Rising value of junk bonds spurs Zenith: 1st quarter income up 78%, per share earnings rise 86%.

Rising value of junk bonds spurs Zenith

Zenith National Insurance Corp.'s net income leaped 78 percent to $12.33 million in the first quarter ended March 31 from $6.92 million in 1990's like quarter, and net per share vaulted 86 percent to 65 cents from 35 cents.

The Woodland Hills-based company announced the dramatic turnaround Wednesday after recording a loss of $1.75 a share in 1990's fourth quarter and a loss of 47 cents a share for the full year. Last year's results were pummeled primarily by after-tax losses of $50.5 million, equal to $2.57 a share, related to reserves, writedowns and sales of principally noninvestment grade securities.

Thus, the market value of Zenith's portfolio of debt securities was pounded down to 94 percent of their carrying value last Dec. 31. However, the junk bond rally during this year's first quarter helped to increase the market value of Zenith's debt portfolio to about 98 percent of carrying value, remarked Stanley R. Zax, chairman, president and chief executive officer.

That is, Zax said, the carrying value of bonds exceeded their market value by $12.20 million at March 31 this year compared with $35.06 million last Dec. 31 and $47.66 million on March 31, 1990.

The rule for insurance companies, he explained, is they carry their debt portfolio investments at cost unless they default; defaulted issues then are carried at estimated market price. During the fourth quarter, Zax related, Zenith sold securities that had defaulted and established reserves for securities that might default.

Since Dec. 31, he continued, market values of Zenith's bond portfolio holdings have risen. Indeed, Zax reported, first-quarter earnings even included an after-tax capital gain of $1.84 million, equal to a dime a share, compared with a loss of $783,000 (4 cents a share) realized in last year's first quarter, he said.

However, Zax noted, Zenith wrote off the preferred stock the company had held for a decade of First Executive Corp., a West Los Angeles-based insurance holding compnay that discontinued preferred dividend payments late last year. First Executive's principal subsidiary, West L.A.-based Executive Life Insurance Co., was put under regulatory control April 11 by California's insurance commissioner because of the asserted "hazardous" financial condition.

Much of the troubles at First Executive and Executive Life stemmed from large purchases of high-yield, high-risk junk bonds from Drexel Burnham Lambert's Beverly Hills junk bond chief, Michael Milken. A confessed felon, Milken now is serving time in federal prison, and many of the bonds he sold to First Executive/Executive Life and others subsequently soured.

Because Milken and Zax are cousins, Zenith often is presumed to have bought a ton of Drexel junk, but that is not so, Zax stressed: Zenith's "noninvestment-grade securities were 9.7 percent of assets at March 31, 1991, compared with 10.5 percent at Dec. 31, 1990."

That, of course, is well below the maximum of 20 percent being discussed in Sacramento for insurance companies licensed to peddle policies in California, he observed. Snorting, Zax declared it was "Alice in Wonderland" thinking to allow purchases of common stocks but to limit junk bonds to 20 percent of assets although bonds are senior to stock in paying investment income and in liquidation.

Zenith's investment portfolio, he quickly added, has "no real estate, no mortgages and no common stocks."

Besides the improved portfolio performance, Zenith benefited from increased insurance premiums and improved underwriting experience in 1991's first quarter, Zax indicated. In 1990's first quarter, he said, Zenith swallowed $2.7 million of pre-tax catastrophe losses related to storm damage in Europe last year.

Per-share figures benefited also from stock repurchases (at an average cost of $13.75 a share through Dec. 4) that reduced the number of outstanding common shares by nearly 5 percent - to 19.02 million at March 31, 1991.

Zax cautioned, though: "Reported results exclude any potential impact that would arise if the insurance commissioner deems the company's rates afford it other than a |fair rate of return' in accordance with the California Supreme Court's directive on Proposition 103."

Investors liked Zenith's May 1 announcement of dramatically improved earnings, for the stock's price closed at $15.50 a share - up 75 cents on the day. That was up 57 percent from the 52-week low of $9.875 a share but 15 percent below the high of $18.25.