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) current unprecedented volatility in the financial markets, including the duration of the crisis and effectiveness of governmental solutions; (2) current 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 in excess of 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

Revenues. Our revenues are comprised of the net premiums earned primarily from our workers' compensation segment, and net investment income and net realized gains from our investments segment. Total revenues, as well as workers' compensation net premiums earned, decreased in the first quarter 2009 compared to the corresponding period of 2008.

The decline in workers' compensation net premiums earned is a result of fewer policies due to competition, declining payrolls for many insureds due to the recession, and the mandated reductions in Florida premium rates. 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 first quarter 2009 was $23.2 million compared to underwriting income of $40.0 million in the corresponding period of 2008. The decrease in income in 2009 compared to 2008 principally reflects the 26% decline in premium revenue and no prior period loss reserve development recognized in 2009 compared to $23.2 million favorable development recognized in 2008. The 2009 accident year loss ratio estimate is 50.3% compared to 43.0% for the full year 2008. The 2009 accident year loss ratio continues to be an excellent result, but is higher than 2008 primarily because of reduced premiums and increasing average cost of claims. The reduced premiums are a result of approximately 12% fewer policies compared to March 31, 2008, declining payrolls for many insureds due to the recession and the mandated premium rate decreases in Florida. Florida premium rates have increased 6.4% effective April 1, 2009 and we anticipate increasing rates in California effective July 1, 2009. The higher expense ratio in 2009 compared to 2008 was caused by lower premiums, and also includes a $5.0 million before tax charge related to workforce and other operating cost reductions.

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

                                                Three Months Ended March 31,
(Dollars in thousands)                            2009               2008
Net investment income                        $        24,256    $        23,235
Net realized gains on investments                      6,274              4,486
Income before tax from investments segment   $        30,530    $        27,721

Net realized gains in 2009 were reduced by $9.7 million for credit related impairment charges on MGM MIRAGE and American General Finance Corporation fixed maturity securities, both of which are still paying interest. The impairment charges were determined in accordance with FSP FAS 115-2 and FAS 124-2 (see Note 10 to the accompanying Consolidated Financial Statements) issued in April 2009 related to recognizing credit related other-than-temporary impairments on debt securities. There were no impairment charges in the first quarter 2008.

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

At March 31, 2009 and December 31, 2008, $0.6 billion and $0.4 billion, respectively, of the investment portfolio was in fixed maturity securities of two years or less.

Stockholders' equity. Stockholders' equity per share was $26.82 and $27.42 at March 31, 2009 and December 31, 2008, respectively. The decline in stockholders' equity per share reflects the $0.50 common stockholders' dividend and the $0.19 increase in unrealized losses in our investment portfolio. The unrealized losses per share in our investment portfolio of $1.54 and $1.35 as of March 31, 2009 and December 31, 2008, respectively, are primarily attributable to widening credit spreads between U.S. Government and investment grade securities. Stockholders' equity per share excluding unrealized losses on investments was $28.36 and $28.77 at March 31, 2009 and December 31, 2008, respectively. Annualized return on average equity in the three months ended March 31, 2009 was 4.2% compared to 15.4% in the three months ended March 31, 2008.

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

Results of Operations

Summary Results by Segment

The comparative components of net income for the three months ended March 31, 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 6 to the accompanying Consolidated Financial Statements.

                                      Three Months Ended
                                          March 31,
(Dollars in thousands)                 2009         2008
Net investment income               $    24,256   $ 23,235
Net realized gains on investments         6,274      4,486
Income from investments segment          30,530     27,721
(Loss) income from:
Workers' compensation segment           (23,212 )   40,008
Reinsurance segment                        (158 )       (7 )
Parent                                   (3,226 )   (3,195 )
Income before tax                         3,934     64,527
Income tax expense                        1,334     22,627
Net income                          $     2,600   $ 41,900

Workers' Compensation Segment

Underwriting loss before tax from our workers' compensation segment was $23.2 million for the three months ended March 31, 2009 compared to underwriting income before tax of $40.0 million for the corresponding period of 2008.

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.

The key operating goal for our workers' compensation segment is to achieve underwriting profits and significantly out-perform the national workers' compensation industry.

                ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES



Workers' compensation calendar year combined ratios, along with a reconciliation
to the accident year combined ratios for the three months ended March 31, 2009
and 2008, were as follows:



                                              Three Months Ended March 31,
                                      2009                                    2008
                                                                            Favorable
                                                                          (Unfavorable)
                      Calendar    Prior Period    Accident    Calendar    Prior Period     Accident
                        Year      Development       Year        Year       Development       Year
Losses                    50.3 %                      50.3 %      20.6 %           12.4 %      33.0 %
Loss adjustment
expenses                  22.8                        22.8        13.8              2.2        16.0
Underwriting and
other operating
expenses (1)              46.6                        46.6        40.4             (1.6 )      38.8
Combined ratio           119.7 %                     119.7 %      74.8 %           13.0 %      87.8 %

The following provides additional information related to the decrease in underwriting income and resulting increase in combined ratios in the three months ended March 31, 2009 compared to the corresponding period of 2008:

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

                              Three Months Ended
                                  March 31,
(Dollars in thousands)         2009        2008
California                  $   64,992   $  85,734
Outside California              53,086      73,003
Total net premiums earned   $  118,078   $ 158,737

Workers' compensation net premiums earned decreased 26% in the three months ended March 31, 2009 compared to the corresponding period of 2008. This decrease reflects our risk reward strategy, which emphasizes pricing and underwriting discipline to maintain profitability in a highly competitive environment, resulting in approximately 12% fewer policies in-force compared to March 31, 2008; as well as declining payrolls for many of our insureds due to the recession and the mandated premium rate reductions in Florida.

† Our actuaries perform a comprehensive review of our loss reserve estimates every quarter. For the three months ended March 31, 2009, we did not recognize any development of prior accident years' loss reserve estimates, compared to $23.2 million of favorable development recognized in the corresponding period in 2008.

† Our accident year estimated loss ratio recorded in the first quarter 2009 increased to 50.3% compared to 33.0% initially estimated for the 2008 accident year in the first quarter 2008. The 2008 accident year loss ratio was revised upward later in the year to 43.0% for the full year as a result of premiums declining more than claim frequency combined with increasing medical costs in California. The 2009 accident year loss ratio is an excellent result, but is higher than 2008 primarily because of reduced premiums and increasing average cost of claims.

† Policy acquisition costs are generally variable to net premiums earned. However, underwriting and other costs are more fixed in nature and become a larger percentage of net premiums earned as premiums trend lower. During 2009, we recognized a charge of $5.0 million in first quarter 2009 related to workforce and other operating

cost reductions. We anticipate these actions will result in approximately $10.0 million ($6.5 million after tax) of annualized expense savings.

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
                         Premiums    Policies    Insured     Premiums    Policies    Insured      Premiums    Policies    Insured
(Dollars in millions)    in-force    in-force   Payrolls     in-force    in-force    Payrolls     in-force    in-force    Payrolls
March 31, 2009          $    290.9     18,700   $ 6,901.4   $    226.4     14,500   $ 10,274.3   $    517.3     33,200   $ 17,175.7
December 31, 2008            304.5     19,600     7,133.2        251.7     14,900     10,838.9        556.2     34,500     17,972.1
March 31, 2008               349.4     21,900     8,077.5        295.3     16,000     11,768.3        644.7     37,900     19,845.8
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, the effects of the recession on insured payroll, as well as premium rate reductions (primarily Florida when comparing March 31, 2009 to March 31, 2008);

2) The reduction in policies in-force also reflects the impact of competition; and

3) The reduction in insured payrolls is caused by the reduction in policies in-force (competition), as well as the impact of the recession on the 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 are 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 benchmarks. The benchmark rates cover expected loss costs, but do not contain an element to cover operating expenses or profit. In September 2008, the WCIRB proposed a 16% increase in the January 1, 2009 claims cost benchmarks; and the California DOI adopted and published a claims cost benchmark increase of 5% for January 1, 2009. In March 2009, the WCIRB proposed a 24.4% increase in the July 1, 2009 claims cost benchmarks, consisting of 17.6% for increased medical inflation and 5.8% for its estimates of the potential cost impacts of two recent en banc decisions from the Workers' Compensation Appeals Board discussed below. The California DOI has not yet adopted or published a claims cost benchmark increase for July 1, 2009.

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 medical costs in California, we increased our manual premium rates 4% effective January 1, 2009 and made provisions to limit increases for our renewal customers to 8%, except for growth in payroll. We expect to increase rates effective July 1, 2009, although we have not yet determined the amount of change.

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):

                                         Manual       Average Renewal
                                      Premium Rate     Charged Rate
Policy Renewal Date                      Change           Change
January 1, 2004 - December 31, 2004          (10.0 )%           (15.0 )%
January 1, 2005 - December 31, 2005          (13.0 )            (17.0 )
January 1, 2006 - December 31, 2006          (17.0 )            (26.0 )
January 1, 2007 - December 31, 2007           (4.0 )            (11.0 )
January 1, 2008 - December 31, 2008                              (6.0 )
January 1, 2009                                4.0                 NA

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

                              Manual
                           Premium Rate
Effective date of change      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

The April 1, 2009 premium rate increase relates to the fourth quarter 2008 Florida Supreme Court decision, which is expected to increase claimant attorney fees on open claims. Future premium rate changes could reflect the outcome of legislative efforts to reverse or revise the impact of this decision as discussed below.

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 beginning on page 31.

                ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

Parent



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



                           Three Months Ended
                               March 31,
(Dollars in thousands)      2009         2008
Interest expense         $    1,285    $  1,301
Parent expenses               1,941       1,894
Parent loss              $    3,226    $  3,195

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)                                     March 31, 2009      December 31, 2008
Workers' compensation segment:
Unpaid losses and loss adjustment expenses               $          1,212    $             1,230
Less: Receivable from reinsurers for unpaid losses                    261                    269
Unpaid losses and loss adjustment expenses, net of
reinsurance                                              $            951    $               961
Reinsurance segment:
Unpaid losses and loss adjustment expenses, gross and
net of reinsurance receivable                            $             42    $                45
Total:
Unpaid losses and loss adjustment expenses               $          1,254    $             1,275
Less: Receivable from reinsurers for unpaid losses                    261                    269
Unpaid losses and loss adjustment expenses, net of
reinsurance                                              $            993    $             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 actual losses or they may prove to exceed the ultimate amount of our actual losses. The amount by which estimated losses, measured subsequently by reference to payments and additional estimates, differ from those originally reported for a period is known as "development." Development is favorable when losses ultimately settle for less than the amount reserved or subsequent estimates indicate a basis for reducing loss reserves on open claims. Development is unfavorable when losses ultimately settle for more than the levels at which they were reserved or subsequent estimates indicate a basis for reserve increases on open claims. Favorable or unfavorable development of loss reserves is reflected in our Consolidated Statements of Operations in the period in which the change is made.

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

(Dollars in thousands)           March 31, 2009     December 31, 2008
Workers' compensation segment   $        209,670   $           212,651
Reinsurance segment                       12,325                10,276
Total IBNR & bulk reserves      $        221,995   $           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 March 31, 2009 and December 31, 2008 reflect the actuarial point estimate, which is management's best estimate of loss reserves. We believe our . . .