FINANCIAL PACIFIC INSURANCE GROUP INC, S-1/A, 1998-08-11

FINANCIAL PACIFIC INSURANCE GROUP INC
S-1/A, 1998-08-11
FIRE, MARINE & CASUALTY INSURANCE

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 11, 1998

REGISTRATION NO. 333-50511
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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AMENDMENT NO. 5

TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

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FINANCIAL PACIFIC INSURANCE GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S> <C> <C>
DELAWARE 6331 68-0311660
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>

3850 ATHERTON ROAD
ROCKLIN, CA 95765
(916) 630-5000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

ROBERT C. GOODELL
PRESIDENT AND CHIEF EXECUTIVE OFFICER
FINANCIAL PACIFIC INSURANCE GROUP, INC.
3850 ATHERTON ROAD
ROCKLIN, CALIFORNIA 95765
(916) 630-5000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)

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COPIES TO:

<TABLE>
<S> <C>
JANIS B. SALIN, ESQ. MICHAEL J. CONNELL, ESQ.
RIORDAN & MCKINZIE MORRISON & FOERSTER LLP
300 SOUTH GRAND AVENUE, 29TH FLOOR 555 W. FIFTH STREET, SUITE 3500
LOS ANGELES, CALIFORNIA 90071 LOS ANGELES, CALIFORNIA 90013
(213) 629-4824 (213) 892-5200
</TABLE>

APPROPRIATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: as soon as practicable after Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]

If the Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]

If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY
STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO
REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.

PROSPECTUS Subject to completion, dated August 11, 1998

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2,500,000 SHARES

(FINANCIAL PACIFIC LOGO)

FINANCIAL PACIFIC INSURANCE GROUP, INC.

Common Stock

Of the shares of Common Stock offered hereby, 2,000,000 shares are being
sold by the Company and 500,000 shares are being sold by the Selling
Stockholders. The Company will not receive any proceeds from the sale of the
shares by the Selling Stockholders. Prior to the Offering, there has been no
public market for the Company's Common Stock. It is currently estimated that the
initial public offering price will be between $9 and $11 per share. See
"Underwriting" for information relating to the method of determining the initial
public offering price. The Common Stock has been approved, subject to issuance,
for quotation on the Nasdaq National Market under the symbol "FPAC".

------------------------------------

SEE "RISK FACTORS" BEGINNING ON PAGE 7 FOR CERTAIN INFORMATION THAT SHOULD
BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY.

------------------------------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

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<TABLE>
<S> <C> <C> <C> <C>
UNDERWRITING PROCEEDS TO THE
PRICE TO DISCOUNT AND PROCEEDS TO THE SELLING
PUBLIC COMMISSION(1) COMPANY(2) STOCKHOLDERS
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Per Share............ $ $ $ $
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Total(3)............. $ $ $ $
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</TABLE>

(1) See "Underwriting" for indemnification and other compensation
arrangements with the Underwriters.

(2) Before deducting expenses estimated at $700,000, which will be paid by
the Company.

(3) The Company has granted the Underwriters a 45-day option to purchase up
to an aggregate of 375,000 additional shares to cover over-allotments, if
any. If the option is exercised in full, the total Price to Public,
Underwriting Discount and Proceeds to the Company will be $ ,
$ and $ , respectively.

------------------------------------

The shares of Common Stock are offered by the several Underwriters subject
to receipt and acceptance by them and subject to their right to reject any order
in whole or in part. It is expected that delivery of the shares of Common Stock
will be made at the offices of EVEREN Securities, Inc. or through the facilities
of the Depository Trust Company, New York, New York on or about August , 1998.

EVEREN SECURITIES, INC. HOEFER & ARNETT INCORPORATED
<PAGE> 3

(MAP OF UNITED STATES SHOWING STATES IN WHICH THE COMPANY IS LICENSED AND HAS
LICENSE APPLICATIONS PENDING GOES HERE)

The map reflects the status of licenses on June 1, 1998. In 1997, 100% of
the Company's direct premiums written were produced in California.

------------------------

State insurance holding company statutes applicable to the Company
generally prohibit any person from acquiring control of the Company, and thus,
indirect control of its insurance subsidiary, without the prior approval of the
appropriate insurance regulators. Generally, any person who acquires beneficial
ownership of ten percent (10%) or more of the outstanding voting stock of the
Company would be presumed to have acquired such control unless appropriate
insurance regulators, upon application, determine otherwise.
------------------------

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK
INCLUDING THE PURCHASE OF THE COMMON STOCK FOLLOWING THE PRICING OF THE OFFERING
TO COVER A SYNDICATE SHORT POSITION IN THE COMMON STOCK OR FOR THE PURPOSE OF
MAINTAINING THE PRICE OF THE COMMON STOCK OR THE IMPOSITION OF PENALTY BIDS. FOR
A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
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2
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PROSPECTUS SUMMARY

The following summary is qualified in its entirety by the more detailed
information, including the consolidated financial statements and notes thereto,
appearing elsewhere in this Prospectus. Unless the context otherwise indicates,
the "Company" or "Financial Pacific" refers to Financial Pacific Insurance
Group, Inc. (the "Group") and its consolidated subsidiaries including the
Group's wholly owned insurance subsidiary, Financial Pacific Insurance Company
("FPIC"). Unless indicated otherwise, the information contained in this
Prospectus (i) is presented in conformity with generally accepted accounting
principles ("GAAP"); (ii) assumes the Underwriters' over-allotment option is not
exercised; (iii) reflects a 394.375 for 1 stock split effected on April 14,
1998; (iv) assumes the conversion of all the outstanding shares of Series A
Convertible Preferred Stock ("Series A Stock") into an aggregate of 1,735,251
shares of Common Stock of the Company (the "Common Stock"); and (v) assumes the
exercise of certain outstanding Warrants, into an aggregate of 593,691 shares of
Common Stock. Certain insurance terms used herein are defined in the "Glossary
of Selected Insurance Terms." This Prospectus contains forward-looking
statements that involve risks and uncertainties. Actual results could differ
materially from those discussed in the forward-looking statements as a result of
certain factors including those set forth under "Risk Factors" and elsewhere in
this Prospectus. Prospective investors should carefully consider the information
set forth under the heading "Risk Factors."

THE COMPANY

Financial Pacific is a regional, custom-underwriting insurance company. The
Company writes policies for small and medium-sized commercial customers within
specified niche markets which are typically overlooked by large insurance
companies. During 1997, the Company derived direct premiums written from artisan
contractors (40%), commercial property owners (5%), light industrial businesses
(5%), a variety of other businesses (25%) and special programs (25%). The
special programs were designed for refuse haulers, farm labor contractors,
bowling centers and restaurants. For these programs, the Company has developed
underwriting expertise and focused marketing materials and applies rate
deviations or coverage extensions. The Company writes the vast majority of its
business in rural markets in California. FPIC is currently rated A-(excellent)
by A.M. Best Company ("A.M. Best").

Direct premiums written increased from $15.1 million in 1994, the Company's
first full year of operation, to $39.5 million in 1997. Net income increased
from $777,000 in 1994 to $2.3 million in 1997. The Company's combined ratio,
which is a measure of underwriting profitability, was 92% in 1997, well below
the industry average of 101%. Much of the Company's growth and profitability is
attributable to its retention of renewal policies. Renewal retention rates were
81%, 83% and 84% in the three years ended 1995, 1996 and 1997, respectively.

The Company markets insurance through 234 independent insurance agents, as
of June 30, 1998, all of which are located in California. The Company believes
its relationship with its agents allows it to provide ongoing and attentive
service to its targeted customer base. The Company's strategy is to focus on
writing policies that typically generate between $1,100 to $5,000 in annual
premiums. These policies are typically written for small businesses having one
to five employees and for medium-sized businesses having more than five but less
than 50 employees. Management believes this market has been overlooked by many
of the larger insurance companies as a result of lower annual premiums per
policy, and in some cases, the remote locations of the policyholders and the
agents.

During 1997, FPIC wrote 100% of its business in California. In that year,
approximately 58% of FPIC's direct premiums written was for Commercial
Multi-Peril Liability ("CMP") coverages, 17% was for Commercial Automobile
Liability coverages, 11% was for Commercial Property coverages, 6% was for
Commercial Automobile Physical Damage coverages, and the remainder was for
Inland Marine, Surety and Fidelity. The Company is also engaged, through its
wholly owned insurance agency, Financial Pacific Insurance Agency ("FPIA"), in
the mail order distribution of license and permit surety bonds in 36 states on
behalf of Markel Corporation. These bonds are low limit surety commitments
pledged to a regulatory agency as a condition of obtaining and maintaining a
business license.

The Company has been able to maintain a high level of service and fast
turnaround time by using its proprietary integrated tracking software
("QuoteTracker") which enables management to track each policy from initial
application through renewal, along with tracking the performance of individual
agents and employees. The system provides data on a real-time basis and allows
for greater visibility of processing time and underwriting performance.

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<PAGE> 5

The Company is raising capital through this Offering to allow for continued
growth of its business and to repay its long-term debt. Insurance regulators and
rating services presently recommend that the Company's ratio of annual net
premiums written to surplus as regards policyholders not exceed 3 to 1. The
Company's ratio at June 30, 1998 was 2.1 to 1.

The Company's long term growth strategies, while continuing to emphasize
small to medium-sized businesses as its primary target market, are to:

- - RETAIN MORE DIRECT PREMIUMS WRITTEN. Due to its limited capital, the Company
has historically ceded as much as 43% of its annual direct premiums written
to reinsurers. As a result of increased capital from this Offering, the
Company will be able to retain a greater portion of premium income.

- - EXPAND EXISTING BUSINESS. The Company intends to pursue further growth in
California by selectively appointing new agents and by attracting a larger
percentage of business from each of its existing agents through
cross-selling of its existing lines of business.

- - DEVELOP NEW PROGRAMS. The Company will continue to focus on developing new
specialty insurance programs for carefully selected market segments in
which the Company has identified niche opportunities. Such programs will
replicate those successfully established in prior periods including those
developed for refuse haulers, restaurants and bowling centers.

- - EXPAND SURETY BUSINESS. The Company began writing surety business in 1995 to
complement CMP. This line of business provides payment or performance
guarantees for construction contracts or other obligations. The Company
wrote nearly $1.2 million in surety premium with one staff underwriter in
1997. The Company plans to emphasize surety as a line of business by
increasing its marketing efforts and adding to its staff.

- - EXPAND GEOGRAPHICALLY. The Company intends to expand its specialty insurance
business into other states. Beginning with the states adjoining California,
the Company will select and appoint agents in rural areas of those states
to sell its products. Its marketing efforts will focus on the insurance
programs in which the Company has developed an expertise in underwriting.
As of July 1, 1998, the Company was licensed to do business in Arizona,
California, Idaho, Kansas, Missouri, Montana, Nebraska, Nevada, North
Dakota, Oregon, South Dakota and Utah and has license applications pending
in seven additional states.

The Company is a Delaware corporation formed in 1993, whose offices are
located at 3850 Atherton Road, Rocklin, California 95765; telephone (916)
630-5000; www.financialpacific.com.

THE OFFERING

Common Stock offered
hereby:
By the Company........... 2,000,000 shares
By the Selling
Stockholders............... 500,000 shares

Common Stock to be
outstanding after the
Offering................. 4,816,897 shares(1)

Use of proceeds............ To contribute additional capital to FPIC which will
allow it to retain a greater portion of direct
premiums written currently being ceded to
reinsurers; to permit greater underwriting volume
of its insurance products; to repay senior debt and
for general corporate purposes. See "Use of
Proceeds."

Nasdaq National Market
Symbol................... FPAC

- ---------------
(1) Excludes 82,819 and 153,525 shares of Common Stock reserved for issuance
upon exercise of options outstanding as of June 30, 1998 pursuant to grants
to officers and employees of the Company and certain Warrants to purchase
Common Stock, respectively, outstanding as of June 30, 1998. Includes
593,691 shares of Common Stock to be issued upon exercise of certain
Warrants to purchase Common Stock and 1,735,251 shares of Common Stock to be
issued upon the conversion of the Series A Stock concurrently with the
closing of the Offering. See Notes to Consolidated Financial Statements.

4
<PAGE> 6

SUMMARY CONSOLIDATED FINANCIAL DATA(1)

<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEARS ENDED DECEMBER 31, JUNE 30
--------------------------------------------------- -----------------
1993(2) 1994 1995 1996 1997 1997 1998
------- ------- -------- -------- --------- ------- -------
(In thousands, except per share data and ratios)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Direct premiums written................ $ 6,094 $15,072 $ 24,695 $ 31,927 $ 39,512 $19,459 $22,059
Premiums ceded......................... (2,345) (5,785) (10,653) (13,674) (12,576) (6,172) (6,809)
------- ------- -------- -------- --------- ------- -------
Net premiums written............. 3,749 9,287 14,042 18,253 26,936 13,287 15,250
------- ------- -------- -------- --------- ------- -------
Net premiums earned.............. 2,380 6,701 12,060 14,987 22,854 10,130 13,831
Commissions............................ 159 213 105 628 709 355 393
Investment income, net of expenses..... 523 750 1,028 1,449 1,720 831 1,053
Net realized gains (losses) on sales of
investments.......................... 68 (246) 466 52 (46) (63) 32
Other income, net...................... (107) 502 578 547 800 371 456
------- ------- -------- -------- --------- ------- -------
Total revenues....................... 3,023 7,920 14,237 17,663 26,037 11,624 15,765

Expenses:
Losses and loss adjustment expenses.... (273) 2,944 6,325 9,750 12,748 5,609 7,183
Policy acquisition costs............... 610 1,493 3,957 4,785 7,440 3,397 4,818
Contingent ceding commission........... -- (422) (1,246) (3,222) (1,511) (1,380) (319)
General operating costs................ 731 2,297 1,712 1,929 2,443 1,366 897
Agency expenses........................ 136 253 145 688 721 350 407
Interest expense....................... 21 113 128 693 617 315 303
------- ------- -------- -------- --------- ------- -------
Total expenses....................... 1,225 6,678 11,021 14,623 22,458 9,657 13,289
------- ------- -------- -------- --------- ------- -------

Income before taxes.................... 1,798 1,242 3,216 3,040 3,579 1,967 2,476
------- ------- -------- -------- --------- ------- -------
Income tax provision............. 588 465 1,066 1,037 1,237 683 852
------- ------- -------- -------- --------- ------- -------
Net income....................... $ 1,210 $ 777 $ 2,150 $ 2,003 $ 2,342 $ 1,284 $ 1,624
======= ======= ======== ======== ========= ======= =======
EARNINGS PER SHARE(3):
Basic................................ $ 5.41 $ 1.60 $ 4.42 $ 4.12 $ 4.82 $ 2.64 $ 3.33
Diluted.............................. $ 1.22 $ 0.40 $ 0.94 $ 0.69 $ 0.79 $ 0.43 $ 0.55
Weighted average diluted shares...... 988 1,956 2,292 2,901 2,970 2,971 2,975
GAAP RATIOS(4):
Loss ratio........................... (7.0)% 43.9% 52.4% 65.1% 55.8% 55.4% 51.9%
Expense ratio........................ 56.1 52.0 36.6 23.3 36.3 33.5 38.9
------- ------- -------- -------- --------- ------- -------
Combined ratio....................... 49.1% 95.9% 89.0% 88.4% 92.1% 88.9% 90.8%
======= ======= ======== ======== ========= ======= =======
STATUTORY RATIOS(4):
Combined ratio....................... 35.6% 95.4% 89.3% 90.3% 92.3% 89.1% 90.2%
======= ======= ======== ======== ========= ======= =======
Industry combined ratio(5)........... 112.2% 110.1% 110.5% 111.0% 101.0% -- --
OTHER DATA:
Underwriting profit(6)............... $ 1,312 $ 389 $ 1,585 $ 1,745 $ 1,734 $ 1,138 $ 1,252
Surplus as regards policyholders..... 5,890 5,773 12,387 13,788 14,262 12,859 14,719
</TABLE>

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<TABLE>
<CAPTION>
JUNE 30, 1998
--------------------------
ACTUAL AS ADJUSTED(7)
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(In thousands, except
per share data and ratios)
<S> <C> <C>
BALANCE SHEET AND OTHER DATA:
Total cash and investments.................................. $37,551 $53,582
Total assets................................................ 77,563 93,594
Unpaid losses and loss adjustment expenses.................. 23,091 23,091
Total debt(8)............................................... 4,987 --
Stockholders' equity........................................ 15,164 36,195
Book value per common share(3).............................. $ 6.57 $ 7.51
Surplus as regards policyholders(9)......................... $14,719 $30,750
Ratio of annualized net premiums written to surplus as
regards policyholders(10)................................. 2.1x 1.0x
</TABLE>

- ---------------
(1) Other than the statutory combined ratios, surplus as regards policyholders
and ratio of net premiums written to surplus as regards policyholders,
which are presented in accordance with statutory accounting principles
("SAP"), all data is presented in accordance with GAAP. See "Glossary of
Selected Insurance Terms."

(2) Effective November 12, 1993, the Group completed the acquisition of FPIC
and FPIA pursuant to the Stock Purchase Agreement dated June 2, 1993.
Because management of the Group had effective control of FPIC and FPIA as
of May 26, 1993, the acquisition has been accounted for as of that date.
Accordingly, the 1993 consolidated financial statements include results of
operations for the period of May 26, 1993 through December 31, 1993.

(3) All periods adjusted to reflect a 394.375 for 1 stock split effective April
14, 1998. Book value per common share is based on stockholders' equity
adjusted for anticipated proceeds from the exercise of the Senior Note
Warrants and outstanding shares as of the calculation date. Outstanding
shares include Common Stock issued and outstanding as of the calculation
date as well as Common Stock issued in conjunction with the anticipated
conversion of Series A Stock and exercise of Senior Note Warrants.

(4) During 1993, in conjunction with the acquisition, management determined
that the Company's IBNR reserves were redundant and recorded a reserve
reduction of $2.4 million.

(5) Source: "Best's Insurance Reports Property/Casualty United States, 1997
Edition." The 1997 ratio is based on A.M. Best's estimate contained in
January 1998, "Review Preview -- Property/Casualty." A comparison of a
company's combined ratio with the industry combined ratio does not
necessarily indicate that a company has performed well or poorly as
compared with its peers.

(6) Underwriting profit represents the difference between premiums earned and
underwriting expenses. Underwriting profit may not provide an accurate
comparison among companies because it is not necessarily computed
identically by all companies. The use of such information is intended only
to supplement the conventional income statement presentation and is not to
be considered as an alternative to net income, cash flows or any other
indicator of the Company's operating performance which is presented in
accordance with GAAP.

(7) Gives effect to the sale of 2,000,000 shares in the Offering (at an assumed
initial public offering price of $10.00 per share) and the transactions
contemplated under "Use of Proceeds."

(8) Effective December 28, 1995, the Company issued $5 million in Senior Notes
due January 1, 2001 (the "Senior Notes"). The Senior Notes were issued in
conjunction with warrants for the purchase of 593,691 shares of the
Company's Common Stock at the price of $5.61 per share (the "Senior Note
Warrants"). The proceeds from the issuance of the Senior Notes were
contributed to FPIC's capital.

(9) Surplus as regards policyholders is derived from financial statements
prepared in accordance with SAP prescribed or permitted by the California
Department of Insurance (the "DOI"), a comprehensive basis of accounting
other than GAAP. Statutory financial information, and the ratios derived
from such information, should not be considered an alternative to
information derived from financial position, results of operations or cash
flows determined in accordance with GAAP.

(10) Ratio of net premiums written to surplus as regards policyholders was
calculated based on annualizing net premiums written for the six months
ended June 30, 1998 as compared to surplus as regards policyholders as of
June 30, 1998.

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RISK FACTORS

In addition to the other information in this Prospectus, the following
information should be considered carefully by potential purchasers in evaluating
the Company, its business and the shares of Common Stock offered hereby. Certain
statements included in this Prospectus, including, without limitation,
statements containing the words "believes", "anticipates", "intends", "expects",
"will" and words of similar import, constitute forward-looking statements. Such
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the Company to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. Such
factors include, among other things, the important factors set forth below and
elsewhere in this Prospectus. Given these uncertainties, potential purchasers of
the Common Stock offered hereby are cautioned not to place undue reliance on
such forward-looking statements.

NATURE OF THE COMPANY'S BUSINESS

All of the Company's direct premiums written (which are the Company's
largest source of revenue) are attributable to property/casualty insurance,
which is cyclical in nature and has historically been characterized by periods
of relatively high levels of price competition, less restrictive underwriting
standards and generally low premium rates ("Soft Market"), followed by periods
of capital shortages resulting in a lack of insurance availability, relatively
low levels of competition, more selective underwriting of risks and relatively
high premium rates ("Hard Market"). A Soft Market has existed for several years
with premiums decreasing and competition remaining at high levels. Historically,
the unpredictability and competitive nature of the property/ casualty insurance
industry have contributed to significant quarter-to-quarter and year-to-year
fluctuations in underwriting results and net income. Many of the factors which
have resulted in the current Soft Market in the property/casualty insurance
industry continue and the Company cannot predict if, or when, the market
conditions for the property/casualty insurance industry, including the product
lines sold by the Company will improve. The Company's profitability is affected
by many factors, including not only rate competition, but also severity and
frequency of claims, fluctuations in interest rates that affect investment
returns, regulation, court decisions, natural disasters, the legislative
climate, and general economic conditions and trends, such as inflationary
pressures that may affect the adequacy of reserves, all of which are
substantially beyond the control of the Company.

One of the distinguishing features of the property/casualty industry is
that prices are set before costs are known because premium rates for individual
policies are determined before losses for such policies are reported. Changes in
statutory and case law can dramatically affect the liability associated with
known risks after the insurance contract is in place. The number of competitors
and the similarity of products offered, as well as regulatory constraints, limit
the ability of property/casualty insurers such as the Company to increase prices
in response to declines in profitability. In addition, during periods of high
interest rates, some property/ casualty insurers may be willing to absorb
underwriting losses in order to generate funds for investment, thereby
prolonging low premium rates which are not adequate to cover underwriting losses
and expenses. As a result of these factors, the Company may experience
significantly lower premiums in the future.

Most insurance underwriting decisions are based on assumptions about events
that will occur over a period of future years and are generally based on
actuarial projections and historical data reflecting the collective experience
of large groups of insureds. The actuarial projections may not accurately
predict the aggregate obligations of any given insurer. Because the Company's
experience represents an insignificant portion of the industry's experience,
actuarial assumptions based on aggregate industry data may not be reflective of
actual obligations to be incurred. With respect to underwriting experience
(decisions concerning the issuance of its policies), the Company relies heavily
on its own underwriting experience.

GEOGRAPHIC AND PRODUCT LINE CONCENTRATION

Virtually all of the Company's direct premiums written to date have been
attributed to policies written in California. During the years ended December
31, 1995, 1996 and 1997, 95% to 100% of direct premiums written by the Company
were derived from policies issued to insureds located in northern and central

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<PAGE> 9

California, where it is estimated that only 30% of California's population
currently resides. The Company's revenues and profitability are therefore
subject to prevailing economic, regulatory, demographic and other conditions in
California. The Company is presently evaluating expansion into other states
where management believes there are favorable insurance climates. As of July 1,
1998, the Company is licensed to transact property/casualty insurance business
in California and 11 other states (Arizona, Idaho, Kansas, Missouri, Montana,
Nebraska, Nevada, North Dakota, Oregon, South Dakota and Utah). The Company has
license applications pending in seven additional states (Arkansas, Colorado,
Iowa, Minnesota, New Mexico, Oklahoma and Wisconsin). Management believes it
will likely receive at least two of these state licenses before the end of 1998.
The Company may need additional funds to finance any such expansion and there
can be no assurance that such funds will be available. Even if the Company
obtains the funds necessary to expand, there can be no assurance that the
Company will be able to overcome competition and/or regulatory barriers or that
any such expansion, if completed, will be successful. See
"Business -- Competition" and "-- Regulation."

REINSURANCE CONSIDERATIONS

The Company depends upon its ability to reinsure certain risks insured by
the Company. The amount, availability and cost of reinsurance are subject to
prevailing market conditions beyond the control of the Company, and they affect
the Company's ability to write additional premiums and its profitability. If the
Company were unable to secure reinsurance at competitive prices and terms, the
Company's results of operations could be adversely impacted. The maintenance of
reinsurance does not affect the Company's direct liability to its policyholders
on the business it writes. Although the Company's reinsurance is currently
maintained with several reinsurers rated A- (excellent) or better by A.M. Best,
one of the Company's reinsurer's insolvency or inability to make payments under
the terms of a reinsurance treaty could have a material adverse effect on the
Company. See "Business -- Reinsurance."

RELIANCE ON INDEPENDENT INSURANCE AGENTS

The failure or inability of independent insurance agents to market the
Company's insurance programs successfully could have a material adverse effect
on the Company's business, financial condition and results of operations. The
Company principally markets its insurance programs through 234 independent
insurance agents as of June 30, 1998. The agents are not obligated to promote
the Company's products and many sell or promote competitors' insurance products
in addition to the Company's products. Independent insurance agents produced
100% of the Company's direct premiums written during 1997. In 1997, 81% of the
Company's business was produced by its top 90 agents. No agent accounted for
more than 4% of the Company's direct premiums written in 1997. As a result, the
Company's business depends in part on the marketing efforts of these agents and
on the Company's ability to offer insurance programs and services that meet the
requirements of the agents and customers of these agents. See
"Business -- Marketing."

ADEQUACY OF LOSS RESERVES

The Company is required to maintain adequate reserves to cover its
estimated ultimate liability for losses and loss adjustment expenses ("LAE")
with respect to reported, and to incurred but not reported ("IBNR"), claims as
of the end of each accounting period. These reserves are the Company's estimates
of the ultimate cost of administration and settlement or other disposition of
all claims incurred by the Company through the end of each accounting period and
are based on facts and circumstances then known to the Company, predictions of
reasonably foreseeable future events, estimates of future trends in claims
frequency and severity and other variable and subjective factors. There are no
methods for precisely estimating an insurer's ultimate liability and many
factors can affect the accuracy of reserve estimates. Inflation, future court
rulings, jury attitudes, improvements in medical technology, and many other
social, economic, scientific, legal and political factors all can have
significant effects on the ultimate costs of claims and claims administration
and the accuracy of reserve estimates. In light of such uncertainties, the
Company also relies on policy language, developed by the Company and by others,
to exclude or limit coverage. If such language is held by a court to be invalid
or unenforceable it could materially adversely affect the Company's financial
position. The

8
<PAGE> 10

possibility of expansion of an insurer's liability, either through new concepts
of liability or through a court's refusal to accept restrictive policy language,
adds to the inherent uncertainty of reserving for claims. Changes in the
reserves are reflected as an adjustment to income during the period in which the
reserve change occurs.

In recent years, courts have issued decisions expanding civil liability.
Such decisions have resulted in higher damage awards to injured parties, and in
many cases have also resulted in liability and increased losses and LAE to
property/casualty insurers. Such court-created retroactive liabilities result in
a "catch-up" period during which adverse development (the recognition of
additional liabilities created by the court) occurs. Such decisions may distort
the Company's historical loss experience and make it more difficult to analyze
and project losses and LAE for more recent years. Since there is no historical
experience with the new types of claims, estimation of the ultimate liabilities
related to such claims is inexact. Over time, the Company develops knowledge and
experience with the new types of claims and refines its estimates of the
ultimate liabilities for those claims.

In July 1995, the California Supreme Court rendered its opinion on Montrose
Chemical Corporation vs. Admiral Insurance Company (the "Montrose Decision"). As
a result of the Montrose Decision, the Company incurred liabilities related to
construction defect claims that previously had not been covered under its
policies. The analysis of the liabilities from construction defect claims is
complicated by the fact that multiple insurers often participate in a single
claim and that many construction defect claims ultimately require no indemnity
payment but require defense. Since the Montrose Decision, it has been industry
practice for carriers that insured a contractor to share in the loss and LAE pro
rata based on number of years of coverage. Through December 31, 1997, the
Company had received a total of approximately $4.0 million of Montrose claims on
a gross basis. After deducting ceded reinsurance totaling approximately $1.0
million, the net incurred loss impact to the Company was approximately $3.0
million. During 1995, 1996 and 1997, the gross amounts of Montrose claims were
approximately $0.8 million, $1.6 million and $1.6 million, respectively. These
amounts only reflect reported case reserves as the Company has not segregated
its IBNR by Montrose and non-Montrose events. Prior to 1995, which were the
years most affected by the Montrose Decision, the Company had a small policy
base and a $100,000 retention under its casualty reinsurance treaties. The
average loss and LAE of a construction defect claim has been less than $20,000.
The length of the Montrose "catch-up" period is heavily influenced by existing
statutes of limitation on the filing of construction defect claims. In
California, there is a ten year statute of limitation for latent construction
defects and a four year statute of limitation for patent construction defects.
The statute for either a latent or patent defect begins to run upon the notice
of completion of the construction. A latent defect is one in which the
substandard work is hidden and cannot be discovered by a reasonable inspection.
Typically, this type of defect involves an element of the construction that
cannot be seen by the naked eye because it is within a wall cavity or buried
underground. A patent defect is typically one in which the substandard work is
obvious, such as a leaky roof, cracked masonry or poor drainage. The magnitude
of the impact on an insurer's earnings during the catch-up period is dependent
upon a combination of factors including, but not limited to, the insurer's
reinsurance program, the availability of other insurance coverage for an
insured, aggregate policy limits provided, the size of the average claim and the
number of affected policies.

Following the Montrose Decision, the Company modified its underwriting
practices and policy language to preclude such claims against future policies
and, to date, has been able to confine the effects of the Montrose Decision to
policies in force in 1995 and prior years. See "-- Regulations, Pending
Legislation and Case Law."

Although management believes that adequate provision has been made for loss
and LAE reserves, the establishment of appropriate reserves is an inherently
uncertain process, and there can be no assurance that ultimate losses will not
exceed the Company's loss reserves and have a material adverse effect on the
Company's results of operations and financial condition. If the Company's
reserves should be inadequate, the Company will be required to increase reserves
with a corresponding increase in losses and LAE incurred and reduction in the
Company's net income and stockholders' equity in the period in which the
deficiency is identified. See "Business -- Reserves."

9
<PAGE> 11

RISKS RELATED TO EXPANSION STRATEGY

Since 1993, the Company has experienced significant growth in its revenues,
policyholders and scope of operations. This growth has required and will
continue to require the Company to obtain additional capital, primarily to fund
FPIC. The Company intends to use a significant portion of the net proceeds from
this Offering to increase the surplus as regards policyholders of FPIC. If the
Company is unable to generate sufficient capital, either internally or from
outside sources, it could be required to slow its growth. The Company intends to
pursue further growth opportunities through greater penetration in existing
markets and expansion into new jurisdictions (see "Business -- Growth
Strategy"). As the Company expands, it will be underwriting policies for
insureds in industries and geographic areas less familiar to the Company. In
addition, the Company may rely to a greater extent on third party providers for
assistance in adjusting claims and various administrative matters in its new
markets. The Company's growth has also resulted in, and is expected to continue
to create, new and increased responsibilities for management personnel, as well
as additional demands on the Company's operating and financial systems. The
Company's further growth will depend on the efforts of key management personnel
and on the Company's ability to attract and retain qualified persons, to enhance
managerial systems for its operations, and to integrate successfully new
employees and systems into its existing operations. If the Company is unable to
continue to manage growth effectively, the Company's business, financial
condition and results of operations could be materially adversely affected. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business -- Business Strategy."

COMPETITION

The property/casualty insurance industry is highly competitive. The Company
competes with other property/casualty insurers both in the recruitment and
retention of qualified independent agents to sell its products. Success in
recruiting and retaining independent agents willing to sell the Company's
products or services is dependent upon the commission rates, services, and the
ability of the insurer to provide products that meet the needs of the agent and
the agent's customers.

In selling its insurance products, the Company competes with other insurers
through independent agents (including insurers represented by the independent
agents who represent the Company), with insurers having their own agency
organizations and with direct sellers of insurance products. There are numerous
companies competing for business in the geographic areas in which the Company
operates. No single company dominates the marketplace, but many of the Company's
competitors have more established national reputations and substantially greater
financial resources and market share than the Company.

The Company pays its agents a base commission of 15% with additional
commission for meeting increasing volume levels. Should other insurers begin
paying higher commissions than the Company, this would present a competitive
disadvantage in attracting and retaining high-quality agents. While recognizing
the significance of the rate of commission, the Company believes its efforts to
serve the agents and their customers by providing superior service in
underwriting and claims processing will allow it to continue to compete with
other insurers. See "Business -- Competition."

IMPORTANCE OF AN A.M. BEST RATING

A.M. Best, an independent insurance rating agency, assigned FPIC a B++
(very good) rating in 1994. In 1996, A.M. Best upgraded FPIC's rating to A-
(excellent). An A- rating is assigned to companies which have a balance, in A.M.
Best's opinion, of excellent financial strength, operating performance and
market profile when compared to the standards established by A.M. Best and have
a good ability to meet their ongoing obligations to policyholders. A- is A.M.
Best's fourth highest rating classification out of 15 ratings. While the Company
does not expect any reduction in its A.M. Best rating, there can be no assurance
that the Company will continue to be rated A-. Any significant decline in the
Company's future ratings could have a material impact on its relationship with
clients, and thus, a material adverse effect on the Company. A.M. Best rates
firms both on quality and on size. The size categories range from I, which
represents surplus as regards policyholders of less than $1 million, to XV,
which represents surplus as regards policyholders of greater than $2 billion.
Prior to the Offering, FPIC was financial size V, representing surplus as
regards

10
<PAGE> 12

policyholders between $10 million and $25 million. Following this Offering, it
is expected that FPIC will be category VI, representing surplus as regards
policyholders between $25 million and $50 million. When considering whether to
accept a Financial Pacific policy, customers often review both the rating and
the financial size category. While many customers and potential customers view
an A- rating as sufficient, there are others that require financial category
sizes of VII and greater. There can be no assurance that customers will continue
to accept FPIC's rating and financial category regardless of the Offering. See
"Business -- Ratings."

LIMITS ON WRITING INSURANCE

The DOI and insurance regulators in all other states in which the Company
is licensed, presently recommend that the Company's annual net premiums written
not exceed three times (300%) its surplus as regards policyholders. As of June
30, 1998, the Company's annual net premiums written to surplus as regards
policyholders was 2.1 to 1. This limitation could restrict the Company's future
growth and profitability unless the Company is able to increase its surplus as
regards policyholders or modify its reinsurance arrangements to cede more of its
premiums. See "Use of Proceeds," "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources," "Business -- Regulation -- Limits on Writing Business" and
"-- Surplus as Regards Policyholders."

RELIANCE ON KEY PERSONNEL

The Company depends, and will continue to depend, on the services of Robert
C. Goodell, the Company's Chairman, President and Chief Executive Officer, as
well as the other members of the senior management team. The Company has entered
into an employment agreement with Mr. Goodell for a one-year term. This
agreement will automatically renew at the end of such term and each anniversary
thereof for a successive one-year term unless terminated in accordance with such
agreement. See "Management -- Employment Agreements." In 1991, Mr. Goodell was
diagnosed with a remitting, relapsing form of Multiple Sclerosis that is being
treated with medication. While Mr. Goodell does not have any health problems
today that materially affect his ability to perform his regular duties, his
condition could deteriorate which could adversely affect his future performance.
The Company is the sole beneficiary of a key man life insurance policy in the
amount of $3.0 million which it maintains on Mr. Goodell. The loss of Mr.
Goodell or any of the other senior managers could have a material adverse effect
on the business of the Company.

REGULATIONS, PENDING LEGISLATION AND CASE LAW

The Company and FPIC, as a California domiciled insurer, are subject to
extensive regulation by the DOI and the California Commissioner of Insurance
("Commissioner"). The Company is also subject to extensive regulation by the
insurance regulatory agencies of Arizona, Idaho, Kansas, Missouri, Montana,
Nebraska, Nevada, North Dakota, Oregon, South Dakota and Utah. The Company will
also become subject to regulation in each jurisdiction in which it becomes
licensed to transact business. Such regulation is primarily for the protection
of policyholders rather than stockholders and could limit the Company's ability
to react to changes in its marketplace or take advantage of new opportunities in
a timely manner. Changes in such regulation could materially and adversely
affect the Company's operations and financial condition. The nature and extent
of such regulation varies from jurisdiction to jurisdiction, but typically
involves: (i) standards of solvency and minimum amounts of capital and surplus
which must be maintained; (ii) limits on types and amounts of investments; (iii)
restrictions on the size of risks which may be insured by a single company; (iv)
licensing of insurers and their agents; (v) required deposits of securities for
the benefit of policyholders; (vi) approval of policy forms; (vii) establishment
of statutory reporting practices and the form and content of statutory financial
statements; (viii) establishment of methods for setting statutory loss and
expense reserves; (ix) review, and in some instances, prior approval of premium
rates; (x) limits on transactions among insurers and affiliates; (xi) approval
of all proposed changes of control; (xii) approval of dividends; (xiii) setting
and collecting guarantee fund assessments; and (xiv) required filing of annual
and other reports with respect to the financial condition and operation of
insurers. In addition, state regulatory examiners perform periodic financial and
underwriting examinations of insurers.

11
<PAGE> 13

In recent years, the insurance regulatory framework has been subject to
increased scrutiny by the National Association of Insurance Commissioners (the
"NAIC"), state legislatures, state insurance regulators and the United States
Congress. The NAIC is a voluntary organization of state regulators. Its
principal mission is to encourage uniformity in state regulation of insurance
through the drafting of model laws and the continuing refinement of insurance
accounting practices and reporting procedures. None of the NAIC's pronouncements
has any legal effect unless enacted by individual states. The NAIC recently
approved codification of statutory accounting practices that change the
definition of what constitutes prescribed statutory accounting practices and
will result in changes to the accounting policies that insurance enterprises use
to prepare their statutory financial statements. The codification becomes
effective in 2001. The Company is unable to predict how codification will affect
FPIC's statutory financial statements or how insurance rating agencies will
interpret or react to any such changes. No assurance can be given that future
legislative or regulatory changes resulting from such activities will not
adversely affect the Company. See "Business -- Regulation."

Currently, approximately 40% of the Company's business is related to
artisan contractors. Accordingly, the law relating to construction defect
liability can substantially affect the Company's business. Any changes in such
laws, rules and regulations, including any attempt to find more fault with a
contractor or subcontractor for problems with a project they worked on, could
materially and adversely affect the operations of the Company. For example, on
July 3, 1995, the California Supreme Court rendered the Montrose Decision. In
that decision, the Supreme Court ruled that in the case of a continuous and
progressively deteriorating loss, such as pollution liability (or construction
defect liability), an insurance company has a definitive duty to defend the
policyholder until all uncertainty related to the severity and cause of the loss
is extinguished. Therefore, multiple periods of coverage are triggered and often
with multiple insurance companies. The Montrose Decision was in stark contrast
to prior decisions wherein, only the carrier insuring the business when a loss
first manifested itself was obligated to defend and/or provide indemnity relief.
As a result of the Montrose Decision, the Company experienced a significant
increase in construction defect liability cases, to which it would not have been
subject under the old law. Specifically, through December 31, 1997, the Company
recorded approximately $4.0 million of Montrose claims on a gross basis. After
deducting ceded reinsurance totaling approximately $1.0 million, the net
incurred loss impact to the Company was approximately $3.0 million on a net
basis. During 1995, 1996 and 1997, the gross amounts of Montrose incurred claims
on a reported basis were approximately $0.8 million, $1.6 million and $1.6
million, respectively. The reinsurance recoverable recorded against these losses
during 1995, 1996 and 1997 was approximately $0.1 million, $0.3 million and $0.7
million, respectively. These amounts only reflect reported case reserves and do
not include any increases in the Company's estimate of its IBNR as a result of
future Montrose activity that may occur since it is not possible to segregate
the Company's IBNR reserve estimates between Montrose and non-Montrose claims.

It is current industry practice for insurance companies to share in the
loss and LAE associated with construction defect cases which extend over
multiple insurance contracts written by multiple insurance companies. Insurance
companies that share in these Montrose claims are jointly and severally liable
with regard to defense costs. This is typically a limited exposure due to the
number of carriers that are required to participate. In the event that one of
the participating carriers defaults on its defense obligation, it is expected
that the defense costs would be re-apportioned among the remaining carriers.
Insurers are not jointly and severally liable for indemnity costs. However,
pursuant to the 1996 California Court of Appeal decision in Stonewall Insurance
Company vs. City of Palos Verdes Estates, the trial court has discretion to
select the most equitable method of allocation of costs among primary insurers.

Once the Montrose Decision was understood, the Company adjusted its
underwriting guidelines to mitigate the risk. Management believes that the
significant improvement in the results for accident years 1995 and following are
attributed to changes in the Company's underwriting guidelines. The Company also
relies on policy language, developed by the Company and by others, to exclude or
limit coverage. If such language is held by a court to be invalid or
unenforceable it could materially adversely affect the Company's financial
position. Although no assurance can be given, management believes that, based
upon presently available information, it has made an adequate provision for all
liabilities associated with the Montrose Decision.

12
<PAGE> 14

The Company is unaware of any additional or amended legislation which is
pending or contemplated concerning construction defect liability or other laws
which, if adopted, could materially and adversely impact the Company's
operations. See "Business -- Regulation" and "-- Reserves."

HOLDING COMPANY STRUCTURE AND RESTRICTIONS ON DIVIDENDS

As a holding company with no significant business operations of its own,
the Group relies on dividends from its subsidiaries, which are domiciled in
California, as the principal source of cash to meet its obligations, including
the payment of principal and interest on its debt obligations and the payment of
dividends to stockholders. California law places significant restrictions on the
ability of FPIC to pay dividends to the Group. In particular, all dividends from
FPIC require prior notice to the DOI. All "extraordinary" dividends must be
approved in advance by the DOI. A dividend is deemed "extraordinary" if, when
aggregated with all other dividends paid within the preceding 12 months, the
dividend exceeds the greater of (i) FPIC's statutory net income (excluding
unrealized capital gains) for the preceding calendar year or (ii) 10% of surplus
as regards policyholders as of the preceding December 31st. Additionally, unless
approved in advance by the DOI, no dividend may be paid by FPIC except from
unassigned funds or earned surplus. The DOI may disallow the payment of any
dividend if, in the DOI's opinion, the payment would in any way violate the
California Insurance Code (the "Code") or be hazardous to policyholders,
creditors or the public. Based on these limitations and statutory results, as of
December 31, 1997, the maximum dividend that could be paid by FPIC to the Group
in 1998, without obtaining prior regulatory approval from the DOI, would be
$1,426,000. A dividend in the amount of $300,000 was declared and paid on
January 1, 1998. Additionally, a dividend in the amount of $200,000 was declared
and paid on July 1, 1998. Both dividends were used to fund the debt service on
the Group's Senior Notes. There can be no assurance that dividends will be
declared by the Group in the future or that any required approval for payment of
dividends by FPIC will be obtained from the applicable state insurance
departments. See "Dividend Policy," "Business -- Regulation" and "-- Regulation
of Dividends and Other Payments from Insurance Subsidiaries."

Income from FPIA is not subject to dividend restrictions; however, the
income generated by FPIA has been de minimis in the past and is expected to be
de minimis for several years. See "Business -- Financial Pacific Insurance
Agency."

RELIANCE ON TECHNOLOGY

The Company relies heavily on computers in all aspects of its business
including rating, issuing and billing policies. In the event of a disaster which
results in the loss of some or all of the Company's computer hardware and/or
software, the Company would incur significant recovery expense. While the
Company purchases insurance against such an event, there can be no assurance
that the Company would be fully compensated for the costs incurred in recovering
to full operations, and as such, an event of this nature could materially
adversely affect the Company's short-term operating results.

CONTROL OF COMPANY

After the completion of this Offering, the directors and executive officers
and certain existing investors who beneficially own more than 5% of the
outstanding capital stock will still beneficially own approximately 47% of the
Company's outstanding Common Stock. Such stockholders will have power to
influence the Company, to select the Board of Directors and to approve any
action requiring stockholder approval, including adopting amendments to the
Company's Certificate of Incorporation and approving or disapproving mergers or
sales of all the assets of the Company. As long as such stockholders maintain
their ownership of the Company's Common Stock, third parties will have a
difficult time obtaining control of the Company through purchases of the Common
Stock in the open market. "See Principal and Selling Stockholders," "Certain
Transactions" and "Description of Capital Stock."

POTENTIAL ANTI-TAKEOVER EFFECT OF REGULATION AND CERTAIN CHARTER PROVISIONS

Under the terms of California law governing insurance holding companies,
any person or entity desiring to acquire 10% or more of the Company's
outstanding voting securities is required to obtain prior approval of the

13
<PAGE> 15

DOI. In addition, certain other factors may have the effect of deterring,
delaying, or preventing a change in control of the Company without further
action by the stockholders; may discourage bids for the Common Stock at a
premium over the market price of the Common Stock; and may adversely affect the
market price of, and the voting and other rights of the holders of, Common
Stock. These factors include the absence of cumulative voting and the ability of
the Company's directors to issue "blank check" preferred stock and provisions of
Delaware law. See "Business -- Regulation -- Insurance Regulation Concerning
Change or Acquisition of Control" and "Description of Capital Stock."

ABSENCE OF PRIOR PUBLIC MARKET

Prior to this Offering, there has been no public market for the Common
Stock. There can be no assurance that an active trading market will develop or
continue after this Offering. The initial public offering price has been
determined by negotiations between the Company and the representative of the
Underwriters and may not be indicative of the market price for the Common Stock
after this Offering. See "Underwriting" for a discussion of the factors
considered in determining the initial public offering price. The market price of
the Common Stock could be subject to significant fluctuations in response to
variations in quarterly and yearly operating results, general trends in the
Company's industry, the overall performance of the stock market and other
factors. See "Underwriting."

USE OF PROCEEDS

Of the net proceeds to the Company from this Offering, estimated to be
$17.7 million (or approximately $21.2 million if the Underwriters'
over-allotment option is exercised in full), $16.0 million will be contributed
by the Company to the capital of FPIC, thereby increasing its capacity to write
additional premiums and retain a greater percentage of direct premiums written
which has historically been ceded to reinsurers. Simultaneously with this
Offering, all of the outstanding Senior Note Warrants will be exercised and the
aggregate exercise price of $3.3 million will be offset against the $5 million
outstanding principal balance of the Senior Notes. The balance of the Senior
Notes, $1.7 million, will be paid with a portion of the proceeds from this
Offering. The Senior Notes bear interest at an annual rate of 12% and mature on
January 1, 2001. The remainder of the estimated net proceeds, if any, is
expected to be utilized by the Company for general corporate purposes including
expansion of its business. The portion of the proceeds contributed to FPIC will
initially be invested in short-term, investment grade, interest-bearing
securities pending orderly reinvestment in accordance with the Company's
investment policies. See "Business -- Regulation -- Limits on Writing Business"
and "Business -- Investments."

The Company will not receive any proceeds from the sale of the shares by
the Selling Stockholders.

DIVIDEND POLICY

The Company does not anticipate paying cash dividends on its Common Stock
in the foreseeable future, but instead intends to retain its earnings in order
to fund the continued development and growth of the Company's business.

All dividends from FPIC require prior notice to the DOI. All
"extraordinary" dividends must be approved in advance by the DOI. A dividend is
deemed "extraordinary" if, when aggregated with all other dividends paid within
the preceding 12 months, the dividend exceeds the greater of: (i) FPIC's
statutory net income (excluding unrealized capital gains) for the preceding
calendar year or (ii) 10% of surplus as regards policyholders as of the
preceding December 31st. Additionally, unless approved in advance by the DOI, no
dividend may be paid by FPIC except from unassigned funds or earned surplus. The
DOI may disallow the payment of any dividend if, in the DOI's opinion, the
payment would in any way violate the Code or be hazardous to policyholders,
creditors or the public. See "Business -- Regulation of Dividends and Other
Payments from Insurance Subsidiaries."

For further discussion of these restrictions, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources," "Business -- Regulation" and Notes to Consolidated Financial
Statements.

14
<PAGE> 16

DILUTION

At June 30, 1998, the outstanding shares of Common Stock had a pro forma
net tangible book value per share of $6.57. Assuming the 2,000,000 shares of
Common Stock offered by the Company hereby had been sold at June 30, 1998 and
without reflecting the effect of operations subsequent to that date, the net
tangible book value per share for all outstanding shares of Common Stock (after
deducting estimated offering expenses, including underwriting discount) would
have been $7.51. This represents an immediate increase in net tangible book
value of $0.94 per share to existing stockholders and an immediate dilution of
$2.49 per share to new investors, as illustrated in the following table:

<TABLE>
<S> <C> <C>
Estimated public offering price per share................... $10.00
------
Pro forma net tangible book value per share before
offering............................................... 6.57
Increase per share attributable to new investors.......... 0.94
------
Pro forma net tangible book value per share after
offering.................................................. 7.51
------
Immediate dilution to new investors......................... $ 2.49
------
</TABLE>

If the Underwriters exercise in full their right to purchase an additional
375,000 shares of Common Stock to cover over-allotments, the net tangible book
value after the Offering would be $7.64 per share of Common Stock, which would
result in a dilution to public investors of $2.36 per share.

The following table sets forth on a pro forma basis as of June 30, 1998,
the number of shares of Common Stock purchased from the Company, the total
consideration paid, and the average price per share paid by the existing
stockholders and by purchasers of the shares of Common Stock offered hereby
(giving effect to the conversion of Series A Stock outstanding as of June 30,
1998 into 1,735,251 shares of Common Stock, the exercise of Warrants to purchase
593,691 shares of Common Stock and the sale of 2,000,000 shares by the Company
at an initial public offering price of $10.00 per share, before deducting the
underwriting discount and offering expenses):

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- --------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ---------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing Stockholders........ 2,816,897 58.5% 8,286,451 29.3% $ 2.94
New Public Investors......... 2,000,000 41.5% 20,000,000 70.7% $10.00
--------- ----- ---------- -----
Total.............. 4,816,897 100.0% 28,286,451 100.0%
========= ===== ========== =====
</TABLE>

The information set forth above does not give effect to the potential
exercise of options to purchase an aggregate of 37,466 shares and Warrants to
purchase 153,525 shares of Common Stock as of June 30, 1998 at exercise prices
ranging from $2.54 to $4.82 per share to certain individuals, including certain
of the Company's officers, employees and former employees. Some of these options
can be exercised immediately. Purchasers of shares of Common Stock offered
hereby will incur additional dilution to the extent outstanding stock options
are exercised. See "Management."

15
<PAGE> 17

CAPITALIZATION

The following table sets forth the consolidated short-term debt and
capitalization of the Company as of June 30, 1998, and as adjusted to reflect
the restatement of the Company's Certificate of Incorporation to increase the
authorized number of shares of Preferred Stock and Common Stock, effective April
14, 1998, a 394.375 for 1 split of the Common Stock effective on April 14, 1998,
the sale by the Company of 2,000,000 shares of Common Stock to the public at an
assumed initial offering price of $10.00 per share, and the application of the
net proceeds of $17.7 million therefrom. See "Use of Proceeds."

<TABLE>
<CAPTION>
JUNE 30, 1998
--------------------------
ACTUAL AS ADJUSTED
----------- -----------
<S> <C> <C>
Short-term debt............................................. $ -- $ --
=========== ===========
Long-term debt.............................................. $ 4,987,134 $ --
----------- -----------
Stockholders' equity:
Preferred stock, $.001 par value, authorized 2,000,000
shares; issued and outstanding 4,400 shares (no shares
as adjusted)........................................... 5 --
Common stock, $.001 par value, authorized 7,500,000 shares
issued and outstanding 487,955 shares (4,816,897 shares
as adjusted)(1)........................................ 488 4,817
Additional paid-in capital................................ 4,954,508 25,981,184
Net unrealized gain on available for sale securities, net
of deferred federal income taxes....................... 103,603 103,603
Retained earnings......................................... 10,105,453 10,105,453
----------- -----------
Total stockholders' equity........................ 15,164,057 36,195,057
=========== ===========
Total capitalization.............................. $20,151,191 $36,195,057
=========== ===========
</TABLE>

16
<PAGE> 18

SELECTED CONSOLIDATED FINANCIAL DATA

The following table presents selected consolidated financial data of the
Company at the dates and for the periods indicated. All information is presented
in accordance with GAAP, except for the statutory property/ casualty ratios and
surplus as regards policyholders, which are presented in accordance with SAP.
The financial data is derived from the consolidated financial statements and
accounting records of the Company. The consolidated financial statements as of
December 31, 1996 and 1997 and for each of the years in the three-year period
ended December 31, 1997 and the report thereon are included elsewhere in the
Prospectus and have been audited by KPMG Peat Marwick, LLP, independent
certified public accountants. The selected data presented below as of and for
the six months ended June 30, 1997 and 1998 is derived from the unaudited
consolidated financial statements of the Company. The information furnished with
respect to the unaudited periods reflects all adjustments which, in the opinion
of management, are necessary for a fair presentation of results for the interim
periods. All such adjustments are, in the opinion of management, of a normal and
recurring nature. The results for the six months ended June 30, 1998 are not
necessarily indicative of the results to be expected for the year ending
December 31, 1998. The industry combined ratio data presented under "Statutory
Ratios" is unaudited. The selected consolidated financial data set forth below
is qualified by reference to, and should be read in conjunction with, the
consolidated financial statements of the Company and notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," appearing elsewhere in this Prospectus.

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
--------------------------------------------------- -------------------
1993(1) 1994 1995 1996 1997 1997 1998
------- ------- -------- -------- --------- -------- --------
(In thousands, except per share data and ratios)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Direct premiums written............... $ 6,094 $15,072 $ 24,695 $ 31,927 $ 39,512 $ 19,459 $ 22,059
Premiums ceded........................ (2,345) (5,785) (10,653) (13,674) (12,576) (6,172) (6,809)
------- ------- -------- -------- --------- -------- --------
Net premiums written............ 3,749 9,287 14,042 18,253 26,936 13,287 15,250
------- ------- -------- -------- --------- -------- --------
Net premiums earned............. 2,380 6,701 12,060 14,987 22,854 10,130 13,831
Commissions........................... 159 213 105 628 709 355 393
Investment income, net of expenses.... 523 750 1,028 1,449 1,720 831 1,053
Net realized gains (losses) on sales
of investments...................... 68 (246) 466 52 (46) (63) 32
Other income, net..................... (107) 502 578 547 800 371 456
------- ------- -------- -------- --------- -------- --------
Total revenues...................... 3,023 7,920 14,237 17,663 26,037 11,624 15,765
Expenses:
Losses and loss adjustment expenses... (273) 2,944 6,325 9,750 12,748 5,609 7,183
Policy acquisition costs.............. 610 1,493 3,957 4,785 7,440 3,397 4,818
Contingent ceding commission.......... -- (422) (1,246) (3,222) (1,511) (1,380) (319)
General operating costs............... 731 2,297 1,712 1,929 2,443 1,366 897
Agency expenses....................... 136 253 145 688 721 350 407
Interest expense...................... 21 113 128 693 617 315 303
------- ------- -------- -------- --------- -------- --------
Total expenses...................... 1,225 6,678 11,021 14,623 22,458 9,657 13,289
------- ------- -------- -------- --------- -------- --------
Income before taxes................... 1,798 1,242 3,216 3,040 3,579 1,967 2,476
------- ------- -------- -------- --------- -------- --------
Income tax provision............ 588 465 1,066 1,037 1,237 683 852
------- ------- -------- -------- --------- -------- --------
Net income...................... $ 1,210 $ 777 $ 2,150 $ 2,003 $ 2,342 $ 1,284 $ 1,624
======= ======= ======== ======== ========= ======== ========
EARNINGS PER SHARE(2):
Basic............................... $ 5.41 $ 1.60 $ 4.42 $ 4.12 $ 4.82 $ 2.64 $ 3.33
Diluted............................. $ 1.22 $ 0.40 $ 0.94 $ 0.69 $ 0.79 $ 0.43 $ 0.55
Weighted average diluted shares..... 988 1,956 2,292 2,901 2,970 2,971 2,975
GAAP RATIOS(3):
Loss ratio.......................... (7.0)% 43.9% 52.4% 65.1% 55.8% 55.4% 51.9%
Expense ratio....................... 56.1 52.0 36.6 23.3 36.3 33.5 38.9
------- ------- -------- -------- --------- -------- --------
Combined ratio...................... 49.1% 95.9% 89.0% 88.4% 92.1% 88.9% 90.8%
======= ======= ======== ======== ========= ======== ========
STATUTORY RATIOS(3)(6):
Loss ratio.......................... (7.0)% 43.9% 52.4% 65.1% 55.8% 55.4% 51.9%
Expense ratio....................... 42.6 51.5 36.9 25.2 36.5 33.7 38.3
------- ------- -------- -------- --------- -------- --------
Combined ratio...................... 35.6% 95.4% 89.3% 90.3% 92.3% 89.1% 90.2%
======= ======= ======== ======== ========= ======== ========
Industry combined ratio(4).......... 112.2% 110.1% 110.5% 111.0% 101.0% -- --
</TABLE>

17
<PAGE> 19

<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
----------------------------------------------- -----------------
1993 1994 1995 1996 1997 1997 1998
------- ------- ------- ------- ------- ------- -------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total cash and investments...... $15,203 $13,530 $23,608 $24,543 $30,609 $27,912 $37,551
Total assets.................... 24,839 31,308 47,339 54,684 65,893 61,647 77,563
Unpaid losses and loss
adjustment expenses........... 7,125 10,141 12,013 13,944 19,592 16,480 23,091
Total debt(5)................... 1,633 1,225 5,901 5,479 4,985 4,982 4,987
Stockholders' equity............ 5,410 6,908 9,142 10,615 13,398 11,878 15,164
OTHER DATA:
Book value per common
share(2)...................... $ 2.81 $ 3.11 $ 4.43 $ 4.95 $ 5.94 $ 5.40 $ 6.57
Surplus as regards
policyholders(5)(6)........... $ 5,890 $ 5,773 $12,387 $13,788 $14,262 $12,859 $14,719
Underwriting profit(7).......... 1,312 389 1,585 1,745 1,734 1,138 1,252
</TABLE>

- ---------------
(1) Effective November 12, 1993, the Group completed the acquisition of FPIC and
FPIA pursuant to the Stock Purchase Agreement dated June 2, 1993. Because
management of the Group had effective control of FPIC and FPIA as of May 26,
1993, the acquisition has been accounted for as of that date. Accordingly,
the 1993 consolidated financial statements include results of operations for
the period of May 26, 1993 through December 31, 1993.

(2) All periods adjusted to reflect a 394.375 for 1 stock split effective April
14, 1998. Book value per common share is based on stockholders' equity
adjusted for anticipated proceeds from the exercise of the Senior Note
Warrants and outstanding shares as of the calculation date. Outstanding
shares include Common Stock issued and outstanding as of the calculation
date as well as Common Stock issued in conjunction with the anticipated
conversion of Series A Stock and exercise of Senior Note Warrants.

(3) During 1993, in conjunction with the acquisition, management determined that
the Company's IBNR reserves were redundant and recorded a reserve reduction
of $2.4 million.

(4) Source: "Best's Insurance Reports Property/Casualty United States, 1997
Edition." The 1997 ratio is based on A.M. Best's estimate contained in the
January 1998, "Review Preview -- Property/Casualty." A comparison of a
company's combined ratio with the industry combined ratio does not
necessarily indicate that a company has performed well or poorly as compared
with its peers.

(5) Effective December 28, 1995, the Company issued $5 million in Senior Notes.
The Senior Notes were issued in conjunction with the Senior Note Warrants.
The proceeds from the issuance of the Senior Notes were contributed to
FPIC's capital.

(6) Surplus as regards policyholders is derived from financial statements
prepared in accordance with SAP prescribed or permitted by the DOI, a
comprehensive basis of accounting other than GAAP. Statutory financial
information, and the ratios derived from such information, should not be
considered an alternative to information derived from financial position,
results of operations or cash flows determined in accordance with GAAP.

(7) Underwriting profit represents the difference between premiums earned and
underwriting expenses. Underwriting profit may not provide an accurate
comparison among companies because it is not necessarily computed
identically by all companies. The use of such information is intended only
to supplement the conventional income statement presentation and is not to
be considered as an alternative to net income, cash flows or any other
indicator of the Company's operating performance which is presented in
accordance with GAAP.

18
<PAGE> 20

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW

The Group is a Delaware holding company formed in 1993 for the purpose of
acquiring 100% of the outstanding shares of M.L. Oates Insurance Company
("Oates"), a Sacramento-based property/casualty insurance company domiciled in
California, and its affiliated agency. The name of the insurance company was
changed to Financial Pacific Insurance Company following the acquisition in
1993. FPIC underwrites primarily CMP policies through its office in Rocklin,
California, which is approximately 20 miles northeast of Sacramento. FPIC also
underwrites commercial automobile insurance as a companion coverage to its CMP
business, and surety bonds. The Group also owns FPIA, an insurance agency
acquired in 1993 and renamed in 1995 that specializes in the direct mail
distribution of license and permit surety bonds in 36 states on behalf of Markel
Corporation.

The Company markets commercial property/casualty insurance through 234
independent insurance agents, as of June 30, 1998, located primarily throughout
northern and central California. The Company believes its relationship with
these agents allows it to provide ongoing and attentive service to its targeted
customer base -- small to medium-sized commercial establishments. Management
believes this market has been overlooked by many of the larger insurance
companies as a result of the lower premiums per policy and, in some cases, the
remote locations of its clients and the agents.

The following table sets forth the Company's direct premiums written, net
premiums earned and losses and LAE ratios by line of business and combined
ratios since 1993.

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
----------------------------------------------- -----------------
1993(1) 1994 1995 1996 1997 1997 1998
------- ------- ------- ------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
DIRECT PREMIUMS WRITTEN:
CMP-Property................... $1,190 $ 1,570 $ 2,668 $ 3,728 $ 4,490 $ 2,105 $ 2,408
CMP-Liability.................. 6,270 9,435 14,167 17,767 22,766 11,008 13,110
Commercial Auto Liability...... 1,037 2,678 4,982 6,414 6,825 3,503 3,504
Commercial Auto Physical 387 683 1,182 1,748 2,244 1,114 1,266
Damage......................
Inland Marine.................. 398 645 1,142 1,536 1,884 912 1,123
Surety......................... 133 47 500 589 1,129 737 578
Fidelity....................... 4 14 54 145 174 80 70
------ ------- ------- ------- ------- ------- -------
Total.................. $9,419 $15,072 $24,695 $31,927 $39,512 $19,459 $22,059
====== ======= ======= ======= ======= ======= =======
</TABLE>

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
----------------------------------------------- -----------------
1993(1) 1994 1995 1996 1997 1997 1998
------- ------- ------- ------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
NET PREMIUMS EARNED:
CMP-Property................... $ 201 $ 298 $ 548 $ 882 $ 1,134 $ 518 $ 630
CMP-Liability.................. 2,444 4,652 7,180 9,261 14,872 6,412 9,505
Commercial Auto Liability...... 453 1,037 2,973 3,126 4,919 2,249 2,801
Commercial Auto Physical 233 462 948 892 768 449 324
Damage......................
Inland Marine.................. 43 136 275 379 486 226 278
Surety......................... 128 108 115 353 517 192 205
Fidelity....................... 2 8 21 94 158 84 88
------ ------- ------- ------- ------- ------- -------
Total.................. $3,504 $ 6,701 $12,060 $14,987 $22,854 $10,130 $13,831
====== ======= ======= ======= ======= ======= =======
</TABLE>

19
<PAGE> 21

<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------------ ---------------
1993(1)(2) 1994 1995 1996 1997 1997 1998
---------- ---- ---- ---- ----- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C>
LOSS AND LAE RATIOS:
CMP-Property....................... 21.4% 43.0% 70.8% 38.5% 107.1% 71.0% 104.0%
CMP-Liability...................... (10.4) 46.8 45.5 59.1 50.4 55.6 46.4
Commercial Auto Liability.......... 21.0 43.8 62.1 97.2 66.2 59.7 61.7
Commercial Auto Physical Damage.... 18.5 32.3 72.0 82.1 54.7 39.4 75.3
Inland Marine...................... 48.8 33.1 50.9 25.1 53.5 42.5 44.6
Surety............................. (2.3) (7.4) 2.6 19.5 14.5 20.3 9.3
Fidelity........................... --(3) 0.0 0.0 0.0 19.0 22.6 3.4
----- ---- ---- ---- ----- ---- -----
Total...................... (7.0%) 43.9% 52.4% 65.1% 55.8% 55.4% 51.9%
===== ==== ==== ==== ===== ==== =====
STATUTORY COMBINED RATIOS:
Loss Ratio(4)........................ (7.0%) 43.9% 52.4% 65.1% 55.8% 55.4% 51.9%
Expense Ratio........................ 42.6 51.5 36.9 25.2 36.5 33.7 38.3
----- ---- ---- ---- ----- ---- -----
Combined Ratios............ 35.6% 95.4% 89.3% 90.3% 92.3% 89.1% 90.2%
===== ==== ==== ==== ===== ==== =====
</TABLE>

- ---------------
(1) Although the Group assumed control of FPIC's operations effective May 26,
1993, for comparison purposes the above table reflects underwriting results
for the year ended December 31, 1993.

(2) During 1993, in conjunction with the acquisition, management determined that
the Company's IBNR reserves were redundant and recorded a reserve reduction
of $2.4 million.

(3) Not meaningful based on immateriality of fidelity earned premium of $2,000
in 1993.

(4) The increase in the loss ratio from 52.4% in 1995 to 65.1% in 1996 resulted
primarily from the effects of the Montrose Decision in July 1995. As a
result of the Montrose Decision, the Company retroactively incurred
construction defect claims for which, prior to this decision, there would
have been no liability. The Company has subsequently revised its
underwriting practices in response to the Montrose Decision. See "Risk
Factors -- Regulation, Pending Legislation and Case Law."

Because insurance companies derive revenues (and incur losses) from
investing activities as well as underwriting activities, an underwriting loss in
a period does not necessarily preclude profitability for that period. A combined
ratio of under 100% indicates an underwriting profit. A combined ratio in excess
of 100% indicates an underwriting loss. Persistent underwriting losses reduce
profitability and, when coupled with investment losses in any period, result in
negative earnings which reduce the insurer's capital and therefore its ability
to underwrite further business.

RESULTS OF OPERATIONS

Six months ended June 30, 1997 versus six months ended June 30, 1998

Direct premiums written. Direct premiums written for the six months ended
June 30, 1997 and 1998 were $19.5 million and $22.1 million, respectively,
representing an increase of 13%. Direct premiums written increased primarily due
to the attraction of a larger percentage of business from each of the Company's
existing agents and the appointment of new agents. During the six months ended
June 30, 1998, total production from agents appointed as of June 30, 1997
increased by approximately 10%. The number of appointed agents also increased by
approximately 11% from 211 as of June 30, 1997 to 234 as of June 30, 1998.

Premiums ceded. Premiums ceded for the six months ended June 30, 1997 and
1998 were $6.2 million and $6.8 million, respectively, representing an increase
of 10%. Premiums ceded as a percentage of direct premiums written decreased from
31.7% in 1997 to 30.9% in 1998. The decrease in premiums ceded as a percentage
of direct premiums written was due to changes in FPIC's reinsurance structure.
Effective January 1, 1997, FPIC increased its retention on casualty lines of
business from $100,000 to $250,000 per

20
<PAGE> 22

occurrence in order to retain more of its underwriting income and reduce the
underwriting income ceded to reinsurers. See further discussion of the
reinsurance structure in "Business -- Reinsurance."

Net premiums earned. Net premiums earned for the six months ended June 30,
1997 and 1998 were $10.1 million and $13.8 million, respectively, representing
an increase of 37%. The increase in net premiums earned is reflective of the
growth in direct premiums written.

Commissions. Commissions earned for the six months ended June 30, 1997 and
1998 were $355,000 and $393,000, respectively, representing an increase of 11%.
The increase reflects the continued growth of FPIA premium production.

Investment income. Investment income for the six months ended June 30, 1997
and 1998 was $831,000 and $1,053,000, respectively, representing an increase of
27%. The increase in investment income is consistent with the 28% increase in
the average invested assets balance from $25.3 million for the six months ended
June 30, 1997 to $32.3 million for the six months ended June 30, 1998. The
growth in invested assets reflects the investment of cash flows generated by
operations. The weighted average annualized investment yield was 6.6% for 1997
and 6.5% for 1998.

Net realized gains (losses) on sales of investments. Net realized gains
(losses) on sales of investments were a net loss of $63,000 and a net gain of
$32,000 for the six months ended June 30, 1997 and 1998, respectively.

Other income, net. Other income, net for the six months ended June 30, 1997
and 1998 was $371,000 and $456,000, respectively. Other income, net consists
primarily of policyholder service fees related to the direct bill installment
payment plan. The increase in other income, net is due primarily to the increase
in direct premiums written as approximately 80% of policies issued are on the
direct bill installment pay plan.

Losses and loss adjustment expenses. Losses and LAE decreased as a
percentage of net premiums earned from 55.4% to 51.9% for the six months ended
June 30, 1997 and 1998, respectively. The decreased loss ratio is due in part to
a reduced "Montrose effect" as compared to 1997. The "Montrose effect" relates
to the Montrose Decision and is discussed in detail at "Risk Factors -- Adequacy
of Loss Reserves," "-- Regulations, Pending Legislation and Case Law" and
"Business -- Reserves." The reduced loss ratio is also attributed to the
formation in 1997 of in-house legal defense capability and the subsequent
assignment of new legal defense work, as well as reassignment of open files
previously handled by external attorneys.

Policy acquisition costs. Policy acquisition costs increased as percentage
of net premiums earned from 33.5% to 34.8% for the six months ended June 30,
1997 and 1998, respectively. The increase is due primarily to the bonus
commission earned by agents which increased from $330,000 in 1997 to $454,000 in
1998. Additionally, the increase in policy acquisition costs was due in part to
the decrease in ceding commission as a percentage of direct premiums written
from 11.9% to 11.4% for the six months ended June 30, 1997 and 1998,
respectively. The decrease in ceding commission was consistent with the decrease
in premiums ceded as a percentage of direct premiums written.

Contingent ceding commission. Contingent ceding commission decreased from
$1,380,000 or 22.4% of premiums ceded for the six months ended June 30, 1997 to
$319,000 or 4.7% of premiums ceded for the six months ended June 30, 1998. On
certain of the Company's reinsurance contracts, the reinsurers allow the Company
to participate, within predetermined limits, in the profits of the ceded
business. The Company records an estimate of its ultimate participation in the
profits, if any, through increases or decreases to contingent ceding commission.
The decrease in 1998 is attributable to loss development on prior years and a
decrease in the ceded premium subject to adjustment as a result of the Company
increasing its retention on the first casualty excess of loss treaty from
$100,000 to $250,000 effective January 1997.

General operating costs. General operating costs decreased as a percentage
of net premiums earned from 13.5% to 6.5% for the six months ended June 30, 1997
and 1998, respectively. The decrease is attributed primarily to the growth in
net earned premium. Additionally, during the six months ended June 30, 1997 the
Company incurred approximately $200,000 in non-recurring costs primarily related
to software/system recovery expenses and relocation of the Company headquarters.

21
<PAGE> 23

Agency expenses. Agency expenses for the six months ended June 30, 1997 and
1998 were $350,000 and $407,000, respectively, representing a 16% increase. The
increase is consistent with the growth in commissions over the same period.

Interest expense. Interest expense decreased from $315,000 to $303,000 for
the six months ended June 30, 1997 and 1998, respectively. The decrease in
interest expense related to the repayment of the $500,000 bank line of credit in
April 1997.

Income before federal income taxes. Income before federal income tax
increased by 26% from $1,967,000 to $2,476,000 for the six months ended June 30,
1997 and 1998, respectively.

Net income. Net income increased from $1.3 million or $0.43 per diluted
share for the six months ended June 30, 1997 to $1.6 million or $0.55 per
diluted share, for the six months ended June 30, 1998, representing an increase
of 26%.

Year ended December 31, 1996 versus December 31, 1997

Direct premiums written. Direct premiums written for the years ended
December 31, 1996 and 1997 were $31.9 million and $39.5 million, respectively,
representing an increase of 24%. Direct premiums written increased by the
attraction of a larger percentage of business from each of the Company's
existing agents, appointment of new agents and continued expansion of specialty
program business (i.e., bowling centers, refuse haulers, farm labor contractors
and restaurants). During 1997, total production from agents appointed as of
December 31, 1996 increased by approximately 20%. The number of appointed
independent agents also increased by approximately 15% from 198 as of December
31, 1996 to 227 as of December 31, 1997. The specialty program business direct
premiums written increased from $6.2 million in 1996 to $8.0 million in 1997.

Premiums ceded. Premiums ceded for the years ended December 31, 1996 and
1997 were $13.7 million and $12.6 million, respectively, representing a decrease
of 8%. Premiums ceded as a percentage of direct premiums written decreased from
42.8% in 1996 to 31.8% in 1997, as FPIC changed its reinsurance structure to
increase its retention. As discussed further in "Business -- Reinsurance,"
effective July 1, 1996, FPIC increased its retention on property lines of
business from $300,000 to $600,000 and effective January 1, 1997, FPIC increased
its retention on casualty lines of business from $100,000 to $250,000. FPIC
increased its retention in order to retain more of its underwriting income and
reduce the underwriting income ceded to reinsurers.

Net premiums earned. Net premiums earned for the years ended December 31,
1996 and 1997 were $15.0 million and $22.9 million, respectively, representing
an increase of 52%. The increase in net premiums earned is reflective of the
growth in direct premiums written and reduction in premiums ceded.

Commissions. Commissions earned for the years ended December 31, 1996 and
1997 were $628,000 and $709,000, respectively, representing an increase of 13%.
The increase reflects the continued growth of FPIA premium production.

Investment income. Investment income for the years ended December 31, 1996
and 1997 was $1.4 million and $1.7 million, respectively, representing an
increase of 19%. The increase in investment income is consistent with the 16%
increase in the average invested assets balance from $23.4 million in 1996 to
$27.0 million in 1997. The growth in invested assets reflects the investment of
cash flows generated by operations. The weighted average investment yield also
increased from 6.2% for 1996 to 6.4% for 1997.

Net realized gains (losses) on sales of investments. Net realized gains
(losses) on sales of investments were a $52,000 net realized gain and a
($46,000) net realized loss for the years ended December 31, 1996 and 1997,
respectively.

Other income (expense). Other income (expense) for the years ended
December 31, 1996 and 1997 was $547,000 and $800,000, respectively. Other income
(expense) consists primarily of policyholder service fees related to the direct
bill installment payment plan. The increase in other income (expense) is due

22
<PAGE> 24

primarily to the increase in direct premiums written as approximately 80% of the
policies issued are on the direct bill installment pay plan.

Losses and loss adjustment expenses. Losses and LAE decreased as a
percentage of net premiums earned from 65.1% in 1996 to 55.8% in 1997. The
decreased loss ratio is due in part to a reduced "Montrose effect" as compared
to 1996. The net impact to the Company was the creation of a retroactive
liability for construction defect claims previously denied. The "Montrose
effect" relates to the Montrose Decision and is discussed in detail at "Risk
Factors -- Adequacy of Loss Reserves," "-- Regulations, Pending Legislation and
Case Law" and "Business -- Reserves." The reduced loss ratio is also attributed
in part to the formation in 1997 of in-house legal defense capability and the
subsequent assignment of all new legal defense work, as well as reassignment of
open files previously handled by external attorneys.

Policy acquisition costs. Policy acquisition costs increased as a
percentage of net premiums earned from 31.9% in 1996 to 32.6% in 1997. The
increase is due primarily to the bonus commission earned by agents which
increased from $431,000 in 1996 to $639,000 in 1997. Agents earn a bonus
commission ranging from 1.5% to 4.0% based on their annual production volume.

Contingent ceding commission. Contingent ceding commission decreased from
$3.2 million, or 23.6% of premiums ceded in 1996, to $1.5 million, or 12% of
premiums ceded in 1997. On certain of the Company's reinsurance contracts, the
reinsurers allow the Company to participate, within predetermined limits, in the
profits of the ceded business. The Company records an estimate of its ultimate
participation in the profits, if any, through increases or decreases to
contingent ceding commission. Approximately one-half of the decrease in 1997 is
attributable to loss development on prior years. The remaining decrease is
largely attributable to a decrease in the ceded premium subject to adjustment as
a result of the Company increasing its retention on the first casualty excess of
loss treaty from $100,000 to $250,000 effective January 1997.

General operating costs. General operating costs decreased as a percentage
of net premiums earned from 12.9% in 1996 to 10.7% in 1997. The decrease is
attributed to the 52% increase in net premiums earned exceeding the 27% increase
in general operating expenses from 1996 to 1997, respectively. During 1997 the
Company incurred approximately $300,000 in non-recurring costs primarily related
to software/system recovery expenses and relocation of the Company headquarters.

Agency expenses. Agency expenses for the years ended December 31, 1996 and
1997 were $688,000 and $721,000, respectively, representing a 5% increase. The
increase is consistent with the growth in commissions over the same period.

Interest expense. Interest expense decreased from $693,000 to $617,000 for
the years ended December 31, 1996 and 1997, respectively. The decrease in
interest expense related to reductions in the outstanding debt due to the
prepayment of the original seller financing debt in May 1996 and the payoff of
the $500,000 bank line of credit in April 1997.

Income before federal income taxes. Income before federal income tax
increased by 18% from $3.0 million in 1996 to $3.6 million in 1997.

Net income. Net income increased from $2.0 million, or $0.69 per diluted
share, for the year ended December 31, 1996 to $2.3 million, or $0.79 per
diluted share, for the year ended December 31, 1997, representing an increase of
17%.

Year ended December 31, 1995 versus December 31, 1996

Direct premiums written. Direct premiums written for the years ended
December 31, 1995 and 1996 were $24.7 million and $31.9 million, respectively,
representing a 29% increase. Direct premiums written increased due to the
attraction of a larger percentage of business from each of the Company's agents,
appointment of new agents and expansion of the specialty program business.
During 1996, the total production increased by approximately 25% for agents who
were appointed as of December 31, 1995. The number of appointed agents also
increased by approximately 13% from 176 as of December 31, 1995 to 198 as of
December 31, 1996. Additionally, the Company continued to diversify its
geographic and portfolio risk by expanding its operating territory and adding
specialty program business such as refuse haulers, farm labor
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contractors, bowling centers and restaurants. The specialty programs accounted
for direct premiums written of $4.7 million in 1995 and $6.2 million in 1996.

Premiums ceded. Premiums ceded for the years ended December 31, 1995 and
1996 were $10.7 million and $13.7 million, respectively, representing an
increase of 28%. Premiums ceded as a percentage of direct premiums written
decreased from 43.1% in 1995 to 42.8% in 1996 as FPIC changed its reinsurance
structure to increase its retention. As discussed further in
"Business -- Reinsurance," effective July 1, 1996, FPIC increased its retention
on property lines of business from $300,000 to $600,000 to retain more of its
underwriting income and reduce the underwriting income ceded to reinsurers.

Net premiums earned. Net premiums earned for the years ended December 31,
1995 and 1996 were $12.1 million and $15.0 million, respectively, representing
an increase of 24%.

Commissions. Commissions earned for the years ended December 31, 1995 and
1996 were $105,000 and $628,000, respectively. The increase reflects expanded
production of surety premiums by FPIA during 1996. FPIA commenced operations
during 1995.

Investment income. Investment income for the years ended December 31, 1995
and 1996 was $1.0 million and $1.4 million, respectively, representing a 41%
increase. The increase in investment income is due primarily to the investment
of the proceeds from the $5.0 million Senior Notes issuance which occurred on
December 28, 1995. Additionally, invested assets increased from $22.7 million at
December 31, 1995 to $24.0 million at December 31, 1996 due to the investment of
cash flow generated by operations. The average investment yield decreased from
6.6% (adjusted to reflect $5 million in investments purchased on December 29,
1995) in 1995 to 6.2% in 1996 due to declining interest rates.

Net realized gains on sales of investments. Net realized gains on sales of
investments were $466,000 in 1995, as compared to $52,000 in 1996. The increased
realized gains in 1995 resulted from a reclassification of the investment
portfolio from held to maturity to available for sale and the related sale of
certain securities to take advantage of favorable market conditions.

Other income (expense). There was no material change in the amount of other
income from 1995 to 1996.

Losses and loss adjustment expenses. Losses and loss adjustment expenses
increased as a percentage of net premiums earned from 52.4% in 1995 to 65.1% in
1996. The increased loss ratio is due to the "Montrose effect". The net impact
to the Company was the creation of a retroactive liability for construction
defect claims previously denied. The "Montrose effect" relates to the Montrose
Decision which is discussed in detail at "Risk Factors -- Adequacy of Loss
Reserves," "-- Regulations, Pending Legislation and Case Law" and
"Business -- Reserves."

Policy acquisition costs. There was no material change in the relationship
of policy acquisition costs to net premiums earned between 1995 and 1996.

Contingent ceding commission. Contingent ceding commission increased from
$1.2 million or 11.7% of premiums ceded in 1995 to $3.2 million or 23.6% of
premiums ceded in 1996. On certain of the Company's reinsurance contracts, the
reinsurers allow the Company to participate, within predetermined limits, in the
profits of the ceded business. The Company records an estimate of its ultimate
participation in the profits, if any, through increases or decreases to
contingent ceding commission. The increase in contingent ceding commission is
due to loss development on the reinsurance treaties.

General operating costs. General operating costs decreased as a percentage
of net premiums earned from 14.2% in 1995 to 12.9% in 1996. The decrease is
attributed to the 24% increase in net premiums earned exceeding the 13% increase
in general operating costs and expenses from 1995 to 1996.

Agency expenses. Agency expenses for the years ended December 31, 1995 and
1996 were $145,000 and $688,000, respectively. The increase is consistent with
the growth in commissions over the same period.

Interest expense. Interest expense increased from $128,000 to $693,000 for
the years ended December 31, 1995 and 1996, respectively. The increase in
interest expense is due to the issuance of $5.0 million of

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<PAGE> 26

Senior Notes effective December 28, 1995 and is offset in part by the prepayment
of the original seller financing in May 1996.

Income before federal income tax. Income before federal income tax
decreased by 5% from $3.2 million in 1995 to $3.0 million in 1996.

Net income. Net income decreased from $2.1 million, or $0.94 per diluted
share for the year ended December 31, 1995, to $2.0 million, or $0.69 per
diluted share, for the year ended December 31, 1996, representing a decrease of
27%. The Senior Note Warrants issued on December 28, 1995 increased the dilution
of earnings per share in 1996 but had little effect in 1995.

LIQUIDITY AND CAPITAL RESOURCES

Operations

The Company receives substantial cash from premiums, and to a lesser
extent, reinsurance recoverables, investment income and other income. The
principal cash outflows are for the payment of claims, premiums paid to
reinsurers, LAE, policy acquisition costs, operating costs and taxes.
Substantially all of the Company's revenue is received by, and expenses are
incurred on behalf of, FPIC. Net cash provided by operations was $4.4 million
and $7.3 million for the six months ended June 30, 1997 and 1998, respectively,
and $2.5 million and $6.6 million for the years ended December 31, 1996 and
1997, respectively. Amounts due from reinsurers increased 54% from $4.9 million
to $7.5 million as of June 30, 1997 and 1998, respectively, and 54% from $4.0
million to $6.2 million as of December 31, 1996 and 1997, respectively. Such
increases were primarily due to the increase in covered losses and LAE. See
Notes to Consolidated Financial Statements.

Because the Company collects cash now for liabilities that may not require
payment for a number of years, an increase in the Company's direct premiums
written will result in an increase in its cash and investment portfolio. Since
acquiring the Company in 1993, the Company's investment portfolio has increased
substantially. The increase was ratable with the increase in the Company's
direct premiums written.

Investing

Net funds used in investing activities of the Company were $3.1 million and
$5.0 million for the six months ended June 30, 1997 and 1998, respectively, and
$2.5 million and $6.0 million for the years ended December 31, 1996 and 1997,
respectively. These comparative increases were attributable to the investment of
cash provided by operating activities.

The Company maintains a sufficient level of cash and liquid short-term
investments to meet anticipated obligations, including claim payments. As of
June 30, 1998, the Company had cash and short-term investments of approximately
$2.9 million. The Company's remaining investment portfolio on such date
consisted of $34.7 million of fixed maturity securities, which could provide
additional liquidity and cash for operations. All of the Company's investments
are investment grade, short and intermediate-term fixed income securities. See
"Business -- Investments."

Capital Expenditures

During 1996, 1997 and the six months ended June 30, 1998, the Company
purchased approximately $400,000, $700,000 and $330,000, respectively, in
capital equipment. The capital expenditures consisted primarily of computer and
office equipment acquired in conjunction with the upgrade and standardization of
the Company's computer and office equipment and the move to its new headquarters
in Rocklin, California. No significant future capital expenditures are currently
planned.

Financing

Net funds used in financing activities of the Company were $0 for the six
months ended June 30, 1998 and $0.4 and $0.5 million for the years ended
December 31, 1996 and 1997, respectively.

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<PAGE> 27

The Company has a bank line of credit agreement which provides for a
$530,000 credit facility bearing interest (payable monthly) on outstanding
balances at an annual rate of prime plus 1.00%. As of June 30, 1998, $500,000 of
this credit facility was available. The bank line of credit matures on August
30, 1998.

The Company believes its cash resources are adequate to meet its operating
requirements.

Reinsurance

FPIC has quota share reinsurance, excess of loss reinsurance and
semi-automatic facultative reinsurance contracts, under which certain types of
policies are automatically reinsured to a predetermined amount. Due to these
reinsurance agreements, the maximum exposure to the Company is $600,000 on any
one property claim and $250,000 on any one liability claim. The reinsurance
contracts renew annually. FPIC's reinsurers are rated "A-" or better by A.M.
Best. See "Business -- Reinsurance."

Dividend Restrictions

Dividends paid by a California domiciled insurance company are subject to
limitations imposed by the Code. Under the Code, cash dividends may be paid by
an insurance company only from statutory earnings. In addition, a California
domiciled insurer may not pay an "extraordinary" dividend to its stockholders
without prior approval of the DOI.

An extraordinary dividend or distribution is defined as a dividend or
distribution of cash or other property whose fair market value, together with
other dividends and distributions made within the preceding 12 months, exceeds
the greater of 10% of surplus as regards policyholders as of December 31 of the
preceding year or statutory net income (excluding unrealized capital gains) for
the immediately preceding calendar year. As of January 1, 1998, the maximum
dividend payable by FPIC without approval of the DOI is $1,426,000. A dividend
in the amount of $300,000 was declared and paid on January 1, 1998.
Additionally, a dividend in the amount of $200,000 was declared and paid
effective July 1, 1998. Both dividends were used to fund the debt service on the
Senior Notes. See "Business -- Regulation -- Regulation of Dividends and Other
Payments From Insurance Subsidiaries."

Impact of Inflation

The Company's operations, like those of other property/casualty insurers,
are susceptible to the effects of inflation, as premiums are established before
the ultimate amounts of losses and LAE are known. Management considers the
potential effects of inflation when setting premiums. Nonetheless, such premiums
may not fully compensate for the effects of inflation.

In addition, inflation may adversely affect the rate of return on the
Company's investment portfolio, as well as its portfolio market value.

New Accounting Standards

Statement of Financial Accounting Standards No. 130 ("SFAS No. 130"),
"Reporting Comprehensive Income," and Statement of Financial Accounting
Standards No. 131 ("SFAS No. 131"), "Disclosures about Segments of an Enterprise
and Related Information," were issued in June 1997 and are effective for fiscal
years beginning after December 15, 1997. SFAS No. 130 establishes standards for
the reporting and display of comprehensive income, which includes net income and
changes in equity except those resulting from investments by, or distributions
to, stockholders. SFAS No. 130 was adopted during the first quarter of 1998.
SFAS No. 131 establishes standards for disclosures related to business operating
segments. The Company is currently evaluating the impact that these statements
will have on the consolidated financial statements.

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PRIMARY DIFFERENCES BETWEEN GAAP AND SAP

The financial statements contained herein have been prepared in conformity
with GAAP, as opposed to SAP, which is prescribed for insurance companies by
insurance regulatory authorities. SAP differs from GAAP principally in the
following respects: (a) premium income is taken into operations over the periods
covered by the policies, whereas the related acquisition and commission costs
are expensed when incurred; (b) deferred income taxes are not recognized; (c)
certain assets such as agents' balances over 90 days due and prepared expenses
are nonadmitted assets; (d) policyholder dividends are accrued when declared;
(e) the cash flow statement is not consistent with classifications and the
presentation under GAAP; (f) bonds are recorded at amortized cost, regardless of
trading activities; and (g) loss and loss adjustment expense reserves and
unearned premium reserves are stated net of reinsurance.

YEAR 2000 COMPLIANCE

The Company's systems are compliant with Year 2000 requirements with the
exception of the claims accounting system, which the Company plans to replace
before the end of 1999. The Company plans to use its existing internal
programming staff to effect the replacement and does not expect to incur any
significant additional costs for equipment or outside programming support.

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BUSINESS

GENERAL

The Company is a regional, custom-underwriting insurance company. The
Company writes policies for small and medium-sized commercial customers within
specified niche markets which are typically overlooked by large insurance
companies. During 1997, the Company derived direct premiums written from artisan
contractors (40%), commercial property owners (5%), light industrial businesses
(5%), a variety of other businesses (25%) and special programs (25%). The
special programs were designed for refuse haulers, farm labor contractors,
bowling centers and restaurants. For these programs, the Company has developed
underwriting expertise and focused marketing materials and applies rate
deviations or coverage extensions. The Company writes the vast majority of its
business in rural markets in California. FPIC is currently rated A-(excellent)
by A.M. Best.

Direct premiums written increased from $15.1 million in 1994, the Company's
first full year of operation, to $39.5 million in 1997. Net income increased
from $777,000 in 1994 to $2.3 million in 1997. The Company's combined ratio,
which is a measure of underwriting profitability, was 92% in 1997, well below
the industry average of 102%. Much of the Company's growth and profitability is
attributable to its retention of renewal policies. Renewal retention rates were
81%, 83% and 84% in the three years ended 1995, 1996 and 1997, respectively.

During 1997, FPIC wrote 100% of its business in California. In that year,
approximately 58% of FPIC's direct premiums written was for CMP-Liability
coverages, 17% was for Commercial Automobile Liability coverages, 11% was for
Commercial Property coverages, 6% was for Commercial Automobile Physical Damage
coverages, and the remainder was for Inland Marine, Surety and Fidelity. The
Company is also engaged, through its wholly owned insurance agency, FPIA, in the
mail order distribution of license and permit surety bonds in 36 states on
behalf of Markel Corporation. These bonds are low limit surety commitments
pledged to a regulatory agency as a condition of obtaining and maintaining a
business license.

There are two general categories of commercial property/casualty insurance:
custom underwritten policies and business owner policies ("BOPs"). The Company
focuses exclusively on custom underwritten accounts, typically with an annual
premium less than $25,000 (the Company's average premium per account is $4,500).
While price is an important part in the purchase of any insurance policy, it is
not necessarily the basis of competition for custom underwritten policies. The
Company believes that by carefully underwriting individual risks, it is able to
select the best risks. Most national insurance companies focus on larger custom
underwritten property/casualty policies or BOPs. As a result, the Company does
not directly compete with most national insurers. A BOP is a low price business
insurance policy that provides broad coverages. BOPs are marketed to businesses
with little differentiation from location to location, such as mini-marts and
dry cleaners. BOPs' key point of differentiation is price. Management believes
it obtains better risk selection and pricing by avoiding BOPs and focusing on
custom underwritten property/casualty policies.

The Company operates primarily in the agrarian valleys and coastal regions
of California which tend to be less litigious than Southern California and the
San Francisco Bay area. The Company will continue to focus on the rural regions
of California, and other states, as it expands. In line with this small town
strategy, the Company appoints small to mid-sized agents. The Company carefully
selects its agents and closely monitors their flow of business and profitability
primarily through the use of its proprietary QuoteTracker software. The Company
believes that, as a specialty regional company, it provides more value to small
to mid-sized
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<PAGE> 30

insurance agents than it provides to large agents or national brokerages.
Consequently, the Company believes it has an important role in most of its
agents' offices. The value of its agency relations is a key advantage for the
Company.

The Company strives to provide competitive base pay and attractive bonus
opportunities. More than two-thirds of the Company's employees participate in
objectively measured bonus plans that provide bonus opportunities of up to 50%
of their annual salary. This and other employee-focused benefits make for
extremely low employee turnover. Low turnover is a significant advantage both in
terms of cost savings and in providing consistent relationships with the
independent agents.

BUSINESS STRATEGY

Management attributes its success to date to the following business
philosophies/strategies: (i) concentrating in its niche market segments,
developing specialty insurance programs, carefully selecting its geography and
avoiding market segments which the Company believes would be unprofitable; (ii)
maintaining strong relationships with independent insurance agents by providing
prompt underwriting decisions, competitive rates and coverages and competitive
commissions; (iii) controlling losses by vigorously defending claims which the
Company believes to be fraudulent, overstated or without merit; (iv) maintaining
control of, and emphasizing the importance, of underwriting every risk; and (v)
attracting and retaining a highly talented management team and staff.

GROWTH STRATEGY

The Company's long term growth strategies, while continuing to emphasize
small to medium-sized businesses as its primary target markets, are to:

Retain More Direct Premiums Written. The Company has historically ceded a
large portion of its direct premiums written to reinsurers. This was necessary
due to the relatively small surplus as regards policyholders the Company had
maintained. The capital infusion provided by this Offering will allow the
Company to retain more of its direct premiums written. As an example,
immediately following this Offering, the Company plans to convert its expensive
property quota share reinsurance contract into a less costly excess of loss
reinsurance program. See "-- Reinsurance."

Expand Existing Business. According to A.M. Best, the Company's market
share in California for CMP insurance has increased each of the last five years.
Management attributes the Company's growth to its strong relations with its
independent agents, its ability to identify and launch insurance programs for
specialty niches of the commercial market and its underwriting expertise. The
Company intends to pursue further growth in California by selectively appointing
new agents and by attracting a larger percentage of business from each of its
existing agents.

Develop New Programs. The Company will continue to research and develop
new specialty insurance programs for small to mid-sized businesses. The Company
attempts to identify business segments that are not being adequately served by
the insurance market. By focusing on businesses that are not directly targeted
by existing insurance programs, the Company is able to avoid competing solely on
price. The Company is also negotiating with other insurers to offer products
they developed through the Company's agents. This will enable the Company to
enhance further its value to the agency force and earn a return on the products
while avoiding the cost of developing the programs.

Expand Surety Business. The Company began writing surety in 1995 to
complement CMP. This business provides payment or performance guarantees on
construction contracts or other obligations. In 1997, the Company wrote nearly
$1.2 million in profitable surety premium using one staff underwriter. The
Company plans to emphasize surety as a line of business by increasing its
marketing efforts and adding to its staff. Though the market is highly
competitive, the Company believes it can attract profitable surety business by
focusing on providing a high level of service.

Expand Geographically. The Company intends to expand its specialty
insurance business into other states. Beginning with the states adjoining
California, the Company will select and appoint agents in rural
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<PAGE> 31

areas of those states to sell its products. The Company does not intend to open
branch offices. Its marketing efforts will focus on the insurance programs in
which the Company has developed an expertise in underwriting. As of July 1,
1998, the Company was licensed to do business in Arizona, California, Idaho,
Kansas, Missouri, Montana, Nebraska, Nevada, North Dakota, Oregon, South Dakota
and Utah and has license applications pending in seven additional states.

INDUSTRY OVERVIEW

According to A.M. Best, in 1996, the property/casualty insurance industry
wrote over $270 billion of insurance premiums. The industry remains fragmented
with approximately 3,000 insurance companies and 400 insurance groups licensed
to transact property/casualty insurance business in the U.S. Last year, the ten
largest companies accounted for less than a 43% national market share.
California is the largest individual state market for insurance in the U.S., and
its market characteristics are similar to the national market. California
insurance premiums totaled $32.8 billion in 1996, and the ten largest companies
captured only a 45% market share.

MARKETING

One of the Company's key competitive advantages is its excellent agency
relations. The Company targets independent agents in small, rural central and
northern California towns with existing books of commercial property casualty
business. These agents are generally ignored by the larger companies because
they cannot meet stiff production goals (usually $500,000 or more per year) or
rigid account minimums (typically $25,000). The Company believes that smaller
agents tend to be more loyal to an insurance company and their customers tend to
be more loyal to their insurance agent. While the Company is most heavily
represented in Fresno, Sacramento, Bakersfield and Santa Barbara, it is
represented in approximately 100 communities across the state by 234 agents, as
of June 30, 1998.

The Company's four field marketing representatives visit each of the
Company's agents at least once per month. The purpose of these visits is to
communicate to the agents the Company's preference for specific classes of
business, to identify and resolve problems and to maintain awareness of the
Company's activities. The marketing representatives also review pending quotes
with the agents and, on occasion, conduct brief inspections of risks submitted
to the Company. The field marketing representatives do not have underwriting
authority.

The Company actively manages its agency force by closely monitoring the
quality of submissions, hit/decline ratios, renewal retention and profitability.
Semi-annually, the Company reviews its agents for application count, win ratio,
average premiums per account, production and subjective factors primarily
through the use of its proprietary QuoteTracker software. Over the past three
years, this review has resulted in the termination of approximately 5% of the
agents and placement of another 10% on rehabilitation. Over time, the Company
believes that this process allows it to retain the best agents.

The Company provides its agents with limited binding authority. Binding
authority is extended to its agents for a few artisan contractors classes for
general liability only. The Company believes that underwriting is the
responsibility of the Company, and it tightly controls risk selection and
pricing. Most agents want binding authority, primarily because it takes
companies so long to quote a risk. The Company believes its exceptional service
overcomes this concern, and consequently most agents readily accept their
limited binding authority.

The Company pays a 15% commission on new business and 15% on renewal
business. From time to time, the Company may offer a higher commission on
special programs or accounts above a certain size. These promotions usually
involve paying the agent an additional 5% commission for a limited period of
time. During 1997, commission payments under these promotions totaled $250,000
or 4% of commission expense. The Company also pays additional commissions to its
agents based on volume. To qualify for additional commission an agent must
produce at least $250,000 of written premium during the preceding year. In 1997,
additional commissions based on volume totaled $639,000 or 9.0% of commission
expense. In 1997, the Company implemented an incentive program to reward agents
for retaining their business with the Company.
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At the end of each year, agents who maintain better than 90% of their renewals
will receive an additional 2% commission. For 1997, 30 agents qualified for
renewal retention bonuses, resulting in bonus commission payments of
approximately $40,000. The Company believes its commission schedules are
competitive.

By providing a market for difficult risks, by rewarding agent loyalty
through incentive commissions and by maintaining consistency in the marketplace,
the Company's agents place a significant value on an FPIC appointment. The
Company believes that these efforts lead to high renewal retention ratios and
more profitable renewal business.

CUSTOMERS

The Company's ultimate customers are small to mid-sized businesses. The
Company reaches these customers through 234 independent insurance agents, as of
June 30, 1998, who are appointed to represent the Company. The average customer
pays approximately $4,500 per year for its insurance policy. During 1997, the
Company derived direct premiums written from artisan contractors (40%),
commercial property owners (5%), light industrial businesses (5%), a variety of
other businesses (25%) and special programs (25%). The special programs were
designed for refuse haulers that haul standard household and industrial waste,
farm labor contractors, bowling centers and restaurants. For the refuse haulers,
the Company provides, as part of its automobile coverage, sudden and accidental
pollution coverage with a sublimit of $100,000 per occurrence. All other
pollution or environmental liability is excluded by the Company's policy forms.
For the special programs, the Company has developed underwriting expertise and
focused marketing materials and applies rate deviations or coverage extensions.
The Company is currently developing other specialty niche programs. Most
customers choose to pay for their policies over nine months following a 25% down
payment. The Company developed a payment plan to respond to the cash flow needs
of small businesses and to respond to competitive pressures.

LINES OF BUSINESS

The Company writes an insurance policy which always, except for surety
bonds, includes Commercial Multiple Peril-Liability ("CMP-Liability") and
generally one or more additional lines of business. The lines of business are
described below:

CMP-Liability -- Insures businesses against third party bodily injury and
property damage claims caused by or allegedly caused by acts or omissions of the
insured. This coverage part also includes a duty to defend the insured against
lawsuits filed alleging bodily injury, property damage or advertising injury
caused by acts or omissions of the insured.

CMP-Property -- First party insurance coverage for businesses for real and
personal property, as well as ancillary coverages such as loss of income and
loss of use. The insurance protects insureds against economic loss for damage or
loss of use of their property as a result of a specified cause of loss.

Commercial Auto Liability -- Similar to a personal auto insurance policy,
this third party coverage protects businesses against third party bodily injury
and property damage claims caused by or allegedly caused by drivers operating an
insured's vehicle.

Commercial Auto Physical Damage -- First party insurance coverage for
businesses against loss or damage to one of its vehicles. The coverage pays to
fix or replace damaged vehicles.

Inland Marine -- First party business coverage for personal property and
equipment which is generally mobile in nature. The coverage pays to fix or
replace the mobile property.

Surety -- The Company guarantees that one party, the principal, will
perform pursuant to a contract for a second party, the obligee. If the principal
fails to perform, the Company is obligated to complete the contract.

Fidelity -- First party coverage for businesses against loss of money,
securities and property due to burglary, theft, robbery and employee dishonesty.

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FINANCIAL PACIFIC INSURANCE AGENCY

Prior to the acquisition of FPIC, FPIA employed agents who served as the
direct sales force for Oates and also placed workers' compensation policies with
other insurance companies. Immediately following the acquisition, the direct
sales strategy was abandoned due to the Company's expansion of independent
agency appointments.

In 1995, FPIA became a general agent for Markel American Insurance Company
and Markel Insurance Company (unaffiliated members of Markel Corporation, a Glen
Allen, Virginia-based specialty property/casualty insurance group). As such,
FPIA produces license and permit surety bonds in 36 states. A license bond is a
low limit (typically $10,000 to $15,000) surety commitment pledged to an obligee
(regulatory agency) as a condition of obtaining and maintaining a business
license. According to the Surety Association of America, the nationwide market
for license bonds is $300 million with a loss ratio of 15%. There are more than
1,000 different types of license bonds throughout the United States. The typical
license bond is underwritten with an application, financial statement and credit
report. In 1997 and the six months ended June 30, 1998, FPIA generated
$1,256,000 and $720,000, respectively, in direct premiums written, of which
$709,000 and $393,000, respectively, was commission income to the Company.
FPIA's net income (loss) for the year ended December 31, 1997 and the six months
ended June 30, 1998 was net income of $5,000 and net loss of $2,000,
respectively.

The Company solicits customers for license and permit surety bonds through
the mail. The Company believes its direct mail distribution strategy will begin
to reap substantial returns as its renewal business grows and when FPIC becomes
the issuing insurance company for the license and permit bonds. Once FPIC
becomes licensed in all of the states in which FPIA operates, FPIC can become
the issuing insurance company for FPIA.

UNDERWRITING

The Company places a high degree of emphasis on underwriting and pricing
discipline. More than 50% of the Company's employees work in underwriting roles,
and the average underwriter has 16.6 years of experience. The underwriting
department has approximately 15 underwriters, along with support staff.

The Company uses Insurance Services Offices ("ISO") underwriting rates,
rules and guidelines. However, most of the Company's current rates are
determined utilizing 1988 ISO loss costs, which are 35% higher, on average, than
loss cost assumptions utilized in current ISO rates for the classes and
territories that the Company writes. While the rates have remained the same
since the Company's inception, the pricing strategy has become more
conservative. The use of schedule rating credits, which are used to reduce the
price of insurance for individual policies, has been substantially restricted.

The limits of liability for each of the types of policies written by the
Company are tailored to the needs of the insured. Approximately 90% of the CMP
liability policies sold by the Company are for limits of $1,000,000. Limits are
available under existing treaties with reinsurance companies up to $11,000,000.
Subject to the judgment of the underwriting department, property insurance is
also available under certain existing treaties with reinsurance companies up to
a limit of $10,000,000. Additional insurance is available for each line of
insurance provided that a facultative arrangement is obtained from an
appropriate reinsurer. See "-- Reinsurance."

Since price is a competitive factor in the sale of property/casualty
insurance, the underwriting department attempts to ensure that prices quoted by
the Company are competitive or that its product is sufficiently differentiated
from less expensive alternatives.

Each full-time employee of the underwriting department has the opportunity
to earn an incentive bonus for meeting objective standards for service,
production and quality. Management believes this plan makes the Company's
underwriters and underwriting technicians the highest paid in the area. Because
an underwriting job with the Company is highly desirable, turnover in the
underwriting department is extremely low.

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The Company also writes surety bonds through its agents. In 1996, its first
full year of operations, the surety department wrote $589,000 of surety
business. In 1997 and the six months ended June 30, 1998, the Company wrote
$1,129,000 and $578,000, respectively, in surety premium. The Company's surety
customers are primarily small contractors with infrequent bond needs. These
accounts require a high level of attention that many other sureties are not
willing to provide.

For a five-year comparison of the Company's combined ratio and the average
for the property/casualty industry, see "Selected Consolidated Financial Data"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Overview."

REINSURANCE

Due to capital constraints, the Company has historically ceded large
amounts of its premium to reinsurers. In 1996 and 1997, on a direct pre-tax
basis, the Company earned $4.7 million and $4.0 million, respectively, of
underwriting income. After ceding the reinsurer's portion of the premium and
losses, the net underwriting income for the Company was approximately $1.7 in
each of 1996 and 1997. The reinsurers received $3.0 million and $2.3 million of
the Company's underwriting income in 1996 and 1997, respectively. The results
from the last two years are not necessarily indicative of results in the future
and the ultimate development of business ceded to the reinsurers could deviate,
perhaps substantially, from such results. However, the Company believes that as
a result of this Offering, it will decrease amounts ceded to reinsurers and
retain a greater share of the corresponding risks. As a consequence, the Company
believes it will also retain some portion of the underwriting profit, if any,
related to the premiums that are no longer ceded. See "Use of Proceeds."

The Company maintains reinsurance on its property, casualty, and surety
businesses. On its property business, the Company has a 30% quota share on the
first $2 million of any risk with a syndicate of reinsurers, resulting in a
maximum company exposure of $600,000 related to any one occurrence. In excess of
$2 million, the Company has an $8 million per risk semi-automatic facultative
reinsurance arrangement with General Reinsurance Corporation. On the casualty
business, the Company maintains a $750,000 excess of $250,000 treaty with a
syndicate of reinsurers led by Gerling Global Reinsurance Company. The Company's
maximum exposure on any one casualty risk is $250,000. In excess of $1 million,
the Company has a semi-automatic facultative agreement with American Reinsurance
Company which provides $10 million of coverage in excess of $1 million. For the
Company's surety bond product line, the Company maintains a variable quota share
reinsurance arrangement with General Reinsurance Company which provides various
levels of participation depending on the size of a bond. The Company's current
reinsurance structure has been in place since January 1, 1997 with the exception
of the surety reinsurance contract which incepted in July 1995 and the $10
million excess $1 million casualty semi-automatic facultative agreement which
incepted on January 1, 1998.

Prior to January 1, 1997, the Company maintained a $400,000 excess $100,000
and $500,000 excess $500,000 casualty treaties and a $4 million excess $1
million casualty semi-automatic facultative agreement.

The Company purchases Extra Contractual Obligations and Excess Policy
Limits ("ECO/XPO") coverage through the London market. This coverage reinsures
the Company's exposure for any punitive, exemplary, compensatory, or
consequential damages in excess of policy limits because of alleged or actual
bad faith or negligence on the Company's part in rejecting a settlement within
policy limits, discharging its duty to defend or prepare the defense in the
trial of an action against a policyholder of the Company, or in discharging its
duty to prepare or prosecute an appeal consequent upon such an action, or
otherwise handling a claim under a policy subject to this reinsurance. Prior to
July 1, 1996, $1 million of this coverage was included in the Company's $1
million excess of $1 million reinsurance treaty. However, when the Company
restructured its reinsurance treaty effective July 1, 1996, it began purchasing
this coverage separately in the London markets, as it was more cost effective to
do so. The Company currently purchases $2 million of ECO/XPO coverage through
this facility.

The reinsurance programs renew on an annual basis. Reinsurance coverages
are placed both directly by the Company and through professional intermediaries.
The Company's 1997 reinsurance costs for liability

33
<PAGE> 35

coverage were reduced from 1996 levels due to favorable results achieved and the
retention by the Company of larger portions of the risk.

Although reinsurance does not discharge the original insurer from its
primary liability to its policyholders, under SAP, it is the practice of
insurers to treat reinsured risks as risks of the reinsurer since the primary
insurer is indemnified by the reinsurers for ceded losses and LAE unless the
reinsurer is unable to meet the obligations it assumed under the reinsurance
agreements. The collectability of reinsurance is subject to the solvency of the
reinsurers.

All of the Company's reinsurance is currently placed with A- or better
rated reinsurers. See "-- Ratings." In accordance with customary industry
practice, the Company maintains no reserves for reinsured liabilities. In 1997,
FPIC ceded $12.6 million in written premium to 17 reinsurers and reinsurer
syndicates. Premiums ceded to the five largest reinsurers were: $2.9 million,
Gerling Global Reinsurance; $1.7 million, SOREMA North America Reinsurance; $1.3
million, St. Paul Fire and Marine; $1.3 million, Constitution Reinsurance; and
$1.2 million, Winterthur Reinsurance Corporation of America.

At December 31, 1997, the Company had unsecured reinsurance recoverables
for paid and unpaid losses and LAE and unearned premiums in excess of 10% of
stockholders' equity from the following reinsurers:

<TABLE>
<S> <C>
Gerling Global Reinsurance.................................. $3,398,002
SOREMA North America Reinsurance............................ 2,049,891
Winterthur Reinsurance Corporation of America............... 1,567,208
St. Paul Fire and Marine.................................... 1,396,365
Constitution Reinsurance.................................... 1,348,644
</TABLE>

The Company reviews information concerning the Company's reinsurers,
including ratings published by A.M. Best and other similar organizations. The
Company is not aware of any financial difficulties being experienced by any of
its reinsurers.

The Company is selective in its choice of reinsurers and considers numerous
factors, the most important of which is the financial stability of the
reinsurer. At January 1, 1998, reinsurance arrangements were in place with one
foreign and 11 domestic reinsurers.

Following this Offering, the Company may convert its costly property quota
share reinsurance contract to an excess of loss contract. It may also convert
its surety quota share contract to an excess of loss contract. See "Use of
Proceeds."

CLAIMS

The claims department pays claims and establishes losses and LAE reserves.
In connection therewith, it resolves questions concerning policy coverage and
manages reinsurance recoveries with the accounting department. Claims in
litigation are defended by a staff of attorneys employed by the Company under
the direction of its Vice President and General Counsel. In order to reduce the
cost of defending its policyholders, the Company began hiring attorneys in late
1996 to build in-house defense capabilities. The Company has hired seven
experienced insurance defense attorneys, all of whom have at least seven years
of experience. As of June 30, 1998, approximately 88% of the Company's insurance
defense files were being adjusted by staff attorneys. By managing the majority
of the cases with staff attorneys, the Company believes it will save a
substantial amount of LAE.

The Company's claims department is staffed by five claims examiners with an
average of 18 years of claim adjustment experience. The claims examiners'
caseloads average approximately 125 claims per examiner. Due to the combination
of experience and manageable caseloads, the Company's claims personnel are
effective in managing claims through frequent contact with claimants.

The Company believes that a distinguishing factor between its claims
department and other insurance companies' claims departments is that its claims
examiners are incentivized to close claim files, all of the adjusters and
attorneys are seasoned professionals and they are closely supervised by the Vice
President of Claims and the Vice President and General Counsel. Senior
management reviews and approves all reserves in

34
<PAGE> 36

excess of $30,000. The Company recently established a special investigation unit
which is used to investigate cases which are suspected to be fraudulent.

RESERVES

Loss reserves are estimates at a given point in time, based on facts and
circumstances then known, of the amount the insurer anticipates it will have to
pay claimants plus investigation and litigation costs. The ultimate liability in
each case may differ from such estimates. During the loss settlement period,
additional facts regarding individual claims may become known and, consequently,
it frequently becomes necessary to refine and adjust the estimates of liability.

The Company's reserving process, following industry practices, is based on
the assumption that past experiences, adjusted for the effect of current
developments and likely trends, is appropriate for predicting future events. The
process also assumes that the legal climate regarding the claims process and
legal liability theories remain constant. Any other assumptions employed by the
Company or its actuaries are not readily quantifiable and are subject to
revision as circumstances change.

Reserves are initially set to take into account both a possible payment for
the loss involved and the anticipated LAE. Adjustments to initial reserves are
made periodically pursuant to the continuing investigation and evaluation by the
claims department. Reserves for other claims, such as property damage by fire or
other causes, are established and revised on a case-by-case basis pursuant to
which a reserve amount is assigned to each claim when reported, based primarily
upon an investigation of the circumstances surrounding each claim, consideration
of the liability and the damages, and the insurance policy provisions relating
to the claim.

The Company also establishes IBNR reserves utilizing its historical
experience. The IBNR reserve is established to provide for future case reserves
and loss payments on claims which have been incurred but not yet reported to the
Company. A significant portion of the Company's total loss reserve is the IBNR
reserve. However, IBNR reserves, by definition, are not established for specific
cases. In calculating IBNR reserves, the Company estimates the ultimate
liability for losses and LAE by using both individual estimates for reported
claims and generally accepted actuarial reserving techniques. IBNR reserve
adjustments also are made to take into account changes in the volume of business
written, claims frequency and severity, the mix of business, claims processing
and other items that can be expected to affect the Company's liability for
losses over time. IBNR reserves are periodically adjusted to correct historical
deficiencies or redundancies in the reserves on a case-by-case basis. On a
quarterly basis, the Company's independent actuary reviews the Company's loss
data and recommends IBNR reserves.

Inflation is implicitly provided for in the reserving function through
analysis of cost trends and reviews of historical results. Reserves are closely
monitored and are recomputed periodically using new information on reported
claims and a variety of statistical techniques. The Company does not discount
loss reserves.

The following table sets forth a reconciliation of beginning and ending
losses and LAE reserves for each of the periods shown.

35
<PAGE> 37

Activity in the liability for unpaid losses and LAE is summarized as
follows:

<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED
--------------------------------------- JUNE 30,
1995 1996 1997 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Balance of unpaid losses and loss
adjustment expense reserves,
beginning of period............... $10,140,556 $12,013,317 $13,944,397 $19,592,060
Less reinsurance recoverables..... 4,902,732 4,349,118 4,007,047 6,184,927
----------- ----------- ----------- -----------
Net balance at beginning of
period............................ 5,237,824 7,664,199 9,937,350 13,407,133
----------- ----------- ----------- -----------
Incurred losses and loss adjustment
expenses:
Provision for insured events of
the current period............. 6,490,825 7,394,848 10,991,179 6,586,923
Increase (decrease) in provision
for insured events of prior
periods........................ (165,766) 2,355,565 1,756,992 596,545
----------- ----------- ----------- -----------
Total incurred losses and loss
adjustment expenses............... 6,325,059 9,750,413 12,748,171 7,183,468
----------- ----------- ----------- -----------
Payments:
Losses and loss adjustment
expenses attributable to
insured events of the current
period......................... 1,975,694 2,413,980 3,370,671 1,496,102
Losses and loss adjustment
expenses attributable to
insured events of prior
periods........................ 1,922,990 5,063,282 5,907,717 3,502,170
----------- ----------- ----------- -----------
Total payments...................... 3,898,684 7,477,262 9,278,388 4,998,272
----------- ----------- ----------- -----------
Net balance at end of period........ 7,664,199 9,937,350 13,407,133 15,592,329
Plus reinsurance recoverables..... 4,349,118 4,007,047 6,184,927 7,498,325
----------- ----------- ----------- -----------
Balance of unpaid losses and
loss adjustment expense
reserves, at end of period... $12,013,317 $13,944,397 $19,592,060 $23,090,654
=========== =========== =========== ===========
</TABLE>

36
<PAGE> 38

The following table sets forth the development of net reserves for unpaid
losses and LAE from 1989 (the first full year of operations) through 1997. In
evaluating the following information, it should be noted that each amount
includes the effects of all changes in amounts for prior years. For example, the
amount of redundancy related to losses settled in 1997 but incurred in 1989 is
included in the cumulative redundance amount of each of the years for 1989 to
1996. The table does not present injury or policy-year development data.
Conditions and trends that have affected development of the reserves in the past
may not necessarily occur in the future. Accordingly, the data in the table may
not be indicative of future redundancies or deficiencies.

<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------------------------
1989 1990 1991 1992 1993 1994 1995 1996 1997
------ ------ ------ ------- ------- ------- ------- ------- -------
($'s in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Liability for losses and
LAE(1).................. $1,243 $3,119 $7,189 $ 6,964 $ 4,533 $ 5,238 $ 7,664 $ 9,938 $13,407
Paid (cumulative) as
of:(2)
End of year............. -- -- -- -- -- -- -- -- --
One year later.......... 391 1,148 1,550 1,676 1,503 1,923 5,063 5,908 --
Two years later......... 967 2,307 3,038 2,883 2,537 4,574 8,903
Three years later....... 1,351 2,728 3,734 3,366 3,243 6,648
Four years later........ 1,594 3,012 4,074 3,601 3,897
Five years later........ 1,845 3,096 4,322 3,829
Six years later......... 1,883 3,308 4,512
Seven years later....... 1,976 3,487
Eight years later....... 2,002
Liability re-estimated as
of:(3)..................
End of year............. 1,243 3,119 7,189 6,964 4,533 5,238 7,664 9,938 13,407
One year later.......... 1,608 4,844 5,648 4,282 3,782 5,073 10,232 11,694
Two years later......... 2,108 4,038 4,755 3,942 3,548 6,983 11,830
Three years later....... 2,125 3,560 4,457 3,893 4,038 8,395
Four years later........ 1,992 3,457 4,421 3,998 4,635
Five years later........ 2,136 3,376 4,624 4,567
Six years later......... 2,052 3,532 4,848
Seven years later....... 1,998 3,738
Eight years later....... 2,044
REDUNDANCY
(DEFICIENCY):(4)........ $ (801) $ (619) $2,341 $ 2,397 $ (102) $(3,157) $(4,166) $(1,756) --
Redundancy (deficiency) as
% of initial
reserve(5),(6),(7)...... (64.4)% (19.8)% 32.6% 34.4% (2.3)% (60.3)% (54.4)% (17.7)% --
Gross liability for losses
and loss adjustment
expenses(8)............. 10,060 7,125 10,141 12,013 13,945 19,592
Ceded liability for losses
and loss adjustment
expenses................ (3,096) (2,592) (4,903) (4,349) (4,007) (6,185)
------- ------- ------- ------- ------- -------
Net liability for losses
and loss adjustment
expenses................ 6,964 4,533 5,238 7,664 9,938 13,407
Gross liability
re-estimated as of
December 31, 1997....... 987 987 2,580 4,089 8,480
Gross paid cumulative as
of December 31, 1997.... 6,301 6,094 8,550 10,405 6,580
------- ------- ------- ------- -------
Gross liability
re-estimated............ 7,288 7,081 11,130 14,494 15,060
Gross reserve redundancy
(deficiency)(4)......... 2,772 44 (989) (2,481) (1,115)
Gross reserve redundancy
(deficiency) as % of
initial reserve......... 27.6% 0.6% (9.8)% (20.7)% (8.0)%
</TABLE>

- ---------------
(1) Sets forth the estimated liability for unpaid losses and LAE, net of
reinsurance, recorded at the balance sheet date for each of the indicated
years; represents the estimated amount of losses and LAE, net of
reinsurance, for claims arising in the current and all prior years that are
unpaid at the balance sheet date, including IBNR.

(2) Cumulative losses and LAE payments made in succeeding years for losses
incurred prior to the balance sheet date.

37
<PAGE> 39

(3) Re-estimated amount of the previously recorded liability based on experience
for each succeeding year, increased or decreased as payments are made and
more information becomes known about the severity of remaining unpaid
claims.

(4) Net reserve deficiencies in 1993, 1994, 1995 and 1996 exceeded gross reserve
deficiencies because fewer losses exceeded the Company's reinsurance
retention than recorded. The Company's casualty reinsurance retention in
1993, 1994, 1995 and 1996 was $100,000 per occurrence and most losses during
those periods were within that retention. Since fewer losses were ceded, the
net deficiency appears greater than the gross deficiency. For an explanation
of the Company's reinsurance, see "-- Reinsurance."

(5) Shows the cumulative redundancy or deficiency at December 31, 1997 of the
reserve estimate shown on the top line of the corresponding column. A
redundancy in reserves means that reserves established in prior years
exceeded actual losses and LAE or were reevaluated at less than the
originally reserved amount. A deficiency in reserves means that the reserves
established in prior years were less than actual losses and LAE or were
reevaluated at more than the originally reserved amount.

(6) Prior to 1994, fluctuation in the net reserve redundancy was attributable to
a $2.4 million reserve reduction in 1993 and a $2.4 million reserve increase
in 1991. In 1991, the Company posted an IBNR reserve of approximately $2.4
million. The result was a net incurred losses and LAE ratio of 165%. During
1993, in conjunction with the acquisition, management determined that the
Company's IBNR reserves were redundant and recorded a reserve reduction of
$2.4 million. As a result, the redundancy trend in 1992 and 1993 ended.

(7) The reserve deficiency noted in 1994 to 1996 resulted primarily from the
effects of the Montrose Decision in July 1995. The impact to the Company was
the creation of retroactive liability for construction defect claims
previously denied. The Company has subsequently revised its underwriting
practices in response to the Montrose Decision. See "Risk
Factors -- Adequacy of Loss Reserves" and "-- Regulations, Pending
Legislation and Case Law."

(8) The gross liability for losses and LAE represents the Company's total
estimated liability, gross of reinsurance, for unpaid losses and LAE. The
gross liability for losses and LAE is the amount that appears on the
Company's balance sheet.

Reserve variances have been affected by continued growth in premium volume
and increases in IBNR, particularly in the CMP liability line between 1993 and
1994. The reserves for IBNR losses and the LAE anticipated changes in costs
related to each prior year's claims. At the same time, the insurance industry
was experiencing inflation in the ultimate resolution values of personal injury
claims. The inflation of personal injury claim values has been principally
attributed to rapidly increasing medical treatment costs, increasing jury awards
for pain and suffering and increased loss adjustment and related litigation
costs. In addition to the adjusted IBNR, specific measures undertaken include
monitoring the actual paid medical, vigorous defense of claims deemed to be
nuisance suits, and ongoing monitoring of pain and suffering awards and related
LAE and litigation expenses. Adjustments are made in IBNR reserves on a periodic
basis to account for documented cost increases, and similar adjustments are made
to case reserves based on individual claim reviews and audits. Actual reserve
development due to IBNR claims and underreported claims is continually monitored
and adjustments to reserves are made consistent with this actual experience.

As noted in note (7), the deficiencies in 1994 and 1995 were primarily the
result of liability created by the Montrose Decision. Through the Montrose
Decision, the courts changed their interpretation of an insurer's liability and
imposed an obligation for insurers to defend previously denied claims. As is
typical for such court-created liabilities, the Montrose Decision resulted in
adverse development in the Company's loss experience. The Company responded to
the adverse development by increasing its reserve estimates, and does not
anticipate further development of the magnitude experienced in 1994 and 1995.
The Montrose case and its impact is described in "Risk Factors -- Adequacy of
Loss Reserves" and "-- Regulations, Pending Legislation and Case Law."

During the loss adjustment period, additional facts regarding individual
claims may become known. As the Company becomes aware of additional facts, it
may become necessary to refine and adjust liability estimates. Accordingly, the
ultimate liability may be less than or greater than the revised estimates.

38
<PAGE> 40

INVESTMENTS

Substantially all investments are held by FPIC and are subject to
regulation by the DOI. Investments are made under the direction of the Company's
Chief Executive Officer and Chief Financial Officer pursuant to written
guidelines approved by the Board of Directors. The written guidelines establish
specific criteria for quality, marketability, holding size and maturity for each
type of investment. Furthermore, the criteria are set to meet the Company's
anticipated liquidity needs and tax positions.

The Company's investment portfolio is managed with the intent to provide
growth and safety of surplus as regards policyholders in order to facilitate
increased premium writings over the long-term while maintaining the ability to
service current insurance operations.

The following table shows the composition of the Company's investment
portfolio by type of security as of December 31, 1995, 1996 and 1997.

<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
--------------------------------------------------------- -----------------
1995 1996 1997 1998
----------------- ----------------- ----------------- -----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------- ------- ------- ------- ------- ------- ------- -------
($'s in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BY TYPE OF SECURITY:
United States government
and agencies............ $ 6,449 28.4% $ 9,870 41.1% $15,628 52.1% $23,620 68.2%
States, municipalities and
political
subdivisions............ 1,289 5.7% 268 1.1% 71 0.2% -- --
Corporate................. 14,951 65.9% 13,708 57.0% 14,065 46.9% 10,814 31.2%
Certificates of deposit... -- 0.0% 200 0.8% 213 0.8% 219 0.6%
------- ----- ------- ----- ------- ----- ------- -----
Total
investments... $22,689 100.0% $24,046 100.0% $29,977 100.0% $34,653 100.0%
======= ===== ======= ===== ======= ===== ======= =====
</TABLE>

Fixed maturity investments are valued in the above table at market value.
The amortized cost of fixed maturities was $22,604,000, $24,764,000 and
$30,028,000 at December 31, 1995, 1996 and 1997, respectively.

Fixed maturity investments held by the Company generally have an investment
quality rating of "A" or better by independent rating agencies. The following
table shows the composition of the Company's fixed maturity investments (at
amortized cost), by rating as of December 31, 1995, 1996 and 1997.

<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
--------------------------------------------------------- -----------------
1995 1996 1997 1998
----------------- ----------------- ----------------- -----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------- ------- ------- ------- ------- ------- ------- -------
($'s in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BY RATING(1):
U.S. Treasury and U.S.
Agency Bonds............ $ 6,449 28.4% $ 9,870 41.0% $15,628 52.1% $23,620 68.2%
AAA to A.................. 15,023 66.2% 12,259 51.0% 11,515 38.4% 9,797 28.3%
BBB....................... 1,217 5.4% 1,717 7.2% 2,621 8.8% 1,017 2.9%
Certificates of Deposit... -- 0.0% 200 0.8% 213 0.7% 219 0.6%
------- ----- ------- ----- ------- ----- ------- -----
Total
Investments... $22,689 100.0% $24,046 100.0% $29,977 100.0% $34,653 100.0%
======= ===== ======= ===== ======= ===== ======= =====
</TABLE>

- ---------------
(1) Represents the lower of the ratings assigned by Moody's Investor's Services,
Inc. or Standard and Poor's Corporation.

The amortized cost of fixed maturity investments exceeded the market value
by approximately $51,000 at December 31, 1997. At the same date, the Company
held callable fixed maturities with an aggregate market value of $13.2 million.

The amortized cost of fixed maturities as of December 31, 1995, 1996 and
1997 is shown by contractual maturity below. Expected maturities may differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties. Management projects
the

39
<PAGE> 41

anticipated weighted average maturity of the fixed maturities to be 6.7 years.
Management attempts to generally match its property/casualty assets and
liabilities. The maturity of claim and benefit liabilities of property/casualty
insurance companies can only be estimated by using actuarial methods. Although a
single figure for weighted average maturity of liabilities is not available, the
Company's actuaries continually review historical data on claims maturation. In
light of the review, management structures its fixed income portfolio
accordingly. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources."

<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
--------------------------------------------------------- -----------------
1995 1996 1997 1998
----------------- ----------------- ----------------- -----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------- ------- ------- ------- ------- ------- ------- -------
($'s in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BY MATURITY:
One year and under........ $ 77 0.3% $ 1,830 7.6% $ 1,152 3.8% $ 1,002 2.8%
Over one year through five
years................... 6,364 28.1% 8,287 34.5% 9,954 33.2% 9,032 26.0%
Over five years through
ten years............... 9,330 41.1% 8,662 36.0% 14,681 49.0% 22,551 65.1%
Over ten years............ 6,918 30.5% 5,267 21.9% 4,190 14.0% 2,068 6.1%
------- ----- ------- ----- ------- ----- ------- -----
Total
Investments... $22,689 100.0% $24,046 100.0% $29,977 100.0% $34,653 100.0%
======= ===== ======= ===== ======= ===== ======= =====
</TABLE>

Investment results of the Company for the periods indicated are shown in
the following table.

<TABLE>
<CAPTION>
YEARS ENDED JUNE 30, SIX MONTHS
----------------------------- ENDED
1995 1996 1997 JUNE 30, 1998
------- ------- ------- --------------
($'s in thousands)
<S> <C> <C> <C> <C>
Invested assets(1)..................... $17,812 $23,368 $27,012 $32,315
Investment income(2)................... $ 1,029 $ 1,449 $ 1,720 $ 1,053
Average yield(3)....................... 5.8% 6.2% 6.4% 6.5%
Net realized gain (losses)............. $ 466 $ 52 $ (46) $ 32
</TABLE>

- ---------------
(1) Average of the aggregate invested amounts at the beginning and end of the
period.

(2) Investment income is net of investment expenses and does not include
realized or unrealized investment gains or losses or provision for income
taxes.

(3) The 1995 average yield was impacted by the $5 million capital infusion from
the sale of the Senior Notes which funded the purchase of $5 million in
investments on December 28, 1995.

COMPETITION

The property/casualty insurance industry is highly competitive. The Company
competes with other property/casualty insurers both in the recruitment and
retention of qualified independent agents to sell its products. Success in
recruiting and retaining independent agents willing to sell the Company's
products or services is dependent upon the commission rates, services and the
ability of the insurer to provide products that meet the needs of the agent and
the agent's customers.

40
<PAGE> 42

the significance of the rate of commission, the Company believes its efforts to
serve the agents and their customers by providing superior service in
underwriting and claims processing will allow it to continue to compete with
other insurers.

Twice per year, the Company surveys its agents to understand the nature of
the competitive environment. The agents indicate that the Company competes with
many companies, but few consistently. According to its agents, FPIC's most
consistent competitor is Allied Group. Agents were asked which companies they
viewed as FPIC's main competitors.

The following table summarizes the results of the last agent survey,
conducted in May 1998:

<TABLE>
<CAPTION>
COMPETITORS % of Agents(1)
- ----------- --------------
<S> <C>
Allied Group................................................ 15%
Maryland Casualty Insurance Company......................... 13%
Travelers Insurance Group................................... 9%
Golden Eagle Insurance Company.............................. 8%
Fireman's Fund Insurance Company............................ 5%
Valley Insurance Company.................................... 5%
15 Other Companies.......................................... 28%
</TABLE>

- ---------------
(1) Represents the percentage of survey respondents indicating that these
companies compete with FPIC.

RATINGS

The oldest and most widely quoted insurance financial rating firm is Best's
Insurance Reports, published by the firm of A.M. Best.

Based on 1993 and prior results, FPIC was assigned an initial rating in
April 1994 of B++ (Very Good) by A.M. Best. An A.M. Best rating is assigned
after an extensive quantitative and qualitative evaluation of a company's
financial condition and operating performance. An A.M. Best rating represents
the current and independent opinion of a company's financial strength and
ability to meet obligations to policyholders. Such ratings do not relate to the
protection of investors or indicate expected investment results, and therefore
do not address the quality of the insurer's securities or the advisability of an
investment in such securities. In March 1996, A.M. Best upgraded FPIC's rating
to A- (excellent) and in 1997 the A- rating was re-affirmed.

A.M. Best rates firms both on quality and on size. The size categories
range from I, which represents surplus as regards policyholders of less than $1
million, to XV, which represents surplus as regards policyholders of greater
than $2 billion. Prior to the Offering, FPIC was financial size V, representing
surplus as regards policyholders between $10 million and $25 million. Following
this Offering, it is expected that FPIC will be category VI, representing
surplus as regards policyholders between $25 million and $50 million. When
considering whether to accept an FPIC policy, customers often review both the
rating and the financial category size. While many customers view an A rating as
sufficient, there are others that require financial category sizes of VII and
greater. There can be no assurance that customers will continue to accept FPIC's
rating and financial category size regardless of the Offering.

A.M. Best provides ratings based on an insurer's annual financial reports
and survey information for several years of operations. A.M. Best rates over
2,300 property/casualty insurers each year. For years prior to 1994, FPIC was
not assigned a letter rating by A.M. Best due to what A.M. Best described as
"insufficient experience," A.M. Best requires five full years of operating
activity before assigning a rating. Ratings above B+ are B++ (Very Good), A- and
A (excellent), A+ and A++ (Superior). Ratings below B+ are B, B-, C++, C+, C,
C-, D, E, F and NA (not issued).

41
<PAGE> 43

REGULATION

National Association of Insurance Commissioners

In order to enhance the regulation of insurer solvency, the NAIC adopted a
formula and model law to implement risk-based capital ("RBC") requirements for
property/casualty insurance companies designed to assess the minimum capital
requirements for the protection of policyholder obligations. The RBC model law
provides for four levels of regulatory action. The extent of regulatory
intervention and action increases as a level of surplus to RBC falls. The first
level, the Company Action Level (as defined by the NAIC), requires an insurer to
submit a plan of corrective actions to the regulator if surplus falls below 200%
of the RBC amount. The Regulatory Action Level (as defined by the NAIC) requires
an insurer to submit a plan containing corrective actions and requires the
relevant insurance commissioner to perform an examination or other analysis and
issue a corrective order if surplus falls below 150% of the RBC amount. The
Authorized Control Level (as defined by the NAIC) gives the relevant insurance
commissioner the option either to take the aforementioned actions or to
rehabilitate or liquidate the insurer if surplus falls below 100% of the RBC
amount. The fourth action level is the Mandatory Control Level (as defined by
the NAIC) which requires the relevant insurance commissioner to rehabilitate or
liquidate the insurer if surplus falls below 70% of the RBC amount. Based on the
foregoing formulae, as of December 31, 1997, FPIC's ratio of total adjusted
surplus to Authorized Control Level RBC was 340%.

The NAIC's Insurance Regulatory Information System ("IRIS") was developed
by a committee of state insurance regulators and is primarily intended to assist
state insurance departments in executing their statutory mandates to oversee the
financial condition of insurance companies operating in their respective states.
IRIS identifies 12 industry ratios and specifies "usual values" for each ratio.
Departure from the usual values on more than four of the ratios may lead to
increased regulatory oversight. Based on its 1997 statutory financial statement,
FPIC was within the usual range for eight of the 12 IRIS tests.

FPIC was not within the usual range of ratios for Change in Net Writings
and Surplus Aid to Surplus due to growth in net written premium and contingent
ceding commission related to favorable loss experience on the swing-rated
reinsurance treaties. A swing-rated reinsurance treaty allows the ceding company
to share in the profitability of its reinsurance program by receiving a portion
of a reinsurance contract's profits. During 1997, net written premium increased
by 48% which exceeded the upper limit of the NAIC usual range of 33%.
Additionally during 1997 FPIC recorded $1.5 million in contingent ceding
commission related to the swing-rated reinsurance treaties.

Unusual values were also noted for IRIS ratios for the Two-Year Reserve
Development to Surplus and Estimated Current Reserve Deficiency to Surplus.
These ratios were both impacted by the results of the Montrose Decision and the
resultant retroactive liability. See "Risk Factors -- Regulations, Pending
Legislation and Case Law" and "-- Reserves."

General

The Company is principally regulated by the DOI and the Commissioner.
California and various other states have established supervisory agencies with
broad authority to regulate, among other things, licenses to transact business,
premium rates for certain coverages, trade practices, agent licensing, policy
forms, underwriting and claims practices, reserve adequacy and insurer solvency.
California, like many jurisdictions, also regulates investment activities on the
basis of quality, distribution and other quantitative criteria. The Company's
insurance operations and accounts are subject to examination upon request by
California insurance regulators. The Company is also subject to examination by
all other states in which it is licensed to do business. California has also
enacted legislation which regulates insurance holding company systems, including
acquisitions, dividends, the use of surplus, the terms of affiliate transactions
and other related matters. The last DOI examination of the Company was for the
three years ended December 31, 1994.

The California insurance holding company law also requires the Group to
register with the DOI and file certain reports containing information concerning
its capital structure, ownership, financial conditions and general business
operations.

42
<PAGE> 44

Recently, the insurance industry has been subject to increased scrutiny. A
number of state legislatures have considered or enacted legislative proposals
that alter and, in many cases, increase the authority of state agencies to
regulate insurance companies and holding company systems. In addition,
legislation has been introduced in several of the past sessions of Congress
which, if enacted, could result in the federal government assuming some role in
the regulation of the insurance industry. Several committees of Congress have
made inquiries and conducted hearings as part of a broad study of the regulation
of United States insurance companies.

In partial response to Congress' initiatives, the NAIC and insurance
regulators are re-examining existing laws and regulations and their application
to insurance companies. In particular, this re-examination has focused on
insurance company investment and solvency issues and, in some instances, has
resulted in new guidelines. The NAIC has formed groups to study and formulate
regulatory proposals on such diverse issues as the use of surplus debentures,
accounting for reinsurance transactions and the adoption of RBC rules. In
addition, in connection with its accreditation of states and as part of its
program to monitor the solvency of insurance companies, the NAIC requires states
to adopt model NAIC laws and regulations on specific topics, such as holding
company regulations and the definition of extraordinary dividends. California is
accredited by the NAIC. Accordingly, California has followed regulatory
rule-making that makes the form of its insurance regulation generally consistent
with the model NAIC laws.

It is not possible to predict the future impact of changing state and
federal regulations on the Company's operations.

California and most other states have insurance laws requiring that
property/casualty rate schedules, policy or coverage forms, and other
information be filed with the states' regulatory authority. In many cases, such
rates and/or policy forms must be approved prior to use. There can be no
assurance that state or federal regulatory requirements will not become more
stringent in the future and have an adverse effect on the operations of the
Company's insurance subsidiary or on stockholder values.

Insurance companies are required to file detailed annual reports with the
state insurance regulator in each of the states in which they do business and
their business and accounts are subject to examination by such agencies at any
time. The Company files these reports with the DOI, the NAIC and in all other
states in which it is licensed to do business. In addition, insurance regulators
occasionally examine the insurer's financial condition, adherence to statutory
accounting principles, and compliance with insurance department rules and
regulations.

In the event of a default on FPIC's liabilities or the insolvency,
liquidation or other reorganization of FPIC, the rights of the creditors and
stockholders of FPIC to proceed against the assets of FPIC, would be governed by
state insurance laws relating to liquidation and rehabilitation. Therefore, if
FPIC were to be liquidated or the subject of rehabilitation proceedings, such
liquidation or rehabilitation proceedings would be conducted by the Commissioner
as the receiver with respect to all FPIC's assets and business. Under the Code,
all creditors of FPIC, including policyholders, would be entitled to payment in
full from such assets before the Group, as a stockholder, would be entitled to
receive any distribution thereof.

Insurance Regulation Concerning Change or Acquisition of Control

The Code contains provisions to the effect that the acquisition or change
of "control" of a domestic insurer or of any person (e.g. parent or holding
company) that controls a domestic insurer cannot be consummated without the
prior approval of the Commissioner. In general, a presumption of "control"
arises from the ownership, control, possession with the power to vote or
possession of proxies with respect to 10% or more of the voting securities of a
domestic insurer or of a person that controls a domestic insurer. A person
seeking to acquire control, directly or indirectly, of a domestic insurance
company or of any person controlling a domestic insurance company must generally
file with the Commissioner a statement relating to the acquisition of control
containing certain information required by statute and published regulations and
provide a copy of such statement to the domestic insurer.

43
<PAGE> 45

In addition, certain state insurance laws contain provisions that require
pre-acquisition notification to state agencies of a change in control of a
non-domestic insurance company admitted in the state. While such pre-acquisition
notification statutes do not authorize the state agency to disapprove the change
of control, such statutes do authorize certain remedies, including the issuance
of a cease and desist order with respect to the non-domestic admitted insurer if
certain conditions exist such as undue market concentration.

Any future transactions involving the acquisition of 10% or more of the
Company's Common Stock by any one person or affiliated group would also
currently require approval by the Commissioner and, should the Company expand
its operations to other states, would require the pre-acquisition notification
in those states which have adopted pre-acquisition notification provisions. Such
requirements may deter, delay or prevent certain transactions affecting the
ownership of the Company's Common Stock.

Limits on Writing Business

The Commissioner has extremely broad power to evaluate insurance companies
on a case-by-case basis, without specific regard to published rules or
standards. That is, if the Commissioner deems an insurer to be in a potentially
hazardous condition detrimental to the interests of the public, the Commissioner
has the authority to issue orders to a particular company, restrict a company's
writings, or place it under supervision or into receivership. Management of the
Company is aware that the Commissioner is always concerned with companies being
overly leveraged by writing large volumes of premium even though they may
possess limited surplus as regards policyholders.

Regulation of Dividends and Other Payments from Insurance Subsidiaries

The Company is a legal entity separate and distinct from its subsidiaries.
As a holding company with no other significant business operations, its primary
sources of cash to meet its obligations, including principal and interest
payments with respect to indebtedness, or to be able to make stockholder
distributions, are dividends and other statutory permitted payments from FPIC.

The payment of dividends to the Company by FPIC is subject to limitations
imposed by the Code which provides that cash dividends may be paid by FPIC only
from retained earnings and surplus as regards policyholders. In addition, an
insurer subject to the insurance holding company law may not pay an
"extraordinary" dividend to its stockholders without the prior approval of the
Commissioner of Insurance.

An extraordinary dividend or distribution includes any dividend or
distribution of cash or other property, the fair market value of which, together
with that of other dividends or distributions made within the preceding 12
months, exceeds the greater of (i) 10% of such insurer's surplus as regards
policyholders as of the preceding December 31, or (ii) 100% of the insurer's
statutory net income (excluding unrealized capital gains) for the preceding
year.

FPIC presently pays the Company to service the interest payments on the
Company's $5 million Senior Notes. For the 12 months ended December 31, 1997,
these interest payments totaled $600,000.

The authority of the Commissioner and government regulators in a number of
other states is such that, if insurance regulators determine that payment of a
dividend or any other payments to an affiliate would, because of the financial
condition of the paying insurance company or otherwise, be hazardous to such
insurance company's policyholders or creditors, the regulators may disapprove,
prohibit, or mandate return of such payments that would otherwise be permitted
without prior approval.

If the ability of FPIC to pay dividends or make other payments to the
Company is materially restricted by regulatory requirements, it could affect the
Company's ability to pay dividends to stockholders and/or service debt. No
assurance can be given that California (or other states in which the Company is
licensed or may someday be licensed) will not adopt statutory provisions more
restrictive than those currently applicable. The Company presently has no plans
to pay dividends to its stockholders. See "Dividend Policy."

44
<PAGE> 46

Surplus as Regards Policyholders

As a California admitted insurer, FPIC is subject to the primary
jurisdiction of the insurance regulations of California. As the Company expands
its operations, it will also be subject to the regulators of each state in which
it does business. Such regulators have the authority, in connection with
continued licensing (or where not yet doing business, in the granting of
licensing), to limit or prohibit writing new business within their jurisdiction
when, in the state's judgment, the insurance subsidiary is not maintaining
adequate capital and surplus as regards policyholders. Surplus as regards
policyholders is the excess of all assets over all liabilities under SAP. This
amount is regarded as a measure of financial protection to policyholders in the
event an insurance company suffers unexpected or catastrophic losses. At June
30, 1998, the Company's surplus as regards policyholders under SAP was
$14,719,000. See "Risk Factors -- Regulations, Pending Legislation and Case
Law."

Investment Regulations

The Company is subject to state laws and regulations that require
diversification of its investment portfolio. Such regulations could cause
non-conforming investments to be treated as non-admitted assets for purposes of
measuring surplus as regards policyholders and, in some instances, could require
divestiture. As of June 30, 1998, the Company's investments complied with such
laws and regulations in all material respects. The NAIC has proposed the
development of a model investment code ("Model Code") which would provide
uniform regulation of insurance company investments in those states that adopt
the Model Code. Although insurance industry and regulatory groups have been
working on the development of the Model Code for several years, it is unclear at
this time what the final provisions will be. The Company believes that FPIC
could comply with the existing proposals without adverse consequences.

Membership in Solvency Funds and Associations

FPIC, like other insurers, is required to participate in insolvency funds
and associations in each state in which FPIC is licensed, and may be subject to
assessments from time to time to cover unpaid policyholder claims of insolvent
insurers participating in the same lines of business as the Company. The maximum
assessment authorized by law in California in any one year has varied between 1%
and 2% of annual premiums written in California. Most of these payments are
recoverable through future policy surcharges and premium tax reductions. No
material assessments have been made on FPIC.

Shared Markets

As a condition of receiving a license to do business in California and most
other states, a property-casualty insurance company is required to participate
in mandatory property-casualty shared market mechanisms or pooling arrangements
which provide various insurance coverages to individuals and other entities that
otherwise are unable to purchase such coverage voluntarily through private
insurers. These shared market mechanisms are structured differently depending on
the state in which they are established and the particular type of insurance
provided through the mechanism. Included within the shared market mechanisms are
structures generally referred to as assigned risk plans, reinsurance facilities,
limited liability pools and property shared markets or "fair plans." The
Company's participation in such shared market mechanisms is generally in amounts
related to the amount of the Company's direct premiums written for the types of
coverage. The cost of mandatory participation in such shared market mechanisms
has not had a materially adverse effect on the Company's operations, liquidity
and capital resources in the past. For the past three years, the Company
incurred no costs to participate in these mechanism. The amount of future losses
or assessments from the commercial lines shared market mechanisms and pooling
arrangements cannot be predicted with certainty.

Federal Legislative Proposals

For the past several years, Congress and certain federal agencies have been
investigating the current condition of the insurance industry (encompassing both
life and property-casualty insurance) in the United

45
<PAGE> 47

States to determine whether such form of federal role in the regulation of
insurance companies would be appropriate. Congress has conducted several
hearings and issued reports relating in general to the solvency of insurers as
well as the effectiveness of state regulation. Over the past several years
Congress has investigated whether it should establish an independent federal
agency to regulate the financial condition of federally-certified life and
property-casualty insurers and reinsurers in the United States. Among several
proposals considered in Congress, which may be introduced in the future, was a
bill which would allow insurers and reinsurers to elect voluntarily to obtain a
certificate of solvency from this federal agency or to conduct regulation.
Additionally, such insurers and reinsurers would also remain subject to state
regulation. At least one congressional initiative has been introduced in
Congress to modify or repeal the McCarran-Ferguson Act (which provides a limited
exemption to the "business of insurance" from federal antitrust laws, to the
extent it is subject to state regulation). Additionally, judicial decisions
narrowing the definition of "business of insurance" for McCarran-Ferguson Act
purposes may limit the ability of insurance companies in general to share
information with respect to rate setting, underwriting and claims management
practices in general. It is not possible to predict whether or in what form this
proposed legislation will be enacted or the potential effects thereof on the
Company and its competitors. It is not possible to predict the outcome of any of
the foregoing legislative, administrative or congressional activities nor the
potential effects thereof on the Company.

EMPLOYEES

As of June 30, 1998, the Company had 96 full-time and 29 part-time
employees. The Company is not a party to any collective bargaining agreement.
The Company believes relations with its employees are good.

PROPERTIES

The Company leases a 25,000 square foot office building as its headquarters
in Rocklin, California. Currently all but three employees work at the Rocklin
location. It is anticipated that the existing premises will be suitable for at
least several years. The Company owns a vacant 2.91 acre lot adjacent to the
Company's headquarters for future expansion.

LEGAL PROCEEDINGS

Except for ordinary, routine litigation incidental to the Company's
business, there are no pending legal proceedings to which the Company is a
party. The nature of the Company's business subjects it to claims or litigation
relating to policies of insurance it has issued. Management believes that the
Company is not a party to any pending legal proceedings which are likely to have
a material adverse effect on its business, financial conditions or results of
operations.

46
<PAGE> 48

MANAGEMENT

The following table provides information regarding the executive officers
and directors of the Company. Biographical information for each of the
individuals set forth in the table is presented below:

<TABLE>
<CAPTION>
NAME AGE TITLE
---- --- -----
<S> <C> <C>
Robert C. Goodell..... 43 Chairman of the Board, President, Chief Executive Officer,
Director
Robert T. Kingsley.... 32 Executive Vice President, Chief Operating Officer,
Treasurer, Secretary
Artur A. Terner....... 31 Vice President and Chief Financial Officer
Timothy N. Blaede..... 37 Vice President of Information Services
John R.
Hollingshead........ 45 Vice President and General Counsel
Edward J. Paoletti.... 52 Vice President of Underwriting
Wallace G. Rascher.... 67 Vice President of Sales and Marketing
Charles E. Wardlaw.... 56 Vice President of Claims
Stephen E. Adamson.... 41 Director
Patrick C. Haden...... 45 Director
Michael J.
Morrissey........... 51 Director
Richard G. Pfeiffer... 54 Director
</TABLE>

Mr. Goodell has served as President and Chief Executive Officer and a
Director of the Company since June 1993 when he and the current stockholders
acquired the Company. From 1992 to 1993, Mr. Goodell provided management
consulting services at CAST Management Consultants, Inc. From 1984 to 1992, Mr.
Goodell served as Executive Vice President and Chief Financial Officer of Amwest
Insurance Group, Inc. From 1983 to 1984, he served as Vice President Financial
Systems at California Federal Savings and Loan. From 1980 to 1983, he served as
a Manager-Management Consulting for Peat, Marwick, Mitchell & Co. Between 1977
and 1980, Mr. Goodell held positions as Controller/Treasurer of Insurance
Subsidiaries of Teledyne, Inc.

Mr. Kingsley, Executive Vice President and Chief Operating Officer, joined
the Company in August 1993, prior to the acquisition of the Company. Mr.
Kingsley worked for Xerox Corporation as a Financial Analyst from 1992 to 1993
following the completion of his MBA. From 1987 to 1991, Mr. Kingsley was
Assistant Treasurer for Amwest Surety Insurance Company. From 1985 to 1987, Mr.
Kingsley served as Senior Insurance Analyst with the Surety Bond Branch of the
U.S. Treasury Department.

Mr. Terner joined the Company in 1994 as Controller, succeeding to his
current position of Vice President and Chief Financial Officer in 1997. Mr.
Terner was employed from 1989 to 1994 in various positions of increasing
responsibility culminating in the position of Supervising Senior Accountant at
KPMG Peat Marwick concentrating primarily in the financial institution practice.

Mr. Blaede joined the Company as Vice President of Information Services in
January 1997. Prior to joining the Company, he was Manager of Special Projects
at ISI Systems, Inc. From 1995 to 1996, he worked as Senior Project Manager for
Innovative Computer Systems. During the period from 1983 to 1995, Mr. Blaede
served in positions of increasing responsibility at ISI Systems, Inc.
culminating in the post of Manager, Custom Development.

Mr. Hollingshead joined the Company in November 1996 as its senior in-house
defense counsel and was promoted to Vice President and General Counsel in 1997.
From 1995 to 1996, he was Managing Attorney for Marlin & Saltzman, a San
Francisco Bay Area insurance defense firm which provided litigation services
exclusively for Atlantic Mutual Insurance Co. From 1982 to 1995, Mr.
Hollingshead was an attorney with Capps, Staples et al, in Walnut Creek,
California.

Mr. Paoletti became Vice President of Underwriting in 1996. From 1982 to
1996 he was Vice President/ Branch Manager in the Sacramento office for CIGNA
Corporation. From 1978 to 1982, Mr. Paoletti was employed by CG/Aetna Insurance
as Casualty Supervisor in Orange County, California and Underwriting Manager in
Portland, Oregon. Previously, he was Personal and Commercial Lines Underwriter
at Ohio

47
<PAGE> 49

Casualty Insurance from 1976 to 1978 and Casualty Underwriter for Safeco
Insurance based in Fountain Valley, California from 1974 to 1976.

Mr. Rascher joined Financial Pacific in 1992 as Vice President of Sales and
Marketing. From 1991 to 1992, he was Field Auditor at DJ Insurance Services,
where he provided workers' compensation and general liability audits to
insurance company clients. From 1989 to 1991, Mr. Rascher was Branch
Manager/Regional Business Manager in Fresno, California for Sequoia Insurance
Company. From 1970 to 1989, Mr. Rascher served in positions of increasing
responsibility with California Insurance Group, including Manager of the
Sacramento Branch Office, Vice President of Marketing and Sales, and various
underwriting positions.

Mr. Wardlaw joined the Company in November 1997 as its Vice President of
Claims. From 1985 to 1997, Mr. Wardlaw was the owner of an independent
property/casualty claims adjusting firm in Sacramento, California. From 1972 to
1985, Mr. Wardlaw held various claims positions with United Pacific/Reliance
Insurance Company including manager of the Sacramento service center branch. In
1971, Mr. Wardlaw began his career with Safeco Insurance Company.

Mr. Adamson became a member of the Board in 1993. Mr. Adamson is a managing
member of Celerity Partners, a private equity firm specializing in leveraged
buyouts. Prior to forming Celerity Partners in 1995, Mr. Adamson was a managing
director of W.E. Myers & Co., a merchant banking firm. Mr. Adamson serves as
Chairman of the Board of Dynamic Circuits, Inc. and is a director of several
private companies.

Mr. Haden became a member of the Board in 1993. Since 1987, Mr. Haden has
been a general partner of Riordan, Lewis & Haden ("RLH"), a Los Angeles based
partnership which invests in management buy-out and venture capital
transactions. Mr. Haden also serves as a director of Tetra Tech, Inc., Data
Processing Resources Corporation, PIA Merchandising Services, Inc. and several
private companies.

Mr. Morrissey became a member of the Board in 1993. Since 1983, Mr.
Morrissey has been the Chairman and Chief Executive Officer of Firemark Group, a
merchant banking firm specializing in insurance related investments. Mr.
Morrissey also serves as a director of Pembridge, Inc. and New Cap Re Holdings,
Limited.

Mr. Pfeiffer became a member of the Board in 1995. Mr. Pfeiffer has worked
for St. Paul Fire and Marine Insurance Company in various capacities since 1971.
He is currently a Vice President working on St. Paul's worldwide insurance
operations.

The directors were each elected in accordance with the Stockholders
Agreement dated September 7, 1993, as amended (the "Stockholders Agreement"),
which requires that each stockholder will vote for the election of directors,
such that the following persons are elected to the Board: (i) one nominee
designated by FinPac Partners ("FinPac"), (ii) one nominee designated by St.
Paul Fire and Marine Insurance Company ("St. Paul"), (iii) one nominee
designated by Firemark Global Insurance Fund, L.P. ("Firemark"), (iv) the Chief
Executive Officer; and (v) one nominee designated by the above four nominees.
The Stockholders Agreement will terminate upon the conclusion of this Offering.
See "Principal and Selling Stockholders" and "Certain Transactions."

The Audit Committee of the Board of Directors consists of Messrs. Adamson,
Haden, Morrissey and Pfeiffer. The Audit Committee meets privately once per year
with the Company's independent auditor and actuary.

Directors of the Company who are not employed by the Company or any
subsidiary receive a fee of $5,000 per quarter. Directors are also entitled to
reimbursement for reasonable out-of-pocket expenses related to travel for Board
meetings.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Company has formed a Compensation Committee of its Board of Directors
which consists of Messrs. Haden and Adamson. Mr. Haden is the nominee of RLH,
the general partner of FinPac, to the Board, and Mr. Adamson is the nominee of
FinPac, St. Paul, Firemark and the Chief Executive Officer to the Board.

48
<PAGE> 50

See "Certain Transactions" for information regarding the interests of RLH in
certain transactions and arrangements involving the Company.

The Compensation Committee evaluates executive performance in relationship
to individual efforts and contributions to corporate earnings and makes
recommendations for raises and merit bonuses. The Compensation Committee is also
responsible for administration of the Company's 1993 Stock Incentive Plan.

Neither Mr. Haden nor Mr. Adamson was at any time during the year ended
December 31, 1997, or at any other time, an officer or employee of the Company.
No member of the Compensation Committee serves as a member of the board of
directors or compensation committee of any entity that has one or more executive
officers serving as a member of the Company's Board or Compensation Committee.

EXECUTIVE COMPENSATION

The following Summary Compensation Table sets forth the compensation earned
by (i) the Company's Chief Executive Officer; (ii) the other four most highly
compensated executive officers at the end of 1997; and (iii) a former executive
officer who would have been one of the other four most highly compensated
executive officers if he remained employed with the Company (the "Named
Executive Officers") for services rendered in all capacities to the Company for
each of the fiscal years in the three year period ended December 31, 1997.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
------------
SECURITIES ALL
NAME AND FISCAL UNDERLYING OTHER
PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS COMPENSATION(1)
------------------ ------ -------- -------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Robert C. Goodell.................. 1997 $244,043 $ 76,795 -- $ 2,684
President, Chief Executive
Officer 1996 $219,734 $ 25,000 -- $ 2,079
and Chairman of the Board 1995 $175,676 $118,148 -- $ 1,402

Robert T. Kingsley................. 1997 $135,580 $ 38,475 -- $ 2,642
Executive Vice President and 1996 $117,517 $ 39,250 15,776 $ 2,152
Chief Operating Officer 1995 $ 89,464 $ 50,000 1,972 $ 1,580

Wallace G. Rascher................. 1997 $103,778 $ 34,200 -- $ 3,379
Vice President -- Sales and 1996 $ 91,508 $ 25,000 5,916 $ 2,745
Marketing 1995 $ 84,488 $ 45,000 1,972 $ 2,203

Edward J. Paoletti................. 1997 $108,516 $ 38,475 -- $ 2,288
Vice President -- Underwriting 1996 $ 78,366 $ 55,000 9,860 $ 216
1995 -- -- -- --

Timothy N. Blaede.................. 1997 $ 87,461 $ 51,813 9,860 $ 94
Vice President -- 1996 -- -- -- --
Information Services 1995 -- -- -- --

John R. Aye........................ 1997 $112,228 $ -- -- $55,788
Vice President -- Claims(2) 1996 $100,260 $ 25,000 5,916 $ 1,788
1995 $ 87,162 $ 50,000 1,972 $ 1,122
</TABLE>

- ---------------
(1) Consists of excess premiums paid by the Company for group term life
insurance, contributions by the Company to the executive's 401(k) benefit
plan and, when applicable, value of personal use of automobiles and
severance benefits.

(2) Effective December 15, 1997, Mr. Aye no longer served as an officer of the
Company. He received $53,500 in severance benefits in 1997.

49
<PAGE> 51

The following table sets forth information concerning options granted to
the Named Executive Officers of the Company during the 1997 fiscal year.

OPTION GRANTS IN LAST FISCAL YEAR

<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT
ASSUMED ANNUAL
NUMBER OF RATES OF STOCK
SECURITIES PERCENT OF PRICE APPRECIATION
UNDERLYING TOTAL OPTIONS FOR OPTION TERMS
OPTIONS GRANTED TO EXERCISE ($)(2)
GRANTED EMPLOYEES IN PRICE EXPIRATION ---------------------
NAME (#)(1) FISCAL YEAR (%) ($/SHARE) DATE 5% 10%
---- ------------- --------------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Timothy N. Blaede........ 9,860 100% $4.82 2/12/07 $29,872 $75,703
</TABLE>

- ---------------
(1) Option vests ratably over the succeeding five anniversary dates.

(2) The potential realizable value columns of the table illustrate values that
might be realized upon exercise of the option immediately prior to its
expiration, assuming the Common Stock appreciates at the compounded annual
rates specified over the term of the option. These numbers do not take into
account provisions of the option providing termination of the option
following termination of employment or nontransferability of the option and
do not make any provision for tax associated with exercise. Because actual
gains will depend upon, among other things, future performance of the Common
Stock, there can be no assurance that the amounts reflected in this table
will be achieved.

The following table sets forth information concerning the number of options
owned by the Named Executive Officers and the value of any in-the-money
unexercised stock options as of December 31, 1997. No options were exercised by
the Named Executive Officers during fiscal 1997.

AGGREGATE OPTION EXERCISES
AND FISCAL YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF VALUE OF
SECURITIES UNEXERCISED
UNDERLYING IN-THE-MONEY
UNEXERCISED OPTIONS OPTIONS AT
AT DECEMBER 31, DECEMBER 31,
1997(#) 1997($)(1)(2)
------------------- ---------------
SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE(#) REALIZED($) UNEXERCISABLE UNEXERCISABLE
- ---- --------------- ----------- ------------------- ---------------
<S> <C> <C> <C> <C>
Robert C. Goodell............. -- -- 0/0 $0/$0
Robert T. Kingsley............ -- -- 11,832/7,888 $23,309/$12,148
Wallace G. Rascher............ -- -- 5,916/3,944 $14,198/$6,074
Edward J. Paoletti............ -- -- 1,972/7,888 $2,781/$11,122
Timothy N. Blaede............. -- -- 0/9,860 $0/$9,071
John R. Aye................... -- -- 5,916/3,944 $14,198/$6,074
</TABLE>

- ---------------
(1) Because there is no established public trading market for Common Stock, the
Board of Directors of the Company must, under certain circumstances,
determine the fair market value of the Common Stock. The Company believes
that the fair market value of the Common Stock was $5.94 per share as of
December 31, 1997.

(2) Values for "in-the-money" outstanding options represent the positive spread
between the respective exercise prices of the outstanding options and the
fair market value of the underlying Common Stock of $5.94 per share as
described in Note 1.

EMPLOYMENT AGREEMENTS

The Company has an employment agreement with Robert C. Goodell, pursuant to
which Mr. Goodell holds the position of Chief Executive Officer and Director,
for a one-year term. This agreement will renew automatically at the end of such
term and each anniversary thereafter for another one-year term unless
50
<PAGE> 52

terminated in accordance with such agreement. Mr. Goodell is paid a salary of
$250,000 per annum subject to increase as agreed to by Mr. Goodell and the
Board. He is also eligible to receive a bonus of up to 50% of his annual base
salary, as determined by the Board of Directors. The agreement also provides for
an automobile allowance not to exceed $900 per month and standard benefits under
any Company employee benefits plan and any additional benefits that are approved
by the Board. Upon termination of employment due to disability or by the Company
(with or without cause), Mr. Goodell will receive a severance payment equal to
the monthly portion of his annual base salary for the first 12 months after
termination of employment regardless of any amounts earned by him from other
employment during such period. During this 12 month period, Mr. Goodell will be
entitled to all standard employee benefits. Also, upon such termination or upon
termination due to death, Mr. Goodell will receive the unpaid portion of his
annual base salary and the prorated portion of his bonus. If Mr. Goodell
voluntarily terminates his employment, he is entitled only to the unpaid portion
of his annual base salary.

During his employment and at all times thereafter, Mr. Goodell will be
subject to disclosure restrictions regarding confidential information of the
Company. For 36 months after his termination, Mr. Goodell also may not solicit
any employees of the Company to become employed by Mr. Goodell or his subsequent
employer.

In February 1997, the Company entered into an employment agreement with
Robert T. Kingsley pursuant to which Mr. Kingsley became Executive Vice
President and Chief Operating Officer of the Company. The agreement provides for
an unspecified annual salary. Upon termination of his employment by the Company
or by mutual agreement with the Company, Mr. Kingsley will receive a severance
of six months his annual base salary. This severance payment will not be offset
by any amounts earned by him from any other employment during such six month
period. Mr. Kingsley will not receive a severance payment upon termination as a
result of his death or resignation.

The Company entered into employment agreements with Messrs. Rascher,
Blaede, Terner, Wardlaw and Hollingshead with terms identical to those of Mr.
Kingsley's contract. All of these contracts, including Mr. Kingsley's, are
terminable upon 30 days written notice by the Company.

In February 1996, the Company entered into an employment agreement with
Edward J. Paoletti, pursuant to which Mr. Paoletti became Vice President of
Underwriting. The agreement calls for an annual salary of $100,000 and a bonus
equal to 50% of his base salary based on achievement targets regarding
production, quality and service goals for the underwriting department. If the
Company terminates Mr. Paoletti's employment for any reason, it will pay
severance equal to 36 weeks of his annual salary. He will receive no other
benefits other than those provided by COBRA during such severance period.

RESTRICTED STOCK AGREEMENT

The Company entered into a Restricted Stock Agreement dated September 7,
1993 with Mr. Goodell in which the Company has the right to repurchase for
cancellation up to 269,076 shares of Common Stock (the "Initial Shares") held by
Mr. Goodell upon the occurrence of certain events at a purchase price of
$0.002536 per share. These events include: Mr. Goodell's termination, a change
in control of the Company and December 31, 1998. A "change in control" includes
a merger or consolidation of the Company into another company, the sale of all
or substantially all of the assets of the Company or a sale of all or
substantially all of the capital stock of the Company.

From 1994 to 1998, a portion of the Initial Shares became exempt from
repurchase (the "Exempt Shares") upon the Company meeting certain net income
thresholds. These net income targets will be adjusted if the Company consummates
a public offering in which the Series A Stock is converted into Common Stock.
Further, upon a "change in control" of the Company, all Initial Shares will
become Exempt Shares. As of December 31, 1997, 209,021 Initial Shares had become
Exempt Shares.

In addition, if Mr. Goodell terminates his employment for any reason on or
before December 31, 1998, the Company may repurchase all shares of Common Stock
(including Exempt Shares) held by Mr. Goodell (including shares held by trusts
established for the benefit of Mr. Goodell or his spouse) except for Initial

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<PAGE> 53

Shares, at a price equal to "book value" per share. The "book value" per share
will be the initial price paid for such shares plus the net income of the
Company determined in accordance with GAAP, calculated from the date of the
agreement to the end of the fiscal quarter immediately preceding the fiscal
quarter in which Mr. Goodell is terminated. The Company may purchase Initial
Shares at $0.00394 per share. If the Company fails to repurchase all of Mr.
Goodell's shares upon such termination, the other stockholders of the Company
may repurchase his shares at the same price offered to the Company.

In the event of the death of Mr. Goodell, his estate has the right to cause
the Company to repurchase any shares not repurchased in the manner described
above at the price the shares were first offered to the Company, provided that,
the estate may not the cause a repurchase to exceed the amount of proceeds from
any key man life insurance covering Mr. Goodell.

1993 STOCK INCENTIVE PLAN

The Company's 1993 Stock Incentive Plan (the "Incentive Plan") was adopted
by the Board of Directors on September 7, 1993. The Company has reserved 109,420
shares for issuance under the Incentive Plan. As of June 30, 1998, 1,972 shares
had been issued upon exercise of options granted under the Incentive Plan,
options for 82,819 shares were outstanding and 24,629 shares remained available
for future grant. Shares of Common Stock subject to outstanding options, which
expire or terminate prior to exercise, will be available for future issuance
under the Incentive Plan.

Under the Incentive Plan, employees and consultants may be awarded any form
of Company securities (an "Award"), including without limitation, options to
purchase shares of Common Stock, shares of Common Stock, warrants, phantom
stock, stock appreciation rights, restricted shares, stock units or a
combination thereof. These individuals may also receive cash bonuses under the
Incentive Plan. Options may be incentive stock options designed to satisfy
Section 422 of the Internal Revenue Code or nonstatutory stock options not
designed to meet such requirements.

The Incentive Plan is administered by the Compensation Committee. The
Compensation Committee has the complete discretion to determine which eligible
individuals are to receive Awards; determine the Award type; determine the
number of shares subject to an Award, vesting requirements and other features
and conditions of such Awards; interpret the Incentive Plan; and make all other
decisions relating to the operation of the Incentive Plan.

Upon a change in control, the Compensation Committee may accelerate the
receipt of benefits pursuant to an Award. A change in control includes a merger
or consolidation of the Company, the dissolution or liquidation of the Company,
a sale of all or substantially all of the assets of the Company and acquisition
of a specified percentage of the combined voting power of the Company's
outstanding stock.

The Board may amend or terminate the Incentive Plan at any time. Amendments
may be subject to stockholder approval to the extent required by applicable
laws. In any event, the Incentive Plan will terminate on September 7, 2003,
unless sooner terminated by the Board.

401(k) PLAN

The Company sponsors a contributory 401(k) Plan. All full-time employees of
the Company 21 years of age or older who have completed one year of service are
eligible for participation in the Plan. Currently, the Company matches 100% of
the employee's pre-tax contribution up to $2,000 and matched 100% of each
employee's contribution up to $1,000 and $1,500 in 1995 and 1996, respectively,
to the Plan. The total amount matched for 1995, 1996 and 1997 was $20,565,
$61,435, and $87,980, respectively.

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<PAGE> 54

PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of August 10, 1998 and as
adjusted to reflect the sale of Common Stock offered hereby, by: (i) each person
known by the Company to beneficially own more than 5% of the outstanding shares
of Common Stock; (ii) each of the Company's directors; (iii) each of the Named
Executive Officers; (iv) each Selling Stockholder; and (v) all directors and
executive officers of the Company as a group. Except as otherwise indicated, the
Company believes that the beneficial owners of the Common Stock listed below,
based on information furnished by such owners, have sole investment and voting
power with respect to such shares, subject to community property laws where
applicable.

<TABLE>
<CAPTION>
BENEFICIAL SHARES
OWNERSHIP NUMBER OF BENEFICIALLY
PRIOR TO SHARES TO OWNED AFTER
OFFERING BE SOLD OFFERING(1)
---------------------- IN THE ----------------------
SHARES PERCENTAGE OFFERING SHARES PERCENTAGE
--------- ---------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Robert C. Goodell(2)................... 381,265 13.5% 381,265 7.6%
Robert T. Kingsley(3).................. 15,776 * 15,776 *
Wallace G. Rascher(4).................. 7,888 * 7,888 *
Edward J. Paoletti(5).................. 3,944 * 3,944 *
Timothy N. Blaede(6)................... 1,972 * 1,972 *
Riordan, Lewis & Haden(7).............. 771,712 27.4% 142,887 628,825 13.1%
Patrick C. Haden(7).................... 771,712 27.4% 628,825 13.1%
Firemark Advisors, Inc.(8)............. 771,712 27.4% 142,887 628,825 13.1%
Michael J. Morrissey(8)................ 771,712 27.4% 628,825 13.1%
St. Paul Fire and Marine Insurance
Company(9)........................... 771,712 27.4% 142,887 628,825 13.1%
Richard G. Pfeiffer(9)................. -- -- -- --
Celerity Partners, L.P.(10)............ 59,367 2.1% 59,367 -- --
Stephen E. Adamson(11)................. 110,542 3.8% 51,175 1.1%
Robert S. Goodell(12).................. 39,438 1.4% 10,000 29,438 *
W.E. Myers(13)......................... 40,940 1.5% 40,940 *
Brian Sanderson(14).................... 10,235 * 10,235 *
John R. Aye............................ 1,972 * 1,972 -- --
All Directors and Executive Officers as
a Group (12 persons)................. 2,068,755 71.3% 1,723,614 35.2%
</TABLE>

- ---------------
* Less than 1%

(1) Assumes no exercise of the Underwriters' over-allotment option.

(2) Includes 234,315 shares held jointly by Robert C. and Suzanne M. Goodell as
of August 10, 1998 and 39,320 shares held by retirement plans for the
benefit of Mr. and Mrs. Goodell. The address of such persons is c/o
Financial Pacific Insurance Group, Inc., 3850 Atherton Road, Rocklin,
California 95765.

(3) Consists of 15,776 shares issuable upon exercise of options which are
exercisable as of, or will be exercisable within 60 days of, August 10,
1998.

(4) Consists of 7,888 shares issuable upon exercise of options which are
exercisable as of, or will be exercisable within 60 days of, August 10,
1998.

(5) Consists of 3,944 shares issuable upon exercise of options which are
exercisable as of, or will be exercisable within 60 days of, August 10,
1998.

(6) Consists of 1,972 shares issuable upon exercise of options which are
exercisable as of, or will be exercisable within 60 days of, August 10,
1998.

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<PAGE> 55

(7) Includes 178,108 shares issuable upon exercise of warrants which are
exercisable as of August 10, 1998. Shares are owned by FinPac Partners,
L.P., the general partner of which is RLH. Mr. Haden, a Director of the
Company, may be deemed to share voting and investment power with respect to
all such shares as a general partner of RLH. Mr. Haden does not own any
shares directly. The address of such persons is 300 S. Grand Avenue, 29th
Floor, Los Angeles, California 90071

(8) Includes 178,108 shares issuable upon exercise of warrants which are
exercisable as of August 10, 1998. Shares are owned by Firemark. Mr.
Morrissey, a Director of the Company, may be deemed to have voting and
investment power with respect to all such shares as the Chairman and Chief
Executive Officer of Firemark. Mr. Morrissey does not own any shares
directly. The address of such persons is 67 Park Place, Morristown, New
Jersey 07960.

(9) Includes 178,108 shares issuable upon exercise of warrants which are
exercisable as of August 10, 1998. The address of such persons is 385
Washington Street, MC 516A, St. Paul, Minnesota 55102. Mr. Pfeiffer has
disclaimed beneficial ownership of the shares owned by St. Paul.

(10) Consists of 59,367 shares issuable upon exercise of warrants which are
exercisable as of August 10, 1998.

(11) Includes 59,367 shares held by Celerity Partners, L.P. Mr. Adamson, a
Director of the Company, may be deemed to have voting and investment power
with respect to all such shares as the managing member of Celerity
Partners. Mr. Adamson also owns 51,175 shares directly, that are issuable
upon exercise of warrants which are exercisable as of August 10, 1998.

(12) Mr. Goodell is the father of Robert C. Goodell.

(13) Consists of 40,940 shares issuable upon exercise of warrants which are
exercisable as of August 10, 1998.

(14) Consists of 10,235 shares issuable upon exercise of warrants which are
exercisable as of August 10, 1998.

CERTAIN TRANSACTIONS

On December 28, 1995, the Company entered into a Note and Warrant Purchase
Agreement (the "Agreement") with Firemark, FinPac, St. Paul, and Celerity
FinPac, LLC ("Celerity"). Pursuant to the Agreement, the Company issued and
sold: (i) $5,000,000 aggregate principal amount of its 12% Senior Notes due
January 1, 2001 (the "Senior Notes") and (ii) Common Stock Purchase Warrants for
the purchase of up to 593,691 shares of the Company's Common Stock (the "Senior
Note Warrants"), as follows: Firemark, FinPac and St. Paul each acquired a
Senior Note in the principal amount of $1,500,000 and Senior Note Warrants to
acquire 178,108 shares of Common Stock, and Celerity acquired a Senior Note in
the principal amount of $500,000 and Senior Note Warrants to acquire 59,367
shares of Common Stock.

In accordance with the terms of the Senior Notes, the Company has paid
interest at the rate of 12% per annum thereon on July 1, 1996, January 1 and
July 1, 1997, and January 1, 1998 to Firemark, FinPac, St. Paul and Celerity.
The Company intends to prepay the Senior Notes with a portion of the proceeds
from this Offering. See "Use of Proceeds." The Senior Note Warrants may be
exercised at any time prior to January 1, 2004, and have an exercise price of
$5.61 per share. However, such Senior Note Warrants must be exercised in
connection with an underwritten public offering of the Company's Common Stock in
which the gross proceeds to be received by the Company equal or exceed
$10,000,000 and the public offering price of the Common Stock is not less than
$12.69 per share (as adjusted for stock splits, dividends or other
recapitalization transactions). Holders of the Senior Note Warrants are entitled
to certain registration rights. See "Description of Capital
Stock -- Registration Rights."

Patrick C. Haden, a Director of the Company, is a general partner of RLH,
the general partner of FinPac. Mr. Haden is also of counsel to Riordan &
McKinzie, the Company's legal counsel.

Michael J. Morrissey, a Director of the Company, is the Chairman and Chief
Executive Officer of Firemark Advisors, Inc. ("Advisors"), the general partner
of Firemark. In June 1997, the Company

54
<PAGE> 56

contracted with Advisors to render financial advisory services. Advisors was
paid a fee of $50,000 plus expenses of $13,099 for its services.

Since 1995, St. Paul, through its reinsurance affiliate, has participated
on the Company's property quota share and casualty excess of loss reinsurance
treaties. St. Paul has a 7.5% participation on the property quota share
reinsurance treaty and a 15% participation on the casualty excess of loss
reinsurance treaty. St. Paul is subject to the same terms and conditions as all
other reinsurance treaty participants. During 1997, the Company ceded $1,269,000
of written premium to St. Paul. At December 31, 1997, the Company had a
reinsurance recoverable under its reinsurance treaties of $1,336,000 due from
St. Paul which consists of paid and unpaid losses and loss adjustment expenses
and unearned premiums, net of amounts payable by the Company to St. Paul.

During 1997, Mr. Goodell sold 15,187 shares of Common Stock to each of
FinPac, St. Paul and Firemark at a price of $9.88 per share. The total proceeds
to Mr. Goodell were $450,000.

The Company has entered into indemnification agreements with its directors
and executive officers for the indemnification of and advancement of expenses to
such persons to the full extent permitted by law. The Company also intends to
execute such agreements with its future directors and executive officers.

The Company believes that the foregoing transactions were in its best
interest and were made on terms no less favorable to the Company than could have
been obtained for unaffiliated third parties. All future transactions between
the Company and any of its officers, directors or principal stockholders will be
approved by a majority of the independent and disinterested members of the Board
of Directors, will be on terms no less favorable to the Company than could be
obtained from unaffiliated third parties and will be in connection with bona
fide business purposes of the Company.

DESCRIPTION OF CAPITAL STOCK

The Company's authorized capital stock consists of 7,500,000 shares of
Common Stock and 2,000,000 shares of Preferred Stock. The following is a
description of the authorized capital stock of the Company as of April 15, 1998.
At such date, there were seven holders of record of the Common Stock and three
holders of record of the Series A Stock.

COMMON STOCK

As of April 15, 1998, there were 487,955 shares of Common Stock and 4,400
shares of Series A Stock outstanding. There will be 4,816,897 shares of Common
Stock outstanding (assuming conversion of all shares of Series A Stock into
1,735,521 shares of Common Stock, the full exercise of all Senior Note Warrants
into 593,691 shares of Common Stock and no exercise after July 1, 1998, of
outstanding options) after giving effect to the sale of shares of Common Stock
to the public offered hereby.

Holders of Common Stock are entitled to one vote per share and have no
cumulative voting rights. In general, action to be taken by a vote of the
stockholders of the Company requires the affirmative vote of at least a majority
of the votes cast by the holders of Common Stock entitled to vote, except that
the election of directors requires a plurality of the votes cast at an election.
Consequently, the holder or holders of record of more than 50% of the
outstanding shares of Common Stock can elect all of the Company's directors.

Subject to any preferences that may be applicable to subsequently issued
shares of Preferred Stock, if and when issued, the holders of Common Stock are
entitled to receive such dividends as may be declared from time to time by the
Board of Directors in its discretion from funds legally available therefor, and
upon liquidation, winding up and/or dissolution of the Company are entitled,
after payment of liabilities and preferences of outstanding Preferred Stock, if
any stock, to share ratably in assets available for distribution.

The holders of Common Stock have no preemptive rights, cumulative voting
rights, or rights to convert shares of Common Stock into any other securities
and are not subject to future calls or assessments by the Company. All
outstanding shares of Common Stock of the Company are fully paid and
nonassessable.

55
<PAGE> 57

Prior to the date of this Registration Statement, there has been no
established public trading market for the Common Stock. The Company has applied
for listing of the Common Stock on the Nasdaq National Market. See "Risk
Factors -- Lack of Prior Public Market for Common Stock."

PREFERRED STOCK

Upon the consummation of the Offering, the Company will have no outstanding
preferred stock, but the Board of Directors, without further action by the
holders of the Common Stock, is authorized to fix the dividend rights and terms,
conversion or exchange rights, voting rights, redemption rights and terms,
liquidation preferences, sinking fund and any other designations, powers,
rights, preferences, privileges, qualifications, limitations and restrictions
applicable to each series of preferred stock. The issuance of preferred stock
could adversely affect the voting power and other rights of the holders of
Common Stock.

The authority possessed by the Board of Directors to issue preferred stock
could potentially be used to discourage attempts by others to obtain control of
the Company through a merger, tender offer, proxy contest or otherwise by making
such attempts more difficult or more costly to successfully complete. The Board
of Directors may issue preferred stock with voting, dividend or liquidation and
conversion right that could adversely affect the rights of the holders of Common
Stock. There are no agreements or understandings for the issuance of preferred
stock, and the Board of Directors has no present intention to issue any
preferred stock.

As of April 15, 1998, the Board of Directors has designated one series of
preferred stock, Series A Stock, comprised of 2,000,000 shares of the Preferred
Stock, 4,400 of which were outstanding. Each share of Series A Stock has a
stated value of $1,000. Upon the consummation of the Offering, each share of
Series A Stock will, pursuant to the terms of the Company's Restated Certificate
of Incorporation, convert into 394.375 shares of Common Stock.

WARRANTS

As of July 1, 1998, the Company has outstanding Warrants providing for the
purchase of an aggregate of 747,216 shares of Common Stock (the "Warrants"). The
exercise price of the Warrants range from $2.54 to $5.61 per share, and the
Warrants expire on dates ranging from September 7, 2003 to January 1, 2004.
Warrants to purchase 593,691 shares of Common Stock will be exercised in
connection with this Offering. Under the Warrants, the holder may elect to
exercise its Warrant by payment of the exercise price or on a cashless basis.
The holders of the Senior Note Warrants will exercise their Warrants by
canceling indebtedness under the Senior Notes in the amount of the exercise
price.

SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW

The Company is subject to Section 203 of the Delaware General Corporation
Law ("Section 203"), which, subject to certain exceptions, prohibits a Delaware
corporation from engaging in any business combination with any interested
stockholder for a period of three years following the date that such stockholder
became an interested stockholder, unless: (i) prior to such date, the board of
directors of the corporation approved either the business combination or the
transaction that resulted in the stockholder becoming an interested stockholder;
(ii) upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at least
85% of the voting stock of the corporation outstanding at the time the
transaction commenced, excluding for purposes of determining the number of
shares outstanding those shares owned (x) by persons who are directors and also
officers and (y) by employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer; or (iii) on or subsequent
such date, the business combination is approved by the board of directors and
authorized at an annual or special meeting of stockholders, and not by written
consent, by the affirmative vote of at least 66 2/3% of the outstanding voting
stock that is not owned by the interested stockholder.

Section 203 defines business combination to include: (i) any merger or
consolidation involving the corporation and the interested stockholder; (ii) any
sale, transfer, pledge or other disposition of 10% or more of the assets of the
corporation involving the interested stockholder; (iii) subject to certain
exceptions, any
56
<PAGE> 58

transaction that results in the issuance or transfer by the corporation of any
stock of the corporation to the interested stockholder; (iv) any transaction
involving the corporation that has the effect of increasing the proportionate
share of the stock of any class or series of the corporation beneficially owned
by the interested stockholder; or (v) the receipt by the interested stockholder
of the benefit of any loans, advances, guarantees, pledges or other financial
benefits provided by or through the corporation. In general, Section 203 defines
an interested stockholder as any entity or person beneficially owning 15% or
more of the outstanding voting stock of the corporation and any entity or person
affiliated with or controlling or controlled by such entity or person.

REGISTRATION RIGHTS

At April 15, 1998, assuming conversion of all shares of Series A Stock into
1,725,251 shares of Common Stock and the full exercise of the Senior Note
Warrants into 593,691 shares of Common Stock, holders of approximately 2,816,897
shares of Common Stock are entitled to certain rights with respect to the
registration of such shares under the Securities Act. Under the terms of the
Stockholders Agreement, if the Company proposes to register any of its
securities under the Securities Act, either for its own account or for the
account of other security holders exercising registration rights, such holders
are entitled to notice of such registration and are entitled to include shares
of such Common Stock therein. All of these registration rights are subject to
certain conditions and limitations, among them the right of the underwriters of
an offering to limit the number of shares included in such registration. These
rights to cause the Company to register such shares shall terminate once such
shares may be sold in accordance with Rule 144(k) under the Securities Act.

TRANSFER AGENT AND REGISTRAR

Registrar and Transfer Company of Cranford, New Jersey will be the transfer
agent and registrar for the shares of Common Stock.

INDEMNIFICATION OF DIRECTORS AND OFFICERS

Section 102 of the DGCL authorizes a Delaware corporation to include a
provision in its Certificate of Incorporation limiting or eliminating the
personal liability of its directors to the corporation and its stockholders for
monetary damages for breach of the directors' fiduciary duty of care. The duty
of care requires that, when acting on behalf of the corporation, directors
exercise an informed business judgment based on all material information
reasonably available to them. Absent the limitations authorized by such
provision, directors are accountable to corporations and their stockholders for
monetary damages for conduct constituting gross negligence in the exercise of
their duty of care. Although Section 102 of the DGCL does not change a
director's duty of care, it enables corporations to limit available relief to
equitable remedies such as injunction or rescission. The Company's Certificate
of Incorporation and Bylaws include provisions which limit or eliminate the
personal liability of its directors to the fullest extent permitted by Section
102 of the DGCL. Consequently, a director of officer will not be personally
liable to the Company or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for (i) any breach of the director's duty
of loyalty to the Company or its stockholders; (ii) acts or omissions not in
good faith or which involved intentional misconduct or a knowing violation of
law; (iii) unlawful payments of dividends or unlawful stock repurchases,
redemptions or other distributions; and (iv) any transaction from which the
director derived an improper personal benefit.

The Company Certificate of Incorporation and Bylaws also provide, in
effect, that, to the fullest extent and under the circumstances permitted by
Section 145 of the DGCL, the Company will indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that he or she is a director or officer of
the Company, or is or was serving at the request of the Company as a director or
officer of another corporation or enterprise. The inclusion of these
indemnification provisions in the Company's Certificate of Incorporation and
Bylaws is intended to enable the Company to attract qualified persons to serve
as directors and officers who might otherwise be reluctant to do so. The Company
may, in its discretion, similarly indemnify its employees and agents.

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<PAGE> 59

Depending upon the character of the proceeding, the Company may indemnify
its directors and officers against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
in connection with any action, suit or proceeding if the person indemnified
acted in good faith and in a manner he or she reasonably believed to be in or
not opposed to the best interests of the Company, and, with respect to any
criminal action or proceeding, had no cause to believe his or her conduct was
unlawful. To the extent that a director or officer of the Company has been
successful in the defense of any action, suit or proceeding referred to above,
under the DGCL, the Company would have the obligation to indemnify him or her
against expenses (including attorneys' fees) actually and reasonably incurred in
connection therewith.

In addition, the limited liability provisions in the Certificate of
Incorporation and the indemnification provisions in the Certificate of
Incorporation and Bylaws may discourage stockholders from bringing a lawsuit
against directors for breach of their fiduciary duty (including breaches
resulting from grossly negligent conduct) and may have the effect of reducing
the likelihood of derivative litigation against directors and officers, even
through such an action, if successful, might otherwise have benefited the
Company and its stockholders. Furthermore, a stockholder's investment in the
Company may be adversely affected to the extent the Company pays the costs of
settlement and damage awards against directors and officers of the Company
pursuant to the indemnification provisions in the Company's Bylaws. The limited
liability provisions in the Certificate of Incorporation will not limit the
liability of directors under federal securities laws.

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of the Offering, the Company will have 4,816,897 shares of
Common Stock outstanding (assuming conversion of all shares of Series A Stock
into 1,735,221 shares of Common Stock, the full exercise of all Senior Note
Warrants into 593,691 shares of Common Stock and no exercise after July 1, 1998
of outstanding options). All 2,500,000 shares sold pursuant to this Offering
will be freely tradable without restriction or further registration under the
Securities Act, unless held by an "affiliate" of the Company (as that terms is
defined below). Any such affiliate would be subject to the resale limitation of
Rule 144 adopted under the Securities Act.

The remaining shares of outstanding Common Stock are "restricted
securities" (the "Restricted Shares") within the meaning of Rule 144 under the
Securities Act and may not be sold in the absence of a registration under the
Securities Act unless an exemption from registration is available, including an
exemption contained in Rule 144.

Of the Restricted Shares, an aggregate of 2,816,897 shares of Common Stock
will be eligible for sale in the public market subject to Rule 144 and Rule 701
under the Securities Act and the expiration of a contractual lock-up ending 180
days after the date of the Prospectus, unless an earlier release is consented
to, in whole or in part, by the Representative.

In general, under Rule 144 as currently in effect, any person (or person
who shares are aggregate for purpose for Rule 144) who has beneficially owned
restricted securities, as that term is defined in Rule 144, for at least one
year (including, in the case of a nonaffiliated holder, any period of ownership
of preceding nonaffiliate holders) is entitled to sell, within any three-month
period, a number of shares that does not exceed the greater of (i) 1% of the
then outstanding shares of Common Stock of the Company, or (ii) the average
weekly trading volume in Common Stock during the four calendar weeks preceding
such sale, provided that certain public information about the Company, as
required by Rule 144, is then available and the seller complies with the manner
of sale and notification requirements of the rule. A person who is not an
affiliate and has not been an affiliate within three months prior to the sale
and has, together with any previous owners who were not affiliates, beneficially
owned restricted securities for at least two years is entitled to sell such
shares under Rule 144 (k) without regard to any of the volume limitations
described above.

Rule 701 permits resales of shares issued pursuant to certain compensatory
benefit plans and contracts and prior to the date the issuer becomes subject to
the reporting requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), subject to certain limitations on the aggregate offering
price of a

58
<PAGE> 60

transaction and certain other conditions, commencing 90 days after the issuer
becomes subject to the reporting requirements of the Exchange Act, in reliance
upon Rule 144, but without compliance with certain restrictions, including the
holding period requirements, contained in Rule 144. In addition, the Securities
and Exchange Commission has indicated that Rule 701 will apply to typical stock
options granted by an issuer before it becomes subject to the reporting
requirements of the Exchange Act, along with the shares acquired upon exercise
of such options (including exercises after the date of this Prospectus).

No predictions can be made of the effect, if any, that future sales of
shares of Common Stock, and grants of options to acquire shares of Common Stock,
or the availability of shares for future sale, will have on the market price of
the Common Stock prevailing from time to time. Sales of substantial amounts of
Common Stock in the public market, or the perception that such sales could
occur, could adversely affect the prevailing market prices of the Common Stock.
See "Principal and Selling Stockholders," "Description of Capital Stock" and
"Underwriting."

59
<PAGE> 61

UNDERWRITING

Subject to the terms and conditions of the Underwriting Agreement, the
underwriters named below (the "Underwriters"), for whom EVEREN Securities, Inc.
(the "Managing Representative") and Hoefer & Arnett Incorporated are acting as
representatives (collectively, the "Representatives"), have severally agreed to
purchase from the Company and the Selling Stockholders, and the Company and the
Selling Stockholders have agreed to sell to the Underwriters, the respective
number of shares of Common Stock set forth opposite each Underwriter's name
below:

<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
<S> <C>
EVEREN Securities, Inc......................................
Hoefer & Arnett Incorporated................................

Total............................................. 2,500,000
=========
</TABLE>

The Underwriting Agreement provides that the obligations of the several
Underwriters thereunder are subject to approval of certain legal matters by
counsel and to various other conditions. The nature of the Underwriters'
obligation is such that they are committed to purchase and pay for all the
shares of Common Stock if any are purchased.

The Underwriters propose to offer the shares of Common Stock directly to
the public at the initial public offering price set forth on the cover page of
this Prospectus and to certain securities dealers at such price less a
concession not in excess of $ per share. The Underwriters may allow,
and such selected dealers may reallow, a concession not in excess of $
per share to certain brokers and dealers. After this Offering, the price to the
public, concession, allowance and reallowance may be changed by the
representatives of the Underwriters.

The Company has granted the Underwriters an option, exercisable during the
45-day period after the date of this Prospectus, to purchase up to 375,000
additional shares of Common Stock to cover over-allotments, if any, at the same
price per share as the initial 2,500,000 shares purchased by the Underwriters of
the Company. To the extent that the Underwriters exercise this option, each of
the Underwriters will be committed, subject to certain conditions, to purchase
such additional shares of Common Stock in approximately the same proportions as
set forth in the above table. The Underwriters may purchase such shares only to
cover over-allotments made in connection with this Offering.

At the close of this Offering, the Company has agreed to pay the Managing
Representative a non-accountable expense allowance of one percent of the total
offering proceeds, which will include proceeds from the Underwriters' exercise
of the over-allotment option to the extent exercised. The Managing
Representative's expenses in excess of the non-accountable expense allowance
will be borne by the Underwriters.

The Company has agreed to issue to the Managing Representative and certain
of its employees warrants (the "Managing Representative's Warrants") to purchase
up to 143,750 shares of Common Stock, at an exercise price per share equal to
110% of the initial public offering price per share. The Managing
Representative's Warrants are exercisable for a period of four years, commencing
one year from the effective date (the "Effective Date") of the Registration
Statement of which this Prospectus is a part and expire five years from the
Effective Date. The Managing Representative's Warrants will not be sold, offered
for sale,

60
<PAGE> 62

transferred, assigned or hypothecated for a period of one year from the
effective date of the Offering other than to officers or partners of the
Underwriters and members of the selling group and their officers and partners.
The holders of the Managing Representative's Warrants will have no voting,
dividend or other shareholders' rights until the Warrants are exercised. The
Company has granted the Managing Representative certain demand and piggy-back
registration rights related to the Managing Representative's Warrants, which are
applicable during the period that the Managing Representative's Warrants are
exercisable and expire five years from the Effective Date.

The Representatives have informed the Company that the Underwriters do not
intend to confirm sales to any account over which they exercise discretionary
authority.

The Company has agreed not to issue, and all the Company's officers and
directors, the Selling Stockholders, and all of the other stockholders, who in
the aggregate hold 100% of the shares of the Common Stock of the Company
outstanding immediately prior to the completion of this Offering, have agreed
not to sell, or otherwise dispose of, any shares of Common Stock or other equity
securities of the Company for a period of 180 days after the date of this
Prospectus (other than shares sold pursuant to this Prospectus) without the
prior written consent of the Managing Representative.

The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities under the Securities Act, or to
contribute to payments the Underwriters may be required to make in respect
thereof.

Prior to this Offering, there has been no trading market for the Common
Stock. Consequently, the initial public offering price was negotiated among the
Company, the Selling Stockholders and the Representatives. Among the factors
considered in such negotiations were the history of and the prospects for the
Company and the industry in which it competes; an assessment of the Company's
management; the past earnings of the Company and the trend and future prospects
of such earnings; the present state of the Company's development; the general
conditions of the securities markets at the time of the Offering; and the market
prices of publicly traded common stocks of comparable companies in recent
periods. There can be no assurance that an active trading market will develop
for the Common Stock or that the Common Stock will trade in the public market
subsequent to this Offering at or above the initial public offering price.

The initial public offering price set forth on the cover page of this
Prospectus should not be considered an indication of the actual value of the
Common Stock. Such price is subject to change as a result of market conditions
and other factors. No assurances can be given that Common Stock can be resold at
or above the initial public offering price.

LEGAL MATTERS

The validity of the shares offered hereby will be passed upon for the
Company by Riordan & McKinzie, a Professional Corporation, Los Angeles,
California and for the Underwriters by Morrison & Foerster LLP, Los Angeles,
California. Certain principals and employees of Riordan & McKinzie are limited
partners of a partnership which is a limited partner of FinPac Partners, a
California limited partnership and one of the Company's principal stockholders.
Certain insurance regulatory matters will be passed upon by LeBoeuf, Lamb,
Greene & MacRae L.L.P., San Francisco, California. See "Principal and Selling
Stockholders" and "Certain Transactions."

EXPERTS

The financial statements and schedules of Financial Pacific Insurance
Group, Inc. as of December 31, 1996 and 1997, and for each of the years in the
three-year period ended December 31, 1997, have been included herein and in the
registration statement in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.

61
<PAGE> 63

ADDITIONAL INFORMATION

The Company has filed with the Securities and Exchange Commission (the
"Commission"), Washington, D.C. 20549, a Registration Statement (which term
shall include all amendments, exhibits and schedules thereto) on Form S-1 under
the Securities Act, with respect to the Common Stock offered hereby. This
Prospectus, which constitutes a part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement, certain
parts of which are omitted in accordance with the rules and regulations of the
Commission, to which Registration Statement reference is hereby made. Statements
contained in this Prospectus as to the contents of any contract, agreement or
other document referred to are complete in all material respects. However, with
respect to each such contract, agreement or other document filed as an exhibit
to the Registration Statement, reference is made to the exhibit for a more
complete description of the matter involved. The Registration Statement may be
inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C., at the Commission's regional offices located at Seven World Trade Center,
13th Floor, New York, New York 10048 and at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials may also
be obtained from the Public Reference Section of the Commission, Washington,
D.C. 20549, at prescribed rates. The Commission maintains a website that
contains reports, proxy and information statements and other information
regarding issuers who file electronically with the Commission. The Commission's
address on the worldwide web is: http://www.sec.gov.

62
<PAGE> 64

GLOSSARY OF SELECTED INSURANCE TERMS

Artisan contractor......... A person who is skilled in and specializes in one
particular facet of the building process, such as
plumbing or electrical. An artisan contractor
performs its services as a subcontractor of a
general contractor.

Cede....................... To transfer to another insurer by way of
reinsurance all or a part of the liability or
expenses of insurance written by an insurer.

CMP -- Liability
Insurance.................. Insurance for business operations that provides
protection for a business against liability for
bodily injury or property damage of a third party.

CMP -- Property
Insurance.................. Insurance that indemnifies a person with an
insurable interest in tangible property for his/her
loss related to damage to or loss of use of his/her
subject property. This is intended as indemnity for
the insured-owner as compared to CMP -- liability
insurance which is intended to provide the insured
with coverage for bodily injury and property damage
to others.

Combined ratio............. The sum of the expense ratio and the loss ratio,
determined in accordance with SAP. A combined ratio
under 100% indicates an underwriting profit and a
combined ratio over 100% indicates an underwriting
loss. The extent by which the combined ratio
deviates from 100% indicates the relative
underwriting profit or loss from the business
operation of issuing policies of insurance. The
combined ratio does not reflect investment income,
federal income taxes or other non-underwriting
income or expense, all of which are included in
determining net income.

Commercial lines........... Insurance policies written by the Company for
business operations, as opposed to personal
coverages, that provide commercial general
liability insurance (protection for a business
operation against general liability for bodily
injury and/or property damage), CMP or property
insurance (protection against business property
damage from fire, lightning, windstorm and certain
other perils), and crime insurance (protection
purchased by businesses to insure against losses
caused by crimes).

Direct premiums written.... Total premiums for insurance sold to insureds, as
opposed to, and not including, premiums received
for reinsuring risks written by other insurance
companies.

Excess of loss
reinsurance................ Reinsurance which indemnifies the reinsured against
all or a specified portion of losses on reinsured
policies in excess of a specified dollar amount or
"retention."

Expense ratio.............. Under SAP, the ratio (expressed as a percentage) of
underwriting expenses to net premiums written.
Under GAAP, the ratio (expressed as a percentage)
of underwriting expenses to premiums earned.

Facultative reinsurance.... Individual risks offered by an insurer for
acceptance or rejection by a reinsurer. Both
parties are free to act in their own best
interests. The reinsurer is liable only for losses
which exceed the insurer's retention level.
Premiums vary with loss expectation.

General agent.............. Agents granted broad authority by an insurance
company it represents to underwrite, bind, cancel,
and collect money on the company's behalf.

Gross premiums written..... Total premiums written by an insurer during a
specified period of time, before ceding any portion
of such insurance risks to reinsurers.

63
<PAGE> 65

Hard Market................ An insurance market in which the demand for
insurance exceeds the readily available supply and
premiums are relatively high.

Incurred but Not Reported
("IBNR") Reserves...... Reserves for estimated losses which have been
incurred by insureds but not yet reported to the
insurer.

Incurred losses............ The total losses sustained by an insurance company
under a policy or policies, whether paid or unpaid.
Incurred losses include a provision for claims that
have occurred but have not yet been reported to the
insurer.

Industry combined ratio.... An average combined ratio for the property/casualty
insurance industry as compiled by the A.M. Best
which is a broad measure of the property/casualty
insurance industry's performance for a particular
period. The industry combined ratio measures the
overall performance of all property/casualty
insurance companies and for all lines of business.
The industry combined ratio is useful only in
assessing general trends within the industry and
should not be used to evaluate the performance of
the Company relative to other companies
underwriting similar lines of business.

Loss adjustment expenses
("LAE")................ The insurer's cost of investigating and settling
claims, including legal fees, other fees and
related expenses of administering the claims
adjustment process.

Loss ratio................. Under both SAP and GAAP, the ratio (expressed as a
percentage) of incurred losses and LAE to premiums
earned.

Loss reserves.............. Liabilities established by insurers to reflect the
estimated cost of claim payments that the insurer
will ultimately be required to pay on all reported
and unreported losses which are unpaid at the end
of a fiscal period on an undiscounted basis with
respect to insurance it has written. Reserves are
established for losses and LAE.

Net premiums earned........ The amount of net premiums written recognized as
income during a given period.

Net premiums written....... The amount of direct (gross) premiums written of an
insurer plus assumed reinsurance premiums, less
ceded reinsurance premiums.

Policy acquisition costs... The direct expenses associated with the production
of business including agents' or brokers'
commissions, premium taxes, marketing and certain
underwriting expenses.

Premiums earned............ The portion of premiums written that is recognized
for accounting purposes (GAAP and SAP) as income
during a period. Also known as earned premiums.

Quota share reinsurance.... Reinsurance in which the reinsured shares a
proportion of the original premiums and losses
under the reinsurance policy. Also known as pro
rata reinsurance.

Reinsurance................ The acceptance by one or more insurers, called
reinsurers, of all or a portion of the risk
underwritten by another insurer which has usually
directly written the coverage. However, the legal
rights of the insured generally are not affected by
the reinsurance transaction and the insurance
company issuing the insurance policy remains liable
to the insured for payment of full policy benefits.
64
<PAGE> 66

Semi-automatic facultative
reinsurance.............. Individuals risks written within the guidelines of
a reinsurance treaty are automatically ceded to and
accepted by the reinsurer. The reinsurer may reject
any reinsurance bound by notifying the Company
within a specified notice period. The liability of
the reinsurer with respect to any rejected
submission shall continue until the Company is able
to cancel the policy.

Soft Market................ An insurance market in which the supply of
insurance exceeds the current demand and premiums
are relatively low.

Statutory accounting
principles (SAP)........... Recording transactions and preparing financial
statements in accordance with the rules and
procedures prescribed or permitted by insurance
related statutes or regulatory authorities,
generally reflecting a liquidating, rather than a
going concern, concept of accounting. The principal
differences between SAP and GAAP, are: (a) under
SAP, certain assets are eliminated from the balance
sheet; (b) under SAP, policy acquisition costs are
expensed as incurred, while under GAAP, they are
deferred and amortized over the term of the
policies; (c) under SAP, no provision is made for
deferred income taxes; and (d) under SAP, certain
reserves are recognized which are not recognized
under GAAP. All financial data set forth in this
Prospectus is presented in accordance with GAAP
unless specifically otherwise stated.

Surplus as regards
policyholders............ The excess of all assets over all liabilities under
SAP.

Underwriting............... The process whereby an insurer reviews applications
submitted for insurance coverage and determines
whether it will issue all or part of the coverage
being requested and what the applicable premiums
will be. Underwriting also includes an ongoing
review of existing policies and their pricing.

Underwriting expenses...... The aggregate of losses, loss adjustment expenses,
policy acquisition costs, contingent ceding
commissions and general operating costs.

Underwriting profit
(loss)..................... The difference between net premiums earned and
underwriting expenses.

Unearned premiums.......... The pro rata portion of a premium representing the
unexpired term of policies in force as of a certain
date.

65
<PAGE> 67

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS -- FINANCIAL PACIFIC
INSURANCE GROUP, INC.
Independent Auditors' Report -- KPMG Peat Marwick LLP..... 67
Consolidated Balance Sheets of Financial Pacific Insurance
Group, Inc. and Subsidiaries -- December 31, 1996 and
1997, and June 30, 1998 (unaudited).................... 68
Consolidated Statements of Operations of Financial Pacific
Insurance Group, Inc. and Subsidiaries -- Years Ended
December 31, 1995, 1996 and 1997, and Six Months Ended
June 30, 1997 and 1998 (unaudited)..................... 69
Consolidated Statements of Comprehensive Income of
Financial Pacific Insurance Group, Inc. and
Subsidiaries -- Years Ended December 31, 1995, 1996 and
1997, and Six Months Ended June 30, 1997 and 1998
(unaudited)............................................ 70
Consolidated Statements of Stockholders' Equity of
Financial Pacific Insurance Group, Inc. and
Subsidiaries -- Years Ended December 31, 1995, 1996 and
1997, and Six Months Ended June 30, 1997 and 1998
(unaudited)............................................ 71
Consolidated Statements of Cash Flows of Financial Pacific
Insurance Group, Inc. and Subsidiaries -- Years Ended
December 31, 1995, 1996 and 1997, and Six Months Ended
June 30, 1997 and 1998 (unaudited)..................... 72
Notes to Consolidated Financial Statements of Financial
Pacific Insurance Group, Inc. and Subsidiaries......... 73
</TABLE>

66
<PAGE> 68

INDEPENDENT AUDITORS' REPORT

The Board of Directors
Financial Pacific Insurance Group, Inc.:

We have audited the accompanying consolidated balance sheets of Financial
Pacific Insurance Group, Inc. and subsidiaries as of December 31, 1996 and 1997,
and the related consolidated statements of operations, comprehensive income,
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Financial
Pacific Insurance Group, Inc. and subsidiaries as of December 31, 1996 and 1997,
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 1997, in conformity with generally
accepted accounting principles.

Also, in our opinion, the information set forth under the captions "Income
Statement Data" and "Balance Sheet Data" in the selected consolidated financial
data as of December 31, 1996 and 1997, and for each of the years in the
three-year period ended December 31, 1997, appearing on pages 16 and 17, is
fairly stated, in all material respects, in relation to the consolidated
financial statements from which it has been derived.

/s/ KPMG Peat Marwick LLP

Sacramento, California
January 30, 1998, except as to
Note 16, which is as of
April 14, 1998

67
<PAGE> 69

FINANCIAL PACIFIC INSURANCE GROUP, INC.
AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- JUNE 30,
1996 1997 1998
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Fixed maturities available for sale, at market value
(cost
$24,764,235, $30,027,603 and $34,495,629 in 1996,
1997 and 1998, respectively)...................... $24,045,597 $29,976,813 $34,652,603
Cash and cash equivalents........................... 497,388 632,495 2,897,958
Accrued investment income........................... 304,605 426,013 410,299
Receivables:
Premiums receivable, net of allowance for doubtful
accounts of $40,000 in 1996, 1997 and 1998..... 13,016,982 14,631,026 16,423,012
Income taxes receivable........................... 210,099 7,933 --
Notes receivable.................................. 47,859 6,691 4,769
----------- ----------- -----------
Total receivables......................... 13,274,940 14,645,650 16,427,781
Prepaid reinsurance premiums........................ 7,922,096 6,828,703 7,441,934
Reinsurance recoverable on unpaid losses and loss
adjustment expenses............................... 4,007,047 6,184,927 7,498,325
Deferred policy acquisition costs................... 3,778,170 5,356,697 5,840,394
Fixed assets, net................................... 525,208 885,841 1,300,876
Other assets........................................ 329,440 956,004 1,092,863
----------- ----------- -----------
Total assets.............................. $54,684,491 $65,893,143 $77,563,033
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Unpaid losses and loss adjustment expenses........ $13,944,397 $19,592,060 $23,090,654
Unearned premiums................................. 18,979,533 21,967,648 24,000,013
Deferred income taxes............................. 1,431,342 1,619,483 1,291,608
Reinsurance payable, net.......................... 1,914,378 1,472,807 3,335,184
Income taxes payable.............................. -- -- 360,373
Notes payable, net................................ 5,479,414 4,984,561 4,987,134
Other liabilities................................. 2,320,072 2,858,446 5,334,010
----------- ----------- -----------
Total liabilities......................... $44,069,136 $52,495,005 $62,398,976
----------- ----------- -----------
Stockholders' equity:
Series A convertible preferred stock, $.001 par
value; 2,000,000 shares authorized; 4,400
shares, issued and outstanding at 1996, 1997,
and 1998 respectively.......................... 5 5 5
Common stock, $.001 par value; 7,500,000 shares
authorized; 485,983 shares in 1996 and 1997,
and 487,955 shares in 1998, issued and
outstanding.................................... 486 486 488
Additional paid-in capital........................ 4,949,510 4,949,510 4,954,508
Retained earnings................................. 6,139,655 8,481,658 10,105,453
Accumulated other comprehensive income:
Net unrealized gain (loss) on available for sale
securities, net of deferred income tax expense
(benefit) of ($244,337), ($17,269) and $53,371
in 1996, 1997 and 1998, respectively........... (474,301) (33,521) 103,603
----------- ----------- -----------
Total stockholders' equity................ 10,615,355 13,398,138 15,164,057
----------- ----------- -----------
Total liabilities and stockholders'
equity.................................. $54,684,491 $65,893,143 $77,563,033
=========== =========== ===========
</TABLE>

See accompanying notes to consolidated financial statements.

68
<PAGE> 70

FINANCIAL PACIFIC INSURANCE GROUP, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------------------ -------------------------
1995 1996 1997 1997 1998
------------ ------------ ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Direct premiums written............ $ 24,694,947 $ 31,926,872 $ 39,511,737 $19,459,128 $22,059,027
Premiums ceded..................... (10,653,344) (13,673,996) (12,576,059) (6,171,758) (6,809,081)
------------ ------------ ------------ ----------- -----------
Net premiums written........... 14,041,603 18,252,876 26,935,678 13,287,370 15,249,946
Increase in unearned premiums........ (1,981,731) (3,265,911) (4,081,508) (3,157,190) (1,419,134)
------------ ------------ ------------ ----------- -----------
Net premiums earned............ 12,059,872 14,986,965 22,854,170 10,130,180 13,830,812
Commissions.......................... 104,985 627,690 709,057 354,726 393,021
Investment income, net of expenses... 1,028,524 1,449,406 1,719,877 831,577 1,053,284
Net realized gains (losses) on sales
of investments..................... 465,695 52,171 (46,194) (62,583) 32,470
Other income, net.................... 578,292 547,117 800,697 371,244 455,917
------------ ------------ ------------ ----------- -----------
Total revenues..................... 14,237,368 17,663,349 26,037,607 11,625,144 15,765,504

Expenses:
Losses and loss adjustment
expenses........................... 6,325,059 9,750,413 12,748,171 5,609,005 7,183,468
Policy acquisition costs............. 3,956,595 4,785,460 7,439,612 3,396,658 4,818,157
Contingent ceding commission......... (1,245,755) (3,222,420) (1,511,253) (1,380,000) (318,779)
General operating costs.............. 1,711,641 1,929,348 2,443,576 1,367,888 897,260
Agency expenses...................... 145,720 688,188 721,187 350,342 406,893
Interest expense..................... 128,603 691,957 617,042 314,469 302,573
------------ ------------ ------------ ----------- -----------
Total expenses..................... 11,021,863 14,622,946 22,458,335 9,658,362 13,289,572
------------ ------------ ------------ ----------- -----------

Income before taxes.................. 3,215,505 3,040,403 3,579,272 1,966,782 2,475,932
Income tax provision:
Current............................ 428,908 22,051 1,276,196 939,623 1,250,652
Deferred........................... 637,093 1,015,066 (38,927) (256,610) (398,515)
------------ ------------ ------------ ----------- -----------
Total income tax provision..... 1,066,001 1,037,117 1,237,269 683,013 852,137
------------ ------------ ------------ ----------- -----------
Net income..................... $ 2,149,504 $ 2,003,286 $ 2,342,003 $ 1,283,769 $ 1,623,795
============ ============ ============ =========== ===========
Earnings per share:
Basic.............................. $ 4.42 $ 4.12 $ 4.82 $ 2.64 $ 3.33
============ ============ ============ =========== ===========
Diluted............................ $ 0.94 $ 0.69 $ 0.79 $ 0.43 $ 0.55
============ ============ ============ =========== ===========
</TABLE>

See accompanying notes to consolidated financial statements.
69
<PAGE> 71

FINANCIAL PACIFIC INSURANCE GROUP, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
----------------------------------- ----------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net income........................ 2,149,504 2,003,286 2,342,003 1,283,769 1,623,795
--------- --------- --------- --------- ---------
Other comprehensive income, net of
tax:
Unrealized holding gain (loss)
arising during the period,
net of taxes of $201,888,
$(255,453), $211,361,
$(32,308) and $81,679,
respectively................. 391,899 (495,876) 410,292 (62,716) 158,554
Less: Reclassification
adjustment for gain (loss)
included in net income, net
of taxes of $158,336,
$17,738, $(15,706), $(21,278)
and $11,040, respectively.... 307,359 34,433 (30,488) (41,305) 21,430
--------- --------- --------- --------- ---------
Unrealized gain (loss) on
securities, net of taxes of
$43,552 $(273,191), $227,067,
$(11,030) and $70,640,
respectively................. 84,540 (530,309) 440,780 (21,411) 137,124
--------- --------- --------- --------- ---------
Comprehensive income.............. 2,234,044 1,472,977 2,782,783 1,262,358 1,760,919
========= ========= ========= ========= =========
</TABLE>

See accompanying notes to consolidated financial statements.
70
<PAGE> 72

FINANCIAL PACIFIC INSURANCE GROUP, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997, AND SIX MONTHS ENDED JUNE 30, 1998

<TABLE>
<CAPTION>
UNREALIZED
GAIN (LOSS)
NUMBER ON
OF NUMBER OF ADDITIONAL AVAILABLE
PREFERRED PREFERRED COMMON COMMON PAID-IN RETAINED FOR SALE
SHARES STOCK SHARES STOCK CAPITAL EARNINGS SECURITIES TOTAL
--------- --------- --------- ------ ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31,
1994.......................... 4,400 $5 485,983 $486 $4,949,510 $ 1,986,865 $ (28,532) $ 6,908,334
Net income.................... -- -- -- -- -- 2,149,504 -- 2,149,504
Change in unrealized gain
(loss) on available for sale
securities, net of deferred
income taxes of $43,552..... -- -- -- -- -- -- 84,540 84,540
----- -- ------- ---- ---------- ----------- --------- -----------
Balances at December 31,
1995........................ 4,400 $5 485,983 $486 $4,949,510 $ 4,136,369 $ 56,008 $ 9,142,378
Net income.................... -- -- -- -- -- 2,003,286 -- 2,003,286
Change in unrealized gain
(loss) on available for sale
securities, net of deferred
income taxes of $273,191.... -- -- -- -- -- -- (530,309) (530,309)
----- -- ------- ---- ---------- ----------- --------- -----------
Balances at December 31,
1996........................ 4,400 $5 485,983 $486 $4,949,510 $ 6,139,655 $(474,301) $10,615,355
Net income.................... -- -- -- -- -- 2,342,003 -- 2,342,003
Change in unrealized gain
(loss) on available for sale
securities, net of deferred
income taxes of $227,067.... -- -- -- -- -- -- 440,780 440,780
----- -- ------- ---- ---------- ----------- --------- -----------
Balances at December 31,
1997........................ 4,400 $5 485,983 $486 $4,949,510 $ 8,481,658 $ (33,521) $13,398,138
Net income.................... -- -- -- -- -- 1,623,795 -- 1,623,795
Capital contribution.......... 1,972 2 4,998 5,000
Change in unrealized gain
(loss) on available for sale
securities, net of deferred
income taxes of $70,640..... -- -- -- -- -- -- 137,124 137,124
----- -- ------- ---- ---------- ----------- --------- -----------
Balances at June 30, 1998
(unaudited)................. 4,400 $5 487,955 $488 $4,954,508 $10,105,453 $ 103,603 $15,164,057
===== == ======= ==== ========== =========== ========= ===========
</TABLE>

See accompanying notes to consolidated financial statements.
71
<PAGE> 73

FINANCIAL PACIFIC INSURANCE GROUP, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
----------------------------------------- -------------------------
1995 1996 1997 1997 1998
------------ ----------- ------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................ $ 2,149,504 $ 2,003,286 $ 2,342,003 $ 1,283,769 $ 1,623,795
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization....................... 104,480 260,138 319,029 173,076 158,741
Net realized (gains) losses on sales of
investments....................................... (465,695) (52,171) 46,194 62,583 (32,470)
Net realized losses on sales of fixed assets........ 2,285 6,141 15,574 18,832 (322)
Write-off of note receivable........................ -- 80,000 33,252 20,000 --
Deferred income taxes............................... 637,093 1,015,066 (38,927) (256,608) (398,515)
Increase in premiums receivable, net................ (3,045,663) (3,390,280) (1,614,044) (1,700,570) (1,791,986)
(Increase) decrease in accrued investment income.... (38,205) (40,987) (121,408) (126,325) 15,714
(Increase) decrease in income taxes receivable...... (84,160) (228,136) 202,166 566,622 368,306
(Increase) decrease in prepaid reinsurance
premiums.......................................... (2,579,263) (1,655,441) 1,093,393 727,116 (613,231)
(Increase) decrease in reinsurance recoverable on
unpaid losses and loss adjustment expenses........ 553,614 342,071 (2,177,880) (876,649) (1,313,398)
Increase in deferred policy acquisition costs....... (801,026) (1,147,059) (1,578,527) (1,105,016) (483,697)
Decrease (increase) in other assets................. 24,476 (81,437) (621,417) (459,331) (138,309)
Increase in unpaid losses and loss adjustment
expenses.......................................... 1,872,761 1,931,080 5,647,663 2,535,576 3,498,594
Increase in unearned premiums....................... 4,560,994 4,921,352 2,988,115 2,430,074 2,032,365
Increase (decrease) in reinsurance payable, net..... 1,458,042 (2,032,914) (441,571) 861,127 1,862,377
Increase in other liabilities....................... 769,277 614,541 538,378 282,236 2,475,564
------------ ----------- ------------ ----------- -----------
Net cash provided by operating activities...... 5,118,514 2,545,250 6,631,993 4,436,512 7,263,528
------------ ----------- ------------ ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed maturities available for sale....... (34,281,021) (7,595,264) (15,090,116) (3,019,276) (11,483,487)
Proceeds from sales of fixed maturities available for
sale................................................ 25,055,423 4,868,420 5,870,015 -- 3,987,624
Proceeds from maturities of fixed maturities available
for sale............................................ 7,408 572,817 3,896,031 410,000 3,040,050
Purchase of equity securities available for sale...... -- -- (118,832) (118,832) --
Proceeds from sales of equity securities available for
sale................................................ 47,177 -- 56,365 56,365 --
Proceeds from sales of short-term investments......... 935 -- -- -- --
Proceeds from principal repayment on note
receivable.......................................... 27,662 3,952 7,916 5,249 1,922
Purchase of fixed assets, net......................... (337,492) (372,178) (618,265) (453,586) (549,174)
------------ ----------- ------------ ----------- -----------
Net cash used in investing activities.......... (9,479,908) (2,522,253) (5,996,886) (3,120,080) (5,003,065)
------------ ----------- ------------ ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable............... 5,000,000 500,000 -- -- --
Principal repayment on notes payable.................. (315,000) (945,000) (500,000) (500,000) --
Capital contribution.................................. -- -- -- -- 5,000
------------ ----------- ------------ ----------- -----------
Net cash provided by (used in) financing
activities................................... 4,685,000 (445,000) (500,000) (500,000) 5,000
------------ ----------- ------------ ----------- -----------
Net increase (decrease) in cash and cash
equivalents.................................. 323,606 (422,003) 135,107 816,432 2,265,463
Cash and cash equivalents, beginning of year............ 595,785 919,391 497,388 497,388 632,495
------------ ----------- ------------ ----------- -----------
Cash and cash equivalents, end of year.................. $ 919,391 $ 497,388 $ 632,495 $ 1,313,820 $ 2,897,958
============ =========== ============ =========== ===========
SUPPLEMENTAL DISCLOSURES:
Cash paid for income taxes during the year.............. $ 513,067 $ 250,187 $ 1,074,030 $ 373,000 $ 882,346
============ =========== ============ =========== ===========
Cash paid for interest expense during the year.......... $ 116,351 $ 381,922 $ 611,583 $ 311,563 $ 300,000
============ =========== ============ =========== ===========
</TABLE>

See accompanying notes to consolidated financial statements
72
<PAGE> 74

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Background

Financial Pacific Insurance Group, Inc. (the "Group") was formed on May 26,
1993 to acquire all of the common stock of Financial Pacific Insurance Company
("FPIC") and Financial Pacific Insurance Agency ("FPIA"). The Group, FPIC and
FPIA are collectively referred to as "the Company".

The Group is primarily owned by Robert C. Goodell, the current President
and Chief Executive Officer, and three other investor groups.

The Company deals principally in commercial property, casualty and surety
lines of insurance. The majority of the Company's business is written for small
to medium sized businesses in California's Central Valley. The Company's
business is primarily written with artisan contractors, commercial property
owners, light industrial risks, and several special programs by a network of
independent agents.

Basis of Presentation

The consolidated financial statements include the accounts of the Group,
FPIC, and the FPIA. All significant intercompany balances and transactions have
been eliminated.

Cash and Cash Equivalents

Cash includes currency on hand with financial institutions. Cash
equivalents represent short-term, highly-liquid investments, readily convertible
to known amounts of cash and near maturity such that there is insignificant risk
of changes in value because of changes in interest rates. Cash equivalents are
carried at cost, which approximates market.

Investments

The Company accounts for investments in accordance with the provisions of
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" ("FAS 115"). Under FAS 115, the
Company classifies its fixed maturity securities as available for sale.
Unrealized holding gains and losses, net of deferred income taxes, on available
for sale securities are reported as a net amount in a separate component of
stockholders' equity until realized. Realized investment gains and losses are
reported based upon specific identification of the investments sold.

Equity securities are classified as available for sale and carried at
market value. Unrealized investment gains and losses, resulting from carrying
equity securities at market value, are recorded net of applicable deferred
income taxes directly in stockholders' equity.

Declines in the value of investments, which are determined to be other than
temporary, are charged to realized losses. Securities are reported at market
values based principally on prices obtained from security exchanges.

Deferred Policy Acquisition Costs

Acquisition costs, consisting of commissions, premium taxes, policy
issuance and underwriting costs, related to the production of new and renewal
business, are deferred and amortized ratably over the terms of the policies. The
method followed in computing deferred acquisition costs limits the amount of
such deferred costs to their estimated realizable value. The determination of
estimated realizable value, gives effect to the premium to be earned, losses and
loss adjustment expenses, investment income to be earned, and certain other
costs expected to be incurred as the premium is earned. Amortization of deferred
policy acquisition costs amounted to $3,956,595, $4,785,460 and $7,439,612 in
1995, 1996 and 1997, respectively.

73
<PAGE> 75
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Long-Lived Assets

The Company accounts for long-lived assets, which currently consists of
land held for expansion, in accordance with the provisions of Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be disposed Of " ("FAS 121").
Pursuant to FAS 121, the Company reviews its long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable.

Federal Income Taxes

Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial reporting basis
and the tax basis of the Company's assets and liabilities. The impact on
deferred taxes of changes in tax rates and laws, if any, are applied to the
years during which temporary differences are expected to be settled, and
reflected in the consolidated financial statements in the period of enactment.

Reinsurance

Reinsurance recoverables (including amounts related to losses incurred but
not reported) and prepaid reinsurance premiums are reported as assets. Estimated
reinsurance recoverables are recognized in a manner consistent with the
liabilities relating to the underlying reinsured contracts. Reinsurance premiums
and commissions are recorded based on management's best estimate of the ultimate
amounts to be incurred.

Losses and Loss Adjustment Expenses

The liability for unpaid losses and loss adjustment expenses is based upon
the accumulation of individual case estimates for losses reported prior to the
close of the accounting period plus estimates, based on experience and industry
data, for unreported losses and loss adjustment expenses.

There is a high level of uncertainty inherent in the evaluation of the
required loss and loss adjustment expense reserves for the Company. The
long-tailed nature of liability claims exacerbates that uncertainty. Management
has selected target losses and loss adjustment expense ratios that it believes
are reasonable and reflective of anticipated ultimate experience. The ultimate
costs of claims are dependent upon future events, the outcomes of which are
affected by many factors. Company claim reserving procedures and settlement
philosophy, current and perceived social conditions, economic inflation, current
and future court rulings and jury attitudes, improvements in medical technology,
and many other economic, scientific, legal, political, and social factors all
can have significant effects on the ultimate costs of claims. Changes in Company
operations and management philosophy also may cause actual developments to vary
from the past. In addition, the Company relies on policy language, developed by
the Company and by others, to exclude or limit coverage. If such language is
held by a court to be invalid or unenforceable, it could materially adversely
affect the Company's financial position. This possibility of expansion of
insurers' liability either through new concepts of liability or a refusal to
accept restrictive policy language has added to the inherent uncertainty of
reserving for losses. Since the emergence and disposition of claims are subject
to uncertainties, the net amounts that will ultimately be paid to settle the
liability may vary significantly from the estimated amounts provided for in the
accompanying consolidated financial statements. Any adjustments to reserves are
reflected in the operating results of the periods in which they are made.

Stock-Based Employee Compensation

Effective December 31, 1996, the Company adopted the disclosure-only
provisions of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" ("FAS 123"). Management has elected to continue
use of the accounting methods prescribed by Accounting Principles

74
<PAGE> 76
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Board Opinion No. 25 and to expand its disclosure of stock-based compensation as
permitted by FAS 123. Accordingly, no related compensation cost has been
recognized.

Revenue Recognition

Insurance premiums are earned ratably over the terms of the policies.
Unearned premiums are computed on a daily pro-rata basis. Agency commission and
related fees for the direct mail surety program are recognized based on the
policy issue date. Revenue related to service fees is earned as billed. Costs
related to service fees are predominantly incurred and recognized when policies
are issued.

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

New Accounting Standards

Statement of Financial Accounting Standards No. 130 ("FAS 130"), "Reporting
Comprehensive Income," and Statement of Financial Accounting Standards No. 131
("FAS 131"), "Disclosures about Segments of an Enterprise and Related
Information," were issued in June 1997 and are effective for fiscal years
beginning after December 15, 1997. FAS 130 establishes standards for the
reporting and display of comprehensive income and its components, which includes
net income and changes in equity during the period except those resulting from
investments by, or distributions to, stockholders. FAS 131 establishes standards
for disclosures related to business operating segments. As of January 1, 1998,
the Company adopted the provisions of FAS 130, which have been applied
retroactively to all periods presented in these financial statements. The
Company is currently evaluating the impact that FAS 131 will have on the
consolidated financial statements.

Earnings per Share

Effective December 31, 1997, the Company adopted SFAS No. 128 "Earnings per
Share."

Interim Financial Statements

The unaudited consolidated financial statements as of June 30, 1998 and for
the six months ended June 30, 1998 and 1997, have been prepared in conformity
with generally accepted accounting principles (GAAP) and include all adjustments
which, in the opinion of management, are necessary for fair presentation of the
results for the interim periods. All such adjustments are, in the opinion of
management, of a normal and recurring nature. All significant intercompany
balances and transactions have been eliminated.

Reclassifications

Certain reclassifications have been made from amounts reported in prior
years in order to be consistent with the June 30, 1998 presentation. Results of
operations for the six months ended June 30, 1998 are not necessarily indicative
of results to be expected for the full year.

75
<PAGE> 77
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 2 INVESTMENTS

The amortized cost and estimated market values of fixed maturities
available for sale at December 31, 1996 and 1997 are as follows:

<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES MARKET VALUE
----------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
1996:
U.S. government and agencies............... $ 9,976,614 $ 6,173 $113,239 $ 9,869,548
Obligations of states and political
subdivision.............................. 262,587 5,906 -- 268,493
Corporate securities....................... 14,325,034 -- 617,478 13,707,556
Certificates of deposit.................... 200,000 -- -- 200,000
----------- ------- -------- -----------
Total fixed maturities........... $24,764,235 $12,079 $730,717 $24,045,597
=========== ======= ======== ===========
1997:
U.S. government and agencies............... $15,619,552 $31,245 $ 22,234 $15,628,563
Obligations of states and political
subdivisions............................. 65,524 5,093 -- 70,617
Corporate securities....................... 14,129,816 37,415 102,309 14,064,922
Certificates of deposit.................... 212,711 -- -- 212,711
----------- ------- -------- -----------
Total fixed maturities........... $30,027,603 $73,753 $124,543 $29,976,813
=========== ======= ======== ===========
</TABLE>

The amortized cost and estimated market value of fixed maturities at
December 31, 1997 by contractual maturity, are shown below. Expected maturities
will differ from contractual maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment penalties.

<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST MARKET VALUE
----------- ------------
<S> <C> <C>
Maturity distribution of fixed maturities available for
sale:
Due in one year or less..................................... $ 1,151,399 $ 1,151,609
Due after one year through five years....................... 9,976,255 9,953,837
Due after five years through ten years...................... 14,723,380 14,681,344
Due after ten years......................................... 4,176,569 4,190,023
----------- -----------
Total fixed maturities............................ $30,027,603 $29,976,813
=========== ===========
</TABLE>

Proceeds from the sale of investments in fixed maturities available for
sale were $25,055,423, $4,868,420 and $5,870,015 for the years ended December
31, 1995, 1996 and 1997, respectively.

76
<PAGE> 78
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 2 INVESTMENTS (CONTINUED)
Summary of investment income, net of expenses:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Investment income, net of expenses of $6,604,
$13,481 and $14,944 in 1995, 1996 and 1997,
respectively
Fixed maturities............................. $1,000,235 $1,421,463 $1,681,025
Equity securities............................ 460 -- 42
Other investments............................ 27,829 27,943 38,810
---------- ---------- ----------
Investment income, net of expenses........ $1,028,524 $1,449,406 $1,719,877
========== ========== ==========
Realized gains (losses) on sales of
investments:
Fixed maturities available for sale:
Gains..................................... $ 592,097 $ 63,114 $ 22,222
Losses.................................... (125,204) (10,943) (5,949)
---------- ---------- ----------
Total................................ 466,893 52,171 16,273
---------- ---------- ----------
Equity securities available for sale:
Gains..................................... -- -- 3,684
Losses.................................... (2,133) -- (66,151)
---------- ---------- ----------
Total................................ (2,133) -- (62,467)
---------- ---------- ----------
Other investments:
Gains..................................... 935 -- --
Losses.................................... -- -- --
---------- ---------- ----------
Total..................................... 935 -- --
---------- ---------- ----------
Net realized gains (losses) on sales
of investments..................... $ 465,695 $ 52,171 ($ 46,194)
========== ========== ==========
</TABLE>

Investments with the following issuers exceeded 10% of total stockholders
equity at December 31, 1997:

<TABLE>
<CAPTION>
ISSUER ESTIMATED MARKET VALUE
------ ----------------------
<S> <C>
Federal Home Loan Mortgage Corporation...................... $3,507,500
==========
Federal National Mortgage Association....................... $7,494,531
==========
</TABLE>

The Company has securities on deposit with state regulatory agencies of
approximately $1,761,000 as of December 31, 1997 and 1996. The deposits
approximate market value.

77
<PAGE> 79
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 3 INCOME TAXES

The income tax expense reflected in the accompanying consolidated
statements of operations varied from amounts computed at the statutory rate of
35% in 1995, 1996 and 1997 on income before income taxes for the following
reasons:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Computed "expected" tax expense at statutory rate...... $1,125,427 $1,064,141 $1,252,745
Adjust graduated tax rate.............................. (32,155) (30,404) (35,792)
Increase (decrease) in income taxes resulting from:
Tax-exempt interest income........................... (31,860) (13,635) 2,442
Other, net........................................... 4,589 17,015 17,874
---------- ---------- ----------
Total income tax provision................... $1,066,001 $1,037,117 $1,237,269
========== ========== ==========
</TABLE>

The tax effect of temporary differences that give rise to significant
portions of deferred tax assets and deferred tax liabilities at December 31,
1996 and 1997, respectively, are presented below:

<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1997
----------- -----------
<S> <C> <C>
Deferred Tax Assets:
Loss and loss adjustment expense reserves................... $ 551,955 $ 709,150
Unearned premiums........................................... 548,343 769,025
Unrealized loss on securities available for sale............ 244,337 17,269
Allowance for doubtful accounts............................. 13,600 13,600
----------- -----------
Total gross deferred tax assets................... $ 1,358,235 $ 1,509,044
=========== ===========
Deferred Tax Liabilities:
Policy acquisition costs.................................... ($1,284,578) ($1,821,277)
Contingent ceding commission................................ (1,409,488) (1,178,787)
Other....................................................... (95,511) (128,463)
----------- -----------
Total gross deferred tax liabilities.............. (2,789,577) (3,128,527)
----------- -----------
Net deferred tax liabilities...................... ($1,431,342) ($1,619,483)
=========== ===========
</TABLE>

Management believes it is more likely than not the deferred tax assets will
reverse during periods in which the Company generates net taxable income or may
recover taxes paid in prior years. Accordingly, a valuation allowance has not
been recorded.

NOTE 4 REINSURANCE

The Company cedes insurance to reinsurers under various contracts that
cover individual risks or entire classes of business. Although the ceding of
insurance does not discharge the Company from its primary liability, the
insurance company that assumes the coverage assumes the related risk, and it is
the practice of insurers to treat reinsured risks, to the extent of the
reinsurance ceded, as though they were risks for which the original insurer is
not liable.

The Company is allowed a ceding commission on each of its reinsurance
contracts. Additionally, the Company's property quota share and first casualty
excess of loss reinsurance treaties contain provisions that establish minimum
and maximum cessions and allow limited participation in the profit of the ceded
business. Generally, the Company shares, on a limited basis, in the
profitability through contingent ceding commissions. The Company's exposure in
the loss experience is contractually defined at minimum and maximum levels. The
terms of such contracts are fixed at inception. Increases in the Company's
retention under such contracts reduces the level of profit participation. Since
estimating the emergence of claims to the applicable

78
<PAGE> 80
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 4 REINSURANCE (CONTINUED)
reinsurance layers in subject to significant uncertainty, the net amounts that
will ultimately be realized may vary significantly from the estimated amounts
recorded in the accompanying financial statements.

At December 31, 1996 and 1997, all property and casualty policies written
by the Company are reinsured with reinsurers rated as A or A minus by A.M. Best.
The Company has both a quota share agreement and a semi-automatic facultative
excess of loss agreement on property and two excess of loss agreements for
casualty. On its property business, the Company has a 30% quota share on the
first $2 million of any risk, resulting in a maximum company exposure of
$600,000 related to any one occurrence. Excess of $2 million, the Company has a
semi-automatic-facultative agreement which provides $8 million of coverage
excess of $2 million. On the casualty business, the Company presently maintains
a $750,000 excess of $250,000 treaty with a syndicate of reinsurers. Prior to
January 1, 1997, the Company maintained $400,000 excess of $100,000 and $500,000
excess of $500,000 casualty treaties. Excess of $1 million, the Company has a
semi-automatic-facultative agreement which provides $10 million of coverage
excess of $1 million. For the Company's surety line of business, the Company
maintains a variable quota share reinsurance arrangement which provides various
levels of participation depending on the size of the bond. The Company also
maintains Extra Contractual Obligation/Loss in Excess of Policy Limits (ECO/XPO)
coverage through the London markets. The Company currently purchases $2 million
worth of ECO/XPO coverage through this facility.

The property quota share and casualty excess of loss reinsurance treaties
include commission adjustment provisions. The Company records such adjustments
based upon estimates of cumulative experience under the contracts at each
reporting period.

At December 31, 1997, the Company had unsecured reinsurance recoverables
for paid and unpaid losses and loss adjustment expenses and unearned premiums in
excess of 10% of stockholders' equity from the following reinsurers:

79
<PAGE> 81
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 4 REINSURANCE (CONTINUED)
Reinsurance activity as reported in the accompanying consolidated financial
statements is as follows:

<TABLE>
<CAPTION>
DIRECT REINSURANCE NET ACTIVITY
BUSINESS CEDED OR BALANCE
----------- ----------- ------------
<S> <C> <C> <C>
1995:
Premiums written.................................... $24,694,947 $10,653,344 $14,041,603
Premiums earned..................................... 20,533,128 8,473,256 12,059,872
Losses and loss adjustment expenses incurred........ 7,977,514 1,652,455 6,325,059
=========== =========== ===========
Unpaid losses and loss adjustment expenses.......... $12,013,317 $ 4,349,118 $ 7,664,199
=========== =========== ===========
Unearned premiums................................... $13,659,006 $ 5,867,480 $ 7,791,526
=========== =========== ===========
1996:
Premiums written.................................... $31,926,872 $13,673,996 $18,252,876
Premiums earned..................................... 26,606,345 11,619,380 14,986,965
Losses and loss adjustment expenses incurred........ 11,131,863 1,381,450 9,750,413
=========== =========== ===========
Unpaid losses and loss adjustment expenses.......... $13,944,397 $ 4,007,047 $ 9,937,350
=========== =========== ===========
Unearned premiums................................... $18,979,533 $ 7,922,096 $11,057,437
=========== =========== ===========
1997:
Premiums written.................................... $39,511,737 $12,576,059 $26,935,678
Premiums earned..................................... 36,523,622 13,669,452 22,854,170
Losses and loss adjustment expenses incurred........ 17,844,735 5,096,564 12,748,171
=========== =========== ===========
Unpaid losses and loss adjustment expenses.......... $19,592,060 $ 6,184,927 $13,407,133
=========== =========== ===========
Unearned premiums................................... $21,967,648 $ 6,828,703 $15,138,945
=========== =========== ===========
</TABLE>

NOTE 5 LIABILITY FOR UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES

Activity in the liability for unpaid losses and loss adjustment expenses is
summarized as follows:

<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Balance at beginning of period.............. $10,140,556 $12,013,317 $13,944,397
Less reinsurance recoverables............. 4,902,732 4,349,118 4,007,047
----------- ----------- -----------
Net balance at beginning of period.......... 5,237,824 7,664,199 9,937,350
----------- ----------- -----------
Incurred related to:
Current year.............................. 6,490,825 7,394,848 10,991,179
Prior years............................... (165,766) 2,355,565 1,756,992
----------- ----------- -----------
Total incurred.............................. 6,325,059 9,750,413 12,748,171
----------- ----------- -----------
Paid related to:
Current year.............................. 1,975,694 2,413,980 3,370,671
Prior years............................... 1,922,990 5,063,282 5,907,717
----------- ----------- -----------
Total paid.................................. 3,898,684 7,477,262 9,278,388
----------- ----------- -----------
Net balance at December 31.................. 7,664,199 9,937,350 13,407,133
Plus reinsurance recoverables............. 4,349,118 4,007,047 6,184,927
----------- ----------- -----------
Balance at December 31................. $12,013,317 $13,944,397 $19,592,060
=========== =========== ===========
</TABLE>

During 1996 and 1997, the provision for losses and loss adjustment expenses
increased due to unfavorable reserve development primarily in the liability
lines of business. The unfavorable development is attributed in part to the
changes in the legal interpretation of manifestation of loss. Currently,
approximately 40% of the

80
<PAGE> 82
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 5 LIABILITY FOR UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES (CONTINUED)
Company's business is related to artisan contractors. Accordingly, the law
relating to construction defect liability can substantially affect the Company's
business. In July of 1995, the California Supreme Court rendered its opinion on
Admiral Insurance Company vs. Montrose Chemical Corporation (the "Montrose
Decision"). In that decision, the Supreme Court ruled that in the case of a
continuous and progressively deteriorating loss, such as pollution liability (or
construction defect liability), an insurance company has a definitive duty to
defend the policyholder until all uncertainty related to the severity and cause
of the loss is extinguished. As a result of the Montrose Decision, the Company
experienced a significant increase in construction defect liability cases, to
which it would not have been subject under the old law.

The liability for unpaid losses and loss adjustment expenses is stated net
of anticipated salvage and subrogation recoverable of $746,000 and $913,000 at
December 31, 1996 and 1997, respectively.

NOTE 6 NOTES PAYABLE, NET

At December 31, 1996 and 1997, and June 30, 1998 (unaudited), the Group
owed $5,000,000 under unsecured Senior Notes payable to certain stockholders of
the Company. The Notes accrue 12% interest compounded annually. Interest
payments are due semi-annually and the Notes are due on January 1, 2001. The
Notes were issued with Common Stock Purchase Warrants which entitle the holders
to purchase up to 593,691 shares of the Group's Common Stock. The Common Stock
Warrants are discussed further at Note 8. The Group is subject to certain
restrictions described in the note agreement.

The Group had outstanding borrowings of $500,000, $0, and $0, under a
$530,000 bank line of credit at December 31, 1996 and 1997, and June 30, 1998
(unaudited), respectively. The line is unsecured, matures July 1, 1998, and
bears interest (payable monthly) at an annual rate of 1 percent over the bank's
base rate. The effective annual interest rate was 9.25% and 8.5% during the
years ended December 31, 1996 and 1997, respectively. Effective July 1, 1998,
the line of credit maturity was extended to August 30, 1998.

The notes payable are presented net of deferred debt issue costs. Deferred
debt issue costs are amortized over the term of the note. Unamortized debt issue
costs totaled $20,586, $15,439, and $12,866, at December 31, 1996 and 1997, and
June 30, 1998 (unaudited), respectively.

NOTE 7 SERIES A CONVERTIBLE PREFERRED STOCK

The Group issued Series A convertible preferred stock ("Series A Stock")
pursuant to a Convertible Preferred Stock Purchase Agreement, dated September 7,
1993 (the "Series A Stock Agreement").

Each share of Series A Stock is convertible, at the option of the holder
thereof, into 394.375 shares of Common Stock, subject to certain adjustments
described in the Series A Stock Agreement. The holders of Series A Stock have
voting rights and powers equal to the voting rights and powers of such Common
Stock.
Each share of Series A Stock is automatically converted into shares of Common
Stock immediately upon the effective date of a registration statement filed by
the Company pursuant to the Securities Act of 1933, as amended, in connection
with a firm commitment, underwritten public offering with an offering price of
not less than $5.00 per share and with gross proceeds equal to or exceeding $10
million.

In the event of any liquidation, dissolution or winding up of the Group,
the holders of the Series A Stock are entitled to receive, prior and in
preference to any distribution of any assets of the Group to the holders of
Common Stock, the amount of $1.00 per share plus any declared but unpaid
dividends. At any time after September 7, 2000, the Group is entitled to redeem
all or any portion of the outstanding shares of Series A Stock for $1.00 per
share plus any declared but unpaid dividends.

81
<PAGE> 83
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 8 COMMON STOCK WARRANTS

On September 7, 1993, the Group issued Common Stock Purchase Warrants ("the
Warrants"). The Warrants entitle the holders to purchase 153,525 shares of the
Group's Common Stock, at any time prior to September 7, 2003, at the price of
$2.54 per share, subject to certain adjustments described in the Warrants.

On December 28, 1995, the Group issued Common Stock Purchase Warrants (the
"Senior Note Warrants") in conjunction with the issuance of the Senior Notes
payable as discussed at Note 6. The Senior Note Warrants entitle the holders to
purchase 593,691 shares of the Group's Common Stock, at any time prior to
January 1, 2004, at the price of $5.61 per share, subject to certain
restrictions described in the Senior Note Warrants.

The Company believes the Warrants and the Senior Note Warrants were issued
at fair market value.

NOTE 9 SALE OF DIRECT BOOK OF BUSINESS

Prior to August 1994, approximately 10% of FPIC policies were sold directly
to policyholders. On August 1, 1994, FPIC sold its direct book of business to an
existing agent, resulting in a gain of $205,000. FPIC received a twenty percent
down payment during August 1994, with the remainder payable monthly over sixty
months. The monthly payments are based on the agent's retention of the book of
business. During 1996 and 1997, respectively, the Company charged-off to other
income $80,000 and $33,252 of the note receivable due to the agent's declining
book of business. The unsecured note receivable balance is $47,859 and $6,691 at
December 31, 1996 and 1997, respectively.

NOTE 10 STOCK INCENTIVE PLAN

During 1993, the Group adopted a Stock Incentive Plan, pursuant to which up
to 109,420 shares of Common Stock of the Group may be issued at the discretion
of the Board of Directors or a committee thereof. Awards may include, without
limitation, stock bonuses, restricted stock, stock options, reload options,
stock purchase warrants, other rights to acquire stock, securities convertible
or redeemable for stock, stock appreciation rights, phantom stock, dividend
equivalents, performance units or performance shares. Officers, employees,
consultants, and advisors to the Company or any of its subsidiaries are eligible
for awards under the plan. To date, all awards have been in the form of stock
options issued with exercise prices at the estimated fair market value as of the
issue date.

The Company applies APB Opinion 25 and related Interpretations in
accounting for the stock incentive plan. Accordingly, no compensation cost has
been recognized in the accompanying consolidated financial statements. Had
compensation costs been determined consistent with FAS 123, the Company's net
income would have been adjusted to the pro forma amounts as follows:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
As reported............................ $2,149,504 $2,003,286 $2,342,003
Pro forma.............................. $2,143,485 $1,983,453 $2,327,768
Pro forma Basic Earnings per share..... $ 4.41 $ 4.08 $ 4.79
Pro forma Diluted Earnings per share... $ 0.94 $ 0.68 $ 0.79
</TABLE>

82
<PAGE> 84
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 10 STOCK INCENTIVE PLAN (CONTINUED)
The following is a summary of the transactions under the stock incentive
plan for the years ended December 31, 1995, 1996 and 1997, respectively:

<TABLE>
<CAPTION>
1995 1996 1997
------------------ ------------------ -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------- -------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year...... 27,608 $2.81 25,636 $3.02 69,016 $3.80
Granted............................. 7,888 $3.15 43,380 $4.25 9,860 $4.82
Forfeited........................... (9,860) $2.54 -- -- (9,860) $3.30
------- ------- --------
Outstanding at end of year............ 25,636 $3.02 69,016 $3.80 69,016 $4.01
======= ======= ========
Options exercisable at year end....... 9,860 19,719 31,550
======= ======= ========
Weighted average fair value of options
granted during the year............. $ 3.15 $ 4.25 $ 4.82
======= ======= ========
</TABLE>

All of the stock options have a ten year term. Options issued and not yet
exercisable at December 31, 1997 vest over periods ranging from one to five
years. At December 31, 1997, 40,404 shares were available for future grants.

The following is a summary of options outstanding at December 31, 1997.

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- -----------------------
WEIGHTED
AVERAGE
REMAINING WEIGHTED NUMBER WEIGHTED
NUMBER CONTRACTUAL AVERAGE EXERCISABLE AVERAGE
OUTSTANDING AT LIFE EXERCISE AT EXERCISE
RANGE OF EXERCISE PRICES 12/31/97 (IN YEARS) PRICE 12/31/97 PRICE
- ------------------------ -------------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$2.54 to 3.15..................... 15,776 6.5 $2.84 15,775 $2.84
$4.20 to 4.33..................... 43,380 8.3 4.25 15,775 4.28
$4.82............................. 9,860 9.1 4.82 -- --
------ --- ----- ------ -----
$2.54 to 4.82..................... 69,016 8.0 $4.01 31,550 $3.56
====== === ===== ====== =====
</TABLE>

The fair value of each option grant was estimated using the Minimum Value
Method. Minimum value is determined by calculating the difference between the
current stock price and the present value of the exercise price with the
following assumptions for 1995, 1996 and 1997, respectively: risk free interest
rates of 5.4%, 6.2% and 5.7%, expected lives of 5 years and no expected
dividends.

NOTE 11 401(k) PLAN

The Company sponsors a contributory 401(k) plan. All employees of the
Company who have completed one year of service are eligible for participation in
the plan. The Company matches 100% of the employee's pre-tax contribution up to
$1,000, $1,500 and $2,000 in 1995, 1996 and 1997, respectively. In 1995, 1996
and 1997, the Company contributed $20,565, $61,435 and $87,980, respectively, to
the plan.

NOTE 12 STATUTORY REGULATIONS AND ACCOUNTING

All dividends from FPIC require prior notice to the California Department
of Insurance ("DOI"). All "extraordinary" dividends must be approved in advance
by the DOI. A dividend is deemed "extraordinary" if, when aggregated with all
other dividends paid within the preceding 12 months, the dividend exceeds the
greater of (i) FPIC's statutory net income (excluding unrealized capital gains)
for the preceding calendar year or (ii) 10% of surplus as regards policyholders
as of the preceding December 31st. Additionally, unless approved in advance by
the DOI, no dividend may be paid by FPIC except from unassigned funds or earned

83
<PAGE> 85
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 12 STATUTORY REGULATIONS AND ACCOUNTING (CONTINUED)
surplus. The DOI may disallow the payment of any dividend if, in the DOI's
opinion, the payment would in any way violate the Code or be hazardous to
policyholders, creditors or the public.

During 1998, the maximum dividend that may be paid by FPIC without approval
of the DOI is $1,426,180. During the years ended December 31, 1995, 1996 and
1997, FPIC paid dividends of $402,000, $630,000 and $900,000, respectively, with
the approval of the DOI.

Statutory accounting principles vary in some respects from generally
accepted accounting principles, the more significant of these differences being:
(a) the cost related to policy acquisition and commission costs are expensed
when incurred, rather than capitalized and amortized over the coverage period;
(b) federal income taxes are recorded when payable and deferred income taxes are
not provided; (c) assets must be included in the statutory statements of
admitted assets, liabilities and changes in capital and surplus at "admitted
asset value" and "non-admitted assets" are excluded through a charge against
surplus. The minimum statutory capital and surplus required by the California
Insurance Code is $2,600,000. As of December 31, 1996 and 1997, respectively,
FPIC had statutory capital and surplus of $13,788,332 and $14,261,802. FPIC's
statutory net income for the years ended December 31, 1995, 1996 and 1997 was
$2,095,205, $2,123,815 and $1,213,293, respectively.

In December 1993, the National Association of Insurance Commissioners
("NAIC") adopted a model law which establishes certain minimum Risk Based
Capital ("RBC") requirements for property/casualty insurance companies. The RBC
calculation serves as a benchmark for the regulation of insurance companies by
state insurance regulatory authorities. The calculation specifies various
formulas and rating factors that are applied to financial balances or various
levels of activity based on the perceived degree of risk, and are set forth in
the RBC requirements. The Company's capital as of December 31, 1996 and 1997
meets the minimum RBC requirements, and management expects capital to continue
to meet the amount required.

The NAIC recently approved newly codified accounting practices that will
change the definition of what constitutes prescribed statutory accounting
practices and may result in changes to the accounting policies that insurance
enterprises use to prepare their statutory financial statements commencing in
2001. The Company has not determined how the newly codified statutory accounting
practices will affect its insurance subsidiary's statutory financial statements
or how insurance rating agencies will interpret or react to any such changes. No
assurance can be given that future legislative or regulatory changes resulting
from such activities will not adversely affect the Company.

84
<PAGE> 86
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 13 FAIR VALUE OF FINANCIAL INSTRUMENTS

Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments" ("FAS 107"), requires disclosures of fair
value information about financial instruments, whether or not recognized in the
consolidated balance sheet, for which it is practicable to estimate that value.
The following table presents the carrying amounts and estimated fair values of
the Company's financial instruments as of December 31, 1996 and 1997. FAS 107
defines the fair value of a financial instrument as the amount at which the
instrument could be exchanged in a current transaction between willing parties.

<TABLE>
<CAPTION>
1996 1997
-------------------------- --------------------------
CARRYING CARRYING
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents............ $ 497,388 $ 497,000 $ 632,495 $ 632,000
Premiums receivable.................. 13,016,982 13,017,000 14,631,026 14,631,000
Investment securities................ 24,045,597 24,046,000 29,976,813 29,977,000
Accrued interest receivable.......... 304,605 305,000 426,013 426,000
Financial liabilities
Notes payable........................ 5,479,414 5,500,000 4,984,561 5,000,000
</TABLE>

The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:

Cash, premiums receivable and accrued interest receivable: The
carrying amounts approximate fair value because of the short maturity of
those instruments.

Investment securities: The fair values of debt securities and equity
investments are based on quoted market prices at the reporting date for
those or similar investments.

Notes payable: The fair value of the Group's notes payable is
estimated based upon discounting expected cash flows at rates currently
offered to the Group for debt of the same remaining maturities and
security.

NOTE 14 COMMITMENTS AND CONTINGENCIES

At December 31, 1997, the Company occupied office space and leased
equipment and vehicles under various operating leases that have remaining
noncancellable lease terms in excess of one year. A summary of minimum future
non-cancelable lease commitments at December 31, 1997 follows:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
- -----------------------
<S> <C>
1998............................................. $ 511,697
1999............................................. 454,615
2000............................................. 360,016
2001............................................. 313,594
2002............................................. 313,594
Thereafter....................................... 1,124,375
----------
Total minimum payments................. $3,077,891
==========
</TABLE>

Rental expense of approximately $382,796, $494,587 and $541,736 for the
years ended December 31, 1995, 1996 and 1997, respectively, has been charged to
operations in the accompanying consolidated statements of operations.

The Company is also the subject of certain claims arising in the ordinary
course of its operations. The Company believes that the ultimate resolution of
such matters will not materially impact its financial condition.
85
<PAGE> 87
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 15 EARNINGS PER SHARE

Reconciliations of the outstanding shares used in the basic and fully
diluted earnings per share calculations, are presented below:

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------------ -------------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Income (Numerator):
Income available to Common
Stockholders for Basic and Diluted
earnings per share.................. $2,149,504 $2,003,286 $2,342,003 $1,283,769 $1,623,795
---------- ---------- ---------- ---------- ----------

Weighted Average Shares (Denominator):
Basic Shares.......................... 485,983 485,983 485,983 485,982 487,180
Effect of dilutive securities
Stock Options....................... 7,380 13,158 40,720 41,899 43,859
Warrants............................ 63,612 666,454 708,288 708,288 708,288
Convertible Preferred stock......... 1,735,250 1,735,250 1,735,250 1,735,250 1,735,250
---------- ---------- ---------- ---------- ----------
Diluted Shares........................ 2,292,225 2,900,845 2,970,241 2,971,419 2,974,577
========== ========== ========== ========== ==========

Per Share Amounts:
Basic Earnings per Share.............. $ 4.42 $ 4.12 $ 4.82 $ 2.64 $ 3.33
Diluted Earnings per Share............ $ 0.94 $ 0.69 $ 0.79 $ 0.43 $ 0.55
</TABLE>

For the years ended December 31, 1995 and 1996, the Company had 593,691
warrants which could potentially dilute Basic EPS in the future but were not
included in Diluted EPS because their effect was antidilutive.

NOTE 16 SUBSEQUENT EVENT

On April 14, 1998, the Company declared a 394.375-to-1 stock split effected
in the form of a dividend to stockholders of record on April 14, 1998.

All data with respect to equity classification, earnings per share and
share information, including price per share, where applicable, in the
consolidated financial statements and notes thereto have been retroactively
adjusted to reflect the split.

86
<PAGE> 88

- ------------------------------------------------------

NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER
TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATES SUBSEQUENT TO THE DATE HEREOF.

------------------------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary......................... 3
Risk Factors............................... 7
Use of Proceeds............................ 14
Dividend Policy............................ 14
Dilution................................... 15
Capitalization............................. 16
Selected Consolidated Financial Data....... 17
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 19
Business................................... 28
Management................................. 47
Principal and Selling Stockholders......... 53
Certain Transactions....................... 54
Description of Capital Stock............... 55
Shares Eligible for Future Sale............ 58
Underwriting............................... 60
Legal Matters.............................. 61
Experts.................................... 61
Additional Information..................... 62
Glossary of Selected Insurance Terms....... 63
Index to Consolidated Financial
Statements........................... 66
</TABLE>

- ------------------------------------------------------
PROSPECTUS
- ------------------------------------------------------

2,500,000 SHARES

(FINANCIAL PACIFIC LOGO)
Common Stock
------------------------
EVEREN SECURITIES, INC.

HOEFER & ARNETT INCORPORATED
- ------------------------------------------------------
<PAGE> 89

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Company in connection
with the sale of Common Stock being registered. All amounts are estimates except
the SEC registration fee, the NASD filing fees and the Nasdaq Stock Market
listing fee.

<TABLE>
<S> <C>
SEC Registration fee........................................ $ 9,330
NASD fee.................................................... $ 3,670
Nasdaq National Market listing fee.......................... $ 60,000
Printing and engraving expenses............................. $130,000
Legal fees and expenses..................................... $210,000
Accounting fees and expenses................................ $120,000
Blue sky fees and expenses.................................. $ 25,000
Transfer agent fees......................................... $ 15,000
Miscellaneous fees and expenses............................. $127,000
--------
Total............................................. $700,000
========
</TABLE>

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Section 145 of the Delaware General Corporation Law authorizes a court to
award or a corporation's Board of Directors to grant indemnification to
directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933,
as amended (the "Securities Act"). Article VI, Section 1, of the Registrant's
Bylaws provides for mandatory indemnification of its directors and officers and
permissible indemnification of employees and other agents to the maximum extent
permitted by the Delaware General Corporation Law. The Registrant's Amended and
Restated Certificate of Incorporation provides that, pursuant to Delaware law,
its directors shall not be liable for monetary damages for breach of the
directors' fiduciary duty as directors to the Company and its stockholders. This
provision in the Amended and Restated Certificate of Incorporation does not
eliminate the directors' fiduciary duty, and in appropriate circumstances
equitable remedies such as injunctive or other forms of non-monetary relief will
remain available under Delaware law. In addition, each director will continue to
be subject to liability for breach of the director's duty of loyalty to the
Company for acts or omissions not in good faith or involving intentional
misconduct, for knowing violations of law, for actions leading to improper
personal benefit to the director, and for payment of dividends or approval of
stock repurchases or redemptions that are unlawful under Delaware law. The
provision also does not affect a director's responsibilities under any other
law, such as the federal securities laws or state or state or federal
environmental laws. The Registrant has entered or will enter into
Indemnification Agreements with its officers and directors that provide the
Registrant's officers and directors with further indemnification to the maximum
extent permitted by the Delaware General Corporation Law. Reference is made to
Section of the Underwriting Agreement contained in Exhibit 1.1 hereto,
indemnifying officers and directors of the Registrant against certain
liabilities.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

Since April 1995, the Company has issued and sold the following
unregistered securities.

1. On December 28, 1995, Registrant issued Warrants to purchase up to
593,691 shares of its Common Stock and $5,000,000 aggregate principal amount of
12% Senior Notes due January 1, 2001 to a Group of four investors for an
aggregate purchase price of $5,000,000.

II-1
<PAGE> 90

2. Within the past three years, from time to time, the Registrant has
granted to employees, directors and consultants options to purchase an aggregate
of approximately 80,847 shares of Common Stock pursuant to stock option
agreements and the Registrant's stock option plans.

3. The Company has agreed to issue to the representative of the
Underwriters ("Representative") warrants (the "Representative's Warrants") to
purchase up to 143,750 shares of Common Stock, at an exercise price per share
equal to 110% of the initial public offering price per share. The
Representative's Warrants are exercisable for a period of four years, commencing
one year from the effective date (the "Effective Date") of the Registration
Statement and expire five years from the Effective Date. The Representative's
Warrants are not transferable prior to the expiration of one year from the
Effective Date other than to officers or partners of the Underwriters and
members of the selling group and their officers and partners. The holders of the
Representative's Warrants will have no voting, dividend or other shareholders'
rights until the Warrants are exercised. The Company has granted the
Representative certain demand and piggy-back registration rights related to the
Representative's Warrants, which are applicable during the period that the
Representative's Warrants are exercisable and expire five years from the
Effective Date.

The sales and issuances described above were deemed to be exempt from
registration under the Securities Act in reliance upon Section 4(2) thereof, as
transactions by an issuer not involving any public offering, or in reliance upon
the exemption from registration provide by Rule 701 promulgated under the
Securities Act. In addition, the recipients of securities in each such
transaction represented their intentions to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof and appropriate legends were affixed to the share
certificates issued in such transactions. All recipients had adequate access,
through their relationships with the Registrant, to information about the
Registrant.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) EXHIBITS

The following Exhibits are attached hereto and incorporated herein by
reference.

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<C> <S>
1.1 *** Underwriting Agreement between EVEREN Securities, Inc. and
the Registrant.
3.1 * Restated Certificate of Incorporation of the Registrant.
3.2 * Bylaws of the Registrant.
4.1 * Specimen Common Stock certificate.
4.2 +****** Stockholders Agreement, dated September 7, 1993, between the
Registrant and the investors named therein.
4.3 * Amendment Number One to the Stockholders Agreement, dated
December 28, 1995, between the Registrant and the investors
named therein.
5.1 **** Opinion of Riordan & McKinzie, a Professional Law
Corporation.
10.1 * 1993 Stock Incentive Plan.
10.2 * Form of Stock Option Agreement.
10.3 *****++ Employment Agreement between the Registrant and Robert C.
Goodell dated February 6, 1996, as amended.
10.4 *++ Employment Agreement between the Registrant and Robert T.
Kingsley dated February 13, 1997.
10.5 *++ Employment Agreement between the Registrant and Edward J.
Paoletti dated November 14, 1997.
10.6 *++ Employment Agreement between the Registrant and Wallace G.
Rascher dated February 14, 1997.
10.7 *++ Employment Agreement between the Registrant and Timothy N.
Blaede dated February 14, 1997.
10.8 *++ Employment Agreement between the Registrant and John R.
Hollingshead dated November 14, 1997.
10.9 *++ Employment Agreement between the Registrant and Artur A.
Terner dated February 14, 1997.
</TABLE>

II-2
<PAGE> 91

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<C> <S>
10.10 *++ Employment Agreement between the Registrant and Charles E.
Wardlaw dated January 1, 1998.
10.11 +++ Restricted Stock Agreement between the Registrant and Robert
C. Goodell dated September 7, 1993, as amended.
10.12 * Note and Warrant Purchase Agreement dated December 28, 1995
among the Registrant and the purchasers listed therein.
10.13 * Form of 12% Senior Note due 2001.
10.14 * Form of Warrant issued by the Registrant dated December 28,
1995.
10.15 * Form of Warrant issued by the Registrant dated September 7,
1993.
10.16 * Financial Pacific Insurance Company Property Quota Share
Reinsurance Contract originally effective July 1, 1993.
10.17 * Financial Pacific Insurance Company Contingent Excess of
Loss Reinsurance Contract originally effective July 1, 1996.
10.18 * Financial Pacific Insurance Company Contingent Excess of
Loss Reinsurance Contract originally effective January 1,
1997.
10.19 * Financial Pacific Insurance Company Semi-Automatic Casualty
Facultative Reinsurance Contract originally effective July
1, 1996.
10.20 * Financial Pacific Insurance Company (M.L. Oates Insurance
Company) Property Quota Share Reinsurance Contract
originally effective July 1, 1993.
10.21 * Financial Pacific Insurance Company First Excess Casualty
Reinsurance Contract originally effective January 1, 1997.
10.22 * Producer Agreement between American Underwriting Managers
Agency, Inc. and Financial Pacific Insurance Agency, Inc.
("FPIA") effective October 1, 1995.
10.23 * Claims Management Agreement between FPIA and American
Underwriting Managers dated November 28, 1995
10.24 * Agreement between Financial Pacific Insurance Company
("FPIC") and General Reinsurance Corporation (No. 118).
10.25 * Agreement between FPIC and General Reinsurance Corporation
(No. AFF-6243440)
10.26 * Agreement between FPIC and General Reinsurance Corporation
(No. 8090).
10.27 * Quota Share Reinsurance Agreement between FPIC and American
Re-insurance dated October 23, 1997.
10.28 * Net Lease Agreement between FPIC and Stanford Ranch I, LLC
dated June 11, 1996.
10.29 * Promissory Note dated September 15, 1997 issued by the
Registrant to U.S. Bank
10.30 * Stock Purchase Agreement dated February 24, 1997 between
Robert C. Goodell and the purchasers listed therein.
10.31 * Form of Indemnification Agreement between the Registrant and
each director of the Registrant.
10.32 ** Representatives Warrant Agreement between the Registrant and
EVEREN Securities, Inc. dated June , 1998.
11.1 * Computation of Net Income Per Share.
21.1 * Subsidiaries of the Registrant.
23.1 ****** Consent of KPMG Peat Marwick LLP, Independent Accountants
(see page S-1).
23.2 **** Consent of Riordan & McKinzie (contained in Exhibit 5.1).
23.3 ** Consent of LeBoeuf, Lamb, Greene & Macrae.
24.1 * Power of Attorney (see page II-5).
27.1 ***** Financial Data Schedule.
</TABLE>

- ---------------
* Filed as an exhibit to the Company's Registration Statement on Form S-1
(Registration No. 333-50511) on April 20, 1998.

** Filed as an exhibit to Amendment No. 1 to the Company's Registration
Statement on Form S-1 (Registration No. 333-50511) on May 29, 1998.

*** Filed as an exhibit to Amendment No. 2 to the Company's Registration
Statement on Form S-1 (Registration No. 333-50511) on June 12, 1998.

II-3
<PAGE> 92

**** Filed as an exhibit to Amendment No. 3 to the Company's Registration
Statement on Form S-1 (Registration No. 333-50511) on June 25, 1998.

***** Filed as an exhibit to Amendment No. 4 to the Company's Registration
Statement on Form S-1 (Registration No. 333-50511) on July 16, 1998.

****** Filed as an exhibit to Amendment No. 5 to the Company's Registration
Statement on Form S-1 (Registration No. 333-50511) on August 11, 1998.

+ The Schedules to this Exhibit have not been filed with the Commission
because the Registrant believes that such Schedules do not contain
information that is material to an investment decision. The Registrant
hereby agrees to furnish supplementally a copy of the omitted schedules to
the Commission upon request.

++ Confidential treatment requested.

(b) FINANCIAL STATEMENT SCHEDULES

Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.

ITEM 17. UNDERTAKINGS

Insofar as indemnification for liabilities arising under the Securities Act
maybe permitted to directors, officers and controlling persons of the Registrant
pursuant to the Delaware General Corporation Law, the Certificate of
Incorporation or the Bylaws of the Registrant, the Underwriting Agreement, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act, and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer,
or controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered hereunder, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question of whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final jurisdiction
of such issue.

The Registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of Prospectus filed as part of this Registrant
Statement in reliance upon Rule 430A and contained in a form of Prospectus filed
by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the
Securities Act shall be deemed to be part of this Registrant Statement as of the
time it was declared effective.

(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of Prospectus shall be deemed
to be a new Registration Statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.

II-4
<PAGE> 93

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 5 Registration Statement on Form
S-1 to be signed on its behalf by the undersigned, thereto duly authorized, in
the City of Rocklin, State of California, on this 10th day of August, 1998.

FINANCIAL PACIFIC INSURANCE GROUP, INC.

By /s/ ROBERT C. GOODELL
-------------------------------------
Robert C. Goodell
President and Chief Executive Officer

Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 5 Registration Statement has been signed below by the following person in
the capacities and on the dates indicated.

<TABLE>
<C> <S> <C>
/s/ ROBERT C. GOODELL President and Chief Executive August 10, 1998
- --------------------------------------------------- Officer and Director
Robert C. Goodell (Principal Executive
Officer)

* Chief Financial Officer August 10, 1998
- --------------------------------------------------- (Principal Financial and
Artur A. Terner Accounting Officer)

* Director August 10, 1998
- ---------------------------------------------------
Richard G. Pfeiffer

* Director August 10, 1998
- ---------------------------------------------------
Patrick C. Haden

* Director August 10, 1998
- ---------------------------------------------------
Michael J. Morrissey

* Director August 10, 1998
- ---------------------------------------------------
Stephen E. Adamson

By /s/ ROBERT C. GOODELL
- ---------------------------------------------------
Robert C. Goodell
Attorney-in-Fact
</TABLE>

II-5
<PAGE> 94

CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

To The Board of Directors and Stockholders
Financial Pacific Insurance Group, Inc.

The audits referred to in our report dated January 30, 1998, except as to
Note 16, which is as of April 14, 1998, included the related financial statement
schedules as of December 31, 1997, and for each of the years in the three-year
period ended December 31, 1997, included in the registration statement. These
financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statement schedules based on our audits. In our opinion, such financial
statement schedules, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.

We consent to the use of our reports included herein and to the reference
to our firm under the headings "Selected Consolidated Financial Data" and
"Experts" in the Prospectus.

/s/ KPMG Peat Marwick LLP
--------------------------------------
KPMG Peat Marwick LLP

Los Angeles, California

August 10, 1998

S-1
<PAGE> 95

SCHEDULE I

FINANCIAL PACIFIC INSURANCE GROUP, INC.

SUMMARY OF INVESTMENTS --
OTHER THAN INVESTMENTS IN RELATED PARTIES
YEARS ENDED DECEMBER 31, 1997

<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D
- --------------------------------------------------- -------- ------------ ----------------
AMOUNT AS
SHOWN ON BALANCE
TYPE OF INVESTMENT COST VALUE SHEET
- --------------------------------------------------- -------- ------------ ----------------
(Dollars in thousands)
<S> <C> <C> <C>
Fixed Maturities:
Bonds:
United States Government and Government
Agencies and Authorities.................... $15,619 $ 15,628 $15,628
States, municipalities and political
subdivisions................................ 66 71 71
Foreign governments........................... -- -- --
Public utilities.............................. -- -- --
Convertibles and bonds with warrants
attached.................................... -- -- --
All other corporate bonds..................... 14,130 14,065 14,065
------- ------------ -------
Total bonds.............................. 29,815 29,764 29,764
Certificates of deposit....................... 213 213 213
Redeemable preferred stock.................... -- -- --
------- ------------ -------
Total fixed maturities................... 30,028 29,977 29,977
------- ------------ -------
Equity Securities:
Common stock:
Public utilities.............................. -- -- --
Banks, trust and insurance companies.......... -- -- --
Industrial, miscellaneous and all other....... -- -- --
Non-redeemable preferred stock................... -- -- --
------- ------------ -------
Total equity securities.................. -- -- --
------- ------------ -------
Mortgage loans on real estate...................... -- xxxxxxxxxxxx --
Real estate........................................ -- xxxxxxxxxxxx --
Policy loans....................................... -- xxxxxxxxxxxx --
Other long-term investments........................ -- xxxxxxxxxxxx --
Short-term money-market investments................ -- xxxxxxxxxxxx --
------- ------------ -------
Total investments........................ $30,028 xxxxxxxxxxxx $29,977
======= ============ =======
</TABLE>

S-2
<PAGE> 96

SCHEDULE II.1

FINANCIAL PACIFIC INSURANCE GROUP, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION -- PARENT COMPANY ONLY

BALANCE SHEETS
($'S IN THOUSANDS)

ASSETS

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1996 1997
-------- --------
<S> <C> <C>
Investment in subsidiaries.................................. $16,309 $18,655
Cash and cash equivalents................................... 3 5
Other assets................................................ 277 487
------- -------
Total assets...................................... $16,589 $19,147
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes payable, net........................................ $ 5,479 $ 4,985
Interest payable.......................................... 304 300
Due to affiliates......................................... 190 464
------- -------
Total liabilities................................. 5,973 5,749
======= =======
Stockholders' Equity
Series A convertible preferred stock, $.001 par value;
2,000,000 shares authorized; 4,400 shares issued and
outstanding at 1996 and 1997, respectively............. -- --
Common stock, $.001 par value; 7,500,000 shares
authorized; 485,983 issued and outstanding at 1996 and
1997, respectively..................................... -- --
Additional paid-in capital................................ 4,950 4,950
Retained earnings......................................... 6,140 8,482
Net unrealized loss on available for sale securities, net
of deferred income tax benefit of $244,337 in 1996 and
$17,269 in 1997........................................ (474) (34)
------- -------
Total stockholders' equity........................ 10,616 13,398
------- -------
Total liabilities and stockholders' equity........ $16,589 $19,147
======= =======
</TABLE>

See accompanying notes to financial statements.

S-3
<PAGE> 97

SCHEDULE II.2

FINANCIAL PACIFIC INSURANCE GROUP, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION -- PARENT COMPANY ONLY

STATEMENT OF OPERATIONS
($'S IN THOUSANDS)

<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Revenues:
Equity in income of subsidiaries.......................... $2,204 $2,462 $2,804
Net investment income..................................... 4 2 2
------ ------ ------
Total revenues.................................... 2,208 2,464 2,806
Expenses:
General and administrative................................ 5 5 4
Interest espense.......................................... 128 692 617
Due diligence expense..................................... -- -- 81
------ ------ ------
133 697 702
Income before federal indome tax benefit.......... 2,075 1,767 2,104
Provision for federal income tax benefit.................... 75 236 238
------ ------ ------
$2,150 $2,003 $2,342
====== ====== ======
</TABLE>

See accompanying notes to financial statements.

S-4
<PAGE> 98

SCHEDULE II.3

FINANCIAL PACIFIC INSURANCE GROUP, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION -- PARENT COMPANY ONLY

STATEMENT OF CASH FLOWS
($'S IN THOUSANDS)

<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 2,150 $ 2,003 $ 2,342
Less equity in income of subsidiaries..................... (1,804) (1,832) (1,904)
------- ------- -------
Net loss from operations............................... 346 171 438
Amortization........................................... 15 32 8
Adjustments:
Increase in other assets (164) (104) (214)
Increase (decrease) in federal income taxes payable (3) 3
Increase (decrease) in interest payable.............. 15 289 (4)
Increase in intercompany payable..................... 118 43 274
------- ------- -------
Net cash provided (used).......................... 327 434 502
Cash flows from investing activities:
Proceeds from sale of fixed maturities available for
sale................................................... 5
Purchase of fixed maturities available for sale........... (55)
------- ------- -------
Net cash provided by investing activities..............
Cash flows from financing activities:
Proceeds form issuance of note payable.................... 5,000 500
Capital contribution...................................... (5,000)
Principal repayment on note payable....................... (315) (945) (500)
------- ------- -------
Net cash provided (used) by financing activities....... (315) (445) (500)
Net increase (decrease) in cash and cash equivalents... 12 (11) 2
Cash and cash equivalents, beginning of year........... 1 14 3
------- ------- -------
Cash and cash equivalents, end of year................. $ 13 $ 3 $ 5
======= ======= =======
</TABLE>

See accompanying notes to financial statements.

S-5
<PAGE> 99

SCHEDULE II.4

FINANCIAL PACIFIC INSURANCE GROUP, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION -- PARENT COMPANY ONLY

NOTES TO FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION

The accompanying condensed financial statements include the accounts of
Financial Pacific Insurance Group, Inc. (the "Parent Company"). The Parent
Company's wholly-owned subsidiaries, Financial Pacific Insurance Company
("Insurance Company") and Financial Pacific Insurance Agency and Financial
Pacific Technologies, Inc. are not presented as consolidated entities on these
condensed financial statements.

2. MATERIAL CONTINGENCIES

The Parent Company is the subject of certain claims arising in the ordinary
course of its operations. The Parent Company believes that the ultimate
resolution of such matters will not materially affect its financial condition.

3. NOTES PAYABLE, NET

At December 31, 1995 and 1996, the Parent Company owed $5,000,000 under an
unsecured senior note payable to certain stockholders and directors of the
Parent Company. The note payable accrues 12% interest compounded annually and is
payable semi-annually. The note is due on January 1, 2001. The note was issued
with a Common Stock Warrant Purchase agreement which entitles the holders the
option to purchase up to 1,505.4 shares of the Group's common stock. The Group
is subject to certain restrictions described in the note agreement.

At December 31, 1995, the Parent Company owed $945,000 under a secured
promissory note issued in conjunction with the Acquisition of the Insurance
Company and Agency. Effective February 1, 1995, the note was amended to extend
the maturity to November 12, 1998 with interest to accrue at 10% compounded
annually and payable quarterly. Principal payments of $315,000 are due annually
on the anniversary date of the promissory note, November 12, 1993. The
promissory note is secured by the common stock of the Insurance Company. The
note was issued with a stock option agreement which grants the holder an option
to purchase from the Parent Company common stock equal to 5% of the Insurance
Company's outstanding common stock each year during the term of promissory note,
on the anniversary of the promissory note, in exchange for the cancellation by
the holder of the principal payment then due under the promissory note.
Effective May 1, 1996, the Parent Company paid off the balance due under this
note and obtained a general release from the former owner.

At December 31, 1996 and 1997, the Parent Company owed $500,000 and $0
under a $530,000 bank line of credit. The line of credit is unsecured, matures
July 1, 1998, and bears interest (payable monthly) at an annual rate of 1
percent over the bank's base rate. The effective annual interest rate was 9.25%
and 8.5% during the years ended December 31, 1996 and 1997. Effective July 1,
1998, the line of credit maturity was extended to August 30, 1998.

The notes payable are presented net of deferred debt issue costs. Deferred
debt issue costs are amortized over the term of the note. Unamortized debt issue
costs totaled $20,586 and $44,340 at December 31, 1996 and 1995, respectively.

NOTE 4. DIVIDENDS FROM SUBSIDIARIES

Financial Pacific Insurance Company, a consolidated subsidiary of the
Parent Company paid dividends to its parent of $402,000, $630,000, and $900,000
in 1995, 1996, and 1997 respectively.

S-6
<PAGE> 100

SCHEDULE III

FINANCIAL PACIFIC INSURANCE GROUP, INC.

SUPPLEMENTARY INSURANCE INFORMATION
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F COLUMN G
- ------------------------------------------ ----------- -------------- -------- ---------- -------- ----------
FUTURE POLICY OTHER
DEFERRED BENEFITS, POLICY
POLICY LOSSES, CLAIMS CLAIMS AND NET NET
ACQUISITION AND LOSS UNEARNED BENEFITS PREMIUM INVESTMENT
SEGMENT COST EXPENSES PREMIUM PAYABLE REVENUE INCOME
- ------------------------------------------ ----------- -------------- -------- ---------- -------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
1997 -- Property & Casualty Insurance..... $5,357 $19,592 21,968 -- $22,854 $ 1,720
====== ======= ======= == ======= =======
1996 -- Property & Casualty Insurance..... $3,778 $13,944 $18,980 -- $14,987 $ 1,449
====== ======= ======= == ======= =======
1995 -- Property & Casualty Insurance..... $2,631 $12,013 $14,058 -- $12,060 $ 1,029
====== ======= ======= == ======= =======

<CAPTION>
COLUMN A COLUMN H COLUMN I COLUMN J COLUMN K
- ------------------------------------------ -------------- ------------ --------- --------
BENEFITS, AMORTIZATION
CLAIMS, LOSSES OF DEFERRED
AND POLICY OTHER NET
SETTLEMENT ACQUISITION OPERATING PREMIUMS
SEGMENT EXPENSES COSTS EXPENSES WRITTEN
- ------------------------------------------ -------------- ------------ --------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
1997 -- Property & Casualty Insurance..... $12,748 $ 7,440 $ 1,655 $26,936
======= ======= ======= =======
1996 -- Property & Casualty Insurance..... $ 9,750 $ 4,785 $ 1,443 $18,253
======= ======= ======= =======
1995 -- Property & Casualty Insurance..... $ 6,325 $ 3,957 $ 1,447 $14,042
======= ======= ======= =======
</TABLE>

S-7
<PAGE> 101

SCHEDULE IV

FINANCIAL PACIFIC INSURANCE GROUP, INC.

REINSURANCE
YEARS ENDED DECEMBER 31, 1997

<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
- ------------------------------------- -------- --------- ---------- -------- ----------
PERCENTAGE
CEDED TO ASSUMED OF AMOUNT
GROSS OTHER FROM OTHER NET ASSUMED TO
AMOUNT COMPANIES COMPANIES AMOUNT NET
-------- --------- ---------- -------- ----------
($'s in thousands)
<S> <C> <C> <C> <C> <C>
Life insurance in force.............. $ -- $ -- $ -- $ -- --%
------- ------- ------- ------- ---
Premiums:
Life insurance..................... -- -- -- -- --
Accident and health insurance...... -- -- -- -- --
Property and liability insurance... 39,512 12,576 -- 26,936 0.0
Title insurance.................... -- -- -- -- --
------- ------- ------- ------- ---
Total Premiums............. $39,512 $12,576 -- $26,936 0.0%
======= ======= ======= ======= ===
</TABLE>

S-8
<PAGE> 102

SCHEDULE IV

FINANCIAL PACIFIC INSURANCE GROUP, INC.

REINSURANCE
YEARS ENDED DECEMBER 31, 1996

<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
- ------------------------------------- -------- --------- ---------- -------- ----------
PERCENTAGE
CEDED TO ASSUMED OF AMOUNT
GROSS OTHER FROM OTHER NET ASSUMED TO
AMOUNT COMPANIES COMPANIES AMOUNT NET
-------- --------- ---------- -------- ----------
($'s in thousands)
<S> <C> <C> <C> <C> <C>
Life insurance in force.............. $ -- $ -- $ -- $ -- --%
------- ------- ------- ------- ---
Premiums:
Life insurance..................... -- -- -- -- --
Accident and health insurance...... -- -- -- -- --
Property and liability insurance... 31,927 13,674 -- 18,253 0.0
Title insurance.................... -- -- -- -- --
------- ------- ------- ------- ---
Total Premiums............. $31,927 $13,674 $ -- $18,253 0.0%
======= ======= ======= ======= ===
</TABLE>

S-9
<PAGE> 103

SCHEDULE IV

FINANCIAL PACIFIC INSURANCE GROUP, INC.

REINSURANCE
YEARS ENDED DECEMBER 31, 1995

<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
- ------------------------------------- -------- --------- ---------- -------- ----------
PERCENTAGE
CEDED TO ASSUMED OF AMOUNT
GROSS OTHER FROM OTHER NET ASSUMED TO
AMOUNT COMPANIES COMPANIES AMOUNT NET
-------- --------- ---------- -------- ----------
($'s in thousands)
<S> <C> <C> <C> <C> <C>
Life insurance in force.............. $ -- $ -- $ -- $ -- --%
------- ------- ------- ------- ---
Premiums:
Life insurance..................... -- -- -- -- --
Accident and health insurance...... -- -- -- -- --
Property and liability insurance... 24,695 10,653 -- 14,042 0.0
Title insurance.................... -- -- -- -- --
------- ------- ------- ------- ---
Total Premiums............. $24,695 $10,653 $ -- $14,042 0.0%
======= ======= ======= ======= ===
</TABLE>

S-10
<PAGE> 104

SCHEDULE V

FINANCIAL PACIFIC INSURANCE GROUP, INC.

VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -------------------------------------------- ------------ ------------ ------------- ----------
DEDUCTIONS --
ADDITIONS -- FROM PREMIUM
BALANCE AT CHARGED TO BALANCE TO BALANCE AT
BEGINNING OF COSTS AND ALLOWANCE END OF
PERIOD EXPENSES ACCOUNT PERIOD
------------ ------------ ------------- ----------
($'s in thousands)
<S> <C> <C> <C> <C>
1997:
Allowance for doubtful accounts............. $40 $30 $30 $40
=== === === ===
1996:
Allowance for doubtful accounts............. $40 $31 $31 $40
=== === === ===
1995:
Allowance for doubtful accounts............. $20 $56 $36 $40
=== === === ===
</TABLE>

S-11
<PAGE> 105

SCHEDULE VI

FINANCIAL PACIFIC INSURANCE GROUP, INC.

SUPPLEMENTAL INFORMATION CONCERNING
PROPERTY/CASUALTY INSURANCE OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1997
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F COLUMN G COLUMN H
- ------------------------- ------------ ------------ --------- -------- -------- ---------- ------------------
NET CLAIMS AND
CLAIMS ADJUSTMENT
RESERVES FOR EXPENSES INCURRED
UNPAID DISCOUNT, RELATED TO
DEFERRED CLAIMS & IF ANY, ------------------
POLICY CLAIM DEDUCTED NET NET (1) (2)
AFFILIATION WITH ACQUISITIONS ADJUSTMENT IN UNEARNED EARNED INVESTMENT CURRENT PRIOR
REGISTRANT COSTS EXPENSES COLUMN C PREMIUMS PREMIUM INCOME YEAR YEAR
- ------------------------- ------------ ------------ --------- -------- -------- ---------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1997:
Financial Pacific
Insurance Company...... $5,357 $19,592 $-- $21,968 $22,854 $1,720 $10,991 $1,757
====== ======= == ======= ======= ====== ======= ======
1996:
Financial Pacific
Insurance Company...... $3,778 $13,944 $-- $18,980 $14,987 $1,449 $ 7,394 $2,356
====== ======= == ======= ======= ====== ======= ======
1995:
Financial Pacific
Insurance Company...... $2,631 $12,013 $-- $14,058 $12,060 $1,029 $ 6,491 $ (166)
====== ======= == ======= ======= ====== ======= ======

<CAPTION>
COLUMN A COLUMN I COLUMN J COLUMN K
- ------------------------- ------------ ---------- --------

AMORTIZATION PAID NET
OF DEFERRED CLAIMS AND
POLICY CLAIM NET
AFFILIATION WITH ACQUISITION ADJUSTMENT PREMIUMS
REGISTRANT COST EXPENSES WRITTEN
- ------------------------- ------------ ---------- --------
<S> <C> <C> <C>
1997:
Financial Pacific
Insurance Company...... $7,440 $9,278 $26,936
====== ====== =======
1996:
Financial Pacific
Insurance Company...... $4,785 $7,477 $18,253
====== ====== =======
1995:
Financial Pacific
Insurance Company...... $3,957 $3,899 $14,042
====== ====== =======
</TABLE>

S-12
<PAGE> 106

EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<C> <S> <C>
1.1 *** Underwriting Agreement between EVEREN Securities, Inc. and
the Registrant. ............................................
3.1 * Restated Certificate of Incorporation of the Registrant. ...
3.2 * Bylaws of the Registrant. ..................................
4.1 * Specimen Common Stock certificate. .........................
4.2 +****** Stockholders Agreement, dated September 7, 1993, between the
Registrant and the investors named therein. ................
4.3 * Amendment Number One to the Stockholders Agreement, dated
December 28, 1995, between the Registrant and the investors
named therein. .............................................
5.1 **** Opinion of Riordan & McKinzie, a Professional Law
Corporation. ...............................................
10.1 * 1993 Stock Incentive Plan. .................................
10.2 * Form of Stock Option Agreement. ............................
10.3 *****++ Employment Agreement between the Registrant and Robert C.
Goodell dated February 6, 1996, as amended. ................
10.4 *++ Employment Agreement between the Registrant and Robert T.
Kingsley dated February 13, 1997. ..........................
10.5 *++ Employment Agreement between the Registrant and Edward J.
Paoletti dated November 14, 1997. ..........................
10.6 *++ Employment Agreement between the Registrant and Wallace G.
Rascher dated February 14, 1997. ...........................
10.7 *++ Employment Agreement between the Registrant and Timothy N.
Blaede dated February 14, 1997. ............................
10.8 *++ Employment Agreement between the Registrant and John R.
Hollingshead dated November 14, 1997. ......................
10.9 *++ Employment Agreement between the Registrant and Artur A.
Terner dated February 14, 1997. ............................
10.10 *++ Employment Agreement between the Registrant and Charles E.
Wardlaw dated January 1, 1998. .............................
10.11 +++ Restricted Stock Agreement between the Registrant and Robert
C. Goodell dated September 7, 1993, as amended. ............
10.12 * Note and Warrant Purchase Agreement dated December 28, 1995
among the Registrant and the purchasers listed therein. ....
10.13 * Form of 12% Senior Note due 2001. ..........................
10.14 * Form of Warrant issued by the Registrant dated December 28,
1995. ......................................................
10.15 * Form of Warrant issued by the Registrant dated September 7,
1993. ......................................................
10.16 * Financial Pacific Insurance Company Property Quota Share
Reinsurance Contract originally effective July 1, 1993. ....
10.17 * Financial Pacific Insurance Company Contingent Excess of
Loss Reinsurance Contract originally effective July 1,
1996. ......................................................
10.18 * Financial Pacific Insurance Company Contingent Excess of
Loss Reinsurance Contract originally effective January 1,
1997. ......................................................
10.19 * Financial Pacific Insurance Company Semi-Automatic Casualty
Facultative Reinsurance Contract originally effective July
1, 1996. ...................................................
10.20 * Financial Pacific Insurance Company (M.L. Oates Insurance
Company) Property Quota Share Reinsurance Contract
originally effective July 1, 1993. .........................
10.21 * Financial Pacific Insurance Company First Excess Casualty
Reinsurance Contract originally effective January 1,
1997. ......................................................
</TABLE>

<PAGE> 107

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
<C> <S> <C>
10.22 * Producer Agreement between American Underwriting Managers
Agency, Inc. and Financial Pacific Insurance Agency, Inc.
("FPIA") effective October 1, 1995. ........................
10.23 * Claims Management Agreement between FPIA and American
Underwriting Managers dated November 28, 1995. .............
10.24 * Agreement between Financial Pacific Insurance Company
("FPIC") and General Reinsurance Corporation (No. 118). ....
10.25 * Agreement between FPIC and General Reinsurance Corporation
(No. AFF-6243440). .........................................
10.26 * Agreement between FPIC and General Reinsurance Corporation
(No. 8090). ................................................
10.27 * Quota Share Reinsurance Agreement between FPIC and American
Re-insurance dated October 23, 1997. .......................
10.28 * Net Lease Agreement between FPIC and Stanford Ranch I, LLC
dated June 11, 1996. .......................................
10.29 * Promissory Note dated September 15, 1997 issued by the
Registrant to U.S. Bank. ...................................
10.30 * Stock Purchase Agreement dated February 24, 1997 between
Robert C. Goodell and the purchasers listed therein. .......
10.31 * Form of Indemnification Agreement between the Registrant and
each director of the Registrant. ...........................
10.32 ** Warrant Agreement between the Registrant and EVEREN
Securities, Inc. dated June , 1998. ......................
11.1 * Computation of Net Income Per Share. .......................
21.1 * Subsidiaries of the Registrant. ............................
23.1 ****** Consent of KPMG Peat Marwick LLP, Independent Accountants
(see page S-1). ............................................
23.2 **** Consent of Riordan & McKinzie (contained in Exhibit 5.1)....
23.3 ** Consent of LeBoeuf, Lamb, Greene & Macrae. .................
24.1 * Power of Attorney (see page II-5). .........................
27.1 ***** Financial Data Schedule. ...................................
</TABLE>

- ---------------
* Filed as an exhibit to the Company's Registration Statement on Form S-1
(Registration No. 333-50511) on April 20, 1998.

** Filed as an exhibit to Amendment No. 1 to the Company's Registration
Statement on Form S-1 (Registration No. 333-50511) on May 29, 1998.

*** Filed as an exhibit to Amendment No. 2 to the Company's Registration
Statement on Form S-1 (Registration No. 333-50511) on June 12, 1998.

**** Filed as an exhibit to Amendment No. 3 to the Company's Registration
Statement on Form S-1 (Registration No. 333-50511) on June 25, 1998.

***** Filed as an exhibit to Amendment No. 4 to the Company's Registration
Statement on Form S-1 (Registration No. 333-50511) on July 16, 1998.

****** Filed as an exhibit to Amendment No. 5 to the Company's Registration
Statement on Form S-1 (Registration No. 333-50511) on August 11, 1998.

++ Confidential treatment requested.

<PAGE> 1
EXHIBIT 4.2

[Execution Copy]

STOCKHOLDERS AGREEMENT

THIS STOCKHOLDERS AGREEMENT (the "Agreement") is entered in as of
September 7,1993 by and among Financial Pacific Insurance Group, Inc., a
Delaware corporation (the "Corporation"), the parties set forth on Schedule 1
attached hereto (the "Purchasers"), Robert C. Goodell ("Goodell"), Suzanne M.
Goodell ("SMG") and Wells Fargo Bank, N.A., Trustee for Latham & Watkins FBO
David B. Rogers ("Rogers") (the Purchasers, Goodell, SMG and Rogers are
individually referred to herein as a "Stockholder" and collectively as the
"Stockholders").

RECITALS

A. As of the date hereof, the authorized capital stock of the
Corporation consists of (i) 10,000,000 shares of common stock, par value $.001
per share ("Common Stock"), of which 1,232,284 shares are issued and
outstanding, and (ii) 4,000,000 shares of preferred stock, par value $.001 per
share, of which 4,000,000 have been designated as Series A Convertible Preferred
Stock (the "Series A Stock") and 3,650,001 shares of Series A Stock are issued
and outstanding.

B. Goodell, SMG and Rogers are the holders of all of the issued
and outstanding shares of Common Stock and the Purchasers are the holders of all
of the issued and outstanding shares of Series A Stock. The shares of Common and
Series A Stock now or hereafter owned by the Stockholders are hereinafter
collectively referred to as the "Shares." As used hereinafter in this Agreement,
the term "Shares" shall also include any additional shares of Common Stock,
options to purchase Common Stock or securities convertible Common Stock of the
Corporation issued to or acquired by any of the parties: and the term "number
of Shares" shall refer to the aggregate of (i) the number of Shares of Common
Stock owned by the Stockholder and (ii) the number of Shares of Common Stock
issuable upon conversion of the Series A Stock owned by the Stockholder.

C. It is deemed to be in the best interests of the Corporation
and the Stockholders that provision be made for the continuity and stability of
the business and policies of the Corporation.

AGREEMENT

The parties agree as follows:

1. Agreement Available for Inspection. An original copy of this
Agreement duly executed by each of the Stockholders shall be delivered to the
Secretary of

<PAGE> 2
the Corporation, maintained at the principal executive office of the Corporation
and made available for inspection.

2. Election of Directors.

(a) Voting of Stock. At or before each annual or special meeting
of the stockholders of the Corporation called for the purpose of electing
directors of the Corporation, and at each time at which stockholders of the
Corporation shall vote for or consent to the election of directors of the
Corporation, then and in each event, each Stockholder shall vote (or consent
with respect to) all Shares owned by him or it, to the extent that such Shares
are entitled to be voted, in a manner that would elect to the Board of Directors
of the Corporation (the "Board") (i) one nominee who is designated by FinPac
Partners, a California limited partnership ("FinPac"), (ii) one nominee who is
designated by St. Paul Fire and Marine Insurance Company ("SPFM"), (iii) one
nominee who is designated by The Firemark Global Insurance Fund, L.P., a
Delaware limited partnership ("Firemark"), as the chief executive officer of the
Corporation and (v) one nominee who is designated by the above four nominees.

(b) Initial Directors. The initial directors of the Corporation
shall be Patrick C. Haden, Richard S. Banas, Michael J. Morrissey, Robert C.
Goodell and Stephen E. Adamson.

(c) Removal of Director. At each annual or special meeting of the
stockholders of the Corporation called for the purpose of removing directors of
the Corporation, and at each time at which stockholders of the Corporation
shall vote for or consent to the removal of directors of the Corporation, then
and in each event, no stockholder shall vote (or consent with respect to) any
Shares owned by him or it, to the extent that such Shares are entitled to be
voted, for the removal of any director who is (i) the chief executive officer
of the Corporation, (ii) designed by FinPac, (iii) designated by SPFM, (iv)
designated by Firemark, or (v) designated by the chief executive officer of the
Corporation and the nominees of FinPac, SPFM and Firemark, as the case may be.
If the vote at such annual or special meeting or such consent results in a
director being removed, there shall immediately follow an election of directors
in accordance with subparagraph (a) above.

(d) Vacancy. In the event of a vacancy on the Board created by
the death, incapacity or resignation of a director, such vacancy shall be
filled by a successor director who shall be elected in the manner by which his
or her predecessor was elected as provided in subparagraph (a) above.

(e) Size of Board of Directors. With respect to any proposed
amendment of the Corporation's Bylaws, each Stockholder agrees to vote (or
consent with respect to) any Shares owned by him or it, to the extent that such
Shares are entitled to be

2.
<PAGE> 3
voted, such that the authorized number of members of the Board shall neither be
increased nor decreased from five without the consent of all of the
Stockholders.

3. Proposed Sales by Stockholders; Right of First Refusal and Co-Sale
Rights.

(a) Solicited Shares. If any Stockholder receives a bona fide offer
to purchase his or its Shares (other than in a Transaction pursuant to Section
6(b)) or any portion thereof (the "Solicited Shares") which he or it does not
wish to accept, he or it shall immediately give notice, as provided in Section
12 of this Agreement, to the Corporation and the other Stockholders (the "Other
Stockholders"), setting forth the terms of such offer and the identity of and
means of contacting the offeror. Each of the other Stockholders shall be
entitled to offer to sell to such offeror such proportion of the Solicited
Shares as the number of Shares owned by him or it bears to the total number of
Shares owned by the other Stockholders.

(b) Proposed Sales. Should any Stockholder desire to sell, assign,
encumber, transfer or otherwise dispose of any of his or its Shares, or of any
interest in such Shares in any transaction other than a transaction pursuant to
Section 6(b) of this Agreement (the "Transaction"), he or it (the "Seller")
shall first serve written notice (the "Notice") on the Corporation and the
Other Stockholders, in the manner prescribed in Section 12 of this Agreement,
of his or its desire to do so. The Notice must specify: (i) the name and address
of the person or entity to whom the Seller proposes to sell, encumber, assign
or transfer the Shares or an interest in the Shares (the "Offeror"), (ii) the
number of Shares, or the interest in the Shares, the Seller proposes to sell,
assign or transfer (the "Offered Shares"), (iii) the price or amount per Share
to be paid or delivered to the Seller for the proposed sale, encumbrance,
assignment or transfer, and (iv) all other terms and conditions of the proposed
sale, encumbrance, assignment or transfer, and (iv) all other terms and
conditions of the proposed sale, encumbrance, assignment or transfer. In the
event the Seller proposes to sell, assign, transfer or encumber a number of
Shares which would reduce the number of shares held by them or it after the
proposed sale, assignment, encumbrance or transfer to less than 10% of the
number of Shares of the Corporation held by such Seller as of the Second
Closing Date (as defined in the Series A Convertible Preferred Stock Purchase
Agreement of even date herewith among the Corporation and the Purchasers) the
Seller must include all Shares held by him or it as Offered Shares.

(c) Board Meeting. The Secretary of the Corporation shall, within
seven days after actual physical receipt by him or her of a Notice, call a
special meeting of the Corporation's Board of Directors in the manner provided
in the Bylaws, to be held at the earliest time that is reasonably feasible.

(d) Corporation's Option to Purchase.

(i) Subject to subparagraph (d)(ii), the Corporation shall have
15 days after a Notice is deemed, under Section 12 of this Agreement, to

<PAGE> 4

have been served on it, to elect to purchase all or any part of the
Offered Shares, at the price and on the terms and conditions
specified in the Notice; provided, however, that the Corporation
shall not be permitted to purchase any part of the Offered Shares
unless all Remaining Shares, as that term is defined in subparagraph
(f), are purchased by The Other Stockholders pursuant to the last
sentence of subparagraph (g).

(ii) In the event the price specified in the Notice is to
be paid in other than cash, cash equivalents or publicly traded
securities and the Corporation and the Seller are unable to reach
agreement as to the valuation of the price specified in the Notice
within ten days of the date the Notice is deemed to have been served,
the valuation of the price shall be determined by arbitration in
accordance with the rules of the American Arbitration Association,
the cost of which shall be borne equally by the Corporation and the
Seller. In such event, the 15 day period provided in subparagraph
(d)(i) hereof, shall be tolled until such time as the arbitrator
delivers his findings as to the valuation of the price to the
Corporation, the Other Stockholders and the Seller.

(e) Exercise of Option by Corporation. Should the Corporation,
within the time specified in subparagraph (d), elect to purchase all or any part
of the Offered Shares, the Secretary of the Corporation shall promptly give
written notice of that fact to the Seller. Within 15 days thereafter, on
delivery to the Corporation of the certificate or certificates representing the
number of Offered Shares purchased by the Corporation endorsed for transfer to
the Corporation, the Corporation shall deliver to the Seller any cash, notes or
other instruments required to consummate its purchase. If the Corporation elects
to purchase only part of the Offered Shares, this purchase shall be held in
escrow pending resolution of whether the Corporation shall be permitted to
purchase any Offered Shares pursuant to subparagraph (d)(i).

(f) Failure of Corporation to Exercise Option. Should the
Corporation fail to purchase, within the time and in the manner specified in
subparagraph (e), all of the Offered Shares, the Secretary of the Corporation
shall promptly give written notice (the "Rejection Notice") of that fact to
each of the Other Stockholders. The Rejection Notice shall also specify the
number of Offered Shares specified in the Notice and the number of Offered
Shares not purchased by the Corporation (the "Remaining Shares").

(g) Other Stockholders' Option to Purchase. Within ten days
after the mailing of the Rejection Notice, each Other Stockholder may serve
written notice on the Secretary of the Corporation of its election to purchase
a specified number of the Remaining Shares at the price and on the terms and
conditions specified in the Notice, or, alternatively, his or its election to
sell Shares on the terms set forth in the Notice and the number of Shares each
Other Stockholder would like to sell in the Transaction if given the
opportunity. Should

4.
<PAGE> 5

the total number of Shares the Other Stockholders have elected to purchase be
less than the number of Remaining Shares, the Seller shall be entitled to sell
all of the Offered Shares to the Offeror in the Transaction, subject to the
rights of co-sale granted to the Other Stockholders hereunder.

(h) Excessive Offers to Purchase. Should the total number of
Shares the Other Stockholders have elected to purchase exceed the number of
Remaining Shares, each of such Other Stockholders shall be entitled to purchase
such proportion of the Remaining Shares as the number of Shares such
Stockholder sought to purchase by notice given pursuant to subparagraph (g)
bears to the total number of Shares owned by Other Stockholders who have
elected to purchase Remaining Shares. The Secretary of the Corporation shall
promptly, on expiration of the time period specified in subparagraph (g),
notify each of the Other Stockholders of the number of Remaining Shares which
he or it may purchase and the date, which shall be five days after the
expiration of the time period specified in subparagraph (g), which the
Secretary has set for consummation of the purchase of the Remaining Shares by
the Other Stockholders (the "Purchase").

(i) Consummation of Purchase. On or prior to the date set by
the Secretary of the Corporation pursuant to subparagraph (h) for consummation
of the Purchase, each of the Other Stockholders participating in the Purchase
must deliver to the Secretary of the Corporation all cash, notes or other
instruments required to consummate his or its Purchase. On the date set
pursuant to subparagraph (h) for consummation of the Purchase, the Secretary of
the Corporation shall, on delivery to him or her of the certificate or
certificates for the Remaining Shares duly endorsed for transfer, consummate
the Purchase and deliver the consideration therefor to the Seller. The
Secretary of the Corporation shall then cause each of the Remaining Shares
purchased by a Stockholder to be transferred to the name of such Stockholder on
the books of the Corporation.

(j) Failure to Exercise Option; Joint Sale.

(i) Should the Corporation and the Other Stockholders fail
to elect within the times specified in this Agreement to purchase all
of the Offered Shares specified in the Notice, and if any Other
Stockholder has expressed, pursuant to subparagraph (g), a desire to
sell all or a portion of his or its Shares, then each such Other
Stockholder (the "Participating Stockholder") shall be entitled to
sell a portion of his or its Shares in the Transaction. The
Secretary of the Corporation shall promptly, on expiration of the
time period specified in subparagraph (g), notify the Seller and
Offeror of the identities of the Participating Stockholders and the
number of Shares they wish to sell. The Seller shall use his or its
best efforts to interest the Offeror in purchasing the Shares the
Participating Stockholders desire to sell, as well as all Offered
Shares. If the Offeror does not wish to purchase the full amount of
available Shares, then the Participating Stockholders as a group
shall be entitled to sell in the Transaction up to that number of
Shares which is

<PAGE> 6

the same percentage of the number of Shares the Offeror will
accept as the number of Shares the Participating Stockholders
wish to sell bears to the total number of the Shares the Seller
and the Participating Stockholder wish to sell and the number of
Shares that each Participating Stockholder will be able to sell
will be allocated pro rata based on the number of Shares each
Participating Stockholder elects to sell pursuant to
subparagraph(g).

(ii) The transaction shall then proceed on the
terms and conditions set forth in the Notice, with the Seller
entitled to sell that number of his or its own Shares which
equals the difference between the number of Shares allowed to be
sold by the Participating Stockholders as calculated above, and
the total number of Shares accepted by the Offeror.

(iii) If there are no Participating Stockholders,
the Seller shall be entitled to sell all of the Offered Shares to
the person or entity specified in the Notice at the price and on
the terms and conditions specified in that Notice, if such sale
is consummated within 90 days from the date the Notice is
received by the Secretary of the Corporation. The Seller may not,
however, without giving a new Notice of his or its intention to
do so, which Notice shall reinstate the options of the
Corporation and the Other Stockholders set forth in this
Agreement to purchase the Offered Shares or to sell their
respective shares, sell any or all of the Offered Shares to the
person or entity and on the terms specified in the Notice after
said 90 day period has elapsed, or to any other person or entity
or at any other price or on any other terms and conditions than
those specified in the Notice.

(iv) The proceeds of any sale made by the Seller
without compliance with the provisions of this Section 3 shall be
deemed to be held in constructive trust in such amount or
amounts as would have been due the Participating Stockholder(s)
had the Seller compiled with this Section 3.

4. Financial Information.

(a) Annual and Quarterly Information. The Corporation will
furnish the following reports to each Stockholder (or its representative) so
long as such Stockholder is a holder of any Shares:

(1) As soon as practicable after the end of each
fiscal year of the Corporation, and in any event within 90 days
thereafter, a consolidated balance sheet of the Corporation and
its subsidiaries as of the end of such fiscal year, and
consolidated statements of income and cash flow of the
Corporation and its subsidiaries for such year, prepared in
accordance with generally accepted accounting principles
consistently applied and setting forth in each case in
comparative form the figures for the previous fiscal year, all
in

<PAGE> 7

reasonable detail and certified by independent public accountants
of recognized national standing selected by the Corporation.

(ii) As soon as practicable after the end of the
first, second and third quarterly accounting periods in each
fiscal year of the Corporation, and in any event within 45 days
thereafter, a consolidated balance sheet of the Corporation and
its subsidiaries as of the end of each such quarterly period, and
consolidated statements of income and cash flow of the
Corporation and its subsidiaries for such period and for the
current fiscal year to date, prepared in accordance with
generally accepted accounting principles consistently applied and
setting forth in comparative form the figures for the
corresponding periods of the previous fiscal year, subject only
to changes resulting from normal year-end audit adjustments, all
in reasonable detail and certified by the principal financial or
accounting officer of the Corporation.

(iii) During such time as the Corporation is
subject to the reporting requirements of Section 13(a) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"),
and in lieu of the financial information required pursuant to
clauses (i) and (ii), copies of its Annual and Quarterly Reports
on Forms 10-K and 10-Q, respectively, or any similar successor
forms, as filed with the Securities and Exchange Commission.

(b) Additional Information. Tile Corporation will permit
representatives of the Stockholders to visit and inspect any of the properties
of the Corporation, including books of account, and to discuss its affairs,
finances and accounts with the Corporation's officers and its independent public
accountants, all at such reasonable times and as often a Stockholder may
reasonably request. During such time as the Corporation is not subject to the
reporting requirements of Section 13(a) of the Exchange Act, the Corporation
will deliver the reports described below in this subparagraph (b) to any
Stockholder who holds at least 10% of the Shares held by the Stockholder on the
Second Closing Date:

(i) As soon as practicable after the end of each
month commencing with the month of January 1994 and in any event
within 30 days thereafter, a consolidated balance sheet of the
Corporation and its subsidiaries as of the end of such month, and
consolidated statements of income and cash flow of the
Corporation and its subsidiaries for each month and for the
current fiscal year of the Corporation to date, prepared in
accordance with generally accepted accounting principles
consistently applied, together with a comparison of such
statements to the prior year's results and the Corporation's
operating plan then in effect and approved by its Board of
Directors, and certified, subject only to changes resulting from
normal year-end audit adjustments, by the principal financial or
accounting officer of the Corporation. As soon as practicable
after the end of each month and in any event within 30 days

<PAGE> 8
thereafter for the months of September 1993 through December 1993, the
following information with respect to M.L. Oates Insurance Company and
Property Managers Insurance Services: sales, claims, reserves,
investment income and paid expenses.

(ii) An annual summary of the financial plan of the
Corporation (to be delivered 30 days prior to each fiscal year end), as
contained in its operating plan approved by the Corporation's Board of
Directors, as soon as practicable following such approval. Any material
changes in such financial plan shall be submitted as promptly as
practicable after such changes have been approved by the Board of
Directors.

(iii) With reasonable promptness, such other information
and data with respect to the Corporation and its subsidiaries as a
Stockholder may from time to time reasonably request.

(iv) The foregoing provisions of this subparagraph (b)
shall not be in limitation of any rights which the Stockholders may
have to the books and records of the Corporation and it subsidiaries,
or to inspect their properties or discuss their affairs, finances and
accounts.

(c) Assignment of Rights to Financial Information. The rights
granted pursuant to subparagraphs (a) and (b) may be assigned or otherwise
conveyed by any Stockholder in connection with the transfer or assignment of
Shares to a partner of a Purchaser, or the transfer or assignment to a single
transferee of not less than 20% of the Shares held by such Stockholder on the
Second Closing Date, and such rights may be further reassigned or conveyed by
such partner or single transferee to another such partner or single transferee,
upon the written consent of the Corporation which consent shall not be
unreasonably withheld.

5. Right of First Refusal Upon New Issuance by Corporation. The
Corporation hereby grants to each Stockholder the right of first refusal to
purchase, pro rata, all (or any part of) such Stockholder's pro rata share of
New Securities (as defined in this Section 5) which the Corporation may, from
time to time, propose to sell and issue. A Stockholder's pro rata share, for
purposes of this right of first refusal, is the ratio of (i) the number of
Shares owned by such Stockholder as of the date of the proposed sale to (ii) the
aggregate number of shares of Common Stock of the Corporation outstanding as of
the date of such proposed sale plus the number of shares of Common Stock
issuable upon conversion of all outstanding convertible securities of the
Corporation (including the Series A Stock) as of the date of such proposed sale.
Each Stockholder shall have a right of over-allotment such that if any
Stockholder fails to exercise its right hereunder to purchase its pro rata
portion of New Securities, the other Stockholders may purchase all or any part
of the non-purchasing Stockholder's portion (pro rata as to all such other
Stockholders who elect to purchase such over-allotment portion) within ten days
from the date such non-purchasing

<PAGE> 9
Stockholder fails to exercise its right hereunder to purchase its pro rata
share of New Securities. This right of first refusal shall be subject to the
following provisions:

(a) Definition. "New Securities" shall mean any capital stock (including
Common Stock or Preferred Stock) of the Corporation whether now authorized or
not, and all rights, options or warrants to purchase capital stock, and
securities of any type whatsoever that are, or may become, convertible into
capital stock; provided that the term "New Securities" does not include (i)
securities outstanding on the date hereof or on the Second Closing Date; (ii)
securities offered to the public pursuant to a registration statement, filed
pursuant to the Securities Act of 1933, as amended (the "Securities Act");
(iii) securities issued pursuant to the acquisition of another corporation by
the Corporation by merger, purchase of all or substantially all the assets or
other reorganization whereby after such acquisition the Corporation owns not
less than 51% of the voting power of such corporation; (iv) any borrowings,
direct or indirect, from financial institutions or other persons by the
Corporation, whether or not presently authorized, including any type of loan or
payment evidenced by any type of debt instrument, provided such borrowings do
not have equity features, including warrants, options or other rights to
purchase capital stock, and are not convertible into capital stock of the
Corporation; (v) the shares of Common Stock reserved for issuance to employees,
directors or consultants of the Corporation (or securities convertible into
such Common Stock, or rights, options or warrants to purchase such Common Stock
or convertible securities); or (vi) the shares of Common Stock issuable upon
conversion of the Series A Stock.

(b) Notice. In the event the Corporation proposes to undertake an
issuance of New Securities, then, with respect to each such issuance, it shall
give each Stockholder written notice of its intention, describing the type of
New Securities, the price and the general terms upon which the Corporation
proposes to issue the same. Each Stockholder shall have 30 days from the date
such notice is given to agree to purchase all or any portion of the
Stockholder's pro rata share of such New Securities for the price and upon the
general terms specified in the notice by giving written notice to the
Corporation and stating therein the quantity of New Securities to be purchased.

(c) Over-Allotment. In the event any Stockholder fails to exercise the
right of first refusal as to all of the New Securities proposed to be issued
within said 30 day period, the Corporation shall give written notice of such
fact, specifying the amount of securities not elected to be purchased, to any
Stockholder who has elected to purchase any of such New Securities, and each
such Stockholder shall have ten days, after the giving of such further notice,
to purchase all or any part of its pro rata share of such unpurchased portion
by giving written notice thereof to the Corporation. After the expiration of
the period for the exercise of the over-allotment provisions of this
subparagraph (c), the Corporation shall have 120 days thereafter to sell or
enter into an agreement (pursuant to which the sale of New Securities covered
thereby shall be closed, if at all, within 120 days from the date of said
agreement) to sell that portion of the New Securities respecting which the
Stockholders' option was not exercised, at a price and upon general terms no
more favorable to the

9.
<PAGE> 10

purchasers thereof than specified in the Corporation's notice. In the event the
Corporation has not sold the New Securities within said 120-day period (or sold
and issued new Securities in accordance with said 120-day period (or sold and
issued New Securities in accordance with the foregoing within 120 days from the
date of said agreement), the Corporation shall not thereafter issue or sell any
New Securities, without first offering such securities to the Stockholders in
the manner provided above.

(d) Assignment of Rights of First Refusal. The right of first
refusal set forth in this Section 5 may be assigned or otherwise conveyed by any
Stockholder in connection with the transfer or assignment of Shares to a partner
of a Purchaser, or the transfer or assignment to a single transferee of not less
than 20% of the Shares held by such Stockholder on the Second Closing Date, and
such rights may be further reassigned or conveyed by such partner or single
transferee to another such partner or single transferee, upon the written
consent of the Corporation which consent shall not unreasonably withheld.

6. Restrictions on Transferability of Securities; Compliance with
Securities

(a) Restrictions of Transferability. To accomplish the purposes of
this Agreement, any transfer, sale, assignment, hypothecation, encumbrance or
alienation of any of the Shares by the Stockholders, other than according to the
terms of this Agreement, devoid and transfers no right, title or interest in
or to said Shares or any of them, whether now owned or hereafter acquired, to
the purported transferee, buyer, assignee, pledgee or encumbrance holder. In
addition to the restrictions on transfer set forth herein, the Stockholders
acknowledge that Goodell's and SMG's Shares are subject to the restrictions set
forth in that certain Restricted Stock Agreement of even date among the
Corporation, Goodell and SMG. The conditions for transfer set forth in this
Section 6 are intended to insure compliance with the provisions of the
Securities Act or, in the case of subparagraph (m) hereof, to assist in an
orderly distribution.

(b) Transfers not Subject to Restrictions. Subject to Section 9 of
this Agreement, (i) either Roger or Goodell may sell, assign or transfer Shares
to his parents, the parents of his spouse, his spouse or issue or adopted
children, or to a trust established for the benefit of his parents, the parents
of his spouse, his spouse, issue, adopted children, or himself, or dispose of
them under his will and (ii) any of the Purchasers may sell, assign or transfer
Shares to a partner or an "affiliate," as such term is defined in Rule 405 under
the Securities Act.

"Commission" shall mean the Securities and Exchange Commission or any other
federal agency at the time administering the Securities Act.

10.
<PAGE> 11
"Restricted Securities" shall mean the securities of the Corporation
required to bear or bearing the legends set forth in subparagraph (d) hereof.

"Registrable Securities" shall mean (i) the Shares, (ii) any Common Stock
issued in respect of securities issued pursuant to the conversion of the Series
A Stock upon any stock split, stock dividend, recapitalization or similar event
and (iii) Common Stock issued upon exercise of the Warrants (as defined in
Section 16 hereof).

The terms "register", "registered" and "registration" shall refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act and applicable rules and regulations
thereunder, and the declaration or ordering of the effectiveness of such
registration statement.

"Registration Expenses" shall mean all expenses incurred by the Corporation
in compliance with subparagraph (f) hereof, including, without limitation, all
registration and filing fees, printing expenses, fees and disbursements of
counsel for the Corporation, blue ??? fees and expenses, and the expense of any
special audits incident to or required by any such registration (but excluding
the compensation of regular employees of the Corporation, which shall be paid in
any event by the Corporation) and the expenses associated with the
Corporation's obligations under subparagraph (h) hereof.

"Selling Expenses" shall mean all underwriting discounts and selling
commissions applicable to the sale of Registrable Securities and all fees and
disbursements of counsel for any Holder.

"Holder" shall mean any holder of the outstanding Shares or Registrable
Securities which have not been sold to the public.

(d) Restrictive Legends. Each certificate representing (i) the Shares,
(ii) shares of the Corporation's Common Stock issued upon conversion of Series
A Stock or exercise of the Warrants, or (iii) any other securities issued
in respect of the Shares of the Common Stock issued upon conversion of the
Series A Stock or exercise of the Warrants, upon any stock split, stock
dividend, recapitalization, merger, consolidation or similar event, shall
(unless otherwise permitted or unless the securities evidenced by such
certificate shall have been registered under the Securities Act and publicly
sold pursuant to such registration) be stamped or otherwise imprinted with
legends substantially in the following form (in addition to any legend required
under applicable state securities laws):

THE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE SOLD OR OFFERED FOR SALE IN
THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES
UNDER SAID ACT AND ANY APPLICABLE

11.

<PAGE> 12
STATE SECURITIES LAW OR AN OPINION OF COUNSEL SATISFACTORY TO THE
CORPORATION THAT SUCH REGISTRATION IS NOT REQUIRED.

THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE TERMS AND
CONDITIONS OF THE STOCKHOLDERS AGREEMENT DATED AS OF SEPTEMBER 7, 1993, BY
AND AMONG THE CORPORATION AND CERTAIN HOLDERS OF THE OUTSTANDING CAPITAL
STOCK OF THE CORPORATION. A COPY OF THE STOCKHOLDERS AGREEMENT AND ALL
AMENDMENTS THERETO HAS BEEN PLACED ON FILE BY THE CORPORATION AND MAY BE
EXAMINED BY A STOCKHOLDER OF THE CORPORATION AS PROVIDED BY SECTION 220 OF
THE DELAWARE GENERAL CORPORATION LAW. ALL THE TERMS AND PROVISIONS OF THE
AGREEMENT ARE HEREBY INCORPORATED BY REFERENCE AND MADE A PART OF THIS
CERTIFICATE.

Upon request of holder of such certificate, the Corporation shall remove
the first legend from the certificate or issue to such holder a new certificate
therefor free of the first transfer legend, if, with such request, the
Corporation shall have received either the opinion referred to in subparagraph
(e)(i) or the "no-action" letter referred to in subparagraph (e)(ii) to the
effect that any transfer by such holder of the securities evidenced by such
certificate will be exempt from the registration and/or qualification
requirements of, and that such legend is not required in order to establish
compliance with, the Securities Act and, if applicable, any state securities
laws under which transfer restrictions on such securities had been previously
imposed.

e. Notice of Proposed Transfers. The Holder of Restricted
Securities by acceptance thereof agrees to comply in all respects with the
provisions of this subparagraph (e) and the other provisions of this Agreement,
if applicable to the proposed transfer. Prior to any proposed transfer of any
Restricted Securities (other than under circumstances described in subparagraph
(f) hereof), the Holder thereof shall give written notice to the Corporation of
such Holder's intention to effect such transfer. Each such notice shall describe
the manner and circumstances of the proposed transfer in sufficient detail, and
shall be accompanied (except in transactions demonstrated to the Corporation's
reasonable satisfaction to be in compliance with Rule 144 of the Commission, or
any substantially identical successor rule of the Commission) by either (i) a
written opinion of legal counsel who shall be reasonably satisfactory to the
Corporation, addressed to the Corporation, and reasonably satisfactory in form
and substance to the Corporation's counsel, to the effect that the proposed
transfer of the Restricted Securities may be effected without registration
under the Securities Act and any applicable state securities laws, or (ii) a
"no action" letter from

12.
<PAGE> 13
the Commission (and any necessary state securities administrators) to the effect
that the distribution of such securities without registration will not result
in a recommendation by the staff of the Commission (or such administrators)
that action be taken with respect thereto, whereupon the Holder of such
Restricted Securities shall be entitled to transfer such Restricted Securities
in accordance with the terms of the notice delivered by the Holder to the
Corporation. Each certificate evidencing the Restricted Securities transferred
as above provided shall bear the appropriate restrictive legend set forth in
subparagraph (d) above, except that such certificate shall not ear such
restrictive legend if the transfer is made pursuant to Rule 144 or if the
opinion or "no-action" letter referred to above is to the further effect that
such legend is not required in order to establish compliance with any
provisions of the Securities Act and applicable state securities laws.

(f) Corporation Registration.

(i) If the Corporation shall determine to register any of its
securities either for its own account or the account of any security holder or
holders, other than a registration relating solely to employee benefit plans, or
a registration relating solely to a Commission Rule 145 (or substantially
similar successor rule) transaction, or a registration on any registration form
which does not permit secondary sales or does not include substantially the same
information regarding the Corporation as would be required to be included in a
registration statement covering the sale of Registrable Securities, the
Corporation will:

(A) promptly give to each Holder written notice thereof;
and

(B) include in such registration (and any related
qualification under state blue sky laws and other compliance filings, and in any
underwriting involved therein), all the Registrable Securities specified in a
written request or requests, given by any Holder within 15 days after such
written notice from the Corporation described in clause (A) above is given,
except as set forth in clause (ii) below.

(ii) Underwriting. If the registration of which the Corporation
gives notice is for a registered public offering involving an underwriting, the
Corporation shall so advise the Holders as part of the written notice given
pursuant to clause (i)(A). In such event the right of any Holder to registration
pursuant to this subparagraph shall be conditioned upon such Holder's
participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting to the extent provided herein. All
Holders proposing to distribute their securities through such underwriting shall
(together with the Corporation and the other persons distributing their
securities through such underwriting) enter into an underwriting agreement in

13.

<PAGE> 14

customary form with the underwriter or underwriters selected or
approved for underwriting by the Corporation. Notwithstanding any
other provision of this subparagraph (f), if the underwriter
determines that marketing factors require a limitation on the
number of shares to be underwritten, (a) if such registration is
the first registered offering of the Corporation's securities to
the public, the underwriter may (subject to the allocation
priority set forth below) exclude from such registration and
underwriting some or all of the Registrable Securities which
would otherwise be underwritten pursuant hereto, and (b) if such
registration is other than the first registered offering of the
sale of the Corporation's securities to the general public, the
underwriter may (subject to the allocation priority set forth
below) limit the number of Registrable Securities to be included
in the registration and underwriting to not less than 50% of the
securities included therein (based on aggregate market values).
The Corporation shall so advise all holders of securities
requesting registration, and the number of shares of securities
that are entitled to be included in the registration and
underwriting shall be allocated in the following manner: The
securities of the Corporation held by officers and directors of
the Corporation (other than Registrable Securities held by
affiliates of the non-employee directors) shall be excluded from
such registration and underwriting to the extent required by such
limitation, and, if a limitation on the number of shares is still
required, the number of shares that may be included in the
registration and underwriting shall be allocated among all
Holders and other security holders requesting registration in
proportion, as nearly as practicable to the respective amounts
of Registrable Securities and other securities which they held at
the time of filing the registration statement. If any Holder of
Registrable Securities or any officer, director or other security
holder requesting registration disapproves of the terms of any
such underwriting, such person may elect to withdraw therefrom by
written notice to the Corporation and the underwriter. Any
Registrable Securities or other securities excluded or withdrawn
from such underwriting shall be withdrawn from such registration.

(g) Expenses of Registration. All Registration Expenses incurred
on behalf of Holders in connection with any registration, qualification or
compliance pursuant to this Section 6 shall be borne by the Corporation and all
Selling Expenses shall be borne by the holders of the securities so registered
pro rata on the basis of the number of their shares so registered.

(h) Registration Procedures. In the case of each registration
effected by the Corporation pursuant to subparagraph (f), the Corporation will
advise each Holder writing as to the initiation of each registration and as to
the completion thereof. The Corporation will:

14.

<PAGE> 15

(i) Keep such registration effective for a period
of 90 days or until the Holder or Holders have completed the
distribution described in the registration statement relating
thereto, whichever first occurs; and

(ii) Furnish such number of prospectuses and other
documents incident thereto as a Holder from time to time may
reasonably request.

(i) Indemnification.

(A) The Corporation will indemnify each Holder,
each of its officers, directors and partners, and each person
controlling such Holder, with respect to which registration,
qualification or compliance has been effected pursuant to this
Section 6, and each underwriter, if any, and each person who
controls any underwriter, against all claims, losses, damages and
liabilities (or actions in respect thereof) arising out of or
based on any untrue statement (or alleged untrue statement) of a
material fact contained ill any prospectus, offering circular or
other document (including any related registration statement,
notification or the like) incident to any such registration,
qualification or compliance, or based on any omission (or alleged
omission) to state therein a material fact required to be stated
therein or necessary to make the statements therein not
misleading, or any violation by the Corporation of the Securities
Act or any rule or regulation thereunder applicable to the
Corporation and relating to action or inaction required of the
Corporation ill connection with any such registration,
qualification or compliance, and will reimburse each such Holder,
each of its officers, directors and partners, and each person
controlling such Holder, each Such underwriter and each person
who controls any such underwriter, for any legal and any other
expenses reasonably incurred in connection with investigating and
defending any such claims loss. damage, liability or action,
provided that the Corporation will not be liable in any such case
to the extent that any such claim, loss, damage, liability or
expense arises out of or is based on (i) any untrue statement or
omission based upon written information furnished to the
Corporation by such Holder or underwriter and stated to be
specifically for use therein, or (ii) any failure by any such
Holder or underwriter to comply with the prospectus delivery
requirements of the Securities Act.

(B) Each Holder and other security holder will, if
Registrable Securities held by him are included in the securities
as to which such registration, qualification or compliance is
being effected, indemnify the Corporation, each of its directors
and officers and each underwriter, if any, of the Corporation's
securities covered by such a registration statement, each person
who controls the Corporation or such underwriter within the
meaning of the Securities Act and the rules and regulations
thereunder, each other such

15.

<PAGE> 16

Holder and other security holder and each of their officers,
directors and partners, and each person controlling such Holder
or other security holder, against all claims, losses, damages and
liabilities (or actions in respect thereof) arising out of or
based on any untrue statement (or alleged untrue statement) of a
material fact contained in any such registration statement,
prospectus, offering circular or other document, or any omission
(or alleged omission) to state therein a material fact required
to be stated therein or necessary to make the statements therein
not misleading, and will reimburse the Corporation and such
Holders, other security holders, directors, officers, partners,
persons, underwriters or control persons for any legal or any
other expenses reasonably incurred in connection with
investigating or defending any such claim, loss, damage,
liability or action, in each case to the extent, but only to the
extent, that such untrue statement (or alleged untrue statement)
or omission (or alleged omission) is made in such registration
statement, prospectus, offering circular or other document in
reliance upon and in conformity with written information
furnished to the Corporation by such Holder or other security
holder and stated to be specifically for use therein; provided,
however, that the obligations of such Holders and other security
holders hereunder shall be limited to an amount equal to the
proceeds to each such Holder or other security holder of
Securities sold as contemplated herein.

(C) Each party entitled to indemnification under
this subparagraph (i) (the "Indemnified Party") shall give notice
to the party required to provide indemnification (the
"Indemnifying Party") promptly after such Indemnified Party has
actual knowledge of any claim as to which indemnity may be
sought, and shall permit the Indemnifying Party to assume the
defense of any such claim or any litigation resulting therefrom,
provided that counsel for the Indemnifying Party, who shall
conduct the defense of such claim or any litigation resulting
therefrom, shall be approved by the Indemnified Party (whose
approval shall not unreasonably be withheld), and the Indemnified
Party may participate in such defense at such party's expense,
and provided further that the failure of any Indemnified Party to
give notice as provided herein shall not relieve the Indemnifying
Party of its obligation under this Section 6. No Indemnifying
Party, in the defense of any such claim or litigation, shall,
except with the consent of each Indemnified Party, consent to
entry of any judgment or enter into any settlement which does not
include as a unconditional term thereof the giving by the
claimant or plaintiff to such Indemnified Party of a release from
all liability in respect of such claim or litigation.

(j) Information by Holder. Each Holder of Registrable Securities,
and each other person holding securities included in any registration, shall
furnish to the Corporation such information regarding such Holder or other
person and the distribution proposed by such Holder or other person as the
Corporation may reasonably request in

16.

<PAGE> 17
writing and as shall be reasonably required in connection with any registration,
qualification or compliance referred to in this Section 6.

(k) Rule 144 Reporting. With a view to making available the
benefits of certain rules and regulations of the Commission which may permit the
sale of the Restricted Securities to the public without registration, the
Corporation agrees to:

(i) Use its best efforts to make and keep public
information available as those terms are understood and defined
in Rule 144 under the Securities Act, at all times from and after
90 days following the effective date of the first registration
under the Securities Act filed by the Corporation for an offering
of its securities to the general public;

(ii) Use its best efforts to file with the Commission
in a timely manner all reports and other documents required of
the Corporation under the Securities Act and the Exchange Act at
any time during which it is subject to such reporting
requirements: and

(iii) So long as the Stockholder owns any Restricted
Securities, furnish to the Stockholder forthwith upon request a
written statement by the Corporation as to its compliance with
the reporting requirements of Rule 144 (at any time from and
after 90 days following the effective date of the first
registration statement filed by the Corporation for an offering
of its securities to the general public), and of the Securities
Act and the Exchange Act (at any time during which it is subject
to such reporting requirements), a copy of the most recent annual
or quarterly report of the Corporation, and such other reports
and documents so filed as the Stockholder may reasonably request
in availing itself of any rule or regulation of the Commission
allowing the Stockholder to sell any such securities without
registration.

(l) Transfer of Registration Rights. The rights to cause
the Corporation to register securities granted by the Corporation under
subparagraph (f) may be assigned by any Holder to transferees or assignees of
Shares constituting at least 1% of the then outstanding Common Stock of the
Corporation (considering, for this purpose, Shares of Series A Stock to be
equivalent to the number of shares of Common Stock into which they are then
convertible); provided, however, that the Corporation is given written notice at
the time of or within a reasonable time after said transfer, stating the name
and address of said transferees or assignees and identifying the securities with
respect to which such registration rights are being assigned; and, provided,
further, that the transferees or assignees of such rights assume the obligations
of the Purchaser under Section 6.

(m) "Market Stand-Off" Agreement. Each Stockholder agrees,
if requested by the Corporation and the underwriter of Common Stock (or other
securities) of

17.

<PAGE> 18
the Corporation, not to sell or otherwise transfer or dispose of any Common
Stock (or other securities) of the Corporation held by it during the 90 day
period following the effective date of any registration statement of the
Corporation filed under the Securities Act with respect to a firmly underwritten
public offering of securities by the Corporation, provided that at least 90% of
all Holders, other security holders whose securities are included in such
registration statement and officers and directors of the Corporation shall also
enter into similar agreements.

Such agreement shall be in writing in a form satisfactory to the
Corporation and such underwriter. The Corporation may impose stop-transfer
instructions with respect to the securities subject to the foregoing
restrictions until the end of said period.

(n) Termination of Registration Rights. The rights to cause the
Corporation to register securities granted by the Corporation under
subparagraph (f) shall terminate with respect to any Holder during such time as
all of the Registrable Securities of such Holder can be sold in accordance with
Rule 144(k) of the Commission.

7. Board Control. The parties hereby agree that the Board shall
have control over (i) the hiring of the second most senior executive officer of
the Corporation, (ii) the loss reserving policy of the Corporation and (iii) the
investment policy of the Corporation. Additionally, the Board shall be required
to approve (i) the Corporation's annual budget and (ii) the Corporation's
significant capital expenditures and acquisitions.

8. Termination of this Agreement. This Agreement shall terminate
upon the earliest to occur of:

(a) The consummation by the Corporation of an offer and sale of
shares of its capital stock to the public pursuant to an effective registration
statement under the Securities Act;

(b) The consolidation or merger of the Corporation with or into
another corporation (other than a merger in which the Corporation is the
continuing or surviving corporation) or the sale or conveyance to another
corporation of all or substantially all of the assets of the Corporation;

(d) The tenth anniversary of the date hereof; and

(e) The date on which the Stockholders, as a group, hold less
than 50% of the outstanding shares of capital stock of the Corporation.

9. Transferees Subject to Provisions. Any transferee of a
Stockholder other than the Corporation or a Stockholder is subject to the terms
of this Agreement, and

18.

<PAGE> 19
??? prior to the receipt of any Shares, consent to be bound by the terms of this
Agreement in duly executing this Agreement and delivering an original executed
copy hereof to the Secretary of the Corporation. Any transfer without such
consent, execution and delivery will be null and void.

10. Amendments or Alterations. This Agreement may be altered or
amended in whole or in part at any time, only be a written instrument signed by
the Corporation and at least 90% in interest of the Stockholders.

11. Remedy for Breach. In addition to all other rights, any
Stockholder shall have the right to enjoin any sale or other transfer of Shares
which would cause any other Stockholder or his or its transferee to be in
breach of this Agreement.

12. Notices. Any and all notices or other communications required or
permitted by this Agreement or by law to be served on, given to, or delivered to
any party hereto by any other party to this Agreement shall be in writing and
shall be deemed duly served, given or delivered when personally delivered to the
party or to any officer of the party, or in lieu of such personal delivery, when
deposited in the United States mail as certified mail, return receipt requested,
with first-class postage prepaid, addressed, if to the Corporation to its
principal place of business, or if to a Stockholder, at the address shown on
Schedule 1 attached hereto.

13. Severability. Should any provision or portion of this
Agreement be held unenforceable or invalid for any reason, the remaining
provisions and portions of this Agreement shall be unaffected by such holding.

14. Governing Law. This Agreement shall be construed and governed by
the laws of the State of Delaware.

15. Attorneys' Fees. If any action at law or equity is necessary to
enforce or interpret the terms of this Agreement, the prevailing party shall be
entitled to reasonable attorneys' fees, costs and necessary disbursements, in
addition to any other relief to which such prevailing party may be entitled.

16. Additional Stockholders upon Exercise of Warrants. The
Corporation was issued a Common Stock Purchase Warrant to each of William E.
Myers, Stephen E. Adamson, Brian E. Sanderson and California Central Trust Bank
Corporation, as Trustee #1060000539 FBO David B. Rogers (the "Warrants"). Upon
the exercise of the Warrants and as provided in the Warrants, the holders of the
Common Stock issued pursuant thereto shall become "Stockholders" under this
Agreement and as such shall be bound by and subject to the provisions hereof and
shall have the benefit of the provisions hereof.

17. Shares Held by IRA Trustees. Certain shares of Common Stock have
been issued to California Central Trust Bank Corporation, as Trustee
#1060000539 FBO

19.

<PAGE> 20
Robert C. Goodell ("RCG Trustee") and California Central Trust Bank Corporation,
as Trustee #1060000539 FBO Suzanne M. Goodell ("SMG Trustee"). The Subscription
Agreements pursuant to which such shares were issued provide that such shares
shall be bound by and subject to the provisions hereof and shall have the
benefit of the provisions thereof. RCG shall cause RCG Trustee to comply with
the provisions of this Agreement. SMG shall cause SMG Trustee to comply with the
provisions of this Agreement.

18. Expenses of Stockholders. The Corporation will pay all
reasonable expenses of the Stockholders as listed on Schedule A hereto.

19. Counterparts. This Agreement may be signed in two or
more identical counterparts, all of which when taken together shall constitute
one and the same agreement.

IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first above written.

CORPORATION:

FINANCIAL PACIFIC INSURANCE
GROUP, INC.

By: /s/ KAREN OLDENKAMP
---------------------------------------
Karen Oldenkamp, Secretary

STOCKHOLDERS:

FINPAC PARTNERS,
a California limited partnership

By: /s/ PATRICK C. HADEN
---------------------------------------
Patrick C. Haden, General Partner

ST. PAUL FIRE AND MARINE INSURANCE
COMPANY

By: [SIG]
---------------------------------------

THE FIREMARK GLOBAL INSURANCE
FUND, L.P., a Delaware limited partnership

By: [SIG]
---------------------------------------

20.

<PAGE> 21

Wells Fargo Bank, N.A., Trustee for Latham &
Watkins for the benefit of David B. Rogers

By: [SIG]
------------------------------------------
Its:
-----------------------------------------

/s/ ROBERT C. GOODELL
---------------------------------------------
Robert C. Goodell

/s/ SUZANNE M. GOODELL
---------------------------------------------
Suzanne M. Goodell

21.