Fitch Affirms Ratings of Zenith Nat’l Subsidiaries

October 1, 2002

Fitch Ratings has affirmed the ‘A-‘ insurer financial strength ratings of Zenith National Insurance Corp.’s (Zenith National) three insurance subsidiaries, Zenith Insurance Company (Zenith Insurance), ZNAT Insurance Company and Zenith Star Insurance Company. Fitch has also affirmed Zenith National’s long-term issuer rating of ‘BBB-‘ and the ‘BB+’ rating of Zenith National Insurance Capital Trust I securities. The Rating Outlook is Stable.

The ratings reflect Zenith National’s disciplined underwriting focus, improved operating results thus far in 2002, strong capitalization and reasonable financial leverage, and overall conservative and liquid investment portfolio. Partially offsetting these positives are business line and geographical concentration risks, challenges in the competitive workers’ compensation market, poor operating performance in recent years (1999-2001), and a somewhat higher exposure to below investment grade bonds than industry averages.

The workers’ comp market has been plagued by inadequate industry pricing, escalating benefits and increased medical and claims severity costs over the past several years, and more recently the unexpected catastrophe losses related to the tragic events of Sept. 11 and the resulting sharp increases in reinsurance costs for primary carriers. Throughout this period Zenith has preserved its focus on profitability through maintaining underwriting discipline and pricing risk accordingly. As a result, Zenith’s accident year results have been and continue to be better than the workers’ comp industry. Consequently, Fitch believes that Zenith is well positioned relative to its peers to take advantage of the current window of opportunity in the hardening market.

Zenith’s underwriting results improved for the second straight year in 2001 as the statutory combined ratio fell to 114.5 percent from 130.7 percent in 2000 and 138.4 percent in 1999, but was still above the average for the proceeding three years (1996 to 1998) of 102.9 percent. The overall improvement in 2001 was driven by better market pricing conditions in workers’ comp partially offset by losses incurred in the reinsurance operations from the events of Sept. 11.

Thus far in 2002, Zenith has continued to improve its profitability, posting a $15.9 million statutory operating gain through June 30th compared to a $3.2 million gain for the same period in 2001. The statutory combined ratio for the first six months of 2002 was 100.4 percent compared to 106.6 percent for the first six months of 2001 as growth in written and earned premiums continued in the hardening market in both the workers’ comp and reinsurance segments.

Statutory capitalization at Zenith Insurance is strong with $259.4 million of policyholders’ surplus at June 30, 2002. In addition, on Sept. 6, 2002, Zenith National made a $47.4 million capital contribution to Zenith Insurance to support the recent increased premium volume of its workers’ compensation business. Zenith National’s capital structure is prudent with the capital mix consisting of 3 percent debt, 17 percent hybrid preferred, and 80 percent common equity at June 30, 2002.

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