Zenith National Insurance Corporation reported net income for the third quarter 2008 of $16.6 million, or $0.44 per share, compared to net income for the third quarter 2007 of $64.5 million, or $1.73 per share. Net income for the nine months ended September 30, 2008 was $86.9 million, or $2.32 per share, compared to net income for the nine months ended September 30, 2007 of $194.3 million, or $5.21 per share.

 

Net income includes net realized losses on investments after tax of $5.8 million and $4.4 million ($0.15 per share and $0.12 per share) in the three and nine months ended September 30, 2008, respectively, compared to realized gains on investments after tax of $3.0 million and $10.3 million ($0.08 per share and $0.28 per share), in the corresponding periods of 2007. Realized losses are attributable to the previously announced impairments of Lehman debt and AIG common stock, partially offset by net realized gains. 

 

Underwriting income before tax from the workers' compensation segment was $15.3 million and $81.8 million in the three and nine months ended September 30, 2008, respectively, compared to $74.7 million and $207.6 million in the corresponding periods of 2007.

 

Workers' compensation calendar year combined ratios, along with a reconciliation to the accident year combined ratios, were as follows:
                                               
Three Months Ended                        Nine Months Ended
                                               
September 30,                             September 30,
                                               
2008                 2007                 2008                 2007

Calendar year combined ratio (1)               
90.0   %             59.5   %          82.4%                63.2%

Prior accident year items:

Favorable loss reserve development             
15.5                 13.5                  13.3                   18.3

(Increase) decrease in policyholders'          
(1.6   )             8.2                      (1.6)                  2.7
dividends

Accident year combined ratio (1)               
103.9  %             81.2   %             94.1   %             84.2%

(1) See Supplemental Financial Information for a description of "Combined
Ratio."

For 2008, pre-tax favorable workers' compensation loss reserve development on prior accident years was $23.6 million in the third quarter compared to $23.2 million and $15.0 million in the first and second quarters, respectively. For 2007, pre-tax favorable workers' compensation loss reserve development on prior accident years was $34.2 million, $44.0 million, $24.9 million and $10.3 million in the first, second, third and fourth quarters, respectively.
 
Total workers' compensation net premiums earned decreased 17.6% in the nine months ended September 30,2008 compared to the corresponding period of 2007. This decrease reflects both the reduction in premium rates due to favorable loss cost trends from the California and Florida legislative reforms, as well as the impact of competition. Insured payroll, our best indicator of exposure, decreased 5.7% in the nine months ended September 30, 2008. For comparison, insured payroll decreased 5.9% in the twelve months ended December 31, 2007.

Consolidated stockholders' equity per share was $28.04, $29.22, and $28.93 at September 30,2008, June30, 2008 and December 31, 2007, respectively. Stockholders' equity at September 30, 2008 and June 30, 2008 is net of unrealized losses in our investment portfolio, after deferred tax, of $1.43per share and $0.28 per share, respectively. December 31, 2007 equity per share includes unrealized gains, after deferred tax, of $0.33 per share. Return on average equity in the nine months ended September 30, 2008 was 11.2% compared to 25.5% in the corresponding period of 2007 and 22.9% in the year ended December 31, 2007. During the nine months ended September 30, 2008, stockholders' equity per share declined 3% due to a 4% decline occurring in the third quarter.
 
Commenting on the results, Stanley R. Zax, Chairman and President, said: "Our investment portfolio at quarter end on a mark to market basis was 96% of cost, a decline of 3% in the quarter. The decline is primarily attributable to widening credit spreads on high-grade corporate securities, although it is possible that some securities may result in future impairment losses in accordance with our accounting policies. We have 30%, or $601 million, of our portfolio in U.S. Government Treasury Bills and other securities maturing in less than 1 year at September 30, 2008. We are obviously in an unprecedented environment with significant volatility, but with a strong capital base the fluctuations in securities values do not impact our business, but as indicated above, stockholders' equity per share is reduced.

We are focused on underwriting quality and our loss ratios are superb. The accident year loss ratio for nine months was 38.9% compared to 33.8% the prior year. During the quarter we increased our estimate of the 2008 accident year loss ratio from the six month ratio of 35.0%, which reduced underwriting income in the quarter. We see continued declines in the number of claims relative to our exposure. Our expense ratios are high and impacting underwriting profitability due primarily to lower premium volume. We continue to see increases in health care costs and as a result we expect to increase rates in California effective January 2009.

 

We are well positioned to take advantage of opportunities due to our financial strength, liquidity and service capabilities."

 

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 release or in other written or oral information conveyed by or on behalf of Zenith are intended to identify forward-looking statements. Zenith undertakes no obligation to update such forward-looking statements, which are subject to a number of risks and uncertainties that could cause actual results to differ materially from those projected. These risks and uncertainties include, but are not limited to the following: (1)impact of the current unprecedented volatility in the financial markets, including the duration of the crisis and the effectiveness of governmental solutions; (2) weakening economy, including impact on our customers' businesses; (3) competition; (4) payroll levels of our customers; (5)adverse state and federal legislation and regulation; (6)changes in interest rates causing fluctuations of investment income and fair values of investments; (7)changes in the frequency and severity of claims and catastrophes; (8)adequacy of loss reserves; (9)changing environment for controlling medical, legal and rehabilitation costs, as well as fraud and abuse; (10)losses associated with any terrorist attacks that impact our workers' compensation business in excess of our reinsurance protection; (11) losses caused by nuclear, biological, chemical or radiological events whether or not there is any applicable reinsurance protection; and (12)other risks detailed herein and from time to time in Zenith's reports and filings with the Securities and Exchange Commission.

 

ZENITH NATIONAL INSURANCE CORP.
Selected Financial Data (Unaudited)

Three Months Ended 09/30,  Nine Months Ended 09/30,
(In thousands, except per share data)           

2008                   2007             2008                  2007
TOTAL REVENUES

$166,952            $215,369     $528,072           $669,992

SELECTED INCOME DATA:
Net investment income after tax (1)                            
$15,475              $17,388        $46,315             $59,284

Net realized (losses) gains on investments after tax (2)
(5,774)                3,056            (4,352)                0,309

Income from investments segment after tax                             
9,701                   20,444           41,963               69,593

Net income                                                     
$16,600               $64,500           $86,900          $194,300
NET INCOME PER COMMON SHARE (1)(2):

Basic                                                          
$0.45                        $1.74                    $2.34                 $5.24

Diluted                                                               
$0.44                        $1.73                    $2.32                 $5.21

CASH DIVIDENDS DECLARED PER COMMON SHARE                       
$0.50                         $0.50                    $1.50                $1.34
STOCKHOLDERS' EQUITY (as of September
30, 2008 and 2007):
Stockholders' equity                                                                         $1,044,555                 $1,078,659
Stockholders' equity per common share (3)                             28.04                     29.10

NUMBER OF COMMON SHARES:
Outstanding (as of September 30, 2008 and 2007)                                                                           
37,254                   37,072
Weighted average for the period -- basic                              
37,248                  37,060              37,190           37,048
Weighted average for the period -- diluted                            
37,424                  37,294              37,387           37,272

(1) Net investment income after tax for the nine months ended
September 30, 2007 includes a $4.9 million, or $0.13 per share,
cash dividend received from a common stock investment.
(2) Net realized losses on investments after tax were $0.15 per
share and $0.12 per share in the three and nine months ended
September30, 2008, respectively, compared to realized gains on
investments after tax of $0.08 per share and $0.28 per share in
the corresponding periods of 2007. Net realized losses on
investments after tax in the three and nine months ended September
30, 2008 include write-downs after tax of $9.9 million and $15.5
million ($0.27 per share and $0.41 per share), respectively. In
September 2008, we recorded impairment charges for our fixed
income investment in Lehman Brothers Holdings Inc. as a result of
its bankruptcy filing, and for our equity investment in American
International Group, Inc. as a result of the substantial decline
in its stock price related to the dilution caused by the
U.S.Government bailout. In June 2008, we recorded impairment
charges on two other securities because we determined that the
decline in fair values was other-than-temporary due to the extent
and duration of the decline. There were no write-downs in 2007.
(3) Stockholders' equity at September
30, 2008 includes net unrealized losses in our investment
portfolio, after deferred tax, of $1.43 per share compared to net
unrealized gains in our investment portfolio, after deferred tax,
of $0.06 per share at September 30, 2007.

ZENITH NATIONAL INSURANCE CORP.
Selected Financial Data (Unaudited)
                                                    
Three Months Ended 09/30,   Nine Months Ended  09/30,
(In thousands)                                            

2008           2007            2008          2007

TOTAL REVENUES:
Net premiums earned                                 
$152,962    $184,612     $466,362    $565,039
Net investment income (1)                                 
22,873         26,056           68,405         89,093
Net realized (losses) gains on investments (2)            
(8,883)         4,701             (6,695)        15,860

$166,952    $215,369        $528,072  $669,992

RESULTS OF OPERATIONS BY SEGMENT (3):
Investments segment:
Net investment income (1)                           
$22,873     $26,056          $68,405        $89,093
Net realized (losses) gains on investments (2)            
(8,883)       4,701              (6,695)         15,860
13,990       30,757             61,710        104,953

Workers' compensation segment (4)                         
15,268       74,743             81,767         207,582
Reinsurance segment (4)                                   
(94)           (3,166)         (107)              (3,526)
Parent (5)                                               
(3,086)      (2,996)       (9,145)             (8,637)
Income before tax                                         
26,078      99,338       134,225            300,372
Income tax expense                                        
9,478       34,838         47,325             106,072

NET INCOME                                          
$16,600   $64,500      $86,900           $194,300

(1) Net investment income before tax for the nine months ended
September 30, 2007 includes a $7.3 million cash dividend received from a common stock investment.

(2) Net realized losses on investments in the three and nine
months ended September 30, 2008 include write-downs before tax of $15.3million and $23.8 million ($9.9 million and $15.5 million after tax or $0.27 per share and $0.41 per share), respectively.

In September 2008, we recorded impairment charges for our fixedincome investment in Lehman Brothers Holdings Inc. as a result of its bankruptcy filing, and for our equity investment in American International Group, Inc. as a result of the substantial decline in its stock price related to the dilution caused by the U.S.
Government bailout. In June 2008, we recorded impairment charges on two other securities because we determined that the decline in fair values was other-than-temporary due to the extent and duration of the decline. There were no write-downs in 2007.
(3) See Supplemental Financial Information for a description of
segment results.
(4) See Property-Casualty Insurance Operations in the following
tables.
(5) Includes interest expense before tax of $1.3 million in both
the three months ended September 30, 2008 and 2007 and $3.9
million in both the nine months ended September 30, 2008 and 2007.

ZENITH NATIONAL INSURANCE CORP.
Selected Financial Data (Unaudited)
                                                                 
Three Months Ended September 30,
(Dollars in thousands)                                           
2008                            2007
PROPERTY-CASUALTY INSURANCE OPERATIONS:
Gross premiums written (1):
Workers' compensation:
California                                                       
$86,750  56.2%           $103,528  55.6%
Outside California                                                  
67,439   43.7              82,522  44.4
Total workers' compensation                                          
154,189  99.9             186,050  100.0
Reinsurance (2)                                                      
225       0.1              32
                                                                 
$154,414     100.0  %       $186,082  100.0  %
Net premiums written (1):
Workers' compensation:
California                                                       
$84,119    56.2   %      $100,630   55.6%
Outside California                                                   
65,370     43.7            80,475   44.4
Total workers' compensation                                          
149,489    99.9           181,105   100.0
Reinsurance (2)                                                      
231        0.1             10
                                                                 
$149,720   100.0  %       $181,115  100.0%
Net premiums earned:
Workers' compensation:
California                                                       
$85,990    56.2%         $103,315     56.0%
Outside California                                                    66,741           43.6          81,287     44.0
Total workers' compensation                                          
152,731    99.8           184,602    100.0

Reinsurance (2)                                                      
231         0.2            10
                                                                 
$152,962     100.0%       $184,612    100.0%

Underwriting income (loss) before tax/combined ratio of (1):
Workers' compensation                                            
$15,268    90.0%         $74,743      59.5%

Reinsurance (2)                                                      
(94)      NM    (3,166)    NM

Workers' compensation calendar year
combined ratios, along with a reconciliation to the accident year
combined ratios, follows (1):
                                                   
Three Months Ended 09/30/08  Three Months Ended , 09/30/08
                                                   
Calendar Favorable  Current        Calendar  Favorable Current
Year    (Unfavorable) Accident      Year   (Unfavorable)  Accident
            Prior Period     Year               Prior Period    Year
            Development                              Development

 

Losses                                             
33.9%   13.0%          46.9%        19.%      11.9%     31.1%
Loss adjustment expenses                           
15.2         2.5            17.7           13.6          1.6          15.2
Underwriting and other operating expenses (3)      
40.9        (1.6)          39.3            26.7          8.2          34.9
Combined ratio                                     
90.0 %    13.9%      103.9%        59.5%      21.7%      81.2%

(1) See Supplemental Financial Information for a description of
segment results, "Premiums Written,"
"Underwriting Income (Loss)"
and "Combined Ratio."
(2) 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.
(3) Prior period development for underwriting and other operating
expenses represents changes in estimated policyholders'
dividends for prior accident years.
NM = Not Meaningful

ZENITH NATIONAL INSURANCE CORP.
Selected Financial Data (Unaudited)
Nine Months Ended September 30,
(Dollars in thousands)                                           
2008                              2007
PROPERTY-CASUALTY INSURANCE OPERATIONS:
Gross premiums written (1):
Workers' compensation:
California                                                       
$260,989  54.5%       $319,968   55.0 %
Outside California                                                   
216,730   45.3              261,101   44.9
Total workers' compensation                                          
477,719   99.8             581,069    99.9
Reinsurance (2)                                                      
1,030         0.2                     358     0.1
                                                                 
$478,749   100.0%      $581,427  100.0%
Net premiums written (1):
Workers' compensation:
California                                                       
$253,324   54.6%         $309,178   55.0 %
Outside California                                                   
210,007    45.2              253,029   45.0
Total workers' compensation                                          
463,331    99.8              562,207  100.0
Reinsurance (2)                                                      
1,038      0.2               347
                                                                 
$464,369    100.0  %      $562,554      100.0%

Net premiums earned:
Workers' compensation:
California                                                       
$254,508   54.6%       $315,131        55.8%
Outside California                                                   
210,816    45.2         249,561         44.2
Total workers' compensation                                          
465,324    99.8         564,692        100.0
Reinsurance (2)                                                      
1,038       0.2         347
                                                                 
$466,362  100.0%      $565,039         100.0%
Underwriting income (loss) before tax/combined ratio of (1):
Workers' compensation                                            
$81,767    82.4   %   $207,582          63.2%
Reinsurance (2)                                                      
(10)       NM         (3,52)            NM

Workers' compensation calendar year
combined ratios, along with a reconciliation to the accident year
combined ratios, follows (1):
                                                   
Nine Months Ended 09/30/08      Nine Months Ended 09/30/07
                                                   
Calendar Favorable Current          Calendar FavorableCurrent
                                                 
Year (Unfavorable) Accident         Year (Unfavorable)  Accident
                                                                     
          Prior Period   Year                     Prior Period    Year
                                                                     
           Development                            Development

 

Losses                                             

27.4%     11.5%    38.9%  17.8%   16.0%   33.8%

Loss adjustment expenses                           
14.5      1.8      16.3   13.0     2.3    15.3

Underwriting and other operating expenses(3)      
40.5     (1.6)     38.9   32.4     2.7    35.1

Combined ratio                                     
82.4%    11.7%     94.1%  63.2%   21.0%   84.2%

(1) See Supplemental Financial Information for a description of
segment results, "Premiums Written,"
"Underwriting Income (Loss)"
and "Combined Ratio."

(2) 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.

(3) Prior period development for underwriting and other operating
expenses represents changes in estimated policyholders'
dividends for prior accident years.

NM = Not Meaningful

ZENITH NATIONAL INSURANCE CORP.
Supplemental Financial Information (Unaudited)

HOW WE REPORT OUR RESULTS
 
Our business is comprised of the following segments: investments, workers' compensation and reinsurance. In September 2005, we exited the reinsurance business. Results of the investments segment include net investment income and net realized gains or losses on investments. We do not allocate investment income to other segments. Income (loss) before tax from the workers' compensation and reinsurance segments is determined by deducting losses and loss adjustment expenses incurred and underwriting and other operating expenses from net premiums earned (this result is also known as underwriting income or loss). The parent loss includes interest expense and the general operating expenses of the holding company, Zenith National Insurance Corp.

 

NON-GAAP MEASURES

 

In addition to the financial measures presented in the consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"), we also use certain non-GAAP financial measures to analyze and report our financial results. Management believes that these non-GAAP measures, when used in conjunction with the consolidated financial statements, can aid in understanding our financial condition and results of operations. These non-GAAP measures are not a substitute for GAAP measures, and where these measures are described we provide information that reconciles the non-GAAP measures to the GAAP measures reported in our consolidated financial statements.
 
Combined Ratio
 
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.

 

Net Cash Flow From the Workers' Compensation Business
 
Net cash flow from our workers' compensation business is a non-GAAP financial measure that represents the net cash flow generated by deducting from workers' compensation premiums collected during the period the amount of workers' compensation losses and loss adjustment expenses paid and workers' compensation underwriting and other operating expenses paid during the applicable period. We provide this measure to assist in understanding the change in the net cash provided by (used in) operating activities in the periods presented, given that we exited the reinsurance business in 2005. Net cash flow from the workers' compensation business does not include the following: premiums collected, losses paid and underwriting and other operating expenses paid in the reinsurance business; investment income received; interest and other expenses paid by our parent company; and income taxes paid, all of which are included in net cash provided by (used in) operating activities, the most comparable GAAP financial measure of net cash flow. The following table provides a reconciliation of the net cash flow from our workers' compensation business to the net cash provided by (used in) operating activities:

 

Premiums Written
 
Gross premiums written is a non-GAAP financial measure representing the amount of premiums we have billed to our policyholders in the applicable period. It is indicative of the amount of cash premium, before commission expenses, that we expect to receive from our policies. Net premiums written are premiums we have billed to our policyholders less any reinsurance premiums ceded. Net premiums earned, a GAAP measure, represent the portion of premiums written that is recognized as earned in the consolidated financial statements for the periods presented. Premiums are earned on a pro-rata basis over the term of the policies or reinsurance contracts. The following table provides a reconciliation of workers' compensation gross and net premiums written to net premiums earned: 

 

Three Months Ended September 30, 2008 (In thousands)    

Workers' Compensation: 
                                               2008             2007
                                      
Gross premiums written          154,189       186,050
Ceded Premiums written           (4,700)       (4,945)
Net premiums written             149,489        181,105
Change in unearned premiums,
net of reinsurance                       3,242           3,497
Net premiums earned              152,731       184,602                    
                                            

Nine Months Ended September 30, 2008:
(in thousands)
Workers' Compensation:

                                                    2008          2007

Gross premiums written           477,719      581,069  
Ceded Premiums written          (14,388)      (18,862)
Net premiums written               465,324      562,207
Change in unearned premiums,
net of reinsurance                          1,993        2,485
Net premiums earned                465,324      564,692

 

SOURCE: Zenith National Insurance Corp.

 

Zenith National Insurance Corp.
William J. Owen
Senior Vice President, Investor Relations
818-676-3936