10-K/A 1 a2111678z10-ka.htm FORM 10-K/A
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K/A
(Amendment No. 1)

FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934

ý	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002

o	TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the transition period from....... to .......
Commission file number 1-9627

ZENITH NATIONAL INSURANCE CORP.

(Exact Name of Registrant as Specified in Its Charter)

DELAWARE
(State or Other Jurisdiction of Incorporation
or Organization)

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

21255 Califa Street, Woodland Hills, California
(Address of Principal Executive Offices)

91367-5021
(Zip Code)

Registrant's telephone number, including area code: (818) 713-1000

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 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 checkmark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2) Yes X No

The aggregate market value of the voting stock of the registrant held by non-affiliates of Zenith National Insurance Corp. on June 30, 2002 was $305,976,000 (based on the closing sale price of such stock on such date).

At March 7, 2003, there were 18,768,000 shares of Zenith National Insurance Corp. common stock outstanding, net of 7,018,000 shares of treasury stock.

DOCUMENTS INCORPORATED BY REFERENCE

(1) Portions of the Annual Report to Stockholders for fiscal year ended December 31, 2002 — Part I and Part II.

(2) Portions of the Proxy Statement in connection with the 2003 Annual Meeting of Stockholders — Part III.

Total number of pages 94

Exhibit index located on pages 33-39

EXPLANATORY NOTE

This Amendment No. 1 on Form 10-K/A amends Items 1, 8 and 15 and Exhibit 13 to our Annual Report on Form 10-K for the year ended December 31, 2002 to provide additional information with respect to Advent Capital (Holdings) PLC, a U.K. Company ("Advent Capital") in which Zenith owns 20.9% of its outstanding shares. Specifically, (i) Item 1. "Business" is amended to provide a reconciliation of changes in Advent Capital's liability for unpaid losses and loss adjustment expenses and to provide a table that shows development of Advent Capital's loss and loss adjustment expense liabilities (see pages 14 to 15), (ii) Item 8. "Financial Statements and Supplementary Expense Data" is amended to provide additional summary financial information for Advent Capital in Note 2 to Zenith's Consolidated Financial Statements, which are incorporated by reference from Zenith's 2002 Annual Report to Stockholders and attached, as revised, as Exhibit 13 to this Form 10-K/A, and (iii) Item 15. "Exhibits, Financial Statement Schedules and Reports on Form 8-K" is amended to add Financial Statement Schedule VI which includes supplementary information concerning property-casualty insurance operations of Advent Capital, and to include the separate financial statements of Advent Capital as of December 31, 2002 and 2001, and for the three years ended December 31, 2002.

Except with respect to the above described information concerning Advent Capital, this report continues to speak as of the date of the original filing of our report on Form 10-K filed on March 14, 2003 and we have not updated this disclosure in this report to speak as of a later date. All information contained in this report is subject to updating and supplementing as provided in our periodic reports filed with the Securities and Exchange Commission.

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 insurance subsidiaries, Zenith Insurance Company ("Zenith Insurance"), ZNAT Insurance Company ("ZNAT Insurance") and Zenith Star Insurance Company ("Zenith Star"), in the property-casualty insurance business. Unless otherwise indicated, all references to "Zenith," "we," "us," "our," the "Company" or similar terms refer to Zenith National together with its subsidiaries.

On October 8, 2002, Zenith closed the sale of its home-building business and related real estate assets in Las Vegas, Nevada to Meritage Corporation ("Meritage"). The business had been operated by Zenith National's indirect wholly-owned subsidiary, Perma-Bilt, a Nevada Corporation ("Perma-Bilt"). In the transaction, Meritage, through its wholly-owned subsidiary, MTH-Homes Nevada, Inc. ("MTH Nevada"), acquired substantially all of Perma-Bilt's assets, subject to the related liabilities, pursuant to a Master Transaction Agreement, dated as of October 7, 2002, and related asset and real property acquisition agreements. Zenith received gross proceeds of $65.0 million in connection with the sale, including $28.4 million in repayment of intercompany loans to Zenith National from Perma-Bilt.

In 2002, Zenith's insurance subsidiaries were assigned a financial strength rating of A- (Excellent) by A.M. Best Company ("A.M. Best"); Baa1 (Adequate) by Moody's Investors Service ("Moody's"); BBB+ (Good) by Standard & Poor's ("S&P"); and A- (Strong) by Fitch Ratings ("Fitch"). These A.M. Best, Moody's, S&P and Fitch ratings are based upon factors of concern to policyholders and insurance agents and are not directed toward the protection of investors.

At December 31, 2002, Zenith had approximately 1,200 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 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.

Glossary of Selected Insurance Terms

The following terms when used herein have the following meanings:

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 a reinsurer all or a portion of a risk in consideration of payment of a premium.
Combined ratio		The sum of net incurred losses, loss adjustment expenses, underwriting expenses and policyholders' dividends, expressed as a percentage of net premiums earned. The combined ratio is the key measure of underwriting profitability used in the property-casualty insurance business.
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 levels at which they were reserved or subsequent estimates indicate a basis for reserve decreases on open claims. Development is unfavorable when losses ultimately settle for more than levels at which they were reserved or subsequent estimates indicate a basis for reserve increases on open claims.
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.
Loss adjustment expenses		The expenses of investigating and settling claims, including legal and other fees, and general expenses of administering the claims adjustment process.
Loss ratio		Net losses incurred expressed as a percentage of net premiums earned.
Net premiums earned		The portion of net premiums written applicable to the expired period of policies.
Participating policy		A policy upon which dividends may be paid after expiration.
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 unexpired term.
Reinsurance		A transaction in which an original insurer, or cedant, 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.
Reserves or loss reserves		The balance sheet liability representing estimates of amounts needed to pay reported and unreported claims and related loss adjustment expenses.
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 prescribed or permitted by the states' departments of insurance. In general, statutory accounting practices address policyholder protection and solvency and are more conservative in presentation of earnings, surplus and assets than generally accepted accounting principles ("GAAP").
Treaty		A contract of reinsurance.
Underwriting		The process whereby an insurer reviews applications submitted for insurance coverage and determines whether it will 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

Zenith is in the business of managing insurance risk and investment risk. Our main business activity is the workers' compensation insurance business. In addition, Zenith maintains a portfolio of investments, principally in fixed maturity securities, funded by the cash flows from its insurance operations and capital. Investment income from the portfolio is impacted by current and historical interest rates and the amount of funds generated annually from (or used by) insurance operations. Results of insurance operations, excluding investment income, may fluctuate due to, among other things, the possibility of material and unpredictable catastrophe losses in our reinsurance business.

Our business is classified into the following segments: Workers' Compensation, Reinsurance, Investment and Parent. Workers' Compensation is our main insurance activity supplemented by a smaller assumed Reinsurance operation. We sold our home-building business and related real estate assets in 2002. Results and descriptions of Zenith's business segments are contained in the Notes to

Consolidated Financial Statements — Note 20 — "Segment Information" in Zenith's 2002 Annual Report to Stockholders, and is hereby incorporated by reference.

Workers' Compensation

Workers' compensation insurance provides coverage for the statutorily prescribed benefits that employers are required to pay to their employees injured in the course of employment. Zenith's Workers' Compensation policies are issued to employers who also pay the premiums. The policies provide payments to covered, injured employees of the policyholder for, among other things, temporary or permanent disability benefits, death benefits, medical and hospital expenses and expenses of vocational rehabilitation. 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: the applicable premium rate, which varies with the nature of the employees' duties and the business of the employer; a factor reflecting the insured employer's historical loss experience; and the amount of the insured employer's payroll. Payrolls may be affected significantly by changes in employment and wage levels. 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. Except in Florida, where rates for workers' compensation insurance are set by the Department of Insurance, Zenith's rates for workers' compensation are actuarially determined in each state in which it does business. 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, either by way of a dividend or a retrospective-rating formula which may also involve additional premium being billed to the policyholder if loss experience is worse than expected. Although we have offered these types of policies at times and have written a small number of them, we prefer to offer our customers a policy with a guaranteed cost based on rates, payroll and experience modification factors. Competition in the national workers' compensation insurance industry is intense, even in Florida where dividend plans and retrospectively-rated policies form the basis for price competition.

Zenith's long-term strategy in the national workers' compensation industry is to provide a value-added insurance policy based on adequate rates. During periods of intense competition or other adverse industry conditions, our premium revenue is reduced as employers buy elsewhere. Our basic value proposition is that our services, over the long run, provide employers the opportunity to reduce their experience modification factor and their long-term, net 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 policyholders to prevent fraud and assist them to favorably resolve litigated claims. Our premium auditors provide appropriate payroll classifications to assure equitable premium billing.

During 2002, Zenith wrote workers' compensation insurance in 45 states. Prior to 1992, Zenith's Workers' Compensation operations were concentrated principally in California. Zenith's Workers' Compensation operations expanded to Texas in 1992 with other states following shortly thereafter. Florida operations commenced with the acquisition of the Associated General Commerce Self-Insurers' Trust Fund 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. Net premiums earned for the year ended December 31, 2002 by state are set forth in the table below:

(Dollars in thousands)	2002		%
California	$	277,120	55.0	%
Florida		97,925	19.4
North Carolina		26,291	5.2
Texas		23,065	4.6
Illinois		11,237	2.2
Pennsylvania		9,137	1.8
Georgia		8,264	1.6
Arizona		7,979	1.6
Iowa		6,287	1.2
Other		36,554	7.4

Net Premiums Earned	$	503,859	100.0	%

A commonly used industry measurement of property and casualty insurance underwriting results is the combined ratio. It is the sum of net incurred losses, loss adjustment expenses, underwriting expenses and policyholders' dividends, expressed as a percentage of net premiums earned. Earned premiums and the combined ratios of our Workers' Compensation and Reinsurance businesses for the each of the three years ended December 31, 2002 are set forth in the Overview section of the Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations of Zenith's 2002 Annual Report to Stockholders and are hereby incorporated by reference.

For the past several years, national workers' compensation industry results have been extremely unprofitable as intense competition resulted in inadequate levels of premium rates at the same time as the industry experienced a general trend of declining frequency and of increasing claim severity. In addition, there are reports by certain industry organizations of significant under-reserving in the industry's reported results. Zenith's in-force Workers' Compensation premiums decreased consistently in the several years prior to 2000 as a result of Zenith's endeavors to maintain rate adequacy in the face of intense competition in the national workers' compensation insurance industry. Competitive pricing conditions began to improve, principally in California, in 2000 and continued through 2002. As a result of this improvement and in conjunction with the rate increases described below, Zenith increased its in-force premiums in California from $146.7 million at December 31, 2000 to $210.4 million at December 31, 2001 and to $350.2 million at December 31, 2002. Outside of California, where competition and pricing are improving only in certain states, Zenith's in-force premiums increased from $162.4 million at December 31, 2000 to $209.7 million at December 31, 2001 and to $259.2 million at December 31, 2002.

Overall effective rate increases are about 21% for 2003 compared to 18% in 2002, including 30% increases in California for 2003 compared to 27% in the prior year.

In California, on January 1, 2003, workers' compensation legislation became effective that provides for increases in the benefits payable to injured workers. Other changes included in the legislation are intended to help control costs and encourage the return to work of injured workers. We cannot quantify the impact of the legislation at this time, but intend to estimate and implement appropriate rate increases. Effective January 1, 2003, Zenith implemented a rate increase of approximately 11% in California on new and renewal policies and approximately 5% on the unexpired term of policies in-force on January 1, 2003. Our California workers' compensation rates will be increased by a further 6.6% on April 1, 2003. The major risk factor is whether or not the legislation or the economy, or a combination of the two, will change the long-term favorable trend of reduced claim frequency and whether or not we can estimate and implement timely and appropriate rate increases.

Zenith expects that the future profitability of its Workers' Compensation operations will be dependent upon the following: 1) general levels of competition; 2) industry pricing; 3) general levels of interest rates; 4) legislative and regulatory actions; 5) the frequency and severity of terrorist acts, if any, similar to the World Trade Center attack of September 11, 2001; 6) management's ability to estimate the impact of any continuing adverse claim severity trends, including increases in the cost of healthcare, on the adequacy of loss reserve estimates and premium rates; and 7) the impact in California of the new legislation that increases workers' compensation benefits. Claim frequency trends continue to decline, but the reasons therefor are not clear, and management is unable to predict whether these trends will continue. Zenith is unable to predict when its Workers' Compensation operations will return to underwriting profitability, although it anticipates continuing improvement in the combined ratio and profitability in the near term as earned premiums reflect recent rate increases. Also, operating results are expected to benefit from investing increases in cash flow from Workers' Compensation underwriting operations.

Reinsurance

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 operation participates in assumed reinsurance transactions in which, typically, the reinsurance coverage being purchased by the ceding company is shared among a number of assuming companies. We currently focus 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 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.

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, liability reinsurance constituted about 20% of our earned reinsurance premiums in the ten years ended December 31, 2002.

We participate in reinsurance contracts that are 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 (excess of loss reinsurance). Depending upon market conditions and other factors, the volume of premiums written fluctuates from year to year. By diversifying the geographical spread of risk and limiting the number of contracts that we write, Zenith's assumed reinsurance business is written so as to limit expected losses, after deducting the applicable premium income and income taxes, from any one catastrophe event in a worst-case scenario to a maximum probable loss of approximately 5% of consolidated stockholders' equity (currently about $15 million).

Underwriting income or loss and the combined ratio of the Reinsurance operation fluctuate significantly depending upon the incidence or absence of large catastrophe losses. However, since its inception in 1985, the combined ratio of our Reinsurance operation through December 31, 2002 was 101.6% on $648.8 million of net premiums earned. Loss reserves, net of reinsurance, at December 31, 2002 in our Reinsurance operation were $130.7 million. In 2002, estimated catastrophe losses were $0.4 million; principally from losses associated with floods in Europe, otherwise, there were no major catastrophe losses in 2002. The Reinsurance operation was adversely impacted by catastrophe losses of

$41.7 million and $22.6 million before tax in 2001 and 2000, respectively. Catastrophe losses in 2001 included $37.6 million, net of additional premium income earned in the year attributable to original and reinstatement premiums, associated with the terrorist attack on the World Trade Center on September 11, 2001. Catastrophe losses in 2000 were attributable to additional estimates of the impact of the events in 1999, particularly moderate-sized catastrophes which culminated in severe storms in Europe at the end of 1999.

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

Investments

Our Investments department invests the funds made available by our capital and the cash flows from our insurance operations. Because 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. The objective of the Investment operations is to provide income and realized gains on investments, primarily from investments in debt securities consistent with investment guidelines approved by the Board of Directors of each company making the investment and taking into consideration state regulatory restrictions. The allocation 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. At December 31, 2002, Zenith's consolidated investment portfolio emphasized high-quality, taxable bonds and short-term investments, supplemented by smaller portfolios of redeemable and other preferred and common stocks. The portfolio of taxable bonds includes U.S. Government securities, mortgage-backed securities issued by the Government National Mortgage Association and corporate bonds diversified to produce a reasonable balance of risk and a stable source of earnings.

Investment yields for each of the three years ended December 31, 2002 and a discussion of the composition of the investment portfolio at December 31, 2002 and 2001 are set forth under the Investments section of the Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations of Zenith's 2002 Annual Report to Stockholders and are hereby incorporated by reference. This information shows the trend of an increasing investment portfolio as a result of increased cash flows from operations and the trend of declining interest rates resulting in roughly consistent net investment income over the past three years.

Zenith has identified certain securities, amounting to 89% of the investments in debt securities at December 31, 2002, as "available-for-sale." Stockholders' equity increased by $20.2 million after deferred tax from December 31, 2001 to December 31, 2002 as a result of changes in the fair values of such investments. Stockholders' equity will fluctuate with any changes in the fair values of available-for-sale securities.

On August 23, 2002, Zenith Insurance acquired 19.2 million Ordinary Shares of Advent Capital (Holdings) PLC, a U.K. company ("Advent Capital") for $14.6 million in an open offer and placing of shares made in July 2002. As a result of the purchase, Zenith owns approximately 20.9% of the outstanding shares of Advent Capital. Advent Capital and its subsidiaries operate in the property and casualty insurance business in the United Kingdom by providing corporate capital to support underwriting of various Lloyd's syndicates and by managing those syndicates. Zenith Insurance used available funds from its short-term investments to fund the purchase of the Advent Capital shares. Prior to August 23, 2002, Zenith owned approximately 6.3% of the outstanding shares of Advent

Capital and accounted for the investment on the cost basis. As of August 23, 2002, Zenith is accounting for its investment in Advent Capital based on the equity method in accordance with the provisions of Accounting Principles Board Opinion No. 18, "The Equity Method of Accounting for Investments in Common Stock" ("APB No. 18"). In accordance with the provisions of APB No. 18, our investment in Advent Capital was restated in 2001 as if the equity method of accounting had been applied. The effect was a reduction in the carrying value of the investment of $3.2 million at December 31, 2001 and a reduction of net income for 2001 of $2.1 million, net of deferred tax benefit. The carrying value of the investment in the common stock of Advent Capital is equal to Zenith's equity in the underlying net assets of Advent Capital. The carrying value at December 31, 2002 was $18.3 million, including goodwill of $10.5 million. At December 31, 2002, Zenith has accounted for its investment in Advent Capital using Advent Capital's September 30, 2002 financial statements. Zenith will continue to report its share of Advent Capital's income and net assets lagged by one quarter in order to allow sufficient time for Advent Capital to prepare the information. Fairfax Financial Holdings Limited ("Fairfax") also participated in the open offer and placing of shares by Advent Capital and after the purchase, through its subsidiaries, Fairfax owns approximately 47% of Advent Capital. Companies controlled by Fairfax owned 42% of the outstanding common stock of Zenith National at December 31, 2002. Fairfax has disclaimed any control of Zenith and has granted a proxy covering all its shares of Zenith National to an individual trustee with instructions to vote the shares in proportion to the voting of all other Zenith National shareholders.

Parent

The Parent operations represent the holding company activities of Zenith National, which owns, directly or indirectly, all of the capital stock of its insurance and non-insurance subsidiaries. Results of the Parent reflect the operating expenses that it incurs in the course of its holding company activities, such as directors fees; stock exchange listing and other licensing fees; insurance costs; 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 operating results.

Discontinued Real Estate Operations

On October 8, 2002, Zenith closed the sale of its home-building business and related real estate assets in Las Vegas, Nevada to Meritage. The business had been operated by Perma-Bilt. In the transaction, Meritage, through MTH Nevada, acquired substantially all of Perma-Bilt's assets, subject to the related liabilities, pursuant to a Master Transaction Agreement, dated as of October 7, 2002, and related asset and real property acquisition agreements (the "Agreement"). Zenith received gross proceeds of $65.0 million in connection with the sale, including $28.4 million in repayment of intercompany loans to Zenith National from Perma-Bilt, and recorded a gain on the sale in the fourth quarter of 2002 of $6.3 million after tax.

In addition to the consideration received in October 2002, the Agreement entitles us 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 are currently unable to estimate how much, if anything, we might receive under this earn-out provision.

For the years ended December 31, 2002, 2001 and 2000, total revenues recognized in the Real Estate operations were $70.8 million, $84.8 million and $84.5 million, respectively, and pre-tax income, excluding the gain on the sale of the business in 2002, was $4.4 million, $5.8 million and $5.5 million, respectively.

Loss and Loss Expense Reserves and Claims and Loss Developments

Accounting for property and casualty insurance operations 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 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 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. 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. Favorable or unfavorable development of loss reserves is reflected currently in earnings.

The adequacy of loss reserve estimates is an inherent risk of the property and casualty insurance business. We endeavor to minimize this risk by relying on the estimates of our professional claims adjusting staff, supplemented by actuarial estimation techniques. Loss reserves, as related to reported claims, are based upon periodic case-by-case evaluation and judgment by Zenith's claims adjusting staff, updated and reviewed continuously to reflect current information. Actuarial techniques and methods are utilized to establish the most reasonably accurate estimate of loss reserves at a point in time including an estimate of the probable amount for unreported claims arising from accidents which have not yet been reported to the Company, commonly known in the industry as "incurred but not reported" or "IBNR." Judgment is required in actuarial estimation to ascertain the relevance of historical payment and claim settlement patterns under current facts and circumstances. Zenith continually monitors loss development trends and data to establish adequate premium rates and reasonable loss reserves estimates. The adequacy of loss reserves, which are based on estimates, is inherently uncertain and represents a significant risk to the business which we attempt to mitigate. No assurance can be given whether the ultimate liability will be more or less than such estimates.

The table that follows shows development of loss and loss adjustment expense liabilities as originally estimated in accordance with GAAP at December 31 of each year presented.

		2002	2001			2000			1999			1998		1997			1996			1995			1994		1993		1992

(Dollars in thousands)
Liability for unpaid loss and loss adjustment expenses, net		$825,869	$	742,678		$	634,172		$	605,250		$708,684		$	525,601		$	526,427		$	463,123		$	462,710	$	474,499	$	471,832

Paid, net (cumulative) as of:
	One year later			239,098			243,506			235,968		271,019			195,596			209,346			185,764			175,488		173,699		184,498
	Two years later						370,100			384,011		414,432			284,080			322,519			295,872			274,560		272,221		292,914
	Three years later									457,717		500,672			338,530			373,383			350,279			331,532		325,916		355,710
	Four years later											546,076			378,536			406,597			378,174			362,287		364,420		389,417
	Five years later														400,853			433,583			398,951			379,517		384,303		416,297
	Six years later																	449,924			417,032			394,481		395,473		429,715
	Seven years later																				427,565			406,856		406,326		438,074
	Eight years later																							414,164		415,840		447,150
	Nine years later																									421,639		454,285
	Ten years later																											459,070

Liability, net re-estimated as of:
	One year later			771,846			638,519			636,130		753,508			514,234			526,078			459,314			460,575		464,779		480,903
	Two years later						651,266			635,750		753,511			511,343			520,114			464,830			450,675		453,497		483,334
	Three years later									638,920		740,559			503,684			516,184			460,782			442,391		452,330		482,019
	Four years later											751,546			516,426			503,821			457,177			437,216		446,746		487,447
	Five years later														526,524			508,239			454,083			434,479		442,053		483,294
	Six years later																	515,205			452,035			439,871		439,446		477,642
	Seven years later																				457,059			436,294		443,887		475,650
	Eight years later																							437,623		439,728		480,399
	Nine years later																									438,851		476,453
	Ten years later																											474,747

Favorable (deficient) development, net				(29,168	)		(17,094	)		(33,670	)	(42,862	)		(923	)		11,222			6,064			25,087		35,648		(2,915	)

Net Liability — December 31,		825,869		742,678			634,172			605,250		708,684			525,601			526,427			463,123			462,710		474,499		471,832
Receivable from reinsurers and state trust funds for unpaid losses		215,663		204,144			243,711			275,679		288,963			87,665			93,651			54,429			47,696		44,919		33,070

Gross liability — December 31,		1,041,532		946,822			877,883			880,929		997,647			613,266			620,078			517,552			510,406		519,418		504,902
Re-estimated liability, net of reinsurance				771,846			651,266			638,920		751,546			526,524			515,205			457,059			437,623		438,851		474,747
Re-estimated receivable from reinsurers and state trust funds for unpaid losses				198,606			215,858			244,133		306,033			114,947			109,623			79,346			67,770		74,420		88,352

Re-estimated liability, gross				970,452			867,124			883,053		1,057,579			641,471			624,828			536,405			505,393		513,271		563,099

Favorable (deficient) development, gross				(23,630	)		10,759			(2,124	)	(59,932	)		(28,205	)		(4,750	)		(18,853	)		5,013		6,147		(58,197	)

The accounting policies used to estimate the liabilities in the preceding table are described in Note 1 to the Consolidated Financial Statements in Zenith's 2002 Annual Report to Stockholders which note is hereby incorporated by reference.

The analysis in the preceding table presents the development of Zenith National and subsidiaries' balance sheet liabilities for unpaid loss and loss adjustment expenses. The first line in the table shows the liability for unpaid loss and loss adjustment expenses, net of reinsurance, as estimated at the end of each calendar year. The first section below that 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 at the end of subsequent annual periods. The second section shows revised estimates of the original unpaid amounts, net of reinsurance, including the subsequent payments and re-estimates of the remaining unpaid liabilities. The next line shows the favorable or deficient developments of the original estimates for each year, net of reinsurance. This loss reserve development table is cumulative and, therefore, balances at the end of an accounting period should not be added since the amount at the end of each calendar year includes activity for both the current and prior years. The liability at the end of each year includes an estimate of the amount yet unpaid and still due at the subsequent

re-evaluation date for all previously estimated liabilities. For example, the liability at the end of 2002 includes an estimate of the amount still due on the 2001 and prior liabilities.

Starting with the liability at the end of 1998, our loss reserve estimates include amounts for the loss reserves we assumed from RISCORP in the RISCORP Acquisition. The purchase price of RISCORP was determined in a three-step process, which culminated in the determination by a neutral auditor and neutral actuary of the GAAP values of the assets and liabilities being acquired from RISCORP. In 1999, we determined that it was necessary to increase the estimate of the loss reserves assumed from RISCORP by about $46.0 million, net of reinsurance. This adjustment to the RISCORP purchase price is reflected in the preceding table as adverse development in 1999 of the 1998 loss reserve liability.

In 1999, we sold CalFarm Insurance Company ("CalFarm"), a wholly-owned subsidiary of Zenith Insurance, which we had owned since 1985. CalFarm wrote insurance coverage for automobile, homeowners, group health, farmowners and other businesses, principally in California. We retained no liabilities for any of CalFarm's unpaid losses or 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 for CalFarm's loss reserve estimates include payments through March 31, 1999, the date of the sale. Subsequent re-estimates of CalFarm's loss reserves are also included in the preceding table. After the date of sale, the re-estimated liability for CalFarm's loss reserves reflects the last re-estimate of CalFarm's liabilities that we made prior to the sale.

Adverse development in 2002 on the reserves established at December 31, 2001 is attributable principally to an increase in workers' compensation loss reserve estimates in the fourth quarter of 2002 due to higher than previously estimated inflation trends, which is discussed below under "Workers' Compensation Loss Reserves." Adverse development in 2001 on the reserves established at December 31, 2000 and adverse development in 2000 on the reserves established at December 31, 1999 is attributable, principally, to additional estimates of 1999 catastrophe losses which is discussed below under "Reinsurance Loss Reserves."

Since conditions and trends that have affected loss 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.

Additional information concerning the effect of loss reserve estimates on the Consolidated Financial Statements is included under "Critical Accounting Policies and Estimates" and under "Loss Reserves" in the Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations in Zenith's 2002 Annual Report to Stockholders and are hereby incorporated by reference.

Reference is made to the table setting forth the reconciliation of changes in the liabilities for loss and loss adjustment expenses included in Notes to Consolidated Financial Statements — Note 7 — "Liability for Unpaid Loss and Loss Adjustment Expenses" in Zenith's 2002 Annual Report to Stockholders, which is hereby incorporated by reference.

Workers' Compensation Loss Reserves

Workers' compensation loss reserves constitute about 84.2% of the net liabilities for unpaid losses and loss adjustment expenses in Zenith's Consolidated Balance Sheet at December 31, 2002. The amount and timing of payments for benefits for workers' compensation claims varies considerably with the nature and severity of the injury and the timeliness of reporting the claim. Payments may take place many years after the initial injury and the establishment of a loss reserve. Zenith regards the timely settlement of its Workers' Compensation claims as important to its profitability and settles cases in exchange for lump-sum payments, where possible, to expedite this process.

Zenith maintains four regional offices in California and offices in Florida, Texas, Pennsylvania, Utah, Illinois and North Carolina, each of which is fully staffed to conduct all workers' compensation claims operations, including review of initial reports of work injury, assignment of appropriate field investigation and determination of whether subrogation should be pursued. Workers' Compensation claims operations are supported by computer systems that provide immediate access to policy coverage verification and claims records and enable Zenith to detail claims payment histories and policy loss experience reports. Our home office technical claims staff provides training, quality assurance and technical support to our field offices. Independent consultants are routinely used to visit our field claims offices to audit and assess the quality of our operations. A fully staffed, in-house legal department is available to assist with litigated claims. Our Medical Management department provides medical cost containment support to our claims department, through medical bill review and negotiation, case management services, identifying and maintaining preferred medical provider relationships and establishing best practices in treating common workplace injuries.

Estimating the impact of adverse severity trends is a major risk factor in estimating adequate loss reserves for our Workers' Compensation business. In the fourth quarter of 2002, we increased our estimate of workers' compensation loss reserves for prior periods by $30.0 million. The change in the estimate was composed of $2.4 million related to claims for 2002, $21.2 million related to claims for 2001 and $6.4 million related to claims for 2000. Therefore, workers' compensation loss reserves of $536.7 million at December 31, 2000 would have been higher by $6.4 million (or 1.2%); loss reserves of $599.7 million at December 31, 2001 would have been higher by $27.6 million (or 4.6%); and loss reserves of $641.2 million at September 30, 2002 would have been higher by $30.0 million (or 4.7%). Workers' compensation loss reserves are stated here net of reinsurance.

During 2002, as in prior years, quarterly reviews of Zenith's workers' compensation reserves were performed. The observed paid loss development and inflation during the first two quarters were in-line with our estimates and expectations as of the previous year-end. The third quarter review showed greater than expected paid loss development and inflation. Given only one quarter of higher than expected inflation, we did not incorporate the new trend into our loss reserve estimates pending confirmation of the increase in the inflation rate in any subsequent quarters. The fourth quarter review also showed higher than anticipated inflation.

Given the confirmation of the higher inflation trend in the fourth quarter, we determined it was appropriate to increase our estimates of the ultimate losses for accident years 2000, 2001 and 2002 by $30.0 million to incorporate these higher levels of inflation. These adverse inflationary trends were most noticeable in our California business. Loss development trends elsewhere, principally in Florida, were more favorable than anticipated. The $30.0 million increase in loss reserves in 2002 was comprised of an increase of $50.0 million in California reserves offset by a decrease of $20.0 million in reserves outside of California, principally in Florida.

In 2000, Zenith increased the estimate of unpaid Workers' Compensation losses for the 1999 accident year by about $8.0 million, principally as a result of higher than expected claims severity. This change in estimate means that workers' compensation loss reserves of $516.9 million at December 31, 1999 should have been higher by $8.0 million (or 1.5%).

amounts due to reinsurers, at December 31, 2002. We bill the SDTF and receive reimbursements as we make payments on accepted claims. The SDTF is funded by assessing a fee of 4.52% of 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 substantial recoveries for second injury claims from the SDTF. We received reimbursements of $5.6 million in 2002, $13.0 million in 2001 and $5.9 million in 2000. The SDTF is currently about 30 to 36 months behind schedule in reimbursing claims but we expect to fully recover the remaining amount receivable.

Reinsurance Loss Reserves

Reinsurance loss reserves constitute about 15.8% of the net liabilities for unpaid losses and loss adjustment expenses in Zenith's Consolidated Balance Sheet at December 31, 2002. For the past several years, Zenith has written predominantly property reinsurance for which loss reserves are paid within a few years. Zenith also maintains loss reserves related to assumed reinsurance liability business written as early as 1985, the year of inception of its Reinsurance operations. Liability reserves in the Reinsurance business may take many years to be paid in full. Zenith uses information supplied by ceding companies in addition to its own data and opinions in arriving at estimates of ultimate losses for assumed reinsurance business. Estimating catastrophe losses in the Reinsurance business is highly dependent upon the nature and timing of the event and Zenith's ability to obtain timely and accurate information with which to estimate its liability to pay losses. Loss reserve estimates for catastrophe losses in recent years have developed unfavorably as discussed below.

In 2002, estimated catastrophe losses were $0.4 million before tax; principally from losses associated with floods in Europe; otherwise, there were no major catastrophe losses in 2002. In 2001, the Reinsurance operations were adversely impacted by $41.7 million of catastrophe losses before tax, including $37.6 million for the World Trade Center loss, net of additional premium income earned in the year attributable to original and reinstatement premiums. The World Trade Center loss is discussed in detail below. Catastrophe losses of $22.6 million before tax in 2000 are attributable to estimates of additional losses from the events in 1999. In 1999, the worldwide catastrophe reinsurance business received a large number of claims attributable to a high frequency of natural disasters that year, culminating in severe storms in Europe at the end of 1999.

In 2001, Zenith incurred a significant loss in connection with the attack on the World Trade Center on September 11. There is considerable uncertainty as to the aggregate amount of insured loss associated with the World Trade Center attack. Zenith has estimated its share of the loss to be approximately $48.0 million, both gross and net of reinsurance recoverable, by estimating the probable impact to each of its reinsurance contracts based on currently available information. Approximately 70% of the estimated loss is attributable to the contractual maximum loss payable by Zenith under its excess of loss reinsurance contracts and, therefore, our loss cannot exceed the amount we have estimated and reserved on those contracts. The remainder of the estimated loss is an estimate of expected losses incurred on assumed quota share reinsurance contracts. Customarily, after a claim, catastrophe reinsurance contracts are renewed for the unexpired term of the original contract and an additional premium, called a reinstatement premium, is due in consideration of the renewal. Zenith has also estimated such reinstatement premiums in connection with its estimate of the World Trade Center loss. The ultimate impact of the World Trade Center loss, after deducting original and reinstatement premium income on Zenith's assumed reinsurance contracts for 2001 is estimated to be $20.0 million before tax, or $13.0 million after tax. Zenith has written its assumed reinsurance business so that its exposure to reinsurance losses from any one event in a worst-case scenario is not expected to be more than approximately 5% of Zenith's stockholders' equity (currently about $15 million); the expected

ultimate loss from the World Trade Center of $13.0 million after tax is within that 5% maximum. The information we have received so far has resulted in no change in the estimate of Zenith's World Trade Center loss at December 31, 2002 compared to 2001.

Estimates of the impact of the World Trade Center loss 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.

Advent Capital

In August 2002, Zenith acquired additional shares of Advent Capital and, as a result of the purchase, Zenith owns 20.9% of the outstanding shares of Advent Capital at December 31, 2002. Zenith is accounting for its investment on the equity method of accounting, lagged by one quarter to allow sufficient time for Advent Capital to prepare its financial information. Advent Capital manages and provides capital to support the underwriting of Lloyd's syndicates that underwrite, principally, insurance and reinsurance for property, property catastrophe and marine business. Advent Capital's net loss in 2001 of $53.2 million was attributable, principally, to its estimated net pre-tax loss of $66 million due to the terrorist attack on the World Trade Center.

The table that follows represents a reconciliation of changes in the liability for unpaid loss and loss adjustment expenses in Advent Capital's financial statements:

(Dollars in thousands)		Advent Capital
(Dollars in thousands)		2002(1)			2001(1)			2000(1)

Beginning of year, net of receivable from reinsurers		$	185,922		$	48,334		$	37,416
Incurred claims:
	Current year		32,929			177,995			25,771
	Prior years		49,953			11,565			13,463

	Total incurred claims		82,882			189,560			39,234
Payments:
	Current year		(4,023	)		(32,081	)		(6,474	)
	Prior years		(54,973	)		(19,891	)		(21,842	)

Total payments			(58,996	)		(51,972	)		(28,316	)

End of period, net of receivable from reinsurers			209,808			185,922			48,334
Receivable from reinsurers for unpaid losses			859,538			589,101			381,911

End of period (1)		$	1,069,346		$	775,023		$	430,245

(1): Reconciliation of changes in the liability for unpaid loss and loss adjustment expenses are presented for the years ended December 31, 2000 and 2001, and the nine months ended September 30, 2002.

The table that follows shows development of loss and loss adjustment expense liabilities as originally estimated at December 31 of each year presented for Advent Capital. Advent Capital became a corporate underwriting member of Lloyd's in 1995.

		at Sept. 30	at December 31,
		2002	2001			2000			1999			1998		1997		1996		1995
(Dollars in thousands)
Liability for unpaid loss and loss adjustment expenses, net		$209,808	$	185,922		$	48,334		$	37,416		$15,512		$	7,129	$	3,000	$	629
Adjustment (1)							8,802			11,035		10,926			8,096		5,027		1,578
Revised liability for unpaid loss and loss adjustment expenses, net		209,808		185,922			57,136			48,451		26,438			15,225		8,027		2,207

Paid, net (cumulative) as of (2):
	One year later			54,973			19,891			21,842		7,277			1,717		801		360
	Two years later						25,105			29,318		10,527			2,925		1,206		419
	Three years later									29,163		12,445			4,139		1,809		505
	Four years later											15,672			5,802		2,433		703
	Five years later														6,975		3,171		872
	Six years later																3,517		1,037
	Seven years later																		1,066

Liability, net re-estimated as of (2):
	One year later			235,875			59,899			50,879		26,076			8,639		2,799		839
	Two years later						69,101			54,160		29,085			12,363		4,441		797
	Three years later									58,942		29,526			15,586		7,719		1,684
	Four years later											32,665			12,956		8,158		2,300
	Five years later														14,109		6,603		2,215
	Six years later																6,903		2,094
	Seven years later																		2,116

Favorable (deficient) development, net				(49,953	)		(11,965	)		(10,491	)	(6,227	)		1,116		1,124		91

Net Liability		209,808		185,922			57,136			48,451		26,438			15,225		8,027		2,207
Receivable from reinsurers for unpaid losses		859,538		589,101			381,911			17,716		9,739			1,051		555		339

Gross liability		1,069,346		775,023			439,047			66,167		36,177			16,276		8,582		2,546
Re-estimated liability, net of reinsurance				235,875			69,101			58,942		32,665			14,109		6,903		2,116
Re-estimated receivable from reinsurers for unpaid losses				908,629			624,041			21,552		12,033			974		478		325

Re-estimated liability, gross				1,144,504			693,142			80,494		44,698			15,083		7,381		2,441

Favorable (deficient) development, gross				(369,481	)		(254,095	)		(14,327	)	(8,521	)		1,193		1,201		105

(1): Adjustment to reflect Advent Capital's current participation level in the underlying Lloyd's syndicates.
(2): Subsequent cumulative net paid losses and the re-estimated net liability are presented as of one year later for all except the most recent cumulative net paid totals and re-estimated liabilities which are as of September 30, 2002.

Adverse development in 2002 on the reserves established at December 31, 2001 was attributable, principally, to increased estimates in 2002 for losses sustained by Advent Capital in connection with the terrorist attack on the World Trade Center on September 11, 2001. Adverse loss reserve development in 2002 was offset, in part, by approximately $32 million of additional estimated reinstatement and other premium income. Adverse loss development, gross of reinsurance, on the reserves established at December 31, 2001 and December 31, 2000 is principally attributable to development of the gross reserves acquired by Advent Capital in the 2000 acquisition of the Kingsmead Underwriting Agency.

Environmental and Asbestos Losses

Zenith has exposure to asbestos losses in its Workers' Compensation operations for medical, indemnity and loss adjustment expenses associated with covered workers' long-term exposure to asbestos or asbestos-containing materials. Many of the claims we have received date back to accidents in the 1960's, 1970's and early 1980's. Zenith's exposure is generally limited to a proportionate share of the workers' compensation-related loss for the period of time coverage was provided because other insurance companies also provided coverage during the period in which the claimant was exposed. In our history, we have paid and closed about 3,200 such asbestos-related workers' compensation claims for a total of $8.3 million, or approximately $2,600 per claim. At the end of 2002, we had 382 such

claims open, and reserved for about $2.2 million, compared to our total workers' compensation loss reserves of $695.2 million, including an IBNR reserve estimate of $123.1 million.

Zenith also has potential exposure to environmental and asbestos losses and loss adjustment expenses beginning in 1985 through its Reinsurance operations, but the business reinsured by Zenith in these operations contains exclusion clauses for such losses. Environmental and asbestos losses have not been material to Zenith's results of operations or financial condition. Zenith believes that its reserves for environmental and asbestos losses are currently appropriately established.

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 and up to a stipulated limit. In accordance with general industry practices, we purchase excess of loss reinsurance to protect Zenith against the impact of large, irregularly-occurring losses in the Workers' Compensation business, which would otherwise cause sudden and unpredictable changes in net income and capital in our insurance business. Although we buy reinsurance to protect Zenith against very large workers' compensation losses, the largest individual workers' compensation claim we have ever had is for about $10.5 million excluding the benefit of reinsurance.

Effective July 1, 2002, Zenith entered into an excess of loss reinsurance treaty with Employers Reinsurance Corporation ("Employers Re") which provides $9.0 million of reinsurance protection, per occurrence, for workers' compensation losses in excess of a $1.0 million retention, and applies to loss occurrences on or after July 1, 2002. The Employers Re treaty replaced the two previous excess of loss reinsurance contracts which provided for $9.2 million of reinsurance protection, per occurrence, in excess of a $0.8 million retention during the first six months of 2002, and reinsurance of $9.4 million, per occurrence, in excess of a retention of $0.6 million in 2001. In 2002, and for 2003, Zenith has also purchased from Employers Re $9.0 million of reinsurance protection, per occurrence or in the aggregate, during a treaty year in excess of a $1.0 million retention for losses arising out of terrorist acts. Effective January 1, 2003, Zenith has purchased additional reinsurance for losses arising out of terrorist acts, excluding nuclear, biological and chemical attacks, which provides 50% of $27.0 million of reinsurance protection in excess of $10.0 million. Losses arising out of acts of terrorism are otherwise excluded in all of our ceded reinsurance contracts (see the discussion of the Terrorism Risk Insurance Act of 2002 that follows).

In each of the three years ended December 31, 2002, and in 2003, reinsurance provides protection for losses in excess of $10.0 million up to $60.0 million. In 2002, this reinsurance was provided primarily by AXA Reinsurance Company, XL Re America, Transatlantic Reinsurance Company, Odyssey America Reinsurance Corporation, Arch Reinsurance Company, ICH (Hanover) Re, Liberty Mutual Insurance Company and the London reinsurance market (primarily Lloyds Syndicates and certain United Kingdom insurance companies). In the three years ended December 31, 2002, Zenith has purchased catastrophe reinsurance coverage for losses as follows: for the two years ended December 31, 2001 - $40.0 million in excess of $60.0 million; for the years ended December 31, 2002 and 2003 - 50% of $40.0 million in excess of $60.0 million. In 2002, this reinsurance was placed with Ace Tempest Re, Hart Re, Everest Reinsurance Company and Converium Reinsurance Company. Effective January 1, 2003, catastrophe reinsurance covers an additional $50.0 million of losses in excess of $100.0 million. The coverage is provided by Swiss Re-Insurance Company, Everest Reinsurance Company, Hart Re and the London reinsurance market.

In summary, Zenith has reinsurance protection for large catastrophe losses, excluding terrorism, of $150.0 million in excess of a retention of $1.0 million, except that Zenith remains 50% liable for the amount of any loss between $60.0 million and $100.0 million.

Ceded reinsurance premiums for all of Zenith's excess of loss reinsurance protection for workers' compensation was $20.4 million, or 3.6% of workers' compensation earned premiums, in 2002, compared to $13.8 million, or 3.2% of workers' compensation earned premiums, in 2001, and $8.2 million, or 2.6% of workers' compensation earned premiums, in 2000. We expect our excess of loss reinsurance premiums to cost about 4.0% of workers' compensation premiums in the first half of 2003 and may change effective July 1, 2003 when the arrangements with Employers Re are scheduled for renewal.

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 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 a subsidiary of Odyssey Re Holdings Corp. ("Odyssey Re"), a subsidiary of Fairfax, 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. Ceded earned premiums under the quota share were $36.8 million in 2002.

Other reinsurance ceded

Other than our excess of loss reinsurance protection and the quota share agreement, 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 total recoverable on unpaid loss and loss adjustment expenses from all reinsurance at December 31, 2002 was $220.6 million compared to $221.6 million at December 31, 2001. Included in these amounts are reinsurance recoverables of $50.8 million and $67.8 million at December 31, 2002 and 2001, respectively, relating to reinsurance arrangements entered into by RISCORP and assumed by Zenith in the acquisition of RISCORP in 1998. The principal reinsurers from which such RISCORP-related amounts are recoverable are: American Re-Insurance Company, Chartwell Reinsurance Company, Continental Casualty Co., Swiss Re-Insurance Company and Trenwick Reinsurance Company. Also, in connection with the RISCORP Acquisition, Zenith Insurance entered into an aggregate excess of loss reinsurance agreement with Inter-Ocean Reinsurance Company, Ltd., which provides ceded reinsurance for unpaid loss and allocated loss adjustment expenses assumed by Zenith 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 secured by 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 Zenith is currently exposed to any material credit risk through its ceded reinsurance arrangements other than in connection with Reliance Insurance Company ("Reliance"). Historically, no material amounts due from reinsurers have been written-off as uncollectible because most of our reinsurance is recoverable from large, well-capitalized reinsurance companies. However, on October 3, 2001, the Commonwealth Court of Pennsylvania approved an Order of Liquidation for Reliance in response to a petition from the Pennsylvania Department of Insurance. At December 31, 2002, Reliance owed 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 Associated General Commerce Self-Insurers' Trust Fund. Zenith Insurance has recorded a provision for impairment of its reinsurance recoverable from Reliance of $3.0 million at December 31, 2002 and 2001. The eventual outcome of this matter will be determined by the ultimate amount of Reliance's liabilities and whether or not Reliance has sufficient assets or can obtain recoveries and investment income in an amount sufficient to pay its liabilities.

Terrorism Risk Insurance Act of 2002

In November 2002, the Terrorism Risk Insurance Act of 2002 (the "Act") became effective. The principal purpose of the Act was to provide a role for the Federal Government in the provision of insurance for losses sustained in connection with terrorism. Prior to the Act, insurance (except for workers' compensation insurance) and reinsurance for losses arising out of acts of terrorism were severely restricted in their availability from private insurance and reinsurance companies. Under the Act, all licensed insurers must offer terrorism coverage on most commercial lines of business. The Act is effective for the period from November 26, 2002 until December 31, 2005. The Secretary of the Treasury 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 Congress. Losses arising out of the act of terrorism must exceed $5.0 million. If an event is certified, the Federal Government will reimburse losses not to exceed $100.0 billion in any year. Each insurance company will be responsible for a deductible based on a percentage of direct earned premiums in the previous calendar year — 7% in 2003, 10% in 2004 and 15% in 2005. For losses in excess of the deductible, the Federal Government will reimburse companies for 90% of the loss up to their proportionate share of $100.0 billion of aggregate losses. Policy surcharges may be required to recover certain of the losses reimbursed by the Federal Government.

The deductible for 2003 under the Act attributable to our Workers' Compensation business is approximately $38 million, based on the formula described above. However, due to the definitions of "affiliate" and "control" under the Act, it is unclear at this time if our direct earned premiums will be included with the direct earned premiums for U.S. exposures of the insurers controlled by Fairfax for purposes of calculating the deductible. In the event that Fairfax's premiums are included with Zenith's for purposes of the deductible calculations, the deductible would be substantially greater than $38 million. Zenith intends to seek a determination from the U.S. Treasury Department that it is not an affiliate of Fairfax for purposes of calculating the deductible amount. Although companies controlled by Fairfax own 42% of the outstanding common stock of Zenith National at December 31, 2002, in separate filings with the departments of insurance in California, Texas and New York, Fairfax has disclaimed control of Zenith National. Fairfax has also granted a proxy covering all its shares of Zenith National to an individual trustee with instructions to vote the shares in proportion to the voting of all other Zenith National shareholders. Fairfax and Zenith have no common Directors, management, employees or business infrastructure. We cannot be assured that we will be able to obtain a favorable determination from the U.S. Treasury Department. We have purchased reinsurance for acts of terrorism in the amount of $9.0 million in excess of a retention of $1.0 million in 2003. In addition for 2003, we have purchased reinsurance for terrorism, excluding nuclear, biological and chemical attacks, up to 50% of losses of $27.0 million in excess of $10.0 million. The cost of such terrorism reinsurance is approximately $2.0 million including the reinsurance from $1.0 million to $10.0 million.

Notwithstanding the protection provided by the Act and by the other reinsurance we have purchased, the risk of severe losses to Zenith from acts of terrorism has not been eliminated because events may not be covered by, or may exceed the capacity of, our reinsurance protection. In our Workers' Compensation business, we monitor the geographical concentrations of insured employees to help mitigate the risk of loss from terrorist acts. Also, small businesses constitute a large proportion of our policies, and we avoid risks in high profile locations. In our Reinsurance business, most of the contracts we have written in 2002 and 2003 exclude losses from terrorism, and any terrorism exposure we have assumed is subject to our underwriting guidelines not to write business that could expose us to losses of greater than approximately $15 million after deducting applicable premium income and after tax. The impact of any future terrorist acts is unpredictable, and the ultimate impact on Zenith, if any, of losses from any future terrorist acts will depend upon their nature, extent, location and timing.

Intercompany reinsurance pooling agreement

Zenith's insurance subsidiaries are parties to an intercompany pooling agreement. Under such agreement, the results of underwriting operations are ceded (the risks are transferred) to Zenith Insurance and are then reapportioned, or retro-ceded (the risks are transferred back), to the companies party to the agreement. At December 31, 2002, the proportions of the pooling agreement were as follows: Zenith Insurance - 97.5%; ZNAT Insurance - 2.0%; and Zenith Star - 0.5%. Transactions pursuant to the pooling agreement are eliminated on consolidation and have no impact on Zenith's consolidated financial statements.

Marketing and Staff

The business in the Workers' Compensation operations is produced by approximately 2,000 independent licensed insurance agents and brokers throughout California, Florida, Texas, North Carolina and other states in which Zenith conducts its business. Zenith's assumed reinsurance premiums are generated nationally by brokers and reinsurance intermediaries.

Applications for insurance and reinsurance submitted by all agents and brokers are evaluated by professional underwriters based upon numerous factors, including underwriting criteria and standards, geographic areas of underwriting concentration, actuarial judgments of 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 insurance business is based upon price, product design and quality of service. The insurance industry is highly competitive, and competition is particularly intense in the national workers' compensation industry. Zenith competes not only with other stock companies, but with mutual companies and other underwriting organizations such as the State Compensation Insurance Fund in California. Recent regulatory action should mitigate the competitive behavior of the State Compensation Insurance Fund in California. Competition also exists with self-insurance 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 focused 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 primarily subject to regulation and supervision by the department of insurance in the state in which they are domiciled and, to a lesser extent, other states in which they conduct business. Our insurance subsidiaries are primarily subject to regulation and supervision by the California Department of Insurance, except for Zenith Star, which is primarily subject to regulation and supervision by the Texas Department of Insurance. 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 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 and other reports are required to be filed with the departments of insurance in which we are licensed to transact business. The financial statements of our insurance subsidiaries are subject to periodic examination by the California and Texas Departments of Insurance. The California Department of Insurance is currently conducting an examination of Zenith Insurance and ZNAT Insurance as of December 31, 2001. Zenith Insurance and ZNAT Insurance were examined by the California Department of Insurance as of December 31, 1996 and the Report of Examination contained no material findings. The Texas Department of Insurance is currently conducting an examination of Zenith Star as of December 31, 2001. Zenith Star was examined by the Texas Department of Insurance as of December 31, 1996, and the Report of Examination contained no material findings.

In California, Zenith Insurance and ZNAT Insurance are required to maintain investments on deposit meeting specified standards that have an aggregate market value equal to the companies' workers' compensation loss reserves. For this purpose, loss reserves are defined as the current estimate of reported and unreported claims net of reinsurance, plus a statutory formula reserve based on a minimum of 65% of workers' compensation earned premiums for the latest three years. Zenith Insurance and ZNAT Insurance are subject to similar deposit requirements in certain other states based on those states' statutes.

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 (the "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.

In 1998, the NAIC adopted the Codification of Statutory Accounting Principles guidance (the "Codification"), which, effective January 2001, replaced the previous Accounting Practices and Procedures manual as the NAIC's primary guidance on statutory accounting. (Statutory accounting is a comprehensive basis of accounting for insurance companies based on the Codification and state laws, regulations and general administrative rules.) The Codification provides guidance for the areas where statutory accounting had been silent and changed previous statutory accounting in some areas. The California and Texas Departments of Insurance have adopted the Codification. The Codification did not have a material impact on the statutory capital and surplus of Zenith's insurance operations when it was adopted.

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, 2002, the capital and surplus of Zenith Insurance was 349% of the Authorized Control Level of RBC.

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 experienced financial examiners of the NAIC and State Insurance Departments to select those companies that merit highest priority in the allocation of the regulators' resources. The 2002 IRIS results for Zenith Insurance showed one result outside the "normal" range for such ratios, as such range is determined by the NAIC. This result was attributable to the growth in Workers' Compensation premiums in 2002 compared to 2001.

Insurance Holding Company System Regulatory Act

Zenith's insurance operations are subject to the California and Texas Insurance Holding Company System Regulatory Acts ("Holding Company Acts"), which contain 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 Acts also limit dividend payments and material transactions by Zenith's insurance operations. See Item 5 for a discussion of dividend restrictions related to the Holding Company Acts.

Risks Relating to Our Business

Our business is subject to numerous risks and uncertainties, the outcome of which may impact future results of operations and financial condition. Some of these risks and uncertainties are described below. These and other risks are also described elsewhere in this Item 1 - Description of the Business, under Item 7 - Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations and under Item 8 - Notes to Consolidated Financial Statements in Zenith's 2002 Annual Report to Stockholders.

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

If we fail to accurately assess the risks associated with the businesses that we insure or reinsure, our reserves may be inadequate to cover our actual losses and we may fail to establish appropriate premium rates. 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. Reserves are merely estimates and are inherently uncertain; they do not and cannot represent an exact measure of liability. Accordingly, our 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 in which the changes are made, with increases in our reserves resulting in a charge to our earnings. For example, in the fourth quarter of 2002, we increased our estimate of workers' compensation loss reserves for prior periods by $30.0 million due to higher inflation trends in the second half of the year. If we need to increase our reserves again in the future, we would incur additional charges to our earnings, and our business and financial condition would be adversely affected, possibly materially.

Our loss reserve estimates are based on estimates of the ultimate cost of individual claims and on actuarial estimation techniques. Several factors contribute to the uncertainty in establishing these estimates. Judgment is required in actuarial estimation to ascertain the relevance of historical payment and claim settlement patterns under current facts and circumstances. Operational changes in claims handling practices over the years may impact the interpretation of the historical data, which can also be impacted at the same time by external forces such as legislative changes, economic fluctuations and legal trends. Key assumptions in the estimation process for workers' compensation reserves are the severity trends, including the increasing costs of health care on the medical component of claim costs. If there were unfavorable changes in severity trends, our reserves may need to be increased, as described above. Our reserve estimates for catastrophe losses in the assumed reinsurance business are heavily 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 large losses over $1.0 million and from the accumulation of losses up to $150.0 million, except that we remain liable for 50% of the amount of any loss between $60.0 million and $100.0 million. The availability, amount and cost of reinsurance depend on market conditions and may vary significantly. As a result of catastrophic events, such as the events of September 11, 2001, we may incur significantly higher reinsurance costs, more restrictive terms and conditions, and decreased availability. 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.

Catastrophe losses in our assumed reinsurance business will cause fluctuations in net income.

In our assumed reinsurance business, we participate in the assumed reinsurance of property catastrophe losses. The loss experience of property catastrophe reinsurers has generally been characterized as low frequency but high severity in nature. Because accounting rules do not permit reinsurers to reserve for such catastrophes until they occur, claims from catastrophes could cause substantial volatility in our financial results for any fiscal quarter or year. Accordingly, our net income typically decreases in periods when there are large catastrophe losses and typically increases in the absence of catastrophe losses. These fluctuations could have a material adverse effect on our financial condition.

Various events cause catastrophes, including hurricanes, windstorms, earthquakes, hail, explosions, severe winter weather and fires as well as man-made events, such as acts of war, acts of terrorism and political instability. The frequency and severity of these catastrophes are inherently unpredictable. The extent of losses from a catastrophe is a function of both the total amount of insured exposures in the area affected and the severity of the event. The amount of catastrophe reinsurance we write in any one year is limited to produce an expected estimated maximum loss from a single, worst-case scenario of approximately $15 million, net of all applicable premiums and reinstatement premiums and net of tax. However, we participate in several global catastrophe reinsurance treaties, and catastrophe losses could be sizable enough to impact our annual earnings significantly, as they have in recent years. Our current estimated loss from the terrorist attack on the World Trade Center on September 11, 2001 is approximately $13.0 million after tax and all applicable premiums and reinstatement premiums.

The risks associated with property and casualty reinsurance underwriting could adversely affect us.

Because we participate in property and casualty reinsurance markets, the success of our underwriting efforts depends, in part, upon the policies, procedures and expertise of the ceding companies making the original underwriting decisions. We face the risk that these ceding companies may fail to accurately assess the risks that they assume initially, which, in turn, may lead us to inaccurately assess the risks we assume. If we fail to establish and receive appropriate premium rates, we could face significant losses on these contracts.

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

Under our workers' compensation policies, we are required to provide workers' compensation benefits for losses resulting from certain 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 be material.

The Terrorism Risk Insurance Act of 2002 is effective for the period from November 26, 2002 through December 31, 2005. Prior to the Act, insurance coverage by private insurers for losses (other than workers' compensation) arising out of acts of terrorism was severely limited. The Act provides, among other things, that all licensed insurers must offer terrorism coverage on most commercial lines of business for acts of terrorism. Losses arising out of acts of terrorism that are certified as such by the Secretary of the Treasury and that exceed $5.0 million will be reimbursed by the Federal Government subject to a limit of $100.0 billion in any year and less a deductible calculated for each insurer. Each insurance company is responsible for a deductible based on a percentage of direct earned premiums in the previous calendar year. For losses in excess of the deductible, the Federal Government will reimburse companies for up to 90% of the loss up to the insurer's proportionate share of the $100.0 billion.

The deductible for 2003 under the Act attributable to our workers' compensation business is approximately $38 million, based on the formula described above. However, due to the definitions of "affiliate" and "control" under the Act, it is unclear at this time if our direct earned premiums will be included with the direct earned premiums for U.S. exposures of the insurers controlled by Fairfax, our significant stockholder, for purposes of calculating the deductible. In the event that Zenith's premiums are included with Fairfax's for purposes of the deductible calculations, the deductible would be substantially greater than $38 million.

Zenith intends to seek a determination from the U.S. Treasury Department that it is not an affiliate of Fairfax for purposes of calculating the deductible amount. Although companies controlled by Fairfax own 42% of the outstanding shares of Zenith National at December 31, 2002, in separate filings with the Departments of Insurance in California, Texas and New York, Fairfax has disclaimed control of Zenith. Fairfax has also granted a proxy covering all of its shares of Zenith National to a trustee with instructions to vote the shares in proportion to the voting of all other Zenith shareholders. Fairfax and Zenith have no common Directors, management, employees or business infrastructure. However, we may not be able to obtain a favorable determination from the U.S. Treasury Department.

We have purchased reinsurance for acts of terrorism in the amount of $9.0 million in excess of a retention of $1.0 million, and we have purchased additional reinsurance for acts of terrorism, excluding nuclear, biological and chemical attacks, of up to 50% of losses of $27.0 million in excess of $10.0 million.

An act of terrorism may not be covered by the Act and, if it is covered, our ability to collect reimbursement from the Federal Government will be limited to the amounts permitted by the Act. In addition, we are subject to the risks with respect to reinsurance described above. Accordingly, any acts of terrorism could materially adversely affect our business and financial condition. Acts of war and acts of domestic terrorism are not covered by the Act.

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 departments of insurance in California and Texas. These state agencies have broad regulatory powers designed to protect

policyholders, and 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. For example, in California, on January 1, 2003, workers' compensation legislation became effective that provides for increases in the benefits payable to injured workers. 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 changes in health care and occupational safety and health regulations can indirectly impact us. In addition, we were impacted by the Terrorism Risk Insurance Act of 2002, as discussed above, and by the Gramm Leach Bliley Act of 2002 related to disclosure of personal information. Moreover, changes in federal tax laws could also impact our business.

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 the wide variety of applicable laws and regulations, which are continually undergoing revision, or the relevant 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. Any 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 both our workers' compensation and our assumed reinsurance business and could have a material adverse effect on our results of operations and our financial position.

Intense competition could adversely affect our ability to sell policies at 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 area, we compete with regional and national insurance companies and state- sponsored insurance funds, as well as potential insureds that have determined to self-insure. Some of our competitors have greater financial, marketing and management resources than Zenith. Intensive 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 Florida, where rates for workers' compensation insurance are determined by regulation, we use our own rates to determine the price for our workers' compensation policies. Historically, when competition has been intense, the amount of business we are able to write has decreased because we have not reduced our prices to maintain market share or other revenue targets. As a result, our profitability during those times has decreased.

In the assumed reinsurance business, our premium volume fluctuates as competitive conditions cause fluctuations in prevailing rates for reinsurance. In the reinsurance business, new capital can rapidly enter the market when prevailing prices are perceived to be favorable to reinsurers. The new capital is used to form new companies or increase the capacity of existing companies or other underwriting entities, such as syndicates of Lloyd's of London.

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. For example, United States participation in hostilities with other countries and large-scale acts of terrorism may adversely affect the economy generally, and our investment income could decrease. 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 equities 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.

Interest rates have declined steadily in the past several years. 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 balance sheet. Our stockholders' equity will continue to fluctuate with any future changes in interest rates.

We also invest 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 and regulatory conditions in California and Florida.

Our business is concentrated in California (55% of 2002 workers' compensation earned premiums) and in Florida (19% of 2002 workers' compensation 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 as a result. 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 of having our business spread more evenly by state.

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 operations is produced by approximately 2,000 licensed insurance agents and brokers. Our assumed reinsurance premiums are generated nationally by brokers and reinsurance intermediaries. Agencies 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 agencies and brokers and on our ability to offer insurance programs and services that meet the requirements of the clients and customers of the these agencies and brokers.

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 recent 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.

The effects of the increasing amount of litigation against insurers on our business are uncertain.

Like other members of the insurance industry, we are the target of an increasing number of class action lawsuits and other types of litigation, some of which involve claims for substantial and/or indeterminate amounts and the outcomes of which are unpredictable. This litigation is based on a variety of issues including insurance and claim settlement practices.

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 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 contractual 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 will depend on numerous factors, including our financial condition, our capital requirements and other factors that our Board of Directors considers relevant.

Fairfax has granted a voting proxy with respect to the owned shares of our common stock, which may impede attempts to replace or remove our Board or management.

As of December 31, 2002, companies controlled by Fairfax owned 42% of our outstanding common stock. Fairfax has disclaimed any control of Zenith National and has granted to a trustee a proxy to vote all of the shares of common stock held by Fairfax and its subsidiaries. The proxy provides that the trustee must vote all such shares in proportion to the voting of all other Zenith National shareholders, except in the event of a proxy contest that is not supported by management and that occurs prior to the earlier of June 30, 2004 and the date on which Stanley R. Zax is no longer our full-time Chairman and President. If such a hostile proxy contest were to occur, the shares must be voted as recommended by management. This arrangement could prevent or delay a change in our Board of Directors or management, and could cause, the value of our securities to decline.

Item 2. Properties.

Zenith Insurance owns a 130,000 square foot office facility in Woodland Hills, California which is the corporate home office of Zenith National and its subsidiaries. Zenith Insurance also owns a 120,000 square foot branch office facility in Sarasota, Florida and a 2 acre vacant parcel in the vicinity. In the regular conduct of business, Zenith Insurance leases offices in various cities. See Notes to Consolidated Financial Statements — Note 14 — "Commitments and Contingent Liabilities" in Zenith's 2002 Annual Report to Stockholders, which note is hereby incorporated by reference. Zenith considers its owned and leased facilities to be adequate for the needs of the organization.

Item 3. Legal Proceedings.

On April 1, 1998, pursuant to an Asset Purchase Agreement dated June 17, 1997 (the "Asset Purchase Agreement") between Zenith Insurance and RISCORP, Zenith Insurance acquired substantially all of the assets and certain liabilities of RISCORP related to RISCORP's workers' compensation business (the "RISCORP Acquisition"). On January 13, 2000, RISCORP filed a complaint against Zenith Insurance and another defendant in the Superior Court of Fulton County in the State of Georgia. RISCORP's lawsuit sought a declaration that would have had the effect of requiring Zenith to pay either $18.1 million (and related charges) or $5.9 million. On September 4, 2002, by stipulation, the litigation filed by RISCORP was dismissed with prejudice and with no liability to Zenith.

Other than the RISCORP litigation described above, Zenith National and its subsidiaries are defendants in various other 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 the consolidated financial condition, results of operations or cash flows of Zenith.

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

Not applicable.

PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.

Zenith National's common stock, par value $1.00 per share, is traded on the New York Stock Exchange under the symbol ZNT. The table below sets forth the high and low sales prices of the common stock for each quarterly period during the last two fiscal years.

Quarter		2002		2001
First:
	High	$	31.25	$	30.70
	Low		27.36		22.80
Second:
	High		32.25		27.92
	Low		28.90		23.41
Third:
	High		31.81		30.15
	Low		23.35		23.78
Fourth:
	High		29.45		29.30
	Low		22.00		24.40

As of March 7, 2003, there were 250 registered holders of record of Zenith National common stock.

The table below sets forth information with respect to the amount and frequency of dividends declared on Zenith National common stock. Based upon Zenith's 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 12, 2003	$0.25 cash per share	April 30, 2003	May 14, 2003
December 10, 2002	$0.25 cash per share	January 31, 2003	February 14, 2003
September 12, 2002	$0.25 cash per share	October 29, 2002	November 14, 2002
May 22, 2002	$0.25 cash per share	July 29, 2002	August 14, 2002
February 12, 2002	$0.25 cash per share	April 30, 2002	May 15, 2002
December 11, 2001	$0.25 cash per share	January 31, 2002	February 14, 2002
September 6, 2001	$0.25 cash per share	October 31, 2001	November 14, 2001
May 24, 2001	$0.25 cash per share	July 31, 2001	August 14, 2001
February 13, 2001	$0.25 cash per share	April 30, 2001	May 15, 2001

The Holding Company Acts limit the ability of Zenith Insurance to pay dividends to Zenith National, and of ZNAT Insurance and Zenith Star to pay dividends to Zenith Insurance, by providing that the appropriate insurance regulatory authorities in the states of California and Texas 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. No such dividends have been paid in 2002. In each of the years ended December 31, 2001 and 2000, Zenith Insurance paid $10.0 million in dividends to Zenith National. During 2003, Zenith Insurance will be able to pay $31.0 million in dividends to Zenith National without prior approval. In March 2003, Zenith Insurance paid a dividend of $10.0 million to Zenith National. The restrictions on the payment of such dividends have not had, and under current regulations are not expected to have, a material

adverse impact on the ability to pay dividends. In a recent court ruling, a California statute that allowed a deduction for the dividends received from wholly-owned insurance companies in the determination of taxable income for the California Franchise Tax was held unconstitutional in certain circumstances. The consequences of the decision are unclear, but it is possible that the California Franchise Tax Board ("FTB") could take the position that the decision has caused the statute to be invalid for all purposes and disallow in its entirety the deduction for dividends received from insurance subsidiaries. If sustained, such action by the FTB would have the effect of imposing a tax of approximately 6% (after the benefit of a federal tax deduction) on any dividends paid from Zenith Insurance to Zenith National. Zenith is unable to predict the ultimate outcome of this matter, which depends upon the actions of the FTB, the prospects for appropriate legislative relief and various tax strategies that may be available to Zenith to alleviate the consequences of any actions by the FTB.

Item 6. Selected Financial Data.

The 5-Year Summary of Selected Financial Information, included in Zenith's 2002 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, included in Zenith's 2002 Annual Report to Stockholders, is hereby incorporated by reference.

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

The "Market Risk of Financial Instruments" section of the Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations included in Zenith's 2002 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 2002 Annual Report to Stockholders are hereby incorporated by reference.

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

None.

PART III

Item 10. Directors and Executive Officers of the Registrant.

The information set forth under the captions "Section 16(a) Beneficial Ownership Reporting Compliance" and "Election of Directors" in the Proxy Statement distributed to stockholders in connection with Zenith's 2003 Annual Meeting of Stockholders (the "Proxy Statement"), which is to be filed by Zenith after the date this Report on Form 10-K is filed, is hereby incorporated by reference.

Executive Officers of the Registrant

Name	Age	Position	Term	Executive Officer Since
Stanley R. Zax	65	Chairman of the Board and President	Annual	1977
Jack D. Miller	57	Executive Vice President	Annual	1998
Robert E. Meyer	54	Senior Vice President and Actuary	Annual	2000
William J. Owen	45	Senior Vice President, Chief Financial Officer, Treasurer and Assistant Secretary	Annual	2000
John J. Tickner	64	Senior Vice President and Secretary	Annual	1985

Each of the executive officers is an officer of Zenith National and certain of its subsidiaries and each has occupied an executive position with Zenith National or a subsidiary of Zenith National for more than five years.

There are no family relationships between any of the executive officers, and there are no arrangements or understandings pursuant to which any of them were selected as officers.

Item 11. Executive Compensation.

The information set forth under the captions "Directors' Compensation," "Executive Compensation," "Summary Compensation Table," "Option/SAR Grants in Last Fiscal Year," "Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End Option/SAR Values," "Employment Agreements and Termination of Employment and Change in Control Arrangements," "Compensation Committee Interlocks and Insider Participation" and "Compensation Committee's Report on Executive Compensation" 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.

The information set forth in footnotes 1 and 2 to the table set forth under the caption "Election of Directors" and under the caption "Certain Transactions with Fairfax Financial" in the Proxy Statement is hereby incorporated by reference.

Item 14. Controls and Procedures.

(a): Evaluation of Disclosure Controls and Procedures.

Zenith's Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of a date within 90 days prior to the filing date of this Annual Report on Form 10-K (the "Evaluation Date"). Based on such evaluation, such officers have concluded that, as of the Evaluation Date, Zenith's disclosure controls and procedures are timely and effective in alerting them to material information relating to Zenith required to be included in Zenith's reports filed or submitted under the Exchange Act.

(b): Changes in Internal Controls.

Since the Evaluation Date, there have not been any significant changes in Zenith's internal controls or in other factors that could significantly affect such controls.

PART IV

Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K.

(a) Documents filed as part of the report:

1.: Financial Statements:

Report of Independent Accountants incorporated herein by reference from Zenith's 2002 Annual Report to Stockholders

Consolidated Financial Statements and notes thereto incorporated herein by reference from Zenith's 2002 Annual Report to Stockholders in Item 8 of Part II:

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

Consolidated Balance Sheet as of December 31, 2002 and 2001

Consolidated Statement of Operations for the years ended December 31, 2002, 2001 and 2000

Consolidated Statement of Cash Flows for the years ended December 31, 2002, 2001 and 2000

Consolidated Statement of Stockholders' Equity for the three years ended December 31, 2002

Notes to Consolidated Financial Statements

2.: Financial Statement Schedules:

Report of Independent Accountants on Financial Statement Schedules

Zenith National Insurance Corp. and Subsidiaries:

As of December 31, 2002:

I — Summary of Investments — Other Than Investments in Related Parties

For the years ended December 31, 2002, 2001 and 2000:

III — Supplementary Insurance Information

IV — Reinsurance

V — Valuation and Qualifying Accounts

VI — Supplementary Information Concerning Property — Casualty Insurance Operations

Zenith National Insurance Corp.:

As of December 31, 2002 and 2001 and for the years ended December 31, 2002, 2001 and 2000:

II — Condensed Financial Information of Registrant

Financial Statements of Advent Capital (Holdings) PLC:

Group Profit and Loss Account

Group Balance Sheet

Company Balance Sheet

Group Cash Flow Statement

Statement of Directors' Responsibilities and Accounting Policies

Notes to the Accounts

Report of the Independent Auditors

Consent of Littlejohn Frazer

Schedules other than those listed above are omitted since they are not applicable, not required or the information required to be set forth therein is included in the consolidated financial statements or in the notes thereto.

3.: Exhibits

The Exhibits listed below are included in this Report.



2.1		Stock Acquisition Agreement, dated as of September 19, 1995, between Anchor National Life Insurance Company and Zenith National Insurance Corp. (Incorporated herein by reference to Exhibit 2.1 to Zenith's Report on Form 8-K dated October 6, 1995.)
2.2		Amendment No. 1 to Stock Acquisition Agreement dated as of December 27, 1995, by and among Anchor National Life Insurance Company, SunAmerica Life Insurance Company and Zenith National Insurance Corp. (Incorporated herein by reference to Exhibit 2.1 to Zenith's Report on Form 8-K dated January 9, 1996.)
3.1		Certificate of Incorporation of Zenith National Insurance Corp., dated May 28, 1971. (Incorporated herein by reference to Exhibit 3.1 to Zenith's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.)
3.2		Certificate of Amendment of Certificate of Incorporation of Zenith National Insurance Corp., dated September 12, 1977. (Incorporated herein by reference to Exhibit 3.2 to Zenith's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.)
3.3		Certificate of Amendment of Certificate of Incorporation of Zenith National Insurance Corp., dated May 31, 1979. (Incorporated herein by reference to Exhibit 3.3 to Zenith's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.)
3.4		Certificate of Amendment of Certificate of Incorporation of Zenith National Insurance Corp., dated September 6, 1983. (Incorporated herein by reference to Exhibit 3.4 to Zenith's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.)
3.5		Certificate of Designation of Zenith National Insurance Corp., dated September 10, 1985. (Incorporated herein by reference to Exhibit 3.5 to Zenith's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.)
3.6		Certificate of Amendment of Certificate of Incorporation of Zenith National Insurance Corp., dated November 22, 1985. (Incorporated herein by reference to Exhibit 3.6 to Zenith's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.)
3.7		Certificate of Amendment of Certificate of Incorporation of Zenith National Insurance Corp., dated May 19, 1987. (Incorporated herein by reference to Exhibit 3.7 to Zenith's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.)
3.8		Certificate of Change of Address of Registered Office and of Registered Agent of Zenith National Insurance Corp., dated October 10, 1989. (Incorporated herein by reference to Exhibit 3.8 to Zenith's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.)
3.9		By-laws 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 June 30, 2002.)
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 March 1, 2000. (Incorporated herein by reference to Exhibit 10.1 to Zenith's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000.)
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 by, between and among Zenith National Insurance Corp. and its subsidiaries, Zenith Insurance Company, CalRehab Services, Inc., CalFarm Insurance Company, CalFarm Insurance Agency, Cal-Ag Insurance Services, Inc., CalFarm Annuity Services Company, ZNAT Insurance Company and CalFarm Life Insurance Company, dated January 1, 1991. (Incorporated herein by reference to Exhibit 10.7 to Zenith's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.)

10.8		Amendment No. 1, dated December 28, 1995, to the Amended and Restated Tax Sharing Agreement, by, between and among Zenith National Insurance Corp. and its subsidiaries, Zenith Insurance Company, CalRehab Services, Inc., CalFarm Insurance Company, CalFarm Insurance Agency, Cal-Ag Insurance Services, Inc., CalFarm Annuity Services Company, ZNAT Insurance Company and CalFarm Life Insurance Company, dated January 1, 1991. (Incorporated herein by reference to Exhibit 10.8 to Zenith's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.)
10.9		Amendment No. 2, dated March 31, 1999, to the Amended and Restated Tax Sharing Agreement, by, between and among Zenith National Insurance Corp. and its subsidiaries, Zenith Insurance Company, CalRehab Services, Inc., CalFarm Insurance Company, CalFarm Insurance Agency, Cal-Ag Insurance Services, Inc., CalFarm Annuity Services Company, ZNAT Insurance Company and CalFarm Life Insurance Company, dated January 1, 1991. (Incorporated herein by reference to Exhibit 10.9 to Zenith's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.)
10.10		Reinsurance and Pooling Agreement between Zenith Insurance Company and CalFarm Insurance Company, ZNAT Insurance Company, and Zenith Star Insurance Company, dated December 28, 1993. (Incorporated herein by reference to Exhibit 10.10 to Zenith's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.)
10.11		Amendment No. 1, dated January 25, 1995, to the Reinsurance and Pooling Agreement between Zenith Insurance Company and CalFarm Insurance Company, ZNAT Insurance Company, and Zenith Star Insurance Company, dated December 28, 1993. (Incorporated herein by reference to Exhibit 10.11 to Zenith's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.)
10.12		Amendment No. 2, dated January 1, 1997, to the Reinsurance and Pooling Agreement between Zenith Insurance Company and CalFarm Insurance Company, ZNAT Insurance Company, and Zenith Star Insurance Company, dated December 28, 1993. (Incorporated herein by reference to Exhibit 10.12 to Zenith's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.)
10.13		Amendment No. 3, dated July 15, 1998, to the Reinsurance and Pooling Agreement between Zenith Insurance Company and CalFarm Insurance Company, ZNAT Insurance Company, and Zenith Star Insurance Company, dated December 28, 1993. (Incorporated herein by reference to Exhibit 10.13 to Zenith's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.)
10.14		Amendment No. 4, dated March 31, 1999, to the Reinsurance and Pooling Agreement between Zenith Insurance Company and CalFarm Insurance Company, ZNAT Insurance Company, and Zenith Star Insurance Company, dated December 28, 1993. (Incorporated herein by reference to Exhibit 10.14 to Zenith's Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.)
10.15		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.)
10.16		Master Transaction Agreement, dated as of October 7, 2002, by and among Meritage Corporation, a Maryland corporation; MTH-Homes Nevada, Inc., an Arizona corporation; Perma-Bilt, A Nevada Corporation; and Zenith National Insurance Corp., a Delaware corporation. (Incorporated herein by reference to Exhibit 10.1 to Zenith's Current Report on Form 8-K dated October 8, 2002.)

10.17		Agreement of Purchase and Sale of Assets, dated as of October 7, 2002, by and among Meritage Corporation, a Maryland corporation; MTH-Homes Nevada, Inc., an Arizona corporation; Perma-Bilt, A Nevada Corporation; and Zenith National Insurance Corp., a Delaware corporation. (Incorporated herein by reference to Exhibit 10.2 to Zenith's Current Report on Form 8-K dated October 8, 2002.)
10.18		Agreement of Purchase and Sale of Real Property, dated as of October 7, 2002, by and among Meritage Corporation, a Maryland corporation; MTH-Homes Nevada, Inc., an Arizona corporation; Perma-Bilt, A Nevada Corporation; and Zenith National Insurance Corp., a Delaware corporation. (Incorporated herein by reference to Exhibit 10.3 to Zenith's Current Report on Form 8-K dated October 8, 2002.)
10.19		Indemnification Agreement, dated as of October 7, 2002, by and among Meritage Corporation, a Maryland corporation; MTH-Homes Nevada, Inc., an Arizona corporation; Perma-Bilt, A Nevada Corporation; and Zenith National Insurance Corp., a Delaware corporation. (Incorporated herein by reference to Exhibit 10.4 to Zenith's Current Report on Form 8-K dated October 8, 2002.)
10.20		Non-Disclosure and Non-Compete Agreement, dated as of October 7, 2002, by and among Meritage Corporation, a Maryland corporation; MTH-Homes Nevada, Inc., an Arizona corporation; Zenith National Insurance Corp., a Delaware corporation; and Perma-Bilt, A Nevada Corporation. (Incorporated herein by reference to Exhibit 10.5 to Zenith's Current Report on Form 8-K dated October 8, 2002.)
10.21		Agreement Regarding Purchase Price and Indemnification, dated as of October 7, 2002, by and among Zenith National Insurance Corporation, a Delaware corporation, Perma-Bilt, a Nevada Corporation and Daniel Schwartz. (Incorporated herein by reference to Exhibit 10.6 to Zenith's Current Report on Form 8-K dated October 8, 2002.)
10.22		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.)
10.23		Stock Purchase Agreement, dated February 22, 1999, between Zenith Insurance Company and Nationwide Mutual Insurance Company. (Incorporated herein by reference to Zenith's Current Report on Form 8-K, dated March 9, 1999.)
10.24		Stock Purchase Agreement, dated as of November 21, 2001, between Zenith National Insurance Corp. and Odyssey Reinsurance Corporation. (Incorporated herein by reference to Zenith's Current Report on Form 8-K, filed December 6, 2001.)
*10.25		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.)
*10.26		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.)
*10.27		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.)

*10.28		Employment Agreement, dated January 5, 1998, between Zenith National Insurance Corp. and John J. Tickner. (Incorporated herein by reference to Exhibit 10.9 to Zenith's Annual Report on Form 10-K for the year ended December 31, 1997.)
*10.29		Amendment to Employment Agreement, dated March 1, 2000, between Zenith National Insurance Corp. and John J. Tickner. (Incorporated herein by reference to Exhibit 10.17 to Zenith's Annual Report on Form 10-K for the year ended December 31, 1999.)
*10.30		Amendment No. 2, dated as of September 17, 2002, to Employment Agreement, dated and effective as of January 5, 1998, between Zenith National Insurance Corp. and John J. Tickner. (Incorporated herein by reference to Exhibit 10.3 to Zenith's Quarterly Report on Form 10-Q for the quarter ended September 30, 2002.)
*10.31		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.)
*10.32		Employment Agreement, dated October 20, 1997, between Zenith Insurance Company and Jack D. Miller. (Incorporated herein by reference to Exhibit 10.1 to Zenith Quarterly Report on Form 10-Q for the quarter ended June 30, 1998.)
*10.33		Amendment to Employment Agreement, dated March 1, 2000, between Zenith Insurance Company and Jack D. Miller. (Incorporated herein by reference to Exhibit 10.20 to Zenith's Annual Report on Form 10-K for the year ended December 31, 1999.)
*10.34		Employment Agreement, dated October 20, 1997, between Zenith Insurance Company and Robert E. Meyer. (Incorporated herein by reference to Exhibit 10.21 to Zenith's Annual Report on Form 10-K for the year ended December 31, 1999.)
*10.35		Amendment to Employment Agreement, dated March 1, 2000, between Zenith Insurance Company and Robert E. Meyer. (Incorporated herein by reference to Exhibit 10.22 to Zenith's Annual Report on Form 10-K for the year ended December 31, 1999.)
*10.36		Stock Option Agreement, dated March 15, 1996, between Zenith and Stanley R. Zax. (Incorporated herein by reference to Exhibit 10.3 to Zenith's Quarterly Report on Form 10-Q for the quarter ended June 30, 1996.)
*10.37		Zenith National Insurance Corp. Executive Officer Bonus Plan, dated March 21, 1994. (Incorporated herein by reference to Exhibit 10.12 to Zenith's Annual Report on Form 10-K for the year ended December 31, 1996.)
10.38		Aggregate Excess of Loss Reinsurance Agreement between Associated General Contractors Self Insurers Trust Fund (now part of Zenith Insurance Company) and Reliance Insurance Company effective December 31, 1991. (Incorporated herein by reference to Exhibit 10.24 to Zenith's Annual Report on Form 10-K for the year ended December 31, 1996.)
10.39		Specific Excess Workers' Compensation and Employers' Liability Policy between Planet Insurance Company (now Reliance National Indemnity Company) and Associated General Contractors of Florida Self Insurance Fund (now part of Zenith Insurance Company) effective January 1, 1993. (Incorporated herein by reference to Exhibit 10.25 to Zenith's Annual Report on Form 10-K for the year ended December 31, 1996.)

10.40		Aggregate Excess of Loss Reinsurance Agreement, dated August 1, 1998, between Zenith National Insurance Group and Inter-Ocean Reinsurance Company LTD. (Incorporated herein by reference to Exhibit 10.32 to Zenith's Annual Report on Form 10-K for the year ended December 31, 1998.)
10.41		Special Endorsement to Retrocessional Agreement, dated August 1, 1998, between American Re-Insurance Company, Inter-Ocean Reinsurance Company LTD., and Zenith Insurance Company, CalFarm Insurance Company, ZNAT Insurance Company and Zenith Star Insurance Company. (Incorporated herein by reference to Exhibit 10.28 to Zenith's Annual Report on Form 10-K for the year ended December 31, 1999.)
10.42		Termination Endorsement Number 1 to Retrocessional Agreement, dated December 22, 1999, between American Re-Insurance Company, Inter-Ocean Reinsurance Company, LTD, and Zenith Insurance Company, CalFarm Insurance Company, ZNAT Insurance Company and Zenith Star Insurance Company. (Incorporated herein by reference to Exhibit 10.29 to Zenith's Annual Report on Form 10-K for the year ended December 31, 1999.)
10.43		Endorsement Number 1 to Aggregate Excess of Loss Reinsurance Agreement, dated December 22, 1999, between Zenith National Insurance Group, CalFarm Insurance Company, ZNAT Insurance Company and Zenith Star Insurance Company and Inter-Ocean Reinsurance Company LTD. (Incorporated herein by reference to Exhibit 10.30 to Zenith's Annual Report on Form 10-K for the year ended December 31, 1999.)
10.44		Trust Agreement, dated December 18, 1998, between Inter-Ocean Reinsurance Company, LTD and Zenith Insurance Company, CalFarm Insurance Company, ZNAT Insurance Company and Zenith Star Insurance Company. (Incorporated herein by reference to Exhibit 10.34 to Zenith's Annual Report on Form 10-K for the year ended December 31, 1998.)
10.45		Trust Agreement, dated October 5, 2001, among American Re-Insurance Company (as Grantor), Zenith Insurance Company, ZNAT Insurance Company and Zenith Star Insurance Company (collectively, as Beneficiary), and State Street Bank and Trust Company (as Trustee). (Incorporated herein by reference to Exhibit 10.32 to Zenith's Annual Report on Form 10-K for the year ended December 31, 2001.)
10.46		Agreement of Reinsurance #8051 between General Reinsurance Corporation and Zenith Insurance Company, ZNAT Insurance Company, Zenith Star Insurance Company and CalFarm Insurance Company, dated May 22, 1995. (Incorporated herein by reference to Exhibit 10.13 to Zenith's Annual Report on Form 10-K for the year ended December 31, 1995.)
10.47		Endorsement No. 11, effective January 1, 2002, to Agreement of Reinsurance # 8051 between General Reinsurance Corporation and Zenith Insurance Company, ZNAT Insurance Company, Zenith Star Insurance Company and CalFarm Insurance Company, et. al., dated as of May 22, 1995. (Incorporated herein by reference to Exhibit 10.2 to Zenith's Quarterly Report on Form 10-Q for the quarter ended September 30, 2001.)
10.48		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.)

10.49		Worker's 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.)
10.50		Promissory Note, dated August 9, 2002, from Zenith National Insurance Corp. to City National Bank. (Incorporated herein by reference to Exhibit 10.1 to Zenith's Quarterly Report on Form 10-Q for the quarter ended September 30, 2002.)
10.51		Amended and Restated Credit Agreement, dated as of September 30, 2002, between Zenith National Insurance Corp., and Bank of America, N.A. (Incorporated herein by reference to Exhibit 10.4 to Zenith's Quarterly Report on Form 10-Q for the quarter ended September 30, 2002.)
10.52		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.)
10.53		Purchase Agreement between Zenith National Insurance Corp., Zenith National Insurance Capital Trust I, Credit Suisse First Boston Corporation, BancAmerica Robertson Stephens and Donaldson, Lufkin & Jenrette Securities Corporation, dated July 27, 1998, for $75,000,000 Zenith National Insurance Capital Trust I 8.55% Capital Securities. (Incorporated herein by reference to Exhibit 10.9 to Zenith's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998.)
10.54		Standstill Agreement, dated June 30, 1999, between Zenith National Corp. and Fairfax Financial Holdings Limited. (Incorporated herein by reference to Exhibit 10.3 to Zenith's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999.)
11		Statements re computation of per share earnings. (Incorporated herein by reference to Notes to Consolidated Financial Statements — Note 18 — "Earnings and Dividends Per Share" in Zenith's 2002 Annual Report to Stockholders.)
13		Zenith's Annual Report to Stockholders for the year ended December 31, 2002, 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/A.
21		Subsidiaries of the Registrant.
23.1		Consent of PricewaterhouseCoopers LLP, dated June 30, 2003. (Incorporated herein by reference to page F-1 of this Annual Report on Form 10-K/A.)
23.2		Consent of Littlejohn Frazer dated 30 June 2003. (Incorporated herein by reference to page F-50 of this Annual Report on Form 10-K/A.)
99.1		Certification, dated June 30, 2003, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*Management contract or compensatory plan or arrangement

(b): Reports on Form 8-K

Zenith filed a Current Report on Form 8-K dated October 8, 2002 in connection with the sale of its home-building business and related real estate assets.

Zenith filed Amendment No. 1 to the Current Report on Form 8-K/A on November 6, 2002 in connection with Zenith's additional acquisition on August 23, 2002 of approximately 19.2 million shares of Advent Capital (Holdings) PLC, a U.K. company.

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 June 30, 2003.

		ZENITH NATIONAL INSURANCE CORP.
		By:	/s/ STANLEY R. ZAX
			Stanley R. Zax Chairman of the Board and President (Principal Executive Officer)
		By:	/s/ WILLIAM J. OWEN
			William J. Owen Senior Vice President & Chief Financial Officer (Principal Financial and Accounting Officer)

CERTIFICATION OF CHAIRMAN OF THE BOARD AND PRESIDENT

I, Stanley R. Zax, certify that:

1.: I have reviewed this Annual Report on Form 10-K/A of Zenith National Insurance Corp.;
2.: Based on my knowledge, this annual 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 annual report;
3.: Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual report;
4.: The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures 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 annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.: The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, 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 in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6.: The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: June 30, 2003

/s/ STANLEY R. ZAX

    Stanley R. Zax
    Chairman of the Board and President,
    Zenith National Insurance Corp.

CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, William J. Owen, certify that:

1.: I have reviewed this Annual Report on Form 10-K/A of Zenith National Insurance Corp.;
2.: Based on my knowledge, this annual 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 annual report;
3.: Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual report;
4.: The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures 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 annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.: The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, 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 in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
6.: The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: June 30, 2003

/s/ WILLIAM J. OWEN

    William J. Owen
    Senior Vice President and
        Chief Financial Officer,
    Zenith National Insurance Corp.

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (File Numbers 33-8948, 33-22219, 333-04399, 333-79199 and 333-62798) of our report dated February 4, 2003 relating to the consolidated financial statements as of December 31, 2002 and 2001, and for each of the three years in the period ended December 31, 2002, which appears in the 2002 Annual Report to Stockholders of Zenith National Insurance Corp. (the "Company"), which is included in the Company's Annual Report on Form 10-K/A (Amendment No. 1) for the year ended December 31, 2002. We also consent to the incorporation by reference of our report dated February 4, 2003 relating to the financial statement schedules on pages F-3 through F-14, which appears in such Annual Report on Form 10-K/A.

PricewaterhouseCoopers LLP

Los Angeles, California
June 30, 2003

F-1

REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULES

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

Our audits of the consolidated financial statements referred to in our report dated February 4, 2003 appearing in the 2002 Annual Report to Stockholders of Zenith National Insurance Corp. (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K/A, Amendment No. 1) also included an audit of the financial statement schedules on pages F-3 through F-14 listed in Item 15(a)2 of this Form 10-K/A. 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 4, 2003

F-2

SCHEDULE I — SUMMARY OF INVESTMENTS —

OTHER THAN INVESTMENTS IN RELATED PARTIES

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

December 31, 2002

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		$	166,744	$	170,920	$	167,470
		Public utilities			22,199		20,603		20,603
		States, municipalities and political subdivisions			53,665		54,312		54,312
		Industrial and miscellaneous			515,669		542,508		542,190
	Redeemable preferred stocks				21,762		25,285		25,285

			Total fixed maturity securities:		780,039		813,628		809,860
Equity securities:
	Floating rate preferred stocks				6,799		6,420		6,420
	Convertible and non-redeemable preferred stocks				6,056		6,695		6,695
	Common stocks:
		Industrial, misc. and all other			24,317		23,230		23,230
		Banks, trust and insurance companies			14,514		12,289		12,289

			Total equity securities		51,686		48,634		48,634
Mortgage loans					26,924		26,924		26,924
Short-term investments					158,078		158,078		158,078
Other investments					54,788		54,788		54,788

			Total investments	$	1,071,515	$	1,102,052	$	1,098,284

(1): Original cost for equity securities. Original cost reduced by repayments and adjusted for amortization of premiums or accrual of discounts for fixed maturity securities.
(2): Amount at which 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

ZENITH NATIONAL INSURANCE CORP.

BALANCE SHEET

			December 31,
(Dollars and shares in thousands)			2002			2001
						(Restated— see Note A)
ASSETS
Investments:
	Common stocks, at fair value (cost $129 in 2002 and $1,678 in 2001)		$	131		$	1,578
	Short-term investments (at cost, which approximates fair value)			7,813			77,817

Total investments				7,944			79,395
Cash				275			608
Investment in subsidiaries (Note A)				387,176			309,134
Receivable from subsidiaries (Note A)				38			43,998
Other assets				16,929			17,644

		Total assets	$	412,362		$	450,779

LIABILITIES
Senior notes payable, less unamortized issue cost of $32 in 2001 (Note B)						$	57,203
8.55% Subordinated Deferrable Interest Debentures, less unamortized issue cost of $240 in 2002 and $250 in 2001 (Note D)			$	77,080			77,070
Dividend payable to stockholders				4,692			4,638
Federal income tax (Note A)				7,197			5,647
Other liabilities				6,369			5,670

		Total liabilities		95,338			150,228

Commitments and contingent liabilities (Note G)
STOCKHOLDERS' EQUITY
Preferred stock, $1 par—shares authorized 1,000; issued and outstanding, none in 2002 and 2001
Common stock, $1 par—shares authorized 50,000; issued 25,786 and 25,571 in 2002 and 2001, outstanding 18,768 and 18,553 in 2002 and 2001				25,786			25,571
Additional paid-in capital				296,974			291,348
Retained earnings				109,008			117,540
Accumulated other comprehensive income (loss) (Note F)				17,398			(1,766	)

				449,166			432,693
Treasury stock, at cost (7,018 shares in 2002 and 2001) (Note E)				(132,142	)		(132,142	)

		Total stockholders' equity		317,024			300,551

		Total liabilities and stockholders' equity	$	412,362		$	450,779

See notes to condensed financial information.

F-4

SCHEDULE II — CONDENSED FINANCIAL INFORMATION OF REGISTRANT

ZENITH NATIONAL INSURANCE CORP.

STATEMENT OF OPERATIONS

	Years ended December 31,
(Dollars in thousands)	2002			2001			2000
				(Restated — see Note A)
Net investment income	$	602		$	2,100		$	4,258
Realized gains (losses) on investments		52			419			(869	)

Total revenues		654			2,519			3,389

Operating expenses		5,135			3,827			6,042
Interest expense		5,301			7,774			5,839

Total expenses		10,436			11,601			11,881

Loss before federal income tax benefit and equity in income (loss) of subsidiaries and extraordinary item		(9,782	)		(9,082	)		(8,492	)
Federal income tax benefit		3,430			992			2,631

Loss before equity in income (loss) of subsidiaries and extraordinary item		(6,352	)		(8,090	)		(5,861	)
Equity in income (loss) of subsidiaries (Note A)		16,552			(17,770	)		(41,932	)

Income (loss) before extraordinary item		10,200			(25,860	)		(47,793	)
Extraordinary item — gain on extinguishment of debt, net of federal income tax expense of $534 (Note C)								993

Net income (loss)	$	10,200		$	(25,860	)	$	(46,800	)

See notes to condensed financial information.

F-5

SCHEDULE II — CONDENSED FINANCIAL INFORMATION OF REGISTRANT

ZENITH NATIONAL INSURANCE CORP.

STATEMENT OF CASH FLOWS

			Years ended December 31,
(Dollars in thousands)			2002			2001			2000
						(Restated —see Note A)
Cash flows from operating activities:
	Investment income received		$	233		$	477		$	721
	Operating expenses paid			(4,086	)		(4,111	)		(6,858	)
	Interest paid			(6,078	)		(7,648	)		(6,216	)
	Income tax recovered (paid)			4,818			(2,657	)		10,675

		Net cash used in operating activities		(5,113	)		(13,939	)		(1,678	)

Cash flows from investing activities:
	Purchases of investments:
		Equity securities available-for-sale		(20	)		(3,069	)		(888	)
	Proceeds from sales of investments:
		Fixed maturity securities available-for-sale					768
		Equity securities available-for-sale		1,762			2,731
	Net decrease (increase) in short-term investments			70,004			(17,873	)		41,485
	Other, net			233			(233	)		5,784

		Net cash provided by (used in) investing activities		71,979			(17,676	)		46,381

Cash flows from financing activities:
	Repurchase of redeemable securities (Note C)									(6,164	)
	Repayment of 9% Notes (Note B)			(57,235	)
	Repurchase of 9% Notes (Note C)						(1,265	)		(16,585	)
	Cash advanced from bank lines of credit			25,000
	Cash repaid on bank lines of credit			(25,000	)
	Cash dividends paid to common stockholders			(18,677	)		(17,502	)		(17,183	)
	Proceeds from exercise of stock options			5,431			3,022			7,246
	Sale of treasury shares (Note E)						25,000
	Purchase of treasury shares						(207	)		(38	)
	Dividends received from subsidiaries (Note A)						10,000			10,000
	Cash contribution to Zenith Insurance (Note A)			(25,000	)					(25,000	)
	Net cash from subsidiary (Note A)			28,282			12,099			4,097

		Net cash (used in) provided by financing activities		(67,199	)		31,147			(43,627	)

Net (decrease) increase in cash				(333	)		(468	)		1,076
Cash at beginning of year				608			1,076

Cash at end of year			$	275		$	608		$	1,076

Reconciliation of net income (loss) to net cash flows from operating activities:
	Net income (loss)		$	10,200		$	(25,860	)	$	(46,800	)
	(Income) loss from subsidiaries (Note A)			(16,552	)		17,770			41,932
	Gain on extinguishment of debt (Note C)									(1,527	)
	Federal income tax			1,388			(3,649	)		8,577
	Other			(149	)		(2,200	)		(3,860	)

		Net cash used in operating activities	$	(5,113	)	$	(13,939	)	$	(1,678	)

See notes to condensed financial information.

F-6

SCHEDULE II—CONDENSED FINANCIAL INFORMATION OF REGISTRANT

ZENITH NATIONAL INSURANCE CORP.

NOTES TO CONDENSED FINANCIAL INFORMATION

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. Certain prior year numbers have been reclassified to conform to the current year presentation.

A. Investment In Subsidiaries

Zenith National owns, directly or indirectly, 100% of the outstanding stock of Zenith Insurance Company ("Zenith Insurance"); ZNAT Insurance Company; Zenith Star Insurance Company; Perma-Bilt, a Nevada Corporation ("Perma-Bilt"); Zenith Development Corp. ("ZDC"); and Zenith National Insurance Capital Trust I (the "Trust"). These investments are included in the financial statements on the equity basis of accounting. Included in investment in subsidiaries at December 31, 2002 and 2001 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.

Through October 8, 2002, Zenith National was engaged in Real Estate operations through Perma-Bilt. Zenith National funded the land acquisitions of its Real Estate operations through intercompany loans to Perma-Bilt. On October 8, 2002, Zenith closed the sale of its home-building business and related real estate assets in Las Vegas, Nevada to Meritage Corporation ("Meritage"). In the transaction, Meritage, through its wholly-owned subsidiary, MTH-Homes Nevada, Inc. ("MTH Nevada"), acquired substantially all of Perma-Bilt's assets, subject to the related liabilities, pursuant to a Master Transaction Agreement, dated as of October 7, 2002, and related asset and real property acquisition agreements ("the Agreement"). Zenith received gross proceeds of $65.0 million in connection with the sale, including $28.4 million in repayment of intercompany loans to Zenith National from Perma-Bilt. Zenith National's equity in the income (loss) of its subsidiaries includes $9.2 million, $3.7 million and $3.6 million in 2002, 2001 and 2000, respectively, of after-tax income related to the discontinued real estate operations of Perma-Bilt. In addition to the consideration received in October 2002, the Agreement entitles us 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 are currently unable to estimate how much, if anything, we might receive under this earn-out provision.

On August 23, 2002, Zenith Insurance acquired 19.2 million Ordinary Shares of Advent Capital, a U.K. company, for $14.6 million in an open offer and placing of shares made in July 2002. As a result of the purchase, Zenith Insurance owns approximately 20.9% of the outstanding shares of Advent Capital. Advent Capital and its subsidiaries operate in the property and casualty insurance business in the United Kingdom by providing corporate capital to support underwriting of various Lloyd's syndicates and by managing those syndicates. Zenith Insurance used available funds from its short-term investments to fund the purchase of the Advent Capital shares. Prior to August 23, 2002, Zenith Insurance owned approximately 6.3% of the outstanding shares of Advent Capital and accounted for the investment on the cost basis. As of August 23, 2002, Zenith is accounting for its investment in Advent Capital based on the equity method in accordance with the provisions of Accounting Principles Board Opinion No. 18, "The Equity Method of Accounting for Investments in Common Stock" ("APB No. 18"). The carrying value of the investment in the common stock of Advent Capital is equal to Zenith Insurance's equity in the underlying net assets of Advent Capital. In accordance with the provisions of APB No. 18, our investment in Advent Capital was restated in 2001 as if the equity method of accounting had been

F-7

applied. The effect was a reduction in Zenith National's investment in its subsidiaries of $2.1 million at December 31, 2001, a decrease in stockholders' equity of $2.1 million at December 31, 2001, and an increase in equity in net loss of its subsidiaries for 2001 of $2.1 million. At December 31, 2002, Zenith has accounted for its investment in Advent Capital using Advent Capital's September 30, 2002 financial statements. Zenith will continue to report its share of Advent Capital's income and net assets lagged by one quarter in order to allow sufficient time for Advent Capital to prepare the information.

Zenith National files a consolidated federal income tax return. The equity in income (loss) of subsidiaries is net of a provision for federal income tax expense of $8.0 million for the year ended December 31, 2002 and federal income tax benefits of $9.9 million in 2001 and $21.9 million in 2000. Zenith National has a tax allocation agreement with its subsidiaries and the 2002, 2001 and 2000 condensed financial information reflects Zenith National's portion of the consolidated tax.

On September 6, 2002, Zenith National contributed $47.5 million to the capital and surplus of Zenith Insurance. The contribution of capital to Zenith Insurance in 2002 consisted of $25.0 million in cash and $22.5 million in the form of a mortgage note owned by ZDC. Prior to its contribution by Zenith National to Zenith Insurance, the note was transferred from ZDC to Zenith National by way of dividend and in satisfaction of an intercompany loan between Zenith National and ZDC. In 2001, Zenith National contributed all of the outstanding capital stock of Perma-Bilt to the capital and surplus of Zenith Insurance at an equity basis value of $14.2 million. In 2000, Zenith National made a contribution of $25.0 million in cash to the capital and surplus of Zenith Insurance.

In January 2003, Zenith National borrowed $45.0 million under its lines of credit to make a further capital contribution to Zenith Insurance. Available bank lines were reduced to $25.0 million as a result of the drawings. We anticipate re-financing the bank debt as soon as practicable, and will also pursue additional financing activities to support the growth of our insurance business.

In each of 2001 and 2000, Zenith Insurance paid a dividend of $10.0 million in cash to Zenith National. In March 2003, Zenith Insurance paid a dividend of $10.0 million to Zenith National.

B. Senior Notes Payable

On May 1, 2002, Zenith National used $57.2 million of its available short-term investments to pay the principal of its 9% Senior Notes due May 1, 2002 (the "9% Notes"). Zenith National had $57.2 million outstanding of the $75.0 million issued of its 9% Notes at December 31, 2001. Interest on the 9% Notes was payable semi-annually. The 9% Notes were general unsecured obligations of Zenith National. Issue costs of $1.2 million were being amortized over the term of the 9% Notes. In the years ended December 31, 2002, 2001 and 2000, $1.7 million, $5.3 million and $5.8 million, respectively, of interest and issue costs were expensed.

C. Extraordinary Item — Gain on Extinguishment of Debt

In 2000, Zenith National paid $22.8 million to repurchase $16.5 million aggregate principal amount of its outstanding 9% Notes and $8.0 million aggregate liquidation amount of the outstanding 8.55% Capital Securities (the "Redeemable Securities") of the Trust, a Delaware statutory business trust, all of the voting securities of which are owned by Zenith National. The repurchases in 2000 resulted in an extraordinary gain before tax of $1.5 million. In 2001, Zenith National paid $1.3 million to repurchase $1.3 million aggregate principal amount of the outstanding 9% Notes. Zenith National used its available cash balances to fund these purchases.

F-8

D. Subordinated Debentures

At December 31, 2002 and 2001, Zenith National had $77.3 million aggregate principal amount of 8.55% Subordinated Deferrable Interest Debentures due 2028 (the "Subordinated Debentures") outstanding all of which were held by 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 any time by Zenith National at the then present value of the remaining scheduled payments of principal and interest. The issue cost and discount on the Subordinated Debentures of $1.7 million are being amortized over the term of the Subordinated Debentures. During each year ended December 31, 2002, 2001 and 2000, $6.7 million of interest and issue costs were expensed. The Subordinated Debentures are subordinated to all other indebtedness of Zenith National.

The aggregate maturities for all long-term borrowings for each of the five years after December 31, 2002 are as follows:


Maturing in: (Dollars in thousands)	Amount

2003
2004
2005
2006
2007
Thereafter	$	77,320

Total	$	77,320

E. Common Stock

On December 5, 2001, Zenith National sold one million shares of its common stock, par value $1.00 per share, in a private placement for $25.00 per share to Odyssey Reinsurance Corporation, an indirect subsidiary of Fairfax Financial Holdings Limited ("Fairfax"). Companies controlled by Fairfax owned 42% of Zenith National's outstanding common stock as of December 31, 2002. Fairfax has disclaimed control of Zenith in separate filings with the Departments of Insurance in California, Texas and New York.

F. Accumulated Other Comprehensive Income (Loss)

The components of accumulated other comprehensive income (loss) were as follows:


(Dollars in thousands) December 31,	2002			2001

Net unrealized gains (losses) on investments	$	26,769		$	(2,717	)
Deferred income tax expense (benefit)		9,369			(951	)

		17,400			(1,766	)

Cumulative translation adjustment		(3	)
Deferred income tax benefit		(1	)

		(2	)

Total accumulated other comprehensive income (loss)	$	17,398		$	(1,766	)

F-9

G. Commitments and Contingent Liabilities

Settlement of RISCORP Litigation and Resolution of Contingency

On April 1, 1998, pursuant to an Asset Purchase Agreement dated June 17, 1997 (the "Asset Purchase Agreement") between Zenith Insurance and RISCORP, Inc. and certain of its subsidiaries (collectively, "RISCORP"), Zenith Insurance acquired substantially all of the assets and certain liabilities of RISCORP related to RISCORP's workers' compensation business (the "RISCORP Acquisition"). On January 13, 2000, RISCORP filed a complaint against Zenith Insurance and another defendant in the Superior Court of Fulton County in the State of Georgia. RISCORP's lawsuit sought a declaration that would have had the effect of requiring Zenith to pay either $18.1 million (and related charges) or $5.9 million. On September 4, 2002, by stipulation, the litigation filed by RISCORP was dismissed with prejudice and with no liability to Zenith.

Other Litigation

Contingencies Surrounding Reinsurance Receivable from Reliance Insurance Company

At December 31, 2002 and 2001, Reliance Insurance Company ("Reliance") owed Zenith Insurance $6.0 million of reinsurance recoverable on paid and unpaid losses in connection with the reinsurance arrangements assumed by Zenith Insurance in its 1996 acquisition of the Associated General Commerce Self-Insurers' Trust Fund.

In January 2001, Reliance was subject to a Supervision Order by the Pennsylvania Department of Insurance. This is not the same as insolvency. Based on the published 1999 financial statements for Reliance, which showed considerable net worth, we had no reason to conclude that we had an impairment of our reinsurance recoverable at the time of the Supervision Order. On May 29, 2001, the Pennsylvania Department of Insurance issued an Order of Rehabilitation for Reliance. Rehabilitation raises the possibility of compromise with Reliance's creditors. Therefore, we disclosed a contingency in the second quarter of 2001 related to possible impairment of our receivable from Reliance. With no information with which to estimate our impairment (no financial statements were filed by Reliance for 2000), we concluded that we could not determine the outcome of the contingency at that time. On October 3, 2001, the Commonwealth Court of Pennsylvania approved an Order of Liquidation for Reliance, which was experiencing cash flow problems caused by slow reinsurance recoveries. At that time, an estimated balance sheet of Reliance was made available as of December 31, 2000, from which we estimated that we could expect to recover no more than 50% of our receivable. This established a range of outcomes for the amount impaired between $3.0 million and $6.0 million (i.e., we expect to recover an amount between 50% and nothing). We have no information with which to establish an estimate within that range as better than any other and, therefore, we recorded an impairment provision of $3.0 million for our receivable from Reliance. We recorded the provision in the third quarter of 2001, the period for which the information became available to estimate the impairment provision. The impairment provision was $3.0 million at December 31, 2002 and 2001. The eventual outcome of this matter will be determined by the ultimate amount of Reliance's liabilities and whether or not Reliance has sufficient assets or can obtain recoveries and investment income in an amount sufficient to pay its liabilities. We will revise our impairment provision, if necessary, upon receipt of relevant information.

F-10

Contingencies Surrounding 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 its policyholder liabilities. The declaration of an insolvency establishes the presumption that assessments by the Guarantee Funds are probable. Zenith Insurance writes workers' compensation insurance in many states in which unpaid workers' compensation liabilities are the responsibility of the Guarantee Funds and has received, and expects to continue to receive, Guarantee Fund assessments, some of which may be based on certain of the premiums it has already earned at December 31, 2002. Zenith recorded an estimate of $6.0 million (net of expected recoveries of $2.0 million recoverable before the end of 2003) for its expected liability at December 31, 2002 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, 2002. The estimated expense for Guarantee Fund assessments was $4.1 million in 2002 compared to $3.5 million in 2001. Our estimated liability is based on currently available information and could change based on additional information or reinterpretation of existing information concerning the actions of the Guarantee Funds. Zenith expects that it 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 Zenith is entitled.

Contingencies Surrounding the Recoverability of the Special Disability Trust Fund Receivable

The Florida Special Disability Trust Fund ("SDTF") is a fund established in Florida to reimburse insurance companies and employers for the cost of certain workers' compensation claims. The SDTF was established to promote 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. Approximately 550 of our Florida claims have been accepted, for which we have recorded a recoverable of $13.1 million, net of amounts due to reinsurers, at December 31, 2002. We bill the SDTF and receive reimbursements as we make payments on accepted claims. The SDTF is funded by assessing a fee of 4.52% of 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 substantial recoveries for second injury claims from the SDTF. We received reimbursements of $5.6 million in 2002, $13.0 million in 2001 and $5.9 million in 2000. The SDTF is currently about 30 to 36 months behind schedule in reimbursing claims but we expect to fully recover the remaining amount receivable.

F-11

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 policy acquisition costs		Other operating expenses		Premiums written
(Dollars in thousands)
Years ended December 31, 2002
Property and Casualty:
	Workers' Compensation	$	9,367	$	695,179	$	78,346		$	503,859			$	407,617	$	81,807	$	55,280	$	517,104
	Reinsurance		4,007		130,690		11,751			53,196				34,434		10,395		723		58,786

			13,374		825,869		90,097			557,055				442,051		92,202		56,003		575,890
Reinsurance ceded					215,663		7,290
Investment											$	48,811
Parent																		5,135

	Total	$	13,374	$	1,041,532	$	97,387		$	557,055	$	48,811	$	442,051	$	92,202	$	61,138	$	575,890

2001
Property and Casualty:
	Workers' Compensation	$	10,111	$	599,688	$	57,843		$	415,848			$	348,730	$	79,137	$	44,332	$	423,763
	Reinsurance		2,568		142,990		13,419			61,028				83,560		8,686		700		65,551

			12,679		742,678		71,262			476,876				432,290		87,823		45,032		489,314
Reinsurance ceded					204,144		51
Investment											$	51,178
Parent																		3,826

	Total	$	12,679	$	946,822	$	71,313		$	476,876	$	51,178	$	432,290	$	87,823	$	48,858	$	489,314

2000
Property and Casualty:
	Workers' Compensation	$	8,610	$	542,173	$	49,928		$	300,833			$	289,923	$	57,979	$	39,241	$	308,131
	Reinsurance		1,700		97,514		8,896			37,919				47,039		4,912		504		39,320

			10,310		639,687		58,824			338,752				336,962		62,891		39,745		347,451
Reinsurance ceded					238,196		83
Investment											$	51,766
Parent																		6,042

	Total	$	10,310	$	877,883	$	58,907		$	338,752	$	51,766	$	336,962	$	62,891	$	45,787	$	347,451

F-12

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
Years ended December 31,
2002
Premiums earned	$	555,023	$	57,739	$	59,771	$	557,055	10.7	%
2001
Premiums earned		427,331		14,430		63,975		476,876	13.4
2000
Premiums earned		307,514		10,610		41,848		338,752	12.4

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
Years ended December 31,
2002
Allowance for uncollectible premiums	$	7,704	$	3,077		$	8,481	$	2,300
Provision for uncollectible reinsurance recoverable		3,000							3,000
2001
Allowance for uncollectible premiums		7,596		4,189			4,081		7,704
Provision for uncollectible reinsurance recoverable				3,000					3,000
2000
Allowance for uncollectible premiums		10,172		2,648			5,224		7,596

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

F-13

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
			Deferred policy acquisition costs				Discount, if any, deducted in Column C											Amortization of deferred policy acquisition costs
			Deferred policy acquisition costs				Discount, if any, deducted in Column C	Unearned premiums		Earned premiums		Net investment income		Current year		Prior year		Amortization of deferred policy acquisition costs		Paid claims and claim adjustment expense		Premiums written
(Dollars in thousands)
Years ended December 31, 2002
(a) Zenith National Insurance Corp. and Subsidiaries
			$	13,374	$	825,869		$	90,097	$	557,055	$	48,811	$	412,883	$	29,168	$	92,202	$	358,860	$	575,890
	Reinsurance ceded					215,663			7,290

		Total	$	13,374	$	1,041,532		$	97,387	$	557,055	$	48,811	$	412,883	$	29,168	$	92,202	$	358,860	$	575,890

(c) Proportionate share of Zenith's equity investee — Advent Capital (Holdings) PLC(2)
			$	7,055	$	43,934		$	40,885	$	19,132	$	1,280	$	7,342	$	6,975	$	3,758	$	8,995	$	17,077
	Reinsurance ceded					179,987			4,058

		Total		7,055	$	223,921		$	44,943	$	19,132	$	1,280	$	7,342	$	6,975	$	3,758	$	8,995	$	17,077

2001(1)
(a) Zenith National Insurance Corp. and Subsidiaries
			$	12,679	$	742,678		$	71,262	$	476,876	$	51,178	$	427,943	$	4,347	$	87,823	$	323,784	$	489,314
	Reinsurance ceded					204,144			51

		Total	$	12,679	$	946,822		$	71,313	$	476,876	$	51,178	$	427,943	$	4,347	$	87,823	$	323,784	$	489,314

2000(1)
(a) Zenith National Insurance Corp. and Subsidiaries
			$	10,310	$	639,687		$	58,824	$	338,752	$	51,766	$	306,082	$	30,880	$	62,891	$	308,040	$	347,451
	Reinsurance ceded					238,196			83

		Total	$	10,310	$	877,883		$	58,907	$	338,752	$	51,766	$	306,082	$	30,880	$	62,891	$	308,040	$	347,451

(1) Information is not required for 50%-or-less-owned equity investee for 2001 and 2000, as Zenith's share of Advent Capital's ending reserves at December 31, 2001 and 2000 is less than 5% of total reserves otherwise required to be reported in this schedule.

(2) Zenith accounts for its investment in Advent Capital on a one quarter lag. Therefore, information in (c) above is presented as of and for the twelve months ended September 30, 2002.

F-14

FINANCIAL STATEMENTS
OF
ADVENT CAPITAL (HOLDINGS) PLC

		PAGE
Group Profit and Loss Account		F-16
Group Balance Sheet		F-18
Company Balance Sheet		F-19
Group Cash Flow Statement		F-20
Statement of Directors' Responsibilities and Accounting Policies		F-21
Notes to the Accounts		F-26
Report of Independent Auditors		F-49
Consent of Littlejohn Frazer		F-50

F-15

ADVENT CAPITAL (HOLDINGS) PLC

GROUP PROFIT AND LOSS ACCOUNT
GROUP GENERAL BUSINESS TECHNICAL ACCOUNT
Year ended 31 December 2002

	Note	2002		2001		2000
		£'000		£'000		£'000
Gross Written Premiums	1	188,791		206,399		49,785
Outward reinsurance premiums		103,879		36,531		11,055

Net Written Premiums		84,912		169,868		38,730
Change in the gross provision for unearned premiums		76,145		16,153		(5,618	)
Reinsurers' share		(4,613	)	(28,452	)	1,134

Earned premiums, net of reinsurance		156,444		157,569		34,246
Allocated Investment Income	2	6,599		7,153		1,787

Total technical income		163,043		164,722		36,033
Claims paid, net of reinsurance	3	88,407		106,090		18,730
Increase in net outstanding claims provisions	4	81,353		108,172		7,888

Claims Incurred Net of Reinsurance		(169,760	)	(214,262	)	(26,618	)
Change in other technical provisions		53,059		47,548		(538	)
Net operating expenses	5	(30,987	)	(44,464	)	(7,760	)

Balance Transferred to Non Technical Account	6	15,355		(46,456	)	1,117

The Accounting Policies and Notes on pages F-21 to F-48 form part of these Accounts.

F-16

ADVENT CAPITAL (HOLDINGS) PLC

GROUP PROFIT AND LOSS ACCOUNT
GROUP NON TECHNICAL ACCOUNT
Year ended 31 December 2002

	Note	2002		2001		2000
		£'000		£'000		£'000
Balance Transferred from Technical Account		15,355		(46,456	)	1,117
Investment Income	7	1,290		1,169		1,360
Other income	8	2,501		1,033		783
Other charges	9	(5,525	)	(4,619	)	(1,711	)

Profit / (Loss) on Ordinary Activities before Taxation		13,621		(48,873	)	1,549
Taxation	13	(11,733	)	103		559

Profit / (Loss) on Ordinary Activities after Taxation	23	25,354		(48,976	)	990

The profit or loss above is from continuing operations.

There are no recognised gains or losses other than the profit or loss stated above.

The Accounting Policies and Notes on pages F-21 to F-48 form part of these Accounts.

F-17

ADVENT CAPITAL (HOLDINGS) PLC

GROUP BALANCE SHEET

At 31 December 2002

		Note	Assets and Liabilities at Lloyd's		Corporate		2002 Total		2001 Total
			£'000		£'000		£'000		£'000
Assets
Tangible fixed assets		16	—		1,760		1,760		810
Intangible fixed assets		17	—		10,077		10,077		10,875
Investments		18	113,540		—		113,540		106,091
Reinsurers' share of technical provisions:
Provision for unearned premiums			7,930		—		7,930		13,329
Provision for outstanding claims			422,554		—		422,554		284,819
Debtors		19	151,074		14,660		165,734		135,103
Cash at bank		20	20,742		39,250		59,992		31,824
Overseas Deposits			12,008		—		12,008		7,215
Prepayments and accrued income		21	6,516		2,992		9,508		31,841

			734,364		68,739		803,103		621,907

Liabilities and Reserves
Called-up share capital		22	—		26,331		26,331		11,316
Share premium account		23	—		1,249		1,249		28,802
Profit and loss account		23	(32,673	)	49,047		16,374		(51,273	)
Other reserves		24	—		(4,308	)	(4,308	)	(4,308	)

Shareholders' funds		25	(32,673	)	72,319		39,646		(15,463	)
Technical Provisions:
	Other technical provisions	26	(68,679	)	—		(68,679	)	(63,034	)
	Provisions for unearned premiums		29,303		—		29,303		105,457
	Provisions for outstanding claims		700,221		—		700,221		507,392
Provision for other charges		27	—		40		40		90
Creditors		28	98,463		3,546		102,009		78,225
Accruals and deferred income			416		147		563		9,240

			727,051		76,052		803,103		621,907

Approved by the Board on 25 June 2003.

B F Caudle
Director

K D Thompson
Director

The Accounting Policies and Notes on pages F-21 to F-48 form part of these Accounts.

F-18

ADVENT CAPITAL (HOLDINGS) PLC

COMPANY BALANCE SHEET

At 31 December 2002

	Note		2002			2001
			£'000			£'000
Fixed Assets
Tangible fixed assets	16		389			592
Investment in group undertakings	29		14,406			14,406
Current Assets
Debtors	19	17,141			6,224
Cash at bank and in hand	20	29,033			13,594

		46,174			19,818
Creditors: amounts due within one year	28	804			1,196

Net Current Assets			45,370			18,622

Total Assets less Current Liabilities			60,165			33,620
Provision for other liabilities and charges	27		40,143			43,543

Net Assets / (Liabilities)			20,022			(9,923	)

Capital and Reserves
Called-up share capital	22		26,331			11,316
Share premium account	23		—			27,553
Profit and loss account	23		(6,309	)		(48,792	)

Shareholders' funds	25		20,022			(9,923	)

Approved by the Board on 25 June 2003.

B F Caudle
Director

K D Thompson
Director

The Accounting Policies and Notes on pages F-21 to F-48 form part of these Accounts.

F-19

A D V E N T C A P I T A L (H O L D I N G S) P L C

GROUP CASH FLOW STATEMENT

Year ended 31 December 2002

	Note	2002		2001		2000
		£'000		£'000		£'000
Net Cash Inflow from Operating Activities	30	11,091		23,813		14,460
Return on Investments and Servicing of Finance
Interest received		1,221		1,169		1,360
Taxation
Corporation tax paid		(96	)	(500	)	(1,192	)
Overseas tax paid		(196	)	—		—

		(292	)	(500	)	(1,192	)
Investing Activities
Additions to tangible fixed assets		(1,364	)	(992	)	(14	)
Disposal of tangible fixed assets		—		5		—
Additions to intangible fixed assets		—		(50	)	(16	)
Cash acquired on acquisition of subsidiaries		—		—		12,813
Acquisition expenses paid		—		—		(316	)

Net Cash (Outflow) / Inflow from Investing Activities		(1,364	)	(1,037	)	12,467
Net Cash Inflow from Financing
Issue of ordinary share capital less expenses		29,755		—		—
Net movement in syndicates' portfolio investments		(7,450	)	(37,493	)	(2,983	)

Increase / (Decrease) in net funds in the Year	31,32	32,961		(14,048	)	24,112

The Accounting Policies and Notes on pages F-21 to F-48 form part of these Accounts.

F-20

ADVENT CAPITAL (HOLDINGS) PLC

STATEMENT OF DIRECTORS' RESPONSIBILITIES AND ACCOUNTING POLICIES

STATEMENT OF DIRECTORS' RESPONSIBILITIES

Company law requires the Directors to prepare Accounts for each financial year which give a true and fair view of the state of affairs of the Company and the Group and of the profit or loss of the Group for that period. In preparing those Accounts the Directors are required to:

•: select suitable Accounting Policies and then apply them consistently;
•: make judgements and estimates that are reasonable and prudent;
•: state whether applicable Accounting Standards have been followed, subject to any material departures disclosed and explained the Accounts;
•: prepare the Accounts on the going concern basis unless it is inappropriate to presume that the Company will continue in business.

The Directors are responsible for maintaining proper accounting records which disclose with reasonable accuracy at any time the financial position of the Company and the Group and to enable them to ensure that the Accounts comply with the Companies Act 1985. They are also responsible for safeguarding the assets of the Company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors confirm that suitable accounting policies, consistently applied and supported by reasonable and prudent estimates, have been used in the preparation of the financial statements and that applicable accounting standards have been followed.

ACCOUNTING POLICIES

BASIS OF PRESENTATION

The Group Accounts have been prepared in accordance with the provisions of Section 255A of, and Schedule 9A to, the Companies Act 1985, and with the Statement of Recommended Practice on Accounting for Insurance Business issued by the Association of British Insurers ("the ABI SORP") dated December 1998. The balance sheet of the holding company has been prepared in accordance with Section 226 of, and Schedule 4 to, the Companies Act 1985.

The Group participates in insurance business as an underwriting member at Lloyd's. The assets and liabilities arising as a result of the underwriting activities are held under various Lloyd's trust deeds and are shown separately on the Balance Sheet as "Assets and Liabilities at Lloyd's".

The Group's share of the technical results of syndicates are presented in this report on an annual accounting basis under which insurance profits or losses are recognised as they are earned instead of at the point of release of the underwriting profit or loss on closure of each Lloyd's year of account, normally, after three years. The profit commission from the Group's managing agency business is also recognised on this basis.

The Group Accounts have been prepared in accordance with applicable Financial Reporting Standards.

BASIS OF CONSOLIDATION

The Group Accounts incorporate the assets, liabilities and results of the Company and its subsidiary and quasi subsidiary undertakings drawn up to 31 December each year.

Merger accounting principles are applied to those subsidiaries where the transaction meets the requirements of the Companies Act 1985 and conforms to current accounting practice. The results and

F-21

cash flows of the merging entities are brought into the accounts from the beginning of the financial year in which the merger or group reorganisation occurred, adjusted so as to achieve uniformity of accounting policies. Corresponding figures are restated by including the results for the merging entities for the previous period and their balance sheets for the previous balance sheet date, adjusted as necessary to achieve uniformity of accounting policies.

BASIS OF ACCOUNTING

GENERAL INSURANCE BUSINESS

The results for general insurance business written are determined on an annual basis whereby the incurred cost of claims, commission and related expenses are charged against the earned proportion of premiums, net of reinsurance as follows:

(i) Premiums written relate to business incepted during the year, together with any differences between booked premiums for prior years and those previously accrued, and include estimates of premiums due but not yet receivable or notified to the company, less an allowance for cancellations.

(ii) Unearned premiums represent the proportion of premiums written that relate to unexpired terms of policies in force at the balance sheet date.

(iii) Acquisition costs, which represent commission and other related expenses, are deferred over the period in which the related premiums are earned.

(iv) Reinsurance premium costs are deferred over the period in which the premiums relating to business written are earned.

(v) Claims incurred comprise claims and related expenses paid in the year and changes in the provisions for outstanding claims, including provisions for claims incurred but not reported and related expenses, together with any other adjustments to claims from previous years. Where applicable, deductions are made for salvage and other recoveries.

(vi) Claims outstanding represent the ultimate cost of settling all claims (including direct and indirect claims settlement costs) arising from events which have occurred up to the balance sheet date, including provision for claims incurred but not yet reported, less any amounts paid in respect of those claims. Claims outstanding are reduced by anticipated salvage and other recoveries.

(vii) Provisions for claims incurred but not reported are calculated based on the latest loss information available at the time of making such calculation. The estimated cost of claims which may have been incurred but not reported is established by the Underwriter exercising his judgement aided by statistical projections based on the history of past claims settlements and by reference to case by case review of notified losses.

The calculation includes estimates for known outstanding claims, claims which may have been incurred but not reported and potential reinsurance recoveries. The uncertainties that are inherent in the process of estimating are such that in the normal course of events, unforeseen or unexpected future developments may cause the ultimate cost of settling the outstanding liabilities to differ from that presently estimated.

Credit is taken for any reinsurance recoveries that are presently estimated to be recoverable. No credit is taken for investment earnings that may be expected to arise in the future on the funds representing the provision for outstanding claims.

SYNDICATE CLOSED YEARS OF ACCOUNT AND REINSURANCE TO CLOSE

At the end of its third year, an underwriting year of account is normally closed by reinsurance into the following year of account. The amount of the reinsurance to close premium payable is determined

F-22

by the managing agent, generally by estimating the cost of claims notified but not settled at 31 December, together with the estimated cost of claims incurred but not reported at that date, and an estimate of future claims handling costs. Any subsequent variation in the ultimate liabilities of the closed year of account is borne by the underwriting year into which it is reinsured. Only when a year of account is closed are funds released to the Group from the various trust deeds under which they are held.

The payment of a reinsurance to close premium does not eliminate the liability of the closed year for outstanding claims. If the reinsuring syndicate was unable to meet its obligations, and the other elements of Lloyd's chain of security were to fail, then the closed underwriting account would have to settle outstanding claims.

The Directors consider that the likelihood of such a failure of the reinsurance to close is extremely remote, and consequently the reinsurance to close has been deemed to settle liabilities outstanding at the closure of an underwriting account. The Group adjusts its provision for outstanding claims at 36 months for a year of account to equal its share of the syndicate reinsurance to close, and no further provision is made for any potential variation in the ultimate liability of that year of account.

The portfolio premiums payable and receivable by the Group arising from the syndicate reinsurance to close are offset and the difference, representing the increase or decrease in the Group's capacity on the syndicate, is shown in the technical account as gross premiums written or reinsurance premiums payable.

RUN OFF YEARS AND ESTIMATED LIABILITIES

Where an underwriting year of account is not closed at the end of the third year (a "run-off" year of account) a provision is made for the estimated cost of all known and unknown outstanding liabilities for that year. The provision is determined initially by the managing agent on a similar basis to the reinsurance to close. However, any subsequent variation in the ultimate liabilities for that year remains with the corporate member participating therein. As a result any run-off year will continue to report movements in its results after the third year until such time as it secures a reinsurance to close.

INVESTMENTS AND ALLOCATED INVESTMENT INCOME

In accordance with Lloyd's current accounting practice, investments are stated at market value, including accrued interest at the Balance Sheet date. Investment income is included in the General Business Technical Account reflecting the net return earned on the investment portfolio held by the Syndicates. The allocated investment income therefore comprises income received and investment profits and losses, net of investment expenses and charges arising in the calendar year including appreciation/depreciation and accrued interest consequent upon the revaluation of investments at 31 December. All gains and losses on investments are treated as realised at the Balance Sheet date.

PROFIT COMMISSION RECEIVABLE

The Group accounts for profit commission receivable by its managing agency business on an annual basis consistent with the recognition of insurance underwriting profits of the syndicate to which it relates. Profit commission receivable is included within Other Income in the non technical Group Profit & Loss Account.

BASIS OF CURRENCY TRANSLATION

The Syndicates maintain separate funds in sterling, euros and United States and Canadian dollars. All assets and liabilities expressed in euros and United States and Canadian dollars are translated into sterling at the rates of exchange ruling at the Balance Sheet date. United States and Canadian dollar

F-23

and euro transactions are translated at the average rate of exchange during the year. Foreign exchange differences are reported in operating expenses in the technical account. Transactions during the year in other overseas currencies are expressed in sterling at the rates ruling at the transaction date.

DEBTORS/CREDITORS ARISING FROM INSURANCE/REINSURANCE OPERATIONS

The amounts shown in notes 19 and 28 include the totals of all the syndicates' outstanding debit and credit transactions as processed by XChanging Ins-sure Services Ltd (previously the LPSO); no account has been taken of any offsets which may be applicable in calculating the net amounts due between the syndicates and their counterparty insureds, reinsurers or intermediaries as appropriate.

TANGIBLE FIXED ASSETS

Depreciation is provided on all tangible fixed assets in order to write down their cost or valuation to their estimated residual value by equal instalments over the periods of their estimated useful economic lives, which are considered to be:

Leasehold improvements		3.5 years
Furniture, fittings and equipment		3.5 to 8 years
Computer equipment		3 years

Motor vehicles are acquired under finance leases and accounted for in accordance with the policy stated below.

INTANGIBLE FIXED ASSETS

Costs incurred by the Group in the Corporation of Lloyd's auctions in order to acquire rights to participate on Syndicates' underwriting years are included within intangible fixed assets and amortised over a fifteen year period from the start of the underwriting year of account for which costs are incurred.

Goodwill arising on consolidation is capitalized in the balance sheet and amortised through the profit and loss account over its useful economic life of fifteen years on a straight line basis.

DEFERRED TAXATION

The company has adopted FRS19 Accounting for Deferred Taxation. Deferred tax is provided in full on timing differences which result in an obligation at the balance sheet date to pay more tax, or a right to pay less tax, at future dates, at rates expected to apply when they crystallise based on current tax rates and law. Timing differences arise from the inclusion of items of income and expenditure in taxation computations in periods different from those in which they are included in the financial statements. Deferred tax is not provided in timing differences arising from the revaluation of fixed assets where there is no commitment to sell the assets, or on unremitted earnings of subsidiaries and associates where there is no commitment to remit those earnings. Deferred tax assets are recognised to the extent that it is regarded as more likely than not that they will be recovered. Deferred tax assets and liabilities are not discounted.

Adoption of FRS 19 has not resulted in a requirement to restate the comparative figures.

LEASING TRANSACTIONS

Assets acquired under finance leases are capitalized and the corresponding liability to the leasing company is included in obligations under finance leases. Depreciation on leased assets is charged to the profit and loss account at rates calculated to write off the capitalized value over the asset over the shorter of its expected useful life and the term of the lease. Leasing payments are treated as consisting

F-24

of capital and finance charge elements and the finance charge is charged to the profit and loss account during the lease term on a straight line basis. All other leases are operating leases and rentals payable are written off to the profit and loss account as incurred.

GROUP CASH FLOW STATEMENT

The Group cash flow statement incorporates cash flows within the syndicates' premium trust funds at syndicate level. However, the Group is unable to readily determine the cash flows arising from the Syndicates managed portfolio of investments. Consequently the movement in the Group's share of the portfolio of investments is stated as a net figure.

F-25

ADVENT CAPITAL (HOLDINGS) PLC

NOTES TO THE ACCOUNTS

1. SEGMENTAL ANALYSIS

	Gross Premiums Written				Gross Premiums Earned
Class of Business	Gross Premiums Written				Gross Premiums Earned
Class of Business	2002		2001	2000	2002	2001	2000
	£'000		£'000	£'000	£'000	£'000	£'000
Direct insurance
Fire and other damage to property	11,613		39,944	4,547	16,334	48,479	4,034
Marine, Aviation and Transport	11,953		22,337	—	22,681	32,871	—
Third party liability	12,285		13,424	2,043	21,108	17,708	1,813
Credit and Surety	(291	)	4,006	—	2,489	9,163	—
Other	7,861		8,934	1,447	13,028	13,319	1,283

	43,421		88,645	8,037	75,640	121,540	7,130
Reinsurance acceptances	145,370		117,754	41,748	189,296	101,012	37,038

	188,791		206,399	49,785	264,936	222,552	44,168

	Gross Claims Incurred and Changes in Other Technical Provisions			Reinsurance Balance
	2002	2001	2000	2002		2001	2000
	£'000	£'000	£'000	£'000		£'000	£'000
Direct insurance
Fire and other damage to property	30,717	73,766	3,049	11,476		20,713	(155	)
Marine, Aviation and Transport	55,499	64,234	—	33,653		36,443	—
Third party liability	43,646	49,848	1,281	27,084		36,423	(91	)
Credit and Surety	15,140	15,530	—	8,471		4,938	—
Other	6,804	16,499	883	(291	)	3,334	(71	)

	151,806	219,877	5,213	80,393		101,851	(317	)
Reinsurance acceptances	251,160	230,562	30,823	97,380		116,891	(724	)

	402,966	450,439	36,036	177,773		218,742	(1,041	)

	Gross & Net Operating Expenses
	2002	2001	2000
	£'000	£'000	£'000
Direct insurance
Fire and other damage to property	2,629	12,525	709
Marine, Aviation and Transport	299	5,748	—
Third party liability	1,884	3,002	318
Credit and Surety	353	2,352	—
Other	2,037	2,912	226

	7,202	26,539	1,253
Reinsurance acceptances	23,785	17,925	6,507

	30,987	44,464	7,760

The reinsurance balance represents the credit/(charge) to the technical account from the aggregate of all items relating to reinsurance outwards.

F-26

Gross and net operating expenses have been allocated to classes of business in relation to earned premiums.

All premiums are written in the United Kingdom.

2. ALLOCATED INVESTMENT INCOME

	2002		2001		2000
	£'000		£'000		£'000
Investment income	7,073		6,420		1,628
Realised gains on investments	(334	)	875		220
Investment expenses and charges	(140	)	(142	)	(61	)

	6,599		7,153		1,787

3. CLAIMS PAID

Gross amount	193,082		191,302		30,245
Reinsurers' share	(104,675	)	(85,212	)	(11,515	)

	88,407		106,090		18,730

4. CHANGE IN THE PROVISION FOR CLAIMS

Gross amount	262,943		306,685		5,253
Reinsurers' share	(181,590	)	(198,513	)	2,635

	81,353		108,172		7,888

5. GROSS AND NET OPERATING EXPENSES

Acquisition costs	29,667		32,935		7,829
Change in deferred acquisition costs	4,600		2,493		(1,584	)
Administrative expenses	10,206		9,926		1,482
Profit on exchange	(13,486	)	(890	)	33

	30,987		44,464		7,760

F-27

6. BALANCE ON TECHNICAL ACCOUNT

Under the annual basis of accounting the Group's share of the syndicates' technical accounts by years of account has been accounted for as follows:

	Year Ended 31 December
	Total		2002		2001		2000		1999		1998
	£'000		£'000		£'000		£'000		£'000		£'000
Syndicate 780—Non Marine
Underwriting Year of Account
2002—open	13,673		13,673		—
2001—open	(25,172	)	(7,976	)	(17,196	)	—		—
2000—closed	(846	)	1,902		(4,147	)	1,399		—
1999—closed	(3,092	)	—		2,970		(3,723	)	(2,339	)

Balance on technical account			7,599		(18,373	)

Syndicate 2—Marine
Underwriting Year of Account
2002—open	5,987		5,987		—
2001—open	(15,994	)	(1,090	)	(14,904	)	—		—
2000—closed	(21,213	)	(9,640	)	(8,770	)	(2,803	)	—
1999—closed	(6,241	)	—		(1,090	)	515		(5,666	)

Balance on technical account			(4,743	)	(24,764	)

Syndicate 271—Aviation
Underwriting Year of Account
2000—open	(53,389	)	(1,361	)	(33,316	)	(23,712	)	—
1999—open	(13,941	)	(428	)	(9,864	)	(434	)	(3,215	)
1998—open	(2,549	)	(94	)	(3,601	)	39		488		619

Balance on technical account			(1,883	)	(46,781	)

Syndicate 506—Non-Marine
Underwriting Year of Account
2001—open	(10,024	)	2,859		(12,883	)	—		—
2000—open	(13,565	)	1,813		(13,955	)	(1,423	)	—
1999—open	(14,372	)	(871	)	(8,278	)	(163	)	(5,060	)

Balance on technical account			3,801		(35,116	)

All Syndicates Balance on Technical Account			4,774		(125,034	)
1998 distribution adjustment			—		15
Underwriting Indemnity			10,581		78,563

Total Balance on Technical Account			15,355		(46,456	)

The figures above exclude profit commission and agency fees payable to the Group's managing agency.

The Group has an indemnity from the previous ultimate parent company of its subsidiary Heraldglen Limited in respect of certain underwriting results of the 1998, 1999 and 2000 years of account of Syndicates 2, 271 and 506. The recovery above is included within the change in other technical provisions in the Technical Account.

F-28

LOSSES RELATING TO 11 SEPTEMBER 2001 TERRORIST ATTACKS IN THE UNITED STATES OF AMERICA

As a result of the terrorist attack on 11 September 2001 the world insurance market was faced with unprecedented losses across a wide range of business underwritten. Many Lloyd's syndicates, including syndicates managed and supported by the Group, have material exposure to claims arising from this event. These claims have fallen mainly on the 2001 underwriting year but significant levels of claims have also impacted the 2000 underwriting year.

The loss provisions established by the Directors for the 2000 and 2001 underwriting years are based upon the estimate of losses as calculated by the management of the Syndicates together with other market information currently available to the Directors. The size and nature of the 11 September 2001 claims, the legal uncertainties that arise and the ability of Syndicates to collect amounts that may become due from reinsurers all increase the level of uncertainty of the total provision for outstanding claims that is necessary. As a result the losses currently estimated by the Directors have a greater degree of uncertainty than usual and may prove to be materially different to the eventual cost of these claims.

7. INVESTMENT INCOME

	2002	2001	2000
	£'000	£'000	£'000
Bank interest receivable	1,290	1,169	1,360

8. OTHER INCOME

Other income attributable to the Group's managing agency business:

Agency fees	1,170	735	373
Profit commission	435	—	191
Recharges to Syndicates	822	277	219
Other (exchange gains / rental income)	74	21	—

	2,501	1,033	783

9. OTHER CHARGES

Included within Other Charges are:
Amortisation of syndicate capacity costs	141	207	141
Amortisation of goodwill	657	657	83
Depreciation of tangible fixed assets	414	224	26
Loss on disposal of fixed assets	—	23	—
Auditors' remuneration:—audit	36	36	33
—other	69	27	86
Directors' emoluments	685	476	446

F-29

10. DIRECTORS' EMOLUMENTS

	2002		2001		2000
	£'000		£'000		£'000
Aggregate emoluments (excluding bonus payments)	720		635		554
Fees	60		40		30
Contributions to money purchase pension schemes	72		45		70

	852		720		654
Recharged to group syndicates (excluding Group's share)	(167	)	(244	)	(208	)

Borne by the Group	685		476		446

The Group Managing Agents account for profit commission and bonuses payable therefrom in the year in which the underwriting year to which they relate closes. Therefore, the actual bonuses due to directors are only formally approved at the end of the third year of the underwriting year of account to which they relate.

Profit commission bonuses are accrued on an annual basis by the Group and are excluded from the figures above.

Profit commission bonuses payable to Directors of Advent Capital (Holdings) PLC at 31 December 2002 in respect of the 2000 underwriting year of account are £ nil (2001—£nil, 1999 underwriting year of account).

Highest Paid Director

	2002		2001		2000
	£'000		£'000		£'000
Emoluments (including benefits in kind)	276		328		327
Contribution to money purchase pension schemes	55		—		27

	331		328		354
Recharged to group Syndicates (excluding Group's share)	(32	)	(135	)	(126	)

Borne by the Group	299		193		228

11. STAFF COSTS

Including Directors and bonuses payable from profit commission accrued on an annual accounting basis.

Wages and salaries	4,377		5,660		1,828
Social security costs	486		608		353
Other pension costs	2,006		1,236		255

	6,869		7,504		2,436
Recharged to group syndicates (excluding Group's share)	(3,337	)	(3,432	)	(890	)

Borne by the Group	3,532		4,072		1,546

F-30

The average number of persons, including executive directors, employed by the Group during the year was:

	2002	2001	2000
Management	3	3	3
Finance	8	9	2
Underwriting	20	21	10
Claims and Reinsurance	14	15	3
Compliance	4	3	2
IT	5	3	2
Administration	4	4	1

	58	58	23

12. DEFINED BENEFIT PENSION SCHEMES

Two of the Group's quasi subsidiaries (see note 29) operate defined benefit pension schemes details of which are as follows:

(a) Advent Underwriting Limited Staff Pension Scheme

The Advent Underwriting Limited Staff Pension Scheme (formerly B F Caudle Agencies Limited Staff Pension Scheme) (the Scheme) is a defined benefits scheme under which benefits are based on final salary at retirement. On 27 February 2002 notice was given to cease making contributions to the Scheme with effect from the next Scheme Anniversary, 1 June 2002 and the Scheme was terminated on that date. Upon termination the Scheme Trustees demanded a contribution of £740,000 in accordance with the Scheme Rules. This contribution has been charged to managed syndicates and group companies in accordance with members' time allocations; the charge to the profit and loss account being £420,968.

The Scheme uses a projected unit funding method. However, the Scheme is part of the Lloyd's Superannuation Fund, a multi-employer scheme, and it has not been possible to readily identify its share of the underlying scheme assets and liabilities as at 31 December 2002.

The latest independent actuarial valuation of the fund for which results are available was carried out at 31 March 2001. The main actuarial assumptions were as follows:

Price inflation		2.3% p.a.
Investment return on existing assets:
Pre-retirement		5.6% p.a.
Post-retirement		5.2% p.a.
Investment return on new contributions:
Pre-retirement		6.1% p.a.
Post-retirement		5.4% p.a.
Pay escalation		4.1% p.a.
Increases to pensions during deferment		2.3% p.a.

The market value of the Scheme assets amounted to £1,463,000 and these assets exceeded by £100,000 the accrued liabilities at the date of valuation. The assets of the Scheme are held in Trustees' administered funds which are financially separate from the group.

F-31

(b) Kingsmead Underwriting Agency Limited Defined Benefit Pension Scheme

This defined benefit pension scheme is funded by the payment of contributions to a separately administered trust fund. Following the reorganisation of the company, the scheme was closed to new members and all employees who were members of the scheme became deferred members with effect from 31 December 2001.

The pension cost is determined with the advice of independent qualified actuaries on the basis of triennial valuations using the projected unit funding method. The results of the most recent actuarial valuation, undertaken as at 1 January 2002, were as follows:

Main assumptions:
Rate of inflation		4.0% p.a.
Effective rate of return on gilts		8.0% p.a.
Effective rate of return on equities		9.0% p.a.
Limited Price Indexation increases to pensions in payment		3.5% p.a.
Market value of Scheme Assets (excluding AVCs)		£21,319,000
Level of funding, being the actuarial value of assets expressed as a percentage of the benefits accrued to members, after allowing for future salary increases		82%

The pension cost is determined by adding to the regular cost the variation in cost which is calculated to be required in order to eliminate the deficiency over 15 years, the average expected remaining service lives of the scheme members. Contributions are being made at a higher rate designed to eliminate the deficit over a shorter timescale and to comply with the Minimum Funding Requirement ("MFR") prescribed under the Pensions Act 1995, which was introduced for all pension fund valuations after 6 April 1997.

The amount of the pension cost charge representing contributions payable to the Scheme in the year ended 31 December 2002 amounted to £772,193 (2001: £870,790) before recharges to group managed syndicates.

FRS 17 Disclosures:

On 30 November 2000, the Accounting Standards Board introduced a new standard, FRS 17 "Retirement Benefits", replacing SSAP 24 "Accounting for Pension Costs". FRS 17 is fully effective for periods ending in 2005, though disclosures are required in the transitional period. The Group is adopting the transitional arrangements of FRS 17. Therefore, the full actuarial valuations for the scheme as a whole have been reviewed and updated as at 31 December 2002 by qualified independent actuaries. Initial disclosures showing the total assets and liabilities of the pension plans are set out below. These have been calculated on the following assumptions:

	2002		2001
Rate of increase for pensions in payment	5.00	%	5.00	%
Rate used to discount scheme liabilities	5.50	%	6.00	%
Inflation assumption	2.50	%	2.75	%

F-32

The fair value of scheme assets and liabilities at 31 December 2002 are shown below:

	2002		2001
	£000		£000
Equities	12,247		15,889
Bonds	3,821		2,878
Cash	2,084		2,552

	18,152		21,319
Present value of scheme liabilities	(26,926	)	(24,659	)

Deficit	(8,774	)	(3,340	)

The expected long-term rate of return over the following year is 4.75% (2001: 5.25%) for bonds, 7% (2001: 7.5%) for equities and 3.75% for cash (2001:4%).

The above annual financial assumptions are prescribed by FRS 17 and do not reflect the assumptions used by the independent qualified actuary in the triennial valuation, which determines the contribution rate for future years. FRS 17 requires the directors to disclose the assets and liabilities of the defined benefit scheme at 31 December 2002 using these FRS 17 assumptions.

The following amounts would be reflected in the profit and loss account and statement of total recognised gains and losses on implementation of FRS 17.

Amount that would be charged to operating profit:

		2002
		£
Current service cost		—
Past service cost		—

Total operating charge		—

Amount that would be credited to other finance income:

	2002
	£000
Expected return on pension scheme assets	1,434
Interest on pension scheme liabilities	(1,470	)

Net Return	(36	)

Analysis of amount that would be recognised in statement of total recognised gains and losses and percentage of scheme assets:

	2002		%
	£000
Actual return less expected return on pension scheme assets	(4,271	)	23.50
Experience gains and losses arising on scheme liabilities	(139	)	0.50
Changes in assumptions underlying present value of scheme liabilities	(1,760	)	9.69

Actuarial loss	(6,170	)	33.69

F-33

Movement in deficit in the scheme over the year is as follows:

	2002
	£000
Deficit in scheme at beginning of the year	(3,340	)
Net interest return on assets	(36	)
Contributions	772
Actuarial loss	(6,170	)

Deficit in scheme at the end of the year	(8,774	)

Reconciliation of profit and loss account reserve on FRS 17 basis.

	2002		2001
	£000		£000
Profit and loss account reserve as reported at 31 December	180		998
Pension and post retirement FRS 17 liabilities	(8,774	)	(3,340	)

Profit and loss account reserve on FRS 17 basis at 31 December	(8,594	)	(2,342	)

Post Balance Sheet Event

Subsequent to the year end, Kingsmead Underwriting Agency Limited entered into a Compromise Agreement with the Trustees of the Defined Benefit Pension Scheme dated 11 March 2003 under the terms of which the Company made a full and final settlement to the Trustees of £1,021,000, in exchange for which the Trustees have released the Company from their debt to the Scheme.

F-34

13. TAX ON PROFIT ON ORDINARY ACTIVITIES

	2002 £'000		2001 £'000		2000 £'000
Analysis of charge in period
Current Tax:
UK Corporation Tax on profits of the period	52		67		627
Adjustments in respect of previous periods	(226	)	16		(68	)

	(174	)	83		559
Foreign Tax	(8	)	—		—

Total current tax	(182	)	83		559
Deferred Tax:
Origination and reversal of timing differences	(11,551	)	20		—

Tax on profit on ordinary activities	(11,733	)	103		559

Factors affecting tax charge for the period
Profit/(loss) on ordinary activities before tax	13,621		(48,873	)	1,549

Profit/(loss) on ordinary activities multiplied by
standard rate of corporation tax in the UK of 30%	4,086		(14,662	)	465
Effects of:
Expenses not deductible for tax purposes	225		387		66
Utilisation of trading losses	—		102		—
Capital allowances in excess of depreciation	(19	)	—		(5	)
Tax losses carried forward	62		10		—
Underwriting results taxable when declared	(5,678	)	13,349		101
Election to disclaim RITC for tax purposes	1,794		823		—
Utilisation of tax losses on consolidation	(387	)	88		—
Profits not recognised on consolidation	(25	)	—		—
Taxation at small companies rate	(6	)	—		—
Group accounting adjustments	—		(30	)	—
Adjustments in respect of previous periods	(234	)	16		(68	)

	(182	)	83		559

F-35

14. DEFERRED TAX

	2002 £'000		2001 £'000
Deferred tax asset / (provision) in respect of decelerated / (accelerated) capital allowances	21		(20	)
Deferred tax asset / (provision) in respect of underwriting results:
1998	—		(97	)
1999	960		67
2000	333		—
2001	15,625		—
2002	(5,438	)	—

	11,501		(50	)

Provision at 1 January 2002	(50	)
Deferred tax credit in profit and loss account for period (note 13)	11,551

Deferred tax asset at 31 December 2002	11,501

15. PROFIT ATTRIBUTABLE TO MEMBERS OF PARENT COMPANY

As permitted by section 230 of the Companies Act 1985, the Parent Company's profit and loss account has not been included in the Group Accounts.

The retained profit dealt with in the Accounts of the Parent Company was £ 190,558 (2001 Loss £49,812,437 and 2000 Profit £406,286).

F-36

16. TANGIBLE FIXED ASSETS

	Leasehold Improvements £'000	Furniture, Fittings and Equipment £'000	Computer Equipment £'000	Total £'000
Group
Cost
At 1 January 2002	294	514	246	1,054
Additions	—	29	1,335	1,364

At 31 December 2002	294	543	1,581	2,418

Depreciation
At 1 January 2002	49	88	107	244
Charges for the year	84	154	176	414

At 31 December 2002	133	242	283	658

Net Book Value
At 31 December 2002	161	301	1,298	1,760

At 31 December 2001	245	426	139	810

Company Cost
At 1 January 2002	258	452	—	710
Additions	—	—	—	—

At 31 December 2002	258	452	—	710

Depreciation
At 1 January 2002	43	75	—	118
Charges for the year	74	129	—	203

At 31 December 2002	117	204	—	321

Net Book Value
At 31 December 2002	141	248	—	389

At 31 December 2001	215	377	—	592

F-37

17. INTANGIBLE FIXED ASSETS

	Goodwill on Acquisition £'000	Auction Capacity £'000	Total £'000
Cost
At 1 January 2002	9,858	2,193	12,051
Additions	—	—	—

At 31 December 2002	9,858	2,193	12,051

Amortisation
At 1 January 2002	740	436	1,176
Charge for the year	657	141	798

At 31 December 2002	1,397	577	1,974

Net Book Value
At 31 December 2002	8,461	1,616	10,077

At 31 December 2001	9,118	1,757	10,875

18. INVESTMENTS

	Assets and Liabilities at Lloyd's	Corporate	2002 Total	2001 Total
	£'000	£'000	£'000	£'000
Group
Market Value
Debt securities & other fixed income securities	110,046	—	110,046	101,435
Deposits with credit institutions	3,442	—	3,442	4,593
Deposits with cedants	52	—	52	63

	113,540	—	113,540	106,091

Cost
Debt securities and other fixed income securities	108,919	—	108,919	99,536
Deposits with credit institutions	3,442	—	3,442	4,593
Deposits with cedants	52	—	52	62

	112,413	—	112,413	104,191

19. DEBTORS

Group
Arising out of direct insurance operations:
Intermediaries	25,217	—	25,217	1,534
Arising out of reinsurance operations	116,730	—	116,730	125,292
Portfolio premium receivable	—	—	—	5,348
Other	9,127	14,660	23,787	2,929

	151,074	14,660	165,734	135,103

F-38

Included within Corporate other debtors at 31 December 2002 is a deferred tax asset of £11,500,882 (2001-£nil) which is recoverable after one year.

Company
Amounts owed by Group Undertakings	16,864	5,711
Other debtors	277	513

	17,141	6,224

20. CASH AT BANK AND IN HAND

	Assets and Liabilities at Lloyd's	Corporate	2002 Total	2001 Total
	£'000	£'000	£'000	£'000
Group
Cash at bank and in hand	20,742	37,278	58,020	31,656
Funds held by Lloyd's	—	1,972	1,972	168

	20,742	39,250	59,992	31,824

Company
Cash at bank and in hand			27,274	13,594
Funds held by Lloyd's			1,759	—

			29,033	13,594

Included within Group cash at bank and in hand is £21,244,558 (2001—£21,244,558) which is subject to a fixed charge in favour of the Group's bankers. This charge is in respect of a guarantee of the same amount given to Lloyd's by the Group's bankers to support the Group's underwriting at Lloyd's.

Included within the Company's cash at bank and in hand is £12,994,558 (2001—£12,994,558) which is subject to a fixed charge in favour of the Group's bankers. This charge is in respect of a guarantee of the same amount given to Lloyd's by the Group's bankers to support the Group's underwriting at Lloyd's.

These guarantees can be called upon by Lloyd's to settle any claims arising from the Group's underwriting at Lloyd's. Lloyd's is unlikely to release the bank from its guarantees without the guarantees being replaced by an equivalent asset or after the expiration of the Group's liabilities in respect of its underwriting.

The Lloyd's deposit represents monies deposited with the Corporation of Lloyd's (Lloyd's) to support the Group's underwriting activities. The Group previously entered into a Lloyd's deposit trust deed which gave Lloyd's the right to apply these monies in settlement of any claims arising from the Group's underwriting at Lloyd's.

F-39

21. PREPAYMENTS AND ACCRUED INCOME

	Assets and Liabilities at Lloyd's	Corporate	2002 Total	2001 Total
	£'000	£'000	£'000	£'000
Group
Accrued income	—	533	533	29
Deferred acquisition costs	5,966	—	5,966	17,005
Prepaid expenses	550	2,459	3,009	14,807

	6,516	2,992	9,508	31,841

22. CALLED-UP SHARE CAPITAL

	Authorised		Allotted, Called-Up and Fully Paid
	2002	2001	2002	2001
	£'000	£'000	£'000	£'000
New Ordinary shares of 25p each	29,112	13,112	26,331	11,316

As part of a capital reconstruction by way of an open offer and placing, on 23 August 2002 the Company issued 60,058,737 New Ordinary Shares of 25 pence each at an issue price of 50 pence per share.

23. RECONCILIATION OF MOVEMENTS IN RESERVES

	Merger Reserve		Share Premium Account		at Lloyd's		Profit & Loss Account Corporate		Total
	£'000		£'000		£'000		£'000		£'000
Group
At 1 January 2002 as previously stated	(4,308	)	28,802		(47,439	)	(3,834	)	(26,779	)
Misclassification adjustment	—		—		(3,790	)	3,790		—

At 1 January 2002 restated	(4,308	)	28,802		(51,229	)	(44	)	(26,779	)
New share capital subscribed	—		15,015		—		—		15,015
New share capital subscribed expenses			(275	)	—		—		(275	)
Capital reduction	—		(42,293	)	—		42,293		—
Retained profit / (loss) for the year	—		—		15,355		9,999		25,354
Transfer of loss due to Lloyd's	—		—		3,201		(3,201	)	—

At 31 December 2002	(4,308	)	1,249		(32,673	)	49,047		13,315

	Share Premium Account		at Lloyd's	Profit & Loss Account Corporate		Total
	£'000		£'000	£'000		£'000
Company
At 1 January 2002	27,553		—	(48,792	)	(21,239	)
New share capital subscribed	15,015		—	—		15,015
New share capital subscribed expenses	(275	)	—	—		(275	)
Capital reduction	(42,293	)		42,293		—
Retained loss for the year	—		—	190		190

At 31 December 2002	—		—	(6,309	)	(6,309	)

F-40

On 2 October 2002, the Company obtained permission by Court Order to reduce its share premium account by £42,292,830 for the purpose of reducing the deficit on the Company's profit and loss account.

24. OTHER RESERVES

	2002		2001
	£'000		£'000
Merger Reserve at 31 December	(4,308	)	(4,308	)

The merger reserve arises through the consolidation of Advent Underwriting Limited (Formerly B F Caudle Agencies Limited).

25. RECONCILIATION OF MOVEMENTS IN SHAREHOLDERS' FUNDS

	at Lloyd's		2002 Corporate		Total		at Lloyd's		2001 Corporate		Total
	£'000		£'000		£'000		£'000		£'000		£'000
Group
Profit/(loss) for the year	15,355		9,999		25,354		(46,456	)	(2,520	)	(48,976	)
(Transfer of loss) / Distribution due to / from Lloyd's	3,201		(3,201	)	—		3,344		(3,344	)	—
New share capital subscribed	—		30,030		30,030		—		—		—
New share capital subscribed expenses	—		(275	)	(275	)	—		—		—

Net addition to shareholders' funds	18,556		36,553		55,109		(43,112	)	(5,864	)	(48,976	)
Opening shareholders' funds	(47,439	)	31,976		(15,463	)	(4,327	)	37,840		33,513
Opening shareholders' funds adjustment	(3,790	)	3,790		—		—		—		—

Closing shareholders' funds	(32,673	)	72,319		39,646		(47,439	)	31,976		(15,463	)

	at Lloyd's		2000 Corporate		Total
	£'000		£'000		£'000
Group
Profit/(loss) for the year	1,117		(127	)	990
(Transfer of loss) / Distribution due to / from Lloyd's	(1,559	)	1,559		—
New share capital subscribed	—		13,620		13,620
New share capital subscribed expenses	—		—		—

Net addition to shareholders' funds	(442	)	15,052		14,610
Opening shareholders' funds	(3,885	)	22,788		18,903
Opening shareholders' funds adjustment	—		—		—

Closing shareholders' funds	(4,327	)	37,840		33,513

F-41

	2002		2001		2000
	£'000		£'000		£'000
Company
Profit / (loss) for the year	190		(49,812	)	406
New share capital subscribed	30,030		—		13,620
New share capital subscribed expenses	(275	)	—		—

Net addition to shareholders' funds	29,945		(49,812	)	14,026
Opening shareholders' funds	(9,923	)	39,889		25,863

Closing shareholders' funds	20,022		(9,923	)	39,889

26. OTHER TECHNICAL PROVISIONS

Unexpired risks provision	720		51,492
Underwriting indemnity (see note 6)	(69,399	)	(114,526	)

	(68,679	)	(63,034	)

27. PROVISION FOR OTHER LIABILITIES AND CHARGES

	Provision & Full Potential Liability
	At 1 January 2002	Profit &Loss Charge/(Credit)	Utilisation in Year	At 31 December 2002
	£'000	£'000	£'000	£'000
Provision for other taxes	40	—	—	40

Company

At 31 December 2001 the Company made a provision of £43,542,907 in respect of the estimated underwriting losses of its subsidiary Advent Capital PLC which the Company is expected to fund. During 2002 the Company funded losses of £3,400,000 leaving a balance in the provision of £40,142,907 at 31 December 2002.

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28. CREDITORS

	Assets and Liabilities at Lloyd's	Corporate	2002 Total	2001 Total
	£'000	£'000	£'000	£'000
Group
Due within one year
Arising out of direct insurance	13,898	—	13,898	66
Arising out of reinsurance operations	65,323	—	65,323	28,965
Other creditors	19,242	2,983	22,225	48,954
Corporation Tax	—	372	372	133
Other taxes	—	191	191	107

	98,463	3,546	102,009	78,225

Company
Amount owed to Group Undertaking			238	—
Corporation Tax			—	57
Other Taxes			36	31
Other creditors			499	811
Accruals			31	297

			804	1,196

29. FIXED ASSETS—INVESTMENTS

	Subsidiary Undertaking		Quasi Subsidiary Undertaking	Total
	£'000		£'000	£'000
Company Cost
At 1 January 2002	426		14,406	14,832
Amount written off at 31 December 2001	(426	)	—	(426	)

At 31 December 2002	—		14,406	14,406

During the year, the Company sold its wholly owned subsidiary, Advent Capital PLC, to its quasi subsidiary undertaking, Advent (Strategic Investments) Limited, for £1.

F-43

QUASI SUBSIDIARY

The Company owns 100% of the non-voting "B' shares of Advent (Strategic Investments) Limited, which is registered in England and Wales.

Advent (Strategic Investments) Limited acts as an investment company owning shares in the following companies:

Company	Shareholding		Nature of Business	Country of Registration
Advent Underwriting Limited (Formerly B F Caudle Agencies Limited)	100% (2001: 100%	)	Lloyd's Managing Agent	England & Wales
Lonestar Capital	100% (2001: 100%	)	Intermediate Holding Company	England & Wales
Advent Group Services Limited	100% (2001: 100%	)	Service Company	England & Wales
Advent Capital PLC	100% (2001: n/a	)	Lloyd's Corporate Name	England & Wales
Advent Capital (No 2) Limited	100% (2001: n/a	)	Lloyd's Corporate Name	England & Wales

Lonestar Capital owns 100% (2001: 100%) of the shares in Sealdrive Limited, an intermediate holding company registered in England & Wales.

Sealdrive Limited owns shares in the following companies:

Company		Shareholding		Nature of Business		Country of Registration
Kingsmead Underwriting Agency Limited		100% (2000: 100%	)	Lloyd's Managing Agent		England & Wales
Heraldglen Limited		100% (2000: 100%	)	Lloyd's Corporate Name		England & Wales

Advent (Strategic Investments) Limited is considered to be a quasi-subsidiary of Advent Capital (Holdings) PLC under the terms of Financial Reporting Standard number 5 (Reporting the Substance of Transactions). The assets and liabilities of the Company and its subsidiaries are consolidated in the Group accounts using acquisition accounting except for Advent Underwriting Limited which is accounted for using merger accounting.

Consolidated in the Group accounts are the following amounts (net of consolidation adjustments) in respect of Advent (Strategic Investments) Limited and its subsidiaries.

	2002		2001		2000
	£'000		£'000		£'000
Profit and Loss Account
Balance on Technical Account	1,893		—		—
Investment income	156		124		63
Other income	1,853		1,033		783
Operating expenses	(2,945	)	(1,748	)	(807	)

Profit/(Loss) before taxation	957		(591	)	39
Taxation	94		(43	)	(75	)

Profit/(Loss) for the period	1,051		(634	)	(36	)

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There are no recognised gains or losses other than the profits stated above.

	2002		2001
	£'000		£'000
Balance Sheet
Tangible fixed assets	1,371		217
Investments	113,540		53,152
Debtors	153,746		73,973
Prepayments and accrued income	9,247		16,624
Cash	30,960		10,303
Provision for other charges	40		(60	)
Net technical provisions	(230,362	)	(91,799	)
Creditors	(102,055	)	(56,948	)
Accruals and deferred income	(532	)	(5,422	)

30. RECONCILIATION OF PROFIT/(LOSS) BEFORE TAX TO NET CASH INFLOW FROM OPERATING ACTIVITIES

	2002		2001		2000
	£'000		£'000		£'000
Profit/(Loss) before tax	13,621		(48,873	)	1,549
Investment income	(1,290	)	(1,169	)	(1,360	)
Depreciation	414		224		26
Loss on disposal of fixed assets	—		23		—
Amortisation	798		864		223
Decrease / Increase in net technical provisions	(21,304	)	80,507		14,942
Decrease in debtors and prepayments	3,891		3,721		(2,267	)
Increase / (Decrease) in creditors and accruals	14,961		(11,356	)	1,159
Decrease in other provisions	—		(128	)	189

	11,091		23,813		14,461

31. MOVEMENT IN NET FUNDS DURING THE YEAR

Increase / (Decrease) in net funds in the year	32,961	(14,048	)	24,112
Net funds at 1 January	39,039	53,087		28,975

Net funds at 31 December	72,000	39,039		53,087

32. ANALYSIS OF NET FUNDS

	at 1 January 2002	Cash Flow	at 31 December 2002
	£'000	£'000	£'000
Cash at bank and in hand—corporate	24,500	14,750	39,250
Cash at bank and in hand—at Lloyd's	7,324	13,418	20,742
Overseas deposits—at Lloyd's	7,215	4,793	12,008

	39,039	32,961	72,000

F-45

33. DIFFERENCES BETWEEN ADVENT GROUP ACCOUNTING PRINCIPLES AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

The generally accepted accounting principles (UK GAAP) under which the Group Accounts are prepared, as set out in the Accounting Policies on pages F-21 to F-25, differ in certain respects from generally accepted accounting principles in the United States (US GAAP). Differences which have a significant effect on consolidated net income and shareholders' equity are as follows:

Acquisition Accounting

On 23 November 1999, the Company acquired the remaining 75% of the equity shares of Advent Underwriting Limited (formerly B F Caudle Agencies Limited) (AUL). The acquisition was accounted for using merger accounting in accordance with Financial Reporting Standard 6 (FRS 6), and an arising merger reserve of £4,308,102 was recorded by the Company in shareholders' equity. In addition, under FRS 6, legal and professional fees incurred in connection with the acquisition of £521,996 were not included in the fair value of assets and liabilities acquired, but were instead included in post acquisition costs and were charged to the Group Profit and loss Account in 1999. Under US GAAP, this acquisition transaction is accounted for as a purchase in accordance with the Accounting Principles Board Opinion No. 16, "Business Combinations".

Goodwill

Under US GAAP, Statement of Financial Accounting Standards Board No. 142, "Goodwill and Other Intangible Assets" has been adopted and goodwill is not being amortised with effect from 1 January 2002.

Pensions and Other Post Retirement Benefits

Under US GAAP the Kingsmead Underwriting Agency Limited Defined Benefit Scheme had a deficit of £1,021,000 at 31 December 2002 which was disclosed but not recognised by the Group in 2002. Under US GAAP, such deficit is recorded as a liability of the Group at 31 December 2002.

Taxation

Effective December 31, 2002, UK and US GAAP are the same in respect of deferred taxes and deferred tax assets previously not recognized under UK GAAP appear as a reconciliation difference in net income in 2002.

F-46

The following is a summary of the significant adjustments to the profit and loss account and shareholders' equity which would be required if US GAAP had been applied instead of applying UK GAAP.

	2002		2001		2000
	£'000		£'000		£'000
Reconciliation of Profit/(Loss) under UK and US GAAP
Profit after Taxation in accordance with UK GAAP	25,354		(48,976	)	990
Deferred tax (charge)/benefit on underwriting income/(loss)	(16,075	)	14,662		—
Goodwill amortisation	657		—		—
Amortisation expense of goodwill on AUL acquisition	—		(322	)	(322	)
Change in Pension fund deficit	1,623		(2,338	)	—

Net income in accordance with US GAAP	11,559		(36,974	)	668

Reconciliation of Shareholders' funds
Shareholders' funds in accordance with UK GAAP	39,646		(15,463	)
Merger reserve recorded and group reorganisation costs incurred in connection with the AUL acquisition accounted for as goodwill	4,673		4,673
Deferred tax asset			16,075
Goodwill amortisation	657		—
Accumulated amortisation on AUL acquisition goodwill	(671	)	(671	)
Pension fund liability not recognised	(715	)	(2,338	)

Shareholders' equity as adjusted in accordance with US GAAP	43,590		2,276

Consolidated Cash Flow Statement

The consolidated statement of cash flows prepared under UK GAAP present substantially the same information as those required under US GAAP. These statements differ, however, with regard to classification of certain items.

Under UK GAAP, cash flows are presented separately for operating activities, returns on investments and servicing of finance, taxation, investing activities and management of liquid resources and financing. US GAAP, however, requires only three categories of cash flow activity to be reported: operating, investing and financing. Cash flows from taxation and returns on investments and servicing of finance shown under UK GAAP, would be included as operating activities under US GAAP. Net

F-47

movement in portfolio investments shown under UK GAAP, would be included as investing activities under US GAAP.

	2002		2001		2000
	£'000		£'000		£'000
Reconciliation of Cash Flows
Net Cash inflow from Operating activities	11,091		23,813		14,460
Interest received	1,221		1,169		1,360
Tax paid	(292	)	(500	)	(1,192	)

Cash flow provided by operating activities in accordance with US GAAP	12,020		24,482		14,628
Net cash outflow from investing activities	(1,364	)	(1,037	)	12,467
Net movement in syndicates' portfolio investments	(7,450	)	(37,493	)	(2,983	)

Cash used in investing activities in accordance with US GAAP	(8,814	)	(38,530	)	9,484
Cash inflow from Financing Activities	29,755		—		—

Net increase in cash and cash equivalents	32,961		(14,048	)	24,112
Cash at beginning of year	39,039		53,087		28,975

Cash at end of year	72,000		39,039		53,087

F-48

Report of Independent Auditors

To the Board of Directors of Advent Capital (Holdings) PLC:

We have audited the financial statements which comprise the Group Balance Sheets of Advent Capital (Holdings) PLC as of December 31, 2002 and 2001, and the related Group Profit and Loss Account, and the Group Cash Flow Statements for the three years ended December 31, 2002, and the accompanying (Parent-only) Company Balance Sheets as of December 31, 2002 and 2001, which have been prepared on the basis of accounting principles generally accepted in the United Kingdom. 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 in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Advent Capital (Holdings) PLC at December 31, 2002 and 2001, and the consolidated results of their operations and their cash flows for the each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United Kingdom. In addition, in our opinion, the (Parent-only) Company Balance Sheets in the accompanying financial statements present fairly, in all material respects, the information set forth therein, when read in conjunction with the related financial statements.

Accounting principles generally accepted in the United Kingdom vary in certain respects from accounting principles generally accepted in the United States of America. The application of the latter would have affected the determination of net (loss) income for the three years ended December 31, 2002, and the determination of shareholders' equity at December 31, 2002 and 2001, to the extent summarized in Note 33 to the financial statements.

/s/ LITTLEJOHN FRAZER Littlejohn Frazer
Chartered Accountants and Registered Auditors
1, Park Place Canary Wharf London E14 4HJ ENGLAND 27 June 2003

F-49

Consent of Littlejohn Frazer

The Board of Directors
Advent Capital (Holdings) Plc
Third Floor, One America Square
17 Cross wall
LONDON
EC2N 2LB

June 30, 2003

Dear Sirs

We consent to the inclusion of our report dated 27 June 2003 ("Report") with respect to the financial statements comprising the Group Balance Sheets of Advent Capital (Holdings) PLC as of December 31, 2002 and 2001, and the related Group Profit and Loss Account, and the Group Cash Flow Statements for the three years then ended, and the accompanying Company Balance Sheets as of December 31, 2002 and 2001 and the related notes, which Report appears in the Annual Report on Form 10-K/A (Amendment No. 1) of Zenith National Insurance Corp. for the fiscal year ended December 31, 2002 filed with the United States Securities and Exchange Commission.

We also consent to the incorporation by reference of the Report in the Registration Statements on Form S-8 (File Nos. 33-8948, 33-22219, 333-04399, 333-79199 and 333-62798). Zenith National Insurance Corp. may rely on this consent in including our Report in the above referenced Form 10-K/A.

Yours faithfully

/s/ LITTLEJOHN FRAZER
Littlejohn Frazer
1, Park Place
Canary Wharf
London E14 4HJ
ENGLAND

F-50

QuickLinks

EXPLANATORY NOTE
PART I
PART II
PART III
PART IV
SIGNATURES
CERTIFICATION OF CHAIRMAN OF THE BOARD AND PRESIDENT
CERTIFICATION OF CHIEF FINANCIAL OFFICER
CONSENT OF INDEPENDENT ACCOUNTANTS
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES
SCHEDULE I — SUMMARY OF INVESTMENTS — OTHER THAN INVESTMENTS IN RELATED PARTIES ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES December 31, 2002
SCHEDULE II — CONDENSED FINANCIAL INFORMATION OF REGISTRANT ZENITH NATIONAL INSURANCE CORP. BALANCE SHEET
SCHEDULE II — CONDENSED FINANCIAL INFORMATION OF REGISTRANT ZENITH NATIONAL INSURANCE CORP. STATEMENT OF OPERATIONS
SCHEDULE II — CONDENSED FINANCIAL INFORMATION OF REGISTRANT ZENITH NATIONAL INSURANCE CORP. STATEMENT OF CASH FLOWS
SCHEDULE II—CONDENSED FINANCIAL INFORMATION OF REGISTRANT ZENITH NATIONAL INSURANCE CORP. NOTES TO CONDENSED FINANCIAL INFORMATION
SCHEDULE IV — REINSURANCE ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
SCHEDULE V — VALUATION AND QUALIFYING ACCOUNTS ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
SCHEDULE VI–SUPPLEMENTARY INFORMATION CONCERNING PROPERTY–CASUALTY INSURANCE OPERATIONS
FINANCIAL STATEMENTS OF ADVENT CAPITAL (HOLDINGS) PLC
ADVENT CAPITAL (HOLDINGS) PLC GROUP PROFIT AND LOSS ACCOUNT GROUP GENERAL BUSINESS TECHNICAL ACCOUNT Year ended 31 December 2002
ADVENT CAPITAL (HOLDINGS) PLC GROUP PROFIT AND LOSS ACCOUNT GROUP NON TECHNICAL ACCOUNT Year ended 31 December 2002
ADVENT CAPITAL (HOLDINGS) PLC GROUP BALANCE SHEET At 31 December 2002
ADVENT CAPITAL (HOLDINGS) PLC COMPANY BALANCE SHEET At 31 December 2002
A D V E N T C A P I T A L (H O L D I N G S) P L C GROUP CASH FLOW STATEMENT Year ended 31 December 2002
ADVENT CAPITAL (HOLDINGS) PLC STATEMENT OF DIRECTORS' RESPONSIBILITIES AND ACCOUNTING POLICIES
ADVENT CAPITAL (HOLDINGS) PLC NOTES TO THE ACCOUNTS
Report of Independent Auditors
Consent of Littlejohn Frazer