Zenith soaring to new highs despite industry uncertainty.

THANKS to its workers compensation insurance business in California, Woodland Hills-based Zenith National Insurance Corp. is experiencing its biggest numbers ever.

Because workers' compensation represents about 90 percent of Zenith's business with the bulk coming from California and Florida, the company's latest revenue figures show a marked improvement over last year.

For the Corporate quarter ending Sept. 30, Zenith reported a $16.1 million profit or $0.85 per share on revenue of $218.4 million, compared with $8.7 million profit or $0.46 per sham on revenue of $163 million fur the year-earlier period.

During the quarter, workers' compensation premiums written grew by 39 percent during the quarter compared to figures from a year earlier. In California alone, the number of workers compensation premiums written increased by 62 percent over the same period last year, the company said.

Stanley Zax, company chairman and president, refused to comment. But in a statement. he said the company's performance was due to "the favorable rate environment, increased cash flows and our focused service strategy."

With workers comp rates on the increase, the company's numbers figure to continue to climb, say analysts like Ira Zuckerman of Connecticut-based Nutmeg Securities Inc.

"They're very competitive in pricing and they're basically one of the few companies specializing in that that are left standing," Zuckerman said.

As workers' comp rates began climbing, more companies left their longstanding insurance carriers to go with the state's Insurance Fund which offered worker's comp insurance at lower rates than many insurance carriers, Zuckerman said.

This move, he said, forced many carriers out of business or away from the segment altogether.

"They were able to survive because they were affordable and provided good customer service," Zuckerman said.

"Their strategy has been to focus on medium to small businesses instead of the big ones which change carriers a lot, and that's helped them."

It was just a few years ago that Zenith was facing tough times as its market share declined and its revenue continued to drop. The company's troubles begun in the mid-1990s when laws were passed allowing insurers to set their own premium rates.

Competition

The deregulation, coupled with a drop in claims forced insurers to cut their rates to better compete.

But in 2001, Zenith's fortunes turned when state regulations required companies to have more workers' comp coverage. This regulatory change set off a chain reaction in the market that pushed workers' comp insurance to increase to increasingly unaffordable levels.

The company managed to grow its business by consistently beating its competitors with lower rates.

As the company's finances improved its stock has continued to climb. So far this year, its shares have remained around its 52-week high of $30.90 leached on Nov. 3, closing last Thursday at $31.58.

Zuckerman projects the stock will hit $45.12 by next year, but cautioned all could change, depending on whether the state legislature and Gov.-elect Arnold Schwarzenegger will be able to revamp the workers' comp system.

"It they force a rate cut and a cost cut on the industry at the same time, you can still make money, but costs need to be cut if that's going to happen," Zuckerman said.

The trouble with the industry, he said, are regulations that allow seemimg unlimited visits to chiropractors and doctors, increasing costs for insurers and employers.

"There are just too many phony doctors and chiropractors out there that keep workers comp costs high," he said.

Today, the company's cash flow has been improving, with about $179 million in cash set aside for future claims and a debt of $186 million.

Zuckerman predicted costs of premiums will go down, but that Zenith will continue to grow its business albeit at a slower clip than this year.

Zenith National Insurance Corp.

YEAR (Dec. 31)                    2002     2001

Revenue (millions)              $602.2   $537.2
Cost of Sales (millions)         442.1    432.3
Operating Expenses (millions)    161.4    146.2
Operating Income (millions)      (1.3)   (41.3)
Net Income (millions)             10.2   (25.9)

SUMMARY

Business: Workers compensation insurer

Headquarters: Woodland Hills

CEO: Stanley Zax

Market Cap: $581.3 million Dividend Yield: 3.24%

Total Liabilities: $1.5 billion P/E:18.18

Long-Term Debt: $186 million