SUPERIOR NATIONAL INSURANCE GROUP INC, 10-K, 1997-03-10

SUPERIOR NATIONAL INSURANCE GROUP INC
10-K, 1997-03-10
INSURANCE AGENTS, BROKERS & SERVICE

Previous: TEMPLETON VARIABLE ANNUITY FUND/FL/, N-30D, 1997-03-10

Next: PIMCO FUNDS, 497, 1997-03-10

<PAGE>

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

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

FORM 10-K

(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1943

FOR THE TRANSITION PERIOD FROM TO

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

COMMISSION FILE NUMBER 0-25984

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

California 95-3994873
(STATE OF INCORPORATION) (IRS EMPLOYER IDENTIFICATION NO.)

26601 Agoura Road, Calabasas, CA 91302
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

Telephone: (818) 880-1600
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

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

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No Par Value Registered - Nasdaq National Market

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

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

Yes X No
----- -----

Indicate by check mark if closure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]

The aggregate market value of the Common Stock of the registrant held by
non-affiliates of the registrant on March 5, 1997, based on the closing price of
$13.50 per share of the Common Stock on the Nasdaq National Market on such date
was $46,530,531.

The number of shares of the registrant's Common Stock outstanding as of
March 5, 1997 was 3,446,706.

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

<PAGE>

SUPERIOR NATIONAL INSURANCE GROUP, INC.
INDEX TO FORM 10-K

PART I Page
----

ITEM 1. Business.............................................................1

ITEM 2. Business Properties.................................................24

ITEM 3. Legal Proceedings...................................................24

ITEM 4. Submission of Matters to a Vote of Security Holders.................24

PART II

ITEM 5. Market for Registrant's Common Equity and Related
Shareholder Matters.................................................25

ITEM 6. Selected Financial Data.............................................27

ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations...........................................28

ITEM 8. Financial Statements and Supplementary Data......................F - 1

ITEM 9. Changes in and Disagreements with Accountants on Equity
and Related Accounting and Financial Disclosure....................N/A

PART III

ITEM 10. Directors and Executive Officers of the Registrant..................38

ITEM 11. Executive Compensation..............................................43

ITEM 12. Security Ownership of Certain Beneficial Owners and Management......49

ITEM 13. Certain Relationship and Related Transactions.......................54

PART IV

ITEM 14. Exhibits, Financial Statements Schedules, and
Reports on Form 8-K.................................................55

Signatures..........................................................58

Index to Consolidate Financial Statements..........................59

Financial Statements and Supplementary Data......................F - 1

<PAGE>

GLOSSARY OF SELECTED INSURANCE TERMS

Admitted Assets . . . . . . . . . . . . . Assets recognized and accepted by
the state insurance regulatory
authorities for purposes of
determining the statutory financial
condition of an insurance company.

Claim and Claim Adjustment Expense. . . . An estimate of claims that have
occurred, both reported and
unreported (including claim
adjustment expenses), and have been
charged against earnings but remain
unpaid.

Combined Ratio. . . . . . . . . . . . . . The sum of the expense ratio, the
loss ratio and the policyholder
dividend ratio. A combined ratio
under 100% generally indicates an
underwriting profit, and a combined
ratio over 100% generally indicates
an underwriting loss.

Expense Ratio . . . . . . . . . . . . . . The ratio of underwriting expenses
to net premiums earned.

Loss Ratio. . . . . . . . . . . . . . . . The ratio of claims (including
claim adjustment expenses) to net
premiums earned.

Net Premiums Earned . . . . . . . . . . . The portion of net premiums written
applicable to the insurance
provided in any particular
accounting period.

Net Premiums Written. . . . . . . . . . . Premiums retained by an insurer
after deducting premiums on
business reinsured with others.

Participating Policies. . . . . . . . . . Policies which provide for the
discretionary payment of dividends
to policyholders (as a refund of
premiums).

Policy Acquisition Costs. . . . . . . . . Agents' or brokers' commissions,
premium taxes, marketing,
underwriting and other expenses
associated with the production of
business.

Policyholder Dividend Ratio . . . . . . . The ratio of policyholder dividends
accrued to net premiums earned.
Policyholder dividends are amounts
refunded by an insurance company to
the policyholder.

Policyholders' Surplus. . . . . . . . . . The amount remaining after all
liabilities are subtracted from all
assets, applying statutory
accounting principles. This sum is
regarded as financial protection to
policyholders in the event an
insurance company suffers
unexpected or catastrophic losses.

<PAGE>

Reinsurance . . . . . . . . . . . . . . . A procedure whereby an insurer
transfers ("cedes") a portion of
the insurance risk to a reinsurer
in exchange for the payment of a
premium. Reinsurance can be
effected by "treaties," where a
reinsurance treaty automatically
covers all risks of a defined
category, amount and type, or by
"facultative reinsurance," which is
negotiated between an original
insurer and the reinsurer on an
individual, contract-by-contract
basis.

Statutory Accounting Principles ("SAP") . Accounting method prescribed or
permitted by state insurance
regulators. The more significant
differences between statutory and
generally accepted accounting
principles ("GAAP") are the
following: (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 ninety days due and prepaid
expenses are nonadmitted assets for
statutory reporting purposes; (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;
(g) loss and loss adjustment
expense reserves and unearned
premium reserves are stated net of
reinsurance; and (h) minimum
statutory reserves for losses in
excess of Company's estimates are
required.

Treaty. . . . . . . . . . . . . . . . . . See Reinsurance.

Underwriting. . . . . . . . . . . . . . . The process whereby an insurer
reviews applications submitted for
insurance coverage, determines
whether it will accept all or part
of the coverage requested and
determines the premiums to be
charged.

Underwriting Expenses . . . . . . . . . . The aggregate of commissions and
other policy acquisition costs, as
well as the portion of
administrative, general and other
expenses attributable to the
underwriting operations.

Underwriting Profit (Loss). . . . . . . . The excess (deficiency) resulting
from the difference between net
premiums earned and the sum of
losses (including loss adjustment
expenses), underwriting expenses
and policyholder dividends.

iii

<PAGE>

PART I

ITEM 1. BUSINESS

OVERVIEW

Superior National Insurance Group, Inc. ("SNIG") is a holding company that,
through its wholly-owned subsidiary Superior National Insurance Company
("SNIC"), is engaged in writing workers' compensation insurance principally in
the State of California and, until September 30, 1993, was engaged in writing
commercial property and casualty insurance. The "Company" refers to SNIG and
its subsidiaries.

SNIG was incorporated in California on March 29, 1985, under the name
Coastal Holdings, Ltd. to raise the capital necessary to acquire SNIC and
increase SNIC's capital and surplus for the planned expansion of its operations.
SNIG received gross proceeds of approximately $11.1 million from a private
offering of common stock (including $3,274,000 from insurance brokers) and
acquired SNIC for $1.6 million on September 30, 1985. The remainder of the
private offering proceeds after expenses ($9.1 million) was contributed to
SNIC's paid in capital. SNIG issued 2,773,250 shares of common stock associated
with the initial private offering. As of the acquisition date, SNIC was
substantively inactive, with fewer than 200 policies in force and approximately
60 open claims. SNIC did not commence significant operations until early 1986.

During 1987, SNIG issued 218,825 shares of common stock in a secondary
private offering and received net proceeds of approximately $4.3 million,
approximately $4.1 million of which was contributed to SNIC's paid in capital.
On May 25, 1995, a four-into-one reverse stock split of SNIG's common stock
became effective. All shares and per share figures used herein have been
adjusted to reflect that reverse stock split.

SNIC specializes in providing workers' compensation coverage for California
and Arizona businesses. Prior to 1995, SNIC specialized in insuring
medium-sized ($20,000 to $75,000 in annual premium) workers' compensation
accounts in California that it believed would be receptive to limited loss
control consulting and active claim management. With the advent of open rating
SNIC has expanded this concept to Arizona and shifted the focus to insuring
smaller accounts ($3,500 to $20,000 in annual premium) in classifications that
SNIC's management believes to be historically profitable. SNIC's management
believes that by maintaining its focus on certain employment classifications it
can provide claim management and standardized loss control services to such
smaller accounts at a level appropriate to the size and business classification
of the policyholder. As of December 31, 1996, SNIC's average premium per policy
was $8,569. A total of 64% of SNIC's premium in force, and 97% of SNIC's
policy count, as of December 31, 1996, was concentrated in 10,000 policies
having less than $50,000 of estimated annual premium. For the year ended
December 31, 1996, the Company had premiums written of $99.2 million, of which
premiums written in Arizona represented 2%.

SNIC historically competed with other workers' compensation insurers
principally on the basis of loss control expertise, claim management services,
and policyholder dividends. Under the open rating system that became effective
in California on January 1, 1995, SNIC's management has witnessed a significant
shift to pure price competition for SNIC's larger and middle-sized accounts.
Competition for small accounts is dependent on the Company's relationships with
insurance brokers ("producers") and SNIC's ability to provide low-cost servicing
for large groups of small accounts.

From SNIC's inception until September 30, 1993, SNIC underwrote commercial
property and casualty ("P&C") risks. Former SNIC management believed it was
possible to link the production of profitable P&C risks to workers' compensation
risks within SNIC's base of producers, and the combined workers' compensation
and P&C experience of some producers ultimately justified this strategy. In
general, however, former management underwrote P&C business for a large number
of producers bringing little or no profitable workers' compensation business to
SNIC, and significantly under-priced certain groups and classes of P&C business,
in particular, contractors' and developers' general liability business. In
addition, the per-risk excess of loss reinsurance

<PAGE>

purchased to cover P&C risks was inappropriate for the exposure assumed by SNIC.
Despite remedial action begun in 1991 to reduce aggregate P&C exposure, renewed
concentration on the strategy of combined workers' compensation and P&C
production within the existing producer plant, and re-underwriting of the book
of business, SNIC continued to incur significant losses in its P&C operations.
Effective October 1, 1993, SNIC withdrew from all P&C lines, the operating
results of which are now recorded as discontinued operations. See DISCONTINUED
OPERATIONS.

For the years ended December 31, 1996 and 1995, all of the Company's
consolidated net premiums earned were attributed to workers' compensation
policies. For the year ended December 31, 1994, 98% of the Company's net
premiums earned were attributed to workers' compensation policies and the
remaining premiums were attributed to its commercial property and casualty lines
of business. As a result of the Company's discontinuation of its property and
casualty operations, none of the Company's premium in force at December 31, 1996
and 1995, was attributed to P&C business.

P&C insurance companies (including workers' compensation insurance
companies) are evaluated by regulators and rating organizations, among others,
with respect to the amount of net premiums they can write based on certain
leverage guidelines established by insurance regulators. The most common
measurement of leverage is the ratio of net premiums written (or premium
retained after cessions to reinsurers) to statutory surplus. SNIC's leverage
for 1996, 1995 and 1994 was 1.7x, 1.5x and 1.4x, respectively. The increase in
the 1996 ratio of premiums written net of reinsurance to statutory surplus was
due to an $11.8 million increase in premiums written net of reinsurance. The
increase in premiums written net of reinsurance is offset in part by a small
increase in statutory surplus resulting from the recording of statutory income.
The increase in net premiums written was primarily due to the Company entering
the Southern California and Arizona marketplaces in late 1995. The Company
increased its premiums written during 1996 over 1995 by $5 million in Southern
California and $2 million in Arizona. Although the 1995 leverage remained
relatively the same as the 1994 leverage, net premiums decreased 18.5% in 1995
but were offset by a 21% decrease in statutory surplus. The decrease in net
premiums was due primarily to lower pricing of policies as a result of open
rating. The decrease in statutory surplus was due to an extraordinary dividend
of 100% of SNIC's shares in Superior (Bermuda) Ltd. to SNIG constituting $15
million of SNIC's statutory capital and surplus. See paragraphs following for
further discussion.

SNIC is currently rated "BBB" by Standard and Poor's, an independent
insurance rating agency. Insurance companies rated "BBB" are considered by
Standard and Poor's to offer adequate financial security, but capacity to meet
policyholder obligations is susceptible to adverse economic and underwriting
conditions. A.M. Best Company, an independent insurance rating agency, has
rated SNIC "B+". Insurance companies rated "B+" by A.M. Best are considered by
A.M. Best to have demonstrated very good overall performance and a good ability
to meet their obligations to policyholders over a long period of time. A.M.
Best's ratings represent an independent opinion of a company's financial
strength and ability to meet its obligations to policyholders. A.M. Best, in
evaluating the proposed acquisition by the Company of Pac Rim Holding
Corporation ("PRIM"), discussed below, has appended a negative implication
notation to the Company's "B+" rating. Standard and Poor's has not made a
corresponding notation.

SNIC is currently licensed to write business in Arizona, Arkansas,
California, Colorado, District of Columbia, Indiana, Iowa, Kentucky, Maryland,
Mississippi, Missouri, Montana, Nevada, New Mexico, Oregon, South Dakota, Utah,
and Wyoming, but virtually all of SNIC's current premium is generated in
California (98%), and Arizona (2%).

The profitability and financial position of the Company are affected by
many factors including competition, the severity and frequency of claims, state
regulation of SNIC's premium rates and policy benefits, and general economic
conditions. The net effect on the Company of these factors cannot be predicted.

The profitability of workers' compensation insurers is affected by many
factors, such as premium rate competition, the severity and frequency of claims,
state regulation, and court decisions that define the extent of coverage and the
amount of compensation due for injuries or losses. One of the features of the
workers' compensation insurance business is that its products must be priced
before the costs are known, as premium rates

<PAGE>

generally are set before losses are reported. Accordingly, workers'
compensation insurers have experienced significant year to year fluctuations in
operating results.

SNIG has seven wholly-owned subsidiaries in addition to SNIC: InfoNet
Management Systems, Inc. ("InfoNet"), SN Insurance Services, Inc. ("SNIS"),
Pacific Insurance Brokerage, Inc. ("Pacific"), Superior National Capital Holding
Corporation ("SNCHC"), Superior (Bermuda) Ltd. ("SBL"), SNTL Acquisition Corp.
("Acquisition") and Superior National Insurance Group, Inc. - Delaware ("SNIG -
Delaware"). InfoNet provides data processing purchasing services to SNIG and
its subsidiaries. SNIS and Pacific are inactive. SNCHC's sole function is to
act as a general partner of Superior National Capital, L.P. ("SNCLP"), a Bermuda
limited partnership that issued $20 million face amount of preferred securities
to Centre Reinsurance Services (Bermuda) III Limited effective June 30, 1994.
The proceeds of that transaction were loaned to SNIG and partially contributed
by SNIG to the capital of SNIC. Centre Reinsurance Services (Bermuda) III
Limited is an affiliate of Centre Reinsurance Limited ("Centre Re"). See
TRANSACTIONS WITH CENTRE RE AND ITS AFFILIATES and Note (7) to the Consolidated
Financial Statements, PREFERRED SECURITIES ISSUED BY AFFILIATE. SBL was
established to facilitate the management of the run-off of SNIC's P&C business.
Acquisition was established for the purpose of facilitating SNIG's proposed
acquisition of PRIM. SNIG - Delaware was formed to facilitate the proposed
reincorporation of SNIG in Delaware.

In September 1995, following approval from the California Department of
Insurance (DOI), SNIC formed SBL, a wholly owned subsidiary domiciled in
Bermuda. SBL was capitalized by SNIC with $15 million in long-term reinsurance
receivables. Following the formation of SBL, SNIC ceded approximately $23
million in P&C reserves to SBL and as consideration SBL received from SNIC $23
million of premium on a funds withheld basis. All reinsurance between SNIC and
SBL will be accounted for on a funds withheld basis. After SNIC ceded the P&C
reserves to SBL, SNIC paid to SNIG an extraordinary dividend of 100% of its
shares in SBL constituting $15 million of SNIC's statutory capital and surplus.
In addition, SNIG paid $1.5 million to SBL as a capital contribution making
SBL's total capitalization equal to $16.5 million.

SNIC's only subsidiary is wholly-owned Western Select Service Corp.
("WSSC"), which currently provides vocational rehabilitation, legal, paralegal,
and other services to SNIC.

SNIG relies on dividends from SNIC for its income. Insurance companies are
subject to restrictions affecting the amount of stockholder dividends and
advances that may be paid within any one year without the prior approval of the
DOI. The California Insurance Code provides that amounts may be paid as
dividends on an annual noncumulative basis (generally based on the greater of
(1) net income for the preceding year or (2) 10% of statutory surplus as regards
policyholders as of the preceding December 31) without prior notice to, or
approval by, the DOI. At December 31, 1996, SNIC could have paid approximately
$5.2 million in dividends and advances to SNIG without the DOI's prior approval
based on 10% of reported statutory surplus. No dividends were paid by SNIC to
SNIG in 1996. In 1995, following approval from the DOI, SNIC made an
extraordinary dividend distribution of 100% of its shares in SBL to SNIG,
constituting $15 million of SNIC's statutory capital and surplus. Cash
dividends of $850,000 were paid by SNIC to SNIG in 1994.

On September 17, 1996, SNIG entered into a definitive agreement to acquire
PRIM for an estimated $54 million in cash, which would have resulted in the
payment of $3.00-$3.10 per share to PRIM's common stockholders. In December
1996, shortly before SNIG's shareholders were to vote to approve the financing
for the acquisition, PRIM indicated regulatory approval would be delayed as a
result of the triennial examination by the DOI of the Pacific Rim Assurance
Company, PRIM's wholly-owned subsidiary. In February 1997, PRIM informed the
Company that it would, based on the results of the triennial examination,
strengthen its claims and claims adjustment expense reserve by $12 million as of
December 31, 1996. The magnitude of the reserve strengthening necessitated
renegotiation of the terms of the original definitive agreement. On February 17,
1997, SNIG and PRIM entered into an amended and restated definitive agreement.
Under the terms of the agreement SNIG will acquire PRIM for aggregate
consideration of approximately $42 million in cash. PRIM stockholders will
receive approximately $20 million ($2.11 per share); $20 million will be paid to
PRIM's convertible debenture holders; and the remainder will be paid to PRIM's
warrant and option holders.

<PAGE>

SNIG will finance the acquisition with a combination of a common stock
issuance and bank debt. Under an agreement reached September 17, 1996, a group
of investors including Insurance Partners, L.P., TJS Partners, L.P., and SNIG
management have agreed to purchase approximately $18 million of newly issued
SNIG common stock at $7.53 per share, based on the September 1996 market price
of SNIG's common stock. SNIG expects the remaining portion of the purchase
price will be funded by a $44 million term loan provided by a bank syndicate led
by Chase Manhattan Bank ("Chase"). Approximately $6.6 million of the loan
proceeds will be used to repay SNIG's outstanding long-term debt. Additionally,
approximately $10 million of the loan proceeds will be contributed to the
capital of Pacific Rim Assurance Company. The PRIM acquisition and the
financing is subject to regulatory approval and the stock issuance is subject
to shareholder approval. There have been no adjustments made to the financial
results or other information presented to reflect the PRIM transaction.

COMPANY STRATEGY

The Company's objective is to maintain and enhance SNIC's market position
in California and Arizona, specializing in workers' compensation. The Company
believes that it is well-positioned to identify and pursue specialized areas in
the insurance marketplace. The key elements of its strategy are as follows:

RELATIONSHIP WITH PRODUCERS. The Company markets SNIC's insurance products
through approximately 182 producers. The Company's producers are state licensed
independent insurance brokers that are licensed to sell workers' compensation
insurance in the states (jurisdictions) where they represent SNIC. SNIC's
producers are primarily medium-sized firms, most having an ongoing relationship
with the Company's executives. As a regional insurer, the Company believes that
SNIC has the flexibility to respond promptly to the business needs of its
producers and to provide the specialty coverages needed by their customers. The
Company considers the producers as SNIC's marketing target and delivers service
the Company believes exceeds industry standards. The Company believes that SNIC
has a good relationship with its producers and has favorably distinguished
itself from its competitors by providing producers with a commitment to superior
service levels and easy access to SNIC executives.

FOCUS ON MIDDLE-MARKET. The Company focuses its marketing efforts on
smaller businesses with premium per policy of between $3,500 and $20,000,
principally to avoid the extreme price competition associated with larger
insureds and the high administrative costs associated with very small accounts.
The Company also targets certain agriculture and hospitality specialized
industry groups.

EXPENSE CONTROLS. The Company monitors and controls its operating expenses
as an important part of its business. Although the Company's operating expenses
are in line with its competitors, management continues to seek ways to further
reduce operating expenses.

PRICING CONTROLS. The Company utilizes a proprietary software system to
maintain an easily accessible record of its policy pricing. The system
generates daily reports that allow the Company to monitor both SNIC's pricing
activities for specific lines of insurance in particular geographic areas and
the activities of SNIC's producers.

MANAGEMENT INFORMATION SERVICES. The Company believes investments in
up-to-date computer systems will increase personnel productivity, and
underwriting and claims processing effectiveness. Additionally, the Company has
developed a proprietary management system to monitor its operations and provide
quality, detailed and timely information to management for pricing and claims
reporting purposes.

<PAGE>

WORKERS' COMPENSATION INSURANCE

OVERVIEW. Workers' compensation is a no-fault statutory system under which
an employer is required to provide its employees with medical care and other
specified benefits for work-related injuries or diseases. There are four types
of benefits payable under workers' compensation policies: disability,
vocational rehabilitation, medical, and death benefits. The amounts of benefits
payable for various types of claims are established by statute and vary with the
nature, severity of the injury or disease, wages, occupation, and age of the
employee. While no dollar limitations are set for medical benefits and limited
dollar amounts are set for vocational rehabilitation benefits, reinsurance
typically covers liability in excess of a specified dollar amount.

Insurers must compensate policyholders' employees injured in the course and
scope of their employment, even though the injuries may have resulted from the
negligence or wrongs of any person (including the employee). However,
subrogation procedures exist which, in certain circumstances, allow an insurer
to recover from third parties all or a portion of the benefits the insurer has
paid. SNIC proceeds against such third parties when it believes the
circumstances so warrant.

PREMIUMS. Effective January 1, 1995 under California's workers'
compensation open rating law, the DOI sets "pure premium" rates (effectively the
estimated pure loss cost) for each employment classification based on its
evaluation of many factors, including the recommendations of the Workers'
Compensation Insurance Rating Bureau ("WCIRB"), and the economic effects of any
recommended rate change. Pure premium rates are generally applied per $100 of
payroll for each employment classification. Changes in pure premium rates are
subject to review and public hearing by the DOI and are changed from time to
time to reflect industry experience. SNIC's "manual rates" are the WCIRB pure
premium rates modified by a pure premium "multiplier," the purpose of which is
to gross-up the pure premium for SNIC's anticipated loss adjustment and
underwriting expenses. SNIC's manual rates may subsequently be modified by a
"loss rating" factor to reward a policyholder for consistently superior
historical loss experience, an "adjustment to expense provision" factor to
modify the manual rate depending on the policy's dividend and commission plan, a
"schedule rating" factor to modify the rate if a policyholder meets certain
financial conditions or safety program requirements, flat charges for
reinsurance or surcharges, adjustments to bring premium to certain minimum rates
established in SNIC's rate filing, and an "experience modification" factor
established by the WCIRB for each policyholder.

The WCIRB determines the experience modification factors for each eligible
employer. The experience rating plan governs all policyholders whose annual
premiums for the preceding three years exceed an amount equal to $16,200
multiplied by SNIC's pure premium multiplier. The modification factors are
based upon the employer's own loss experience as compared to the loss experience
of other employers of similar size and with the same payroll classifications
applicable to its business. The applicable loss experience covers a three-year
period commencing four years and nine months prior to, and terminating one year
and nine months prior to, the date for which the experience modification is
applied.

Prior to 1995, the DOI set minimum premiums for each employment
classification, which were the minimum rates all workers' compensation carriers
were obligated to charge. In July 1993, the California legislature enacted a
series of bills to significantly change the California workers' compensation
system (collectively, the "1993 Reforms") that became effective in full on
January 1, 1995. See REGULATION. The 1993 Reforms addressed various aspects of
the system then in effect, including: limitation of employees' post-termination
claims and claims for psychiatric injuries; managed care alternatives;
restrictions on vocational rehabilitation benefits; additional penalties for
fraud and abuse of the system; scheduled increases in disability benefits
beginning July 1, 1994; implementation of a 7.0% decrease in minimum rates
effective July 16, 1993; and replacement of California's minimum rate law with a
competitive rating law effective January 1, 1995. A further average 12.7%
reduction in minimum rates was ordered by the DOI in late 1993, which became
effective January 1, 1994. Effective October 1, 1994, the DOI ordered an
additional reduction in minimum rates of 16.0%. Beginning January 1, 1995, the
WCIRB began publishing advisory pure premium rates which provide for claim and
claim adjustment expenses as indicated by prior history and an actuarial
projection of future claim and claim expenses. California workers' compensation
underwriters can adopt these rates and apply their own expense factor or file
their own actuarially sound rates. SNIC chose to adopt the WCIRB pure premium
rates

5
<PAGE>

grossed-up by a company expense factor of 1.35. In July 1995, SNIC removed
commissions from the expense factor in order to more accurately negotiate rates
and adjusted the final rate to reflect the actual commission paid while
maintaining the advisory pure premium portion of the filed rates supplied by the
WCIRB. California workers' compensation underwriters are allowed to file plans
that provide credit and/or debit criteria to be applied to their filed rates.
SNIC has filed such a credit and debit plan and applies these factors in a
non-discriminatory manner.

The WCIRB provided 1997 pure premium rates that were in total 6.2% lower
than 1996 and SNIC will adopt these rates effective April 1, 1997.

INSURANCE UNDERWRITING. SNIC historically concentrated on insuring
workers' compensation accounts with annual premiums between $20,000 and $75,000
based on the belief that this type of insured would be receptive to limited loss
control consulting and active claim management while avoiding the intensive
competition that historically existed for larger accounts. In late 1991, SNIC
developed and began marketing a workers' compensation product targeted at
accounts with annual premiums below $10,000 to diversify the size of risks in
its book of business. Under this program, SNIC developed pre-determined
underwriting rules, acceptable risk characteristics, pricing guidelines and
qualifying employment classifications, for the purpose of assisting both SNIC
and its producers with risk selection. Producers submitted a complete
application for coverage to SNIC's underwriting department confirming the
accuracy of the information presented and proper application of underwriting
rules, before SNIC bound coverage and issued a policy. This small risk program
was successfully marketed through a California agents' association from mid-1991
through mid-1994 when the relationship with the association was terminated by
mutual consent. Starting in 1995, the Company reactivated the program on its
own in the general workers' compensation marketplace. See MARKETING.

Because the types of accounts that SNIC insures vary among different
geographic regions in California, SNIC conducts its underwriting activities
through branch offices. SNIC's branch offices are typically allowed to write
accounts with estimated annual premiums of less than $250,000 whereas accounts
with estimated annual premiums above that amount or with certain risk
characteristics must be approved by SNIC's principal underwriting officer. SNIC
provides a market for risks in over 400 of the approximately 450 employment
classifications established by the DOI. The Company generally avoids
underwriting in the remaining classifications because of the historically higher
risk exposure they represent. Classifications generally avoided include, among
others, the manufacturing, handling, and shipping of explosives; oil rig and
derrick work; subway construction; and navigation of marine vessels.
Classifications that require the approval of SNIC's principal underwriting
officer include those which represent potential exclusions from SNIC's
reinsurance treaties, unusual hazards or catastrophic exposures such as taxicab
fleets, carnivals, ski resorts, and detective agencies. Certain risks, such as
the transportation of groups of employees, are generally ceded to reinsurers
under separate reinsurance agreements. SNIC's workers' compensation business is
diverse in terms of employment classifications, with no single classification
accounting for more than eight percent of SNIC's workers' compensation premiums
in force as of December 31, 1996.

In mid-1990, SNIC introduced restricted underwriting standards for
Los Angeles, Orange, San Bernardino, and Riverside counties because SNIC
believed that these counties were adversely affected by the California recession
and were susceptible to the activities of fraudulent and abusive medical
providers. This resulted in a substantial reduction in workers' compensation
premiums on business previously underwritten in those California counties. SNIC
has since re-entered those markets and now is achieving satisfactory results,
but at significantly lower premium volumes.

Prior to insuring an account, SNIC's underwriting department reviews, INTER
ALIA, the employer's prior loss experience and safety record, premium payment
and credit history, operations, geographic location and employment
classifications. SNIC verifies employment classifications principally through
information provided by the WCIRB and, in many instances, through its own
on-site surveys of the employer's place of business.

If the underwriting department determines that an account is one that SNIC
may be willing to insure, a SNIC loss control consultant may review the
employer's prior loss patterns and communicate with the

<PAGE>

policyholder on the extent to which such losses may be prevented, and the
commitment of the employer's management to safety in the work place. By helping
reduce an employer's losses, SNIC believes it can reduce the policyholder's
ultimate net cost of insurance as well as help improve its own profit potential
on the risk. See LOSS CONTROL.

SUPPORT SPECIALISTS. To further facilitate its underwriting and claims
management functions, SNIC has a full complement of additional support
specialists. Specifically, SNIC is staffed with a rehabilitation department
that interprets and implements new workers' compensation reform along with
monitoring existing rules and regulations regarding rehabilitation claims, an
audit department that monitors premiums and payroll, and a bill review
department that insures provider invoices are within statutory fee schedules and
that contracted for discounts are applied.

DATA PROCESSING

The Company uses its proprietary, personal computer-based management
information system to satisfy its data processing requirements. The system is
operated on off-the-shelf computer hardware, including a commercial local area
network communications system, and uses the Company's internally-developed,
proprietary computer software. The key advantage of the Company's approach to
data processing is that personal computer technology provides flexibility at
relatively low cost. The Company believes the structure of its system makes it
expandable well beyond the Company's current or projected needs.

MARKETING

The Company's principal marketing strategy is to meet the business needs of
SNIC's producers by providing the insurance coverage and services needed by
their customers. SNIC's insurance policies are sold exclusively through
producers who also represent one or more competing insurance companies. SNIC
views the producers as its marketing target and delivers service which the
Company believes surpasses normal industry levels.

SNIC's producers are primarily medium-sized insurance brokerage firms
located in Central and Northern California. However, SNIC has re-entered the
Southern California market on a limited basis through producers that are
generally new to SNIC. SNIC's percentage of business with each of its
producers, in terms of premium volume, has a significant effect on a producer's
efforts, because management believes that companies that represent a significant
volume of a producer's business typically receive the highest quality business.
SNIC believes that it is recognized by each of its producers as one of its lead
carriers. Additionally, no single policy accounted for more than 4% of net
earned premiums in 1996 and no single producer generated more than 8% of written
premiums.

SNIC closely monitors its producers through its on-line management
information systems, with special attention given to the volume and
profitability of business written through SNIC. Producers who consistently
write unprofitable business, or do not meet the minimum guideline of annual
premium per year, may be canceled. SNIC believes that by continually monitoring
and improving the quality of its producers, long term profitability will be
enhanced.

Marketing staff, along with the branch office managers and the
underwriting, loss control, and regional claim staffs, work closely with
producers and frequently make joint presentations with producers to potential
workers' compensation policyholders. SNIC conducts its marketing by territory
to enable its marketing representatives to better address the specific types of
accounts on which they focus in each region. Producer commissions are generally
determined by negotiation and are dependent on the size and profit potential of
the producer's accounts. Commissions for the size of account SNIC has targeted
over the past three years generally range from 10% to 12% of premiums.

<PAGE>

SNIC's average direct commission rate was 11.1% in 1996, 12.0% in 1995, and
11.7% in 1994. SNIC's producers are not permitted to bind SNIC with respect to
any account. All new and renewal policyholder applications must be submitted to
SNIC for approval. SNIC is not committed to accept a fixed portion of any
producer's business.

LOSS CONTROL

In addition to its responsibility for risk evaluation as part of the
underwriting process, SNIC's loss control department may assist SNIC's workers'
compensation policyholders in developing and maintaining safety programs and
procedures to minimize on-the-job injuries and health hazards. After analyzing
the policyholder's loss profile, SNIC's loss control consultants will help
develop a loss control program and establish accident reporting and claim
follow-up activities for the policyholder. SNIC's loss control personnel may
also consult with policyholder management about safety and health issues, as
well as about the effectiveness of the policyholder's loss prevention
procedures. Prior to the end of the policy period, loss control personnel
typically provide a report to the larger premium-size policyholder's senior
management summarizing the programs instituted by the employer over the policy
period and the effect such programs and procedures have had on reducing the
number and severity of employee claims. SNIC's loss control consultants may
also conduct special training seminars for the policyholder's employees on such
subjects as the prevention of back injuries, general first aid and industrial
hygiene.

CLAIM MANAGEMENT

SNIC's policy is to work closely with policyholders to return injured
workers to the job quickly, while avoiding litigation. SNIC maintains four
full-service Claims Servicing Offices ("CSO") in California located in
Calabasas, Fresno, South San Francisco, and Sacramento. Each CSO is managed by
a claims manager and, with the exception of Sacramento, due to its smaller size,
an assistant claims manager. The claims technical staffs in each CSO are
organized into units with, generally, one supervisor supervising four claims
examiners and two claims assistants per unit.

Each CSO also has specialized claims units, the size of which are dependent
upon the size of the CSO. SNIC has responded to fraud by training and
dedicating a claims staff to handle potentially fraudulent claims. The
Calabasas CSO has a Special Investigation Unit staffed with two senior
examiners. The other CSOs each have one senior examiner dedicated to Special
Investigations. Excepting Sacramento, each CSO has a vocational
rehabilitation/disability management unit staffed by vocational rehabilitation
counselors and coordinators and disability management ("DMU") specialists. The
sole purpose of the DMU staff is to provide effective and efficient handling of
vocational rehabilitation plans and to maximize SNIC's early return-to-work
efforts with employers. These efforts provide significant benefits to insureds
and SNIC when considering that each claimant whose return-to-work is
successfully accelerated results in substantial indemnity wage benefit savings.

SNIC's claims department relies extensively on the Company's data
processing systems. The Company's data processing systems were internally
developed by claims staff and data processing personnel, with three main goals
in mind: the capture of timely and meaningful data, the creation of a minimal
processing error environment by means of numerous system prompts and edit
checks, and the automation of many otherwise manual functions. An additional
benefit resulting from the claims system is increased productivity resulting
from the claims examiner's ability to handle a higher case load without
negatively impacting claims processing results.

SNIC's claims handling also includes a specialized subrogation function.
Claims examiners are responsible for the identification of potential recoupments
from third parties responsible for a work-related accident, after which the
examiner notifies a subrogation specialist of this potential. The subrogation
specialist determines whether a subrogation situation exists, and, if so,
assumes responsibility for all aspects of subrogation to finalization. The
subrogation specialists report to an experienced in-house subrogation attorney.

<PAGE>

POLICYHOLDER DIVIDENDS

California law permits workers' compensation insurers to issue
participating policies, which allow the insurer to declare and pay dividends to
a policyholder after the expiration of the policy. At the inception of open
rating on January 1, 1995, 65% of SNIC's workers' compensation premiums in force
were participating policies. The percent of participating policies has declined
to less than 1% of premiums at December 31, 1996. The decline in participating
policies is the result of a change in the consumers' preference for the lowest
net price at a policy's inception.

Insurers are prohibited by law from promising policyholders that future
dividends will be paid to them, or stating the amount or rate of dividends to be
paid. However, an insurance carrier is required to disclose its historical
policyholder dividend payment practices and procedures to a prospective
participating policyholder by means of a policyholder dividend disclosure
statement. The disclosure statement must state that there is no guarantee to
the potential policyholder that any of the factors shown in the disclosure
statement will actually be used in determining policyholder dividends for a
specified period. In fact, when an insurance company calculates the dividend a
number of months after the expiration of the policy, conditions may have changed
from the time of the original proposal and the Company may decide not to pay any
or all of the indicated dividend. Any payment of dividends to policyholders is
determined by the board of directors of an insurance company subject to the
legal requirements in California that such dividends may not exceed the earned
surplus on such company's California workers' compensation policies, may not be
unfairly discriminatory, and may not be declared or paid until after the
expiration of the policy period (when there are more facts available for
determining loss experience).

SNIC evaluated the value of dividends on one-year policies in two different
time frames. The initial payout limitation, which was 70% of dividends
liability, was calculated approximately nineteen months after the policy
expiration date, and paid twenty-two months after expiration or later. The
second and final valuation of the remaining 30% of dividends liability was done
approximately one year after the first valuation, and paid approximately three
months after the final calculations. The SNIC Board of Directors considered a
number of factors in connection with the declaration of policyholder dividends,
including loss ratio, class of business, geographical location and premium
payment history of the policyholder, risk and expense factors, competition and
the overall loss ratio and financial condition of SNIC.

Prior to open rating, policyholder dividends served both as an economic
incentive to employers for safe operations and as a means of price
differentiation. As a result of consumers' preference for the lowest net price
at the policy's inception under open rating, however, the dividend payment
feature is no longer a significant factor in the marketing or selling of
workers' compensation insurance in California. Further, as a result of the
continued instability of the California workers' compensation marketplace, the
failure of the legislature to take corrective action as to the impact of
judicial decisions adverse to the insurance industry and AB 1913 (described
below), and the diminished value of the policyholder dividends, SNIC's
management has determined that it is prudent to suspend the further issuance of
policyholder dividends.

CLAIMS AND CLAIM ADJUSTMENT EXPENSE RESERVES

Several years or more may elapse between the occurrence of a workers'
compensation loss, the reporting of the loss, and final payment of the loss.
Claims and claim adjustment expense reserves are estimates of what an insurer
expects to pay claimants. SNIC is required to maintain reserves for payment of
estimated claims and claim adjustment expense for both reported claims and
claims which have been incurred but have not yet been reported ("IBNR"). SNIC's
ultimate liability may be materially more or less than current reserve
estimates.

Reserves for reported claims are established on a case-by-case basis.
Case-by-case reserve amounts are determined by claim examiners, based on the
examiner's judgment and experience, and on SNIC's reserving practices, which
take into account the type of risk, the circumstances surrounding the claim or
policy provisions relating to type of loss, and historical paid claim and claim
adjustment expense data for similar claims. Case-by-

<PAGE>

case reserves are not established for claim (loss) adjustment expense ("LAE"),
and the entire reserve for LAE is established based upon the Company's
historical paid data. SNIC's claims department regularly monitors reserve
adequacy for claims which have occurred and been reported to it and adjusts such
reserves as necessary.

Claims and claim adjustment expense reserves for IBNR are estimated based
on many variables including historical and statistical information, inflation,
legal developments, the regulatory environment, benefit levels, economic
conditions, judicial administration of claims, general frequency and severity
trends, medical costs, and other factors affecting the adequacy of loss
reserves. The senior officers of the Company review and adjust IBNR reserves
monthly.

SNIC utilizes the services of an independent actuarial firm to assist in
the evaluation of the sufficiency of loss and loss adjustment reserves for
purposes of meeting state insurance regulatory requirements. SNIC considers the
estimates of the independent actuarial firm as corroborative evidence as to the
reasonableness of its reserves. To the extent SNIC's reserves differ from those
estimated by the independent actuary, management uses its best efforts to
identify reasons for such differences and determine if modifications are
necessary to its initial reserve estimates. No assurance can be given that the
ultimate liability will not vary from such estimates.

Adjustments in aggregate reserves are reflected in the operating results of
the period during which such adjustments are made. Although claims for which
reserves are established may not be paid for several years or more, the reserves
are not discounted, except as required by the Internal Revenue Code of 1986, as
amended (the "Code") to calculate taxable income.

The following table provides a reconciliation of the beginning and ending
claim and claim adjustment expense reserves for each of the years in the
three-year period ended December 31, 1996, computed in accordance with GAAP.

RECONCILIATION OF LIABILITY FOR CLAIMS AND CLAIM ADJUSTMENT EXPENSE

YEARS ENDED DECEMBER 31,
-----------------------------------------
1996 1995 1994
------------ ------------ -----------
(Amounts in thousands)
<S> <C> <C> <C>
Beginning reserve, gross of reinsurance. . . . . . . . . . . . . . . $141,495 $171,258 $171,038
Less: Reinsurance recoverable on unpaid losses . . . . . . . . . . . 27,076 31,897 28,971
Beginning reserve, net of reinsurance. . . . . . . . . . . . . . . . 114,419 139,361 142,067
Provision for net claims and claim adjustment expenses
For claims occurring in current year . . . . . . . . . . . . . . 57,614 58,842 72,457
For claims occurring in prior years. . . . . . . . . . . . . . . (1,976) (4,872) 6,304
Total claims and claim adjustment expenses . . . . . . . . . . . 55,638 53,970 78,761
Payments for net claims and claim adjustment expense:
Attributable to insured events incurred in current year. . . . . (19,816) (19,732) (23,061)
Attributable to insured events incurred in prior years . . . . . (59,698) (59,180) (58,406)
Total claims and claim adjustment expense payments . . . . . . . (79,514) (78,912) (81,467)
Ending reserves, net of reinsurance. . . . . . . . . . . . . . . . . 90,543 114,419 139,361
Reinsurance recoverable on unpaid losses . . . . . . . . . . . . . . 24,986 27,076 31,897
Ending reserves, gross of reinsurance. . . . . . . . . . . . . . . . $115,529 $141,495 $171,258

</TABLE>

<PAGE>

The following table discloses the development of direct workers'
compensation claims and claim adjustment expense reserves of SNIC from December
31, 1987 through December 31, 1996.

ANALYSIS OF DIRECT CLAIMS AND CLAIM ADJUSTMENT EXPENSE DEVELOPMENT

Re-estimated as of:
One Year Later . . . . . 24,241 43,581 68,718 112,160 144,676 162,634 171,960 162,635 137,242
Two Years Later. . . . . 26,120 46,788 79,059 111,151 143,912 148,906 161,262 154,249
Three Years Later. . . . 29,140 50,955 74,619 117,506 138,607 152,420 148,654
Four Years Later . . . . 29,423 47,696 78,112 113,029 137,939 144,898
Five Years Later . . . . 29,541 49,297 75,475 112,840 135,074
Six Years Later. . . . . 29,082 47,554 75,913 109,655
Seven Years Later. . . . 27,759 49,470 74,149
Eight Years Later. . . . 27,846 48,653
Nine Years Later . . . . 27,573
Cumulative Deficiency
(Redundancy). . . . . . . 5,604 6,385 13,534 21,385 18,263 8,796 (22,384) (17,009) (4,235)

Cumulative Amount of
Reserve Paid through
One Year Later . . . . . $9,447 $17,698 $24,478 $36,975 $53,914 $57,348 $60,726 $67,757 $63,587
Two Years Later. . . . . 14,482 19,879 35,195 45,561 56,299 61,648 66,077 61,952
Three Years Later. . . . 15,777 25,830 38,067 52,811 63,354 63,523 64,464
Four Years Later . . . . 18,666 26,165 38,261 56,369 64,703 66,547
Five Years Later . . . . 19,384 26,026 40,794 57,768 68,152
Six Years Later. . . . . 19,660 27,181 42,032 59,622
Seven Years Later. . . . 20,707 27,202 43,146
Eight Years Later. . . . 20,803 27,947
Nine Years Later . . . . 21,123
Gross Reserve - December 31. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171,038 171,258 141,495 115,529
Reinsurance Recoverables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,971 31,897 27,076 24,986
-------- -------- -------- --------
142,067 139,361 114,419 90,543
Reclassification of amounts recoverable from reinsurers. . . . . . . . . . . . . . . . . (41,889) (34,344) (11,670) -
-------- -------- -------- --------
Net Reserve - December 31. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,178 105,017 102,749 90,543
-------- -------- -------- --------
-------- -------- -------- --------

Gross Re-estimated Reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 148,654 154,249 137,242
Re-estimated Reinsurance Recoverables. . . . . . . . . . . . . . . . . . . . . . . . . . 23,589 25,511 24,799
-------- -------- --------
125,065 128,738 112,443
Reclassification of amounts recoverable from reinsurers. . . . . . . . . . . . . . . . . (41,889) (34,344) (11,670)
-------- -------- --------
Net Re-estimated Reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83,176 94,394 100,773
-------- -------- --------
-------- -------- --------

Net Cumulative (Redundancy) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (17,002) (10,623) (1,976)
-------- -------- --------
-------- -------- --------

</TABLE>

The first line of the preceding table depicts the estimated liability for
unpaid claims and claim adjustment expense recorded at the balance sheet date
for each of the indicated periods. This liability represents the estimated
amount of claims and claim adjustment expense for claims arising in all prior
years that are unpaid as of the balance sheet date, gross of reinsurance
recoverables reserve, including losses that had been incurred but not yet
reported to SNIC. The preceding table also shows the re-estimated amount of the
previously recorded liability based on experience as of the end of each
succeeding year, including cumulative payments made for such claims since the
end of the respective year. The lower portion of the table shows the cumulative
amounts paid as of successive years for such claims. The estimates change as
more information becomes known about the frequency and severity of claims for
each year. A (redundancy) deficiency exists when the initial liability estimate
is (greater) less than the re-estimated liability at each December 31.

The increases in estimated ultimate claims and claim adjustment expense for
the years ended December 31, 1987 and 1988 were due to the lack of Company
history, which prevented management from accurately estimating ultimate loss
costs. For years 1989 to 1992, the increase in estimated ultimate claims and
claim

<PAGE>

adjustment expense was driven by continuing litigation in the workers'
compensation market and the economic recession, which encouraged the filing of
both stress claims and fraudulent claims.

Currently, the Company prepares on a monthly basis a comprehensive analysis
of workers' compensation experience and the reserving process is continually
modified to consider additional information regarding trends in pricing,
frequency, and severity.

The Company's 1996 accident year net claim and claim adjustment expense
ratio for accident year 1996 at the end of calendar year 1996 was 65.0%, versus
65.6% for accident years 1995 and 1994, at their respective calendar year ends.
In 1996, the Company experienced approximately $2.0 million in favorable
development on net claims and claim adjustment expense reserves estimated at
December 31, 1995. This $2.0 million favorable development is the result of
$8.4 million in favorable development on direct reserves for accident years 1994
and prior. The favorable development was offset in part by $4.1 million adverse
development on direct reserves for accident year 1995, and $2.3 million adverse
development on ceded reserves for accident years 1995 and prior. Adverse
development on the 1995 accident year began to emerge during 1996. The
Company's 1995 accident year net claim and claim adjustment expense ratio for
accident year 1995 at the end of calendar year 1995, as noted above, was 65.6%,
but had risen to 74.6% at the end of the 1996 calendar year. Similar adverse
development has been experienced throughout the California workers' compensation
industry.

During 1995, the Company experienced approximately $8.6 million of
favorable development on direct claim and claim adjustment expense reserves
estimated at December 31, 1994. Management believes the favorable development
resulted from the Company's improved claims management controls and decreased
claim severity, particularly in the medical component of the workers'
compensation line. Similar favorable development on pre-1995 losses has been
experienced elsewhere in the California workers' compensation industry.
Offsetting the favorable direct development in large part was the re-estimation
during 1995 of reinsurance receivables recorded at December 31, 1994 from
approximately $66.2 million to approximately $59.9 million at December 31, 1995.

In 1993, SNIC experienced significant adverse development on 1992 accident
year claims. In addition to adjusting the 1992 accident year claims estimates
to levels indicated by 1990 and 1991 accident year experience, SNIC also
established initial reserves for the 1993 accident year above the level of
initial reserves established for prior years. During 1995, the Company
recognized approximately $10.7 million of favorable development on direct claim
and claim adjustment expense reserves estimated at December 31, 1994, pertaining
to years prior to 1994. Management believes the favorable development resulted
from the Company's improved claims management controls and decreased claim
severity, in both the medical and vocational rehabilitation components of the
workers' compensation line. Similar favorable development on pre-1994 losses
has been experienced elsewhere in the California workers' compensation industry.

SNIC significantly increased its direct reserves in 1992 based on the
results of an independent actuarial review effective June 30, 1992, of
outstanding claims. The review was commenced primarily because SNIC was
experiencing higher than anticipated costs for claims, including increases in
vocational rehabilitation, medical expenses, and claim adjustment expense, on
the 1990 and 1991 accident years, partially offset by modest improvement in
prior accident years. Management believes the workers' compensation laws in
effect during 1990 and 1991 encouraged claimants to file fraudulent or abusive
claims, causing the increase in claims costs, and SNIC responded by increasing
net of reinsurance reserves for prior accident years' claims by $12.5 million in
1992. Accident year 1992 reserves, however, were recorded at levels consistent
with pre-1990 and 1991 experience. During 1995, the Company's direct claims and
claim adjustment expenses for years 1992 and prior increased from $149 million
in 1994 to $152.5 million in 1995, an increase of $3.5 million.

Conditions and trends that have historically affected SNIC's claims may not
necessarily be indicative of conditions and trends that will affect future
claims. Accordingly, it would not be appropriate to extrapolate future
redundancies or deficiencies based on the results set forth above.

<PAGE>

DISCONTINUED OPERATIONS

SNIC's discontinued operations consist of P&C business that was
discontinued effective September 30, 1993. The discontinued operations
liabilities principally pertain to contractors' general liability policies
underwritten during the years 1986 through 1990. There is often a significant
lag between the date of loss of construction-related claims and the date such
claims are reported to SNIC. SNIC believes the existing provision, and the
assets allocated to support the discontinued operations, are sufficient to cover
future claims, but there is significant uncertainty associated with the
reporting and severity of construction claims.

In 1993, the Company recorded a pre-tax charge to income of $3.0 million
for estimated operating losses during the phase-out period. During the second
quarter of 1995, the Company increased by approximately $15 million its reserves
for discontinued operations for accident years 1993 and prior. This increase in
claims and claim adjustment expense reserves from the original estimate at the
measurement date resulted from increased frequency and severity of claims
incurred from those years, relative to previous expectations, which in turn
caused an increase in the estimated ultimate claims and claim adjustment expense
reserves related to 1993 and prior years. No similar adjustment was made in
1996.

SNIC supports discontinued operations with $25.9 million of assets. At
December 31, 1996, discontinued operations assets consisted of $17.3 million of
receivables due from reinsurer associated with the 1991 Centre Re Aggregate
Excess of Loss Contract, and $8.6 million of other reinsurance recoverables on
paid and unpaid losses. To the extent that cash recoveries under the Centre Re
contracts do not match cash requirements of SNIC's discontinued operations,
reinsurance receivables will be substituted with cash from continuing
operations, and the reinsurance receivables will be re-established in continuing
operations. Management estimates that discontinued operations will essentially
have "run off" by the year 2000.

The following table provides a reconciliation of the beginning and ending
loss and loss adjustment expense reserves for discontinued operations for each
of the years in the three-year period ended December 31, 1996, computed in
accordance with GAAP.

RECONCILIATION OF LIABILITY FOR DISCONTINUED OPERATIONS CLAIMS AND CLAIM
ADJUSTMENT EXPENSE

YEARS ENDED DECEMBER 31,
--------------------------------------
1996 1995 1994
-------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Beginning reserve, gross of reinsurance. . . . . . . . . . . . . . . . . . . . $40,526 $36,410 $54,898
Less: Reinsurance recoverable on unpaid losses. . . . . . . . . . . . . . . . 9,159 8,777 8,379
------- ------- -------
Beginning reserve, net of reinsurance. . . . . . . . . . . . . . . . . . . . . 31,367 27,633 46,519
Provision for net claims and claim adjustment expenses
For claims occurring in current year . . . . . . . . . . . . . . . . . . . --- --- 4,482
For claims occurring in prior years. . . . . . . . . . . . . . . . . . . . --- 15,006 (2,294)
------- ------- -------
Total claim and claims adjustment expenses . . . . . . . . . . . . . . . . --- 15,006 2,188
------- ------- -------
Payments for net claims and claim adjustment expense
For claims occurring in current year . . . . . . . . . . . . . . . . . . . --- --- (3,019)
For claims occurring in prior years. . . . . . . . . . . . . . . . . . . . (12,877) (11,272) (18,055)
------- ------- -------
Total claim and claims adjustment expense payments . . . . . . . . . . . . (12,877) (11,272) (21,074)
------- ------- -------
Ending reserves, net of reinsurance. . . . . . . . . . . . . . . . . . . . . . 18,490 31,367 27,633
Reinsurance recoverable on unpaid losses . . . . . . . . . . . . . . . . . . . 6,976 9,159 8,777
------- ------- -------
Ending reserves, gross of reinsurance. . . . . . . . . . . . . . . . . . . . . $25,466 $40,526 $36,410
------- ------- -------
------- ------- -------
</TABLE>

13
<PAGE>

The following table discloses the development of direct discontinued
operations claims and claim adjustment expense reserves from December 31, 1987
through December 31, 1996.

ANALYSIS OF DISCONTINUED OPERATIONS DIRECT CLAIMS AND CLAIM ADJUSTMENT EXPENSE
DEVELOPMENT

- -----------------------------------------------------------------------------------------------------------------------------------
CALENDAR YEARS ENDED DECEMBER 31,
- -----------------------------------------------------------------------------------------------------------------------------------
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Reserve for Direct
Unpaid Claims and
Claim Adjustment
Expenses, Gross of
Reinsurance Recoverables
Reserve. . . . . . . . . . . $12,678 $25,935 $41,088 $56,735 $65,629 $66,532 $54,898 $36,410 $40,526 $25,466
Re-estimated as of:
One Year Later . . . . . 19,879 32,395 56,093 73,295 83,770 73,298 56,041 54,855 41,293
Two Years Later. . . . . 25,865 43,160 60,679 89,336 91,453 73,067 75,703 55,622
Three Years Later. . . . 30,455 43,585 72,860 98,206 90,717 96,531 76,079
Four Years Later . . . . 30,134 52,261 82,218 102,538 117,215 92,569
Five Years Later . . . . 34,215 61,539 84,304 126,431 113,084
Six Years Later. . . . . 38,051 63,072 103,326 123,722
Seven Years Later. . . . 38,844 77,080 104,428
Eight Years Later. . . . 44,129 78,938
Nine Years Later . . 44,866
Cumulative Deficiency. . . . 32,188 53,003 63,340 66,987 47,455 26,037 21,181 19,212 767

Cumulative Amount of Reserve
Paid Through
One Year Later . . . . . 7,529 13,754 19,839 26,587 29,274 26,473 23,043 14,329 15,827
Two Years Later. . . . . 13,146 15,301 26,399 31,124 29,165 23,483 16,203 16,765
Three Years Later. . . . 15,900 19,844 32,188 39,486 28,136 18,380 19,649
Four Years Later . . . . 18,915 23,007 37,758 42,399 23,255 17,777
Five Years Later . . . . 22,329 28,609 38,798 40,990 22,047
Six Years Later. . . . . 26,129 31,715 37,585 45,029
Seven Years Later. . . . 27,645 31,247 42,260
Eight Years Later. . 27,791 37,394
Nine Years Later . . . . 27,780
Gross Reserve - December 31. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54,898 36,410 40,526 25,466
Reinsurance Recoverables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,379 8,777 9,159 6,976
-------- -------- -------- --------
Net Reserve - December 31. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46,519 27,633 31,367 18,490
-------- -------- -------- --------
-------- -------- -------- --------
Gross Re-estimated Reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76,079 55,622 41,293
Re-estimated Reinsurance Recoverables. . . . . . . . . . . . . . . . . . . . . . . . . . 11,816 12,216 9,926
-------- -------- --------
Net Re-estimated Reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64,263 43,406 31,367
Net Cumulative Deficiency. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $17,744 $15,773 $ 0
-------- -------- --------
-------- -------- --------

</TABLE>

The first line of the preceding table depicts the estimated liability for
unpaid claims and claim adjustment expense for discontinued operations recorded
for each of the indicated periods. The table follows the form of the table
depicting workers' compensation reserve development in "Analysis of Direct
Claims and Claim Adjustment Expense Development," above.

From 1987 to 1990, the increase in ultimate claims and claim adjustment
expense for discontinued operations was due to the lack of Company history, as
well as changes in economic and legal environments which prevented management
from reasonably estimating ultimate loss costs. Thereafter, a full actuarial
analysis has been performed semi-annually taking into account the Company's
history of reserve development, industry claim experience, and the effects of
litigation on future loss costs.

A significant percentage of the Company's pre-1991 ultimate loss costs and
reserve development is attributable to construction defect claims associated
with commercial package policies sold to general contractors,

<PAGE>

developers, and artisan contractors underwritten from 1986 to 1991. Other
carriers writing these same lines of business have also been negatively affected
by the unfavorable increase in claims frequency and severity that occurred as a
result of changes in the economic and legal environment during this time. At
December 31, 1996, approximately $23 million of the total $25.5 million
(approximately 90%) of direct reserves for discontinued operations, and
approximately 893 of the Company's 992 (approximately 90%)
incurred-but-not-reported claim counts, were attributable to expected future
reports of construction defect claims. Approximately $4.9 million of the total
$17.6 million of paid claim and claim adjustment expense for discontinued
operations was attributable to a single claim paid in the first quarter of 1996.

The Company began to monitor separately the effects of construction defect
claims beginning in 1993. Prior to 1993 the effects of construction defect
claims were combined with all other general liability business for reserve
valuation purposes. The frequency, severity, and time lag between the
occurrence and reporting dates of such claims vary significantly from the
statistics associated with all other lines and sublines of the Company's claims
and claim adjustment expense reserves for discontinued operations. Effective
June 30, 1995, the Company recorded approximately a $15 million pre-tax ($9.8
million net of tax) charge for discontinued property and casualty operations due
principally to an increase in management's estimates of
incurred-but-not-recorded construction defect claims.

The frequency of newly reported construction defect claims increased
significantly in July 1995. Management believes the increase in new
construction defect claims was attributable to the California Supreme Court
decision in MONTROSE CHEMICAL CORPORATION V. ADMIRAL INSURANCE COMPANY
("Montrose") handed down in July 1995. The Montrose decision effectively
broadened the definition of "loss occurrence" to include the entire period
beginning with the construction date and ending with the date of judgment
associated with defective construction. Since July 1995 the Company has
received notices of claims on allegedly defective construction projects where
the manifestation of the loss, the immediate cause of the loss, and the first
report of the loss, all fall outside of the Company's policy terms. Regardless,
under the Supreme Court's ruling, the Company is compelled to defend the
"insured" and contribute to loss settlements. Beginning in July 1996 and
continuing through year-end, management began to see the trend in newly reported
claims decline.

Management believes its current reserves are adequate to cover this
increase in claims activity depending on the length of time the recent reporting
trends continue. Management can not predict the volume of future
Montrose-related claims, the cost of handling the claims, or the ultimate
severity of loss associated with such claims. Further, the approximately $15
million pre-tax charge to discontinued operations recorded effective June 30,
1995, was estimated before the effects of the Montrose decision were reflected
in the Company's loss experience. There can be no assurance, therefore, that
further upward development of ultimate loss costs associated with construction
defect claims will not occur.

The Company has also experienced significant development with respect to
loss costs for components of discontinued operations other than construction
defect claims. While these other claims are generally more predictable than
construction defect claims, there can be no assurance that further upward
development of loss costs associated with such claims will not occur.

REINSURANCE

Reinsurance is generally used to reduce the liability on individual risks
and to protect against individual risk or aggregate catastrophic losses. SNIC
follows the industry practice of reinsuring a portion of its risks. The
availability and cost of reinsurance are subject to prevailing market conditions
and may affect SNIC's profitability. SNIC believes the terms of its contracts
are consistent with industry practice and its reinsurance program is based on
security of the reinsurers, coverage, and price. SNIC monitors its reinsurers'
financial condition carefully and recoverable losses are pursued aggressively.
Occasionally SNIC is involved in disputes with reinsurers, which, if not
settled, may be resolved in arbitration. As of December 31, 1996, SNIC was
involved in a dispute with its property and casualty reinsurers as to the
existence of coverage related to a claim in

<PAGE>

the amount of $850,000. Management expects to recover the entire disputed
amount. At December 31, 1996, there were no disputes related to the workers'
compensation operations.

Effective June 30, 1991, SNIC entered into an aggregate excess of loss
reinsurance contract ("1991 Contract") with Centre Re. Under the 1991 Contract,
SNIC purchased for $50 million reinsurance for claims and claim adjustment
expense incurred on or prior to June 30, 1991 to the extent that these amounts
were unpaid at June 30, 1991. The coverage obtained was $87.5 million in excess
of SNIC's retention equal to $55.7 million. Additionally, SNIC ceded
approximately $69.1 million of earned premiums and $78.1 million of claims and
claim adjustment expense to Centre Re through December 31, 1992. Total claims
and claim adjustment expenses occurring prior to December 31, 1992 were ceded to
Centre Re in the amount of $165.6 million under the 1991 Contract. Prospective
cessions of premium and claims were effectively terminated by mutual consent of
SNIC and Centre Re effective December 31, 1992, however, all other terms of the
1991 Contract remain in effect until the treaty terminates on January 1, 1998.

During 1996 and 1995, $33.0 million and $19.8 million of ceded losses were
recovered under the 1991 Contract. Reinsurance recoverable (anticipated future
cash reimbursements from reinsurers) of $145.8 million at December 31, 1995 was
expected under the 1991 Contract. Under related reinsurance agreements with
Centre Re, SNIC carried a funds withheld liability of $105.7 million at December
31, 1995, and irrevocable letters of credit of $27.6 million at December 31,
1995.

Effective January 1, 1993, SNIC entered into an aggregate excess of loss
reinsurance contract ("1993 Contract") with Centre Re. From SNIC's perspective
the 1993 Contract substantively operated as a one year contract with at least
four one year options to renew exercisable solely at SNIC's election during the
first five years of the contract. Subsequent to January 1, 1998, the 1993
Contract could have been terminated by either SNIC or Centre Re upon 30 days'
notice. The 1993 Contract required SNIC to cede not less than $15 million and
not more than $20 million of premiums to Centre Re with respect to any covered
accident year. Claims and allocated claim adjustment expenses occurring during
the accident year are ceded to Centre Re in excess of a variable percentage of
earned premium (60% and 56.5% for the 1995 and 1994 accident years,
respectively) and are subject to a limit of 130% of ceded earned premium, not to
exceed $26.0 million for any accident year. Effective January 1, 1996, the 1993
Contract was canceled at SNIC's election. The Company accrued a $5.3 million
charge related to the cancellation of the 1993 Contract.

SNIC maintains excess of loss reinsurance contracts with various reinsurers
and a quota-share contract with Zurich Reinsurance Centre ("ZRC"). Under its
current excess of loss contracts (with multiple reinsurers), various reinsurers
collectively assume liability on that portion of each loss that exceeds $500,000
on a per occurrence basis, up to a maximum of $150 million per occurrence.

Effective January 1, 1994, SNIC entered into a quota-share reinsurance
contract ("Quota Share Contract") with ZRC. Under the Quota Share Contract, ZRC
provides SNIC with an Assumption of Liability Endorsement ("ALE") facility
(based on a 50% quota-share cession during 1995 and 25% during 1996) and has the
option to modify its percentage participation in subsequent years. The ceding
rate under the contract was 20% for 1994, and ZRC and SNIC mutually agreed to
reduce the quota-share participation to 5% for 1995 and 1996. Further, SNIC
receives ceding commissions ranging between 22.5% and 24.5% for premiums ceded
to ZRC. The purpose of the ceding commission is to cover SNIC's cost of
acquiring new business and may be changed as a result of changes in market
conditions on a quarterly basis.

Effective January 1, 1997, the terms of the Quota Share Contract were
amended. Under the amended terms of the Quota Share Contract, ZRC increased its
participation from 5% of premiums written in 1996 to 6.5% in 1997. In exchange
for the increased participation ZRC will no longer receive a separate fee for
policies written on Assumption of Liability Endorsements. In conjunction with
the amendment to the Quota Share Contract, SNIC entered into a fronting
arrangement that permits it to use a ZRC affiliate's A.M. Best "A" rating for an
additional 2% of premiums written under the terms of the fronting arrangement.

<PAGE>

Reinsurance makes the assuming reinsurer liable to the insurer to the
extent of the reinsurance ceded, but it generally does not legally discharge an
insurer of its primary liability for the full amount of the policy liability
(except for ALEs). If a reinsurer fails to meet its obligations under the
reinsurance agreement, the ceding company is required to pay the loss. With
respect to policies with an ALE, however, in the event that SNIC is unable to
meet its claim payment obligations, ZRC assumes all responsibility for the
payment of losses related to the policy. All of the excess of loss reinsurance
is with non-affiliated reinsurers.

SNIC's contracts are generally entered-into on an annual basis. SNIC has
maintained reinsurance treaties with many reinsurers for a number of years. In
general, SNIC's reinsurance contracts are of the treaty variety and cover
underwritten risks specified in the treaties. SNIC also from time to time
purchases facultative reinsurance covering specific liabilities or policies
underwritten. As of December 31, 1996, ZRC, General Reinsurance Corporation and
UNUM Life Insurance Co. accounted for 36.8%, 24.8% and 15.6%, respectively, of
total amounts recoverable by SNIC from all reinsurers on paid and unpaid claims
and claim adjustment expenses, and were the only reinsurers that accounted for
more than 10% of such amounts.

INVESTMENTS

The amount and types of investments that may be made by the Company are
regulated under the California Insurance Code and rules and regulations
promulgated by the DOI. The investments of the Company are primarily managed
internally, although SNIC hires an outside investment management company as
needed on a fee for service basis. The Company's consolidated portfolio
consisted almost entirely of fixed income securities as of December 31, 1996.
The bond portfolio is heavily weighted toward short to intermediate term,
investment grade securities rated "A" or better, with approximately 93% rated
"AA" or better.

Funds withheld assets having carrying and market values of $114.9 and
$117.1 million, respectively, at December 31, 1995, were withheld from Centre Re
as collateral under the 1991 and 1993 Contracts. All investment income and
market value risk associated with such assets is Centre Re's. Interest expense
in the amount of $6.1 million and $8.8 million was paid to Centre Re during 1996
and 1995, respectively. At such time that Centre Re was obligated to pay SNIC
under the 1991 and 1993 contracts, SNIC would have been reimbursed for the
carrying of the funds withheld assets. Funds withheld assets were carried as
held-to-maturity until returned to Centre Re in 1996.

<PAGE>

The table below contains information concerning the composition of the
investment portfolio at December 31, 1996:

Type of Investment Carrying Market
Amount Value
(1)
-------- --------
BONDS (2) (In thousands)
U.S. government and agencies. . . . . . . . $35,338 $35,338
AA/Aa rated . . . . . . . . . . . . . . . . 1,417 1,417
A rated . . . . . . . . . . . . . . . . . . 3,617 3,617
BBB/Baa rated . . . . . . . . . . . . . . . 2,954 2,954
B rated . . . . . . . . . . . . . . . . . . 3,004 3,004
-------- --------
Total Bonds. . . . . . . . . . . . . 46,330 46,330
Invested cash and short-term investments. . 101,937 101,937
Common stocks . . . . . . . . . . . . . . . 1,173 1,173
-------- --------
Total. . . . . . . . . . . . . . . . $149,440 $149,440
-------- --------
-------- --------

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

(1) Carrying amount is amortized cost for bonds held to maturity, and market
value for bonds held for sale, common stocks, and short-term investments.

(2) Standard & Poor's Corporation defines "AAA" rated securities as "highest
rating, extremely strong security," "AA" rated securities as "very strong
security," "A" as "strong security," "BBB" as adequate security," and "B" as
"low quality." Moody's Investor Services, Inc. defines "Aaa" rated securities
as "best quality," "Aa" as "high quality," "A" as "strong security," "Baa" as
"adequate security," and "Ba" as "low quality."

The table below reflects investments and interest earned thereon and
average annual yield on investments for each year in the five-year period ended
December 31, 1996.

Year Ended December 31,
----------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
(Dollar amounts in thousands)
<S> <C> <C> <C> <C> <C>
Total investments at end of period. . . . . . . . . . . . . . . . . . $149,440 $163,951 $174,345 $144,778 $151,354
Net investment income before taxes. . . . . . . . . . . . . . . . . . $7,769 $9,784 $9,049 $9,550 $10,802
Average annual yield on ending investment portfolio (before taxes). . 5.2 % 5.9 % 5.2 % 6.6 % 7.1 %

</TABLE>

The Company in monitoring its asset and liability match attempts to keep
the investment duration at the mid-point of the payout pattern. As of December
31, 1996, the investments under the Company's management (excluding funds
withheld) have a duration of 2.77 years.

<PAGE>

The table below sets forth the maturity profile of the Company's bond
portfolio at market value as of December 31, 1996:

Bonds Rated (1)
----------------------------------------------------------------------------------
AAA/Aaa AA/Aa A BBB/Baa B Total
--------- ---------- --------- --------- --------- --------
(Dollar amounts in thousands)
<S> <C> <C> <C> <C> <C> <C>
1 year or less. . . . . . . . . . . . . $7,309 $ 7,309
More than 1 year, through 3 years . . . 12,984 $3,617 16,601
More than 3 years, through 5 years. . . - --
More than 5 years, through 10 years . . 4,305 $2,954 $3,004 10,263
More than 10 years, through 15 years. . - --
More than 15 years. . . . . . . . . . . 10,740 1,417 12,157
-------- -------- -------- -------- -------- --------
Total . . . . . . . . . . . . . . . . . $35,338 $1,417 $3,617 $2,954 $3,004 $46,330
-------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- --------

</TABLE>

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

(1) Standard & Poor's Corporation defines "AAA" rated securities as "highest
rating, extremely strong security," "AA" rated securities as "very strong
security," "A" as "strong security," "BBB" as adequate security," and "B" as
"low quality." Moody's Investor Services, Inc. defines "Aaa" rated securities
as "best quality," "Aa" as "high quality," "A" as "strong security," "Baa" as
"adequate security," and "Ba" as "low quality."

INFORMATION SERVICES

The Company emphasizes the development of personal computer based
information and processing systems for use in all areas of its business.
Management believes that personal computer based processing systems enable the
Company to compete more effectively through enhanced policyholder services,
efficient underwriting, more effective claim support systems, reduced processing
costs, and timely management information. One of the Company's key strategic
initiatives is the maintenance of a creative, flexible, and dynamic data
processing ("DP") capability. The Company invested 4.2%, 3.3%, and 1.8% of
direct written premiums in its DP operations in 1996, 1995, and 1994,
respectively.

SNIC management believes that personnel productivity, and underwriting and
claims processing effectiveness, can be greatly improved through its computer
systems. Beginning in late 1991, the Company began to upgrade its DP operations
to take advantage of the new technologies, and switched to a current generation
database engine, to maintain the claims and underwriting databases. The claims
processing system was placed in service in early 1992, and is continually
modified to reflect new procedural and regulatory requirements. A new Windows
based underwriting and policy issue system was placed in service in mid-1993.

Concurrent with the enhancements of the claims and underwriting systems,
management commenced a project to enhance the quality, quantity, and timeliness
of information available to management to monitor the Company's operations, and
to feed-back corrections to the operations personnel. Management believes most
insurance companies monitor their operations, and feed-back corrections to their
staff, quarterly; a large minority do this annually, and a small minority do it
monthly. SNIC management views quarterly or less frequent monitoring and
feedback as insufficient, and from 1992 to mid-1994 systems were implemented to
permit management to control the Company using batch processed reports, mostly
printed on paper, that were prepared no less frequently than monthly and, to a
major extent in the claims department, weekly.

Beginning with the installation of SNIC's proprietary SWAMI-Registered
Trademark- system in mid-1994, SNIC adjusted the Company's monitor and feedback
cycle to no less frequently than weekly and, in many respects, to a daily basis.
Management believes this to be necessary due to the information intensive nature
of the insurance business; lack of information represents a major aspect of
underwriting risk. The role of SWAMI-Registered Trademark- is to provide
quality,

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

- -Registered Trademark- Windows is a trademark of Microsoft Corporation.

<PAGE>

detailed, timely information to management as needed to reduce the risk
represented by lack of information. The SWAMI-Registered Trademark- system has
been constantly enhanced since its implementation.

Management considers information monitoring to be meaningful only if the
result is a thorough understanding of the Company's experience; generally, that
means a need to understand claim frequency and severity by workers' compensation
line components, and paid, reported, and ultimate losses, all available by
producing office, claims servicing office, agent, and underwriter. Management
must also have immediate access to the details behind the numbers, and that
information has to be accessible to, and understandable by, non-actuarial and
non-data processing personnel and executives. SWAMI-Registered Trademark-
provides information of sufficient type and quality such that virtually all of
the routine data processing generated paper reports historically used by the
Company have been rendered obsolete.

SWAMI-Registered Trademark- provides a variety of underwriting information
as well. SNIC management has the ability to monitor producer production and
profitability, selected by branch, whether or not in force, and quickly review
any producer's experience in a variety of ways. Detailed information for each
producer can be instantaneously reviewed on an accident year, policy year, or
calendar year basis. The system provides analytical analysis as to producers,
underwriters, or branch operations, which management uses to take corrective
action with respect to unprofitable producers or ineffective staff. The system
permits management to evaluate commissions, in force business, collections
activity, and product pricing, in detail, utilizing information that is no more
than 24 hours old.

The Company has comprehensive physical and virtual safeguards for its
information and processing systems. Disaster recovery programs and back-up
procedures include nightly back-up storage of all transactions and changes to
the system's database. At the end of each business day, the Company transfers
this information to tapes that are stored off site. The Company maintains
back-up systems in the branch offices to use if the main system fails. Computer
access is restricted by use of codes and passwords.

COMPETITION

California is the largest single-state workers' compensation insurance
market in the United States. For 1995, the latest period for which data is
available, the total direct workers' compensation written premiums in the State
of California were approximately $5.9 billion, of which SNIC wrote approximately
$97 million, or 1.6%. Approximately 300 companies reported to the WCIRB that
they wrote workers' compensation insurance in 1995.

The workers' compensation insurance industry in California is extremely
competitive. Many of SNIC's competitors have been in business longer, have a
larger volume of business, offer more diversified types of insurance coverage,
have greater financial resources, and have greater distribution capabilities
than SNIC. SNIC believes the dominant competitor in the California workers'
compensation industry is the State Compensation Insurance Fund. SNIC
historically concentrated on insuring medium to small workers' compensation
accounts with less than $75,000 in annual premiums, where it competed primarily
on the basis of limited loss control services to insureds who were not generally
offered such services, and claim management services. In late 1991, SNIC
developed and began marketing a small workers' compensation product targeted at
accounts with annual premiums below $10,000 where the underlying payroll is
predominately concentrated in specific employment classifications.

The workers' compensation market is commodity-oriented, highly fragmented,
and reflective of intense price competition. Nevertheless, because each risk is
somewhat unique in terms of insurance exposure, different insurers can develop
widely divergent estimates of prospective losses. Most insurers attempt to
segment classes within markets so that they target the more profitable
sub-classes with lower, although adequate, rates given the estimated
profitability of the segment. In some cases, no statistics are available for
the sub-classes involved, and the insurer implements discounted rate structures
based solely on theoretical judgment. Finally, different insurers have
widely-divergent internal expense positions, due to distribution methods,
economies of scale, and efficiency

<PAGE>

of operations. Therefore, although workers' compensation insurance is a
commodity, the price of insurance does not necessarily reflect commodity
pricing.

Beginning in mid-1994 many of SNIC's competitors began offering bonus
commissions to their producers ranging from five to ten percentage points or
more above the standard commissions historically paid. Some of SNIC's
competitors continue to offer bonus commission plans in spite of the significant
decline in rate levels experienced since January 1, 1995. To date, SNIC has not
offered bonus commission programs generally to its producers, but when
appropriate, SNIC will negotiate with individual producers on a case-by-case
basis.

SNIC's ability to attract and retain customers (and therefore, producers)
results from price structures tailored to attract certain sub-segments of the
workers' compensation insurance market. Nevertheless, SNIC's existing and
prospective customer bases are vulnerable to competition, especially from larger
insurers, that at any time are capable of penetrating SNIC's markets with
products priced at levels substantially below SNIC's.

REGULATION

SNIG and its subsidiaries are subject to extensive governmental regulation
and supervision. Regulations relate to such matters as prior approval of rates,
adequacy of reserves, types and quality of investments, minimum capital and
surplus requirements, deposit of securities for the protection of policyholders,
statutory financial reporting requirements, and restrictions on shareholder
dividends. SNIG and its insurance subsidiaries are also subject to periodic
examination by the DOI and must file annual and other reports on their financial
condition and other financial matters. In addition, assessments are made
against SNIC to cover liabilities to policyholders of insolvent insurance
companies and various state regulated involuntary or assigned risk pools have
been created to provide insurance coverage for insureds which are unable to
obtain insurance from private companies. The regulation and supervision of
insurance companies by state agencies is designed principally for the benefit of
their policyholders, not their shareholders. SNIG believes that it and its
subsidiaries are in compliance with state regulatory requirements which are
relevant to their respective businesses.

The DOI triennial audit, begun during the fourth quarter of 1995 of SNIC
covering the three years ended December 31, 1994, was completed in 1996 and
indicated no material issues or actions needed to be taken by SNIC in either its
operations or financial statements.

The California Insurance Code requires the DOI to approve any proposed
change of control of the Company. For such purposes, "control" is presumed to
exist if any person, directly or indirectly, owns, controls, holds with the
power to vote, or holds proxies representing more than 10% of the voting
securities of the Company.

The California Insurance Code also limits the amount of dividends or
distributions an insurance subsidiary may pay in any 12-month period to the
greater of (a) net income for the preceding year or (b) 10% of statutory
policyholders' surplus as of the preceding 31 of December. Payments of greater
amounts require the approval of the DOI.

The California Workers' Compensation Reform Act passed into law in 1989
(the "Reform Act") provided for substantial changes to the California workers'
compensation system beginning January 1, 1990. The changes included an increase
of 50% in maximum temporary disability and permanent total disability benefits
over two years and smaller increases in maximum death benefits and maximum
vocational rehabilitation allowances. In addition, the Reform Act created an
arbitration process that was intended to streamline the resolution of contested
claims and reduce the number of medical opinions allowed in such claims. A bill
clarifying and amending certain provisions of the Reform Act became effective on
January 1, 1991. The legislation was intended to provide technical corrections
for the administrative costs of the Reform Act. The legislation revised the
standards for the use of qualified medical evaluators and allows the injured
worker, the employer, and any attorney involved, to use one expert, thus
reducing the costs of defense and medical and legal costs. The bill also
revised the standard for

<PAGE>

psychiatric injuries and vocational rehabilitation services. Further, payments
of temporary disability, partial disability, permanent disability and death
benefits were also increased. The increased benefits and inadequate controls
over medical service providers under the Reform Act significantly increased
SNIC's loss payments during 1990, 1991, and 1992.

In July 1993, the California legislature enacted a series of bills to
significantly change the California workers' compensation system ("1993
Reforms"). The 1993 Reforms were intended to provide substantial cost savings
as a result of: (i) a higher compensability standard for psychiatric injuries
through a requirement that work causation be the predominant cause (more than
50%) in contrast to the previously existing 10% cause standard; (ii) a provision
that psychiatric injuries are not compensable if they arise from lawful
personnel actions; (iii) restrictions on post-termination claims unless, among
other things, notice of an injury prior to termination is given; (iv) possible
extension of the employers' control of medical treatment of up to one year;
(v) imposition of a cap on vocational rehabilitation costs of $16,000, which
previously were not subject to maximum dollar limitations; (vi) restrictions on
the number and timing of medical-legal evaluations; (vii) a prohibition on
referrals by physicians and other providers to facilities in which they have a
financial interest; (viii) a requirement that a schedule of medical-legal fees
be developed; and (ix) a strengthening of provisions which are intended to
combat fraudulent claims and abuse of the system by providing for felony
penalties, restitution and civil liability. In each case, these provisions
contain various qualifications and conditions.

The 1993 Reforms also increased insurers' costs as a result of benefit
increases commencing July 1, 1994, and continuing through July 1, 1996. In
addition, the 1993 Reforms reduced revenue through an immediate reduction in
minimum rates of 7%. The legislation permitted the DOI to approve even lower
rates, and, effective January 1, 1994, the DOI ordered a further 12.7% reduction
in minimum rates. Minimum rates were once again reduced by 16.0% effective
October 1, 1994.

Effective January 1995, California's minimum rate law was replaced by an
open rating system. Under this new rating system, individual insurance
companies file rates and rules not less than 30 days prior to their effective
date, and such rates can only be disapproved by the DOI after a hearing and only
on the basis of solvency, market share, or improper filing. The 1993 Reforms
also permit certain large entities or groups in the construction business to
establish alternative workers' compensation programs. The 1993 Reforms contain
numerous other provisions, including limitations on grounds for cancellation of
policies.

SNIC cannot predict the ultimate effect of open rating on its workers'
compensation business, but during the first two years of open rating intense
price competition has been experienced leading to lower average premiums per
policy. The specified benefit increases are scheduled to occur gradually over a
three-year period. The potential cost savings from the other reforms discussed
above may not be realized for some period of time, and there can be no assurance
that the intended benefits of the cost savings provisions will materialize.
SNIC believes the rates it has filed with the DOI are adequate, but it is unable
to predict the degree to which such rates are competitive in the marketplace.

The California legislature passed, and the DOI has issued its guidelines
with respect to the implementation of, Assembly Bill 1913 (AB 1913). AB 1913,
among other things, causes the experience modification factor of a current
workers' compensation policy and the immediately preceding two policies
(regardless of carrier) to be subject to revision if a claim used in a
modification closes on or after January 1, 1995, for a value of 60% or less than
its highest earlier reported value, if the highest reported incurred value was
$10,000 or more. Such a change in the experience modification factor will
require the current workers' compensation carrier to return a portion of a
policyholders' premium for the current and preceding two policies' periods
regardless if the current carrier was the insured's previous carrier. WCIRB
estimates of the ultimate cost to California workers' compensation underwriters
range from 1% to 2.5% of 1996 premium; however, these estimates are based upon
broad industry estimates and could vary significantly from company to company
based upon the type of claims incurred, size of employer, and employer industry
group. Because of the uncertainty and variability regarding the effects of AB
1913, no reasonable estimate of the cost can be made. The Company paid $505,000
in AB 1913 refunds in the year ending December 31, 1996. The Company's
management is monitoring the situation and will book reserves as necessary.

<PAGE>

Proposed federal legislation has been introduced from time to time in
recent years that would provide the federal government with substantial power
to regulate property and casualty insurers including state workers' compensation
systems, primarily through the establishment of uniform solvency standards.
Proposals also have been discussed to modify or repeal the antitrust exemption
for insurance companies provided by the McCarran-Ferguson Act. The adoption of
such proposals could have a material adverse impact upon the operations of the
Company.

A risk-based capital formula was adopted by the National Association of
Insurance Commissioners ("NAIC") in December 1993 for the purpose of helping
regulators identify property and casualty insurers that may be in financial
difficulty. Each insurer is required to report to regulators the quality of its
capital as measured by the company's Authorized Control Level Risk Based Capital
("ACLRBC"), and the relationship of its modified capital base to the level of
risk assumed in specific aspects of its operations. The formula does not
address all of the risks associated with the operations of an insurer, but does
provide a minimum threshold measure of capital adequacy by individual insurance
companies. The formula does not purport to compute a target level of capital.
Companies falling below the threshold will be placed into one of four
categories: Company Action Level (ACLRBC multiplied by a factor of 2.0), where
the insurer must submit a plan of corrective action; Regulatory Action Level
(ACLRBC multiplied by a factor of 1.5), where the insurer must submit such a
plan and the regulator will issue a corrective order; Authorized Control Level
(ACLRBC multiplied by 1.0), which includes the above actions and may include
rehabilitation or liquidation; and Mandatory Control Level (ACLRBC multiplied by
a factor of 0.7), where the regulator must rehabilitate or liquidate the
insurer. The Company has calculated its Risk Based Capital requirements at
December 31, 1996 and has capital available in amounts that exceed the highest
level Risk Based Capital requirement.

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 eleven industry ratios and specifies "usual values" for each
ratio. Departure from the usual values on four or more of the ratios generally
leads to inquiries from individual state insurance commissioners. Based on the
1996 statutory financial statements, SNIC was within the usual range of all IRIS
tests.

<PAGE>

EMPLOYEES

As of December 31, 1996, the Company had approximately 355 employees, none
of whom was covered by a collective bargaining agreement.

ITEM 2. BUSINESS PROPERTIES

The Company's principal executive offices and the Los Angeles Branch share
approximately 40,000 square feet of space in Calabasas, California pursuant to a
lease expiring in 1999. The Company also leases space for branch offices
located in South San Francisco, Sacramento, and Fresno (all in California).
Such leases expire in 1997, 2001, and 2000, respectively. See Note (12) to
Consolidated Financial Statements.

ITEM 3. LEGAL PROCEEDINGS

SNIG and its subsidiaries are parties to various legal proceedings, all of
which are considered routine and incidental to the business of the Company and
are not material to the financial condition and operation of the business.
Neither SNIG nor any of its subsidiaries is a party to any litigation expected
to have a material adverse effect upon the Company's business or financial
position.

ITEM 4. SUBMISSION TO MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted to a vote of security holders, through
solicitation of proxies or otherwise, during the fourth quarter of 1996.

<PAGE>

PART II

ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE COMPANY'S
COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

SNIG's common stock (the "Common Stock") is listed and traded on The Nasdaq
National Market under the trading symbol "SNTL". "The Nasdaq Stock Market" or
"Nasdaq" is a highly-regulated electronic securities market comprised of
competing Market Makers whose trading is supported by a communications network
linking them to quotation dissemination, trade reporting, and order execution
system. This market also provides specialized automation services for
screen-based negotiations of transactions, on-line comparison of transactions,
and a range of informational services tailored to the needs of the securities
industry, investors and issuers. Nasdaq consists of two distinct market tiers:
The Nasdaq National Market and The Nasdaq SmallCap Market. Nasdaq is operated
by The Nasdaq Stock Market, Inc., a wholly-owned subsidiary of the National
Association of Securities Dealers, Inc. Set forth below are the quarterly high
and low closing sale prices for the Common Stock as reported to SNIG by those
broker-dealers believed by SNIG to be most active in making a market in the
Common Stock. As SNIG's Common Stock was not approved for listing on The Nasdaq
National Market until March 5, 1996, quotations prior to SNIG being listed on
Nasdaq are inter-dealer prices (giving effect to the May 25, 1995, four-into-one
reverse stock split), without retail mark-up, mark-down, or commission and may
not necessarily represent actual transactions.

High Low
------ -----
1996
Fourth quarter . . . . . . . . . . $13.75 $9.88
Third quarter. . . . . . . . . . . $10.75 $7.13
Second quarter . . . . . . . . . . $ 8.00 $4.87
First quarter. . . . . . . . . . . $ 5.63 $4.87
1995
Fourth quarter . . . . . . . . . . $6.00 $4.75
Third quarter. . . . . . . . . . . $5.50 $4.75
Second quarter . . . . . . . . . . $5.00 $4.00
First quarter. . . . . . . . . . . $5.40 $4.60
1994
Fourth quarter . . . . . . . . . . $5.00 $4.60
Third quarter. . . . . . . . . . . $5.00 $4.60
Second quarter . . . . . . . . . . $5.00 $4.00
First quarter. . . . . . . . . . . $4.00 $3.00

As of March 5, 1997, the number of shareholders of record of SNIG's Common
Stock was 295 and 3,446,706 shares of Common Stock were outstanding on that
date.

The Company believes the increase in price in the third and fourth quarter
of 1996 is primarily attributable to the announcement of the PRIM transaction.

The Company's current policy is to retain its earnings for use in its
business; it has paid no cash dividends to its shareholders in its two most
recent fiscal years and has no present intention of paying cash dividends in the
foreseeable future. The payment of dividends in the future is subject to the
discretion of the Board of Directors and will depend on the Company's operating
results, financial condition and capital

<PAGE>

requirements, general business conditions, and other relevant factors, including
legal restrictions applicable to the payment of dividends by SNIC. The
California Insurance Code restricts the dividends or distributions an insurance
subsidiary may pay in any 12-month period to the greater of (a) net income for
the preceding year, or (b) 10% of statutory policyholders' surplus as of the
preceding December 31. Payments of greater amounts require the approval of the
DOI. Because the Company conducts no substantial business other than through
SNIC, SNIG would be dependent upon dividends from SNIC in order to pay dividends
to SNIG's shareholders.

During the fiscal year ended December 31, 1996, the Company, through a
series of grants to certain employees pursuant to its 1995 Stock Incentive Plan,
awarded (a) an aggregate of 45,934 shares of restricted Common Stock, which
shares are subject to the Company's right of repurchase, and (b) options to
purchase an aggregate of 146,516 shares of Common Stock, vesting in equal annual
increments of 20% from the date of grant of such option and having exercise
prices ranging from $5.20 to $7.70 per share. In issuing such securities, the
Company relied on the exemption from registration under Section 4(2) of the
Securities Act.

t
<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

SELECTED FINANCIAL DATA - YEARS ENDED 1987 THROUGH 1996
(Amounts in thousands, except share and per share amounts.)

OPERATIONS FOR THE YEAR ENDED DECEMBER 31:

1996 1995 1994 1993 1992
---------------------------------------------------------
<S> <C> <C> <C> <C> <C>
REVENUES:
Net premiums written $87,715 $89,139 $105,946 $154,431 $59,827
Net earned premiums 88,648 89,735 110,418 153,585 55,892
Net investment income (excluding capital gains
and losses) 7,738 10,309 9,014 8,481 5,050
Net capital gain (loss) 31 (525) 35 1,069 5,752
---------------------------------------------------------
Total revenues 96,417 99,519 119,467 163,135 66,694
---------------------------------------------------------

COMPONENTS OF NET INCOME (LOSS):
Underwriting profit (loss) (2) 4,799 12,060 5,014 (382) 6,554
Investment income and capital gains 7,769 9,784 9,049 9,550 10,802
Interest (expense) (7,527) (9,619) (8,726) (6,221) (1,258)
Other income (expense), net 186 (536) (340) (743) (243)
Federal income taxes benefit (expense) (739) 5,849 (4) 2,304 ---
Preferred securities (dividends and accretion) -
pre-tax (2,525) (2,255) (1,035) --- ---
(Loss) from discontinued operations - pre-tax (3) --- (14,912) --- (4,532) (15,606)
Extraordinary (loss) - pre-tax --- --- (3,064) (686) ---
Cumulative effect of change in accounting for
income taxes --- --- --- 2,297 ---
---------------------------------------------------------
Net income (loss) $1,963 $371 $894 $1,587 $249
---------------------------------------------------------

PER SHARE:(1)
Income (loss) before items below - after all taxes .88 $5.12 $1.45 $1.31 $4.62
Preferred securities (dividends and accretion) -
pre-tax (.48) (.66) (0.30) --- ---
(Loss) from discontinued operations - pre-tax --- (4.35) --- (1.32) (4.55)
Extraordinary (loss) - pre-tax --- --- (0.89) (0.20) ---
Cumulative effect of change in accounting for
income taxes --- --- --- 0.67 ---
---------------------------------------------------------
Net income (loss) $.40 $.11 $0.26 $0.46 $0.07
---------------------------------------------------------

RATIOS FROM CONTINUING OPERATIONS, NET OF
REINSURANCE:
Claim and claim adjustment expense ratio 62.8% 60.1% 71.3% 74.1% 60.7%
Underwriting expense ratio 38.5% 32.8% 19.6% 18.7% 19.4%
Interest and other expense ratio 8.3% 11.3% 8.2% 4.5% 2.7%
Policyholder dividends ratio -6.7% -6.4% 4.5% 7.4% 8.2%
---------------------------------------------------------
Continuing operations combined ratios,
net of reinsurance 102.9% 97.9% 103.6% 104.7% 91.0%
---------------------------------------------------------

PRE-TAX NET INCOME (LOSS) AS A PERCENT OF NET
EARNED PREMIUMS 3.0% -6.1% 0.8% -0.5% 0.4%
RATE OF RETURN ON BEGINNING EQUITY 4.5% 0.9% 2.2% 4.1% 0.7%

FINANCIAL POSITION AT YEAR-END:
Total cash and investments - carrying value $149,440 $163,951 $176,878 $150,179 $154,953
- market value 149,440 166,103 172,706 156,744 154,294
Total assets 306,569 240,781 286,776 264,098 291,487
Long-term debt 98,961 8,530 9,730 6,743 9,192
Claim and claim adjustment expense reserves 115,529 141,495 171,258 171,038 202,634
Total liabilities 237,807 176,256 227,622 224,044 253,012
Preferred securities issued by affiliate 23,571 21,045 18,790 --- ---
Shareholders' equity 45,191 43,480 40,364 40,055 38,475
Book value per share(1) $13.11 $12.68 $11.77 $11.68 $11.22
Outstanding shares(1) 3,446,492 3,430,373 3,429,873 3,429,873 3,429,873

OPERATIONS FOR THE YEAR ENDED DECEMBER 31:

1991 1990 1989 1988 1987
---------------------------------------------------------
<S> <C> <C> <C> <C> <C>
REVENUES:
Net premiums written $93,742 $124,957 $96,656 $75,229 $57,064
Net earned premiums 98,119 124,114 91,127 71,780 53,108
Net investment income (excluding capital gains
and losses) 5,436 5,744 4,398 3,245 2,414
Net capital gain (loss) 331 (223) 788 (550) (167)
---------------------------------------------------------
Total revenues 103,886 129,635 96,313 74,475 55,355
---------------------------------------------------------

COMPONENTS OF NET INCOME (LOSS):
Underwriting profit (loss) (2) (20,912) 3,978 4,994 12,433 4,260
Investment income and capital gains 5,767 5,521 5,186 2,695 2,247
Interest (expense) (158) (478) (603) (570) ---
Other income (expense), net (456) (162) (154) 152 (38)
Federal income taxes benefit (expense) 6,538 (1,741) (1,820) (4,175) (1,592)
Preferred securities (dividends and accretion) -
pre-tax --- --- --- --- ---
(Loss) from discontinued operations - pre-tax (3) --- --- --- --- ---
Extraordinary (loss) - pre-tax --- --- --- --- ---
Cumulative effect of change in accounting for
income taxes --- --- --- --- ---
---------------------------------------------------------
Net income (loss) ($9,221) $7,118 $7,603 $10,535 $4,877
---------------------------------------------------------

PER SHARE:(1)
Income (loss) before items below - after all taxes ($2.69) $2.08 $2.22 $3.14 $1.47
Preferred securities (dividends and accretion) -
pre-tax --- --- --- --- ---
(Loss) from discontinued operations - pre-tax --- --- --- --- ---
Extraordinary (loss) - pre-tax --- --- --- --- ---
Cumulative effect of change in accounting for
income taxes --- --- --- --- ---
---------------------------------------------------------
Net income (loss) ($2.69) $2.08 $2.22 $3.14 $1.47
---------------------------------------------------------

RATIOS FROM CONTINUING OPERATIONS, NET OF
REINSURANCE:
Claim and claim adjustment expense ratio 95.7% 67.9% 63.9% 53.2% 62.7%
Underwriting expense ratio 27.9% 27.9% 27.4% 26.8% 25.9%
Interest and other expense ratio 0.6% 0.5% 0.8% 0.6% 0.1%
Policyholder dividends ratio 11.7% 1.9% 5.0% 4.4% 4.5%
---------------------------------------------------------
Continuing operations combined ratios,
net of reinsurance 135.9% 98.2% 97.1% 85.0% 93.2%
---------------------------------------------------------

PRE-TAX NET INCOME (LOSS) AS A PERCENT OF NET
EARNED PREMIUMS -16.1% 7.1% 10.3% 20.5% 12.2%
RATE OF RETURN ON BEGINNING EQUITY -19.6% 17.6% 23.7% 51.5% 41.4%

FINANCIAL POSITION AT YEAR-END:
Total cash and investments - carrying value $82,285 $86,183 $102,193 $64,844 $48,277
- market value 85,463 86,641 102,447 64,109 47,721
Total assets 124,843 172,726 158,759 103,697 69,299
Long-term debt --- 2,635 4,500 5,000 ---
Claim and claim adjustment expense reserves 44,716 78,009 56,199 41,478 29,394
Total liabilities 86,840 125,760 118,344 71,589 48,824
Preferred securities issued by affiliate --- --- --- --- ---
Shareholders' equity 38,003 46,966 40,415 32,109 20,475
Book value per share(1) $11.08 $13.70 $11.78 $9.58 $6.16
Outstanding shares(1) 3,429,873 3,429,323 3,430,973 3,351,578 3,326,047

</TABLE>

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

(1) Adjusted to reflect a four-into-one reverse stock split effective as of May
24, 1995.
(2) In 1991, several liabilities were revised upward including property and
casualty and workers' compensation claims and claim adjustment expense of
$22.6 million, policyholders dividends of $7.1 million, and employee
severance of $1.2 million. In addition, premiums receivables were written
down by $4.0 million.
(3) The Company's losses from discontinued operations resulted principally from
contractors' and developers' liability business underwritten from 1986 to
1991.

<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis provides information that management
believes to be relevant to an understanding of the Company's consolidated
results of operations and financial condition. The discussion should be read in
conjunction with the consolidated financial statements and the notes thereto.

OVERVIEW

GENERAL. The Company's net income was $1,963,000 for the year ended
December 31, 1996 as compared to $371,000 for the same period in 1995. Net
income per share for the year ended December 31, 1996 was $0.40 versus $0.11 in
1995. Income before preferred securities accretion, discontinued operations,
and extraordinary loss was $3,630,000 for the year ended December 31, 1996
versus $11,701,000 in 1995. The decrease in the 1996 period is due principally
to a $5.3 million fee for reinsurance, as well as an increase of $1.7 million
from 1995 in claims and claims adjustment expense. Income before preferred
securities accretion, discontinued operations, and extraordinary loss, excluding
the above discussed adjustments, was $10,630,000 for the year ended December 31,
1996 as compared to $11,701,000 for the comparable period in 1995.

The Company's net income was $371,000 for the year ended December 31, 1995,
versus $894,000 in 1994. Net income per share was $0.11 for 1995 versus $0.26 in
1994. Income before preferred securities accretion, discontinued operation, and
extraordinary loss was $11,701,000 for 1995 versus $3,599,000 in 1994, due
principally to favorable adjustments relating to prior year income effects
totaling $13.7 million, consisting of favorable workers' compensation reserve
development, adjustments to policyholder dividend reserves, and tax benefits
resulting from an IRS settlement. Net income for both 1995 and 1994 was
impacted by extraordinary items, including a $9,842,000 net of tax charge to
discontinued operations in the second quarter of 1995, and $2,022,000 net of tax
charge associated with the retirement of the Company's debt incurred in 1992,
effective June 30, 1994.

Net income from 1995 accident and policy year operations was generally
lower versus 1994 due to decreased premium production before and after
reinsurance, increased commission expense caused by reductions in ceded
commissions, increased overhead expenses, and accrued preferred securities
accretion.

The operating results of the workers' compensation insurance industry are
subject to significant fluctuations from quarter to quarter and from year to
year due to the effect of competition on pricing, the frequency and severity of
losses incurred in connection with general economic conditions and changes in
regulatory environment. Fluctuations in interest rates also have a significant
impact on the Company's operating results, as over 50% of the Company's total
assets were interest-bearing investments at December 31, 1996.

SNIC is domiciled in the State of California and prepares its statutory
financial statements in accordance with accounting practices prescribed or
permitted by the DOI. SNIC received written approval from the DOI as to the
accounting for certain aspects of its Centre Re aggregate excess of loss
contracts and the accounting of the assets of SNIC's subsidiary, WSSC. See Note
10 to the Consolidated Financial Statements.

In 1994, after the Company's decision to withdraw from the property and
casualty markets late in 1993, the Company's management focused its effort on
its workers' compensation operations. Also during 1994, several major financing
transactions were completed as discussed in the "Financial Condition" section
below.

In September 1993, in addition to discontinuing its property and casualty
business, the Company also discontinued writing workers' compensation insurance
through its Calabasas Branch due to its poor underwriting results. Management
attributed this situation to the prolonged recession in Southern California as
well as the litigious

<PAGE>

nature of the area which, in addition to increasing overall claim costs, had a
greater prevalence of fraudulent claims than other geographical areas in
California. Management does not expect the adverse developments experienced
during 1993 and 1992 on prior years' Southern California business to continue in
the future. As of December 31, 1996, the discontinued Calabasas Branch
continued to "run off" in accordance with management's expectations.

During the first half of 1995, the Company re-entered the Southern
California market with a new marketing and underwriting team targeting different
producers, insureds and industries. The effect of this operation has not been
material, with net premiums written totaling $7.5 million, 8% of the total
premium written, for 1996.

CHASE LOAN. In November 1996, the Company entered into a financing
transaction involving Centre Re and Chase Manhattan Bank (Chase). Chase
extended a $93.1 million term loan (net of transaction costs). The Company used
the proceeds from the financing to purchase from SNIC reinsurance receivables
due from Centre Re.

The principal balance of the loan amortizes based on the payout pattern of
the underlying claims of the reinsurance receivables. Approximately $6.0
million will be payable in 1997; $33.7 million in 1998; $25.6 million in 1999;
$15.2 million in 2000 and immaterial annual amounts thereafter through 2004
totaling approximately $11.2 million. The effective interest rate of the loan
will be approximately 6.87%. See Note 8 to Consolidated Financial Statements.
The reason for the transaction was its positive impact on liquidity and
anticipated positive impact on investment income in future periods. The
realization of investment income is dependent on the performance of the
Company's portfolio, as well as factors beyond the Company's control, such as
interest rates and economic conditions generally.

PRIM ACQUISITION. The Company has agreed to acquire Pac Rim Holding
Corporation for $42 million in cash. (The acquisition is subject to regulatory
and shareholder approval.) PRIM, through its wholly-owned subsidiary, the
Pacific Rim Assurance Company ("PRAC"), is engaged in the underwriting of
workers' compensation insurance principally in California, and also in Arizona,
Texas, Georgia and Alabama. The acquisition of PRIM provides the opportunity
for the Company to realize immediate strategic and financial benefits. The
consolidation of two mid-sized companies whose home offices are located only
eight miles apart should provide significant economies of scale that neither
company could achieve independently. The combined company will be able to
spread fixed costs over a wider premium base. In addition, PRIM's strong
presence in Southern California complements the Company's historical focus on
Northern and Central California. The foregoing statements contain
forward-looking statements regarding efficiencies and economies of scale that
management believes may be achieved through the acquisition of PRIM.
Realization of management's beliefs and projections will depend on a number of
factors, including management's successful execution of its business plan for
integrating the operations of the two companies, the insurance market's
reception to the combined companies, and other factors beyond the Company's
control.

The terms of the transaction with PRIM represent a $12 million purchase
price reduction from the $54 million purchase price announced in September 1996.
An increase in the loss and loss adjustment expense reserves of PRAC by $12
million as of December 31, 1996 necessitated renegotiation of the terms of the
prior agreement. The reserve adjustment resulted in PRAC experiencing an
operating loss of $15.9 million in 1996 for the fiscal year ended December 31,
1996. In order to recognize the full benefits of the transaction, the Company
intends to strengthen PRAC financially by contributing $10 million to PRAC's
capital. Depending on claims experience, additional reserve strengthening for
PRAC (to be renamed Superior Pacific Casualty Company) could be required over
the next five years for accident years 1996 and prior; however, such reserve
adjustments would not be expected to be material to the combined Company's
operating results, and the Company expects to realize strategic and financial
benefits from the acquisition as outlined in the previous paragraph.

Financing for the acquisition of PRIM and the capital contribution will be
obtained by issuing 2,390,438 shares of Common Stock under a Stock Purchase
Agreement entered into September 17, 1996, as amended and restated February 17,
1997, by and among the Company, Insurance Partners, L.P., Insurance Partners
(Offshore) Bermuda, L.P., TJS Partners, L.P. and members of management of the
Company. The shares will be sold at $7.53 per share for a total of $18 million.
In addition, the Company will borrow $44 million from a syndicate of banks led
by Chase, and use part of the proceeds of such loan to refinance existing
long-term debt as well as for

<PAGE>

the acquisition and capital contribution. While the Company believes that an
efficient market will have already made appropriate allowances in arriving at
the current price of the Company's shares, the issuance of Common Stock upon
closing of the PRIM transaction at $7.53 per share represents a significant
dilutive event to shareholders based upon the closing price of $13.50 per share
on Nasdaq for the Company's Common Stock on March 5, 1997. In addition, certain
of the purchasers under the Stock Purchase Agreement will be granted
registration rights, and it is likely that all purchasers will be able to sell
shares into the public market under Rule 144 under the Securities Act, beginning
in limited amounts after one year, and, for purchasers who are not then
affiliates, in unlimited amounts after two years.

FINANCIAL CONDITION

Total assets increased $65.8 million to $306.6 million at year-end December
31, 1996. The increase was primarily the result of the proceeds received from
the Chase financing agreement, which were partially offset by a $14.5 million
decrease in investments and a $14.3 million decrease in reinsurance recoverable.

Total liabilities increased $61.6 million to $237.8 million. The increase
in total liabilities is due to the recording of $92 million in long term debt
related to the Chase financing agreement.

Reinsurance recoverable on unpaid losses decreased $13.8 million in 1996
primarily due to the settlement of the 1991 Contract and the return of our funds
withheld assets. Premiums receivable decreased due to improved collection
efforts by the Company.

Policyholder dividends liability decreased $8.1 million due to 1996
dividend payments to policyholders of $1.3 million and adjustment to
policyholders dividend reserves of $6.8 million in response to the market change
in pricing from a statutory basis to an open rating basis. The Company has
discontinued paying policyholder dividends.

RESULTS OF OPERATIONS

Premiums have stabilized in 1996 from the decline in 1995. This
stabilization is due to management's focus on small profitable accounts and the
renewal of those accounts. Premiums had been declining due to competitive
pressures and strategic decisions to focus on smaller accounts. Management is
committed to maintaining operating margins by avoiding exchanging margins for
market share.

Over the past three years, the underwriting results have fluctuated
significantly. The 1996, 1995 and 1994 years returned an underwriting profit of
$4.8 million, $12.1 million and $5.0 million, respectively. The 1996 decrease
in comparison to the 1995 underwriting results was due primarily to a $5.3
million charge recorded in 1996 related to the settlement of the 1993 Centre Re
contract and an increase in net claims and claims adjustment expenses of $1.7
million due to adverse development in the 1995 accident year. The 1995
improvement as compared to 1994 was due to decreases in workers' compensation
reserves of $2.2 million and policyholders dividend reserves of $5.7 million.
These decreases were partially offset by increased underwriting, overhead and
general and administrative expenses.

During the second quarter of 1995, the Company received a $1.7 million tax
refund from the Internal Revenue Service, which confirmed the Company's tax net
operating loss ("NOL") position. Accordingly, the valuation allowance that was
established with the adoption of FAS 109 in 1993 is no longer deemed necessary.
The Company's management has reviewed its deferred tax asset balance and
concluded it is more likely than not the entire deferred tax asset will be
realized. Management's conclusion is based on the utilization of its NOL and
its expectation that sufficient taxable income will be generated in future
periods. The Company is expected to be profitable in the future and has
demonstrated such for the last three years ended December 31, 1996.

<PAGE>

YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995

Selected financial data as reported for the twelve months ended December 31,
1996 and 1995 are presented below.

TWELVE MONTHS ENDED DECEMBER 31,
--------------------------------
1996 1995
--------------- --------------
(Dollars in thousands)

Gross premiums written $ 99,282 $ 97,084
Net premiums written 87,715 89,139
Net premiums earned 88,648 89,735

Claims and claim adjustment expenses 55,638 53,970
Underwriting expenses 34,138 29,447
Policyholder dividends (5,927) (5,742)

Underwriting profit (loss) 4,799 12,060

Net investment income 7,769 9,784

UNDERWRITING RATIOS (GAAP BASIS)
Claims and claim adjustment expense ratio 62.8% 60.1%
Underwriting expense ratio 38.5% 32.8%
Policyholder dividends ratio (6.7)% (6.4)%
--------------- --------------
Combined ratio 94.6% 86.5%
--------------- --------------
--------------- --------------

GROSS PREMIUMS WRITTEN increased 2.3% to $99.3 million in 1996 from $97.1
million in 1995. The increase in premiums written is attributable to SNIC's
strategy to underwrite smaller risks. The Company's strategy is to continue to
focus on profitable operating margins first and market share second. The
Company continues to make strenuous efforts to increase production, subject to
the constraints of sound underwriting, and to develop profitable niches. The
result of this strategy was a 24% increase in policy count, which was offset by
a 20% decrease in average written premiums per policy. The Company believes the
acquisition of PRIM will enhance its ability to pursue this strategy.

NET PREMIUMS EARNED decreased 1.2% to $88.6 million in 1996 from $89.7
million in 1995. The decrease in net premiums earned, coupled with an increase
in gross premiums written, reflects an increase in ceded insurance.

CLAIMS AND CLAIM ADJUSTMENT EXPENSE increased 3.1% to $55.6 million in 1996
from $53.9 million in 1995. The increase of $1.7 million is due to adverse
development in the 1995 accident year. The claims and claim adjustment expense
ratio as a percentage of net earned premium increased slightly to 62.8% in 1996
from 60.1% in 1995.

UNDERWRITING EXPENSES, excluding policyholder dividends, increased $4.7
million or 16% in 1996 from 1995. The increase was due primarily to a $5.3
million adjustment recorded in the second quarter of 1996 for accrued costs
related to the settlement of a reinsurance contract. Underwriting expenses for
1996, excluding the $5.3 million in accrued costs, were $28.8 million as
compared to $29.4 million in 1995. The underwriting expense ratio, excluding
the $5.3 million in accrued costs, was 32.5% for 1996 which is comparable to
32.8% in 1995.

POLICYHOLDER DIVIDENDS for 1996 were comparable to 1995, a decrease of $5.9
million in 1996 versus a decrease of $5.7 million in 1995. Prior to open
rating, policyholder dividends served both as an economic incentive to employers
for safe operations and as a means of price differentiation. As a result of
consumers' preference for the

<PAGE>

lowest net price at the policy's inception under open rating, dividend paying is
no longer a significant factor in the marketing or selling of workers'
compensation insurance in California.

UNDERWRITING PROFIT from continuing operations decreased $7.2 million to
$4.8 million in 1996 from $12.0 million in 1995. The change in underwriting
results for 1996 is attributable to a $4.7 million increase in underwriting
expense principally due to the cost of canceling the Centre Re contract and a
$2.0 million increase in claims and claim adjustment expense due mainly to prior
accident year adverse development.

NET INVESTMENT INCOME decreased $2 million or 20% in 1996 as compared to
1995. The decrease is attributable to a decrease in the average investable
assets of $11.3 million, and a decline in the average portfolio investment yield
as a result of generally lower market interest rates in 1996 as compared to
1995. See the discussion in LIQUIDITY AND CAPITAL RESOURCES below. The Chase
financing, discussed above, substantially increased the size of the investment
portfolio on which SNIC retains the investment income. However, that
transaction took place too late in 1996 to have a material effect on 1996 net
investment income results.

YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994

Selected financial data as reported for the twelve months ended December 31,
1995 and 1994 are presented below.

TWELVE MONTHS ENDED DECEMBER 31,
--------------------------------
1995 1994
--------------- --------------
(Dollars in thousands)

Gross premiums written $97,084 $134,769
Net premiums written 89,139 105,946
Net premiums earned 89,735 110,418

Claims and claim adjustment expense 53,970 78,761
Underwriting expenses 29,447 21,660
Policyholder dividends (5,742) 4,983

Underwriting profit 12,060 5,014

Net investment income 9,784 9,049

UNDERWRITING RATIOS (GAAP BASIS)
Claims and claim adjustment expense ratio 60.1% 71.3%
Underwriting expense ratio 32.8% 19.7%
Policyholder dividends ratio (6.4)% 4.5%
--------------- --------------
Combined ratio 86.5% 95.5%
--------------- --------------
--------------- --------------

GROSS PREMIUMS WRITTEN decreased $37.7 million or 28% in 1995 from 1994.
The significant decrease in premium production was due to the competitive
effects of the open rating system in California which replaced California's
minimum rate law effective January 1, 1995. In 1995, production measured in
policy counts was 8% higher than the 1994 period, but the estimated annual
premium associated with those policies was down 26%. The Company's strategy is
to continue to focus on profitable operating margins first and market share
second. The Company is making strenuous efforts to increase production, subject
to the constraints of sound underwriting standards, and to reduce the Company's
fixed and semi-fixed expense ratios commensurate with premium levels. Since
1995, the Company has pursued new markets and distribution channels to increase
market share in profitable niches, such as Phoenix, Arizona, which commenced
operations October 1, 1995.

NET PREMIUMS WRITTEN decreased $16.8 million or 16% in 1995 from 1994. The
decrease in net premiums written is reflective of the decrease in gross premiums
written as discussed above, but was partially offset by a

<PAGE>

decrease in ceded premiums of $20.9 million for the twelve months ended December
31, 1995. The decrease in ceded premiums of $20.9 million was related to a
reduction in the ceding rate from 20% in 1994 to 5% in 1995 in the quota-share
contract with ZRC and lower direct premium production in 1995 compared to 1994.

NET PREMIUMS EARNED decreased $20.7 million or 19% in 1995 from 1994. The
decrease in net premiums earned reflects the decrease in net premiums written
described above.

CLAIMS AND CLAIM ADJUSTMENT EXPENSE decreased $24.8 million or 31% in 1995
from 1994. The claims and LAE ratio decreased 11.2 percentage points to 60.1%
in 1995 from 71.3% in 1994. The 1995 claims and LAE include a $2.2 million
decrease in the estimated ultimate claims and LAE on accident years prior to
1995 as a result of continued decreases in the Company's estimates of frequency
and severity of claims incurred for those years. The Company's estimates are
consistent with those of its outside actuaries. This favorable development
provided a 2.5 percentage point improvement in 1995. The remaining decrease of
8.7% in claims and LAE ratio was due to the decline in frequency and severity of
the reporting claims to the Company continued through 1995 accident year.

UNDERWRITING EXPENSES, excluding policyholder dividends, increased $7.8
million or 36% in 1995 from 1994. The increase was primarily due to a $4.5
million decrease in ceding commissions in 1995 from the quota-share contract
with ZRC offset, in part, by a decrease in direct commission expense of $3.0
million due to lower premium production. The remaining increase in underwriting
expenses was due to higher general and administrative expenses in 1995.

POLICYHOLDER DIVIDENDS decreased $10.7 million in 1995 from 1994. The
decrease was primarily due to $5.7 million reduction in the policyholder
dividend accrual in 1995 compared to a policyholder dividend accrual of $5.1
million in 1994.

UNDERWRITING PROFIT from continuing operations increased $7.0 million for
the year ended December 31, 1995. The improvement was primarily due to a $10.5
million increase in underwriting profit attributable to a $4.8 million decrease
in workers' compensation reserves and $5.7 million reduction in policyholder
dividends. In 1995, the Company, based upon internally developed estimates,
decreased workers' compensation reserves by $4.8 million due to continued
favorable loss reserve development on accident years prior to 1995. The
Company's estimates are consistent with reserve estimates of its outside
independent actuaries. Also, in 1995, the Company adjusted its reserves for
policyholder dividends downward by $5.7 million. This was offset by an increase
in underwriting expense of $7.8 million in 1995. The $7.8 million increase in
1995 was primarily due to a $3.0 million decrease in ceding commission as
compared to 1994. Underwriting results for the twelve months ended December 31,
1995, excluding the unusual items discussed earlier, decreased $0.9 million due
primarily to decreased premium production not commensurate with the decrease in
commission and overhead expenses.

NET INVESTMENT INCOME increased $0.7 million or 8.1% for the period ended
December 31, 1995. Of the $0.7 million increase, $0.1 million was attributable
to a 10 basis point increase in the investment yield to 5.70% for the twelve
months of 1995 from 5.60% for the 1994 period. The increase is generally due to
higher investment yields received as a result of general increases in interest
rates during the second half of 1994. The remaining $0.6 million increase
occurred as a result of a 6.3% increase in average investable assets at December
31, 1995 versus December 31, 1994.

<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

Liquidity is a measure of an entity's ability to secure sufficient cash to
fulfill its contractual obligations and operating needs. The Company's cash
inflows are generated from cash collected from policies sold and investment
income generated from its existing portfolio. The Company's cash outflows are
required primarily to pay policyholders' claims, operating expenses, and,
historically, dividend obligations. Generally, premium is collected months or
years before claims are paid under the policies purchased by the premium. These
funds are used first to pay current claims and expenses. The balance is
invested in high quality securities to augment the investment income generated
by the existing portfolio. Beginning in 1995, there has been a negative impact
on cash flows due to several factors, including a decline in premiums as a
result of the open rating system adopted in California effective January 1, 1995
and the continued payments of property and casualty claims. While the Company
monitors its cash flow carefully, it does not view the trend negatively as it
reflects the run-off of claims written on the higher premium volumes that
existed prior to January 1, 1995, the start of open rating. Further, the
Company's open reserves of P&C claims have declined from $40.5 million in
December 1995 to $25.5 million in 1996. In 1996, somewhat off-setting these
factors are the recovery of reinsurance receivables under the 1991 Centre Re
contract, but such receivables have now been purchased by SNIG and pledged as
collateral to Chase . Additionally, as a result of a pay down of its workers'
compensation claims and claim adjustment expense, the Company expects the DOI to
release approximately $20 million in excess assets currently pledged to secure
future workers' compensation claims. Subsequent to the release of the excess
assets, additional funds will be available for any working capital needs of the
Company. Furthermore, the Chase financing described above has had a positive
impact on liquidity and is anticipated to have a positive impact on investment
income in future periods, although realization of additional income is not
assured.

For its insurance operations, SNIC must have available cash and liquid
assets to meet its obligations to policyholders and claimants in accordance with
contractual obligations in addition to meeting its ordinary operating costs. It
is management's opinion that its present cash resources, with the addition of
$44 million in additional bank debt and $18 million in equity anticipated in
connection with the PRIM acquisition, are sufficient to meet the needs of the
Company, including after the acquisition of PRIM.

After the closing of the PRIM acquisition, should it be completed, the
Company may seek to boost the statutory capital of SNIC in order to pursue new
business opportunities. On February 4, 1997, the Company announced the signing
of a non-binding letter of intent to complete a private placement of Common
Stock with Insurance Partners, L.P. ("IP Delaware") and Insurance Partners
Offshore (Bermuda), L.P. ("IP Bermuda," and with IP Delaware, "IP"), parties
providing the bulk of the equity investment in the PRIM transaction, of up to
$32.5 million, at a price of $11.775 per share, and to issue rights to purchase
Common Stock to shareholders and warrant holders of record as of the close of
business on February 4, 1997 in order to raise a matching amount of capital of
up to $32.5 million, in which rights offering IP would act as standby purchaser.
The letter of intent contemplated that the funds would be used by the Company to
participate in the rehabilitation of Golden Eagle Insurance Company. However,
after the Company determined it would not participate in the rehabilitation, at
least in the near term, it requested that IP keep the letter of intent in place
should the Company desire to raise additional capital following the closing of
the PRIM transaction, so as to provide the Company added financing flexibility.
Additional capital could help the Company better compete in the turbulent market
in California for provision of workers' compensation insurance, better position
the Company with respect to review by insurance rating agencies, and permit
growth in premium volume. The additional capital needs of the Company, if any,
have yet to be determined and any transaction may be delayed to better gauge the
business opportunities generated by the PRIM transaction and the reaction of
rating agencies to the combination of the companies. Before proceeding with any
transaction with IP under the letter of intent, the Board of Directors will
consult with financial advisors as to fairness and, if necessary, based upon the
number of shares to be issued and other factors, will seek shareholder approval
to issue additional stock. To the extent consistent with the fiduciary duties
of the Board of Directors, the Company has indicated to IP that it would offer
IP the first opportunity to provide additional capital under the terms of the
letter of intent, should the need for additional capital arise. The issuance of
rights to purchase Common Stock, if it occurs, would be subject

<PAGE>

to registration with the SEC under the Securities Act. Any offering of rights,
if made, would be made only by means of a prospectus.

The effect of inflation on the revenues and net income of SNIG and SNIC
during all three periods discussed below was not significant.

YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995

The Company believes that it has adequate short-term investments and
readily marketable investment grade securities to cover both claim payments and
expenses. As of December 31, 1996, the Company had total cash, cash equivalents
and investments of $149.4 million. This amount includes $1.45 million in
restricted investments. The Company's remaining invested assets were comprised
of $46.3 million in bonds and notes, held at market value; $1.2 million in
equity securities; and $100.5 million in cash and invested cash, including
certificates of deposit with maturities less than one year and money market
deposits. It is management's belief that the liquidity of these investments is
sufficient to meet the Company's obligations and liabilities through December
31, 1997.

The Company used $14.9 million in cash from operating activities for the
year ended December 31, 1996 compared to $23.8 million during the year ended
December 31, 1995. The improved cash flow from operations was primarily the
result of lower claim and claim adjustment expense payments and policyholder
dividends. This positively impacts liquidity and investment income in future
periods. See OVERVIEW.

Early in 1995, SNIC entered into a reverse repurchase facility with a
national securities brokerage firm ("broker") that allows SNIC to engage in up
to $5 million in reverse repurchase transactions secured either by U.S. Treasury
instruments or U.S. Agency debt. This arrangement provides SNIC with additional
short-term liquidity. Under the facility, SNIC contacts the broker and
indicates the size of the reverse repurchase transaction desired, and the nature
of the security SNIC proposes to "sell" to the broker. Based upon the
characteristics of the security, the broker indicates at what price it will
purchase the security and what rate they will sell the security back to SNIC in
30 days. SNIC then transfers the security to the broker in exchange for the
agreed-upon proceeds. SNIC repurchases the security from the broker at a later
date at a previously agreed-upon price. SNIC may roll over any reverse
repurchase transaction, and the transaction is repriced at the time of roll
over. This type of financing allows SNIC a great deal of flexibility to manage
short-term investments, avoiding the unnecessary realization of losses to
satisfy short-term cash needs. Further, this method of financing is relatively
inexpensive as compared to bank debt. Reverse repurchase transactions are
viewed as short-term financing both by the DOI and current accounting
literature. As of December 31, 1996, SNIC had no obligation outstanding under
this facility. Historically, for long-term financing, the Company required
borrowings in order to meet its obligations.

Because SNIG depends primarily on dividends from its insurance subsidiary
for its net cash flow requirements, absent other sources of cash flow, SNIG
cannot pay dividends materially in excess of the amount of dividends that could
be paid by SNIC to SNIG. Insurance companies are also subject to restrictions
affecting the amount of shareholder dividends and advances that may be paid
within any one year without the prior approval of the DOI. The California
Insurance Code provides that amounts may be paid as dividends on an annual
noncumulative basis (generally based on the greater of (1) net income for the
preceding year or (2) 10% of statutory surplus as regards policyholders as of
the preceding December 31) without prior notice to, or approval by, the DOI. No
cash dividends were paid in 1996 and 1995.

SNIC is a party to various leases principally associated with the Company's
home and branch office space. Such leases contain provisions for scheduled
lease charges and escalations in base rent over the lease term. The Company's
minimum commitment with respect to these leases in 1997 is approximately $1.9
million. These leases expire from 1997 to 2001. See Note 12 to the
Consolidated Financial Statements.

Excluding the Company's commitment to acquire PRIM, the Company has no
significant cash commitments beyond its obligations to pay claims, ceded
reinsurance premiums, lease expenses and the Company's commitments to pay
principal and interest on the bank debt.

<PAGE>

Effective June 30, 1994, the Company entered into a $10 million term loan
agreement (the "1994 Loan") with Imperial Bank, which was used to retire
subordinated notes issued during 1992. This term loan is to be fully amortized
over seven years with quarterly payments of $300,000 plus interest per quarter
for years one and two, $350,000 plus interest per quarter for years three and
four, and $400,000 plus interest per quarter for years five, six and seven.
Effective July 1, 1995, the borrowing rate was changed from Imperial Bank's
prime rate plus one half percent to a fixed rate of 8% per annum. Additionally,
under the amended terms of the 1994 Loan, the Company could not prepay the Loan
until July 1, 1996. At such time, the Loan may be prepaid based upon an agreed
upon premium which varies by year. The premium for 1997 is 3.5%; 1998 is 2.5%;
1999 is 1%; and 2000 is none.

The Company must adhere to certain requirements and provisions to be in
compliance with the terms of the Imperial Bank notes. The provisions require
SNIC to maintain certain financial ratios and SNIG to maintain Imperial Bank
certificates of deposit in an amount equal to 20% of SNIG's outstanding balance
under the 1994 Loan. At December 31, 1996, the Imperial Bank certificates of
deposit were $1.5 million, all of which was restricted. The Company is in
compliance with all loan covenants as of December 31, 1996.

YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994

As of December 31, 1995, the Company had total cash, cash equivalents, and
investments of $163.9 million. Included in these amounts is an aggregate of
$114.9 million in funds withheld from Centre Re. As of December 31, 1995, the
Company's investment balances were comprised of $42.1 million in bonds and notes
available-for-sale, $.7 million in common equity securities, $114.9 million in
funds withheld from reinsurers and $6.3 million in cash and invested cash,
including certificates of deposit with maturities of less than one year and
money market deposits.

The Company used $23.8 million in cash from operating activities for the
twelve months ended December 31, 1995 compared to cash generated of $6.2 million
for the comparable period of the prior year. The $30.0 million decline in cash
from operating activities was primarily due to $23.1 million decrease in
premiums received net of reinsurance in 1995.

The Company (used) generated ($1.2) million and $21.6 million in cash from
financing activities in 1995 and 1994, respectively. The use of cash in 1995
was related to the principal paydown of the bank term loan. The cash generated
by financing activities in 1994 was funded principally by the sales of preferred
securities ($18.0 million) and warrants to affiliates of Centre Re ($2.0
million), and the net proceeds of refinancing the Company's 1992 Notes with bank
debt ($2.1 million).

Net cash provided by investing activities was $28.8 million in 1995 which
was used to fund the Company's operations. In 1994 net cash used in investing
activities in 1994 was primarily due to the purchase of short-term investments
with funds obtained from the sale of the preferred securities and warrants
described above.

TAXES

As of December 31, 1996, the Company had available $86.1 million in NOLs to
offset taxable income recognized by the Company in periods after December 31,
1996. For federal income tax purposes, these NOLs will expire in material
amounts beginning in the year 2006. If the issuance of 2,390,438 shares of
Common Stock to IP and the other purchasers is completed, any additional 5%
shift of ownership in the Company may result in a "change of ownership" under
Section 382 of the Code, and severely limit the Company's ability to utilize
NOLs. In order to issue the new stock and complete the PRIM acquisition, the
Company must obtain shareholder approval of a charter amendment that would
prohibit 5% owners of the Company's Common Stock (including holders of options
and warrants) from acquiring additional stock and prohibit any additional person
or entity from becoming a 5% holder of Common Stock. The prohibition against 5%
changes in ownership would expire three years after the closing of the PRIM
acquisition, which is expected to occur in April 1997. The Company would also
reincorporate in Delaware, in part to better implement the charter amendment.

<PAGE>

ACCOUNTING STANDARD ADOPTED

In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard 123, "Accounting for Stock-Based Compensation"
("SFAS 123"), which establishes financial accounting and reporting standards for
stock-based employee compensation plans. SFAS 123 is effective for fiscal year
beginning in 1996. The Company has adopted the disclosure method of accounting
for SFAS 123. SFAS 123 will not have a material impact on the consolidated
financial statements.

<PAGE>

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

Information is set forth below concerning the directors of the Company, and
the year in which each director was first elected as a director of the Company.

NAME AGE POSITION WITH THE COMPANY DIRECTOR
SINCE
- ------------------------- --- ----------------------------- --------
Steven D. Germain (2) 43 Director 1995

Thomas J. Jamieson (1)(3) 54 Director 1985

Gordon E. Noble (2) 68 Director 1990

C. Len Pecchenino (1) 69 Director 1988

Craig F. Schwarberg (1)(3) 41 Director 1992

Robert A. Spass 41 Director 1992

Bradley E. Cooper (2)(3) 30 Director 1992

William Gentz 56 President, Chief Executive 1994
Officer and Director

J. Chris Seaman (3) 42 Executive Vice President, Chief 1993
Financial Officer and Director

- ---------------
(1) Member of Audit Committee
(2) Member of Compensation Committee
(3) Member of Investment Committee

No arrangement or understanding exists between any director and any other
person pursuant to which any director holds such position. None of the
directors has any family relationship to any other director or executive officer
of the Company.

STEVEN D. GERMAIN was elected to the Company's Board of Directors in
April 1995. From 1988 to 1994 he served as General Counsel to the Centre
Reinsurance Group of Companies. Since 1994 he has served as Managing Director
of Centre ReSource Limited, a company that provides management services to the
Centre Reinsurance Group of Companies. Mr. Germain continues to serve as a
director and as Senior Vice President, General Counsel and Secretary to Centre
Re and as a director, Senior Vice President and Secretary of CentreLine. Mr.
Germain is also a director, President and Chief Executive Officer of Home
Holdings, Inc. and a director of certain of its subsidiaries.

THOMAS J. JAMIESON has been a director of the Company since December 1985.
Since 1971, he has served as President of Jaco Oil Company. He is also active
as an independent investor. Mr. Jamieson has been a director of Berry Oil Co.
since 1993.

GORDON E. NOBLE became a director of the Company in October 1990. Since
July 1990, he has been Chairman and Chief Executive Officer of Commodore
Insurance Services. From January 1986 to January 1989, Mr. Noble served as
Executive Vice President and as a director and member of the Executive Committee
of Sedgwick James, an international insurance brokerage and risk management
firm.

C. LEN PECCHENINO became a director of the Company in May 1988 and was
elected as Chairman in June 1994. He served as the Company's Chief Executive
Officer from September 1991 to February 1992 and as the President and Chief
Executive Officer from February 1994 to May 1994. He also served as the
Chairman from

38
<PAGE>

September 1991 to August 1992. Mr. Pecchenino was President and Chief Operating
Officer of IC Industries, Inc. from November 1985 until he retired in 1986.
From 1984 to November 1985, he was President and Chief Executive Officer of
Pneumo Corporation, which was acquired by IC Industries in October 1984. Prior
to 1984, he was Executive Vice President of Pneumo Corporation. IC Industries
and Pneumo Corporation operated a number of companies in various industries,
including manufacturing, aerospace and retailing.

CRAIG F. SCHWARBERG was appointed to the Board of Directors in March 1992.
From 1991 to the present, Mr. Schwarberg has worked for International Insurance
Advisors, Inc. ("IIA"), serving as a Managing Director through February 1994.
From 1994 to March 1996, Mr. Schwarberg was a director and Chairman of the Board
of NACOLAH Holding Corporation. From 1983 to 1990, he was associated with
Lehman Brothers, a division of Shearson Lehman Brothers Inc. He was an
associate from 1983 to 1986, Vice President from 1986 to 1990 and Senior Vice
President during 1990.

ROBERT A. SPASS was appointed to the Board of Directors in March 1992.
Since 1990, Mr. Spass has served as President and Chief Executive Officer, and a
director, of IIA. From 1994 to the present, Mr. Spass has been a Managing
Partner of Insurance Partners Advisors, L.P. and a director of Unionamerica
Holdings plc, and from 1994 to March 1996 was a director of NACOLAH Holding
Corporation. Since January 1996, he has served as a director of Highlands
Insurance Group, Inc. From 1984 to 1990, Mr. Spass was associated with Salomon
Brothers Inc, where he was an associate from 1984 to 1985, Vice President from
1985 to 1988, and a director from 1988 to 1990. Mr. Spass has served from 1991
to 1995 as a director of Home Holdings, Inc., the parent company to The Home
Insurance Company. From 1990 to 1996 he served as a director of National
Reinsurance Holdings Corp., the holding company for National Reinsurance Corp.
In both these director positions he serves as the designee of III pursuant to
separate shareholder agreements.

BRADLEY E. COOPER became a director of the Company in May 1992. From 1988
to 1990, Mr. Cooper was an analyst at Salomon Brothers Inc. From May 1990 to
February 1994, Mr. Cooper served as Vice President of IIA. From 1994 to the
present, Mr. Cooper has been a Principal of Insurance Partners Advisors, L.P.
Since January 1996, he has served as a director of Highlands Insurance Group,
Inc.

WILLIAM GENTZ became a director of the Company in June 1994. Mr. Gentz has
held the position of President and Chief Executive Officer since mid-1994. Mr.
Gentz joined the Company after seventeen years at Zenith Insurance Company where
he was responsible for marketing, underwriting, loss control, and field
operations for Zenith's workers' compensation operations. Mr. Gentz began his
insurance career in 1958, and from 1958 to 1968 worked in the marketing and
underwriting departments of a variety of insurance companies in the mid-west and
California.

J. CHRIS SEAMAN became a director of the Company in March 1993. Mr. Seaman
has held the positions of Executive Vice President since February 1995 and Chief
Financial Officer since July 1991. Prior to joining the Company, Mr. Seaman was
the CFO of a private company engaged in insurance company acquisitions following
ten years with Ernst & Whinney. Mr. Seaman previously held staff and management
positions at Industrial Indemnity Insurance Company and Allianz of America
Corporation, respectively.

39
<PAGE>

EXECUTIVE OFFICERS

Set forth in the table below are the names, ages and current offices held
by all executive officers of the Company and SNIC. Unless specifically noted,
the positions named are held at both the Company and at SNIC.

NAME AGE POSITION WITH THE COMPANY EXECUTIVE OFFICER
- ---- --- ------------------------- SINCE
-----

William L. Gentz 56 President and Chief Executive Officer 1994
J. Chris Seaman 42 Executive Vice President and 1991
Chief Financial Officer
Arnold J. Senter 54 Executive Vice President and 1997
Chief Operating Officer
Joseph P. Wolonsky 50 Senior Vice President 1989
Thomas I. Boggs, Jr. 50 Senior Vice-President- 1995
Underwriting, SNIC
Karl O. Johnson 65 Senior Vice President, SNIC 1989
Douglas R. Roche 57 Senior Vice President 1990
Robert E. Nagle 48 Senior Vice President, General 1996
Counsel and Secretary
James L. Cinney 56 Senior Vice President, SNIC 1994
Matthew Natalizio 41 Vice President 1994
Sue A. Binder 49 Vice President, SNIC 1992
Harold J. Fedora 46 Vice President, SNIC 1993
Curtis H. Carson 36 Vice President, SNIC 1997
Jack W. Solomon 63 Resident Vice President, SNIC 1991
Robert J. Niebur 61 Resident Vice President, SNIC 1995

Executive officers of the Company are elected by and serve at the
discretion of the Board. No arrangement exists between any executive officer
and any other person or persons pursuant to which any executive officer was or
is to be selected as an executive officer. None of the executive officers has
any family relationship to any nominee for director or to any other executive
officer of the Company. Set forth below is a brief description of the business
experience for the previous five years of all of the executive officers.

WILLIAM L. GENTZ has held the position of President and Chief Executive Officer
since mid-1994. Mr. Gentz joined the Company after seventeen years at Zenith
Insurance Company where he was responsible for marketing, underwriting, loss
control, and field operations for Zenith's workers' compensation operations.
Mr. Gentz began his insurance career in 1958, and from 1958 to 1968 worked in
the marketing and underwriting departments of a variety of insurance companies
in the mid-west and California.

J. CHRIS SEAMAN has held the positions of Executive Vice President since
February 1995 and Chief Financial Officer since July 1991, and has served as a
director of the Company since March 1993. Prior to joining the Company, Mr.
Seaman was the CFO of a private company engaged in insurance company
acquisitions following ten years with Ernst & Whinney. Mr. Seaman previously
held staff and management positions at Industrial Indemnity Insurance Company
and Allianz of America Corporation, respectively.

ARNOLD J. SENTER has held the position of Executive Vice President and Chief
Operating Officer since February 1997. Prior to joining the Company, Mr. Senter
most recently served as Senior Vice President, Southwest and Southeast
Operations, at Zenith National Insurance Company, and had previously held
various operational positions in nearly every functional area for Zenith since
1981. Mr. Senter has 30 years experience with both regional and national
carriers.

JOSEPH P. WOLONSKY has held the position of Senior Vice President and General
Counsel from 1989 to December 1995, and was appointed to the position of Chief
Claims Officer in December of 1992. Prior to joining the Company, Mr. Wolonsky
had 12 years of insurance industry experience as General Counsel to a national
credit life and accident and health general agency, and served as General
Counsel to the Insurance Division of Borg-Warner Corporation.

40
<PAGE>

THOMAS I. BOGGS, JR. was appointed Senior Vice President of Workers'
Compensation Underwriting of SNIC effective March 1995. Previously he was
Assistant Vice President of Fremont Compensation Insurance Company, and held
various underwriting and marketing positions at Fireman's Fund Insurance
Company, Cypress Insurance Company, Industrial Indemnity Insurance Company, and
Safeco.

KARL O. JOHNSON has been responsible for SNIC's Central California Operations
since 1989. He was promoted to Senior Vice President in 1994. Mr. Johnson has
served with various insurance organizations in loss control and marketing
capacities since 1955; he joined the Company in 1987.

DOUGLAS R. ROCHE was appointed Senior Vice President - Management Information
Systems in 1994, prior to which he served as Vice President of Internal
Operations from the time he joined the Company in 1990. From 1987 to 1990, Mr.
Roche sold software and provided systems consulting services to the insurance
industry. From 1969 to 1987 he held a variety of management positions in
various insurance companies' systems analysis operations.

ROBERT E. NAGLE has held the position of Senior Vice President, General Counsel
and Secretary since January 1996. From 1986 until he joined the Company, Mr.
Nagle was corporate counsel and senior corporate counsel for Farmers Group, Inc.

JAMES L. CINNEY has held the position of Senior Vice President - Loss Control of
SNIC since 1994. Before joining the Company, Mr. Cinney was self-employed in
the hospitality industry for one year. Prior to that, he was Vice President,
responsible for Loss Control, at Industrial Indemnity Insurance Company. Mr.
Cinney has 30 years of workers' compensation loss control experience in a
variety of staff and management positions with Industrial Indemnity Insurance
Company, Zenith Insurance Company, Employee Benefits Insurance Company, and
Hanover Cal/Comp Insurance Company.

MATTHEW NATALIZIO has held the position of Vice President - Finance and
Treasurer since 1994. From 1988 until he joined the Company, Mr. Natalizio was
employed by KPMG Peat Marwick LLP.

SUE A. BINDER has held the position of Home Office Claims Manager of SNIC since
1991 and was made a Vice President in 1992. Prior to 1991, Ms. Binder held a
variety of claims department staff and management positions at Fremont Indemnity
Company where she had been employed since 1977.

HAROLD J. FEDORA, JR. has held the position of Vice President - Claims Services
of SNIC since 1993, prior to which he was Calabasas Branch Claims Manager. From
1975 to 1987 Mr. Fedora was employed at several insurance companies in various
claims department staff and management positions.

CURTIS H. CARSON has held the position of Vice President Human Resources since
January 1997. From 1984 until he joined the Company, Mr. Carson was employed by
Farmers Insurance, most recently as Manager Human Resources.

JACK W. SOLOMON has held the position of Vice President of SNIC and Phoenix
Manager since 1995 and was the Sacramento Branch Manager from 1990 until 1995.
Prior to joining the Company, Mr. Solomon had 30 years experience in workers'
compensation underwriting, marketing, and executive level management in a
variety of insurance companies, principally in the mid-west.

ROBERT J. NIEBUR became Resident Vice President of SNIC, in charge of the South
San Francisco branch in July, 1995. Prior to joining the Company, he was
Workers' Compensation Manager for Flinn, Gray & Herterich, an insurance
brokerage, from 1994 to 1995, and operated his own insurance consulting business
from 1993 to 1994. For three years prior to that, Mr. Niebur was an operating
executive with Great States Insurance Company and, earlier, he held various
staff and executive positions over eleven years with Zenith Insurance Company.

41
<PAGE>

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Exchange Act ("Section 16(a)") requires the Company's
Directors and certain of its officers, and persons who own more than ten percent
of a registered class of the Company's equity securities (collectively,
"Insiders"), to file reports of ownership and changes in ownership with the SEC.
Insiders are required by SEC regulations to furnish the Company with copies of
all Section 16(a) forms they file.

Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons that no Forms 5s were
required for those persons, the Company believes that its Insiders complied with
all applicable Section 16(a) filing requirements for fiscal 1996, with the
exception of (i) Douglas R. Roche, an executive officer of the Company, who
filed a late Form 4 in November 1996 to report his purchase in July 1996 of
shares of Common Stock, (ii) Matthew Natalizio, an executive officer of the
Company, who filed a Form 5 in February 1997 to report the granting to him in
May 1996 of shares of restricted stock under the Company's 1995 Plan (as
hereafter defined), which grant was not timely reported on a Form 4, and (iii)
TJS Partners, L.P., a direct ten percent beneficial owner of Common Stock, and
Thomas J. Salvatore, TJS Management, L.P., and TJS Corporation, the indirect
beneficial owners of all securities held by TJS, each of which filed a late Form
4 in July 1996 to report five separate purchases of shares of Common Stock by
TJS in April and May 1996.

42
<PAGE>

ITEM 11. EXECUTIVE COMPENSATION

The following table sets forth certain information concerning the
compensation for services in all capacities to the Company for the fiscal years
ended December 31, 1996, December 31, 1995 and December 31, 1994, of those
persons who were, at December 31, 1996, (i) the chief executive officer and
(ii) the other four most highly compensated executive officers of the Company.

SUMMARY COMPENSATION TABLE

LONG TERM COMPENSATION
---------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
--------------------------------- ------------ --------- --------
NAME AND PRINCIPAL POSITION YEAR SALARY(1) BONUS(2) OTHER RESTRICTED SECURITIES LTIP ALL OTHER
ANNUAL STOCK UNDERLYING PAYOUTS COMPEN-
COMPEN- AWARDS OPTIONS/ (#) SATION
SATION ($)(3) SARS(#) ($)(4)
($)
- ---------------------------- ---- ------- --------- -------- ---------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>

William L. Gentz (5) 1996 $ 298,300 $ - - $46,874 (6) 17,875 -- 2,250
President and Chief 1995 294,508 203,500 - 53,690 19,175 -- 2,250
Executive Officer 1994 168,755 100,000 - 31,250 - --

J. Chris Seaman 1996 235,298 - -- 36,223 (7) 13,813 -- 2,250
Executive Vice President 1995 215,600 128,500 -- 40,170 39,325 -- 2,250
and Chief Financial Officer 1994 173,690 75,000 -- -- -- -- 2,250

Joseph P. Wolonsky 1996 168,974 - -- 21,306 (8) 8,125 -- 2,250
Senior Vice President 1995 163,700 53,500 -- 24,700 20,050 -- 2,250
and Corporate Counsel 1994 145,200 30,000 -- -- -- -- 2,250

Karl O. Johnson 1996 143,974 - -- 21,306 (9) 8,125 -- 2,007
Senior Vice President 1995 135,200 27,000 -- 16,900 17,300 -- 2,250
1994 131,108 27,000 -- -- -- -- 2,250

Thomas I. Boggs, Jr.(10) 1996 155,800 - -- 21,306 (11) 8,125 -- 2,163
Senior Vice President 1995 115,917 7,000 -- 13,000 12,150 -- 1,098

1994 - - -- -- -- -- --
</TABLE>

- --------------
(1) The amounts set forth for fiscal year 1996 include salary and other cash
compensation paid in that year, other than amounts listed in the column
entitled "Bonus."
(2) Bonus amounts represent cash payments and are presented in the year in
which they are earned, although payment typically is made in March of the
subsequent year. Bonus amounts for fiscal year 1996 have not yet been
declared.
(3) Represents the fair market value of the underlying shares on the date of
grant.
(4) Other than as specifically noted, represents the employer's contribution
under the Company's 401(k) Plan.
(5) Mr. Furman K. Stanley resigned as President, Chief Executive Officer and
director of the Company in February 1994. Mr. Pecchenino served as interim
President, Chief Executive Officer and Chairman from February 1994 until
Mr. Gentz's appointment to those positions in June 1994. During his
tenure, Mr. Pecchenino received a total of $136,858 in cash compensation,
with no bonus, long term compensation or other compensation earned or paid.
Mr. Pecchenino was re-appointed as Chairman in June 1994 and continues to
serve in that capacity.
(6) Represents a grant of 9,625 shares of restricted stock that vests in nine
equal annual increments following the date of grant. As of December 31,
1996, Mr. Gentz held an aggregate of 19,950 shares of restricted stock
valued at $254,363, based upon the $12.75 per share fair market value of
the Common Stock on such date.

43
<PAGE>

(7) Represents a grant of 7,438 shares of restricted stock that vests in nine
equal annual increments following the date of grant. As of December 31,
1996, Mr. Seaman held an aggregate of 15,163 shares of restricted stock
valued at $193,328, based upon the $12.75 per share fair market value of
the Common Stock on such date.
(8) Represents a grant of 4,375 shares of restricted stock that vests in nine
equal annual increments following the date of grant. As of December 31,
1996, Mr. Wolonsky held an aggregate of 9,125 shares of restricted stock
valued at $116,344, based upon the $12.75 per share fair market value of
the Common Stock on such date.
(9) Represents a grant of 4,375 shares of restricted stock that vests in nine
equal annual increments following the date of grant. As of December 31,
1996, Mr. Johnson held an aggregate of 7,625 shares of restricted stock
valued at $97,219, based upon the $12.75 per share fair market value of the
Common Stock on such date.
(10) Mr. Boggs began his employment with the Company in March 1995.
(11) Represents a grant of 4,375 shares of restricted stock that vests in nine
equal annual increments following the date of grant. As of December 31,
1996, Mr. Boggs held an aggregate of 6,875 shares of restricted stock
valued at $87,656, based upon the $12.75 per share fair market value of the
Common Stock on such date.

EMPLOYMENT AGREEMENTS

The Company has in effect employment agreements with the following
officers:

(1) William L. Gentz, President and Chief Executive Officer. Mr. Gentz's
agreement expires on June 1, 1997, but is subject to automatic renewal
in one-year increments unless notification of non-renewal is given
sixty days prior to the expiration of the then-current term. His
salary was set as of June 1, 1994 at $275,000 annually, plus benefits
and incidentals generally provided to officers of the Company, and is
thereafter as determined by the Board. Mr. Gentz's annual salary was
increased to $287,500 effective August 1, 1995. If Mr. Gentz's
employment is terminated by the Company other than for cause, he is
entitled to payments of his salary and benefits for the then-remaining
term of his agreement. In the event of a change in control of the
Company, Mr. Gentz would be deemed terminated without cause and his
employment agreement would be deemed to have a three-year remaining
term.

(2) Matthew Natalizio, Vice President, Finance and Treasurer.
Mr. Natalizio's agreement is open-ended. His compensation and
benefits are determined by the Board. If Mr. Natalizio's employment
is terminated by the Company other than for cause, he is entitled to
payments of his salary and benefits for one year from the date of the
termination. Mr. Natalizio's agreement does not provide any special
rights in the event of a change in control.

(3) Arnold J. Senter, Executive Vice President and Chief Operating
Officer. Mr. Senter's agreement expires on February 17, 2000, but is
subject to automatic renewal in one-year increments unless
notification of non-renewal is given sixty days prior to the
expiration of the then-current term. His salary was set as of
February 17, 1997 at $200,000 annually, plus benefits and incidentals
generally provided to officers of the Company, and is thereafter as
determined by the Board. If Mr. Senter's employment is terminated by
the Company other than for cause, he is entitled to payments of his
salary and benefits for the then-remaining term of his agreement. In
the event of a change in control of the Company, Mr. Senter would be
deemed terminated without cause and his employment agreement would be
deemed to have a three-year remaining term.

44
<PAGE>

CHANGE-IN-CONTROL ARRANGEMENTS

In addition to the rights described above with respect to Mr. Gentz and Mr.
Senter, the only change-in-control arrangement in place is in connection with
the Company's stock incentives. Under the terms of the 1986 Non-Statutory Stock
Option and 1986 Non-Statutory Stock Purchase Plan (the "1986 Plan"), upon a
change of control of the Company, unless replacement options to purchase stock
in the new or recapitalized entity are offered, all option holders will have
thirty days to exercise their outstanding options, excluding those that have
then not yet vested. Under the terms of the 1995 Stock Incentive Plan (the
"1995 Plan"), under similar circumstances, the Option Committee of the Board of
Directors (the "Option Committee") may, in its discretion, allow each person
holding an option or restricted stock who did not receive a replacement equity
incentive grant to exercise that option without regard to its vesting
provisions, or to retain that restricted stock without regard to the Company's
repurchase right, as applicable.

EQUITY INCENTIVE GRANTS

Key employees, including directors who are key employees, chosen by the
Compensation Committee (which acts as the Option Committee under the terms of
the 1986 Plan and 1995 Plan) are eligible to participate in the 1995 Plan.

Under the 1995 Plan, officers and key employees of the Company or its
subsidiaries may be granted options to purchase shares of Common Stock or they
may be given the opportunity to purchase restricted stock of the Company. The
1995 Plan permits the granting both of options that qualify for treatment as
incentive stock options ("Incentive Stock Options") under Section 422 of the
Code, and options that do not qualify as Incentive Stock Options ("Nonqualified
Stock Options").

In 1986, the Company adopted the 1986 Plan, which allowed the Company to
issue to employees of the Company and its subsidiaries Nonqualified Stock
Options and rights to purchase Common Stock. The purchase right aspect of the
1986 Plan was terminated by the Board of Directors in 1989. Following the
adoption of the 1995 Plan, the Board of Directors determined to make no further
grants pursuant to the 1986 Plan.

OPTION GRANTS IN LAST FISCAL YEAR

The following table sets forth information concerning options granted
during fiscal 1996 to each of the executive officers named in the Summary
Compensation Table set forth above under "Executive Compensation."

INDIVIDUAL GRANTS
--------------------------------------------------------------
NAME NUMBER OF % OF TOTAL EXERCISE OR EXPIRATION POTENTIAL REALIZABLE VALUE AT
SECURITIES OPTIONS/ BASE PRICE DATE ASSUMED ANNUAL RATES OF STOCK
UNDERLYING SARS GRANTED TO ($/SH)(1) PRICE APPRECIATION
OPTIONS/SARS EMPLOYEES IN FOR OPTION TERM
GRANTED FISCAL YEAR
(#) -----------------------------------
0%(2) 5% ($)(3) 10% ($)(3)
- ------------------------- --------------- --------------- ------------ ----------- ------ --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>

William L. Gentz 17,875(4) 12.0 4.87 3/01/06 0 54,746 138,738

J. Chris Seaman 13,813(4) 9.3 4.87 3/01/06 0 42,306 107,210

Joseph P. Wolonsky 8,125(4) 5.5 4.87 3/01/06 0 24,884 63,062

Karl O. Johnson 8,125(4) 5.5 4.87 3/01/06 0 24,884 63,062

Thomas I. Boggs, Jr. 8,125(4) 5.5 4.87 3/01/06 0 24,884 63,062

</TABLE>

- ---------------
(1) Represents the fair market value of the underlying shares of Common Stock
at the time of the grant.
(2) Unless the stock price increases, which will benefit all shareholders
commensurately, an option holder will realize no gain.

45
<PAGE>

(3) Represents the value of the shares of Common Stock issuable upon the
exercise of the option, assuming the stated rates of price appreciation for
ten years, compounded annually, with the aggregate exercise price deducted
from the final appreciated value. The 5% and 10% rates are established by
the SEC as examples only and are not intended to forecast future
appreciation in the Company's stock price.
(4) Represents a ten-year, incentive stock option grant, vesting at a rate of
20% per year for five years from the date of grant, granted pursuant to the
1995 Plan.

OPTION EXERCISES AND YEAR END VALUE

The following table sets forth information concerning the aggregate number
of options exercised during fiscal 1996 by each of the executive officers named
in the Summary Compensation Table set forth above under "Executive
Compensation," and outstanding options held by each such officer as of
December 31, 1996.
<TABLE>
<CAPTION>

NUMBER OF
SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS/ IN-THE-MONEY OPTIONS/SARS
SARS AT AT
FISCAL YEAR-END(#) FISCAL YEAR-END(1)
------------------ -----------------------
NAME SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
ON EXERCISE(#) REALIZED($) UNEXERCISABLE UNEXERCISABLE
- ------------------------------- --------------- ----------- ------------------ -----------------------
<S> <C> <C> <C> <C>

William Gentz -- -- 16,335/51,965 $ 123,329/$398,235

J. Chris Seaman -- -- 37,065/31,073 290,880/246,119

Joseph P. Wolonsky -- -- 19,260/18,915 152,913/149,990

Karl O. Johnson -- -- 14,060/21,365 113,473/168,667

Thomas I. Boggs, Jr. -- -- 2,430/17,845 18,347/137,411

</TABLE>

- ---------------
(1) Uses a fair market value at December 31, 1996 of $12.75 per share, with the
aggregate exercise price deducted from the total value of the stock
underlying the options.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Compensation Committee during the fiscal year ended December 31, 1996
consisted of Messrs. Noble, Cooper and Germain, each of whom was a non-employee
director. Mr. Cooper is an employee and beneficial owner of less than one
percent of the equity securities of IIA, which was paid in excess of $60,000 by
the Company in fiscal 1996 for investment banking and financial consulting
services. Mr. Germain is an officer and a director of Centre Re, which was
involved in several transactions with the Company during 1996 involving payments
in excess of $60,000. See "Certain Relationships and Related Transactions."

During fiscal 1996, no officers participated in deliberations of the
Company's Compensation Committee concerning executive officer compensation,
except William Gentz, the Company's Chief Executive Officer.

REPORT OF THE COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS

The Compensation Committee of the Board was comprised of Messrs. Noble,
Cooper and Germain during 1996. The Compensation Committee establishes the
general compensation policies of the Company, establishes the compensation plans
and specific compensation levels for executive officers, and administers the
1986 Plan and the 1995 Plan.

46
<PAGE>

As required by rules designated to enhance the disclosure of the Company's
executive compensation policies and practices, the following is the Compensation
Committee's report submitted to the Board addressing the compensation of the
Company's executive officers for fiscal 1996.

The Compensation Committee of the Board of Directors establishes the
general compensation policies of the Company, establishes the compensation
plans, establishes the specific compensation of Mr. William Gentz, the Company's
Chief Executive Officer, reviews the Chief Executive Officer's recommendations
as to the specific compensation levels for the other executive officers, and
administers the Company's stock incentive plans.

COMPENSATION POLICY AND PROGRAMS. The Compensation Committee's
responsibility is to provide a strong and direct link among shareholder values,
Company performance, and executive compensation through its oversight of the
design and implementation of a sound compensation program that will attract and
retain highly qualified personnel. Compensation programs are intended to
complement the Company's short and long-term business objectives and to focus
executive efforts on the fulfillment of these objectives.

The Compensation Committee, consistent with its standing policy, has
conducted a full review of the Company's executive compensation program and will
repeat this review as it deems necessary. Advisors with expertise in executive
compensation matters are consulted regularly by the Compensation Committee. It
is the Compensation Committee's practice to establish target levels of
compensation for senior officers consistent with that of companies comparable in
size and complexity to the Company, as well as companies that are direct
business competitors of the Company. After considerable review of extensive
data relating to aspects of compensation paid by such groups of companies,
actual compensation of the Company's executive officers is subject to increase
or decrease by the Compensation Committee from targeted levels according to the
Company's overall performance and the individual's efforts and contributions.
As of 1996, as in previous years, a significant portion of executive
compensation is directly related to the Company's financial performance and is
therefore at risk. Total compensation for the Company's senior management is
composed of base salary, near-term incentive compensation in the form of
bonuses, and long-term incentive compensation in the form of stock options and
restricted stock grants. The Compensation Committee retains the discretion to
adjust the formula for certain items of compensation so long as total
compensation reflects overall corporate performance and individual achievement.

BASE SALARY. In establishing base salary levels for senior officer
positions, the Compensation Committee and Mr. Gentz consider levels of
compensation at other similarly situated companies and at direct competitors,
levels of responsibility, and internal issues of consistency and fairness. In
determining the base salary of a particular executive, the Compensation
Committee and Mr. Gentz consider individual performance, including the
accomplishment of short- and long-term objectives, and various subjective
criteria including initiative, contribution to overall corporate performance,
and leadership ability.

In the fiscal year ended December 31, 1995, the annual base salary of
Mr. Gentz began at $275,000 and increased to $287,500 in September, a level
determined to be appropriate by the Compensation Committee based on comparable
chief executive salaries of a peer group of companies and of direct competitors
referred to above, the Company's overall performance and profitability in the
prior fiscal year, and Mr. Gentz's efforts and contributions to the Company.
Mr. Gentz's annual base salary of $287,500 did not increase in the fiscal year
ended December 31, 1996.

BONUSES. The Company's executive officers are eligible for annual bonuses
based upon recommendations made by Mr. Gentz (as to the other executive
officers) and the Compensation Committee (as to Mr. Gentz) as to individual
performance and the Company's achievement of certain operating results.

Amounts of individual awards are based principally upon the results of the
Company's financial performance during the prior fiscal year. The awards for
senior officers are within guidelines established by the Compensation Committee
and Mr. Gentz as a result of their review of total compensation for senior
management of peer companies and competitors. The actual amount awarded within
these guidelines is determined principally by the Compensation Committee's and
Mr. Gentz's assessment of the individual's contribution to the Company's overall
financial performance. Consideration is also given to factors such as the
individual's successful

47
<PAGE>

completion of a special project, any significant increase or decrease in the
level of the participant's executive responsibility, and the Compensation
Committee's and Mr. Gentz's evaluation of the individual's overall efforts and
ability to discharge the responsibilities of his position. In fiscal 1996,
bonuses were paid with respect to fiscal 1995 performance to all of the
continuing executive officers named in the Summary Compensation Table and to
eleven executive officers in total. Bonuses earned related to fiscal 1996 have
not been declared. The Company's practice has been to declare and pay these
bonuses in the second quarter.

In determining Mr. Gentz's bonus, the Compensation Committee gives
particular consideration to the following factors: (1) the Company's
underwriting results; (2) the Company's return on average equity during the
fiscal year; (3) the positive earnings growth of the Company during the fiscal
year; (4) performance of the Company's stock during the fiscal year; and (5) the
efforts and contributions made by Mr. Gentz in discharging his responsibilities
as Chief Executive Officer. In 1996, the Compensation Committee placed
significant weight on the continued improvement in the Company's underwriting
profits and implementation of strategies designed to compete in the open-rating
environment.

STOCK INCENTIVES. The Company currently has in place the 1986 Plan and the
1995 Plan. The Company ceased providing options under the 1986 Plan in
April 1995. The purpose of the 1995 Plan is to provide incentives and reward
the contributions of key employees and officers for the achievement of long-term
Company performance, as measured by earnings per share and the market value of
the Common Stock. The Compensation Committee set guidelines for the number and
terms of stock option or restricted stock awards based on factors similar to
those considered with respect to the other components of the Company's
compensation program, including comparison with the practices of peer group
companies and direct competitors. In the event of unsatisfactory corporate
performance, the Compensation Committee may decide not to award stock options or
restricted stock in any given fiscal year although exceptions to this policy may
be made for individuals who have assumed substantially greater responsibilities
and other similar factors. The awards under the 1995 Plan are designed to align
the interests of executives with those of the shareholders. Generally, stock
options become exercisable in cumulative installments over a period of five
years, but the individual forfeits any installment that has not vested during
the period of his employment. Restricted stock grants generally vest in equal
installments over nine years with unvested shares subject to repurchase by the
Company at no gain to the officer upon the termination of his or her employment.

Under the 1995 Plan, the Compensation Committee during 1996 approved a set
of stock option grants to all executive officers then employed, and restricted
stock grants to thirteen executive officers. These approvals were acted upon by
the Compensation Committee in its capacity as the "Option Committee" under the
terms of the 1995 Plan. Agreements reflecting these option grants and
restricted stock grants have been prepared and delivered to the recipient
employees. The share certificates representing the restricted stock are only
issued when restrictions lapse, hence the bulk of those share grants are not
reflected in the Company's total outstanding shares number.

The Compensation Committee has reviewed the Company's executive
compensation policies and plans in light of the provisions of the Omnibus Budget
Reconciliation Act of 1993 and the rules promulgated under that Act. This
legislation amended Section 162 of the Code by limiting to $1 million the
deductibility of compensation paid to certain executives. Rulemaking has
clarified the impact of the 1993 act on equity incentive plans. It is the
current policy of the Compensation Committee to maximize, to the extent
reasonably possible, the Company's ability to obtain a corporate tax deduction
for compensation paid to executive officers of the Company to the extent
consistent with the best interests of the Company and its shareholders.

BRADLEY E. COOPER
STEVEN D. GERMAIN
GORDON E. NOBLE
MEMBERS OF THE COMPENSATION COMMITTEE

48
<PAGE>

COMPANY PERFORMANCE

The graph below compares the cumulative total shareholder return of the
Company with the cumulative total return on the Nasdaq Stock Market (U.S.
Companies) Index and the Nasdaq Insurance Stocks Index for the period from
June 30, 1995 (the date on which the Company's registration statement under
Section 12 of the Exchange Act became effective) through December 31, 1996.

COMPARISON OF CUMULATIVE TOTAL RETURN

[GRAPH]

Superior National Insurance Group, Inc. Common Stock. . . . . . . $283.33
Nasdaq Insurance Stocks Index . . . . . . . . . . . . . . . . . . $139.12
Nasdaq Stock Market (U.S. Companies) Index. . . . . . . . . . . . $138.97

Assumes that $100 was invested on June 30, 1995 (the date on which the
Company's registration statement under Section 12 of the Exchange Act became
effective) in each of the Company's Common Stock, the Nasdaq Stock Market (U.S.
Companies) Index, and the Nasdaq Insurance Stocks Index, and that all dividends
were reinvested.

The Company believes that the Company's total shareholder return
improved dramatically during 1996 primarily as a result of the increase in the
Company's stock price in the second half of 1996 following the announcement of
the PRIM transaction.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Security Ownership of Certain Beneficial Owners

The table below sets forth certain information regarding the beneficial
ownership of the Company's voting securities as of March 5, 1997 by each person
who is known by the Company to be the beneficial owner of more than 5% of the
indicated classes of the Company's voting securities. On March 31, 1992, the
Company issued its 14.5% Senior Subordinated Voting Notes due April 1, 2002 (the
"Voting Notes") in connection with a transaction wherein the Company issued its
14.5% Senior Subordinated promissory notes in an aggregate principal amount of
$11 million,

49
<PAGE>

together with warrants to purchase approximately 1,616,886 shares of the
Company's Common Stock. The Company redeemed all of those promissory notes with
a prepayment, effective June 30, 1994, except for the Voting Notes, with
respect to which prepayment is prohibited. The outstanding principal amount of
the Voting Notes is $30,000. The number of votes attaching to the Voting Notes
is equal to the number of shares of Common Stock that may be purchased upon
exercise of the warrants that were issued in that March 31, 1992 transaction
and remain outstanding and are unexercised as of the applicable record date for
a shareholder vote. As of March 5, 1997, the number of votes held by the holder
of the Voting Notes was equivalent to 1,566,465 shares of Common Stock. The
Voting Notes are permitted to vote only in director elections, director
removals, votes on amending that right to vote, and changes to the number of
authorized directors. As a result of the cancellation of a portion of the
relevant warrants, the number of common stock equivalent votes held by the
Voting Notes has decreased somewhat since March 31, 1992. The specific voting
rights of the Voting Notes are set forth in the Company's Amended and Restated
Articles of Incorporation and Bylaws. This table does not reflect the 2,390,438
shares of Common Stock to be issued and sold by the Company pursuant to the
Stock Purchase Agreement upon consummation of the PRIM transaction.
<TABLE>
<CAPTION>

COMMON STOCK(1) VOTING NOTES
------------------------------- ----------------------------
SHARES-
NAME AND ADDRESS SHARES PERCENT(2) EQUIVALENT PERCENT
- -------------------------------------------------- ----------- ------------ -------------- --------
<S> <C> <C> <C> <C>

"III" -- -- 1,566,465(3) 100%
International Insurance Investors, L.P.,
a Bermuda limited partnership
c/o International Insurance Investors
(Bermuda) Limited, General Partner
Cumberland House
One Victoria Street
Hamilton HM HX, Bermuda

"IIA" 1,474,306(4) 29.96% -- --
International Insurance Advisors, Inc.
One Chase Manhattan Plaza
44th Floor
New York, New York 10005

"CENTRELINE" 579,356(5) 14.39% -- --
CentreLine Reinsurance Limited,
a Bermuda corporation
Cumberland House
One Victoria Street
Hamilton HM HX, Bermuda

"CENTRE RE" 470,390(6) 12.01% -- --
Centre Reinsurance Limited
One Victoria Street
Seventh Floor
Hamilton HM HX, Bermuda

"TJS" 396,950(7) 11.52% -- --
TJS Partners, L.P.
52 Vanderbilt Avenue, 5th Floor
New York, New York 10017

"BISHOP ESTATE" 388,752(8) 10.14% -- --
Trustees of the Estate of Bernice P. Bishop
567 South King Street
Suite 200
Honolulu, Hawaii 96813
<PAGE>

<CAPTION>
COMMON STOCK(1) VOTING NOTES
------------------------------- ----------------------------
SHARES-
NAME AND ADDRESS SHARES PERCENT(2) EQUIVALENT PERCENT
- -------------------------------------------------- ----------- ------------ -------------- --------
<S> <C> <C> <C> <C>
THOMAS J. JAMIESON 245,300(9) 7.12% -- --
Jaco Oil Company
P.O. Box 1807
Bakersfield, California 93303

THE RAVENSWOOD INVESTMENT COMPANY 206,046(10) 5.98% -- --
104 Gloucester Road
Massapequa, New York 11758

</TABLE>

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

(1) Includes warrants expiring on April 1, 2002 to purchase 1,566,465 shares of
Common Stock (the "Warrants") and a warrant expiring on June 30, 2001 to
purchase 579,356 shares of Common Stock described more fully in footnote 5,
below. The Warrants were issued on March 31, 1992 in a transaction in
which the Company issued (a) Warrants to purchase approximately 1,616,886
shares of Common Stock and (b) promissory notes in the aggregate principal
amount of $11 million to III and certain members of the Company's
management. The Warrants are exercisable at $4.00 per share. The Warrants
purchased by III, exercisable into 1,474,306 shares of Common Stock, were
originally issued to IIA, as agent for each of the limited partners and the
general partner of III. The Warrants have since been distributed to the
partners of III; however, IIA's revocable agency relationship with such
partners was reestablished after the distribution. See footnote 4 below.
The Company has retired certain Warrants issued to members of management no
longer employed by the Company.
(2) Percent ownership is based on the number of shares outstanding as of March
5, 1997, which number was 3,446,706 shares, plus any shares issuable
pursuant to options or warrants held by the person in question that may be
exercised within 60 days after March 5, 1997.
(3) Robert A. Spass, Craig F. Schwarberg and Bradley E. Cooper, directors of
the Company, beneficially own limited partnership interests in III of
0.583%, 0.225%, and 0.075%, respectively. In addition, Mr. Spass has
voting power over all of the voting capital stock of International
Insurance Investors (Bermuda) Limited, the general partner of III.
(4) Represents Warrants to purchase shares of Common Stock that are held by
IIA, as agent for each of the limited partners and for the general partner
of III, as discussed in footnote 1 above. As agent for such partners, IIA
has the revocable authority to exercise rights set forth in the Warrants
and to vote any shares of Common Stock issuable upon exercise of the
Warrants. Robert A. Spass, a director of the Company, is an officer of IIA
and as such has the authority to exercise these rights. The partners who,
upon revocation of IIA's authority, would be entitled to exercise Warrants
covering more than 5% of the Common Stock are Centre Re and Bishop Estate,
in the share amounts and percentages stated.
(5) Represents a warrant to purchase 579,356 shares of Common Stock issued as
of June 30, 1994 (the "CentreLine Warrant"). CentreLine is an affiliate of
Centre Re. The CentreLine Warrant was issued in connection with an
investment in the Company (and its affiliate, Superior National Capital,
L.P.) by CentreLine and a second Centre Re affiliate, Centre Reinsurance
Services, aggregating $20 million. The CentreLine Warrant is exercisable
at $5.20 per share. Steven D. Germain, a director of the Company, is an
officer and a director of both Centre Re and CentreLine. In addition to
Mr. Germain, each of Steven M. Gluckstern, Michael D. Palm, Laurence Cheng,
David A. Brown and Jay S. Ralph is an officer and a director of both Centre
Re and CentreLine. Messrs. Germain, Gluckstern, Palm, Cheng, Brown and
Ralph disclaim any beneficial interest in the CentreLine Warrant and the
Common Stock issuable upon its exercise, or in the Warrants held by IIA, as
agent for Centre Re, as described in footnote 6 below, or the shares of
Common Stock issuable upon the exercise of such Warrants. However, as
officers and directors of both Centre Re and CentreLine, such persons share
voting and/or investment power over such securities (subject to the agency
appointment described in footnotes 1 and 4 above).
(6) Represents Warrants to purchase shares of Common Stock received upon the
distribution by III to its partners of the Warrants as described in
footnote 1 above. See footnote 4 above for information concerning
Centre Re's agency relationship with IIA with respect to such Warrants and
see footnote 5 above for information concerning

51
<PAGE>

Centre Re's relationships with Steven D. Germain and CentreLine. The
numbers of shares reported for Centre and III (excluding the Voting
Notes) are based on an Amendment No. 1 to Schedule 13G filed with the
SEC in February 1997.

(7) Based on a Form 4 filed with the SEC in July 1996, TJS is the direct
beneficial owner of 396,950 shares of Common Stock. TJS Corporation and
its controlling stockholder, sole director and executive officer, Thomas J.
Salvatore, are the general partners of TJS Management, L.P., the general
partner of TJS Partners, L.P., and exercise voting control and dispositive
power over all 396,950 shares presently owned, and are beneficial owners of
those shares.
(8) Represents Warrants to purchase shares of Common Stock received upon the
distribution by III to its partners of the Warrants as described in
footnote 1 above. Richard S.H. Wong, Oswald K. Stender, Lokelani Lindsey,
Gerard A. Jervis and Henry H. Peters, the trustees of the Bishop Estate,
share voting and/or investment power over securities held by the Bishop
Estate. Mr. Peters is a director of IIA. The number of shares reported
for the Bishop Estate is based on a Schedule 13G with the SEC in February
1996.
(9) Includes 98,050 shares owned of record by Jaco Oil Company, an entity
controlled by Mr. Jamieson.
(10) According to a report on Schedule 13D dated July 5, 1995, The Ravenswood
Investment Company is the direct beneficial owner of 83,546 shares of
Common Stock and has a contractual right to buy 122,500 additional shares
from the receiver of AMS Life Insurance Company, an Arizona insurer in
liquidation. The Company believes that acquisition has occurred. The
general partners of The Ravenswood Investment Company, Robert E. Robotti
and Kenneth R. Wasiak, exercise voting control and dispositive power over
all 206,046 shares presently owned or subject to the contract to purchase,
and are beneficial owners of those shares.

SECURITY OWNERSHIP OF MANAGEMENT

The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of March 5, 1997 by (i) each director and
certain executive officers of the Company, individually, and (ii) all directors
and executive officers as a group. This table does not reflect the number of
shares of Common Stock that may be issued and sold by the Company pursuant to
the Stock Purchase Agreement, in which members of the Company's management have
agreed to participate and in which several directors of the Company have certain
interests.

PERCENT OF
NAME SHARES OWNED COMMON STOCK(1)
- --------------------------------------------- -------------- ---------------
William Gentz . . . . . . . . . . . . . . . . 56,445(2) 1.62%

J. Chris Seaman . . . . . . . . . . . . . . . 133,049(3) 3.74%

Joseph P. Wolonsky . . . . . . . . . . . . . 43,502(4) 1.25%

Karl O. Johnson . . . . . . . . . . . . . . . 37,282(5) 1.07%

Douglas R. Roche . . . . . . . . . . . . . . 16,354(6) *

Thomas J. Jamieson . . . . . . . . . . . . . 245,300(7) 7.12%

Gordon E. Noble . . . . . . . . . . . . . . . 10,000 *

C.L. Pecchenino . . . . . . . . . . . . . . . 14,250 *

Robert A. Spass . . . . . . . . . . . . . . . 16,591(8) *

Craig F. Schwarberg . . . . . . . . . . . . . 3,321(9) *

Bradley E. Cooper . . . . . . . . . . . . . . 3,107(10) *

Steven D. Germain . . . . . . . . . . . . . . 1,053,947(11) 23.44%

Directors and Executive Officers as a
Group (22 persons). . . . . . . . . . . . 1,826,782(12) 25.37%

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

52
<PAGE>

(1) Percent ownership is based on the number of shares outstanding as of March
5, 1997, which number was 3,446,706 shares, plus any shares issuable
pursuant to options or warrants held by the person in question which may be
exercised within 60 days after March 5, 1997.
(2) Includes 23,745 shares issuable upon exercise of stock options that are
exercisable within sixty days of March 5, 1997. Also includes 19,950
restricted stock grants awarded under the 1995 Plan in 1995 and 1996, of
which the restrictions have lapsed as to 3,361 shares.
(3) Includes 58,795 shares issuable upon exercise of Warrants and 42,691 shares
issuable upon exercise of stock options, each of which is exercisable
within sixty days of March 5, 1997. Also includes 15,163 restricted stock
grants awarded under the 1995 Plan in 1995 and 1996, of which the
restrictions have lapsed as to 2,557 shares.
(4) Includes 10,582 shares issuable upon exercise of Warrants and 22,645 shares
issuable upon exercise of stock options, both of which are exercisable
within sixty days of March 5, 1997. Also includes 1,000 shares held by his
spouse, the ownership of which is subject to community property laws. Also
includes 9,125 restricted stock grants awarded under the 1995 Plan in 1995
and 1996, of which the restrictions have lapsed as to 1,556 shares.
(5) Includes 4,262 shares issuable upon exercise of Warrants and 16,895 shares
issuable upon exercise of stock options, each of which is exercisable
within sixty days of March 5, 1997. Also includes 7,625 restricted stock
grants awarded under the 1995 Plan in 1995 and 1996, of which the
restrictions have lapsed as to 1,218 shares.
(6) Includes 8,667 shares issuable upon exercise of stock options exercisable
within sixty days of March 5, 1997. Also includes 4,687 restricted stock
grants awarded under the 1995 Plan in 1995 and 1996, of which the
restrictions have lapsed as to 804 shares.
(7) Includes 98,050 shares owned of record by Jaco Oil Company, an entity
controlled by Mr. Jamieson.
(8) Represents 8,000 shares of Common Stock owned directly by Mr. Spass. In
addition, Mr. Spass is the beneficial owner of Warrants held by IIA, as
agent, representing the right to purchase 8,591 shares of Common Stock as
described in footnote 4 of the preceding "Certain Beneficial Owners After
the Stock Issuance" table. Mr. Spass is an officer of IIA and is the
beneficial owner of less than one percent of the equity securities of IIA.
IIA holds, as agent for the partners of III, Warrants to purchase 1,474,306
shares of Common Stock. In addition, see footnote 3 to the preceding
"Certain Beneficial Owners After the Stock Issuance" table concerning Mr.
Spass' voting power with respect to the Voting Notes. The number of shares
reported for Mr. Spass is based on an Amendment No. 1 to Schedule 13G filed
with the SEC in February 1997.
(9) Comprised of Warrants representing the right to purchase 3,321 shares of
Common Stock held by IIA, as agent, as described in footnote 4 of the
preceding "Certain Beneficial Owners After the Stock Issuance" table. In
addition, Mr. Schwarberg is the beneficial owner of less than one percent
of the equity securities of IIA.
(10) Represents 2,000 shares of Common Stock. Also includes Warrants to
purchase 1,107 shares of Common Stock held by IIA, as agent, as described
in footnote 4 of the preceding "Certain Beneficial Owners After the Stock
Issuance" table. In addition, Mr. Cooper is the beneficial owner of less
than one percent of the equity securities of IIA.
(11) Represents (i) 3,600 shares of Common Stock owned directly, (ii) 600 shares
of Common Stock owned indirectly as custodian for the benefit of his
children under the New York Uniform Gift to Minors Act, and (iii) warrants
to purchase Common Stock, consisting of the CentreLine Warrant to purchase
579,356 shares issued to CentreLine and the Warrants held by IIA, as agent
for Centre Re. See the preceding "Security Ownership of Certain Beneficial
Owners" table and footnotes 4 and 5 thereto. Mr. Germain is an officer and
director of both Centre Re and CentreLine. As such, he shares voting
and/or dispositive control over such securities (subject to the termination
of the agency relationship with IIA by Centre Re). Mr. Germain disclaims
any beneficial interest in the CentreLine Warrant, the Warrants held by
IIA, as agent for Centre Re, and the Common Stock issuable upon their
exercise.
(12) Includes (i) 1,136,404 shares issuable upon exercise of warrants and
(ii) 145,498 shares issuable upon exercise of stock options, each of which
is exercisable within sixty days of March 5, 1997. Also includes 76,598
shares subject to the Company's right of repurchase, of which restrictions
have lapsed as to 12,624 shares. Refer to footnotes 8 and 11 for
information regarding beneficial interests in the Warrants and the
Centreline Warrant held by certain directors.

53
<PAGE>

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

TRANSACTIONS WITH IIA

Messrs. Spass, Schwarberg and Cooper, directors of the Company, are
employees of IIA and are each the beneficial owner of less than one percent of
IIA's equity securities. Mr. Spass is also an officer and director of IIA. IIA
was acting as advisor to III and SNIG regarding the purchase by III of $10
million of debt securities, including the Voting Notes, in 1992. IIA was paid
$250,000 by the Company during fiscal 1996 for investment banking and financial
consulting services. That payment was made pursuant to a consulting agreement
entered into in 1992 that continues through 1998.

TRANSACTIONS WITH CENTRE RE AND ITS AFFILIATES

Mr. Germain, a director of the Company, is an officer and director of
Centre Re and of CentreLine. Effective January 1, 1996, the Company cancelled
certain reinsurance services provided by Centre Re. The Company accrued a $5.3
million charge related to the cancellation of such reinsurance services.

An affiliate of the Company, Superior National Capital, L.P., a Bermuda
limited partnership, issued an additional 83,337 shares of preferred stock in
1995 for preferred securities dividends to an affiliate of Centre Re in
connection with the transaction described in Footnote 5 to the Security
Ownership of Certain Beneficial Owners table.

TRANSACTIONS WITH IP

Mr. Spass, a director of the Company, and Mr. Steven Gruber, a director
nominee, are executive officers of the ultimate general partner of each of IP
Delaware and IP Bermuda. If the Stock Purchase Agreement is approved and
consummated, IP will acquire 2,124,834 shares of newly issued common stock. In
addition, each of Messrs. Spass and Gruber are executive officers of Insurance
Partners Advisors, L.P. ("IPA"). If the Stock Purchase Agreement is
consummated, IPA will receive a transaction fee from the Company of $625,000
representing a percentage of all of the funds raised to acquire PRIM and to make
a capital contribution to the Pacific Rim Assurance Company. Under certain
circumstances, alternative fees would be paid.

54
<PAGE>

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K

(a)(1) FINANCIAL STATEMENTS:

Consolidated Balance Sheets as of December 31, 1996 and 1995
Consolidated Statements of Income for the Years Ended December 31, 1996,
1995 and 1994
Consolidated Statements of Changes in Shareholders' Equity for the Years
Ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the Years Ended December 31,
1996, 1995 and 1994
Notes to Consolidated Financial Statements

(a)(2) FINANCIAL STATEMENT SCHEDULES:

Condensed Financial Information of Registrant, Superior National Insurance
Group, Inc.
Supplemental Insurance Information
Reinsurance
Valuation and Qualifying Accounts and Reserves
Supplemental Property and Casualty Insurance Information

(a)(3) EXHIBITS

EXHIBIT DESCRIPTION
NUMBER -----------
- -------

2.1 Amended and Restated Agreement and Plan of Merger dated as of February
17, 1997 among the Company, SNTL Acquisition Corp., and PRIM*****
2.2 Series A Convertible Debentures and Series 1, 2 and 3 Detachable
Warrant Purchase Agreement, ("Debenture Purchase Agreement") dated
September 17, 1997 among the Company, Prac Limited Partnership and
Allstate Insurance Company****
2.3 First Amendment to Debenture Purchase Agreement, dated as of February
17, 1997*****
2.4 Voting Agreement dated as of February 17, 1997 among the Company and
certain stockholders and debenture holders of PRIM*****

3.1 Articles of Incorporation of the Company, as amended and restated by
the Company and currently in effect*
3.2 Bylaws of the Company, to date*

EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS

10.1 Employment agreement, dated 1st of June 1994, by and between Mr.
William L. Gentz, President and Chief Executive Officer of the
Company, and the Company*
10.2 Employment agreement, dated February 17, 1997, by and between Mr.
Arnold J. Senter, Executive Vice President and Chief Operating Officer
of the Company, and the Company
10.3 1986 Non-Statutory Stock Option and Non-Statutory Stock Purchase
Plan***
10.4 1995 Stock Incentive Plan***

55
<PAGE>

OTHER MATERIAL CONTRACTS

10.5 Aggregate Excess of Loss Cover entered into on the 30th day of August
1991, between Centre Reinsurance Limited (Centre Re) and the Company,
as amended*
10.6 Multi-year Prospective Accident Year Stop Loss Reinsurance Contract
effective the 1st of January 1993, between Centre Reinsurance
International Company and the Company (the "1993 Centre Re Contract")*
10.7 Letter dated March 28, 1996 from the Company canceling the 1993 Centre
Re Contract effective January 1, 1996***
10.8 Workers' Compensation and Employers' Liability Quota Share Insurance
Contract No. 30006A effective January 1, 1994, between the Company and
Zurich Reinsurance Centre, as amended (the "ZRC Contract")*
10.9 Addendum No. 4 to the ZRC Contract effective as of January 1, 1996***
10.10 Addendum No. 1 to the Retrocession Agreement (an ancillary agreement
to the ZRC Contract) effective as of January 1, 1996***
10.11 Lease, dated 27th day of October 1988, by and between Corporate Center
at Malibu Canyon, a California Limited Partnership and the Company,
relating to the lease of the Company's home office and Calabasas
Branch Facilities*
10.12 Lease, dated 27th of July 1993, by and between TOMOE Investment and
Development, Inc. and the Company, relating to the lease of its South
San Francisco Facility*
10.13 Lease, dated 14th of November 1991, by and between Dean Witter
Reynolds and the Company relating to the lease of its Fresno
Facilities*
10.14 Lease, dated 23rd of February 1993, by and between Shaw Avenue
Associates, a California Limited Partnership and the Company relating
to the lease of its Fresno Facilities*
10.15 Lease, dated 14th of February 1994, by and between Contra Costa County
Employees Retirement Association and the Company relating to its
Sacramento Facility*
10.16 Bank Debt, $10 million loan agreement between Imperial Bank and the
Company that was entered into on the 1st day of July 1994 (the
"Imperial Loan")*
10.17 Amendment No. 1 to the Imperial Loan dated March 27, 1995**
10.18 Amendment No. 2 to the Imperial Loan dated October 16, 1995**
10.19 Credit Agreement between the Company and The Chase Manhattan Bank
dated as of November 12, 1996, (the "1996 Credit Agreement"), and
all material exhibits thereto
10.20 Agreement in Principle dated 29th of March 1994 by and between
the Company and Centre, a Bermuda Corporation, or one of its
affiliates*
10.21 Limited Partnership Agreement of Superior National Capital, L.P.
(Capital) with certificate of Limited Partnership and Certificate
of Exempted Partnership, all as filed on the 28th of June 1994,
with the Registrar of Companies of Bermuda*
10.22 Preferred securities purchase agreement, dated 30th day of June
1994, by and between Capital, Superior National Capital Holding
Corporation, the Company and Centre Reinsurance Services
(Bermuda) III Limited*
10.23 Loan agreement, dated 30th of June 1994, whereby Capital agrees
to loan $20,408,163 to the Company*
10.24 Liability Assumption Agreement, dated 30th of June 1994, by and
between the Company and Capital*
10.25 Certificate dated 30th of June 1994, evidencing the issuance of
800,000 Preferred Securities of Capital to Centre Re*
10.26 Note made by the Company in favor of Capital dated 30th of June
1994, in the aggregate principal amount of $20,408,163*
10.27 Purchase warrant, dated as of the 30th of June 1994, entitles
CentreLine Reinsurance Limited to purchase 2,317,426 shares of
the Company's common stock*
10.28 Certificate of Limited Partnership of Superior National
Capital, L.P.*
10.29 Warrant held by International Insurance Advisors, Inc. to
purchase 6,097,130 shares at $1.00 per share dated March 31, 1992
and expiring April 1, 2002*

<PAGE>

10.30 Stock Purchase Agreement dated as of September 17, 1996, as
amended and restated effective as of February 17, 1997, among the
Company, Insurance Partners, L.P., Insurance Partners Offshore
(Bermuda), L.P., TJS Partners, L.P., and certain members of the
Company's management*****
10.31 State of California Department of Insurance Amended Certificate
of Authority*
11.1 Statement re computation of per share earnings
21.1 Subsidiaries of the Registrant*

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

* Previously filed as an exhibit to SNIG's Registration Statement on
Form 10 as filed with the Securities and Exchange Commission ("SEC") on
May 1, 1995 (File No. 0-25984).

** Previously filed as an exhibit to Amendment No. 2 to SNIG's Registration
Statement on Form 10/A as filed with the SEC on November 1, 1995 (File
No. 0-25984).

*** Previously filed as an exhibit to SNIG's Annual Report on Form 10-K as
filed with the SEC on March 29, 1996.

**** Previously filed as an exhibit to SNIG's statement on Schedule 13D filed
for Pac Rim Holding Corporation, as filed with the SEC on September 26,
1996.

***** Previously filed as an exhibit to SNIG's statement on Schedule 13D filed
for Pac Rim Holding Corporation, as filed with the SEC on February 27,
1997.

(b) REPORTS ON FORM 8-K: None

(c) The page numbers of the Exhibits filed in response to this
portion of Item 14 are listed on an Index of Exhibits that
follows the signature page.

(d) The response to this portion of Item 14 is presented in response
to Item 8 of this report.

<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Annual Report on
Form 10-K to be signed on its behalf by the undersigned, thereunto duly
authorized.

Date: March 10, 1997

Superior National Insurance Group, Inc.

By: /s/ J. Chris Seaman
-------------------------------------
J. Chris Seaman
Executive Vice President and
Chief Financial Officer

Pursuant to the requirements of the Securities Exchange Act of 1934,
this Annual Report on Form 10-K has been signed below by the following
persons on behalf of the Registrant and in the capacities and on the dates
indicated.

Signatures Title Date
---------- ----- ------
<S> <C> <C>

/s/ William Gentz Director, President and Chief March 10, 1997
- ----------------------- Executive Officer (Principal
William Gentz Executive Officer)

/s/ J. Chris Seaman Director, Executive Vice President March 10, 1997
- ----------------------- and Chief Financial Officer
J. Chris Seaman (Principal Accounting Officer)

/s/ Steven D. Germain Director March 10, 1997
- -----------------------
Steven D. Germain

/s/ Thomas J. Jamieson Director March 10, 1997
- -----------------------
Thomas J. Jamieson

/s/ Gordon E. Noble Director March 10, 1997
- -----------------------
Gordon E. Noble

/s/ C.L. Pecchenino Director March 10, 1997
- -----------------------
C.L. Pecchenino

/s/ Craig F. Schwarberg Director March 10, 1997
- -----------------------
Craig F. Schwarberg

/s/ Robert A. Spass Director March 10, 1997
- -----------------------
Robert A. Spass

/s/ Bradley E. Cooper Director March 10, 1997
- -----------------------
Bradley E. Cooper

</TABLE>

<PAGE>

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report.........................................................60

Consolidated Financial Statements:

Consolidated Balance Sheets as of December 31, 1996 and 1995...................F-1
Consolidated Statements of Income for the years ended December 31, 1996,
1995 and 1994............................................................F-2
Consolidated Statements of Changes in Shareholders' Equity for the years ended
December 31, 1996, 1995 and 1994.........................................F-3
Consolidated Statements of Cash Flows for the years ended December 31, 1996,
1995 and 1994............................................................F-4
Notes to Consolidated Financial Statements.....................................F-5

Financial Statements Schedules:

Schedule I: Condensed Financial Information of the Registrant, Superior
National Insurance Group, Inc...............................F-24
Schedule II: Valuation and Qualifying Accounts and Reserves.................F-28
Schedule V: Supplemental Insurance Information, Reinsurance and
Supplemental Property and Casualty Insurance Information....F-29

</TABLE>

<PAGE>

INDEPENDENT AUDITORS' REPORT

The Board of Directors
Superior National Insurance Group, Inc.:

We have audited the consolidated financial statements of Superior National
Insurance Group, Inc. and subsidiaries as listed in the accompanying index. In
connection with our audits of the consolidated financial statements, we also
have audited the financial statement schedules as listed in the accompanying
index. These consolidated financial statements and financial statement
schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and the financial statement schedules 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 Superior National
Insurance Group, Inc. and subsidiaries as of December 31, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996, in conformity with generally accepted
accounting principles. Also, in our opinion, the related 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.

KPMG Peat Marwick LLP

Los Angeles, California
February 18, 1997

<PAGE>

SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
(In thousands, except share data)

-------- --------
ASSETS 1996 1995
-------- --------
<S> <C> <C>

Investments:
Bonds and Notes
Available-for-sale, at market (cost: 1996, $46,549; 1995, $41,800) $ 46,330 $ 42,053
Equity securities, at market
Common stock (cost: 1996, $1,199; 1995, $686) 1,173 689
Funds withheld from reinsurers, at amortized cost
(market: 1995, $117,073) - 114,921
Cash and Invested cash (Restricted cash: 1996, $297; 1995, $2,686) 100,487 4,588
Restricted investment 1,450 1,700
-------- --------
TOTAL INVESTMENTS 149,440 163,951

Reinsurance recoverable:
Paid and unpaid claims and claim adjustment expense 25,274 38,772
Policyholder dividends - 841
Premiums receivable (less allowance for doubtful
accounts of $300 in 1996 and $500 in 1995) 9,390 11,574
Earned but unbilled premiums receivable 5,251 3,150
Accrued investment income 1,035 1,827
Deferred policy acquisition costs 3,042 2,780
Deferred income taxes 9,520 10,085
Funds held by reinsurer 1,948 972
Receivable from reinsurer 93,266 -
Prepaid reinsurance premiums 1,039 752
Prepaid and other 7,364 6,077
-------- --------
TOTAL ASSETS $306,569 $240,781
-------- --------
-------- --------

LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Claims and claim adjustment expense $115,529 $141,495
Unearned premiums 9,702 10,347
Reinsurance payable 874 370
Long-term debt 98,961 8,530
Policyholder dividends - 8,094
Accounts payable and other liabilities 12,741 7,420
-------- --------
TOTAL LIABILITIES 237,807 176,256

PREFERRED SECURITIES ISSUED BY AFFILIATE; authorized
1,100,000 shares; issued and outstanding 1,013,753 shares in
1996 and 922,137 shares in 1995 23,571 21,045

SHAREHOLDERS' EQUITY
Common stock, no par value; authorized 25,000,000 shares;
issued and outstanding 3,446,492 shares in 1996 and 3,430,373 16,022 15,943
shares in 1995
Unrealized (loss) gain on equity securities, net of taxes (17) 2
Unrealized (loss) gain on available-for-sale investments, net of taxes (145) 167
Paid in capital - warrants 2,206 2,206
Retained earnings 27,125 25,162
-------- --------
NET SHAREHOLDERS' EQUITY 45,191 43,480
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $306,569 $240,781
-------- --------
-------- --------

</TABLE>

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

F-1
<PAGE>

SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
------- ------- --------
1996 1995 1994
------- ------- --------
<S> <C> <C> <C>

REVENUES:
Premiums written, net of reinsurance ceded $87,715 $89,139 $105,946
Net change in unearned premiums 933 596 4,472
------- ------- --------
Net premiums earned 88,648 89,735 110,418
Net investment income 7,769 9,784 9,049
------- ------- --------
TOTAL REVENUES 96,417 99,519 119,467
------- ------- --------

EXPENSES:
Claims and claim adjustment, net of reinsurance
recoveries of $6,064, $2,418 and $8,402 in 1996,
1995 and 1994, respectively 55,638 53,970 78,761
Commissions, net of reinsurance ceding
commissions of $2,030, $1,350 and $5,854 in
1996, 1995 and 1994, respectively 10,426 11,881 10,404
Policyholder dividends (5,927) (5,742) 4,983
Interest 7,527 9,619 8,726
General and administrative
Underwriting 23,712 17,566 11,256
Other (186) 536 340
------- ------- --------
TOTAL EXPENSES 91,190 87,830 114,470

INCOME BEFORE INCOME TAXES, PREFERRED SECURITIES
DIVIDENDS AND ACCRETION, DISCONTINUED
OPERATIONS, AND EXTRAORDINARY ITEM 5,227 11,689 4,997
Income tax expense (benefit) 1,597 (12) 1,398
------- ------- --------
INCOME BEFORE PREFERRED SECURITIES DIVIDENDS AND
ACCRETION, DISCONTINUED OPERATIONS, AND
EXTRAORDINARY ITEM 3,630 11,701 3,599
Preferred securities dividends and accretion, net of
income tax benefit of $858, $767 and $352, in
1996, 1995 and 1994, respectively (1,667) (1,488) (683)
Loss from operations of discontinued property
and casualty operations, net of income tax
benefit of $5,070 in 1995 - (9,842) -
Extraordinary loss on retirement of long-term debt,
net of income tax benefit of $1,042 in 1994 - - (2,022)
------- ------- --------
NET INCOME $ 1,963 $ 371 $ 894
------- ------- --------
------- ------- --------

EARNINGS PER SHARE:
INCOME BEFORE PREFERRED SECURITIES DIVIDENDS AND
ACCRETION, DISCONTINUED OPERATIONS, AND
EXTRAORDINARY ITEM $0.71 $3.41 $1.05
Preferred securities dividends and accretion, net of
income taxes (0.31) (0.43) (0.20)
Loss from operations of discontinued property and
casualty operations, net of income tax benefit - (2.87) -
Extraordinary loss on retirement of long-term debt,
net of income tax benefit - - (0.59)
------- ------- --------
NET INCOME $ 0.40 $ 0.11 $ 0.26
------- ------- --------
------- ------- --------
</TABLE>

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

F-2
<PAGE>

SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(Amounts in thousands, except share amounts)

NET
UNREALIZED UNREALIZED
COMMON STOCK GAIN GAIN (LOSS)
---------------------- (LOSS) ON AVAILABLE- PAID IN TOTAL
SHARES NO PAR ON EQUITY FOR-SALE CAPITAL- RETAINED SHAREHOLDERS'
ISSUED VALUE SECURITIES INVESTMENTS WARRANTS EARNING EQUITY
------ ----- ---------- ------------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
-----------------------------------------------------------------------------------------
Balance at December 31, 1993 3,429,873 $15,941 - - $ 216 $23,897 $40,054
-----------------------------------------------------------------------------------------

Net income - - - - - 894 894
Retirement of warrants - - - - (10) - (10)
Issuance of warrants - - - - 2,000 - 2,000
Adjustment for change in
accounting for available-for-
sale investments, net of taxes - - - $ 289 - - 289
Change in unrealized gain (loss)
on available-for-sale
investments, net of taxes - - - (2,863) - - (2,863)
Balance at December 31, 1994 3,429,873 15,941 - (2,574) 2,206 24,791 40,364

Net income - - - - - 371 371
Unrealized gain on equity
securities - - $ 2 - - - 2
Change in unrealized loss on
available-for-sale
investments, net of taxes - - - 2,741 - - 2,741
stock issued under stock option
plan 500 2 - - - - 2
-----------------------------------------------------------------------------------------
Balance at December 31, 1995 3,430,373 15,943 2 167 2,206 25,162 43,480
-----------------------------------------------------------------------------------------

Net Income - - - - - 1,963 1,963
Unrealized gain on equity
securities - - (19) - - - (19)
Change in unrealized loss
on available-for-sale
investments, net of taxes - - - (312) - - (312)
stock issued under stock option
plan 3,100 12 - - - - 12
Common stock issued under stock
incentive 13,019 67 - - - - 67
-----------------------------------------------------------------------------------------
Balance at December 31, 1996 3,446,492 $16,022 $ (17) $ (145) $2,206 $27,125 $45,191
-----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------

</TABLE>

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

F-3
<PAGE>

SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(AMOUNTS IN THOUSANDS)

1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,963 $ 371 $ 894
-------- -------- --------
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Amortization of bonds and preferred stock (1,581) (3,575) (2,770)
Amortization of long-term debt - - 1,151
(Gain)/loss on sale of investments (31) 525 (35)
(Gain)/loss on sale of Centre Re investments (2,036) (4,891) -
Preferred securities dividends and accretion 2,526 2,255 1,035
Decrease in reinsurance balances receivable 14,339 28,516 2,874
Decrease in premiums receivable 2,184 6,901 208
(Increase) decrease in earned but unbilled premiums receivable (2,101) 3,336 2,580
Decrease (increase) in accrued investment income 792 (491) 138
(Increase) decrease in deferred policy acquisition costs (262) 125 446
Decrease in income taxes receivable - 1,721 -
Decrease (increase) in deferred taxes 735 (5,853) -
(Increase) in funds held by reinsurer (976) (972) -
(Increase) decrease in prepaid reinsurance premiums (287) (88) (537)
(Increase) in other assets (1,287) (1,413) (362)
(Decrease) increase in claims and claim adjustment expense reserves (25,966) (29,763) 220
Decrease in unearned premium reserves (645) (508) (3,935)
(Decrease) increase in reinsurance payable 504 (2,835) 2,161
(Decrease) increase in policyholder dividends payable (8,094) (10,970) 1,163
Decrease in discontinued operations - (4,223) -
Increase (decrease) in accounts payable and other liabilities 5,321 (1,994) 984
-------- -------- --------
Total adjustments (16,865) (24,197) 5,321
-------- -------- --------
Net cash provided by (used in) operating activities (14,902) (23,826) 6,215
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Retirement of long-term debt (2,660) (1,200) (8,165)
Proceeds from long-term debt - - 10,000
Proceeds from Chase Financing 93,091 - -
Proceeds from issuance of preferred securities - - 17,755
Paid-in capital - new warrants issued - - 2,000
Paid-in capital - warrants - - (10)
Paid-in capital - stock options taken 79 2 -
-------- -------- --------
Net cash provided by (used in) financing activities 90,510 (1,198) 21,580
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of bonds and notes:
Investments held-to-maturity - - (4,179)
Investments available-for-sale (43,257) (4,611) (15,025)
Investments funds withheld from reinsurers (88,568) (204,577) (16,982)
Purchases of common stock (513) (680) -
(Increase) in receivable from reinsurer (93,266) - -
Investments and cash allocated to discontinued operations - (1,581) (19,034)
Sales of bonds and notes: Investments available for sale 25,343 17,643 4,047
Maturities of bonds and notes:
Investments held-to-maturity - 2,250 -
Investments available-for-sale 12,771 3,035 9,179
Sales and maturities of funds withheld from reinsurers 206,548 191,238 14,949
Sales of common stock - - 27
Net decrease (increase) in invested cash 983 26,062 (3,645)
-------- -------- --------
Net cash provided by (used in) investing activities 20,041 28,779 (30,663)
-------- -------- --------
Net increase (decrease) in cash 95,649 3,755 (2,868)
Cash and invested cash at beginning of period 6,288 2,533 5,401
-------- -------- --------
Cash and invested cash at end of period $101,937 $ 6,288 $ 2,533
-------- -------- --------
-------- -------- --------
Supplemental disclosure of cash flow information:
Cash paid during the year for income taxes $ 4 $ 4 $ 4
-------- -------- --------
-------- -------- --------
Cash paid during the year for interest $ 641 $ 808 $ 1,222
-------- -------- --------
-------- -------- --------

</TABLE>

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.

F-4
<PAGE>

SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(Dollar amounts in thousands, except share data)

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of Superior
National Insurance Group, Inc. and all subsidiaries (the Company). The
Company's principal insurance subsidiary, Superior National Insurance Company
(SNIC) is licensed to write workers' compensation insurance and commercial
property and casualty insurance in 17 states and the District of Columbia.

During the third quarter of 1993, the Company adopted a plan to discontinue
underwriting commercial property and casualty risks. Earned premiums reported
in 1996, 1995, and 1994, reflect workers' compensation premium from policies
that were primarily located in California.

The Company's consolidated financial statements have been prepared on the
basis of generally accepted accounting principles that vary in certain respects
from accounting practices prescribed or permitted by state insurance regulatory
authorities. The results of all significant intercompany transactions have been
eliminated.

Certain reclassifications have been made to prior year financial statements
to conform to the 1996 presentation.

REVERSE STOCK SPLIT

Effective May 25, 1995, shareholders of Superior National Insurance Group,
Inc. approved a four-into-one reverse split of the Company's Common Stock. The
purpose of the reverse split was to increase the per-share price of the
Company's Common Stock in order to enhance public trading of the Common Stock
upon the effectiveness of the Company's registration with the Securities and
Exchange Commission. Consequently, the shares of common stock and stock options
information included in the accompanying consolidated financial statements were
prepared assuming the reverse stock split had been outstanding at the beginning
of all periods presented.

CASH AND INVESTED CASH

Cash includes currency on hand and demand deposits with financial
institutions. Invested cash represents 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.
Invested cash is carried at cost, which approximates market.

INVESTMENTS

Investments in debt instruments consist primarily of bonds and
collateralized mortgage obligations. Effective January 1, 1994, the Company
adopted Statement of Financial Accounting Standards No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" (SFAS 115). Under SFAS 115
debt instruments and equities are classified as (i) "held-to-maturity" (carried
at amortized cost); (ii) "trading" (carried at market with differences between
cost and market being reflected in the results of operations); or (iii) if not
otherwise classified, as "available for sale" (carried at market with
differences between cost and market being reflected as a separate component of
shareholders' equity, net of the applicable income tax effect). The premium and
discount on fixed maturities and collateralized mortgage obligations are
amortized using the scientific method. Amortization and accretion of premiums
and discounts on collateralized mortgage obligations are adjusted for principal
paydowns and changes in expected maturities. Current market values of
investments are obtained from published sources. Declines in market value that
are considered other than temporary are charged to operations. The adoption of
SFAS 115 resulted in an

F-5
<PAGE>

Notes to Consolidated Financial Statements, Continued

increase in reported shareholders' equity of approximately $289 net of deferred
income taxes in 1994. The Company's adoption of SFAS 115 may result in
substantial fluctuations in reported shareholders' equity.

Upon adoption of SFAS 115 the Company designated assets withheld under
certain reinsurance contracts as held to maturity. The Company does not own any
investments that qualify as derivatives as defined by Statement of Financial
Accounting Standard No. 119, "Disclosure About Derivative Financial Investments
and Fair Value of Financial Investments." Securities not designated as held to
maturity have been designated as available-for-sale. The Company did not have
any investments categorized as trading securities. For determining realized
gains or losses on securities sold, cost is based on average cost.

During 1995, the Financial Accounting Standards Board allowed companies the
opportunity to re-designate their investments between (i) held to maturity;
(ii) trading; and, (iii) available-for-sale without penalty. During the grace
period given by the FASB, the Company re-designated $2 million from held to
maturity to available-for-sale.

Investments in equity securities are carried at market value. Unrealized
gains or losses on equity securities are reflected, net of applicable tax, in
shareholders' equity.

PREMIUMS RECEIVABLE

SNIC records premiums receivable for both billed and unbilled amounts.
Unbilled premiums receivable, which are substantially all earned, primarily
represent SNIC's estimate of the difference between amounts billed on
installment policies and the amount to be ultimately billed on the policy.
Unbilled premiums receivable also include estimated billings on payroll
reporting policies which were earned but not billed prior to year end. SNIC
uses its historical experience to estimate earned but unbilled amounts which are
recorded as premiums receivable. These unbilled amounts are estimates, and
while the Company believes such amounts are reasonable, there can be no
assurance that the ultimate amounts received will equal the recorded unbilled
amounts.

The ultimate collectability of the unbilled receivables can be affected to
a greater degree by general changes in the economy and the regulatory
environment than billed receivables due to the increased time required to
determine the billable amount. The Company attempts to consider these factors
when estimating the receivable for unbilled premiums.

DEFERRED POLICY ACQUISITION COSTS

Acquisition costs, consisting principally of commissions, premium taxes and
certain marketing, policy issuance, and underwriting costs, related to the
production of SNIC's workers' compensation business, are deferred and amortized
ratably over the terms of the policies. If recoverability of such costs is not
anticipated, the amounts not considered recoverable are charged to income. In
determining estimated recoverability, the computation gives effect to the
premium to be earned, related investment income, claims and claim adjustment
expenses, and certain other costs expected to be incurred as the premium is
earned.

Policy acquisition costs incurred and amortized into income are as follows:

1996 1995 1994
-------- -------- --------

Balance as of beginning of year $ 2,780 $ 2,905 $ 3,351
Cost deferred during the year 17,132 18,163 16,300
Amortization charged to expense (16,870) (18,288) (16,746)
-------- -------- --------
Balance at end of year $ 3,042 $ 2,780 $ 2,905
-------- -------- --------
-------- -------- --------

F-6
<PAGE>

Notes to Consolidated Financial Statements, Continued

CLAIMS AND CLAIM ADJUSTMENT EXPENSE

Claims and claim adjustment expenses are based on case-basis estimates of
reported claims and on estimates, based on experience and industry data, for
unreported claims and claim adjustment expenses. The provision for unpaid
claims and claim adjustment expenses, net of estimated salvage and subrogation,
has been established to cover the estimated net cost of incurred claims. The
amounts are necessarily based on estimates, and accordingly, there can be no
assurance the ultimate liability will not differ from such estimates.

There is a high level of uncertainty inherent in the evaluation of the
required claims and claim adjustment expense reserves. Management has selected
ultimate claim and claim adjustment expense that it believes will reasonably
reflect anticipated ultimate experience. The ultimate costs of such claims are
dependent upon future events, the outcomes of which are affected by many
factors. Claims reserving procedures and settlement philosophy, current and
perceived social and economic factors, inflation, current and future court
rulings and jury attitudes, 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.

POLICYHOLDER DIVIDENDS

Prior to open rating, policyholder dividends served both as an economic
incentive to employers for safe operations and as a means of price
differentiation; however, since the inception of open rating in January, 1995
the consumers' preference has been for the lowest net price at a policy's
inception. This is evidenced by the decline in participating policies written
by SNIC as a percent of total policies, such percentage has declined from 65% of
workers' compensation premiums in force at December 31, 1994 to 24% at December
31, 1995, and less than 1% at December 31, 1996. In 1995, as a result of the
diminishing value of Policyholder Dividends SNIC's management declared a
moratorium in the payment of policyholder dividends. In December 1996, the
Company discontinued policyholder dividend payments. Estimated amounts to be
returned to policyholders were accrued when the related premium was earned by
SNIC. Dividends were paid to the extent that a surplus was accumulated from
premiums on workers' compensation policies.

PREMIUM INCOME RECOGNITION

Insurance premiums are earned ratably over the terms of the policies.
Unearned premiums are computed on a daily pro-rata basis.

INCOME TAXES

The Company files a consolidated Federal income tax return which includes
all qualifying subsidiaries.

Deferred income taxes are provided for temporary differences between
financial statement and tax return bases using the asset and liability method,
in accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" (SFAS 109). Under the asset and liability method
deferred taxes are measured using enacted tax rates in effect for the year in
which those temporary differences are expected to be settled. Tax rate changes
are accounted for in the year in which the tax law is enacted.

EARNINGS PER SHARE ("EPS")

The EPS calculations for the years ended December 31, 1996, 1995 and 1994
were calculated based upon the weighted average number of shares of common stock
after giving effect to the four-into-one reverse stock split, and adjusted for
the effect, if any, of options and warrants considered to be common stock
equivalents. Stock options and warrants are considered to be common stock
equivalents, except when their effect is antidilutive. The calculations assume
the reverse stock split, effective May 25, 1995, had been outstanding at the
beginning of all periods presented. The weighted number of shares outstanding
used in the earnings per share calculations are 5,315,670 shares for 1996,
3,430,373 shares for 1995 and 3,429,873 shares for 1994.

F-7
<PAGE>

Notes to Consolidated Financial Statements, Continued

PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS

Property, equipment, and leasehold improvements are stated at cost, net of
accumulated depreciation and amortization (approximately $5,061 and $4,176 at
December 31, 1996 and 1995, respectively). Depreciation and amortization are
provided principally on the straight-line method over the estimated useful lives
of the assets or, if less, the term of the lease. Property, equipment, and
leasehold improvements are included as a component of "Prepaid and other assets"
on the consolidated balance sheets.

USE OF MANAGEMENT ESTIMATIONS

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the amounts of assets, liabilities, and disclosures of
contingent assets and liabilities at the date of the financial statements. The
Company has provided such estimates for its workers' compensation claims and
claim adjustment expenses; discontinued operations; policyholder dividends; and
deferred taxes balances in its financial statements. While, these estimates are
based upon analyses performed by management, outside consultants and actuaries,
the amounts the Company will ultimately pay may differ materially from the
amounts presently estimated.

STOCK- BASED COMPENSATION

In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard 123, "Accounting for Stock-Based Compensation"
("SFAS 123"), which establishes financial accounting and reporting standards for
stock-based employee compensation plans. SFAS 123 is effective for the fiscal
year beginning in 1996. The Company has adopted the disclosure method of
accounting for SFAS 123.

(2) INVESTMENTS

The amortized cost and market values of bonds and notes classified as
available-for-sale at December 31, 1996 are as follows:

Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ------

AVAILABLE-FOR-SALE:
United States government
agencies and authorities 22,596 62 (174) 22,484
Collateralized mortgage
obligations 12,989 - (134) 12,855
Corporate instruments 9,864 23 (20) 9,867
State and political
subdivisions 1,100 24 - 1,124
--------- ---------- ---------- ------
Total-available-for-sale 46,549 109 (328) 46,330
--------- ---------- ---------- ------
--------- ---------- ---------- ------

The market value of equity securities as of December 31, 1996 are as
follows:

Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ------
EQUITY SECURITIES:
Corporate Instruments $ 1,199 $ 73 $ (99) $1,173
--------- ---------- ---------- ------
Total Equity Securities $ 1,199 $ 73 $ (99) $1,173
--------- ---------- ---------- ------
--------- ---------- ---------- ------

F-8
<PAGE>

Notes to Consolidated Financial Statements, Continued

The amortized cost and estimated market values of investments classified as
available for sale at December 31, 1996, by contractual maturity are shown
below. Expected maturities are likely to differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without penalty. Mortgage backed securities are included based upon the
expected payout pattern and duration of the fixed income security. Changes in
interest rates, investor expectations and political agendas could cause the
ultimate payout pattern to differ.

Available for Sale
----------------------
Amortized Market
Cost Value
--------- ------

Due in one year or less 7,458 7,309
Due after one year
through five years 16,641 16,601
Due after five years
through ten years 10,266 10,263
Due after ten years 12,184 12,157
------ ------
Total 46,549 46,330
------ ------
------ ------

The amortized cost and market values of bonds and notes classified as held
to maturity and investments classified as available for sale at December 31,1995
are as follows:

Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ------

AVAILABLE FOR SALE:
United States government
agencies and authorities 22,549 129 (154) 22,524
Collateralized mortgage
obligations 10,753 88 (62) 10,779
Corporate instruments 7,398 214 - 7,612
State and political
subdivisions 1,100 38 - 1,138
--------- ---------- ---------- ------
Total available for sale 41,800 469 (216) 42,053
--------- ---------- ---------- ------
--------- ---------- ---------- ------

The amortized cost and market values of bonds, notes and invested cash for
funds withheld from reinsurers as of December 31, 1995 are as follows:

Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- --------

FUNDS WITHHELD FROM REINSURER:
United States government
agencies and authorities $103,496 $ 2,132 $ (74) $105,554
Collateralized mortgage
obligations 2,306 10 - 2,316
Special revenue 2,118 65 - 2,183
Corporate instruments 7,001 19 - 7,020
--------- ---------- ---------- --------
Total funds withheld from
reinsurers $ 114,921 $ 2,226 $ (74) $117,073
--------- ---------- ---------- --------
--------- ---------- ---------- --------

F-9
<PAGE>

Notes to Consolidated Financial Statements, Continued

The market value of equity securities as of December 31, 1995 are as
follows:

Gross Gross
Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ------

EQUITY SECURITIES:
Corporate Instruments $ 686 $ 3 $ - $ 689
--------- ---------- ---------- ------
Total Equity Securities $ 686 $ 3 $ - $ 689
--------- ---------- ---------- ------
--------- ---------- ---------- ------

A summary of net investment income for the years ended December 31, are as
follows:

1996 1995 1994
------ ------- ------
Interest on bonds and notes $6,628 $ 9,310 $8,738
Interest on invested cash 1,609 1,297 597
Realized gains (losses) 31 (525) 35
Other - - 3
------ ------- ------
Total investment income 8,268 10,082 9,373
Investment expense 499 298 324
------ ------- ------
Net investment income $7,769 $9,784 $9,049
------ ------- ------
------ ------- ------

Realized gains (losses) on investments for the years ended December 31, are
as follows:

1996 1995 1994
------ ------- ------
Bonds and notes $ 31 $ (525) $ 55
Equity securities - - (20)
------ ------- ------
Total $ 31 $ (525) $ 35
------ ------- ------
------ ------- ------

The changes in unrealized gains (losses) on debt instruments held as
available-for-sale and equity security investments at December 31, are as
follows:

1996 1995 1994
------ ------- ------
Bonds and notes $ (472) $ 4,154 14,637
Equity securities (29) 2 -
------ ------- ------
Total $ (501) $ 4,156 14,637
------ ------- ------
------ ------- ------

Proceeds from sales of investments held as available for sale for the year
ended December 31, 1996, 1995 and 1994 were $25,343, $17,643 and $4,047,
respectively. Gross gains of $44 and gross losses of $13 were realized on
those sales in 1996. Gross gains of $4 and gross losses of $529 were realized
on those sales in 1995. Gross gains of $63 and gross losses of $8 were realized
on those sales in 1994.

Bonds and other securities with a market value of $127,112 at December 31,
1996 and $143,462 at December 31, 1995, were on deposit with various insurance
regulatory authorities. Additionally, see Note (7) regarding investments held
related to reinsurance contracts.

F-10
<PAGE>

Notes to Consolidated Financial Statements, Continued

(3) FAIR VALUE OF FINANCIAL INSTRUMENTS

The following table represents the carrying amounts and estimated fair
values of the Company's financial instruments at December 31, 1996 and 1995.
FASB Statement No. 107, Disclosure about Fair Value of Financial Instruments,
defines the fair value of a financial instruments as the amount at which the
instrument could be exchanged in a current transaction between willing parties.

The carrying amounts shown in the table below are included in the
Consolidated Balance Sheets under the indicated options.

1996 1995
---------------- -----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- ---------------------------------------- -------- ------ -------- -------
Financial liabilities:
Chase financing agreement 91,681 91,374 - -
Imperial Bank Debt 7,250 7,541 8,530 $ 8,769
Preferred securities issued by affiliate $23,571 19,998 $21,045 $22,035
------- ------ ------- -------
------- ------ ------- -------

Fair value is estimated based on the quoted market prices for similar
issues or by discounting expected cash flows at the rates currently offered to
the Company for debt of the same remaining maturities.

(4) CLAIM AND CLAIM ADJUSTMENT EXPENSE RESERVES

The activity in the claim and claim adjustment expense reserve account is
summarized as follows:
<TABLE>
<CAPTION>
--------------------------------------
YEARS ENDED DECEMBER 31,
--------------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Beginning reserve, gross of reinsurance $141,495 $171,258 $171,038
Less: Reinsurance recoverable on unpaid losses 27,076 31,897 28,971
-------- -------- --------
Beginning reserve, net of reinsurance 114,419 139,361 142,067
Provision for net claims and claim adjustment expenses
For claims occurring in current year 57,614 58,842 72,457
For claims occurring in prior years (1,976) (4,872) 6,304
-------- -------- --------
Total claims and claim adjustment expenses 55,638 53,970 78,761
-------- -------- --------
Payments for net claims and claim adjustment expense:
Attributable to insured events incurred in current year (19,816) (19,732) (23,061)
Attributable to insured events incurred in prior years (59,698) (59,180) (58,406)
-------- -------- --------
Total claims and claim adjustment expense payments (79,514) (78,912) (81,467)
-------- -------- --------
Ending reserves, net of reinsurance 90,543 114,419 139,361
Reinsurance recoverable on unpaid losses 24,986 27,076 31,897
-------- -------- --------
Ending reserves, gross of reinsurance $115,529 $141,495 $171,258
-------- -------- --------
-------- -------- --------
</TABLE>
During 1996, the Company continued to experience decreased frequency and
severity with respect to claims incurred during 1996; however adverse develop-
ment on the 1995 accident year began to emerge. The Company's 1996 accident
year net claim and claim adjustment expense ratio for accident year 1996 at the
end of calendar year 1996 was 65.0%, versus 65.6% for accident years 1995 and
1994, at their respective calendar year ends.

In 1996, the Company experienced approximately $2.0 million in favorable
development on net claims and claim adjustment expense reserves estimated at
December 31, 1995. This $2.0 million favorable development is the result of
$8.4 million in favorable development on direct reserves for accident years 1994
and prior. The favorable development was offset in part by $4.1 million adverse
development on direct reserves for accident year

F-11
<PAGE>

Notes to Consolidated Financial Statements, Continued

1995, and $2.3 million adverse development on ceded reserves for accident years
1995 and prior. The Company's 1995 accident year net claims and claim
adjustment expense ratio for accident year 1995 at the end of calendar year 1995
was 65.6%, verses 74.6% at the end of the 1996 calendar year. Similar adverse
development has been experienced throughout the California workers' compensation
industry.

During 1995, the Company experienced approximately $8.6 million of favor-
able development on direct claim and claim adjustment expense reserves estimated
at December 31, 1994. Management believes the favorable development resulted
from the Company's improved claims management controls and decreased claim
severity, particularly in the medical component of the workers' compensation
line. Similar favorable development on pre-1995 losses has been experienced
elsewhere in the California workers' compensation industry. Offsetting the
favorable direct development in large part was the re-estimation during 1995 of
reinsurance receivables recorded at December 31, 1994 from approximately $66.2
million to approximately $59.9 million at December 31, 1995.

(5) DISCONTINUED OPERATIONS

During the third quarter of 1993, the Company adopted a plan to discontinue
underwriting commercial property and casualty risks. As a result, the Company
recorded a pre-tax charge to income of $2,991 for estimated operating losses
during the phase-out period.

During the second quarter of 1995, the Company increased its reserves by
approximately $15 million for discontinued operations for accident years 1994
and prior. This increase in claims and claim adjustment expense reserves from
the original estimate at the measurement date resulted from increased frequency
and severity of claims incurred from those years, relative to previous
expectations, which in turn caused an increase in the estimated ultimate claims
and claim adjustment expense reserves related to 1994 and prior years.

At December 31, 1996 and 1995, the net assets and liabilities of
discontinued operations, consisting primarily of reinsurance receivables,
securities, and unpaid claims and claim adjustment expenses, have been
reclassified in the balance sheet at estimated net realizable or payable
value. Management estimates the discontinued operations will be "run off" by
the year 2000. The assets and liabilities of discontinued operations are
summarized below.

--------------------
December 31,
--------------------
1996 1995
------- -------
Assets:
Reinsurance recoverables $ 8,604 $40,495
Investments and other assets 17,261 43
------- -------
Total Assets $25,865 $40,538
------- -------
------- -------
Liabilities:
Claims and claim adjustment expense reserves $25,466 $40,526
Other liabilities 399 12
------- -------
Total liabilities $25,865 $40,538
------- -------
------- -------

F-12
<PAGE>

Notes to Consolidated Financial Statements, Continued

(6) INCOME TAXES

Total income tax expense (benefit) for the years ended December 31, 1996,
1995, and 1994, was allocated as follows:

1996 1995 1994
------ ------- ------
Continuing operations $1,597 $ (12) $ 1,398
Dividend accrued on preferred securities (858) (767) (352)
Discontinued operations - (5,070) -
Extraordinary item - - (1,042)
------ ------- -------
Total $ 739 $(5,849) $ 4
------ ------- -------
------ ------- -------

Income tax expense (benefit) from continuing operations for the years ended
December 31, 1996, 1995, and 1994 is composed of the following amounts:

1996 1995 1994
------ ------- ------
Current $ 4 $ 4 $ 4
Deferred 1,593 (16) 1,394
------ ------- -------
Total $1,597 $ (12) $ 1,398
------ ------- -------
------ ------- -------

Taxes computed at the statutory rate of 34% varied from the amounts
reported in the consolidated statements of income at December 31, as follows:

1996 1995 1994
------ ------- ------
Income taxes at statutory rates $1,777 $ 3,974 $1,699
Effect of tax-exempt interest (22) (15) (15)
Effect of meals and entertainment 38 38 37
Research and Development credit (200) - -
Change in valuation allowance for
tax assets - (4,013) (237)
Internal Revenue Service settlement - - 15
Change in AMT credit carryforward - - (101)
Other 4 4 -
------ ------- -------
Total $1,597 $ (12) $ 1,398
------ ------- -------
------ ------- -------

F-13
<PAGE>

Notes to Consolidated Financial Statements, Continued

The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, are
presented below:

1996 1995
-------- --------

Deferred tax assets:
Original issue discount $ 5,764 $ 22,908
Net operating loss carryforward 29,062 27,961
Alternate minimum tax carryforward 701 701
Unearned premium liability 660 686
Policyholder dividends - 2,326
Unrealized loss on available for sale securities 84 -
Research and development credit 200 -
Other 281 391
-------- --------
Total gross deferred tax assets 36,752 54,973
Less: Valuation allowance - -
-------- --------
Total 36,752 54,973
-------- --------

Deferred tax liabilities:
Loss reserves (9,139) (22,197)
Discontinued operations (1,245) (5,850)
Reinsurance experience refund (15,300) (15,300)
Deferred acquisition costs (1,034) (945)
Direct collection allowance (510) (510)
Unrealized gain on available-for-sale - (86)
Reinsurance payable (4) -
-------- --------
Total gross deferred tax liabilities (27,232) (44,888)
-------- --------
Net deferred tax asset $ 9,520 $ 10,085
-------- --------
-------- --------

Management believes it is more likely than not the existing net deductible
temporary differences will reverse during periods in which the Company generates
net taxable income. However, there can be no assurance the Company will
generate any earnings or any specific level of continuing earnings in future
years. Certain tax planning strategies could be implemented to supplement
income from operations to fully realize recorded tax benefits.

At December 31, 1996, the Company had a tax net operating loss carry
forward of $86.1 million that begins to expire in the year 2006.

(7) REINSURANCE

SNIC cedes claims and claim adjustment expenses to reinsurers under various
contracts that cover individual risks, classes of business, or claims that occur
during specified periods of time. Reinsurance is ceded on pro rata, per-risk
excess-of-loss, and aggregate bases. These reinsurance arrangements provide
greater diversification of risk and limit SNIC's claims arising from large risks
or from hazards of an unusual nature. SNIC is contingently liable to the extent
that any reinsurer becomes unable to meet its contractual obligations.
Therefore, the Company evaluates the financial condition of its reinsurers and
monitors concentrations of credit risks arising from reinsurance activities and
economic characteristics to minimize its exposure to significant losses from
reinsurer insolvencies.

As of December 31, 1996, SNIC was involved in a dispute with reinsurers,
which, if not settled, may be resolved in arbitration. SNIC's dispute exists
with its property and casualty reinsurers as to the existence of coverage
related to a claim in the amount of $850. Management expects to recover the
entire disputed amount. At December 31, 1996, there were no disputes related to
the workers' compensation operations.

Effective June 30, 1991, SNIC entered into an aggregate excess of loss
reinsurance contract (1991 Contract) with Centre Reinsurance Limited (Centre
Re). Under the 1991 Contract, SNIC purchased for $50 million reinsurance for
claims and claim adjustment expense incurred on or prior to June 30, 1991, to
the extent that these

F-14
<PAGE>

Notes to Consolidated Financial Statements, Continued

amounts were unpaid at June 30, 1991. The coverage obtained amounted to $87.5
million in excess of SNIC's retention. Additionally, SNIC ceded approximately
$69.1 million of earned premiums to Centre Re through December 31, 1992. Claims
and claim adjustment expenses occurring prior to December 31, 1992 were ceded to
Centre Re in the amount of $165.6 million under the 1991 Contract. Prospective
cessions of premium and claims were terminated by mutual consent of SNIC and
Centre Re effective December 31, 1992; however, all other terms of the 1991
Contract remain in effect until the treaty terminates January 1, 1998.

As a result of the transaction entered into between the Company, Centre Re
and Chase Manhattan Bank (see footnote 8), the reinsurance receivables related
to the 1991 Contract no longer qualify as reinsurance receivables under the
conditions established in SFAS No. 113. Therefore, the receivables have been
reclassified as receivables from reinsurer on the balance sheet.

Effective January 1, 1993, SNIC entered into an aggregate excess of loss
reinsurance contract (1993 Contract) with Centre Re. From SNIC's perspective
the 1993 Contract substantively operated as a one year contract with at least
four one year options to renew that were exercisable solely at the Company's
election during the first five years of the contract. Subsequent to January 1,
1998, the 1993 Contract could have been terminated by either SNIC or Centre Re
upon 30 days notice. The 1993 Contract required the Company to cede not less
than $15 million and not more than $20 million of premium to Centre Re with
respect to any covered accident year. Claims and allocated claim adjustment
expenses occurring during the accident year are ceded to Centre Re in excess of
a variable percentage of earned premium (60%, 56.5% and 57.5% for the 1995, 1994
and 1993 accident years, respectively) and are subject to a limit of 130% of
ceded earned premium, such limit not to exceed $26 million for any accident
year. Effective January 1, 1996, the 1993 Contract was canceled at the Company's
election. The Company accrued $5.3 million related to the cancellation of the
1993 contract.

Reinsurance recoverable of $145.8 million and $165.6 million for the years
ended December 31, 1995 and 1994, respectively, were associated with Centre Re.
Under related reinsurance agreements with Centre Re, the Company held collateral
in the form of funds withheld of $105.7 million and $111.7 million for the years
ended December 31, 1995 and 1994, respectively, and irrevocable letters of
credit of $27.6 million and $62.3 million for the years ended December 31, 1995
and 1994, respectively. Centre Re realized $4.9 million in capital gains in
1995 and none in 1994 and 1993. The investment risk of investments related to
the funds withheld account was Centre Re's. Additionally, investment income on
the funds withheld account inured to the benefit of Centre Re.

Effective January 1, 1994, the Company entered into a 20% quota-share
reinsurance agreement with Zurich Reinsurance Centre (ZRC), an affiliate of
Centre Re. Under the terms of the treaty, the Company is to receive a ceding
commission to cover its costs of acquisition, and ZRC has the option to reduce
its participation level in subsequent years. Policies covered under this
contract include statutory workers' compensation and employers liability in-
force at January 1, 1994, and new and renewal policies occurring on or after
January 1, 1994. On December 31, 1994, ZRC elected to reduce its quota share
participation to 5%; however, all other terms of the treaty remained in effect.

SNIC's contracts are generally entered into on an annual basis. SNIC has
maintained reinsurance treaties with many reinsurers for a number of years. In
general, SNIC's reinsurance contracts are of the treaty variety, and cover
underwritten risks specified in the treaties. SNIC also from time to time
purchases facultative reinsurance covering specific liabilities or policies
underwritten. As of December 31, 1996, ZRC, General Reinsurance Corporation and
Unum Life Insurance Co. account for 36.8%, 24.8% and 15.6%, respectively, of
total amounts recoverable from all reinsurers on paid and unpaid claims and
claim adjustment expenses.

F-15
<PAGE>
Notes to Consolidated Financial Statements, Continued

Amounts included in the income and expense accounts in continuing
operations in connection with all ceded reinsurance at December 31, are as
follows:

1996 1995 1994
------ ------- ------
Net Premiums written:
Premiums written $ 99,282 $97,084 $134,769
Premiums ceded (11,567) (7,945) (28,823)
-------- ------- --------
Net premiums written $ 87,715 $89,139 $105,946
-------- ------- --------
-------- ------- --------

Net change in unearned premiums:
Direct $ (645) $ (381) $ (3,935)
Ceded (288) (215) (537)
-------- ------- --------
Net change in unearned premiums $ (933) $ (596) $ (4,472)
-------- ------- --------
-------- ------- --------

Net claims and claim adjustment expenses:
Claims and claim adjustment expenses $ 61,702 $56,388 $ 87,163
Reinsurance recoveries (6,064) (2,418) (8,402)
-------- ------- --------
Net claims and claim adjustment
expenses $ 55,638 $53,970 $ 78,761
-------- ------- --------
-------- ------- --------

Funds withheld interest charges relating to the Centre Re treaties were
recorded in the amount of $6,062, $8,815 and $7,545 for the years ended
December 31, 1996, 1995, and 1994, respectively. Additionally, these interest
charges have been included in the funds withheld liability and interest expense
in the accompanying consolidated financial statements. The funds withheld
liability and interest accrual have been offset against amounts due from
reinsurers. The entire funds withheld investments were returned to Certre Re in
November 1996.

(8) LONG TERM DEBT

The following is a summary of the long-term debt balances at December 31:

1996 1995
-------- --------

Chase Financing Agreement - 6.87% due through 2004 $91,681 $ -
Imperial Bank Debt - 8.25% due through 2001 7,250 8,500
Voting Notes due 2002 30 30
------- ------
Balance at end of period $98,961 $8,530
------- ------
------- ------

Effective June 30, 1994, the Company entered into a $10 million term loan
agreement (the "1994 Loan") with Imperial Bank, which was used to retire
subordinated notes issued during 1992. This term loan is to be fully amortized
over seven years with quarterly payments of $300 plus interest per quarter for
years one and two, $350 plus interest per quarter for years three and four, and
$400 plus interest per quarter for years five, six and seven. Effective July 1,
1995, the borrowing rate was changed from Imperial Bank's prime rate plus one
half percent to a fixed rate of 8% per annum. Additionally, under the amended
terms of the 1994 Loan, the Company could not prepay the Loan until July 1,
1996. At which time, the Loan may be prepaid based upon an agreed upon premium
which varies by year. The premium for 1997 is 3.5%; 1998 is 2.5%; 1999 is 1%;
and 2000 is none.

The Company must adhere to certain requirements and provisions to be in
compliance with the terms of the notes. The provisions require SNIC to maintain
certain financial ratios and Superior National Insurance Group, Inc. the holding
company, to maintain Imperial Bank certificates of deposit in an amount equal to
20% of SNIG's outstanding balance under the 1994 Loan. At December 31, 1996,
the Imperial Bank time certificates of deposit were $1.5 million all of which
was restricted. The Company is in compliance with all loan covenants as of
December 31, 1996.

F-16
<PAGE>
Notes to Consolidated Financial Statements, Continued

During 1996, the Company entered into a financing transaction involving
Centre Re and Chase. Chase extended a $93.1 million term loan (net of
transaction costs). The Company used the proceeds from the financing to
purchase from SNIC reinsurance receivables due from Centre Re.

The principal balance of the loan is collateralized by receivables due from
reinsurer and amortizes based upon the payout pattern of the underlying claims
of the reinsurance receivables. The loan amortizes approximately $6.0 million
in 1997, $33.7 million in 1998, $25.6 million in 1999, $15.2 million in 2000
and $(0.8) in 2001, with the remaining $12.0 million due through 2004. The
effective interest rate of the loan will be approximately 6.87%.

On June 30, 1994, the Company retired all of its 14.5% Senior Subordinated
Series A Notes and Series B Notes. Voting Notes of $30 are still outstanding as
of December 31, 1996. As a result of the prepayment of the debt, the Company
recognized an extraordinary loss of $2,022, net of an income tax benefit of
$1,042. For the year ended December 31, 1994, amounts paid to International
Insurance Investors (III), an affiliate of Centre Re, and Company officers for
prepayment penalty related to the early extinguishment of debt are $1,397 and
$153, respectively. Interest expense incurred in 1996, 1995, and 1994, was
$1,465, $804, and $1,181, respectively.

The warrants related to the Series A and B notes remain outstanding and
provide their holders the right to purchase 1,566,465 shares of common stock at
a strike price of $4 per share. The warrants are currently exercisable and
expire on April 1, 2002. The warrants are held by senior management and a
nominee for III.

In February 1995, SNIC entered into an agreement with a national brokerage
house to allow it to enter into $5 million in reverse repurchase transactions
that must be secured by either U.S. treasuries or government agency bonds.
There were no outstanding transactions at December 31, 1996.

The aggregate maturities of the financing agreement; long-term debt and
voting notes are as follows:

Financing Long-term Voting
Fiscal Year Agreement Debt Notes
----------- --------- --------- ------
1997 6,021 1,400 -
1998 33,709 1,450 -
1999 25,555 1,600 -
2000 15,229 1,600 -
2001 (799) 1,200 -
Thereafter 11,966 - 30
--------- --------- ------
91,681 7,250 30
--------- --------- ------
--------- --------- ------

(9) PREFERRED SECURITIES ISSUED BY AFFILIATE

On June 30, 1994, the Company completed the sale of $20 million of
preferred securities and warrants to affiliates of Centre Re in a transaction
approved by the shareholders and the DOI. The preferred securities are
subordinate to the Imperial Bank term debt. A special purpose investment
partnership, Superior National Capital, L.P. (the Limited Partnership), was
formed in Bermuda to issue $20 million face amount of 9.7% redeemable preferred
securities to Centre Reinsurance Services (Bermuda) III, Limited in exchange for
$18 million. CentreLine Reinsurance Limited paid the Company $2 million for
warrants to purchase 579,357 shares of the Company's common shares at $5.20 per
share, representing a fully-diluted 10 percent interest in the Company. The
warrants are currently exercisable and expire on June 30, 2001.

The proceeds received from the sale of preferred securities by the Limited
Partnership were loaned to Superior National Insurance Group, Inc. Interest on
the debt is to be paid to the Limited Partnership, which in turn will make the
required dividend payments on the preferred securities. The Limited Partnership
is accounted for as a subsidiary in the Company's consolidated financial
statements. The debt between Superior National Insurance Group, Inc. and the
Limited Partnership eliminates in consolidation. The preferred securities
issued by the Limited

F-17
<PAGE>
Notes to Consolidated Financial Statements, Continued

Partnership and are presented between the liability and shareholders' equity
sections of the balance sheet, net of transaction costs.

The difference between the face value and the carrying value is amortized
over the seven year maturity of the preferred securities using the scientific
method. The amortization, net of tax benefits, and accrued dividends, is
charged to current year income after continuing operations, net of taxes.

The following is a summary of the preferred securities balance as of
December 31:

1996 1995
-------- --------
Beginning balance $21,045 $18,790
Add: Dividends and accretion 2,526 2,255
-------- --------
Balance at end of period $23,571 $21,045
-------- --------
-------- --------

For the first three years, the preferred securities will pay dividends in
the form of additional face value of the preferred securities at the coupon rate
of 9.7%.

(10) STATUTORY SURPLUS AND DIVIDEND RESTRICTIONS

SNIC is domiciled in the State of California and prepares its statutory
financial statements in accordance with accounting practices prescribed or
permitted by the State of California Department of Insurance (DOI). Prescribed
statutory accounting practices include a variety of publications of the National
Association of Insurance Commissioners (NAIC), as well as state laws,
regulations, and general administrative rules. Permitted statutory accounting
practices encompass all accounting practices not so prescribed.

SNIC has been permitted to record its experience rated refund at its
estimated realizable value, which may be different from its current market value
as a result of fluctuations in interest rates and future yields on certain U.S.
Treasury Bonds.

SNIC's statutory policyholders' surplus as reported to regulatory
authorities was $51,998 and $51,895 at December 31, 1996, and 1995,
respectively. SNIC's statutory net income, as reported to regulatory
authorities, was $791, $1,050 and $3,917 for the years ended December 31, 1996,
1995, and 1994 respectively.

Insurance companies are subject to insurance laws and regulations
established by the states in which they transact business. The laws of the
various states establish supervisory agencies with broad administrative and
supervisory powers. Most states have also enacted legislation regulating
insurance holding company systems, including acquisitions, extraordinary
dividends, the terms of affiliate transactions and other related matters. The
Company and SNIC have registered as holding company systems pursuant to such
legislation in California. The NAIC has formed committees and appointed
advisory groups to study and formulate regulatory proposals on such diverse
issues as the use of surplus debentures, and accounting for reinsurance
transactions. It is not possible to predict the future impact of changing state
and federal regulation on the operations of the Company and SNIC.

The Risk Based Capital Model (RBC) for property and casualty insurance
companies was adopted by the NAIC in December 1993, and starting in 1995,
companies were required to report their RBC ratios to the NAIC. SNIC has
calculated and met its RBC requirement.

Insurance companies are also subject to restrictions affecting the amount
of stockholder dividends and advances that may be paid within any one year
without the prior approval of the DOI. The California Insurance Code provides
that amounts may be paid as dividends on an annual noncumulative basis
(generally based on the greater of (1) net income for the preceding year or
(2) 10% of statutory surplus as regards policyholders as of the preceding
December 31) without prior notice to, or approval by, the DOI. At December 31,
1996, SNIC could pay

F-18
<PAGE>

Notes to Consolidated Financial Statements, Continued

approximately $5.2 million in dividends and advances to the Company without the
DOI's prior approval based on 10% of reported statutory surplus.

In 1995, SNIC made an extraordinary dividend distribution of 100% of its
shares in Superior (Bermuda) Limited to Superior National Insurance Group, Inc.,
after receiving prior approval from the DOI, constituting $15 million of SNIC's
statutory capital and surplus. Cash dividends of $850 were paid in 1994.

(11) EMPLOYEE BENEFIT PLANS

The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options. As discussed below
in management's opinion, the alternative fair value accounting provided for
under FAS No. 123, "Accounting for Stock Based Compensation" requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of the grant, no compensation expense is recognized.

The Company has two fixed option plans the 1986 Stock Option Plan (the
"1986 Plan") and the 1995 Stock Incentive Plan (the "1995 Plan"). The terms of
the 1986 Plan permit the Company, at the Board of Directors discretion, to grant
options to its management to purchase 225,000 shares of common stock. Options
granted under the 1986 Plan are not intended to qualify as incentive stock
options within the meaning of section 422 of the Internal Revenue Code (the
"Code"). The 1995 Plan permits granting of both options that qualify for
treatment as incentive stock options under Section 422 of the Code, and options
that do not qualify as incentive stock options. Under the 1995 Plan, officers
and key employees of the Company may be granted options to purchase shares of
common stock of the Company or may be given the opportunity to receive
restricted stock of the Company. Under the 1995 Plan the number of shares of
common stock that may be granted, either through the exercise of options or the
issuance of restricted stock, is 625,000 shares. Under both plans, the exercise
price of each option equals the market price of the Company's stock on the date
of grant and options have a maximum term of ten years. The Board of Directors
may grant options at any point during a year and the options generally vest over
five years.

Pro forma information regarding net income and earnings per share is
required by Statement 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions. The risk free interest rate used is in the calculation is the 10
year Treasury Note rate on the date the options were granted. The risk free
interest rate used for options granted during 1996 ranged from 6.0% to 6.79% and
options granted during 1995, the risk free interest rate ranged from 6% to
7.11%. The volatility factors for the expected market price of the common stock
of 70% and 77% were used for options granted in 1996 and 1995 respectively. A
weighted average expected life of ten years was used as the Company has little
history of options being exercised prior to their expiration.

The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that do not have vesting
restrictions and are fully transferable. In addition, option valuation models
require the input of highly subjective assumptions including the expected stock
price volatility. Because the Company's stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the value of an estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.

F-19
<PAGE>

Notes to Consolidated Financial Statements, Continued

For purposes of pro forma disclosures, the estimated fair value of the
options is amortized into expense over the options' vesting period. The
Company's pro forma information follows (in thousands except for earnings per
share information):

1996 1995
------- ------
Pro forma net income $ 1,842 $ 338
Pro forma earnings per share
Primary $ 0.41 0.10
Fully Diluted $ 0.38 0.10

A summary of the Company's stock option activity, and related information
for the years ended December 31, follows:

1996 1995
----------------------------- -----------------------------
Number Weighted-Average Number Weighted-Average
of Shares Exercise Price of Shares Exercise Price
----------------------------- -----------------------------
<S> <C> <C> <C> <C>

Stock options outstanding
beginning of year 252,500 $ 4.19 138,750 $ 4.47
Stock options granted 146,516 5.46 135,000 5.20
Stock options exercised (3,100) 4 (500) 4
Stock options canceled (6,400) 4.61 (20,750) 4
Stock options outstanding,
end of year 389,516 $ 5.13 252,500 $ 4.90
------- ------ ------- ------
------- ------ ------- ------
Exercisable at end of year 102,200 - 56,690 -
Weighted-average fair value
of options granted during the year $ 4.41 $ 4.40

</TABLE>

Exercise prices for options outstanding as of December 31, 1996 ranged from
$4 to $7.70. The weighted-average remaining contractual life of those options
is 9 years.

The following is a summary of the transactions under the 1986 stock option
plan for the years ended December 31:

1996 1995 1994
------------------------ ------------------------ ------------------------
Number Option Number Option Number Option
of Shares Price of Shares Price of Shares Price
------------------------ ------------------------ ------------------------
<S> <C> <C> <C> <C> <C> <C>
Stock options outstanding
beginning of year 127,500 $4.00-$5.20 138,750 $4.00-$5.20 146,250 $ 4.00
Stock options granted - - 10,000 5.20 57,500 5.00-5.20
Stock options exercised (3,100) 4.00 (500) 4.00 - -
Stock options canceled (4,400) 4.00-5.20 (20,750) 4.00 (65,000) 4.00
------- ------- -------
Stock options outstanding,
end of year 120,000 $4.00-$5.20 127,500 $4.00-$5.20 138,750 $4.00-$5.20
------- ----------- ------- ----------- ------- -----------
------- ----------- ------- ----------- ------- -----------

</TABLE>

F-20
<PAGE>

Notes to Consolidated Financial Statements, Continued

At December 31, 1996, 58,200 vested options were exercisable and no
additional options or purchase rights will be granted under the 1986 plan.

1996 1995
---------------------- -----------------
STOCK OPTIONS: Number Option Number Option
of Shares Price of Shares Price
--------- ---------- --------- ------
Options outstanding at
beginning of the year 125,000 $5.20 - -
Options granted 146,516 $5.20-7.70 125,000 $5.20
Options canceled (2,000) 5.20 - -
------- -------
Options outstanding at end of year 269,516 $5.20-7.70 125,000 $5.20
------- ---------- ------- -----
------- ---------- ------- -----

1996 1995
---------------------- -----------------
RESTRICTED STOCK: Number Option Number Option
of Shares Price of Shares Price
--------- ---------- --------- ------
Shares outstanding at
beginning of year 36,350 $5.20 - -
Shares granted 45,934 4.87-6.25 36,350 $5.20
Shares issued (13,019) 4.87-5.20 - -
------- -------
Shares outstanding at end of year 69,265 $4.87-6.25 36,350 $5.20
------- ---------- ------- -----
------- ---------- ------- -----

At December 31, 1996, 44,000 vested options were exercisable and 243 of the
restricted shares granted in 1996 were vested, but were not issued. Shares
available for future grants under the 1995 Plan at December 31, 1996 were
286,219.

Effective January 1, 1990, the Company implemented a 401(k) Plan (the
"Plan") which is available for substantially all employees and under which the
Company matches a percentage of the participant's compensation. The employer
contributions are discretionary and vest over a five year period. The employer
contributions for plan years 1996, 1995, and 1994 were $170, $150, and $82,
respectively.

The Company has no formal post-employment retirement benefit plans;
however, the Company has entered into severance contracts with certain former
employees for which approximately $48, $322 and $284 of accrued expenses were
recorded at December 31, 1996, 1995, and 1994, respectively.

(12) COMMITMENTS

The Company and its subsidiaries occupy offices under various operating
leases. The future minimum lease payments at December 31, 1996, are as
follows:

1997 $1,931
1998 1,589
1999 1,604
2000 391
2001 43

Rental expenses totaled approximately $1,918, $1,772 and $1,780 for the
years ended December 31, 1996, 1995, and 1994, respectively.

F-21
<PAGE>

Notes to Consolidated Financial Statements, Continued

In a transaction associated with the sale of Senior Subordinated Notes to
III, the Company and SNIC agreed to pay International Insurance Advisors, Inc.,
agent for each of the III limited partners and for the general partner of III, a
consulting fee in the amount of $250 beginning on April 1, 1993, and on each
April 1 thereafter, to and including April 1, 1998. The retirement of the 1992
Notes in 1994 did not affect the obligation of the Company and SNIC to pay the
consulting fee.

(13) LITIGATION

The Company is subject to various litigation which arises in the ordinary
course of business. Management is of the opinion that such litigation will not
have a material adverse effect on the consolidated financial position of the
Company or its consolidated results of operations.

(14) PREPAID AND OTHER ASSETS

A summary of prepaid and other assets at December 31, are as follows:

1996 1995
------- -------
Furniture and fixtures, net $ 1,260 $ 1,151
Data processing equipment, net 3,560 2,767
Prepaid and advances 1,091 1,540
Other 1,453 619
------- -------
$ 7,364 $ 6,077
------- -------
------- -------

(15) ACCOUNTS PAYABLE AND OTHER LIABILITIES

A summary of accounts payable and other liabilities at December 31, are as
follows:

1996 1995
------- -------
Escheatment payable $ 333 $ 1,423
Rent and lease liability 527 662
Accounts payable 8,683 5,275
Other liabilities 3,198 60
------- -------
$12,741 $ 7,420
------- -------
------- -------

(16) SUBSEQUENT EVENT

On September 17, 1996 the Company entered into a definitive agreement to
acquire Pac Rim Holding Corporation (PRIM) for approximately $54 million in
cash. The ultimate price per share to be paid was based on a formula that was
based upon the size of PRIM's loss reserves at the time of the scheduled
transaction closing in December 1996. The transaction was expected to yield $3
to $3.10 a share to PRIM shareholders. As a result of the DOI's triennial audit
of PRIM, it was required to strengthen its claim and claim adjustment expense
reserve by $12 million. The magnitude of the reserve strengthening necessitated
renegotiation of the terms of the original definitive agreement. On February
18, 1997 a revised purchase agreement was announced by the Company and PRIM.
Under the terms of the agreement the Company will acquire PRIM for the aggregate
consideration of approximately $42 million in cash. PRIM shareholders will
receive approximately $20 million ($2.11 per share); $20 million will be paid to
PRIM's convertible debenture holders; and approximately $2 million will be paid
to PRIM's warrant and option holders.

F-22
<PAGE>

Notes to Consolidated Financial Statements, Continued

The Company will finance the acquisition with a combination of common stock
and bank debt. Under an agreement reached September 17, 1996, a group of
investors including Insurance Partners, L.P., TJS Partners, L.P., and the
Company's management have agreed to purchase $18 million of newly issued common
stock (2,390,438 shares) at $7.53 per share, based upon the September 1996
market price of the Company's common stock. The Company expects the remaining
$24 million of the purchase price will be funded by a $44 million bank loan to
be provided by a syndicate of banks led by Chase Manhattan Bank. Approximately
$6.6 million of the loan proceeds will be used to redeem the Company's
outstanding long- term debt. Approximately $10 million of the loan proceeds
will be contributed to the capital of PRIM's wholly owned subsidiary, Pacific
Rim Assurance Company. The above described transaction is subject to both
shareholder and regulatory approval.

F-23
<PAGE>

SCHEDULE I.1
SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
SUPERIOR NATIONAL INSURANCE GROUP, INC.
BALANCE SHEET
(Amounts in thousands, except share data)

DECEMBER 31,
1996 1995
-------- -------
<S> <C> <C>

ASSETS
Investments:
Bonds and Notes at market (amortized cost: $1,497 in 1995) $ - $ 1,500
Cash and invested cash (certificates of deposit and other short-term instruments) 1,787 2,889
-------- -------
Total Investments 1,787 4,389
Accrued investment income 1 9
Receivable from reinsurer 110,527 -
Investment in subsidiaries 72,788 67,695
Intercompany receivable 91 91
Deferred income taxes 4,957 1,526
Other 1,087 94
-------- -------
Total Assets $191,238 $73,804
-------- -------
-------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Long-term debt $98,961 $8,530
Intercompany Liability 23,465 -
Accounts payable and other liabilities 50 749
-------- -------
Total liabilities 122,476 9,279
-------- -------

Preferred securities issued by affiliate; authorized 1,100,000 shares; issued and
outstanding 1,013,753 shares in 1996 and 922,137 shares in 1995 23,571 21,045

Shareholders' Equity:

Common stock, no par value; authorized 25,000,000 shares: issued and outstanding
3,446,492 shares in 1996 and 3,430,373 shares in 1995 16,022 15,943
Unrealized gain (loss) on investments, net of income taxes (162) 169
Paid in capital - warrants 2,206 2,206
Retained earnings 27,125 25,162
-------- -------
Total shareholders' equity 45,191 43,480
-------- -------
Total liabilities and shareholders' equity $191,238 $73,804
-------- -------
-------- -------

</TABLE>

SEE NOTES TO CONDENSED FINANCIAL INFORMATION

F-24
<PAGE>

SCHEDULE I.2

SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
SUPERIOR NATIONAL INSURANCE GROUP, INC.
STATEMENTS OF INCOME
(Amounts in thousands)

TWELVE MONTHS ENDED
DECEMBER 31,
-------------------------------------
------- ------- -------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>

REVENUES:
Net investment income $ 89 $ 330 $ 90
------- ------- -------
Total revenues 89 330 90

EXPENSES:
Interest expense 1,465 804 1,108
General and administrative expenses (446) 304 116
------- ------- -------
Total expenses 1,019 1,108 1,224
------- ------- -------
Loss from operations before federal income tax expense, equity in net
income of subsidiaries, extraordinary item and preferred securities
dividends and accretion (930) (778) (1,134)
Income tax expense 858 767 1,394
------- ------- -------
Loss from operations before equity in net income of subsidiaries,
extraordinary item, taxes, and preferred securities dividend and accretion (1,788) (1,545) (2,528)
Equity in net income of subsidiaries 5,418 3,404 6,127
Extraordinary loss on retirement of long-term debt, net of income tax benefit
of $1,042 in 1994 - - (2,022)
Preferred securities dividends and accretion, net of income tax benefit of
$858, $767 and $352 in 1996,1995 and 1994 respectively (1,667) (1,488) (683)
------- ------- -------
Net income $ 1,963 $ 371 $ 894
------- ------- -------
------- ------- -------

</TABLE>

SEE NOTES TO CONDENSED FINANCIAL INFORMATION

F-25
<PAGE>

SCHEDULE I.3

SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
SUPERIOR NATIONAL INSURANCE GROUP, INC.
STATEMENTS OF CASH FLOWS
(Amounts in thousands)

TWELVE MONTHS ENDED
DECEMBER 31,
---------------------------------------
1996 1995 1994
--------- -------- --------
<S> <C> <C> <C>

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income $ 1,963 $ 371 $ 894
--------- ------- --------
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Amortization of bonds and preferred stock - (1) 55
Amortization of long-term debt - - 1,151
Income from subsidiaries (5,418) (3,404) (6,127)
Loss on sale of investments 5 - 68
Preferred securities dividends and accretion 2,525 2,255 1,035
Decrease in accrued investment income 8 1 11
Increase in current income taxes - 1,721 -
(Decrease) increase in other assets (994) (11) 157
(Decrease) increase in accounts payable and other liabilities 19,334 78 (271)
--------- ------- --------
Total adjustments 15,460 639 (3,921)
--------- ------- --------
Net cash provided by (used in) operating activities 17,423 1,010 (3,027)
--------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Retirement of long-term debt - - (8,164)
Repayment of bank loans - Imperial Bank (1,250) (1,200) -
Repayment of bank loans - Chase (1,410) - -
Proceeds from long-term debt - - 10,000

Proceeds from Chase financing 93,091 - -

Proceeds from issuance of preferred securities - - 17,755
Paid-in capital - new warrants issued - - 2,000
Paid-in capital - warrants - - (10)
Paid-in capital - stock options 78 2 -
--------- ------- --------
Net cash provided by (used in) financing activities 90,509 (1,198) 21,581
--------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of bonds and notes:
Investments - (1,496) -
Dividends received from subsidiaries - - 850

(Increase) in receivable from reinsurer (110,527) - -

Sales of bonds and notes:
Investments available for sale 1,493 - 923
Capital contribution to subsidiaries - (1,500) (15,000)
Sales of common & preferred stock - - 24
Net (increase) decrease in invested cash - - 668
--------- ------- --------
Net cash provided by (used in) investing activities (109,034) (2,996) (12,535)
--------- ------- --------
Net increase (decrease) in cash (1,102) (3,184) 6,019
Cash and Invested cash at beginning of period 2,889 6,073 54
--------- ------- --------
Cash and Invested cash at end of period $ 1,787 $ 2,889 $ 6,073
--------- ------- --------
--------- ------- --------
Supplemental disclosure of cash flow information:
Cash paid during the year for income taxes $ 1 $ 1 $ 1
--------- ------- --------
--------- ------- --------
Cash paid during the year for interest $ 641 $ 808 $ 1,222
--------- ------- --------
--------- ------- --------

</TABLE>

SEE NOTES TO CONDENSED FINANCIAL INFORMATION

F-26
<PAGE>

SCHEDULE I.4

SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
SUPERIOR NATIONAL INSURANCE GROUP, INC.
NOTES TO CONDENSED FINANCIAL INFORMATION

1. BASIS OF PRESENTATION

In accordance with the requirements of Regulation S-X of the Securities and
Exchange Commission, the financial statements of the registrant are
condensed and omit many disclosures presented in the consolidated financial
statements and the notes thereto.

2. LONG TERM DEBT

The following is a summary of the long-term debt balances at December 31:

1996 1995
------- ------
Chase Financing Agreement - 6.87% due through 2004 $91,681 $ -
Imperial Bank Debt - 8.25% due through 2001 7,250 8,500
Voting Notes due 2002 30 30
------- ------
Balance at end of period $98,961 $8,530
------- ------
------- ------

Maturities of long-term debt for the next five years are as follows:

Financing Long-term Voting
Fiscal Year Agreement Debt Notes
- ----------- --------- --------- ------
1997 $ 6,021 $ 1,400 $ -
1998 33,709 1,450 -
1999 25,555 1,600 -
2000 15,229 1,600 -
2001 (799) 1,200 -
Thereafter 11,966 - 30
--------- --------- ------
$ 91,681 $ 7,250 $ 30
--------- --------- ------
--------- --------- ------

3. DIVIDENDS FROM SUBSIDIARIES

During 1996 and 1995, there were no dividends paid to Superior National
Insurance Group by its consolidated subsidiaries. During 1994, a cash
dividend of $850,000 was paid to Superior National Insurance Group by its
consolidated subsidiaries.

4. CONTINGENCIES

The Company is subject to various litigation which arises in the ordinary
course of business. Based upon discussions with counsel, management is of
the opinion that such litigation will not have a material adverse effect on
the consolidated financial position of the Company or its consolidated
results of operations.

5. RECONCILIATION - RECEIVABLE FROM REINSURER

The following is a reconciliation between the Condensed Financial
Information of Registrant Balance Sheet and the Consolidated Balance Sheet
for Receivable from reinsurer.

Receivable
from Reinsurer
--------------

Balance per Consolidated Balance Sheet $ 93,266
Add: Elimination for Discontinued Operations 17,261
--------------
Balance per Condensed Balance Sheet $ 110,527
--------------
--------------

F-27
<PAGE>

SCHEDULE II
SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(Amounts in thousands)

COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -------------------------------- ---------- --------------------------- ---------- ---------
ADDITIONS
---------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING COSTS OTHER AT END
OF PERIOD AND EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD
---------- ------------ ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>

Year ended December 31, 1996
Allowance for possible losses on
premiums receivable $500 $1,369 - $(1,569) $300
---------- ------------ ---------- ---------- ---------
---------- ------------ ---------- ---------- ---------

Allowance for possible losses on
reinsurance recoverable - - - - -
---------- ------------ ---------- ---------- ---------
---------- ------------ ---------- ---------- ---------

YEAR ENDED DECEMBER 31, 1995
Allowance for possible losses on
premiums receivable $900 $1,531 - $(1,931) $500
---------- ------------ ---------- ---------- ---------
---------- ------------ ---------- ---------- ---------

Allowance for possible losses on
reinsurance recoverable - - - - -
---------- ------------ ---------- ---------- ---------
---------- ------------ ---------- ---------- ---------

YEAR ENDED DECEMBER 31, 1994
Allowance for possible losses on
premiums receivable $900 $2,697 - $(2,697) $900
---------- ------------ ---------- ---------- ---------
---------- ------------ ---------- ---------- ---------

Allowance for possible losses on
reinsurance recoverable - - - - -
---------- ------------ ---------- ---------- ---------
---------- ------------ ---------- ---------- ---------

</TABLE>

F-28
<PAGE>

SCHEDULE V. 1
SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES
SUPPLEMENTAL INSURANCE INFORMATION
(Amounts in thousands)
<TABLE>
<CAPTION>

COLUMN COLUMN COLUMN COLUMN COLUMN COLUMN
A B C D E F
- ---------------- ----------- -------------- -------- ------------ -------
DEFERRED FUTURE POLICY UNEARNED OTHER POLICY PREMIUM
POLICY BENEFITS PREMIUM CLAIMS AND REVENUE
ACQUISITION LOSSES, CLAIMS BENEFITS
COSTS AND LOSS PAYABLE
EXPENSES
<S> <C> <C> <C> <C> <C>
1996
Workers
Compensation $3,042 $115,529 $9,702 $ - $ 88,648
------ -------- ------- ------- --------
------ -------- ------- ------- --------
1995
Workers'
Compensation $2,780 $141,495 $10,347 $ - $ 89,735
------ -------- ------- ------- --------
------ -------- ------- ------- --------
1994
Workers'
Compensation $2,905 $171,258 $10,728 $ - $110,418
------ -------- ------- ------- --------
------ -------- ------- ------- --------

COLUMN COLUMN COLUMN COLUMN COLUMN COLUMN
A G H I J K
- ---------------- ----------- -------------- ------------ ------------ --------
NET BENEFITS, AMORTIZATION OTHER PREMIUMS
INVESTMENT CLAIMS, OF DEFERRED OPERATING WRITTEN
INCOME LOSSES AND POLICY EXPENSES
SETTLEMENT ACQUISITION
EXPENSES COSTS
<S> <C> <C> <C> <C> <C>

1996
Workers
Compensation $7,769 $ 55,638 $16,870 $24,609 $ 87,715
------ -------- ------- ------- --------
------ -------- ------- ------- --------
1995
Workers'
Compensation $9,784 $ 53,970 $18,288 $21,314 $ 89,139
------ -------- ------- ------- --------
------ -------- ------- ------- --------
1994
Workers'
Compensation $9,049 $ 78,761 $16,746 $13,980 $105,946
------ -------- ------- ------- --------
------ -------- ------- ------- --------

</TABLE>

F-29
<PAGE>

SCHEDULE V. 2

SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES
REINSURANCE
(In thousands)

COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
- ------------------------------- -------- --------- --------- -------- ----------
PERCENTAGE
ASSUMED OF
CEDED TO FROM AMOUNT
GROSS OTHER OTHER NET ASSUMED
DESCRIPTION AMOUNT COMPANIES COMPANIES AMOUNT TO NET
- ------------------------------- -------- --------- --------- -------- ----------
<S> <C> <C> <C> <C> <C>

YEAR ENDED DECEMBER 31, 1996
Premiums:
Workers' compensation insurance $ 97,270 $11,280 $2,658 $ 88,648 3.0%
-------- ------- ----- -------- ------
Total Premiums $ 97,270 $11,280 $2,658 $ 88,648 3.0%
-------- ------- ----- -------- ------
-------- ------- ----- -------- ------

YEAR ENDED DECEMBER 31, 1995
Premiums:
Workers' compensation insurance $ 96,630 $ 7,730 $ 835 $ 89,735 0.9%
-------- ------- ----- -------- ------
Total premiums $ 96,630 $ 7,730 $ 835 $ 89,735 0.9%
-------- ------- ----- -------- ------
-------- ------- ----- -------- ------

YEAR ENDED DECEMBER 31, 1994
Premiums:
Workers' compensation insurance $138,704 $28,286 $ - $110,418 $ -
-------- ------- ----- -------- ------
Total premiums $138,704 $28,286 $ - $110,418 $ -
-------- ------- ----- -------- ------
-------- ------- ----- -------- ------

</TABLE>

F-30
<PAGE>

SCHEDULE V. 3

SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES
SUPPLEMENTAL PROPERTY AND CASUALTY INSURANCE INFORMATION
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>

COLUMN COLUMN COLUMN COLUMN COLUMN COLUMN COLUMN
A B C D E F G
- -------------- ----------- ---------- ----------- -------- ------- ----------
DISCOUNT
IF ANY,
DEDUCTED
RESERVES IN RESERVES
FOR UNPAID FOR UNPAID
DEFERRED CLAIMS AND CLAIMS AND
POLICY CLAIMS CLAIM NET
ACQUISITION ADJUSTMENT ADJUSTMENT UNEARNED EARNED INVESTMENT
COSTS EXPENSES EXPENSES PREMIUM PREMIUM INCOME
----------- ---------- ----------- -------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>

1996
Workers'
Compensation $ 3,042 $115,529 $ - $ 9,702 $ 88,648 $7,769
------- -------- ------- ------- -------- ------
------- -------- ------- ------- -------- ------

1995
Workers'
Compensation $ 2,780 $141,495 $ - $10,347 $ 89,735 $9,784
------- -------- ------- ------- -------- ------
------- -------- ------- ------- -------- ------

1994
Workers'
Compensation $ 2,905 $171,258 $ - $10,728 $110,418 $9,049
------- -------- ------- ------- -------- ------
------- -------- ------- ------- -------- ------

COLUMN COLUMN COLUMN COLUMN COLUMN
A H I J K
- -------------- ------------------------- -------------- ---------- --------
CLAIMS AND CLAIM AMORTIZATION
ADJUSTMENT EXPENSES OF PAID
INCURRED RELATED TO: DEFERRED CLAIMS AND
------------------------- POLICY CLAIM
CURRENT PRIOR ACQUISITION ADJUSTMENT PREMIUM
YEAR YEAR COSTS EXPENSES WRITTEN
--------- --------- -------------- ---------- --------
<S> <C> <C> <C> <C> <C>

1996
Workers'
Compensation $57,614 $(1,976) $16,870 $79,514 $ 87,715
------- -------- ------- ------- --------
------- -------- ------- ------- --------

1995
Workers'
Compensation $58,842 $(4,872) $18,288 $78,912 $ 89,139
------- -------- ------- ------- --------
------- -------- ------- ------- --------

1994
Workers'
Compensation $72,457 $ 6,304 $16,746 $81,467 $105,946
------- -------- ------- ------- --------
------- -------- ------- ------- --------

</TABLE>

F-31

<PAGE>

INDEX OF EXHIBITS

EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
- ------ ----------- ------
<S> <C> <C>

2.1 Amended and Restated Agreement and Plan of Merger dated as of February 17, 1997
among the Company, SNTL Acquisition Corp., and PRIM . . . . . . . . . . . . . . . . . . . . . . *****

2.2 Series A Convertible Debentures and Series 1, 2 and 3 Detachable Warrant
Purchase Agreement ("Debenture Purchase Agreement"), as amended effective
as of February 17, 1997 among the Company, Prac Limited Partnership and
Allstate Insurance Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *****

2.3 First Amendment to Debenture Purchase Agreement, dated as of February 17, 1997. . . . . . . . . *****

2.4 Voting Agreement dated as of February 17, 1997 among the Company and
certain stockholders and debenture holders of PRIM. . . . . . . . . . . . . . . . . . . . . . . *****

3.1 Articles of Incorporation of the Company, as amended and restated by the
Company and currently in effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *

3.2 Bylaws of the Company, to date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *

EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS

10.1 Employment agreement, dated 1st of June 1994, by and between Mr. William L.
Gentz, President and Chief Executive Officer of the Company, and the Company. . . . . . . . . . . . . *

10.2 Employment agreement, dated February 17, 1997, by and between Mr. Arnold
J. Senter, Executive Vice President and Chief Operating Officer of the
Company, and the Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

10.3 1986 Non-Statutory Stock Option and Non-Statutory Stock Purchase Plan . . . . . . . . . . . . . . . . ***

10.4 1995 Stock Incentive Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ***

OTHER MATERIAL CONTRACTS

10.5 Aggregate Excess of Loss Cover entered into on the 30th day of August 1991,
between Centre Reinsurance Limited (Centre Re) and the Company, as amended. . . . . . . . . . . . . . *

10.6 Multi-year Prospective Accident Year Stop Loss Reinsurance Contract effective
the 1st of January 1993, between Centre Reinsurance International Company and
the Company (the "1993 Centre Re Contract") . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *

10.7 Letter dated March 28, 1996 from the Company canceling the 1993 Centre Re
Contract effective January 1, 1996. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ***

<PAGE>

10.8 Workers' Compensation and Employers' Liability Quota Share Insurance
Contract No. 30006A effective January 1, 1994, between the Company and
Zurich Reinsurance Centre, as amended (the "ZRC Contract"). . . . . . . . . . . . . . . . . . . . . . *

10.9 Addendum No. 4 to the ZRC Contract effective as of January 1, 1996. . . . . . . . . . . . . . . . . . ***

10.10 Addendum No. 1 to the Retrocession Agreement (an ancillary agreement to the
ZRC Contract) effective as of January 1, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . ***

10.11 Lease, dated 27th day of October 1988, by and between Corporate Center at
Malibu Canyon, a California Limited Partnership and the Company, relating to
the lease of the Company's home office and Calabasas Branch Facilities. . . . . . . . . . . . . . . . *

10.12 Lease, dated 27th of July 1993, by and between TOMOE Investment and
Development, Inc. and the Company, relating to the lease of its South
San Francisco Facility. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *

10.13 Lease, dated 14th of November 1991, by and between Dean Witter Reynolds and
the Company relating to the lease of its Fresno Facilities. . . . . . . . . . . . . . . . . . . . . . *

10.14 Lease, dated 23rd of February 1993, by and between Shaw Avenue Associates, a
California Limited Partnership and the Company relating to the lease of its Fresno Facilities . . . . *

10.15 Lease, dated 14th of February 1994, by and between Contra Costa County
Employees Retirement Association and the Company relating to its Sacramento Facility. . . . . . . . . *

10.16 Bank Debt, $10 million loan agreement between Imperial Bank and the Company
that was entered into on the 1st day of July 1994 (the "Imperial Loan") . . . . . . . . . . . . . . . *

10.17 Amendment No. 1 to the Imperial Loan dated March 27, 1995 . . . . . . . . . . . . . . . . . . . . . . **

10.18 Amendment No. 2 to the Imperial Loan dated October 16, 1995 . . . . . . . . . . . . . . . . . . . . . **

10.19 Credit Agreement between the Company and The Chase Manhattan Bank dated
as of November 12, 1996 (the "1996 Credit Agreement"), and all material exhibits thereto. . . . . . .

10.20 Agreement in Principle dated 29th of March 1994 by and between the Company
and Centre Re, a Bermuda Corporation, or one of its affiliates. . . . . . . . . . . . . . . . . . . . *

10.21 Limited Partnership Agreement of Superior National Capital, L.P. (Capital)
with certificate of Limited Partnership and Certificate of Exempted Partnership, all as
filed on the 28th of June 1994, with the Registrar of Companies of Bermuda. . . . . . . . . . . . . . *

10.22 Preferred securities purchase agreement, dated 30th day of June 1994, by and
between Capital, Superior National Capital Holding Corporation, the Company
and Centre Reinsurance Services (Bermuda) III Limited . . . . . . . . . . . . . . . . . . . . . . . . *

10.23 Loan agreement, dated 30th of June 1994, whereby Capital agrees
to loan $20,408,163 to the Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *

62
<PAGE>

10.24 Liability Assumption Agreement, dated 30th of June 1994, by and between the Company and Capital . . *

10.25 Certificate dated 30th of June 1994, evidencing the issuance of 800,000 Preferred
Securities of Capital to Centre Re. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *

10.26 Note made by the Company in favor of Capital dated 30th of June 1994, in the
aggregate principal amount of $20,408,163 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *

10.27 Purchase warrant, dated as of the 30th of June 1994, entitles CentreLine
Reinsurance Limited to purchase 2,317,426 shares of the Company's common stock. . . . . . . . . . . *

10.28 Certificate of Limited Partnership of Superior National Capital, L.P. . . . . . . . . . . . . . . . *

10.29 Warrant held by International Insurance Advisors, Inc. to purchase 6,097,130
shares at $1.00 per share dated March 31, 1992 and expiring April 1, 2002 . . . . . . . . . . . . . *

10.30 Stock Purchase Agreement dated as of September 17, 1996, as amended and
restated effective as of February 17, 1997, among the Company, Insurance
Partners, L.P., Insurance Partners Offshore (Bermuda), L.P., TJS Partners,
L.P., and certain members of the Company's management . . . . . . . . . . . . . . . . . . . . . . . *****

10.31 State of California Department of Insurance Amended Certificate of Authority. . . . . . . . . . . . *

11.1 Statement re: Computation of per share earnings . . . . . . . . . . . . . . . . . . . . . . . . . .

21.1 Subsidiaries of the Registrant. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *

</TABLE>

- -----------
* Previously filed as an exhibit to SNIG's Registration Statement on
Form 10 as filed with the Securities and Exchange Commission ("SEC")
on May 1, 1995 (File No. 0-25984).

** Previously filed as an exhibit to Amendment No. 2 to SNIG's
Registration Statement on Form 10/A as filed with the SEC on
November 1, 1995 (File No. 0-25984).

*** Previously filed as an exhibit to SNIG's Annual Report on Form 10-K as
filed with the SEC on March 29, 1996 (File No. 0-25984)

**** Previously filed as an exhibit to SNIG's statement on Schedule 13D
filed for Pac Rim Holding Corporation as filed with the SEC on
September 26, 1996.

***** Previously filed as an exhibit to SNIG's statement on Schedule 13D
filed for Pac Rim Holding Corporation as filed with the SEC on
February 27, 1997.

<PAGE>

EMPLOYMENT AGREEMENT

This Employee Agreement, made as of FEBRUARY 17, 1997, by and between
SUPERIOR NATIONAL INSURANCE GROUP, INC. ("Superior National"), a California
corporation, and ARNOLD J. SENTER ("Employee"), an individual, residing at 35
Buckskin Road, Bell Canyon, CA. 91307.

W I T N E S S E T H:

WHEREAS, Superior National and Employee wish to establish the terms and
conditions that shall apply to Employee's employment with Superior National;

NOW THEREFORE, in consideration of the mutual covenants and agreements set
forth herein, the parties hereto agree as follows:

1. EMPLOYMENT. Superior National hereby employs Employee, and Employee
hereby accepts this employment as Executive Vice-President and Chief Operating
OFFICER of Superior National (reference herein to Superior National shall also
mean each of the subsidiary companies of Superior National) and in conformance
with the terms and conditions set forth herein agrees to exercise and perform
faithfully and to the best of Employee's ability and experience on behalf of
Superior National the powers and duties customarily exercised and performed by a
Chief Operating Officer and Executive Vice-President of an insurance group.
Employee shall devote Employee's full time efforts to the business affairs of
Superior National. The terms of the Employment Term Sheet attached hereto as
Addendum A are made a part hereof.

2. LOCATION. Employee's services pursuant to this Agreement shall be
performed at Superior National's offices in Los Angeles County, California and
such other locations as Superior National's offices may be located. Employee
shall not be required to relocate outside of Southern California in order to
perform the services hereunder, without the Employee's consent, except for
travel reasonably required in the performance of Employee's duties hereunder.

3. TERM OF EMPLOYMENT. Subject to section 7 hereof, Employer hereby
employs Employee, and Employee agrees to be so employed for a term of three
years, commencing on February 17, 1997, and renewing automatically for one-year
increments unless notice of non-renewal is given by Employer at least sixty (60)
days prior to the end of the then-current term of this Agreement.

4. COMPENSATION AND OTHER BENEFITS. As compensation in full for
services to be rendered by Employee hereunder, Superior National shall pay and
Employee shall accept the following:

4.1 SALARY. From the date of this Agreement until termination of
employment, Superior National shall pay Employee a salary determined by the
Board of Directors of Superior National, payable in accordance with Superior
National's payroll policies. Employee's starting salary shall be set forth at
Addendum "A".

<PAGE>

4.2 BENEFITS. In conformance with Superior National's standard
employment practices for senior executives, Employee shall be entitled to such
vacation, medical, life insurance, accident, disability and dental benefits and
auto allowance, as shall be authorized from time to time by Superior National's
Board of Directors.

4.3 BONUSES. During the term of this Agreement Employee shall be
entitled to such discretionary bonuses or incentive compensation as may be
authorized from time to time by Superior National's Board of Directors.

4.4 OPTIONS. Employee shall initially be granted a stock option to
purchase 25,000 Shares of Superior National Insurance Group, Inc. common stock,
no par value, at a purchase price of $11.38 per share pursuant to the form of
Stock Option Agreement set forth hereto as Addendum "B".

5. EXPENSES. In addition to the salary and benefits provided hereunder,
Superior National shall pay for or reimburse Employee for those expenses
reasonably incurred in the course of Employee's activities for Superior
National, including transportation, living and related expenses incurred by
Employee during travel on behalf of Superior National away from Superior
National's principal office and for other business and entertainment expenses
reasonably incurred by Employee in connection with the business of Superior
National.

6. TERMINATION BY EMPLOYEE.

6.1 VOLUNTARY TERMINATION. In the event Employee voluntarily resigns
or quits employment with Superior National, then, without limitation of Superior
National's other legal or equitable remedies, Superior National shall have no
further obligation hereunder and no further payments of any kind shall be
payable by Superior National to Employee under this Agreement; provided,
however, Employee shall be entitled to receive payments, if any, under any
existing vacation pay, retirement and other benefit plans and policies then
maintained by Superior National and under which Employee may, at such time and
under the separate terms of such plans and policies, be eligible to receive
payment or other benefits.

7. TERMINATION BY SUPERIOR NATIONAL.

7.1 TERMINATION FOR CAUSE. In the event Superior National terminates
Employee's employment for cause ("For Cause"), it shall have no further
obligation to compensate Employee other than to pay for services rendered
through the date of such termination For Cause. For the purposes of this
Agreement, termination For Cause shall be limited to the following:

(a) Employee is convicted of, or pleads guilty or nolo
centendere to, any felony or any crime involving fraud, dishonesty or moral
turpitude:

<PAGE>

(b) Employee unlawfully misappropriates funds or other assets of
Superior National or its subsidiaries;

(c) Employee becomes unable, due to physical or mental illness
or injury to carry on the full-time duties and services required to be performed
by Employee for six consecutive months or for a total of six months during any
twelve-month period;

(d) Employee fails or refuses to comply with a reasonable
directive of Superior National's Board of Directors that is consistent with the
terms of this Agreement and with California law (as applicable), or Employee
materially neglects Employee's duties, is grossly negligent in the performance
of those duties, engages in gross misconduct materially injurious to Superior
National or Employee breaches this Agreement;

(e) Employee engages or participates, directly or indirectly,
without the prior written consent of Superior National's Board of Directors, in
any business that is in competition in any manner with the businesses of
Superior National whether as an employee, agent, employer, principal, partner,
shareholder (except as a shareholder of any outstanding class of securities of a
corporation that has a class of securities traded on a national securities
exchange or in the over-the-counter market), officer, director or any other
individual or representative capacity whatsoever;

(f) Employee's death;

(g) A material conflict of interest between Superior National
and Employee.

For the purpose of effectuating a termination For Cause under
subsection 7.1(e), Superior National shall give Employee thirty days (30) prior
written notice setting forth the alleged basis of the Cause and the fact that
Employee shall have thirty (30) days from the date of such notice to cure such
Cause. If Employee fails to cure such Cause within 30 days of the date of such
notice, Employee's employment shall be automatically terminated on the 31st day
following the date of such notice.

7.2 TERMINATION OTHER THAN FOR CAUSE.

(a) Any termination of Employee's employment under this
Agreement by Superior National other than For Cause (as defined in Paragraph
7.1) shall be deemed to be a termination without cause ("Without Cause").
Superior National may terminate Employee's employment under this Agreement
Without Cause at any time. In the event that Superior National terminates
Employee's employment Without Cause, then from the effective date of this
termination and continuing for the then remaining full term of this Agreement
provided for in section 3, Superior National will pay Employee a termination
benefit equal to One Hundred Percent (100%) of Employee's fixed monthly salary
to which Employee was entitled

<PAGE>

in the month in which such termination occurred (the termination benefit).
During the period of payment of monthly termination benefits Employee shall
not be deemed to be employed by Superior National, however Employee shall be
entitled to also receive, under the same terms and conditions, those medical
and dental insurance benefits as Superior National may, from time to time,
provide to its regular full-time senior executives. Employee shall be
responsible for "employee premium contributions" for such medical and dental
coverages on the same basis that Superior National's full-time senior
executives are assessed for individual and/or dependent coverages, and such
contributions will be deducted from sums due Employee hereunder. Employee
will have the opportunity to continue all coverages which Employee is
entitled to continue under COBRA legislation within the time periods provided
under COBRA. Information regarding COBRA rights will be mailed to Employee at
the appropriate time. Employee will also be entitled to any conversion
rights provided by the terms of the individual coverage plans.

(b) Any termination of Employee or significant diminution of
Employee's duties and responsibilities in connection with any reorganization,
merger, or consolidation of Superior National, a result of which Superior
National does not survive or in which the outstanding voting stock of Superior
National prior to such event represents less than Fifty Percent (50%) of the
outstanding voting stock of the surviving entity (collectively, "Change of
Control"), shall be deemed a termination Without Cause. In the event of a
termination Without Cause occurring as a result of a Change of Control, this
Agreement shall be deemed to have a three-year remaining term and Superior
National or the surviving entity will pay Employee the monthly termination
benefit in accordance with Subparagraph 7.2(a) above.

7.3 During any period (prior to a termination) for which Employee is
unable to carry on the full-time duties and services required of Employee due to
physical or mental illness or injury, salary and benefits, as of the beginning
of the period of incapacity, payable in accordance with Superior National's
payroll policies.

7.4 Employee shall be entitled to a pro rata participation in any
bonuses or incentive compensation determined pursuant to section 4.3 for both
the year prior to which a termination under sections 7.1(c) or (f) or 7.2 should
occur and for the year during which such termination occurs.

8. NON-HIRING OF SUPERIOR NATIONAL PERSONNEL. As long as Superior
National is making payments to Employee under the terms of this Agreement and
for a period twelve months subsequent to the termination of any such payments,
Employee will not hire or cause any person employed by Superior National as of
Employee's termination date or during the six-month period prior to such
termination date to be hired by another employer competing in any manner with
the businesses of Superior National. Recognizing the

<PAGE>

irreparable nature of the injury that could be caused by Employee's violation of
any provision of this Paragraph 8, Employee agrees that in addition to and
without limitation of any rights which Superior National may have hereunder, any
such violation shall be the proper subject matter for immediate injunctive
relief and entitle Superior National to terminate this Agreement whereupon no
further amounts shall be payable by Superior National to Employee under this
Agreement.

9. CONFIDENTIAL INFORMATION. Employee shall not, except as may be
required by law, use any Confidential Information for any purpose other than on
behalf of Superior National and to not use any Confidential Information for any
purpose adverse to Superior National. For purposes of this Agreement, the term
Confidential Information shall refer to certain confidential information
developed by Superior National as a necessary function of the conduct of its
businesses including, but not limited to, the identity, lists and/or
descriptions of producers or policyholders, financial data, projections, plans
and reports developed for management purposes and not otherwise disseminated,
internal policies and procedures, management systems and procedures, employee
records and information, and other information that may be developed from time
to time by Superior National and be designated as confidential. Such
Confidential Information is unique and has been developed and effectively
applied by Superior National in the conduct of its businesses and constitutes a
valuable and essential asset of the businesses of Superior National. Employee
agrees to protect the confidentiality of and to take all appropriate steps to
prevent unauthorized disclosure or use of the Confidential Information, and
otherwise prevent the Confidential Information from entering the public domain
or the possession by unauthorized persons, with the same degree of reasonable
and appropriate care as Employee uses with respect to Employee's own
confidential information.

9.1 All documents or media containing the Confidential Information
are, and at all times shall remain, the sole property of Superior National.

9.2 Without diminishing or waiving any rights of Superior National
otherwise available under law, the term of Employee's covenants of
non-disclosure set forth in this section 9 shall be continuing and shall survive
the termination of this Agreement. Employee's covenants not to use or disclose
the Confidential Information shall terminate as to any information that is or
becomes public knowledge through no fault of Employee and may be utilized by the
public without obligation to Superior National. Termination of Employee's
obligations pursuant to the previous sentence shall have no effect on Superior
National's rights to enforce the non-disclosure obligations with respect to
conduct occurring before the information became public knowledge.

10. TERMINATION OF PAYMENTS. No further termination benefits shall be
payable to Employee under the terms of this Agreement from and after any time
when Employee commences, without the prior

<PAGE>

written consent of Superior National's Board of Directors, any activity
described in Subparagraph 7.1(e) of this Agreement.

11. NON-COMPETITION. During such employment and for a period of two (2)
years thereafter, employee shall not at any time, directly or indirectly, use or
disclose to any persons, except Superior National and its duly authorized
officers and employees entitled thereto, employee's customer, broker and agent
lists, credit classifications, records, statistics, or other information
acquired by employee in the course of his employment in any capacity whatsoever,
nor in any manner, directly or indirectly, aid or be party to any acts the
effect of which would tend to divert, diminish, or prejudice the good will or
business of Superior National.

12. REMEDIES OF SUPERIOR NATIONAL. Employee recognizes and agrees that
the duties and services to be rendered by Employee hereunder are of a special,
unique and intellectual character and that Employee's failure to perform those
duties and services will cause irreparable and immeasurable harm to Superior
National. Employee also recognizes and agrees that the restrictions on
Employee's activities contained in this Agreement are required for the
reasonable protection of Superior National's business. Superior National will
be entitled, if it so elects, to institute and prosecute proceedings at law or
in equity or obtain damages with respect to such breach or to enforce the
specific performance of this Agreement by Employee or to enjoin Employee from
engaging in any activity in violation hereof.

13. NOTICES. All notices which Superior National is required or permitted
to give to Employee shall be given by first class mail addressed to Employee at
Employee's residence indicated above or such other place as Employee may, from,
time to time, designate in writing to Superior National. All notices which
Employee is required to give to Superior National hereunder will be given in
duplicate by registered mail, one copy addressed to Superior National's Board of
Directors and the other to Superior National's Corporate Secretary, at Superior
National's principal place of business.

14. ENTIRE AGREEMENT; AMENDMENT. This Agreement supersedes and terminates
any and all prior understandings, agreements or contracts, whether oral or in
writing, if any, entered into between Employee and Superior National as of the
effective date of this Agreement with respect to all matters covered hereunder.
This Agreement constitutes the entire agreement between the parties pertaining
to the subject matters hereof. No representative of Superior National is
authorized to make to any person any representation, warranty or promise with
respect to the subject matters hereof not contained or referred to herein. No
change, termination, waiver or other modification of any provision hereof shall
be binding on Superior National or Employee unless in writing and entered into
between Employee and the Board of Directors of Superior National.

15. CALIFORNIA LAW; SEVERABILITY. This Agreement shall be governed and
construed in accordance with the laws of the State of California. In the event
any provision of this Agreement or the application of any provision to any
signatory hereto shall be held by a court of competent jurisdiction to the
contrary to any applicable California or Federal law, the remaining provisions
of this Agreement shall remain in full force and effect. In the event of a
declaratory, injunctive or enforcement action or in the event of any other
litigation between Employee or Superior National arising under or with respect
to this Agreement and not found subject to the terms of section 15 following
shall be conducted in a State or Federal court sitting in Los Angeles County,
California.

<PAGE>

16. ARBITRATION. Except for the rights of the parties to apply to a court
of competent jurisdiction for a Temporary Restraining Order to preserve the
status quo or prevent irreparable harm pending the selection and confirmation of
any arbitrator, any disputes under this Agreement involving its interpretation
or the obligations of a party hereto, and any other disputes whatsoever between
Employee and Superior National, shall be determined by binding arbitration in
accordance with the commercial arbitration rules of the American Arbitration
Association, in the County of Los Angeles, State of California. Arbitration
shall be conducted by one (1) impartial arbitrator by mutual agreement. If
Superior National and Employee are unable to agree on the arbitrator within
thirty (30) days of first demand for arbitration, Employee and Superior National
shall each select two (2) arbitrators from a qualified list of available
arbitrators prepared by the Los Angeles County Bar Association. The four names
shall be placed on identical pieces of paper and placed in a "blind" lottery
with the names not visible, from which "blind" lottery Employee shall select one
paper. The arbitrator selected shall then be the arbitrator. The arbitrator
shall have the authority to permit discovery, to the extent deemed appropriate
by the arbitrator, upon request of a party. The arbitrator shall have no power
or authority to add to or detract from the agreements of the parties or to award
other than compensatory damages. The cost of the arbitration, including the
expenses of investigating and attorneys' fees, shall be borne by the party not
prevailing on the merits; or, if appropriate, shared by the parties based on
their culpability on the merits; or, if the foregoing are not appropriate, then
borne equally. The arbitrator shall have the authority to grant injunctive
relief in a form substantially similar to that which would otherwise be granted
by a court of law. The resulting arbitration award may be enforced, or
injunctive relief may be sought, in the Superior Court of the County of Los
Angeles, California, which the parties hereby stipulate is a court of competent
jurisdiction.

17. WAIVER. Waiver by Superior National or Employee of any provision or
any rights under any provision of this Agreement in any instance shall not be
taken as a waiver of any subsequent breach of such provision or as a continuing
waiver of the provision itself.

18. ASSIGNMENT. The rights of Employee hereto shall inure to the benefit
of and be binding upon the successors and assigns of Superior National
consistent with the terms of this Agreement and regardless of the form in which
such succession or assignment takes place. This Agreement and the rights,
interest and benefits hereunder are personal to Employee and shall not be
assigned, transferred, pledged, or hypothecated in any way by Employee, and
shall not be subject to execution, attachment or similar process. Any attempted
assignment, transfer, pledge, or hypothecation, or the levy of any execution,
attachment of similar process thereon, shall be null and void and without
effect.

<PAGE>

19. ATTORNEYS' FEES, COSTS. If either party shall bring an action against
the other party hereto by reason of a breach of any covenant, warranty,
representation or condition herein, or otherwise arising out of this Agreement,
whether for declaratory or other relief, the prevailing party in such suit shall
be entitled to such party's costs of suit and attorneys' fees, which shall be
payable whether or not such action is prosecuted to judgment. Costs and
attorneys fees resulting from any arbitration shall be governed by section 15,
hereof.

20. PARAGRAPH HEADINGS. Paragraph headings are for the purpose of
convenience only and shall not be considered to be any part of this Agreement.

21. COUNTERPARTS. More than one counterpart of this Agreement may be
executed by the parities hereto, and each counterpart shall be deemed an
original, and all counterparts together shall be one agreement.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement to take
effect the date first stated above.

EMPLOYEE

- -----------------------------------------------
Arnold J. Senter

Date:
------------------------------------------

SUPERIOR NATIONAL INSURANCE GROUP, INC.

By: William L. Gentz
--------------------------------------------

Title: President
-----------------------------------------

Date:
------------------------------------------

<PAGE>

ADDENDUM "A"

EMPLOYMENT TERM SHEET - ARNOLD J. SENTER

Position: Executive Vice-President and Chief Operating Officer
Superior National Insurance Group, Inc. and subsidiaries

Salary: Effective February 17, 1997, $200,000 annually

Stock Option: 25,000 share at $11.38

Car Allowance: $1,000 per month

Health Insurances: On same terms, conditions and coverages of other
Superior National senior executives

Life Insurance: As to be agreed

Expenses: Usual and customary

<PAGE>

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

CREDIT AGREEMENT

between

SUPERIOR NATIONAL INSURANCE GROUP, INC.

and

THE CHASE MANHATTAN BANK, LONDON BRANCH

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

Dated as of November 12, 1996

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

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

<PAGE>

TABLE OF CONTENTS

Page

SECTION 1. Amount and Terms of Credit.................................... 1
1.01 Commitments................................................... 1
1.02 Notice of Borrowing........................................... 2
1.03 Disbursement of Funds......................................... 2
1.04 Notes......................................................... 2
1.05 Interest...................................................... 3
1.06 Compensation.................................................. 3

SECTION 2. Fees; Commitments............................................. 3
2.01 Fees.......................................................... 3
2.02 Voluntary Reduction of Commitments............................ 4
2.03 Mandatory Termination of Commitments.......................... 4

SECTION 3. Payments...................................................... 4
3.01 Voluntary Prepayments......................................... 4
3.02 Mandatory Repayments.......................................... 4
3.03 Method and Place of Payment................................... 5
3.04 Net Payments.................................................. 5

SECTION 4. Conditions Precedent.......................................... 6
4.01 Effectiveness; Notes.......................................... 6
4.02 No Default; Representations and Warranties.................... 6
4.03 Officer's Certificate......................................... 6
4.04 Opinions of Counsel........................................... 6
4.05 Corporate Proceedings......................................... 6
4.06 Litigation.................................................... 7
4.07 Transfer of Reinsurance Receivables........................... 7
4.08 Security Agreement............................................ 7
4.09 Put Agreement................................................. 8
4.10 Asset Transfer Agreement...................................... 8
4.11 Approvals..................................................... 8
4.12 Payment of Fees............................................... 9
4.13 Notice of Borrowing........................................... 9
4.14 Centre Re Letter.............................................. 9
4.15 Subordinated Loan Agreement................................... 9
4.16 Bank Certificate.............................................. 9

SECTION 5. Representations, Warranties and

(i)

<PAGE>

Agreements.................................................. 9
5.01 Corporate Status.............................................. 10
5.02 Corporate Power and Authority................................. 10
5.03 No Violation.................................................. 10
5.04 Litigation.................................................... 11
5.05 Use of Proceeds............................................... 11
5.06 Governmental Approvals........................................ 11
5.07 Investment Company Act........................................ 11
5.08 Public Utility Holding Company Act............................ 11
5.09 True and Complete Disclosure.................................. 12
5.10 Financial Statements; Financial Condition; Undisclosed
Liabilities; etc............................................ 12
5.11 Security Interests............................................ 12
5.12 Subsidiaries.................................................. 12
5.13 Compliance with Statutes, etc................................. 13

SECTION 6. Affirmative Covenants......................................... 13
6.01 Information Covenants......................................... 13
6.02 Books, Records and Inspections................................ 15
6.03 Corporate Franchises.......................................... 15
6.04 Compliance with Statutes, etc................................. 15

SECTION 7. Negative Covenants............................................ 16
7.01 Consolidation, Merger, Sale or Purchase of Assets, etc........ 16
7.02 Liens......................................................... 16
7.03 Modifications of Agreements, etc.............................. 16

SECTION 8. Events of Default............................................. 16
8.01 Payments...................................................... 17
8.02 Representations, etc.......................................... 17
8.03 Covenants..................................................... 17
8.04 Bankruptcy, etc............................................... 17
8.05 Security Agreement............................................ 17
8.06 Put Agreement................................................. 18
8.07 Put Guaranty.................................................. 18
8.08 Asset Transfer................................................ 18
8.09 Ownership..................................................... 18

SECTION 9. Definitions................................................... 19

SECTION 10. The Collateral Agent.......................................... 25
10.01 Appointment................................................... 25
10.02 Delegation of Duties.......................................... 25
10.03 Exculpatory Provisions........................................ 26
10.04 Reliance by Collateral Agent.................................. 26

(ii)

<PAGE>

10.05 Notice of Default............................................. 27
10.06 Non-Reliance on Collateral Agent.............................. 27
10.07 Indemnification............................................... 28
10.08 Collateral Agent in Its Individual
Capacity.................................................... 29
10.09 Resignation of the Collateral Agent; Successor
Collateral Agent............................................ 29

SECTION 11. Miscellaneous................................................. 29
11.01 Payment of Expenses, etc...................................... 29
11.02 Right of Setoff............................................... 30
11.03 Notices....................................................... 30
11.04 Benefit of Agreement.......................................... 31
11.05 No Waiver; Remedies Cumulative................................ 32
11.06 Calculations; Computations.................................... 32
11.07 Governing Law; Submission to
Jurisdiction; Venue......................................... 33
11.08 Counterparts.................................................. 34
11.09 Effectiveness................................................. 34
11.10 Headings Descriptive.......................................... 34
11.11 Amendment or Waiver........................................... 34
11.12 Survival...................................................... 34
11.13 Confidentiality............................................... 34
11.14 Waiver of Jury Trial.......................................... 35
11.15 Subordinated Loan Agreement................................... 35
11.16 Transfer Restrictions......................................... 35

ANNEX I -- List of Banks and Commitments
ANNEX II -- Bank Addresses

EXHIBIT A -- Form of Notice of Borrowing
EXHIBIT B-1 -- Form of A Note
EXHIBIT B-2 -- Form of B Note
EXHIBIT C-1 -- Form of Opinion of Counsel to Borrower
EXHIBIT C-2 -- Form of Opinion of in-house Counsel to Borrower
EXHIBIT C-3 -- Form of Opinion of outside Counsel to Centre Re
EXHIBIT C-4 -- Form of Opinion of in-house Counsel to Centre Re
EXHIBIT D -- Form of Officers' Certificate
EXHIBIT E -- Form of Security Agreement
EXHIBIT F-1 -- Form of Put Agreement
EXHIBIT F-2 -- Form of Put Guaranty

(iii)

<PAGE>

EXHIBIT G -- Form of Asset Transfer Agreement
EXHIBIT H -- Form of Assignment and Assumption
Agreement
EXHIBIT I -- Form of Centre Re Letter
EXHIBIT J -- Form of Certification of Non-U.S. Ownership

(iv)

<PAGE>

CREDIT AGREEMENT, dated as of November 12, 1996, between SUPERIOR
NATIONAL INSURANCE GROUP, INC. a California corporation (the "Borrower"), THE
CHASE MANHATTAN BANK, LONDON BRANCH (together with its successors and assigns
pursuant to Section 11.04(b), the "Bank") and THE CHASE MANHATTAN BANK, as
Collateral Agent (together with any successor collateral agent pursuant to
Section 10.09, the "Collateral Agent"). Unless otherwise defined herein, all
capitalized terms used herein and defined in Section 9 are used herein as so
defined.

W I T N E S S E T H :

WHEREAS, subject to and upon the terms and conditions set forth
herein, the Bank is willing to make available to the Borrower the credit
facilities provided for herein.

NOW, THEREFORE, IT IS AGREED:

SECTION 1. AMOUNT AND TERMS OF CREDIT.

1.01 COMMITMENTS. Subject to and upon the terms and conditions herein
set forth, the Bank agrees to make the following loans (each a "Loan" and,
collectively, the "Loans") to the Borrower, which Loans shall be drawn under the
A Loan Facility and the B Loan Facility, as set forth below:

(a) The Loan under the A Loan Facility (the "A Loan") (i) shall be
made pursuant to a single drawing, which shall be on the Closing Date and
(ii) shall not exceed for at the time of incurrence thereof that aggregate
amount which equals the A Loan Commitment of the Bank at such time. Once
repaid, the A Loan may not be reborrowed.

(b) The Loan under the B Loan Facility (the "B Loan") (i) shall be
made pursuant to a single drawing, which shall be on the Closing Date and
(ii) shall not exceed for at the time of incurrence thereof that aggregate
amount which equals the B Loan Commitment of the Bank at such time. Once
repaid, B Loans may not be reborrowed.

<PAGE>

1.02 NOTICE OF BORROWING. (a) In connection with its incurrence of
Loans on the Closing Date, the Borrower shall give the Bank at its Notice
Office, prior to 12:00 Noon (New York time), at least one Business Day's prior
written notice (or telephonic notice promptly confirmed in writing). Such
notice (the "Notice of Borrowing") shall be irrevocable, and, in the case of a
written notice and a confirmation of telephonic notice, shall be in the form of
Exhibit A hereto, appropriately completed to specify (i) the Facility pursuant
to which each Borrowing is to be made, (ii) the aggregate principal amount of
the Loans to be made pursuant to such Borrowing and (iii) the date of such
Borrowing (which shall be a Business Day).

(b) Without in any way limiting the obligation of the Borrower to
confirm in writing any notice it may give hereunder by telephone, the Bank may
act prior to receipt of written confirmation without liability upon the basis of
such telephonic notice, believed by the Bank in good faith to be from an
Authorized Officer of the Borrower. In each such case the Borrower hereby
waives the right to dispute the Bank's record of the terms of any such
telephonic notice.

1.03 DISBURSEMENT OF FUNDS. Subject to the terms and conditions
herein set forth, no later than 11:00 A.M. (New York time) on the Closing Date,
the Bank will make available to the Borrower each Borrowing requested to be made
on such date in U.S. dollars and immediately available funds by transferring
such amount to the Borrower as the Borrower shall direct.

1.04 NOTES. (a) The Borrower's obligation to pay the principal of,
and interest on, all the Loans made to it shall be evidenced (i) if the A Loan,
by a promissory note substantially in the form of Exhibit B-1 with blanks
appropriately completed in conformity herewith (the "A Note") and (ii) if the B
Loan, by a promissory note substantially in the form of Exhibit B-2 with blanks
appropriately completed in conformity herewith (the "B Note").

(b) The A Note issued to the Bank shall (i) be executed by the
Borrower, (ii) be in bearer form, (iii) be payable to the order of the Bearer
and be dated the Closing Date, (iv) be payable in accordance with Sections
3.02(a) and 3.03, (v) mature on the A Maturity Date and (vi) be entitled to the
benefits of this Agreement and the other Credit Documents.

-2-

<PAGE>

(c) The B Note issued to the Bank shall (i) be executed by the
Borrower, (ii) be in bearer form, (iii) be payable to the order of the Bearer
and be dated the Closing Date, (iv) be payable in accordance with Sections
3.02(b) and 3.03, (v) mature on the B Maturity Date and (vi) be entitled to the
benefits of this Agreement and the other Credit Documents.

(d) The Bank will record on its internal records the amount of each
Loan made by it and each payment in respect thereof and will, prior to any
transfer of any of its Notes, endorse on the reverse side thereof the
outstanding principal amount of Loans evidenced thereby and the interest in
respect thereof. Failure to make any such notation or any error in any such
notation shall not affect the Borrower's obligations in respect of such Loans or
interest.

1.05 INTEREST. (a) Overdue amounts payable under Section 3.02 shall
bear interest at a rate per annum equal to the Base Rate in effect from time to
time plus 2%, which interest shall be payable on demand.

(b) All computations of interest hereunder shall be made in
accordance with Section 11.06(b).

1.06 COMPENSATION. The Borrower shall compensate the Bank, upon its
written request (which request shall set forth the basis for requesting such
compensation), for all reasonable losses, expenses and liabilities (including,
without limitation, any loss, expense or liability incurred by reason of the
liquidation or reemployment of deposits or other funds required by the Bank to
fund the Loans but excluding any loss of anticipated profit with respect to the
Loans) which the Bank may sustain if for any reason (other than a default by the
Bank) a Borrowing of Loans does not occur on a date specified therefor in a
Notice of Borrowing.

SECTION 2. FEES; COMMITMENTS.

2.01 FEES. (a) The Borrower shall pay to the Bank, for the account
of the Bank, when and as due, such fees as have been, or are from time to time,
separately agreed upon between the Borrower and the Bank. All such fees shall
be payable as the Bank shall direct, provided that in any event such fees shall
be payable outside the United States of America and its possessions.

(b) The total amount of all fees, charges, costs and expenses of any
kind payable by the Borrower to the Bank

-3-

<PAGE>

in connection with this Agreement and the other Credit Documents on the Closing
Date is $986,049.47.

2.02 VOLUNTARY REDUCTION OF COMMITMENTS. Upon at least three Business
Days' prior written notice (or telephonic notice promptly confirmed in writing)
given by the Borrower prior to the Closing Date to the Bank at its Notice
Office, the Borrower shall have the right, without premium or penalty, to
terminate, in whole but not in part, the Total Commitment.

2.03 MANDATORY TERMINATION OF COMMITMENTS. (a) The Total Commitment
shall be terminated at 5:00 p.m. (New York time) on the Expiration Date unless
the Closing Date has occurred on or before such date.

(b) The Total Commitment shall be terminated on the Closing Date,
after giving effect to the incurrence of Loans on such date.

SECTION 3. PAYMENTS.

3.01 VOLUNTARY PREPAYMENTS. The Borrower shall have the right in its
sole and absolute discretion to prepay the Loans, in whole but not in part, from
time to time on the following terms and conditions: (i) the Borrower shall give
the Bank at its Notice Office written notice (or telephonic notice promptly
confirmed in writing) of its intent to prepay the Loans in whole, which notice
shall be given by the Borrower no later than 12:00 Noon (New York time) five
Business Days prior to the date of such prepayment; and (ii) the amount owing by
the Borrower in respect of such prepayment shall be equal to the aggregate
principal amount of the Loans plus interest accrued and unpaid on such principal
amount to the date of such prepayment, plus the market value of the Interest
Rate Agreement (if any) entered into by the Bank in respect of the Loans, if the
Bank is "out-of-the-money" in respect of such Interest Rate Agreement at the
time of such prepayment (or minus the market value of any such Interest Rate
Agreement if the Bank is "in-the- money" in respect of such Interest Rate
Agreement at the time of such prepayment).

3.02 MANDATORY REPAYMENTS. (a) On each date set forth below (each an
"A Loan Repayment Date"), the Borrower shall be required to make principal and
interest payments in respect of the A Loans in the amounts which are set forth
opposite such date:

-4-

Aggregate
Repayment Date Principal Interest Payment
-------------- --------- -------- ---------
<S> <C> <C> <C>
January 15, 1997 $2,969,460 $ 30,540 $ 3,000,000
April 15, 1997 $2,925,658 $ 74,342 $ 3,000,000
July 15, 1997 $2,881,787 $ 118,213 $ 3,000,000
October 15, 1997 $2,837,440 $ 162,560 $ 3,000,000
January 15, 1998 $2,792,987 $ 207,013 $ 3,000,000
April 15, 1998 $9,164,443 $ 835,557 $10,000,000
July 15, 1998 $9,017,949 $ 982,053 $10,000,000
October 15, 1998 $8,870,155 $1,129,845 $10,000,000
January 15, 1999 $8,723,208 $1,276,792 $10,000,000
April 15, 1999 $6,006,274 $ 993,726 $ 7,000,000
July 15, 1999 $5,906,536 $1,093,464 $ 7,000,000
October 15, 1999 $5,806,704 $1,193,296 $ 7,000,000
January 15, 2000 $5,704,649 $1,295,351 $ 7,000,000
April 15, 2000 $4,111,425 $1,019,575 $ 5,131,000
July 15, 2000 $4,041,644 $1,089,356 $ 5,131,000
October 15, 2000 $3,972,623 $1,158,377 $ 5,131,000

</TABLE>

(b) On each date set forth below (each a "B Loan Repayment Date"),
the Borrower shall be required to make principal and interest payments in
respect of the B Loans in the amounts which are set forth opposite such date:

Aggregate
Repayment Date Principal Interest Payment
-------------- --------- -------- ---------
<S> <C> <C> <C>
July 15, 2004 $4,267,953 $2,924,160 $7,192,113
October 15, 2004 $4,190,959 $3,001,154 $7,192,113

</TABLE>

3.03 METHOD AND PLACE OF PAYMENT. Except as otherwise specifically
provided herein, all payments under this Agreement and the Notes shall be made
to the Bearer not later than 1:00 P.M. (New York time) on the date when due and
shall be made in immediately available funds and in lawful money of the United
States of America at the Bearer's Payment Office. Any payments under this
Agreement which are made later than 1:00 P.M. (New York time) shall be deemed to
have been made on the next succeeding Business Day. Whenever any payment to be
made hereunder shall be stated to be due on a day which is not a Business Day,
the due date thereof shall be the next preceding Business Day.

3.04 NET PAYMENTS. All payments required to be made by the Borrower
hereunder will be made without setoff or counterclaim.

-5-

<PAGE>

SECTION 4. CONDITIONS PRECEDENT. The obligation of the Bank to
make Loans to the Borrower hereunder is subject, at the time of the making of
such Loans, to the satisfaction of the following conditions:

4.01 EFFECTIVENESS; NOTES. This Agreement shall have become effective
as provided in Section 11.09 and there shall have been delivered to the Bank the
appropriate Notes executed by the Borrower in the amount, maturity and as
otherwise provided herein.

4.02 NO DEFAULT; REPRESENTATIONS AND WARRANTIES. At the time of the
making of the Loans and also after giving effect thereto, (i) there shall exist
no Default or Event of Default and (ii) all representations and warranties
contained herein or in the other Credit Documents shall be true and correct in
all material respects with the same effect as though such representations and
warranties had been made on and as of the Closing Date, unless stated to relate
to a specific earlier date, in which case such representations and warranties
shall be true and correct in all material respects as of such earlier date.

4.03 OFFICER'S CERTIFICATE. On the Closing Date, the Bank shall have
received a certificate dated such date, signed by an appropriate officer of the
Borrower, stating that all of the applicable conditions set forth in Sections
4.02 and 4.06 exist as of such date.

4.04 OPINIONS OF COUNSEL. On the Closing Date, the Bank shall have
received an opinion, or opinions, in form and substance reasonably satisfactory
to the Bank, addressed to the Bank and dated the Closing Date, from (i) Lewis,
D'Amato, Brisbois & Bisgaard LLP, counsel to the Borrower and SNIC, which
opinion shall cover the matters contained in Exhibit C-1 hereto, (ii) from
Robert Nagle, in-house counsel to the Borrower, which opinion shall cover the
matters contained in Exhibit C-2 hereto, (iii) Appleby, Spurling & Kempe,
counsel to Centre Re and Centre Re (Bermuda), which opinion shall cover the
matters contained in Exhibit C-3 hereto and (iv) Joseph Magnano, in-house
counsel to Zurich Centre Resource Limited, an affiliate of Centre Re and Centre
Re (Bermuda), which opinion shall cover the matters contained in Exhibit C-4
hereto.

4.05 CORPORATE PROCEEDINGS. (a) On the Closing Date, the Bank shall
have received a certificate from each Credit Party, dated the Closing Date,
signed by the President or any Vice President of such Credit Party, and attested
to

-6-

<PAGE>

by the Secretary or any Assistant Secretary of such Credit Party, in the form of
Exhibit D hereto with appropriate insertions, together with copies of the
Certificate of Incorporation and By-Laws and resolutions of such Credit Party
and the other documents referred to in such certificate, and the foregoing shall
be reasonably satisfactory to the Bank.

(b) All corporate and legal proceedings and all instruments and
agreements in connection with the transactions contemplated by this Agreement
and the other Credit Documents shall be reasonably satisfactory in form and
substance to the Bank, and the Bank shall have received all information and
copies of all certificates, documents and papers, including records of corporate
proceedings and governmental approvals, if any, which the Bank reasonably may
have requested in connection therewith, such documents and papers where
appropriate to be certified by proper corporate or governmental authorities.

4.06 LITIGATION. On the Closing Date, there shall be no actions,
suits or proceedings pending or threatened (a) with respect to this Agreement or
any other Credit Document or the transactions contemplated herein or therein, or
(b) which in the judgment of the Bank could reasonably be expected to have a
Material Adverse Effect.

4.07 TRANSFER OF REINSURANCE RECEIVABLES. On or prior to the Closing
Date, SNIC shall have transferred to the Borrower all of the Reinsurance
Receivables in a manner and pursuant to documentation satisfactory in form and
substance to the Bank.

4.08 SECURITY AGREEMENT. On or prior to the Closing Date, the
Borrower shall have duly authorized, executed and delivered the Security
Agreement in the form of Exhibit E hereto (the "Security Agreement") covering
all the Borrower's present and future Collateral, together with:

(a) acknowledgment copies of proper financing statements (Form UCC-1)
duly filed under the UCC of each jurisdiction as may be necessary or, in
the opinion of the Collateral Agent, desirable to perfect the security
interests purported to be created by the Security Agreement;

(b) certified copies of requests for information or copies (Form
UCC-11), or equivalent reports, listing the financing statements referred
to in clause (a) above

-7-

<PAGE>

and all other effective financing statements that name the Borrower as
debtor and that are filed in the jurisdictions referred to in said clause
(a), together with copies of such other financing statements (none of which
shall cover the Collateral);

(c) evidence of the completion of all other recordings and filings
of, or with respect to, the Security Agreement as may be necessary or, in
the opinion of the Collateral Agent, desirable to perfect the security
interests purported to be created by the Security Agreement; and

(d) evidence that all other actions necessary or, in the opinion of
the Collateral Agent, desirable to perfect and protect the security
interests purported to be created by the Security Agreement have been
taken.

4.09 PUT AGREEMENT. On or prior to the Closing Date, (i) Centre Re
shall have duly authorized, executed and delivered the Put Agreement in the form
of Exhibit F-1 hereto (the "Put Agreement"), and the Put Agreement shall be in
full force and effect, and the Borrower and SNIC shall have executed the Put
Agreement, consenting to the terms thereof and (ii) Centre Re (Bermuda) shall
have duly authorized, executed and delivered the Put Guaranty in the form of
Exhibit F-2 hereto (the "Put Guaranty"), thereby guaranteeing the obligations of
Centre Re under the Put Agreement, and the Put Guaranty shall be in full force
and effect.

4.10 ASSET TRANSFER AGREEMENT. On or prior to the Closing Date, the
Borrower, SNIC, Centre Re, the Bank and the Collateral Agent shall have duly
authorized, executed and delivered the Asset Transfer Agreement in the form of
Exhibit G hereto (the "Asset Transfer Agreement").

4.11 APPROVALS. On the Closing Date, all necessary and material
governmental and third party approvals and filings in connection with the
transactions contemplated by this Agreement and the other Credit Documents and
otherwise referred to herein or therein (including, without limitation, the
written approval of the Insurance Department of the State of California) shall
have been obtained and remain in full force and effect or (in the case of
filings) shall have been made, and all applicable waiting periods shall have
expired, in each case without any action being taken by any competent authority
which restrains, prevents or imposes, in the judgment of the Bank, materially
adverse

-8-

<PAGE>

conditions upon the consummation of any such agreement or transaction.

4.12 PAYMENT OF FEES. On the Closing Date, all fees, charges, costs
and expenses set forth in Section 2.01(b) shall have been paid.

4.13 NOTICE OF BORROWING. The Bank shall have received a Notice of
Borrowing satisfying the requirements of Section 1.02 with respect to all
Borrowings of Loans on the Closing Date.

4.14 CENTRE RE LETTER. On the Closing Date, Centre Re shall have
delivered a letter to the Borrower in the form of Exhibit I.

4.15 SUBORDINATED LOAN AGREEMENT. The Subordinated Loan Agreement
shall have been amended, or certain provisions thereof waived, in a manner
satisfactory to the Bank to permit the transactions contemplated by this
Agreement and the other Credit Documents.

4.16 BANK CERTIFICATE. On the Closing Date, the Bank shall have
delivered to the Borrower a Certificate in the form of Exhibit J.

The acceptance of the benefits of the Loans on the Closing Date shall
constitute a representation and warranty by the Borrower to the Bank that all of
the conditions specified above exist or have been satisfied as of such date.
All of the certificates, legal opinions and other documents and papers referred
to in this Section 4, unless otherwise specified, shall be delivered to the Bank
at its Notice Office and shall be reasonably satisfactory in form and substance
to the Bank.

SECTION 5. REPRESENTATIONS, WARRANTIES AND AGREEMENTS. In order
to induce the Bank to enter into this Agreement and to make the Loans provided
for herein, the Borrower makes the following representations and warranties to,
and agreements with, the Bank, all of which shall survive the execution and
delivery of this Agreement and the making of the Loans (with the making of the
Loans being deemed to constitute a representation and warranty that the matters
specified in this Section 5 are true and correct in all material respects on and
as of the date of the making of the Loans (after giving effect to the
consummation of the transactions contemplated herein and in the other Credit
Documents on such date) unless such representation and

-9-

<PAGE>

warranty expressly indicates that it is being made as of any specific date in
which case such representation and warranty shall be true and correct in all
material respects as of such specified date):

5.01 CORPORATE STATUS. Each of the Borrower and SNIC (i) is a duly
organized and validly existing corporation in good standing under the laws of
the jurisdiction of its organization and has the corporate or other
organizational power and authority to own its property and assets and to
transact the business in which it is engaged and presently proposes to engage
and (ii) has duly qualified and is authorized to do business and is in good
standing in all jurisdictions where it is required to be so qualified and where
the failure to be so qualified would have a Material Adverse Effect.

5.02 CORPORATE POWER AND AUTHORITY. Each of the Borrower and SNIC has
the corporate power and authority to execute, deliver and carry out the terms
and provisions of the Credit Documents to which it is a party and has taken all
necessary corporate action to authorize the execution, delivery and performance
of the Credit Documents to which it is a party. Each of the Borrower and SNIC
has duly executed and delivered each Credit Document to which it is a party and
each such Credit Document constitutes the legal, valid and binding obligation of
the Borrower and/or SNIC, as the case may be, enforceable in accordance with its
terms except as the enforceability thereof may be limited by applicable
bankruptcy, insolvency, reorganization or other similar laws affecting
creditors' rights generally and by general equitable principles (regardless of
whether the issue of enforceability is considered in a proceeding in equity or
at law).

5.03 NO VIOLATION. Neither the execution, delivery and performance by
the Borrower or SNIC of the Credit Documents to which it is a party nor
compliance with the terms and provisions thereof, nor the consummation of the
transactions contemplated therein (i) will contravene any applicable provision
of any law, statute, rule, regulation, order, writ, injunction or decree of any
court or governmental instrumentality, (ii) will conflict or be inconsistent
with or result in any breach of any of the terms, covenants, conditions or
provisions of, or constitute a default under, or (other than pursuant to the
Security Agreement) result in the creation or imposition of (or the obligation
to create or impose) any Lien upon any of the property or assets of the Borrower
or SNIC pursuant to the

-10-

<PAGE>

terms of, any indenture, mortgage, deed of trust, material agreement or other
material instrument to which the Borrower or SNIC is a party or by which it or
any of its property or assets are bound or to which it may be subject or (iii)
will violate any provision of the charter or By-Laws of the Borrower or SNIC.

5.04 LITIGATION. There are no actions, suits or proceedings pending
or, to the Borrower's knowledge threatened, with respect to the Borrower or SNIC
that could reasonably be expected to have a Material Adverse Effect.

5.05 USE OF PROCEEDS. (a) The proceeds of all Loans shall be utilized
(i) to purchase Reinsurance Receivables under the Reinsurance Agreement from
SNIC, (ii) to pay certain fees and expenses relating thereto and (iii) for other
corporate purposes of the Borrower.

(b) No part of the proceeds of any Loan will be used to purchase or
carry any Margin Stock or to extend credit for the purpose of purchasing or
carrying any Margin Stock.

5.06 GOVERNMENTAL APPROVALS. Except for the approval of the Insurance
Department of the State of California referred to in Section 4.11 (which has
been obtained and remains in full force and effect), no order, consent,
approval, license, authorization, or validation of, or filing, recording or
registration with, or exemption by, any foreign or domestic governmental or
public body or authority, or any subdivision thereof, is required to authorize
or is required in connection with (i) the execution, delivery and performance of
any Credit Document or (ii) the legality, validity, binding effect or
enforceability of any Credit Document.

5.07 INVESTMENT COMPANY ACT. Neither the Borrower nor SNIC is an
"investment company" or a company "controlled" by an "investment company",
within the meaning of the Investment Company Act of 1940, as amended.

5.08 PUBLIC UTILITY HOLDING COMPANY ACT. Neither the Borrower nor
SNIC is a "holding company," or a "subsidiary company" of a "holding company,"
or an "affiliate" of a "holding company" or of a "subsidiary company" of a
"holding company," within the meaning of the Public Utility Holding Company Act
of 1935, as amended.

-11-

<PAGE>

5.09 TRUE AND COMPLETE DISCLOSURE. There is no fact known to the
Borrower which could reasonably be expected to have a Material Adverse Effect
which has not been disclosed herein or in such other documents, certificates and
statements furnished to the Bank for use in connection with the transactions
contemplated hereby.

5.10 FINANCIAL STATEMENTS; FINANCIAL CONDITION; UNDISCLOSED
LIABILITIES; ETC. The consolidated and consolidating statements of financial
condition of the Borrower and its Consolidated Subsidiaries at December 31, 1995
and June 30, 1996, and the related consolidated and consolidating statements of
income and retained earnings and changes in financial position of the Borrower
and its Consolidated Subsidiaries for the fiscal year or 6-month period, as the
case may be, ended on such date and heretofore furnished to the Bank present
fairly the consolidated and consolidating financial condition of the Borrower
and its Consolidated Subsidiaries at the date of such statements of financial
condition and the consolidated and consolidating results of the operations of
the Borrower and its Consolidated Subsidiaries for such fiscal year or 6-month
period, as the case may be. All such financial statements have been prepared in
accordance with GAAP except for, with respect to the financial statements for
the 6-month period ended on June 30, 1996, normal year-end audit adjustments.
Since December 31, 1995, there has been no material adverse change in the
business, operations or financial condition of the Borrower or of the Borrower
and its Subsidiaries taken as a whole.

5.11 SECURITY INTERESTS. On and after the Closing Date, the Security
Agreement creates, as security for the Obligations, a valid and enforceable
perfected security interest in and Lien on all of the Collateral, superior to
and prior to the rights of all third persons and subject to no other Liens, in
favor of the Collateral Agent for the benefit of the Bank. At all times on or
after the Closing Date, the Borrower has good and marketable title to all
Collateral free and clear of all Liens (except as created pursuant to the
Security Agreement). No filings or recordings are required in order to perfect
the security interests created under the Security Agreement except for filings
or recordings which shall have been made, or provided for, upon or prior to the
Closing Date.

5.12 SUBSIDIARIES. SNIC is the sole Material Subsidiary of the
Borrower existing on the Closing Date. SNIC is a Wholly-Owned Subsidiary of the
Borrower.

-12-

<PAGE>

5.13 COMPLIANCE WITH STATUTES, ETC. Each of the Borrower and SNIC is
in compliance with all applicable statutes, regulations and orders of, and all
applicable restrictions imposed by, all governmental bodies, domestic or
foreign, in respect of the conduct of its business and the ownership of its
property, except such noncompliances as would not, in the aggregate, have a
Material Adverse Effect.

SECTION 6. AFFIRMATIVE COVENANTS. The Borrower hereby covenants
and agrees that on the Closing Date and thereafter, for so long as this
Agreement is in effect and until the Loans, together with interest, Fees and all
other Obligations incurred hereunder, are paid in full:

6.01 INFORMATION COVENANTS. The Borrower will furnish to the Bank:

(a) ANNUAL FINANCIAL STATEMENTS. (i) As soon as available and in any
event within 90 days after the close of each fiscal year of the Borrower,
the consolidated balance sheet of the Borrower and its Subsidiaries as at
the end of such fiscal year and the related consolidated statements of
income, of stockholder's equity and of cash flows for such fiscal year,
examined by independent certified public accountants of recognized national
standing whose opinion shall not be qualified as to the scope of audit or
as to the status of the Borrower or any of its Subsidiaries as a going
concern, together with a certificate of such accounting firm stating that
in the course of its regular audit of the business of each of the Borrower
and its Subsidiaries, which audit was conducted in accordance with
generally accepted auditing standards, such accounting firm has obtained no
knowledge of any Default or Event of Default which has occurred and is
continuing or, if in the opinion of such accounting firm such a Default or
Event of Default has occurred and is continuing, a statement as to the
nature thereof.

(ii) As soon as available and in any event within 120 days after the
close of each fiscal year of SNIC, the Annual Statement of SNIC and its
Subsidiaries (prepared in accordance with SAP) for such fiscal year and as
filed with the Insurance Department of the State of California, together
with the opinion thereon of the Chief Financial Officer or other Authorized
Officer of SNIC, stating that such Annual Statement presents the financial
condition and results of operations of SNIC, in accordance with SAP.

-13-

<PAGE>

(b) QUARTERLY FINANCIAL STATEMENTS. (i) As soon as available and in
any event within 45 days after the close of each of the first three
quarterly accounting periods in each fiscal year of the Borrower, the
consolidated balance sheet of each of the Borrower and its Subsidiaries as
at the end of such quarterly period and the related consolidated statements
of income, of stockholders' equity and of cash flows for such quarterly
period and for the elapsed portion of the fiscal year ended with the last
day of such quarterly period, setting forth comparative figures for the
related periods in the prior fiscal year, and all of which shall be
certified by the Chief Financial Officer or other Authorized Officer of the
Borrower, subject to changes resulting from normal year-end audit
adjustments.

(ii) As soon as available and in any event within 45 days after the
close of each of the first three quarterly accounting periods in each
fiscal year of SNIC, quarterly financial statements of SNIC and its
Subsidiaries (prepared in accordance with SAP) for such fiscal period and
as filed with the Insurance Department of the State of California, together
with the opinion thereon of the Chief Financial Officer or other Authorized
Officer of SNIC, stating that such financial statements present the
financial condition and results of operations of SNIC, in accordance with
SAP.

(c) OFFICER'S CERTIFICATES. At the time of the delivery of the
financial statements provided for in Sections 6.01(a)(i) and (b)(i), a
certificate of the Chief Financial Officer or other Authorized Officer of
the Borrower to the effect that no Default or Event of Default exists or,
if any Default or Event of Default does exist, specifying the nature and
extent thereof.

(d) NOTICE OF DEFAULT OR LITIGATION. Promptly, and in any event
within three Business Days after the Borrower or any of its Subsidiaries
obtains knowledge thereof, notice of the occurrence of any event which
constitutes a Default or Event of Default, which notice shall specify the
nature thereof, the period of existence thereof and what action the
Borrower proposes to take with respect thereto.

(e) AUDITORS' REPORTS. Promptly upon receipt thereof, a copy of each
other report or "management letter" submitted to the Borrower or SNIC or
any of their respective Subsidiaries by their independent

-14-

<PAGE>

accountants or independent actuaries in connection with any annual, interim
or special audit made by them of the books of the Borrower or SNIC or any
of their respective Subsidiaries.

(f) OTHER INFORMATION. Promptly upon transmission thereof, copies of
any filings and registrations with, and reports to, the SEC by the Borrower
or SNIC or any of their respective Subsidiaries (other than any
registration statement on Form S-8) and copies of all financial statements,
proxy statements, notices and reports as the Borrower or SNIC or any of
their respective Subsidiaries shall send to analysts or the holders of
their capital stock in their capacity as such holders (in each case to the
extent not theretofore delivered to the Banks pursuant to this Agreement)
and, with reasonable promptness, such other information or documents
(financial or otherwise) as the Bank may reasonably request from time to
time.

6.02 BOOKS, RECORDS AND INSPECTIONS. The Borrower will, and will
cause each of its Material Subsidiaries to, permit, upon at least two Business
Days' notice to the Chief Financial Officer or any other Authorized Officer of
the Borrower, officers and designated representatives of the Bank to visit and
inspect any of the properties or assets of the Borrower and any of its Material
Subsidiaries in whomsoever's possession (but only to the extent the Borrower or
such Material Subsidiary has the right to do so to the extent in the possession
of another Person), and to examine the books of account of the Borrower and any
of its Material Subsidiaries and discuss the affairs, finances and accounts of
the Borrower and of any of its Material Subsidiaries with, and be advised as to
the same by, its and their officers and independent accountants and independent
actuaries, if any, all at such reasonable times and intervals and to such
reasonable extent as the Agent or the Required Banks may request.

6.03 CORPORATE FRANCHISES. The Borrower will do, and will cause each
Material Subsidiary to do, or cause to be done, all things necessary to preserve
and keep in full force and effect its corporate existence, rights and authority;
PROVIDED that any transaction permitted by Section 7.01 will not constitute a
breach of this Section 6.03.

6.04 COMPLIANCE WITH STATUTES, ETC. The Borrower will, and will cause
each Material Subsidiary to, comply with all applicable statutes, regulations
and orders of, and all

-15-

<PAGE>

applicable restrictions imposed by, all governmental bodies, domestic or
foreign, in respect of the conduct of its business and the ownership of its
property (including applicable statutes, regulations, orders and restrictions
relating to environmental standards and controls) other than those the
non-compliance with which would not have a Material Adverse Effect.

SECTION 7. NEGATIVE COVENANTS. The Borrower hereby covenants and
agrees that on the Closing Date and thereafter, for so long as this Agreement is
in effect and until the Loans together with interest, Fees and all other
Obligations incurred hereunder, are paid in full:

7.01 CONSOLIDATION, MERGER, SALE OR PURCHASE OF ASSETS, ETC. The
Borrower will not, and will not permit any Material Subsidiary to, wind up,
liquidate or dissolve its affairs, or enter into any transaction of merger or
consolidation, sell or otherwise dispose of all or substantially all of its
property or assets, or any property or asset which is material to the business
of the Borrower or such Material Subsidiary (but excluding any sale or
disposition of property or assets in the ordinary course of business).

7.02 LIENS. The Borrower will not, and will not permit SNIC to,
create, incur, assume or suffer to exist any Lien upon or with respect to the
Collateral or any Reinsurance Receivables.

7.03 MODIFICATIONS OF AGREEMENTS, ETC. The Borrower will not, and
will not permit any Material Subsidiary to, amend, modify or change in any
manner (i) which could reasonably be expected to have a Material Adverse Effect
the Certificate of Incorporation (including, without limitation, by the filing
of any certificate of designation) or By-Laws of the Borrower or such Material
Subsidiary or any other agreement entered into by the Borrower or such Material
Subsidiary with respect to its capital stock, or enter into any new agreement
with respect to the capital stock of the Borrower or such Material Subsidiary
which could reasonably be expected to have a Material Adverse Effect or (ii) the
Reinsurance Agreement.

SECTION 8. EVENTS OF DEFAULT. Upon the occurrence of any of the
following specified events (each an "Event of Default"):

-16-

<PAGE>

8.01 PAYMENTS. The Borrower shall (i) default, and such default shall
continue for one or more Business Days, in the payment when due of any amount
payable pursuant to Section 3.02 or (ii) default, and such default shall
continue for five or more Business Days, in the payment when due of any Fees or
any other amounts owing hereunder or under any other Credit Document; or

8.02 REPRESENTATIONS, ETC. Any representation, warranty or statement
made or deemed made by the Borrower or any of its Subsidiaries herein or in any
other Credit Document or in any statement or certificate delivered or required
to be delivered pursuant hereto or thereto shall prove to be untrue in any
material respect on the date as of which made or deemed made; or

8.03 COVENANTS. The Borrower shall (a) default in the due performance
or observance by it of any term, covenant or agreement contained in Section 7,
or (b) default in the due performance or observance by it of any term, covenant
or agreement (other than those referred to in Sections 8.01, 8.02 or clause (a)
of this Section 8.03) contained in this Agreement and such default shall
continue unremedied for a period of at least 30 days after notice to the
Borrower by the Bank; or

8.04 BANKRUPTCY, ETC. The Borrower or SNIC shall commence a voluntary
case concerning itself under Title 11 of the United States Code entitled
"Bankruptcy," as now or hereafter in effect, or any successor thereto (the
"Bankruptcy Code"); or an involuntary case is commenced against the Borrower or
SNIC and the petition is not controverted within 10 days, or is not dismissed
within 60 days, after commencement of the case; or a custodian (as defined in
the Bankruptcy Code) is appointed for, or takes charge of, all or substantially
all of the property of the Borrower or SNIC; or the Borrower or SNIC commences
(including by way of applying for or consenting to the appointment of, or the
taking of possession by, a rehabilitator, receiver, custodian, trustee,
conservator or liquidator (collectively, a "conservator") of itself or all or
any substantial portion of its property) any other proceeding under any
reorganization, arrangement, adjustment of debt, relief of debtors, dissolution,
insolvency, liquidation, rehabilitation, conservatorship or similar law of any
jurisdiction whether now or hereafter in effect relating to the Borrower or
SNIC; or

8.05 SECURITY AGREEMENT. The Security Agreement shall cease to be in
full force and effect, or shall cease to

-17-

<PAGE>

give the Collateral Agent the Liens, rights, powers and privileges purported to
be created thereby (including, without limitation, a first priority perfected
security interest in, and Lien on, all of the Collateral subject thereto, in
favor of the Collateral Agent, superior to and prior to the rights of all third
Persons and subject to no other Liens), or the Borrower or any other pledgor
thereunder shall default in the due performance or observance of any term,
covenant or agreement on its part to be performed or observed pursuant to the
Security Agreement; or

8.06 PUT AGREEMENT. Except with the prior written consent of the
Bank, the Put Agreement shall cease to be in full force and effect, or Centre Re
shall default in the due performance or observance of any term, covenant or
agreement on its part to be performed or observed pursuant to the Put Agreement;
or

8.07 PUT GUARANTY. Except with the prior written consent of the Bank,
the Put Guaranty shall cease to be in full force and effect, or Centre Re
(Bermuda) shall default in the due performance or observance of any term,
covenant or agreement on its part to be performed or observed pursuant to the
Put Guaranty; or

8.08 ASSET TRANSFER AGREEMENT. The Asset Transfer Agreement shall
cease to be in full force and effect, or any of the parties thereto shall
default in the due performance or observance of any term, covenant or agreement
on its part to be performed or observed pursuant to the Asset Transfer
Agreement; or

8.09 OWNERSHIP. The Borrower shall cease to own, directly, 100% of
the capital stock of SNIC;

then, and in any such event, and at any time thereafter, if any Event of Default
shall then be continuing, the Bank may, by written notice to the Borrower, take
any or all of the following actions, without prejudice to the rights of the Bank
to enforce its claims against the Borrower, except as otherwise specifically
provided for in this Agreement (PROVIDED that if an Event of Default specified
in Section 8.04 shall occur with respect to the Borrower, the result which would
occur upon the giving of written notice by the Agent as specified in clauses (i)
and (ii) below shall occur automatically without the giving of any such notice):
(i) declare the Total Commitment terminated, whereupon the A Loan Commitment and
the B Loan Commitment of the Bank shall forthwith terminate immediately; (ii)
declare the principal

-18-

<PAGE>

of and any accrued interest, together with the loss (if any) incurred by the
Bank in terminating the Interest Rate Agreement (if any) entered into by the
Bank in respect of the Loans, in respect of all Loans and all Obligations owing
hereunder and under the other Credit Documents to be, whereupon the same shall
become, forthwith due and payable by the Borrower without presentment, demand,
protest or other notice of any kind, all of which are hereby waived by the
Borrower; and/or (iii) direct the Collateral Agent to enforce any or all of the
Liens and security interests created pursuant to the Security Agreement.

SECTION 9. DEFINITIONS. As used herein, the following terms shall
have the meanings herein specified unless the context otherwise requires.
Defined terms in this Agreement shall include in the singular number the plural
and in the plural the singular:

"A Loan" shall have the meaning provided in Section 1.01(a).

"A Loan Commitment" shall mean the amount set forth in Annex I hereto
directly below the column entitled "A Loan Commitment," as the same may be
reduced or terminated pursuant to Sections 2.02, 2.03 and/or 8.

"A Loan Facility" shall mean the Facility evidenced by the A Loan
Commitment.

"A Loan Repayment Date" shall have the meaning provided in Section
3.02(a).

"A Maturity Date" shall mean October 15, 2000.

"A Note" shall have the meaning provided in Section 1.04(a).

"Agreement" shall mean this Credit Agreement, as the same may be from
time to time modified, amended and/or supplemented.

"Asset Transfer Agreement" shall have the meaning provided in Section
4.10.

"Authorized Officer" shall mean any senior officer of the Borrower
designated as such in writing by the Borrower to, and found acceptable by, the
Agent.

-19-

<PAGE>

"B Loan" shall have the meaning provided in Section 1.01(b).

"B Loan Commitment" shall mean the amount set forth in Annex I hereto
directly below the column entitled "B Loan Commitment," as the same may be
reduced or terminated pursuant to Sections 2.02, 2.03 and/or 8.

"B Loan Facility" shall mean the Facility evidenced by the B Loan
Commitment.

"B Loan Repayment Date" shall have the meaning provided in Section
3.02(b).

"B Maturity Date" shall mean October 15, 2004.

"B Note" shall have the meaning provided in Section 1.04(a).

"Bank" shall have the meaning provided in the first paragraph of this
Agreement.

"Bankruptcy Code" shall have the meaning provided in Section 8.04.

"Base Rate" at any time shall mean the higher of (x) the rate which is
1/2 of 1% in excess of the Federal Funds Effective Rate and (y) the Prime
Lending Rate as in effect from time to time.

"Bearer" shall mean, as to either Note, the Person in legal possession
of such Note.

"Borrower" shall have the meaning provided in the first paragraph of
this Agreement.

"Borrowing" shall mean the incurrence pursuant to a single Facility of
a Loan by the Borrower from the Bank on a given date.

"Business Day" shall mean any day excluding Saturday, Sunday and any
day which shall be in the City of New York a legal holiday or a day on which
banking institutions are authorized by law or other governmental actions to
close.

"Centre Re" shall mean Centre Reinsurance Limited, a Bermuda
corporation.

-20-

<PAGE>

"Centre Re (Bermuda)" shall mean Centre Reinsurance (Bermuda) Limited,
a Bermuda corporation.

"Chase" shall mean The Chase Manhattan Bank, and any successor thereto
by merger.

"Closing Date" shall mean the date upon which the Loans are incurred
hereunder.

"Collateral" shall mean all of the Collateral as defined in the
Security Agreement.

"Collateral Agent" shall mean Chase acting as collateral agent for the
Bank, and any successor collateral agent pursuant to Section 10.09.

"Consolidated Subsidiaries" shall mean, as to any Person, all
Subsidiaries of such Person which are consolidated with such Person for
financial reporting purposes in accordance with GAAP or SAP.

"Credit Documents" shall mean this Agreement, the Notes, the Security
Agreement, the Put Agreement, the Put Guaranty, the Asset Transfer Agreement and
any Assignment Agreement (a form of which is set forth as Exhibit H) delivered
pursuant to Section 11.04.

"Credit Parties" shall mean the Borrower and SNIC.

"Default" shall mean any event, act or condition which with notice or
lapse of time, or both, would constitute an Event of Default.

"Effective Date" shall have the meaning provided in Section 11.09.

"Event of Default" shall have the meaning provided in Section 8.

"Expiration Date" shall mean November 30, 1996.

"Facility" shall mean either of the two facilities established under
this Agreement, I.E., the A Loan Facility and the B Loan Facility.

"Federal Funds Effective Rate" shall mean for any period, a
fluctuating interest rate equal for each day during such period to the weighted
average of the rates on overnight Federal Funds transactions with members of the
Federal

-21-

<PAGE>

Reserve System arranged by Federal Funds brokers, as published for such day (or,
if such day is not a Business Day, for the next preceding Business Day) by the
Federal Reserve Bank of New York, or, if such rate is not so published for any
day which is a Business Day, the average of the quotations for such day on such
transactions received by Chase from three Federal Funds brokers of recognized
standing selected by the Agent.

"Fees" shall mean all amounts payable pursuant to, or referred to in,
Section 2.01.

"GAAP" shall mean generally accepted accounting principles
consistently applied in the United States of America.

"Interest Rate Agreement" shall mean any interest rate swap agreement,
interest rate cap agreement, interest rate collar agreement, interest rate
hedging agreement or other similar agreement or arrangement.

"Lien" shall mean any mortgage, pledge, security interest,
encumbrance, lien or charge of any kind (including any agreement to give any of
the foregoing, any conditional sale or other title retention agreement or any
lease in the nature thereof).

"Loan" shall mean each and every loan made by the Bank hereunder,
including the A Loan or the B Loan.

"Material Adverse Effect" shall mean a material adverse effect on (x)
the business operations or financial condition of the Borrower and its
Subsidiaries taken as a whole, (y) the transactions contemplated herein or in
any other Credit Document or (z) the rights or remedies of the Bank or the
Collateral Agent hereunder or under any other Credit Document or on the ability
of the Borrower to perform its obligations to the Bank hereunder or under any
other Credit Document.

"Material Subsidiary" shall mean, at any time, each Subsidiary of the
Borrower the aggregate fair market value of whose assets is at least 20% of the
fair market value of the assets of the Borrower and its Subsidiaries taken as a
whole at such time; PROVIDED that whether or not the foregoing test is
satisfied, SNIC shall constitute a Material Subsidiary of the Borrower at all
times and for all purposes.

-22-

<PAGE>

"Margin Stock" shall have the meaning provided in Regulation U.

"NAIC" shall mean the National Association of Insurance Commissioners
or any successor organization thereto.

"Notes" shall mean the A Note and the B Note.

"Notice of Borrowing" shall have the meaning provided in Section 1.02.

"Notice Office" shall mean such office of the Bank as the Bank may
designate to the Borrower from time to time.

"Obligations" shall mean all amounts, direct or indirect, contingent
or absolute, of every type or description, and at any time existing, owing to
the Bank or the Collateral Agent pursuant to the terms of this Agreement or any
other Credit Document.

"Payment Office" shall mean, as to any Bearer, such office of such
Bearer as such Bearer may designate to the Borrower from time to time; provided,
that in no event shall any Payment Office be within the United States of America
or any of its possessions.

"Person" shall mean any individual, partnership, joint venture, firm,
corporation, association, trust or other enterprise or any government or
political subdivision or any agency, department or instrumentality thereof.

"Prime Lending Rate" shall mean the rate which Chase announces from
time to time as its prime commercial lending rate, the Prime Lending Rate to
change when and as such prime commercial lending rate changes. The Prime
Lending Rate is a reference rate and does not necessarily represent the lowest
or best rate actually charged to any customer. Chase may make commercial loans
or other loans at rates of interest at, above or below the Prime Lending Rate.

"Put Agreement" shall have the meaning provided in Section 4.09.

"Put Guaranty" shall have the meaning provided in Section 4.09.

"Reinsurance Agreement" shall mean the Aggregate Excess of Loss Cover
dated as of August 30, 1991 between

-23-

<PAGE>

Centre Re and the Borrower, as amended on or prior to the Closing Date but
without giving effect to any further amendment, waiver or other modification
thereof unless consented to in writing by the Bank.

"Reinsurance Receivables" shall mean all amounts owing by Centre Re
under the Reinsurance Agreement.

"Repayment Date" shall mean each A Loan Repayment Date and B Loan
Repayment Date.

"SAP" shall mean, with respect to SNIC, the accounting procedures and
practices prescribed or permitted by the Insurance Department of the State of
California.

"SEC" shall mean the Securities and Exchange Commission or any
successor thereto.

"Security Agreement" shall have the meaning provided in Section 4.08.

"SNIC" shall mean Superior National Insurance Company, a California
corporation.

"Subordinated Loan Agreement" shall mean the Loan Agreement, dated as
of June 30, 1994, between the Borrower and Superior National Capital, L.P., as
amended, modified or supplemented from time to time.

"Subsidiary" of any Person shall mean and include (i) any corporation
more than 50% of whose stock of any class or classes having by the terms thereof
ordinary voting power to elect a majority of the directors of such corporation
(irrespective of whether or not at the time stock of any class or classes of
such corporation shall have or might have voting power by reason of the
happening of any contingency) is at the time owned by such Person directly or
indirectly through Subsidiaries, (ii) any partnership, association, joint
venture or other entity in which such Person directly or indirectly through
Subsidiaries has more than a 50% equity or voting interest at the time and (iii)
SNIC. Unless otherwise expressly provided, all references herein to
"Subsidiary" shall mean a Subsidiary of the Borrower.

"Total Commitment" shall mean the sum of the A Loan Commitment and the
B Loan Commitments of the Bank.

"Triggering Event" shall have the meaning provided in the Put
Agreement.

-24-

<PAGE>

"UCC" shall mean the Uniform Commercial Code.

"Wholly-Owned Subsidiary" of any Person shall mean any Subsidiary of
such Person to the extent all of the capital stock or other ownership interests
in such Subsidiary, other than directors' or nominees' qualifying shares, is
owned directly or indirectly by such Person.

"Written" or "in writing" shall mean any form of written communication
or a communication by means of telex, facsimile device, telegraph or cable.

SECTION 10. THE COLLATERAL AGENT.

10.01 APPOINTMENT. The Bank hereby irrevocably designates and
appoints Chase as Collateral Agent of the Bank to act as specified herein and in
the other Credit Documents, and the Bank hereby irrevocably authorizes Chase as
the Collateral Agent for such Bank to take such action on its behalf under the
provisions of this Agreement and the other Credit Documents and to exercise such
powers and perform such duties as are expressly delegated to the Collateral
Agent by the terms of this Agreement and the other Credit Documents, together
with such other powers as are reasonably incidental thereto. The Collateral
Agent agrees to act as such upon the express conditions contained in this
Section 10. Notwithstanding any provision to the contrary elsewhere in this
Agreement, the Collateral Agent shall not have any duties or responsibilities,
except those expressly set forth herein or in the other Credit Documents, or any
fiduciary relationship with the Bank, and no implied covenants, functions,
responsibilities, duties, obligations or liabilities shall be read into this
Agreement or otherwise exist against the Collateral Agent. The provisions of
this Section 10 are solely for the benefit of the Collateral Agent and the Bank,
and the Borrower shall have no rights as a third party beneficiary of any of the
provisions hereof. In performing its functions and duties under this Agreement,
the Collateral Agent shall act solely as the agent of the Bank and the
Collateral Agent does not assume, nor shall it be deemed to have assumed, any
obligation or relationship of agency or trust with or for the Borrower or any of
its Subsidiaries.

10.02 DELEGATION OF DUTIES. The Collateral Agent may execute any of
its duties under this Agreement or any other Credit Document by or through
agents or attorneys-in-fact and shall be entitled to advice of counsel
concerning all matters pertaining to such duties. The Collateral Agent shall
not be responsible for the negligence or misconduct of

-25-

<PAGE>

any agents or attorneys-in-fact selected by it with reasonable care except to
the extent otherwise required by Section 10.03.

10.03 EXCULPATORY PROVISIONS. None of the Collateral Agent nor any
of its officers, directors, employees, representatives, agents, attorneys-
in-fact or affiliates shall be (i) liable for any action lawfully taken or
omitted to be taken by it or such Person under or in connection with this
Agreement (except for its or such Person's own gross negligence or willful
misconduct) or (ii) responsible in any manner to the Bank for any recitals,
statements, representations or warranties made by the Borrower, any Subsidiary
or any of their respective officers contained in this Agreement, any other
Credit Document or in any certificate, report, statement or other document
referred to or provided for in, or received by the Collateral Agent under or in
connection with, this Agreement or any other Credit Document or for any failure
of the Borrower or any Subsidiary or any of their respective officers to perform
its obligations hereunder or thereunder. The Collateral Agent shall not be
under any obligation to the Bank to ascertain or to inquire as to the observance
or performance of any of the agreements contained in, or conditions of, this
Agreement, or to inspect the properties, books or records of the Borrower or any
Subsidiary. The Collateral Agent shall not be responsible to any Bank for the
effectiveness, genuineness, validity, enforceability, collectibility or
sufficiency of this Agreement or any Credit Document or for any representations,
warranties, recitals or statements made herein or therein or made in any written
or oral statement or in any financial or other statements, instruments, reports,
certificates or any other documents in connection herewith or therewith
furnished or made by the Collateral Agent to the Bank or by or on behalf of the
Borrower to the Collateral Agent or the Bank or be required to ascertain or
inquire as to the performance or observance of any of the terms, conditions,
provisions, covenants or agreements contained herein or therein or as to the use
of the proceeds of the Loans or of the existence or possible existence of any
Default or Event of Default.

10.04 RELIANCE BY COLLATERAL AGENT. The Collateral Agent shall be
entitled to rely, and shall be fully protected in relying, upon any note,
writing, resolution, notice, consent, certificate, affidavit, letter, cablegram,
telegram, facsimile, telex or teletype message, statement, order or other
document or conversation believed by it to be genuine and correct and to have
been signed, sent or made by

-26-

<PAGE>

the proper Person or Persons and upon advice and statements of legal counsel
(including, without limitation, counsel to the Borrower), independent
accountants and other experts selected by the Collateral Agent. The Collateral
Agent shall be fully justified in failing or refusing to take or continue to
take any action under this Agreement or any other Credit Document unless it
shall first receive such advice or concurrence of the Bank as it deems
appropriate or it shall first be indemnified to its satisfaction by the Bank
against any and all liability and expense which may be incurred by it by reason
of taking or continuing to take any such action. The Collateral Agent shall in
all cases be fully protected in acting, or in refraining from acting, under this
Agreement and the other Credit Documents in accordance with a request of the
Bank, and such request and any action taken or failure to act pursuant thereto
shall be binding upon the Bank.

10.05 NOTICE OF DEFAULT. The Collateral Agent shall not be deemed to
have knowledge or notice of the occurrence of any Default or Event of Default
hereunder unless the Collateral Agent has received notice from the Bank or the
Borrower referring to this Agreement, describing such Default or Event of
Default and stating that such notice is a "notice of default." In the event
that the Collateral Agent receives such a notice, the Collateral Agent shall
give prompt notice thereof to the Bank. The Collateral Agent shall take such
action with respect to such Default or Event of Default as shall be reasonably
directed by the Bank, PROVIDED that, unless and until the Collateral Agent shall
have received such directions, the Collateral Agent may (but shall not be
obligated to) take such action, or refrain from taking such action, with respect
to such Default or Event of Default as it shall deem advisable in the best
interests of the Bank.

10.06 NON-RELIANCE ON COLLATERAL AGENT. The Bank expressly
acknowledges that none of the Collateral Agent nor any of its officers,
directors, employees, agents, representatives, attorneys-in-fact or affiliates
has made any representations or warranties to it and that no act by the
Collateral Agent hereinafter taken, including any review of the affairs of the
Borrower or any Subsidiary (including SNIC and its Subsidiaries), shall be
deemed to constitute any representation or warranty by the Collateral Agent to
the Bank. The Bank represents to the Collateral Agent that it has, independently
and without reliance upon the Collateral Agent, and based on such documents and
information as it has deemed appropriate, made its own appraisal of and
investigation into the business, assets, operations, property,

-27-

<PAGE>

financial and other conditions, prospects and creditworthiness of the Borrower
and its Subsidiaries (including SNIC and its Subsidiaries) and made its own
decision to make its Loans hereunder and enter into this Agreement. The Bank
also represents that it will, independently and without reliance upon the
Collateral Agent, and based on such documents and information as it shall deem
appropriate at the time, continue to make its own credit analysis, appraisals
and decisions in taking or not taking action under this Agreement, and to make
such investigation as it deems necessary to inform itself as to the business,
assets, operations, property, financial and other conditions, prospects and
creditworthiness of the Borrower and its Subsidiaries. The Collateral Agent
shall not have any duty or responsibility to provide the Bank with any credit or
other information concerning the business, operations, assets, property,
financial and other conditions, prospects or creditworthiness of the Borrower or
any Subsidiary (including SNIC and its Subsidiaries) which may come into the
possession of the Agent or any of its officers, directors, employees, agents,
representatives, attorneys-in-fact or affiliates.

10.07 INDEMNIFICATION. The Bank agrees to indemnify the Collateral
Agent in its capacity as such from and against any and all liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, costs,
reasonable expenses or disbursements of any kind whatsoever which may at any
time (including, without limitation, at any time following the payment of the
Obligations) be imposed on, incurred by or asserted against the Collateral Agent
in its capacity as such in any way relating to or arising out of this Agreement
or any other Credit Document, or any documents contemplated by or referred to
herein or the transactions contemplated hereby or any action taken or omitted to
be taken by the Collateral Agent under or in connection with any of the
foregoing, but only to the extent that any of the foregoing is not paid by the
Borrower or any of its Subsidiaries, PROVIDED that the Bank shall not be liable
to the Collateral Agent for the payment of any portion of such liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, costs,
expenses or disbursements resulting solely from the gross negligence or willful
misconduct of the Collateral Agent. If any indemnity furnished to the Collateral
Agent for any purpose shall, in the opinion of the Collateral Agent, be
insufficient or become impaired, the Collateral Agent may call for additional
indemnity and cease, or not commence, to do the acts indemnified against until
such additional indemnity is furnished. The agreements in

-28-

<PAGE>

this Section 10.07 shall survive the payment of all Obligations.

10.08 COLLATERAL AGENT IN ITS INDIVIDUAL CAPACITY. The Collateral
Agent and its affiliates may make loans to, accept deposits from and
generally engage in any kind of business with the Borrower and its affiliates
(including SNIC and its Subsidiaries) as though the Collateral Agent were not
the Collateral Agent hereunder. With respect to the Loans made by it and all
Obligations owing to it, the Collateral Agent shall have the same rights and
powers under this Agreement as the Bank and may exercise the same as though
it were not the Collateral Agent and the terms "Bank" shall include the
Collateral Agent in its individual capacity.

10.09 RESIGNATION OF THE COLLATERAL AGENT; SUCCESSOR COLLATERAL
AGENT. The Collateral Agent may resign as the Collateral Agent upon 20 days'
notice to the Bank. Upon the resignation of the Collateral Agent, the Bank
shall appoint a successor Collateral Agent for the Bank subject to prior
approval by the Borrower (such approval not to be unreasonably withheld),
whereupon such successor agent shall succeed to the rights, powers and duties of
the Collateral Agent, and the term "Collateral Agent" shall include such
successor agent effective upon its appointment, and the resigning Collateral
Agent's rights, powers and duties as the Collateral Agent shall be terminated,
without any other or further act or deed on the part of such former Collateral
Agent or any of the parties to this Agreement. After the resignation of the
Collateral Agent hereunder, the provisions of this Section 10 shall inure to its
benefit as to any actions taken or omitted to be taken by it while it was the
Collateral Agent under this Agreement.

SECTION 11. MISCELLANEOUS.

11.01 PAYMENT OF EXPENSES, ETC. The Borrower agrees to: (i) whether
or not the transactions herein contemplated are consummated, pay all reasonable
out-of-pocket costs and expenses of the Collateral Agent and the Bank in
connection with the negotiation, preparation, execution and delivery of the
Credit Documents and the documents and instruments referred to therein
(including, without limitation, the reasonable fees and disbursements of White &
Case); (ii) pay all reasonable out-of-pocket costs and expenses of the
Collateral Agent and the Bank in connection with any amendment, waiver or
consent relating to any of the Credit Documents (including, without limitation,
the reasonable fees and disbursements of White & Case); (iii) pay all reasonable

-29-

<PAGE>

out-of-pocket costs and expenses of the Collateral Agent and the Bank in
connection with the enforcement of the Credit Documents and the documents and
instruments referred to therein (including, without limitation, the reasonable
fees and disbursements of counsel for the Collateral Agent and for the Bank);
and (iv) indemnify the Collateral Agent and the Bank, and their respective
officers, directors, employees, representatives and agents (each, an
"indemnified person") from and hold each of them harmless against any and all
losses, liabilities, claims, damages or expenses (collectively, "Claims")
incurred by any of them as a result of, or arising out of, or in any way related
to, or by reason of, any breach or default by the Borrower hereunder or under
any other Credit Document, including, without limitation, the reasonable fees
and disbursements of counsel (but excluding any such losses, liabilities,
claims, damages or expenses to the extent incurred by reason of the gross
negligence or willful misconduct of the Person to be indemnified.

11.02 RIGHT OF SETOFF. In addition to any rights now or hereafter
granted under applicable law or otherwise, and not by way of limitation of any
such rights, upon the occurrence and during the continuance of an Event of
Default, the Bank is hereby authorized at any time or from time to time, without
presentment, demand, protest or other notice of any kind to the Borrower or to
any other Person, any such notice being hereby expressly waived, to set off and
to appropriate and apply any and all deposits (general or special) and any other
indebtedness at any time held or owing by the Bank (including, without
limitation, by branches and agencies of the Bank wherever located) to or for the
credit or the account of the Borrower against and on account of the Obligations
and liabilities of the Borrower to the Bank under this Agreement or under any of
the other Credit Documents, and all other claims of any nature or description
arising out of or connected with this Agreement or any other Credit Document,
irrespective of whether or not the Bank shall have made any demand hereunder and
although said Obligations, liabilities or claims, or any of them, shall be
contingent or unmatured.

11.03 NOTICES. Except as otherwise expressly provided herein, all
notices and other communications provided for hereunder shall be in writing
(including telegraphic, telex, facsimile or cable communication) and mailed,
telegraphed, telexed, telecopied, cabled or delivered, if to the Borrower, at
the address specified opposite its signature below; if to the Bank, at its
address specified on Annex II hereto; or, at such other address as shall be
designated by

-30-

<PAGE>

any party in a written notice to the other parties hereto. All such notices and
communications shall be mailed, telegraphed, telexed, telecopied, cabled or sent
by overnight courier and shall be effective when received.

11.04 BENEFIT OF AGREEMENT. (a) This Agreement shall be binding upon
and inure to the benefit of and be enforceable by the respective successors and
assigns of the parties hereto; PROVIDED that the Borrower may not assign or
transfer any of its rights or obligations hereunder without the prior written
consent of the Bank. The Bank may at any time grant participations in any of
its rights hereunder or under any of its Notes to another financial institution,
which participations shall not be required to be PRO RATA among the Facilities;
PROVIDED that in the case of any such participation, the participant shall not
have any rights under this Agreement or any of the other Credit Documents (the
participant's rights against the Bank in respect of such participation to be
those set forth in the agreement executed by the Bank in favor of the
participant relating thereto) and all amounts payable by the Borrower hereunder
shall be determined as if the Bank had not sold such participation.

(b) Notwithstanding the foregoing, on the terms set forth in this
Section 11.04(b), the Bank may assign all or a portion of its rights and
obligations hereunder and under the other Credit Documents (including, without
limitation, the right to receive payments of Reinsurance Receivables pursuant to
Sections 1.1 and 1.2 of the Asset Transfer Agreement) to one or more commercial
banks, other financial institutions or other lenders (including, without
limitation, Centre Re pursuant to the Put Agreement), which assignments shall
not be required to be PRO RATA among the Facilities. Any such assignment
(other than to Centre Re) shall require the consent of Centre Re (such consent
not to be unreasonably withheld); PROVIDED that if Centre Re shall have
defaulted on any of its obligations under the Put Agreement, no such consent
shall be required so long as the assigning Bank gives Centre Re 15 days prior
notice of any such assignment. If the Bank so sells or assigns all or a part of
its rights hereunder or under the Notes, any reference in this Agreement or the
Notes to such assigning Bank shall thereafter refer to such Bank and to the
respective assignee to the extent of their respective interests and the
respective assignee shall have, to the extent of such assignment (unless
otherwise provided therein), the same rights and benefits as it would if it were
such assigning Bank. Each assignment pursuant to this Section 11.04(b) shall be
effected by (i) the assigning Bank transferring to the assignee Bank the
respective Note or

-31-

<PAGE>

Notes and (ii) the assigning Bank and the assignee Bank executing an Assignment
and Assumption Agreement substantially in the form of Exhibit H (appropriately
completed). At the time of any such assignment, Annex I shall be deemed to be
amended to reflect the Commitments, if any, and outstanding Loans of the
respective assignee (which shall result in a direct reduction to the
Commitments, if any, and outstanding Loans of the assigning Bank) and of the
other Banks. Nothing in this Section 11.04 shall prevent or prohibit the Bank
from pledging its Loans or Notes hereunder to a Federal Reserve Bank in support
of borrowings made by the Bank from such Federal Reserve Bank.

(c) Notwithstanding any other provisions of this Section 11.04, no
transfer or assignment of the interests or obligations of the Bank hereunder or
any grant of participations therein shall be permitted if such transfer,
assignment or grant would require the Borrower to file a registration statement
with the SEC or to qualify the Loans under the "Blue Sky" laws of any State.

11.05 NO WAIVER; REMEDIES CUMULATIVE. No failure or delay on the
part of the Collateral Agent or the Bank in exercising any right, power or
privilege hereunder or under any other Credit Document and no course of dealing
between the Borrower and the Collateral Agent or the Bank shall operate as a
waiver thereof; nor shall any single or partial exercise of any right, power or
privilege hereunder or under any other Credit Document preclude any other or
further exercise thereof or the exercise of any other right, power or privilege
hereunder or thereunder. The rights and remedies herein expressly provided are
cumulative and not exclusive of any rights or remedies which the Collateral
Agent or the Bank would otherwise have. No notice to or demand on the Borrower
in any case shall entitle the Borrower to any other or further notice or demand
in similar or other circumstances or constitute a waiver of the rights of the
Collateral Agent or the Bank to any other or further action in any circumstances
without notice or demand.

11.06 CALCULATIONS; COMPUTATIONS. (a) The financial statements to be
furnished to the Banks pursuant hereto shall be made and prepared in accordance
with GAAP or SAP, as the case may be, consistently applied throughout the
periods involved (except as set forth in the notes thereto or as otherwise
disclosed in writing by the Borrower to the Bank).

-32-

<PAGE>

(b) All computations of interest hereunder shall be made on the
actual number of days elapsed over a year of 360 days.

11.07 GOVERNING LAW; SUBMISSION TO JURISDICTION; VENUE. (a) THIS
AGREEMENT AND THE OTHER CREDIT DOCUMENTS AND THE RIGHTS AND OBLIGATIONS OF THE
PARTIES HEREUNDER AND THEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE
GOVERNED BY THE LAW OF THE STATE OF NEW YORK. Any legal action or proceeding
with respect to this Agreement or any other Credit Document may be brought in
the courts of the State of New York or of the United States for the Southern
District of New York, and, by execution and delivery of this Agreement, the
Borrower hereby irrevocably accepts for itself and in respect of its property,
generally and unconditionally, the jurisdiction of the aforesaid courts. The
Borrower hereby further irrevocably waives any claim that any such courts lack
jurisdiction over the Borrower and agrees not to plead or claim, in any legal
action or proceeding with respect to this Agreement or any other Credit Document
brought in any of such aforesaid courts, that any such court lacks jurisdiction
over the Borrower. The Borrower further irrevocably consents to the service of
process out of any of the aforementioned courts in any such action or proceeding
by the mailing of copies thereof by registered or certified mail, postage
prepaid, to the Borrower at its address for notices pursuant to Section 11.03,
such service to become effective 30 days after such mailing. The Borrower
hereby irrevocably waives any objection to such service of process and further
irrevocably waives and agrees not to plead or claim in any legal action or
proceeding commenced hereunder or under any other Credit Document that service
of process was in any way invalid or ineffective. Nothing herein shall affect
the right of the Collateral Agent or the Bank to serve process in any other
manner permitted by law or to commence legal proceedings or otherwise proceed
against the Borrower in any other jurisdiction.

(b) The Borrower hereby irrevocably waives any objection which it may
now or hereafter have to the laying of venue of any of the aforesaid actions or
proceedings arising out of or in connection with this Agreement or any other
Credit Document brought in the courts referred to in clause (a) above and hereby
further irrevocably waives and agrees not to plead or claim in any such court
that any such action or proceeding brought in any such court has been brought in
an inconvenient forum.

-33-

<PAGE>

11.08 COUNTERPARTS. This Agreement may be executed in any number of
counterparts and by the different parties hereto on separate counterparts, each
of which when so executed and delivered shall be an original, but all of which
shall together constitute one and the same instrument. A set of
counterparts executed by all the parties hereto shall be lodged with the
Borrower and the Bank.

11.09 EFFECTIVENESS. This Agreement shall become effective on the
date (the "Effective Date") on which the Borrower and the Bank shall have signed
a copy hereof (whether the same or different copies) and shall have delivered
the same to the Bank at the Bank's Notice Office. The Bank will give the
Borrower prompt written notice of the occurrence of the Effective Date.

11.10 HEADINGS DESCRIPTIVE. The headings of the several sections and
subsections of this Agreement are inserted for convenience only and shall not in
any way affect the meaning or construction of any provision of this Agreement.

11.11 AMENDMENT OR WAIVER. Neither this Agreement nor any other
Credit Document nor any terms hereof or thereof may be changed, waived,
discharged or terminated unless such change, waiver, discharge or termination is
in writing signed by the Borrower, the Bank and Centre Re, PROVIDED that no such
change, waiver, discharge or termination shall, without the consent of the
Collateral Agent, modify the rights, duties or obligations of the Collateral
Agent. Any purported change, waiver, discharge or termination of this Agreement
or any other Credit Document which is not agreed to in writing by the Borrower,
the Bank and Centre Re shall have no force or effect.

11.12 SURVIVAL. All indemnities set forth herein including, without
limitation, in Section 10.07 or 11.01 shall survive the execution and delivery
of this Agreement and the making of the Loans, the repayment of the Obligations
and the termination of the Total Commitment.

11.13 CONFIDENTIALITY. The Bank shall hold all non-public
information furnished by or on behalf of the Borrower in connection with the
Bank's evaluation of whether to become a Bank hereunder or obtained by the Bank
pursuant to the requirements of this Agreement, which has been identified as
such by the Borrower ("Confidential Information"), in accordance with its
customary procedure for handling confidential information of this nature and in
accordance with

-34-

<PAGE>

safe and sound banking or lending practices and in any event may make disclosure
reasonably required by any bona fide actual or contemplated transferee or
participant in connection with an actual or contemplated transfer of any Loans
or participation therein or as required or requested by any governmental agency
or representative thereof or pursuant to legal process or to the Bank's
attorneys or independent auditors; PROVIDED that unless specifically prohibited
by applicable law or court order, the Bank shall notify the Borrower of any
request or requirement by any governmental agency or representative thereof
(other than any such request or requirement in connection with an examination of
the financial condition of the Bank by such governmental agency) or pursuant to
legal process for disclosure of any such non-public information prior to
disclosure of such information; and PROVIDED FURTHER, that in no event shall the
Bank be obligated or required to return any materials furnished by the Borrower
or any Subsidiary of the Borrower. The Bank agrees that it will not provide to
prospective assignees, transferees or participants any of the Confidential
Information unless such Person has executed an agreement containing provisions
substantially identical to those contained in this Section 11.13.

11.14 WAIVER OF JURY TRIAL. Each of the parties to this Agreement
hereby irrevocably waives all right to a trial by jury in any action, proceeding
or counterclaim arising out of or relating to this Agreement, the Credit
Documents or the transactions contemplated hereby or thereby.

11.15 SUBORDINATED LOAN AGREEMENT. All Obligations shall be senior
in right of payment to the Loan under and as defined in the Subordinated Loan
Agreement and shall constitute "Senior Indebtedness" for all purposes of the
Subordinated Loan Agreement.

11.16 TRANSFER RESTRICTIONS. The Bank hereby represents, warrants
and agrees as follows:

(1) Except to the extent permitted under U.S. Treasury Regulations
Section 1.163-5(c)(2)(i)(D) (the "D Rules"), (a) the Bank has not offered or
sold, and during the restricted period will not offer or sell, any Note in
bearer form to a person who is within the United States or its possessions or to
a United States person, and (b) the Bank has not delivered and will not deliver
within the United States or its possessions any Note in bearer form that is sold
during the restricted period; and

-35-

<PAGE>

(2) The Bank represents and agrees that it has and throughout the
restricted period will have in effect procedures reasonably designed to ensure
that the Bank's employees or agents who are directly engaged in selling Notes in
bearer form are aware that such Notes may not be offered or sold during the
restricted period to a person who is within the United States or its possessions
or to a United States person, except as permitted by the D Rules.

Terms used in this Section 11.16 have the meanings given to them by
the U.S. Internal Revenue Code of 1986, as amended and the Treasury Regulations
issued thereunder, including the D Rules.

* * *

-36-

<PAGE>

IN WITNESS WHEREOF, the parties hereto have caused their duly
authorized officers to execute and deliver this Agreement as of the date first
above written.

SUPERIOR NATIONAL
INSURANCE GROUP, INC.

By /s/ J. Chris Seaman
----------------------------
Title: CFO

THE CHASE MANHATTAN BANK,
LONDON BRANCH

By /s/ Robert Foster
----------------------------
Title: Vice President

THE CHASE MANHATTAN BANK,
as Collateral Agent

By /s/ Robert Foster
----------------------------
Title: Vice President

<PAGE>

ANNEX I

LIST OF BANKS AND COMMITMENTS

A Loan B Loan
Name of Bank Commitment Commitment
- ------------ ---------- ----------
The Chase Manhattan
Bank, London Branch $85,732,941 $8,458,912

Total: $85,732,941 $8,458,912
----------- ----------
----------- ----------

<PAGE>

ANNEX II

BANK ADDRESSES

BANK ADDRESS

The Chase Manhattan 125 London Wall
Bank, London Branch London, England EC2Y 5AJ
Attention: Neil McVity
Telephone: 011-44-171-962-5812

<PAGE>

EXHIBIT B-1

IT IS INTENDED THAT THIS OBLIGATION WILL BE IN BEARER FORM AND AS SUCH ANY
UNITED STATES PERSON WHO HOLDS THIS OBLIGATION WILL BE SUBJECT TO LIMITATIONS
UNDER THE UNITED STATES INCOME TAX LAWS, INCLUDING THE LIMITATIONS PROVIDED IN
SECTION 165(j) AND 1287(a) OF THE INTERNAL REVENUE CODE.

A NOTE

_________, 1996

FOR VALUE RECEIVED, SUPERIOR NATIONAL INSURANCE GROUP, INC., a
California corporation (the "Borrower"), hereby promises to make payments to the
order of Bearer, in lawful money of the United States of America in immediately
available funds, at the Bearer's direction (provided, however, that all payments
must be payable only outside the United States of America and its possessions),
on the dates and in the amounts set forth in Section 3.02(a) of the Agreement
referred to below.

This Note is the A Note referred to in the Credit Agreement, dated as
of November 12, 1996, among the Borrower, The Chase Manhattan Bank, London
Branch, and The Chase Manhattan Bank, as Collateral Agent (as from time to time
in effect, the "Agreement") and is entitled to the benefits thereof. This Note
is secured by and entitled to the benefits of the Security Agreement (as defined
in the Agreement) and is entitled to the benefits of the other Credit Documents
(as defined in the Agreement). As provided in the Agreement, this Note is
subject to voluntary prepayment, in whole but not in part.

In case an Event of Default (as defined in the Agreement) shall occur
and be continuing, all amounts due in respect of the A Loan evidenced by this
Note may become or be declared to be due and payable in the manner and with the
effect provided in the Agreement.

The Borrower hereby waives presentment, demand, protest or notice of
any kind in connection with this Note.

<PAGE>

EXHIBIT B-1
Page 2

THIS NOTE SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE
LAW OF THE STATE OF NEW YORK.

SUPERIOR NATIONAL INSURANCE GROUP, INC.

By
---------------------------------
Title:

<PAGE>

EXHIBIT B-2

B NOTE

New York, New York
_________, 1996

FOR VALUE RECEIVED, SUPERIOR NATIONAL INSURANCE GROUP, INC., a
California corporation (the "Borrower"), hereby promises to make payments to the
order of Bearer, at the Bearer's direction (provided, however, that all payments
must be payable only outside the United States of America and its possessions),
on the dates and in the amounts set forth in Section 3.02(b) of the Agreement
referred to below.

This Note is the B Note referred to in the Credit Agreement, dated as
of November 12, 1996, among the Borrower, The Chase Manhattan Bank, London
Branch, and The Chase Manhattan Bank, as Collateral Agent (as from time to time
in effect, the "Agreement") and is secured by and entitled to the benefits of
the Security Agreement (as defined in the Agreement) and is entitled to the
benefits of the other Credit Documents (as defined in the Agreement). As
provided in the Agreement, this Note is subject to voluntary prepayment, in
whole but not in part.

In case an Event of Default (as defined in the Agreement) shall occur
and be continuing, all amounts due in respect of the B Loan evidenced by this
Note may become or be declared to be due and payable in the manner and with the
effect provided in the Agreement.

The Borrower hereby waives presentment, demand, protest or notice of
any kind in connection with this Note.

<PAGE>

EXHIBIT B-2
Page 2

THIS NOTE SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE
LAW OF THE STATE OF NEW YORK.

SUPERIOR NATIONAL INSURANCE GROUP, INC.

By
---------------------------------
Title:

<PAGE>

EXECUTION COPY

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

SECURITY AGREEMENT

between

SUPERIOR NATIONAL INSURANCE GROUP, INC.

and

THE CHASE MANHATTAN BANK,

as Collateral Agent

Dated as of November 12, 1996

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

<PAGE>

TABLE OF CONTENTS

PAGE

ARTICLE I SECURITY INTERESTS............................................ 2
1.1. Grant of Security Interests................................... 2
1.2. Power of Attorney............................................. 2

ARTICLE II GENERAL REPRESENTATIONS, WARRANTIES AND COVENANTS............. 3
2.1. Necessary Filings............................................. 3
2.2. No Liens...................................................... 3
2.3. Other Financing Statements.................................... 3
2.4. Chief Executive Office; Records............................... 4
2.5. Recourse...................................................... 4
2.6. Maintenance of Records........................................ 4
2.7. Modification of Terms; etc.................................... 5
2.8. Collection.................................................... 5
2.9. Instruments................................................... 5
2.10. Assignor to Remain Liable Under Receivables................... 6
2.11. Assignor to Remain Liable Under the Contract.................. 6
2.12. Protection of the Creditors' Security......................... 7
2.13. Further Actions............................................... 7
2.14. Financing Statements.......................................... 7

ARTICLE III REMEDIES UPON OCCURRENCE OF EVENT OF DEFAULT..................8
3.1. Remedies; Obtaining the Collateral Upon Default............... 8
3.2. Remedies; Disposition of the Collateral....................... 8
3.3. Waiver of Claims.............................................. 9
3.4. Application of Proceeds....................................... 10
3.5. Remedies Cumulative........................................... 11
3.6. Discontinuance of Proceedings................................. 11

ARTICLE IV INDEMNITY..................................................... 12
4.1. Indemnity..................................................... 12
4.2. Indemnity Obligations Secured by Collateral; Survival......... 13

ARTICLE V DEFINITIONS................................................... 14

ARTICLE VI MISCELLANEOUS................................................. 16
6.1. Notices....................................................... 16
6.2. Waiver; Amendment............................................. 17
6.3. Obligations Absolute.......................................... 17

(i)

<PAGE>

PAGE

6.4. Successors and Assigns........................................ 17
6.5. Headings Descriptive.......................................... 17
6.6. Governing Law................................................. 17
6.7. Assignor's Duties............................................. 17
6.8. Termination................................................... 18
6.9. Counterparts.................................................. 18

ANNEX A Schedule of Covered Contract Rights/
Receivables
ANNEX B Schedule of Chief Executive Offices and other
Record Locations

(ii)

<PAGE>

SECURITY AGREEMENT

SECURITY AGREEMENT, dated as of November 12, 1996, between Superior
National Insurance Group, Inc. (the "Assignor") and The Chase Manhattan Bank, as
Collateral Agent (the "Collateral Agent") for the Secured Creditors (as defined
below). Except as otherwise defined herein, terms used herein and defined in
the Credit Agreement (as defined below) shall be used herein as therein defined.

W I T N E S S E T H :

WHEREAS, the Assignor, the Collateral Agent and The Chase Manhattan
Bank, London Branch (together with its successors and assigns thereunder, the
"Bank" and together with the Collateral Agent, the "Creditors") have entered
into a Credit Agreement, dated as of November 12, 1996 (as amended, modified or
supplemented from time to time, the "Credit Agreement") providing for the making
of Loans to the Assignor as contemplated therein;

WHEREAS, the Assignor desires to incur the Loans under the Credit
Agreement;

WHEREAS, it is a condition precedent to the making of Loans to the
Assignor under the Credit Agreement that the Assignor shall have executed and
delivered to the Collateral Agent this Agreement;

WHEREAS, the Assignor desires to execute this Agreement to satisfy the
conditions described in the
preceding paragraph;

NOW, THEREFORE, in consideration of the benefits accruing to the
Assignor, the receipt and sufficiency of which are hereby acknowledged, the
Assignor hereby makes the following representations and warranties to the
Collateral Agent and hereby covenants and agrees with the Collateral Agent as
follows:

<PAGE>

ARTICLE I

SECURITY INTERESTS

1.1. GRANT OF SECURITY INTERESTS. (a) As security for the prompt and
complete payment and performance when due of all of the Obligations, the
Assignor does hereby assign and transfer unto the Collateral Agent, and does
hereby pledge, hypothecate and grant to the Collateral Agent, a continuing
security interest of first priority in, all of its right, title and interest in,
to and under all of the following, whether now existing or hereafter from time
to time acquired: (i) the Contract, together with all Contract Rights arising
thereunder (to the extent representing the right to receive payments in the
amounts and on the dates set forth on Annex A hereto), (ii) each and every
Receivable (to the extent representing the right to receive payments in the
amounts and on the dates set forth on Annex A hereto), (iii) the Collateral
Account and all monies, securities and instruments deposited or required to be
deposited in such Collateral Account, and (iv) all Proceeds (including, without
limitation, each and every payment made under the Contract) and products of any
and all of the foregoing (all of the above, collectively, the "Collateral").

(b) The security interest of the Collateral Agent under this
Agreement extends to all Collateral of the kind which is the subject of this
Agreement which the Assignor may acquire at any time during the continuation of
this
Agreement.

1.2. POWER OF ATTORNEY. The Assignor hereby constitutes and appoints
the Collateral Agent its true and lawful attorney, irrevocably, with full power
after the occurrence of and during the continuance of an Event of Default (in
the name of the Assignor or otherwise) to act, require, demand, receive,
compound and give acquittance for any and all monies and claims for monies due
or to become due to the Assignor under or arising out of the Collateral, to
endorse any checks or other instruments or orders in
connection therewith and to file any claims or take any action or institute any
proceedings which the Collateral Agent may deem to be necessary or advisable to
its interests, which appointment as attorney is coupled with an interest.

<PAGE>

ARTICLE II

GENERAL REPRESENTATIONS, WARRANTIES AND COVENANTS

The Assignor represents, warrants and covenants, which representations,
warranties and covenants shall survive execution and delivery of this
Agreement, as follows:

2.1. NECESSARY FILINGS. All filings, registrations and recordings
necessary or appropriate to create, preserve and protect the priority of the
security interest granted by the Assignor to the Collateral Agent hereby in
respect of the Collateral have been accomplished and the security interest
granted to the Collateral Agent pursuant to this Agreement in and to the
Collateral creates a valid and enforceable security interest therein prior to
the rights of all other Persons therein and subject to no other Liens and is
entitled to all the rights, priorities and benefits afforded by California and
New York law to first priority interests.

2.2. NO LIENS. The Assignor is, and as to Collateral acquired by it
from time to time after the date hereof the Assignor will be, the owner of, or
has rights in, all Collateral free from any Lien, security interest, encumbrance
or other right, title or interest of any Person, and the Assignor shall defend
the Collateral to the extent of its rights therein against all claims and
demands of all Persons at any time claiming the same or any interest therein
adverse to the Collateral Agent.

2.3. OTHER FINANCING STATEMENTS. As of the date hereof, there is no
financing statement (or similar statement or instrument of registration under
the law of any jurisdiction) covering or purporting to cover any interest of any
kind in the Collateral, and so long as the Total Commitment has not been
terminated or any Note remains unpaid or any of the Obligations remain unpaid,
the Assignor will not execute or authorize to be filed in any public office any
financing statement (or similar statement or instrument of registration under
the law of any jurisdiction) or statements relating to the Collateral, except
financing statements and charges filed or to be filed in respect of and covering
the security interests granted hereby by the Assignor.

2.4. CHIEF EXECUTIVE OFFICE; RECORDS. The chief executive office of
the Assignor is located at the address indicated on Annex B hereto. The
Assignor will not move its chief executive office except to such new location as
it may establish in accordance with the last sentence of this Section 2.4. The
originals of all documents evidencing all Receivables and Contract Rights of the
Assignor and the only

<PAGE>

original books of account and records of the Assignor relating thereto are, and
will continue to be, kept at such chief executive office or at such new location
as the Assignor may establish in accordance with the last sentence of this
Section 2.4. All Receivables and Contract Rights of the Assignor are, and will
continue to be, maintained at, and controlled and directed (including, without
limitation, for general accounting purposes) from, the office location described
above or such new location established in accordance with the last sentence of
this Section 2.4. The Assignor shall not establish a new location for such
office until (i) it shall have given to the Collateral Agent not less than 30
days' prior written notice of its intention to do so, clearly describing such
new location and providing such other information in connection therewith as the
Collateral Agent may reasonably request and (ii) with respect to such new
location, it shall have taken all action, satisfactory to the Collateral Agent,
to maintain the first priority security interest of the Collateral Agent in the
Collateral intended to be granted hereby at all times in full force and effect.

2.5. RECOURSE. This Agreement is made with full recourse to the
Assignor and pursuant to and upon all the warranties, representations, covenants
and agreements on its part contained herein, in the other Credit Documents and
otherwise in writing in connection herewith or therewith.

2.6. MAINTENANCE OF RECORDS. The Assignor will keep and maintain at
its own cost and expense accurate records of its Receivables, records of all
payments received, all credits granted thereon, and all other dealings
therewith, and the Assignor will make the same available on its premises to the
Collateral Agent for inspection, at the Assignor's own cost and expense, at any
and all reasonable times upon prior notice to an Authorized Officer of the
Assignor. Upon the occurrence and during the continuance of an Event of Default
and at the request of the Collateral Agent, the Assignor shall, at its own cost
and expense, deliver all tangible evidence of its Receivables and Contract
Rights (including, without limitation, all documents evidencing the Receivables
and the Contract) and such books and records to the Collateral Agent or to its
representatives (copies of which evidence and books and records may be retained
by the Assignor). Upon the occurrence and during the continuance of an Event of
Default and if the Collateral Agent so directs, the Assignor shall legend, in
form and manner satisfactory to the Collateral Agent, the Receivables and the
Contract, as well as books, records and documents (if any) of the Assignor
evidencing or pertaining to such Receivables and Contract with an appropriate
reference to the

<PAGE>

fact that such Receivables and Contract have been assigned to the Collateral
Agent and that the Collateral Agent has a security interest therein.

2.7. MODIFICATION OF TERMS; ETC. The Assignor shall not rescind or
cancel any indebtedness or other obligations evidenced by any Receivable or
under the Contract, or modify any term thereof or make any adjustment with
respect thereto, or extend or renew the same, or compromise or settle any
dispute, claim, suit or legal proceeding relating thereto, or sell any
Receivable or the Contract, or interest therein, without the prior written
consent of the Collateral Agent. The Assignor will duly fulfill all obligations
on its part to be fulfilled under or in connection with the Receivables and
Contract and will do nothing to impair the rights of the Collateral Agent in the
Receivables or the Contract.

2.8. COLLECTION. The Assignor shall endeavor in accordance with
reasonable business practices to cause to be collected from Centre Re, as and
when due (including, without limitation, amounts which are delinquent, such
amounts to be collected in accordance with generally accepted lawful collection
procedures) any and all amounts owing under or on account of each Receivable or
Contract, and apply forthwith upon receipt thereof all such amounts as are so
collected to the outstanding balance of such Receivable or under such Contract.

2.9. INSTRUMENTS. If the Assignor owns or acquires any Instrument
constituting Collateral, it will within 10 Business Days notify the Collateral
Agent thereof, and upon request by the Collateral Agent will promptly deliver
such Instrument to the Collateral Agent appropriately endorsed to the order of
the Collateral Agent as further security hereunder.

2.10. ASSIGNOR TO REMAIN LIABLE UNDER RECEIVABLES. Anything
herein to the contrary notwithstanding, the Assignor shall remain liable under
each of the Receivables to observe and perform all of the conditions and
obligations to be observed and performed by it thereunder, if any, all in
accordance with the terms of any agreement giving rise to such Receivables. The
Collateral Agent shall not have any obligation or liability under any Receivable
(or any agreement giving rise thereto) by reason of or arising out of this
Agreement or the receipt by the Collateral Agent of any payment relating to such
Receivable pursuant hereto, nor shall the Collateral Agent be obligated in any
manner to perform any of the obligations of the Assignor under or pursuant to
any Receivable (or any agreement giving rise thereto), to make any payment, to
make any inquiry as to the nature or the sufficiency of any payment received by
it or as to the sufficiency of any performance by any party under any Receivable
(or any agreement giving rise

<PAGE>

thereto), to present or file any claim, to make any action to enforce any
performance or to collect the payment of any amounts which may have been
assigned to it or to which it may be entitled at any time or times.

2.11. ASSIGNOR TO REMAIN LIABLE UNDER THE CONTRACT. Anything
herein to the contrary notwithstanding, the Assignor shall remain liable under
the Contract to observe and perform all of the conditions and obligations to be
observed and performed by it thereunder, if any, all in accordance with and
pursuant to the terms and provisions of the Contract. The Collateral Agent
shall not have any obligation or liability under the Contract by reason of or
arising out of this Agreement or the receipt by the Collateral Agent of any
payment relating to such contract pursuant hereto, nor shall the Collateral
Agent be obligated in any manner to perform any of the obligations of the
Assignor under or pursuant to the Contract, to make any payment, to make any
inquiry as to the nature or the sufficiency of any performance by any party
under the Contract, to present or file any claim, to make any action to enforce
any performance to collect the payment of any amounts which may have been
assigned to it or to which it may be entitled at any time or times.

2.12. PROTECTION OF THE CREDITORS' SECURITY. The Assignor will do
nothing to impair the rights of the Creditors in the Collateral. The Assignor
assumes all liability and responsibility in connection with the Collateral
acquired by it and the liability of the Assignor to pay the Obligations shall in
no way be affected or diminished by reason of the fact that such Collateral may
be lost, destroyed, stolen, damaged or for any reason whatsoever unavailable to
it.

2.13. FURTHER ACTIONS. The Assignor will, at its own expense,
make, execute, endorse, acknowledge, file and/or deliver to the Collateral Agent
from time to time such lists, descriptions and designations of its Collateral,
invoices, schedules, confirmatory assignments, financing statements, charge
registrations, powers of attorney, certificates, reports and other assurances or
instruments and take such further steps relating to the Collateral and other
property or rights covered by the security interest hereby granted, which the
Collateral Agent deems reasonably appropriate or advisable to preserve or
protect its first priority security interest in the Collateral.

<PAGE>

2.14. FINANCING STATEMENTS. The Assignor agrees to execute and
deliver to the Collateral Agent such financing statements or similar filings, in
form reasonably acceptable to the Collateral Agent, as the Collateral Agent may
from time to time reasonably request or as are necessary or desirable in the
opinion of the Collateral Agent to establish and maintain a valid, enforceable,
first priority security interest in the Collateral as provided herein and the
other rights and security contemplated hereby all in accordance with the Uniform
Commercial Code as enacted in any and all relevant jurisdictions or any other
relevant law. The Assignor will pay any applicable filing fees, recordation
taxes and related expenses relating to its Collateral. The Assignor hereby
authorizes the Collateral Agent to file any such financing statements or similar
filings without the signature of the Assignor where permitted by law.

ARTICLE III

REMEDIES UPON OCCURRENCE OF EVENT OF DEFAULT

3.1. REMEDIES; OBTAINING THE COLLATERAL UPON DEFAULT. The Assignor
agrees that, if any Event of Default shall have occurred and be continuing, then
and in every such case, the Collateral Agent, in addition to any rights now or
hereafter existing under applicable law, shall have all rights as a secured
creditor under the Uniform Commercial Code in all relevant jurisdictions and
may:

(i) instruct the obligor or obligors on any agreement, instrument or
other obligation (including, without limitation, the Receivables and the
Contract) constituting the Collateral to make any payment required by the
terms of such agreement, instrument or other obligation directly to the
Collateral Agent;

(ii) withdraw all monies, securities and instruments in the
Collateral Account for application to the Obligations in accordance with
Section 3.4 hereof; and/or

(iii) sell, assign or otherwise liquidate any or all of the Collateral
or any part thereof in accordance with Section 3.2 hereof, or direct the
Assignor to sell, assign or otherwise liquidate any or all of the
Collateral or any part thereof, and, in each case, take possession of the
proceeds of any such sale or liquidation;

it being understood that the Assignor's obligation so to deliver the Collateral
is of the essence of this Agreement

<PAGE>

and that, accordingly, upon application to a court of equity having
jurisdiction, the Collateral Agent shall be entitled to a decree requiring
specific performance by the Assignor of said obligation.

3.2. REMEDIES; DISPOSITION OF THE COLLATERAL. Any Collateral
repossessed by the Collateral Agent under or pursuant to Section 3.1 hereof and
any other Collateral whether or not so repossessed by the Collateral Agent, may
be sold, assigned, leased or otherwise disposed of under one or more contracts
or as an entirety, and without the necessity of gathering at the place of sale
the property to be sold, and in general in such manner, at such time or times,
at such place or places and on such terms as the Collateral Agent may, in
compliance with any mandatory requirements of applicable law, determine to be
commercially reasonable.

3.3. WAIVER OF CLAIMS. Except as otherwise provided in this
Agreement, THE ASSIGNOR HEREBY WAIVES, TO THE EXTENT PERMITTED BY APPLICABLE
LAW, NOTICE AND JUDICIAL HEARING IN CONNECTION WITH THE COLLATERAL AGENT'S
TAKING POSSESSION OR THE COLLATERAL AGENT'S DISPOSITION OF ANY OF THE
COLLATERAL, INCLUDING, WITHOUT LIMITATION, ANY AND ALL PRIOR NOTICE AND HEARING
FOR ANY PREJUDGMENT REMEDY OR REMEDIES AND ANY SUCH RIGHT WHICH THE ASSIGNOR
WOULD OTHERWISE HAVE UNDER THE CONSTITUTION OR ANY STATUTE OF THE UNITED STATES,
OF ANY STATE THEREOF OR ANY OTHER JURISDICTION, and the Assignor hereby further
waives, to the extent permitted by law:

(i) all damages occasioned by such taking of possession except any
damages which are the direct result of the Collateral Agent's gross
negligence or willful misconduct;

(ii) all other requirements as to the time, place and terms of sale
or other requirements with respect to the enforcement of the Collateral
Agent's rights hereunder; and

(iii) all rights of redemption, appraisement, valuation, stay,
extension or moratorium now or hereafter in force under any applicable law
in order to prevent or delay the enforcement of this Agreement or the
absolute sale of the Collateral or any portion thereof, and the Assignor,
for itself and all who may claim under it, insofar as it or they now or
hereafter lawfully may, hereby waives the benefit of all such laws.

Any sale of, or the grant of options to purchase, or any other realization upon,
any Collateral shall operate to divest all right, title, interest, claim and
demand, either

<PAGE>

at law or in equity, of the Assignor therein and thereto, and shall be a
perpetual bar both at law and in equity against the Assignor and against any and
all Persons claiming or attempting to claim the Collateral so sold, optioned or
realized upon, or any part thereof, from, through and under the Assignor.

3.4. APPLICATION OF PROCEEDS. (a) All moneys collected by the
Collateral Agent upon any sale or other disposition of the Collateral, together
with all other moneys received by the Collateral Agent hereunder, shall be
applied as follows:

(i) first, to the payment of all Obligations owing the Collateral
Agent of the type provided in clauses (ii) and (iii) of the definition of
Obligations;

(ii) second, to the extent proceeds remain after the application
pursuant to the preceding clause (i), an amount equal to the outstanding
Obligations shall be paid to the Creditors as provided in Section 3.4(d)
hereof with each Creditor receiving an amount equal to its outstanding
Obligations or, if the proceeds are insufficient to pay in full all such
Obligations, its Pro Rata Share (as defined below) of the amount remaining
to be distributed; and

(iii) third, to the extent proceeds remain after the application
pursuant to the preceding clauses (i) and (ii) and following the
termination of this Agreement pursuant to Section 6.8 hereof, to the
Assignor or, to the extent directed by the Assignor or a court of competent
jurisdiction, to whomever may be lawfully entitled to receive such surplus.

(b) For purposes of this Agreement, "Pro Rata Share" shall mean, when
calculating a Creditor's portion of any distribution or amount, that amount
(expressed as a percentage) equal to a fraction the numerator of which is the
then unpaid amount of such Creditor's Obligations and the denominator of which
is the then outstanding amount of all Obligations.

(c) It is understood that the Assignor shall remain liable to the
extent of any deficiency between the amount of the proceeds of the Collateral
and the aggregate amount of the sums referred to in clause (a) of this Section
3.4.

<PAGE>

(d) All payments required to be made to the Creditors hereunder shall
be made to the Agent under the Credit Agreement for the account of the
Creditors.

(e) For purposes of applying payments received in accordance with
this Section 3.4, the Collateral Agent shall be entitled to rely upon the Bank
for a determination (which the Bank shall agree to provide upon request of the
Collateral Agent) of the outstanding Obligations owed to the Creditors. Unless
it has actual knowledge (including by way of written notice from a Creditor) to
the contrary, the Bank under the Credit Agreement, in furnishing information
pursuant to the preceding sentence, and the Collateral Agent, in acting
hereunder, shall be entitled to assume that no Obligations other than principal,
interest and regularly accruing fees are owing to any Creditor.

3.5. REMEDIES CUMULATIVE. Each and every right, power and remedy
hereby specifically given to the Collateral Agent shall be in addition to every
other right, power and remedy specifically given under this Agreement, the other
Credit Documents or now or hereafter existing at law, in equity or by statute
and each and every right, power and remedy whether specifically herein given or
otherwise existing may be exercised from time to time or simultaneously and as
often and in such order as may be deemed expedient by the Collateral Agent. All
such rights, powers and remedies shall be cumulative and the exercise or the
beginning of the exercise of one shall not be deemed a waiver of the right to
exercise any other or others. No delay or omission of the Collateral Agent in
the exercise of any such right, power or remedy and no renewal or extension of
any of the Obligations shall impair any such right, power or remedy or shall be
construed to be a waiver of any Default or Event of Default or an acquiescence
therein. No notice to or demand on the Assignor in any case shall entitle it to
any other or further notice or demand in similar or other circumstances or
constitute a waiver of any of the rights of the Collateral Agent to any other or
further action in any circumstances without notice or demand. In the event that
the Collateral Agent shall bring any suit to enforce any of its rights hereunder
and shall be entitled to judgment, then in such suit the Collateral Agent may
recover reasonable expenses, including attorneys' fees, and the amounts thereof
shall be included in such judgment.

3.6. DISCONTINUANCE OF PROCEEDINGS. In case the Collateral Agent
shall have instituted any proceeding to enforce any right, power or remedy under
this Agreement by foreclosure, sale, entry or otherwise, and such proceeding
shall have been discontinued or abandoned for any reason or

<PAGE>

shall have been determined adversely to the Collateral Agent, then and in every
such case the Assignor, the Collateral Agent and each holder of any of the
Obligations shall be restored to their former positions and rights hereunder
with respect to the Collateral subject to the security interest created under
this Agreement, and all rights, remedies and powers of the Collateral Agent
shall continue as if no such proceeding had been instituted.

ARTICLE IV

INDEMNITY

4.1. INDEMNITY. (a) The Assignor agrees to indemnify, reimburse and
hold the Collateral Agent and its successors, permitted assigns, employees,
agents and servants (hereinafter in this Section 4.1 referred to individually as
"Indemnitee," and collectively as "Indemnitees") harmless from any and all
liabilities, obligations, damages, injuries, penalties, claims, demands,
actions, suits, judgments and any and all costs, expenses or disbursements
(including attorneys' fees and expenses) (for the purposes of this Section 4.1
the foregoing are collectively called "expenses") of whatsoever kind and nature
imposed on, asserted against or incurred by any of the Indemnitees in any way
relating to or arising out of this Agreement or any other document executed in
connection herewith or in any other way connected with the administration of the
transactions contemplated hereby or thereby or the enforcement of any of the
terms of, or the preservation of any rights under any thereof, or in any way
relating to or arising out of the ownership, control, possession, or use of the
Collateral, the violation of the laws of any country, state or other
governmental body or unit, any tort, or contract claim; provided that no
Indemnitee shall be indemnified pursuant to this Section 4.1(a) for losses,
damages or liabilities to the extent caused by the gross negligence or willful
misconduct of such Indemnitee. The Assignor agrees that upon written notice by
any Indemnitee of the assertion of such a liability, obligation, damage, injury,
penalty, claim, demand, action, suit or judgment, it shall assume full
responsibility for the defense thereof. Each Indemnitee agrees to use its best
efforts to notify promptly the Assignor of any such assertion of which such
Indemnitee has knowledge.

(b) Without limiting the application of Section 4.1(a) hereof, the
Assignor agrees to pay, or reimburse the Collateral Agent for any and all
reasonable fees, costs and expenses of whatever kind or nature incurred in
connection with the creation, preservation or protection of the

<PAGE>

Collateral Agent's Liens on, and security interest in, the Collateral,
including, without limitation, all fees and taxes in connection with the
recording or filing of instruments and documents in public offices, payment or
discharge of any taxes or Liens upon or in respect of the Collateral and all
other fees, costs and expenses in connection with protecting, maintaining or
preserving the Collateral and the Collateral Agent's interest therein, whether
through judicial proceedings or otherwise, or in defending or prosecuting any
actions, suits or proceedings arising out of or relating to the Collateral.

(c) Without limiting the application of Section 4.1(a) or (b) hereof,
the Assignor agrees to pay, indemnify and hold each Indemnitee harmless from and
against any loss, costs, damages and expenses which such Indemnitee may suffer,
expend or incur in consequence of or growing out of any misrepresentation by any
Assignor in this Agreement, any other Credit Document or in any writing
contemplated by or made or delivered pursuant to or in connection with this
Agreement or any other Credit Document.

(d) If and to the extent that the obligations of the Assignor under
this Section 4.1 are unenforceable for any reason, the Assignor hereby agrees to
make the maximum contribution to the payment and satisfaction of such
obligations which is permissible under applicable law.

4.2. INDEMNITY OBLIGATIONS SECURED BY COLLATERAL; SURVIVAL. Any
amounts paid by any Indemnitee as to which such Indemnitee has the right to
reimbursement shall constitute Obligations secured by the Collateral. The
indemnity obligations of the Assignor contained in this Article IV shall
continue in full force and effect notwithstanding the full payment of the Notes
issued under the Credit Agreement and the payment of all other Obligations and
notwithstanding the discharge thereof.

ARTICLE V

DEFINITIONS

The following terms shall have the meanings herein specified. Such
definitions shall be equally applicable to the singular and plural forms of the
terms defined.

"Agreement" shall mean this Security Agreement as the same may be
modified, supplemented or amended from time to time in accordance with its
terms.

<PAGE>

"Assignor" shall have the meaning provided in the first paragraph of
this Agreement.

"Bank" shall have the meaning provided in the recitals of this
Agreement.

"Collateral" shall have the meaning provided in Section 1.1(a) of this
Agreement.

"Collateral Agent" shall have the meaning provided in the first
paragraph of this Agreement.

"Collateral Account" shall mean an account maintained with, and in the
sole dominion and control of, the Collateral Agent.

"Contract" shall mean, collectively, (i) the Aggregate Excess Loss
Cover between Centre Re and SNIC, dated August 30, 1991 (as amended, modified or
supplemented from time to time, including pursuant to the Asset Transfer
Agreement (the "Asset Transfer Agreement"), among SNIC, the Assignor, Centre Re,
the Bank and the Collateral Agent, dated November 12, 1996) and (ii) the Asset
Transfer Agreement (as amended, modified or supplemented from time to time).

"Contract Rights" shall mean all rights of the Assignor under the
Contract, including, without limitation, (i) any and all rights to receive and
demand payments under the Contract, (ii) any and all rights to receive and
compel performance under the Contract and (iii) any and all other rights,
interests and claims now existing or in the future arising in connection with
the Contract.

"Credit Agreement" shall have the meaning provided in recitals of this
Agreement.

"Creditors" shall have the meaning provided in the recitals of this
Agreement.

"Default" shall mean any event which, with notice or lapse of time, or
both, would constitute an Event of Default.

"Event of Default" shall mean any Event of Default under, and as
defined in, the Credit Agreement and shall in any event, without limitation,
include any payment default on any of the Obligations after the expiration of
any applicable grace period.

"Indemnitee" shall have the meaning provided in Section 4.1 of this
Agreement.

<PAGE>

"Instrument" shall have the meaning provided in the Uniform Commercial
Code as in effect on the date hereof in the State of New York.

"Liens" shall mean any security interest, mortgage, pledge, lien,
claim, charge, encumbrance, title retention agreement, lessor's interest in a
financing lease or analogous instrument, in, of, or on the Assignor's property.

"Obligations" shall mean (i) the full and prompt payment when due
(whether at the stated maturity, by acceleration or otherwise) of all
obligations and liabilities of the Assignor, now existing or hereafter incurred
under, arising out of or in connection with any Credit Document to which it is a
party and the due performance and compliance by the Assignor with the terms of
each such Credit Document; (ii) any and all sums advanced by the Collateral
Agent in order to preserve the Collateral or preserve its security interest in
the Collateral; (iii) in the event of any proceeding for the collection or
enforcement of any indebtedness, obligations, or liabilities of the Assignor
referred to in clause (i), after an Event of Default shall have occurred and be
continuing, the reasonable expenses of re-taking, holding, preparing for sale or
lease, selling or otherwise disposing of or realizing on the Collateral, or of
any exercise by the Collateral Agent of its rights hereunder, together with
reasonable attorneys' fees and court costs; and (iv) all amounts paid by any
Indemnitee as to which such Indemnitee has the right to reimbursement under
Section 4.1 of this Agreement.

"Proceeds" shall have the meaning provided in the Uniform Commercial
Code as in effect in the State of New York on the date hereof or under other
relevant law and, in any event, shall include, but not be limited to, (i) any
and all proceeds of any insurance, indemnity, warranty or guaranty payable to
the Collateral Agent or the Assignor from time to time with respect to any of
the Collateral, (ii) any and all payments (in any form whatsoever) made or due
and payable to the Assignor from time to time in connection with any
requisition, confiscation, condemnation, seizure or forfeiture of all or any
part of the Collateral by any governmental authority (or any person acting under
color of governmental authority) and (iii) any and all other amounts from time
to time paid or payable under or in connection with any of the Collateral.

"Receivables" shall mean any "account" as such term is defined in the
Uniform Commercial Code as in effect on the date hereof in the State of New
York, now or hereafter owned by the Assignor and arising under the Contract,
including

<PAGE>

without limitation all of the Assignor's rights to payment pursuant to the
Contract.

"SNIC" shall mean Superior National Insurance Company, a California
corporation.

"Termination Date" shall have the meaning provided in Section 6.8 of
this Agreement.

ARTICLE VI

MISCELLANEOUS

6.1. NOTICES. Except as otherwise specified herein, all notices,
requests, demands or other communications to or upon the respective parties
hereto shall be deemed to have been duly given or made when delivered to the
party to which such notice, request, demand or other communication is required
or permitted to be given or made under this Agreement, addressed to the
addresses listed opposite the signatures of the respective parties.

6.2. WAIVER; AMENDMENT. None of the terms and conditions of this
Agreement may be changed, waived, modified or varied in any manner whatsoever
unless in writing duly signed by the Assignor and the Collateral Agent.

6.3. OBLIGATIONS ABSOLUTE. The obligations of the Assignor hereunder
shall remain in full force and effect without regard to, and shall not be
impaired by, (a) any bankruptcy, insolvency, reorganization, arrangement,
readjustment, composition, liquidation or the like of the Assignor; (b) any
exercise or non-exercise, or any waiver of, any right, remedy, power or
privilege under or in respect of this Agreement or any other Credit Document; or
(c) any amendment to or modification of any Credit Document or any security for
any of the Obligations; whether or not the Assignor shall have notice or
knowledge of any of the foregoing.

6.4. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon the
Assignor and its successors and assigns and shall inure to the benefit of the
Collateral Agent and its successors and assigns; PROVIDED, that the Assignor may
not transfer or assign any or all of its rights or obligations hereunder without
the prior written consent of the Collateral Agent.

6.5. HEADINGS DESCRIPTIVE. The headings of the several sections of
this Agreement are inserted for conven-

<PAGE>

ience only and shall not in any way affect the meaning or construction of any
provision of this Agreement.

6.6. GOVERNING LAW. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF
THE PARTIES HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY
THE LAW OF THE STATE OF NEW YORK.

6.7. ASSIGNOR'S DUTIES. It is expressly agreed, anything herein
contained to the contrary notwithstanding, that the Assignor shall remain liable
to perform all of the obligations, if any, assumed by it with respect to the
Collateral and the Collateral Agent shall not have any obligations or
liabilities with respect to any Collateral by reason of or arising out of this
Agreement, nor shall the Collateral Agent be required or obligated in any manner
to perform or fulfill any of the obligations of the Assignor under or with
respect to any Collateral.

6.8. TERMINATION. After the Termination Date, this Agreement shall
terminate (provided that all indemnities set forth herein including, without
limitation, in Section 4.1 hereof shall survive such termination) and the
Collateral Agent, at the request and expense of the Assignor, will promptly
execute and deliver to the Assignor a proper instrument or instruments
acknowledging the satisfaction and termination of this Agreement, and will duly
assign, transfer and deliver to the Assignor (without recourse and without any
representation or warranty) such of the Collateral as may be in the possession
of the Collateral Agent and as has not theretofore been sold or otherwise
applied or released pursuant to this Agreement. As used in this Agreement,
"Termination Date" shall mean the date upon which the Total Commitment has been
terminated, no Note is outstanding and all other Obligations (other than any
indemnities described in Section 4.1 hereof) have been paid in full.

6.9. COUNTERPARTS. This Agreement may be executed in any number of
counterparts and by the different parties hereto on separate counterparts, each
of which when so executed and delivered shall be an original, but all of which
shall together constitute one and the same instrument.

<PAGE>

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed and delivered by their duly authorized officers as of the date first
above written.

Address:
SUPERIOR NATIONAL INSURANCE
26601 Agoura Road GROUP, INC., as Assignor
Calabasas, California 91302

By /s/ J. Chris Seaman
----------------------------
Attn: Mr. Chris Seaman Title: CFO

1 Chase Manhattan Plaza THE CHASE MANHATTAN BANK,
New York, New York 10081 as Collateral Agent
Attn: Mr. Robert Foster

By /s/ Robert Foster
----------------------------
Title: Vice President

<PAGE>

ANNEX A
to
SECURITY
AGREEMENT
---------

SCHEDULE OF COVERED CONTRACT RIGHTS/RECEIVABLES

PAYMENT DATE AMOUNT
------------ ------
July 15, 1998 $5,297,569
October 15, 1998 $10,000,000
January 15, 1999 $10,000,000
April 15, 1999 $7,000,000
July 15, 1999 $7,000,000
October 15, 1999 $7,000,000
January 15, 2000 $7,000,000
April 15, 2000 $5,131,000
July 15, 2000 $5,131,000
October 15, 2000 $5,131,000
July 15, 2004 $7,192,113
October 15, 2004 $7,192,113

<PAGE>

ANNEX B
to
SECURITY
AGREEMENT
---------

SCHEDULE OF CHIEF EXECUTIVE OFFICE
AND OTHER RECORD LOCATIONS

CHIEF EXECUTIVE OFFICE:

26601 Agoura Road
Calabasas, California 91302

OTHER RECORD LOCATIONS:

None.

<PAGE>

EXECUTION COPY

PUT AGREEMENT

PUT AGREEMENT, dated as of November 12, 1996, made by and between
CENTRE REINSURANCE LIMITED, a corporation organized and existing under the laws
of Bermuda ("Centre Re") and THE CHASE MANHATTAN BANK, LONDON BRANCH (together
with its successors and assigns in its capacity as the "Bank" under and as
defined in the Credit Agreement referred to below, the "Bank"). Capitalized
terms used herein shall have the meanings set forth in Section 12 hereof.

W I T N E S S E T H :

WHEREAS, Superior National Insurance Group, Inc. (the "Borrower"), the
Bank and The Chase Manhattan Bank, as Collateral Agent, have entered into a
Credit Agreement, dated as of November 12, 1996 (as modified, supplemented or
amended from time to time, the "Credit Agreement"), providing for the making of
Loans to the Borrower as contemplated therein;

WHEREAS, it is a condition to the making of Loans to the Borrower
under the Credit Agreement that Centre Re shall have executed and delivered this
Put Agreement; and

WHEREAS, Centre Re will obtain benefits as a result of the Loans made
to the Borrower under the Credit Agreement and, in consideration of the
foregoing and for other consideration, the sufficiency of which is hereby
acknowledged, Centre Re desires to execute and deliver this Put Agreement in
order to satisfy the condition described in the preceding paragraph;

NOW, THEREFORE, IT IS AGREED:

1. On the terms and subject to the conditions set forth herein,
Centre Re irrevocably and unconditionally agrees, upon one Business Day's notice
from the Bank that a Triggering Event has occurred, to purchase from the Bank,
in whole, for the price set forth in Section 2, the total amount of all
outstanding Loans under the Credit Agreement (without recourse or warranty other
than that such Loans are free and

<PAGE>

clear of any Liens), whether or not any such Loan is due and payable, together
with all other obligations and liabilities (including, without limitation,
indemnities, fees and interest thereon) of the Borrower now existing or
hereafter incurred under, arising out of or in connection with the Credit
Agreement or any other Credit Document (all such Loans, interest, obligations
and liabilities, collectively, the "Put Obligations"). The purchase by Centre
Re of the Put Obligations will be consummated in the form of an assignment
pursuant to Section 11.04(b) of the Credit Agreement. Centre Re hereby agrees
to execute and deliver an Assignment and Assumption Agreement in the form of
Exhibit H to the Credit Agreement to effect its purchase of the Put Obligations
pursuant to this Put Agreement.

2. The purchase price to be paid by Centre Re for the Put Obligations
shall be an amount equal to the aggregate outstanding principal amount of the
Loans at the time of such purchase, plus accrued but unpaid interest thereon,
plus the market value of the Interest Rate Agreement (if any) entered into by
the Bank in respect of the Put Obligations, if the Bank is "out-of-the-money" in
respect of such Interest Rate Agreement at the time that the purchase price is
to be paid (or minus the market value of any such Interest Rate Agreement if the
Bank is "in-the-money" in respect of such Interest Rate Agreement at the time of
such purchase), plus all other outstanding Put Obligations at such time;
PROVIDED, that if at any time following the payment by Centre Re to the Bank of
the amount provided above in this Section 2, the Bank shall be required to
return, disgorge or otherwise forfeit any payment received from the Borrower or
any of its Subsidiaries under or in connection with the Credit Agreement (as a
result of any applicable preferential payment statute or otherwise), upon notice
from the Bank, Centre Re will make a supplemental payment to the Bank in an
amount equal to such returned, disgorged or forfeited payment. All amounts
owing by Centre Re hereunder shall be paid to the Bank in accordance with
Section 3.03 of the Credit Agreement.

3. The Bank may at any time and from time to time without the consent
of, or notice to Centre Re, without incurring responsibility to Centre Re and
without impairing or releasing the obligations of Centre Re hereunder, upon or
without any terms or conditions and in whole or in part:

(a) exercise or refrain from exercising any rights against the
Borrower or others or otherwise act or refrain from acting (it being
understood and agreed that, as provided in the Credit Agreement, no Credit
Document may be amended, modified or supplemented without the consent of
Centre Re); and/or

<PAGE>

(b) apply any sums by whomsoever paid or howsoever realized to any
liability or liabilities of the Borrower to the Bank regardless of what
liabilities of the Borrower remain unpaid (it being understood that
Reinsurance Receivables paid to the Bank pursuant to the Asset Transfer
Agreement shall be applied to the Put Obligations).

4. The obligations of Centre Re under this Put Agreement are absolute
and unconditional and shall remain in full force and effect without regard to,
and shall not be released, suspended, discharged, terminated or otherwise
affected by, any circumstance or occurrence whatsoever, including, without
limitation: (a) any action or inaction by the Bank as contemplated in Section 3
of this Put Agreement; (b) any invalidity, irregularity or unenforceability of
all or part of the Put Obligations; or (c) any invalidity, irregularity,
unenforceability or failure to perfect any security for any of the Put
Obligations. This Put Agreement is a primary obligation of Centre Re, and
Centre Re shall be obligated to purchase the Put Obligations in accordance with
the terms hereof regardless of any set-off, counterclaim or defense it may have
with respect to the Borrower, SNIC or any other person.

5. In order to induce the Bank to make the Loans pursuant to the
Credit Agreement, Centre Re makes the following representations, warranties and
agreements:

(a) Centre Re (i) is a duly organized and validly existing
corporation in good standing under the laws of the jurisdiction of its
incorporation, (ii) has the power and authority to own its property and
assets and to transact the business in which it is engaged and (iii) is
duly qualified as a foreign corporation and in good standing in each
jurisdiction where the ownership, leasing or operation of property or the
conduct of its business requires such qualification and where the failure
to do so would have a material adverse effect on the financial condition or
operations of Centre Re.

(b) Centre Re has the corporate power to execute, deliver and perform
the terms and provisions of this Put Agreement and has taken all necessary
corporate action to authorize the execution, delivery and performance by it
of this Put Agreement. Centre Re has duly executed and delivered this Put
Agreement, and this Put Agreement constitutes its legal, valid and binding
obligation enforceable in accordance with its terms except as the
enforceability thereof may be limited by applicable

<PAGE>

bankruptcy, insolvency, reorganization or other similar laws affecting
creditors' rights generally and by general equitable principles (regardless
of whether the issue of enforceability is considered in a proceeding in
equity or at law).

(c) Neither the execution, delivery or performance by Centre Re of
this Put Agreement, nor compliance by it with the terms and provisions
hereof, (i) will contravene any provision of any law, statute, rule or
regulation or any order, writ, injunction or decree of any court or
governmental instrumentality, (ii) will conflict or be inconsistent with or
result in any breach of any of the terms, covenants, conditions or
provisions of, or constitute a default under, or result in the creation or
imposition of (or the obligation to create or impose) any Lien upon any of
the property or assets of Centre Re pursuant to the terms of any indenture,
mortgage, deed of trust, credit agreement, loan agreement or any other
material agreement, contract or instrument to which Centre Re is a party or
by which it or any of its property or assets is bound or to which it may be
subject or (iii) will violate any provision of the Certificate of
Incorporation or By-Laws of Centre Re.

(d) No order, consent, approval, license, authorization or validation
of, or filing, recording or registration with, or exemption by, any
governmental or public body or authority, or any subdivision thereof, is
required to authorize, or is required in connection with, (i) the
execution, delivery and performance of this Put Agreement or (ii) the
legality, validity, binding effect or enforceability of this Put Agreement.

(e) There are no actions, suits or proceedings pending or, to the
best knowledge of Centre Re, threatened with respect to this Put Agreement
or the Reinsurance Agreement or the transactions contemplated hereby or
thereby.

(f) The Reinsurance Agreement remains in full force and effect and
Centre Re is not in default in the due performance or observance of any
term, covenant or agreement on its part to be performed or observed
pursuant to the Reinsurance Agreement.

(g) Centre Re is in compliance with all applicable statutes,
regulations and orders of, and all applicable restrictions imposed by, all
governmental bodies, domestic or foreign, in respect of the conduct of its

<PAGE>

business and the ownership of its property (including applicable statutes,
regulations, orders and restrictions relating to environmental standards
and controls), except such noncompliance as would not, in the aggregate,
have a material adverse effect on the ability of Centre Re to perform its
obligations (including, without limitation, to purchase the Put
Obligations) in accordance with the terms of this Put Agreement.

6. All liabilities to which this Put Agreement applies or may apply
under the terms hereof shall be conclusively presumed to have been created in
reliance hereon. No failure or delay on the part of the Bank in exercising any
right, power or privilege hereunder and no course of dealing between Centre Re
and any Bank shall operate as a waiver thereof; nor shall any single or partial
exercise of any right, power or privilege hereunder preclude any other or
further exercise thereof or the exercise of any other right, power or privilege.
The rights, powers and remedies herein expressly provided are cumulative and not
exclusive of any rights, powers or remedies which the Bank would otherwise have.
No notice to or demand on Centre Re in any case shall entitle Centre Re to any
other further notice or demand in similar or other circumstances or constitute a
waiver of the rights of the Bank to any other or further action in any
circumstances without notice or demand.

7. This Put Agreement shall be binding upon Centre Re and its
successors and assigns and shall inure to the benefit of the Banks and their
successors and assigns; PROVIDED, that Centre Re may not assign or transfer any
of its rights or obligations hereunder without the prior written consent of the
Bank.

8. Neither this Put Agreement nor any provision hereof may be
changed, waived, discharged or terminated except as provided in Section 11.11 of
the Credit Agreement. As provided in such Section 11.11, any purported change,
waiver, discharge or termination of this Put Agreement or any other Credit
Document which is not agreed to in writing by the Borrower, the Bank and Centre
Re shall have no force or effect.

9. Centre Re acknowledges that an executed (or conformed) copy of the
Credit Agreement has been made available to its principal executive officers and
such officers are familiar with the contents thereof.

10. All notices and other communications hereunder shall be made at
the addresses, in the manner and with the

<PAGE>

effect provided in Section 11.03 of the Credit Agreement, provided that, for
this purpose, the address of Centre Re shall be the one specified opposite its
signature below.

11. (a) This Put Agreement and the rights and obligations of the
Bank and Centre Re hereunder shall be construed in accordance with and governed
by the law of the State of New York. Any legal action or proceeding with
respect to this Put Agreement may be brought in the courts of the State of New
York or of the United States for the Southern District of New York, and, by
execution and delivery of this Put Agreement, Centre Re hereby irrevocably
accepts for itself and in respect of its property, generally and
unconditionally, the jurisdiction of the aforesaid courts. Centre Re hereby
further irrevocably waives any claim that any such courts lack jurisdiction over
Centre Re and agrees not to plead or claim, in any legal action or proceeding
with respect to this Put Agreement or any other Credit Document brought in any
of such aforesaid courts, that any such court lacks jurisdiction over Centre Re.
Centre Re further irrevocably consents to the service of process out of any of
the aforementioned courts in any such action or proceeding by the mailing of
copies thereof by registered or certified mail, postage prepaid, to Centre Re at
its address set forth opposite its signature below, such service to become
effective 30 days after such mailing. Centre Re hereby irrevocably waives any
objection to such service of process and further irrevocably waives and agrees
not to plead or claim in any legal action or proceeding commenced hereunder or
under any other Credit Document that service of process was in any way invalid
or ineffective. Nothing herein shall affect the right of the Bank to serve
process in any other manner permitted by law or to commence legal proceedings or
otherwise proceed against Centre Re in any other jurisdiction. Centre Re hereby
irrevocably waives any objection which it may now or hereafter have to the
laying of venue of any of the aforesaid actions or proceedings arising out of or
in connection with this Put Agreement brought in the courts referred to above
and hereby further irrevocably waives and agrees not to plead or claim in any
such court that any such action or proceeding brought in any such court has been
brought in an inconvenient forum.

(b) Upon default by Centre Re in the payment when due of the purchase
price, the Bank may notify Centre Re that the Bank is holding the Loans for
account of Centre Re, whereupon the Loans will be deemed to have been tendered
and delivered to, and accepted by, Centre Re and Centre Re shall thereupon
become obligated to pay, and the Bank shall be entitled to proceed against
Centre Re for payment of, the purchase price. Centre Re agrees that the Bank is
entitled

<PAGE>

to specific performance of Centre Re's obligation to pay the purchase price and
Centre Re hereby waives, and agrees that it will not raise, any defense to such
an action for specific performance of Centre Re's obligation to pay the purchase
price based upon the Bank having an adequate remedy at law.

12. The terms defined in this Section 12, whenever used and
capitalized in this Put Agreement, shall, unless the context otherwise requires,
have the respective meanings herein specified:

"Asset Transfer Agreement" shall have the meaning provided in Section
9 of the Agreement.

"Bankruptcy Event" shall mean the occurrence of any of the following:
Centre Re or Centre Re (Bermuda) shall generally not pay its debts as such debts
become due, or shall admit in writing its inability to pay its debts generally,
or shall make a general assignment for the benefit of creditors; or any
proceeding shall be instituted by or against Centre Re or Centre Re (Bermuda)
seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation,
winding-up, reorganization, arrangement, adjustment, protection, relief or
composition of it or its debts under any law relating to bankruptcy, insolvency
or reorganization or relief of debtors, or seeking the entry of an order for
relief or the appointment of a rehabilitator, receiver, custodian, conservator,
liquidator, trustee or other similar official for it or for any substantial part
of its property and, in the case of any such proceeding instituted against it
(but not instituted by it), either such proceeding shall remain undismissed or
unstayed for a period of 60 days or any of the actions sought in such proceeding
(including, without limitation, the entry of an order for relief against it or
the appointment of a receiver, trustee, custodian or other similar official for
it or for any substantial part of its property) shall occur; or Centre Re or
Centre Re (Bermuda) shall take any corporate action to authorize any of the
actions set forth above in this definition of "Bankruptcy Event".

"Bank" shall have the meaning set forth in the first recital of this
Put Agreement.

"Centre Re (Bermuda)" shall mean Centre Reinsurance (Bermuda) Limited,
a Bermuda corporation.

"Change in Control" shall mean the failure of Zurich Insurance Company
to own, directly or indirectly, 100% of the capital stock of Centre Re
(Bermuda).

<PAGE>

"Claims Paying Ability" of Centre Re (Bermuda) shall mean the claims
paying rating assigned to Centre Re (Bermuda) by Standard & Poor's Ratings
Services or any successor thereto.

"Consolidated Shareholders' Equity" of Centre Re (Bermuda) shall mean
all amounts which would be included under shareholders' equity on a consolidated
balance sheet of Centre Re (Bermuda) and its Consolidated Subsidiaries at such
time, determined on a consolidated basis in accordance with generally accepted
accounting principles in the United States.

"Consolidated Subsidiaries" shall mean, as to Centre Re or Centre Re
(Bermuda), all Subsidiaries of Centre Re, or Centre Re (Bermuda) as the case may
be, which are consolidated with such Person for financial reporting purposes in
accordance with generally accepted accounting principles in the United States.

"Credit Agreement" shall have the meaning set forth in the first
recital of this Put Agreement.

"Credit Documents" shall have the meaning set forth in Section 9 of
the Credit Agreement.

"Fundamental Business Change" shall mean the engagement (directly or
indirectly) by Centre Re (Bermuda) in any business other than the business in
which it is engaged on the date of this Put Agreement and businesses reasonably
related thereto.

"Liens" shall have the meaning set forth in Section 9 of the Credit
Agreement.

"Loans" shall have the meaning set forth in Section 9 of the Credit
Agreement.

"Put Agreement" shall mean this Put Agreement, as amended,
supplemented or otherwise modified from time to time.

"Put Obligations" shall have the meaning set forth in Section 1 of
this Put Agreement.

"Reinsurance Agreement" shall have the meaning set forth in Section 9
of the Credit Agreement.

"Subsidiary" of any Person shall mean any corporation of which such
Person directly or indirectly owns or controls at least a majority of the
outstanding stock

<PAGE>

having general voting power, including without limitation the right, under
ordinary circumstances, to vote for the election of a majority of the Board of
Directors of such corporation.

"Triggering Event" shall mean the occurrence of any of the following:

(a) the occurrence of a Default or an Event of Default under and as
defined in the Credit Agreement; or

(b) the failure of the Reinsurance Agreement to be in full force and
effect or the default by any party to such Reinsurance Agreement in the due
performance or observance of any term, covenant or agreement on its part to be
performed or observed pursuant to the Reinsurance Agreement (including, without
limitation, the failure of Centre Re to make any payment owing under the
Reinsurance Agreement); or

(c) the failure by Centre Re (Bermuda) to maintain at all times
Consolidated Shareholders' Equity in an amount equal to or in excess of
$700,000,000; or

(d) the failure of Centre Re (Bermuda) to maintain its Claims Paying
Ability at a level of A or higher; or

(e) the occurrence of a Bankruptcy Event; or

(f) the occurrence of a Change in Control; or

(g) the occurrence of a Fundamental Business Change; or

(h) at any time on or after December 23, 1996, SNIC shall fail to
have an A.M. Best rating of at least A-.

* * *

<PAGE>

IN WITNESS WHEREOF, Centre Re has caused this Put Agreement to be
executed and delivered as of the date first above written.

ADDRESS

Cumberland House CENTRE REINSURANCE LIMITED
One Victoria Street
P.O. Box HM 1788
Hamilton HM HX Bermuda
By /s/ David Brown
----------------------------
Title: President

125 London Wall THE CHASE MANHATTAN BANK,
London, England LONDON BRANCH
EC2Y 5AJ

By /s/ Robert Foster
----------------------------
Title: Vice President

<PAGE>

Each of the undersigned hereby acknowledges and consents to the Put Agreement
and hereby waives any defenses it may have relating to, or any other rights it
may have to object to, the exercise by the Bank of its right to require Centre
Re to purchase the Put Obligations pursuant to the Put Agreement.

SUPERIOR NATIONAL INSURANCE GROUP, INC.

By /s/ J. Chris Seaman
---------------------------------
Title: CFO

SUPERIOR NATIONAL INSURANCE COMPANY

By /s/ J. Chris Seaman
---------------------------------
Title: CFO

<PAGE>

EXECUTION COPY

GUARANTY

GUARANTY, dated as of November 12, 1996, made by CENTRE REINSURANCE
(BERMUDA) LIMITED, a corporation organized and existing under the laws of
Bermuda (the "Guarantor"). Capitalized terms used herein shall have the
meanings set forth in Section 18 hereof.

W I T N E S S E T H :

WHEREAS, Centre Reinsurance Limited (the "Put Party") and The Chase
Manhattan Bank, London Branch (together with its successors and assigns in its
capacity as the "Bank" under and as defined in the Credit Agreement referred to
below, the "Bank") have entered into a Put Agreement, dated as of November 12,
1996 (as modified, supplemented or amended from time to time, the "Put
Agreement"), pursuant to which the Put Party has agreed, subject to and upon the
terms and conditions set forth therein, to purchase the Loans incurred by
Superior National Insurance Group, Inc. (the "Borrower") pursuant to the Credit
Agreement (the "Credit Agreement"), dated as of November 12, 1996, among the
Borrower, the Bank and The Chase Manhattan Bank, as Collateral Agent;

WHEREAS, the Put Party is a wholly-owned Subsidiary of the Guarantor;

WHEREAS, it is a condition to the making of the Loans under the Credit
Agreement that the Guarantor shall have executed and delivered this Guaranty;
and

WHEREAS, the Guarantor desires to execute and deliver this Guaranty in
order to satisfy the condition described in the preceding paragraph;

NOW, THEREFORE, in consideration of the foregoing and other benefits
accruing to the Guarantor, the receipt and sufficiency of which are hereby
acknowledged, the Guarantor hereby makes the following representations and
warranties to the Bank and hereby covenants and agrees with the Bank as follows:

<PAGE>

1. The Guarantor irrevocably and unconditionally guarantees the full
and prompt payment when due (whether by acceleration or otherwise) of all
amounts payable under the Put Agreement and of all other obligations and
liabilities of the Put Party now existing or hereafter incurred under, arising
out of or in connection with the Put Agreement and the due performance and
compliance with the terms of the Put Agreement by the Put Party (all such
amounts, obligations and liabilities, collectively, the "Guaranteed
Obligations").

2. The Guarantor hereby waives notice of acceptance of this Guaranty
and notice of any liability to which it may apply, and waives presentment,
demand of payment, protest, notice of dishonor or nonpayment of any such
liability, suit or taking of other action by the Bank against, and any other
notice to, any party liable thereon (including such Guarantor or any other
guarantor).

3. The Bank may at any time and from time to time without the consent
of, or notice to the Guarantor, without incurring responsibility to the
Guarantor and without impairing or releasing the obligations of the Guarantor
hereunder, upon or without any terms or conditions and in whole or in part:

(a) change the manner, place or terms of payment of, and/or change or
extend the time of payment of, renew or alter, any of the Guaranteed
Obligations, any security therefor, or any liability incurred directly or
indirectly in respect thereof, and the guaranty herein made shall apply to
the Guaranteed Obligations as so changed, extended, renewed or altered;

(b) sell, exchange, release, surrender, realize upon or otherwise
deal with in any manner and in any order any property by whomsoever at any
time pledged or mortgaged to secure, or howsoever securing, the Guaranteed
Obligations or any liabilities (including any of those hereunder) incurred
directly or indirectly in respect thereof or hereof, and/or any offset
thereagainst;

(c) exercise or refrain from exercising any rights against the Put
Party or others or otherwise act or refrain from acting;

(d) settle or compromise any of the Guaranteed Obligations, any
security therefor or any liability (including any of those hereunder)
incurred directly or indirectly in respect thereof or hereof, and may
subordinate the payment of all or any part thereof to the

<PAGE>

payment of any liability (whether due or not) of the Put Party to creditors
of the Put Party other than the Bank and the Guarantor;

(e) apply any sums by whomsoever paid or howsoever realized to any
liability or liabilities of the Put Party to the Bank regardless of what
liabilities or liabilities of the Put Party remain unpaid;

(f) consent to or waive any breach of, or any act, omission or
default under, the Put Agreement, or otherwise amend, modify or supplement
the Put Agreement or any of such other instruments or agreements; and/or

(g) act or fail to act in any manner referred to in this Guaranty
which may deprive the Guarantor of its right to subrogation against the Put
Party to recover full indemnity for any payments made pursuant to this
Guaranty.

4. The obligations of the Guarantor under this Guaranty are absolute
and unconditional and shall remain in full force and effect without regard to,
and shall not be released, suspended, discharged, terminated or otherwise
affected by, any circumstance or occurrence whatsoever, including, without
limitation: (a) any action or inaction by the Bank as contemplated in Section 3
of this Guaranty; or (b) any invalidity, irregularity or unenforceability of all
or part of the Guaranteed Obligations or of any security therefor. This
Guaranty is a primary obligation of the Guarantor.

5. If and to the extent that the Guarantor makes any payment to the
Bank or to any other Person pursuant to or in respect of this Guaranty, any
claim which the Guarantor may have against the Put Party by reason thereof shall
be subject and subordinate to the prior payment in full of the Guaranteed
Obligations.

6. In order to induce the Bank to make the Loans pursuant to the
Credit Agreement, the Guarantor makes the following representations, warranties
and agreements:

(a) The Guarantor (i) is a duly organized and validly existing
corporation in good standing under the laws of the jurisdiction of its
incorporation, (ii) has the power and authority to own its property and
assets and to transact the business in which it is engaged and (iii) is
duly qualified as a foreign corporation and in good standing in each
jurisdiction where the ownership, leasing or operation of property or the
conduct of its

<PAGE>

business requires such qualification and where the failure to do so would
have a material adverse effect on the financial condition or operations of
the Guarantor.

(b) The Guarantor has the corporate power to execute, deliver and
perform the terms and provisions of this Guaranty and has taken all
necessary corporate action to authorize the execution, delivery and
performance by it of this Guaranty. The Guarantor has duly executed and
delivered this Guaranty, and this Guaranty constitutes its legal, valid and
binding obligation enforceable in accordance with its terms except as the
enforceability thereof may be limited by applicable bankruptcy, insolvency,
reorganization or other similar laws affecting creditors' rights generally
and by general equitable principles (regardless of whether the issue of
enforceability is considered in a proceeding in equity or at law).

(c) Neither the execution, delivery or performance by the Guarantor
of this Guaranty, nor compliance by it with the terms and provisions
hereof, (i) will contravene any provision of any law, statute, rule or
regulation or any order, writ, injunction or decree of any court or
governmental instrumentality, (ii) will conflict or be inconsistent with or
result in any breach of any of the terms, covenants, conditions or
provisions of, or constitute a default under, or result in the creation or
imposition of (or the obligation to create or impose) any Lien upon any of
the property or assets of the Guarantor pursuant to the terms of any
indenture, mortgage, deed of trust, credit agreement, loan agreement or any
other material agreement, contract or instrument to which the Guarantor is
a party or by which it or any of its property or assets is bound or to
which it may be subject or (iii) will violate any provision of the
Certificate of Incorporation or By-Laws of the Guarantor.

(d) No order, consent, approval, license, authorization or validation
of, or filing, recording or registration with (except as have been obtained
or made prior to the Effective Date), or exemption by, any governmental or
public body or authority, or any subdivision thereof, is required to
authorize, or is required in connection with, (i) the execution, delivery
and performance of this Guaranty or (ii) the legality, validity, binding
effect or enforceability of this Guaranty.

<PAGE>

(e) The Guarantor is in compliance with all applicable statutes,
regulations and orders of, and all applicable restrictions imposed by, all
governmental bodies, domestic or foreign, in respect of the conduct of its
business and the ownership of its property (including applicable statutes,
regulations, orders and restrictions relating to environmental standards
and controls), except such noncompliance as would not, in the aggregate,
have a material adverse effect on the business, operations, property,
assets, condition (financial or otherwise) or prospects of the Guarantor
and its Subsidiaries taken as a whole.

(f) The Guarantor owns, directly or indirectly, 100% of the capital
stock of the Put Party.

7. The Guarantor hereby covenants and agrees that for so long as this
Guaranty is in effect the Guarantor will furnish to the Bank, with reasonable
promptness, such information or documents (financial or otherwise) as the Bank
may reasonably request from time to time.

8. This Guaranty is a continuing one and all liabilities to which it
applies or may apply under the terms hereof shall be conclusively presumed to
have been created in reliance hereon. No failure or delay on the part of the
Bank in exercising any right, power or privilege hereunder and no course of
dealing between the Guarantor, the Put Party or the Bank shall operate as a
waiver thereof; nor shall any single or partial exercise of any right, power or
privilege hereunder preclude any other or further exercise thereof or the
exercise of any other right, power or privilege. The rights, powers and
remedies herein expressly provided are cumulative and not exclusive of any
rights, powers or remedies which the Bank would otherwise have. No notice to or
demand on the Guarantor in any case shall entitle the Guarantor to any other
further notice or demand in similar or other circumstances or constitute a
waiver of the rights of the Bank to any other or further action in any
circumstances without notice or demand.

9. This Guaranty shall be binding upon the Guarantor and its
successors and assigns and shall inure to the benefit of the Bank and its
successors and assigns; PROVIDED, that the Guarantor may not assign or transfer
any of its rights or obligations hereunder without the prior written consent of
the Bank.

10. Neither this Guaranty nor any provision hereof may be changed,
waived, discharged or terminated except as provided in Section 11.11 of the
Credit Agreement. As

<PAGE>

provided in such Section 11.11, any purported change, waiver, discharge or
termination of this Guaranty or any other Credit Document which is not agreed to
in writing by the Borrower, the Bank and the Put Party shall have no force or
effect.

11. The Guarantor acknowledges that an executed (or conformed) copy
of each of the Put Agreement and the Credit Agreement has been made available to
its principal executive officers and such officers are familiar with the
contents thereof.

12. In addition to any rights now or hereafter granted under
applicable law or otherwise, and not by way of limitation of any such rights,
upon the failure of the Put Party to timely honor its obligations under the Put
Agreement, the Bank is hereby authorized at any time or from time to time,
without presentment, demand, protest, or other notice of any kind to the
Guarantor or to any other Person, any such notice being hereby expressly waived,
to set off and to appropriate and apply any and all deposits (general or
special) and any other indebtedness at any time held or owing by the Bank
(including without limitation by branches and agencies of the Bank wherever
located) to or for the credit or the account of the Guarantor against and on
account of the obligations of the Guarantor to the Bank under this Guaranty,
irrespective of whether or not the Bank shall have made any demand hereunder and
although said obligations, or any of them, shall be contingent or unmatured.

13. All notices and other communications hereunder shall be made at
the addresses, in the manner and with the effect provided in Section 11.03 of
the Credit Agreement, provided that, for this purpose, the address of the
Guarantor shall be the one specified opposite its signature below.

14. If claim is ever made upon the Bank for repayment or recovery of
any amount or amounts received in payment or on account of any of the Guaranteed
Obligations and any of the aforesaid payees repays all or part of said amount by
reason of (a) any judgment, decree or order of any court or administrative body
having jurisdiction over such payee or any of its property or (b) any settlement
or compromise of any such claim effected by such payee with any such claimant
(including the Put Party), then and in such event the Guarantor agrees that any
such judgment, decree, order, settlement or compromise shall be binding upon it,
notwithstanding any revocation hereof or the cancellation of any instrument
evidencing any liability of the Put Party, and the Guarantor shall be and remain
liable to the aforesaid payees hereunder for the amount so repaid or recovered
to the

<PAGE>

same extent as if such amount had never originally been received by any such
payee.

15. Any acknowledgment or new promise, whether by payment of any
amount or otherwise and whether by the Put Party or others (including the
Guarantor), with respect to any of the Guaranteed Obligations shall, if the
statute of limitations in favor of the Guarantor against the Bank shall have
commenced to run, toll the running of such statute of limitations, and if the
period of such statute of limitations shall have expired, prevent the operation
of such statute of limitations.

16. (a) This Guaranty and the rights and obligations of the Bank and
the Guarantor hereunder shall be construed in accordance with and governed by
the law of the State of New York. Any legal action or proceeding with respect
to this Guaranty may be brought in the courts of the State of New York or of the
United States for the Southern District of New York, and, by execution and
delivery of this Guaranty, the Guarantor hereby irrevocably accepts for itself
and in respect of its property, generally and unconditionally, the jurisdiction
of the aforesaid courts. The Guarantor hereby further irrevocably waives any
claim that any such courts lack jurisdiction over the Guarantor and agrees not
to plead or claim, in any legal action or proceeding with respect to this
Guaranty brought in any of such aforesaid courts, that any such court lacks
jurisdiction over the Guarantor. The Guarantor further irrevocably consents to
the service of process out of any of the aforementioned courts in any such
action or proceeding by the mailing of copies thereof by registered or certified
mail, postage prepaid, to the Guarantor at its address set forth opposite its
signature below, such service to become effective 30 days after such mailing.
The Guarantor hereby irrevocably waives any objection to such service of process
and further irrevocably waives and agrees not to plead or claim in any legal
action or proceeding commenced hereunder or under the Put Agreement that service
of process was in any way invalid or ineffective. Nothing herein shall affect
the right of the Bank to serve process in any other manner permitted by law or
to commence legal proceedings or otherwise proceed against the Guarantor in any
other jurisdiction. The Guarantor hereby irrevocably waives any objection which
it may now or hereafter have to the laying of venue of any of the aforesaid
actions or proceedings arising out of or in connection with the Guaranty brought
in the courts referred to above and hereby further irrevocably waives and agrees
not to plead or claim in any such court that any such action or proceeding
brought in any such court has been brought in an inconvenient forum.

<PAGE>

(b) Upon default by the Guarantor in the payment when due of the
Guaranteed Obligations, the Bank may notify the Guarantor that the Bank is
holding the Guaranteed Obligations for account of the Guarantor, whereupon the
Guaranteed Obligations will be deemed to have been tendered and delivered to,
and accepted by, the Guarantor and the Guarantor shall thereupon become
obligated to pay, and the Bank shall be entitled to proceed against the
Guarantor for payment of, the Guaranteed Obligations. The Guarantor agrees that
the Bank is entitled to specific performance of the Guarantor's obligation to
pay the Guaranteed Obligations and the Guarantor hereby waives, and agrees that
it will not raise, any defense to such an action for specific performance of the
Guarantor's obligation to pay the Guaranteed Obligations based upon the Bank
having an adequate remedy at law.

17. The obligation of the Guarantor to make payment in U.S. Dollars
of any Guaranteed Obligations due hereunder shall not be discharged or satisfied
by any tender, or any recovery pursuant to any judgment, which is expressed in
or converted into any currency other than U.S. Dollars, except to the extent
such tender or recovery shall result in the actual receipt by the Bank at its
Payment Office of the full amount of U.S. Dollars expressed to be payable in
respect of any such Guaranteed Obligations. The obligation of the Guarantor to
make payment in U.S. Dollars as aforesaid shall be enforceable as an alternative
or additional cause of action for the purpose of recovery in U.S. Dollars of the
amount, if any, by which such actual receipt shall fall short of the full amount
of U.S. Dollars expressed to be payable in respect of any such Guaranteed
Obligations, and shall not be affected by judgment being obtained for any other
sums due under this Guaranty.

18. The terms defined in this Section 18, whenever used and
capitalized in this Guaranty, shall, unless the context otherwise requires, have
the respective meanings herein specified:

"Bank" shall have the meaning set forth in the first recital paragraph
hereof.

"Borrower" shall have the meaning set forth in the first recital
paragraph hereof.

"Credit Agreement" shall have the meaning set forth in the first
recital paragraph hereof.

"Effective Date" shall mean November 12, 1996.

<PAGE>

"Loans" shall have the meaning set forth in Section 9 of the Credit
Agreement.

"Put Agreement" shall have the meaning set forth in the first recital
paragraph hereof.

"Put Party" shall have the meaning set forth in the first recital
paragraph hereof.

"Subsidiary" shall mean any corporation of which the Guarantor
directly or indirectly owns or controls at least a majority of the outstanding
stock having general voting power, including without limitation the right, under
ordinary circumstances, to vote for the election of a majority of the Board of
Directors of such corporation.

"U.S. Dollar" or "U.S.$" shall mean the lawful currency of the United
States of America.

* * *

<PAGE>

IN WITNESS WHEREOF, the Guarantor has caused this Guaranty to be
executed and delivered as of the date first above written.

ADDRESS

Cumberland House CENTRE REINSURANCE (BERMUDA)
One Victoria Street LIMITED
P.O. Box HM 1788
Hamilton HM HX Bermuda

By /s/ David Brown
---------------------------------
Title: Executive Vice President

Accepted and Agreed to:

THE CHASE MANHATTAN BANK,
LONDON BRANCH

By /s/ Robert Foster
----------------------------
Title: Vice President
<PAGE>

EXHIBIT G

ASSET TRANSFER AGREEMENT

ASSET TRANSFER AGREEMENT (hereinafter, "Agreement") is dated as of
November 12, 1996 by and among SUPERIOR NATIONAL INSURANCE GROUP, INC., a
California corporation; SUPERIOR NATIONAL INSURANCE COMPANY, a California
corporation; CENTRE REINSURANCE LIMITED, a Bermuda corporation; and THE CHASE
MANHATTAN BANK, LONDON BRANCH, the London branch of a New York banking
corporation; and THE CHASE MANHATTAN BANK, as Collateral Agent under the Loan
Documents referred to below (the "Collateral Agent") as follows:

RECITALS

A. Superior National Insurance Group, Inc. (hereinafter, "SNIG") is
a corporation organized and existing under the laws of the State of California;
has its principal place of business in the State of California; and owns all of
the authorized, issued, and outstanding stock of Superior National Insurance
Company.

B. Superior National Insurance Company (hereinafter, "SNIC") is a
corporation organized and existing under the laws of the State of California;
has its principal place of business in the State of California; and is
authorized and licensed in and by the State of California to engage in the
business of insurance and reinsurance.

C. Centre Reinsurance Limited (hereinafter, "Centre Re") is a
corporation organized and existing under the laws of Bermuda; has its principal
place of business in Bermuda; and is authorized and licensed in and by Bermuda
to engage in the business of insurance and reinsurance.

D. The Chase Manhattan Bank, London Branch (hereinafter "Chase"), is
the London branch of a corporation organized and existing under the laws of the
State of New York; has its principal place of business in London; and is
authorized and licensed to engage in the business of banking.

E. The Collateral Agent is a corporation organized and existing
under the laws of the State of New York; has its principal place of business in
the State of New York; and is authorized and licensed in and by the State of New
York to engage in the business of banking.

F. On or about August 30, 1991, SNIC and Centre Re entered into a
reinsurance agreement known as "Aggregate Excess of Loss Cover," as amended
(hereinafter, the "Reinsurance Agreement"), pursuant to which agreement SNIC
ceded and Centre Re accepted reinsurance of certain policies, bonds, binders,
and other contracts of insurance and reinsurance as specifically set forth in
the Reinsurance Agreement, which is incorporated herein by reference and
attached hereto as Exhibit A.

<PAGE>

G. Pursuant to the Reinsurance Agreement, Centre Re is obligated to
pay reinsurance proceeds to SNIC, which are reinsurance receivables to SNIC from
Centre Re, in an amount which SNIC and Centre Re agree totals, as of the date
hereof, one hundred twelve million, seven hundred seventy-seven thousand, two
hundred twenty-six dollars ($112,777,226) (hereinafter, "Reinsurance
Receivables").

H. Contemporaneously with this Agreement, SNIG and Chase are
entering into a "Credit Agreement" (hereinafter, "Loan Agreement") and related
documents, exhibits, and schedules thereto, including, without limitation,
bearer promissory notes from SNIG, evidencing loans from Chase to SNIG
(hereinafter collectively referenced as "Loan Documents"), incorporated herein
by reference and attached hereto as Exhibit B.

I. Contemporaneously with this Agreement, Chase will, pursuant to
the Loan Documents, lend to SNIG the aggregate amount of ninety-four million,
one hundred ninety-one thousand, eight hundred fifty-three dollars ($94,191,853)
(hereinafter, the "Loans").

J. Contemporaneously with this Agreement, Centre Re and Chase are
entering into a "Put Agreement," incorporated herein by reference and attached
hereto as Exhibit C.

K. Pursuant to the terms and conditions of the Put Agreement, Centre
Re will INTER ALIA obligate itself to purchase the Loan upon Chase's exercise of
a demand to do so upon occurrence of a "Triggering Event" as defined in the Put
Agreement.

L. Pursuant to this Agreement, SNIC will sell to SNIG and SNIG will
purchase from SNIC, SNIC's right to receive all one hundred twelve million,
seven hundred seventy-seven thousand, two hundred twenty-six dollars
($112,777,226) of the Reinsurance Receivables (the "Sold Receivables").

M. The purchase price for the Sold Receivables which shall be paid
by SNIG to SNIC shall consist of (i) the amount of eighty-three million,
seventy-four thousand, seven hundred ninety-five dollars ($83,074,795) in cash,
plus (ii) SNIG's assumption of SNIC's liability to Superior Bermuda Limited
("SBL") in the amount of twenty-nine million, seven hundred two thousand, four
hundred thirty-one dollars ($29,702,431), for an aggregate purchase price of one
hundred twelve million, one hundred twelve million, seven hundred seventy-seven
thousand, two hundred twenty-six dollars ($112,777,226) (the "Purchase Price").

N. Contemporaneously with this Agreement, SNIG will, pursuant to the
Loan Documents, assign to the Collateral Agent as security for the Loan a
security interest in, INTER ALIA, eighty-three million, seventy-four thousand,
seven hundred ninety-five dollars ($83,074,795) of the Sold Receivables payable
on the payment dates July 15, 1998 through October 15, 2004, inclusive, pursuant
to the payment schedule as set forth in Section 1.1 hereof (the "Pledged
Receivables").

<PAGE>

O. By this Agreement, SNIG and SNIC instruct Centre Re to make all
payments of all Reinsurance Receivables directly to Chase, as the Bank under the
Loan Agreement.

P. By this Agreement, it is the desire and agreement of all parties
hereto that any and all payments made by Centre Re to Chase pursuant to this
Agreement, in the amount(s) and to the extent actually and irrevocably paid,
shall (1) be deemed to be payment in satisfaction of a like amount of the Loan
and a like amount of all other obligations of Centre Re or SNIG to make
payment(s) to Chase under the Loan Documents; and (2) be deemed satisfaction and
discharge of a like amount of Centre Re's obligations to pay reinsurance
proceeds under the Reinsurance Agreement.

Q. All parties acknowledge that this Agreement, and the other
agreements and documents described here, are or may be subject to regulatory
review, approval, or disclosure, as the case may be under the relevant laws of
the State of California or Bermuda, including without limitation by the
California Department of Insurance.

AGREEMENT

THEREFORE, in consideration of the foregoing and the mutual promises
and covenants contained herein, and agreeing to be bound hereby, the parties
hereto hereby further agree as follows:

ARTICLE I. INSTRUCTION TO PAY REINSURANCE PROCEEDS

1.1 DIRECT PAYMENT INSTRUCTION. SNIG and SNIC, each individually and
both jointly and severally, hereby irrevocably instruct Centre Re to pay any and
all reinsurance proceeds, otherwise required to be paid by Centre Re as
Reinsurance Receivables pursuant to the Reinsurance Agreement, directly to
Chase, as the Bank under the Loan Agreement ("Direct Payment Instruction"), at
such times and in such amounts as are set forth in the following schedule:

<PAGE>

PAYMENT SCHEDULE:

Payment Date Amount
------------ ------

January 15, 1997 $3,000,000
April 15, 1997 3,000,000
July 15, 1997 3,000,000
October 15, 1997 3,000,000
January 15, 1998 3,000,000
April 15, 1998 10,000,000
July 15, 1998 4,702,431
July 15, 1998 5,297,569*
October 15, 1998 10,000,000*
January 15, 1999 10,000,000*
April 15, 1999 7,000,000*
July 15, 1999 7,000,000*
October 15, 1999 7,000,000*
January 15, 2000 7,000,000*
April 15, 2000 5,131,000*
July 15, 2000 5,131,000*
October 15, 2000 5,131,000*
July 15, 2004 7,192,113*
October 15, 2004 7,192,113*
-------------------- ---------------------
TOTAL $112,777,226

* Denotes "Pledged Receivables"

1.2. ACKNOWLEDGMENT OF INSTRUCTION. Centre Re and Chase, each
individually, hereby acknowledge and accept to irrevocable payment instruction
set forth in section 1.1 (relating to "Direct Payment Instruction"), and agree
to comply therewith and be bound thereby.

1.3. DISCHARGE OF PROMISSORY NOTE. Except as provided in the last
sentence of this Section 1.3, to the extent and in the amount of Centre Re's
payment of Reinsurance Receivables as required by this Agreement to Chase, (a)
any and all amounts paid by Centre Re to Chase, at the times and in the amounts
required under this Agreement, shall be deemed to satisfy a like amount of the
obligations, if any, of SNIG to make payments (including principal and interest)
on the Loans for all purposes as if fully paid by and received directly from
SNIG; and (b) SNIG shall be released and discharged in respect of a like amount
of its obligations under the Loan Documents, and a like amount of its
obligations under the Loan Documents shall be deemed satisfied and extinguished.
Under no circumstances shall Chase be required to return to Centre Re, SNIG,
SNIC, or any other person any payment received by Chase from Centre Re under
this Agreement. In the event that, notwithstanding the preceding sentence,
Chase is required to return or disgorge any payment received by Chase hereunder,
then to the extent and in the amount of such return or disgorgement SNIG's
obligations under the Loan Documents

<PAGE>

shall be reinstated and shall not, to the extent and in the amount of such
return or disgorgement, be deemed satisfied, released, discharged, or
extinguished.

1.4. DISCHARGE OF REINSURANCE AGREEMENT. To the extent and in the
amount of Centre Re's payment of Reinsurance Receivables as required by this
Agreement to Chase, (a) any and all amounts paid by Centre Re to Chase,
including without limitation payments under the Put Agreement, shall be deemed
to satisfy a like amount of its obligations of Centre Re to pay Reinsurance
Receivables under the Reinsurance Agreement; and (b) Centre Re shall be released
and discharged in respect of a like amount of its obligations under the
Reinsurance Agreement, and a like amount of its obligations shall be deemed
satisfied and extinguished, under the Reinsurance Agreement. Centre Re hereby
acknowledges and confirms that as of the date hereof, the aggregate amount of
Reinsurance Receivables is one hundred twelve million, seven hundred
seventy-seven thousand, two hundred twenty-six dollars ($112,777,226). All
payments made by Centre Re respecting Reinsurance Receivables to Chase shall
reduce by the same amount any and all liabilities and obligations Centre Re may
have, now or in the future, under the Reinsurance Agreement with respect to the
Reinsurance Receivables.

1.5. NO INTEREST CREATED FOR POLICYHOLDERS OR CLAIMANTS.
Notwithstanding anything in this Agreement or in any other agreement or document
described in this Agreement that may appear to the contrary, nothing in this
Agreement creates any right, title, or interest on the part of any person who is
a policyholder, bondholder, insured, named insured, additional insured, or
otherwise insured or who is a claimant, loss payee, applicant for benefits, or
any other type of claimant or recipient who claims or seeks insurance proceeds
under any policy, binder, endorsement, or other contract of insurance issued at
any time by SNIC.

1.6. PURCHASE AND SALE OF THE SOLD RECEIVABLES. SNIC hereby sells to
SNIG, and SNIG hereby purchases from SNIC, effective upon the Closing under the
Loan Agreement, all of SNIC's right, title and interest in, to and under the
Sold Receivables. On the Closing Date, SNIG shall pay to SNIC the Purchase
Price for the Sold Receivables.

1.7. ACKNOWLEDGMENT OF PURCHASE AND SALE. Centre Re hereby
acknowledges and consents to the purchase and sale of the Sold Receivables
pursuant to Section 1.6.

1.8. ACKNOWLEDGMENT OF SECURITY INTEREST. Centre Re hereby
acknowledges and consents to the grant by SNIG to the Collateral Agent of a
security interest in the Pledged Receivables pursuant to the Security Agreement,
which is one of the Loan Documents.

1.9. RESTRICTION ON TRANSFER. SNIG and SNIC hereby agree not to
transfer, assign, or grant any security or other interest in, any of the
Reinsurance Receivables for the benefit of any person other than the Collateral
Agent under the Loan Documents.

<PAGE>

ARTICLE II. REPRESENTATIONS AND WARRANTIES

2.1. WARRANTIES TO CHASE. SNIG, SNIC, and Centre Re, each
individually with respect to itself and not jointly and severally, hereby
represent and warrant to Chase and to each other the following as of the date
hereof:

a. It is a corporation validly existing and in good standing
under the laws of the state or nation of its incorporation, with full power
to enter into and perform this Agreement.

b. Its execution, delivery, and performance of and compliance
with this Agreement do not and will not violate or conflict with (1) any
provision of its articles of Incorporation or bylaws, or any amendments
thereto; (2) any material terms of any mortgage, indenture, lien, lease,
agreement, instrument, order, judgment, or decree to which such entity is a
party or by which it is bound; or (3) to the actual knowledge of such
entity, any provision of law, statute, ordinance, rule, or regulation.

c. Upon execution, this Agreement shall constitute a legal and
valid obligation of such entity enforceable against it in accordance with
its terms except insofar as enforceability may be limited by bankruptcy,
insolvency, reorganization, or similar laws affecting the rights of
creditors generally.

d. SNIC and Centre Re, each individually, has duly authorized,
executed and delivered the Reinsurance Agreement, and the Reinsurance
Agreement constitutes a legal, valid, and binding obligation between them,
enforceable against each in accordance with the terms of said Reinsurance
Agreement, except insofar as enforceability may be limited by bankruptcy,
insolvency, reorganization, or similar laws affecting the rights of
creditors generally.

e. The amounts and payment dates set forth in the payment
schedule set forth in section 1.1 (relating to "Direct Payment
Instruction") of this Agreement represent absolute and unconditional
payment obligations of Centre Re that have arisen under the Reinsurance
Agreement. Such payment obligations are not subject to any setoff,
adjustment, counterclaim, or defense of any kind, other than as set forth
in Section 3.15 hereof.

2.2. WARRANTIES FROM CHASE. Chase hereby represents and warrants to
SNIG, SNIC, and Centre Re, as follows as of the date hereof:

<PAGE>

a. Chase is the London branch of a New York banking corporation
which is validly existing and in good standing under the laws of the State
of New York with full power to enter into and perform this Agreement.

b. Chase's execution, delivery, and performance of and
compliance with this Agreement does not and will not violate or conflict
with (1) any provision of its articles of incorporation or bylaws, or any
amendments thereto; (2) any material terms of any mortgage, indenture,
lien, lease, agreement, instrument, order, judgment, or decree to which
such entity is a party or by which it is bound; or (3) to the actual
knowledge of Chase, any provision of law, statute, ordinance, rule, or
regulation.

c. Upon execution, this Agreement shall constitute a legal and
valid obligation of Chase enforceable against it in accordance with its
terms except insofar as enforceability may be limited by bankruptcy,
insolvency, reorganization, or similar laws affecting the rights of
creditors generally.

ARTICLE III. GENERAL PROVISIONS

3.1. EFFECTIVE DATE. This Agreement shall take effect on the date
it is executed by all parties hereto.

3.2. NOTICES. All notices required under this Agreement (1) shall
be personally delivered, sent by first-class mail with postage fully prepaid at
the following addresses, sent by a national or international courier service, or
sent by facsimile or telecopier transmission with confirmation to the following
numbers; (2) or delivered, sent, or transmitted to such other address(es) or
number(s) of a party that said party to this Agreement shall advise every other
party to this Agreement in accordance with the preceding clause (1):

a. If to SNIG, to the attention of J. Chris Seaman, C.P.A.,
Senior Vice President and Chief Financial Officer, as follows:

Superior National Insurance Group, Inc.
26601 Agoura Road
Calabasas, California 91302
United States of America
Facsimile transmission number: (818) 880-8615
Telephone number: (818) 880-1600

With a copy to the attention of Joseph K. Hegedus, Esq. as follows:

<PAGE>

Lewis, D'Amato, Brisbois & Bisgaard LLP
221 North Figueroa Street, Suite 1200
Los Angeles, California 90012
United States of America
Facsimile transmission number: (213) 250-7900
Telephone number: (213) 250-1800

b. If to SNIC, to the attention of J. Chris Seaman, C.P.A.,
Senior Vice President and Chief Financial Officer, with a copy to Joseph K.
Hegedus, Esq., at the addresses and facsimile transmission numbers set
forth in subsection a of this section.

c. If to Centre Re, to the attention of Mr. David Brown,
President, as follows:

Centre Reinsurance (Bermuda) Limited
Cumberland House
One Victoria Street
PO HM 1788
Hamilton HM HX
Bermuda
Facsimile transmission number: (441) 295-3705
Telephone number: (441) 295-8501

With a copy to the attention of Rolf Staub, Esq., General Counsel of
Reinsurance, as follows:

ZC Resource Ltd.
One Chase Manhattan Plaza, 35th Floor
New York, New York 10005
United States of America
Facsimile transmission number: (212) 509-2228
Telephone number: (212) 898-5347

d. If to Chase, to the attention, of Mr. Neil McVity, as
follows:

The Chase Manhattan Bank, London Branch
125 London Wall
London, England
EC2Y 5AJ
Telephone number: 011 44 171 962-5812

With a copy to the attention of David N. Koschik, Esq., as follows:

<PAGE>

White & Case
1155 Avenue of the Americas
New York, New York 10036-2787
Facsimile transmission number: (212) 354-8113
Telephone number: (212) 819-8241

e. If to the Collateral Agent, to the attention of Mr. Robert
Foster, Vice President, as follows:

The Chase Manhattan Bank
One Chase Manhattan Plaza, 4th Floor
New York, New York 10081
Unites States of America
Facsimile transmission number: (212) 552-1999
Telephone number: (212) 552-5512

With a copy to the attention of David N. Koschik, Esq., as follows:

White & Case
1155 Avenue of the Americas
New York, New York 10036-2787
Facsimile transmission number: (212) 354-8113
Telephone number: (212) 819-8241

3.3 COUNTERPARTS. This Agreement, and any amendment, waiver,
consent, or supplement hereto, may be executed in any number of counterparts,
each of which when so executed and delivered shall be deemed an original, but
all such counterparts together shall constitute but one and the same instrument.

3.4. WARRANTY OF SIGNATORIES. Each signatory of this Agreement
warrants that he or she is (1) an officer of the party on whose behalf he or she
is signing this Agreement; (2) is legally competent and authorized to execute
this Agreement on behalf of the party whose name is subscribed at or above the
signatory's signature; and (3) has obtained all necessary corporate approval
from the party on whose behalf he or she is signing this Agreement.

3.5. REPRESENTATION BY ATTORNEYS. Each party hereby acknowledges
that it has been fully, adequately, and competently represented by an attorney
or attorneys of that party's choice in connection with this Agreement.

3.6. TERMINATION OR AMENDMENT OF AGREEMENTS. Except as otherwise
provided in Section 3.8 hereof, this Agreement may be terminated, amended,
modified, or otherwise changed only by an agreement in writing expressly
referring to this Agreement and executed by the all parties hereto, and in no
other manner; and no waiver of any provision of this

9
<PAGE>

Agreement, estoppel of any party, custom or usage, or course of conduct shall
be deemed to be an amendment, modification, or other change to this
Agreement. The Loan Documents, and the Put Agreement, may not be amended
without the written consent of Centre Re.

3.7. WAIVER OF BREACH. In the event of any breach or claimed
breach by any party to this Agreement, the non-breaching party's or parties'
failure to enforce such breach shall not be deemed a waiver thereof (subject
to governing statutes of limitations and the doctrine of laches), and the
non-breaching party's or parties' waiver of any breach of any provision of
this Agreement by a breaching party shall not be deemed to be a waiver of any
other provision of this Agreement or waiver of any other breach of the same
provision. No waiver of any provision of this Agreement shall be enforceable
unless it is in a writing signed by the party to be charged.

3.8. TERMINATION. This Agreement shall remain in effect until the
obligations set forth in the Loan Documents have been irrevocably paid in full.

3.9. GOVERNING LAW, CONSENT TO JURISDICTION, AND CHOICE OF FORUM.
This Agreement shall be governed by and construed in accordance with the laws of
the State of California, whether or not the laws governing choice of law of the
State of California or any other jurisdiction would apply the substantive law of
California; and any action brought to enforce or construe any provision of this
Agreement shall be brought in a court having jurisdiction over the subject
matter of the action and located within the County of Los Angeles, State of
California. Each party to this Agreement hereby consents to personal
jurisdiction over that party by the courts of general trial jurisdiction within
the State of California and the County of Los Angeles.

3.10. SEVERABILITY. In the event that any one or more of the
provisions of this Agreement shall be held invalid, illegal, or unenforceable,
then each such invalidity, illegality or unenforceability shall not affect any
other provision hereof, and this Agreement shall be construed by disregarding
the invalid, illegal, or unenforceable provision or provisions.

3.11. INUREMENT: ASSIGNMENT. Subject to the restrictions on
assignment and delegation set forth herein, all of the provisions of this
Agreement shall be binding upon and inure to the benefit of each party hereto
and to that party's conservator, Liquidator, receiver, rehabilitator, successor,
trustee, and other similar representative, and permitted assigns and delegates.
No party hereto may assign any right or delegate any duty hereunder to any other
person or entity whatsoever, without the express prior written consent of all
other parties hereto, which consent may be given or withheld in each party's
sole and absolute discretion, and any purported assignment or delegation not in
full compliance herewith shall be null and void AB INITIO and of no force or
effect whatsoever: PROVIDED, HOWEVER, that in the event of any assignment of the
Loan by Chase in accordance with the Loan Documents (including without
limitation, as a result of the exercise of the right by Chase to cause Centre Re
to purchase the Put Obligations pursuant to the Put Agreement in accordance with
the provisions thereof), the

<PAGE>

rights and obligations of Chase hereunder may be assigned and delegated to
the respective assignee (including, without limitation Centre Re) without the
necessity of any such consent.

3.12. CONSTRUCTION OF AGREEMENT. The recitals and first paragraph of
this Agreement are material parts hereof. As the context requires, the singular
shall be deemed to include the plural and VICE VERSA, and use of the masculine,
feminine, or neuter gender shall be deemed to include each other gender, as the
context requires. The titles to and numbers of articles, sections, and
subsections of this Agreement are for reference only and do not constitute parts
of this Agreement. In the event of conflict, the verbal description of any
article, section, or subsection shall control over the number of that provision.

3.13. MERGER. Except for those Agreements and other documents
expressly referenced or described in this Agreement, including the recitals
herein, this Agreement constitutes the entire and exclusive agreement between
the parties hereto on the matters set forth herein, and any and all prior or
contemporaneous agreements, undertakings, promises, representations, warranties,
and covenants, whether written or oral and whether express, implied, or
apparent, are hereby deemed to be merged into and made a part of this Agreement.

3.14. INDEMNIFICATION. SNIC and SNIG, on the one hand, and Centre
Re, on the other hand (each, an "Indemnifying Party"), hereby agree to indemnify
and hold one another, and their respective directors, officers, employees and
agents (each, an "Indemnitee" and collectively an "Indemnitee Group") from and
against any and all damages, claims, losses, liabilities, costs or expenses
(including, without limitation, reasonable attorneys' fees) (collectively,
"Claims") whatsoever which any Indemnitee may incur (or which may be claimed
against any Indemnitee by any person whatsoever) by reason of or in connection
with any breach by the Indemnifying Party of any representation, warranty,
covenant, term or condition, or the occurrence of any default by such
Indemnifying Party, under this Agreement, and any Loan Document to which such
Indemnifying Party is or hereafter becomes a party, including, without
limitation, all reasonable fees and expenses resulting from the settlement of or
defense of any claims or liabilities arising as a result of any such breach or
default: PROVIDED, HOWEVER, that an Indemnifying Party shall not be required to
indemnify any Indemnitee for any Claim to the extent that such Claim shall have
been caused by the willful misconduct or gross negligence of such Indemnitee or
any member of the Indemnitee Group. In the event of the occurrence of any Claim
to which this Indemnity shall apply, the Indemnitee shall promptly notify the
Indemnifying Party of such Claim and may direct the Indemnifying Party to assume
the defense of such Claim and to pay all reasonable expenses incurred in
connection therewith, and if the Indemnifying Party shall fail or refuse to
assume such defense, then such Indemnitee may assume the defense of such Claim,
the reasonable costs of which shall be paid by the Indemnifying Party.

3.15. RIGHT OF SETOFF. At any time and from time to time after the
exercise by Chase of the put option and the purchase of the Loans by Centre Re
pursuant to the Put Agreement, in addition to any rights now or hereafter
granted under applicable law or otherwise, and not by way of limitation of any
of such rights, Centre Re is hereby authorized, and SNIC and SNIG hereby agree
that Centre Re shall have the right, without presentment, demand,

<PAGE>

protest or other notice of any kind to SNIC or SNIG, any such notice being
hereby expressly waived, to the fullest extent permitted by law, to set off
and appropriate and apply: (x) any amounts owed by Centre Re at such time
with respect to the Reinsurance Receivables (as defined herein), irrespective
of whether or not SNIG or SNIC shall have made demand with respect thereto
and although said obligations with respect to the Reinsurance Receivables
shall be contingent or unmatured: AGAINST (y) any "Obligations," as defined
in the Loan Agreement, owed at any time, and from time to time, by SNIC or
SNIG, directly or indirectly, to Centre Re, irrespective of whether or not
Centre Re shall have made any demand hereunder or thereunder, and although
said Obligations shall be contingent or unmatured. To the extent and in the
amount that Centre Re exercises this right of setoff, the Obligations
referred to in clause (y) shall be deemed paid and satisfied.

IN WITNESS WHEREOF, the parties hereto have duly executed this Asset
Transfer Agreement as of the date first written hereinabove.

SUPERIOR NATIONAL INSURANCE CENTRE REINSURANCE LIMITED
GROUP, INC.

By /s/ J. Chris Seaman By /s/ David Brown
--------------------------- -------------------------
J. CHRIS SEAMAN DAVID BROWN
Senior Vice President and President
Chief Financial Officer

SUPERIOR NATIONAL INSURANCE THE CHASE MANHATTAN BANK,
COMPANY LONDON BRANCH

By /s/ J. Chris Seaman By /s/ Robert Foster
--------------------------- -------------------------
J. CHRIS SEAMAN ROBERT FOSTER
Senior Vice President and Vice President
Chief Financial Officer

THE CHASE MANHATTAN BANK,
as Collateral Agent

By /s/ Robert Foster
-------------------------
ROBERT FOSTER
Vice President

<PAGE>

EXHIBIT H

FORM OF ASSIGNMENT AGREEMENT

ASSIGNMENT AGREEMENT (the "Assignment Agreement") dated as of
____________ __, 19__ between ________________ ("Assignor") and ________________
("Assignee"). All capitalized terms used herein and not otherwise defined shall
have the respective meanings provided such terms in the Credit Agreement
referred to below.

W I T N E S S E T H :

WHEREAS, Assignor is a party to a Credit Agreement, dated as of
November 12, 1996 (as amended to the date hereof, the "Credit Agreement"), among
Superior National Insurance Group, Inc. (the "Borrower"), the Assignor and The
Chase Manhattan Bank, as Collateral Agent;

WHEREAS, Assignor has outstanding A Loans under the Credit Agreement
of $________ and outstanding B Loans under the Credit Agreement of $________;

WHEREAS, Assignor and Assignee wish Assignor to assign to Assignee its
rights under the Credit Agreement with respect to a portion of its outstanding
Loans; and

WHEREAS, Assignor and Assignee wish Assignee to assume the obligations
of Assignor under the Credit Agreement to the extent of the rights so assigned;

NOW, THEREFORE, in consideration of the mutual agreements herein
contained, the parties hereto agree as follows:

1. ASSIGNMENT. Assignor hereby assigns to Assignee, without
recourse, or representation or warranty (other than expressly provided herein)
and subject to Section 4(b) hereof, [x] [that principal amount listed on Annex 1
hereto as the "Amount of Assigned A Loans" of the outstanding A Loans held by
Assignor] [and (y)] [that amount listed on Annex 1 hereto as the "Amount of
Assigned B Loans" of the outstanding B Loans held by Assignor] (collectively,
the "Assigned Loans"), together with all of Assignor's rights, title and
interest arising under the Credit Agreement with

<PAGE>

EXHIBIT H
Page 2

respect to the Assigned Loans and under the other Credit Documents (including,
without limitation, the right to receive payments of Reinsurance Receivables
pursuant to Sections 1.1 and 1.2 of the Asset Transfer Agreement).

2. ASSUMPTION. Assignee hereby assumes from Assignor all of
Assignor's obligations arising under the Credit Agreement relating to the
Assigned Loans. It is the intent of the parties hereto that Assignor shall be
released from all of its obligations under the Credit Agreement relating to the
Assigned Loans pursuant to Section 11.04(b) of the Credit Agreement.

3. ASSIGNMENTS; PARTICIPATIONS. Assignee may assign all or any part
of the rights granted to it hereunder, PROVIDED, that such assignment complies
with the provisions of Sections 11.04(b) and 11.04(c) of the Credit Agreement.
Assignee may sell or grant participations in all or any part of the rights
granted to it hereunder in accordance with the provisions of Sections 11.04(a)
and 11.04(c) of the Credit Agreement.

4. PAYMENT OF INTEREST TO ASSIGNEE. (a) Interest is payable by the
Borrower in respect of the Assigned Loans at the rates, and at the times set
forth in Sections 1.05 and 3.02 of the Credit Agreement, which interest, to the
extent payable after the Assignment Effective Date (as defined below), will be
payable for the account of the Assignee.

(b) Notwithstanding anything to the contrary contained in this
Assignment Agreement, if and when Assignor receives or collects, in either case
after the Assignment Effective Date, any payment of interest on any of the
Assigned Loans which in any such case, is required to be paid to Assignee
pursuant to clause (a) above, Assignor shall distribute to Assignee such
payment.

(c) Notwithstanding anything to the contrary contained in this
Assignment Agreement, if and when Assignee receives or collects any payment of
interest on any Assigned Loan which, in any such case, is required to be paid to
Assignor pursuant to clause (a) above, Assignee shall distribute to Assignor
such payment.

<PAGE>

EXHIBIT H
Page 3

5. PAYMENTS ON ASSIGNMENT EFFECTIVE DATE. In consideration of the
assignment by Assignor to Assignee of the Assigned Loans as set forth above,
Assignee agrees to pay to Assignor on or prior to the Assignment Effective Date
an amount specified by Assignor in writing on or prior to the Assignment
Effective Date which represents the [amount specified in the Put Agreement]
principal amount of the Assigned Loans outstanding on the Assignment Effective
Date [plus interest accrued thereon as of the Assignment Effective Date].(1)

6. EFFECTIVENESS. This Assignment Agreement shall become effective
on the date (the "Assignment Effective Date") on which (i) Assignor and Assignee
shall have signed a copy hereof (whether the same or different copies) and, in
the case of Assignee, shall have delivered same to Assignor and (ii) Assignee
shall have paid to Assignor the amount set forth in Section 5(a).

7. AMENDMENT OF CREDIT AGREEMENT. In accordance with the
requirements of Section 11.04(b) of the Credit Agreement, on the Assignment
Effective Date the Credit Agreement shall be amended by deeming the signature of
Assignee herein as a signature to the Credit Agreement. For purposes of Section
11.04(b) of the Credit Agreement, the Assignee shall be deemed a "Bank" for all
purposes under the Credit Agreement, and shall be subject to and shall benefit
from all of the rights and obligations of a Bank under the Credit Agreement and
the address of the Assignee for notice purposes shall be as set forth opposite
its signature below.

8. REPRESENTATIONS AND WARRANTIES. Each of the Assignor and the
Assignee represents and warrants to the other party as follows:

(a) it has full power and authority, and has taken all action
necessary, to execute and deliver this Assignment Agreement and to fulfill
its obligations under, and to consummate the transactions contemplated by,
this Assignment Agreement;

- ---------------
(1) Include bracketed language if appropriate.

<PAGE>

EXHIBIT H
Page 4

(b) the making and performance by it of this Assignment Agreement and
all documents required to be executed and delivered by it hereunder do not
and will not violate any law or regulation of the jurisdiction of its
incorporation or any other law or regulation applicable to it;

(c) this Assignment Agreement has been duly executed and delivered by
it and constitutes its legal, valid and binding obligation, enforceable in
accordance with its terms; and

(d) all consents, licenses, approvals, authorizations, exemptions,
registrations, filings, opinions and declarations from or with any agency,
department, administrative authority, statutory corporation or judicial
entity necessary for the validity or enforceability of its obligations
under this Assignment Agreement have been obtained, and no governmental
authorizations other than any already obtained are required in
connection with its execution, delivery and performance of this Assignment
Agreement.

The Assignor further represents and warrants that it is transferring the
Assigned Loans to the Assignee free and clear of all Liens.

9. EXPENSES. The Assignor and the Assignee agree that each party
shall bear its own expenses in connection with the preparation and execution of
this Assignment Agreement.

10. MISCELLANEOUS. (a) Assignor shall not be responsible to Assignee
for the execution (by any party other than the Assignor), effectiveness,
genuineness, validity, enforceability, collectibility or sufficiency of any of
the Credit Documents or for any representations, warranties, recitals or
statements made therein or in any written or oral statement or in any financial
or other statements, instruments, reports, certificates or any other documents
made or furnished or made available by Assignor to Assignee or by or on behalf
of the Borrower or any of its Subsidiaries to Assignor or Assignee in connection
with the Credit Documents and the transactions contemplated thereby. Assignor
shall not be required to ascertain or inquire as to the performance

<PAGE>

EXHIBIT H
Page 5

or observance of any of the terms, conditions, provisions, covenants or
agreements contained in any of the Credit Documents or as to the use of the
proceeds of the Loans or as to the existence or possible existence of any
Default or Event of Default.

(b) Assignee represents and warrants that it has made its own
independent investigation of the financial condition and affairs of the Borrower
in connection with the making of the Loans and the assignment of the Assigned
Loans to Assignee hereunder and has made and shall continue to make its own
appraisal of the creditworthiness of the Borrower. Assignor shall have no duty
or responsibility either initially or on a continuing basis to make any such
investigation or any such appraisal on behalf of Assignee or to provide Assignee
with any credit or other information with respect thereto, whether coming into
its possession before the making of the Loans or at any time or times thereafter
and shall further have no responsibility with respect to the accuracy of, or the
completeness of, any information provided to Assignee, whether by Assignor or by
or on behalf of the Borrower.

(c) THE VALIDITY, CONSTRUCTION AND ENFORCEABILITY OF THIS ASSIGNMENT
AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF NEW YORK.

(d) No term or provision of this Assignment Agreement may be changed,
waived, discharged or terminated orally, but only by an instrument in writing
signed by both parties.

(e) This Assignment Agreement may be executed in one or more
counterparts, each of which shall be an original but all of which, taken
together, shall constitute one and the same instrument.

(f) The Assignor may at any time or from time to time grant to others
assignments or participations in its Loans but not in the portions thereof
assigned to Assignee pursuant to this Assignment Agreement. The Assignor
represents and warrants that it has not at any time prior to the Assignment
Effective Date encumbered or assigned the portion of its Loans being assigned
hereunder.

<PAGE>

EXHIBIT H
Page 6

(g) This Assignment Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and assigns.
Neither of the parties hereto may assign or transfer any of its rights or
obligations under this Assignment Agreement without the prior consent of the
other party. The preceding sentence shall not limit the right of the Assignee
to assign all or part of the Assigned Loans in the manner contemplated by the
Credit Agreement, subject to the provisions of Section 3 hereof.

(h) All representations and warranties made herein and indemnities
provided for herein shall survive the consummation of the transaction
contemplated hereby.

(i) The Assignor shall promptly provide the Assignee with copies of
the documents received in connection with the transactions contemplated by the
Credit Documents and this Assignment Agreement.

(j) Neither the entering into of this Assignment Agreement nor the
transfer of the Assigned Loans pursuant hereto shall increase or reduce any of
the obligations of the Borrower or SNIC set forth in the Credit Documents,
except as otherwise expressly provided in [the Related Issues Agreement, dated
as of November 12, 1996, among the Borrower, SNIC, Centre Re and Centre Re
(Bermuda)](2) or in any other agreement to which the Borrower and/or SNIC is a
party.

IN WITNESS WHEREOF, the parties hereto have executed this Assignment
Agreement as of the date first above written.

[NAME OF ASSIGNOR]

By
---------------------------
Title:

[NAME OF ASSIGNEE]

By
---------------------------
Title:

- ---------------
(2) To be included if assignment is made to Centre Re.

<PAGE>

ANNEX I
to
ASSIGNMENT AGREEMENT

1. BORROWER: Superior National Insurance Group, Inc.

2. DATE OF CREDIT AGREEMENT: as of November 12, 1996

3. ASSIGNEE:

4. DATE OF ASSIGNMENT AGREEMENT: ________________, 19__

5. AMOUNT OF ASSIGNMENT:

a. Assignor's outstanding A
Loans........................ $..........

b. Amount of Assigned A Loans... $..........

c. Assignor's outstanding B
Loans........................ $..........

d. Amount of Assigned B Loans... $..........

Accepted and Agreed:

[NAME OF ASSIGNOR]

By
---------------------------
Title:

[NAME OF ASSIGNEE]

By
---------------------------
Title:

<PAGE>

EXHIBIT 11.1

STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>

Year Ended December 31,
-----------------------------------
1996 1995 1994
-----------------------------------
(In Thousands Except Per Share Data)
<S> <C> <C> <C>
SIMPLE:
Shares outstanding at beginning of period 3,430 3,430 3,430
Shares issued upon exercise of stock options 3 - -
Shares issued as grants of restricted stock 13 - -
Additional shares issuable - - -
------- ------- -------
Total weighted average shares and common stock
equivalents outstanding 3,446 3,430 3,430

Net income $ 1,963 $ 371 $ 894
------- ------- -------
------- ------- -------
Net income per common share $ 0.57 $ 0.11 $ 0.26
------- ------- -------
------- ------- -------

PRIMARY:
Shares outstanding at beginning of period 3,430 3,430 3,430
Shares issued upon exercise of stock options 3 - -
Shares issued as grants of restricted stock 13 - -
Additional shares issuable 1,869 1,752 1,674
------- ------- -------
Total weighted average shares and common stock
equivalents outstanding 5,315 5,182 5,104

Net income $ 1,963 $ 371 $ 894
Interest reduction, net of tax 347 658 744
------- ------- -------
Net income available to common shareholders $ 2,310 $ 1,029 $ 1,638
------- ------- -------
------- ------- -------

Net income per common share $ 0.43 $ 0.20 $ 0.32
------- ------- -------
------- ------- -------

FULLY DILUTED:
Shares outstanding at beginning of period 3,430 3,430 3,430
Shares issued upon exercise of stock options 3 - -
Shares issued as grants of restricted stock 13 - -
Additional shares issuable 1,869 1,752 1,674
------- ------- -------
Total weighted average shares and common stock
equivalents outstanding 5,315 5,182 5,104

Net income $ 1,963 $ 371 $ 894
Interest reduction, net of tax 174 684 747
------- ------- -------
Net income available to common shareholders $ 2,137 $ 1,055 $ 1,641
------- ------- -------
------- ------- -------

Net income per common share $ 0.40 $ 0.20 $ 0.32
------- ------- -------
------- ------- -------

</TABLE>

<PAGE>
<ARTICLE> 7
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 46,330
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 1,173
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 149,440
<CASH> 101,937
<RECOVER-REINSURE> 288
<DEFERRED-ACQUISITION> 3,042
<TOTAL-ASSETS> 306,569
<POLICY-LOSSES> 115,529
<UNEARNED-PREMIUMS> 9,702
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 98,961
23,571
0
<COMMON> 16,022
<OTHER-SE> 29,169
<TOTAL-LIABILITY-AND-EQUITY> 306,569
88,648
<INVESTMENT-INCOME> 7,769
<INVESTMENT-GAINS> 31
<OTHER-INCOME> 0
<BENEFITS> 55,638
<UNDERWRITING-AMORTIZATION> 16,870
<UNDERWRITING-OTHER> 17,268
<INCOME-PRETAX> 5,227
<INCOME-TAX> 1,597
<INCOME-CONTINUING> 3,630
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,963
<EPS-PRIMARY> 0
<EPS-DILUTED> .40
<RESERVE-OPEN> 114,419
<PROVISION-CURRENT> 57,614
<PROVISION-PRIOR> (1,976)
<PAYMENTS-CURRENT> 19,816
<PAYMENTS-PRIOR> 59,698
<RESERVE-CLOSE> 90,543
<CUMULATIVE-DEFICIENCY> (1,976)

</TABLE>