<PAGE>
ANNUAL REPORT 1998
 
             ZENITH NATIONAL INSURANCE CORP.
 
                                    CALFARM
                                   THEZENITH
<PAGE>
INSURANCE PRODUCTS AND SERVICES
 
             Automobile
 
             Business
             Earthquake
             Farmowners
             Health
             Homeowners
             Reinsurance
             SinglePoint
             Integrated 24-Hour Health & Disability
             Workers' Compensation
 
                                    CALFARM
                                   THEZENITH
<PAGE>
CONTENTS
 
<TABLE>
<S>                                                                          <C>
Financial Highlights.......................................................          3
 
Letter to Stockholders.....................................................          4
Management's Discussion and Analysis of
  Consolidated Financial Condition and Results of Operations...............         30
Five-Year Summary of Selected Financial Information........................         44
Property-Casualty Loss Development.........................................         46
Consolidated Balance Sheet.................................................         48
Consolidated Statement of Operations.......................................         50
Consolidated Statement of Cash Flows.......................................         51
Consolidated Statement of Stockholders' Equity.............................         52
Notes to Consolidated Financial Statements.................................         54
Report of Independent Accountants..........................................         71
Corporate Directory
  Zenith National Insurance Corp...........................................         72
  Zenith Insurance Company.................................................         73
  TheZenith Marketing, Underwriting and Claims Offices.....................         74
  CalFarm Insurance Company................................................         75
  Perma-Bilt, a Nevada Corporation.........................................         76
</TABLE>
 
2
<PAGE>
FINANCIAL HIGHLIGHTS
 
<TABLE>
<CAPTION>
                                                           1998      1997      1996
                                                         ----------------------------
 
                                                            (Dollars in thousands,
OPERATING RESULTS                                           except per share data)
<S>                                                      <C>       <C>       <C>
 
              Revenues                                   $636,779  $600,480  $556,371
 
              Income after taxes and before realized
                gains                                      11,559    19,669    30,575
 
              Realized gains on investments after taxes     7,541     8,431     7,025
 
              Net income                                   19,100    28,100    37,600
 
PER SHARE DATA
 
              Income after taxes and before realized
                gains*                                   $   0.67  $   1.10  $   1.72
 
              Realized gains on investments after
                taxes*                                       0.44      0.47      0.40
 
              Net income*                                    1.11      1.57      2.12
 
              Stockholders' dividends                        1.00      1.00      1.00
 
KEY STATISTICS
              Combined ratio
 
                Including catastrophes                     105.3%    103.4%     99.8%
 
                Excluding catastrophes                     103.1%    103.1%     99.8%
 
              Statutory risk-based capital ratio**                     332%      364%
 
              Stockholders' equity                       $346,952  $361,866  $337,503
 
              Stockholders' equity per share***          $  20.23  $  20.31  $  19.17
 
              Closing common stock price                 $ 23 1/8  $ 25 3/4  $ 27 3/8
</TABLE>
 
              *Amounts are presented on a diluted basis. 1996 amounts have been
               restated as required to comply with Statement of Financial
               Accounting Standards ("SFAS") No. 128, "Earnings Per Share". See
               Note 16 to the consolidated financial statements on page 68.
              **The computation of the statutory risk-based capital ("RBC")
                ratio for 1998 has not yet been completed. The previously filed
                statutory financial information of Zenith's insurance
                subsidiaries is being re-stated following the determination of
                the RISCORP purchase price on March 19, 1999. Although the RBC
                ratio for 1998 is expected to be lower than the 1997 RBC ratio,
                it is expected that such ratio will substantially exceed the
                Company and Regulatory Action Levels.
             ***Excluding the effect of SFAS No. 115, "Accounting for Certain
                Investments in Debt and Equity Securities," stockholders' equity
                per share was $19.86, $20.03 and $19.28 in 1998, 1997 and 1996,
                respectively. See Notes 1 and 2 to the consolidated financial
                statements on pages 54-59.
 
                                    CALFARM
                                   THEZENITH                                   3
<PAGE>
TO OUR STOCKHOLDERS
 
             Two significant events occurred during the first quarter of 1999:
             the sale of our CalFarm Insurance operations in California and the
             decision with respect to the final purchase price to be paid for
             the acquisition of substantially all of the assets and certain
             liabilities of the RISCORP Florida-based Workers' Compensation
             business acquired on April 1, 1998.
 
SALE OF CALFARM
             Effective March 31, 1999 we completed the sale of CalFarm
             Insurance, including the health business, to Nationwide Mutual
             Insurance Company. The price is $275 million in cash, subject to
             post-closing adjustment in certain circumstances. We estimate a
             gain of approximately $100 million from the transaction. Investable
             assets will not change materially.
                    CalFarm is an excellent company with expertise in the
             California agricultural industry, the most important in the United
             States. We received an attractive offer from Nationwide, also a
             company rooted with agricultural involvement, and considered what
             would be in the best interest of our company, CalFarm and its
             employees, agents and policyholders, and our shareholders.
             Specifically, we believe this transaction will provide attractive
             opportunities to agricultural and rural insurance customers in
             California and a broader market for insurance agents. As a result
             of the transaction, our book value will increase by about $5.84 per
             share, or 28.9%, thereby strengthening the company as we search for
             profitable insurance niches.
 
4
<PAGE>
WE ARE HOPEFUL THE FINAL PURCHASE PRICE
 
OF THE RISCORP ACQUISITION REPRESENTS
 
A FAIR COMPUTATION OF BOOK VALUE.
 
RISCORP PURCHASE PRICE
             On March 19, 1999 we received a report determining the final
             purchase price of the RISCORP Acquisition. This report, prepared by
             a nationally recognized accounting firm, indicated that the GAAP
             net book value of the assets transferred over the liabilities
             assumed as of April 1, 1998 in the RISCORP Acquisition was
             $92,336,000. On March 26, 1999 we paid $53,688,000 to RISCORP, the
             balance of the purchase price payable including interest from April
             1, 1998, less an amount for assets not transferred by RISCORP.
                    The report indicated that there was considerable value in
             the former RISCORP operations. We are hopeful that the final
             purchase price represents a fair computation of book value.
             Reinsurance acquired in 1998 will provide protection for adverse
             loss reserve development for up to $50,000,000 in excess of the
             reserves originally booked by RISCORP at April 1, 1998. After
             recognizing additional reserves in line with the final purchase
             price we have approximately $24,500,000 of this reinsurance
             protection that will cover future adverse development, if any.
 
                                    CALFARM
                                   THEZENITH                                   5
<PAGE>
STOCKHOLDERS' EQUITY PER SHARE
 
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
 
<TABLE>
<S>        <C>
'94           $16.35
'95           $18.58
'96           $19.17
'97           $20.31
'98           $20.23
</TABLE>
 
1998 ANNUAL REPORT
             Despite less than satisfactory underwriting performance, investment
             results continue to be positive. The sale of CalFarm will enhance
             our financial strength and flexibility. Also, the determination of
             the RISCORP purchase price removes a major uncertainty from our
             balance sheet. Our management has focused their efforts to improve
             the underwriting profitability of our nationally-diversified
             Workers' Compensation operations with California now representing
             less than half our business for the first time.
 
SUMMARY OF FINANCIAL HIGHLIGHTS
             - Premiums increased 8.4% to $529,855,000.
             - Income after tax before net realized gains on investments was
               $11,559,000, or $0.67 per share, compared to $19,669,000, or
               $1.10 per share in 1997.
             - Investment income after tax was $35,907,000, or $2.09 per share,
               compared to $34,655,000, or $1.94 per share in 1997.
             - Net income was $19,100,000, or $1.11 per share, compared to
               $28,100,000, or $1.57 per share in 1997.
             - Realized capital gains on investments after taxes were
               $7,541,000, or $0.44 per share, compared to $8,431,000, or $0.47
               per share in 1997. Unrealized gains on fixed maturities after
               taxes were $7,431,000, compared to $5,890,000 in 1997.
             - The combined ratio for the property-casualty insurance operations
               was 105.3%, compared to 103.4% in 1997.
             - Book value per share at 1998 year-end was $20.23, compared to
               $20.31 at 1997 year-end.
 
6
<PAGE>
THE CALFARM SALE WILL RESULT IN A GAIN OF
 
ABOUT $100 MILLION AND AN INCREASE IN
 
BOOK VALUE OF ABOUT $5.84 PER SHARE.
 
ANALYSIS
             Operating earnings, which consist of investment income and
             insurance underwriting results, after taxes were $17,202,000, or
             $1.00 per share in 1998, compared to $23,463,000, or $1.31 per
             share the prior year. The RISCORP Acquisition reduced 1998
             operating earnings after taxes by an estimated $7,542,000, or $0.44
             per share.
                    The following table summarizes pre-tax underwriting
             performance during the past three years.
 
<TABLE>
<CAPTION>
   -------------------------------------------------------------------------------
 
                  UNDERWRITING RESULTS                     1998      1997      1996
                                                         ----------------------------
                                                            (Dollars in thousands)
<S>        <C>      <S>                                  <C>       <C>       <C>
 
              Workers' Compensation                      $(42,638) $(37,157) $(19,462)
 
              CalFarm Health                               (2,991)      125        42
 
              CalFarm Property-Casualty                     7,401     6,384     8,034
 
              Reinsurance                                  10,268    14,189    12,479
              -----------------------------------------------------------------------
 
              Underwriting (Loss) Income                 $(27,960) $(16,459) $  1,093
              -----------------------------------------------------------------------
</TABLE>
 
                    1998 results were significantly below our goals, due
             primarily to continuing substantial underwriting losses in the
             Workers' Compensation operations, losses in the CalFarm health
             business and reduced reinsurance profits due to Hurricane Georges.
 
                                    CALFARM
                                   THEZENITH                                   7
<PAGE>
1998 SHAREHOLDERS' EQUITY PER SHARE WAS
 
$20.23, COMPARED TO $20.31 THE PRIOR YEAR.
                    The combined ratio for Workers' Compensation of 115.3% was
             composed of a 61.5% loss ratio, and a 53.8% loss adjustment and
             underwriting expense ratio. Prior accident years' loss and loss
             adjustment expense remained unchanged during 1998. Significantly,
             $15,018,000 of the total underwriting loss was related to the
             RISCORP Acquisition while the California underwriting loss was
             reduced. Since the beginning of California open rating in 1995, our
             California loss ratio has averaged 61%, while the entire California
             industry has averaged approximately 87%. This 26-point advantage is
             consistent with our relative results prior to open rating and
             demonstrates the rationality of our pricing and underwriting
             strategy, and the absence of creative reinsurance.
                    Expansion of our national Workers' Compensation operations
             through the RISCORP Acquisition resulted in California premiums
             being less than 50% of our total Workers' Compensation business for
             the first time. Despite the increasing competition in many state
             markets, we expanded and built important relationships at a
             reasonable cost. Our 1998 loss ratio estimate for all states
             outside of California is 62.7% compared to 55.6% the prior year.
             The loss ratio related to the business acquired from RISCORP
             commencing April 1, 1998 is estimated at 70.0%. Our expense ratio
             reflects volume reductions due to the competitive climate, costs
             for Year 2000 compliance and other expenses related to the RISCORP
             Acquisition and integration.
                    Our Reinsurance operations had another successful year,
             their sixth since 1992, despite $4,500,000 of losses from Hurricane
             Georges.
 
8
<PAGE>
OUR REINSURANCE OPERATION RECORDED ITS
 
SIXTH CONSECUTIVE SUCCESSFUL YEAR.
                    CalFarm delivered outstanding underwriting performance for
             the third consecutive year in the property-casualty business, but
             incurred significant losses for the first time in the health
             business. The combined ratio in the health business was 105.7% in
             1998, compared to 99.7% the prior year.
                    During the five years ended 1998, our average combined ratio
             was 102.0%, compared to the industry average of 105.5%, and for the
             past 10 years was 101.7%. Since management assumed operating
             responsibility in 1977, the combined ratio has averaged 101.0%, an
             excellent result, however slightly higher than our goal of 100%.
 
<TABLE>
<CAPTION>
       ZENITH COMBINED RATIOS VERSUS INDUSTRY
              ---------------------------------------
     Year             Zenith            Industry*
              ---------------------------------------
<S>                 <C>              <C>
     1994                 97.8%                108.5%
     1995                103.1                 106.5
     1996                 99.8                 105.8
     1997                103.4                 101.6
     1998                105.3                 105.0
    AVERAGE              102.0%                105.5%
              ---------------------------------------
                        * Source A.M. Best Company
</TABLE>
 
                    The above table clearly shows we have outperformed the
             industry combined ratio over the past five years.
                    Investment income after tax increased 3.6% from $34,655,000,
             or $1.94 per share in 1997, to $35,907,000, or $2.09 per share in
             1998.
 
                                    CALFARM
                                   THEZENITH                                   9
<PAGE>
SINCE MANAGEMENT ASSUMED OPERATING
 
RESPONSIBILITY IN 1977, THE COMBINED
 
RATIO HAS AVERAGED 101.0%, SLIGHTLY
 
HIGHER THAN OUR GOAL OF 100%.
                    Net income in 1998 was $19,100,000, or $1.11 per share,
             compared to $28,100,000, or $1.57 per share in 1997. Net income in
             1998 included capital gains after taxes of $7,541,000, or $0.44 per
             share, compared to capital gains of $8,431,000, or $0.47 per share
             for the prior year.
                    Stockholders' equity at December 31, 1998 was $346,952,000,
             compared to $361,866,000 at December 31, 1997. The decline was due
             to the repurchase of $24,023,000 worth of Zenith Common Stock.
             Stockholders' equity per share was $20.23, compared to $20.31 at
             December 31, 1997. Estimated statutory capital of our insurance
             companies increased to approximately $350,000,000 at year-end 1998
             from $279,993,000 at December 31, 1997.
                    Cash used in operating activities was $47,138,000 in 1998,
             compared to cash provided of $26,974,000 in 1997. The increased use
             of cash was due primarily to payment of claim liabilities acquired
             from the former RISCORP operations.
                    We repurchased about 960,000 shares of Zenith Common Stock
             during 1998 and 33,000 shares in March 1999, leaving authority to
             purchase an additional 1,092,000 shares as of March 1999. During
             the 10 years through 1998, we repurchased 6,188,000 shares, or an
             estimated 24.8% of the total shares then issued for an aggregate
             cost of $119,069,000, or an average of $19.19 per share.
 
10
<PAGE>
STOCK PRICES
 
              EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
 
<TABLE>
<S>                 <C>        <C>        <C>        <C>        <C>
                          '94        '95        '96        '97        '98
First Qtr. High        24 1/4     22 3/4     24 7/8     27 7/8    29 1/16
First Qtr. Low         20 3/4     19 3/8     21 1/8     25 7/8     24 1/2
Second Qtr. High       25 1/2         22     28 7/8     27 1/2     30 1/2
Second Qtr. Low        20 5/8         20     23 7/8     24 5/8         28
Third Qtr. High        27 3/8     24 1/4     28 1/2     28 5/8     28 1/2
Third Qtr. Low             22         20     26 1/4    26 5/16    23 9/16
Fourth Qtr. High       24 1/2     24 5/8         28     28 3/4     25 7/8
Fourth Qtr. Low        20 3/4         20     25 1/4    25 7/16     22 7/8
</TABLE>
 
                    At December 31, 1998, Zenith had long-term debt of
             $74,596,000, with a total debt-to-equity position of 21.3% debt and
             78.7% equity. Also outstanding was $75,000,000 of 8.55% Capital
             Securities issued in July 1998 and maturing in 30 years. Zenith had
             $100,000,000 of bank lines of credit with aggregate availability at
             December 31, 1998 of $95,000,000.
                    Zenith Insurance, CalFarm Insurance, ZNAT Insurance and
             Zenith Star (the Texas-based company) collectively are rated A+
             (Superior) by A.M. Best Company. Moody's Investors Service has
             assigned insurance financial strength ratings of A3 (Good) to
             Zenith Insurance, CalFarm Insurance, ZNAT Insurance and Zenith
             Star. Standard & Poor's has rated the financial strength of the
             property-casualty operations AA- (Very Strong).
                    The information in the following table provides estimates of
             Zenith's net incurred losses and loss adjustment expenses by
             accident year, evaluated in the year they were incurred and as they
             were subsequently evaluated in succeeding years. The information
             set forth in this table is of critical importance in judging the
             accuracy of reserve estimates as well as providing a guide to the
             setting of fair prices and rates.
 
                                    CALFARM
                                   THEZENITH                                  11
<PAGE>
RESERVING ACCURACY IS A CRUCIAL SKILL IN
 
ACHIEVING OUR GOAL OF A COMBINED RATIO
 
OF 100%.
 
<TABLE>
<CAPTION>
                                       ACCIDENT YEAR RESERVE DEVELOPMENT
            ----------------------------------------------------------------------------------------
                                        Net incurred losses and loss adjustment expenses reported at end of year
            ----------------------------------------------------------------------------------------
                  Years in which
          losses were incurred               1993        1994        1995        1996        1997        1998
                                               -----------------------------------------------------------
                        (Dollars in                                                                    without
                           thousands)                                                                  RISCORP
<S>                 <C>        <C>        <C>        <C>        <C>        <C>            <C>         <C>
 
                Prior to 1993             $2,592,008  $2,594,472  $2,593,169  $2,598,599  $2,594,450  $2,588,802
                1993                         297,652     285,544     275,591     269,003     267,576     268,535
                Cumulative                 2,889,660   2,880,016   2,868,760   2,867,602   2,862,026   2,857,337
                1994                                     303,749     312,953     304,246     301,550     301,068
                Cumulative                             3,183,765   3,181,713   3,171,848   3,163,576   3,158,405
                1995                                                 327,503     333,667     347,501     348,629
                Cumulative                                         3,509,216   3,505,515   3,511,077   3,507,034
                1996                                                             318,843     365,908     365,006
                Cumulative                                                     3,824,358   3,876,985   3,872,040
                1997                                                                         348,849     342,343
                Cumulative                                                                 4,225,834   4,214,383
                1998                                                                                     336,245
                Ratios:
                1993                          66.20%      63.51%      61.29%      59.83%      59.51%      59.72%
                1994                                      68.87%      70.95%      68.98%      68.37%      68.26%
                1995                                                  74.67%      76.08%      79.23%      79.13%
                1996                                                              70.48%      72.42%      72.24%
                1997                                                                          71.67%      70.33%
                1998                                                                                      73.46%
        --------------------------------------------------------------------------------------------------------
                        -  This analysis displays the accident year net incurred losses and loss adjustment
             expenses development on a statutory basis for accident years 1993-1998 for all property-casualty
             business. The total of net loss and loss adjustment expenses for all claims occurring within each
             annual period is shown first at the end of that year and then annually thereafter. The total cost
             includes both payments made and the estimate of future payments as of each year-end. Past
             development may not be an accurate indicator of future development since trends and conditions
             change. Net incurred loss and loss adjustment expenses and loss ratios prior to 1995 have been
             restated to include health insurance.
                        -  Effective April 1, 1998, Zenith acquired substantially all of the assets and certain
             liabilities, including unpaid loss and loss adjustment expenses, of RISCORP's workers' compensation
             business. To facilitate comparison between years, estimates of net incurred losses and loss
             adjustment expenses at the end of 1998 are presented with the business acquired in the RISCORP
             Acquisition excluded.
                        -  On December 31, 1996, Zenith acquired through merger the outstanding reserves for net
             loss and loss adjustment expenses of the Associated General Commerce Self-Insurers' Trust Fund of
             $65,429,000. The development of these reserves will be included in future operating results of
             Zenith and will be reflected as development of the 1996 year.
</TABLE>
 
12
<PAGE>
INVESTMENT INCOME AFTER TAXES PER SHARE
 
             EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
 
<TABLE>
<S>        <C>        <C>        <C>        <C>        <C>
                  94         95         96         97         98
               $1.42      $1.67      $1.92      $1.94      $2.09
</TABLE>
 
INVESTMENTS
             Investment activities are a major part of our revenues and
             earnings; we believe our portfolios are diversified to achieve a
             reasonable balance of risk and a stable source of earnings. Zenith
             primarily invests in debt securities as compared to equities and
             our largest holdings are U.S. Government securities.
                    Our portfolio increased this year as a result of the RISCORP
             Acquisition and the proceeds from the sale of $75,000,000 of 8.55%
             Capital Securities.
             - Consolidated investment income before tax was $53,593,000 in
               1998, compared to $52,332,000 in 1997. The increase in investment
               income is primarily due to the investment of the assets acquired
               in the RISCORP Acquisition and the proceeds of the sale of 8.55%
               Capital Securities.
             - Consolidated investment income after taxes and after interest
               expense was $32,083,000, or $1.87 per share in 1998, compared to
               $32,068,000, or $1.79 per share in 1997. Average yields on this
               portfolio in 1998 were 5.7% before taxes and 3.8% after taxes,
               compared to 6.0% and 3.9%, respectively in 1997.
             - During 1998, we recorded net realized capital gains before taxes
               from our investment portfolio of $11,602,000, compared to
               $14,008,000 the prior year.
                    A substantial portion of our investment portfolio is now
             recorded in the financial statements at market value, with our
             consolidated investment portfolio carrying value totaling
             $1,048,681,000 at December 31, 1998, compared to
             $879,973,000 at the end of 1997. Average life of the bond portfolio
             was 5.7 years at
             December 31, 1998, compared to 5.3 years at December 31, 1997. Our
             portfolio quality is high with 96% rated investment grade.
 
                                    CALFARM
                                   THEZENITH                                  13
<PAGE>
OUR PORTFOLIO INCREASED THIS YEAR AS A
 
RESULT OF THE RISCORP ACQUISITION AND THE
 
PROCEEDS FROM THE SALE OF CAPITAL SECURITIES.
                    The major development in the U.S. bond markets was continued
             low inflation and reduced interest rates with long-term government
             bonds often trading below 5%. Also, spreads between corporate and
             government bonds fluctuated significantly. As a result, our
             portfolio of fixed maturities increased in value, relative to
             amortized cost, by $2,430,000 before taxes from 1997 to 1998.
                    Short-term investments remained high to provide the
             necessary liquidity for funding any additional consideration in
             connection with the RISCORP Acquisition.
 
<TABLE>
<CAPTION>
SECURITIES PORTFOLIO                     AT DECEMBER 31, 1998          At December 31, 1997
                                        -----------------------------------------------------
                                        -----------------------------------------------------
                                       AMORTIZED                     Amortized
                                         COST*       MARKET VALUE      Cost*       Market Value
                                        -----------------------------------------------------
                                                       (Dollars in thousands)
<S>        <C>        <C>        <C>        <C>        <C>         <C>             <C>
Short-term investments                $  187,123     $  187,123     $  209,827     $  209,827
U.S. Government bonds                    180,064        181,466        243,346        244,921
Taxable bonds:
  Investment grade                       537,176        546,448        305,250        311,553
  Non-investment grade                    29,255         29,735         17,083         17,554
Redeemable preferred stocks               14,045         14,347         16,040         16,717
Other preferred stocks*                   24,293         24,674         21,286         22,272
Common stocks*                            22,402         26,935         17,790         23,439
-------------------------------------------------------------------------------
*Equity securities at cost
</TABLE>
 
                    In 1993, we started a home-building subsidiary (Perma-Bilt),
             in order to participate in the growth of the Las Vegas, Nevada
             housing market. During 1998, we closed and delivered 275 homes at
             an average selling price of $137,000, compared to 305 homes at an
             average selling price of $149,000 the prior year. As a result,
             sales of
 
14
<PAGE>
CALIFORNIA REPRESENTED LESS THAN 50% OF
 
WORKERS' COMPENSATION PREMIUMS FOR THE
 
FIRST TIME.
             $37,737,000 and $1,363,000 of pre-tax income were recorded during
             1998, compared to sales of $45,419,000 and $1,678,000 of pre-tax
             income the previous year. Land presently owned at a cost of about
             $42,142,000 will support the construction of an estimated 1,125
             homes over the next several years and possibly some commercial
             and/or apartment development. Increased interest rates and other
             factors may impact the volume of home sales, but we are confident
             the land we have acquired is strategically located and will have
             long-term value. For example, we own about 170 acres on Las Vegas
             Boulevard south-west of the airport, one of the largest undeveloped
             holdings on The Strip.
 
WORKERS' COMPENSATION
             Workers' Compensation business represents 52.6% of our
             property-casualty volume. During 1998, 44.2% of this business was
             in California and the balance in 36 states, with the greatest
             concentrations in Florida and Texas.
                    Workers' Compensation operations recorded an underwriting
             loss, after dividends to policyholders, of $42,638,000 in 1998,
             compared to a loss of $37,157,000 for the prior year. Our Workers'
             Compensation combined ratio was 115.3% in both 1998 and 1997.
                    During 1998, as compared to the prior year, earned premium
             increased $36,596,000, or 15.1%, primarily due to the RISCORP
             Acquisition. There were about 38,600 policies in force nation-wide
             at year-end 1998, compared to about 26,700 the prior year. During
             the last several years, our underwriting results have been
             significantly below our 20-year combined ratio of 102.8%.
             Specifically, our combined ratio for the last three years has
             averaged 113.6%.
 
                                    CALFARM
                                   THEZENITH                                  15
<PAGE>
LOW LOSS RATIOS WITHOUT CREATIVE REINSURANCE
 
PROVIDE CUSTOMER CONFIDENCE IN OUR SERVICES
 
AND PRICING STABILITY.
                    We estimate our underwriting loss during the past two years
             on a geographic basis as follows:
 
<TABLE>
<CAPTION>
              Underwriting Loss                            1998       1997
                                                         --------------------
<S>                                                      <C>        <C>
                                                             (Dollars in
                                                              thousands)
 
              California                                 $ (18,536) $ (27,218)
 
              RISCORP Acquisition                          (15,018)
 
              Other states                                  (9,084)    (9,939)
</TABLE>
 
                    As the above chart indicates, we are beginning to work
             effectively to improve our California underwriting results, despite
             poor market conditions. Although loss ratios outside of Florida in
             the Southeast were unsatisfactory, the RISCORP Acquisition data is
             more a reflection of our substantial investment in strengthened
             management and systems, than it is in underwriting performance.
                    The following table compares the components of our combined
             ratio for the three years ended 1998 to the prior 10 years ended
             1998:
 
<TABLE>
<CAPTION>
                                          Three-Year Average      10-Year Average
              Combined Ratio Analysis      to December 1998      to December 1998
                                           --------------------------------------
<S>                                       <C>                   <C>
              Accident year loss ratio            57.0%                 52.1%
              Loss reserve and expense
                development                        5.0                  (0.1)
              Underwriting and loss
                adjustment expenses               51.1                  47.3
              Policyholder dividends               0.5                   4.7
                                                 -----                 -----
              Combined ratio                     113.6%                104.0%
              ---------------------------------------------------------------------
</TABLE>
 
                    The table shows that underwriting and loss adjustment
             expense percentages made up a significant part of the difference in
             the combined ratio. Specifically, the combined ratio is 9.6 points
             higher with expenses accounting for 3.8 points of this
 
16
<PAGE>
CHANGING CIRCUMSTANCES MOTIVATE OUR
 
EMPLOYEES TO PARTICIPATE IN CONTINUING
 
EDUCATION TO IMPROVE SERVICES AND SKILLS.
             amount. Also, reserving was less accurate than over the prior 10
             years. From an analytical perspective, the combination of accident
             year loss ratio and policyholder dividends is about the same, a
             good indication that we are managing risks realistically and
             effectively. Management of controllable expenses is a high
             priority, and during 1998 we reduced the number of employees by
             about 12%.
                    There are many factors currently affecting our Workers'
             Compensation performance:
             1. Intense rate and price competition affecting our volume but not
                our loss ratios in areas other than the business from the
                RISCORP Acquisition outside of Florida.
             2. Increased rates and prices for insureds with high loss ratios
                and high experience
                modifications.
             3. Additional expenses or investments to upgrade our computer
                systems and address the Year 2000 challenge while focusing on
                managing controllable expenses.
             4. Additional expenses incurred in connection with the RISCORP
                Acquisition and in order to upgrade the quality of their
                operations, hire and train new claims personnel and integrate
                with TheZenith.
             5. Unsatisfactory underwriting results in former RISCORP operations
                outside of Florida.
             6. Increases in expenses to adjust claims due to changes in the
                Workers' Compensation systems.
             7. Higher average costs per claim, including increases in health
                care costs.
             8. Declining claim frequencies.
             9. Creative reinsurance supporting competitors' low-ball pricing
                strategies; this form of reinsurance will probably be
                short-term.
 
                                    CALFARM
                                   THEZENITH                                  17
<PAGE>
WE ARE COMMITTED TO PROVIDING VALUE-ADDED
 
POLICYHOLDER SERVICES TO REDUCE CUSTOMER
 
LOSS RATIOS, AND TO DO SO AT LOWER COST.
             10. Our commitment to continue delivering value-added services to
                 our policyholders, helping them reduce their loss ratios, and
                 the challenge to provide these services at a lower cost.
                    Considering the persistence of the extremely competitive
             market conditions, our focus is on the two segments of the business
             where we have managed risk successfully for many years: smaller
             employers and insureds where quality services impact results. We
             can clearly demonstrate our service capabilities reduce employer
             experience modifications significantly and, therefore, lower
             policyholder net costs over many years. As we obtain more
             opportunities to service employers at adequate prices, and continue
             to control costs, we are confident our operating results will
             improve. In the meantime, we are unwilling to reduce prices or
             underwriting standards to the unrealistic levels of certain
             competitors and we will continue to focus on managing controllable
             expenses.
                    When we published our annual report last year, we clearly
             expected improvement in market conditions by this time, primarily
             in California. Unfortunately, this has not been the case; the
             latest estimates project a 93% accident year loss ratio and an
             accident year combined ratio of 131% for the California industry.
             Zenith's Workers' Compensation accident year loss ratio is 61.5%
             and combined ratio is 115.3%, demonstrating we outperform the
             industry in these most critical areas. Also, our underwriting loss
             improved significantly in California despite the environment.
             Average costs for indemnity claims continue to increase as a result
             of growing health
 
18
<PAGE>
WE HAVE MANAGED WORKERS' COMPENSATION
 
RISK SUCCESSFULLY IN TWO SEGMENTS: SMALLER
 
EMPLOYERS AND INSUREDS WHERE QUALITY
 
SERVICES IMPACT RESULTS.
             care costs and other factors. Investment income is declining due to
             lower interest rates, although capital gains augment returns. Some
             competitors have already left the marketplace due to poor results,
             and many of the remaining insurers have a low pricing strategy
             based on creative reinsurance. We do not participate in creative
             reinsurance. We believe that any changes in the market will be
             directly related to circumstances surrounding this type of
             reinsurance. Also, we expect continued opportunities to obtain
             reasonable prices on policies with a history of unfavorable
             results, as we are focused on continuing to improve our
             underwriting results.
                    With the recent change of political leadership in
             California, we expect comprehensive legislative reform of the
             Workers' Compensation system to be a major topic in 1999. Labor
             interests will advocate benefit increases, while our agenda will be
             focused on simplifying and speeding up the system while correcting
             certain abuses inherent in the last round of reforms. Achieving a
             balanced program will be a challenge, but we are hopeful the needs
             of the California economy and fairness to all parties involved will
             prevail over short-term political strategies.
                    In Florida, there is discussion of the potential for
             reducing the role government plays in pricing Workers' Compensation
             insurance. Minimum rates increased 1.6% in 1999 and decreased 3.2%
             and 11.3% during 1998 and 1997, respectively. During this period,
             the Florida residual market share has shrunk significantly and
             today represents less than 1% of the total market. We are not able
             to predict legislative changes, if any, to the various state
             Workers' Compensation systems; this is one of the risks inherent in
             our operations.
 
                                    CALFARM
                                   THEZENITH                                  19
<PAGE>
WE DO NOT PARTICIPATE IN CREATIVE
 
REINSURANCE.
 
SINGLEPOINT
             We continue to market an integrated disability program in
             partnership with UNUM in Arkansas, but have ceased this operation
             in California due to poor performance. Although the results are not
             meaningful to date, SinglePoint is experimenting and improving its
             capabilities in a market segment that may have future value for
             certain employers.
 
RISCORP ACQUISITION
             On June 17, 1997, Zenith entered into an agreement with RISCORP,
             Inc. to purchase substantially all of the assets of RISCORP related
             to its Workers' Compensation business, including RISCORP's existing
             in-force insurance business as well as the rights to all new and
             renewal policies. Zenith also purchased RISCORP's "First Call"
             managed care Workers' Compensation system.
                    Zenith assumed certain liabilities related to RISCORP's
             insurance business in connection with the transaction, including
             $15 million in indebtedness of RISCORP which Zenith immediately
             repaid. The transaction closed on April 1, 1998, and the final
             purchase price was paid by Zenith to RISCORP on March 26, 1999.
             There is litigation pending with respect to compliance with the
             purchase agreement. The RISCORP Acquisition reduced 1998 operating
             earnings after taxes by an estimated $7,542,000, or $0.44 per
             share. Underwriting losses from the business acquired from RISCORP
             were about $15,018,000. We view these losses in the context of the
             acquisition as a part of the purchase price even though not
             permitted by accounting rules.
 
20
<PAGE>
WE ARE UNWILLING TO REDUCE OUR PRICES OR
 
UNDERWRITING STANDARDS TO THE UNREALISTIC
 
LEVELS OF CERTAIN COMPETITORS.
                    Unfortunately, progress in closing the transaction was
             slower than anticipated with negative short-term impacts on the
             business, employees and RISCORP's agency force. As a result,
             significant time, effort and cost have been required to integrate
             RISCORP and TheZenith, and rebuild certain aspects of the business
             that were not up to professional standards. The purchased in-force
             business consisted of about 17,600 policies, 82% of which were in
             Florida. To date, the Florida policies appear to produce loss
             ratios as anticipated, but the business outside of Florida is
             producing unsatisfactory results. We purchased $50 million of
             reinsurance to protect against adverse development of the acquired
             loss reserves and no benefit has yet been recognized in results of
             operations. The number of employees has been reduced from about 550
             as of the closing to about 440 at the present time. Under the able
             leadership of Jack Miller, we continue to build a professional
             specialty operation and a profit culture that we believe will
             produce long-term favorable results.
 
CALFARM INSURANCE COMPANY
             CalFarm Insurance Company is a Sacramento, California-based
             property-casualty company that offers comprehensive coverages
             written for individual and commercial customers, primarily in the
             rural and suburban areas of California. Automobile, Farmowners,
             Commercial coverages and Homeowners are the major lines of business
             with about 105,000 policies in-force. CalFarm also offers group
             health insurance products previously written by CalFarm Life
             Insurance Company with about 24,000 certificates in-force.
                    In 1998, CalFarm continued its focus on building better
             relationships with those agents who play an important role in the
             successful sale of its products.
 
                                    CALFARM
                                   THEZENITH                                  21
<PAGE>
WE ARE FOCUSED ON CONTINUING TO IMPROVE
 
OUR WORKERS' COMPENSATION UNDERWRITING
 
PERFORMANCE.
             Numerous initiatives and programs were delivered to our agents
             including aggressive field support and training, more efficient and
             automated interfaces, new competitive products, and financial
             support to assist agents in expanding their CalFarm business.
                    CalFarm is strategically working to be a "First Choice"
             provider of insurance products within the rural and suburban
             marketplace. CalFarm's customers rely on our agents to develop
             specialized protection programs and tailor coverage to individual
             needs. In the highly competitive California marketplace, CalFarm
             was able to achieve profitable underwriting results by establishing
             agent "partnerships" and making it easy for such agents to do
             business with CalFarm. Responsive customer service is our highest
             priority.
                    During 1998, CalFarm continued to improve its service
             processes for reporting and settling claims. Through ongoing
             investments in claims leadership and training programs, CalFarm has
             been able to reduce the time between claim reporting and
             settlement. The benefits of an early claim management intervention
             and resolution program are demonstrated by CalFarm's low inventory
             of open claims. In addition to an expedient settlement process,
             CalFarm continued to emphasize fraud prevention by committing the
             resources of its Special Investigation Unit to the rapid
             identification of questionable cases and immediate response to
             major losses. CalFarm also expanded the use of medical advisors in
             its three regional claims locations to enhance the staff's
             decision-making capabilities.
                    In 1998, CalFarm progressed toward creating a culture that
             nurtures and supports lifelong learning for its employees with
             underwriting and claims management personnel participating in
             extensive leadership development courses.
 
22
<PAGE>
IN 1998, OUR CALIFORNIA WORKERS'
 
COMPENSATION UNDERWRITING LOSS IMPROVED
 
SIGNIFICANTLY, DESPITE THE ENVIRONMENT.
             CalFarm also supported sizable investments in, and progress toward,
             advancing its information systems and service capabilities.
             Examples of such investments are a flexible billing system
             implemented in 1998, emphasis on e-commerce strategies, including
             the further development of a data warehouse and an Agency intranet
             to meet our customers' and CalFarm's information needs, and the
             installation of a new processing system for our Home and Auto
             programs. CalFarm's Farmowners package product was improved, and
             two programs targeted at small food service and auto service
             employers were expanded. These small employer programs were
             developed with coverages necessary and unique to these segments,
             with competitive prices, simplified pricing, and new promotional
             materials. As an example, the "Country Lifestyle" program was
             introduced to offer a convenient, comprehensive package policy for
             rural customers who appreciate an agricultural way of life but do
             not make their principal source of income from farming. CalFarm's
             success depends on its ability to develop its people and systems,
             and to transact business with agents in an easy and efficient
             manner using newer technologies and by marketing modern products.
                    CalFarm actively manages its earthquake catastrophe
             exposures and engages the services of prominent outside experts to
             assist in geographic modeling and simulation techniques to mitigate
             risk and achieve desired objectives. In 1998, CalFarm expanded the
             scope of its catastrophe management efforts outside of earthquake
             peril to include an analysis of brush fire exposures. With the use
             of specialized mapping software, CalFarm is able to monitor
             aggregations of exposures in areas of potential conflagration.
             CalFarm also purchases quality reinsurance at levels expected to
             protect our capital from large disasters.
 
                                    CALFARM
                                   THEZENITH                                  23
<PAGE>
IN FLORIDA, WE CONTINUE TO BUILD A
 
PROFESSIONAL SPECIALTY OPERATION WE
 
BELIEVE WILL PRODUCE LONG-TERM
 
FAVORABLE RESULTS.
                    CalFarm is the largest writer of Farmowners policies in
             California with an estimated market share of 41%. Its specialists
             have first-hand knowledge of the diverse business and personal
             insurance needs of California farmers. CalFarm enjoys the
             sponsorship of the California Farm Bureau Federation, the state's
             largest general agricultural organization. The Farm Bureau
             relationship has existed since 1985, although either party has six
             months contractual termination rights. CalFarm is committed to
             seeking new and profitable opportunities in the California
             agricultural sector, which has led the nation in farm production
             and income for 50 years.
                    CalFarm's loss ratio was 53.9% in 1998, compared to 51.4% in
             1997, and the combined ratio was 98.0% in 1998, compared to 96.9%
             in 1997. Results for 1998 include $5,000,000 of catastrophe losses
             from El Nino-related wind and storm damage in February 1998,
             compared with $1,500,000 catastrophe losses from the 1997 New
             Year's flood, and $3,500,000 of technology expenditures for system
             improvements and Year 2000 compliance.
                    CalFarm's Health insurance results, written under a plan
             sponsored by the California Farm Bureau Federation, were adversely
             affected by higher medical costs and greater utilization. For the
             year ended December 31, 1998, pre-tax losses amounted to $2.6
             million, compared to pre-tax income of $1.2 million the prior year.
             Most of the losses were incurred in the fourth quarter and reserves
             were increased by $2.4 million. This is the first year since the
             acquisition of CalFarm by Zenith in 1985 that the health operations
             were significantly unprofitable. A new health management team was
             put into place in December 1998 charged with the mission to improve
             network containment controls, medical management, and operating
             results. Also, rates were increased about 24% to offset the abrupt
             industry-wide increase in health care costs.
 
24
<PAGE>
SINCE THE INCEPTION OF OUR REINSURANCE
 
OPERATIONS, THE COMBINED RATIO HAS
 
AVERAGED 92.3%.
                    For the 13 years since CalFarm was acquired by Zenith, the
             combined ratio has averaged 100.1%, excluding the effect of
             Proposition 103 rollback refunds in 1992. Management of CalFarm is
             pleased with its 1998 operating results in view of the fiercely
             competitive climate, and is committed to maintaining appropriate
             underwriting margins, including a rapid turnaround in the results
             of the Health operations.
 
REINSURANCE
             For the past 13 years, Zenith Insurance has been selectively
             underwriting assumed treaty and facultative reinsurance as well as
             commercial package policies for targeted industry groups.
             Reinsurance represents 5.5% of our property-casualty volume, while
             reinsurance reserves represent 10.0% of our total property-casualty
             reserves.
                    During 1998, the net written premium of this operation was
             $29,856,000, compared to $29,780,000 in 1997. Earned premium was
             $29,150,000, compared to $32,251,000 in 1997. Underwriting profits
             of $10,268,000 were recorded in 1998, resulting in a combined ratio
             of 64.8%, compared to underwriting profits of $14,189,000 and a
             combined ratio of 56.0% the prior year. Since the inception of this
             operation in 1985, the combined ratio has averaged 92.3%. During
             1997 and 1998, the majority of written premium was derived from
             world-wide property catastrophe business.
                    Accounting for the property catastrophe reinsurance business
             has a different result from our other property-casualty businesses.
             At the end of each reporting period, income is recognized without
             reserves being established if no major catastrophe has occurred. In
             our other businesses, reserves are mandated based upon actual
             events as well as expected loss patterns. As a result, there may be
             large
 
                                    CALFARM
                                   THEZENITH                                  25
<PAGE>
ZENITH HAS MADE SUBSTANTIAL PROGRESS
 
IN PREPARING AND TESTING OUR SYSTEMS
 
TO FUNCTION PROPERLY IN THE YEAR 2000.
             fluctuations (positive or negative) in underwriting results for the
             property catastrophe reinsurance business in the short-term since
             only actual events are considered. The major event in 1998 was
             Hurricane Georges where we have estimated our loss at $4,500,000.
             Industry experts indicate 1998 was the third worst storm year on
             record.
 
YEAR 2000
             Zenith has made substantial progress in preparing and testing its
             computer and business systems to function properly in view of the
             Year 2000 problem. To date, we have spent $4,522,000, and we
             estimate an additional cost of $1,100,000 will complete the
             necessary work and testing of our internal computer and business
             systems. In addition to the remediation and testing of our systems,
             we will purchase $3,724,000 of new PCs and related equipment which
             are Y2K compliant and spend an additional $500,000 to upgrade and
             make our Florida imaging system Y2K compliant. Lastly, a process
             and schedule are in place to monitor timely compliance of third
             parties with whom we conduct business.
                    Although we do not have all contingency plans in place to
             address the possibility that either we or third parties may not be
             Y2K ready, we have started a process to develop such plans and
             expect such plans to evolve throughout this year. We also have
             hired outside lawyers and consultants to advise and critique all
             our activities in the Y2K area.
 
DIRECTORS
             During this past year, our friend, Jack Ostrow, Director and
             Chairman of the Audit Committee for 20 years, passed away. We miss
             the judgment and integrity of our learned colleague and continue to
             adhere to the principles he stood for and taught us at every
             opportunity.
 
26
<PAGE>
WE HAVE A HIGH-QUALITY, LIQUID INVESTMENT
 
PORTFOLIO THAT CONTRIBUTES A STEADY STREAM
 
OF INVESTMENT INCOME.
                    As previously announced, Michael Wm. Zavis, a founding and
             Co-Managing Partner of the national law firm of Katten, Muchen &
             Zavis, Chicago, Illinois, was elected to the Board and as Chairman
             of the Audit Committee.
                    On March 1, 1999, we also announced the election to the
             Board of Robert J. Miller, former Governor of Nevada and Senior
             Partner of Jones Vargas, a law firm with offices in Las Vegas and
             Reno, Nevada.
 
CONCLUSION
             With the closing of the sale of CalFarm, our financial condition
             will be strengthened with a substantial estimated increase in book
             value of $100,000,000, or $5.84 per share. We have not made any
             decisions as to the use of the proceeds, although we continue with
             an active stock repurchase program. Our focus will be as a
             specialty Workers' Compensation insurer with geographic
             diversification and a long history of effective risk management and
             as a selective reinsurance underwriter. Also, our high-quality,
             liquid investment portfolio will provide a steady stream of
             investment income.
                    We continue to focus on internal growth of our operations at
             appropriate actuarial prices to maintain reasonable loss ratios and
             to provide quality services to our customers. From time to time,
             acquisition opportunities present themselves as in the case of
             CalFarm in 1985 and RISCORP in 1997. Both acquisitions were
             available due to serious business or financial problems created by
             prior managements and required an investment of time and money to
             improve results. We are always looking for other intelligent
             transactions and believe that our improved financial strength will
             provide assistance in this regard.
 
                                    CALFARM
                                   THEZENITH                                  27
<PAGE>
THE CONSUMMATION OF THE CALFARM SALE
 
HAS IMPROVED OUR FINANCIAL STRENGTH
 
AND FLEXIBILITY.
                    Continued integration and further strengthening of
             operations acquired from RISCORP will dominate our short-term
             activities. Managing controllable expenses continues to be a high
             priority.
                    We continue to focus on stockholder value in a
             property-casualty insurance world of inadequate pricing and
             profits, and increasing excess capacity. In our judgment, the best
             strategies under these circumstances are to improve our management,
             customer services and operational capabilities; integrate our
             Southeast operations; refine our underwriting, pricing and claim
             disciplines; reduce expenses; and continue to build professional
             relationships with our customers. Although short-term profitability
             has been impacted by the RISCORP Acquisition, Year 2000 expenses
             and Workers' Compensation underwriting losses, we believe long-term
             investors will benefit from our strategies, financial strength and
             experience in managing insurance risk successfully over a long
             period of time. The recent disclosure of substantial losses in the
             Workers' Compensation reinsurance market should improve market
             conditions.
                    Predicting losses and charging premiums proportionate to the
             exposures is a difficult task. It is one thing to understand what
             risks are, and quite another to persuade customers of the need to
             pay appropriate premiums in an extremely competitive environment.
             However, we are fortunate to have many knowledgeable policyholders,
             employees and agents who recognize the value of what we deliver; we
             intend to amplify this message to an expanding customer base.
 
28
<PAGE>
WE CONTINUE TO FOCUS ON STOCKHOLDERS'
 
VALUE IN A WORLD OF INADEQUATE PRICING
 
AND INCREASING EXCESS CAPACITY.
                    We appreciate the assistance and confidence of our
             employees, agents, stockholders and directors as we deal with the
             challenges and opportunities ahead. The continued support of our
             policyholders and exceptional efforts of our people provide
             confidence for the future. In closing, we believe our people are
             Zenith's most important asset, for which no number on our balance
             sheet can begin to quantify their value to the company and our
             customers.
 
             /s/ Stanley R. Zax
 
             Stanley R. Zax
 
             Chairman of the Board and President
 
             Woodland Hills, California, March 1999
 
             Note: While it has never been our policy to produce "slick" Annual
             Reports, regular readers of this document will no doubt be aware of
             the de-engineered production values compared to prior years. Our
             objective was to cover all of the information of interest which was
             not fully available until late in March, and therefore, we
             fast-tracked this year's production.
 
                                    CALFARM
                                   THEZENITH                                  29
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED
 
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
FORWARD-LOOKING INFORMATION
   The Private Securities Litigation Reform Act of 1995 provides a safe harbor
for forward-looking statements if accompanied by meaningful cautionary
statements identifying important factors that could cause actual results to
differ materially from those discussed. Forward-looking statements include those
related to the plans and objectives of management for future operations, future
economic performance, or projections of revenues, income, earnings per share,
capital expenditures, dividends, capital structure, or other financial items.
Statements containing words such as EXPECT, ANTICIPATE, BELIEVE, or similar
words that are used in the Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations, in other parts of the Zenith
National Insurance Corp. ("Zenith") Annual Report on Form 10-K pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year
ended December 31, 1998, in other parts of Zenith's 1998 Annual Report to
Stockholders or in other written or oral information conveyed by or on behalf of
Zenith are intended to identify forward-looking statements. Zenith 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) heightened competition, particularly intense
price competition; (2) adverse state and federal legislation and regulation; (3)
changes in interest rates causing a reduction of investment income; (4) general
economic and business conditions which are less favorable than expected; (5)
unanticipated changes in industry trends; (6) adequacy of loss reserves; (7)
catastrophic events or the occurrence of a significant number of storms and wind
and hail losses; (8) ability to timely and accurately complete the Year 2000
conversion process; (9) impact of any failure of third parties with whom Zenith
does business to be Year 2000 compliant; (10) uncertainties related to the
acquisition of 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, including (a) the ability of Zenith
to integrate on a profitable basis the business acquired from RISCORP, (b) the
value of transferred assets and transferred liabilities, (c) the ability of
Zenith to recover any amounts from RISCORP for breaches of representations,
warranties and covenants under the Asset Purchase Agreement and (d) whether
RISCORP will contest the determination of the Final Purchase Price for the
RISCORP Acquisition and, if so, the ability of RISCORP, to prevail on any such
attempt, as well as to recover any amount from Zenith Insurance for the alleged
failure to comply with certain indemnification provisions of the Asset Purchase
Agreement; (11) changing environment for controlling medical, legal and
rehabilitation costs, as well as fraud and abuse; and (12) other risks detailed
herein and from time to time in Zenith's other reports and filings with the
Securities and Exchange Commission.
 
OVERVIEW
   Zenith's principal source of consolidated earnings is the income, including
investment income, from the operations of its property-casualty insurance
businesses and its investment portfolio. Property-casualty operations comprise
Workers' Compensation (52.6% of 1998 consolidated net premiums earned); Other
Property-Casualty, principally automobile, homeowners, farmowners and commercial
coverages and group health insurance (41.9% of 1998 consolidated net premiums
earned); and Reinsurance (5.5% of 1998 consolidated net premiums earned).
Results of such operations for the three years ended December 31, 1998 are set
forth in the table on page 32. The Workers' Compensation business has grown over
the past three years with an expanding presence in Florida through the
acquisition of Associated General Commerce Self-Insurers' Trust Fund
("AGC-SIF"), a Florida workers' compensation self-insurers' fund, in 1996 and
the acquisition of substantially all of the assets and certain liabilities of
RISCORP related to its worker's compensation business (see RISCORP Acquisition
on pages 31-32) in 1998. During 1998, approximately 44.2% of the Workers'
Compensation business was in California and the balance in 36 states, with the
greatest concentration in Florida and Texas. Substantially all of Zenith's Other
Property-Casualty business is written in California. Reinsurance business
assumed by Zenith provides insurance coverage
 
30
<PAGE>
for world-wide exposures with a particular emphasis on catastrophe losses and
large property risks. Zenith's Real Estate Operations develop land and primarily
construct private residences for sale in Las Vegas, Nevada. Zenith, as a holding
company, owns directly or indirectly all of the capital stock of its
subsidiaries.
   Property insurance and reinsurance coverages expose Zenith to the risk of
significant loss in the event of major adverse natural phenomena, known in the
insurance industry as catastrophes. These catastrophes may cause significant
contemporaneous financial statement losses since catastrophe losses may not be
accrued in advance of the event. Zenith manages its exposure to the risk of
catastrophe losses through a combination of the purchase of reinsurance and the
application of underwriting and actuarial techniques to control the amount and
number of risks that are underwritten with an exposure to possible catastrophe
losses.
   Effective March 31, 1999, Zenith Insurance Company ("Zenith Insurance"), a
wholly-owned subsidiary of Zenith, sold its wholly-owned subsidiary, CalFarm
Insurance Company ("CalFarm"), for $275,000,000 in cash, subject to post-closing
adjustment in certain circumstances to Nationwide Mutual Insurance Company. The
net change in Zenith's consolidated invested assets as a result of the
transaction is estimated to be a decrease of approximately $15,000,000. The
transaction will result in an estimated after-tax gain of $100,000,000, or $5.84
per share. CalFarm writes Zenith's Other Property-Casualty business principally
in California.
 
The table below sets forth the components of net income for the three years
ended December 31, 1998:
 
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
(Dollars in thousands)                                               1998       1997       1996
--------------------------------------------------------------------------------------------------
<S>                                                                <C>        <C>        <C>
Net investment income, after taxes                                 $  35,907  $  34,655  $  34,069
Realized gains on investments, after taxes                             7,541      8,431      7,025
--------------------------------------------------------------------------------------------------
Sub-total                                                             43,448     43,086     41,094
--------------------------------------------------------------------------------------------------
Property-casualty underwriting results, after taxes:
  (Loss) income excluding catastrophes                               (11,230)   (10,217)       356
  Catastrophe losses                                                  (7,475)      (975)
--------------------------------------------------------------------------------------------------
Property-casualty underwriting (loss) income, after taxes            (18,705)   (11,192)       356
--------------------------------------------------------------------------------------------------
Income from real estate operations, after taxes                          868      1,079      1,251
Interest expense, after taxes                                         (3,824)    (2,587)    (3,170)
Parent net expenses, after taxes                                      (2,687)    (2,286)    (1,931)
--------------------------------------------------------------------------------------------------
Net income                                                         $  19,100  $  28,100  $  37,600
--------------------------------------------------------------------------------------------------
</TABLE>
 
RISCORP ACQUISITION
   On April 1, 1998, pursuant to an Asset Purchase Agreement dated June 17, 1997
(as amended from time to time, the "Asset Purchase Agreement") between Zenith
Insurance and RISCORP, Zenith Insurance acquired substantially all of the assets
and certain liabilities of RISCORP related to RISCORP's workers' compensation
business (the "RISCORP Acquisition").
   See Note 15 to the Consolidated Financial Statements on pages 66-67 ("Note
15") for a full discussion of the RISCORP Acquisition which note is herein
incorporated by reference. The RISCORP Acquisition was accounted for as a
purchase and the fair values of the assets acquired and liabilities assumed are
set forth in Note 15. The total purchase price for such assets acquired and
liabilities assumed is the difference between the generally accepted accounting
principles ("GAAP") book value of assets purchased and the GAAP book value of
the liabilities assumed by Zenith Insurance as of April 1, 1998, or $92,336,000.
Such amount was determined by a three step process in which RISCORP; Zenith
Insurance and its external accounting and actuarial consultants; and a third
party, acting as a Neutral Auditor and Neutral Actuary, made certain estimates
of the GAAP values of the assets and liabilities acquired by
 
                                    CALFARM
                                   THEZENITH                                  31
<PAGE>
Zenith Insurance. Such estimates varied considerably, particularly with respect
to the value of premiums receivable and the liability for unpaid losses and loss
adjustment expenses.
   The carrying values of premiums receivable and the liability for unpaid
losses and loss adjustment expenses at December 31, 1998 reflect management's
estimates using available current information. Different actuarial assumptions,
particularly assumptions about long-lived workers' compensation claims, suggest
that the ultimate liability for unpaid losses and loss adjustment expenses could
be higher than Zenith's carrying value of liabilities for such claims at
December 31, 1998. Also, Zenith's claims handling practices vary in certain
respects from those employed by RISCORP. The ultimate amount of premiums
receivable for retrospectively-rated policies is determined, in part, by the
amount and timing of losses sustained under such policies. Also, certain of
Zenith's billing and collections procedures differ from those employed by
RISCORP and Zenith is continuing to ascertain the impact such differences may
have on the collectibility of premiums receivable. Subsequent re-interpretation
of currently available data or any new information that becomes available with
respect to premiums receivable and liabilities for unpaid losses and loss
adjustment expenses acquired from RISCORP may change the estimates of the
carrying values of such amounts and such changes, if any, will be reflected in
the results of operations of the period in which they occur.
   Zenith Insurance has purchased ceded reinsurance protection relating to
development of the loss and loss adjustment expense reserves assumed from
RISCORP. Such reinsurance would allow Zenith Insurance to recover up to
$50,000,000 in excess of $182,000,000 for net unpaid losses and allocated loss
adjustment expenses acquired from RISCORP. After deducting reinsurance premiums
of $16,000,000, Zenith has recorded reinsurance recoverable of $24,510,000 and a
deferred benefit of $8,510,000 at December 31, 1998. Future adverse loss
development, if any, of the reserves acquired from RISCORP would be recoverable
up to the $50,000,000 limit, although the benefit of such reinsurance
recoverable would be deferred and recognized over the recovery period of such
reinsurance.
 
PROPERTY-CASUALTY INSURANCE OPERATIONS
   Premiums earned and underwriting results of Zenith's property-casualty
subsidiaries for the three years ended December 31, 1998, 1997 and 1996 were as
follows:
 
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------
(Dollars in thousands)                                1998       1997       1996
----------------------------------------------------------------------------------
<S>                                                 <C>        <C>        <C>
Premiums earned:
  Workers' Compensation                             $278,660   $242,064   $210,916
  Other Property-Casualty                            222,045    214,406    204,778
  Reinsurance                                         29,150     32,251     37,162
----------------------------------------------------------------------------------
  Total                                             $529,855   $488,721   $452,856
----------------------------------------------------------------------------------
Underwriting (loss) income, before taxes:
  Workers' Compensation                             $(42,638)  $(37,157)  $(19,462)
  Other Property-Casualty                              4,410      6,509      8,076
  Reinsurance                                         10,268     14,189     12,479
----------------------------------------------------------------------------------
  Total                                             $(27,960)  $(16,459)  $  1,093
----------------------------------------------------------------------------------
</TABLE>
 
   Zenith's key operating goal is to achieve a combined ratio of 100% or lower.
The combined ratio, expressed as a percentage, is the key measure of
underwriting profitability traditionally used in the property-casualty insurance
business. It is the sum of net incurred loss and loss adjustment expenses,
underwriting expenses and policyholders' dividends, expressed as a percentage of
net premiums earned.
 
32
<PAGE>
 
<TABLE>
<CAPTION>
The combined ratios for the three years ended December 31, 1998 were as follows:
------------------------------------------------------------------------------------------------------
                                                                       1998        1997        1996
<S>                                                                 <C>         <C>         <C>
------------------------------------------------------------------------------------------------------
Combined loss and expense ratios:
  Workers' Compensation:
    Loss and loss adjustment expenses                                    79.3%       81.6%       75.4%
    Underwriting expenses                                                35.8        33.6        32.6
    Dividends to policyholders                                            0.2         0.1         1.2
------------------------------------------------------------------------------------------------------
  Combined ratio                                                        115.3       115.3       109.2
------------------------------------------------------------------------------------------------------
  Other Property-Casualty:
    Loss and loss adjustment expenses                                    67.0        65.2        67.1
    Underwriting expenses                                                31.0        31.7        29.0
------------------------------------------------------------------------------------------------------
  Combined ratio                                                         98.0        96.9        96.1
------------------------------------------------------------------------------------------------------
  Reinsurance:
    Loss and loss adjustment expenses                                    45.3        33.7        49.0
    Underwriting expenses                                                19.5        22.3        17.4
------------------------------------------------------------------------------------------------------
  Combined ratio                                                         64.8        56.0        66.4
------------------------------------------------------------------------------------------------------
Total combined ratio                                                    105.3%      103.4%       99.8%
------------------------------------------------------------------------------------------------------
</TABLE>
 
   The profitability of property-casualty insurance operations is principally
dependent upon the adequacy of rates charged to the insured for insurance
protection; the frequency and severity of claims; the ability to accurately
estimate and accrue reported and unreported losses in the correct period; the
level of dividends paid to policyholders; the ability to manage claim costs and
keep operating expenses in line with premium volume; and the ability to service
claims, maintain policies and acquire business efficiently.
   The amount by which 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 reserves on open claims. The following shows the one-year loss reserve
development for loss and loss adjustment expense for the three segments of
property-casualty business:
 
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
                                      Other
(Dollars in        Workers'         Property-
thousands)       Compensation       Casualty        Reinsurance      Total
----------------------------------------------------------------------------
<S>             <C>              <C>              <C>              <C>
One-year loss
development
in:
  1998             $     (75)       $  (3,754)       $  (7,538)    $ (11,367)
  1997                11,837           (5,316)          (6,870)         (349)
  1996                  (869)            (224)          (2,716)       (3,809)
----------------------------------------------------------------------------
Favorable development is shown in brackets.
</TABLE>
 
   The unfavorable development in 1997 for the Workers' Compensation operation
is due to loss and loss adjustment expense reserve strengthening for the 1995
and 1996 accident years.
   The process of evaluating an insurance company's exposure to the cost of
environmental and asbestos damage is subject to significant uncertainties. Among
the complications are lack of historical data, long reporting delays,
uncertainty as to the number and identity of insureds with potential exposure
and unresolved legal issues regarding policy coverage. The legal issues
concerning the interpretations of various insurance policy provisions and
whether environmental and asbestos losses are, or were ever intended to be,
covered are complex. Courts have reached different and sometimes inconsistent
conclusions regarding such issues as: when the loss occurred
 
                                    CALFARM
                                   THEZENITH                                  33
<PAGE>
and which policies provide coverage, how policy limits are applied and
determined, how policy exclusions are applied and interpreted, whether clean-up
costs are covered as insured property damage and whether site assessment costs
are either indemnity payments or adjusting costs.
   Zenith has exposure to asbestos losses in its Workers' Compensation operation
for medical, indemnity and loss adjustment expenses associated with covered
workers' long-term exposure to asbestos or asbestos-containing materials. Most
of these claims date back to the 1970's and early 1980's and Zenith's exposure
is generally limited to a pro rata share of the loss for the period of time
coverage was provided. Zenith also has potential exposure to environmental and
asbestos losses and loss adjustment expenses beginning in 1985 through its
Reinsurance operation and through CalFarm, which writes liability coverage under
farmowners' and small commercial policies, however such losses are substantially
excluded from all such coverage. The business reinsured by Zenith contains
exclusion clauses for environmental and asbestos losses, and in 1988 an absolute
pollution exclusion was incorporated into CalFarm's policy forms. All claims for
damages resulting from environmental or asbestos losses are identified and
handled by Zenith's most experienced claims/legal professionals. Environmental
and asbestos losses have not been material and Zenith believes that its reserves
for environmental and asbestos losses are appropriately established based on
currently available facts, technology, laws and regulations. However, due to the
long-term nature of these claims, the inconsistencies of court decisions on
coverage, plaintiffs' expanded theories of liability, the risks inherent in
major litigation and other uncertainties, the ultimate exposure from these
claims may vary from the amounts currently reserved.
   Some of the factors that continue to impact the business and economic
environment in which Zenith operates include: an uncertain political and
regulatory environment, both state and federal; the outlook for economic growth
in geographic areas where Zenith operates; the expansion of Zenith's Workers'
Compensation business outside of California; the use in the industry of creative
reinsurance by competitors; a highly competitive insurance industry; and the
changing environment for controlling medical, legal and rehabilitation costs, as
well as fraud and abuse. Although management is currently unable to predict the
effect of any of the foregoing, these factors and related trends and
uncertainties could have a material effect on Zenith's future operations and
financial condition.
   Inflation rates impact the financial statements and operating results in
several areas. Fluctuations in inflation rates impact the market value of the
investment portfolio and yields on new investments. Inflation also impacts the
portion of the loss reserves that relates to hospital and medical expenses and
property claims and loss adjustment expenses, but not the portion of loss
reserves that relates to workers' compensation indemnity payments for lost wages
which are fixed by statute. Adjustments for inflationary impacts are implicitly
included as part of Zenith's subsidiaries' continual review of property-casualty
reserve estimates. Actuarial account of increased costs is considered in setting
adequate rates, and this is particularly important in the health insurance area
where hospital and medical inflation rates have exceeded general inflation
rates. Operating expenses, including payrolls, are impacted to a certain degree
by the inflation rate. Social inflation affects the loss reserves for other
property-casualty liability claims for which settlements are determined in court
proceedings.
 
WORKERS' COMPENSATION
   Premiums earned in the Workers' Compensation operation increased in 1998 and
1997 compared to their respective prior years. The RISCORP Acquisition added
$73,828,000 of earned premiums in 1998 and the AGC-SIF acquisition added
$26,144,000 and $47,214,000 of earned premiums in 1998 and 1997, respectively.
Excluding the impact of the RISCORP and AGC-SIF acquisitions, Zenith's workers'
compensation premiums earned decreased in 1998 and 1997 compared to their
respective prior years, principally as a result of intense competition in the
national workers' compensation insurance industry.
 
34
<PAGE>
   Underwriting losses in the Workers' Compensation operation increased in 1998
and 1997 compared to their respective prior years principally as a result of
approximately $2,000,000 of catastrophic workers' compensation losses incurred
in 1998, the 1998 RISCORP Acquisition and reduced premium income acting in
conjunction with fixed expenses for underwriting and loss adjusting that have
not been reduced commensurably with premium income in 1998 and 1997. The 1997
underwriting loss in Workers' Compensation also includes $11.8 million of
adverse development on prior years loss and loss adjustment expense reserves in
the fourth quarter. Fixed expenses increased significantly in 1998 with the
RISCORP Acquisition and such expenses will continue to impact Zenith's Workers'
Compensation operations adversely until the former RISCORP operations are
integrated into Zenith's other Workers' Compensation operations. In 1998, the
underwriting loss from the former RISCORP operation was $15,018,000.
   Competition in the national workers' compensation insurance industry
continues to be intense. In 1998 and 1997 Zenith continued its geographic
diversification through the RISCORP and AGC-SIF acquisitions, thereby reducing
Zenith's former concentration in the California workers' compensation insurance
market. Zenith continues to adhere to its underwriting philosophy of requiring
adequate pricing for the risks that are being underwritten. Although earned
premiums have declined through some resulting loss of business, Zenith's workers
compensation loss ratios, which were 61.5%, 68.4% and 55.2% in 1998, 1997 and
1996, respectively, indicate that it has maintained its disciplined approach in
spite of the pressures to underprice.
   The outlook for future profitability in the Workers' Compensation operation
is dependent upon the ability to maintain adequate rates, manage claims costs
and to keep operating expenses in line with premium volume. Zenith is unable to
predict when its Workers' Compensation operation will return to underwriting
profitability that is consistent with Zenith's historical experience.
   Zenith is required to participate in the National Workers' Compensation
Reinsurance Pool ("NWCRP"), which is an involuntary assigned risk pool that
covers several states in which Zenith conducts business. Zenith's participation
in NWCRP premiums earned in 1998, 1997 and 1996 was $1.9 million, $3.3 million
and $3.6 million, respectively. The underwriting results for NWCRP did not
materially impact Workers' Compensation underwriting results in 1998, 1997 or
1996.
   Florida has created the Special Disability Trust Fund (the "Fund") which
assesses workers' compensation insurers to pay for what are commonly referred to
as "Second Injuries". Historic assessments have been inadequate to completely
fund obligations of the Fund. In late 1997, the Florida statute was amended so
that the Fund will not be liable for and will not reimburse employers or
carriers for Second Injuries occurring on or after January 1, 1998. Zenith has
recorded its receivable from the Fund for Second Injuries based on specific
claims and historical experience prior to January 1, 1998. The receivable at
December 31, 1998 of $39,077,000, which relates to pre-January 1, 1998 claims,
is primarily related to the RISCORP Acquisition.
 
OTHER PROPERTY-CASUALTY
   Other Property-Casualty reflects the results of the property-casualty
business written through CalFarm for individual and commercial customers,
primarily in the rural and suburban areas of California. The major lines of
business are automobile, farmowners, commercial coverages and homeowners, with
about 105,000 policies in-force. Other Property-Casualty also includes the
results of the health line of business which offers individually underwritten
comprehensive medical coverage to California Farm Bureau members with about
24,000 certificates in-force.
   The business of CalFarm is closely tied to the California farm economy.
CalFarm benefits from the endorsement of the California Farm Bureau Federation
and is the largest writer of farmowner policies in California with an estimated
market share of 41%. Farm Bureau membership is a prerequisite to the purchase of
farmowners, automobile insurance at discounted rates (preferred), and health
insurance coverages from CalFarm.
 
                                    CALFARM
                                   THEZENITH                                  35
<PAGE>
   Underwriting results in the Other Property-Casualty operation were profitable
for 1998, 1997 and 1996 as a result of favorable loss and loss adjustment
expense ratios for both current and prior accident years. Underwriting results
for 1998 and 1997 were impacted by catastrophe losses, intense competition,
increased expenses primarily due to computer costs for Year 2000 compliance and
the continuing investment to upgrade existing computer systems. Both 1998 and
1997 results include catastrophe losses attributable to California storm damage,
amounting to $5,000,000 in 1998 and $1,500,000 in 1997. The 1996 results
benefited from the absence of catastrophe losses. Underwriting results in 1998
were adversely impacted by the health line of business because of higher health
care costs and increased utilization. Underwriting losses attributable to the
health line of business were $2,991,000 in 1998, including $2,361,000 in the
fourth quarter, as compared to income of $125,000 in 1997 and $42,000 in 1996.
   Premiums earned increased in 1998 and 1997 as compared to their respective
prior years primarily due to new business writings and rate increases in the
health line of business. Premium growth in other property-casualty lines of
business was limited by the intense pricing pressures and rate decreases in
automobile insurance. All rate changes, except for the health line of business,
are subject to prior approval by the state of California Department of Insurance
(the "Department of Insurance"). Management is unable to predict whether
requests for future rate increases, if any, will be granted by the Department of
Insurance. Failure by the Department of Insurance to act upon such requests
would adversely affect the adequacy of such rates and the profitability of
operations in the associated lines of business.
   The California Legislature passed legislation in September 1996 which created
the California Earthquake Authority ("CEA"). The CEA, which became operational
in December 1996, is a privately financed, publicly managed state agency, which
provides limited earthquake coverage throughout California. Participation in the
CEA is voluntary and CalFarm elected not to participate. CalFarm can elect to
participate in the CEA at a later date subject to meeting the participation
requirements at that time.
   CalFarm continues to write homeowners and associated earthquake insurance
with broader coverages than available through the CEA. CalFarm expects to
continue offering earthquake coverage as long as private reinsurance is
available and affordable. Earthquake exposure is closely monitored through the
use of earthquake modeling software and simulation techniques and through the
use of industry experts. In 1998, CalFarm expanded the scope of its catastrophe
management efforts to include an analysis of brush fire exposures. Catastrophe
reinsurance is used to protect CalFarm from excessive catastrophe losses.
   CalFarm is required to participate in involuntary market plans, including the
California Automobile Assigned Risk Plan ("CAARP"), the Commercial Automobile
Insurance Procedure ("CAIP") and the California Fair Plan ("Fair Plan"). The
CAARP, the CAIP and the Fair Plan are organizations that were established by
statute in California but are serviced by the insurance industry. The 1998, 1997
and 1996 underwriting results for the CAARP, the CAIP, and the Fair Plan
together did not materially impact the Other Property-Casualty underwriting
results.
   The private passenger automobile insurance market continues to be affected by
legislative actions. Both the mandatory proof of insurance law and the "Personal
Responsibility Act of 1996" created by Proposition 213 were effective January
1997. During 1997, CalFarm implemented the new rating factor regulations which
further limit the impact of territorial rating on automobile insurance rates.
During 1999, the legislature is expected to continue their debate on a way to
provide a low-cost auto policy to the uninsured drivers in California.
 
REINSURANCE
   Zenith's assumed reinsurance operation emphasizes the reinsurance of
accumulated losses from catastrophes and the reinsurance of large property
risks.
   The underwriting results for the year ended December 31, 1998 include
catastrophe losses related to Hurricane Georges of $4,500,000, including
$2,000,000 in the fourth quarter. Underwriting results were favorable during
1997 and 1996 as a result of absence of catastrophes.
 
36
<PAGE>
   The outlook for profitability in the reinsurance operation continues to be
dependent upon, among other things, the level of rates for property and
catastrophe reinsurance and the frequency and severity of world-wide property
losses. Premiums earned in the reinsurance operation decreased in 1998 and 1997
due to selected non-renewal by Zenith of certain reinsurance treaties and
general softening of such rates in the industry. If rates do not improve,
premiums may continue to decrease in 1999.
 
REAL ESTATE OPERATIONS
   Zenith's Real Estate Operations develop land and primarily construct private
residences for sale in Las Vegas, Nevada. Zenith recognized total revenues of
$37,737,000, $45,419,000 and $41,554,000 in 1998, 1997, and 1996, respectively,
related to its Real Estate Operations. Income from Real Estate Operations before
taxes was $1,363,000, $1,678,000 and $1,909,000 in 1998, 1997 and 1996,
respectively. Construction in progress, including undeveloped land, was
$42,142,000 at December 31, 1998 compared to $53,121,000 at December 31, 1997.
In addition to continuing home construction, Zenith may use some land presently
owned for commercial construction. Increased interest rates or other factors
could affect the rate of home sales.
 
INVESTMENTS
   At December 31, 1998, 96% of Zenith's consolidated portfolio of fixed
maturity investments were classified as available-for-sale with the unrealized
appreciation or depreciation recorded as a separate component of stockholders'
equity. The effect on consolidated stockholders' equity of the change in the
value of fixed maturities classified as available-for-sale in 1998 compared to
1997 was an increase of $1,378,000, net of deferred taxes, as compared to an
increase of $7,001,000 from 1996 to 1997.
   Zenith's primary investment goal is to maintain safety and liquidity, enhance
principal values and achieve increased rates of return consistent with
regulatory constraints. The allocation among various types of securities is
adjusted from time to time based on market conditions, credit conditions, tax
policy, fluctuations in interest rates and other factors.
 
   The change in the carrying value of Zenith's consolidated investment
portfolio in 1998 was as follows:
 
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
(Dollars in thousands)
-----------------------------------------------------------------------------------------------
<S>                                                                        <C>        <C>
Carrying value at beginning of year                                                   $ 879,973
  Purchases at cost                                                                     403,267
  Investments acquired in RISCORP Acquisition                                           190,460
  Maturities and redemptions                                                           (107,945)
  Proceeds from sales of investments:
    Available-for-sale                                                      (302,648)
    Other                                                                    (13,145)
                                                                           ---------
      Total proceeds from sales of investments                                         (315,793)
  Net realized gains:
    Available-for-sale                                                         6,817
    Other                                                                      4,785
                                                                           ---------
      Total net realized gains                                                           11,602
  Change in unrealized gains                                                                406
  Change in short-term investments                                                      (14,916)
  Net amortization of bonds and preferred stocks and other changes                        1,627
-----------------------------------------------------------------------------------------------
Carrying value at end of year                                                         $1,048,681
-----------------------------------------------------------------------------------------------
</TABLE>
 
                                    CALFARM
                                   THEZENITH                                  37
<PAGE>
   At December 31, 1998 and 1997, Zenith's consolidated investment portfolio
emphasized high quality, liquid bonds and short-term investments. Bonds
constituted 72% and 67%, and short-term investments constituted 18% and 24%, of
the carrying value of Zenith's consolidated investment portfolio at December 31,
1998 and 1997, respectively. At December 31, 1998 and 1997, 96% of the
consolidated carrying values of investments in bonds were rated investment
grade. The average maturity of the investment portfolio was 4.2 years at
December 31, 1998 and 4.2 years at December 31, 1997.
   Zenith's invested assets and cash increased as a result of the RISCORP
Acquisition. The investment portfolio acquired in the RISCORP Acquisition
consists of investment grade U.S. treasury notes, corporate debt and municipal
debt.
 
   Investment  income  during the  three years  ended December  31, 1998  was as
follows:
 
<TABLE>
<CAPTION>
-------------------------------------------------------
(Dollars in thousands)    1998       1997       1996
-------------------------------------------------------
<S>                     <C>        <C>        <C>
Before taxes            $  53,593  $  52,332  $  51,154
After taxes                35,907     34,655     34,069
-------------------------------------------------------
</TABLE>
 
   The yields on invested assets vary with the general level of interest rates,
the average life of invested assets and the amount of funds available for
investment. Such yields for the three years ended December 31, 1998 were as
follows:
 
<TABLE>
<CAPTION>
---------------------------------------------------------
                          1998        1997        1996
---------------------------------------------------------
<S>                    <C>         <C>         <C>
Before taxes                 5.7%        6.0%        6.1%
After taxes                  3.8         3.9         4.0
---------------------------------------------------------
</TABLE>
 
   The total fair value of fixed maturity investments, and the unrealized gain
on held-to-maturity and available-for-sale fixed maturity investments, were as
follows:
 
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------
                                                             Unrealized Gain on Fixed Maturities
                                                         -------------------------------------------
                                      Total Fair Value   Held-to-Maturity      Available-for-Sale
                                          of Fixed       -----------------  ------------------------
(Dollars in thousands)                   Maturities*        Before Tax      Before Tax    After Tax
----------------------------------------------------------------------------------------------------
<S>                                   <C>                <C>                <C>          <C>
DECEMBER 31, 1998                         $ 959,119          $   1,569       $   9,864    $   6,412
December 31, 1997                         $ 800,572          $   1,318       $   7,744    $   5,034
----------------------------------------------------------------------------------------------------
</TABLE>
 
* Includes short-term investments
 
   Stockholders' equity will continue to be affected by volatility in the fixed
maturity securities market and changes in interest rates through changes in the
values of fixed maturity investments which are classified as available-for-sale.
 
MARKET RISK OF FINANCIAL INSTRUMENTS
   Approximately 96% of the carrying value of fixed maturity investments are
categorized as available-for-sale, for which category changes in fair value are
reflected in stockholders' equity. The fair value of the fixed income 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. In addition, certain mortgage-backed securities are
exposed to accelerated prepayment risk in that a decline in interest rates could
prompt mortgage holders to refinance existing mortgages at lower rates. However,
Zenith has the ability to hold fixed income investments to maturity.
   Zenith relies on the experience and judgment of senior management to monitor
and control interest rate risk. Zenith does not utilize financial instrument
hedges or derivative financial instruments to manage risks, nor does it enter
into any swap, forward or options contracts, but will attempt to mitigate its
exposure through active portfolio management. Allocation among various types of
securities is adjusted from time to time based on market conditions, credit
conditions, tax policy, fluctuations in interest rates and other factors. In
addition, Zenith places the majority of its investments in high quality, liquid
securities and limits the amount of credit exposure to any one issuer.
 
38
<PAGE>
   The table below provides information about Zenith's financial instruments as
of December 31, 1998 for which fair values are subject to changes in interest
rates. For fixed maturity investments, the table presents fair value of
investments held and weighted average interest rates on such investments by
expected maturity dates. Such investments include sinking fund preferreds,
redeemable preferreds, corporate bonds, municipal bonds, government bonds and
mortgage-backed securities. For debt obligations, the table presents principal
cash flows by expected maturity dates.
 
<TABLE>
<CAPTION>
                                                                          Expected Maturity Date
                                               -----------------------------------------------------------------------------
(Dollars in thousands)                           1999       2000       2001       2002       2003     Thereafter     Total
----------------------------------------------------------------------------------------------------------------------------
<S>                                            <C>        <C>        <C>        <C>        <C>        <C>          <C>
Fixed maturities:
Held-to-maturity and available-for-sale
 securities:
  Fixed rate                                   $  92,213  $ 105,376  $  83,529  $  72,838  $  52,425   $ 362,614   $ 768,995
  Weighted average interest rate                     4.9%       4.9%       5.3%       5.8%       6.3%        6.7%
Trading securities:
  Fixed rate                                                         $   3,001                                     $   3,001
  Weighted average interest rate                                           5.6%
Short-term investments                         $ 187,123                                                           $ 187,123
Debt obligations:
  9% senior notes payable                          6,750  $   6,750  $   6,750  $  77,250                             97,500
  8.55% redeemable securities                      6,413      6,413      6,413      6,413  $   6,413   $ 232,638     264,703
  Payable to banks and other notes payable        14,817      5,123        130         34         34         406      20,544
----------------------------------------------------------------------------------------------------------------------------
</TABLE>
 
LIQUIDITY AND CAPITAL RESOURCES
   Zenith's property-casualty insurance subsidiaries create liquidity because
insurance premiums are generally collected prior to disbursements for claims and
benefits. These net cash flows, as set forth on page 51 in the Consolidated
Financial Statements, are invested as described in "Investments" above. Net cash
used in operations was $47,138,000 in 1998. Such cash was used principally to
pay loss and loss adjustment expense reserves in the former RISCORP operation.
Net cash flows from operations will continue to be adversely affected by the
payment of such acquired reserves.
   Net cash flows from operating activities were $26,974,000 and $9,749,000 for
1997 and 1996, respectively.
   Zenith's principal liquidity requirements in the long-term and the short-term
are the funds needed to pay its expenses, service its outstanding debt, pay any
cash dividends which may be declared to its stockholders and fund the land
acquisitions and development by its real estate operations. Zenith is
principally dependent upon its portfolio of marketable securities and the
investment yields thereon; dividends from its insurance subsidiaries, whose
operations are supported by their own cash flows; and available lines of credit
to pay its expenses, service debt and pay any cash dividends which may be
declared to its stockholders.
   Zenith has three revolving, unsecured lines of credit amounting to
$100,000,000 with aggregate availability at December 31, 1998 of $95,000,000.
   Zenith's insurance subsidiaries are subject to insurance regulations which
restrict their ability to distribute dividends. Such dividend capabilities are
set forth in Note 11 to the Consolidated Financial Statements on page 64. Such
restrictions have not had, and under current regulations are not expected to
have, a material adverse impact on Zenith. Zenith received no dividends from its
insurance subsidiaries in 1998 and received dividends from its insurance
subsidiaries amounting to $22,750,000 and $15,000,000 in 1997 and 1996,
respectively. Maximum dividend capability, without prior approval of the
Department, of Zenith's insurance subsidiary in 1999 is $32,975,000, of which
$30,000,000 was paid to Zenith on March 12, 1999.
   Zenith's Real Estate Operations maintain certain bank credit facilities to
provide financing for development and construction of private residences for
sale. At December 31, 1998, maximum permitted borrowing under the facilities was
$32,315,000, with a balance outstanding of $12,245,000 and $11,408,000 as of
December 31, 1998 and 1997, respectively.
 
                                    CALFARM
                                   THEZENITH                                  39
<PAGE>
Although a maximum of $32,315,000 is available to be borrowed, in practice, such
amount will not be outstanding. The agreements provide that funding and
repayment of development and construction loans are made in tandem for each
project. A development loan will always precede a construction loan loan for a
project and the proceeds of the construction loan are required to first be used
to pay off the respective development loan. Zenith's Real Estate Operations are
obligated under various notes arising from its purchase of several parcels of
land. The amount outstanding for such notes at December 31, 1998 and 1997 was
$2,010,000 and $2,334,000, respectively.
   Insurance companies are required to have securities on deposit for the
protection of policyholders in accordance with various states' regulations. At
December 31, 1998 and 1997, investments carried at their fair value of
$261,986,000 and $294,309,000, respectively, were on deposit to comply with such
regulations.
   At December 31, 1998, Zenith was authorized to repurchase up to 1,125,000
shares of Zenith common stock pursuant to a share purchase program authorized by
its Board of Directors. These purchases, which are made at prevailing market
prices, are discretionary and can be adequately funded from Zenith's existing
sources of liquidity.
   In 1998, Zenith repurchased 960,000 shares on the open market for a total
purchase price of $24,023,000. On March 3, 1999, Zenith repurchased 33,000
shares on the open market for a total purchase price of $811,000.
   On July 30, 1998, Zenith issued $75,000,000 of 8.55% Capital Securities at a
price of $996.24 per security through Zenith National Insurance Capital Trust I,
a Delaware statutory business trust (the "Trust"), all of the voting securities
of which are owned by Zenith. Each Capital Security pays semi-annual cumulative
cash distributions at the annual rate of 8.55% of the $1,000 liquidation amount
per security.
   The Trust used the proceeds from its offering to purchase $75,000,000 of
Zenith's 8.55% Subordinated Deferrable Interest Debentures due 2028 (the
"Subordinated Debentures"), which constitute the principal asset of the Trust.
The semi-annual interest payments on the Subordinated Debentures may be deferred
by Zenith for up to ten consecutive semi-annual periods. The Subordinated
Debentures are redeemable at any time by Zenith at the then present value of the
remaining scheduled payments of principal and interest. Payments on the Capital
Securities, including distributions and redemptions, follow those of the
Subordinated Debentures. Zenith used $65,000,000 from the net proceeds to make a
capital contribution to Zenith Insurance. The remaining net proceeds were used
for general corporate purposes.
   The net proceeds from the Capital Securities were primarily invested by
Zenith in various short-term securities which, in the aggregate, yield less than
the interest cost of the Subordinated Debenture.
   On April 1, 1998, in connection with the closing of the RISCORP Acquisition,
Zenith Insurance paid $35,000,000 to RISCORP and repaid $15,000,000 in
indebtedness assumed from RISCORP, Inc. On March 26, 1999, Zenith Insurance paid
the balance of the purchase price payable, plus interest, of $53,689,000, after
deducting $6,765,000 for assets not transferred by RISCORP.
 
CODIFICATION OF
STATUTORY ACCOUNTING PRINCIPLES
   In 1998, the National Association of Insurance Commissioners ("NAIC") adopted
the Codification of Statutory Accounting Principles guidance (the
"Codification"), which will replace the current Accounting Practices and
Procedures manual as the NAIC's primary guidance on statutory accounting
(statutory accounting is a comprehensive basis of accounting based on prescribed
accounting practices, which include state laws, regulations and general
administrative rules, as well as a variety of publications of the NAIC). The
NAIC is now considering amendments to the Codification that would also be
effective upon implementation. The NAIC has recommended an effective date of
January 1, 2001. The Codification provides guidance for areas where statutory
accounting has been silent and changes current statutory accounting in some
areas.
 
40
<PAGE>
   It is not known whether the Department of Insurance will adopt the
Codification, and whether the Department of Insurance will make any changes to
that guidance. Implementation of the Codification may affect the surplus level
and capitalization requirements of Zenith's insurance subsidiaries on a
statutory basis. Zenith has not determined the potential impact of the
Codification.
 
RECENT DEVELOPMENTS IN
ACCOUNTING PRONOUNCEMENTS
   On June 15, 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 is effective for Zenith for
all fiscal quarters of all fiscal years beginning after January 1, 2000. SFAS
No. 133 requires that all derivative instruments be recorded on the balance
sheet at their fair value. Changes in the fair value of derivatives are recorded
each period in current earnings or other comprehensive income, depending on
whether a derivative is designated as part of a hedge transaction and, if it is,
the type of hedge transaction. Zenith does not invest in derivative instruments,
and therefore adoption of SFAS No. 133 is not expected to have any effect on
Zenith's results of operations or its financial position.
 
YEAR 2000
   The Year 2000 Problem refers to the inability of information technology
("IT") and non-information technology ("non-IT") systems to accurately process
dates during and after 1999. IT systems include computer hardware and software.
Non-IT systems include equipment that incorporates embedded micro controllers
such as elevators, security systems and HVAC systems. If not corrected, the
processes of IT and non-IT systems that are date sensitive could fail or
miscalculate data resulting in disruptions of operations such as a temporary
inability to process transactions, send and receive electronic data with third
parties or otherwise engage in normal business activities. There may also be a
negative impact on the economic and social infrastructure on which Zenith
depends.
   In early 1996, Zenith formed a Year 2000 team consisting of staff familiar
with Zenith's IT and non-IT systems to coordinate the elimination, to the extent
possible, of Zenith's exposure to the Year 2000 Problem. Reports of the Year
2000 team's efforts are presented to Zenith's Board of Directors periodically.
   Since 1996, Zenith has been systematically replacing and modifying its
internal systems to function correctly with dates from 1999 forward, thereby
rendering them "Year 2000 Compliant." Internal systems ("Internal Systems")
consist of (1) core information technology systems supporting corporate level
accounting and financial reporting processes ("Core Corporate IT Systems"); (2)
core information technology systems supporting operational processes involving
(a) underwriting, premium collection and claims processes in Zenith's insurance
operations (including those systems acquired in the RISCORP Acquisition) and (b)
land acquisitions, development, construction, sales and escrow
tracking/monitoring in the real estate operations ("Core Operational IT
Systems"); (3) computer networks and communications infrastructure ("IT
Infrastructure"); (4) personal and laptop computers including applications
("Other IT Equipment"); and (5) owned facility systems which rely on
non-computer equipment incorporating embedded microprocessors, such as
elevators, HVAC and security as well as office equipment such as facsimile and
copy machines and postage meters ("Facilities and Other Non-IT Systems"). The
majority of Zenith's Year 2000 compliance efforts have been staffed internally,
although Zenith has engaged and will continue to engage technical consultants to
assist its internal staff, as well as to assist Zenith in reviewing its
progress.
   The Internal Systems are being corrected through a process with five phases,
some of which are concurrent: (1) Inventory (listing IT and non-IT systems and
their components); (2) Assessment (identifying possible Year 2000-related
failures and developing strategies to repair, replace, or eliminate them); (3)
Remediation (creating or acquiring corrections to identified deficiencies); (4)
Validation (confirming whether corrections would be successful); and (5)
Implementation (installing corrections into the business operations for general
use).
 
                                    CALFARM
                                   THEZENITH                                  41
<PAGE>
   The status and scheduled completion dates of efforts to make the Internal
Systems supporting Zenith's operations Year 2000 Compliant are as follows:
 
<TABLE>
<CAPTION>
                            Inventory   Assessment   Remediation   Validation  Implementation
<S>                         <C>         <C>          <C>           <C>         <C>
----------------------------------------------------------------------------------------------
Core Corporate IT Systems   Completed    Completed    Completed    Completed      Completed
----------------------------------------------------------------------------------------------
Core Operational IT
 Systems:
  Workers' Compensation     Completed    Completed     4/30/99      5/31/99        5/31/99
  Other Property-Casualty   Completed    Completed    Completed     4/30/99        4/30/99
  Reinsurance               Completed    Completed    Completed    Completed      Completed
  Real Estate Operations    Completed    Completed    Completed     5/31/99        5/31/99
----------------------------------------------------------------------------------------------
IT Infrastructure:
  Workers' Compensation     Completed    Completed     6/30/99      7/31/99        7/31/99
  Other Property-Casualty   Completed    Completed     6/30/99      7/31/99        7/31/99
  Reinsurance               Completed    Completed     6/30/99      7/31/99        7/31/99
  Real Estate Operations    Completed    Completed    Completed    Completed      Completed
----------------------------------------------------------------------------------------------
Other IT Equipment:
  Workers' Compensation     Completed    Completed     5/31/99      7/31/99        7/31/99
  Other Property-Casualty   Completed    Completed     5/31/99      7/31/99        7/31/99
  Reinsurance               Completed    Completed     5/31/99      7/31/99        7/31/99
  Real Estate Operations    Completed    Completed    Completed    Completed      Completed
----------------------------------------------------------------------------------------------
Facilities and Other
 Non-IT Systems:
  Woodland Hills, CA        Completed    Completed    Completed    Completed      Completed
  Sarasota, FL              Completed    Completed     5/31/99      8/31/99        8/31/99
  Sacramento, CA            Completed    Completed    Completed    Completed      Completed
----------------------------------------------------------------------------------------------
</TABLE>
 
   Zenith plans to further test and refine the Internal Systems during the
second half of 1999, to assure that they all function in Zenith's operating
environment on an interconnected basis.
   Zenith's Year 2000 efforts also include a systematic assessment of the Year
2000 Compliant status of third parties upon which Zenith relies in its business
operations, including major suppliers of services and products, owners of its
leased facilities and principal business partners (collectively, "Key External
Dependencies"). Zenith has used letters, questionnaires, surveys and interviews
to determine whether these Key External Dependencies will achieve Year 2000
Compliant status. To date, Zenith has been unable, in most cases, to obtain
reliable information, and is therefore uncertain about the state of readiness of
many of its Key External Dependencies. Although none of the Key External
Dependencies has informed Zenith that it has a Year 2000 issue that would have a
material impact on Zenith, few have provided definitive statements, written
assurances or warranties that they will be Year 2000 Compliant. Zenith intends
to continue its systematic assessment, including follow-ups of its Key External
Dependencies.
   All companies are faced with certain unknown risks arising from Year 2000
issues that may impact them negatively. Zenith's Year 2000 efforts have been
designed to mitigate to the extent possible its risks from Year 2000-related
failures faced by Zenith. Despite Zenith's Year 2000-related efforts, Zenith
recognizes the possibility of some negative impact on its operations resulting
from Year 2000-related failures. Zenith believes that the most reasonably likely
worst-case, Year 2000 scenarios could include failures of Zenith's Internal
Systems, a failure of one or more of its critical Key External Dependencies,
such as financial institutions, agents/brokers or
 
42
<PAGE>
reinsurers, and/or the contamination of Zenith's IT systems due to receipt of
corrupted data. Such a scenario could result in a disruption of Zenith's normal
business activities and could have a material adverse impact on its financial
condition and results of operations. In the quarter ended September 30, 1998,
Zenith began developing contingency plans to substantially reduce material
business disruptions from such risks. Zenith intends such plans to include
measures, such as 1) acceleration into the last quarter of 1999 the performance
of obligations and duties otherwise owed in the first quarter of 2000; 2)
identification of alternatives to Key External Dependencies that may not be Year
2000 Compliant and therefore unable to meet Zenith's needs; and 3) certain
activities in Zenith's pre-existing Business Recovery/ Resumption Plan designed
for Zenith to operate during, and to recover from, catastrophes. All contingency
plans are expected to be in place by September 30, 1999.
   Zenith has been planning to upgrade its IT Infrastructure and its other IT
equipment for some time; however, because of the Year 2000 Problem, certain
components of those plans will be accelerated and completed by mid-1999. The
table below sets out the costs for either repairing Zenith's IT systems ("IT
Repair Costs") or for replacing them ("IT Replacement Costs").
 
<TABLE>
<CAPTION>
                                  Expenditures      Percent Expended    Estimate       Total
                                      as of               as of            to        Estimated
(Dollars in thousands)          December 31, 1998   December 31, 1998   Complete   IT Expenditure
<S>                             <C>                 <C>                 <C>        <C>
-------------------------------------------------------------------------------------------------
IT Repair Costs                      $4,522                80%           $1,100       $ 5,622
IT Replacement Costs:
  Software                              197                13%            1,277         1,474
  Hardware                              191                 8%            2,125         2,316
  Related Expenditures                  341                51%              322           663
-------------------------------------------------------------------------------------------------
    Total                            $5,251                52%           $4,824       $10,075
-------------------------------------------------------------------------------------------------
</TABLE>
 
   IT Repair Costs and IT Replacement Costs include external costs and the cost
of dedicated information technology personnel. IT Repair Costs are expensed as
they are incurred; IT Replacement Costs are capitalized in accordance with
Statement of Position 98-1. (See Note 1 to the Consolidated Financial Statements
on pages 54-57.) The internal cost of user participation in acceptance testing
has not been measured and is not included in the foregoing estimates. Although
not quantified at this time, costs associated with non-IT systems and
contingency planning are not expected to be significant. All Year 2000-related
costs have been, and will continue to be, funded from internal sources. No
planned information technology projects were deferred because of Year
2000-related efforts.
   The reader is directed to the section of this Report entitled
"Forward-Looking Information" on page 30 and cautioned that the foregoing
discussion on the Year 2000 Problem must be read in conjunction with such
section. The forward looking information on the Year 2000 Problem, including its
impact on Zenith, future costs, scheduled completion dates, and the success of
Zenith's efforts in preparing for it are based on management's best estimates of
future events. Such estimates, however, are subject to the inherent uncertainty
of the ultimate effect and the extent of the Year 2000 Problem and the
availability of technical resources and hardware.
 
                                    CALFARM
                                   THEZENITH                                  43
<PAGE>
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL INFORMATION
 
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
 
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,              Note     1998        1997
<S>                                  <C>   <C>         <C>
-----------------------------------------------------------------
(Dollars and shares in thousands,
  except per share data)
REVENUES:                             1
  Property-Casualty insurance
    operations:
    Premiums earned                        $  529,855  $  488,721
    Investment income                          53,593      52,332
  Realized gains on investments                11,602      14,008
  Real estate operations                       37,737      45,419
  Service fee income                            3,992
  Income from legal settlement
-----------------------------------------------------------------
TOTAL REVENUES                                636,779     600,480
-----------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS
  AFTER TAXES AND BEFORE REALIZED
  GAINS                              1, 2      11,559      19,669
Per common share*                    1, 2        0.67        1.10
-----------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS
  AFTER TAXES                                  19,100      28,100
Per common share*                                1.11        1.57
-----------------------------------------------------------------
COMPONENTS OF NET INCOME:             1
  Underwriting (loss) income:
    Excluding catastrophe losses              (11,230)    (10,217)
    Including catastrophe losses              (18,705)    (11,192)
  Net investment income                        35,907      34,655
  Realized gains on investments                 7,541       8,431
  Real estate operations                          868       1,079
  Parent operations                            (6,511)     (4,873)
  Income (loss) from discontinued
    life and annuity operations       3
-----------------------------------------------------------------
NET INCOME                                     19,100      28,100
Per common share*                                1.11        1.57
-----------------------------------------------------------------
CASH DIVIDENDS PER SHARE TO COMMON
  STOCKHOLDERS                                   1.00        1.00
WEIGHTED AVERAGE COMMON SHARES
  OUTSTANDING*                                 17,158      17,886
-----------------------------------------------------------------
FINANCIAL CONDITION:                  1
Total assets                                1,818,726   1,252,156
Investments                                 1,048,681     879,973
Property-casualty unpaid claims               997,647     613,266
Senior notes, bank debt and other
  notes payable                                93,851      88,216
Redeemable securities                          73,341
Total stockholders' equity                    346,952     361,866
Stockholders' equity per share                  20.23       20.31
Stockholders' equity per share,
  excluding effect of SFAS No. 115              19.86       20.03
Return on average equity                         5.4%        8.3%
-----------------------------------------------------------------
PROPERTY-CASUALTY INSURANCE
  STATISTICS (GAAP):                  1
  Paid loss and loss adjustment
    expense ratio                               82.9%       66.9%
  Loss and loss adjustment expense
    ratio                                       72.3%       71.2%
  Underwriting expense ratio                    32.9%       32.1%
  Policyholder dividends ratio                   0.1%        0.1%
                                           ---------   ---------
  Combined ratio                               105.3%      103.4%
  Net premiums earned-to-surplus
    ratio                                         1.2         1.4
  Loss and loss adjustment expense
    reserves-to-surplus ratio (net
    of reinsurance)                   4           1.6         1.5
-----------------------------------------------------------------
</TABLE>
 
*Amounts prior to 1997 have been restated as required to comply with SFAS No.
 128 and represent diluted amounts per share and weighted average shares
 assuming exercise of stock options. For further discussion of earnings per
 share and the impact of SFAS No. 128, see Note 16 to the Consolidated Financial
 Statements on page 68.
 
44
<PAGE>
--------------------------------------------------------------------------------
 
<TABLE>
<CAPTION>
                                        1996        1995        1994
<S>                                  <C>         <C>         <C>       <C>
---------------------------------------------------------------------------------------------------------------
(Dollars and shares in thousands,
 except per share data)
REVENUES:
  Property-Casualty insurance
    operations:
    Premiums earned                  $  452,856  $  437,513  $  438,829
    Investment income                    51,154      46,150      40,068
  Realized gains on investments          10,807       3,621       1,428
  Real estate operations                 41,554      31,736      30,220
  Service fee income
  Income from legal settlement                                    1,910
---------------------------------------------------------------------------------------------------------------
TOTAL REVENUES                          556,371     519,020     512,455
---------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS
 AFTER TAXES AND BEFORE REALIZED
 GAINS                                   30,575      17,368      27,628
Per common share*                          1.72        0.95        1.45
---------------------------------------------------------------------------------------------------------------
INCOME FROM CONTINUING OPERATIONS
 AFTER TAXES                             37,600      19,722      29,798
Per common share*                          2.12        1.08        1.56
---------------------------------------------------------------------------------------------------------------
COMPONENTS OF NET INCOME:
  Underwriting (loss) income:
    Excluding catastrophe losses            356        (226)     15,652
    Including catastrophe losses            356      (8,936)      5,707
  Net investment income                  34,069      30,690      26,995
  Realized gains on investments           7,025       2,354         929
  Real estate operations                  1,251       1,349       1,423
  Parent operations                      (5,101)     (5,735)     (5,256)
  Income (loss) from discontinued
    life and annuity operations                     (13,122)      8,102
---------------------------------------------------------------------------------------------------------------
NET INCOME                               37,600       6,600      37,900
Per common share*                          2.12        0.36        1.99
---------------------------------------------------------------------------------------------------------------
CASH DIVIDENDS PER SHARE TO COMMON
 STOCKHOLDERS                              1.00        1.00        1.00
WEIGHTED AVERAGE COMMON SHARES
 OUTSTANDING*                            17,752      18,334      19,029
---------------------------------------------------------------------------------------------------------------
FINANCIAL CONDITION:
Total assets                          1,242,724   1,115,433   1,093,675
Investments                             852,799     835,214     709,030
Property-casualty unpaid claims         620,078     517,552     510,406
Senior notes, bank debt and other
 notes payable                           88,861      83,135      76,582
Redeemable securities
Total stockholders' equity              337,503     330,432     309,860
Stockholders' equity per share            19.17       18.58       16.35
Stockholders' equity per share,
 excluding effect of SFAS No. 115         19.28       18.18       18.79
Return on average equity                  11.4%        2.0%       11.7%
---------------------------------------------------------------------------------------------------------------
PROPERTY-CASUALTY INSURANCE
 STATISTICS (GAAP):
  Paid loss and loss adjustment
    expense ratio                         69.9%       74.3%       69.6%
  Loss and loss adjustment expense
    ratio                                 69.5%       74.4%       66.9%
  Underwriting expense ratio              29.7%       27.4%       26.9%
  Policyholder dividends ratio             0.6%        1.3%        4.0%
                                     ---------   ---------   ---------
  Combined ratio                          99.8%      103.1%       97.8%
  Net premiums earned-to-surplus
    ratio                                   1.4         1.4         1.7
  Loss and loss adjustment expense
    reserves-to-surplus ratio (net
    of reinsurance)                         1.6         1.5         1.7
---------------------------------------------------------------------------------------------------------------
</TABLE>
 
(1) 1994 has been restated to include health insurance in property-casualty
    insurance operations. 1998 amounts include the assets acquired and
    liabilities assumed from RISCORP on April 1, 1998 and the results of
    operations of RISCORP for the nine months ended December 31, 1998 (See Note
    15 to the Consolidated Financial Statements on pages 66-67).
(2) Excludes $1,241,000, or $0.06 per share, in 1994 for the effect of legal
    settlement.
 
(3) In 1995, Zenith sold CalFarm Life.
(4) Computed including AGC-SIF net reserves of $65,429,000 acquired through
    merger on December 31, 1996 (See Note 15 to the Consolidated Financial
    Statements on page 67).
 
                                    CALFARM
                                   THEZENITH                                  45
<PAGE>
PROPERTY-CASUALTY LOSS DEVELOPMENT
 
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
   The table that follows shows analysis of development of loss and loss
adjustment expense liabilities as originally estimated on a generally accepted
accounting principles basis at December 31 of each year presented. The
accounting policies used to estimate these liabilities are described in Note 1
to the Consolidated Financial Statements on page 54. Amounts represent all
property-casualty operations.
 
ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE LIABILITY DEVELOPMENT
--------------------------------------------------------------------------------
 
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,                1998      1997
<S>                                  <C>       <C>
-------------------------------------------------------
(Dollars in thousands)
LIABILITY FOR UNPAID LOSS AND LOSS
  ADJUSTMENT EXPENSES, NET           $708,684  $525,601
-------------------------------------------------------
PAID, NET (CUMULATIVE) AS OF:
  One year later                                195,596
  Two years later
  Three years later
  Four years later
  Five years later
  Six years later
  Seven years later
  Eight years later
  Nine years later
  Ten years later
-------------------------------------------------------
LIABILITY, NET RE-ESTIMATED AS OF:
  One year later                                514,234
  Two years later
  Three years later
  Four years later
  Five years later
  Six years later
  Seven years later
  Eight years later
  Nine years later
  Ten years later
-------------------------------------------------------
FAVORABLE (DEFICIENT) DEVELOPMENT               $11,367
-------------------------------------------------------
NET LIABILITY -- DECEMBER 31,        $708,684  $525,601
Receivable from reinsurers and
  state trust funds                   288,963    87,665
-------------------------------------------------------
GROSS LIABILITY -- DECEMBER 31,       997,647   613,266
Re-estimated liability, net of
  reinsurance                                   514,234
Re-estimated receivable from
  reinsurers                                     84,541
-------------------------------------------------------
Re-estimated liability, gross                   598,775
-------------------------------------------------------
FAVORABLE (DEFICIENT) DEVELOPMENT,
  GROSS                                         $14,491
-------------------------------------------------------
</TABLE>
 
   The analysis above presents the development of Zenith's balance sheet
liabilities for 1988 through 1998. The first line in the table shows the
liability for unpaid loss and loss adjustment expense, net of reinsurance, as
estimated at the end of each calendar year. The first section shows the actual
payments of loss and loss adjustment expenses that relate to each year-end
liability as they are paid during subsequent annual periods. The second section
includes revised estimates of the original unpaid amounts, net of reinsurance,
including the subsequent payments. The next line shows the favorable or
deficient developments of the original estimates for each year through 1998, net
of reinsurance. This loss reserve development table is cumulative and,
therefore, ending balances should not be added since the amount at the end of
each calendar year includes activity for both the current and prior years.
Hence, the liability at the end of each year includes an estimate of the amount
yet unpaid and still due at the subsequent re-evaluation date for all previously
estimated liabilities. For example, the liability at the end of 1997 includes an
estimate of the amount still due on the 1996 and prior liabilities. The loss and
loss adjustment expense data prior to 1995 have been restated to include health
insurance business previously written by CalFarm Life Insurance Company. 1996
and subsequent includes the AGC-SIF net reserves acquired through merger on
December 31, 1996 as described in Note 15 to the Consolidated Financial
Statements on page 66. Information for 1998 includes the results of the
acquisition of RISCORP as described in Note 15 to the Consolidated Financial
Statements on pages 66-67.
   Since conditions and trends that have affected loss and loss adjustment
expense development in the past may not occur in the future in exactly the same
manner, if at all, future results may not be reliably predicted by extrapolation
of the data presented.
 
46
<PAGE>
--------------------------------------------------------------------------------
 
<TABLE>
<CAPTION>
                                       1996      1995      1994      1993      1992      1991      1990      1989      1988
<S>                                  <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>
-----------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
LIABILITY FOR UNPAID LOSS AND LOSS
  ADJUSTMENT EXPENSES, NET           $526,427  $463,123  $462,710  $474,499  $471,832  $447,702  $424,373  $386,445  $347,888
-----------------------------------------------------------------------------------------------------------------------------
PAID, NET (CUMULATIVE) AS OF:
  One year later                      209,346   185,764   175,488   173,699   184,498   184,593   162,642   129,605   118,332
  Two years later                     322,519   295,872   274,560   272,221   292,914   291,228   264,904   205,132   179,241
  Three years later                             350,279   331,532   325,916   355,710   352,208   323,685   258,632   216,321
  Four years later                                        362,287   364,420   389,417   390,459   357,233   289,963   245,629
  Five years later                                                  384,303   416,297   412,600   380,524   309,524   263,971
  Six years later                                                             429,715   433,322   394,741   323,041   275,983
  Seven years later                                                                     442,258   409,190   332,239   284,877
  Eight years later                                                                               415,176   341,520   290,126
  Nine years later                                                                                          345,971   295,039
  Ten years later                                                                                                     297,945
-----------------------------------------------------------------------------------------------------------------------------
LIABILITY, NET RE-ESTIMATED AS OF:
  One year later                      526,078   459,314   460,575   464,779   480,903   467,636   427,458   381,096   341,679
  Two years later                     520,114   464,830   450,675   453,497   483,334   485,399   442,332   371,272   332,541
  Three years later                             460,782   442,391   452,330   482,019   485,816   453,802   374,455   327,961
  Four years later                                        437,216   446,746   487,447   488,723   454,744   380,983   325,457
  Five years later                                                  442,053   483,294   491,216   455,971   381,703   328,415
  Six years later                                                             477,642   488,826   456,860   382,280   328,640
  Seven years later                                                                     483,433   453,475   382,219   329,058
  Eight years later                                                                               448,191   377,410   328,465
  Nine years later                                                                                          372,415   322,236
  Ten years later                                                                                                     317,581
-----------------------------------------------------------------------------------------------------------------------------
FAVORABLE (DEFICIENT) DEVELOPMENT    $  6,313  $  2,341  $ 25,494  $ 32,446  $ (5,810) $(35,731) $(23,818) $ 14,030  $ 30,307
-----------------------------------------------------------------------------------------------------------------------------
NET LIABILITY -- DECEMBER 31,        $526,427  $463,123  $462,710  $474,499  $471,832
Receivable from reinsurers and
  state trust funds                    93,651    54,429    47,696    44,919    33,070
-------------------------------------------------------------------------------------
GROSS LIABILITY -- DECEMBER 31,       620,078   517,552   510,406   519,418   504,902
Re-estimated liability, net of
  reinsurance                         520,114   460,782   437,216   442,053   477,642
Re-estimated receivable from
  reinsurers                           91,256    52,764    43,607    51,186    68,084
-------------------------------------------------------------------------------------
Re-estimated liability, gross         611,370   513,546   480,823   493,239   545,726
-------------------------------------------------------------------------------------
FAVORABLE (DEFICIENT) DEVELOPMENT,
  GROSS                              $  8,708  $  4,006  $ 29,583  $ 26,179  $(40,824)
-------------------------------------------------------------------------------------
</TABLE>
 
                                    CALFARM
                                   THEZENITH                                  47
<PAGE>
CONSOLIDATED BALANCE SHEET
 
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
 
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
DECEMBER 31,                                                                        Note       1998          1997
---------------------------------------------------------------------------------------------------------------------
<S>                                                                               <C>       <C>           <C>
(Dollars in thousands)
 
ASSETS:
 
Investments
 
 Fixed maturities:
 
  At amortized cost (fair value $36,712 in 1998 and $48,266 in 1997)                        $    35,143   $    46,948
 
  At fair value (cost $725,397 in 1998 and $534,771 in 1997)                                    735,284       542,479
 
 Floating rate preferred stocks, at fair value (cost $16,614 in 1998 and $14,614
 in 1997)                                                                                        17,324        15,670
 
 Convertible and non-redeemable preferred stocks, at fair value (cost $7,679 in
 1998
   and $6,672 in 1997)                                                                            7,350         6,602
 
 Common stocks, at fair value (cost $22,402 in 1998 and $17,790 in 1997)                         26,935        23,439
 
 Short-term investments (at cost, which approximates fair value)                                187,123       209,827
 
 Other investments                                                                               39,522        35,008
---------------------------------------------------------------------------------------------------------------------
Total investments                                                                   1, 2      1,048,681       879,973
 
Cash                                                                                              1,998        12,504
 
Accrued investment income                                                                        13,646         9,523
 
Premiums receivable, less allowance for doubtful accounts of $9,760 in 1998
  and $1,575 in 1997                                                                            133,631        72,813
 
Receivable from reinsurers, state trust funds and prepaid reinsurance premiums     1, 15        373,045       106,067
 
Deferred policy acquisition costs                                                                23,941        20,840
 
Properties and equipment, less accumulated depreciation                              3           79,908        54,531
 
Federal income taxes                                                                 7           25,351        19,940
 
Intangible assets                                                                  1, 15         25,744        11,609
 
Other assets                                                                         1           92,781        64,356
---------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS                                                                                $ 1,818,726   $ 1,252,156
---------------------------------------------------------------------------------------------------------------------
</TABLE>
 
The accompanying notes are an integral part of this statement.
 
48
<PAGE>
 
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
DECEMBER 31,                                                                              Note        1998           1997
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                                     <C>       <C>            <C>
(Dollars and shares in thousands)
 
LIABILITIES:
 
Policy liabilities and accruals
 
  Unpaid loss and loss adjustment expenses                                               14, 15   $    997,647   $    613,266
 
  Unearned premiums                                                                                    157,965        128,469
 
Policyholders' dividends accrued                                                                         4,763          5,360
 
Other policyholder funds                                                                                                6,407
 
Reserves on loss portfolio transfers                                                                     9,689         11,054
 
Payable to banks and other notes payable                                                   4            19,255         13,742
 
Senior notes payable, less unamortized issue costs of $404 in 1998 and $526 in 1997        5            74,596         74,474
 
Payable to RISCORP                                                                         15           52,952
 
Other liabilities                                                                          15           81,566         37,518
-----------------------------------------------------------------------------------------------------------------------------
Total liabilities                                                                                    1,398,433        890,290
-----------------------------------------------------------------------------------------------------------------------------
 
REDEEMABLE SECURITIES:
 
Company-obligated, mandatorily redeemable capital securities of Zenith National
  Insurance Capital Trust I, holding solely 8.55% Subordinated Deferrable Interest
  Debentures due 2028, of Zenith National Insurance Corp., less unamortized issue cost
  and discount of $1,659 in 1998                                                           6            73,341
-----------------------------------------------------------------------------------------------------------------------------
 
Commitments and contingent liabilities                                                     9
 
STOCKHOLDERS' EQUITY:
 
Preferred stock, $1 par -- shares authorized 1,000; issued and outstanding,
  none in 1998 and 1997
 
Common stock, $1 par -- shares authorized 50,000; issued 24,970, outstanding 17,148 in
  1998; issued 24,681, outstanding 17,819 in 1997                                          10           24,970         24,681
 
Additional paid-in capital                                                                             270,679        264,098
 
Retained earnings                                                                                      188,243        186,268
 
Accumulated other comprehensive income -- net unrealized appreciation on investments,
  net of deferred tax expense of $5,167 in 1998 and $5,025 in 1997                        1, 2           9,596          9,332
-----------------------------------------------------------------------------------------------------------------------------
                                                                                                       493,488        484,379
Less treasury stock at cost (7,822 shares in 1998 and 6,862 shares in 1997)                10         (146,536)      (122,513)
-----------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity                                                                             346,952        361,866
-----------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES, REDEEMABLE SECURITIES AND STOCKHOLDERS' EQUITY                                 $  1,818,726   $  1,252,156
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>
 
                                    CALFARM
                                   THEZENITH                                  49
<PAGE>
CONSOLIDATED STATEMENT OF OPERATIONS
 
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
 
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,                                                   Note       1998         1997         1996
----------------------------------------------------------------------------------------------------------------------
<S>                                                                     <C>       <C>          <C>          <C>
(Dollars and shares in thousands, except per share data)
REVENUES:
Premiums earned                                                            8      $  529,855   $  488,721   $  452,856
Net investment income                                                      2          53,593       52,332       51,154
Realized gains on investments                                              2          11,602       14,008       10,807
Real estate sales                                                                     37,737       45,419       41,554
Service fee income                                                                     3,992
----------------------------------------------------------------------------------------------------------------------
Total revenues                                                                       636,779      600,480      556,371
----------------------------------------------------------------------------------------------------------------------
EXPENSES:
Loss and loss adjustment expenses incurred                               8, 14       382,890      348,165      314,700
Policy acquisition costs                                                              96,937       92,213       84,093
Other underwriting and operating expenses                                             85,299       68,003       53,413
Policyholders' dividends and participation                                               516          355        2,526
Real estate construction and operating costs                                          36,374       44,286       39,645
Interest expense                                                        4, 5, 6        5,928        3,980        4,877
----------------------------------------------------------------------------------------------------------------------
Total expenses                                                                       607,944      557,002      499,254
----------------------------------------------------------------------------------------------------------------------
Income before federal income tax expense                                              28,835       43,478       57,117
Federal income tax expense                                                 7           9,735       15,378       19,517
----------------------------------------------------------------------------------------------------------------------
NET INCOME                                                                        $   19,100   $   28,100   $   37,600
----------------------------------------------------------------------------------------------------------------------
Net income per common share -- basic                                       16     $     1.12   $     1.59   $     2.14
----------------------------------------------------------------------------------------------------------------------
Net income per common share -- diluted                                     16     $     1.11   $     1.57   $     2.12
----------------------------------------------------------------------------------------------------------------------
</TABLE>
 
The accompanying notes are an integral part of this statement.
 
50
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
 
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
 
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,                                                      Note       1998       1997       1996
---------------------------------------------------------------------------------------------------------------------
<S>                                                                        <C>        <C>        <C>        <C>
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
    Premiums and service fee income collected                                         $ 580,945  $ 521,588  $ 474,831
    Investment income received                                                           54,970     52,242     46,167
    Proceeds from sales of real estate                                                   37,737     45,964     41,554
    Loss and loss adjustment expenses paid                                             (434,610)  (342,461)  (316,949)
    Underwriting and other operating expenses paid                                     (181,877)  (160,438)  (127,975)
    Real estate construction costs paid                                                 (47,423)   (47,565)   (54,480)
    Reinsurance premiums paid                                                           (41,429)   (27,336)   (23,748)
    Dividends paid to policyholders                                                        (358)    (1,284)    (5,985)
    Interest paid                                                                       (10,513)    (6,910)    (7,626)
    Income taxes paid                                                                    (4,580)    (8,242)   (23,090)
    Net proceeds from sales of trading portfolio investments                                         1,416      7,050
---------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities                                     (47,138)    26,974      9,749
---------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
    Purchases of investments:
      Debt securities held-to-maturity                                                                         (5,342)
      Debt and equity securities available-for-sale                                    (390,373)   (82,734)  (447,251)
      Other debt and equity securities and other investments                            (12,894)    (8,510)   (13,295)
    Proceeds from maturities and exchanges of investments:
      Debt securities held-to-maturity                                                   11,583      6,258      8,460
      Debt and equity securities available-for-sale                                      96,362     48,338    173,287
      Other debt and equity securities and other investments                                        15,483
    Proceeds from sales of investments:
      Debt and equity securities available-for-sale                                     302,648    104,809    261,410
      Other debt and equity securities and other investments                             13,145     15,211      9,656
    Net change in short-term investments                                                 14,916   (103,115)    34,716
    Capital expenditures and other, net                                                 (11,356)    (5,304)    (5,784)
    Cash payment to RISCORP                                                       15    (35,000)
    RISCORP acquisition costs                                                     15    (11,035)    (2,804)
    Cash acquired in RISCORP Acquisition                                          15     29,309
---------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities                                       7,305    (12,368)    15,857
---------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
    Repayment of note assumed from RISCORP                                        15    (15,000)
    Net cash received from the sale of Zenith National Insurance Capital
      Trust I
      8.55% Capital Securities                                                     6     73,320
    Cash advanced from bank line of credit                                         4      7,000
    Cash repaid on bank line of credit                                             4     (2,000)
    Cash advanced from bank loans and other notes payable                                35,431     39,729     27,935
    Cash repaid on bank loans and other notes payable                                   (34,918)   (40,719)   (25,691)
    Cash dividends paid to common stockholders                                          (17,010)   (17,695)   (17,605)
    Proceeds from exercise of stock options                                               6,527      4,940      2,572
    Purchase of treasury shares                                                         (24,023)      (482)    (7,611)
---------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities                                      29,327    (14,227)   (20,400)
---------------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash                                                         (10,506)       379      5,206
Cash at beginning of year                                                                12,504     12,125      6,919
---------------------------------------------------------------------------------------------------------------------
CASH AT END OF YEAR                                                                   $   1,998  $  12,504  $  12,125
---------------------------------------------------------------------------------------------------------------------
RECONCILIATION OF NET INCOME TO NET CASH FLOWS FROM OPERATING ACTIVITIES:
Net income                                                                            $  19,100  $  28,100  $  37,600
Adjustments to reconcile net income to net cash flows (used in) provided
    by operating activities:
    Depreciation and amortization                                                         9,096      5,716      3,081
    Realized gains on investments                                                       (11,602)   (14,008)   (10,807)
    Net cash from trading portfolio                                                                  1,416      7,050
    Decrease (increase) in:
        Premiums receivable                                                              25,757      7,732     (3,467)
        Receivable from reinsurers, state trust funds and prepaid
          reinsurance premiums                                                           22,039     13,457     (1,824)
        Deferred policy acquisition costs                                                (3,101)       (88)      (413)
        Real estate construction in progress and land held for
        development                                                                     (16,266)    (8,038)   (19,601)
    Increase (decrease) in:
        Unpaid loss and loss adjustment expenses                                        (97,601)    (6,812)      (164)
        Unearned premiums                                                               (13,681)     1,260      7,618
        Policyholders' dividends accrued                                                   (597)    (2,310)    (5,570)
        Federal income taxes                                                              5,019      6,385     (3,574)
        Deferred credit on reinsurance                                            15      8,510
        Other                                                                             6,189     (5,836)      (180)
---------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities                                   $ (47,138) $  26,974  $   9,749
---------------------------------------------------------------------------------------------------------------------
</TABLE>
 
The accompanying notes are an integral part of this statement.
See Note 15 to the Consolidated Financial Statements on pages 66-67 for non-cash
activities related to the RISCORP Acquisition.
 
                                    CALFARM
                                   THEZENITH                                  51
<PAGE>
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
 
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
--------------------------------------------------------------------------------
 
<TABLE>
<CAPTION>
                                                 PREFERRED       COMMON
THREE YEARS ENDED DECEMBER 31, 1998    NOTE     STOCK $1 PAR  STOCK $1 PAR
<S>                                  <C>        <C>           <C>
---------------------------------------------------------------------------
(Dollars in thousands, except per
  share data)
BALANCE AT DECEMBER 31, 1995                                    $  24,310
  Net income for 1996
  Other comprehensive income -- net
    unrealized (depreciation) on
    investments, net of deferred
    tax benefit of $4,468                2
Comprehensive income
Exercise of 137,000 stock options       10                            137
Tax benefit on options exercised in
  1996
Purchase of 317,000 treasury shares
  at cost
Cash dividends declared to common
  stockholders ($1.00 per share,
  paid quarterly)
---------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996                                       24,447
  Net income for 1997
  Other comprehensive income -- net
    unrealized appreciation on
    investments, net of deferred
    tax expense of $4,741                2
Comprehensive income
Exercise of 234,000 stock options       10                            234
Tax benefit on options exercised in
  1997
Purchase of 19,000 treasury shares
  at cost
Cash dividends declared to common
  stockholders ($1.00 per share,
  paid quarterly)
---------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997                                       24,681
  NET INCOME FOR 1998
  OTHER COMPREHENSIVE INCOME -- NET
    UNREALIZED APPRECIATION
    ON INVESTMENTS, NET OF DEFERRED
    TAX EXPENSE OF $142                  2
COMPREHENSIVE INCOME
EXERCISE OF 289,000 STOCK OPTIONS       10                            289
TAX BENEFIT ON OPTIONS EXERCISED IN
  1998
PURCHASE OF 960,000 TREASURY SHARES
  AT COST
CASH DIVIDENDS DECLARED TO COMMON
  STOCKHOLDERS ($1.00 PER SHARE,
  PAID QUARTERLY)
---------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998                                    $  24,970
---------------------------------------------------------------------------
</TABLE>
 
The accompanying notes are an integral part of this statement.
 
52
<PAGE>
--------------------------------------------------------------------------------
 
<TABLE>
<CAPTION>
                                                                         ACCUMULATED OTHER
                                                                      COMPREHENSIVE INCOME -
                                       ADDITIONAL      RETAINED     NET UNREALIZED APPRECIATION   TREASURY
                                     PAID-IN CAPITAL   EARNINGS    (DEPRECIATION) ON INVESTMENTS    STOCK      TOTAL
<S>                                  <C>              <C>          <C>                            <C>        <C>
----------------------------------------------------------------------------------------------------------------------
(Dollars in thousands, except per
 share data)
BALANCE AT DECEMBER 31, 1995            $ 256,083      $ 155,634             $   8,825            $(114,420) $ 330,432
  Net income for 1996                                     37,600                                                37,600
  Other comprehensive income -- net
    unrealized (depreciation) on
    investments, net of deferred
    tax benefit of $4,468                                                       (8,297)                         (8,297)
 
                                                                                                              -------
Comprehensive income                                                                                            29,303
Exercise of 137,000 stock options           2,435                                                                2,572
Tax benefit on options exercised in
 1996                                         357                                                                  357
Purchase of 317,000 treasury shares
 at cost                                                                                             (7,611)    (7,611)
Cash dividends declared to common
 stockholders ($1.00 per share,
 paid quarterly)                                         (17,550)                                              (17,550)
----------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996              258,875        175,684                   528             (122,031)   337,503
  Net income for 1997                                     28,100                                                28,100
  Other comprehensive income -- net
    unrealized appreciation on
    investments, net of deferred
    tax expense of $4,741                                                        8,804                           8,804
 
                                                                                                              -------
Comprehensive income                                                                                            36,904
Exercise of 234,000 stock options           4,706                                                                4,940
Tax benefit on options exercised in
 1997                                         517                                                                  517
Purchase of 19,000 treasury shares
 at cost                                                                                               (482)      (482)
Cash dividends declared to common
 stockholders ($1.00 per share,
 paid quarterly)                                         (17,516)                                              (17,516)
----------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997              264,098        186,268                 9,332             (122,513)   361,866
  NET INCOME FOR 1998                                     19,100                                                19,100
  OTHER COMPREHENSIVE INCOME -- NET
    UNREALIZED APPRECIATION
    ON INVESTMENTS, NET OF DEFERRED
    TAX EXPENSE OF $142                                                            264                             264
 
                                                                                                              -------
COMPREHENSIVE INCOME                                                                                            19,364
EXERCISE OF 289,000 STOCK OPTIONS           6,238                                                                6,527
TAX BENEFIT ON OPTIONS EXERCISED IN
 1998                                         343                                                                  343
PURCHASE OF 960,000 TREASURY SHARES
 AT COST                                                                                            (24,023)   (24,023)
CASH DIVIDENDS DECLARED TO COMMON
 STOCKHOLDERS ($1.00 PER SHARE,
 PAID QUARTERLY)                                         (17,125)                                              (17,125)
----------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998            $ 270,679      $ 188,243             $   9,596            $(146,536) $ 346,952
----------------------------------------------------------------------------------------------------------------------
</TABLE>
 
                                    CALFARM
                                   THEZENITH                                  53
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES
 
NOTE 1
SUMMARY OF ACCOUNTING POLICIES,
OPERATIONS AND PRINCIPLES OF CONSOLIDATION
   Zenith National Insurance Corp. ("Zenith") is engaged through its
wholly-owned property-casualty insurance subsidiaries in the business of writing
Workers' Compensation insurance, 44.2% of which is in California; Reinsurance,
principally of world-wide property and catastrophe risks; and Other
Property-Casualty, principally automobile, homeowners, farmowners, commercial
coverages and health insurance and other coverages primarily in the rural and
suburban areas of California. Zenith's subsidiaries sell insurance and
reinsurance through agents and brokers and not directly to consumers. Zenith
also conducts real estate operations, developing private residences for sale in
Las Vegas, Nevada. On April 1, 1998, Zenith Insurance Company ("Zenith
Insurance"), a wholly owned subsidiary of Zenith, 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 (see Note 15). On December 31, 1996, Zenith acquired
through merger the assets and liabilities of Associated General Commerce
Self-Insurers' Trust Fund ("AGC-SIF"), a Florida workers' compensation
self-insurers' fund (See Note 15).
   The financial statements have been prepared in accordance with generally
accepted accounting principles ("GAAP") and include Zenith and its subsidiaries.
GAAP requires the use of assumptions and estimates in reporting certain assets
and liabilities and related disclosures and actual results could differ from
those estimates. All significant intercompany transactions and balances have
been eliminated in consolidation.
 
FAIR VALUES OF FINANCIAL INSTRUMENTS
   Financial instruments are contractual obligations that result in the delivery
of cash or an ownership interest in an entity. Disclosures included in these
notes regarding the fair value of financial instruments have been derived using
external market sources, estimates using present value or other valuation
techniques.
   The following summarizes the carrying amounts and fair value of Zenith's
financial instruments as of December 31:
 
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------
                                                 1998                    1997
                                        ----------------------  ----------------------
                                         CARRYING      FAIR      Carrying      Fair
(Dollars in thousands)          NOTE      AMOUNT      VALUE       amount      value
--------------------------------------------------------------------------------------
<S>                             <C>     <C>         <C>         <C>         <C>
ASSETS:
Investments:
  Trading securities              2     $    3,041  $    3,041  $   2,982   $    2,982
  Other investments               2      1,045,640   1,047,209    876,991      878,309
                                        ----------  ----------  ----------  ----------
                                         1,048,681   1,050,250    879,973      881,291
LIABILITIES:
Other notes payable               4          2,010       2,010      2,334        2,334
Payable to banks                  4         17,245      17,245     11,408       11,408
Senior notes payable              5         74,596      80,881     74,474       82,365
Redeemable securities             6         73,341      66,312
--------------------------------------------------------------------------------------
</TABLE>
 
INVESTMENTS
   Zenith's investments in debt and equity securities are identified in three
categories as follows: held-to-maturity -- those securities, which by their
terms must be redeemed by the issuing company and that the enterprise has the
positive intent and ability to hold to maturity, and are reported at amortized
cost; trading -- those securities that are held principally for the purpose of
selling them in the near term and are reported at fair value with unrealized
gains and losses included in earnings; and available-for-sale -- those
securities not classified as either held-to-maturity or trading and are reported
at fair value with unrealized gains and losses excluded from earnings and
reported as a separate component of stockholders' equity, net of deferred taxes.
   Other investments and receivables, which are classified as other investments,
are carried at cost.
   When, in the opinion of management, a decline in market value of investments
is considered to be "other than temporary," such investments are written down to
their net realizable value. The determination of "other than temporary"
includes, in addition to consideration of other relevant factors, a presumption
that if the market value is below cost by a significant amount for a period of
time, a writedown is necessary.
   The market value of investments was supplied by the Merrill Lynch pricing
service, with the exception of 43 items whose values were obtained from other
brokers making a market in the investment, the Bloomberg
 
54
<PAGE>
financial news service and the use of analytical pricing methods for issues for
which there is no ready market. The pricing for municipal bonds is provided by
Muller Data. These market values are considered fair value.
   The cost of securities sold is determined by the "identified cost" method.
Short-term investments include debt securities such as corporate, municipal and
treasury securities with maturities of less than one year at the time of
purchase. For these short-term investments, the carrying amount is a reasonable
estimate of fair value.
 
CASH
   Cash includes currency on hand and demand deposits with financial
institutions.
 
RECOGNITION OF PROPERTY-CASUALTY
REVENUE AND EXPENSE
   Property-casualty premiums are earned on a pro rata basis over the terms of
the policies. Premiums applicable to the unexpired terms of policies in force
are recorded as unearned premiums. Included with premiums earned is an estimate
for earned but unbilled audit premiums. Workers' compensation insurance premiums
are determined based upon the payroll of the insured and applicable premium
rates. Premiums for retrospectively-rated policies are also determined by the
loss experience incurred by the policyholder.
   Policy acquisition costs, consisting of commissions, premium taxes and
certain other underwriting costs, are deferred and amortized as the related
premiums are earned.
   Zenith's insurance subsidiaries make provisions for the settlement of all
incurred claims, both reported and unreported. The liabilities for unpaid loss
and loss adjustment expenses are estimates for the eventual costs of claims
incurred but not settled, less estimates of salvage and subrogation. Estimates
for reported claims are primarily determined by evaluation of individual
reported claims and amounts reported by ceding companies. Estimates for claims
incurred but not reported are based on experience with respect to the probable
number and nature of such claims. The methods for making such estimates and for
establishing the resulting liabilities are continually reviewed and updated and
any adjustments resulting therefrom are reflected in earnings currently.
Estimates of losses from environmental and asbestos-related claims are included
in overall loss reserves and to date have not been material. Due to the
significant uncertainties inherent in establishing such reserves, the ultimate
exposure may vary from the amounts currently reserved.
   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
Zenith's insurance subsidiaries. California policyholders' dividends are not
anticipated to be material in the foreseeable future due to deregulation,
Florida policyholders' dividends are also immaterial.
   Property insurance and reinsurance coverages expose Zenith to the risk of
significant loss in the event of major adverse natural phenomena, known in the
insurance industry as catastrophes. These catastrophes may cause significant
contemporaneous financial statement losses since catastrophe losses may not be
accrued in advance of the event.
   Zenith's business, although concentrated in California, has expanded to other
states, primarily Florida and Texas. However, the concentration of Zenith's
business in California makes the results of operations highly dependent upon the
state's economy, social and cultural trends, legislative and regulatory changes,
and catastrophic events such as windstorms and earthquakes. In addition, premium
revenues for most property and casualty insurance coverages written in
California (except workers' compensation and health) are subject to prior
approval of rates by the State of California Department of Insurance (the
"Department of Insurance").
 
REINSURANCE
   In accordance with general industry practices, Zenith's insurance
subsidiaries annually purchase reinsurance to protect against liabilities in
excess of certain limits on insurance risks they have underwritten. Such
arrangements are known in the industry as "excess of loss" protection. The
purpose of such reinsurance is to protect Zenith from the impact of large,
unforeseen losses. Such reinsurance reduces the magnitude of sudden and
unpredictable changes in net income and the capitalization supporting insurance
operations.
 
                                    CALFARM
                                   THEZENITH                                  55
<PAGE>
   The ceding of insurance liabilities does not discharge the original insurer
from primary liability to its policyholder. Balances due from reinsurers on
unpaid losses, including an estimate of such recoverables related to reserves
for incurred but not reported losses, are reported as assets and are included in
receivables from reinsurers. The unearned portion of premiums due to reinsurers
is also included in receivable from reinsurers. In connection with the RISCORP
Acquisition (see Note 15), Zenith acquired approximately $244,305,000 of
reinsurance recoverables associated with ceded reinsurance arrangements entered
into by RISCORP. All of such reinsurance is recoverable from large United States
reinsurers. Earned premiums and loss and loss adjustment expenses incurred are
stated in the Consolidated Statement of Operations after deduction of amounts
ceded to reinsurers. Of amounts recoverable from reinsurers at December 31,
1998, 62.2% is attributable to reinsurance arrangements with four large United
States reinsurance companies. No material amounts due from reinsurers have been
written off as uncollectable in the three years ended December 31, 1998.
 
REAL ESTATE OPERATIONS
   Land, land development costs and construction costs, including costs of
acquisition and development, property taxes and related interest, are
capitalized. Such costs, and an estimate of the costs to complete a project, are
recognized pro rata against sales of completed units (see Note 5). Such
capitalized costs are included in other assets.
   Profitable real estate operations are dependent upon real estate values,
interest rates, construction costs, competition and management ability.
   Included in other assets is land carried at a cost of $42,142,000 which is
held to support future construction by the Real Estate Operations.
 
PROPERTIES AND EQUIPMENT
   Properties and equipment are stated at cost less accumulated depreciation.
Depreciation is calculated principally on a straight-line basis using the
following useful lives: buildings, 10 to 40 years; furniture, fixture 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
   Intangible assets include purchased intangibles and the costs in excess of
tangible assets acquired, including those related to the acquisitions of RISCORP
and AGC-SIF discussed in Note 15. The amounts assigned to such assets acquired
since 1970 are being amortized on a straight-line basis over 20 to 25 years.
Amortization expense was $1,058,000, $405,000 and $412,000 in 1998, 1997 and
1996, respectively. Accumulated amortization was $7,631,000 and $6,573,000 at
December 31, 1998 and 1997, respectively. Intangible assets were $25,744,000 and
$11,609,000 at December 31, 1998 and 1997, respectively, of which $23,735,000
and $9,600,000, respectively, are amortizable. Management periodically assesses
the recoverability of these purchased intangibles based on a review of
projected, undiscounted cash flows of the operations acquired.
 
COMPREHENSIVE INCOME
   As of January 1, 1998, Zenith adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income" which establishes
standards for reporting and presenting comprehensive income and its components
in a full set of financial statements. Comprehensive income includes net income
and all changes in stockholders' equity (except those arising from transactions
with stockholders) including changes in net unrealized appreciation
(depreciation) on investments. The new standard requires only additional
disclosures in the consolidated financial statements; it does not affect the
financial position or results of operations.
 
56
<PAGE>
COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE
   Zenith adopted Statement of Position ("SOP") 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use" effective January
1, 1998. SOP 98-1 requires capitalization of certain internal and external costs
associated with computer software developed or obtained for internal use. For
the year ended December 31, 1998, capitalized costs under SOP 98-1 were
$6,404,000. During the year ended December 31, 1998, $86,000 of such costs were
amortized.
   The cost of purchased software for internal use is capitalized and amortized
over the useful life of the software. The cost of software developed or obtained
for internal use is either capitalized and amortized over the useful life of the
software or expensed as incurred, depending on the type of software and the work
performed to develop the software. The cost of modifying software for Year 2000
compliance is expensed as incurred.
 
INSURANCE-RELATED ASSESSMENTS
   On January 1, 1998, Zenith adopted SOP 97-3, "Accounting by Insurance and
Other Enterprises for Insurance-Related Assessments." SOP 97-3 provides guidance
for the determination of when a liability for insurance-related assessments
should be recognized and how to measure that liability. As of December 31, 1998
the impact of adoption of the SOP was immaterial to the accrual for guaranty
fund and other insurance-related assessments and to the results of operations,
which reflects the cumulative effect of this accounting change.
 
RECENTLY ISSUED ACCOUNTING STANDARDS
   On June 15, 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities".
SFAS No. 133 is effective for Zenith for all fiscal quarters of all fiscal years
beginning after January 1, 2000. SFAS No. 133 requires that all derivative
instruments be recorded on the balance sheet at their fair value. Changes in the
fair value of derivatives are recorded each period in current earnings or other
comprehensive income, depending on whether a derivative is designated as part of
a hedge transaction and, if it is, the type of hedge transaction. Zenith does
not invest in derivative instruments, and therefore adoption of SFAS No. 133 is
not expected to have any effect on Zenith's results of operations or its
financial position.
 
CODIFICATION OF STATUTORY ACCOUNTING PRINCIPLES
   In 1998, the National Association of Insurance Commissioners ("NAIC") adopted
the Codification of Statutory Accounting Principles guidance (the
"Codification"), which will replace the current Accounting Practices and
Procedures manual as the NAIC's primary guidance on statutory accounting
(statutory accounting is a comprehensive basis of accounting based on prescribed
accounting practices, which include state laws, regulations and general
administrative rules, as well as a variety of publications of the NAIC). The
NAIC is now considering amendments to the Codification that would also be
effective upon implementation. The NAIC has recommended an effective date of
January 1, 2001. The Codification provides guidance for areas where statutory
accounting has been silent and changes current statutory accounting in some
areas.
   It is not known whether the Department of Insurance will adopt the
Codification, and whether the Department of Insurance will make any changes to
that guidance. Implementation of the Codification may affect the surplus level
and capitalization requirements of Zenith's insurance subsidiaries on a
statutory basis. Zenith has not determined the potential impact of the
Codification.
 
RECLASSIFICATIONS AND RESTATEMENTS
   Certain 1997 and 1996 amounts have been reclassified to conform to the 1998
presentation.
   All 1996 earnings per share data have been restated in accordance with SFAS
No. 128, "Earnings per Share" (See Note 16).
 
                                    CALFARM
                                   THEZENITH                                  57
<PAGE>
NOTE 2
INVESTMENTS
   The amortized cost and fair values of investments were as follows:
 
<TABLE>
<CAPTION>
-------------------------------------------------------------------------
TYPE OF SECURITY
(DOLLARS IN                              GROSS        GROSS
THOUSANDS)                AMORTIZED   UNREALIZED   UNREALIZED     FAIR
DECEMBER 31, 1998           COST         GAINS      (LOSSES)      VALUE
<S>                      <C>          <C>          <C>          <C>
-------------------------------------------------------------------------
HELD-TO-MATURITY:
CORPORATE DEBT            $   5,330    $     740                $   6,070
MORTGAGE-BACKED              29,813          829                   30,642
-------------------------------------------------------------------------
    TOTAL, HELD-TO-
      MATURITY            $  35,143    $   1,569                $  36,712
-------------------------------------------------------------------------
AVAILABLE-FOR-SALE:
U.S. TREASURIES           $ 161,548    $     962    $    (295)  $ 162,215
CORPORATE DEBT              529,888       12,904       (3,924)    538,868
MORTGAGE-BACKED              16,938           45         (130)     16,853
REDEEMABLE PREFERRED
  STOCKS                     14,045          332          (30)     14,347
EQUITIES                     46,670        6,771       (1,872)     51,569
SHORT-TERM INVESTMENTS      187,123                               187,123
-------------------------------------------------------------------------
    TOTAL, AVAILABLE-
      FOR-SALE            $ 956,212    $  21,014    $  (6,251)  $ 970,975
-------------------------------------------------------------------------
TRADING:
CORPORATE DEBT            $   2,978    $      23                $   3,001
EQUITIES                         25           15                       40
-------------------------------------------------------------------------
    TOTAL, TRADING        $   3,003    $      38                $   3,041
-------------------------------------------------------------------------
</TABLE>
 
<TABLE>
<CAPTION>
-------------------------------------------------------------------------
Type of Security
(Dollars in                              Gross        Gross
thousands)                Amortized   unrealized   unrealized     Fair
December 31, 1997           cost         gains      (losses)      value
-------------------------------------------------------------------------
<S>                      <C>          <C>          <C>          <C>
Held-to-maturity:
Corporate debt            $   5,335    $     371                $   5,706
Mortgage-backed              41,613          947                   42,560
-------------------------------------------------------------------------
    Total, held-to-
      maturity            $  46,948    $   1,318                $  48,266
-------------------------------------------------------------------------
Available-for-sale:
U.S. Treasuries           $ 131,929    $     424                $ 132,353
Corporate debt              313,641        7,443    $    (954)    320,130
Mortgage-backed              70,190          788         (634)     70,344
Redeemable preferred
  stocks                     16,040          729          (52)     16,717
Equities                     39,051        7,012         (399)     45,664
Short-term investments      209,827                               209,827
-------------------------------------------------------------------------
    Total, available-
      for-sale            $ 780,678    $  16,396    $  (2,039)  $ 795,035
-------------------------------------------------------------------------
Trading:
Corporate debt            $   2,971                 $     (36)  $   2,935
Equities                         25    $      22                       47
-------------------------------------------------------------------------
    Total, trading        $   2,996    $      22    $     (36)  $   2,982
-------------------------------------------------------------------------
</TABLE>
 
   Debt securities, including short-term investments, at December 31, 1998 by
contractual maturity were as follows:
 
<TABLE>
<CAPTION>
-----------------------------------------------------
(Dollars in thousands)          AMORTIZED     FAIR
DECEMBER 31, 1998                 COST        VALUE
-----------------------------------------------------
<S>                            <C>          <C>
HELD-TO-MATURITY:
Due after ten years             $  35,143   $  36,712
-----------------------------------------------------
Total, held-to-maturity         $  35,143   $  36,712
-----------------------------------------------------
AVAILABLE-FOR-SALE:
Due in one year or less         $ 270,526   $ 270,973
Due after one year through
  five years                      301,681     307,295
Due after five years through
  ten years                       226,516     229,460
Due after ten years               110,819     111,678
-----------------------------------------------------
Total, available-for-sale       $ 909,542   $ 919,406
-----------------------------------------------------
TRADING:
Due after one year through
  five years                    $   2,978   $   3,001
-----------------------------------------------------
Total, trading                  $   2,978   $   3,001
-----------------------------------------------------
</TABLE>
 
   Fluctuating interest rates will impact stockholders' equity, profitability
and maturities of certain debt and preferred securities. Expected maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.
Mortgage-backed securities are shown as being due at their average expected
maturity dates. Redeemable preferred stocks with sinking fund redemption periods
are shown as being due at the mid-point of the sinking fund period. During the
past three years, Zenith has not incurred any material losses due to the credit
quality of its investments and has not included in its financial statements any
allowance for possible future losses.
   The gross realized gains on sales of investments classified as
available-for-sale during 1998, 1997 and 1996 were $9,863,000, $5,067,000, and
$8,564,000, respectively, and the gross realized losses were $3,046,000,
$959,000, and $2,355,000, respectively.
   The effect on consolidated stockholders' equity of the increase in the value
of fixed maturity securities classified as available-for-sale in 1998 compared
to 1997 was an increase of $1,378,000, net of deferred taxes, as compared to an
increase of $7,001,000 from 1996 to 1997.
 
58
<PAGE>
   Investment income is summarized as follows:
 
<TABLE>
<CAPTION>
---------------------------------------------------------------
(Dollars in thousands)
YEAR ENDED DECEMBER 31,      1998         1997         1996
---------------------------------------------------------------
<S>                       <C>          <C>          <C>
Fixed maturities:
  Bonds                    $  44,460    $  42,837    $  37,968
  Redeemable
    preferred stocks           1,113        1,289        1,578
Equity securities:
  Floating rate
    preferred stocks             977          872          876
  Convertible and
    nonredeemable
    preferred stocks             477          337          402
  Common stocks                  717          595          758
Short-term investments         8,265        8,090        9,257
Other                          1,088        1,489        3,608
---------------------------------------------------------------
                              57,097       55,509       54,447
Less investment expenses       3,504        3,177        3,293
---------------------------------------------------------------
Net investment income      $  53,593    $  52,332    $  51,154
---------------------------------------------------------------
</TABLE>
 
   Investments carried at their fair value of $261,986,000 at December 31, 1998
and $294,309,000 at December 31, 1997 were on deposit with regulatory
authorities in compliance with insurance company regulations.
   At December 31, 1998 and 1997, Zenith and its subsidiaries owned $6,185,000
and $6,370,000, respectively, at fair value, of securities issued by Reliance
Group Holdings Inc. Reliance Insurance Company ("Reliance"), a subsidiary of
Reliance Group Holdings Inc., is a major stockholder of Zenith.
 
NOTE 3
PROPERTIES AND EQUIPMENT
   Properties and equipment consist of the following:
 
<TABLE>
<CAPTION>
------------------------------------------------------
(Dollars in thousands)
DECEMBER 31,                        1998       1997
------------------------------------------------------
<S>                               <C>        <C>
Land                              $  16,536  $  14,836
Buildings                            44,203     31,852
Furniture, fixtures and
  equipment                          57,368     37,627
------------------------------------------------------
                                    118,107     84,315
Less accumulated depreciation        38,199     29,784
------------------------------------------------------
Total                             $  79,908  $  54,531
------------------------------------------------------
</TABLE>
 
   Depreciation expense amounted to $8,804,000, $5,788,000, and $5,503,000 in
1998, 1997 and 1996, respectively.
 
NOTE 4
PAYABLE TO BANKS AND OTHER NOTES PAYABLE
   Zenith has three revolving, unsecured lines of credit amounting to
$100,000,000 with aggregate availability at December 31, 1998 of $95,000,000. As
of December 31, 1997, there were no outstanding balances on these unsecured
lines of credit. Interest on funds borrowed on each of these three lines of
credit is payable, respectively, at: (1) either (a) the bank's reference rate
less 0.55% OR (b) LIBOR plus 0.40%; (2) either (a) the bank's reference rate, OR
(b) the Federal Funds Rate plus 0.40% OR (c) the Eurodollar Rate plus .40%; and
(3) either (a) the higher of the bank's reference rate or the Federal Funds Rate
plus 0.50% OR (b) the bank's offered rate to prime international banks in the
offshore dollar market plus either 0.375% or 0.475%.
   Under these agreements, certain restrictive covenants apply including the
maintenance of a specific level of net worth for Zenith and its insurance
subsidiaries.
   Zenith drew down $7,000,000 and repaid $2,000,000 on the lines of credit
during 1998. There were no borrowings on the lines of credit in 1997 and 1996.
The prime interest rate was 7.75%, 8.50% and 8.25% at December 31, 1998, 1997
and 1996, respectively.
   Zenith's Real Estate Operations have seven development and construction loan
agreements outstanding as of December 31, 1998, each providing for either
subdivision lot development or construction. These loans bear interest at prime
plus 1.0% and prime plus 0.75% and mature between June 1999 and April 2000. Each
agreement pertains to a separate residential housing project and the maximum
that may be borrowed under the seven agreements combined is $32,315,000.
Although a maximum of $32,315,000 is available to be borrowed, in practice, such
amount will not be outstanding. The agreements provide that funding and
repayment of development and construction loans are made in tandem for each
project. A development loan will always precede a construction loan for a
project and the proceeds of the construction loan are required to first be used
to pay off the respective development loan. At December 31, 1998 and 1997,
$12,244,000 and $11,408,000, respectively, was outstanding with
 
                                    CALFARM
                                   THEZENITH                                  59
<PAGE>
respect to the development and construction loans.
   Zenith's Real Estate Operations are obligated under various notes payable
arising from the purchase of several parcels of property. Such notes are
collateralized by the land parcels and bear interest at rates between 8% and
12%, with a maximum maturity of August 2004. The balance outstanding with
respect to these notes was $2,011,000 and $2,334,000 at December 31, 1998 and
1997, respectively.
 
NOTE 5
SENIOR NOTES PAYABLE
   Zenith has $75,000,000 of its 9% Senior Notes due 2002 (the "9% Notes")
issued and outstanding at December 31, 1998 and 1997. Interest on the 9% Notes
is payable semi-annually. The 9% Notes are general unsecured obligations of
Zenith. Issue costs of $1,213,000 are being amortized over the term of the 9%
Notes. In each of the three years ended December 31, 1998, 1997 and 1996,
$6,871,000 of interest and issue costs were expended. Covenants contained in the
indenture include restrictions on the ability of Zenith and its subsidiaries to
incur secured debt and the right of holders of the 9% Notes to require Zenith to
repurchase the 9% Notes upon a decline in the rating of the 9% Notes within
ninety days after the occurrence of certain events. Those events are: (a) a
person or group becomes the beneficial owner of more than 50% of Zenith common
stock; (b) 10% or more of Zenith common stock is acquired by Zenith within any
12-month period; or (c) the sum of the fair market value of distributions (other
than regular dividends or distributions of capital stock) and the consideration
for purchases of Zenith common stock by Zenith during a 12-month period is 30%
or more of the fair market value of outstanding Zenith common stock.
   Interest incurred on borrowings is summarized as follows:
 
<TABLE>
<CAPTION>
---------------------------------------------------------------------
(Dollars in thousands)
YEAR ENDED DECEMBER 31,                         1998    1997    1996
---------------------------------------------------------------------
<S>                                            <C>     <C>     <C>
Interest capitalized for real estate
 operations                                    $3,971  $3,755  $3,127
Interest expense not related to real estate
  operations                                    5,928   3,980   4,877
---------------------------------------------------------------------
Total interest incurred                        $9,899  $7,735  $8,004
---------------------------------------------------------------------
</TABLE>
 
NOTE 6
REDEEMABLE SECURITIES
   On July 30, 1998, Zenith issued $75,000,000 of 8.55% Capital Securities at a
price of $996.24 per security through Zenith National Insurance Capital Trust I,
a Delaware statutory business trust (the "Trust"), all of the voting securities
of which are owned by Zenith. Each Capital Security pays semi-annual cumulative
cash distributions at the annual rate of 8.55% of the $1,000 liquidation amount
per security.
   The Trust used the proceeds from its offering to purchase $75,000,000 of
Zenith's 8.55% Subordinated Deferrable Interest Debentures due 2028 (the
"Subordinated Debentures"), which constitute the principal asset of the Trust.
The semi-annual interest payments on the Subordinated Debentures may be deferred
by Zenith for up to ten consecutive semi-annual periods. The Subordinated
Debentures are redeemable at any time by Zenith at the then present value of the
remaining scheduled payments of principal and interest. Payments on the Capital
Securities, including distributions and redemptions, follow those of the
Subordinated Debentures. Zenith used $65,000,000 from the net proceeds to make a
capital contribution to Zenith Insurance. The remaining net proceeds were used
for general corporate purposes. The issue cost and discount on the Subordinated
Debentures of $1,680,000 are being amortized over the term of the Subordinated
Debentures. During the year ended December 31, 1998, $2,695,000 of interest,
issue costs and discount were expensed.
   Zenith fully and unconditionally guaranteed the distributions on, and the
liquidation amount generally of, the Capital Securities to the extent the Trust
has funds legally available therefore. Zenith's guarantee of the Capital
Securities, as well as the Subordinated Debentures, are subordinated to all
other indebtedness of Zenith.
 
NOTE 7
FEDERAL INCOME TAXES
   The components of the provision (benefit) for taxes on net income are:
 
<TABLE>
<CAPTION>
-------------------------------------------------------------
(Dollars in thousands)
YEAR ENDED DECEMBER 31,         1998       1997       1996
-------------------------------------------------------------
<S>                           <C>        <C>        <C>
Current                       $   6,458  $  10,989  $  19,979
Deferred                          3,277      4,389       (462)
-------------------------------------------------------------
Federal income tax expense    $   9,735  $  15,378  $  19,517
-------------------------------------------------------------
</TABLE>
 
60
<PAGE>
   The difference between the statutory federal income tax rate of 35% and
Zenith's effective tax rate on income, as reflected in the financial statements,
is explained as follows:
 
<TABLE>
<CAPTION>
-------------------------------------------------------------------
(Dollars in thousands)
YEAR ENDED DECEMBER 31,                    1998     1997     1996
-------------------------------------------------------------------
<S>                                       <C>      <C>      <C>
Statutory federal income tax expense      $10,092  $15,217  $19,991
Increase (reduction) in taxes:
  Dividend received
    deduction and tax-
    exempt interest                        (1,062)    (693)    (846)
  Other                                       705      854      372
-------------------------------------------------------------------
Federal income tax expense                $ 9,735  $15,378  $19,517
-------------------------------------------------------------------
</TABLE>
 
   Deferred taxes are 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:
 
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
                                         1998                    1997
(Dollars in thousands)               DEFERRED TAX            Deferred Tax
YEAR ENDED DECEMBER 31,          ASSETS    LIABILITIES   Assets    Liabilities
------------------------------------------------------------------------------
<S>                             <C>        <C>          <C>        <C>
Differences between the tax
  basis and carrying value of
  investments*                              $   6,116               $   5,521
Deferred policy acquisition
  costs                                         8,379                   7,294
Purchased intangibles                           1,658                   1,747
Properties and equipment                        8,409                   4,371
Property-casualty loss reserve
  discount                      $  32,159               $  27,039
Limitation on deduction for
  unearned premiums                10,190                   8,513
Policyholders' dividends
  accrued                           1,667                   1,876
Deferred income on ceded
  reinsurance                       2,979
Other                               3,091       2,913       2,538       5,230
------------------------------------------------------------------------------
                                   50,086      27,475      39,966      24,163
------------------------------------------------------------------------------
Net deferred tax asset          $  22,611               $  15,803
------------------------------------------------------------------------------
*principally unrealized appreciation on available-for-sale investments
</TABLE>
 
   Zenith's net deferred tax asset will be fully recoverable because all future
deductible amounts can be offset by future taxable amounts or recovery of
federal income taxes paid within the statutory carryback period.
   Property-Casualty loss reserves are not discounted for book purposes, however
the Tax Reform Act of 1986 requires property and casualty loss reserves to be
discounted for tax purposes.
   Federal income taxes receivable was as follows:
 
<TABLE>
<CAPTION>
--------------------------------------------------------
(Dollars in thousands)
YEAR ENDED DECEMBER 31,               1998       1997
--------------------------------------------------------
<S>                                 <C>        <C>
Current taxes receivable            $   2,740  $   4,137
Net deferred tax asset                 22,611     15,803
--------------------------------------------------------
Federal income taxes                $  25,351  $  19,940
--------------------------------------------------------
</TABLE>
 
   Zenith files a consolidated federal income tax return. Zenith's insurance
subsidiaries pay premium taxes on gross premiums written in lieu of most state
income or franchise taxes.
 
NOTE 8
REINSURANCE
   Reinsurance transactions reflected in the financial statements are as
follows:
 
<TABLE>
<CAPTION>
-----------------------------------------------------------
(Dollars in thousands)
Year ended December 31,       1998       1997       1996
-----------------------------------------------------------
<S>                         <C>        <C>        <C>
Direct premiums earned      $ 545,573  $ 477,527  $ 435,568
Assumed premiums earned        38,769     37,385     41,930
Ceded premiums earned          54,487     26,191     24,642
-----------------------------------------------------------
Net premiums earned         $ 529,855  $ 488,721  $ 452,856
-----------------------------------------------------------
Ceded loss and loss
  adjustment expenses
  incurred                  $  26,456  $  10,491  $  12,396
-----------------------------------------------------------
</TABLE>
 
   Zenith Insurance has an assumed reinsurance agreement with Reliance.
Estimated costs paid to Reliance relating to this arrangement amounted to
$53,000, $97,000, and $181,000 for 1998, 1997 and 1996, respectively. Zenith
Insurance (through AGC-SIF) also maintains aggregate and specific excess of loss
reinsurance agreements with Reliance. Included in receivable from reinsurers as
of December 31, 1998 and 1997 is $14,461,000 and $14,872,000, respectively,
relating to this reinsurance arrangement.
   Zenith maintains excess of loss and catastrophic reinsurance protection which
varies based on the type of coverage. Excess of loss reinsurance covers losses
per occurrence in excess of $350,000 for property, $550,000 for workers'
compensation, $500,000 for liability and $200,000 for umbrella (20% of the first
$1,000,000). CalFarm Insurance Company ("CalFarm"), an indirect, wholly-owned
subsidiary of Zenith, has property catastrophe reinsurance that provides for
recovery of 95% of $105,000,000, excess of a retention of $5,000,000. Zenith's
catastrophe reinsurance coverage provides protection against aggregate losses
per event up to $100,000,000 for workers' compensation. Assumed reinsurance
business is not covered by such catastrophe reinsurance. Credit quality of
reinsurers may impact profitability and stockholders' equity. No losses have
been incurred from uncollectible reinsurance during the past three years and no
allowances are carried on the financial statements for unrecoverable
reinsurance.
 
                                    CALFARM
                                   THEZENITH                                  61
<PAGE>
NOTE 9
COMMITMENTS AND CONTINGENT LIABILITIES
   Zenith and its subsidiaries have office space on leases expiring through
2003, equipment on leases expiring through 2003 and automobiles on two through
three-year leases. The minimum rentals on these operating leases as of December
31, 1998 were as follows:
 
<TABLE>
<CAPTION>
------------------------------------------------------------
(Dollars in thousands)      EQUIPMENT
                               AND
YEAR                       AUTO FLEET    OFFICES     TOTAL
------------------------------------------------------------
<S>                        <C>          <C>        <C>
1999                        $   1,341   $   3,329  $   4,670
2000                              799       2,791      3,590
2001                              534       2,104      2,638
2002                              139       1,342      1,481
2003                               58         352        410
Thereafter
------------------------------------------------------------
Total                       $   2,871   $   9,918  $  12,789
------------------------------------------------------------
</TABLE>
 
   Rental expenses for 1998, 1997 and 1996 amounted to $5,765,000, $5,925,000
and $5,358,000, respectively.
   See Note 15 for litigation concerning the RISCORP Acquisition.
   Zenith and its subsidiaries are defendants in various other litigation. In
the opinion of management, after consultation with legal counsel, such
litigation is either without merit or the ultimate liability, if any, will not
have a material adverse effect on the consolidated financial condition or
results of operations of Zenith.
 
CONTINGENCIES SURROUNDING FAIR VALUES OF CERTAIN ASSETS ACQUIRED AND
LIABILITIES ASSUMED FROM RISCORP
   On April 1, 1998, Zenith Insurance acquired substantially all of the assets
and certain liabilities of RISCORP related to RISCORP's workers' compensation
business (the "RISCORP Acquisition"). See Note 15 for a full discussion of the
RISCORP Acquisition. The RISCORP Acquisition was accounted for as a purchase and
the fair values of the assets and liabilities acquired are set forth in Note 15.
The total purchase price for such acquired assets and liabilities was determined
by a three step process in which RISCORP; Zenith Insurance and its external
accounting and actuarial consultants; and a third party, acting as a Neutral
Auditor and Neutral Actuary, made certain estimates of the GAAP values of the
assets and liabilities acquired by Zenith Insurance. Such estimates varied
considerably, particularly with respect to the value of premiums receivable and
the liability for unpaid losses and loss adjustment expenses.
   The carrying values of premiums receivable and the liability for unpaid
losses and loss adjustment expenses at December 31, 1998 reflect management's
estimates using available current information. Different actuarial assumptions,
particularly assumptions about long-lived workers' compensation claims, suggest
that the ultimate liability for unpaid losses and loss adjustment expenses could
be higher than Zenith's carrying value of reserves for such claims at December
31, 1998. Also, Zenith's claims handling practices vary in certain respects from
those employed by RISCORP. The ultimate amount of premiums receivable for
retrospectively-rated policies is determined, in part, by the amount and timing
of losses sustained under such policies. Also, certain of Zenith's billing and
collections procedures differ from those employed by RISCORP and Zenith is
continuing to ascertain the impact such differences may have on the
collectibility of premiums receivable. Subsequent re-interpretation of currently
available data or any new information that becomes available with respect to
premiums receivable and liabilities for unpaid losses and loss adjustment
expenses acquired from RISCORP may change the estimates of the carrying values
of such amounts and such changes, if any, will be reflected in the results of
operations of the period in which they occur.
   Zenith Insurance has purchased reinsurance protection relating to development
of the loss and loss adjustment expense reserves assumed from RISCORP. Such
reinsurance would allow Zenith Insurance to recover up to $50,000,000 in excess
of $182,000,000 for net unpaid losses and allocated loss adjustment expenses
acquired from RISCORP. After deducting reinsurance premiums of $16,000,000,
Zenith has recorded reinsurance recoverable of $24,510,000 and a deferred
benefit of $8,510,000 at December 31, 1998. Future adverse loss development, if
any, of the reserves acquired from RISCORP would be recoverable up to the
$50,000,000 limit although, the benefit of such reinsurance recoverable
 
62
<PAGE>
would be deferred and recognized over the recovery period of such reinsurance.
 
CONTINGENCIES SURROUNDING
RECOVERABILITY OF STATE DISABILITY
TRUST FUND RECEIVABLES
   Florida has created the Special Disability Trust Fund (the "Fund") which
assesses workers' compensation insurers to pay for what are commonly referred to
as "Second Injuries". Historic assessments have been inadequate to completely
fund obligations of the Fund. In late 1997, the Florida statute was amended so
that the Fund will not be liable for and will not reimburse employers or
carriers for Second Injuries occurring on or after January 1, 1998.
   Zenith has recorded its receivable from the fund for Second Injuries based on
specific claims and historical experience prior to January 1, 1998.
   At December 31, 1998 and 1997, the receivable from the Fund was $39,077,000
and $5,094,000, respectively, related to pre-January 1, 1998 claims. The
December 31, 1998 receivable includes $34,709,000 from the RISCORP Acquisition
of which $3,287,000 was collected in 1998.
NOTE 10
COMMON STOCK
   Under employee non-qualified stock option plans adopted by the Board of
Directors and Stockholders in 1978 and in 1996, options are granted to certain
officers and key employees for the purchase of Zenith's common stock at 100% of
the market price at the date of grant. The majority of options outstanding at
December 31, 1998 expire five years after the date of grant or three months
after termination of employment and vest one-fourth per year after the first
year. One grant for 1,000,000 shares is for a term of ten years and vests one-
fifth per year after the first year.
   Zenith has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation". Accordingly, no compensation cost has
been recognized for the stock option plans. Had compensation cost for Zenith's
stock option plans been determined based on the fair value at the grant date for
awards in 1998, 1997 and 1996 consistent with the provisions of SFAS No. 123,
Zenith's net income and net income per share would have been reduced to the
pro-forma amounts indicated as follows:
 
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
                                                                     1998                    1997                    1996
----------------------------------------------------------------------------------------------------------------------------------
                                                                           PRO-                    Pro-                    Pro-
(Dollars in thousands, except per share data)               AS REPORTED    FORMA    As Reported    forma    As Reported    forma
<S>                                                         <C>          <C>        <C>          <C>        <C>          <C>
----------------------------------------------------------------------------------------------------------------------------------
Net income                                                   $  19,100   $  17,703   $  28,100   $  26,583   $  37,600   $  36,647
Net income per common share -- basic                              1.12        1.04        1.59        1.50        2.14        2.08
Net income per common share -- diluted                            1.11        1.03        1.57        1.49        2.12        2.06
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
 
1996 earnings per share data have been restated in accordance with SFAS No. 128.
 
   The pro-forma effect on net income for 1998, 1997 and 1996 is not
representative of the pro-forma effect on net income in future years because the
presented disclosure does not take into consideration pro-forma compensation
expense related to grants made prior to 1995.
   The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions:
 
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
                                                                      1997        1996
                                                     1998 GRANTS     Grants      Grants
-----------------------------------------------------------------------------------------
<S>                                                 <C>            <C>         <C>
Risk-free interest rates                            4.52% - 5.66%      5.70%       6.50%
Dividend yields                                             3.75%      4.10%       4.20%
Volatility factors                                         19.83%     16.94%      27.40%
Weighted average expected life
    Five-year term options                               4.5 YRS.     5 yrs.      4 yrs.
    Ten-year term options                                      --         --     10 yrs.
Weighted average fair value per share                       $4.40      $4.07       $6.16
-----------------------------------------------------------------------------------------
</TABLE>
 
                                    CALFARM
                                   THEZENITH                                  63
<PAGE>
   Additional information with respect to stock options is as follows:
 
<TABLE>
<CAPTION>
-------------------------------------------------------------------
                                                            WEIGHTED
                                                    NUMBER  AVERAGE
                                                      OF    EXERCISE
(Options in thousands)                              SHARES   PRICE
-------------------------------------------------------------------
<S>                                                 <C>     <C>
Outstanding at December 31, 1995                    1,134   $21.94
Granted                                             1,422    24.51
Exercised                                             136    18.90
Expired or cancelled                                   72    22.56
-------------------------------------------------------------------
Outstanding at December 31, 1996                    2,348    23.65
Granted                                               590    26.95
Exercised                                             234    21.12
Expired or cancelled                                   74    25.31
-------------------------------------------------------------------
Outstanding at December 31, 1997                    2,630    24.58
GRANTED                                               460    26.74
EXERCISED                                             289    22.56
EXPIRED OR CANCELLED                                  268    26.43
-------------------------------------------------------------------
OUTSTANDING AT DECEMBER 31, 1998                    2,533   $25.00
-------------------------------------------------------------------
</TABLE>
 
   Options exercisable at December 31, 1998, 1997, and 1996 were 877,000,
737,000 and 474,000, respectively.
   Certain information on outstanding options is as follows:
 
<TABLE>
<CAPTION>
-------------------------------------------------------------------
(Options in                       WEIGHTED
thousands)                         AVERAGE      OUTSTANDING OPTIONS
RANGE OF           NUMBER      REMAINING LIFE    WEIGHTED AVERAGE
EXERCISE PRICE   OUTSTANDING      IN YEARS        EXERCISE PRICE
-------------------------------------------------------------------
<S>             <C>            <C>              <C>
    $23.63            1,000             7.2          $   23.63
   $20.94 -
    $28.34            1,533             1.8              25.90
-------------------------------------------------------------------
</TABLE>
 
   Certain information on exercisable options is as follows:
 
<TABLE>
<CAPTION>
------------------------------------------------
(Options in                       EXERCISABLE
thousands)                     OPTIONS WEIGHTED
RANGE OF            NUMBER     AVERAGE EXERCISE
EXERCISE PRICES   EXERCISABLE        PRICE
------------------------------------------------
<S>               <C>          <C>
     $23.63              400       $   23.63
$20.94 - $28.34          477           24.89
------------------------------------------------
</TABLE>
 
   At December 31, 1998, Zenith had authority from its Board of Directors to
repurchase up to 1,125,000 of Zenith's common shares at prevailing market
prices.
 
NOTE 11
DIVIDEND RESTRICTIONS
   State insurance regulations limit the maximum dividends that may be paid to
Zenith by its insurance subsidiary during any 12-month period without prior
regulatory approval. Stockholder's equity of Zenith's insurance subsidiaries, in
accordance with generally accepted accounting principles, amounted to
$448,765,000 as of December 31, 1998, of which $32,974,000 can be paid in 1999
to Zenith in dividends without prior approval.
 
NOTE 12
STATUTORY FINANCIAL DATA
   Capital stock and surplus and net income of Zenith's insurance subsidiaries
on a statutory basis as reported, except for 1998, to regulatory authorities,
were as follows:
 
<TABLE>
<CAPTION>
------------------------------------------------------
(Dollars in
thousands)
YEAR ENDED              1998
DECEMBER 31,         (ESTIMATED)    1997       1996
------------------------------------------------------
<S>                  <C>          <C>        <C>
Capital stock and
  surplus             $ 350,000   $ 279,993  $ 265,341
Net income               22,100      31,820     33,384
------------------------------------------------------
</TABLE>
 
   Capital stock and surplus and net income for 1998, previously filed with
regulatory authorities will be restated to incorporate the determination of the
RISCORP purchase price included in the above estimate.
   The insurance business is subject to state-by-state regulation and
legislation focused on solvency, pricing, market conduct, claims practices,
underwriting, accounting, investment criteria and other areas. Such regulation
and legislation is constantly changing and compliance is essential and is an
inherent risk of the business.
 
64
<PAGE>
NOTE 13
UNAUDITED QUARTERLY FINANCIAL DATA
 
<TABLE>
<CAPTION>
----------------------------------------------------------------------
                                    1998 PERIOD ENDED
(DOLLARS IN         --------------------------------------------------
THOUSANDS,                          JUNE       SEPTEMBER
EXCEPT PER SHARE       MARCH         30           30        DECEMBER
DATA)                   31       (RESTATED)   (RESTATED)       31
----------------------------------------------------------------------
<S>                 <C>          <C>          <C>          <C>
PREMIUMS EARNED      $ 118,784    $ 137,554    $ 136,151    $ 137,366
NET INVESTMENT
  INCOME                12,343       13,583       14,198       13,469
REALIZED GAINS
  ON INVESTMENTS         2,420        3,754        2,164        3,264
REAL ESTATE SALES       11,748        8,684        8,398        8,907
SERVICE FEE INCOME                    1,392        1,206        1,394
NET INCOME               7,100        7,300        3,400        1,300
NET INCOME PER
  COMMON SHARE --
  BASIC                   0.42         0.43         0.20         0.08
NET INCOME PER
  COMMON SHARE --
  DILUTED                 0.42         0.42         0.20         0.08
</TABLE>
 
<TABLE>
<CAPTION>
------------------------------------------------------------------------
    (Dollars in                       1997 Period Ended
     thousands,       --------------------------------------------------
  except per share       March        June       September    December
       data)              31           30           30           31
------------------------------------------------------------------------
<S>                   <C>          <C>          <C>          <C>
Premiums earned        $ 122,363    $ 125,831    $ 120,475    $ 120,052
Net investment
  income                  12,448       13,406       13,272       13,206
Realized gains
  on investments           1,876        1,996        1,861        8,275
Real estate sales          9,963       11,174       11,480       12,802
Net income                 7,100        7,900        8,000        5,100
Net income per
  common share --
  basic                     0.40         0.45         0.45         0.29
Net income per
  common share --
  diluted                   0.40         0.44         0.45         0.28
------------------------------------------------------------------------
</TABLE>
 
--The second and third quarters of 1998 have been restated to reflect the
determination of the final RISCORP purchase price which changed from that
originally used to record the acquisition in the second quarter (see Note 15).
As a result of this restatement, the previously reported net income for the
second and third quarters of 1998 decreased by $0.3 million, or $0.02 per share,
and $0.1 million, or $.00 per share, respectively, primarily due to additional
interest on the balance of the purchase price and a reduction in the
amortization of intangible assets.
 
--The first three quarters of 1997 earnings per share have been restated in
accordance with SFAS No. 128.
 
--The fourth quarter of 1998 net income includes catastrophe losses of $1.6
million and underwriting losses of $1.5 million in the group health business.
 
--The fourth quarter of 1997 net income reflects a $7.8 million loss and expense
reserve strengthening for prior accident years.
 
NOTE 14
LOSS AND LOSS ADJUSTMENT
EXPENSE RESERVES
   The following table represents a reconciliation of changes in liabilities for
unpaid property-casualty loss and loss adjustment expenses for the three years
ended December 31, 1998.
 
<TABLE>
<CAPTION>
--------------------------------------------------------------
(Dollars in thousands)           1998       1997       1996
--------------------------------------------------------------
<S>                            <C>        <C>        <C>
Beginning of year, net of
 reinsurance recoverable        $525,601   $526,427   $463,123
Acquisition of RISCORP as of
 April 1, 1998                   242,760
Incurred claims:
Current year                     394,257    348,514    318,509
Prior years                      (11,367)      (349)    (3,809)
--------------------------------------------------------------
Total incurred claims            382,890    348,165    314,700
--------------------------------------------------------------
Payments:
Current year                    (176,678)  (138,393)  (131,061)
Prior years                     (262,361)  (209,346)  (185,764)
--------------------------------------------------------------
Total payments                  (439,039)  (347,739)  (316,825)
--------------------------------------------------------------
End of year, net of
 reinsurance                     712,212    526,853    460,998
Reinsurance recoverable          288,963     87,665     56,390
AGC-SIF December 31, 1996
 balances acquired:
  Reserves, net                                         65,429
  Recoverable from reinsurers
    and state trust funds                               37,261
  Change in net reserves and
    recoverables from
    reinsurers and state
    trust funds                   (3,528)    (1,252)
--------------------------------------------------------------
End of year                     $997,647   $613,266   $620,078
--------------------------------------------------------------
</TABLE>
 
Statutory reserves differ from GAAP by the amount of the deposit receivable from
Reliance, which is treated as reinsurance recoverable for statutory purposes.
 
   Subsequent development of AGC-SIF net reserves acquired at December 31, 1996
is included in the Member distribution formula under the terms of the
acquisition for three years. (See Note 15).
 
                                    CALFARM
                                   THEZENITH                                  65
<PAGE>
NOTE 15
ACQUISITIONS
ACQUISITION OF RISCORP
   On April 1, 1998, pursuant to an Asset Purchase Agreement dated June 17, 1997
(as amended from time to time, the "Asset Purchase Agreement") between Zenith
Insurance and RISCORP, Zenith Insurance acquired substantially all of the assets
and certain liabilities of RISCORP related to RISCORP's workers' compensation
business (the "RISCORP Acquisition"). At the closing, Zenith Insurance paid $35
million in cash, of which $10 million was paid into an escrow account, and
assumed and repaid $15 million of indebtedness of RISCORP, Inc. The final
purchase price, which was subject to a three-step determination process, is the
difference between the GAAP book value of assets purchased and the GAAP book
value of the liabilities assumed by Zenith Insurance as of April 1, 1998.
   As the first step of the three-step process to determine the final purchase
price, on June 9, 1998, RISCORP provided Zenith Insurance with an audited
"Proposed Business Balance Sheet" indicating that RISCORP's determination of the
final purchase price would be approximately $141 million. As the second step of
this process, on July 9, 1998, Zenith Insurance provided RISCORP with proposed
adjustments to the Proposed Business Balance Sheet, which adjustments were
prepared with assistance from Zenith Insurance's external accounting and
actuarial consultants. These proposed adjustments resulted in large part from
differences in the estimation of loss and loss adjustment expense reserves,
primarily related to differences in actuarial methodology and assumptions,
including anticipated loss development. Such adjustments indicated that the
value of the liabilities assumed by Zenith Insurance exceeded the value of the
assets transferred to Zenith Insurance by as much as $71 million, and that the
final purchase price would be no greater than the $35 million already paid by
Zenith Insurance at closing. As the final step of the price determination
process, RISCORP and Zenith Insurance submitted all items in dispute concerning
the Proposed Business Balance Sheet to a nationally recognized independent
accounting firm which served as the Neutral Auditor and Neutral Actuary to
resolve all such disputes.
   On March 19, 1999, Zenith received the report of the Neutral Auditor and
Neutral Actuary which indicated that the value of the assets transferred to
Zenith Insurance exceeded the value of the liabilities assumed by Zenith
Insurance by $92,336,000 and that Zenith Insurance owed an additional
$57,336,000 above the $35,000,000 already paid to RISCORP. On March 26, 1999,
after deducting $6,765,000 for the value of assets not transferred to Zenith
Insurance by RISCORP, Zenith Insurance paid $53,689,000 to RISCORP including
interest in the amount of $3,118,000 computed from April 1, 1998. Of this
amount, $50,853,000 was paid directly to RISCORP and $2,836,000 was paid into an
escrow account. The escrow account has a balance of $12,836,000 and is available
to satisfy RISCORP's indemnification obligations to Zenith under the Asset
Purchase Agreement. Although the determination of "Final Purchase Price" by the
Neutral Auditor and Neutral Actuary is to be final, binding, and conclusive
under the Asset Purchase Agreement, it is uncertain whether RISCORP will contest
the determination.
   The RISCORP Acquisition was accounted for as a purchase by Zenith Insurance
and the assets acquired, liabilities assumed and the results of operations from
RISCORP at April 1, 1998 are included in Zenith's consolidated financial
statements as of and for the year ended December 31, 1998.
   The excess of the purchase price, including acquisition expenses, over the
estimated fair value of net assets acquired is $19,851,000, which is net of a
deferred tax asset of $10,228,000, and is being amortized over 25 years.
Amortization expense from April 1, 1998 through December 31, 1998 was $595,000.
   Zenith Insurance has provided notice to RISCORP of certain breaches of
representations, warranties and covenants made by RISCORP in the Asset Purchase
Agreement. These breaches may result in recovery by Zenith Insurance of a
portion of the purchase price paid by Zenith Insurance.
   On January 11, 1999, Zenith Insurance served RISCORP with a complaint filed
in the United States District Court in the Southern District of New York. The
complaint against
 
66
<PAGE>
RISCORP asserts various claims arising from the RISCORP Acquisition, including
claims seeking recovery of assets that were not transferred to Zenith Insurance
at the closing, as well as damages for breaches of representations, warranties,
and covenants in the Asset Purchase Agreement. On January 22, 1999, RISCORP
served Zenith Insurance with a complaint in an action that RISCORP had filed
against Zenith Insurance in the United States District Court in the Middle
District of Florida. In that action, RISCORP is seeking damages based on the
alleged failure of Zenith Insurance to comply with certain indemnification
provisions of the Asset Purchase Agreement, as well as damages relating to the
allegedly improper acquisition of certain assets. Zenith is unable to predict
the outcome of these litigations.
   The following table summarizes the estimated fair value of assets acquired
and liabilities assumed from RISCORP at April 1, 1998.
 
<TABLE>
<CAPTION>
---------------------------------------------------------
                                               APRIL 1,
(Dollars in thousands)                           1998
---------------------------------------------------------
<S>                                           <C>
Assets:
Invested assets*                               $ 190,460
Cash                                              29,309
Premiums receivable                               86,575
Receivable from reinsurers and state trust
  funds                                          288,483
Intangible assets                                  7,707
Other assets                                      46,962
---------------------------------------------------------
  Total assets                                   649,496
---------------------------------------------------------
Liabilities:
Unpaid loss and loss adjustment expense          482,518
Unearned premium reserve                          43,177
Other liabilities                                 31,465
---------------------------------------------------------
  Total liabilities                              557,160
---------------------------------------------------------
Purchase price                                 $  92,336
---------------------------------------------------------
*primarily U.S. Government issues
</TABLE>
 
   Included in intangible assets is $1,694,000 of costs associated with
termination of employees from the former RISCORP operations.
   Pro forma total revenues for Zenith (after giving effect to the RISCORP
Acquisition as if it had been consummated at the beginning of the respective
periods) were $669,155,000 and $808,339,000, respectively, for years ended
December 31, 1998 and 1997. Pro forma net income was $11,100,000 and
$37,200,000, respectively, for years ended December 31, 1998 and 1997. Net
income per common share was $0.65 (basic) and $0.65 (diluted) and $2.19 (basic)
and $2.17 (diluted), respectively, for years ended December 31, 1998 and 1997.
   Such pro forma data has been derived in part from the historical statement of
operations data of RISCORP, Inc. as reported by RISCORP, Inc. for the three
months ended March 31, 1998 and year ended December 31, 1997. Zenith
specifically disclaims any responsibility for the accuracy or completeness of
such historical RISCORP, Inc. data or such pro forma data to the extent it is
based on such historical data. Further, such pro forma data may not necessarily
be indicative of future total revenues or future net income or what they might
have been if the RISCORP Acquisition had been consummated at the beginning of
each of the respective periods.
 
ACQUISITION OF AGC-SIF
   On December 31, 1996, Zenith Insurance completed the acquisition of AGC-SIF.
Under the terms of the acquisition, Zenith Insurance acquired by merger all of
AGC-SIF's assets and assumed its liabilities, including the liabilities of the
insured policyholders (members) of AGC-SIF for future assessments. The
acquisition was accounted for as a purchase. Over a three-year period, Zenith
Insurance will distribute to AGC-SIF's members a minimum amount of $1,140,000 to
a maximum amount equal to AGC-SIF's adjusted GAAP "Net Worth," as defined in the
acquisition agreement, based on a formula and audited by an independent
certified public accounting firm. As of December 31, 1998 and 1997, the payable
to the AGC-SIF members was $1,495,000 and zero, respectively.
 
                                    CALFARM
                                   THEZENITH                                  67
<PAGE>
NOTE 16
EARNINGS AND DIVIDENDS PER SHARE
   The following table sets forth the computation of basic and diluted net
income per common share.
 
<TABLE>
<CAPTION>
--------------------------------------------------------------
(In thousands, except per
share data)                      1998       1997       1996
--------------------------------------------------------------
<S>                            <C>        <C>        <C>
(A) Net income                 $  19,100  $  28,100  $  37,600
--------------------------------------------------------------
(B) Weighted average
     outstanding shares
     during the period            17,035     17,716     17,594
 
  Additional common shares
     issuable under employee
     stock option plans using
     the treasury stock
method                               123        170        158
--------------------------------------------------------------
(C) Weighted average number
    of common shares
    outstanding assuming
    exercise of stock options     17,158     17,886     17,752
--------------------------------------------------------------
Net income per common share:
(A)/(B) -- basic               $    1.12  $    1.59  $    2.14
(A)/(C) -- diluted                  1.11       1.57       2.12
--------------------------------------------------------------
Dividends per common share     $    1.00  $    1.00  $    1.00
--------------------------------------------------------------
</TABLE>
 
   Options to purchase 1,290,000 shares and 407,000 shares, respectively, of
common stock at an average price of $26.69 and $28.00, respectively, per share
were outstanding as of December 31, 1998 and 1997 but were not included in the
computation of diluted earnings per share because the options' exercise prices
were greater than the average market price of the common shares, and, therefore,
the effect would be anti-dilutive.
 
NOTE 17
SEGMENT INFORMATION
   Effective January 1, 1998, Zenith adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." The statement establishes
standards for disclosures by public companies about operating segments.
   Zenith classifies its business into six segments: Workers' Compensation,
Reinsurance, Other Property-Casualty, Real Estate Operations, Investment and
Parent. Segments are designated based on the types of products and services
provided and based on the risks associated with the products and services.
Workers' Compensation represents insurance coverage for the statutorily
prescribed benefits that employers are required to pay to their employees
injured in the course of employment. Reinsurance represents the book of assumed
reinsurance of accumulated losses from catastrophes and the reinsurance of large
property risks. Other Property-Casualty represents multiple product line direct
insurance other than workers' compensation, primarily in California. Real Estate
Operations develop land and primarily construct private residences in Las Vegas,
Nevada. Investment provides investment income and realized gains on investments,
primarily from investments in debt securities. Parent represents the holding
company operations of Zenith owning directly or indirectly all of the capital
stock of the property and casualty insurance and non-insurance companies.
   The accounting policies of the segments are the same as those described in
Note 1. Zenith evaluates insurance segment performance based on the combined
ratios and income or loss from operations before income taxes, and not including
investment income or realized gains or losses.
   The operating results of the Workers' Compensation segment include the
results of operations of RISCORP for the nine months ended December 31, 1998.
   Information as to the operations of the segments is set forth on page 70.
 
68
<PAGE>
NOTE 18
UNAUDITED COMMON STOCK MARKET PRICES
   The following table shows the high and low common stock prices during each
quarter for the past two years.
 
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------
                                                  1998                  1997
                                           ------------------    ------------------
                                            HIGH        LOW       High        Low
-----------------------------------------------------------------------------------
<S>                                        <C>        <C>        <C>        <C>
March 31                                    29 1/16    24 1/2     27 7/8     25 7/8
June 30                                     30 1/2     28         27 1/2     24 5/8
September 30                                28 1/2     23 9/16    28 5/8     26 5/16
December 31                                 25 7/8     22 7/8     28 3/4     25 7/16
-----------------------------------------------------------------------------------
</TABLE>
 
NOTE 19
SUBSEQUENT EVENT (UNAUDITED)
   Effective March 31, 1999, Zenith Insurance completed its sale of CalFarm
Insurance Company for $275,000,000 in cash, subject to post-closing adjustment
in certain circumstances, to Nationwide Mutual Insurance Company. CalFarm
contributed $221,814,000, $214,128,000 and $204,467,000 of premiums earned and
$4,410,000, $6,506,000 and $8,055,000 of net underwriting income before taxes in
1998, 1997 and 1996, respectively. The net change in Zenith's consolidated
invested assets as a result of the transaction is estimated to be a decrease of
approximately $15,000,000.
   The transaction will result in an estimated after tax gain of approximately
$100,000,000, or $5.84 per share.
 
                                    CALFARM
                                   THEZENITH                                  69
<PAGE>
Information as to the operations of the segments is set forth below:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------
                                                                   OTHER
                                   WORKERS'                      PROPERTY-   REAL ESTATE
(DOLLARS IN THOUSANDS)           COMPENSATION     REINSURANCE    CASUALTY    OPERATIONS   INVESTMENT    PARENT      TOTAL
---------------------------------------------------------------------------------------------------------------------------
                                                           FOR THE YEAR ENDED DECEMBER 31, 1998
<S>                             <C>              <C>            <C>          <C>          <C>          <C>        <C>
---------------------------------------------------------------------------------------------------------------------------
REVENUES:
PREMIUMS EARNED                    $ 278,660       $  29,150     $ 222,045                                        $ 529,855
NET INVESTMENT INCOME                                                                      $  53,593                 53,593
REALIZED GAINS ON INVESTMENTS                                                                 11,602                 11,602
REAL ESTATE SALES                                                             $  37,737                              37,737
SERVICE FEE INCOME                     3,992                                                                          3,992
---------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES                       282,652          29,150       222,045       37,737       65,195                636,779
---------------------------------------------------------------------------------------------------------------------------
SEGMENT (LOSS) INCOME, BEFORE
  TAXES                              (42,638)         10,268         4,410        1,363       65,195   $  (9,763)    28,835
COMBINED RATIOS                       115.3%           64.8%         98.0%                                           105.3%
INTEREST EXPENSE                                                                                          (5,928)    (5,928)
INCOME TAX BENEFIT (EXPENSE)          14,003          (3,322)       (1,426)        (495)     (21,747)      3,252     (9,735)
---------------------------------------------------------------------------------------------------------------------------
SEGMENT ASSETS                       554,650          20,484       102,667       66,098    1,064,325      10,502  1,818,726
---------------------------------------------------------------------------------------------------------------------------
 
<CAPTION>
                                                           For the Year Ended December 31, 1997
<S>                             <C>              <C>            <C>          <C>          <C>          <C>        <C>
---------------------------------------------------------------------------------------------------------------------------
Revenues:
Premiums earned                    $ 242,064       $  32,251     $ 214,406                                        $ 488,721
Net investment income                                                                      $  52,332                 52,332
Realized gains on investments                                                 $     545       13,463                 14,008
Real estate sales                                                                45,419                              45,419
---------------------------------------------------------------------------------------------------------------------------
Total revenues                       242,064          32,251       214,406       45,964       65,795                600,480
---------------------------------------------------------------------------------------------------------------------------
Segment (loss) income, before
  taxes                              (37,157)         14,189         6,509        1,678       65,795   $  (7,536)    43,478
Combined ratios                       115.3%           56.0%         96.9%                                           103.4%
Interest expense                                                                                          (3,980)    (3,980)
Income tax benefit (expense)          11,891          (4,541)       (2,083)        (599)     (22,709)      2,663    (15,378)
---------------------------------------------------------------------------------------------------------------------------
Segment assets                       164,236          20,591        98,628       53,593      902,000      13,108  1,252,156
---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
                                                           For the Year Ended December 31, 1996
<S>                             <C>              <C>            <C>          <C>          <C>          <C>        <C>
---------------------------------------------------------------------------------------------------------------------------
Revenues:
Premiums earned                    $ 210,916       $  37,162     $ 204,778                                        $ 452,856
Net investment income                                                                      $  51,154                 51,154
Realized gains on investments                                                                 10,807                 10,807
Real estate sales                                                             $  41,554                              41,554
---------------------------------------------------------------------------------------------------------------------------
Total revenues                       210,916          37,162       204,778       41,554       61,961                556,371
---------------------------------------------------------------------------------------------------------------------------
Segment (loss) income, before
  taxes                              (19,462)         12,479         8,076        1,909       61,961   $  (7,846)    57,117
Combined ratios                       109.2%           66.4%         96.1%                                            99.8%
Interest expense                                                                                          (4,877)    (4,877)
Income tax benefit (expense)          13,142          (8,426)       (5,453)        (658)     (20,867)      2,745    (19,517)
---------------------------------------------------------------------------------------------------------------------------
</TABLE>
 
70
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
             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, and
             stockholders' equity present fairly, in all material respects, the
             financial position of Zenith National Insurance Corp. and
             subsidiaries (the "Company") at December 31, 1998 and 1997, and the
             results of their operations and their cash flows for each of the
             three years in the period ended December 31, 1998, in conformity
             with generally accepted accounting principles. These financial
             statements are the responsibility of the Company's management; our
             responsibility is to express an opinion on these financial
             statements based on our audits. We conducted our audits of these
             statements in accordance with generally accepted auditing standards
             which require that we plan and perform the audit to obtain
             reasonable assurance about whether the financial statements are
             free of material misstatement. An audit includes examining, on a
             test basis, evidence supporting the amounts and disclosures in the
             financial statements, assessing the accounting principles used and
             significant estimates made by management, and evaluating the
             overall financial statement presentation. We believe that our
             audits provide a reasonable basis for the opinion expressed above.
 
                                                      PricewaterhouseCoopers LLP
             Los Angeles, California
             March 26, 1999
 
                                    CALFARM
                                   THEZENITH                                  71
<PAGE>
CORPORATE DIRECTORY
                    ZENITH NATIONAL INSURANCE CORP.
 
Directors
Also Directors of Zenith
Insurance Company
 
George E. Bello
Executive Vice President
and Controller of Reliance
Group Holdings, Inc.
 
Max M. Kampelman
Attorney, Of Counsel,
Fried, Frank, Harris,
Shriver & Jacobson
 
Robert J. Miller
Attorney, Senior Partner,
Jones Vargas
 
William S. Sessions
Attorney
Sessions & Sessions, L.C.,
Security Consultant
 
Harvey L. Silbert
Attorney, Of Counsel,
Loeb & Loeb LLP
 
Robert M. Steinberg
President and Chief
Operating Officer
of Reliance Group
Holdings, Inc.
 
Saul P. Steinberg
Chairman of the
Board and Chief
Executive Officer
of Reliance
Group Holdings, Inc.
 
Gerald Tsai, Jr.
Management of
Private Investments
 
Michael Wm. Zavis
Attorney
Katten, Muchin & Zavis
 
Stanley R. Zax
Chairman of the
Board and President
 
Officers
 
Stanley R. Zax
Chairman of the
Board and President
 
Fredricka Taubitz
Executive Vice President
& Chief Financial Officer
 
Westley M. Heyward
Senior Vice President
 
Michael W. Jacobson
Senior Vice President
 
James P. Ross
Senior Vice President
 
John J. Tickner
Senior Vice President
and Secretary
 
Hyman J. Lee, Jr.
Vice President
 
Transfer Agent-
Common Stock
ChaseMellon Shareholder Services, L.L.C.
Los Angeles, CA
www.chasemellon.com
 
Transfer Agent-
9% Senior Notes and
Redeemable Securities
(8.55% Capital Securities)
Norwest Bank
Minnesota, N.A.
Minneapolis, MN
 
Corporate
Headquarters
21255 Califa Street
Woodland Hills, CA
91367-5021
www.zenithnational.com
 
NYSE Trading Symbol
Common stock -- ZNT
 
Independent
Accountants
PricewaterhouseCoopers LLP
Los Angeles, CA
 
The Annual Report
on Form 10-K, for
the fiscal year ended
December 31, 1998
may be obtained
free of charge upon
written request to:
Chief Financial Officer
Zenith National
Insurance Corp.
21255 Califa Street
Woodland Hills, CA
91367-5021
 
72
<PAGE>
CORPORATE DIRECTORY
                    ZENITH INSURANCE COMPANY
 
Officers
 
Stanley R. Zax
Chairman of the
Board and President
 
Fredricka Taubitz
Executive Vice President &
Chief Financial Officer
 
Jack D. Miller
Executive Vice President,
President of Southeast Division
 
James P. Ross
Senior Vice President,
President of Workers'
Compensation Division
 
Stephen J. Albers
Senior Vice President
 
John V. D'Alusio
Senior Vice President
 
Gary J. Ferguson
Senior Vice President
 
Dan M. Hair
Senior Vice President
 
John C. Hasbrouck
Senior Vice President
 
Westley M. Heyward
Senior Vice President
 
Fred A. Hunt
Senior Vice President
 
Corey A. Ingber
Senior Vice President
 
Michael W. Jacobson
Senior Vice President
 
Edward G. Krisak
Senior Vice President
 
Robert E. Meyer
Senior Vice President
and Actuary
 
William J. Saake
Senior Vice President
 
Douglas L. Symes
Senior Vice President
 
John J. Tickner
Senior Vice President,
General Regulatory
Counsel and Secretary
 
Keith E. Trotman
Senior Vice President
 
Chris L. Uselton
Senior Vice President
 
Kenneth L. Wuelfing
Senior Vice President
 
Glen R. Zepnick
Senior Vice President
 
Bryan A. Anderson
Vice President
 
Norman H. Baker
Vice President
 
Jeffrey J. Beaudoin
Vice President
 
Steen Brydum
Vice President
 
Richard V. Caligiuri
Vice President
 
Suzanne M. Chapan
Vice President
 
Duane H. Chernow
Vice President
 
Ronald W. Crabtree
Vice President
 
Gerald D. Curtin
Vice President
 
Charles J. Davis
Vice President
 
Bradley C. Eastwood
Vice President
 
F. Stephen Fetchet
Vice President
 
Robert L. Hernandez
Vice President
 
Carolyn N. Hinson
Vice President
 
David G. Hoppen
Vice President
 
Mark M. Jansen
Vice President
 
Diane L. Kinney
Vice President
 
Hyman J. Lee, Jr.
Vice President
 
Jonathan W. Lindsay
Vice President
 
Andrew M. Lyman
Vice President
 
Linda K. Mangone
Vice President
 
Richard H. McMurry
Vice President
 
Colin S. Mitchell
Vice President
 
Doris M. Oberhardt
Vice President
 
David A. O'Connor
Vice President
 
William J. Owen
Vice President
 
Michael J. Paladino
Vice President
 
Angela Parmelee
Vice President
 
Stephen D. Petrula
Vice President
 
S. Robin Reeves
Vice President
 
Diane E. Schaefer
Vice President
 
Alan I. Steinhardt
Vice President
 
John A. Swift
Vice President
 
Jessica Ann Vasquez
Vice President
 
Paul M. Williams
Vice President
 
Philip S. Wilson
Vice President
 
Norman C. Winters
Vice President
 
Laura F. Yamanaka
Vice President
 
William M. Zachry
Vice President
 
                                    CALFARM
                                   THEZENITH                                  73
<PAGE>
CORPORATE DIRECTORY
                    THEZENITH MARKETING, UNDERWRITING AND CLAIMS OFFICES
 
Los Angeles, CA
Corporate Headquarters
21255 Califa Street
Woodland Hills, CA 91367
818/713-1000
www.thezenith.com
 
Pleasanton, CA
(San Francisco Bay Area)
4309 Hacienda Drive
Suite 200
Pleasanton, CA 94588
925/460-0600
 
Fresno, CA
575 E. Locust Avenue
Suite 101
Fresno, CA 93720
209/432-6660
 
San Diego, CA
1660 Hotel Circle Drive North
Suite 400
San Diego, CA 92108
619/299-6252
 
Austin, TX
1101 Capital of Texas
Hwy, South, Bldg. J
Austin, TX 78746
512/306-1700
 
Dallas, TX
5430 LBJ Freeway
Suite 270
Dallas, TX 75240
972/701-5700
 
Conway, AR
824 Front Street
Conway, AR 72032
501/450-6884
 
Harrisburg, PA
4400 Deer Path Way
Suite 200
Harrisburg, PA 17110
717/221-7000
 
Springfield, IL
2105 West White Oaks Drive
Springfield, IL 62704
217/726-2900
 
Salt Lake City, UT
4 Triad Center
Suite 150
Salt Lake City, UT 84180
801/741-4900
 
Orlando, FL
3504 Lake Lynda Drive Ste 400
Orlando, FL 32817
407/380-9144
 
Sarasota, FL
South East Region
Sarasota Office
1390 Main St.
Sarasota, FL 34236-5642
800/226-2324
 
Charlotte, NC
5832 Farm Pond Lane
Suite 300
Charlotte, NC 28212
800/200-2667
 
Birmingham, AL
10 Iverness Center Parkway
Suite 220
Birmingham, AL 35242
800/355-0708
 
74
<PAGE>
CORPORATE DIRECTORY
                    CALFARM INSURANCE COMPANY
 
Officers
 
Westley M. Heyward
President
and Chief
Executive Officer
 
Franklin V. Adams
Executive Vice President
 
Philip M. Joffe
Executive Vice President
and Chief
Operating Officer
 
Frank J. Kotarba
President,
Property & Casualty
Division
 
John P. O'Brien
Executive Vice President
 
James H. Townsend
Executive Vice President,
Health Division
 
Kari L. Van Gundy
Senior Vice President, Finance
and Treasurer
 
Michael W. Jacobson
Senior Vice President
 
Susan J. McGinness
Senior Vice President
 
Robert E. Meyer
Senior Vice President
 
Stanley K. Miyao
Senior Vice President
and Actuary
 
James P. Ross
Senior Vice President
 
Fredricka Taubitz
Senior Vice President
 
John J. Tickner
Senior Vice President,
General Regulatory
Counsel and Secretary
 
Keith E. Trotman
Senior Vice President
 
James R. Zuehl
Senior Vice President
 
Larry W. Brogan
Vice President
 
Thomas F. Carroll
Vice President
 
Suzanne M. Chapan
Vice President
 
Philip S. Cole
Vice President
 
Nancy J. Friedhoff
Vice President
 
Diane F. Harvell
Vice President
 
Walter P. Krause
Vice President
 
Hyman J. Lee, Jr.
Vice President
 
Donald C. Marshall
Vice President
 
Sara E. Martin
Vice President
 
Craig G. McIntosh
Vice President
 
Peter M. Occhialini
Vice President
 
Stephen D. Petrula
Vice President
 
Craig C. Thomson
Vice President
 
James J. Tiffany
Vice President
 
Paul M. Williams
Vice President
 
Headquarters
CalFarm Insurance Company
1601 Exposition Boulevard
Sacramento, CA 95815
916/924-4000
www.calfarm.com
 
Claims/Legal Offices
Fresno
Sacramento
Santa Ana
 
                                    CALFARM
                                   THEZENITH                                  75
<PAGE>
CORPORATE DIRECTORY
                    PERMA-BILT, A NEVADA CORPORATION
 
Officers
 
Daniel Schwartz
President
 
David Durant
Vice President
 
Craig A. Hardy
Vice President
 
Fred W. Lessman
Vice President
 
Ruth E. Ochoa
Vice President
Headquarters
7150 Pollock Drive
Suite 104
Las Vegas, NV 89119
702/896-9100
 
76