Zenith National, Units Outlook Revised to Postivie; Ratings Affirmed

August 11, 2005

Standard & Poor’s Ratings Services has affirmed its ‘BB+’ counterparty credit rating and ‘B+’ preferred stock rating on Zenith National Insurance Corp. (Zenith).

Standard & Poor’s also affirmed its ‘BBB+’ counterparty credit and financial strength ratings on Zenith’s rated operating companies Zenith Insurance Co. and ZNAT Insurance Co.

At the same time, Standard & Poor’s revised its outlook on all the ratings to positive from stable.

“The positive outlook is driven by two recent favorable developments and the company’s exceeding our expectations for earnings and capitalization,” explained Standard & Poor’s credit analyst Jason Jones. “The main development is the emerging benefits from California workers’ compensation reforms. Until now, the amount of benefit was discounted due to the uncertainty normally associated with reforms and the potential for unintended consequences. Reforms should improve loss costs on prospective business and mitigate the potential for adverse reserve development on prior years’ business.” The second development is the conversion of $80 million of debt into equity in the second quarter of 2005, driving debt-to-capital down from 26% at year-end 2004 to 14% as of June 30, 2005.

Zenith’s strengths include its very strong earnings, favorable conditions in its core markets (California and Florida workers’ comp), strong and improved capitalization, decreased financial leverage, strong competitive position in California workers’ comp, and record of outperforming the California workers’ comp industry throughout the cycle.

Partially offsetting weaknesses are the company’s geographic and line of business concentrations, and its exposure to property/catastrophe volatility from the smaller assumed reinsurance segment.

Standard & Poor’s expects underwriting results to remain very strong with a combined ratio of about 85%-86% for the remainder of 2005. Workers’ comp results should be very strong in Zenith’s largest markets – California and Florida.

As recent rate decreases take effect, Zenith’s combined ratio is expected to rise several points in 2006 but it should maintain strong earnings and underwriting profits. Assumed reinsurance is expected to contribute a small amount of earnings provided no significant catastrophe losses occur. Financial leverage is expected to remain conservative at about its current level, and capitalization is expected to remain strong to very strong.

If Zenith meets Standard & Poor’s expectations and conditions remain favorable in its core markets, an upgrade is possible within the next six to 12 months.

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