COMBINED ANNUAL STATEMENT

PROPERTY AND CASUALTY COMPANIES ASSOCIATION EDITION COMBINED ANNUAL STATEMENT FOR THE YEAR ENDING December, 06 OF THE CONDITION AND AFFAIRS OF THE ZENITH INSURANCE COMPANY AND ITS AFFILIATED PROPERTY AND CASUALTY INSURER NAIC Group Code 058 NAIC Combined Company Code 060 Mail Address 55 Califa Street, Woodland Hills, CA 67 (Street and Number) (City or Town, State and Zip Code) Combined Statement Contact William John Owen 88-7-000 (Name) (Area Code) (Telephone Number) (Extension) NAME OF COMPANIES INCLUDED IN THIS STATEMENT Name of Company NAIC Company Code ZENITH INSURANCE COMPANY 6 ZNAT INSURANCE COMPANY 00 a. Is this an original filing? Yes ( X ) No ( ) b. If no,. State the amendment number. Date filed. Number of pages attached

ANNUAL STATEMENT FOR THE YEAR 06 OF THE ZENITH INSURANCE COMPANY AND ITS AFFILIATED PROPERTY AND CASUALTY INSURER ASSETS Assets Current Year Nonadmitted Assets Net Admitted Assets (Cols. - ) Prior Year 4 Net Admitted Assets. Bonds (Schedule D) 56,75,8 56,75,8 780,76,75. Stocks (Schedule D):. Preferred stocks 50,005 50,005 0,50,005. Common stocks 55,465,0 55,465,0 44,45,88. Mortgage loans on real estate (Schedule B):. First liens. Other than first liens 4. Real estate (Schedule A): 4. Properties occupied by the company (less $ encumbrances) 7,88,07 7,88,07 8,067,87 4. Properties held for the production of income (less $ encumbrances) 4. Properties held for sale (less $ encumbrances) 5. Cash ($ 8,7,8, Schedule E - Part ), cash equivalents ($ 5,60,8, Schedule E - Part ) and short-term investments ($ 607,45,, Schedule DA) 67,40,0 67,40,0 45,,77 6. Contract loans (including $ premium notes) 7. Derivatives (Schedule DB) 7,57,77 7,57,77,44,5 8. Other invested assets (Schedule BA) 58,4,7 58,4,7 4,646,5. Receivable for securities,87,0,87,0,05,06 0. Securities lending reinvested collateral assets (Schedule DL). Aggregate write-ins for invested assets. Subtotals, cash and invested assets (Lines to ),684,66,05,684,66,05,78,87,85. Title plants less $ charged off (for Title insurers only) 4. Investment income due and accrued 7,44,0 7,44,0 8,6,60 5. Premiums and considerations: 5. Uncollected premiums and agents' balances in the course of collection 4,47,74 888,760,584,74,5,40 5. Deferred premiums and agents' balances and installments booked but deferred and not yet due (including $ 5,44,687 earned but unbilled premiums),57,55 54,46,45,486 7,8,67 5. Accrued retrospective premiums ($ ) and 6. Reinsurance: contracts subject to redetermination ($ ) 6. Amounts recoverable from reinsurers,,64,,64 84,8 6. Funds held by or deposited with reinsured companies,464,464,6 6. Other amounts receivable under reinsurance contracts 0,666 0,666,666 7. Amounts receivable relating to uninsured plans 8. Current federal and foreign income tax recoverable and interest thereon 7,56,08 8. Net deferred tax asset 0,,64 0,,64 66,74,84. Guaranty funds receivable or on deposit 7,086, 7,086, 6,6,78 0. Electronic data processing equipment and software,48,400,87,8 6,,07,00. Furniture and equipment, including health care delivery assets ($ ),48,8,48,8. Net adjustment in assets and liabilities due to foreign exchange rates. Receivables from parent, subsidiaries and affiliates 4. Health care ($ ) and other amounts receivable 5. Aggregate write-ins for other than invested assets 5,06,0 8,580,4 6,75,75 5,767,65 6. Total assets excluding Separate Accounts, Segregated Accounts and Protected Cell Accounts (Lines to 5),867,4,,64,65,85,75,67,4,874,6 7. From Separate Accounts, Segregated Accounts and Protected Cell Accounts 8. Total (Lines 6 and 7),867,4,,64,65,85,75,67,4,874,6 0. 0. 0. DETAILS OF WRITE-INS 8. Summary of remaining write-ins for Line from overflow page. Totals (Lines 0 thru 0 plus 8)(Line above) 50. Prepaid items, deposits and loss fund deposits 0,404,55 7,48,60,455,4,48,5 50. Equities and deposits in pools and associations,07,04,07,04,45,4 50. Miscellaneous assets,55,4 47,678,876,65,05,7 58. Summary of remaining write-ins for Line 5 from overflow page 47,6 5,008 85,65,80 5. Totals (Lines 50 thru 50 plus 58)(Line 5 above) 5,06,0 8,580,4 6,75,75 5,767,65

ANNUAL STATEMENT FOR THE YEAR 06 OF THE ZENITH INSURANCE COMPANY AND ITS AFFILIATED PROPERTY AND CASUALTY INSURER LIABILITIES, SURPLUS AND OTHER FUNDS Current Year Prior Year. Losses (Part A, Line 5, Column 8) 5,656,66 48,44,0. Reinsurance payable on paid losses and loss adjustment expenses (Schedule F, Part, Column 6),546 4,867. Loss adjustment expenses (Part A, Line 5, Column ) 8,75,08 4,846,48 4. Commissions payable, contingent commissions and other similar charges 8,870,874 8,5,77 5. Other expenses (excluding taxes, licenses and fees) 8,,80 4,86,7 6. Taxes, licenses and fees (excluding federal and foreign income taxes) 8,500,76 4,7, 7. Current federal and foreign income taxes (including $ on realized capital gains (losses)),045,568 7. Net deferred tax liability 8. Borrowed money $ and interest thereon $. Unearned premiums (Part A, Line 8, Column 5) (after deducting unearned premiums for ceded reinsurance of $,45,7 and including warranty reserves of $ and accrued accident and health experience rating refunds including $ for medical loss ratio rebate per the Public Health Service Act) 77,64,5 76,44,5 0. Advance premium 4,07,06 4,,4. Dividends declared and unpaid:. Stockholders. Policyholders. Ceded reinsurance premiums payable (net of ceding commissions),00,800,80,. Funds held by company under reinsurance treaties (Schedule F, Part, Column ),60,60 4. Amounts withheld or retained by company for account of others,47,0,46,5 5. Remittances and items not allocated 6. Provision for reinsurance (including $ 6,50 certified) (Schedule F, Part 8) 68,7 565,455 7. Net adjustments in assets and liabilities due to foreign exchange rates 8. Drafts outstanding. Payable to parent, subsidiaries and affiliates,78,446 6,40 0. Derivatives,088,75,45,58. Payable for securities,647,80. Payable for securities lending. Liability for amounts held under uninsured plans 4. Capital notes $ and interest thereon $ 5. Aggregate write-ins for liabilities 4,40,80,58,04 6. Total liabilities excluding protected cell liabilities (Lines through 5),0,7,046,,0,0 7. Protected cell liabilities 8. Total liabilities (Lines 6 and 7),0,7,046,,0,0. Aggregate write-ins for special surplus funds,0,4 4,45,450 0. Common capital stock 4,00,000 4,00,000. Preferred capital stock. Aggregate write-ins for other than special surplus funds. Surplus notes 4. Gross paid in and contributed surplus 8,0,645 8,0,645 5. Unassigned funds (surplus) 6,54,60 4,5,564 6. Less treasury stock, at cost: 6. shares common (value included in Line 0 $ ) 6. shares preferred (value included in Line $ ) 7. Surplus as regards policyholders (Lines to 5, less 6) (Page 4, Line ) 56,56,58 6,67,65 8. TOTALS (Page, Line 8, Col. ),85,75,67,4,874,6 DETAILS OF WRITE-INS 50. Loss reserves assumed from portfolio transfers 8,7,7 8,5,8 50. Other liabilities,66,44,474,58 50. Retroactive reinsurance reserve ceded (,0,4) (4,45,450) 58. Summary of remaining write-ins for Line 5 from overflow page 5. Totals (Lines 50 thru 50 plus 58)(Line 5 above) 4,40,80,58,04 0. Special surplus from retroactive reinsurance account,0,4 4,45,450 0. 0. 8. Summary of remaining write-ins for Line from overflow page. Totals (Lines 0 thru 0 plus 8)(Line above),0,4 4,45,450 0. 0. 0. 8. Summary of remaining write-ins for Line from overflow page. Totals (Lines 0 thru 0 plus 8)(Line above)

ANNUAL STATEMENT FOR THE YEAR 06 OF THE ZENITH INSURANCE COMPANY AND ITS AFFILIATED PROPERTY AND CASUALTY INSURER STATEMENT OF INCOME UNDERWRITING INCOME Current Year Prior Year. Premiums earned (Part, Line 5, Column 4) 807,58, 766,65,45 DEDUCTIONS:. Losses incurred (Part, Line 5, Column 7) 58,0,67 55,76,60. Loss adjustment expenses incurred (Part, Line 5, Column ) 0,778,67 0,67,6 4. Other underwriting expenses incurred (Part, Line 5, Column ) 57,845,56 50,7,404 5. Aggregate write-ins for underwriting deductions 6. Total underwriting deductions (Lines through 5) 67,7,65 607,577,6 7. Net income of protected cells 8. Net underwriting gain or (loss) (Line minus Line 6 plus Line 7) 8,0,7 58,788,06 INVESTMENT INCOME. Net investment income earned (Exhibit of Net Investment Income, Line 7) 0,545,55,64,464 0. Net realized capital gains or (losses) less capital gains tax of $ 5,4,000 (Exhibit of Capital Gains (Losses) ) (44,57,44) (,47,48). Net investment gain (loss) (Lines + 0) (4,06,7),76,8 OTHER INCOME. Net gain (loss) from agents or premium balances charged off (amount recovered $ 68,56 amount charged off $,4,4 ) (74,687) (858,0). Finance and service charges not included in premiums 8,54 7,6 4. Aggregate write-ins for miscellaneous income,68,8,605, 5. Total other income (Lines through 4),6,687 80,4 6. Net income before dividends to policyholders, after capital gains tax and before all other federal and foreign income taxes (Lines 8 + + 5) 76,60,85 7,46, 7. Dividends to policyholders 6,566,67,4,05 8. Net income, after dividends to policyholders, after capital gains tax and before all other federal and foreign income taxes (Line 6 minus Line 7) 60,064,78 58,404,06. Federal and foreign income taxes incurred 44,76,77 7,86,6 0. Net income (Line 8 minus Line )(to Line ) 5,7,0 0,588,580 CAPITAL AND SURPLUS ACCOUNT. Surplus as regards policyholders, December prior year (Page 4, Line, Column ) 6,67,65 564,54,76. Net income (from Line 0) 5,7,0 0,588,580. Net transfers (to) from Protected Cell accounts 4. Change in net unrealized capital gains or (losses) less capital gains tax of $ (4,45,80) (78,7,) 5,0,5 5. Change in net unrealized foreign exchange capital gain (loss) (,84,08) (4,44,67) 6. Change in net deferred income tax,,78 5,08,5 7. Change in nonadmitted assets (Exhibit of Nonadmitted Assets, Line 8, Col. ) (,85,747) 4,8 8. Change in provision for reinsurance (Page, Line 6, Column minus Column ) 6,74 8,4. Change in surplus notes 0. Surplus (contributed to) withdrawn from protected cells. Cumulative effect of changes in accounting principles. Capital changes:. Paid in. Transferred from surplus (Stock Dividend). Transferred to surplus. Surplus adjustments:. Paid in. Transferred to capital (Stock Dividend). Transferred from capital 4. Net remittances from or (to) Home Office 5. Dividends to stockholders 6. Change in treasury stock (Page, Lines 6. and 6., Column minus Column ) (80,000,000) (60,000,000) 7. Aggregate write-ins for gains and losses in surplus (4,6) (0,858) 8. Change in surplus as regards policyholders for the year (Lines through 7) (58,0,07) 57,6,87. Surplus as regards policyholders, December current year (Line plus Line 8) (Page, Line 7) 56,56,58 6,67,65 050. 050. 050. DETAILS OF WRITE-INS 058. Summary of remaining write-ins for Line 5 from overflow page 05. Totals (Lines 050 thru 050 plus 058)(Line 5 above) 40. Miscellaneous income from pools and associations 47, 8, 40. Other income,57,7,587,0 40. 48. Summary of remaining write-ins for Line 4 from overflow page 4. Totals (Lines 40 thru 40 plus 48)(Line 4 above),68,8,605, 70. Change in special surplus from retroactive reinsurance account (4,6) (0,858) 70. 70. 78. Summary of remaining write-ins for Line 7 from overflow page 7. Totals (Lines 70 thru 70 plus 78)(Line 7 above) (4,6) (0,858) 4

ANNUAL STATEMENT FOR THE YEAR 06 OF THE ZENITH INSURANCE COMPANY AND ITS AFFILIATED PROPERTY AND CASUALTY INSURER CASH FLOW Current Year Prior Year Cash from Operations. Premiums collected net of reinsurance 80,48,60 766,4,06. Net investment income 0,65,,504,485. Miscellaneous income,6,686 80, 4. Total (Lines through ) 85,7,0 786,55,47 5. Benefit and loss related payments 8,,55 6,5,58 6. Net transfers to Separate Accounts, Segregated Accounts and Protected Cell Accounts 7. Commissions, expenses paid and aggregate write-ins for deductions 6,7, 44,,44 8. Dividends paid to policyholders 6,566,67,4,05. Federal and foreign income taxes paid (recovered) net of $ 5,4,000 tax on capital gains (losses) 0,565,50 7,7,8 0. Total (Lines 5 through ) 6,404,85 666,4,080. Net cash from operations (Line 4 minus Line 0) 4,66,457 0,45, Cash from Investments. Proceeds from investments sold, matured or repaid:. Bonds 60,57,4,457,00. Stocks 80,4,6 54,588,850. Mortgage loans,675,000.4 Real estate.5 Other invested assets,07,775 46,74,0.6 Net gains or (losses) on cash, cash equivalents and short-term investments 64,68 (,48,7).7 Miscellaneous proceeds,754,85 5,875,68.8 Total investment proceeds (Lines. to.7) 688,508, 87,,486. Cost of investments acquired (long-term only):. Bonds 57,05,5 67,,40. Stocks 54,77,57 6,85,760. Mortgage loans.4 Real estate 878,,546.5 Other invested assets 0,58,70,6,04.6 Miscellaneous applications 4,687,4 6,055.7 Total investments acquired (Lines. to.6) 58,706,647 6,80,55 4. Net increase (decrease) in contract loans and premium notes 5. Net cash from investments (Line.8 minus Line.7 minus Line 4) 5,80,645 (4,4,0) Cash from Financing and Miscellaneous Sources 6. Cash provided (applied): 6. Surplus notes, capital notes 6. Capital and paid in surplus, less treasury stock 6. Borrowed funds 6.4 Net deposits on deposit-type contracts and other insurance liabilities 6.5 Dividends to stockholders 80,000,000 60,000,000 6.6 Other cash provided (applied) (4,75,80) (,0,6) 7. Net cash from financing and miscellaneous sources (Lines 6. to 6.4 minus Line 6.5 plus Line 6.6) (84,75,80) (6,0,6) RECONCILIATION OF CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS 8. Net change in cash, cash equivalents and short-term investments (Line, plus Lines 5 and 7),008, 8,06,7. Cash, cash equivalents and short-term investments:. Beginning of year 45,,77 444,84,454. End of period (Line 8 plus Line.) 67,40,0 45,,77 Note: Supplemental disclosures of cash flow information for non-cash transactions: 0.000. During the year ended December, 06, proceeds from investments sold, bonds (line.) and cost of investments acquired, bonds (line.) exclude $5.6 million related to the non-cash disposal/acquisition of various municipal bonds. In addition, proceeds from investments sold, stocks (line.) and cost of investments acquired, stocks (line.) exclude $0.8 million related to the non-cash conversion of preferred stocks to common stocks. 7,8,75 5

ANNUAL STATEMENT FOR THE YEAR 06 OF THE ZENITH INSURANCE COMPANY AND ITS AFFILIATED PROPERTY AND CASUALTY INSURER Note: Supplemental disclosures of cash flow information for non-cash transactions: 0.000. During the year ended December, 05, proceeds from investments sold, bonds (line.) and cost of investments acquired, bonds (line.) exclude $.8 million related to the non-cash disposal/acquisition of a municipal bond. In addition, proceeds from investments sold, stocks (line.) and cost of investments acquired, stocks (line.) exclude $.4 million related to the non-cash conversion of preferred stocks to common stocks. 5,44,000 5.

ANNUAL STATEMENT FOR THE YEAR 06 OF THE ZENITH INSURANCE COMPANY AND ITS AFFILIATED PROPERTY AND CASUALTY INSURER UNDERWRITING AND INVESTMENT EXHIBIT Line of Business PART - PREMIUMS EARNED Net Premiums Written per Column 6, Part B Unearned Premiums Dec. Prior Year - per Col., Last Year s Part Unearned Premiums Dec. Current Year - per Col. 5 Part A 4 Premiums Earned During Year (Cols. + - ). Fire 4,54,8,86,080,5,5 4,5,86. Allied lines. Farmowners multiple peril 4. Homeowners multiple peril 5. Commercial multiple peril,0,60 8,,0,05,7 0,508,08 6. Mortgage guaranty 8. Ocean marine. Inland marine 0. Financial guaranty. Medical professional liability - occurrence. Medical professional liability - claims-made. Earthquake,66 08,06,8 07,87. Group accident and health 4. Credit accident and health (group and individual) 5. Other accident and health 6. Workers' compensation 757,654,60 54,58,58 5,0, 758,70,86 7. Other liability - occurrence 6,6,67,78,04 4,,40 5,840, 7. Other liability - claims-made 7. Excess workers' compensation 8. Products liability - occurrence 8. Products liability - claims-made.,. Private passenger auto liability.,.4 Commercial auto liability 4,088,844 5,57,7 6,,64,4,75. Auto physical damage 4,74,58,800,76,5,550 4,47,80. Aircraft (all perils). Fidelity 4. Surety 6. Burglary and theft 6,606 0,4 6,64 57,45 7. Boiler and machinery 8. Credit. International 0. Warranty. Reinsurance - nonproportional assumed property. Reinsurance - nonproportional assumed liability. Reinsurance - nonproportional assumed financial lines 4. Aggregate write-ins for other lines of business 5. TOTALS 808,878,60 76,44,5 77,64,5 807,58, 40. 40. 40. DETAILS OF WRITE-INS 48. Summary of remaining write-ins for Line 4 from overflow page 4. Totals (Lines 40 thru 40 plus 48)(Line 4 above) 6

ANNUAL STATEMENT FOR THE YEAR 06 OF THE ZENITH INSURANCE COMPANY AND ITS AFFILIATED PROPERTY AND CASUALTY INSURER UNDERWRITING AND INVESTMENT EXHIBIT Line of Business PART A - RECAPITULATION OF ALL PREMIUMS Amount Unearned (Running One Year or Less from Date of Policy) (a) Amount Unearned (Running More Than One Year from Date of Policy) (a) Earned But Unbilled Premium 4 Reserve for Rate Credits and Retrospective Adjustments Based on Experience 5 Total Reserve for Unearned Premiums Cols. + + + 4. Fire,5,5,5,5. Allied lines. Farmowners multiple peril 4. Homeowners multiple peril 5. Commercial multiple peril,05,7,05,7 6. Mortgage guaranty 8. Ocean marine. Inland marine 0. Financial guaranty. Medical professional liability - occurrence. Medical professional liability - claims-made. Earthquake,8,8. Group accident and health 4. Credit accident and health (group and individual) 5. Other accident and health 6. Workers' compensation 5,,8 678,500 5,0, 7. Other liability - occurrence 4,,40 4,,40 7. Other liability - claims-made 7. Excess workers' compensation 8. Products liability - occurrence 8. Products liability - claims-made.,. Private passenger auto liability.,.4 Commercial auto liability 6,,64 6,,64. Auto physical damage,5,550,5,550. Aircraft (all perils). Fidelity 4. Surety 6. Burglary and theft 6,64 6,64 7. Boiler and machinery 8. Credit. International 0. Warranty. Reinsurance - nonproportional assumed property. Reinsurance - nonproportional assumed liability. Reinsurance - nonproportional assumed financial lines 4. Aggregate write-ins for other lines of business 5. TOTALS 77,86,04 678,500 77,64,5 6. Accrued retrospective premiums based on experience 7. Earned but unbilled premiums 8. Balance (Sum of Line 5 through 7) 77,64,5 40. 40. 40. DETAILS OF WRITE-INS 48. Summary of remaining write-ins for Line 4 from overflow page 4. Totals (Lines 40 thru 40 plus 48)(Line 4 above) (a) State here basis of computation used in each case Principally daily pro-rata. 7

ANNUAL STATEMENT FOR THE YEAR 06 OF THE ZENITH INSURANCE COMPANY AND ITS AFFILIATED PROPERTY AND CASUALTY INSURER UNDERWRITING AND INVESTMENT EXHIBIT PART B - PREMIUMS WRITTEN Line of Business Reinsurance Assumed Reinsurance Ceded 6 4 5 Net Premiums Written Business (a) From Affiliates From Non-Affiliates To Affiliates To Non-Affiliates Cols. ++-4-5. Fire 5,44,56 5,8 4,54,8. Allied lines. Farmowners multiple peril 4. Homeowners multiple peril 5. Commercial multiple peril,6,47,86,67,0,60 6. Mortgage guaranty 8. Ocean marine. Inland marine 0. Financial guaranty. Medical professional liability - occurrence. Medical professional liability - claims-made. Earthquake 4,48 0,8,66. Group accident and health 4. Credit accident and health (group and individual) 5. Other accident and health 6. Workers' compensation 755,5,54 7,,086 4,68,7 757,654,60 7. Other liability - occurrence 0,40,8 4,676,60 6,6,67 7. Other liability - claims-made 7. Excess workers' compensation 8. Products liability - occurrence 8. Products liability - claims-made.,. Private passenger auto liability.,.4 Commercial auto liability 4,088,844 4,088,844. Auto physical damage 4,78,7 56,74 4,74,58. Aircraft (all perils). Fidelity 4. Surety 6. Burglary and theft 6,40 5,75 6,606 7. Boiler and machinery 8. Credit. International 0. Warranty. Reinsurance - nonproportional assumed property XXX. Reinsurance - nonproportional assumed liability XXX. Reinsurance - nonproportional assumed financial lines XXX 4. Aggregate write-ins for other lines of business 5. TOTALS 84,0, 7,,086,55,707 808,878,60 40. 40. 40. DETAILS OF WRITE-INS 48. Summary of remaining write-ins for Line 4 from overflow page 4. Totals (Lines 40 thru 40 plus 48)(Line 4 above) (a) Does the company's direct premiums written include premiums recorded on an installment basis? Yes [ X ] No [ ] If yes:. The amount of such installment premiums $ 788,04,0. Amount at which such installment premiums would have been reported had they been reported on an annualized basis $ 750,670,75 8

ANNUAL STATEMENT FOR THE YEAR 06 OF THE ZENITH INSURANCE COMPANY AND ITS AFFILIATED PROPERTY AND CASUALTY INSURER UNDERWRITING AND INVESTMENT EXHIBIT PART - LOSSES PAID AND INCURRED Losses Paid Less Salvage 5 6 7 8 4 Net Losses Unpaid Current Year (Part A, Col. 8) Losses Incurred Current Year (Cols. 4 + 5-6) Percentage of Losses Incurred (Col. 7, Part ) to Premiums Earned (Col. 4, Part ) Reinsurance Reinsurance Net Payments Net Losses Unpaid Line of Business Business Assumed Recovered (Cols. + - ) Prior Year. Fire 47,564 47,564 54, 558,84,85.. Allied lines. Farmowners multiple peril 4. Homeowners multiple peril 5. Commercial multiple peril 0,0, 7,0 0,,7 7,6,8 7,6, 0,,87 50. 6. Mortgage guaranty 8. Ocean marine. Inland marine 0. Financial guaranty. Medical professional liability - occurrence. Medical professional liability - claims-made. Earthquake. Group accident and health 4. Credit accident and health (group and individual) 5. Other accident and health 6. Workers' compensation 6,0,044,8,70 7,6, 60,0,076 8,75,76 8,7,65,800,507 0.8 7. Other liability - occurrence,764,48,6,66 60,585 5,08,65,6,,06,887 5. 7. Other liability - claims-made 7. Excess workers' compensation 8. Products liability - occurrence 8. Products liability - claims-made.,. Private passenger auto liability.,.4 Commercial auto liability 5,56,066 5,56,066 7,74,70 4,85,76 8,46,060 6.4. Auto physical damage,76,70,76,70 5,078 5,067,77,8 86.. Aircraft (all perils). Fidelity 4. Surety 6. Burglary and theft,44,44,44.5 7. Boiler and machinery 8. Credit. International 0. Warranty. Reinsurance - nonproportional assumed property XXX. Reinsurance - nonproportional assumed liability XXX 57,084 57,084,58,7,5,64 (50,88). Reinsurance - nonproportional assumed financial lines XXX 4. Aggregate write-ins for other lines of business 5. TOTALS 84,4,48 4,4,454 8,60,04 8,088,8 5,656,66 48,44,0 58,0,67.0 DETAILS OF WRITE-INS 40. 40. 40. 48. Summary of remaining write-ins for Line 4 from overflow page 4. Totals (Lines 40 thru 40 plus 48)(Line 4 above)

0 ANNUAL STATEMENT FOR THE YEAR 06 OF THE ZENITH INSURANCE COMPANY AND ITS AFFILIATED PROPERTY AND CASUALTY INSURER UNDERWRITING AND INVESTMENT EXHIBIT PART A - UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES Reported Losses Incurred But Not Reported 8 4 5 6 7 Deduct Reinsurance Recoverable Net Losses Excl. Incurred But Not Reported (Cols. + - ) Net Unpaid Loss Adjustment Expenses Reinsurance Reinsurance Reinsurance Net Losses Unpaid Line of Business Assumed Assumed Ceded (Cols. 4 + 5 + 6-7). Fire 70,00 70,00 456,506,88 54, 78,56. Allied lines. Farmowners multiple peril 4. Homeowners multiple peril 5. Commercial multiple peril,67,56 40,000,5,56,86,4 85,85 7,6,8,77,4 6. Mortgage guaranty 8. Ocean marine. Inland marine 0. Financial guaranty. Medical professional liability - occurrence. Medical professional liability - claims-made. Earthquake. Group accident and health (a) 4. Credit accident and health (group and individual) 5. Other accident and health (a) 6. Workers' compensation 58,85,86,88,06 4,48,45 558,875,557 4,8,8,8,8 0,86,8 8,75,76,47,5 7. Other liability - occurrence,5,50 45,000,06,50 6,766,08,0,67 5,08,65,86,08 7. Other liability - claims-made 7. Excess workers' compensation 8. Products liability - occurrence 8. Products liability - claims-made.,. Private passenger auto liability.,.4 Commercial auto liability 0,77,58 0,77,58 7,57, 7,74,70,54,05. Auto physical damage 7,6 7,6 54,464 6 5,078 7,6. Aircraft (all perils). Fidelity 4. Surety 6. Burglary and theft 6,857 7. Boiler and machinery 8. Credit. International 0. Warranty. Reinsurance - nonproportional assumed property XXX XXX. Reinsurance - nonproportional assumed liability XXX 7,64 7,64 XXX,74,756,58,7 7,05. Reinsurance - nonproportional assumed financial lines XXX XXX 4. Aggregate write-ins for other lines of business 5. TOTALS 606,85,45,08,77 4,,45 575,0,78 5,50,7,007,,85,8 5,656,66 8,75,08 DETAILS OF WRITE-INS 40. 40. 40. 48. Summary of remaining write-ins for Line 4 from overflow page 4. Totals (Lines 40 thru 40 plus 48)(Line 4 above) (a) Including $ for present value of life indemnity claims.

ANNUAL STATEMENT FOR THE YEAR 06 OF THE ZENITH INSURANCE COMPANY AND ITS AFFILIATED PROPERTY AND CASUALTY INSURER UNDERWRITING AND INVESTMENT EXHIBIT. Claim adjustment services: PART - EXPENSES Loss Adjustment Expenses Other Underwriting Expenses Investment Expenses. 8,888,687 8,888,687. Reinsurance assumed,5,5. Reinsurance ceded 86,4 86,4.4 Net claim adjustment service (. +. -.) 8,8,8 8,8,8. Commission and brokerage:. excluding contingent 80,48,578 80,48,578. Reinsurance assumed, excluding contingent,77,470,77,470. Reinsurance ceded, excluding contingent,68,888,68,888.4 Contingent - direct,60,85,60,85.5 Contingent - reinsurance assumed (6,44) (6,44).6 Contingent - reinsurance ceded (,000) (,000).7 Policy and membership fees.8 Net commission and brokerage (. +. -. +.4 +.5 -.6 +.7) 8,7, 8,7,. Allowances to managers and agents 4. Advertising 74,64 74,64 5. Boards, bureaus and associations 6,87,00 6,87,00 6. Surveys and underwriting reports 88,40 88,40 7. Audit of assureds records,5,5 8. Salary and related items: 8. Salaries 57,758,577 4,85,8,00,6 5,587,0 8. Payroll taxes 4,74,75 6,07,5 66,5 0,5,407. Employee relations and welfare,55,85 7,440,4 7,6,766,845 0. Insurance 5,74 70,006,0,740. ors fees. Travel and travel items,6,500 5,40,7 5,800 6,554,7. Rent and rent items 4,574,70 5,70,556 5,045 0,400, 4. Equipment 7,05 6,444,0 8,478 7,45,60 5. Cost or depreciation of EDP equipment and software 56,70,6,858,5,648 6. Printing and stationery,4,55, 8,7,5,670 7. Postage, telephone and telegraph, exchange and express,85,,,0,5 5,58,86 8. Legal and auditing 5,5,0 0,65 5,0,74. Totals (Lines to 8) 8,,5 57,50,,888,70 4,0,778 0. Taxes, licenses and fees: 0. State and local insurance taxes deducting guaranty association credits of $ 6,7,47 6,7,47 0. Insurance department licenses and fees 65,577 65,577 0. Gross guaranty association assessments (,7,00) (,7,00) 0.4 All other (excluding federal and foreign income and real estate) 7,445,,78,,6 0.5 Total taxes, licenses and fees (0. + 0. + 0. + 0.4) 7,445 4,844,5 4,85,77. Real estate expenses 6,8,5 6,8,5. Real estate taxes. Reimbursements by uninsured plans 4. Aggregate write-ins for miscellaneous expenses (,04,5),8,40 5,88,6 (,45,0) 5. Total expenses incurred 0,778,67 57,845,56 4,75,58 (a) 7,7, 6. Less unpaid expenses - current year 8,75,08 5,40,5 54,4, 7. Add unpaid expenses - prior year 4,846,48 6,74,0 6,58,748 8. Amounts receivable relating to uninsured plans, prior year. Amounts receivable relating to uninsured plans, current year 0. TOTAL EXPENSES PAID (Lines 5-6 + 7-8 + ) 07,87,7 5,07, 4,75,58 8,45,846 DETAILS OF WRITE-INS 40. Expense adjustment (,66,845) (,66,845) 40. Investment management fee 5,05,70 5,05,70 40. Third party technologies,84,075 458,6 60,,80,08 48. Summary of remaining write-ins for Line 4 from overflow page (5,8),860,7 68,546,,04 4. Totals (Lines 40 thru 40 plus 48)(Line 4 above) (,04,5),8,40 5,88,6 (,45,0) (a) Includes management fees of $ 5,5,70 to affiliates and $ to non-affiliates. 4 Total

ANNUAL STATEMENT FOR THE YEAR 06 OF THE ZENITH INSURANCE COMPANY AND ITS AFFILIATED PROPERTY AND CASUALTY INSURER EXHIBIT OF NET INVESTMENT INCOME Collected During Year Earned During Year. U.S. Government bonds (a) 0,88,7 0,05,80. Bonds exempt from U.S. tax (a),46,686,4,6. Other bonds (unaffiliated) (a) 7,7,80 8,54,84. Bonds of affiliates (a). Preferred stocks (unaffiliated) (b) 865,60 865,60. Preferred stocks of affiliates (b). Common stocks (unaffiliated),7,760,80,870. Common stocks of affiliates,6,856,6,856. Mortgage loans (c) 4. Real estate (d) 6,8,5 6,8,5 5 Contract loans 6 Cash, cash equivalents and short-term investments (e),454,66,454,74 7 Derivative instruments (f) (8,8,68) (8,8,68) 8. Other invested assets. Aggregate write-ins for investment income,74,74 0. Total gross investment income 46,8,0 44,7,585. Investment expenses (g) 4,75,58. Investment taxes, licenses and fees, excluding federal income taxes (g). Interest expense (h),5 4. Depreciation on real estate and other invested assets (i) 5. Aggregate write-ins for deductions from investment income 6. Total deductions (Lines through 5) 4,78,060 7. Net investment income (Line 0 minus Line 6) 0,545,55 DETAILS OF WRITE-INS 00. MIscellaneous income,74,74 00. 00. 08. Summary of remaining write-ins for Line from overflow page 0. Totals (Lines 00 thru 00 plus 08) (Line, above),74,74 50. 50. 50. 58. Summary of remaining write-ins for Line 5 from overflow page 5. Totals (Lines 50 thru 50 plus 58) (Line 5, above) (a) Includes $ 4,5,67 accrual of discount less $ 4,4,67 amortization of premium and less $,44,86 paid for accrued interest on purchases. (b) Includes $ accrual of discount less $ amortization of premium and less $ paid for accrued dividends on purchases. (c) Includes $ accrual of discount less $ amortization of premium and less $ paid for accrued interest on purchases. (d) Includes $ 6,8,5 for company s occupancy of its own buildings; and excludes $ interest on encumbrances. (e) Includes $,45,75 accrual of discount less $ amortization of premium and less $ paid for accrued interest on purchases. (f) Includes $ accrual of discount less $ amortization of premium. (g) Includes $ investment expenses and $ investment taxes, licenses and fees, excluding federal income taxes, attributable to segregated and Separate Accounts. (h) Includes $ interest on surplus notes and $ interest on capital notes. (i) Includes $ depreciation on real estate and $ depreciation on other invested assets. EXHIBIT OF CAPITAL GAINS (LOSSES) 4 5 Total Realized Capital Gain (Loss) (Columns + ) Change in Unrealized Capital Gain (Loss) Change in Unrealized Foreign Exchange Capital Gain (Loss) Realized Gain (Loss) On Sales or Maturity Other Realized Adjustments. U.S. Government bonds 5,08, 5,08,. Bonds exempt from U.S. tax,07,,07,. Other bonds (unaffiliated),044,7 (54,54) 8,50,68 76,000 (57,75). Bonds of affiliates. Preferred stocks (unaffiliated) 0,7,440 0,7,440. Preferred stocks of affiliates. Common stocks (unaffiliated) 8,7,65 (,75,8) 6,564,784 (80,6,055) (,55,67). Common stocks of affiliates (5,448,6) (6,6). Mortgage loans 4. Real estate 5. Contract loans 6. Cash, cash equivalents and short-term investments 64,68 64,68 7. Derivative instruments (0,860,6) (0,860,6) (4,4,84) 48, 8. Other invested assets 60,77 (7,44) (6,7) (,7,40) (65,). Aggregate write-ins for capital gains (losses) (6,6) (6,6) 0. Total capital gains (losses) (6,046,556) (,84,68) (,4,45) (0,47,0) (,84,08) DETAILS OF WRITE-INS 00. Miscellaneous realized foreign exchange and other gain/(loss) (6,6) (6,6) 00. 00. 08. Summary of remaining write-ins for Line from overflow page 0. Totals (Lines 00 thru 00 plus 08) (Line, above) (6,6) (6,6)

ANNUAL STATEMENT FOR THE YEAR 06 OF THE ZENITH INSURANCE COMPANY AND ITS AFFILIATED PROPERTY AND CASUALTY INSURER. Bonds (Schedule D). Stocks (Schedule D):. Preferred stocks. Common stocks. Mortgage loans on real estate (Schedule B):. First liens. Other than first liens 4. Real estate (Schedule A): 4. Properties occupied by the company 4. Properties held for the production of income 4. Properties held for sale EXHIBIT OF NON-ADMITTED ASSETS 5. Cash (Schedule E - Part ), cash equivalents (Schedule E - Part ) and short-term investments (Schedule DA) 6. Contract loans 7. Derivatives (Schedule DB) 8. Other invested assets (Schedule BA). Receivables for securities 0. Securities lending reinvested collateral assets (Schedule DL). Aggregate write-ins for invested assets. Subtotals, cash and invested assets (Lines to ). Title plants (for Title insurers only) 4. Investment income due and accrued 5. Premiums and considerations: Current Year Total Nonadmitted Assets Prior Year Total Nonadmitted Assets Change in Total Nonadmitted Assets (Col. - Col. ) 5. Uncollected premiums and agents' balances in the course of collection 888,760 67,44 (0,6) 5. Deferred premiums, agents' balances and installments booked but deferred and not yet due 54,46 45,50 (0,) 5. Accrued retrospective premiums and contracts subject to redetermination 6. Reinsurance: 6. Amounts recoverable from reinsurers 6. Funds held by or deposited with reinsured companies 6. Other amounts receivable under reinsurance contracts 7. Amounts receivable relating to uninsured plans 8. Current federal and foreign income tax recoverable and interest thereon 8. Net deferred tax asset. Guaranty funds receivable or on deposit 0. Electronic data processing equipment and software,87,8,0,6 0,0. Furniture and equipment, including health care delivery assets,48,8,64,44 5,55. Net adjustment in assets and liabilities due to foreign exchange rates. Receivables from parent, subsidiaries and affiliates 4. Health care and other amounts receivable 5. Aggregate write-ins for other than invested assets 8,580,5 5,04, (,75,6) 6. Total assets excluding Separate Accounts, Segregated Accounts and Protected Cell Accounts (Lines to 5),64,66 0,78,4 (,85,747) 7. From Separate Accounts, Segregated Accounts and Protected Cell Accounts 8. Total (Lines 6 and 7),64,66 0,78,4 (,85,747) 0. 0. 0. DETAILS OF WRITE-INS 8. Summary of remaining write-ins for Line from overflow page. Totals (Lines 0 thru 0 plus 8)(Line above) 50. Prepaid items, deposits and loss fund deposits 7,48,60 4,77,4 (,,66) 50. Other assets not admitted 5,008 45,746,78 50. Miscellaneous assets 47,678,84 (57,85) 58. Summary of remaining write-ins for Line 5 from overflow page 5. Totals (Lines 50 thru 50 plus 58)(Line 5 above) 8,580,5 5,04, (,75,6)

ANNUAL STATEMENT FOR THE YEAR 06 OF THE ZENITH INSURANCE COMPANY AND ITS AFFILIATED PROPERTY AND CASUALTY INSURER NOTES TO FINANCIAL STATEMENTS Note Summary of Significant Accounting Policies and Going Concern A. Accounting Practices The accompanying combined financial statements of Zenith Insurance Company ( Zenith Insurance ) and its wholly-owned property and casualty insurer, ZNAT Insurance Company ( ZNAT Insurance and together with Zenith Insurance, the Company ) have been prepared in conformity with the statutory accounting practices of the National Association of Insurance Commissioners' ( NAIC ) Annual Statement Instructions and Accounting Practices and Procedures Manual ( NAIC SAP ) as adopted by the California Department of Insurance ( California DOI ) ( California SAP ). All intercompany balances and transactions have been eliminated in combining the financial statements. Both companies are property-casualty insurance companies domiciled in the State of California. The California DOI recognizes only statutory accounting practices prescribed or permitted by the State of California for determining and reporting the financial condition and results of operations of an insurance company for purposes of determining its solvency under the California Insurance Code ( CIC ). The NAIC SAP version effective January, 00 and all subsequent amendments have been adopted as a component of California SAP. Currently, there are no differences between NAIC SAP and California SAP as they apply to the Company as shown below: Year ended December, Net Income State of Domicile 06 05 State Basis California $ 5,7,0 $ 0,588,580 State Prescribed Practices California State Permitted Practices California NAIC SAP $ 5,7,0 $ 0,588,580 December, Surplus State of Domicile 06 05 State Basis California $ 56,56,58 $ 6,67,65 State Prescribed Practices California State Permitted Practices California NAIC SAP $ 56,56,58 $ 6,67,65 B. Use of Estimates in the Preparation of the Financial Statements The preparation of financial statements in accordance with NAIC SAP requires the use of assumptions and estimates in reporting certain assets and liabilities and related disclosures. Actual results could differ from those estimates. C. Accounting Policies The Company participates in an intercompany pooling agreement (see Note 6). Revenue Recognition The consideration paid for an insurance policy is generally known as a premium. Premiums billed to the Company s policyholders are recorded as revenues in the Statement of Income. Premiums are billed and collected according to policy terms, predominantly in the form of installments during the policy period. Premiums are earned pro-rata over the terms of the policies. Billed premiums applicable to the unexpired terms of policies in-force are recorded in the accompanying Balance Sheet as a liability for unearned premiums. Certain states in which the Company conducts business require that the Company bill additional amounts, or assessments, to policyholders in accordance with state statutes. In some cases, the Company is required to pay in advance estimated amounts of these assessments to the relevant regulatory agency. Premiums do not include these assessments and their collection does not have any impact on the Company s results of operations. Workers compensation premiums are determined based upon the payroll of the insured, the applicable premium rates and, where applicable, an experience based modification factor and a debit or credit applied by the Company s underwriters based upon individual risk characteristics. Audits of policyholders records are conducted after policy expiration to make a final determination of applicable premiums. Included with premiums earned is an estimate of the impact of final audit premiums. The Company can estimate this adjustment because it monitors, by policy, how much additional premium will be billed or refunded in final audit invoices as a percentage of the original estimated amount that was billed. The Company uses the historical percentage and current trends to estimate the probable amount to be billed or refunded as of the balance sheet date. When payrolls decline during policy periods (such as during a recession), the Company may bill more premium than is actually owed and will establish a liability for the estimated amount to be refunded to its policyholders. When payrolls increase during policy periods, the Company may bill less premium than is actually owed and will establish a receivable for the estimated amount due from its policyholders. At December, 06 and 05, the Company recorded assets of approximately $5.4 million and $4.5 million, respectively, for estimated additional amounts of premiums to be billed to its policyholders. Losses and Loss Adjustment Expenses ( LAE ) Incurred Losses and LAE incurred in the accompanying Statement of Income include provisions for the amount the Company expects to ultimately pay for all reported and unreported claims for the applicable periods. LAE are the expenses applicable to the process of administering, settling and investigating claims, including related legal expenses. Estimates of losses from environmental and asbestos related claims are included in overall loss reserves and to date have not been material. Unpaid Losses and LAE The liabilities for unpaid losses and LAE ( loss reserves ) in the accompanying Balance Sheet are estimates of the unpaid amounts that the Company expects to pay for the ultimate cost of reported and unreported claims as of the balance sheet date. Loss reserves are estimates and are inherently uncertain; they do not and cannot represent an exact measure of ultimate liability. The Company performs a comprehensive review of its loss reserves at the end of every quarter. Estimating loss reserves is a complex process that involves a combination of actuarial techniques and methods and management judgment to establish the most reasonable estimate of loss reserves. Any resulting adjustments to loss reserves are reflected in the Company s Statement of Income in the period in which the change is made. 4

ANNUAL STATEMENT FOR THE YEAR 06 OF THE ZENITH INSURANCE COMPANY AND ITS AFFILIATED PROPERTY AND CASUALTY INSURER NOTES TO FINANCIAL STATEMENTS When losses are reported to the Company, it establishes individual 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. The Company s actuaries use this information about reported claims in some of their estimation techniques. In estimating the Company s total loss reserves, the Company makes 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 and the Company s loss reserves contain an estimate for IBNR claims. In addition to this provision for late reported claims, the Company also has to estimate, and make provision for, 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. The Company s loss reserves make provision for both IBNR and bulk reserves in total, but not separately. The principal uncertainty in the Company s workers compensation loss reserve estimates is the trend of increasing claim costs, particularly medical. In estimating loss reserves, the Company s actuaries consider medical costs by evaluating long-term trends. The additional uncertainties considered in estimating ultimate loss costs include the ultimate number of expensive cases and the length of time required to settle long-term expensive cases. Expensive claims are those involving permanent disability of an injured worker and are paid over many years. The ultimate costs of expensive claims are difficult to estimate because of such factors as the on-going and possibly increasing need for medical care, complications from comorbidity, the duration of disability, life expectancy and benefits for dependents, as well as increased costs associated with obtaining settlement approval from Medicare. The Company believes its loss reserve estimates are adequate. However, the ultimate losses will not be known with any certainty for several years. The Company evaluates its loss reserve estimates every quarter to reflect the most current data and judgments. State Guaranty Fund Assessments Guaranty funds ( Guaranty Funds ) exist in several states to ensure that policyholders (holders of direct insurance policies but not of reinsurance policies) receive payment of their claims if insurance companies become insolvent. A Guaranty Fund is funded primarily by statutorily required assessments on insurance companies doing business in the state. Various mechanisms exist in some of these states for assessed insurance companies to recover these assessments. Upon the insolvency of an insurance company, the Guaranty Funds become primarily liable for the payment of the insolvent company s liabilities to policyholders. The declaration of an insolvency establishes the presumption that assessments by the Guaranty Funds are probable. The Company writes workers compensation insurance in many states in which unpaid workers compensation liabilities are the responsibility of the Guaranty Funds and has received, and expects to continue to receive, Guaranty Fund assessments, some of which may be based on a certain amount of the premiums it has already earned as of December, 06. The Company recorded an estimate of $.8 million and $5.8 million for the expected net liability at December, 06 and 05, respectively, for Guaranty Fund assessments; the ultimate impact of such assessments will depend upon the amount and timing of actual assessments and of any recoveries to which the Company may be entitled. Reinsurance Ceded In the ordinary course of business and in accordance with general insurance industry practices, the Company purchases excess of loss reinsurance to protect it against the impact of large, irregularly occurring losses in the workers compensation business. Such reinsurance reduces the magnitude of such losses on net income and the surplus as regards policyholders of the Company. Reinsurance makes the assuming reinsurer liable to the ceding company to the extent of the reinsurance. It does not, however, discharge the ceding company from its primary liability to its policyholders in the event the reinsurer is unable to meet its obligations under such reinsurance agreement. The Company monitors the financial condition of its reinsurers and does not believe that it is currently exposed to any material credit risk through its ceded reinsurance arrangements because most of its reinsurance is recoverable from large, well-capitalized reinsurance companies. The Company records a provision for possible uncollectible reinsurance as required by NAIC SAP. Historical write-offs have been infrequent and insignificant. 07 Reinsurance ceded coverage The Company maintains excess of loss and catastrophe reinsurance which provides protection up to $50 million for workers compensation losses including catastrophe losses arising out of California earthquakes and acts of terrorism including nuclear, biological and chemical attacks. For the California agriculture business, the Company retains the first $0 million and the layer from $0 million to $0 million of each loss arising from industrial accidents. For all other business classes, the Company retains the first $0 million of each loss. 06 Reinsurance ceded workers compensation coverage The Company maintained excess of loss and catastrophe reinsurance which provides protection up to $50 million for workers compensation losses including catastrophe losses arising out of California earthquakes and acts of terrorism excluding nuclear, biological and chemical attacks. For the California agriculture business, the Company retains the first $0 million and the layer from $0 million to $0 million of each loss arising from industrial accidents. For all other business classes, the Company retains the first $0 million of each loss. 05 Reinsurance ceded workers compensation coverage The Company maintained excess of loss and catastrophe reinsurance which provides protection up to $00 million for workers compensation losses including catastrophe losses arising out of California earthquakes and acts of terrorism excluding nuclear, biological and chemical attacks. The Company retained the first $0 million of each loss arising from industrial accidents only in its California agriculture business. For all other business classes, the Company retained the first $0 million of each loss. Investments The carrying value of investments is determined by the rules established by the Securities Valuation Office ( SVO ) of the NAIC. The fair value of investments is determined by a third party pricing service, Interactive Data Corporation ( IDC ), except for certain securities for which IDC does not provide a price, in which case a market price is obtained from various broker-dealers or the fair value is estimated using analytical methods. Investments are generally stated as follows:. Bonds and redeemable preferred stocks designated and by the SVO are stated at amortized cost using the scientific method. Nonredeemable preferred stocks are reported at fair value. Bonds and redeemable preferred stocks designated through 6 by the SVO are carried at the lower of cost basis or fair value.. Unaffiliated common stocks are mostly reported at fair value. One non-traded common stock investment of a company based in the United Kingdom is recorded at fair value which approximates its net asset value. A significant portion of the net asset of this equity investment, excluding cash balances, is comprised of real estate holdings supported by appraisals. 4.

ANNUAL STATEMENT FOR THE YEAR 06 OF THE ZENITH INSURANCE COMPANY AND ITS AFFILIATED PROPERTY AND CASUALTY INSURER NOTES TO FINANCIAL STATEMENTS. Investments in wholly-owned non-insurance subsidiaries of the Company (Zenith of Nevada, Inc. and Zenith Insurance Management Services, Inc.) are reported at their equity values in accordance with accounting principles generally accepted in the United States of America ( GAAP ). 4. Investments in occupied real estate are reported at depreciated cost with additions and improvements capitalized and depreciated over their respective useful lives. 5. Short-term investments are reported at amortized cost. 6. Investments in partnerships are primarily reported at our share of the partnership s GAAP equity value. 7. The first lien mortgage loan on real estate was recorded at its unpaid principal balance. It was repaid in full in 05 (see Note 5A). 8. Derivative contracts are reported at fair value (see Note 8).. Investments in common stocks and partnerships where the Company s ownership is more than minor or where the Company is presumed to have significant operating or financial influence are recorded using the equity method of accounting. The carrying amount of these investments represents initial cost, adjusted for any additional purchases/distributions, goodwill amortization, if any, and the Company s share of the changes in the investee s net asset value, on a quarter lag. Cash, cash equivalents, and short-term investments include short-term investments which are highly liquid and are readily convertible to cash. Cash equivalents and short-term investments include U.S. Treasury securities bond and overnight sweep accounts with maturities of less than one year at the date of purchase. Investment income is recorded when earned. Realized capital gains and losses are determined under the average cost method. Investments that the Company currently owns could be subject to default by the issuer or declines in fair value that become other-than-temporary. The Company continually assesses the prospects for individual securities as part of its ongoing portfolio management, including the identification of other-than-temporary declines in fair values. The Company s other-than-temporary assessment includes reviewing the extent and duration of declines in fair values of investments below the amortized cost basis, the seniority and duration of the securities, historical and projected company financial performance, company-specific news and other developments, the outlook for industry sectors, credit ratings and macro-economic changes, including government policy initiatives. Equipment Properties and equipment used in operations, including certain costs incurred to develop and obtain computer software, are capitalized and carried at cost less accumulated depreciation. Depreciation is calculated on a straight-line basis using the following useful lives: buildings up to 40 years; and other property and equipment to 0 years. Expenditures for maintenance and repairs are charged to operations as incurred. Additions and improvements to buildings and other fixed assets are capitalized and depreciated over the useful lives of the properties and equipment. Upon disposition, the asset cost and related depreciation are removed from the accounts and the resulting gain or loss is included in the Company s Statement of Income. Income Taxes Change in policyholders surplus includes a provision for deferred taxes based on temporary differences between the statutory basis and tax basis of assets and liabilities, computed in accordance with NAIC SAP. D. Going Concern None Note Accounting Changes and Corrections of Errors None Note Business Combinations and Goodwill None Note 4 Discontinued Operations From 85 through 004, Zenith Insurance was engaged in the property-casualty assumed reinsurance business. In 005, Zenith Insurance exited the assumed reinsurance business. The results of this business will continue to be included in the Statement of Income, primarily consisting of changes to loss reserve estimates, if any, and direct expenses. Note 5 Investments A. Mortgage Loans In July 05, Zenith Insurance received $.7 million in full settlement of the mortgage loan investment. B. Debt Restructuring None 4.