company engaged, through its wholly-owned subsidiaries (primarily Zenith Insurance Company (“Zenith Insurance”)), in the workers’ compensation insurance business, nationally.  Unless otherwise indicated, all references to “Zenith,” “we,” “us,” “our,” the “Company” or similar terms refer to Zenith National together with its subsidiaries.  The accompanying unaudited Consolidated Financial Statements of Zenith National and subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information; with the instructions to Form 10-Q; and Article 10 of Regulation S-X of the Securities Exchange Act of 1934, as amended.  Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements.  In the opinion of management, all adjustments (including normal, recurring adjustments) necessary for a fair statement of our financial position and results of operations for the periods presented have been included.  The results of operations for an interim period are not necessarily indicative of the results for an entire year.  For further information, refer to the audited Financial Statements and Notes thereto included in the Zenith National Insurance Corp. Annual Report on Form 10-K for the year ended December 31, 2008.

 

We evaluated subsequent events through the date and time the Consolidated Financial Statements were issued on October 20, 2009.

 

Reclassifications.  Certain prior year amounts in the accompanying Consolidated Financial Statements have been reclassified to conform to the current year presentation.

 

Note 2.  Net Income and Dividends per Share

 

The following table sets forth the computation of basic and diluted net income per common share and cash dividends declared per common share:

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

(Dollars and shares in thousands, except per share data)

 

2009

 

2008

 

2009

 

2008

 

Net income as reported

 

$

19,200

 

$

16,600

 

$

23,600

 

$

86,900

 

Net income allocated to unvested restricted stock shares (see below)

 

233

 

 

 

292

 

 

 

(A)

Net income allocated to common shares

 

$

18,967

 

$

16,600

 

$

23,308

 

$

86,900

 

(B)

Interest expense on the Convertible Senior Notes Payable, net of tax

 

 

 

 

 

 

 

$

11

 

(C)

Weighted average shares outstanding – basic

 

37,353

 

37,248

 

37,342

 

37,190

 

 

Weighted average shares issued under the Restricted Stock Plan (see below)

 

 

 

176

 

 

 

174

 

 

Weighted average shares issued in 2008 upon conversion of the Convertible Senior Notes Payable

 

 

 

 

 

 

 

23

 

(D) 

Weighted average shares outstanding – diluted

 

37,353

 

37,424

 

37,342

 

37,387

 

Net income per common share:

 

 

 

 

 

 

 

 

 

(A)/(C)  

Basic

 

$

0.51

 

$

0.45

 

$

0.62

 

$

2.34

 

((A)+(B))/(D)

Diluted

 

0.51

 

0.44

 

0.62

 

2.32

 

Cash dividends declared per common share

 

$

0.50

 

$

0.50

 

$

1.50

 

$

1.50

 

 

8



 

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

On January 1, 2009, we adopted the accounting guidance on “Participating Securities and the Two-Class Method,” which required that unvested restricted stock with a right to receive nonforfeitable dividends be included in the two-class method of computing earnings per share.  The weighted average shares outstanding and net income per common share for the three and nine months ended September 30, 2009 are presented in accordance with this guidance.  Prior period amounts were not restated due to immateriality.

 

Note 3.  Investments

 

At September 30, 2009, all of our investments in fixed maturity and equity securities and short-term investments were classified as available-for-sale and reported at fair value with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders’ equity, net of tax.

 

At December 31, 2008, in addition to our available-for-sale securities, our investments portfolio also included certain fixed maturity securities classified as held-to-maturity and reported at amortized cost.  We reclassified our entire held-to-maturity investment portfolio with an amortized cost of approximately $200 million at the date of transfer to available-for-sale during the first quarter 2009 because the unprecedented events in the financial markets resulted in market and economic risks that were not present at the time we elected to hold these securities to maturity.  We determined that we no longer had the positive intent to hold these securities to maturity because of these unusual events and substantial economic changes.  In March 2009, we sold all of our mortgage-backed securities issued by the Government National Mortgage Association, most of which were originally classified as held-to-maturity, resulting in a realized gain of $8.8 million before tax.

 

9



 

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

The cost or amortized cost, fair value and carrying value of available-for-sale investments at September 30, 2009 and held-to-maturity and available-for-sale investments at December 31, 2008 were as follows:

 

 

 

Cost or
Amortized

 

Gross
Unrealized

 

Fair

 

Carrying

 

(Dollars in thousands)

 

Cost

 

Gains

 

(Losses)

 

Value

 

Value

 

September 30, 2009

 

 

 

 

 

 

 

 

 

 

 

Fixed maturity securities available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

Corporate debt

 

$

1,215,754

 

$

53,633

 

$

(8,712

)

$

1,260,675

 

$

1,260,675

 

State and local government debt

 

118,188

 

6,389

 

(1

)

124,576

 

124,576

 

Mortgage-backed securities

 

9,732

 

368

 

 

 

10,100

 

10,100

 

Foreign government debt

 

2,670

 

27

 

 

 

2,697

 

2,697

 

Redeemable preferred stocks

 

26,875

 

241

 

(595

)

26,521

 

26,521

 

U.S. Government debt

 

54,286

 

59

 

 

 

54,345

 

54,345

 

Total fixed maturity securities available-for-sale

 

1,427,505

 

60,717

 

(9,308

)

1,478,914

 

1,478,914

 

Equity securities

 

28,450

 

4,233

 

(44

)

32,639

 

32,639

 

Short-term investments

 

479,333

 

247

 

(228

)

479,352

 

479,352

 

Total available-for-sale investments

 

$

1,935,288

 

$

65,197

 

$

(9,580

)

$

1,990,905

 

$

1,990,905

 

 

December 31, 2008

 

 

 

 

 

 

 

 

 

 

 

Fixed maturity securities held-to-maturity:

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

$

175,737

 

$

7,285

 

 

 

$

183,022

 

$

175,737

 

State and local government debt

 

22,612

 

521

 

$

(43

)

23,090

 

22,612

 

Foreign government debt

 

5,000

 

16

 

 

 

5,016

 

5,000

 

Total fixed maturity securities held-to-maturity

 

$

203,349

 

$

7,822

 

$

(43

)

$

211,128

 

$

203,349

 

Fixed maturity securities available-for sale:

 

 

 

 

 

 

 

 

 

 

 

Corporate debt

 

$

1,280,354

 

$

18,058

 

$

(90,480

)

$

1,207,932

 

$

1,207,932

 

State and local government debt

 

175,516

 

3,450

 

(3,214

)

175,752

 

175,752

 

Mortgage-backed securities

 

14,866

 

638

 

 

 

15,504

 

15,504

 

Redeemable preferred stocks

 

4,505

 

 

 

(892

)

3,613

 

3,613

 

U.S. Government debt

 

4,054

 

36

 

 

 

4,090

 

4,090

 

Total fixed maturity securities available-for-sale

 

1,479,295

 

22,182

 

(94,586

)

1,406,891

 

1,406,891

 

Equity securities

 

52,888

 

1,680

 

(6,826

)

47,742

 

47,742

 

Short-term investments

 

241,452

 

273

 

(10

)

241,715

 

241,715

 

Total available-for-sale investments

 

$

1,773,635

 

$

24,135

 

$

(101,422

)

$

1,696,348

 

$

1,696,348

 

 

Fixed maturity securities, including short-term investments, by contractual maturity were as follows at September 30, 2009:

 

(Dollars in thousands)

 

Amortized
Cost

 

Fair
Value

 

Due in 1 year or less

 

$

606,242

 

$

608,072

 

Due after 1 year through 5 years

 

1,035,185

 

1,078,373

 

Due after 5 years through 10 years

 

233,008

 

239,357

 

Due after 10 years

 

32,403

 

32,464

 

Total

 

$

1,906,838

 

$

1,958,266

 

 

Investments that we currently own could be subject to default by the issuer or could suffer declines in fair value that become other-than-temporary.  We continually assess the prospects for individual securities as part of our ongoing portfolio management, including the identification of other-than-temporary declines in fair values.  Our other-than-temporary assessment includes reviewing the

 

10



 

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

extent and duration of declines in fair values of investments below the amortized cost basis, the seniority and duration of the securities, historical and projected company financial performance, company-specific news and other developments, the outlook for industry sectors, credit ratings and macro-economic changes, including government policy initiatives.  For over seventeen years, we have consistently applied the presumption that an unrealized loss of 20% or more continuously for six months or more is other-than-temporary, in addition to issuer specific events.  The accounting guidance on “Recognition and Presentation of Other-Than-Temporary Impairments” that we adopted effective January 1, 2009 amended the determination of other-than-temporary impairments for debt securities, but not for equity securities.  For debt securities, the amount of an other-than-temporary impairment related to a credit loss or an impairment on a security that, at the balance sheet date, we intend to sell before recovery is recognized in earnings and reflected as a reduction in the cost basis of the security.  The amount of an other-than-temporary impairment on debt securities related to other factors is recorded consistent with changes in the fair value of all other available-for-sale securities as a component of stockholders’ equity in other comprehensive income or loss with no change to the cost basis of the security.  For equity securities, the amount of an other-than-temporary impairment due to the extent and duration that fair value is below cost, in addition to issuer specific events, is recognized in earnings and reflected as a reduction in the cost basis of the security.

 

In determining whether a credit loss existed on debt securities as of each balance sheet date, we estimated the present value of cash flows expected to be collected from the fixed maturity securities.  Considerable judgment is required in determining estimated cash flows for any individual security and we use market observable data as well as management judgment.  The cash flow estimates incorporate our assumption regarding the probability of default, and the timing and amount of recoveries associated with a default.  We develop our estimates using information based on market observable data such as industry analysts’ reports and forecasts, analysis of investment yield spreads to comparable peer company securities where there are no indications of credit related impairments, analysis of credit default swap spreads and other data relevant to the collectability of a security.

 

11



 

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

There were no other-than-temporary impairments recorded during the three months ended September 30, 2009.  The following table presents other-than-temporary impairments for the nine months ended September 30, 2009 and shows the amounts recognized in earnings and the amounts recorded as a component of stockholders’ equity as of the date of impairment.  For the three and nine months ended September 30, 2008, we recognized other-than-temporary impairments in earnings before tax of $15.3 million and $23.8 million, respectively.

 

 

 

Nine Months Ended
September 30, 2009

 

(Dollars in thousands)

 

Realized Losses
Recognized

in Earnings

 

Unrealized Losses
Recognized

as a Component
of

Stockholders’
Equity

 

Fixed maturity securities:

 

 

 

 

 

With credit related losses

 

$

9,700

 

$

8,762

 

With intent to sell

 

962

 

 

 

Equity securities

 

8,418

 

 

 

 

 

 

 

 

 

Total other-than-temporary impairments, before tax

 

$

19,080

 

$

8,762

 

 

 

 

 

 

 

Total other-than-temporary impairments, after tax

 

$

12,402

 

$

5,695

 

 

We recognized in earnings the credit related impairments of $9.7 million before tax for two corporate debt securities based on estimated cash flows as of March 31, 2009.  We estimated the cash flows at 60% of par value for one of the debt securities and 90% of par value for the other debt security, and discounted the cash flows using the effective interest rate of 6.6% and 5.49% implicit in the two debt securities at the date of acquisition.

 

The $5.7 million unrealized loss after tax was not credit related and was recognized as a component of stockholders’ equity at March 31, 2009, the date of impairment. As of September 30, 2009, this non-credit related loss has fully recovered to a $0.7 million unrealized gain due to the appreciation in fair values and partial sales of the related securities.

 

The following table presents the change in other-than-temporary credit related impairments before tax recognized in earnings:

 

(Dollars in thousands)

 

 

 

Beginning balance for securities owned as of December 31, 2008

 

$

0

 

Not previously recognized

 

9,700

 

Reduction for securities sold subsequent to impairment

 

(5,952

)

Ending balance for securities owned as of September 30, 2009

 

$

3,748

 

 

 

 

 

Beginning balance for securities owned as of June 30, 2009

 

7,096

 

Reduction for securities sold subsequent to impairment

 

(3,348

)

Ending balance for securities owned as of September 30, 2009

 

$

3,748

 

 

12


 


 

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

The following table presents the fair value of securities classified as available-for-sale with unrealized losses, aggregated by investment category and length of time the securities have been in a continuous unrealized loss position at September 30, 2009 and December 31, 2008:

 

(Dollars in thousands)

 

Fair
Value

 

Unrealized
Losses

 

Number of
Issues

 

September 30, 2009

 

 

 

 

 

 

 

Less than 12 months:

 

 

 

 

 

 

 

Corporate debt

 

$

75,565

 

$

(1,254

)

14

 

Short-term investments

 

20,088

 

(228

)

2

 

State and local government debt

 

1,052

 

(1

)

1

 

Total less than 12 months

 

$

96,705

 

$

(1,483

)

17

 

Greater than 12 months:

 

 

 

 

 

 

 

Corporate debt

 

$

115,260

 

$

(7,458

)

16

 

Redeemable preferred stocks

 

3,910

 

(595

)

2

 

Equity securities

 

302

 

(44

)

1

 

Total greater than 12 months

 

$

119,472

 

$

(8,097

)

19

 

Total available-for-sale:

 

 

 

 

 

 

 

Corporate debt

 

$

190,825

 

$

(8,712

)

30

 

Redeemable preferred stocks

 

3,910

 

(595

)

2

 

Short-term investments

 

20,088

 

(228

)

2

 

State and local government debt

 

1,052

 

(1

)

1

 

Equity securities

 

302

 

(44

)

1

 

Total available-for-sale investments

 

$

216,177

 

$

(9,580

)

36

 

 

December 31, 2008

 

 

 

 

 

 

 

Less than 12 months:

 

 

 

 

 

 

 

Corporate debt

 

$

640,894

 

$

(57,606

)

120

 

Equity securities

 

16,163

 

(6,826

)

9

 

State and local government debt

 

67,330

 

(3,214

)

18

 

Redeemable preferred stocks

 

2,956

 

(644

)

1

 

Short-term investments

 

112,435

 

(10

)

1

 

Total less than 12 months

 

$

839,778

 

$

(68,300

)

149

 

Greater than 12 months:

 

 

 

 

 

 

 

Corporate debt

 

$

107,060

 

$

(32,874

)

13

 

Redeemable preferred stocks

 

657

 

(248

)

1

 

Total greater than 12 months

 

$

107,717

 

$

(33,122

)

14

 

Total available-for-sale:

 

 

 

 

 

 

 

Corporate debt

 

$

747,954

 

$

(90,480

)

133

 

Equity securities

 

16,163

 

(6,826

)

9

 

State and local government debt

 

67,330

 

(3,214

)

18

 

Redeemable preferred stocks

 

3,613

 

(892

)

2

 

Short-term investments

 

112,435

 

(10

)

1

 

Total available-for-sale investments

 

$

947,495

 

$

(101,422

)

163

 

 

13



 

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

The unprecedented events in the capital and credit markets have resulted in extreme volatility and disruption to the financial markets over the past twelve months.  The fair value of our available-for-sale investment portfolio improved from an unrealized loss before tax of $77.3 million at December 31, 2008 to an unrealized gain before tax of $55.6 million at September 30, 2009, an increase of $132.9 million.  The unrealized gain on our available-for-sale investment portfolio as of September 30, 2009 is net of unrealized losses on individual fixed maturity and equity securities.

 

The change in unrealized gains (losses) on our available-for-sale investment portfolio were as follows:

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

(Dollars in thousands)

 

2009

 

2008

 

2009

 

2008

 

Change in unrealized gains (losses) on available-for-sale investments:

 

 

 

 

 

 

 

 

 

Fixed maturity securities, including short-term investments

 

$

45,341

 

$

(61,253

)

$

123,569

 

$

(86,036

)

Equity securities

 

111

 

(4,962

)

9,335

 

(14,571

)

Total change in unrealized gains (losses):

 

 

 

 

 

 

 

 

 

Before tax

 

$

45,452

 

$

(66,215

)

$

132,904

 

$

(100,607

)

After tax

 

29,546

 

(43,038

)

86,390

 

(65,394

)

 

We believe that our unrealized losses on individual fixed maturity and equity securities at September 30, 2009 are not material and are not indicative of impaired values.  We base this conclusion on our current understanding of the issuers of these securities. As of September 30, 2009, we have not made a decision to sell any of these securities with unrealized losses and we have adequate liquidity and will not be required to sell these securities before recovery of their cost basis.  It is possible that we could recognize future impairments on some securities we owned at September 30, 2009 if future events, information and the passage of time cause us to determine that a decline in value is other-than-temporary.

 

Net realized gains (losses) on all of our investments were as follows:

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

(Dollars in thousands)

 

2009

 

2008

 

2009

 

2008

 

Fixed maturity securities, including short-term investments

 

$

19,031

 

$

2,493

 

$

41,215

 

$

5,462

 

Equity securities

 

648

 

3,620

 

815

 

10,971

 

Partnerships and limited liability companies

 

966

 

278

 

2,710

 

679

 

WorldCom settlement and other

 

 

 

17

 

502

 

23

 

Other-than-temporary impairment losses on fixed maturity securities

 

 

 

(10,352

)

(10,662

)

(13,224

)

Other-than-temporary impairment losses on equity securities

 

 

 

(4,939

)

(8,418

)

(10,606

)

Net realized gains (losses) on investments

 

$

20,645

 

$

(8,883

)

$

26,162

 

$

(6,695

)

 

For the three and nine months ended September 30, 2009 and 2008, the gross realized gains and the gross realized losses on sales of investments classified as available-for-sale were as follows:

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

(Dollars in thousands)

 

2009

 

2008

 

2009

 

2008

 

Gross realized gains

 

$

21,916

 

$

7,170

 

$

46,717

 

$

25,130

 

Gross realized losses

 

(2,237

)

(1,057

)

(4,687

)

(8,697

)

 

14



 

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

Net investment income before tax was as follows:

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

(Dollars in thousands)

 

2009

 

2008

 

2009

 

2008

 

Fixed maturity securities

 

$

20,367

 

$

21,445

 

$

68,356

 

$

62,550

 

Short-term investments

 

723

 

1,411

 

1,635

 

6,884

 

Equity securities

 

212

 

470

 

1,029

 

1,671

 

Other

 

1,189

 

1,075

 

2,015

 

2,046

 

Subtotal

 

22,491

 

24,401

 

73,035

 

73,151

 

Investment expenses

 

1,950

 

1,528

 

4,927

 

4,746

 

Net investment income

 

$

20,541

 

$

22,873

 

$

68,108

 

$

68,405

 

 

Note 4. Fair Value Measurements

 

Our available-for-sale investment portfolio consists of fixed maturity and equity securities and short-term investments and is recorded at fair value in the accompanying Consolidated Balance Sheets.

 

Fair value is the price that would be received to sell an asset or would be paid to transfer a liability (i.e., the “exit price”) in an orderly transaction between market participants at the measurement date. In determining fair value, we primarily use prices and other relevant information generated by market transactions involving identical or comparable assets (“market approach”).  We also consider the impact of a significant decrease in volume and level of activity for an asset or liability when compared with normal activity to identify transactions that are not orderly.

 

Fair value measurements are determined under a three-level hierarchy that prioritizes the inputs to valuation techniques used to measure fair value, distinguishing between market participant assumptions developed based on market data obtained from sources independent of the reporting entity (“observable inputs”) and the reporting entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (“unobservable inputs”).  The hierarchy level assigned to each security in our available-for-sale investment portfolio is based on our assessment of the transparency and reliability of the inputs used in the valuation of each instrument at the measurement date.  The highest priority is given to unadjusted quoted prices in active markets for identical assets (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).  Securities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.  The three hierarchy levels are as follows:

 

·                  Level 1—Valuations based on unadjusted quoted market prices in active markets for identical securities.  The fair values of fixed maturity and equity securities and short-term investments included in the Level 1 category were based on quoted prices that are readily and regularly available in an active market.  Our Level 1 category includes publicly traded equity securities, highly liquid U.S. Government notes and treasury bills, highly liquid cash management funds, and short-term certificates of deposit.

 

·                  Level 2—Valuations based on observable inputs (other than Level 1 prices), such as quoted prices for similar assets at the measurement date; quoted prices in markets that are not active; or other inputs that are observable, either directly or indirectly.  The fair values of fixed maturity securities and short-term investments included in the Level 2 category were based on market values obtained from independent pricing services that were evaluated using pricing models that vary by asset class and incorporate available trade, bid and other

 

15



 

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

market information and price quotes from well-established independent broker-dealers.  The independent pricing services monitor market indicators, industry and economic events, and for broker-quoted only securities, obtain quotes from market makers or broker-dealers that they recognize to be market participants.  Our Level 2 category includes corporate bonds, municipal bonds, short-term commercial paper and redeemable preferred stocks.

 

·                  Level 3—Valuations based on inputs that are unobservable and significant to the overall fair value measurement and involve management judgment.  The fair values of certain privately held or thinly traded securities are determined using internal analytical methods based on the best information available.  The estimated fair values of our Level 3 securities consist primarily of the following: 1) An equity security of a company based in the United Kingdom with fair value approximating its net asset value because a significant portion of the net asset value, excluding cash balances, is comprised principally of real estate holdings supported by independent appraisals.  The estimated fair value for this investment also includes foreign currency fluctuations and considers the value of an unrecognized tax loss carry forward. 2) A fixed maturity security representing our participation in a commercial senior secured term loan. The fair value of this fixed maturity security was based on discounted expected cash flows.

 

The following table presents our available-for-sale investments measured at fair value on a recurring basis as of September 30, 2009 and December 31, 2008 classified by the valuation hierarchy discussed above:

 

 

 

Fair Value Measurements

 

(Dollars in thousands)

 

Level 1

 

Level 2

 

Level 3

 

Total

 

September 30, 2009

 

 

 

 

 

 

 

 

 

Fixed maturity securities

 

$

54,345

 

$

1,415,052

 

$

9,517

 

$

1,478,914

 

Equity securities

 

1,660

 

 

 

30,979

 

32,639

 

Short-term investments

 

429,377

 

49,975

 

 

 

479,352

 

Total

 

$

485,382

 

$

1,465,027

 

$

40,496

 

$

1,990,905

 

 

 

 

 

 

 

 

 

 

 

December 31, 2008

 

 

 

 

 

 

 

 

 

Fixed maturity securities

 

$

19,594

 

$

1,377,866

 

$

9,431

 

$

1,406,891

 

Equity securities

 

19,394

 

 

 

28,348

 

47,742

 

Short-term investments

 

145,883

 

95,832

 

 

 

241,715

 

Total

 

$

184,871

 

$

1,473,698

 

$

37,779

 

$

1,696,348

 

 

16



 

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

The following table presents changes in our Level 3 fixed maturity and equity securities measured at fair value on a recurring basis for the three and nine months ended September 30, 2009 and 2008:

 

(Dollars in thousands)

 

Fixed Maturity
Securities

 

Equity
Securities

 

Balance at June 30, 2009

 

$

14,494

 

$

31,855

 

Realized and unrealized gains included in:

 

 

 

 

 

Other comprehensive income (1)

 

(34

)

(876

)

Net income

 

57

 

 

 

Maturities

 

(5,000

)

 

 

Balance at September 30, 2009

 

$

9,517

 

$

30,979

 

 

Balance at December 31, 2008

 

$

9,431

 

$

28,348

 

Realized and unrealized gains included in:

 

 

 

 

 

Other comprehensive income (1)

 

 

 

2,631

 

Net income

 

86

 

 

 

Maturities

 

(5,000

)

 

 

Reclassification from held-to-maturity (see Note 3)

 

5,000

 

 

 

Balance at September 30, 2009

 

$

9,517

 

$

30,979

 

 

Balance at June 30, 2008

 

$

 

 

$

38,472

 

Change in unrealized gains included in other comprehensive income (1)

 

 

 

(4,089

)

Purchases

 

9,404

 

 

 

Balance at September 30, 2008

 

$

9,404

 

$

34,383

 

 

Balance at December 31, 2007

 

$

 

 

$

38,350

 

Change in unrealized gains included in other comprehensive income (1)

 

 

 

(3,967

)

Purchases

 

9,404

 

 

 

Balance at September 30, 2008

 

$

9,404

 

$

34,383

 

 


(1) Changes in unrealized gains for equity securities represent foreign currency fluctuation.

 

Note 5. Goodwill

 

We test goodwill for impairment annually as of December 31 and more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.  A reporting unit is an operating segment or a unit one level below the operating segment.  The impairment tests include a comparison of the carrying amount of goodwill to the present value of future cash flows of both our workers’ compensation segment and our Florida workers’ compensation business operation, a reporting unit.

 

We did not evaluate goodwill for impairment as of September 30, 2009, as no events occurred or circumstances changed that would have more likely than not reduced the fair value of a reporting unit below its carrying amount since December 31, 2008.  The carrying value of goodwill was $21.0 million as of September 30, 2009 and December 31, 2008.

 

17



 

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

Note 6.  Policyholders’ Dividends

 

Most of our workers’ compensation policies are non-participating; however, we issue certain policies in which the policyholder may participate in favorable claims experience through a dividend.  In addition, Florida statutes require payment of additional dividends to policyholders pursuant to a formula based on underwriting results.  An estimated provision for workers’ compensation policyholders’ dividends is accrued as the related premiums are earned.  At December 31, 2008, we accrued approximately $20 million for Florida dividends payable for prior accident years.  In the third quarter 2009 we reduced our estimated Florida policyholders’ dividends for prior accident years by $11.1 million based on our actual filing with the Florida Department of Insurance, which was partially offset by an increase of $3.7 million in our current estimated California policyholders’ dividends.

 

Note 7. Treasury Stock

 

On September 30, 2009, we cancelled and retired 7,695,000 shares of treasury stock which had been repurchased by the Company over the years for an aggregate repurchase price of $166.7 million.  Upon cancellation and retirement, these shares were returned to the status of authorized and unissued.  The excess of the repurchase price of the treasury stock over the par value was allocated between additional paid-in capital and retained earnings.  There was no impact on our consolidated stockholders’ equity as a result of the cancellation and retirement.

 

Note 8.  Segment Information

 

Our business is comprised of the following segments: workers’ compensation, reinsurance and investments.  Segments are designated based on the types of products and services provided.  Workers’ compensation represents insurance coverage for the statutorily prescribed benefits that employers are required to provide to their employees who may be injured in the course of employment.  Reinsurance principally consists of assumed reinsurance of property losses from worldwide catastrophes and large property risks.  In September 2005, we exited the assumed reinsurance business and ceased writing and renewing assumed reinsurance contracts with all contracts fully expired at the end of 2006; however, we will be paying assumed reinsurance claims for several years.  The results of the reinsurance segment will continue to be included in the results of continuing operations.  Income from the workers’ compensation and reinsurance segments is determined by deducting net losses and loss adjustment expenses incurred and underwriting and other operating expenses incurred from net premiums earned (this result is also known as underwriting income or loss).  Income from operations of the investments segment includes net investment income and net realized gains or losses on investments.  We do not allocate investment income to the results of other segments.  The losses from the parent include interest expense and the general operating expenses of Zenith National, a holding company, which owns, directly or indirectly, all of the capital stock of its insurance subsidiaries and other investment securities.

 

The combined ratio, expressed as a percentage, is a key measurement of profitability traditionally used in the property-casualty insurance business.  The combined ratio, also referred to as the “calendar year combined ratio,” is the sum of the losses and loss adjustment expense ratio and the underwriting and other operating expense ratio.  The losses and loss adjustment expense ratio is the percentage of net losses and loss adjustment expenses incurred to net premiums earned.  The underwriting and other operating expense ratio is the percentage of underwriting and other operating expenses to net premiums earned.

 

18



 

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

Segment information is set forth below, with a reconciliation to the accompanying Consolidated Statements of Operations shown in the total column:

 

(Dollars in thousands)

 

Workers’
Compensation

 

Reinsurance

 

Investments

 

Parent

 

Total

 

Three Months Ended September 30, 2009

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

Net premiums earned

 

$

115,666

 

$

36

 

 

 

 

 

$

115,702

 

Net investment income

 

 

 

 

 

$

20,541

 

 

 

20,541

 

Net realized gains on investments

 

 

 

 

 

20,645

 

 

 

20,645

 

Total revenues

 

115,666

 

36

 

41,186

 

 

 

156,888

 

Interest expense

 

 

 

 

 

 

 

$

(1,284

)

(1,284

)

(Loss) income before tax

 

(8,526

)

87

 

41,186

 

(3,108

)

29,639

 

Income tax (benefit) expense

 

(2,636

)

29

 

14,134

 

(1,088

)

10,439

 

Net (loss) income

 

$

(5,890

)

$

58

 

$

27,052

 

$

(2,020

)

$

19,200

 

Combined ratio

 

107.4

%

NM

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2009

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

Net premiums earned

 

$

350,380

 

$

(72

)

 

 

 

 

$

350,308

 

Net investment income

 

 

 

 

 

$

68,108

 

 

 

68,108

 

Net realized gains on investments

 

 

 

 

 

26,162

 

 

 

26,162

 

Total revenues

 

350,380

 

(72

)

94,270

 

 

 

444,578

 

Interest expense

 

 

 

 

 

 

 

$

(3,852

)

(3,852

)

(Loss) income before tax

 

(49,366

)

(42

)

94,270

 

(9,162

)

35,700

 

Income tax (benefit) expense

 

(16,175

)

(14

)

31,496

 

(3,207

)

12,100

 

Net (loss) income

 

$

(33,191

)

$

(28

)

$

62,774

 

$

(5,955

)

$

23,600

 

Combined ratio

 

114.1

%

NM

 

 

 

 

 

 

 

As of September 30, 2009

 

 

 

 

 

 

 

 

 

 

 

Total Assets

 

$

430,842

 

$

2,162

 

$

2,071,379

 

$

4,396

 

$

2,508,779

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 2008

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

Net premiums earned

 

$

152,731

 

$

231

 

 

 

 

 

$

152,962

 

Net investment income

 

 

 

 

 

$

22,873

 

 

 

22,873

 

Net realized losses on investments

 

 

 

 

 

(8,883

)

 

 

(8,883

)

Total revenues

 

152,731

 

231

 

13,990

 

 

 

166,952

 

Interest expense

 

 

 

 

 

 

 

$

(1,284

)

(1,284

)

Income (loss) before tax

 

15,268

 

(94

)

13,990

 

(3,086

)

26,078

 

Income tax expense (benefit)

 

6,304

 

(35

)

4,289

 

(1,080

)

9,478

 

Net income (loss)

 

$

8,964

 

$

(59

)

$

9,701

 

$

(2,006

)

$

16,600

 

Combined ratio

 

90.0

%

NM

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2008

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

Net premiums earned

 

$

465,324

 

$

1,038

 

 

 

 

 

$

466,362

 

Net investment income

 

 

 

 

 

$

68,405

 

 

 

68,405

 

Net realized losses on investments

 

 

 

 

 

(6,695

)

 

 

(6,695

)

Total revenues

 

465,324

 

1,038

 

61,710

 

 

 

528,072

 

Interest expense

 

 

 

 

 

 

 

$

(3,870

)

(3,870

)

Income (loss) before tax

 

81,767

 

(107

)

61,710

 

(9,145

)

134,225

 

Income tax expense (benefit)

 

30,819

 

(40

)

19,747

 

(3,201

)

47,325

 

Net income (loss)

 

$

50,948

 

$

(67

)

$

41,963

 

$

(5,944

)

$

86,900

 

Combined ratio

 

82.4

%

NM

 

 

 

 

 

 

 

As of September 30, 2008

 

 

 

 

 

 

 

 

 

 

 

Total Assets

 

$

500,238

 

$

9,296

 

$

2,083,974

 

$

2,585

 

$

2,596,093

 

 


NM = Not meaningful

 

19



 

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

Note 9.  Stock-Based Compensation Plan

 

Under a restricted stock plan approved by our stockholders (“Restricted Stock Plan”), non-employee Directors and key employees are awarded shares of Zenith National’s common stock with restricted ownership rights.  Other than for certain performance-based shares granted in September 2009, shares of restricted stock granted to employees vest 50% on the second anniversary of the grant date and 50% on the fourth anniversary of the grant date.  Shares granted to non-employee Directors vest on each of the first three anniversaries of the grant date in equal amounts.  The fair value of restricted stock awards is measured using the closing price of Zenith National’s common stock on the grant date and is recognized as an expense over the vesting period of the awards.  The tax savings resulting from tax deductions in excess of compensation expense (“excess tax benefits”) are reflected as a cash inflow from financing activities in the accompanying Consolidated Statements of Cash Flows.

 

The following table provides information regarding the shares under the Restricted Stock Plan:

 

Number of shares authorized for grants since plan inception in 2004

 

995,000

 

Number of shares restricted

 

(444,000

)

Number of shares vested

 

(349,000

)

Number of shares available for future grants at September 30, 2009

 

202,000

 

 

Changes in restricted stock during 2009 were as follows:

 

 

 

Number
of Shares

 

Weighted
Average
Grant Date
Fair Value

 

Restricted shares at December 31, 2008

 

471,000

 

$

39.42

 

Granted

 

1,000

 

27.37

 

Vested

 

(11,000

)

42.29

 

Forfeited

 

(11,000

)

39.50

 

Restricted shares at March 31, 2009

 

450,000

 

39.33

 

Granted

 

23,000

 

22.48

 

Vested

 

(14,000

)

42.26

 

Forfeited

 

(1,000

)

42.55

 

Restricted shares at June 30, 2009

 

458,000

 

38.41

 

Granted

 

5,000

 

27.02

 

Vested

 

(18,000

)

42.82

 

Forfeited

 

(1,000

)

31.40

 

Restricted shares at September 30, 2009

 

444,000

 

38.12

 

 

Compensation expense recognized under the Restricted Stock Plan for the three months ended September 30, 2009 and 2008 was $0.9 million and $1.0 million after tax, respectively, and $2.9 million and $3.0 million after tax for the nine months ended September 30, 2009 and 2008, respectively.

 

Unrecognized compensation expense before tax under the Restricted Stock Plan was $6.4 million and $10.3 million at September 30, 2009 and December 31, 2008, respectively.  This amount will be recognized over the remaining vesting period of the restricted shares.

 

20



 

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

Note 10.  Income Tax

 

At September 30, 2009 and December 31, 2008, we had no material unrecognized tax benefits and no adjustments to liabilities or results of operations were required.

 

Tax years 2004 through 2008 are subject to examination by the state taxing authorities.  Tax years 2005 through 2007 are currently being examined by the Internal Revenue Service (“IRS”).  It is possible that the IRS audit may result in additional payments; however, it is too early in the process to make an estimate of the amount, if any.

 

Note 11.  Commitments and Contingencies

 

We are involved in various litigation proceedings that arise in the ordinary course of our business.  Disputes adjudicated in the workers’ compensation administrative systems may be appealed to review boards or civil courts, depending on the issues and local jurisdictions involved.  From time to time, plaintiffs also sue us on theories falling outside of the exclusive jurisdiction and remedies of the workers’ compensation claims adjudication systems.  Certain of these legal proceedings seek injunctive relief or substantial monetary damages, including claims for punitive damages, which may not be covered by our third party reinsurance agreements.  Historically, the Company has not experienced any material exposure or damages from any of these legal proceedings.  In addition, in the opinion of management, after consultation with legal counsel, all of our currently outstanding litigation is either without merit or the ultimate liability, if any, is not expected to have a material adverse effect on our consolidated financial condition, results of operations or cash flows.

 

Note 12. Recent Accounting Guidance

 

Accounting guidance not yet effective:

In June 2009, the Financial Accounting Standards Board (“FASB”) issued guidance on “Accounting for Transfers of Financial Assets” that requires enhanced disclosures about transfers of financial assets and a company’s continuing involvement in transferred assets.  This guidance is effective for financial statements issued for fiscal years beginning after November 15, 2009.  We do not expect the adoption of this guidance to have any impact on our disclosures since we do not engage in transfers of financial assets.

 

In June 2009, the FASB issued guidance which 1) replaces the quantitative-based risks and rewards calculation for determining whether an enterprise is the primary beneficiary in a variable interest entity with an approach that is primarily qualitative, 2) requires ongoing assessments of whether an enterprise is the primary beneficiary of a variable interest entity, and 3) requires additional disclosures about an enterprise’s involvement in variable interest entities.  This guidance is effective for financial statements issued for fiscal years beginning after November 15, 2009.  We do not expect the adoption of this guidance to have a material impact, if any, on our consolidated financial condition or results of operations.

 

Accounting guidance adopted in 2009:

In April 2009, the FASB issued guidance on “Recognition and Presentation of Other-Than-Temporary Impairments.”  This guidance requires entities to separate an other-than-temporary impairment of a debt security into two components when there are credit related losses associated with the impaired debt security for which management asserts that it does not have the intent to sell the security and it is more likely than not that it will not be required to sell the security before recovery of its cost basis. 

 

21



 

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

The amount of the other-than-temporary impairment related to a credit loss is recognized in earnings and the amount of the other-than-temporary impairment related to other factors is recorded in other comprehensive income (loss).  This guidance was effective for periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009.  We elected to adopt this guidance in the first quarter 2009 and effective January 1, 2009.  There were no impairments previously recognized on debt securities we owned at December 31, 2008; therefore, there was no cumulative effect adjustment to retained earnings and other comprehensive loss as a result of adopting this guidance.

 

In April 2009, the FASB issued guidance on “Determining Fair Value When Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions that are Not Orderly.”  Under this guidance, if an entity determines that there has been a significant decrease in the volume and level of activity for the asset or the liability in relation to the normal market activity for the asset or liability (or similar assets or liabilities), then transactions or quoted prices may not accurately reflect fair value.  In addition, if there is evidence that the transaction for the asset or liability is not orderly, the entity shall place little, if any, weight on that transaction price as an indicator of fair value.  This guidance is effective for periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009.  We elected to adopt this guidance in the first quarter 2009 and effective January 1, 2009, and its adoption did not have a material impact on our consolidated financial condition or results of operations.

 

In April 2009, the FASB issued guidance on “Interim Disclosures about Fair Value of Financial Instruments.”  This guidance requires disclosures about fair value of financial instruments in interim and annual financial statements which is effective for periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009.  We elected to adopt this guidance in the first quarter 2009 and effective January 1, 2009, and have included required disclosures in the Notes to Consolidated Financial Statements.

 

In May 2009, the FASB issued guidance on “Subsequent Events.”  This guidance sets forth general standards of accounting for, and disclosure of, events that occur after the balance sheet date but before financial statements are issued or are available to be issued.  This guidance is effective for periods ending after June 15, 2009.  The adoption of this guidance did not have an impact on our consolidated financial condition or results of operations.

 

In June 2009, the FASB issued guidance on “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles” which established the FASB Accounting Standards Codification as the single source of authoritative accounting principles in the preparation of financial statements in conformity with GAAP.  This guidance also explicitly recognized rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under federal securities laws as authoritative GAAP for SEC registrants.  This guidance was effective for financial statements issued for periods ending after September 15, 2009.  The adoption of this guidance did not have an impact on our consolidated financial condition or results of operations.

 

22



 

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

 

We also adopted the following accounting guidance in the first quarter 2009, none of which had a material effect on our consolidated financial condition or results of operations:

 

·                  “Business Combinations;”

 

·                  “Noncontrolling Interests in Consolidated Financial Statements;”

 

·                  “Disclosures about Derivative Instruments and Hedging Activities;” and

 

·                  “Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities.”

 

23



 

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

 

Item 2.  Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations

 

Zenith National Insurance Corp. (“Zenith National”) is a holding company engaged, through its wholly-owned subsidiaries (primarily Zenith Insurance Company (“Zenith Insurance”)), in the workers’ compensation insurance business, nationally.  Unless otherwise indicated, all references to “Zenith,” “we,” “us,” “our,” the “Company” or similar terms refer to Zenith National together with its subsidiaries.

 

The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements if accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those discussed.  Forward-looking statements include those related to the plans and objectives of management for future operations, future economic performance, or projections of revenues, income, earnings per share, capital expenditures, dividends, capital structure, or other financial items.  Statements containing words such as expect, anticipate, believe, estimate, likely or similar words that are used in this Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations, in other parts of this report or in other written or oral information conveyed by or on behalf of Zenith are intended to identify forward-looking statements.  The Company undertakes no obligation to update such forward-looking statements, which are subject to a number of risks and uncertainties that could cause actual results to differ materially from those projected.  These risks and uncertainties include, but are not limited to, the following: 1) volatility in the financial markets, including the duration of the recent crisis and effectiveness of governmental solutions; 2) economic recession; 3) competition; 4) decreased payroll levels of our customers; 5) medical cost trends; 6) regulatory restrictions on investments; 7) changes in state and federal legislation and regulation; 8) changes in interest rates causing fluctuations of investment income and fair values of investments; 9) changes in the frequency and severity of claims and catastrophes; 10) adequacy of loss reserves; 11) changing environment for controlling medical, legal and rehabilitation costs, as well as fraud and abuse; 12) losses associated with any terrorist attacks that impact our workers’ compensation business for amounts not covered by our reinsurance protection; 13) losses caused by nuclear, biological, chemical or radiological events whether or not there is any applicable reinsurance protection; and 14) other risks detailed herein and from time to time in our reports and filings with the Securities and Exchange Commission.

 

Overview

 

The economy significantly affects our business and over the past two years the recession has resulted in the following impacts:

 

1.               Payrolls for our insureds have declined which has resulted in reduced premiums.

2.               Claim counts have declined, but not necessarily at the same rate as payroll declines.

3.               Premium increases in California have been moderated to assist our customers during a weak economy.

4.               Selection of customers is more complex as certain businesses are facing unprecedented challenges in sustaining their operations.

 

As the economy recovers, the timing of which is uncertain, we expect that jobs will be restored, resulting in growth in payroll.  We also expect an improved economy may be conducive to stronger premium rate levels and more opportunities to write business.

 

24



 

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

 

Revenues.  Our revenues are comprised of the net premiums earned primarily from our workers’ compensation segment, and net investment income and net realized gains (losses) from our investments segment.

 

Workers’ compensation net premiums earned decreased in both the three and nine months ended September 30, 2009 compared to the corresponding periods of 2008 as a result of: 1) fewer policies in-force due to competition in relation to our risk management practices; 2) increased unemployment and declining payrolls for many insureds due to the recession; and 3) net reductions in Florida premium rates year over year, offset in part by California premium rate increases.  Our risk-reward strategy emphasizes pricing and underwriting discipline to maintain profitability rather than focusing on revenue or market share.

 

Workers’ compensation segment.  Underwriting loss before tax from our workers’ compensation segment in the three and nine months ended September 30, 2009 was $8.5 million and $49.4 million, respectively, compared to underwriting income before tax of $15.3 million and $81.8 million in the corresponding periods of 2008.  The decrease in underwriting results in the three and nine months ended September 30, 2009 compared to 2008 principally reflects the decline in premium revenue and no prior period loss reserve development recognized in 2009 compared to favorable development of $23.6 million and $61.8 million recognized in the three and nine months ended September 30, 2008, respectively.  Policyholders’ dividends for the nine months ended September 30, 2009 reflect an $11.1 million reduction in our estimated Florida policyholders’ dividends for prior accident years, partially offset by a $3.7 million increase in our current estimated California policyholders’ dividends.

 

The 2009 accident year loss ratio estimate, excluding loss adjustment expenses, is 50.6% compared to 43.0% for the full year 2008, but continues to be an excellent result in comparison to historical industry trends.  The higher expense ratio in 2009 compared to 2008 primarily reflects lower net premiums earned.

 

Investments segment.  Net investment income and net realized gains (losses) on investments before tax were as follows:

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

(Dollars in thousands)

 

2009

 

2008

 

2009

 

2008

 

Net investment income

 

$

20,541

 

$

22,873

 

$

68,108

 

$

68,405

 

Net realized gains (losses) on investments

 

20,645

 

(8,883

)

26,162

 

(6,695

)

Income before tax from investments segment

 

$

41,186

 

$

13,990

 

$

94,270

 

$

61,710

 

 

The average annual yields on the investment portfolio in the three and nine months ended September 30, 2009 and 2008 were as follows:

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

 

 

2009

 

2008

 

2009

 

2008

 

Before tax (1)

 

4.3

%

4.6

%

4.8

%

4.4

%

After tax

 

2.8

%

3.0

%

3.1

%

2.9

%

 


(1)  Reflects the pre-tax equivalent yield on tax-exempt securities.

 

There were no other-than-temporary impairments recorded during the three months ended September 30, 2009.  Net realized gains on investments before tax for the nine months ended

 

25



 

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

 

September 30, 2009 are net of other-than-temporary impairments of $19.1 million.  Net realized losses on investments before tax for the three and nine months ended September 30, 2008 include other-than-temporary impairments of $15.3 million and $23.8 million, respectively.

 

The fair value of our available-for-sale investment portfolio improved from an unrealized loss before tax of $77.3 million at December 31, 2008 to an unrealized gain before tax of $55.6 million at September 30, 2009, an increase of $132.9 million, or $2.32 per share.  Our investment portfolio reflects our philosophy of diversification and high quality assets with a focus on compounding interest over time.  In the short-term, investment income and the value of our investment portfolio will be affected by historically low U.S. Government interest rates, as well as the recent narrowing of corporate spreads in relation to market expectations about the Federal Reserve Board withdrawing excess liquidity.

 

At September 30, 2009 and December 31, 2008, $808.7 million and $416.8 million, respectively, of the investment portfolio was in fixed maturity securities of two years or less.  This represented 39% and 21%, respectively, of our investment portfolio.

 

Stockholders’ equity.  Stockholders’ equity per share was $28.93, $28.11, $26.82 and $27.42 at September 30, 2009, June 30, 2009, March 31, 2009 and December 31, 2008, respectively.  Stockholders’ equity per share before stockholders’ dividends increased by 11% from December 31, 2008 to September 30, 2009 primarily because of the increase in the fair value of our available-for-sale investment portfolio.  Annualized return on average equity in the nine months ended September 30, 2009 was 3.0% compared to 8.9% in the year ended December 31, 2008.

 

Results of Operations

 

Summary Results by Segment

 

The comparative components of net income for the three and nine months ended September 30, 2009 and 2008 are set forth in the following table.  These components of net income are consistent with the results of our business segments set forth in Note 8 to the Consolidated Financial Statements.

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

(Dollars in thousands)

 

2009

 

2008

 

2009

 

2008

 

Net investment income

 

$

20,541

 

$

22,873

 

$

68,108

 

$

68,405

 

Net realized gains (losses) on investments

 

20,645

 

(8,883

)

26,162

 

(6,695

)

Income from investments segment

 

41,186

 

13,990

 

94,270

 

61,710

 

(Loss) income from:

 

 

 

 

 

 

 

 

 

Workers’ compensation segment

 

(8,526

)

15,268

 

(49,366

)

81,767

 

Reinsurance segment

 

87

 

(94

)

(42

)

(107

)

Parent

 

(3,108

)

(3,086

)

(9,162

)

(9,145

)

Income before tax

 

29,639

 

26,078

 

35,700

 

134,225

 

Income tax expense

 

10,439

 

9,478

 

12,100

 

47,325

 

Net income

 

$

19,200

 

$

16,600

 

$

23,600

 

$

86,900

 

 

Workers’ Compensation Segment

 

Underwriting loss before tax from our workers’ compensation segment was $8.5 million and $49.4 million for the three and nine months ended September 30, 2009, respectively, compared to underwriting income before tax of $15.3 million and $81.8 million for the corresponding periods of 2008.

 

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ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

 

The key operating goal for our workers’ compensation segment is to achieve underwriting profitability and significantly out-perform the national workers’ compensation industry (“industry”).  Neither Zenith nor the industry is expected to achieve underwriting profitability in 2009.  Underwriting profitability is comprised of the loss ratio, which is a measure of how we manage risk over the long term, and the expense ratio.  In regards to our loss ratio, we expect to produce, and for a long period of time have produced, lower than average loss ratios compared to the industry.  However, because of our service strategy as a workers’ compensation specialist, our expense ratio may be higher compared to industry results.  During periods of declining premiums and policy counts such as in 2009, this high expense ratio can result in underwriting losses.  Although we are reducing costs as our business declines, we are maintaining and improving our ability to provide services to our customers and ensuring that we will be in a position to grow our business when the economy and market change.

 

Workers’ compensation calendar year combined ratios, along with a reconciliation to the accident year combined ratios for the three and nine months ended September 30, 2009 and 2008, were as follows:

 

 

 

Calendar
Year

 

Favorable
Prior Period
Development

 

Accident
Year

 

Calendar
Year

 

Favorable
(Unfavorable)
Prior Period
Development

 

Accident
Year

 

 

 

2009

 

2008

 

Three Months Ended September 30,

 

 

 

 

 

Losses and loss adjustment expenses

 

69.5

%

 

 

69.5

%

49.1

%

15.5

%

64.6

%

Underwriting and other operating expenses

 

42.5

 

 

 

42.5

 

37.2

 

 

 

37.2

 

Policyholders’ dividends

 

(4.6

)

9.6

%

5.0

 

3.7

 

(1.6

)

2.1

 

Combined ratio

 

107.4

%

9.6

%

117.0

%

90.0

%

13.9

%

103.9

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

 

 

 

 

 

 

 

 

 

 

 

Losses and loss adjustment expenses

 

71.3

%

 

 

71.3

%

41.9

%

13.3

%

55.2

%

Underwriting and other operating expenses

 

43.2

 

 

 

43.2

 

36.7

 

 

 

36.7

 

Policyholders’ dividends

 

(0.4

)

3.2

%

2.8

 

3.8

 

(1.6

)

2.2

 

Combined ratio

 

114.1

%

3.2

%

117.3

%

82.4

%

11.7

%

94.1

%

 

The combined ratio, expressed as a percentage, is a key measurement of profitability traditionally used in the property-casualty insurance business.  The combined ratio, also referred to as the “calendar year combined ratio,” is the sum of the losses and loss adjustment expense ratio and the underwriting and other operating expense ratio.  The losses and loss adjustment expense ratio is the percentage of net losses and loss adjustment expenses incurred to net premiums earned.  The underwriting and other operating expense ratio is the percentage of underwriting and other operating expenses to net premiums earned.  When the calendar year combined ratio is adjusted to exclude prior period items, such as loss reserve development and policyholders’ dividends, it becomes the “accident year combined ratio,” a non-GAAP financial measure.

 

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ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

 

The following provides additional information related to the decrease in underwriting results and the increase in combined ratios in the three and nine months ended September 30, 2009 compared to the corresponding periods of 2008:

 

·                  Net premiums earned for the workers’ compensation segment were as follows:

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

(Dollars in thousands)

 

2009

 

2008

 

2009

 

2008

 

California

 

$

68,616

 

$

85,990

 

$

200,977

 

$

254,508

 

Outside California

 

47,050

 

66,741

 

149,403

 

210,816

 

Total net premiums earned

 

$

115,666

 

$

152,731

 

$

350,380

 

$

465,324

 

 

Workers’ compensation net premiums earned decreased approximately 25% in both the three and nine months ended September 30, 2009 compared to the corresponding periods of 2008 as a result of: 1) our risk-reward strategy, which emphasizes pricing and underwriting discipline to maintain profitability in a highly competitive environment, resulting in approximately 15% fewer policies in-force compared to September 30, 2008; 2) increased unemployment as well as declining payrolls for many of our insureds due to the recession; and 3) net reductions in Florida premium rates year over year, offset in part by California premium rate increases.

 

·                  Our actuaries perform a comprehensive review of our loss reserve estimates every quarter.  For the three and nine months ended September 30, 2009, we did not recognize any development of prior accident years’ loss reserve estimates compared to $23.6 million and $61.8 million of favorable development recognized in the corresponding periods of 2008.

 

·                  Our accident year estimated loss ratio, excluding loss adjustment expenses, recorded in the nine months ended September 30, 2009 increased to 50.6% compared to 38.9% estimated for the 2008 accident year in the corresponding period of 2008.  Our 2008 accident year loss ratio was increased in the third and fourth quarters 2008 to 43.0% for the full year as a result of premiums declining more than claim frequency combined with increasing medical costs in California.  Our 2009 accident year loss ratio is an excellent result in comparison to historical industry trends and current industry estimates, but is higher than 2008 primarily because of reduced premiums and increasing average cost of claims.

 

·                  Loss adjustment expenses consist of both costs directly related to individual claims (allocated) as well as primarily our internal costs associated with servicing and settling claims (unallocated).  Allocated loss adjustment expenses generally vary in proportion to losses.  Unallocated loss adjustment expenses are more fixed in nature and become a larger percentage of net premiums earned as premiums trend lower.  The overall trend of loss adjustment expenses, however, is toward lower expenses.

 

·                  Policy acquisition costs are generally variable to net premiums earned.  However, underwriting and other costs are also more fixed in nature and become a larger percentage of net premiums earned as premiums trend lower.

 

·                  We recognized a charge of $5.0 million before tax in the first quarter 2009 related to workforce and other operating cost reductions, offset by expense savings from these actions recognized in the second and third quarters 2009.  We anticipate annualized expense savings of approximately $10.0 million, or $6.5 million after tax.

 

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ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

 

·                  At September 30, 2009, we reduced our estimated Florida policyholders’ dividends for prior accident years by $11.1 million based on our actual filing with the Florida Department of Insurance (“Florida DOI”), which was partially offset by an increase of $3.7 million in our current estimated California policyholders’ dividends.

 

Workers’ compensation premiums in-force, number of policies in-force and insured payrolls in California and outside of California are shown in the following table.  Premiums in-force is a measure of the amount of premiums billed, or to be billed, on all unexpired policies at the date shown; and insured payroll is an indicator of exposure.

 

 

 

California

 

Outside California

 

Total

 

(Dollars in millions)

 

Premiums
In-force

 

Policies
In-force

 

Insured
Payrolls

 

Premiums
In-force

 

Policies
In-force

 

Insured
Payrolls

 

Premiums
In-force

 

Policies
In-force

 

Insured
Payrolls

 

September 30, 2009

 

$

273.0

 

16,600

 

$

6,388.5

 

$

200.4

 

14,000

 

$

9,933.1

 

$

473.4

 

30,600

 

$

16,321.6

 

December 31, 2008

 

304.5

 

19,600

 

7,133.2

 

251.7

 

14,900

 

10,838.9

 

556.2

 

34,500

 

17,972.1

 

September 30, 2008

 

325.7

 

20,600

 

7,538.8

 

267.3

 

15,200

 

11,302.4

 

593.0

 

35,800

 

18,841.2

 

December 31, 2007

 

359.3

 

22,100

 

8,108.8

 

310.8

 

16,200

 

11,875.7

 

670.1

 

38,300

 

19,984.5

 

 

The table above reflects the following trends in our workers’ compensation business:

1)             The reduction in premiums in-force reflects the impact of competition in relation to our risk management practices; increased unemployment and declining payrolls due to the recession; as well as net premium rate reductions in Florida year over year, offset in part by California premium rate increases;

2)             The reduction in policies in-force also reflects the impact of competition in relation to our risk management practices; and

3)             The reduction in insured payrolls is caused by the reduction in policies in-force (competition), as well as the impact of increased unemployment and declining payroll levels of our insureds.

To the extent that payroll levels on in-force policies continue to decline as a result of the recession, our actual premiums earned will be less than the amount implied by premiums in-force.

 

In California, the state in which the largest volume of our workers’ compensation premiums is earned, the Workers’ Compensation Insurance Rating Bureau (“WCIRB”) recommends claims cost benchmarks (previously called advisory pure premium rates) to be used by companies in determining their premium rates.  The California Department of Insurance (“California DOI”) also adopts and publishes its own claims cost benchmark.  The benchmark rates cover expected loss costs, but do not contain an element to cover operating expenses or profit.  In September 2008, the WCIRB proposed a 16% increase in the January 1, 2009 claims cost benchmark and the California DOI adopted and published a claims cost benchmark increase of 5% for January 1, 2009.  In April 2009, the WCIRB proposed a 23.7% increase in the July 1, 2009 claims cost benchmark consisting of 16.9% for increased medical inflation and 5.8% for its estimates of the potential cost impacts of the two recent en banc decisions from the Workers’ Compensation Appeals Board discussed on page 35.  On July 8, 2009, the California DOI rejected the WCIRB’s recommendations and did not make any changes to its claims cost benchmark for July 1, 2009.  In August 2009, the WCIRB recommended a 22.8% increase in the January 1, 2010 claims cost benchmark.  The California DOI has not yet indicated what changes, if any, will be made to the advisory rate levels for January 1, 2010.

 

Notwithstanding the foregoing, we set our own California premium rates based upon our actuarial analysis of current and anticipated cost trends, including any modification to the workers’ compensation system, while maintaining our goal of achieving underwriting profits and out-performing the industry.  We reduced our premium rates from 2004 through 2007 as a result of favorable loss costs trends originating from the 2003 and 2004 legislative reforms.  Due to increasing claim costs in

 

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ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

 

California, we increased our manual premium rates 4% effective January 1, 2009 and increased premium rates another 4% effective July 1, 2009.  We have not yet determined the amount of the change in our California manual premium rates for January 1, 2010, but we expect it will be in the vicinity of the most recent changes.

 

These manual premium rates do not necessarily indicate the rates charged to our policyholders because employers’ experience modification factors are subject to revision annually and our underwriters are given authority to increase (debit) or decrease (credit) rates based upon individual risk characteristics.  The following table sets forth the manual premium rate change percentages in California, as well as the change in the average rates charged in California on renewal business for each period.  The change in the average renewal rate takes into consideration changes in manual premium rates, as well as the changes in experience modification factors and net credits or debits applied by our underwriters (decreases are shown in parentheses):

 

Policy Renewal Date

 

Manual Premium
Rate Change

 

Average Renewal
Charged Rate
Change

 

July 1, 2003 — June 30, 2004

 

0.0

%

(3.0

)%

July 1, 2004 — June 30, 2005

 

(11.0

)

(14.0

)

July 1, 2005 — June 30, 2006

 

(24.0

)

(31.0

)

July 1, 2006 — June 30, 2007

 

(9.0

)

(16.0

)

July 1, 2007 — June 30, 2008

 

0.0

 

(9.0

)

July 1, 2008 — June 30, 2009

 

4.0

 

0.0

 

July 1, 2009

 

4.0

 

NA

 

 


NA = Not yet available

 

In Florida, the state in which the second largest volume of our workers’ compensation premiums is earned, premium rates for workers’ compensation insurance are set by the Florida DOI.  Manual premium rate change percentages in Florida are as follows:

 

Effective date of change

 

Manual Premium
Rate Change

 

January 1, 2004

 

0.0

%

January 1, 2005

 

(4.0

)

January 1, 2006

 

(13.4

)

January 1, 2007

 

(12.5

)

January 1, 2008

 

(18.4

)

January 1, 2009

 

(18.6

)

April 1, 2009

 

6.4

 

July 1, 2009

 

(6.4

)

January 1, 2010

 

(6.8

)

 

The April 1, 2009 Florida premium rate increase related to the fourth quarter 2008 Florida Supreme Court decision in the Emma Murray vs. Mariner Health case, which was expected to increase claimants’ attorneys’ fees on open claims.  In the second quarter 2009, the Florida Legislature restored the limits on claimants’ attorneys’ fees going forward and as a result, the Florida DOI reversed the April 1, 2009 6.4% rate increase effective July 1, 2009, including rates on in-force policies issued on or after April 1, 2009.

 

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ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

 

Reinsurance Segment

 

In September 2005, we exited the assumed reinsurance business and ceased writing and renewing assumed reinsurance contracts with all contracts fully expired at the end of 2006; however, we will be making payments on assumed reinsurance claims for several years.  For further information, refer to “Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2008.

 

Investments Segment

 

Investment income and realized gains and losses are discussed in the “Investments” section below.

 

Parent

 

The parent loss reflects the holding company activities of Zenith National as follows:

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

(Dollars in thousands)

 

2009

 

2008

 

2009

 

2008

 

Interest expense

 

$

1,284

 

$

1,284

 

$

3,852

 

$

3,870

 

Parent expenses

 

1,824

 

1,802

 

5,310

 

5,275

 

Parent loss

 

$

3,108

 

$

3,086

 

$

9,162

 

$

9,145

 

 

Loss Reserves

 

Accounting for the workers’ compensation and reinsurance segments requires us to estimate the liability for the expected ultimate cost of unpaid losses and loss adjustment expenses (“loss reserves”) as of the balance sheet date.  Our loss reserves were as follows:

 

(Dollars in millions)

 

September 30, 2009

 

December 31, 2008

 

Workers’ compensation segment:

 

 

 

 

 

Unpaid losses and loss adjustment expenses

 

$

1,175

 

$

1,230

 

Less: Receivable from reinsurers for unpaid losses

 

243

 

269

 

Unpaid losses and loss adjustment expenses, net of reinsurance

 

$

932

 

$

961

 

Reinsurance segment:

 

 

 

 

 

Unpaid losses and loss adjustment expenses, gross and net of reinsurance receivable

 

$

40

 

$

45

 

Total:

 

 

 

 

 

Unpaid losses and loss adjustment expenses

 

$

1,215

 

$

1,275

 

Less: Receivable from reinsurers for unpaid losses

 

243

 

269

 

Unpaid losses and loss adjustment expenses, net of reinsurance

 

$

972

 

$

1,006

 

 

Loss reserves are estimates and are inherently uncertain; they do not and cannot represent an exact measure of ultimate liability.  Accordingly, as we receive new information and update our assumptions over time regarding the ultimate liability, our loss reserves may prove to be inadequate to cover our ultimate actual losses or they may prove to exceed the ultimate amount of our actual losses.  The amount by which estimated losses, measured subsequently by reference to payments and additional estimates, differ from those originally reported for a period is known as “development.”  Development is favorable when losses ultimately settle for less than the amount reserved or subsequent estimates indicate a basis for reducing loss reserves on open claims.  Development is unfavorable when losses ultimately settle for more than the levels at which they were reserved or subsequent estimates indicate a basis for reserve increases on open claims.  Favorable or unfavorable development of loss

 

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ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

 

reserves is reflected in our Consolidated Statements of Operations for the period in which the change is made.

 

When losses are reported to us, we establish, individually, estimates of the ultimate cost of the claims, known as “case reserves.”  These case reserves are continually monitored and revised in response to new information and for amounts paid.  In estimating our total loss reserves we have to make provisions for two types of loss development.  At the end of any calendar period there are a number of claims that have not yet been reported, but will arise out of accidents that have already occurred.  These are referred to in the insurance industry as incurred but not reported (“IBNR”) claims and our loss reserves contain an estimate for IBNR claims.  In addition to this provision for late reported claims, we also have to estimate, and make provision for, the extent to which the case reserves on known claims may develop.  These types of reserves are referred to in the insurance industry as “bulk” reserves. Our loss reserves make provision for both IBNR and bulk reserves in total, but not separately.

 

At September 30, 2009 and December 31, 2008, IBNR and bulk reserves included in loss reserves, net of reinsurance recoverables, were as follows:

 

(Dollars in thousands)

 

September 30, 2009

 

December 31, 2008

 

Workers’ compensation segment

 

$

197,391

 

$

212,651

 

Reinsurance segment

 

11,496

 

10,276

 

Total IBNR & bulk reserves

 

$

208,887

 

$

222,927

 

 

We perform a comprehensive review of our loss reserves at the end of every quarter.  Estimating loss reserves is a complex process that involves a combination of actuarial techniques and management judgment.  Because we have a long history in the workers’ compensation business, particularly in California, we give weight to our own data as well as external information in determining our loss reserve estimates.

 

The loss reserve estimates recorded in the financial statements (“carried reserves”) at September 30, 2009 and December 31, 2008 are management’s best estimate of loss reserves, and reflect the actuarial point estimate.  We believe our loss reserve estimates as of September 30, 2009 are adequate; however, we cannot predict the amount or timing of future loss reserve development, whether favorable or unfavorable.

 

The 2009 accident year loss ratio estimate, excluding loss adjustment expenses, for the nine months ended September 30, 2009 is 50.6% compared to 43.0% for the full year 2008.  The increase in the 2009 accident year loss ratio is primarily caused by reduced premiums and increasing average cost of claims.

 

For the nine months ended September 30, 2009, we did not recognize any development of prior accident year loss reserves.  In comparison, for the nine months ended September 30, 2008, we recognized net favorable development of prior accident year workers’ compensation loss reserves of $61.8 million, representing 5.8% of our estimated workers’ compensation loss reserves, net of reinsurance, at December 31, 2007 and 13.3% of our workers’ compensation net premiums earned in the nine months ended September 30, 2008.

 

Discussed below are the principal uncertainties considered, the actuarial estimation process used, the role of management, recent trends and new information received, and the impact of different assumptions regarding medical cost trends on workers’ compensation loss reserve estimates.

 

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ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

 

Principal Uncertainties.  In our workers’ compensation business the large majority of claims are reported to us promptly and therefore, as of the balance sheet date, the number of IBNR claims is relatively insignificant.  The greater part of the challenge in estimating our loss reserves is associated with estimating ultimate loss costs across a population of claims for each accident year.  The principal uncertainty in our workers’ compensation loss reserve estimates at this time is the trend of increasing claim costs, particularly medical.  In estimating loss reserves, our actuaries consider medical costs by evaluating longer term trends.  During the accident years just prior to the legislative reforms (1998 - 2002), we experienced double-digit medical cost increases.  During 2003 and 2004, reforms enacted in Florida and California provided both immediate medical cost reductions and more control over future medical costs.  These reforms included reductions in the medical fee schedules, provision for medical networks and establishment of medical treatment guidelines.  Our loss estimates for these two years reflect an average 6% per year decrease in medical costs.  For the accident years following the reforms we are experiencing a return to increasing medical costs and our loss reserve estimates reflect an average 8% per year increase in medical costs for 2005 through 2009 (medical costs represent approximately 65% of total costs).  Our premium rates are established based on actuarial and business judgments regarding claim cost trends, principally medical.  During the reform years, we reduced our premium rates based on the expected decrease in claim costs combined with the other benefits of the reforms.  Due to increasing claim costs including medical, we increased our California premium rates 4% effective January 1, 2009 and an additional 4% effective July 1, 2009.  Additional uncertainties considered in estimating ultimate loss costs include the ultimate number of expensive claims and the length of time required to settle long-term, expensive claims.  Expensive claims are those involving permanent partial disability (“PPD”) of an injured worker and are paid over several years.  The ultimate costs of expensive claims are difficult to estimate because of such factors as the on-going and possibly increasing need for medical care, length of disability and life expectancy.  Prior to the reforms, these expensive claims were approximately 20% of all claims in California, but contributed 90% of the total costs.  In the years immediately following the reforms, these claims were reduced to about 14% of all claims; however, in recent accident years we are experiencing modest annual increases in the proportion of expensive claims to total claims.

 

Actuarial Estimation Process.  Our actuaries produce a point estimate for workers’ compensation loss reserves using the results of various methods of estimation.  Our actuaries prepare reserve estimates for all accident years using our own historical claims data and many of the common actuarial methodologies for estimating loss reserves, such as paid loss development methods, incurred loss development methods, Bornhuetter-Ferguson indications and claim count methods.  The actuarial point estimate is based on a selection of the results of these various methods depending upon both the age of the accident year and the geographic state of the injury.  For mature accident years, all of the methods produce very similar loss estimates and our actuarial point selections are based upon incurred loss development methods because our actuaries believe this most accurately reflects the required reserves for the relatively few claims that remain open.  For accident year 2009, our actuarial estimate is based upon an average of the Bornhuetter-Ferguson method and the claim count method.

 

Role of Management.  Management reviews the actuarial point estimate each quarter, as well as all relevant information regarding medical cost trends, claim payment trends and our settlement practices, and any judicial and administrative court decisions and legislative changes.  Management has established a loss reserve estimate in the financial statements that reflects the actuarial point estimate as its best estimate for loss reserves at September 30, 2009 and December 31, 2008.

 

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ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

 

Recent Trends and New Information.  The recent trends and the new information received during the third quarter 2009 are discussed below.

 

We believe it is appropriate to provide a comparison of our California results to the California industry results because the amount of business we write is meaningful in relation to the California workers’ compensation industry and we earn approximately 60% of our premiums from our California business.  During the third quarter, the WCIRB made available its current estimate of California workers’ compensation loss experience based on data through June 30, 2009 as follows:

 

·                  An ultimate loss ratio of 70% for accident year 2008 and 56% for accident year 2007.  These ratios compare to our ultimate California loss ratios of 46% and 38%, respectively, for those same years.  We have an estimated ultimate California loss ratio for 2009 of 51%.  The comparisons for the 2008 and 2007 accident years show that we continue to have loss ratios substantially below the California industry averages, demonstrating our continued focus on managing risk and reflecting consistency with our long-term record of producing lower than average loss ratios compared to the industry.  However, because of our service strategy as a workers’ compensation specialist, our expense ratio may be higher compared to industry results.  During periods of declining premium and policy counts, such as in 2009, this high expense ratio can result in underwriting losses.

 

·                  Indemnity claim frequency for accident year 2008 is 5 percentage points lower than accident year 2007.

 

·                  The average cost of a 2008 indemnity claim reflects a 12% increase in severity, representing the third consecutive year of double-digit severity increases after sharp severity declines in 2003, 2004 and 2005.

 

·                  The amount by which the California workers’ compensation industry’s reported loss reserves are redundant for all accident years was $5 billion.  We do not believe that the WCIRB’s estimate of reserve redundancy is representative of our situation, and therefore we do not believe this information should be used to estimate redundancies in our loss reserves.

 

We believe there are three key reasons that we have historically produced lower than average loss ratios than the workers’ compensation industry:

 

1.    Our key operating goal is to achieve underwriting profits.

 

2.    We specialize in workers’ compensation and service all material aspects of our policy obligations with our own employees.  We have our own underwriters, actuaries, safety engineers, payroll auditors, claims managers, physician medical directors, case management nurses, and claims lawyers.  Many of our competitors outsource some or all of these functions.

 

3.    We manage our business with a focus on risk versus reward.  Our field offices have no premium or growth targets.  Our underwriters only write business that is priced with a reasonable expectation of producing a profitable underwriting result.

 

In August 2009, the WCIRB recommended a 22.8% increase in the pure premium rate level (or claims cost benchmark) effective January 1, 2010.  The California DOI has not yet indicated what changes, if any, will be made to the advisory rate levels for January 1, 2010.

 

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ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

 

In April 2009, the WCIRB recommended a 23.7% increase in the pure premium rate level effective July 1, 2009, consisting of 16.9% for increased medical inflation and 5.8% for its estimates of the potential cost impacts of the recent en banc decisions discussed below.  On July 8, 2009, the California DOI rejected the WCIRB’s recommendations and did not make any changes to claims cost benchmark for July 1, 2009.  In this regard, the California DOI suggested certain changes to reduce medical costs, but these recommendations have no legal impact, as is the case with their opinion on rates.

 

In September 2009, the California Workers’ Compensation Board (“WCAB”) issued two significant en banc decisions, revising its earlier decisions, relating to use of the American Medical Association Guide (“AMA Guide”) to determine permanent disability and the method for determining an injured worker’s diminished future earnings capacity (“DFEC”).  The original WCAB decision in Almaraz v. Environmental Recovery Services/Guzman v. Milpitas Unified School District (“Almaraz/Guzman”) rendered the AMA Guide portion of the 2005 permanent disability (“PD”) rating schedule rebuttable if the permanent disability award could be shown to be inequitable and not commensurate with the injured worker’s disability, and would have allowed workers’ compensation judges to make an impairment determination taking into account medical opinions that are not based on, or are only partially based on, the AMA Guide.  The revised decision in Almaraz/Guzman limits the physician from deviating from the AMA Guide in determining a PD rating.  A physician can deviate from the scheduled rating only if his opinion for the deviation constitutes “substantial evidence,” and the rating must be derived based solely on the four corners of the AMA Guide.  The WCAB’s original decision in Ogilvie v. City and County of San Francisco (“Ogilvie”) rendered the DFEC portion of the 2005 permanent disability rating schedule rebuttable.  The revised Ogilvie decision does not substantially change the initial decision, but provides some examples of how this decision could be applied.  These decisions could affect both the number and amount of PD payments, including those on open claims.  We do not know how these decisions will affect our loss costs trends or our reserves, if at all, and we expect legal challenges to continue.  We will continue to monitor these decisions and their impact on our results.

 

Impact of Different Medical Cost Trend Assumptions.  As previously discussed, assumptions regarding medical cost trends are used in estimating ultimate losses.  Our loss estimates for the 2003 and 2004 accident years reflect an average 6% per year decrease in medical costs, and for the 2005-2009 accident years reflect an average 8% per year increase in medical costs.  If the average annual medical cost trend for each of the accident years 2003-2009 were all increased or all decreased by one, two and three percentage points in each year, our loss reserve estimates at September 30, 2009 would change by approximately $25 million, $45 million and $70 million, respectively.

 

We believe our loss reserve estimates are adequate.  However, the ultimate losses will not be known with any certainty for several years.  We assume that increasing medical cost trends will continue and will impact our long-term claims costs and loss reserves.  Additionally, the impact, if any, of the recession on our claim costs is not yet known.  We will continue to evaluate our estimate of loss reserves every quarter to reflect the most current data and judgments.

 

Investments

 

We invest the net cash flow from our operations and from our capital primarily in fixed maturity securities. These investments provide a stable source of income over the long run, although, in the short run, changes in interest rates impact the amount of investment income we earn.

 

35



 

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

 

Refer to Exhibit 99.1 to this report for a listing of our available-for-sale investment portfolio as of September 30, 2009 including the securities’ identification numbers assigned in accordance with the Committee on Uniform Securities Identification Procedures (“CUSIP”).

 

Other investments are comprised of interests in limited partnerships and limited liability companies (“LLC”) with an aggregate carrying value of $62.1 million and a net asset value of $69.7 million at September 30, 2009.  The $7.6 million difference between the carrying value and the net asset value is not recognized in either our investment values or our equity at September 30, 2009 because our share of capital in certain investments is less than 5%, and such investments are recorded at cost.  We have additional commitments to our existing investments in limited partnerships and LLCs of $12.4 million as of September 30, 2009.

 

As of September 30, 2009 and December 31, 2008, we did not have sub-prime mortgages, derivative strategies, credit default swaps or other credit-enhancement exposures.  We do not engage in securities lending.

 

The average maturity of the fixed maturity portfolio, including short-term investments, was approximately 2.8 years at September 30, 2009 compared to 4.5 years at December 31, 2008.  The duration of the fixed maturity portfolio, including short-term investments, was 2.4 years at September 30, 2009 compared to 3.5 years at December 31, 2008.

 

Our internal investments department actively manages our investment portfolio to preserve principal values whenever possible.  We do not rely on external portfolio managers.  We review the appropriateness and consistency of the fair values, which are affected primarily by changes in interest rates, and changes in the credit quality and liquidity of the companies in which we have invested or changes in general economic and market conditions. 

 

36



 

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

 

At September 30, 2009, all of our investments in fixed maturity and equity securities and short-term investments were classified as available-for-sale with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders’ equity, net of tax.  Fair values of our available-for-sale investment portfolio at September 30, 2009 improved by approximately $132.9 million before tax, compared to December 31, 2008, which resulted in an increase to stockholders’ equity of $86.4 million, after tax, or $2.32 per share.  The net unrealized gains (losses) on available-for-sale investments reported as a separate component of stockholders’ equity were as follows:

 

 

 

Fixed Maturity Securities,
Including Short-term
Investments

 

Equity Securities

 

Total

 

(Dollars in thousands)

 

Before Tax

 

After Tax

 

Before Tax

 

After Tax

 

Before Tax

 

After Tax

 

September 30, 2009

 

$

51,428

 

$

33,429

 

$

4,189

 

$

2,723

 

$

55,617

 

$

36,152

 

December 31, 2008

 

(72,141

)

(46,893

)

(5,146

)

(3,345

)

(77,287

)

(50,238

)

 

We diversify our fixed maturity portfolio across a number of industries.  The table below sets forth the amortized cost and fair value of fixed maturity securities, including short-term investments, by industry at September 30, 2009:

 

(Dollars in thousands)

 

Amortized Cost

 

Fair Value

 

U.S. Treasury

 

$

413,023

 

22

%

$

413,143

 

21

%

Insurance

 

225,931

 

12

 

227,740

 

12

 

Financial institutions

 

209,527

 

11

 

214,975

 

11

 

Municipal bonds

 

118,188

 

6

 

124,576

 

6

 

Food and beverage

 

108,515

 

6

 

112,903

 

6

 

Petroleum and natural gas

 

91,977

 

5

 

96,527

 

5

 

Utilities

 

89,170

 

5

 

93,592

 

5

 

Machinery

 

57,848

 

3

 

61,506

 

3

 

Pharmaceuticals

 

55,421

 

3

 

58,788

 

3

 

Communications

 

55,209

 

3

 

58,119

 

3

 

Personal goods

 

53,310

 

3

 

55,138

 

3

 

Hotels and casinos

 

44,481

 

2

 

45,532

 

2

 

Homebuilding

 

23,500

 

1

 

23,693

 

1

 

Entertainment

 

21,811

 

1

 

23,459

 

1

 

Chemicals

 

20,776

 

1

 

21,120

 

1

 

Other (1)

 

318,151

 

16

 

327,455

 

17

 

Total

 

$

1,906,838

 

100

%

$

1,958,266

 

100

%

 


(1) Represents industries comprising less than 1% of our fixed maturity portfolio.

 

Approximately 90% of our consolidated fixed maturity portfolio, including short-term investments, was rated investment grade at September 30, 2009.

 

37



 

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

 

The following table presents the amortized cost and fair value of our corporate bond and short-term investment portfolio by credit rating categories as of September 30, 2009:

 

(Dollars in thousands)

 

Amortized
Cost

 

Fair
Value

 

Percent
of Total
Fair
Value

 

 

 

 

 

 

 

 

 

AAA (1)

 

$

464,795

 

$

466,279

 

27

%

AA

 

188,805

 

192,419

 

11

 

A

 

510,191

 

537,165

 

31

 

BBB

 

350,836

 

363,641

 

21

 

Non-investment grade (2)

 

180,460

 

180,523

 

10

 

Total

 

$

1,695,087

 

$

1,740,027

 

100

%

 


(1)          Includes highly liquid cash management funds and short-term certificates of deposit that were rated internally.

(2)          Based on ratings by the National Association of Insurance Commissioners, Inc. (“NAIC”).

 

The following table presents the average credit rating, amortized cost and fair value of our municipal bond portfolio at September 30, 2009:

 

(Dollars in thousands)

 

Average Credit
Rating

 

Amortized Cost

 

Fair Value

 

Insured by bond insurers (1)

 

AA- to AA

 

$

59,764

 

$

62,526

 

Pre-refunded (2)

 

AA

 

27,521

 

29,166

 

Uninsured

 

AA+

 

30,903

 

32,884

 

Total

 

AA

 

$

118,188

 

$

124,576

 

 


(1) Average credit rating of underlying issuers is AA-.

(2) Pre-refunded municipal bonds in our portfolio are collateralized by investments in U.S. Government securities.

 

The fair values of our available-for-sale investments are determined using the market approach, which is based on prices and other relevant information generated by market transactions involving identical or comparable assets.  We use an independent pricing service as the primary source of our fair value measures.  This pricing service is a leading global provider of financial market data, analytics and related services to financial institutions, active traders and individual investors. For equity securities traded in active markets, the independent pricing service obtains closing prices from major stock markets.  For the majority of our fixed maturity securities, the independent pricing service provides values generated by valuation models which use observable market inputs from various industry sources, including traded prices for both identical and comparable assets as reported by an over-the-counter corporate bond market real-time price dissemination service.  Considerable judgment is required in making assumptions used in such models, including the selection of interest rates, default risk and recovery rates and volatility risk assumptions.

 

To validate that the values obtained from the independent pricing service are reasonable estimates of fair value, we perform various quantitative and qualitative procedures, including, but not limited to a review of approximately 20 valuations obtained from our pricing service each quarter. The securities selected for testing are based on values that vary significantly from the previous week’s values, or where values vary significantly from actual trade information or other observable market information.  When variances occur that cannot be explained internally, we challenge the prices with our independent pricing service.  The pricing service responds to all challenges with either an affirmation or a change in their price.  We review and validate the basis for any affirmation in values.

 

38



 

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

 

To validate the methodology and observable market inputs used by our pricing service, we perform various quantitative and qualitative procedures, including but not limited to: 1) a quarterly written confirmation from the independent pricing service regarding changes, if any, to its underlying valuation methodologies, and 2) a semi-annual analysis of the inputs and recalculation and comparison to the outputs of the valuation models used by the independent pricing service for a minimum of ten securities selected to provide an adequate representation from each of our investment categories for each analysis period.

 

Based on the validation procedures noted above, we did not identify any material discrepancies between our values and those provided by the independent pricing service, and we did not adjust the prices provided by our independent pricing services as of September 30, 2009.

 

We use mid-market quotes from well recognized market information sources as the basis for the fair value of highly liquid U.S. Government securities (includes U.S. Government Treasury Notes and Bills).  We also use market information sources and unadjusted non-binding quotes from broker-dealers to determine the fair value of a small number of our securities that are not priced by our independent pricing service.  As of September 30, 2009, we had two fixed income securities with fair values totaling $18.7 million based on non-binding quotes obtained from broker-dealers.  To validate that the values obtained from the broker-dealers are reasonable estimates of fair value, we confirm that the non-binding quotes are based on proprietary models that use observable market inputs and trade information for similar securities.  The fair values of certain privately held or thinly traded securities are determined using internal analytical methods based on the best information available.

 

Investments that we currently own could be subject to default by the issuer or could suffer declines in fair value that become other-than-temporary.  We continually assess the prospects for individual securities as part of our ongoing portfolio management, including the identification of other-than-temporary declines in fair values.  Our other-than-temporary assessment includes reviewing the extent and duration of declines in fair values of investments below the amortized cost basis, the seniority and duration of the securities, historical and projected company financial performance, company-specific news and other developments, the outlook for industry sectors, credit ratings and macro-economic changes, including government policy initiatives.  For over seventeen years, we have consistently applied the presumption that an unrealized loss of 20% or more continuously for six months or more is other-than-temporary, in addition to issuer specific events.  Our adoption of the guidance on “Recognition and Presentation of Other-Than-Temporary Impairments” effective January 1, 2009, amends the determination of other-than-temporary impairments for debt securities, but not for equity securities.  For debt securities, the amount of an other-than-temporary impairment related to a credit loss or an impairment on a security we have the intent, at the balance sheet date, to sell before recovery of our cost is recognized in earnings and reflected as a reduction in the cost basis of the security.  The amount of an other-than-temporary impairment on debt securities related to other factors is recorded consistent with changes in the fair value of all other available-for-sale securities as a component of stockholders’ equity in other comprehensive income (loss) with no change to the cost basis of the security.  For equity securities, the amount of an other-than-temporary impairment due to the extent and duration that fair value is below cost, in addition to issuer specific events, is recognized in earnings and reflected as a reduction in the cost basis of the security.

 

39



 

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

 

At September 30, 2009, gross unrealized gains and losses in our investment portfolio were as follows:

 

 

 

Unrealized

 

(Dollars in thousands)

 

Gains

 

(Losses)

 

Fixed maturity securities, including short-term investments

 

$

60,964

 

$

(9,536

)

Equity securities

 

4,233

 

(44

)

Total unrealized gains (losses)

 

$

65,197

 

$

(9,580

)

Percent of total investment portfolio

 

3.2

%

0.5

%

 

The table below sets forth information about securities with unrealized losses at September 30, 2009:

 

(Dollars in thousands)

 

Fixed
Maturity
Securities,
Including
Short-term
Investments (1)

 

Equity
Securities

 

Total

 

Securities with unrealized losses less than 20% of cost:

 

 

 

 

 

 

 

Number of issues

 

35

 

1

 

36

 

Fair value

 

$

215,875

 

$

302

 

$

216,177

 

Unrealized losses

 

(9,536

)

(44

)

(9,580

)

Securities with unrealized losses greater than 20% of cost for a continuous period of less than six months:

 

 

 

 

 

 

 

Number of issues

 

 

 

 

 

 

 

Fair value

 

 

 

 

 

 

 

Unrealized losses

 

 

 

 

 

 

 

Securities with unrealized losses greater than 20% of cost for a continuous period of six months or more:

 

 

 

 

 

 

 

Number of issues

 

 

 

 

 

 

 

Fair value

 

 

 

 

 

 

 

Unrealized losses

 

 

 

 

 

 

 

Total:

 

 

 

 

 

 

 

Number of issues

 

35

 

1

 

36

 

Fair value

 

$

215,875

 

$

302

 

$

216,177

 

Unrealized losses

 

(9,536

)

(44

)

(9,580

)

 


(1)          For fixed maturity securities, cost represents amortized cost.

 

We believe that our unrealized losses at September 30, 2009 are not other-than-temporary impairments based on our current understanding of the issuers of these securities.  As of September 30, 2009, we have not made a decision to sell any securities with unrealized losses and we have adequate liquidity and will not be required to sell these securities before recovery of their cost basis.

 

The scheduled maturity dates for fixed maturity securities, including short-term investments, with unrealized losses at September 30, 2009 are shown below.  Actual repayments may differ from those scheduled as a result of prepayments by the issuers.

 

(Dollars in thousands)

 

Unrealized Losses

 

Fair Value

 

Due in 1 year or less

 

$

(435

)

$

41,575

 

Due after 1 year through 5 years

 

(5,158

)

90,777

 

Due after 5 years through 10 years

 

(2,966

)

73,494

 

Due after 10 years

 

(977

)

10,029

 

Total

 

$

(9,536

)

$

215,875

 

 

40



 

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

 

The following is a summary of losses realized on the sale of securities, excluding short-term investments, for the three and nine months ended September 30, 2009 and 2008, reflecting the period of time that the security had been continuously in an unrealized loss position preceding the sale:

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

 

(Dollars in thousands)

 

2009

 

2008

 

2009

 

2008

 

Fixed maturity securities:

 

 

 

 

 

 

 

 

 

Realized losses on sales

 

$

(1,479

)

$

(704

)

$

(3,908

)

$

(6,249

)

Fair value at the date of sale

 

37,778

 

143,313

 

156,400

 

289,289

 

Number of securities sold

 

11

 

7

 

32

 

22

 

Losses realized on securities with an unrealized loss preceding the sale for:

 

 

 

 

 

 

 

 

 

Less than 3 months

 

$

(51

)

$

(261

)

$

(251

)

$

(975

)

3-6 months

 

(26

)

 

 

(551

)

 

 

6-12 months

 

 

 

(241

)

(828

)

(1,949

)

Greater than 12 months

 

(1,402

)

(202

)

(2,278

)

(3,325

)

Equity securities:

 

 

 

 

 

 

 

 

 

Realized losses on sales

 

$

(758

)

$

(353

)

$

(779

)

$

(2,448

)

Fair value at the date of sale

 

18,217

 

3,705

 

19,697

 

29,643

 

Number of securities sold

 

10

 

2

 

11

 

18

 

Losses realized on securities with an unrealized loss preceding the sale for:

 

 

 

 

 

 

 

 

 

Less than 3 months

 

$

(51

)

$

(286

)

$

(72

)

$

(1,601

)

3-6 months

 

 

 

(67

)

 

 

(426

)

6-12 months

 

(233

)

 

 

(233

)

 

 

Greater than 12 months

 

(474

)

 

 

(474

)

(421

)

 

Sales of investments at a loss result from ongoing portfolio management, and may reflect our response to changes in interest rates, changes in our view of the prospects for an issuer or its industry, or changes in our views about appropriate asset concentrations and allocation.  At the time we sold these investments at a loss, the sales were not related to any liquidity needs. At September 30, 2009, those securities which we were holding in our portfolio with an unrealized loss were compatible with our view of appropriate asset allocation and issuer prospects. Any future changes in those assumptions could result in sales at a loss or impairment write-downs of securities.

 

41



 

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

 

Liquidity and Capital Resources

 

Our insurance subsidiaries generally create liquidity because insurance premiums are collected prior to disbursements for claims which may take place many years after the collection of premiums.  Collected premiums are invested prior to their disbursements for claims, and investment income provides additional cash receipts.  At September 30, 2009 and December 31, 2008, short-term investments and fixed maturity securities maturing within two years in the insurance subsidiaries were $748.0 million and $333.2 million, respectively.  We expect to pay our obligations as they become due from our liquid assets.

 

The following is a summary of our net cash provided by operating activities in the nine months ended September 30, 2009 and 2008:

 

 

 

Nine Months Ended September 30,

 

(Dollars in thousands)

 

2009

 

2008

 

Net cash flow from workers’ compensation operations

 

$

(69,130

)

$

14,577

 

Net cash flow from reinsurance operations

 

(5,293

)

(11,180

)

Investment income received

 

70,228

 

64,191

 

Interest and other expenses paid by parent

 

(10,665

)

(10,011

)

Income taxes refunded (paid)

 

18,200

 

(56,694

)

Net cash provided by operating activities

 

$

3,340

 

$

883

 

 

Net cash flows from our workers’ compensation and reinsurance operations are non-GAAP financial measures that represent the following on a pre-tax basis: premiums collected less losses, loss adjustment expenses, underwriting and other operating expenses paid.  The net cash flows from the insurance operations, in addition to investment income received, interest and other expenses paid by our parent company, and income taxes refunded or paid are included in net cash provided by operating activities, the most comparable GAAP financial measure.

 

Net cash flow from workers’ compensation operations in 2009 decreased as compared to 2008 primarily due to lower workers’ compensation premiums.  In periods in which net cash flow from operating activities is negative, such cash flow is offset by cash flow from investing activities, principally from short-term investments and maturities of longer-term investments.  We maintain a portfolio of invested assets with varying maturities and a substantial amount of short-term investments to provide adequate liquidity.

 

Our insurance subsidiaries are required to have securities on deposit for the protection of injured workers in accordance with various state laws and regulations, primarily in California, our state of domicile.  At September 30, 2009, investments with a fair value of $1.0 billion were on deposit to comply with such laws and regulations.  In addition, California laws and regulations place various restrictions on the types and amounts of investments that may be made by our insurance subsidiaries.

 

Zenith National requires cash to pay dividends declared to our stockholders, make interest and principal payments on our outstanding debt due 2028, fund operating expenses and, from time to time, make capital contributions to Zenith Insurance.  Such cash requirements are generally funded in the long-run by dividends received from Zenith Insurance and financing or refinancing activities by Zenith National.  Cash, short-term investments and other marketable investments of Zenith National were $63.0 million and $82.4 million at September 30, 2009 and December 31, 2008, respectively.   Zenith National’s available invested assets and other sources of liquidity are currently expected to be sufficient to meet its short-term and long-term liquidity requirements.

 

42



 

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

 

Zenith National has an undrawn $30 million revolving credit agreement with Bank of America, N. A. expiring in February 2010.  We do not currently anticipate the need to draw on the line of credit.

 

Our insurance subsidiaries are subject to insurance regulations, which restrict their ability to distribute dividends.  In 2009, Zenith Insurance has the ability to pay up to $111.5 million of dividends to Zenith National without prior approval of the California DOI.  Zenith Insurance paid $45.0 million and $30.0 million in dividends to Zenith National in the nine months ended September 30, 2009 and 2008, respectively.  The restrictions on the payment of dividends have not had, and under current regulations are not expected to have, a material adverse impact on the ability of Zenith Insurance to pay dividends.

 

Critical Accounting Policies and Estimates

 

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires both the use of estimates and judgment relative to the application of appropriate accounting policies.  Our accounting policies are described in the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2008.  We believe that certain matters related to accounting policies and estimates in the areas of loss reserve estimation, investment write-downs and deferred income taxes are particularly important to an understanding of our Consolidated Financial Statements.  These matters are discussed under “Critical Accounting Policies and Estimates” in the Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2008.  Effective January 1, 2009, we adopted the guidance on “Recognition and Presentation of Other-Than-Temporary Impairments” related to recognizing credit related other-than-temporary impairments on debt securities.

 

43



 

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

 

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

 

The fair value of the fixed maturity investment portfolio is exposed to interest rate risk — the risk of loss in fair value resulting from changes in prevailing market rates of interest for similar financial instruments.  However, we have the ability to hold fixed maturity securities to maturity.  We rely on the experience and judgment of senior management to monitor and mitigate the effects of market risk.  We do not utilize financial instrument hedges or derivative financial instruments to manage risks, nor do we enter into any swap, forward or option contracts, but attempt to mitigate our exposure through active portfolio management.  The allocation among various types of securities is adjusted from time to time based on market conditions, credit and liquidity conditions, tax policy, changes in interest rates and other factors.  In addition, we place the majority of our investments in high-quality, liquid securities and limit the amount of credit exposure to any one issuer.  At September 30, 2009, we did not have sub-prime mortgages, derivative strategies, credit default swaps or other credit-enhancement exposures.

 

The table below provides information about our financial instruments for which fair values are subject to changes in interest rates.  For fixed maturity securities, the table below presents fair values of investments held and weighted average interest rates on such investments by expected maturity dates.  Such investments include corporate, municipal and U.S. Government bonds.  The December 31, 2008 table also includes mortgage-backed securities.  For our debt obligations, the table presents principal cash flows by expected maturity dates (including interest):

 

 

 

Expected Maturity Date

 

(Dollars in thousands)

 

2009

 

2010

 

2011

 

2012

 

2013

 

Thereafter

 

Total

 

As of September 30, 2009

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed Maturity Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed rate

 

$

19,729

 

$

150,539

 

$

225,250

 

$

302,776

 

$

381,289

 

$

399,331

 

$

1,478,914

 

Weighted average interest rate

 

4.2

%

2.4

%

2.3

%

3.7

%

3.8

%

5.7

%

3.9

%

Short-term investments

 

$

439,377

 

$

39,975

 

 

 

 

 

 

 

 

 

$

479,352

 

Redeemable securities payable

 

 

 

5,002

 

$

5,002

 

$

5,002

 

$

5,002

 

$

133,525

 

153,533

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2008

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed Maturity Securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed rate

 

$

83,553

 

$

91,530

 

$

299,753

 

$

277,147

 

$

307,015

 

$

559,021

 

$

1,618,019

 

Weighted average interest rate

 

3.4

%

6.6

%

4.9

%

6.3

%

5.6

%

7.6

%

6.2

%

Short-term investments

 

$

241,715

 

 

 

 

 

 

 

 

 

 

 

$

241,715

 

Redeemable securities payable

 

5,002

 

$

5,002

 

$

5,002

 

$

5,002

 

$

5,002

 

$

133,525

 

158,535

 

 

44



 

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

 

Item 4.  Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”)) as of the end of the period covered by this report.  Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed in the reports that we file or submit under the Exchange Act and are effective in ensuring that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 

Changes in Internal Control Over Financial Reporting

 

There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

45



 

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

 

Part II — OTHER INFORMATION

 

Item 6.  Exhibits

 

3.1

 

Amended and Restated Certificate of Incorporation of Zenith National Insurance Corp. filed with the Delaware Secretary of State on May 30, 2006. (Incorporated by reference to Exhibit 3.1 to Zenith’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006.)

 

 

 

3.2

 

Bylaws of Zenith National Insurance Corp. (Incorporated by reference to Exhibit 3.2 to Zenith’s Current Report on Form 8-K filed May 19, 2009.)

 

 

 

10.1

 

Zenith National Insurance Corp. 2004 Restricted Stock Plan, Form of Award Agreement for Employees (performance-based vesting), a copy of which is filed herewith.

 

 

 

10.2

 

Zenith National Insurance Corp. 2004 Restricted Stock Plan, Form of Award Agreement for Employees (time-based vesting), a copy of which is filed herewith.

 

 

 

31.1

 

Certification of the Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a) or Rule 15d-14(a), a copy of which certification is filed herewith.

 

 

 

31.2

 

Certification of the Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a) or Rule 15d-14(a), a copy of which certification is filed herewith.

 

 

 

32

 

Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, a copy of which certification is filed herewith.

 

 

 

99.1

 

Available-for-sale investment portfolio as of September 30, 2009, a copy of which is filed herewith.

 

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ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

 

Signatures

 

Pursuant to the requirements 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.

 

 

 

ZENITH NATIONAL INSURANCE CORP.

 

 

 

 

 

 

 

October 20, 2009

 

By:

/s/ Stanley R. Zax

Date

 

 

Stanley R. Zax

 

 

 

Chairman of the Board and President

 

 

 

(Principal Executive Officer)

 

 

 

 

 

 

 

 

October 20, 2009

 

By:

/s/ Kari L. Van Gundy

Date

 

 

Kari L. Van Gundy

 

 

 

Executive Vice President

 

 

 

and Chief Financial Officer

 

 

 

(Principal Financial and Accounting Officer)

 

Index to Exhibits

 

Number

 

Index

 

 

 

10.1

 

Zenith National Insurance Corp. 2004 Restricted Stock Plan, Form of Award Agreement for Employees (performance-based vesting), a copy of which is filed herewith.

 

 

 

10.2

 

Zenith National Insurance Corp. 2004 Restricted Stock Plan, Form of Award Agreement for Employees (time-based vesting), a copy of which is filed herewith.

 

 

 

31.1

 

Certification of the Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a) or Rule 15d-14(a), a copy of which certification is filed herewith.

 

 

 

31.2

 

Certification of the Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a) or Rule 15d-14(a), a copy of which certification is filed herewith.

 

47



 

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

 

32

 

Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, a copy of which certification is filed herewith.

 

 

 

99.1

 

Available-for-sale investment portfolio as of September 30, 2009.

 

The complete list of all exhibits filed or furnished with this quarterly report on Form 10-Q, including those incorporated by reference, are set forth in Item 6 of this Form 10-Q.

 

48