ZENITH NATIONAL INSURANCE CORP.2008

---



ANNUAL REPORT 2008

GRAPHIC

---



FINANCIAL HIGHLIGHTS

Year Ended December 31,

2008

2007

2006RESULTS OF OPERATIONS:


(Dollars in thousands, except per share data)Total revenues

$
682,847

$
873,748

$
1,063,888Net investment income after tax


63,602


76,501


70,926Net realized (losses) gains on investments after tax


(12,030
)

13,229


8,695Net income


95,300


233,900


258,700PER SHARE DATA:Net income

$
2.55

$
6.27

$
6.96Cash dividends declared (1)


2.40


2.84


1.26KEY STATISTICS:Underwriting income (loss) before tax (2):Workers' compensation

$
84,658

$
243,832

$
313,576Reinsurance (3)


(192
)

(3,661
)

(20,508
)Workers' compensation combined ratio (4)


86.0%


67.0%


66.3%Stockholders' equity

$
1,023,437

$
1,073,357

$
940,720Stockholders' equity per share:Excluding unrealized (losses) gains on investments, net of tax (5)

$
28.77

$
28.60

$
25.06Unrealized (losses) gains on investments, net of tax


(1.35
)

0.33


0.35Stockholders' equity per share

$
27.42

$
28.93

$
25.41Closing stock price

$
31.57

$
44.73

$
46.91




(1)

Includes an extra dividend of $0.40 and $1.00 per common share declared and paid in December 2008 and 2007, respectively.(2)

Underwriting income (loss) before tax from the workers' compensation and reinsurance segments is determined by deducting losses and loss adjustment expenses incurred and underwriting and other operating expenses from net
premiums earned.(3)

In September 2005, we exited the assumed reinsurance business and ceased writing and renewing assumed reinsurance contracts, with all contracts fully expired at the end of 2006. The results of the reinsurance segment in
2007 and 2006 consist primarily of changes to loss reserve estimates for the 2005 hurricanes.(4)

The combined ratio, expressed as a percentage, is a key measurement of profitability traditionally used in the property-casualty insurance business. The combined ratio, 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 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. The key operating goal for our workers' compensation segment is to achieve underwriting profits
and significantly outperform the national workers' compensation industry.(5)

Stockholders' equity excluding unrealized (losses) gains 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
(losses) gains on investments classified as available-for-sale. We provide this measure to assist in understanding the impact of the unprecedented volatility of the financial markets on our stockholders' equity per share. Stockholders' equity per
share is the most comparable GAAP financial measure.


1

---



TABLE OF CONTENTS

3

Letter to Stockholders20

Accident Year Reserve Development From Operations21

Stock Price Performance22

Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations48

5-Year Summary of Selected Financial Information50

Consolidated Balance Sheets51

Consolidated Statements of Operations52

Consolidated Statements of Cash Flows54

Consolidated Statements of Stockholders' Equity and Consolidated Statements of Comprehensive Income55

Notes to Consolidated Financial Statements76

Report of Independent Registered Public Accounting Firm78

Certifications, Evaluation of Disclosure Controls and Procedures and Management's Report on Internal Control over Financial ReportingCorporate Directory82

Zenith National Insurance Corp.83

Zenith Insurance Company84

Zenith Office Locations


TheZenith and Zenith are registered U.S. trademarks.

2

---



TO OUR STOCKHOLDERS

Our strategy focused on managing risk (both insurance and investment) with underwriting discipline, low leverage, large amounts of liquidity, and
perhaps having excess capital, served us well during a year of unprecedented turmoil in the worldwide financial system. The year 2008 witnessed massive and controversial government bailouts,
aggressive Federal Reserve intervention resulting in historically low U.S. Government interest rates, volatile and declining equity markets, an economic downturn in the U.S. resulting in a serious
recession of unknown duration, unprecedented declines in consumer wealth and spending, and a lack of stability and confidence in our financial institutions.

Zenith's
record of outperforming the workers' compensation industry continued with a combined ratio of 86% compared to industry estimates of 106%. The combination of low loss ratios and
high expense ratios is not ideal, but it does demonstrate the importance of capable risk management and is the best option until market conditions present attractive growth
opportunities. Premium volume, investment income and net income declined. We continued our stockholders' dividend at $2.00 per share and paid an extra dividend at year-end of $0.40 per share. We have
paid dividends for the past 31 years in the aggregate amount of $637 million, which represents an annual dividend yield of 4.1%.

Premiums
have grown over the long term, but have declined during the past several years. Premium declines are primarily due to rate decreases, underwriting discipline, competition and
the recession in 2008. Long-term performance requires continual disciplined risk management practices (sound underwriting judgment) which is demonstrated by our extremely low loss ratios.
Expense ratios have increased due to our premium declines and commitment to service our customers with quality.

The
combined effect of the economic crisis, unemployment trends and the competitive environment caused our business to decline with insured payrolls down 10%. Claim trends are mixed:
frequency continues favorable but to a lesser extent than in the past few years, while continued pressures on severity persist because of increasing health care cost trends. California's emerging
claim trends caused rate increases of about 4%, effective January 1, 2009.

3

---



STOCKHOLDERS' EQUITY AS A PERCENTAGE OF TOTAL ASSETS IS AMONG THE HIGHEST IN THE INDUSTRY.

Our investment portfolio reflects our philosophy of diversification and high quality assets with a focus on compounding interest over time. Our
portfolio was valued at 97% of cost at year-end and values improved by approximately $14 million through February 6, 2009. Most of the decline is due to record spreads between U.S.
Government and investment grade
securities which seem to be moderating due to Federal Reserve policy. During 2008, we incurred portfolio losses of $12 million after tax, about the same as gains realized in 2007. Stockholders'
equity per share, with our investment portfolio marked to market, was $27.42 per share at December 31, 2008 compared to $28.93 at prior year-end.

In
summary, a strong balance sheet with low leverage, and underwriting discipline coupled with a strong service strategy, provide the basis for our optimism about our
long-term success. In the final analysis, our human capital is our most important asset and is not included on our balance sheet. Continuous improvement in our aggregate knowledge and
curiosity coupled with adequate compensation and incentives for our team is essential for us to continue to prosper in the current challenging environment. Despite the recession, we must continue to
invest in our people and service strategy while curtailing unnecessary expenses. We will discuss these matters in more detail in the balance of this report.

FIVE YEAR SUMMARY  2004 TO 2008

December 31,



Total Assets

Stockholders'
Equity

Stockholders'
Equity
Per Share

Return on
Average
Equity(Dollars in thousands, except per share)2004



$2,414,655

$   502,147

$17.28

27.2
%2005



2,717,456

712,795

19.14

26.32006



2,767,553

940,720

25.41

31.82007



2,772,980

1,073,357

28.93

22.92008



2,520,783

1,023,437

27.42

8.9


FINANCIAL PERFORMANCE  2008 & 2007

4

---



STOCKHOLDERS' EQUITY PER SHARE

GRAPH

FINANCIAL SUMMARY

The following table summarizes pre-tax workers' compensation segment income and reinsurance segment loss during the past three years:

Segment Income (Loss)

2008

2007

2006(Dollars in thousands)Workers'  Compensation

$
84,658

$
243,832

$
313,576Reinsurance*


(192
)

(3,661
)

(20,508
)


*We exited the reinsurance business in 2005.

2008 results compared to 2007 in several key areas were as follows:

1. Net Income:

2. Investments:

5

---



STOCKHOLDERS' EQUITY WAS RELATIVELY UNCHANGED EXCEPT FOR THE DECLINE IN THE VALUE OF OUR INVESTMENT PORTFOLIO.

3. Workers' Compensation:

4. Financial Strength:

6

---



NET INCOME PER COMMON SHARE

GRAPH

RESERVES

Information in the table on page 20 provides estimates of Zenith's net incurred losses and loss adjustment expenses for our workers' compensation and
reinsurance segments by accident year, evaluated in the year they were incurred and as they were subsequently evaluated in succeeding years. These data are of critical importance in judging the
historical accuracy of our reserve estimates as well as providing a guide to setting fair prices and rates. The accuracy of reserve estimates is one of our major business risks which we endeavor to
manage professionally. It is not realistic to believe that 100% accuracy is achievable when forecasting the future. As a result, loss reserve estimates are refined continually in an ongoing process as
experience develops, new information is obtained and evaluated, and claims are reported and paid.

During
the past three years we have reduced workers' compensation loss reserves to reflect the favorable development of prior accident years and increased pre-tax earnings by
$353.5 million. In hindsight, our initial estimates of the benefits of the legislative reforms in California in 2003 and 2004 and in Florida in 2003 were conservative, resulting in favorable
development as the paid loss data for these accident years evolved and the reduction in the frequency of expensive claims became apparent. As the data for these accident years have matured, the
uncertainty surrounding the ultimate impact of these reforms on ultimate loss costs has diminished and our loss reserve estimate at year-end reflects the point estimate of our actuaries. Obviously,
loss reserves in the most recent years contain a greater degree of uncertainty even though the actuarial estimates are based on the best available data. For additional information about reserving and
inflation trends, please turn to pages 30 to 35 of this report.

We
are no longer engaged in the assumed reinsurance business; however, we will be paying our assumed reinsurance claims for several years. As of December 31, 2008, we held
$45 million of reserves to pay our estimated liabilities compared to $63 million at year-end 2007.

7

---



OUR INVESTMENT PORTFOLIO WAS VALUED AT 97% OF COST AND FOCUSES ON COMPOUNDING INTEREST OVER TIME.

INVESTMENTS

Investment activities are a major part of our revenues and earnings. We believe our portfolio is diversified to achieve a reasonable balance of risk and stable
source of earnings. Regulations require Zenith to primarily invest its reserves in high quality debt securities, as compared to equity securities, with large holdings in cash and
short-term U.S. Government securities. Our strategy is to focus on the benefits of compound interest over time. Compared to other insurers we believe our portfolio consists of a smaller
percentage of equity securities to total assets and a larger percentage of cash and short-term securities, with no derivative securities or credit enhancement exposure.

Investment
income pre-tax was $94.0 million compared to $114.9 million in the prior year. Fourth quarter investment income was about 12% higher than the prior
quarter, providing a good start for the current year.

Our
strategy helped us avoid the large losses recognized by other financial firms from equities, mortgages, sub-prime and other derivative securities this past year, but on a
mark-to-market basis we have recorded declines in market value as have others. During 2008 we started with an unrealized gain and ended with an unrealized loss; the change in market value was a
decline of $91.7 million pre-tax or 4.2% of the investment portfolio, and $62.3 million or 5.8% of stockholders' equity after tax. Volatility in the debt markets was unprecedented, with
the beginning modest unrealized gain, ranging up to an unrealized loss of $156 million or 7.8% on $2 billion, and ending with an unrealized loss of $69.5 million. We have also
realized net losses of $18.5 million primarily due to losses on the common stocks of AIG and Advent (Lloyd's reinsurer) and the bonds of Lehman and Harrah's. In certain instances we realized
losses in order to take advantage of tax loss carrybacks.

Under
our accounting principles, in addition to issuer-specific events, a decline of more than 20% for six months requires an impairment charge. At December 31, 2008, we had 23
issues with a decline of more than 20%, but for less than six months. If there is no change in the value of these securities by March 31, 2009, impairment charges of about $17 million
may be required. Impairment charges will reduce current earnings, but have already been reflected in stockholders' equity at year-end 2008.

8

---



INVESTMENT INCOME AFTER TAX PER SHARE

GRAPH

The major developments affecting the U.S. financial markets were the global financial meltdown, liquidity issues, significantly wider spreads
between municipal and corporate and government bonds and substantially reduced short-term interest rates to stimulate a weakened economy. Against this background, the decline in value of
our portfolio, including realized and unrealized losses of $110.2 million, was offset almost entirely by investment income of $94.0 million. We are encouraged by this result during one
of the most difficult investment environments of our time.

Our
short-term investments and liquidity remain high as we search for investment opportunities. Cash and short-term government securities are not the preferred
choices compared to a year ago due to the unprecedented low yields resulting from excess liquidity and a flight to safety. Concerns about the economy (the length and depth of the recession), tight
lending policy by banks, domestic politics, the lack of transparency in balance sheets and the long-term implications of the government abandoning any pretense of financial discipline
suggest that short-term high-quality corporate debt with unprecedented spreads to government securities provides an attractive risk-reward choice at this time. It is, of course, possible
that the default risk of corporate securities has increased, but we are being paid to assume this risk along with the liquidity risk with higher investment income. Our corporate bond and short-term
investment portfolio consists of 70% of securities rated A or above, 21% of securities rated BBB and 9% of securities rated non-investment grade. We have invested only a small amount of
our capital in common stocks since we believe the volatility in the market could impact our capital and our ability to expand our insurance business when desirable. In this regard, it should be
obvious that "excess capital" allows us to pursue a more diversified and opportunistic investment approach, and provided a cushion for the declines in market value of the portfolio caused by the
unanticipated increase in credit spreads and the losses caused by defaults during 2008.

9

---



WORKERS' COMPENSATION PREMIUM EARNED

GRAPH

(in millions)

Securities Portfolio

At December 31, 2008

At December 31, 2007Amortized Cost*

Market Value

Amortized Cost*

Market Value(Dollars in thousands)Securities  maturing
within  two  years:U.S. Treasury bills and notes

$   136,495

$   136,524

$   488,526

$   489,213Commercial  paper

82,817

82,817Short-term  corporates

197,212

195,456

202,640

203,957Municipal bonds

2,000

2,001

17,330

17,355418,524

416,798

708,496

710,525Other  fixed  maturity  securities:Taxable,  investment grade

954,032

918,489

890,054

897,008Taxable,  non-investment grade

160,304

125,467

141,005

132,958GNMAs**

190,603

198,526

218,475

222,352Municipal  bonds

196,128

196,841

128,361

128,960Redeemable  preferred
stocks

4,505

3,613

5,600

4,946Equity  securities

52,888

47,742

60,226

77,669Other investments

58,297

58,297

19,688

19,688Total

$2,035,281

$1,965,773

$2,171,905

$2,194,106


*Equity securities and other investments at cost.
**Mortgage-backed securities that carry the full faith and credit guaranty of the U.S. Government.

WORKERS' COMPENSATION

Zenith is a workers' compensation specialist with 58 years of experience and has primary operations in California and Florida, with business in 43
additional states. California and Florida represent 80% of our business. Our philosophy does not include any planned goals as to size, market share or ranking, but is focused entirely on providing
quality services to our insureds and claimants, generating underwriting profits and delivering an above-average return to our stockholders over time.

Gross
premiums written in 2008 were $608.2 million, a decrease of 17.8% from the prior year, with California premiums representing 54.9% of the total. The decrease in premiums is
due primarily to rate reductions in California and Florida, and our pricing and underwriting strategy compared to our competition, as well as the recession. Underwriting income before tax in this
segment was $84.7 million in 2008 compared to $243.8 million in 2007. During the past five years, our underwriting income from this segment was $959.4 million or 22.4% of net
premiums earned.

10

---



WORKERS' COMPENSATION COMBINED RATIO

GRAPH

Zenith's combined ratios (ratios of losses and expenses incurred to total net premiums earned) on a calendar year and accident year basis as
recorded in our financial statements for the past five years were as follows:

Combined Ratios

Calendar Year

Accident Year2004


88.5
%

86.3
%2005


80.9


81.82006


66.3


80.02007


67.0


84.42008


86.0


99.0


The primary difference between calendar and accident year is the impact of prior accident year reserve adjustments recorded in the calendar year figures. Prior accident
year net, favorable (unfavorable), pre-tax workers' compensation reserve adjustments during the past five years were as follows:

Loss Reserve Adjustments(Dollars in thousands)2004

$
(20,249
)2005


26,2892006


161,2522007


113,3552008


78,896


As a result of substantial loss reserve adjustments in the past few years, the following is the comparison of accident year loss ratios and combined ratios as originally
reported and as estimated at December 31, 2008:

Loss Ratios

Combined RatiosAccident
Year

Originally Reported

As of
December 31, 2008

Originally Reported

As of
December 31, 20082004


46.0
%

27.1
%

86.3
%

64.2
%2005


39.8


26.6


81.8


65.42006


33.6


32.3


80.0


77.82007


33.9


37.9


84.4


88.92008


43.0





99.0


11

---



WE ARE FOCUSED ON PROVIDING QUALITY SERVICES AND GENERATING UNDERWRITING PROFITS OVER TIME.

As can readily be seen in the prior tables, the major contributor to the underwriting profitability during the past several years has been the
relatively large favorable reserve adjustments. Also, the above table shows the declining profitability of the accident years primarily due to increasing expense ratios. Although we do not have a
crystal ball about premium levels in a recessionary environment, we are focused on improving the expense ratio.

Improved
profitability has been shared with our customers in California and Florida, as indicated by the premium rate reductions in the following table:

Effective Date of Rate (Reductions) Increases

California

FloridaJanuary 1, 2005


(2.0
)%

(4.0
)%July 1, 2005


(12.0
)January 1, 2006


(13.0
)

(13.4
)July 1, 2006


(5.0
)January 1, 2007


(4.4
)

(12.5
)January 1, 2008





(18.4
)January 1, 2009


4.0


(18.6
)April 1, 2009





6.4


In addition to the data in the prior table, further price reductions have resulted from lower experience modifications and individual pricing adjustments which are
measured retroactively, and therefore, changes in filed rates alone do not provide a complete picture. We have also incurred dividends to our policyholders of $91.4 million for the years 2005
to 2008. We believe that our service strategy provides the lowest net cost to our long-term customers.

Effective
January 1, 2009, premium rates in California increased 4.0% and in Florida decreased 18.6%. Due to the weak California economy, we have taken steps to ensure that no
renewal policyholder's price will increase by more than 8%, except due to a growth in payrolls. In Florida, the January rate decline will be muted to some degree by a reduction in policyholders'
dividends. In addition, effective April 1, 2009, Florida rates are expected to increase 6.4% as a result of the Florida Supreme Court decision related to increased claimant attorney fees.

12

---



OUR CONTINUED LOW LOSS RATIOS INDICATE OUR SUCCESSFUL UNDERWRITING RISK MANAGEMENT.

Risk-reward issues concerning the financial service industry have received a significant amount of attention recently. Traditional
insurance risk can be measured by the loss ratio. The following table shows our workers' compensation accident year loss ratios for California, outside California and in total compared to estimated
industry loss ratios as of December 31, 2008:

Outside
CaliforniaCalifornia

TotalAccident Year
Loss RatiosZenith

Industry

Zenith

Industry

Zenith

Industry*2002


59
%

83
%

49
%

70
%

55
%

77
%2003


37


52


39


64


37


562004


23


33


36


61


27


422005


24


29


33


58


27


382006


31


38


34


58


32


462007


38


52


38


60


38


562008


46





39





43


*Based on Zenith's premium distribution.

The
comparisons above show that during 2002 to 2007 we have loss ratios substantially below industry averages and demonstrate that we are managing risk successfully. As you may recall
from prior years' Annual Reports, our results appeared not as favorable in 2004 and 2005 in relation to the industry as they do at present. This change is due to the favorable reserve development we
have reflected during the past three years which has resulted in a revision of the accident year loss ratios to reflect our current estimates. We now have more confidence in our estimates of the
accident year loss ratios because they are based on more data.

Zenith
adheres to disciplined and consistent underwriting and customer service principles, and a commitment to pricing strategies based on realistic assumptions anticipated to generate
an underwriting profit. Significantly, our agents offer numerous opportunities for business; however, we are selective and successful in writing only a small proportion of the prospective new
accounts. We do, however, write a substantial percentage of renewal accounts, testimony to our mission of customer satisfaction.

13

---



CLAIM FREQUENCY TRENDS REMAINED FAVORABLE ALTHOUGH
AT A RATE LESS THAN THE REDUCTION IN PREMIUMS.

We measure our sales progress based on insured payroll trends which we believe is a more accurate assessment of size and exposure, rather than
premiums or policy counts. The following table compares premiums, policy counts and insured payrolls, both within and outside of California.

California

Outside  California

TotalDecember  31,

Premiums
in-force

Policies
in-force

Insured
payrolls

Premiums
in-force

Policies
in-force

Insured
payrolls

Premiums
in-force

Policies
in-force

Insured
payrolls(Dollars in millions)2003

$587.9


25,900

$
7,752.2

$
277.8

15,600

$
8,699.4

$
865.7


41,500

$
16,451.62004

731.3


27,200


9,701.2


311.0

16,200


9,993.5


1,042.3


43,400


19,694.72005

722.9


27,500


10,280.9


326.9

16,900


10,833.6


1,049.8


44,400


21,114.52006

501.2


24,600


9,487.4


332.8

16,600


11,744.4


834.0


41,200


21,231.82007

359.3


22,100


8,108.8


310.8

16,200


11,875.7


670.1


38,300


19,984.52008

304.5


19,600


7,133.2


251.7

14,900


10,838.9


556.2


34,500


17,972.1


Our 34,500 policyholders are widely diversified across a number of industries thereby reducing our exposure to an economic downturn. Our largest
exposures are to California agriculture, restaurants, dentists, auto dealers, building maintenance and retail stores.

Claim
frequency trends in 2008 remained favorable as they have for a number of years, with a continuing reduction in the frequency of our highest-cost California claims. The
reduction, however, was less than the reduction in premiums.

The
following table shows the trends in the number of California permanent partial disability ("PPD") claims (our highest cost claims) at various dates:

Number of California PPD Claims Reported After Number of MonthsAccident Year

12

24

36

48

60

72

842002


3,320


2,820


2,735


2,715


2,683


2,665


2,6662003


4,091


3,117


2,912


2,861


2,844


2,8302004


3,972


2,862


2,668


2,617


2,6082005


3,346


2,641


2,573


2,5142006


2,236


2,295


2,2432007


1,812


2,0302008


1,766


14

---



LONG-TERM MEDICAL INFLATION IS A MAJOR CONTRIBUTOR TO SEVERITY IN OUR WORKERS' COMPENSATION CLAIMS.

We also analyze claim frequency in relation to our exposure, as measured by insured payroll. The following table shows the California PPD claims
from the previous table in relation to insured payroll:

California PPD Claims per $10 million of Insured Payroll
After Number of MonthsAccident Year

12

24

36

48

60

72

842002


5.1


4.3


4.2


4.2


4.1


4.1


4.12003


5.4


4.1


3.8


3.8


3.7


3.72004


4.4


3.2


3.0


2.9


2.92005


3.2


2.5


2.4


2.42006


2.2


2.3


2.32007


2.1


2.42008


2.4


As shown, there is a sharply decreasing trend in the frequency of PPD claims compared to payroll exposure as a result of the benefits of the
reforms between accident years 2002 and 2005. The frequency has stabilized in subsequent accident years, 2006 through 2008.

Estimating
the severity trend (the year over year change in the average ultimate cost) of workers' compensation claims is one of our principal business risks. The ultimate costs of
expensive claims (those involving PPD awards) are difficult to estimate due to the uncertainties associated with such factors as the on-going and possibly increasing need for medical care,
the long-term trend of medical inflation, the duration of disability, life expectancy and benefits for dependants.

In
the short run, legislative changes to the workers' compensation system may cause favorable changes in severity trends such as we observed in California (in 2003 and 2004) and in
Florida (in 2003). In the long run, we typically expect to experience an upward severity trend in our workers' compensation claims. Because medical expenses now constitute about 60% of total workers'
compensation benefits, long-term medical inflation is a major contributor to this trend. Health care reform in Washington, D.C. or in California, if it occurs, may impact this trend.

15

---



WE ACTIVATED OUR OWN MEDICAL NETWORKS IN CALIFORNIA WHICH SHOULD REDUCE COSTS OVER TIME AND IMPROVE MEDICAL CARE TO INJURED WORKERS.

We are currently estimating an average medical inflation trend of 7% for accident years 2005 through 2008 which compares with an average medical
deflation trend of 6% for accident years 2003 and 2004 and double-digit inflation rates in the years just preceding the reforms (1998 to 2002). In addition to what we believe are prudent reserving
assumptions, our risk management infrastructure includes significant resources directed towards the medical component of claims.

During
this past year we activated our own medical networks in California. The focus of these networks is quality medical care which should reduce costs over time and improve medical
care to injured workers. We are working on Florida medical networks with a similar focus during 2009. Monitoring the performance of the networks and the quality of treatment and outcomes will be a
continuous challenge, but will be made easier by Dr. Anne Searcy, former head of the California Division of Workers' Compensation medical unit who has joined us as Assistant Chief Medical
Officer to assist Dr. Bernyce Peplowski, our National Medical Director.

Our
catastrophe management strategies are designed to mitigate our exposure to earthquakes, floods and terrorism. Through a combination of reinsurance, underwriting controls and careful
tracking of our exposures, supported by technology, we are focused on effectively managing our risks. We do not routinely insure employers with large concentrations of employees or companies located
in perceived target areas; therefore we are in a good position to minimize the impact of possible terrorist acts.

With
respect to reinsurance, we do business with highly rated reinsurers. When losses are incurred, reinsurers are required to place on deposit with the State of California securities
equal to the losses on the same basis that we are required to do so. These requirements are in place to protect injured workers due to the fact that some losses are paid over many years.

We
are frequently asked the question: how will a long and deep recession impact our underwriting business? Obviously, payrolls of some insureds will decline and the financial condition
of many of our customers may weaken. On the claim side, will claim frequency increase or decrease compared to the change in our exposure? Will settlement patterns or amounts be impacted?
Unfortunately, we have no crystal ball and will watch our data as it emerges for the answer. All businesses will not be impacted similarly. Since the recession has existed for at least one year we can
report no evidence of a material impact on claim frequency to date.

16

---



RISK VERSUS REWARD IS CONTINUALLY RE-ASSESSED IN ALL DIMENSIONS OF OUR BUSINESS.

CONCLUSION

Considering
the unprecedented turmoil in financial markets, we are pleased with the performance of our business during this past year. Stockholders' equity, excluding the fluctuation in
our investment portfolio was about the same in the past year, but including the portfolio, stockholders' equity per share declined about $1.50 or 5%. On the other hand, tangible book value plus
dividends per share increased by 3.2% in 2008.

Workers'
compensation profitability during the past few years has been substantially above average primarily due to the short-term impact of legislative reforms in Florida
and California resulting in favorable reserve development, and our risk management discipline. It is clear that competitive pricing pressures have reduced growth and profitability in all aspects of
the property and casualty business, including workers' compensation. The sub-prime debacle and resulting banking crisis clearly indicate what happens
when underwriting standards and risk management are ignored. Our risk management has produced low loss ratios in our insurance business that have outperformed the competition over long periods, and a
conservative investment portfolio diversified with high quality securities. We continue to re-assess risk in all dimensions of our business in order to avoid the danger of excessive
risk-taking under ever changing circumstances.

Perhaps
the substantial investment losses by insurers and the difficulty in obtaining credit will lead to a change in the competitive climate. Our financial strength is intact (even with
modest mark-to-market portfolio declines) and we intend to continue our high underwriting standards irrespective of the short-term impact on our volume or profits. The continuation of
extremely low loss ratios is evidence that we are succeeding with sound underwriting in our insurance business, but we must continue to be disciplined due to the challenging environment presented by
the recession. Our service strategy provides long-term benefits to our policyholders and investors.

Our
business model operates well despite the ups and down of the economic and competitive cycles provided that we maintain underwriting discipline and continue to improve our services to
claimants, policyholders and agents. The 2008 results reflect lower underwriting profits than in prior years, consisting of continued low loss ratios and high expense ratios. We are taking certain
actions to reduce our administrative costs, but not at

17

---



THE RECESSION PROVIDES BOTH CHALLENGES AND OPPORTUNITIES.

the expense of weakened underwriting discipline or reduced services to our customers. We prefer growth coupled with underwriting discipline when market
conditions permit. Our strong balance sheet, human capital and recent unprecedented investment opportunities in short-term high-quality corporate securities provide encouragement for the
future. During the past year there has been unprecedented volatility in our investment portfolio, but as of year-end we are pleased to report that market value reflects a modest loss of 3%. The
portfolio value improved by approximately $14 million through February 6, 2009.

Stockholder
dividends continued at an annual rate of $2.00 per share; in addition, we paid a $0.40 extra dividend at year-end. Our stock price declined this year from $44.73 to $31.57 or
29%. Many insurers declined by large amounts, some even to a greater extent than Zenith. The future is clouded by a recession of unknown dimensions despite considerable government intervention.
Against this background, our financial and operational strength is not only intact, but to some extent stronger than ever relative to some of our large competitors. We are searching for opportunities
while carefully considering the financial strength of our customers. We are managing our expenses while making sure we enhance our human capital for the long term.

President
Obama has made one of his high priorities the revamping of the nation's health care system. Since health care costs are the largest component of our loss ratio, we may be
impacted by any legislation that results. Also, regulatory change will be discussed due to the financial chaos, including the possibility of federal regulation of insurance. At this time we have no
details, but we will closely follow the developments.

I
am saddened to record in this report the previously announced death of our esteemed director Gerald Tsai, Jr. Jerry was a Zenith director for 17 years and his advice and
guidance were instrumental in our success. He always reminded us of the conflict between danger and opportunity which is an important lesson during these difficult and challenging times. Jerry is
deeply missed, but his guidance continues to impact our decisions.

We
announced in December the election of a new director, Fabian Nuñez, Speaker Emeritus of the California Assembly. Fabian brings a wealth of experience and judgment to
our Board coupled with a record of achievement at a relatively young age which should serve as a source of inspiration to our entire workforce.

18

---



WE CONTINUE TO FOCUS ON LONG-TERM RESULTS.

I have mixed emotions in acknowledging that our esteemed director Leon Panetta has resigned from our Board effective February 2, 2009 to
become the Director of the CIA. Leon has made invaluable contributions to our Company during the past eight and a half years. We are pleased that Leon will take over this important responsibility for
President Obama and contribute his unique talents for the benefit of all of our citizens. In this case, Washington's gain is Zenith and California's loss, but we are confident that all Americans will
benefit from Leon's abilities.

On
February 5, 2009, Jerome L. Coben, formerly managing partner of the law offices of Skadden, Arps in Los Angeles was appointed to our Board. Jerry has been our principal
outside corporate counsel for about 25 years and has a strong familiarity with our business, officers and directors. We look forward to having the benefit of Jerry's advice and guidance in this
new capacity.

In
conclusion, we are fortunate to have an extremely qualified and collegial board of directors to help us deal with the challenging environment and to operate the business with a focus
on long-term results, legal and ethical compliance and high standards of corporate conduct. Our disclosures in this report demonstrate continuing commitment to maximum transparency so that
all of our constituencies are fully informed.

SIG

Stanley
R. Zax
Chairman of the Board and President
Woodland Hills, California, February 13, 2009

19

---



ACCIDENT YEAR RESERVE DEVELOPMENT FROM OPERATIONS

Net incurred losses and loss adjustment expenses reported at end of yearYears in which losses were incurred

2002

2003

2004

2005

2006

2007

2008(Dollars in thousands)Prior to 2003

$
5,331,762

$
5,345,977

$
5,411,435

$
5,488,897

$
5,504,983

$
5,523,625

$
5,491,8082003





523,707


471,615


443,744


440,190


423,524


387,3022004








615,397


538,906


490,530


455,377


410,8142005











730,770


625,292


593,668


578,5932006














464,106


419,106


435,3352007

















362,645


395,9852008




















358,016Prior Period Development (Unfavorable) Favorable





(14,215
)

(13,366
)

26,900


141,322


109,801


78,108Losses and loss adjustment expense ratios2003





67.7
%

60.9
%

57.3
%

56.9
%

54.7
%

50.1
%2004








65.2


57.1


51.9


48.2


43.52005











62.0


53.0


50.4


49.12006














49.2


44.4


46.12007

















49.2


53.62008




















59.0


This
analysis displays the accident year net incurred losses and loss adjustment expenses on a GAAP basis in total for accident years prior to 2003 and for each of the accident years
2003-2008 for our workers' compensation and reinsurance businesses together. The total of estimated net losses and loss adjustment expenses for all claims occurring within each annual
period is shown first at the end of that year and then annually thereafter. The total cost includes both payments made and the estimate of future payments as of each year-end. Past
development may not be an accurate indicator of future development since trends and conditions change.

The
total change in our incurred losses estimates for all prior accident years in 2008 was a net decrease, or favorable development, of $78.9 million in our workers' compensation loss reserves
reflecting a reduction of estimated losses for the 1999 through 2005 accident years, partially offset by increases for the 2006 and 2007 accident years.

20

---



STOCK PRICE PERFORMANCE

The Stock Price Performance Graph below compares the cumulative total returns of the Common Stock, par value $1.00 per share, of Zenith National
Insurance Corp., ticker symbol ZNT ("Zenith"), the Standard and Poor's 500 Stock Index ("S&P") and the Standard and Poor's 500 Property-Casualty Insurance Index ("S&P PC")
for a five-year period. Stock price performance is based on historical results and is not necessarily indicative of future stock price performance. The following graph assumes $100 was invested at the
close of trading on the last trading day preceding the first day of the fifth preceding year in Zenith, the S&P 500 and the S&P PC. The calculation of cumulative total return assumes the
reinvestment of dividends. The graph was prepared by Standard and Poor's Financial Services, LLC, which obtained factual materials from sources believed by it to be reliable, but which disclaims
responsibility for any errors or omissions contained in such data.

Comparative Five-Year Total Returns
Zenith, S&P 500, and S&P PC
(Performance Results Through December 31, 2008)

GRAPHIC

21

---



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

Zenith National Insurance Corp. and Subsidiaries

Zenith National Insurance Corp. ("Zenith National") is a holding company engaged, through its wholly-owned subsidiaries (primarily Zenith Insurance
Company ("Zenith Insurance")), in the workers' compensation insurance business, nationally. 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 asexpect, anticipate, believe, estimate, likely,or similar words that are used in this Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations ("MD&A"), in other parts of this
report or in other written or oral information conveyed by or on behalf of Zenith, are intended to identify forward-looking statements. The Company undertakes no obligation to update such
forward-looking statements, which are subject to a number of risks and uncertainties that could cause actual results to differ materially from those projected. These risks and
uncertainties include, but are not limited to, the following: 1) impact of the current unprecedented volatility in the financial markets, including the duration of the crisis and effectiveness
of governmental solutions; 2) current recession; 3) competition; 4) payroll levels of our customers; 5) adverse state and federal legislation and regulation;
6) changes in interest rates causing fluctuations of investment income and fair values of investments; 7) changes in the frequency and severity of claims and catastrophes;
8) adequacy of loss reserves; 9) changing environment for controlling medical, legal and rehabilitation costs, as well as fraud and abuse; 10) losses associated with any terrorist
attacks that impact our workers' compensation business in excess of our reinsurance protection; 11) losses caused by nuclear, biological, chemical or radiological events whether or not there is
any applicable reinsurance protection; and 12) other risks detailed herein and from time to time in our reports and filings with the Securities and Exchange Commission.

OVERVIEW

We are in the business of managing insurance and investment risk with the major risk factors set forth in the preceding paragraph. Our main
business activity is the workers' compensation insurance business. We measure our performance by our ability to increase stockholders' equity, including dividends, over the long term. Following is a
summary of our recent business performance and how we expect the trends to continue for the foreseeable future.

Revenues.Our revenues are comprised of the net premiums earned primarily from our workers' compensation segment, and net
investment income and realized (losses) gains from our investments segment. Total revenues, as well as workers' compensation net premium earned, decreased in the year ended December 31, 2008
compared to 2007, and also decreased in the year ended December 31, 2007 compared to 2006. The decline in workers'

22

---



compensation net premium earned reflects the reduction in premium rates, the impact of competition and, in 2008, the recession. Revenues in 2008 also reflect decreased net
investment income compared to 2007 and net realized losses in 2008 compared to net realized gains in 2007.

Premium
revenues in 2009 will reflect the 4% increase in California premium rates and the 18.6% decrease in Florida premium rates, both effective January 1, 2009; as well as the
impact of competition and the recession. The Florida rate decrease will be partially offset by a 6.4% rate increase effective April 1, 2009 for new and renewal business as a result of a Supreme
Court decision expected to increase claimant attorney fees.

Our
risk reward strategy emphasizes pricing and underwriting discipline to maintain profitability rather than focusing on revenue or market share. Our workers' compensation premiums are
discussed further under "Results of OperationsWorkers' Compensation Segment" beginning on page 25.

Workers' Compensation Segment.Underwriting income before tax from our workers' compensation segment for each of the three
years ended December 31, 2008 was as follows (dollars in thousands):

2008

$
84,6582007


243,8322006


313,576


Workers' compensation underwriting income reflects a decreasing trend but continued at very profitable levels, resulting in combined ratios that outperformed the workers' compensation
industry in all three years. Underwriting income includes favorable development on prior accident year loss reserve estimates, but at decreasing amounts as shown below. In addition, underwriting
income reflects the impact of increasing accident year combined ratios primarily due to the decline in premium combined with fixed expenses. Additional information about our workers'
compensation segment results are discussed further under "Results of OperationsWorkers' Compensation Segment" beginning on page 25.

The
pre-tax favorable development on prior accident year workers' compensation loss reserve estimates recognized for each of the three years ended December 31, 2008
follows (dollars in thousands):

2008

$
78,8962007


113,3552006


161,252


The favorable development is a result of our estimates of loss reserves following the legislative reforms in California and Florida. With the passage of time, more claims for the
2003 - 2006 accident years have been paid and closed and, with the benefit of this data, our estimates of prior year reserves have proven to be redundant. At this time, we
do not currently expect the favorable development that occurred over the past three years to continue and we cannot predict the amount or timing of future reserve changes, whether favorable or
unfavorable.

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

Year Ended December 31,(Dollars in thousands)

2008

2007

2006Net investment income

$
94,027

$
114,863

$
106,294Net realized (losses) gains on investments


(18,507
)

20,353


13,377Income before tax from investments segment

$
75,520

$
135,216

$
119,671


Investment income in 2008 compared to 2007 reflects lower earnings on short-term investments during 2008. In addition, 2008 and 2007 include a $1.1 million and a
$7.3 million cash dividend on a common stock investment, before tax, respectively.

23

---



Net
realized losses during 2008 are primarily attributable to the common stock of American International Group, Inc. ("AIG") and Advent Capital (Holdings) PLC (Lloyd's
reinsurer) ("Advent") and the bonds of Lehman Brothers Holdings Inc. ("Lehman") and Harrah's Entertainment, Inc. ("Harrah's"), partially offset by realized gains. During the fourth
quarter 2008, we sold certain securities in order to generate tax capital losses that can be carried back and used to offset taxes paid on net realized capital gains in 2005.

Our
investment portfolio reflects our philosophy of diversification and high quality assets with a focus on compounding interest over time. Investment income in the short term will be
affected by changing interest rates and our ability to invest in attractive risk reward opportunities provided by the current financial markets.

At
December 31, 2008, $0.4 billion of our investment portfolio was in fixed maturities of two years or less compared to $0.7 billion at December 31, 2007.

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

December 31,(Per outstanding common share)2008

2007

2006Stockholders' equity:Excluding unrealized (losses) gains on investments

$
28.77

$
28.60

$
25.06Unrealized (losses) gains on investments


(1.35
)

0.33


0.35Stockholders' equity

$
27.42

$
28.93

$
25.41Cash dividends declared:Regular

$
2.00

$
1.84

$
1.26Extra


0.40


1.00Total

$
2.40

$
2.84

$
1.26


Stockholders' equity excluding unrealized (losses) gains 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 (losses) gains on investments classified as available-for-sale. We provide this measure to assist in understanding the impact of
the unprecedented volatility of the financial markets on our stockholders' equity per share. Stockholders' equity per share is the most comparable GAAP financial measure.

The
decline in stockholders' equity per share substantially consists of the decline in the market value of our investment portfolio. The decline in fair values in our investment
portfolio in 2008 is primarily attributable to widening credit spreads between U. S. Government and investment grade securities. It is possible that we could recognize impairment losses on some
securities we own at December 31, 2008 if future events, information and the passage of time cause us to determine that a decline in value is other-than-temporary. If
there is no change in the value of certain securities by March 31, 2009, impairment charges of approximately $17 million may be required based on December 31, 2008 valuations.

Stockholders'
equity will primarily depend upon the future level of net income, payment of dividends and any fluctuations in the fair values of our investments. We will continue to
evaluate whether we have excess capital, including consideration over time of the level of dividends.

More
information about the key elements of our performance is provided in the following pages.

24

---



RESULTS
OF OPERATIONS

Summary Results by Segment.Our business is comprised of the following segments:
workers' compensation, reinsurance and investments. Income from operations of the investments segment includes net investment income and net realized gains and losses on investments, and we do not
allocate investment income to the results of our other segments. Income (loss) from operations of the workers' compensation and reinsurance segments is determined by deducting 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). In September 2005, we exited
the assumed reinsurance business. 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)

2008

2007

2006Net investment income

$
94,027

$
114,863

$
106,294Net realized (losses) gains on investments


(18,507
)

20,353


13,377Income before tax from investments segment


75,520


135,216


119,671Income (loss) from:Workers' compensation segment


84,658


243,832


313,576Reinsurance segment


(192
)

(3,661
)

(20,508
)Parent


(12,790
)

(12,506
)

(11,927
)Income before tax


147,196


362,881


400,812Income tax expense


51,896


128,981


142,112Net income

$
95,300

$
233,900

$
258,700


Workers' Compensation Segment.In the workers' compensation segment, we provide insurance coverage for the statutorily
prescribed benefits that employers are required to provide to their employees who may be injured in the course of employment. Except in those states, primarily Florida, where we are required by
regulation to use mandated rates, we set our own rates based upon actuarial analysis of current and anticipated cost trends with the goal of achieving underwriting profits. We continually analyze data
and use our best judgment about loss cost trends, particularly medical inflation, to set adequate premium rates and loss reserves.

Each
quarter, we re-estimate our loss reserves for prior accident years and our loss ratio for the current accident year as we receive more information. Changes in estimates
for prior accident years are reflected in the Statement of Operations in the period in which the changes are made. We discuss our loss reserve estimates beginning on page 30.

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. 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 profits and significantly outperform the national workers' compensation industry. Historically, a
combined ratio of 100% or lower was considered an excellent result, however, in recent years we have achieved combined ratios significantly better than this target.

25

---



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

Calendar
Year

Favorable
(Unfavorable)
Prior Period
Development

Accident
YearYear Ended December 31, 2008Losses


31.9
%

11.1
%

43.0
%Loss adjustment expenses


14.1


1.9


16.0Underwriting and other operating expenses


40.0





40.0Combined 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 (1)


33.2


2.0


35.2Combined ratio


67.0
%

17.4
%

84.4
%Year Ended December 31, 2006Losses


16.9
%

16.7
%

33.6
%Loss adjustment expenses


14.5


0.6


15.1Underwriting and other operating expenses (1)


34.9


(3.6
)

31.3Combined ratio


66.3
%

13.7
%

80.0
%


(1) Prior period development for underwriting and other operating expenses represents changes in estimated policyholders' dividends for prior
accident years.

The
table above reflects increasing combined ratios year over year on both a calendar year and accident year basis, resulting in lower profitability, however, prior period development
has had approximately the same effect on the ratios each year.

Net
premiums earned in the workers' compensation segment were as follows:

Year Ended December 31,(Dollars in thousands)2008

2007

2006California

$
332,196

$
407,105

$
582,282Outside California


274,088


331,091


349,457Total net premiums earned

$
606,284

$
738,196

$
931,739


Calendar
year workers' compensation underwriting income before tax was $84.7 million for the year ended December 31, 2008, compared to $243.8 million and
$313.6 million for 2007 and 2006, respectively. The following provides additional information related to the decrease in workers' compensation underwriting income:

26

---





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

(Dollars in millions)

Premiums
in-force

Policies
in-force

Insured
payrollsCaliforniaDecember 31, 2008

$
304.5


19,600

$
7,133.2December 31, 2007


359.3


22,100


8,108.8December 31, 2006


501.2


24,600


9,487.4December 31, 2005


722.9


27,500


10,280.9December 31, 2004


731.3


27,200


9,701.2December 31, 2003


587.9


25,900


7,752.2Outside CaliforniaDecember 31, 2008

$
251.7


14,900

$
10,838.9December 31, 2007


310.8


16,200


11,875.7December 31, 2006


332.8


16,600


11,744.4December 31, 2005


326.9


16,900


10,833.6December 31, 2004


311.0


16,200


9,993.5December 31, 2003


277.8


15,600


8,699.4TotalDecember 31, 2008

$
556.2


34,500

$
17,972.1December 31, 2007


670.1


38,300


19,984.5December 31, 2006


834.0


41,200


21,231.8December 31, 2005


1,049.8


44,400


21,114.5December 31, 2004


1,042.3


43,400


19,694.7December 31, 2003


865.7


41,500


16,451.6


The
table above reflects the following trends in our workers' compensation business over the last three years: 1) the reduction in premiums in-force reflects the
impact of premium rate reductions due to favorable loss cost trends originating from the legislative reforms in California and Florida, as well as the impact of competition; 2) the impact of
competition is also reflected in the reduction in policies in-force; and 3) the reduction in insured payrolls is caused by the reduction in policies in-force
(competition), as well as the current recession in 2008.

In
California, the Workers' Compensation Insurance Rating Bureau ("WCIRB") recommends Claims Cost Benchmarks (previously called the advisory pure premium rates) to be used by companies
in determining their premium rates. The California Department of Insurance ("California DOI") also adopts and publishes their own recommended Claims Cost Benchmarks. The benchmark rates cover expected
loss costs, but do not contain an element to cover operating expenses or profit. In
September 2008, the WCIRB proposed a 16% increase in the January 1, 2009 Claims Cost Benchmarks; and the California DOI adopted and published a Claims Cost Benchmark increase of 5% for
January 1, 2009. Notwithstanding the foregoing, we set our own California premium rates based upon actuarial analysis of current and anticipated cost trends, including any modification to the
workers' compensation system, while maintaining our goal of achieving underwriting profits and outperforming the industry. Due to increasing medical costs in California, we increased our manual rates
4% effective January 1, 2009. The manual rates do not necessarily indicate the rates charged to our policyholders because employers' experience modification factors are subject to revision
annually and our underwriters are given authority to increase (debit) or decrease (credit) rates based upon individual risk characteristics. We also made provisions that renewal rates are limited to
an 8% increase due to the combined impact of changes in rates and rating factors effective January 1, 2009. The following table sets forth

27

---



the
manual rate change percentages in California, as well as the change in the average rate charged on renewal business for each period presented, after taking into consideration all of the factors
discussed above.

Policy Renewal Date

Manual
Rate
Change

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


(10.0
)%

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


(13.0
)

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


(17.0
)

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


(4.0
)

(11.0
)January 1, 2008 - December 31, 2008





(6.0
)January 1, 2009


4.0


NA


NA = Not yet available.

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

Effective date of change

Manual
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

6.4


The
January 1, 2009 premium rate decline in Florida will be partially offset by a reduction in policyholders' dividends. The National Council on Compensation
Insurance, Inc. ("NCCI") has estimated that premium rates will need to increase 8.9% in March 2009 and another 8.9% in January 2010 due to the fourth quarter 2008 Florida Supreme Court
decision, expected to increase claimant attorney fees, discussed in the "Workers' Compensation Reform Legislation" section below. In February 2009, the Florida Insurance Commissioner approved a
premium rate increase of 6.4% effective April 1, 2009 for new and renewal business.

Most
of our workers' compensation policies are non-participating but 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. In addition, Florida statutes require payment of additional
policyholders' dividends to Florida policyholders pursuant to a formula based on underwriting results ("Florida Dividends"). As of December 31, 2008 and 2007, we accrued approximately
$20 million for Florida Dividends payable for prior accident years. We reduced our estimate for Florida Dividends at December 31, 2008 from the estimate made at September 30, 2008
to reflect the impact of the fourth quarter 2008 Florida Supreme Court decision expected to increase claimant attorney fees. During 2007, we reduced our accrual for estimated Florida Dividends by
$15.1 million to reflect the impact of changes in our direct loss reserves. Our ultimate obligation for Florida Dividends is dependent on our filings with the Florida DOI and on our prescribed
loss reserves included in our annual statutory financial statements.

Workers' Compensation Reform Legislation.During 2008, we wrote workers' compensation insurance in 45 states, but the largest
concentrations, 54.8% and 25.1% of our workers' compensation net premiums earned during 2008, were in California and Florida, respectively. The concentration of our workers' compensation business in
these states makes the results of our operations dependent on trends that are characteristic of these states as compared to national trends, e.g., state legislation, competition, economic and
employment trends, and workers' compensation medical inflation trends.

28

---



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

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

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
Florida, legislation was enacted effective October 1, 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 Health, Inc. case which
reverses an element of the 2003 reforms limiting attorney awards and precluding attorneys from earning an hourly fee on litigated benefit issues. We have incorporated the estimated impact of this
decision in our estimate of ultimate losses for open claims in Florida as well as our estimate for Florida Dividends as of December 31, 2008.

29

---



Reinsurance Segment.In September 2005, we exited the assumed reinsurance business and ceased writing and renewing assumed
reinsurance contracts with all contracts fully expired at the end of 2006; 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, primarily consisting of changes to loss reserves.

In
assumed reinsurance, we provided coverage that protected other insurance and reinsurance companies from the accumulation of large losses from major loss events, known in the insurance
industry as "catastrophes." Results of the reinsurance segment were favorable in the absence of catastrophes and unfavorable in periods when catastrophes occurred and, consequently, the results of
this segment fluctuated. There were no catastrophe losses recorded in the reinsurance segment for the year ended December 31, 2008. Results of the reinsurance segment for the year ended
December 31, 2007 were reduced by catastrophe losses of $3.0 million ($2.0 million after tax, or $0.05 per share) compared to catastrophe losses of $19.9 million
($12.9 million after tax, or $0.35 per share) for the year ended December 31, 2006, primarily attributable to loss development on Hurricanes Wilma and Rita, which occurred in 2005.

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

Investments Segment.Investment income and realized gains and losses are discussed in the "Investments" section below.

Parent.The parent loss reflects the holding company activities of Zenith National, as follows:

Year Ended December 31,(Dollars in thousands)

2008

2007

2006Interest expense

$
5,154

$
5,245

$
5,275Parent expenses


7,636


7,261


6,652Parent loss

$
12,790

$
12,506

$
11,927


LOSS RESERVES

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. Our loss reserves were as follows:

December 31,(Dollars in millions)

2008

2007Workers' compensation segment:Unpaid losses and loss adjustment expenses

$
1,230

$
1,390Less: Receivable from reinsurers for unpaid losses


269


326Unpaid losses and loss adjustment expenses, net of reinsurance

$
961

$
1,064Reinsurance segment:Unpaid losses and loss adjustment expenses

$
45

$
63Total:Unpaid losses and loss adjustment expenses

$
1,275

$
1,453Less: Receivable from reinsurers for unpaid losses


269


326Unpaid losses and loss adjustment expenses, net of reinsurance

$
1,006

$
1,127


30

---



Loss
reserves are estimates and are inherently uncertain; they do not and cannot represent an exact measure of ultimate liability. Accordingly, as we receive new information and update
our assumptions over time regarding the ultimate liability, our loss reserves may prove to be inadequate to cover our actual losses or they may prove to exceed the ultimate amount of our actual
losses. The amount by which estimated losses, measured subsequently by reference to payments and additional estimates, differ from those originally reported for a period is known as "development."
Development is favorable when losses ultimately settle for less than the amount reserved or subsequent estimates indicate a basis for reducing loss reserves on open claims. Development is unfavorable
when losses ultimately settle for more than the levels at which they were reserved or subsequent estimates indicate a basis for reserve increases on open claims. Favorable or unfavorable development
of loss reserves is reflected in our Consolidated Statements of Operations in the period in which the change is made.

The
following table shows the favorable (unfavorable) one-year loss reserve development for loss reserves for each of the three years ended December 31, 2008. The
one-year loss reserve development is the change recorded in the current year for the estimate of the loss reserves established at the end of the preceding year and reflects a cumulative
adjustment to estimates for all accident years.

(Dollars in thousands)

Workers'
Compensation

Reinsurance

TotalOne-year loss development in:2008

$
78,896

$
(788
)
$
78,1082007


113,355


(3,554
)

109,8012006


161,252


(19,930
)

141,322


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 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.

At
December 31, 2008 and 2007, IBNR and bulk reserves included in loss reserves, net of reinsurance recoverables, were as follows:

December 31,(Dollars in thousands)

2008

2007Workers' compensation

$
212,651

$
294,105Reinsurance


10,276


10,266Total IBNR & bulk reserves

$
222,927

$
304,371


We
perform a comprehensive review of our loss reserves at the end of every quarter. Estimating loss reserves is a complex process which involves a combination of actuarial techniques and
management judgment. 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.

31

---



Favorable
development of our workers' compensation loss reserves in 2008, 2007 and 2006 reflects management's 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, as well as the reduction in the number of California expensive claims
relative to the total number of claims in recent accident years. The loss reserve estimates recorded in the financial statements ("carried reserves") at December 31, 2008 reflect the actuarial
point estimate. In prior periods the carried reserves have been higher than the actuarial point estimate, including as of December 31, 2007, when our carried reserves were $41 million
higher than the actuarial estimate. The differences between the actuarial point estimate and the carried reserves in prior periods were principally caused by the differences in the assumptions used by
management for workers' compensation claim cost inflation (deflation) as compared to the inflation (deflation) assumptions produced using actuarial methods. Due to the long-tail nature of
the business
and the uncertainties in estimating ultimate loss costs caused by the significant uncertainties of the 2003 and 2004 legislative reforms on ultimate loss costs, management's assessment of the ultimate
benefits of the reforms lagged those produced by actuarial techniques. As the data for these accident years has matured, the uncertainty surrounding the ultimate outcome of the workers' compensation
claim costs has diminished, and management believes the actuarial point estimate reflects the best estimate for loss reserves at December 31, 2008. We believe our loss reserve estimates as of
December 31, 2008 are adequate; however, we cannot predict the amount or timing of future loss reserve development, whether favorable or unfavorable.

In
prior periods we presented paid loss inflation (deflation) by accident year as well as our assumptions for accident year inflation (deflation) rates used in our estimates of ultimate
losses. This information was presented to provide insight into the significant changes occurring as a result of the legislative reforms, as well as management's ongoing assessment of the ultimate
benefits of these reforms in estimating loss reserves. We are no longer providing the annual inflation table because with the passage of time and as the data have matured, the differences between the
paid and carried inflation factors over several years is minimal.

In
determining our loss reserve estimates, our actuaries consider medical inflation by evaluating longer term trends. During the accident years just prior to the legislative reforms
(1998 - 2002), we experienced double digit medical inflation. During 2003 and 2004, legislative 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 medical treatment guidelines. Our loss
estimates for these two years reflect an average 6% per year deflation in medical costs. For the accident years following the reforms, we are experiencing a return to inflation and our loss reserve
estimates reflect an average 7% per year medical inflation rate for 2005 through 2008. Our premium rates are established based on our forecast of future medical inflation. During the reform years, we
reduced our premium rates in California based on the expected decrease in medical costs, combined with the other benefits of the reforms. Because we are expecting future medical inflation to be
greater than that of recent years, we increased premium rates in California by 4% effective January 1, 2009.

Discussed
below are the principal uncertainties considered, the actuarial estimation process used, the role of management, recent trends and new information received, and the impact of
different medical inflation assumptions on workers' compensation loss reserve estimates.

32

---



Principal Uncertainties.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 uncertainties considered include the ultimate number of expensive cases and the length of time required to settle
long-term, expensive cases, combined with the effects of medical inflation. Expensive claims are those involving permanent partial disability ("PPD") of an injured worker and are paid over
several 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. Historically in California, the expensive claims have comprised about 20% of the number of claims and 90% of the cost of all claims.

Although
we believe the current recession is a risk to the claims operations, we do not have any data that suggest that it may have a material impact on our business.

Actuarial Estimation Process.Our actuaries produce a point estimate for workers' compensation loss reserves using the
results of various methods of estimation. However, these various methods do not produce separate point
estimates. Our actuaries prepare reserve estimates 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. A customized method is used for more recent accident years related to business
written in California to focus on the impacts of the legislative reforms in determining loss reserves. The actuarial point estimate is based on a selection of the results of these various methods
depending upon both the age of the accident year and the geographic state of the injury. For more mature accident years, all of the methods produce very similar loss estimates, and our actuarial point
selections are based upon incurred loss development methods because our actuaries believe this most accurately reflects the required reserves for the relatively few claims that remain open. For recent
accident years related to business written outside of California, our actuarial point selections are also based on the incurred loss development methods because our actuaries believe this method most
accurately reflects the required reserves based on their analysis of the data and understanding of the claim environments in which we operate. For the more recent accident years related to business
written in California, our actuaries use a loss reserving model which estimates the differing effects of the 2003 and 2004 legislative reforms on the following five categories of benefit types:
1) temporary disability indemnity, 2) vocational rehabilitation, 3) permanent disability indemnity, 4) medical costs, and 5) allocated loss adjustment expense. For
each of these types of benefits, our actuaries review the historical paid trends and make adjustments to reflect the known effects of the reforms (e.g., limitations on temporary disability
indemnity benefits and eliminating vocational rehabilitation benefits). Our actuaries then use judgment to forecast ultimate inflation rates for each benefit type allowing for the late emergence of
costs for the most serious cases based on historical trends. The selected inflation rate produces an estimate of loss reserves for each benefit type. This method responds gradually to each quarter's
actual paid loss information.

Role of Management.Management reviews the actuarial point estimate each quarter as well as all relevant information
regarding recent legislative reforms, claim payment trends and settlement practices of the Company. Because the uncertainties of the effects of the reforms have diminished, 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, 2008.

33

---



Recent Trends and New Information.The recent trends and the new information received during 2008 are
discussed below.

In
previous reports, we discussed the favorable impact of declining claim frequency on our estimates of ultimate loss costs, particularly for the California PPD claims (expensive
claims). Historical trends show that the ultimate number of expensive claims for each accident year is not apparent until 36 months has elapsed because the level of permanent disability is
initially estimated early in the claim process based upon the available medical information. The final assessment of a claimant's permanent disability occurs when the claimant has reached a permanent
and stationary medical status.

The
following table shows the trend in the number of California PPD claims at various dates:

Number of California PPD Claims Reported
After Number of MonthsAccident Year

12

24

36

48

60

72

842002


3,320


2,820


2,735


2,715


2,683


2,665


2,6662003


4,091


3,117


2,912


2,861


2,844


2,8302004


3,972


2,862


2,668


2,617


2,6082005


3,346


2,641


2,573


2,5142006


2,236


2,295


2,2432007


1,812


2,0302008


1,766


The following table shows the California PPD claims from the previous table in relation to insured payroll:

California PPD Claims per $10 million of Insured Payroll
After Number of MonthsAccident Year

12

24

36

48

60

72

842002


5.1


4.3


4.2


4.2


4.1


4.1


4.12003


5.4


4.1


3.8


3.8


3.7


3.72004


4.4


3.2


3.0


2.9


2.92005


3.2


2.5


2.4


2.42006


2.2


2.3


2.32007


2.1


2.42008


2.4


As shown in the table above, the frequency of California PPD claims compared to the payroll exposure has decreased sharply as a result of the benefits of the reforms
between accident years 2002 and 2005. The frequency of California PPD claims compared to payroll exposure has stabilized in subsequent accident years, 2006 through 2008.

In
previous reports, we also discussed the impact of settlements on the recent paid loss trends, as well as on our estimates of ultimate loss costs. Expensive claims often result in some
form of a settlement with the injured worker which generally takes place many years after the injury. As the percentage of settlements increases for the expensive claims, the uncertainty in our
estimates of the ultimate loss
costs for these accident years diminishes. During 2007 and 2008, the rate of settlement of the California PPD claims has increased. For the 2006 accident year, we have settled 57.2% of the California
PPD claims as of December 31, 2008 compared to 44.5% for accident year 2005 as of December 31, 2007. We believe that more rapid settlement of these claims will favorably impact our
ultimate loss costs.

We
also evaluate loss information for the entire California industry in estimating our ultimate loss costs for each accident year. In December 2008, the WCIRB released its current
estimate of California workers' compensation loss experience based on data through September 30, 2008. The WCIRB projects an ultimate accident year loss ratio of 52% for the 2007 accident year,
which is a 14 percentage point increase over its estimated 2006 ultimate accident year loss ratio of 38% and a 23 percentage point increase over its estimated 2005 ultimate accident year
loss ratio of 29%. The WCIRB's estimate of the amount by which the California workers' compensation industry's reported loss reserves are redundant for all accident years was increased to
$7.5 billion from the $6.9 billion previous estimate. We do not believe that the WCIRB's estimate of reserve redundancy is representative of our situation, and therefore we do not
believe this information should be used to estimate redundancies in our loss reserves.

34

---



During
the fourth quarter 2008, the Florida Supreme Court reached a decision in theEmma Murray vs. Mariner Health, Inc.case expected to increase claimant attorney fees. The NCCI estimated that this legal decision results in a $400 million unfunded liability for the Florida workers' compensation industry.
Utilizing NCCI's methodology, we have estimated our liability at $9.5 million, which partially offsets the continuing favorable development on prior accident year loss reserves that we
recognized from the legislative reforms during 2008.

Year ended December 31, 2008.During 2008, we decreased our estimated ultimate losses for prior accident years to
reflect the actuarial point estimate and recognized net favorable development of $78.9 million, representing 7.4% of our estimated workers' compensation loss reserves, net of reinsurance, at
December 31, 2007 and 13.0% of our workers' compensation net premiums earned for the year ended December 31, 2008.

Our
2008 accident year loss ratio increased to 43.0% for the year ended December 31, 2008 compared to 33.9% for the year ended December 31, 2007. The higher 2008 accident
year loss ratio reflects lower claim frequency, however this reduction was less than the reduction in premium, combined with increasing medical costs in California.

Year Ended December 31, 2007.During 2007, we recognized net favorable development of prior accident year workers'
compensation loss reserves of $113.4 million during 2007, representing 9.5% of our estimated workers' compensation net loss reserves at December 31, 2006, and 15.4% of our workers'
compensation net premiums earned for the year ended December 31, 2007.

Year Ended December 31, 2006.During 2006, we recognized net favorable development of prior accident year workers'
compensation loss reserves of $161.3 million, representing 12.6% of our estimated workers' compensation net loss reserves at December 31, 2005, and 17.3% of our workers'
compensation net premiums earned for the year ended December 31, 2006.

Impact of Different Medical Inflation Assumptions.As previously discussed, medical inflation rates are used in estimating
ultimate losses. Our loss estimates for the 2003 and 2004 accident years reflect an average 6% per year medical deflation rate, and for the 2005 to 2008 accident years reflect an average 7% per year
medical inflation rate. If the average annual medical inflation rate for each of the accident years 2005 through 2008 were changed by one, two and three percentage points in each year, our loss
reserve estimates at December 31, 2008 would change by approximately $20 million, $40 million and $60 million, respectively.

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 medical inflation trends will
continue and will impact our long-term claims costs and loss reserves. The extent to which this may be affected by changes in the number of California expensive claims is uncertain.
Additionally, the impact, if any, of the current recession on our claim costs is not yet known. We will continue to evaluate our best estimate of loss reserves every quarter to reflect the most
current data and judgments.

Asbestos and Environmental Loss Reserves.We have exposure to asbestos losses in our workers' compensation segment which have
not been material to results of operations or financial condition in any year or in the aggregate. In our history, we have paid and closed approximately 4,200 such asbestos-related workers'
compensation claims for a total of $12.6 million. At December 31, 2008, we had approximately 340 such claims open with loss reserves of $3.2 million compared to our total workers'
compensation net loss reserves of $1.0 billion.

35

---



INVESTMENTS

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 impact the amount of investment income we earn.

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

Year Ended December 31,(Dollars in thousands)

2008

2007

2006Net investment income

$
94,027

$
114,863

$
106,294Net realized (losses) gains on investments


(18,507
)

20,353


13,377Income before tax from investments segment

$
75,520

$
135,216

$
119,671


Investment income in 2008 compared to 2007 reflects lower earnings on short-term investments during 2008. In addition, 2008 and 2007
include a cash dividend on a common stock investment of $1.1 million and $7.3 million, before tax, respectively.

The
average yields on the investment portfolio were as follows:

Year Ended December 31,2008

2007

2006Before tax(1)


4.6
%

5.2
%

4.8
%After tax


3.0


3.4


3.2


(1) Reflects the pre-tax equivalent yield on tax-exempt securities.

Net realized (losses) gains from sales of investments vary each year based on market performance and opportunities. Net realized losses during
2008 are primarily attributable to the common stock of AIG and Advent and the bonds of Lehman and Harrah's, partially offset by realized gains. We sold certain securities in order to generate tax
capital losses that can be carried back and used to offset the taxes paid on the net realized capital gains in 2005. The realized gains on investments during the year ended December 31, 2007
reflect higher gains from sales of common stock investments compared to 2006.

Our
investment portfolio was comprised as follows:

December 31,2008

2007Fixed maturity securities


82
%

73
%Short-term investments


12


22Equity securities


2


4Other investments


4


1100
%

100
%


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

December 31,2008

2007Corporate bonds


66
%

54
%Municipal bonds


11


7GNMA securities*


10


11U. S. Treasury bills and notes


7


24Commercial paper


5Other securities


1


4100
%

100
%


* GNMA securities are mortgage-backed securities issued by the Government National
Mortgage Association and carry the full faith and credit guaranty of the U.S. Government.

Other investments are comprised of $58.3 million invested in limited partnerships and limited liability companies ("LLC") as of
December 31, 2008 compared to $19.7 million as of December 31, 2007. We have additional commitments to these investments of $13.5 million as of December 31, 2008.
For partnerships and LLCs where our share of capital is less than 5%, we account for the investment at cost, which we believe is also a reasonable estimate of fair value. When our

36

---



share
of capital is in excess of 5%, the carrying value of our investment is adjusted to reflect our share of the underlying equity of the limited partnership or LLC.

As
of December 31, 2008 and 2007, we did not have sub-prime mortgages, derivative securities or other credit-enhancement exposures. We only invest in mortgage-backed
securities that carry the full faith and credit guaranty of the U.S. Government ("GNMAs"). We do not engage in securities lending.

The
average maturity of the fixed maturity portfolio, including short-term investments, was approximately 5 and 4 years at December 31, 2008 and 2007,
respectively. The duration of the fixed maturity portfolio, including short-term investments, was approximately 3.6 years and 3.2 years at December 31, 2008 and 2007,
respectively.

Our
available-for-sale investment portfolio consists of fixed maturity and equity securities and short-term investments, and is recorded at fair value
in our Consolidated Balance Sheets, with changes in fair value recorded as a component of other comprehensive (loss) income. At both December 31, 2008 and 2007, approximately 90% of the
investments in fixed maturity securities and short-term investments were classified as available-for-sale securities.

Our
internal investments department manages our investment portfolio, and 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. Changes in the fair values of investments classified as available-for-sale resulted in decreases to stockholders' equity of $62.3 million, after deferred
tax, for the year ended December 31, 2008 compared to decreases to stockholders' equity of $0.7 million, after deferred tax, for the year ended December 31, 2007. The unrealized
net (losses) gains on available-for-sale investments reported as a separate component of stockholders' equity were as follows:

Fixed Maturity,
Including Short-term
Investments(Dollars in thousands)

Before Tax

After TaxDecember 31,2008

$
(72,141
)
$
(46,893
)2007


1,171


7622006


(9,562
)

(6,215
)


Equity InvestmentsBefore Tax

After TaxDecember 31,2008

$
(5,146
)
$
(3,345
)2007


17,443


11,3382006


29,304


19,047


TotalBefore Tax

After TaxDecember 31,2008

$
(77,287
)
$
(50,238
)2007


18,614


12,1002006


19,742


12,832


Approximately
93% of our consolidated fixed maturity investment portfolio, including short-term investments, was rated investment grade at December 31, 2008 and 2007.
The amortized cost and fair value for each of the following components of our fixed maturity investment portfolio are set forth below by credit rating categories based on ratings provided by a
nationally recognized rating organization: 1) corporate bonds and short-term investments, 2) municipal bonds and 3) GNMAs.

37

---



The following table identifies our corporate bond and short-term investment portfolio by credit rating categories as of December 31, 2008 and
2007.

Corporate Bond and Short-term Investments
by Credit Rating Category(Dollars in thousands)

Amortized Cost

Fair Value

Percent of Total Fair ValueDecember 31, 2008AAA (1)

$
161,877

$
161,628


11
%AA


254,025


255,948


18A


609,387


591,768


41BBB


324,484


303,978


21Non-investment grade (2)


172,033


136,325


9Total

$
1,521,806

$
1,449,647


100
%December 31, 2007AAA (1)

$
549,477

$
551,462


34
%AA


246,994


250,335


15A


460,283


462,620


28BBB


234,670


234,942


14Non-investment grade (2)


145,738


137,980


9Total

$
1,637,162

$
1,637,339


100
%


Our municipal bond portfolio at December 31, 2008 was comprised of the following:

(Dollars in thousands)

Average
Credit Rating

Amortized
Cost

Fair ValueMunicipal bonds:Insured by Berkshire Hathaway, Inc.

AAA

$
48,623

$
46,163Insured by other bond insurers (1)

AA


81,863


82,475Pre-refunded (2)

AA


14,894


15,696Uninsured

AA


52,748


54,508Total municipal bonds

AA

$
198,128

$
198,842


Our fixed maturity portfolio also included GNMAs which were rated AAA, representing $190.6 million at amortized cost and
$198.5 million at fair value at December 31, 2008.

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 at December 31, 2008:

(Dollars in thousands)

Amortized Cost

Fair ValueInsurance

$
234,722


12
%
$
208,647


11
%Financial


207,874


11


194,826


11Municipal bonds


198,128


10


198,842


11GNMA


190,603


10


198,526


11Food and beverage


141,845


7


145,033


8U.S. Government


136,495


7


136,524


7Personal goods


78,364


4


78,801


4Hotels and Casinos


71,599


4


55,631


3Machinery


70,703


4


69,393


4Pharmaceuticals


69,372


4


72,531


4Communications


68,199


4


66,561


4Utilities


60,664


3


60,040


3Petroleum


60,029


3


59,061


3Technology


39,494


2


40,534


2Chemicals


29,031


2


28,925


2Homebuilding


24,241


1


16,575


1Other (1)


242,733


12


229,284


11Total

$
1,924,096


100
%
$
1,859,734


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

38

---



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. Periodically, we independently select a sample of securities and validate the inputs and outputs of the valuation models used by the independent pricing service using well recognized
market information sources. In addition, when prices provided by the independent pricing service for some securities vary significantly from week to week, we review and revalidate such prices for each
security with other recognized market information sources or independent broker-dealers. Valuations of securities in the current market environment have become more complex and reflect more volatility
due to record spreads and lack of liquidity. The valuations on certain securities may or may not reflect the values obtained on actual trades at any point in time.

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 (including U.S.
Government Treasury Notes and Bills and GNMAs). We also use market information sources and broker-dealers to determine the fair value of a small number of our securities that are not priced by our
independent pricing service.

The
fair value of certain privately held or thinly traded securities are determined using internal analytical methods based on the best information available. At December 31,
2008, the fair value of these securities classified as Level 3 under SFAS No. 157 was $37.8 million or approximately 1.9% of total investments. The estimated fair value of
Level 3 equity securities primarily consists of the following: 1) The net asset value of a company based in the United Kingdom, with a significant portion of the net asset
value of this equity investment, excluding cash balances, comprised principally of real estate holdings supported by independent appraisals. The estimated fair value for this investment also includes
foreign currency fluctuations. 2) A fixed maturity security we invested in during 2008 representing our participation in a commercial senior secured term loan. We determined that the estimated
fair value of this fixed maturity security approximates amortized cost as of December 31, 2008.

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 monitor
our portfolio continuously and actively manage our investments to preserve principal values whenever possible. When, in the opinion of management, a decline in the fair value of an investment is
considered to be other-than-temporary, such investment is written-down to its fair value. The amount written-down is recorded in earnings as a realized
loss on investments.

We
continuously assess the prospects for individual securities as part of our ongoing portfolio management, including the identification of other-than-temporary
declines in fair values. We have established a 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. We have consistently applied this presumption for seventeen years. Our other-than-temporary assessment includes reviewing the extent and duration of
declines in fair values of investments, 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. We believe that our unrealized losses at December 31, 2008 are temporary, and we base
this conclusion on our

39

---



current
understanding of the issuers of these securities, as described above, and because we also have the ability and intent to hold securities with unrealized losses for a sufficient amount of time
for them to recover their values or reach maturity.

The
unprecedented events in the capital and credit markets have resulted in extreme volatility and disruption to the financial markets. Several factors are contributing to the decrease
in fair values of our investment portfolio as of December 31, 2008 including the tightening/freezing of credit markets, significant failures of large financial institutions, uncertainty
regarding the effectiveness of governmental solutions, as well as the current recession. Unrealized losses on fixed maturity securities at December 31, 2008 are principally attributable to
widening credit spreads between U.S. Government and investment grade corporate securities. It is possible that we could recognize future impairment losses on some securities we owned at
December 31, 2008 if future events, information and the passage of time cause us to determine that a decline in value is other-than-temporary. If there is no change in
the value of certain securities by March 31, 2009, impairment charges of approximately $17.0 million may be required based on December 31, 2008 valuations. Impairment charges will
reduce 2009 earnings, but have already been reflected in stockholders' equity at December 31, 2008.

At
December 31, 2008, gross unrealized gains and losses in our investment portfolio were as follows:

Unrealized(Dollars in thousands)

Gains

LossesFixed 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
%


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

(Dollars in thousands)

Fixed Maturity Securities (1)

Equity Securities

TotalSecurities 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
)


The scheduled maturity dates for fixed maturity securities, including short-term investments, with unrealized losses at
December 31, 2008 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

$
(163
)
$
128,351Due after 1 year through 5 years


(31,164
)

382,655Due after 5 years through 10 years


(50,333
)

301,159Due after 10 years


(12,979
)

122,394Total

$
(94,639
)
$
934,559


40

---



The following is a summary of losses realized on the sale of securities for each of the three years ended December 31, 2008 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)

2008

2007

2006Fixed maturity securities:Realized losses on sales

$
(12,662
)
$
(4,289
)
$
(3,163
)Fair value at the date of sale


499,831


608,325


1,721,649Number of securities sold


30


26


23Losses realized on securities with an unrealized loss preceding the sale for:Less than 3 months

$
(1,743
)
$
(1,201
)
$
(826
)3-6 months


(5,552
)6-12 months


(2,042
)

(1,006
)

(1,103
)Greater than 12 months


(3,325
)

(2,082
)

(1,234
)Equity securities:Realized losses on sales

$
(8,888
)
$
(2,252
)
$
(560
)Fair value at the date of sale


36,385


31,743


5,768Number of securities sold


22


13


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

$
(2,697
)
$
(1,715
)
$
(407
)3-6 months


(2,849
)

(375
)6-12 months


(2,921
)

(162
)

(153
)Greater than 12 months


(421
)


In
addition to the losses realized on the sale of securities during 2008 shown in the table above, we initially recognized $13.2 million and $10.6 million of impairment
losses on certain fixed maturity and equity securities, respectively, due to the amount and duration of the decline in fair value on those securities, as well as issuer-specific credit and equity
events, consistent with our criteria for recognizing other-than-temporary declines in fair values. All of the initially impaired securities were sold in the fourth quarter
2008, and there were no impairment write-downs on securities we owned as of December 31, 2008. In addition, there were no impairment write-downs in 2007 and 2006.

Sales
of investments at a loss result from ongoing portfolio management, for example, in response to changes in interest rates, changes in our view of the prospects for an issuer or its
industry and changes in our views about appropriate asset concentrations and allocation. In the fourth quarter 2008, we sold certain securities, classified as
available-for-sale, in order to generate tax capital losses that can be carried back and used to offset taxes paid on net realized capital gains in 2005. At the time we sold
these investments at a loss, we had the ability to hold them for the long term and the sales were not related to any liquidity needs. At December 31, 2008, those securities which we are holding
in our portfolio with an unrealized loss
were compatible with our view of appropriate asset allocation and issuer prospects. Any future changes in those assumptions could result in sales at a loss or write-downs of securities.

TERRORISM EXPOSURE AND THE TERRORISM RISK INSURANCE ACT OF 2002

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

41

---



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, as modified in 2007, 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. Effective
January 1, 2008, the definition of terrorism includes domestic acts of terrorism and continues to exclude 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
$124.4 million for a covered loss incurring in 2009. 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 materially adversely affect our business
and financial condition.

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

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.

Liquidity.Our insurance subsidiaries generally create liquidity because insurance premiums are collected prior to
disbursements for claims which may take place many years after the collection of premiums. Collected premiums are invested prior to their use in such disbursements, and investment income provides
additional cash receipts. At December 31, 2008 and 2007, short-term investments and fixed maturity investments maturing within two years in the insurance subsidiaries were
$0.3 billion and $0.6 billion, respectively. We expect to pay our obligations as they become due from our liquid assets.

42

---



Net
cash (used in) provided by operating activities for each of the three years ended December 31, 2008 was as follows:

Year Ended December 31,(Dollars in thousands)

2008

2007

2006Net cash flow from workers' compensation operations

$
(17,516
)
$
81,688

$
228,882Net cash used in reinsurance operations


(14,256
)

(38,558
)

(73,536
)Investment income received


84,283


91,993


73,818Interest and other expenses paid by parent


(11,328
)

(7,025
)

(6,170
)Income taxes paid


(66,729
)

(138,282
)

(124,004
)Net cash (used in) provided by operating activities

$
(25,546
)
$
(10,184
)
$
98,990


Net
cash flow from our workers' compensation and reinsurance operations is a non-GAAP financial measure that represents 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 paid are included in net cash used in operating activities, the most comparable GAAP financial measure.

Net
cash flow from operations in 2008 decreased as compared to 2007 and in 2007 compared to 2006 primarily due to lower workers' compensation premiums. In periods in which net cash flow
from operating activities is negative, such cash flow is offset by cash flow from investing activities, principally from short-term investments and maturities of longer-term
investments. We maintain a portfolio of invested assets with varying maturities and a substantial amount of short-term investments to provide adequate liquidity.

Our
excess of loss and catastrophe reinsurance provides protection for workers' compensation losses up to $150 million, and up to $200 million for catastrophe losses
arising out of California earthquakes. Effective May 1, 2007, we increased our retention of workers' compensation losses from $1 million to $5 million, with an annual aggregate
limit of $25 million in the layer of $5 million in excess of the $5 million retention. We also retain 50% of any losses in the layer of $10 million excess of
$10 million. We do not believe that this change in retention will have a material impact on our liquidity or capital resources.

Our
insurance subsidiaries are required to have securities on deposit for the protection of injured workers in accordance with various states' regulations. At December 31, 2008
and 2007, investments with a fair value of $1.3 billion and $1.5 billion, respectively, were on deposit to comply with such regulations.

Zenith
National requires cash to pay any dividends declared to our stockholders, make interest and principal payments on our outstanding debt obligations, fund our operating expenses,
and, from time to time, to make capital contributions to Zenith Insurance. Such cash requirements are generally funded in the long run by dividends received from Zenith Insurance and financing or
refinancing activities by Zenith National. Cash, short-term investments, and other marketable investments in Zenith National were $82.4 million and $83.6 million at
December 31, 2008 and 2007, 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 2009, Zenith Insurance expects to be able to pay up to $111.5 million of dividends to Zenith National without the prior approval of the California
Department of Insurance. Zenith Insurance paid dividends to Zenith National of $95.0 million, $115.0 million and $50.0 million in 2008, 2007, and 2006, respectively. The
restrictions on the payment of dividends have not had, and under current regulations are not

43

---



expected
to have, a material adverse impact on the ability of Zenith Insurance to pay dividends.

At
December 31, 2008, we had a $30.0 million revolving credit agreement with Bank of America, N. A. expiring February 16, 2010. Interest is payable on outstanding
loans at either the bank's prime rate or a rate based on Eurodollar deposit rates plus a specified margin depending on our credit rating. This credit agreement contains covenants that require, among
other things, 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, 2008. There was no amount drawn under the line of credit in 2008 or 2007 nor do we currently
anticipate any need to draw on the line of credit because our current liquidity is sufficient for foreseeable requirements.

Capital Resources.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 where ratios such as net premiums written to statutory surplus measure capital adequacy. Risk-based capital is used by regulators for
financial surveillance purposes and by rating agencies to assign financial strength ratings to our insurance subsidiaries and ratings for the debt issued by Zenith National. Insurance regulations
require insurance companies to maintain capital at a minimum of 200% of regulatory risk-based capital. At December 31, 2008, our statutory capital of $1.0 billion was 1,365%
of regulatory risk-based capital.

In
2008, the rating agencies affirmed our financial strength 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, 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, 2008, 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 2009.

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

44

---



portion
of losses and loss reserves that relates to workers' compensation indemnity payments for lost wages, which are fixed by statute. Adjustments for inflationary impacts are included as part of
the continual review of loss reserve estimates. Actuarial account of increases or decreases in costs is considered in setting adequate workers' compensation premium rates, and this is particularly
important in the health care area, where hospital and medical inflation rates have historically exceeded general inflation rates. Operating expenses, including payrolls, are impacted to a certain
degree by the inflation rate.

CONTRACTUAL OBLIGATIONS AND CONTINGENT LIABILITIES

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

The
table below sets forth the amounts of our contractual obligations, including interest payable, at December 31, 2008:

Payments Due by Period(Dollars in thousands)

Less than 1 year

1-3 years

3-5 years

More than 5 years

TotalLoss reserves

$
304,347

$
332,052

$
174,470

$
463,717

$
1,274,586Policyholders' dividends accrued


28,721


8,532








37,253Redeemable securities


5,002


10,004


10,004


133,525


158,535Operating lease commitments


9,420


13,381


5,604


739


29,144Total

$
347,490

$
363,969

$
190,078

$
597,981

$
1,499,518


Our
loss reserves do not have contractual maturity dates and the exact timing of the payment of claims cannot be predicted with certainty. However, based upon historical payment
patterns, we have included an estimate of when we expect our loss reserves (without the benefit of any reinsurance recoveries) to be paid. We maintain a portfolio of investments with varying
maturities and a substantial amount of short-term investments to provide adequate cash for the payment of claims. We 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 are comprised of $100.0 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 10 to the Consolidated Financial Statements.

MARKET RISK OF FINANCIAL INSTRUMENTS

The fair value of the fixed maturity investment portfolio is exposed to interest rate
riskthe risk of loss in fair value resulting from changes in prevailing market rates of interest for similar financial instruments. However, we have the ability to hold fixed maturity
investments to maturity. We rely on the experience and judgment of senior management to monitor and mitigate the effects of market risk. We do not utilize financial instrument hedges or derivative
financial instruments to manage risks, nor do we enter into any swap, forward or option contracts, but will attempt to mitigate our exposure through active portfolio management. The allocation among
various types of securities is adjusted from time to time based on market conditions, credit 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 only invest in mortgage-backed securities that carry the
full faith and credit guaranty of the U.S. Government. We do not engage in securities lending. At December 31, 2008, we do not have sub-prime mortgages, derivative securities or
other credit-enhancement exposures.

45

---



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

Expected Maturity Date(Dollars in thousands)2009

2010

2011

2012

2013

Thereafter

TotalDecember 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




Expected Maturity Date(Dollars in thousands)2008

2009

2010

2011

2012

Thereafter

TotalDecember 31, 2007Fixed maturity securities:Fixed rate

$
134,897

$
89,714

$
93,470

$
104,094

$
370,166

$
818,494

$
1,610,835Weighted average interest rate


4.1
%

4.3
%

4.8
%

4.7
%

5.1
%

5.6
%

5.2
%Short-term investments

$
485,914
















$
485,914Debt and interest obligations:Convertible senior notes payable (1)


1,216

















1,216Redeemable securities payable


5,002

$
5,002

$
5,002

$
5,002

$
5,002

$
138,527


163,537


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 Estimation.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 three years ended
December 31, 2008 is discussed in the preceding "Loss Reserves" section. Also included is a discussion of the principal uncertainties considered, the actuarial estimation processes used, the
role of management, recent trends and new information received as well as the impact of different medical inflation assumptions on workers' compensation loss reserves estimates.

Deferred Income Taxes.The temporary differences between the tax and book bases of assets and liabilities are recorded as
deferred income taxes. At December 31, 2008 and 2007,

46

---



Zenith
recorded net deferred tax assets of $70.5 million and $45.7 million, respectively, including deferred tax assets of $35.9 million and $41.5 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.

Investment Fair Value.Our available-for-sale investment portfolio consists of fixed maturity and
equity securities and short-term investments, and is recorded at fair value. 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. The fair value of fixed maturity and equity securities and short-term
investments were primarily based on the following:

See
Notes 2 and 3 to the Consolidated Financial Statements for further information on fair value and our adoption of Statement of Financial Accounting Standards No. 157, "Fair Value
Measurements," as of January 1, 2008.

Investment Write-Downs.When, in the opinion of management, a decline in the fair value of an investment is considered to be
other-than-temporary, such investment is written-down to its fair value. The amount written-down is recorded in earnings as a realized loss on
investments. The determination of other-than-temporary includes a 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, and a write-down is necessary. Notwithstanding this presumption, the determination of
other-than-temporary impairment requires judgment about future prospects for an investment and is therefore a matter of inherent uncertainty. We describe investment write-downs
in more detail in the preceding "Investments" section.

RECENTLY ISSUED ACCOUNTING PRONOUCEMENTS

As of December 31, 2008, there are several recently issued accounting pronouncements that we either implemented during the year or will
implement in future periods. None of these pronouncements 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.

47

---



5-YEAR SUMMARY OF SELECTED FINANCIAL INFORMATION

Zenith National Insurance Corp. and Subsidiaries

Years Ended December 31,

Note

2008

2007(Dollars and shares in thousands, except per share data)Revenues:Net premiums earned


1

$
607,327

$
738,532Net investment income





94,027


114,863Net realized (losses) gains on investments





(18,507
)

20,353Total revenues





682,847


873,748Results of operations by segment:Net investment income




$
94,027

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





(18,507
)

20,353Income before tax from investments segment





75,520


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





84,658


243,832Reinsurance segment


2


(192
)

(3,661
)Parent


3,5


(12,790
)

(12,506
)Income from continuing operations before tax and equity in earnings of investee





147,196


362,881Income tax expense





51,896


128,981Income from continuing operations after tax and before equity in earnings of investee





95,300


233,900Equity in earnings of investee after taxIncome from continuing operations after tax





95,300


233,900Gain on sale of discontinued operations after tax


4Net income




$
95,300

$
233,900Per common share  diluted:Income from continuing operations after tax


5

$
2.55

$
6.27Net income


5


2.55


6.27Cash dividends declared per common share


6


2.40


2.84Weighted average common shares outstanding  diluted


5


37,399


37,284Financial condition:Total assets




$
2,520,783

$
2,772,980Investments





1,957,994


2,190,519Unpaid losses and loss adjustment expenses





1,274,586


1,453,370Convertible senior notes payable


5





1,135Redeemable securities payable


7


58,357


58,350Stockholders' equity





1,023,437


1,073,357Stockholders' equity per share





27.42


28.93Return on average equity





8.9
%

22.9
%Insurance statistics (GAAP):Combined ratio:Workers' compensation segment





86.0
%

67.0
%Reinsurance segment


2


NM


NMNet premiums earned-to-surplus ratio





0.6


0.7Losses and loss adjustment expense reserves-to-surplus ratio (net of reinsurance)





1.0


1.0


NM=

Not meaningful(1)

Net premiums earned in 2004 are net of $98.7 million of workers' compensation ceded premiums earned in connection with a 10% ceded quota share reinsurance agreement. This agreement was terminated effective
December 31, 2004.(2)

Includes catastrophe losses before tax of $3.0 million, $19.9 million, $69.2 million and $21.1 million in 2007, 2006, 2005 and 2004, respectively.(3)

Includes interest expense before tax of $5.2 million, $5.2 million, $5.3 million, $8.8 million and $13.1 million in 2008, 2007, 2006, 2005 and 2004, respectively.(4)

In 2002, we sold our home-building business and related real estate assets. In 2005 and 2004, we received payments of $1.9 million before tax ($1.3 million after tax) and $2.0 million before tax
($1.3 million after tax), respectively, of additional sales proceeds under the earn-out provision of the sale agreement. The last such payment under the earn-out provision was received in 2005.


48

---



Years Ended December 31,

2006

2005

2004(Dollars and shares in thousands, except per share data)Revenues:Net premiums earned

$
944,217

$
1,178,700

$
944,425Net investment income


106,294


79,200


61,876Net realized (losses) gains on investments


13,377


22,224


38,579Total revenues


1,063,888


1,280,124


1,044,880Results of operations by segment:Net investment income

$
106,294

$
79,200

$
61,876Net realized (losses) gains on investments


13,377


22,224


38,579Income before tax from investments segment


119,671


101,424


100,455Income (loss) before tax from:Workers' compensation segment


313,576


213,244


104,098Reinsurance segment


(20,508
)

(56,183
)

(11,956
)Parent


(11,927
)

(20,938
)

(19,051
)Income from continuing operations before tax and equity in earnings of investee


400,812


237,547


173,546Income tax expense


142,112


81,894


57,213Income from continuing operations after tax and before equity in earnings of investee


258,700


155,653


116,333Equity in earnings of investee after tax





794


1,381Income from continuing operations after tax


258,700


156,447


117,714Gain on sale of discontinued operations after tax





1,253


1,286Net income

$
258,700

$
157,700

$
119,000Per common share  diluted:Income from continuing operations after tax

$
6.96

$
4.29

$
3.35Net income


6.96


4.32


3.38Cash dividends declared per common share


1.26


0.94


0.75Weighted average common shares outstanding  diluted


37,174


37,052


36,696Financial condition:Total assets

$
2,767,553

$
2,717,456

$
2,414,655Investments


2,273,656


2,167,000


1,900,014Unpaid losses and loss adjustment expenses


1,522,280


1,703,445


1,482,319Convertible senior notes payable


1,129


1,124


121,548Redeemable securities payable


58,342


58,833


58,825Stockholders' equity


940,720


712,795


502,147Stockholders' equity per share


25.41


19.14


17.28Return on average equity


31.8
%

26.3
%

27.2
%Insurance statistics (GAAP):Combined ratio:Workers' compensation segment


66.3
%

80.9
%

88.5
%Reinsurance segment


264.4
%

187.1
%

128.2
%Net premiums earned-to-surplus ratio


1.0


1.6


1.5Losses and loss adjustment expense reserves-to-surplus ratio (net of reinsurance)


1.4


2.0


1.9


(5)

On March 21, 2003, Zenith issued $125.0 million aggregate principal amount of 5.75% Convertible Senior Notes due March 30, 2023 ("Convertible Notes") and received net proceeds of approximately
$120.0 million. Diluted per share amounts for the years ended December 31, 2008, 2007, 2006, 2005 and 2004 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.(6)

Includes an extra dividend of $0.40 and $1.00 per common share declared and paid in December 2008 and 2007, respectively.(7)

In 2006 and 2004, we paid $0.5 million to repurchase $0.5 million of aggregate principal amount and paid $7.6 million to repurchase $8.0 million of aggregate principal amount, respectively, of the
outstanding 8.55% Capital Securities of Zenith National Insurance Capital Trust I, all voting securities of which are owned by Zenith.


49

---



CONSOLIDATED BALANCE SHEETS

Zenith National Insurance Corp. and Subsidiaries

December 31,(Dollars and shares in thousands)

2008

2007Assets:Investments:Fixed maturity securities:At amortized cost (fair value $211,128 in 2008 and $244,537 in 2007)

$
203,349

$
240,950At fair value (amortized cost $1,479,295 in 2008 and $1,365,127 in 2007)


1,406,891


1,366,298Equity securities, at fair value (cost $52,888 in 2008 and $60,226 in 2007)


47,742


77,669Short-term investments, at fair value (amortized cost $241,452 in 2008 and $485,914 in 2007)


241,715


485,914Other investments


58,297


19,688Total investments


1,957,994


2,190,519Cash


10,478


6,933Accrued investment income


23,147


21,415Premiums receivable


9,576


17,627Reinsurance recoverables


285,269


346,082Deferred policy acquisition costs


7,274


9,538Deferred tax asset


70,469


45,719Income tax receivable


33,448


8,654Goodwill


20,985


20,985Other assets


102,143


105,508Total assets

$
2,520,783

$
2,772,980Liabilities:Unpaid losses and loss adjustment expenses

$
1,274,586

$
1,453,370Unearned premiums


45,226


61,950Policyholders' dividends accrued


37,253


39,500Convertible senior notes payable





1,135Redeemable securities payable


58,357


58,350Other liabilities


81,924


85,318Total liabilities


1,497,346


1,699,623Commitments and contingencies (see Note 10)Stockholders' equity:Preferred stock, $1 par value,
 1,000 shares authorized; none issued or outstanding in 2008 and 2007Common stock, $1 par value,
 100,000 shares authorized; issued 45,019 in 2008 and 44,802 in 2007; outstanding 37,324 in 2008 and 37,107 in 2007


45,019


44,802Additional paid-in capital


472,312


464,932Retained earnings


722,996


718,175Accumulated other comprehensive (loss) income


(50,238
)

12,100Treasury stock, at cost (7,695 shares in 2008 and 2007)


(166,652
)

(166,652
)Total stockholders' equity


1,023,437


1,073,357Total liabilities and stockholders' equity

$
2,520,783

$
2,772,980


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

50

---



CONSOLIDATED STATEMENTS OF OPERATIONS

Zenith National Insurance Corp. and Subsidiaries

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

2008

2007

2006Revenues:Net premiums earned

$
607,327

$
738,532

$
944,217Net investment income


94,027


114,863


106,294Net realized (losses) gains on investments


(18,507
)

20,353


13,377Total revenues


682,847


873,748


1,063,888Expenses:Losses and loss adjustment expenses incurred


279,908


252,844


322,784Underwriting and other operating expenses:Policy acquisition costs


111,106


123,092


147,153Underwriting and other costs


127,353


130,776


136,464Policyholders' dividends


12,130


(1,090
)

51,400Interest expense


5,154


5,245


5,275Total expenses


535,651


510,867


663,076Income before tax


147,196


362,881


400,812Income tax expense


51,896


128,981


142,112Net income

$
95,300

$
233,900

$
258,700Net income per common share:Basic

$
2.56

$
6.31

$
7.00Diluted


2.55


6.27


6.96


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

51

---



CONSOLIDATED STATEMENTS OF CASH FLOWS

Zenith National Insurance Corp. and Subsidiaries

Year Ended December 31,(Dollars in thousands)



2008

2007

2006Cash flows from operating activities:Premiums collected



$
615,993

$
756,123

$
973,416Investment income received




84,283


91,993


73,818Losses and loss adjustment expenses paid




(398,162
)

(435,409
)

(478,607
)Underwriting and other operating expenses paid




(255,804
)

(279,415
)

(340,399
)Interest paid




(5,127
)

(5,194
)

(5,234
)Income taxes paid




(66,729
)

(138,282
)

(124,004
)Net cash (used in) provided by operating activities




(25,546
)

(10,184
)

98,990Cash flows from investing activities:Purchases of investments:Fixed maturity securities held-to-maturity







(48,602
)

(99,760
)Fixed maturity securities available-for-sale




(982,269
)

(493,906
)

(786,166
)Equity securities available-for-sale




(114,505
)

(96,304
)

(51,364
)Other investments




(38,090
)

(14,069
)

(2,823
)Proceeds from maturities and redemptions of investments:Fixed maturity securities held-to-maturity




26,000


23,852


20,365Fixed maturity securities available-for-sale




95,386


131,969


69,289Other investments




1,528


3,885


5,343Proceeds from sales of investments:Fixed maturity securities available-for-sale




768,957


276,103


469,474Equity securities available-for-sale




116,270


122,730


59,955Net decrease in short-term investments




252,842


217,275


265,764Capital expenditures and other




(7,043
)

(12,929
)

(5,985
)Net cash provided by (used in) investing activities




119,076


110,004


(55,908
)Cash flows from financing activities:Cash dividends paid to common stockholders




(90,361
)

(100,734
)

(43,241
)Excess tax benefit on stock-based compensation




376


341


273Proceeds from exercise of stock options







196


227Repurchase of redeemable securities










(500
)Net cash used in financing activities




(89,985
)

(100,197
)

(43,241
)Net increase (decrease) in cash




3,545


(377
)

(159
)Cash at beginning of year




6,933


7,310


7,469Cash at end of year



$
10,478

$
6,933

$
7,310


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

52

---



CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT.)

Zenith National Insurance Corp. and Subsidiaries

Year Ended December 31,(Dollars in thousands)



2008

2007

2006Reconciliation of net income to net cash (used in)
 provided by operating activities:Net income



$
95,300

$
233,900

$
258,700Adjustments to reconcile net income to net cash (used in)
 provided by operating activities:Depreciation expense




8,376


9,451


10,152Net accretion




(6,634
)

(20,912
)

(28,762
)Net realized losses (gains) on investments




18,507


(20,353
)

(13,377
)(Increase) decrease in:Accrued investment income




(1,706
)

(1,989
)

(3,748
)Premiums receivable




6,755


15,310


31,205Reinsurance recoverables




60,795


(110,394
)

23,329Prepaid expenses




(1,894
)

(1,827
)

(13,898
)Deferred policy acquisition costs




2,264


3,079


4,057Net income taxes receivable




(16,034
)

(9,301
)

18,108(Decrease) increase in:Unpaid losses and loss adjustment expenses




(178,784
)

(68,910
)

(181,165
)Unearned premiums




(16,724
)

(21,042
)

(40,481
)Policyholders' dividends accrued




(2,247
)

(17,572
)

26,496Accrued expenses




(2,276
)

(12,827
)

4,397Other




8,756


13,203


3,977Net cash (used in) provided by operating activities



$
(25,546
)
$
(10,184
)
$
98,990


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

53

---



CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

Zenith National Insurance Corp. and Subsidiaries

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

2008

2007

2006Preferred stock, $1 par value:Beginning of year


none


none


noneEnd of year


none


none


noneCommon stock, $1 par value:Beginning of year

$
44,802

$
44,722

$
44,944Restricted stock vested


148


71


87Conversion of Convertible Notes


69Exercise of stock options





9


11Restricted stock awards not yet vested








(320
)End of year

$
45,019

$
44,802

$
44,722Additional paid-in capital:Beginning of year

$
464,932

$
459,103

$
454,281Recognition of stock-based compensation expense


5,995


5,223


4,269Conversion of Convertible Notes


1,223Exercise of stock options





187


216Excess tax benefit on stock-based compensation


162


419


337End of year

$
472,312

$
464,932

$
459,103Retained earnings:Beginning of year

$
718,175

$
590,715

$
379,031Net income


95,300


233,900


258,700Cash dividends declared to common stockholders


(90,479
)

(106,440
)

(47,016
)End of year

$
722,996

$
718,175

$
590,715Accumulated other comprehensive income (loss):Beginning of year

$
12,100

$
12,832

$
1,191Net change in unrealized gains on investments,
 net of deferred tax and reclassification adjustment


(62,338
)

(732
)

11,641End of year

$
(50,238
)
$
12,100

$
12,832Treasury stock, at cost

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

$
1,023,437

$
1,073,357

$
940,720Cash dividends declared per common share

$
2.40

$
2.84

$
1.26Stockholders' equity per outstanding common share

$
27.42

$
28.93

$
25.41


CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Zenith National Insurance Corp. and Subsidiaries

Year Ended December 31,(Dollars in thousands)

2008

2007

2006Net income

$
95,300

$
233,900

$
258,700Other comprehensive (loss) income, net of tax:Net change in unrealized gains on investments, net of tax


(62,338
)

(732
)

11,641Comprehensive income

$
32,962

$
233,168

$
270,341


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

54

---



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Zenith National Insurance Corp. and Subsidiaries

NOTE 1

BASIS OF PRESENTATION AND SUMMARY OF OPERATIONS

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

Organization and operations.Zenith National is 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 and ceased writing and
renewing assumed reinsurance contracts with all contracts fully expired at the end of 2006; however, we will be paying our assumed reinsurance claims for several years. The results of the reinsurance
segment, principally consisting of any changes to loss reserve estimates and resulting adjustments to contractual premium, will continue to be included in the results of continuing operations. In
addition to the workers' compensation and assumed reinsurance segments, we have an investments segment (see Note 15).

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

NOTE 2

SUMMARY OF ACCOUNTING POLICIES

INVESTMENTS

Our investments in debt 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 deferred tax. There were no investments
classified as trading at December 31, 2008 or 2007. The majority of held-to-maturity investments are mortgage-backed securities issued by the Government National
Mortgage Association ("GNMA"), which carry the full faith and credit guaranty of the U.S. Government, and we receive periodic returns of principal on these securities in addition to interest income.

Other
investments are comprised of investments in limited partnerships and limited liability companies ("LLC"). If our share of a partnership's capital or LLC is greater than 5%,
we account for the investment on the equity method, and the carrying value of our investment is adjusted to reflect our share of the underlying equity of the partnership or LLC. If our share of
a partnership's capital or LLC is no more than 5%, we account for the investment at cost, which we believe is a reasonable estimate of fair value.

When,
in the opinion of management, a decline in the fair value of an investment is considered to be "other-than-temporary," such investment is
written-down to its fair value. The amount written-down is recorded in earnings as a realized loss on investments. We continuously assess the prospects for individual
securities as part of our portfolio management, including the identification of other-than-temporary decline in fair values. We have established a presumption

55

---



that
an unrealized loss of 20% or more continuously for six months or more is other-than-temporary, in addition to issuer-specific events. We have consistently applied this
presumption for seventeen years. The amount of any write-down is determined by the difference between cost or amortized cost of the investment and its fair value at the time the
other-than-temporary decline was identified.

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

CASH

Cash includes currency on hand and demand deposits with financial institutions.

RECOGNITION OF PROPERTY-CASUALTY REVENUE AND EXPENSE

Revenue Recognition.The consideration paid for an insurance policy 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.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 earned but unbilled final audit
premiums. We can estimate earned but unbilled premiums because we keep track, by policy, of how much additional premium is billed in final audit invoices as a percentage of the original estimated
amount that was billed. We use the historical percentage to estimate the probable additional amount that we have earned but not yet billed as of the balance sheet date. Estimated earned but not billed
premiums included in premiums receivable were $2.2 million and $5.1 million at December 31, 2008 and 2007, respectively.

Any
amounts receivable for billed premiums are charged-off if they are submitted to our in-house legal collections department. An estimate of amounts that are
likely to be charged-off is established as an allowance for doubtful accounts as of the balance sheet date. The estimate is comprised of any specific accounts that are past due and are
considered probable to be charged-off and a provision against remaining accounts receivable based on historical charge-off data. Premium receivables are reported net of an
allowance for estimated uncollectible premium amounts which were $550,000 and $150,000 at December 31, 2008 and 2007, 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

56

---



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 $4.1 million and $6.1 million at
December 31, 2008 and 2007, respectively.

Assumed Reinsurance Premiums.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, was due in consideration of the reinstatement which gets adjusted and earned as losses develop over time.

Losses and Loss Adjustment Expenses Incurred.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.

Unpaid Losses and Loss Adjustment Expenses.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, and we employ a combination of actuarial techniques and methods and management judgment to establish the most reasonable estimate of loss reserves based on the most recent relevant data. Any
resulting adjustments to loss reserves are reflected in our Consolidated Statements of Operations in the period 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 uncertainties in our workers' compensation loss reserve estimates include the ultimate number of expensive cases and the length of time required to settle
long-term expensive
cases, combined with the effects of medical inflation. Expensive claims are those involving permanent disability of an injured worker and are paid over several 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.
Historically in California, the expensive claims have constituted about 20% of the number of claims and 90% of the cost of all claims.

57

---



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 medical inflation trends will
continue and will impact our long-term claim costs and loss reserves. The extent to which this may be affected by changes in the number of California permanent partial disability
(expensive) claims is uncertain. Additionally, the impact, if any, of the current recession on our claim costs is not yet known. We will continue to evaluate our best estimate of loss reserves every
quarter to reflect the most current data and judgments.

Catastrophes.In our reinsurance segment, which we exited in 2005, we were exposed to the risk of significant loss in the
event of major loss events, known in the insurance industry as catastrophes. Estimates of the impact of the prior catastrophes, including the 2005 hurricanes, are based on the information that is
currently available. Such estimates could change based on any new information that becomes available or based upon reinterpretation of existing information.

Deferred Policy Acquisition Costs.Policy acquisition costs, consisting of 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 related unearned premiums. A premium deficiency would first be recognized by charging any unamortized acquisition costs to expense to the extent required to eliminate the
deficiency. If the premium deficiency were greater than unamortized acquisition costs, a liability would be accrued for the excess deficiency. We do not consider anticipated investment income when
determining if a premium deficiency exists. Our estimates indicate that there was no premium deficiency at December 31, 2008 and 2007.

Policyholders' Dividends.Most of our workers' compensation policies are non-participating but 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 at 18 months after such expiration). We are able to estimate any liability we may have because we know the underlying loss experience of the policies we have written with dividend
provisions and can estimate future dividend payments from the policy terms.

In
addition, Florida statutes require payment of additional policyholders' dividends to Florida policyholders pursuant to a formula based on underwriting results ("Florida Dividends").
As of
December 31, 2008 and 2007, we accrued approximately $20 million for Florida Dividends payable for prior accident years. We reduced our estimate for Florida Dividends at
December 31, 2008 from the estimate made at September 30, 2008 to reflect the impact of the fourth quarter 2008 Florida Supreme Court decision expected to increase claimant attorney
fees. During 2007, we reduced our accrual for estimated Florida Dividends by $15.1 million to reflect the impact of changes in our direct loss reserves. Our ultimate obligation for Florida
Dividends is dependent on our filings with the Florida Department of Insurance and on our prescribed loss reserves included in our annual statutory financial statements.

State Guarantee Fund Assessments.State guarantee funds ("Guarantee Funds") exist to ensure that policyholders (holders of
direct insurance policies but not of reinsurance policies) receive payment of their claims if insurance companies become insolvent. The

58

---



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 certain of the premiums we have already earned as of December 31, 2008.

We
recorded an estimate of $6.6 million (net of expected recoveries of $1.3 million recoverable before the end of 2009) for our expected liability at December 31,
2008 for Guarantee Fund assessments. Recoveries are attributable to premium tax credits in various states. The amount of the recovery we have recorded is limited to credits applicable to, and
recoverable from, premiums earned as of December 31, 2008. The estimated expense for Guarantee Fund assessments was $142,000, $33,000 and $2.0 million in 2008, 2007 and 2006,
respectively. We expect that we will continue to accrue and receive Guarantee Fund assessments; and the ultimate impact of such assessments will depend upon the amount and timing of the assessments
and of any recoveries to which we are entitled.

REINSURANCE CEDED

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

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 $279.4 million and $336.6 million at December 31, 2008 and 2007, respectively.

In
1998, Zenith Insurance acquired substantially all of the assets and certain liabilities of RISCORP, Inc. and certain of its subsidiaries (collectively, "RISCORP") related to
RISCORP's workers' compensation business. Also, in 1998, 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, 2008 and 2007
includes $13.0 million and

59

---



$14.2 million,
respectively, recoverable under such reinsurance and is secured by assets held in a trust account. The deferred benefit associated with such reinsurance was $4.5 million
and $5.2 million at December 31, 2008 and 2007, respectively.

PROPERTIES AND EQUIPMENT

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

INTANGIBLE ASSETS

At December 31, 2008 and 2007, 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, 2008 or 2007. Goodwill is
tested for impairment on an annual basis or whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. We tested goodwill impairment at the reporting unit
level by comparing the fair value of the reporting unit with its carrying amount, including goodwill. 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, 2008, 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. Of the shares of stock granted to key employees, 50% vest on the second anniversary of the grant date and the
remaining 50% vest on the fourth anniversary of the grant date. Shares granted to non-employee Directors vest on each of the first three anniversaries of the grant date in equal amounts.
The fair value of restricted stock awards is measured using the closing price of Zenith National's common stock on the grant date and is recognized as an expense, net of estimated forfeitures, over
the vesting period of the awards. The tax savings resulting from tax deductions in excess of compensation expense ("excess tax benefits") is reflected as a cash inflow from financing activities in our
statement of cash flows.

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.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In December 2007, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141(R), "Business Combinations" ("SFAS 141(R)").
SFAS 141(R) establishes principles and requirements for how an acquiring company recognizes and measures in its financial statements the identifiable assets and goodwill acquired, the
liabilities assumed and any noncontrolling interest in the acquired company. It also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business
combination. SFAS 141(R) is effective for fiscal years beginning after December 15, 2008. We do not expect its adoption to have a material impact, if any, on our consolidated financial
condition or results of operations.

In
December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in

60

---



Consolidated
Financial Statementsan amendment of Accounting Research Bulletin No. 51" ("SFAS 160"). SFAS 160 establishes accounting and reporting standards for
ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent's
ownership interest and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. It also establishes disclosure requirements that clearly identify and
distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS 160 is effective for fiscal years beginning after December 15, 2008. We currently do
not expect its adoption to have a material impact, if any, on our consolidated financial condition or results of operations.

In
March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities" ("SFAS 161"). SFAS 161 amends and expands the
disclosure requirements of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS 161 requires qualitative disclosures about objectives and strategies for
using derivatives, quantitative disclosures about fair value amounts of gains and losses on derivative instruments and disclosures about credit-risk-related contingent features
in derivative agreements. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2008. We do not expect its adoption to have any impact on our
disclosures since we do not engage in derivative or hedging activities.

In
June 2008, the FASB issued FSP EITF 03-6-1, "Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities"
("FSP EITF 03-6-1"). FSP EITF 03-6-1 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 as described in SFAS
No. 128, "Earnings per Share." FSP EITF 03-6-01 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. FSP EITF 03-6-1 is effective for financial statements issued for
fiscal years and interim periods beginning after December 15, 2008, and requires a company to retrospectively adjust its earnings per share data. Early adoption is not permitted. We do not
expect its adoption to have a material effect on our consolidated results of operations or earnings per share.

We
also adopted the following accounting standards in 2007 and 2008, none of which had a material effect on our consolidated financial condition or results of
operations:

61

---



NOTE
3

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 in accordance with FASB Statement No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." The change in the fair value of these investments is recorded as a component of other comprehensive income.

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").

SFAS 157
established a three-level hierarchy for fair value measurements 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:



62

---





The
following table presents our available-for-sale investments measured at fair value on a recurring basis as of December 31, 2008 classified by the
SFAS 157 valuation hierarchy (as discussed above):

Fair Value Measurements(Dollars in thousands)

Level 1

Level 2

Level 3

TotalAvailable-for-sale investments:Fixed maturity securities

$
19,594

$
1,377,866

$
9,431

$
1,406,891Equity securities


19,394





28,348


47,742Short-term investments


145,883


95,832





241,715Total

$
184,871

$
1,473,698

$
37,779

$
1,696,348


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

(Dollars in thousands)

Fixed Maturity
Securities

Equity
SecuritiesBalance at December 31, 2007




$
38,350Purchases

$
9,404Accretion of discount included in investment income


27Change in unrealized gains included in other comprehensive income (1)





(10,002
)Balance at December 31, 2008

$
9,431

$
28,348


NOTE 4

INVESTMENTS

The amortized cost, fair value and carrying value of held-to-maturity and available-for-sale
investments were as follows:

Gross UnrealizedDecember 31, 2008 (Dollars in thousands)

Cost or Amortized
Cost

Fair
Value

Carrying
ValueGains

(Losses)Held-to-maturity:Mortgage-backed securities

$
175,737

$
7,285




$
183,022

$
175,737State and local government debt


22,612


521

$
(43
)

23,090


22,612Foreign government debt


5,000


16





5,016


5,000Total held-to-maturity

$
203,349

$
7,822

$
(43
)
$
211,128

$
203,349Available-for-sale:U.S. government debt

$
4,054

$
36




$
4,090

$
4,090State and local government debt


175,516


3,450

$
(3,214
)

175,752


175,752Corporate debt


1,280,354


18,058


(90,480
)

1,207,932


1,207,932Mortgage-backed securities


14,866


638





15,504


15,504Redeemable preferred stocks


4,505





(892
)

3,613


3,613Equity securities


52,888


1,680


(6,826
)

47,742


47,742Short-term investments


241,452


273


(10
)

241,715


241,715Total available-for-sale

$
1,773,635

$
24,135

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

$
1,696,348




Gross
UnrealizedDecember 31, 2007 (Dollars in thousands)

Cost or Amortized
Cost

Fair
Value

Carrying
ValueGains

(Losses)Held-to-maturity:Corporate debt

$
11,465

$
314




$
11,779

$
11,465Mortgage-backed securities


201,518


3,691

$
(123
)

205,086


201,518State and local government debt


22,967





(342
)

22,625


22,967Foreign government debt


5,000


47





5,047


5,000Total held-to-maturity

$
240,950

$
4,052

$
(465
)
$
244,537

$
240,950Available-for-sale:U.S. government debt

$
80,063

$
687




$
80,750

$
80,750State and local government debt


122,724


1,111

$
(145
)

123,690


123,690Corporate debt


1,139,783


13,714


(13,851
)

1,139,646


1,139,646Mortgage-backed securities


16,957


309





17,266


17,266Redeemable preferred stocks


5,600





(654
)

4,946


4,946Equity securities


60,226


21,526


(4,083
)

77,669


77,669Short-term investments


485,914








485,914


485,914Total available-for-sale

$
1,911,267

$
37,347

$
(18,733
)
$
1,929,881

$
1,929,881


63

---



Fixed maturity securities, including short-term investments, by contractual maturity were as follows at December 31, 2008:

(Dollars in thousands)

Amortized
Cost

Fair
ValueHeld-to-maturity:Due in 1 year or less

$
5,000

$
5,016Due after 1 year through 5 years


172,732


179,760Due after 5 years through 10 years


25,617


26,352Total held-to-maturity

$
203,349

$
211,128Available-for-sale:Due in 1 year or less

$
319,107

$
320,252Due after 1 year through 5 years


745,292


725,481Due after 5 years through 10 years


520,975


480,479Due after 10 years


135,373


122,394Total available-for-sale

$
1,720,747

$
1,648,606


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

Fixed
maturity securities classified as held-to-maturity with unrealized losses were as follows:

December 31, 2008(Dollars in thousands)

Fair
Value

Unrealized
Losses

Number of
IssuesLess than 12 months:State and local government debt

$
3,227

$
(43
)

1




December 31, 2007 (Dollars in thousands)

Fair
Value

Unrealized
Losses

Number of
IssuesLess than 12 months:State and local government debt

$
3,248

$
(11
)

1Mortgage-backed securities


16,082


(123
)

6Total less than 12 months

$
19,330

$
(134
)

7Greater than 12 months:State and local government debt

$
19,377

$
(331
)

6Total greater than 12 months

$
19,377

$
(331
)

6Total held-to-maturity:State and local government debt

$
22,625

$
(342
)

7Mortgage-backed securities


16,082


(123
)

6Total held-to-maturity

$
38,707

$
(465
)

13


Securities classified as available-for-sale with unrealized losses were as follows:

December 31, 2008(Dollars in thousands)

Fair
Value

Unrealized
Losses

Number of
IssuesLess than 12 months:Corporate debt

$
640,894

$
(57,606
)

120Equity securities


16,163


(6,826
)

9State and local government debt


67,330


(3,214
)

18Redeemable preferred stocks


2,956


(644
)

1Short-term investments


112,435


(10
)

1Total 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
)

133Equity securities


16,163


(6,826
)

9State and local government debt


67,330


(3,214
)

18Redeemable preferred stocks


3,613


(892
)

2Short-term investments


112,435


(10
)

1Total available-for-sale

$
947,495

$
(101,422
)

163




December 31, 2007 (Dollars in thousands)

Fair
Value

Unrealized
Losses

Number of
IssuesLess than 12 months:Corporate debt

$
298,926

$
(8,022
)

53Equity securities


11,711


(798
)

7Redeemable preferred stocks


4,946


(654
)

2State and local government debt


28,359


(102
)

13Total less than 12 months

$
343,942

$
(9,576
)

75Greater than 12 months:Corporate debt

$
72,804

$
(5,829
)

9Equity securities


10,728


(3,285
)

1State and local government debt


6,421


(43
)

2Total greater than 12 months

$
89,953

$
(9,157
)

12Total available-for-sale:Corporate debt

$
371,730

$
(13,851
)

62Equity securities


22,439


(4,083
)

8Redeemable preferred stocks


4,946


(654
)

2State and local government debt


34,780


(145
)

15Total available-for-sale

$
433,895

$
(18,733
)

87


64

---



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 monitor our portfolio continuously and actively manage our investments to preserve principal values whenever possible.

Our
other-than-temporary assessment includes reviewing the extent and duration of declines in fair values of investments, 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. During 2008, we initially recognized $13.2 million and $10.6 million of impairment losses on certain fixed maturity and equity securities, respectively,
due to the amount and duration of the decline in fair value on those securities, as well as issuer-specific credit and equity events, consistent with our criteria for recognizing
other-than-temporary declines in fair values. All of the initially impaired securities were sold in the fourth quarter 2008, and there were no impairment write-downs on
securities we owned as of December 31, 2008. We believe that our unrealized losses at December 31, 2008 are temporary, and we base this conclusion on our current understanding of the
issuers of these securities, as described above, and because we also have the ability and intent to hold securities with unrealized losses for a sufficient amount of time for them to recover their
values or reach maturity.

The
unprecedented events in the capital and credit markets have resulted in extreme volatility and disruption to the financial markets. Several factors are contributing to the decrease
in fair values of our investment portfolio as of December 31, 2008 including the tightening/freezing of credit markets, significant failures of large financial institutions, uncertainty
regarding the effectiveness of governmental solutions, as well as the current recession. Unrealized losses on fixed maturity securities at December 31, 2008 are principally attributable to
widening credit spreads between U.S. Government and investment grade corporate securities. It is possible that we could recognize impairment losses on some securities we own at December 31,
2008 if future events, information and the passage of time cause us to determine that a decline in value is other-than-temporary. If there is no change in the value of certain
securities by March 31, 2009, impairment changes of approximately $17.0 million will be required based on December 31, 2008 valuations.

At
December 31, 2008 and 2007, approximately 90% of the investments in fixed maturity securities and short-term investments were classified as
available-for-sale
securities. The change in fair value of investments classified as available-for-sale resulted in a decrease in stockholders' equity of $62.3 million after deferred tax
for the year ended December 31, 2008 compared to a decrease of $0.7 million after deferred tax for the comparable period in 2007. Our internal investments department manages our
investment portfolio and 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.

65

---



Net
realized investment (losses) gains and the change in unrealized investment (losses) gains before tax on our consolidated investment portfolio were as follows:

Year Ended December 31,(Dollars in thousands)

2008

2007

2006Net realized (losses) gains:Fixed maturity securities

$
(13,614
)
$
667

$
(975
)Equity securities


(5,571
)

17,642


9,532Partnerships and joint ventures


672


1,922


2,744WorldCom settlement








2,076Other


6


122Net realized (losses) gains

$
(18,507
)
$
20,353

$
13,377Change in fair value (under) over cost:Equity securities

$
(22,589
)
$
(11,861
)
$
24,048Fixed maturity securities, including short-term investments


(69,120
)

14,964


(6,485
)


The gross realized gains on sales of investments classified as available-for-sale, including short-term
investments, during 2008, 2007, and 2006 were $26.2 million, $24.9 million and $12.3 million, respectively, and the gross realized losses were $21.6 million,
$6.5 million and $3.7 million, respectively. During 2008, we initially recognized $23.8 million of impairment losses on certain securities, all of which were sold in the fourth
quarter 2008. There were no impairment write-downs on securities we owned at December 31, 2008 and there were no impairment write-downs in 2007 and 2006.

Net
investment income before tax was as follows:

Year Ended December 31,(Dollars in thousands)

2008

2007

2006Fixed maturity securities

$
85,824

$
82,417

$
71,891Short-term investments


8,870


29,716


37,246Equity securities


2,928


8,045


1,659Other


3,189


508


978Subtotal


100,811


120,686


111,774Investment expenses


(6,784
)

(5,823
)

(5,480
)Net investment income

$
94,027

$
114,863

$
106,294


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 on a common stock investment.

Investments
with a fair value of $1.3 billion and $1.5 billion at December 31, 2008 and 2007, respectively, were on deposit with regulatory authorities in compliance
with insurance company regulations.

NOTE 5

PROPERTIES AND EQUIPMENT

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

December 31, (Dollars in thousands)

2008

2007Land

$
9,650

$
9,650Buildings


36,607


36,018Furniture, fixtures and equipment


85,097


81,281Subtotal


131,354


126,949Accumulated depreciation


(74,734
)

(69,097
)Total

$
56,620

$
57,852


Depreciation expense for the years ended December 31, 2008, 2007 and 2006 was $8.4 million, $9.4 million and
$10.2 million, respectively.

NOTE 6

INCOME TAX

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

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

Year Ended December 31,(Dollars in thousands)

2008

2007

2006Current

$
42,921

$
119,552

$
135,460Deferred


8,975


9,429


6,652Income tax expense

$
51,896

$
128,981

$
142,112


66

---



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)

2008

2007

2006Statutory income tax expense

$
51,519

$
127,008

$
140,284(Reduction) increase in tax:Dividend received deduction and tax-exempt interest


(2,470
)

(1,828
)

(1,839
)Non-deductible expenses and other


2,847


3,801


3,667Income tax expense

$
51,896

$
128,981

$
142,112


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,

2008

2007Deferred Tax

Deferred Tax(Dollars in thousands)

Assets

Liabilities

Assets

LiabilitiesInvestments

$
16,718







$
14,330Deferred policy acquisition costs




$
2,546





3,338Properties and equipment





4,673





4,695Unpaid losses and loss adjustment expenses discount


35,894




$
41,469Limitation on deduction for unearned premiums


4,820





5,639Policyholders' dividends accrued


13,039





13,825Other


7,851


634


8,322


1,17378,322

$
7,853


69,255

$
23,536Net deferred tax asset

$
70,469




$
45,719


Property-casualty loss reserves are not discounted in our consolidated financial statements; however, the Tax Reform Act of 1986 requires property
and casualty loss reserves to be discounted for tax purposes. Our net deferred tax asset is expected to be fully recoverable because all future deductible amounts associated with deferred tax assets
can be offset by recovery of income taxes paid within the statutory carry-back period or anticipated future taxable income, including investment income.

At
December 31, 2008, 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 year ended December 31, 2008.

Tax
years 2004 through 2008 are subject to examination by the state taxing authorities. Tax years 2005 and 2006 are currently being examined by the Internal Revenue Service ("IRS"). It
is possible that the IRS audit may result in additional payments, however, it is too early in the process to make an estimate of the amount, if any.

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)

2008

2007

2006Beginning of year, net

$
1,126,808

$
1,301,076

$
1,459,797Incurred claims:Current accident year


358,016


362,645


464,106Prior accident years


(78,108
)

(109,801
)

(141,322
)Total incurred claims


279,908


252,844


322,784Payments:Current accident year


(102,283
)

(116,642
)

(131,595
)Prior accident years


(298,843
)

(310,470
)

(349,910
)Total payments


(401,126
)

(427,112
)

(481,505
)End of year, net


1,005,590


1,126,808


1,301,076Receivable from reinsurers for unpaid losses


268,996


326,562


221,204End of year, gross

$
1,274,586

$
1,453,370

$
1,522,280


67

---



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

The
net favorable development of $141.3 million in 2006 is principally related to a reduction in estimated workers' compensation losses for the 2004 and 2005 accident years
offset, in part, by unfavorable development of reinsurance reserves for the 2005 hurricanes.

NOTE 8

DEBT

Convertible Senior Notes.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.

Redeemable securities.At December 31, 2008 and 2007, 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 $47.7 million and $55.9 million at December 31, 2008 and 2007, 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, 2008 and
2007, which constitute the principal asset of the Trust. The semi-annual interest payments on the Subordinated Debentures may be deferred by Zenith National for up to ten consecutive
semi-annual periods. The Subordinated Debentures are redeemable at 100% of the principal amount of the Subordinated Debentures plus a "make-whole premium," if any, together
with accrued and unpaid interest. The make-whole premium is the excess of the then present value of the remaining scheduled payments of principal and interest over 100% of the principal
amount. Payments on the Redeemable Securities, including distributions and redemptions, follow those of the Subordinated Debentures. Zenith National fully and unconditionally guarantees the
distributions on, and the liquidation amount generally of, the Redeemable Securities to the extent the Trust has funds legally available therefor. Zenith National's guarantee of the Redeemable
Securities, as well as the Subordinated Debentures, is subordinated to all other indebtedness of Zenith National.

The
issue costs and discount on the Subordinated Debentures of $1.7 million are being amortized over the term of the Subordinated Debentures. During each of the years ended
December 31, 2008, 2007, and 2006, $5.0 million, $5.0 million, and $5.1 million, respectively, of interest, issue costs and discount were expensed.

In
the first quarter of 2006, Zenith National paid $0.5 million to repurchase $0.5 million aggregate principal amount of the outstanding Redeemable Securities.

Bank Line of Credit.At December 31, 2008, we had a $30.0 million revolving credit agreement with Bank of
America, N. A. expiring February 16, 2010. Interest is payable on any outstanding loans at either the bank's prime rate or a rate based on Eurodollar deposit rates plus a specified margin
depending on our credit rating. This credit agreement contains covenants

68

---



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, 2008. There were no outstanding borrowings under the bank line of
credit in 2008 and 2007. We currently do not anticipate any need to draw on the line of credit because our current liquidity is sufficient for any foreseeable requirements.

NOTE 9

REINSURANCE CEDED

We maintain excess of loss and catastrophe reinsurance which provides protection up to $150 million for workers' compensation losses and up
to $200 million for 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 $25 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.

In
the third quarter 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 as compared to
December 31, 2006, offset in full by the resulting increase in receivable from reinsurers.

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

Year Ended December 31,(Dollars in thousands)

2008

2007

2006Direct premiums earned

$
621,763

$
756,965

$
964,131Assumed premiums earned


4,198


4,890


18,533Ceded premiums earned


(18,634
)

(23,323
)

(38,447
)Net premiums earned

$
607,327

$
738,532

$
944,217Ceded losses and loss adjustment expenses incurred

$
(32,023
)
$
123,757

$
4,402


NOTE 10

COMMITMENTS AND CONTINGENCIES

Leases.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, 2008 were as follows:

(Dollars in thousands)

Equipment
and
Auto Fleet

Offices

Total2009

$1,290

$
8,130

$
9,4202010

556


7,213


7,7692011

419


5,193


5,6122012

97


3,020


3,1172013




2,487


2,487Thereafter




739


739Total

$2,362

$
26,782

$
29,144


Rent expense for the years ended December 31, 2008, 2007 and 2006 was $10.8 million, $10.7 million, and $10.6 million,
respectively.

69

---



Litigation.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 11

STOCK-BASED COMPENSATION PLAN

In May 2008, stockholders approved an increase of 370,000 shares to be reserved for grants under the Restricted Stock Plan. The following table
provides information regarding the shares under the Restricted Stock Plan:

Number of shares authorized for grants since plan inception in 2004


995,000Number of shares restricted


(471,000
)Number of shares vested


(306,000
)Number of shares available for future grants at December 31, 2008


218,000


Changes in restricted stock for each of the three years ended December 31, 2008 were as follows:

Number
of Shares

Weighted
Average
Grant Date
Fair ValueRestricted shares at December 31, 2005


320,000

$
37.13Granted


137,000


45.06Vested


(87,000
)

31.55Forfeited


(40,000
)

37.15Restricted 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


39.42


Compensation expense recognized for stock-based awards was $4.0 million (net of $2.1 million tax benefit), $3.4 million (net
of $1.9 million tax benefit), and $2.6 million (net of $1.4 million tax benefit) for the years ended December 31, 2008, 2007, and 2006, respectively. Unrecognized
compensation expense before tax under the Restricted Stock Plan was $10.3 million and $11.5 million at December 31, 2008 and December 31, 2007, respectively. This amount
will be recognized over the remaining vesting period of the restricted shares.

NOTE 12

STOCKHOLDERS' EQUITY AND STATUTORY FINANCIAL INFORMATION

Common Stock.From time to time, Zenith National may make repurchases of its
outstanding common shares. At December 31, 2008, Zenith National was authorized to

70

---



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, 2008.

Dividend Restrictions.The California Insurance Holding Company System Regulatory Act limits the ability of Zenith Insurance
to pay dividends to Zenith National, and of the insurance subsidiary of Zenith Insurance to pay dividends to Zenith Insurance, by providing that the appropriate insurance regulatory authorities in the
state of California must approve any dividend that, together with all other such dividends paid during the preceding twelve months, exceeds the greater of: (a) 10% of the paying company's
statutory surplus as regards policyholders at the preceding December 31; or (b) 100% of the net income for the preceding year. In addition, any such dividend must be paid from
policyholders' surplus attributable to accumulated earnings. Such restrictions on dividends are not cumulative. Zenith Insurance paid dividends to Zenith National of $95.0 million,
$115.0 million, and $50.0 million in 2008, 2007, and 2006, respectively. In 2009, $111.5 million can be paid to Zenith National in dividends without prior approval of the
California Department of Insurance. The restrictions on the payment of dividends have not had, and under current regulations are not expected to have, a material adverse impact on the ability to pay
dividends.

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

Year Ended December 31,(Dollars in thousands)

2008

2007

2006Capital stock and surplus

$
1,015,330

$
1,033,190

$
919,835Net income


113,665


243,840


278,163


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 are no longer required under California law. At December 31, 2007 and 2006, we reported statutory surplus of
$451.1 million and $559.5 million, respectively, which reflects a reduction of $582.1 million and $360.3 million, respectively, 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.

71

---



NOTE
13

EARNINGS 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)2008

2007

2006(A)

Net income

$
95,300

$
233,900

$
258,700(B)

Interest expense on the Convertible Notes, net of tax

$
11

$
48

$
48(C)

Weighted average shares outstandingbasic


37,210


37,056


36,974Weighted average shares issuable under the Stock Option Plan (treasury stock method)








4Weighted average shares issued under the Restricted Stock Plan (treasury stock method)


172


159


127Weighted average shares issued in 2008 and issuable in 2007 and 2006 upon conversion of the Convertible Notes


17


69


69(D)

Weighted average shares outstandingdiluted


37,399


37,284


37,174Net income per common share:(A)/(C)

Basic

$
2.56

$
6.31

$
7.00((A)+(B))/(D)

Diluted

$
2.55

$
6.27

$
6.96Cash dividends declared per common share

$
2.40

$
2.84

$
1.26


NOTE 14

OTHER COMPREHENSIVE (LOSS) INCOME

Other comprehensive (loss) income 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 (loss) income, other than net income, for each of the three years ended December 31, 2008:

(Dollars in thousands)

Pre-Tax

Income Tax
Effect

After-TaxYear 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
)Year Ended December 31, 2006Net unrealized gains arising during the year

$
24,190

$
8,467

$
15,723Less:

reclassification adjustment for net realized gains included in net income


(6,281
)

(2,199
)

(4,082
)Total other comprehensive income

$
17,909

$
6,268

$
11,641


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

December 31,(Dollars in thousands)

2008

2007Net unrealized (losses) gains on investments, before tax

$
(77,287
)
$
18,614Deferred tax benefit (expense)


27,049


(6,514
)Total accumulated other comprehensive (loss) income

$
(50,238
)
$
12,100


72

---



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 consisted of assumed reinsurance of property losses from worldwide catastrophes and large property risks. In September 2005, we exited
the assumed reinsurance business and ceased writing and renewing assumed reinsurance contracts, with all contracts fully expired at the end of 2006; however, we will be paying assumed reinsurance
claims for several years. 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 includes interest expense and the general operating
expenses of Zenith National, a holding company, which owns, directly or indirectly, all of the capital stock of its insurance subsidiaries and other investment securities.

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. 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.

73

---



Segment
information is set forth below:

(Dollars in thousands)

Workers'
Compensation

Reinsurance

Investments

Parent

TotalYear 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

$
491,834

$
9,437

$
2,016,326

$
3,186

$
2,520,783




(Dollars in thousands)

Workers'
Compensation

Reinsurance

Investments

Parent

TotalYear 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

$
547,460

$
10,618

$
2,212,352

$
2,550

$
2,772,980




(Dollars in thousands)

Workers'
Compensation

Reinsurance

Investments

Parent

TotalYear Ended December 31, 2006Revenues:Net premiums earned

$
931,739

$
12,478







$
944,217Net investment income







$
106,294





106,294Net realized gains on investments








13,377





13,377Total revenues


931,739


12,478


119,671





1,063,888Interest expense










$
(5,275
)

(5,275
)Income (loss) before tax


313,576


(20,508
)

119,671


(11,927
)

400,812Income tax expense (benefit)


113,414


(7,178
)

40,050


(4,174
)

142,112Net income (loss)

$
200,162

$
(13,330
)
$
79,621

$
(7,753
)
$
258,700Combined ratio


66.3
%

264.4
%Total assets

$
447,756

$
24,144

$
2,293,265

$
2,388

$
2,767,553


NM = Not meaningful

74

---



The following table is a reconciliation of our segment results to the accompanying Consolidated Statements of Operations:

Year Ended December 31,(Dollars in thousands)

2008

2007

2006Net investment income

$
94,027

$
114,863

$
106,294Net realized (losses) gains on investments


(18,507
)

20,353


13,377Income from investments segment


75,520


135,216


119,671Income (loss) from:Workers' compensation segment


84,658


243,832


313,576Reinsurance segment


(192
)

(3,661
)

(20,508
)Parent


(12,790
)

(12,506
)

(11,927
)Income before tax


147,196


362,881


400,812Income tax expense


51,896


128,981


142,112Net income

$
95,300

$
233,900

$
258,700


NOTE 16

EMPLOYEE BENEFIT AND RETIREMENT PLANS

We offer a tax deferred savings plan organized under Section 401(k) of the Internal Revenue Code for all eligible employees. We match 50%
of employee contributions that are 6% or less of salary on a current basis and we are not liable for any future payments under the plan. For the years ended December 31, 2008, 2007, and 2006,
we contributed $2.5 million, $2.7 million, and $2.6 million, respectively.

We
also offer a stock purchase plan, under which we match 25% of employees' contributions to purchase shares of our common stock at market value. For the years ended December 31,
2008, 2007, and 2006, we contributed $0.7 million, $0.4 million, and $1.3 million, respectively. In September 2006, we suspended the stock purchase plan in order to comply with
certain applicable stock exchange listing standards. An amended and restated stock purchase plan 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.

NOTE 17

QUARTERLY FINANCIAL DATA AND COMMON STOCK PRICES (UNAUDITED)

Quarterly results for the years ended December 31, 2008 and 2007 were as follows:

2008 Quarter Ended(Dollars in thousands,
except per share data)

March
31

June
30

September
30

December
31Net 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




2007 Quarter Ended(Dollars in thousands,
except per share data)

March
31

June
30

September
30

December
31Net premiums earned

$
194,082

$
186,345

$
184,612

$
173,493Net investment income


35,486


27,551


26,056


25,770Net realized gains on investments


5,958


5,201


4,701


4,493Net income

$
64,500

$
65,300

$
64,500

$
39,600Net income per common share:Basic

$
1.74

$
1.76

$
1.74

$
1.07Diluted

$
1.73

$
1.75

$
1.73

$
1.06Cash dividends declared per common share

$
0.42

$
0.42

$
0.50

$
1.50


The following table shows the high and low common stock prices as reported by the New York Stock Exchange during each quarter for the past two years:

2008

2007Quarter Ended

High

Low

High

LowMarch 31

$
45.69

$
33.18

$
50.94

$
45.02June 30


41.16


35.16


51.44


45.89September 30


48.00


33.03


49.56


38.80December 31


37.23


26.00


46.98


37.90


As of January 31, 2009, there were 250 registered holders of record of our common stock.

75

---



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 (the "Company") at December 31, 2008 and December 31, 2007, and the
results of their operations and their cash flows for each of the three years in the period ended December 31, 2008 in conformity with accounting principles generally accepted in the United
States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2008, 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, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting, included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express opinions on these financial statements
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.

76

---



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.

SIG

Los
Angeles, California
February 13, 2009

77

---



CERTIFICATIONS, EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
AND MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

For
readers of this Annual Report we furnish on the following pages the Certifications, the Evaluation of Disclosure Controls and Procedures, Management's Report on Internal Control Over
Financial Reporting and Changes in Internal Control Over Financial Reporting that we include in our Annual Report on Form 10-K. We also include a statement about our Chief Executive
Officer's certification to the New York Stock Exchange.

CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO EXCHANGE ACT RULE 13A-14(A) OR RULE 15D-14(A)

I,
Stanley R. Zax, certify that:

Date:
February 13, 2009

SIGChairman of the Board and President (Chief Executive Officer) Zenith National Insurance Corp.


78

---



CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO EXCHANGE ACT RULE 13A-14A(A) OR RULE 15D-14(A)

I,
Kari L. Van Gundy, certify that:

Date:
February 13, 2009

SIGSenior Vice President & Chief Financial Officer Zenith National Insurance Corp.


79

---



CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE
SARBANES OXLEY ACT OF 2002

In connection with the Annual Report on Form 10-K of Zenith National Insurance Corp. (the "Company") for the year ended
December 31, 2008, as filed with the Securities and Exchange
Commission on the date hereof (the "Report"), Stanley R. Zax, as Chief Executive Officer of the Company, and Kari L. Van Gundy, as Chief Financial Officer of the Company, each hereby
certifies, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that, to the best of his or her knowledge:

SIG

SIGName:

Stanley R. Zax

Name:

Kari L. Van GundyTitle:

Chairman of the Board and President

Title:

Chief Financial Officer(Chief Executive Officer)

Date:

February 13, 2009Date:

February 13, 2009


80

---



EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

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

MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in
Exchange Act Rules 13a-15(f) or 15d-15(f). Under the supervision and with the participation of our management, including our principal executive officer and principal
financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission inInternal ControlIntegrated Framework. Based on our evaluation, our management concluded that our internal control
over financial reporting was effective as of December 31, 2008.

The
effectiveness of the Company's internal control over financial reporting as of December 31, 2008 has been audited by PricewaterhouseCoopers LLP, an independent
registered public accounting firm, as stated in their 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.

NEW YORK STOCK EXCHANGE CORPORATE GOVERNANCE LISTING STANDARDS

Zenith National is listed on the New York Stock Exchange. As required by Section 303A.12(a) of the New York Stock Exchange Listed Company
Manual, Mr. Zax, as the Chief Executive Officer of Zenith, certified on May 15, 2008, that he was not aware of any violation by Zenith of NYSE Corporate Governance listing standards as
of such date.

81

---



CORPORATE DIRECTORY
ZENITH NATIONAL INSURANCE CORP.

DIRECTORS Also Directors of
Zenith Insurance Company

Jerome L. Coben Attorney; Partner, Zeughauser Group;
Retired Partner, Skadden, Arps, Slate,
Meager & Flom LLP

Max M. Kampelman Attorney; Of Counsel,
Fried, Frank, Harris,
Shriver & Jacobson LLP

Robert J. Miller Attorney; Principal,
Dutko Worldwide

Fabian Nuñez Partner and CoChair,
Mercury Public Affairs LLC

Catherine B. Reynolds Chairman and CEO,
The Catherine B. Reynolds Foundation

Alan I. Rothenberg Attorney; Chairman and CEO,
1st Century Bancshares, Inc.
Chairman, 1st Century Bank N.A.;
Retired Partner,
Latham & Watkins LLP

William S. Sessions Attorney, Holland & Knight LLP;
Security Consultant

Michael Wm. Zavis Attorney; Retired Founding Partner,
Katten Muchin Rosenman LLP

Stanley R. Zax Chairman of the Board
and President

EXECUTIVE OFFICERS

Stanley R. Zax Chairman of the
Board and President

Michael E. Jansen Executive Vice President
and General Counsel

Jack D. Miller Executive Vice President

Davidson M. Pattiz Executive Vice President

Keith E. Trotman Executive Vice President

Robert E. Meyer Senior Vice President

Kari L. Van Gundy Senior Vice President,
Chief Financial Officer and
Treasurer

OFFICERS

William J. Owen Senior Vice President,
Investor Relations

Hyman J. Lee Jr. Vice President, Assistant General
Counsel and Secretary

TRANSFER AGENT-
COMMON STOCK Computershare Investor Services
250 Royall St.
Canton, MA 02021
www.computershare.com

TRANSFER AGENT-
8.55% CAPITAL SECURITIES Wells Fargo Corporate Trust Services
Wells Fargo Bank, N. A.
Minneapolis, MN

CORPORATE
HEADQUARTERS 21255 Califa Street
Woodland Hills, CA 91367
(818) 713-1000

NYSE TRADING SYMBOL
COMMON STOCKZNT INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM PricewaterhouseCoopers LLP
Los Angeles, CA

THE ANNUAL REPORT on Form 10-K for the year ended
December 31, 2008, quarterly
reports on Form 10-Q, current
reports on Form 8-K and all
amendments to these reports may
be obtained at our website at
www.thezenith.com or free of
charge upon written request to:
Chief Financial Officer
Zenith National Insurance Corp.
21255 Califa Street
Woodland Hills, CA 91367

WEBSITE www.thezenith.com

82

---



CORPORATE DIRECTORY
ZENITH INSURANCE COMPANY

OFFICERS

Stanley R. Zax Chairman of the Board
and Chief Executive Officer

Jack D. Miller President
and Chief Operating Officer

A. Mary Ames Executive Vice President

Eden M. Feder Executive Vice President

Westley M. Heyward Executive Vice President

Michael E. Jansen Executive Vice President and
General Counsel

Robert E. Meyer Executive Vice President
and Chief Actuary

Davidson M. Pattiz Executive Vice President

Bernyce M. Peplowski Executive Vice President

Keith E. Trotman Executive Vice President

Kari L. Van Gundy Executive Vice President,
Chief Financial Officer and Treasurer

Stephen J. Albers Senior Vice President

Bryan A. Anderson Senior Vice President

Norman H. Burdick Senior Vice President

Linda J. Carmody Senior Vice President Jason T. Clarke Senior Vice President

Anita Devan Senior Vice President

Robert L. Hernandez Senior Vice President

Fred A. Hunt Senior Vice President

Corey A. Ingber Senior Vice President

Jonathan W. Lindsay Senior Vice President

James S. Lubman Senior Vice President

Robert J. Peters Senior Vice President

Richard B. Riddle Senior Vice President

Anne Searcy Senior Vice President

Vernon L. Steiner Senior Vice President

Chris L. Uselton Senior Vice President

John H. Weber Senior Vice President

Glen R. Zepnick Senior Vice President

A. Rebecca Barnette Vice President

Brian R. Beams Vice President

Alan M. Bub Vice President

Suzanne M. Chapan Vice President

Duane H. Chernow Vice President

Douglas A. Claman Vice President

Gerald D. Curtin Vice President

Bradley C. Eastwood Vice President

Stephen T. Frye Vice President

Antonio Gaitan Vice President

Michael B. Gillikin Vice President

Jackie C. Hilston Vice President

Carolyn N. Hinson Vice President

Sharon L. Hulbert Vice President and
Assistant General Counsel

Mark M. Jansen Vice President

Kathleen T. Jenkins Vice President

Kimberlee S. Jones Vice President

Mark A. Koman Vice President

Sandra M. Kuhlman Vice President

Hyman J. Lee Jr. Vice President, Assistant
General Counsel and Secretary

Jenny S. Lewis Vice President

Kerri L. Lierman Vice President

Donald C. Marshall Vice President

Thomas M. McCarthy Vice President

Michael R. McFadden Vice President

Timothy I. Mertz Vice President

Mahtab Moayedi Vice President

Timothy S. Mondon Vice President

David J. Oberg Vice President

Charlene C. Ossler Vice President

David C. Park Vice President and
Assistant
General Counsel

Karen E. Parker Vice President

Scott G. Perrotty Vice President

S. Daniel Petrula Vice President

Scott M. Sandler Vice President

Jay S. Schwanz Vice President

Marcia T. Shafer Vice President

Alan I. Steinhardt Vice President

Michael J. Walbeck Vice President

83

---



CORPORATE DIRECTORY
ZENITH OFFICE LOCATIONS

LOS ANGELES, CA Corporate Headquarters
and Los Angeles Regional Office
21255 Califa Street
Woodland Hills, CA 91367
(818) 713-1000
www.thezenith.com

FRESNO, CA 7440 N. Palm Avenue
Suite 103
Fresno, CA 93711
(800) 508-9910

GLENDALE, CA 700 North Brand Blvd.
7th Floor
Glendale, CA 91203
(818) 502-7500

ORANGE, CA 790 The City Drive South
Suite 300
Orange, CA 92868
(714) 705-2300

PLEASANTON, CA 4309 Hacienda Drive
Suite 200
Pleasanton, CA 94588
(925) 460-0600

SACRAMENTO, CA 1601 Response Road
Suite 200
Sacramento, CA 95815
(916) 614-3140

SAN DIEGO, CA 7676 Hazard Center Drive
Suite 1200
San Diego, CA 92108
(619) 299-6252

SANTA CRUZ, CA 1200 Pacific Avenue
Suite 310
Santa Cruz, CA 95060
(831) 460-7700

SOLANA BEACH, CA 420 Stevens Avenue
Suite 300
Solana Beach, CA 92075
(858) 509-6100

AUSTIN, TX 1101 South Capitol of Texas Hwy.
Bldg. J
Austin, TX 78746
(512) 306-1700

LISLE, IL 701 Warrenville Road
Suite 300
Lisle, IL 60532
(630) 353-7300

SPRINGFIELD, IL 2105 W. White Oaks Drive
Springfield, IL 62704
(217) 726-2900

BLUE BELL, PA 2 Valley Square
Suite 301
Blue Bell, PA 19422
(877) 311-0703

BIRMINGHAM, AL 10 Inverness Center Parkway
Suite 220
Birmingham, AL 35242
(800) 355-0708

HOLLYWOOD, FL 4000 Hollywood Blvd.
Suite 465
South Hollywood, FL 33021
(954) 983-1200

ORLANDO, FL 3504 Lake Lynda Drive
Suite 200
Orlando, FL 32817
(800) 999-3242

SARASOTA, FL 1390 Main Street
Sarasota, FL 34236
(800) 226-2324

CHARLOTTE, NC 900 W. Trade Street
Suite 600
Charlotte, NC 28202
(800) 200-2667

84

---