10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2009

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                to                

Commission file number 1-9627

ZENITH NATIONAL INSURANCE CORP.

Incorporated in Delaware	I.R.S. Employer Identification No.
21255 Califa Street, Woodland Hills, California	95-2702776
91367-5021
(818) 713-1000

Indicate by check mark whether the registrant: 1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and 2) has been subject to such filing requirements for the past 90 days.

Yes  x No  o

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

Yes  o No  o

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

Large accelerated filer	x	Accelerated filer	o
Non-accelerated filer (do not check
if a smaller reporting company)	o	Smaller reporting company	o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  o No  x

At October 15, 2009, there were 37,367,000 shares of Zenith National Insurance Corp. common stock outstanding.

Zenith National Insurance Corp. and Subsidiaries

Form 10-Q

For the Quarter Ended September 30, 2009

Table of Contents

		Page
Part I – Financial Information
Item 1.	Financial Statements (unaudited):
	Consolidated Balance Sheets – September 30, 2009 and December 31, 2008	3
	Consolidated Statements of Operations – Three and Nine Months Ended September 30, 2009 and 2008	4
	Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2009 and 2008	5
	Consolidated Statements of Stockholders’ Equity and Comprehensive Income - Nine Months Ended September 30, 2009 and 2008	7
	Notes to Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations	24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	44
Item 4.	Controls and Procedures	45
Part II – Other Information
Item 6.	Exhibits	46
Signatures		47

2

Part I – FINANCIAL INFORMATION

Item 1. Financial Statements

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

	September 30,		December 31,
(Dollars and shares in thousands)	2009		2008
Assets:
Investments:
Fixed maturity securities:
At fair value (amortized cost $1,427,505 in 2009 and $1,479,295 in 2008)	$	1,478,914	$	1,406,891
At amortized cost (fair value $211,128 in 2008)			203,349
Equity securities, at fair value (cost $28,450 in 2009 and $52,888 in 2008)	32,639		47,742
Short-term investments, at fair value (amortized cost $479,333 in 2009 and $241,452 in 2008)	479,352		241,715
Other investments	62,063		58,297
Total investments	2,052,968		1,957,994
Cash	15,981		10,478
Accrued investment income	21,346		23,147
Premiums receivable	10,619		14,815
Reinsurance recoverables	259,316		285,269
Deferred policy acquisition costs	7,285		7,274
Deferred tax asset	17,180		70,469
Income tax receivable	9,905		33,448
Goodwill	20,985		20,985
Other assets	93,194		102,143
Total assets	$	2,508,779	$	2,526,022
Liabilities:
Unpaid losses and loss adjustment expenses	$	1,214,571	$	1,274,586
Unearned premiums	46,112		45,226
Policyholders’ dividends accrued	25,644		37,253
Redeemable securities payable	58,362		58,357
Other liabilities	82,883		87,163
Total liabilities	1,427,572		1,502,585
Commitments and contingencies (see Note 11)
Stockholders’ equity:
Preferred stock, $1 par value, 1,000 shares authorized; none issued or outstanding in 2009 and 2008
Common stock, $1 par value, 100,000 shares authorized; issued 37,367 in 2009 and 45,019 in 2008; outstanding 37,367 in 2009 and 37,324 in 2008	37,367		45,019
Additional paid-in capital	359,861		472,312
Retained earnings	647,827		722,996
Accumulated other comprehensive income (loss)	36,152		(50,238		)
Treasury stock, at cost (7,695 shares in 2008) (see Note 7)			(166,652		)
Total stockholders’ equity	1,081,207		1,023,437
Total liabilities and stockholders’ equity	$	2,508,779	$	2,526,022

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

3

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(Dollars in thousands, except per share data)	2009			2008			2009			2008
Revenues:
Net premiums earned	$	115,702		$	152,962		$	350,308		$	466,362
Net investment income	20,541			22,873			68,108			68,405
Net realized gains (losses) on investments	20,645			(8,883		)	26,162			(6,695		)
Total revenues	156,888			166,952			444,578			528,072
Expenses:
Losses and loss adjustment expenses incurred	80,310			75,297			249,791			195,618
Underwriting and other operating expenses:
Policy acquisition costs	22,151			27,543			67,426			83,296
Underwriting and other costs	28,832			31,146			89,323			93,422
Policyholders’ dividends	(5,328		)	5,604			(1,514		)	17,641
Interest expense	1,284			1,284			3,852			3,870
Total expenses	127,249			140,874			408,878			393,847
Income before tax	29,639			26,078			35,700			134,225
Income tax expense	10,439			9,478			12,100			47,325
Net income	$	19,200		$	16,600		$	23,600		$	86,900
Net income per common share:
Basic	$	0.51		$	0.45		$	0.62		$	2.34
Diluted	0.51			0.44			0.62			2.32
Cash dividends declared per common share	$	0.50		$	0.50		$	1.50		$	1.50
Net realized gains (losses) on investments, before tax
Other-than-temporary impairment losses:
Total impairment losses on fixed maturity securities							$	(19,424	)
Non-credit portion of impairment losses on fixed maturity securities recognized in other comprehensive income							8,762
Other-than-temporary impairment losses on fixed maturity securities				$	(10,352	)	(10,662		)	$	(13,224	)
Other-than-temporary impairment losses on equity securities				(4,939		)	(8,418		)	(10,606		)
Other net realized gains	$	20,645		6,408			45,242			17,135
Net realized gains (losses) on investments, before tax	$	20,645		$	(8,883	)	$	26,162		$	(6,695	)

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

4

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Nine Months Ended September 30,
(Dollars in thousands)	2009			2008
Cash flows from operating activities:
Premiums collected	$	368,148		$	483,579
Investment income received	70,228			64,191
Losses and loss adjustment expenses paid	(285,586		)	(297,046		)
Underwriting and other operating expenses paid	(162,581		)	(188,040		)
Interest paid	(5,069		)	(5,107		)
Income taxes refunded (paid)	18,200			(56,694		)
Net cash provided by operating activities	3,340			883
Cash flows from investing activities:
Purchases of investments:
Fixed maturity securities available-for-sale	(794,566		)	(696,311		)
Equity securities available-for-sale	(27,613		)	(104,354		)
Other investments	(5,434		)	(37,190		)
Proceeds from maturities and redemptions of investments:
Fixed maturity securities held-to-maturity				20,997
Fixed maturity securities available-for-sale	73,121			70,508
Other investments	2,790			1,528
Proceeds from sales of investments:
Fixed maturity securities available-for-sale	950,850			719,552
Equity securities available-for-sale	44,449			105,131
Net increase in short-term investments	(180,326		)	(20,408		)
Capital expenditures and other	(4,424		)	(5,299		)
Net cash provided by investing activities	58,847			54,154
Cash flows from financing activities:
Cash dividends paid to common stockholders	(56,695		)	(56,420		)
Excess tax benefit on stock-based compensation	11			340
Net cash used in financing activities	(56,684		)	(56,080		)
Net increase (decrease) in cash	5,503			(1,043		)
Cash at beginning of period	10,478			6,933
Cash at end of period	$	15,981		$	5,890

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

5

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(UNAUDITED)

	Nine Months Ended September 30,
(Dollars in thousands)	2009			2008
Reconciliation of net income to net cash provided by operating activities:
Net income	$	23,600		$	86,900
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense	6,108			6,369
Net amortization (accretion)	244			(5,037		)
Net realized (gains) losses on investments	(26,162		)	6,695
Decrease (increase) in:
Accrued investment income	1,751			1,425
Premiums receivable	4,114			4,830
Reinsurance recoverables	25,938			46,524
Net income tax	30,300			(10,569		)
(Decrease) increase in:
Unpaid losses and loss adjustment expenses	(60,015		)	(147,574		)
Unearned premiums	886			(1,838		)
Policyholders’ dividends accrued	(11,609		)	8,139
Other	8,185			5,019
Net cash provided by operating activities	$	3,340		$	883

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

6

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

(UNAUDITED)

	Nine Months Ended September 30,
(Dollars in thousands, except per share data)	2009			2008
Preferred stock, $1 par value	None			None
Common stock, $1 par value:
Beginning of period	$	45,019		$	44,802
Treasury stock retirement (see Note 7)	(7,695		)
Restricted stock vested	43			78
Conversion of Convertible Senior Notes Payable				69
End of period	37,367			44,949
Additional paid-in capital:
Beginning of period	472,312			464,932
Treasury stock retirement (see Note 7)	(116,890		)
Recognition of stock-based compensation expense	4,446			4,504
Conversion of Convertible Senior Notes Payable				1,223
Excess tax (short-fall) benefit on stock-based compensation	(7		)	283
End of period	359,861			470,942
Retained earnings:
Beginning of period	722,996			718,175
Treasury stock retirement (see Note 7)	(42,067		)
Net income	23,600			86,900
Cash dividends declared to common stockholders	(56,702		)	(56,465		)
End of period	647,827			748,610
Accumulated other comprehensive (loss) income:
Beginning of period	(50,238		)	12,100
Net change in unrealized gains (losses) on available-for-sale investments,net of tax and reclassification adjustment	85,721			(65,394		)
Net change in other-than-temporary impairments for which the credit relatedportion was recognized in net realized gains, net of tax	669
End of period	36,152			(53,294		)
Treasury stock:
Beginning of period	(166,652		)	(166,652		)
Treasury stock retirement (see Note 7)	166,652
End of period				(166,652		)
Total stockholders’ equity	$	1,081,207		$	1,044,555
Stockholders’ equity per outstanding common share	$	28.93		$	28.04

	Nine Months Ended September 30,
(Dollars in thousands)	2009		2008
Comprehensive income:
Net income	$	23,600	$	86,900
Net change in unrealized gains (losses) on available-for-sale investments,net of tax and reclassification adjustment	85,721		(65,394		)
Net change in other-than-temporary impairments for which the creditrelated portion was recognized in net realized gains, net of tax	669
Comprehensive income	$	109,990	$	21,506

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

7

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

Note 1.  Basis of Presentation

Zenith National Insurance Corp. (“Zenith National”) is a holding company engaged, through its wholly-owned subsidiaries (primarily Zenith Insurance Company (“Zenith Insurance”)), in the workers’ compensation insurance business, nationally.  Unless otherwise indicated, all references to “Zenith,” “we,” “us,” “our,” the “Company” or similar terms refer to Zenith National together with its subsidiaries.  The accompanying unaudited Consolidated Financial Statements of Zenith National and subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information; with the instructions to Form 10-Q; and Article 10 of Regulation S-X of the Securities Exchange Act of 1934, as amended.  Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements.  In the opinion of management, all adjustments (including normal, recurring adjustments) necessary for a fair statement of our financial position and results of operations for the periods presented have been included.  The results of operations for an interim period are not necessarily indicative of the results for an entire year.  For further information, refer to the audited Financial Statements and Notes thereto included in the Zenith National Insurance Corp. Annual Report on Form 10-K for the year ended December 31, 2008.

We evaluated subsequent events through the date and time the Consolidated Financial Statements were issued on October 20, 2009.

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

Note 2.  Net Income and Dividends per Share

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

			Three Months EndedSeptember 30,				Nine Months EndedSeptember 30,
(Dollars and shares in thousands, except per share data)			2009		2008		2009		2008
Net income as reported			$	19,200	$	16,600	$	23,600	$	86,900
Net income allocated to unvested restricted stockshares (see below)			233				292
(A)	Net income allocated to common shares		$	18,967	$	16,600	$	23,308	$	86,900
(B)	Interest expense on the Convertible Senior NotesPayable, net of tax								$	11
(C)	Weighted average shares outstanding – basic		37,353		37,248		37,342		37,190
	Weighted average shares issued under the RestrictedStock Plan (see below)				176				174
	Weighted average shares issued in 2008 upon conversionof the Convertible Senior Notes Payable								23
(D)	Weighted average shares outstanding – diluted		37,353		37,424		37,342		37,387
Net income per common share:
(A)/(C)		Basic	$	0.51	$	0.45	$	0.62	$	2.34
((A)+(B))/(D)		Diluted	0.51		0.44		0.62		2.32
Cash dividends declared per common share			$	0.50	$	0.50	$	1.50	$	1.50

8

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

On January 1, 2009, we adopted the accounting guidance on “Participating Securities and the Two-Class Method,” which required that unvested restricted stock with a right to receive nonforfeitable dividends be included in the two-class method of computing earnings per share.  The weighted average shares outstanding and net income per common share for the three and nine months ended September 30, 2009 are presented in accordance with this guidance.  Prior period amounts were not restated due to immateriality.

Note 3.  Investments

At September 30, 2009, all of our investments in fixed maturity and equity securities and short-term investments were classified as available-for-sale and reported at fair value with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders’ equity, net of tax.

At December 31, 2008, in addition to our available-for-sale securities, our investments portfolio also included certain fixed maturity securities classified as held-to-maturity and reported at amortized cost.  We reclassified our entire held-to-maturity investment portfolio with an amortized cost of approximately $200 million at the date of transfer to available-for-sale during the first quarter 2009 because the unprecedented events in the financial markets resulted in market and economic risks that were not present at the time we elected to hold these securities to maturity.  We determined that we no longer had the positive intent to hold these securities to maturity because of these unusual events and substantial economic changes.  In March 2009, we sold all of our mortgage-backed securities issued by the Government National Mortgage Association, most of which were originally classified as held-to-maturity, resulting in a realized gain of $8.8 million before tax.

9

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

The cost or amortized cost, fair value and carrying value of available-for-sale investments at September 30, 2009 and held-to-maturity and available-for-sale investments at December 31, 2008 were as follows:

	Cost or Amortized		GrossUnrealized					Fair		Carrying
(Dollars in thousands)	Cost		Gains		(Losses)			Value		Value
September 30, 2009
Fixed maturity securities available-for-sale:
Corporate debt	$	1,215,754	$	53,633	$	(8,712	)	$	1,260,675	$	1,260,675
State and local government debt	118,188		6,389		(1		)	124,576		124,576
Mortgage-backed securities	9,732		368					10,100		10,100
Foreign government debt	2,670		27					2,697		2,697
Redeemable preferred stocks	26,875		241		(595		)	26,521		26,521
U.S. Government debt	54,286		59					54,345		54,345
Total fixed maturity securitiesavailable-for-sale	1,427,505		60,717		(9,308		)	1,478,914		1,478,914
Equity securities	28,450		4,233		(44		)	32,639		32,639
Short-term investments	479,333		247		(228		)	479,352		479,352
Total available-for-sale investments	$	1,935,288	$	65,197	$	(9,580	)	$	1,990,905	$	1,990,905

December 31, 2008
Fixed maturity securities held-to-maturity:
Mortgage-backed securities	$	175,737	$	7,285				$	183,022	$	175,737
State and local government debt	22,612		521		$	(43	)	23,090		22,612
Foreign government debt	5,000		16					5,016		5,000
Total fixed maturity securitiesheld-to-maturity	$	203,349	$	7,822	$	(43	)	$	211,128	$	203,349
Fixed maturity securities available-for sale:
Corporate debt	$	1,280,354	$	18,058	$	(90,480	)	$	1,207,932	$	1,207,932
State and local government debt	175,516		3,450		(3,214		)	175,752		175,752
Mortgage-backed securities	14,866		638					15,504		15,504
Redeemable preferred stocks	4,505				(892		)	3,613		3,613
U.S. Government debt	4,054		36					4,090		4,090
Total fixed maturity securities available-for-sale	1,479,295		22,182		(94,586		)	1,406,891		1,406,891
Equity securities	52,888		1,680		(6,826		)	47,742		47,742
Short-term investments	241,452		273		(10		)	241,715		241,715
Total available-for-sale investments	$	1,773,635	$	24,135	$	(101,422	)	$	1,696,348	$	1,696,348

Fixed maturity securities, including short-term investments, by contractual maturity were as follows at September 30, 2009:

(Dollars in thousands)	AmortizedCost		FairValue
Due in 1 year or less	$	606,242	$	608,072
Due after 1 year through 5 years	1,035,185		1,078,373
Due after 5 years through 10 years	233,008		239,357
Due after 10 years	32,403		32,464
Total	$	1,906,838	$	1,958,266

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

10

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

extent and duration of declines in fair values of investments below the amortized cost basis, the seniority and duration of the securities, historical and projected company financial performance, company-specific news and other developments, the outlook for industry sectors, credit ratings and macro-economic changes, including government policy initiatives.  For over seventeen years, we have consistently applied the presumption that an unrealized loss of 20% or more continuously for six months or more is other-than-temporary, in addition to issuer specific events.  The accounting guidance on “Recognition and Presentation of Other-Than-Temporary Impairments” that we adopted effective January 1, 2009 amended the determination of other-than-temporary impairments for debt securities, but not for equity securities.  For debt securities, the amount of an other-than-temporary impairment related to a credit loss or an impairment on a security that, at the balance sheet date, we intend to sell before recovery is recognized in earnings and reflected as a reduction in the cost basis of the security.  The amount of an other-than-temporary impairment on debt securities related to other factors is recorded consistent with changes in the fair value of all other available-for-sale securities as a component of stockholders’ equity in other comprehensive income or loss with no change to the cost basis of the security.  For equity securities, the amount of an other-than-temporary impairment due to the extent and duration that fair value is below cost, in addition to issuer specific events, is recognized in earnings and reflected as a reduction in the cost basis of the security.

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

11

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

There were no other-than-temporary impairments recorded during the three months ended September 30, 2009.  The following table presents other-than-temporary impairments for the nine months ended September 30, 2009 and shows the amounts recognized in earnings and the amounts recorded as a component of stockholders’ equity as of the date of impairment.  For the three and nine months ended September 30, 2008, we recognized other-than-temporary impairments in earnings before tax of $15.3 million and $23.8 million, respectively.

	Nine Months EndedSeptember 30, 2009
(Dollars in thousands)	Realized Losses Recognizedin Earnings		Unrealized Losses Recognizedas a Component ofStockholders’Equity
Fixed maturity securities:
With credit related losses	$	9,700	$	8,762
With intent to sell	962
Equity securities	8,418
Total other-than-temporary impairments, before tax	$	19,080	$	8,762
Total other-than-temporary impairments, after tax	$	12,402	$	5,695

We recognized in earnings the credit related impairments of $9.7 million before tax for two corporate debt securities based on estimated cash flows as of March 31, 2009.  We estimated the cash flows at 60% of par value for one of the debt securities and 90% of par value for the other debt security, and discounted the cash flows using the effective interest rate of 6.6% and 5.49% implicit in the two debt securities at the date of acquisition.

The $5.7 million unrealized loss after tax was not credit related and was recognized as a component of stockholders’ equity at March 31, 2009, the date of impairment. As of September 30, 2009, this non-credit related loss has fully recovered to a $0.7 million unrealized gain due to the appreciation in fair values and partial sales of the related securities.

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

(Dollars in thousands)
Beginning balance for securities owned as of December 31, 2008	$	0
Not previously recognized	9,700
Reduction for securities sold subsequent to impairment	(5,952		)
Ending balance for securities owned as of September 30, 2009	$	3,748
Beginning balance for securities owned as of June 30, 2009	7,096
Reduction for securities sold subsequent to impairment	(3,348		)
Ending balance for securities owned as of September 30, 2009	$	3,748

12

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

The following table presents the fair value of securities classified as available-for-sale with unrealized losses, aggregated by investment category and length of time the securities have been in a continuous unrealized loss position at September 30, 2009 and December 31, 2008:

(Dollars in thousands)	Fair Value		Unrealized Losses			Number of Issues
September 30, 2009
Less than 12 months:
Corporate debt	$	75,565	$	(1,254	)	14
Short-term investments	20,088		(228		)	2
State and local government debt	1,052		(1		)	1
Total less than 12 months	$	96,705	$	(1,483	)	17
Greater than 12 months:
Corporate debt	$	115,260	$	(7,458	)	16
Redeemable preferred stocks	3,910		(595		)	2
Equity securities	302		(44		)	1
Total greater than 12 months	$	119,472	$	(8,097	)	19
Total available-for-sale:
Corporate debt	$	190,825	$	(8,712	)	30
Redeemable preferred stocks	3,910		(595		)	2
Short-term investments	20,088		(228		)	2
State and local government debt	1,052		(1		)	1
Equity securities	302		(44		)	1
Total available-for-sale investments	$	216,177	$	(9,580	)	36

December 31, 2008
Less than 12 months:
Corporate debt	$	640,894	$	(57,606	)	120
Equity securities	16,163		(6,826		)	9
State and local government debt	67,330		(3,214		)	18
Redeemable preferred stocks	2,956		(644		)	1
Short-term investments	112,435		(10		)	1
Total less than 12 months	$	839,778	$	(68,300	)	149
Greater than 12 months:
Corporate debt	$	107,060	$	(32,874	)	13
Redeemable preferred stocks	657		(248		)	1
Total greater than 12 months	$	107,717	$	(33,122	)	14
Total available-for-sale:
Corporate debt	$	747,954	$	(90,480	)	133
Equity securities	16,163		(6,826		)	9
State and local government debt	67,330		(3,214		)	18
Redeemable preferred stocks	3,613		(892		)	2
Short-term investments	112,435		(10		)	1
Total available-for-sale investments	$	947,495	$	(101,422	)	163

13

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

The unprecedented events in the capital and credit markets have resulted in extreme volatility and disruption to the financial markets over the past twelve months.  The fair value of our available-for-sale investment portfolio improved from an unrealized loss before tax of $77.3 million at December 31, 2008 to an unrealized gain before tax of $55.6 million at September 30, 2009, an increase of $132.9 million.  The unrealized gain on our available-for-sale investment portfolio as of September 30, 2009 is net of unrealized losses on individual fixed maturity and equity securities.

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

	Three Months EndedSeptember 30,					Nine Months EndedSeptember 30,
(Dollars in thousands)	2009		2008			2009		2008
Change in unrealized gains (losses) on available-for-sale investments:
Fixed maturity securities, including short-term investments	$	45,341	$	(61,253	)	$	123,569	$	(86,036	)
Equity securities	111		(4,962		)	9,335		(14,571		)
Total change in unrealized gains (losses):
Before tax	$	45,452	$	(66,215	)	$	132,904	$	(100,607	)
After tax	29,546		(43,038		)	86,390		(65,394		)

We believe that our unrealized losses on individual fixed maturity and equity securities at September 30, 2009 are not material and are not indicative of impaired values.  We base this conclusion on our current understanding of the issuers of these securities. As of September 30, 2009, we have not made a decision to sell any of these securities with unrealized losses and we have adequate liquidity and will not be required to sell these securities before recovery of their cost basis. It is possible that we could recognize future impairments on some securities we owned at September 30, 2009 if future events, information and the passage of time cause us to determine that a decline in value is other-than-temporary.

Net realized gains (losses) on all of our investments were as follows:

	Three Months EndedSeptember 30,					Nine Months EndedSeptember 30,
(Dollars in thousands)	2009		2008			2009			2008
Fixed maturity securities, including short-term investments	$	19,031	$	2,493		$	41,215		$	5,462
Equity securities	648		3,620			815			10,971
Partnerships and limited liability companies	966		278			2,710			679
WorldCom settlement and other			17			502			23
Other-than-temporary impairment losses on fixed maturity securities			(10,352		)	(10,662		)	(13,224		)
Other-than-temporary impairment losses on equity securities			(4,939		)	(8,418		)	(10,606		)
Net realized gains (losses) on investments	$	20,645	$	(8,883	)	$	26,162		$	(6,695	)

For the three and nine months ended September 30, 2009 and 2008, the gross realized gains and the gross realized losses on sales of investments classified as available-for-sale were as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
(Dollars in thousands)	2009			2008			2009			2008
Gross realized gains	$	21,916		$	7,170		$	46,717		$	25,130
Gross realized losses	(2,237		)	(1,057		)	(4,687		)	(8,697		)

14

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

Net investment income before tax was as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in thousands)	2009		2008		2009		2008
Fixed maturity securities	$	20,367	$	21,445	$	68,356	$	62,550
Short-term investments	723		1,411		1,635		6,884
Equity securities	212		470		1,029		1,671
Other	1,189		1,075		2,015		2,046
Subtotal	22,491		24,401		73,035		73,151
Investment expenses	1,950		1,528		4,927		4,746
Net investment income	$	20,541	$	22,873	$	68,108	$	68,405

Note 4. Fair Value Measurements

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

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

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

·Level 1—Valuations based on unadjusted quoted market prices in active markets for identical securities.  The fair values of fixed maturity and equity securities and short-term investments included in the Level 1 category were based on quoted prices that are readily and regularly available in an active market.  Our Level 1 category includes publicly traded equity securities, highly liquid U.S. Government notes and treasury bills, highly liquid cash management funds, and short-term certificates of deposit.

·Level 2—Valuations based on observable inputs (other than Level 1 prices), such as quoted prices for similar assets at the measurement date; quoted prices in markets that are not active; or other inputs that are observable, either directly or indirectly.  The fair values of fixed maturity securities and short-term investments included in the Level 2 category were based on market values obtained from independent pricing services that were evaluated using pricing models that vary by asset class and incorporate available trade, bid and other

15

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

market information and price quotes from well-established independent broker-dealers.  The independent pricing services monitor market indicators, industry and economic events, and for broker-quoted only securities, obtain quotes from market makers or broker-dealers that they recognize to be market participants.  Our Level 2 category includes corporate bonds, municipal bonds, short-term commercial paper and redeemable preferred stocks.

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

The following table presents our available-for-sale investments measured at fair value on a recurring basis as of September 30, 2009 and December 31, 2008 classified by the valuation hierarchy discussed above:

	Fair Value Measurements
(Dollars in thousands)	Level 1		Level 2		Level 3		Total
September 30, 2009
Fixed maturity securities	$	54,345	$	1,415,052	$	9,517	$	1,478,914
Equity securities	1,660				30,979		32,639
Short-term investments	429,377		49,975				479,352
Total	$	485,382	$	1,465,027	$	40,496	$	1,990,905
December 31, 2008
Fixed maturity securities	$	19,594	$	1,377,866	$	9,431	$	1,406,891
Equity securities	19,394				28,348		47,742
Short-term investments	145,883		95,832				241,715
Total	$	184,871	$	1,473,698	$	37,779	$	1,696,348

16

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

The following table presents changes in our Level 3 fixed maturity and equity securities measured at fair value on a recurring basis for the three and nine months ended September 30, 2009 and 2008:

(Dollars in thousands)	Fixed Maturity Securities			EquitySecurities
Balance at June 30, 2009	$	14,494		$	31,855
Realized and unrealized gains included in:
Other comprehensive income (1)	(34		)	(876		)
Net income	57
Maturities	(5,000		)
Balance at September 30, 2009	$	9,517		$	30,979

Balance at December 31, 2008	$	9,431		$	28,348
Realized and unrealized gains included in:
Other comprehensive income (1)				2,631
Net income	86
Maturities	(5,000		)
Reclassification from held-to-maturity (see Note 3)	5,000
Balance at September 30, 2009	$	9,517		$	30,979

Balance at June 30, 2008	$		$	38,472
Change in unrealized gains included in othercomprehensive income (1)			(4,089		)
Purchases	9,404
Balance at September 30, 2008	$	9,404	$	34,383

Balance at December 31, 2007	$		$	38,350
Change in unrealized gains included in othercomprehensive income (1)			(3,967		)
Purchases	9,404
Balance at September 30, 2008	$	9,404	$	34,383

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

Note 5. Goodwill

We test goodwill for impairment annually as of December 31 and more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.  A reporting unit is an operating segment or a unit one level below the operating segment.  The impairment tests include a comparison of the carrying amount of goodwill to the present value of future cash flows of both our workers’ compensation segment and our Florida workers’ compensation business operation, a reporting unit.

We did not evaluate goodwill for impairment as of September 30, 2009, as no events occurred or circumstances changed that would have more likely than not reduced the fair value of a reporting unit below its carrying amount since December 31, 2008.  The carrying value of goodwill was $21.0 million as of September 30, 2009 and December 31, 2008.

17

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

Note 6.  Policyholders’ Dividends

Most of our workers’ compensation policies are non-participating; however, we issue certain policies in which the policyholder may participate in favorable claims experience through a dividend.  In addition, Florida statutes require payment of additional dividends to policyholders pursuant to a formula based on underwriting results.  An estimated provision for workers’ compensation policyholders’ dividends is accrued as the related premiums are earned.  At December 31, 2008, we accrued approximately $20 million for Florida dividends payable for prior accident years.  In the third quarter 2009 we reduced our estimated Florida policyholders’ dividends for prior accident years by $11.1 million based on our actual filing with the Florida Department of Insurance, which was partially offset by an increase of $3.7 million in our current estimated California policyholders’ dividends.

Note 7. Treasury Stock

On September 30, 2009, we cancelled and retired 7,695,000 shares of treasury stock which had been repurchased by the Company over the years for an aggregate repurchase price of $166.7 million.  Upon cancellation and retirement, these shares were returned to the status of authorized and unissued.  The excess of the repurchase price of the treasury stock over the par value was allocated between additional paid-in capital and retained earnings.  There was no impact on our consolidated stockholders’ equity as a result of the cancellation and retirement.

Note 8.  Segment Information

Our business is comprised of the following segments: workers’ compensation, reinsurance and investments.  Segments are designated based on the types of products and services provided.  Workers’ compensation represents insurance coverage for the statutorily prescribed benefits that employers are required to provide to their employees who may be injured in the course of employment.  Reinsurance principally consists of assumed reinsurance of property losses from worldwide catastrophes and large property risks.  In September 2005, we exited the assumed reinsurance business and ceased writing and renewing assumed reinsurance contracts with all contracts fully expired at the end of 2006; however, we will be paying assumed reinsurance claims for several years.  The results of the reinsurance segment will continue to be included in the results of continuing operations.  Income from the workers’ compensation and reinsurance segments is determined by deducting net losses and loss adjustment expenses incurred and underwriting and other operating expenses incurred from net premiums earned (this result is also known as underwriting income or loss).  Income from operations of the investments segment includes net investment income and net realized gains or losses on investments.  We do not allocate investment income to the results of other segments.  The losses from the parent include interest expense and the general operating expenses of Zenith National, a holding company, which owns, directly or indirectly, all of the capital stock of its insurance subsidiaries and other investment securities.

The combined ratio, expressed as a percentage, is a key measurement of profitability traditionally used in the property-casualty insurance business.  The combined ratio, also referred to as the “calendar year combined ratio,” is the sum of the losses and loss adjustment expense ratio and the underwriting and other operating expense ratio.  The losses and loss adjustment expense ratio is the percentage of net losses and loss adjustment expenses incurred to net premiums earned.  The underwriting and other operating expense ratio is the percentage of underwriting and other operating expenses to net premiums earned.

18

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

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

(Dollars in thousands)	Workers’Compensation			Reinsurance			Investments			Parent			Total
Three Months Ended September 30, 2009
Revenues:
Net premiums earned	$	115,666		$	36								$	115,702
Net investment income							$	20,541					20,541
Net realized gains on investments							20,645						20,645
Total revenues	115,666			36			41,186						156,888
Interest expense										$	(1,284	)	(1,284		)
(Loss) income before tax	(8,526		)	87			41,186			(3,108		)	29,639
Income tax (benefit) expense	(2,636		)	29			14,134			(1,088		)	10,439
Net (loss) income	$	(5,890	)	$	58		$	27,052		$	(2,020	)	$	19,200
Combined ratio	107.4		%	NM
Nine Months Ended September 30, 2009
Revenues:
Net premiums earned	$	350,380		$	(72	)							$	350,308
Net investment income							$	68,108					68,108
Net realized gains on investments							26,162						26,162
Total revenues	350,380			(72		)	94,270						444,578
Interest expense										$	(3,852	)	(3,852		)
(Loss) income before tax	(49,366		)	(42		)	94,270			(9,162		)	35,700
Income tax (benefit) expense	(16,175		)	(14		)	31,496			(3,207		)	12,100
Net (loss) income	$	(33,191	)	$	(28	)	$	62,774		$	(5,955	)	$	23,600
Combined ratio	114.1		%	NM
As of September 30, 2009
Total Assets	$	430,842		$	2,162		$	2,071,379		$	4,396		$	2,508,779
Three Months Ended September 30, 2008
Revenues:
Net premiums earned	$	152,731		$	231								$	152,962
Net investment income							$	22,873					22,873
Net realized losses on investments							(8,883		)				(8,883		)
Total revenues	152,731			231			13,990						166,952
Interest expense										$	(1,284	)	(1,284		)
Income (loss) before tax	15,268			(94		)	13,990			(3,086		)	26,078
Income tax expense (benefit)	6,304			(35		)	4,289			(1,080		)	9,478
Net income (loss)	$	8,964		$	(59	)	$	9,701		$	(2,006	)	$	16,600
Combined ratio	90.0		%	NM
Nine Months Ended September 30, 2008
Revenues:
Net premiums earned	$	465,324		$	1,038								$	466,362
Net investment income							$	68,405					68,405
Net realized losses on investments							(6,695		)				(6,695		)
Total revenues	465,324			1,038			61,710						528,072
Interest expense										$	(3,870	)	(3,870		)
Income (loss) before tax	81,767			(107		)	61,710			(9,145		)	134,225
Income tax expense (benefit)	30,819			(40		)	19,747			(3,201		)	47,325
Net income (loss)	$	50,948		$	(67	)	$	41,963		$	(5,944	)	$	86,900
Combined ratio	82.4		%	NM
As of September 30, 2008
Total Assets	$	500,238		$	9,296		$	2,083,974		$	2,585		$	2,596,093

NM = Not meaningful

19

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

Note 9.  Stock-Based Compensation Plan

Under a restricted stock plan approved by our stockholders (“Restricted Stock Plan”), non-employee Directors and key employees are awarded shares of Zenith National’s common stock with restricted ownership rights.  Other than for certain performance-based shares granted in September 2009, shares of restricted stock granted to employees vest 50% on the second anniversary of the grant date and 50% on the fourth anniversary of the grant date.  Shares granted to non-employee Directors vest on each of the first three anniversaries of the grant date in equal amounts.  The fair value of restricted stock awards is measured using the closing price of Zenith National’s common stock on the grant date and is recognized as an expense over the vesting period of the awards.  The tax savings resulting from tax deductions in excess of compensation expense (“excess tax benefits”) are reflected as a cash inflow from financing activities in the accompanying Consolidated Statements of Cash Flows.

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

Number of shares authorized for grants since plan inception in 2004	995,000
Number of shares restricted	(444,000	)
Number of shares vested	(349,000	)
Number of shares available for future grants at September 30, 2009	202,000

Changes in restricted stock during 2009 were as follows:

	Number of Shares		Weighted Average Grant Date Fair Value
Restricted shares at December 31, 2008	471,000		$	39.42
Granted	1,000		27.37
Vested	(11,000	)	42.29
Forfeited	(11,000	)	39.50
Restricted shares at March 31, 2009	450,000		39.33
Granted	23,000		22.48
Vested	(14,000	)	42.26
Forfeited	(1,000	)	42.55
Restricted shares at June 30, 2009	458,000		38.41
Granted	5,000		27.02
Vested	(18,000	)	42.82
Forfeited	(1,000	)	31.40
Restricted shares at September 30, 2009	444,000		38.12

Compensation expense recognized under the Restricted Stock Plan for the three months ended September 30, 2009 and 2008 was $0.9 million and $1.0 million after tax, respectively, and $2.9 million and $3.0 million after tax for the nine months ended September 30, 2009 and 2008, respectively.

Unrecognized compensation expense before tax under the Restricted Stock Plan was $6.4 million and $10.3 million at September 30, 2009 and December 31, 2008, respectively.  This amount will be recognized over the remaining vesting period of the restricted shares.

20

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

Note 10.  Income Tax

At September 30, 2009 and December 31, 2008, we had no material unrecognized tax benefits and no adjustments to liabilities or results of operations were required.

Tax years 2004 through 2008 are subject to examination by the state taxing authorities.  Tax years 2005 through 2007 are currently being examined by the Internal Revenue Service (“IRS”).  It is possible that the IRS audit may result in additional payments; however, it is too early in the process to make an estimate of the amount, if any.

Note 11.  Commitments and Contingencies

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

Note 12. Recent Accounting Guidance

Accounting guidance not yet effective:

In June 2009, the Financial Accounting Standards Board (“FASB”) issued guidance on “Accounting for Transfers of Financial Assets” that requires enhanced disclosures about transfers of financial assets and a company’s continuing involvement in transferred assets.  This guidance is effective for financial statements issued for fiscal years beginning after November 15, 2009.  We do not expect the adoption of this guidance to have any impact on our disclosures since we do not engage in transfers of financial assets.

In June 2009, the FASB issued guidance which 1) replaces the quantitative-based risks and rewards calculation for determining whether an enterprise is the primary beneficiary in a variable interest entity with an approach that is primarily qualitative, 2) requires ongoing assessments of whether an enterprise is the primary beneficiary of a variable interest entity, and 3) requires additional disclosures about an enterprise’s involvement in variable interest entities.  This guidance is effective for financial statements issued for fiscal years beginning after November 15, 2009.  We do not expect the adoption of this guidance to have a material impact, if any, on our consolidated financial condition or results of operations.

Accounting guidance adopted in 2009:

In April 2009, the FASB issued guidance on “Recognition and Presentation of Other-Than-Temporary Impairments.”  This guidance requires entities to separate an other-than-temporary impairment of a debt security into two components when there are credit related losses associated with the impaired debt security for which management asserts that it does not have the intent to sell the security and it is more likely than not that it will not be required to sell the security before recovery of its cost basis. 

21

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

The amount of the other-than-temporary impairment related to a credit loss is recognized in earnings and the amount of the other-than-temporary impairment related to other factors is recorded in other comprehensive income (loss).  This guidance was effective for periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009.  We elected to adopt this guidance in the first quarter 2009 and effective January 1, 2009.  There were no impairments previously recognized on debt securities we owned at December 31, 2008; therefore, there was no cumulative effect adjustment to retained earnings and other comprehensive loss as a result of adopting this guidance.

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

In April 2009, the FASB issued guidance on “Interim Disclosures about Fair Value of Financial Instruments.”  This guidance requires disclosures about fair value of financial instruments in interim and annual financial statements which is effective for periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009.  We elected to adopt this guidance in the first quarter 2009 and effective January 1, 2009, and have included required disclosures in the Notes to Consolidated Financial Statements.

In May 2009, the FASB issued guidance on “Subsequent Events.”  This guidance sets forth general standards of accounting for, and disclosure of, events that occur after the balance sheet date but before financial statements are issued or are available to be issued.  This guidance is effective for periods ending after June 15, 2009.  The adoption of this guidance did not have an impact on our consolidated financial condition or results of operations.

In June 2009, the FASB issued guidance on “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles” which established the FASB Accounting Standards Codification as the single source of authoritative accounting principles in the preparation of financial statements in conformity with GAAP.  This guidance also explicitly recognized rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under federal securities laws as authoritative GAAP for SEC registrants.  This guidance was effective for financial statements issued for periods ending after September 15, 2009.  The adoption of this guidance did not have an impact on our consolidated financial condition or results of operations.

22

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

We also adopted the following accounting guidance in the first quarter 2009, none of which had a material effect on our consolidated financial condition or results of operations:

·“Business Combinations;”

·“Noncontrolling Interests in Consolidated Financial Statements;”

·“Disclosures about Derivative Instruments and Hedging Activities;” and

·“Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities.”

23

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

Item 2.  Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations

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

The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements if accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those discussed.  Forward-looking statements include those related to the plans and objectives of management for future operations, future economic performance, or projections of revenues, income, earnings per share, capital expenditures, dividends, capital structure, or other financial items.  Statements containing words such as expect, anticipate, believe, estimate, likely or similar words that are used in this Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations, in other parts of this report or in other written or oral information conveyed by or on behalf of Zenith are intended to identify forward-looking statements.  The Company undertakes no obligation to update such forward-looking statements, which are subject to a number of risks and uncertainties that could cause actual results to differ materially from those projected.  These risks and uncertainties include, but are not limited to, the following: 1) volatility in the financial markets, including the duration of the recent crisis and effectiveness of governmental solutions; 2) economic recession; 3) competition; 4) decreased payroll levels of our customers; 5) medical cost trends; 6) regulatory restrictions on investments; 7) changes in state and federal legislation and regulation; 8) changes in interest rates causing fluctuations of investment income and fair values of investments; 9) changes in the frequency and severity of claims and catastrophes; 10) adequacy of loss reserves; 11) changing environment for controlling medical, legal and rehabilitation costs, as well as fraud and abuse; 12) losses associated with any terrorist attacks that impact our workers’ compensation business for amounts not covered by our reinsurance protection; 13) losses caused by nuclear, biological, chemical or radiological events whether or not there is any applicable reinsurance protection; and 14) other risks detailed herein and from time to time in our reports and filings with the Securities and Exchange Commission.

Overview

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

1.Payrolls for our insureds have declined which has resulted in reduced premiums.

2.Claim counts have declined, but not necessarily at the same rate as payroll declines.

3.Premium increases in California have been moderated to assist our customers during a weak economy.

4.Selection of customers is more complex as certain businesses are facing unprecedented challenges in sustaining their operations.

As the economy recovers, the timing of which is uncertain, we expect that jobs will be restored, resulting in growth in payroll.  We also expect an improved economy may be conducive to stronger premium rate levels and more opportunities to write business.

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ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

Revenues.  Our revenues are comprised of the net premiums earned primarily from our workers’ compensation segment, and net investment income and net realized gains (losses) from our investments segment.

Workers’ compensation net premiums earned decreased in both the three and nine months ended September 30, 2009 compared to the corresponding periods of 2008 as a result of: 1) fewer policies in-force due to competition in relation to our risk management practices; 2) increased unemployment and declining payrolls for many insureds due to the recession; and 3) net reductions in Florida premium rates year over year, offset in part by California premium rate increases.  Our risk-reward strategy emphasizes pricing and underwriting discipline to maintain profitability rather than focusing on revenue or market share.

Workers’ compensation segment.Underwriting loss before tax from our workers’ compensation segment in the three and nine months ended September 30, 2009 was $8.5 million and $49.4 million, respectively, compared to underwriting income before tax of $15.3 million and $81.8 million in the corresponding periods of 2008.  The decrease in underwriting results in the three and nine months ended September 30, 2009 compared to 2008 principally reflects the decline in premium revenue and no prior period loss reserve development recognized in 2009 compared to favorable development of $23.6 million and $61.8 million recognized in the three and nine months ended September 30, 2008, respectively.  Policyholders’ dividends for the nine months ended September 30, 2009 reflect an $11.1 million reduction in our estimated Florida policyholders’ dividends for prior accident years, partially offset by a $3.7 million increase in our current estimated California policyholders’ dividends.

The 2009 accident year loss ratio estimate, excluding loss adjustment expenses, is 50.6% compared to 43.0% for the full year 2008, but continues to be an excellent result in comparison to historical industry trends.  The higher expense ratio in 2009 compared to 2008 primarily reflects lower net premiums earned.

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

	Three Months EndedSeptember 30,					Nine Months EndedSeptember 30,
(Dollars in thousands)	2009		2008			2009		2008
Net investment income	$	20,541	$	22,873		$	68,108	$	68,405
Net realized gains (losses) on investments	20,645		(8,883		)	26,162		(6,695		)
Income before tax from investments segment	$	41,186	$	13,990		$	94,270	$	61,710

The average annual yields on the investment portfolio in the three and nine months ended September 30, 2009 and 2008 were as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2009		2008		2009		2008
Before tax (1)	4.3	%	4.6	%	4.8	%	4.4	%
After tax	2.8	%	3.0	%	3.1	%	2.9	%

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

There were no other-than-temporary impairments recorded during the three months ended September 30, 2009.  Net realized gains on investments before tax for the nine months ended

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ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

September 30, 2009 are net of other-than-temporary impairments of $19.1 million.  Net realized losses on investments before tax for the three and nine months ended September 30, 2008 include other-than-temporary impairments of $15.3 million and $23.8 million, respectively.

The fair value of our available-for-sale investment portfolio improved from an unrealized loss before tax of $77.3 million at December 31, 2008 to an unrealized gain before tax of $55.6 million at September 30, 2009, an increase of $132.9 million, or $2.32 per share.  Our investment portfolio reflects our philosophy of diversification and high quality assets with a focus on compounding interest over time.  In the short-term, investment income and the value of our investment portfolio will be affected by historically low U.S. Government interest rates, as well as the recent narrowing of corporate spreads in relation to market expectations about the Federal Reserve Board withdrawing excess liquidity.

At September 30, 2009 and December 31, 2008, $808.7 million and $416.8 million, respectively, of the investment portfolio was in fixed maturity securities of two years or less.  This represented 39% and 21%, respectively, of our investment portfolio.

Stockholders’ equity.  Stockholders’ equity per share was $28.93, $28.11, $26.82 and $27.42 at September 30, 2009, June 30, 2009, March 31, 2009 and December 31, 2008, respectively.  Stockholders’ equity per share before stockholders’ dividends increased by 11% from December 31, 2008 to September 30, 2009 primarily because of the increase in the fair value of our available-for-sale investment portfolio.  Annualized return on average equity in the nine months ended September 30, 2009 was 3.0% compared to 8.9% in the year ended December 31, 2008.

Results of Operations

Summary Results by Segment

The comparative components of net income for the three and nine months ended September 30, 2009 and 2008 are set forth in the following table.  These components of net income are consistent with the results of our business segments set forth in Note 8 to the Consolidated Financial Statements.

	Three Months Ended September 30,						Nine Months Ended September 30,
(Dollars in thousands)	2009			2008			2009			2008
Net investment income	$	20,541		$	22,873		$	68,108		$	68,405
Net realized gains (losses) on investments	20,645			(8,883		)	26,162			(6,695		)
Income from investments segment	41,186			13,990			94,270			61,710
(Loss) income from:
Workers’ compensation segment	(8,526		)	15,268			(49,366		)	81,767
Reinsurance segment	87			(94		)	(42		)	(107		)
Parent	(3,108		)	(3,086		)	(9,162		)	(9,145		)
Income before tax	29,639			26,078			35,700			134,225
Income tax expense	10,439			9,478			12,100			47,325
Net income	$	19,200		$	16,600		$	23,600		$	86,900

Workers’ Compensation Segment

Underwriting loss before tax from our workers’ compensation segment was $8.5 million and $49.4 million for the three and nine months ended September 30, 2009, respectively, compared to underwriting income before tax of $15.3 million and $81.8 million for the corresponding periods of 2008.

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ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

The key operating goal for our workers’ compensation segment is to achieve underwriting profitability and significantly out-perform the national workers’ compensation industry (“industry”).  Neither Zenith nor the industry is expected to achieve underwriting profitability in 2009.  Underwriting profitability is comprised of the loss ratio, which is a measure of how we manage risk over the long term, and the expense ratio.  In regards to our loss ratio, we expect to produce, and for a long period of time have produced, lower than average loss ratios compared to the industry.  However, because of our service strategy as a workers’ compensation specialist, our expense ratio may be higher compared to industry results.  During periods of declining premiums and policy counts such as in 2009, this high expense ratio can result in underwriting losses.  Although we are reducing costs as our business declines, we are maintaining and improving our ability to provide services to our customers and ensuring that we will be in a position to grow our business when the economy and market change.

Workers’ compensation calendar year combined ratios, along with a reconciliation to the accident year combined ratios for the three and nine months ended September 30, 2009 and 2008, were as follows:

	Calendar Year		Favorable Prior Period Development		Accident Year		Calendar Year		Favorable (Unfavorable) Prior Period Development		Accident Year
	2009						2008
Three Months Ended September 30,
Losses and loss adjustmentexpenses	69.5	%			69.5	%	49.1	%	15.5	%	64.6	%
Underwriting and otheroperating expenses	42.5				42.5		37.2				37.2
Policyholders’ dividends	(4.6	)	9.6	%	5.0		3.7		(1.6	)	2.1
Combined ratio	107.4	%	9.6	%	117.0	%	90.0	%	13.9	%	103.9	%
Nine Months Ended September 30,
Losses and loss adjustmentexpenses	71.3	%			71.3	%	41.9	%	13.3	%	55.2	%
Underwriting and otheroperating expenses	43.2				43.2		36.7				36.7
Policyholders’ dividends	(0.4	)	3.2	%	2.8		3.8		(1.6	)	2.2
Combined ratio	114.1	%	3.2	%	117.3	%	82.4	%	11.7	%	94.1	%

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

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ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

The following provides additional information related to the decrease in underwriting results and the increase in combined ratios in the three and nine months ended September 30, 2009 compared to the corresponding periods of 2008:

·Net premiums earned for the workers’ compensation segment were as follows:

	Three Months EndedSeptember 30,				Nine Months EndedSeptember 30,
(Dollars in thousands)	2009		2008		2009		2008
California	$	68,616	$	85,990	$	200,977	$	254,508
Outside California	47,050		66,741		149,403		210,816
Total net premiums earned	$	115,666	$	152,731	$	350,380	$	465,324

Workers’ compensation net premiums earned decreased approximately 25% in both the three and nine months ended September 30, 2009 compared to the corresponding periods of 2008 as a result of: 1) our risk-reward strategy, which emphasizes pricing and underwriting discipline to maintain profitability in a highly competitive environment, resulting in approximately 15% fewer policies in-force compared to September 30, 2008; 2) increased unemployment as well as declining payrolls for many of our insureds due to the recession; and 3) net reductions in Florida premium rates year over year, offset in part by California premium rate increases.

·Our actuaries perform a comprehensive review of our loss reserve estimates every quarter.  For the three and nine months ended September 30, 2009, we did not recognize any development of prior accident years’ loss reserve estimates compared to $23.6 million and $61.8 million of favorable development recognized in the corresponding periods of 2008.

·Our accident year estimated loss ratio, excluding loss adjustment expenses, recorded in the nine months ended September 30, 2009 increased to 50.6% compared to 38.9% estimated for the 2008 accident year in the corresponding period of 2008.  Our 2008 accident year loss ratio was increased in the third and fourth quarters 2008 to 43.0% for the full year as a result of premiums declining more than claim frequency combined with increasing medical costs in California.  Our 2009 accident year loss ratio is an excellent result in comparison to historical industry trends and current industry estimates, but is higher than 2008 primarily because of reduced premiums and increasing average cost of claims.

·Loss adjustment expenses consist of both costs directly related to individual claims (allocated) as well as primarily our internal costs associated with servicing and settling claims (unallocated).  Allocated loss adjustment expenses generally vary in proportion to losses.  Unallocated loss adjustment expenses are more fixed in nature and become a larger percentage of net premiums earned as premiums trend lower.  The overall trend of loss adjustment expenses, however, is toward lower expenses.

·Policy acquisition costs are generally variable to net premiums earned.  However, underwriting and other costs are also more fixed in nature and become a larger percentage of net premiums earned as premiums trend lower.

·We recognized a charge of $5.0 million before tax in the first quarter 2009 related to workforce and other operating cost reductions, offset by expense savings from these actions recognized in the second and third quarters 2009.  We anticipate annualized expense savings of approximately $10.0 million, or $6.5 million after tax.

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·At September 30, 2009, we reduced our estimated Florida policyholders’ dividends for prior accident years by $11.1 million based on our actual filing with the Florida Department of Insurance (“Florida DOI”), which was partially offset by an increase of $3.7 million in our current estimated California policyholders’ dividends.

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

	California					Outside California					Total
(Dollars in millions)	Premiums In-force		Policies In-force	Insured Payrolls		Premiums In-force		Policies In-force	Insured Payrolls		Premiums In-force		Policies In-force	Insured Payrolls
September 30, 2009	$	273.0	16,600	$	6,388.5	$	200.4	14,000	$	9,933.1	$	473.4	30,600	$	16,321.6
December 31, 2008	304.5		19,600	7,133.2		251.7		14,900	10,838.9		556.2		34,500	17,972.1
September 30, 2008	325.7		20,600	7,538.8		267.3		15,200	11,302.4		593.0		35,800	18,841.2
December 31, 2007	359.3		22,100	8,108.8		310.8		16,200	11,875.7		670.1		38,300	19,984.5

The table above reflects the following trends in our workers’ compensation business:

1)The reduction in premiums in-force reflects the impact of competition in relation to our risk management practices; increased unemployment and declining payrolls due to the recession; as well as net premium rate reductions in Florida year over year, offset in part by California premium rate increases;

2)The reduction in policies in-force also reflects the impact of competition in relation to our risk management practices; and

3)The reduction in insured payrolls is caused by the reduction in policies in-force (competition), as well as the impact of increased unemployment and declining payroll levels of our insureds.

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

In California, the state in which the largest volume of our workers’ compensation premiums is earned, the Workers’ Compensation Insurance Rating Bureau (“WCIRB”) recommends claims cost benchmarks (previously called advisory pure premium rates) to be used by companies in determining their premium rates.  The California Department of Insurance (“California DOI”) also adopts and publishes its own claims cost benchmark.  The benchmark rates cover expected loss costs, but do not contain an element to cover operating expenses or profit.  In September 2008, the WCIRB proposed a 16% increase in the January 1, 2009 claims cost benchmark and the California DOI adopted and published a claims cost benchmark increase of 5% for January 1, 2009.  In April 2009, the WCIRB proposed a 23.7% increase in the July 1, 2009 claims cost benchmark consisting of 16.9% for increased medical inflation and 5.8% for its estimates of the potential cost impacts of the two recent en banc decisions from the Workers’ Compensation Appeals Board discussed on page 35.  On July 8, 2009, the California DOI rejected the WCIRB’s recommendations and did not make any changes to its claims cost benchmark for July 1, 2009.  In August 2009, the WCIRB recommended a 22.8% increase in the January 1, 2010 claims cost benchmark.  The California DOI has not yet indicated what changes, if any, will be made to the advisory rate levels for January 1, 2010.

Notwithstanding the foregoing, we set our own California premium rates based upon our actuarial analysis of current and anticipated cost trends, including any modification to the workers’ compensation system, while maintaining our goal of achieving underwriting profits and out-performing the industry.  We reduced our premium rates from 2004 through 2007 as a result of favorable loss costs trends originating from the 2003 and 2004 legislative reforms.  Due to increasing claim costs in

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California, we increased our manual premium rates 4% effective January 1, 2009 and increased premium rates another 4% effective July 1, 2009.  We have not yet determined the amount of the change in our California manual premium rates for January 1, 2010, but we expect it will be in the vicinity of the most recent changes.

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

Policy Renewal Date	Manual Premium Rate Change		Average Renewal Charged Rate Change
July 1, 2003 — June 30, 2004	0.0	%	(3.0	)%
July 1, 2004 — June 30, 2005	(11.0	)	(14.0	)
July 1, 2005 — June 30, 2006	(24.0	)	(31.0	)
July 1, 2006 — June 30, 2007	(9.0	)	(16.0	)
July 1, 2007 — June 30, 2008	0.0		(9.0	)
July 1, 2008 — June 30, 2009	4.0		0.0
July 1, 2009	4.0		NA

NA = Not yet available

In Florida, the state in which the second largest volume of our workers’ compensation premiums is earned, premium rates for workers’ compensation insurance are set by the Florida DOI.  Manual premium rate change percentages in Florida are as follows:

Effective date of change	Manual Premium Rate Change
January 1, 2004	0.0	%
January 1, 2005	(4.0	)
January 1, 2006	(13.4	)
January 1, 2007	(12.5	)
January 1, 2008	(18.4	)
January 1, 2009	(18.6	)
April 1, 2009	6.4
July 1, 2009	(6.4	)
January 1, 2010	(6.8	)

The April 1, 2009 Florida premium rate increase related to the fourth quarter 2008 Florida Supreme Court decision in the Emma Murray vs. Mariner Health case, which was expected to increase claimants’ attorneys’ fees on open claims.  In the second quarter 2009, the Florida Legislature restored the limits on claimants’ attorneys’ fees going forward and as a result, the Florida DOI reversed the April 1, 2009 6.4% rate increase effective July 1, 2009, including rates on in-force policies issued on or after April 1, 2009.

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Reinsurance Segment

In September 2005, we exited the assumed reinsurance business and ceased writing and renewing assumed reinsurance contracts with all contracts fully expired at the end of 2006; however, we will be making payments on assumed reinsurance claims for several years.  For further information, refer to “Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2008.

Investments Segment

Investment income and realized gains and losses are discussed in the “Investments” section below.

Parent

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

	Three Months Ended September 30,				Nine Months Ended September 30,
(Dollars in thousands)	2009		2008		2009		2008
Interest expense	$	1,284	$	1,284	$	3,852	$	3,870
Parent expenses	1,824		1,802		5,310		5,275
Parent loss	$	3,108	$	3,086	$	9,162	$	9,145

Loss Reserves

Accounting for the workers’ compensation and reinsurance segments requires us to estimate the liability for the expected ultimate cost of unpaid losses and loss adjustment expenses (“loss reserves”) as of the balance sheet date.  Our loss reserves were as follows:

(Dollars in millions)	September 30, 2009		December 31, 2008
Workers’ compensation segment:
Unpaid losses and loss adjustment expenses	$	1,175	$	1,230
Less: Receivable from reinsurers for unpaid losses	243		269
Unpaid losses and loss adjustment expenses, net of reinsurance	$	932	$	961
Reinsurance segment:
Unpaid losses and loss adjustment expenses, gross and net of reinsurance receivable	$	40	$	45
Total:
Unpaid losses and loss adjustment expenses	$	1,215	$	1,275
Less: Receivable from reinsurers for unpaid losses	243		269
Unpaid losses and loss adjustment expenses, net of reinsurance	$	972	$	1,006

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

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reserves is reflected in our Consolidated Statements of Operations for the period in which the change is made.

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

At September 30, 2009 and December 31, 2008, IBNR and bulk reserves included in loss reserves, net of reinsurance recoverables, were as follows:

(Dollars in thousands)	September 30, 2009		December 31, 2008
Workers’ compensation segment	$	197,391	$	212,651
Reinsurance segment	11,496		10,276
Total IBNR & bulk reserves	$	208,887	$	222,927

We perform a comprehensive review of our loss reserves at the end of every quarter.  Estimating loss reserves is a complex process that involves a combination of actuarial techniques and management judgment.  Because we have a long history in the workers’ compensation business, particularly in California, we give weight to our own data as well as external information in determining our loss reserve estimates.

The loss reserve estimates recorded in the financial statements (“carried reserves”) at September 30, 2009 and December 31, 2008 are management’s best estimate of loss reserves, and reflect the actuarial point estimate.  We believe our loss reserve estimates as of September 30, 2009 are adequate; however, we cannot predict the amount or timing of future loss reserve development, whether favorable or unfavorable.

The 2009 accident year loss ratio estimate, excluding loss adjustment expenses, for the nine months ended September 30, 2009 is 50.6% compared to 43.0% for the full year 2008.  The increase in the 2009 accident year loss ratio is primarily caused by reduced premiums and increasing average cost of claims.

For the nine months ended September 30, 2009, we did not recognize any development of prior accident year loss reserves.  In comparison, for the nine months ended September 30, 2008, we recognized net favorable development of prior accident year workers’ compensation loss reserves of $61.8 million, representing 5.8% of our estimated workers’ compensation loss reserves, net of reinsurance, at December 31, 2007 and 13.3% of our workers’ compensation net premiums earned in the nine months ended September 30, 2008.

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

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Principal Uncertainties.  In our workers’ compensation business the large majority of claims are reported to us promptly and therefore, as of the balance sheet date, the number of IBNR claims is relatively insignificant.  The greater part of the challenge in estimating our loss reserves is associated with estimating ultimate loss costs across a population of claims for each accident year.  The principal uncertainty in our workers’ compensation loss reserve estimates at this time is the trend of increasing claim costs, particularly medical.  In estimating loss reserves, our actuaries consider medical costs by evaluating longer term trends.  During the accident years just prior to the legislative reforms (1998 - 2002), we experienced double-digit medical cost increases.  During 2003 and 2004, reforms enacted in Florida and California provided both immediate medical cost reductions and more control over future medical costs.  These reforms included reductions in the medical fee schedules, provision for medical networks and establishment of medical treatment guidelines.  Our loss estimates for these two years reflect an average 6% per year decrease in medical costs.  For the accident years following the reforms we are experiencing a return to increasing medical costs and our loss reserve estimates reflect an average 8% per year increase in medical costs for 2005 through 2009 (medical costs represent approximately 65% of total costs).  Our premium rates are established based on actuarial and business judgments regarding claim cost trends, principally medical.  During the reform years, we reduced our premium rates based on the expected decrease in claim costs combined with the other benefits of the reforms.  Due to increasing claim costs including medical, we increased our California premium rates 4% effective January 1, 2009 and an additional 4% effective July 1, 2009.  Additional uncertainties considered in estimating ultimate loss costs include the ultimate number of expensive claims and the length of time required to settle long-term, expensive claims.  Expensive claims are those involving permanent partial disability (“PPD”) of an injured worker and are paid over several years.  The ultimate costs of expensive claims are difficult to estimate because of such factors as the on-going and possibly increasing need for medical care, length of disability and life expectancy.  Prior to the reforms, these expensive claims were approximately 20% of all claims in California, but contributed 90% of the total costs.  In the years immediately following the reforms, these claims were reduced to about 14% of all claims; however, in recent accident years we are experiencing modest annual increases in the proportion of expensive claims to total claims.

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

Role of Management.  Management reviews the actuarial point estimate each quarter, as well as all relevant information regarding medical cost trends, claim payment trends and our settlement practices, and any judicial and administrative court decisions and legislative changes.  Management has established a loss reserve estimate in the financial statements that reflects the actuarial point estimate as its best estimate for loss reserves at September 30, 2009 and December 31, 2008.

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Recent Trends and New Information.  The recent trends and the new information received during the third quarter 2009 are discussed below.

We believe it is appropriate to provide a comparison of our California results to the California industry results because the amount of business we write is meaningful in relation to the California workers’ compensation industry and we earn approximately 60% of our premiums from our California business.  During the third quarter, the WCIRB made available its current estimate of California workers’ compensation loss experience based on data through June 30, 2009 as follows:

·An ultimate loss ratio of 70% for accident year 2008 and 56% for accident year 2007.  These ratios compare to our ultimate California loss ratios of 46% and 38%, respectively, for those same years.  We have an estimated ultimate California loss ratio for 2009 of 51%.  The comparisons for the 2008 and 2007 accident years show that we continue to have loss ratios substantially below the California industry averages, demonstrating our continued focus on managing risk and reflecting consistency with our long-term record of producing lower than average loss ratios compared to the industry.  However, because of our service strategy as a workers’ compensation specialist, our expense ratio may be higher compared to industry results.  During periods of declining premium and policy counts, such as in 2009, this high expense ratio can result in underwriting losses.

·Indemnity claim frequency for accident year 2008 is 5 percentage points lower than accident year 2007.

·The average cost of a 2008 indemnity claim reflects a 12% increase in severity, representing the third consecutive year of double-digit severity increases after sharp severity declines in 2003, 2004 and 2005.

·The amount by which the California workers’ compensation industry’s reported loss reserves are redundant for all accident years was $5 billion.  We do not believe that the WCIRB’s estimate of reserve redundancy is representative of our situation, and therefore we do not believe this information should be used to estimate redundancies in our loss reserves.

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

1.Our key operating goal is to achieve underwriting profits.

2.We specialize in workers’ compensation and service all material aspects of our policy obligations with our own employees.  We have our own underwriters, actuaries, safety engineers, payroll auditors, claims managers, physician medical directors, case management nurses, and claims lawyers.  Many of our competitors outsource some or all of these functions.

3.We manage our business with a focus on risk versus reward.  Our field offices have no premium or growth targets.  Our underwriters only write business that is priced with a reasonable expectation of producing a profitable underwriting result.

In August 2009, the WCIRB recommended a 22.8% increase in the pure premium rate level (or claims cost benchmark) effective January 1, 2010.  The California DOI has not yet indicated what changes, if any, will be made to the advisory rate levels for January 1, 2010.

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ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

In April 2009, the WCIRB recommended a 23.7% increase in the pure premium rate level effective July 1, 2009, consisting of 16.9% for increased medical inflation and 5.8% for its estimates of the potential cost impacts of the recent en banc decisions discussed below.  On July 8, 2009, the California DOI rejected the WCIRB’s recommendations and did not make any changes to claims cost benchmark for July 1, 2009.  In this regard, the California DOI suggested certain changes to reduce medical costs, but these recommendations have no legal impact, as is the case with their opinion on rates.

In September 2009, the California Workers’ Compensation Board (“WCAB”) issued two significant en banc decisions, revising its earlier decisions, relating to use of the American Medical Association Guide (“AMA Guide”) to determine permanent disability and the method for determining an injured worker’s diminished future earnings capacity (“DFEC”).  The original WCAB decision in Almaraz v. Environmental Recovery Services/Guzman v. Milpitas Unified School District (“Almaraz/Guzman”) rendered the AMA Guide portion of the 2005 permanent disability (“PD”) rating schedule rebuttable if the permanent disability award could be shown to be inequitable and not commensurate with the injured worker’s disability, and would have allowed workers’ compensation judges to make an impairment determination taking into account medical opinions that are not based on, or are only partially based on, the AMA Guide.  The revised decision in Almaraz/Guzman limits the physician from deviating from the AMA Guide in determining a PD rating.  A physician can deviate from the scheduled rating only if his opinion for the deviation constitutes “substantial evidence,” and the rating must be derived based solely on the four corners of the AMA Guide.  The WCAB’s original decision in Ogilvie v. City and County of San Francisco (“Ogilvie”) rendered the DFEC portion of the 2005 permanent disability rating schedule rebuttable.  The revised Ogilvie decision does not substantially change the initial decision, but provides some examples of how this decision could be applied.  These decisions could affect both the number and amount of PD payments, including those on open claims.  We do not know how these decisions will affect our loss costs trends or our reserves, if at all, and we expect legal challenges to continue.  We will continue to monitor these decisions and their impact on our results.

Impact of Different Medical Cost Trend Assumptions.  As previously discussed, assumptions regarding medical cost trends are used in estimating ultimate losses.  Our loss estimates for the 2003 and 2004 accident years reflect an average 6% per year decrease in medical costs, and for the 2005-2009 accident years reflect an average 8% per year increase in medical costs.  If the average annual medical cost trend for each of the accident years 2003-2009 were all increased or all decreased by one, two and three percentage points in each year, our loss reserve estimates at September 30, 2009 would change by approximately $25 million, $45 million and $70 million, respectively.

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

Investments

We invest the net cash flow from our operations and from our capital primarily in fixed maturity securities. These investments provide a stable source of income over the long run, although, in the short run, changes in interest rates impact the amount of investment income we earn.

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ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

Refer to Exhibit 99.1 to this report for a listing of our available-for-sale investment portfolio as of September 30, 2009 including the securities’ identification numbers assigned in accordance with the Committee on Uniform Securities Identification Procedures (“CUSIP”).

Other investments are comprised of interests in limited partnerships and limited liability companies (“LLC”) with an aggregate carrying value of $62.1 million and a net asset value of $69.7 million at September 30, 2009.  The $7.6 million difference between the carrying value and the net asset value is not recognized in either our investment values or our equity at September 30, 2009 because our share of capital in certain investments is less than 5%, and such investments are recorded at cost.  We have additional commitments to our existing investments in limited partnerships and LLCs of $12.4 million as of September 30, 2009.

As of September 30, 2009 and December 31, 2008, we did not have sub-prime mortgages, derivative strategies, credit default swaps or other credit-enhancement exposures.  We do not engage in securities lending.

The average maturity of the fixed maturity portfolio, including short-term investments, was approximately 2.8 years at September 30, 2009 compared to 4.5 years at December 31, 2008.  The duration of the fixed maturity portfolio, including short-term investments, was 2.4 years at September 30, 2009 compared to 3.5 years at December 31, 2008.

Our internal investments department actively manages our investment portfolio to preserve principal values whenever possible.  We do not rely on external portfolio managers.  We review the appropriateness and consistency of the fair values, which are affected primarily by changes in interest rates, and changes in the credit quality and liquidity of the companies in which we have invested or changes in general economic and market conditions. 

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ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

At September 30, 2009, all of our investments in fixed maturity and equity securities and short-term investments were classified as available-for-sale with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders’ equity, net of tax.  Fair values of our available-for-sale investment portfolio at September 30, 2009 improved by approximately $132.9 million before tax, compared to December 31, 2008, which resulted in an increase to stockholders’ equity of $86.4 million, after tax, or $2.32 per share.  The net unrealized gains (losses) on available-for-sale investments reported as a separate component of stockholders’ equity were as follows:

	Fixed Maturity Securities, Including Short-term Investments						Equity Securities						Total
(Dollars in thousands)	Before Tax			After Tax			Before Tax			After Tax			Before Tax			After Tax
September 30, 2009	$	51,428		$	33,429		$	4,189		$	2,723		$	55,617		$	36,152
December 31, 2008	(72,141		)	(46,893		)	(5,146		)	(3,345		)	(77,287		)	(50,238		)

We diversify our fixed maturity portfolio across a number of industries.  The table below sets forth the amortized cost and fair value of fixed maturity securities, including short-term investments, by industry at September 30, 2009:

(Dollars in thousands)	Amortized Cost				Fair Value
U.S. Treasury	$	413,023	22	%	$	413,143	21	%
Insurance	225,931		12		227,740		12
Financial institutions	209,527		11		214,975		11
Municipal bonds	118,188		6		124,576		6
Food and beverage	108,515		6		112,903		6
Petroleum and natural gas	91,977		5		96,527		5
Utilities	89,170		5		93,592		5
Machinery	57,848		3		61,506		3
Pharmaceuticals	55,421		3		58,788		3
Communications	55,209		3		58,119		3
Personal goods	53,310		3		55,138		3
Hotels and casinos	44,481		2		45,532		2
Homebuilding	23,500		1		23,693		1
Entertainment	21,811		1		23,459		1
Chemicals	20,776		1		21,120		1
Other (1)	318,151		16		327,455		17
Total	$	1,906,838	100	%	$	1,958,266	100	%

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

Approximately 90% of our consolidated fixed maturity portfolio, including short-term investments, was rated investment grade at September 30, 2009.

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ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

The following table presents the amortized cost and fair value of our corporate bond and short-term investment portfolio by credit rating categories as of September 30, 2009:

(Dollars in thousands)	Amortized Cost		Fair Value		Percent of Total Fair Value
AAA (1)	$	464,795	$	466,279	27	%
AA	188,805		192,419		11
A	510,191		537,165		31
BBB	350,836		363,641		21
Non-investment grade (2)	180,460		180,523		10
Total	$	1,695,087	$	1,740,027	100	%

(1)Includes highly liquid cash management funds and short-term certificates of deposit that were rated internally.

(2)Based on ratings by the National Association of Insurance Commissioners, Inc. (“NAIC”).

The following table presents the average credit rating, amortized cost and fair value of our municipal bond portfolio at September 30, 2009:

(Dollars in thousands)	Average Credit Rating	Amortized Cost		Fair Value
Insured by bond insurers (1)	AA- to AA	$	59,764	$	62,526
Pre-refunded (2)	AA	27,521		29,166
Uninsured	AA+	30,903		32,884
Total	AA	$	118,188	$	124,576

(1) Average credit rating of underlying issuers is AA-.

(2) Pre-refunded municipal bonds in our portfolio are collateralized by investments in U.S. Government securities.

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

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

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ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

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

Based on the validation procedures noted above, we did not identify any material discrepancies between our values and those provided by the independent pricing service, and we did not adjust the prices provided by our independent pricing services as of September 30, 2009.

We use mid-market quotes from well recognized market information sources as the basis for the fair value of highly liquid U.S. Government securities (includes U.S. Government Treasury Notes and Bills).  We also use market information sources and unadjusted non-binding quotes from broker-dealers to determine the fair value of a small number of our securities that are not priced by our independent pricing service.  As of September 30, 2009, we had two fixed income securities with fair values totaling $18.7 million based on non-binding quotes obtained from broker-dealers.  To validate that the values obtained from the broker-dealers are reasonable estimates of fair value, we confirm that the non-binding quotes are based on proprietary models that use observable market inputs and trade information for similar securities.  The fair values of certain privately held or thinly traded securities are determined using internal analytical methods based on the best information available.

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

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ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

At September 30, 2009, gross unrealized gains and losses in our investment portfolio were as follows:

	Unrealized
(Dollars in thousands)	Gains			(Losses)
Fixed maturity securities, including short-term investments	$	60,964		$	(9,536	)
Equity securities	4,233			(44		)
Total unrealized gains (losses)	$	65,197		$	(9,580	)
Percent of total investment portfolio	3.2		%	0.5		%

The table below sets forth information about securities with unrealized losses at September 30, 2009:

(Dollars in thousands)	FixedMaturitySecurities,IncludingShort-termInvestments (1)			EquitySecurities			Total
Securities with unrealized losses less than 20% of cost:
Number of issues	35			1			36
Fair value	$	215,875		$	302		$	216,177
Unrealized losses	(9,536		)	(44		)	(9,580		)
Securities with unrealized losses greater than 20% ofcost for a continuous period of less than six months:
Number of issues
Fair value
Unrealized losses
Securities with unrealized losses greater than 20% ofcost for a continuous period of six months or more:
Number of issues
Fair value
Unrealized losses
Total:
Number of issues	35			1			36
Fair value	$	215,875		$	302		$	216,177
Unrealized losses	(9,536		)	(44		)	(9,580		)

(1)For fixed maturity securities, cost represents amortized cost.

We believe that our unrealized losses at September 30, 2009 are not other-than-temporary impairments based on our current understanding of the issuers of these securities.  As of September 30, 2009, we have not made a decision to sell any securities with unrealized losses and we have adequate liquidity and will not be required to sell these securities before recovery of their cost basis.

The scheduled maturity dates for fixed maturity securities, including short-term investments, with unrealized losses at September 30, 2009 are shown below.  Actual repayments may differ from those scheduled as a result of prepayments by the issuers.

(Dollars in thousands)	Unrealized Losses			Fair Value
Due in 1 year or less	$	(435	)	$	41,575
Due after 1 year through 5 years	(5,158		)	90,777
Due after 5 years through 10 years	(2,966		)	73,494
Due after 10 years	(977		)	10,029
Total	$	(9,536	)	$	215,875

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ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

The following is a summary of losses realized on the sale of securities, excluding short-term investments, for the three and nine months ended September 30, 2009 and 2008, reflecting the period of time that the security had been continuously in an unrealized loss position preceding the sale:

	Three Months Ended September 30,						Nine Months Ended September 30,
(Dollars in thousands)	2009			2008			2009			2008
Fixed maturity securities:
Realized losses on sales	$	(1,479	)	$	(704	)	$	(3,908	)	$	(6,249	)
Fair value at the date of sale	37,778			143,313			156,400			289,289
Number of securities sold	11			7			32			22
Losses realized on securities with an unrealized loss preceding the sale for:
Less than 3 months	$	(51	)	$	(261	)	$	(251	)	$	(975	)
3-6 months	(26		)				(551		)
6-12 months				(241		)	(828		)	(1,949		)
Greater than 12 months	(1,402		)	(202		)	(2,278		)	(3,325		)
Equity securities:
Realized losses on sales	$	(758	)	$	(353	)	$	(779	)	$	(2,448	)
Fair value at the date of sale	18,217			3,705			19,697			29,643
Number of securities sold	10			2			11			18
Losses realized on securities with an unrealized loss preceding the sale for:
Less than 3 months	$	(51	)	$	(286	)	$	(72	)	$	(1,601	)
3-6 months				(67		)				(426		)
6-12 months	(233		)				(233		)
Greater than 12 months	(474		)				(474		)	(421		)

Sales of investments at a loss result from ongoing portfolio management, and may reflect our response to changes in interest rates, changes in our view of the prospects for an issuer or its industry, or changes in our views about appropriate asset concentrations and allocation.  At the time we sold these investments at a loss, the sales were not related to any liquidity needs. At September 30, 2009, those securities which we were holding in our portfolio with an unrealized loss were compatible with our view of appropriate asset allocation and issuer prospects. Any future changes in those assumptions could result in sales at a loss or impairment write-downs of securities.

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ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

Liquidity and Capital Resources

Our insurance subsidiaries generally create liquidity because insurance premiums are collected prior to disbursements for claims which may take place many years after the collection of premiums.  Collected premiums are invested prior to their disbursements for claims, and investment income provides additional cash receipts.  At September 30, 2009 and December 31, 2008, short-term investments and fixed maturity securities maturing within two years in the insurance subsidiaries were $748.0 million and $333.2 million, respectively.  We expect to pay our obligations as they become due from our liquid assets.

The following is a summary of our net cash provided by operating activities in the nine months ended September 30, 2009 and 2008:

	Nine Months Ended September 30,
(Dollars in thousands)	2009			2008
Net cash flow from workers’ compensation operations	$	(69,130	)	$	14,577
Net cash flow from reinsurance operations	(5,293		)	(11,180		)
Investment income received	70,228			64,191
Interest and other expenses paid by parent	(10,665		)	(10,011		)
Income taxes refunded (paid)	18,200			(56,694		)
Net cash provided by operating activities	$	3,340		$	883

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

Net cash flow from workers’ compensation operations in 2009 decreased as compared to 2008 primarily due to lower workers’ compensation premiums.  In periods in which net cash flow from operating activities is negative, such cash flow is offset by cash flow from investing activities, principally from short-term investments and maturities of longer-term investments.  We maintain a portfolio of invested assets with varying maturities and a substantial amount of short-term investments to provide adequate liquidity.

Our insurance subsidiaries are required to have securities on deposit for the protection of injured workers in accordance with various state laws and regulations, primarily in California, our state of domicile.  At September 30, 2009, investments with a fair value of $1.0 billion were on deposit to comply with such laws and regulations.  In addition, California laws and regulations place various restrictions on the types and amounts of investments that may be made by our insurance subsidiaries.

Zenith National requires cash to pay dividends declared to our stockholders, make interest and principal payments on our outstanding debt due 2028, fund operating expenses and, from time to time, make capital contributions to Zenith Insurance.  Such cash requirements are generally funded in the long-run by dividends received from Zenith Insurance and financing or refinancing activities by Zenith National.  Cash, short-term investments and other marketable investments of Zenith National were $63.0 million and $82.4 million at September 30, 2009 and December 31, 2008, respectively.   Zenith National’s available invested assets and other sources of liquidity are currently expected to be sufficient to meet its short-term and long-term liquidity requirements.

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ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

Zenith National has an undrawn $30 million revolving credit agreement with Bank of America, N. A. expiring in February 2010.  We do not currently anticipate the need to draw on the line of credit.

Our insurance subsidiaries are subject to insurance regulations, which restrict their ability to distribute dividends.  In 2009, Zenith Insurance has the ability to pay up to $111.5 million of dividends to Zenith National without prior approval of the California DOI.  Zenith Insurance paid $45.0 million and $30.0 million in dividends to Zenith National in the nine months ended September 30, 2009 and 2008, respectively.  The restrictions on the payment of dividends have not had, and under current regulations are not expected to have, a material adverse impact on the ability of Zenith Insurance to pay dividends.

Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires both the use of estimates and judgment relative to the application of appropriate accounting policies.  Our accounting policies are described in the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2008.  We believe that certain matters related to accounting policies and estimates in the areas of loss reserve estimation, investment write-downs and deferred income taxes are particularly important to an understanding of our Consolidated Financial Statements.  These matters are discussed under “Critical Accounting Policies and Estimates” in the Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2008.  Effective January 1, 2009, we adopted the guidance on “Recognition and Presentation of Other-Than-Temporary Impairments” related to recognizing credit related other-than-temporary impairments on debt securities.

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ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

The fair value of the fixed maturity investment portfolio is exposed to interest rate risk — the risk of loss in fair value resulting from changes in prevailing market rates of interest for similar financial instruments.  However, we have the ability to hold fixed maturity securities to maturity.  We rely on the experience and judgment of senior management to monitor and mitigate the effects of market risk.  We do not utilize financial instrument hedges or derivative financial instruments to manage risks, nor do we enter into any swap, forward or option contracts, but attempt to mitigate our exposure through active portfolio management.  The allocation among various types of securities is adjusted from time to time based on market conditions, credit and liquidity conditions, tax policy, changes in interest rates and other factors.  In addition, we place the majority of our investments in high-quality, liquid securities and limit the amount of credit exposure to any one issuer.  At September 30, 2009, we did not have sub-prime mortgages, derivative strategies, credit default swaps or other credit-enhancement exposures.

The table below provides information about our financial instruments for which fair values are subject to changes in interest rates.  For fixed maturity securities, the table below presents fair values of investments held and weighted average interest rates on such investments by expected maturity dates.  Such investments include corporate, municipal and U.S. Government bonds.  The December 31, 2008 table also includes mortgage-backed securities.  For our debt obligations, the table presents principal cash flows by expected maturity dates (including interest):

	Expected Maturity Date
(Dollars in thousands)	2009			2010			2011			2012			2013			Thereafter			Total
As of September 30, 2009
Fixed Maturity Securities:
Fixed rate	$	19,729		$	150,539		$	225,250		$	302,776		$	381,289		$	399,331		$	1,478,914
Weighted average interest rate	4.2		%	2.4		%	2.3		%	3.7		%	3.8		%	5.7		%	3.9		%
Short-term investments	$	439,377		$	39,975														$	479,352
Redeemable securities payable				5,002			$	5,002		$	5,002		$	5,002		$	133,525		153,533
As of December 31, 2008
Fixed Maturity Securities:
Fixed rate	$	83,553		$	91,530		$	299,753		$	277,147		$	307,015		$	559,021		$	1,618,019
Weighted average interest rate	3.4		%	6.6		%	4.9		%	6.3		%	5.6		%	7.6		%	6.2		%
Short-term investments	$	241,715																	$	241,715
Redeemable securities payable	5,002			$	5,002		$	5,002		$	5,002		$	5,002		$	133,525		158,535

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ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

Item 4.  Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

Changes in Internal Control Over Financial Reporting

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

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ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

Part II — OTHER INFORMATION

Item 6.  Exhibits

3.1	Amended and Restated Certificate of Incorporation of Zenith National Insurance Corp. filed with the Delaware Secretary of State on May 30, 2006. (Incorporated by reference to Exhibit 3.1 to Zenith’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006.)
3.2	Bylaws of Zenith National Insurance Corp. (Incorporated by reference to Exhibit 3.2 to Zenith’s Current Report on Form 8-K filed May 19, 2009.)
10.1	Zenith National Insurance Corp. 2004 Restricted Stock Plan, Form of Award Agreement for Employees (performance-based vesting), a copy of which is filed herewith.
10.2	Zenith National Insurance Corp. 2004 Restricted Stock Plan, Form of Award Agreement for Employees (time-based vesting), a copy of which is filed herewith.
31.1	Certification of the Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a) or Rule 15d-14(a), a copy of which certification is filed herewith.
31.2	Certification of the Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a) or Rule 15d-14(a), a copy of which certification is filed herewith.
32	Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, a copy of which certification is filed herewith.
99.1	Available-for-sale investment portfolio as of September 30, 2009, a copy of which is filed herewith.

46

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	ZENITH NATIONAL INSURANCE CORP.
October 20, 2009	By:	/s/ Stanley R. Zax
Date		Stanley R. Zax
		Chairman of the Board and President
		(Principal Executive Officer)
October 20, 2009	By:	/s/ Kari L. Van Gundy
Date		Kari L. Van Gundy
		Executive Vice President
		and Chief Financial Officer
		(Principal Financial and Accounting Officer)

Index to Exhibits

Number	Index
10.1	Zenith National Insurance Corp. 2004 Restricted Stock Plan, Form of Award Agreement for Employees (performance-based vesting), a copy of which is filed herewith.
10.2	Zenith National Insurance Corp. 2004 Restricted Stock Plan, Form of Award Agreement for Employees (time-based vesting), a copy of which is filed herewith.
31.1	Certification of the Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a) or Rule 15d-14(a), a copy of which certification is filed herewith.
31.2	Certification of the Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a) or Rule 15d-14(a), a copy of which certification is filed herewith.

47

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

32	Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, a copy of which certification is filed herewith.
99.1	Available-for-sale investment portfolio as of September 30, 2009.

The complete list of all exhibits filed or furnished with this quarterly report on Form 10-Q, including those incorporated by reference, are set forth in Item 6 of this Form 10-Q.

48

EX-10.1

Exhibit 10.1

ZENITH NATIONAL INSURANCE CORP.

FORM

OF

RESTRICTED STOCK AWARD AGREEMENT

FOR EMPLOYEES

(PERFORMANCE-BASED VESTING)

THIS RESTRICTED STOCK AWARD AGREEMENT (the “Award Agreement”) is made and entered into as of «Award_Date» (the “Date of Grant”), by and between Zenith National Insurance Corp., a Delaware corporation (the “Company”), and «Name» (the “Grantee”).  Capitalized terms not defined herein shall have the meaning ascribed to them in the Zenith National Insurance Corp. 2004 Restricted Stock Plan, as may be amended and restated from time to time and in effect at the time of this Award Agreement (the “Plan”).  Where the context permits, references to the Company or any of its Subsidiaries shall include the successors to the foregoing.

Pursuant to the Plan, the Administrator has determined that the Grantee is to be granted Restricted Stock, subject to the terms, conditions and restrictions set forth in the Plan and herein, and hereby grants such Restricted Stock.

1.Grant of Restricted Stock.  The Company hereby grants to the Grantee «Award1» shares of Restricted Stock (the “Award”) on the terms, conditions and restrictions set forth in this Award Agreement and as otherwise provided in the Plan.

2.Purchase Price; Method of Payment.  The purchase price per share of Restricted Stock shall be $1.00.  The purchase price may be paid (i) in cash or its equivalent, (ii) shares of unrestricted Stock owned by the Grantee for greater than six (6) months, the Fair Market Value of which on the purchase date is equal to the purchase price of the Restricted Stock, (iii) to the extent permitted by law, cancellation of indebtedness, (iv) services rendered or (v) any combination of the foregoing.  In the absence of any other form of payment tendered by the Grantee, the purchase price shall be paid by services rendered.

3.Restrictions with Respect to Restricted Stock.

(a)Restrictions.  The Restricted Stock granted hereunder and any interest therein, may not be sold, transferred, pledged, hypothecated, assigned or otherwise disposed of, except by will or the laws of descent and distribution, prior to the lapsing of restrictions set forth in the Plan and this Award Agreement.  Any attempt to dispose of any Restricted Stock in contravention of any such restrictions shall be null and void and without effect.

(b)Restricted Period; Lapse of Restrictions.  Except as otherwise provided in the Plan or this Award Agreement, the restrictions set forth in Paragraph 3(a) shall lapse with respect to the shares of Restricted Stock granted hereunder on the Determination Date (as

defined below) provided that both of the following conditions are met:  (i)  the Grantee continues to be employed by the Company or any Subsidiary as of such Determination Date and (ii) the Company Combined Ratio (as defined below) for the [three future] fiscal year period ended December 31, [     ] is at least [five] percentage points below the average Industry Combined Ratio for the [    ], [    ] and [    ] fiscal years.  For the purposes of this provision, “Company Combined Ratio” for a period shall mean the total combined ratio for the workers’ compensation operations of the Company for such period as determined from the consolidated statutory financial statements of the property and casualty insurance subsidiaries of the Company; “Industry Combined Ratio” for a fiscal year shall mean the combined ratio for the workers’ compensation insurance industry, as a whole, based on actual and projected statutory financial statements for such fiscal year as published or announced by any independent organization; and “Determination Date” shall mean either [February 15,    ], or such later date that the Compensation Committee determines to be necessary in order to accurately calculate to a reasonable degree whether the vesting conditions have been met.

4.Form of Restricted Stock.  The Company may, in its discretion, reflect ownership of Restricted Stock through the issuance of stock certificates, in book-entry form or any combination thereof, in accordance with Section 5(e) of the Plan.

5.Unrestricted Shares.  Promptly after each lapse of restrictions relating to the Restricted Stock without forfeiture, and provided that the Grantee shall have complied with his or her obligations under Paragraph 9 hereof, the Company shall, with respect to such Unrestricted Shares:

(a)If such Unrestricted Shares were initially issued in certificated form, issue to the Grantee or the Grantee’s personal representative a stock certificate representing a number of shares of Stock, free of the restrictive legend described in Paragraph 7, equal to the number of shares of Restricted Stock with respect to which such restrictions have lapsed.  If certificates representing such Restricted Stock shall have theretofore been delivered to the Grantee, such certificates shall be returned to the Company, complete with any necessary signatures or instruments of transfer prior to the issuance by the Company of such unlegended shares of Stock; or

(b)If such Unrestricted Shares were initially issued in book-entry form, transfer such Unrestricted Shares to the Grantee in the form and registration as indicated by the Grantee.

6.Rights as a Stockholder.  Subject to the restrictions set forth in the Plan and this Award Agreement, the Grantee shall possess all incidents of ownership with respect to the Restricted Stock granted hereunder, including the right to vote such Restricted Stock and the right to receive dividends (whether ordinary, extraordinary or in kind) with respect to such Restricted Stock; provided, however, that all dividends accrued on shares of Restricted Stock while they are still subject to the restrictions set forth in Paragraph 3(a) will not be paid by the Company to the Grantee until the restrictions with respect to such shares have lapsed in accordance with Paragraph 3(b).

If the restrictions set forth in Paragraph 3(a) do not lapse in accordance with Paragraph 3(b), then, as of the date that it is determined that the restrictions will not lapse, (a) the Restricted Stock shall be cancelled, (b) the Grantee shall possess no further incidents of ownership of such Restricted Stock and (c) the Grantee shall not be entitled to any of the dividends accrued on the shares of Restricted Stock while they were subject to the restrictions set forth in Paragraph 3(a).

7.Certificate; Restrictive Legend.  Any certificate issued for Restricted Stock prior to the lapse of any outstanding restrictions relating thereto shall be inscribed with the following legend, or such other legend as determined by the Administrator:

THIS CERTIFICATE AND THE SHARES OF STOCK REPRESENTED HEREBY ARE SUBJECT TO THE TERMS AND CONDITIONS, INCLUDING FORFEITURE PROVISIONS AND RESTRICTIONS AGAINST TRANSFER (THE “RESTRICTIONS”), CONTAINED IN THE ZENITH NATIONAL INSURANCE CORP. AMENDED AND RESTATED 2004 RESTRICTED STOCK PLAN AND THE RESTRICTED STOCK AWARD AGREEMENT ENTERED INTO BETWEEN THE REGISTERED OWNER AND THE COMPANY.  ANY ATTEMPT TO DISPOSE OF THESE SHARES IN CONTRAVENTION OF THE RESTRICTIONS, INCLUDING BY WAY OF SALE, ASSIGNMENT, TRANSFER, PLEDGE, HYPOTHECATION OR OTHERWISE, SHALL BE NULL AND VOID AND WITHOUT EFFECT.

8.Termination of Employment.  Except as may otherwise be set forth in this Award Agreement or the Plan [or the written Employment Agreement, if any, between the Grantee and the Company or its subsidiary], the following provisions shall apply upon the termination of Grantee’s employment:

(a)Upon the Grantee’s death or termination of employment due to Disability, the restrictions set forth in Paragraph 3(a) shall lapse.

(b)Upon termination of the Grantee’s employment with the Company or any Subsidiary thereof for any reason (other than death or Disability) prior to the lapsing of restrictions with respect to any portion of the Restricted Stock granted hereunder, the Grantee shall forfeit any rights to the shares of Restricted Stock with respect to which the restrictions have not lapsed and shall have no further rights thereto.

(c)Upon forfeiture of any shares of Restricted Stock, to the extent the Grantee paid the purchase price of such forfeited shares in a manner other than services rendered, the Company shall repurchase such shares from the Grantee at a price per share equal to the lesser of (i) the Fair Market Value of such shares at the time of forfeiture or (ii) the price Grantee paid for such shares initially.

9.Taxes.  Pursuant to Section 9(d) of the Plan, the Company (or Subsidiary, as the case may be) may require the Grantee to remit to the Company (or Subsidiary, as the case may be) in cash an amount sufficient to satisfy any federal, state and local tax withholding requirements related to the Award.  With the approval of the Administrator, the Grantee may satisfy the foregoing requirement by electing to have the Company withhold from delivery shares of Stock or by delivering shares of Stock already owned by the Grantee for at least 6

months, in each case, having a value equal to the minimum amount of tax required to be withheld.  Such shares shall be valued at their Fair Market Value on the date on which the amount of tax to be withheld is determined, and fractional share amounts shall be settled in cash.  Such an election may be made with respect to all or any portion of the shares of Stock to be delivered pursuant to the Award.

The Grantee shall promptly notify the Company of any election made pursuant to Section 83(b) of the Internal Revenue Code of 1986, as amended.

10.Adjustments.  The Award and all rights and obligations under this Award Agreement are subject to Section 3 of the Plan.

11.Notices.  Whenever any notice is required or permitted hereunder, such notice shall be in writing and shall be given by personal delivery or first class, certified or registered mail with return receipt requested.  Any notice required or permitted to be delivered hereunder shall be deemed to have been duly given on the date which it is personally delivered or, whether actually received or not, on the third business day after mailing to the respective parties named below.

If to the Company:	Zenith National Insurance Corp.
	21255 Califa St
	Woodland Hills, CA 91367
	Attn.: Michael E. Jansen, Executive Vice President
	and General Counsel
	Facsimile: 818-713-0177
If to the Grantee:	«Name»
	«Address_Line_1»
	«City_State_Zip»

Either party may change such party’s address for notices by duly giving notice pursuant hereto.

12.Compliance with Laws.

(a)Shares of Stock shall not be issued pursuant to the Award granted hereunder unless the issuance or delivery of such shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the Securities Act of 1933 (the “Securities Act”) and the Exchange Act, shall be subject to the requirements of any stock exchange upon which the Stock may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance.  The Company shall be under no obligation to effect the registration pursuant to the Securities Act, of any interests in the Plan or any shares of Stock to be issued hereunder or to effect similar compliance under any state laws.

(b)All certificates for shares of Stock delivered under the Plan shall be subject to such stop-transfer orders and other restrictions as the Administrator may deem advisable under the rules, regulations, and other requirements of the Securities and Exchange

Commission, any stock exchange upon which the Stock may then be listed, and any applicable federal or state securities law, and the Administrator may cause a legend or legends to be placed on any such certificates to make appropriate reference to such restrictions.  The Administrator may require, as a condition of the issuance or delivery of certificates evidencing shares of Stock pursuant to the terms hereof, that the recipient of such shares make such agreements and representations as the Administrator, in its sole discretion, deems necessary or desirable.

13.Protections Against Violations of Agreement.  No purported sale, assignment, mortgage, hypothecation, transfer, pledge, encumbrance, gift, transfer in trust (voting or other) or other disposition of, or creation of a security interest in or lien on, any of the shares of Stock underlying the Award by any holder thereof in violation of the provisions of this Award Agreement, the Plan or the certificate of incorporation or the bylaws of the Company, will be valid, and the Company will not transfer any such shares on its books nor will any such shares be entitled to vote, nor will any dividends be paid thereon, unless and until there has been full compliance with such provisions to the satisfaction of the Company.  The foregoing restrictions are in addition to and not in lieu of any other remedies, legal or equitable, available to enforce said provisions.

14.Failure to Enforce Not a Waiver.  The failure of the Company to enforce at any time any provision of the Award Agreement shall in no way be construed to be a waiver of such provision or of any other provision hereof.

15.Governing Law.  The Award Agreement shall be governed by and construed according to the laws of the State of Delaware without regard to its principles of conflict of laws.

16.Incorporation of the Plan.   The Plan, as it exists on the date of the Award Agreement and as amended from time to time, is hereby incorporated by reference and made a part hereof, and the Award and this Award Agreement shall be subject to all terms and conditions of the Plan.  In the event of any conflict between the provisions of the Award Agreement and the provisions of the Plan, the terms of the Plan shall control, except as expressly stated otherwise.  The term “Section” generally refers to provisions within the Plan (except where denoted otherwise); provided, however, the term “Paragraph” shall refer to a provision of this Award Agreement.

17.Amendments.  This Award Agreement may be amended or modified at any time, but only by an instrument in writing signed by each of the parties hereto.

18.Counterparts.This Award Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

19.Invalid Provision.   The invalidity or unenforceability of any particular provision hereof shall not affect the other provisions hereof, and this Award Agreement shall be construed in all respects as if such invalid or unenforceable provision had been omitted.

20.Entire Agreement.    This Award Agreement and the Plan, as it exists on the date of this Award Agreement and as amended from time to time, [and the written Employment Agreement, if any, between the Grantee and the Company or its subsidiary] contain the entire

agreement and understanding of the parties hereto with respect to the subject matter contained herein and therein and supersede all prior communications, representations and negotiations in respect thereto.

21.Captions and Headings.   The captions and headings of the paragraphs and subparagraphs of this Award Agreement are provided for convenience only and are not to serve as a basis for interpreting or construing this Award Agreement.

22.Agreement Not a Contract of Employment.  Neither the Plan, the granting of the Award, the Award Agreement nor any other action taken pursuant to the Plan shall constitute or be evidence of any agreement or understanding, express or implied, that the Grantee has a right to continue to be employed by, or to provide services as a director, consultant or advisor to, the Company, any Subsidiary or affiliate thereof for any period of time or at any specific rate of compensation.

23.Authority of the Administrator.  The Administrator shall have full authority to interpret and construe the terms of the Plan and the Award Agreement.  The determination of the Administrator as to any such matter of interpretation or construction shall be final, binding and conclusive.

24.Binding Effect.  The Award Agreement shall apply to and bind the Grantee and the Company and their respective permitted assignees or transferees, heirs, legatees, executors, administrators and legal successors.

25.Tax Representation.  The Grantee has reviewed with his or her own tax advisors the federal, state, local and foreign tax consequences of the transactions contemplated by this Award Agreement.  The Grantee is relying solely on such advisors and not on any statement or representations of the Company or any of its agents.  The Grantee understands that he or she (and not the Company) shall be responsible for any tax liability that may arise as a result of the transactions contemplated by the Award Agreement.

26.Acceptance.  The Grantee hereby acknowledges receipt of a copy of the Plan, the prospectus and this Award Agreement.  Grantee has read and understands the terms and provisions thereof, and accepts the Award subject to all the terms and conditions of the Plan and the Award Agreement.

IN WITNESS WHEREOF, the parties hereto have executed and delivered the Award Agreement as of the day and year first above written.

ZENITH NATIONAL INSURANCE CORP.
By:
Name:	[                                 ]
Title:	[                                 ]
GRANTEE
Signature:
Name:		«Name»
Address:		«Address_Line_1»
		«City_State_Zip»
Social Security No.: «SSN»
Date:

EX-10.2

Exhibit 10.2

ZENITH NATIONAL INSURANCE CORP.

FORM

OF

RESTRICTED STOCK AWARD AGREEMENT

FOR EMPLOYEES

(TIME-BASED VESTING)

THIS RESTRICTED STOCK AWARD AGREEMENT (the “Award Agreement”) is made and entered into as of «Award_Date» (the “Date of Grant”), by and between Zenith National Insurance Corp., a Delaware corporation (the “Company”), and «Name» (the “Grantee”).  Capitalized terms not defined herein shall have the meaning ascribed to them in the Zenith National Insurance Corp. 2004 Restricted Stock Plan, as may be amended and restated from time to time and in effect at the time of this Award Agreement (the “Plan”).  Where the context permits, references to the Company or any of its Subsidiaries shall include the successors to the foregoing.

Pursuant to the Plan, the Administrator has determined that the Grantee is to be granted Restricted Stock, subject to the terms, conditions and restrictions set forth in the Plan and herein, and hereby grants such Restricted Stock.

1.Grant of Restricted Stock.  The Company hereby grants to the Grantee «Award2» shares of Restricted Stock (the “Award”) on the terms, conditions and restrictions set forth in this Award Agreement and as otherwise provided in the Plan.

2.Purchase Price; Method of Payment.  The purchase price per share of Restricted Stock shall be $1.00.  The purchase price may be paid (i) in cash or its equivalent, (ii) shares of unrestricted Stock owned by the Grantee for greater than six (6) months, the Fair Market Value of which on the purchase date is equal to the purchase price of the Restricted Stock, (iii) to the extent permitted by law, cancellation of indebtedness, (iv) services rendered or (v) any combination of the foregoing.  In the absence of any other form of payment tendered by the Grantee, the purchase price shall be paid by services rendered.

3.Restrictions with Respect to Restricted Stock.

(a)Restrictions.  The Restricted Stock granted hereunder and any interest therein, may not be sold, transferred, pledged, hypothecated, assigned or otherwise disposed of, except by will or the laws of descent and distribution, prior to the lapsing of restrictions set forth in the Plan and this Award Agreement.  Any attempt to dispose of any Restricted Stock in contravention of any such restrictions shall be null and void and without effect.

(b)Restricted Period; Lapse of Restrictions.  Except as otherwise provided in the Plan or this Award Agreement, the restrictions set forth in Paragraph 3(a) shall lapse with respect to fifty percent (50%) of the shares of Restricted Stock granted hereunder on the second

(2nd) anniversary of the Date of Grant, and with respect to the remaining fifty percent (50%) of such shares on of the fourth (4th) anniversary of the Date of Grant, so long as the Grantee is employed by the Company or any Subsidiary as of each such anniversary.

4.Form of Restricted Stock.  The Company may, in its discretion, reflect ownership of Restricted Stock through the issuance of stock certificates, in book-entry form or any combination thereof, in accordance with Section 5(e) of the Plan.

5.Unrestricted Shares.  Promptly after each lapse of restrictions relating to the Restricted Stock without forfeiture, and provided that the Grantee shall have complied with his or her obligations under Paragraph 9 hereof, the Company shall, with respect to such Unrestricted Shares:

(a)If such Unrestricted Shares were initially issued in certificated form, issue to the Grantee or the Grantee’s personal representative a stock certificate representing a number of shares of Stock, free of the restrictive legend described in Paragraph 7, equal to the number of shares of Restricted Stock with respect to which such restrictions have lapsed.  If certificates representing such Restricted Stock shall have theretofore been delivered to the Grantee, such certificates shall be returned to the Company, complete with any necessary signatures or instruments of transfer prior to the issuance by the Company of such unlegended shares of Stock; or

(b)If such Unrestricted Shares were initially issued in book-entry form, transfer such Unrestricted Shares to the Grantee in the form and registration as indicated by the Grantee.

6.Rights as a Stockholder.  Subject to the restrictions set forth in the Plan and this Award Agreement, the Grantee shall possess all incidents of ownership with respect to the Restricted Stock granted hereunder, including the right to vote such Restricted Stock and the right to receive dividends (whether ordinary, extraordinary or in kind) with respect to such Restricted Stock; provided, however, that all dividends accrued on shares of Restricted Stock while they are still subject to the restrictions set forth in Paragraph 3(a) will not be paid by the Company to the Grantee until the restrictions with respect to such shares have lapsed in accordance with Paragraph 3(b).

If the restrictions set forth in Paragraph 3(a) do not lapse in accordance with Paragraph 3(b), then, as of the date that it is determined that the restrictions will not lapse, (a) the Restricted Stock shall be cancelled, (b) the Grantee shall possess no further incidents of ownership of such Restricted Stock and (c) the Grantee shall not be entitled to any of the dividends accrued on the shares of Restricted Stock while they were subject to the restrictions set forth in Paragraph 3(a).

7.Certificate; Restrictive Legend.  Any certificate issued for Restricted Stock prior to the lapse of any outstanding restrictions relating thereto shall be inscribed with the following legend, or such other legend as determined by the Administrator:

THIS CERTIFICATE AND THE SHARES OF STOCK REPRESENTED HEREBY ARE SUBJECT TO THE TERMS AND CONDITIONS, INCLUDING FORFEITURE

PROVISIONS AND RESTRICTIONS AGAINST TRANSFER (THE “RESTRICTIONS”), CONTAINED IN THE ZENITH NATIONAL INSURANCE CORP. AMENDED AND RESTATED 2004 RESTRICTED STOCK PLAN AND THE RESTRICTED STOCK AWARD AGREEMENT ENTERED INTO BETWEEN THE REGISTERED OWNER AND THE COMPANY.  ANY ATTEMPT TO DISPOSE OF THESE SHARES IN CONTRAVENTION OF THE RESTRICTIONS, INCLUDING BY WAY OF SALE, ASSIGNMENT, TRANSFER, PLEDGE, HYPOTHECATION OR OTHERWISE, SHALL BE NULL AND VOID AND WITHOUT EFFECT.

8.Termination of Employment.  Except as may otherwise be set forth in this Award Agreement or the Plan [or the written Employment Agreement, if any, between the Grantee and the Company or its subsidiary], the following provisions shall apply upon the termination of Grantee’s employment:

(a)Upon the Grantee’s death or termination of employment due to Disability, the restrictions set forth in Paragraph 3(a) shall lapse.

(b)Upon termination of the Grantee’s employment with the Company or any Subsidiary thereof for any reason (other than death or Disability) prior to the lapsing of restrictions with respect to any portion of the Restricted Stock granted hereunder, the Grantee shall forfeit any rights to the shares of Restricted Stock with respect to which the restrictions have not lapsed and shall have no further rights thereto.

(c)Upon forfeiture of any shares of Restricted Stock, to the extent the Grantee paid the purchase price of such forfeited shares in a manner other than services rendered, the Company shall repurchase such shares from the Grantee at a price per share equal to the lesser of (i) the Fair Market Value of such shares at the time of forfeiture or (ii) the price Grantee paid for such shares initially.

9.Taxes.  Pursuant to Section 9(d) of the Plan, the Company (or Subsidiary, as the case may be) may require the Grantee to remit to the Company (or Subsidiary, as the case may be) in cash an amount sufficient to satisfy any federal, state and local tax withholding requirements related to the Award.  With the approval of the Administrator, the Grantee may satisfy the foregoing requirement by electing to have the Company withhold from delivery shares of Stock or by delivering shares of Stock already owned by the Grantee for at least 6 months, in each case, having a value equal to the minimum amount of tax required to be withheld.  Such shares shall be valued at their Fair Market Value on the date on which the amount of tax to be withheld is determined, and fractional share amounts shall be settled in cash.  Such an election may be made with respect to all or any portion of the shares of Stock to be delivered pursuant to the Award.

The Grantee shall promptly notify the Company of any election made pursuant to Section 83(b) of the Internal Revenue Code of 1986, as amended.

10.Adjustments.  The Award and all rights and obligations under this Award Agreement are subject to Section 3 of the Plan.

11.Notices.  Whenever any notice is required or permitted hereunder, such notice shall be in writing and shall be given by personal delivery or first class, certified or registered mail with return receipt requested.  Any notice required or permitted to be delivered hereunder shall be deemed to have been duly given on the date which it is personally delivered or, whether actually received or not, on the third business day after mailing to the respective parties named below.

If to the Company:	Zenith National Insurance Corp.
	21255 Califa St
	Woodland Hills, CA 91367
	Attn.: Michael E. Jansen, Executive Vice President
	and General Counsel
	Facsimile: 818-713-0177
If to the Grantee:	«Name»
	«Address_Line_1»
	«City_State_Zip»

Either party may change such party’s address for notices by duly giving notice pursuant hereto.

12.Compliance with Laws.

(a)Shares of Stock shall not be issued pursuant to the Award granted hereunder unless the issuance or delivery of such shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the Securities Act of 1933 (the “Securities Act”) and the Exchange Act, shall be subject to the requirements of any stock exchange upon which the Stock may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance.  The Company shall be under no obligation to effect the registration pursuant to the Securities Act, of any interests in the Plan or any shares of Stock to be issued hereunder or to effect similar compliance under any state laws.

(b)All certificates for shares of Stock delivered under the Plan shall be subject to such stop-transfer orders and other restrictions as the Administrator may deem advisable under the rules, regulations, and other requirements of the Securities and Exchange Commission, any stock exchange upon which the Stock may then be listed, and any applicable federal or state securities law, and the Administrator may cause a legend or legends to be placed on any such certificates to make appropriate reference to such restrictions.  The Administrator may require, as a condition of the issuance or delivery of certificates evidencing shares of Stock pursuant to the terms hereof, that the recipient of such shares make such agreements and representations as the Administrator, in its sole discretion, deems necessary or desirable.

13.Protections Against Violations of Agreement.  No purported sale, assignment, mortgage, hypothecation, transfer, pledge, encumbrance, gift, transfer in trust (voting or other) or other disposition of, or creation of a security interest in or lien on, any of the shares of Stock underlying the Award by any holder thereof in violation of the provisions of this Award

Agreement, the Plan or the certificate of incorporation or the bylaws of the Company, will be valid, and the Company will not transfer any such shares on its books nor will any such shares be entitled to vote, nor will any dividends be paid thereon, unless and until there has been full compliance with such provisions to the satisfaction of the Company.  The foregoing restrictions are in addition to and not in lieu of any other remedies, legal or equitable, available to enforce said provisions.

14.Failure to Enforce Not a Waiver.  The failure of the Company to enforce at any time any provision of the Award Agreement shall in no way be construed to be a waiver of such provision or of any other provision hereof.

15.Governing Law.  The Award Agreement shall be governed by and construed according to the laws of the State of Delaware without regard to its principles of conflict of laws.

16.Incorporation of the Plan.   The Plan, as it exists on the date of the Award Agreement and as amended from time to time, is hereby incorporated by reference and made a part hereof, and the Award and this Award Agreement shall be subject to all terms and conditions of the Plan.  In the event of any conflict between the provisions of the Award Agreement and the provisions of the Plan, the terms of the Plan shall control, except as expressly stated otherwise.  The term “Section” generally refers to provisions within the Plan (except where denoted otherwise); provided, however, the term “Paragraph” shall refer to a provision of this Award Agreement.

17.Amendments.  This Award Agreement may be amended or modified at any time, but only by an instrument in writing signed by each of the parties hereto.

18.Counterparts.This Award Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

19.Invalid Provision.   The invalidity or unenforceability of any particular provision hereof shall not affect the other provisions hereof, and this Award Agreement shall be construed in all respects as if such invalid or unenforceable provision had been omitted.

20.Entire Agreement.    This Award Agreement and the Plan, as it exists on the date of this Award Agreement and as amended from time to time [and the written Employment Agreement, if any, between the Grantee and the Company or its subsidiary], contain the entire agreement and understanding of the parties hereto with respect to the subject matter contained herein and therein and supersede all prior communications, representations and negotiations in respect thereto.

21.Captions and Headings.   The captions and headings of the paragraphs and subparagraphs of this Award Agreement are provided for convenience only and are not to serve as a basis for interpreting or construing this Award Agreement.

22.Agreement Not a Contract of Employment.  Neither the Plan, the granting of the Award, the Award Agreement nor any other action taken pursuant to the Plan shall constitute or be evidence of any agreement or understanding, express or implied, that the Grantee has a right

to continue to be employed by, or to provide services as a director, consultant or advisor to, the Company, any Subsidiary or affiliate thereof for any period of time or at any specific rate of compensation.

23.Authority of the Administrator.  The Administrator shall have full authority to interpret and construe the terms of the Plan and the Award Agreement.  The determination of the Administrator as to any such matter of interpretation or construction shall be final, binding and conclusive.

24.Binding Effect.  The Award Agreement shall apply to and bind the Grantee and the Company and their respective permitted assignees or transferees, heirs, legatees, executors, administrators and legal successors.

25.Tax Representation.  The Grantee has reviewed with his or her own tax advisors the federal, state, local and foreign tax consequences of the transactions contemplated by this Award Agreement.  The Grantee is relying solely on such advisors and not on any statement or representations of the Company or any of its agents.  The Grantee understands that he or she (and not the Company) shall be responsible for any tax liability that may arise as a result of the transactions contemplated by the Award Agreement.

26.Acceptance.  The Grantee hereby acknowledges receipt of a copy of the Plan, the prospectus and this Award Agreement.  Grantee has read and understands the terms and provisions thereof, and accepts the Award subject to all the terms and conditions of the Plan and the Award Agreement.

IN WITNESS WHEREOF, the parties hereto have executed and delivered the Award Agreement as of the day and year first above written.

ZENITH NATIONAL INSURANCE CORP.
By:
Name:	[                                 ]
Title:	[                                 ]
GRANTEE
Signature:
Name:		«Name»
Address:		«Address_Line_1»
		«City_State_Zip»
Social Security No.: «SSN»
Date:

EX-31.1

Exhibit 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO

EXHANGE ACT RULE 13a-14(a) OR RULE 15d-14(a)

I, Stanley R. Zax, certify that:

1.I have reviewed this Quarterly Report on Form 10-Q of Zenith National Insurance Corp.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date:  October 20, 2009	/s/ Stanley R. Zax
	Stanley R. Zax
	Chairman of the Board and President
	(Chief Executive Officer)
	Zenith National Insurance Corp.

EX-31.2

Exhibit 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

PURSUANT TO

EXHANGE ACT RULE 13a-14(a) OR RULE 15d-14(a)

I, Kari L. Van Gundy, certify that:

1.I have reviewed this Quarterly Report on Form 10-Q of Zenith National Insurance Corp.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: October 20, 2009	/s/ Kari L. Van Gundy
	Kari L. Van Gundy
	Executive Vice President and Chief Financial Officer
	Zenith National Insurance Corp.

EX-32

Exhibit 32

CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER

PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of Zenith National Insurance Corp. (the “Company”) for the quarterly period ended September 30, 2009, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Stanley R. Zax, as Chief Executive Officer of the Company, and Kari L. Van Gundy, as Chief Financial Officer of the Company, each hereby certifies, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that, to the best of his and her knowledge:

(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date:October 20, 2009

/s/ Stanley R. Zax

Stanley R. Zax

Chairman of the Board and President

(Chief Executive Officer)

/s/ Kari L. Van Gundy

Kari L. Van Gundy

Executive Vice President and Chief Financial Officer

EX-99.1

Exhibit 99.1

ZENITH NATIONAL INSURANCE CORP AND SUBSIDIARIES

Available-For-Sale Investment Portfolio

September 30, 2009

(in thousands)

CUSIP	Description	Cost or Amortized Cost		Fair Value		Par Value/ Shares
Corporate Debt
88579EAB1	3M CO	$	3,000	$	3,013	$	3,000
008685AC3	AHOLD FINANCE USA INC	4,006		4,140		3,960
013716AR6	ALCAN ALUMINUM LTD	4,830		5,188		5,000
013817AF8	ALCOA INC	6,112		6,280		6,000
017363AD4	ALLEGHENY ENERGY SUPPLY	5,166		5,297		5,000
017363AE2	ALLEGHENY ENERGY SUPPLY	4,178		4,406		4,000
020002AR2	ALLSTATE CORPORATION	10,005		10,541		10,000
02003MBQ6	ALLSTATE LIFE GL FN TRST	1,999		2,129		2,000
023551AE4	AMERADA HESS CORP	5,000		5,000		5,000
023608AE2	AMEREN CORPORATION	1,991		2,248		2,000
024937AA2	AMERICAN CAPITAL LTD	3,830		3,306		4,000
026074AA2	AMERICAN FINANCIAL GROUP	10,000		10,985		10,000
025932203	AMERICAN FINANCIAL GROUP	6,501		6,119		6,875
02635PRT2	AMERICAN GENERAL FINANCE	4,580		3,864		5,000
02687QBE7	AMERICAN INTERNATIONAL GROUP	10,051		9,251		10,000
026874AT4	AMERICAN INTERNATIONAL GROUP	14,471		12,492		15,000
031162AN0	AMGEN INC	1,897		1,995		2,000
031162AJ9	AMGEN INC	9,746		10,819		10,000
032479AC1	ANADARKO FINANCE CO	1,030		1,063		1,000
032511AU1	ANADARKO PETROLEUM CORP	2,002		2,055		2,000
00184AAB1	AOL TIME WARNER	7,348		8,016		7,500
00184AAF2	AOL TIME WARNER	3,111		3,302		3,000
037389AS2	AON CORPORATION	8,280		8,494		8,000
037411AQ8	APACHE CORP	2,054		2,205		2,000
046353AC2	ASTRAZENECA PLC	5,160		5,480		5,000
00206RAF9	AT&T INC	5,336		5,331		5,000
054303AM4	AVON PRODUCTS INC	2,002		2,013		2,000
054303AS1	AVON PRODUCTS INC	5,740		5,963		5,750
064057BA9	BANK OF NEW YORK CO INC.	1,028		1,098		1,000
06406HBJ7	BANK OF NEW YORK MELLON	3,175		3,194		3,000
073902CE6	BEAR STEARNS COMPANIES	5,103		5,169		5,000
079860AJ1	BELLSOUTH CORP	1,002		1,066		1,000
084423AK8	BERKLEY (WR) CORP	1,536		1,561		1,550
084423AJ1	BERKLEY (WR) CORP	7,961		8,154		8,204
084664BD2	BERKSHIRE HATHAWAY FINANCE	5,136		5,297		5,000
055451AD0	BHP BILLITON FIN USA LTD	1,008		1,079		1,000
055451AG3	BHP BILLITON FIN USA LTD	5,050		5,526		5,000
10112RAF1	BOSTON PROPERTIES LP	854		1,064		1,050
05565QBF4	BP CAPITAL MARKETS PLC	8,473		8,763		8,000
054937AD9	BRANCH BANKING & TRUST	2,455		2,607		2,500
134429AM1	CAMPBELL SOUP CO	5,659		5,902		5,500
134429AR0	CAMPBELL SOUP CO	4,516		4,909		4,500
14170TAC5	CAREFUSION CORP	1,352		1,350		1,315
14912L2W0	CATERPILLAR FINANCIAL SERVICES	742		766		740
149123BP5	CATERPILLAR INC	2,999		3,444		3,000

CUSIP	Description	Cost or Amortized Cost	Fair Value	Par Value/ Shares
166754AC5	CHEVRON PHILLIPS	5,148	5,316	5,000
171232AF8	CHUBB CORP	5,031	5,394	5,000
172967CQ2	CITIGROUP INC	9,633	9,516	10,000
12572QAA3	CME GROUP INC	7,176	7,567	7,000
12572QAD7	CME GROUP INC	999	1,094	1,000
191216AL4	COCA-COLA COMPANY	5,164	5,182	5,000
19416QDB3	COLGATE PALMOLIVE CO.	2,000	2,186	2,000
205887BA9	CONAGRA INC	218	230	211
20825RAB7	CONOCOPHIL AU	4,877	5,430	5,000
20825CAM6	CONOCOPHILLIPS	5,279	5,277	5,000
20825VAA0	CONOCOPHILLIPS CANADA	5,418	5,837	5,400
209111DZ3	CONSOLIDATED EDISON	4,072	4,336	4,000
209111EC3	CONSOLIDATED EDISON	4,813	5,109	5,000
209615BX0	CONSOLIDATED NATURAL GAS	10,233	10,782	10,000
21701RAB4	COORS BREWING CO	424	449	411
224044BE6	COX COMMUNICATIONS INC	2,032	2,231	2,000
126650BD1	CVS CORP	5,009	5,346	5,000
23331AAT6	D.R. HORTON INC	1,960	1,930	2,000
23383FBU8	DAIMLER FINANCE NA LLC	2,039	2,101	2,000
25179SAC4	DEVON FINANCING CORP ULC	4,118	4,352	4,000
254687AV8	DISNEY (WALT) CO	8,461	9,170	8,500
260003AE8	DOVER CORP	2,947	3,220	3,000
26054CAD5	DOW CAPITAL BV	4,094	4,080	4,000
260543BF9	DOW CHEMICAL CO	5,897	6,089	5,700
263534BM0	DU PONT (E I) DE NEMOURS	4,973	5,109	5,000
263534BU2	DU PONT (E I) DE NEMOURS	5,812	5,842	5,363
278058DF6	EATON CORP	5,276	5,301	5,000
291011AT1	EMERSON ELECTRIC CO	739	802	750
291011AP9	EMERSON ELECTRIC CO	8,258	8,881	8,000
518439AA2	ESTEE LAUDER COMPANIES	2,054	2,138	2,000
303901AN2	FAIRFAX FINANCIAL HLDGS	23,090	23,163	23,250
303901AC6	FAIRFAX FINANCIAL HLDGS	8,169	8,320	8,457
303901AP7	FAIRFAX FINANCIAL HLDGS	6,698	6,860	7,000
31331FAN1	FEDERAL EXPRESS	7,575	7,569	7,569
31331FAQ4	FEDERAL EXPRESS	3,192	3,351	3,103
5526E2AC3	FIA CREDIT SERVICES NA	5,285	5,403	5,000
361448AH6	GATX CORP	1,999	2,012	2,000
361477AA0	GATX CORP	3,865	4,449	3,865
361448AG8	GATX CORP	2,972	3,376	3,000
369550AK4	GENERAL DYNAMICS CORP	8,611	9,267	8,750
36962GY24	GENERAL ELECTRIC CAPITAL CORP	1,851	1,856	1,860
36962G2S2	GENERAL ELECTRIC CAPITAL CORP	4,913	5,168	5,000
36962GWB6	GENERAL ELECTRIC CAPITAL CORP	3,116	3,165	3,000
369604AY9	GENERAL ELECTRIC CO	5,301	5,275	5,000
37033LFW1	GENERAL MILLS INC	5,219	5,542	5,000
37047RAJ6	GENERAL NUTRITION CENTER	850	1,173	1,325

CUSIP	Description	Cost or Amortized Cost	Fair Value	Par Value/ Shares
38143UAW1	GOLDMAN SACHS GROUP INC	10,376	10,526	10,000
406216AR2	HALLIBURTON CO	1,008	1,042	1,000
4128A0AB9	HARLEY DAVIDSON	3,536	3,677	3,700
41283DAA1	HARLEY DAVIDSON FUNDING	6,201	6,993	7,000
416515AR5	HARTFORD FINANCIAL SVCS GRP	4,910	4,660	5,000
42217JBE8	HCP INC	6,906	6,888	6,850
43502@AA9	HOLDINGS GAMING BORROWER, L.P.	9,517	9,517	10,000
437076AM4	HOME DEPOT INC	14,961	15,432	15,000
437076AN2	HOME DEPOT INC	2,029	2,078	2,000
438516AN6	HONEYWELL INTERNATIONAL INC	5,126	5,456	5,000
448055AE3	HUSKY ENERGY INC	499	539	500
459200DU2	IBM CORP	7,055	7,379	7,000
459200AL5	IBM CORP	10,069	10,697	9,200
459200GN5	IBM CORP	4,985	5,700	5,000
44924EAB6	IBM INTERNATIONAL GROUP CAP	3,032	3,265	3,000
452308AH2	ILLINOIS TOOL WORKS	2,006	2,148	2,000
45665QAC7	INFINITY PROPERTY & CASUALTY	4,937	4,493	5,000
456866AS1	INGERSOLL RAND PLC	5,711	5,786	5,750
460146BU6	INTERNATIONAL PAPER CO	5,967	6,077	6,000
450679BW4	ITT CORP	998	1,043	1,000
24422EQP7	JOHN DEERE CAPITAL CORP	3,000	3,005	3,000
244217BG9	JOHN DEERE CAPITAL CORP	5,212	5,579	5,000
24422EQW2	JOHN DEERE CAPITAL CORP	5,987	6,488	6,000
24422EQM4	JOHN DEERE CAPITAL CORP	956	1,081	1,000
244217BK0	JOHN DEERE CAPITAL CORP	4,947	5,412	5,000
478366AQ0	JOHNSON CONTROLS INC	5,870	6,230	6,000
478366AM9	JOHNSON CONTROLS INC	5,901	6,111	6,000
46625HGG9	JPMORGAN CHASE & CO	5,228	5,304	5,000
46625HAT7	JPMORGAN CHASE & CO	5,376	5,337	5,000
46625HAX8	JPMORGAN CHASE & CO	4,877	5,088	5,000
48666KAM1	KB HOME	4,902	4,775	5,000
487836AS7	KELLOGG CO	2,047	2,144	2,000
487836AZ1	KELLOGG CO	5,008	5,428	5,000
494550AR7	KINDER MORGAN ENERGY PARTNERS	2,748	2,875	2,750
49926AAA3	KNOWLEDGE LEARNING CENTER	8,943	8,550	9,000
50075NAM6	KRAFT FOODS INC	999	1,003	1,000
50075NAH7	KRAFT FOODS INC	5,132	5,437	5,000
50075NAQ7	KRAFT FOODS INC	5,042	5,363	5,000
501044BX8	KROGER CO	3,024	3,066	3,000
527288AS3	LEUCADIA NATIONAL CORP	7,015	7,079	7,000
527288BD5	LEUCADIA NATIONAL CORP	4,990	5,100	5,000
55608JAA6	MACQUARIE GROUP LTD	1,996	2,136	2,000
570535AH7	MARKEL CORP	6,989	7,261	7,000
571748AN2	MARSH & MCLENNAN COMPANY	6,449	6,531	6,400
55259PAC0	MARSHALL & ILSLEY BANK	3,484	3,101	3,500
57629WBH2	MASSMUTUAL GLOBAL FUNDING	999	1,030	1,000

CUSIP	Description	Cost or Amortized Cost	Fair Value	Par Value/ Shares
58013MDU5	MCDONALD’S CORP	4,862	5,240	5,000
589331AH0	MERCK & CO INC	5,185	5,223	5,000
59018YJ36	MERRILL LYNCH & CO	17,312	18,130	17,000
590188JF6	MERRILL LYNCH & CO INC	13,722	13,111	13,000
59217EAR5	MET LIFE GLOBAL FUNDING	9,886	9,987	10,000
59217EAU8	MET LIFE GLOBAL FUNDING	4,995	5,102	5,000
59217EBD5	MET LIFE GLOBAL FUNDING	10,035	10,497	10,000
552953AG6	MGM GRAND INC	5,319	7,065	9,000
617446C23	MORGAN STANLEY	4,862	5,007	5,000
626717AB8	MURPHY OIL CORP	5,864	6,060	5,700
636180BJ9	NATIONAL FUEL GAS CO	998	1,193	1,000
638612AG6	NATIONWIDE FINANCIAL SERVICES	3,941	3,660	4,000
63866EBF6	NATIONWIDE LIFE GBL FUND	3,922	3,985	4,000
64952WAJ2	NEW YORK LIFE GLOBAL FDG	10,069	10,712	10,000
64953BAP3	NEW YORK LIFE GLOBAL FDG	4,993	5,264	5,000
652482BG4	NEWS AMERICA INC	5,402	5,382	5,000
65473QAJ2	NISOURCE FINANCE CORP	4,160	4,208	4,000
665859AJ3	NORTHERN TRUST CORP	1,994	2,192	2,000
674599BV6	OCCIDENTAL PETROLEUM CORP	13,018	13,770	12,440
67612WAC2	ODYSSEY RE HOLDINGS CORP	6,149	6,514	6,250
677415CK5	OHIO POWER COMPANY	4,545	4,651	4,500
68268NAA1	ONEOK PARTNERS LP	4,029	4,214	4,000
68402LAE4	ORACLE CORP	5,115	5,229	5,000
694308GD3	PACIFIC GAS & ELECTRIC	6,057	6,399	6,000
701094AG9	PARKER-HANNIFIN CORP	598	626	600
704549AC8	PEABODY ENERGY CORP	5,912	6,060	6,000
10138MAF2	PEPSI BOTTLING GROUP INC	4,926	5,420	5,000
713448BK3	PEPSICO INC	5,189	5,206	5,000
717081CZ4	PFIZER INC	8,129	8,498	8,000
718172AB5	PHILIP MORRIS INTERNATIONAL	7,367	7,437	7,000
72447WAN9	PITNEY BOWES INC	9,730	10,258	10,000
73755LAE7	POTASH CORP-SASKATCHEWAN	2,993	3,246	3,000
737628AC1	POTLATCH CORP	2,706	2,704	2,700
74005PAJ3	PRAXAIR INC	718	770	695
74005PAL8	PRAXAIR INC	1,437	1,566	1,500
74005PAS3	PRAXAIR INC	9,971	10,595	10,000
74047PAR5	PREMCOR REFINING GROUP	2,046	1,964	2,000
74254PLA8	PRINCIPAL LIFE INC FDG	2,940	2,993	2,950
742718DL0	PROCTER & GAMBLE CO	9,671	9,669	9,000
74432QAP0	PRUDENTIAL FINANCIAL INC	1,544	1,768	1,700
74438GAE1	PRUDENTIAL HOLDINGS, LLC	10,039	10,440	10,000
771196AQ5	ROCHE HOLDINGS INC	11,980	12,973	12,000
786514BL2	SAFEWAY INC	5,579	5,738	5,555
803111AK9	SARA LEE CORP	7,159	7,557	7,000
78387GAH6	SBC COMMUNICATIONS INC	5,028	5,424	5,000
816851AB5	SEMPRA ENERGY	5,055	5,141	5,000

CUSIP	Description	Cost or Amortized Cost	Fair Value	Par Value/ Shares
816851AN9	SEMPRA ENERGY	998	1,105	1,000
828807AW7	SIMON PROPERTY GROUP INC	5,080	5,110	5,000
828807BE6	SIMON PROPERTY GROUP LP	4,832	5,119	5,000
828807BX4	SIMON PROPERTY GROUP LP	4,359	5,156	5,000
828807BM8	SIMON PROPERTY GROUP LP	4,632	4,983	5,000
842434CE0	SOUTHERN CAL GAS	9,919	10,322	10,000
843646AC4	SOUTHERN POWER CO	3,072	3,284	3,000
852061AE0	SPRINT NEXTEL CORP	4,000	3,885	4,000
854616AK5	STANLEY WORKS	4,969	5,345	5,000
855030AH5	STAPLES INC	1,040	1,093	1,000
855030AJ1	STAPLES INC	5,108	5,946	4,950
85744NAA9	STATE STREET CORP	7,975	8,267	8,000
86764PAE9	SUNOCO INC	3,077	3,564	3,000
87612EAM8	TARGET CORP	4,161	4,180	4,000
88319QL27	TEXTRON FINANCIAL CORP	3,988	3,930	4,000
883203BJ9	TEXTRON INC	3,982	4,007	4,000
88732JAR9	TIME WARNER CABLE INC	1,992	2,294	2,000
88731EAF7	TIME WARNER ENTERTAINMENT	11,358	11,995	10,000
893521AA2	TRANSATLANTIC HOLDINGS	3,214	4,506	5,000
8941A0AB1	TRAVELERS LIFE	4,196	4,346	4,250
907818CN6	UNION PACIFIC CORP	2,050	2,154	2,000
913017BD0	UNITED TECHNOLOGIES CORP	510	532	500
913017BF5	UNITED TECHNOLOGIES CORP	5,336	5,771	5,200
91324PBH4	UNITEDHEALTH GROUP INC	1,970	2,079	2,000
91324PAE2	UNITEDHEALTH GROUP INC	4,906	5,195	5,000
91159HGR5	US BANCORP	10,045	10,450	10,000
90331HKP7	US BANK NA	5,157	5,364	5,000
920355AD6	VALSPAR CORP	1,992	2,081	2,000
92343VAJ3	VERIZON COMMUNICATIONS	10,135	10,513	10,000
92344UAA3	VERIZON NEW JERSEY INC	2,026	2,150	2,000
92345NAA8	VERIZON VIRGINIA INC	12,691	13,505	13,000
925524BB5	VIACOM INC	2,500	2,696	2,500
92976GAB7	WACHOVIA BANK NA	4,890	5,074	5,000
929903AJ1	WACHOVIA CORP	4,912	5,078	5,000
931422AD1	WALGREEN CO	5,179	5,390	5,000
931142BV4	WAL-MART STORES INC	4,074	4,168	4,000
931142BT9	WAL-MART STORES INC	6,044	6,476	6,000
931142AS2	WAL-MART STORES INC	2,075	2,334	2,000
93884PDD9	WASHINGTON GAS LIGHT	3,000	3,110	3,000
92933DAA8	WEA FINANCE LLC	4,952	5,389	5,000
94973VAJ6	WELLPOINT INC	749	773	750
94973VAK3	WELLPOINT INC	4,895	5,099	5,000
949746CL3	WELLS FARGO & COMPANY	4,959	5,269	5,000
94975CAL1	WELLS FARGO FINANCIAL	5,082	5,309	5,000
962166BP8	WEYERHAEUSER CO	2,051	2,084	2,000
964152AA0	WHITE MOUNTAINS RE GROUP	4,995	4,406	5,000

CUSIP	Description	Cost or Amortized Cost		Fair Value		Par Value/ Shares
96946RAA3	WILLIAM COS INC	4,030		4,106		4,000
976843BC5	WISCONSIN PUBLIC SERVICE	5,021		5,329		5,000
982526AA3	WRIGLEY (WM) JR CO	8,979		9,090		12,000
983024AA8	WYETH	11,972		12,450		11,500
983130AD7	WYNN LAS VEGAS LLC	29,645		28,950		30,000
984121BL6	XEROX CORP	5,003		5,148		5,000
984121BN2	XEROX CORP	3,041		3,200		3,000
984121BY8	XEROX CORP	500		568		500
Subtotal Corporate Debt		$	1,215,754	$	1,260,675	$	1,218,348
State and Local Government Debt
005482F66	ADAMS & ARAPAHOE CNTYS CO	$	3,219	$	3,377	$	3,000
041790L61	ARLINGTON TEXAS	1,057		1,128		1,000
13034PBX4	CALIFORNIA HSG FIN AGY REV	1,000		1,022		1,000
13033WUP6	CALIFORNIA INFRASTRUCTURE	1,583		1,603		1,530
13033WTX1	CALIFORNIA INFRASTRUCTURE	1,079		1,092		1,045
13062PWZ1	CALIFORNIA STATE	954		974		945
167592QH0	CHICAGO ILL O HARE INTL ARPT	968		1,017		1,000
167664XK2	CHICAGO ILL PUB BLDG COMM REV	3,178		3,402		3,000
181108RS2	CLARK CNTY WASH PUB UTIL DIST	3,157		3,345		3,000
20772F6N5	CONNECTICUT STATE	3,178		3,396		3,000
2131833N4	COOK CNTY ILL	3,231		3,365		3,000
235416UJ1	DALLAS TEX WTRWKS & SWR S	2,122		2,246		2,000
251129J37	DETROIT MICH CITY SCH DIST	1,053		1,052		1,000
303820G81	FAIRFAX CNTY VA	2,045		2,165		2,000
403760DA6	GWINNETT CNTY GA WTR & SEW AUT	3,151		3,334		3,000
414004LG4	HARRIS CNTY TEX	2,080		2,172		2,000
4424366E6	HOUSTON TEX WTR & SWR SYS REV	981		1,031		935
4424366F3	HOUSTON TEX WTR & SWR SYS REV	1,117		1,161		1,065
4424362S9	HOUSTON TEX WTR & SWR SYS REV	3,186		3,418		3,000
452151DD2	ILLINOIS ST	3,188		3,313		3,000
452151MS9	ILLINOIS ST	3,143		3,352		3,000
495289JC5	KING CNTY WASH SWR REV	2,107		2,231		2,000
544495FN9	LOS ANGELES CALIF WTR & PWR	2,076		2,247		2,000
556547EX1	MADISON & JERSEY CNTYS ILL SD	3,225		3,407		3,000
574192SH4	MARYLAND ST	2,260		2,463		2,085
576004FA8	MASSACHUSETTS ST SPL OBLIG	3,132		3,383		3,000
576004FB6	MASSACHUSETTS ST SPL OBLIG	3,203		3,413		3,000
590536CB2	MESA ARIZ STR & HWY REV	2,005		2,114		2,000
6775183J9	OHIO STATE	3,105		3,266		3,000
696617XJ3	PALM DESERT CALIF FING AUTH	4,023		4,088		3,835
709141D36	PENNSYLVANIA ST	3,173		3,349		3,000
736688EW8	PORTLAND ORE CMNTY COLLEGE	3,171		3,290		3,000
785849SK7	SACRAMENTO CALIF CITY FING AUT	1,030		1,081		1,000
79575DLN8	SALT RIVER PROJ ARIZ AGRIC IMP	3,134		3,310		3,000
7962364F1	SAN ANTONIO TEX	2,970		3,170		2,800

CUSIP	Description	Cost or Amortized Cost		Fair Value		Par Value/ Shares
7962363U9	SAN ANTONIO TEX	249		268		235
796253WA6	SAN ANTONIO TEX ELEC & GAS	3,156		3,431		3,000
798153DW9	SAN JOSE CALIF FING AUTH LEASE	3,097		3,189		3,000
798147XL3	SAN JOSE CALIF REDEV AGY TAX	5,208		5,369		5,000
798147XN9	SAN JOSE CALIF REDEV AGY TAX	3,744		3,807		3,525
833085SJ3	SNOHOMISH CNTY WASH	3,787		4,033		3,670
791434TD5	ST LOUIS CNTY MO ROCKWOOD SD	3,184		3,373		3,000
930863XQ3	WAKE CNTY NORTH CAROLINA	2,006		2,164		2,000
93974AA61	WASHINGTON ST SER B	2,068		2,233		2,000
93974AXW9	WASHINGTON ST SER B	2,072		2,243		2,000
969871LM2	WILLIAMSON CNTY TENN	3,143		3,304		3,000
9770565Q9	WISCONSIN ST	3,190		3,385		3,000
Subtotal State and Local Government Debt		$	118,188	$	124,576	$	112,670
Mortgage-Backed Securities
05947U5E4	BACM	$	9,732	$	10,100	$	12,469
Subtotal Mortgage-Backed Securities		$	9,732	$	10,100	$	12,469
Foreign Government Debt
46513EHJ4	STATE OF ISRAEL	$	2,670	$	2,697	$	2,500
Subtotal Foreign Government Debt		$	2,670	$	2,697	$	2,500
Redeemable Preferred Stocks
055188205	BAC CAP TRUST II	$	3,600	$	3,056	144
08449Q203	BERKLEY (W.R.) CORP	905		854		36
42307T306	HEINZ(H.J) CO.	22,370		22,611		220
Subtotal Redeemable Preferred Stocks		$	26,875	$	26,521
U.S. Government Debt
912828FX3	U S TREASURY NOTES	$	2,006	$	2,011	$	2,000
912828JL5	U S TREASURY NOTES	2,026		2,032		2,000
912828KU3	U S TREASURY NOTES	200		201		200
912828LV0	U S TREASURY NOTES	50,054		50,101		50,000
Subtotal U.S. Government Debt		$	54,286	$	54,345	$	54,200
Equity Securities
31943X102	1st CENTURY BANCSHARES INC	$	346	$	302	74
203485107	COMMUNITY BANK OF THE BAY	32		32		8
22282E102	COVANTA HOLDING CORP	1		1		51
G4413Q108	HERON INTERNATIONAL LIMITED	26,405		30,457		5,292
589400100	MERCURY GENERAL CORP	1,216		1,357		38
6399123*3	NEIGHBORHOOD BANCORP	250		250		17
639912104	NEIGHBORHOOD BANCORP	200		240		20
Subtotal Equity Securities		$	28,450	$	32,639
Short-Term Investments		$	479,333	$	479,352	N/A
TOTAL AVAILABLE-FOR-SALE INVESTMENT PORTFOLIO		$	1,935,288	$	1,990,905