Zenith National Insurance 10Q 2007 Q2 Quarterly report

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 June 30, 2007

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

For the transition period from to

Commission file number 1-9627

ZENITH NATIONAL INSURANCE CORP.

[Exact name of registrant as specified in its charter]

Delaware		95-2702776
[State or other jurisdiction of		[I.R.S. Employer
incorporation or organization]		Identification No.]

21255 Califa Street, Woodland Hills, California		91367-5021
[Address of principal executive offices]		[Zip Code]

(818) 713-1000

[Registrant’s telephone number, including area code]

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 is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act (check one).

Large accelerated filer x

Accelerated filer o

Non-accelerated filer 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 July 20, 2007, there were 37,056,000 shares of Zenith National Insurance Corp. common stock outstanding, net of 7,695,000 shares of treasury stock.

Zenith National Insurance Corp. and Subsidiaries

Form 10-Q

For the Quarter Ended June 30, 2007

Table of Contents

			Page

Part I – Financial Information

	Item 1.	Financial Statements (unaudited):

		Consolidated Balance Sheets as of June 30, 2007 and December 31, 2006	3

		Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2007 and 2006	4

		Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2007 and 2006	5

		Consolidated Statements of Stockholders’ Equity for the Three and Six Months Ended June 30, 2007 and 2006	7

		Notes to Consolidated Financial Statements	8

	Item 2.	Management’s Discussion and Analysis of Consolidated Financial Condition and Results of Operations	15

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	33

	Item 4.	Controls and Procedures	34

Part II – Other Information

	Item 4.	Submission of Matters to a Vote of Security Holders	35

	Item 5.	Other Information	35

	Item 6.	Exhibits	36

Signatures			37

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

	June 30,			December 31,
(Dollars and shares in thousands)	2007			2006
Assets:
Investments:
Fixed maturity investments:
At amortized cost (fair value $200,458 in 2007 and $215,902 in 2006)	$	205,483		$	216,546
At fair value (amortized cost $1,239,438 in 2007 and $1,280,749 in 2006)	1,216,160			1,271,187
Equity securities, at fair value (cost $74,179 in 2007 and $69,014 in 2006)	90,112			98,318
Short-term investments (at cost or amortized cost, which approximates fair value)	713,283			679,989
Other investments	18,398			7,616
Total investments	2,243,436			2,273,656
Cash	14,921			7,310
Accrued investment income	19,099			19,209
Premiums receivable	22,792			32,413
Receivable from reinsurers for paid and unpaid losses	247,989			235,802
Deferred policy acquisition costs	12,848			12,617
Deferred tax asset	60,088			54,753
Goodwill	20,985			20,985
Other assets	102,982			110,808
Total assets	$	2,745,140		$	2,767,553
Liabilities:
Policy liabilities:
Unpaid losses and loss adjustment expenses	$	1,431,686		$	1,522,280
Unearned premiums	84,003			82,992
Policyholders’ dividends accrued	59,809			57,072
Convertible senior notes payable	1,132			1,129
Redeemable securities	58,346			58,342
Current income tax payable				13,936
Other liabilities	85,674			91,082
Total liabilities	1,720,650			1,826,833

Commitments and contingencies (see Note 8)

Stockholders’ equity:
Preferred stock, $1 par, 1,000 shares authorized; none issued or outstanding in 2007 and 2006
Common stock, $1 par, 100,000 shares authorized; issued 44,751 in 2007 and 44,722 in 2006; outstanding 37,056 in 2007 and 37,027 in 2006	44,751			44,722
Additional paid-in capital	462,052			459,103
Retained earnings	689,113			590,715
Accumulated other comprehensive (loss) income	(4,774		)	12,832
	1,191,142			1,107,372
Treasury stock, at cost (7,695 shares in 2007 and 2006)	(166,652		)	(166,652		)
Total stockholders’ equity	1,024,490			940,720
Total liabilities and stockholders’ equity	$	2,745,140		$	2,767,553

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

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
(Dollars in thousands, except per share data)	2007			2006			2007			2006

Revenues:
Net premiums earned	$	186,345		$	239,484		$	380,427		$	493,910
Net investment income	27,551			26,273			63,037			51,005
Realized gains on investments	5,201			1,113			11,159			2,723
Total revenues	219,097			266,870			454,623			547,638

Expenses:
Loss and loss adjustment expenses incurred	48,974			106,015			114,244			220,466
Policy acquisition costs	31,064			38,501			61,859			78,275
Underwriting and other operating expenses	31,992			33,895			66,935			66,869
Policyholders’ dividends	4,354			3,610			7,911			7,485
Interest expense	1,301			1,314			2,640			2,649
Total expenses	117,685			183,335			253,589			375,744
Income before tax	101,412			83,535			201,034			171,894
Income tax expense	36,112			29,435			71,234			60,294
Net income	$	65,300		$	54,100		$	129,800		$	111,600

Net income per common share:

Basic	$	1.76		$	1.46		$	3.50		$	3.02

Diluted	1.75			1.46			3.48			3.00

Disclosure regarding comprehensive income:

Net income	$	65,300		$	54,100		$	129,800		$	111,600
Decrease in unrealized appreciation of investments during the period, net of tax	(15,762		)	(9,345		)	(17,606		)	(16,361		)
Comprehensive income	$	49,538		$	44,755		$	112,194		$	95,239

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

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Six Months Ended June 30,
(Dollars in thousands)	2007			2006

Cash flows from operating activities:
Premiums collected	$	403,732		$	521,923
Investment income received	51,030			33,542
Loss and loss adjustment expenses paid	(220,129		)	(237,000		)
Policy acquisition, underwriting and other operating expenses paid	(131,665		)	(171,674		)
Interest paid	(2,591		)	(2,632		)
Income taxes paid	(80,071		)	(65,364		)
Net cash provided by operating activities	20,306			78,795

Cash flows from investing activities:
Purchases of investments:
Fixed maturity securities held-to-maturity				(54,937		)
Fixed maturity securities available-for-sale	(96,808		)	(458,550		)
Equity securities available-for-sale	(50,783		)	(23,772		)
Other investments	(11,681		)	(234		)
Proceeds from maturities and redemptions of investments:
Fixed maturity securities held-to-maturity	10,878			9,002
Fixed maturity securities available-for-sale	58,397			20,753
Other investments	1,205			4,048
Proceeds from sales of investments:
Fixed maturity securities available-for-sale	79,119			247,828
Equity securities available-for-sale	55,865			16,597
Other investments	42
Net (increase) decrease in short-term investments	(19,865		)	190,512
Capital expenditures and other, net	(10,783		)	(5,984		)
Net cash provided by (used in) investing activities	15,586			(54,737		)

Cash flows from financing activities:
Cash dividends paid to common stockholders	(28,773		)	(19,588		)
Repurchase of redeemable securities				(500		)
Proceeds from exercise of stock options	196			227
Excess tax benefit on stock-based compensation	296			72
Net cash used in financing activities	(28,281		)	(19,789		)
Net increase in cash	7,611			4,269
Cash at beginning of period	7,310			7,469
Cash at end of period	$	14,921		$	11,738

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

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(UNAUDITED)

	Six Months Ended June 30,
(Dollars in thousands)	2007			2006

Reconciliation of net income to net cash provided by operating activities:

Net income	$	129,800		$	111,600

Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense	4,835			5,055
Net accretion	(12,147		)	(14,669		)
Realized gains on investments	(11,159		)	(2,723		)
(Increase) decrease in:
Accrued investment income	123			(2,797		)
Premiums receivable	8,387			18,034
Receivable from reinsurers for paid and unpaid losses	(12,291		)	11,035
Prepaids	4,453			(20,353		)
Deferred policy acquisition costs	(231		)	(459		)
Increase (decrease) in:
Unpaid losses and loss adjustment expenses	(90,594		)	(29,338		)
Unearned premiums	1,011			(10,394		)
Policyholders’ dividends accrued	2,737			5,330
Net income taxes payable	(8,837		)	(5,070		)
Accrued expenses	(7,069		)	5,639
Other	11,288			7,905
Net cash provided by operating activities	$	20,306		$	78,795

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

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(UNAUDITED)

	Three Months Ended June 30,						Six Months Ended June 30,
(Dollars in thousands, except per share data)	2007			2006			2007			2006

Preferred stock, $1 par:
Beginning of period	None			None			None			None
End of period	None			None			None			None

Common stock, $1 par:
Beginning of period	$	44,739		$	44,627		$	44,722		$	44,944
Exercise of stock options				8			9			11
Restricted stock awards not yet vested										(320		)
Restricted stock vested	12			56			20			56
End of period	44,751			44,691			44,751			44,691

Additional paid-in capital:
Beginning of period	460,781			455,925			459,103			454,281
Exercise of stock options				146			187			216
Excess tax benefit on stock-based compensation	18			162			111			198
Recognition of stock-based compensation expense	1,253			664			2,651			2,202
End of period	462,052			456,897			462,052			456,897

Retained earnings:
Beginning of period	639,520			426,176			590,715			379,031
Net income	65,300			54,100			129,800			111,600
Cash dividends declared to common stockholders	(15,707		)	(10,348		)	(31,402		)	(20,703		)
End of period	689,113			469,928			689,113			469,928

Accumulated other comprehensive income (loss):
Beginning of period	10,988			(5,825		)	12,832			1,191
Decrease in unrealized appreciation of investments during the period, net of deferred tax benefit and reclassification adjustment	(15,762		)	(9,345		)	(17,606		)	(16,361		)
End of period	(4,774		)	(15,170		)	(4,774		)	(15,170		)

Treasury stock, at cost:
Beginning of period	(166,652		)	(166,652		)	(166,652		)	(166,652		)
End of period	(166,652		)	(166,652		)	(166,652		)	(166,652		)

Total stockholders’ equity	$	1,024,490		$	789,694		$	1,024,490		$	789,694

Cash dividends declared per common share	$	0.42		$	0.28		$	0.84		$	0.56

Stockholders’ equity per outstanding common share							$	27.65		$	21.35

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

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. In September 2005, we exited the assumed reinsurance business and ceased writing and renewing assumed reinsurance contracts. 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 and 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 (consisting of normal, recurring adjustments) necessary for a fair presentation 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 Financial Statements and Notes thereto included in the Zenith National Insurance Corp. Annual Report on Form 10-K for the year ended December 31, 2006.

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

Note 2. Earnings and Dividends Per Share

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

		Three Months Ended June 30,				Six Months Ended June 30,
(Dollars and shares in thousands, except per share data)		2007		2006		2007		2006
(A)	Net income	$	65,300	$	54,100	$	129,800	$	111,600
(B)	Interest expense on the Convertible Notes, net of tax	$	12	$	12	$	24	$	24
(C)	Weighted average shares outstanding - basic	37,050		36,964		37,042		36,948
	Common shares issuable under the Stock Option Plan (treasury stock method)			4				6
	Common shares issued under the Restricted Stock Plan (treasury stock method)	159		128		149		131
	Common shares issuable upon conversion of the Convertible Notes	69		69		69		69
(D)	Weighted average shares outstanding – diluted	37,278		37,165		37,260		37,154
	Net income per common share:
(A)/(C)	Basic	$	1.76	$	1.46	$	3.50	$	3.02
((A)+(B))/(D)	Diluted	1.75		1.46		3.48		3.00

Cash dividends declared per common share		$	0.42	$	0.28	$	0.84	$	0.56

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

Note 3. Policyholders’ Dividends

Most of our workers’ compensation policies are non-participating but we issue certain policies in which the policyholder may participate in favorable claims experience through a dividend. An estimated provision for workers’ compensation policyholders’ dividends is accrued as the related premiums are earned.

In addition, Florida statutes require payment of additional policyholders’ dividends to Florida policyholders pursuant to a formula based on underwriting results (“Additional Florida Dividends”). At June 30, 2007 and December 31, 2006, we accrued $34.1 million for estimated Additional Florida Dividends. Our ultimate obligation for Additional Florida Dividends is dependent on our filings with the Florida Department of Insurance and on our prescribed loss reserves included in our annual statutory financial statements.

Note 4. Debt

At June 30, 2007, the aggregate maturities for all of our long-term borrowings for each of the five years after December 31, 2006 were as follows:

(Dollars in thousands)	Convertible Notes		Redeemable Securities		Total
Maturing in:
2007	$	1,150			$	1,150
2008
2009
2010
2011
Thereafter			$	58,500	58,500
Total	$	1,150	$	58,500	$	59,650

In the first quarter of 2006, we paid $0.5 million to repurchase $0.5 million aggregate principal amount of the outstanding 8.55% Capital Securities of Zenith National Insurance Capital Trust I, all voting securities of which are owned by Zenith National (“Redeemable Securities”).

The maturity of the outstanding 5.75% Convertible Senior Notes due March 30, 2023 (“Convertible Notes”) is presented as being due in 2007 because the holders of our Convertible Notes have the right to convert their notes into our common stock during the third quarter of 2007 since the contingent conversion condition relative to our common stock price was met as of June 30, 2007. If any holder requires Zenith National to repurchase its Convertible Notes, Zenith National may choose to pay the repurchase price in cash or shares of its common stock or a combination thereof. Whether the notes will be convertible after September 30, 2007 will depend upon the occurrence of events specified in the Indenture governing the Convertible Notes, including the sale price of Zenith National’s common stock, par value $1.00 per share (“Zenith National’s common stock”). If the Convertible Notes are not converted or redeemed, their scheduled maturity is March 2023. The maximum number of shares that could be required to be issued upon conversion of all Convertible Notes at June 30, 2007 was approximately 69,000.

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

Note 5. Reinsurance Ceded

Our excess of loss and catastrophe reinsurance provides protection for workers’ compensation losses up to $150.0 million, with catastrophe losses arising out of California earthquakes up to $200.0 million. Effective May 1, 2007, we increased our retention of workers’ compensation losses from $1.0 million to $5.0 million, with an annual aggregate limit of $25.0 million in the layer of $5.0 million in excess of the $5.0 million retention. The limits and terms for the remaining layers in excess of $10.0 million remain unchanged.

Note 6. Segment Information

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

The combined ratio, expressed as a percentage, is a key measurement of profitability traditionally used in the property-casualty insurance business. The combined ratio is the sum of the loss and loss adjustment expense ratio and the underwriting and other operating expense ratio. The loss and loss adjustment expense ratio is the percentage of net incurred loss and loss adjustment expenses to net premiums earned. The underwriting and other operating expense ratio is the percentage of underwriting and other operating expenses to net premiums earned. The key operating goal for our insurance segments is to achieve a combined ratio of 100% or lower and to achieve a workers’ compensation combined ratio that is at least three percentage points lower than the combined ratio of the national workers’ compensation industry.

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

Note 6. Segment Information (continued)

Segment information is set forth below:

(Dollars in thousands)	Workers’ Compensation			Reinsurance			Investments		Parent			Total
Three Months Ended June 30 2007
Revenues:
Net premiums earned	$	186,341		$	4							$	186,345
Net investment income							$	27,551				27,551
Realized gains on investments							5,201					5,201
Total revenues	186,341			4			32,752					219,097
Interest expense									$	(1,301	)	(1,301		)
Income (loss) before tax	71,456			(210		)	32,752		(2,586		)	101,412
Income tax expense (benefit)	25,966			(76		)	11,126		(904		)	36,112
Net income (loss)	$	45,490		$	(134	)	$	21,626	$	(1,682	)	$	65,300
Combined ratios	61.7		%	NM

Six Months Ended June 30, 2007
Revenues:
Net premiums earned	$	380,090		$	337							$	380,427
Net investment income							$	63,037				63,037
Realized gains on investments							11,159					11,159
Total revenues	380,090			337			74,196					454,623
Interest expense									$	(2,640	)	(2,640		)
Income (loss) before tax	132,839			(360		)	74,196		(5,641		)	201,034
Income tax expense (benefit)	48,292			(131		)	25,047		(1,974		)	71,234
Net income (loss)	$	84,547		$	(229	)	$	49,149	$	(3,667	)	$	129,800
Combined ratios	65.1		%	206.8		%
As of June 30, 2007
Total assets	$	448,090		$	14,823		$	2,280,027	$	2,200		$	2,745,140

NM = Not Meaningful

(Dollars in thousands)	Workers’ Compensation			Reinsurance			Investments		Parent			Total
Three Months Ended June 30, 2006
Revenues:
Net premiums earned	$	235,360		$	4,124							$	239,484
Net investment income							$	26,273				26,273
Realized gains on investments							1,113					1,113
Total revenues	235,360			4,124			27,386					266,870
Interest expense									$	(1,314	)	(1,314		)
Income (loss) before tax	73,816			(14,915		)	27,386		(2,752		)	83,535
Income tax expense (benefit)	26,473			(5,220		)	9,146		(964		)	29,435
Net income (loss)	$	47,343		$	(9,695	)	$	18,240	$	(1,788	)	$	54,100
Combined ratios	68.6		%	461.7		%

Six Months Ended June 30, 2006
Revenues:
Net premiums earned	$	482,982		$	10,928							$	493,910
Net investment income							$	51,005				51,005
Realized gains on investments							2,723					2,723
Total revenues	482,982			10,928			53,728					547,638
Interest expense									$	(2,649	)	(2,649		)
Income (loss) before tax	139,114			(14,909		)	53,728		(6,039		)	171,894
Income tax expense (benefit)	49,712			(5,218		)	17,914		(2,114		)	60,294
Net income (loss)	89,402			(9,691		)	35,814		(3,925		)	111,600
Combined ratios	71.2		%	236.4		%
As of June 30, 2006
Total assets	$	476,788		$	39,349		$	2,244,850	$	1,991		$	2,762,978

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

Note 6. Segment Information (continued)

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

	Three Months Ended June 30,						Six Months Ended June 30,
(Dollars in thousands)	2007			2006			2007			2006
Income before tax from investments segment:
Net investment income	$	27,551		$	26,273		$	63,037		$	51,005
Realized gains on investments	5,201			1,113			11,159			2,723
Income before tax from investments segment	32,752			27,386			74,196			53,728
Income (loss) before tax from:
Workers’ compensation segment	71,456			73,816			132,839			139,114
Reinsurance segment	(210		)	(14,915		)	(360		)	(14,909		)
Parent segment	(2,586		)	(2,752		)	(5,641		)	(6,039		)
Income before tax	101,412			83,535			201,034			171,894
Income tax expense	36,112			29,435			71,234			60,294
Net income	$	65,300		$	54,100		$	129,800		$	111,600

Note 7. Stock-Based Compensation Plans

Restricted Stock Awards. Under a restricted stock plan approved by our stockholders in May 2004, as subsequently amended (“Restricted Stock Plan”), non-employee Directors and key employees are awarded shares of Zenith National’s common stock with restricted ownership rights. Of the shares of stock granted to employees, 50% vest two years after the grant date and the remaining 50% of the shares vest four years after the grant date. Shares granted to non-employee Directors vest in equal amounts of one-third of the amount granted over three years. 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 following table provides certain information regarding the shares available for future grants under the Restricted Stock Plan at June 30, 2007:

Number of shares authorized for grants	625,000
Number of shares restricted	(335,000	)
Number of shares vested	(106,000	)
Number of shares available for future grants	184,000

Changes in restricted stock for the six months ended June 30, 2007 were as follows:

	Number Of Shares		Weighted Average Grant Date Fair Value
Restricted shares at December 31, 2006	330,000		$	41.88
Granted	6,500		49.15
Vested	(7,500	)	31.41
Restricted shares at March 31, 2007	329,000		42.26
Granted	18,000		48.31
Vested	(12,000	)	41.35
Restricted shares at June 30, 2007	335,000		42.62

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

Note 7. Stock-Based Compensation Plans (continued)

Compensation expense recognized for the three months ended June 30, 2007 and 2006 was $0.8 million and $0.5 million after tax, respectively, and $1.7 million and $1.3 million after tax, respectively, for the six months ended June 30, 2007 and 2006. Unrecognized compensation expense before tax under the Restricted Stock Plan was $7.5 million and $8.9 million at June 30, 2007 and December 31, 2006, respectively.

Employee Stock Options. At June 30, 2007, no outstanding stock options remained outstanding under the Stock Option Plan and all compensation expense related to previously outstanding options had been recognized. Compensation expense was $0 and $15,000 in the six months ended June 30, 2007 and 2006, respectively. The 9,500 options outstanding at December 31, 2006 were fully exercised during the first quarter of 2007. The Stock Option Plan expired according to its terms in May 2006.

Note 8. Commitments and Contingencies

Litigation. We are defendants in various litigation proceedings. In the opinion of management, after consultation with legal counsel, all such 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 9. Income Taxes

We adopted the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (“FIN 48”), on January 1, 2007. At the adoption date and as of June 30, 2007, we had no material unrecognized tax benefits and no adjustments to liabilities or operations were required.

We recognize interest and penalties related to uncertain tax positions in income tax expense which were zero for each of the three and six months ended June 30, 2007.

Tax years 2003 through 2006 and 2002 through 2006 are subject to examination by the federal and state taxing authorities, respectively. There are no income tax examinations currently in process.

Note 10. Recently Issued Accounting Pronouncements

In September 2005, the American Institute of Certified Public Accountants (“AICPA”) released Statement of Position 05-1, “Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection With Modifications or Exchanges of Insurance Contracts” (“SOP 05-1”). SOP 05-1 requires identification of transactions that result in a substantial change in an insurance contract. If it is determined that a substantial change to an insurance contract has occurred, the related unamortized deferred policy acquisition costs, unearned premiums and other related balances must be written off. The Company adopted SOP 05-1 on January 1, 2007. SOP 05-1 did not have a material effect on our consolidated financial condition or results of operations.

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(UNAUDITED)

Note 10. Recently Issued Accounting Pronouncements (continued)

In February 2006, the FASB issued statement No. 155, “Accounting for Certain Hybrid Financial Instruments” (“SFAS No. 155”). Under current generally accepted accounting principles an entity that holds a financial instrument with an embedded derivative must bifurcate the financial instrument, resulting in the host and the embedded derivative being accounted for separately. SFAS No. 155 permits, but does not require, entities to account for financial instruments with an embedded derivative at fair value thus negating the need to bifurcate the instrument between its host and the embedded derivative. The Company adopted SFAS No. 155 on January 1, 2007. SFAS No. 155 did not have a material effect on our consolidated financial condition or results of operations.

In September 2006, the FASB issued Statement No. 157, “Fair Value Measurements” (“SFAS No. 157”), which provides a common definition of fair value and establishes a framework to make the measurement of fair value more consistent and comparable. SFAS No. 157 also requires expanded disclosures about (1) the extent to which companies measure assets and liabilities at fair value, (2) the methods and assumptions used to measure fair value and (3) the effect of fair value measures on earnings. We will adopt SFAS No. 157 on January 1, 2008 and we expect that it will not have a material effect on our consolidated financial condition or results of operations.

In February 2007, the FASB issued Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”), which permits entities to elect to measure many financial instruments and certain other items at fair value. Upon adoption of SFAS No. 159, an entity may elect the fair value option for eligible items that exist at the adoption date. Subsequent to the initial adoption, the election of the fair value option should only be made at the initial recognition of the asset or liability or upon a re-measurement event that gives rise to the new-basis of accounting. All subsequent changes in fair value for that instrument are reported in earnings. SFAS No. 159 does not affect any existing accounting literature that requires certain assets and liabilities to be recorded at fair value nor does it eliminate disclosure requirements included in other accounting standards. SFAS No. 159 is effective as of January 1, 2008. We are currently evaluating the impact that the adoption of SFAS No. 159 will have on our consolidated financial position and results of operations.

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

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

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, 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) competition; (2) adverse state and federal legislation and regulation; (3) changes in interest rates causing fluctuations of investment income and fair values of investments; (4) changes in the frequency and severity of claims and catastrophes; (5) adequacy of loss reserves; (6) changing environment for controlling medical, legal and rehabilitation costs, as well as fraud and abuse; (7) losses associated with any terrorist attacks that impact our workers’ compensation business in excess of our reinsurance protection; (8) losses caused by nuclear, biological, chemical or radiological events whether or not there is any applicable reinsurance protection; and (9) other risks detailed herein and from time to time in our reports and filings with the Securities and Exchange Commission.

Overview

1) Revenues. Our revenues are comprised of the net premiums earned from our workers’ compensation and reinsurance segments and the net investment income and realized gains from our investments segment. Total revenues decreased in the three and six months ended June 30, 2007 compared to the corresponding periods of 2006 principally because of decreased workers’ compensation premium revenues partially offset by increases in net investment income and realized gains on investments. The decrease in workers’ compensation premiums earned principally reflects the impact of rate decreases in California combined with increased competition.

Our operating goals do not include objectives for revenues or market share but rather emphasize pricing and underwriting discipline to maintain profitability. Our workers’ compensation premiums are discussed further under “Results of Operations — Workers’ Compensation Segment” on pages 18 to 19.

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

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

2) Income from workers’ compensation segment. Income before tax from our workers’ compensation segment in the three and six months ended June 30, 2007 was $71.5 million and $132.8 million, respectively, compared to $73.8 million and $139.1 million in the corresponding periods of 2006.

3) Loss reserves. We recognized pre-tax favorable development on prior accident year workers’ compensation loss reserve estimates of $44.0 million and $78.2 million in the three and six months ended June 30, 2007, respectively, compared to $32.9 million and $65.2 million in the corresponding periods of 2006, respectively. The favorable development reflects the continuing favorable trends in the paid loss data during the corresponding periods of 2007 and 2006.

4) Investments segment. Investment income increased in the six months ended June 30, 2007 compared to the corresponding period of 2006 principally due to a $7.3 million cash dividend, before tax, received in January 2007 from a common stock investment and higher long-term interest rates on fixed maturity investments. At June 30, 2007, $1.0 billion of the investment portfolio was in fixed maturities of two years or less compared to $0.9 billion at December 31, 2006.

Realized gains from investments were higher in the three and six months ended June 30, 2007 compared to the corresponding periods in 2006.

5) Stockholders’ equity. Our stockholders’ equity increased to $1.0 billion ($27.65 per share) at June 30, 2007 from $0.9 billion ($25.41 per share) at December 31, 2006.

Results of Operations

Summary Results by Segment

The comparative components of net income for the three and six months ended June 30, 2007 and 2006 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 Consolidated Financial Statements.

	Three Months Ended June 30,						Six Months Ended June 30,
(Dollars in thousands)	2007			2006			2007			2006
Income before tax from investments segment:
Net investment income	$	27,551		$	26,273		$	63,037		$	51,005
Realized gains on investments	5,201			1,113			11,159			2,723
Income before tax from investments segment	32,752			27,386			74,196			53,728
Income (loss) before tax from:
Workers’ compensation segment	71,456			73,816			132,839			139,114
Reinsurance segment	(210		)	(14,915		)	(360		)	(14,909		)
Parent segment	(2,586		)	(2,752		)	(5,641		)	(6,039		)
Income before tax	101,412			83,535			201,034			171,894
Income tax expense	36,112			29,435			71,234			60,294
Net income	$	65,300		$	54,100		$	129,800		$	111,600

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

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

The combined ratios for the workers’ compensation segment were as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
	2007		2006		2007		2006
Loss and loss adjustment expenses	26.3	%	37.3	%	30.0	%	40.7	%
Underwriting and other operating expenses	35.4	%	31.3	%	35.1	%	30.5	%
Combined ratio	61.7	%	68.6	%	65.1	%	71.2	%

Workers’ compensation accident year combined ratios were as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
	2007		2006		2007		2006
Combined Ratio	61.7	%	68.6	%	65.1	%	71.2	%
Prior accident year favorable loss reserve development	23.6	%	14.0	%	20.6	%	13.5	%
Accident year combined ratio	85.3	%	82.6	%	85.7	%	84.7	%

Net premiums earned for the workers’ compensation and reinsurance segments were as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
(Dollars in thousands)	2007		2006		2007		2006
Workers’ compensation:
California	$	101,851	$	152,055	$	211,816	$	312,402
Outside California	84,490		83,305		168,274		170,580
Total workers’ compensation	186,341		235,360		380,090		482,982
Reinsurance	4		4,124		337		10,928
Net premiums earned	$	186,345	$	239,484	$	380,427	$	493,910

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

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

Workers’ Compensation Segment

The combined ratio of our workers’ compensation segment improved in the three and six months ended June 30, 2007 compared to the corresponding periods in 2006. In the second quarter and six months of 2007, we recorded 23.6 and 20.6 percentage points of favorable development of prior year loss reserves, respectively, compared to 14.0 and 13.5 percentage points in the second quarter and six months of 2006, respectively. These improvements were offset by a decrease in net premiums earned and higher underwriting and other operating expense ratios in the second quarter and six months of 2007 compared to the corresponding periods in 2006. The current accident year combined ratio estimate was 85.3% and 85.7% for the second quarter and six months ended June 30, 2007, respectively, compared to 82.6% and 84.7% for the corresponding periods in 2006, respectively. The estimates we made for our loss costs in recent accident years are subject to considerable uncertainty because of fluctuating rates of claims cost inflation and deflation including the impact of the 2003 and 2004 workers’ compensation legislative reforms. We discuss the assumptions we made at June 30, 2007 about the inflation trends and associated uncertainties for recent accident years under “Loss Reserves” on pages 20 to 26.

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

	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
June 30, 2007	$	417.1	23,200	$	8,471.6	$	333.4	16,700	$	13,003.6	$	750.5	39,900	$	21,475.2
December 31, 2006	501.2		24,600	9,200.3		332.8		16,600	12,404.5		834.0		41,200	21,604.8
June 30, 2006	589.7		26,500	9,558.6		334.0		17,000	12,069.6		923.7		43,500	21,628.2
December 31, 2005	722.9		27,500	9,930.3		326.9		16,900	11,236.3		1,049.8		44,400	21,166.6

Premiums in-force in California as of June 30, 2007 decreased compared to December 31, 2006, as a result of premium rate changes due to favorable loss cost trends from the 2003 and 2004 legislative reforms, combined with our pricing and underwriting strategy in comparison to our competition as reflected in the decline in insured payrolls and policies in-force. Premiums in-force outside California remained flat as of June 30, 2007 compared to December 31, 2006 with growth in insured payrolls offsetting rate reductions.

In California, the state in which the largest amount of our workers’ compensation premiums is earned, we set our own rates based upon actuarial analysis of current and anticipated cost trends. The short-term data for loss costs indicate a favorable impact from the 2003 and 2004 legislative reforms. As a result of these favorable trends we have reduced our California premium rates in a manner that we believe deals prudently with the uncertainty about the long-term outcome of loss cost trends for recent accident years. These manual rates do not necessarily indicate the rates charged to our policyholders because employers’ experience modification factors are subject to revision annually; and our underwriters are given authority to increase (debit) or decrease (credit) rates based upon

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

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

individual risk characteristics. The following table sets forth the manual 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 rates as well as the changes in experience modification factors and net credits or debits applied by our underwriters (decreases are shown in parentheses):

Effective date of change	Manual Rate Change		Average Renewal Charged Rate Change
January 1, 2004	0.0	%	(4.0	)%
July 1, 2004	(10.0	)	(12.0	)
January 1, 2005	(2.0	)	0.0
July 1, 2005	(12.0	)	(19.0	)
January 1, 2006	(13.0	)	(15.0	)
July 1, 2006	(5.0	)	(13.0	)
January 1, 2007	(4.4	)	0.0

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

Effective date of change	Manual Rate Change
January 1, 2004	0.0	%
January 1, 2005	(4.0	)
January 1, 2006	(13.4	)
January 1, 2007	(12.5	)

Most of our workers’ compensation policies are non-participating but we issue certain policies for which the policyholder may participate in favorable claims experience through a dividend. An estimated provision for workers’ compensation policyholders’ dividends is accrued as the related premiums are earned.

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

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

Reinsurance Segment

In September 2005, we exited the reinsurance business and we ceased writing and renewing assumed reinsurance contracts. All contracts fully expired by the end of 2006, however, we will be paying our assumed reinsurance claims for several years. The results of the reinsurance segment will continue to be included in the results of continuing operations, consisting of changes to loss reserve estimates, adjustments to contractual premium and operating expenses.

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

Investments Segment

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

Parent Segment

The parent segment loss reflects the holding company activities of Zenith National. The parent segment loss before tax was as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
(Dollars in thousands)	2007			2006			2007			2006
Interest expense	$	(1,301	)	$	(1,314	)	$	(2,640	)	$	(2,649	)
Parent expenses	(1,285		)	(1,438		)	(3,001		)	(3,390		)
Parent segment loss	$	(2,586	)	$	(2,752	)	$	(5,641	)	$	(6,039	)

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 as of the balance sheet date (“loss reserves”). Our loss reserves were as follows:

(Dollars in millions)	June 30, 2007		December 31, 2006
Workers’ compensation segment:
Unpaid losses and loss adjustment expenses	$	1,350	$	1,416
Less: Receivable from reinsurers for unpaid losses	230		221
Unpaid losses and loss adjustment expenses, net of reinsurance	$	1,120	$	1,195
Reinsurance segment:
Unpaid losses and loss adjustment expenses gross and net of reinsurance receivable	$	82	$	106
Total:
Unpaid losses and loss adjustment expenses	$	1,432	$	1,522
Less: Receivable from reinsurers for unpaid losses	230		221
Total unpaid losses and loss adjustment expenses, net of reinsurance	$	1,202	$	1,301

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

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

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 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 provision for two types of loss development. At the end of any calendar period, there are a number of claims that have not yet been reported but will arise out of accidents that have already occurred. These are referred to in the insurance industry as incurred but not reported (“IBNR”) claims. In addition to this provision for late reported claims, we also have to estimate the extent to which the case reserves on known claims may also develop. These types of reserves are referred to in the insurance industry as “bulk” reserves. Our loss reserves make provision for both IBNR and bulk reserves in total, but not separately.

At June 30, 2007 and December 31, 2006, IBNR and bulk reserves included in unpaid losses and loss adjustment expenses, net of reinsurance, were as follows:

(Dollars in millions)	June 30, 2007		December 31, 2006
Workers’ compensation	$	334	$	382
Reinsurance	11		19
Total IBNR & bulk reserves	$	345	$	401

We perform a comprehensive review of our loss reserves at the end of every quarter. Estimating loss reserves is an uncertain and complex process which involves 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. During the six months ended June 30, 2007 we recognized $78.2 million of favorable development on prior accident year workers’ compensation loss reserves compared to $65.2 million during the corresponding period of 2006. Favorable development in both periods reflects management’s assessment of ultimate loss trends and loss reserves after considering all relevant data, including continuing improvement in the paid loss trends as a result of the California and Florida legislative reforms and the reduction in the number of expensive claims (discussed below). The loss reserve estimates recorded in the financial statements were higher than the actuarial point estimates by approximately $66 million and $109 million at June 30, 2007 and December 31, 2006, respectively. Discussed below are the principal uncertainties considered, the actuarial estimation process used, the role of management, and the inflation assumptions selected in determining loss reserve estimates, as well as the impact of different inflation assumptions on loss reserve estimates.

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

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

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 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 caused by the deflation trend in more recent years as compared to the trend of increasing severity (inflation) in the years prior to 2002. Severity is the average cost of a claim as measured by the total cost of claims for a year divided by the number of claims in that year. The annual rate of claim cost inflation (or deflation) is the year over year percentage change in claim severity. Inflation or deflation is attributable to several factors which include changes in health care costs, legislative reforms to the workers’ compensation system and the number of expensive claims relative to the total number of claims in a year. Expensive claims are those involving permanent disability of an injured worker. Historically in California, the expensive claims have contributed about 20% of the number of claims and 90% of the cost of all claims. We have observed deflationary trends in the amounts we have paid for claims in recent accident years compared to increasing inflation trends for claim payments in the years prior to 2002. However, expensive claims are paid over several years, and ultimate costs are difficult to estimate because of such factors as the on-going and possibly increasing need for medical care, length of disability, life expectancy and benefits for dependents. These expensive claims often result in some form of a settlement with the injured worker which generally takes place many years after the injury. In California, as of June 30, 2007, we have closed only 46%, 23% and 5% of our 2004, 2005 and 2006 expensive permanent disability cases, respectively. These closing ratios are slower than the ratios we experienced prior to the legislative reforms and uncertainty remains as to the extent to which the recent deflationary data will be sustained as the remaining expensive claims are settled.

We have also recently observed a reduction in the number of California permanent disability claims beginning in 2005 as compared to prior accident years, reflecting the change in the permanent disability rating system effective January 1, 2005. This reduction in expensive claims for the 2005, 2006 and 2007 accident years as compared to prior accident years is not yet a material component of the paid loss data trends due to the longer time lag in paying and settling these claims. While the ultimate number of expensive claims for these accident years is still uncertain, a permanent frequency reduction would be material as the historic average cost of these types of claims is approximately $75,000. The following table shows the trend in the number of California permanent partial disability (“PPD”) claims (expensive claims) at various dates:

	Number of California Claims with Paid or Reserved PPD Benefits After (number of months)
Accident Year	6	18	30	42	54	66
2002	1,628	2,952	2,783	2,729	2,687	2,675
2003	2,342	3,324	3,014	2,866	2,846
2004	2,206	3,160	2,725	2,627
2005	2,546	2,748	2,608
2006	1,329	2,276
2007	985

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

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

Actuarial estimation process: Our actuaries produce a point estimate for workers’ compensation loss reserves using the results of various methods of estimation. However, these various methods do not produce separate point estimates. Our actuaries prepare reserve estimates for all accident years using our own historical claims data and based upon many of the common actuarial methodologies for estimating loss reserves, such as paid development methods, incurred development methods, Bornhuetter-Ferguson indications and claim count methods. A customized method is used for more recent accident years related to business written in California to focus on the impacts of the legislative reforms in determining loss reserves. The actuarial point estimate is based on a selection of the results of these various methods depending upon both the age of the accident year and the geographic state of the injury. For more mature accident years, all of the methods produce very similar loss estimates and our actuarial point selections are based upon incurred loss development methods because our actuaries believe this most accurately reflects the required reserves for the relatively few claims that remain open. For recent accident years related to business written outside of California, our actuarial point selections are also based on the incurred loss development methods because our actuaries believe this method most accurately reflects the required reserves based on their analysis of the data and understanding of the claim environments in which we operate. For the more recent accident years related to business written in California, our actuaries use a loss reserving model which estimates the differing affects of the 2003 and 2004 legislative reforms on the following five categories of benefit types: (1) temporary disability indemnity, (2) vocational rehabilitation, (3) permanent disability indemnity, (4) medical costs and (5) allocated expense. For each of these types of benefits, our actuaries review the historical paid trends and make adjustments to reflect the known effects of the reforms (e.g., limitations on temporary disability indemnity benefits and eliminating vocational rehabilitation benefits). Our actuaries then use judgment to forecast ultimate inflation rates for each benefit type allowing for the late emergence of costs for the most serious cases based on historical trends. The selected inflation rate produces an estimate of loss reserves for each benefit type. The actuarial point estimate was then determined by weighting this customized method with the paid loss methods used by the California Workers’ Compensation Insurance Rating Bureau (“WCIRB”) in estimating ultimate losses for the entire California industry.

Role of management: Because of the lack of empirical data regarding the ultimate outcome of loss costs for the post-reform years, combined with our long history in the workers’ compensation business, we do not believe it is prudent to extrapolate recent trends on early claim payments to the entire population of claims until sufficient data is known about the more costly claims. Our loss reserve estimates are based on judgments regarding the weight given to recent data, as well as our history. The inflation or deflation assumption is the key assumption in establishing loss reserve estimates for recent accident years. The 2003 and 2004 legislative reforms in California and the 2003 reforms in Florida, as well as delays in settling and closing the most serious cases in recent accident years in California as compared to historical trends, have resulted in uncertainty in determining the ultimate inflation assumptions for the most recent accident years. Management reviews the actuarial point estimate each quarter and establishes loss reserve estimates in the financial statements that provide for rates of claim cost inflation (deflation) using the most recent relevant data and incorporates judgment regarding the inherent uncertainties of ultimate loss costs. These uncertainties include the length of time required to settle long-term, expensive cases combined with the effects of medical care inflation, uncertainties in the long-term outcome of the legislative reforms including the ultimate number of expensive cases, and the fact that in certain years prior to the legislative reforms our loss reserves proved to be inadequate.

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

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

The differences between the actuarial point estimate and the loss reserves recorded in the financial statements are principally caused by the differences in the inflation assumptions used by management as compared to the inflation assumptions produced using actuarial methods. As the data for these accident years mature, the uncertainty surrounding the ultimate outcome of the workers’ compensation claim costs will continue to diminish and therefore the difference between our financial statement loss reserves and our actuarial point estimates will decrease. This can occur by some combination of increases or decreases in management’s estimate of loss reserves as compared to increases or decreases in the actuarial point estimates.

Inflation assumptions: At June 30, 2007, the workers’ compensation accident year paid loss inflation rates (deflation rates are shown in parentheses) in our paid loss data and the assumptions of accident year inflation rates in our estimates of ultimate losses were as follows:

(Dollars in Thousands)	Estimated Ultimate Losses (A)		Average Paid Loss per Claim Annual Inflation (Deflation) Evaluated After (number of months)																Assumed Inflation (Deflation) In Estimated Ultimate Losses
Accident Year			18		30		42		54		66		78		90		102		June 30, 2007		March 31, 2007		December 31, 2006
1999	$	220,670	15	%	13	%	15	%	15	%	15	%	15	%	15	%	15	%	16	%	16	%	16	%
2000	241,527		10		11		12		13		13		13		12				14		14		14
2001	313,012		15		15		15		15		15		14						16		17		17
2002	325,752		2		3		4		4		3								6		7		7
2003	337,714		4		1		(3	)	(4	)									2		3		5
2004	335,821		(8	)	(14	)	(15	)											(7	)	(5	)	(5	)
2005	366,260		(4	)	(8	)													(11	)	(11	)	(11	)
2006	337,206		7																(4	)	(4	)	(4	)
2007	150,440																		(3	)	(3	)

(A) Estimated ultimate losses for an accident year represent the estimated aggregate amount we expect to pay for all claims that will be reported for that year for losses and allocated loss adjustment expenses. Loss reserves are the liability for the unpaid portion of ultimate losses, computed by subtracting the amount paid from the ultimate loss estimate as of the balance sheet date.

When we estimate our loss reserves, we do so in the aggregate for all years, and then allocate them to each accident year. This allows us to look at the year-over-year change in claim severity, or inflation — our most important concept for understanding adequate loss reserve estimates. By allocating loss reserves to individual accident years, we produce an implied rate of inflation for each year. Each quarter, we receive additional data about the inflation rate in paid losses for each accident year as we pay and close additional claims. We use these and other data to determine if any changes in our inflation assumptions are appropriate. The allocation of loss reserves between accident years is less certain for more recent accident years, for which there is less paid loss data and greater uncertainty caused by the legislative reforms in 2003 and 2004. Any changes in our assumptions about inflation rates will cause a change in our loss reserve estimates, although our view of the adequacy of the total loss reserve estimate may be unchanged if the effect of the change in the inflation assumptions has the effect of reallocating the loss reserve estimate among accident years.

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

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

Considerable judgment is used in determining our inflation assumptions and each quarter we consider and evaluate the most recent trends, new information and the payment of additional claims, as well as the inherent uncertainties discussed previously.

In the second quarter 2007, we received the following information:

· We paid and closed additional claims and the paid loss trends remained unchanged from year-end 2006.

· The frequency of California permanent disability claims (expensive claims) continues to decline.

· In June 2007, the WCIRB continued to confirm the historically low loss ratio estimates for the California workers’ compensation industry for accident years 2004, 2005 and 2006 based on estimates of loss costs as of March 31, 2007 of 33%, 27% and 37%, respectively. The WCIRB’s estimate of the industry reserve redundancy for all accident years grew to $6.9 billion using data through March 31, 2007 from $6.5 billion using data through December 31, 2006.

· The new Permanent Disability Rating Schedule (PDRS) in California continues to be challenged in the courts. In May 2007, a workers’ compensation judge found that the diminished future earnings capacity adjustment factors to the PDRS were invalid. This ruling is contrary to a recent California Workers’ Compensation Appeals Board decision which validated the PDRS. The ultimate outcome of this issue has not yet been determined.

During the second quarter 2007, we attributed more weight to the paid loss trends in the 2001 through 2004 accident years because with the passage of time more of the expensive claims have closed and the observed paid loss trends continue to be stable. We therefore reduced our inflation assumptions by one percentage point for each of the 2001, 2002 and 2003 accident years, and by two percentage points for the 2004 accident year as compared to March 31, 2007. We continue to carry ultimate inflation factors in excess of the paid loss trends for these years to reflect the potential for long-term health care cost inflation. We attribute less weight to the paid loss trends in the 2005 and 2006 accident years where less claims have closed and therefore more uncertainty exists, including the ultimate outcome of the change in the mix of California claims as a result of the change in the permanent disability rating system effective January 1, 2005. Changes to the inflation assumptions in each accident year 2001 through 2004 also changed the ultimate loss estimate for each subsequent accident year, resulting in net favorable development of prior accident year workers’ compensation loss reserves of $44.0 million in the second quarter of 2007. For the six months ended June 30, 2007, we recognized net favorable development of prior accident year workers’ compensation loss reserves of $78.2 million, representing 6.5% of our estimated workers’ compensation loss reserves at December 31, 2006, and 20.6% of our workers’ compensation net premiums earned in the six month ended June 30, 2007.

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

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

We cannot predict the timing or amount of future reserve changes (which could be increases or decreases) as they will be dependent on new information concerning the continuation of the paid loss trends. With the passage of time we gain more certainty regarding the paid loss trends and this information will be evaluated at each reporting period.

In the three months and six months ended June 30, 2006, we reduced the inflation assumptions for the 2005 and 2004 accident years to reflect the change in the paid loss deflation in those years as well as the change in the mix of claims as a result of the change in the permanent disability rating system effective January 1, 2005, resulting in net favorable development of prior accident year loss reserves of $32.9 million and $65.2 million, respectively. The $65.2 million favorable development of prior accident year workers’ compensation loss reserves was 5.1% of our estimated workers’ compensation net loss reserves at December 31, 2005 and was 13.5% of our workers’ compensation net premiums earned in the six months ended June 30, 2006.

Impact of different inflation assumptions: Different assumptions about the inflation or deflation rates would change our workers’ compensation loss reserve estimates, and a material change is reasonably possible although we cannot predict if and to what extent such a change will occur. A change in the assumed inflation rate for any particular accident year would change our estimate of ultimate losses for that accident year by an amount equal to the change in the inflation rate multiplied by the estimated loss for that year. Such a change in the inflation rate for a particular accident year would also change the estimated ultimate loss for each subsequent accident year. For example, if the average annual inflation rate for each of the accident years 2001 through 2007 were decreased by one percentage point in each year, our loss reserve estimates at June 30, 2007 would decrease by about $79.6 million as illustrated in the following table:

(Dollars in thousands)	Assumption Currently Used					Revised Assumption
Accident Year	Assumed Inflation (Deflation) Rate		(a) Cumulative Inflation Factor	(b) Estimated Ultimate Losses		Assumed Inflation (Deflation) Rate		(c) Cumulative Inflation Factor	[(c)/(a)]x(b)] Estimated Ultimate Losses
2001	16	%	1.160	$	313,012	15	%	1.150	$	310,314
2002	6		1.230	325,752		5		1.208	319,926
2003	2		1.255	337,714		1		1.220	328,296
2004	(7	)	1.167	335,821		(8	)	1.122	322,872
2005	(11	)	1.039	366,260		(12	)	0.987	347,929
2006	(4	)	0.997	337,206		(5	)	0.938	317,251
2007	(3	)	0.967	150,440		(4	)	0.900	140,017
				$	2,166,205				$	2,086,605
								Decrease	$	(79,600	)

We believe our loss reserve estimates are adequate. However, the actual ultimate inflation (or deflation) rate will not be known with any certainty for several years. We assume that general health care inflation trends will continue and will impact our long-term claim costs and loss reserves. The extent to which this may be offset by benefits from the legislative reforms and recently observed reduction in the number of California expensive claims is uncertain. We will evaluate our best estimate of inflation rates and reserves every quarter to reflect the most current data.

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

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

Investments

The increase in investment income in the six months ended June 30, 2007 compared to the corresponding period in 2006 was principally due to a $7.3 million cash dividend, before tax, or $4.9 million after tax, received in January 2007 from a common stock investment and higher long-term interest rates on fixed maturity investments. The average annual yields on the investment portfolio in the three and six months ended June 30, 2007 and 2006 were as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
	2007		2006		2007		2006
Before Tax (1)	5.2	%	4.7	%	5.2	%	4.6	%
After Tax	3.5	%	3.1	%	3.5	%	3.1	%

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

The increase in realized gains on investments in 2007 compared to 2006 includes gains before tax of $3.5 million and $7.5 million from sales of a common stock investment in the three and six months ended June 30, 2007, respectively.

At June 30, 2007, our investment portfolio was comprised of 63% fixed maturity securities, 32% short-term investments, 4% equity securities and 1% other investments. Fixed maturity securities include primarily corporate bonds, U.S. Government bonds, municipal bonds and mortgage-backed securities issued by the Government National Mortgage Association (“GNMA”). Of the fixed maturity portfolio, including short-term investments, 94% and 93% were rated investment grade at June 30, 2007 and December 31, 2006, respectively. The average maturity of the fixed maturity portfolio, including short-term investments, was 3.5 years and 3.7 years at June 30, 2007 and December 31, 2006, respectively. The duration of the fixed maturity portfolio including short-term investments was 2.8 years as of June 30, 2007 and December 31, 2006.

At June 30, 2007 and December 31, 2006, 90% of the investments in fixed maturity securities and short-term investments were classified as available-for-sale securities. Stockholders’ equity will fluctuate with changes in the fair values of available-for-sale securities. Stockholders’ equity decreased by $17.6 million after deferred tax from December 31, 2006 to June 30, 2007 as a result of changes in the fair values of fixed maturity and equity investments classified as available-for-sale.

The following table sets forth the unrealized net (loss) gain on available-for-sale investments as of June 30, 2007 and December 31, 2006:

	Fixed Maturity						Equity
(Dollars in thousands)	Before Tax			After Tax			Before Tax		After Tax
June 30, 2007	$	(23,278	)	$	(15,130	)	$	15,933	$	10,356
December 31, 2006	(9,562		)	(6,215		)	29,304		19,048

Investments that we currently own could be subject to default by the issuer or could suffer declines in value that become other-than-temporary. Unrealized losses on fixed maturity securities at June 30, 2007 are principally attributable to the impact of increases in interest rates, rather than declines in the credit quality of these investments. We do not directly own any subprime mortgage debt securities or derivative securities relating thereto.

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

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

We monitor our portfolio continuously and actively manage our investments to preserve principal values whenever possible. When, in the opinion of management, a decline in the fair value of an investment is considered to be other-than-temporary, such investment is written-down to its fair value. The amount written-down is recorded in earnings as a realized loss on investments. The determination of other-than-temporary includes, in addition to other relevant factors, a presumption that if the market value is below cost by a significant amount for a period of time, a write-down is necessary. There were no such write-downs in the six months ended June 30, 2007 and 2006.

We continuously assess the prospects for individual securities as part of ongoing portfolio management, including the identification of other-than-temporary declines in fair values. This process includes reviewing the amount and length of time of unrealized losses on investments, historical and projected company financial performance, company-specific news and other developments, the outlook for industry sectors, credit ratings and macro-economic changes, including government policy initiatives. We believe that our unrealized losses at June 30, 2007 are not other-than-temporary. We base this conclusion on our current understanding of the issuers of these securities, as described above, and because we have established a presumption that an unrealized loss of a significant amount for a specific period of time is other-than-temporary. We have consistently applied this presumption for over fifteen years. We also have the ability and intent to hold securities with unrealized losses for a sufficient amount of time for them to recover their values or reach maturity.

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

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

Set forth below is information about unrealized gains and losses in our investment portfolio at June 30, 2007:

	Securities with Unrealized
(Dollars in thousands)	Losses			Gains
Fixed maturity securities:
Fair value	$	1,235,264		$	181,354
Amortized cost	1,266,195			178,726
Unrealized (loss) gain	(30,931		)	2,628
Fair value as a percentage of amortized cost	97.6		%	101.5		%
Number of security positions held	237			56
Concentration of unrealized (losses) gains by type or industry:
GNMA’s	$	(4,183	)	$	44
Municipal bonds	(3,391		)
Financial institutions	(2,323		)	53
Hotels	(2,254		)
Insurance companies	(2,039		)	1,545
Food and beverage	(2,021		)	14
Machinery	(1,877		)	38
Pharmaceuticals	(1,621		)
Petroleum	(1,307		)	2
Utilities	(1,136		)	157
Personal goods	(1,075		)	103
Other	(7,704		)	672
Total	$	(30,931	)	$	2,628
Fixed maturity securities:
Investment grade:
Fair value	$	1,131,381		$	160,147
Amortized cost	1,156,852			158,737
Fair value as a percentage of amortized cost	97.8		%	100.9		%
Non-investment grade:
Fair value	$	103,883		$	21,207
Amortized cost	109,343			19,989
Fair value as a percentage of amortized cost	95.0		%	106.1		%
Equity securities:
Fair value	$	33,408		$	56,704
Cost	37,572			36,607
Unrealized (loss) gain	(4,164		)	20,097
Fair value as a percentage of cost	88.9		%	154.9		%
Number of security positions held	10			14

The table below sets forth the fair value of fixed maturity securities at June 30, 2007, based on their scheduled maturities:

	Securities with Unrealized
(Dollars in thousands)	Losses		Gains
1 year or less	$	76,981	$	35,496
After 1 year through 5 years	382,288		80,295
After 5 years through 10 years	745,982		56,899
After 10 years	30,013		8,664
Total	$	1,235,264	$	181,354

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

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

The table below sets forth information about fixed maturity and equity securities with unrealized losses at June 30, 2007:

(Dollars in thousands)	Fair Value		Unrealized Loss			Fair Value as a Percentage of Cost Basis
Fixed maturity securities with unrealized losses:
Individually exceeding $0.5 million and for:
Less than 3 months (2 issues)	$	18,515	$	(1,504	)	92.5	%
3-6 months (3 issues)	52,681		(1,628		)	97.0	%
6-12 months (4 issues)	68,477		(4,367		)	94.0	%
Greater than 12 months (2 issues)	23,232		(1,057		)	95.6	%
Individually less than $0.5 million (226 issues)	1,072,359		(22,375		)	98.0	%
Total	$	1,235,264	$	(30,931	)	97.6	%
Equity securities with unrealized losses:
Individually exceeding $0.5 million and for:
Less than 3 months (1 issue)	$	10,848	$	(3,165	)	77.4	%
Individually less than $0.5 million (9 issues)	22,560		(999		)	95.8	%
Total	$	33,408	$	(4,164	)	88.9	%

The following is a summary of securities sold at a loss in the three and six months ended June 30, 2007 and 2006:

	Three Months Ended June 30,				Six Months Ended June 30,
(Dollars in thousands)	2007	2006			2007			2006
Fixed maturity securities:
Realized losses on sales	None	$	(432	)	$	(1,188	)	$	(857	)
Fair value at the date of sale		734,218			19,383			1,543,213
Number of securities sold		8			5			13
Losses realized on securities with an unrealized loss preceding the sale for:
Less than 3 months		$	(401	)	$	(15	)	$	(826	)
6-12 months		(31		)				(31		)
Greater than 12 months					(1,173		)
Equity securities:
Realized losses on sales	None	None			$	(114	)	$	(407	)
Fair value at the date of sale					2,105			3,466
Number of securities sold					3			2
Losses realized on securities with an unrealized loss preceding the sale for:
Less than 3 months					$	(109	)	$	(407	)
6-12 months					(5		)

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 use in such disbursements, and investment income provides additional cash receipts. In periods in which disbursements for claims and benefits, current policy acquisition costs and current operating and other expenses exceed operating cash receipts, cash flow is negative. Such negative cash flow is offset by cash flow from investments, principally from short-term investments and maturities of longer-term investments. The exact timing of the payment of claims cannot be predicted with certainty. The insurance subsidiaries maintain portfolios of invested assets with varying maturities and a substantial amount of short-term investments to

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

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

provide adequate cash for the payment of claims. At June 30, 2007 and December 31, 2006, short-term investments and fixed maturity investments maturing within two years in the insurance subsidiaries amounted to $1.0 billion and $0.9 billion, respectively. These securities, in conjunction with our positive net cash flow from operations, provide adequate sources of liquidity for the expected payment of our loss reserves in the near future. We do not expect to sell securities or use our credit facility to pay our policy liabilities as they come due.

Net cash provided by operating activities was positive in the six months ended June 30, 2007 but lower than net cash provided by operating activities in the six months ended June 30, 2006 primarily due to lower cash flow from our workers’ compensation business as a result of decreased premiums, as shown in the table below:

	Six Months Ended June 30,
(Dollars in thousands)	2007			2006
Net cash flow from workers’ compensation business	$	72,222		$	146,040
Net cash used in reinsurance business	(18,594		)	(32,427		)
Investment income received	51,030			33,542
Interest and other expenses paid by parent	(4,281		)	(2,996		)
Income taxes paid	(80,071		)	(65,364		)
Net cash provided by operating activities	$	20,306		$	78,795

Zenith National requires cash to pay any dividends declared to our stockholders, make interest and principal payments on our outstanding debt obligations, fund operating expenses and, from time to time, to make capital contributions to Zenith Insurance. Such cash requirements are generally funded in the long-run by dividends received from Zenith Insurance and financing or refinancing activities by Zenith National. Cash, short-term investments and other marketable investments in Zenith National were $70.0 million and $69.4 million at June 30, 2007 and December 31, 2006, respectively. Zenith National’s available invested assets and other sources of liquidity are currently expected to be sufficient to meet its requirements for liquidity in the short-term and long-term.

Our insurance subsidiaries are subject to insurance regulations which restrict their ability to distribute dividends. During 2007, Zenith Insurance is able to pay up to $225.9 million of dividends to Zenith National without prior approval of the California Department of Insurance. Zenith Insurance paid $30.0 million in dividends to Zenith National in the six months ended June 30, 2007 and $25.0 million in dividends were paid in the six months ended June 30, 2006. 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.

In April 2007, A. M. Best Company upgraded the financial strength rating of our insurance subsidiaries to A (Excellent) from A- (Excellent).

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

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

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, 2006 (“2006 Form 10-K”). 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 2006 Form 10-K.

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 investments to maturity. We rely on the experience and judgment of senior management to monitor and mitigate the effects of market risk. We do not utilize financial instrument hedges or derivative financial instruments to manage risks, nor do we enter into any swap, forward or option contracts, but will attempt to mitigate our exposure through active portfolio management. The allocation among various types of securities is adjusted from time to time based on market conditions, credit conditions, tax policy, fluctuations 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.

The table below provides information about our financial instruments for which fair values are subject to changes in interest rates. For fixed maturity investments, the table presents fair values of investments held and weighted average interest rates on such investments by expected maturity dates. Such investments include corporate bonds, municipal bonds, U. S. Government bonds, and 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)	2007			2008			2009			2010			2011			Thereafter			Total
As of June 30 2007
Fixed Maturity Investments:
Fixed rate	$	60,900		$	148,738		$	87,094		$	93,598		$	95,374		$	930,914		$	1,416,618
Weighted average interest rate	5.0		%	5.3		%	5.4		%	5.5		%	5.6		%	6.1		%	5.8		%
Short-term investments	$	713,283																	$	713,283
Debt and interest obligations:
Convertible Notes payable (1)	1,183																		1,183
Redeemable securities	$	2,501		$	5,002		$	5,002		$	5,002		$	5,002		$	143,529		$	166,038

As of December 31, 2006
Fixed Maturity Investments:
Fixed rate	$	115,904		$	147,827		$	84,666		$	93,933		$	197,193		$	847,566		$	1,487,089
Weighted average interest rate	5.4		%	5.2		%	5.2		%	5.3		%	6.0		%	5.6		%	5.6		%
Short-term investments	$	679,989																	$	679,989
Debt and interest obligations:
Convertible Notes payable (1)	1,216																		1,216
Redeemable securities	$	5,002		$	5,002		$	5,002		$	5,002		$	5,002		$	143,529		$	168,539

(1) The Convertible Notes payable are shown with an expected maturity date in 2007 because the note holders have the right to convert their notes into our common stock during the third quarter of 2007 and had the same right in the first quarter of 2007 (see Note 4 to the Consolidated Financial Statements).

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.

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

Part II. OTHER INFORMATION

Item 4. Submission of Matters to a Vote of Security Holders

The Annual Stockholders’ Meeting of Zenith National was held on May 24, 2007. Three matters were presented to a vote of the stockholders.

One matter was the election of Directors. The tabulation of votes for the nominees, all of whom were elected, follows:

Director	Votes For	Votes Withheld
Max M. Kampelman	34,384,156	475,896
Robert J. Miller	34,463,605	396,447
Leon E. Panetta	34,576,989	283,063
Catherine B. Reynolds	34,794,569	65,483
Alan I. Rothenberg	34,668,851	191,201
William S. Sessions	34,384,861	475,191
Gerald Tsai, Jr.	34,265,808	594,244
Michael Wm. Zavis	34,801,661	58,391
Stanley R. Zax	34,034,310	825,742

With respect to the election of Directors, there were no votes cast against any Director, no abstentions and no broker non-votes.

The second matter was a vote to approve the 2007 Employee Stock Purchase Plan. The tabulation of the votes for the amended and restated plan, which was approved, follows:

		Votes
For		29,311,411
Against		993,820
Abstain		34,645
Broker Non-Votes		4,520,176

The third matter was a vote to ratify the appointment of PricewaterhouseCoopers LLP as Zenith’s auditors for the fiscal year ending December 31, 2007. The tabulation of votes for the appointment, which was ratified, follows:

		Votes
For		34,811,233
Against		19,969
Abstain		21,348
Broker Non-Votes		7,502

Item 5. Other Information

Amendment No. 7 to the Workers’ Compensation and Employers’ Liability Excess of Loss Reinsurance Agreement of July 1, 2002, between Employers Reinsurance Corporation, as the reinsurer, and Zenith Insurance Company and ZNAT Insurance Company as the reinsureds, was executed on July 20, 2007. The Amendment, which is effective from May 1, 2007, increases the reinsureds’ retention under the agreement from $1.0 million to $5.0 million with an annual aggregate limit of $25.0 million in the layer of $5.0 million in excess of the $5.0 million retention. A copy of Amendment No. 7 is attached to this Quarterly Report as Exhibit 10.1.

ZENITH NATIONAL INSURANCE CORP. AND SUBSIDIARIES

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 as 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 as Exhibit 3.9 to Zenith’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2006.)

10.1	Amendment No. 7 to the Workers’ Compensation and Employers’ Liability Excess of Loss Reinsurance Agreement of July 1, 2002, between Employers Reinsurance Corporation and Zenith Insurance Company and ZNAT Insurance Company, a copy of which is filed herewith.

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

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

32	Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, a copy of which is filed herewith.

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.


July 24, 2007	By:	/s/ Stanley R. Zax
Date		Stanley R. Zax
		Chairman of the Board and President
		(Principal Executive Officer)


July 24, 2007	By:	/s/ Kari L. Van Gundy
Date		Kari L. Van Gundy
		Senior Vice President
		& Chief Financial Officer
		(Principal Financial and Accounting Officer)

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Litigious
Readability	8th grade Avg

Zenith National Insurance (ZNT) Inactive 10-Q2007 Q2 Quarterly report

Content analysis