During the term of the Option and Voting Agreement (which term generally will terminate on the earlier of the Effective Time and the date of termination of the Merger Agreement), ZRC may exercise the Option, in whole, but not in part, if (i) a Third Party Business Combination occurs or (ii) the Merger Agreement is terminated and ZRC is entitled to payment of expenses and a fee pursuant to applicable provisions of the Merger Agreement. If the Option is exercised, the closing of the purchase would be subject to the receipt of all necessary regulatory approvals. During the term of the Option and Voting Agreement, Deere Insurance may not sell, transfer or otherwise dispose of the Deere Insurance Shares. See "Relationship with Deere Insurance -- Control of the Company."
The operating results of the Property and Casualty Industry (the "P&C Industry"), including the Company, are subject to significant fluctuations due to numerous factors including premium rate competition, catastrophic and unpredictable events (including man-made and natural disasters), general economic and social conditions, interest rates and changes in tax laws and regulatory developments. The P&C Industry has been characterized by cycles in which a period of improved profitability has led to increased capacity and more competition, which has resulted in diminished profitability. This part of the cycle has been followed by a reduction in capacity and the partial or complete withdrawal or the insolvency of a number of insurers and reinsurers, leading to decreased competition and improved rates and profitability.
The industry experienced an extended down cycle from 1979 to the end of 1984. Underwriting losses in that period grew significantly as a result of severe price competition and an increase in the frequency and severity of reported losses. The industry was affected by expanding theories of tort and insurer liability and by growing exposure to long-tail risks, such as asbestos and other pollution claims, which were not adequately taken into account in the pricing, terms and conditions of insurance and reinsurance being written. At the same time, premium rates declined as competition in the industry increased. These conditions led to a decline in the surplus of insurers and reinsurers and a number of insurance and reinsurance companies became insolvent or voluntarily withdrew from the market. From 1985 to 1987, the demand for reinsurance increased and reinsurance pricing and underwriting results improved. This attracted increased capacity into the industry as insurers and reinsurers strengthened their surplus through capital infusions and retained earnings. From mid-1987 and continuing through 1994, the P&C Industry experienced increased competition and reduced premium rates. This competition has been much more pronounced in certain areas than in others.
The Company continues to maintain a disciplined investment policy whereby the investment portfolio is invested exclusively in fixed income securities rated "A" or better. This policy is an outgrowth of the Company's investment strategy, which seeks to maximize after-tax investment income through a high-quality, diversified taxable bond and tax-exempt municipal bond portfolio, while maintaining an adequate level of liquidity. Consistent with this policy, the Company has elected to manage its portfolio to maintain yield rather than to pursue a strategy of realizing investment gains. The Company seeks to achieve an appropriate matching of its investments with its reinsurance liabilities. The average effective maturity of the investment portfolio was 3.3 years at December 31, 1994 versus 3.9 years at December 31, 1993.