-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NwiaoeXGDoLzZM37k9cifyWEto16niQl09Clop97ZB/6QjJ4PJGSQ4nBVtyUpgTB wi5eyugglUo2iCrTsCqhZA== 0001047469-07-001242.txt : 20070216 0001047469-07-001242.hdr.sgml : 20070216 20070216111202 ACCESSION NUMBER: 0001047469-07-001242 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 19 CONFORMED PERIOD OF REPORT: 20061231 FILED AS OF DATE: 20070216 DATE AS OF CHANGE: 20070216 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ZENITH NATIONAL INSURANCE CORP CENTRAL INDEX KEY: 0000109261 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 952702776 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-09627 FILM NUMBER: 07629905 BUSINESS ADDRESS: STREET 1: 21255 CALIFA ST CITY: WOODLAND HILLS STATE: CA ZIP: 91367 BUSINESS PHONE: 8187131000 10-K 1 a2175738z10-k.htm 10-K
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

ý	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2006Commission file number 1-9627
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

ZENITH NATIONAL INSURANCE CORP.

Incorporated in Delaware
21255 Califa Street, Woodland Hills, California 91367-5021
(818) 713-1000

I.R.S. Employer Identification No.
95-2702776

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class		Name of Each Exchange on Which Registered
Common Stock, $1.00 Par Value		New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act: Yes X No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act: Yes No X

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer X Accelerated filer Non-accelerated filer

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act): Yes No X

The aggregate market value of the voting and non-voting common equity of the registrant held by non-affiliates was $1,434,746,000 (based on the closing price for such common equity reported by the New York Stock Exchange for June 30, 2006, the last business day of the registrant's most recently completed second quarter).

At January 31, 2007, there were 37,031,000 shares of Zenith National Insurance Corp. common stock outstanding, net of 7,695,000 shares of treasury stock.

DOCUMENTS INCORPORATED BY REFERENCE

(1) Portions of the Annual Report to Stockholders for fiscal year ended December 31, 2006 — Part I and Part II.

(2) Portions of the Proxy Statement in connection with the 2007 Annual Meeting of Stockholders — Part III.

Table of Contents
Zenith National Insurance Corp. and Subsidiaries

Item	Description	Page
*Part I*
Item 1	Business	1
	General	1
	Glossary of Selected Insurance Terms	1
	Description of the Business	3
	Losses and Loss Adjustment Expense Reserves, Claims and Loss Developments	9
	Reinsurance Ceded	11
	Marketing and Staff	14
	Competition	14
	Regulation	15
Item 1A	Risk Factors	16
Item 1B	Unresolved Staff Comments	21
Item 2	Properties	21
Item 3	Legal Proceedings	21
Item 4	Submission of Matters to a Vote of Security Holders	21
*Part II*
Item 5	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	22
Item 6	Selected Financial Data	23
Item 7	Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations	23
Item 7A	Quantitative and Qualitative Disclosures about Market Risk	23
Item 8	Financial Statements and Supplementary Data	23
Item 9	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	23
Item 9A	Controls and Procedures	23
Item 9B	Other Information	24
*Part III*
Item 10	Directors, Executive Officers and Corporate Governance	25
Item 11	Executive Compensation	25
Item 12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	26
Item 13	Certain Relationships and Related Transactions and Director Independence	26
Item 14	Principal Accountant Fees and Services	26
*Part IV*
Item 15	Exhibits and Financial Statement Schedules	27
Signatures		32
Index to Financial Statements and Schedules		33

PART I

Item 1. Business.
General

Zenith National Insurance Corp. ("Zenith National"), a Delaware corporation incorporated in 1971, is a holding company engaged, through its wholly-owned subsidiaries, Zenith Insurance Company ("Zenith Insurance") and ZNAT Insurance Company ("ZNAT Insurance") (collectively, "Zenith"), in the workers' compensation insurance business, nationally, and the assumed reinsurance business. In September 2005, we announced our exit from the reinsurance business and we ceased writing and renewing assumed reinsurance contracts. Unless otherwise indicated, all references to "Zenith," "we," "us," "our," "Company" or similar terms refer to Zenith National together with its subsidiaries.

Zenith's insurance subsidiaries have been assigned a financial strength rating of A- (Excellent) by A.M. Best Company ("A.M. Best"); A3 (Good) by Moody's Investors Service ("Moody's"); A- (Strong) by Standard & Poor's ("S&P"); and A (Strong) by Fitch Ratings ("Fitch").

At December 31, 2006, Zenith had approximately 1,750 full-time employees. The principal executive offices of Zenith are located at 21255 Califa Street, Woodland Hills, California 91367-5021, telephone (818) 713-1000.

Zenith's Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports, Proxy Statement for its Annual Meeting of Stockholders and Annual Report to Stockholders (which is filed as an exhibit to this report) are made available free of charge on its website at www.thezenith.com as soon as reasonably practicable after such reports have been electronically filed with or furnished to the Securities and Exchange Commission ("SEC"). Also available on our website are the following corporate governance materials: Code of Business Conduct; Code of Ethics for Senior Financial Officers (which applies to Zenith's Chief Executive Officer, Chief Financial Officer, Vice President of Accounting and Controller); Corporate Governance Guidelines; and Charters of the Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee. In addition, amendments to, or waivers of, the Code of Ethics for Senior Financial Officers will be posted to our website or contained in a Form 8-K filed within four business days after any such amendment or waiver. Any of the foregoing material may also be obtained, free of charge by written request to: Corporate Secretary, Zenith National Insurance Corp., 21255 Califa Street, Woodland Hills, CA 91367-5021.

Glossary of Selected Insurance Terms

The following terms when used herein have the following meanings:

Accident year losses		Loss data grouped by the year in which the accident occurred, regardless of when the accident was reported.
Assume		To receive from a ceding company all or a portion of a risk in consideration of receipt of a premium.
Cede		To transfer to an assuming company, or reinsurer, all or a portion of a risk in consideration of payment of a premium.

Combined ratio		Expressed as a percentage, is a key measurement of profitability traditionally used in the property-casualty insurance business. The combined ratio is the sum of the loss and loss adjustment expense ratio and the underwriting and other operating expense ratio. The loss and loss adjustment expense ratio is the percentage of the net incurred loss and loss adjustment expenses to net premiums earned. The underwriting and other operating expense ratio is the percentage of underwriting and other operating expenses to net premiums earned.
Development		The amount by which estimated losses, measured subsequently by reference to payments and additional estimates, differ from those originally reported for a period. Development is favorable when losses ultimately settle for less than the amount reserved or subsequent estimates indicate a basis for reducing loss reserves. Development is unfavorable when losses ultimately settle for more than the levels at which they were reserved or subsequent estimates indicate a basis for reserve increases.
Experience modification factor		A policy premium factor reflecting the insured employer's historical loss experience.
Excess of loss reinsurance		A form of reinsurance in which the reinsurer pays all or a specified percentage of a loss caused by a particular occurrence or event in excess of a fixed amount and up to a stipulated limit.
Incurred but not reported claims		Claims relating to insured events that have occurred but have not yet been reported to the insurer or reinsurer.
In-force premiums		Premiums billed or to be billed on all un-expired policies.
Loss adjustment expenses		The expenses of investigating, administering and settling claims, including legal expenses.
Loss ratio		Net incurred losses expressed as a percentage of net premiums earned.
Loss and loss adjustment expense ratio		The sum of net incurred loss and loss adjustment expenses expressed as a percentage of net premiums earned.
Loss reserves		The balance sheet liability representing estimates of amounts needed to pay reported and unreported claims and related loss adjustment expenses.
Net premiums earned		The portion of net premiums written applicable to the expired period of policies.
Policyholder dividend		A payment to the policyholder on a type of policy upon which a portion of the premium may be repaid to the policyholder after expiration depending upon the loss experience.

Policyholders' surplus		The amount remaining after all liabilities are subtracted from all admitted assets, as determined in accordance with statutory accounting practices. This amount is regarded as financial protection to policyholders in the event an insurance company suffers unexpected or catastrophic losses.
Reinstatement premium		An additional premium paid after a claim on a catastrophe reinsurance contract to renew the contract for the un-expired term.
Reinsurance		A transaction between insurance companies in which an original insurer, or ceding company, remits a portion of the premium to a reinsurer, or assuming company, as payment for the reinsurer's assumption of a portion of the risk.
Retention		The amount of loss(es) from a single occurrence or event which is paid by the company prior to the attachment of excess of loss reinsurance.
Retrocession		A reinsurance of reinsurance assumed.
Retrospectively-rated policy		A policy containing a provision for determining the insurance premium for a specified policy period on the basis of the loss experience for the same period.
Statutory accounting practices		Accounting practices promulgated by the National Association of Insurance Commissioners and prescribed or permitted by the states' departments of insurance. In general, statutory accounting practices address policyholders protection and solvency and are more conservative in presentation of earnings, surplus and assets than accounting principles generally accepted in the United States of America ("GAAP").
Treaty		A contract of reinsurance.
Underwriting		The process whereby an insurer reviews applications submitted for insurance coverage and determines whether to accept all or part, and at what premium, of the coverage being requested.
Underwriting expenses		The aggregate of policy acquisition costs and the portion of administrative, general and other expenses attributable to the underwriting process as they are accrued and expensed.

Description of the Business

We are in the business of managing insurance and investment risk. Our main business activity is the workers' compensation insurance business. We also operated a small assumed reinsurance business from which, in September 2005, we announced our exit and ceased writing and renewing assumed reinsurance contracts. In addition, we maintain a portfolio of investments, principally in fixed maturity securities, funded by the operating cash flows from our insurance businesses and capital. Investment income from the portfolio is impacted by current and historical interest rates and the amount of operating cash flows generated annually from (or used by) the workers' compensation and reinsurance segments. We measure our performance over the long-term by our ability to increase stockholders' equity.

We report our business in the following segments: workers' compensation; reinsurance; investments; and parent. Our real estate segment was discontinued in 2002. The key operating goal for our insurance segments is to achieve a combined ratio of 100% or lower and to achieve a workers' compensation combined ratio that is at least three percentage points lower than the combined ratio of the national workers' compensation industry. Earned premiums, segment results and the combined ratios of our workers' compensation and reinsurance segments and results of our other business segments for each of the three years ended December 31, 2006, are set forth in Note 16 — "Segment Information" of our Consolidated Financial Statements in our 2006 Annual Report to Stockholders and are hereby incorporated by reference.

Workers' Compensation Segment

In the workers' compensation segment, we provide insurance coverage for the statutorily prescribed benefits that employers are required to provide to their employees who may be injured in the course of employment. Our workers' compensation policies are issued to employers who also pay the premiums. The policies provide payments for covered, injured employees of the policyholder for, among other things, temporary or permanent disability benefits, death benefits and medical and hospital expenses. The benefits payable and the duration of such benefits are set by statute, and vary by state and with the nature and severity of the injury or disease and the wages, occupation and age of the employee.

Generally, premiums for workers' compensation insurance policies are a function of: (1) the applicable premium rate; (2) the amount of the insured employer's payroll; and (3) if applicable, a factor reflecting the insured employer's historical loss experience (the "experience modification factor"). Premium rates vary according to the nature of the employee's duties and the business of the employer; for example, in California there are currently approximately 500 different classes into which employees are grouped for rating purposes. The policy premium is computed by applying the applicable premium rate to the payroll in each class of the employer's business. Total policy premium is determined after applying the experience modification factor and a further adjustment, known as a schedule rating adjustment, may be made, in certain circumstances, to increase (debit) or decrease (credit) the policy premium. Schedule rating adjustments are made at the discretion of the underwriter based on the individual risk characteristics of the employer and subject to maximum amounts as established in our rate filings. A deposit premium is paid at the beginning of the policy period, periodic installments are paid during the policy period and the final amount of the premium is generally determined as of the end of the policy period after the policyholder's payroll records are audited.

Our workers' compensation premium revenues will fluctuate depending upon the general level of our rates and the number and size of the businesses we insure. Additional factors impacting our revenues include the general level of employment and wages in the businesses we insure, changes in our insureds' experience modification factors and the amount of schedule rating credits or debits applied by our underwriters, as well as our pricing and underwriting strategy in comparison to our competition.

Except in those states, primarily Florida, where premium rates for workers' compensation insurance are set by State regulations, our premium rates for workers' compensation are determined by our actuaries for each state in which we do business. In California, the state with the largest concentration of our workers' compensation business, insurance companies are required by law to set adequate workers' compensation premium rates for their own use. Although the California Insurance Commissioner does not set workers' compensation premium rates, the California Insurance Commissioner adopts and publishes advisory pure premium rates (pure premium rates are rates that would cover expected loss costs but generally do not contain an element to cover operating expenses or profit). We are not required to use these California advisory rates. Our rates are continually reviewed for adequacy using actuarial analysis of current and anticipated trends in costs.

In certain circumstances, a policyholder may be eligible for a return of a portion of the premium based on the loss experience during the policy term, by way of a dividend, calculated and paid after the policy has expired. Alternatively, the policyholder's premium may be adjusted after expiration using a retrospective-rating formula based on losses sustained under the policy. Such retrospective adjustments can result in additional premium due from the policyholder if loss experience is worse than expected or a premium refund if loss experience is better than expected. Although we offer these types of loss-sensitive policies and have written a small number of them, we prefer to offer our customers a policy with a guaranteed cost based on premium rates, insured employer's payrolls and experience modification factors. In addition, Florida statutes require payment of additional policyholder dividends to Florida policyholders pursuant to a formula based on underwriting results.

Our long-term strategy in the national workers' compensation industry is to attract customers requiring quality services based on adequate premium rates for the exposure. During periods of intense competition or other adverse industry conditions, our premium revenue may be reduced as employers buy elsewhere because we adhere to a long-standing operating principle that we will not compromise the adequacy of our premium rates in order to achieve revenue or market share objectives. Our value proposition is that our services, over the long-run, provide employers the opportunity to reduce their experience modification factor and thereby, their long-term workers' compensation costs. Our loss prevention services focus on workplace safety, accident and illness prevention and safety awareness training. Claims management services include return-to-work programs, case management by nurses for serious injuries and management of medical provider services and billings. Investigation and legal services help to detect and prevent fraud and to pursue favorable resolution of disputed claims. Our premium auditors verify appropriate payroll classifications to assure equitable premium billing. We do not out-source our key workers' compensation services, and we have legal services provided by our in-house attorneys and supporting staff.

During 2006, we wrote workers' compensation insurance in 45 states. Prior to 1992, our workers' compensation segment was concentrated principally in California. We expanded into Texas in 1992 with other states following shortly thereafter. Florida operations commenced with the acquisition of the Associated General Commerce Self-Insurers' Trust Fund ("AGC") on December 31, 1996. On April 1, 1998, Zenith Insurance acquired substantially all of the assets and certain liabilities of RISCORP, Inc. and certain of its subsidiaries (collectively, "RISCORP") related to RISCORP's workers' compensation business (the "RISCORP Acquisition"). The RISCORP Acquisition added workers' compensation business in Florida and other states in the Southeast, principally in North Carolina and Alabama. In recent years, California has offered us the best opportunity to profitably expand our business and has become the state in which the majority of our net premiums are derived. Florida is our second largest state of operations. Net premiums earned for each of the years ended December 31, 2006, 2005 and 2004 for California, Florida and other states, are set forth in the table below:

(Dollars in thousands)	2006		%		2005		%		2004		%
California	$	582,282	62.5	%	$	762,095	68.4	%	$	621,284	68.9	%
Florida		207,200	22.2			208,128	18.7			152,007	16.9
Other		142,257	15.3			143,971	12.9			128,756	14.2

Net Premiums Earned	$	931,739	100.0	%	$	1,114,194	100.0	%	$	902,047	100.0	%

Our workers' compensation operations are conducted through offices maintained throughout the country. There are ten office locations in California, three in Florida, two in Illinois and offices in each of Texas, Pennsylvania, North Carolina and Alabama.

The concentration of our business in California and Florida makes the results of our operations dependent on trends that are characteristic of these states as compared to national trends. For

example, state legislation, local competition and workers' compensation cost inflation or deflation trends in such states are material to our results.

In California, workers' compensation reform legislation was enacted in October 2003 and April 2004 with the principal objectives of lowering the trend of increasing costs and improving fairness in the system. The principal changes in the legislation of October 2003 included: 1) a reduction in the reimbursable amount for certain physician fees, outpatient surgeries, pharmaceutical products and certain durable medical equipment; 2) a limitation on the number of chiropractor and physical therapy office visits; 3) the introduction of medical utilization guidelines; 4) a requirement for second opinions on certain spinal surgeries; 5) a repeal of the presumption of correctness afforded to the treating physician, except where the employee has pre-designated a treating physician; and 6) a presumption of correctness is to be afforded to the evidence-based medical utilization guidelines developed by the American College of Occupational and Environmental Medicine.

The principal changes in the legislation of 2004 included: 1) employers and insurers are authorized, beginning in 2005, to establish networks of medical providers within which injured workers are required to be treated (an independent medical review would be allowed if the claimant disputes the treatment recommended in the network only after obtaining the opinions of three network physicians); 2) within one working day of filing a claim form, a claimant must be afforded necessary treatment for up to $10,000 in medical fees (however, employers and insurers still have up to 90 days to investigate the compensability of a claim); 3) a methodology for apportioning disabilities between covered, work-related and prior causes was created such that employers are only liable for the portion of permanent disability that accrues from a covered, work-related injury; 4) Temporary Disability ("TD") benefits are not to exceed 104 weeks within 2 years of the first TD payment, but cases with certain specified injuries will be allowed up to 240 weeks of TD benefits within 5 years of the date of injury; 5) Permanent Disability ("PD") ratings are based on a new, objective disability rating schedule effective January 1, 2005 (and for some injuries prior to January 1, 2005) as well as upon the injured workers' diminished future earning capacity, rather than their ability to compete in the open labor market (PD benefits were revised to make available higher benefits to more severely injured workers and lower benefits to less severely injured workers); 6) incentives were created to encourage employers to offer return-to-work programs; and 7) new medical-legal processes for resolving disputed medical issues were created.

In Florida, legislation was enacted effective October 1, 2003, which provides changes to the workers' compensation system. Such changes are designed to expedite the dispute resolution process, provide greater compliance and enforcement authority to combat fraud, revise certain indemnity benefits and increase medical reimbursement fees for physicians and surgical procedures. One of the intended outcomes of the legislation is a reduction in the overall costs associated with delivering workers' compensation benefits in the state of Florida.

The short-term data for loss costs indicate a favorable impact from the legislative reforms. As a result, we have reduced our California premium rates in a manner that we believe deals prudently with the uncertainty about the long-term outcome of loss cost trends for recent accident years. Future California premium rate decisions will be based on the data about loss cost trends or upon any modifications to the workers' compensation system while maintaining our goal of achieving a combined ratio under 100%.

During the 2006 California legislative sessions, there were no legislative changes to the workers' compensation reforms. We anticipate on-going discussions regarding the implementation of the California reforms particularly as they relate to determination of disability and the level of benefits to injured workers with permanent disabilities. We cannot currently predict if any substantial changes will occur.

Reinsurance Segment

In 2005, we exited the reinsurance business and we ceased writing and renewing assumed reinsurance contracts. We earned premiums and were subject to continuing exposure to losses until our in-force assumed reinsurance contracts expired. The majority of our excess of loss assumed reinsurance contracts expired on December 31, 2005 and the remainder fully expired in 2006. Also, under our quota share assumed reinsurance contracts we assumed premiums through the third quarter 2006. However, premiums earned from assumed reinsurance contracts in 2006 were substantially less than in 2005. We will be paying our assumed reinsurance claims for several years and the results of the reinsurance segment, principally consisting of any changes to loss reserve estimates and resulting adjustments to contractual premium, will continue to be included in the results of continuing operations.

Reinsurance is a transaction between insurance companies in which an original insurer, or ceding company, remits a portion of its premiums to a reinsurer, or assuming company, as payment for the reinsurer's assumption of a portion of the risk. Our reinsurance segment participated in assumed reinsurance transactions in which, typically, the reinsurance coverage being purchased by the ceding company is shared among a number of assuming companies. In recent years, our focus was primarily on assumed reinsurance of worldwide property losses from catastrophes and large property risks. In the insurance industry, catastrophes are events such as tornadoes, hurricanes and earthquakes that cause widespread damage. Insurance and reinsurance companies purchase catastrophe reinsurance to protect themselves from the aggregation of losses caused by a large number of claims from policies written in the impacted geographical area. Contract language in catastrophe reinsurance contracts defines which perils will or will not be covered by the reinsurer and certain events such as acts of terrorism or flooding may not be covered, depending upon the terms of the contract.

We participated in reinsurance contracts that were either proportional in nature, in which the assuming company shares pro rata in the premiums and losses of the ceding company (quota share reinsurance), or arrangements under which the assuming company pays losses in excess of a certain limit in return for a premium, usually determined as a percentage of the ceding company's primary insurance premiums (known as excess of loss reinsurance).

The income or loss and the combined ratio of the reinsurance segment fluctuated significantly depending upon the incidence or absence of large catastrophe losses. Consequently, the results of our reinsurance business should be evaluated over the long-term. Since its inception in 1985, the combined ratio of our reinsurance segment through December 31, 2006 was 111.0% on $829.2 million of net premiums earned. Loss reserves, net of reinsurance, at December 31, 2006 in our reinsurance segment were $106.1 million, or 8.1% of consolidated net loss reserves.

In 2006, 2005 and 2004, we recorded losses in our reinsurance segment due to catastrophe losses. The results of the reinsurance segment for the year ended December 31, 2006 include $19.9 million ($12.9 million after tax), of increased estimated losses attributable to claims and information we received in 2006 regarding losses primarily from Hurricanes Wilma and Rita which occurred in the second half of 2005. In 2005, catastrophe losses were $69.2 million ($45.0 million after tax), attributable to Hurricanes Katrina, Rita and Wilma. In 2004, catastrophe losses were $21.1 million ($13.7 million after tax) principally from Hurricanes Charley, Frances, Ivan and Jeanne offset, in part, by a $5.7 million reduction of previously established loss reserves, net of reinstatement premiums, for the 2001 World Trade Center loss.

Estimating catastrophe losses in the reinsurance business is highly dependent upon the nature and timing of the event and our ability to obtain timely and accurate information with which to estimate our liability to pay losses. Estimates of the impact of catastrophes on the reinsurance segment are based on the information that is currently available and such estimates could change based on new information that becomes available or based upon any reinterpretation of existing information.

In addition to property reinsurance we have, historically, written reinsurance for liability insurance, such as general business liability coverage, directors' and officers' liability and excess or umbrella coverage. Although we wrote more of this type of business at the beginning of our involvement in the reinsurance business in 1985 than in the last few years, liability reinsurance constituted about 17% of our earned reinsurance premiums in the ten years ended December 31, 2006.

Investments Segment

Our investments department invests the funds made available by our capital and the net cash flows from operations. The objective of our investments segment is to provide income and realized gains on investments, primarily from investments in fixed maturity securities, consistent with policy guidelines and taking into consideration state regulatory restrictions on investments in our insurance subsidiaries. We manage our investment portfolio ourselves and do not rely on external investment managers. The allocation of the portfolio among various types of securities is adjusted from time to time based on market conditions, credit conditions, tax policy, fluctuations in interest rates and other factors. We do not invest in derivative instruments. At December 31, 2006, our consolidated investment portfolio consisted primarily of high-quality bonds and short-term investments, supplemented by a small portfolio of preferred and common stocks. The portfolio of bonds primarily includes U.S. Government securities, mortgage-backed securities issued by the Government National Mortgage Association, municipal bonds and corporate bonds diversified to produce a reasonable balance of risk and investment income. Of the fixed maturity portfolio, including short-term investments, 93% of the investments were rated investment-grade at December 31, 2006 and 95% at December 31, 2005. At December 31, 2006, $0.9 billion of the investment portfolio was in fixed maturities of two years or less.

As a result of favorable cash flow from our workers' compensation segment, investment income has increased in each of the three years ended December 31, 2006, and is a function of increases in our investment portfolio and higher short-term interest rates during 2005 and 2006.

At December 31, 2006, 90% of the investments in fixed maturity securities and short-term investments were classified as available-for-sale. Stockholders' equity will fluctuate with changes in the fair values of available-for-sale securities. Stockholders' equity decreased by $4.0 million after deferred taxes from December 31, 2005 to December 31, 2006 as a result of changes in the fair values of fixed maturity investments classified as available-for-sale.

From time to time, we also make investments in limited partnerships and real estate joint ventures. The limited partnerships make long-term strategic investments in corporations, many of which are not publicly traded, with a view toward ultimately exiting the investment position, sometimes after many years. In 2006, 2005 and 2004, we realized $1.7 million, $8.3 million and $15.5 million, respectively, of gains from real estate investments.

Income from operations of the investments segment includes investment income and realized gains and losses on investments. We do not allocate investment income to the results of our workers' compensation and reinsurance segments.

Parent Segment

The parent segment represents the holding company activities of Zenith National, which owns, directly or indirectly, all of the capital stock of its insurance and non-insurance subsidiaries. The results of the parent segment reflect the operating expenses incurred in the holding company activities, such as stock exchange listing and other licensing fees; directors' fees; and legal, auditing and other administrative fees. Interest expense incurred on outstanding debt pursuant to financing and refinancing activities is also a part of the parent segment loss.

Discontinued Real Estate Segment

In 2002, we sold our home-building business and related real estate assets to MTH-Homes Nevada, Inc. ("MTH Nevada"), a subsidiary of Meritage Corporation.

In addition to the consideration received in 2002, we were entitled to receive 10% of MTH Nevada's pre-tax net income, subject to certain adjustments, for each of the twelve-month periods ending September 30, 2003, September 30, 2004 and September 30, 2005. We recorded additional gains under the earn-out provision of the sale agreement of $1.9 million ($1.3 million after tax), $2.0 million ($1.3 million after tax) and $1.8 million ($1.2 million after tax) in 2005, 2004 and 2003, respectively. The last such payment under the earn-out provision was received in 2005.

Losses and Loss Adjustment Expense Reserves, Claims and Loss Developments

Accounting for the workers' compensation and reinsurance segments requires us to estimate the liability for the expected ultimate cost of unpaid losses and loss adjustment expenses ("loss reserves") as of the balance sheet date. The adequacy of loss reserves is inherently uncertain and represents a significant risk to the business which we attempt to mitigate by continually reviewing loss cost trends, attempting to set our premium rates to adequately cover anticipated costs and by professionally managing our claims servicing organization. We endeavor to minimize the estimation risk by performing a comprehensive review of our loss reserves every quarter and, in conjunction with actuarial techniques and methods, we employ judgment to establish the most reasonably accurate estimate of loss reserves based on the most recent relevant data. Significant judgment is required to ascertain the relevance of historical payment and claim settlement patterns under current facts and circumstances. No assurance can be given whether the ultimate liability for unpaid losses will be more or less than our current estimates.

The amount by which estimated losses, measured subsequently by reference to payments and additional estimates, differ from those originally reported for a period is known as "development." Development is favorable when losses ultimately settle for less than the amount reserved or subsequent estimates indicate a basis for reducing loss reserves. Development is unfavorable when losses ultimately settle for more than the levels at which they were reserved or subsequent estimates indicate a basis for reserve increases. Favorable or unfavorable development of loss reserves is reflected in our results of operations in the period the changes are made.

Additional information regarding loss reserve estimates and loss reserve development is set forth under "Loss Reserves" in the Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations in our 2006 Annual Report to Stockholders and is hereby incorporated by reference.

The following table shows development of our liability for unpaid losses and loss adjustment expenses as originally estimated in accordance with GAAP at December 31 of each year presented.


(Dollars in thousands)		2006	2005	2004	2003		2002		2001		2000		1999		1998		1997		1996

Liability for unpaid losses and loss adjustment expenses, net		$1,301,076	$1,459,797	$1,212,032	$990,877		$825,869		$742,678		$634,172		$605,250		$708,684		$525,601		$526,427

Paid, net (cumulative) as of:
	One year later		349,910	308,179	298,664		281,043		239,098		243,506		235,968		271,019		195,596		209,346
	Two years later			479,465	484,077		470,663		431,015		370,100		384,011		414,432		284,080		322,519
	Three years later				593,334		590,107		543,067		452,727		457,717		500,672		338,530		373,383
	Four years later						661,999		617,567		517,173		509,915		546,076		378,536		406,597
	Five years later								664,244		563,998		550,698		582,092		400,853		433,583
	Six years later										595,706		582,425		609,369		419,684		449,924
	Seven years later												604,446		630,263		436,585		463,172
	Eight years later														645,272		450,490		475,594
	Nine years later																461,079		485,729
	Ten years later																		494,022

Liability, net re-estimated as of:
	One year later		1,318,475	1,185,132	1,004,243		840,084		771,846		638,519		636,130		753,508		514,234		526,078
	Two years later			1,149,288	1,053,834		905,542		802,822		651,266		635,750		753,511		511,343		520,114
	Three years later				1,066,366		983,004		845,662		670,797		638,920		740,559		503,684		516,184
	Four years later						999,090		907,177		703,470		650,849		751,546		516,426		503,821
	Five years later								917,474		758,129		673,928		752,039		526,524		508,239
	Six years later										765,019		723,829		778,543		525,632		515,205
	Seven years later												731,454		818,529		549,836		513,359
	Eight years later														825,020		579,567		540,178
	Nine years later																583,038		551,825
	Ten years later																		555,243

Favorable (deficient) development, net			141,322	62,744	(75,489	)	(173,221	)	(174,796	)	(130,847	)	(126,204	)	(116,336	)	(57,437	)	(28,816	)
Net liability — December 31,		1,301,076	1,459,797	1,212,032	990,877		825,869		742,678		634,172		605,250		708,684		525,601		526,427
Receivable from reinsurers and state trust funds for unpaid losses		221,204	243,648	270,287	229,872		215,663		204,144		243,711		275,679		288,963		87,665		93,651

Gross liability — December 31,		1,522,280	1,703,445	1,482,319	1,220,749		1,041,532		946,822		877,883		880,929		997,647		613,266		620,078
Re-estimated liability, net			1,318,475	1,149,288	1,066,366		999,090		917,474		765,019		731,454		825,020		583,038		555,243
Re-estimated receivable from reinsurers and state trust funds for unpaid losses			241,491	262,775	255,500		232,632		222,212		239,423		271,615		328,736		127,756		122,669

Re-estimated liability, gross			1,559,966	1,412,063	1,321,866		1,231,722		1,139,686		1,004,442		1,003,069		1,153,756		710,794		677,912
Favorable (deficient) development, gross			143,479	70,256	(101,117	)	(190,190	)	(192,864	)	(126,559	)	(122,140	)	(156,109	)	(97,528	)	(57,834	)

The accounting policies used to estimate the liabilities in the preceding table are described in Note 2—"Summary of Accounting Policies" of our Consolidated Financial Statements in our 2006 Annual Report to Stockholders, and are hereby incorporated by reference.

The first line in the table shows the liability for unpaid losses and loss adjustment expenses, net of reinsurance, as estimated at the end of each calendar year and recorded as of the balance sheet date for each of the indicated years.

The first section of the table following the first line shows the cumulative actual payments of loss and loss adjustment expenses, net of reinsurance, that relate to each year-end liability as they were paid as of the end of subsequent annual periods.

The second section of the table shows revised estimates for each subsequent calendar year of the original unpaid amounts, net of reinsurance, that are based on the subsequent payments plus re-estimates of the remaining unpaid liabilities.

The line labeled "Favorable (deficient) development, net" represents the aggregate change in the initial estimates from the original balance sheet date indicated through December 31, 2006. These amounts have been reported in earnings over time as a component of loss and loss adjustment expenses incurred. The favorable or adverse net development shown in each column should be viewed

independently of the other columns because components of the development shown in recent years are also included as components of development in older years.

The information in the table provides our historical track record of reserving accuracy for unpaid losses and loss adjustment expenses for each calendar year presented. However, since conditions and trends that have affected losses and loss adjustment expense development in the past may not occur in the future in exactly the same manner, if at all, future results may not be reliably predicted by extrapolation of the data presented. We believe our loss reserve estimates are adequate as of the end of 2006. However, due to the inherent uncertainties underlying our loss reserve estimates, and as we receive new information and update our assumptions over time regarding the ultimate liability, our loss reserves may prove to be inadequate to cover our actual losses, or they may prove to exceed the ultimate amount of our actual losses.

Reference is made to the table setting forth the reconciliation of changes in the liabilities for losses and loss adjustment expenses included in Note 8 - "Unpaid Losses and Loss Adjustment Expenses" of our Consolidated Financial Statements in our 2006 Annual Report to Stockholders, which is hereby incorporated by reference.

Net development of losses and loss adjustment expenses shown in the table above include the following:

•: Favorable development of our balance sheet liability recorded as of December 31, 2005 of $141.3 million is attributable to lower estimates of our workers' compensation loss costs principally for the 2005 and 2004 accident years, offset in part, by adverse development of reinsurance reserves related to the 2005 hurricanes.
•: Adverse development of our balance sheet liabilities for 1996 - 2003 is principally attributable to a reallocation of our workers' compensation loss reserves to older accident years in 2005 and 2004 to better reflect the paid claim cost inflation trends.
•: We recorded $34.0 million of additional estimates for 1998 and 1999 catastrophe losses in our reinsurance business during 1999 and 2001.
•: Beginning in 1998, our loss reserve estimates include amounts related to the loss reserves we assumed from RISCORP in the RISCORP Acquisition. In 1999, we recorded $46.0 million of additional reserves, net of reinsurance, associated with an adjustment to the RISCORP purchase price and which was reflected as adverse development of the 1998 loss reserve liability.
•: On March 31, 1999, we sold CalFarm Insurance Company ("CalFarm"), a wholly-owned subsidiary of Zenith Insurance Company, which we had owned since 1985. We retained no liabilities for any of CalFarm's unpaid losses and loss adjustment expenses after the sale. In the preceding table, CalFarm's loss reserves are included in the first line through December 31, 1998. Subsequent payments and re-estimates of CalFarm's loss reserves are included through March 31, 1999, the date of the sale.

Reinsurance Ceded

Excess of loss reinsurance

Excess of loss reinsurance is a form of reinsurance in which the reinsurer pays all or a specified percentage of a loss caused by a particular occurrence or event in excess of a fixed amount (the retention amount) and up to a stipulated limit. In accordance with general insurance industry practices, we purchase excess of loss reinsurance to protect us against the impact of large, irregularly-occurring losses in the workers' compensation segment. Such reinsurance reduces the magnitude of the impact of such losses on net income and the capital of Zenith Insurance. We maintain reinsurance protection for large catastrophe losses up to $200 million in excess of a retention of $1 million except that we retain

50% of any losses between $10 million and $20 million. Catastrophe losses between $150 million and $200 million are covered only for losses in connection with a California earthquake.

Employers Reinsurance Corporation ("Employers Re") provides $9 million of reinsurance protection, per occurrence, for workers' compensation losses in excess of a $1 million retention. The principal companies providing the coverage between $10 million and $200 million are Arch Reinsurance Company, Odyssey America Reinsurance Corporation, Swiss Reinsurance America Corporation, Transatlantic Reinsurance Company, Axis Specialty Limited, ACE Tempest Reinsurance Company, ACE Property and Casualty Insurance Company, Endurance Specialty Insurance LTD, Hanover Reinsurance Company, Liberty Mutual Insurance Company, Aspen Insurance UK LTD, Platinum Underwriters Bermuda, LTD, Catlin Insurance Company, Allied World Assurance Company LTD and various Lloyd's syndicates.

Terrorism Exposure and the Terrorism Risk Insurance Act of 2002

Under our workers' compensation policies, we are required to provide workers' compensation benefits for losses arising from acts of terrorism. The impact of any terrorist act is unpredictable, and the ultimate impact on us will depend upon the nature, extent, location and timing of such an act. Any such impact on us could have a material adverse affect on our business and financial condition.

We have purchased reinsurance protection for domestic acts of terrorism up to $150 million in excess of a $1 million retention and we retain 50% of any losses between $10 million and $20 million. The reinsurance for foreign acts of terrorism is up to $75 million in excess of a $1 million retention and we retain 50% of any losses between $10 million and $20 million. Both of these coverages exclude losses from nuclear, biological and chemical attacks for losses in excess of $20 million and we retain 15% of any such losses between $10 million and $20 million.

In 2005, the Terrorism Risk Insurance Act of 2002 ("Act"), was extended through December 31, 2007. It is unclear at this time whether the Act or a modified version will be extended beyond December 31, 2007. The Act, as modified in 2005, may provide us with reinsurance protection for losses arising out of terrorist acts under certain circumstances and subject to certain limitations. The U.S. Treasury Secretary must certify an act for it to constitute an act of terrorism. The definition of terrorism excludes domestic acts of terrorism or acts of terrorism committed in the course of a war declared by the U.S. Congress. The losses arising from an act of terrorism must exceed a threshold amount to qualify for reimbursement. The threshold is $100 million in 2007. If an event is certified, the U.S. Federal Government will reimburse losses not to exceed $100 billion in any year. Each insurance company is responsible for a deductible based on a percentage of its direct earned premiums in the previous calendar year. Our deductible is $192.8 million in 2007. For losses in excess of the deductible in 2007, the U.S. Federal Government will reimburse 85% of the insurer's loss, up to the insurer's proportionate share of the $100 billion limit.

Notwithstanding the protection provided by the reinsurance we have purchased and any protection provided by the Act, the risk of severe losses to us from acts of terrorism has not been eliminated because events may not be covered by, or may exceed the capacity of, our reinsurance protection. Also, an act of terrorism may impact the business community at large, impacting our ability to conduct business, even if any losses we sustain are covered by our reinsurance or any protection provided by the Act. Accordingly, any acts of terrorism could materially adversely affect our business and financial condition.

In our workers' compensation business, we monitor the geographical concentrations of insured employees to help mitigate the risk of loss from terrorist acts and other catastrophes. Also, small businesses constitute a large proportion of our policies, and we avoid risks in high profile locations.

Quota share reinsurance

Quota share reinsurance is a form of reinsurance in which the assuming company accepts a pro rata share of the ceding company's losses and an equal share of the applicable premiums. In addition, the assuming company pays the ceding company a fee, known as a ceding commission, which is usually a percentage of the premiums ceded. Quota share reinsurance allows the ceding company to increase the amount of business it could otherwise write by sharing the risks with the assuming company. The effect of the quota share reinsurance on the ceding company is similar to increasing its capital, the principal constraint on the amount of business an insurance company can prudently write. Zenith and Odyssey America Reinsurance Corporation ("Odyssey America") entered into a 10% quota share ceded reinsurance agreement with respect to all new and renewal workers' compensation business written by Zenith in the three years commencing January 1, 2002.

Effective December 31, 2004, we terminated the quota share contract with Odyssey America. In connection with the termination, we also elected to reassume $98.7 million of ceded unearned premiums in-force as of December 31, 2004.

Other reinsurance ceded

We are involved in collecting reinsurance recoverable under reinsurance contracts that were entered into by companies that we acquired and whose reinsurance arrangements we terminated. Our reinsurance recoverable includes $30.8 million for paid and unpaid losses relating to reinsurance arrangements we assumed in the RISCORP Acquisition. The principal reinsurers from which such reinsurance is recoverable are American Re-Insurance Company, Continental Casualty Co. and Swiss Reinsurance Company. Also, in connection with the RISCORP Acquisition, we entered into an aggregate excess of loss reinsurance agreement with Inter-Ocean Reinsurance Company, Ltd., which provides ceded reinsurance for unpaid losses and allocated loss adjustment expenses we assumed from RISCORP at April 1, 1998 up to $50.0 million in excess of $182.0 million. Reinsurance recoverable from Inter-Ocean Reinsurance Company is fully secured by assets in a trust account.

Recoverability of ceded reinsurance

Reinsurance makes the assuming reinsurer liable to the ceding company to the extent of the reinsurance. It does not, however, discharge the ceding company from its primary liability to its policyholders in the event the reinsurer is unable to meet its obligations under such reinsurance treaty. We monitor the financial condition of our reinsurers and do not believe that we are currently exposed to any material credit risk through our ceded reinsurance arrangements because most of our reinsurance is recoverable from large, well-capitalized reinsurance companies. Historically, no material amounts due from reinsurers have been written-off as uncollectible other than in connection with Reliance Insurance Company ("Reliance"). Reliance is subject to an Order of Liquidation approved by the Commonwealth Court of Pennsylvania. Reliance owes Zenith Insurance $6.0 million of reinsurance recoverable on paid and unpaid losses in connection with reinsurance arrangements assumed by Zenith Insurance in its 1996 acquisition of the AGC, all of which has been written-off.

Amounts recoverable (including amounts for paid and unpaid losses and reinsurance commissions) at December 31, 2006 were as follows:


(Dollars in thousands) Name of Reinsurer	Amount Recoverable (1)		A.M. Best Rating (2)

General Reinsurance Corporation	$	89,467	A++
Employers Reinsurance Corporation		54,847	A
Odyssey America Reinsurance Corporation		28,315	A
Continental Casualty Company		23,570	A
Inter-Ocean Reinsurance Company (3)		9,993	A-
Munich Reinsurance America		4,788	A
Clearwater Insurance Company		2,652	A
Allstate Insurance Company		1,647	A+
National Union Fire Insurance Co Pittsburgh PA		1,445	A+
All Others (90 Reinsurers, none individually in excess of $1.5 million)		10,069

Total	$	226,793

(1): Under insurance regulations in the State of California, reinsurers are required to place securities on deposit in an amount equal to the California component of our reinsured workers' compensation loss reserves and which represents about 58% of our reinsured loss reserves.
(2): A.M. Best, in assigning ratings, is primarily concerned with the ability of insurance and reinsurance companies to pay the claims of policyholders. In the A.M. Best ratings scheme, ratings of B+ to A++ are considered "Secure" and ratings of B and below are considered "Vulnerable."
(3): Reinsurance recoverable from Inter-Ocean Reinsurance Company is fully secured by assets held in a trust account.

Intercompany reinsurance pooling agreement

Our insurance subsidiaries are parties to an intercompany pooling agreement for statutory reporting purposes. Under such agreement, the results of underwriting operations are ceded (the risks are transferred) to Zenith Insurance and the aggregate results are then reapportioned, or retro-ceded (the risks are transferred back), to the companies party to the agreement. At December 31, 2006, the proportions of the pooling agreement were as follows: Zenith Insurance — 98% and ZNAT Insurance — 2.0%. Transactions pursuant to the pooling agreement are eliminated in consolidation and have no impact on our consolidated financial statements.

Marketing and Staff

The business in the workers' compensation segment is produced by approximately 1,400 independent licensed insurance agents and brokers throughout all states in which we conduct business.

Applications for insurance submitted by all agents are evaluated by professional underwriters based upon numerous factors, including underwriting criteria and standards, geographic areas of underwriting concentration, actuarial judgments of premium rate adequacy, economic considerations and review of known data on the particular risk. We retain all authority over underwriting, claims processing, safety engineering and auditing and do not delegate any such authority to our agents or brokers.

Competition

Competition in the workers' compensation insurance business is based upon price and quality of services. The insurance industry is highly competitive and there is significant competition in the national workers' compensation industry which, at times, is intense. We compete not only with other stock companies, but with mutual companies and other underwriting organizations such as the State

Compensation Insurance Fund in California. Competition also exists with self-insurers and captive insurers. Many companies in competition with us have been in business for a much longer time, have a larger volume of business, are more widely known, and/or possess substantially greater financial resources.

Regulation

The insurance business is subject to state-by-state regulation and legislation that focuses on solvency, pricing, market conduct, claims practices, underwriting, accounting, investment criteria and other areas. Such regulation and legislation is subject to continual change, and compliance is an inherent risk of the business.

State Departments of Insurance

Insurance companies are subject to regulation and supervision by the departments of insurance in the states in which they are domiciled and, to a lesser extent, other states in which they conduct business. Our insurance subsidiaries are domiciled in California and are primarily subject to regulation and supervision by the California Department of Insurance ("California DOI"). These state agencies have broad regulatory, supervisory and administrative powers, including, among other things, the power to: grant and revoke licenses to transact business; license agents; set the standards of solvency to be met and maintained; determine the nature of, and limitations on, investments and dividends; approve policy forms and, in some states, establish premium rates; periodically examine financial statements; determine the form and content of required financial statements; and periodically examine market conduct.

Detailed annual and quarterly financial statements, prepared in accordance with statutory accounting practices, and other reports are required to be filed with the departments of insurance of the states in which we are licensed to transact business. The financial statements of our insurance subsidiaries are subject to periodic examination by the California DOI. The California DOI recently completed an examination of Zenith Insurance and ZNAT Insurance as of December 31, 2005 and the Report of Examination contained no findings.

The National Association of Insurance Commissioners

The National Association of Insurance Commissioners (the "NAIC") is a group formed by state Insurance Commissioners to discuss issues and formulate policy with respect to regulation, reporting and accounting of insurance companies. Although the NAIC has no legislative authority and insurance companies are at all times subject to the laws of their respective domiciliary states and, to a lesser extent, other states in which they conduct business, the NAIC is influential in determining the form in which such laws are enacted. Model Insurance Laws, Regulations and Guidelines ("Model Laws") have been promulgated by the NAIC as a minimum standard by which state regulatory systems and regulations are measured. Adoption of state laws which provide for substantially similar regulations to those described in the Model Laws is a requirement for accreditation by the NAIC. The NAIC provides authoritative guidance to insurance regulators on current statutory accounting practices by promulgating and updating a codified set of statutory accounting practices in its Accounting Practices and Procedures Manual. The California DOI requires us to follow such statutory accounting practices and, in addition, they require that we record excess statutory reserves, if applicable.

Under NAIC Model Laws, insurers are required to maintain minimum levels of capital based on their investments and operations. These "risk-based capital" ("RBC") requirements provide a standard by which regulators can assess the adequacy of an insurance company's capital and surplus relative to its operations. An insurance company must maintain capital and surplus of at least 200% of the RBC computed by the NAIC's RBC model (known as the "Authorized Control Level" of RBC). At

December 31, 2006, our statutory capital of $559.5 million was 577% of such minimum. Statutory capital at December 31, 2006 has been reduced by $360.3 million for the excess statutory reserves required soley because we are domiciled in California (see Note 13 "Stockholders' Equity And Statutory Information" of our Consolidated Financial Statements in our 2006 Annual Report to Stockholders, which is hereby incorporated by reference). Excluding this excess statutory reserve, our statutory capital at December 31, 2006 would be $919.8 million, which is 948% of regulatory risk-based capital and on a comparable basis to other insurers who are subject to industry rules promulgated by the NAIC.

The NAIC Insurance Regulatory Information System ("IRIS") key financial ratios, developed to assist insurance departments in overseeing the financial condition of insurance companies, are reviewed by examiners of the NAIC and state insurance departments to select those companies that merit highest priority in the allocation of the regulators' resources. The 2006 IRIS results for Zenith Insurance showed one ratio at the top of the "normal" range as determined by the NAIC. This result was attributable to the increase in statutory policyholders' surplus in 2006 primarily as a result of improved underwriting income.

Insurance Holding Company System Regulatory Act

Our subsidiaries are subject to the California Insurance Holding Company System Regulatory Act ("Holding Company Act") which contains certain reporting requirements, including the requirement that such subsidiaries file information relating to capital structure, ownership, financial condition and general business operation. The Holding Company Act also limits dividend payments and material transactions by our insurance subsidiaries. See Part II — Item 5. "Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities" for a discussion of dividend restrictions related to the Holding Company Act.

Item 1A. Risk Factors.

Our business is subject to numerous risks and uncertainties, the outcome of which may impact future results of operations and financial condition. These risks are as follows:

Our loss reserves are based on estimates and may be inadequate to cover our losses.

We establish loss reserves in our financial statements that represent an estimate of amounts needed to pay, and administer claims with respect to, insured and reinsured events that have occurred, including events that have not yet been reported to us. Loss reserves are estimates and are inherently uncertain; they do not and cannot represent an exact measure of liability. Accordingly, as we receive new information and update our assumptions over time regarding the ultimate liability, our loss reserves may prove to be inadequate to cover our actual losses. Any changes in these estimates are reflected in our results of operations during the period the changes are made, with increases in our loss reserves resulting in a charge to our earnings.

Our loss reserve estimates are based on estimates of the ultimate cost of claims. Several factors contribute to the uncertainty in establishing these estimates including the length of time required to settle long-term, expensive cases, uncertainties in the long-term outcome of 2003 and 2004 legislative reforms in California and 2003 legislative reforms in Florida, and the fact that in certain of the years prior to reforms our loss reserves proved to be inadequate. Judgment is required to ascertain the relevance of historical payment and claim settlement patterns under current facts and circumstances. The key assumption in the estimation process for workers' compensation reserves is the claim cost inflation (deflation) trend, including the increasing costs of health care, which affects the medical component of claim costs, and the number of expensive claims relative to the total number of claims in a year. If there are increases in inflation trends, our reserves may need to be increased. Our loss

reserve estimates for catastrophe losses in the assumed reinsurance business are dependent upon obtaining information timely from ceding companies. Estimates of catastrophe losses can be negatively impacted by lags in reporting from ceding companies. In addition, we are subject to the risk that the ceding company may not have adequately estimated the amount of the reinsured loss.

If we are unable to obtain or collect on ceded reinsurance, our ability to write new policies could be materially adversely affected.

We buy reinsurance protection in our workers' compensation business to protect us from the impact of losses over $1 million and from the accumulation of losses up to $150 million and, in the event of a California earthquake, up to $200 million. The availability, amount and cost of reinsurance depend on market conditions and may vary significantly. Any decrease in the amount of our reinsurance will increase our risk of loss and could materially, adversely affect our business and financial condition.

In addition, we are subject to credit risk with respect to our reinsurers. Ceded reinsurance does not discharge our direct obligations under the policies we write. We remain liable to our policyholders, even if we are unable to make recoveries to which we believe we are entitled under our reinsurance contracts. Losses may not be recovered from our reinsurers until claims are paid and, in the case of long-term workers' compensation cases, the creditworthiness of our reinsurers may change before we can recover amounts to which we are entitled.

Acts of terrorism could negatively impact our business and our financial condition.

We purchased reinsurance protection for domestic acts of terrorism up to $150 million in excess of a $1 million retention and we retain 50% of any losses between $10 million and $20 million. The reinsurance for foreign acts of terrorism is up to $75 million in excess of a $1 million retention and we retain 50% of any losses between $10 million and $20 million. Both of these coverages exclude losses from nuclear, biological and chemical attacks for losses in excess of $20 million, and we retain 15% of any such losses between $10 million and $20 million.

In 2005, the Terrorism Risk Insurance Act of 2002 ("Act") was extended through December 31, 2007. It is unclear at this time whether the Act or a modified version will be extended beyond December 31, 2007. The Act, as modified in 2005, may provide us with reinsurance protection for losses arising out of terrorist acts under certain circumstances and subject to certain limitations. The U.S. Treasury Secretary must certify an act for it to constitute an act of terrorism. The definition of terrorism excludes domestic acts of terrorism or acts of terrorism committed in the course of a war declared by the U.S. Congress. Losses arising from an act of terrorism must exceed a threshold amount to qualify for reimbursement. The threshold is $100 million in 2007. If an event is certified, the U.S. Federal Government will reimburse losses not to exceed $100 billion in any year. Each insurance company is responsible for a deductible based on a percentage of its direct earned premiums in the previous calendar year. Our deductible is $192.8 million in 2007. For losses in excess of the deductible in 2007, the U.S. Federal Government will reimburse 85% of the insurer's loss, up to the insurer's proportionate share of the $100 billion limit.

business, even if any insurance losses we sustain are covered by our reinsurance or any protection provided by the Act. Accordingly, any acts of terrorism could materially adversely affect our business and financial condition.

The insurance business is subject to extensive regulation and legislative changes, which impact the manner in which we operate our business.

Our insurance business is subject to extensive regulation by the applicable state agencies in the jurisdictions in which we operate, perhaps most significantly by the California DOI. These state agencies have broad regulatory powers designed to protect policyholders, not stockholders or other investors. These powers include, among other things, the ability to:

•: influence how we conduct our business;
•: place limitations on our investments and dividends;
•: place limitations on our ability to transact business with our affiliates;
•: set standards of solvency to be met and maintained; and
•: prescribe the form and content of, and to examine, our financial statements.

In addition, workers' compensation insurance is statutorily provided for in all of the states in which we do business. State laws and regulations provide for the form and content of policy coverage and the rights and benefits that are available to injured workers, their representatives and medical providers. In Florida, the rates at which we provide coverage are determined by regulation. Legislation and regulation also impact our ability to investigate fraud and other abuses of the workers' compensation system in the states in which we do business. Our relationships with medical providers are also impacted by legislation and regulation, including penalties for failure to make timely payments.

Federal legislation typically does not directly impact our workers' compensation business, but our business can be indirectly affected by changes in health care and occupational safety and health regulations.

This extensive regulation of our business may affect the cost or demand for our products and may limit our ability to obtain rate increases or to take other actions that we might desire to increase our profitability. In addition, we may be unable to maintain all required approvals or comply fully with applicable laws and regulations, or the relevant governmental authority's interpretation of such laws and regulations.

A downgrade in the financial strength rating of our insurance subsidiaries could reduce the amount of business we are able to write.

Rating agencies rate insurance companies based on financial strength as an indication of an ability to pay claims. Our insurance subsidiaries currently have a financial strength rating of A- (Excellent) from A.M. Best, which we believe has the most influence on our business. The financial strength ratings of A.M. Best and other rating agencies are subject to periodic review using, among other things, proprietary capital adequacy models, and are subject to revision or withdrawal at any time. Insurance financial strength ratings are directed toward the concerns of policyholders and insurance agents and are not intended for the protection of investors. Our competitive position relative to other companies is determined in part by our financial strength rating. A reduction in our A.M. Best rating below A-, or a downgrading by one of the other rating agencies, could cause a reduction in the number of policies we write in our workers' compensation business.

Intense competition could adversely affect our ability to sell policies at premium rates we deem adequate.

In most of the states in which we operate, we face significant competition which, at times, is intense. If we are unable to compete effectively, our business and financial condition could be materially adversely affected. Competition in our businesses is based on many factors, including premiums charged, services provided, financial strength ratings assigned by independent rating agencies, speed of claims payments, reputation, perceived financial strength and general experience. In the workers' compensation business, we compete with regional and national insurance companies and state-sponsored insurance funds, as well as potential insureds that have decided to self-insure. Some of our competitors have greater financial, marketing and management resources than we have. Intense competitive pressure on prices can result from the actions of even a single large competitor, such as the State Compensation Insurance Fund in California. Except in states such as Florida, where premium rates for workers' compensation insurance are determined by regulation, we establish our prices for our workers' compensation policies based on the work of our actuaries and using our best judgment about loss cost trends. Historically, when competition has been intense, the amount of business we are able to write has decreased because we have not reduced our prices below levels we deem to be adequate to maintain our goal of achieving a combined ratio under 100% to maintain market share or other revenue targets. As a result, our profitability during those times has decreased.

If we are unable to realize our investment objectives, our financial condition may be adversely affected.

Investment income is an important component of our revenues and net income. The ability to achieve our investment objectives is affected by factors that are beyond our control. Interest rates are highly sensitive to many factors, including governmental monetary policies and domestic and international economic and political conditions. These and other factors also affect the equity markets, and, consequently, the value of the equity securities we own. Any significant decline in our investment income as a result of falling interest rates, decreased dividend payment rates or general market conditions would have an adverse effect on our net income and, as a result, on our stockholders' equity and our policyholders' surplus.

The outlook for our investment income is dependent on the future direction of interest rates and the amount of cash flows from operations that are available for investment. The fair values of fixed maturity investments that are "available-for-sale" fluctuate with changes in interest rates and cause fluctuations in our stockholders' equity.

We invest a small portion of our portfolio in below investment-grade securities. The risk of default by borrowers that issue below investment-grade securities is significantly greater than other borrowers because these borrowers are often highly leveraged and more sensitive to adverse economic conditions, including a recession. In addition, these securities are generally unsecured and often subordinated to other debt. The risk that we may not be able to recover our investments in below investment-grade securities is higher than with investment-grade securities.

Our geographic concentration ties our performance to the business, economic, natural perils and regulatory conditions in California and Florida.

Our business is concentrated in California (62.5% of 2006 workers' compensation net earned premiums) and in Florida (22.2% of 2006 workers' compensation net earned premiums). Accordingly, unfavorable business, economic or regulatory conditions in these states could negatively impact our business. For example, regulatory changes in California in the early 1990's created intense price competition in our workers' compensation business from about 1995 to 1999, during which time our overall profitability experienced significant declines. In addition, California and Florida are states that are exposed to severe natural perils, such as earthquakes and hurricanes, along with the possibility of terrorist acts. Accordingly, we could suffer losses as a result of catastrophic events in these states.

Because our business is concentrated in this manner, we may be exposed to economic and regulatory risks or risk from natural perils that are greater than the risks associated with greater geographic diversification.

We purchased excess of loss and catastrophe reinsurance protection up to $150 million in excess of a $1 million retention with catastrophe reinsurance protection for losses arising out of a California earthquake up to $200 million. We will retain 50% of any losses between $10 million and $20 million. The risk of loss from natural perils has not been eliminated because events may exceed the capacity of our reinsurance protection.

We rely on independent insurance agents and brokers.

The failure or inability of independent insurance agencies and brokers to market our insurance programs successfully could have a material adverse effect on our business, financial condition and results of operations. The business in our workers' compensation segment is produced by approximately 1,400 licensed insurance agents and brokers. Agents and brokers are not obligated to promote our insurance programs and may sell competitors' insurance programs. As a result, our business depends in part on the marketing efforts of these agents and brokers and on our ability to offer insurance programs and services that meet the requirements of their clients and customers.

Assessments and other surcharges for guaranty funds and second injury funds and other mandatory pooling arrangements may reduce our profitability.

Virtually all states require insurers licensed to do business in their state to bear a portion of the loss suffered by some insureds as the result of impaired or insolvent insurance companies. These obligations are funded by assessments that are expected to continue in the future as a result of insolvencies. Many states also have laws that established second injury funds to provide compensation to injured employees for aggravation of a prior condition or injury, which are funded by either assessments based on paid losses or premium surcharge mechanisms. In addition, as a condition to the ability to conduct business in some states, insurance companies are required to participate in mandatory workers' compensation shared market mechanisms or pooling arrangements, which provide workers' compensation insurance coverage from private insurers. The effect of these assessments and mandatory shared market mechanisms or changes in them could reduce our profitability in any given period or limit our ability to grow our business.

Litigation may have an adverse effect on our business.

Like other members of the insurance industry, we are subject to various lawsuits, some of which could involve claims for substantial and/or indeterminate amounts (including claims for punitive damage that are not covered by insurance) and the outcomes of which are unpredictable. This litigation is based on a variety of issues including insurance and claim settlement practices. Based on current information, we believe any ultimate liability that may arise from outstanding lawsuits would not materially affect our consolidated financial position, results of operations or cash flows. However, our evaluation of the likely impact of these actions could change in the future and an unfavorable outcome, depending upon the amount and timing, could have a material effect on our results of operations or cash flows of a future period.

Our status as an insurance holding company with no direct operations could adversely affect our ability to meet our debt obligations and pay dividends.

Zenith National is a holding company which transacts substantially all of its business through its subsidiaries. Our primary assets are the stock of our operating subsidiaries. Our ability to meet our obligations on our outstanding debt, and to pay expenses and dividends, depends, in the long-run, upon

the surplus and earnings of our subsidiaries and the ability of our subsidiaries to pay dividends to us. Payments of dividends by our insurance company subsidiaries are restricted by state insurance laws, including laws establishing minimum solvency and liquidity thresholds, and could be subject to revised restrictions in the future. As a result, at times, we may not be able to receive dividends from these subsidiaries and we may not receive dividends in amounts necessary to meet our debt obligations or to pay dividends on our capital stock. In addition, the payment of dividends by us is within the discretion of our Board of Directors and depends on numerous factors, including our results of operations, financial condition, capital requirements and other factors that our Board of Directors considers relevant.

State insurance laws may discourage takeover attempts that could be beneficial to us and our stockholders.

We are subject to state statutes governing insurance holding companies, which generally require that any person or entity desiring to acquire direct or indirect control of any of our insurance company subsidiaries obtain prior regulatory approval. Control would be presumed to exist under most state insurance laws with the acquisition of 10% or more of our outstanding voting securities. Applicable state insurance company laws and regulations could delay or impede a change of control of our company, which could prevent our stockholders from receiving a control premium.

Item 1B. Unresolved Staff Comments.

None.

Item 2. Properties.

We own a 130,000 square foot office facility in Woodland Hills, California which is the corporate home office of Zenith National and its subsidiaries. We also own a 120,000 square foot branch office facility in Sarasota, Florida. In the regular conduct of business, we lease offices in various cities. See Notes to Consolidated Financial Statements — Note 11 — "Commitments and Contingencies — Leases" in our 2006 Annual Report to Stockholders, which is hereby incorporated by reference. We consider our owned and leased facilities to be adequate for the needs of our organization.

Item 3. Legal Proceedings.

Zenith National and its subsidiaries are defendants in various litigation matters. In the opinion of management, after consultation with legal counsel, all of such litigation is either without merit or the ultimate liability, if any, is not expected to have a material adverse effect on our consolidated financial condition, results of operations or cash flows.

Item 4. Submission of Matters to a Vote of Security Holders.

No matters were submitted to a vote of stockholders during the fourth quarter of the fiscal year covered by this report.

PART II

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

On September 7, 2005, Zenith National's Board of Directors declared a 3-for-2 stock split which was paid in the form of a 50% stock dividend. The additional shares of Zenith National's common stock were distributed on October 11, 2005 to stockholders of record as of September 19, 2005. Stock prices and dividends per share in the information that follows prior to the stock split have been adjusted to reflect the 3-for-2 stock split.

Our common stock, par value $1.00 per share ("Common Stock"), is traded on the New York Stock Exchange ("NYSE") under the symbol ZNT. The table below sets forth the high and low sales prices of our Common Stock for each quarterly period as reported by the NYSE during the last two fiscal years.

Quarter		2006		2005
First:
	High	$	55.30	$	34.87
	Low		45.11		30.65
Second:
	High		48.90		46.00
	Low		37.93		34.17
Third:
	High		41.73		48.99
	Low		36.14		40.90
Fourth:
	High		47.91		48.90
	Low		39.13		41.00

As of January 31, 2007, there were 199 registered holders of record of our common stock.

The table below sets forth information with respect to the amount and frequency of dividends declared on our Common Stock. Based upon our financial condition, it is currently expected that cash dividends will continue to be paid in the future.

Date of Declaration by Zenith Board	Type and Amount of Dividend		Record Date for Payment	Payment Date
February 16, 2007	$	0.42 cash per share	April 27, 2007	May 11, 2007
December 7, 2006	$	0.35 cash per share	January 31, 2007	February 14, 2007
September 13, 2006	$	0.35 cash per share	October 31, 2006	November 15, 2006
May 24, 2006	$	0.28 cash per share	July 28, 2006	August 11, 2006
February 7, 2006	$	0.28 cash per share	April 28, 2006	May 12, 2006
December 6, 2005	$	0.25 cash per share	January 31, 2006	February 14, 2006
September 7, 2005	$	0.25 cash per share	October 31, 2005	November 15, 2005
May 18, 2005	$	0.22 cash per share	July 29, 2005	August 12, 2005
February 10, 2005	$	0.22 cash per share	April 29, 2005	May 13, 2005

The Holding Company Act limits the ability of Zenith Insurance to pay dividends to Zenith National, and of ZNAT Insurance to pay dividends to Zenith Insurance, by providing that the California DOI must approve any dividend that, together with all other such dividends paid during the preceding twelve months, exceeds the greater of: (a) 10% of the paying company's statutory surplus as regards policyholders at the preceding December 31; or (b) 100% of the net income for the preceding year. In addition, any such dividend must be paid from policyholders' surplus attributable to accumulated earnings. Such restrictions on dividends are not cumulative. Zenith Insurance paid $50.0 million, $30.0 million and $20.0 million in dividends to Zenith National in 2006, 2005 and 2004, respectively. In 2007, Zenith Insurance will be able to pay up to $225.9 million of dividends to Zenith

National without prior approval of the California DOI. The restrictions on the payment of dividends have not had, and under current regulations are not expected to have, a material adverse impact on the ability of Zenith Insurance to pay dividends.

Item 6. Selected Financial Data.

"5-Year Summary of Selected Financial Information" in Zenith's 2006 Annual Report to Stockholders is hereby incorporated by reference.

Item 7. Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations.

"Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations" in Zenith's 2006 Annual Report to Stockholders is hereby incorporated by reference.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk.

"Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations — Market Risk of Financial Instruments" in Zenith's 2006 Annual Report to Stockholders is hereby incorporated by reference.

Item 8. Financial Statements and Supplementary Data.

The Consolidated Financial Statements and Notes thereto included in Zenith's 2006 Annual Report to Stockholders is hereby incorporated by reference.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

Item 9A. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended ("Exchange Act")) as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed in the reports that we file or submit under the Exchange Act and are effective in ensuring that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Management's Report on Internal Control Over Financial Reporting.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) or 15d-15(f). Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control — Integrated Framework. Based on our evaluation, our

management concluded that our internal control over financial reporting was effective as of December 31, 2006.

Our management's assessment of the effectiveness of our internal control over financial reporting as of December 31, 2006 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report. See "Report of Independent Registered Accounting Firm" in Zenith's 2006 Annual Report to Stockholders, which is hereby incorporated by reference.

Changes in Internal Control Over Financial Reporting.

There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fourth quarter that have materially affected, or are reasonably likely to materially affect, Zenith's internal control over financial reporting.

Item 9B. Other Information

None.

PART III

Item 10. Directors, Executive Officers and Corporate Governance.

The information set forth under the captions "Election of Directors," "Section 16(a) Beneficial Ownership Reporting Compliance," "Audit Committee," and "Code of Ethics for Senior Financial Officers" in the Proxy Statement distributed to stockholders in connection with Zenith's 2007 Annual Meeting of Stockholders ("Proxy Statement"), which we will file after the date this Annual Report on Form 10-K, is hereby incorporated by reference.

Executive Officers of the Registrant

Name	Age	Position	Term	Executive Officer Since
Stanley R. Zax	69	Chairman of the Board and President	Annual	1977
Michael E. Jansen	40	Executive Vice President and General Counsel	Annual	2006
Robert E. Meyer	57	Senior Vice President and Actuary	Annual	2000
Jack D. Miller	61	Executive Vice President	Annual	1998
Davidson M. Pattiz	39	Executive Vice President	Annual	2006
Keith E. Trotman	69	Executive Vice President	Annual	2005
Kari L. Van Gundy	49	Senior Vice President, Chief Financial Officer, Treasurer and Assistant Secretary	Annual	2006

Each of the executive officers is an officer of Zenith National and certain of its subsidiaries. Other than Messrs. Jansen and Pattiz and Ms. Van Gundy, each executive officer has occupied an executive position with Zenith National or a subsidiary of Zenith National for more than the past five years.

Mr. Jansen became an executive officer in January 2006. From 2003 until January 2006, Mr. Jansen was Senior Vice President and Deputy General Counsel for PacifiCare Health Systems Inc. From 1992 to 2003, Mr. Jansen held various positions including Vice President and Assistant General Counsel for Health Net, Inc. and its predecessor companies. Prior thereto, Mr. Jansen was an attorney at the firm of Skadden, Arps, Slate, Meagher & Flom LLP.

Mr. Pattiz was designated an Executive Officer in February 2006. For more than 5 years prior to his employment with Zenith, Mr. Pattiz was an attorney at the firm of Skadden, Arps, Slate, Meagher & Flom LLP.

Ms. Van Gundy was named Chief Financial Officer in August 2006. She had rejoined Zenith as Senior Vice President, Finance in July 2006 and was designated an Executive Officer at that time. From October 2002 to July 2006, she was Vice President and Treasurer for GenCorp Inc. From May 1998 to September 2002, Ms. Van Gundy was employed by Zenith in executive positions.

There are no family relationships between any of the executive officers.

Item 11. Executive Compensation.

The information under the captions, "Executive Compensation," "Compensation Discussion and Analysis for 2006," "Compensation Committee Report," "Compensation Committee Interlocks and Insider Participation," "2006 Summary Compensation Table," "Grants of Plan-Based Awards in 2006," "Outstanding Equity Awards at 2006 Year-End," "Option Exercises and Stock Vested in 2006," "Early Termination of Employment and Change in Control Arrangements," "Director Compensation" and "2006 Director Compensation Table," in the Proxy Statement is hereby incorporated by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The information set forth under the captions, "Equity Compensation Plan Information" and "Security Ownership of Certain Beneficial Owners and Management," in the Proxy Statement is hereby incorporated by reference.

Item 13. Certain Relationships and Related Transactions and Director Independence.

The information under the captions, "Independence of Directors," "Related Person Transactions Approval Policy And Procedures" and "Related Person Transactions," in the Proxy Statement is hereby incorporated by reference.

Item 14. Principal Accountant Fees and Services.

The information set forth under the caption, "Information Relating to Independent Auditors and Their Fees," in the Proxy Statement is hereby incorporated by reference.

PART IV

Item 15. Exhibits, Financial Statement Schedules

(a) The following documents are filed as part of this report:

1.: Financial Statements:

Report of Independent Registered Public Accounting Firm incorporated herein by reference from Zenith's 2006 Annual Report to Stockholders.

Consolidated Financial Statements and notes thereto incorporated herein by reference from Zenith's 2006 Annual Report to Stockholders in Item 8 of Part II:

Consolidated Financial Statements of Zenith National Insurance Corp. and Subsidiaries:

Consolidated Balance Sheets as of December 31, 2006 and 2005

Consolidated Statements of Operations for the three years ended December 31, 2006

Consolidated Statements of Cash Flows for the three years ended December 31, 2006

Consolidated Statements of Stockholders' Equity for the three years ended December 31, 2006

Consolidated Statements of Comprehensive Income for the three years ended December 31, 2006

Notes to Consolidated Financial Statements

2.: Financial Statement Schedules:

See Index to Financial Statements and Schedules at page 35.

3.: Exhibits

The Exhibits listed below are included in this Report.

3.1		Amended and Restated Certificate of Incorporation of Zenith National Insurance Corp. filed with the Delaware Secretary of State on May 30, 2006. (Incorporated herein by reference to Exhibit 3.1 to Zenith's Quarterly Report on Form 10-Q for the quarter ended June 30, 2006.)
3.2		Bylaws of Zenith National Insurance Corp., as currently in effect. (Incorporated herein by reference to Exhibit 3.9 to Zenith's Quarterly Report on Form 10-Q for the quarter ended March 31, 2006.)
4.1		Indenture, dated July 30, 1998, between Zenith National Insurance Corp. and Norwest Bank Minnesota, National Association, as trustee, pursuant to which Zenith issued its 8.55% Subordinated Deferrable Interest Debentures. (Incorporated herein by reference to Exhibit 10.6 to Zenith's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998.)
4.2		Amended and Restated Declaration of Trust of Zenith National Insurance Capital Trust I, dated July 30, 1998, between Zenith National Insurance Corp., the trustees and the holders. (Incorporated herein by reference to Exhibit 10.8 to Zenith's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998.)
‡4.3		Certificate of Amendment to Certificate of Trust of Zenith National Insurance Capital Trust I, dated August 1, 2006, a copy of which is filed herewith as Exhibit 4.3.

4.4		Indenture, dated March 21, 2003, by and between Zenith National Insurance Corp. and Wells Fargo Bank Minnesota, N.A., as Trustee. (Incorporated herein by reference to Exhibit 99.2 to Zenith's Current Report on Form 8-K dated March 21, 2003.)
10.1		Cost Allocation Agreement between Zenith National Insurance Corp., Zenith Insurance Company, ZNAT Insurance Company, CalFarm Insurance Company, CalFarm Life Insurance Company, and CalFarm Insurance Agency, dated December 31, 1990. (Incorporated herein by reference to Exhibit 10.1 to Zenith's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.)
10.2		Amendment No. 1, dated December 28, 1993, to the Cost Allocation Agreement between Zenith National Insurance Corp., Zenith Insurance Company, ZNAT Insurance Company, CalFarm Insurance Company, CalFarm Life Insurance Company, and CalFarm Insurance Agency, dated December 31, 1990. (Incorporated herein by reference to Exhibit 10.2 to Zenith's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.)
10.3		Amendment No. 2, dated December 28, 1995, to the Cost Allocation Agreement between Zenith National Insurance Corp., Zenith Insurance Company, ZNAT Insurance Company, CalFarm Insurance Company, CalFarm Life Insurance Company, and CalFarm Insurance Agency, dated December 31, 1990. (Incorporated herein by reference to Exhibit 10.3 to Zenith's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.)
10.4		Amendment No. 3, dated January 7, 1998, to the Cost Allocation Agreement between Zenith National Insurance Corp., Zenith Insurance Company, ZNAT Insurance Company, CalFarm Insurance Company, CalFarm Life Insurance Company, and CalFarm Insurance Agency, dated December 31, 1990. (Incorporated herein by reference to Exhibit 10.4 to Zenith's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.)
10.5		Amendment No. 4, dated July 15, 1998, to the Cost Allocation Agreement between Zenith National Insurance Corp., Zenith Insurance Company, ZNAT Insurance Company, CalFarm Insurance Company, CalFarm Life Insurance Company, and CalFarm Insurance Agency, dated December 31, 1990. (Incorporated herein by reference to Exhibit 10.5 to Zenith's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.)
10.6		Amendment No. 5, dated March 31, 1999, to the Cost Allocation Agreement between Zenith National Insurance Corp., Zenith Insurance Company, ZNAT Insurance Company, CalFarm Insurance Company, CalFarm Life Insurance Company, and CalFarm Insurance Agency, dated December 31, 1990. (Incorporated herein by reference to Exhibit 10.6 to Zenith's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.)
‡10.7		Amended and Restated Tax Sharing Agreement dated as of December 19, 2006 by and among Zenith National Insurance Corp. and its subsidiaries, Zenith Insurance Company, ZNAT Insurance Company, Zenith Development Corp., Zenith of Nevada, Inc., Zenith Insurance Management Services, Inc. and 1390 Main Street, LLC, a copy of which is filed herewith as Exhibit 10.7.
10.8		Amended and Restated Reinsurance and Pooling Agreement between Zenith Insurance Company and ZNAT Insurance Company and Zenith Star Insurance Company dated March 21, 2005. (Incorporated herein by reference to Exhibit 10.7 to Zenith's Quarterly Report on Form 10-Q for the quarter ended March 31, 2005.)

10.9		Amendment No. 1 to Amended and Restated Reinsurance and Pooling Agreement between Zenith Insurance Company, ZNAT Insurance Company and Zenith Star Insurance Company dated September 15, 2005. (Incorporated herein by reference to Exhibit 10.1 to Zenith's Quarterly Report on Form 10-Q for the quarter ended September 30, 2005.)
10.10		Purchase Agreement, dated February 4, 1981, among Reliance Insurance Company, Zenith National Insurance Corp., the Selling Stockholders referred to therein, and Eugene V. Klein, Daniel Schwartz and Harvey L. Silbert as agents for the Selling Stockholders. (Incorporated herein by reference to Exhibit 10.1 to Zenith's Annual Report on Form 10-K for the year ended December 31, 2001.)
*10.11		Zenith National Insurance Corp. 1996 Employee Stock Option Plan, approved by the Stockholders on May 22, 1996. (Incorporated herein by reference to Exhibit 10.5 to Zenith's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996.)
*10.12		Amendment No. 1, dated December 8, 1998, to Zenith National Insurance Corp. 1996 Employee Stock Option Plan. (Incorporated herein by reference to Exhibit 10.1 to Zenith's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999.)
*10.13		Amendment No. 2, dated May 24, 2001, to Zenith National Insurance Corp. 1996 Employee Stock Option Plan. (Incorporated herein by reference to Exhibit 10.14 to Zenith's Annual Report on Form 10-K for the year ended December 31, 2001.)
*10.14		1996 Employee Stock Option Plan, Form of Stock Option Agreement. (Incorporated herein by reference to Exhibit 10.28 to Zenith's Annual Report on Form 10-K for the year ended December 31, 2004.)
*10.15		Zenith National Insurance Corp. 2004 Restricted Stock Plan (as amended and restated May 24, 2006). (Incorporated herein by reference to Exhibit 10.2 to Zenith's Current Report on Form 8-K filed on May 26, 2006.)
*10.16		Zenith National Insurance Corp. 2004 Restricted Stock Plan, Form of Award Agreement for Non-Employee Directors. (Incorporated herein by reference to Exhibit 10.5 to Zenith's Quarterly Report on Form 10-Q for the quarter ended March 31, 2006.)
*10.17		Zenith National Insurance Corp. 2004 Restricted Stock Plan, Form of Award Agreement for Employees. (Incorporated herein by reference to Exhibit 10.6 to Zenith's Quarterly Report on Form 10-Q for the quarter ended March 31, 2006.)
*10.18		Employment Agreement dated January 23, 2006 between Zenith National Insurance Corp. and Michael E. Jansen. (Incorporated herein by reference to Exhibit 10.1 to Zenith's Current Report on Form 8-K filed on January 24, 2006.)
*10.19		Employment Agreement, executed November 1, 2004, between Zenith National Insurance Corp. and Robert E. Meyer. (Incorporated herein by reference to Exhibit 10.3 to Zenith's Report on Form 8-K dated October 12, 2004.)
*10.20		Employment Agreement, executed November 1, 2004, between Zenith National Insurance Corp. and Jack D. Miller. (Incorporated herein by reference to Exhibit 10.2 to Zenith's Report on Form 8-K dated October 12, 2004.)
*10.21		Employment Agreement dated September 12, 2005 between Zenith National Insurance Corp. and Davison Pattiz. (Incorporated herein by reference to Exhibit 10.1 to Zenith's Current Report on Form 8-K filed on February 9, 2006.)

*10.22		Amendment No. 1 dated February 9, 2006 to Employment Agreement dated September 12, 2005 between Zenith National Insurance Corp. and Davidson Pattiz. (Incorporated herein by reference to Exhibit 10.2 to Zenith's Current Report on Form 8-K filed on February 9, 2006.)
*10.23		Employment Agreement dated May 24, 2006 between Zenith National Insurance Corp. and Kari L. Van Gundy. (Incorporated herein by reference to Exhibit 10.1 to Zenith's Current Report on Form 8-K filed on May 26, 2006.)
*10.24		Compensation of Keith E. Trotman, Executive Officer. Mr. Trotman serves as an Executive Officer without an employment agreement and is eligible for bonuses under the Executive Officer Bonus Plan, an automobile allowance or lease and for employee benefits that are generally available to all full time regular employees. His annual base salary is established from time to time by the Compensation Committee.
*10.25		Establishment by the Compensation Committee of an annual base salary of $550,000 for Keith E. Trotman, effective January 1, 2007. (The information in Item 5.02 of Zenith's Current Report on Form 8-K filed December 11, 2006 is incorporated herein by reference.)
*10.26		Restated and Amended Employment Agreement, executed March 13, 2001, between Zenith National Insurance Corp. and Stanley R. Zax. (Incorporated herein by reference to Exhibit 10.18 to Zenith's Annual Report on Form 10-K for the year ended December 31, 2000.)
*10.27		Amendment No. 1 to the Restated and Amended Employment Agreement between Zenith National Insurance Corp. and Stanley R. Zax. (Incorporated herein by reference to Exhibit 10.1 to Zenith's Current Report on Form 8-K dated October 12, 2004.)
*10.28		Establishment by the Compensation Committee of an annual base salary of $2,000,000 for Stanley R. Zax, effective January 1, 2007. (The Information in Item 5.02 of Zenith's Current Report on Form 8-K filed December 11, 2006 is incorporated herein by reference.)
*10.29		Amended and Restated Zenith National Insurance Corp. Executive Officer Bonus Plan dated February 12, 2003. (Incorporated herein by reference to Exhibit 10.5 to Zenith's Quarterly Report on Form 10-Q for the quarter ended March 31, 2003.)
*10.30		Zenith National Insurance Corp.'s revised policy on non-business use of the company-owned aircraft by executive officers and imputation of income therefor. (The information under the caption "Company-Owned Aircraft Usage Policy" in Item 1.01 of Zenith's Current Report on Form 8-K filed on May 26, 2006 is incorporated herein by reference.)
*10.31		Zenith National Insurance Corp. 2003 Non-Employee Director Deferred Compensation Plan dated May 20, 2003. (Incorporated herein by reference to Exhibit 10.38 to Zenith's Registration Statement on Form S-1 filed July 18, 2003.)
*10.32		Amendment No. 1 to Zenith National Insurance Corp. 2003 Non-Employee Director Deferred Compensation Plan dated May 20, 2003. (Incorporated herein by reference to Exhibit 10.1 to Zenith's Current Report on Form 8-K dated December 3, 2004.)
*10.33		2003 Non-Employee Director Deferred Compensation Plan, Form of Deferred Compensation Agreement. (Incorporated herein by reference to Exhibit 10.42 to Zenith's Annual Report on Form 10-K for the year ended December 31, 2004.)

*10.34		Compensation of Non-Employee Directors (updated February 2006). (Incorporated herein by reference to Exhibit 10.4 to Zenith's Quarterly Report on Form 10-Q filed for the quarter ended March 31, 2006.)
10.35		Workers' Compensation and Employers' Liability Reinsurance Agreement between Zenith Insurance Company and Employers Reinsurance Corporation, effective January 1, 1986. (Incorporated herein by reference to Exhibit 10.14 to Zenith's Annual Report on Form 10-K for the year ended December 31, 1991.)
10.36		Workers' Compensation and Employers' Liability Excess of Loss Reinsurance Agreement between Employers Reinsurance Corporation of Overland Park, Kansas, Zenith Insurance Company and ZNAT Insurance Company, both of Woodland Hills, California, and Zenith Star Insurance Company of Austin, Texas, dated as of July 1, 2002. (Incorporated herein by reference to Exhibit 10.21 to Zenith's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.)
10.37		Amendment No. 4 to the Workers' Compensation and Employers' Liability Excess of Loss Reinsurance Agreement of July 1, 2002, between Employers Reinsurance Corporation and Zenith Insurance Company, ZNAT Insurance Company and Zenith Star Insurance Company. (Incorporated herein by reference to Exhibit 10.9 to Zenith's Quarterly Report on Form 10-Q for the quarter ended March 31, 2005.)
10.38		Workers' Compensation Quota Share Reinsurance Agreement between Zenith Insurance Company, ZNAT Insurance Company, Zenith Star Insurance Company (collectively, as cedant) and Odyssey America Reinsurance Corporation (as Reinsurer) dated December 28, 2001. (Incorporated herein by reference to Exhibit 10.36 to Zenith's Annual Report on Form 10-K for the year ended December 31, 2001.)
‡10.39		Credit Agreement, dated as of February 16, 2007, between Zenith National Insurance Corp., and Bank of America, N.A., a copy of which is filed herewith as Exhibit 10.39.
10.40		Capital Securities Guarantee Agreement, dated July 30, 1998, between Zenith National Insurance Corp. and Norwest Bank Minnesota, National Association. (Incorporated herein by reference to Exhibit 10.7 to Zenith's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998.)
11		Statement recomputation of per share earnings. (Incorporated herein by reference to Notes to Consolidated Financial Statements — Note 14 — "Earnings and Dividends Per Share" in Zenith's 2006 Annual Report to Stockholders.)
‡13		Zenith's Annual Report to Stockholders for the year ended December 31, 2006, but only to the extent such report is expressly incorporated by reference herein, and such report is not otherwise to be deemed "filed" as a part of this Annual Report on Form 10-K.
‡21		Subsidiaries of the Registrant, a copy of which is filed herewith as Exhibit 21.
‡23.1		Consent of PricewaterhouseCoopers LLP, dated February 16, 2007. (Incorporated herein by reference to page F-1 of this Annual Report on Form 10-K.)
‡31.1		Certification of the Chief Executive Officer pursuant to Exchange Rule 13a-14(a) or Rule 15d-14(a), a copy of which is filed herewith as Exhibit 31.1.
‡31.2		Certification of the Chief Financial Officer pursuant to Exchange Rule 13a-14(a) or Rule 15d-14(a), a copy of which is filed herewith as Exhibit 31.2.
‡32		Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. section 1350, a copy of which is filed herewith as Exhibit 32.

*Management contract or compensatory plan or arrangement.

‡Filed with this Annual Report on Form 10-K.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on February 16, 2007.


		ZENITH NATIONAL INSURANCE CORP.
		By:		/s/ STANLEY R. ZAX Stanley R. Zax Chairman of the Board and President

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated, on February 16, 2007.

/s/ STANLEY R. ZAX Stanley R. Zax		Chairman of the Board and President (Principal Executive Officer)
/s/ MAX M. KAMPELMAN Max M. Kampelman		Director
/s/ ROBERT J. MILLER Robert J. Miller		Director
/s/ LEON E. PANETTA Leon E. Panetta		Director
/s/ CATHERINE B. REYNOLDS Catherine B. Reynolds		Director
/s/ ALAN I. ROTHENBERG Alan I. Rothenberg		Director
/s/ WILLIAM S. SESSIONS William S. Sessions		Director
/s/ GERALD TSAI, JR. Gerald Tsai, Jr.		Director
/s/ MICHAEL WM. ZAVIS Michael Wm. Zavis		Director
/s/ KARI L. VAN GUNDY Kari L. Van Gundy		Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)

Zenith National Insurance Corp. and Subsidiaries
Index to Financial Statements and Schedules

		Page
Consent of Independent Registered Public Accounting Firm		F-1
Report of Independent Registered Public Accounting Firm on Financial Statement Schedules		F-2
Financial Statement Schedules
I	Summary of Investments — Other Than Investments in Related Parties	F-3
II	Condensed Financial Information of Registrant (Parent Company)	F-4
	Balance Sheets	F-4
	Statements of Operations	F-5
	Statements of Cash Flows	F-6
	Notes to Condensed Financial Information of Registrant	F-7
III	Supplemental Insurance Information	F-11
IV	Reinsurance	F-12
V	Valuation and Qualifying Accounts	F-12
VI	Supplementary Information Concerning Property-Casualty Insurance Operations	F-13

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (File Nos. 33-8948, 33-22219, 333-04399, 333-79199, 333-62798, 333-115902 and 333-134531) of Zenith National Insurance Corp. of our report dated February 16, 2007 relating to the consolidated financial statements, management's assessment of the effectiveness of internal control over financial reporting and the effectiveness of internal control over financial reporting, which appears in the 2006 Annual Report to Stockholders, which is incorporated by reference in this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report dated February 16, 2007 relating to the financial statement schedules, which appears in this Form 10-K.

PricewaterhouseCoopers LLP
Los Angeles, California
February 16, 2007

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON FINANCIAL STATEMENT SCHEDULES

To the Board of Directors of
Zenith National Insurance Corp.:

Our audits of the consolidated financial statements, of management's assessment of the effectiveness of internal control over financial reporting and of the effectiveness of internal control over financial reporting referred to in our report dated February 16, 2007 appearing in the 2006 Annual Report to Stockholders of Zenith National Insurance Corp. (which report, consolidated financial statements and assessment are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the financial statement schedules listed in Item 15(a)(2) of this Form 10-K. In our opinion, these financial statement schedules present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.

PricewaterhouseCoopers LLP
Los Angeles, California
February 16, 2007

F-2

SCHEDULE I — SUMMARY OF INVESTMENTS —

OTHER THAN INVESTMENTS IN RELATED PARTIES

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

December 31, 2006

Column A				Column B		Column C		Column D
Type of investment				Cost (1)		Fair Value		Amount at Which Shown in the Balance Sheet (2)
				(Dollars in thousands)
Fixed maturity securities:
	Bonds:
		United States Government and government agencies and authorities		$	286,416	$	286,351	$	286,279
		States, municipalities and political subdivisions			133,887		132,414		133,215
		Public utilities			46,702		46,423		46,423
		Foreign governments			5,000		4,875		5,000
		Convertibles and bonds with warrants attached			7,366		8,190		8,190
		All other corporate bonds			990,577		980,927		980,717
	Redeemable preferred stocks				27,347		27,909		27,909

			Total fixed maturity securities		1,497,295		1,487,089		1,487,733
Equity securities:
	Common stocks:
		Public utilities			725		1,093		1,093
		Banks, trust and insurance companies			22,115		24,123		24,123
		Industrial, misc. and all other			43,355		70,284		70,284
	Nonredeemable preferred stocks				2,819		2,818		2,818

			Total equity securities		69,014		98,318		98,318
Short-term investments					679,989		679,989		679,989
Other investments					7,616		7,616		7,616

			Total investments	$	2,253,914	$	2,273,012	$	2,273,656

(1): Original cost for equity securities. Original cost reduced by repayments and adjusted for amortization of premiums or accretion of discounts for fixed maturity securities.
(2): Amount shown in the balance sheet may differ from cost or fair value for fixed maturity securities depending on the classification of the underlying securities in accordance with Statement of Financial Accounting Standards No. 115 — "Accounting for Investments in Certain Debt and Equity Securities."

F-3

SCHEDULE II — CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY)

ZENITH NATIONAL INSURANCE CORP.

BALANCE SHEETS

			December 31,
(Dollars and shares in thousands)			2006			2005
ASSETS
Investments:
	Fixed maturity investments, at fair value (amortized cost $4,848 in 2006 and $44,193 in 2005)		$	4,925		$	43,715
	Short-term investments (at cost or amortized cost, which approximates fair value)			64,354			21,156

Total investments				69,279			64,871
Cash				120			246
Investment in subsidiaries				951,301			721,355
Other assets				17,256			23,724

		Total assets	$	1,037,956		$	810,196

LIABILITIES
Convertible senior notes payable			$	1,129		$	1,124
Subordinated debentures				77,117			77,108
Dividend payable to stockholders				13,075			9,300
Income tax payable				407			5,902
Other liabilities				5,508			3,967

		Total liabilities		97,236			97,401

Commitments and contingencies (see Note 4)
STOCKHOLDERS' EQUITY
Preferred stock, $1 par — 1,000 shares authorized; none issued or outstanding in 2006 and 2005
Common stock, $1 par — 100,000 shares authorized in 2006 and 50,000 in 2005; issued 44,722 in 2006 and 44,944 in 2005; outstanding 37,027 in 2006 and 37,249 in 2005				44,722			44,944
Additional paid-in capital				459,103			454,281
Retained earnings				590,715			379,031
Accumulated other comprehensive income				12,832			1,191

				1,107,372			879,447
Treasury stock, at cost (7,695 shares in 2006 and 2005)				(166,652	)		(166,652	)

		Total stockholders' equity		940,720			712,795

		Total liabilities and stockholders' equity	$	1,037,956		$	810,196

The accompanying notes are an integral part of these financial statements.

F-4

SCHEDULE II — CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY)

ZENITH NATIONAL INSURANCE CORP.

STATEMENTS OF OPERATIONS

		Year Ended December 31,
(Dollars in thousands)		2006			2005			2004
Net investment income		$	3,028		$	2,637		$	2,471
Realized gains on investments			117			2,206			39

	Total revenues		3,145			4,843			2,510

Operating expenses			6,652			7,471			6,000
Payment regarding conversion of convertible senior notes (see Note 3)						4,710
Interest expense			5,474			8,956			13,250

	Total expenses		12,126			21,137			19,250

Loss from continuing operations after tax and before income tax benefit and equity in earnings of subsidiaries			(8,981	)		(16,294	)		(16,740	)
Income tax benefit			(3,191	)		(5,485	)		(8,685	)

Loss from continuing operations before equity in earnings of subsidiaries			(5,790	)		(10,809	)		(8,055	)
Gain on sale of discontinued real estate segment, net of income tax expense of $675 in 2005 and $692 in 2004						1,253			1,286

Loss after tax and before equity in earnings of subsidiaries			(5,790	)		(9,556	)		(6,769	)
Equity in earnings of subsidiaries			264,490			167,256			125,769

Net income		$	258,700		$	157,700		$	119,000

The accompanying notes are an integral part of these financial statements.

F-5

SCHEDULE II — CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY)

ZENITH NATIONAL INSURANCE CORP.

STATEMENTS OF CASH FLOWS

			Year Ended December 31,
(Dollars in thousands)			2006			2005			2004
Cash flows from operating activities:
	Investment income received		$	3,384		$	2,918		$	2,972
	Operating expenses paid			(403	)		(4,692	)		(5,090	)
	Interest paid			(5,432	)		(10,299	)		(13,132	)
	Income tax (paid) recovered			(267	)		22,537			5,625
	Cash paid regarding conversion of convertible senior notes (see Note 3)						(4,710	)

	Net cash (used in) provided by operating activities			(2,718	)		5,754			(9,625	)

Cash flows from investing activities:
	Purchases of investments:
		Fixed maturity securities available-for-sale					(49,772	)		(4,800	)
		Equity securities available-for-sale								(785	)
	Proceeds from sales of investments:
		Fixed maturity securities available-for-sale		38,918			37,165			28,282
		Equity securities available-for-sale					1,639			436
	Net (increase) decrease in short-term investments			(43,091	)		9,664			(12,821	)
	Dividends received from Zenith Insurance			50,000			30,000			20,000
	Proceeds from sale of discontinued real estate segment						1,928			1,978
	Other, net			6			(398	)		(78	)

	Net cash provided by investing activities			45,833			30,226			32,212

Cash flows from financing activities:
	Cash dividends paid to common stockholders			(43,241	)		(29,472	)		(20,849	)
	Proceeds from exercise of stock options			227			4,296			5,895
	Purchase of treasury shares (see Note 6)						(10,886	)
	Repurchase of redeemable securities			(500	)					(7,600	)
	Excess tax benefit on stock-based compensation			273

	Net cash used in financing activities			(43,241	)		(36,062	)		(22,554	)

Net (decrease) increase in cash				(126	)		(82	)		33
Cash at beginning of year				246			328			295

Cash at end of year			$	120		$	246		$	328

Reconciliation of net income to net cash flows (used in) provided by operating activities:
	Net income		$	258,700		$	157,700		$	119,000
	Equity in income of subsidiaries			(264,490	)		(167,256	)		(125,769	)
	Gain on sale of discontinued real estate segment						(1,253	)		(1,286	)
	(Decrease) increase in income tax payable			(3,458	)		17,052			(3,060	)
	Other			6,530			(489	)		1,490

	Net cash (used in) provided by operating activities		$	(2,718	)	$	5,754		$	(9,625	)

The accompanying notes are an integral part of these financial statements.

F-6

SCHEDULE II — CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY)

ZENITH NATIONAL INSURANCE CORP.

NOTES TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT (PARENT COMPANY)

The accompanying condensed financial statements and the related notes should be read in conjunction with the consolidated financial statements and notes thereto of Zenith National Insurance Corp. ("Zenith National") and subsidiaries (collectively, "Zenith"). Certain prior year amounts in the condensed financial statements have been reclassified to conform to the current year presentation.

NOTE 1. 3-for-2 Stock Split

On September 7, 2005, Zenith National's Board of Directors declared a 3-for-2 stock split which was paid in the form of a 50% stock dividend. The additional shares of Zenith National's common stock were distributed on October 11, 2005 to stockholders of record as of September 19, 2005. The 3-for-2 stock split was recorded in the third quarter of 2005 as an increase to common stock and a decrease to additional paid-in capital.

NOTE 2. Investment In Subsidiaries

Zenith National owns, directly or indirectly, 100% of the outstanding stock of Zenith Insurance Company ("Zenith Insurance"); ZNAT Insurance Company; Zenith of Nevada, Inc. (formerly, Perma-Bilt, a Nevada corporation ("Perma-Bilt")); and Zenith National Insurance Capital Trust I ("Trust"). These investments are included in the accompanying condensed financial statements on the equity basis of accounting. Included in investment in subsidiaries at December 31, 2006 and 2005 was $2.0 million of the unamortized excess of cost over underlying net tangible assets of companies acquired prior to 1970, which is considered to have continuing value.

Zenith National also owns $16.5 million of the Trust's 8.55% Capital Securities, which are included in other assets and interest earned thereon is recorded as an offset to interest expense.

In 2002, we sold our home-building business and related real estate assets in Las Vegas, Nevada to MTH-Homes Nevada, Inc. ("MTH Nevada"), a wholly-owned subsidiary of Meritage Corporation. In addition to the consideration received in 2002, we were entitled to receive 10% of MTH Nevada's pre-tax net income, subject to certain adjustments, for each of the twelve-month periods ending September 30, 2003, September 30, 2004 and September 30, 2005. We recorded additional gains under the earn-out provision of the sale agreement for all three twelve month periods, including $1.9 million ($1.3 million after tax) and $2.0 million ($1.3 million after tax) in 2005 and 2004, respectively. The last such payment under the earn-out provision was received in 2005.

We file a consolidated income tax return. Our equity in the income of our subsidiaries is net of a provision for income tax expense of $145.3 million, $87.8 million and $66.6 million for the years ended December 31, 2006, 2005 and 2004, respectively. We have a tax allocation agreement with our subsidiaries and the 2006, 2005 and 2004 condensed financial information of the parent company reflects Zenith National's portion of the consolidated tax.

NOTE 3. Debt

Convertible Senior Notes Payable. On March 21, 2003, we issued $125.0 million aggregate principal amount of 5.75% Convertible Senior Notes due March 30, 2023 ("Convertible Notes") in a private placement, from which we received net proceeds of $120.0 million.

In 2005, a total $123.8 million of aggregate principal amount of the Convertible Notes were converted into shares of our common stock. We entered into privately negotiated transactions with the holders of $81.2 million of the aggregate principal amount pursuant to which the holders converted their Convertible Notes in accordance with the Indenture governing the Convertible Notes

F-7

("Indenture") and received a total of $4.7 million in cash as an incentive for such conversion. An additional $42.6 million aggregate principal amount of the Convertible Notes were converted into shares of our common stock and no cash incentive was paid in connection with these conversions.

The remaining $1.2 million aggregate principal amount of Convertible Notes outstanding at December 31, 2006 are general unsecured obligations of Zenith National and rank equally with our other unsecured and unsubordinated obligations. Interest on the Convertible Notes is payable semi-annually on March 30 and September 30, beginning September 30, 2003. In addition, we will pay contingent interest during any six-month period commencing with the six-month period beginning September 30, 2008 if the average market price of a Convertible Note for the five trading days ending on the second trading day immediately preceding the relevant six-month period equals 120% or more of the principal amount of the Convertible Notes. Each $1,000 principal amount of the Convertible Notes is convertible at each holder's option into 59.988 shares of our common stock, par value $1.00 per share (subject to adjustment as provided in the Indenture) only if: (i) during any fiscal quarter the sale price of the common stock for at least 20 trading days in the 30 trading-day period ending on the last trading day of the immediately preceding fiscal quarter exceeds 120% of the conversion price on that 30th trading day; (ii) after the 30th day following the initial issuance of the Convertible Notes, the credit rating assigned to the Convertible Notes by Standard & Poor's Rating Services falls below BB- or is suspended or withdrawn; (iii) Zenith has called the Convertible Notes for redemption; or (iv) certain corporate events have occurred. The conversion rate of 59.988 shares for each $1,000 principal amount of Convertible Notes is equivalent to a conversion price of $16.67 per share of our common stock. The sale price of our common stock exceeded 120% of the conversion price of $16.67 per share for 20 trading days during the last 30 trading days of the fourth quarter of 2006. As a result of this event, each holder of the remaining $1.2 million aggregate principal amount of the notes has the right to convert their Convertible Notes into our common stock at a conversion rate of 59.988 shares per $1,000 principal amount of Convertible Notes during the period beginning on January 1, 2007 and ending on March 31, 2007 (maximum number of shares that could be required to be issued is approximately 69,000). Whether the Convertible Notes will be convertible after March 31, 2007 will depend upon the occurrence of the events specified in the Indenture, including the sale price of our common stock.

We may redeem some or all of the remaining $1.2 million aggregate principal amount of Convertible Notes for cash on or after March 30, 2008 at the prices specified in the Indenture. Each holder may require us to repurchase all or a portion of its Convertible Notes on March 30, 2010, March 30, 2013, March 30, 2018, or, subject to certain exceptions, upon a change of control of Zenith. If any holder requires us to repurchase its Convertible Notes in any of these events, we may choose to pay the repurchase price in cash or shares of its common stock or a combination of cash and shares of its common stock.

Issue costs and discount of $5.0 million are being amortized using the effective interest method over the time from issuance to March 30, 2010. At December 31, 2006 and 2005, the unamortized issue costs and discount was approximately $21,000 and $26,000, respectively. During the years ended December 31, 2006, 2005 and 2004, $0.1 million, $3.5 million and $7.8 million, respectively, of interest, issue costs and discount were expensed.

Subordinated Debentures. At December 31, 2006 and 2005, we had $77.3 million aggregate principal amount of the 8.55% Subordinated Deferrable Interest Debentures due 2028 ("Subordinated Debentures") outstanding, all of which were held by the Trust. The semi-annual interest payments on the Subordinated Debentures may be deferred by us for up to ten consecutive semi-annual periods. The Subordinated Debentures are redeemable at any time by us at 100% of the principal amount of the Subordinated Debentures plus a "make-whole premium," if any, together with accrued and unpaid interest. The make-whole premium is the excess of the then present value of the remaining scheduled payments of principal and interest over 100% of the principal amount. The issue cost and discount on

F-8

the Subordinated Debentures of $1.7 million are being amortized over the term of the Subordinated Debentures. During each of the years ended December 31, 2006, 2005 and 2004, $6.7 million of interest and issue costs were expensed. At December 31, 2006 and 2005, the unamortized costs and discount was approximately $203,000 and $212,000, respectively. The Subordinated Debentures are subordinated to all other indebtedness of Zenith National.

Aggregate Maturities

At December 31, 2006, the aggregate maturities for all of our long-term borrowings for each of the five years and thereafter were as follows:


(Dollars in thousands)	Convertible Notes		Subordinated Debentures		Total

Maturing In:
2007	$	1,150			$	1,150
2008
2009
2010
2011
Thereafter			$	77,320		77,320

Total	$	1,150	$	77,320	$	78,470

The maturity of the outstanding Convertible Notes is presented as being due in 2007 because the holders of our Convertible Notes have the right to convert their notes into our common stock during the first quarter of 2007 since the contingent conversion condition relative to our stock price was met at December 31, 2006. Whether the notes will be convertible after March 31, 2007 will depend upon the occurrence of events specified in the Indenture, including the sale price of our common stock. If the remaining Convertible Notes are not converted or redeemed, their scheduled maturity is March 2023.

Bank Lines of Credit. At December 31, 2006, we had a $30.0 million revolving credit agreement with a bank which on February 16, 2007, was renewed with an expiration date of February 16, 2010. Interest is payable on any outstanding loans at either the bank's prime rate or a rate based on Eurodollar deposit rates plus a specified margin depending on our credit rating. This credit agreement contains covenants that require, among other things, we maintain certain financial ratios, including a minimum amount of capital in our insurance subsidiaries, a maximum debt-to-total capitalization ratio and a minimum interest coverage ratio. We were in compliance with all of these covenants at December 31, 2006.

There were no borrowings under the bank line of credit in 2006 and 2005. We currently do not anticipate the need to draw on our available line of credit because our current cash and available invested assets are sufficient for any foreseeable requirements.

NOTE 4. Commitments and Contingencies

F-9

claims have been accepted, for which we have recorded a recoverable of $3.7 million, net of amounts due to reinsurers. We bill the SDTF and receive reimbursements as we make payments on accepted claims. The SDTF is funded by currently assessing a fee of 4.52% of workers' compensation premiums written in Florida, and we accrue the assessment as a liability when we write Florida business. If the legislature in Florida were to decide to cease or suspend the assessment, and thereby the funding of the SDTF, any recoverable that we may have at that time which is related to un-reimbursed claims might be at risk. However, we have no current information to indicate that the SDTF assessment in Florida will not continue. We continue to collect recoveries for second injury claims from the SDTF and although the SDTF is currently about 36 months behind schedule in reimbursing claims, we expect to fully recover the remaining amount receivable. The ultimate resolution of this matter is not expected to have a material impact because the amount recoverable from the SDTF at December 31, 2006 is not material to our consolidated financial position, results of operations or cash flows.

Litigation. We are defendants in various litigation. In the opinion of management, after consultation with legal counsel, such litigation is either without merit or the ultimate liability, if any, is not expected to have a material adverse effect on our consolidated financial condition, results of operations or cash flows.

NOTE 5. Other Comprehensive Income

Other comprehensive income is comprised of changes in unrealized appreciation on investments classified as available-for-sale. The following table summarizes the components of accumulated other comprehensive income:


	December 31,
(Dollars in thousands)	2006			2005

Net unrealized appreciation on investments, before tax	$	19,742		$	1,833
Deferred tax expense		(6,910	)		(642	)

Total accumulated other comprehensive income:	$	12,832		$	1,191

NOTE 6. Exercise of Stock Options Using Previously Acquired Shares

An employee exercised his option to purchase from Zenith National a total of 1,198,500 shares of Zenith National's common stock in 2005 and 301,500 shares in 2004 at an exercise price of $15.75 per share using previously owned shares to pay the purchase price. In connection with the exercises in 2005, the employee arranged with us to withhold shares from the shares acquired upon exercise of the option as reimbursement of withholding taxes due.

The following table sets forth these transactions:


(Dollars and shares in thousands, except per share data)	September 2005		February 2005		March 2004

Shares of common stock purchased		268		931		301
Exercise price per share	$	15.75	$	15.75	$	15.75
Aggregate exercise price	$	4,219	$	14,657	$	4,748
Number of shares tendered by employee in lieu of cash payment of aggregate exercise price		99		432		182
Number of shares withheld for withholding taxes due		78		225
Value of shares tendered by employee in lieu of cash payment of aggregate exercise price	$	4,219	$	14,657	$	4,748
Value of shares withheld for withholding taxes due		3,341		7,545

These exercises of stock options had no net effect on cash or stockholders' equity in 2005 or 2004 because the increase in treasury stock for the shares tendered was offset by an increase in common stock and an increase in additional paid-in capital for the shares issued. The shares withheld by us in lieu of cash payment to reimburse us for withholding taxes decreased stockholders' equity by increasing treasury stock and decreasing cash.

F-10

SCHEDULE III — SUPPLEMENTARY INSURANCE INFORMATION
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

Column A		Column B		Column C		Column D		Column E	Column F		Column G		Column H		Column I		Column J		Column K
Segment		Deferred Policy Acquisition Costs		Future Policy Benefits, Losses, Claims and Loss Expenses		Unearned Premiums		Other Policy Claims and Benefits Payable	Premium Revenue		Net Investment Income		Benefits, Claims, Losses and Settlement Expenses		Amortization of Deferred Policy Acquisition Costs		Other Operating Expenses		Premiums Written
(Dollars in thousands)
Year Ended December 31, 2006
Property and Casualty:
	Workers' compensation	$	12,617	$	1,416,005	$	82,992		$	931,739			$	292,160	$	145,833	$	128,770	$	901,108
	Reinsurance				106,275					12,478				30,624		1,320		1,042		2,661

			12,617		1,522,280		82,992			944,217				322,784		147,153		129,812		903,769
Investment											$	106,294
Parent																		6,652

	Total	$	12,617	$	1,522,280	$	82,992		$	944,217	$	106,294	$	322,784	$	147,153	$	136,464	$	903,769

2005
Property and Casualty:
	Workers' compensation	$	15,493	$	1,523,617	$	113,623		$	1,114,194			$	590,738	$	164,769	$	116,433	$	1,092,790
	Reinsurance		1,181		179,828		9,850			64,506				113,132		6,366		1,191		67,143

			16,674		1,703,445		123,473			1,178,700				703,870		171,135		117,624		1,159,933
Investment											$	79,200
Parent																		12,181

	Total	$	16,674	$	1,703,445	$	123,473		$	1,178,700	$	79,200	$	703,870	$	171,135	$	129,805	$	1,159,933

2004
Property and Casualty:
	Workers' compensation								$	902,047			$	583,165	$	109,766	$	99,276	$	944,629
	Reinsurance									42,378				45,598		7,499		1,237		40,377

										944,425				628,763		117,265		100,513		985,006
Investment											$	61,876
Parent																		6,000

	Total								$	944,425	$	61,876	$	628,763	$	117,265	$	106,513	$	985,006

F-11

SCHEDULE IV — REINSURANCE
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

Column A	Column B		Column C		Column D		Column E		Column F
(Dollars in thousands)	Gross Amount		Ceded to Other Companies		Assumed From Other Companies		Net Amount		Percentage of Amount Assumed to Net Percentage
Year Ended December 31,
2006
Premiums earned	$	964,131	$	38,447	$	18,533	$	944,217	2.0	%
2005
Premiums earned		1,148,775		46,580		76,505		1,178,700	6.5
2004
Premiums earned		1,034,903		144,260		53,782		944,425	5.7

SCHEDULE V — VALUATION AND QUALIFYING ACCOUNTS
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

			Column C
Column A	Column B		Additions			Column D		Column E
(Dollars in thousands)	Balance at Beginning of Year		Charged to Costs and Expenses		Charged to Other Accounts	Deductions (1)		Balance at End of Year
Year Ended December 31,
2006
Allowance for uncollectible premiums	$	77	$	731		$	808
Provision for uncollectible reinsurance recoverable
2005
Allowance for uncollectible premiums		192		3,677			3,792	$	77
Provision for uncollectible reinsurance recoverable		3,000		3,000			6,000
2004
Allowance for uncollectible premiums		578		3,831			4,217		192
Provision for uncollectible reinsurance recoverable		3,000							3,000

(1): Deductions represent amounts determined to be uncollectible and written-off.

F-12

SCHEDULE VI — SUPPLEMENTARY INFORMATION CONCERNING PROPERTY-CASUALTY INSURANCE OPERATIONS
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES AND ITS PROPORTIONATE SHARE OF EQUITY INVESTEE —
ADVENT CAPITAL (HOLDINGS) PLC

Column A	Column B	Column C	Column D	Column E	Column F		Column G		Column H				Column I		Column J		Column K
									Claims and claim adjustment expenses incurred related to
		Reserves for Unpaid Claims and Claim Adjustment Expenses											Amortization of Deferred Policy Acquisition Costs		Paid Claims and Claim Adjustment Expense
	Deferred Policy Acquisition Costs		Discount, if any, Deducted in Column C
Affiliation with Registrant	Deferred Policy Acquisition Costs		Discount, if any, Deducted in Column C	Unearned Premiums	Earned Premiums		Net Investment Income		Current Year		Prior Year						Premiums Written
(Dollars in thousands)
Year ended December 31, 2004 (1)
(a) Zenith National Insurance Corp. and Subsidiaries					$	944,425	$	61,876	$	615,397	$	13,366	$	117,265	$	407,608	$	985,006

(c) Proportionate share of Zenith's equity investee — Advent Capital (Holdings) PLC (2)					$	33,509	$	768	$	23,486	$	94	$	5,913	$	19,152	$	35,374

(1): Advent Capital (Holdings) PLC's information is not required after 2004 as we account for our investment in Advent Capital (Holdings) PLC under the cost method of accounting at December 31, 2005 and 2006.
(2): Information in (c) above is presented for the twelve months ended September 30, 2004 because we previously accounted for our investment in Advent Capital (Holdings) PLC under the equity method on a one-quarter lag.

F-13

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

EXHIBIT INDEX

Number		Exhibit
4.3		Certificate of Amendment to Certificate of Trust of Zenith National Insurance Capital Trust I dated August 1, 2006.
10.7		Amended and Restated Tax Sharing Agreement dated as of December 19, 2006 by and among Zenith National Insurance Corp. and its subsidiaries, Zenith Insurance Company, ZNAT Insurance Company, Zenith Development Corp., Zenith of Nevada, Inc., Zenith Insurance Management Services, Inc. and 1390 Main Street, LLC.
10.39		Credit Agreement, dated as of February 16, 2007, between Zenith National Insurance Corp., and Bank of America, N.A.
13		Zenith's Annual Report to Stockholders for the year ended December 31, 2006, but only to the extent such report is expressly incorporated by reference herein, and such report is not otherwise to be deemed "filed" as a part of this Annual Report on Form 10-K.
21		Subsidiaries of the Registrant
31.1		Certification of Chief Executive Officer pursuant to Exchange Rule 13a-14(a) or Rule 15d-14(a).
31.2		Certification of Chief Financial Officer pursuant to Exchange Rule 13a-14(a) or Rule 15d-14(a).
32		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350.

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PART I

Item 1. Business. General

Item 1B. Unresolved Staff Comments.

Item 2. Properties.

Item 3. Legal Proceedings.

Item 4. Submission of Matters to a Vote of Security Holders.

PART II

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Item 6. Selected Financial Data.

Item 7. Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk.

Item 8. Financial Statements and Supplementary Data.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

Item 9A. Controls and Procedures.

Item 9B. Other Information

PART III

Item 10. Directors, Executive Officers and Corporate Governance.

Item 11. Executive Compensation.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

Item 13. Certain Relationships and Related Transactions and Director Independence.

Item 14. Principal Accountant Fees and Services.

Exhibit 4.3

CERTIFICATE OF AMENDMENT TO CERTIFICATE OF TRUST
OF
ZENITH NATIONAL INSURANCE CAPITAL TRUST I

On June 30, 1998, a Certificate of Trust (the "Certificate of Trust"), forming Zenith National Insurance Capital Trust I (the "Trust") as a business trust under the Delaware Business Trust Act (12 Del. C. section 3801 et. seq.), was filed with the Secretary of State, State of Delaware.

This Certificate of Amendment constitutes notice of a change in the Regular Trustees of the Trust, namely, that effective August 1, 2006, William J. Owen ceased being a Regular Trustee and Kari L. Van Gundy was appointed to replace him. In all other respects, the Certificate of Trust remains unchanged and is expressly reaffirmed.

IN WITNESS WHEREOF, the undersigned have executed this Certificate of Amendment as of August 1, 2006.

WILMINGTON TRUST COMPANY,			WELLS FARGO BANK, N. A.,
	not in its individual capacity but solely as Delaware Trustee			not in its individual capacity but solely as Property Trustee
By:	/s/ MICHAEL G. OLLER, JR.		By:	/s/ TIMOTHY P. MOWDY
	Name:	Michael G. Oller, Jr.		Name:	Timothy P. Mowdy
	Title:	Senior Financial Services Officer		Title:	Vice President
/s/ STANLEY R. ZAX STANLEY R. ZAX,			/s/ KARI L. VAN GUNDY KARI L. VAN GUNDY,
	not in his individual capacity but solely as Regular Trustee			not in her individual capacity but solely as Regular Trustee
/s/ WILLIAM J. OWEN WILLIAM J. OWEN
	not in his individual capacity but solely as withdrawing Regular Trustee

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CERTIFICATE OF AMENDMENT TO CERTIFICATE OF TRUST OF ZENITH NATIONAL INSURANCE CAPITAL TRUST I
EX-10.7 3 a2175738zex-10_7.htm EXHIBIT 10.7
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Exhibit 10.7

AMENDED AND RESTATED TAX SHARING AGREEMENT
(AS OF DECEMBER 19, 2006)

This Amended and Restated Tax Sharing Agreement (the "Agreement") is made as of this 19^th day of December 2006 by and among Zenith National Insurance Corp.("Zenith National") and its subsidiaries, Zenith Insurance Company, ZNAT Insurance Company, Zenith Development Corp., Zenith of Nevada, Inc., Zenith Insurance Management Services, Inc. and 1390 Main Street, LLC (the "Existing Subsidiaries").

WHEREAS, Zenith National is the common parent of an affiliated group of corporations, as defined in section 1504 (a) of the Internal Revenue Code of 1986, as amended (the "Code"), of which the Existing Subsidiaries are members;

WHEREAS, Zenith National, on behalf of its affiliated group, has filed for previous taxable years consolidated federal income tax returns in accordance with section 1501 of the Code and is required to file consolidated federal income tax returns for subsequent taxable years;

WHEREAS, Zenith National and the Existing Subsidiaries had entered into an Amended and Restated Tax Sharing Agreement as of January 1, 1991, which has been subsequently amended from time to time (as so amended, the "Existing Agreement"), and which provides for the allocation of the consolidated federal income tax among the parties and certain related matters;

WHEREAS, Zenith National, on behalf of its affiliated group or any sub-group of the affiliated group has filed, or may elect to file in the future, combined or consolidated State Income Tax Returns (as hereinafter defined) with those states that require or allow such combined or consolidated returns;

WHEREAS, the parties now wish to provide for the allocation among them of consolidated or combined state income tax liability and certain related matters; and

WHEREAS, Zenith National and the Existing Subsidiaries now desire to amend and restate the Existing Agreement to consolidate the documents that constitute the Existing Agreement into a single document and also to provide for the allocation among them of consolidated or combined state income tax liability.

NOW, THEREFORE, in consideration of the foregoing premises and of the mutual covenants and agreements contained herein, the parties agree that the Existing Agreement is hereby amended and restated in its entirety, as follows:

1.: DEFINITIONS.

For purposes of this Agreement, the terms set forth below shall be defined as follows:

(a): "Federal Tax Group" shall mean Parent (as hereinafter defined), the Existing Subsidiaries, and all other corporations (whether now existing or hereafter formed or acquired) that are required to join with Parent in filing a consolidated federal income tax return.
(b): "Federal Tax Group Liability" shall mean the consolidated federal income tax liability of the Federal Tax Group reported on the Federal Tax Group's consolidated federal income tax return filed for the taxable year.
(c): "Hypothetical Basis." Whenever, in this Agreement, a computation is to be made on a Hypothetical Basis, it shall be made on a pro forma basis, as if the Subsidiary filed a separate federal income tax return or State Income Tax Return, as applicable, for each taxable period, based upon any assumptions stated in the respective provision.

(d): "Member" shall mean any entity that is included in the Federal Tax Group or a State Tax Group, as applicable, or any successor to such entity.
(e): "Parent" shall mean (i) Zenith National, (ii) any successor common parent corporation described in Treas. Reg. §1.1502-75 (d)(2)(i) or (ii), or (iii) any corporation as to which Parent (or successor corporation described in clause (ii) hereof) is the "predecessor" within the meaning of Treas. Reg. §1.1502-1(f)(1), if such corporation acquires Zenith National (or a successor corporation described in clause (ii) hereof) in a "reverse acquisition" within the meaning of Treas. Reg. §1.1502-75(d)(3).
(f): "Separate Federal Tax Benefit" of a Subsidiary shall mean the amount by which the Federal Tax Group Liability was reduced as a result of a tax credit or of a Separate Federal Taxable Loss or the carryforward or carryback of a Separate Federal Taxable Loss attributable to such Subsidiary. The amount of reduction of the Federal Tax Group Liability on the Federal Tax Group's consolidated return attributable to a Subsidiary shall be computed by calculating the difference between (i) the Federal Tax Group Liability and (ii) the hypothetical Federal Tax Group Liability computed by excluding the items of income, deduction, loss and credit attributable to the Subsidiary in question. The ordering and allocation of the use of credits, net operating losses and capital losses of Subsidiaries will be determined under the Code, the regulations thereunder and generally accepted procedures of tax accounting. Notwithstanding the foregoing, the computation provided in clause (ii) above will be made based only on the items included for purposes of making the computation provided in clause (i) above; no additional losses or credits of other Subsidiaries are to be considered in making the computation provided in clause (ii).
(g): "Separate Federal Tax Liability" of a Subsidiary shall mean an amount equal to any tax computed as a flat tax at the highest marginal rate, without exemptions, under each respective tax provision (including, without limitation, that imposed under Sections 11, 55 and 1201 (a) of the Code) with respect to the Separate Federal Taxable Income of such Subsidiary, reduced by current credits, if any, against tax, allowable in respect of such Separate Federal Taxable Income, without giving effect to any otherwise allowable carryover or carryback of a Separate Federal Taxable Loss or credits (other than SRLY losses or credits) from any other taxable year of such Subsidiary, all as computed on a Hypothetical Basis.
(h): "Separate Federal Taxable Income" of a Subsidiary shall mean the amount of taxable income of the Subsidiary for any period for which the Subsidiary has positive taxable income (including, but not limited to, alternative minimum taxable income), computed on a Hypothetical Basis pursuant to the method of federal income tax accounting employed by each such Subsidiary.
(i): "Separate Federal Taxable Loss" of the Subsidiary shall mean the amount of any net operating loss or net capital loss of the Subsidiary for any period pursuant to section 172 and section 1211 of the Code, respectively, computed using the principles applicable to a determination of Separate Federal Taxable Income.
(j): "Separate State Tax Benefit" of a Subsidiary shall mean the amount by which the State Tax Group Liability was reduced as a result of a tax credit or of a Separate State Taxable Loss or the carryforward or carryback of a Separate State Taxable Loss attributable to such Subsidiary. The amount of reduction of the State Tax Group Liability on the State Tax Group's consolidated return attributable to a Subsidiary shall be computed by calculating the difference between (i) the State Tax Group Liability and (ii) the hypothetical State Tax Group Liability computed by excluding the items of income, deduction, loss and credit attributable to the Subsidiary in question. The ordering and

allocation of the use of credits, net operating losses and capital losses of Subsidiaries will be determined under applicable state law and generally accepted procedures of tax accounting. Notwithstanding the foregoing, the computation provided in clause (ii) above will be made based only on the items included for purposes of making the computation provided in clause (i) above; no additional losses or credits of other Subsidiaries are to be considered in making the computation provided in clause (ii).

(k): "Separate State Tax Liability" of a Subsidiary shall mean an amount equal to any tax computed as a flat tax at the highest marginal rate, without exemptions, under each respective tax provision with respect to the Separate State Taxable Income of such Subsidiary, reduced by current credits, if any, against tax, allowable in respect of such Separate State Taxable Income, without giving effect to any otherwise allowable carryover or carryback of a Separate State Taxable Loss or credits (other than SRLY losses or credits) from any other taxable year of such Subsidiary, all as computed on a Hypothetical Basis.
(l): "Separate State Taxable Income" of a Subsidiary shall mean the amount of taxable income of the Subsidiary for any period for which the Subsidiary has positive taxable income (including, but not limited to, alternative minimum taxable income), computed on a Hypothetical Basis pursuant to the method of applicable income tax accounting employed by each such Subsidiary.
(m): "Separate State Taxable Loss" of a Subsidiary shall mean the amount of any net operating loss or net capital loss of the Subsidiary for any period pursuant to applicable state tax provisions, computed using the principles applicable to a determination of Separate State Taxable Income.
(n): "State Income Tax Return" shall mean any income tax, franchise tax or excise tax return based on the net income of the taxpayer.
(o): "State Tax Group" shall mean, as applicable, the Federal Tax Group or any other combination of Parent and one or more Subsidiary that join in filing a combined or consolidated state return for any state.
(p): "State Tax Group Liability" shall mean the consolidated state income tax liability of the State Tax Group reported on a State Tax Group's consolidated State Income Tax Return filed for the taxable year.
(q): "Subsidiary" shall mean a corporation or a limited liability company, other than Parent, and which is a Member of the Federal Tax Group or the State Tax Group, as applicable.

2.

FILING OF CONSOLIDATED RETURNS.

(a): Parent shall, on a timely basis, file or cause to be filed, consolidated federal income tax returns and estimated tax returns for the Federal Tax Group for each taxable year during the term of this Agreement and shall pay in full any tax shown as due thereon. Each Member shall execute and file such consents, elections, and other documentation as may be required or appropriate for the proper filing of such returns. Each Member shall also maintain such books and records and provide such information as Parent may request in connection with the matters contemplated by this Agreement. The cost of preparing such tax returns and estimated tax returns shall be borne by each Member in the manner set forth in the Cost Allocation Agreement, dated December 31, 1990, as may be amended from time to time, entered into by certain parties that are Members of the Federal Tax Group.

(b): Parent shall have the right, in its sole discretion, to (i) make any elections which are employed in the filing of such returns, including any elections denominated as such in the Code and choice of methods of accounting and depreciation; (ii) determine the manner in which such returns shall be prepared and filed, including without limitation, the manner in which any item of income, gain, loss, deduction or credit shall be reported; (iii) contest, compromise or settle any adjustment or deficiency proposed or asserted as a result of any audit of any such returns; (iv) file, prosecute, compromise or settle any claim for refund; and (v) determine whether any refunds to which the Federal Tax Group may be entitled shall be paid by way of refund or credit against the federal income tax liability of the Federal Tax Group.
(c): Parent shall have the right, in its sole discretion, to elect to file combined or consolidated State Income Tax Returns with states that allow or require such combined or consolidated State Income Tax Returns for a State Tax Group(s). In such event, Parent shall pay in full any tax shown as due on such returns or estimates. Each Member shall execute and file such consents, elections, and other documentation as may be required or appropriate for the proper filing of such returns. Each Member shall also maintain such books and records and provide such information as Parent may request in connection with the matters contemplated by this Agreement. Parent shall have the right, in its sole discretion, to (i) make any elections which are employed in the filing of such returns, including any elections denominated as such in applicable provisions and choice of methods of accounting and depreciation; (ii) determine the manner in which such returns shall be prepared and filed, including without limitation, the manner in which any item of income, gain, loss, deduction or credit shall be reported; (iii) contest, compromise or settle any adjustment or deficiency proposed or asserted as a result of any audit of any such returns; (iv) file, prosecute, compromise or settle any claim for refund; and (v) determine whether any refunds to which the State Tax Group may be entitled shall be paid by way of refund or credit against the state income tax liability of the State Tax Group. The cost of preparing such tax returns and estimated tax returns shall be borne by each Member in the manner set forth in the Cost Allocation Agreement, dated December 31, 1990, as may be amended from time to time, entered into by certain parties that are Members of the State Tax Group.

3A.: FEDERAL TAX GROUP PAYMENTS.

For each taxable year of the Federal Tax Group with respect to which a consolidated federal income tax return is filed, the Members of the Federal Tax Group shall make payments to Parent in the following manner:

(a): Each Member shall pay to Parent the amount of such Member's Separate Federal Tax Liability no earlier than ten (10) days prior to the filing date of the Federal Tax Group's consolidated federal income tax return (taking into account of any extensions thereof) and no later than thirty (30) days after such filing date.
(b): At the option of Parent, each Member shall pay to Parent, no earlier than ten (10) days before the date the Federal Tax Group makes a consolidated estimated federal tax payment (including any payment due at the time any extension of time for filing the consolidated federal tax return is obtained), an amount, as determined by Parent in a manner consistent with paragraph l (g), equal to the portion of such Member's Separate Federal Tax Liability that would be due were such Member to file a separate federal income tax return for the taxable year. Any payments made by a Member to Parent under this subparagraph (b) with respect to a taxable year shall be applied to reduce the amount, if any, owing by the Member under subparagraph (a) of this paragraph 3A with

respect to such year. Any excess of such payments over the amount determined under subparagraph (a) of this paragraph 3A for such year shall be repaid by Parent to the Member no later than thirty (30) days after the date on which the excess is calculated or, to the extent that such excess represents all or part of a tax refund claimed by the Federal Tax Group, no later than thirty (30) days after the receipt of such refund.

(c): For taxable years of the Federal Tax Group beginning on or after the date of this Agreement, Parent shall pay to each Subsidiary, by the date upon which the Federal Tax Group's consolidated federal income tax return is filed, an amount equal to the Separate Federal Tax Benefit, if any, of the Subsidiary. No compensation shall be paid by any Subsidiary to another Subsidiary for tax savings resulting from the effective utilization by the first Subsidiary of (i) any net operating loss, capital loss, investment tax credit, foreign tax credit, or other tax credit, or (ii) a carryover of such loss or credit, of such Subsidiary.

3B.: STATE TAX GROUP PAYMENTS.

For each taxable year of a State Tax Group with respect to which a consolidated or combined State Income Tax Return is filed, the Members of the respective State Tax Group shall make payments to Parent in the following manner, on a state by state basis:

(a): Each Member shall pay to Parent the amount of such Member's Separate State Tax Liability no earlier than ten (10) days prior to the filing date of the State Tax Group's consolidated State Income Tax Return (taking account of any extensions thereof) and no later than thirty (30) days after such filing date.
(b): At the option of Parent, each Member shall pay to Parent, no earlier than ten (10) before the date the State Tax Group makes a consolidated estimated state tax payment (including any payment due at the time any extension of time for the filing of a consolidated State Income Tax Return), an amount, as determined by Parent in a manner consistent with paragraph 1(k), equal to the portion of such Member's Separate State Tax Liability that would be due were such Member to file a separate State Income Tax Return for the taxable year. Any payments made by a Member to Parent under this subparagraph (b) with respect to a taxable year shall be applied to reduce the amount, if any, owing by the Member under subparagraph (a) of this paragraph 3B with respect to such year. Any excess of such payments over the amount determined under subparagraph (a) of this paragraph 3B for such year shall be repaid by Parent to the Member no later than thirty (30) days after the date on which such excess is calculated or, to the extent that such excess represents all or part of a tax refund claimed by the State Tax Group, no later than thirty (30) days after the receipt of such refund.
(c): For taxable years of the State Tax Group beginning on or after the date of this Agreement, Parent shall pay to each Subsidiary, by the date upon which the Group's consolidated State Income Tax Return is filed, an amount equal to the Separate State Tax Benefit, if any, of the Subsidiary. No compensation shall be paid by any Subsidiary to another Subsidiary for tax savings resulting from the effective utilization by the first Subsidiary of (i) any net operating loss, capital loss, investment tax credit, foreign tax credit, or other tax credit, or (ii) a carryover of such loss or credit, of such Subsidiary.

4A.

CHANGES IN FEDERAL TAX LIABILITY.

(a): If with respect to any taxable year (i) the Federal Tax Group files an amended consolidated federal income tax return reporting a consolidated federal income tax liability different from the Federal Tax Group Liability, (ii) the Federal Tax Group Liability or any Member's tax liability is adjusted and such adjustment is part of a final "determination" as that term is defined in section 1313 (a) of the Code, or (iii) the

Federal Tax Group is assessed and pays federal income taxes in excess of the Federal Tax Group Liability by reason of any of the events specified in section 6213 (b) or (d) of the Code, then the amounts of the payments required under paragraph 3A shall be recomputed, subject to the limitations of subparagraph (c) of this paragraph 4A, to give effect to such amended return, adjustment or assessment, as the case may be. Each Member shall then pay to Parent, or Parent shall then pay to each Member, as the case may be, any difference between the amounts determined by such recomputation and the amounts previously paid. Such payments shall be made as follows: (i) where an additional payment of tax by the Federal Tax Group is due as a result of such amended return, adjustment or assessment, no earlier than ten (10) days prior to the date on which such additional tax payment is due and no later than thirty (30) days after such payment is due; or (ii) where the Federal Tax Group receives a refund arising from such amended return or adjustment, no later than thirty (30) days after the receipt of such refund.

(b): If with respect to any taxable year the Federal Tax Group files an amended consolidated federal income tax return reporting a consolidated federal income tax liability identical to the Federal Tax Group Liability, then the amounts of the payments required under paragraph 3A, subject to the limitations of subparagraph (c) of this paragraph 4A, shall be recomputed to give effect to such amended return. No later than thirty (30) days after the filing of such amended return, each Member shall pay to Parent, or Parent shall pay to each Member, as the case may be, any difference between the amounts determined by such recomputation and the amounts previously paid.
(c): The parties recognize that a recomputation under subparagraphs (a) or (b) of this paragraph 4A of the amounts of the payments required under paragraph 3A for any taxable year will not necessarily be the final determination of the amounts of such payments for such year, and the amounts of such payments may be recomputed more than once.
(d): In the event that a change in the tax liability of the Federal Tax Group arising from an amended return, adjustment or assessment described in subparagraph (a) of this paragraph 4A results or will result in the receipt or payment of interest, or the payment or recovery of penalties in excess of the aggregate interest or penalties included in determining the aggregate Separate Federal Tax Liability of all of the Members, such interest or penalties shall be allocated to each Member as follows: The total amount of such excess interest or penalty shall be multiplied by a fraction, the denominator of which is the amount of the change in the Federal Tax Group Liability on which the interest or penalty is computed, and the numerator of which is the amount of the change in the Member's allocated tax liability, in both cases with respect to the most recent prior computation of the Federal Tax Group Liability and the Member's Separate Federal Tax Liability. Each Member shall pay to Parent, or Parent shall pay to each Member, as the case may be, the excess interest or penalties allocated to each Member pursuant to this subparagraph 4A (d) at the same time the amounts payable pursuant to subparagraph (a) of this paragraph 4A become payable.
(e): Except as provided in paragraph 6, payments made pursuant to subparagraphs (a), (b), (c) or (d) of this paragraph 4A shall not themselves bear interest.

4B.

CHANGES IN STATE TAX LIABILITY

(a): If with respect to any taxable year (i) a State Tax Group files an amended consolidated State Income Tax Return reporting a consolidated state income tax liability different from the State Tax Group Liability, (ii) the State Tax Group Liability or any Member's tax liability is adjusted and such adjustment is part of a final "determination" as defined in

the applicable state provisions, or (iii) the State Tax Group is assessed and pays state income taxes in excess of the State Tax Group Liability, then the amounts of the payments required under paragraph 3B shall be recomputed, subject to the limitations of subparagraph (c) of this paragraph 4B, to give effect to such amended return, adjustment or assessment, as the case may be. Each Member shall then pay to Parent, or Parent shall then pay to each Member, as the case may be, any difference between the amounts determined by such recomputation and the amounts previously paid. Such payments shall be made as follows: (i) where an additional payment of tax by the State Tax Group is due as a result of such amended return, adjustment or assessment, no earlier than ten (10) days prior to the date on which such additional tax payment is due and no later than thirty (30) days after such payment is due; (ii) where the State Tax Group receives a refund arising from such amended return or adjustment, no later than thirty (30) days after the receipt of such refund.

(b): If with respect to any taxable year the State Tax Group files an amended consolidated State Income Tax Return reporting a consolidated state income tax liability identical to the State Tax Group Liability, then the amounts of the payments required under paragraph 3B, subject to the limitations of subparagraph (c) of this paragraph 4B, shall be recomputed to give effect to such amended return. No later than thirty (30) days after the filing of such amended return, each Member shall pay to Parent, or Parent shall pay to each Member, as the case may be, any difference between the amounts determined by such recomputation and the amounts previously paid.
(c): The parties recognize that a recomputation under subparagraphs (a) or (b) of this paragraph 4B of the amounts of the payments required under paragraph 3B for any taxable year will not necessarily be the final determination of the amounts of such payments for such year, and the amounts of such payments may be recomputed more than once.
(d): In the event that a change in the tax liability of a State Tax Group arising from an amended return, adjustment or assessment described in subparagraph (a) of this paragraph 4B results or will result in the receipt or payment of interest, or the payment or recovery of penalties in excess of the aggregate interest or penalties included in determining the aggregate Separate State Tax Liability of all of the Members, such interest or penalties shall be allocated to each Member as follows: The total amount of such excess interest or penalty shall be multiplied by a fraction, the denominator of which is the amount of the change in the State Tax Group Liability on which the interest or penalty is computed, and the numerator of which is the amount of the change in the Member's allocated tax liability, in both cases with respect to the most recent prior computation of the State Tax Group Liability and the Member's Separate State Tax Liability. Each Member shall pay to Parent, or Parent shall pay to each Member, as the case may be, the excess interest or penalties allocated to each Member pursuant to this subparagraph 4B (d) at the same time the amounts payable pursuant to subparagraph (a) of this paragraph 4B become payable.
(e): Except as provided in paragraph 6, payments made pursuant to subparagraphs (a), (b), (c) or (d) of this paragraph 4B shall not themselves bear interest.

5.

INDEMNIFICATION.

(a): Each Subsidiary agrees to indemnify and hold harmless Parent with respect to any liability for federal or state income taxes, including any interest thereon, any additions to such taxes and assessable penalties imposed with respect thereto (collectively "Taxes") to the extent that Parent's liability for such Taxes is attributable to the failure of such Subsidiary

to make the payments required of it pursuant to paragraphs 3A, 3B, 4A and 4B of the Agreement or to the failure of such Subsidiary to comply with subparagraphs (a) and (c) of paragraph 2 of this Agreement.

(b): Parent agrees to indemnify and hold harmless each Subsidiary with respect to (i) any liability for Taxes attributable to any taxable period for which such Subsidiary has paid Parent its Separate Federal Tax Liability or Separate State Tax Liability, as applicable and if any, in accordance with this Agreement (including any recomputations in accordance with paragraphs 4A and 4B hereof) and (ii) any liability for Taxes of the Federal Tax Group or a State Tax Group for a taxable period where such liability arises solely by reason of any Subsidiary being severally liable for any Taxes of the respective group pursuant to Treas. Reg. §1.1502-6 or applicable state provisions.
(c): Payment pursuant to the indemnity provided in this paragraph 5 shall be made within ten (10) days of notice that a payment requiring indemnification under this paragraph 5 has been made by Parent or a Subsidiary.

6.: DEFAULT INTEREST.

Where any payment required by this Agreement to be made from one party to another is not made within the time provided, the amount not timely paid shall bear interest at the rate established pursuant to section 6621 (a) (2) of the Code.

7.

TERMINATION OF AFFILIATION.

(a): In the event that a Member other than Parent ceases to be included in the Federal Tax Group or a State Tax Group, but continues to be a corporation subject to federal income tax or state income tax, respectively (a "Former Member"), this Agreement shall, except as provided in this paragraph 7, terminate with respect to such Member.
(b): Parent and the Former Member shall consult and furnish each other with information concerning the status of any tax audit or tax refund claim relating to a taxable year in which the Former Member was a Member and a consolidated federal income tax return or State Income Tax Return was filed. Parent shall have the right to make the final determination as to the response of the Federal Tax Group or State Tax Group, as applicable, to any audit and shall have the sole right to control, at its own expense, any contest of any change proposed and any proposed disallowance of a refund claim by the Internal Revenue Service or a state taxing agency through the Appeals Office of the Internal Revenue Service or the applicable state office and the courts in connection with any taxable year for which this Agreement is in effect.
(c): The Former Member shall reimburse Parent to the extent that the Former Member received a payment under this Agreement on account of (or payments made by it under this Agreement were reduced by) any loss or credit that remained an attribute of the Former Member (i.e., the loss or credit was not absorbed by the Federal Tax Group or State Tax Group in calculating the Federal Tax Group Liability or State Tax Group Liability, respectively).
(d): Payments which would have been required under paragraphs 3A, 3B, 4A and 4B of this Agreement to or by a Former Member, were the Former Member still a Member, with respect to taxable years as to which the Former Member was a Member, shall be so made in accordance with principles analogous to those set forth in such paragraphs and at the times set forth therein; provided, however, that no such payments shall be made on account of any loss or credit realized by a Former Member that may be carried back to a taxable year in which the Former Member was a Member.

8.

RESOLUTION OF DISPUTES.

(a): Any dispute of ambiguity concerning the amount of any payment provided for under this Agreement shall be resolved by Parent in a manner consistent with the principles and procedures set forth in this Agreement. The judgment of Parent shall be conclusive and binding upon each of the parties to this Agreement.
(b): Parent may from time to time establish any other special rules that Parent in its sole discretion deems necessary or appropriate to carry out the purposes of this Agreement.

9.

NEW SUBSIDIARIES.

Any corporation formed or acquired by Parent or a Member, directly or indirectly, which becomes a Member shall become a party to this Agreement and shall be required to sign a consent in the form of Exhibit A, attached hereto, when it becomes a Member. The direct parent of such new Member hereby agrees to require such new Member to sign such consent. Upon the signing of such consent, the parties to this Agreement hereby agree to be bound with respect to such new Member in the same manner as they are bound with respect to any other Member.

10.: EFFECTIVE DATE.

The Agreement shall be effective on the date first above written and shall remain in effect for each taxable year thereafter in which a Member is included in a consolidated federal income tax return or State Income Tax Return filed by Parent.

11.

MISCELLANEOUS PROVISIONS.

(a): This Agreement contains the entire understanding of the parties hereto with respect to the subject matter contained herein and supersedes all prior written, oral or implied understandings, representations and agreements among the parties with respect thereto. No alteration, amendment, or modification of any of the terms of this Agreement shall be valid unless made by an instrument signed in writing by an authorized officer of each party.
(b): This Agreement shall be binding upon and inure to the benefit of each party hereto, its successors and assigns, and each Member not a party hereto, to the extent it is not contrary to the laws of any jurisdiction which governs any of the affected parties.
(c): This Agreement is not intended to benefit any person other than the parties hereto, each of their respective successors and assigns, and Members not a party hereto. No person not (i) a party, (ii) a party's successor or assign or (iii) a Member shall be a third party beneficiary hereof.
(d): This Agreement shall be governed by, interpreted and enforced in accordance with the laws of the State of California (regardless of the laws that might be applicable under principles of conflicts of laws).
(e): This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.
(f): The descriptive headings of the paragraphs of this Agreement are inserted for convenience only and shall not constitute a part hereof.
(g): Any notice or other communication required or permitted under this Agreement shall be in writing and shall be personally delivered or sent by certified or registered United States

mail, postage prepaid, to the parties at the following addresses (or at such other address as a party may specify by notice to the others):

If to Parent:

Zenith National Insurance Corp.
21255 Califa Street
Woodland Hills, CA 91367
Attn: Tax Director

If to any Subsidiary:

c/o Zenith National Insurance Corp.
21255 Califa Street
Woodland Hills, CA 91367
Attn: Tax Director

Any such notice or communication shall be effective and be deemed to have been given as of the dates delivered or mailed, as the case may be; provided that any notice or communication changing any of the addresses set forth above shall be effective and deemed to have been given only upon its receipt.

(h): Where the context so requires, the word "person" shall include a corporation, firm, partnership or other form of association or entity.

(Signature on following page)

IN WITNESS WHEREOF, the parties hereto have entered into this Agreement effective as of the date first above written.

		ZENITH NATIONAL INSURANCE CORP.
		By:	/s/ STANLEY R. ZAX Chairman and President
		ZENITH INSURANCE COMPANY
		By:	s/s KARI L. VAN GUNDY Senior Vice President & Chief Financial Officer
		ZNAT INSURANCE COMPANY
		By:	s/s KARI L. VAN GUNDY Senior Vice President & Treasurer
		ZENITH DEVELOPMENT CORP.
		By:	s/s KARI L. VAN GUNDY President & Chief Financial Officer
		ZENITH OF NEVADA, INC.
		By:	s/s KARI L. VAN GUNDY President & Chief Financial Officer
		ZENITH INSURANCE MANAGEMENT SERVICES, INC.
		By:	s/s KARI L. VAN GUNDY Vice President & Treasurer
		1390 MAIN STREET, LLC
		By:	Zenith Insurance Company, its Member and Manager
		By:	s/s KARI L. VAN GUNDY

EXHIBIT A

CONSENT OF NEW SUBSIDIARY

The undersigned hereby agrees, subject to the agreement or approval of the appropriate regulatory authorities (as required by law), to be bound as a Subsidiary by the attached Amended and Restated Tax Sharing Agreement (as of December 19, 2006) (the "Agreement"). By signing this Consent, the undersigned will have all rights and obligations of a Subsidiary under the Agreement as of the date the undersigned became a Member (as defined in the Agreement).

By:

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EXHIBIT A CONSENT OF NEW SUBSIDIARY
EX-10.39 4 a2175738zex-10_39.htm EXHIBIT 10.39
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Exhibit 10.39

CREDIT AGREEMENT
Dated as of February 16, 2007
between
ZENITH NATIONAL INSURANCE CORP.,
and
BANK OF AMERICA, N.A.

TABLE OF CONTENTS

Section		Page
ARTICLE I DEFINITIONS		1
1.1	Certain Defined Terms	1
1.2	Other Interpretive Provisions	12
1.3	Accounting Principles	12
ARTICLE II THE CREDITS		12
2.1	Amount and Terms of Commitment	12
2.2	Note	13
2.3	Procedure for Borrowing	13
2.4	Conversion and Continuation Elections	13
2.5	Voluntary Termination or Reduction of Commitment	14
2.6	Optional Prepayments	14
2.7	Repayment	14
2.8	Interest	15
2.9	Commitment Fee	15
2.10	Computation of Fees and Interest	16
2.11	Payments by the Company	16
ARTICLE III TAXES, YIELD PROTECTION AND ILLEGALITY		17
3.1	Taxes	17
3.2	Illegality	17
3.3	Increased Costs and Reduction of Return	18
3.4	Funding Losses	18
3.5	Inability to Determine Rates	19
3.6	Certificates of Bank	19
3.7	Survival	19
ARTICLE IV CONDITIONS PRECEDENT		19
4.1	Conditions of Effectiveness	19
4.2	Conditions to All Borrowings	21
ARTICLE V REPRESENTATIONS AND WARRANTIES		21
5.1	Corporate Existence and Power	21
5.2	Corporate Authorization; No Contravention	21
5.3	Governmental Authorization	22
5.4	Binding Effect	22
5.5	Litigation	22
5.6	No Default	22
5.7	ERISA Compliance	22
5.8	Use of Proceeds	22
5.9	Title to Properties	22
5.10	Taxes	23
5.11	Financial Condition	23
5.12	Environmental Matters	23
5.13	Regulated Entities	23
5.14	No Burdensome Restrictions	23
5.15	Copyrights, Patents, Trademarks and Licenses, Etc.	23
5.16	Subsidiaries	24
5.17	Insurance	24
5.18	Full Disclosure	24

ARTICLE VI AFFIRMATIVE COVENANTS		24
6.1	Financial Statements	24
6.2	Certificates; Other Information	25
6.3	Notices	26
6.4	Preservation of Corporate Existence Etc.	27
6.5	Maintenance of Property	27
6.6	Insurance	27
6.7	Payment of Obligations	27
6.8	Compliance with Laws	28
6.9	Inspection of Property and Books and Records	28
6.10	Use of Proceeds	28
6.11	Further Assurances	28
ARTICLE VII NEGATIVE COVENANTS		28
7.1	Limitation on Liens	28
7.2	Disposition of Assets	28
7.3	Consolidations and Mergers	29
7.4	[Intentionally Omitted]	29
7.5	Limitation on Indebtedness	29
7.6	Transactions with Affiliates	29
7.7	Use of Proceeds	29
7.8	Change in Business	29
7.9	Accounting Changes	30
7.10	Minimum Surplus	30
7.11	Debt to Total Capitalization	30
7.12	Risk-Based Capital	30
7.13	Interest Coverage Ratio	30
ARTICLE VIII EVENTS OF DEFAULT		30
8.1	Event of Default	30
8.2	Remedies	32
8.3	Rights Not Exclusive	32
ARTCLE IX MISCELLANEOUS		32
9.1	Amendments and Waivers	32
9.2	Notices; Effectiveness; Electronic Communication	32
9.3	No Waiver; Cumulative Remedies	33
9.4	Costs and Expenses	33
9.5	Company Indemnification	34
9.6	Marshalling; Payments Set Aside	34
9.7	Successors and Assigns	35
9.8	Survival of Representations and Warranties	36
9.9	Set-off	36
9.10	Counterparts	36
9.11	Severability	36
9.12	No Third Parties Benefited	37
9.13	Governing Law and Jurisdiction	37
9.14	Waiver of Jury Trial	37
9.15	No Advisory or Fiduciary Responsibility	37
9.16	USA Patriot Act Notice	38
9.17	Entire Agreement	38
9.18	Execution and Delivery	38

SCHEDULES

Schedule 5.5		Litigation
Schedule 5.7		ERISA
Schedule 5.12		Environmental Matters
Schedule 5.16		Subsidiaries
Schedule 5.17		Insurance Matters
Schedule 9.2		Lending Offices; Addresses for Notices

EXHIBITS

Exhibit A		Form of Notice of Borrowing
Exhibit B		Form of Notice of Conversion/Continuation
Exhibit C		Form of Compliance Certificate
Exhibit D		Form of Legal Opinion of Company's Counsel
Exhibit E		Form of Note

iii

CREDIT AGREEMENT

This CREDIT AGREEMENT is entered into as of February 16, 2007, between ZENITH NATIONAL INSURANCE CORP., a Delaware corporation (the "Company") and Bank of America, N.A. (together with its successors and assigns, the "Bank"). The parties hereto agree as follows:

ARTICLE I
DEFINITIONS

1.1 Certain Defined Terms. The following terms have the following meanings:

"Adjusted Capital" shall mean, as to any Insurance Subsidiary, as of any date, the total adjusted surplus to policyholders shown on line 27, page 18, column 1 of the Annual Statement of such Insurance Subsidiary (adjusted, if applicable, to conform with SAP), or an amount determined in a consistent manner for any date other than one as of which an Annual Statement is prepared.

"Affiliate" means, as to any Person, any other Person which, directly or indirectly, is in control of, is controlled by, or is under common control with, such Person. A Person shall be deemed to control another Person if the controlling Person possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of the other Person, whether through the ownership of voting securities, membership interests, by contract, or otherwise.

"Agreement" means this credit agreement.

"Amounts Available for Dividends" shall mean, without duplication, the amount that is paid or may be paid by ZIC as a dividend at any time during the then current calendar year without being an "extraordinary dividend" under Section 1215.5(g) of the California Insurance Code.

"Annual Statement" shall mean, as to any Insurance Subsidiary, the annual financial statement of such Insurance Subsidiary as required to be filed with the applicable Department, together with all exhibits or schedules filed therewith, prepared in conformity with SAP. References to amounts on particular exhibits, schedules, lines, pages and columns of the Annual Statement are based on the format promulgated by the NAIC for 2005 Property and Casualty Company Annual Statements. If such format is changed in future years so that different information is contained in such items or they no longer exist, it is understood that the reference is to information consistent with that reported in the referenced item in the 2005 Annual Statement of such Insurance Subsidiary.

"Applicable Insurance Code" shall mean, as to any Insurance Subsidiary, the insurance code of any state where such Insurance Subsidiary is domiciled or doing insurance business and any successor statute of similar import, together with the regulations thereunder, as amended or otherwise modified and in effect from time to time. References to sections of the Applicable Insurance Code shall be construed to also refer to successor sections.

"Applicable Margin" means (a) as to Base Rate Loans, 0% per annum; and (b) as to Eurodollar Rate Loans, the applicable margin per annum set forth in the table below based on the Company's implied counterparty credit rating by S&P and/or the implied rating of the Company's non-credit-enhanced, senior unsecured long-term debt by Moody's:

Rating	Applicable Margin
BBB+/Baa1 or higher	.60	%
BBB/Baa2	.70	%
BBB-/Baa3	.80	%
BB+/Ba1 or lower	.975	%

Any adjustment in the Applicable Margin as a result of a change in the Company's implied counterparty credit rating by S&P and/or the implied rating of the Company's non-credit-enhanced,

senior unsecured long-term debt by Moody's shall be effective as of the effective date of the change in such rating. In the event the rating by S&P and Moody's do not fall in the same category provided above, the Applicable Margin shall be determined by adding one level to the lower of the two rating levels. In the event S&P does not provide an implied counterparty credit rating for the Company and Moody's does not provide an implied rating of the Company's non-credit-enhanced, senior unsecured long-term debt, the Applicable Margin shall remain unchanged for a period of 90 days thereafter, during which period the Bank and the Company shall negotiate in good faith to agree upon a substitute means for determining the Applicable Margin. In the event such agreement is not reached in such 90-day period, the Applicable Margin shall, after such 90^th day, be .975% for Eurodollar Rate Loans.

"Approved Fund" has the meaning specified in Section 9.7(f).

"Attorney Costs" means and includes all fees and disbursements of any law firm or other external counsel and without duplication, the allocated cost of internal legal services and all disbursements of internal counsel.

"Bank" has the meaning specified in the introductory clause hereto.

"Bankruptcy Code" means Title 11 of the United States Code entitled "Bankruptcy," as now or hereafter in effect, or any successor statute.

"Base Rate" means for any day a fluctuating rate per annum equal to the higher of (a) the Federal Funds Rate plus ¹/2 of 1% and (b) the rate of interest in effect for such day as publicly announced from time to time by the Bank as its "prime rate." The "prime rate" is a rate set by the Bank based upon various factors including the Bank's costs and desired return, general economic conditions and other factors, and is used as a reference point for pricing some loans, which may be priced at, above, or below such announced rate. Any change in such rate announced by the Bank shall take effect at the opening of business on the day specified in the public announcement of such change.

"Base Rate Loan" means a Loan that bears interest based on the Base Rate.

"Borrowing" means a borrowing hereunder consisting of Loans of the same Type made to the Company on the same day by the Bank under Article II, and, other than in the case of Base Rate Loans, having the same Interest Period.

"Borrowing Date" means any date on which a Borrowing occurs under Section 2.3.

"Business Day" means any day other than a Saturday, Sunday or other day on which commercial banks in Dallas, Texas are authorized or required by law to close and, if the applicable Business Day relates to any Eurodollar Rate Loan, means such a day on which dealings are carried on in the applicable offshore dollar interbank market.

"Capital Adequacy Regulation" means any guideline, request or directive of any central bank or other Governmental Authority, or any other law, rule or regulation, whether or not having the force of law, in each case, regarding capital adequacy of any bank or of any corporation controlling a bank.

"Capital and Surplus" shall mean, as to any Insurance Subsidiary, as of the date of the Annual Statement, the total amount shown on line 35, page 3, column 1 of the Annual Statement of such Insurance Subsidiary, or an amount determined in a manner consistent with the Annual Statement for any fiscal quarter which does not end on the date of the Annual Statement.

"Capital Securities" shall have the meaning provided therefor in the Capital Trust Offering Memorandum.

"Capital Trust" shall mean the Zenith National Insurance Capital Trust I, a statutory business trust fund formed under the laws of the State of Delaware.

"Capital Trust Offering Memorandum" shall mean the Confidential Offering Circular dated July 27, 1998, related to the Capital Trust and the securities being issued thereby.

"Change of Control" means (a) any Person, or two or more Persons acting in concert, directly or indirectly acquire after the Closing Date beneficial ownership (within the meaning of Rule 13d-3 of the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended) of 51% or more of the outstanding shares of voting stock of the Company or (b) individuals who as of the Closing Date constituted the Company's Board of Directors (together with any new director whose election by the Company's Board of Directors or whose nomination for election by the Company's stockholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of such period or whose election or nomination for election was previously so approved), for any reason, cease to constitute a majority of the directors at any time then in office or (c) the Company ceases to own 100% of the capital stock of ZIC on a fully-diluted basis.

"Closing Date" means the date on which this Agreement is effective, which shall be the date on which all the conditions in Section 4.1 are satisfied.

"Code" means the Internal Revenue Code of 1986, and regulations promulgated thereunder.

"Commitment" has the meaning specified in Section 2.1.

"Common Securities" shall have the meaning provided therefor in the Capital Trust Offering Memorandum.

"Company" has the meaning specified in the introductory clause hereto.

"Compliance Certificate" means a certificate substantially in the form of Exhibit C.

"Contingent Obligation" shall mean any agreement, undertaking or arrangement (other than insurance and reinsurance obligations and surety bonds, in each case entered into in the ordinary course of business) by which any Person guarantees, endorses or otherwise becomes or is contingently liable for (by direct or indirect agreement, contingent or otherwise, to provide funds for payment, to supply funds to, or otherwise to invest in, a debtor, or otherwise to assure a creditor against loss) the debt, obligation or other liability of any other Person (other than by endorsements of instruments in the course of collection), or guarantees the payment of dividends or other distributions upon the shares of any other Person. The amount of any Person's obligation under any Contingent Obligation shall (subject to any limitation set forth therein) be deemed to be the outstanding principal amount of the debt, obligation or other liability guaranteed thereby. The Company's obligations under the Guarantee, the Subordinated Debentures, the Indenture, and the Declaration (which taken together is a full and unconditional guaranty by the Company of the Capital Trust's obligations under the Capital Security) shall not constitute Contingent Obligations for purposes of this Agreement, except for purposes of Section 8.1(e).

"Contractual Obligation" means, as to any Person, any provision of any security issued by such Person or of any agreement, undertaking, contract, indenture, mortgage, deed of trust or other instrument, document or agreement to which such Person is a party or by which it or any of its property is bound other than insurance and reinsurance obligations and surety bonds, in each case entered into in the ordinary course of business.

"Conversion/Continuation Date" means any date on which, under Section 2.4, the Company (a) converts Loans of one Type to another Type, or (b) continues as Loans of the same Type, but with a new Interest Period, Loans having Interest Periods expiring on such date.

"Debt to Total Capitalization Ratio" means, as of any date of determination, the ratio of (i) the principal balance of all Indebtedness of the Company described in clauses (a), (b), (e), (f) or (g) of the definition thereof for which the Company is directly liable or which is a Contingent Obligation of the

Company to (ii) Total Capitalization (provided, that for purposes of determining the amount of the principal balance of such Indebtedness, such principal balance shall be reduced by an amount equal to 25% of that portion of the principal balance of the Company's Senior Convertible Notes due 2023 then outstanding).

"Declaration" shall have the meaning provided therefor in the Capital Trust Offering Memorandum.

"Default" means any event or circumstance which, with the giving of notice, the lapse of time, or both, would (if not cured or otherwise remedied during such time) constitute an Event of Default.

"Department" means, as to any insurance company, the state department of insurance of the state of domicile of such insurance company.

"Disposition" means (a) the sale, lease, assignment, conveyance or other disposition or transfer of property, and (b) the sale or transfer by the Company or any Subsidiary of the Company of any equity securities issued by any Subsidiary of the Company and held by such transferor Person.

"Distribution" shall have the meaning provided therefor in the Capital Trust Offering Memorandum.

"Dollars", "dollars" and "$" each mean lawful money of the United States.

"Eligible Assignee" has the meaning specified in Section 9.7(f).

"Environmental Claims" means all claims, however asserted, by any Governmental Authority or other Person alleging potential liability or responsibility for violation of any Environmental Law, or for release or injury to the environment.

"Environmental Laws" means all federal, state or local laws, statutes, common law duties, rules, regulations, ordinances and codes, together with all administrative orders, directed duties, requests, licenses, authorizations and permits of, and agreements with, any Governmental Authorities, in each case relating to environmental, health, safety and land use matters.

"Environmental Permits" has the meaning specified in Section 5.12(b).

"ERISA" means the Employee Retirement Income Security Act of 1974, and regulations promulgated thereunder.

"ERISA Affiliate" means any trade or business (whether or not incorporated) under common control with the Company within the meaning of Section 414 (b) or (c) of the Code (and Sections 414(m) and (o) of the Code for purposes of provisions relating to Section 412 of the Code).

"ERISA Event" means (a) a Reportable Event with respect to a Plan; (b) a withdrawal by the Company or any ERISA Affiliate from a Plan subject to Section 4063 of ERISA during a plan year in which it was a substantial employer (as defined in Section 4001(a)(2) of ERISA) or a cessation of operations which is treated as such a withdrawal under Section 4062(e) of ERISA; (c) a complete or partial withdrawal by the Company or any ERISA Affiliate from a Multiemployer Plan or notification that a Multiemployer Plan is in reorganization; (d) the filing of a notice of intent to terminate, the treatment of a Plan amendment as a termination under Section 4041 or 4041A of ERISA, or the commencement of proceedings by the PBGC to terminate a Plan or Multiemployer Plan; (e) an event or condition which would reasonably be expected to constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan or Multiemployer Plan; or (f) the imposition of any liability under Title IV of ERISA, other than PBGC premiums due but not delinquent under Section 4007 of ERISA, upon the Company or any ERISA Affiliate.

"Eurodollar Rate" means, for any Interest Period, with respect to any Eurodollar Rate Loan, a rate per annum determined by the Bank pursuant to the following formula:


		Eurodollar Rate =		Eurodollar Base Rate 1.00 - Eurodollar Reserve Percentage

Where,

"Eurodollar Base Rate" means, for such Interest Period:

(a) the rate per annum equal to the rate per annum equal to the rate determined by the Bank to be the offered rate that appears on the page of the Telerate screen (or any successor thereto) that displays an average British Bankers Association Interest Settlement Rate for deposits in Dollars (for delivery on the first day of such Interest Period) with a term equivalent to such Interest Period, determined as of approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period, or

(b) if the rate referenced in the preceding clause (a) does not appear on such page or service or such page or service shall not be available, the rate per annum equal to the rate determined by the Bank to be the offered rate on such other page or other service that displays an average British Bankers Association Interest Settlement Rate for deposits in Dollars (for delivery on the first day of such Interest Period) with a term equivalent to such Interest Period, determined as of approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period, or

(c) if the rates referenced in the preceding clauses (a) and (b) are not available, the rate per annum determined by the Bank as the rate of interest at which deposits in Dollars for delivery on the first day of such Interest Period in same day funds in the approximate amount of the Eurodollar Rate Loan being made, continued or converted by the Bank and with a term equivalent to such Interest Period would be offered by the Bank's London Branch to major banks in the London interbank eurodollar market at their request at approximately 4:00 p.m. (London time) two Business Days prior to the first day of such Interest Period.

"Eurodollar Reserve Percentage" means, for any day during any Interest Period, the reserve percentage (expressed as a decimal, carried out to five decimal places) in effect on such day, whether or not applicable to the Bank, under regulations issued from time to time by the FRB for determining the maximum reserve requirement (including any emergency, supplemental or other marginal reserve requirement) with respect to Eurocurrency funding (currently referred to as "Eurocurrency liabilities"). The Eurodollar Rate for each outstanding Eurodollar Rate Loan shall be adjusted automatically as of the effective date of any change in the Eurodollar Reserve Percentage.

"Eurodollar Rate Loan" means a Loan that bears interest based on the Eurodollar Rate.

"Event of Default" means any of the events or circumstances specified in Section 8.1.

"Exchange Act" means the Securities and Exchange Act of 1934, and regulations promulgated thereunder.

"Existing Agreement" means that certain Amended and Restated Credit Agreement dated as of September 30, 2002, as amended, between the Company and the Bank.

"FDIC" means the Federal Deposit Insurance Corporation, and any Governmental Authority succeeding to any of its principal functions.

"Federal Funds Rate" means, for any day, the rate per annum equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by

Federal funds brokers on such day, as published by the Federal Reserve Bank on the Business Day next succeeding such day; provided that (a) if such day is not a Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Business Day as so published on the next succeeding Business Day, and (b) if no such rate is so published on such next succeeding Business Day, the Federal Funds Rate for such day shall be the average rate (rounded upward, if necessary, to a whole multiple of 1/100 of 1%) charged to the Bank on such day on such transactions as determined by the Bank.

"Fixed Interest Charges" shall mean interest paid by the Company or, without duplication, accrued but unpaid on the Loans or any other Indebtedness described in clauses (a), (b), (d), (e) or (f) of the definition thereof, which shall be determined at the end of each fiscal quarter for the four consecutive fiscal quarters then ended; provided, that interest on the Subordinated Debentures, but not Distributions on the Capital Securities, shall in any event be included as interest on Indebtedness described in clauses (a) or (d) of the definition thereof for purposes of the calculation; and provided further, that interest on the Subordinated Debentures shall be reduced by the amount of Distributions (whether characterized as interest or dividends) that is received by the Company on the Common Securities or Capital Securities issued by the Capital Trust that the Company holds, but only to the extent such Distributions are not included as part of clause (a) of the definition of Interest Coverage Ratio.

"FRB" means the Board of Governors of the Federal Reserve System, and any Governmental Authority succeeding to any of its principal functions.

"Fund" has the meaning specified in Section 9.7(f).

"GAAP" means generally accepted accounting principles in the United States that are applicable to the circumstances as of the date of determination.

"Governmental Authority" means any nation or government, any state or other political subdivision thereof, any central bank (or similar monetary or regulatory authority) thereof, any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, and any corporation or other entity owned or controlled, through stock or capital ownership or otherwise, by any of the foregoing.

"Guarantee" shall have the meaning provided therefor in the Capital Trust Offering Memorandum.

"Guaranty Obligation" means to assure or hold harmless the holder of any such primary obligation against loss in respect thereof.

"Hazardous Materials" means all those substances that are regulated by, or which may form the basis of liability under, any Environmental Law, including all substances identified under any Environmental Law as a pollutant, contaminant, hazardous waste, hazardous constituent, special waste, hazardous substance, hazardous material, or toxic substance, or petroleum or petroleum derived substance or waste.

"Indebtedness" of any Person means, without duplication, (a) all indebtedness for borrowed money; (b) all obligations issued, undertaken or assumed as the deferred purchase price of property or services (other than trade payables entered into in the ordinary course of business on ordinary terms); (c) all non-contingent reimbursement or payment obligations with respect to Surety Instruments; (d) all obligations evidenced by notes, bonds, debentures or similar instruments, including obligations so evidenced incurred in connection with the acquisition of property, assets or businesses; (e) all indebtedness created or arising under any conditional sale or other title retention agreement, or incurred as financing, in either case with respect to property acquired by the Person (even though the rights and remedies of the seller or bank under such agreement in the event of default are limited to repossession or sale of such property); (f) all obligations with respect to capital leases; (g) all net

obligations with respect to Swap Contracts; (h) all indebtedness referred to in clauses (a) through (g) above secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien upon or in property (including accounts and contracts rights) owned by such Person, even though such Person has not assumed or become liable for the payment of such Indebtedness; and (i) all Guaranty Obligations in respect of indebtedness or obligations of others of the kinds referred to in clauses (a) through (g) above. The Company's obligations under the Guarantee, the Subordinated Debentures, the Indenture, the Declaration and the Capital Securities, whether or not taken together, shall not constitute Indebtedness for purposes of this Agreement, except for purposes of Section 8.1(e).

"Indemnified Liabilities" has the meaning specified in Section 9.5.

"Indemnified Person" has the meaning specified in Section 9.5.

"Indenture" shall have the meaning provided therefor in the Capital Trust Offering Memorandum.

"Independent Auditor" has the meaning specified in Section 6.1(a).

"Insolvency Proceeding" means (a) any case, action or proceeding before any court or other Governmental Authority relating to bankruptcy, reorganization, insolvency, liquidation, receivership, dissolution, winding-up or relief of debtors, or (b) any general assignment for the benefit of creditors, composition, marshalling of assets for creditors, or other, similar arrangement in respect of its creditors generally or any substantial portion of its creditors; undertaken under U.S. Federal, state or foreign law, including the Bankruptcy Code.

"Insurance Subsidiary" shall mean any Subsidiary of the Company (other than Zenith Insurance Management Services and any Subsidiary that does not issue or underwrite insurance or reinsurance) that is authorized or admitted to carry on or transact one or more aspects of the business of selling, issuing or underwriting insurance or reinsurance.

"Interest Coverage Ratio" shall mean the ratio of (a) (i) Amounts Available for Dividends, plus (ii) pre-tax income from the Non-Insurance Subsidiaries as of the end of each fiscal quarter for the four quarters then ended, plus (iii) without duplication, pre-tax, pre-interest income of the Company as of the end of each fiscal quarter for the four quarters then ended to (b) Fixed Interest Charges.

"Interest Payment Date" means, as to any Loan other than a Base Rate Loan, the last day of each Interest Period applicable to such Loan and, as to any Base Rate Loan, the last Business Day of each calendar quarter and each date such Loan is converted into another Type of Loan; provided, however, that if any Interest Period for an Eurodollar Rate Loan exceeds three months the date that falls three months after the beginning of such Interest Period and after each Interest Payment Date thereafter is also an Interest Payment Date.

"Interest Period" means, as to any Eurodollar Rate Loan, the period commencing on the Borrowing Date of such Loan or on the Conversion/Continuation Date on which the Loan is converted into or continued as an Eurodollar Rate Loan, and ending on the date one, two, three or six months thereafter as selected by the Company in its Notice of Borrowing or Notice of Conversion/Continuation; provided, that:

(a) if any Interest Period would otherwise end on a day that is not a Business Day, that Interest Period shall be extended to the following Business Day unless the result of such extension would be to carry such Interest Period into another calendar month, in which event such Interest Period shall end on the preceding Business Day;

(b) any Interest Period that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such

Interest Period) shall end on the last Business Day of the calendar month at the end of such Interest Period; and

"IRS" means the Internal Revenue Service, and any Governmental Authority succeeding to any of its principal functions under the Code.

"Lending Office" means the office or offices of the Bank specified as its "Lending Office" or "Domestic Lending Office" or "Offshore Lending Office", as the case may be, on Schedule 9.2, or such other office or offices as the Bank may from time to time notify the Company.

"Lien" means any security interest, mortgage, deed of trust, pledge, hypothecation, assignment, charge or deposit arrangement, encumbrance, or lien (statutory or other) in respect of any property (including those created by, arising under or evidenced by any conditional sale or other title retention agreement, the interest of a lessor under a capital lease, any financing lease having substantially the same economic effect as any of the foregoing, or the filing of any financing statement naming the owner of the asset to which such lien relates as debtor, under the Uniform Commercial Code or any comparable law) and any contingent or other agreement to provide any of the foregoing, but not including the interest of a lessor under an operating lease.

"Loan" means an extension of credit by the Bank to the Company under Article II, and may be a Base Rate Loan or an Eurodollar Rate Loan (each, a "Type" of Loan).

"Loan Documents" means this Agreement, the Note and all other documents delivered to the Bank in connection herewith.

"Margin Stock" means "margin stock" as such term is defined in Regulation T or U of the FRB.

"Material Adverse Effect" means (a) a material adverse change in, or a material adverse effect upon, the operations, business, properties or financial condition of the Company or the Company and its Subsidiaries taken as a whole; (b) a material impairment of the ability of the Company to perform under any Loan Document and to avoid any Event of Default; or (c) a material adverse effect upon the legality, validity, binding effect or enforceability against the Company of any Loan Document.

"Moody's" shall mean Moody's Investors Service, Inc. and any successor thereto.

"Multiemployer Plan" means a "multiemployer plan", within the meaning of Section 4001(a)(3) of ERISA, to which the Company or any ERISA Affiliate makes, is making, or is obligated to make contributions or, during the preceding three calendar years, has made, or been obligated to make, contributions.

"NAIC" shall mean the National Association of Insurance Commissioners, or any successor organization.

"Non-Insurance Subsidiary" means any Subsidiary which is not an Insurance Subsidiary.

"Note" means a promissory note executed by the Company in favor of the Bank pursuant to Section 2.2, in substantially the form of Exhibit E.

"Notice of Borrowing" means a notice in substantially the form of Exhibit A.

"Notice of Conversion/Continuation" means a notice in substantially the form of Exhibit B.

"Obligations" means all advances, debts, liabilities, obligations, covenants and duties arising under any Loan Document owing by the Company to the Bank or any Indemnified Person, whether direct or indirect (including those acquired by assignment), absolute or contingent, due or to become due, now existing or hereafter arising.

"Organization Documents" means, for any corporation, partnership or limited liability company, the certificate or articles of incorporation, partnership agreement, operating agreement, bylaws or similar document, certificate of determination or instrument relating to the rights of preferred shareholders of such corporation, shareholder rights agreement, and all applicable resolutions of the board of directors (or any committee thereof) or similar body of such entity.

"Other Taxes" means any present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies which arise from any payment made hereunder or from the execution, delivery or registration of, or otherwise with respect to this Agreement or any other Loan Documents.

"Participant" has the meaning specified in Section 9.7(c).

"Payment Office" means Building B, 2001 Clayton Rd., Concord, California 94520 or such other office as may be designated by the Bank to the Company in writing.

"PBGC" means the Pension Benefit Guaranty Corporation, or any Governmental Authority succeeding to any of its principal functions under ERISA.

"Permitted Liens" means:

(a) Liens in favor of the Bank;

(b) Liens existing on the date hereof and any renewals or extensions thereof, provided that the property covered thereby is not increased;

(c) Liens for taxes not yet due or which are being contested in good faith and by appropriate proceedings diligently conducted, if adequate reserves with respect thereto are maintained on the books of the applicable Person in accordance with GAAP;

(d) carriers', warehousemen's, mechanics', materialmen's, repairmen's or other like Liens arising in the ordinary course of business which are not overdue for a period of more than 30 days or which are being contested in good faith and by appropriate proceedings diligently conducted, if adequate reserves with respect thereto are maintained on the books of the applicable Person;

(e) pledges or deposits in the ordinary course of business in connection with workers' compensation, unemployment insurance and other social security legislation, other than any Lien imposed by ERISA;

(f) deposits to secure the performance of bids, trade contracts and leases (other than Indebtedness), statutory obligations, surety bonds (other than bonds related to judgments or litigation), performance bonds and other obligations of a like nature incurred in the ordinary course of business;

(g) easements, rights-of-way, restrictions and other similar encumbrances affecting real property which, in the aggregate, are not substantial in amount, and which do not in any case materially detract from the value of the property subject thereto or materially interfere with the ordinary conduct of the business of the applicable Person;

(h) Liens arising by virtue of any contractual, statutory or common law provision relating to banker's liens, rights of set-off or similar rights and remedies as to deposit accounts or other funds maintained with a creditor depository institution;

(i) Liens securing judgments for the payment of money not constituting an Event of Default under Section 8.01(i) or securing appeal or other surety bonds related to such judgments;

(j) other Liens securing Indebtedness or other obligations, provided that such Indebtedness or other obligations does not exceed $5,000,000.

"Person" means an individual, partnership, corporation, limited liability company, business trust, joint stock company, trust, unincorporated association or Governmental Authority.

"Plan" means a pension plan (as defined in Section 3(2) of ERISA which is subject to Title IV of ERISA) which the Company sponsors or maintains or to which the Company makes, is making, or is obligated to make contributions or in the case of a multiple employer plan (as described in Section 4064 (a) of ERISA) has made contributions at any time during the immediately preceding five (5) plan years.

"Reportable Event" means, any of the events set forth in Section 4043(b) of ERISA or the regulations thereunder, other than any such event for which the 30-day notice requirement under ERISA has been waived in regulations issued by the PBGC.

"Requirement of Law" means, as to any Person, any law, treaty, rule or regulation or determination of an arbitrator or of a Governmental Authority, in each case applicable to or binding upon the Person or any of its property or to which the Person or any of its property is subject.

"Responsible Officer" means the chief executive officer, the president or the chief financial officer of the Company, or any other officer having substantially the same authority and responsibility; or, with respect to compliance with financial covenants, the chief executive officer, the president, the chief financial officer or the treasurer of the Company, or any other officer having substantially the same authority and responsibility.

"Risk-Based Capital" shall mean, with respect to any Insurance Subsidiary as of the end of any fiscal quarter, the ratio of Adjusted Capital of such Insurance Subsidiary as of the end of such fiscal quarter to the Company Action Level of such Insurance Company as of the end of such fiscal quarter (as determined by the Company in accordance with the requirements of the NAIC or the applicable Department). In the event that there is a conflict between the Risk-Based Capital formulas adopted by the NAIC and any applicable Department, the calculation of the Department shall govern.

"S&P" shall mean Standard & Poor's Ratings Group and any successor thereto.

"SAP" shall mean, as to any Insurance Subsidiary, the statutory accounting practices prescribed or permitted by the Department.

"SEC" means the Securities and Exchange Commission, or any Governmental Authority succeeding to any of its principal functions.

"Significant Subsidiary" means a "significant subsidiary" as such term is defined in Regulation S-X of the Securities Act of 1933, as amended.

"Solvent" means, as to any Person at any time, that (a) the fair value of the property of such Person is greater than the amount of such Person's liabilities (including disputed, contingent and unliquidated liabilities) as such value is established and liabilities evaluated for purposes of Section 101(31) of the Bankruptcy Code and, in the alternative, for purposes of the Uniform Fraudulent Transfer Act; (b) the present fair saleable value of the property of such Person is not less than the amount that will be required to pay the probable liability of such Person on its debts as they become absolute and matured; (c) such Person is able to realize upon its property and pay its debts and other liabilities (including disputed, contingent and unliquidated liabilities) as they mature in the normal course of business; (d) such Person does not intend to, and does not believe that it will, incur debts or liabilities beyond such Person's ability to pay as such debts and liabilities mature; and (e) such Person is not engaged in business or a transaction, and is not about to engage in business or a transaction, for which such Person's property would constitute unreasonably small capital.

"Subordinated Debentures" shall have the meaning provided therefor in the Capital Trust Offering Memorandum.

"Subsidiary" of a Person means any corporation, association, partnership, limited liability company, joint venture or other business entity of which more than 50% of the voting stock, membership interests or other equity interests (in the case of Persons other than corporations), is owned or controlled directly or indirectly by the Person, or one or more of the Subsidiaries of the Person, or a combination thereof. Unless the context otherwise clearly requires, references herein to a "Subsidiary" refer to a Subsidiary of the Company; provided that the Capital Trust shall not be considered to be a Subsidiary of the Company.

"Surety Instruments" means all letters of credit (including standby and commercial), banker's acceptances, surety bonds and similar instruments but excluding insurance and reinsurance obligations and surety obligations, in each case entered into in the ordinary course of business.

"Swap Contract" means any agreement (including any master agreement and any agreement, whether or not in writing, relating to any single transaction) that is an interest rate swap agreement, basis swap, forward rate agreement, commodity swap, commodity option, equity or equity index swap or option, bond option, interest rate option, forward foreign exchange agreement, rate cap, collar or floor agreement, currency swap agreement, cross-currency rate swap agreement, swaption, currency option or any other, similar agreement (including any option to enter into any of the foregoing).

"Taxes" means any and all present or future taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, excluding, in the case of the Bank, such taxes (including income taxes or franchise taxes) as are imposed on or measured by each Bank's net income by the jurisdiction (or any political subdivision thereof) under the laws of which such Bank, as the case may be, is organized or maintains a Lending Office.

"Termination Date" means February 16, 2010.

"Total Capitalization" shall mean (a) principal of all Indebtedness of the Company described in clauses (a), (d) or (f) of the definition thereof for which the Company is directly liable or which is a Contingent Obligation of the Company related to Indebtedness described in one of such clauses plus (b) the Total Shareholders' Equity of the Company plus (c) the aggregate liquidation amount of any Capital Securities then outstanding.

"Total Shareholders' Equity" shall mean the total shareholders' equity of a Person as determined in accordance with GAAP (calculated excluding unrealized gains (losses) of securities as determined in accordance with FASB 115).

"Type" has the meaning specified in the definition of "Loan."

"Unfunded Pension Liability" means the excess of a Plan's benefit liabilities under Section 4001(a)(16) of ERISA, over the current value of that Plan's assets, determined in accordance with the assumptions used for funding the Plan pursuant to Section 412 of the Code for the applicable plan year.

"United States" and "U.S." each means the United States of America.

"Wholly-Owned Subsidiary" means any corporation in which (other than directors' qualifying shares required by law) 100% of the capital stock of each class having ordinary voting power, and 100% of the capital stock of every other class, in each case, at the time as of which any determination is being made, is owned, beneficially and of record, by the Company, or by one or more of the other Wholly-Owned Subsidiaries, or both.

"ZIC" means Zenith Insurance Company, a California corporation.

1.2 Other Interpretive Provisions.

(a) The meanings of defined terms are equally applicable to the singular and plural forms of the defined terms.

(b) The words "hereof", "herein", "hereunder" and similar words refer to this Agreement as a whole and not to any particular provision of this Agreement; and subsection, Section, Schedule and Exhibit references are to this Agreement unless otherwise specified.

(c) (i) The term "documents" includes any and all instruments, documents, agreements, certificates, indentures, notices and other writings, however evidenced.

(ii) The term "including" is not limiting and means "including without limitation."

(iii) In the computation of periods of time from a specified date to a later specified date, the word "from" means "from and including"; the words "to" and "until" each mean "to but excluding", and the word "through" means "to and including."

(iv) The term "property" includes any kind of property or asset, real, personal or mixed, tangible or intangible.

(d) Unless otherwise expressly provided herein, (i) references to agreements (including this Agreement) and other contractual instruments shall be deemed to include all subsequent amendments and other modifications thereto, but only to the extent such amendments and other modifications are not prohibited by the terms of any Loan Document, and (ii) references to any statute or regulation are to be construed as including all statutory and regulatory provisions consolidating, amending, replacing, supplementing or interpreting the statute or regulation.

(e) The captions and headings of this Agreement are for convenience of reference only and shall not affect the interpretation of this Agreement.

(f) This Agreement and other Loan Documents may use several different limitations, tests or measurements to regulate the same or similar matters. All such limitations, tests and measurements are separate and distinct limitations, tests and measurements and shall each be performed in accordance with their terms.

(g) This Agreement and the other Loan Documents are the result of negotiations among and have been reviewed by counsel to the Bank and the Company and are the products of all parties. Accordingly, they shall not be construed against the Bank merely because of its involvement in their preparation.

1.3 Accounting Principles.

(a) Unless the context otherwise clearly requires, all accounting terms not expressly defined herein shall be construed, and all financial computations required under this Agreement shall be made, in accordance with GAAP, consistently applied.

(b) References herein to "fiscal year" and "fiscal quarter" refer to such fiscal periods of the Company.

ARTICLE II
THE CREDITS

2.1 Amount and Terms of Commitment. The Bank agrees, on the terms and conditions set forth herein, to make loans to the Company from time to time on any Business Day during the period from the Closing Date to the Termination Date in an aggregate amount not to exceed at any time

outstanding $30,000,000 (such amount as the same may be reduced under Section 2.5, the "Commitment"). Within the limits of the Commitment, and subject to the other terms and conditions hereof, the Company may borrow under this Section 2.1, prepay under Section 2.6 and reborrow under this Section 2.1.

2.2 Note. The Loans made by the Bank shall be evidenced by the Note. The Bank shall record on the schedules annexed to its Note the date, amount and maturity of each Loan made by it and the amount of each payment of principal made by the Company with respect thereto. The Bank is irrevocably authorized by the Company to record on its Note and the Bank's record shall be conclusive and binding unless the Company objects to such record within 30 days of having notice of any notation thereon; provided, however, that the failure of the Bank to make, or an error in making, a notation thereon with respect to any Loan shall not limit or otherwise affect the obligations of the Company hereunder or under the Note to the Bank.

2.3. Procedure for Borrowing.

(a) Each Borrowing shall be made upon the Company's irrevocable (subject to Section 3.5) written notice delivered to the Bank in the form of a Notice of Borrowing (which notice must be received by the Bank prior to 12:00 noon (Dallas time) (i) at least three Business Days prior to the requested Borrowing Date, in the case of Eurodollar Rate Loans and (ii) on or before the requested Borrowing Date, in the case of Base Rate Loans, specifying:

(A) the amount of the Borrowing, which shall be in an aggregate minimum amount of $250,000 or any multiple of $10,000 in excess thereof;

(B) the requested Borrowing Date, which shall be a Business Day;

(D) the duration of the Interest Period applicable to such Loans included in such notice. If the Notice of Borrowing fails to specify the duration of the Interest Period for any Borrowing comprised of Eurodollar Rate Loans, such Interest Period shall be three months.

(b) The proceeds of all Loans will be made available to the Company by the Bank by crediting the account of the Company on the books of the Bank with the aggregate of such Loan or by wire transfer in accordance with written instructions provided to the Bank by the Company.

2.4 Conversion and Continuation Elections.

(a) The Company may, upon irrevocable (subject to Section 3.5) written notice to the Bank in accordance with Section 2.4(b):

(i) elect, as of any Business Day, in the case of Base Rate Loans, or as of the last day of the applicable Interest Period, in the case of any other Type of Loans, to convert any such Loans (or any part thereof in an amount not less than $250,000, or that is in an integral multiple of $1,000 in excess thereof) into Loans of any other Type; or

(ii) elect, as of the last day of the applicable Interest Period, to continue any Loans having Interest Periods expiring on such day (or any part thereof in an amount not less than $250,000, or that is in an integral multiple of $1,000 in excess thereof);

provided, that if at any time the aggregate amount of Eurodollar Rate Loans in respect of any Borrowing is reduced, by payment, prepayment, or conversion of part thereof to be less than $250,000, such Eurodollar Rate Loans shall automatically convert into Base Rate Loans, and on

and after such date the right of the Company to continue such Loans as, and convert such Loans into Eurodollar Rate Loans shall terminate.

(b) The Company shall deliver a Notice of Conversion/Continuation to be received by the Bank not later than 12:00 noon (Dallas time) (i) at least three Business Days in advance of the Conversion/Continuation Date, if the Loans are to be converted into or continued as Eurodollar Rate Loans and (ii) on or before the Conversion/Continuation Date, if the Loans are to be converted into Base Rate Loans, specifying:

(A) the proposed Conversion/Continuation Date;

(B) the aggregate amount of Loans to be converted or renewed;

(D) other than in the case of conversions into Base Rate Loans, the duration of the requested Interest Period.

(c) If upon the expiration of any Interest Period applicable to Eurodollar Rate Loans, the Company has failed to select timely a new Interest Period to be applicable to such Eurodollar Rate Loans or if any Default or Event of Default then exists, the Company shall be deemed to have elected to convert such Eurodollar Rate Loans into Base Rate Loans effective as of the expiration date of such Interest Period.

(d) During the existence of a Default or Event of Default, the Company may not elect to have a Loan converted into or continued as an Eurodollar Rate Loan.

(e) After giving effect to any conversion or continuation of Loans, there may not be more than fifteen different Interest Periods in effect.

2.5 Voluntary Termination or Reduction of Commitment. The Company may, upon not less than one Business Days' prior notice to the Bank, terminate the Commitment, or permanently reduce the Commitment by an aggregate minimum amount of $1,000,000 or any multiple of $100,000 in excess thereof; unless, after giving effect thereto and to any prepayments of Loans made on the effective date thereof, the then-outstanding principal amount of such Loans would exceed the amount of the Commitment then in effect. Once reduced in accordance with this Section, the Commitment may not be increased. All accrued commitment fees to, but not including the effective date of any reduction or termination of the Commitment, shall be paid on the effective date of such reduction or termination.

2.6 Optional Prepayments. Subject to Section 3.4, the Company may, at any time or from time to time, upon not less than two (2) Business Days' irrevocable notice to the Bank in the case of Eurodollar Rate Loans and upon same day irrevocable notice to the Bank in the case of Base Rate Loans, prepay Loans in whole or in part, in minimum amounts of $250,000 or any multiple of $10,000 in excess thereof (or, if less, the outstanding amount of such Loans). Such notice of prepayment shall specify the date and amount of such prepayment and the Type(s)) of Loans to be prepaid. If such notice is given by the Company, the Company shall make such prepayment and the payment amount specified in such notice shall be due and payable on the date specified therein, together with accrued interest to each such date on the amount prepaid and any amounts required pursuant to Section 3.4.

2.7 Repayment.

(a) The Credit. The Company shall repay to the Bank in full on the Termination Date the aggregate principal amount of the Loans outstanding on such date and all related Obligations.

(b) Issuances of Indebtedness. Promptly after the incurrence or issuance by the Company of any indebtedness for borrowed money described in clause (a) of the definition of Indebtedness that is evidenced by notes, debentures, bonds or similar instruments (other than such Indebtedness

incurred hereunder or incurred in the ordinary course of business), the net cash proceeds realized by the Company from such incurrence or issuance shall be applied first to prepay the outstanding principal amount of all Loans, together with accrued interest thereon, until such amounts are repaid in full, then to the use by the Company of such net cash proceeds for any other purpose allowed hereunder (it being understood that any prepayment made pursuant to this Section 2.7(b) shall not affect the Commitment in any respect).

(c) Equity Issuances. Promptly after the issuance by the Company of any shares of any class of stock, warrants, or other equity investments (other than issuances to officers, directors, and employees of the Company as part of compensation arrangements), the net cash proceeds realized by the Company from such equity issuances shall be applied first to prepay the outstanding principal amount of all Loans, together with accrued interest thereon, until such amounts are repaid in full, then to the use by the Company of such net cash proceeds for any other purpose allowed hereunder (it being understood that any prepayment made pursuant to this Section 2.7(c) shall not affect the Commitment in any respect).

2.8 Interest.

(a) Each Loan shall bear interest on the outstanding principal amount thereof from the applicable Borrowing Date at a rate per annum equal to the Eurodollar Rate or the Base Rate, as the case may be (and subject to the Company's right to convert to other Types of Loans under Section 2.4), plus the Applicable Margin.

(b) Interest on each Loan shall be paid in arrears on each Interest Payment Date. Interest shall also be paid on the date of any prepayment of Loans under Section 2.6 for the portion of the Loans so prepaid and upon payment (including prepayment) in full thereof and, during the existence of any Event of Default, interest shall be paid on demand of the Bank.

(c) If any amount payable by the Company under any Loan Document is not paid when due (without regard to any applicable grace periods), whether at stated maturity, by acceleration or otherwise, such amount (if the principal of a Loan) shall thereafter bear interest at a rate per annum determined by adding 2% per annum to the Applicable Margin then in effect for such Loan and, in the case of Obligations not subject to an Applicable Margin, at a rate per annum equal to the Base Rate plus 2%. Accrued and unpaid interest on past due amounts (including interest on past due interest) shall be due and payable upon demand.

(d) Anything herein to the contrary notwithstanding, the obligations of the Company to the Bank hereunder shall be subject to the limitation that payments of interest shall not be required, for any period for which interest is computed hereunder, to the extent (but only to the extent) that contracting for or receiving such payment by the Bank would be contrary to the provisions of any law applicable to the Bank limiting the highest rate of interest that may be lawfully contracted for, charged or received by the Bank, and in such event the Company shall pay the Bank interest at the highest rate permitted by applicable law.

2.9 Commitment Fee. The Company shall pay to the Bank a commitment fee on the average daily unused portion of the Commitment, computed on a quarterly basis in arrears on the last Business Day of each calendar quarter based upon the daily utilization for that quarter as calculated by the Bank, equal to the applicable per annum rate set forth in the table below based on the Company's

implied counterparty credit rating by S&P and/or the implied rating of the Company's non-credit-enhanced, senior unsecured long-term debt by Moody's:

Debt Rating	Commitment Fee
BBB+/Baa1 or higher	.20	%
BBB/Baa2	.25	%
BBB-/Baa3	.30	%
BB+/Ba1 or lower	.35	%

Any adjustment to the commitment fee as a result of a change in the implied rating of the Company's implied counterparty credit rating by S&P and/or the Company's non-credit-enhanced, senior unsecured long-term debt by Moody's shall be effective as of the effective date of the change in such rating. In the event the rating by S&P and Moody's do not fall in the same category provided above, the commitment fee shall be determined by adding one level to the lower of the two rating levels. In the event S&P does not provide an implied counterparty credit rating for the Company and Moody's does not provide an implied rating of the Company's non-credit-enhanced, senior unsecured long-term debt, the commitment fee shall remain unchanged for a period of 90 days thereafter, during which period the Bank and the Company shall negotiate in good faith to agree upon a substitute means for determining the commitment fee. In the event such agreement is not reached in such 90-day period, the commitment fee shall, after such 90^th day, be .35%.

Such commitment fee shall accrue from the Closing Date to the Termination Date, and shall be due and payable quarterly in arrears on the last Business Day of each fiscal quarter of the Company commencing on March 30, 2007 through such Termination Date, with the final payment to be made on the Termination Date; provided, that in connection with any reduction or termination of the Commitment under Section 2.5, the accrued commitment fee calculated for the period ending on such date shall also be paid on the date of such reduction or termination, with the following quarterly payment being calculated on the basis of the period from such reduction or termination date to such quarterly payment date. The commitment fee provided in this subsection shall accrue at all times after the above-mentioned commencement date, including at any time during which one or more conditions in Article IV are not met.

2.10 Computation of Fees and Interest.

(a) All computations of interest for Base Rate Loans when the Base Rate is determined by the Bank's "prime rate" shall be made on the basis of a year of 365 or 366 days, as the case may be, and actual days elapsed. All other computations of fees and interest shall be made on the basis of a 360-day year and actual days elapsed (which results in more interest being paid than if computed on the basis of a 365-day year). Interest and fees shall accrue during each period during which interest or such fees are computed from the first day thereof to the last day thereof.

(b) Each determination of an interest rate by the Bank shall be conclusive and binding on the Company unless the Company objects in writing to such determination within thirty days of having notice thereof. The Bank will, at the request of the Company, deliver to the Company a statement showing the quotations used by the Bank in determining any interest rate and the resulting interest rate.

2.11 Payments by the Company.

(a) All payments to be made by the Company shall be made without condition or deduction for any counterclaim, defense, recoupment or set-off. Except as otherwise expressly provided herein, all payments by the Company shall be made to the Bank at the Payment Office, and shall be made in dollars and in immediately available funds, no later than 3:00 p.m. (Dallas time) on the date specified herein. Any payment received by the Bank later than 3:00 p.m. (Dallas time) on

such date shall be deemed to have been received on the following Business Day and any applicable interest or fee shall continue to accrue.

(b) Subject to the provisions set forth in the definition of "Interest Period" herein, whenever any payment is due on a day other than a Business Day, such payment shall be made on the following Business Day, and such extension of time shall in such case be included in the computation of interest or fees, as the case may be.

ARTICLE III
TAXES, YIELD PROTECTION AND ILLEGALITY

3.1 Taxes.

(a) Subject to clause (c) below, any and all payments by the Company to the Bank or under this Agreement and any other Loan Document shall be made free and clear of, and without deduction or withholding for any Taxes, In addition, the Company shall pay all Other Taxes.

(b) Without duplication of any amounts paid by the Company under Sections 3.1(c)(i) and (iv), the Company agrees to indemnify and hold harmless the Bank for the full amount of Taxes or Other Taxes (including any Taxes or Other Taxes imposed by any jurisdiction on amounts payable under this Section) paid by the Bank and any liability (including penalties, interest, additions to tax and expenses) arising therefrom or with respect thereto, whether or not such Taxes or Other Taxes were correctly or legally asserted. Payment under this indemnification shall be made within 30 days after the date the Bank makes written demand therefor.

(c) If the Company shall be required by law to deduct or withhold any Taxes or Other Taxes from or in respect of any sum payable hereunder to the Bank, then:

(i) the sum payable shall be increased as necessary so that after making all required deductions and withholdings (including deductions and withholdings applicable to additional sums payable under this Section) the Bank receives an amount equal to the sum it would have received had no such deductions or withholdings been made;

(ii) the Company shall make such deductions and withholdings;

(iii) the Company shall pay the full amount deducted or withheld to the relevant taxing authority or other authority in accordance with applicable law; and

(iv) without duplication, the Company shall also pay to the Bank at the time interest is paid, all additional amounts which the Bank specifies as necessary to preserve the after-tax yield the Bank would have received if such Taxes or Other Taxes had not been imposed.

(d) Within 30 days after the date of any payment by the Company of Taxes or Other Taxes, the Company shall furnish the Bank the original or a certified copy of a receipt evidencing payment thereof, or other evidence of payment satisfactory to the Bank.

(e) If the Company is required to pay additional amounts to the Bank pursuant to subsection (c) of this Section, then the Bank shall use reasonable efforts (consistent with legal and regulatory restrictions) to change the jurisdiction of its Lending Office so as to eliminate any such additional payment by the Company which may thereafter accrue, if such change in the judgment of the Bank is not otherwise materially disadvantageous to the Bank.

3.2 Illegality.

(a) If the Bank determines that the introduction of any Requirement of Law, or any change in any Requirement of Law, or in the interpretation or administration of any Requirement of Law, has made it unlawful, or that any central bank or other Governmental Authority has asserted that

it is unlawful, for the Bank or its applicable Lending Office to make Eurodollar Rate Loans, then, on notice thereof by the Bank to the Company, any obligation of the Bank to make Eurodollar Rate Loans shall be suspended until the Bank notifies the Company that the circumstances giving rise to such determination no longer exist.

(b) If the Bank determines that it is unlawful to maintain any Eurodollar Rate Loan, the Company shall, upon its receipt of notice of such fact and demand from the Bank, prepay in full such Eurodollar Rate Loans of the Bank then outstanding, together with interest accrued thereon and amounts required under Section 3.4, either on the last day of the Interest Period thereof, if the Bank may lawfully continue to maintain such Eurodollar Rate Loans to such day, or immediately, if the Bank may not lawfully continue to maintain such Eurodollar Rate Loan. If the Company is required to so prepay any Eurodollar Rate Loan, then concurrently with such prepayment, the Company shall borrow from the Bank, in the amount of such repayment, a Base Rate Loan or otherwise pay such Loan and all accrued interest thereon in full in cash.

(c) Before giving any notice under this Section, the Bank shall designate a different Lending Office with respect to its Eurodollar Rate Loans if such designation will avoid the need for giving such notice or making such demand and will not, in the judgment of the Bank, be illegal or otherwise disadvantageous to the Bank.

3.3 Increased Costs and Reduction of Return.

(a) If the Bank determines that, due to either (i) the introduction of or any change (other than any change by way of imposition of or increase in reserve requirements included in the calculation of the Eurodollar Rate or in respect of the assessment rate payable by the Bank to the FDIC for insuring U.S. deposits) in or in the interpretation of any law or regulation or (ii) the compliance by the Bank with any guideline or request from any central bank or other Governmental Authority (whether or not having the force of law), there shall be any increase in the cost to the Bank of agreeing to make or making, funding or maintaining any Eurodollar Rate Loans, then the Company shall be liable for, and shall from time to time, upon demand, pay to the Bank, additional amounts as are sufficient to reimburse the Bank for the costs associated with such increased costs.

(b) If the Bank shall have determined that (i) the introduction of any Capital Adequacy Regulation, (ii) any change in any Capital Adequacy Regulation, (iii) any change in the interpretation or administration of any Capital Adequacy Regulation by any central bank or other Governmental Authority charged with the interpretation or administration thereof, or (iv) compliance by the Bank (or its Lending Office) or any corporation controlling the Bank with any Capital Adequacy Regulation, affects or would affect the amount of capital required or expected to be maintained by the Bank or any corporation controlling the Bank and (taking into consideration the Bank's or such corporation's policies with respect to capital adequacy and the Bank's desired return on capital) determines that the amount of such capital is to be increased as a consequence of the Commitment, loans, credits or obligations under this Agreement, then, upon demand of the Bank to the Company, the Company shall pay to the Bank, from time to time as specified by the Bank, amounts sufficient to reimburse the Bank for the additional costs resulting from such increase.

3.4 Funding Losses. The Company shall reimburse the Bank and hold the Bank harmless from any loss or expense which the Bank may sustain or incur as a consequence of:

(a) the failure of the Company to make on a timely basis any payment of principal of any Eurodollar Rate Loan;

(b) the failure of the Company to borrow, continue or convert a Loan after the Company has given a Notice of Borrowing or a Notice of Conversion/Continuation;

(d) the prepayment or other payment (including after acceleration thereof) of an Eurodollar Rate Loan on a day that is not the last day of the relevant Interest Period; or

(e) the automatic conversion under Section 2.4 of any Eurodollar Rate Loan to a Base Rate Loan on a day that is not the last day of the relevant Interest Period;

including any such loss or expense arising from the liquidation or reemployment of funds obtained by it to maintain its Eurodollar Rate Loans or from fees payable to terminate the deposits from which such funds were obtained (but excluding loss of anticipated profits). For purposes of calculating amounts payable by the Company to the Bank under this Section and under Section 3.3(a), each Eurodollar Rate Loan made by the Bank (and each related reserve, special deposit or similar requirement) shall be conclusively deemed to have been funded at the Eurodollar Base Rate used in determining the Eurodollar Rate for such Eurodollar Rate Loan by a matching deposit or other borrowing in the interbank eurodollar market for a comparable amount and for a comparable period, whether or not such Eurodollar Rate Loan is in fact so funded.

3.5 Inability to Determine Rates If the Bank determines that for any reason adequate and reasonable means do not exist for determining the Eurodollar Rate for any requested Interest Period with respect to a proposed Eurodollar Rate Loan, or that the Eurodollar Rate for any requested Interest Period with respect to a proposed Eurodollar Rate Loan does not adequately and fairly reflect the cost to the Bank of funding such Loan, the Bank will promptly so notify the Company. Thereafter, the obligation of the Bank to make or maintain Eurodollar Rate Loans, as the case may be, hereunder shall be suspended until the Bank revokes such notice in writing. Upon receipt of such notice, the Company may revoke any Notice of Borrowing or Notice of Conversion/Continuation then submitted by it. If the Company does not revoke such notice, the Bank shall make, convert or continue the Loans, as proposed by the Company, in the amount specified in the applicable notice submitted by the Company, but such Loans shall be made, converted or continued as Base Rate Loans instead of Eurodollar Rate Loans, as the case may be.

3.6 Certificates of Bank. In the event of the Bank claiming reimbursement or compensation under this Article III, the Bank shall deliver to the Company a certificate setting forth in reasonable detail the amount payable to the Bank hereunder and such certificate shall be conclusive and binding on the Company unless objected to by the Company in writing within 30 days of the Company receiving such certificate.

3.7 Survival. The agreements and obligations of the Company in this Article III shall survive the payment of all other Obligations.

ARTICLE IV
CONDITIONS PRECEDENT

4.1 Conditions of Effectiveness. The effectiveness of this Agreement is subject to the condition that the Bank shall have received all of the following, in form and substance and dated a date satisfactory to the Bank:

(a) Credit Agreement and Note. This Agreement and the Note executed by each party thereto;

(b) Resolutions; Incumbency.

(i) Copies of the resolutions of the board of directors of the Company authorizing the transactions contemplated hereby, certified as of the Closing Date by the Secretary or an Assistant Secretary of the Company; and

(ii) a certificate of the Secretary or Assistant Secretary of the Company certifying the names and true signatures of the officers of the Company authorized to execute, deliver and perform, as applicable, this Agreement, and all other Loan Documents to be delivered by it hereunder;

(i) the articles or certificate of incorporation and the bylaws of the Company as in effect on the Closing Date, certified by the Secretary or Assistant Secretary of the Company as of the Closing Date; and

(ii) a good standing and tax good standing certificate for the Company from the Secretary of State (or similar, applicable Governmental Authority) of its state of incorporation and each state where the Company is qualified to do business as a foreign corporation as of a recent date;

(d) Legal Opinion. An opinion of Michael E. Jansen, Executive Vice President and General Counsel of the Company, addressed to the Bank and covering those matters addressed in Exhibit D;

(e) Payment of Fees. Evidence of payment by the Company of all accrued and unpaid fees, costs and expenses to the extent then due and payable on or before the date of the effectiveness of this Agreement, together with Attorney Costs of the Bank to the extent invoiced prior to or on such date, plus such additional amounts of Attorney Costs as shall constitute the Bank's reasonable estimate of Attorney Costs incurred or to be incurred by it through the closing proceedings (provided that such estimate shall not thereafter preclude final settling of accounts between the Company and the Bank); including any such costs, fees and expenses arising under or referenced in Sections 2.9 and 9.4;

(f) Termination and Repayment of the Existing Agreement. Evidence of the irrevocable termination of the Existing Agreement and commitment outstanding thereunder and the payment by the Company of all principal, accrued and unpaid interest, fees and other amount owing under the Existing Agreement;

(g) Certificate. A certificate signed by a Responsible Officer, dated as of such date, stating that:

(i) the representations and warranties contained in Article V are true and correct in all material respects (provided that if such representations and warranties are qualified by standards of materiality or by reference to a Material Adverse Effect, such representations and warranties are true and correct) on and as of such date, as though made on and as of such date;

(ii) no Default or Event of Default exists on the date of the effectiveness;

(iii) except as disclosed in publicly available filings made with the SEC, there has occurred since December 31, 2005, no event or circumstance that has resulted or would reasonably be expected to result in a Material Adverse Effect; and

(iv) all necessary material governmental, creditor, shareholder, and third party approvals in connection with the transactions contemplated herein have been obtained and remain in

effect, and all applicable waiting periods shall have expired without, in all such cases, any action being taken by any competent authority that restrains, prevents, or imposes materially adverse conditions upon the consummation of the transaction contemplated hereby;

(h) A.M. Best Rating. Evidence that the Financial Strength/Claims Paying rating of the Insurance Subsidiaries by A.M. Best Company, Inc. is not less than A- on the Closing Date; and

(i) Other Documents. Such other approvals, opinions, documents or materials as the Bank may reasonably request.

4.2 Conditions to All Borrowings. The obligation of the Bank to make any Loan to be made by it (including its initial Loan) is subject to the satisfaction of the following conditions precedent on the relevant Borrowing Date:

(a) Notice of Borrowing. The Bank shall have received a Notice of Borrowing;

(b) Continuation of Representations and Warranties. The representations and warranties in Article V (other than those contained in Section 5.5) shall be true and correct in all material respects (provided that if such representations and warranties are qualified by standards of materiality or by reference to a Material Adverse Effect, such representations and warranties shall be true and correct) on and as of such Borrowing Date with the same effect as if made on and as of such Borrowing Date (except to the extent such representations and warranties expressly refer to an earlier date, in which case they shall be true and correct in all material respects (provided that if such representations and warranties are qualified by standards of materiality or by reference to a Material Adverse Effect, such representations and warranties shall be true and correct) as of such earlier date); and

ARTICLE V
REPRESENTATIONS AND WARRANTIES

The Company represents and warrants to the Bank that:

5.1 Corporate Existence and Power. The Company and each of its Subsidiaries:

(a) is duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation;

(b) has the power and authority and all material governmental licenses, authorizations, consents and approvals to own its assets, carry on its business and to execute, deliver, and perform its obligations under the Loan Documents;

(c) is duly qualified and is licensed and in good standing under the laws of each jurisdiction where its ownership, lease or operation of property or the conduct of its business requires such qualification or license, except to the extent that failure to be so qualified would not reasonably be expected to have a Material Adverse Effect; and

(d) is in compliance with all Requirements of Law, except to the extent that the failure to do so would not reasonably be expected to have a Material Adverse Effect.

5.2 Corporate Authorization; No Contravention. The execution, delivery and performance by the Company of this Agreement and each other Loan Document, have been duly authorized by all necessary corporate action, and do not and will not:

(a) contravene the terms of any of the Company's Organization Documents;

(b) conflict with or result in any breach or contravention of, or the creation of any Lien under, any document evidencing any Contractual Obligation to which the Company is a party or any order, injunction, writ or decree of any Governmental Authority to which the Company or its property is subject; or

5.3 Governmental Authorization. No approval, consent, exemption, authorization, or other action by, or notice to, or filing with, any Governmental Authority is necessary or required in connection with the execution, delivery or performance by, or enforcement against, the Company of the Agreement or any other Loan Document.

5.4 Binding Effect. This Agreement and each other Loan Document to which the Company is a party constitute the legal, valid and binding obligations of the Company, enforceable against the Company in accordance with their respective terms, except as enforceability may be limited by applicable bankruptcy, insolvency, or similar laws affecting the enforcement of creditors' rights generally or by equitable principles relating to enforceability.

5.5 Litigation. Except as specifically disclosed in Schedule 5.5, there are no actions, suits, proceedings, claims or disputes pending, or to the best knowledge of the Company, threatened or contemplated, at law, in equity, in arbitration or before any Governmental Authority, against the Company, or its Subsidiaries or any of their respective properties that:

(a) purport to affect or pertain to this Agreement or any other Loan Document, or any of the transactions contemplated hereby or thereby; or

(b) would reasonably be expected to have a Material Adverse Effect.

5.6 No Default. As of the Closing Date, no Default or Event of Default exists or would result from the incurring of any Obligations by the Company. As of the Closing Date, neither the Company nor any Subsidiary is in default under or with respect to any Contractual Obligation in any respect which, individually or together with all such defaults, would reasonably be expected to have a Material Adverse Effect, or that would, if such default had occurred after the Closing Date, create an Event of Default under Section 8.1(e).

5.7 ERISA Compliance. Except as specifically disclosed in Schedule 5.7:

(a) Each Plan is in compliance in all material respects with the applicable provisions of ERISA, the Code and other federal or state law, except to the extent any such non-compliance would not reasonably be expected to have a Material Adverse Effect. The Company and each ERISA Affiliate has made all required contributions to any Plan subject to Section 412 of the Code, and no application for a funding waiver or an extension of any amortization period pursuant to Section 412 of the Code has been made with respect to any Plan.

(b) There has been no prohibited transaction or violation of the fiduciary responsibility rules with respect to any Plan which has resulted or would reasonably be expected to result in a Material Adverse Effect.

(c) No ERISA Event has occurred or is reasonably expected to occur except to the extent such ERISA Event would not reasonably be expected to have a Material Adverse Effect.

5.8 Use of Proceeds. The proceeds of the Loans are to be used solely for the purposes set forth in and permitted by Section 6.10 and Section 7.7.

5.9 Title to Properties. The Company and each Subsidiary have title to, or valid leasehold interests in, all real property necessary or used in the ordinary conduct of their respective businesses, except for such defects in title as would not, individually or in the aggregate, have a Material Adverse Effect. As of the Closing Date, the property of the Company and its Subsidiaries is subject to no Liens, other than Permitted Liens.

5.10 Taxes. The Company and its Subsidiaries have filed all Federal and other material tax returns and reports required to be filed, and have paid all Federal and other material taxes, assessments, fees and other governmental charges levied or imposed upon them or their properties, income or assets otherwise due and payable, except those (a) which are being contested in good faith by appropriate proceedings and for which adequate reserves have been provided in accordance with GAAP or (b) for which appropriate extensions have been obtained. There is no proposed tax assessment against the Company or any Subsidiary that would reasonably be expected to have a Material Adverse Effect.

5.11 Financial Condition.

(a) The audited consolidated financial statements of the Company and its Subsidiaries dated December 31, 2005 and the unaudited consolidated financial statements of the Company and its Subsidiaries dated December 31, 2006 and, in each case, the related consolidated statements of income or operations, shareholders' equity and cash flows for the fiscal year or fiscal quarter ended on that date:

(i) were prepared in accordance with GAAP consistently applied throughout the period covered thereby, except as otherwise expressly noted therein, subject to ordinary, good faith year end audit adjustments; and

(ii) fairly present the financial condition of the Company and its Subsidiaries as of the date thereof and results of operations for the period covered thereby.

(b) Since December 31, 2005, there has been no Material Adverse Effect, except as disclosed in publicly available filings made with the SEC prior to the date hereof.

5.12 Environmental Matters.

(a) Except as specifically disclosed in Schedule 5.12, the on-going operations of the Company and each of its Subsidiaries comply in all material respects with all Environmental Laws, except where noncompliance therewith would not reasonably be expected to have a Material Adverse Effect.

(b) Except as specifically disclosed in Schedule 5.12, the Company and each of its Subsidiaries have obtained all licenses, permits, authorizations and registrations required under any Environmental Law ("Environmental Permits") and the Company and each of its Subsidiaries are in compliance with all material terms and conditions of such Environmental Permits, except where failure to meet such requirements or noncompliance with such terms and conditions would not reasonably be expected to have a Material Adverse Effect.

(c) Except as specifically disclosed in Schedule 5.12, there are no Hazardous Materials existing with respect to any property of the Company or any Subsidiary, or arising from operations prior to the Closing Date, of the Company or any of its Subsidiaries that would reasonably be expected to have a Material Adverse Effect.

5.13 Regulated Entities. None of the Company, any Person controlling the Company, or any Subsidiary, is an "Investment Company" within the meaning of the Investment Company Act of 1940.

5.14 No Burdensome Restrictions. Neither the Company nor any Subsidiary is a party to or bound by any Contractual Obligation, or subject to any restriction in any Organization Document, or any Requirement of Law, that would reasonably be expected to have a Material Adverse Effect.

5.15 Copyrights, Patents, Trademarks and Licenses, Etc.. The Company or its Subsidiaries own or are licensed or otherwise have the right to use all of the patents, trademarks, service marks, trade names, copyrights, authorizations and other rights that are reasonably necessary for the operation of their respective businesses, without conflict with the rights of any other Person. To the best knowledge

of the Company, no slogan or other advertising device, product, process, method, substance, part or other material now employed, or now contemplated to be employed, by the Company or any Subsidiary infringes upon any rights held by any other Person. Except as specifically disclosed in Schedule 5.5, no claim or litigation regarding any of the foregoing is pending or threatened, and no patent, invention, device, application, principle or any statute, law, rule, regulation, standard or code is pending or, to the knowledge of the Company, proposed, which, in either case, would reasonably be expected to have a Material Adverse Effect.

5.16 Subsidiaries. As of the Closing Date, the Company has no Subsidiaries other than those specifically disclosed in Schedule 5.16 hereto.

5.17 Insurance. Except as specifically disclosed in Schedule 5.17, the properties of the Company and its Subsidiaries are insured with financially sound and reputable insurance companies not Affiliates of the Company, in such amounts, with such deductibles and covering such risks as are customarily carried by companies engaged in similar businesses and owning similar properties in localities where the Company or such Subsidiary operates.

5.18 Full Disclosure. None of the representations or warranties made by the Company or any Subsidiary in the Loan Documents as of the date such representations and warranties are made or deemed made, and none of the statements contained in any exhibit, report, statement or certificate furnished by or on behalf of the Company or any Subsidiary in connection with the Loan Documents, contains any untrue statement of a material fact or omits any material fact required to be stated therein or necessary to make the statements made therein, in light of the circumstances under which they are made, not misleading as of the time when made or delivered.

ARTICLE VI
AFFIRMATIVE COVENANTS

So long as the Bank shall have any Commitment hereunder, or any Loan or other Obligation shall remain unpaid or unsatisfied, unless the Bank waives compliance in writing:

6.1 Financial Statements. The Company shall deliver to the Bank:

(a) as soon as available, but not later than one hundred (100) days after the end of each fiscal year, a copy of the audited consolidated and unaudited consolidating balance sheet of the Company and its Subsidiaries as at the end of such year and the related consolidated and consolidating statements of income or operations, shareholders' equity and cash flows for such year, setting forth in each case in comparative form the figures for the previous fiscal year, and accompanied by the opinion of PricewaterhouseCoopers, LLP or another nationally-recognized independent public accounting firm ("Independent Auditor") which report shall state that such consolidated financial statements present fairly the financial position for the periods indicated in conformity with GAAP applied on a basis consistent with prior years (except as noted in such report). Such opinion shall not be qualified or limited because of a restricted or limited examination by the Independent Auditor of any material portion of the Company's or any Subsidiary's records;

(b) as soon as available, but not later than fifty (50) days after the end of each of the first three fiscal quarters of each fiscal year, a copy of the unaudited consolidated and consolidating balance sheet of the Company and its Subsidiaries as of the end of such quarter and the related consolidated statements of income, shareholders' equity and cash flows for the period commencing on the first day and ending on the last day of such quarter (or, at the option of the Company, its 10-Q filing for such fiscal quarter);

(c) as soon as possible, but in any event within one hundred twenty (120) days after the end of each fiscal year of ZIC, a copy of the Annual Statement of ZIC and its Subsidiaries on a

combined basis, in each case, for such fiscal year prepared in accordance with SAP or as allowed by the Department;

(d) as soon as possible, but in any event within sixty (60) days after the end of each of the first three fiscal quarters of each fiscal year of ZIC, a copy of the quarterly statement of ZIC and its Subsidiaries on a combined basis, in each case, for such fiscal quarter, all prepared in accordance with SAP, or as allowed by the Department, and accompanied by the certification of the chief financial officer or a vice-president with responsibility for or knowledge of financial matters of ZIC and its Subsidiaries that (i) such quarterly financial statement has been prepared principally for the internal use of management and is not required by, or filed with, any regulatory agencies, (ii) such quarterly statement contains combined data for and the consolidated financial statements of Zenith Insurance Company with its wholly owned affiliated Property and Casualty Insurers (including ZNAT Insurance Company) that, to the best of the certifying officer's information, knowledge and belief, were compiled in accordance with the NAIC instructions for the completion of quarterly statements and (iii) for purposes of such quarterly financial statements, all significant intercompany balances and transactions have been eliminated in consolidation;

(e) within thirty (30) days after being delivered to ZIC, any final Triennial Examination Report issued by the applicable Department;

(f) within one hundred twenty (120) days after the close of each fiscal year of ZIC, a copy of the "Statement of Actuarial Opinion" and "Combined Management Discussion and Analysis" for ZIC and its Subsidiaries which is provided to the applicable Department (or equivalent information should such Department no longer require such a statement) as to the adequacy of loss reserves of ZIC and its Subsidiaries. Such opinion shall be in the format prescribed by the Applicable Insurance Code of the state of domicile of ZIC.

6.2 Certificates; Other Information. The Company shall furnish to the Bank:

(a) concurrently with the delivery of the financial statements referred to in Sections 6.1(c) and (d), a Compliance Certificate executed by a Responsible Officer;

(b) promptly, copies of all financial statements and reports that the Company sends to its shareholders, and copies of all financial statements and regular, periodical or special reports (including Forms 10K, 10Q and 8K) that the Company or any Subsidiary may make to, or file with, the SEC or that ZIC and its Subsidiaries on a combined basis may make to, or file with, the Department;

(c) promptly, copies of all material Insurance Holding Company System Act filings with Governmental Authorities by the Company or any of its Subsidiaries, including, without limitation, filings which seek approval of Governmental Authorities with respect to transactions between the Company and its Affiliates;

(d) within five (5) Business Days of notice, notice of actual suspension, termination or revocation of any License or restriction thereon (material to the Insurance Subsidiaries taken as a whole) of any of the Insurance Subsidiaries by any Governmental Authority or of receipt of notice from any Governmental Authority notifying any of the Insurance Subsidiaries of a hearing (not withdrawn within ten (10) days) relating to such a suspension, termination, revocation or restriction, including any request by a Governmental Authority that commits any of the Insurance Subsidiaries to take, or refrain from taking, any action that affects the authority of any of the Insurance Subsidiaries to conduct its business in each case only if the underlying event would reasonably be expected to have a Material Adverse Effect; and

(e) promptly, such additional information regarding the business, financial or corporate affairs of the Company or any Subsidiary, the Bank may from time to time reasonably request.

Documents required to be delivered pursuant to Section 6.1(a) or (b) or Section 6.2(b) (to the extent any such documents are included in materials otherwise filed with the SEC) may be delivered electronically and if so delivered, shall be deemed to have been delivered on the date (i) on which the Company posts such documents, or provides a link thereto on the Company's website on the Internet at the website address listed on Schedule 9.2; or (ii) on which such documents are posted on the Company's behalf on an Internet or intranet website, if any, to which the Bank has access (whether a commercial, third-party website or whether sponsored by the Bank); provided that: (i) if the Bank so requests, the Company shall deliver paper copies of such documents to the Bank until a written request to cease delivering paper copies is given by the Bank and (ii) the Company shall notify (which may be by facsimile or electronic mail) the Bank of the posting of any such documents. Notwithstanding anything contained herein, in every instance the Company shall be required to provide paper copies of the Compliance Certificates required by Section 6.2(a) to the Bank.

6.3 Notices. The Company shall promptly notify the Bank:

(a) of the occurrence of any Default or Event of Default;

(b) of (i) any breach or non-performance of, or any default under, any Contractual Obligation of the Company or any of its Subsidiaries which would reasonably be expected to have a Material Adverse Effect; and (ii) any dispute, litigation, investigation, proceeding or suspension which may exist at any time between the Company or any of its Subsidiaries and any Governmental Authority which would result in a Material Adverse Effect;

(c) of the commencement of, or any material development in, any litigation or proceeding affecting the Company or any Subsidiary (i) in which the amount of damages claimed, if awarded, would result in a Material Adverse Effect, (ii) in which injunctive or similar relief is sought and that, if adversely determined, would reasonably be expected to have a Material Adverse Effect, or (iii) in which the relief sought is an injunction or other stay of the performance of this Agreement or any Loan Document;

(d) of (i) any and all enforcement, cleanup, removal or other governmental or regulatory actions instituted, completed or threatened against the Company or any Subsidiary or any of their respective properties pursuant to any applicable Environmental Laws, and (ii) all other Environmental Claims, that in each case would reasonably be expected to have a Material Adverse Effect;

(e) of any of the following events affecting the Company unless such event would not reasonably be expected to have a Material Adverse Effect, together with a copy of any notice with respect to such event that may be required to be filed with a Governmental Authority and any notice delivered by a Governmental Authority to the Company with respect to such event:

(i) an ERISA Event;

(ii) the adoption of any amendment to a Plan, if such amendment results in a material increase in contributions or Unfunded Pension Liability; or

(iii) the commencement of contributions to any Plan subject to Section 412 of the Code;

(f) of any material change in accounting policies or financial reporting practices by the Company or any of its consolidated Subsidiaries;

(g) within three (3) Business Days of such notice, of any pending or threatened investigation or regulatory proceeding (other than routine periodic investigations or reviews) by any Governmental Authority concerning the business, practices or operations of any of the Insurance Subsidiaries and within three (3) Business Day of the Company having knowledge thereof, of any

agent or managing general agent thereof, that would be reasonably expected to have a Material Adverse Effect; and

(h) of notice of any change in the rating of the Company's non-credit-enhanced, senior unsecured long-term debt by Moody's and/or of the Company's counterparty credit rating by S&P.

Each notice under this Section shall be accompanied by a written statement by a Responsible Officer setting forth details of the occurrence referred to therein in form and substance reasonably satisfactory to the Bank.

6.4 Preservation of Corporate Existence Etc. The Company shall, and shall cause each Significant Subsidiary to:

(a) preserve and maintain in full force and effect its corporate (or other) existence and good standing under the laws of its state or jurisdiction of incorporation or organization, except as permitted by Section 7.3;

(b) preserve and maintain in full force and effect all governmental rights, privileges, qualifications, permits, licenses and franchises necessary or desirable in the normal conduct of its business, except where failure to do so would not reasonably be expected to result in a Material Adverse Effect;

(c) use reasonable efforts, in the ordinary course of business, to preserve its business organization and goodwill, except as permitted by Section 7.3; and

(d) preserve or renew all of its registered patents, trademarks, trade names, service marks and Licenses, the non-preservation of which would reasonably be expected to have a Material Adverse Effect.

6.5 Maintenance of Property. The Company shall maintain, and shall cause each Subsidiary to maintain, and preserve all its property which is used or useful in its business in good working order and condition, ordinary wear and tear excepted and make all necessary repairs thereto and renewals and replacements thereof except where the failure to do so would not reasonably be expected to have a Material Adverse Effect. The Company and each Subsidiary shall use the standard of care typical in the industry in the operation and maintenance of its facilities except where the failure to do so would not reasonably be expected to have a Material Adverse Effect.

6.6 Insurance. Except as disclosed on Schedule 5.17, the Company shall maintain, and shall cause each of its Subsidiaries to maintain, with financially sound and reputable independent insurers, insurance with respect to its properties and business against loss or damage of the kinds customarily insured against by Persons engaged in the same or similar business, of such types and in such amounts as are customarily carried under similar circumstances by such other Persons; including workers' compensation insurance, public liability and property and casualty insurance. Upon request of the Bank, the Company shall furnish the Bank, at reasonable intervals (but not more than once per calendar year) a certificate of a Responsible Officer of the Company setting forth the nature and extent of all insurance maintained by the Company and its Subsidiaries in accordance with this Section.

6.7 Payment of Obligations. The Company shall, and shall cause each Subsidiary to, pay and discharge as the same shall become due and payable, all their respective material obligations and liabilities except where the failure to do so would not reasonably be expected to have a Material Adverse Effect, including:

(a) all tax liabilities, assessments and governmental charges or levies upon it or its properties or assets, unless the same are being contested in good faith by appropriate proceedings and adequate reserves in accordance with GAAP are being maintained by the Company or such Subsidiary;

(b) all lawful claims which, if unpaid, would by law become a Lien upon its property; and

(c) all indebtedness, as and when due and payable (after giving effect to applicable grace periods), but subject to any subordination provisions contained in any instrument or agreement evidencing such Indebtedness.

6.8 Compliance with Laws. The Company shall comply, and shall cause each Subsidiary (or, in the case of ERISA, each ERISA Affiliate in which the Company owns a controlling interest) to comply, in all material respects with all Requirements of Law of any Governmental Authority having jurisdiction over it or its business (including the Federal Fair Labor Standards Act, ERISA and the Environmental Laws), except such as may be contested in good faith or as to which a bona fide dispute may exist.

6.9 Inspection of Property and Books and Records. The Company shall maintain and shall cause each Subsidiary to maintain proper books of record and account, in which full, true and correct entries in conformity with GAAP consistently applied shall be made of all financial transactions and matters involving the assets and business of the Company and such Subsidiary. The Company shall permit, and shall cause each Subsidiary to permit, representatives and independent contractors of the Bank to visit and inspect any of their respective properties, to examine their respective corporate, financial and operating records, and make copies thereof or abstracts therefrom, and to discuss their respective affairs, finances and accounts with their respective directors, Responsible Officers, and independent public accountants (at which discussions the Company's representatives may be present unless a Default has occurred and is continuing), all at the expense of the Bank and at such reasonable times during normal business hours and as often as may be reasonably desired, upon reasonable advance notice to the Company; provided, however, when a Default exists the Bank may do any of the foregoing at the expense of the Company at any time during normal business hours and without advance notice.

6.10 Use of Proceeds. The Company shall use the proceeds of the Loans for the capitalization of ZIC, working capital, capital expenditures and other lawful general corporate purposes and acquisitions of companies that are negotiated and consummated with the consent of the company to be acquired and, in each case that are not in contravention of any Requirement of Law or of any Loan Document.

6.11 Further Assurances. The Company shall ensure that all written information, exhibits and reports furnished to the Bank do not and will not contain any untrue statement of a material fact or omit to state any material fact necessary to make the statements contained therein not misleading in light of the circumstances in which made, and will promptly disclose to the Bank and correct any material misstatement or omission that may be discovered therein or in any Loan Document or in the execution or acknowledgement thereof.

ARTICLE VII
NEGATIVE COVENANTS

So long as the Bank shall have any Commitment hereunder, or any Loan or other Obligation shall remain unpaid or unsatisfied, unless the Bank waives compliance in writing:

7.1 Limitation on Liens. The Company shall not directly or indirectly, make, create, incur, assume or suffer to exist any Lien upon or with respect to any part of its property, whether now owned or hereafter acquired, other than Permitted Liens.

7.2 Disposition of Assets. The Company shall not, and shall not suffer or permit any Significant Subsidiary to, make a Disposition of (whether in one or a series of transactions) any property (including accounts and notes receivable, with or without recourse) or enter into any agreement to do so, except:

(a) in the ordinary course of business and consistent with past practices;

(b) Dispositions made for fair market value; provided, that at the time of any Disposition under this clause (b), no Event of Default shall exist or shall result from such Disposition;

(d) Dispositions (i) made by the Company to any of its Significant Subsidiaries or Wholly-Owned Subsidiaries or (ii) by any of the Company's Significant Subsidiaries to the Company, any other Significant Subsidiary or any Wholly-Owned Subsidiary.

7.3 Consolidations and Mergers. The Company shall not, and shall not suffer or permit any Significant Subsidiary to, merge, consolidate with or into, or convey, transfer, lease or otherwise dispose of (whether in one transaction or in a series of transactions) all or substantially all of its assets (whether now owned or hereafter acquired) to or in favor of any Person, except:

(a) any Subsidiary may merge with the Company, provided that the Company shall be the continuing or surviving corporation, or with any one or more Subsidiaries; provided, that if any transaction shall be between a Subsidiary and a Wholly-Owned Subsidiary, the Wholly-Owned Subsidiary shall be the continuing or surviving corporation;

(b) any Subsidiary may sell all or substantially all of its assets (upon voluntary liquidation or otherwise), to the Company or another Wholly-Owned Subsidiary;

(c) a merger where the Company or one of its Subsidiaries is the surviving corporation in the merger and no Default exists immediately prior to or immediately following such merger; and

7.4 [Intentionally Omitted].

7.5 Limitation on Indebtedness. The Company shall not permit its Insurance Subsidiaries to create, incur, assume, suffer to exist, or otherwise become or remain directly or indirectly liable with respect to, any Indebtedness defined in clauses (a), (c), (d) or (f) of the definition thereof exceeding $20,000,000 at any one time outstanding.

7.6 Transactions with Affiliates. The Company shall not, and shall not suffer or permit any Subsidiary to, enter into any transaction (other than (i) pooling arrangements entered into in the ordinary course of business between Insurance Subsidiaries, (ii) the tax-sharing agreement between the Company and its Subsidiaries, (iii) the cost-sharing agreement between the Company and its Subsidiaries, and (iv) other transactions between Subsidiaries, or between the Company and a Subsidiary, in each case in the ordinary course of business) with any Affiliate of the Company, except upon fair and reasonable terms no less favorable to the Company or such Subsidiary than would obtain in a comparable arm's-length transaction with a Person not an Affiliate of the Company or such Subsidiary.

7.7 Use of Proceeds. The Company shall not, and shall not suffer or permit any Subsidiary to, use any portion of the Loan proceeds, directly or indirectly, (a) in a manner that would cause the Bank to violate or not to comply with Regulations T, U or X of the FRB, (b) to repay or otherwise refinance indebtedness of the Company or others incurred to purchase or carry Margin Stock, (c) to extend credit for the purpose of purchasing or carrying any Margin Stock, or (d) to acquire any security in any transaction that is subject to Section 13 or 14 of the Exchange Act, unless such transaction is permitted by Section 6.10 and, to the extent permitted by law, the name of the Bank shall not be made available to the public.

7.8 Change in Business. The Company shall not, and shall not suffer or permit any Significant Subsidiary to, engage in any material line of business substantially different from those lines of business (and activities related or incidental thereto) carried on by the Company and its Significant Subsidiaries on the date hereof.

7.9 Accounting Changes. The Company shall not, and shall not suffer or permit any Subsidiary to, make any significant change in accounting treatment or reporting practices, except as required or permitted by GAAP or SAP, or change the fiscal year of the Company or of any Subsidiary.

7.10 Minimum Surplus. The Company shall not permit the Capital and Surplus of ZIC as reported on a combined basis as of the end of any fiscal quarter (commencing with the fiscal quarter ended December 31, 2006) to be less than 75% of the Capital and Surplus of ZIC as reported on a combined basis as of the end of the fiscal year ended immediately prior to the end of such fiscal quarter.

7.11 Debt to Total Capitalization. The Company shall not permit the Debt to Total Capitalization Ratio to exceed .20:1 as of the end of any fiscal quarter (commencing with the fiscal quarter ended December 31, 2006).

7.12 Risk-Based Capital. The Company shall not permit the Risk-Based Capital of ZIC, as reported on a combined basis, to fall below 145% as of the end of any fiscal quarter (commencing with the fiscal quarter ended December 31, 2006).

7.13 Interest Coverage Ratio. The Company shall not permit the Interest Coverage Ratio to be less than 3.00:1 as of the end of any fiscal quarter (commencing with the fiscal quarter ended December 31, 2006).

ARTICLE VIII
EVENTS OF DEFAULT

7.1 Event of Default. Any of the following shall constitute an "Event of Default":

(a) Non-Payment. The Company fails to pay, (i) when and as required to be paid herein, any amount of principal of any Loan, or (ii) within five (5) days after the same becomes due, any interest, fee or any other amount payable hereunder or under any other Loan Document;

(b) Representation or Warranty. Any representation or warranty by the Company or any Subsidiary made herein, in any other Loan Document, or which is contained in any certificate, document or financial or other statement by the Company, any Subsidiary, or any Responsible Officer, furnished at any time under this Agreement, or in or under any other Loan Document, is incorrect in any material respect on or as of the date made;

(c) Specific Defaults. The Company fails to perform or observe any term, covenant or agreement contained in any of Section 6.3 (a) or in Article VII;

(d) Other Defaults. The Company fails to perform or observe any other term or covenant contained in this Agreement or any other Loan Document, and such default shall continue unremedied for a period of 30 days after the date upon which written notice thereof is given to the Company by the Bank; provided, that if the default cannot be cured within 30 days after such notice but the Company commences a cure within 30 days and the default is ultimately cured within 90 days of such notice, then no Event of Default shall be deemed to have occurred hereunder;

(e) Cross-Payment and Acceleration. The Company or any Subsidiary (i) fails to make any payment in respect of any Indebtedness defined in clauses (a), (c), (d) or (f) or any Contingent Obligations related thereto having an aggregate principal amount (including undrawn committed or available amounts and including amounts owing to all creditors under any combined or syndicated credit arrangement) of more than $10,000,000 when due (whether by scheduled maturity, required prepayment, acceleration, demand, or otherwise) and such failure continues after the applicable grace or notice period, if any, specified in the relevant document on the date of such failure; or

(ii) fails to perform or observe any other condition or covenant, or any other event shall occur or condition exist, under any agreement or instrument relating to any such Indebtedness or Contingent Obligation, and such failure continues after the applicable grace or notice period, if any, specified in the relevant document on the date of such failure if the effect of such failure, event or condition is to cause such Indebtedness to be declared to be due and payable prior to its stated maturity, or such Contingent Obligation to become payable or cash collateral in respect thereof to be demanded;

(f) Insolvency; Voluntary Proceedings. The Company or any Significant Subsidiary (i) ceases or fails to be Solvent, or generally fails to pay, or admits in writing its inability to pay, its debts as they become due, subject to applicable grace periods, if any, whether at stated maturity or otherwise; (ii) voluntarily ceases to conduct its business in the ordinary course; (iii) commences any Insolvency Proceeding with respect to itself; or (iv) takes any action to effectuate or authorize any of the foregoing;

(g) Involuntary Proceedings. (i) Any involuntary Insolvency Proceeding is commenced or filed against the Company or any Significant Subsidiary, or any writ, judgment, warrant of attachment, execution or similar process, is issued or levied against a substantial part of the Company's or any Significant Subsidiary's properties, and any such proceeding or petition shall not be dismissed, or such writ, judgment, warrant of attachment, execution or similar process shall not be released, vacated or fully bonded within 60 days after commencement, filing or levy; (ii) the Company or any Significant Subsidiary admits the material allegations of a petition against it in any Insolvency Proceeding, or an order for relief (or similar order under non-U.S. law) is ordered in any Insolvency Proceeding; or (iii) the Company or any Significant Subsidiary acquiesces in the appointment of a receiver, trustee, custodian, conservator, liquidator, mortgagee in possession (or agent therefor), or other similar Person for itself or a substantial portion of its property or business;

(h) ERISA. (i) An ERISA Event shall occur with respect to a Plan or Multiemployer Plan which has resulted or would reasonably be expected to result in liability of the Company under Title IV of ERISA to the Plan, Multiemployer Plan or the PBGC in an aggregate amount in excess of $10,000,000; or (ii) the aggregate amount of Unfunded Pension Liability among all Plans at any time exceeds $10,000,000; or (iii) the Company or any ERISA Affiliate shall fail to pay when due, after the expiration of any applicable grace period, any installment payment with respect to its withdrawal liability under Section 4201 of ERISA under a Multiemployer Plan in an aggregate amount in excess of $10,000,000;

(i) Monetary Judgments. One or more non-interlocutory judgments, non-interlocutory orders, decrees or arbitration awards is entered against the Company or any Subsidiary involving in the aggregate a liability (to the extent not covered by independent third-party insurance as to which the insurer does not deny coverage) as to any single or related series of transactions, incidents or conditions, of $10,000,000 or more, and the same shall remain unsatisfied, unvacated or unstayed pending appeal for a period of the longer of (i) 30 days after the entry thereof or (ii) the expiration of the applicable period for filing notice of an appeal;

(j) Non-Monetary Judgments. Any non-monetary judgment, order or decree is entered against the Company or any Significant Subsidiary which does or would reasonably be expected to have a Material Adverse Effect, and there shall be any period of 30 consecutive days during which such judgment is not vacated or a stay of enforcement of such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect;

(k) Change of Control. There occurs any Change of Control; or

(l) Loss of Licenses. Any Governmental Authority revokes or fails to renew any material insurance license, permit or franchise of the Company or any Significant Subsidiary, or the Company or any Significant Subsidiary for any reason loses any material insurance license, permit or franchise, or the Company or any Significant Subsidiary suffers the imposition of any restraining order, escrow, suspension or impound of funds in connection with any proceeding (judicial or administrative) with respect to any material insurance license, permit or franchise.

8.2 Remedies. If any Event of Default occurs, the Bank may:

(a) declare the Commitment to be terminated, whereupon such Commitment shall be terminated;

(b) declare the unpaid principal amount of all outstanding Loans, all interest accrued and unpaid thereon, and all other amounts owing or payable hereunder or under any other Loan Document to be immediately due and payable, without presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived by the Company; and

provided, however, that upon the occurrence of any event specified in subsection (f) or (g) of Section 8.1 (in the case of clause (i) of subsection (g) upon the expiration of the 60-day period mentioned therein), the obligation of the Bank to make Loans shall automatically terminate and the unpaid principal amount of all outstanding Loans and all interest and other amounts as aforesaid shall automatically become due and payable without further act of the Bank.

8.3 Rights Not Exclusive. The rights provided for in this Agreement and the other Loan Documents are cumulative and are not exclusive of any other rights, powers, privileges or remedies provided by law or in equity, or under any other instrument, document or agreement now existing or hereafter arising.

ARTICLE IX
MISCELLANEOUS

9.1 Amendments and Waivers. No amendment or waiver of any provision of this Agreement or any other Loan Document, and no consent with respect to any departure by the Company therefrom, shall be effective unless the same shall be in writing and signed by the Bank and the Company, and then any such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given.

9.2 Notices; Effectiveness; Electronic Communication.

(a) Notices Generally. Except in the case of notices and other communications expressly permitted to be given by telephone (and except as provided in subsection (b) below), all notices and other communications provided for herein shall be in writing and shall be delivered by hand or overnight courier service, mailed by certified or registered mail or sent by telecopier, and all notices and other communications shall be made to the address, telecopier number, electronic mail address or telephone number specified for each party hereto on Schedule 9.2.

Notices sent by hand or overnight courier service, or mailed by certified or registered mail, shall be deemed to have been given when received; notices sent by telecopier shall be deemed to have been given when sent (except that, if not given during normal business hours for the recipient, shall be deemed to have been given at the opening of business on the next business day for the recipient). Notices delivered through electronic communications to the extent provided in subsection (b) below, shall be effective as provided in such subsection (b).

(b) Electronic Communications. The Bank or the Company may, in its discretion, agree to accept notices and other communications to it hereunder by electronic communications pursuant to procedures approved by it, provided that approval of such procedures may be limited to particular notices or communications.

Unless the Bank otherwise prescribes, (i) notices and other communications sent to an e-mail address shall be deemed received upon the sender's receipt of an acknowledgement from the intended recipient (such as by the "return receipt requested" function, as available, return e-mail or other written acknowledgement), provided that if such notice or other communication is not sent during the normal business hours of the recipient, such notice or communication shall be deemed to have been sent at the opening of business on the next business day for the recipient, and (ii) notices or communications posted to an Internet or intranet website shall be deemed received upon the deemed receipt by the intended recipient at its e-mail address as described in the foregoing clause (i) of notification that such notice or communication is available and identifying the website address therefor.

(c) Effectiveness of Facsimile Documents and Signatures. Loan Documents may be transmitted and/or signed by facsimile. The effectiveness of any such documents and signatures shall, subject to applicable law, have the same force and effect as manually signed originals and shall be binding on the Company and the Bank. The Bank may also require that any such documents and signatures be confirmed by a manually-signed original thereof; provided, however, that the failure to request or deliver the same shall not limit the effectiveness of any facsimile document or signature.

(d) Change of Address, Etc. Both the Company and the Bank may change its address, telecopier or telephone number for notices and other communications hereunder by notice to the other party hereto.

(e) Reliance by the Bank. The Bank shall be entitled to rely and act upon any notices (including telephonic Notices of Borrowing) purportedly given by or on behalf of the Company even if (i) such notices were not made in a manner specified herein, were incomplete or were not preceded or followed by any other form of notice specified herein, or (ii) the terms thereof, as understood by the recipient, varied from any confirmation thereof. The Company shall indemnify the Bank, its Affiliates, and their respective officers, directors, employees, agents and attorneys-in-fact from all losses, costs, expenses and liabilities resulting from the reliance by such Person on each notice purportedly given by or on behalf of the Company. All telephonic notices to and other communications with the Bank may be recorded by the Bank, and the Company hereby consents to such recording.

9.3 No Waiver; Cumulative Remedies. No failure to exercise and no delay in exercising, on the part of the Bank, any right, remedy, power or privilege hereunder, shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege.

9.4 Costs and Expenses. The Company shall:

(a) whether or not the transactions contemplated hereby are consummated, pay or reimburse the Bank within five Business Days after demand (subject to Section 4.1(e)) for all costs and expenses incurred by the Bank in connection with the preparation, delivery and execution of this Agreement and the other Loan Documents and any amendment, supplement, waiver or modification to (whether or not the transactions contemplated hereby or thereby are consummated), this Agreement, any Loan Document and any other documents prepared in connection herewith or therewith, and the consummation and administration of the transactions contemplated hereby and thereby, including reasonable Attorney Costs incurred by the Bank with respect thereto; and

(b) pay or reimburse the Bank within five Business Days after demand (subject to Section 4.1(e)) for all costs and expenses (including Attorney Costs) incurred by it in connection with the enforcement, attempted enforcement, or preservation of any rights or remedies under this Agreement or any other Loan Document (including in connection with any "workout" or restructuring regarding the Loans, and including in any Insolvency Proceeding or appellate proceeding).

The agreements in this Section shall survive the termination of the Commitment and repayment of all other Obligations.

9.5 Company Indemnification.

(a) Whether or not the transactions contemplated hereby are consummated, the Company shall indemnify, defend and hold the Bank and its officers, directors, employees, counsel, agents and attorneys-in-fact (each, an "Indemnified Person") harmless from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, charges, expenses and disbursements (including Attorney Costs) of any kind or nature whatsoever which may at any time (including at any time following repayment of the Loans) be imposed on, incurred by or asserted against any such Indemnified Person in any way relating to or arising out of or in connection with (a) the execution, delivery, enforcement, performance or administration of any Loan Document or any other agreement, letter or instrument delivered in connection with the transactions contemplated hereby or the consummation of the transactions contemplated thereby, (b) the Commitment or the Loans or the use or the proposed use of the proceeds therefrom, or (c) any actual or prospective claim, litigation, investigation or proceeding relating to any of the foregoing, whether based on contract, tort or any other theory (including any investigation of, preparation for, or defense of any pending or threatened claim, investigation, litigation or proceeding) and regardless of whether any Indemnified Person is a party thereto (all the foregoing, collectively, the "Indemnified Liabilities"), IN ALL CASES, WHETHER OR NOT CAUSED BY OR ARISING, IN WHOLE OR IN PART, OUT OF THE NEGLIGENCE OF THE INDEMNIFIED PERSON; provided that such indemnity shall not, as to any Indemnified Person, be available to the extent that such liabilities, obligations, losses, damages, penalties, claims, demands, actions, judgments, suits, costs, expenses or disbursements are determined by a court of competent jurisdiction by final and nonappealable judgment to have resulted from the gross negligence or willful misconduct of such Indemnified Person. No Indemnified Person shall have any liability for any indirect or consequential damages relating to this Agreement or any other Loan Document or arising out of its activities in connection herewith or therewith (whether before or after the Closing Date). All amounts due under this Section 9.5 shall be payable within ten Business Days after demand therefor. The agreements in this Section shall survive the termination of the Commitment and the repayment, satisfaction or discharge of all other Obligations.

(b) Defense. At the election of any Indemnified Person, the Company shall defend such Indemnified Person using legal counsel satisfactory to such Indemnified Person in such Person's sole discretion, at the sole cost and expense of the Company.

9.6 Marshalling; Payments Set Aside. The Bank shall not be under any obligation to marshal any assets in favor of the Company or any other Person or against or in payment of any or all of the Obligations. To the extent that the Company makes a payment to the Bank, or the Bank exercises its right of set-off, and such payment or the proceeds of such set-off or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside or required (including pursuant to any settlement entered into by the Bank in its discretion) to be repaid to a trustee, receiver or any other party, in connection with any Insolvency Proceeding or otherwise, then to the extent of such recovery the obligation or part thereof originally intended to be satisfied shall be revived and continued in full force and effect as if such payment had not been made or such set-off had not occurred.

9.7 Successors and Assigns.

(a) The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns permitted hereby, except that the Company may not assign or otherwise transfer any of its rights or obligations hereunder without the prior written consent of the Bank and the Bank may not assign or otherwise transfer any of its rights or obligations hereunder except (i) to an Eligible Assignee in accordance with the provisions of subsection (b) of this Section, (ii) by way of participation in accordance with the provisions of subsection (c) of this Section, or (iii) by way of pledge or assignment of a security interest subject to the restrictions of subsection (e) of this Section (and any other attempted assignment or transfer by any party hereto shall be null and void). Nothing in this Agreement, expressed or implied, shall be construed to confer upon any Person (other than the parties hereto, their respective successors and assigns permitted hereby, Participants to the extent provided in subsection (c) of this Section and, to the extent expressly contemplated hereby, the Indemnitees) any legal or equitable right, remedy or claim under or by reason of this Agreement.

(b) The Bank may at any time assign to one or more Eligible Assignees all or a portion of its rights and obligations under this Agreement (including all or a portion of the Commitment and the Loans at the time owing to it) pursuant to documentation acceptable to the Bank and the assignee. From and after the effective date specified in such documentation, such Eligible Assignee shall be a party to this Agreement and, to the extent of the interest assigned by the Bank, have the rights and obligations of the Bank under this Agreement, and the Bank shall, to the extent of the interest so assigned, be released from its obligations under this Agreement (and, in the case of an assignment of all of the Bank's rights and obligations under this Agreement, shall cease to be a party hereto but shall continue to be entitled to the benefits of Sections 3.1, 3.3, 3.4, 9.4 and 9.5 with respect to facts and circumstances occurring prior to the effective date of such assignment. Upon request, the Company (at its expense) shall execute and deliver new or replacement Notes to the Bank and the assignee.

(c) The Bank may at any time, without the consent of, or notice to, the Company, sell participations to any Person (other than a natural person or the Company or any of the Company's Affiliates or Subsidiaries) (each, a "Participant") in all or a portion of the Bank's rights and/or obligations under this Agreement (including all or a portion of its Commitment and/or the Loans); provided that (i) the Bank's obligations under this Agreement shall remain unchanged, (ii) the Bank shall remain solely responsible to the Company for the performance of such obligations and (iii) the Company shall continue to deal solely and directly with the Bank in connection with the Bank's rights and obligations under this Agreement. Any agreement or instrument pursuant to which the Bank sells such a participation shall provide that the Bank shall retain the sole right to enforce this Agreement and to approve any amendment, modification or waiver of any provision of this Agreement; provided that such agreement or instrument may provide that the Bank will not, without the consent of the Participant, agree to any amendment, waiver or other modification that would (i) postpone any date upon which any payment of money is scheduled to be made to such Participant or (ii) reduce the principal, interest, fees or other amounts payable to such Participant (provided, however, that the Bank may, without the consent of the Participant, waive the right to be paid interest at the Default Rate). Subject to subsection (d) of this Section, the Company agrees that each Participant shall be entitled to the benefits of Sections 3.1, 3.3 and 3.4 to the same extent as if it were the Bank and had acquired its interest by assignment pursuant to subsection (b) of this Section. To the extent permitted by law, each Participant also shall be entitled to the benefits of Section 9.9 as though it were the Bank.

(d) A Participant shall not be entitled to receive any greater payment under Section 3.1, 3.3 or 3.4 than the Bank would have been entitled to receive with respect to the participation sold to such Participant, unless the sale of the participation to such Participant is made with the

Company's prior written consent. A Participant that is not a "United States person" within the meaning of Section 7701(a)(30) of the Code shall not be entitled to the benefits of Section 3.1 unless the Company is notified of the participation sold to such Participant and such Participant agrees, for the benefit of the Company, to provide to the Bank such tax forms prescribed by the IRS as are necessary or desirable to establish an exemption from, or reduction of, U.S. withholding tax.

(e) The Bank may at any time pledge or assign a security interest in all or any portion of its rights under this Agreement (including under the Note, if any) to secure obligations of the Bank, including any pledge or assignment to secure obligations to a Federal Reserve Bank; provided that no such pledge or assignment shall release the Bank from any of its obligations hereunder or substitute any such pledgee or assignee for the Bank as a party hereto.

(f) As used herein, the following terms have the following meanings:

"Eligible Assignee" means (a) an Affiliate of the Bank; (b) an Approved Fund; and (c) any other Person (other than a natural person) approved by the Company (such approval not to be unreasonably withheld or delayed); provided that no such approval shall be required if an Event of Default has occurred and is continuing.

"Fund" means any Person (other than a natural person) that is (or will be) engaged in making, purchasing, holding or otherwise investing in commercial loans and similar extensions of credit in the ordinary course of its business.

"Approved Fund" means any Fund that is administered or managed by (a) the Bank or (b) an Affiliate of the Bank.

9.8 Survival of Representations and Warranties. All representations and warranties made hereunder and in any other Loan Document or other document delivered pursuant hereto or thereto or in connection herewith or therewith shall survive the execution and delivery hereof and thereof. Such representations and warranties have been or will be relied upon by the Bank, regardless of any investigation made by the Bank or on its behalf, and shall continue in full force and effect as long as any Loan or any other Obligation hereunder shall remain unpaid or unsatisfied.

9.9 Set-off. In addition to any rights and remedies of the Bank provided by law, if an Event of Default exists or the Loans have been accelerated, the Bank is authorized at any time and from time to time, without prior notice to the Company, any such notice being waived by the Company to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held by, and other indebtedness at any time owing by, the Bank to or for the credit or the account of the Company (excluding any account that is expressly designated as a custodial or trust account on the books and records of the Bank) against any and all Obligations owing to the Bank, now or hereafter existing, irrespective of whether or not the Bank shall have made demand under this Agreement or any Loan Document and although such Obligations may be contingent or unmatured. The Bank agrees promptly to notify the Company after any such set-off and application made by the Bank; provided, however, that the failure to give such notice shall not affect the validity of such set-off and application.

9.10 Counterparts. This Agreement may be executed in any number of separate counterparts, each of which, when so executed, shall be deemed an original, and all of said counterparts taken together shall be deemed to constitute but one and the same instrument.

9.11 Severability. The illegality or unenforceability of any provision of this Agreement or any instrument or agreement required hereunder shall not in any way affect or impair the legality or enforceability of the remaining provisions of this Agreement or any instrument or agreement required hereunder.

9.12 No Third Parties Benefited. This Agreement is made and entered into for the sole protection and legal benefit of the Company and the Bank and their permitted successors and assigns, and no other Person shall be a direct or indirect legal beneficiary of, or have any direct or indirect cause of action or claim in connection with, this Agreement or any of the other Loan Documents.

9.13 Governing Law and Jurisdiction.

(a) THIS AGREEMENT AND THE NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF CALIFORNIA WITHOUT REGARD TO CONFLICT OF LAWS PRINCIPLES; PROVIDED, THAT THE PARTIES SHALL RETAIN ALL RIGHTS ARISING UNDER FEDERAL LAW.

(b) ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT MAY BE BROUGHT IN THE COURTS OF THE STATE OF CALIFORNIA OR OF THE UNITED STATES FOR THE CENTRAL DISTRICT OF CALIFORNIA, AND BY EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH OF THE COMPANY AND THE BANK CONSENTS, FOR ITSELF AND IN RESPECT OF ITS PROPERTY, TO THE NON-EXCLUSIVE JURISDICTION OF THOSE COURTS. EACH OF THE COMPANY AND THE BANK IRREVOCABLY WAIVES ANY OBJECTION, INCLUDING ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS, WHICH IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY ACTION OR PROCEEDING IN SUCH JURISDICTION IN RESPECT OF THIS AGREEMENT OR ANY DOCUMENT RELATED HERETO. THE COMPANY AND THE BANK EACH WAIVES PERSONAL SERVICE OF ANY SUMMONS, COMPLAINT OR OTHER PROCESS, WHICH MAY BE MADE BY ANY OTHER MEANS PERMITTED BY CALIFORNIA LAW.

9.14 Waiver of Jury Trial. THE COMPANY AND THE BANK WAIVE THEIR RESPECTIVE RIGHTS TO A TRIAL BY JURY OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF OR RELATED TO THIS AGREEMENT, THE OTHER LOAN DOCUMENTS, OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY, IN ANY ACTION, PROCEEDING OR OTHER LITIGATION OF ANY TYPE BROUGHT BY ANY OF THE PARTIES AGAINST ANY OTHER PARTY, PARTICIPANT OR ASSIGNEE, WHETHER WITH RESPECT TO CONTRACT CLAIMS, TORT CLAIMS, OR OTHERWISE. THE COMPANY AND THE BANK EACH AGREE THAT ANY SUCH CLAIM OR CAUSE OF ACTION SHALL BE TRIED BY A COURT TRIAL WITHOUT A JURY. WITHOUT LIMITING THE FOREGOING, THE PARTIES FURTHER AGREE THAT THEIR RESPECTIVE RIGHT TO A TRIAL BY JURY IS WAIVED BY OPERATION OF THIS SECTION AS TO ANY ACTION, COUNTERCLAIM OR OTHER PROCEEDING WHICH SEEKS, IN WHOLE OR IN PART, TO CHALLENGE THE VALIDITY OR ENFORCEABILITY OF THIS AGREEMENT OR THE OTHER LOAN DOCUMENTS OR ANY PROVISION HEREOF OR THEREOF. THIS WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS.

9.15 No Advisory or Fiduciary Responsibility. In connection with all aspects of each transaction contemplated hereby (including in connection with any amendment, waiver or other modification hereof or of any other Loan Document), the Company acknowledges and agrees that: (i)(A) the services regarding this Agreement provided by the Bank are arm's length commercial transactions between the Company, on the one hand, and the Bank, on the other hand, (B) the Company has consulted its own legal, accounting, regulatory and tax advisors to the extent it has deemed appropriate, and (C) the Company is capable of evaluating, and understands and accepts, the terms, risks and conditions of the transactions contemplated hereby and by the other Loan Documents; (ii)(A) the Bank is and has been acting solely as a principal and, except as expressly agreed in writing by the relevant

parties, has not been, is not, and will not be acting as an advisor, agent or fiduciary for the Company or any other person and (B) the Bank does not have any obligation to the Company with respect to the transactions contemplated hereby except those obligations expressly set forth herein and in the other Loan Documents; and (iii) the Bank and its respective Affiliates may be engaged in a broad range of transactions that involve interests that differ from those of the Company. To the fullest extent permitted by law, the Company hereby waives and releases any claims that it may have against the Bank with respect to any breach or alleged breach of agency or fiduciary duty in connection with any aspect of any transactions contemplated hereby.

9.16 USA Patriot Act Notice. The Bank hereby notifies the Company that pursuant to requirements of the USA Patriot Act (Title III of Pub. L. 107-56 (signed into law October 26, 2001)) (the "Act"), it is required to obtain, verify and record information that identifies the Company, which information includes the name and address of the Company and other information that will allow the Bank to identify the Company in accordance with the Act.

9.17 Entire Agreement. This Agreement, together with the other Loan Documents, embodies the entire agreement and understanding among the Company and the Bank, and supersedes all prior or contemporaneous agreements and understandings of such Persons, verbal or written, relating to the subject matter hereof and thereof.

9.18 Execution and Delivery. This Agreement shall be deemed to have been executed and delivered immediately following the adoption by the Company's Board of Directors at its meeting held on February 16, 2007 of resolutions authorizing, approving, ratifying and confirming this Agreement.

[REMAINDER OF PAGE INTENTIONALLY BLANK.
SIGNATURE PAGES FOLLOW.]

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written.

		BANK OF AMERICA, N.A.
		By:	/s/ KIPLING DAVIS Name: Kipling Davis Title: Sr. Vice President

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written.

		ZENITH NATIONAL INSURANCE CORP.
		By:	/s/ STANLEY R. ZAX Name: Stanley R. Zax Title: President and Chairman of the Board

EXHIBIT A

FORM OF NOTICE OF BORROWING

Bank of America, N.A.
Building B
2001 Clayton Road
Concord, CA 94520-2405

Attention: Jennifer Baines

Ladies and Gentlemen:

This Notice of Borrowing is delivered to you pursuant to Sections 2.3 and 4.2(a) of the Credit Agreement dated as of February , 2007 (as amended or modified, the "Credit Agreement"), between Zenith National Insurance Corp., a Delaware corporation (the "Company") and Bank of America, N.A. (the "Lender"). Unless otherwise defined herein, capitalized terms used herein have the meanings provided in the Credit Agreement.

The Company hereby requests that a Loan be made in the aggregate principal amount of $ on , 200 as a [Base Rate Loan] [Eurodollar Rate Loan having an Interest Period of months].

The Company hereby certifies and warrants that on the date the Borrowing requested hereby is made, after giving effect to the making of such Borrowing, the conditions set forth in Section 4.2 of the Credit Agreement are satisfied.

The Company agrees that if prior to the time of the Borrowing requested hereby any matter certified to herein by it will not be true and correct at such time as if then made, it will immediately so notify the Lender. Except to the extent, if any, that prior to the time of the Borrowing requested hereby the Lender shall receive written notice to the contrary from the Company, each matter certified to herein shall be deemed once again to be certified as true and correct at the date of such Borrowing as if then made.

Please wire transfer the proceeds of the Borrowing to the accounts of the following persons as set forth on Annex I attached hereto.

The Company has caused this Notice of Borrowing to be executed and delivered, and the certification and warranties contained herein to be made, by a Responsible Officer this day of , 200.

		ZENITH NATIONAL INSURANCE CORP.
		By:
				Name:
				Title:

ANNEX I

		Person to be Paid
Amount to be Transferred		Person to be Paid		Name, Address, etc. of Transferee Lender
Amount to be Transferred		Name	Account No.	Name, Address, etc. of Transferee Lender
$				Attention:

$				Attention:

	Balance of such proceeds	The Company		Attention:

EXHIBIT B

FORM OF NOTICE OF CONVERSION/CONTINUATION

Bank of America, N.A.
Building B
2001 Clayton Road
Concord, CA 94520-2405

Attention: Jennifer Baines

Ladies and Gentlemen:

This Conversion/Continuation Notice is delivered to you pursuant to Sections 2.4(b) and 4.2(a) of the Credit Agreement dated as of February , 2007 (as amended or modified, the "Credit Agreement"), between Zenith National Insurance Corp., a Delaware corporation (the "Company") and Bank of America, N.A. (the "Lender"). Unless otherwise defined herein, capitalized terms used herein have the meanings provided in the Credit Agreement.

The Company hereby requests that on , 200 ,

(1) $ of the presently outstanding principal amount of the Loans originally made on , 200 [and $ of the presently outstanding principal amount of the Loans originally made on , 2000 ],

(2) and all presently being maintained as¹[Base Rate Loans] [Eurodollar Rate Loans],

(3) be [converted into] [continued as],

(4) ²[Base Rate Loans] [Eurodollar Rate Loans having an Interest Period of months].

The Company hereby represents and warrants that no Default or Event of Default exists.

Except to the extent, if any, that prior to the time of the continuation or conversion requested hereby the Lender shall receive written notice to the contrary from the Company, each matter certified to herein shall be deemed to be certified at the date of such continuation or conversion as if then made.

The Company has caused this Continuation/Conversion Notice to be executed and delivered, and the certification and warranties contained herein to be made, by a Responsible Officer this day of , 200 .

		ZENITH NATIONAL INSURANCE CORP.
		By:

				Name:

				Title:

1: Select appropriate interest rate option.
2: Insert appropriate interest rate option.

EXHIBIT C

FORM OF COMPLIANCE CERTIFICATE

Bank of America, N.A.
901 Main Street, 64th Floor
Dallas, Texas 75202

Attention: James H. Harper

Ladies and Gentlemen:

This certificate (the "Certificate") is delivered to you pursuant to Section 6.2(a) of the Credit Agreement dated as of February , 2007 (as amended or modified, the "Credit Agreement"), between Zenith National Insurance Corp., a Delaware corporation (the "Company") and Bank of America, N.A. (the "Lender"). Unless otherwise defined herein, capitalized terms used herein have the meanings provided in the Credit Agreement.

The undersigned hereby certifies and warrants to the Lender that he is a Responsible Officer of the Company and that, as such, he is authorized to execute this Certificate on behalf of the Company and further certifies and warrants to the Lender on behalf of the Company that as at , 200 (the "Computation Date") the following is a true and correct computation of the ratios and financial restrictions contained in the Credit Agreement:

1.	Section 7.10 — Minimum Surplus
	The Capital and Surplus of ZIC on a combined basis is $ (cannot be less than 75% of the Capital and Surplus of ZIC as reported on a combined basis as of the end of the fiscal year ended immediately prior to the end of such fiscal quarter).
2.	Section 7.11 — Debt to Total Capitalization
	(a)	Debt	$

	(b)	Total Capitalization	$

	(c)	Ratio of (a) to (b) (cannot exceed .20:1)		:
3.	Section 7.12 — Risk Based Capital
	The Risk-Based Capital of ZIC on a combined basis is % (cannot be less than 145%).
4.	Section 7.13 — Interest Coverage
	(a)	Amounts Available for Dividends	$

	(b)	Pre-tax income from Non-Insurance Subsidiaries for the four quarters ending on the Computation Date	$

	(c)	Pre-tax, pre-interest income of the Company for the four quarters ending on the Computation Date	$

	(d)	Sum of (a) + (b) + (c)	$

	(e)	Fixed Interest Charges (including interest on Subordinated Debentures)	$

	(f)	Ratio of (d:e) (cannot be less than 3.00:1)		: 1

The Company further certifies that no Default or Event of Default has occurred and is continuing under the Credit Agreement as of the date hereof.

IN WITNESS WHEREOF, the Company has caused this Certificate to be executed and delivered and the certifications and warranties contained herein to be made, by a Responsible Officer this day of 200 .

		ZENITH NATIONAL INSURANCE CORP.
		By:

				Name:

				Title:

EXHIBIT D

FORM OF OPINION OF COMPANY'S COUNSEL

February , 2007
Bank of America, N.A.
901 Main Street, 64th Floor
Dallas, Texas 75202

Attention: James H. Harper

Ladies and Gentlemen:

We have acted as counsel for Zenith National Insurance Corp., a Delaware corporation (the "Company") in connection with the preparation, authorization, execution and delivery of, and the consummation of the transactions contemplated by, the Credit Agreement (hereinafter defined). Unless otherwise defined herein, capitalized terms used herein have the meanings provided in the Credit Agreement. This opinion is delivered to you pursuant to Section 4.1(d) of the Credit Agreement.

In connection with this opinion, we have examined the following:

(a) the Credit Agreement (the "Credit Agreement"), dated as of the date hereof, between the Company and Bank of America, N.A. (the "Lender"); and

(b) the Note of the Company, dated the date hereof and delivered pursuant to the Credit Agreement.

The foregoing documents (a) and (b) are hereinafter collectively referred to as the "Loan Documents".

In connection with this opinion, we also have been furnished with and have examined the originals, or certified, conformed or reproduction copies, of certificates of public officials and officers of the Company and such other records, agreements, instruments and documents as we have deemed relevant and necessary as the basis for the opinions hereinafter expressed. In stating our opinion, we have assumed the genuineness of all signatures, the authenticity of documents submitted to us as originals, the conformity to original or certified copies of all copies submitted to us as certified or reproduction copies, and the legal capacity of natural persons.

As to various questions of fact material to our opinions, we have relied upon the representations and warranties in the Loan Documents and upon certificates of the Company's public officials.

Based upon the foregoing, and upon such further matters as we have deemed necessary or appropriate, and subject to the qualifications, limitations and assumptions set forth herein, we are of the opinion that:

1. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of its incorporation and has all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as now being conducted. The Company is duly qualified to transact business and is in good standing as a foreign corporation in each jurisdiction where the nature of its business makes such qualification necessary or the failure of the Company to be so qualified could have a Material Adverse Effect.

2. The Company has the corporate power to execute, deliver and perform the terms and provisions of each of the Loan Documents and has taken all necessary corporate action to authorize the execution, delivery and performance by it of each of such Loan Documents.

3. The execution, delivery and performance by the Company of the Loan Documents to which it is a party, and compliance by the Company with the terms and provisions thereof, will not (i) contravene or conflict with any provision of any existing law, statute, rule or regulation applicable to the Company, (ii) to the best of our knowledge, contravene or conflict with, result in

any breach of, or constitute a default under, any indenture, mortgage, deed of trust, credit agreement, loan agreement or other agreement, contract or instrument binding on it, or (iii) result in the creation or imposition of (or the obligation to create or impose) any Lien (except for Permitted Liens) upon any of the property or assets of the Company pursuant to the terms of any of the indentures, mortgages, deeds of trust, credit agreements, loan agreements or other agreements, contracts or instruments to which the Company is a party, or (iv) contravene or conflict with any of the articles of incorporation or by-laws of the Company.

4. No order, consent, approval, license, authorization or validation of, or filing, recording or registration with (except as may be required to be made or obtained by you as a result of your involvement in the transactions contemplated by the Loan Documents), or exemption by, any governmental or public body or authority, or any subdivision thereof, is required to authorize, or is required in connection with, the execution and delivery of any Loan Document by the Company and the performance by the Company of its obligations thereunder.

5. The Company has duly executed and delivered each of the Loan Documents and each of such Loan Documents constitutes the legal, valid and binding obligation of the Company, enforceable in accordance with its terms.

6. The Company is not engaged principally, or in one of its important activities, in the business of extending credit for the purpose of purchasing or carrying "margin stock" within the meaning of Regulation U of the Board of Governors of the Federal Reserve Board.

7. None of the Company or its Subsidiaries are an "investment company" within the meaning of the Investment Company Act of 1940, as amended.

[Add exceptions and qualifications.]

Very truly yours,

EXHIBIT E

FORM OF NOTE

February , 2007

$30,000,000

On or before February , 2010 the undersigned, FOR VALUE RECEIVED, promises to pay to the order of BANK OF AMERICA, N.A. (the "Lender") at its principal office at 2001 Clayton Rd. in Concord, California, THIRTY MILLION DOLLARS ($30,000,000) or, if less, the aggregate unpaid principal amount of all Loans (as defined in the Credit Agreement hereinafter referred to) made by the Lender to the undersigned pursuant to the Credit Agreement, as shown in the schedule attached hereto (and any continuation thereof).

The undersigned also promises to pay interest on the unpaid principal amount hereof from time to time outstanding from the date hereof until maturity (whether by acceleration or otherwise) and, after maturity, until paid, at the rates per annum and on the dates specified in the Credit Agreement.

Payments of both principal and interest are to be made in lawful money of the United States of America in same day or immediately available funds.

This Note is the Note described in, and is subject to the terms and provisions of, the Credit Agreement dated as of February , 2007 (as the same may at any time be amended or modified and in effect, the "Credit Agreement"), between the undersigned and the Lender. Reference is hereby made to the Credit Agreement for a statement of the prepayment rights and obligations of the undersigned and for a statement of the terms and conditions under which the due date of this Note may be accelerated. Upon the occurrence of any Event of Default as specified in the Credit Agreement, the principal balance hereof and the interest accrued hereon may be declared to be forthwith due and payable, and any indebtedness of the holder hereof to the undersigned may be appropriated and applied hereon.

In addition to and not in limitation of the foregoing and the provisions of the Credit Agreement, the undersigned further agrees, subject only to any limitation imposed by applicable law, to pay all expenses, including reasonable attorneys' fees and legal expenses, incurred by the holder of this Note in endeavoring to collect any amounts payable hereunder which are not paid when due, whether by acceleration or otherwise.

All parties hereto, whether as makers, endorsers, or otherwise, severally waive presentment for payment, demand, protest and notice of dishonor.

THIS NOTE SHALL BE DEEMED TO BE A CONTRACT MADE UNDER AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF CALIFORNIA.

		ZENITH NATIONAL INSURANCE CORP.
		By:
				Name:
				Title:

QuickLinks

TABLE OF CONTENTS
ARTICLE I DEFINITIONS
ARTICLE II THE CREDITS
ARTICLE III TAXES, YIELD PROTECTION AND ILLEGALITY
ARTICLE IV CONDITIONS PRECEDENT
ARTICLE V REPRESENTATIONS AND WARRANTIES
ARTICLE VI AFFIRMATIVE COVENANTS
ARTICLE VII NEGATIVE COVENANTS
ARTICLE VIII EVENTS OF DEFAULT
ARTICLE IX MISCELLANEOUS
[REMAINDER OF PAGE INTENTIONALLY BLANK. SIGNATURE PAGES FOLLOW.]
EX-13 5 a2175738zex-13.htm EXHIBIT 13

ZENITH NATIONAL INSURANCE CORP. 2006

ANNUAL REPORT 2006

FINANCIAL HIGHLIGHTS

Year Ended December 31,	2006			2005			2004

RESULTS OF OPERATIONS:		(Dollars in thousands, except per share data)
Total revenues	$	1,063,888		$	1,280,124		$	1,044,880
Net investment income after tax		70,926			53,358			42,265
Realized gains on investments after tax		8,695			14,446			24,726
Income from continuing operations after tax	$	258,700		$	156,447		$	117,714
Gain on sale of discontinued real estate segment after tax (1)					1,253			1,286

Net income	$	258,700		$	157,700		$	119,000

PER SHARE DATA (2):
Income from continuing operations after tax	$	6.96		$	4.29		$	3.35
Gain on sale of discontinued real estate segment after tax (1)					0.03			0.03

Net income	$	6.96		$	4.32		$	3.38

Cash dividends declared per common share	$	1.26		$	0.94		$	0.75
KEY STATISTICS:
Underwriting income (loss) before tax (3):
Workers' compensation	$	313,576		$	213,244		$	104,098
Reinsurance		(20,508	)		(56,183	)		(11,956	)
Combined ratios (4):
Workers' compensation		66.3	%		80.9	%		88.5	%
Reinsurance		264.4	%		187.1	%		128.2	%
Stockholders' equity	$	940,720		$	712,795		$	502,147
Stockholders' equity per share		25.41			19.14			17.28
Closing common stock price		46.91			46.12			33.23

(1) In 2002, we sold our home-building business and related real estate assets. Gains of $1.9 million and $2.0 million before tax ($1.3 million and $1.3 million after tax) were recorded from additional sales proceeds received in 2005 and 2004, respectively, under the earn-out provision of the sale. The last such payment under the earn-out provision was received in 2005.

(2) Diluted per share amounts reflect the impact of additional shares issuable in connection with our 5.75% Convertible Senior Notes.

(3) Underwriting income (loss) before tax from the workers' compensation and reinsurance segments is determined by deducting net loss and loss adjustment expenses incurred and underwriting and other operating expenses incurred from net premiums earned.

(4) The combined ratio, expressed as a percentage, is a key measurement of profitability traditionally used in the property-casualty insurance business. The combined ratio is the sum of the loss and loss adjustment expense ratio and the underwriting and other operating expense ratio. The loss and loss adjustment expense ratio is the percentage of net incurred loss and loss adjustment expenses to net premiums earned. The underwriting and other operating expense ratio is the percentage of underwriting and other operating expenses to net premiums earned. The key operating goal for our insurance segments is to achieve a combined ratio of 100% or lower and to achieve a workers' compensation combined ratio that is at least three percentage points lower than the combined ratio of the national workers' compensation industry.

TABLE OF CONTENTS

•	Letter to Stockholders	3
•	Accident Year Reserve Development From Operations	23
•	Stock Price Performance	24
•	Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations	25
•	5-Year Summary of Selected Financial Information	54
•	Consolidated Balance Sheets	56
•	Consolidated Statements of Operations	57
•	Consolidated Statements of Cash Flows	58
•	Consolidated Statements of Stockholders' Equity and Consolidated Statements of Comprehensive Income	60
•	Notes to Consolidated Financial Statements	61
•	Report of Independent Registered Public Accounting Firm	87
•	Certifications and Management's Report on Internal Controls over Financial Reporting	89
•	Corporate Directory
	Zenith National Insurance Corp.	94
	Zenith Insurance Company	95
	Zenith Office Locations	96

TheZenith and Zenith are registered U.S. trademarks.

TO OUR STOCKHOLDERS

2006 marked my 30^th year as your Chairman, and on this occasion I am particularly pleased to report record earnings and earnings per share as a result of our 2006 workers' compensation underwriting performance. I thank our entire staff for their excellent work and invite each and every one to join me with a sense of pride for attaining this achievement.

Net income was $258.7 million or $6.96 per share, compared to $157.7 million or $4.32 per share in 2005. Losses from our reinsurance business, which we have exited and is in runoff, reduced 2006 net income by $13.3 million or $0.36 per share and reduced 2005 net income by $36.5 million or $0.99 per share.

Financial reports include both our workers' compensation and reinsurance operations. Claim trends continue to be favorable in the workers' compensation segment, delivering substantial underwriting profits and positive cash flow for investment. However, the reinsurance business had a negative impact due to the loss development associated with 2004 and 2005 hurricanes.

Zenith's investment income increased from $79.2 million to $106.3 million due primarily to an increase in the average yield of the portfolio where about 35% is held in securities with a maturity of one year or less.

Our financial strength was significantly improved as a result of our 2006 workers' compensation performance and increased investment income, offset, in part, by additional reinsurance losses. Stockholders' dividends were increased 34% during the year to an annual rate of $1.40 per share; an aggregate of $458.7 million in dividends has been declared over the past 30 years.

We approach the New Year with optimism because we believe our specialist workers' compensation experience and service strategy will continue to support favorable results for our policyholders, claimants and stockholders alike. Zenith's staff is committed to managing risk in a professional manner and we are pursuing our new initiative to expand the highest quality healthcare services to our seriously injured claimants to help them return to work and productivity while recovering from job-related injuries. Maximizing stockholder value over the long-term is our

RECORD EARNINGS AND EARNINGS PER SHARE ARE A RESULT OF OUR 2006 WORKERS' COMPENSATION UNDERWRITING PERFORMANCE.

fundamental objective which is supported by our highly effective business and service model. Competition is always present in our business, however it is more intense at this time in California than during the recent past. Our long-term underwriting and pricing philosophy has been to forego market share in favor of maintaining profitablity in a competitive price market.

We have strong corporate governance practices with excellent controls and our disclosures provide full transparency.

As always, the primary thrust of these annual reports is to address the future, its challenges and opportunities. However, please indulge me in a moment of reminiscence.

Thirty years ago back in 1977, our after-tax profit was $3.0 million, stockholders' equity was $12.9 million and our total assets were $88.9 million. Certain goals and commitments were expressed at that time such as achieving above-average underwriting performance over a sustained period of time, and sharing our success with our talented people in the form of bonuses and stock options.

Management and staff have delivered. Total stockholders' dividends declared since 1978 were $458.7 million, stock repurchases totaled $151.0 million and stockholders' equity is $940.7 million at year-end. Our people have performed beyond our expectations, as we continue to focus on further progress to reach our full potential.

As one of my dear friends and a Zenith stockholder says, "Only in America!"

FINANCIAL SUMMARY — 2006 & 2005

Net Income: + 64.0%.

Workers' Compensation Underwriting Income: + 47.1%.

Investment Income: + 34.2%.

Workers' Compensation Combined Ratio: 66.3% v. 80.9%.

Stockholders Equity: + 32.0%.

Return on Average Equity: 31.8% v. 26.3%.

Stockholders' Dividends Declared: + 34.0%.

STOCKHOLDERS' EQUITY PER SHARE

ANALYSIS

The following table summarizes pre-tax workers' compensation and reinsurance underwriting results during the past three years:


Segment Income (Loss)	2006			2005			2004

		(Dollars in thousands)
Workers' Compensation	$	313,576		$	213,244		$	104,098
Reinsurance		(20,508	)		(56,183	)		(11,956	)

2006 results improved compared to 2005 in several key areas:

•: Net income increased by $101.0 million.
•: Workers' compensation underwriting results improved by $100.3 million.
•: Reinsurance underwriting results improved by $35.7 million.
•: Investment income pre-tax increased by $27.1 million.
•: Workers' compensation calendar year combined ratio was 66.3% in 2006 compared to 80.9%.
•: Favorable workers' compensation loss reserve development increased to $161.3 million from $26.3 million.
•: Workers' compensation accident year combined ratio was 80.0% compared to 81.8%.
•: Stockholders' equity at December 31, 2006 was $940.7 million compared to $712.8 million, a 32.0% increase in contrast to the property-casualty industry growth in surplus of 13.5% as estimated by A.M. Best Company.
•: Stockholders' equity, plus dividends paid to stockholders, has grown at an annual rate of 24.5% for one year, 23.7% for three years and 17.7% for five years.
•: Stockholders' equity per share was $25.41 compared to $19.14.
•: Dividends declared to stockholders were $47.0 million compared to $33.4 million.

STOCKHOLDERS' EQUITY AT DECEMBER 31, 2006 WAS $940.7 MILLION COMPARED TO $712.8 MILLION AT DECEMBER 31, 2005; PER SHARE WAS $25.41 COMPARED TO $19.14.

The most frequently asked question I receive from investors is why don't we repurchase common stock. There are several reasons:

1.: After doing so in the 1990's, it was difficult to see how our stockholders benefited. This would be particularly true today with the stock selling substantially above book value.
2.: Increased dividends, we believe, are the best way of sharing our success with stockholders.
3.: The assumption that we have excess capital in substantial amounts may or may not be reasonable. As a specialist with concentrations of business in California and Florida, we are prevented from receiving higher ratings from rating agencies despite our performance. Equally important, we are always searching for additional beneficial opportunities to apply our capital in our business or through acquisitions.
4.: We do not want to interfere with the liquidity in our common stock.
5.: Weakening our financial strength by borrowing large sums in order to buy a material amount of stock is not prudent.

RESERVES

Information in the table on page 23 provides estimates of Zenith's net incurred loss and loss adjustment expenses for our workers' compensation and reinsurance segments by accident year, evaluated in the year they were incurred and as they were subsequently evaluated in succeeding years. These data are of critical importance in judging the historical accuracy of our reserve estimates, as well as providing a guide to setting fair prices and rates. The accuracy of reserve estimates is one of our major business risks which we endeavor to manage professionally. It is not realistic to believe that 100% accuracy is achievable when forecasting the future. As a result, loss reserve estimates are refined continually in an ongoing process as experience develops, new information is obtained and evaluated, and claims are reported and paid. The inflation or deflation trend of paid claim costs in

NET INCOME PER COMMON SHARE

recent years, compared to the assumptions included in the loss reserve estimates for each accident year, is the most important factor at this time in understanding our reserve situation. Data from 2003, 2004, and 2005 indicate deflation for the recent accident years compared to substantial inflation in prior years. The primary causes of these developments are the California legislative reforms enacted in 2003 and 2004, Florida reforms enacted in 2003, and the long-term trend of declining claim frequency. Due to the relatively small sample of paid claim amounts compared to estimated total claim costs for 2003 through 2006, and the small percentage of costly claims settled, inflation estimates in loss reserves are higher than short-term paid deflation rates and our actuaries' view of future trends. As a result, financial statement reserves currently exceed our actuaries' point estimates. This is necessary due to the length of time required to settle long-term cases post reforms, uncertainties in the long-term outcome of the reforms and the fact that in the not-too-distant past, before the reforms, our track record of reserving accuracy was weak. In order to refine our loss reserve estimates, new models have been created which should bring the actuarial and accounting results into alignment quicker as new data are received and the risk of major change diminishes. The key factors influencing the result of the model and the exercise of our judgment are the timing of claim settlements and the ultimate number of higher-cost claims. For additional information about reserving and inflation trends, please turn to pages 33 to 40 of this report.

Estimating catastrophe losses in the reinsurance business is highly dependent upon the nature of the event and our ability to obtain timely and accurate information with which to estimate our liability for losses. Given our limited involvement in this business, industry models do not really help in establishing estimated loss reserves. There remains the possibility of additional losses associated with the hurricanes in 2004 and 2005 and the casualty business written earlier, although at this point we do not believe there is material exposure to adverse loss development.

DIVIDENDS DECLARED TO SHAREHOLDERS WERE $47.0 MILLION IN 2006 COMPARED TO $33.4 MILLION IN 2005.

INVESTMENTS

Investment activities are a major part of our revenues and earnings; we believe our portfolio is diversified to achieve a reasonable balance of risk and a stable source of earnings. Regulations require Zenith to primarily invest in debt securities, as compared to equity securities; our largest holdings are cash and short-term U.S. Government securities. Compared to other insurers we believe our portfolio consists of a smaller percentage of equity securities to total assets and a larger percentage of cash or short-term securities, with no derivative securities or credit enhancement exposure.

•: Zenith's investment portfolio was $2.3 billion at year end.
•: Consolidated investment income after tax and after interest expense was $67.5 million, or $1.82 per share in 2006 compared to $47.7 million, or $1.35 per share in 2005. Average yields on this portfolio in 2006 were 4.8% before tax and 3.2% after tax compared to 3.9% and 2.6%, respectively, in 2005.
•: During 2006, Zenith recorded capital gains before tax of $13.4 million compared to $22.2 million the prior year.
•: Net unrealized gains in our portfolio were $19.1 million before tax at year end 2006 compared to $1.5 million before tax at year end 2005. The increase is due to higher unrealized gains on equity investments, partially offset by higher unrealized losses on fixed maturity investments as a result of increases in interest rates.
•: Zenith's investment portfolio is recorded in the financial statements primarily at market value. Average maturity of the fixed maturity portfolio was 3.7 years at December 31, 2006 compared to 3.8 years at December 31, 2005. The portfolio quality is high, with 93% and 95% of fixed maturity securities rated investment grade at December 31, 2006 and 2005, respectively.

INVESTMENT INCOME AFTER TAX PER SHARE

The major developments affecting the U.S. bond markets were increasing inflation, narrower spreads between corporate and government bonds and fluctuating interest rates with the Federal Reserve Board raising short-term rates, pausing at mid-year. Long-term rates ended the year at a 4.81% yield for 30-year U.S. Government bonds compared to 4.54% the prior year. Since we are capable of holding bonds to maturity, and the average maturities are relatively short, fluctuations in bond values do not significantly impact our operations.

Short-term investments and liquidity remain high as we search for investment opportunities. Concerns about the economy, politics, inflation and geopolitical issues suggest a continuation of higher cash holdings than would otherwise be the case. We have invested only a small amount of our capital in common stocks, since we believe the volatility in the market could impact our ability to expand our insurance business.


Securities Portfolio	At December 31, 2006		At December 31, 2005

	Amortized Cost*	Market Value	Amortized Cost*	Market Value

	(Dollars in Thousands)
Short-term investments: U.S. Govt. and other securities maturing within 2 years	$944,796	$943,720	$1,153,516	$1,151,982
Other fixed maturity securities:
Taxable, investment grade	915,888	909,468	706,382	706,746
Taxable, non-investment grade	156,619	154,749	78,457	76,582
Municipal bonds	133,887	132,414	125,926	124,001
Redeemable preferred stocks	26,094	26,727	25,436	26,685
Other preferred stocks*	2,819	2,818	3,317	3,328
Common stocks*	66,195	95,500	64,731	69,976
Other*	7,616	7,616	7,402	7,402

Total	$2,253,914	$2,273,012	$2,165,167	$2,166,702

*Equity securities and other investments at cost.

INVESTMENT INCOME INCREASED FROM $79.2 MILLION IN 2005 TO $106.3 MILLION IN 2006 DUE PRIMARILY TO AN INCREASE IN THE AVERAGE YIELD OF THE PORTFOLIO.

WORKERS' COMPENSATION

Zenith is a workers' compensation specialist with 56 years of experience supporting primary operations in California and Florida, with additional business in 43 other states. We estimate that Zenith ranks among the top five underwriters in California and Florida, the two states in which we conduct approximately 85% of our business. Our philosophy does not include any planned goals as to size, market share or ranking, but is focused entirely on providing quality services to our insureds and claimants, generating underwriting profits and delivering an above-average return to our stockholders over time.

Gross premiums written in 2006 were $939.5 million, a decrease of 17.5% from the prior year, with California premiums representing 61.9% of the total. The decrease in premiums is due primarily to rate reductions in California and Florida, and our California pricing and underwriting strategy in comparison to our competition. Profits before tax in this segment were a record $313.6 million in 2006 compared to $213.2 million in 2005. During the past five years, our profit from this segment was $616.3 million, or 14.8% of earned premium.

Zenith's combined ratio (ratio of losses and expenses to total premiums) improved to 66.3% in 2006 from 80.9% the prior year. Industry combined ratios for workers' compensation are estimated at 95.5% and 102.4% for 2006 and 2005, respectively. Profits resulted from improved accident year loss ratios and reserve releases from prior years. Claim cost deflation in recent years as set forth on the schedule on page 37 has led to the release of reserves in the current year and if new data continue to indicate stability in our claim costs, additional reserve releases can be anticipated as the reserving risk diminishes. The lowering of loss ratios in earlier years also has the impact of lowering accident year loss ratios in the current year assuming all other factors remain constant. Obviously, the reverse would also be true if claim costs were increasing.

WORKERS' COMPENSATION PREMIUM EARNED

(in millions)

Improved profitability has been shared with our customers in California and Florida as indicated by the rate reductions in the following table:


Effective Date of Change	California		Florida

January 1, 2004	0.0	%	0.0	%
July 1, 2004	10.0
January 1, 2005	2.0		4.0
July 1, 2005	12.0
January 1, 2006	13.0		13.4
July 1, 2006	5.0
January 1, 2007	4.4		12.5

In addition to the above, further price reductions have resulted from lower experience modifications and individual pricing adjustments which are measured retroactively, and, therefore, filed rates alone do not provide a complete picture. We have also paid dividends to our policyholders of $24.9 million in 2006, $4.4 million in 2005 and $2.8 million in 2004.

Declining claim frequency and severity and reduced rates to our customers are the major business trends during the past few years. These factors have resulted in improved profitability, lower accident year loss ratios and strengthened reserve performance. Deflation relating to claim costs is clearly evident in the schedule on page 37 as are the assumptions relating to establishing loss reserves in our financial statements. Due to the uncertainties indicated, our California rate changes have lagged short-term cost decreases and our competitors' pricing, consistent with our long-term strategy of maintaining price discipline.

ZENITH WORKERS' COMPENSATION COMBINED RATIO (RATIO OF LOSSES AND EXPENSES TO TOTAL PREMIUMS) IMPROVED TO 66.3% IN 2006 FROM 80.9% THE PRIOR YEAR.

Comparative workers' compensation accident year loss ratios both within and outside California compared to rating bureau estimated loss ratios are set forth in the following table:


	California		Outside of California
Accident Year Loss Ratios	California		Outside of California
Accident Year Loss Ratios	Zenith	Industry	Zenith	Industry

2000	87%	123%	57%	89%
2001	78%	104%	58%	78%
2002	64%	81%	50%	70%
2003	44%	52%	42%	64%
2004	33%	31%	37%	61%
2005	29%	30%	34%	60%
2006	34%	—	33%	—

The California portion of the table indicates that during 2000 to 2003 we have loss ratios substantially below industry averages, and thereafter they are about even with industry averages. The 2004 and 2005 relationships may be temporary and primarily a result of our assumptions in loss reserve estimates compared to the industry at this time. As time passes and actual data replace estimates for both Zenith and the industry, we expect the traditional relationship to reappear. This can occur by Zenith's loss ratios going down, the industry's going up or some combination of the two. In this regard, the California Rating Bureau also estimates that insurers' reserves are $8.2 billion overstated.

Favorable long-term results as compared to the industry are due to a number of factors: workers' compensation specialization, a long-standing goal and culture to achieve underwriting profitability, application of our own actuarial rates in California, well-established agency relationships, reasonable (not perfect) reserving accuracy, disciplined underwriting, technical support for our services, our commitment to quality and intelligent risk taking. Most importantly, the focus on underwriting

WORKERS' COMPENSATION COMBINED RATIO

profits, decentralization in tandem with adequate controls, low turnover of key employees and improving service capabilities (particularly the integration of claims, legal and health experts) make a significant difference. Profitable industry results in California and a growing economy continue to provide an attractive operating environment. Legislative reforms have resulted in dramatic initial short-term benefits to our customers to a greater extent than could have been reasonably anticipated when they were enacted. Industry results that project 2004 and 2005 accident year combined ratios of 54% are unprecedented and unbelievable. As a result, prices have dropped substantially and competition in the California market place is more aggressive. Also, in many cases lower prices for our customers result from declining rates combined with reduced experience modification factors.

Zenith adheres to disciplined and consistent underwriting and customer service principles, and a commitment to pricing strategies based on realistic assumptions anticipated to generate an underwriting profit. Significantly, our agents and brokers offer numerous opportunities for business, however, we are selective and successful in writing only a small proportion of the prospective new accounts. We do, however, write a substantial percentage of renewal accounts; testimony to our mission of customer satisfaction. Based on current market conditions, we expect California to continue to be our most important and profitable market. Underwriting profit margins will be primarily dependent upon new data relating to claim cost trends and the frequency of the more costly claims, partially offset by rate decreases. In other words, will the current short-term benefits from reforms continue throughout the entire claim cycle of a given accident year? Due to the importance of the reforms and the short period since their adoption we do not know the answer to this important question nor do we know whether the trends from claim patterns prior to the reforms will re-assert themselves.

RESERVE ADEQUACY IS STRONG AS FINANCIAL STATEMENT RESERVES EXCEED ACTUARIAL POINT ESTIMATE IN CONCERT WITH CONTINUING CLAIM COST DEFLATION.

We measure our progress based on payroll trends which we believe is a more accurate assessment of size and exposure, rather than premiums or policy count. The following five-year table compares premiums, payroll and policy count both within and outside of California.


	California					Outside California					Total
	Premiums In-Force		Policies In-Force	Insured Payrolls		Premiums In-Force		Policies In-Force	Insured Payrolls		Premiums In-Force		Policies In-Force	Insured Payrolls

		(Dollars in millions)
December 31, 2006	$	501.2	24,600	$	9,200.3	$	332.8	17,200	$	12,404.5	$	834.0	41,800	$	21,604.8
December 31, 2005		722.9	27,500		9,930.3		326.9	16,900		11,236.3		1,049.8	44,400		21,166.6
December 31, 2004		731.3	27,200		9,310.0		311.0	16,200		10,410.5		1,042.3	43,400		19,720.5
December 31, 2003		587.9	25,900		7,476.8		277.8	15,600		8,974.8		865.7	41,500		16,451.6
December 31, 2002		350.2	22,600		6,606.6		259.2	16,900		8,562.0		609.4	39,500		15,168.6
December 31, 2001		210.4	19,100		5,556.9		209.7	16,400		7,468.7		420.1	35,500		13,025.6

Our five year growth in payrolls was 66% with the current year at 2%, primarily a result of reduced payrolls in California due to our pricing and underwriting strategy in comparison to our competition, which is more than offset by increases in payroll outside California. The table also shows that payrolls are larger outside California which is the opposite of premiums.

Claim frequency trends in 2006 remained favorable as they have for a number of years. We observed a significant drop in the frequency of our highest-cost California claims for the first time, and if this trend continues it will bode well for the ongoing deflation of our claim costs. The following table shows the trend in the number of California permanent partial disability ("PPD") claims (our highest cost claims) at various dates:


	Number of California PPD Claims Reported after Number of Months
Accident Year	12	24	36	48	60

2002	3,320	2,820	2,735	2,715	2,683
2003	4,091	3,117	2,912	2,861
2004	3,972	2,862	2,668
2005	3,346	2,641
2006	2,236

DECLINING CLAIM FREQUENCY AND SEVERITY, REDUCED RATES TO OUR CUSTOMERS AND INCREASED COMPETITION ARE THE MAJOR BUSINESS TRENDS DURING THE PAST FEW YEARS.

The claims data in the table on page 14 represent approximately 20% of the California claims reported in an accident year and about 90% of the costs. As is evident, the ultimate number of claims is not apparent until about 36 months. This reduction of reported claims for the 2006 accident year will be monitored closely to see how it evolves during the next two years. Since the average cost of these types of claims is approximately $75,000, a permanent frequency reduction as indicated above would be material.

Severity trends in recent years have continued at reduced levels and our ultimate loss estimates reflect caution regarding the long-term outcome of the reform legislation. Severity impact is caused primarily by healthcare and pharmacy cost treatment trends, the duration and amount of temporary disability, benefit levels and permanent disability ratings. California reforms have required that we become more effective in dealing with healthcare issues than in the past. Healthcare inflation, in general, continues to increase in the 8-9% range per year. In contrast, California workers' compensation healthcare costs have declined from 2002-2005. It is unclear whether this short-term trend will continue or materially reflect the long-term pattern of increases. Historically, long-term trends tend to be interrupted for relatively short periods, but the current situation may prove different due to medical networks, utilization guidelines and peer review, plus the rescinding of the treating physician presumption. While it is obvious, it is worth saying, the longer healthcare costs for our business remain at reduced levels and claim cost deflation continues, the more beneficial it will be for our customers and stockholders.

Quality healthcare and improved medical management from claim inception to outcome are essential to helping our injured workers return to work and productivity while recovering from job-related injuries. Highly experienced healthcare experts are in consultation with us in designing and implementing improved medical management practices and systems. During 2006, we engaged a

CALIFORNIA INDUSTRY RESULTS THAT PROJECT 2004 AND 2005 ACCIDENT YEAR COMBINED RATIOS OF 54% AND $8 BILLION OVER-RESERVED ARE UNPRECEDENTED, BUT WILL THE ESTIMATES BE VALIDATED AS ADDITIONAL DATA EMERGE?

full-time medical expert with a long history of involvement in the California workers' compensation system to direct and coordinate our efforts. Employers tend to believe over-treatment is the norm while labor argues under-treatment of injured workers is prevalent. We believe these different views can only be balanced with quality medical treatment, based upon best practices and outcome data. As a result, we are working to change our business practices to upgrade the quality of medical care around best practices supported by data and outcome measures. We are also funding research at the Rand Corporation to establish best practices for carpal tunnel claims.

As a result of large insurance company insolvencies several years ago, it is expected the California Insurance Guarantee Association will continue funding hundreds of millions of dollars in losses. Under current law, each of our policyholders (and all policyholders in the State) will continue to be assessed up to 2% of their premiums annually to cover these losses for the foreseeable future.

Our catastrophe management strategies are designed to mitigate our exposure to earthquakes and terrorism. Through a combination of reinsurance, underwriting controls and careful tracking of our exposures supported by technology, we are focused on effectively managing our risks. Since we do not routinely insure large employers with large concentrations of employees or companies located in perceived target areas, we are in a good position to minimize the impact of possible terrorist acts. During the fourth quarter of 2005, a modified version of the Terrorism Risk Insurance Act ("TRIA") was extended for two years. Deductibles applicable to workers' compensation are 20.0% of the 2006 direct premiums earned provided the total industry loss is more than $100 million in 2007.

WORKERS' COMPENSATION AND CALIFORNIA POLITICS

Workers' compensation and California politics are inseparable. Changes are being lobbied and discussed on a continuing basis. The success of the recent reforms has reduced employer costs (including governmental entities) and acted as a stimulant to the economy greater than could have

WE OBSERVED A SIGNIFICANT DROP IN THE 2006 FREQUENCY OF OUR HIGHEST-COST CALIFORNIA CLAIMS FOR THE FIRST TIME, AND IF THIS CONTINUES IT WILL BODE WELL FOR ONGOING DEFLATION OF OUR CLAIM COSTS.

been accomplished by a large tax decrease. Since growth of tax revenue is essential to the State of California, we are optimistic the reforms will continue despite occasional rhetoric to the contrary. No legislative changes to the reforms were made in 2006.

One of the most controversial aspects of the reforms is a change in the permanent disability rating system. The goal of the revised rating schedule was to give consideration to diminished future earning capacity in place of diminished ability to compete in the labor market. The guidelines of the American Medical Association were to be used as in many other states as opposed to subjective considerations unique to California. The legislature delegated the implementation of the changes to the Administrative Director. Critics and so-called experts without real data are already pressing for legislative changes with litigation underway. We believe legislative changes should not be considered until reliable and accurate data establish that the reforms created unintended negative consequences to seriously injured workers. We do not believe that meaningful data will be available for several years, at the earliest, or that studies predicting the results will be credible. Interestingly, due to these factors, and explicitly acknowledging that they were not desirous of changing the reforms without data, the California legislature passed legislation in 2006 increasing cash benefits to injured workers. The Governor vetoed this legislation indicating that studies would be conducted to determine the scope of the problem, if any. Undoubtedly, in an election year this may have been a good political decision, but fairness to injured workers and the dollar amount of benefits must be given consideration sooner rather than later.

Litigation relating to permanent disability guidelines and apportionment continues. In a significant decision, a unanimous court upheld the validity of the guidelines, but permitted expert testimony to be considered. This case is on appeal as is a case before the California Supreme Court on how to apply apportionment.

HEALTHCARE INFLATION, IN GENERAL, CONTINUES TO INCREASE IN THE 8-9% RANGE PER YEAR; IN CONTRAST CALIFORNIA'S WORKERS' COMPENSATION HEALTHCARE COSTS HAVE DECLINED FROM 2002-2005.

Healthcare and workers' compensation can be expected to receive political attention. Critics argue that injured workers do not receive adequate or timely medical care thereby enriching insurers. Also, 24-hour coverage is again being advanced as part of the political effort to obtain universal healthcare. Utilization guidelines and penalties are the subject of recent regulations. Whether modifications, if any, of the existing rules will be based on facts, politics, court decisions or some combination is not clear at this time.

REINSURANCE

Despite the fact we are no longer active in the reinsurance business, we are required to report it as a separate segment. During 2006, we incurred a loss of $20.5 million compared to a loss of $56.2 million the prior year. At year end we had $106.1 million of reserves for estimated losses, which will take many years to pay.

CORPORATE GOVERNANCE

Zenith's Board of Directors and its management are committed to governance policies and practices that help assure we are among the leaders in this important area. Meetings of Zenith's Audit, Compensation and Nominating and Corporate Governance Committees consistently include oversight reviews to make certain our Company is in the forefront of compliance with the highest standards of corporate governance. We frequently obtain outside legal review of our various charters and policies for compliance with changing laws and regulations and best corporate practices.

Over the past three years, Zenith's management and Audit Committee have spent considerable time and resources to comply with Sarbanes-Oxley and Section 404 requirements. Section 404 relates to management's responsibilities to establish and maintain adequate internal controls over financial reporting and to evaluate the effectiveness of these controls at year-end. We believe that we have

WE ARE UPGRADING MEDICAL CARE AROUND BEST PRACTICES SUPPORTED BY DATA AND OUTCOME MEASURES, AND WE ARE FUNDING CARPAL TUNNEL BEST PRACTICES RESEARCH AT THE RAND CORP.

maintained effective controls and welcome the recently proposed guidance from the Securities and Exchange Commission ("SEC") and the Public Company Accounting Oversight Board regarding management's and our external auditor's evaluation of internal control over financial reporting. We expect the new guidance will allow us to recognize efficiencies and reduce costs while maintaining our strong financial reporting controls.

Zenith's management and Board of Directors also strive to fully comply with the SEC's new rules regarding executive compensation, related person transactions and director independence disclosures. We believe that our 2007 proxy statement provides full transparency regarding all of these important disclosures. The objectives we initially set for executive compensation thirty years ago remain today — to provide long-term incentives and reward executives for above average performance over a sustained period of time.

INFORMATION TECHNOLOGY

The use of effective technology combined with quality and timely management information are two key components of our business strategy. We continue to build our systems around an architecture that supports rapid changes in our business environment as well as the ability to interface with multiple external partners. In addition, we focus particular attention and resources on the internal and external security of our systems and the information contained within them.

Our highest priority is to use technology to enable standardized workflows around "best practices" and to provide "real time" information to management and to our underwriting, claims, claims-legal and medical specialists.

The Internet has become an important part of our business and we continue to look for ways to enhance our product and services through new content and technology upgrades. Our external website, www.thezenith.com, has become a repository for valuable information regarding workers'

WITH REGARD TO CORPORATE GOVERNANCE, WE BELIEVE OUR CONTROLS ARE EXCELLENT AND OUR DISCLOSURES PROVIDE FULL TRANSPARENCY AND ACCOUNTABILITY.

compensation as well as the portal for our agents to receive rapid quotes for their customers. We received over 1.2 million visits to our site in 2006 and we expect this number to rise as we offer our e-commerce products more widely in 2007.

Our continuing investment in technology, combined with our people and our specialization in workers' compensation, allows us to continually upgrade our services and capabilities and positions us for future opportunities.

ACCOUNTING DISCLOSURE

Our financial statements include full disclosure of the accounting policies, estimates and assumptions used in their preparation. As we have discussed earlier in this report, estimating our workers' compensation loss costs and loss reserves is one of our major business risks. Our loss costs, or cost of goods sold, are not quantifiable with a high degree of certainty for several years until a large percentage of the claims for a given year are closed. This is particularly true in light of the California and Florida reforms where it is difficult to know whether the initial trends will continue over the long term.

Zenith's actuaries perform comprehensive analyses of our loss reserves on a quarterly basis. Assumptions are required to project estimates of loss costs and loss reserves, with the key assumption being the rate of deflation in the most recent accident years of our workers' compensation loss reserves. In the table on page 37, we show the available data concerning paid loss inflation and deflation for the past several accident years and the rates we have assumed in our loss reserve estimate. We also provide a discussion of the long-term uncertainly surrounding the trends of our workers' compensation loss costs. Under all of these circumstances, including our track record of reserving accuracy prior to the reforms, our financial statement loss reserve estimates are higher than our actuaries' point estimate. Over time we expect the accounting and actuarial estimates to be approximately the same.

OUR BUSINESS MODEL IS A SPECIALIST FOCUSED ON AN EFFECTIVE, CUSTOMER-SENSITIVE SERVICE STRATEGY EXECUTED WITH DISCIPLINE.

California insurance law also requires that we file financial statements prepared in accordance with Department of Insurance ("DOI") regulations (statutory basis) which differ from those contained in this report (GAAP basis). Based on information we submitted to the DOI, the DOI has informed us that they have no objection to the manner in which we reflected these regulations in our statutory financial statements for the year ended 2006 as described on page 80 of this report.

CONCLUSION

Improved underwriting performance and financial strength provide optimism to believe we can continue to produce excellent results for our agents, insureds and stockholders. Deflationary loss cost trends during the past three accident years combined with our underwriting and pricing discipline are providing substantial short-term workers' compensation profitability. Our returns on equity have been above average during the past three years. Despite declining written premiums in California during 2005 and 2006, our market share increased from 3.7% to 5.3% from 2003 to 2005, the latest available data.

Zenith is motivated to take advantage of opportunities and to meet the challenges ahead. Our business model as a specialist is focused on an effective, customer-sensitive service strategy executed with discipline. Our rate decreases in California have not compromised rate adequacy and are responsive to our cautious view of favorable short-term claim cost trends. We anticipate the continuation of current claim trends will generate above-average returns despite competition being more aggressive than in the recent past. Unfortunately, it will require a few more years of data to be relatively certain that the deflationary loss cost trends will be applicable to the entire distribution of an accident year's claims. As new data are received and assessed, we will adjust our reserve position, accident year loss ratios and pricing accordingly.

OUR GOAL OF ABOVE-AVERAGE UNDERWRITING PERFORMANCE ESTABLISHED 30 YEARS AGO CONTINUES TO BE OUR FOCUS.

Zenith's financial strength continues to grow and dividends to stockholders have been increased twice during 2006. Our Board of Directors will continue to evaluate future dividends in relation to our performance, financial strength and regulatory requirements.

The contributions of our distinguished Board of Directors serve as an inspiration to us all. We appreciate the confidence and support of our agents, brokers, policyholders, reinsurers, investors, lenders and stockholders. In conclusion, we are well positioned to manage risk professionally and to continue to enhance stockholder value over the long-term in a prudent manner. Our company consists of professionals with ambition, intelligence and motivation focused on delivering value to our customers, necessary services to our claimants and above-average returns to our stockholders, many of whom are employees of Zenith. Our goal of above-average underwriting performance established 30 years ago is imbedded in our culture and continues to be our focus.

Stanley R. Zax
Chairman of the Board and President
Woodland Hills, California, February 2007

ACCIDENT YEAR RESERVE DEVELOPMENT FROM OPERATIONS


	Net incurred loss and loss adjustment expenses reported at end of year
Years in which losses were incurred
Years in which losses were incurred	2000			2001			2002			2003			2004			2005			2006

		(Dollars in thousands)
Prior to 2001	$	4,496,701		$	4,501,048		$	4,513,795		$	4,533,326		$	4,565,999		$	4,620,658		$	4,627,548
2001					409,586			426,007			437,452			447,619			454,475			457,882
2002								391,960			375,199			397,817			413,764			419,553
2003											523,707			471,615			443,744			440,190
2004														615,397			538,906			490,530
2005																	730,770			625,292
2006																				464,106
Calendar Year Adverse (Favorable) Prior Period Development				$	4,347		$	29,168		$	14,215		$	13,366		$	(26,900	)	$	(141,322	)
Loss and loss adjustment expense ratios:
2000		85.6	%		87.0	%		89.8	%		92.1	%		94.9	%		96.3	%		96.1	%
2001					85.9	%		89.3	%		91.7	%		93.9	%		95.3	%		96.0	%
2002								70.4	%		67.4	%		71.4	%		74.3	%		75.3	%
2003											67.7	%		60.9	%		57.3	%		56.9	%
2004														65.2	%		57.1	%		51.9	%
2005																	62.0	%		53.0	%
2006																				49.2	%

This analysis displays the accident year net incurred loss and loss adjustment expenses on a GAAP basis for accident years prior to 2001 and for each of the accident years 2001-2006 for our workers' compensation and reinsurance businesses, together. The total of net loss and loss adjustment expenses for all claims occurring within each annual period is shown first at the end of that year and then annually thereafter. The total cost includes both payments made and the estimate of future payments as of each year-end. Past development may not be an accurate indicator of future development since trends and conditions change.

The total change in our incurred loss estimates for all prior accident years in 2006 was a net decrease of approximately $141.3 million, comprised of $161.3 million for our workers' compensation loss reserves, partially offset by an increase of approximately $20.0 million for our reinsurance loss reserves. The favorable development of our workers' compensation loss reserves during 2006 principally reflects a reduction of estimated losses for the 2005 and 2004 accident years. The adverse development of incurred losses in our reinsurance business during 2006 reflects increased estimated losses primarily attributable to Hurricanes Wilma and Rita based on claims and information we received in 2006.

STOCK PRICE PERFORMANCE

The Stock Price Performance Graph below compares the cumulative total returns of the Common Stock, par value $1.00 per share of Zenith National Insurance Corp., ticker symbol ZNT ("Zenith"), the Standard and Poor's 500 Stock Index ("S&P 500") and the Standard and Poor's 500 Property-Casualty Insurance Index ("S&P PC") for a five year period. Stock price performance is based on historical results and is not necessarily indicative of future stock price performance. The following graph assumes $100 was invested at the close of trading on the last trading day preceding the first day of the fifth preceding year in Zenith, the S&P 500 and the S&P PC. The calculation of cumulative total return assumes reinvestment of dividends. The graph was prepared by Standard and Poor's Institutional Market Services, which obtained factual materials from sources believed by it to be reliable, but which disclaims responsibility for any errors or omissions contained in such data.

Comparative Five-Year Total Returns
Zenith, S&P 500 and S&P PC
(Performance Results Through 12/31/06)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

Zenith National Insurance Corp. ("Zenith National") is a holding company engaged, through its wholly-owned subsidiaries (primarily Zenith Insurance Company ("Zenith Insurance")), in the workers' compensation insurance business, nationally, and the assumed reinsurance business. In September 2005, we announced our exit from the assumed reinsurance business and we ceased writing and renewing assumed reinsurance contracts. Unless otherwise indicated, all references to "Zenith," "we," "us," "our," the "Company" or similar terms refer to Zenith National together with its subsidiaries.

The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements if accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those discussed. Forward-looking statements include those related to the plans and objectives of management for future operations, future economic performance, or projections of revenues, income, earnings per share, capital expenditures, dividends, capital structure, or other financial items. Statements containing words such as expect, anticipate, believe, estimate, or similar words that are used in this Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations ("MD&A"), in other parts of this report or in other written or oral information conveyed by or on behalf of Zenith, are intended to identify forward-looking statements. The Company undertakes no obligation to update such forward-looking statements, which are subject to a number of risks and uncertainties that could cause actual results to differ materially from those projected. These risks and uncertainties include, but are not limited to, the following: (1) competition; (2) adverse state and federal legislation and regulation; (3) changes in interest rates causing fluctuations of investment income and fair values of investments; (4) changes in the frequency and severity of claims and catastrophes; (5) adequacy of loss reserves; (6) changing environment for controlling medical, legal and rehabilitation costs, as well as fraud and abuse; (7) losses associated with any terrorist attacks that impact our workers' compensation business in excess of our reinsurance protection; (8) losses caused by nuclear, biological, chemical or radiological events whether or not there is any applicable reinsurance protection; and (9) other risks detailed herein and from time to time in Zenith's other reports and filings with the Securities and Exchange Commission ("SEC").

OVERVIEW

We are in the business of managing insurance and investment risk with the major risk factors set forth in the preceding paragraph. Our main business activity is the workers' compensation insurance business. We measure our performance by our ability to increase stockholders' equity over the long-term. Following is a summary of our recent business performance and how we expect the trends to continue for the foreseeable future:

Revenues. Our revenues are comprised of the net premiums earned from our workers' compensation and reinsurance segments and the net investment income and realized gains from our investments segment. The most significant trends in our revenues in the year ended December 31, 2006 compared to the prior year were the decrease in California workers' compensation net premiums earned and the decline in reinsurance premiums due to our exit from the business, partially offset by higher investment income. The 2006 decline in California workers' compensation premiums principally reflects rate decreases as a result of

favorable loss costs trends from the 2003 and 2004 legislative reforms combined with our pricing and underwriting strategy in comparison to our competition. 2006 workers' compensation premiums outside California were comparable to 2005, with rate decreases offset by growth in insured payrolls.

Our operating goals do not include objectives for revenues or market share but rather emphasize pricing and underwriting discipline to maintain profitability. We expect similar workers' compensation premium trends in 2007 as in 2006. Our workers' compensation premiums are discussed further under "Results of Operations — Workers' Compensation Segment" on pages 28 to 30.

Income (Loss) from Workers' Compensation and Reinsurance Segments. The results of our workers' compensation and reinsurance segments are as follows:


		Year Ended December 31,
(Dollars in thousands)		2006			2005			2004

Income (loss) before tax from:
	Workers' compensation	$	313,576		$	213,244		$	104,098
	Reinsurance (1)		(20,508	)		(56,183	)		(11,956	)

(1) Includes catastrophe losses before taxes of $19.9 million ($12.9 million after tax), $69.2 million ($45.0 million after tax), and $21.1 million ($13.7 million after tax) in 2006, 2005 and 2004, respectively. Catastrophe losses in 2006 represent increased estimated losses from the 2005 hurricanes.

Loss Reserves. We recognized $161.3 million and $26.3 million of pre-tax favorable development on prior year workers' compensation loss reserve estimates in the years ended December 31, 2006 and 2005, respectively. The favorable development in 2006 reflects a continuation of deflation trends in the paid loss data for recent accident years, offset, in part, by the pre-tax adverse development of reinsurance reserves of $19.9 million related to the 2005 hurricanes. The favorable development in 2005 reflects net favorable development on prior year loss reserves as a result of deflation trends in the paid loss data for recent accident years, partially offset by a re-allocation of our workers' compensation loss reserves to older accident years to better reflect the facts and trends known at that time.

There is uncertainty as to whether the short-term paid loss trends, which reflect the benefits of the 2003 and 2004 legislative reforms in California and 2003 reforms in Florida, will continue over the long-term and we will not know the full impact of these reforms with a high degree of confidence for several years. We have established loss reserves based on our best estimates which provide that ultimate loss costs will be higher than indicated from the current paid loss claim data for recent accident years. If these paid trends continue, we expect to recognize additional favorable development for prior accident years in the future, however we cannot currently predict if and to what extent such development will occur. We discuss the assumptions we made about the inflation trends and associated uncertainties for recent accident years under "Loss Reserves" on pages 33 to 40.

Investments Segment. Our investment portfolio increased by $106.7 million in the year ended December 31, 2006, principally as a result of favorable net cash flow from operations in 2006. We expect favorable net cash flow from operations in 2007. Investment income increased in each of the three years ended December 31, 2006 because of increases in the investment portfolio in each of these years and higher

short-term interest rates in 2006 and 2005. At December 31, 2006, $0.9 billion of the investment portfolio was in fixed maturities of two years or less compared to $1.2 billion at December 31, 2005.

We recorded realized gains from investments in each of the last three years, but we cannot predict future realized gains from investments.

Stockholders' Equity. During the last three years, our consolidated stockholders' equity increased from $502.1 million ($17.28 per share) at December 31, 2004 to $712.8 million ($19.14 per share) at December 31, 2005 and to $940.7 million ($25.41 per share) at December 31, 2006. Stockholders' equity will primarily depend upon the future level of net income and any fluctuations in the values of our investments.

More information about the key elements of our performance follows below.

RESULTS OF OPERATIONS

Summary Results by Segment. Our business is classified into the following segments: investments; workers' compensation; reinsurance; and parent. Our real estate segment was discontinued in 2002. Income from operations of the investments segment includes investment income and realized gains and losses on investments and we do not allocate investment income to the results of our workers' compensation and reinsurance segments. Income (loss) from operations of the workers' compensation and reinsurance segments is determined by deducting net loss and loss adjustment expenses incurred and underwriting and other operating expenses incurred from net premiums earned. The loss from operations of the parent segment includes interest expense and the general operating expenses of Zenith National. The comparative components of net income are set forth in the following table:


		Year Ended December 31,
(Dollars in thousands)		2006			2005			2004

Net investment income		$	106,294		$	79,200		$	61,876
Realized gains on investments			13,377			22,224			38,579

Income before tax from investments segment			119,671			101,424			100,455
Income (loss) before tax from:
	Workers' compensation segment		313,576			213,244			104,098
	Reinsurance segment		(20,508	)		(56,183	)		(11,956	)
	Parent segment		(11,927	)		(20,938	)		(19,051	)

Income from continuing operations before tax and equity in earnings of investee			400,812			237,547			173,546
Income tax expense			142,112			81,894			57,213

Income from continuing operations after tax and before equity in earnings of investee			258,700			155,653			116,333
Equity in earnings of investee after tax						794			1,381

Income from continuing operations after tax			258,700			156,447			117,714
Gain on sale of discontinued real estate segment after tax						1,253			1,286

Net income		$	258,700		$	157,700		$	119,000

Net income improved in 2006 compared to 2005, and in 2005 compared to 2004, principally as a result of improved results in the workers' compensation segment, offset, in part, by catastrophe losses in the reinsurance segment in 2006, 2005 and 2004.

The combined ratio, expressed as a percentage, is a key measurement of profitability traditionally used in the property-casualty insurance business. The combined ratio is the sum of the loss and loss adjustment expense ratio and the underwriting and other operating expense ratio. The loss and loss adjustment expense ratio is the percentage of net incurred loss and loss adjustment expenses to net premiums earned. The underwriting and other operating expense ratio is the percentage of underwriting and other operating expenses to net premiums earned. The key operating goal for our insurance segments is to achieve a combined ratio of 100% or lower and to achieve a workers' compensation combined ratio that is at least three percentage points lower than the combined ratio of the national workers' compensation industry.

The combined ratios reported for the workers' compensation and reinsurance segments were as follows:


		Year Ended December 31,
		2006	2005	2004

Workers' compensation:
	Loss and loss adjustment expenses	31.4%	53.0%	64.6%
	Underwriting and other operating expenses (1) (2)	34.9%	27.9%	23.9%

Combined ratio		66.3%	80.9%	88.5%

Reinsurance:
	Loss and loss adjustment expenses (3)	245.4%	175.4%	107.6%
	Underwriting and other operating expenses	19.0%	11.7%	20.6%

Combined ratio		264.4%	187.1%	128.2%

(1) Includes additional policyholders' dividends of 3.6 and 1.5 percentage points for 2006 and 2005, respectively, related to prior accident years.

(2) The underwriting and other operating expense ratio is lower in 2004 by approximately 2 percentage points due to the benefit of ceding commissions received in 2004 on a 10% quota share ceded reinsurance agreement, which terminated effective December 31, 2004.

(3) Includes catastrophe losses before taxes of $19.9 million, $69.2 million and $21.1 million for 2006, 2005 and 2004, respectively.

Workers' compensation reported accident year combined ratios were as follows:


		Year Ended December 31,
		2006		2005		2004

Combined ratio		66.3%		80.9%		88.5%
Prior Accident Year Items:
	Favorable (Unfavorable) loss reserve development	17.3%		2.4%		(2.2%	)
	Policyholders' Dividends (1)	(3.6%	)	(1.5%	)

Total Prior Accident Year		13.7%		0.9%		(2.2%	)

Accident Year Combined Ratio		80.0%		81.8%		86.3%

(1) Additional policyholders' dividends in 2006 and 2005 related to prior accident years.

Net premiums earned in the workers' compensation and reinsurance segments were as follows:


		Year Ended December 31,
(Dollars in thousands)		2006		2005		2004

Workers' compensation:
	California	$	582,282	$	762,095	$	621,284
	Outside California		349,457		352,099		280,763

Total workers' compensation (1)			931,739		1,114,194		902,047
Reinsurance (2)			12,478		64,506		42,378

Net premiums earned		$	944,217	$	1,178,700	$	944,425

(1) Net premiums earned in 2004 are net of $98.7 million of ceded premiums earned in connection with a 10% quota share ceded reinsurance agreement, which terminated effective December 31, 2004.

(2) 2006 reflects the impact of our previously announced exit from the reinsurance business.

Workers' Compensation Segment. In the workers' compensation segment, we provide insurance coverage for the statutorily prescribed benefits that employers are required to provide to their employees who may be injured in the course of employment. We establish our prices (except in those states, primarily Florida, where we are required by regulation to use mandated rates) with the goal of achieving a combined ratio under 100%. We continually analyze data and use our best judgment about loss cost trends, particularly claim inflation, to set adequate premium rates and loss reserves.

The combined ratio of our workers' compensation segment improved and income from this segment increased in 2006 compared to 2005, and in 2005 compared to 2004. These favorable trends reflect a lower reported current accident year loss and loss adjustment expense ratio in 2006 compared to 2005, and in 2005 compared to 2004. Favorable development of prior year loss reserves was higher in 2006 compared to 2005, and in 2005 compared to 2004 (in 2004 there was unfavorable development). These benefits were offset, in part, by higher underwriting and other operating expense ratios in 2006 compared to 2005, and 2005 compared to 2004, and by a decrease in net premiums earned in 2006. The lower loss and loss adjustment expense ratio estimates for prior accident years recorded in 2006 and 2005 caused us to re-evaluate and increase our estimate for accrued policyholder dividends for prior accident years, resulting in an increase in the underwriting and other operating expense ratio of 3.6 and 1.5 percentage points, respectively. The estimates we made for our loss costs in recent accident years are subject to considerable uncertainty because of fluctuating rates of claims cost inflation and deflation including the impact of the 2003 and 2004 workers' compensation legislative reforms. We discuss the assumptions we made about the inflation trends and associated uncertainties for recent accident years under "Loss Reserves" on pages 33 to 40.

Workers' compensation premiums in-force, number of policies in-force and insured payrolls in California and outside of California are shown in the following table. Premiums in-force is a measure of the amount of premiums billed or to be billed on all un-expired policies at the date shown; and insured payroll is our best indicator of exposure.


(Dollars in millions)	Premiums in-force		Policies in-force	Insured Payrolls

California
December 31, 2006	$	501.2	24,600	$	9,200.3
December 31, 2005		722.9	27,500		9,930.3
December 31, 2004		731.3	27,200		9,310.0
Outside California
December 31, 2006	$	332.8	17,200	$	12,404.5
December 31, 2005		326.9	16,900		11,236.3
December 31, 2004		311.0	16,200		10,410.5
Total
December 31, 2006	$	834.0	41,800	$	21,604.8
December 31, 2005		1,049.8	44,400		21,166.6
December 31, 2004		1,042.3	43,400		19,720.5

Premiums in-force in California as of December 31, 2006 decreased compared to December 31, 2005 principally as a result of rate decreases due to favorable loss cost trends from the 2003 and 2004 legislative reforms, combined with our pricing and underwriting strategy in comparison to our competition in the California market as reflected in the decline in insured payrolls and policies in-force. Premiums in-force outside California increased in 2006 as growth in insured payrolls exceeded rate reductions.

In California, the state in which the largest amount of our workers' compensation premiums is earned, we set our own rates based upon actuarial analysis of current and anticipated loss cost trends. The short-term data for loss costs indicate a favorable impact from the 2003 and 2004 legislative reforms discussed under "Workers' Compensation Reform Legislation" on page 30. As a result of these favorable trends we have reduced our California premium rates in a manner that we believe deals prudently with the uncertainty about the long-term outcome of loss costs trends for recent accident years. These manual rates do not necessarily indicate the rates charged to our policyholders because employers' experience modification factors are subject to revision,

annually; and our underwriters are given authority to increase (debit) or decrease (credit) manual rates based upon individual risk characteristics. The following table sets forth the manual rate change percentages in California, as well as the change in average rates charged in California on renewal business for each period. The change in the average renewal rate takes into consideration changes in manual rates as well as the changes in experience modification factors and net credits or debits applied by our underwriters (decreases are shown in parentheses).


Effective date of change	Manual Rate Change		Average Renewal Charged Rate Change

January 1, 2004	0.0	%	(4.0	)%
July 1, 2004	(10.0	)	(12.0	)
January 1, 2005	(2.0	)	0.0
July 1, 2005	(12.0	)	(19.0	)
January 1, 2006	(13.0	)	(15.0	)
July 1, 2006	(5.0	)	(13.0	)
January 1, 2007	(4.4	)

Future California premium rate decisions will be based on the data about loss costs trends or upon any modification to the workers' compensation system while maintaining our goal of achieving a combined ratio under 100%.

In Florida, the state in which the second largest amount of our workers' compensation premium is earned, rates for workers' compensation insurance are set by the Florida Department of Insurance. Manual rate change percentages in Florida were as follows:


Effective date of change	Manual Rate Change

January 1, 2004	0.0	%
January 1, 2005	(4.0	)
January 1, 2006	(13.4	)
January 1, 2007	(12.5	)

Most of our workers' compensation policies are non-participating but we issue certain policies for which the policyholder may participate in favorable claims experience through a dividend. An estimated provision for workers' compensation policyholders' dividends is accrued as the related premiums are earned. In addition, Florida statutes require payment of additional policyholders' dividends to Florida policyholders pursuant to a formula based on underwriting results. As of December 31, 2006 and 2005, we accrued $34.1 million and $16.0 million, respectively, for Florida dividends payable for prior accident years. The 2005 amount was paid in 2006.

Workers' Compensation Reform Legislation. During 2006, we wrote workers' compensation insurance in 45 states, but the largest concentrations, 62.5% and 22.2% of our workers' compensation net premiums earned during 2006, were in California and Florida, respectively. The concentration of our workers' compensation business in these states makes the results of our operations dependent on trends that are characteristic of these states as compared to national trends, e.g., state legislation, competition and workers' compensation loss costs inflation or deflation trends.

In California, workers' compensation reform legislation was enacted in October 2003 and April 2004 with the principal objectives of lowering the trend of increasing costs and improving fairness in the system. The principal changes in the legislation of 2003 included: 1) a reduction in the reimbursable amount for certain physician fees, outpatient surgeries, pharmaceutical products and certain durable medical equipment; 2) a limitation on the number of chiropractor or physical therapy office visits; 3) the introduction of medical utilization guidelines; 4) a requirement for second opinions on certain spinal surgeries; 5) a repeal of the presumption of correctness afforded to the treating physician, except where the employee has pre-designated a treating

physician; and 6) a presumption of correctness is to be afforded to the evidence-based medical utilization guidelines developed by the American College of Occupational and Environmental Medicine.

In Florida, legislation was enacted effective October 1, 2003, which provides changes to the workers' compensation system. Such changes are designed to expedite the dispute resolution process, provide greater compliance and enforcement authority to combat fraud, revise certain indemnity benefits and increase medical reimbursement fees for physicians and surgical procedures. One of the intended outcomes of the legislation is a reduction in the overall cost associated with delivering workers' compensation benefits in the state of Florida.

Reinsurance Segment. In September 2005, we exited the reinsurance business and we ceased writing and renewing assumed reinsurance contracts. We received earned premiums and were subject to continuing exposure to losses until our in-force assumed reinsurance contracts expired. The majority of our excess of loss assumed reinsurance contracts expired on December 31, 2005, and the remainder fully expired in 2006. Also, under our quota share assumed reinsurance contracts we assumed premiums through the third quarter of 2006. Consequently, premiums earned from assumed reinsurance contracts in 2006 were substantially less than in 2005.

We will be paying our assumed reinsurance claims for several years and the results of the reinsurance segment, principally consisting of any changes to loss reserve estimates and resulting adjustments to contractual premium, will continue to be included in the results of continuing operations.

In assumed reinsurance, we provided coverage that protects other insurance and reinsurance companies from the accumulation of large losses from major loss events, known in the insurance industry as "catastrophes." Results of the reinsurance segment were favorable in the absence of catastrophes and unfavorable in periods when they occurred and, consequently, the results of this segment fluctuated. The results of the reinsurance segment for the year ended December 31, 2006 includes $19.9 million ($12.9 million after tax, or $0.35 per share) of increased estimated losses attributable to claims and information we received in 2006 regarding losses primarily from Hurricanes Wilma and Rita which occurred in the second half of 2005.

The $56.2 million loss before tax in the reinsurance segment for the year ended December 31, 2005 was due to estimated catastrophe losses of $69.2 million ($45.0 million after tax, or $1.21 per share) net of additional premiums earned from reinstatement premiums. Catastrophe losses in 2005 were attributable to Hurricanes Katrina, Rita and Wilma.

The $12.0 million loss before tax in the reinsurance segment for the year ended December 31, 2004 was due to catastrophe losses of $21.1 million before tax ($13.7 million after tax, or $0.37 per share). Catastrophe losses in 2004 were attributable to $26.8 million from the Florida hurricanes of 2004 offset by a $5.7 million reduction of previously estimated loss reserves, net of reinstatement premiums, for the 2001 World Trade Center Loss ("WTC").

Investments Segment. Investment income and realized gains and losses are discussed in the "Investments" section following.

Parent Segment. The parent segment loss reflects the holding company activities of Zenith National. The parent segment loss before tax was as follows:


	Year Ended December 31,
(Dollars in thousands)	2006		2005		2004

Interest expense	$	5,275	$	8,757	$	13,051
Parent expenses		6,652		12,181		6,000

Parent segment loss	$	11,927	$	20,938	$	19,051

Interest expense was less in 2006 compared to 2005 and in 2005 compared to 2004 because $123.8 million aggregate principle amount of our 5.75% Convertible Senior Notes due March 30, 2023 ("Convertible Notes") was converted into our common stock during 2005. Interest expense on the Convertible Notes is added back to net income in the computation of diluted earnings per share (see Note 14 to the Consolidated Financial Statements).

Parent expenses in 2005 include $4.7 million related to the conversion of certain of the Convertible Notes in 2005 (see Note 9 to the Consolidated Financial Statements).

Equity in Earnings of Investee. Since the second quarter of 2005, our investment in Advent Capital (Holdings) PLC ("Advent Capital") is no longer accounted for under the equity method as our ownership was reduced from 20.9% to less than 10% and we no longer have representation on the board of directors.

At December 31, 2006 and 2005, we owned 22.1 million shares of Advent Capital common stock, which is included in equity securities and is recorded at fair value. On June 3, 2005, Advent Capital sold 114.3 million shares of its common stock in a public offering at the United States dollar equivalent of $0.64 per share. On the same date, Advent Capital common stock was listed for trading on the Alternative Investments Market of the London Stock Exchange ("AIM") under the symbol ADV LN.

To reflect the new, publicly traded price of Advent Capital, we reduced the carrying value of this investment to its fair value resulting in a charge of $9.5 million before tax ($6.2 million after tax) in the second quarter of 2005 as a reduction of realized gains on investments. The charge resulted from the difference between the fair value of our investment in Advent Capital, based upon the offering price for Advent Capital's common stock, and the carrying value of the investment under the equity method as of the date of the public offering.

Discontinued Real Estate Segment. In 2002, we sold our home-building business and related real estate assets to MTH-Homes Nevada, Inc. ("MTH Nevada"), a wholly-owned subsidiary of Meritage Corporation.

In addition to the consideration received in 2002, we were entitled to receive 10% of MTH Nevada's pre-tax net income, subject to certain adjustments, for each of the twelve-month periods ending September 30, 2003, September 30, 2004 and September 30, 2005. We recorded additional gains under the earn-out provision of the sale agreement for all three twelve month periods, including $1.9 million ($1.3 million after tax) and $2.0 million ($1.3 million after tax) in 2005 and 2004, respectively. The last such payment under the earn-out provision was received in 2005.

LOSS RESERVES


		December 31,
(Dollars in millions)		2006		2005

Workers' compensation segment:
	Unpaid losses and loss adjustment expenses	$	1,416	$	1,523
	Less: Receivable from reinsurers for unpaid losses		221		243

Unpaid losses and loss adjustment expenses, net of reinsurance		$	1,195	$	1,280

Reinsurance segment:
	Unpaid losses and loss adjustment expenses gross and net of reinsurance receivable	$	106	$	180

Total:
	Unpaid losses and loss adjustment expenses	$	1,522	$	1,703
	Less: Receivable from reinsurers for unpaid losses		221		243

Unpaid losses and loss adjustment expenses, net of reinsurance		$	1,301	$	1,460

Loss reserves are estimates and are inherently uncertain; they do not and cannot represent an exact measure of ultimate liability. Accordingly, as we receive new information and update our assumptions over time regarding the ultimate liability, our loss reserves may prove to be inadequate to cover our actual losses or they may prove to exceed the ultimate amount of our actual losses. The amount by which estimated losses, measured subsequently by reference to payments and additional estimates, differ from those originally reported for a period is known as "development." Development is favorable when losses ultimately settle for less than the amount reserved or subsequent estimates indicate a basis for reducing loss reserves on open claims. Development is unfavorable when losses ultimately settle for more than the levels

at which they were reserved or subsequent estimates indicate a basis for reserve increases on open claims. Favorable or unfavorable development of loss reserves is reflected in our Consolidated Statements of Operations in the period the change is made.

The following table shows the (favorable) adverse one-year loss reserve development for loss reserves in each of the three years ended December 31, 2006. The one-year loss reserve development is the change recorded in the current year for the estimate of the loss reserves established at the end of the preceding year and reflects a cumulative adjustment to estimates for all accident years.


(Dollars in thousands)		Workers' Compensation			Reinsurance			Total

One-year loss development in:
	2006	$	(161,252	)	$	19,930		$	(141,322	)
	2005		(26,289	)		(611	)		(26,900	)
	2004		20,249			(6,883	)		13,366

When losses are reported to us, we establish, individually, estimates of the ultimate cost of the claims, known as "case reserves." These case reserves are continually monitored and revised in response to new information and for amounts paid. Our actuaries use this information about reported claims in some of their estimation techniques. In estimating our total loss reserves, we have to make provision for two types of loss development. At the end of any calendar period, there are a number of claims that have not yet been reported but will arise out of accidents that have already occurred. These are referred to in the insurance industry as incurred but not reported ("IBNR") claims. In addition to this provision for late reported claims, we also have to estimate the extent to which the case reserves on known claims may also develop. These types of reserves are referred to in the insurance industry as "bulk" reserves. Our loss reserves make provision for both IBNR and bulk reserves in total, but not separately. We are required to file exhibits with state insurance departments which reflect the sum of our IBNR and bulk reserves.

At December 31, 2006 and 2005, IBNR and bulk reserves included in unpaid losses and loss adjustment expenses, net of reinsurance, were as follows:


	December 31,
(Dollars in millions)	2006		2005

Workers' compensation	$	382	$	408
Reinsurance		19		54

Total IBNR & bulk reserves	$	401	$	462

We perform a comprehensive review of our loss reserves at the end of every quarter and, in conjunction with actuarial techniques and methods, we employ judgment to establish the most reasonably accurate estimate of loss reserves based on the most recent relevant data. During 2006 we recognized $161.3 million of favorable development on prior accident year workers' compensation loss reserves which primarily reflects the improvement in the paid loss trends during 2006 combined with attributing more weight to these paid trends in management's assessment of loss reserves. The loss reserve estimates recorded in the financial statements included assumptions of ultimate loss trends that were higher than the paid trends for recent accident years. In addition, the loss reserve estimates recorded in the financial statements were higher than the actuarial point estimates by approximately $109 million and $104 million at December 31, 2006 and 2005, respectively. A description of the actuarial estimation process, the role of management, and our assumptions in determining loss reserve estimates, as well as the associated uncertainties, are discussed below.

Receivables from reinsurers are a function of estimated loss reserves and are therefore subject to similar uncertainties. In addition,

reinsurance recoverables may ultimately prove to be uncollectible if the reinsurer is unable to perform under the contract. Reinsurance contracts do not relieve us of our obligations to our policyholders. We monitor the financial condition of our reinsurers and do not believe that we are currently exposed to any material credit risk through our ceded reinsurance arrangements because most of our reinsurance is recoverable from large, well-capitalized reinsurance companies.

Workers' Compensation Loss Reserves. In our workers' compensation business, the large majority of claims are reported to us promptly and therefore, as of the balance sheet date, the number of IBNR claims is relatively insignificant. The greater part of the challenge in estimating loss reserves is associated with estimating ultimate loss costs across a population of claims for each accident year. The principal uncertainty in our workers' compensation loss reserve estimates at this time is caused by the trend of increasing severity (inflation) in the years prior to 2002 compared to the deflation trend in more recent years. Severity is the average cost of a claim as measured by the total cost of claims for a year divided by the number of claims in that year. The annual rate of claim cost inflation (or deflation) is the year over year percentage change in claim severity. Inflation or deflation is attributable to factors which include changes in health care costs, legislative reforms to the workers' compensation system and the number of expensive claims relative to the total number of claims in a year. Expensive claims are those involving permanent disability of an injured worker. Historically in California, the expensive claims have contributed about 20% of the number of claims and 90% of the cost of all claims. We have observed deflationary trends in the amounts we have paid for claims in recent accident years compared to increasing inflation trends for claim payments in 2001 and prior. However, expensive claims are paid over several years, and ultimate costs are difficult to estimate because of such factors as the on-going and possibly increasing need for medical care, length of disability, life expectancy and benefits for dependents. These expensive claims often result in some form of a settlement with the injured worker which generally takes place many years after the injury. There is uncertainty as to whether the recent deflationary data will be sustained as the expensive claims are settled. We have also recently observed a reduction in the number of California permanent disability claims in 2005 and 2006 as compared to 2004 and prior accident years, reflecting the change in the permanent disability rating system effective January 1, 2005. This reduction in expensive claims for the 2005 and 2006 accident years as compared to prior accident years is not yet fully reflected in the paid loss data trends due to the longer time lag in paying and settling these claims. Also, the ultimate number of expensive claims for the 2005 and 2006 accident year is still uncertain.

Our actuaries produce a point estimate for workers' compensation loss reserves using the results of various methods of estimation. However, these various methods do not produce separate point estimates. Our actuaries prepare reserve estimates using our own historical claims data and based upon many of the common actuarial methodologies for estimating loss reserves, such as paid development methods, incurred development methods, Bornhuetter-Ferguson indications and claim count methods, which our actuaries use to determine reserve estimates for all accident years. A customized method is used for more recent accident years related to business written in California to focus on the impacts of the legislative reforms in determining loss reserves. The actuarial point estimate is based on a selection of the results of these various methods depending upon both the age of the accident

year and the geographic state of the injury. For more mature accident years, all of the methods produce very similar loss estimates and our actuarial point selections are based upon incurred loss development methods because our actuaries believe this most accurately reflects the required reserves for the relatively few claims that remain open. For recent accident years related to business written outside of California, our actuarial point selections are also based on the incurred loss development methods because our actuaries believe this method most accurately reflects the required reserves based on their analysis of the data and understanding of the claim environments in which we operate. For the more recent accident years related to business written in California, our actuaries use a loss reserving model which estimates the differing affects of the 2003 and 2004 legislative reforms on five categories of benefit types. The five benefit types are: (1) temporary disability indemnity, (2) vocational rehabilitation, (3) permanent disability indemnity, (4) medical costs and (5) allocated expense. For each of these types of benefits, our actuaries review the historical paid trends and make adjustments to reflect the known effects of the reforms (e.g., limitations on temporary disability indemnity benefits and eliminating vocational rehabilitation benefits). Our actuaries then use judgment to forecast ultimate inflation rates for each benefit type allowing for the late emergence of costs for the most serious cases based on historical trends. The selected inflation rate produces an estimate of loss reserves for each benefit type and the actuarial point selection is equal to the sum of the estimated loss reserves for all five benefit types for each accident year.

The inflation or deflation assumption is the key assumption in establishing loss reserve estimates for recent accident years. The 2003 and 2004 legislative reforms in California and the 2003 reforms in Florida, as well as delays in settling and closing the most serious cases in recent accident years in California as compared to historical trends, have resulted in uncertainty in determining the ultimate inflation assumptions for the most recent accident years. Management reviews the actuarial point estimate each quarter and establishes loss reserve estimates in the financial statements that provide for fluctuating rates of claim cost inflation using the most recent relevant data and incorporates judgment regarding the inherent uncertainties of ultimate loss costs. These uncertainties include the length of time required to settle long-term, expensive cases, uncertainties in the long-term outcome of reforms and the fact that in certain years prior to reforms our loss reserves proved to be inadequate. The differences between the actuarial point estimate and the loss reserves recorded in the financial statements are principally caused by the differences in the inflation assumptions used by management as compared to the actuarial inflation assumptions for the 2003 and 2004 accident years, as well as the impact of these inflation assumption differences on the 2005 and 2006 accident year ultimate loss estimates (changes to inflation rates for a particular accident year also change the ultimate loss estimate for each subsequent accident year). Over time, as the data for these accident years mature and uncertainty surrounding the ultimate outcome of the workers' compensation claim costs diminishes, we expect the difference between our financial statement loss reserves and our actuarial point estimates will decrease.

When we estimate our loss reserves, we do so in the aggregate for all years, and then allocate them to each accident year. This allows us to look at the year-over-year change in claim severity, or inflation — our most important concept for understanding adequate loss reserve estimates. By allocating loss reserves to individual accident years, we produce an implied rate of inflation for each year. Each

quarter, we receive additional data about the inflation rate in paid losses for each accident year as we pay and close additional claims. We use these and other data to determine if any changes in our inflation assumptions are appropriate. The allocation of loss reserves between accident years is less certain for more recent accident years, for which there is less paid loss data and greater uncertainty caused by the legislative reforms in 2003 and 2004. Any changes in our assumptions about inflation rates will cause a change in our loss reserve estimates, although our view of the adequacy of the total loss reserve estimate may be unchanged if the effect of the change in the inflation assumptions has the effect of reallocating the loss reserve estimate among accident years.

At December 31, 2006, the workers' compensation accident year paid loss inflation rates (negative inflation or deflation rates are shown in parentheses) in our paid loss data and the assumptions of accident year inflation rates in our estimates of ultimate losses were as follows:

																					Assumed Inflation (Deflation) in Estimated Ultimate Losses
(Dollars in Thousands)	Estimated Ultimate Losses (A)		Average Paid Loss per Claim Annual Inflation (Deflation) Evaluated After (Number of Months)
(Dollars in Thousands)	Estimated Ultimate Losses (A)																								June 30, 2006
Accident Year			12		24		36		48		60		72		84		96		108		December 31, 2006		September 30, 2006		June 30, 2006		March 31, 2006		December 31, 2005

1998	$	220,802	15	%	9	%	9	%	9	%	9	%	11	%	13	%	13	%	14	%	14	%	14	%	14	%	14	%	14	%
1999		220,032	14		15		15		14		15		15		16		15				16		16		16		16		16
2000		240,350	2		10		11		13		13		13		12						14		14		14		14		14
2001		313,136	18		16		16		15		15		14								17		17		17		17		17
2002		327,111	(2	)	2		4		4		3										7		8		8		8		8
2003		348,269	11		2		(2	)	(4	)											5		5		6		6		6
2004		355,250	(7	)	(11	)	(15	)													(5	)	(1	)	0		2		5
2005		390,669	(2	)	(8	)															(11	)	(11	)	(2	)	3		6
2006		360,663	7																		(4	)	(6	)	0		0

(A): Estimated ultimate losses for an accident year represent the estimated aggregate amount we expect to pay for all claims that will be reported for that year for losses and allocated loss adjustment expenses. Loss reserves are the liability for the unpaid portion of ultimate losses, computed by subtracting the amount paid from the ultimate loss estimate as of the balance sheet date.

In 2006, we received the following information:

•: We paid and closed additional claims and the paid loss deflation trends in recent accident years continued, primarily in the 2004 and 2005 accident years with decreases of 4 and 6 percentage points, respectively.
•: We observed a change in the mix of claims for the 2005 and 2006 accident years. The number of California permanent disability claims (expensive claims) relative to the total number of claims decreased compared to 2004 and prior accident years.
•: The California Workers' Compensation Insurance Rating Bureau ("WCIRB") recently published its current estimate of California workers' compensation loss experience based on data through September 30, 2006. Their loss ratio estimates are 30% and 31% for accident years 2005 and 2004, respectively, and their combined ratios estimates are 54% for both 2005 and 2004. Their estimate of the California worker's compensation industry aggregate reserve redundancy for all accident years increased to $8.2 billion using data through September 30, 2006 from $5.0 billion using data through December 31, 2005, and from $0.5 billion using data through September 30, 2005. Their analysis contains some specific anticipated savings from the reforms and also relies significantly on the most current paid loss trends.

•: During the recent California legislative session, it became clear that there is currently no intent to retroactively change the workers' compensation reforms, although we anticipate on-going discussions regarding prospectively increasing benefits to injured workers with permanent disabilities.
•: The California Workers' Compensation Appeals Board upheld the validity of the 2005 permanent disability rating schedule, but it ruled that expert testimony or other expert evidence will be permitted in the determination of permanent disability on a case by case basis.

Considerable judgment is used in determining our inflation assumptions and each quarter we consider and evaluate the most recent trends, new information and the payment of additional claims, as well as the inherent uncertainties discussed previously. During 2006, we decreased the inflation assumption 10 percentage points for the 2004 accident year to reflect changes in paid loss deflation trends for this accident year, as well as attributing more weight to the paid loss trends because of the passage of time and because more claims were closed. We also considered the WCIRB's growing confidence in the 2004 loss cost savings as a result of the legislative reforms. We also reduced our inflation assumptions in estimated losses for the 2005 accident year by 17 percentage points to reflect both the change in the paid loss deflation during 2006 and the observed change in the mix of claims to fewer expensive claims. These lower inflation assumptions resulted in net favorable development of $161.3 million in 2006, principally related to a reduction of estimated losses for the 2005 and 2004 accident years.

The $161.3 million decrease in loss reserves during the year ended December 31, 2006 for accident year 2005 and prior was 12.6% of our estimated workers' compensation net loss reserves at December 31, 2005. As a percentage of workers' compensation net premiums earned for the year ended December 31, 2006, the favorable development of our workers' compensation loss reserves was 17.3%.

Our current accident year combined ratio estimate is impacted by, among other factors, changes in estimates for prior year losses. The favorable development in the 2004 and 2005 accident years, as well as the observed change in the mix of claims to fewer expensive claims for the 2005 and 2006 accident years, had a favorable impact on our ultimate loss estimate for the 2006 accident year. Our 2006 accident year loss and loss adjustment expense ratio and combined ratio estimates are 48.7% and 80.0%, respectively.

During 2005, we reduced our inflation assumptions in estimated losses for the 2003 and 2004 accident years compared to December 31, 2004 to reflect the favorable paid loss deflation trends. The lower inflation assumptions resulted in net favorable development of $100.8 million in 2005 for the 2004 and 2003 accident years, of which $74.5 million was reallocated to increase reserves for older accident years. The net decrease in loss reserves during the year ended December 31, 2005 for accident years 2004 and prior was $26.3 million, or 2.4% of our estimated workers' compensation net loss reserves at December 31, 2004. As a percentage of workers' compensation net premium earned in 2005, the favorable development of our workers' compensation loss reserves was 2.4%.

At December 31, 2004, our inflation assumptions resulted in a reallocation of loss reserve estimates by accident year primarily from 2004 and 2003 to older accident years. The net increase in workers' compensation loss reserves in 2004 for accident years 2003 and prior was $20.2 million, or 2.4% of our workers' compensation net loss reserves at December 31,

2003. As a percentage of workers' compensation net premiums earned in 2004, this adverse development of our workers' compensation loss reserves was 2.2%.

Different assumptions about the inflation or deflation rates would change our workers' compensation loss reserve estimates, and a material change is reasonably possible although we cannot predict if and to what extent such a change will occur. A change in the assumed inflation rate for any particular accident year would change our estimate of ultimate losses for that accident year by an amount equal to the change in the inflation rate multiplied by the estimated loss for that year. Such a change in the inflation rate for a particular accident year would also change the estimated ultimate loss for each subsequent accident year. For example, if the average annual inflation rate for each of the accident years 2001 through 2006 were decreased by one percentage point in each year, our loss reserve estimates at December 31, 2006 would decrease by about $70.7 million as illustrated in the table that follows:


(Dollars in thousands)	Assumption Currently Used					Revised Assumption

Accident Year	Assumed Inflation (Deflation) Rate		(a) Cumulative Inflation Factor	(b) Estimated Ultimate Losses		Assumed Inflation (Deflation) Rate		(c) Cumulative Inflation Factor	[(c)/(a)]x(b)] Estimated Ultimate Losses

2001	17	%	1.170	$	313,136	16	%	1.160	$	310,460
2002	7		1.252		327,111	6		1.230		321,363
2003	5		1.314		348,269	4		1.279		338,992
2004	(5	)	1.249		355,250	(6	)	1.202		341,882
2005	(11	)	1.111		390,669	(12	)	1.058		372,032
2006	(4	)	1.067		360,663	(5	)	1.005		339,706

				$	2,095,098				$	2,024,435
								Decrease	$	70,663

In California, as of December 31, 2006, we have closed only 34%, 11% and 1% of our 2004, 2005 and 2006 expensive permanent disability cases, respectively. These closing ratios are slower than the ratios we experienced prior to reforms and are too small for us to conclude at this time that the recent decline in the short-term inflation rate will offset the long-term inflation in workers' compensation health care costs, which have historically exceeded general health care costs. As a result, we have established current loss reserves based on our best estimate that the cumulative inflation rates from 2002 to 2006 will be higher than observed in our paid claim data, but lower than the actual inflation rates observed during 1998 - 2001.

We believe our loss reserve estimates are adequate. However, the actual ultimate inflation (or deflation) rate will not be known with any certainty for several years. We assume that general health care inflation trends will continue and will impact our long-term claim costs and loss reserves. The extent to which this may be offset by benefits from the reform legislation and recently observed reduction in the number of California expensive claims is uncertain. We will evaluate our best estimate of inflation rates and reserves every quarter to reflect the most current data.

Reinsurance Loss Reserves. Loss reserve estimates in our reinsurance segment are subject to uncertainties that are inherent to the reinsurance business. As a reinsurer, we are further removed from the original loss events than we would be as a primary insurer. Therefore, we are subject to longer reporting lags. We are also subject to the estimates that

ceding companies make before they determine when, if and how much to report to us. When we are estimating losses for catastrophes, our estimates are highly dependent upon the nature and timing of the event and our ability to obtain timely and accurate information with which to estimate our liability. In September 2005, we exited the reinsurance business and ceased writing and renewing assumed reinsurance. As of December 31, 2006, all of our assumed reinsurance contracts are fully expired and our continuing exposure is limited to loss reserve development, if any, on prior accident years and resulting adjustments to contractual premium.

Estimated catastrophe losses in 2006 reflect $19.9 million of increased estimated losses primarily attributable to Hurricanes Wilma and Rita based on claims and information we received in 2006.

In 2005, we recorded our estimate of the impact of losses arising from Hurricanes Katrina, Rita and Wilma of $69.2 million, net of reinstatement premiums.

In 2004, we recorded our estimate of the impact of the Florida hurricanes of $26.8 million, net of reinstatement premiums. In the fourth quarter of 2004, we also revised our estimate of losses from the WTC in 2001. In view of the time that had elapsed from the date of the loss and an absence of additional reported losses, we reduced our WTC estimate by $5.7 million — the amount of outstanding IBNR, net of reinstatement premiums.

Estimates of the impact of catastrophe losses are based on the information that is currently available and such estimates could change based on any new information that becomes available or based upon any reinterpretation of existing information.

Asbestos and Environmental Loss Reserves. We have exposure to asbestos losses in our workers' compensation segment which have not been material to results of operations or financial condition in any year or in the aggregate. In our history, we have paid and closed approximately 4,000 such asbestos-related workers' compensation claims for a total of $10.8 million. At December 31, 2006, we had approximately 500 such claims open with loss reserves of $4.1 million compared to our total workers' compensation net loss reserves of $1.2 billion.

We also have potential exposure to environmental and asbestos losses and loss adjustment expenses beginning in 1985 through our reinsurance segment, but the business we reinsured in this segment contains exclusion clauses for such losses. We believe that our reserves for environmental and asbestos losses are currently appropriately established.

INVESTMENTS

We invest the net cash flow from our operations and from our capital primarily in fixed maturity securities with investment-grade ratings. These investments provide a stable source of income over the long-run, although, in the short-run, changes in interest rates impact the amount of investment income we earn. As a result of favorable cash flow from our workers' compensation segment our investment portfolio increased. Recently, we have maintained a high proportion of investments with short-term maturities.

The increase in investment income during each of the three years ending December 31, 2006 was principally the result of the increase in our investment portfolio and higher short-term interest rates in 2006 and 2005.

The average yields on the investment portfolio were as follows:


	Year Ended December 31,
	2006		2005		2004 (2)

Before tax(1)	4.8	%	3.9	%	3.8	%
After tax	3.2		2.6		2.5

(1) Reflects the pre-tax equivalent yield on tax-exempt securities.

(2) Investment income in 2004 includes $2.7 million of contingent interest on a mortgage loan.

Net realized gains from sales of investments will vary each year based on market performance and opportunities. Realized gains from real estate investments contributed $1.7 million, $8.3 million and $15.5 million to net realized gains in 2006, 2005 and 2004, respectively. In 2006, we recorded a $2.1 million realized investment gain on proceeds received from a class action settlement relating to the WorldCom, Inc. securities litigation. Previously in 2002, we recognized a loss of $3.9 million on our investment in WorldCom, Inc., which we also sold in 2002. Net realized gains were reduced by a charge of $9.5 million before tax ($6.2 million after tax) in the second quarter of 2005 associated with Advent Capital (see description under "Equity in Earnings of Investee" on page 32).

Our investment portfolio was comprised as follows:


	December 31,
	2006		2005

Fixed Maturity Securities	65	%	54	%
Short-term Investments	30		42
Equity Securities	4		3
Other Investments	1		1

	100	%	100	%

Fixed maturity securities include primarily corporate bonds, U.S. Government bonds, municipal bonds and mortgage-backed securities issued by the Government National Mortgage Association ("GNMA"). Of the fixed maturity portfolio, including short-term investments, 93% and 95% were rated investment grade at December 31, 2006 and December 31, 2005, respectively. The average maturity of the fixed maturity portfolio, including short-term investments, was 3.7 years and 3.8 years at December 31, 2006 and December 31, 2005, respectively. The duration of the fixed maturity portfolio including short-term investments was 2.8 years and 2.9 years as of December 31, 2006 and December 31, 2005, respectively.

At December 31, 2006 and 2005, 90% and 93%, respectively, of the investments in fixed maturity securities and short-term investments were classified as available-for-sale. Total unrealized net losses in our fixed maturity securities at December 31, 2006 and 2005 were $10.2 million and $3.7 million, respectively. Stockholders' equity will fluctuate with changes in the fair values of available-for-sale securities. Stockholders' equity decreased by $4.0 million after deferred tax from December 31, 2005 to December 31, 2006 and by $14.8 million after deferred tax from December 31, 2004 to December 31, 2005 as a result of changes in the fair values of fixed maturity investments classified as available-for-sale.

The unrealized net (losses) gains on available-for-sale fixed maturity investments were as follows:


	Available-for-Sale
(Dollars in thousands)	Before Tax			After Tax

December 31,
2006	$	(9,562	)	$	(6,215	)
2005		(3,423	)		(2,225	)
2004		19,322			12,559

The fair values of investment securities are generally obtained from market sources. However, the fair values of non-traded fixed maturity securities of $20.6 million and $41.0 million at December 31, 2006 and December 31, 2005, respectively, were estimated

using a quantitative analytical technique to arrive at an estimate of fair value. This technique compares the security to traded securities with similar maturity and credit rating characteristics. The underlying assumption in this methodology is that fair values of non-traded securities can be reasonably estimated because if they were traded, our non-traded securities would probably have market yields similar to traded securities with similar credit and maturity characteristics. The fair value of a non-traded common stock investment at December 31, 2006 and 2005 was estimated based on the net asset value of the company which is comprised principally of real estate holdings. Translated into United States dollars, the estimated fair value was $37.3 million and $23.7 million at December 31, 2006 and December 31, 2005, respectively.

We diversify our corporate debt investments across a number of industries. The largest concentration of corporate debt investments is in insurance companies (fair values of approximately $183.9 million and $120.2 million at December 31, 2006 and 2005, respectively). Investments in corporate debt expose us to the risk of loss of principal in the event of default by the issuer. Also, market prices of both corporate debt and equity investments can fall significantly below the prices at which we acquired the investment. We monitor our portfolio continuously and actively manage our investments to preserve principal values whenever possible. When, in the opinion of management, a decline in the fair value of an investment below its cost or amortized cost is considered to be other-than-temporary, such investment is written-down to its fair value. The amount written-down is recorded in earnings as a realized loss on investments. The determination of other-than-temporary includes, in addition to other relevant factors, a presumption that if the fair value is below cost by a significant amount for a period of time, a write-down is necessary. Investment write-downs reduced realized gains on investments as follows:


	Year Ended December 31,
(Dollars in thousands)	2006	2005		2004

Write-downs	none	$	9,547	$	68

The write-down in 2005 was attributable to our investment in Advent Capital.

Our internal investments department manages our investment portfolio and we do not rely on external portfolio managers. We continuously assess the prospects for individual securities as part of ongoing portfolio management, including the identification of other-than-temporary declines in fair values. This process includes reviewing the amount and length of time of unrealized losses on investments, historical and projected company financial performance, company-specific news and other developments, the outlook for industry sectors, credit ratings and macro-economic changes, including government policy initiatives. We believe that we have appropriately identified other-than-temporary declines in fair value in the three years ended December 31, 2006, and that our remaining unrealized losses at December 31, 2006 are not other-than-temporary. We base this conclusion on our current understanding of the issuers of these securities, as described above, and because we have also established a presumption that an unrealized loss of a significant amount for a specific period of time is other-than-temporary. We have consistently applied this presumption for fifteen years. We also have the ability and intent to hold securities with unrealized losses for a sufficient amount of time for them to recover their values or reach maturity.

Investments that we currently own could be subject to default by the issuer or could suffer future declines in value that become

other-than-temporary. Unrealized losses on fixed maturity securities at December 31, 2006 are principally attributable to increases in short-term interest rates in 2006 and 2005.

Set forth below is information about unrealized gains and losses in our investment portfolio at December 31, 2006:


			Securities with Unrealized
(Dollars in thousands)			Losses			Gains

Fixed maturity securities:
	Fair value		$	991,879		$	495,210
	Amortized cost			1,010,102			487,193
	Unrealized (loss) gain			(18,223	)		8,017
	Fair value as a percentage of amortized cost			98.2%			101.7%
	Number of security positions held			187			112

	Concentration of unrealized (losses) gains by type or industry:
		Hotels	$	(2,715	)	$	191
		Municipal bonds		(1,827	)		354
		Food and beverage		(1,285	)		129
		Petroleum		(1,234	)		30
		Machinery		(1,169	)		103
		Financial institutions		(1,092	)		1,043
		Pharmaceuticals		(1,025	)		123
		Utilities		(940	)		206
		Insurance companies		(828	)		2,970
		Personal goods		(700	)		228
		GNMA		(691	)		881
		Other		(4,717	)		1,759

		Total	$	(18,223	)	$	8,017

Fixed maturity securities:
	Investment grade:
		Fair value	$	914,960		$	411,855
		Amortized cost		928,540			406,550
		Fair value as a percentage of amortized cost		98.5%			101.3%
	Non-investment grade:
		Fair value	$	76,919		$	83,355
		Amortized cost		81,562			80,643
		Fair value as a percentage of amortized cost		94.3%			103.4%

Equity securities:
	Fair value		$	3,463		$	94,855
	Cost			3,477			65,537
	Unrealized (loss) gain			(14	)		29,318
	Fair value as a percentage of cost			99.6%			144.7%
	Number of security positions held			3			22

The table below sets forth the fair value of fixed maturity securities at December 31, 2006 based on their scheduled maturities:


	Securities with Unrealized
(Dollars in thousands)	Losses		Gains

1 year or less	$	101,853	$	14,051
After 1 year through 5 years		303,526		220,093
After 5 years through 10 years		573,967		235,401
After 10 years		12,533		25,665

Total	$	991,879	$	495,210

The tables below set forth information about fixed maturity securities with unrealized losses at December 31, 2006:


(Dollars in thousands)		Fair Value		Unrealized Losses			Fair Value as a % of Cost Basis

Fixed maturity securities with unrealized losses:
Individually exceeding $0.5 million and for:
	6-12 months (1 issue)	$	8,888	$	(1,218	)	87.9	%
	Greater than 12 months (3 issues)		43,363		(2,584	)	94.4	%
Less than $0.5 million (183 issues)			939,628		(14,421	)	98.5	%

Total		$	991,879	$	(18,223	)	98.2	%

The aging of unrealized losses on equity securities at December 31, 2006 is not presented because such unrealized losses are not material to our consolidated financial condition, results of operations or cash flows. At December 31, 2006, there were no investments in fixed maturity or equity securities with individually material unrealized losses.

The following is a summary of securities sold at a loss:


		Year Ended December 31,
(Dollars in thousands)		2006			2005			2004

Fixed maturity securities:
Realized losses on sales		$	(3,163	)	$	(10,248	)	$	(2,648	)
Fair value at the date of sale			1,721,649			2,236,432			309,254
Number of securities sold			23			48			18
Losses realized on securities with an unrealized loss preceding the sale for:
	Less than 3 months	$	(826	)	$	(2,388	)	$	(1,748	)
	3-6 months					(2,839	)		(213	)
	6-12 months		(1,103	)		(4,324	)		(686	)
	Greater than 12 months		(1,234	)		(697	)		(1	)

Equity securities:
Realized losses on sales		$	(560	)	$	(2,031	)	$	(2,099	)
Fair value at the date of sale			5,768			17,271			20,334
Number of securities sold			3			17			23
Losses realized on securities with an unrealized loss preceding the sale for:
	Less than 3 months	$	(407	)	$	(699	)	$	(1,891	)
	3-6 months					(602	)		(208	)
	6-12 months		(153	)		(730	)

Sales of investments at a loss result from ongoing portfolio management, for example, in response to changes in interest rates, changes in our view of the prospects for an issuer or its industry and changes in our views about appropriate asset concentrations and allocation. At the time we sold these investments at a loss, we had the ability to hold them for the long-term and the sales were not related to any liquidity needs. At December 31, 2006, those securities which we are holding in our portfolio with an unrealized loss were compatible with our current view of appropriate asset allocation and issuer prospects. Any future changes in those assumptions could result in sales at a loss or write-downs of securities.

Under the criteria of Statement of Financial Accounting Standards No. 57, "Related Party Disclosures," our investments in the common stock of Wynn Resorts, Limited ("Wynn Common Stock") and in the Wynn Las Vegas LLC corporate bonds ("Wynn Bonds") meet the definition of investments in related parties. However, these investments were made in the ordinary course of business, in which we make investment and reinvestment decisions, and were purchased at prevailing market prices at the time of purchase. The table below sets forth the fair value of our investment in these related parties:


		December 31,
(Dollars in thousands)		2006		2005

	Wynn Common Stock	$	16,424	$	13,713
	Wynn Bonds		9,938		9,725

	Total	$	26,362	$	23,438

Two of Zenith's Directors are also Directors of Wynn Resorts, Limited.

We sold shares of Wynn Common Stock in 2006 and 2005 and recognized gains of $6.1 million and $25.5 million, respectively.

TERRORISM EXPOSURE AND THE TERRORISM RISK INSURANCE ACT OF 2002

We have purchased reinsurance for domestic acts of terrorism up to $150 million in excess of a $1 million retention and we retain 50% of any losses between $10 million and $20 million. The reinsurance for foreign acts of terrorism is up to $75 million in excess of a $1 million retention and we retain 50% of any losses between $10 million and $20 million. Both of these coverages exclude losses from nuclear, biological and chemical attacks for losses in

excess of $20 million and we retain 15% of any such losses between $10 million and $20 million.

LIQUIDITY AND CAPITAL RESOURCES

The primary concerns in managing our liquidity are (a) the need to ensure that there is adequate cash available in the insurance subsidiaries to pay claims, and (b) the need to ensure the holding company, Zenith National, which has no operating revenues, has adequate cash to service our debt obligations and pay any dividends declared to our stockholders. The management of capital resources is primarily concerned with ensuring that there is adequate capital to operate our insurance business within the criteria imposed by regulatory requirements and within the criteria used by rating agencies to assign financial strength ratings.

Liquidity. Our insurance subsidiaries generally create liquidity because insurance premiums are collected prior to disbursements for claims which may take place many years after the collection of premiums. Collected premiums may be invested, prior to their use in such disbursements, and investment income provides additional cash receipts. In periods in which disbursements for claims and benefits, current policy acquisition costs and current operating and other expenses exceed operating cash receipts, cash flow is negative. Such negative cash flow is offset by cash flow from investments, principally from short-term investments and maturities of longer-term investments. The exact timing of the payment of claims and benefits cannot be predicted with certainty. The insurance subsidiaries maintain portfolios of invested assets with varying maturities and a substantial amount of short-term investments to provide adequate cash

for the payment of claims. At December 31, 2006, short-term investments and fixed maturity investments maturing within two years in the insurance subsidiaries amounted to $0.9 billion. These securities, in conjunction with our positive cash flow from operations, provide adequate sources of liquidity for the expected payment of our loss reserves in the near future. We do not expect to sell securities or use our credit facility to pay our policy liabilities as they come due.

Net cash flow provided by operating activities was positive for the year ended December 31, 2006 but lower than net cash flow provided by operating activities for the year ended December 31, 2005 and 2004 due to lower workers' compensation premiums and our exit from the reinsurance business as shown in the table below:


	December 31,
(Dollars in thousands)	2006			2005			2004

Net cash flow from workers' compensation business	$	228,882		$	419,634		$	375,756
Net cash used in reinsurance business		(73,536	)		(35,219	)		(5,064	)
Investment income received		73,818			72,066			62,337
Interest and other expenses paid by parent		(6,170	)		(19,329	)		(18,010	)
Income taxes paid		(124,004	)		(92,292	)		(69,128	)

Net cash provided by operating activities	$	98,990		$	344,860		$	345,891

We expect positive cash flow from operations in 2007.

Our insurance subsidiaries are required to have securities on deposit for the protection of policyholders in accordance with various states' regulations. At December 31, 2006 and 2005, investments with a fair value of $1.3 billion and $0.9 billion, respectively, were on deposit to comply with such regulations.

Zenith National requires cash to pay any dividends declared to our stockholders, make interest and principal payments on our outstanding debt obligations, fund our operating expenses, and, from time to time, to make capital contributions to Zenith Insurance. Such cash requirements are generally funded in the long-run by dividends received from Zenith Insurance and financing or refinancing activities by Zenith National. Cash, short-term investments and other marketable investments in Zenith National were $69.4 million and $65.1 million at December 31, 2006 and 2005, respectively. Zenith National's available invested assets and other sources of liquidity are currently expected to be sufficient to meet its requirements for liquidity in the short-term and long-term.

Our insurance subsidiaries are subject to insurance regulations which restrict their ability to distribute dividends. These restrictions are set forth in Note 13 to the Consolidated Financial Statements. In 2007, Zenith Insurance expects to be able to pay up to $225.9 million of dividends to Zenith National without the prior approval of the California Department of Insurance. Zenith Insurance paid dividends to Zenith National of $50.0 million, $30.0 million and $20.0 million in 2006, 2005 and 2004, respectively. The restrictions on the payment of dividends have not had, and under current regulations are not expected to have, a material adverse impact on the ability of Zenith Insurance to pay dividends.

In 2003, we issued $125.0 million aggregate principal amount of the Convertible Notes in a private placement, from which Zenith National received net proceeds of $120.0 million (see Note 9 to the Consolidated Financial Statements for a full description of the Convertible Notes). Our Convertible Notes are convertible at each holder's option into shares of our common stock under certain circumstances including if the price of our common stock reaches specified thresholds. In 2005, holders of the Convertible Notes converted $123.8 million aggregate principal amount into shares of our common stock. Each holder of the remaining $1.2 million of Convertible Notes has the right to convert the Convertible Notes into our common stock at a

conversion rate of 59.988 shares per $1,000 principal amount of Convertible Notes during the period beginning on January 1, 2007 and ending on March 31, 2007. Whether the Convertible Notes will be convertible after March 31, 2007 will depend upon the occurrence of the events specified in the Indenture governing the Convertible Notes, including the sale price of our common stock. At December 31, 2006, the maximum number of shares that could be required to be issued upon conversion of the remaining Convertible Notes is approximately 69,000.

In 2006 and 2004, we paid $0.5 million to repurchase $0.5 million of aggregate principal amount and paid $7.6 million to repurchase $8.0 million of aggregate principal amount, respectively, of the outstanding 8.55% Capital Securities of Zenith National Insurance Capital Trust I, all voting securities of which are owned by Zenith National ("Redeemable Securities"). We used our available cash balances to fund these purchases.

At December 31, 2006, we had a $30.0 million revolving credit agreement with a bank which on February 16, 2007, was renewed with an expiration date of February 16, 2010. Interest is payable on outstanding loans at either the bank's prime rate or a rate based on Eurodollar deposit rates plus a specified margin depending on our credit rating. This credit agreement contains covenants that require, among other things, we maintain certain financial ratios, including a minimum amount of capital in our insurance subsidiaries, a maximum debt-to-total capitalization ratio and a minimum interest coverage ratio. We were in compliance with all of these covenants at December 31, 2006. There was no amount drawn under the line of credit in 2006 or 2005 nor do we currently anticipate the need to draw on the line of credit for the foreseeable future.

Capital Resources. In our insurance subsidiaries, cash and liquid investments are required to pay claims and expenses, but the amount of capital in our insurance subsidiaries influences how much premium we can write. The principal sources of capital for the insurance subsidiaries are the earnings generated by the workers' compensation and investments segments and contributions of capital by Zenith National. The amount of capital in our insurance subsidiaries is maintained relative to standardized capital adequacy measures such as risk-based capital where ratios such as net premiums written to statutory surplus measure capital adequacy. Risk-based capital is used by regulators for financial surveillance purposes and by rating agencies to assign financial strength ratings to our insurance subsidiaries and ratings for the debt issued by Zenith National. Insurance regulations require insurance companies to maintain capital at a minimum of 200% of regulatory risk-based capital. At December 31, 2006, our statutory capital of $559.5 million was 577% of such minimum. Statutory capital at December 31, 2006 has been reduced by $360.3 million for the excess statutory reserves required solely because we are domiciled in California (see Note 13 to the Consolidated Financial Statements). Excluding this excess statutory reserve, our statutory capital at December 31, 2006 would be $919.8 million, which is 948% of regulatory risk-based capital and on a comparable basis to other insurers who are subject to industry rules promulgated by the National Association of Insurance Commissioners.

In 2006, A.M. Best Company ("A.M. Best") affirmed the financial strength rating of our insurance subsidiaries at A- (Excellent), Standard & Poor's Rating Services ("S&P") raised the rating to A- (strong), Moody's Investors Service ("Moody's") raised the rating to A3 (Good) and Fitch Ratings ("Fitch") raised the financial strength rating to A (Strong). Our competitive position is partly determined by

these financial strength ratings and therefore we could be affected by a reduction in these ratings. We currently believe that the most influential of these ratings is the rating assigned by A.M. Best. In the A.M. Best rating scheme, ratings of B+ to A++ are considered "Secure" and ratings of B and below are considered "Vulnerable." However, we believe that a reduction in our A.M. Best rating below A- could cause a reduction in the number of policies we write in our workers' compensation segment. In addition to the assigned rating, these rating agencies also provide an accompanying rating outlook for the company. The rating outlook is currently "stable" for the A.M. Best, S&P, Moody's and Fitch ratings.

From time to time, we may make repurchases of our outstanding common stock shares or outstanding debt. At December 31, 2006, we were authorized to repurchase up to 929,000 shares of our common stock at prevailing market prices pursuant to a share repurchase program authorized by our Board of Directors. Any purchases are discretionary and can be adequately funded from our existing sources of liquidity. We have not repurchased any material amounts of our common stock under this repurchase program since 2001 and do not expect to repurchase common stock shares during 2007.

INFLATION

Inflation rates may impact the financial statements and operating results in several areas. Changes in rates of inflation influence interest rates, which in turn impact the market value of the investment portfolio and yields on new investments. Inflation also impacts the portion of losses and loss reserves that relates to hospital and medical expenses and property claims and loss adjustment expenses but not the portion of losses and loss reserves that relates to workers' compensation indemnity payments for lost wages, which are fixed by statute. Adjustments for inflationary impacts are included as part of the continual review of loss reserve estimates. Actuarial account of increases or decreases in costs is considered in setting adequate workers' compensation premium rates, and this is particularly important in the health care area where hospital and medical inflation rates have historically exceeded general inflation rates. Operating expenses, including payrolls, are impacted to a certain degree by the inflation rate.

CONTRACTUAL OBLIGATIONS AND CONTINGENT LIABILITIES

All of our outstanding financing obligations are included in the Consolidated Financial Statements and the accompanying Notes. There are no liquidity or financing arrangements with unconsolidated entities or any off-balance sheet arrangements. Our available invested assets and other sources of liquidity are currently expected to be sufficient to meet our requirements for liquidity in the short-term and long-term.

The table below sets forth the amounts of our contractual obligations, including interest payable, at December 31, 2006:


	Payments Due by Period
(Dollars in thousands)	Less than 1 year		1-3 years		3-5 years		More than 5 years		Total

Loss reserves	$	317,461	$	332,084	$	164,527	$	708,208	$	1,522,280
Policyholders' dividends accrued		47,759		9,313						57,072
Redeemable securities		5,002		10,004		10,004		143,529		168,539
Convertible notes		1,216								1,216
Operating lease commitments		8,724		10,610		3,227				22,561

Total	$	380,162	$	362,011	$	177,758	$	851,737	$	1,771,668

Our loss reserves do not have contractual maturity dates and the exact timing of the payment of claims cannot be predicted with certainty. However, based upon historical payment patterns, we have included an estimate of when we expect our loss reserves (without the benefit of any reinsurance recoveries) to be paid. We maintain a portfolio of investments with varying maturities and a substantial

amount of short-term investments to provide adequate cash for the payment of claims. We do not expect to have to sell securities or use our credit facilities to pay claims.

Our contractual obligations under the outstanding Redeemable Securities are comprised of $110.0 million of interest payments over the next 22 years and $58.5 million of principal payable in 2028. Our contractual obligations under the outstanding Convertible Notes are comprised of $1.2 million of principal that may be due in 2007 because the holders of the Convertible Notes currently have the right to convert their notes into our common stock during the first quarter of 2007 as a result of the triggering of the contingent conversion condition relative to our stock price at the end of the fourth quarter of 2006. Whether the notes will be convertible after March 31, 2007 will depend upon the occurrence of events specified in the Indenture governing the Convertible Notes, including the sale price of our common stock. If the Convertible Notes are not converted or redeemed prior to the scheduled maturity in 2023, the total interest obligation over the remaining term would be approximately $1.1 million. See Note 9 to the Consolidated Financial Statements for more information concerning the Convertible Notes.

Our commitments and contingencies are disclosed in Note 11 to the Consolidated Financial Statements.

MARKET RISK OF FINANCIAL INSTRUMENTS

The fair value of the fixed maturity investment portfolio is exposed to interest rate risk — the risk of loss in fair value resulting from changes in prevailing market rates of interest for similar financial instruments. However, we have the ability to hold fixed maturity investments to maturity. We rely on the experience and judgment of senior management to monitor and mitigate the effects of market risk. We do not utilize financial instrument hedges or derivative financial instruments to manage risks, nor do we enter into any swap, forward or option contracts, but will attempt to mitigate our exposure through active portfolio management. The allocation among various types of securities is adjusted from time to time based on market conditions, credit conditions, tax policy, changes in interest rates and other factors. In addition, we place the majority of our investments in high-quality, liquid securities and limit the amount of credit exposure to any one issuer.

The table on page 50 provides information about our financial instruments for which fair values are subject to changes in interest rates. For fixed maturity investments, which includes held-to-maturity and available for-sale securities, the table presents fair values of investments held and weighted average interest rates on such investments by expected maturity dates. Such investments include corporate bonds, municipal bonds, U.S. Government bonds and mortgage-backed securities. For our debt obligations, the table presents cash flows by expected maturity dates (including interest).


			Expected Maturity Date
(Dollars in thousands)			2007			2008			2009			2010			2011			Thereafter			Total

December 31, 2006
Fixed Maturity Investments:
		Fixed rate	$	115,904		$	147,827		$	84,666		$	93,933		$	197,193		$	847,566		$	1,487,089
		Weighted average interest rate		5.4	%		5.2	%		5.2	%		5.3	%		6.0	%		5.6	%		5.6	%
Short-term investments			$	679,989																	$	679,989
Debt and interest obligations of Zenith:
	Convertible notes payable(1)			1,216																		1,216
	Redeemable securities			5,002			5,002			5,002			5,002			5,002			143,529			168,539


			Expected Maturity Date
			2006			2007			2008			2009			2010			Thereafter			Total

December 31, 2005
Fixed Maturity Investments:
		Fixed rate	$	59,111		$	190,319		$	70,724		$	74,823		$	62,436		$	724,490		$	1,181,903
		Weighted average interest rate		4.8	%		4.7	%		5.2	%		4.7	%		5.0	%		5.4	%		5.2	%
Short-term investments			$	904,093																	$	904,093
Debt and interest obligations of Zenith:
	Convertible notes payable(1)			1,216																		1,216
	Redeemable securities			5,045		$	5,045		$	5,045		$	5,045		$	5,045		$	149,799			175,024

(1) The Convertible notes payable are shown with an expected maturity date in 2007 at December 31, 2006 and in 2006 at December 31, 2005 because the note holders have the right to convert their notes into our common stock in the first quarter of 2007 and had the same right in the first quarter of 2006 (see Note 9 to the Consolidated Financial Statements).

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In September 2005, the American Institute of Certified Public Accountants ("AICPA") released Statement of Position 05-1, "Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection With Modifications or Exchanges of Insurance Contracts" ("SOP 05-1"). SOP 05-1 requires identification of transactions that result in a substantial change in an insurance contract. If it is determined that a substantial change to an insurance contract has occurred, the related unamortized deferred policy acquisition costs, unearned premiums and other related balances must be written off. The Company will adopt SOP 05-1 on January 1, 2007, and we expect that it will not have a material effect on our consolidated financial condition or results of operation.

In February 2006, the Financial Accounting Standards Board ("FASB") issued statement No. 155, "Accounting for Certain Hybrid Financial Instruments" ("SFAS No. 155"). Under current generally accepted accounting principles an entity that holds a financial instrument with an embedded derivative must bifurcate the financial instrument, resulting in the host and the embedded derivative being accounted for separately. SFAS No. 155 permits, but does not require, entities to account for financial instruments with an embedded derivative at fair value thus negating the need to bifurcate the instrument between its host and the embedded derivative. We will adopt SFAS No. 155 on January 1, 2007, and we expect that it will not have a material effect on our consolidated financial condition or results of operation.

In July 2006, the FASB issued FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109" ("FIN 48"), which provides criteria for the recognition, measurement, presentation and disclosure of uncertain tax positions. A tax benefit from an uncertain position may be recognized only if it is "more likely than not" that the position is sustainable based on its technical merits. We will adopt FIN 48 on January 1, 2007, and we expect that it will not have a material effect on our consolidated financial condition or results of operation.

In September 2006, the FASB issued Statement No. 157, "Fair Value Measurements" ("SFAS No. 157"), which provides a common definition of fair value and establishes a framework to make the measurement of fair value more consistent and comparable. SFAS No. 157 also requires expanded disclosures about (1) the extent to which companies measure assets and liabilities at fair value, (2) the methods and assumptions used to measure fair value and (3) the effect of fair value measures on earnings. We will adopt SFAS No. 157 on January 1, 2008 and we expect that it will not have a material effect on our consolidated financial condition or results of operations.

In September 2006, the FASB issued Statement No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106 and 132(R)" ("SFAS No. 158"). The requirements of SFAS No. 158 are effective for fiscal years ending after June 15, 2007. Since the Company does not sponsor any defined benefit pension or other postretirement plans, SFAS No. 158 will not have any effect on our consolidated financial condition or results of operations.

In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108, "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements" ("SAB 108"). SAB 108 provides interpretive guidance on how the effects of prior-year uncorrected misstatements should be considered when quantifying misstatements in the current year financial statements. SAB 108 requires registrants to quantify misstatements using both an income statement and balance sheet approach and evaluate whether either approach results in a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. The adoption of SAB 108 as of December 31, 2006 did not have a material effect on our consolidated financial condition or results of operation.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America ("GAAP") requires both the use of estimates and judgment relative to the application of appropriate accounting policies. Our accounting policies are described in the Notes to Consolidated Financial Statements, but we believe that the following matters are particularly important to an understanding of our financial statements because changes in these estimates or changes in the assumptions used to make them could have a material impact on the results of operations, financial condition and cash flows.

Loss Reserve Estimation. Loss reserve estimates are inherently uncertain because the ultimate amount we pay under many of the claims we have incurred as of the balance sheet date will not be known for many years. The impact of loss reserve developments on the results of operations in each of the three years ended December 31, 2006 is discussed in the preceding "Loss Reserves" section. Also included is a discussion of the key assumptions and inherent uncertainties underlying our loss reserve estimates and the sensitivity of our loss reserve estimates to our important assumptions.

Investment Write-Downs. When, in the opinion of management, a decline in the fair value of an investment below its cost or amortized cost is considered to be other-than-temporary, such investment is written-down to its fair value. The amount written-down is recorded in earnings as a realized loss on investments. The determination of other-than-temporary includes, in addition to other relevant factors, a presumption that if the

market value is below cost by a significant amount for a period of time, a write-down is necessary. Notwithstanding this presumption, the determination of other-than-temporary impairment requires judgment about future prospects for an investment and is therefore a matter of inherent uncertainty. We describe investment write-downs in more detail in the preceding "Investments" section.

Deferred Income Taxes. The temporary differences between the tax and book bases of assets and liabilities are recorded as deferred income taxes. At December 31, 2006 and 2005, Zenith recorded net deferred tax assets of $54.8 million and $67.7 million, respectively, including deferred tax assets of $43.7 million and $55.7 million, respectively, attributable to the fact that the Internal Revenue Code requires property and casualty insurance companies to discount the tax deduction for loss reserves. We do not discount loss reserves in our financial statements. We expect that the net deferred tax asset is fully recoverable because all future deductible amounts associated with temporary differences can be offset by taxes previously paid and by anticipated future taxable income, including investment income. If this assumption were to change, any amount of the net deferred tax asset which we could not expect to recover would be provided for as an allowance and would be reflected as an increase in income tax expense in the period in which it was established.

5-YEAR SUMMARY OF SELECTED FINANCIAL INFORMATION
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

5-YEAR SUMMARY OF SELECTED FINANCIAL INFORMATION

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES


Years Ended December 31,	Note	2006			2005

(Dollars and shares in thousands, except per share data)
Revenues:
Premiums earned	1	$	944,217		$	1,178,700
Net investment income			106,294			79,200
Realized gains (losses) on investments			13,377			22,224

Total revenues			1,063,888			1,280,124

Results of operations by segment:
Net investment income		$	106,294		$	79,200
Realized gains (losses) on investments			13,377			22,224

Income before tax from investments segment			119,671			101,424
Income (loss) before tax from:
Workers' compensation segment			313,576			213,244
Reinsurance segment	2		(20,508	)		(56,183	)
Parent segment	3,5		(11,927	)		(20,938	)

Income (loss) from continuing operations before tax and equity in earnings of investee			400,812			237,547
Income tax expense (benefit)			142,112			81,894

Income (loss) from continuing operations after tax and before equity in earnings of investee			258,700			155,653
Equity in earnings of investee after tax						794

Income from continuing operations after tax			258,700			156,447
Income from discontinued operations after tax	4					1,253

Net income		$	258,700		$	157,700

Per common share — diluted:
Income from continuing operations after tax	5	$	6.96		$	4.29
Net income	5		6.96			4.32

Cash dividends declared per common share			1.26			0.94

Weighted average common shares outstanding — diluted	5		37,174			37,052

Financial condition:
Total assets		$	2,767,553		$	2,717,456
Investments			2,273,656			2,167,000
Unpaid losses and loss adjustment expenses			1,522,280			1,703,445
Convertible senior notes payable	5		1,129			1,124
Redeemable securities payable	6		58,342			58,833
Stockholders' equity			940,720			712,795
Stockholders' equity per share			25.41			19.14
Return on average equity			31.8%			26.3%

Insurance statistics (GAAP):
Combined ratio:
Workers' compensation segment			66.3	%		80.9	%
Reinsurance segment	2		264.4	%		187.1	%
Net premiums earned-to-surplus ratio			1.0			1.6
Loss and loss adjustment expense reserves-to-surplus ratio (net of reinsurance)			1.4			2.0

(1)		Net premiums earned in 2004, 2003 and 2002 are net of $98.7 million, $78.5 million and $36.8 million, respectively, of workers' compensation ceded premiums earned in connection with a 10% ceded quota share reinsurance agreement. This agreement was terminated effective December 31, 2004.
(2)		2006, 2005, 2004 and 2002 include catastrophe losses before tax of $19.9 million, $69.2 million, $21.1 million and $0.4 million, respectively.
(3)		Includes interest expense before tax of $5.3 million, $8.8 million, $13.1 million, $12.4 million and $5.1 million in 2006, 2005, 2004, 2003 and 2002, respectively.
(4)		In 2002, we sold our home-building business and related real estate assets. Income from discontinued real estate operations in 2002 includes the gain on the sale of $6.3 million after tax. In 2005, 2004 and 2003, we received payments of $1.9 million before tax ($1.3 million after tax), $2.0 million before tax ($1.3 million after tax) and $1.8 million before tax ($1.2 million after tax), respectively, of additional sales proceeds under the earn-out provision of the sale. The last such payment under the earn-out provision was received in 2005.

Years Ended December 31,
Years Ended December 31,	2004			2003			2002

(Dollars and shares in thousands, except per share data)
Revenues:
Premiums earned	$	944,425		$	773,799		$	557,055
Net investment income		61,876			56,103			48,811
Realized gains (losses) on investments		38,579			19,433			(3,631	)

Total revenues		1,044,880			849,335			602,235

Results of operations by segment:
Net investment income	$	61,876		$	56,103		$	48,811
Realized gains (losses) on investments		38,579			19,433			(3,631	)

Income before tax from investments segment		100,455			75,536			45,180
Income (loss) before tax from:
Workers' compensation segment		104,098			29,260			(43,848	)
Reinsurance segment		(11,956	)		9,562			7,644
Parent segment		(19,051	)		(17,694	)		(10,237	)

Income (loss) from continuing operations before tax and equity in earnings of investee		173,546			96,664			(1,261	)
Income tax expense (benefit)		57,213			33,664			(914	)

Income (loss) from continuing operations after tax and before equity in earnings of investee		116,333			63,000			(347	)
Equity in earnings of investee after tax		1,381			2,846			1,363

Income from continuing operations after tax		117,714			65,846			1,016
Income from discontinued operations after tax		1,286			1,154			9,184

Net income	$	119,000		$	67,000		$	10,200

Per common share — diluted:
Income from continuing operations after tax	$	3.35		$	2.04		$	0.03
Net income		3.38			2.07			0.36

Cash dividends declared per common share		0.75			0.67			0.67

Weighted average common shares outstanding — diluted		36,696			34,256			28,343

Financial condition:
Total assets	$	2,414,655		$	2,023,704		$	1,615,113
Investments		1,900,014			1,530,494			1,098,284
Unpaid losses and loss adjustment expenses		1,482,319			1,220,749			1,041,532
Convertible senior notes payable		121,548			121,019
Redeemable securities payable		58,825			66,794			65,719
Stockholders' equity		502,147			383,246			317,024
Stockholders' equity per share		17.28			13.51			11.26
Return on average equity		27.2%			18.8%			3.3%

Insurance statistics (GAAP):
Combined ratio:
Workers' compensation segment		88.5	%		95.9	%		108.7	%
Reinsurance segment		128.2	%		84.3	%		85.6	%
Net premiums earned-to-surplus ratio		1.5			1.5			1.5
Loss and loss adjustment expense reserves-to-surplus ratio (net of reinsurance)		1.9			2.0			2.2

(5)		On March 21, 2003, Zenith issued $125.0 million aggregate principal amount of 5.75% Convertible Senior Notes due March 30, 2023 ("Convertible Notes") and received net proceeds of approximately $120.0 million. Diluted per share amounts for the years ended December 31, 2006, 2005, 2004 and 2003 reflect the impact of the additional shares issued or issuable in connection with the Convertible Notes. In 2005, $123.8 million of the Convertible Notes were converted into shares of our common stock. In connection with certain of these conversions we paid a cash incentive of $4.7 million in 2005 which is included in the parent segment.
(6)		In 2006 and 2004, we paid $0.5 million to repurchase $0.5 million of aggregate principal amount and paid $7.6 million to repurchase $8.0 million of aggregate principal amount, respectively, of the outstanding 8.55% Capital Securities of Zenith National Insurance Capital Trust I, all voting securities of which are owned by Zenith.

CONSOLIDATED BALANCE SHEETS
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

			December 31,

(Dollars and shares in thousands)			2006			2005

Assets:
Investments:
	Fixed maturity investments:
		At amortized cost (fair value $215,902 in 2006 and $137,237 in 2005)	$	216,546		$	137,535
		At fair value (amortized cost $1,280,749 in 2006 and $1,048,089 in 2005)		1,271,187			1,044,666
	Equity securities, at fair value (cost $69,014 in 2006 and $68,048 in 2005)			98,318			73,304
	Short-term investments (at cost or amortized cost, which approximates fair value)			679,989			904,093
	Other investments			7,616			7,402

Total investments				2,273,656			2,167,000
Cash				7,310			7,469
Accrued investment income				19,209			14,165
Premiums receivable				32,413			64,749
Receivable from reinsurers for paid and unpaid losses				235,802			259,076
Deferred policy acquisition costs				12,617			16,674
Deferred tax asset				54,753			67,674
Goodwill				20,985			20,985
Other assets				110,808			99,664

Total assets			$	2,767,553		$	2,717,456

Liabilities:
Policy liabilities:
	Unpaid losses and loss adjustment expenses		$	1,522,280		$	1,703,445
	Unearned premiums			82,992			123,473
Policyholders' dividends accrued (see Note 2)				57,072			30,576
Convertible senior notes payable				1,129			1,124
Redeemable securities				58,342			58,833
Current income tax payable				13,936			2,543
Other liabilities				91,082			84,667

Total liabilities				1,826,833			2,004,661

Commitments and contingencies (see Note 11)
Stockholders' equity:
Preferred stock, $1 par, 1,000 shares authorized; none issued or outstanding in 2006 and 2005
Common stock, $1 par, 100,000 shares authorized in 2006 and 50,000 in 2005; issued 44,722 in 2006 and 44,944 in 2005; outstanding 37,027 in 2006 and 37,249 in 2005				44,722			44,944
Additional paid-in capital				459,103			454,281
Retained earnings				590,715			379,031
Accumulated other comprehensive income				12,832			1,191

				1,107,372			879,447
Treasury stock, at cost (7,695 shares in 2006 and 2005)				(166,652	)		(166,652	)

Total stockholders' equity				940,720			712,795

Total liabilities and stockholders' equity			$	2,767,553		$	2,717,456

The accompanying notes are an integral part of these financial statements.

CONSOLIDATED STATEMENTS OF OPERATIONS
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

	Year Ended December 31,

(Dollars in thousands, except per share data)	2006		2005		2004

Revenues:
Premiums earned	$	944,217	$	1,178,700	$	944,425
Net investment income		106,294		79,200		61,876
Realized gains on investments		13,377		22,224		38,579

Total revenues		1,063,888		1,280,124		1,044,880

Expenses:
Loss and loss adjustment expenses incurred		322,784		703,870		628,763
Policy acquisition costs		147,153		171,135		117,265
Underwriting and other operating expenses		136,464		125,095		106,513
Policyholders' dividends (see Note 2)		51,400		29,010		5,742
Interest expense		5,275		8,757		13,051
Payment regarding conversion of convertible senior notes (see Note 9)				4,710

Total expenses		663,076		1,042,577		871,334

Income from continuing operations before tax and equity in earnings of investee		400,812		237,547		173,546
Income tax expense		142,112		81,894		57,213

Income from continuing operations after tax and before equity in earnings of investee		258,700		155,653		116,333
Equity in earnings of investee, net of income tax expense of $428 in 2005 and $743 in 2004 (see Note 4)				794		1,381

Income from continuing operations after tax		258,700		156,447		117,714

Gain on sale of discontinued real estate segment, net of income tax expense of $675 in 2005 and $692 in 2004 (see Note 20)				1,253		1,286

Net income	$	258,700	$	157,700	$	119,000

Net income per common share (see Note 14):
Basic:
Continuing operations	$	7.00	$	4.66	$	4.10
Discontinued operations				0.04		0.04

Net income	$	7.00	$	4.70	$	4.14

Diluted:
Continuing operations	$	6.96	$	4.29	$	3.35
Discontinued operations				0.03		0.03

Net income	$	6.96	$	4.32	$	3.38

The accompanying notes are an integral part of these financial statements.

CONSOLIDATED STATEMENTS OF CASH FLOWS
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

			Year Ended December 31,

(Dollars in thousands)			2006			2005			2004

Cash flows from operating activities:
	Premiums collected		$	973,416		$	1,200,424		$	1,130,188
	Investment income received			73,818			72,066			62,337
	Loss and loss adjustment expenses paid			(478,607	)		(455,420	)		(402,432	)
	Underwriting and other operating expenses paid			(340,399	)		(365,107	)		(362,140	)
	Interest paid			(5,234	)		(10,101	)		(12,934	)
	Income taxes paid			(124,004	)		(92,292	)		(69,128	)
	Cash paid regarding conversion of convertible senior notes (see Note 9)						(4,710	)

Net cash provided by operating activities				98,990			344,860			345,891

Cash flows from investing activities:
	Purchases of investments:
		Fixed maturity securities held-to-maturity		(99,760	)		(31,179	)		(45,030	)
		Fixed maturity securities available-for-sale		(786,166	)		(1,664,184	)		(965,956	)
		Equity securities available-for-sale		(51,364	)		(71,966	)		(69,197	)
		Other investments		(2,823	)		(862	)		(10,865	)
	Proceeds from maturities and redemptions of investments:
		Fixed maturity securities held-to-maturity		20,365			31,571			29,357
		Fixed maturity securities available-for-sale		69,289			53,458			47,665
		Other investments		5,343			24,893			50,897
	Proceeds from sales of investments:
		Fixed maturity securities available-for-sale		469,474			1,644,659			760,370
		Equity securities available-for-sale		59,955			114,308			94,571
	Net decrease (increase) in short-term investments			265,764			(401,419	)		(205,064	)
	Net proceeds from sale of discontinued real estate segment						1,928			1,978
	Capital expenditures and other, net			(5,985	)		(12,858	)		(9,747	)

Net cash used in investing activities				(55,908	)		(311,651	)		(321,021	)

Cash flows from financing activities:
	Cash dividends paid to common stockholders			(43,241	)		(29,472	)		(20,849	)
	Proceeds from exercise of stock options			227			4,296			5,895
	Purchase of treasury stock						(10,886	)
	Repurchase of redeemable securities			(500	)					(7,600	)
	Excess tax benefit on stock-based compensation			273

Net cash used in financing activities				(43,241	)		(36,062	)		(22,554	)

Net (decrease) increase in cash				(159	)		(2,853	)		2,316
Cash at beginning of year				7,469			10,322			8,006

Cash at end of year			$	7,310		$	7,469		$	10,322

The accompanying notes are an integral part of these financial statements.

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

			Year Ended December 31,

(Dollars in thousands)			2006			2005			2004

Reconciliation of net income to net cash provided by operating activities:
Net income			$	258,700		$	157,700		$	119,000
Adjustments to reconcile net income to net cash provided by operating activities:
	Gain on sale of discontinued real estate segment						(1,253	)		(1,286	)
	Depreciation expense			10,152			8,887			7,834
	Net (accretion) amortization			(28,762	)		(8,028	)		3,251
	Realized gains on investments			(13,377	)		(22,224	)		(38,579	)
	Equity in earnings of investee						(794	)		(1,381	)
	(Increase) decrease in:
		Accrued investment income		(3,748	)		1,147			(2,193	)
		Premiums receivable		31,205			(6,110	)		10,534
		Receivable from reinsurers for paid and unpaid losses		23,329			29,977			(25,445	)
		Deferred policy acquisition costs		4,057			1,990			(6,742	)
	Increase (decrease) in:
		Unpaid losses and loss adjustment expenses		(181,165	)		221,126			261,570
		Unearned premiums		(40,481	)		(18,746	)		30,969
		Policyholders' dividends accrued		26,496			24,575			2,968
		Net income taxes payable		18,108			(10,398	)		(11,915	)
		Accrued expenses		4,397			(5,175	)		(5,476	)
		Other		(9,921	)		(27,814	)		2,782

Net cash provided by operating activities			$	98,990		$	344,860		$	345,891

The accompanying notes are an integral part of these financial statements.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES


				Year Ended December 31,
(Dollars in thousands, except per share data)				2006			2005			2004

Preferred stock, $1 par:
	Beginning of year				none			none			none

		End of year			none			none			none

Common stock, $1 par:
	Beginning of year			$	44,944		$	26,510		$	25,928
	Exercise of stock options				11			985			462
	Conversion of convertible senior notes (see Note 9)							5,806
	3-for-2 stock split (see Note 1)							11,520
	Restricted stock awards granted							127			122
	Restricted stock awards not yet vested				(320	)
	Restricted stock vested				87
	Restricted stock awards forfeited							(4	)		(2	)

		End of year		$	44,722		$	44,944		$	26,510

Additional paid-in capital:
	Beginning of year			$	454,281		$	314,262		$	300,448
	Exercise of stock options				216			22,186			10,182
	Excess tax benefit on stock-based compensation				337			10,248			2,778
	Recognition of stock-based compensation expense				4,269			2,714			849
	Conversion of convertible senior notes (see Note 9)							116,391			5
	3-for-2 stock split (see Note 1)							(11,520	)

		End of year		$	459,103		$	454,281		$	314,262

Retained earnings:
	Beginning of year			$	379,031		$	254,682		$	157,191
	Net income				258,700			157,700			119,000
	Cash dividends declared to common stockholders				(47,016	)		(33,351	)		(21,509	)

		End of year		$	590,715		$	379,031		$	254,682

Accumulated other comprehensive income:
	Beginning of year			$	1,191		$	43,583		$	31,821
	Net change in unrealized appreciation on investments, net of deferred tax and reclassification adjustment				11,641			(39,383	)		11,833
	Change in foreign currency translation adjustment, net of deferred tax							(3,009	)		(71	)

		End of year		$	12,832		$	1,191		$	43,583

Treasury stock, at cost:
	Beginning of year			$	(166,652	)	$	(136,890	)	$	(132,142	)
	Acquisition of treasury stock							(29,762	)		(4,748	)

		End of year		$	(166,652	)	$	(166,652	)	$	(136,890	)

			Total stockholders' equity	$	940,720		$	712,795		$	502,147

Cash dividends declared per common share				$	1.26		$	0.94		$	0.75

Stockholders' equity per outstanding common share				$	25.41		$	19.14		$	17.28

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES


		Year Ended December 31,
(Dollars in thousands)		2006		2005			2004

Net income		$	258,700	$	157,700		$	119,000
Other comprehensive (loss) income, net of tax:
	Net change in unrealized appreciation (depreciation) on investments		11,641		(39,383	)		11,833
	Net change in foreign currency translation adjustment				(3,009	)		(71	)

	Comprehensive income	$	270,341	$	115,308		$	130,762

The accompanying notes are an integral part of these financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

NOTE 1

BASIS OF PRESENTATION AND
SUMMARY OF OPERATIONS

Basis of presentation. The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") and include Zenith National Insurance Corp. ("Zenith National") and its subsidiaries (collectively, "Zenith"). All intercompany transactions and balances have been eliminated in consolidation.

Organization and operations. Zenith National is engaged through its wholly-owned subsidiaries (primarily Zenith Insurance Company ("Zenith Insurance")) in the workers' compensation insurance business, nationally, and the assumed reinsurance business. In September 2005, we exited the assumed reinsurance business and ceased writing and renewing assumed reinsurance contracts. We received earned premiums and were subject to continuing exposure to losses until our in-force assumed reinsurance contracts expired during 2006. We will be paying our assumed reinsurance claims for several years and the results of the reinsurance segment, principally consisting of any changes to loss reserve estimates and resulting adjustments to contractual premium, will continue to be included in the results of continuing operations. In addition to the workers' compensation insurance and assumed reinsurance segments, our other business segments include investments and parent (see Note 16). Our home-building business and related real estate assets were sold in 2002. The results of the discontinued real estate segment are presented as discontinued operations (see Note 20). Results of operations of our investment in Advent Capital (Holdings) PLC ("Advent Capital") are presented as equity in earnings of investee through the second quarter of 2005 (see Note 4).

Use of Estimates. GAAP requires the use of assumptions and estimates in reporting certain assets and liabilities and related disclosures. Actual results could differ from those estimates.

3-for-2 Stock Split. On September 7, 2005, Zenith National's Board of Directors declared a 3-for-2 stock split which was paid in the form of a 50% stock dividend. The additional shares of Zenith National's common stock were distributed on October 11, 2005 to shareholders of record as of September 19, 2005. The 3-for-2 stock split was recorded in the third quarter of 2005 as an increase to common stock and a decrease to additional paid-in capital. Dividends, earnings per share amounts and common stock shares and prices in the current and prior periods reflect the 3-for-2 stock split.

NOTE 2

SUMMARY OF ACCOUNTING POLICIES

INVESTMENTS

Our investments in debt and equity securities are classified into the following three categories: (1) held-to-maturity—those securities which by their terms must be redeemed by the issuing company and that we have the positive intent and ability to hold to maturity are reported at amortized cost; (2) trading—those securities that are held principally for the purpose of selling in the near term are reported at fair value with unrealized gains and losses included in earnings; and (3) available-for-sale—those securities not classified as either held-to-maturity or trading are reported at fair value with unrealized gains and losses excluded from earnings and reported in a separate component of stockholders' equity, net of deferred tax. There were no investments classified as trading at December 31, 2006 or 2005. The majority of held-to-maturity investments are mortgage-backed securities

issued by the Government National Mortgage Association ("GNMA") and we receive periodic returns of principal on these securities in addition to interest income.

Short-term investments include debt securities such as corporate, municipal and U.S. Treasury securities with maturities of less than one year at the date of purchase. For these short-term investments, the cost or amortized cost is a reasonable estimate of fair value.

Other investments are comprised of investments in limited partnerships. If our share of a partnership's capital is greater than 5%, we account for the investment on the equity method, and the carrying value of our investment is adjusted to reflect our share of the underlying equity of the partnership. If our share of the partnership capital is no more than 5%, we account for the investment at cost, which is also a reasonable estimate of fair value.

The investment in Advent Capital was accounted for under the equity method through the second quarter of 2005 (see Note 4).

When, in the opinion of management, a decline in the fair value of an investment below its cost or amortized cost is considered to be "other-than-temporary," such investment is written-down to its fair value and the amount written-down is recorded in earnings as a realized loss on investments. The determination of other-than-temporary includes, in addition to other relevant factors, a presumption that if the market value is below cost by a significant amount for a period of time, a write-down is necessary. The amount of any write-downs are determined by the difference between cost or amortized cost of the investment and its fair value at the time the other-than-temporary decline was identified. There were no such write-downs in 2006. During the years ended December 31, 2005 and 2004, there were $9.5 million and $0.1 million, respectively, of such write-downs.

Investment income is recorded when earned. Realized capital gains and losses are calculated based on the cost of securities sold which is determined by the "identified cost" method.

CASH

Cash includes currency on hand and demand deposits with financial institutions.

RECOGNITION OF PROPERTY-CASUALTY REVENUE AND EXPENSE

Revenue Recognition. The consideration paid for an insurance policy or reinsurance contract is generally known as a "premium." Premiums billed to and paid by our policyholders and reinsured companies are the revenues attributable to our workers' compensation and reinsurance segments. Premiums are billed and collected according to policy terms, predominantly in the form of installments during the policy period. Premiums are earned pro-rata over the terms of the policies. Billed premiums applicable to the unexpired terms of policies in-force are recorded in the accompanying consolidated balance sheets as a liability for unearned premiums.

Workers' Compensation Premiums. Workers' compensation premiums are determined based upon the payroll of the insured, the applicable premium rates and, where applicable, an experience-based modification factor. An audit of the policyholders' records is conducted after policy expiration to make a final determination of applicable premiums. Included with premiums earned is an estimate for earned but unbilled final audit premiums. We can estimate earned but unbilled premiums because we keep track, by policy, of how much additional premium is billed in final audit invoices as a percentage of the original estimated amount that was billed. We use the historical percentage to estimate the probable additional amount that we have

earned but not yet billed as of the balance sheet date. Estimated earned but not billed premiums included in premiums receivable were $9.1 million and $11.0 million at December 31, 2006 and 2005, respectively.

Any amounts receivable for billed premiums are charged-off if they are submitted to our in-house legal collections department. An estimate of amounts that are likely to be charged-off is established as an allowance for doubtful accounts as of the balance sheet date. The estimate is comprised of any specific accounts that are past due and are considered probable to be charged-off and a provision against remaining accounts receivable based on historical charge-off data. Premium receivables are reported net of an allowance for estimated uncollectible premium amounts which were $0 and $77,000 at December 31, 2006 and 2005, respectively.

We have written a relatively small number of workers' compensation policies that are retrospectively-rated. Under this type of policy, subsequent to policy expiration, the policyholder may be entitled to a refund or may owe additional premium based on the amount of losses sustained under the policy. These retrospective premium adjustments are limited in the amount by which they increase or decrease the standard amount of premium applicable to the policy. We can estimate these retrospective premium adjustments because we know the underlying loss experience of the policies involved. The estimated liability for return of premiums under retrospectively-rated workers' compensation policies included in unearned premiums was $8.6 million and $8.9 million at December 31, 2006 and 2005, respectively.

Assumed Reinsurance Premiums. Reinsurance contracts covering catastrophe losses are customarily written to provide reinsurance for losses associated with one catastrophic event with a provision to reinstate the contract for the unexpired term of the original contract. An additional premium, called a reinstatement premium, is due in consideration of the reinstatement. If a catastrophe loss is reported and we accrue an estimate for loss, any unearned premium associated with the contract at that time becomes fully earned. The reinstatement premium is then earned over the remaining term of the contract. Additional premiums earned attributable to reinstatement premiums for catastrophe reinsurance contracts were $0, $20.7 million and $3.5 million in 2006, 2005 and 2004, respectively.

Loss and Loss Adjustment Expenses Incurred. Loss and loss adjustment expenses incurred in the accompanying consolidated statements of operations include provisions for the amount we expect to ultimately pay for all reported and unreported claims for the applicable periods. Loss adjustment expenses are the expenses applicable to the process of administering, settling and investigating claims, including legal expenses.

Estimates of losses from environmental and asbestos-related claims are included in overall loss reserves and to date have not been material.

Unpaid Losses and Loss Adjustment Expenses. The liabilities for unpaid losses and loss adjustment expenses in the accompanying consolidated balance sheets ("loss reserves") are estimates of the unpaid amounts that we expect to pay for the ultimate cost of reported and unreported claims as of the balance sheet date. Loss reserves are estimates and are inherently uncertain; they do not and cannot represent an exact measure of ultimate liability. We perform a comprehensive review of our loss reserves at the end of every quarter and, in conjunction with actuarial techniques and methods, we employ judgment to establish the most reasonably accurate estimate of loss reserves based on the most recent, relevant data. Any resulting adjustments to loss reserves are reflected in our

Consolidated Statements of Operations in the period the changes are made.

When losses are reported to us, we establish, individually, estimates of the ultimate cost of the claims, known as "case reserves." These case reserves are continually monitored and revised in response to new information and for amounts paid. Our actuaries use this information about reported claims in some of their estimation techniques. In estimating our total loss reserves, we make provision for two types of loss development. At the end of any calendar period, there are a number of claims that have not yet been reported but will arise out of accidents that have already occurred. These are referred to in the insurance industry as incurred but not reported ("IBNR") claims. In addition to this provision for late reported claims, we also have to estimate the extent to which the case reserves on known claims may also develop. These types of reserves are referred to in the insurance industry as "bulk" reserves. Our loss reserves make provision for both IBNR and bulk reserves in total, but not separately.

The principal uncertainty in our workers' compensation loss reserve estimates at this time is caused by the trend of increasing severity (inflation) in the years prior to 2002 compared to the deflation trend in more recent years. Severity is the average cost of a claim as measured by the total cost of claims for a year divided by the number of claims in that year. The annual rate of claim cost inflation (deflation) is the year over year percentage change in claim severity. Inflation or deflation is attributable to factors which include changes in health care costs, legislative reforms to the workers' compensation system and the number of expensive claims relative to the total number of claims in a year. We have observed deflationary trends in the amounts we have paid for claims in recent accident years compared to increasing inflation for claim payments for 2001 and prior, but there is uncertainty as to whether the recent deflationary data will be sustained over the long term. We believe our loss reserve estimates are adequate. However, the actual ultimate inflation (or deflation) rate will not be known with any certainty for several years. We assume that general healthcare inflation trends will continue and will impact our long term claim costs and loss reserves. The extent to which this may be offset by benefits from the reform legislation and recently observed reduction in the number of California expensive claims is uncertain. We will evaluate our best estimate of inflation rates and reserves every quarter to reflect the most current data.

Catastrophes. Insurance and reinsurance coverages expose Zenith to the risk of significant loss in the event of major loss events, known in the insurance industry as catastrophes. Catastrophes may cause significant contemporaneous financial statement losses since catastrophe losses may not be accrued in advance of the event.

Estimates of the impact of the 2005 and 2004 hurricanes and other catastrophes are based on the information that is currently available. Such estimates could change based on any new information that becomes available or based upon reinterpretation of existing information.

Deferred Policy Acquisition Costs. Policy acquisition costs, consisting of commissions, premium taxes and certain other underwriting costs that vary with, and are primarily related to, the production of new or renewal business are deferred and amortized as the related premiums are earned.

A premium deficiency is recognized if the sum of expected claims costs, claims adjustment expenses, expected dividends to policyholders, unamortized acquisition costs and policy maintenance costs exceed the related unearned premiums. A premium deficiency would first be

recognized by charging any unamortized acquisition costs to expense to the extent required to eliminate the deficiency. If the premium deficiency were greater than unamortized acquisition costs, a liability would be accrued for the excess deficiency. We do not consider anticipated investment income when determining if a premium deficiency exists. Our estimates indicate that there was no premium deficiency at December 31, 2006 and 2005.

Policyholders' Dividends. Most of our workers' compensation policies are non-participating but we issue certain policies for which the policyholder may participate in favorable claims experience through a dividend. An estimated provision for workers' compensation policyholders' dividends is accrued as the related premiums are earned. Such dividends do not become a fixed liability unless and until declared by the respective Boards of Directors of our insurance subsidiaries. The dividend to which a policyholder may be entitled is set forth in the policy and is related to the amount of losses sustained under the policy. Dividends are calculated after policy expiration (usually at 6 months and at 18 months after such expiration). We are able to estimate any liability we may have because we know the underlying loss experience of the policies we have written with dividend provisions and can estimate future dividend payments from the policy terms.

In addition, Florida statutes require payment of additional policyholders' dividends to Florida policyholders pursuant to a formula based on underwriting results. As of December 31, 2006 and 2005, we accrued $34.1 million and $16.0 million, respectively, for Florida dividends payable for prior accident years. The 2005 amount was paid in 2006.

State Guarantee Fund Assessments. State guarantee funds ("Guarantee Funds") exist to ensure that policyholders (holders of direct insurance policies but not of reinsurance policies) receive payment of their claims if insurance companies become insolvent. The Guarantee Funds are funded primarily by statutorily prescribed assessments they bill to other insurance companies doing business in their states. Various mechanisms exist in some of these states for assessed insurance companies to recover these assessments. Upon the insolvency of an insurance company, the Guarantee Funds become primarily liable for the payment of the insolvent company's liabilities to policyholders. The declaration of an insolvency establishes the presumption that assessments by the Guarantee Funds are probable. We write workers' compensation insurance in many states in which unpaid workers' compensation liabilities are the responsibility of the Guarantee Funds and have received, and expect to continue to receive, Guarantee Fund assessments, some of which may be based on certain of the premiums we have already earned at December 31, 2006.

We recorded an estimate of $7.7 million (net of expected recoveries of $1.9 million recoverable before the end of 2007) for our expected liability at December 31, 2006 for Guarantee Fund assessments. Recoveries are attributable to premium tax credits in various states. The amount of the recovery we have recorded is limited to credits applicable to, and recoverable from, premiums earned at December 31, 2006. The estimated expense for Guarantee Fund assessments was $2.0 million, $5.4 million and $5.4 million in 2006, 2005 and 2004, respectively. We expect that we will continue to accrue and receive Guarantee Fund assessments; and the ultimate impact of such assessments will depend upon the amount and timing of the assessments and of any recoveries to which we are entitled.

REINSURANCE CEDED

In the ordinary course of business and in accordance with general insurance industry practices, we purchase excess of loss reinsurance to protect us against the impact of large, irregularly-occurring losses in the workers' compensation segment. Such reinsurance reduces the magnitude of such losses on net income and the capital of Zenith Insurance. Reinsurance makes the assuming reinsurer liable to the ceding company to the extent of the reinsurance. It does not, however, discharge the ceding company from its primary liability to its policyholders in the event the reinsurer is unable to meet its obligations under such reinsurance agreement. We monitor the financial condition of our reinsurers and do not believe that we are currently exposed to any material credit risk through our ceded reinsurance arrangements because most of our reinsurance is recoverable from large, well-capitalized reinsurance companies. Historically, no material amounts due from reinsurers have been written-off as uncollectible other than a total write-off of $6.0 million in connection with Reliance Insurance Company for a reinsurance recoverable we acquired in a 1996 acquisition.

Premiums earned and loss and loss adjustment expenses incurred are stated in the accompanying Consolidated Statements of Operations after deduction of amounts ceded to reinsurers. Balances due from reinsurers on unpaid losses, including an estimate of such recoverables related to reserves for IBNR losses, are reported as assets and are included in receivable from reinsurers even though amounts due on unpaid loss and loss adjustment expenses are not recoverable from the reinsurer until such losses are paid. Receivable from reinsurers on unpaid losses and loss adjustment expenses amounted to $225.8 million and $243.3 million at December 31, 2006 and 2005, respectively.

In 1998, Zenith Insurance acquired substantially all of the assets and certain liabilities of RISCORP, Inc. and certain of its subsidiaries (collectively "RISCORP") related to RISCORP's workers' compensation business. Also, in 1998, Zenith entered into an aggregate excess of loss reinsurance agreement which provides ceded reinsurance for unpaid losses assumed by Zenith Insurance from RISCORP up to $50.0 million in excess of $182.0 million. Receivable from reinsurers on unpaid losses and loss adjustment expenses at December 31, 2006 and 2005 includes $10.5 million and $10.7 million, respectively, recoverable under such reinsurance and is secured by assets held in a trust account. The deferred benefit associated with such reinsurance was $2.9 million and $3.4 million at December 31, 2006 and 2005, respectively.

PROPERTIES AND EQUIPMENT

Properties and equipment are stated at cost less accumulated depreciation. Depreciation is calculated on a straight-line basis using the following useful lives: buildings—10 to 40 years; and furniture, fixtures and equipment—3 to 10 years. Expenditures for maintenance and repairs are charged to operations as incurred. Additions and improvements to buildings and other fixed assets are capitalized and depreciated over the useful lives of the properties and equipment. Upon disposition, the asset cost and related depreciation are removed from the accounts and the resulting gain or loss is included in income.

INTANGIBLE ASSETS

Goodwill from acquisitions was $21.0 million at December 31, 2006 and 2005 net of accumulated amortization of $3.6 million and is included in assets of the workers' compensation segment. We evaluated this goodwill at December 31, 2006 and 2005 and determined that such goodwill was not

impaired. Other than goodwill, we had no intangible assets at December 31, 2006 or 2005.

RESTRICTED STOCK AND STOCK OPTIONS

Restricted Stock. Under a restricted stock plan approved by our stockholders in May 2004, as amended in May 2005 ("Restricted Stock Plan"), non-employee Directors and key employees are awarded shares of Zenith National's common stock with restricted ownership rights. Of the shares of stock granted to employees, 50% vest two years after the grant date and the remaining 50% of the shares vest four years after the grant date. Shares granted to non-employee Directors vest in equal amounts of one-third of the amount granted over three years. The fair value of restricted stock awards is measured using the closing price of Zenith National's common stock on the grant date and is recognized as an expense over the vesting period of the awards.

Stock options. Under an employee non-qualified stock option plan adopted by the Board of Directors and stockholders of Zenith National in 1996 ("Stock Option Plan"), options were granted to certain officers and key employees for the purchase of Zenith National's common stock at 100% of the market price at the date of grant. No options have been granted since 2002 and the Stock Option Plan expired according to its terms in May 2006. All options outstanding were exercisable at December 31, 2006 and all of these options will expire during the second quarter of 2007 if not exercised.

Effective January 1, 2006, we adopted Statement of Financial Accounting Standards ("SFAS") No. 123(R), Share-Based Payment ("SFAS No. 123R"), using the modified prospective application transition method. SFAS No. 123R revised SFAS No. 123, Accounting for Stock-Based Compensation ("SFAS No. 123"). We previously adopted the fair value based method of recording stock options consistent with SFAS No. 123 and accounted for the change in accounting principle using the prospective method in accordance with SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure. Under the prospective method, all employee stock options granted since January 2002 are expensed over the stock option vesting period based on the fair value at the date the options were granted. Because the fair value recognition provisions of SFAS No. 123 and SFAS No. 123R were materially consistent under our stock-based compensation plans, the adoption of SFAS No. 123R did not have a material impact on our consolidated statements of financial condition, results of operations, or cash flows.

SFAS No. 123R requires us to estimate forfeitures in calculating the expense relating to stock-based compensation as opposed to recognizing these forfeitures and the corresponding reduction in expense as they occur. In addition, SFAS No. 123R requires the Company to reflect the tax savings resulting from tax deductions in excess of compensation expense reflected in our financial statements ("excess tax benefits") as a cash inflow from financing activities in our statement of cash flows rather than as an operating cash flow as in prior periods.

RECLASSIFICATIONS

Certain prior year amounts in the Consolidated Financial Statements have been reclassified to conform to the current year presentation.

FOREIGN CURRENCY TRANSLATION

Translation gains or losses, net of applicable tax, associated with foreign currency investments accounted for under the equity method were credited or charged directly to a separate component of other comprehensive income.

The fair value of any foreign investments in our investment portfolio includes a component to reflect the fair value in United States dollars.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In September 2005, the American Institute of Certified Public Accountants ("AICPA") released Statement of Position 05-1, "Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection With Modifications or Exchanges of Insurance Contracts" ("SOP 05-1"). SOP 05-1 requires identification of transactions that result in a substantial change in an insurance contract. If it is determined that a substantial change to an insurance contract has occurred, the related unamortized deferred policy acquisition costs, unearned premiums and other related balances must be written off. The Company will adopt SOP 05-1 on January 1, 2007. We expect that SOP 05-1 will not have a material effect on our consolidated financial condition or results of operations.

In February 2006, the Financial Accounting Standards Board ("FASB") issued statement No. 155, "Accounting for Certain Hybrid Financial Instruments" ("SFAS No. 155"). Under current generally accepted accounting principles an entity that holds a financial instrument with an embedded derivative must bifurcate the financial instrument, resulting in the host and the embedded derivative being accounted for separately. SFAS No. 155 permits, but does not require, entities to account for financial instruments with an embedded derivative at fair value thus negating the need to bifurcate the instrument between its host and the embedded derivative. We will adopt SFAS No. 155 on January 1, 2007, and we expect it will not have a material effect on our consolidated financial condition or results of operations.

In July 2006, the FASB issued FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109" ("FIN 48"), which provides criteria for the recognition, measurement, presentation and disclosure of uncertain tax positions. A tax benefit from an uncertain position may be recognized only if it is "more likely than not" that the position is sustainable based on its technical merits. We will adopt FIN 48 on January 1, 2007 and we expect that it will not have a material effect on our consolidated financial condition or results of operations.

In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108, "Considering the Effects of Prior Year Misstatements when Quantifying

Misstatements in Current Year Financial Statements" ("SAB 108"). SAB 108 provides interpretive guidance on how the effects of prior-year uncorrected misstatements should be considered when quantifying misstatements in the current year financial statements. SAB 108 requires registrants to quantify misstatements using both an income statement and balance sheet approach and evaluate whether either approach results in a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. The adoption of SAB 108 as of December 31, 2006 did not have a material effect on our consolidated financial condition or results of operations.

NOTE 3

INVESTMENTS

The amortized cost, fair value and carrying value of investments were as follows:


				Gross Unrealized
December 31, 2006 (Dollars in thousands)		Cost or Amortized Cost		Gross Unrealized					Fair Value		Carrying Value
December 31, 2006 (Dollars in thousands)		Cost or Amortized Cost		Gains		(Losses)			Fair Value		Carrying Value

Held-to-maturity:
	Corporate debt	$	11,522	$	210				$	11,732	$	11,522
	Mortgage-backed securities		176,713		759	$	(687	)		176,785		176,713
	State and local government debt		23,311				(801	)		22,510		23,311
	Foreign government debt		5,000				(125	)		4,875		5,000

Total held-to-maturity		$	216,546	$	969	$	(1,613	)	$	215,902	$	216,546

Available-for-sale:
	U.S. government debt	$	90,564			$	(255	)	$	90,309	$	90,309
	State and local government debt		110,576	$	354		(1,026	)		109,904		109,904
	Corporate debt		1,033,123		5,938		(15,253	)		1,023,808		1,023,808
	Mortgage-backed securities		19,139		122		(4	)		19,257		19,257
	Redeemable preferred stocks		27,347		634		(72	)		27,909		27,909
	Equity securities		69,014		29,318		(14	)		98,318		98,318
	Short-term investments		679,989							679,989		679,989

Total available-for-sale		$	2,029,752	$	36,366	$	(16,624	)	$	2,049,494	$	2,049,494


				Gross Unrealized
December 31, 2005 (Dollars in thousands)		Cost or Amortized Cost		Gross Unrealized					Fair Value		Carrying Value
December 31, 2005 (Dollars in thousands)		Cost or Amortized Cost		Gains		(Losses)			Fair Value		Carrying Value

Held-to-maturity:
	Corporate debt	$	11,575			$	(12	)	$	11,563	$	11,575
	Mortgage-backed securities		97,315	$	994		(177	)		98,132		97,315
	State and local government debt		23,645				(994	)		22,651		23,645
	Foreign government debt		5,000				(109	)		4,891		5,000

Total held-to-maturity		$	137,535	$	994	$	(1,292	)	$	137,237	$	137,535

Available-for-sale:
	U.S. government debt	$	168,645			$	(1,364	)	$	167,281	$	167,281
	State and local government debt		102,281	$	294		(1,225	)		101,350		101,350
	Corporate debt		732,958		5,900		(9,085	)		729,773		729,773
	Mortgage-backed securities		18,769		808					19,577		19,577
	Redeemable preferred stocks		25,436		1,426		(177	)		26,685		26,685
	Equity securities		68,048		11,299		(6,043	)		73,304		73,304
	Short-term investments		904,093							904,093		904,093

Total available-for-sale		$	2,020,230	$	19,727	$	(17,894	)	$	2,022,063	$	2,022,063

Fixed maturity securities, including short-term investments, by contractual maturity were as follows at December 31, 2006:


(Dollars in thousands)		Amortized Cost		Fair Value

Held-to-maturity:
	Due after 1 year through 5 years	$	100,355	$	100,589
	Due after 5 years through 10 years		104,669		103,581
	Due after 10 years		11,522		11,732

Total held-to-maturity		$	216,546	$	215,902

Available-for-sale:
	Due in 1 year or less		796,528		795,893
	Due after 1 year through 5 years		423,503		423,030
	Due after 5 years through 10 years		714,925		705,787
	Due after 10 years		25,782		26,466

Total available-for-sale		$	1,960,738	$	1,951,176

Mortgage-backed securities are shown as being due at their average expected maturity dates. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

Fixed maturity securities classified as held-to-maturity with unrealized losses were as follows:


December 31, 2006 (Dollars in thousands)		Fair Value		Unrealized Losses			Number of Issues

Less than 12 months:
	Mortgage-backed securities	$	90,322	$	(357	)	16

Total less than 12 months			90,322		(357	)	16

Greater than 12 months:
	State and local government debt		22,510		(801	)	7
	Mortgage-backed securities		15,721		(330	)	4
	Foreign government debt		4,875		(125	)	1

Total greater than 12 months			43,106		(1,256	)	12

Total held-to-maturity:
	State and local government debt		22,510		(801	)	7
	Mortgage-backed securities		106,043		(687	)	20
	Foreign government debt		4,875		(125	)	1

Total held-to-maturity		$	133,428	$	(1,613	)	28


December 31, 2005 (Dollars in thousands)		Fair Value		Unrealized Losses			Number of Issues

Less than 12 months:
	State and local government debt	$	16,192	$	(665	)	5
	Mortgage-backed securities		23,696		(177	)	6
	Foreign government debt		4,891		(109	)	1
	Corporate debt		11,563		(12	)	1

Total less than 12 months			56,342		(963	)	13

Greater than 12 months:
	State and local government debt		6,459		(329	)	2

Total greater than 12 months			6,459		(329	)	2

Total held-to-maturity:
	State and local government debt		22,651		(994	)	7
	Mortgage-backed securities		23,696		(177	)	6
	Foreign government debt		4,891		(109	)	1
	Corporate debt		11,563		(12	)	1

Total held-to-maturity		$	62,801	$	(1,292	)	15

Securities classified as available-for-sale with unrealized losses were as follows:


December 31, 2006 (Dollars in thousands)		Fair Value		Unrealized Losses			Number of Issues

Less than 12 months:
	Corporate debt	$	268,094	$	(3,949	)	59
	State and local government debt		15,927		(118	)	7
	U.S. government debt		74,916		(162	)	2
	Equity securities		3,463		(14	)	3
	Redeemable preferred stocks		400		(1	)	1
	Mortgage-backed securities		4,929		(4	)	1

Total less than 12 months			367,729		(4,248	)	73

Greater than 12 months:
	Corporate debt		423,533		(11,304	)	68
	State and local government debt		54,077		(908	)	17
	U.S. government debt		15,393		(93	)	3
	Redeemable preferred stocks		1,182		(71	)	1

Total greater than 12 months			494,185		(12,376	)	89

Total available-for-sale:
	Corporate debt		691,627		(15,253	)	127
	State and local government debt		70,004		(1,026	)	24
	U.S. government debt		90,309		(255	)	5
	Equity securities		3,463		(14	)	3
	Redeemable preferred stocks		1,582		(72	)	2
	Mortgage-backed securities		4,929		(4	)	1

Total available-for-sale		$	861,914	$	(16,624	)	162


December 31, 2005 (Dollars in thousands)		Fair Value		Unrealized Losses			Number of Issues

Less than 12 months:
	Corporate debt	$	428,164	$	(8,546	)	89
	State and local government debt		61,187		(1,225	)	19
	U.S. government debt		167,281		(1,364	)	8
	Equity securities		46,998		(6,043	)	11
	Redeemable preferred stocks		3,170		(177	)	3

Total less than 12 months			706,800		(17,355	)	130

Greater than 12 months:
	Corporate debt		17,357		(539	)	5

Total greater than 12 months			17,357		(539	)	5

Total available-for-sale:
	Corporate debt		445,521		(9,085	)	94
	State and local government debt		61,187		(1,225	)	19
	U.S. government debt		167,281		(1,364	)	8
	Equity securities		46,998		(6,043	)	11
	Redeemable preferred stocks		3,170		(177	)	3

Total available-for-sale		$	724,157	$	(17,894	)	135

Unrealized losses on fixed maturity securities at December 31, 2006 are principally attributable to increases in short-term interest rates in 2005 and 2006. We continuously assess

the prospects for individual securities as part of ongoing portfolio management, including the identification of other-than-temporary declines in fair values. This process includes reviewing the amount and length of time of unrealized losses on investments, historical and projected company financial performance, company-specific news and other developments, the outlook for industry sectors, credit ratings and macro-economic changes, including government policy initiatives. We believe that we have appropriately identified other-than-temporary declines in fair value in the three years ended December 31, 2006 and that our remaining unrealized losses at December 31, 2006 are not other-than-temporary. We base this conclusion on our current understanding of the issuers of these securities, as described above, and because we have also established a presumption that an unrealized loss of a significant amount for a specific period of time is other-than-temporary. We have consistently applied this presumption for fifteen years. We also have the ability and intent to hold securities with unrealized losses for a sufficient amount of time for them to recover their values or reach maturity.

At December 31, 2006 and 2005, 90% and 93%, respectively, of the investments in fixed maturity securities and short-term investments were classified as available-for-sale. The change in fair value of fixed maturity investments classified as available-for-sale resulted in a decrease in stockholders' equity of $4.0 million after deferred tax from December 31, 2005 to December 31, 2006 and a decrease of $14.8 million from December 31, 2004 to December 31, 2005. Fluctuating interest rates will impact stockholders' equity, realized gains and maturities of certain debt securities.

The gross realized gains on sales of investments classified as available-for-sale, including short-term investments, during 2006, 2005 and 2004 were $12.3 million, $34.7 million and $28.0 million, respectively, and the gross realized losses were $3.7 million, $12.3 million and $4.7 million, respectively.

Net realized and unrealized investment gains (losses) were as follows:


		Year Ended December 31,
(Dollars in thousands)		2006			2005			2004

Net realized gains (losses):
	Equity securities	$	9,532		$	30,067		$	16,909
	Fixed maturity securities		(975	)		(7,560	)		6,258
	Real estate investments		1,664			8,255			15,494
	WorldCom settlement		2,076
	Advent Capital write-down (see Note 4)					(9,547	)
	Other		1,080			1,009			(82	)

Net realized gains		$	13,377		$	22,224		$	38,579

Change in fair value over (under) cost:
	Equity securities	$	24,048		$	(37,844	)	$	24,591
	Fixed maturity securities		(6,485	)		(25,611	)		(5,630	)

Net investment income was as follows:


	Year Ended December 31,
(Dollars in thousands)	2006			2005			2004

Fixed maturity securities	$	71,891		$	67,037		$	53,127
Equity securities		1,659			1,247			1,113
Mortgage loans					362			5,652
Short-term investments		37,246			14,766			5,353
Other		978			361			642

Subtotal		111,774			83,773			65,887
Investment expenses		(5,480	)		(4,573	)		(4,011	)

Net investment income	$	106,294		$	79,200		$	61,876

Investments with a fair value of $1.3 billion and $0.9 billion at December 31, 2006 and 2005, respectively, were on deposit with regulatory authorities in compliance with insurance company regulations.

NOTE 4

EQUITY IN EARNINGS OF INVESTEE

At December 31, 2006 and 2005, we owned 22.1 million shares of Advent Capital common stock. On June 3, 2005, Advent Capital sold 114.3 million shares of its common stock in a public offering at the United States dollar equivalent of $0.64 per share. On the same date,

Advent Capital common stock was listed for trading on the Alternative Investments Market of the London Stock Exchange ("AIM"). Prior to Advent Capital's listing on the AIM, there was no public market for such shares. Prior to the public offering, we owned approximately 20.9% of the outstanding shares of Advent Capital and recorded our investment in Advent Capital under the equity method of accounting, recognizing our share of the earnings or losses of Advent Capital. After the sale of additional shares of common stock by Advent Capital in 2005, we owned less than 10.0% of the outstanding shares of Advent Capital and no longer have representation on the board of directors. We therefore account for our investment in Advent Capital under the cost method of accounting and report this investment as an equity security in the Consolidated Balance Sheets at fair value using the quoted price of Advent Capital's common stock from AIM, translated into United States dollars.

To reflect the new, publicly traded price of Advent Capital in June 2005, we reduced the carrying value of this investment to its fair value resulting in a charge of $9.5 million before tax ($6.2 million after tax) in the second quarter of 2005 as a reduction of realized gains on investments. The charge resulted from the difference between the fair value of our investment in Advent Capital, based upon the offering price for Advent Capital's common stock, and the carrying value of the investment under the equity method as of the date of the public offering.

In each of the second quarters of 2005 and 2004, we received a dividend payment from Advent Capital of $1.1 million. No such dividends were received during 2006.

NOTE 5

FAIR VALUES OF FINANCIAL INSTRUMENTS

Financial instruments are contractual obligations that result in the delivery of cash or an ownership interest in an entity. The following summarizes the carrying value and fair value of our financial instruments. For financial instruments not discussed below, the carrying amount is a reasonable estimate of the fair value.


		2006				2005
December 31,						Carrying Value
(Dollars in thousands)		Carrying Value		Fair Value		Carrying Value		Fair Value

Assets:
	Investments	$	2,273,656	$	2,273,012	$	2,167,000	$	2,166,702
Liabilities:
	Convertible Notes		1,129		3,215		1,124		3,156
	Redeemable Securities		58,342		61,987		58,833		58,632

Fair values of investments, which are further detailed in Note 3, were determined using market prices obtained from independent pricing services and various broker-dealers, or the fair value is estimated using analytical methods. The fair values of non-traded fixed maturity securities of $20.6 million and $41.0 million at December 31, 2006 and 2005, respectively, were estimated using a quantitative analytical technique, which compares such securities with the prices of traded securities with similar characteristics, to arrive at an estimate of fair value. The fair value of a non-traded common stock investment of $37.3 million and $23.7 million at December 31, 2006 and 2005, respectively, was estimated based on the net asset value of the company translated into United States dollars. The fair values of the 5.75% Convertible Senior Notes due March 30, 2023 (the "Convertible Notes") and 8.55% Capital Securities ("Redeemable Securities") were estimated using quantitative analytical techniques, which compare the Convertible Notes to the price of our common stock, into which they are convertible, and the Redeemable

Securities to the price of traded securities with similar characteristics.

NOTE 6

PROPERTIES AND EQUIPMENT

Properties and equipment, included in other assets, consist of the following:


December 31, (Dollars in thousands)	2006			2005

Land	$	9,650		$	9,650
Buildings		35,550			34,700
Furniture, fixtures and equipment		75,119			70,146

Subtotal		120,319			114,496
Accumulated depreciation		(64,874	)		(57,316	)

Total	$	55,445		$	57,180

Depreciation expense in the years ended December 31, 2006, 2005 and 2004 was $10.2 million, $8.9 million and $7.8 million, respectively.

NOTE 7

INCOME TAX

Zenith files a consolidated federal income tax return. The insurance subsidiaries pay premium taxes on gross premiums written in lieu of most state income or franchise taxes.

The components of the provision for tax on the income from continuing operations before equity in earnings of investee were:


	Year Ended December 31,
(Dollars in thousands)	2006		2005			2004

Current	$	135,460	$	96,141		$	64,677
Deferred		6,652		(14,247	)		(7,464	)

Income tax expense	$	142,112	$	81,894		$	57,213

The difference between the statutory income tax rate of 35% and our effective tax rate on income from continuing operations before tax and equity in earnings of investee, as reflected in the Consolidated Statements of Operations, was as follows:


		Year Ended December 31,
(Dollars in thousands)		2006			2005			2004

Statutory income tax expense		$	140,284		$	83,141		$	60,741
(Reduction) increase in tax:
	Dividend received deduction and tax-exempt interest		(1,839	)		(1,866	)		(2,000	)
	Reduction in tax estimate for a prior year					(1,105	)		(2,596	)
	Non-deductible expenses and other		3,667			1,724			1,068

Income tax expense		$	142,112		$	81,894		$	57,213

Deferred tax is provided based upon temporary differences between the tax and book basis of assets and liabilities. The components of the deferred tax assets and liabilities were as follows:


December 31,	2006				2005

	Deferred Tax				Deferred Tax

(Dollars in thousands)	Assets		Liabilities		Assets		Liabilities

Investments			$	14,141			$	5,989
Deferred policy acquisition costs				4,416				5,836
Properties and equipment				3,791				5,008
Unpaid losses and loss adjustment expenses discount	$	43,723			$	55,697
Limitation on deduction for unearned premiums		7,711				11,676
Policyholders' dividends accrued		19,975				10,702
Other		6,957		1,265		7,714		1,282

	$	78,366	$	23,613	$	85,789	$	18,115

Net deferred tax asset	$	54,753			$	67,674

Property-casualty loss reserves are not discounted in our consolidated financial statements; however, the Tax Reform Act of 1986 requires property and casualty loss reserves to be discounted for tax purposes. Our net deferred tax asset is expected to be fully recoverable because all future deductible amounts associated with deferred tax assets can be offset by recovery of income taxes paid

within the statutory carry-back period or anticipated future taxable income, including investment income.

NOTE 8

UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES

The following table represents a reconciliation of changes in the liability for unpaid losses and loss adjustment expenses:


		Year Ended December 31,
(Dollars in thousands)		2006			2005			2004

Beginning of year, net		$	1,459,797		$	1,212,032		$	990,877
Incurred claims:
	Current accident year		464,106			730,770			615,397
	Prior accident years		(141,322	)		(26,900	)		13,366

Total incurred claims			322,784			703,870			628,763

Payments:
	Current accident year		(131,595	)		(147,926	)		(108,944	)
	Prior accident years		(349,910	)		(308,179	)		(298,664	)

Total payments			(481,505	)		(456,105	)		(407,608	)

End of year, net			1,301,076			1,459,797			1,212,032
Receivable from reinsurers for unpaid losses			221,204			243,648			270,287

End of year, gross		$	1,522,280		$	1,703,445		$	1,482,319

The net $141.3 million favorable development in 2006 principally related to a reduction in estimated workers' compensation losses for the 2005 and 2004 accident years offset, in part, by adverse development of reinsurance reserves for the 2005 hurricanes. The net $26.9 million favorable development in 2005 principally related to a reduction in estimated workers' compensation losses for the 2004 and 2003 accident years, partially offset by a re-allocation of loss reserves to older accident years. The net $13.4 million adverse development in 2004 was due to a net increase in workers' compensation loss reserves for prior years, offset by a decrease in assumed reinsurance loss reserves for prior years.

NOTE 9

DEBT

Convertible Senior Notes Payable. On March 21, 2003, we issued $125.0 million aggregate principal amount of the Convertible Notes in a private placement, from which we received net proceeds of $120.0 million. In 2005, $123.8 million of aggregate principal amount of the Convertible Notes were converted into shares of our common stock. We paid $4.7 million in cash as an incentive for certain of these conversions which is included in the results of the Parent segment.

Services falls below BB- or is suspended or withdrawn; (iii) Zenith has called the Convertible Notes for redemption; or (iv) certain corporate events have occurred. The conversion rate of 59.988 shares for each $1,000 principal amount of Convertible Notes is equivalent to a conversion price of $16.67 per share of our common stock. The sale price of our common stock exceeded 120% of the conversion price of $16.67 per share for 20 trading days during the last 30 trading days of the fourth quarter of 2006. As a result of this event, each holder of the remaining $1.2 million aggregate principal amount of the notes has the right to convert their Convertible Notes into Zenith National's common stock at a conversion rate of 59.988 shares per $1,000 principal amount of Convertible Notes during the period beginning on January 1, 2007 and ending on March 31, 2007 (maximum number of shares that could be required to be issued is approximately 69,000). Whether the Convertible Notes will be convertible after March 31, 2007 will depend upon the occurrence of the events specified in the Indenture, including the sale price of our common stock.

We may redeem some or all of the remaining $1.2 million aggregate principal amount of Convertible Notes for cash on or after March 30, 2008 at the prices specified in the Indenture. Each holder may require us to repurchase all or a portion of its Convertible Notes on March 30, 2010, March 30, 2013, March 30, 2018, or, subject to certain exceptions, upon a change of control of Zenith. If any holder requires us to repurchase its Convertible Notes in any of these events, we may choose to pay the repurchase price in cash or shares of our common stock or a combination of cash and shares of our common stock.

Redeemable securities. At December 31, 2006 and 2005, Zenith National Insurance Capital Trust I, a Delaware statutory business trust ("Trust"), all of the voting securities of which are owned by Zenith National, had $58.5 million outstanding of the $75.0 million Redeemable Securities originally issued. The Redeemable Securities pay semi-annual cumulative cash distributions at the annual rate of 8.55% of the $1,000 liquidation amount per security.

The Trust had invested $77.3 million in Zenith National's 8.55% Subordinated Deferrable Interest Debentures due 2028 ("Subordinated Debentures") at December 31, 2006 and 2005, which constitute the principal asset of the Trust. The semi-annual interest payments on the Subordinated Debentures may be deferred by Zenith National for up to ten consecutive semi-annual periods. The Subordinated Debentures are redeemable at 100% of the principal amount of the Subordinated Debentures plus a "make-whole premium," if any, together with accrued and unpaid interest. The make-whole premium is the excess of the then present value of the remaining scheduled payments of principal and interest over 100% of the principal amount. Payments on the Redeemable Securities, including distributions and redemptions, follow those of the Subordinated Debentures. Zenith National fully and unconditionally guarantees the distributions on, and the liquidation amount generally of, the Redeemable Securities to the extent the Trust has funds legally available therefor. Zenith National's guarantee of the Redeemable Securities, as well as the Subordinated

Debentures, is subordinated to all other indebtedness of Zenith National.

The issue costs and discount on the Subordinated Debentures of $1.7 million are being amortized over the term of the Subordinated Debentures. At December 31, 2006 and 2005, the unamortized issue costs and discount was approximately $158,000 and $167,000, respectively. During each of the years ended December 31, 2006, 2005 and 2004, $5.1 million, $5.1 million and $5.2 million, respectively, of interest, issue costs and discount were expensed.

In the first quarter of 2006, Zenith National paid $0.5 million to repurchase $0.5 million aggregate principal amount of the outstanding Redeemable Securities. In March 2004, Zenith National repurchased $8.0 million aggregate liquidation amount of the outstanding Redeemable Securities which resulted in a gain of $0.3 million before tax ($0.2 million after tax). The gain has been recorded as a reduction of interest expense in the year ended December 31, 2004. Zenith National used its available cash balances to fund these purchases.

Aggregate Maturities. At December 31, 2006, the aggregate maturities for all of our long-term borrowings for each of the five years and thereafter were as follows:


(Dollars in thousands)	Convertible Notes		Redeemable Securities		Total

Maturing in:
2007	$	1,150			$	1,150
2008
2009
2010
2011
Thereafter			$	58,500		58,500

Total	$	1,150	$	58,500	$	59,650

The maturity of the remaining outstanding Convertible Notes is presented as being due in 2007 because the holders of our Convertible Notes have the right to convert their notes into our common stock during the first quarter of 2007 since the contingent conversion condition relative to our stock price was met as of December 31, 2006. If the remaining Convertible Notes are not converted or redeemed, their scheduled maturity is March 2023.

Bank Line of Credit. At December 31, 2006, we had a $30.0 million revolving credit agreement with a bank which, on February 16, 2007, was renewed with an expiration date of February 16, 2010. Interest is payable on any outstanding loans at either the bank's prime rate or a rate based on Eurodollar deposit rates plus a specified margin depending on our credit rating. This credit agreement contains covenants that require, among other things, we maintain certain financial ratios, including a minimum amount of capital in our insurance subsidiaries, a maximum debt-to-total capitalization ratio and a minimum interest coverage ratio. We were in compliance with all of these covenants at December 31, 2006. There were no outstanding borrowings under the bank line of credit in 2006 and 2005. We currently do not anticipate any need to draw on our bank line of credit because our current cash and available invested assets are sufficient for any foreseeable requirements.

NOTE 10

REINSURANCE CEDED

We maintain excess of loss and catastrophe reinsurance which provides protection for workers' compensation losses in excess of $1.0 million up to $150.0 million with catastrophe losses arising out of a California

earthquake up to $200.0 million. We will also retain 50% of any losses between $10.0 million and $20.0 million.

Our reinsurance also provides protection for acts of terrorism. The limit for domestic acts of terrorism is $150.0 million in excess of a $1.0 million retention and we retain 50% of any losses between $10.0 million and $20.0 million. The limit for foreign acts of terrorism is up to $75.0 million in excess of a $1.0 million retention and we retain 50% of any losses between $10.0 million and $20.0 million. Both of these coverages exclude losses from nuclear, biological and chemical attacks for losses in excess of $20.0 million and we retain 15% of any losses between $10.0 million and $20.0 million.

Also, from January 1, 2002 through December 31, 2004, we ceded 10% of our workers' compensation premiums under a quota share reinsurance agreement. We terminated the quota share contract effective December 31, 2004.

Reinsurance transactions reflected in the accompanying Consolidated Statements of Operations were as follows:


	Year Ended December 31,
(Dollars in thousands)	2006			2005			2004

Direct premiums earned	$	964,131		$	1,148,775		$	1,034,903
Assumed premiums earned		18,533			76,505			53,782
Ceded premiums earned (1)		(38,447	)		(46,580	)		(144,260	)

Net premiums earned	$	944,217		$	1,178,700		$	944,425

Ceded loss and loss adjustment expenses incurred (1)	$	4,402		$	12,294		$	78,229

(1) Ceded premiums earned and ceded loss and loss adjustment expenses incurred in 2004 reflect the impact of the 10% quota share agreement, which terminated effective December 31, 2004.

NOTE 11

COMMITMENTS AND CONTINGENCIES

Leases. Zenith has office space, equipment and automobile leases expiring through 2011. The minimum lease payments for the next five years on these non-cancelable operating leases at December 31, 2006 were as follows:


(Dollars in thousands)	Equipment and Auto Fleet		Offices		Total

2007	$	1,862	$	6,862	$	8,724
2008		1,280		5,198		6,478
2009		404		3,728		4,132
2010		10		2,542		2,552
2011				675		675

Total	$	3,556	$	19,005	$	22,561

Rent expense for the years ended December 31, 2006, 2005 and 2004 was $10.6 million, $8.7 million and $7.5 million, respectively.

Contingencies Surrounding Recoverability of Special Disability Trust Fund Receivable. The Florida Special Disability Trust Fund ("SDTF") was established to reimburse insurance companies and employers for the cost of certain workers' compensation claims. The SDTF promotes the re-hiring of injured workers by providing a reimbursement for certain qualifying claims made by a previously injured worker subsequent to their re-hiring. These claims are sometimes referred to as "second injuries." We are able to submit such second injury claims to the SDTF and, if the claims are accepted, we are reimbursed for part of the cost of the claim. The SDTF stopped accepting new second injury claims dated after January 1, 1998. At December 31, 2006, approximately 550 of our eligible Florida claims have been accepted, for which we have recorded a recoverable of $3.7 million, net of amounts due to reinsurers. We bill the SDTF and receive reimbursements as we make payments on accepted claims. The SDTF is funded by currently assessing a fee of 4.52% of workers' compensation premiums written in Florida, and we accrue the assessment as a liability when we write Florida business. If the legislature in Florida were to decide to cease or suspend the assessment, and thereby the funding of the SDTF, any recoverable that we

may have at that time which is related to un-reimbursed claims might be at risk. However, we have no current information to indicate that the SDTF assessment in Florida will not continue. We continue to collect recoveries for second injury claims from the SDTF and although the SDTF is currently about 36 months behind schedule in reimbursing claims, we expect to fully recover the remaining amount receivable. The ultimate resolution of this matter is not expected to have a material impact on us because the amount recoverable from the SDTF at December 31, 2006 is not material to our consolidated financial position, results of operations or cash flows.

NOTE 12

STOCK-BASED COMPENSATION PLANS

The total compensation cost recognized for stock-based awards was $2.6 million (net of $1.4 million tax benefit), $1.8 million (net of $1.0 million tax benefit) and $0.6 million (net of $0.3 million tax benefit) for the years ended December 31, 2006, 2005 and 2004, respectively.

Restricted Stock Awards. The following table provides certain information regarding the shares available for future grants under the Restricted Stock Plan at December 31, 2006:


Number of shares authorized for grants	625,000
Number of shares outstanding	(330,000	)
Number of shares vested	(87,000	)

Number of shares available for future grants	208,000

Changes in restricted stock for the three years ended December 31, 2006 were as follows:


		Number of Shares		Weighted Average Grant Date Fair Value

Outstanding at December 31, 2003
	Granted	183,000		$	30.66
	Forfeited	(4,000	)		30.17

Outstanding at December 31, 2004		179,000			30.67
	Granted	147,000			44.74
	Forfeited	(6,000	)		30.17

Outstanding at December 31, 2005		320,000			37.13
	Granted	137,000			45.06
	Vested	(87,000	)		31.55
	Forfeited	(40,000	)		37.15

Outstanding at December 31, 2006		330,000			41.88

At December 31, 2006, 87,000 shares had vested under the Restricted Stock Plan. Compensation expense recognized for the years ended December 31, 2006, 2005 and 2004 was $2.6 million, $1.8 million and $0.6 million after tax, respectively. Unrecognized compensation expense before tax under the Restricted Stock Plan was $8.9 million and $8.3 million at December 31, 2006 and December 31, 2005, respectively.

Unrecognized compensation expense associated with restricted shares in the prior periods was reclassified to additional paid-in-capital.

Employee Stock Options. At December 31, 2006, all outstanding stock options granted under the Stock Option Plan had previously vested and all compensation expense related to these options had been recognized. Compensation expense after tax was $15,000, $39,000 and $39,000 for the years ended December 31, 2006, 2005 and 2004, respectively.

Changes in stock options for the three years ended December 31, 2006 were as follows:


	Number of Shares		Weighted Average Exercise Price

Outstanding at December 31, 2003	2,205,000		$	15.81
Exercised	(691,000	)		15.37
Expired	(5,000	)		15.17
Forfeited	(20,000	)		15.80

Outstanding at December 31, 2004	1,489,000			16.01
Exercised	(1,457,000	)		18.47
Forfeited	(11,000	)		20.88

Outstanding at December 31, 2005	21,000			20.51
Exercised	(11,500	)		20.19

Outstanding at December 31, 2006	9,500			20.88

Options exercisable at December 31, 2006, 2005 and 2004 were 9,500, 3,750, and 1,412,000, respectively.

All 9,500 options outstanding and exercisable at December 31, 2006 will expire during the second quarter of 2007 if not exercised. Upon the full exercise of these options, 9,500 shares of Zenith National's common stock would be issued.

NOTE 13

STOCKHOLDERS' EQUITY AND
STATUTORY FINANCIAL INFORMATION

Common Stock. From time to time, Zenith National may make repurchases of its outstanding common shares. At December 31, 2006, Zenith National was authorized to repurchase up to 929,000 shares of its common stock at prevailing market prices pursuant to a share repurchase program authorized by its Board of Directors on February 24, 1998. Any purchases are discretionary and can be adequately funded from Zenith National's existing sources of liquidity. No shares were repurchased under the share repurchase program during the three years ended December 31, 2006.

Dividend Restrictions. The California Insurance Holding Company System Regulatory Act limits the ability of Zenith Insurance to pay dividends to Zenith National, and of the insurance subsidiary of Zenith Insurance to pay dividends to Zenith Insurance, by providing that the appropriate insurance regulatory authorities in the state of California must approve any dividend that, together with all other such dividends paid during the preceding twelve months, exceeds the greater of: (a) 10% of the paying company's statutory surplus as regards policyholders at the preceding December 31; or (b) 100% of the net income for the preceding year. In addition, any such dividend must be paid from policyholders' surplus attributable to accumulated earnings. Such restrictions on dividends are not cumulative. Zenith Insurance paid dividends to Zenith National of $50.0 million, $30.0 million and $20.0 million in 2006, 2005 and 2004, respectively. In 2007, $225.9 million can be paid to Zenith National in dividends without prior approval of the California DOI. The restrictions on the payment of dividends have not had, and under current regulations are not expected to have, a material adverse impact on the ability to pay dividends.

Statutory Financial Data. The capital stock and surplus and net income of our insurance subsidiaries, prepared in accordance with the statutory accounting practices of the National Association of Insurance Commissioners ("NAIC") were as follows:


	Year Ended December 31,
(Dollars in thousands)	2006		2005		2004

Capital stock and surplus	$	919,835	$	685,511	$	573,270
Net income		278,163		162,158		112,824

The California DOI (the domiciliary state of our insurance subsidiaries) requires that in addition to applying the NAIC's statutory accounting practices, insurance companies must record, under certain circumstances, an additional liability, called an "excess statutory reserve." The excess statutory reserve formula establishes a 65% loss and loss adjustment expense ratio for the current and prior two years. Excess statutory reserves reduce statutory surplus but do not impact statutory net income.

Based upon actuarial data submitted to the California DOI in support of our workers' compensation losses and loss adjustment expense reserves, the California DOI has informed us in writing that they do not object to the recording of an excess statutory reserve of $360.3 million as of December 31, 2006, instead of $533.4 million produced under the formula. As a result, we recorded statutory surplus of $559.5 million as of December 31, 2006. At December 31, 2005 we reported statutory surplus of $440.8 million as determined under the formula.

The insurance business is subject to state-by-state regulation and legislation focused on solvency, pricing, market conduct, claims practices, underwriting, accounting, investment criteria and other areas. Such regulation and legislation changes frequently. Compliance is essential and is an inherent risk of the business.

NOTE 14

EARNINGS AND DIVIDENDS PER SHARE

The following table sets forth the computation of basic and diluted net income per common share.


			Year Ended December 31,
(Dollars and shares thousands, except per share data)			Year Ended December 31,
(Dollars and shares thousands, except per share data)			2006		2005		2004

(A)	Income from continuing operations		$	258,700	$	156,447	$	117,714
(B)	Gain on sale of discontinued real estate segment					1,253		1,286

(C)	Net income		$	258,700	$	157,700	$	119,000

(D)	Interest expense on the Convertible Notes, net of tax		$	48	$	2,254	$	5,070

(E)	Weighted average shares outstanding — basic			36,974		33,555		28,737
	Common shares issuable under the Stock Option Plan (treasury stock method)			4		124		450
	Common shares issuable under the Restricted Stock Plan (treasury stock method)			127		92		9
	Common shares issuable upon conversion of the Convertible Notes			69		3,281		7,500

(F)	Weighted average shares outstanding — diluted			37,174		37,052		36,696

Net income per common share:
Basic:
(A)/(E)		Continuing operations	$	7.00	$	4.66	$	4.10
(B)/(E)		Gain on sale of discontinued real estate segment				0.04		0.04

(C)/(E)		Net income	$	7.00	$	4.70	$	4.14

Diluted:
((A)+(D))/(F) Continuing operations			$	6.96	$	4.29	$	3.35
(B)/(F)		Gain on sale of discontinued real estate segment				0.03		0.03

((C)+(D))/(F) Net income			$	6.96	$	4.32	$	3.38

Cash dividends declared per common share			$	1.26	$	0.94	$	0.75

Basic weighted average shares outstanding for the years ended December 31, 2006 and 2005 include shares issued in 2005 in connection with the conversions of $123.8 million aggregate principal of our Convertible Notes. Diluted weighted average shares outstanding include an additional 69,000, 3.3 million and 7.5 million shares for the years ended December 31, 2006, 2005 and 2004, respectively, that could have been issued in connection with our Convertible Notes during these periods. After-tax interest expense associated with the Convertible Notes of $48,000, $2.3 million and $5.1 million for the years ended December 31, 2006, 2005 and 2004, respectively, was added back to net income in computing net income per diluted share.

NOTE 15

OTHER COMPREHENSIVE INCOME

Other comprehensive income is comprised of changes in unrealized appreciation on investments classified as available-for-sale and changes, for the applicable periods, in foreign currency translation adjustments on investments accounted for under the equity method. The following table summarizes the components of accumulated other comprehensive income:


	December 31,
(Dollars in thousands)	2006			2005

Net unrealized appreciation on investments, before tax	$	19,742		$	1,833
Deferred tax expense		(6,910	)		(642	)

Total accumulated other comprehensive income	$	12,832		$	1,191

The following table summarizes the components of our other comprehensive income (loss), other than net income, for the three years ended December 31, 2006:


(Dollars in thousands)		Pre-Tax			Income Tax Effect			After-Tax

Year Ended December 31, 2006

Net unrealized appreciation arising during the year		$	24,190		$	8,467		$	15,723
Less:	reclassification adjustment for realized gains included in net income		(6,281	)		(2,199	)		(4,082	)

Total other comprehensive income		$	17,909		$	6,268		$	11,641

Year Ended December 31, 2005

Net unrealized depreciation arising during the year		$	(34,346	)	$	(12,021	)	$	(22,325	)
Less:	reclassification adjustment for realized gains included in net income		(26,243	)		(9,185	)		(17,058	)

Net change in unrealized appreciation on investments			(60,589	)		(21,206	)		(39,383	)

Change in foreign currency translation arising during the year
Less:	reclassification adjustment for realized foreign currency gains included in net income		(4,629	)		(1,620	)		(3,009	)

Net change in foreign currency translation			(4,629	)		(1,620	)		(3,009	)

Total other comprehensive (loss)		$	(65,218	)	$	(22,826	)	$	(42,392	)

Year Ended December 31, 2004

Net unrealized appreciation arising during the year		$	40,973		$	14,341		$	26,632
Less:	reclassification adjustment for realized gains included in net income		(22,768	)		(7,969	)		(14,799	)

Net change in unrealized appreciation on investments			18,205			6,372			11,833

Increase in foreign currency translation arising during the year			3,017			1,055			1,962
Less:	reclassification adjustment for realized foreign currency gains included in net income		(3,127	)		(1,094	)		(2,033	)

Net change in foreign currency translation			(110	)		(39	)		(71	)

Total other comprehensive income		$	18,095		$	6,333		$	11,762

NOTE 16

SEGMENT INFORMATION

Our business is comprised of the following segments: workers' compensation; reinsurance; investments; and parent. Our real estate segment was discontinued in 2002. Segments are designated based on the types of products and services provided. Workers' compensation represents insurance coverage for the statutorily prescribed benefits that employers are required to provide to their employees who may be injured in the course of employment. Reinsurance principally consisted of assumed reinsurance of property losses from worldwide catastrophes and large property risks. In September 2005, we exited the reinsurance business and we ceased writing and renewing assumed reinsurance contracts. We will service our obligations under our assumed reinsurance contracts and the results of the reinsurance segment will continue to be included in the results of continuing operations. Income from operations of the investments segment includes investment income and realized gains and losses on investments and we do not allocate investment income to the results of our workers' compensation and reinsurance segments. Income from the workers' compensation and reinsurance segments is determined by deducting net loss and loss adjustment expenses incurred and underwriting and other operating expenses incurred from net premiums earned. Loss from operations of the parent segment includes interest expense and the general operating expenses of Zenith National, a holding company which owns, directly or indirectly, all of the capital stock of its insurance subsidiaries and other investment securities.

In 2006, we wrote workers' compensation premiums in 45 states, but the largest concentrations, 62.5% and 22.2%, respectively, of our workers' compensation earned premium, were in California and Florida. The concentration of our business in these states makes the results of our operations dependent upon trends that are characteristic of these states as compared to national trends, for example, state legislation, competition and workers' compensation inflation trends.

The accounting policies of the segments are the same as those described in Note 2.

Segment information is set forth below:


(Dollars in thousands)	Workers' Compensation			Reinsurance			Investments		Parent			Total

Year Ended December 31, 2006

Revenues:
Premiums earned	$	931,739		$	12,478							$	944,217
Net investment income							$	106,294					106,294
Realized gains on investments								13,377					13,377

Total revenues		931,739			12,478			119,671					1,063,888

Interest expense									$	(5,275	)		(5,275	)

Income (loss) before tax		313,576			(20,508	)		119,671		(11,927	)		400,812
Income tax expense (benefit)		113,414			(7,178	)		40,050		(4,174	)		142,112

Net income (loss)	$	200,162		$	(13,330	)	$	79,621	$	(7,753	)	$	258,700

Combined ratios		66.3	%		264.4	%

Total assets	$	447,756		$	24,144		$	2,293,265	$	2,388		$	2,767,553


(Dollars in thousands)	Workers' Compensation			Reinsurance			Real Estate(1)		Investments		Parent			Total

Year Ended December 31, 2005

Revenues:
Premiums earned	$	1,114,194		$	64,506									$	1,178,700
Net investment income									$	79,200					79,200
Realized gains on investments										22,224					22,224

Total revenues		1,114,194			64,506					101,424					1,280,124

Interest expense											$	(8,757	)		(8,757	)

Income (loss) from continuing operations before tax and equity in earnings of investee		213,244			(56,183	)				101,424		(20,938	)		237,547
Income tax expense (benefit)		74,990			(19,664	)				33,620		(7,052	)		81,894

Income (loss) from continuing operations after tax and before equity in earnings of investee		138,254			(36,519	)				67,804		(13,886	)		155,653
Equity in earnings of investee, net of income tax expense of $428 (see Note 4)										794					794

Income (loss) from continuing operations		138,254			(36,519	)				68,598		(13,886	)		156,447

Gain on sale of discontinued real estate segment, net of income tax expense of $675							$	1,253							1,253

Net income (loss)	$	138,254		$	(36,519	)	$	1,253	$	68,598	$	(13,886	)	$	157,700

Combined ratios		80.9	%		187.1	%

Total assets	$	464,194		$	59,398				$	2,187,993	$	5,871		$	2,717,456

(1) Gain on sale of discontinued real estate segment represents a payment received in 2005 of additional sales proceeds under the earn-out provision of the sale of our home-building business and related real estate assets in October 2002 (see Notes 1 and 20). The amount received in 2005 was the last such payment under the earn-out provision.


(Dollars in thousands)	Workers' Compensation			Reinsurance			Real Estate(1)		Investments		Parent			Total

Year Ended December 31, 2004

Revenues:
Premiums earned	$	902,047		$	42,378									$	944,425
Net investment income									$	61,876					61,876
Realized gains on investments										38,579					38,579

Total revenues		902,047			42,378					100,455					1,044,880

Interest expense											$	(13,051	)		(13,051	)

Income (loss) from continuing operations before tax and equity in earnings of investee		104,098			(11,956	)				100,455		(19,051	)		173,546
Income tax expense (benefit) (2)		37,354			(4,185	)				33,464		(9,420	)		57,213

Income (loss) from continuing operations after tax and before equity in earnings of investee		66,744			(7,771	)				66,991		(9,631	)		116,333
Equity in earnings of investee, net of income tax expense of $743 (see Note 4)										1,381					1,381

Income (loss) from continuing operations		66,744			(7,771	)				68,372		(9,631	)		117,714

Gain on sale of discontinued real estate segment, net of income tax expense of $692							$	1,286							1,286

Net income (loss)	$	66,744		$	(7,771	)	$	1,286	$	68,372	$	(9,631	)	$	119,000

Combined ratios		88.5	%		128.2	%

Investment in Advent Capital									$	28,066				$	28,066

Total assets	$	477,028		$	29,014				$	1,902,180	$	6,433		$	2,414,655

(1) Gain on sale of discontinued real estate segment represents a payment received in 2004 of additional sales proceeds under the earn-out provision of the sale of Zenith's home-building business and related real estate assets in October 2002 (see Notes 1 and 20).

(2) Parent segment includes $2.6 million in reduced income tax expense for a reduction of an estimated tax liability for prior years.

The following table is a reconciliation of our segment results to the accompanying Consolidated Statements of Operations:


		Year Ended December 31,
(Dollars in thousands)		2006			2005			2004

Income before tax from investments segment:
Net investment income		$	106,294		$	79,200		$	61,876
Realized gains on investments			13,377			22,224			38,579

Income before tax from investments segment			119,671			101,424			100,455
Income (loss) before tax from:
	Workers' compensation segment		313,576			213,244			104,098
	Reinsurance segment		(20,508	)		(56,183	)		(11,956	)
	Parent segment		(11,927	)		(20,938	)		(19,051	)

Income from continuing operations before tax and equity in earnings of investee			400,812			237,547			173,546
Income tax expense			142,112			81,894			57,213

Income from continuing operations after tax and before equity in earnings of investee			258,700			155,653			116,333
Equity in earnings of investee, net of tax (see Note 4)						794			1,381

Income from continuing operations			258,700			156,447			117,714
Gain on sale of discontinued real estate segment, net of tax						1,253			1,286

Net income		$	258,700		$	157,700		$	119,000

NOTE 17

EMPLOYEE BENEFIT AND RETIREMENT PLANS

We offer a tax deferred savings plan organized under Section 401(k) of the Internal Revenue Code for all eligible employees. We match 50% of employee contributions that are 6% or less of salary on a current basis and we are not liable for any future payments under the plan. For the years ended December 31, 2006, 2005 and 2004, we contributed $2.6 million, $2.7 million and $2.3 million, respectively.

We also offer a stock purchase plan, under which we match 25% of employees' contributions to purchase shares of our common stock at market value. For the years ended December 31, 2006, 2005 and 2004, we contributed $1.3 million, $0.9 million and $0.5 million, respectively. In September 2006, we suspended the stock purchase plan in order to comply with certain applicable stock exchange listing standards. An amended and restated stock purchase plan will be presented for stockholder approval in May 2007.

NOTE 18

RELATED PARTIES

The following table shows our investment in related parties, at fair value:


	December 31,
(Dollars in thousands)	2006		2005

Wynn Resorts, Limited Common Stock	$	16,424	$	13,713
Wynn Las Vegas LLC Bonds		9,938		9,725

Total	$	26,362	$	23,438

Two of Zenith's Directors are also Directors of Wynn Resorts, Limited.

We sold shares of Wynn Resorts, Limited common stock in 2006 and 2005 and recognized gains of $6.1 million and $25.5 million, respectively.

NOTE 19

EXERCISE OF STOCK OPTIONS USING PREVIOUSLY ACQUIRED SHARES

The following table sets forth these transactions:


(Dollars and shares in thousands, except per share data)	Sept. 2005		Feb. 2005		Mar. 2004

Shares of common stock purchased		268		931		301
Exercise price per share	$	15.75	$	15.75	$	15.75
Aggregate exercise price	$	4,219	$	14,657	$	4,748
Number of shares tendered by employee in lieu of cash payment of aggregate exercise price		99		432		182
Number of shares withheld for withholding taxes due		78		225
Value of shares tendered by employee in lieu of cash payment of aggregate exercise price	$	4,219	$	14,657	$	4,748
Value of shares withheld for withholding taxes due		3,341		7,545

NOTE 20

DISCONTINUED OPERATIONS — GAIN ON SALE OF REAL ESTATE SEGMENT

In 2002, we sold our home-building business and related real estate assets in Las Vegas, Nevada to MTH-Homes Nevada, Inc. ("MTH Nevada"), a wholly-owned subsidiary of Meritage Corporation.

In addition to the consideration received in 2002, we were entitled to receive 10% of MTH Nevada's pre-tax net income, subject to certain adjustments, for each of the twelve-month periods ending September 30, 2003, September 30, 2004 and September 30, 2005. We recorded additional gains under the earn-out provision of the sale agreement for all three twelve month periods, including $1.9 million ($1.3 million after tax) and $2.0 million ($1.3 million after tax) in 2005 and 2004, respectively. The amount received in 2005 was the last such payment under the earn-out provision.

NOTE 21

QUARTERLY FINANCIAL DATA AND COMMON STOCK PRICES (UNAUDITED)

Quarterly results for the years ended December 31, 2006 and 2005 were as follows:


		2006 Quarter Ended
(Dollars in thousands, except per share data)		March 31		June 30		September 30		December 31

Premiums earned		$	254,426	$	239,484	$	229,636	$	220,671
Net investment income			24,732		26,273		27,494		27,795
Realized gains on investments			1,610		1,113		833		9,821

Net income		$	57,500	$	54,100	$	72,200	$	74,900

Net income per common share:
	— basic	$	1.56	$	1.46	$	1.95	$	2.02
	— diluted		1.55		1.46		1.94		2.01

Cash dividends declared per common share		$	0.28	$	0.28	$	0.35	$	0.35


		2005 Quarter Ended
(Dollars in thousands, except per share data)		March 31		June 30		September 30		December 31

Premiums earned		$	285,717	$	296,780	$	301,302	$	294,901
Net investment income			17,131		19,051		20,550		22,468
Realized gains on investments			2,870		16,352		2,043		959

Income from continuing operations			39,300		46,400		21,747		49,000

Gain on sale of discontinued real estate segment							1,253

Net income		$	39,300	$	46,400	$	23,000	$	49,000

Net income per common share:
	— basic	$	1.35	$	1.36	$	0.67	$	1.34
	— diluted		1.10		1.26		0.63		1.32

Cash dividends declared per common share		$	0.22	$	0.22	$	0.25	$	0.25

The following table shows the high and low common stock prices as reported by the New York Stock Exchange during each quarter for the past two years:


	2006				2005
Quarter Ended	High		Low		High		Low

March 31	$	55.30	$	45.11	$	34.87	$	30.65
June 30		48.90		37.93		46.00		34.17
September 30		41.73		36.14		48.99		40.90
December 31		47.91		39.13		48.90		41.00

As of January 31, 2007, there were 199 registered holders of record of our common stock.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and Board of Directors of
Zenith National Insurance Corp.:

We have completed integrated audits of Zenith National Insurance Corp.'s consolidated financial statements and of its internal control over financial reporting as of December 31, 2006 in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.

Consolidated financial statements

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, cash flows, stockholders' equity and comprehensive income present fairly, in all material respects, the financial position of Zenith National Insurance Corp. and subsidiaries (the "Company") at December 31, 2006 and 2005, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2006 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

Internal control over financial reporting

Also, in our opinion, management's assessment, included in the accompanying Management's Report on Internal Control Over Financial Reporting, that the Company maintained effective internal control over financial reporting as of December 31, 2006 based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control—Integrated Framework issued by the COSO. The Company's management is responsible for maintaining effective

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (CONTINUED)

internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management's assessment and on the effectiveness of the Company's internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Los Angeles, California
February 16, 2007

CERTIFICATIONS, EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES AND
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

For readers of this Annual Report we furnish on the following pages the certifications, the Evaluation of Disclosure Controls and Procedures and Management's Report on Internal Control Over Financial Reporting that we include in our Annual Report on Form 10-K. We also include a statement about our Chief Executive Officer's certification to the New York Stock Exchange.

CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO EXCHANGE ACT RULE 13a-14(a) OR RULE 15d-14(a)

I, Stanley R. Zax, certify that:

1.

I have reviewed this Annual Report on Form 10-K of Zenith National Insurance Corp.;

2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.

The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a): Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b): Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c): Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d): Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.

The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a): All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b): Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: February 16, 2007
		Chairman of the Board and President (Chief Executive Officer) Zenith National Insurance Corp.

CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO EXCHANGE ACT RULE 13a-14a(a)
OR RULE 15d-14(a)

I, Kari L. Van Gundy, certify that:

1.

I have reviewed this Annual Report on Form 10-K of Zenith National Insurance Corp.;

2.

3.

4.

(a): Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b): Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c): Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d): Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.

(a): All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b): Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: February 16, 2007
		Senior Vice President & Chief Financial Officer Zenith National Insurance Corp.

CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report on Form 10-K of Zenith National Insurance Corp. ("Company") for the year ended December 31, 2006, as filed with the Securities and Exchange Commission on the date hereof ("Report"), Stanley R. Zax, as Chief Executive Officer of the Company, and Kari L. Van Gundy, as Chief Financial Officer of the Company, each hereby certifies, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge:

(1): The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2): The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: February 16, 2007


Chairman of the Board and President (Chief Executive Officer)		Chief Financial Officer

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended ("Exchange Act")) as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports that we file or submit under the Exchange Act and are effective in ensuring that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) or 15d-15(f). Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control—Integrated Framework. Based on our evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2006.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

NEW YORK STOCK EXCHANGE CORPORATE GOVERNANCE LISTING STANDARDS

Zenith National is listed on the New York Stock Exchange. As required by Section 303A.12(a) of the New York Stock Exchange Listed Company Manual, Mr. Zax, as the Chief Executive Officer of Zenith, certified on May 31, 2006, that he was not aware of any violation by Zenith of NYSE Corporate Governance listing standards as of such date.

CORPORATE DIRECTORY
ZENITH NATIONAL INSURANCE CORP.
ZENITH INSURANCE COMPANY

CORPORATE DIRECTORY
ZENITH NATIONAL INSURANCE CORP.

DIRECTORS
Also Directors of
Zenith Insurance Company

Max M. Kampelman
Attorney; Of Counsel,
Fried, Frank, Harris,
Shriver & Jacobson LLP

Robert J. Miller
Attorney; Principal,
Dutko Worldwide

Leon E. Panetta
Founder and Director,
The Leon & Sylvia Panetta
Institute for Public Policy

Catherine B. Reynolds
Chairman and CEO
The Catherine B. Reynolds Foundation

Alan I. Rothenberg
Attorney; Chairman, First
Century Bank N.A.;
Retired Partner,
Latham & Watkins LLP

William S. Sessions
Attorney,
Holland & Knight LLP
and Security Consultant

Gerald Tsai, Jr.
Management of
Private Investments

Michael Wm. Zavis
Attorney; Retired Founding Partner,
Katten Muchin Zavis Rosenman

Stanley R. Zax
Chairman of the Board
and President

EXECUTIVE OFFICERS

Stanley R. Zax
Chairman of the
Board and President

Michael E. Jansen
Executive Vice President
and General Counsel

Jack D. Miller
Executive Vice President

Davidson M. Pattiz
Executive Vice President

Keith E. Trotman
Executive Vice President

Robert E. Meyer
Senior Vice President

Kari L. Van Gundy
Senior Vice President,
Chief Financial Officer,
Treasurer and Assistant Secretary

OFFICER

Hyman J. Lee Jr.
Vice President, Assistant General
Counsel and Secretary

TRANSFER AGENT-
COMMON STOCK
Mellon Investor Services LLC
Newport Office Center VII
480 Washington Blvd.
Jersey City, NJ 07310
www.melloninvestor.com

TRANSFER AGENT-
8.55% CAPITAL SECURITIES
Wells Fargo Corporate Trust Services
Wells Fargo Bank, National Association
Minneapolis, MN

TRANSFER AGENT-
5.75% CONVERTIBLE SENIOR NOTES
Wells Fargo Corporate Trust Services
Wells Fargo Bank, National Association
Minneapolis, MN

CORPORATE
HEADQUARTERS
21255 Califa Street
Woodland Hills, CA 91367
(818) 713-1000

NYSE TRADING SYMBOL
COMMON STOCK — ZNT

INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
PricewaterhouseCoopers LLP
Los Angeles, CA

THE ANNUAL REPORT
on Form 10-K for the year ended December 31, 2006, quarterly
reports on Form 10-Q, current
reports on Form 8-K and all
amendments to these reports may
be obtained at our website at www.thezenith.com or free of
charge upon written request to:
Chief Financial Officer
Zenith National Insurance Corp.
21255 Califa Street
Woodland Hills, CA 91367

WEBSITE
www.thezenith.com

CORPORATE DIRECTORY
ZENITH INSURANCE COMPANY

OFFICERS

Stanley R. Zax
Chairman of the Board
and Chief Executive Officer

Jack D. Miller
President
and Chief Operating Officer

A. Mary Ames
Executive Vice President

Eden M. Feder
Executive Vice President

John C. Hasbrouck
Executive Vice President

Michael E. Jansen
Executive Vice President and
General Counsel

Robert E. Meyer
Executive Vice President
and Chief Actuary

Davidson M. Pattiz
Executive Vice President

Bernyce M. Peplowski
Executive Vice President

Keith E. Trotman
Executive Vice President

Kari L. Van Gundy
Executive Vice President,
Chief Financial Officer and Treasurer

Stephen J. Albers
Senior Vice President

Bryan A. Anderson
Senior Vice President

Linda J. Carmody
Senior Vice President

Jason T. Clarke
Senior Vice President

Anita Devan
Senior Vice President

Robert L. Hernandez
Senior Vice President

Westley M. Heyward
Senior Vice President

Fred A. Hunt
Senior Vice President

Corey A. Ingber
Senior Vice President

Jonathan W. Lindsay
Senior Vice President

James S. Lubman
Senior Vice President

Robert J. Peters
Senior Vice President

Richard B. Riddle
Senior Vice President

Chris L. Uselton
Senior Vice President

John H. Weber
Senior Vice President

Glen R. Zepnick
Senior Vice President

Rhen C. Bass
Vice President

Brian R. Beams
Vice President

Jeffrey J. Beaudoin
Vice President

Kathleen M. Burns
Vice President

Suzanne M. Chapan
Vice President

Duane H. Chernow
Vice President

Douglas A. Claman
Vice President

Gerald D. Curtin
Vice President

Charles J. Davis
Vice President

Bradley C. Eastwood
Vice President

J. Rae Farese
Vice President

Gary P. Fore
Vice President

Stephen T. Frye
Vice President

Antonio Gaitan
Vice President

Michael B. Gillikin
Vice President

Jackie C. Hilston
Vice President

Carolyn N. Hinson
Vice President

Daniel W. Huckemeyer
Vice President

Mark M. Jansen
Vice President

Mark A. Koman
Vice President

Gerald F. Ladner
Vice President

Steven M. Larson
Vice President

Hyman J. Lee Jr.
Vice President, Assistant General
Counsel and Secretary

Jenny S. Lewis
Vice President

Esther Liu
Vice President

Donald C. Marshall
Vice President

Thomas M. McCarthy
Vice President

Michael R. McFadden
Vice President

Timothy I. Mertz
Vice President

Colin S. Mitchell
Vice President

Mahtab Moayedi
Vice President

David J. Oberg
Vice President

David A. O'Connor
Vice President

Charlene C. Ossler
Vice President

David C. Park
Vice President and Assistant
General Counsel

Scott G. Perrotty
Vice President

S. Daniel Petrula
Vice President

Tracy S. Pletcher
Vice President

Steven M. Rothman
Vice President

Scott M. Sandler
Vice President

Jay S. Schwanz
Vice President

Marcia T. Shafer
Vice President

Alan I. Steinhardt
Vice President

CORPORATE DIRECTORY
ZENITH OFFICE LOCATIONS

LOS ANGELES, CA
Corporate Headquarters
and Los Angeles Regional Office
21255 Califa Street
Woodland Hills, CA 91367
(818) 713-1000
www.thezenith.com

FRESNO, CA
7440 N. Palm Avenue
Suite 103
Fresno, CA 93711
(800) 508-9910

GLENDALE, CA
700 North Brand Blvd.
7^th Floor
Glendale, CA 91203
(818) 502-7500

ORANGE, CA
790 The City Drive South
Suite 300
Orange, CA 92868
(714) 705-2300

PLEASANTON, CA
4309 Hacienda Drive
Suite 200
Pleasanton, CA 94588
(925) 460-0600

SACRAMENTO, CA
1601 Response Road
Suite 200
Sacramento, CA 95815
(916) 614-3140

SAN DIEGO, CA
7676 Hazard Center Drive
Suite 1200
San Diego, CA 92108
(619) 299-6252

SAN FRANCISCO, CA
425 California Street
Suite 1010
San Francisco, CA 94104
(415) 986-0187

SANTA CRUZ, CA
1200 Pacific Avenue
Suite 310
Santa Cruz, CA 95060
(831) 460-7700

SOLANA BEACH, CA
420 Stevens Ave.
Suite 300
Solana Beach, CA 92075
(858) 509-6100

AUSTIN, TX
1101 South Capitol of Texas Hwy.
Bldg. J
Austin, TX 78746
(512) 306-1700

LISLE, IL
701 Warrenville Road
Suite 300
Lisle, IL 60532
(630) 353-7300

SPRINGFIELD, IL
2105 W. White Oaks Drive
Springfield, IL 62704
(217) 726-2900

BLUE BELL, PA
2 Valley Square
Suite 301
Blue Bell, PA 19422
(877) 311-0703

BIRMINGHAM, AL
10 Inverness Center Parkway
Suite 220
Birmingham, AL 35242
(800) 355-0708

HOLLYWOOD, FL
4000 Hollywood Blvd.
Suite 465
South Hollywood, FL 33021
(954) 983-1200

ORLANDO, FL
3504 Lake Lynda Drive
Suite 200
Orlando, FL 32817
(800) 999-3242

SARASOTA, FL
1390 Main Street
Sarasota, FL 34236
(800) 226-2324

CHARLOTTE, NC
900 W. Trade Street
Suite 600
Charlotte, NC 28202
(800) 200-2667

EX-21 6 a2175738zex-21.htm EXHIBIT 21
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Exhibit 21

SUBSIDIARIES OF THE REGISTRANT

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
(As of December 31, 2006)

Zenith National Insurance Corp. (a Delaware corporation)
Zenith National Insurance Capital Trust I (a Delaware statutory trust)
Zenith Development Corp. (a Nevada corporation)

                Zenith Insurance Company (a California corporation)
                                ZNAT Insurance Company (a California corporation)
                                Zenith Insurance Management Services, Inc. (a Florida corporation)
                                1390 Main Street LLC (a Delaware limited liability company)
                                Zenith of Nevada, Inc. (a Nevada corporation)

Each subsidiary shown is wholly-owned by the subsidiary shown in the tier above it.

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Exhibit 21

SUBSIDIARIES OF THE REGISTRANT
EX-31.1 7 a2175738zex-31_1.htm EXHIBIT 31.1
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Exhibit 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO
EXCHANGE ACT RULE 13a-14(a) OR RULE 15d-14(a)

I, Stanley R. Zax, certify that:

1.

I have reviewed this Annual Report on Form 10-K of Zenith National Insurance Corp.;

2.

3.

4.

(a): Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b): Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c): Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d): Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.

(a): All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b): Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: February 16, 2007

/s/ STANLEY R. ZAX

Stanley R. Zax
Chairman of the Board and President
(Chief Executive Officer)
Zenith National Insurance Corp.

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Exhibit 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO EXCHANGE ACT RULE 13a-14(a) OR RULE 15d-14(a)
EX-31.2 8 a2175738zex-31_2.htm EXHIBIT 31.2
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Exhibit 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO
EXCHANGE ACT RULE 13a-14(a) OR RULE 15d-14(a)

I, Kari L. Van Gundy, certify that:

1.

I have reviewed this Annual Report on Form 10-K of Zenith National Insurance Corp.;

2.

3.

4.

(a): Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b): Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c): Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d): Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.

(a): All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b): Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: February 16, 2007

/s/ KARI L. VAN GUNDY

Kari L. Van Gundy
Senior Vice President & Chief Financial Officer
Zenith National Insurance Corp.

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Exhibit 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO EXCHANGE ACT RULE 13a-14(a) OR RULE 15d-14(a)
EX-32 9 a2175738zex-32.htm EXHIBIT 32
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Exhibit 32

Certification of Chief Executive Officer and Chief Financial Officer Pursuant to
18 U.S.C. Section 1350,
as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Annual Report on Form 10-K of Zenith National Insurance Corp. (the "Company") for the year ended December 31, 2006, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), Stanley R. Zax, as Chief Executive Officer of the Company, and Kari L. Van Gundy, as Chief Financial Officer of the Company, each hereby certifies, pursuant to 18 U.S.C. !1350, as adopted pursuant to !906 of the Sarbanes-Oxley Act of 2002, that, to the best of his knowledge:

(1): The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2): The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ STANLEY R. ZAX
Name:		Stanley R. Zax
Title:		Chairman of the Board and President (Chief Executive Officer)
Date:		February 16, 2007
/s/ KARI L. VAN GUNDY
Name:		Kari L. Van Gundy
Title:		Chief Financial Officer
Date:		February 16, 2007

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Exhibit 32

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