ZNT Zenith National Insurance Corp.

Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No.          )

 

---

Table of Contents

March 31, 2010

Dear Fellow Stockholder:

        We cordially invite you to attend a special meeting of the stockholders of Zenith National Insurance Corp., which we refer to as the Company, to be held on April 29, 2010, at 3:00 p.m., local time, at the corporate offices of the Company located at 21255 Califa Street, Woodland Hills, California 91367.

        At the special meeting, you will be asked to approve the adoption of the Agreement and Plan of Merger, dated as of February 17, 2010, as it may be amended from time to time, which we refer to as the merger agreement, among Fairfax Financial Holdings Limited, which we refer to as Fairfax, Fairfax Investments II USA Corp., an indirect wholly owned subsidiary of Fairfax, which we refer to as Merger Sub, and the Company, pursuant to which Merger Sub will be merged with and into the Company and the Company will continue as the surviving corporation. Following the merger, the Company will be a subsidiary of Fairfax.

        If the merger is completed, you will be entitled to receive $38.00 in cash, without interest, less any applicable withholding taxes, for each share of the Company's common stock owned by you.

        The board of directors of the Company has unanimously determined that the merger is fair to, and in the best interests of, the Company's stockholders, approved and declared advisable the merger agreement and resolved to recommend that the stockholders adopt the merger agreement. The board of directors made its recommendation after consultation with its independent legal and financial advisers and consideration of a number of factors. The board of directors unanimously recommends that you vote "FOR" approval of the proposal to adopt the merger agreement and "FOR" approval of the proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies.

        Approval of the proposal to adopt the merger agreement requires the affirmative vote of holders of a majority of the outstanding shares of the Company's common stock entitled to vote thereon.

        Your vote is very important.     Whether or not you plan to attend the special meeting, please complete, date, sign and return, as promptly as possible, the enclosed proxy card in the accompanying prepaid reply envelope, or submit your proxy by telephone or through the Internet. If you attend the special meeting and vote in person, your vote by ballot will revoke any proxy previously submitted. The failure to vote will have the same effect as a vote against approval of the proposal to adopt the merger agreement.

        If your shares of common stock of the Company are held in street name by your bank, brokerage firm or other nominee, your bank, brokerage firm or other nominee will be unable to vote your shares of common stock of the Company without instructions from you. You should instruct your bank, brokerage firm or other nominee as to how to vote your shares of the Company's common stock, following the procedures provided by your bank, brokerage firm or other nominee. The failure to instruct your bank, brokerage firm or other nominee to vote your shares of the Company's common stock "FOR" approval of the proposal to adopt the merger agreement will have the same effect as voting against the proposal to adopt the merger agreement.

        The accompanying proxy statement provides you with detailed information about the special meeting, the merger agreement and the merger. A copy of the merger agreement is attached as Annex A to the proxy statement. We encourage you to read the entire proxy statement and its annexes, including the merger agreement, carefully. You may also obtain additional information about the Company from documents we have filed with the Securities and Exchange Commission.

---

Table of Contents

        If you have any questions or need assistance voting your shares of common stock of the Company, please call Georgeson Inc., the Company's proxy solicitor, toll-free at 800-733-9986 (banks and brokers call collect at 212-440-9800).

        Thank you in advance for your cooperation and continued support.

        This proxy statement is dated March 31, 2010, and is first being mailed to the Company's stockholders on or about March 31, 2010.

         NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THE MERGER, PASSED UPON THE MERITS OR FAIRNESS OF THE MERGER AGREEMENT OR THE TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING THE MERGER, OR PASSED UPON THE ADEQUACY OR ACCURACY OF THE INFORMATION CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

---

Table of Contents

NOTICE OF SPECIAL MEETING

        A special meeting of the stockholders of Zenith National Insurance Corp., which we refer to as the Company, will be held at the corporate offices of the Company located at 21255 Califa Street, Woodland Hills, California 91367, on April 29, 2010, at 3:00 p.m., local time, for the following purposes:

1.

To consider and vote on a proposal to adopt the Agreement and Plan of Merger, dated as of February 17, 2010, as it may be amended from time to time, which we refer to as the merger agreement, among Fairfax Financial Holdings Limited, a Canadian corporation, which we refer to as Fairfax, Fairfax Investments II USA Corp., a Delaware corporation and an indirect wholly owned subsidiary of Fairfax, which we refer to as Merger Sub, and the Company. A copy of the merger agreement is attached as Annex A to the accompanying proxy statement.



2.

To consider and vote on a proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the special meeting to approve the proposal to adopt the merger agreement.



3.

To transact any other business that may properly come before the special meeting, or any adjournment or postponement of the special meeting, by or at the direction of the board of directors of the Company.

        Stockholders of record at the close of business on March 26, 2010, the record date fixed by the board of directors for the special meeting, are entitled to notice of, and to vote at, such meeting.

        STOCKHOLDERS, WHETHER OR NOT THEY EXPECT TO ATTEND THE SPECIAL MEETING IN PERSON, ARE REQUESTED TO COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED FORM OF PROXY IN THE ACCOMPANYING POSTAGE PAID AND PRE-ADDRESSED ENVELOPE OR TO VOTE BY TELEPHONE OR THROUGH THE INTERNET. THE PROXY IS REVOCABLE AT ANY TIME PRIOR TO THE EXERCISE THEREOF AT THE SPECIAL MEETING BY WRITTEN NOTICE TO THE COMPANY, AND STOCKHOLDERS WHO ARE PRESENT AT THE MEETING MAY WITHDRAW THEIR PROXIES AND VOTE IN PERSON IF THEY SO DESIRE.

Dated: March 31, 2010
Woodland Hills, California

---

Table of Contents

TABLE OF CONTENTS

---

Table of Contents

ii

---

Table of Contents

QUESTIONS AND ANSWERS ABOUT THE SPECIAL MEETING AND THE MERGER

         The following questions and answers are intended to address briefly some commonly asked questions regarding the merger, the merger agreement and the special meeting. These questions and answers may not address all questions that may be important to you as a stockholder of the Company. Please refer to the "Summary" and the more detailed information contained elsewhere in this proxy statement, the annexes to this proxy statement and the documents referred to in this proxy statement, all of which you should read carefully. You may obtain the information incorporated by reference in this proxy statement without charge by following the instructions under "Where You Can Find More Information" beginning on page 77.

Q.    Why am I receiving this document?

A.

Zenith National Insurance Corp., which we refer to as the Company, us, our or we, has agreed to be acquired by Fairfax Financial Holdings Limited, or Fairfax, pursuant to the terms of the merger agreement described in this proxy statement. A copy of the merger agreement is attached to this proxy statement as Annex A . The Company's stockholders must vote to adopt the merger agreement before the transactions contemplated by the merger agreement can be completed, and the Company is holding a special meeting of its stockholders so that its stockholders may vote with respect to such adoption of the merger agreement.

You are receiving this proxy statement because you own shares of the Company's common stock. This proxy statement contains important information about the proposed transaction and the special meeting, and you should read it carefully. The enclosed proxy statement allows you to vote your shares of the Company's common stock without attending the special meeting in person.

Your vote is extremely important, and we encourage you to vote as soon as possible. For more information on how to vote your shares of the Company's common stock, please see the section of this proxy statement entitled "The Special Meeting" beginning on page 19.

Q.    What is the proposed transaction and what effects will it have on the Company?

A.

The proposed transaction is the acquisition of the Company by Fairfax pursuant to the merger agreement. If the proposal to adopt the merger agreement is approved by our stockholders and the other closing conditions under the merger agreement have been satisfied or waived, Fairfax Investments II USA Corp., or Merger Sub, an indirect wholly owned subsidiary of Fairfax, will merge with and into the Company, with the Company continuing as the surviving corporation. We refer to this transaction as the merger. As a result of the merger, the Company will become a subsidiary of Fairfax and will no longer be a publicly held corporation. In addition, as a result of the merger, our common stock will be delisted from the New York Stock Exchange, or NYSE, and deregistered under the Securities Exchange Act of 1934, as amended, or the Exchange Act, we will no longer file periodic reports with the Securities and Exchange Commission, or SEC, on account of our common stock and you will no longer have any interest in our future earnings or growth.

Q.    What will I receive if the merger is completed?

A.

Upon completion of the merger, you will be entitled to receive $38.00 in cash, without interest, which amount we refer to as the merger consideration, less any applicable withholding taxes, for each share of the Company's common stock that you own, unless you properly exercise and do not withdraw your appraisal rights under the Delaware General Corporation Law, or the DGCL, with respect to such shares. For example, if you own 100 shares of the Company's common stock, you will receive $3,800 in cash in exchange for your shares of the Company's common stock, less any applicable withholding taxes. Upon consummation of the merger, you will not own any shares of the capital stock of the surviving corporation.

---

Table of Contents

Q.    How does the merger consideration compare to the market price of the Company's common stock prior to the announcement of the merger?

A.

The merger consideration represents a premium of 31.4% to the closing price of the Company's common stock on February 17, 2010, the last trading day prior to the public announcement of the merger agreement, and a premium of 34.0% to the 30-day average closing price of the Company's common stock for such period ending on February 17, 2010. The merger consideration also represents a premium of 34.5% to the Company's book value per share of the Company's common stock as of December 31, 2009, a 36% premium to the Company's book value per share on a fully diluted basis as of December 31, 2009, a 37% premium to the Company's tangible book value per share as of December 31, 2009 and a 39% premium to the Company's tangible book value per share on a fully diluted basis as of December 31, 2009.

Q.    Will I still be paid dividends on my shares of the Company's common stock prior to the merger?

A.

On February 10, 2010, the Company declared a cash dividend of $0.50 per share of the Company's common stock, which is payable on May 14, 2010 to stockholders of record as of the close of business on April 30, 2010. The terms of the merger agreement permit the Company to pay that dividend, and the Company expects that dividend to be paid on May 14, 2010, prior to the completion of the merger. Other than that dividend, the merger agreement does not permit the Company to pay any additional dividends on its common stock without Fairfax's prior consent while the merger agreement remains in effect.

Q.    When do you expect the merger to be completed?

A.

We are working towards completing the merger as soon as possible. Assuming timely satisfaction of necessary closing conditions, we anticipate that the merger will be completed in the second quarter of 2010. If our stockholders vote to approve the proposal to adopt the merger agreement, the merger will become effective as promptly as practicable following the satisfaction or waiver of the other conditions to the merger.

Q.    What happens if the merger is not completed?

A.

If the merger agreement is not adopted by the stockholders of the Company or if the merger is not completed for any other reason, the stockholders of the Company will not receive any payment for their shares of the Company's common stock in connection with the merger. Instead, the Company will remain an independent public company and the common stock will continue to be listed and traded on the NYSE. Under specified circumstances, the Company may be required to reimburse Fairfax for its expenses or pay Fairfax a fee with respect to the termination of the merger agreement, as described under "The Merger Agreement—Termination Fee" beginning on page 62.

Q.    Is the merger expected to be taxable to me?

A.

The exchange of shares of common stock for cash pursuant to the merger generally will be a taxable transaction for U.S. federal income tax purposes. If you are a "U.S. holder," as defined under "The Merger—Material U.S. Federal Income Tax Consequences of the Merger," you will generally recognize gain or loss in an amount equal to the difference, if any, between the cash payments made pursuant to the merger and your adjusted tax basis in your shares of the Company's common stock. If you are a "non-U.S. holder," as defined under "The Merger—Material U.S. Federal Income Tax Consequences of the Merger," any gain that you realize generally will not be subject to U.S. federal income tax, subject to certain exceptions discussed in that section. You should read "The Merger—Material U.S. Federal Income Tax Consequences of

2

---

Table of Contents

the Merger" beginning on page 46, which provides a discussion of the U.S. federal income tax consequences of the merger for "U.S. holders" and "non-U.S. holders." You should also consult your tax adviser for a complete analysis of the effect of the merger on your U.S. federal, state, local and foreign taxes.

Q:    Do any of the Company's directors or officers have interests in the merger that may differ from or be in addition to my interests as a stockholder?

A:

Yes. In considering the recommendation of the board of directors to vote in favor of the adoption of the merger agreement, you should be aware that the Company's directors and officers have interests in the merger that are different from, or in addition to, the interests of our stockholders generally. The board of directors was aware of and considered these interests, among other matters, in evaluating and negotiating the merger agreement and the merger, and in recommending that the merger agreement be adopted by the stockholders of the Company. See "The Merger—Interests of Certain Persons in the Merger" beginning on page 43.

Q.    When and where is the special meeting?

A.

The special meeting of stockholders of the Company will be held on April 29, 2010, at 3:00 p.m., local time, at the corporate offices of the Company located at 21255 Califa Street, Woodland Hills, California 91367.

Q.    What am I being asked to vote on at the special meeting?

A.

You are being asked to consider and vote on proposals to adopt the merger agreement and to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the special meeting to approve the proposal to adopt the merger agreement.

Q.    What vote is required for the Company's stockholders to approve the proposal to adopt the merger agreement?

A.

The adoption of the merger agreement requires the affirmative vote of the holders of a majority of the outstanding shares of our common stock entitled to vote thereon.

Because the affirmative vote required to approve the proposal to adopt the merger agreement is based upon the total number of outstanding shares of our common stock, failing to submit a proxy or vote in person at the special meeting, abstaining from the vote or failing to provide your bank, broker or other nominee with instructions as to how to vote your shares will each have the same effect as a vote against the proposal to adopt the merger agreement.

Q.    What vote of our stockholders is required to approve the proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies?

A.

Approval of the proposal to adjourn the special meeting, if necessary or appropriate, for the purpose of soliciting additional proxies requires the affirmative vote of the holders of a majority of the shares of common stock present in person or represented by proxy and entitled to vote on the matter at the special meeting, whether or not a quorum is present.

Abstaining will have the same effect as a vote against the proposal to adjourn the special meeting, if necessary or appropriate, for the purpose of soliciting additional proxies. If your shares of common stock are held through a bank, brokerage firm or other nominee and you do not instruct your bank, brokerage firm or other nominee as to how to vote your shares of common stock, your

3

---

Table of Contents

shares of common stock will not be voted, and this will not have any effect on the proposal to adjourn the special meeting.

Q.    How does the board of directors recommend that I vote?

A.

The board of directors unanimously recommends that you vote "FOR" the proposal to adopt the merger agreement and "FOR" the proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies.

Q.    How many votes are already committed to be voted in favor of the adoption of the merger agreement?

A.

Pursuant to voting agreements, each dated as of February 17, 2010, between Fairfax and each of the directors and executive officers of the Company as of the date of the merger agreement, which we refer to collectively as the voting agreements, our directors and executive officers as of such date, solely in their capacities as stockholders, agreed, among other things, to vote in favor of the proposal to adopt the merger agreement and against any action, agreement, transaction or proposal that would result in a material breach by the Company of any provision of the merger agreement. See the section entitled "Voting Agreements" beginning on page 65 for more information. As of March 26, 2010, the record date for the special meeting, or the record date, such directors and executive officers collectively were entitled to vote 1,309,693 shares, or approximately 3.5%, of the Company's outstanding common stock. In addition, as of the record date, Fairfax and its affiliates collectively owned 3,118,441 shares, or approximately 8.2% of the Company's outstanding common stock. Fairfax has advised the Company that it and its affiliates intend to vote their shares "FOR" the proposal to adopt the merger agreement and "FOR" the proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies.

Q.    Who can vote at the special meeting?

A.

Stockholders of record as of the close of business on the record date are entitled to receive notice of, and to vote at, the special meeting. Each record holder of shares of our common stock as of the record date is entitled to cast one vote on each matter properly brought before the special meeting for each share of common stock that such holder owns as of the record date.

Q.    What is a quorum?

A.

A majority of the shares of our common stock outstanding at the close of business on the record date and entitled to vote, present in person or represented by proxy, at the special meeting constitutes a quorum for the purposes of the special meeting. Abstentions and broker non-votes are counted as present for the purpose of establishing a quorum.

Q.    How do I vote?

A.

If you are a stockholder of record as of the record date, you may vote your shares on matters presented at the special meeting in any of the following ways:

•

in person—you may attend the special meeting and cast your vote there;

•

by proxy—stockholders of record have a choice of voting by proxy:

•

over the Internet (the website address for Internet voting is printed on your proxy card);

•

by using the toll-free telephone number noted on your proxy card; or

•

by signing, dating and returning the enclosed proxy card in the accompanying prepaid reply envelope.

4

---

Table of Contents

If you are a beneficial owner of shares of our common stock as of the record date, please refer to the instructions provided by your bank, brokerage firm or other nominee to see which of the above choices are available to you. Please note that if you are a beneficial owner and wish to vote in person at the special meeting, you must have a legal proxy from your bank, brokerage firm or other nominee.

The control number located on your proxy card is designed to verify your identity and allow you to vote your shares of our common stock, and to confirm that your voting instructions have been properly recorded when voting over the Internet or by telephone. Please be aware that if you vote over the Internet, you may incur costs such as telephone and Internet access charges for which you will be responsible.

Q.    What is the difference between being a "stockholder of record" and a "beneficial owner?"

A.

If your shares of our common stock are registered directly in your name with our transfer agent, Computershare Investor Services, you are considered, with respect to those shares of common stock, the "stockholder of record." In that case, this proxy statement, and your proxy card, have been sent directly to you by the Company.

If your shares of common stock are held through a bank, brokerage firm or other nominee, you are considered the beneficial owner of shares of our common stock held in street name. In that case, this proxy statement has been forwarded to you by your bank, brokerage firm or other nominee which may be, with respect to those shares of common stock, the stockholder of record. As the beneficial owner, you have the right to direct your bank, brokerage firm or other nominee as to how to vote your shares of common stock by following their instructions for voting.

If you are a current or former employee of the Company or any of its subsidiaries, please note that the number of shares set forth on your proxy card represents all of the shares of the Company's common stock that you hold of record, all of the shares of the Company's common stock that are allocated to your account in the Company's 401(k) plan and all of the shares of the Company's common stock that are allocated to your account pursuant to the Company's employee stock purchase plan. When you return the proxy card or when you vote by telephone or through the Internet, you are voting all of such shares as a group.

Q.    If my shares of common stock are held in street name by my bank, brokerage firm or other nominee, will my bank, brokerage firm or other nominee vote my shares of common stock for me?

A.

Your bank, brokerage firm or other nominee will only be permitted to vote your shares of common stock of the Company if you instruct your bank, brokerage firm or other nominee as to how to vote. You should follow the procedures provided by your bank, brokerage firm or other nominee regarding the voting of your shares of the Company's common stock. If you do not instruct your bank, brokerage firm or other nominee as to how to vote your shares of the Company's common stock, your shares of the Company's common stock will not be voted and that will be the same as a vote against the proposal to adopt the merger agreement and will have no effect on the proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies.

Q.    What is a proxy?

A.

A proxy is your legal designation of another person, who is also referred to as a proxy, to vote your shares of common stock. This written document describing the matters to be considered and voted on at the special meeting is called a proxy statement. The document used to designate a proxy to vote your shares of stock is called a proxy card.

5

---

Table of Contents

Q.    If a stockholder gives a proxy, how are the shares of common stock voted?

A.

Regardless of the method you choose to vote, the individuals named on the enclosed proxy card, or your proxies, will vote your shares of common stock in the way that you indicate. When completing the Internet or telephone processes or the proxy card, you may specify whether your shares of common stock should be voted "FOR" or "AGAINST," or to "ABSTAIN" from voting on, all, some or none of the specific items of business to come before the special meeting.

If you properly sign your proxy card but do not mark the boxes indicating how your shares should be voted on a matter, the shares represented by your properly signed proxy will be voted "FOR" the proposal to adopt the merger agreement and "FOR" the proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies.

Q.    Can I change or revoke my vote?

A.

You have the right to revoke a proxy, whether delivered over the Internet, by telephone or by mail, at any time before it is exercised, by voting again at a later date through any of the methods available to you, by giving written notice of revocation to our Corporate Secretary, which must be filed with our Corporate Secretary by the time the special meeting begins, or by attending the special meeting and voting in person.

Q.    What happens if I do not vote or submit a proxy card, or do not instruct my bank, broker or other nominee as to how to vote, or abstain from voting?

A.

If you fail to vote, either in person or by proxy, or fail to instruct your bank, broker or other nominee as to how to vote, it will have the same effect as a vote cast against the proposal to adopt the merger agreement and will have no effect on the proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies. Abstaining will have the same effect as a vote against the proposal to adopt the merger agreement and the same effect as a vote against the proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies.

Q.    What do I do if I receive more than one proxy or set of voting instructions?

A.

If you hold shares of our common stock in street name, or through more than one bank, brokerage firm or other nominee, and also directly as a record holder or otherwise, you may receive more than one proxy or set of voting instructions relating to the special meeting. These should each be voted and returned separately in accordance with the instructions provided in this proxy statement in order to ensure that all of your shares of our common stock are voted.

Q.    What happens if I sell my shares of the Company's common stock before the special meeting?

A.

The record date for stockholders entitled to vote at the special meeting is prior to both the date of the special meeting and the consummation of the merger. If you transfer your shares of common stock before the record date, you will not be entitled to vote at the special meeting and will not be entitled to receive the merger consideration. If you transfer your shares of common stock after the record date but before the special meeting you will, unless special arrangements are made, retain your right to vote at the special meeting but will transfer the right to receive the merger consideration to the person to whom you transfer your shares. The person to whom you transfer your share of the Company's common stock after the record date will not have a right to vote those shares at the special meeting.

6

---

Table of Contents

Q.    Who will solicit and pay the cost of soliciting proxies?

A.

The Company has engaged Georgeson Inc. to assist in the solicitation of proxies for the special meeting. The Company estimates that it will pay Georgeson Inc. a fee of approximately $10,000. The Company will reimburse Georgeson Inc. for reasonable out-of-pocket expenses and will indemnify Georgeson Inc. and its affiliates against certain claims, liabilities, losses, damages and expenses. The Company also will reimburse banks, brokers and other custodians, nominees and fiduciaries representing beneficial owners of shares of the Company's common stock for their expenses in forwarding soliciting materials to beneficial owners of the Company's common stock and in obtaining voting instructions from those owners. Our directors, officers and employees may also solicit proxies by telephone, by facsimile, by mail, on the Internet or in person. They will not be paid any additional amounts for soliciting proxies.

Q.    What do I need to do now?

A.

Even if you plan to attend the special meeting, after carefully reading and considering the information contained in this proxy statement, please vote promptly to ensure that your shares are represented at the special meeting. If you hold your shares of the Company's common stock in your own name as the stockholder of record, please vote your shares of the Company's common stock by completing, signing, dating and returning the enclosed proxy card in the accompanying prepaid reply envelope, by using the telephone number printed on your proxy card or by following the Internet voting instructions printed on your proxy card. If you decide to attend the special meeting and vote in person, your vote by ballot at the special meeting will revoke any proxy previously submitted. If you are a beneficial owner of shares of the Company's common stock, please refer to the instructions provided by your bank, brokerage firm or other nominee to see which of the above choices are available to you.

Q.    Should I send in my stock certificates now?

A.

No. You will receive a letter of transmittal shortly after the completion of the merger describing how you may exchange your shares of the Company's common stock for the merger consideration. If your shares of common stock are held in street name by your bank, brokerage firm or other nominee, you will receive instructions from your bank, brokerage firm or other nominee as to how to effect the surrender of your street name shares of the Company's common stock in exchange for the merger consideration. Please do NOT return your stock certificate(s) with your proxy.

Q.    Am I entitled to exercise appraisal rights under the DGCL instead of receiving the merger consideration for my shares of the Company's common stock?

A.

Yes. As a holder of the Company's common stock, you are entitled to appraisal rights under the DGCL with respect to any or all of your shares of the Company's common stock in connection with the merger if you take certain actions and meet certain conditions. See "Appraisal Rights" beginning on page 72.

7

---

Table of Contents

Q.    Who can help answer my other questions?

A.

If you have additional questions about the merger, need assistance in submitting your proxy or voting your shares of the Company's common stock, or need additional copies of the proxy statement or the enclosed proxy card, please contact:

Georgeson Inc.,
199 Water Street
26 ^th  Floor
New York, NY 10038
800-733-9986
212-440-9800

        For media inquiries, please contact:

Zenith National Insurance Corp.
21255 Califa Street
Woodland Hills, California 91367
Attention: Investor Relations
818-676-3936

8

---

Table of Contents

SUMMARY

         The following summary highlights selected information in this proxy statement and may not contain all the information that may be important to you. Accordingly, we encourage you to read carefully this entire proxy statement, its annexes and the documents referred to in this proxy statement. Each item in this summary includes a page reference directing you to a more complete description of that topic. You may obtain the information incorporated by reference in this proxy statement without charge by following the instructions under "Where You Can Find More Information" beginning on page 77.

Parties to the Merger (Page 18)

         Zenith National Insurance Corp. , or the Company, we or us, a Delaware corporation headquartered in Woodland Hills, California, is engaged in the workers' compensation insurance business nationally.

         Fairfax Financial Holdings Limited , or Fairfax, a Canadian corporation headquartered in Toronto, Canada, is a financial services holding company. Fairfax is a financial services holding company which, through its subsidiaries, is engaged in property and casualty insurance and reinsurance and investment management.

         Fairfax Investments II USA Corp. , or Merger Sub, a Delaware corporation, is an indirect wholly owned subsidiary of Fairfax and was formed by Fairfax solely for purposes of entering into the merger agreement and completing the transactions contemplated by the merger agreement. Upon completion of the merger, Merger Sub will be merged with and into the Company and will cease to exist.

        In this proxy, we refer to the Agreement and Plan of Merger, dated as of February 17, 2010, as it may be amended from time to time, among Fairfax, Merger Sub and the Company, as the merger agreement, and the merger of Merger Sub with and into the Company pursuant to the merger agreement as the merger.

The Merger (Page 24)

        The merger agreement provides that Merger Sub will merge with and into the Company. The Company will be the surviving corporation in the merger and will continue to do business following the merger, as a subsidiary of Fairfax. As a result of the merger, the Company will cease to be a publicly traded company. If the merger is completed, you will not own any shares of the capital stock of the surviving corporation.

Merger Consideration (Page 24)

        In the merger, each issued and outstanding share of our common stock, par value $1.00 per share (except for shares owned by Fairfax, the Company, or any of their respective wholly owned subsidiaries, and shares owned by stockholders who properly exercise appraisal rights under the DGCL), will be cancelled and converted into the right to receive $38.00 in cash, without interest, which amount we refer to as the merger consideration, less any applicable withholding taxes.

The Special Meeting (Page 19)

Time, Place and Purpose of the Special Meeting (Page 19)

        The special meeting will be held on April 29, 2010, starting at 3:00 p.m., local time, at the corporate offices of the Company located at 21255 Califa Street, Woodland Hills, California 91367.

        At the special meeting, holders of our common stock will be asked to approve the proposal to adopt the merger agreement, and to approve any adjournment of the special meeting, if necessary or appropriate, for the purpose of soliciting additional proxies if there are insufficient votes at the time of the special meeting to approve the proposal to adopt the merger agreement.

9

---

Table of Contents

Record Date and Quorum (Page 19)

        You are entitled to receive notice of, and to vote at, the special meeting if you owned shares of the Company's common stock as of the close of business on March 26, 2010, the record date for the special meeting, which we refer to as the record date. You will have one vote for each share of common stock that you owned on the record date. As of the record date, there were 37,930,463 shares of common stock outstanding and entitled to vote at the special meeting. A majority of the shares of common stock outstanding at the close of business on the record date and entitled to vote, present in person or represented by proxy at the special meeting constitutes a quorum for purposes of the special meeting.

Vote Required (Page 20)

        Approval of the proposal to adopt the merger agreement requires the affirmative vote of the holders of a majority of the outstanding shares of the Company's common stock entitled to vote thereon.

        Approval of the proposal to adjourn the special meeting, if necessary or appropriate, for the purpose of soliciting additional proxies requires the affirmative vote of holders of a majority of the shares of the Company's common stock present in person or represented by proxy and entitled to vote on the matter at the special meeting, whether or not a quorum is present.

        In connection with the execution of the merger agreement, each of the directors and executive officers of the Company as of the date of the merger agreement, solely in their capacities as stockholders, entered into voting agreements with Fairfax pursuant to which they, among other things and subject to certain exceptions, (i) agreed to vote their shares of the Company's common stock in favor of the proposal to adopt the merger agreement and of any matter necessary to the consummation of the transactions contemplated thereby, and against any action, agreement, transaction or proposal that would result in a material breach by the Company of the merger agreement or a failure of any condition to the Company's obligations thereunder to be satisfied and (ii) granted Fairfax an irrevocable proxy to vote their shares in accordance with the foregoing if and only to the extent they fail to do so. As of March 26, 2010, such directors and executive officers collectively were entitled to vote 1,309,693 shares, or approximately 3.5%, of the Company's issued and outstanding common stock. As of March 26, 2010, Fairfax and its affiliates collectively owned 3,118,441 shares, or approximately 8.2% of the Company's outstanding common stock. Fairfax has advised the Company that it and its affiliates intend to vote their shares "FOR" the proposal to adopt the merger agreement and "FOR" the proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies.

Proxies and Revocation (Page 22)

        Any stockholder of record entitled to vote at the special meeting may submit a proxy by telephone, over the Internet, or by returning the enclosed proxy card in the accompanying prepaid reply envelope, or may vote in person by appearing at the special meeting. If your shares of the Company's common stock are held in street name by your bank, broker or other nominee, you should instruct your bank, broker or other nominee on how to vote your shares of the Company's common stock using the instructions provided by your bank, broker or other nominee. If you fail to submit a proxy or to vote in person at the special meeting, or do not provide your bank, broker or other nominee with instructions, as applicable, your shares of the Company's common stock will not be voted on the proposal to adopt the merger agreement, which will have the same effect as a vote against the proposal to adopt the merger agreement, and your shares of common stock will not have any effect on the proposal to adjourn the special meeting.

        You have the right to revoke a proxy, whether delivered over the Internet, by telephone or by mail, at any time before it is exercised, by voting again at a later date through any of the methods available to you, by giving written notice of revocation to our Corporate Secretary, which must be filed with our

10

---

Table of Contents

Corporate Secretary before the special meeting begins, or by attending the special meeting and voting in person.

Background of the Merger (Page 24)

        A description of the actions that led to the execution of the merger agreement, including our discussions with Fairfax, is included under the section entitled "The Merger—Background of the Merger" below, which begins on page 24.

Reasons for the Merger; Recommendation of the Board of Directors (Page 30)

        After careful consideration, the board of directors unanimously (i) determined that the merger is fair to, and in the best interests of, the Company's stockholders, (ii) approved and declared advisable the merger agreement and (iii) directed that the merger agreement be submitted for consideration by the stockholders of the Company at a special meeting of stockholders and resolved to recommend that our stockholders vote to adopt the merger agreement. For the factors considered by the board of directors in reaching its decision to approve the merger agreement, please see the section entitled "The Merger—Reasons for the Merger" below, which begins on page 30.

         The board of directors unanimously recommends that you vote "FOR" the proposal to adopt the merger agreement and "FOR" the proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies.

Opinion of BofA Merrill Lynch (Page 34)

        Merrill Lynch, Pierce, Fenner & Smith Incorporated, which we refer to as BofA Merrill Lynch, has delivered its opinion, dated February 17, 2010, to the board of directors that, as of such date, the consideration to be received by the holders of shares of the Company's common stock in the merger was fair, from a financial point of view, to the holders of such shares (other than Fairfax and its subsidiaries).

        The full text of the BofA Merrill Lynch opinion is attached to this proxy statement as Annex B . You should read the BofA Merrill Lynch opinion in its entirety. BofA Merrill Lynch provided its opinion for the information and assistance of the board of directors in connection with its consideration of the merger. The BofA Merrill Lynch opinion addresses only the fairness, from a financial point of view, as of the date of such opinion, of the consideration to be received by the holders of the Company's common stock (other than Fairfax and its subsidiaries) in the merger, and does not address any other aspect of the merger nor any other matter. The BofA Merrill Lynch opinion is not intended to be and does not constitute a recommendation to any stockholder as to how such stockholder should vote with respect to the merger or any other matter and should not be relied upon by any stockholder as such.

No Financing Condition (Page 42)

        The merger is not subject to any financing condition. We anticipate that the total funds needed to complete the merger will be approximately $1.3 billion, taking into account the 3.1 million shares of the Company's common stock already owned by Fairfax. Fairfax has informed us that it will fund this amount through a combination of holding company cash and subsidiary dividends.

Interests of Certain Persons in the Merger (Page 43)

        When considering the recommendation by the board of directors, you should be aware that our officers and directors have interests in the merger that are different from, or in addition to, your interests as a stockholder. The board of directors was aware of and considered these interests, among other matters, in evaluating and negotiating the merger agreement and the merger, and in

11

---

Table of Contents

recommending that the merger agreement be adopted by the stockholders of the Company. These interests include the following:

•

the vesting and cash-out of all unvested restricted stock and phantom stock units held by our officers and directors;



•

the payment of severance to our officers (including, if applicable, tax gross-ups relating to excise taxes resulting from such severance payments) if a termination of employment were to occur in connection with the merger;



•

the Company's directors and officers are entitled to continued indemnification and insurance coverage under the merger agreement, and the surviving corporation is required to maintain in its organizational documents for a period of six years after the effective time, provisions with respect to the exculpation and indemnification of the current and former directors and officers of the Company that are at least as favorable as those currently set forth in the Company's certificate of incorporation; and



•

the interests of the Company's officers in continuing their roles with the Company after the merger.

Material U.S. Federal Income Tax Consequences of the Merger (Page 46)

        The exchange of shares of common stock for cash pursuant to the merger generally will be a taxable transaction for U.S. federal income tax purposes. Stockholders who are U.S. holders and who exchange their shares of common stock in the merger will generally recognize gain or loss in an amount equal to the difference, if any, between the cash payments made pursuant to the merger and their adjusted tax basis in their shares of common stock. Stockholders who are non-U.S. holders and who realize gain on the exchange of their shares of the Company's common stock in the merger generally will not be subject to U.S. federal income tax on the realized gain, subject to certain exceptions. You should read "The Merger—Material U.S. Federal Income Tax Consequences of the Merger" beginning on page 46, which provides a discussion of tax consequences of the merger for "U.S. holders" and "non-U.S. holders" as defined in that discussion. You should consult your tax adviser for a complete analysis of the effect of the merger on your U.S. federal, state, local and foreign taxes.

Regulatory Approvals (Page 49)

        The Company has two insurance company subsidiaries domiciled in the State of California. California insurance law requires an acquiring person to obtain the approval of the California Insurance Commissioner prior to the direct or indirect acquisition of control of a California-domiciled insurance company. Fairfax and certain of its affiliates filed an application for such approval with the California Insurance Commissioner on February 24, 2010. Although the Company and Fairfax do not expect the California Insurance Commissioner to withhold its approval of Fairfax's application, there is no assurance that such approval will be obtained.

        In addition, the insurance laws and regulations of certain U.S. states require that, prior to an acquisition of an insurance company doing business in that state or licensed by that state (or the acquisition of its holding company), a notice filing that discloses certain market share data in that jurisdiction must be made and an applicable waiting period must expire or be terminated.

        Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, or the HSR Act, and the rules promulgated thereunder by the Federal Trade Commission, or the FTC, the merger cannot be completed until each of the Company and Fairfax file a notification and report form with the FTC and the Antitrust Division of the Department of Justice, or the DOJ, under the HSR Act and the applicable waiting period has expired or been terminated. Each of the Company and Fairfax filed such

12

---

Table of Contents

a notification and report form on March 3, 2010 and requested early termination of the applicable waiting period. On March 15, 2010, the FTC notified the parties that their request for early termination of the applicable waiting period under the HSR Act had been granted.

The Merger Agreement (Page 51)

Treatment of Common Stock and Restricted Stock (Page 52)

•

Common Stock.   At the effective time of the merger, or the effective time, each issued and outstanding share of the Company's common stock (except for shares held by Fairfax, the Company, or any of their respective wholly owned subsidiaries, and shares held by stockholders who properly exercise appraisal rights under the DGCL) will be cancelled and converted into the right to receive the merger consideration of $38.00 in cash, without interest, less any applicable withholding taxes.



•

Restricted Stock.   Each restricted share of the Company's common stock issued and outstanding and subject to forfeiture immediately prior to the effective time will become fully vested without restrictions at the effective time and will be treated as an unrestricted issued and outstanding share of the Company's common stock. The holder of each such restricted share will be entitled to receive the merger consideration with respect thereto, without interest, less any applicable withholding taxes.

No Solicitation of Other Offers (Page 57)

        The merger agreement contains detailed provisions that restrict the Company, its subsidiaries and their respective directors, officers, employees, affiliates and representatives from soliciting, initiating or knowingly encouraging, or knowingly taking any other action designed to facilitate, the submission of any other takeover proposal (as defined in the merger agreement). The merger agreement also restricts the Company, its subsidiaries and their respective directors, officers, employees, affiliates and representatives from participating in any discussions or negotiations regarding any other takeover proposal. The merger agreement does not, however, prohibit the board of directors from considering, recommending to the Company's stockholders and entering into an alternative transaction with a third party if specified conditions are met, including that the alternative transaction includes a superior proposal (as defined in the merger agreement) and subject to, in certain cases, the payment to Fairfax of a termination fee.

Conditions to the Merger (Page 60)

        The respective obligations of the Company, Fairfax and Merger Sub to consummate the merger are subject to the satisfaction or waiver of certain customary conditions, including the adoption of the merger agreement by our stockholders, receipt of required antitrust and other regulatory approvals, the accuracy of the representations and warranties of the parties (subject to materiality qualifications), the absence of any legal restrictions on the consummation of the merger and material compliance by the parties with their respective covenants and agreements under the merger agreement.

Termination of the Merger Agreement (Page 61)

        The merger agreement may be terminated at any time prior to the completion of the merger by mutual written consent of the Company and Fairfax. The merger agreement may also be terminated by either the Company or Fairfax if:

•

the merger is not completed on or before November 15, 2010 (which date will be extended day-by-day, but in no event later than December 15, 2010, for each day during which any party is subject to a nonfinal or appealable injunction, order, decree or ruling that makes the

13

---

Table of Contents

consummation of the merger illegal or otherwise prevents or prohibits it from occurring), which date, as it may be so extended, we refer to as the outside date, except that this right to terminate the merger agreement will not be available to any party whose failure to comply with the merger agreement results in the failure of the merger to be completed by that date;

•

any final, non-appealable governmental injunction, order, decree or ruling prohibits the completion of the merger, except that the party seeking to terminate the merger agreement pursuant to this provision must have complied in all material respects with its obligations under the merger agreement to prevent the enactment, issuance or enforcement of that injunction, order, decree or ruling; or



•

the Company's stockholders fail to adopt the merger agreement at the special meeting of the Company's stockholders.

        Fairfax may terminate the merger agreement if:

•

the Company has breached any of its representations, warranties, covenants or agreements under the merger agreement and such breach would give rise to the failure of the related conditions to Fairfax's obligation to close to be satisfied and has not or cannot be cured prior to the 30th day after Fairfax gives the Company written notice of such breach or, if earlier, the outside date;



•

the board of directors or any committee thereof withdraws or modifies, or proposes publicly to withdraw or modify, in a manner adverse to Fairfax, its recommendation that the Company's stockholders adopt the merger agreement or approves or recommends for approval, or proposes publicly to approve or recommend for approval, a takeover proposal (as defined in the merger agreement); or



•

the board of directors fails to reaffirm its recommendation that the Company's stockholders adopt the merger agreement within five business days after Fairfax requests in writing that such recommendation be reaffirmed.

        The Company may terminate the merger agreement if:

•

Fairfax has breached any of its representations, warranties, covenants or agreements under the merger agreement and such breach would give rise to the failure of the related conditions to the Company's obligation to close to be satisfied and has not or cannot be cured prior to the 30th day after the Company gives Fairfax written notice of such breach or, if earlier, the outside date; or



•

the Company enters into a definitive agreement providing for a superior proposal (as defined in the merger agreement), provided that the Company simultaneously pays or had previously paid to Fairfax the termination fee described below.

Termination Fee (Page 62)

        The Company has agreed to pay Fairfax a termination fee of $39.6 million, which amount represents approximately 2.75% of the equity value of the transaction (including shares of our common stock currently held by Fairfax and its subsidiaries), if the merger agreement is terminated under any of the following circumstances:

(i)

Fairfax terminates the merger agreement because the board of directors or any committee thereof withdraws or modifies, or proposes publicly to withdraw or modify, in a manner adverse to Fairfax, its recommendation that the Company's stockholders adopt the merger agreement or approves or recommends for approval, or proposes publicly to approve or recommend for approval, a takeover proposal;

14

---

Table of Contents

(ii)

the Company terminates the merger agreement because it enters into a definitive agreement providing for a superior proposal; or



(iii)

a takeover proposal is made known to the Company or is made directly to the Company's stockholders generally or any person publicly announces an intention to make a takeover proposal; and



•

thereafter, either party terminates the merger agreement because:



•

the merger has not been completed by the outside date; or



•

there exists a final non-appealable governmental order, decree or ruling that prohibits the completion of the merger and is based on the existence of such takeover proposal; or



•

the stockholder approval necessary to complete the merger is not obtained at the special meeting of the Company's stockholders; and



•

such takeover proposal (as defined in the merger agreement) is consummated within one year of the termination.

        If the merger is terminated as a result of clause (i) above, the termination fee will be payable by the Company to Fairfax no later than two business days following such termination. If the merger agreement is terminated as a result of clause (ii) above, the termination fee will be payable by the Company to Fairfax prior to or simultaneously with such termination. If the merger is terminated as a result of clause (iii) above, the termination fee will be payable by the Company to Fairfax no later than two business days following the consummation of such transaction.

Expenses (Page 63)

        The merger agreement further provides for a reciprocal obligation of each party to reimburse the other party for its expenses, up to a maximum of $1.5 million, if such other party terminates the merger agreement because of an uncured or incurable breach of any representation, warranty, covenant or agreement in the merger agreement by the non-terminating party that would cause the failure of the related conditions to the terminating party's obligation to close under the merger agreement, provided the terminating party is not itself in material breach of any of its representations, warranties, covenants or agreements in the merger agreement. Any termination fee payable by the Company after the reimbursement of expenses would be reduced by any such reimbursement of expenses paid to Fairfax.

Remedies (Page 63)

        If Fairfax is entitled to terminate the merger agreement and receive a termination fee from the Company, Fairfax's receipt of such termination fee will be the sole and exclusive remedy of Fairfax against the Company, regardless of the circumstances of such termination.

        The parties are entitled to an injunction, specific performance and other equitable relief to prevent breaches of the merger agreement and to enforce specifically the terms of the merger agreement in addition to any other remedy to which they may be entitled at law or in equity.

Market Price of Common Stock (Page 67)

        The closing price of the common stock on the NYSE, on February 17, 2010, the last trading day prior to the public announcement of the execution of the merger agreement, was $28.91 per share of common stock. On March 29, 2010, the most recent practicable date before this proxy statement was mailed to our stockholders, the closing price for the common stock on the NYSE was $38.32 per share

15

---

Table of Contents

of common stock. You are encouraged to obtain current market quotations for common stock in connection with voting your shares of common stock.

Appraisal Rights (Page 72)

        Stockholders are entitled to appraisal rights under the DGCL with respect to any or all of their shares of the Company's common stock in connection with the merger, provided they meet all of the conditions set forth in Section 262 of the DGCL. This means that you are entitled to have the fair value of your shares of common stock determined by the Delaware Court of Chancery and to receive payment based on that valuation. The ultimate amount you receive in an appraisal proceeding may be less than, equal to or more than the amount you would have received under the merger agreement.

        To exercise your appraisal rights, you must submit a written demand for appraisal to the Company before a vote is taken on the merger agreement, you must not submit a proxy or otherwise vote in favor of the proposal to adopt the merger agreement and you must hold your shares continuously through the effective time and otherwise comply with Section 262 of the DGCL. Your failure to follow exactly the procedures specified under the DGCL may result in the loss of your appraisal rights. See "Appraisal Rights" beginning on page 72 and the text of the Delaware appraisal rights statute reproduced in its entirety as Annex E to this proxy statement. If you hold your shares of common stock through a bank, brokerage firm or other nominee and you wish to exercise appraisal rights, you should consult with your bank, broker or other nominee to determine the appropriate procedures for the making of a demand for appraisal by the nominee. In view of the complexity of the DGCL, stockholders who may wish to pursue appraisal rights should consult their legal and financial advisers promptly.

Delisting and Deregistration of Common Stock (Page 76)

        If the merger is completed, the Company's common stock will be delisted from the NYSE and deregistered under the Securities Exchange Act of 1934, as amended, or the Exchange Act. As such, we would no longer file periodic reports with the SEC on account of our common stock.

Litigation Relating to the Merger (Page 50)

        Five substantially similar putative class action lawsuits relating to the merger have been filed. Three of these cases were filed in California Superior Court in Los Angeles and have since been consolidated and the other two in the Delaware Court of Chancery. The Delaware actions have also been consolidated and the plaintiffs have filed a Consolidated Amended Complaint. The complaints in these actions, each of which purport to be brought as class actions on behalf of all of the Company's stockholders, excluding the defendants and their affiliates, allege that the consideration that stockholders will receive in connection with the merger is inadequate and that the Company's directors breached their fiduciary duties to stockholders in negotiating and approving the merger agreement and, in the case of the consolidated Delaware action, in disseminating incomplete and inaccurate information regarding the merger. The complaints further allege that the Company and Fairfax aided and abetted the alleged breaches by the Company's directors. The complaints seek various forms of relief, including injunctive relief that would, if granted, prevent the merger from being consummated in accordance with the agreed-upon terms. The plaintiffs in the consolidated Delaware action have moved for a preliminary injunction to prevent the stockholder vote on the merger. That motion is scheduled to be heard by the Delaware Court of Chancery on April 22, 2010. The plaintiffs in the consolidated California action have stipulated that they will not seek injunctive relief in that case in connection with the proposed transaction as long as the plaintiffs in the Delaware action proceed with their preliminary injunction motion. The defendants believe that the complaints are without merit and intend to defend the actions vigorously.

16

---

Table of Contents

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION

        This proxy statement, and the documents to which we refer you in this proxy statement, as well as information included in oral statements or other written statements made or to be made by us, contain statements that, in our opinion, may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Statements containing words such as expect, anticipate, believe, estimate, likely or similar words that are used herein or in other written or oral information conveyed by or on behalf of the Company, are intended to identify forward-looking statements. Forward-looking statements are made based upon management's current expectations and beliefs concerning future developments and their potential effects on the Company. Such forward-looking statements are not guarantees of future events. Actual results may differ, even materially, from those contemplated by the forward-looking statements due to, among others, the following factors:

•

the stockholders of the Company may not adopt the merger agreement;



•

litigation in respect of the merger could delay or prevent the closing of the merger;



•

the parties may be unable to obtain governmental and regulatory approvals required for the merger, or required governmental and regulatory approvals may delay the merger or result in the imposition of conditions that could cause the parties to abandon the merger;



•

the parties may be unable to complete the merger because, among other reasons, conditions to the closing of the merger may not be satisfied or waived;



•

the possibility of disruption from the merger making it more difficult to maintain business and operational relationships;



•

developments beyond the parties' control, including but not limited to, changes in domestic or global economic conditions, competitive conditions and consumer preferences, adverse weather conditions or natural disasters, health concerns, international, political or military developments and technological developments; or



•

the "risk factors" and other factors referred to in the Company's reports filed with or furnished to the SEC.

        Consequently, all of the forward-looking statements we make in this document are qualified by the information contained or incorporated by reference herein, including, but not limited to, (i) the information contained under this heading and (ii) the information contained under the headings "Risk Factors" and "Business" and that is otherwise disclosed in our annual report on Form 10-K for the year ended December 31, 2009, as supplemented and amended by Amendment No. 1 to the Annual Report on Form 10-K/A filed with the SEC on March 3, 2010 for the period ended December 31, 2009, and each quarterly report on Form 10-Q filed thereafter (see "Where You Can Find More Information" beginning on page 77).

        You should carefully consider the cautionary statements contained or referred to in this section in connection with any subsequent written or oral forward-looking statements that may be issued by us or persons acting on our behalf.

17

---

Table of Contents

PARTIES TO THE MERGER

The Company

Zenith National Insurance Corp.
21255 Califa Street
Woodland Hills, CA 91367
(818) 713-1000

        The Company is a Delaware corporation headquartered in Woodland Hills, California. The Company is primarily engaged, through its wholly owned subsidiaries, Zenith Insurance Company and ZNAT Insurance Company, in the workers' compensation insurance business nationally. Zenith Insurance Company operates primarily in California and Florida, with business in 42 additional states and the District of Columbia. ZNAT Insurance Company conducts business in Arkansas, California, Pennsylvania, Iowa, Texas and Utah. For more information about the Company, please visit our website at http://www.thezenith.com. Our website address is provided as an inactive textual reference only. The information contained on our website is not incorporated into, and does not form a part of, this proxy statement or any other report or document on file with or furnished to the SEC. See also "Where You Can Find More Information" beginning on page 77. Our common stock is publicly traded on the NYSE under the symbol "ZNT."

Fairfax

Fairfax Financial Holdings Limited
95 Wellington Street West, Suite 800
Toronto, Ontario M5J 2N7
Canada
(416) 367-4941

        Fairfax is a Canadian corporation with its principal financial office in Toronto, Canada. Fairfax is a financial services holding company which, through its subsidiaries, is engaged in property and casualty insurance and reinsurance and investment management. Fairfax provides a full range of property and casualty products, maintaining a diversified portfolio of risks across classes of business, geographic regions, and types of insureds.

Merger Sub

Fairfax Investments II USA Corp.
c/o Fairfax Financial Holdings Limited
95 Wellington Street West, Suite 800
Toronto, Ontario M5J 2N7
Canada
(416) 367-4941

        Merger Sub, is a Delaware corporation and an indirect wholly owned subsidiary of Fairfax that was formed by Fairfax solely for purposes of entering into the merger agreement and completing the transactions contemplated by the merger agreement. Merger Sub has not engaged in any business except for activities incidental to its formation and as contemplated by the merger agreement. At the effective time of the merger, Merger Sub will merge with and into the Company and will cease to exist and the Company will continue as the surviving corporation and a subsidiary of Fairfax.

18

---

Table of Contents

THE SPECIAL MEETING

Time, Place and Purpose of the Special Meeting

        This proxy statement is being furnished to our stockholders as part of the solicitation of proxies by the board of directors for use at the special meeting to be held on April 29, 2010, starting at 3:00 p.m., local time, at the corporate offices of the Company located at 21255 Califa Street, Woodland Hills, California 91367, or at any postponement or adjournment thereof. At the special meeting, holders of our common stock will be asked to approve the proposal to adopt the merger agreement and to approve the proposal to adjourn the special meeting, if necessary or appropriate, for the purpose of soliciting additional proxies if there are insufficient votes at the time of the special meeting to approve the proposal to adopt the merger agreement.

        Our stockholders must approve the proposal to adopt the merger agreement in order for the merger to occur. If our stockholders fail to approve the proposal to adopt the merger agreement, the merger will not occur. A copy of the merger agreement is attached as Annex A to this proxy statement. We encourage you to read the merger agreement carefully in its entirety.

Record Date and Quorum

        We have fixed the close of business on March 26, 2010 as the record date for the special meeting, and only holders of record our common stock on the record date are entitled to vote at the special meeting. You are entitled to receive notice of, and to vote at, the special meeting if you owned shares of common stock at the close of business on the record date. On the record date, there were 37,930,463 shares of common stock outstanding and entitled to vote. Each share of common stock entitles its holder to one vote on all matters properly brought before the special meeting.

        A majority of the shares of our common stock outstanding at the close of business on the record date and entitled to vote, present in person or represented by proxy, at the special meeting constitutes a quorum for the purposes of the special meeting. Shares of our common stock represented at the special meeting but not voted, including shares of common stock for which a stockholder directs an "abstention" from voting, as well as "broker non-votes" (as described below), will be counted for purposes of establishing a quorum. A quorum is necessary to transact business at the special meeting. Once a share of common stock is represented at the special meeting, it will be counted for the purpose of determining a quorum at the special meeting and any adjournment of the special meeting. However, if a new record date is set for the adjourned special meeting, a new quorum will have to be established. In the event that a quorum is not present at the special meeting, the stockholders who are present in person or represented by proxy may be asked to vote as to whether the special meeting will be adjourned or postponed to solicit additional proxies.

Attendance

        Only stockholders of record or their duly authorized proxies have the right to attend the special meeting. To gain admittance, you must present valid photo identification, such as a driver's license or passport. If your shares of common stock are held through a bank, brokerage firm or other nominee, please bring to the special meeting a copy of your brokerage statement evidencing your beneficial ownership of common stock and valid photo identification. If you are the representative of a corporate or institutional stockholder, you must present valid photo identification along with proof that you are the representative of such stockholder. Please note that cameras, recording devices and other electronic devices will not be permitted at the special meeting.

19

---

Table of Contents

Vote Required

        Approval of the proposal to adopt the merger agreement requires the affirmative vote of the holders of a majority of the outstanding shares of our common stock entitled to vote thereon. For the proposal to adopt the merger agreement, you may vote "FOR," "AGAINST" or "ABSTAIN." Abstentions will have the same effect as a vote against the proposal to adopt the merger agreement, and will count for the purpose of determining whether a quorum is present. If you fail to submit a proxy or to vote in person at the special meeting, it will have the same effect as a vote against the proposal to adopt the merger agreement.

        If your shares of common stock are registered directly in your name with our transfer agent, Computershare Investor Services, you are considered, with respect to those shares of common stock, the "stockholder of record." This proxy statement and proxy card have been sent directly to you by the Company.

        If your shares of the Company's common stock are held through a bank, brokerage firm or other nominee, you are considered the "beneficial owner" of shares of common stock held in street name. In that case, this proxy statement has been forwarded to you by your bank, brokerage firm or other nominee who is considered, with respect to those shares of common stock, the stockholder of record. As the beneficial owner, you have the right to direct your bank, brokerage firm or other nominee as to how to vote your shares by following their instructions for voting.

        If you are a current or former employee of the Company or any of its subsidiaries, please note that the number of shares set forth on your proxy card represent all of the shares of the Company's common stock that you hold of record, all of the shares of the Company's common stock that are allocated to your account in the Company's 401(k) plan and all of the shares of the Company's common stock that are allocated to your account pursuant to the Company's employee stock purchase plan. When you return the proxy card or when you vote by telephone or through the Internet, you are voting all of such shares as a group.

        Under the rules of the NYSE, brokers who hold shares in street name for customers have the authority to vote on "routine" proposals when they have not received instructions from beneficial owners. However, brokers are precluded from exercising their voting discretion with respect to approving non-routine matters. The proposal to adopt the merger agreement is considered a non-routine proposal and, as a result, brokers are not empowered to vote shares of common stock absent specific instructions from the beneficial owner of such shares of the Company's common stock. We generally refer to situations where brokers have not received such specific instructions from beneficial owners of the Company's common stock as broker non-votes. These broker non-votes will be counted for purposes of determining a quorum, but will have the same effect as a vote against the proposal to adopt the merger agreement.

        The proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies requires the affirmative vote of the holders of a majority of the shares of common stock present in person or represented by proxy and entitled to vote on the matter at the special meeting, whether or not a quorum is present. For the proposal to adjourn the special meeting, if necessary or appropriate to solicit additional proxies, you may vote "FOR," "AGAINST" or "ABSTAIN." For purposes of this proposal, if your shares of the Company's common stock are present at the special meeting but are not voted with respect to this proposal, or if you have given a proxy and abstained on this proposal, this will have the same effect as if you voted against the proposal. If you fail to submit a proxy or vote in person at the special meeting, or there are broker non-votes on the issue, as applicable, the shares of the Company's common stock not voted will have no effect on the proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies.

20

---

Table of Contents

        If you are a stockholder of record, you may vote your shares of the Company's common stock on matters presented at the special meeting in any of the following ways:

•

in person—you may attend the special meeting and cast your vote there;



•

by proxy—stockholders of record have a choice of voting by proxy:



•

over the Internet (the website address for Internet voting is printed on your proxy card);



•

by using the toll-free telephone number noted on your proxy card; or



•

by signing, dating and returning the enclosed proxy card in the accompanying prepaid reply envelope.

        If you are a beneficial owner of shares of our common stock as of the record date, you will receive instructions from your bank, brokerage firm or other nominee that you must follow in order to have your shares of the Company's common stock voted. Those instructions will identify which of the above choices are available to you in order to have your shares voted. Please note that if you are a beneficial owner and wish to vote in person at the special meeting, you must have a legal proxy from your bank, brokerage firm or other nominee naming you as the proxy.

        The control number located on your proxy card is designed to verify your identity and allow you to vote your shares of the Company's common stock, and to confirm that your voting instructions have been properly recorded when voting over the Internet or by telephone. Please be aware that if you vote over the Internet, you may incur costs such as telephone and Internet access charges for which you will be responsible.

        Please refer to the instructions on your proxy or voting instruction card to determine the deadlines for voting over the Internet or by telephone. If you choose to vote by mailing a proxy card, your proxy card must be filed with our Corporate Secretary of the Company by the time the special meeting begins. Please do not send in your stock certificates with your proxy card. When the merger is completed, a separate letter of transmittal will be mailed to you that will enable you to receive the merger consideration in exchange for your stock certificates.

        If you vote by proxy, regardless of the method you choose to vote, the individuals named on the enclosed proxy card, and each of them, with full power of substitution, or your proxies, will vote your shares of common stock in the way that you indicate. When completing the Internet or telephone voting processes or the proxy card, you may specify whether your shares of the Company's common stock should be voted "FOR" or "AGAINST," or to "ABSTAIN" from voting on, all, some or none of the specific items of business to come before the special meeting.

        If you properly sign your proxy card but do not mark the boxes showing how your shares of common stock should be voted on a matter, the shares of common stock represented by your properly signed proxy will be voted "FOR" the proposal to adopt the merger agreement and "FOR" the proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies.

        If you have any questions or need assistance voting your shares, please call Georgeson Inc., our proxy solicitor, toll-free at 800-733-9986 (banks and brokers call collect at 212-440-9800).

         IT IS IMPORTANT THAT YOU VOTE YOUR SHARES OF COMMON STOCK PROMPTLY. WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE, DATE, SIGN AND RETURN, AS PROMPTLY AS POSSIBLE, THE ENCLOSED PROXY CARD IN THE ACCOMPANYING PREPAID REPLY ENVELOPE, OR SUBMIT YOUR PROXY BY TELEPHONE OR THROUGH THE INTERNET. STOCKHOLDERS WHO ATTEND THE SPECIAL MEETING MAY REVOKE THEIR PROXIES AND VOTE IN PERSON.

21

---

Table of Contents

        In connection with the execution of the merger agreement, each of the directors and executive officers of the Company as of the date of the merger agreement, solely in their capacities as stockholders, entered into voting agreements with Fairfax pursuant to which they, among other things and subject to certain exceptions, (i) agreed to vote their shares of the Company's common stock in favor of the proposal to adopt the merger agreement and of any matter necessary to the consummation of the transactions contemplated thereby, and against any action, agreement, transaction or proposal that would result in a material breach by the Company of the merger agreement or a failure of any condition to the Company's obligations thereunder to be satisfied and (ii) granted Fairfax an irrevocable proxy to vote their shares in accordance with the foregoing if and to the extent they fail to do so. As of March 26, 2010, such directors and executive officers collectively were entitled to vote 1,309,693 shares, or approximately 3.5%, of the Company's outstanding common stock. As of March 26, 2010, Fairfax and its affiliates collectively owned 3,118,441 shares, or approximately 8.2% of the Company's outstanding common stock. Fairfax has advised the Company that it and its affiliates intend to vote their shares "FOR" the proposal to adopt the merger agreement and "FOR" the proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies.

Proxies and Revocation

        Any stockholder of record entitled to vote at the special meeting may submit a proxy by telephone, over the Internet or by returning the enclosed proxy card in the accompanying prepaid reply envelope, or may vote in person at the special meeting. If your shares of the Company's common stock are held in street name by your bank, broker or other nominee, you should instruct your bank, broker or other nominee, on how to vote your shares of the Company's common stock using the instructions provided by your bank, broker or other nominee. If you fail to submit a proxy or vote in person at the special meeting, or abstain, or you do not provide your bank, broker or other nominee, with instructions, as applicable, your shares of the Company's common stock will not be voted on the proposal to adopt the merger agreement, which will have the same effect as a vote against the proposal to adopt the merger agreement.

        You have the right to revoke a proxy, whether delivered over the Internet, by telephone or by mail, at any time before it is exercised, by voting at a later date through any of the methods available to you, by giving written notice of revocation to our Corporate Secretary, which must be filed with our Corporate Secretary before the special meeting begins, or by attending the special meeting and voting in person.

Adjournments and Postponements

        Any adjournment or postponement of the special meeting may be made from time to time by approval of the holders of a majority of the shares of the Company's common stock present in person or represented by proxy at the special meeting, whether or not a quorum exists, without further notice other than by an announcement made at the special meeting. If a quorum is not present at the special meeting, or if a quorum is present at the special meeting but there are not sufficient votes at the time of the special meeting to adopt the merger agreement, then the Company's stockholders may be asked to vote on a proposal to adjourn or postpone the special meeting so as to permit further solicitation of proxies. Any adjournment or postponement of the special meeting for the purpose of soliciting additional proxies will allow the Company's stockholders who have already sent in their proxies to revoke them at any time prior to their use at the special meeting as adjourned or postponed.

Anticipated Date of Completion of the Merger

        We are working towards completing the merger as soon as possible. Assuming timely satisfaction of necessary closing conditions, we anticipate that the merger will be completed in the second quarter of 2010. If our stockholders vote to approve the proposal to adopt the merger agreement, the merger

22

---

Table of Contents

will become effective as promptly as practicable following the satisfaction or waiver of the other conditions to the merger.

Rights of Stockholders Who Seek Appraisal

        Stockholders are entitled to appraisal rights under the DGCL with respect to any or all of their shares of the Company's common stock in connection with the merger. This means that you are entitled to have the fair value of your shares of common stock determined by the Delaware Court of Chancery and to receive payment based on that valuation. The ultimate amount you receive in an appraisal proceeding may be less than, equal to or more than the amount you would have received under the merger agreement.

        To exercise your appraisal rights, you must submit a written demand for appraisal to the Company before a vote is taken on the merger agreement, you must not vote in favor of the proposal to adopt the merger agreement and you must hold your shares continuously through the effective time and otherwise comply with Section 262 of the DGCL. Your failure to follow exactly the procedures specified under the DGCL may result in the loss of your appraisal rights. See "Appraisal Rights" beginning on page 72 and the text of the Delaware appraisal rights statute reproduced in its entirety as Annex E to this proxy statement. If you hold your shares of common stock through a bank, brokerage firm or other nominee and you wish to exercise appraisal rights, you should consult with your bank, broker or other nominee to determine the appropriate procedures for the making of a demand for appraisal by the nominee. In view of the complexity of the DGCL, stockholders who may wish to pursue appraisal rights should consult their legal and financial advisers.

Solicitation of Proxies; Payment of Solicitation Expenses

        The Company has engaged Georgeson Inc. to assist in the solicitation of proxies for the special meeting. The Company estimates that it will pay Georgeson Inc. a fee of approximately $10,000. The Company will reimburse Georgeson Inc. for reasonable out-of-pocket expenses and will indemnify Georgeson Inc. and its affiliates against certain claims, liabilities, losses, damages and expenses. The Company also will reimburse brokers, banks and other custodians, nominees and fiduciaries representing beneficial owners of shares of the Company's common stock for their expenses in forwarding soliciting materials to beneficial owners of the Company's common stock and in obtaining voting instructions from those owners. Our directors, officers and employees may also solicit proxies by telephone, by facsimile, by mail, on the Internet or in person. Our directors, officers and employees will not be paid any additional amounts for soliciting proxies.

Questions and Additional Information

        If you have more questions about the merger or how to submit your proxy, or if you need additional copies of this proxy statement or the enclosed proxy card or voting instructions, please call Georgeson Inc., our proxy solicitor, toll-free at 800-733-9986 (banks and brokers call collect at 212-440-9800).

23

---

Table of Contents

THE MERGER

         This discussion of the merger is qualified in its entirety by reference to the merger agreement, which is attached to this proxy statement as Annex A . You should read the entire merger agreement carefully as it is the legal document that governs the merger.

        The merger agreement provides that Merger Sub will merge with and into the Company. The Company will be the surviving corporation in the merger and will continue to do business following the merger as a subsidiary of Fairfax. As a result of the merger, the Company will cease to be a publicly traded company. You will not own any shares of the capital stock of the surviving corporation.

Merger Consideration

        In the merger, each issued and outstanding share of the Company's common stock (other than shares of the Company's common stock held by Fairfax, the Company or any of their respective wholly owned subsidiaries, and shares of the Company's common stock held by stockholders who properly exercise appraisal rights under the DGCL with respect to such shares) will, at the effective time, be cancelled and converted into the right to receive the merger consideration of $38.00 in cash, without interest, less any applicable withholding taxes.

Background of the Merger

        From October 1999 until early 2006, Fairfax was a significant stockholder of the Company, owning up to approximately 40% of the Company's common stock. During that time, Fairfax's investment in the Company was passive. Fairfax had granted voting control over its shares of the Company's common stock to a third party trustee to vote such shares in the same proportion as the votes cast by all other voting stockholders of the Company, and did not otherwise exercise any control over the Company or offer to buy the remaining shares of the Company. Fairfax sold its shares of the Company's common stock in three transactions between 2004 and 2006. In addition, the Company's insurance subsidiaries and an affiliate of Fairfax were parties to a 10% quota share ceded reinsurance agreement relating to all new and renewal business written by the Company during the period 2002 through 2004.

        As of the date of this proxy statement, the Company's insurance company subsidiaries are parties to reinsurance agreements with an affiliate of Fairfax and other reinsurers. These reinsurance agreements were entered into in the ordinary course of their business and on an arm's-length basis.

        Additionally, the Company's insurance company subsidiaries hold approximately $45 million in aggregate principal amount of debt securities issued by Fairfax and its affiliates. These debt securities were obtained through open market purchases in the ordinary course of business and in accordance with the Company's investment guidelines.

        On January 22, 2010, V. Prem Watsa, Fairfax's Chairman of the Board and Chief Executive Officer, spoke by telephone with Stanley R. Zax, the Company's Chairman of the Board and President, and informed him that Fairfax had made open-market purchases for investment purposes of approximately 3.1 million shares of the Company's outstanding common stock.

        On January 24, 2010, Messrs. Watsa and Zax spoke again by telephone. Their conversation covered various topics, including Fairfax's recent investment in the Company's common stock, the state of the financial and insurance markets and economic and political conditions in the United States and California. Mr. Watsa advised Mr. Zax that, as a result of their conversations, he had begun to consider whether Fairfax should consider acquiring more shares of the Company's common stock. At the end of that conversation, Messrs. Watsa and Zax agreed to schedule a meeting in which they could continue their discussions about Fairfax's investment in the Company's common stock and whether it would be advisable for the parties to evaluate and explore a potential transaction in which Fairfax would acquire all of the shares of the Company's common stock it did not own. After this call, Mr. Zax called Michael Zavis, the Company's lead director, to inform him of his telephone conversation with Mr. Watsa. During this call, Messrs. Zax and Zavis discussed, among other things, the likelihood that

24

---

Table of Contents

Fairfax would make an offer to acquire the Company, the Company's prospects in the current economic environment and the duties of the board of directors, if such an offer were made, to submit it for consideration by the Company's stockholders, depending on the financial and other terms and conditions of the offer.

        On January 25, 2010, Mr. Watsa telephoned Mr. Zax to invite him to dinner on February 1, 2010 in Toronto, Canada, followed by a meeting on February 2, 2010. Mr. Zax accepted Mr. Watsa's invitation.

        On January 25, 2010, after the call from Mr. Watsa, Mr. Zax contacted Merrill Lynch, Pierce, Fenner & Smith Incorporated, the Company's financial adviser, which we refer to as BofA Merrill Lynch, and Dewey & LeBoeuf LLP, the Company's outside legal counsel, to receive advice in preparation for the meeting with Mr. Watsa. In addition, after the call and during the week of January 25, 2010, Mr. Zax contacted seven of the eight other directors of the Company to inform them of his discussions and scheduled meetings with Mr. Watsa. Mr. Zax also discussed with the directors whether the Company should evaluate and explore a potential transaction in which Fairfax would acquire all of the shares of the Company's common stock it did not own, as well as other potential transaction terms. During these inquiries, the directors acknowledged their familiarity with Mr. Watsa and Fairfax as a former significant stockholder of the Company and noted that Mr. Watsa's knowledge of the Company made Fairfax a very strong potential acquirer of the Company. The directors individually expressed the consistent view that Mr. Zax should continue his discussions with Mr. Watsa and, based also on the advice received from BofA Merrill Lynch, should endeavor to negotiate a transaction that included a premium of approximately 35% to the Company's book value per share as of December 31, 2009, because such a transaction would be compelling and require serious consideration by the board of directors.

        On January 29, 2010, Mr. Watsa, Fairfax and certain of its subsidiaries filed with the SEC a Schedule 13D reporting that they collectively owned 3,118,441 shares, or approximately 8.4%, of the Company's outstanding common stock.

        On February 1, 2010, Messrs. Watsa and Zax met for dinner in Toronto. During the course of that dinner, they discussed, among other things, the Company's business and a potential transaction between Fairfax and the Company.

        On February 2, 2010, Messrs. Watsa and Zax met to continue their discussions. At that meeting, Mr. Watsa suggested that Fairfax might be willing to consider an acquisition of the Company at a price that represented a 25% premium to the Company's book value per share as of December 31, 2009, or approximately $35.00 per share. Mr. Zax advised Mr. Watsa that, in his view, a 25% premium would be insufficient and that the Company's board of directors would not consider a transaction unless the price per share represented a premium of approximately 35% to the Company's book value per share as of December 31, 2009. Mr. Watsa acknowledged that a higher premium would be required and advised Mr. Zax that Fairfax remained interested in exploring and evaluating a potential transaction. Before the end of the meeting, Messrs. Watsa and Zax reached an understanding that, if Fairfax were to make an offer to acquire the Company, the offer would be at $38.00 per share. In addition, the Company would be able to pay one more dividend of $0.50 per share on its common stock prior to the closing of any acquisition. Mr. Watsa then invited Paul Rivett, Vice President and the Chief Legal Officer of Fairfax, to join the meeting.

        Mr. Watsa and Mr. Rivett advised Mr. Zax that any affirmative determination to proceed with a potential transaction would require the approval of Fairfax's board of directors and that before Fairfax could make any determination with respect to a potential transaction with Zenith, Fairfax would need further information and confirmation with respect to several matters. First, Fairfax would need to conduct due diligence in respect of the Company's reserves, including a review of the Company's actuarial report as of December 31, 2009. Second, Fairfax would need to receive comfort from the rating agencies that a potential transaction would not adversely affect Fairfax's financial strength rating. Third, Fairfax would need to confirm that the California Department of Insurance would permit the

25

---

Table of Contents

Company's insurance company subsidiary to pay an extraordinary dividend in connection with a potential transaction. Fourth, Fairfax would need the Company's commitment to obtain, prior to or concurrently with the execution of any definitive acquisition agreement, written commitments to vote in favor of the transaction from all of the Company's directors and executive officers, as well as certain institutional stockholders of the Company.

        Mr. Zax indicated that he understood Fairfax's need to confirm certain matters, but stated that, in his view, the Company's board of directors would not consider any proposal that was conditional on a payment by the Company's insurance subsidiary of an extraordinary dividend. Mr. Zax then stated that any acquisition agreement between the Company and Fairfax would need to include a "fiduciary out" provision to allow the Company's board of directors to terminate such acquisition agreement in the event a third party made a superior proposal to acquire the Company after the announcement of a transaction. Mr. Watsa indicated that he understood any acquisition agreement in respect of a potential transaction would include a "fiduciary out" provision and indicated that he also expected that any such agreement would include a "break-up" fee equal to 3.0% of the equity value of the transaction.

        During the February 1 and 2, 2010 meetings, Messrs. Watsa and Zax also discussed Mr. Zax's potential role with the Company following consummation of a potential transaction. Mr. Watsa said he expected that Mr. Zax and the Company's current management team would remain in place and continue to operate the Company in the same manner as they have operated the Company in the past, but that Fairfax would manage the Company's investment portfolio, which is consistent with the decentralized management structure Fairfax employs with respect to its insurance and reinsurance subsidiaries. Mr. Zax advised Mr. Watsa that he would be agreeable to such an arrangement and that his employment and that of the other executive officers of the Company would continue pursuant to, and with no amendments or extensions of, the terms of their respective employment agreements currently in effect with the Company.

        Following that meeting, Mr. Zax reported on the results of his meetings with Mr. Watsa to the Company's directors individually and to the Company's financial and legal advisers. He noted in particular Mr. Watsa's request for a 3.0% "break-up" fee and his expressed intention to seek approval of the payment of an extraordinary dividend by the Company's insurance subsidiary as a way of providing a portion of the financing required for the transaction. The directors emphasized to Mr. Zax that the Company should negotiate a "break-up" fee lower than 3.0% and that Mr. Watsa's request for the payment of an extraordinary dividend was not acceptable. In the following days, Mr. Zax had conversations on a regular basis with several directors about these and other proposed transaction terms.

        On February 3, 2010, representatives of Dewey & LeBoeuf and Shearman & Sterling LLP, Fairfax's outside legal counsel, negotiated the terms of a confidentiality agreement so that the Company could provide Fairfax with the information regarding the Company's reserves and the actuarial report requested at the February 2, 2010 meeting.

        On February 4, 2010, the confidentiality agreement was executed and Fairfax was provided with the reserve information and actuarial report it had requested. Also on that date, Mr. Watsa telephoned Mr. Zax and informed him that Fairfax would not require confirmation that the California Department of Insurance would approve the payment by the Company's insurance subsidiary of an extraordinary dividend in connection with a potential transaction. Mr. Zax informed Mr. Watsa that a meeting of the Company's board of directors had been scheduled for February 9, 2010 to discuss, among other things, a potential transaction with Fairfax. Mr. Zax invited Mr. Watsa to discuss Fairfax and its potential offer to acquire the Company with the directors at that meeting.

        On February 5, 2010, in connection with its evaluation and exploration of a potential transaction, Fairfax sent Dewey & LeBoeuf a form of a merger agreement, which included, among other things, a "fiduciary out" provision subject to the payment by the Company to Fairfax of a "break-up" fee equal to 3.0% of the equity value of the transaction.

26

---

Table of Contents

        On February 7, 2010, in connection with Fairfax's evaluation and exploration of a potential transaction, Shearman & Sterling sent Dewey & LeBoeuf a form of voting agreement, which Fairfax expected would be executed by each of the executive officers and directors of the Company and certain institutional stockholders in connection with any transaction, and a form of noncompetition agreement, which Fairfax expected would be executed by Mr. Zax in connection with any transaction, pursuant to which Mr. Zax would agree not to compete with the Company for a period of three years after the completion of any such transaction.

        From February 5, 2010 through February 7, 2010, senior officers of Fairfax and the Company participated in telephone conferences to discuss the Company's reserves.

        On February 8, 2010, five directors of the Company, including Mr. Zax, had several discussions regarding the transaction terms as reflected in the draft merger agreement circulated by Fairfax on February 5, 2010, and concluded that overall the draft was reasonable and showed that Fairfax was serious about entering into a transaction with the Company.

        On February 9, 2010, a meeting of the Company's board of directors was held at which the directors discussed, among other things, a potential transaction with Fairfax. In attendance at that meeting were certain senior officers of the Company as well as representatives of BofA Merrill Lynch and Dewey & LeBoeuf. At that meeting, Mr. Watsa made an oral presentation to the board of directors regarding Fairfax and its operations. Mr. Watsa advised the Company's board of directors that any acquisition of the Company would be funded from Fairfax's available cash resources. Mr. Watsa reiterated to the board of directors that any affirmative determination by Fairfax to proceed with a potential transaction would require approval of Fairfax's board of directors and that no such determination could be made unless and until Fairfax had received comfort from the rating agencies that a potential transaction would not adversely affect Fairfax's financial strength rating and a definitive acquisition agreement could be negotiated. Mr. Watsa also indicated that he expected the Company's current management team to continue to operate the Company after consummation of a potential transaction in the same manner as it had in the past, except that Fairfax would manage the Company's investment portfolio, and that each of the Company's directors and executive officers and certain institutional stockholders of the Company would enter into agreements to vote in favor of a potential transaction with Fairfax in the event an offer was made. Certain of the directors inquired whether securing voting agreements from institutional stockholders would be a condition to Farifax's entering into a potential acquisition agreement. Mr. Watsa advised that it would not. Mr. Watsa further stated that, if a potential transaction were to be consummated, the board of directors of the Company would consist of directors appointed by Fairfax, but that he was considering whether to ask the Company's current directors to serve on an advisory board after consummation of a potential transaction. Finally, Mr. Watsa informed the board of directors that, once Fairfax had reached an agreement with respect to an acquisition, it had never renegotiated the price of, or failed to close, that acquisition. After Mr. Watsa and the representative of BofA Merrill Lynch left the meeting, a representative of Dewey & LeBoeuf discussed the board's fiduciary duties under Delaware law in connection with a potential transaction with Fairfax. The representative of BofA Merrill Lynch then rejoined the meeting and discussed BofA Merrill Lynch's preliminary financial analyses of the Company. As part of this discussion, BofA Merrill Lynch discussed, among other things, the general economic environment in the United States and, in particular, the impact of the recession on employment, payrolls and workers' compensation insurance premiums and the Company's business from a historical and forecast perspective. BofA Merrill Lynch also reviewed with the board of directors, among other things, a list of potential bidders for the Company and expressed the view, based on its knowledge of and familiarity with the market for mergers and acquisitions in the insurance industry generally, that the likelihood that other potential bidders would make an all-cash offer on better terms than those discussed with Fairfax was low. The board of directors discussed BofA Merrill Lynch's preliminary financial analyses and the potential transaction at a price of $38.00 per share. The board of directors then unanimously authorized the Company's management to proceed with negotiating the terms of a merger agreement with Fairfax, and established an ad hoc committee of three non-management directors, comprised of

27

---

Table of Contents

Messrs. Jerome L. Coben, Alan I. Rothenberg and Michael Wm. Zavis, each with significant legal experience, to oversee such negotiation.

        Later that day, seven directors of the Company, including Mr. Zax, had informal discussions during which they further reviewed the potential transaction with Fairfax.

        On February 10, 2010, the Company declared a regular quarterly cash dividend of $0.50 per share on its outstanding shares of common stock to be paid on May 14, 2010 to stockholders of record as of the close of business on April 30, 2010.

        Also on February 10, 2010, a special meeting of the ad hoc committee was held at which the committee reviewed the terms of the draft merger agreement with Mr. Zax, Mr. Michael E. Jansen, the Company's General Counsel, Ms. Kari L. Van Gundy, the Company's Chief Financial Officer and a representative of Dewey & LeBoeuf. The committee then provided management and the Company's advisers with instructions with respect to the negotiation of a merger agreement, including, among other things, that they should pursue a "break-up" fee equal to 2.5% of the equity value of the potential transaction. The committee noted Mr. Watsa's statement to the board of directors that he expected the Company's current management team to continue to operate the Company after consummation of a potential transaction as it had in the past and instructed the Company's advisers to ensure that the transaction agreements reflect that arrangement, including with respect to the interim period between the signing of the merger agreement and the closing of the merger, as well as after the closing (including with respect to compensation matters (other than Mr. Zax's compensation)), for as long as Mr. Zax continued to be President of the Company. The committee also instructed the Company's advisers to proceed with the negotiation of a form of voting agreement that could be executed by the Company's directors and executive officers. As a result of concerns that the solicitation of voting agreements from institutional stockholders of the Company could give rise to regulatory issues, adversely affect the confidentiality of the discussions with Fairfax and compromise a potential transaction with Fairfax, the ad hoc committee instructed the Company's advisers to inform Fairfax that the Company would not agree to Fairfax soliciting voting agreements from institutional stockholders of the Company.

        On February 11, 2010, four directors of the Company, including Mr. Zax, had informal discussions during which they reviewed the current status of the negotiations.

        Also on February 11, 2010, Dewey & LeBoeuf sent Shearman & Sterling a revised draft of the merger agreement reflecting, among other things, the terms discussed with the ad hoc committee of the Company's board of directors. Later that day, representatives of Dewey & LeBoeuf and Shearman & Sterling held a conference call to discuss and negotiate the terms of the draft merger agreement. During that call, representatives of Shearman & Sterling advised representatives of Dewey & LeBoeuf that they had discussed with Fairfax the potential inclusion in the merger agreement of a "go shop" provision, which would permit the Company to solicit takeover proposals from third parties for a period of time after the execution of the merger agreement, and that, in light of the significant premium Fairfax was considering offering, the relatively low "break-up" fee of 3.0% of the transaction's equity value requested by Fairfax and the absence of a "force-the-vote" provision or a "matching right" in the proposed merger agreement, Fairfax objected to the inclusion of a "go shop" provision.

        On February 12, 2010, Mr. Watsa telephoned Mr. Zax and informed him that Fairfax had scheduled meetings with the rating agencies for the morning of February 16, 2010, and that Fairfax expected to have comfort with respect to any action in respect of its financial strength ratings by February 17, 2010. Mr. Watsa further informed Mr. Zax that, after discussion with the rating agencies, Fairfax believed that in order to maintain its financial strength rating following a potential acquisition of the Company, Fairfax would have to raise $200 million through an equity offering. Mr. Watsa advised Mr. Zax that Fairfax was confident that it could raise such additional equity. Mr. Watsa also told Mr. Zax that the rating agencies had expressed concern about continuity in the Company's management after completion of the proposed transaction and wanted to speak to Mr. Zax directly to obtain comfort that he and his senior management team would continue to operate the Company following the completion of an acquisition. Mr. Zax agreed to speak to the representatives of the rating agencies.

28

---

Table of Contents

        Also on February 12, 2010, the board of directors of the Company held a special meeting to discuss the potential transaction. At that meeting, Mr. Zax informed the board of directors that there was a delay in scheduling the meetings with the rating agencies and representatives of Dewey & LeBoeuf updated the board of directors with respect to the ongoing negotiations regarding the merger agreement, including the rejection by Fairfax of the inclusion of a "go shop" provision in the merger agreement, the ongoing discussion about the size of the "break-up" fee and Fairfax's continued desire to obtain voting agreements from certain institutional stockholders of the Company prior to or concurrently with the execution of the merger agreement. Representatives of BofA Merrill Lynch updated the board of directors regarding its fairness opinion process.

        From February 12, 2010 through February 17, 2010, the parties and their respective advisers worked toward finalizing the terms of the merger agreement and the related disclosure letter, the form of voting agreement and the noncompetition agreement to be executed by Mr. Zax. During this time, representatives of Dewey & LeBoeuf regularly updated Mr. Zax and members of the ad hoc committee regarding the status of the negotiations with Shearman & Sterling and received direction from Mr. Zax and such members of the ad hoc committee in connection with such negotiations. Also during this time, the Company's advisers successfully negotiated to reduce the size of the "break-up" fee from 3.0% to 2.75% of the equity value of the transaction and for Fairfax not to condition any offer to acquire the Company on the execution of voting agreements from any of the Company's institutional stockholders.

        On February 16, 2010, at the request of Mr. Watsa, Mr. Zax spoke to representatives of the rating agencies, each of which sought comfort from Mr. Zax that he and his senior management team would continue to manage the Company after consummation of a potential transaction with Fairfax.

        On February 17, 2010, after discussions with representatives of the rating agencies, Mr. Watsa contacted Mr. Zax to inform him that Fairfax was comfortable that its financial strength rating would not be adversely affected by a potential transaction to acquire the Company if such potential transaction was financed as reported to the rating agencies. Mr. Watsa further informed Mr. Zax that, subject to approval by Fairfax's board of directors, Fairfax was prepared to acquire all of the shares of the Company's common stock it did not currently own for $38.00 per share in cash, which would represent a premium of approximately 34.5% to the book value per share of Company's common stock as of December 31, 2009. In addition, the Company would be able to pay one more dividend of $0.50 per share on its common stock prior to the closing of the transaction.

        Later in the day on February 17, 2010, the board of directors of the Company held a special meeting to continue its consideration of a transaction with Fairfax. At the meeting, a representative of Dewey & LeBoeuf reviewed certain legal matters, including the final proposed transaction terms and Mr. Zax's interests in the transaction, including the value of the merger consideration he would receive under the terms of the merger agreement and Mr. Zax's proposed noncompetition agreement with Fairfax. Mr. Zax stated that his current employment agreement with the Company would continue after the closing of the transaction on its current terms, without any modification or extension, and that he was not seeking or being offered any severance or other consideration as part of the transaction and the change in control, other than the merger consideration payable with respect to his shares of the Company's common stock. Mr. Zax also stated that the terms of his noncompetition agreement with Fairfax, which Mr. Zax would execute concurrently with the execution of the merger agreement, would provide for Mr. Zax to continue to manage the business and operations of the Company and its subsidiaries after the closing of the transaction with the same level of responsibility, control and discretion that he currently exercises, except that Fairfax would manage the Company's investment portfolio, and that Mr. Zax would have the right to terminate the noncompetition agreement if that provision were ever breached by Fairfax. The board of directors also discussed the interests of the Company's other directors and executive officers in the transaction, including the vesting and cash-out of all unvested restricted stock they hold, the payments required upon a change of control with respect to all phantom stock units held by certain of the Company's directors, the payment of severance to the

29

---

Table of Contents

Company's executive officers (including, if applicable, tax gross-ups relating to excise taxes resulting from such severance payments) if a termination of employment were to occur in connection with the merger and the interests of the Company's directors and officers in being entitled to continued indemnification and insurance coverage from the surviving corporation under the merger agreement. Also at the meeting, BofA Merrill Lynch reviewed with the board of directors, among other things, a list of potential bidders for the Company and reiterated its view, based on its knowledge of and familiarity with the market for mergers and acquisitions in the insurance industry generally, that the likelihood that any of those potential bidders would make an all-cash offer on better terms than those discussed with Fairfax was low. BofA Merrill Lynch also reviewed with the Company's board of directors its financial analysis of the merger consideration and delivered to the Company's board of directors an oral opinion, which was confirmed by delivery of a written opinion dated February 17, 2010, to the effect that, as of that date and based on and subject to various assumptions and limitations described in its opinion, the merger consideration to be received by holders of the Company's common stock was fair, from a financial point of view, to such holders (other than Fairfax and its subsidiaries).

        Following BofA Merrill Lynch's presentation, the board of directors discussed BofA Merrill Lynch's financial analysis and whether it was advisable to sell the Company in the current economic environment. The board of directors considered the risks associated with deferring the decision to sell the Company and concluded unanimously that, particularly in light of the price being offered by Fairfax and the current outlook for the economy and unemployment and its impact on the Company, the decision to sell the Company should not be deferred. In addition, Mr. Zax stated that, based on, among other things, discussions with the Company's legal and financial advisers, he believed it was unlikely that the "break-up" fee would deter an interested third party from making an offer to acquire the Company and that, under the terms of the merger agreement, the board of directors would otherwise have the ability to review and accept any such higher bid. At the end of that meeting, the board of directors unanimously determined that the merger agreement was advisable, fair to and in the best interests of the Company and its stockholders and unanimously resolved to approve the merger agreement and recommend that the stockholders of the Company adopt the merger agreement.

        After the special meeting of the Company's board of directors on February 17, 2010, the board of directors of Fairfax approved the merger agreement. Shortly thereafter, the parties executed the merger agreement, each of the directors and executive officers of the Company as of that date executed his or her respective voting agreement, and Mr. Zax executed the noncompetition agreement.

        Prior to the opening of the markets on the morning of February 18, 2010, the parties issued a joint press release announcing the execution of the merger agreement.

Reasons for the Merger

        In evaluating the merger agreement and the merger, the board of directors consulted with our senior management team and our outside legal and financial advisers and considered a number of factors weighing in favor of the merger, including, among others, the material factors set forth below (the order in which the following factors appear does not reflect any relative significance).

•

The Company's Business and Prospects.   The board of directors believes that the merger maximizes value to the Company's stockholders and is a more attractive option for the Company's stockholders than any other reasonably available option, including continuing to operate the Company on an independent, stand-alone basis. In making this determination, the board of directors considered, on a historical and prospective basis, the Company's business, results of operation (including, among other things, trends in workers' compensation premiums, underwriting performance and return on equity), earnings, financial condition and book value, and the market price and volatility of, and trading information with respect to, the Company's common stock. The board of directors also considered the risks and benefits associated with the Company's efforts and plans to increase the scope and profitability of its business as an

30

---

Table of Contents

independent, stand-alone company, including its plans to increase its distribution network and underwriting capabilities, as compared to the risks and benefits associated with the merger.

•

The Impact of Difficult Economic Conditions.   The board of directors considered the Company's prospects as an independent public company in light of current difficult economic conditions in the United States. Since the Company's results of operations are particularly affected by the level of unemployment in the jurisdictions in which the Company operates (which affects, together with other factors, workers' compensation premium revenue), the board of directors considered the current and forecast employment data in the United States, in general, and in the States of California and Florida, the Company's most significant markets, in particular. The board of directors noted that the unemployment forecasts reviewed by it did not portend significant improvements in the Company's revenues or results of operations in the foreseeable future. The board of directors also considered the impact of economic conditions on the Company's investment portfolio, including the potential impact of increasing interest rates after the end of the current recession on the value of the Company's fixed-income investments and the related impact on the Company's book value. The board of directors concluded that there were significant risks associated with deferring the decision to sell the Company, particularly in light of the current outlook for the economy and unemployment and its impact on the Company.



•

BofA Merrill Lynch's Financial Presentation and Opinion.   The board of directors considered the financial analyses of BofA Merrill Lynch and its opinion, dated February 17, 2010, as to the fairness, from a financial point of view and as of such date, of the merger consideration to be received by the Company's stockholders (other than Fairfax and its subsidiaries), as more fully described below in the section entitled "—Opinion of BofA Merrill Lynch" beginning on page 34.



•

The Compelling Nature of the Merger Consideration.   The board of directors considered that the merger consideration represented a premium of 31.4% to the closing price of the Company's common stock on February 17, 2010, the last trading day prior to the announcement of the execution of the merger agreement, a 34.0% premium to the 30-day average closing price of the Company's common stock for the period ended on February 17, 2010, a 34.5% premium to the Company's book value per share as of December 31, 2009, a 36% premium to the Company's book value per share on a fully diluted basis as of December 31, 2009, a 37% premium to the Company's tangible book value per share as of December 31, 2009 and a 39% premium to the Company's tangible book value per share on a fully diluted basis as of December 31, 2009.

The board of directors also considered the fact that the merger consideration will be paid entirely in cash, which will provide liquidity and certainty of value to the Company's stockholders. While the board of directors understood this transaction would be taxable for United States federal income tax purposes, the board of directors considered the fact that the existing maximum tax rate on long-term capital gains is scheduled to increase in 2011 upon the expiration of the tax cuts enacted during the Bush administration.

•

The Ability of the Company to Pay a Dividend on its Shares of Common Stock, and the Ability of the Company's Management to Operate the Company, Prior to the Consummation of the Merger.   The board of directors considered the restrictions contemplated by the merger agreement on the Company's actions between the date the merger agreement was executed and the effective time, that such restrictions are not, in the reasonable view of the board of directors, unreasonable, and that the merger agreement allows the Company's management significant latitude to continue to operate the Company pending consummation of the merger. The board of directors further considered that the merger agreement permits the Company to pay a cash dividend of $0.50 per share on the Company's common stock prior to the consummation of the merger.

31

---

Table of Contents

•

The Low Likelihood that a Third Party Would Propose an Acquisition at a Higher Price.   The board of directors reviewed a list of third parties most likely to be interested in acquiring the Company and considered the view of the Company's financial adviser that the likelihood that any of such parties would make an all-cash offer on better terms than those discussed with Fairfax was low.



•

The Ability of the Board of Directors to Change its Recommendation and Terminate the Merger Agreement and that the "Break-Up" Fee Was Not Preclusive.   The board of directors considered the fact that the merger agreement allows the Company to respond to unsolicited takeover proposals, to change or withdraw its recommendation to the Company's stockholders with respect to the adoption of the merger agreement and to terminate the merger agreement to enter into an alternative agreement relating to a superior proposal, subject, in certain situations, to the payment to Fairfax of a $39.6 million "break-up" fee. The board of directors further considered the absence in the merger agreement of a "force the vote" provision, which would have required the Company to submit the proposal to adopt the merger agreement to the Company's stockholders notwithstanding the fact that the board of directors no longer recommends adoption of the merger agreement by the Company's stockholders, and the absence of a "matching right" for Fairfax with respect to any such superior proposal. The board of directors also considered the size of the "break-up" fee and determined that, at 2.75% of the equity value of the transaction, it was reasonable in light of the benefits of the merger and would not, in the directors' reasonable judgment, preclude other interested third parties from making a competing offer for the Company.



•

The High Likelihood that the Transaction with Fairfax will be Completed.   The board of directors considered Fairfax's financial condition and the relatively limited conditions to the closing of the merger, including the fact that merger agreement does not contain any financing contingency, and determined that, in its judgment and assuming adoption of the merger agreement by the Company's stockholders, there is a high likelihood that the proposed transaction with Fairfax will be completed. The board of directors further considered Fairfax's record in successfully completing acquisitions of other companies, including Mr. Watsa's statement to the board of directors that, once Fairfax had reached an agreement with respect to a proposed acquisition, Fairfax has never lowered the price of or failed to close any such transaction, and Fairfax's covenant in the merger agreement to use its reasonable best efforts to consummate the merger (subject to the terms and conditions of the merger agreement).



•

Stockholder Approval and Appraisal Rights.   The board of directors considered the fact that the merger is subject to the approval of the Company's stockholders, who therefore have the option to reject the merger by voting against the proposal to adopt the merger agreement as described in this proxy statement. The board of directors also considered the fact that the total number of shares of the Company's common stock that would be subject to voting agreements would represent only 3.5% of the Company's outstanding common stock, and that Fairfax and its subsidiaries only owned an additional 8.2% of the shares of the Company's common stock that they could vote in favor of the proposal to adopt the merger agreement. In addition, the board of directors considered the fact that the Company's stockholders will have the right to demand appraisal of their shares in accordance with the procedures established by Delaware law. See the section entitled "Appraisal Rights" beginning on page 72.



•

The Terms of the Merger Agreement.   The board of directors considered all of the terms and conditions of the merger agreement, including, among other things, the representations, warranties, covenants and agreements of the parties, the conditions to closing, the form and structure of the merger consideration and the termination rights, and the fact that the merger agreement was negotiated between two sophisticated parties in an arm's-length negotiation.

32

---

Table of Contents

        The board of directors also considered, among others, the following potentially negative factors in determining whether to approve the merger agreement (the order in which the following factors appear does not reflect any relative significance).

•

That the Merger Consideration Represents a Discount to the Highest Price at which the Company's Common Stock has Traded in Recent Years.   The board of directors considered that the merger consideration represents a 21.3% discount to the highest price at which the Company's common stock has traded over the last two years, a 26.1% discount to the highest price at which the Company's common stock has traded over the last three years and a 31.3% discount to the highest price at which the Company's common stock has traded over the last five years.



•

The Interests of Certain Individuals in the Merger.   The board of directors considered that the Company's officers and directors have interests in the merger that are different from, or in addition to, the interests of the Company's stockholders, including the vesting and cash-out of all unvested restricted stock they hold and the payments required upon a change of control with respect to all phantom stock units held by the Company's directors, the payment of severance to the Company's executive officers (including, if applicable, tax gross-ups relating to excise taxes resulting from such severance payments) if a termination of employment were to occur in connection with the merger and the interests of the Company's directors and officers in being entitled to continued indemnification and insurance coverage from the surviving corporation under the merger agreement.



•

The No Solicitation, "Break-up" Fee and Expense Reimbursement Provisions.   The board of directors considered the restrictions contained in the merger agreement on the Company's ability to solicit competing proposals from third parties, the absence of a "go shop" provision in the merger agreement that would have permitted the Company to solicit takeover proposals from third parties for a period of time after the execution of the merger agreement and the possibility that the $39.6 million "break-up" fee may discourage an interested third party from submitting a competing, higher proposal to acquire the Company.



•

The Risk that the Merger will be Delayed or will not be Completed.   The board of directors considered the risk that the merger will be delayed or will not be completed, including the risk that the affirmative vote of the Company's stockholders or the required regulatory approvals may not be obtained, as well as the potential loss of value to the Company's stockholders and the potential negative impact on the operations and prospects of the Company if the merger were delayed or were not completed for any reason.



•

The Significant Costs Involved.   The board of directors considered the significant costs involved in connection with negotiating the merger agreement and completing the merger, the substantial management time and effort required to effectuate the merger and the related disruption to the Company's day-to-day operations during the pendency of the merger. If the merger is not consummated, the Company may be required to bear such costs and expenses.



•

The Potential Impact of the Announcement of the Merger Agreement.   The board of directors considered the risk that the pendency of the merger could adversely affect the relationship of the Company and its subsidiaries with their respective employees, agents, policyholders and others with whom they have business dealings.



•

The Interests of the Company's Stockholders in the Future of the Company.   The board of directors considered the fact that, following the merger, the Company's public stockholders will cease to participate in any future earnings growth of the Company or benefit from any future increase in the Company's value.



•

The Taxable Nature of the Transaction.   The board of directors considered the fact that, for United States federal income tax purposes, the merger is a taxable transaction.

33

---

Table of Contents

        The above discussion of the information and factors considered by the board of directors includes the principal information and factors, both positive and negative, considered by the board of directors in its evaluation of the merger agreement and the merger. The above discussion is not intended to be exhaustive and may not include all of the information and factors considered by the board of directors. After considering the above factors, the board of directors concluded that, in the aggregate, the positive factors relating to the merger agreement and merger significantly outweighed the potential negative factors.

        In view of the variety of factors considered in connection with its evaluation, and the complexity of these matters, the board of directors did not quantify or assign relative or specific weights to the factors considered in reaching its conclusion, nor did it consider it practical to do so. Rather, the board of directors made its recommendation based on the totality of the information presented to and considered by it and the investigations it conducted. In addition, individual directors may have given different weights to different factors.

        It should be noted that this explanation of the reasoning of the board of directs and certain information presented in this section is forward-looking in nature and should be read in light of the factors discussed in the section titled "Cautionary Statement Concerning Forward-Looking Information" beginning on page 17 of this proxy statement.

Recommendation of the Board of Directors

         The board of directors unanimously recommends that you vote "FOR" the proposal to adopt the merger agreement and "FOR" the proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies.

Opinion of BofA Merrill Lynch

        The board of directors engaged BofA Merrill Lynch to act as its financial advisor in connection with the merger and to render an opinion as to whether the consideration to be received by the holders of our common stock pursuant to the merger was fair, from a financial point of view, to the holders of such shares (other than Fairfax and its subsidiaries).

        On February 17, 2010, BofA Merrill Lynch delivered its oral opinion to the board of directors, subsequently confirmed in writing on February 17, 2010, that, as of that date, and based upon and subject to the assumptions made, matters considered, qualifications and limitations set forth in the written opinion (which are described below), the consideration of $38.00 per share in cash to be received by the holders of our common stock pursuant to the merger was fair, from a financial point of view, to the holders of such shares (other than Fairfax and its subsidiaries).

        The full text of the written opinion of BofA Merrill Lynch, which sets forth assumptions made, matters considered and qualifications and limitations on the review undertaken by BofA Merrill Lynch, is attached to this proxy statement as Annex B and is incorporated into this proxy statement by reference. The following summary of BofA Merrill Lynch's opinion is qualified by reference to the full text of the opinion. You are urged to read and should read the entire opinion carefully.

        The opinion is addressed to the board of directors and addresses only the fairness, from a financial point of view, of the consideration to be received by the holders of our common stock (other than Fairfax and its subsidiaries) pursuant to the merger. The opinion does not address the merits of the underlying decision by us to engage in the merger and does not constitute, nor should it be construed as, a recommendation to any stockholder as to how the stockholder should vote with respect to the merger or any other matter. In addition, BofA Merrill Lynch was not asked to address, and its opinion does not address, the fairness to, or any other consideration of, the holders of any class of securities, creditors or other constituencies of the Company, other than the holders of our common stock.

34

---

Table of Contents

Although BofA Merrill Lynch participated in negotiations among the parties, the consideration to be received by such holders pursuant to the merger was determined by the board of directors, and was approved by the board of directors.

        In arriving at its opinion, BofA Merrill Lynch, among other things:

•

reviewed certain publicly available business and financial information relating to us that BofA Merrill Lynch deemed to be relevant;



•

reviewed certain internal financial and operating information with respect to our business operations and prospects furnished to or discussed with BofA Merrill Lynch by our management, including certain forward-looking financial data relating to the Company given to BofA Merrill Lynch by our management;



•

discussed the past and current business, operations, financial condition and prospects of the Company with members of our senior management;



•

reviewed the trading history for our common stock and a comparison of that trading history with the histories of other companies BofA Merrill Lynch deemed to be relevant;



•

compared certain financial and stock market information of the Company with similar information of other companies that BofA Merrill Lynch deemed to be relevant;



•

compared certain financial terms of the merger to financial terms, to the extent publicly available, of other transactions that BofA Merrill Lynch deemed to be relevant;



•

reviewed a draft of the merger agreement dated February 15, 2010; and



•

performed such other analyses and studies and considered such other information and factors that BofA Merrill Lynch deemed appropriate.

        In arriving at its opinion, BofA Merrill Lynch assumed and relied upon, without independent verification, the accuracy and completeness of the financial information and other information and data publicly available or provided to or otherwise reviewed by or discussed with it, and relied upon the assurances of our management that they were not aware of any facts or circumstances that would make such information or data inaccurate or misleading in any material respect. With respect to the Company's forward-looking financial data, BofA Merrill Lynch was advised by the Company, and assumed, that such information was reasonably prepared on bases reflecting the best currently available estimates and good faith judgments of our management as to the future financial performance of the Company. BofA Merrill Lynch did not make and was not provided with any independent evaluation or appraisal of the assets and liabilities (contingent or otherwise) of the Company, nor did it make any physical inspection of the properties or assets of the Company. BofA Merrill Lynch did not evaluate the solvency or fair value of the Company or Fairfax under any state, federal or other laws relating to bankruptcy, insolvency or similar matters. BofA Merrill Lynch is not an expert in evaluating reserves for property and casualty insurance losses and loss adjustment expenses and did not make an independent evaluation of the adequacy of the reserves of the Company. In that regard, BofA Merrill Lynch made no analysis of, and expresses no opinion as to, the adequacy of the losses and loss adjustment expense reserves of the Company. BofA Merrill Lynch assumed, at the direction of our management, that the merger will be consummated in accordance with the terms of the merger agreement, without waiver, modification or amendment of any material term, condition or agreement and that, in the course of obtaining necessary governmental, regulatory and other approvals, consents, releases and waivers for the merger, no delay, limitation, restriction or condition, including any divestiture requirements or amendments or modifications, will be imposed that would have an adverse effect on the Company or the contemplated benefits of the merger. BofA Merrill Lynch also assumed, at the direction of the Company, that the final executed merger agreement would not differ in any material respect from the draft merger agreement reviewed by BofA Merrill Lynch.

35

---

Table of Contents

        In performing its analyses, BofA Merrill Lynch made numerous assumptions with respect to industry performance, general business, economic, market and financial conditions and other matters, many of which are beyond the control of BofA Merrill Lynch and us. Any estimates contained in the analyses performed by BofA Merrill Lynch are not necessarily indicative of actual values or future results, which may be significantly more or less favorable than suggested by BofA Merrill Lynch's analyses. Additionally, estimates of the value of businesses or securities do not purport to be appraisals or to reflect the prices at which those businesses or securities might actually be sold. Accordingly, the analyses and estimates are inherently subject to substantial uncertainty. BofA Merrill Lynch's opinion was among a number of factors taken into consideration by the board of directors in making its determination to approve the merger agreement. In addition, the board of directors did not rely on any single analysis in making its determination. Consequently, the analyses described below should not be viewed as determinative of the decision of the board of directors or management with respect to the fairness of the consideration to be paid pursuant to the merger.

        At the February 17, 2010 meeting of the board of directors, BofA Merrill Lynch made a presentation of certain financial analyses of the merger. BofA Merrill Lynch performed each of the financial analyses summarized below. The summary below does not purport to be a complete description of the analyses performed by BofA Merrill Lynch and underlying its opinion. The preparation of a fairness opinion is a complex analytic process involving various determinations as to the most appropriate and relevant methods of financial analysis and the application of those methods to the particular circumstances. Therefore, a fairness opinion is not readily susceptible to partial analysis or summary description.

        In arriving at its opinion, BofA Merrill Lynch considered the results of all of its analyses and did not attribute any particular weight to any analysis or factor that it considered. The financial analyses summarized below include information presented in tabular format. BofA Merrill Lynch believes that its analyses and the summary of its analyses must be considered as a whole and that selecting portions of its analyses and factors or focusing on the information presented below in tabular format, without considering all analyses and factors or the full narrative description of the financial analyses, including the methodologies and assumptions underlying the analyses, could create a misleading or incomplete view of the process underlying its analyses and opinion. The tables alone do not constitute a complete description of the financial analyses.

        Historical Trading Analysis.     BofA Merrill Lynch reviewed the historical trading performance of our common stock as reported by FactSet, an online investment research and database service used by financial institutions, and calculated for the board of directors various multiples and premiums resulting from the merger. The following table presents the results of BofA Merrill Lynch's calculations:

36

---

Table of Contents

        Analysis of Selected Comparable Publicly Traded Companies.     BofA Merrill Lynch analyzed the public market statistics of certain comparable publicly traded companies and examined various trading statistics and information. Comparable publicly traded companies include:

•

W.R. Berkley Corporation



•

Markel Corporation



•

HCC Insurance Holdings, Inc.



•

American Financial Group, Inc.



•

ProAssurance Corporation



•

RLI Corp.



•

Tower Group, Inc.



•

Harleysville Group Inc.



•

Selective Insurance Group, Inc.



•

Navigators Group, Inc.



•

AmTrust Financial Services, Inc.



•

Employers Holdings, Inc.



•

AMERISAFE, Inc.



•

SeaBright Insurance Holdings, Inc.



•

PMA Capital Corporation



•

Eastern Insurance Holdings, Inc.

        BofA Merrill Lynch selected these companies because their businesses and operating profiles are reasonably similar to ours. None of the comparable companies identified above is identical to us. A complete analysis involves complex considerations and judgments concerning differences in financial and operating characteristics of the comparable companies and other factors that could affect public trading values of such comparable companies. Mathematical analysis (such as determining the mean and median) is not by itself a meaningful method of using the selected comparable companies' data.

        As part of its analysis, BofA Merrill Lynch examined public market data, including the following market statistics for each of the selected comparable companies:

•

the multiple of market price per share to book value per share;



•

the multiple of market price per share to estimated 2010 earnings per share; and



•

the multiple of market price per share to estimated 2011 earnings per share.

Analysis of Price / Earnings Multiples:

        BofA Merrill Lynch observed the multiples of share price to estimated 2010 earnings per share of the comparable companies and derived a range of such multiples of 5.6x to 19.0x. Considering this analysis, BofA Merrill Lynch derived an implied equity value per share of our common stock of $2.69 to $9.16 using Reuters estimates.

37

---

Table of Contents

Analysis of Price / Book Multiples:

        BofA Merrill Lynch observed the multiples of share price to December 31, 2009 book value of the comparable companies and derived a range of such multiples of 0.46x to 1.34x. Considering this analysis, BofA Merrill Lynch derived an implied equity value per share of our common stock of $13.10 to $37.78.

Precedent Transaction Analysis:

        BofA Merrill Lynch analyzed certain information relating to selected comparable precedent transactions announced during the period from December 12, 2006 to February 12, 2010 in the property and casualty insurance sector. The transactions reviewed were:

        BofA Merrill Lynch calculated various multiples and ratios implied for the target companies in certain "selected transactions." With respect to the selected transactions, BofA Merrill Lynch calculated offer values as multiples of (i) book value and (ii) forward earnings per share. BofA Merrill Lynch then applied these multiples to the appropriate metrics for the Company. The book value multiples of selected transactions were applied to our book value per share as of December 31, 2009. The price/forward earnings per share multiples of selected transactions were applied to the 2010 Reuters earnings estimates for the Company.

38

---

Table of Contents

        Based on the analysis of the selected transactions, BofA Merrill Lynch derived the following implied valuation ranges:

Discounted Dividend Analysis

        BofA Merrill Lynch performed a discounted dividend analysis to estimate a range of present values for our common stock as of January 1, 2010. The analysis used management's financial projections for the time period ending December 31, 2014, as described in the section titled "—Forward-Looking Financial Data Prepared for Purposes of BofA Merrill Lynch Opinion" beginning on page 40. The cash flows were modeled assuming that we continue to operate as an independent entity. The valuation range was determined by adding (i) the present value of cash available for dividends during the time period January 1, 2010 to December 31, 2014 and (ii) the present value of the "terminal value" of our common stock. In calculating the terminal value of our common stock, BofA Merrill Lynch used book value multiples and price/earnings multiples. The book value multiples ranged from 1.00x to 1.40x, while the price/earnings multiples ranged from 9.0x to 11.0x forward earnings. The dividend stream and the terminal value were discounted using discount rates ranging from 10% to 12%, which are rates BofA Merrill Lynch viewed as the appropriate range for a company with our risk characteristics. Based on the above assumptions, BofA Merrill Lynch determined that the implied present value of our common stock ranged from $21.48 to $30.51.

General

        The summary set forth above does not purport to be a complete description of the analyses performed by BofA Merrill Lynch. The preparation of a fairness opinion is a complex process and is not necessarily susceptible to partial analysis or summary description. BofA Merrill Lynch believes that selecting any portion of its analyses or of the summary set forth above, without considering the analyses as a whole, would create an incomplete view of the process underlying BofA Merrill Lynch's opinion. In arriving at its opinion, BofA Merrill Lynch considered the results of all its analyses. The analyses performed by BofA Merrill Lynch include analyses based upon forecasts of future results, which results may be significantly more or less favorable than those suggested by BofA Merrill Lynch's analyses. The analyses do not purport to be appraisals or to reflect the prices at which our common stock may trade at any time after announcement of the merger. The analyses were prepared solely for purposes of BofA Merrill Lynch providing its opinion to the board of directors. Because the analyses are inherently subject to uncertainty, being based upon numerous factors and events, including, without limitation, factors relating to general economic and competitive conditions beyond the control of the parties or their respective advisors, neither BofA Merrill Lynch nor any other person assumes responsibility if future results or actual values are materially different from those forecasted.

        The board of directors selected BofA Merrill Lynch as its financial adviser because of BofA Merrill Lynch's reputation as an internationally recognized investment banking and advisory firm with experience in transactions similar to the merger and BofA Merrill Lynch's familiarity with us and our

39

---

Table of Contents

business. BofA Merrill Lynch has, in the past, provided financial advisory and financing services to us and may continue to do so and has received, and may receive, fees for the rendering of such services. In addition, BofA Merrill Lynch and its affiliates in the past have provided, currently are providing, and in the future may provide, investment banking, commercial banking and other financial services to Fairfax, and have received, and in the future may receive, compensation for the rendering of these services. In the past two years, such services have included having acted as (i) financial adviser in connection with Fairfax's acquisition of the outstanding minority interest in Odyssey Re Holdings Corp. announced in September 2009, (ii) joint-bookrunner in connection with Fairfax's $1.0 billion equity offering completed in September 2009, (iii) co-manager for Fairfax's C$400 million senior notes offering completed in August 2009, (iv) corporate broker for Fairfax's purchase of the outstanding minority ownership of Advent Capital (Holdings) PLC in August 2009 and (v) adviser to Fairfax in connection with its unsolicited cash offer for a portion of Advent Capital (Holdings) PLC in July 2008. Fairfax has advised the Company that it paid fees to BofA Merrill Lynch and certain of its affiliates of less than $9.0 million in the aggregate in respect of the foregoing services. In the ordinary course of its business, BofA Merrill Lynch and its affiliates may actively trade shares of our and our subsidiaries' common stock, as well as Fairfax's and its subsidiaries' common stock and other of our and our subsidiaries' securities, as well as Fairfax's and its subsidiaries' securities, for its own account and for the accounts of its customers and, accordingly, may at any time hold a long or short position in such securities.

        Under the terms of a letter agreement dated February 17, 2010, pursuant to which the board of directors engaged BofA Merrill Lynch as its financial advisor, we agreed to pay BofA Merrill Lynch for its services a success fee of $7 million upon the closing of the merger or (i) another merger, consolidation or other business combination pursuant to which all or substantially all of the business, assets or divisions of the Company is combined with that of a potential purchaser, (ii) a sale, transfer, exchange or other disposition of all or substantially all of the business, assets or voting securities of the Company or (iii) a restructuring, recapitalization or similar transaction resulting in the Company's stockholders immediately prior to giving effect to such transaction beneficially owning less than 50% of the resulting entity. If the Company consummates an alternative transaction involving the business, assets or voting securities of the Company with the assistance of BofA Merrill Lynch, compensation for such services will be negotiated in connection with such alternative transaction (taking into account, among other things, customary fees paid to investment banks comparable to BofA Merrill Lynch, acting in similar transactions). In addition to any fees payable to BofA Merrill Lynch under the letter agreement, we have agreed to reimburse BofA Merrill Lynch for its reasonable out-of-pocket expenses incurred in connection with providing its engagement, including the reasonable fees of its legal counsel. We have also agreed to indemnify BofA Merrill Lynch and related parties against various liabilities, including liabilities arising under United States federal securities laws or relating to or arising out of the merger or the engagement of BofA Merrill Lynch.

Forward-Looking Financial Data Prepared for Purposes of BofA Merrill Lynch Opinion

        The Company does not, as a matter of course, prepare financial projections or disclose forward-looking information about the Company's future financial performance, earnings or other results (except that the chief financial officer prepares estimates of financial results for the current quarter solely as information for the board of directors at its regularly scheduled meetings). This is due primarily to two factors: (i) the opportunistic nature of our business and the risks inherent in it, including reserve fluctuation; and (ii) the need to prevent any pressure on management to write insurance business at inadequate or unsatisfactory prices or terms in order to achieve forecasts. The Company has followed this practice for years and believes it assists in producing the best long-term results. At the request of BofA Merrill Lynch, however, the Company provided BofA Merrill Lynch with certain financial projections prepared by the Company's management solely for purposes of BofA Merrill Lynch's financial analysis in connection with the preparation of its fairness opinion. The

40

---

Table of Contents

projections set forth below are included in this proxy statement solely because this information was provided to BofA Merrill Lynch, and not to influence your decision as to whether to vote for the proposal to adopt the merger agreement. The inclusion of the financial projections in this proxy statement should not be regarded as an indication that the Company, the board of directors, BofA Merrill Lynch or any other recipient of the financial projections considered, or now considers, them to be reliable predictions of future results, and they should not be relied upon as such.

        The financial projections are subjective in many respects and reflect numerous judgments, estimates and assumptions that are inherently uncertain, many of which are beyond the Company's control, including estimates and assumptions regarding general economic conditions, unemployment levels and payrolls and the impact of such factors on workers' compensation insurance premiums, premium rate levels, loss ratios, loss cost trends including medical inflation and other financial metrics. Important factors that may affect actual results and cause the financial projections not to be accurate include, but are not limited to, employment trends, risks and uncertainties relating to the Company's business (including its ability to achieve strategic goals, objectives and targets over the applicable periods), industry performance, the regulatory environment, general business and economic conditions, workers' compensation loss cost trends including medical inflation, competition and other factors described under "Cautionary Statement Concerning Forward-Looking Information" beginning on page 17 of this proxy statement. In addition, the financial projections do not reflect any events that could affect the Company's prospects, changes in general business or economic conditions or any other transaction or event that has occurred since, or that may occur and that was not anticipated at, the time the financial projections were prepared. The financial projections also cover multiple years and by their nature become subject to greater uncertainty with each successive year. Furthermore, and for the same reasons, the financial projections should not be construed as commentary by the Company's management as to how the Company's management expects the Company's actual results to compare to Wall Street research analysts' estimates. There can be no assurance that the financial projections are or will be accurate or that the Company's future financial results will not vary, even materially, from the financial projections. None of the Company, its affiliates, representatives or agents undertakes any obligation to update or otherwise to revise the financial projections to reflect circumstances existing or arising after the date such projections were generated or to reflect the occurrence of future events, even if any or all of the underlying estimates and assumptions are shown to be in error.

        Set forth below is a summary of the financial projections prepared by the Company's management for purposes of BofA Merrill Lynch's financial analysis in connection with the preparation of its fairness opinion.

        The financial projections should be read together with the historical financial statements of the Company, which have been filed with the SEC. See "Where You Can Find More Information" on page 77. The financial projections were not prepared with a view toward public disclosure or compliance with published guidelines of the SEC, the Public Company Accounting and Oversight Board or the American Institute of Certified Public Accountants for preparation and presentation of prospective financial information. Neither our independent registered public accounting firm nor any other independent accountant has compiled, examined or performed any procedures with respect to the prospective financial information contained in the financial projections, nor have they expressed any opinion or given any form of assurance on the financial projections or their achievability, and

41

---

Table of Contents

accordingly assume no responsibility for them. The report of the Company's independent registered public accounting firm incorporated into this proxy statement by reference relates to the Company's historical financial information. It does not extend to the prospective financial information and should not be read to do so.

         There can be no assurance that any projections will be, or are likely to be, realized, or that the assumptions on which they are based will prove to be, or are likely to be, correct. You are cautioned not to place undue reliance on this information in making a decision as to whether to vote for the proposal to adopt the merger agreement.

Financing of the Merger

        The merger is not subject to any financing condition. We anticipate that the total funds needed to complete the merger will be approximately $1.3 billion, taking into account the 3.1 million shares of the Company's common stock already owned by Fairfax. Fairfax has informed us that it will fund this amount through a combination of holding company cash and subsidiary dividends.

Effective Time of Merger

        The closing of the merger is expected to take place no later than the third business day following the date on which the last of the conditions to the closing of the merger (described under "The Merger Agreement—Conditions to the Merger") has been satisfied or waived (other than the conditions that by their nature are to be satisfied at the closing of the merger, but subject to the satisfaction or written waiver of those conditions).

        The effective time of the merger will occur as soon as practicable following the closing of the merger upon the filing of a certificate of merger with the Secretary of State of the State of Delaware (or at such later date as we and Fairfax may agree and specify in the certificate of merger).

Payment of Merger Consideration and Surrender of Stock Certificates

        Each record holder of shares of our common stock (other than shares of the Company's common stock held by Fairfax, the Company or any of their respective wholly owned subsidiaries, and shares of the Company's common stock held by stockholders who properly exercise appraisal rights under the DGCL with respect to such shares) will receive shortly after the completion of the merger a letter of transmittal describing how such holder may exchange shares of the Company's common stock for the merger consideration.

         You should not return your stock certificates with the enclosed proxy card, and you should not forward your stock certificates to the paying agent without a letter of transmittal.

        You will not be entitled to receive the merger consideration until you deliver a duly completed and executed letter of transmittal to the paying agent. If your shares are certificated, you must also surrender your stock certificate or certificates to the paying agent. If ownership of your shares is not registered in the transfer records of the Company, a check for any cash to be delivered will only be issued if the applicable letter of transmittal is accompanied by all documents reasonably required to evidence and effect transfer and to evidence that any applicable stock transfer taxes have been paid or are not applicable. With respect to shares of our common stock held by The Depository Trust Company, or DTC, the paying agent will transmit to DTC an amount in cash in immediately available funds equal to the number of shares of our common stock held of record by DTC immediately prior to the effective time, multiplied by the per share merger consideration. DTC will then appropriately credit the accounts of the holders of our common that is stock held by DTC.

42

---

Table of Contents

Interests of Certain Persons in the Merger

        In considering the recommendation of the board of directors that you vote to approve the proposal to adopt the merger agreement, you should be aware that our directors and officers have interests in the merger that are different from, or in addition to, those of our stockholders generally. The board of directors was aware of and considered these interests, among other matters, in evaluating and negotiating the merger agreement and the merger, and in recommending that the merger agreement be adopted by the stockholders of the Company. For the purposes of all of the agreements and plans described below, the completion of the transactions contemplated by the merger agreement will constitute a change in control.

Restricted Stock and Phantom Stock Units

        At the effective time of the merger, each restricted share of the Company's common stock issued and outstanding and subject to forfeiture will become fully vested without restrictions and will be treated as an unrestricted share of the Company's common stock. Each director or officer who holds any restricted shares will be entitled to receive the merger consideration with respect thereto, without interest, less any applicable withholding taxes.

        The following table sets forth the numbers of restricted shares of the Company's common stock held by the Company's directors and officers as of the date of this proxy statement, including the amounts to which such directors and officers will be entitled at the effective time with respect to the acceleration of vesting of such restricted stock:

        Each of the directors and officers listed in the above table will also receive the merger consideration in respect of the shares of the Company's common stock beneficially owned by such director or officer. See "Security Ownership of Certain Beneficial Owners and Management" beginning on page 68 below for more information.

43

---

Table of Contents

        Under the Company's 2003 Non-Employee Director Deferred Compensation Plan, the Company's non-employee directors have the option to defer all or a portion of their cash compensation to later years. If a director elected to defer all or a portion of his or her compensation, the amount of the compensation was transferred into a deferred cash account, stock unit account or any combination thereof. Amounts in the stock unit account are represented by phantom stock units that fluctuate in value in accordance with the value of the Company's common stock, and the stock unit account is credited with additional units with respect to dividends that would be payable if the stock units in the account were actual shares of the Company's common stock. Upon a change in control, all amounts in such stock unit accounts will be payable in cash and may be paid, subject to the prior election of the director that was made when the director made the relevant election with respect to such amounts, in a lump sum or in annual installments over five or ten years after the effective time. The following table summarizes the number of phantom stock units held by our non-employee directors and the value to which such non-employee directors will be entitled with respect to such phantom stock units as of the date of this proxy statement:

Employment Agreements

        Stanley R. Zax, Janet Frank, Michael E. Jansen, Robert E. Meyer, Jack D. Miller, Davidson M. Pattiz and Kari L. Van Gundy have entered into employment agreements with the Company with terms that expire on December 31, 2012 (March 15, 2015 for Janet Frank). None of the employment agreements were entered into in connection with, or in contemplation of, the execution of the merger agreement. The employment agreements generally provide the right to receive lump-sum severance payments upon termination of employment in the following instances:

        For each of the above terminations, the employment agreements also provide for continuation of insurance benefits for two years after such terminations, and the bonus amount payable is based upon the highest bonus paid for any one of the three years immediately preceding the year of termination. In addition, for each of the above terminations that occur on or after July 1 of a calendar year, the executive officer will have the right to receive a pro-rata annual bonus (based on the highest bonus paid for any one of the last three years immediately preceding the year of termination). If any of such terminations occurs following the end of any given year but before the annual bonus for such year has been paid, the executive officer shall be entitled to receive such annual bonus; provided that in the event the amount of the annual bonus had already been determined prior to such termination, then the annual bonus paid shall be equal to the amount so determined. If, however, the annual bonus had not yet been determined prior to such termination, then the amount shall be equal to the highest annual bonus paid to the executive officer for the three calendar years immediately preceding such given year. The foregoing bonus payments are in addition to any other bonus payments to which the executive officer is entitled as severance under their employment agreements. Under the employment

44

---

Table of Contents

agreements, "cause" is generally defined as (i) failure to substantially perform duties or any other material breach of the employment agreement (which failure or breach is not cured); (ii) competing with the Company's business (which competition is not cured); (iii) conviction of a felony; or (iv) violation of the confidentiality provisions of the employment agreement. Under the employment agreements, "good reason" generally is defined as (a) material diminution of base compensation; (b) material diminution in authority, duties, responsibilities or reporting relationship; (c) material diminution in the budget over which employee has authority; (d) material change in geographic work location; or (e) any other material breach of the employment agreement by the Company. The employment agreements also provide for a gross-up for any excise tax that may due by reason of sections 280G and 4999 of the Internal Revenue Code.

        With respect to Mr. Zax, upon expiration of his term of employment on December 31, 2012, or his retirement prior to December 31, 2012, Mr. Zax will provide consulting services to the Company pursuant to a five-year consulting agreement with the Company in which Mr. Zax will be paid an annual consulting fee of $750,000 in year one of the agreement, $600,000 in year two, $500,000 in year three, $400,000 in year four and $300,000 in year five. In the event the consulting agreement is terminated by the Company other than for "cause," the Company will be required to pay the benefits under the consulting agreement for the remainder of the five-year term. For purposes of the consulting agreement, "cause" means Mr. Zax's breach of any material obligations under the consulting agreement.

        Under the employment agreements of Stanley R. Zax, Janet Frank, Michael E. Jansen, Robert E. Meyer, Jack D. Miller, Davidson M. Pattiz and Kari L. Van Gundy, the only benefit that is conditioned solely on a change in control is that all stock options, stock appreciation rights, unvested restricted stock and any and all similar rights granted to them, will become immediately vested and exercisable. The amounts to be received upon such vesting are set forth on page 43 of this proxy statement.

        The following table indicates the estimated severance amounts payable to the executive officers under the employment agreements assuming that the executive officer's employment is terminated as of June 30, 2010 either by the Company without cause or by the executive officer for good reason:

        All of our executive officers with employment agreements are expected to continue in their current capacities with the Company following the merger.

45

---

Table of Contents

Arrangements with Fairfax

        Concurrently with the execution and delivery of the merger agreement, Stanley R. Zax, the Chairman of the board of directors and President of the Company, entered into a noncompetition agreement with Fairfax, pursuant to which, among other things (i) for the period beginning from the effective date of the merger and ending on the second anniversary of the date on which Mr. Zax ceases to be a director, officer or employee of the Company, Mr. Zax undertook certain confidentiality obligations with respect to proprietary information of the Company and (ii) for three years after the effective time, Mr. Zax agreed not to (a) engage in a U.S. business that is in direct competition with the business of the Company, (b) solicit for employment any officer or employee of the Company or (c) solicit any customer, client, supplier, licensee or other business relation of the Company to enter into any business relationship with Mr. Zax. The foregoing obligations of Mr. Zax are subject to Mr. Zax's continued management of the business and operations of the Company and its subsidiaries with the same level of responsibility, control and discretion that Mr. Zax exercised at the time the merger agreement was executed and delivered (except that (A) all matters and decisions in respect of the investment of the assets of the Company and its subsidiaries will be at the sole discretion of Fairfax and (B) all other matters and decisions related to financing activities and capital allocation of the Company and its subsidiaries (including the declaration and payment of dividends) will be determined by the board of directors of the Company). The full text of the noncompetition agreement appears in Annex D to this proxy statement.

Indemnification; Directors' and Officers' Insurance

        Under the merger agreement, Fairfax has agreed to cause the surviving corporation to indemnify, defend and hold harmless our current and former directors and officers, and our subsidiaries' present and former officers and directors, against any and all losses, claims and liabilities arising from the fact that such person is or was a director or officer of the Company or any of its subsidiaries and in respect of acts or omissions that occurred at or prior to the effective time, as well as against losses, claims and liabilities based on, or arising out of or pertaining to, in whole or in part, the merger agreement or the transactions contemplated by it. The surviving corporation is also required under the merger agreement to maintain in its organizational documents for a period of six years after the effective time, provisions with respect to the exculpation and indemnification of the current and former directors and officers of the Company that are at least as favorable as those currently set forth in the Company's certificate of incorporation.

        In addition, under the terms of the merger agreement, the Company will purchase a single payment, run-off policy of directors' and officers' liability insurance covering our current and former officers and directors, and our subsidiaries' current and former officers and directors, which will remain in effect for a period of six years from the effective time. Such policy will have coverage comparable to the currently existing officers' and directors' liability insurance policy and fiduciary liability insurance policy.

        The present and former directors and officers of the Company will have the right to enforce the provisions of the merger agreement relating to their indemnification.

Material U.S. Federal Income Tax Consequences of the Merger

        The following is a summary of the material U.S. federal income tax consequences of the merger to U.S. holders and non-U.S. holders (as defined below) whose shares of common stock are converted into the right to receive cash in the merger. This summary does not purport to consider all aspects of U.S. federal income taxation that might be relevant to our stockholders. For purposes of this

46

---

Table of Contents

discussion, we use the term "U.S. holder" to mean a beneficial owner of shares of the Company's common stock that is, for U.S. federal income tax purposes:

•

an individual who is a citizen or resident of the United States;



•

a corporation (or other entity taxable as a corporation for U.S. federal income tax purposes) created or organized under the laws of the United States or any of its political subdivisions;



•

a trust that (i) is subject to the supervision of a court within the United States and the control of one or more U.S. persons or (ii) has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person; or



•

an estate that is subject to U.S. federal income tax on its income regardless of its source.

        For purposes of this discussion, we use the term "non-U.S. holder" to mean a beneficial owner of shares of the Company's common stock that is not a U.S. holder or a partnership or other entity treated as a partnership for U.S. federal income tax purposes.

        If a partnership (including an entity treated as a partnership for U.S. federal income tax purposes) holds common stock, the tax treatment of a partner generally will depend on the status of the partner and the activities of the partnership. A partner of a partnership holding common stock should consult the partner's tax adviser regarding the U.S. federal income tax consequences of the merger to such partner.

        This discussion is based on the provisions of the Internal Revenue Code of 1986, as amended, U.S. Treasury regulations promulgated thereunder, judicial authorities, and administrative rulings, all of which are subject to change, possibly with retroactive effect. The discussion applies only to beneficial owners who hold shares of common stock as capital assets, and does not apply to stockholders who hold an equity interest, actually or constructively, in Fairfax or the surviving corporation after the merger, stockholders who validly exercise their rights under the DGCL to object to the merger or to certain types of beneficial owners who may be subject to special rules (such as insurance companies, banks, tax-exempt organizations, financial institutions, broker-dealers in securities or currencies, partnerships, S corporations or other pass-through entities, mutual funds, traders in securities who elect the mark-to-market method of accounting, stockholders subject to the alternative minimum tax, U.S. expatriates, stockholders that have a functional currency other than the U.S. dollar or stockholders who hold common stock as part of a hedge, straddle, constructive sale or conversion transaction). This discussion also does not address the receipt of cash in connection with the vesting of shares of restricted stock or phantom stock units, or any other matters relating to equity compensation or benefit plans. This discussion does not address any aspect of state, local or foreign tax laws, nor does it address any aspect of estate or gift taxation.

U.S. Holders

Exchange of Shares of Common Stock for Cash Pursuant to the Merger Agreement.

        The receipt of cash in exchange for the Company's common stock in the merger will be a taxable transaction for U.S. federal income tax purposes. In general, a U.S. holder whose shares of our common stock are converted into the right to receive cash in the merger will recognize capital gain or loss for U.S. federal income tax purposes equal to the difference, if any, between the amount of cash received with respect to such shares (determined before the deduction of any applicable withholding taxes) and the U.S. holder's adjusted tax basis in such shares. A U.S. holder's adjusted tax basis will generally equal the price the U.S. holder paid for such shares. Gain or loss will be determined separately for each block of shares of common stock (i.e., shares of common stock acquired at the same cost in a single transaction). Such gain or loss will be long-term capital gain or loss provided that the U.S. holder's holding period for such shares of common stock is more than 12 months at the

47

---

Table of Contents

effective time. Short-term capital gains are subject to U.S. federal income tax at the same rates as ordinary income. Long-term capital gains of non-corporate U.S. holders are eligible for reduced rates of taxation. There are limitations on the deductibility of capital losses.

Backup Withholding and Information Reporting.

        Backup withholding of tax (at the rate of 28%) may apply to cash payments to which a non-corporate U.S. holder is entitled under the merger agreement, unless the U.S. holder or other payee provides a taxpayer identification number and otherwise complies with the backup withholding rules. Each of our U.S. holders should complete the Substitute Form W-9 included as part of the letter of transmittal and return it to the paying agent, in order to provide the information necessary to avoid backup withholding, unless an exemption applies and is established in a manner satisfactory to the paying agent.

        Backup withholding is not an additional tax. Any amounts withheld from cash payments to a U.S. holder pursuant to the merger under the backup withholding rules will be allowable as a refund or a credit against such U.S. holder's U.S. federal income tax liability provided the required information is timely furnished to the Internal Revenue Service.

        Cash payments made pursuant to the merger will also be subject to information reporting unless an exemption applies.

Non-U.S. Holders

Exchange of Shares of Common Stock for Cash Pursuant to the Merger Agreement .

        Any gain realized upon the receipt of cash in exchange for the Company's common stock in the merger by a non-U.S. holder generally will not be subject to U.S. federal income tax unless: (i) the gain is effectively connected with the non-U.S. holder's conduct of a trade or business in the United States, and, if required by an applicable income tax treaty, is attributable to a permanent establishment maintained by the non-U.S. holder in the United States, (ii) the non-U.S. holder is a nonresident alien individual who will be present in the United States for 183 days or more during the taxable year of the merger, and certain other requirements are met, or (iii) the common stock constitutes a "United States real property interest" for U.S. federal income tax purposes with respect to the non-U.S. holder by reason of the Company's status as a "United States real property holding corporation" (a "USRPHC") at any time within the shorter of the five-year period preceding the merger or the non-U.S. holder's holding period for the common stock. Even if the Company is or has been a USRPHC, a non-U.S. holder would not be subject to U.S. federal income tax as long as the non-U.S. holder actually or constructively holds or held, during the applicable period, 5% or less of the Company's common stock. A non-U.S. holder that actually or constructively holds or has held more than 5% of the Company's common stock should consult its own tax advisor regarding any U.S. federal income tax consequences applicable to it with respect to the USRPHC rules.

        Unless an applicable income tax treaty provides otherwise, gain described in (i) in the preceding paragraph will be subject to U.S. federal income tax on a net income basis in the same manner as if the non-U.S. holder recognizing such gain were a U.S. holder. A non-U.S. holder that is a corporation also may be subject to a branch profits tax equal to 30% (or such lower rate specified by an applicable income tax treaty) of a portion of its effectively connected earnings and profits for the taxable year. Gain recognized by an individual non-U.S. holder described in (ii) in the preceding paragraph will be subject to U.S. federal income tax at a flat 30% rate (unless an applicable income tax treaty provides otherwise), but may be offset by U.S. source capital losses (even though the individual is not considered a resident of the United States for U.S. federal income tax purposes).

48

---

Table of Contents

Backup Withholding and Information Reporting.

        Backup withholding of tax (at the rate of 28%) may apply to cash payments to which a non-U.S. holder is entitled under the merger agreement unless the non-U.S. holder furnishes the required certification as to its non-U.S. status by providing the applicable Internal Revenue Service Form W-8 or by otherwise establishing that such non-U.S. holder is not subject to backup withholding.

        Backup withholding is not an additional tax. Any amounts withheld from cash payments to a non-U.S. holder pursuant to the merger under the backup withholding rules will be allowable as a refund or a credit against such non-U.S. holder's U.S. federal income tax liability, if any, provided the required information is timely furnished to the Internal Revenue Service.

        Cash payments made pursuant to the merger may also be subject to information reporting unless an exemption applies.

         The U.S. federal income tax consequences described above are not intended to constitute a complete description of all tax consequences relating to the merger. Because individual circumstances may differ, each stockholder should consult the stockholder's tax adviser regarding the applicability of the rules discussed above to the stockholder and the particular tax effects to the stockholder of the merger in light of such stockholder's particular circumstances, the application of state, local and foreign tax laws, and, if applicable, the tax consequences of the receipt of cash in connection with the vesting of restricted stock or phantom stock units.

Regulatory Approvals

        The Company has two insurance company subsidiaries domiciled in the State of California. California insurance law requires an acquiring person to obtain the approval of the California Insurance Commissioner prior to the direct or indirect acquisition of control of a California-domiciled insurance company. Fairfax and certain of its affiliates filed an application for such approval with the California Insurance Commissioner on February 24, 2010. On March 16, 2010, representatives of Fairfax provided the California Insurance Department with three-year statutory financial projections for the Company's insurance subsidiaries in connection with Fairfax's application for approval to acquire control of the Company. These projections showed the payment of a dividend of approximately $283 million by Zenith Insurance Company to the Company on June 1, 2010, $200 million of which would be in excess of the maximum ordinary dividend payable by Zenith Insurance Company during 2010. Due to its timing and amount, a substantial majority of this projected dividend would constitute an extraordinary dividend under California insurance law. Fairfax has advised the Company that it has not sought the California Insurance Department's permission to pay an extraordinary dividend in connection with its application to acquire control of the Company and would seek such permission only after the closing of the merger, and that Fairfax has sufficient cash resources available to complete the merger without any such extraordinary dividend. Although the Company and Fairfax do not expect the California Insurance Commissioner to withhold its approval of Fairfax's application, there is no assurance that such approval will be obtained.

        In addition, the insurance laws and regulations of certain U.S. states require that, prior to an acquisition of an insurance company doing business in that state or licensed by that state (or the acquisition of its holding company), a notice filing that discloses certain market share data in that jurisdiction must be made and an applicable waiting period must expire or be terminated.

        Under the HSR Act, and the rules promulgated thereunder by the FTC, the merger cannot be completed until each of the Company and Fairfax file a notification and report form with the FTC and the Antitrust Division of the DOJ under the HSR Act and the applicable waiting period has expired or been terminated. Each of the Company and Fairfax filed such a notification and report form on March 3, 2010 and each requested early termination of the applicable waiting period. On March 15,

49

---

Table of Contents

2010, the FTC notified the parties that their request for early termination of the applicable waiting period under the HSR Act had been granted. At any time before or after consummation of the merger, notwithstanding the termination of the waiting period under the HSR Act, the Antitrust Division of the DOJ or the FTC could take such action under the antitrust laws as it deems necessary or desirable in the public interest, including seeking to enjoin the completion of the merger or seeking divestiture of substantial assets of the Company or Fairfax. Private parties may also seek to take legal action under the antitrust laws under certain circumstances.

        There can be no assurance that all of the regulatory approvals described above will be obtained and, if obtained, there can be no assurance as to the timing of any approvals or the absence of any litigation challenging such approvals.

Litigation Relating to the Merger

        Five purported class action lawsuits have been filed by alleged stockholders of the Company challenging the proposed transaction and naming as defendants the Company, its board of directors and Fairfax. To date, three such stockholder actions have been filed in the Superior Court of the State of California, Los Angeles County and two such actions have been filed in the Delaware Court of Chancery.

        The three California actions are Laurence D. Paskowitz, Individually and on Behalf of All Others Similarly Situated v. Zenith National Insurance Corp. et al, Case No. BC432177, Robert Spears, Individually and on Behalf of All Others Similarly Situated v. Stanley R. Zax et al, Case No. BC432186, and Harold Ginsberg and Doris Ginsberg, Individually and on Behalf of All Others Similarly Situated v. Zenith National Insurance Corp. et al, Case No. BC432733. The two Delaware actions are Paul Ansfield, On Behalf of Himself and All Others Similarly Situated v. Zenith National Insurance Corp. et al, Case No. 5296-VCL, and NECA-IBEW Pension Trust Fund on behalf of Itself and All Others Similarly Situated v. Zenith National Insurance Corp. et al, Case No. 5308-VCL. The Delaware actions have been consolidated under the caption In re Zenith National Insurance Corp. Shareholders Litigation, Consolidated C.A. No. 5296-VCL, and the plaintiffs have filed a Consolidated Amended Complaint. The California actions have been consolidated under the caption In re Zenith National Insurance Corp. Shareholder Litigation, Case No. BC 432177.

        The complaints in these actions, each of which purport to be brought as class actions on behalf of all of the Company's stockholders, excluding the defendants and their affiliates, allege that the consideration that stockholders will receive in connection with the merger is inadequate and that the Company's directors breached their fiduciary duties to stockholders in negotiating and approving the merger agreement and, in the case of the consolidated Delaware action, in disseminating incomplete and inaccurate information regarding the merger. The complaints further allege that the Company and/or Fairfax aided and abetted the alleged breaches by the Company's directors. The complaints seek various forms of relief, including injunctive relief that would, if granted, prevent the merger from being consummated in accordance with the agreed-upon terms. The plaintiffs in the consolidated Delaware action have moved for a preliminary injunction to prevent the stockholder vote on the Merger. That motion is scheduled to be heard by the Delaware Court of Chancery on April 22, 2010. The plaintiffs in the consolidated California action have stipulated that they will not seek injunctive relief in that case in connection with the proposed transaction as long as the plaintiffs in the Delaware action proceed with their preliminary injunction motion. The defendants believe that the complaints are without merit and intend to defend the actions vigorously.

        Copies of the complaints relating to the California actions and the Consolidated Amended Complaint relating to the Delaware actions were filed as exhibits to the Current Report on Form 8-K filed by the Company with the SEC on March 31, 2010 and such report is incorporated herein by reference. The foregoing summary is qualified in its entirety by reference to such exhibits.

50

---

Table of Contents

THE MERGER AGREEMENT

         This section describes the material terms of the merger agreement. The description in this section and elsewhere in this proxy statement is qualified in its entirety by reference to the complete text of the merger agreement, a copy of which is attached as Annex A and is incorporated by reference into this proxy statement. This summary does not purport to be complete and may not contain all of the information about the merger agreement that is important to you. We encourage you to read the merger agreement carefully and in its entirety. This section is not intended to provide you with any factual information about us. Such information can be found elsewhere in this proxy statement and in the public filings we make with the SEC, as described in the section entitled, "Where You Can Find More Information," beginning on page 77.

Explanatory Note Regarding the Merger Agreement

        The merger agreement is included to provide you with information regarding its terms. Factual disclosures about the Company contained in this proxy statement or in the Company's public reports filed with the SEC may supplement, update or modify the factual disclosures about the Company contained in the merger agreement. The representations, warranties and covenants made in the merger agreement by the Company, Fairfax and Merger Sub were qualified and subject to important limitations agreed to by the Company, Fairfax and Merger Sub in connection with negotiating the terms of the merger agreement. In particular, in your review of the representations and warranties contained in the merger agreement and described in this summary, it is important to bear in mind that the representations and warranties were negotiated with the principal purposes of establishing the circumstances in which a party to the merger agreement may have the right not to close the merger if the representations and warranties of the other party prove to be untrue due to a change in circumstance or otherwise, and allocating risk between the parties to the merger agreement, rather than establishing matters as facts. The representations and warranties may also be subject to a contractual standard of materiality different from those generally applicable to stockholders and to reports and documents filed with the SEC and, in some cases, were qualified by disclosures that were made by each party to the other that were not reflected in the merger agreement. Moreover, information concerning the subject matter of the representations and warranties, which do not purport to be accurate as of the date of this proxy statement, may have changed since the date of the merger agreement, and subsequent developments or new information qualifying a representation or warranty may have been included in or incorporated by reference into this proxy statement.

Effects of the Merger; Directors and Officers; Certificate of Incorporation; Bylaws

        The merger agreement provides for the merger of Merger Sub with and into the Company upon the terms, and subject to the conditions, set forth in the merger agreement. As the surviving corporation, the Company will continue to exist following the merger as a subsidiary of Fairfax.

        The board of directors of the surviving corporation will, from and after the effective time, consist of the directors of Merger Sub until their successors have been duly elected or appointed and qualified or until the earlier of their death, resignation or removal. The officers of the Company at the effective time will, from and after the effective time, be the officers of the surviving corporation until their successors have been duly elected or appointed and qualified or until the earlier of their death, resignation or removal.

        Except as described below, the certificate of incorporation of the surviving corporation will be in the form of the certificate of incorporation of Merger Sub (except with respect to the name of the Company), until amended in accordance with its terms or by applicable law. Also, except as described below, unless otherwise determined by Fairfax prior to the effective time, the bylaws of the surviving corporation will be in the form of the bylaws of Merger Sub (except with respect to the name of the Company) until amended in accordance with its terms, the terms of the certificate of incorporation of

51

---

Table of Contents

the surviving corporation or applicable law. The certificate of incorporation and bylaws of the surviving corporation will include provisions with respect to the exculpation and indemnification of the current and former directors and officers of the Company that are at least as favorable as those currently set forth in the Company's certificate of incorporation for a period of six years after the effective time.

        Following the completion of the merger, our common stock will be delisted from the NYSE and deregistered under the Exchange Act, and will cease to be publicly traded.

Closing and Effective Time of the Merger

        The closing of the merger is expect to occur no later than the third business day following the date on which the last of the conditions to the closing of the merger (described under "—Conditions to the Merger") have been satisfied or waived (other than the conditions that by their nature are to be satisfied at the closing of the merger, but subject to the satisfaction or written waiver of those conditions).

        The effective time of the merger will occur as soon as practicable following the closing of the merger upon the filing of a certificate of merger with the Secretary of State of the State of Delaware (or at such later date as we and Fairfax may agree and specify in the certificate of merger).

Treatment of Common Stock

Common Stock

        At the effective time, each issued and outstanding share of the Company's common stock immediately prior thereto (other than shares of the Company's common stock held by Fairfax, the Company or any of their respective wholly owned subsidiaries, and shares of the Company's common stock held by stockholders who properly exercise appraisal rights under the DGCL with respect to such shares) will be cancelled and converted into the right to receive the merger consideration, without interest, less any applicable withholding taxes. Common stock owned by Fairfax, Merger Sub or any other direct or indirect wholly owned subsidiary of Fairfax will remain issued and outstanding after the effective time, but no merger consideration will be paid with respect to such common stock. Common stock owned by the Company or any of its wholly owned subsidiaries will be cancelled without payment of any merger consideration with respect thereto. Common stock owned by stockholders who have perfected and not withdrawn a demand for, or lost the right to, appraisal rights under the DGCL will be cancelled without payment of consideration. Such stockholders will instead be entitled to the appraisal rights provided under the DGCL as described under "Appraisal Rights."

Restricted Stock

        At the effective time of the merger, each restricted share of the Company's common stock issued and outstanding and subject to forfeiture will become fully vested without restrictions and will be treated as an unrestricted share of the Company's common stock. Each holder of restricted shares of common stock of the Company will be entitled to receive the merger consideration with respect thereto, without interest and less any applicable withholding taxes.

Exchange and Payment Procedures

        At the effective time, Fairfax will deposit, or will cause to be deposited, with the paying agent, an amount in immediately available funds necessary for the paying agent to pay the aggregate merger consideration to the holders of shares of our common stock. Fairfax has agreed to take all actions necessary to ensure that the amounts on deposit with the paying agent are at all times sufficient to satisfy Fairfax's obligations to pay the merger consideration to the Company's stockholders.

52

---

Table of Contents

        Each record holder of shares of the Company's common stock (other than shares of the Company's common stock held by Fairfax, the Company or any of their respective wholly owned subsidiaries, and shares of the Company's common stock held by stockholders who properly exercise appraisal rights under the DGCL with respect to such shares) will receive a letter of transmittal describing how it may exchange its shares of common stock for the merger consideration shortly after the completion of the merger. With respect to shares of our common stock held by The Depository Trust Company, or DTC, the paying agent will transmit to DTC an amount in cash in immediately available funds equal to the number of shares of our common stock held of record by DTC immediately prior to the effective time, multiplied by the per share merger consideration. DTC will then appropriately credit the accounts of the holders of our common stock that is held by DTC.

         You should not return your stock certificates with the enclosed proxy card, and you should not forward your stock certificates to the paying agent without a letter of transmittal.

        You will not be entitled to receive the merger consideration until you deliver a duly completed and executed letter of transmittal to the paying agent. If your shares are certificated, you must also surrender your stock certificate or certificates to the paying agent. If ownership of your shares is not registered in the transfer records of the Company, a check for any cash to be delivered will only be issued if the applicable letter of transmittal is accompanied by all documents reasonably required to evidence and effect transfer and to evidence that any applicable stock transfer taxes have been paid or are not applicable.

        No interest will be paid or accrued on the cash payable as the merger consideration as provided above. Fairfax, the surviving corporation and the paying agent will be entitled to deduct and withhold any applicable taxes from the merger consideration. Any sum that is withheld will be deemed to have been paid to the person with regard to whom it is withheld.

        From and after the effective time, there will be no transfers on our stock transfer books of shares of common stock that were outstanding immediately prior to the effective time. If, after the effective time, any person presents to the surviving corporation, Fairfax or the paying agent, any certificates or any transfer instructions relating to shares cancelled in the merger, such person will be given a copy of the letter of transmittal and told to comply with the instructions in that letter of transmittal in order to receive the cash to which such person is entitled.

        Any portion of the merger consideration deposited with the paying agent that remains unclaimed by former record holders of our common stock for six months after the effective time will be delivered to the surviving corporation. Record holders of our common stock who have not complied with the above-described exchange and payment procedures will thereafter only look to the surviving corporation for payment of the merger consideration. Neither the surviving corporation nor the paying agent will be liable to any former record holders of our common stock for any cash delivered to a public official pursuant to any applicable abandoned property, escheat or similar laws.

         If you have lost a certificate, or if it has been stolen or destroyed, then before you will be entitled to receive the merger consideration, you will have to complete an affidavit of the loss, theft or destruction, and, if required by the surviving corporation, post a bond in a reasonable amount as indemnity against any claim that may be made against the surviving corporation with respect to such certificate. These procedures will be described in the letter of transmittal that you will receive, which you should read carefully in its entirety.

No Financing Covenants or Conditions

        The merger is not subject to any financing condition. We anticipate that the total funds needed to complete the merger will be approximately $1.3 billion, taking into account the 3.1 million shares of the Company's common stock already owned by Fairfax. Fairfax has informed us that it will fund this

53

---

Table of Contents

amount through available cash on hand, including cash received as dividends from Fairfax's insurance subsidiaries.

Representations and Warranties

        We made customary representations and warranties in the merger agreement that are subject to matters the Company disclosed in certain documents filed with the SEC and to specified exceptions and qualifications contained in the merger agreement or in the disclosure letter the Company delivered to Fairfax in connection therewith. These representations and warranties relate to, among other things:

•

the organization, existence, good standing and authority to carry on our businesses;



•

the accuracy and validity of and compliance with our certificate of incorporation and our by-laws;



•

our capitalization;



•

our corporate power and authority to enter into, and consummate the transactions under, the merger agreement, and the enforceability of the merger agreement against us;



•

the absence of violations of, or conflicts with, our governing documents, applicable law and certain agreements as a result of our entering into and performing our obligations under the merger agreement;



•

any required governmental permits, consents and approvals;



•

compliance with applicable laws, licenses, permits and agreements;



•

our SEC filings since December 31, 2009 and the financial statements included therein;



•

the absence of material undisclosed liabilities;



•

our disclosure controls and procedures and internal controls over financial reporting;



•

the absence of a material adverse effect (as described below) and the absence of certain other changes or events since December 31, 2009;



•

the absence of legal proceedings and governmental orders against us and our subsidiaries;



•

employee benefit plans;



•

employment and labor matters;



•

real and personal property owned or leased by us or our subsidiaries;



•

tax matters;



•

the absence of any stockholders' rights plan;



•

material contracts;



•

the approval of the merger agreement by our board of directors and the required adoption of the same by our stockholders;



•

the receipt of the fairness opinion from BofA Merrill Lynch;



•

the accuracy of certain information contained in this proxy statement; and



•

the absence of any undisclosed broker's, finder's or investment banker's fees.

        Many of our representations and warranties are qualified by, among other things, exceptions relating to the absence of a "material adverse effect." The phrase "material adverse effect" is defined in the merger agreement to mean any event, circumstance, change, state of facts or effect that, alone or

54

---

Table of Contents

in combination, has had, or is reasonably likely to have, a material adverse effect on (i) the business, financial condition or results of operations of the Company and its subsidiaries, taken as a whole; or (ii) the ability of the Company to consummate the merger and the other transactions contemplated by the merger agreement. For purposes of clause (i) of the previous sentence, however, to the extent that any such event, circumstance, change, state of facts or effect, results, alone or in combination, from any of the following factors, it will not be deemed to have or contribute to a "material adverse effect":

•

changes in the economy in general or in financial or securities markets (including credit markets), to the extent such changes do not have a materially disproportionate impact on the Company and its subsidiaries, taken as a whole, compared to all other participants in the workers' compensation insurance industry;



•

changes generally affecting any of the industries in which the Company or its subsidiaries operate, to the extent such changes do not have a materially disproportionate impact on the Company and its subsidiaries, taken as a whole, compared to all other participants in the workers' compensation insurance industry;



•

changes in applicable law or accounting regulations, or principles or interpretations thereof to the extent such changes do not have a materially disproportionate impact on the Company and its subsidiaries, taken as a whole, compared to all other participants in the workers' compensation insurance industry;



•

any change in the Company's stock price or trading volume or any failure, in and of itself, by the Company to meet published revenue or earnings projections (but not any change, effect, event, occurrence, condition or state of facts underlying such change or failure);



•

the announcement of the execution of the merger agreement, including the identity of Fairfax;



•

any legal proceedings relating to the merger agreement, the merger or the other transactions contemplated by the merger agreement (including those described under "The Merger—Litigation Related to the Merger");



•

acts of war (whether or not declared), armed hostilities, sabotage or terrorism, or any escalation or worsening thereof, to the extent such changes do not have a materially disproportionate impact on the Company and its subsidiaries, taken as a whole, compared to all other participants in the workers' compensation insurance industry;



•

earthquakes, hurricanes, floods or other natural disasters, to the extent such changes do not have a materially disproportionate impact on the Company and its subsidiaries, taken as a whole, compared to all other participants in the workers' compensation insurance industry; and



•

any action taken by Fairfax or any of its affiliates or by the Company at the request of Fairfax or any of its affiliates.

        The merger agreement also contains customary representations and warranties made by Fairfax and Merger Sub that are subject, in some cases, to specified exceptions and qualifications contained in the merger agreement. The representations and warranties of Fairfax and Merger Sub relate to, among other things:

•

their organization, existence, good standing and authority to carry on their businesses;



•

their corporate power and authority to enter into, and consummate the transactions under, the merger agreement, and the enforceability of the merger agreement against them;



•

the absence of violations of, or conflicts with, their governing documents, applicable law and certain agreements as a result of entering into and performing their obligations under the merger agreement and completing the merger;

55

---

Table of Contents

•

any required governmental consents and approvals;



•

Fairfax's knowledge of any facts or conditions related to it or Merger Sub that are likely to impede their ability promptly to obtain any required governmental approvals;



•

their financial ability to pay the merger consideration and otherwise satisfy their obligations under the merger agreement;



•

the absence of any undisclosed broker's, finder's or investment banker's fees; and



•

the accuracy of certain information contained in this proxy statement.

        The representations and warranties in the merger agreement of each of the Company, Fairfax and Merger Sub will terminate upon the consummation of the merger or the termination of the merger agreement pursuant to its terms.

Conduct of Our Business Pending the Merger

        Under the merger agreement, we have agreed that, subject to certain exceptions in the merger agreement and in the disclosure letter we delivered to Fairfax in connection with the merger agreement, between the date of the merger agreement and the effective time, unless required or prohibited by applicable law, or unless Fairfax gives its prior written approval (which cannot be unreasonably withheld, conditioned or delayed), (i) we and our subsidiaries will conduct our businesses in all material respects in the ordinary course of business consistent with past practice, (ii) we will use our commercially reasonable efforts to preserve substantially intact our and our subsidiaries' business organizations and keep available the services of our and our subsidiaries' officers and employees and (iii) neither the Company nor any of its subsidiaries will, directly or indirectly, do any of the following:

•

amend its organizational documents;



•

issue, sell or encumber any of its equity securities or rights to acquire such securities (other than in connection with the Company's deferred compensation plan and other than sales by the administrators under the Company's employee stock purchase and 401(k) plans) or any of its assets (other than in the ordinary course of business consistent with past practice);



•

declare, set aside, make or pay any dividend or other distribution, payable in cash, stock, property or otherwise, with respect to any of its capital stock, except for dividends by any wholly owned subsidiary to the Company or any of its subsidiaries, and one cash dividend by the Company to its stockholders in an amount not to exceed $0.50 per share;



•

reclassify, combine, split, subdivide, or redeem, or purchase or acquire any of its capital stock (other than purchases or acquisitions made pursuant to the Company's employee stock purchase plan and 401(k) plans);



•

(a) increase compensation payable or to become payable or the benefits provided to, grant any retention, severance or termination pay to or enter into any employment bonus, change in control or severance agreement with, its current or former directors, officers or employees (except (1) for increases in the ordinary course of business consistent with past practice to non-executive and non-director employees, (2) with respect to employees hired after the date of the merger agreement and (3) bonuses or retention, severance or termination payments in an aggregate amount not to exceed $5,000,000), or (b) establish, adopt, enter into, terminate or amend any collective bargaining plan, or (c) grant any equity based awards;



•

take any action, other than in the ordinary course of business consistent with past practice, with respect to accounting policies or procedures except as required by changes in GAAP or relevant statutory accounting principles;

56

---

Table of Contents

•

make or change any material tax election, tax return or method of tax accounting, settle or compromise any material tax liability, consent to any material tax claim or assessment or waive any statute of limitations in respect of a material amount of taxes, or agree to any extension of time with respect to an assessment or deficiency for a material amount of taxes; or



•

amend, modify or consent to the termination of any material contract or material right thereunder, other than in the ordinary course of business consistent with past practice or as would not have a "material adverse effect" (as such term is described above).

No Solicitation of Other Offers

        The merger agreement provides that neither the Company nor any of its subsidiaries, nor its or their respective directors, officers, employees, affiliates and representatives will, except as described below:

•

solicit, initiate or knowingly encourage (including by way of furnishing information not previously publicly disseminated), or knowingly take any other action designed to facilitate, any inquiries or the making of any proposal which constitutes, or may reasonably be expected to lead to, any takeover proposal (as described below); or



•

participate in any discussions or negotiations regarding a takeover proposal.

        The Company may, however, in response to an unsolicited proposal that is made after the date of the merger agreement in circumstances not otherwise involving a breach of this provision of the merger agreement, and which proposal is either a superior proposal (as described below) or is reasonably expected to lead to a superior proposal, if the board of directors determines in good faith, after consultation with outside counsel, that a failure to do so would be inconsistent with its fiduciary duties under applicable law:

•

request information from the party making that takeover proposal for the purpose of informing itself about the takeover proposal and the party making it;



•

furnish non-public information regarding the Company and its subsidiaries to the person making that takeover proposal pursuant to a customary confidentiality agreement, provided that (i) such confidentiality agreement may not include any provision calling for an exclusive right to negotiate with the Company and (ii) substantially concurrently the Company advises Fairfax of all such non-public information it delivers to such person (to the extent not previously delivered or made available to Fairfax); and



•

participate in discussions and negotiations with the party making that takeover proposal regarding that takeover proposal.

        In addition, the Company has agreed that neither the board of directors nor any committee thereof will, except as described below:

•

withdraw or modify, or propose publicly to withdraw or modify, in a manner adverse to Fairfax, the board of directors' recommendation that the Company's stockholders adopt the merger agreement, or approve or recommend for approval, or propose publicly to approve or recommend for approval, a takeover proposal, any of which we refer to as an adverse recommendation change; or



•

cause the Company to enter into any letter of intent, agreement in principle, acquisition agreement or other similar agreement related to any takeover proposal (other than a customary confidentiality agreement, as described above).

        However, in response to a proposal made after the date of the merger agreement and prior to receipt of stockholder approval of the merger agreement that the board of directors determines in good

57

---

Table of Contents

faith constitutes a superior proposal and that was unsolicited and otherwise not in breach of the Company's non-solicitation obligations under the merger agreement, if the board of directors determines in good faith, after consultation with outside counsel, that the failure to do so would be inconsistent with its fiduciary duties under applicable law, the board of directors may take either of the following actions:

•

make an adverse recommendation change; or



•

cause the Company to enter into an agreement related to the superior proposal, provided that the Company simultaneously pays or had previously paid to Fairfax the termination fee described in "—Termination Fee" below,

provided, that in either case, such action may be taken only after the second business day following Fairfax's receipt of written notice from the Company that describes, among other things, which of the foregoing actions the board of directors has determined to take.

        In addition, the board of directors may, at any time (other than in connection with a takeover proposal), withdraw or modify or propose publicly to withdraw or modify, in a manner adverse to Fairfax, the board of directors' recommendation that the Company's stockholders adopt the merger agreement if it determines in good faith that a failure to do so would be inconsistent with its fiduciary duties under applicable law, so long as the Company has given Fairfax two business days' prior written notice of the board of director's intention to take any such action and the board's reasons for doing so.

        The Company has also agreed to cease any discussion or negotiations with any third parties that may have been ongoing on the date of the merger agreement with respect to a takeover proposal, and will seek to have returned to the Company or destroyed any confidential information that has been provided in any such discussions or negotiations. In addition, the Company has agreed to notify Fairfax orally (and in writing as promptly as reasonably practicable) of any request for confidential information in connection with a takeover proposal or of any takeover proposal, the material terms and conditions of such request or Takeover Proposal and the identity of the party making such request or takeover proposal, and to keep Fairfax advised as promptly as reasonably practicable of all material developments that could reasonably be expected to result in the board of directors making an adverse recommendation change or exercising any of its rights under these provisions of the merger agreement.

        For purposes of this discussion, the term "takeover proposal" means any inquiry, proposal or offer from any person (other than Fairfax or any of its affiliates or representatives) relating to:

•

any direct or indirect acquisition or purchase, including pursuant to any merger, consolidation, share exchange, business combination, recapitalization, liquidation, dissolution or similar transaction involving the Company, of 10% or more of the consolidated assets (including equity interests in subsidiaries) of the Company and its subsidiaries, taken as a whole, or 10% or more of any class of voting equity securities of the Company; or



•

any tender offer or exchange offer that if consummated would result in any person (other than Fairfax or any of its affiliates or representatives) beneficially owning 10% or more of any class of voting equity securities of the Company.

        For purposes of this discussion, the term "superior proposal" means any bona fide unsolicited written offer from any person (other than Fairfax or any of its affiliates or representatives) for

•

a direct or indirect acquisition or purchase, including pursuant to any merger, consolidation, share exchange, business combination, recapitalization, liquidation, dissolution or similar transaction involving the Company, of 50% or more of the consolidated assets (including equity interests in subsidiaries) of the Company and its subsidiaries, taken as a whole, or 50% or more of any class of voting equity securities of the Company; or

58

---

Table of Contents

•

any tender offer or exchange offer that if consummated would result in any person (other than Fairfax or any of its affiliates or representatives) beneficially owning 50% or more of any class of equity securities of the Company;

in each case, that, considering all relevant factors (including whether financing for such offer is fully committed or is reasonably likely to be obtained), the board of directors determines in its good faith judgment (after receiving the advice of the Company's financial adviser and outside counsel) is more favorable to the Company and its stockholders than the merger.

Stockholders Meeting

        Subject to the provisions of the merger agreement described above under "—No Solicitation of Other Offers," we are required to convene and hold a meeting of our stockholders as promptly as practicable after the execution of the merger agreement to consider and vote on the adoption of the merger agreement. Subject to the provisions of the merger agreement discussed above under "—No Solicitation of Other Offers," we must use our reasonable best efforts to solicit from our stockholders proxies in favor of the adoption of the merger agreement.

Filings; Other Actions; Notification

        We and Fairfax will (i) promptly (within two weeks of entering into the merger agreement) make our respective regulatory filings described under "The Merger—Regulatory Approvals" and thereafter make any other required submissions, under the HSR Act or other applicable foreign, federal or state antitrust, competition or fair trade laws with respect to the merger and (ii) use our respective reasonable best efforts to take, or cause to be taken, all appropriate actions, and do, or cause to be done, all things necessary, proper or advisable under applicable law to consummate the merger and the other transactions contemplated by the merger, including using our reasonable best efforts to obtain all permits, consents, approvals, authorizations, qualifications and orders of governmental authorities (including the approval of the California Insurance Commissioner) and parties to contracts with us and our subsidiaries as are necessary for the consummation of the merger and to fulfill the conditions to the merger.

        Fairfax and the Company have agreed that (i) as soon as practicable (and in any event within two weeks) after entering into the merger agreement, Fairfax, with the Company's cooperation, will prepare and file with the relevant insurance regulators, any requests for approval of the transactions contemplated by the merger agreement and will use its reasonable best efforts to have such insurance regulators approve the transactions contemplated by the merger agreement; (ii) the Company will have the right to review in advance, and Fairfax will consult with the Company in advance, in each case subject to applicable laws relating to the exchange of information, with respect to any information relating to the Company or any of its subsidiaries that appear in any filing made with, or materials submitted to, any third party or any governmental authority by Fairfax or any of its affiliates relating to the merger agreement or the merger; (iii) Fairfax and its affiliates will consult with the Company prior to participating in any substantive meeting, discussion or communication, with any governmental authority with respect to any filing, submission, investigation or inquiry relating to the merger agreement or the merger, and will provide the Company and its representatives the opportunity to attend and participate thereat; (iv) Fairfax and its affiliates will furnish in advance to the Company copies of all correspondence, filings, submissions and written communications between Fairfax, any of its affiliates or any of their respective representatives, on one hand, and any governmental authority, on the other hand, with respect to the merger agreement or the merger, and will consult with the Company on and take into account any reasonable comments the Company may have to such correspondence, filing, submission or written communication prior to their being made; (v) Fairfax and its affiliates will keep the Company apprised of the status of matters relating to completion of the transactions contemplated hereby, will inform the Company of the substance of any material oral

59

---

Table of Contents

communications with any governmental authority for which it was impractical to have advance consultation or participation, and will respond to inquiries and requests received from any governmental authority or third party, in each case with respect to the merger agreement or the merger, as promptly as practicable; and (vi) Fairfax and the Company will not extend any waiting period under the HSR Act or enter into any agreement, arrangement or understanding with any governmental authority not to consummate or delay the transactions contemplated by the merger agreement, except with the prior written consent of the other parties, which consent may not be unreasonably withheld, conditioned or delayed. In connection with any application for approval of the transactions contemplated by the merger agreement by any governmental authority, Fairfax and Merger Sub agree that they will not seek approval for the payment of an extraordinary dividend (as defined under applicable California insurance law) by any subsidiary of the Company.

        The Company and Fairfax have agreed to give each other prompt notice of

•

the occurrence, or non-occurrence, of any event the occurrence, or non-occurrence, of which reasonably would be expected to cause any representation or warranty contained in the merger agreement to be untrue or inaccurate in any material respect, such that the related conditions precedent to the merger agreement would fail to be satisfied;



•

any material breach by the Company, Fairfax or Merger Sub, as the case may be, of any covenant or agreement contained in the merger agreement; and



•

any notice or other communication from any governmental authority in connection with the transactions contemplated by the merger agreement or from any person alleging that the consent of such person is or may be required in connection with the merger agreement or the transactions contemplated thereby.

Employee Benefit Matters

        Fairfax and the Company have agreed that, for so long as Stanley Zax continues to serve as the Chief Executive Officer of the Company (as the surviving corporation) following the effective time, Mr. Zax will have sole discretion to determine the base salary, bonuses and other compensation and employee benefits (including severance benefits) to be provided to each officer or employee of the Company and any of its subsidiaries. Mr. Zax's compensation is established pursuant to his employment agreement with the Company, which was entered into effective September 22, 2008.

        In addition, Fairfax has agreed that, following the effective time, each employee of the Company or any of its subsidiaries that currently is eligible to participate in the Company's employee stock purchase plan will be eligible to participate, without any waiting time, in an employee share purchase plan of Fairfax that has the same terms, in all material respects, as that currently provided by Fairfax to its employees, and, following the effective time, Fairfax will cause the Company (as the surviving corporation) to honor all payments required to be made under the Company's 2003 Non-Employee Director Deferred Compensation Plan.

Conditions to the Merger

        The respective obligations of the Company, Fairfax and Merger Sub to consummate the merger are subject to the satisfaction or waiver of the following mutual conditions:

•

the merger agreement must have been duly adopted by our stockholders;



•

the waiting period applicable to the consummation of the merger under the HSR Act must have expired or have been early terminated;



•

certain insurance regulatory approvals and consents required to consummate the merger, including by the California Insurance Commissioner, must have been obtained, and

60

---

Table of Contents

•

no court or governmental entity of competent jurisdiction in the U.S. or Canada has enacted, issued, promulgated, enforced or entered any law that makes illegal the acquisition of shares of the Company's common stock by Fairfax, Merger Sub, or any affiliate of either, or otherwise prevents or prohibits the consummation of the merger.

        The obligations of Fairfax and Merger Sub to effect the merger are also subject to the satisfaction or (where permissible) waiver by Fairfax at or prior to the effective time of the following additional conditions:

•

(i) our representations and warranties regarding (a) certain aspects of our capitalization must be true and correct, except for de minimis errors and (b) our corporate power and authority to enter into the merger agreement and consummate the merger must be true and correct in all respects; and (ii) all other representations and warranties contained in the merger agreement must be true and correct, except as would not have a material adverse effect (but without regard to materiality qualifiers contained therein), in each case, as of the effective time, as though made on and as of such date (except to the extent expressly made as of an earlier date, in which case, as of such earlier date);



•

we have performed or complied in all material respects with all agreements and covenants required by the merger agreement to be performed or complied with by us on or prior to the effective time; and



•

we have delivered to Fairfax a certificate, dated as of the date of the closing of the merger, signed by an authorized officer of the Company, certifying that the two conditions above have been satisfied.

        Our obligation to effect the merger is subject to the satisfaction or (where permissible) waiver by us at or prior to the effective time of the following additional conditions:

•

(i) the representations and warranties of Fairfax and Merger Sub relating to their financial ability to complete the merger must be true and correct in all respects and (ii) all other representations and warranties must be true and correct, except as would not, individually or in the aggregate, be reasonably likely to have a material adverse effect on the ability of Fairfax and Merger Sub to consummate the merger (but without regard to materiality qualifiers contained therein), in each case, as of the effective time, as though made on and as of such time (except to the extent expressly made as of an earlier date, in which case as of such earlier date);



•

each of Fairfax and Merger Sub have performed or complied in all material respects with all agreements and covenants required by the merger agreement to be performed or complied with by Fairfax and Merger Sub on or prior to the effective time; and



•

Fairfax has delivered to us a certificate, dated as of the date of the closing of the merger, signed by an authorized officer of Fairfax, certifying that the two conditions above have been satisfied.

Termination

        The merger agreement may be terminated at any time prior to the completion of the merger, notwithstanding adoption of the merger agreement by the Company's stockholders, by mutual written consent of the Company and Fairfax. The merger agreement may also be terminated at any time prior to the completion of the merger notwithstanding adoption of the merger agreement by the Company's stockholders by either the Company or Fairfax if:

•

the merger is not completed on or before November 15, 2010 (which date will be extended day-by-day, but in no event later than December 15, 2010, for each day during which any party is subject to a nonfinal or appealable injunction, order, decree or ruling that makes the acquisition of our common stock by Fairfax or any of its affiliates illegal or otherwise prevents or

61

---

Table of Contents

prohibits the consummation of the merger), which date, as it may be so extended, we refer to as the outside date, except that this right to terminate the merger agreement will not be available to any party whose failure to comply with the merger agreement results in the failure of the merger to be completed by that date;

•

any final, non-appealable governmental injunction, order, decree or ruling has been enacted, issued or enforced by any governmental authority of competent jurisdiction in the U.S. or Canada, which has the effect of prohibiting or making illegal the completion of the merger, except that the party seeking to terminate under this provision must have complied in all material respects with its obligations under the merger agreement to prevent the enactment, issuance or enforcement of that injunction, order, decree, ruling; or



•

the Company's stockholders fail to adopt the merger agreement at the special meeting of the Company's stockholders;

        by Fairfax if:

•

the Company has breached any of its representations, warranties, covenants or agreements under the merger agreement and such breach would give rise to the failure of the related conditions to Fairfax's obligation to close to be satisfied and has not or cannot be cured prior to the 30th day after Fairfax gives the Company written notice of such breach or, if earlier, the outside date;



•

the board of directors or any committee thereof makes an adverse recommendation change; or



•

the board of directors fails to reaffirm its recommendation that the Company's stockholders adopt the merger agreement, within five business days after Fairfax requests in writing that such recommendation be reaffirmed; and

        by the Company if:

•

Fairfax has breached any of its representations, warranties, covenants or agreements under the merger agreement and such breach would give rise to the failure of the related conditions to the Company's obligation to close to be satisfied and has not or cannot be cured prior to the 30th day after the Company gives Fairfax written notice of such breach or, if earlier, the outside date; or



•

concurrently with such termination, the Company enters into a definitive agreement providing for a superior proposal, provided that the Company simultaneously pays or had previously paid to Fairfax the termination fee described below.

        In the event that the merger agreement is terminated as described above, the merger agreement will (subject to certain exceptions) become void, and there will be no liability under the merger agreement on the part of any party to the merger agreement, or on the part of any such party's officers, directors, employees, affiliates, agents, legal and financial advisers and other representatives, except for the parties' obligations with respect to expense reimbursement described below under "—Expenses" and except that no party will be relieved from liability for any knowing and intentional breach of the merger agreement prior to the date of such termination.

Termination Fee

        The Company has agreed to pay Fairfax a termination fee of $39.6 million, which amount represents approximately 2.75% of the equity value of the transaction (including shares of our common stock currently held by Fairfax and its subsidiaries), if the merger agreement is terminated under any of the following circumstances:

(i)

Fairfax terminates the merger agreement because the board of directors or any committee thereof makes an adverse recommendation change;

62

---

Table of Contents

(ii)

the Company terminates the merger agreement because it enters into a definitive agreement providing for a superior proposal; or



(iii)

a takeover proposal is made known to the Company or is made directly to the Company's stockholders generally or any person publicly announces an intention (whether or not conditional) to make a takeover proposal; and



•

thereafter, either party terminates the merger agreement because:



•

the merger has not been completed by the outside date; or



•

there exists a final non-appealable governmental order, decree or ruling that prohibits or makes illegal the completion of the merger and that is based on the existence of such takeover proposal (whether or not modified after it was first made); or



•

the stockholder approval necessary to complete the merger is not obtained at the special meeting of the Company's stockholders; and



•

such takeover proposal (whether or not modified after it was first made) is consummated within one year of such termination.

        If the merger agreement is terminated as a result of clause (i) above, the termination fee will be payable by the Company to Fairfax no later than two business days following such termination. If the merger agreement is terminated as a result of clause (ii) above, the termination fee will be payable by the Company to Fairfax prior to or simultaneously with such termination. If the merger is terminated as a result of clause (iii) above, the termination fee will be payable by the Company to Fairfax no later than two business days following the consummation of such transaction.

Expenses

        Except as otherwise set forth below, all expenses (as defined in the merger agreement) incurred in connection with the merger agreement and the transactions contemplated thereby will be paid by the party incurring such expenses, whether or not the merger is consummated.

        However, if Fairfax or the Company terminates the merger agreement as a result of the other's breach of any representation, warranty, covenant or agreement in the merger agreement under the circumstances described above under "—Termination," (provided that the terminating party is not in material breach of any of its representations, warranties, covenants or agreements in the merger agreement), then such breaching party will reimburse the terminating party for all of its expenses, up to $1.5 million, provided , however , that if the Company is required to pay the termination fee described above under "—Termination Fee," then the Company may reduce any termination fee owed to Fairfax by the full amount of any expense reimbursement paid to Fairfax pursuant to this provision.

Remedies

        If Fairfax is entitled to terminate the merger agreement and receive a termination fee from the Company, Fairfax's receipt of such termination fee will be the sole and exclusive remedy of Fairfax against the Company, regardless of the circumstances of such termination.

        The parties are entitled to an injunction, specific performance and other equitable relief to prevent breaches of the merger agreement and to enforce specifically the terms of the merger agreement in addition to any other remedy to which they may be entitled at law or in equity.

Indemnification; Directors' and Officers' Insurance

        From and after the effective time, Fairfax shall cause the surviving corporation to, and the surviving corporation will, indemnify, defend and hold harmless, to the fullest extent permitted by law,

63

---

Table of Contents

our present and former officers and directors, and our subsidiaries' present and former officers and directors, against any and all losses, claims, damages, costs (including reasonable attorneys fees and expenses), expenses, fines, liabilities or judgments, including any amounts that are paid in settlement with the approval of the surviving corporation (which may not be unreasonably withheld or delayed) of or in connection with any action (as defined in the merger agreement) based on or arising out of the fact that such person is or was a director or officer of the Company or any of its subsidiaries at or prior to the effective time, including any such losses, liabilities and amounts arising out of our pertaining to the merger agreement or the transactions contemplated thereby. In addition, the surviving corporation will advance and pay all expenses of each such indemnified party in advance of the final disposition of any such action to the fullest extent permitted by law, upon receipt of an undertaking to repay such advances if it is ultimately determined in accordance with applicable law that such party is not entitled to indemnification. The surviving corporation is also required under the merger agreement to maintain in its organizational documents for a period of six years after the effective time, provisions with respect to the exculpation and indemnification of the current and former directors and officers of the Company that are at least as favorable as those currently set forth in the Company's certificate of incorporation.

        Under the merger agreement, we have the right, immediately prior to the effective time, to purchase a single payment run-off policy of directors' and officers' liability insurance covering our and our subsidiaries' current and former officers and directors, which policy will remain in effect for a period of six years from the effective time, for a price not to exceed 300% of the annual premium amount we are currently paying for such policy. In addition, the surviving corporation must provide for our and our subsidiaries' current officers and directors who become officers and directors of the surviving corporation after the closing of the merger, coverage under its directors' and officers' liability policy with the same terms as those applicable to the other officers and directors of the surviving corporation and its subsidiaries.

        If we fail to purchase the run-off policy described above, Fairfax has agreed to cause the surviving corporation to continue to maintain the Company's current policy in place or to purchase a new policy of at least the same coverage and containing no less advantageous terms and conditions, in each case, for a six-year period following the effective time. Fairfax's obligation to provide this insurance is also capped at 300% of the annual premium amount we are currently paying for such policy. If annual premiums for such coverage exceed the cap, the surviving corporation must obtain a policy with the greatest coverage available for a premium price not exceeding the 300% cap per annum.

        Under the merger agreement, the present and former directors and officers of the Company and its subsidiaries will have the right to enforce these provisions of the merger agreement.

Access

        Subject to certain limitations, we have agreed to afford Fairfax, Merger Sub and their authorized representatives, reasonable access to the Company (including our officers, employees, offices and other facilities and our books and records) and to furnish Fairfax with our financial, operating and other data and information, as may reasonably be requested.

Modification or Amendment

        At any time prior to the effective time, the parties to the merger agreement may modify or amend the merger agreement in writing, by action taken by their respective boards of directors. After the approval and adoption of the merger agreement and the merger by the stockholders of the Company, however, no amendment may be made that would require further approval of the stockholders of the Company under applicable law without such further approval.

64

---

Table of Contents

VOTING AGREEMENTS

        This section describes the voting agreements among Fairfax and each of the directors and executive officers of the Company as of the date of the merger agreement. The description is not complete, and you should read the form of voting agreement for a more complete understanding of its terms. The complete text of the form of voting agreement is attached to this proxy statement as Annex C and is incorporated by reference into this proxy statement.

        Concurrently with the execution of the merger agreement, each of the directors and executive officers of the Company as of the date of the merger agreement, solely in their capacities as stockholders, entered into a voting agreement with Fairfax under which they have agreed to appear at every meeting of the Company's stockholders and to vote all of their shares of Company common stock (and any other such shares they may acquire after the date of the merger agreement):

•

in favor of the proposal to adopt the merger agreement and of any other matter necessary to the consummation of the transactions contemplated thereby, and



•

against any action, agreement, transaction or proposal that would result in a material breach by the Company of the merger agreement or could result in any condition to the Company's obligations thereunder not being fulfilled.

        Each of such directors and executive officers also have granted Fairfax an irrevocable proxy to vote their shares in accordance with the foregoing if and to the extent such director or executive officer fails to do so. As of March 26, 2010, the record date for the special meeting, such directors and executive officers collectively were entitled to vote 1,309,693 shares, or approximately 3.5%, of the Company's outstanding common stock. Ms. Janet Frank, who was awarded 50,000 restricted shares of the Company's common stock upon her commencement of employment with the Company on March 15, 2010, did not execute a voting agreement.

        Such directors and executive officers also have agreed among other things that, except as contemplated by the merger agreement, they will not, directly or indirectly, on or after the date of the merger agreement:

•

sell, assign, transfer, pledge, dispose of or otherwise encumber (referred to in the voting agreement as a transfer) any of their shares, other than a transfer of any such shares to any person who executes and delivers to Fairfax a joinder to the transferor's voting agreement, pursuant to which such person will be bound by all of the terms and provisions of such voting agreement,



•

deposit any of their shares into a voting trust or enter into a voting agreement or arrangement or grant any proxy or power of attorney with respect thereto that is inconsistent with the voting agreements or



•

knowingly take any action that would have the effect of preventing or disabling the director or officer from performing his or her obligations under the voting agreements.

        Such directors and executive officers also have agreed that they will:

•

not, except as expressly permitted by the provisions of the merger agreement described above under "Merger Agreement—No Solicitation of Other Offers," directly or indirectly, engage in any action that the Company is prohibited from taking under such provisions (and will cause their respective representatives and agents not to engage in any action prohibited under such provisions) and



•

promptly advise the Company orally and in writing of any takeover proposal (as defined in the merger agreement) or any request for information with respect thereto, and the material terms

65

---

Table of Contents

and conditions of, and identity of the person making, such takeover proposal or request, and any material changes therein.

        The voting agreements will terminate upon the earliest to occur of:

•

the termination of the merger agreement in accordance with its terms,



•

the occurrence of an adverse recommendation change under (and as defined in) the merger agreement and



•

the effective time of the merger.

        Notwithstanding the foregoing, the directors and executive officers who have entered into the voting agreements have done so solely in their capacities as stockholders of the Company and nothing in the voting agreements will limit or affect any action or inaction by such directors and executive officers in their capacities as directors or executive officers and as fiduciaries of the Company (or the Company's subsidiaries), and any such action or inaction will not be deemed to be a breach of the voting agreements.

NONCOMPETITION AGREEMENT

        This section describes the noncompetition agreement between Stanley R. Zax and Fairfax. The description is not complete, and you should read the noncompetition agreement for a more complete understanding of its terms. The complete text of the noncompetition agreement is attached to this proxy statement as Annex D and is incorporated by reference into this proxy statement.

        Also concurrently with the execution and delivery of the merger agreement, Stanley R. Zax, the Chairman of the board of directors and President of the Company, entered into a noncompetition agreement with Fairfax, pursuant to which, among other things (i) for the period beginning from the effective date of the merger and ending on the second anniversary of the date on which Mr. Zax ceases to be a director, officer or employee of the Company, Mr. Zax undertook certain confidentiality obligations with respect to proprietary information of the Company and (ii) for three years after the effective time, Mr. Zax agreed not to (a) engage in a U.S. business that is in direct competition with the business of the Company, (b) solicit for employment any officer or employee of the Company or (c) solicit any customer, client, supplier, licensee or other business relation of the Company to enter into any business relationship with Mr. Zax. The foregoing obligations of Mr. Zax are subject to Mr. Zax's continued management of the business and operations of the Company and its subsidiaries with the same level of responsibility, control and discretion that Mr. Zax exercised at the time the merger agreement was executed and delivered (except that (A) all matters and decisions in respect of the investment of the assets of the Company and its subsidiaries will be at the sole discretion of Fairfax and (B) all other matters and decisions related to financing activities and capital allocation of the Company and its subsidiaries (including the declaration and payment of dividends) will be determined by the board of directors of the Company).

66

---

Table of Contents

MARKET PRICE OF COMMON STOCK

        The common stock is listed for trading on the NYSE under the symbol "ZNT." The table below shows, for the periods indicated, the price range of the common stock, as reported by Bloomberg L.P., and the dividends per share declared during each of the calendar quarters of 2007, 2008 and 2009 and the first quarter of 2010.

        The closing price of the common stock on the NYSE on February 17, 2010, the last trading day prior to the public announcement of the execution of the merger agreement, was $28.91 per share of common stock. On March 29, 2010, the most recent practicable date before this proxy statement was mailed to our stockholders, the closing price for the common stock on the NYSE was $38.32 per share of common stock. You are encouraged to obtain current market quotations for our common stock in connection with voting your shares of common stock at the special meeting.

        On February 10, 2010, the Company declared a cash dividend of $0.50 per share of the Company's common stock, which is payable on May 14, 2010 to stockholders of record at the close of business on April 30, 2010. The terms of the merger agreement permit the Company to pay that dividend, and the Company expects that dividend to be paid on May 14, 2010, prior to the completion of the merger. Other than that dividend, the merger agreement does not permit the Company to pay any additional dividends on its common stock without Fairfax's prior consent while the merger agreement remains in effect.

67

---

Table of Contents

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

        The following table contains certain information as of March 26, 2010 as to: (i) all persons who, to our knowledge, were the beneficial owners of more than 5% of the outstanding shares of the Company's common stock; (ii) each of our named executive officers; (iii) each of our directors; and (iv) all of our executive officers and directors as a group. The persons named hold sole voting and investment power with respect to the shares shown opposite their respective names, unless otherwise indicated. The information with respect to each person specified is as supplied or confirmed by such person.

68

---

Table of Contents

69

---

Table of Contents