CORPORATE FOCUS—Zenith National Insurance Corp

Woodland Hills-based Zenith National Insurance Corp., a workers’ compensation insurer, has been pummeled the last six years. The company has lost about half its California customer base in that time period and has reported growing losses each year. Earlier this year, it was downgraded by Moody’s Investor Services (which rates an insurance firm’s ability to pay on premiums) from stable to negative because of its financial condition. For the second quarter ended June 30, Zenith reported a net loss of $19.6 million ($1.14 per share) compared with a net loss of $3.4 million (20 cents per share) for the same period a year ago. Revenues were $110.8 million versus $106.5 million. Despite the problems, investors appear to be standing by the company. Zenith stock is trading around $22 a share, up from its 52-week low of $19.29 but still below its 52-week high of $26.69. The reason is that workers’ comp rates are again on the rise. And analysts believe rates will continue to increase over the coming years, making it possible for Zenith to turn its losses around within two years. “Their rates are going up,” said analyst Ira Zuckerman of Nutmeg Securities LTD, which tracks Zenith stock. “I still think they’re attractive. They’ve got the best management in the business, and they’ve done the right things.” Of the two analysts polled by Zack’s Investment Research, one rates the stock a strong buy and the other a hold. Analysts expect the company to report a loss of 64 cents a share for the year ending Dec. 31, 2000, compared to a gain of 66 cents a share for the year ending Dec. 31, 2001. Zenith’s troubles began in the mid-1990s, like most workers’ comp insurers. It was then that laws changed allowing insurers to set their own premium prices. At the same time, the number of claims dropped. Competition in California, the biggest market in the country, increased, with insurers quickly slashing rates to compete for more customers. After the amount of money paid on claims began climbing, cutthroat competition kept premiums low and insurers throughout the state and country had to eat the losses. Prices in California for workers’ comp insurance have dropped an average 50 percent from 1994 to 1999 but have began increasing this year as changes in state law have mandated that employers have greater coverage. “Insurers under-priced the business for a period of time and underestimated what they paid on clients,” Zuckerman said. “Zenith has done better than most in a bad situation.” Rather than cut their prices as much as many other insurers, Zenith only made modest decreases. Because of that, they lost customers from 1994 to 1996, when most other workers’ comp insurers reported increases in their customer bases. “That was the only way we felt we could survive,” said Stanley Zax, chairman and president of Zenith. “We maintained our financial strength, but it was not enough business to pay our fixed expenses because our volume dropped. We didn’t think (the slashed prices) would last that long.” In late 1998, Zenith sold off its property-casualty insurance operation, CalFarm Insurance Co., for $104.3 million to help cover growing losses. But in the last year, the market has begun to change. Zenith will report an increase in the number of customers for 2000, and its prices in California have increased 30 percent over the past year, Zax said. “Prices are going back up. They’re still not up to something healthy yet,” he said. “I suspect the year 2000 will mark the beginning of some long-term change in the pricing.” Zax said it will take several more years of price increases before the market returns to levels that will allow the company to turn a profit. And while the California market has begun to turn around, workers’ comp insurers in the rest of the country which also suffered from depressed prices are continuing to operate with below-cost pricing. As if workers’ comp troubles weren’t enough, Zenith also has lost money on its reinsurance business. Zax blamed the problems on a series of natural disasters, including tornadoes in the Midwest, hurricanes Floyd and Lenny in the Southeast, and storms that struck Europe. Zenith lost $13 million on its reinsurance business for the second quarter of 2000. The company also plans rate increases in that sector.