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4Q2017 GAAP Financial Statements

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4Q2017 GAAP Financial Statements Zenith National Insurance Corp. and Subsidiaries Consolidated Financial Statements and Supplementary Consolidating Information December 31, 2017 and 2016 and for the Three Years Ended December 31, 2017 Zenith National Insurance Corp. and Subsidiaries Consolidated Financial Statements Table of Contents Page Report of Independent Auditors 2 Consolidated Balance Sheets – December 31, 2017 and 2016 4 Consolidated Statements of Comprehensive Income – Years Ended December 31, 2017, 2016 and 2015 5 Consolidated Statements of Cash Flows – Years Ended December 31, 2017, 2016 and 2015 6 Consolidated Statements of Stockholders’ Equity – Years Ended December 31, 2017, 2016 and 2015 8 Notes to Consolidated Financial Statements 9 Report of Independent Auditors on Supplementary Consolidating Information 50 Supplementary Consolidating Balance Sheet – December 31, 2017 51 Notes to Supplementary Consolidating Balance Sheet 52 Report of Independent Auditors To the Management of Zenith National Insurance Corp. We have audited the accompanying consolidated financial statements of Zenith National Insurance Corp. and its subsidiaries, which comprise the consolidated balance sheets as of December 31, 2017 and December 31, 2016, and the related consolidated statements of comprehensive income, cash flows and stockholders’ equity for each of the three years in the period ended December 31, 2017. Management's Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors’ Responsibility Our responsibility is to express an opinion on the consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the Company's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. PricewaterhouseCoopers LLP, 601 South Figueroa Street, Los Angeles CA 90017 T: (213) 356-6000, F: (813) 637-4444, www.pwc.com Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Zenith National Insurance Corp. and its subsidiaries as of December 31, 2017 and December 31, 2016, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2017, in accordance with accounting principles generally accepted in the United States of America. Other Matter Accounting principles generally accepted in the United States of America require that information about incurred and paid claims development that precedes the current reporting period and the historical claims payout percentages included in Note 8 be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Financial Accounting Standards Board (FASB) who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management's responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provide any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Los Angeles, California February 22, 2018 ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, (In thousands, except par value) 2017 2016 Assets: Investments: Fixed maturity securities, at fair value (amortized cost $433,191 in 2017 and $565,099 in 2016) $ 460,349 $ 591,581 Equity securities, at fair value (cost $376,920 in 2017 and $413,035 in 2016) 326,841 271,119 Short-term investments, at fair value which approximates cost 726,952 644,377 Other investments 220,377 142,102 Derivative assets, at fair value (cost $43,017 in 2017 and $41,058 in 2016) 6,804 7,518 Assets pledged for derivative obligations, at fair value (amortized cost $11,858 in 2017 and $19,892 in 2016) 11,858 19,892 Total investments 1,753,181 1,676,589 Cash 13,105 21,409 Accrued investment income 5,533 7,495 Premiums receivable 41,686 36,161 Reinsurance recoverables 54,431 69,657 Deferred policy acquisition costs 12,164 10,928 Deferred tax asset 46,140 105,175 Income tax receivable 3,711 Goodwill 20,985 20,985 Other assets 65,145 57,141 Total assets $ 2,016,081 $ 2,005,540 Liabilities: Unpaid losses and loss adjustment expenses $ 1,191,531 $ 1,208,572 Unearned premiums 88,701 80,400 Policyholders’ dividends accrued 41,995 36,401 Long-term debt 38,196 38,167 Income tax payable 1,526 Derivative liabilities 4,280 3,089 Other liabilities 76,294 69,534 Total liabilities 1,440,997 1,437,689 Commitments and contingencies (see Note 15) Stockholders’ equity: Common stock, $1 par value, 40 authorized shares; 39 shares issued and outstanding 39 39 Additional paid-in capital 398,821 401,249 Retained earnings 180,072 173,430 Accumulated other comprehensive loss (3,848) (6,867) Total stockholders’ equity 575,084 567,851 Total liabilities and stockholders’ equity $ 2,016,081 $ 2,005,540 The accompanying notes are an integral part of these financial statements. 4 ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Year Ended December 31, (In thousands) 2017 2016 2015 Revenues: Net premiums earned $ 811,604 $ 807,258 $ 766,366 Net investment income 30,094 27,075 47,969 Net realized gains (losses) on investments (23) 12,786 28,370 Change in net unrealized gains/losses on fair value option investments 90,321 (73,457) (135,400) Net gains (losses) on derivatives (13,346) (124,720) 44,162 Service fee income 9,622 9,071 8,522 Total revenues 928,272 658,013 759,989 Expenses: Losses and loss adjustment expenses incurred 403,958 360,082 357,381 Underwriting and other operating expenses: Policy acquisition costs 143,239 134,637 130,632 Underwriting and other costs 132,110 130,697 126,954 Policyholders’ dividends 25,307 27,590 27,309 Interest expense 3,321 3,321 3,321 Total expenses 707,935 656,327 645,597 Income before tax 220,337 1,686 114,392 Income tax expense (benefit) 71,935 (2,902) 36,227 Change in tax rate 30,760 Net income $ 117,642 $ 4,588 $ 78,165 Net change in unrealized gains/losses on available-for-sale and other investments, net of tax and reclassification adjustment 571 (3,010) (871) Change in unrealized foreign currency translation adjustment, net of tax 2,448 (424) (1,550) Other comprehensive income (loss) 3,019 (3,434) (2,421) Total comprehensive income $ 120,661 $ 1,154 $ 75,744 The accompanying notes are an integral part of these financial statements. 5 ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31, (In thousands) 2017 2016 2015 Cash flows from operating activities: Premiums collected $ 828,726 $ 815,367 $ 777,803 Investment income received 18,301 28,364 22,312 Losses and loss adjustment expenses paid (407,877) (389,468) (339,358) Underwriting and other operating expenses paid (290,390) (280,795) (264,518) Interest paid (3,292) (3,292) (3,292) Income taxes paid (50,523) (29,722) (65,224) Net cash provided by operating activities 94,945 140,454 127,723 Cash flows from investing activities: Purchases of investments: Fixed maturity securities – fair value option (26,339) (357,633) (67,322) Equity securities – fair value option (26,372) (2,065) (179,585) Other investments (77,346) (73,151) (27,516) Derivatives (1,959) (229) (1,668) Proceeds from maturities and redemptions of investments: Fixed maturities securities – fair
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