Use these links to rapidly review the documentTABLE OF CONTENTS Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

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LOGO



UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549



FORM 10-K

ý

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934For the fiscal year ended December 31, 2009          Commission file number 1-9627ORo

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934For the transition period
from                           to


ZENITH NATIONAL INSURANCE CORP.

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

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


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

Title of Each Class

Name of Each Exchange on
Which RegisteredCommon Stock, $1.00 Par Value

New York Stock Exchange


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

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

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

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

Indicate
by checkmark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files).     Yes  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.    ý

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a small reporting company.
See definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer X

Accelerated filer

Non-accelerated filer

Smaller reporting company(Do not check if a smaller
reporting company)


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

The
aggregate market value of the voting and non-voting common equity of the registrant held by non-affiliates was $794,234,000 (based on the closing price for
such common equity reported by the New York Stock Exchange for June 30, 2009, the last business day of the registrant's most recently completed second quarter).

At
January 31, 2010, there were 37,880,463 shares of Zenith National Insurance Corp. common stock outstanding.

DOCUMENTS
INCORPORATED BY REFERENCE

(1)  Portions
of the Proxy Statement in connection with the 2010 Annual Meeting of Stockholders  Part III.



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TABLE OF CONTENTS

Zenith National Insurance Corp. and Subsidiaries



PagePART IItem 1

Business

1Item 1A

Risk Factors

19Item 1B

Unresolved Staff Comments

25Item 2

Properties

25Item 3

Legal Proceedings

25Item 4

Submission of Matters to a Vote of Security Holders

25PART IIItem 5

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

26Item 6

Selected Financial Data

28Item 7

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

29Item 7A

Quantitative and Qualitative Disclosures about Market Risk

51Item 8

Financial Statements and Supplementary Data

52Item 9

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

86Item 9A

Controls and Procedures

86Item 9B

Other Information

86PART IIIItem 10

Directors, Executive Officers and Corporate Governance

87Item 11

Executive Compensation

87Item 12

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

87Item 13

Certain Relationships and Related Transactions, and Director Independence

87Item 14

Principal Accountant Fees and Services

87PART IVItem 15

Exhibits and Financial Statement Schedules

88Signatures

96Exhibit Index

97


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Table of Contents

PART I

Item 1. BUSINESS

General

Zenith National Insurance Corp. ("Zenith National"), a Delaware corporation incorporated in 1971, is a holding company engaged, through
its wholly-owned subsidiaries, Zenith Insurance Company ("Zenith Insurance") and ZNAT Insurance Company ("ZNAT Insurance"), in the workers' compensation insurance business, nationally. Unless
otherwise indicated, all references to "Zenith," "we," "us," "our," "Company" or similar terms refer to Zenith National together with its subsidiaries.

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

At
December 31, 2009, Zenith had approximately 1,400 full-time employees. Our principal executive offices are located at 21255 Califa Street, Woodland Hills,
California 91367-5021, telephone (818) 713-1000.

Our
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 our Annual Meeting of Stockholders and Annual Report to Stockholders are made available free of charge on our 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. Also available on our website are the following corporate governance materials: Code of
Business Conduct; Code of Ethics for Senior Financial Officers (which applies to Zenith's Chief Executive Officer, Chief Financial Officer and Senior Vice President of Finance); Corporate Governance
Guidelines; and Charters of the Audit Committee, Compensation Committee, Nominating and Corporate Governance Committee and Healthcare Committee. In addition, amendments to, or waivers of, the Code of
Ethics for Senior Financial Officers will be posted to our website or contained in a Form 8-K filed within four business days after any such amendment or waiver. Any of the
foregoing material may also be obtained free of charge by written request to: Corporate Secretary, Zenith National Insurance Corp., 21255 Califa Street, Woodland Hills, CA 91367-5021.

Glossary of Selected Insurance Terms

The
following terms when used herein have the following meanings:

Accident year losses

Loss data grouped by the year in which the accident occurred, regardless of when the accident was reported or when the loss amount was recognized in our Consolidated Statements of Operations.Assume

To receive from a ceding company all or a portion of a risk in consideration of receipt of a premium.Cede

To transfer to an assuming company, or reinsurer, all or a portion of a risk in consideration of payment of a premium.


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Combined ratio

Expressed as a percentage, is a key measurement of profitability traditionally used in the property-casualty insurance business. The combined ratio, also referred to as the "calendar year combined ratio," is the sum of
the losses and loss adjustment expense ratio and the underwriting and other operating expense ratio. The losses and loss adjustment expense ratio is the percentage of the net losses and loss adjustment expenses incurred to net premiums earned. The
underwriting and other operating expense ratio is the percentage of underwriting and other operating expenses to net premiums earned. When the calendar year combined ratio is adjusted to exclude prior period items, such as loss reserve development
and policyholders' dividends, it becomes the "accident year combined ratio," a non-GAAP financial measure.Development

The amount by which estimated losses, measured subsequently by reference to payments and additional estimates, differ from those originally reported for a period. Development is favorable when losses ultimately settle
for less than the amount reserved or subsequent estimates indicate a basis for reducing loss reserves on open claims. Development is unfavorable when losses ultimately settle for more than the levels at which they were reserved or subsequent
estimates indicate a basis for reserve increases on open claims. Favorable or unfavorable development of loss reserves is reflected in our Consolidated Statements of Operations in the period the change is made.Experience modification factor

A policy premium factor reflecting the insured employer's historical loss experience.Excess of loss reinsurance

A form of reinsurance in which the reinsurer pays all or a specified percentage of a loss caused by a particular occurrence or event in excess of a fixed amount and up to a stipulated limit.GAAP

Accounting principles generally accepted in the United States of America.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, administering and settling claims, including legal expenses.Loss ratio

Net losses incurred expressed as a percentage of net premiums earned.Losses and loss adjustment
expense ratio

The sum of net losses and loss adjustment expenses incurred, expressed as a percentage of net premiums earned.Loss reserves

The balance sheet liability representing estimates of amounts needed to pay reported and unreported claims and related loss adjustment expenses.Net premiums earned

The portion of net premiums written applicable to the expired portion of time for which insurance was in-force during the calendar period and is recognized as revenue.


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Net premiums written

The amount of premiums we have billed to our policyholders in the applicable period less reinsurance premium ceded.Policyholders' dividends

Payments to policyholders on a type of policy upon which the policyholder may receive a payment after policy expiration depending upon the loss experience.Policyholders' surplus

The amount remaining after all liabilities are subtracted from all admitted assets, as determined in accordance with statutory accounting practices. This amount is regarded as financial protection to policyholders in
the event an insurance company suffers unexpected or catastrophic losses.Premiums in-force

Premiums billed or to be billed on all unexpired policies.Reinsurance

A transaction between insurance companies in which an original insurer, or ceding company, remits a portion of the premium to a reinsurer, or assuming company, as payment for the reinsurer's assumption of a portion of
the risk.Retention

The amount of loss(es) from a single occurrence or event which is paid by the company issuing the insurance policy prior to the attachment of excess of loss reinsurance.Retrospectively-rated policy

A policy containing a provision for determining the insurance premium for a specified policy period on the basis of the loss experience for the same period.Statutory accounting practices

Accounting practices promulgated by the National Association of Insurance Commissioners ("NAIC") and prescribed or permitted by the states' departments of insurance. In general, statutory accounting practices address
policyholders' protection and solvency and are more conservative than GAAP in presentation of earnings, surplus and assets.Treaty

A contract of reinsurance.Underwriting

The process whereby an insurer reviews applications submitted for insurance coverage and determines whether to accept all or part, and at what premium, of the coverage being requested.Underwriting income (loss)

The income (loss) before tax from the workers' compensation and reinsurance segments determined by deducting losses and loss adjustment expenses incurred and underwriting and other operating expenses from net premiums
earned.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.Underwriting and other operating expense ratio

Underwriting and other operating expenses expressed as a percentage of net premiums earned.


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Description of the Business

We are in the business of managing insurance and investment risk. Our main business activity is the workers' compensation insurance
business. The key operating goal for our workers' compensation segment is to achieve underwriting profitability and significantly outperform the national workers' compensation insurance industry. In
addition, we invest the net cash flow from our operations and our capital principally in fixed maturity securities. These investments provide a stable source of income over the long run, although in
the short term, changes in interest rates and our current investment strategies impact the amount of investment income we earn and the market value of our portfolio. We measure our performance by our
ability to increase stockholders' equity, plus dividends to stockholders, over the long term.

Our
business is comprised of the following segments: workers' compensation, reinsurance and investments. In September 2005, we exited the assumed reinsurance business; however, we will
be paying our assumed reinsurance claims for several years. The results of the reinsurance segment will continue to be included in the results of continuing operations. Net earned premiums, segment
results and the combined ratios of our workers' compensation and reinsurance segments and results of our investments segment, as well as the losses from the parent for each of the three years ended
December 31, 2009, are set forth in Note 15  "Segment Information" of our Consolidated Financial Statements.



In the workers' compensation segment, we provide insurance coverage for the statutorily prescribed benefits that employers are required
to provide to their employees who may be injured in the course of employment. Our workers' compensation policies are issued to employers who also pay the premiums. The policies provide payments for,
among other things, temporary or permanent disability benefits, death benefits and medical and hospital expenses for covered employees with work-related injuries or illnesses. 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.

Our
long-term underwriting and pricing strategy in the national workers' compensation industry is to deliver quality services based on adequate premium rates for the
exposure. We continually analyze data and use our best judgment about loss cost trends, particularly medical costs, to set adequate premium rates and loss reserves. During periods of intense
competition or other adverse industry conditions, our exposure base as measured by insured payroll may decrease as employers buy coverage elsewhere because we adhere to a long-standing
operating principle that we will not compromise the adequacy of our premium rates in order to achieve revenue or market share objectives. Our value proposition is that our services, over the long run,
provide employers the opportunity to reduce their experience modification factor and their long-term workers' compensation costs.

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We
write workers' compensation insurance in 45 states and have eight office locations in California, three in Florida, two in Illinois, and offices in each of Texas, Pennsylvania, North
Carolina and Alabama. Our primary office locations consist of teams of Zenith employees providing the following services to our insureds:

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Our
specialist strategy is focused on providing quality services to our insureds and claimants, generating underwriting profits and delivering an above average return to our stockholders
over time. This strategy has resulted in a long-term record of significantly outperforming the industry. The following table compares our California workers' compensation accident year
loss ratios to the accident year loss ratios estimated by the Workers' Compensation Insurance Rating Bureau ("WCIRB") for the California workers' compensation industry for more than 30 years:

California Accident Year Loss Ratios
Estimated as of December 31, 2009Accident Year

Zenith

WCIRB1978


44
%

55
%1979


43


581980


45


571981


52


601982


54


661983


57


751984


63


831985


60


841986


52


761987


48


691988


44


671989


49


701990


58


811991


58


851992


49


701993


39


561994


49


641995


70


911996


69


1011997


77


1151998


85


1311999


95


1412000


86


1272001


77


1072002


59


832003


36


522004


23


332005


23


302006


31


412007


38


572008


45


702009


51


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We have a shorter history in writing business outside of California, but our specialist strategy has delivered similar results. The following table compares our
non-California workers' compensation accident year loss ratios to the accident year loss ratios estimated by the National Council on Compensation Insurance, Inc. ("NCCI"), for the
workers' compensation industry for the past eight years:

Non-California Accident Year Loss Ratios
Estimated as of December 31, 2009Accident Year

Zenith

NCCI2002


50
%

70
%2003


39


642004


36


612005


33


592006


33


582007


38


612008


41


652009


50


We believe there are three key reasons that we have historically produced lower than average loss ratios than the workers' compensation
industry:



Our
business is concentrated in California and Florida, which makes the results of our operations dependent on trends that are characteristic to these states as compared to national
trends. For example, state legislation, local competition, economic and employment trends, climate and environmental changes and workers' compensation medical costs trends in such states can be
material to our results.

In
California, workers' compensation reform legislation was enacted in 2003 and 2004 with the principal objectives of lowering the trend of increasing costs and improving fairness in the
system. In Florida, legislation was enacted effective in 2003, which provided changes to the workers' compensation system. See "Workers' Compensation Reform Legislation" on page 10.

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Net
premiums earned for California, Florida and other states, were as follows:

Year Ended December 31,(Dollars in thousands)

2009



2008



2007California

$
268,891


58.1
%
$
332,196


54.8
%
$
407,105


55.1
%Florida


96,632


20.9


152,321


25.1


192,889


26.1Other


97,495


21.0


121,767


20.1


138,202


18.8Net premiums earned

$
463,018


100.0
%
$
606,284


100.0
%
$
738,196


100.0
%


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

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

Our
premium rates for workers' compensation are determined by our actuaries for each state in which we do business, except in those states where premium rates for workers' compensation
insurance are set by state regulators, primarily Florida. In California, the state in which the largest amount of our workers' compensation premiums are earned, the WCIRB recommends claims cost
benchmarks to be used by companies in determining their premium rates. The California Department of Insurance ("California DOI") also adopts and publishes its own claims cost benchmark. The benchmark
rates cover expected loss costs, but do not contain an element to cover operating expenses or profit. The WCIRB recommended a 22.8% increase in the January 1, 2010 claims cost benchmark;
however, the California DOI did not change its cost benchmark for January 1, 2010. Notwithstanding the foregoing, we are not required to use these California benchmark rates. We set our own
California premium rates based upon actuarial analysis of current and anticipated cost trends including any modifications to the workers' compensation system, while maintaining our goal of achieving
underwriting profits and outperforming the industry.

We
reduced our premium rates from 2004 through 2007 as a result of favorable loss cost trends originating from the 2003 and 2004 legislative reforms in a manner that we believe dealt
prudently with the uncertainty about the long-term outcome of loss cost trends for the accident years most affected by the reforms. Due to increasing medical costs in California, we
increased our premium rates 4% effective January 1, 2009, 4% effective July 1, 2009 and an additional 2.7% effective January 1, 2010. Due to the weak economy, we have moderated
the increase in premium for our California customers.

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In
some cases, experience modifications for renewing customers may increase which, in combination with an increase in premium rates, causes a substantial premium increase, even with no change in
payroll. In 2009, we instituted limits on the overall premium increases in such cases, which saved our California policyholders $11.4 million. Effective January 1, 2010, we are limiting
premium increases for renewal customers to 25%, except due to a growth in payrolls.

These
premium rates do not necessarily indicate the rates charged to our policyholders because employers' experience modification factors are subject to revision annually and our
underwriters are given authority to increase (debit) or decrease (credit) rates based upon individual risk characteristics. The following table sets forth the premium rate change percentages in
California, as well as the changes in the average rate charged on renewal business for each period. The change in the average renewal rate takes into consideration changes in premium rates, as well as
the changes in experience modification factors and net credits or debits applied by our underwriters (decreases are shown in parentheses):

Policy Renewal Date

Rate
Change

Average Renewal
Charged Rate
ChangeJanuary 1, 2004  December 31, 2004


(10.0
)%

(15.0
)%January 1, 2005  December 31, 2005


(13.4
)

(17.0
)January 1, 2006  December 31, 2006


(17.4
)

(26.0
)January 1, 2007  December 31, 2007


(4.4
)

(12.0
)January 1, 2008  December 31, 2008


0.0


(6.0
)January 1, 2009  December 31, 2009


8.2


2.0January 1, 2010


2.7


NA


NA=Not
yet available.


In Florida, the state in which the second largest amount of our workers' compensation premiums is earned, premium rates for workers' compensation
insurance are set by the Florida Department of Insurance. Premium rate change percentages in Florida were as follows:

Effective date of change

Rate
ChangeJanuary 1, 2004


0.0
%January 1, 2005


(4.0
)January 1, 2006


(13.4
)January 1, 2007


(12.5
)January 1, 2008


(18.4
)January 1, 2009


(18.6
)April 1, 2009


6.4July 1, 2009


(6.4
)January 1, 2010


(6.8
)


In certain circumstances, a policyholder may be eligible for a return of a portion of the premium based on favorable loss experience during the
policy term, by way of a dividend, calculated and paid after the policy has expired. In addition, Florida statutes require payment of dividends to policyholders pursuant to a formula based on
underwriting results. An estimated provision for workers' compensation policyholders' dividends is accrued as the related premiums are earned. Alternatively, the policyholder's premium may be adjusted
after expiration using a retrospective-rating formula based on losses sustained under the policy. Such retrospective adjustments can result in additional premium due from the policyholder if loss
experience is worse than expected or a premium refund if loss experience is

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better
than expected. Although we offer these types of loss-sensitive policies and have written a small number of them, we generally have written policies with a guaranteed cost based on
premium rates, insured employer's payrolls and experience modification factors.



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

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

During
2007, the California Legislature extended the time period for which the 104 weeks of temporary disability payments may be taken. This change did not materially impact our
workers' compensation business.

In
September 2009, the California Workers' Compensation Appeals Board ("WCAB") issued two significant en banc decisions, revising its earlier decisions, relating to use of the American
Medical Association Guide ("AMA Guide") to determine permanent disability and the method for determining an injured worker's DFEC. The original WCAB decision inAlmaraz v.
Environmental Recovery Services/Guzman v. Milpitas Unified School District ("Almaraz/Guzman")rendered the AMA Guide portion of the 2005 permanent disability ("PD") rating
schedule rebuttable if the permanent disability award could be shown to be inequitable and not commensurate with the injured worker's disability, and would have allowed workers' compensation judges to
make an impairment determination taking into account medical opinions that are not based on, or are only partially based on, the AMA Guide. The revised decision in Almaraz/Guzmanlimits the physician
from deviating from the AMA Guide in determining a PD rating. A physician can deviate from the scheduled rating only
if his opinion for the deviation constitutes "substantial evidence," and the rating must be derived based solely within the four corners of the AMA Guide. The WCAB's original decision in Ogilvie v. City and County of San
Francisco ("Ogilvie")rendered the DFEC portion of the 2005 permanent disability rating schedule rebuttable. The
revisedOgilviedecision does not substantially change the initial decision, but provides some examples of how this decision could be applied. These
decisions could affect both the number and

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amount
of PD payments, including those on open claims. We do not know how these decisions will affect our loss costs trends or our reserves, if at all, and we expect legal challenges to continue. We
will continue to monitor these decisions and their impact on our results.

In
Florida, legislation was enacted effective in 2003 which provided changes to the workers' compensation system. Such changes were designed to expedite the dispute resolution process,
provide greater compliance and enforcement authority to combat fraud, revise certain indemnity benefits and increase medical reimbursement fees for physicians and surgical procedures. In addition, the
reforms limited attorney awards to a maximum percentage of the injured worker award, and precluded attorneys from earning an hourly fee on litigated benefit issues.

During
the fourth quarter 2008, the Florida Supreme Court reached a decision in theEmma Murray vs. Mariner Healthcase which reversed an
element of the 2003 reforms limiting attorney awards and
precluding attorneys from earning an hourly fee on litigated benefit issues. During 2009, the Florida Legislature restored the limits on claimants' attorneys' fees going forward.



In 2005, we exited the assumed reinsurance business, although we will be paying our assumed reinsurance claims for several years. The
results of the reinsurance segment will continue to be included in the results of continuing operations, primarily consisting of changes to loss reserve estimates, if any, and direct expenses. Loss
reserves applicable to our reinsurance segment were $38.5 million, or 3% of consolidated loss reserves at December 31, 2009. There were no material adjustments to our reinsurance loss
reserves in the three years ended December 31, 2009.

Our
assumed reinsurance business was primarily focused on assuming worldwide property losses from catastrophes and large property risks. In addition, we also wrote liability reinsurance
from 1985 through 2001 including general business liability, directors' and officers' liability and excess or umbrella coverage.



Our investment portfolio is recorded in the financial statements primarily at fair value and was approximately $2.0 billion at
December 31, 2009 and 2008. The average maturity of the fixed maturity portfolio, including short-term investments, was approximately 3.0 and 4.5 years at December 31,
2009 and 2008, respectively. The portfolio quality is high, with approximately 90% and 93% of our fixed maturity securities, including short-term investments, rated investment grade at
December 31, 2009 and 2008, respectively.

We
invest the net cash flow from operations and from our capital primarily in fixed maturity securities. These investments provide a stable source of income over the long run and net
realized gains on investments, consistent with our policy guidelines and taking into consideration state regulatory restrictions on investments in our insurance subsidiaries. We manage our investment
portfolio ourselves and for the most part do not rely on external portfolio managers. We invest a small percentage of our portfolio in equity securities. The allocation of the portfolio among various
types of securities is adjusted from time to time based on market conditions, credit conditions, tax policy, fluctuations in interest rates and other factors. We do not utilize hedges or derivative
financial instruments to manage risk, nor do we enter in any swap or forward contracts, but attempt to mitigate our exposure through active portfolio management. As of December 31, 2009 and
2008, we did not have any sub-prime mortgages, derivative strategies, credit default swaps or other credit-enhancement exposures. We do not engage in securities lending. We also make
certain
long-term strategic investments in limited partnerships and limited liability companies which are not publicly traded with a view toward ultimately exiting the investment position
sometimes after many years. We may invest in real estate ventures from time to time.

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Additional
information regarding our investment portfolio, including our approach to managing investment risk, is set forth under "Investments" in Item 7. "Management's Discussion
and Analysis of Consolidated Financial Condition and Results of Operations" ("MD&A"), Item 7A. "Quantitative and Qualitative Disclosures about Market Risk" and Notes 2, 3 and 4 of our
Consolidated Financial Statements.



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

Losses and Loss Adjustment Expense Reserves, Claims and Loss Developments

Accounting for the workers' compensation and reinsurance segments requires us to estimate the liability for the expected ultimate cost
of unpaid losses and loss adjustment expenses ("loss reserves") as of the balance sheet date. Loss reserves are estimates and are inherently uncertain; they do not and cannot represent an exact
measure of ultimate liability. Loss reserve estimates represent a significant risk to the business which we attempt to mitigate by continually reviewing loss cost trends, attempting to set our premium
rates to adequately cover anticipated costs and by investing in our claims servicing organization. We endeavor to minimize the estimation risk by performing a comprehensive review of our loss reserves
every quarter. Estimating loss reserves is an uncertain and complex process which involves a combination of actuarial techniques and management judgment to establish the most reasonable estimate of
loss reserves based on the most recent relevant data. Because we have a long history in the workers' compensation business, particularly in California,
we give weight to our own data as well as external information in determining our loss reserve estimates. No assurance can be given whether the ultimate liability for unpaid losses will be more or
less than our current estimates.

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

Additional
information regarding loss reserve estimates and loss reserve development is set forth under "Loss Reserves" in Item 7. MD&A and Note 7 "Unpaid Losses and Loss
Adjustment Expenses" of our Consolidated Financial Statements.

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The
following table shows the subsequent development of our liability for unpaid losses and loss adjustment expenses based on the original estimate recorded in our financial statements
at December 31 for the ten years prior to 2009.

(Dollars in thousands)

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999Liability for unpaid losses and loss adjustment expenses, net

$
953,492

$
1,005,590

$
1,126,808

$
1,301,076

$
1,459,797

$
1,212,032

$
990,877

$
825,869

$
742,678

$
634,172

$
605,250Paid, net (cumulative) as of:One year later





277,432


298,843


310,470


349,910


308,179


298,664


281,043


239,098


243,506


235,968Two years later








474,050


499,280


554,330


479,465


484,077


470,663


431,015


370,100


384,011Three years later











614,411


680,808


591,279


593,334


590,107


543,067


452,727


457,717Four years later














762,189


673,296


670,789


661,999


617,567


517,173


509,915Five years later

















728,124


729,998


717,472


664,244


563,998


550,698Six years later




















771,472


762,837


702,550


595,706


582,425Seven years later























794,508


736,912


621,362


604,446Eight years later


























762,753


644,633


622,387Nine years later





























663,090


639,924Ten years later
































655,073Liability, net re-estimated as of:One year later





996,512


1,048,700


1,191,275


1,318,475


1,185,132


1,004,243


840,084


771,846


638,519


636,130Two years later








1,039,622


1,079,827


1,253,674


1,149,288


1,053,834


905,542


802,822


651,266


635,750Three years later











1,070,749


1,125,997


1,116,111


1,066,366


983,004


845,662


670,797


638,920Four years later














1,122,043


1,003,509


1,068,342


999,090


907,177


703,470


650,849Five years later

















1,003,518


1,000,303


1,017,732


917,474


758,129


673,928Six years later




















1,000,174


985,915


934,390


765,019


723,829Seven years later























985,497


919,555


776,861


731,454Eight years later


























919,179


770,032


737,403Nine years later





























771,199


735,328Ten years later
































735,615Favorable (unfavorable) development, net





9,078


87,186


230,327


337,754


208,514


(9,297
)

(159,628
)

(176,501
)

(137,027
)

(130,365
)Net liability  December 31,


953,492


1,005,590


1,126,808


1,301,076


1,459,797


1,212,032


990,877


825,869


742,678


634,172


605,250Receivable from reinsurers and state trust funds for unpaid losses


237,612


268,996


326,562


221,204


243,648


270,287


229,872


215,663


204,144


243,711


275,679Gross liability  December 31,


1,191,104


1,274,586


1,453,370


1,522,280


1,703,445


1,482,319


1,220,749


1,041,532


946,822


877,883


880,929Re-estimated liability, net





996,512


1,039,622


1,070,749


1,122,043


1,003,518


1,000,174


985,497


919,179


771,199


735,615Re-estimated receivable from reinsurers and state trust funds for unpaid losses





247,919


263,797


261,384


267,038


281,406


275,697


250,716


236,471


247,170


281,067Re-estimated liability, gross





1,244,431


1,303,419


1,332,133


1,389,081


1,284,924


1,275,871


1,236,213


1,155,650


1,018,369


1,016,682Favorable (unfavorable) development, gross





30,155


149,951


190,147


314,364


197,395


(55,122
)

(194,681
)

(208,828
)

(140,486
)

(135,753
)


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The accounting policies used to estimate the liabilities in the preceding table are described in Note 2 "Summary of Accounting Policies" of our
Consolidated Financial Statements.

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

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

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

The
line labeled "Favorable (unfavorable) development, net" represents the aggregate change in the initial estimates from the original balance sheet date indicated through
December 31, 2009. As shown in the table, our reserves have developed favorably for 2004 - 2008 and developed
unfavorably for 1999 - 2003. These amounts have been reported in earnings over time as a component of losses and loss adjustment expenses incurred. The favorable or
unfavorable net development shown in each column should be viewed independently of the other columns because components of the development shown in recent years are also included as components of
development in earlier years.

The
information in the table provides our historical track record of reserving accuracy for unpaid losses and loss adjustment expenses as of each calendar year-end presented.
However, since conditions and trends that have affected losses and loss adjustment expense development in the past may not occur in the future in exactly the same manner, if at all, future results may
not be reliably predicted by extrapolation of the data presented. We believe our loss reserve estimates are adequate as of the end of 2009. However, due to the inherent uncertainties underlying our
loss reserve estimates, and as we receive new information and update our assumptions over time regarding the ultimate liability, our loss reserves may prove to be inadequate to cover our actual
losses, or they may prove to exceed the ultimate amount of our actual losses.

Net
development of loss reserves shown in the table includes the following:

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Reinsurance Ceded



In accordance with general insurance industry practices, we purchase excess of loss reinsurance to protect us against the impact of
large, irregularly-occurring losses in the workers' compensation segment. Such reinsurance reduces the magnitude of the impact of such losses on net income and the capital of Zenith Insurance. We
maintain excess of loss and catastrophe reinsurance which provides protection up to $150 million for workers' compensation losses including catastrophe losses arising out of California
earthquakes. We retain the first $5 million of each loss. In the layer of $5 million in excess of $5 million we retain any losses that exceed our annual aggregate limit of
$15 million. In the layer of $10 million excess of $10 million we retain 50%.

We
have changed our retention amounts over time as follows:

Effective Dates

Retention AmountThrough December 31, 2001

$
550,000January 1, 2002 - June 30, 2002


750,000July 1, 2002 - April 30, 2007


1,000,000May 1, 2007 through present


5,000,000


The following table shows the number and amount of incurred loss for claims in excess of $1 million in each of the last five accident
years:

Incurred Losses(Dollars in thousands) Accident Year

Number
of Claims

Total

Excess
of $1M2005


4

$
8,587

$
4,5872006


12


24,759


12,7592007


4


6,382


2,3822008


4


8,426


4,4262009


4


11,492


7,49228

$
59,646

$
31,646


The amount and timing of any such large claim is unpredictable, due to the circumstances that give rise to such claim. The causes from which we
receive catastrophic claims will vary and are often fortuitous. Although some of these types of accidents occur more frequently, the $1 million threshold is usually reached when the injuries
involve brain damage, paralysis, traumatic amputation or multiple back surgeries. Notwithstanding any short-term volatility of our loss ratio, we believe our financial strength justifies a
retention of $5 million per claim and is cost efficient in the long run.



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

We
maintain excess of loss and catastrophe reinsurance which provides protection up to $20 million for acts of terrorism including nuclear, biological and chemical attacks. We
retain the first $5 million of each loss. We retain any losses in the $5 million excess $5 million layer which exceed our annual

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aggregate
of $5 million. We also retain 50% of any loss other than nuclear, biological or chemical in the $10 million excess $10 million layer. We retain none of the loss in the
$10 million excess $10 million layer in events of nuclear, biological or chemical attacks.

In
2007, the Terrorism Risk Insurance Act of 2002 ("TRIA"), was extended through December 31, 2014. TRIA may provide us with reinsurance protection for losses arising out of
terrorist acts under certain circumstances and subject to certain limitations. The U.S. Treasury Secretary must certify an act for it to constitute an act of terrorism. The definition of terrorism
includes domestic acts of terrorism and excludes acts of terrorism committed in the course of a war declared by the U.S. Congress. The losses arising from an act of terrorism must exceed
$100 million to qualify for reimbursement under TRIA. If an event is certified, the U.S. Government will reimburse losses not to exceed $100 billion in any year. Each insurance company
is responsible for a deductible based on 20% of its direct premiums earned in the previous calendar year. Our deductible is $95.2 million for a covered loss incurring in 2010. For losses in
excess of the deductible, the U.S. Government will reimburse 85% of the insurer's loss, up to the insurer's proportionate share of the $100 billion aggregate limit.

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

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



We are involved in collecting reinsurance recoverables under reinsurance contracts that were entered into by companies that we acquired
and whose reinsurance arrangements we terminated. In 1998, Zenith Insurance acquired substantially all of the assets and certain liabilities of RISCORP, Inc. and certain of its subsidiaries
(collectively "RISCORP") related to its workers' compensation business. Our reinsurance recoverable at December 31, 2009 includes $27.1 million for paid and unpaid losses relating to
reinsurance arrangements we assumed from RISCORP. The principal reinsurers from which such reinsurance is recoverable are Continental Casualty Co. and Munich Re America Corporation. We also
entered into an aggregate excess of loss reinsurance agreement with Inter-Ocean Reinsurance Company, Ltd., which provides ceded reinsurance for unpaid losses and allocated loss adjustment
expenses we assumed from RISCORP up to $50 million in excess of $182 million. Reinsurance recoverable from Inter-Ocean Reinsurance Company is fully secured by an investment grade
security held in a trust account.



Reinsurance makes the assuming reinsurer liable to the ceding company to the extent of the reinsurance. It does not, however, discharge
the ceding company from its primary liability to its policyholders in the event the reinsurer is unable to meet its obligations under such reinsurance treaty. We monitor the financial condition of our
reinsurers and do not believe that we are currently exposed to any material credit risk through our ceded reinsurance arrangements because most of our reinsurance is recoverable from large,
well-capitalized reinsurance companies.

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Amounts
recoverable (including amounts for paid and unpaid losses and reinsurance commissions) and A.M. Best ratings at December 31, 2009 were as follows:

(Dollars in thousands) Name of Reinsurer

Amount
Recoverable(1)

A.M. Best
Rating(2)Swiss Reinsurance America Corporation

$
118,562


AGeneral Reinsurance Corporation


75,590


A++Continental Casualty Company


19,926


AOdyssey America Reinsurance Corporation


12,638


AInter-Ocean Reinsurance Company(3)


10,840


NRMunich Re America Corporation


3,091


A+National Union Fire Insurance Company of Pittsburgh


1,827


AAllstate Insurance Company


1,103


A+All others (67 Reinsurers, none individually in excess of $1.0 million)


6,799Total

$
250,376


(1)Under
insurance regulations in California, reinsurers placed securities on deposit equal to the California component of our ceded workers' compensation loss
reserves.(2)A.M.
Best, in assigning ratings, is primarily concerned with the ability of insurance and reinsurance companies to pay the claims of policyholders. In
the A.M. Best ratings scheme, ratings of B+ to A++ are considered "Secure" and ratings of B and below are considered "Vulnerable."(3)Reinsurance
recoverable from Inter-Ocean Reinsurance Company is fully secured by an investment grade security held in a trust account on our behalf with
State Street Bank Insurances Services.




Our insurance subsidiaries are parties to an intercompany pooling agreement for statutory reporting purposes. Under such agreement, the
results of underwriting operations are ceded (the risks are transferred) to Zenith Insurance and the aggregate results are then reapportioned, or retro-ceded (the risks are transferred back), to the
companies party to the agreement. At December 31, 2009, the proportions of the pooling agreement were as follows: Zenith Insurance  98.0% and ZNAT
Insurance  2.0%. Transactions pursuant to the pooling agreement are eliminated in consolidation and have no impact on our consolidated financial statements.

Marketing and Staff

The business in the workers' compensation segment is produced by approximately 1,600 independent licensed insurance agents throughout
all states in which we conduct business.

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

Competition

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

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insurers.
Many companies in competition with us have a larger volume of business, are more widely known, and/or possess substantially greater financial resources.

Regulation

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



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

Workers'
compensation insurance is statutorily provided for in all of the states in which we do business. State laws and regulations specify the form and content of policy coverage and
the rights and benefits that are available to injured workers, their representatives and medical providers. In Florida, premium rates for workers' compensation are determined by regulators.
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.

Detailed
annual and quarterly financial statements, prepared in accordance with statutory accounting practices, and other reports are required to be filed with the departments of
insurance of the states in which we are licensed to transact business. The statutory financial statements of our insurance subsidiaries are subject to periodic examination by the California DOI.
Currently, the California DOI is conducting an examination of the statutory financial statements of our insurance subsidiaries for the three years ended December 31, 2008. The previous
examination of the statutory financial statements of our insurance subsidiaries by the California DOI was for the three years ended December 31, 2005 and contained no findings.



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

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accounting
practices in its Accounting Practices and Procedures Manual. The California DOI requires us to follow such statutory accounting practices.

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, 2009, our statutory capital of $979.2 million was approximately
1,500% of Authorized Control Level, which was substantially above the required minimum.

The
NAIC Insurance Regulatory Information System ("IRIS") key financial ratios, developed to assist insurance departments in overseeing the financial condition of insurance companies,
are reviewed by examiners of the NAIC and state insurance departments to select those companies that merit highest priority in the allocation of the regulators' resources. The 2009 IRIS results for
Zenith Insurance showed all ratios within the "normal" range as determined by the NAIC.



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

Item 1A. RISK FACTORS

Our business is subject to numerous risks and uncertainties, the outcome of which may impact future results of operations and financial
condition. The more significant risks and uncertainties are described below.

The continuing volatility in the financial markets and the current economic recession could have a material adverse effect on our results of operations and financial
condition.

The significant financial market volatility experienced worldwide during the third and fourth quarters of 2008 continued into 2009.
Although the U.S. and other foreign governments have taken various actions to stabilize the financial markets, it is uncertain whether those actions will be effective over the long term. Therefore,
the financial market volatility could continue and it is possible that it could result in a prolonged negative economic impact.

We
cannot predict future market conditions or their impact on our stock price, investment portfolio, or our workers' compensation business. In addition, continuing financial market
volatility and economic downturn could have a material adverse affect on our insureds, agents, claimants, reinsurers, vendors and competitors. Depending on financial market conditions, we could incur
additional realized and unrealized losses in the future in our investment portfolio, which could have an adverse effect on our results of operations and financial condition. Reduced employment and
payrolls have contributed to the decline in our premium. Selection of customers is more complex as certain businesses are facing unprecedented challenges in sustaining their operations. Over time we
expect that recovery from the recession will improve hiring and payroll trends, but we cannot predict when this will occur.

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Certain of the actions the U.S. Government has taken or may take in response to the financial market crisis have impacted certain property and casualty insurance
carriers. The government continues to implement measures to stabilize the financial markets and stimulate the economy, and it is possible that these measures could further affect the property and
casualty insurance industry and its competitive environment.

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

We establish loss reserves in our financial statements that represent an estimate of amounts needed to pay and administer claims with
respect to insured and reinsured events that have occurred, including events that have not yet been reported to us. We believe our loss reserves as of December 31, 2009 are adequate, however
loss reserves are estimates and are inherently uncertain; they do not and cannot represent an exact measure of liability. Accordingly, as we receive new information and update our assumptions over
time regarding the ultimate liability, our loss reserves may prove to be inadequate to cover our actual losses. Any changes in these estimates could be material and could have an adverse effect on our
results of operations and financial condition during the period the changes are made.

As
can be seen on page 13 under the line titled "Favorable (unfavorable) development, net" the reserves reported for 1999 to 2003 developed unfavorably while the reserves reported
for 2004 to 2008 developed favorably. The net effect over these 10 years was net favorable development; however we cannot predict the amount or timing of future loss reserve development,
whether favorable or unfavorable.

Our
loss reserve estimates for the assumed reinsurance business, which we exited in 2005, are dependent upon obtaining information timely from ceding companies. Estimates of 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 losses.

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

We buy reinsurance protection in our workers' compensation business to protect us from the impact of losses over our retention amount,
which is currently $5 million, and from the accumulation of losses up to $150 million including catastrophe losses arising out of California earthquakes. The availability, amount and
cost of reinsurance depend on market conditions and may vary significantly. Any decrease in the amount of our reinsurance will increase our risk of loss and could adversely affect our business and
financial condition.

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

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

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

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We
maintain excess of loss and catastrophe reinsurance which provides protection up to $20 million for acts of terrorism including nuclear, biological and chemical attacks. We
retain the first $5 million of each loss. We retain any losses in the $5 million excess $5 million layer which exceed our annual aggregate of $5 million. We also retain 50%
of any loss other than nuclear, biological or chemical in the $10 million excess $10 million layer. We retain none of the loss in the $10 million excess $10 million layer
in events of nuclear, biological or chemical attacks.

In
2007, the Terrorism Risk Insurance Act of 2002 ("TRIA"), was extended through December 31, 2014. TRIA may provide us with reinsurance protection for losses arising out of
terrorist acts under certain circumstances and subject to certain limitations as described on page 15. Our deductible is $95.2 million for a covered loss occurring in 2010. For losses in
excess of the deductible, the U.S. Federal Government will reimburse 85% of the insurer's loss, up to the insurer's proportionate share of the $100 billion aggregate limit.

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

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

Our insurance business is subject to extensive regulation by the applicable state agencies in the jurisdictions in which we operate,
perhaps most significantly by the California DOI. State agencies have broad regulatory powers designed to protect policyholders, not stockholders or other investors. These powers include, among other
things, the ability to: grant and revoke licenses to transact business; license agents and brokers; set the standards of solvency to be met and maintained; determine the nature of, and limitations on,
investments and dividends; approve policy forms and, in some states, establish premium rates; set tax rates on premiums; periodically examine financial statements; determine the form and content of
required financial statements; and periodically examine market conduct.

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

Federal
legislation typically does not directly impact our workers' compensation business, but our business can be indirectly affected by changes in healthcare, occupational safety and
health and tax regulations. Since healthcare costs are the largest component of our loss costs, we may be impacted by change in healthcare legislation, if any. Also, the unprecedented events in the
financial markets have re-opened discussions regarding the possibility of federal regulation of insurance.

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 maintain our profitability. In addition, we may be unable to maintain all required approvals or comply fully with applicable laws and regulations, or the relevant governmental authority's
interpretation of such laws and regulations.

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

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

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

In most of the states in which we operate, we face significant competition which, at times, is intense and prolonged. If we are unable
to compete effectively, our business and financial condition could be 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 and quality of claims payments, reputation, perceived financial strength and general experience. In the workers' compensation
business, we compete with regional and national insurance companies and state-sponsored insurance funds as well as potential insureds that have decided to self-insure. Some of our
competitors have greater financial, marketing and management resources than we have. Intense competitive pressure on prices can result from the actions of even a single large competitor, such as the
State Compensation Insurance Fund in California. Except in states such as Florida, where premium rates for workers' compensation insurance are determined by regulators, we establish our prices for our
workers' compensation policies based on the work of our actuaries, using our own data and our best judgment about loss cost trends. Historically, when competition has been intense, the amount of
business we are able to write has decreased because we have not reduced our prices below levels we deem to be adequate to maintain our goal of achieving underwriting profits and outperforming the
industry. As a result, our profitability during those times has decreased.

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

Investment income is an important component of our revenues and net income. The ability to achieve our investment objectives is
affected by certain factors that are beyond our control. Our fixed income portfolio is affected by changes in interest rates. Interest rates are highly sensitive to many factors, including
governmental monetary policies and domestic and international economic and political conditions. These and other factors also affect the equity markets and, consequently, the value of the equity
securities we own. Any significant decline in our investment income or the value of our investments as a result of falling interest rates, deterioration in the credit or liquidity of companies in
which we have invested, decreased dividend payment rates, general market conditions, or events that have an adverse impact on any particular industry or geographic region in which we hold significant
investments could have an adverse effect on our net income and, as a result, on our stockholders' equity and our policyholders' surplus.

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

22

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Table of Contents

Our
investment strategy attempts to manage interest rate and credit risk. We primarily invest in a broadly diversified portfolio of high quality fixed maturity securities and we have
large holdings in cash and short-term U.S. Government securities. We do not currently have any sub-prime mortgages, derivative strategies or other credit-enhancement exposures.
We do not engage in securities lending. We invest a small portion of our portfolio in below investment grade securities. The risk of default by borrowers that issue below investment grade securities
is significantly greater than other borrowers because these borrowers are often highly leveraged and more sensitive to adverse economic conditions, including a recession. In addition, these securities
are generally unsecured and often subordinated to other debt. The risk that we may not be able to recover our investments in below investment grade securities is higher than with investment grade
securities.

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

Our business is concentrated in California (58.1% of 2009 workers' compensation net earned premiums) and in Florida (20.9% of 2009
workers' compensation net earned premiums). Accordingly, unfavorable business, economic or regulatory conditions in these states could negatively impact our business. For example, regulatory changes
in California in the early 1990's created intense price competition in our workers' compensation business from about 1995 to 1999, during which time our overall profitability experienced significant
declines. In addition, California and Florida are states that are exposed to climate and environmental changes, natural perils such as earthquakes, hurricanes and water supplies, along with the
possibility of pandemics or terrorist acts. Accordingly, we could suffer losses as a result of catastrophic events in these states. The California and Florida economies have been affected by the
sub-prime and real estate issues; and California is experiencing budget deficits; all of which are affecting the general economy and employment levels in these states and affecting the
total payroll levels of our customers. Because our business is concentrated in this manner, we may be exposed to economic and regulatory risks or risk from natural perils that are greater than the
risks associated with greater geographic diversification.

We
maintain excess of loss and catastrophe reinsurance which provides protection up to $150 million for workers' compensation losses including catastrophe losses arising out of
California earthquakes. We retain the first $5 million of each loss. In the layer of $5 million in excess of $5 million we retain any losses that exceed our annual aggregate limit
of $15 million. In the layer of $10 million excess of $10 million we retain 50%. The risk of loss from catastrophes has not been eliminated because events may exceed the capacity
of our reinsurance protection.

We rely on independent insurance agents.

The failure or inability of independent insurance agencies to market our insurance programs successfully could have a material adverse
effect on our business, financial condition and results of operations. The business in our workers' compensation segment is produced by approximately 1,600 independent licensed insurance agents.
Agents are not obligated to promote our insurance programs and may sell competitors' insurance programs. As a result, our business depends in part on the marketing efforts of these agents and on our
ability to offer insurance programs and services that meet the requirements of their customers.

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

Virtually all states require insurers licensed to do business in their state to bear a portion of the loss suffered by some insureds as
the result of impaired or insolvent insurance companies. These obligations are funded by assessments that are expected to continue in the future as a result of insolvencies. Many states also have laws
that established second injury funds to provide compensation

23

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Table of Contents

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.

Our ability to write business, service our customers and meet certain regulatory requirements could be adversely affected if our information systems are rendered inoperable.

Our business operations are increasingly dependent on technology-enabled systems and processes. In addition, the capture, storage and
use of customer and proprietary company data and information are essential to our ongoing operations. Our information systems interface with various third-party systems for the purpose of exchanging
information and complying with an ever increasing number of electronic regulatory requirements.

We
have implemented business continuity plans that include redundant systems at an alternate location, which we periodically test. However, there are certain events outside of our
control that could render our systems inoperable such that we would be unable to service our agents, insureds and injured workers, or meet certain regulatory requirements, or could cause a breach of
security that could jeopardize the privacy, confidentiality and integrity of our data or our customers' data. If such an event were to occur and our systems were unable to be restored or secured
within a reasonable timeframe, our results of operations and financial condition could be adversely affected.

Examples
of these events include, but are not limited to, catastrophic and wide-spread outages, "cyber or terrorist attacks" that destroy our information or systems and the
loss of a number of our key information technology personnel or vendors.

Litigation may have an adverse effect on our business.

We are involved in various litigation proceedings that arise in the ordinary course of our business. Disputes adjudicated in the
workers' compensation administrative systems may be appealed to review boards or civil courts, depending on the issues and local jurisdictions involved. From time to time plaintiffs also sue us on
theories falling outside of the exclusive jurisdiction and remedies of the workers' compensation claims adjudication systems. Certain of these legal proceedings seek injunctive relief or substantial
monetary damages, including claims for punitive damages, that may not be covered by our third-party reinsurance agreements. Historically the Company has not experienced any material exposure or
damages from any of these legal proceedings. In addition, in the opinion of management, after consultation with legal counsel, all of our currently outstanding litigation is either without merit or
the ultimate liability, if any, is not expected to have a material adverse effect on our consolidated financial condition, results of operations or cash flows.

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 Zenith National's expenses and dividends, depends, in the long run, upon the surplus
and earnings of our subsidiaries and the ability of our subsidiaries to pay dividends to us. Payments of dividends by our insurance company subsidiaries are restricted by state insurance laws,
including laws establishing minimum solvency and liquidity thresholds, and could be subject to revised restrictions in the future. As a result, at times, we may not be able to receive

24

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Table of Contents

dividends
from these subsidiaries and we may not receive dividends in amounts necessary to meet our debt obligations or to pay dividends on our capital stock. In addition, the payment of dividends by
us is within the discretion of our Board of Directors and depends on numerous factors, including our results of operations, financial condition, capital requirements and other factors that our Board
of Directors considers relevant.

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

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

Item 1B. UNRESOLVED STAFF COMMENTS

None.

Item 2. PROPERTIES

We own a 130,000 square foot office facility in Woodland Hills, California which is the corporate home office of Zenith National and
its subsidiaries. We also own a 120,000 square foot branch office facility in Sarasota, Florida. In the regular conduct of business, we lease offices in various cities, which also serve as branch
offices and include such services as marketing, underwriting, safety and health, claims, medical management and claims adjudication, as well as premium audit. We have eight office locations in
California, three in Florida, two in Illinois and offices in each of Texas, Pennsylvania, North Carolina and Alabama. We consider our owned and leased facilities to be adequate for the needs of our
organization.

Item 3. LEGAL PROCEEDINGS

We are involved in various litigation proceedings that arise in the ordinary course of our business. Disputes adjudicated in the
workers' compensation administrative systems may be appealed to review boards or civil courts, depending on the issues and local jurisdictions involved. From time to time plaintiffs also sue us on
theories falling outside of the exclusive jurisdiction and remedies of the workers' compensation claims adjudication systems. Certain of these legal proceedings seek injunctive relief or substantial
monetary damages, including claims for punitive damages, that may not be covered by our third-party reinsurance agreements. Historically the Company has not experienced any material exposure or
damages from any of these legal proceedings. In addition, in the opinion of management, after consultation with legal counsel, all of our currently outstanding litigation is either without merit or
the ultimate liability, if any, is not expected to have a material adverse effect on our consolidated financial condition, results of operations or cash flows.

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

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

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Table of Contents

PART II

Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Price Range of Common Stock

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

Quarter

2009

2008First:High

$
33.76

$
45.69Low


18.51


33.18Second:High


27.90


41.16Low


20.52


35.16Third:High


31.75


48.00Low


20.56


33.03Fourth:High


32.49


37.23Low


27.60


26.00


Dividends

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

Date of Declaration by Zenith Board



Amount of
Cash per
Share

Record Date
for Payment

Payment
DateFebruary 10, 2010

Regular

$
0.50


April 30, 2010

May 14, 2010December 3, 2009

Regular


0.50


January 29, 2010

February 12, 2010December 3, 2009

Extra


0.40


December 15, 2009

December 29, 2009September 2, 2009

Regular


0.50


October 30, 2009

November 13, 2009May 13, 2009

Regular


0.50


July 31, 2009

August 14, 2009February 6, 2009

Regular


0.50


April 30, 2009

May 14, 2009December 4, 2008

Regular


0.50


January 30, 2009

February 13, 2009December 4, 2008

Extra


0.40


December 15, 2008

December 29, 2008September 18, 2008

Regular


0.50


October 31, 2008

November 14, 2008May 13, 2008

Regular


0.50


July 31, 2008

August 14, 2008February 21, 2008

Regular


0.50


April 30, 2008

May 14, 2008


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Table of Contents

The Holding Company Act limits the ability of Zenith Insurance to pay dividends to Zenith National, and of ZNAT Insurance to pay dividends to
Zenith Insurance, by providing that the California DOI must approve any dividend that, together with all other such dividends paid during the preceding twelve months, exceeds the greater of:
(a) 10% of the paying company's statutory surplus as regards
policyholders at the preceding December 31; or (b) 100% of the net income for the preceding year. In addition, any such dividend must be paid from policyholders' surplus attributable to
accumulated earnings. Such restrictions on dividends are not cumulative. Zenith Insurance paid $110.0 million, $95.0 million, and $115.0 million in dividends to Zenith National in
2009, 2008, and 2007, respectively. In 2010, Zenith Insurance will be able to pay up to $97.9 million of dividends to Zenith National without prior approval of the California DOI. Dividend
payments from Zenith Insurance to Zenith National must also be in compliance with the California Corporations Code that permit dividends to be paid only out of retained earnings and only if specified
ratios between assets and liabilities and between current assets and current liabilities exist after payment. The restrictions on the payment of dividends have not had, and under current regulations
are not expected to have, a material adverse impact on the ability of Zenith Insurance to pay dividends.

Stockholders of Record

As of January 31, 2010, there were 353 registered holders of record of our Common Stock.

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Table of Contents

Item 6. SELECTED FINANCIAL DATA

Year Ended December 31,

2009

2008

2007

2006

2005(Dollars and shares in thousands, except per share data)Revenues:Net premiums earned

$
463,081

$
607,327

$
738,532

$
944,217

$
1,178,700Net investment income


85,514


94,027


114,863


106,294


79,200Net realized gains (losses) on investments


36,252


(18,507
)

20,353


13,377


22,224Total revenues


584,847


682,847


873,748


1,063,888


1,280,124Results of operations by segment:Net investment income

$
85,514

$
94,027

$
114,863

$
106,294

$
79,200Net realized gains (losses) on investments


36,252


(18,507
)

20,353


13,377


22,224Income from investments segment


121,766


75,520


135,216


119,671


101,424Income (loss) from:Workers' compensation segment


(57,452
)

84,658


243,832


313,576


213,244Reinsurance segment (1)


(7
)

(192
)

(3,661
)

(20,508
)

(56,183
)Parent (2) (4)


(12,172
)

(12,790
)

(12,506
)

(11,927
)

(20,938
)Income from continuing operations before tax and equity in earnings of investee


52,135


147,196


362,881


400,812


237,547Income tax expense


17,735


51,896


128,981


142,112


81,894Income from continuing operations after tax and before equity in earnings of investee


34,400


95,300


233,900


258,700


155,653Equity in earnings of investee after tax














794Income from continuing operations after tax


34,400


95,300


233,900


258,700


156,447Gain on sale of discontinued operations after tax (3)














1,253Net income

$
34,400

$
95,300

$
233,900

$
258,700

$
157,700Per common share  diluted:Income from continuing operations after tax (4)

$
0.91

$
2.55

$
6.27

$
6.96

$
4.29Net income (4)


0.91


2.55


6.27


6.96


4.32Cash dividends declared per common share (5)


2.40


2.40


2.84


1.26


0.94Weighted average common shares outstanding  diluted (4)


37,355


37,399


37,284


37,174


37,052Financial condition:Total assets

$
2,438,244

$
2,526,022

$
2,778,635

$
2,777,147

$
2,729,928Investments


2,002,830


1,957,994


2,190,519


2,273,656


2,167,000Unpaid losses and loss adjustment expenses


1,191,104


1,274,586


1,453,370


1,522,280


1,703,445Redeemable securities payable


58,363


58,357


58,350


58,342


58,833Convertible senior notes payable (4)








1,135


1,129


1,124Stockholders' equity


1,058,931


1,023,437


1,073,357


940,720


712,795Stockholders' equity per share


28.25


27.42


28.93


25.41


19.14Return on average equity


3.3
%

8.9
%

22.9
%

31.8
%

26.3
%Insurance statistics (GAAP):Combined ratio:Workers' compensation segment


112.4
%

86.0
%

67.0
%

66.3
%

80.9
%Reinsurance segment (1)


NM


NM


NM


264.4
%

187.1
%Net premiums earned to stockholders' equity


0.4


0.6


0.7


1.0


1.7Losses and loss adjustment expense reserves, net of reinsurance, to stockholders' equity ratio


0.9


1.0


1.0


1.4


2.0


NM = Not meaningful (1)Includes
catastrophe losses before tax of $3.0 million, $19.9 million and $69.2 million in 2007, 2006 and 2005, respectively, in our
reinsurance segment.(2)Includes
interest expense before tax of approximately $5.2 million, $5.2 million, $5.2 million, $5.3 million and
$8.8 million in 2009, 2008, 2007, 2006 and 2005, respectively.(3)In
2002, we sold our home-building business and related real estate assets. In 2005, we received the last payment of $1.9 million before
tax ($1.3 million after tax) of additional sales proceeds under the earn-out provision of the sale agreement.(4)On
March 21, 2003, we issued $125.0 million aggregate principal amount of 5.75% Convertible Senior Notes due March 30, 2023
("Convertible Notes") and received net proceeds of approximately $120.0 million. Diluted per share amounts for the years ended December 31, 2008, 2007, 2006 and 2005 reflect the impact
of the additional shares issued or issuable in connection with the Convertible Notes. In 2005, $123.8 million of the Convertible Notes were converted into shares of our common stock. In
connection with certain of these conversions we paid a cash incentive of $4.7 million in 2005 which was included in the parent expenses. The remaining $1.1 million of outstanding
Convertible Notes were converted in March 2008.(5)Includes
an extra dividend of $0.40, $0.40 and $1.00 per common share declared and paid in December 2009, 2008 and 2007, respectively.


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Table of Contents

Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Zenith National Insurance Corp. ("Zenith National") is a holding company engaged, through its wholly-owned subsidiaries (primarily
Zenith Insurance Company ("Zenith Insurance")), in the workers' compensation insurance business, nationally. Unless otherwise indicated, all references to "Zenith," "we," "us," "our," "Company" or
similar terms refer to Zenith National together with its subsidiaries.

The
Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements if accompanied by meaningful cautionary statements identifying important
factors that could cause actual results to differ materially from those discussed. Forward-looking statements include those related to the plans and objectives of management for future operations,
future economic performance, or projections of revenues, income, earnings per share, capital expenditures, dividends, capital structure or other financial items. Statements containing words such as expect, anticipate, believe,
estimate, likelyor similar words that are used in this Management's Discussion and Analysis of Consolidated Financial
Condition and Results of Operations ("MD&A"), in other parts of this report or in other written or oral information conveyed by or on behalf of Zenith, are intended to identify forward-looking
statements. The Company undertakes no obligation to update such forward-looking statements, which are subject to a number of risks and uncertainties that could cause actual results to differ
materially from those projected. These risks and uncertainties are set forth in Item 1A. "Risk Factors."

Overview

We are in the business of managing insurance and investment risk with the major risk factors set forth in Item 1A. Our main business
activity is the workers' compensation insurance business. Our revenues are comprised of the net premiums earned from our workers' compensation segment, and net investment income and net realized gains
(losses) from our investments segment. We measure our performance by our ability to increase stockholders' equity, plus dividends to stockholders, over the long term. Following is a summary of our
financial performance over the last three years, the short-term trends affecting our business, and how these trends may affect us for the foreseeable future.

The
economy significantly affects our business and over the past few years the recession has resulted in the following impacts:

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Table of Contents

As
the economy recovers, the timing of which is uncertain, we expect that jobs will gradually be restored, resulting in growth in payroll and premium. We also expect an improved economy
may be conducive to stronger premium rate levels and more opportunities to write business, but may or may not affect the trend in claim counts. As the economy recovers, it is also possible that
interest rates will increase which will increase investment income, but could result in lower portfolio values and realized gains. A combination of these trends will affect our net income going
forward, but we cannot predict the timing or magnitude of the impacts, if at all.

Results of Operations



Our business is comprised of the following segments: workers' compensation, reinsurance and investments. In September 2005, we exited
the assumed reinsurance business; however we will be paying our assumed reinsurance claims for several years. The results of the reinsurance segment will continue to be included in the results of
continuing operations. Income (loss) from the workers' compensation and reinsurance segments is determined by deducting net losses and loss adjustment expenses incurred and underwriting and other
operating expenses incurred from net premiums earned (this result is also known as underwriting income or loss). Investment income and realized gains (losses) on investments are discussed under
"Investments" on page 38. The losses from the parent include interest expense and the general operating expenses of Zenith National. The comparative components of net income are set forth in
the following table:

Year Ended December 31,(Dollars in thousands)

2009

2008

2007Net investment income

$
85,514

$
94,027

$
114,863Net realized gains (losses) on investments


36,252


(18,507
)

20,353Income from investments segment


121,766


75,520


135,216Income (loss) from:Workers' compensation segment


(57,452
)

84,658


243,832Reinsurance segment


(7
)

(192
)

(3,661
)Parent


(12,172
)

(12,790
)

(12,506
)Income before tax


52,135


147,196


362,881Income tax expense


17,735


51,896


128,981Net income

$
34,400

$
95,300

$
233,900


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Table of Contents



The following table shows the net premiums earned, the underwriting income (loss) before tax and the amount of favorable development on
prior accident year unpaid losses and loss adjustment expenses ("Loss Reserves") included in the underwriting income (loss):

(Dollars in thousands)

Net Premiums Earned

Underwriting Income (Loss)

Favorable Loss Reserve DevelopmentYear ended December 31,2009

$
463,018

$
(57,452
)
$
8,9912008


606,284


84,658


78,8962007


738,196


243,832


113,355


As can be seen from the table above, underwriting results have declined by over $300 million in a three-year time period.
Approximately one-third of this decline is attributable to the decreasing amount of favorable development on prior accident year loss reserves. Increasing loss and expense ratios comprise
the balance of the decline.

The
combined ratio, expressed as a percentage, is a key measurement of profitability traditionally used in the property-casualty insurance business. The combined ratio, also referred to
as the "calendar year combined ratio," is the sum of the losses and loss adjustment expense ratio and the underwriting and other operating expense ratio. When the combined ratio is less than 100%, we
have recorded underwriting income, and conversely, when the combined ratios is greater than 100%, we have recorded underwriting losses. The losses and loss adjustment expense ratio is the percentage
of losses and loss adjustment expenses incurred to net premiums earned. The underwriting and other operating expense ratio is the percentage of underwriting and other operating expenses to net
premiums earned. When the calendar year combined ratio is adjusted to exclude prior period items, such as loss reserve development and policyholders' dividends, it becomes the "accident year combined
ratio," a non-GAAP financial measure.

The
key operating goal for our workers' compensation segment is to achieve underwriting profitability and significantly out-perform the national workers' compensation
industry ("industry").
Our risk-reward strategy emphasizes pricing and underwriting discipline to maintain profitability rather than focusing on revenue or market share. In regards to our loss ratio, it is a
measure of how we manage risk over the long term. We expect to produce, and for a long period of time have produced, lower than average loss ratios compared to the industry. However, because of our
service strategy as a workers' compensation specialist, our expense ratios may be higher compared to industry results. During periods of declining premiums and policy counts such as in 2009, these
high expense ratios coupled with an excellent loss ratio resulted in an underwriting loss. Although we are reducing costs as our business declines, we are maintaining and improving our ability to
provide services to our customers and ensuring that we will be in a position to grow our business when the economy and employment trends improve.

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Table of Contents

Workers'
compensation calendar year combined ratios, along with a reconciliation to the accident year combined ratios, were as follows:

Calendar Year

Favorable Prior Period Development

Accident YearYear Ended December 31, 2009Losses


49.3
%

1.0
%

50.3
%Loss adjustment expenses


19.8


0.9


20.7Underwriting and other operating expenses


43.3





43.3Policyholders' dividends





2.4


2.4Combined ratio


112.4
%

4.3
%

116.7
%Year Ended December 31, 2008Losses


31.9
%

11.1
%

43.0
%Loss adjustment expenses


14.1


1.9


16.0Underwriting and other operating expenses


38.0





38.0Policyholders' dividends


2.0





2.0Combined ratio


86.0
%

13.0
%

99.0
%Year Ended December 31, 2007Losses


20.7
%

13.2
%

33.9
%Loss adjustment expenses


13.1


2.2


15.3Underwriting and other operating expenses


33.3





33.3Policyholders' dividends


(0.1
)

2.0


1.9Combined ratio


67.0
%

17.4
%

84.4
%


The major factors contributing to the 26.4 percentage point increase in the calendar year combined ratio in 2009 of 112.4% compared to 2008
of 86.0% are as follows:

The
major factors contributing to the 19.0 percentage point increase in the calendar year combined ratio in 2008 of 86.0% compared to 2007 of 67.0% are as
follows:

The
2007 and 2008 loss ratios were exceptionally low in comparison to our long-term experience because of the favorable impacts caused by the California and Florida
legislative reforms. Although our 2009 loss ratio increased from 2008, it is consistent with our long-term history and continues to be an excellent result in comparison to historical
industry trends and current industry estimates. Accident year loss ratios trended up each year primarily because of increasing average cost of claims. Expense ratios increased primarily due to the
decline in premiums.

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Workers'
compensation premiums in-force, number of policies in-force and insured payrolls in California and outside of California are shown in the following
table. Premiums in-force is a measure of the amount of premiums billed, or to be billed, on all unexpired policies at the date shown; and insured payroll is an indicator of exposure.

California

Outside California

Total(Dollars in millions)

Premiums in-force

Policies in-force

Insured payrolls

Premiums in-force

Policies in-force

Insured payrolls

Premiums in-force

Policies in-force

Insured payrollsDecember 31,2009

$
267.9


16,000

$
6,293.9

$
188.3


13,600

$
9,613.5

$
456.2


29,600

$
15,907.42008


304.5


19,600


7,133.2


251.7


14,900


10,838.9


556.2


34,500


17,972.12007


359.3


22,100


8,108.8


310.8


16,200


11,875.7


670.1


38,300


19,984.52006


501.2


24,600


9,487.4


332.8


16,600


11,744.4


834.0


41,200


21,231.8


The table above reflects declines in premiums in-force, number of policies in-force and insured payrolls both in and
outside California. The following trends affected our workers' compensation business:

To
the extent that payroll levels on in-force policies continue to decline as a result of the recession or increase as the economy recovers, our actual premiums earned will
be less or more than the amount implied by premiums in-force.

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Loss Reserves

Loss reserves are our largest liability and were as follows:

December 31,(Dollars in thousands)

2009

2008Workers' compensation segment:Unpaid losses and loss adjustment expenses

$
1,152,628

$
1,229,561Less: Receivable from reinsurers for unpaid losses


237,612


268,996Unpaid losses and loss adjustment expenses,
net of reinsurance

$
915,016

$
960,565Reinsurance segment:Unpaid losses and loss adjustment expenses, gross and net of reinsurance receivable

$
38,476

$
45,025Total:Unpaid losses and loss adjustment expenses

$
1,191,104

$
1,274,586Less: Receivable from reinsurers for unpaid losses


237,612


268,996Unpaid losses and loss adjustment expenses,
net of reinsurance

$
953,492

$
1,005,590


When losses are reported to us, we establish, individually, estimates of the ultimate cost of the claims, known as "case reserves." These case
reserves are continually monitored and revised in response to new information and for amounts paid. In estimating our total loss reserves we have to make provisions for two types of loss development.
At the end of any calendar period there are a number of claims that have not yet been reported, but will arise out of accidents that have already occurred. These are referred to in the insurance
industry as incurred but not reported ("IBNR") claims and our loss reserves contain an estimate for IBNR claims. In addition to this provision for late reported claims, we also have to estimate, and
make provision for, the extent to which the case reserves on known claims may develop. These types of reserves are referred to in the insurance industry as "bulk" reserves. Our loss reserves make
provision for both IBNR and bulk reserves in total, but not separately.

At
December 31, 2009 and 2008, IBNR and bulk reserves included in loss reserves, net of reinsurance recoverables, were as follows:

December 31,(Dollars in thousands)

2009

2008Workers' compensation segment

$
197,034

$
212,651Reinsurance segment


11,012


10,276Total IBNR & bulk reserves

$
208,046

$
222,927


Loss reserves are estimates and are inherently uncertain; they do not and cannot represent an exact measure of ultimate liability. Accordingly, as
we receive new information and update our assumptions over time regarding the ultimate liability, our loss reserves may prove to be inadequate to cover our ultimate actual losses or they may prove to
exceed the ultimate amount of our actual losses. We perform a comprehensive review of our loss reserves at the end of every quarter. Estimating loss reserves is a complex process that involves a
combination of actuarial techniques and management judgment to establish the most reasonable estimate of loss reserves. Because we have a long history in

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the
workers' compensation business, particularly in California, we give weight to our own data as well as external information in determining our loss reserve estimates.

The
following table shows the favorable (unfavorable) one-year loss reserve development for loss reserves for each of the periods shown, as well as the loss reserve
development as a percent of loss reserves, net of reinsurance, established at the end of the preceding year. The one-year loss reserve development is the change recorded in the calendar
year for the estimate of the loss reserves established at the end of the preceding year and reflects a cumulative adjustment to estimates for all accident years.

One-Year Loss Development
Favorable (Unfavorable)% of Loss
Reserves
Established
at End of
Preceding Year(Dollars in thousands) Calendar Year

Workers' Compensation Segment

Reinsurance Segment

Total2009

$
8,991

$
87

$
9,078


0.9
%2008


78,896


(788
)

78,108


6.92007


113,355


(3,554
)

109,801


8.4


Favorable development of our workers' compensation loss reserves reflects management's and our actuaries' assessment of ultimate loss trends and
loss reserve estimates after considering all relevant data, including favorable paid loss trends as a result of the California and Florida legislative reforms, the reduction in the number of
California expensive claims relative to the total number of claims, as well as increasing average cost of claims in recent accident years. The 2009 favorable development is principally for the 2005
and 2006 accident years due to the reduction in paid and incurred trends for prior accident years that occurred in the fourth quarter 2009. We believe our loss reserve estimates as
of December 31, 2009 are adequate; however, we cannot predict the amount or timing of future loss reserve development, whether favorable or unfavorable.

Further
information about our loss reserve estimates and the favorable (unfavorable) development over the past ten years is included in Item 1. "Business" beginning on page 12.

Discussed
below are the principal uncertainties considered, the actuarial estimation process used, the role of management and recent trends and new information considered in establishing
our workers' compensation loss reserve estimates.



In our workers' compensation business the large majority of claims are reported to us promptly and therefore, as of the balance sheet
date, the number of IBNR claims is relatively insignificant. The greater part of the challenge in estimating our loss reserves is associated with estimating ultimate loss costs across a population of
claims for each accident year. The principal uncertainty in our workers' compensation loss reserve estimates at this time is the trend of increasing claim costs, particularly medical. The cost trend
is the year over year increase (or decrease) in average claim costs. Medical costs are approximately 65% of our total loss costs. In estimating loss reserves, our actuaries consider medical costs by
evaluating longer term trends. During the accident years just prior to the legislative reforms (1998 - 2002), we experienced double-digit medical cost increases. During 2003
and 2004, reforms enacted in Florida and California provided both immediate medical cost reductions and more control over future medical costs. These reforms included reductions in the medical fee
schedules, provision for medical networks and establishment of medical treatment guidelines. Our loss estimates for these two years reflect an average 6% per year decrease in medical costs. For the
accident years following the reforms we are experiencing a return to increasing medical costs and our loss reserve estimates reflect an average 8% per year increase in medical costs for
2005 - 2009. If the average

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annual
medical cost trend for each of the accident years 2005 - 2009 were all increased or all decreased by one, two and three percentage points in each year, our loss
reserve estimates at December 31, 2009 would change by approximately $27 million, $54 million and $81 million, respectively, or 3%, 6% and 9%, of the December 31,
2009 loss reserves, net of reinsurance, respectively. Our premium rates are established based on actuarial and business judgments regarding claim cost trends, principally medical. During the reform
years, we reduced our premium rates based on the expected decrease in claim costs combined with the other benefits of the reforms. Due to increasing claim costs including medical, we increased our
California premium rates 4.0% effective January 1, 2009, 4.0% effective July 1, 2009 and an additional 2.7% effective January 1, 2010.

Additional
uncertainties considered in estimating ultimate loss costs include the ultimate number of expensive claims and the length of time required to settle long-term,
expensive claims. Expensive claims are those involving permanent partial disability ("PPD") of an injured worker and are paid over many years. The ultimate costs of expensive claims are difficult to
estimate because of such factors as the on-going and possibly increasing need for medical care, length of disability, life expectancy and changes in legal decisions and legislation. Prior
to the reforms, these expensive claims were approximately 20% of all claims in California, but contributed 90% of the total costs. In the years immediately following the reforms, these claims were
reduced to about 14% of all claims and 85% of total costs; however, in recent accident years we are experiencing modest annual increases in the proportion of expensive claims to total claims.



Our actuaries produce a point estimate for workers' compensation loss reserves using the results of various methods of estimation. Our
actuaries prepare reserve estimates for all accident years using our own historical claims data and many of the common actuarial methodologies for estimating loss reserves, such as paid loss
development methods, incurred loss development methods, Bornhuetter-Ferguson indications and claim count methods. The actuarial point estimate is based on a selection of the results of these various
methods depending upon both the age of the accident year and the geographic state of the injury. For mature accident years, all of the methods produce very similar loss estimates, and our actuarial
point selections are based upon incurred loss development methods because our actuaries believe this most accurately reflects the required reserves for the relatively few claims that remain open. For
accident year 2009, our actuarial estimate is based upon an average of the paid and incurred methods. Our actuaries review the cost trends implied by the point estimate to determine its
reasonableness.



Management reviews the actuarial point estimate each quarter, as well as all relevant information regarding medical cost trends, claim
payment trends and our settlement practices, and any judicial and administrative court decisions and legislative changes. Management has established a loss reserve estimate in the financial statements
that reflects the actuarial point estimate as its best estimate for loss reserves at December 31, 2009 and 2008.

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We believe it is appropriate to provide a comparison of our California results to the California workers' compensation industry results
because the amount of business we write is meaningful in relation to the California workers' compensation industry and we earn approximately 60% of our premiums from our California business. During
December 2009, the Workers' Compensation Insurance Rating Bureau ("WCIRB") made available its current estimate of California workers' compensation loss experience based on data through September 2009
as follows:

We
believe there are three key reasons that we have historically produced lower than average loss ratios than the workers' compensation industry:





We have exposure to asbestos losses in our workers' compensation segment which have not been material to results of operations or
financial condition. In our history, we have paid and closed 4,340 such asbestos-related workers' compensation claims for a total of $13.4 million or 0.2% of ultimate loss estimates. At
December 31, 2009, we had 304 such claims open with loss reserves of $3.4 million compared to our total workers' compensation loss reserves, net or reinsurance, of $915.0 million.

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Investments

Investments are the largest assets on our balance sheet. We invest the net cash flow from our operations and from our capital primarily
in fixed maturity securities. These investments provide a stable source of income over the long run; although, in the short run, changes in interest rates and our current investment strategies impact
the amount of investment income we earn and the market value of our portfolio.

Refer
to Exhibit 99.1 to this report for a listing of our available-for-sale investment portfolio as of December 31, 2009, including the securities'
identification numbers assigned in accordance with the Committee on Uniform Securities Identification Procedures ("CUSIP").

Our
internal investments department actively manages our investment portfolio to provide a stable source of income and preserve principal values whenever possible. For the most part, we
do not rely on external portfolio managers. We review the appropriateness and consistency of the fair values, which are affected primarily by changes in interest rates and changes in the credit
quality and liquidity of the companies in which we have invested or changes in general economic and market conditions. As of
December 31, 2009 and 2008, we did not have sub-prime mortgages, derivative strategies, credit default swaps or other credit-enhancement exposures. We do not engage in securities
lending.

Net
investment income and net realized gains (losses) on investments before tax were as follows:

Year Ended December 31,(Dollars in thousands)

2009

2008

2007Net investment income

$
85,514

$
94,027

$
114,863Net realized gains (losses) on investments


36,252


(18,507
)

20,353Income before tax from investments segment

$
121,766

$
75,520

$
135,216


The average annual yields on the investment portfolio were as follows:

Year Ended December 31,2009

2008

2007Before tax(1)


4.5
%

4.6
%

5.2
%After tax


2.9


3.0


3.4




Net investment income was lower each year primarily because of lower yields on short-term investments and an increase in
short-term investments in 2009. In addition, 2007 included a $7.3 million cash dividend on an equity security.

The
fair value of our available-for-sale investment portfolio improved by approximately $133.4 million before tax compared to December 31, 2008, or
$2.32 per share after tax. The net unrealized gain before tax at December 31, 2009 was $56.1 million, or $0.97 per share after tax, compared to a net unrealized loss of
$77.3 million at December 31, 2008, or $1.35 per share after tax. Our investment portfolio reflects our philosophy of diversification and high quality assets with a focus on compounding
interest over time. In the short term, investment income and the value of our investment portfolio will be affected by historically low interest rates, as well as the narrowing of credit spreads and a
large amount of short-term securities.

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During
2009, we increased the portfolio liquidity and reduced the maturity length of our portfolio. At December 31, 2009 and 2008, $737.3 million and $416.8 million,
respectively, of the investment portfolio was in fixed maturity securities, including short-term investments, maturing within two years. This represented 37% and 21%, respectively, of the
investment portfolio. The average maturity of the fixed maturity portfolio, including short-term investments, was approximately 3.0 and 4.5 years at December 31, 2009 and
2008, respectively. The duration of the fixed maturity portfolio, including short-term investments, was approximately 2.5 years and 3.5 years at December 31, 2009 and
2008, respectively.

Our
investment portfolio was comprised as follows:

December 31,2009

2008Fixed maturity securities


73
%

82
%Short-term investments


21


13Equity securities


3


2Other investments


3


3100
%

100
%


Other investments are comprised of interests in partnerships and limited liability companies managed by professionals and related to alternative
energy, investing and trading securities, privately-held educational investments and entertainment assets. These investments are recorded at cost if our ownership is minor and we do not
have significant operating and financial influence, otherwise the investments are recorded at our share of the net asset value. At December 31, 2009, the net asset values exceeded the carrying
values by approximately $10 million, which is not reflected in the carrying values of our investments or in our equity. Gains from the cost-based investments are recognized when we receive
distributions and impairments are recognized when we determine that an other-than-temporary impairment has occurred.

Our
fixed maturity and short-term investment portfolio was comprised of the following:

December 31,2009

2008Corporate bonds


69
%

66
%U.S. Treasury bills and notes


19


7Municipal bonds


9


11Commercial mortgage-backed securities


1GNMA securities(1)





10Commercial paper





5Other securities


2


1100
%

100
%




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Table of Contents



The following tables present the amortized cost and fair value of our fixed maturity securities, including short-term investments, by
credit rating categories as of December 31, 2009 and 2008:

(Dollars in thousands) Total Fixed Maturity Securities

Amortized
Cost

Fair
Value

Percent of
Total Fair
ValueDecember 31, 2009AAA

$
399,085

$
400,199


21
%AA


323,690


335,284


18A


541,194


563,562


30BBB


386,733


400,471


21Non-investment grade(1)


189,754


191,914


10Total

$
1,840,456

$
1,891,430


100
%December 31, 2008AAA

$
356,534

$
364,244


20
%AA


452,153


454,790


24A


617,987


599,740


33BBB


325,389


304,635


16Non-investment grade(1)


172,033


136,325


7Total

$
1,924,096

$
1,859,734


100
%


(1)Based
on ratings by the National Association of Insurance Commissioners.


The following table presents the average credit ratings, amortized cost and fair value of our municipal bonds included as a component of the AA
category in the table above:

(Dollars in thousands) Municipal Bonds

Average
Credit Rating

Amortized
Cost

Fair ValueDecember 31, 2009Insured by bond insurers(1)


AA

$
70,493

$
72,995Pre-refunded(2)


AA to AA+


26,839


28,444Uninsured


AA- to AA


64,047


66,074Total


AA

$
161,379

$
167,513December 31, 2008Insured by bond insurers(1)


AA+

$
130,486

$
128,638Pre-refunded(2)


AA to AA+


14,894


15,696Uninsured


AA to AA+


52,748


54,508Total


AA+

$
198,128

$
198,842


(1)Average
credit ratings of underlying issuers were AA- in 2009 and A+ to AA- in 2008.(2)Pre-refunded
municipal bonds in our portfolio are collateralized by investments in U.S. Government securities.


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We diversify our fixed maturity portfolio across a number of industries. The table below sets forth the amortized cost and fair values of fixed
maturity securities, including short-term investments, by industry as well as U.S. Government securities at December 31, 2009:

December 31, 2009(Dollars in thousands) Total Fixed Maturity SecuritiesAmortized Cost

Fair ValueU.S. Government

$
366,182


20
%
$
366,223


19
%Financial


233,042


13


238,300


13Insurance


183,326


10


188,645


10Municipal bonds


161,379


9


167,513


9Food and beverage


112,069


6


115,939


6Utilities


89,862


5


93,792


5Petroleum


85,232


5


88,647


5Communications


78,710


4


81,467


4Machinery


66,829


4


69,846


4Pharmaceuticals


59,158


3


62,379


3Hotels and Casinos


57,858


3


58,255


3Personal goods


53,355


3


54,997


3Entertainment


27,249


1


28,794


2Chemicals


21,403


1


21,788


1Other(1)


244,802


13


254,845


13Total

$
1,840,456


100
%
$
1,891,430


100
%


(1)Represents
industries comprising less than 1% of our fixed income portfolio.


The unrealized net gains (losses) on available-for-sale investments reported as a separate component of stockholders'
equity were as follows:

Fixed Maturity Securities,
Including Short-term
Investments

Equity Securities

Total(Dollars in thousands)

Before Tax

After Tax

Before Tax

After Tax

Before Tax

After TaxDecember 31, 2009

$
50,974

$
33,133

$
5,100

$
3,315

$
56,074

$
36,448December 31, 2008


(72,141
)

(46,893
)

(5,146
)

(3,345
)

(77,287
)

(50,238
)December 31, 2007


1,171


762


17,443


11,338


18,614


12,100


The fair values of our available-for-sale investments are determined using the market approach, which is based on prices
and other relevant information generated by market transactions involving identical or comparable assets. We use an independent pricing service as the primary source of our fair value measures. This
pricing service is a leading global provider of financial market data, analytics and related services to financial institutions, active traders and individual investors. For equity securities traded
in active markets, the independent pricing service obtains closing prices from major stock markets. For the majority of our fixed income securities, the independent pricing service provides values
generated by valuation models which use observable market inputs from various industry sources, including traded prices for both identical and comparable assets as reported by an
over-the-counter corporate bond market real-time price dissemination service. Considerable judgment is required in making assumptions used in such models, including
the selection of interest rates, default risk and recovery rates and volatility risk assumptions.

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To validate that the values obtained from the independent pricing service are reasonable estimates of fair value, we perform various quantitative and qualitative
procedures, including, but not limited to a review of approximately 20 valuations obtained from our pricing service each quarter. The securities selected for testing are based on values that vary
significantly from the previous week's values, or where values vary significantly from actual trade information or other observable market information. When variances occur that cannot be explained
internally, we challenge the prices with our independent pricing service. The pricing service responds to all challenges with either an affirmation or a change in their price. We review and validate
the basis for any affirmation in values.

To
validate the methodology and observable market inputs used by our pricing service, we perform various quantitative and qualitative procedures, including but not limited to:
1) a quarterly written confirmation from the independent pricing service regarding changes, if any, to its underlying valuation methodologies, and 2) a semi-annual analysis
of the inputs and recalculation and comparison to the outputs of the valuation models used by the independent pricing service for a minimum of 10 securities selected to provide an adequate
representation from each of our investment categories for each analysis period.

Based
on the validation procedures noted above, we did not identify any material discrepancies between our values and those provided by the independent pricing service, and we did not
adjust the prices provided by our independent pricing services as of December 31, 2009.

We
use mid-market quotes from well recognized market information sources as the basis for the fair value of highly liquid U.S. Government securities (includes U.S. Government
Treasury Notes and Bills). We also use market information sources and unadjusted non-binding quotes from broker-dealers to determine the fair value of a small number of our securities that
are not priced by our independent pricing service. As of December 31, 2009, we had three fixed income securities with fair values based on non-binding quotes obtained from
broker-dealers totaling $20.1 million. To validate that the values obtained from the broker-dealers are reasonable estimates of fair value, we confirm that the non-binding quotes
are based on proprietary models that use observable market inputs and trade information for similar securities. The fair values of certain privately held or thinly traded securities are determined
using internal analytical methods based on the best information available, including unobservable market data.

Investments
that we currently own could be subject to default by the issuer or could suffer declines in fair value that become other-than-temporary. We
continually assess the prospects for individual securities as part of our ongoing portfolio management, including the identification of other-than-temporary declines in fair
values. Our other-than-temporary assessment includes reviewing the extent and duration of declines in fair values of investments below the amortized cost basis, the seniority
and duration of the securities, historical and projected company financial performance, company-specific news and other developments, the outlook for industry sectors, credit ratings and
macro-economic changes, including government policy initiatives. For over eighteen years, we have consistently applied the presumption that an unrealized loss of 20% or more continuously for six
months or more is other-than-temporary, in addition to issuer specific events. Our adoption of the accounting guidance on "Recognition and Presentation of
Other-Than-Temporary Impairments" effective January 1, 2009 amended the determination of other-than-temporary impairments for debt securities,
but not for equity securities. For debt securities, the amount of an other-than-temporary impairment related to a credit loss or an impairment on a security we have the intent,
at the balance sheet date, to sell before recovery of our cost is recognized in earnings and reflected as a reduction in the cost basis of the security. The amount of an
other-than-temporary impairment on debt securities related to other factors is recorded consistent with changes in the fair value of all other
available-for-sale securities as a component of stockholders' equity in other comprehensive income (loss) with no change to the cost basis of the security. For equity
securities, an other-than-temporary impairment is recognized in earnings and reflected as a reduction in the cost basis of the security based on the extent and duration that
fair value is below cost, in addition to issuer specific events.

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At
December 31, 2009 and 2008, gross unrealized gains and losses in our fixed maturity, including short-term investments, and equity securities were as follows:

Unrealized(Dollars in thousands)

Gains

LossesDecember 31, 2009Fixed maturity securities, including short-term investments

$
54,895

$
(3,921
)Equity securities


5,219


(119
)Total unrealized gains (losses)

$
60,114

$
(4,040
)Percent of total investment portfolio at fair value


3.0
%

0.2
%December 31, 2008Fixed maturity securities, including short-term investments

$
30,277

$
(94,639
)Equity securities


1,680


(6,826
)Total unrealized gains (losses)

$
31,957

$
(101,465
)Percent of total investment portfolio at fair value


1.6
%

5.2
%


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Table of Contents

The table below sets forth information about securities with unrealized losses at December 31, 2009 and 2008:

(Dollars in thousands)

Fixed Maturity Securities, Including Short-term Investments(1)

Equity Securities

TotalDecember 31, 2009Securities with unrealized losses less than 20% of cost:Number of issues


41


6


47Fair value

$
309,946

$
763

$
310,709Unrealized losses


(3,921
)

(27
)

(3,948
)Securities with unrealized losses greater than 20% of cost for a continuous period of less than six months:Number of issues


none


1


1Fair value




$
254

$
254Unrealized losses





(92
)

(92
)Securities with unrealized losses greater than 20% of cost for a continuous period of six months or more:


none


none


noneTotal:Number of issues


41


7


48Fair value

$
309,946

$
1,017

$
310,963Unrealized losses


(3,921
)

(119
)

(4,040
)December 31, 2008Securities with unrealized losses less than 20% of cost:Number of issues


135


6


141Fair value

$
817,110

$
4,980

$
822,090Unrealized losses


(47,972
)

(408
)

(48,380
)Securities with unrealized losses greater than 20% of cost for a continuous period of less than six months:Number of issues


20


3


23Fair value

$
117,449

$
11,183

$
128,632Unrealized losses


(46,667
)

(6,418
)

(53,085
)Securities with unrealized losses greater than 20% of cost for a continuous period of six months or more:


none


none


noneTotal:Number of issues


155


9


164Fair value

$
934,559

$
16,163

$
950,722Unrealized losses


(94,639
)

(6,826
)

(101,465
)


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Table of Contents

We believe that our unrealized losses on individual fixed maturity and equity securities at December 31, 2009 are not material and are not
indicative of impaired values. We base this conclusion on our current understanding of the issuers of these securities. As of December 31, 2009, we have not made a decision to sell any of these
securities and we have adequate liquidity and will not be required to sell before recovery of their cost basis. It is possible that we could recognize future impairments on some securities we owned at
December 31, 2009 if future events, information and the passage of time cause us to determine that a decline in value is other-than-temporary.

We
may, from time to time, sell invested assets subsequent to the balance sheet date that we did not intend to sell at the balance sheet date. Conversely, we may not sell invested assets
that we asserted that we intended to sell at the balance sheet date. Such changes in intent are generally due to events occurring subsequent to the balance sheet date. The types of events that may
result in a change in intent include, but are not limited to, significant changes in the economic facts and circumstances related to the invested asset, significant unforeseen changes in liquidity
needs, or changes in tax laws or the regulatory environment.

The
scheduled maturity dates for fixed maturity securities, including short-term investments, with unrealized losses at December 31, 2009 are shown below. Actual
maturities may differ from those scheduled as a result of prepayments by the issuers.

(Dollars in thousands)

Unrealized
Losses

Fair ValueDue in 1 year or less

$
(66
)
$
81,590Due after 1 year through 5 years


(1,932
)

154,897Due after 5 years through 10 years


(1,266
)

57,741Due after 10 years


(657
)

15,718Total

$
(3,921
)
$
309,946


During 2009, net realized gains were reduced by $19.1 million of impairments on certain securities, with a fair value of
$19.6 million at the date of impairment, in accordance with our other-than-temporary impairments accounting policy discussed previously. These securities had unrealized
losses continually for six months prior to the impairments. Most of these securities, representing $17.2 million of the impairment charge, were sold during 2009 and we realized gains of
$1.7 million at the time of sale. At December 31, 2009, we owned only one impaired security with a credit-related impairment of $1.9 million for which the original
non-credit related loss recovered to an unrealized gain and is included in other comprehensive income. During 2008, net realized losses included $23.8 million of impairment losses
on certain securities, with a fair value of $16.5 million at the date of impairment, in accordance with our other-than-temporary impairments accounting policy at that
time. These securities had unrealized losses continually for six months or had issuer-specific credit and equity events prior to the impairment. All of these impaired securities were sold during 2008
and we realized
additional losses of $8.4 million at the time of sale. There were no other-than-temporary impairments in 2007.

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In addition to the other-than-temporary impairments included in net realized gains (losses), the following is a summary of losses realized
on the sale of securities, excluding short-term investments, for the periods shown reflecting the period of time that the security had been continuously in an unrealized loss position
preceding the sale:

Year Ended December 31,(Dollars in thousands)

2009

2008

2007Fixed maturity securities:Realized losses on sales

$
(4,694
)
$
(12,662
)
$
(4,289
)Fair value at the date of sale


177,838


499,831


608,325Number of securities sold


37


30


26Losses realized on securities with an unrealized
loss preceding the sale for:Less than 3 months

$
(251
)
$
(1,743
)
$
(1,201
)3-6 months


(551
)

(5,552
)6-12 months


(828
)

(2,042
)

(1,006
)Greater than 12 months


(3,064
)

(3,325
)

(2,082
)Equity securities:Realized losses on sales

$
(779
)
$
(8,888
)
$
(2,252
)Fair value at the date of sale


19,697


36,385


31,743Number of securities sold


11


22


13Losses realized on securities with an unrealized
loss preceding the sale for:Less than 3 months

$
(72
)
$
(2,697
)
$
(1,715
)3-6 months





(2,849
)

(375
)6-12 months


(233
)

(2,921
)

(162
)Greater than 12 months


(474
)

(421
)


Sales of investments at a loss result from ongoing portfolio management, and may reflect our response to changes in interest rates, changes in our
view of the prospects for an issuer or its industry, or changes in our views about appropriate asset concentrations and allocation. At the time we sold these investments at a loss, the sales were not
related to any liquidity needs.

Liquidity and Capital Resources

The primary needs in managing our liquidity are to ensure that there is adequate cash available in the insurance subsidiaries to pay
claims; and to ensure the holding company, Zenith National, has adequate cash to service our debt obligations and pay any dividends declared to our stockholders. The management of capital resources
ensures that there is adequate capital to operate our insurance business within the applicable requirements.



Our insurance subsidiaries generally create liquidity because insurance premiums are collected prior to disbursements for claims which
may take place many years after the collection of premiums. Collected premiums are invested prior to their use in such disbursements for claims, and investment income provides additional cash flow.
During 2009, we increased the investment portfolio liquidity and reduced the maturity length of the portfolio. At December 31, 2009 and 2008, short-term investments and fixed
maturity securities maturing within two years in the insurance subsidiaries were $646.1 million and $333.2 million, respectively. We expect to pay our obligations as they become due from
our liquid assets.

46

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Table of Contents

The
following is a summary of our net cash used in operating activities for the periods shown:

Year Ended December 31,(Dollars in thousands)

2009

2008

2007Net cash flow from workers' compensation business

$
(120,339
)
$
(17,516
)
$
81,688Net cash flow from assumed reinsurance business


(6,783
)

(14,256
)

(38,558
)Investment income received


90,557


84,283


91,993Interest and other expenses paid by parent


(12,018
)

(11,328
)

(7,025
)Income taxes refunded (paid)


26,538


(66,729
)

(138,282
)Net cash used in operating activities

$
(22,045
)
$
(25,546
)
$
(10,184
)


Net cash flows from our workers' compensation and assumed reinsurance businesses are non-GAAP financial measures that represent the
following on a pre-tax basis: premiums collected less losses, loss adjustment expenses, underwriting and other operating expenses paid. The net cash flows from the insurance operations, in
addition to investment income received, interest and other expenses paid by our parent company, and income taxes refunded or paid are included in net cash used in operating activities, the most
comparable GAAP financial measure.

Net
cash used in operations reflects primarily lower workers' compensation premiums year over year offset by income tax refunds in 2009 compared to income tax payments in 2008 and 2007.

Our
insurance subsidiaries are required to have securities on deposit for the protection of injured workers in accordance with various state laws and regulations, primarily in
California, our state of domicile. At December 31, 2009 and 2008, investments with a fair value of $1.0 billion and $1.3 billion, respectively, were on deposit to comply with such
regulations. In addition, California laws and regulations place various restrictions on the type and amounts of investments that may be made by our insurance subsidiaries.

Zenith
National requires cash to pay dividends declared to our stockholders, make interest and principal payments on our debt due 2028, fund operating expenses and, from time to time,
make capital contributions to Zenith Insurance. Such cash requirements are generally funded in the long run by dividends received from Zenith Insurance and financing activities by Zenith National.
Cash and short-term investments of Zenith National were $94.7 million and $82.4 million at
December 31, 2009 and 2008, respectively. Zenith National's available invested assets and other sources of liquidity are currently expected to be sufficient to meet its requirements for
liquidity in the short-term and long-term.

Our
insurance subsidiaries are subject to insurance regulations, which restrict their ability to distribute dividends. These restrictions are set forth in Note 12 to the
Consolidated Financial Statements. In 2010, Zenith Insurance has the ability to pay up to $97.9 million of dividends to Zenith National without prior approval of the California Department of
Insurance. Zenith Insurance paid dividends to Zenith National of $110.0 million, $95.0 million and $115.0 million in 2009, 2008, and 2007, respectively. The restrictions on the
payment of dividends have not had, and under current regulations are not expected to have, a material adverse impact on the ability of Zenith Insurance to pay dividends.

At
December 31, 2009, we had a $30.0 million revolving credit agreement with Bank of America, N.A. which will expire February 16, 2010. We do not currently plan to
renew this credit agreement because our current sources of liquidity are adequate.

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Stockholders' equity is primarily affected by the level of net income, payment of dividends and any fluctuations in the fair values of
our investments. Stockholders' equity was approximately $1 billion at December 31, 2009, 2008 and 2007.

The
following table provides a reconciliation of stockholders' equity per share to reflect the impact of net unrealized investment gains (losses) after tax:

December 31,(Per outstanding common share)

2009

2008

2007Stockholders' equity:Excluding unrealized gains (losses) on investments

$
27.28

$
28.77

$
28.60Unrealized gains (losses) on investments


0.97


(1.35
)

0.33Stockholders' equity

$
28.25

$
27.42

$
28.93Year Ended December 31,2009

2008

2007Cash dividends declared:Regular

$
2.00

$
2.00

$
1.84Extra


0.40


0.40


1.00Total

$
2.40

$
2.40

$
2.84


Stockholders' equity excluding unrealized gains (losses) on investments per share is a non-GAAP financial measure that represents
stockholders' equity per share after tax, but excludes the after tax impact of unrealized gains (losses) on available-for-sale investments. We provide this measure to assist in
understanding the impact of the volatility of the financial markets on our stockholders' equity per share. Stockholders' equity per share is the most comparable GAAP financial measure.

Stockholders'
equity per share before stockholders dividends of $2.40 increased by 12% from December 31, 2008 to December 31, 2009 reflecting primarily the increase in the
fair value of our available-for-sale investment portfolio. Annual return on average equity was 3.3% in 2009, compared to 8.9% and 22.9% in 2008 and 2007, respectively.

In
our insurance subsidiaries, cash and liquid investments are required to pay claims and expenses and the amount of capital in our insurance subsidiaries can determine how much premium
we can write. The principal sources of capital for the insurance subsidiaries are the earnings generated by the workers' compensation and investments segments and contributions of capital by Zenith
National. The amount of capital in our insurance subsidiaries is maintained relative to standardized capital adequacy measures such as risk-based capital. Risk-based capital is
used by regulators for financial surveillance purposes and by rating agencies to assign financial strength ratings to our insurance subsidiaries and ratings for the debt issued by Zenith National.
Insurance regulations require insurance companies to maintain capital at a minimum of 200% of regulatory risk-based capital. At December 31, 2009, our statutory capital of
$979.2 million was approximately 1,500% of regulatory risk-based capital, which was substantially above the required minimum.

In
2009, the rating agencies affirmed the financial strength of our insurance subsidiaries as follows: A.M. Best Company ("A.M. Best") at A (Excellent), Standard & Poor's
Rating Services ("S&P") at A- (Strong), Moody's Investors Service ("Moody's") at A3 (Good) and Fitch Ratings ("Fitch") at A (Strong). Our competitive position is partly determined by these
financial strength ratings and therefore we could be affected by a reduction in these ratings. We currently believe that the most influential of these ratings is the rating assigned by A.M.
Best. In the A.M. Best rating scheme,

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ratings
of B+ to A++ are considered "Secure" and ratings of B and below are considered "Vulnerable." If a reduction in our A.M. Best rating were to occur, we believe it could impact the amount
of business we could write in our workers' compensation segment. In addition to the assigned rating, these rating agencies also provide an accompanying rating outlook for the company. The rating
outlook is currently "stable" for the A.M. Best, S&P, Moody's and Fitch ratings.

From
time to time, we may make repurchases of our outstanding shares of common stock or outstanding debt. At December 31, 2009, we were authorized to repurchase up to 929,000
shares of our common stock at prevailing market prices pursuant to a share repurchase program authorized by our Board of Directors. Any purchases are discretionary and can be adequately funded from
our existing sources of liquidity. We have not repurchased any material amounts of our common stock under this repurchase program since 2001 and do not expect to repurchase common stock during 2010.

Inflation

Inflation rates may impact the financial statements and operating results in several areas. Changes in rates of inflation influence
interest rates, which in turn impact the market value of the investment portfolio and yields on new investments. Inflation also impacts the portion of losses and loss reserves that relates to hospital
and medical expenses and property claims and loss
adjustment expenses but not the portion of losses and loss reserves that relates to workers' compensation indemnity payments for lost wages, which are fixed by statute. Adjustments for inflationary
impacts are included as part of the continual review of loss reserve estimates. Actuarial account of increases or decreases in costs is considered in setting adequate workers' compensation premium
rates, and this is particularly important in the health care area, where hospital and medical inflation rates have historically exceeded general inflation rates. Operating expenses, including
payrolls, are impacted to a certain degree by the inflation rate.

Contractual Obligations and Contingent Liabilities

All of our outstanding financing obligations are included in the Consolidated Financial Statements and the accompanying Notes. There
are no liquidity or financing arrangements with unconsolidated entities or any off-balance sheet arrangements. Our available invested assets and other sources of liquidity are currently
expected to be sufficient to meet our short-term and long-term liquidity requirements.

The
table below sets forth the amounts of our contractual obligations, including interest payable, at December 31, 2009:

Payments Due by Period(Dollars in thousands)

Less than 1 year

1-3 years

3-5 years

More than 5 years

TotalLoss reserves

$
278,965

$
300,496

$
167,646

$
443,997

$
1,191,104Policyholders' dividends accrued


5,085


3,548








8,633Redeemable securities payable


5,002


10,004


10,004


128,523


153,533Operating lease commitments


8,065


9,656


3,640


497


21,858Total

$
297,117

$
323,704

$
181,290

$
573,017

$
1,375,128


Our loss reserves do not have contractual maturity dates and the exact timing of the payment of claims cannot be predicted with certainty.
However, based upon historical payment patterns, we have included an estimate of when we expect our loss reserves (without the benefit of any reinsurance recoveries) to be paid. We maintain a
portfolio of investments with varying maturities and a substantial

49

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amount
of short-term investments to provide adequate cash for the payment of claims. We expect to pay our obligations as they become due from our liquidity, and from our assets, if needed.

Our
contractual obligations under the outstanding redeemable securities payable are comprised of $95.0 million of interest payments over the next 20 years and
$58.5 million of principal payable in 2028.

Our
commitments and contingencies are disclosed in Note 11 to the Consolidated Financial Statements.

Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America
("GAAP") requires both the use of estimates and judgment relative to the application of appropriate accounting policies. Our accounting policies are described in the Notes to the Consolidated
Financial Statements, but we believe that the following matters are particularly important to an understanding of our financial statements because changes in these estimates or changes in the
assumptions used to make them could have a material impact on the results of operations, financial condition and cash flows.



Loss reserve estimates are inherently uncertain because the ultimate amount we pay for many of the claims we have incurred as of the
balance sheet date will not be known for many years. The impact of loss reserve developments on the results of operations in each of the years ended December 31, 2009, 2008 and 2007 is
discussed in the preceding "Workers' Compensation Segment" and "Loss Reserves" sections. Also included in the "Loss Reserves" section is a discussion of the principal uncertainties considered, the
actuarial estimation processes used, the role of management and recent trends and new information considered in establishing our workers' compensation loss reserves estimates.



The temporary differences between the tax and book bases of assets and liabilities are recorded as deferred income taxes. At
December 31, 2009 and 2008, Zenith recorded net deferred tax assets of $14.4 million and $70.5 million, respectively, including deferred tax assets of $36.6 million and
$35.9 million, respectively, attributable to the fact that the Internal Revenue Code requires property and casualty insurance companies to discount the tax deduction for loss reserves. We do
not discount loss reserves in our financial statements. We expect that the net deferred tax asset is fully recoverable because all future deductible amounts associated with temporary differences can
be offset by taxes previously paid and by anticipated future taxable income, including investment income. If this assumption were to change, any amount of the net deferred tax asset which we could not
expect to recover would be provided for as an allowance and would be reflected as an increase in income tax expense in the period in which it was established.



Our available-for-sale investment portfolio consists of fixed maturity and equity securities and
short-term investments, and is recorded at fair value. Fair values are determined using the market approach, which is based on prices and other relevant information generated by market
transactions involving identical or comparable assets. We use an independent pricing service as the primary source of our fair value measures. A small number of our securities are not priced by our
independent pricing services and we use non-binding quotes obtained from broker-dealers. The fair values of certain privately held or thinly traded securities are determined using internal
analytical methods based in the best information available, including unobservable market data. Valuation of securities is complex and

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requires
considerable judgment. During periods of market volatility, the valuations on certain securities may or may not reflect the values on actual trades at any point in time.



Investments that we currently own could be subject to default by the issuer or could suffer declines in fair value that become
other-than-temporary. We continually assess the prospects for individual securities as part of our ongoing portfolio management, including the identification of
other-than-temporary declines in fair values. Our other-than-temporary assessment includes reviewing the extent and duration of declines in fair values
of investments below the amortized cost basis, the seniority and duration of the securities, historical and projected company financial performance, company-specific news and other developments, the
outlook for industry sectors, credit ratings and macro-economic changes, including government policy initiatives. For debt securities, we determine whether a credit impairment has occurred by
estimating the present value of cash flows expected to be collected. Considerable judgment is required in determining estimated cash flows for any individual security and we use market observable data
as well as management judgment.

Recent Accounting Guidance

As of December 31, 2009, there were recently issued accounting guidance that we either implemented during the year or will
implement in future periods. None of this guidance had or is expected to have a material effect on our consolidated financial condition or results of operations. See Note 2 to the Consolidated
Financial Statements for a more complete summary.

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk of Financial Instruments

The fair value of the fixed maturity investment portfolio is exposed to interest rate risk  the risk of loss in
fair value resulting from changes in prevailing market rates of interest for similar financial instruments. However, we have the ability to hold fixed maturity securities to maturity. We rely on the
experience and judgment of senior management to monitor and mitigate the effects of market risk. We do not utilize hedges or derivative financial instruments to manage risks, nor do we enter into any
swap, forward or option contracts, but will attempt to mitigate our exposure through active portfolio management. The allocation among various types of securities is adjusted from time to time based
on market conditions, credit and liquidity conditions, tax policy, changes in interest rates, and other factors. In addition, we place the majority of our investments in high-quality,
liquid securities and limit the amount of credit exposure to any one issuer. We do not engage in securities lending. At December 31, 2009, we did not have sub-prime mortgages,
derivative strategies or other credit-enhancement exposures.

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The
table below provides information about our financial instruments for which fair values are subject to changes in interest rates. For fixed maturity securities, the table presents
fair values of investments held and weighted average interest rates on such investments by expected maturity dates. Such investments include corporate, municipal, mortgage-backed and U.S. Government
bonds as well as redeemable preferred stock. For our debt obligations, the table presents cash flows by expected maturity dates (including interest).

Expected Maturity Date(Dollars in thousands)

2010

2011

2012

2013

2014

Thereafter

TotalDecember 31, 2009Fixed maturity securities:Fixed rate

$
146,328

$
197,572

$
315,512

$
418,380

$
214,716

$
182,559

$
1,475,067Weighted average interest rate


1.4
%

2.0
%

3.1
%

3.5
%

4.3
%

6.5
%

3.5
%Short-term investments

$
416,363
















$
416,363Redeemable securities payable


5,002

$
5,002

$
5,002

$
5,002

$
5,002

$
128,523


153,533December 31, 2008Fixed maturity securities:Fixed rate

$
83,553

$
91,530

$
299,753

$
277,147

$
307,015

$
559,021

$
1,618,019Weighted average interest rate


3.4
%

6.6
%

4.9
%

6.3
%

5.6
%

7.6
%

6.2
%Short-term investments

$
241,715
















$
241,715Redeemable securities payable


5,002

$
5,002

$
5,002

$
5,002

$
5,002

$
133,525


158,535


As shown in the table above, during 2009 we increased our short-term investments and reduced the maturity length of our portfolio.
These changes reduce investment income in the short term but provide opportunities for increased income if and when interest rates increase.

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Audited Financial Statements as of December 31, 2009 and 2008 and for each of the three years
in the period ended December 31, 2009:



PageReport of Independent Registered Public Accounting Firm


53Consolidated Balance Sheets as of December 31, 2009 and 2008


54Consolidated Statements of Operations for the years ended
December 31, 2009, 2008 and 2007


55Consolidated Statements of Cash Flows for the years ended
December 31, 2009, 2008 and 2007


56Consolidated Statements of Stockholders' Equity and Consolidated
Statements of Comprehensive Income for the years ended December 31, 2009, 2008 and 2007


58Notes to Consolidated Financial Statements


59


The Following Financial Statement Schedules are filed in Item 15. of PART IV of this report:

PageSchedule I




Summary of Investments  Other than Investments in Related Parties


89Schedule II




Condensed Financial Information of Registrant (Parent Company)


90Schedule III




Supplementary Insurance Information


94Schedule IV




Reinsurance


95Schedule V




Valuation and Qualifying Accounts


95


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Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

In
our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, cash flows, stockholders' equity and comprehensive income present
fairly, in all material respects, the financial position of Zenith National Insurance Corp. and its subsidiaries (collectively, the "Company") at December 31, 2009 and December 31, 2008,
and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2009 in conformity with accounting principles generally accepted in the
United States of America. In addition, in our opinion, the financial statement schedules listed in the index appearing under Item 15 present fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2009, based on criteria
established inInternal ControlIntegrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
The Company's management is responsible for these financial statements and financial statement schedules, for maintaining effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting, included in Management's Report on Internal Control over Financial Reporting. Our responsibility is to express opinions on these
financial statements, on the financial statement schedules, and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with
the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included
performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A
company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures
that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

PricewaterhouseCoopers
LLP

Los
Angeles, California
February 10, 2010

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CONSOLIDATED BALANCE SHEETS

Zenith
National Insurance Corp. and Subsidiaries

December 31,(Dollars and shares in thousands)

2009

2008Assets:Investments:Fixed maturity securities:At fair value (amortized cost $1,424,359 in 2009 and $1,479,295 in 2008)

$
1,475,067

$
1,406,891At amortized cost (fair value $211,128 in 2008)





203,349Short-term investments, at fair value (amortized cost $416,097 in 2009 and $241,452 in 2008)


416,363


241,715Equity securities, at fair value (cost $50,875 in 2009 and $52,888 in 2008)


55,975


47,742Other investments


55,425


58,297Total investments


2,002,830


1,957,994Cash


14,843


10,478Accrued investment income


20,001


23,147Premiums receivable


8,901


14,815Reinsurance recoverables


254,481


285,269Deferred policy acquisition costs


5,461


7,274Deferred tax asset


14,425


70,469Income tax receivable





33,448Goodwill


20,985


20,985Other assets


96,317


102,143Total assets

$
2,438,244

$
2,526,022Liabilities:Unpaid losses and loss adjustment expenses

$
1,191,104

$
1,274,586Unearned premiums


33,994


45,226Policyholders' dividends accrued


8,633


37,253Redeemable securities payable


58,363


58,357Income tax payable


1,878Other liabilities


85,341


87,163Total liabilities


1,379,313


1,502,585Commitments and contingencies (see Note 11)Stockholders' equity:Preferred stock, $1 par value, 1,000 shares authorized; none issued or outstanding in 2009 and 2008Common stock, $1 par value, 100,000 shares authorized; issued 37,482 in 2009 and 45,019 in 2008; outstanding 37,482 in 2009 and 37,324 in 2008


37,482


45,019Additional paid-in capital


360,464


472,312Retained earnings


624,537


722,996Accumulated other comprehensive income (loss)


36,448


(50,238
)Treasury stock, at cost (7,695 shares in 2008) (see Note 12)





(166,652
)Total stockholders' equity


1,058,931


1,023,437Total liabilities and stockholders' equity

$
2,438,244

$
2,526,022


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

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CONSOLIDATED STATEMENTS OF OPERATIONS

Zenith
National Insurance Corp. and Subsidiaries

Year Ended December 31,(Dollars in thousands, except per share data)

2009

2008

2007Revenues:Net premiums earned

$
463,081

$
607,327

$
738,532Net investment income


85,514


94,027


114,863Net realized gains (losses) on investments


36,252


(18,507
)

20,353Total revenues


584,847


682,847


873,748Expenses:Losses and loss adjustment expenses incurred


320,001


279,908


252,844Underwriting and other operating expenses:Policy acquisition costs


89,100


111,106


123,092Underwriting and other costs


118,372


127,353


130,776Policyholders' dividends


103


12,130


(1,090
)Interest expense


5,136


5,154


5,245Total expenses


532,712


535,651


510,867Income before tax


52,135


147,196


362,881Income tax expense


17,735


51,896


128,981Net income

$
34,400

$
95,300

$
233,900Net income per common share:Basic

$
0.91

$
2.56

$
6.31Diluted


0.91


2.55


6.27Net realized gains (losses) on investments, before taxOther-than-temporary impairment losses:Total impairment losses on fixed maturity securities

$
(19,424
)Non-credit portion of impairment losses on fixed maturity
securities recognized in other comprehensive income


8,762Other-than-temporary impairment losses on fixed maturity securities


(10,662
)
$
(13,224
)Other-than-temporary impairment losses on equity securities


(8,418
)

(10,606
)Other net realized gains


55,332


5,323

$
20,353Net realized gains (losses) on investments, before tax

$
36,252

$
(18,507
)
$
20,353


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

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CONSOLIDATED STATEMENTS OF CASH FLOWS

Zenith
National Insurance Corp. and Subsidiaries

Year Ended December 31,(Dollars in thousands)

2009

2008

2007Cash flows from operating activities:Premiums collected

$
475,515

$
615,993

$
756,123Investment income received


90,557


84,283


91,993Losses and loss adjustment expenses paid


(375,319
)

(398,162
)

(435,409
)Underwriting and other operating expenses paid


(234,242
)

(255,804
)

(279,415
)Interest paid


(5,094
)

(5,127
)

(5,194
)Income taxes refunded (paid)


26,538


(66,729
)

(138,282
)Net cash used in operating activities


(22,045
)

(25,546
)

(10,184
)Cash flows from investing activities:Purchases of investments:Fixed maturity securities available-for-sale


(1,039,551
)

(982,269
)

(493,906
)Fixed maturity securities held-to-maturity








(48,602
)Equity securities available-for-sale


(52,904
)

(114,505
)

(96,304
)Other investments


(6,147
)

(38,090
)

(14,069
)Proceeds from maturities and redemptions of investments:Fixed maturity securities available-for-sale


88,980


95,386


131,969Fixed maturity securities held-to-maturity





26,000


23,852Other investments


11,582


1,528


3,885Proceeds from sales of investments:Fixed maturity securities available-for-sale


1,245,470


768,957


276,103Equity securities available-for-sale


48,003


116,270


122,730Net (increase) decrease in short-term investments


(172,959
)

252,842


217,275Capital expenditures and other


(5,356
)

(7,043
)

(12,929
)Net cash provided by investing activities


117,118


119,076


110,004Cash flows from financing activities:Cash dividends paid to common stockholders


(90,717
)

(90,361
)

(100,734
)Excess tax benefit on stock-based compensation


9


376


341Proceeds from exercise of stock options








196Net cash used in financing activities


(90,708
)

(89,985
)

(100,197
)Net increase (decrease) in cash


4,365


3,545


(377
)Cash at beginning of year


10,478


6,933


7,310Cash at end of year

$
14,843

$
10,478

$
6,933


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

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CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

Zenith
National Insurance Corp. and Subsidiaries

Year Ended December 31,(Dollars in thousands)

2009

2008

2007Reconciliation of net income to net cash used
in operating activities:Net income

$
34,400

$
95,300

$
233,900Adjustments to reconcile net income to net cash used
in operating activities:Depreciation expense


8,119


8,376


9,451Net amortization (accretion)


1,734


(6,634
)

(20,912
)Net realized (gains) losses on investments


(36,252
)

18,507


(20,353
)(Increase) decrease in:Accrued investment income


3,501


(1,706
)

(1,989
)Premiums receivable


6,477


6,755


15,310Reinsurance recoverables


30,771


60,795


(110,394
)Deferred policy acquisition costs


1,813


2,264


3,079Net income taxes payable (receivable)


44,273


(16,034
)

(9,301
)(Decrease) increase in:Unpaid losses and loss adjustment expenses


(83,482
)

(178,784
)

(68,910
)Unearned premiums


(11,232
)

(16,724
)

(21,042
)Policyholders' dividends accrued


(28,620
)

(2,247
)

(17,572
)Accrued expenses


(2,905
)

(2,276
)

(12,827
)Other


9,358


6,862


11,376Net cash used in operating activities

$
(22,045
)
$
(25,546
)
$
(10,184
)


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

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CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

Zenith
National Insurance Corp. and Subsidiaries

Year Ended December 31,(Dollars in thousands, except per share data)

2009

2008

2007Preferred stock, $1 par value:


None


None


NoneCommon stock, $1 par value:Beginning of year

$
45,019

$
44,802

$
44,722Restricted stock vested


158


148


71Treasury stock retirement (see Note 12)


(7,695
)Conversion of Convertible Senior Notes payable





69Exercise of stock options








9End of year

$
37,482

$
45,019

$
44,802Additional paid-in capital:Beginning of year

$
472,312

$
464,932

$
459,103Recognition of stock-based compensation expense


5,455


5,995


5,223Excess tax (short-fall) benefit on stock-based compensation


(413
)

162


419Treasury stock retirement (see Note 12)


(116,890
)Conversion of Convertible Senior Notes payable





1,223Exercise of stock options








187End of year

$
360,464

$
472,312

$
464,932Retained earnings:Beginning of year

$
722,996

$
718,175

$
590,715Net income


34,400


95,300


233,900Cash dividends declared to common stockholders


(90,792
)

(90,479
)

(106,440
)Treasury stock retirement (see Note 12)


(42,067
)End of year

$
624,537

$
722,996

$
718,175Accumulated other comprehensive (loss) income:Beginning of year

$
(50,238
)
$
12,100

$
12,832Net change in unrealized losses (gains) on available-for-sale investments, net of tax and reclassification adjustment


86,005


(62,338
)

(732
)Net change in other-than-temporary impairments for which the credit related
portion was recognized in net realized gains, net of tax


681End of year

$
36,448

$
(50,238
)
$
12,100Treasury stock, at cost:Beginning of year

$
(166,652
)
$
(166,652
)
$
(166,652
)Treasury stock retirement (see Note 12)


166,652End of year

$


$
(166,652
)
$
(166,652
)Total stockholders' equity

$
1,058,931

$
1,023,437

$
1,073,357Cash dividends declared per common share

$
2.40

$
2.40

$
2.84Stockholders' equity per outstanding common share

$
28.25

$
27.42

$
28.93


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Zenith
National Insurance Corp. and Subsidiaries

Year Ended December 31,(Dollars in thousands)

2009

2008

2007Net income

$
34,400

$
95,300

$
233,900Other comprehensive income (loss), net of tax:Net change in unrealized losses (gains) on available-for-sale investments, net of tax


86,005


(62,338
)

(732
)Net change in other-than-temporary impairments for which the credit related
portion was recognized in net realized gains, net of tax


681Total other comprehensive income (loss)


86,686


(62,338
)

(732
)Comprehensive income

$
121,086

$
32,962

$
233,168


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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Basis of Presentation and Summary of Operations



The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in
the United States of America ("GAAP") and include Zenith National Insurance Corp. ("Zenith National") and its subsidiaries. All intercompany transactions and balances have been eliminated in
consolidation.



Zenith National is a holding company engaged, through its wholly-owned subsidiaries (primarily Zenith Insurance Company ("Zenith
Insurance")), in the workers' compensation insurance business, nationally. In September 2005, we exited the assumed reinsurance business; however, we will be paying our assumed reinsurance claims for
several years. The results of the reinsurance segment, principally consisting of changes to loss estimates, if any, and direct expenses, will continue to be included in the results of continuing
operations. In addition to the workers' compensation and reinsurance segments, we have an investments segment (see Note 15).



GAAP requires the use of assumptions and estimates in reporting certain assets and liabilities and related disclosures. Actual results
could differ from those estimates.



We evaluated subsequent events through the date and time the Consolidated Financial Statements were issued on February 10, 2010.



Certain prior year amounts in the accompanying Consolidated Financial Statements have been reclassified to conform to the current year
presentation.

Note 2. Summary of Accounting Policies

Investments

Our investments in fixed maturity and equity securities and short-term investments are classified into the following three
categories: 1) held-to-maturity  those securities which by their terms must be redeemed by the issuing company and that we have the positive intent
and ability to hold to maturity are reported at amortized cost; 2) trading  those securities that are held principally for the purpose of selling in the near term are
reported at fair value with unrealized gains and losses included in earnings; and 3) available-for-sale  those securities not classified as either
held-to-maturity or trading are reported at fair value with unrealized gains and losses excluded from earnings and reported in a separate component of stockholders' equity, net
of tax. There were no investments classified as held-to-maturity at December 31, 2009 and no investments classified as trading at December 31, 2009 and 2008. The
majority of held-to-maturity investments at December 31, 2008 were mortgage-backed securities issued by the Government National Mortgage Association ("GNMA") which were
reclassified to available-for-sale and sold during 2009 (see Note 3).

Other
investments are comprised of interests in partnerships and limited liability companies managed by professionals and related to alternative energy, investing and trading securities,
privately-held educational investments and entertainment assets. These investments are recorded at cost

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if
our ownership is minor and we do not have significant operating and financial influence, otherwise the investments are recorded at our share of the net asset value. At December 31, 2009, the
net asset values exceeded the carrying values by approximately $10 million, which is not reflected in the carrying values of our investments or in our equity. Gains from the cost-based
investments are recognized when we receive distributions and impairments are recognized when we determine that an other-than-temporary impairment has occurred.

Investments
that we currently own could be subject to default by the issuer or could suffer declines in fair value that become other-than-temporary. We
continually assess the prospects for individual securities as part of our ongoing portfolio management, including the identification of other-than-temporary declines in fair
values. Our other-than-temporary assessment includes reviewing the extent and duration of declines in fair values of investments below the amortized cost basis, the seniority
and duration of the securities, historical and projected company financial performance, company-specific news and other developments, the outlook for industry sectors, credit ratings and
macro-economic changes, including government policy initiatives. For over eighteen years, we have consistently applied the presumption that an unrealized loss of 20% or more continuously for six
months or more is other-than-temporary, in addition to issuer specific events. Our adoption of the accounting guidance on "Recognition and Presentation of
Other-Than-Temporary Impairments" effective January 1, 2009 amended the determination of other-than-temporary impairments for debt securities,
but not for equity securities. For debt securities, the amount of an other-than-temporary impairment related to a credit loss or an impairment on a security we have the intent,
at the balance sheet date, to sell before recovery of our cost is recognized in earnings and reflected as a reduction in the cost basis of the security. The amount of an
other-than-temporary impairment on debt securities related to other factors is recorded consistent with changes in the fair value of all other
available-for-sale securities as a component of stockholders' equity in other comprehensive income (loss) with no change to the cost basis of the security. For equity
securities, an other-than-temporary impairment is recognized in earnings and reflected as a reduction in the cost basis of the security based on the extent and duration that
fair value is below cost, in addition to issuer specific events.

In
determining whether a credit loss existed on debt securities with other-than-temporary impairments as of each balance sheet date, we estimated the present value of cash flows expected
to be collected from the fixed maturity securities. Considerable judgment is required in determining estimated cash flows for any individual security and we use market observable data as well as
management judgment. The cash flow estimates incorporate our assumption regarding the probability of default, and the timing and amount of recoveries associated with a default. We develop our
estimates using information based on market observable data such as industry analysts' reports and forecasts, analysis of investment yield spreads to comparable peer company securities where there are
no indications of credit related
impairments, analysis of credit default swap spreads and other data relevant to the collectability of a security.

Investment
income is recorded when earned. Realized capital gains and losses are calculated based on the cost of securities sold which is determined by the "identified cost" method.

Cash

Cash includes demand deposits with financial institutions.

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Recognition of Property-Casualty Revenue and Expense



The consideration paid for an insurance policy is generally known as a "premium." Premiums billed to and paid by our policyholders are
the revenues attributable to our workers' compensation segment. Premiums are billed and collected according to policy terms, predominantly in the form of installments during the policy period.
Premiums are earned pro-rata over the terms of the policies. Billed premiums applicable to the unexpired terms of policies in-force are recorded in the accompanying
consolidated balance sheets as a liability for unearned premiums. Premiums exclude policyholder surcharges primarily attributable to California business, which generally represent state insolvency
fund assessments. These insolvency fund assessments are generally paid in advance to the various state agencies and subsequently collected from policyholders in the form of a surcharge, and do not
affect our results of operations.



Workers' compensation premiums are determined based upon the payroll of the insured, the applicable premium rates and, where
applicable, an experience-based modification factor and a debit or credit applied by our underwriters based upon individual risk characteristics. An audit of the policyholders' records is conducted
after policy expiration to make a final determination of applicable premiums. Included with premiums earned is an estimate for the impact of final audit premiums. We can estimate this adjustment
because we keep track, by policy, of how much additional premium is billed or refunded in final audit invoices as a percentage of the original estimated amount that was billed. We use the historical
percentage and current trends to estimate the probable amount to be billed or refunded as of the balance sheet date. At times, such as 2009 during a recessionary period where payrolls are declining
during policy periods, we may have billed more premium than is actually owed and we establish a liability for the estimated amount to be refunded to our policyholders. Included in other liabilities
was $4.2 million at December 31, 2009 for estimated amounts to be refunded to our policyholders. Included in premiums receivable was $2.2 million at December 31, 2008 for
estimated additional amounts to be billed to our policyholders.

Any
amounts receivable for billed premiums are charged-off if they are submitted to our in-house legal collections department. An estimate of amounts that are
likely to be charged-off is established as an allowance for doubtful accounts as of the balance sheet date. The estimate is comprised of any specific accounts that are past due and are
considered probable to be charged-off and a provision against remaining accounts receivable based on historical charge-off data. Premiums receivable are reported net of an
allowance for estimated uncollectible premium amounts which was $620,000 and $550,000 at December 31, 2009 and 2008, respectively.

We
have written a relatively small number of workers' compensation policies that are retrospectively rated. Under this type of policy, subsequent to policy expiration, the policyholder
may be entitled to a refund or may owe additional premium based on the amount of losses sustained under the policy. These retrospective premium adjustments are limited in the amount by which they
increase or decrease the standard amount of premium applicable to the policy. We can estimate these retrospective premium adjustments because we know the underlying loss experience of the policies
involved. The estimated liability for return of premiums under retrospectively rated workers' compensation policies included in unearned premiums was $1.5 million and $4.1 million at
December 31, 2009 and 2008, respectively.

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Reinsurance contracts covering catastrophe losses were customarily written to provide reinsurance for losses associated with one
catastrophic event with a provision to reinstate the contract for the unexpired term of the original contract. An additional premium, called a reinstatement premium, is due in consideration of the
reinstatement which gets adjusted and earned as losses develop over time.



Losses and loss adjustment expenses incurred in the accompanying consolidated statements of operations include provisions for the
amount we expect to ultimately pay for all reported and unreported claims for the applicable periods. Loss adjustment expenses are the expenses applicable to the process of administering, settling and
investigating claims, including legal expenses.

Estimates
of losses from environmental and asbestos related claims are included in overall loss reserves and to date have not been material.



The liabilities for unpaid losses and loss adjustment expenses ("loss reserves") in the accompanying consolidated balance sheets are
estimates of the unpaid amounts that we expect to pay for the ultimate cost of reported and unreported claims as of the balance sheet date. Loss reserves are estimates and are inherently uncertain;
they do not and cannot represent an exact measure of ultimate liability. We perform a comprehensive review of our loss reserves at the end of every quarter. Estimating loss reserves is a complex
process that involves a combination of actuarial techniques and methods and management judgment to establish the most reasonable estimate of loss reserves. Any resulting adjustments to loss reserves
are reflected in our Consolidated Statements of Operations in the period in which the change is made.

When
losses are reported to us, we establish individual estimates of the ultimate cost of the claims, known as "case reserves." These case reserves are continually monitored and revised
in response to new information and for amounts paid. Our actuaries use this information about reported claims in
some of their estimation techniques. In estimating our total loss reserves, we make provision for two types of loss development. At the end of any calendar period, there are a number of claims that
have not yet been reported but will arise out of accidents that have already occurred. These are referred to in the insurance industry as incurred but not reported ("IBNR") claims and our loss
reserves contain an estimate for IBNR claims. In addition to this provision for late reported claims, we also have to estimate, and make provision for, the extent to which the case reserves on known
claims may also develop. These types of reserves are referred to in the insurance industry as "bulk" reserves. Our loss reserves make provision for both IBNR and bulk reserves in total, but not
separately.

The
principal uncertainty in our workers' compensation loss reserve estimates at this time is the trend of increasing claim costs, particularly medical. In estimating loss reserves, our
actuaries consider medical costs by evaluating longer term trends. The additional uncertainties considered in estimating ultimate loss costs include the ultimate number of expensive cases and the
length of time required to settle long-term expensive cases. Expensive claims are those involving permanent disability of an injured worker and are paid over many years. The ultimate costs
of expensive claims are difficult to estimate because of such factors as the on-going and possibly increasing need for medical care, length of disability, life expectancy and benefits for
dependents.

We
believe our loss reserve estimates are adequate. However, the ultimate losses will not be known with any certainty for several years. We assume that increasing medical cost trends
will continue and will impact our long-term claim costs and loss reserves. We will continue to evaluate our loss reserve estimates every quarter to reflect the most current data and
judgments.

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Policy acquisition costs, consisting of agent commissions, premium taxes and certain other underwriting costs that vary with, and are
primarily related to, the production of new or renewal business are deferred and amortized as the related premiums are earned.

A
premium deficiency is recognized if the sum of expected claims costs, claims adjustment expenses, expected dividends to policyholders, unamortized acquisition costs and policy
maintenance costs exceeds the remaining premiums. A premium deficiency would first be recognized by charging any unamortized acquisition costs to expense to the extent required to eliminate the
deficiency. If the premium deficiency were greater than unamortized acquisition costs, a liability would be accrued for the excess deficiency. We do not consider anticipated investment income when
determining if a
premium deficiency exists. Our estimates indicate that there was no premium deficiency at December 31, 2009 or 2008.



Most of our workers' compensation policies are non-participating; however, we issue certain policies in which the
policyholder may participate in favorable claims experience through a dividend. An estimated provision for workers' compensation policyholders' dividends is accrued as the related premiums are earned.
Such dividends do not become a fixed liability unless and until declared by the respective Boards of Directors of our insurance subsidiaries. The dividend to which a policyholder may be entitled is
set forth in the policy and is related to the amount of losses sustained under the policy. Dividends are calculated after policy expiration (usually at 6 months and 18 months after
expiration). We are able to estimate any liability we may have because we know the underlying loss experience of the policies we have written with dividend provisions and can estimate future dividend
payments from the policy terms.

In
addition, Florida statutes require payment of additional dividends to policyholders pursuant to a formula based on underwriting results. At December 31, 2008, we accrued
approximately $20 million for Florida dividends payable for prior accident years. During 2009, we reduced our estimated Florida policyholders' dividends for prior accident years by
$11.1 million based on our actual filing with the Florida Department of Insurance and paid the remaining amount to our policyholders.



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 insurance
companies doing business in their states. Various mechanisms exist in some of these states for assessed insurance companies to recover these assessments. Upon the insolvency of an insurance company,
the Guarantee Funds become primarily liable for the payment of the insolvent company's liabilities to policyholders. The declaration of an insolvency establishes the presumption that assessments by
the Guarantee Funds are probable. We write workers' compensation insurance in many states in which unpaid workers' compensation liabilities are the responsibility of the Guarantee Funds and have
received, and expect to continue to receive, Guarantee Fund assessments, some of which may be based on a certain amount of the premiums we have already earned as of December 31, 2009.

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We
recorded an estimate of $6.4 million and $6.6 million for our expected liability at December 31, 2009 and 2008, respectively, for Guarantee Fund assessments. We
did not incur material amounts of estimated expense for Guarantee Fund assessments in 2009, 2008 and 2007. We expect that we will continue to receive and accrue Guarantee Fund assessments; and the
ultimate impact of such assessments will depend upon the amount and timing of the assessments and of any recoveries to which we are entitled.

Reinsurance Ceded

In the ordinary course of business and in accordance with general insurance industry practices, we purchase excess of loss reinsurance
to protect us against the impact of large, irregularly occurring losses in the workers' compensation segment. Such reinsurance reduces the magnitude of such losses on net income and the capital of
Zenith Insurance. Reinsurance makes the assuming reinsurer liable to the ceding company to the extent of the reinsurance. It does not, however, discharge the ceding company from its primary liability
to its policyholders in the event the reinsurer is unable to meet its obligations under such reinsurance agreement. We monitor the financial condition of our reinsurers and do not believe that we are
currently exposed to any material credit risk through our ceded reinsurance arrangements because most of our reinsurance is recoverable from large, well-capitalized reinsurance companies.

Premiums
earned and losses and loss adjustment expenses incurred are stated in the accompanying Consolidated Statements of Operations after deduction of amounts ceded to reinsurers.
Balances due from reinsurers on unpaid losses, including an estimate of such recoverables related to reserves for IBNR losses, are reported as assets and are included in reinsurance recoverables even
though amounts due on unpaid losses and loss adjustment expenses are not recoverable from the reinsurer until such losses are paid. Receivable from reinsurers on unpaid losses and loss adjustment
expenses amounted to $245.3 million and $279.4 million at December 31, 2009 and 2008, respectively.

In
1998, Zenith Insurance acquired substantially all of the assets and certain liabilities of RISCORP, Inc. and certain of its subsidiaries (collectively, "RISCORP") related to
its workers' compensation business. Also, in 1998, we entered into an aggregate excess of loss reinsurance agreement which provides ceded reinsurance for unpaid losses assumed by Zenith Insurance from
RISCORP up to $50.0 million in excess of $182.0 million. Receivable from reinsurers on unpaid losses and loss adjustment expenses at December 31, 2009 and 2008 includes
recoverable under such insurance of $10.6 million and $13.0 million, respectively, which is fully secured by an investment grade security held in a trust account.
The deferred benefit associated with such reinsurance was $4.2 million and $4.5 million at December 31, 2009 and 2008, respectively.

Properties and Equipment

Properties and equipment used in operations, including certain costs incurred to develop and obtain computer software, are capitalized
and carried at cost less accumulated depreciation. Depreciation is calculated on a straight-line basis using the following useful lives: buildings  10 to
40 years; and other property and equipment  3 to 10 years. Expenditures for maintenance and repairs are charged to operations as incurred. Additions and improvements
to buildings and other fixed assets are capitalized and depreciated over the useful lives of the properties and equipment. Upon disposition, the asset cost and related depreciation are removed from
the accounts and the resulting gain or loss is included in income.

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Intangible Assets

At December 31, 2009 and 2008, goodwill from acquisitions was $21.0 million, of which $19.0 million is included in
assets of the workers' compensation segment with the remaining $2.0 million included in parent assets. Other than goodwill, we had no intangible assets at December 31, 2009 or 2008. We
test goodwill for impairment annually as of December 31 and more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit
below its carrying amount. A reporting unit is an operating segment or a unit one level below the operating segment. The impairment tests include a comparison of the carrying amount of goodwill to the
present value of future cash flows of both our workers' compensation segment and our Florida workers' compensation business operation, a reporting unit. The fair value, estimated based on Zenith
National's common stock price and present value techniques, of the reporting unit exceeded its carrying amount as of December 31, 2009, therefore, goodwill of the reporting unit is not
considered impaired.

Restricted Stock

Under a restricted stock plan approved by our stockholders ("Restricted Stock Plan"), non-employee Directors and key
employees are awarded shares of Zenith National's common stock with restricted ownership rights. Shares granted to non-employee Directors vest on each of the first three anniversaries of
the grant date in equal amounts. Shares granted to employees prior to 2009 vest 50% on the second anniversary of the grant date and 50% on the fourth anniversary of the grant date. Beginning in 2009,
restricted stock awards to key employees can vest either based on the passage of time or based on performance criterion. The performance-based awards will vest only upon the determination that the
average combined ratio for our workers' compensation segment for the three calendar years following the date of grant is at least five percentage points below the average statutory combined ratio for
the workers' compensation industry for the same period. Restricted stock is generally forfeited by employees who terminate employment prior to vesting.

The
fair value of restricted stock awards is measured using the closing price of Zenith National's common stock on the grant date. Compensation expense is recognized ratably over the
vesting period for time-based restricted stock awards. For performance-based awards, compensation expense is not recognized until it is probable that the performance criteria will be met.
At that time, an expense for the pro-rated amount from the date of grant is recognized with the remaining amount recognized over the remaining vesting period of the awards.

Foreign Currency Translation

The fair value of any foreign investments in our investment portfolio includes a component to reflect the fair value in United States
dollars.

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Recent Accounting Guidance

We adopted the following accounting guidance in 2009, none of which had a material effect, if any, on our year-end
consolidated financial position or results of operations.



In April 2009, the Financial Accounting Standards Board ("FASB") issued guidance that requires entities to separate an
other-than-temporary impairment of a debt security into two components when there are credit related losses associated with the impaired debt security for which management
asserts that it does not have the intent to sell the security and it is more likely than not that it will not be required to sell the security before recovery of its cost basis. The amount of the
other-than-temporary impairment related to a credit loss is recognized in earnings and the amount of the other-than-temporary impairment related to
other factors is recorded in other comprehensive income (loss). This guidance was effective for periods ending after June 15, 2009, with early adoption permitted for periods ending after
March 15, 2009. We adopted this guidance effective January 1, 2009 (see Note 3). There were no impairments previously recognized on debt securities we owned at December 31,
2008; therefore, there was no cumulative effect adjustment to retained earnings or other comprehensive loss as a result of adopting this guidance (see Note 3).



In April 2009, the FASB issued guidance on "Determining Fair Value When Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions that are Not Orderly." Under this guidance, if an entity determines that there has been a significant decrease in the volume and level of activity
for the asset or the liability in relation to the normal market activity for the asset or liability (or similar assets or liabilities), then transactions or quoted prices may not accurately reflect
fair value. In addition, if there is evidence that the transaction for the asset or liability is not orderly, the entity shall place little, if any, weight on that transaction price as an indicator of
fair value. This guidance was effective for periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. We adopted this guidance effective
January 1, 2009.



In April 2009, the FASB issued guidance that requires disclosures about fair value of financial instruments in interim and annual
financial statements which was effective for periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. We adopted this guidance effective
January 1, 2009 (see Note 4).



In June 2008, the FASB issued guidance that clarifies whether instruments, such as restricted stock, granted in share-based payments
are participating securities prior to vesting. Such participating securities must be included in the computation of earnings per share under the two-class method. It also requires
companies to treat unvested share-based payment awards that have non-forfeitable rights to dividend or dividend equivalents as a separate class of securities in calculating earnings per
share. This guidance was effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008, and required a company to retrospectively adjust its
earnings per share data (see Note 13).

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In May 2009, the FASB issued guidance that is consistent with existing auditing standards in defining subsequent events as events or
transactions that occur after the balance sheet date but before the financial statements are issued or are available to be issued. This guidance was effective for periods ending after June 15,
2009.



In June 2009, the FASB issued guidance that established the FASB Accounting Standards Codification as the single source of
authoritative accounting principles in the preparation of financial statements in conformity with GAAP. This guidance also explicitly recognized rules and interpretive releases of the Securities and
Exchange Commission ("SEC") under federal securities laws as authoritative GAAP for SEC registrants. This guidance was effective for financial statements issued for periods ending after
September 15, 2009.



In September 2009, the FASB issued updated guidance for the fair value measurement of alternative investments such as hedge funds,
private equity funds, and venture capital funds. This guidance allows companies to determine the fair value of such investments using net asset value ("NAV") as a practical expedient if the fair value
of the investment is not readily determinable and the investee entity issues financial statements in accordance with measurement principles for investment companies. Use of this practical expedient is
prohibited if it is probable the investment will be sold at something other than NAV. This guidance also requires new disclosures for each major category of alternative investments and was effective
for financial statements issued in the period ending after December 15, 2009.

The
following accounting guidance will be adopted in 2010, and is not expected to have a material impact, if any, on our consolidated financial position or results of operations.



In June 2009, the FASB issued guidance which 1) replaces the quantitative-based risks and rewards calculation for determining
whether an enterprise is the primary beneficiary in a variable interest entity with an approach that is primarily qualitative; 2) requires ongoing assessments of whether an enterprise is the
primary beneficiary of a variable interest entity; and 3) requires additional disclosures about an enterprise's involvement in variable interest entities. This guidance is effective for
financial statements issued for fiscal years beginning after November 15, 2009.

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Note 3. Investments

The cost or amortized cost, fair value and carrying value of available-for-sale investments at
December 31, 2009 and held-to-maturity and available-for-sale investments at December 31, 2008 were as follows:

Gross
UnrealizedCost or
Amortized
CostFair
Value

Carrying
Value(Dollars in thousands)

Gains

(Losses)December 31, 2009Available-for-sale investmentsFixed maturity securities:Corporate debt

$
1,218,304

$
47,809

$
(3,211
)
$
1,262,902

$
1,262,902State and local government debt


161,379


6,309


(175
)

167,513


167,513Redeemable preferred stocks


26,853


477


(477
)

26,853


26,853Commercial mortgage-backed securities


11,821





(54
)

11,767


11,767U.S. Government debt


3,341


4


(1
)

3,344


3,344Foreign government debt


2,661


27





2,688


2,688Total fixed maturity securities


1,424,359


54,626


(3,918
)

1,475,067


1,475,067Short-term investments


416,097


269


(3
)

416,363


416,363Equity securities


50,875


5,219


(119
)

55,975


55,975Total available-for-sale investments

$
1,891,331

$
60,114

$
(4,040
)
$
1,947,405

$
1,947,405December 31, 2008Available-for-sale investmentsFixed maturity securities:Corporate debt

$
1,280,354

$
18,058

$
(90,480
)
$
1,207,932

$
1,207,932State and local government debt


175,516


3,450


(3,214
)

175,752


175,752Redeemable preferred stocks


4,505





(892
)

3,613


3,613Mortgage-backed securities(1)


14,866


638





15,504


15,504U.S. Government debt


4,054


36





4,090


4,090Total fixed maturity securities


1,479,295


22,182


(94,586
)

1,406,891


1,406,891Short-term investments


241,452


273


(10
)

241,715


241,715Equity securities


52,888


1,680


(6,826
)

47,742


47,742Total available-for-sale investments

$
1,773,635

$
24,135

$
(101,422
)
$
1,696,348

$
1,696,348Held-to-maturity investmentsFixed maturity securities:State and local government debt

$
22,612

$
521

$
(43
)
$
23,090

$
22,612Mortgage-backed securities(1)


175,737


7,285





183,022


175,737Foreign government debt


5,000


16





5,016


5,000Total held-to-maturity investments

$
203,349

$
7,822

$
(43
)
$
211,128

$
203,349


At December 31, 2009, all of the investments in fixed maturity securities and short-term investments were classified as
available-for-sale securities compared to 89% at December 31, 2008. We reclassified our entire held-to-maturity investment portfolio to
available-for-sale during the first quarter 2009 because we determined that we no longer had the positive intent to hold these securities to maturity as a result of the
unprecedented events in the financial markets which caused market and economic risks
that were not present at the time we elected to hold these securities to maturity. In March 2009, we sold all of our GNMA securities, most of which were originally classified as
held-to-maturity, resulting in a realized gain of $8.8 million before tax.

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Fixed
maturity securities, including short-term investments, by contractual maturity were as follows at December 31, 2009:

(Dollars in thousands)

Amortized
Cost

Fair
ValueDue in 1 year or less

$
558,609

$
561,680Due after 1 year through 5 years


1,092,361


1,137,270Due after 5 years through 10 years


136,072


138,941Due after 10 years


53,414


53,539Total

$
1,840,456

$
1,891,430


Mortgage-backed securities are shown as being due at their average expected maturity dates. Expected maturities may differ from contractual
maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

Investments
that we currently own could be subject to default by the issuer or could suffer declines in fair value that become other-than-temporary. As described
in Note 2, we continually assess the prospects for individual securities as part of our ongoing portfolio management, including the identification of
other-than-temporary declines in fair values.

During
2009, net realized gains were reduced by $19.1 million of impairments on certain securities, with a fair value of $19.6 million at the date of impairment, in
accordance with our other-than-temporary impairments accounting policy discussed previously. These securities had unrealized losses continually for six months prior to the
impairments. Most of these securities, representing $17.2 million of the impairment charge, were sold during 2009 and we realized gains of $1.7 million at the time of sale. At
December 31, 2009, we owned only one impaired security with a credit-related impairment of $1.9 million for which the original non-credit related loss recovered to an
unrealized gain and is included in other comprehensive income. During 2008, net realized losses included $23.8 million of impairment losses on certain securities, with a fair value of
$16.5 million at the date of impairment, in accordance with our
other-than-temporary impairments accounting policy at that time. These securities had unrealized losses continually for six months or had issuer-specific credit and equity
events prior to the impairment. All of these impaired securities were sold during 2008 and we realized additional losses of $8.4 million at the time of sale. There were no
other-than-temporary impairments in 2007.

Included
in the $19.1 million other-than-temporary impairments recognized in 2009, were credit related impairments of $9.7 million for two corporate
debt securities based on estimated cash flows as of March 31, 2009. We determined the estimated cash flows at 60% of par value for one of the debt securities and 90% of par value for the other
debt security, and discounted the cash flows using the effective interest rate of 6.60% and 5.49% implicit in the two debt securities at the date of acquisition.

The
following table presents the change in other-than-temporary credit related impairments before tax recognized in earnings:

(Dollars in thousands)Beginning balance for securities owned as of December 31, 2008

$
0Not previously recognized


9,700Reduction for securities sold subsequent to impairment


(7,840
)Ending balance for securities owned as of December 31, 2009

$
1,860


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The following table presents the fair value of securities classified as available-for-sale with unrealized losses,
aggregated by investment category and length of time the securities have been in a continuous unrealized loss position at December 31, 2009 and 2008:

(Dollars in thousands)

Fair
Value

Unrealized
Losses

Number of
IssuesDecember 31, 2009Less than 12 months:Corporate debt

$
114,825

$
(720
)

20State and local government debt


17,705


(175
)

4Commercial mortgage-backed securities


11,767


(54
)

2U.S. Government debt


1,120


(1
)

1Short-term investments


77,653


(3
)

2Equity securities


763


(27
)

6Total less than 12 months

$
223,833

$
(980
)

35Greater than 12 months:Corporate debt

$
82,848

$
(2,491
)

10Redeemable preferred stocks


4,028


(477
)

2Equity securities


254


(92
)

1Total greater than 12 months

$
87,130

$
(3,060
)

13Total available-for-sale:Corporate debt

$
197,673

$
(3,211
)

30State and local government debt


17,705


(175
)

4Redeemable preferred stocks


4,028


(477
)

2Commercial mortgage-backed securities


11,767


(54
)

2U.S. Government debt


1,120


(1
)

1Short-term investments


77,653


(3
)

2Equity securities


1,017


(119
)

7Total available-for-sale

$
310,963

$
(4,040
)

48December 31, 2008Less than 12 months:Corporate debt

$
640,894

$
(57,606
)

120State and local government debt


67,330


(3,214
)

18Redeemable preferred stocks


2,956


(644
)

1Short-term investments


112,435


(10
)

1Equity securities


16,163


(6,826
)

9Total less than 12 months

$
839,778

$
(68,300
)

149Greater than 12 months:Corporate debt

$
107,060

$
(32,874
)

13Redeemable preferred stocks


657


(248
)

1Total greater than 12 months

$
107,717

$
(33,122
)

14Total available-for-sale:Corporate debt

$
747,954

$
(90,480
)

133State and local government debt


67,330


(3,214
)

18Redeemable preferred stocks


3,613


(892
)

2Short-term investments


112,435


(10
)

1Equity securities


16,163


(6,826
)

9Total available-for-sale

$
947,495

$
(101,422
)

163


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The unprecedented events in the capital and credit markets resulted in extreme volatility and disruption to the financial markets over the past
two years. The fair value of our
available-for-sale investment portfolio improved from a net unrealized loss before tax of $77.3 million at December 31, 2008 to a net unrealized gain before tax
of $56.1 million at December 31, 2009, an increase of $133.4 million. This change in fair value of investments classified as available-for-sale resulted in
an increase in stockholders' equity of $86.7 million after tax for the year ended December 31, 2009 compared to a decrease of $62.3 million after tax for the comparable period in
2008. Our internal investments department manages our investment portfolio and for the most part we do not rely on external portfolio managers. We review the appropriateness and consistency of the
fair values, which are affected primarily by changes in interest rates, as well as changes in the credit quality and liquidity of the companies in which we have invested or changes in general economic
and market conditions.

The
change in unrealized gains (losses) on our available-for-sale investment portfolio was as follows:

Year Ended December 31,(Dollars in thousands)

2009

2008

2007Change in unrealized gains (losses) on available-for-sale investments:Fixed maturity securities, including short-term investments

$
123,115

$
(73,312
)
$
10,733Equity securities


10,246


(22,589
)

(11,861
)Total change in unrealized gains (losses):Before tax

$
133,361

$
(95,901
)
$
(1,128
)After tax


86,686


(62,338
)

(732
)


We believe that our unrealized losses on individual fixed maturity and equity securities at December 31, 2009 are not material and are not
indicative of impaired values. We base this conclusion on our current understanding of the issuers of these securities. As of December 31, 2009, we have not made a decision to sell any of these
securities and we have adequate liquidity and will not be required to sell before recovery of their cost basis. It is possible that we could recognize future impairments on some securities we owned at
December 31, 2009 if future events, information and the passage of time cause us to determine that a decline in value is other-than-temporary.

We
may, from time to time, sell invested assets subsequent to the balance sheet date that we did not intend to sell at the balance sheet date. Conversely, we may not sell invested assets
that we asserted that we intended to sell at the balance sheet date. Such changes in intent are generally due to events occurring subsequent to the balance sheet date. The types of events that may
result in a change in intent include, but are not limited to, significant changes in the economic facts and circumstances related to the invested asset, significant unforeseen changes in liquidity
needs, or changes in tax laws or the regulatory environment.

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Net
realized gains (losses) on our investments included the following components:

Year Ended December 31,(Dollars in thousands)

2009

2008

2007Sales of fixed maturity securities, including short-term investments

$
49,792

$
(390
)
$
667Sales of equity securities


1,151


5,035


17,642Distributions from partnerships and limited liability companies


3,882


672


1,922WorldCom settlement and other


507


6


122Other-than-temporary impairment losses on fixed maturity securities


(10,662
)

(13,224
)Other-than-temporary impairment losses on equity securities


(8,418
)

(10,606
)Net realized gains (losses) on investments

$
36,252

$
(18,507
)
$
20,353


The gross realized gains and the gross realized losses on sales of fixed maturity and equity securities were as follows:

Year Ended December 31,(Dollars in thousands)

2009

2008

2007Gross realized gains

$
56,416

$
26,195

$
24,850Gross realized losses


(5,473
)

(21,550
)

(6,541
)


Net investment income before tax was as follows:

Year Ended December 31,(Dollars in thousands)

2009

2008

2007Fixed maturity securities

$
87,329

$
85,824

$
82,417Short-term investments


2,247


8,870


29,716Equity securities


1,061


2,928


8,045Other


2,029


3,189


508Subtotal


92,666


100,811


120,686Investment expenses


(7,152
)

(6,784
)

(5,823
)Net investment income

$
85,514

$
94,027

$
114,863


Net investment income from equity securities in the years ended December 31, 2008 and 2007 include a $1.1 million and
$7.3 million, respectively, cash dividend from an equity security investment.

Investments
with a fair value of $1.0 billion and $1.3 billion at December 31, 2009 and 2008, respectively, were on deposit with regulatory authorities in compliance
with insurance company regulations.

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Note 4. Fair Value Measurements

Our available-for-sale investment portfolio consists of fixed maturity and equity securities and
short-term investments and is recorded at fair value in the accompanying Consolidated Balance Sheets.

Fair
value is the price that would be received to sell an asset or would be paid to transfer a liability (i.e., the "exit price") in an orderly transaction between market
participants at the measurement date. In determining fair value, we primarily use prices and other relevant information generated by market transactions involving identical or comparable assets
("market approach"). We also consider the impact of a significant decrease in volume and level of activity for an asset or liability when compared with normal activity to identify transactions that
are not orderly.

Fair
value measurements are determined under a three-level hierarchy that prioritizes the inputs to valuation techniques used to measure fair value, distinguishing between market
participant assumptions developed based on market data obtained from sources independent of the reporting entity ("observable inputs") and the reporting entity's own assumptions about market
participant assumptions developed based on the best information available in the circumstances ("unobservable inputs"). The
hierarchy level assigned to each security in our available-for-sale portfolio is based on our assessment of the transparency and reliability of the inputs used in the valuation
of each instrument at the measurement date. The highest priority is given to unadjusted quoted prices in active markets for identical assets (Level 1 measurements) and the lowest priority to
unobservable inputs (Level 3 measurements). Securities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The three hierarchy
levels are defined as follows:

Level 1 Valuations based on unadjusted quoted market prices in active markets for identical securities. The fair values of
fixed maturity and equity securities and short-term investments included in the Level 1 category were based on quoted prices that were readily and regularly available in an active
market. Our Level 1 category includes publicly traded equity securities; highly liquid U.S. Government notes and treasury bills; GNMA's (at December 31, 2008); highly liquid cash
management funds; and short-term certificates of deposit.

Level 2 Valuations based on observable inputs (other than Level 1 prices), such as quoted prices for similar assets at
the measurement date; quoted prices in markets that are not active; or other inputs that are observable, either directly or indirectly. The fair value of fixed maturity securities and
short-term investments included in the Level 2 category were based on market values obtained from independent pricing services that were evaluated using pricing models that vary by
asset class and incorporate available trade, bid and other market information and price quotes from well-established independent broker-dealers. The independent pricing services monitor
market indicators, industry and economic events, and for broker-quoted only securities, obtain quotes from market makers or broker-dealers that they recognize to be market participants. Our
Level 2 category includes corporate bonds, foreign government bonds, municipal bonds, short-term commercial paper (at December 31, 2008), redeemable preferred stocks and
certain publicly traded common stocks with no trades on the measurement date.

Level 3 Valuations based on inputs that are unobservable and significant to the overall fair value measurement and involve
management judgment. The fair values of certain privately held or thinly traded securities are determined using internal analytical methods based on the best information available. The estimated fair
values of Level 3 equity securities consist primarily of the following: 1) An equity security of a company based in the United Kingdom with a fair value approximating its net asset value
because a significant portion of the net asset value, excluding cash balances, is comprised of real estate holdings supported by appraisals. The estimated fair value for this investment also includes
foreign currency fluctuations and considers the value of an unrecognized tax loss carry forward. 2) A fixed maturity security representing our participation in a commercial senior secured term
loan. The

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fair
value of this fixed maturity security was determined internally based on a non-binding broker quote and other unobservable inputs.

The
following table presents our available-for-sale investments measured at fair value on a recurring basis as of December 31, 2009 and 2008 classified by
valuation hierarchy discussed previously:

Fair Value Measurements(Dollars in thousands)

Level 1

Level 2

Level 3

TotalDecember 31, 2009Fixed maturity securities

$
3,344

$
1,461,200

$
10,523

$
1,475,067Short-term investments


375,598


40,765





416,363Equity securities


24,709





31,266


55,975Total

$
403,651

$
1,501,965

$
41,789

$
1,947,405December 31, 2008Fixed maturity securities

$
19,594

$
1,377,866

$
9,431

$
1,406,891Short-term investments


145,883


95,832





241,715Equity securities


19,394





28,348


47,742Total

$
184,871

$
1,473,698

$
37,779

$
1,696,348


The following table presents changes in our Level 3 fixed maturity and equity securities measured at fair value on a recurring basis for
the years ended December 31, 2009 and 2008:

(Dollars in thousands)

Fixed Maturity
Securities

Equity
SecuritiesBalance at December 31, 2007




$
38,350Purchases

$
9,404Realized and unrealized gains (losses) included in:Other comprehensive income(1)





(10,002
)Net income


27Balance at December 31, 2008

$
9,431

$
28,348Reclassification from held-to-maturity (see Note 3)


5,000Maturities


(5,000
)Purchases


1,000Realized and unrealized gains included in:Other comprehensive income(1)





2,918Net income


92Balance at December 31, 2009

$
10,523

$
31,266


(1)Changes
in unrealized gains represent foreign currency fluctuation.


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Note 5. Properties and Equipment

Properties and equipment, included in other assets, consist of the following:

December 31,(Dollars in thousands)

2009

2008Land

$
9,650

$
9,650Buildings


36,179


36,607Other property and equipment


87,543


85,097Subtotal


133,372


131,354Accumulated depreciation


(79,018
)

(74,734
)Total

$
54,354

$
56,620


Depreciation expense for the years ended December 31, 2009, 2008 and 2007 was $8.1 million, $8.4 million and
$9.4 million, respectively.

Note 6. Income Tax

We file a consolidated federal income tax return. The insurance subsidiaries pay premium taxes on gross premiums written in lieu
of most state income or franchise taxes.

The
components of the provision for tax on income were as follows:

Year Ended December 31,(Dollars in thousands)

2009

2008

2007Current

$
8,366

$
42,921

$
119,552Deferred


9,369


8,975


9,429Income tax expense

$
17,735

$
51,896

$
128,981


The difference between the statutory income tax rate of 35% and our effective tax rate on income, as reflected in the Consolidated Statements of
Operations, was as follows:

Year Ended December 31,(Dollars in thousands)

2009

2008

2007Statutory income tax expense

$
18,247

$
51,519

$
127,008(Reduction) increase in tax:Dividend received deduction and tax-exempt interest


(2,142
)

(2,470
)

(1,828
)Non-deductible expenses and other


1,630


2,847


3,801Income tax expense

$
17,735

$
51,896

$
128,981


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Deferred tax is provided based upon temporary differences between the tax and book basis of assets and liabilities. The components of the deferred tax assets and
liabilities were as follows:

December 31,2009

2008Deferred Tax

Deferred Tax(Dollars in thousands)

Assets

Liabilities

Assets

LiabilitiesInvestments




$
28,989

$
16,718Deferred policy acquisition costs





1,911




$
2,546Properties and equipment





5,680





4,673Unpaid losses and loss adjustment expenses discount

$
36,644





35,894Limitation on deduction for unearned premiums


4,904





4,820Policyholders' dividends accrued


2,498





13,039Other


8,146


1,187


7,851


63452,192

$
37,767


78,322

$
7,853Net deferred tax asset

$
14,425




$
70,469


Property-casualty loss reserves are not discounted in our consolidated financial statements; however, our loss reserves are required to be
discounted for tax purposes. Our net deferred tax asset is expected to be fully recoverable because all future deductible amounts associated with deferred tax assets can be offset by recovery of
income taxes paid within the statutory carry-back period or anticipated future taxable income, including investment income.

At
December 31, 2009, we had no material unrecognized tax benefits. We recognize any interest and penalties related to uncertain tax positions in income tax expense; however,
there were none for the years ended December 31, 2009 and 2008.

In
December 2009, we received the Internal Revenue Service ("IRS") audit report related to the examination of our federal income tax returns filed for years 2005 through 2007. The IRS
has proposed adjustments to the timing of our loss reserves deductions that would require us to ultimately pay interest but not additional tax. We are protesting these adjustments to the Appeals
Division of the IRS. Any adjustments that may result from the IRS examination of tax returns are not expected to have a material effect on our consolidated financial position, results of operations or
cash flows. In addition, tax years 2005 through 2008 are subject to examination by state taxing authorities.

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Note 7. Unpaid Losses and Loss Adjustment Expenses

The following table represents a reconciliation of changes in the liability for unpaid losses and loss adjustment expenses:

Year Ended December 31,(Dollars in thousands)

2009

2008

2007Beginning of year, net of reinsurance

$
1,005,590

$
1,126,808

$
1,301,076Incurred claims:Current accident year


329,079


358,016


362,645Prior accident years


(9,078
)

(78,108
)

(109,801
)Total incurred claims


320,001


279,908


252,844Payments:Current accident year


(94,667
)

(102,283
)

(116,642
)Prior accident years


(277,432
)

(298,843
)

(310,470
)Total payments


(372,099
)

(401,126
)

(427,112
)End of year, net of reinsurance


953,492


1,005,590


1,126,808Receivable from reinsurers for unpaid losses


237,612


268,996


326,562End of year, gross of reinsurance

$
1,191,104

$
1,274,586

$
1,453,370


The net favorable development of $9.1 million in 2009 is principally for the 2005 and 2006 accident years due to the reduction in the
workers' compensation paid and incurred trends.

The
net favorable development on prior accident years of $78.1 million in 2008 is principally related to a reduction in estimated workers' compensation losses for the 1999 through
2005 accident years, partially offset by increases for the 2006 and 2007 accident years.

The
net favorable development on prior accident years of $109.8 million in 2007 is principally related to a reduction in estimated workers' compensation losses for the 2003
through 2006 accident years.

Note 8. Debt



At December 31, 2009 and 2008, Zenith National Insurance Capital Trust I, a Delaware statutory business trust ("Trust"), all of
the voting securities of which are owned by Zenith National, had $58.5 million outstanding of the $75.0 million Redeemable Securities originally issued. The Redeemable Securities pay
semi-annual cumulative cash distributions at the annual rate of 8.55% of the $1,000 liquidation amount per security. The fair value of the Redeemable Securities was $49.4 million
and $47.7 million at December 31, 2009 and 2008, respectively.

The
Trust had invested $77.3 million in Zenith National's 8.55% Subordinated Deferrable Interest Debentures due 2028 ("Subordinated Debentures") at December 31, 2009 and
2008, which constitute the principal asset of the Trust. The semi-annual interest payments on the Subordinated Debentures may be deferred by Zenith National for up to ten consecutive
semi-annual periods. The Subordinated Debentures are redeemable at 100% of the principal amount of the Subordinated Debentures plus a "make-whole premium," if any, together
with accrued and unpaid interest. The make-whole premium is the excess of the then present value of the remaining scheduled payments of principal and interest over 100% of the principal
amount. Payments on the Redeemable Securities, including distributions and redemptions, follow those of the Subordinated Debentures. Zenith National fully and unconditionally guarantees the
distributions on, and the liquidation amount generally of, the Redeemable Securities to

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the
extent the Trust has funds legally available therefor. Zenith National's guarantee of the Redeemable Securities, as well as the Subordinated Debentures, is subordinated to all other indebtedness
of Zenith National.

The
issue costs and discount on the Subordinated Debentures of $1.7 million are being amortized over the term of the Subordinated Debentures. During each of the years ended
December 31, 2009, 2008, and 2007, $5.0 million of interest, issue costs and discount were expensed.



At December 31, 2009, we had a $30.0 million revolving credit agreement with Bank of America, N. A. which will expire
February 16, 2010. There were no amounts drawn under the Line of Credit in 2009 or 2008. This credit agreement contains covenants that require, among other things, that we maintain certain
financial ratios, including a minimum amount of capital in our insurance subsidiaries, a maximum debt-to-total capitalization ratio, and a minimum interest coverage ratio. We
were in compliance with all of these covenants at December 31, 2009. We do not currently plan to renew this credit agreement because our current sources of liquidity are adequate.



On March 21, 2003, we issued $125.0 million aggregate principal amount of 5.75% Convertible Senior Notes due March 2023
("Convertible Notes") in a private placement, from which we received net proceeds of $120.0 million. In March 2008, the remaining $1.1 million aggregate
principal amount of our Convertible Notes was converted, in a non-monetary transaction, into 68,986 shares of our common stock.

Note 9. Reinsurance Ceded

We maintain excess of loss and catastrophe reinsurance which provides protection up to $150 million for workers' compensation
losses including catastrophe losses arising out of California earthquakes. We retain the first $5 million of each loss. In the layer of $5 million in excess of $5 million we
retain any losses that exceed our annual aggregate limit of $15 million. In the layer of $10 million excess of $10 million we retain 50%.

We
maintain excess of loss and catastrophe reinsurance which provides protection up to $20 million for acts of terrorism including nuclear, biological and chemical attacks. We
retain the first $5 million of each loss. We retain any losses in the $5 million excess $5 million layer which exceed our annual aggregate of $5 million. We also retain 50%
of any loss other than nuclear, biological or chemical in the $10 million excess $10 million layer. We retain none of the loss in the $10 million excess $10 million layer
in events of nuclear, biological or chemical attacks.

Reinsurance
transactions reflected in the accompanying Consolidated Statements of Operations were as follows:

Year Ended December 31,(Dollars in thousands)

2009

2008

2007Direct premiums earned

$
475,997

$
621,763

$
756,965Assumed premiums earned


1,809


4,198


4,890Ceded premiums earned


(14,725
)

(18,634
)

(23,323
)Net premiums earned


463,081

$
607,327

$
738,532Ceded losses and loss adjustment expenses incurred

$
14,112

$
(32,023
)
$
123,757


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Table of Contents

In 2007, we reviewed our workers' compensation losses in excess of our reinsurance retention (ceded losses), a small population of
high-value claims which remain open for several years. We determined it was prudent to incorporate industry-wide loss development factors in addition to using our own
historical claims data to estimate our ceded loss reserves. As of December 31, 2007, our estimate of ceded losses included in unpaid losses and loss adjustment expenses was increased by
approximately $97.3 million, offset in full by the resulting increase in receivable from reinsurers.

Note 10. Stock-Based Compensation Plan

The following table provides information regarding the shares under the Restricted Stock Plan:

Number of
SharesAuthorized for grants since plan inception in 2004


995,000Restricted as of December 31, 2009


(398,000
)Vested since plan inception in 2004


(464,000
)Available for future grants at December 31, 2009


133,000


Changes in restricted stock for each of the three years ended December 31, 2009 were as follows:

Number of
Shares

Weighted
Average
Grant Date
Fair ValueRestricted shares at December 31, 2006


330,000

$
41.88Granted


196,000


41.90Vested


(71,000
)

43.53Forfeited


(2,000
)

30.17Restricted shares at December 31, 2007


453,000


41.68Granted


166,000


32.32Vested


(148,000
)

38.40Restricted shares at December 31, 2008


471,000


39.42Granted


98,000


27.43Vested


(158,000
)

42.36Forfeited


(13,000
)

39.13Restricted shares at December 31, 2009


398,000


35.31


Of the restricted shares outstanding at December 31, 2009, 323,000 shares have nonforfeitable rights to dividends whereby dividends are
paid during the restricted period and 75,000 shares have forfeitable rights whereby dividends accumulate during the vesting period and are paid only if the shares vest.

Compensation
expense recognized for stock-based awards was $3.6 million (net of $2.0 million tax benefit), $4.0 million (net of $2.1 million tax benefit), and
$3.4 million (net of $1.9 million tax benefit) for the years ended December 31, 2009, 2008 and 2007, respectively.

Unrecognized
compensation expense before tax under the Restricted Stock Plan was $7.1 million and $10.3 million at December 31, 2009 and 2008, respectively. The
unrecognized compensation expense of $7.1 million at December 31, 2009 includes $5.1 million related to time-based restricted stock awards and $2.0 million
related to performance-based restricted stock awards.

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Note 11. Commitments and Contingencies



We have office space, equipment and automobile leases expiring through 2015. The minimum lease payments for the next five years on
these non-cancelable operating leases at December 31, 2009 were as follows:

(Dollars in thousands)

Equipment and Auto Fleet

Offices

Total2010

$
924

$
7,141

$
8,0652011


649


5,279


5,9282012


291


3,437


3,7282013


3


2,842


2,8452014





795


795Thereafter





497


497Total

$
1,867

$
19,991

$
21,858


Rent expense for the years ended December 31, 2009, 2008 and 2007 was $11.2 million, $10.8 million, and $10.7 million,
respectively.



We are involved in various litigation proceedings that arise in the ordinary course of our business. Disputes adjudicated in the
workers' compensation administrative systems may be appealed to review boards or civil courts, depending on the issues and local jurisdictions involved. From time to time plaintiffs also sue us on
theories falling outside of the exclusive jurisdiction and remedies of the workers' compensation claims adjudication systems. Certain of these legal proceedings seek injunctive relief or substantial
monetary damages, including claims for punitive damages, which may not be covered by our third party reinsurance agreements. Historically, the Company has not experienced any material exposure or
damages from any of these legal proceedings. In addition, in the opinion of management, after consultation with legal counsel, all of our currently outstanding litigation is either without merit or
the ultimate liability, if any, is not expected to have a material adverse effect on our consolidated financial condition, results of operations or cash flows.

Note 12. Stockholders' Equity and Statutory Financial Information



From time to time, Zenith National may make repurchases of its outstanding common shares. At December 31, 2009, Zenith National
was authorized to repurchase up to 929,000 shares of its common stock at prevailing market prices pursuant to a share repurchase program authorized by our Board of Directors on February 24,
1998. Any purchases are discretionary and can be adequately funded from Zenith National's existing sources of liquidity. No shares were repurchased under the share repurchase program during the three
years ended December 31, 2009.



On September 30, 2009, we cancelled and retired 7,695,000 shares of treasury stock which had been repurchased by the Company
over the years for an aggregate repurchase price of $166.7 million. Upon cancellation and retirement, these shares were returned to the status of authorized and unissued. The excess of the
repurchase price of the treasury stock over the par value was allocated between additional

80

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paid-in
capital and retained earnings. There was no impact on our consolidated stockholders' equity as a result of the cancellation and retirement.



The California Insurance Holding Company System Regulatory Act limits the ability of Zenith Insurance to pay dividends to Zenith
National and for Zenith Insurance to receive dividends from its insurance subsidiary, by providing that the appropriate insurance regulatory authorities in the state of California must approve any
dividend that, together with all other such dividends paid during the preceding twelve months, exceeds the greater of: (a) 10% of the paying company's statutory surplus as regards policyholders
at the preceding December 31; or (b) 100% of the net income for the preceding year. In addition, any such dividend must be paid from policyholders' surplus attributable to accumulated
earnings. Such restrictions on dividends are not cumulative. Zenith Insurance paid dividends to Zenith National of $110.0 million, $95.0 million, and $115.0 million in 2009, 2008,
and 2007, respectively. In 2010, $97.9 million can be paid to Zenith National in dividends without prior approval of the California Department of Insurance. Dividend payments from Zenith
Insurance to Zenith National must also be in compliance with the California Corporations Code that permit dividends to be paid only out of retained earnings and only if specified ratios between assets
and liabilities and between current assets and current liabilities exist after payment. The restrictions on the payment of dividends have not had, and under current regulations are not expected to
have, a material adverse impact on the ability to pay dividends.



The capital stock and surplus and net income of our insurance subsidiaries, prepared in accordance with the statutory accounting
practices of the National Association of Insurance Commissioners ("NAIC"), were as follows:

Year Ended December 31,(Dollars in thousands)

2009

2008

2007Capital stock and surplus

$
979,164

$
1,015,330

$
1,033,190Net income


45,692


113,665


243,840


Through December 31, 2007, California statutes (the domiciliary state of our insurance subsidiaries) required that in addition to applying
the NAIC's statutory accounting practices, insurance companies must record, under certain circumstances, an additional liability, called an "excess statutory reserve." The excess statutory reserve
formula established a 65% losses and loss adjustment expense ratio for the current and prior two years. Excess statutory reserves reduced statutory surplus but did not impact statutory net income. As
of December 31, 2008, the excess statutory reserves were no longer required
under California law. At December 31, 2007, we reported statutory surplus of $451.1 million, which reflects a reduction of $582.1 million for the excess statutory reserves as
determined under the formula.

The
insurance business is subject to state-by-state regulation and legislation focused on solvency, pricing, market conduct, claims practices, underwriting,
accounting, investment criteria, and other areas. Such regulation and legislation changes frequently. Compliance is essential and is an inherent risk and cost of the business.

81

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Note 13. Net Income and Dividends per Share

The following table sets forth the computation of basic and diluted net income per common share and cash dividends declared per common
share:

Year Ended December 31,(Dollars and shares in thousands, except per share data)

2009

2008

2007Net income as reported

$
34,400

$
95,300

$
233,900Net income allocated to unvested restricted stock shares (see below)


386(A) Net income allocated to common shares

$
34,014

$
95,300

$
233,900(B) Interest expense on the Convertible Senior Notes payable,
net of tax




$
11

$
48(C) Weighted average shares outstanding  basic


37,355


37,210


37,056Weighted average shares issued under the Restricted Stock Plan (see below)





172


159Weighted average shares issued in 2008 and issuable in 2007
upon conversion of the Convertible Senior Notes payable





17


69(D) Weighted average shares outstanding  diluted


37,355


37,399


37,284Net income per common share:(A)/(C) Basic

$
0.91

$
2.56

$
6.31((A)+(B))/(D) Diluted

$
0.91

$
2.55

$
6.27Cash dividends declared per common share

$
2.40

$
2.40

$
2.84


On January 1, 2009, we adopted the accounting guidance on "Participating Securities and the Two-Class Method," which required
that unvested restricted stock with a right to receive nonforfeitable dividends be included in the two-class method of computing earnings per share. The weighted average shares outstanding
and net income per common share for the year ended December 31, 2009 are presented in accordance with this guidance. Prior period amounts were not restated due to immateriality.

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Note 14. Other Comprehensive Income (Loss)

Other comprehensive income (loss) is comprised of changes in unrealized (losses) gains on investments classified as
available-for-sale.

The
following table summarizes the components of our other comprehensive income (loss), other than net income:

(Dollars in thousands)

Pre-Tax

Income Tax
Effect

After-TaxYear Ended December 31, 2009Net unrealized gains arising during the year

$
146,169

$
51,158

$
95,011Less: reclassification adjustment for net realized
gains included in net income


(12,808
)

(4,483
)

(8,325
)Total other comprehensive income

$
133,361

$
46,675

$
86,686Year Ended December 31, 2008Net unrealized losses arising during the year

$
(115,517
)
$
(40,431
)
$
(75,086
)Less: reclassification adjustment for net realized
losses included in net income


19,616


6,868


12,748Total other comprehensive loss

$
(95,901
)
$
(33,563
)
$
(62,338
)Year Ended December 31, 2007Net unrealized gains arising during the year

$
12,099

$
4,235

$
7,864Less: reclassification adjustment for net realized
gains included in net income


(13,227
)

(4,631
)

(8,596
)Total other comprehensive loss

$
(1,128
)
$
(396
)
$
(732
)


The following table summarizes the components of accumulated other comprehensive income (loss):

December 31,(Dollars in thousands)

2009

2008Net unrealized gains (losses) on investments, before tax

$
56,074

$
(77,287
)Deferred tax (expense) benefit


(19,626
)

27,049Total accumulated other comprehensive income (loss)

$
36,448

$
(50,238
)


Note 15. Segment Information

Our business is comprised of the following segments: workers' compensation, reinsurance and investments. Segments are designated based
on the types of products and services provided. Workers' compensation represents insurance coverage for the statutorily prescribed benefits that employers are required to provide to their employees
who may be injured in the course of employment. Reinsurance principally consists of assumed reinsurance of property losses from worldwide catastrophes and large property risks. In September 2005, we
exited the assumed reinsurance business; however, we will be paying assumed reinsurance claims for several years. The results of the reinsurance segment, principally consisting of changes to loss
reserve estimates, if any, and direct expenses, will continue to be included in the results of continuing operations. Income from the workers' compensation and reinsurance segments is determined by
deducting net losses and loss
adjustment expenses incurred and underwriting and other operating expenses incurred from net premiums earned (this result is also known as underwriting income or loss). Income from operations of the
investments segment includes net investment income and net realized gains or losses on investments. We do not allocate investment income to the results of other segments. The losses from the parent
include interest expense and the general operating expenses of Zenith National, a holding company, which owns, directly or indirectly, all of the capital stock of its insurance subsidiaries and other
investment securities.

The
combined ratio, expressed as a percentage, is a key measurement of profitability traditionally used in the property-casualty insurance business. The combined ratio, also referred to
as the "calendar year combined ratio," is the sum of the losses and loss adjustment expense ratio and the underwriting

83

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and
other operating expense ratio. The losses and loss adjustment expense ratio is the percentage of net losses and loss adjustment expenses incurred to net premiums earned. The underwriting and other
operating expense ratio is the percentage of underwriting and other operating expenses to net premiums earned.

Segment
information is set forth below, with a reconciliation to the accompanying Consolidated Statements of Operations shown in the total column:

(Dollars in thousands)

Workers'
Compensation

Reinsurance

Investments

Parent

TotalYear Ended December 31, 2009Revenues:Net premiums earned

$
463,018

$
63







$
463,081Net investment income







$
85,514





85,514Net realized gains on investments








36,252





36,252Total revenues


463,018


63


121,766





584,847Interest expense










$
5,136


5,136Income (loss) before tax


(57,452
)

(7
)

121,766


(12,172
)

52,135Income tax (benefit) expense


(18,463
)

(2
)

40,461


(4,261
)

17,735Net (loss) income

$
(38,989
)
$
(5
)
$
81,305

$
(7,911
)
$
34,400Combined ratio


112.4
%

NMTotal assets

$
423,455

$
2,346

$
2,008,686

$
3,757

$
2,438,244




Year Ended December 31, 2008Revenues:Net premiums earned

$
606,284

$
1,043







$
607,327Net investment income







$
94,027





94,027Net realized losses on investments








(18,507
)




(18,507
)Total revenues


606,284


1,043


75,520





682,847Interest expense










$
(5,154
)

(5,154
)Income (loss) before tax


84,658


(192
)

75,520


(12,790
)

147,196Income tax expense (benefit)


32,499


(74
)

23,948


(4,477
)

51,896Net income (loss)

$
52,159

$
(118
)
$
51,572

$
(8,313
)
$
95,300Combined ratio


86.0
%

NMTotal assets

$
497,073

$
9,437

$
2,016,326

$
3,186

$
2,526,022




Year Ended December 31, 2007Revenues:Net premiums earned

$
738,196

$
336







$
738,532Net investment income







$
114,863





114,863Net realized gains on investments








20,353





20,353Total revenues


738,196


336


135,216





873,748Interest expense










$
(5,245
)

(5,245
)Income (loss) before tax


243,832


(3,661
)

135,216


(12,506
)

362,881Income tax expense (benefit)


89,164


(1,292
)

45,486


(4,377
)

128,981Net income (loss)

$
154,668

$
(2,369
)
$
89,730

$
(8,129
)
$
233,900Combined ratio


67.0
%

NMTotal assets

$
553,115

$
10,618

$
2,212,352

$
2,550

$
2,778,635


NM = Not meaningful

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Table of Contents

Note 16. Employee Benefit and Retirement Plans

We offer a tax deferred savings plan created under Section 401(k) of the Internal Revenue Code for all eligible employees. We
match 50% of employee contributions that are 6% or less of salary on a current basis and we are not liable for any future payments under the plan. For the years ended December 31, 2009, 2008,
and 2007, we contributed $2.4 million, $2.5 million, and $2.7 million, respectively.

We
also offer a stock purchase plan, under which we match 25% of employees' contributions to purchase shares of our common stock at market value. An amended and restated stock purchase
plan
was approved by our stockholders in May 2007, which provides for a Company match limited to $1.0 million in each calendar year, and limits employee contributions to 25% of salary through
payroll deduction in each calendar year. For the years ended December 31, 2009, 2008, and 2007, we contributed $0.7 million, $0.7 million, and $0.4 million, respectively.

Note 17. Quarterly Financial Data (unaudited)

Quarterly results for the years ended December 31, 2009 and 2008 were as follows:

(Dollars in thousands, except per share data)

March 31

June 30

September 30

December 312009 Quarter EndedNet premiums earned

$
117,983

$
116,623

$
115,702

$
112,773Net investment income


24,256


23,311


20,541


17,406Net realized gains (losses) on investments


6,274


(757
)

20,645


10,090Net income


2,600


1,800


19,200


10,800Net income per common share:Basic


0.07


0.05


0.51


0.29Diluted


0.07


0.05


0.51


0.29Cash dividends declared per common share


0.50


0.50


0.50


0.90




2008 Quarter EndedNet premiums earned

$
159,032

$
154,368

$
152,962

$
140,965Net investment income


23,235


22,297


22,873


25,622Net realized gains (losses) on investments


4,486


(2,298
)

(8,883
)

(11,812
)Net income


41,900


28,400


16,600


8,400Net income per common share:Basic


1.13


0.76


0.45


0.23Diluted


1.12


0.76


0.44


0.22Cash dividends declared per common share


0.50


0.50


0.50


0.90


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Table of Contents

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

Item 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

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

Management's Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is
defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including our principal executive officer and
principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission inInternal Control  Integrated Framework. Based on our evaluation, our management
concluded that our internal control over financial reporting was effective as of December 31, 2009.

The
effectiveness of the Company's internal control over financial reporting as of December 31, 2009 was audited by PricewaterhouseCoopers LLP, the Registered Public
Accounting Firm that also audited the consolidated financial statements included in this Annual Report on Form 10-K, as stated in its report.

Changes in Internal Control over Financial Reporting

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

Item 9B. OTHER INFORMATION

None

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Table of Contents

PART III

Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information set forth under the captions "Election of Directors," "Section 16(a) Beneficial Ownership Reporting Compliance,"
"Audit Committee," "Executive Officers," and "Code of Ethics for Senior Financial Officers" in the Proxy Statement distributed to stockholders in connection with Zenith's 2010 Annual Meeting of
Stockholders ("Proxy Statement"), which we will file after the date this Annual Report on Form 10-K is filed, is hereby incorporated by reference.

Item 11. EXECUTIVE COMPENSATION

The information under the captions: "Executive Compensation," "Compensation Discussion and Analysis for 2009," "Compensation Committee
Report," "Compensation Committee Interlocks and Insider Participation," "Summary Compensation Table," "Grants of Plan-Based Awards in 2009," "Outstanding Equity Awards at 2009
Year-End," "Option Exercises and Stock Vested in 2009," "Early Termination of Employment and Change in Control Arrangements," "Director Compensation," and "2009 Director Compensation
Table" in the Proxy Statement is hereby incorporated by reference.

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

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

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

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

Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

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

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Table of Contents

PART IV

Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)  1. Index to Financial Statements



PageReport of Independent Registered Public Accounting Firm


53Consolidated Balance Sheets as of December 31, 2009 and 2008


54Consolidated Statements of Operations for the years ended
December 31, 2009, 2008 and 2007


55Consolidated Statements of Cash Flows for the years ended
December 31, 2009, 2008 and 2007


56Consolidated Statements of Stockholders' Equity and Consolidated Statements of
Comprehensive Income for the years ended December 31, 2009, 2008 and 2007


58Notes to Consolidated Financial Statements


59


2. Index to Financial Schedules



PageSchedule I




Summary of Investments  Other than Investments in Related Parties


89Schedule II




Condensed Financial Information of Registrant (Parent Company)


90Schedule III




Supplementary Insurance Information


94Schedule IV




Reinsurance


95Schedule V




Valuation and Qualifying Accounts


95


3. Exhibits



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Table of Contents

SCHEDULE I  SUMMARY OF INVESTMENTS  OTHER THAN INVESTMENTS  IN RELATED PARTIES

Zenith
National Insurance Corp. and Subsidiaries

December 31, 2009

(Dollars in thousands) Type of investment

Cost(1)

Fair
Value

Amount at
Which
Shown in the
Balance
SheetFixed maturity investments:Bonds:United States Government and government
agencies and authorities

$
3,341

$
3,344

$
3,344States, municipalities and political subdivisions


161,379


167,513


167,513Foreign governments


2,661


2,688


2,688Convertibles and bonds with warrants attached


1,916


1,975


1,975All other corporate bonds


1,228,209


1,272,694


1,272,694Redeemable preferred stocks


26,853


26,853


26,853Total fixed maturity investments


1,424,359


1,475,067


1,475,067Equity investments:Common stocks:Industrial, misc. and all other


50,625


55,725


55,725Nonredeemable preferred stocks


250


250


250Total equity investments


50,875


55,975


55,975Short-term investments(2)


416,097


416,363


416,363Other investments(3)


53,794





55,425Total investments

$
1,945,125




$
2,002,830


(1)Original
cost for equity investments. Original cost reduced by repayments and adjusted for amortization of premiums or accretion of discounts for fixed
maturity investments.(2)Includes
U.S. Treasury bills, highly liquid cash management funds, short-term certificates of deposit and corporate bonds purchased within
twelve months of maturity.(3)Other
investments are recorded at cost if our ownership is minor and we do not have significant operating and financial influence, otherwise the investments
are recorded at our share of the net asset value.


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Table of Contents

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

Zenith
National Insurance Corp.

BALANCE SHEETS

December 31,(Dollars and shares in thousands)

2009

2008Assets:Short-term investments, at fair value (cost $91,066 in 2009 and
$81,507 in 2008)

$
91,110

$
81,497Cash


3,542


913Investment in subsidiaries


1,049,924


1,026,152Other assets


16,635


17,640Total assets

$
1,161,211

$
1,126,202Liabilities:Subordinated debentures

$
77,145

$
77,136Dividends payable to stockholders


18,973


18,898Other liabilities


6,162


6,731Total liabilities

$
102,280

$
102,765Commitments and contingenciesStockholders' equity:Preferred stock, $1 par value, 1,000 shares authorized; none issued or outstanding in 2009 and 2008Common stock, $1 par value, 100,000 shares authorized; issued 37,482 in 2009 and 45,019 in 2008; outstanding 37,482 in 2009 and 37,324 in 2008


37,482


45,019Additional paid-in capital


360,464


472,312Retained earnings


624,537


722,996Accumulated other comprehensive income (loss)


36,448


(50,238
)Treasury stock, at cost (7,695 shares in 2008)





(166,652
)Total stockholders' equity


1,058,931


1,023,437Total liabilities and stockholders' equity

$
1,161,211

$
1,126,202


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

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

Zenith
National Insurance Corp.

STATEMENTS OF OPERATIONS

Year Ended December 31,(Dollars in thousands)

2009

2008

2007Revenues:Net investment income

$
401

$
1,183

$
3,445Net realized (losses) gains on investments


(12
)

6


259Total revenues


389


1,189


3,704Expenses:Operating expenses


7,036


7,636


7,261Interest expense


5,335


5,353


5,444Total expenses


12,371


12,989


12,705Loss from operations before income tax benefit
and equity in earnings of subsidiaries


(11,982
)

(11,800
)

(9,001
)Income tax benefit


(4,199
)

(4,156
)

(3,201
)Loss from operations after income tax benefit
and before equity in earnings of subsidiaries


(7,783
)

(7,644
)

(5,800
)Equity in earnings of subsidiaries


42,183


102,944


239,700Net income

$
34,400

$
95,300

$
233,900


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

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

Zenith
National Insurance Corp.

STATEMENTS OF CASH FLOWS

Year Ended December 31,(Dollars in thousands)

2009

2008

2007Cash flows from operating activities:Investment income received

$
280

$
393

$
1,720Operating expenses paid


(6,924
)

(6,201
)

(1,831
)Interest paid


(5,292
)

(5,325
)

(5,392
)Income tax recovered


4,757


3,989


2,410Net cash used in operating activities


(7,179
)

(7,144
)

(3,093
)Cash flows from investing activities:Net (increase) decrease in short-term investments


(9,484
)

2,938


(17,281
)Proceeds from sales of fixed maturity securities available-for-sale








4,987Dividends received from Zenith Insurance


110,000


95,000


115,000Other, net








8Net cash provided by investing activities


100,516


97,938


102,714Cash flows from financing activities:Cash dividends paid to common stockholders


(90,717
)

(90,361
)

(100,174
)Excess tax benefit on stock-based compensation


9


376


341Net proceeds from exercise of stock options








196Net cash used in financing activities


(90,708
)

(89,985
)

(99,637
)Net increase (decrease) in cash


2,629


809


(16
)Cash at beginning of year


913


104


120Cash at end of year

$
3,542

$
913

$
104Reconciliation of net income to net cash used in operating activities:Net income

$
34,400

$
95,300

$
233,900Equity in income of subsidiaries


(42,183
)

(102,944
)

(239,700
)Other


604


500


2,707Net cash used in operating activities

$
(7,179
)
$
(7,144
)
$
(3,093
)


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

92

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

Zenith
National Insurance Corp.

NOTES TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT

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.

NOTE 1. Investment In Subsidiaries

Zenith National directly owns 100% of the outstanding stock of Zenith Insurance Company and Zenith National Insurance Capital Trust I
("Trust"). These investments are included in the accompanying condensed financial statements on the equity basis of accounting. Included in investment in subsidiaries at December 31, 2009 and
2008 was $2.0 million of the unamortized excess of cost over underlying net tangible assets of companies acquired prior to 1970, which is considered to have continuing value.

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

We
file a consolidated income tax return. Our equity in the income of our subsidiaries is net of a provision for income tax expense of $21.9 million, $56.1 million,
and $132.2 million for the years ended December 31, 2009, 2008, and 2007, respectively. We have a tax allocation agreement with our subsidiaries and the 2009, 2008, and 2007 condensed
financial information of the parent company reflects Zenith National's portion of the consolidated tax.

NOTE 2. Subordinated Debentures

At December 31, 2009 and 2008, we had $77.3 million aggregate principal amount of the 8.55% Subordinated Deferrable
Interest Debentures due 2028 ("Subordinated Debentures") outstanding, all of which were held by the Trust. The semi-annual interest payments on the Subordinated Debentures may be deferred
by us for up to ten consecutive semi-annual periods. The Subordinated Debentures are redeemable at any time by us at 100% of the principal amount of the Subordinated Debentures plus a
"make-whole
premium," if any, together with accrued and unpaid interest. The make-whole premium is the excess of the then present value of the remaining scheduled payments of principal and interest
over 100% of the principal amount. The issue cost and discount on the Subordinated Debentures of $1.7 million are being amortized over the term of the Subordinated Debentures. During each of
the years ended December 31, 2009, 2008 and 2007, $6.7 million of interest and issue costs were expensed. The Subordinated Debentures are subordinated to all other indebtedness of Zenith
National. The fair value of the Subordinated Debentures was $65.2 million and $63.1 million at December 31, 2009 and 2008, respectively.

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SCHEDULE III  SUPPLEMENTARY INSURANCE INFORMATION

Zenith National Insurance Corp. and Subsidiaries

(Dollars in thousands) Segment

Deferred
Policy
Acquisition
Costs

Future Policy
Benefits,
Losses, Claims
and Loss
Expenses

Unearned
Premiums

Other Policy
Claims and
Benefits
Payable

Premium
Revenue

Net
Investment
Income

Benefits,
Claims,
Losses and
Settlement
Expenses

Amortization
of Deferred
Policy
Acquisition
Costs

Other
Operating
Expenses

Premiums
WrittenAs of and for the Year Ended December 31,2009Property and Casualty:Workers' compensation

$
5,461

$
1,152,628

$
33,994




$
463,018




$
320,088

$
89,131

$
111,147

$
451,948Reinsurance





38,476








63





(87
)

(31
)

189


635,461


1,191,104


33,994





463,081





320,001


89,100


111,336


452,011Investment
















$
85,514Parent


























7,036Total

$
5,461

$
1,191,104

$
33,994




$
463,081

$
85,514

$
320,001

$
89,100

$
118,372

$
452,0112008Property and Casualty:Workers' compensation

$
7,274

$
1,229,561

$
45,226




$
606,284




$
279,121

$
110,996

$
119,379

$
589,397Reinsurance





45,025








1,043





787


110


338


1,0437,274


1,274,586


45,226





607,327





279,908


111,106


119,717


590,440Investment
















$
94,027Parent


























7,636Total

$
7,274

$
1,274,586

$
45,226




$
607,327

$
94,027

$
279,908

$
111,106

$
127,353

$
590,4402007Property and Casualty:Workers' compensation













$
738,196




$
249,290

$
123,073

$
123,091

$
717,154Reinsurance














336





3,554


19


424


336738,532





252,844


123,092


123,515


717,490Investment
















$
114,863Parent


























7,261Total













$
738,532

$
114,863

$
252,844

$
123,092

$
130,776

$
717,490


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SCHEDULE IV  REINSURANCE

Zenith
National Insurance Corp. and Subsidiaries

(Dollars in thousands)

Gross
Amount

Ceded to
Other
Companies

Assumed
from
Other
Companies

Net
Amount

Percentage of
Amount
Assumed to
Net
AmountYear Ended December 31,2009Premiums earned

$
475,997

$
14,725

$
1,809

$
463,081


0.4
%2008Premiums earned


621,763


18,634


4,198


607,327


0.72007Premiums earned


756,965


23,323


4,890


738,532


0.7


SCHEDULE V  VALUATION AND QUALIFYING ACCOUNTS

Zenith
National Insurance Corp. and Subsidiaries

Additions(Dollars in thousands)

Balance at
Beginning
of Year

Charged to
Costs and
Expenses

Charged to
Other
Accounts

Deductions(1)

Balance at
End of YearYear Ended December 31,2009Allowance for uncollectible premiums

$
550

$
1,931




$
1,861

$
6202008Allowance for uncollectible premiums


150


1,851





1,451


5502007Allowance for uncollectible premiums





585





435


150


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


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Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized, on February 10, 2010.

ZENITH NATIONAL INSURANCE CORP.By:

/s/ STANLEY R. ZAX Stanley R. Zax
Chairman of the Board and President


Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities
indicated, on February 10, 2010.

/s/ STANLEY R. ZAX Stanley R. Zax

Chairman of the Board and President
(Principal Executive Officer)/s/ JEROME L. COBEN Jerome L. Coben

Director/s/ MAX M. KAMPELMAN Max M. Kampelman

Director/s/ ROBERT J. MILLER Robert J. Miller

Director/s/ FABIAN NUÑEZ Fabian Nuñez

Director/s/ CATHERINE B. REYNOLDS Catherine B. Reynolds

Director/s/ ALAN I. ROTHENBERG Alan I. Rothenberg

Director/s/ WILLIAM S. SESSIONS William S. Sessions

Director/s/ MICHAEL WM. ZAVIS Michael Wm. Zavis

Director/s/ KARI L. VAN GUNDY Kari L. Van Gundy

Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)


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Table of Contents

EXHIBIT INDEX

Zenith
National Insurance Corp. and Subsidiaries

3.1

Amended and Restated Certificate of Incorporation of Zenith National Insurance Corp. filed with the Delaware Secretary of State on May 30, 2006. (Incorporated herein by reference to Exhibit 3.1 to Zenith's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2006.)3.2

Amended and Restated Bylaws of Zenith National Insurance Corp., as currently in effect. (Incorporated herein by reference to Exhibit 3.2 to Zenith's Current Report on Form 8-K filed May 19,
2009.)4.1

Indenture, dated July 30, 1998, between Zenith National Insurance Corp. and Norwest Bank Minnesota, National Association, as trustee, pursuant to which Zenith issued its 8.55% Subordinated Deferrable Interest
Debentures. (Incorporated herein by reference to Exhibit 10.6 to Zenith's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998.)4.2

Amended and Restated Declaration of Trust of Zenith National Insurance Capital Trust I, dated July 30, 1998, between Zenith National Insurance Corp., the trustees and the holders. (Incorporated herein by
reference to Exhibit 10.8 to Zenith's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998.)4.3

Certificate of Amendment to Certificate of Trust of Zenith National Insurance Capital Trust I, dated August 1, 2006. (Incorporated by reference to Exhibit 4.3 to Zenith's Annual Report on Form 10-K for
the year ended December 31, 2006.)*10.1

Zenith National Insurance Corp. Third Amended and Restated 2004 Restricted Stock Plan (as amended and restated May 13, 2008). (Incorporated herein by reference to Exhibit 10.1 to Zenith's Current Report on
Form 8-K filed on May 13, 2008.)*10.2

Zenith National Insurance Corp. 2004 Restricted Stock Plan, Form of Award Agreement for Non-Employee Directors. (Incorporated herein by reference to Exhibit 10.5 to Zenith's Quarterly Report on Form 10-Q for
the quarter ended March 31, 2006.)*10.3

Zenith National Insurance Corp. 2004 Restricted Stock Plan, Form of Award Agreement for Employees (performance-based vesting). (Incorporated herein by reference to Exhibit 10.1 to Zenith's Quarterly Report on
Form 10-Q for the quarter ended September 30, 2009.)*10.4

Zenith National Insurance Corp. 2004 Restricted Stock Plan, Form of Award Agreement for Employees (time-based vesting). (Incorporated herein by reference to Exhibit 10.2 to Zenith's Quarterly Report on
Form 10-Q for the quarter ended September 30, 2009.)*10.5

Employment Agreement dated January 11, 2010 between Zenith National Insurance Corp. and Janet Frank. (Incorporated herein by reference to Exhibit 10.1 to Zenith's Current Report on Form 8-K filed on
January 11, 2010.)*10.6

Amended and Restated Employment Agreement effective June 3, 2009 between Zenith National Insurance Corp. and Michael E. Jansen. (Incorporated herein by reference to Exhibit 10.2 to Zenith's Current Report on
Form 8-K filed on June 8, 2009.)*10.7

Amended and Restated Employment Agreement effective June 3, 2009 between Zenith National Insurance Corp. and Robert E. Meyer. (Incorporated herein by reference to Exhibit 10.3 to Zenith's Current Report on
Form 8-K filed on June 8, 2009.)


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Table of Contents

EXHIBIT INDEX (continued):

*10.8

Amended and Restated Employment Agreement effective June 3, 2009 between Zenith National Insurance Corp. and Jack D. Miller. (Incorporated herein by reference to Exhibit 10.1 to Zenith's Current Report on
Form 8-K filed on June 8, 2009.)*10.9

Amendment No. 1 dated January 11, 2010 to Amended and Restated Employment Agreement between Zenith National Insurance Corp. and Jack D. Miller. (Incorporated herein by reference to Exhibit 10.2 to
Zenith's Current Report on Form 8-K filed on January 11, 2010.)*10.10

Amended and Restated Employment Agreement effective June 3, 2009 between Zenith National Insurance Corp. and Davidson M. Pattiz. (Incorporated herein by reference to Exhibit 10.4 to Zenith's Current Report
on Form 8-K filed on June 9, 2009.)*10.11

Amended and Restated Employment Agreement effective June 3, 2009 between Zenith National Insurance Corp. and Kari L. Van Gundy. (Incorporated herein by reference to Exhibit 10.5 to Zenith's Current Report on
Form 8-K filed on June 9, 2009.)*10.12

Amended and Restated Employment Agreement between Zenith National Insurance Corp. and Stanley R. Zax effective September 22, 2008, (Incorporated herein by reference to Exhibit 10.1 to Zenith's Current Report
on Form 8-K filed on September 22, 2008.)*10.13

Amended and Restated Zenith National Insurance Corp. Executive Officer Bonus Plan dated February 12, 2003. (Incorporated herein by reference to Exhibit 10.5 to Zenith's Quarterly Report on Form 10-Q for
the quarter ended March 31, 2003.)*10.14

First Amendment effective December 1, 2008 to Amended and Restated Zenith National Insurance Corp. Executive Officer Bonus Plan dated February 12, 2003. (Incorporated herein by reference to
Exhibit 10.17 to Zenith's Annual Report on Form 10-K for the year ended December 31, 2008.)*10.15

Zenith National Insurance Corp.'s revised policy on non-business use of the company-owned aircraft by executive officers and imputation of income therefore. (The information under the caption "Company-Owned Aircraft
Usage Policy" in Item 1.01 of Zenith's Current Report on Form 8-K filed on May 26, 2006 is incorporated herein by reference.)*10.16

Amended and Restated Zenith National Insurance Corp. 2003 Non-Employee Director Deferred Compensation Plan effective December 1, 2008. (Incorporated by reference to Exhibit 10.19 to Zenith's Annual Report on
Form 10-K for the year ended December 31, 2008.)*10.17

Amended and Restated Zenith National Insurance Corp. 2003 Non-Employee Director Deferred Compensation Plan effective December 1, 2008, Form of Deferred Compensation Agreement. (Incorporated herein by reference to
Exhibit 10.20 to Zenith's Annual Report on Form 10-K for the year ended December 31, 2008.)10.18

Workers' Compensation Quota Share Reinsurance Agreement between Zenith Insurance Company, ZNAT Insurance Company, Zenith Star Insurance Company (collectively, as cedant) and Odyssey America Reinsurance Corporation (as
Reinsurer) dated December 28, 2001. (Incorporated herein by reference to Exhibit 10.36 to Zenith's Annual Report on Form 10-K for the year ended December 31, 2001.)10.19

Credit Agreement, dated as of February 16, 2007, between Zenith National Insurance Corp., and Bank of America, N.A. (Incorporated herein by reference to Exhibit 10.39 to Zenith's Annual Report on
Form 10-K for the year ended December 31, 2006.)


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Table of Contents

EXHIBIT INDEX (continued):

10.20

Capital Securities Guarantee Agreement, dated July 30, 1998, between Zenith National Insurance Corp. and Norwest Bank Minnesota, National Association. (Incorporated herein by reference to Exhibit 10.7 to
Zenith's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998.)11

Statement of recomputation of per share earnings. (Incorporated herein by reference to Notes to Consolidated Financial Statements  Note 13  "Net Income and Dividends per Share").21

Subsidiaries of the Registrant, a copy of which is filed herewith as Exhibit 21.23

Consent of PricewaterhouseCoopers LLP dated February 10, 2010.31.1

Certification of the Chief Executive Officer pursuant to Exchange Rule 13a-14(a) or Rule 15d-14(a), a copy of which is filed herewith as Exhibit 31.1.31.2

Certification of the Chief Financial Officer pursuant to Exchange Rule 13a-14(a) or Rule 15d-14(a), a copy of which is filed herewith as Exhibit 31.2.32

Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. section 1350, a copy of which is furnished herewith as Exhibit 32.99.1

Available-for-sale investment portfolio as of December 31, 2009, a copy of which is filed herewith.


---

99

---