SUPERIOR NATIONAL INSURANCE GROUP INC, S-3/A, 1998-10-21

SUPERIOR NATIONAL INSURANCE GROUP INC
S-3/A, 1998-10-21
INSURANCE AGENTS, BROKERS & SERVICE

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<PAGE> 1

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON , 1998

REGISTRATION NO. 333-58579

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1

TO FORM S-1

ON FORM S-3

REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------

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

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<S> <C> <C>
DELAWARE 6331 95-4610936
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>

26601 AGOURA ROAD
CALABASAS, CALIFORNIA 91302
(818) 880-1600
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

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ROBERT E. NAGLE, ESQ.
SENIOR VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
26601 AGOURA ROAD
CALABASAS, CALIFORNIA 91302
(818) 880-1600
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)

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COPIES TO:

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DANA M. WARREN, ESQ. GARY I. HOROWITZ, ESQ.
RIORDAN & MCKINZIE JOHN R. LOBRANO, ESQ.
300 SOUTH GRAND AVENUE, SUITE 2900 SIMPSON THACHER & BARTLETT
LOS ANGELES, CALIFORNIA 90071 425 LEXINGTON AVENUE
(213) 629-4824 NEW YORK, NEW YORK 10017
(212) 455-2000
</TABLE>

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.

If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]

If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [ ]

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

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

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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.

The Stock Offering contemplated by this Registration Statement is subject to
the prior approval of the holders of the Registrant's Common Stock. A proxy
statement has been filed with the Commission to solicit proxies from the holders
of the Registrant's Common Stock for use at an annual meeting of stockholders of
the Registrant to consider and vote upon the Stock Offering and the other
matters described therein.

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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.

SUBJECT TO COMPLETION, DATED , 1998

PROSPECTUS
, 1998

[LOGO]

6,544,043 SHARES

SUPERIOR NATIONAL INSURANCE GROUP, INC.
COMMON STOCK

Superior National Insurance Group, Inc., a Delaware corporation ("Superior
National" or the "Company"), is distributing (i) to holders of record as of the
close of business on October 30, 1998 (the "Record Date") of shares of its
common stock, par value $.01 per share (the "Common Stock") (excluding IP
Delaware and IP Bermuda (as defined below)) and outstanding warrants to purchase
Common Stock, excluding certain warrant holders as described herein, one
transferable subscription right ("a Right") to subscribe for and purchase a
share of Common Stock at a price of $16.75 (the "Subscription Price") for each
share of Common Stock or warrant held (the "Rights Offering") and (ii) to each
employee and consultant of the Company holding vested and unvested stock
options, or granted shares of restricted Common Stock, the same form of Right
issued in the Rights Offering, excepting contractual restrictions on
transferability (the "Employee Participation," and, together with the Rights
Offering, the "Stock Offering"). The Stock Offering is part of a plan to finance
the Company's acquisition of Business Insurance Group, Inc. (the "Acquisition").
The closing of the Stock Offering is conditioned upon completion of the
Acquisition.

The Company also has entered into a stock purchase agreement (the "Stock
Purchase Agreement") with Insurance Partners, L.P. ("IP Delaware"), Insurance
Partners Offshore (Bermuda), L.P. ("IP Bermuda"), and Insurance Partners II,
L.P. and/or Insurance Partners II Private Fund, L.P. (collectively, "IP II,"
and, together with IP Delaware and IP Bermuda, "IP") pursuant to which, subject
to certain conditions, IP has agreed to purchase $94.0 million of Common Stock
at $16.75 per share (the "IP Stock Issuance") and, further, has provided a
standby commitment (the "Standby Commitment") to purchase at the Subscription
Price shares of Common Stock sufficient to bring the total proceeds of the Stock
Offering, the IP Stock Issuance (and related exercises of warrant holder
preemptive rights) to $200.0 million. The Company will pay a fee consisting of
warrants exercisable to purchase 734,000 shares of Common Stock at a purchase
price of $16.75 (the "Commitment Fee Warrants") in consideration for the Standby
Commitment. No Rights will be issued to the recipients of the Commitment Fee
Warrants.

The Stock Offering and the Rights will expire at 5:00 p.m., New York City
time, on November 20, 1998 unless extended by the Company from time to time
(such date, as it may be extended, is referred to herein as the "Expiration
Date"). HOLDERS SHOULD NOTE THAT IMMEDIATELY AVAILABLE FUNDS ARE REQUIRED BY THE
EXPIRATION DATE FOR A SUBSCRIPTION TO BE VALID. Although personal checks will be
accepted, if they have not cleared by the Expiration Date the subscription will
not be valid. See "The Stock Offering -- Exercise of Rights." Holders who
exercise their Rights will not be entitled to revoke their subscriptions.
Holders who do not exercise or sell their Rights will relinquish any value
inherent in the Rights. Accordingly, holders are strongly urged to exercise or
sell their Rights.

CURRENT STOCKHOLDERS AND WARRANT HOLDERS OF THE COMPANY WHO DO NOT
PARTICIPATE IN THE STOCK OFFERING WILL SUFFER A SUBSTANTIAL DILUTION IN THEIR
RELATIVE PERCENTAGE OWNERSHIP IN THE COMPANY UPON ISSUANCE OF COMMON STOCK TO
HOLDERS EXERCISING RIGHTS AND, TO THE EXTENT A SUFFICIENT NUMBER OF SUCH RIGHTS
ARE NOT EXERCISED, TO IP PURSUANT TO THE STANDBY COMMITMENT. See "Risk
Factors -- Dilution of Ownership."

(cover page continues)

SEE "RISK FACTORS," BEGINNING ON PAGE 24, FOR INFORMATION THAT SHOULD BE
CONSIDERED BY PROSPECTIVE INVESTORS.

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

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PROCEEDS TO
SUBSCRIPTION PRICE COMPANY(1)(2)
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Per Share............................................... $16.75 $16.75
Total................................................... $109,612,720 $109,612,720
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</TABLE>

(1) Assumes the purchase of all shares of Common Stock offered hereby. Before
deducting expenses payable by the Company estimated to be $640,000.

(2) The Company has agreed to indemnify the Dealer Manager against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended.

The Dealer Manager for the Rights Offering is:
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
<PAGE> 3

(cover page continues)

The Common Stock is traded on The Nasdaq National Market ("Nasdaq") under
the symbol "SNTL." On May 4, 1998 (the last day on which trading prices were
reported prior to the public announcement of the Stock Offering) and on
, 1998, the last reported per share sales price of the Common
Stock was $20.50 and $ , respectively. It is anticipated that the
Rights will trade on Nasdaq under the symbol "SNTLR." Certain registered
broker-dealers have indicated to the Company that they intend to make a market
in the Rights. There can be no assurance, however, that a market for the Rights
will develop. Orders to sell Rights must be received by the Subscription Agent
(as defined herein) not later than 11:00 a.m., New York City time, on the third
Nasdaq trading day prior to the Expiration Date if a holder wishes to sell
Rights through the Subscription Agent.

Under resolutions adopted by the Board of Directors of the Company (the
"Board of Directors" or "Board"), Rights will be issued under the Employee
Participation only upon delivery of a participation agreement restricting
transfer of the Rights, and "stop transfer" instructions will be issued to the
Subscription Agent. Each Right issued under the Employee Participation may be
exercised to purchase one share of Common Stock, at the Subscription Price of
$16.75 per share. Employees and consultants of the Company intending to exercise
their Rights must deliver an executed stock purchase agreement and payment of
the subscription price no later than 5:00 p.m., New York City time, on the
Expiration Date. Such payment may be delivered in the form of a secured
promissory note so long as securities pledged as collateral have sufficient
value, with value determined as stated herein. See "The Stock
Offering -- Employee Participation." The stock subscription agreement will
contain restrictions on the transferability of the shares acquired and rights of
repurchase in favor of the Company.

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

Wilmington Trust Company is the Subscription Agent for the Rights Offering.
Purchases of Common Stock require timely delivery of a Subscription Certificate
and immediately available funds.

To Purchase Rights:

All payments must be made by (i) check or bank draft drawn upon a U.S. bank
or of any postal, telegraphic, or express money order payable to "Wilmington
Trust Company, as Subscription Agent," or (ii) wire transfer of same-day funds
to the account maintained by the Subscription Agent for such purpose at
, Account No. , ABA No. Attn: [telephone
number].

Subscription Certificates and payment of the Subscription Price should be
delivered to one of the following addresses:

By Mail:

By Hand:

By Overnight Delivery:

By Facsimile (Foreign/APO/FPO use only):

Confirm facsimile by telephone only:

A subscription will not be valid if the Subscription Certificate has not
been received on or before the Expiration Date.

PLEASE NOTE THAT FUNDS PAID BY UNCERTIFIED PERSONAL CHECK MAY TAKE FIVE OR
MORE BUSINESS DAYS TO CLEAR. ACCORDINGLY, HOLDERS WHO WISH TO PAY THE
SUBSCRIPTION PRICE BY MEANS OF UNCERTIFIED PERSONAL CHECK ARE URGED TO MAKE
PAYMENT SUFFICIENTLY IN ADVANCE OF THE EXPIRATION DATE TO ENSURE THAT SUCH
PAYMENT IS RECEIVED AND CLEARED BY SUCH DATE, AND ARE URGED TO CONSIDER PAYMENT
BY MEANS OF CERTIFIED OR CASHIER'S CHECK, MONEY ORDER, OR WIRE TRANSFER OF SAME
DAY FUNDS.

<PAGE> 4

AVAILABLE INFORMATION

The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements, and other information with the
Securities and Exchange Commission (the "SEC" or the "Commission"). Such
reports, proxy statements, and other information may be inspected and copied at
the public reference facilities maintained by the Commission at Room 1024, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the Regional Offices of the
Commission located at Suite 1400, Citicorp Center, 500 West Madison Street,
Chicago, Illinois 60661 and Room 1300, 7 World Trade Center, New York, New York
10048. Copies of such material may also be obtained by mail from the Public
Reference Branch of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549 at prescribed rates. Such information may also be accessed electronically
by means of the Commission's home page on the Internet (http://www.sec.gov).
Additionally, the Common Stock is traded on Nasdaq. Accordingly, such reports,
proxy statements, and other information are also available for inspection at the
library of Nasdaq at 1735 K Street, N.W., Washington, D.C. 20006.

Business Insurance Group, Inc. is not subject to the informational
requirements of the Exchange Act; however, it is an indirect subsidiary of
Foundation Health Systems, Inc., which does file such reports, proxy statements,
and other information with the Commission.

The Company has filed with the Commission a Registration Statement on Form
S-3 (together with all amendments and exhibits thereto, referred to as the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act") with respect to the securities offered by this Prospectus.
This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules relating thereto, certain
portions of which have been omitted as permitted by the rules and regulations of
the Commission. For further information with respect to the Company and the
securities offered by this Prospectus, reference is made to the Registration
Statement and the exhibits filed or incorporated as a part thereof, which are on
file at the offices of the Commission. Statements contained in this Prospectus
as to the contents of any documents referred to are not necessarily complete,
and, in each such instance, are qualified in all respects by reference to the
applicable documents filed with the Commission.

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The following documents that have been filed with the Commission by the
Company are hereby incorporated by reference in this Prospectus.

(1) Annual Report on Form 10-K/A for the fiscal year ended December 31,
1997 (File No. 0-25984).

(2) Quarterly Report on Form 10-Q/A for the fiscal quarter ended March 31,
1998 (File No. 0-25984).

(3) Quarterly Report on Form 10-Q/A for the fiscal quarter ended June 30,
1998 (File No. 0-25984).

(4) Current Report on Form 8-K/A (Amendment No. 2) filed with the
Commission on October 16, 1998 (Date of earliest event
reported -- April 11, 1997) (File No. 0-25984).

All documents and reports filed by the Company pursuant to Sections 13(a),
13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this Prospectus
and prior to the termination of the offering of the Common Stock made hereby
shall be deemed to be incorporated by reference in this Prospectus and shall be
a part hereof from the date of filing of such reports and documents. Any
statement contained in this Prospectus or in a document incorporated or deemed
to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any subsequently filed document which also is or is
deemed to be incorporated by reference herein modifies or supersedes such
statement. Any statement so modified or superseded shall not be deemed, except
as so modified or superseded, to constitute a part of this Prospectus.

Copies of all documents incorporated herein by reference (not including the
exhibits to such information, unless such exhibits are specifically incorporated
by reference in such information) will be provided without charge to each
person, including any beneficial owner, to whom this Prospectus is delivered,
upon written or oral request. Copies of this Prospectus, as amended or
supplemented from time-to-time, and any other documents (or parts of documents)
that constitute part of this Prospectus under Section 10(a) of the Securities
Act will also be provided without charge to each such person, upon written or
oral request. Requests should be directed to Superior National Insurance Group,
Inc., 26601 Agoura Road, Calabasas, California 91302, Attention: Robert E.
Nagle, Senior Vice President, General Counsel and Secretary; telephone number
(818) 880-1600.

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PROSPECTUS SUMMARY

See "Glossary of Terms" ("Glossary") for the definitions of certain of the
capitalized and defined terms used herein.

The following is a brief summary of certain information contained elsewhere
in this Prospectus and is qualified in its entirety by the more detailed
information, including "Risk Factors" and the consolidated financial statements
and notes thereto, appearing elsewhere in this Prospectus. Unless the context
indicates otherwise, (i) the "Company" or "Superior National" refers to Superior
National Insurance Group, Inc., a Delaware corporation, and its Subsidiaries,
(ii) the "Subsidiaries" refer to the direct and indirect subsidiaries of the
Company, including, after the Acquisition, BIG (each as defined below), and
(iii) "Superior Pacific" refers to Superior National Insurance Company ("SNIC")
and Superior Pacific Casualty Company ("SPCC"), the principal operating
subsidiaries of the Company. "BIG" refers to the insurance business of Business
Insurance Group, Inc., a Delaware corporation, and, where the context indicates,
BIG and its wholly owned insurance subsidiaries, Business Insurance Company
("BICO"), California Compensation Insurance Company ("CalComp"), Combined
Benefits Insurance Company ("CBIC"), and Commercial Compensation Insurance
Company ("CCIC," and, together with BICO, CalComp, and CBIC, the "BIG Insurance
Subsidiaries"). "FHS" refers to Foundation Health Systems, Inc., the holding
company that is the ultimate parent of BIG, and "FHC" refers to Foundation
Health Corporation, a subsidiary of FHS and the immediate parent of BIG.

Unless otherwise indicated, all financial information and operating
statistics applicable to the Company and BIG set forth in this Prospectus are
based on generally accepted accounting principles ("GAAP") and not statutory
accounting practices ("SAP"). In conformity with industry practice, data derived
from A.M. Best Company, Inc. ("A.M. Best") and the National Association of
Insurance Commissioners ("NAIC"), generally used herein for industry
comparisons, are based on SAP.

THE COMPANY

Superior National is a holding company that, through its wholly owned
subsidiaries, SNIC and SPCC, underwrites and markets workers' compensation
insurance principally in the State of California and, until September 30, 1993,
was engaged in the underwriting and marketing of commercial property and
casualty ("P&C") insurance. On May 5, 1998, Superior National agreed to acquire
BIG for approximately $256.5 million in cash ($285.0 million less the cost to
FHC of the Loss Reserves Guarantee, described below, provided through
reinsurance) (the "Acquisition"). Pro forma for the Acquisition of BIG, the
Company would have had direct written premium of $823.3 million and $848.6
million for the years ended December 31, 1996 and 1997, respectively, and $378.5
million in direct written premium in the first six months of 1998. Based on
available data for 1997 on direct written premium, on a pro forma basis, the
Company and BIG would be the largest private sector workers' compensation
insurer in California.

In April 1997, Superior National acquired Pac Rim Holding Corporation ("Pac
Rim"), the parent company of The Pacific Rim Assurance Company (subsequently
renamed SPCC). SPCC's Southern California operations complement SNIC's
historical focus on Central and Northern California. As a result of the
acquisition of SPCC (the "Pac Rim Transaction"), the Company believes that,
excluding the California State Compensation Insurance Fund (the "State Fund"),
it is the eighth largest California workers' compensation insurer overall, based
upon 1996 direct written premium. Pro forma for the Pac Rim Transaction, the
Company would have had direct written premium of $182.2 million and $179.7
million for the years ended December 31, 1996 and 1997, respectively, and had
$82.0 million in direct written premium in the first six months of 1998. The Pac
Rim Transaction has enabled the Company to increase its book of California
workers' compensation business and generate significant expense savings through
the consolidation of the back office operations of the two companies. The
Company's Board of Directors (the "Board" or "Board of Directors") is continuing
its acquisition strategy through its anticipated combination with BIG and the
related financing transactions, which it believes will generate significant
benefits. However, a number of

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mitigating factors could prevent the Company from realizing these benefits and
could possibly materially and adversely affect the Company's financial condition
and results of operations, including that:

- The significant net losses recently incurred and significant declines in
direct written premium in California experienced by BIG could continue
after the Acquisition.

- The Company may not be successful in coordinating and integrating the
operations and business enterprises of the Company and BIG.

- The large negative cash flows expected to arise after the Acquisition
will result in reduced investment income to the Company.

- The anticipated longer-term economies of scale may fail to materialize,
adversely affecting the Company's cash flow and earnings before taxes.

- The change in the Company's operating strategy caused by the Acquisition,
primarily expanding its focus to larger accounts throughout the United
States, may not be successful.

- The Company's significant use of reinsurance following the Acquisition
could materially and adversely affect the Company if the reinsurers fail
to perform their obligations.

- The increased concentration of ownership of the Company by IP and certain
parties having business relationships with it (as defined and described
below) could negatively affect the Company.

- The limitations on the Company's ability to use its net operating loss
carryforwards ("NOLs") upon the completion of the equity financings
contemplated to accomplish the Acquisition could adversely affect its
earnings.

After considering the above factors, the Board of Directors approved the
Acquisition and the related financing transactions, reflecting its belief that
the various risks and mitigating factors it considered were outweighed by the
substantial benefits it expected the Company to receive from these transactions,
including, that:

- The Company will be the largest private sector workers' compensation
carrier in California, based on available data on 1997 direct written
premium.

- The Company will benefit from economies of scale over a period of years,
potentially realizing cost savings as a result.

- The Company will reduce its financial leverage due to the additional
equity provided by the equity financings contemplated to accomplish the
Acquisition.

- The Company will strengthen its relationship with IP (defined below),
providing opportunities for additional acquisitions and continued growth.

STRUCTURE OF THE ACQUISITION AND RELATED FINANCING TRANSACTIONS

The Company has entered into a definitive agreement (the "Acquisition
Agreement") to acquire BIG from FHC for approximately $256.5 million in cash
($285.0 million less the cost of a Loss Reserves Guarantee (defined below) to be
provided through reinsurance). The Company will offset the reduction in BIG's
surplus resulting from the cost of reinsurance for the Loss Reserves Guarantee
with a capital contribution to BIG, so the total cash outlay by the Company in
connection with the Acquisition will be $285.0 million, excluding transaction
expenses. BIG is a holding company that, through its subsidiaries, writes

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workers' compensation and group health insurance, principally in California,
with branch operations throughout the continental United States. Under the
Acquisition Agreement, upon consummation of the Acquisition (the "Closing"), BIG
will become a wholly owned subsidiary of the Company. As a result, CalComp,
CCIC, and CBIC, which are currently wholly owned subsidiaries of BIG, will
become indirect operating subsidiaries of the Company. BICO will be sold to
Zurich Centre Group LLC, an affiliate of Zurich Centre Group Holdings, Limited
("Zurich"), or a designee of Zurich Centre Group LLC, immediately after the
Closing. Prior to the sale of BICO, the Company will transfer the operating
assets, liabilities, and infrastructure of BICO into Superior Pacific. The
purchase price will be $5.6 million, subject to certain adjustments. The Company
thereafter will continue to do business outside of California through CCIC. In
connection with the Acquisition, FHC is obligated prior to Closing to cause all
of BIG's intercompany balances and real estate holdings related to FHC and its
parent, FHS, and their affiliates, to be settled in cash.

The Acquisition of BIG will be financed by the Company with a combination
of equity and debt. The debt portion of the financing will be provided by the
proceeds of senior debt financing in a principal amount of approximately $110.0
million through a public or private offering of senior notes or through a bank
credit facility (the "Senior Debt Financing"). The equity portion consists of
the issuance and sale of approximately $109.6 million of Common Stock (the
"Stock Offering"), which consists of the offering of rights to purchase Common
Stock (the "Rights") to existing stockholders (other than Insurance Partners,
L.P. ("IP Delaware") and Insurance Partners Offshore (Bermuda), L.P. ("IP
Bermuda")) and warrant holders (excluding certain warrant holders) (the "Rights
Offering"), and the offering of Rights to holders of options and restricted
stock (the "Employee Participation"). Additionally, IP Delaware, IP Bermuda, and
Capital Z Financial Services Fund II, L.P. and Capital Z Financial Services
Private Fund II, L.P. (collectively, "IP II," and, together with IP Delaware and
IP Bermuda, "IP") will purchase $94.0 million in Common Stock in a private
transaction (the "IP Stock Issuance"). Warrant holders may exercise preemptive
rights in connection with the IP Stock Issuance to purchase up to 2,145,821
shares of Common Stock, and those who do so will be excluded from the Stock
Offering. IP has also agreed to provide a standby commitment of up to $106.0
million to purchase an amount of shares of Common Stock necessary to bring the
total proceeds of the Stock Offering, the IP Stock Issuance and the sales to
warrant holders exercising preemptive rights to purchase under the terms of the
IP Stock Issuance to $200.0 million (the "Standby Commitment"). The Stock
Offering, the Standby Commitment, and the IP Stock Issuance (with the related
exercise of warrant holder preemptive rights), together, are referred to as the
"Equity Financings." The amounts obtained from the Senior Debt Financing and the
Equity Financings in excess of $285.0 million will be used for transaction costs
in connection with the Acquisition, the Senior Debt Financing, and the Equity
Financings; for capital for the Company's insurance subsidiaries; and for
general corporate purposes. The Stock Offering, the Standby Commitment, the IP
Stock Issuance, and the Senior Debt Financing are each conditioned on the
completion of the other and the completion of the Acquisition.

SENIOR DEBT FINANCING

The Company also intends to obtain the Senior Debt Financing in the
aggregate principal amount of approximately $110.0 million through a public or
private offering of senior notes or through a bank credit facility. The interest
rate, due date, and other terms of the Senior Debt Financing will be determined
in negotiations between the Company and the underwriters or initial purchasers
of the senior notes or the lenders under the credit facility, as the case may
be. To the extent that the Equity Financings and the Senior Debt Financing in
the amounts contemplated would yield proceeds significantly in excess of that
necessary to meet the cash outlays anticipated to complete the Acquisition, the
Company may reduce the size of the Senior Debt Financing in an amount determined
appropriate by the Board of Directors, in consultation with the Company's
financial advisors.

LOSS RESERVES GUARANTEE

In connection with the Acquisition, FHC has agreed to obtain, at its
expense, guarantees on BIG's claim and claim adjustment expense reserves (the
"Loss Reserves Guarantee"). The Loss Reserves Guarantee covers $150.0 million in
reserves for losses incurred prior to December 31, 1997 and an additional

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$25.0 million for losses incurred through the Closing. Under the Acquisition
Agreement, FHC is permitted to cause BIG to purchase reinsurance that is
effective immediately prior to the Closing to fulfill the Loss Reserves
Guarantee. The $28.5 million paid by BIG for reinsurance will be deducted from
the price paid to FHC by the Company. Using the proceeds of the Equity
Financings and the Senior Debt Financing, the Company will contribute capital to
BIG following the Closing to offset any reductions in surplus arising out of the
purchase of reinsurance, so that the Company's total cash outlay in connection
with the Acquisition will be approximately $285.0 million, excluding transaction
costs.

LARGE ACCOUNT QUOTA-SHARE ARRANGEMENT

Separately, effective May 1, 1998 the Company and BIG each entered into a
three-year quota-share arrangement with a reinsurer (the "Quota-Share
Arrangement") under which each will cede all risks with an estimated annual
premium at each risk's inception date of $25,000 or more. Continuation of the
Quota-Share Arrangement by BIG is contingent on the Closing. The Company
believes there is significantly more pricing and persistency risk associated
with policies with larger annual premium amounts. The use of the Quota-Share
Arrangement will allow the Company to re-underwrite this business over time to
the Company's underwriting standards while preserving BIG's relationships with
producers and insureds. Additionally, because the Quota-Share Arrangement will
reduce net written premium, the Company's and BIG's ratio of net written premium
to statutory surplus will decrease, a result that is generally viewed favorably
by regulators and rating agencies.

TERMS OF THE ACQUISITION AGREEMENT AND SERVICE AGREEMENTS

The Acquisition Agreement contains customary terms and conditions,
representations and warranties, covenants of the parties, conditions to closing,
and provisions requiring certain payments upon termination under certain
conditions, all as more fully described herein. The Company is obligated to
consummate the Acquisition notwithstanding certain material adverse developments
in the business of BIG.

The Acquisition requires the approval of the departments of insurance in
the States of California, Delaware and New York, and notice filings in other
states. The Company has already made the requisite filings in order to obtain
such approval, including an application to the New York Department of Insurance.
If approval in New York is not obtained, the Acquisition will proceed without
the inclusion of CCIC. While the Company is confident of obtaining approval in
New York, as of the date of this Prospectus, all necessary regulatory approvals
have not yet been obtained. The Acquisition is also subject to the expiration of
the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended (the "HSR Act"), and the waiting period has expired.
Additionally, the holders of the 10 3/4% Trust Preferred Securities (the "Trust
Preferred Securities") issued by the Company's subsidiary, Superior National
Capital Trust I (the "Trust") are being requested to consent to the Senior Debt
Financing. The Company expects to obtain all such approvals, although no
assurances can be given that they will be obtained.

In connection with the Acquisition Agreement, the Company and BIG will
enter into long-term service agreements (the "Service Agreements") with various
subsidiaries of FHC that are not being sold to Superior National. These
agreements include medical bill review, PPO utilization, certain managed care
services, claim negotiation and review, recruitment of employees, placement of
temporary workers, and transitional corporate administrative services. The
Service Agreements will have minimum terms of five years.

DISPOSITION OF BICO

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produce up to $50.0 million in estimated annual premium on BICO's policy forms
in exchange for an underwriting fee equal to 2.5% of direct written premium plus
a pass through of all related expenses. The Company intends to retain BICO's
business and employees within the Superior National organization, and, together
with CCIC and the other BIG Insurance Subsidiaries acquired in the Acquisition,
to continue, and attempt to expand, BIG's national workers' compensation
insurance operations.

The sale of BICO is contingent upon a number of conditions, including the
completion of a due diligence investigation by Zurich Centre Group LLC,
execution of definitive documents prior to the completion of the Acquisition,
approval from state insurance regulators, the execution of other related
agreements, and other customary conditions.

STRATEGY

Integration Strategy

The Company acquired SPCC in April 1997 and has rapidly integrated SPCC's
operations into Superior Pacific. The Company believes it has achieved
significant expense savings through that integration. Although the Company does
not expect any material cost savings to arise in the short term out of the
Acquisition of BIG, the benefits of economies of scale could be realized over a
period of years. The Company's strategy for improving the overall financial
performance of both Superior Pacific and BIG includes:

- Leadership in California Market. As the largest private sector workers'
compensation insurer in California, the Company will be positioned to
offer insureds and producers outstanding service, innovative loss control
programs, and competitive pricing.

- Nationwide Presence; Opportunities for Growth. The Company intends to
maintain a nationwide presence and seek additional opportunities for
growth outside of California, using the regional and branch network
established by BIG.

- Underwriting. The Company believes it can accomplish a gradual
re-underwriting of BIG's book of business to enhance its profitability.
The pricing and persistency risk associated with the re-underwriting of
larger accounts will be mitigated by ceding accounts with estimated
annual premium of $25,000 or more at inception to a reinsurer.

- Information Systems. The Company believes that its data processing
systems will give Superior Pacific and BIG a significant competitive
advantage by (i) enhancing the effectiveness of their employees'
underwriting, policy administration, and claims activities, (ii)
providing detailed, real-time, and near real-time information to
management for control and administration purposes, and (iii) providing
marketing benefits through improved customer service.

- Loss Control and Claim Management. The Company believes BIG is a leader
in loss control for workers' compensation insurance, and expects to
introduce innovative concepts developed by BIG, such as employer safety
management schools, to Superior Pacific's business. Additionally, once a
claim is made the Company expects to benefit from service arrangements
with FHS and the claim severity management services Superior Pacific is
obtaining from Risk Enterprise Management Limited ("REM") (a Zurich
affiliate) as part of its Claim Severity Management Program (as described
herein). These claim practices will continue to emphasize rapid medical
intervention to mitigate the severity of injuries.

- Producer Relationships. The Company intends to strengthen its marketing
relationships with its producers, including nationally recognized
insurance brokers who have longstanding relationships with BIG, in order
to reach potential customers with nationwide operations. The Company
endeavors to be the primary supplier of workers' compensation insurance
for many of its producers. The Company will continue to emphasize its
relationships with small- and medium-sized producers who often use the
Company as a primary underwriter of workers' compensation insurance.

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Operating Strategy

Superior National intends to continue to focus on the bottom line while
completing the integration of Superior Pacific and BIG. The key elements of its
strategy to maintain operating margins in its business are:

- Focus on Specialized Market Segments. The Company's experienced
management team utilizes a sophisticated information system to focus the
Company's business on selected policy sizes and employment
classifications that management believes provide the greatest opportunity
for profitability.

- Underwriting Discipline. Following the advent of open rating in
California in 1995, some California workers' compensation insurers have
reduced premium rates substantially to increase or maintain market share.
The Company has not followed this practice and has maintained
consistently stringent underwriting policies to maintain gross profit
margins. As a result, although the Company experienced declines in
premium until acquiring SPCC, from 1993 to 1997 the Company's combined
ratio from continuing operations improved from 100.2% to 90.9%.

CALIFORNIA WORKERS' COMPENSATION INSURANCE MARKET

California is the country's largest workers' compensation insurance market.
It is composed of (i) the State Fund, (ii) companies, including BIG, that write
workers' compensation insurance in California but have significant writings in
other lines of business and/or in other states, and (iii) the Company, which,
prior to the Acquisition, is the one private sector company that writes
exclusively workers' compensation insurance specifically focused in California.

The State Fund, which is obligated to write workers' compensation insurance
for any applicant, including those turned down by the private sector carriers,
is the largest underwriter of workers' compensation insurance in California,
accounting for approximately 19% of the direct written premium in California in
1996. Because the State Fund must accept all risks, its combined ratios have
historically been much higher than those of the private sector carriers. Despite
these results, the State Fund has consistently achieved profitability through
the investment income earned on its large invested asset base. As of December
31, 1997, the State Fund had invested assets of approximately $7.1 billion and
statutory capital and surplus of approximately $1.6 billion. The State Fund
currently maintains an "A" claims paying ability rating from Standard & Poor's
Corporation ("S&P") and an "A-" rating from A.M. Best. Notwithstanding its
profitability, the State Fund's relatively poor underwriting results, together
with its large size, have created a skewed perception of the underwriting
profitability of companies writing business in the California workers'
compensation insurance marketplace. Although the State Fund regularly competes
with the Company for profitable underwriting business, the Company views the
State Fund's role as the insurer of last resort to be a significant benefit
because it eliminates the need to create an assigned risk plan in which the
Company and other insurers conducting business in California would be required
to participate.

While competitive pressures in the California workers' compensation
insurance market increased with the implementation of open rating in January
1995, certain fundamentals of the workers' compensation insurance market in
California recently have improved. For 1996, the latest year for which
information is available, total direct workers' compensation written premium in
California leveled out at approximately $5.0 billion as compared to
approximately $9.0 billion in 1993, as the market began to experience rate
stabilization. Based on the Company's analysis of data obtained from the
California Workers' Compensation Insurance Rating Bureau ("WCIRB") and other
sources, this trend continued in 1997, as demonstrated by a slight improvement
in premium pricing of approximately 0.5% for the year ended December 31, 1997 as
compared to 1996. Additionally, anti-fraud legislation enacted in 1993 continues
to have a positive effect on underwriting results by addressing fraudulent
claims and medical and legal expenses. These improvements have resulted in a
reduction in the frequency of claims in the California workers' compensation
insurance market. However, beginning in 1997, the Company has recognized an
increase in claim severity for injuries sustained in 1995 and thereafter.
Management has taken steps to address this issue by undertaking a Claim Severity
Management Program. BIG also experienced increased claim severity in 1997 and in
early 1998.

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EFFECT OF THE ACQUISITION

After giving effect to the Acquisition, the Company believes it will be
better positioned than its competitors to compete successfully in the post-open
rating California workers' compensation insurance market, while also reducing
somewhat its dependence on the California market for growth and profitability.
The Company believes it will benefit from its focus on workers' compensation
insurance, and that its leadership position in the California market will allow
it to offer insureds and producers outstanding service, innovative loss control
programs, and competitive pricing. The national presence provided by the
Acquisition will give the Company some diversification from the California
market, offering what the Company believes are attractive growth opportunities
in a number of markets. The Company continues to believe that pricing and
underwriting policies designed specifically for workers' compensation insurance
means that segment of its business should perform better financially than the
workers' compensation insurance business of insurers who offer workers'
compensation policies to insureds as part of a package of insurance.

EXPERIENCED MANAGEMENT; BUSINESS RELATIONSHIPS WITH ZURICH AFFILIATES

The Company is led by an experienced management team, with the Chief
Executive Officer and the Chief Operating Officer having a combined 60 years of
workers' compensation insurance business experience, both in and outside of
California. The experience of management and the Company's sophisticated data
processing systems allow the Company to react quickly to positive and negative
developments in its markets.

In addition, the Company benefits from business relationships with
affiliates of Zurich, which have provided financing and access to their
expertise and products, including claim management services and reinsurance. The
Company currently maintains a facility that allows it to offer certain
policyholders insurance policies written by Zurich Centre Insurance Company, a
Zurich affiliate having an A.M. Best "A" rating. Affiliates of Zurich are
providing services that the Company has integrated into its Claim Severity
Management Program. Furthermore, in December 1997, Centre Solutions (Bermuda)
Ltd. ("Centre Solutions"), an affiliate of Zurich, purchased $10.0 million of
the Trust Preferred Securities. In addition, in connection with the Acquisition,
Zurich Centre Group LLC or its designee will purchase BICO from the Company and
establish an underwriting arrangement with the Company for a fee equal to 2.5%
of direct written premium plus a pass through of all related expenses.

EFFECT OF EQUITY FINANCINGS; RELATIONSHIPS AMONG THE COMPANY, IP, AND ZURICH

Effect of Equity Financings; Ownership of IP. IP is playing a significant
role in the Equity Financings. Following the Acquisition and assuming no
exercise of the Standby Commitment, the IP partnerships would own in the
aggregate approximately 7.7 million shares and 528,480 warrants, representing
approximately 43% of the then outstanding Common Stock (approximately 38% on a
diluted basis). In addition, certain parties having business relationships with
IP, primarily, Centre Solutions, CentreLine Reinsurance Limited ("CentreLine"),
International Insurance Investors, L.P. ("III"), International Insurance
Advisors, Inc. ("IIA"), and other related parties, could acquire approximately
1.3 million shares (as participants in the Rights Offering or upon exercise of
their warrant holder preemptive rights). As a result, following the Acquisition,
IP and these other parties could own in the aggregate up to approximately 9.0
million shares of Common Stock and approximately 2.6 million warrants,
representing approximately 50% of the then outstanding Common Stock
(approximately 54% on a diluted basis).

IP Delaware and IP Bermuda are investment partnerships formed in 1994 to
make equity investments in the insurance, healthcare, and insurance services
industries, and have total committed capital of $540 million. Robert A. Spass
and Steven B. Gruber, directors of the Company, are also officers and directors
of, and (together with Daniel L. Doctoroff, who has no other relationship with
the Company) own all of the voting capital stock of, the ultimate general
partner of each of IP Delaware and IP Bermuda. See "Security Ownership of
Certain Beneficial Owners and Management -- Security Ownership of Certain
Beneficial Owners," footnotes 6 and 10. Major partners include Centre
Reinsurance Limited ("Centre Re"), Keystone, Inc. (formerly the Robert M. Bass
Group, Inc.), and The Chase Manhattan Bank ("Chase"). Since their

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<PAGE> 12

formation, the partnerships have invested, or have committed to invest, in
excess of $500 million in insurance, healthcare, and insurance services
transactions.

The partnerships within IP II were formed to make investments similar to
those made by IP Delaware and IP Bermuda. Robert A. Spass and Bradley E. Cooper,
directors of the Company, are also officers of Capital Z, the ultimate general
partner of the IP II partnerships. Each of Messrs. Spass and Cooper owns 9.9% of
the voting capital stock of Capital Z. No person or entity owns 10% or more of
the voting capital stock of Capital Z. See "Security Ownership of Certain
Beneficial Owners and Management -- Security Ownership of Certain Beneficial
Owners," footnote 7. The partnerships within IP II expect to have committed
capital in excess of $1.5 billion. Major partners will be Zurich Insurance
Group, Inc., Centre Re, and Chase. Capital Z executed the Stock Purchase
Agreement and subsequently assigned its rights and obligations thereunder to IP
II.

In the event that IP is required to purchase all of the shares under the
Standby Commitment, then the IP partnerships would own in the aggregate
approximately 14.1 million shares and 528,480 warrants, representing
approximately 79% of the then outstanding Common Stock (approximately 68% on a
diluted basis). Furthermore, IP, Centre Solutions, CentreLine, III, IIA, and
other related parties would own in the aggregate approximately 14.1 million
shares and approximately 2.6 million warrants, representing approximately 79% of
the then outstanding Common Stock (approximately 78% on a diluted basis).

Currently, IP Delaware and IP Bermuda respectively beneficially own
1,375,547 and 765,304 shares of Common Stock or approximately 23.1% and 12.8% of
the outstanding Common Stock. IP II does not currently own any Common Stock. IP
Delaware and IP Bermuda purchased their shares in April 1997 in connection with
the Company's financing of its acquisition of Pac Rim. Robert A. Spass and
Steven B. Gruber, directors of the Company, are also officers and directors of,
and (together with Daniel L. Doctoroff who has no other relationship to the
Company) own all of the voting capital stock of, the ultimate general partner of
each of IP Delaware and IP Bermuda. Mr. Spass and Bradley E. Cooper, a director
of the Company, are officers of Capital Z Partners, Ltd. ("Capital Z"), the
ultimate general partner of IP II. Each of Messrs. Spass and Cooper owns 9.9% of
the voting capital stock of Capital Z. No person or entity owns 10% or more of
the voting capital stock of Capital Z.

III engaged in a transaction with the Company in 1992 that involved the
Company's issuing $11.0 million in promissory notes (which were repaid in 1994),
the Company's 14.5% Senior Subordinated Voting Notes due April 1, 2002 (the
"Voting Notes"), and 1,616,886 warrants (some of which were issued to the
Company's management). The warrants have been distributed to and (to the extent
not transferred to unaffiliated parties) are held by the partners of III, one of
which is an affiliate of Centre Solutions, subject to a revocable agency
relationship with IIA that allows IIA to exercise rights set forth in the
warrants and with respect to the Common Stock issuable upon their exercise. The
Voting Notes are held directly by III and allow III to vote the number of shares
of Common Stock that may be purchased upon exercise of the warrants originally
issued to III (1,566,465 votes at present, as some of the warrants issued to
management have since been cancelled) in director elections and removals,
amendments to such voting rights, and changes to the authorized number of
directors. Some of III's management are also involved in IP. Robert A. Spass, a
director of the Company, is an officer of IIA and has voting power over all of
the capital stock of the general partner of III; however, pursuant to an
agreement between the general partner's board of directors and Mr. Spass, he
makes no voting or investment decisions with respect to the securities of the
Company held by such general partner. Bradley E. Cooper, a director of the
Company, was an officer of IIA from 1990 to 1994.

Participation of Zurich. Zurich is part of the multinational Zurich
Insurance Group. Zurich is the ultimate owner of CentreLine and Centre
Solutions, both of which have made investments in the Company, as discussed
below. In addition, several affiliates of Zurich are significant investors in
some of the IP partnerships.

CentreLine completed a $20.0 million financing transaction with the Company
in 1994 under which CentreLine received 579,356 warrants (which if exercised
would represent approximately 8.9% of the presently outstanding Common Stock).
The preferred securities that were issued by an affiliate of the Company to an
affiliate of Centre Solutions in connection with this transaction have since
been redeemed. Steven Germain, a director of the Company, is an officer and
director of CentreLine.

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<PAGE> 13

Centre Solutions, which is an affiliate of CentreLine, holds 395,128
warrants (which if exercised would represent approximately 6.2% of the presently
outstanding Common Stock), which were transferred to it by an affiliate that
received them through an investment in III. III received these warrants, as
discussed above, in connection with its 1992 investment in the Company. In
addition, an affiliate of Centre Solutions is a significant limited partner in
some of the IP partnerships. Mr. Germain is also an officer and director of
Centre Solutions.

In connection with the Equity Financings, Zurich is receiving 205,520 of
the 734,000 warrants (the "Commitment Fee Warrants") being issued to IP in
consideration of IP's agreeing to provide the Standby Commitment. Zurich is
receiving these warrants because at the time the Acquisition was being
negotiated, IP II was in the process of being formed. As a condition to entering
into the Acquisition Agreement, FHC required assurances that funding would exist
in IP II to allow it to meet its obligations to fund the Acquisition. Zurich,
anticipating its major investment in IP II, provided FHC with the necessary
assurances and, in exchange, received from IP a portion of the Commitment Fee
Warrants that IP was to receive under the Stock Purchase Agreement dated May 5,
1998 among the Company and IP (the "Stock Purchase Agreement"). Separately, the
Company is selling BICO to Zurich Centre Group LLC, an affiliate of Zurich, or a
designee of Zurich Centre Group LLC. See "-- Disposition of BICO." Other than
with respect to the transactions described above and except for any
participation that they may have as investors in any of the IP partnerships,
Zurich and its affiliates are not actively involved in any other aspect of the
Acquisition or the Equity Financings.

Background to the Acquisition and Equity Financings. The degree of
ownership that IP and its related parties would have upon consummation of the
Acquisition was an issue of concern to the Board of Directors during the period
when the Company negotiated the Acquisition and the Equity Financings. The Board
was particularly concerned that IP would have the ability to further influence
the Company's management and policies and was aware that such a concentration of
ownership could delay or prevent a change in control of the Company or have a
depressive effect on the trading market for the Company's equity securities.
However, these concerns were reduced to some degree by the knowledge that "IP"
constitutes a number of entities not under common control, with some diversity
of ownership and related, but not necessarily identical, investment objectives
and motivations. While for convenience "IP" is referred to in this Prospectus as
though it were a single entity, the differences among the IP partnerships,
including diversity in ownership, term of existence, and management personnel,
are significant enough that all of the IP partnerships may not necessarily act
in concert on every matter. Furthermore, to reduce the impact of IP's and its
related parties' ownership of the Company, the terms of the Stock Purchase
Agreement were negotiated to restrict IP's and its related parties' voting
rights and ability to acquire additional shares of Common Stock. Finally, the
Board of Directors believes that aspects of the relationship with IP are
beneficial to the Company's ability to continue its growth and take advantage of
opportunities to complete acquisitions as they arise. The Board of Directors
determined that these advantages, in addition to the willingness of IP to make
equity commitments months in advance of the consummation of the Acquisition, and
to do so to an extent that convinced FHC that the Company, although
significantly smaller than BIG in terms of assets and direct written premium,
could complete the Acquisition, outweighed the concerns raised by this
concentration of control.

The terms of the Acquisition were negotiated by J. Chris Seaman, an
Executive Vice President and the Chief Financial Officer of the Company, with
the assistance of Bradley E. Cooper, a director of the Company who is affiliated
with parties related to IP. These negotiations were overseen by C. Len
Pecchenino, the Company's Chairman of the Board. Because of the conflict of
interest with Messrs. Spass, Gruber, and Cooper, independent directors of the
Company were designated by the Board of Directors to negotiate, on behalf of the
Company, the terms of Stock Purchase Agreement, including the $3.9 million
transaction fee payable to IP and the Commitment Fee Warrants to purchase
734,000 shares of Common Stock, which are to be issued in consideration of the
Standby Commitment. Mr. Pecchenino and Thomas J. Jamieson, in consultation with
the Company's lawyers and investment bankers, performed that function.

The Board, in consultation with Donaldson, Lufkin & Jenrette Securities
Corporation ("DLJ"), investigated a number of transaction forms and terms before
determining to finance the Acquisition with the Equity Financings and the Senior
Debt Financing. The Board of Directors determined that a majority of the

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<PAGE> 14

financing for the Acquisition should be equity in order to avoid incurring
excessive debt obligations and to provide the Company with additional
stockholders' equity, which it believes will be viewed favorably by rating
agencies, such as A.M. Best. Further, in negotiations with FHC it became clear
that the Company would have to guarantee the availability of its financing, thus
the Company needed committed financing that it could be confident would be
available at the designated time. This need made it impractical to structure the
financing solely in reliance upon transactions dependent upon the decisions of a
large group of private purchasers or upon access to the public market at a
future date due to the risk that the market would be unfavorable and no
financing transaction meeting the Company's needs could be completed on a timely
basis. The Company determined, therefore, to complete the equity transactions
with IP, in the form of the IP Stock Issuance and the Stock Offering, backed by
the Standby Commitment, because it had assisted the Company in procuring the
Acquisition; had communicated its desire and ability to enter quickly into a
private equity investment agreement with the Company committing it to provide a
substantial portion of the Acquisition price, which allowed the Company to
convince FHC that it could finance the Acquisition; and was an investment group
known to the Company. The IP Stock Issuance, in conjunction with the Standby
Commitment, gave the Company and FHC confidence that the Company would raise the
equity financing necessary to complete the Acquisition, which, in turn, upon the
advice of DLJ, also made the likelihood of successfully completing the Senior
Debt Financing significantly greater.

RISK FACTORS

The success of the Acquisition depends in part on the ability of the
Company's management to coordinate the operations of the business enterprises of
the Company and BIG. There can be no assurance that the coordination necessary
to realize the expected benefits of the Acquisition will be achieved. In
addition, the Company has identified longer-term economies of scale it believes
can be achieved through integration of functions over a period of several years.
There can be no assurance that the Company will be able to realize the
anticipated economies of scale, and the failure to realize them could adversely
affect the Company's cash flow and earnings before taxes. Finally, the Company's
competitive position is dependent in part on its rating by A.M. Best and other
rating agencies. There is no direct relationship between a rating established by
A.M. Best and the investment ratings issued by the several securities rating
firms. An A.M. Best rating is purported to be an overall measure of the
financial strength of an insurance enterprise for use primarily by producers and
consumers of insurance products, rather than an evaluation of an individual
security or investment. Although A.M. Best has placed the Company's "B+" rating
under review with positive implications, there can be no assurance that any of
A.M. Best, other insurance rating agencies, or any of the investment rating
agencies will view the completed Acquisition favorably. See "Risk Factors."

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THE STOCK OFFERING

The Stock Offering............ The Stock Offering consists of the Rights
Offering and the Employee Participation, each
as described herein, and involves a total of up
to 6,544,043 shares of Common Stock at a
purchase price of $16.75 per share. The Stock
Offering will commence on November 5, 1998 and
will expire fifteen days thereafter (unless
extended by the Board of Directors) on November
20, 1998 (the "Expiration Date").

Need for Immediately Available
Funds......................... In order to enable the Company to complete the
Acquisition as soon as possible after the
Expiration Date, all Subscription Price
payments must be in immediately available funds
or must clear on or prior to the Expiration
Date. HOLDERS EXERCISING RIGHTS IN THE WEEK
PRIOR TO THE EXPIRATION DATE ARE URGED TO
DELIVER IMMEDIATELY AVAILABLE FUNDS TO THE
SUBSCRIPTION AGENT, BY WIRE TRANSFER IF
POSSIBLE. Although personal checks will be
accepted, if they have not cleared by the
Expiration Date the subscription will not be
valid. SEE "THE STOCK OFFERING -- EXERCISE OF
RIGHTS."

Use of Proceeds............... The maximum gross proceeds of the Stock
Offering will be $109.6 million, in the event
all Rights are exercised. The Company intends
to use the proceeds of the Stock Offering,
warrant holder exercises of preemptive rights,
the proceeds of the Standby Commitment (if
necessary) and approximately $94.0 million of
gross proceeds obtained from the IP Stock
Issuance (with these Equity Financings expected
to total $200.0 million in gross proceeds),
together with approximately $110.0 million of
gross proceeds obtained from the Senior Debt
Financing, to acquire BIG from FHC for $256.5
million in cash and to contribute approximately
$28.5 million to the capital of BIG to replace
the funds spent by FHC in purchasing the
reinsurance to fund the Loss Reserves
Guarantee. The amounts obtained from the Equity
Financings and the Senior Debt Financing in
excess of the purchase price for BIG and
required capital contributions may be used to
reduce the amount of Senior Debt Financing
obtained, and, if not will be used for
transaction costs in connection with the
Acquisition and the related financing
transactions, for capital for the Company's
insurance subsidiaries, and for general
corporate purposes. See "Use of Proceeds" and
"Acquisition of Business Insurance Group, Inc."

Shares of Common Stock
Outstanding after Stock
Offering.................... Based on the number of shares outstanding on
the Rights Offering Record Date and assuming
that no outstanding options or warrants are
exercised, and that all Rights are exercised, a
maximum of shares of Common Stock
will be outstanding following the Stock
Offering and the IP Stock Issuance.

Return of Funds Without
Interest if the Acquisition
Fails to Close................ The proceeds of the Stock Offering, together
with the proceeds of the Standby Commitment (if
necessary) the IP Stock Issuance, the exercise
of preemptive rights by warrant holders, and
the

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<PAGE> 16

Senior Debt Financing, will be used to
consummate the Acquisition. The closing of the
Stock Offering is conditioned upon the
simultaneous closing of the Acquisition and the
other related financing transactions. If the
Acquisition does not close (including due to
the failure of the Company to consummate the
other financing transactions), the Subscription
Agent will return subscription funds received
for exercise of the Rights without interest.

Issuance of Common Stock...... Certificates representing shares of Common
Stock purchased in the Stock Offering will be
delivered as soon as practicable after the
]Closing (expected to be two to three weeks
after the Expiration Date). See "The Stock
Offering -- The Rights."

Subscription Agent............ Wilmington Trust Company has been retained by
the Company as its Subscription Agent. See "The
Stock Offering -- Subscription Agent."

Information Agent............. Corporate Investor Communications, Inc. ("CIC")
has been retained by the Company as its
Information Agent. See "The Stock
Offering -- Information Agent."

THE RIGHTS OFFERING

The Rights.................... Pursuant to the Rights Offering, the Company
will distribute to each holder of Common Stock
(excluding IP Delaware and IP Bermuda), and to
each of the warrant holders (excluding warrant
holders exercising preemptive rights with
respect to the IP Stock Issuance) as of the
Record Date, one transferable Right for each
share of Common Stock or, in the case of
warrant holders, Common Stock equivalent, held,
and each Right will entitle the holder thereof
to receive, upon payment of the $16.75 per
share Subscription Price, one share of Common
Stock. An aggregate of 6,544,043 Rights
(including Rights issued under the Employee
Participation) will be distributed. Once a
holder has exercised a Right, that exercise may
not be revoked. The Rights issued in the Rights
Offering, once distributed and until the
Expiration Date, are intended to be freely
transferable.

Subscription Price............ $16.75 in cash per share of Common Stock.

Record Date................... Friday, October 30, 1998.

Expiration Date............... Friday, November 20, 1998, at 5:00 p.m., New
York City time, unless extended. The Company
may extend the Expiration Date, in its sole
discretion, and will announce any extension by
not later than 9:00 a.m., New York City time,
on the business day following the previously
scheduled Expiration Date. Any extension of the
Expiration Date will be for at least three
Nasdaq trading days. See "The Stock
Offering -- Expiration Date."

Transferability of Rights..... The Rights distributed in the Rights Offering
will be transferable and will be evidenced by
transferable subscription certificates
("Subscription Certificates"). It is expected
that the Rights (not including those issued
under the Employee Participation) will trade on
Nasdaq under the symbol "SNTLR" until the close
of business on the last Nasdaq trading day
prior to the Expiration Date. Certain
registered broker-dealers have indicated that
they intend to make a

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<PAGE> 17

market in the Rights during the period the
Rights are outstanding. No assurance can be
given, however, that a market for the Rights
will develop or, if such a market develops, how
long it will continue, nor can any assurance be
given as to a price sellers of Rights may
receive. For holders not able to sell Rights in
this fashion, the Subscription Agent will
attempt to execute a sale of Rights upon
delivery of a Subscription Certificate, with
the instruction for sale contained on it,
properly executed to the Subscription Agent.
The Subscription Agent cannot attempt sales
under instructions received later than 11:00
a.m., New York City time, on the third Nasdaq
trading day preceding the Expiration Date.
There can be no assurance that the Subscription
Agent will be able to sell any Rights or as to
the price that the Subscription Agent will be
able to obtain if it is able to effect any such
sale. See "The Stock Offering -- Method of
Transferring Rights."

How to Exercise Rights........ Rights may be exercised by properly completing
and signing the Subscription Certificate and
forwarding it, with payment of the Subscription
Price for each share of Common Stock subscribed
for pursuant to the Rights, to the Subscription
Agent on or prior to the Expiration Date. THE
SUBSCRIPTION AGENT MUST HAVE IMMEDIATELY
AVAILABLE FUNDS ON THE EXPIRATION DATE FOR A
SUBSCRIPTION TO BE VALID. Although personal
checks will be accepted, if they have not
cleared by the Expiration Date, the
Subscription will not be valid. If the mail is
used to forward Subscription Certificates and
payment, it is recommended that insured,
registered mail be used. Delivery will also be
accepted by courier or by hand at the office of
the Subscription Agent. No interest will be
paid on subscription funds delivered to the
Subscription Agent. See "The Stock Offering --
Exercise of Rights." Once a holder of Rights
has exercised his or her Rights, that exercise
may not be revoked. See "The Stock
Offering -- No Revocation."

How Foreign and Certain Other
Stockholders Can Exercise
Rights...................... In the event Subscription Certificates cannot
be mailed to persons whose addresses are
outside the United States or who have an APO or
FPO address, such certificates will be held by
the Subscription Agent for their account. To
exercise their Rights, these holders must
notify the Subscription Agent of their desire
to exercise before 11:00 a.m., New York City
time, on the third Nasdaq trading day preceding
the Expiration Date, and must establish to the
satisfaction of the Company that their exercise
is permitted under applicable law. If such a
holder does not notify the Subscription Agent
and provide acceptable instructions to the
Subscription Agent before that deadline, his or
her Rights will be sold, if feasible, and the
net proceeds, if in excess of $5.00 (after
expenses of sale), will be remitted to such
holder. Any net proceeds not distributed will
be retained by the Company for general
corporate purposes. See "The Stock
Offering -- Foreign and Certain Other
Stockholders."

15
<PAGE> 18

Persons Holding Shares or
Warrants, or Wishing to
Exercise Rights, Through
Others...................... Persons holding shares of Common Stock or
warrants and receiving the Rights distributed
with respect thereto through a broker, dealer,
commercial bank, trust company, or other
nominee, as well as persons holding
certificates of Common Stock or warrants
personally who would prefer to have such
institutions effect transactions relating to
the Rights on their behalf, should contact the
appropriate institution or nominee and request
it to effect the transaction for them. See "The
Stock Offering -- Exercise of Rights."

Warrant holders exercising
preemptive rights............. The Company's warrant holders have preemptive
rights that allow them to purchase Common Stock
under the terms of the IP Stock Issuance. If
they do not choose do so, they will receive
Rights under the terms of the Rights Offering.
Warrant holders who decide to purchase Common
Stock directly under the terms of the IP Stock
Issuance will have the opportunity to purchase
one share per Common Stock equivalent share
they hold at the same $16.75 per share price to
be paid by IP. These warrant holders will be
excluded from the Rights Offering. To reflect
that exclusion, the size of the Rights Offering
will be reduced by the number of shares being
purchased by warrant holders exercising their
preemptive rights to buy under the IP Stock
Issuance, but the one for one distribution
ratio for the Rights will not be changed. The
total number of shares of Common Stock issuable
to warrant holders is not affected by their
decision to participate in the private sale
under the terms of the IP Stock Issuance rather
than in the Rights Offering.

Certain Federal Income
Tax Considerations.......... In general, existing stockholders as of the
Record Date (other than holders of shares of
restricted Common Stock which were issued
pursuant to the Company's equity incentive
plans, but for which a valid Section 83(b)
election has not been made in accordance with
the Internal Revenue Code of 1986, as amended
(the "Code"), ("Restricted Stock") receiving
Rights pursuant to the Employee Participation)
most likely will not recognize taxable income
in connection with the issuance to them or
exercise by them of Rights. Holders of warrants
who have exercised their preemptive rights to
purchase shares under the terms of the IP Stock
Issuance most likely will not recognize taxable
income, while holders of warrants who have not
exercised preemptive rights in connection with
the IP Stock Issuance and instead are issued
Rights pursuant to the Rights Offering most
likely will be treated as having received a
taxable distribution of the right to acquire
shares of Common Stock and, accordingly, would
recognize taxable income in connection with the
issuance of Rights to them in an amount equal
to the fair market value of the Rights
distributed (determined at the time of
issuance). Thereafter, holders of warrants will
not recognize additional taxable income in
connection with the exercise by them of the
Rights. See "Certain Federal Income Tax
Considerations."

16
<PAGE> 19

EMPLOYEE PARTICIPATION

Terms of Participation........ Pursuant to the Employee Participation, the
Company will distribute to each employee and
consultant of the Company holding as of the
Record Date vested and unvested stock options,
or shares of Restricted Stock, the same form of
Right issued in the Rights Offering, except for
contractual restrictions on transferability.
The shares of Common Stock purchased under the
Employee Participation by payment of the $16.75
Subscription Price and delivery of a
subscription agreement will be subject to
contractual restrictions, primarily a one-year
restriction on transferability. Rights issued
under the Employee Participation will not be
listed for trading on Nasdaq. Under the terms
of the Employee Participation, the Board of
Directors has approved the payment of a portion
of the Subscription Price in the form of a
secured promissory note. The maximum amount of
the loan by the Company will be determined
based on a calculation of 66% of the value of
the securities of the Company pledged in
connection therewith. See "The Stock
Offering -- Employee Participation."

Participation Procedures...... Employees and consultants may receive Rights in
the Employee Participation only upon delivery
of a participation agreement ("Employee
Participation Agreement") in which they will
agree the Rights are not transferable.

Subscription Price............ $16.75 per share of Common Stock.

Record Date................... Friday, October 30, 1998.

Non-Transferability of
Rights........................ Rights distributed in the Employee
Participation will not be transferable and
"stop transfer" instructions will be given to
the Subscription Agent. Any attempted transfers
of a Right distributed in the Employee
Participation will be void.

How to Exercise Rights
Under Employee
Participation............... A Right issued under the Employee Participation
may be exercised by properly completing and
signing the Subscription Certificate and
forwarding it, together with (i) payment of the
Subscription Price, in the form of cash, an
employee participation promissory note (a
"Participation Note"), or a combination
thereof, (ii) a Securities Pledge Agreement,
and (iii) a Stock Subscription Agreement, to
the Subscription Agent. THE SUBSCRIPTION AGENT
MUST RECEIVE IMMEDIATELY AVAILABLE FUNDS, AND
THE OTHER DOCUMENTATION, ON OR PRIOR TO THE
EXPIRATION DATE. Additionally, if securities of
the Company other than options, Restricted
Stock, and Common Stock issuable upon exercise
of the Rights are being pledged to secure a
Participation Note, they must be received by

17
<PAGE> 20

the Company's Corporate Secretary before the
Expiration Date. If mail is used to forward the
documentation, it is recommended that insured,
registered mail be used. Delivery will also be
accepted by courier or by hand. No interest
will be paid on subscription funds delivered to
exercise Employee Participation Rights. Once a
participant has exercised his or her Rights,
that exercise may not be revoked. See "The
Stock Offering -- No Revocation."

Certain Federal Income
Tax Considerations.......... The Company believes that employees,
consultants and holders of Restricted Stock who
are issued Rights in connection with the
Employee Participation will not recognize gain
or loss upon receipt of the Rights because the
Rights should not be treated as having a
readily ascertainable fair market value within
the meaning of Treasury Regulation Section
1.83-7(b) when issued. However, each employee,
consultant or holder of Restricted Stock would
recognize ordinary income, if any, at the time
the Rights are exercised in an amount equal to
the difference between the fair market value of
the Common Stock (at the time of exercise) and
the Subscription Price in accordance with
Section 83 of the Code. See "Certain Federal
Income Tax Considerations."

Standby Commitment............ To assure the Company that a total of $200.0
million in proceeds will be provided by the
Stock Offering, the IP Stock Issuance, and the
exercise of warrant holder preemptive rights to
purchase stock under the terms of the IP Stock
Issuance, IP has agreed to purchase up to
6,328,358 shares of Common Stock, with the
exact number being that number of shares
necessary to bring the total proceeds of the
Stock Offering, the IP Stock Issuance (together
with related exercises of warrant holder
preemptive rights), and the Standby Commitment
to $200.0 million. Any shares purchased
pursuant to the Standby Commitment will be
purchased privately at the Subscription Price
under the terms and conditions of the Stock
Purchase Agreement. IP Delaware and IP Bermuda
are not participating in the Stock Offering.

The Standby Commitment is in addition to IP's
agreement to purchase a minimum of 5,611,940
shares of Common Stock at $16.75, or
approximately $94.0 million in the aggregate,
pursuant to the IP Stock Issuance. The purpose
of the Standby Commitment is to assure the
Company of at least $200.0 million in proceeds
from the sale of its Common Stock in the Equity
Financings to complete the Acquisition.

Commitment Fee................ In consideration of the commitment to provide
the Standby Commitment, regardless of whether
the Stock Offering and Standby Commitment are
consummated, IP will receive a commitment fee
consisting of the Commitment Fee Warrants to
purchase 734,000 shares of Common Stock at
$16.75 per share. A portion of the Commitment
Fee Warrants will be issued to Zurich in
consideration of certain financing commitments
made by Zurich to IP II. Rights will not be
issued to the recipients of the Commitment Fee
Warrants in respect of those warrants.

18
<PAGE> 21

SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA

The following table sets forth summary consolidated financial information
with respect to Superior National and BIG for the periods indicated. The
historical financial information was prepared in accordance with GAAP. The
financial information for Superior National as of June 30, 1998 and 1997 is
unaudited; however, in management's opinion, it includes all adjustments,
including normally occurring accruals, that are necessary for a fair
presentation of results for such interim periods. The financial information for
BIG as of June 30, 1998 and 1997 and as of December 31, 1995, 1994, and 1993, as
well as for the years ended December 31, 1994 and 1993 and the six months ended
June 30, 1998 and 1997, is unaudited. Interim results are not necessarily
indicative of results for the full year. The pro forma consolidated statement of
operations data for the six months ended June 30, 1998 and the year ended
December 31, 1997 is unaudited and presents results for the Company as if the
Acquisition had been consummated as of the beginning of each period presented.

BIG is an indirect wholly owned subsidiary of FHS, and as a subsidiary is
not subject to the same financial reporting requirements, therefore audited
financial information is not available for all periods. For the same reason,
earnings per share information is not meaningful.

The pro forma information is presented for illustrative purposes only and
is not necessarily indicative of the results of operations or financial position
that would have occurred had the Acquisition been consummated on the dates
assumed, nor is the pro forma information intended to be indicative of the
Company's future results of operations.

19
<PAGE> 22

SUPERIOR NATIONAL INSURANCE GROUP, INC.

SUMMARY FINANCIAL DATA

<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEAR ENDED DECEMBER 31,
-------------------- ----------------------------------------------------
1998 1997 1997(1) 1996 1995 1994 1993
------- ---------- ---------- ------- ------- -------- --------
(RESTATED) (RESTATED)
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
REVENUES:
Net premiums earned.................... $50,206 $64,388 $140,920 $88,648 $89,735 $110,418 $153,585
Total Revenues................ 58,220 69,909 153,594 96,417 99,519 119,467 163,135
EXPENSES:
Claim and claim adjustment expenses,
net of reinsurance................... 26,319 44,995 90,447 55,638 53,970 78,761 113,817
Underwriting and general and
administrative expenses (e.g.,
commissions)......................... 18,406 17,849 37,695 34,138 29,447 21,660 28,778
Total Expenses................ 45,739 83,345 152,032 91,190 87,830 114,470 160,931

Income before income taxes, preferred
securities dividends and accretion,
discontinued operations,
extraordinary items, and cumulative
effect of change in accounting for
income taxes......................... 12,481 (13,436) 1,562 5,227 11,689 4,997 2,204
Preferred securities dividends and
accretion, net of income tax
benefit.............................. (3,724) (907) (3,069) (1,667) (1,488) (683) --
Net income from continuing
operations........................... $ 7,816 $(8,867) $ 463 $ 3,630 $11,701 $ 3,599 $ 2,734
======= ======= ======== ======= ======= ======== ========

BASIC EPS:
Per common share:
Income from continuing operations...... $ 1.34 $ (1.91) $ 0.09 $ 1.06 $ 3.41 $ 1.05 $ 0.80
Weighted average shares outstanding.... 5,854 4,642 5,250 3,433 3,430 3,430 3,430

DILUTED EPS:
Per common share:
Income from continuing operations...... $ 0.99 $ (1.38) $ 0.07 $ 0.75 $ 2.97 $ 0.70 $ 0.58
Weighted average shares outstanding.... 7,912 6,411 7,016 4,826 3,942 5,122 4,753
</TABLE>

<TABLE>
<CAPTION>
AS OF JUNE 30, DECEMBER 31,
------------------- ----------------------------------------------------
1998 1997 1997(1) 1996 1995 1994 1993
-------- -------- -------- -------- -------- -------- --------
(UNAUDITED) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET
ASSETS:
Total cash and investments
- -- carrying value.................. $191,164 $244,326 $242,116 $149,440 $ 49,030 $ 68,595 $ 45,982
- -- market value.................... 191,164 244,326 242,116 149,440 49,030 68,591 46,212
Investments withheld from a related
party reinsurer.................. -- -- -- -- 114,921 108,283 104,197
Reinsurance receivables............ 55,474 33,450 53,082 25,274 39,613 68,129 71,003
Total Assets.............. $396,036 $395,399 $429,473 $323,830 $240,781 $286,776 $264,098
======== ======== ======== ======== ======== ======== ========

LIABILITIES AND STOCKHOLDERS'
EQUITY:
Claim and claim adjustment
expenses......................... $154,843 $213,686 $201,255 $115,529 $141,495 $171,258 $171,038
Total Liabilities......... 236,290 316,464 268,378 255,068 176,256 227,622 224,044
Total Stockholders'
Equity.................. $ 58,695 $ 53,990 $ 59,818 $ 45,191 $ 43,480 $ 40,364 $ 40,055
======== ======== ======== ======== ======== ======== ========
</TABLE>

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

(1) The information for the year ended December 31, 1997 includes the financial
data of SPCC (formerly The Pacific Rim Assurance Company) from April 1,
1997.

20
<PAGE> 23

BUSINESS INSURANCE GROUP, INC.

SUMMARY FINANCIAL DATA(1)

<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEAR ENDED DECEMBER 31,
------------------- ----------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
-------- -------- ---------- ---------- ---------- -------- --------
(UNAUDITED) (RESTATED) (RESTATED) (RESTATED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
REVENUES:
Net premiums earned................ $215,911 $246,282 $515,272 $480,828 $390,974 $340,097 $233,341
Total Revenues............ 234,501 267,377 563,508 517,860 416,894 356,278 249,591
EXPENSES:
Claim and claim adjustment
expenses, net of reinsurance..... 182,385 176,348 443,204 381,897 245,522 218,240 169,828
Underwriting and general and
administrative expenses (e.g.,
commissions)..................... 63,156 70,037 170,070 111,477 118,572 75,364 49,262
Total Expenses............ 252,469 250,828 623,655 493,363 369,844 304,926 244,698

Income (loss) before income
taxes............................ (17,968) 16,549 (60,147) 24,497 47,050 51,352 4,893
Net income (loss) from continuing
operations....................... $ (7,777) $ 14,424 $(30,641) $ 22,906 $ 35,377 $ 37,520 $ 6,354
======== ======== ======== ======== ======== ======== ========
</TABLE>

<TABLE>
<CAPTION>
AS OF JUNE 30, DECEMBER 31,
----------------------- -----------------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET
ASSETS:
Total cash and investments
-- carrying value.......... $ 768,203 $ 771,042 $ 763,171 $ 754,652 $529,515 $419,943 $362,133
-- market value............ 768,404 771,063 763,339 754,745 529,650 419,053 370,437
Reinsurance receivables...... 243,538 175,076 229,521 136,109 81,545 104,573 119,050
Total Assets........ $1,225,649 $1,146,967 $1,222,406 $1,093,773 $749,104 $627,855 $602,023

LIABILITIES AND STOCKHOLDER'S
EQUITY:
Claim and claim adjustment
expenses................... $ 690,515 $ 623,087 $ 728,421 $ 590,595 $443,600 $412,666 $386,194
Total Liabilities... 982,066 855,225 970,060 825,881 508,214 479,543 466,139
Total Stockholder's
Equity............ $ 243,583 $ 291,742 $ 252,346 $ 267,892 $240,890 $148,312 $135,884
========== ========== ========== ========== ======== ======== ========
</TABLE>

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

(1) The data reflects only the insurance operations of BIG that are being
acquired by the Company.

21
<PAGE> 24

The unaudited pro forma combined financial data has been derived from the
unaudited pro forma combined financial statements and notes thereto included
elsewhere in this document and should be read in conjunction with those
financial statements and notes. The summary unaudited pro forma financial
information is not necessarily indicative of future operations and should not be
construed as representative of future operations of the combined companies.

SUMMARY UNAUDITED PRO FORMA FINANCIAL STATEMENTS

ACQUISITION OF BUSINESS INSURANCE GROUP, INC.

BY SUPERIOR NATIONAL INSURANCE GROUP, INC.

PURCHASE ACCOUNTING METHOD

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1998
------------------------------------------------
PRO
FORMA
ADJUST-
MENTS PRO
SUPERIOR INC. FORMA
NATIONAL BIG (DECR.)(1) COMBINED
--------- -------- ---------- ----------

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
REVENUES:
Net premiums earned.................. $ 50,206 $215,911 $ 266,117
Other income......................... 8,014 18,590 (1,296)(a) 25,308
--------- -------- --------- ----------
Total Revenues................ 58,220 234,501 (1,296) 291,425
EXPENSES:
Claim and claim adjustment expenses,
net of reinsurance.................. 26,319 182,385 208,704
Underwriting and general and
administrative expenses............. 18,406 63,156 2,420(g) 83,982
Loss on termination of financing
transaction with a related party
reinsurer...........................
Other expense........................ 1,014 6,928 (447)(c) 6,204
(973)(d)
(4,718)(e)
4,400(b)
--------- -------- --------- ----------
Total Expenses................ 45,739 252,469 682 298,890
--------- -------- --------- ----------
Income (loss) before income taxes,
preferred securities dividends and
accretion, discontinued operations,
extraordinary items, and cumulative
effect of change in accounting for
income taxes........................ 12,481 (17,968) (1,978) (7,465)
Income tax expense (benefit)......... 4,665 (10,191) 2,874(f) (2,652)
--------- -------- --------- ----------
Net income (loss) from continuing
operations.......................... 7,816 (7,777) (4,852) (4,813)
========= ======== ========= ==========
BASIC EPS:
Per common share:
Net income (loss) from continuing
operations.......................... $ 1.34 $ (0.27)
Weighted average shares
outstanding......................... 5,854 17,794
DILUTED EPS:
Per common share:
Net income (loss) from continuing
operations.......................... $ 0.99 $ (0.24)
Weighted average shares
outstanding......................... 7,912 19,959

<CAPTION>
YEAR ENDED DECEMBER 31, 1997
-------------------------------------------------------------
PRO
FORMA
ADJUST-
MENTS PRO
SUPERIOR PAC INC. FORMA
NATIONAL(3) RIM(2) BIG(3) (DECR.)(1) COMBINED
----------- -------- ---------- ---------- --------
(RESTATED) (RESTATED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Net premiums earned.................. $140,920 $ 19,507 $515,272 $675,699
Other income......................... 12,674 1,449 48,236 (1,996)(a) 60,363
-------- -------- -------- --------- --------
Total Revenues................ 153,594 20,956 563,508 (1,996) 736,062
EXPENSES:
Claim and claim adjustment expenses,
net of reinsurance.................. 90,447 25,841 443,204 559,492
Underwriting and general and
administrative expenses............. 37,695 10,769 170,070 2,420(g) 220,954
Loss on termination of financing
transaction with a related party
reinsurer........................... 15,699 15,699
Other expense........................ 8,191 1,595 10,381 (8,326)(e) 17,432
(1,947)(d)
8,800(b)
(1,262)(c)
-------- -------- -------- --------- --------
Total Expenses................ 152,032 38,205 623,655 (315) 813,577
-------- -------- -------- --------- --------
Income (loss) before income taxes,
preferred securities dividends and
accretion, discontinued operations,
extraordinary items, and cumulative
effect of change in accounting for
income taxes........................ 1,562 (17,249) (60,147) (1,681) (77,515)
Income tax expense (benefit)......... 1,099 612 (29,506) 1,131(f) (26,664)
-------- -------- -------- --------- --------
Net income (loss) from continuing
operations.......................... 463 (17,861) (30,641) (2,812) (50,851)
======== ======== ======== ========= ========
BASIC EPS:
Per common share:
Net income (loss) from continuing
operations.......................... $ 0.09 $ (2.96)
Weighted average shares
outstanding......................... 5,250 17,190
DILUTED EPS:
Per common share:
Net income (loss) from continuing
operations.......................... $ 0.07 $ (2.68)
Weighted average shares
outstanding......................... 7,016 18,956
</TABLE>

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

(1) See explanatory notes to "Unaudited Pro Forma Financial Information."

(2) Pac Rim information is presented for the three months ended March 31, 1997
(unaudited).

(3) Derived from audited financial statements. Superior National information
includes the results of SPCC (formerly The Pacific Rim Assurance Company)
for the periods subsequent to April 1, 1997.

22
<PAGE> 25

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET

<TABLE>
<CAPTION>
AS OF JUNE 30, 1998
-------------------------------------------------------
PURCHASE
SUPERIOR ACCOUNTING PRO FORMA
NATIONAL BIG ADJUSTMENTS(1) COMBINED
-------- ---------- -------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS:
Investments................................................. $186,743 $ 717,624 $ (29,496)(a) $ 864,871
(10,000)(b)
Cash and cash equivalents................................... 4,421 50,579 29,496(a) 109,293
10,387(b)
17,509(c)
107,000(e)
177,100(f)
(7,799)(g)
(256,500)(h)
(28,500)(h)
5,600(i)
Reinsurance receivables..................................... 55,474 243,538 299,012
Premiums receivable......................................... 34,518 90,730 125,248
Deferred policy acquisition costs........................... 5,422 21,629 27,051
Goodwill.................................................... 35,248 13,813 (13,813)(k) 35,248
Other assets................................................ 74,210 87,736 (387)(b) 125,465
(17,509)(c)
(18,585)(j)
-------- ---------- --------- ----------
Total Assets........................................ $396,036 $1,225,649 $ (35,497) $1,586,188
======== ========== ========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Claim and claim adjustment expenses......................... $154,843 $ 690,515 $ 845,358
Unearned premiums........................................... 16,198 47,827 64,025
Long-term debt.............................................. 30 121,750 $(121,750)(d) 107,030
107,000(e)
Deferred credit -- negative goodwill........................ 80,333(h) 53,535
5,600(i)
(18,585)(j)
(13,813)(k)
Accounts payable and other liabilities...................... 65,219 121,974 (7,799)(g) 179,394
-------- ---------- --------- ----------
Total Liabilities................................... 236,290 982,066 30,986 1,249,342
Trust preferred securities.................................. 101,051 -- 101,051
Total Stockholders' Equity.......................... 58,695 243,583 177,100(f) 235,795
121,750(d)
(365,333)(h)
-------- ---------- --------- ----------
Total Liabilities and Stockholders' Equity.......... $396,036 $1,225,649 $ (35,497) $1,586,188
======== ========== ========= ==========
</TABLE>

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

(1) See explanatory notes to "Unaudited Pro Forma Financial Information."

23
<PAGE> 26

RISK FACTORS

This Stock Offering involves a high degree of risk. In addition to the
other information set forth in this Prospectus, the following risk factors
should be considered carefully in evaluating the Company and its business before
purchasing any of the shares of Common Stock. Certain statements in this
Prospectus are forward-looking and are identified by the use of forward-looking
words or phrases such as "intended," "will be positioned," "expects," is or are
"expected," "anticipates," and "anticipated." These forward-looking statements
are based on the Company's current expectations. To the extent any of the
information contained in this Prospectus constitutes a "forward-looking
statement" as defined in Section 27A(i)(1) of the Securities Act, the risk
factors set forth below are cautionary statements identifying important factors
that could cause results to differ materially from those in the forward-looking
statement.

INHERENT UNCERTAINTIES RELATING TO CERTAIN EFFECTS OF THE ACQUISITION

Recent Losses at BIG. On a consolidated basis, BIG incurred a net loss of
$30.6 million in the fiscal year ended December 31, 1997 and $7.8 million in the
six months ended June 30, 1998, with a very high combined ratio of 119.2% and
114.6%, respectively. A substantial portion of the 1997 losses was attributable
to a reserve strengthening of $75.2 million, booked in the fourth quarter of
1997, and related principally to accident years 1996 and prior and revised
estimates of claim severity from those years. The six months ended June 30, 1998
losses were attributable to increased claim and claim adjustment expenses due to
the non-renewal of an aggregate excess of loss reinsurance treaty, and
increasing claim severity. As BIG's operations will now represent a substantial
portion of the Company's business, these losses should be viewed as applicable
to the Company's business going forward. There can be no assurance that such
losses at BIG will not be repeated in the future, and the Company's overall
results would reflect these losses. See " -- Uncertainty Associated with
Estimating Reserves for Unpaid Claim and Claim Adjustment Expenses." Although
the Company believes it can improve BIG's financial performance, there are no
assurances the Company will be successful in this regard.

Decline in Premium at BIG. In the first six months of 1998, BIG's direct
written premium in California decreased by $31.8 million, as compared to the
six-month period ended June 30, 1997, precipitated by a change in BIG's
underwriting and pricing criteria implemented for policies with inception dates
after January 1, 1998. Additional factors responsible for the decline were
uncertainties created by the pendency of the Acquisition and the recent
downgrade of BIG's rating by A.M. Best from "A-" to "B++." See "Business
Insurance Group, Inc. -- Business -- Underwriting." Further reductions in direct
written premium are likely to result as the Company re-underwrites BIG's book of
business over a period of three years or more, reflecting the Company's ongoing
strategy of preserving operating margins rather than competing for accounts
solely on the basis of price. If the Company were to experience declines in
premium volume substantially greater than expected, the Company's leadership
position in the California workers' compensation insurance market could be
threatened. Further, if the Company is unable to spread sufficient premium over
its fixed costs, that could have a material adverse impact on the Company's
earnings. See "Superior National -- Business -- Strategy."

Coordination of Operations. The success of the Acquisition in enhancing
long-term stockholder value depends in part on the ability of the Company to
coordinate and integrate the operations and the business enterprises of the
Company and BIG. As in every business combination, such coordination will
require the dedication of management resources, which may temporarily divert
attention from the day-to-day business of the Company. In addition, integration
of BIG into the Company's information systems, which the Company believes would
enhance its competitive position, is a difficult and complex task given the
relative size of BIG's operations. There can be no assurance that the
coordination necessary to realize the expected benefits of the Acquisition will
be achieved. See "Superior National -- Business -- Information Services" and
"Business Insurance Group, Inc. -- Business -- Information Services."

Negative Cash Flows. The Company expects that following the Acquisition it
will experience large negative cash flows. Negative cash flows have been
characteristic of the Company's business since the advent of open rating in
California at the beginning of 1995. Since then, claims arising under policies
written on the higher premium volumes that existed prior to 1995 have been
run-off while premium has decreased. The same

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conditions could exist at BIG. The Company believes BIG sought to enhance its
competitiveness under open rating by aggressively pricing its products, and
that, as BIG's pricing structure is integrated into the Company's, premium
volume could decline while BIG's prior year claims are run-off. Moreover, the
recently-implemented Quota-Share Arrangement will result in additional negative
cash flows. This negative cash flow will result in reduced investment income.
See "Superior National -- Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."

Change in Operating Strategy. The Company has, since reorganizing its
business in late 1993, operated as a workers' compensation insurer, with its
business focused almost entirely on California and Arizona. In 1997, 94% of the
Company's premium was written in California. Additionally, the Company has
concentrated its marketing on group programs and smaller accounts generating
less than $50,000 in annual premium, believing such accounts represent higher
margin business. The Acquisition marks a significant departure from these
strategies in that BIG is a multi-state carrier in workers' compensation
insurance. Further, BIG has traditionally marketed to larger accounts where
pricing has been more competitive. The Company's strategy will now also
encompass a focus on larger accounts, the use of reinsurance to mitigate the
pricing and persistency risk associated with these large accounts, and the
broadening of the geographic scope of its business. See "Superior
National -- Business -- Strategy." There can be no assurance that the Company
will successfully implement these strategies, or that the new strategies will
generate the expected financial benefits. If these financial benefits are not
realized, the expected advantages to the Company provided by the Acquisition may
be materially and adversely affected, with a resulting adverse impact on the
Company's financial performance.

Realization of Economies of Scale. The Company has identified economies of
scale through the combination of the BIG and Superior Pacific businesses that it
believes can be achieved over a period of years. There can be no assurance that
the Company will be able to realize the expected economies of scale within any
particular time frame or at all, or to generate additional revenue to offset any
unanticipated inability to benefit from economies of scale. See "Superior
National -- Business -- Strategy."

Dependence on Reinsurance. The Company's operating strategy after the
Acquisition includes the use of reinsurance through the Quota-Share Arrangement
to reduce the pricing and persistency risk the Company believes is associated
with the Company's plan to re-underwrite the large account book of business at
BIG. Additionally, the Loss Reserves Guarantee will be accomplished through
BIG's purchase of reinsurance prior to Closing. As a result of these
transactions, the expected benefits of the Acquisition could be materially and
adversely affected if the reinsurers fail to perform their obligations. See
" -- Importance of Reinsurance" and "Acquisition of Business Insurance Group,
Inc. -- Loss Reserves Guarantee."

UNCERTAINTY ASSOCIATED WITH ESTIMATING RESERVES FOR UNPAID CLAIM AND CLAIM
ADJUSTMENT EXPENSES

The reserves for unpaid claim and claim adjustment expenses established by
the Company and by BIG are estimates of amounts needed to pay reported and
unreported claim and related claim adjustment expenses based on facts and
circumstances then known. These reserves are based on estimates of trends in
claim frequency and severity, judicial theories of liability, market conditions,
and other factors. The establishment of adequate reserves is an inherently
uncertain process, and there can be no assurance that the ultimate liability
will not materially exceed the Company's reserves for claim and claim adjustment
expenses of Superior Pacific and BIG and have a material adverse effect on the
Company's results of operations and financial condition following the
Acquisition. Due to the inherent uncertainty of estimating reserve amounts, the
Company and BIG have found it necessary, and may over time continue to find it
necessary, to revise estimates of reserves for claim and claim adjustment
expenses in response to trends in claim frequency and severity, judicial
theories of liability, market conditions, and other factors. The historic
development of reserves for claim and claim adjustment expenses may not
necessarily reflect future trends in the development of these amounts.
Accordingly, it may not be appropriate to extrapolate redundancies or
deficiencies based on historical information. See "Superior
National -- Business -- Claim and Claim Adjustment Expense Reserves."

The Company believes there is an industry-wide increase in claim severity
in California workers' compensation insurance. Although claim frequency has
declined as expected in light of benefit and claim

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<PAGE> 28

reform after the advent of open rating in 1995, if the Company is correct in
viewing the increase in claim severity for 1995 and subsequent accident years as
a true trend and not an aberration, then the assumptions underlying claim and
claim adjustment expense reserves established for the 1995 and subsequent
accident years were flawed, and the Company's reserves could therefore be
materially understated. Thus, although the Company has recently experienced
reduced claim frequency, the impact of that reduction has been outweighed,
perhaps substantially, by an increase in claim severity for injuries sustained
in 1995 and thereafter. In response, the Company has undertaken the Claim
Severity Management Program. See "Superior National -- Business -- Claim
Severity Management Program." There can be no assurance that the Company's
severity management efforts will have the effect the Company anticipates and, if
they do not, the Company could be required to book additional reserves for
Superior Pacific for accident years 1995 and subsequent. The Company sought the
Loss Reserves Guarantee in the Acquisition Agreement in part due to its concern
that the increase in claim severity is an industry-wide trend that is also being
experienced at BIG. See "Acquisition of Business Insurance Group, Inc. -- Loss
Reserves Guarantee" and "Business Insurance Group, Inc. -- Business -- Claim and
Claim Adjustment Expenses." However, as with Superior Pacific, the Company
cannot be assured that the Loss Reserves Guarantee is adequate, particularly if
the negative trends in claim severity turn out to be more severe at BIG than at
Superior Pacific. If the Loss Reserves Guarantee is not adequate, then the
Company could be required to book additional loss reserves with respect to
losses incurred prior to the Closing. It is in part due to the Company's view
that the trends in claim severity are more uncertain in larger-premium accounts
that it has entered into (and has required BIG to enter into) the Quota-Share
Arrangement. See "Acquisition of Business Insurance Group, Inc. -- Large Account
Quota-Share Arrangement." Although the Quota-Share Arrangement may mitigate to
some degree ongoing pricing and persistency risk of large premium accounts, the
Company is relying solely on the Claim Severity Management Program and the Loss
Reserves Guarantee with respect to historic risks, and it faces continuing
uncertainty in estimating reserves with respect to retained and new premiums.

TRANSACTIONS WITH AFFILIATES; OWNERSHIP OF THE COMPANY

Concentration of Ownership. IP is playing a significant role in the Equity
Financings and, upon their consummation, will continue to own a significant
percentage of the Common Stock that will then be outstanding. Based upon the
Common Stock outstanding as of October 30, 1998, assuming all Rights are
exercised in the Stock Offering or warrant holders exercise their preemptive
rights in full, and no outstanding warrants or stock options are exercised prior
to consummation of the Equity Financings, shares of Common Stock will
be outstanding upon consummation of the Equity Financings, of which the Company
believes approximately 9.0 million shares and approximately 2.6 million warrants
(approximately 50% of the total number of shares of Common Stock that will then
be outstanding, or approximately 54% on a diluted basis) will be held in the
aggregate by IP and certain related parties. In the event that none of the
Rights are exercised in the Stock Offering and 6,328,358 shares issuable
thereunder are instead purchased by IP under the Standby Commitment, then
approximately 14.1 million shares and approximately 2.6 million warrants
(approximately 79% of the Common Stock that will then be outstanding or
approximately 78% on a diluted basis) will be held in the aggregate by IP and
certain related parties. Further, III, some of the management of which are also
involved in IP, owns all of the outstanding Voting Notes issued by the Company.
See "Security Ownership of Certain Beneficial Owners and Management" and
"Certain Relationships and Related Transactions -- 1996-1997 Transactions with
IP and Limitations on Related Party Control."

Significant Ownership by Affiliates of Zurich and Related Parties. Certain
affiliates of Zurich are limited partners of IP Delaware and IP Bermuda and hold
approximately 23% of the limited partnership interests in those funds on an
aggregate basis. They also hold a significant percentage of the limited
partnership interests in IP II. In addition, certain affiliates of Zurich
collectively own warrants to acquire 11.3% of the Common Stock on a fully
diluted basis, 4.6% of which are subject to a revocable agency relationship with
IIA. See "Security Ownership of Certain Beneficial Owners and Management" and
"Certain Relationships and Related Transactions -- Transactions with Zurich,
Including Centre Re."

Effects on Unaffiliated Stockholders. As a result of this concentration of
ownership, absent agreements to the contrary, IP and its related parties could,
if they acted together, have the potential to exercise control

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<PAGE> 29

over the Company and the Board of Directors. Five of the Company's eleven
directors either have relationships with, or became directors pursuant to rights
to nominate directors held by, such parties. Consequently, these parties have
significant influence over the management of the Company and have a significant
portion of the votes needed to approve any action requiring stockholder
approval, including adopting amendments to the Company's Certificate of
Incorporation and approving certain actions, such as mergers or sales of all or
substantially all of the Company's assets, which could materially affect the
Company's financial condition. Further, such a concentration of ownership may
have the effect of delaying or preventing a change in control of the Company
because the unaffiliated stockholders may not have sufficient voting power to
approve a potential future strategic offer for the Company by a third party that
might be attractive to the unaffiliated stockholders. This concentration of
ownership could also have a depressive effect on the trading market for the
Common Stock. However, IP and certain related parties have agreed under the
terms of the Stock Purchase Agreement to certain limitations on their ability to
acquire additional equity securities of the Company and their voting power as
stockholders. Other than with respect to the election of directors of the
Company, IP and such parties have agreed that if the aggregate number of all
shares that are voted in like manner by IP and such parties shall be greater
than 35% of the total number of shares voted, then those votes that exceed such
35% threshold shall be voted in the same proportion as the other stockholders
voted their shares with respect to the same matter. However, the disinterested
members of the Board of Directors could deem it to be in the best interests of
the Company to waive, limit, or revoke these limitations on IP, and that
determination would result in IP's having control over the Company. See "Certain
Relationships and Related Transactions -- 1996-97 Transactions with IP and
Limitations on Related Party Control."

UNCERTAIN PRICING AND PROFITABILITY

One of the distinguishing features of the insurance industry, including the
workers' compensation insurance industry, is that its products generally are
priced before its costs are known because premium rates are determined before
losses are reported. Premium rate levels are related in part to the availability
of insurance coverage, which varies according to the level of surplus in the
industry. Increases in surplus have generally been followed by increased price
competition among workers' compensation insurers. For these reasons, together
with the commencement of open rating in January 1995, the California workers'
compensation insurance business in recent years has experienced very competitive
pricing conditions and there can be no assurance as to the Company's ability to
achieve adequate pricing for its policies. Further, changes in case law, the
passage of new statutes, or the adoption of new regulations relating to the
interpretation of insurance contracts can retroactively and dramatically affect
the liabilities associated with known risks after an insurance contract is in
place. Product enhancements also present special issues in establishing
appropriate premium levels in the absence of sufficient experience with such
products' performance. See "Superior National -- Business -- California Workers'
Compensation Market" and " -- Underwriting."

The number of competitors and the similarity of products offered, as well
as regulatory constraints, limit the ability of workers' compensation insurers
to increase prices in response to declines in profitability or market demand. In
addition, the reported profits and losses of a workers' compensation insurance
company are also determined, in part, by the establishment of, and adjustments
to, reserves reflecting estimates made by management as to the amount of claim
and claim adjustment expenses that will ultimately be incurred in the settlement
of claims. The ultimate liability of the insurer for all claim and claim
adjustment expenses reserved at any given time will likely be more or less than
these estimates, and differences in the estimates may have a material adverse
effect on the insurer's financial position, results of operations, or cash flows
in the future periods. See "Superior National -- Business -- Claim and Claim
Adjustment Expense Reserves."

IMPORTANCE OF RATINGS

A.M. Best, an independent insurance rating agency, assigned the Company a
"B+" (Very Good) rating in 1995, which the Company has continued to maintain. A
"B+" rating is assigned to companies having, on balance, in A.M. Best's opinion,
very good financial strength, operating performance, and market profile when
compared to the standards established by A.M. Best, and having a good ability to
meet their ongoing

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obligations to policyholders. "B+" is A.M. Best's sixth highest rating
classification out of 15 ratings. The Company's A.M. Best rating is lower than
that of many of its competitors. There is no direct relationship between a
rating established by A.M. Best and the investment ratings issued by the several
securities rating firms, including S&P and Moody's Investment Services, Inc.
("Moody's"). An A.M. Best rating is purported to be an overall measure of the
financial strength of an insurance enterprise for use primarily by marketers and
consumers of insurance products. Investment ratings generally pertain to
individual securities, although the firms who issue ratings associated with
specific investments also issue insurance ratings that duplicate in some
respects the activities of A.M. Best. A.M. Best's ratings are not
recommendations to buy, sell, or hold securities and are subject to change at
any time. A.M. Best bases its ratings on factors that concern policyholders and
not necessarily upon factors concerning investors. There can be no assurance
that the Company's rating or future changes therein will not affect the
Company's competitive position. See "Superior National -- Business -- Ratings."
As of the date hereof, BIG is maintaining a "B++" A.M. Best rating, having been
lowered from "A-" because of BIG's recent financial performance and other
factors. There can be no assurance that the Company's rating post-closing will
be changed to reflect BIG's rating, and, should BIG be assigned a "B+" rating
following the Acquisition, the further downgrade may have a material adverse
effect on the Company's financial condition and results of operations. See
"Business Insurance Group, Inc. -- Business -- Ratings."

IMPORTANCE OF REINSURANCE

In order to reduce its underwriting risk, the Company follows the industry
practice of reinsuring a portion of its risks. In addition, reinsurance is an
important component of the Company's strategy to mitigate pricing and
persistency risks related to large premium accounts, and is the expected
mechanism for FHC to implement the Loss Reserves Guarantee. Reinsurance does not
relieve the Company of liability to its insureds for the risks ceded to
reinsurers. As such, the Company is subject to credit risk with respect to
amounts not recoverable from reinsurers. Although the Company places its
workers' compensation reinsurance with reinsurers that are "A" rated or higher
by A.M. Best and that the Company generally believes to be financially stable, a
significant reinsurer's insolvency or inability to make payments under the terms
of a reinsurance treaty could have a material adverse effect on the Company's
financial condition or results of operations.

The amount and cost of reinsurance available to companies specializing in
workers' compensation insurance are subject, in large part, to prevailing market
conditions beyond the control of such companies. The Company's ability to
provide insurance at competitive premium rates and coverage limits on a
continuing basis depends upon its ability to obtain adequate reinsurance in
amounts and at rates that will not adversely affect its competitive position.

Due to continuing market uncertainties regarding reinsurance capacity, no
assurances can be given as to the Company's ability to maintain its current
reinsurance facilities, which generally are subject to annual renewal. However,
the Quota-Share Arrangement adopted by the Company in connection with the
Acquisition has a three-year term with two one-year extension options. If the
Company is unable to renew its reinsurance facilities upon their expiration and
the pricing environment does not improve, the Company may need to reduce the
levels of its underwriting commitments. See "Superior National -- Business --
Reinsurance and "Business Insurance Group, Inc. -- Business -- Reinsurance."

DILUTION OF OWNERSHIP

The Company's current stockholders could experience dilution of their
ownership interest in the Company for several reasons. First, the issuance of
securities in the IP Stock Issuance will reduce the proportionate ownership of
other stockholders in the Company. In addition, a transfer of his or her Rights
may not compensate a stockholder for all or any part of any reduction in the
market value of such stockholder's Common Stock resulting from the Stock
Offering. Stockholders who do not exercise or sell their rights will relinquish
any value inherent in the Rights. Further, stockholders who do not exercise
their Rights (resulting in Common Stock being purchased under the Standby
Commitment) will experience a significant decrease in their proportionate
interest in the equity ownership and voting power of the Company. See
"Dilution."

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Additionally, the IP Stock Issuance and the Standby Commitment may be
regarded as dilutive to the Company's market value if at the time of these
issuances the market price exceeds the $16.75 per share price to be paid by IP.
However, because IP is required to perform its obligations at the $16.75 price
in any event, the IP Stock Issuance and the Standby Commitment may be accretive
if at the time of these issuances the $16.75 price exceeds the market price of
the Common Stock on Nasdaq. See "The Stock Offering -- Standby Commitment."

Further, notwithstanding completion of the Acquisition, purchasers of
Common Stock exercising Rights in the Stock Offering will experience immediate
and substantial dilution in the net tangible book value per share attributable
to the shares of Common Stock they purchase. See "Dilution."

The $16.75 Subscription Price and the identical price to be paid by IP in
the IP Stock Issuance were determined after negotiations between IP and
directors of the Company not affiliated with IP or Zurich, with the Company
having the opportunity to consult its financial advisors. The Subscription Price
does not necessarily bear any relationship to the book value of the Company's
assets, past operations, cash flow, earnings, financial condition, or any other
established criteria for value and should not be considered an indication of the
underlying value of the Company. The issuance of stock in the Equity Financings
nevertheless could be viewed as dilutive because the market price on the date
prior to the announcement of the Acquisition exceeded the Subscription Price by
$3.75 per share. See "The Stock Offering -- Determination of Subscription
Price." Recently, the public trading price has been near or below $16.75. If the
shares are purchased in the Equity Financings at a price above the market price,
the transaction could then be viewed as accretive to the Company.

After giving effect to the Equity Financings (and assuming no other
issuances of Common Stock, that warrant holders exercise preemptive rights in
full, and that all Rights are exercised), the Company will have
shares of Common Stock issued and outstanding, as compared with
shares of Common Stock issued and outstanding as of October 30, 1998. See
"Market Price of and Dividends on the Common Stock."

INCREASED DEBT

The Company intends, as part of the financing of the Acquisition, to
undertake the Senior Debt Financing pursuant to which the Company will incur
approximately $110.0 million in senior debt. As a result of that increased debt
and the expected terms of the senior debt, the Company's principal and interest
payment obligations will be increased substantially. As of June 30, 1998, the
Company had $108.0 million of long term debt outstanding, comprised of $101.1
million related to the Trust Preferred Securities issued by a Subsidiary and
$6.9 million in the form of a capital lease. At June 30, 1998, the Company's
ratio of earnings to fixed charges and distributions on the Trust Preferred
Securities was 1.91 to 1. See "Acquisition of Business Insurance Group,
Inc. -- Financing of the Acquisition."

On a pro forma basis for the Acquisition, the Equity Financings, and the
Senior Debt Financing, the Company will breach certain covenants in the
indenture pursuant to which the Senior Subordinated Notes underlying the Trust
Preferred Securities were issued. As a result, the Company is required, and will
therefore seek to, obtain the consent of the holders of the Trust Preferred
Securities to the Senior Debt Financing. No assurance can be given that such
consent will be obtained. See "Acquisition of Business Insurance Group,
Inc. -- Governmental and Regulatory and Other Approvals."

The indenture or credit facility pursuant to which the senior debt will be
incurred and the Senior Subordinated Notes indenture will not permit the Company
to incur substantially any additional indebtedness above and beyond the Senior
Debt Financing, although it may be possible to raise additional funds to pursue
acquisitions of other workers' compensation insurance companies. The Company
believes that cash flow from operations and existing funds available for
payments of principal and interest will be adequate to permit the Company to
make its required payments of principal and interest on its indebtedness,
although there can be no assurance that this will be the case. To the extent
that cash flow from operations is insufficient to satisfy the Company's cash
requirements, the Company may seek to raise funds from additional borrowings or
equity financings, by restructuring, or by acquiring other businesses that would
provide cash flow (in all such cases to

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<PAGE> 32

the extent permitted by the terms of the Senior Debt Financing) See "Superior
National -- Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources." There can be no
assurance that such actions could be effected on satisfactory terms, in a timely
manner, or at all, that would enable the Company to make any payments due on the
Senior Debt Financing or the Senior Subordinated Notes or that any such actions
would be permitted under the related terms of the Senior Debt Financing.

The degree to which the Company is leveraged could have adverse
consequences, including the following: (i) a substantial portion of the
Company's cash flow from operations in the form of dividends from its
Subsidiaries must be dedicated to the payment of principal and interest on its
indebtedness, thereby reducing the funds available to the Company for other
purposes, (ii) the Company's ability to obtain additional financing in the
future for working capital, acquisitions or other purposes may be impaired,
(iii) certain of the Company's borrowings may be at variable rates of interest,
which would expose the Company to the risk of higher interest rates, (iv) the
Company's flexibility in planning for or reacting to changes in market
conditions may be limited, (v) the Company may be substantially more leveraged
than certain of its competitors, which may place the Company at a competitive
disadvantage, and (vi) the Company may be more vulnerable in the event of a
downturn in its business. The Company's ability to satisfy its obligations will
be dependent upon its future performance, which will be subject to prevailing
economic conditions and to financial, business, and other factors, including
factors beyond the control of the Company.

The terms of the Senior Debt Financing may also include operational and
financial covenants made by the Company. Current market conditions may well
result in financing sources negotiating for more stringent covenants, which
would cause the Company to face a higher risk of non-monetary default under the
terms of the Senior Debt Financing. In the event of a non-monetary default,
financing sources may have the right to accelerate the due date for payment of
principal on the Senior Debt Financing, and the Company's ability to repay the
Senior Debt Financing at such time would be uncertain. In addition, acceleration
of a principal payment due date on the Senior Debt Financing may create similar
acceleration rights for the holders of the Trust Preferred Securities.

VARIABILITY OF WORKERS' COMPENSATION INSURANCE BUSINESS

The workers' compensation insurance business is affected by many factors
that can cause fluctuations in the results of operations of companies
participating in this business. Many of these factors are not subject to control
by the Company. For example, an economic downturn could result in an increase in
the number of claims and less demand for workers' compensation insurance. These
factors, together with competitive pricing and other considerations, could
result in fluctuations in the Company's underwriting results and net income. See
"Superior National -- Business -- Regulation" and "-- Ratings."

HIGHLY COMPETITIVE BUSINESSES

The Company writes primarily workers' compensation insurance, which is a
highly competitive business. Some of the Company's competitors have
substantially greater financial and other resources than the Company, and there
can be no assurance the Company will be able to compete effectively against such
competitors in the future. Some of the Company's competitors are units of
financial services organizations having billions of dollars of assets. In the
event of a major reversal in the marketplace, such as a large, unanticipated
increase in industry-wide claim severity experience, the Company's competitors
that have access to substantial additional resources may be better able to
withstand the losses resulting from that reversal until conditions improve.

The Company's competitors include other companies that, like the Company,
serve the independent producer market, as well as companies that sell insurance
directly to insureds. Direct writers may have certain competitive advantages
over writers using producers, including increased name recognition, loyalty of
the customer base to the insurer rather than to an independent producer, and,
potentially, reduced acquisition costs.

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Historically, the Company has concentrated on marketing to group programs
and smaller accounts, but, in part due to the SPCC acquisition, 56.0% of its
premium in force at June 30, 1998 was attributable to 820 non-group policies and
311 group programs that provide estimated annual premium at inception of $25,000
or more. BIG, by comparison, actively pursues larger accounts and at June 30,
1998, 70.5% of BIG's overall premium in force was accounted for by policies with
estimated annual premium at inception of $25,000 or more. Following the Closing,
therefore, the Company will have to refocus its operating strategy to more
actively pursue accounts with very large annual premiums. The market for large
accounts is highly competitive, and the Company believes price is the single
most important factor such customers weigh in determining which carrier will
provide their workers' compensation insurance. In order to maintain market
leadership after the Acquisition, the Company may have to aggressively price its
offerings to large premium volume customers. If the premium collected does not
provide the Company with acceptable operating margins on the accounts, this
competitive environment could have a materially adverse effect on the Company's
results of operations. For at least three years, while re-underwriting BIG's
book of business, the Company intends to mitigate the pricing and persistency
risk associated with large accounts by maintaining the Quota-Share Arrangement.
During the period the Quota-Share Arrangement is in force, the Company is
subject to risks associated with reinsurance and its overall financial
performance will be dependent on the profitability of smaller accounts. See
"Superior National -- Business -- Competition" and "-- Reinsurance."

GEOGRAPHIC CONCENTRATION

After the Acquisition, on a pro forma basis, 74.1% of the Company's premium
will be written in the State of California. Consequently, the Company will
continue to be significantly affected by changes in the regulatory and business
climate in California. See "Superior National -- Business -- Regulation."

LIMITATION OF USE OF NET OPERATING LOSS CARRYFORWARDS

As of June 30, 1998, the Company had available approximately $128.0 million
in net operating loss carryforwards ("NOLs") to offset taxable income recognized
by it for periods after June 30, 1998. For federal income tax purposes, these
NOLs will expire in material amounts beginning in the year 2006. In approving
the Acquisition, the Board of Directors contemplated the fact that the
availability of a substantial portion of the NOLs could be limited and deferred
upon consummation of the Equity Financings, because of an "ownership change"
under Section 382 of the Code. If an "ownership change" is deemed to have
occurred, then the Company will be able to use a maximum of approximately $8.0
million per year of its NOLs, together with additional amounts to offset
"built-in gains." Built-in gains are unrealized gains related to appreciated
property, including investments, owned by the Company. These limitations may
cause the availability of the NOLs to be deferred, causing the Company to incur
tax obligations when it otherwise would not, or may allow some portions of the
NOLs to expire before they can be used to reduce the Company's tax obligations.
The Company's tax obligation affects its cash position and therefore will affect
its ability to make payments on the debt under the Senior Subordinated Notes and
to be incurred under the Senior Debt Financing as they become due. See "Superior
National -- Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Taxes."

The Company intends to remove the transfer restrictions currently
prohibiting a change in ownership under Section 382 of the Code only if the
Equity Financings occur. See "Description of Superior National Capital
Stock -- Delaware Anti-Takeover Law and Certain Charter Provisions."

FUTURE GROWTH AND CONTINUED OPERATIONS DEPENDENT ON ACCESS TO CAPITAL

The underwriting of workers' compensation insurance is a capital intensive
business. The Company must maintain minimum levels of surplus in Superior
Pacific to continue to write policies and meet the other related standards
established by insurance regulatory authorities and insurance rating bureaus.
See "Superior National -- Business -- Regulation."

The Company achieved premium growth in 1997 as a result of its acquisition
of SPCC. In addition to acquiring BIG, it intends to continue to pursue
acquisition and internal growth opportunities. Among the

31
<PAGE> 34

factors that may restrict the Company's future growth is the availability of
capital. Such new capital will likely have to be obtained through debt or equity
financing or retained earnings. There can be no assurance that the Company will
have access to sufficient capital to support future growth and also satisfy the
capital requirements of rating agencies and regulators. In addition, the Company
may require additional capital to finance future acquisitions. See "Superior
National -- Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."

RISKS ASSOCIATED WITH INVESTMENTS

The Company's results of operations depend in part on the performance of
its invested assets. As of June 30, 1998, virtually all of the Company's and
BIG's investment portfolio was invested in investment-grade, fixed-income
securities. Certain risks are inherent in connection with fixed-income
securities, including loss upon default, price volatility in reaction to changes
in interest rates, and general market factors, and, in the case of certain
asset-backed securities, prepayment and reinvestment risk. See "Superior
National -- Business -- Investments."

COMPREHENSIVE STATE REGULATION

The Company and BIG are subject to comprehensive regulation by state
government agencies wherever they are licensed. The nature and extent of that
regulation typically involve prior approval of the acquisition of control of an
insurance company or of any company controlling an insurance company, regulation
of certain transactions entered into by an insurance company with any of its
affiliates, limitations on dividends, filing of premium rates and policy forms,
solvency standards, minimum amounts of capital and surplus that must be
maintained, limitations on types and amounts of investments, restrictions on the
size of risks that may be insured by a single company, limitation of the right
to cancel or nonrenew policies in some lines, regulation of the right to
withdraw from markets, requirements to participate in residual markets,
licensing of insurers and agents, deposits of securities for the benefit of
policyholders, reporting and satisfying certain regulatory standards with
respect to financial condition, and other matters. In addition, state insurance
department examiners perform periodic financial and market conduct examinations
of insurance companies and dictate the accounting practices to be used by
insurance companies when reporting to regulatory authorities. Such regulation is
generally intended for the protection of policyholders rather than stockholders
or other security holders. No assurance can be given that future legislative or
regulatory changes will not adversely affect the Company. See "Superior
National -- Business -- Regulation."

HOLDING COMPANY STRUCTURE; DIVIDEND AND OTHER RESTRICTIONS

Superior National is a holding company whose principal asset is the capital
stock of its Subsidiaries and BIG will similarly be established as a Subsidiary.
The Company relies primarily on dividends and other payments from SNIC and SPCC,
and will rely on dividends from the BIG Insurance Subsidiaries, to meet its
obligations to creditors and to pay corporate expenses, including the principal
and interest on the debt to be incurred under the Senior Debt Financing and
dividends on the Trust Preferred Securities. SNIC, SPCC, CBIC, and CalComp are
domiciled in the State of California, which limits the payment of dividends and
other distributions by insurance companies. An insurance subsidiary may pay a
dividend to the extent it exceeds the greater of (a) net income from operations
for the preceding year or (b) 10% of statutory policyholders' surplus as of the
preceding December 31. CCIC is domiciled in the State of New York, which has
similar restrictions. Additionally, in ordinary circumstances, a two-year
moratorium is placed on dividend payments by a subsidiary that has undergone a
change in control. The Company has requested of the California Department of
Insurance ("DOI"), and expects to receive, a waiver from this moratorium in
connection with its acquisition of CalComp and the other BIG Insurance
Subsidiaries. Further, state insurance laws and regulations require that the
statutory surplus of an insurance company, following any dividends or
distribution by such company, be reasonable in relation to its outstanding
liabilities and adequate for its financial needs. See "Superior
National -- Business -- Regulation" and " -- Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."

32
<PAGE> 35

DEPENDENCE UPON PRODUCERS

The Company and BIG depend on outside producers to provide it with
insurance business. The renewal rights of all of such business written are owned
by the producers, not by the insurer. While the Company believes that its
relationships with its producers are generally excellent, and believes that
relations between BIG and its producers are strong, there can be no assurance
that producers will not move business currently written by either the Company or
BIG to another carrier. If renewal rates were to drop significantly as a result
of producers moving business to other carriers, or if producers were to deliver
less business of the type the Company prefers to underwrite, then the earnings
of the Company could be adversely affected.

Approximately $39.3 million (26.8%), $47.0 million (25.0%), and $44.0
million (26.0%) of Superior Pacific's direct written premium for the years ended
December 31, 1997, 1996, and 1995, respectively, was derived from its ten
leading producers. BIG's top ten producers accounted for 18.5% of direct written
premium in fiscal 1997. The loss of any of these producers could have a material
adverse effect on the Company. Eight of the Company's top 50 producers in
California and Arizona are also among the top 50 producers for BIG. See
"Superior National -- Business -- Marketing" and "Business Insurance Group,
Inc. -- Business -- Marketing."

COMBINED CARE BENEFITS

BIG has, through CBIC in California and BICO in Utah, marketed a program of
"24-hour care," providing its insured's employees with workers' compensation
insurance and group health benefits. The combined care benefits business
constituted 1.2% of BIG's direct written premium in 1997. This business can be
adversely affected by several factors that are not necessarily subject to
control by the Company. For example, market acceptance of the concept of 24-hour
care, the combination into a single program of group health insurance with
workers' compensation insurance, has been weaker than expected to date. Since
first offering this product in December of 1995, BIG has not been able to
achieve sufficient market penetration to achieve pricing that would generate
acceptable operating margins. The Company is inexperienced in the group health
benefits business and may therefore be poorly positioned to operate that
business profitably after the Acquisition. If the Company cannot achieve
adequate operating margins, it may incur costs in restructuring or selling the
group health benefits business. These factors, together with competitive pricing
and other considerations, could result in fluctuations in the Company's
underwriting results and net income. See "Business Insurance Group,
Inc. -- Business -- Combined Care Benefits."

PARTICIPATING POLICIES

BIG uses participating policies that pay policyholder dividends as a
marketing tool to sell workers' compensation insurance outside of California.
The Company anticipates continuing this practice following the Acquisition.
Participating policies may result in payment of dividends to the policyholder at
the conclusion of the policy term. Policyholder dividends may be based on a flat
percentage of premium, or more commonly, several factors relating to loss
experience.

BIG has a limited history of issuing participating workers' compensation
insurance policies in states outside of California. As policies that have been
issued as participating expire and come up for dividend consideration, BIG would
perform a calculation based on its dividend plan, and its board of directors
would declare policyholder dividends based on current loss experience. Any
adverse loss development occurring on policies for which a policyholder dividend
has been declared and paid could have a negative adverse impact on BIG's
financial condition and results of operations. To the extent that producers and
policyholders expect BIG to declare and pay policyholder dividends according to
the policyholder dividend proposals at the inception of the policies, if the
loss experience of accounts written on a participating basis do not support
policyholder dividend declarations, the absence of dividend payments could have
a negative adverse impact on BIG's producer support and marketing efforts and
could result in a negative impact on BIG's financial condition and results of
operations. See "Business Insurance Group, Inc. -- Business -- Underwriting."

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<PAGE> 36

IRREVOCABILITY OF SUBSCRIPTIONS

The election to exercise Rights is irrevocable by the electing stockholder.
Until certificates representing shares of Common Stock are delivered,
subscribing holders may not be able to sell the newly purchased shares.
Certificates representing shares of Common Stock purchased in the Stock Offering
will be delivered by mail as soon as practicable following the Closing, which is
expected to occur two to three weeks after the Expiration Date. No interest will
be paid on funds delivered to the Subscription Agent to exercise Rights covering
the time from payment until the delivery of stock certificates. If the
Acquisition is not consummated, no interest would be earned on the money
delivered to the Subscription Agent, however, all funds delivered to the
Subscription Agent would be returned. See "The Stock Offering -- Exercise of
Rights" and "-- No Revocation."

DEPENDENCE ON KEY PERSONNEL IN CONNECTION WITH FUTURE SUCCESS

The future success of the Company depends significantly upon the efforts of
certain key management personnel, including William L. Gentz, a director and the
President and Chief Executive Officer; J. Chris Seaman, a director, an Executive
Vice President, and the Chief Financial Officer; and Arnold J. Senter, an
Executive Vice President and the Chief Operating Officer. A loss of any of these
officers or other key employees could materially and adversely affect the
Company's business. See "Superior National -- Management -- Executive Officers."

MARKET CONSIDERATIONS

Until the Registration Statement is declared effective, there will be no
public market for the Rights. Although the Company has been advised by certain
broker-dealers that they intend to make a market in the Rights, they are under
no obligation to do so, and any market making activity may be discontinued at
any time. Although the Company believes the Rights will be transferable and
listed on Nasdaq, there can be no assurance that the Rights will have any
economic value or that a public market for the Rights will develop or be
sustained. There also can be no assurance that, following the issuance of the
Rights and of the underlying shares upon exercise of Rights, a subscribing
stockholder will be able to sell shares of Common Stock purchased in the Stock
Offering at a price equal to or greater than the Subscription Price.

Transfer of the Rights issued as part of the Employee Participation portion
of the Stock Offering will be contractually barred, which means that they will
have no economic value to the employees and consultants receiving them unless
they are exercised.

The market price of the Common Stock is likely to be highly volatile and
could be subject to wide fluctuations in response to factors such as actual or
anticipated variations in the Company's results of operations, new products or
services introduced by the Company or its competitors, changes in financial
estimates by securities analysts, general market conditions, and other factors.
Further, stock markets, and in particular Nasdaq, have experienced extreme price
and volume fluctuations that have particularly affected the market prices of
equity securities of corporations like the Company with relatively low "float"
and that often have been unrelated or disproportionate to the operating
performance of the affected corporations. There can be no assurance that the
trading price and price-to-earnings ratios seen in the equity markets generally
will be sustained. These broad market factors may adversely affect the market
price of the Common Stock. These market fluctuations, as well as general
economic, political, and market conditions, such as recessions or interest rates
fluctuations, may adversely affect the market price of the Common Stock. In the
past, following periods of volatility in the market price of a corporation's
securities, securities class action litigation has often been instituted.
Litigation, if instituted, could result in substantial costs and a diversion of
management's attention and resources, which would have a material adverse effect
on the Company's business, results of operations, and financial condition. See
"Market Price of and Dividends on the Common Stock."

YEAR 2000 COMPLIANCE

A significant percentage of the software that runs most of the computers in
the United States relies on two-digit date codes to perform a number of
computation and decision making functions. These computer
34
<PAGE> 37

programs may fail from an inability to interpret date codes properly, misreading
"00" for the year 1900 instead of the year 2000. Insurance policies with a
January 1, 2000 or later expiration date could be affected by a Year 2000
malfunction. The Company believes that its Year 2000 program, anticipated to be
completed no later than December 31, 1998, will result in its proprietary
operating systems, application software programs and computer hardware being
Year 2000 compliant in all material respects, though there can be no assurance
in that regard. See "Superior National -- Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Year 2000 Strategy." The
Company has received certain representations from FHC as to BIG's Year 2000
compliance program. While the Company believes that BIG's Year 2000 Compliance
program will result in the operating systems and application software used by
BIG being Year 2000 compliant in all material respects, there can be no
assurance in that regard. See "Business Insurance Group, Inc. -- Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Year
2000 Strategy."

Although the Company has not received any claims made under policies
written in its P&C insurance business (discontinued in 1993) related to business
losses caused by Year 2000 malfunctions or costs incurred in connection with
prevention or correction of Year 2000 problems, it is conceivable that such
claims could be made. Published estimates of Year 2000 business losses and costs
are in the many billions of dollars. If P&C insurers were required by court
decision to pay claims on policies issued between 1985 and 1993 related to Year
2000 losses the Company may have to pay such claims. In such event, the Company
would likely have inadequate reserves in its discontinued operations and the
booking of additional reserves would have a material adverse effect on the
Company's results of operations.

REGISTRATION OF ADDITIONAL SHARES; SHARES ELIGIBLE FOR FUTURE SALE

Sales of substantial amounts of shares of Common Stock in the public market
after the Equity Financings, or the perception that such sales could occur, may
adversely affect the market price of the Common Stock and the Company's ability
to raise capital in the future in the equity markets. Upon completion of the
Equity Financings, and assuming all Rights are exercised, the Company will have
outstanding shares of Common Stock, assuming no exercise prior to
Closing of any outstanding options or warrants. Of these shares, approximately
will be freely tradeable without restriction or limitation under the
Securities Act, except for any shares purchased by "affiliates," the resale of
which shall be subject to the volume limitations of Rule 144. Shares issued
through the Employee Participation, due to certain contractual restrictions,
will be non-transferable for a period of one year. The remaining
shares of Common Stock estimated to be outstanding will be "restricted
securities" within the meaning of Rule 144. These shares do not include an
aggregate of approximately 2,879,821 shares issuable upon exercise of warrants.
A significant portion of these shares may be eligible for sale under Rule 144
immediately upon exercise, subject to the volume limitations set forth in Rule
144. Additionally, the Company has granted registration rights to each holder of
warrants. Shares eligible for future sale also include approximately 2.4 million
shares issued to IP Delaware, IP Bermuda, TJS Partners, L.P. ("TJS"), and
certain members of the Company's management in April 1997 (the "1997 Shares").
The 1997 Shares are now eligible for sale under Rule 144, subject to the volume
limitations set forth in Rule 144. Additionally, the Company has granted
registration rights to IP Delaware and IP Bermuda with respect to the 1997
Shares they acquired. Furthermore, the Company has approximately
shares of Common Stock reserved for issuance pursuant to equity incentive plans,
under which options to purchase shares of Common Stock have been granted
as of October 30, 1998. Common Stock issuable under these plans will be
registered or exempt from registration when issued. Subsequent to the
Acquisition, the Company intends to increase the total number of shares of
Common Stock reserved for issuance under equity incentive plans by an additional
2,375,000 shares of Common Stock, and to create a new Stock Purchase Plan
permitting the issuance of up to 500,000 additional shares, and to register the
future issuance of such shares. See "Shares Eligible for Future Sale."

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<PAGE> 38

USE OF PROCEEDS

The maximum gross proceeds of the Stock Offering will be $109.6 million, in
the event all Rights are exercised. The Company intends to use the proceeds of
the Stock Offering, warrant holder exercises of preemptive rights, the proceeds
of the Standby Commitment (if necessary) and approximately $94.0 million of
gross proceeds obtained from the IP Stock Issuance (with these Equity Financings
expected to total $200.0 million in gross proceeds), together with approximately
$110.0 million of gross proceeds obtained from the Senior Debt Financing, to
acquire BIG from FHC for $256.5 million in cash and to contribute approximately
$28.5 million to the capital of BIG to replace the funds spent by FHC in
purchasing the reinsurance to fund the Loss Reserves Guarantee. See "Acquisition
of Business Insurance Group, Inc." The amounts obtained from the Equity
Financings and the Senior Debt Financing in excess of the purchase price for BIG
and required capital contributions may be used to reduce the amount of Senior
Debt Financing obtained, and, if not, will be used for transaction costs in
connection with the Acquisition and the related financing transactions, for
capital for the Company's insurance subsidiaries, and for general corporate
purposes.

The following illustrates the sources (including the Stock Offering) and
uses of cash to complete the Acquisition, make the capital contributions, and
pay related transaction costs:

[DIAGRAM]

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<PAGE> 39

CAPITALIZATION

Set forth below is the capitalization of the Company at June 30, 1998 and
the capitalization of the Company at June 30, 1998, as adjusted to give effect
to the Stock Offering, the IP Stock Issuance, and the Senior Debt Financing and
the application of proceeds from them as described in "Use of Proceeds."

<TABLE>
<CAPTION>
JUNE 30, 1998
-----------------------------
AS ADJUSTED
FOR THE
SENIOR NOTES
OFFERING
AND THE
ACTUAL EQUITY FINANCINGS
-------- -----------------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt.............................................. $ 30 $ 30
Senior Debt................................................. -- 107,000(1)
Trust Preferred Securities.................................. 101,051 101,051
Stockholders' Equity:
Common Stock, $.01 par value; authorized 25,000,000
shares; issued and outstanding 5,876,399 shares; and
17,816,697 shares issued and outstanding as adjusted
for the Equity Financings.............................. 59 178
Paid-in capital excess of par............................. 34,274 227,255(2)
Paid-in capital -- warrants............................... 2,206 2,206
Unrealized gain on investments, net of taxes.............. 1,225 1,225
Retained earnings......................................... 20,931 20,931
-------- --------
Net stockholders' equity.................................... 58,695 251,795
-------- --------
Total capitalization........................................ $159,776 $459,876
======== ========
</TABLE>

- ---------------
(1) Net of estimated transaction costs of approximately $3.0 million, including
underwriting discounts and commissions.

(2) Net of transaction costs associated with the Equity Financings of
approximately $6.9 million.

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<PAGE> 40

MARKET PRICE OF AND DIVIDENDS ON THE COMMON STOCK

The Common Stock is listed and traded on Nasdaq under the trading symbol
"SNTL." Nasdaq is a highly-regulated electronic securities market comprised of
competing market makers whose trading is supported by a communications network
linking them to a 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:
Nasdaq 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 the Company by those
broker-dealers believed by the Company to be most active in making a market in
the Common Stock. As the Common Stock was not approved for listing on Nasdaq
until March 5, 1996, quotations prior to the Company's 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.

<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1998
Fourth quarter (through October 30)...................... $ -- $ --
Third quarter............................................ $23.25 $15.75
Second quarter........................................... $25.75 $17.75
First quarter............................................ $21.19 $14.25
1997
Fourth quarter........................................... $15.25 $14.00
Third quarter............................................ $15.50 $13.25
Second quarter........................................... $13.63 $11.63
First quarter............................................ $15.25 $11.25
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
</TABLE>

As of October 30, 1998, the number of stockholders of record of Common
Stock was and shares of Common Stock were outstanding. The
closing sales price per share of Common Stock on October 30, 1998 was
$ . The closing sales price per share of Common Stock on May 4, 1998,
the date immediately prior to the public announcement of the Acquisition was
$20.50.

The Company believes the increase in price in the third and fourth quarters
of 1996 and the first quarter of 1997 was primarily due to the announcement of
the Pac Rim Transaction. The Pac Rim Transaction was completed on April 11,
1997. The Company also believes the increase in price in the second quarter of
1998 was primarily due to the announcement of the Acquisition and the Stock
Offering. The Company believes the decrease in price in the third quarter of
1998 reflected the general weakness in the market for equity securities.

The Company's current policy is to retain its earnings for use in its
business; it has paid no cash dividends to its stockholders in its two most
recent fiscal years and has no present intention of paying cash dividends to its
Common stockholders 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

38
<PAGE> 41

and capital requirements, general business conditions, and other relevant
factors, including legal restrictions applicable to the payment of dividends by
SNIC and SPCC. 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 from operations 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 and SPCC, the Company would be
dependent upon dividends from SNIC and SPCC in order to pay dividends to the
Company's stockholders. Similar dividend payment restrictions will govern BIG's
Insurance Subsidiaries after the Acquisition.

DILUTION

The unaudited net tangible book value of the Common Stock as of June 30,
1998 was approximately $23.4 million, or $3.99 per share. See "Capitalization."
"Net tangible book value per share" represents the amount of total tangible
assets less total liabilities divided by the number of shares of Common Stock
outstanding. After giving effect to the consummation of the Equity Financings
(assuming $200.0 million in gross proceeds), and after deducting the estimated
offering expenses, including the Commitment Fee Warrants, the unaudited net
tangible book value of the Company as of June 30, 1998, would have been
approximately $254.1 million, or $14.26 per share. This represents an immediate
increase in unaudited net tangible book value of $10.27 per share to persons
holding shares of Common Stock prior to the exercise of the Rights and an
immediate dilution of $2.49 per share to holders of Common Stock purchased upon
issuance of the Rights. The following table illustrates this per share dilution
at June 30, 1998.

<TABLE>
<S> <C>
Subscription Price.......................................... $16.75
======
Unaudited net tangible book value per share at June 30,
1998...................................................... $ 3.99
Increase per share attributable to purchasers in the Equity
Financings................................................ 10.27
------
Unaudited net tangible book value per share after the
Stock Offering......................................... 14.26
======
Dilution per share to purchasers in the Equity
Financings(1).......................................... $ 2.49
======
</TABLE>

- ------------------------------
(1) Dilution is determined by subtracting the unaudited pro forma net tangible
book value per share from the Subscription Price paid by purchasers in the
Equity Financings.

The foregoing assumes no exercise of outstanding options or warrants prior
to the Expiration Date. No restrictions will lapse with respect to Restricted
Stock granted prior to the Expiration Date. At December 31, 1997, options to
purchase 461,079 shares of Common Stock were outstanding with a weighted average
exercise price of $7.17 per share. At December 31, 1997, and at June 30, 1998,
the Company also had existing warrants to purchase 1,566,465 and 579,356 shares
of Common Stock with exercise prices of $4.00 and $5.20, respectively. The
foregoing also does not take into account any contribution to net tangible book
value as a result of the Acquisition.

39
<PAGE> 42

ACQUISITION OF BUSINESS INSURANCE GROUP, INC.

THE ACQUISITION

The Company has entered into the Acquisition Agreement to acquire BIG from
FHC. BIG is a holding company that, through its subsidiaries, writes workers'
compensation and group health insurance, principally in California, with
regional and branch operations throughout the continental United States. The
Company will pay to FHC approximately $256.5 million in cash ($285.0 million
less the cost of the Loss Reserves Guarantee). The Company will offset the
reduction in BIG's surplus resulting from the cost of reinsurance for the Loss
Reserves Guarantee with a capital contribution to BIG, so the total cash outlay
by the Company in connection with the Acquisition will be $285.0 million,
excluding transaction costs. Subject to obtaining the required approval by the
Company's stockholders, it is contemplated that the Acquisition will be financed
by the Equity Financings and the Senior Debt Financing. Under the Acquisition
Agreement, at the Closing, BIG will become a wholly owned subsidiary of the
Company. As a result, the BIG Insurance Subsidiaries will become indirect
operating subsidiaries of the Company. BICO, currently a wholly owned subsidiary
of BIG, will be sold to Zurich Centre Group LLC, an affiliate of Zurich, or a
designee of Zurich Centre Group LLC, immediately after the Closing. Prior to
such sale the Company will transfer the operating assets, liabilities, and
infrastructure of BICO into Superior Pacific. The purchase price will be $5.6
million, subject to certain adjustments. The Company will thereafter continue to
issue policies outside of California through CCIC. In connection with the
Acquisition, FHC is obligated prior to Closing to cause all of BIG's
intercompany balances and real estate holdings related to FHC and its parent,
FHS, and their affiliates to be settled in cash. The Acquisition and related
financing transactions are expected to close two to three weeks after the
Expiration Date of the Stock Offering.

BUSINESS INSURANCE GROUP, INC.

For the year ended December 31, 1997, and the six months ended June 30,
1998, BIG had net premiums earned of approximately $515.3 million and $215.9
million, respectively, and had losses from operations of approximately $30.6
million and $7.8 million, respectively. After certain adjustments described in
the next sentence, for the year ended December 31, 1997, and the six months
ended June 30, 1998, BIG had losses of approximately $29.9 million and $4.9
million, respectively. The 1997 results exclude unusually high realized gains of
approximately $7.2 million, and $8.3 million of interest charges associated
solely with inter-company debt due to FHS. The inter-company debt will be
settled in cash prior to Closing and therefore interest charges will not affect
BIG's results of operations thereafter. Prior to 1995, BIG was exclusively a
California insurer and BIG's business continues to be concentrated in
California, accounting for approximately 68.3% of direct premiums written for
the six months ended June 30, 1998. However, in anticipation of regulatory
reforms and the elimination of minimum rate laws in 1995, BIG began to pursue
national growth opportunities and currently writes business in 42 states through
a network of 37 regional and branch offices. BIG is licensed in 49 states and
the District of Columbia. For the six months ended June 30, 1998 approximately
31.7% of BIG's direct premiums was written outside of the State of California.
BIG has historically written policies with average annual premium greater than
those of the Company's, as demonstrated by an average annual premium per policy
of approximately $16,200 as opposed to approximately $8,300 for Superior
National in the year ended December 31, 1997. The foregoing description of BIG
is qualified in its entirety by reference to the more complete information set
forth herein under "Business Insurance Group, Inc. -- Business."

At June 30, 1998, BIG's net stockholder's equity under GAAP was $243.6
million, and its long-term intercompany debt was $121.8 million. BIG's equity
will be reduced by $28.5 million upon FHC's acquisition of reinsurance to fund
the Loss Reserves Guarantee. The net purchase price for BIG is $256.5 million.
Under purchase accounting, the Acquisition, plus the elimination of the
long-term debt, results in negative goodwill (the excess of the GAAP fair value
of the net assets acquired over the purchase price). Pending the revaluation of
BIG's assets after Closing as required under GAAP, the Company estimates it will
book negative goodwill in the amount of $80.3 million.

The purchase price and other terms were negotiated over a period of
approximately four weeks by representatives of the Company and FHC and approved
by the boards of directors of both parties. The GAAP

40
<PAGE> 43

book value of BIG was not a significant factor in the Company's proposal to
purchase BIG, although the Company relied very heavily on the book value
determined under statutory accounting principles to arrive at the purchase price
it was willing to pay. The Company adopted this position because, in the
insurance industry, statutory book value, or multiples thereof, have
historically been the basis upon which acquisitions occur. The Company concluded
that BIG, because it was operating at a loss in 1997, in a line of business
generally viewed as unattractive, was worth 100 percent or less of statutory
book value. The Company also concluded that FHC was a motivated seller. FHC's
parent, FHS, had stated its intention to divest itself of risk bearing
activities that were not part of FHS' core operations. FHS had, in fact,
discontinued its workers' compensation insurance operations and announced its
intention to sell those operations prior to engaging in sale negotiations with
the Company. Based on published accounts of the sale of BIG, and news associated
with FHS, it appeared to the Company that a prompt sale of BIG was a key issue
for FHS. Under these circumstances, FHS was apparently motivated to accept a
purchase price below GAAP book value, and approximating statutory book value, to
assure the timely disposition of its discontinued operations.

In addition, the Company believes the fundamentals of BIG's business
deteriorated temporarily, but significantly, after FHS announced its intention
to discontinue its workers' compensation operations. BIG's insurance
subsidiaries received a downgrade from a major rating agency, BIG's
non-California operations received inquiries from certain state insurance
regulators due to the failure of one of the BIG insurance subsidiaries to be
within the usual range of six regulatory financial ratio tests run using the
1997 statutory annual statement, and there was a substantial amount of negative
publicity associated with FHS' withdrawal from the workers' compensation
insurance market. See "Business Insurance Group, Inc. -- Business." Meanwhile,
in early 1998, BIG had adopted a premium pricing strategy that, in the Company's
view, was resulting in a significant decline in BIG's direct premium written.
All of the above contributed to a temporary, but nonetheless real, decline in
the intangible value of the BIG franchise, which decline the Company took into
account in the determination of the purchase price.

Prior to agreeing to the Purchase Agreement, the Company conducted due
diligence on BIG's assets, liabilities, operations and business practices,
including BIG's premium pricing strategies and its claim and claim adjustment
expense reserves. BIG recorded a significant adjustment to its reserves in the
fourth quarter of 1997, resulting in its reporting operating losses for the year
of $30.6 million. FHC's actuaries have apparently determined that after giving
effect to this adjustment, BIG's reserves were adequate, and its auditors
delivered an unqualified opinion as to BIG's financial statements for the year
ended December 31, 1997. Although the adequacy of claim and claim adjustment
reserves is inherently difficult to determine, the Company conducted an
examination of BIG's reserving practices, taking particular note of the negative
trends in claim severity that the Company believes are affecting all California
workers' compensation insurers. The Company satisfied itself as to its risks
regarding BIG's reserves by negotiating the Loss Reserves Guarantee, the cost of
which is being carried by FHC through a purchase price adjustment. The Loss
Reserves Guarantee mitigates, but does not eliminate, the Company's risk that
BIG's claim and claim adjustment expense reserves may be inadequate.

The Company also secured protections against premium pricing practices at
BIG that the Company believes were not warranted by the loss ratios experienced
in the BIG subsidiaries in 1997. These protections primarily take the form of a
consulting relationship that allows the Company to maintain a day-to-day
presence in BIG's executive offices during the period between the signing of the
Purchase Agreement and the Closing, and consult in the major strategic
decisions, including underwriting practices, by BIG's executive officers. In
exchange for these interim consulting rights, the Company assumed a greater risk
than is typical for adverse changes in BIG's business between the signing of the
Agreement and Closing. During the interim period, the Company has used its
consulting team and the knowledge they have obtained in planning for the
combination of the businesses and for enhancing collections, investment
strategies, claims handling and other business practices at BIG.

FINANCING OF THE ACQUISITION

The Acquisition will be financed by the Company with a combination of
equity and debt. The Company will, upon stockholder approval, commence the Stock
Offering, with expected proceeds of $106.0 million.

41
<PAGE> 44

Additionally, IP will purchase, upon stockholder approval, $94.0 million of
Common Stock in the IP Stock Issuance. As a result of the IP Stock Issuance,
warrant holders of the Company will have the opportunity to exercise preemptive
rights and purchase shares of Common Stock under the terms of the IP Stock
Issuance, and, if they do so, they will not participate in the Stock Offering.
IP has also agreed to provide the Standby Commitment and purchase up to
6,328,358 shares of Common Stock, with the exact number being that number of
shares necessary to bring the total proceeds of the Stock Offering, the IP Stock
Issuance (with the related exercises of warrant holder preemptive rights), and
the Standby Commitment to $200.0 million.

The Company also intends to undertake the Senior Debt Financing, with
estimated proceeds of approximately $110.0 million. The interest rate, due date,
and other terms of the Senior Debt Financing will be determined in negotiations
between the Company and the underwriters or initial purchasers of the senior
notes or the lenders under the credit facility, as the case may be. The amounts
obtained from the Senior Debt Financing and Equity Financings in excess of
$285.0 million will be used for transaction costs in connection with the
Acquisition and these financing transactions, for capital for BIG, and for
general corporate purposes.

RATIONALE FOR THE ACQUISITION

Before approving the Acquisition and the Equity Financings, the Board of
Directors considered not only the benefits it expected the Company to receive
from these transactions, but also a number of mitigating factors that could
prevent the Company from realizing these benefits and could possibly materially
and adversely affect the Company's financial condition and results of
operations, including, that:

- Significant net losses recently incurred by BIG could continue after the
Acquisition, which would materially and adversely affect the Company's
future financial condition and results of operations.

- Significant declines in BIG's direct written premium in California could
continue after the Acquisition, which could threaten the Company's
leadership position in California and limit the Company's ability to
spread sufficient premium over its fixed costs, thereby materially and
adversely affecting the Company's earnings.

- If the Company were not successful in coordinating and integrating the
operations and business enterprises of the Company and BIG, the Company
would not realize the expected benefits of the Acquisition.

- The Company expects to experience large negative cash flows after the
Acquisition, due primarily to the Company's increased use of reinsurance
and, with respect to the Company and BIG, the higher number of claims
arising under policies written on the higher premium volumes that existed
prior to 1995 relative to the current decreased level of premium. This
negative cash flow will result in reduced investment income.

- The anticipated longer-term economies of scale may fail to materialize,
adversely affecting the Company's cash flow and earnings before taxes.

- The Acquisition will cause the Company to change its operating strategy
from focusing on smaller accounts located almost entirely in California
and Arizona to expanding the focus to larger accounts throughout the
United States, while maintaining its emphasis on California and Arizona.
The Company may not be successful in implementing these strategies, or
the new strategies may fail to generate the expected financial benefits.

- The Company's change in operating strategy also includes a significant
use of reinsurance. The expected benefits of the Acquisition could be
materially and adversely affected if the reinsurers fail to perform their
obligations.

- The Equity Financings will increase the concentration of ownership of the
Company by IP and certain parties having business relationships with it
and will enable them to further influence the Company's management and
policies, delay or prevent a change in control of the Company, or have a
depressive effect on the trading market for the Common Stock.

42
<PAGE> 45

- The limitations on the Company's ability to use its NOLs upon completion
of the Equity Financings could adversely affect its earnings. See "Risk
Factors -- Inherent Uncertainties Relating to Certain Effects of the
Acquisition."

After considering the above factors, the Board of Directors approved the
Acquisition and the Equity Financings, reflecting its belief that the various
risks and mitigating factors it considered were outweighed by the substantial
benefits it expected the Company to receive from these transactions, including,
that:

- The Company will be the largest private sector workers' compensation
carrier in California, based on available data on 1997 direct written
premium. The Company believes that size and financial strength are
important to the Company's ability to succeed in the workers'
compensation insurance industry.

- While increasing its presence in California, the Company will also
diversify geographically by acquiring BIG's non-California book of
business, thereby lessening its dependence on the California market for
workers' compensation insurance. The Company has been informed by
insurance rating agencies that the Company's status as a mono-state
carrier has been viewed negatively by them in the review process.

- The Company will have the opportunity to improve BIG's financial
performance by implementing the Company's underwriting policies, applying
its expertise in information systems, and using reinsurance to mitigate
financial and integration risk during the transition period immediately
following the Acquisition. The Board of Directors believes that the
Company's operating and reinsurance strategy will be important factors in
the Company's success following the Acquisition.

- The Company will benefit from economies of scale over a period of years,
potentially realizing cost savings as a result.

- The Company will reduce its financial leverage due to the additional
equity provided by the Equity Financings. The Board of Directors believes
this will be viewed favorably by insurance and investment rating
agencies.

- The Company will strengthen its relationship with IP, providing
opportunities for additional acquisitions and continued growth. The Board
of Directors believes important growth opportunities through acquisitions
will continue to arise in the workers' compensation insurance industry in
the near future.

In evaluating the above factors, the Board of Directors found particularly
important the strength of Company's management team and their experience and
ability to coordinate and integrate the business operations of the Company and
BIG, having recently completed the integration of Pac Rim's business operations
into the Company's business operations. While the Board of Directors was
particularly sensitive to the risks associated with the increase in the
ownership of IP and certain related parties, the Board determined that the terms
of the Stock Purchase Agreement, which restrict the impact of such control,
sufficiently mitigated this concern. Also given significant weight was the
Board's view that size and financial strength are critical to success in the
insurance industry. On a pro forma basis, after the Acquisition the Company
would have had net premiums earned of $675.7 million for the year ended December
31, 1997 (versus $160.4 million for Superior National and Pac Rim combined as of
that date), and assets of $1.6 billion on a pro forma combined basis at June 30,
1998 versus $396 million in assets for Superior National at June 30, 1998.
Ultimately, after weighing the various risks and concerns against the expected
benefits, the Board of Directors determined that completing the Acquisition and
the Equity Financings is in the best interests of the Company and its
stockholders.

The foregoing statements contain forward-looking statements regarding
benefits that management believes may be achieved through the Acquisition.
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 combination of the two companies, and other factors beyond the
Company's control. See "Risk Factors."

43
<PAGE> 46

LOSS RESERVES GUARANTEE

In connection with the Acquisition, FHC has agreed to obtain, at its
expense, the Loss Reserves Guarantee on BIG's claim and claim adjustment expense
reserves. The Loss Reserves Guarantee covers $150.0 million in reserves for
losses incurred prior to December 31, 1997 and an additional $25.0 million for
losses incurred through the Closing. The Loss Reserves Guarantee, which is
effective immediately prior to the Closing, is in the form of an Aggregate
Excess of Loss Reinsurance Agreement that was entered into by BIG, at the
request and on behalf of FHC, with an affiliate of American Re-Insurance Company
("American Re") pursuant to which the affiliate will retrocede its obligations
under the Loss Reserves Guarantee to American Re. Under the Loss Reserves
Guarantee, BIG may cede to American Re up to $175.0 million of loss and
allocated loss adjustment expense in excess of BIG's aggregate retention at the
Closing Date. The aggregate retention at the Closing Date is defined as $495.0
million (the amount of BIG's recorded loss and allocated loss adjustment expense
reserves at December 31, 1997), plus 75.7% of 1998 net earned premium excluding
premium ceded to the Quota-Share Arrangement, and less losses and allocated loss
adjustment expense paid by BIG during 1998.

The Company intends to account for the Loss Reserves Guarantee in
accordance with Topic D-54 of the Emerging Issues Task Force of the Financial
Accounting Standards Board, Accounting by the Purchaser for a Seller's Guarantee
of the Adequacy of Liabilities for Losses and Loss Adjustment Expenses of an
Insurance Enterprise Acquired in a Purchase Business Combination ("EITF D-54").
Under EITF D-54, losses and allocated loss adjustment in the income statement
and the effects of the Loss Reserves Guarantee will be disclosed separately in
the notes to the financial statements, including the reconciliation of claims
reserves, in loss ratio information, and in Management's Discussion and Analysis
of Financial Condition and Results of Operations.

In addition to bearing the cost of the Loss Reserves Guarantee through a
purchase price adjustment, FHC was responsible for and bore all costs in
connection with the negotiation and obtaining of the reinsurance policy used to
provide the Loss Reserves Guarantee. FHC, with the assistance of Salomon Smith
Barney, its representative in the sale transaction, selected the reinsurer
(American Re) and contacted American Re only after the Company requested a
guarantee on loss reserves. The terms of the reinsurance contract were
negotiated solely by officers of FHC. FHC placed the reinsurance with the BIG
insurance subsidiaries only in order to minimize a perceived credit risk, in a
manner that the Company and FHC, in consultation with their respective auditors,
believed was consistent with EITF D-54. The Company was given the opportunity to
consent to the terms of the contract, which consent was not to be unreasonably
withheld.

The amount paid by BIG for reinsurance will be deducted from the price paid
to FHC by the Company, thus reducing the purchase price for BIG's capital stock
to $256.5 million. The Company believes it is prudent to contribute additional
capital to BIG out of the proceeds of the Equity Financings and the Senior Debt
Financing. This contribution of additional capital will result in the Company's
total cash outlay to complete the Acquisition being $285.0 million, excluding
transaction expenses.

LARGE ACCOUNT QUOTA-SHARE ARRANGEMENT

Separately, effective May 1, 1998, the Company and BIG each entered into
the three-year Quota-Share Arrangement with a reinsurer under which each will
cede all risks with an estimated annual premium at each risk's inception date of
$25,000 or more. Continuation of the Quota-Share Arrangement by BIG is
contingent on the Closing. The Company believes there is significantly more
pricing and persistency risk associated with policies with larger annual premium
amounts. The use of the Quota-Share Arrangement will allow the Company to
re-underwrite this business over time to the Company's underwriting standards
while preserving BIG's relationships with producers and insureds. Additionally,
because the Quota-Share Arrangement will reduce net written premium, the
Company's and BIG's ratio of net written premium to statutory surplus will
decrease.

44
<PAGE> 47

DISPOSITION OF BICO

The Company has entered into a letter of intent to sell BICO to Zurich
Centre Group LLC, an affiliate of Zurich, or a designee of Zurich Centre Group
LLC, immediately after the Closing. Under the letter of intent, Superior Pacific
will assume BICO's insurance business and liabilities, receive assets with a
fair market value equal to the liabilities assumed, and receive additional
consideration equal to BICO's statutory capital and surplus, plus the value of
BICO's charter and licenses, at the sale date. The purchase price is $5.6
million, subject to adjustments reflecting the statutory capital surplus
requirements in the various licensed jurisdictions. After the sale of BICO, an
affiliate of Zurich intends to recapitalize BICO and enter into a five-year
underwriting arrangement with Superior Pacific under which Superior Pacific will
be given the right to produce up to $50.0 million in estimated annual premium on
BICO's policy forms in exchange for an underwriting fee equal to 2.5% of direct
written premium plus a pass through of all related expenses. The Company intends
to retain BICO's business and employees within the Superior National
organization, and, together with other BIG Insurance Subsidiaries acquired in
the Acquisition, to continue, and attempt to expand, BIG's national workers'
compensation insurance operations.

SERVICE AGREEMENTS

CONSEQUENCES IF THE COMPANY FAILS TO COMPLETE THE ACQUISITION

In the event FHC meets all of its conditions precedent to the sale of BIG
to the Company, and the Company then fails to complete the Acquisition, such
event would likely have a material adverse effect on the Company. In such
circumstances, if the Company is deemed to have wrongfully failed to close the
Acquisition, it could be liable to FHC for a $15.0 million payment and
additional monetary damages. Further, the Commitment Fee Warrants are payable,
even if the Acquisition and the Equity Financings do not take place.

If the Acquisition is not consummated, all funds received by the
Subscription Agent in the Stock Offering will be returned, but without interest.

GOVERNMENTAL AND REGULATORY AND OTHER APPROVALS

The Acquisition requires the approval of the departments of insurance in
the States of California, Delaware, and New York, and notice filings in other
states. The Company has already made the requisite filings in order to obtain
such approval, including an application to the New York Department of Insurance.
If approval in New York is not obtained, the Acquisition will proceed without
the inclusion of CCIC. While the Company is confident of obtaining approval in
New York, as of the date of this Prospectus, all necessary regulatory approvals
have not yet been obtained. The Acquisition is also subject to the expiration of
the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended, which has expired. Additionally, the holders of the Trust
Preferred Securities issued by a Subsidiary of the Company are being requested
to consent to the issuance of the debt under the Senior Debt Financing. The
Company expects to obtain all such approvals, although no assurances can be
given that they will be obtained.

45
<PAGE> 48

ACCOUNTING TREATMENT

The Acquisition is to be treated as a purchase for accounting purposes. See
"Unaudited Pro Forma Financial Information."

EFFECT OF EQUITY FINANCINGS; RELATIONSHIPS AMONG THE COMPANY, IP, AND ZURICH

Effect of Equity Financings; Ownership of IP. IP is playing a significant
role in the Equity Financings. Following the Acquisition and assuming no
exercise of the Standby Commitment, the IP partnerships would own in the
aggregate approximately 7.7 million shares and 528,480 warrants, representing
approximately 43% of the then outstanding Common Stock (approximately 38% on a
diluted basis). In addition, certain parties having business relationships with
IP, primarily, Centre Solutions, CentreLine, III, and IIA could acquire
approximately 1.3 million shares (as participants in the Rights Offering or upon
exercise of their warrant holder preemptive rights). As a result, following the
Acquisition, IP and these related parties could own in the aggregate up to
approximately 9.0 million shares of Common Stock and approximately 2.6 million
warrants, representing approximately 50% of the then outstanding Common Stock
(approximately 54% on a diluted basis).

Currently, IP Delaware and IP Bermuda respectively beneficially own
1,375,547 and 765,304 shares of Common Stock or 23.1% and 12.8% of the
outstanding Common Stock. IP II does not own any Common Stock. IP Delaware and
IP Bermuda purchased their shares in April 1997 in connection with the Company's
financing of its acquisition of Pac Rim. Robert A. Spass and Steven B. Gruber,
directors of the Company, are also officers and directors of, and (together with
Daniel L. Doctoroff who has no other relationship to the Company) own all of the
voting capital stock of, the ultimate general partner of each of IP Delaware and
IP Bermuda. Mr. Spass and Bradley E. Cooper, a director of the Company, are
officers of Capital Z, the ultimate general partner of IP II. Each of Messrs.
Spass and Cooper owns 9.9% of the voting capital stock of Capital Z. No person
or entity owns 10% or more of the voting capital stock of Capital Z.

III engaged in a transaction with the Company in 1992 that involved the
Company's issuing $11.0 million in promissory notes (which were repaid in 1994),
the Voting Notes, and 1,616,886 warrants (some of which were issued to the
Company's management). The warrants have been distributed to and, to the extent
not transferred to unaffiliated parties, are held by the partners of III and
Centre Solutions, subject to a revocable agency relationship with IIA that
allows IIA to exercise rights set forth in the warrants and with respect to the
Common Stock issuable upon their exercise. The Voting Notes are held directly by
III and allow III to vote the number of shares of Common Stock that may be
purchased upon exercise of the warrants originally issued to III (1,566,465
votes at present, as some of the warrants issued to management have since been
cancelled) in director elections and removals, amendments to such voting rights,
and changes to the authorized number of directors. Some of III's management are
also involved in IP. Robert A. Spass, a director of the Company, is an officer
of IIA and has voting power over all of the capital stock of the general partner
of III, however, pursuant to an agreement between the general partner's board of
directors and Mr. Spass, he makes no voting or investment decisions with respect
to the securities of the Company held by such general partner. Bradley E.
Cooper, a director of the Company, was an officer of IIA from 1990 to 1994.

46
<PAGE> 49

Centre Solutions, which is an affiliate of CentreLine, holds 395,128
warrants (which if exercised would represent approximately 6.2% of the presently
outstanding Common Stock), which were transferred to it by an affiliate that
received them through an investment in III. III received these warrants, as
discussed above, in connection with its investment in the Company. In addition,
an affiliate of Centre Solutions is a significant limited partner in some of the
IP partnerships. Mr. Germain is also an officer and director of Centre
Solutions.

In connection with the Equity Financings, Zurich is receiving 205,520 of
the Commitment Fee Warrants. Zurich is receiving these warrants because at the
time the Acquisition was being negotiated, IP II was in the process of being
formed. As a condition to entering into the Acquisition Agreement, FHC required
assurances that funding would exist in IP II to allow it to meet its obligations
to fund the Acquisition. Zurich, anticipating its major investment in IP II,
provided FHC with the necessary assurances and, in exchange, received from IP a
portion of the Commitment Fee Warrants that IP was to receive under the Stock
Purchase Agreement. Separately, the Company is selling BICO to Zurich Centre
Group LLC, an affiliate of Zurich, or a designee of Zurich Centre Group LLC. See
"-- Disposition of BICO." Other than with respect to the transactions described
above and except for any participation that they may have as investors in any of
the IP partnerships, Zurich and its affiliates are not actively involved in any
other aspect of the Acquisition or the Equity Financings.

Background to the Acquisition and Equity Financings. The degree of
ownership that IP and its related parties would have upon consummation of the
Acquisition was an issue of concern to the Board of Directors during the period
when the Company negotiated the Acquisition and the Equity Financings. The Board
was particularly concerned that IP would have the ability to further influence
the Company's management and policies and was aware that such a concentration of
ownership could delay or prevent a change in control of the Company or have a
depressive effect on the trading market for the Company's equity securities.
However, these concerns were reduced to some degree by the knowledge that "IP"
constitutes a number of entities not under common control, with some diversity
of ownership and related, but not necessarily identical, investment objectives
and motivations. While for convenience, "IP" is referred to in this Prospectus
as though it were a single entity, the differences among the IP partnerships,
including diversity in ownership, term of existence, and management personnel
are significant enough that all of the IP partnerships may not necessarily act
in concert on every matter. Furthermore, to reduce the impact of IP's and its
related parties' ownership of the Company, the terms of the Stock Purchase
Agreement were negotiated to restrict IP's and its related parties' voting
rights and ability to acquire additional shares of Common Stock. Finally, the
Board of Directors believes that aspects of the relationship with IP are
beneficial to the Company's ability to continue its growth and take advantage of
opportunities to complete acquisitions as they arise. The Board of Directors
determined these advantages, in addition to the willingness of IP to make equity
commitments months in advance of the consummation of the Acquisition, and to do
so to an extent that convinced FHC that the Company, although significantly
smaller than BIG in terms of assets and direct written premium, could complete
the Acquisition, outweighed the concerns raised by this concentration of
control.

The terms of the Acquisition were negotiated by J. Chris Seaman, an
Executive Vice President and the Chief Financial Officer of the Company, with
the assistance of Bradley E. Cooper, a director of the Company who is affiliated
with parties related to IP. These negotiations were overseen by C. Len
Pecchenino, the Company's Chairman of the Board. Because of the conflict of
interest with Messrs. Spass, Gruber, and Cooper, independent directors of the
Company were designated by the Board of Directors to negotiate, on behalf of the
Company, the terms of Stock Purchase Agreement, including the $3.9 million
transaction fee payable to IP and the Commitment Fee Warrants. Mr. Pecchenino
and Thomas J. Jamieson, in consultation with the Company's lawyers and
investment bankers, performed that function.

47
<PAGE> 50

The Board of Directors, in consultation with DLJ, investigated a number of
transaction forms and terms before determining to finance the Acquisition with
the Equity Financings and the Senior Debt Financing, including a larger debt
offering, a private equity offering to a wider group of institutional investors,
and an underwritten public offering of Common Stock. The Board of Directors
determined that a majority of the financing for the Acquisition should be equity
in order to avoid incurring excessive debt obligations and to provide the
Company with additional stockholders' equity, which it believes will be viewed
favorably by rating agencies, such as A.M. Best. The directors determined that
the expected benefits from the Acquisition and a significant equity financing
would outweigh any limitation on the availability of the Company's NOLs as a
result of the likely "ownership change" (as defined in Section 382 of the Code)
that would occur upon the consummation of such an equity financing. See
"Description of Superior National Capital Stock -- Delaware Anti-Takeover Law
and Certain Charter Provisions." Further, in negotiations with FHC it became
clear that the Company would have to guarantee the availability of its
financing. Thus, when the Acquisition was to close, the Company would have to
have committed financing that it could call upon quickly and be confident that
sufficient funds would be available at the designated time. This need made it
impractical for the Company to structure its financing arrangements for the
Acquisition solely in reliance upon transactions that would depend upon the
decisions of a large group of private purchasers or upon access to the public
market at a future date. These transaction forms presented too much risk that
the market would be unfavorable and no financing transaction meeting the
Company's needs could be completed on a timely basis. The Company determined,
therefore, to complete the equity transactions with IP, in the form of the IP
Stock Issuance and the Stock Offering, backed by the Standby Commitment, because
it had assisted the Company in procuring the Acquisition, had communicated its
desire and ability to enter quickly into a private equity investment agreement
with the Company committing IP to provide a substantial portion of the
Acquisition price, which enabled the Company to convince FHC that it could
finance the Acquisition, and was an investment group known to the Company. The
IP Stock Issuance, in conjunction with the Standby Commitment, gave the Company
and FHC confidence that the Company would raise the equity financing necessary
to complete the Acquisition, which, in turn, upon the advice of the Company's
financial advisor, made the likelihood of successfully completing the Senior
Debt Financing significantly greater.

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<PAGE> 51

UNAUDITED PRO FORMA FINANCIAL INFORMATION

The following Unaudited Pro Forma Financial Information of the Company for
the six months ended June 30, 1998 and the year ended December 31, 1997 presents
the results of operations for the Company as if the Acquisition had been
consummated as of the beginning of each period presented. The pro forma
adjustments are based on available information and certain assumptions the
Company currently believes are reasonable in the circumstances. The Unaudited
Pro Forma Financial Information has been derived from and should be read in
conjunction with the historical Consolidated Financial Statements and Notes of
the Company for the six months ended June 30, 1998 (unaudited) and the year
ended December 31, 1997 and the historical Combined Financial Statements and
Notes of BIG for the six months ended June 30, 1998 (unaudited) and the year
ended December 31, 1997 contained elsewhere herein, and should be read in
conjunction with the accompanying Notes to Unaudited Pro Forma Financial
Information.

The pro forma information is presented for illustrative purposes only and
is not necessarily indicative of the results of operations that would have
occurred had the Acquisition been consummated on the dates assumed, nor is the
pro forma information intended to be indicative of the Company's future results
of operations.

49
<PAGE> 52

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET

<TABLE>
<CAPTION>
AS OF JUNE 30, 1998
------------------------------------------------------
PURCHASE
SUPERIOR ACCOUNTING PRO FORMA
NATIONAL BIG ADJUSTMENT(1) COMBINED
-------- ---------- ------------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
ASSETS
Investments:
Bonds and notes:
Available-for-sale, at market..................... $180,830 $ 667,290 $ $ 848,120
Held-to-maturity, at amortized value.............. -- 10,838 10,838
Equity securities, at market........................ 5,263 -- 5,263
Real estate......................................... -- 29,496 (29,496)(a) --
Note from parent...................................... -- 10,000 (10,000)(b) --
Short-term investments, at cost....................... 650 -- 650
-------- ---------- --------- ----------
Total investments............................... 186,743 717,624 (39,496) 864,871
Cash and cash equivalents............................... 4,421 50,579 29,496(a) 109,293
10,387(b)
17,509(c)
107,000(e)
177,100(f)
(7,799)(g)
(256,500)(h)
(28,500)(h)
5,600(i)
Reinsurance receivables................................. 55,474 243,538 299,012
Premiums receivable..................................... 23,375 75,536 98,911
Earned but unbilled premiums receivable................. 11,143 15,194 26,337
Accrued investment income............................... 1,799 11,232 (387)(b) 12,644
Deferred policy acquisition costs....................... 5,422 21,629 27,051
Income tax receivable................................... -- 17,509 (17,509)(c) --
Deferred income taxes................................... 22,592 18,585 (18,585)(j) 22,592
Funds held by reinsurer................................. 5,969 -- 5,969
Prepaid reinsurance premiums............................ 25,822 19,400 45,222
Goodwill................................................ 35,248 13,813 (13,813)(k) 35,248
Prepaid and other....................................... 18,028 21,010 39,038
-------- ---------- --------- ----------
Total Assets.................................... $396,036 $1,225,649 $ (35,497) $1,586,188
======== ========== ========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Claim and claim adjustment expenses..................... $154,843 $ 690,515 $ 845,358
Unearned premiums....................................... 16,198 47,827 64,025
Reinsurance payable..................................... 17,964 67,942 85,906
Long-term debt.......................................... 30 121,750 $(121,750)(d) 107,030
107,000(e)
Deferred credit -- negative goodwill.................... 80,333(h) 53,535
5,600(i)
(18,585)(j)
(13,813)(k)
Policyholder dividends.................................. 1,370 3,473 4,843
Capital lease........................................... 6,960 -- 6,960
Discontinued operations -- liabilities.................. 10,861 10,861
Accounts payable and other liabilities.................. 28,064 50,559 (7,799)(g) 70,824
-------- ---------- --------- ----------
Total Liabilities............................... 236,290 982,066 30,986 1,249,342
Trust preferred securities.............................. 101,051 -- 101,051
Stockholders' equity
Common stock............................................ 34,333 167,416 195,520(f) 227,433
(167,416)(h)
(2,420)(f)
Paid-in capital warrants................................ 2,206 -- 2,206
Accumulated other comprehensive income.................. --
Unrealized gain on investments, net of taxes............ 1,225 3,884 (3,884)(h) 1,225
Retained earnings....................................... 26,076 72,283 121,750(d) 26,076
(194,033)(h)
Less: Notes receivable from subscribed stock............ -- -- (16,000)(f) (16,000)
Less: 245,000 shares of treasury stock at cost.......... (5,145) -- -- (5,145)
-------- ---------- --------- ----------
Total Stockholders' Equity...................... 58,695 243,583 (66,483) 235,795
-------- ---------- --------- ----------
Total Liabilities and Stockholders' Equity...... $396,036 $1,225,649 $ (35,497) $1,586,188
======== ========== ========= ==========
</TABLE>

Footnotes on following page

50
<PAGE> 53

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

(1) Description of Pro Forma Adjustments

(a) Adjustment represents the sale of real estate to FHS at current book value,
pursuant to the Acquisition Agreement.

(b) Adjustment represents FHC's repayment of an intercompany promissory note
including principal and interest, pursuant to the Acquisition Agreement.

(d) Adjustment represents FHC's forgiveness of intercompany debt at the time of
the Acquisition, pursuant to the Acquisition Agreement.

(e) Adjustment represents the issuance of debt in connection with the Senior
Debt Financing in the amount of $110.0 million, net of transaction costs in
the amount of $3.0 million, in connection with the Acquisition.

(f) Adjustment represents the Equity Financings proceeds of $200 million less
Employee Participation of $16.0 million which is shown as a contra equity
account, net of transaction costs in the amount of $6.9 million, which
include the $3.9 million transaction fee payable to IP under the Stock
Purchase Agreement, in connection with the Acquisition. The Company will pay
a fee to IP consisting of the Commitment Fee Warrants, which are exercisable
to purchase 734,000 shares of Common Stock at a purchase price of $16.75, in
consideration of the Standby Commitment. Zurich will receive 205,520 of
these warrants in consideration of certain financing commitments to IP II.

The Company will incur compensation expense for up to 645,239 shares issued
to employees and consultants with an "in-the-money" value, assumed for
purposes of this calculation to be $3.75 per share, which is the difference
between the $20.50 per share market price at May 4, 1998, the day
immediately prior to the public announcement of the Stock Offering, and the
$16.75 Subscription Price of the Rights. The actual compensation expense the
Company will incur will be equal to the actual number of shares purchased
pursuant to the Employee Participation multiplied by the "in-the-money"
value, if any, on the day the Rights are exercised. In the event the market
price on such date is equal to or below $16.75, the Company expects that
there may be little to no purchases under the Employee Participation, which
would result in no or substantially less borrowing than the amount
presented. On September 30, 1998, the last reported trading price for a
share of Common Stock on Nasdaq was $16.38.

(g) Adjustment to settle intercompany payable arising in the ordinary course of
business with FHS, pursuant to the Acquisition Agreement.

(h) Adjustments represent $256.5 million payable to FHC to acquire BIG, plus an
expected $28.5 million capital contribution as set forth in the Company's
applications for regulatory approval of the Acquisition, and corresponding
adjustment to Common Stock and additional paid-in capital to reflect the
elimination of BIG's stockholders' equity interest.

(i) Adjustment represents the sale of BICO to Zurich Centre Group LLC or its
designee for estimated proceeds of $5.6 million. The Company will retain
BICO's insurance business, infrastructure, liabilities, and employees.

(j) Adjustment represents the elimination of the deferred tax asset related to
the election under Section 338(h) of the Code taken by FHC.

(k) Adjustment represents the elimination of BIG's goodwill existing prior to
the Acquisition.

51
<PAGE> 54

PRO FORMA FINANCIAL INFORMATION

ACQUISITION OF BUSINESS INSURANCE GROUP, INC. BY SUPERIOR NATIONAL INSURANCE
GROUP, INC.

PURCHASE ACCOUNTING METHOD

UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

[CAPTION]

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1998
-------------------------------------------------
PRO
FORMA
ADJUST-
MENTS PRO
SUPERIOR INC. FORMA
NATIONAL BIG (DECR)(1) COMBINED
---------- -------- --------- -----------
<S> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE
AMOUNTS)
<S> <C> <C> <C> <C>
REVENUES:
Net premiums earned..... $ 50,206 $215,911 -- $ 266,117
Net investment income
and capital gains..... 8,014 18,490 (1,296)(a) 25,208
Other income............ 100 100
---------- -------- --------- -----------
Total
Revenues...... 58,220 234,501 (1,296) 291,425
EXPENSES:
Claim and claim
adjustment expenses,
net of reinsurance.... 26,319 182,385 -- 208,704
Underwriting and general
and administrative
expenses.............. 18,406 63,156 2,420(g) 83,982
Policyholder
dividends............. -- 1,763 1,763
Goodwill amortization... 639 447 (447)(c) (334)
(973)(d)
Interest expense........ -- 4,718 (4,718)(e) 4,400
4,400(b)
Loss on termination of
financing transaction
with a related party
reinsurer.............
Other expense........... 375 -- 375
---------- -------- --------- -----------
Total
Expenses...... 45,739 252,469 682 298,890
---------- -------- --------- -----------
Income (loss) before
income taxes,
preferred securities
dividends and
accretion,
discontinued
operations,
extraordinary items,
and cumulative effect
of change in
accounting for income
taxes................. 12,481 (17,968) (1,978) (7,465)
Income tax expense
(benefit)............. 4,665 (10,191) 2,874(f) (2,652)
---------- -------- --------- -----------
Income (loss) before
preferred securities
dividends and
accretion, and
extraordinary items... $ 7,816 $ (7,777) $ (4,852) $ (4,813)
========== ======== ========= ===========
BASIC EPS:
Per Common Share:
Net income (loss)....... $ 1.34 $ (0.27)
Weighted average shares
outstanding........... 5,853,713 17,794,012
DILUTED EPS:
Per Common Share:
Net income (loss)....... $ 0.99 $ (0.24)
Weighted average shares
outstanding........... 7,912,227 19,959,000

<CAPTION>
(RESTATED) (RESTATED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Net premiums earned..... $ 140,920 $ 19,507 $515,272 -- $ 675,699
Net investment income
and capital gains..... 12,674 1,449 44,724 (1,996)(a) 56,851
Other income............ -- -- 3,512 3,512
---------- --------- -------- --------- -----------
Total
Revenues...... 153,594 20,956 563,508 (1,996) 736,062
EXPENSES:
Claim and claim
adjustment expenses,
net of reinsurance.... 90,447 25,841 443,204 559,492
Underwriting and general
and administrative
expenses.............. 37,695 10,769 170,070 2,420(g) 220,954
Policyholder
dividends............. -- 1,006 793 1,799
Goodwill amortization... 1,039 -- 1,262 (1,262)(c) (908)
(1,947)(d)
Interest expense........ 6,335 589 8,326 (8,326)(e) 15,724
8,800(b)
Loss on termination of
financing transaction
with a related party
reinsurer............. 15,699 15,699
Other expense........... 817 -- -- -- 817
---------- --------- -------- --------- -----------
Total
Expenses...... 152,032 38,205 623,655 (315) 813,577
---------- --------- -------- --------- -----------
Income (loss) before
income taxes,
preferred securities
dividends and
accretion,
discontinued
operations,
extraordinary items,
and cumulative effect
of change in
accounting for income
taxes................. 1,562 (17,249) (60,147) (1,681) (77,515)
Income tax expense
(benefit)............. 1,099 612 (29,506) 1,131(f) (26,664)
---------- --------- -------- --------- -----------
Income (loss) before
preferred securities
dividends and
accretion, and
extraordinary items... $ 463 $ (17,861) $(30,641) $ (2,812) $ (50,851)
========== ========= ======== ========= ===========
BASIC EPS:
Per Common Share:
Net income (loss)....... $ 0.09 $ (2.96)
Weighted average shares
outstanding........... 5,249,736 17,190,034
DILUTED EPS:
Per Common Share:
Net income (loss)....... $ 0.07 $ (2.68)
Weighted average shares
outstanding........... 7,016,165 18,956,463
</TABLE>

Footnotes on following page

52
<PAGE> 55

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

(1) Description of Pro Forma Adjustments.

(a) Adjustment represents the elimination of net investment income for real
estate sold to FHC and interest on the promissory note from FHC, pursuant to
the Acquisition Agreement.

(b) Adjustment represents estimated interest expense on the $110.0 million of
debt to be issued in connection with the Senior Debt Financing. The Company
is using an estimated interest rate of 8.0% for purposes of this
calculation, which assumes a benchmark ten year treasury rate plus a credit
spread that the Company believes is reasonable. A one percentage point
change in the interest rate on such debt would result in an annual
increase/decrease in interest expense of approximately $1.1 million.

(d) Adjustment represents the amortization of the negative goodwill (deferred
credit) on a straight line basis over 27.5 years.

(e) Adjustment represents the elimination of the interest expense at a rate of
7.75% and 6.75% in 1998 and 1997, respectively, associated with $121.7
million of intercompany debt that will be settled by FHC at the time of the
Acquisition.

(f) Adjustment represents the tax effect of the pro forma adjustments,
excluding goodwill, calculated at the statutory rate in effect during the
periods presented.

(g) Adjustment reflects the deferred compensation expense related to the Rights
distribution and is assumed for purposes of this calculation to be the
difference between the $20.50 per share market price on May 4, 1998, the
day immediately prior to the public announcement of the Stock Offering, and
the $16.75 Subscription Price of the Rights. The Rights are fully vested
upon the issuance of the Rights. The actual deferred compensation expense
the Company will incur will be equal to the number of shares purchased
pursuant to the Employee Participation multiplied by the "in-the-money"
value, if any, on the day the Rights are exercised. In the event the market
price on such date is equal to or below $16.75, the Company expects that
there may be little to no purchases under the Employee Participation, which
would result in no or substantially less borrowing than the amount
presented. On September 30, 1998, the last reported trading price for a
share of Common Stock on Nasdaq was $16.38.

(2) The results of Superior National for the year ended December 31, 1997
include the results of SPCC (formerly The Pacific Assurance Company) for
periods subsequent to April 1, 1997.

(3) Pac Rim was acquired on April 11, 1997. The results of operations presented
are for the period January 1, 1997 through March 31, 1997.

53
<PAGE> 56

THE STOCK OFFERING

The Stock Offering consists of the Rights Offering and the Employee
Participation. Under the Rights Offering, the Company will issue to existing
stockholders of record as of the Record Date (excluding IP Delaware and IP
Bermuda) and outstanding warrants to purchase Common Stock (other than warrant
holders exercising preemptive rights in connection with the IP Stock Issuance),
one transferable subscription Right to purchase a share of Common Stock for the
Subscription Price of $16.75 for each share of Common Stock (or share of Common
Stock issuable upon the exercise of a warrant). The Employee Participation
consists of the grant, to each employee and consultant of the Company holding
vested and unvested stock options, or granted shares of Restricted Stock, all of
which were issued pursuant to the Company's stock incentive plans, the same form
of Right issued in the Rights Offering, excepting contractual restrictions on
transferability. The closing of the Stock Offering is conditioned upon
completion of the Acquisition.

The Company also has entered into the Stock Purchase Agreement with IP
pursuant to which, subject to certain conditions, IP has provided the Standby
Commitment. The Company will pay a fee in the form of the Commitment Fee
Warrants, exercisable to purchase 734,000 shares of Common Stock at a purchase
price of $16.75, in consideration for the Standby Commitment. No Rights will be
issued to the recipients of the Commitment Fee Warrants.

THE RIGHTS

The Company is distributing transferable Rights at no cost to the holders
of its Common Stock (excluding IP Delaware and IP Bermuda) and warrants to
purchase Common Stock (excluding certain warrant holders as discussed below) as
of the close of business on the Record Date. One Right will be distributed for
each share of Common Stock or, in the case of warrant holders, share of Common
Stock issuable upon the exercise of a warrant, held on the Record Date.
Separately, the Company will distribute the same form of Right, excepting for
contractual restrictions on transferability, to participants in the Employee
Participation. Each Right will entitle the holder to purchase one share of
Common Stock upon the payment of the Subscription Price. An aggregate of
6,544,043 Rights exercisable to purchase an aggregate of 6,544,043 shares of
Common Stock are being distributed in connection with the Rights Offering and
the Employee Participation. The Rights will be evidenced by Subscription
Certificates, which will be delivered by the Subscription Agent and, in the case
of the Rights Offering, will be transferable, and, in the case of the Employee
Participation, will not be transferable. There can be no assurance that the
Common Stock will trade at prices above the Subscription Price. See "Risk
Factors -- Market Considerations."

The issuance by the Company of shares of Common Stock pursuant to the Stock
Offering is not conditioned upon subscription for any minimum number of shares
of Common Stock by holders of the Rights. The completion of the Stock Offering
is conditioned, however, upon completion of the IP Stock Issuance, the Senior
Debt Financing, and the Acquisition. If the Acquisition Agreement is terminated
in accordance with its terms, the Subscription Agent will return all
subscription payments made, without interest.

BEFORE EXERCISING OR SELLING ANY RIGHTS, POTENTIAL INVESTORS ARE URGED TO
READ CAREFULLY THE INFORMATION SET FORTH UNDER "RISK FACTORS."

Each Right issued in the Stock Offering will entitle the holder thereof to
receive, upon payment of the Subscription Price, one share of Common Stock. To
exercise the Rights, holders must deliver payment of the Subscription Price in
funds that are immediately available on or prior to the Expiration Date and
fully comply with the instructions set forth below under the heading
"-- Exercise of Rights." Certificates representing shares of Common Stock
purchased pursuant to the exercise of the Rights will be delivered to
subscribers as soon as practicable after the Closing (expected to be two to
three weeks after the Expiration Date).

EXPIRATION DATE

The Stock Offering and the Rights will expire on the Expiration Date
(November 20, 1998) at 5:00 p.m., New York City time, unless extended. The
Company may extend the Expiration Date, in its sole discretion, up to a total of
30 days and will announce any extensions thereof by not later than 9:00 a.m.,
New York City

54
<PAGE> 57

time, on the business day following the previously scheduled Expiration Date.
Any extension of the Expiration Date will be for at least three Nasdaq trading
days. After the Expiration Date, unexercised Rights will be null and void. The
Company will not be obligated to honor any purported exercise of Rights received
by the Subscription Agent after the Expiration Date, or any exercise for which
immediately available funds are not on deposit with the Subscription Agent on or
prior to the Expiration Date, regardless of when payment or the documents
relating to such exercise were sent.

DETERMINATION OF SUBSCRIPTION PRICE

The Subscription Price of $16.75 was determined in negotiations between the
Company and IP. The Company's objective in establishing the Subscription Price
was to approximate recent trading prices, raise the targeted proceeds, and
provide all of the Company's stockholders with a reasonable opportunity to make
an additional investment in the Company and thus limit to some extent dilution
of their ownership and voting percentage in the Company. In approving the
Subscription Price, the Board of Directors considered such factors as the
alternatives available to the Company for raising capital, the market price of
the Common Stock, pricing of similar transactions, the business prospects for
the Company, and the general condition of the securities markets. There can be
no assurance, however, that the market price of the Common Stock will not
decline prior to the Expiration Date or that, following the issuance of the
Rights and of the Common Stock upon exercise of Rights, a subscribing holder
will be able to sell the Rights or sell the Common Stock purchased in the Rights
Offering at a price equal to or greater than the Subscription Price.

EXERCISE OF RIGHTS

Except for participants in the Employee Participation, Rights may be
exercised by delivery to the Subscription Agent, on or prior to the Expiration
Date, of the properly completed and duly executed Subscription Certificate
evidencing such Rights (together with any required signature guarantees),
accompanied by payment in full of the Subscription Price for each share of
Common Stock to be purchased. Persons exercising Rights may purchase any number
of shares of Common Stock, up to the maximum shown on the Subscription
Certificate. All payments must be made by (i) check or bank draft drawn upon a
U.S. bank or of any postal, telegraphic, or express money order payable to
"Wilmington Trust Company, as Subscription Agent," or (ii) wire transfer of
same-day funds to the account maintained by the Subscription Agent for such
purpose at , Account No. , ABA No. Attn:
[telephone number]. Payment of the Subscription Price will be
deemed to have been received by the Subscription Agent only upon (a) clearance
of any uncertified check, (b) receipt by the Subscription Agent of any certified
check or bank draft drawn upon a U.S. bank or of any postal, telegraphic, or
express money order, or (c) receipt of good funds in the Subscription Agent's
account designated above. PLEASE NOTE THAT FUNDS PAID BY UNCERTIFIED PERSONAL
CHECK MAY TAKE FIVE OR MORE BUSINESS DAYS TO CLEAR. ACCORDINGLY, HOLDERS WHO
WISH TO PAY THE SUBSCRIPTION PRICE BY MEANS OF UNCERTIFIED PERSONAL CHECK ARE
URGED TO MAKE PAYMENT SUFFICIENTLY IN ADVANCE OF THE EXPIRATION DATE TO ENSURE
THAT SUCH PAYMENT IS RECEIVED AND CLEARED BY SUCH DATE, AND ARE URGED TO
CONSIDER PAYMENT BY MEANS OF CERTIFIED OR CASHIER'S CHECK, MONEY ORDER, OR WIRE
TRANSFER OF SAME DAY FUNDS. Subscription Certificates and payment of the
Subscription Price should be delivered to one of the following addresses:

By Mail:

By Hand:

By Overnight Delivery:

By Facsimile (Foreign/APO/FPO use only):

Confirm facsimile by telephone only:

A subscription will not be valid if the Subscription Certificate has not
been received on or before the Expiration Date.
55
<PAGE> 58

Unless a Subscription Certificate (i) provides that the shares of Common
Stock to be issued pursuant to the exercise of Rights represented thereby are to
be delivered to the record holder of such Rights or (ii) is submitted for the
account of an Eligible Institution (as defined below), signatures on such
Subscription Certificate must be guaranteed by an Eligible Institution subject
to the standards and procedures adopted by the Subscription Agent. An "Eligible
Institution" is an eligible guarantor institution (banks, stockbrokers, savings
and loan associations, and credit unions with membership in an approved
medallion signature guarantee program) as defined in the Commission's rules.

A holder who holds shares of Common Stock or warrants for the account of
others, such as a broker, a trustee, or a depositary for securities, should
notify the respective beneficial owners of such shares as soon as possible to
ascertain such beneficial owners' intentions and to obtain instructions with
respect to the Rights beneficially owned by them. Beneficial owners of Common
Stock, warrants, or Rights held through a nominee should contact the nominee and
request the nominee to effect transactions in accordance with the beneficial
owner's instructions. If a beneficial owner wishes to obtain a separate
Subscription Certificate, he or she should contact the nominee as soon as
possible and request that a separate Subscription Certificate be issued in his
or her own name. A nominee may request that any Subscription Certificate held by
it be split into such smaller denominations as it wishes, provided that the
Subscription Certificate to be split is received by the Subscription Agent,
properly endorsed, no later than 11:00 a.m., New York City time, three Nasdaq
trading days prior to the Expiration Date.

If either the number of Rights being exercised is not specified on a
Subscription Certificate, or the payment delivered is not sufficient to pay the
full Subscription Price for all Common Stock stated as being subscribed for, the
holder will be deemed to have exercised the maximum number of Rights that could
be exercised for the amount of the payment he or she delivered. If the payment
delivered exceeds the aggregate Subscription Price for the number of shares of
Common Stock subscribed for, as indicated on the Subscription Certificate(s),
any excess payment remaining after the number of shares so indicated have been
purchased will be refunded as soon as practicable by mail, without interest.

The Instructions accompanying the Subscription Certificates should be read
carefully and followed in detail. PLEASE DO NOT SEND SUBSCRIPTION CERTIFICATES
TO THE COMPANY.

THE METHOD OF DELIVERY OF SUBSCRIPTION CERTIFICATES AND PAYMENT OF THE
SUBSCRIPTION PRICE TO THE SUBSCRIPTION AGENT WILL BE AT THE ELECTION AND RISK OF
THE HOLDERS, BUT, IF SENT BY MAIL, IT IS RECOMMENDED THAT SUCH CERTIFICATES AND
PAYMENTS BE SENT BY REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT
REQUESTED, AND THAT A SUFFICIENT NUMBER OF DAYS BE ALLOWED TO ENSURE DELIVERY TO
THE SUBSCRIPTION AGENT AND CLEARANCE OF PAYMENT PRIOR TO THE EXPIRATION DATE.
BECAUSE UNCERTIFIED PERSONAL CHECKS MAY TAKE FIVE OR MORE BUSINESS DAYS TO
CLEAR, HOLDERS ARE STRONGLY URGED TO PAY, OR ARRANGE FOR PAYMENT, BY MEANS OF
CERTIFIED OR CASHIER'S CHECK, MONEY ORDER, OR WIRE TRANSFER OF SAME DAY FUNDS.

IF THE SUBSCRIPTION PRICE HAS NOT BEEN RECEIVED IN IMMEDIATELY AVAILABLE
FUNDS ON OR PRIOR TO THE EXPIRATION DATE, THE SUBSCRIPTION WILL NOT BE VALID.

All questions concerning the timeliness, validity, form, and eligibility of
any exercise of Rights will be determined by the Company, whose determinations
will be final and binding. The Company, in its sole discretion, may waive any
defect or irregularity, or permit a defect or irregularity to be corrected
within such time as it may determine, or reject the purported exercise of any
Right by reason of any defect or irregularity in such exercise. Subscriptions
will not be deemed to have been received or accepted until all irregularities
have been waived or cured within such time as the Company determines in its sole
discretion. Neither the Company nor the Subscription Agent will be under any
duty to give notification of any defect or irregularity in connection with the
submission of Subscription Certificates or incur any liability for failure to
give such notification.

56
<PAGE> 59

Any questions or requests for assistance concerning the method of
exercising Rights or requests for additional copies of this Prospectus should be
directed to the Information Agent whose address and telephone numbers are set
forth under "-- Information Agent."

NO REVOCATION

ONCE A HOLDER HAS EXERCISED HIS OR HER RIGHTS, THAT EXERCISE MAY NOT BE
REVOKED.

METHOD OF TRANSFERRING RIGHTS

Rights (other than those issued in connection with the Employee
Participation) may be purchased or sold through usual investment channels,
including banks and brokers. It is anticipated that the Rights will trade on
Nasdaq under the symbol "SNTLR." Certain registered broker-dealers have
indicated that they intend to make a market in the Rights during the period the
Rights are outstanding. However, there can be no assurance that a trading market
for the Rights will develop or, if such a market develops, as to how long it
will continue.

The Rights evidenced by a single Subscription Certificate may be
transferred in whole by endorsing the Subscription Certificate for transfer in
accordance with the instructions included thereon. A portion of the Rights
evidenced by a single Subscription Certificate (but not fractional Rights) may
be transferred by delivering to the Subscription Agent a Subscription
Certificate properly endorsed for transfer, with instructions to register that
portion of the Rights indicated thereon in the name of the transferee (and to
issue a new Subscription Certificate to the transferee evidencing such
transferred Rights). In such event, a new Subscription Certificate evidencing
the balance of the Rights will be issued to the holder or, if the holder so
instructs, to an additional transferee. A signature guarantee must be provided
by an Eligible Institution.

Rights issued pursuant to the Employee Participation are not transferable.

The Rights evidenced by a Subscription Certificate also may be sold, in
whole or in part, through the Subscription Agent by delivering to the
Subscription Agent such Subscription Certificate properly executed for sale by
the Subscription Agent. If only a portion of the Rights evidenced by a single
Subscription Certificate is to be sold by the Subscription Agent, such
Subscription Certificate must be accompanied by instructions setting forth the
action to be taken with respect to the Rights that are not to be sold. If the
Rights can be sold, sales of such Rights will be deemed to have been effected at
the weighted average price received by the Subscription Agent for all Rights
sold by it on the day such Rights are sold, less any applicable brokerage
commissions, taxes, and other direct expenses of sale. Promptly following the
settlement of any such sale, the Subscription Agent will send the holder a check
for the net proceeds (after deduction of any applicable brokerage commissions,
taxes, and other direct expenses of the sale) from the sale of any Rights sold.
The Company will pay the fees charged by the Subscription Agent for effecting
sales. Orders to sell Rights must be received by the Subscription Agent prior to
11:00 a.m., New York City time, on the third Nasdaq trading day preceding the
Expiration Date. If fewer than all sales orders received by the Subscription
Agent can be filled, sales proceeds will be prorated among the holders based
upon the number of Rights each holder has instructed the Subscription Agent to
sell during such period, irrespective of when during such period the
instructions are received by the Subscription Agent. The Subscription Agent's
obligation to execute orders for the sale of Rights is subject to its ability to
find buyers. There can be no assurance that the Subscription Agent will be able
to sell any Rights or as to the price the Subscription Agent will be able to
obtain if it is able to effect any such sale. Any Rights that cannot be sold by
the Subscription Agent by 5:00 p.m., New York City time, on the third Nasdaq
trading day preceding the Expiration Date will be returned promptly by mail to
the holder.

Holders wishing to transfer all or a portion of their Rights (but not
fractional Rights) should allow a sufficient amount of time prior to the
Expiration Date for (i) the transfer instructions to be received and processed
by the Subscription Agent, (ii) a new Subscription Certificate to be issued and
transmitted to the transferee or transferees with respect to transferred Rights,
and to the transferor with respect to retained Rights, if any, and (iii) the
Rights evidenced by such new Subscription Certificates to be exercised or sold
by
57
<PAGE> 60

the recipients thereof. Neither the Company nor the Subscription Agent shall
have any liability to a transferee or transferor of Rights if Subscription
Certificates are not received in time for exercise or sale prior to the
Expiration Date.

Except for the engagement fee to be paid by the Company to the Subscription
Agent, all commissions, fees, and other expenses (including brokerage
commissions and transfer taxes) incurred in connection with the purchase, sale,
or exercise of Rights will be for the account of the transferor of the Rights,
and none of such commissions, fees, or expenses will be paid by the Company or
the Subscription Agent.

FOREIGN AND CERTAIN OTHER STOCKHOLDERS

In the event Subscription Certificates cannot be mailed to persons whose
addresses are outside the United States or who have an APO or FPO address, those
Certificates will be held by the Subscription Agent for their account. To
exercise their Rights, these holders must notify the Subscription Agent of their
desire to exercise before 11:00 a.m., New York City time, on the third Nasdaq
trading day preceding the Expiration Date, and must establish to the
satisfaction of the Company that their exercise is permitted under applicable
law. If such a holder does not notify the Subscription Agent and provide
acceptable instructions to the Subscription Agent before that deadline, his or
her Rights will be sold, if feasible, and the net proceeds, if in excess of
$5.00 (after expenses of sale), will be remitted to such holder. Any net
proceeds not distributed will be retained by the Company for general corporate
purposes.

SUBSCRIPTION AGENT

The Company has appointed Wilmington Trust Company as Subscription Agent
for the Stock Offering. The Subscription Agent's address, which is the address
to which the Subscription Certificates and payment of the Subscription Price
must be delivered, is:

By Mail:

By Hand:

By Overnight Delivery:

By Facsimile (Foreign/APO/FPO/use only):

Confirm facsimile by telephone only:

The Subscription Agent will be paid customary fees and reimbursements for
its expenses by the Company. The Company has also agreed to indemnify the
Subscription Agent against any liability that it may incur in connection with
the Stock Offering.

INFORMATION AGENT

The Company has appointed Corporate Investor Communications, Inc. ("CIC")
as Information Agent for the Stock Offering. Any questions or requests for
additional copies of this Prospectus may be directed to the Information Agent at
the following address and telephone number:

Banks and brokers can call collect: ( ) - . All others can call
toll-free (800)
- ---------------.

The Information Agent will be paid customary fees and reimbursed for its
expenses by the Company. The Company has also agreed to indemnify the
Information Agent from certain liabilities that it may incur in connection with
the Stock Offering.

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<PAGE> 61

EMPLOYEE PARTICIPATION

The Board of Directors has approved the grant, pursuant to the Employee
Participation, of the opportunity to participate in the Stock Offering for
employees and consultants holding stock options and grants of Restricted Stock,
all of which have been issued under the terms of equity incentive plans
previously approved by the Company's stockholders. The consultants are employees
of Comprehensive Compensation Claims Management, Inc., a third party provider of
claims administration services to the Company.

As a result, each employee or consultant will receive one non-transferable
right to purchase Common Stock at the Subscription Price of $16.75 for each
Common Stock equivalent share held by them. The opportunity to participate will
be effected through the issuance of the same form of Right issued pursuant to
the Rights Offering, except that each employee or consultant, in order to
participate, will be required to agree that his or her Rights are
non-transferrable.

Issuance of the Rights

In order to receive Rights under the Employee Participation, option holders
and holders of Restricted Stock are required to enter into an Employee
Participation Agreement with the Company. This agreement will contain
restrictions on transferability of the Rights to be issued. Employee
Participation Agreements will be distributed on or before the Record Date.

Rights Non-Transferable; Shares Issued Upon Exercise Non-Transferable

Pursuant to the terms of the Employee Participation Agreement, option
holders and holders of Restricted Stock will be unable to transfer the Rights
issued under the Employee Participation. To enforce the restriction, the Company
will issue a "stop transfer" order to the Subscription Agent for Subscription
Certificates issued in connection with the Employee Participation.

Purchases and sales of publicly traded Rights (if such a market develops),
issued in the Rights Offering by employees and consultants are governed by the
Company's normal stock trading policies. Employees and consultants should obtain
a copy of these policies from the general counsel of the Company before engaging
in any transactions.

Under the terms of the "Stock Subscription Agreement," (under which
purchases of Common Stock by participants in the Employee Participation will
take place), the shares of Common Stock purchased under the Employee
Participation by payment of the Subscription Price will be restricted from
transfer for a period of one year, except in certain limited circumstances.

Stock Purchase Program

The Board of Directors has incorporated a stock purchase program into the
Employee Participation in order to encourage the employees and consultants of
the Company who are eligible to participate in the Employee Participation to
exercise Rights and make an investment in the Common Stock. Each employee and
consultant of the Company who wishes to purchase shares of Common Stock in the
Employee Participation may, in lieu of delivering cash to pay the Subscription
Price, borrow funds from the Company and use the borrowed funds to pay all or a
portion of the Subscription Price and income taxes incurred as a result of
exercise. The maximum amount that may be borrowed is 66% of the value of the
collateral pledged by an individual, with value calculated as set forth below.
Material terms of these loans, including their maturity date and interest rate,
are discussed below in the "Participation Note" paragraph. Employees or
consultants may pledge as collateral for the loan (i) shares of Common Stock
purchased by the employee or consultant under the Employee Participation, (ii)
other shares of Common Stock owned by the employee or consultant, (iii) warrants
held by the employee or consultant, and (iv) vested and unvested options and
Restricted Stock granted to the employee or consultant.

The "value" of a share of Common Stock (including shares of Restricted
Stock) pledged as collateral will be equal to the average closing price (last
trade) of a share of Common Stock for the first ten trading days after the
Rights Offering begins (including the first day Rights are eligible for
trading). The value of each

59
<PAGE> 62

option or warrant pledged as collateral will be equal to the deemed value of the
underlying share of Common Stock, less the exercise price of such security.

Each employee and consultant of the Company who elects to pay all or a
portion of the Subscription Price with loan proceeds shall deliver to the
Subscription Agent a promissory note in favor of the Company (a "Participation
Note") and enter into a pledge agreement with respect to shares, options, or
warrants pledged as collateral (a "Securities Pledge Agreement"). See
"-- Participation Note" and "-- Securities Pledge Agreement."

Exercise of the Employee Participation Right

Participants may exercise their Rights in the Employee Participation by
delivery to the Subscription Agent, on or before the Expiration Date, of the
properly completed and duly executed Subscription Certificate evidencing such
Rights and a duly executed Stock Subscription Agreement, accompanied by payment
in full of the Subscription Price for each share of Common Stock being
purchased. All payments must be made by a combination of (i) delivery of a duly
executed Participation Note, together with a duly executed Securities Pledge
Agreement and the certificates evidencing the securities (other than the shares
being purchased) pledged as collateral under the Securities Pledge Agreement,
(ii) check or bank draft drawn upon a United States bank or postal, telegraphic
or express money order payable to "Wilmington Trust Company, as Subscription
Agent," or (iii) wire transfer of same-day funds to the account maintained by
the Subscription Agent for such purpose at , Account No. ,
ABA No. , Attn: [telephone number]. Payment of the
Subscription Price will be deemed to have been received by the Subscription
Agent only upon (i) acceptance of the Participation Note and the accompanying
documents, (ii) clearance of any uncertified check, (iii) receipt by the
Subscription Agent of any certified check or bank draft drawn upon a United
States bank or of any postal, telegraphic or express money order, or (iv)
receipt of good funds by wire in the Subscription Agent's account designated
above. PLEASE NOTE THAT FUNDS PAID BY UNCERTIFIED PERSONAL CHECK MAY TAKE FIVE
OR MORE BUSINESS DAYS TO CLEAR. ACCORDINGLY, HOLDERS WHO WISH TO PAY THE
SUBSCRIPTION PRICE BY MEANS OF UNCERTIFIED PERSONAL CHECK ARE URGED TO MAKE
PAYMENT SUFFICIENTLY IN ADVANCE OF THE EXPIRATION DATE TO ENSURE THAT SUCH
PAYMENT IS RECEIVED AND CLEARED BY SUCH DATE, AND ARE URGED TO CONSIDER PAYMENT
BY MEANS OF CERTIFIED OR CASHIER'S CHECK, MONEY ORDER, OR WIRE TRANSFER OF SAME
DAY FUNDS. Subscription Certificates, Stock Subscription Agreements, and payment
of the Subscription Price (which may include a Participation Note and Securities
Pledge Agreement) should be delivered to one of the following addresses:

By Mail:

By Hand:

By Overnight Delivery:

A subscription will not be valid if the Subscription Certificate has not
been received on or before the Expiration Date.

Stock Subscription Agreement

The Stock Subscription Agreement will contain a provision that prohibits
the employee or consultant purchasing shares of Common Stock in the Employee
Participation from selling, transferring, or otherwise disposing of or
encumbering those shares for a period of one year, except in certain limited
circumstances. In the event of termination of the employment or consulting
relationship with the Company, the loan evidenced by the Participation Note, if
applicable, and accrued interest thereon, will be immediately due and payable.

Participation Note

Under the terms of the Participation Note, the employee or consultant will
promise to pay the Company the amount borrowed, plus any unpaid accrued interest
thereon. The Company's recourse in event of default
60
<PAGE> 63

on payment of principal or interest will be to the collateral pledged as
security for the Participation Note. The interest rate will be determined by the
Board on the Record Date. The interest accrued on the Participation Note will be
payable on each December 31. Principal on the Participation Note will be due in
a lump sum on the earlier of the tenth anniversary of the Closing, or
termination of the employment or consulting relationship with the Company.
Additionally, the Company may call principal for repayment at any time the loan
amount exceeds 100% of the value of the pledged collateral.

Securities Pledge Agreement

Under the terms of the Securities Pledge Agreement, the employee or
consultant will grant to the Company a security interest in all of the
collateral pledged in order to collateralize the loan amount. The pledge will
secure the payment of all of the obligations of such employee or consultant
under the Participation Note. In the event of default under the Stock
Subscription Agreement, the Participation Note, or the Securities Pledge
Agreement, the Company may seize the pledged collateral in order to satisfy any
outstanding obligations which the employee or consultant may have under such
agreements. There can be no assurance that the liquidation value of the
collateral will be sufficient to satisfy the amount due under the Participation
Note, particularly in light of the fact that the unvested securities will have
no value in liquidation.

No Revocation

ONCE A HOLDER HAS EXERCISED THE RIGHTS ISSUED UNDER THE EMPLOYEE
PARTICIPATION, THAT EXERCISE MAY NOT BE REVOKED.

PREEMPTIVE RIGHTS OF WARRANT HOLDERS

The Company's outstanding warrants to purchase Common Stock grant
preemptive rights to the warrant holders. Due to these rights, the warrant
holders are entitled to be included in the Rights Offering. The IP Stock
Issuance, however, is a separate transaction to which the preemptive rights also
apply. In order to meet its obligations under the preemptive rights, the Company
has offered warrant holders the opportunity to participate in the private
issuance of Common Stock occurring in the IP Stock Issuance. Their participation
in the IP Stock Issuance will be on the basis of one share per share of Common
Stock issuable upon the exercise of their warrants. They may purchase shares at
$16.75 per share (the same price being paid by IP) and the amount of their
purchases will be added to the $94.0 million of shares to be purchased by IP.
Warrant holders who satisfy their preemptive rights by this means will be
excluded from the Rights Offering.

To the extent that a warrant holder has not elected to exercise his or her
preemptive rights by purchasing under the terms of the IP Stock Issuance, that
holder will be eligible to receive Rights in the Rights Offering on the basis of
one share per share of Common Stock issuable upon the exercise of warrants held.

The advantage to the warrant holders of purchasing Common Stock under the
terms of the IP Stock Issuance rather than in the Rights Offering is that the
tax treatment of exercising a contractual right inherent in the warrant (by
purchasing under the terms of the IP Stock Issuance) is probably more favorable
than that of receiving a Right and exercising it. See "Certain Federal Income
Tax Considerations." A disadvantage is that the Common Stock purchased privately
under the terms of the IP Stock Issuance is non-transferable in the public
market other than by complying with Rule 144, while the shares purchased upon
exercise of the Rights will be issued in a registered transaction and will be
freely tradeable on Nasdaq. A further disadvantage is that the ability to
purchase under the terms of the IP Stock Issuance is not transferable. Warrant
holders who have made the election to purchase in that transaction, are not be
eligible to participate in the Rights Offering, even if he or she subsequently
decides not to complete a purchase of shares under the terms of the IP Stock
Issuance.

From the Company's perspective, the total number of shares being made
available to the warrant holders is the same, regardless how they choose to
exercise their preemptive rights. To the extent that any warrant holder has
opted to purchase Common Stock under the terms of the IP Stock Issuance and is
thereby excluded from the Rights Offering, the total number of Rights
distributed will have been reduced by the

61
<PAGE> 64

number of Rights that would have been distributed to the excluded warrant
holders. The Standby Commitment will be based on the proceeds of the Stock
Offering plus the proceeds of purchases by warrant holders who exercised their
preemptive rights by purchasing privately under the terms of the IP Stock
Issuance. Thus, the means chosen by warrant holders to exercise their preemptive
rights is neutral in terms of use or effect of the Standby Commitment.

STANDBY COMMITMENT

To assure the Company that a total of $200.0 million in proceeds will be
provided by the Stock Offering, the IP Stock Issuance and the exercise of
warrant holder preemptive rights to purchase stock under the terms of the IP
Stock Issuance, IP has agreed to purchase up to 6,328,358 shares of Common
Stock, with the exact number being that number of shares necessary to bring the
total proceeds of the Stock Offering, the IP Stock Issuance, the exercise of
warrant holder preemptive rights, and the Standby Commitment to $200.0 million.
Any shares purchased pursuant to the Standby Commitment will be purchased
privately at the Subscription Price under the terms and conditions of the Stock
Purchase Agreement. IP Delaware and IP Bermuda are not participating in the
Stock Offering.

The Standby Commitment is in addition to IP's agreement to purchase a
minimum of 5,611,940 shares of Common Stock at $16.75, or approximately $94.0
million in the aggregate. See "Acquisition of Business Insurance Group,
Inc. -- Equity Financings."

The Company is also obligated to pay a commitment fee to IP (consisting of
the Commitment Fee Warrants, which are exercisable to purchase 734,000 shares of
Common Stock at a $16.75 per share) in consideration of its providing the
Standby Commitment. Of that number, Commitment Fee Warrants to purchase 205,520
shares of Common Stock will be issued to Zurich in consideration of certain
financing commitments to IP II. The Company is obligated to issue the Commitment
Fee Warrants whether or not the Stock Offering is consummated. No Rights will be
issued in respect of the Commitment Fee Warrants.

The rights and obligations of the Company and IP with respect to the
Standby Commitment are subject to certain limited conditions, including the
absence of any pending or threatened action, suit, or proceeding relating to the
Stock Offering or the Stock Purchase Agreement.

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<PAGE> 65

SUPERIOR NATIONAL INSURANCE GROUP, INC.

SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data are qualified by
reference to, and should be read in conjunction with, the consolidated financial
statements and notes thereto included elsewhere in this document. The selected
consolidated financial data set forth below as of and for the years ended
December 31, 1997, 1996, and 1995 have been derived from the audited financial
statements of the Company included elsewhere in this document. The selected
consolidated financial data set forth below as of and for the years ended
December 31, 1994 and 1993 have been derived from audited financial statements
of the Company not included in this document. The selected consolidated
financial data as of and for the six months ended June 30, 1998 and 1997 have
been derived from unaudited consolidated financial statements of the Company,
but include all adjustments, including normally occurring accruals, that the
Company considers necessary for a fair presentation of the results of operations
for the periods presented. The results of operations for the three months ended
June 30, 1998 are not necessarily indicative of the results that may be expected
for the Company's fiscal year ending December 31, 1998.

<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEAR ENDED DECEMBER 31,
----------------------- --------------------------------------------------------------
1998 1997 1997(1) 1996 1995 1994 1993
---------- ---------- ---------- ---------- ---------- ---------- ----------
(RESTATED) (RESTATED)
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Gross premiums written............. $ 81,951 $ 71,090 $ 159,352 $ 99,282 $ 97,084 $ 134,769 $ 157,986
Net premiums written............... 42,080 63,706 136,929 87,715 89,139 105,946 154,431
Net premiums earned................ 50,206 64,388 140,920 88,648 89,735 110,418 153,585
Net investment income (excluding
capital gains and losses)........ 6,985 5,502 12,630 7,738 10,309 9,014 8,481
Net capital gain (loss)............ 1,029 19 44 31 (525) 35 1,069
Other (expense) income, net........ (375) (521) (817) 186 (536) (340) (743)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total revenues............... 57,845 69,388 152,777 96,603 98,983 119,127 162,392
EXPENSES:
Claim and claim adjustment
expenses, net of reinsurance..... 26,319 44.995 90,447 55,638 53,970 78,761 113,817
Underwriting and general and
administrative expenses.......... 18,406 17,849 37,695 34,138 29,447 21,660 28,779
Policyholder dividends............. -- -- -- (5,927) (5,742) 4,983 11,371
Goodwill amortization.............. 639 137 1,039 -- -- -- --
Interest expense................... -- 4,144 6,335 7,527 9,619 8,726 6,221
Loss on termination of financing
transaction with a related party
reinsurer........................ 15,699 15,699
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total expenses............... 45,364 82,824 151,215 91,376 87,294 114,130 160,188
Income from continuing operations
before preferred securities and
extraordinary items -- pre-tax... 12,481 (13,436) 1,562 5,227 11,689 4,997 2,204
Income tax (expense) benefit....... (2,747) 5,036 1,788 (739) 5,849 (4) 2,304
Accretion on preferred securities
-- pre-tax....................... (5,642) (1,374) (4,650) (2,525) (2,255) (1,035) --
(Loss) from operations of
discontinued P&C
operations -- pre-tax(2)......... -- -- -- -- (14,912) -- (4,532)
Extraordinary (loss) -- pre-tax.... -- -- (3,841) -- -- (3,064) (686)
Cumulative effect of change in
accounting for income taxes...... -- -- -- -- -- -- 2,297
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income (loss)............ $ 4,092 $ (9,774) $ (5,141) $ 1,963 $ 371 $ 894 $ 1,587
========== ========== ========== ========== ========== ========== ==========
</TABLE>

63
<PAGE> 66

<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEAR ENDED DECEMBER 31,
----------------------- --------------------------------------------------------------
1998 1997 1997(1) 1996 1995 1994 1993
---------- ---------- ---------- ---------- ---------- ---------- ----------
(RESTATED) (RESTATED)
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
BASIC EPS:(7)
Per common share:
Income before items below -- after
all taxes(3)..................... $ 1.66 $ (1.81) $ 0.64 $ 1.31 $ 5.12 $ 1.45 $ 1.31
Preferred securities -- pre-tax.... (0.96) (0.30) $ (0.89) (0.74) (0.66) (0.30) --
Discontinued
operations -- pre-tax............ -- -- -- -- (4.35) -- (1.32)
Extraordinary items -- pre-tax..... -- -- (0.73) -- -- (0.89) (0.20)
Cumulative effect of change in
accounting -- pre-tax............ -- -- -- -- -- -- 0.67
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income (loss)............ $ 0.70 $ (2.11) $ (0.98) $ 0.57 $ 0.11 $ 0.26 $ 0.46
========== ========== ========== ========== ========== ========== ==========
DILUTED EPS:(7)
Per common shares:
Income before items below -- after
all taxes(3)..................... $ 1.23 $ (1.31) $ 0.47 $ 0.93 $ 4.44 $ 0.97 $ 0.94
Preferred Securities -- pre-tax.... (0.71) (0.21) (0.66) (0.52) (0.57) (0.20) --
Discontinued
operations -- pre-tax............ -- -- -- -- (3.78) -- (0.95)
Extraordinary items -- pre-tax..... -- -- (0.55) -- -- (0.60) (0.14)
Cumulative effect of change in
accounting -- pre-tax............ -- -- -- -- -- -- 0.48
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income (loss)................ $ 0.52 $ (1.52) $ (0.74) $ 0.41 $ 0.09 $ 0.17 $ 0.33
========== ========== ========== ========== ========== ========== ==========
GAAP RATIOS:(4)
Claim and claim adjustment expense
ratio............................ 52.4% 69.9% 64.2% 62.8% 60.1% 71.3% 74.1%
Expense ratio...................... 36.7% 27.7% 26.7% 31.8% 26.4% 24.1% 26.1%
---------- ---------- ---------- ---------- ---------- ---------- ----------
Continuing operations combined
ratios, net of reinsurance....... 89.1% 97.6% 90.9% 94.6% 86.5% 95.4% 100.2%
========== ========== ========== ========== ========== ========== ==========
Ratio of earnings to combined fixed
charges and accretion on
preferred securities(5).......... 1.91x (1.46x) 0.51x 1.27x 1.87x 1.36x 1.33x
FINANCIAL POSITION:
Total cash and investment(6)
Carrying value..................... $ 191,164 $ 244,326 $ 242,116 $ 149,440 $ 49,030 $ 68,595 $ 45,982
Market value..................... 191,164 244,326 242,116 149,440 49,030 68,591 46,212
Investments withheld from a related
party reinsurer.................. -- -- -- -- 114,921 108,283 104,197
Total assets....................... 396,036 395,399 429,473 323,830 240,781 286,776 264,098
Long-term debt..................... 30 44,030 30 98,961 8,530 9,730 6,743
Claim and claim adjustment expense
liability........................ 154,843 213,686 201,225 115,529 141,495 171,258 171,038
Total liabilities.................. 236,290 316,464 268,378 255,068 176,256 227,622 224,044
1994 Preferred securities issued by
affiliate........................ -- 24,945 -- 23,571 21,045 18,790 --
Company-obligated trust preferred
securities....................... 101,051 -- 101,277 -- -- -- --
Net stockholders' equity........... 58,695 53,990 59,818 45,191 43,480 40,364 40,055
Book value per share(7)............ $ 9.98 $ 9.25 $ 10.19 $ 13.11 $ 12.68 $ 11.77 $ 11.68
Outstanding shares(7).............. 5,876,399 5,837,173 5,871,279 3,446,492 3,430,373 3,429,873 3,429,873
</TABLE>

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

(1) The information for the year ended December 31, 1997 includes the financial
data of SPCC for the period beginning April 1, 1997.

(2) The Company's losses from discontinued operations resulted principally from
contractors' and developers' liability business underwritten from 1986 to
1991.

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<PAGE> 67

(3) Since the Company's inception it has not declared or paid any dividends to
its stockholders. "Income before items below -- after all taxes" has been
calculated to include the tax benefits related to the items following.

(4) These ratios are for continuing operations. The claim and claim adjustment
expense ratio is calculated by dividing the claim and claim adjustment
expenses by net premiums earned. The expense ratio is calculated by dividing
the sum of commissions (net of reinsurance ceding commissions), policyholder
dividends, and general and administrative expenses by net premiums earned.
The combined ratio is the sum of the claim and claim adjustment expense
ratio and the expense ratio.

(5) For purposes of calculating the ratio of earnings to combined fixed charges
and accretion on preferred securities, earnings represent income before the
provision (benefit) for income taxes, plus fixed charges. Fixed charges
consist of interest expense, amortization of financing costs, and the
portion of rental expense on operating leases which the Company estimates to
be representative of the interest factor attributable to the leases.
Preferred stock dividends consist of dividends on preferred securities
having an effective interest rate of 11.7% issued in June 1994 by an
affiliate. An aggregate of $20.0 million in such securities were issued and
$26.6 million in face value was repaid in December 1997. The payment was
made out of the proceeds of the Trust Preferred Securities and thereafter
accrual of preferred securities dividends reflects the Trust Preferred
Securities.

(6) Investments as of December 31, 1997 and 1996 are reflected at market value.
As of December 31, 1995 and 1994 a portion of the portfolio was classified
as held to maturity and was therefore reflected at amortized cost and the
remaining portfolio was shown at market value. Investments as of December
31, 1993 are reflected at amortized cost. The changes in portfolio valuation
reflect the adoption of Statement of Financial Accounting Standard No. 115,
effective for fiscal years following December 15, 1993.

(7) Adjust to reflect a four-into-one reverse stock split effective as of May
24, 1995.

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<PAGE> 68

SUPERIOR NATIONAL

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 for 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

The Company recorded an underwriting profit from continuing operations of
$5.5 million in the six month period ended June 30, 1998, versus an underwriting
profit of $1.5 million, excluding a loss on the termination of a financing
transaction with a related party reinsurer (namely, Centre Re) in the
corresponding period in the prior year. The increase in underwriting profit from
continuing operations was primarily the result of an increase in premiums as a
result of the April 11, 1997 acquisition of SPCC. During the six months ended
June 30, 1998, the Company realized net income of $4.1 million or $0.52 per
share on a diluted basis as compared to a loss of $9.8 million or $1.52 per
share on a diluted basis for the six months ended June 30, 1997. In addition to
improved underwriting profit, net income increased due to a $2.5 million
increase in investment income, which resulted from the increase in invested
assets. Invested assets increased due to the SPCC acquisition and the net
proceeds of the issuance of the Trust Preferred Securities discussed below. The
increase in underwriting profit and investment income was offset in part by
dividends and accretion on the Trust Preferred Securities and amortization of
goodwill. The loss in the prior year relates to a $15.7 million charge due to
the termination of a financing transaction with a related party reinsurer.

During 1997, the Company entered into three significant transactions: the
acquisition of Pac Rim, the parent of SPCC, completed April 11, 1997; the
termination of a financing transaction with a related party reinsurer, which
transferred $110.5 million in receivables from the related party reinsurer in
exchange for the cancellation of $94.9 million of long-term debt, completed June
30, 1997; and the issuance by the Trust of $105.0 million in Trust Preferred
Securities, completed December 3, 1997. The Company's income before preferred
securities' dividends and accretion, discontinued operations, and extraordinary
items was $0.5 million in 1997, as compared to $3.6 million in 1996. The
decrease of $3.1 million in income before preferred securities' dividends and
accretion, discontinued operations, and extraordinary items was primarily the
result of a $15.7 million loss on the termination of a financing transaction
with a related party reinsurer. The $15.7 million charge was offset in part by a
$4.9 million increase in investment income before taxes in 1997 and a $5.9
million pre-tax reduction in the accrual for policyholder dividends in 1996. The
increase of $4.9 million in net investment income is primarily due to increases
of $92.7 million and $93.1 million in assets available for investment that
resulted, respectively, from the acquisition of SPCC and the November 1996
financing transaction with The Chase Manhattan Bank ("Chase"). See "-- Liquidity
and Capital Resources."

For the year ended December 31, 1997, the Company recorded a net loss of
$5.1 million after preferred securities' dividends and accretion, discontinued
operations, and extraordinary items, as compared to net income of $2.0 million
for the year ended December 31, 1996. Net loss per share for the year ended
December 31, 1997 was $0.74 (diluted) versus net income per share of $0.41
(diluted) in 1996. During 1997, the Company recorded a $15.7 million pretax
charge as a result of the termination of a financing transaction with a related
party reinsurer as compared to 1996, when no such charges were recorded.
Further, during 1997, the Company recorded $3.0 million in dividend expense and
accretion on preferred securities, as compared to $1.7 million in 1996.

For the year ended December 31, 1996, the Company's net income was $2.0
million, as compared to $0.4 million in 1995. Net income per share for the year
ended December 31, 1996 was $0.41 (diluted) versus $0.09 (diluted) for the year
ended December 31, 1995. Income before preferred securities' dividends and
accretion, discontinued operations, and extraordinary loss was $3.6 million for
the year ended December 31, 1996, versus $11.7 million in 1995. The decrease in
1996 was due principally to a $5.3 million expense for a negotiated settlement
of a reinsurance contract with Centre Re, as well as an increase of $1.7 million
from 1995 claim and claim adjustment expense. Income before preferred
securities' dividends and accretion,

66
<PAGE> 69

discontinued operations, and extraordinary loss, excluding the above discussed
adjustments, was $10.6 million for the year ended December 31, 1996, as compared
to $11.7 million for the comparable period of 1995. See "Certain Relationships
and Related Transactions -- Transactions with Affiliates of Zurich, Including
Centre Re."

SIX MONTHS ENDED JUNE 30, 1998 AS COMPARED TO SIX MONTHS ENDED JUNE 30, 1997

Gross written premium increased $10.9 million or 15.3% to $82.0 million in
the first six months of 1998 as compared to the same period in 1997.
Substantially all of this increase can be attributed to the addition of business
written by SPCC. Net written premium decreased $21.6 million or 33.9% to $42.1
million in the first six months of 1998 as compared to the same period in 1997.
This decrease is primarily due to $31.6 million in premiums ceded under the
Quota-Share Arrangement, which is partially offset by a $10.9 million increase
to gross written premiums. Net premium earned decreased $14.2 million or 22% to
$50.2 million in the first six months of 1998 as compared to the same period in
1997, reflecting the decrease in net written premium.

Net claim and claim adjustment expenses decreased $18.7 million or 41.5% to
$26.3 million in the first six months of 1998 as compared to the same period in
1997. This decrease primarily reflects a $17.7 million increase in ceded claim
and claim adjustment expense related to the Quota-Share Arrangement. The net
claim and claim adjustment expense ratio decreased to 52.4% in the first six
months of 1998 from 69.9% in the same period of 1997. This decrease in the net
claim and claim adjustment expense ratio is due to an increase, during the
second quarter of 1997, in claim and claim adjustment expenses relative to the
related premium level from activity related to the SPCC acquisition.

Underwriting and general and administrative expenses, excluding the loss on
the termination of a financing transaction with a related party reinsurer
(namely, Centre Re), increased $6.0 million or 54.5% to $16.9 million in the
first six months of 1998, as compared to the same period in 1997. This increase
is primarily due to the acquisition of SPCC and partially due to a $1.8 million
expense. The $1.8 million expense is related to the commutation of a reinsurance
contract effective June 30, 1998 where the Company and Zurich Reinsurance (North
America), Inc. ("ZRNA") entered an agreement to settle and commute all
obligations and liabilities known and unknown associated with a quota share
reinsurance contract, effective January 1, 1994, between SNIC and ZRNA (the
"ZRNA Quota-Share") and its related Assumption of Liability Endorsement facility
for the contract years incepting January 1, 1994, 1995, 1996, and 1997. The
commutation was negotiated in accordance with the commutation provision from the
original ZRNA Quota-Share contract. See "Superior
National -- Business -- Reinsurance." Net commission expense decreased $5.4
million or 78.7% to $1.5 million in the first six months of 1998, as compared to
the same period in 1997. The decrease in net commission expense is mainly due to
$6.6 million in ceded commission related to the Quota-Share Arrangement, which
is partially offset by an increase in gross commission expense related to the
increase in gross written premium. Net underwriting and general and
administrative expenses increased 3.1% to $18.4 million in the first six months
of 1998 from $17.8 million in the same period of 1997, reflecting the changes
discussed above.

The Company recorded an underwriting profit, excluding the loss on the
termination of a financing transaction with a related party reinsurer, from
continuing operations of $5.5 million in the first six months of 1998, versus
$1.5 million for the same period in 1997. The increase in underwriting profit
from continuing operations was primarily the result of the decrease in claim and
claim adjustment expense discussed above, along with a decrease in underwriting
and general and administrative expenses.

Net investment income, excluding realized investment gains/losses,
increased $1.5 million or 27.0% to $7.0 million in the first six months of 1998
compared to the same period in 1997. The improvement was due to the increase in
assets available for investment resulting from the SPCC acquisition and the
availability of $30.0 million in invested assets as a result of the issuance of
the Trust Preferred Securities. Excluding the assets acquired in the SPCC
acquisition and the increase in invested assets due to the issuance of the Trust
Preferred Securities, net investment income decreased $2.6 million or 46.4% to
$2.9 million in the first six months of 1998 as compared to the same period in
1997. This 46.4% decrease was due to a decrease in the average investable asset
of $10.9 million as compared to the same period in 1997.

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No interest expense was incurred in the first six months of 1998 as
compared to $4.1 million for the same period in 1997, due to the repayment in
the fourth quarter of 1997 of all long-term debt with funds obtained through the
sale of the Trust Preferred Securities.

In June 1997, the Company recorded a $15.7 million charge related to the
termination of a financing transaction with Centre Re, a related party
reinsurer. The termination of the financing transaction transferred $110.5
million in receivables from the related party reinsurer in exchange for the
cancellation of $94.9 million in indebtedness to Chase. No such charges were
incurred in the 1998 period.

Distributions and accretion on preferred securities increased by $4.3
million to $5.6 million in the first six months of 1998 as compared to the same
period in 1997, as a result of the issuance of the Trust Preferred Securities
and by the redemption of preferred securities issued by an affiliate in December
1997.

A summary of net investment income, excluding capital gains (losses), for
the six months ended June 30, 1998 and 1997 is as follows (in thousands):

<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------
1998 1997
------ ------
<S> <C> <C>
Interest on bonds and notes................................. $6,685 $2,798
Interest on invested cash................................... 518 3,052
Other....................................................... 143 --
------ ------
Total investment income..................................... 7,346 5,850
Capital gains............................................... 1,029 19
Investment expense.......................................... 361 348
------ ------
Net investment income....................................... $8,014 $5,521
====== ======
</TABLE>

The distribution of the Company's consolidated investment portfolio is as
follows:

<TABLE>
<CAPTION>
JUNE 30, 1998
(UNAUDITED) DECEMBER 31, 1997
-------------------- --------------------
CARRYING MARKET CARRYING MARKET
VALUE VALUE VALUE VALUE
AVAILABLE FOR SALE: -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Government Agencies and
Authorities........................... $ 60,405 $ 60,405 $ 90,097 $ 90,097
Collateralized Mortgage Obligations..... 40,923 40,923 73,481 73,481
Corporate Instruments................... 22,707 22,707 41,636 41,636
Special Revenue and Special
Assessment............................ 56,795 56,795 -- --
-------- -------- -------- --------
Total Available for Sale................ $180,830 $180,830 $205,214 $205,214
======== ======== ======== ========
</TABLE>

<TABLE>
<CAPTION>
JUNE 30, 1998
(UNAUDITED) DECEMBER 31, 1997
---------------- ------------------
MARKET MARKET
COST VALUE COST VALUE
EQUITY SECURITIES ------ ------ ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Corporate....................................... $5,179 $5,263 $1,356 $1,526
------ ------ ------ ------
Total........................................... $5,179 $5,263 $1,356 $1,526
====== ====== ====== ======
</TABLE>

The Company's management monitors the matching of assets and liabilities
and attempts to maintain the Company's portfolio's investment duration at the
mid-point of the length of its net claim and claim adjustment expense payout
pattern. Investment duration is the weighted average measurement of the current
maturity of a fixed income security, in terms of time, of the present value of
the future payments to be received from that security. However, in selecting
assets to purchase for its investment portfolio, the Company considers each
security's modified duration and the effect of that security's modified duration
on the portfolio's overall modified duration. Modified duration is a measurement
that estimates the percentage change in market value of an investment for a
small change in interest rates. The modified duration of fixed maturities at
June 30, 1998 was 2.94 years compared to 2.90 years at December 31, 1997. At
June 30, 1998, 99.5% of the carrying

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<PAGE> 71

values of investments in the fixed maturities portfolio were rated as investment
grade by the Securities Valuation Office of NAIC.

Discontinued operations had claim and claim adjustment expense reserves of
$11.3 million as of June 30, 1998, which was consistent with management's
expectations. The Company has significant exposure to construction defect
liabilities on P&C insurance policies underwritten from 1986 to 1993. Management
continues to closely monitor the Company's potential exposure to construction
defect claims and has not changed its estimates of ultimate claim and claim
adjustment expenses on discontinued operations since 1995. Management believes
its current reserves are adequate to cover the Company's claims activity. There
can be no assurance, however, that further upward development of ultimate loss
costs associated with construction defect claims will not occur. The Company
will continue to closely monitor the adequacy of its claim and claim adjustment
expense reserves in the discontinued operations. Offsetting these liabilities
are $0.5 million in reinsurance recoverable on paid and unpaid claim and claim
adjustment expenses.

YEAR ENDED DECEMBER 31, 1997 AS COMPARED TO YEAR ENDED DECEMBER 31, 1996

Gross written premium for the years ended December 31, 1997 and 1996 was
$159.4 million and $99.3 million, respectively. This increase in gross written
premium represents an increase of $60.1 million or 60.5% for the 1997 policy
year as compared to the 1996 policy year. Substantially all of this increase can
be attributed to business written related to SPCC. Net written premium increased
$49.2 million or 56.1% to $136.9 million for the year ended December 31, 1997,
as compared to the year ended December 31, 1996. This increase reflects the
increase in gross written premium. Net premium earned increased $52.3 million or
59.0% to $140.9 million for the year ended December 31, 1997, as compared to the
year ended December 31, 1996.

For the year ended December 31, 1997, net claim and claim adjustment
expenses increased $34.8 million or 62.6% to $90.4 million as compared to $55.6
million for the year ended December 31, 1996. The entire increase of claim and
claim adjustment expense relates to the acquisition of SPCC. The net claim and
claim adjustment expense ratio increased to 64.2% for the year ended December
31, 1997, as compared to 62.8% for the year ended December 31, 1996. The
increase in the claim and claim adjustment expense ratio is due primarily to the
1997 accident year. Although the Company has continued to experience a reduction
in the frequency of claims, at the same time there has been an increase in claim
severity for injuries sustained in 1995 and thereafter. To address the
increasing severity trend, management has put into place the Claim Severity
Management Program that is intended to reduce the Company's average ultimate
loss cost per claim and claim adjustment expense for 1995 and subsequent dates
of injury. See "Superior National -- Business -- Claim Severity Management
Program."

Underwriting and general and administrative expenses, excluding
policyholder dividends and a loss on the termination of a financing transaction
with a related party reinsurer, increased $3.6 million or 10.4% to $37.7 million
for the year ended December 31, 1997, as compared to the same period in 1996.
This increase primarily resulted from the SPCC acquisition. Excluding the
one-time expense of $5.3 million for the cancellation in 1996 of a reinsurance
contract, underwriting expenses for 1997 increased $8.9 million or 30.9%. The
Company's expense ratio decreased to 26.7% from 38.5% for the year ended
December 31, 1997, as compared to 1996. The decrease in the expense ratio from
1997 to 1996 is due to the 1996 expense of $5.3 million in connection with a
negotiated settlement of a reinsurance contract with Centre Re, and an increase
in premium without a corresponding increase in expense resulting from the SPCC
acquisition.

No policyholder dividends were paid during the year ended December 31,
1997, as compared to $1.3 million of such dividends during fiscal 1996. 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 price at a policy's inception
under open rating, dividends are currently no longer a significant factor in the
marketing of workers' compensation insurance in California. In 1995, as a result
of the diminishing value of policyholder dividends as a marketing tool, the
Company's management declared a moratorium in the payment of policyholder
dividends for California policies. 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 the Company.
As a result of the change in

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<PAGE> 72

policyholder dividend practices, a $5.9 million accrual (pre-tax) was reversed
in 1996. Dividends were paid to the extent that a surplus was accumulated from
the premium paid on the specific workers' compensation policy.

Net investment income increased $4.9 million or 63.1% to $12.7 million for
the year ended December 31, 1997, as compared to 1996. The increase in
investment income is due to a $92.7 million increase in assets available for
investment that resulted from the acquisition of SPCC.

Interest expense decreased 15.8% to $6.3 million for the year ended
December 31, 1997, as compared to 1996. The decline in interest expense is due
primarily to the elimination of the funds withheld balance.

In June 1997, the Company recorded a $15.7 million charge related to the
termination of a financing transaction with Centre Re, a related party
reinsurer. The termination of the financing transaction transferred $110.5
million in receivables from a related party reinsurer in exchange for the
cancellation of $94.9 million in indebtedness to Chase. No such charges were
incurred in the 1996 period.

Discontinued operations claim counts and losses as of December 31, 1997
were 215 and $13.5 million, respectively. These amounts and estimates are
consistent with management's expectations. The Company has significant exposure
to construction defect liabilities on P&C insurance policies underwritten from
1986 to 1993. Management continues to monitor closely its potential exposure to
construction defect claims and has not changed its estimates of ultimate claim
and claim adjustment expense on discontinued operations since 1995. Management
believes its current reserves are adequate to cover its claim liabilities. There
can be no assurance, however, that further upward development of ultimate loss
costs associated with construction defect claims will not occur. See "Superior
National -- Business -- Discontinued Operations."

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

Gross written premium increased $2.2 million or 2.3% to $99.3 million in
1996 from 1995. The increase in gross written premium in 1996 was due primarily
to the Company's continued strategy of underwriting smaller risks where the
competition has been less fierce, as compared to larger policies. Net written
premium decreased $1.4 million or 1.6% to $87.7 million reflecting an increased
amount of premiums ceded to reinsurers. Net premiums earned decreased $1.1
million or 1.2% to $88.6 million in 1996 from 1995, reflecting, in part, an
increase in ceded premiums.

Claim and claim adjustment expenses increased $1.7 million or 3.1% to $55.6
million in 1996 from 1995, due principally to adverse development in claim and
claim adjustment expense reserves related to the 1995 accident year. The claim
and claim adjustment expense ratio as a percentage of net earned premium
increased slightly to 62.8% in 1996 from 60.1% in the 1995 accident year.

Underwriting and general and administrative expenses, excluding
policyholder dividends, increased $4.7 million or 16% to $34.1 million in 1996
from 1995. The increase in underwriting and general and administrative expenses,
excluding policyholder dividends, was due primarily to a $5.3 million expense in
connection with a negotiated settlement of a reinsurance contract with Centre
Re. See "Certain Relationships and Related Transactions -- Transactions with
Affiliates of Zurich, Including Centre Re." Underwriting and general and
administrative expenses for 1996, excluding the $5.3 million in accrued costs,
were $28.8 million as compared to $29.4 million in 1995. The Company's expense
ratio, excluding the $5.3 million in accrued costs and policyholder dividends,
was 32.5% for 1996, which is comparable to 32.8% in 1995.

Policyholder dividend expenses for 1996 were comparable to 1995,
constituting a decrease in underwriting expense of $5.9 million in 1996 as
compared to $5.7 million in 1995.

Underwriting profit from continuing operations decreased $7.3 million or
60% to $4.8 million in 1996 from 1995, principally due to a $4.7 million
increase in underwriting expense. The increase in underwriting and general and
administrative expenses was due primarily to the cost of canceling the
reinsurance contract discussed above, and $2.0 million in claim and claim
adjustment expense due as a result of adverse development on reserves related to
prior accident years.

Net investment income decreased $2.0 million or 20% to $7.8 million in 1996
as compared to 1995. The decline in investment income was due 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
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<PAGE> 73

compared to 1995. While a financing transaction involving Chase and Centre Re
entered into in November 1996 substantially increased the size of the investment
portfolio on which the Company retained investment income, it occurred too late
in 1996 to have a material effect on 1996 net investment income results. See "--
Liquidity and Capital Resources."

LIQUIDITY AND CAPITAL RESOURCES

Liquidity is a measure of an entity's ability to secure sufficient cash to
meet its contractual obligations and operating needs. The Company's cash inflows
are generated from cash collected for policies sold, investment income on the
existing portfolio, and sales and maturities of investments. The Company's cash
outflows consist primarily of payments for policyholders' claims, operating
expenses, and debt service. For their insurance operations, the Company's
Subsidiaries must have available sufficient cash and liquid assets to meet their
obligations to policyholders and claimants in accordance with contractual
obligations in addition to meeting their ordinary operating costs. Absent
adverse material changes in the workers' compensation insurance market, and
based on the expectation that the financing transactions in connection with the
Acquisition will be completed, management believes that the Company's present
cash resources are sufficient to meet the needs of the Company for the
foreseeable future.

Six Month Comparison

During the first six months of 1998, the Company used $40.0 million of cash
in its operations versus cash used of $11.9 million during the same period in
1997. This $28.1 million increase in cash used is primarily due to the addition
of SPCC's operations beginning April 1, 1997. The Company's continued negative
cash flow is the result of the Company's historical in force premium bases being
significantly higher than its current level and higher than expected payments of
claim and claim adjustment expenses in the 1995 and 1996 accident years. The
Company anticipates it will continue to experience negative cash flow from
operations until the claims related to the historically higher premium base have
been paid out. In addition, the reduction in net written premium arising out of
the Quota-Share Arrangement for large accounts will increase negative cash flow
substantially. Although the Company has implemented its Claim Severity
Management Program to control cash outflows related to the 1995 and 1996
accident years at acceptable levels, there can be no assurance that it will be
successful. In any event, 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 June 30, 1998, the Company had total cash,
cash equivalents and investments of $193.3 million and had 97.3% of its
investment portfolio invested in cash, cash equivalents, and fixed maturities.
In addition, 97.1% of the Company's fixed-income portfolio had ratings of "AA"
or equivalent or better and 99.5% had ratings of "BBB" or equivalent or better.

The Company used $17.8 million in cash from financing activities for the
six months ended June 30, 1998, and generated $54.8 million for the
corresponding period in 1997. During the six months ended June 30, 1998, funds
used for financing activities consisted of $12.7 million in reinsurance deposits
to ZRNA associated with a reinsurance contract, and $5.1 million to purchase
245,000 shares of Common Stock, which are held by SNIC as treasury stock on a
GAAP basis. The Common Stock acquired by SNIC was purchased in a single
transaction from Thomas J. Jamieson, a director of the Company, and Jaco Oil
Company, an entity controlled by Mr. Jamieson. The purchase price of $21.00 per
share represented a discount from the market price of the Common Stock at the
time of the transaction. See "Certain Relationships and Related Transactions --
Purchase of Common Stock by SNIC from Thomas J. Jamieson, Director." The cash
generated by financing activities in the first six months of 1997 was primarily
associated with the Company's acquisition of SPCC. The Company generated the
necessary cash to acquire SPCC from the proceeds of a $44.0 million term loan
and the sale of approximately $18.0 million in Common Stock. Of the
approximately $62.0 million raised in those financing transactions,
approximately $42.0 million was used to fund the acquisition of SPCC,
approximately $6.6 million was used to repay an existing bank loan, $10.0
million was contributed as capital to SPCC, and the remaining funds were used
for general corporate purposes, including the payment of related transaction
costs.

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Year to Year Comparison

During the year ended December 31, 1997, the Company used $52.4 million of
cash in its operations versus $7.4 million of cash used in the year ended
December 31, 1996. The cash used in 1997 includes a $6.8 million increase in
cash used in operations due to the addition of the SPCC operations and a $38.1
million increase in reinsurance balances receivable. The Company believes that
it has adequate short-term investments and readily marketable investment-grade
securities to cover both claim payments and expenses. At December 31, 1997, the
Company had total cash, cash equivalents, and investments of $242.1 million and
had 99.4% of its investment portfolio invested in cash, cash equivalents, and
fixed maturities. In addition, 90.8% of the Company's fixed-income portfolio had
ratings of "AA" or equivalent or better and 98.0% had ratings of "BBB" or
equivalent or better.

The Company generated $81.6 million from financing activities during the
year ended December 31, 1997, as compared to cash generated of $90.5 million in
1996. During 1997, the Company repaid outstanding bank debts and redeemed the
outstanding preferred stock issued in 1994 by an affiliate for a total use of
cash of $79.2 million. Partially offsetting the use of cash are the proceeds
from the Trust Preferred Securities and bank debt and the issuance and sale of
Common Stock in connection with the Company's acquisition of SPCC totaling
$160.8 million. The 1996 financing activities consisted primarily of the
November 1996 Chase loan discussed below.

Other Events

On December 3, 1997, the Trust, a wholly owned subsidiary of the Company,
issued its Trust Preferred Securities, having an aggregate liquidation amount of
$105.0 million, in a private placement, and also issued to the Company, for an
aggregate consideration of approximately $3.25 million, all of the Trust's
common securities. The proceeds from the sale of these securities were used by
Trust to purchase the Senior Subordinated Notes. On January 16, 1998, the
Company and the Trust completed the registration with the SEC of an exchange
offer for the outstanding Trust Preferred Securities, Senior Subordinated Notes,
and related Company guarantee, pursuant to which substantially all of these
securities were exchanged for substantially similar securities. The Company used
the proceeds it received from the issuance of the Senior Subordinated Notes to
repay the $40.3 million outstanding balance on the term loan used to acquire
SPCC, to redeem approximately $27.7 million in preferred stock issued by a
Company affiliate to Centre Solutions, to pay approximately $4.0 million in
related transaction costs, and for general corporate purposes, including a $15.0
million contribution to the surplus of SNIC.

Distributions on the Trust Preferred Securities (and interest on the
related Senior Subordinated Notes) are payable semi-annually, in arrears, on
June 1 and December 1 of each year, and commenced June 1, 1998. Subject to
certain conditions set forth in the Indenture pursuant to which the Senior
Subordinated Notes were issued (the "Subordinated Notes Indenture"), on or after
December 1, 2005, the Company has the right to redeem the Senior Subordinated
Notes, in whole or in part at any time, at call prices ranging from 105.375% at
December 1, 2005 to 101.792% at December 1, 2007, and 100% thereafter. The
proceeds from any redemption will be immediately applied by the Trust to redeem
Trust Preferred Securities and the Trust's common securities at such redemption
prices. In addition, the Company has the right, at any time, subject to certain
conditions, to defer payments of interest on the Senior Subordinated Notes for
Extension Periods (as defined in the Subordinated Notes Indenture), each not
exceeding 10 consecutive semi-annual periods, provided that no Extension Period
may extend beyond the maturity date of the Senior Subordinated Notes. As a
consequence of any such extension by the Company of the interest payment period,
distributions on the Trust Preferred Securities would be deferred (though such
distributions would continue to accrue interest at a rate of 10.75% per annum
compounded semi-annually). Upon the termination of any Extension Period and the
payment of all amounts then due, the Company may commence a new Extension
Period, subject to certain requirements.

In addition, during 1997 the Company repaid approximately $0.6 million of
an existing bank loan and, at the time due, $3.7 million of the principal of the
term loan used to acquire SPCC.

In November 1996, the Company entered into a financing transaction
involving Centre Re and Chase pursuant to which Chase extended a $93.1 million
term loan, net of transaction costs. The Company used the

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<PAGE> 75

proceeds from the transaction to purchase from SNIC reinsurance receivables due
from Centre Re. As a result, the Company's investable assets increased $93.1
million. The additional investments contributed to the increase in investment
income in 1997.

In June 1997, the term loan was retired when $110.5 million of receivables
from Centre Re were transferred to Chase in exchange for cancellation of the
Company's $94.9 million debt due to Chase under the term loan. The retirement of
the term loan resulted in the Company recognizing a $15.7 million charge.

The Company has a reverse purchase facility with a national securities
brokerage firm that allows it to engage in up to $20.0 million in reverse
purchase transactions secured by either U.S. Treasury instruments, U.S. Agency
debt, or corporate debt. This arrangement provides the Company with additional
short-term liquidity. Reverse purchase transactions may be rolled from one
period to the next, at which time the transaction is repriced. This type of
financing allows the Company a great deal of flexibility to manage short-term
investments, avoiding unnecessary realization of losses to satisfy short-term
cash needs. Further, this method of financing is less expensive than bank debt.
As of June 30, 1998, the Company had no obligation outstanding under this
facility.

The Company, as a holding company, depends on dividends and intercompany
tax allocation payments from its operating Subsidiaries for its net cash flow
requirements, which consist primarily of periodic payments on its outstanding
debt obligations. Absent other sources of cash flow, the Company cannot expend
funds materially in excess of the amount of dividends or tax allocation payments
that could be paid to it by SNIC and SPCC. Further, insurance companies are
subject to restrictions affecting the amount of shareholder dividends and
advances that may be paid within any 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 up to the greater of (i) net income for
the preceding year and (ii) 10% of statutory surplus as regards policyholders as
of the preceding December 31) without prior notice to, or approval by, the DOI.
Dividends may only be paid out of "earned surplus" as defined in the California
Insurance Code. No dividends were paid by SPCC or SNIC during 1997; however,
SNIC paid $2.9 million to the Company for its current income taxes. No dividends
were paid in the six months ended June 30, 1998. Insurance holding company
regulations, in ordinary circumstances, place a two-year moratorium on payments
of dividends by a subsidiary that has undergone a change of control. The Company
has requested of the DOI, and expects to receive, a waiver from the moratorium
in connection with the Acquisition. If dividends are available for payment as
expected, the Company believes it will have adequate cash to service its debt.

The Company is party to several leases principally associated with the
Company's home and branch office space, as well as its fixed assets. These
leases contain provisions for scheduled lease charges and escalations in base
rent over the lease term. The Company's minimum lease commitment with respect to
these leases in 1998 is approximately $7.0 million. These leases expire from
2000 to 2003.

With the exception of the approximately $285.0 million in cash outlays to
complete the Acquisition of BIG, together with fees and costs related thereto,
the Company does not foresee any material expenditures during the next twelve
months other than those arising in the ordinary course of business.

The effect of inflation on the revenues and net income of the Company
during the six months ended June 30, 1998 and the years ended December 31, 1997,
1996, and 1995 was not significant.

TAXES

As of June 30, 1998, the Company had available $128.0 million in NOLs to
offset taxable income recognized by the Company in periods after June 30, 1998.
For federal income tax purposes, these NOLs will expire in material amounts
beginning in the year 2006. Any 5% shift in the current ownership of the Company
may result in a "change of ownership" under Section 382 of the Code, and limit
and defer the Company's ability to utilize NOLs. In an effort to protect these
NOLs, the Company's charter documents prohibit 5% owners of 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 changes in ownership by the 5% holders of Common
Stock expires in April 2000. The Company believes that it is very likely that
the Equity Financings will result in a "change of ownership," but has concluded
that the cost of the limitation of use of the NOLS in relation to the benefits
derived from the Acquisition is acceptable.
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The Company intends to remove the transfer restrictions currently prohibiting a
change in ownership only if the Equity Financings occur. See "Risk
Factors -- Limitation of Use of Net Operating Loss Carryforwards" and
"Description of Superior National Capital Stock -- Delaware Anti-Takeover Law
and Certain Charter Provisions."

PRIMARY DIFFERENCES BETWEEN GAAP AND SAP

The financial statements contained herein have been prepared in conformity
with GAAP, as opposed to SAP prescribed or permitted for insurance companies by
regulatory authorities. SAP differs from GAAP principally in the following
respects: (a) premium income is taken into operations over the periods covered
by the policies, whereas the related acquisition and commission costs are
expensed when incurred; (b) deferred income taxes are not recognized under SAP;
(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 the
Company's estimates are required.

The NAIC recently approved the codification of SAP with an effective date
of January 1, 2001. Included in the codification is a change in the definition
of prescribed versus permitted policies that insurance companies use to prepare
their statutory financial statements. The Company has not yet determined the
impact of the adoption of the codification project.

YEAR 2000 STRATEGY

A significant percentage of the software that runs most of the computers in
the United States and the rest of the world relies on two-digit date codes to
perform computations and decision making functions. Commencing January 1, 2000,
these computer programs may fail from an inability to interpret date codes
properly, misinterpreting "00" as the year 1900 rather than 2000. The Company is
in the process of identifying all necessary software and hardware changes to
ensure that it does not experience any loss of critical business functionality
due to the Year 2000 issue. The Company has appointed an internal Year 2000
project manager and adopted a three-phase approach of assessment, correction,
and testing. The scope of the project includes all internal software, hardware,
and operating systems, and assessment of risk to the business from producers,
vendors, and other partners in Year 2000 issues. The Company believes that this
formal assessment of risk (including the prioritization of business risk),
correction (including conversions to new software), and testing of necessary
changes will minimize the business risk of Year 2000 from internal systems. The
Company plans to complete its Year 2000 conversion not later than December 31,
1998. Although the Company has not completed its Year 2000 project, the Company
does not believe the Year 2000 issue will cause any system problems that could
have a material adverse effect on its operations. The Company does not expect
the cost associated with its Year 2000 project to be material. See "Risk Factors
- -- Year 2000 Compliance" and "Superior National -- Business -- Discontinued
Operations."

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SUPPLEMENTARY DATA

Summarized quarterly financial data for 1998 (unaudited), 1997, and 1996 is
as follows:

<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
--------- -------- --------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
1998
Earned premiums................................... $30,587 $ 19,619 $ -- $ --
Income before income taxes, preferred securities
dividends and accretion and extraordinary
items........................................... $ 6,078 $ 6,403 $ -- $ --
Net income........................................ $ 1,895 $ 2,197 $ -- $ --
Basic earnings per share.......................... $ 0.32 $ 0.37 $ -- $ --
Diluted earnings per share........................ $ 0.24 $ 0.27 $ -- $ --
1997
Earned premiums................................... $18,978 $ 45,410 $34,760 $41,772
Income before income taxes, preferred securities
dividends and accretion and extraordinary
items........................................... $ 1,881 $(15,317)* $ 5,460 $ 9,538
Net income (loss)................................. $ 756 $(10,530) $ 2,132 $ 2,501
Basic earnings per share.......................... $ 0.22 $ (1.80) $ 0.36 $ 0.42
Diluted earnings per share........................ $ 0.14 $ (1.39) $ 0.28 $ 0.32
1996
Earned premiums................................... $18,897 $ 24,136 $23,007 $22,608
Income before income taxes, preferred securities
dividends and accretion and extraordinary
items........................................... $ 1,656 $ 1,406 $ 1,440 $ 725
Net income........................................ $ 678 $ 526 $ 712 $ 47
Basic earnings per share.......................... $ 0.20 $ 0.15 $ 0.21 $ 0.02
Diluted earnings per share........................ $ 0.17 $ 0.12 $ 0.15 $ 0.01
</TABLE>

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

* Three months ended June 30, 1997, restated.

NEW ACCOUNTING STANDARDS

In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 128, "Earnings per Share" ("SFAS
128"), which was adopted for the year ended December 31, 1997. The Company has
changed its method used to compute per share results and restated the results
for all prior periods. The impact of SFAS 128 did not have a material effect on
the Company's earnings per share.

In June 1997, the FASB issued Statement of Financial Accounting Standard
No. 130, "Reporting Comprehensive Income" ("SFAS 130"). Effective for periods
ending after December 15, 1997, including interim periods, SFAS 130 requires
companies to report comprehensive income and its components in a financial
statement and display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in-capital. Comprehensive
income includes all changes in equity during a period except those resulting
from investments by stockholders and distributions to stockholders. The Company
has not yet seen any material impact from the implementation of SFAS 130.

Also, in June 1997, the FASB issued Statement of Financial Accounting
Standard No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131"). This statement specifies revised guidelines for
determination of an entity's operating segments and the type and level of
financial information to be disclosed. SFAS 131 is effective for periods ending
after December 15, 1997, including interim periods. The Company's adoption of
SFAS 131 has not had any impact on its current financial reporting practices.

In December 1997, the AICPA Accounting Standards Executive Committee issued
Statement of Position (SOP) 97-3, "Accounting by Insurance and Other Enterprises
for Insurance-Related Assessments," which focuses on the timing of recognition
and measurement of liabilities for insurance-related assessments. The SOP is
effective for fiscal years beginning after December 15, 1998. The adoption of
this pronouncement is not expected to have a material effect on the financial
statements of the Company.

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SUPERIOR NATIONAL

BUSINESS

OVERVIEW

In April 1997, Superior National acquired Pac Rim, the parent company of
The Pacific Rim Assurance Company (subsequently renamed Superior Pacific
Casualty Company). SPCC's Southern California operations complement SNIC's
historical focus on Central and Northern California. As a result of the Pac Rim
Transaction, the Company believes that, excluding the State Fund, it is the
eighth largest California workers' compensation insurer overall, based upon 1996
direct written premium. Pro forma for the Pac Rim Transaction, the Company would
have had direct written premium of $182.2 million and $179.7 million for the
years ended December 31, 1996 and 1997, respectively. The Company had direct
written premium for the year ended December 31, 1997 (reflecting the SPCC
acquisition as of April 1, 1997) of $159.4 million, and had $82.0 million in
direct written premium in the first six months of 1998. Pro forma for the
Acquisition of BIG, the Company would have had direct written premium of $823.3
million and $848.6 million for the years ended December 31, 1996 and 1997,
respectively, and $378.5 million in direct written premium for the first six
months ended June 30, 1998. The preceding pro forma information is presented for
illustrative purposes only and is not necessarily indicative of the results of
operations that would have occurred had the Acquisition or the Pac Rim
Transaction been consummated on the dates assumed, nor is this pro forma
information intended to be indicative of the Company's future results of
operations.

In connection with the Pac Rim Transaction, the Company agreed with the DOI
that SPCC would operate in a "run-off" situation and that all new or renewal
business would be written only by SNIC. As a result, the Company has been
integrating SPCC's operations into SNIC's operations and has substantially
completed the process. The Pac Rim Transaction has enabled the Company to
increase its book of California workers' compensation insurance business and
generate significant expense savings through the consolidation of the back
office operations of the two companies.

In addition to California, Superior Pacific is also licensed to write
business in Arizona, Arkansas, Colorado, District of Columbia, Georgia, Indiana,
Iowa, Kentucky, Maryland, Mississippi, Missouri, Montana, Nevada, New Mexico,
Oregon, South Dakota, Texas, Utah, and Wyoming, but virtually all of Superior
Pacific's current premium is generated in California (94%) and Arizona (6%).
Following the Pac Rim Transaction, SPCC's operations in states other than
California and Arizona were discontinued and are currently in run-off, but the
Company intends to maintain BIG's multi-state operations upon consummation of
the Acquisition.

STRATEGY

Integration Strategy

The Company acquired SPCC in April 1997 and has rapidly integrated SPCC's
operations into Superior Pacific. The Company believes it has achieved
significant expense savings through the integration of SPCC into Superior
Pacific. Although the Company does not expect any material cost savings to arise
in the short term out of the Acquisition of BIG, the benefits of economics of
scale could be realized over a period of years.

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<PAGE> 79

The Company's strategy for improving the overall financial performance of both
Superior Pacific and BIG includes:

- Underwriting. The Company believes it can accomplish a gradual
re-underwriting of BIG's book of business to enhance profitability. The
pricing and persistency risk associated with the re-underwriting of
larger accounts will be mitigated by ceding accounts with estimated
annual premium of $25,000 or more at inception to a reinsurer.

- Loss Control and Claims Management. The Company believes BIG is a leader
in loss control for workers' compensation, and expects to introduce
innovative concepts developed by BIG, such as employer safety management
schools, to Superior Pacific's business. Additionally, once a claim is
made the Company expects to benefit from the Service Agreements with FHS,
and the claim severity management services Superior Pacific will obtain
from REM as part of the Claim Severity Management Program. These claim
practices will continue to emphasize rapid medical intervention to
mitigate the severity of injuries.

Operating Strategy

- Underwriting Discipline. Following the advent of open rating in
California in 1995, some California workers' compensation insurers have
reduced premium rates substantially to increase or maintain market share.
The Company has not followed this practice and has maintained
consistently stringent underwriting policies in order to maintain gross
profit margins. As a result, although the Company experienced declines in
premium until acquiring SPCC, from 1993 to 1997 the Company's combined
ratio from continuing operations has improved from 100.2% to 90.9%.

EXPERIENCED MANAGEMENT; BUSINESS RELATIONSHIPS WITH ZURICH AFFILIATES

The Company is led by an experienced management team, with the Chief
Executive Officer and the Chief Operating Officer having a combined 60 years of
workers' compensation insurance business experience both in and outside of
California. The experience of management and the Company's sophisticated data
processing systems allow the Company to react quickly to positive and negative
developments in its markets.

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<PAGE> 80

In addition, the Company benefits from business relationships with
affiliates of Zurich, which have provided financing and access to their
expertise and products, including claim management services and reinsurance. The
Company currently maintains a facility that allows it to offer certain
policyholders insurance policies written by a Zurich affiliate having an A.M.
Best "A" rating. Affiliates of Zurich are providing services that the Company
has integrated into its Claim Severity Management Program. Furthermore, in
December 1997, Centre Solutions purchased $10.0 million of the Trust Preferred
Securities issued by the Company's subsidiary, the Trust. In addition, in
connection with the Acquisition, Zurich Centre Group LLC or its designee will
purchase BICO from the Company and establish an underwriting arrangement with
the Company for a fee equal to 2.5% of direct written premium plus a pass
through of all related expenses.

COMPANY STRUCTURE

Superior National has two direct, wholly owned active subsidiaries:
Superior Pacific Insurance Group, Inc. ("SPIG") and the Trust, a statutory
business trust created under the laws of the State of Delaware. SPIG has four,
direct, wholly owned active subsidiaries: SNIC, SPCC, InfoNet Management
Systems, Inc. ("InfoNet"), and Superior (Bermuda) Ltd. ("SBL"). InfoNet provides
data processing purchasing services to Superior National and its Subsidiaries.
SBL was formed in September 1995 to facilitate the management of the run-off of
SNIC's P&C business.

The Trust was formed by the Company in December 1997 and exists solely for
the purpose of issuing the Trust Preferred Securities, having an aggregate
liquidation amount of $105.0 million, and investing the proceeds thereof in an
equivalent amount of the Senior Subordinated Notes. The Company owns directly
all of the common securities issued by the Trust, which it purchased for an
aggregate consideration of approximately $3.25 million. See "Superior
National -- Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."

SNIC's only subsidiary is wholly owned Western Select Service Corp., which
currently provides vocational rehabilitation, legal, paralegal, and other
services to SNIC and SPCC. SPCC has no active subsidiaries.

CALIFORNIA WORKERS' COMPENSATION MARKET

Workers' Compensation. 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 and diseases. There are
four types of benefits payable under workers' compensation policies: disability,
vocational rehabilitation, medical, and death benefits. The amount of benefits
payable for various types of claims is established by statute and varies with
the nature and severity of the injury or disease, and the wage, occupation, and
age of the employee. While no dollar limitations are set for medical benefits
and dollar limitations apply only under certain circumstances to vocational
rehabilitation benefits, reinsurance typically covers liability in excess of a
specified dollar amount agreed upon by the insurer and the reinsurer.

California Marketplace. California is the country's largest workers'
compensation insurance market, with total direct written premium of $4.9 billion
in 1997. The California market is composed of (i) the State Fund, (ii)
companies, including BIG, that write workers' compensation insurance in
California but have significant writings in other lines of business and/or in
other states, and (iii) the Company, which, prior to the Acquisition, is the one
private sector company that writes exclusively workers' compensation insurance
specifically focused in California. The State Fund, which is obligated to write
workers' compensation insurance for any applicant, including those turned down
by the private sector carriers, is the largest underwriter of workers'
compensation insurance in California, accounting for approximately 19% of the
direct written premium in California in 1996. Because the State Fund must accept
all risks, its combined ratios have historically been much higher than those of
the private sector carriers. Despite these results, the State Fund has
consistently achieved profitability through the investment income earned on its
large invested asset base. As of December 31, 1997, the State Fund had invested
assets of $7.1 billion and statutory capital and surplus of $1.6 billion. The
State Fund currently maintains an "A" claims paying ability rating from S&P and
an "A-" rating from A.M. Best. Although the State Fund regularly competes with
the Company for profitable underwriting business, the Company views the State
Fund's role as the insurer of last resort to be a significant

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<PAGE> 81

benefit because it eliminates the need to create an assigned risk plan in which
the Company and other insurers conducting business in California would be
required to participate.

Pricing. Prior to January 1, 1995, the DOI set minimum premium rates for
workers' compensation insurance to provide a stable environment for the pricing
of such insurance. On January 1, 1995, the State of California formally
converted to a system of "open rating" for workers' compensation insurance
written within the state. Insurance companies now file and use their own
actuarially defensible rates. Following the introduction of open rating, total
direct written premium in the California market decreased from $9.0 billion in
1993 to $5.0 billion in 1996 as many carriers engaged in price competition.

Under open rating, the DOI sets "pure premium" (effectively, the estimated
claim and allocated claim adjustment expense) rates for each employment
classification. Carriers then apply their own multipliers to the pure premium
rate to adjust for that carrier's anticipated unallocated claim adjustment and
underwriting expenses. These rates are then subject to further adjustment on a
policyholder by policyholder basis to account for historical loss experience,
the presence of stricter safety programs, differing dividend and commission
plans, and other factors.

Recent Results. The State Fund's relatively poor underwriting results,
together with its large size, have created a skewed perception of the
underwriting profitability of companies writing business in the California
workers' compensation insurance marketplace. Although market-wide combined
ratios have increased, responsible underwriters, such as Superior National, have
been able to achieve an underwriting profit. The results of the State Fund and
of the total industry under SAP are detailed below (1997 data is not yet
available):

<TABLE>
<CAPTION>
1996 1995 1994 1993
------------------ ------------------ ------------------ ------------------
STATE STATE STATE STATE
FUND INDUSTRY FUND INDUSTRY FUND INDUSTRY FUND INDUSTRY
------ -------- ------ -------- ------ -------- ------ --------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Premiums................... $ 992 $ 5,779 $1,073 $5,855 $1,456 $7,655 $1,705 $8,965
Loss Ratio................. 111.8% 94.4% 87.0% 75.7% 71.0% 67.8% 96.1% 80.4%
Expense Ratio.............. 21.1 20.6 17.0 20.0 12.6 17.8 11.1 15.4
Policyholder Dividend
Ratio.................... 11.8 6.5 26.3 15.1 23.3 14.2 9.8 7.4
------ ------- ------ ------ ------ ------ ------ ------
Combined Ratio............. 144.7% 121.5% 130.3% 110.8% 106.9% 99.8% 117.0% 103.2%
====== ======= ====== ====== ====== ====== ====== ======
Underwriting Gain (Loss)... $ (443) $(1,244) $ (325) $ (632) $ (102) $ 15 $ (290) $ (286)
Investment Income.......... 473 NA 490 1,740 502 1,623 531 2,178
------ ------- ------ ------ ------ ------ ------ ------
Pre-Tax Income............. $ 30 NA $ 165 $1,108 $ 400 $1,638 $ 241 1,892
====== ======= ====== ====== ====== ====== ====== ======
</TABLE>

Recent Developments. While competitive pressures in the California's
workers' compensation insurance market increased with the implementation of open
rating in January 1995, certain fundamentals of the workers' compensation
insurance market have recently improved. In 1996, the total direct workers'
compensation written premium in California leveled out at approximately $5.0
billion as compared to $9.0 billion in 1993, as the market began to experience
rate stabilization. Based on the Company's analysis of data obtained from the
WCIRB and other sources, this trend continued into 1997, as demonstrated by a
slight improvement in premium pricing of 0.5% for the year ended December 31,
1997 over 1996. Additionally, anti-fraud legislation passed by the State of
California in 1993 continues to have a positive effect on the market's losses by
addressing fraudulent claims and medical and legal expense levels. These
improvements have resulted in a reduction in the frequency of claims in the
California workers' compensation insurance market. However, beginning in 1997,
the Company has recognized an increase in claim severity for injuries sustained
in 1995 and thereafter. Management has taken steps to address this issue by
undertaking the Claim Severity Management Program. See "-- Claim Severity
Management Program" and "-- Claim and Claim Adjustment Expense Reserves" and
"Risk Factors -- Uncertainty Associated with Estimating Reserves for Unpaid
Claim and Claim Adjustment Expenses."

Superior Pacific Within the California Workers' Compensation Market. After
the Acquisition the Company believes that it will be better positioned than its
competitors to compete successfully in the post-open rating California workers'
compensation insurance market, while also reducing somewhat its dependence on
California for growth and profitability. The Company believes it will benefit
from its focus on workers'

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compensation insurance, and that its leadership position in the California
market will allow it to offer insureds and producers outstanding service,
innovative loss control programs, and competitive pricing. The national presence
provided by the Acquisition will give the Company some diversification from the
California market, offering what the Company believes are attractive growth
opportunities in a number of markets. The Company continues to believe that
pricing and underwriting policies designed specifically for workers'
compensation insurance means that its workers' compensation insurance business
should perform better financially than the workers' compensation insurance
business of insurers who offer workers' compensation policies to insureds as
part of a package of insurance.

MARKETING

Superior Pacific primarily markets its insurance products through
approximately 250 small- to medium-sized producers located throughout California
and Arizona, most of which have an ongoing relationship with the Company's
executives. The Company's legal relationship with its producers is evidenced by
a broker agreement, under which the producer agrees to present potential
workers' compensation risks to the Company on a non-exclusive basis. The broker
agreement principally documents that the producer represents his policyholder
client, not the Company, establishes the producer's authority to bind the
Company to risks, typically extremely limited, and prescribes the terms under
which premium must be remitted to the Company. Because these producers also
represent one or more competing insurance companies, Superior Pacific views the
producers as its marketing target and delivers service the Company believes
surpasses normal industry levels. Superior Pacific'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 companies that represent a
significant volume of a producer's business typically receive the highest
quality business. The Company is one of the primary underwriters of workers'
compensation insurance for most of its producers. During the year ended December
31, 1997, no single producer controlled more than 5.0% of premium in force.

While the Company's principal marketing strategy is to meet the business
needs of Superior Pacific's producers by providing the insurance coverage and
services needed by their customers, the Company has concentrated its marketing
efforts on policies with annual premium under $50,000, principally to avoid the
extreme price competition usually associated with larger insureds. As of
December 31, 1997, the Company's average annual premium per policy was
approximately $8,300. In 1998, the Company initiated a program to market
coverage to selected large accounts that meet the Company's underwriting
criteria.

Approximately 57.9% of the Company's premium in force is concentrated in
925 non-group policies and 291 group programs that each provide annual premium
in excess of $25,000. The average annual premium volume generated by each of
Superior Pacific's group programs is approximately $820,000 and in the aggregate
these programs represent 31.1% of the Company's premium in force. Because
policies issued through group programs reflect some of the attributes of smaller
non-group policies, marketing workers' compensation insurance through such
programs to reach smaller policyholders is a means by which the Company can
implement its strategy to underwrite smaller policies. For example, individual
policies within a group typically possess rate adequacy associated with small
non-group accounts. Moreover, renewal rates within a group are generally
superior to non-group business. However, group programs, because of their
overall premium, also reflect some of the attributes of large non-group
policies, mainly their greater vulnerability to price competition than the
individual accounts within the group.

The average size of Superior Pacific's non-group policies that exceed
$25,000 in annual premium is approximately $76,424 and those policies in the
aggregate represent 47.1% of premium in force. Most of these policies were
obtained by the Company upon its acquisition of SPCC. The Company's strategy is
to maintain adequate pricing on accounts regardless of their size, and in
pursuing this strategy the Company has been unable to retain a portion of these
large non-group policies. However, the Company expects to replace many of them
with new, smaller accounts through its newly acquired relationships with
policyholders and producers previously associated with Pac Rim, and with larger
accounts (where adequate pricing can be obtained) through the Company's new
large account marketing program.

Superior Pacific closely monitors its producers through its on-line
management information systems, with special attention given to the volume and
profitability of business written through Superior Pacific.

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<PAGE> 83

Relationships with producers who consistently write unprofitable business, or do
not meet the minimum guideline of annual premium per year, may be terminated.
Superior Pacific believes that by continually monitoring and improving the
quality of the business acquired through its producers, long-term profitability
will be enhanced. See "-- Information Services."

The 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. Superior Pacific conducts its marketing by
territory to enable its marketing representatives to better address the specific
types of accounts located in each region.

Producer commissions are generally determined by negotiation and are
dependent on the size and profit potential of the producer's accounts. Superior
Pacific's average direct commission rate was 11.1% for the years ended December
31, 1997 and 1996, and 12.0% in 1995. The Company believes the stabilization in
the average direct commission rate for the year ended December 31, 1997 was due
primarily to a combination of firming prices and a greater use by larger
policyholders of fee-based arrangements (as opposed to traditional commission
arrangements) with their insurance producers. Superior Pacific's producers are
not permitted to bind Superior Pacific with respect to any account. All new and
renewal policyholder applications must be submitted to Superior Pacific for
approval. Superior Pacific is not committed to accept a fixed portion of any
producer's business.

UNDERWRITING

Because the types of accounts that Superior Pacific insures vary among
different geographic regions, Superior Pacific conducts its underwriting
activities through branch offices that are focused on the local economies. While
Superior Pacific underwrites over 400 of the approximately 500 employment
classifications established by the WCIRB, it targets specific classifications
that management believes to be profitable. The Company believes that by focusing
on certain employment classifications, it can provide claim management and
standardized loss control services at a level appropriate to each policyholder.
For the year ended December 31, 1997, five employment classifications, made up
primarily of office and clerical, hospitality, agricultural, garment, and health
care workers, represented approximately 35% of Superior Pacific's premium in
force. The Company excludes most employment classifications that represent
historically higher risk exposure, including 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
Superior Pacific's principal underwriting officer include those that represent
potential exclusions from Superior Pacific'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.

Prior to insuring an account, Superior Pacific'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. Superior Pacific 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.

The Company's underwriting system is a fully integrated, computerized,
rating, quoting, and policy issuance system for use both internally and remotely
from producers' offices. The system contains edit and blocking features that
prohibit underwriters from issuing policies associated with business that is
deemed inappropriate or undesirable by management, or that may be
inappropriately priced. See "-- Information Services."

SPCC historically underwrote larger accounts than SNIC, and in a more
limited range of risk classification codes. Since SPCC's acquisition, Superior
Pacific has been re-underwriting SPCC's book of business at policy renewal dates
in conformity with SNIC's historic underwriting standards and pricing
guidelines. SPCC's average policy size has declined significantly, standing at
approximately $17,000 for the policy year ended December 31, 1997, versus
approximately $20,300 for the policy year ended December 31, 1996. Management
believes that the re-underwriting of SPCC's business will produce a new book of
business

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<PAGE> 84

mirroring SNIC's historical book of business, both as to size and range of risk
classifications, by the end of 1998.

Virtually all of SPCC's business is located in urban and suburban Southern
California. Until 1993, claim experience in Southern California was more
volatile and less favorable than the remainder of the state. Further, since open
rating began in 1995, the relatively large accounts that SPCC has underwritten
have been subject to extreme price competition, consequently, the nature of
SPCC's historical book of business may cause historical claim reserves to be
subject to more uncertainty versus claim reserves established on prospective
business.

LOSS CONTROL

In addition to its responsibility for risk evaluation as part of the
underwriting process, Superior Pacific's loss control department may assist
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, Superior Pacific's loss control consultants will
help develop a loss control program and establish accident reporting and claim
follow-up activities for the policyholder. Superior Pacific'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.

CLAIM SEVERITY MANAGEMENT PROGRAM

Effective December 31, 1997, the Company entered into agreements with REM
and ZRNA, affiliates of Zurich, to provide claim management services for its
Claim Severity Management Program ("CSMP"). Under the CSMP, REM, acting as a
third party administrator ("TPA"), provides claim processing and management
services to Superior Pacific, and ZRNA provides Superior Pacific with protection
predicated on REM's ability to reduce Superior Pacific's claim severity. The
Company may terminate the contract with six months notice after the initial
three-year term of the contract, with a penalty that will not exceed $250,000
plus REM's reasonable expenses to unwind the agreement.

REM, in its capacity as a TPA, provides certain claim management services,
while the Company provides claims facilities and data processing systems. All of
the Company's claims personnel have been moved to an independent contractor
service provider as part of the CSMP. The terms of the agreement bind REM to
certain operational restrictions and performance standards designed to assure
quality claims administration. The Company believes that combining REM's claim
management techniques with the Company's claim processing systems should produce
material improvements in the Company's claim severity, more than offsetting the
cost of such services. The Company believes the CSMP will reduce the Company's
ultimate loss cost severity with favorable cost-benefit trade-offs.

Under the agreement with ZRNA, ZRNA will credit the Company's direct claim
costs, up to an aggregate of $30.0 million, to the extent that REM is
unsuccessful in minimizing the claim severity.

The Company's claims services are provided primarily by Comprehensive
Compensation Claims Management, Inc. ("3CM"), which was formed with the support
of the Company and REM for that purpose. The Company and REM continue to work
closely with policyholders to return injured workers to the job as quickly as is
medically appropriate. 3CM continues to maintain for the Company four full
service claim service offices ("CSOs") in California, which are located in
Woodland Hills, Fresno, Pleasanton, and Sacramento. Additionally, the Company
uses a 3CM CSO in Phoenix, Arizona. Each CSO is managed by a claims manager. The
claims technical staffs are organized into units with, generally, one supervisor
supervising four claims examiners and two claims assistants per unit.

3CM relies extensively on the Company's data processing systems. The
Company's data processing systems were developed internally through a joint
effort of the claim and management information systems departments' personnel
with three goals in mind: capture timely and meaningful data, reduce the
possibility of human error through a series of system prompts and edit checks,
and automate manual functions. An additional benefit of the claims system is the
increased productivity, as a result of claims examiners' handling larger case
loads.

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3CM'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.

CLAIM 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.
Claim and claim adjustment expense reserves are estimates of what an insurer
expects to pay claimants. Superior Pacific is required to maintain reserves for
payment of estimated claim and claim adjustment expense for both reported claims
and claims that have been incurred but not reported ("IBNR"). Superior Pacific'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 Superior Pacific'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-case reserves are not established for claim adjustment expense, and the
entire reserve for claim adjustment expense is established primarily based upon
the Company's historical paid data. Superior Pacific's claims services providers
regularly monitor reserve adequacy for claims that have occurred and been
reported and Superior Pacific adjusts such reserves as necessary.

Claim 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. Changes in the Company's operations and management philosophy also may
cause actual developments to vary from the past. The adoption of new data
processing systems, shifts to underwriting more or less hazardous risk
classifications, the hiring of new claims personnel, changes in claims servicing
vendors and third party administrators, may all change rates of reserve
development, payments, and claims closings, increasing or decreasing claim
severity and closing rates. See "Risk Factors -- Uncertainty Associated with
Estimating Reserves for Unpaid Claim and Claim Adjustment Expense." The senior
officers of the Company review and adjust IBNR reserves monthly.

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 to calculate taxable income as required by the Code.

83
<PAGE> 86

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, 1997, computed in accordance with GAAP.

RECONCILIATION OF LIABILITY FOR CLAIM AND CLAIM ADJUSTMENT EXPENSE

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Beginning reserve, gross of reinsurance.................... $115,529 $141,495 $171,258
Less: Reinsurance recoverable on unpaid losses............. 24,986 27,076 31,897
-------- -------- --------
Beginning reserve, net of reinsurance...................... 90,543 114,419 139,361
Pac Rim reserves at acquisition............................ 104,588 -- --
Provision for net claim and claim adjustment expenses:
For claims occurring in current year..................... 95,826 57,614 58,842
For claims occurring in prior years...................... (5,379) (1,976) (4,872)
-------- -------- --------
Total claim and claim adjustment expenses................ 90,447 55,638 53,970
-------- -------- --------
Payments for net claim and claim adjustment expense:
Attributable to insured events incurred in current
year.................................................. (37,945) (19,816) (19,732)
Attributable to insured events incurred in prior years... (95,533) (59,698) (59,180)
-------- -------- --------
Total claim and claim adjustment expense payments........ (133,478) (79,514) (78,912)
-------- -------- --------
Ending reserves, net of reinsurance........................ 152,100 90,543 114,419
Reinsurance recoverable on unpaid losses................... 49,155 24,986 27,076
-------- -------- --------
Ending reserves, gross of reinsurance...................... $201,255 $115,529 $141,495
======== ======== ========
</TABLE>

During 1997, the Company continued to experience decreased frequency of
claims and at the same time experienced an increase in claim severity for
accident years 1995 and thereafter. The Company's net claim and claim adjustment
expense ratio for accident year 1997 at the end of calendar year 1997 was 68.0%,
versus 65.0% and 65.6% for accident years 1996 and 1995 at their respective
calendar year ends.

In 1997, the Company experienced approximately $5.4 million in favorable
development on net claim and claim adjustment expense reserves estimated at
December 31, 1996. This $5.4 million favorable development is the result of a
$10.8 million favorable development on ceded reserves for accident years 1996
and prior. The $10.8 million favorable development on ceded reserves is
attributable to SPCC and due to the post-acquisition review of all open claim
files and the subsequent adjustment to reserves, which caused many claims to
have incurred claim and claim adjustment expenses in excess of the retention on
SPCC's reinsurance treaties. The $10.8 million favorable development is offset
by a $5.4 million adverse development on direct reserves attributable to the
accident years 1995 and 1996. The Company believes similar adverse development
has been experienced throughout the California workers' compensation industry,
perhaps due to an increase in claim severity.

In 1996, the Company experienced approximately $2.0 million in favorable
development on net claim 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 in adverse
development on direct reserves for accident year 1995. The accident year net
claim and claim adjustment expense ratio for accident year 1995 at the end of
calendar year 1995 was 65.6% versus 74.6% at the end of the 1996 calendar year.
The Company believes, from its review of data obtained by the WCIRB, that
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

84
<PAGE> 87

reinsurance receivables recorded at December 31, 1994, from approximately $66.2
million to approximately $59.9 million at December 31, 1995.

On April 11, 1997, the Company acquired SPCC. The claim and claim
adjustment expenses related to SPCC for this analysis are reflected in the
Company's 1997 claim and claim adjustment expense balances regardless of the
year the claim was previously reported to SPCC. To the extent that claims
develop in the future or close favorably, the result will be reflected in the
calendar year development to which it relates.

85
<PAGE> 88

The following table discloses the development of direct workers'
compensation claim and claim adjustment expense reserves of Superior Pacific
from December 31, 1987 through December 31, 1997.

ANALYSIS OF DIRECT CLAIM AND CLAIM ADJUSTMENT EXPENSE DEVELOPMENT
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------
1987 1988 1989 1990 1991 1992 1993 1994
------- ------- ------- ------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Reserve for Unpaid Losses
and Loss Adjustment
Expenses, Gross of
Reinsurance Recoverables
Reserve................. $21,969 $42,268 $60,615 $88,270 $116,811 $136,102 $171,038 $171,258
Reserve Re-estimated as
of:
One Year Later.......... 24,241 43,581 68,718 112,160 144,676 162,634 171,960 162,635
Two Years Later......... 26,120 46,788 79,059 111,151 143,912 148,906 161,262 145,626
Three Years Later....... 29,140 50,955 74,619 117,506 138,607 152,420 148,654 144,173
Four Years Later........ 29,423 47,696 78,112 113,029 137,939 144,898 148,983
Five Years Later........ 29,541 49,297 75,475 112,840 135,074 146,867
Six Years Later......... 29,082 47,554 75,913 109,655 138,048
Seven Years Later....... 27,759 49,470 74,149 111,871
Eight Years Later....... 27,846 48,653 75,898
Nine Years Later........ 27,573 49,451
Ten Years Later......... 27,803
Cumulative (Deficiency)
Redundancy.............. (5,834) (7,183) (15,283) (23,601) (21,237) (10,765) 22,055 27,085

Cumulative Amount of
Reserve Paid through:
One Year Later.......... $ 9,447 $17,698 $24,478 $42,627 $ 53,914 $ 57,348 $ 60,726 $ 67,757
Two Years Later......... 14,482 19,879 35,195 51,160 56,299 61,648 66,077 61,952
Three Years Later....... 15,777 25,830 38,067 52,761 63,354 63,523 64,464 67,388
Four Years Later........ 18,666 26,165 38,261 57,332 64,703 66,547 66,754
Five Years Later........ 19,384 26,026 40,794 59,093 68,152 66,750
Six Years Later......... 19,660 27,181 42,032 59,917 69,052
Seven Years Later....... 20,707 27,202 43,146 60,749
Eight Years Later....... 20,803 27,947 42,898
Nine Years Later........ 21,123 27,857
Ten Years Later......... 20,899
Gross Reserve -- December 31........................................................... $171,038 $171,258
Reinsurance Recoverables............................................................... 28,971 31,897
-------- --------
142,067 139,361
Reclassification of Amounts Recoverable from Centre Re................................. (42,032) (34,269)
-------- --------
Net Reserve -- December 31............................................................. $100,035 $105,092
======== ========
Gross Re-estimated Reserve............................................................. $148,983 $144,173
Re-estimated Reinsurance Recoverables.................................................. 25,775 34,083
-------- --------
123,208 110,090
Reclassification of Amounts Recoverable from Centre Re................................. 42,032 34,269
-------- --------
Net Re-estimated Reserve............................................................... $ 81,176 $ 75,821
======== ========
Net Cumulative Redundancy.............................................................. $ 18,859 $ 29,271
======== ========

<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1995 1996 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Reserve for Unpaid Losses
and Loss Adjustment
Expenses, Gross of
Reinsurance Recoverables
Reserve................................ $141,495 $115,529 $201,255
Reserve Re-estimated as
of:
One Year Later......................... 137,242 120,999
Two Years Later........................ 145,209
Three Years Later......................
Four Years Later.......................
Five Years Later.......................
Six Years Later........................
Seven Years Later......................
Eight Years Later......................
Nine Years Later.......................
Ten Years Later........................
Cumulative (Deficiency)
Redundancy............................. (3,714) (5,470)
Cumulative Amount of
Reserve Paid through:
One Year Later......................... $ 63,587 $ 69,658
Two Years Later........................ 72,946
Three Years Later......................
Four Years Later.......................
Five Years Later.......................
Six Years Later........................
Seven Years Later......................
Eight Years Later......................
Nine Years Later.......................
Ten Years Later........................

Gross Reserve -- December 31............. $141,495 $115,529 $201,255
Reinsurance Recoverables................. 27,076 24,986 49,155
-------- -------- --------
114,419 90,543 152,100
Reclassification of Amounts Recoverable
from Centre Re......................... (11,696) -- --
-------- -------- --------
Net Reserve -- December 31............... $102,723 $ 90,543 $152,100
======== ======== ========
Gross Re-estimated Reserve............... $145,209 $120,999
Re-estimated Reinsurance Recoverables.... 35,648 35,835
-------- --------
109,561 85,164
Reclassification of Amounts Recoverable
from Centre Re......................... 11,696 --
-------- --------
Net Re-estimated Reserve................. $ 97,865 $ 85,164
======== ========
Net Cumulative Redundancy................ $ 4,858 $ 5,379
======== ========
</TABLE>

86
<PAGE> 89

The first line of the preceding table depicts the estimated liability for
unpaid claim and claim adjustment expense recorded on the balance sheets of
Superior Pacific at the indicated balance sheet dates. This liability represents
the estimated amount of claim and claim adjustment expense for claims arising
during all years prior to the indicated balance sheet date that are unpaid as of
that balance sheet date, gross of reinsurance recoverables, including losses
that have been incurred but not yet reported. The table also shows the re-
estimated liability as of the end of each succeeding year through the latest
balance sheet date, and the cumulative payments made for such claims, at annual
intervals after the initial indicated balance sheet date. The claim and claim
adjustment expense liability estimates change as more information becomes known
about the frequency and severity of claims for each year. A direct reserve
redundancy or deficiency is displayed for each balance sheet date in the center
of the table when the initial liability estimate is greater (or less) than the
re-estimated liability at the latest balance sheet date. A net-of-reinsurance
redundancy is displayed for each of the years ended December 31, 1993, 1994,
1995, and 1996 at the bottom of the table.

The direct reserve deficiencies associated with the years ended December
31, 1987 and 1988 were due to the lack of claim and claim adjustment expense
history, which prevented management from accurately estimating ultimate claim
costs. The direct deficiencies associated with reserves as of December 31, 1989,
1990, 1991, and 1992 were due to unexpected increases in claim costs resulting
from increased litigation in the California workers' compensation system, an
economic recession in California, and workers' compensation laws that at the
time effectively encouraged workers to file unwarranted psychiatric stress and
fraudulent claims. The direct redundancies associated with the years ended
December 31, 1993 and 1994 occurred as a result of significant reforms in the
California workers' compensation laws that became effective January 1, 1993 and
an improvement in the California economy that were not anticipated when reserves
were established. The direct reserve deficiencies associated with the years
ended December 31, 1995 and 1996 occurred as a result of unexpected increases in
severity affecting claims occurring in 1995 and 1996. The Company believes that
the increase in claim severity resulted from the weeding out of low dollar
claims by workers' compensation reform, creating a statistical increase in per
claim severity and by a general inflation in medical costs. BIG has informed the
Company that it believes other factors were more important causes of the
increase in claim severity. See "Business Insurance Group, Inc. -- Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Six
Months Ended June 30, 1998 as Compared to Six Months Ended June 30, 1997."

Superior Pacific's experience with direct reserve deficiencies occurring
for the years ended December 31, 1989 through 1992, 1995, and 1996 and direct
redundancies occurring for the years ended December 31, 1993 and 1994 is
consistent with the results experienced by the California workers' compensation
industry during the same time periods. The underlying improvement in claim
frequency and severity during the years ended December 31, 1993 and 1994 that
caused Superior Pacific to develop direct redundant reserves is also consistent
with industry experience. The direct reserve deficiencies occurring for the
years ended December 31, 1995 and 1996 resulted from unexpected increases in
claim severity, consistent with some California workers' compensation insurers'
experience. The net-of-reinsurance redundancies displayed at the bottom of the
table reflect Superior Pacific's per risk excess of loss, quota-share, and
aggregate excess of loss reinsurance, the effects of which were to reduce
Superior Pacific's direct redundancies/deficiencies due to the cession to a
reinsurer of a portion of Superior Pacific's favorable development.

Currently, management prepares on a monthly basis a comprehensive analysis
of workers' compensation experience, and the process of estimating claim and
claim adjustment expense liabilities is continually modified to consider
additional information regarding trends in pricing, frequency, and severity.
However, conditions and trends that have historically affected Superior
Pacific's claims may not necessarily be indicative of conditions and trends that
will affect future claims, and it is not appropriate to extrapolate future
reserve redundancies or deficiencies based on the data set forth above.

By frequently reviewing reserves and utilizing sophisticated data
processing systems, management is generally able to detect trends in claim and
claim adjustment expenses and take appropriate actions in a timely manner to
avoid having to increase reserves substantially at a later date. For example,
the Company was one of the first to recognize and quantify the increase in claim
severity appearing in claims with 1995 and subsequent

87
<PAGE> 90

dates of injury. Recognition of this shift has enabled management to take
pro-active steps, an example of which is its undertaking of the CSMP. See
"-- Claim Severity Management Program."

DISCONTINUED OPERATIONS

Superior Pacific'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 Superior Pacific. Superior Pacific believes the existing
provision is sufficient to cover future claims, but there is significant
uncertainty associated with the reporting and severity of construction claims.
Certain investments are allocated to discontinued operations to fund future
claim and claim adjustment expense payments. Management estimates that
discontinued operations will essentially have "run-off" by the year 2000.

In 1993, the Company recorded a pre-tax charge to income of $4.5 million
for estimated operating losses during the phase-out period. During the second
quarter of 1995, the Company increased by approximately $15.0 million its
reserves for discontinued operations for accident years 1993 and prior and has
not increased them since.

The following table provides a reconciliation of the beginning and ending
claim and claim adjustment expense reserves for discontinued operations for each
of the years in the three-year period ended December 31, 1997, computed in
accordance with GAAP.

RECONCILIATION OF LIABILITY FOR DISCONTINUED OPERATIONS CLAIM AND
CLAIM ADJUSTMENT EXPENSE

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Beginning reserve, gross of reinsurance..................... $25,466 $ 40,526 $ 36,410
Less: Reinsurance recoverable on unpaid losses.............. 6,976 9,159 8,777
------- -------- --------
Beginning reserve, net of reinsurance....................... 18,490 31,367 27,633
Provision for net claim and claim adjustment expenses:
For claims occurring in current year...................... -- -- --
For claims occurring in prior years....................... -- -- 15,006
------- -------- --------
Total claim and claim adjustment expenses......... -- -- 15,006
------- -------- --------
Payments for net claim and claim adjustment expense:
For claims occurring in current year...................... -- -- --
For claims occurring in prior years....................... (5,020) (12,877) (11,272)
------- -------- --------
Total claim and claim adjustment expense
payments........................................ (5,020) (12,877) (11,272)
------- -------- --------
Ending reserves, net of reinsurance......................... 13,470 18,490 31,367
Reinsurance recoverable on unpaid losses.................... 5,216 6,976 9,159
------- -------- --------
Ending reserves, gross of reinsurance....................... $18,686 $ 25,466 $ 40,526
======= ======== ========
</TABLE>

88
<PAGE> 91

The following table discloses the development of discontinued operations
direct claim and claim adjustment expense reserves from December 31, 1987
through December 31, 1997.

ANALYSIS OF DISCONTINUED OPERATIONS DIRECT CLAIM AND CLAIM ADJUSTMENT EXPENSE
DEVELOPMENT
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------
1987 1988 1989 1990 1991 1992 1993 1994
-------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Reserve for Direct
Unpaid Claim 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
Re-estimated as of:
One Year Later........ 19,879 32,395 56,093 73,295 83,770 73,298 56,041 54,855
Two Years Later....... 25,865 43,160 60,679 89,336 91,453 73,067 75,073 55,622
Three Years Later..... 30,455 43,585 72,860 98,206 90,717 96,531 76,079 60,849
Four Years Later...... 30,134 52,261 82,218 102,538 117,215 92,569 82,026
Five Years Later...... 34,215 61,539 84,304 126,431 113,084 99,009
Six Years Later....... 38,051 63,072 103,326 123,722 119,112
Seven Years Later..... 38,844 77,080 104,428 130,055
Eight Years Later..... 44,129 78,938 108,897
Nine Years Later...... 44,866 80,906
Ten Years Later....... 45,315
Cumulative
(Deficiency).......... (32,637) (54,971) (67,809) (73,320) (53,483) (32,477) (27,128) (24,439)
Cumulative Amount of
Reserve Paid Through
One Year Later........ $ 7,529 $ 13,754 $ 19,839 $ 27,397 $ 29,274 $ 26,473 $ 23,043 $ 14,329
Two Years Later....... 13,146 15,301 26,399 35,278 29,165 23,483 16,203 16,765
Three Years Later..... 15,900 19,844 32,188 39,203 28,136 18,380 19,649 11,857
Four Years Later...... 18,915 23,007 37,758 42,135 23,255 17,777 19,263
Five Years Later...... 22,329 28,609 38,798 41,835 22,047 18,276
Six Years Later....... 26,129 31,715 37,585 42,943 23,104
Seven Years Later..... 27,645 31,247 42,260 42,363
Eight Years Later..... 27,791 37,394 40,796
Nine Years Later...... 27,780 41,325
Ten Years Later....... 29,163
Gross Reserve -- December 31............................................................. $ 54,898 $ 36,410
Reinsurance Recoverables................................................................. (8,379) (8,777)
-------- --------
Net Reserve -- December 31............................................................... $ 46,519 $ 27,633
======== ========
Gross Re-estimated Reserve............................................................... $ 82,026 $ 60,849
Re-estimated Reinsurance Recoverables.................................................... 21,249 18,210
-------- --------
Net Re-estimated Reserve................................................................. $ 60,777 $ 42,639
======== ========
Net Cumulative (Deficiency).............................................................. $(14,258) $(15,006)
======== ========

<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1995 1996 1997
-------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Reserve for Direct
Unpaid Claim and Claim
Adjustment Expenses,
Gross of Reinsurance
Recoverables
Reserve................................. $ 40,526 $25,466 $18,686
Re-estimated as of:
One Year Later.......................... 41,293 30,693
Two Years Later......................... 46,520
Three Years Later.......................
Four Years Later........................
Five Years Later........................
Six Years Later.........................
Seven Years Later.......................
Eight Years Later.......................
Nine Years Later........................
Ten Years Later.........................
Cumulative
(Deficiency)............................ (5,994) (5,227)
Cumulative Amount of
Reserve Paid Through
One Year Later.......................... $ 15,827 $10,717
Two Years Later......................... 10,717
Three Years Later.......................
Four Years Later........................
Five Years Later........................
Six Years Later.........................
Seven Years Later.......................
Eight Years Later.......................
Nine Years Later........................
Ten Years Later.........................
Gross Reserve -- December 31.............. $ 40,526 $25,466 $18,686
Reinsurance Recoverables.................. (9,159) (6,976) (5,216)
-------- ------- -------
Net Reserve -- December 31................ $ 31,367 $18,490 $13,470
======== ======= =======
Gross Re-estimated Reserve................ $ 46,520 $30,693
Re-estimated Reinsurance Recoverabables... 15,153 12,203
-------- -------
Net Re-estimated Reserve.................. $ 31,367 $18,490
======== =======
Net Cumulative (Deficiency)............... $ -- $ --
======== =======
</TABLE>

The first line of the preceding table depicts the estimated liability for
unpaid claim 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
Claim and Claim Adjustment Expense Development," above.

89
<PAGE> 92

From 1987 to 1990, the increase in ultimate claim and claim adjustment
expense for discontinued operations was due to the lack of Company history, as
well as changes in economic and legal environments that 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.

The predominant number of the Company's pre-1991 discontinued operations
claims are attributable to construction defect claims associated with commercial
package policies sold to general contractors, developers, and artisan
contractors underwritten from 1986 to 1993. Other carriers writing these same
lines of business have also been negatively affected by the unfavorable increase
in claim frequency and severity that occurred as a result of changes in the
economic and legal environment during this time. At December 31, 1997,
approximately $16.8 million (approximately 90%) of the total $18.7 million of
direct reserves for discontinued operations was attributable to construction
defect claims.

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 claim and claim
adjustment expense reserves for discontinued operations. Effective June 30,
1995, the Company recorded a pre-tax charge of approximately $15.0 million ($9.8
million net of tax) for discontinued P&C operations due principally to an
increase in management's estimates of IBNR 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 potentially include an extended period of time beginning
with the construction date and ending perhaps as late as 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 of these
facts, under the California Supreme Court's ruling, the Company believes it is
compelled to defend the "insured" and to contribute appropriately to loss
settlements.

Management cannot predict the volume of future Montrose-related claims, the
cost of handling the claims, or the ultimate severity of loss associated with
such claims, but believes its current reserves are adequate to cover this
increase in claims activity, depending on the length of time the recent
reporting trends continue. There can be no assurance, however, 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 risks or aggregate catastrophic losses.
Superior Pacific 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 Superior Pacific's profitability. Superior Pacific's
reinsurance program is based on the security of the reinsurers, coverage, and
price. Superior Pacific monitors its reinsurers' financial condition carefully
and recoverable losses are pursued aggressively. Occasionally, Superior Pacific
is involved in disputes with reinsurers, which, if not settled, may be resolved
in arbitration. At December 31, 1997, there were no disputes related to the
workers' compensation operations.

90
<PAGE> 93

Superior Pacific maintains excess of loss reinsurance contracts with
various reinsurers and a quota-share contract with ZRNA. 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 $150.0 million per occurrence.

Effective January 1, 1994, SNIC entered into the ZRNA Quota-Share with
ZRNA. Under the ZRNA Quota-Share, ZRNA may provide Superior Pacific with an
Assumption of Liability Endorsement facility ("ALE"), or, effective January 1,
1997, Superior Pacific may write directly on policy forms of ZC Insurance
Company ("ZCIC"), an affiliate of Zurich (the "ZCIC Underwriting Agreement").
The ceding rate under the contract was 20% for 1994, and ZRNA and Superior
Pacific mutually agreed to reduce the quota-share participation to 5% for 1995
and 1996. Further, Superior Pacific received ceding commissions ranging between
22.5% and 24.5% for premiums ceded to ZRNA under the 1994-1997 contracts. The
purpose of the ceding commission is to cover Superior Pacific'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 ZRNA Quota-Share were amended
to increase ZRNA's participation from 5% of premiums written in 1996 to 6.5% in
1997. In exchange for the increased participation, ZRNA no longer received a
separate fee for policies written on ALEs, but received an additional 2% of
premiums written on ZCIC Underwriting Agreement policies only.

Effective January 1, 1998, the terms of the ZRNA Quota-Share again were
amended to increase the ceding commission to 27.5% for non-ZCIC policies and on
ALE premium. The ceding commission on ZCIC policies remained at 20%. Further,
the additional 2% of premium paid to ZCIC for its underwriting was eliminated.

Superior Pacific entered into a contract with Centre Re effective June 30,
1997, under which Centre Re assumed $10.0 million of reserves associated with
claims open for future medical payments from Superior Pacific in consideration
of $1.0 million in cash and assignment of Superior Pacific's rights of
contribution and subrogation recoveries during the term of the contract. The
contract is accounted for as a deposit, and no gain will be recognized until net
cash payments from Centre Re are greater than Superior Pacific's $1.0 million
premium. See "Superior National -- Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."

Effective February 1, 1998, Superior Pacific entered into the unrelated
Quota-Share Arrangement with United States Life Insurance Company, rated "A+" by
A.M. Best, under which Superior Pacific ceded 100% of premiums and claim and
claim adjustment expenses associated with policies having $100,000 or more of
estimated annual premium. Superior Pacific received a 35.0% ceding commission on
premiums ceded under this contract. Effective May 1, 1998, the Quota-Share
Arrangement was amended so that the ceding level was reduced to $25,000 in
estimated annual premium at inception, and the ceding commission was adjusted to
33.5%. The term of the amended agreement is three years, with two one-year
extensions. As BlG has entered into a substantially identical Quota-Share
Arrangement with the same reinsurer, this contract plays an important role in
the Company's strategy going forward.

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 a
reinsurance agreement, the ceding company is required to pay the loss. With
respect to policies of Superior Pacific's with an ALE, however, in the event
that Superior Pacific is unable to meet its claim payment obligations, ZRNA
assumes all responsibility for the payment of losses related to the policy. All
of the excess of loss reinsurance is with non-affiliated reinsurers.

Superior Pacific generally enters into its contracts on an annual basis.
Superior Pacific has maintained reinsurance contracts with many reinsurers for a
number of years. In general, Superior Pacific's reinsurance contracts cover
specified underwritten risks. Superior Pacific also from time to time purchases
reinsurance covering specific liabilities or policies underwritten. As of
December 31, 1997, ZRNA and General Reinsurance Corporation ("Gen Re") accounted
for 24.5% and 21.6%, respectively, of total amounts recoverable by Superior
Pacific 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.
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<PAGE> 94

INVESTMENTS

The amount and types of investments that may be made by the Company are
regulated under the California Insurance Code and the rules and regulations
promulgated by the DOI. The Company's investments are primarily managed
externally, based upon guidelines and strategies approved by management. As of
December 31, 1997, the Company's consolidated portfolio consisted almost
entirely of fixed-income securities. The bond portfolio is heavily weighted
toward short- to intermediate-term, investment-grade securities rated "A" or
better, with approximately 91% rated "AA" or better.

Funds withheld assets having carrying and market values of $114.9 million
and $117.1 million, respectively, at December 31, 1995, were withheld from
Centre Re as collateral under an excess of loss reinsurance contract. These
investments are reported separately on the financial statements as investments
withheld from a related party reinsurer. These assets were carried as held to
maturity until they were returned to Centre Re in 1996 upon the commutation of
the reinsurance contract. All investment income and market value risk associated
with these assets was assumed by Centre Re. Interest expense in the amount of
$6.1 million and $8.8 million was paid to Centre Re during 1996 and 1995,
respectively. In November 1996, the Company entered into a financing transaction
involving Centre Re and Chase pursuant to which Chase extended a $93.1 million
term loan, net of transaction costs. The Company used proceeds from the
transaction to purchase from SNIC reinsurance receivables due from Centre Re. On
June 30, 1997, the Company reached an agreement under which the Company agreed
to transfer receivables from a related party reinsurer to Chase in exchange for
the cancellation of the Company's debt to Chase. As a result of these
transactions, the Company's investable assets increased by $93.1 million.

The table below contains information concerning the composition of the
Company's investment portfolio at December 31, 1997:

<TABLE>
<CAPTION>
AS OF
DECEMBER 31, 1997
----------------------
CARRYING MARKET
AMOUNT (1) VALUE
TYPE OF INVESTMENT ---------- --------
(IN THOUSANDS)
<S> <C> <C>
Bonds: (2)
U.S. government and agencies (AAA/Aaa rated).......... $165,273 $165,273
AA/Aa rated........................................... 21,127 21,127
A rated............................................... 12,584 12,584
BBB/Baa rated......................................... 2,150 2,150
BB/Ba rated........................................... 4,080 4,080
-------- --------
Total Bonds................................. 205,214 205,214
Cash and cash equivalents and short-term
investments......................................... 35,376 35,376
Common stocks......................................... 1,526 1,526
-------- --------
Total....................................... $242,116 $242,116
======== ========
</TABLE>

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

(2) S&P 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 "BB" as "low quality." Moody's
defines "Aaa" rated securities as "best quality," "Aa" as "high quality,"
"A" as "strong security," "Baa" as "adequate security," and "Ba" as "low
quality."

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<PAGE> 95

The table below reflects investments (including investments withheld from a
related party reinsurer) and interest earned thereon and average annual yield on
investments for each year in the five-year period ended December 31, 1997.

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total investments at end of period...... $213,374 $115,017 $163,951 $174,345 $144,778
Net investment income (before taxes).... $ 12,674 $ 7,769 $ 9,784 $ 9,049 $ 9,550
Average annual yield on ending
investment portfolio (before taxes)... 5.9% 6.7% 5.9% 5.2% 6.6%
</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, 1997, the investments under the Company's management (i.e., excluding funds
withheld) have a duration of 2.9 years.

The table below sets forth the maturity profile of the Company's bond
portfolio at market value as of December 31, 1997:

<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
----------------------------------------------------------
BONDS RATED(1)
----------------------------------------------------------
AAA/AAA AA/AA A BBB/BAA BB/BA TOTAL
-------- ------- ------- ------- ------ --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
1 year or less.................... $ 25,086 $ 25,086
More than 1 year, through 3
years........................... 9,038 $ 5,544 14,582
More than 3 years, through 5
years........................... 11,988 $15,120 3,020 30,128
More than 5 years, through 10
years........................... 26,519 6,007 4,020 $2,150 $4,080 42,776
More than 10 years, through 15
years........................... 2,866 2,866
More than 15 years................ 89,776 89,776
-------- ------- ------- ------ ------ --------
Total................... $165,273 $21,127 $12,584 $2,150 $4,080 $205,214
======== ======= ======= ====== ====== ========
</TABLE>

- ------------------------------
(1) S&P 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 "BB" as "low quality." Moody's
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 Company intends to cause BIG to liquidate its investment portfolio
immediately prior to Closing. The bulk of the investable assets obtained as a
result of the Acquisition will be invested in accordance with the Company's
existing investment policies. The Company also intends to purchase a $110.0
million Federal National Mortgage Association security maturing in 2013. Such a
security would have a high investment grade rating, a higher yield coupon than
the Company's portfolio generally, and an approximately ten-year duration.

INFORMATION SERVICES

Superior Pacific emphasizes the development of personal computer based
information and processing systems for use in all areas of its business and to
that end strives to maintain a creative, flexible, and dynamic data processing
capability that (i) enhances the effectiveness of its employees' underwriting,
policy administration, and claims activities, (ii) provides detailed, real-time,
and near real-time information to management for control and administration
purposes, and (iii) provides marketing benefits through improved customer
service. The Company believes that these systems give it a significant
competitive advantage over competitors that lack such systems. Superior Pacific
expensed or capitalized 3.7%, 4.2%, and 3.3% of direct written premium in 1997,
1996, 1995, respectively, for developing and upgrading its systems.

Data Warehouse Decision Support System. In 1993 the Company developed
SWAMI(R), its proprietary "data warehouse decision support" system. Beginning
with the installation of SWAMI(R), Superior Pacific

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<PAGE> 96

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
monitoring and feedback system is necessary due to the information intensive
nature of the insurance business because lack of information represents a major
aspect of underwriting risk. Accordingly, SWAMI(R) was developed to provide
quality, detailed, real-time, and near real-time information to management as
needed to reduce the risk represented by lack of information. The SWAMI(R)
system has been constantly enhanced since its implementation. Management
believes that SWAMI(R) is the first comprehensive "data warehouse decision
support" system developed in the insurance industry.

Underwriting. The Company's underwriting system is a fully integrated,
computerized, rating, quoting, and policy issuance system for use both
internally and remotely from producers' offices. The system contains edit and
blocking features that prohibit underwriters from issuing policies associated
with business that is deemed inappropriate or undesirable by management, or that
may be inappropriately priced. Detailed information for each producer can be
instantaneously reviewed on an accident year, policy year, or calendar year
basis. The system provides analytical information 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.

Policy Administration. The Company's policy administration, including
premium collection and audit activities, is fully automated. In addition to
traditional "agency" billing services, the Company's collections capabilities
also include direct bill, automatic withdrawals from policyholders' bank
accounts, and credit card billings, which, management believes, dramatically
improve credit experience and policy persistency.

Claims Administration. The core of the claims system is a proprietary
document imaging system that, combined with sophisticated workflow protocols,
improves the productivity of the Company's claims administration.

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.

The Company does not believe that it will incur any material expenditures
or liabilities as a result of the Year 2000 problem in computer software and
hardware. See "Superior National -- Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Year 2000 Strategy."

The Company is developing a strategy to integrate BIG's policy and claims
functions into its system over time. The integration of policy functions would
be the first step, and could occur as new or renewal policies are issued after
the Acquisition. The claims functions of Superior Pacific and BIG would be
separate for some time.

COMPETITION

California is the country's largest workers' compensation insurance market.
Competitive pressures in the California workers' compensation market increased
with the implementation of open rating in January 1995. As a result, total
direct written premium for the California market decreased from $9.0 billion in
1993 to $4.9 billion in 1997. More recently, certain fundamentals of the
workers' compensation market in California have improved, as demonstrated by an
actual improvement in premium pricing of 0.5% for the year ended December 31,
1997, as compared to the same period in 1996.

The workers' compensation insurance industry in California is extremely
competitive. Many of Superior Pacific'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 Superior Pacific. Of the approximately 300
companies that report to the WCIRB that write workers' compensation insurance,
the Company believes that Liberty Mutual Insurance Companies, CalComp, and

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<PAGE> 97

American International Group are the largest private sector underwriters of
workers' compensation insurance in California. Superior Pacific believes the
dominant competitor in the California workers' compensation industry is the
State Fund. As a result of the Pac Rim Transaction, the Company believes that,
excluding the State Fund, it is the eighth largest California workers'
compensation insurer overall, based upon 1996 direct written premium. On a pro
forma basis, upon acquiring CalComp in the Acquisition, as well as the other BIG
Insurance Subsidiaries, the Company believes it will be the largest California
workers' compensation insurer overall, excluding the State Fund.

The workers' compensation market is commodity-oriented, highly fragmented,
and reflective of intense price competition. Nevertheless, because each risk is
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 of operations. Therefore, although workers' compensation insurance is
a commodity, the price of insurance does not necessarily reflect commodity
pricing. Superior Pacific's existing and prospective customer bases are
vulnerable to competition, especially from larger insurers that at any time are
capable of penetrating Superior Pacific's markets with products priced at levels
substantially below Superior Pacific's.

RATINGS

Superior Pacific is currently rated "BBB" by S&P, a claims paying rating it
has held since 1995. Insurance companies rated "BBB" are considered by S&P to
offer adequate financial security, but capacity to meet policyholder obligations
is susceptible to adverse economic and underwriting conditions. A.M. Best has
currently assigned a "B+" (Very Good) rating to Superior Pacific, a rating it
has held since 1995. A.M. Best has placed the Company's rating on a watch with
positive implications. A.M. Best's ratings are based upon an evaluation of a
company's: (i) financial strength (leverage/capitalization, capital
structure/holding company, quality, appropriateness of reinsurance program,
adequacy of loss/policy reserves, quality, diversification of assets, and
liquidity); (ii) operating performance (profitability, revenue composition, and
management experience and objectives); and (iii) market profile (market risk,
competitive market position, spread of risk, and event risk). A "B+" rating is
assigned to companies that have on balance, in A.M. Best's opinion, very good
financial strength, operating performance, and market profile when compared to
the standards established by A.M. Best, and have a good ability to meet their
ongoing obligations to policyholders. "B+" is A.M. Best's sixth highest rating
classification out of 15 ratings. A.M. Best's and S&P's ratings represent
independent opinions of a company's financial strength and ability to meet its
obligations to policyholders and are not based upon factors concerning
investors. There is no direct relationship between an insurance rating
established by A.M. Best or S&P and the investment ratings issued by the several
securities rating firms, including S&P and Moody's. Investment ratings generally
pertain to individual securities, although the firms who issue ratings
associated with specific investments also issue insurance ratings that duplicate
in some respects the activities of A.M. Best. Insurance ratings are subject to
change and are not recommendations to buy, sell, or hold securities. One factor
in an insurer's ability to compete effectively is its A.M. Best rating. The
Company's A.M. Best rating is lower than that of many of its competitors. There
can be no assurance that such ratings or future changes therein will not affect
the Company's competitive position.

In addition, the Company currently maintains a facility that allows it to
offer certain policyholders insurance policies written by ZCIC, having an A.M.
Best "A" rating. As a result of the planned sale of BICO to Zurich Centre Group
LLC or its designee, and an underwriting arrangement created in connection
therewith, the Company expects to have the ability to offer certain
policyholders policies with Zurich's "A" rating.

REGULATION

Superior National and its insurance subsidiaries are subject to extensive
governmental regulation and supervision. Regulations relate to such matters as
the filing of premium rates and policy forms, adequacy of reserves, types and
quality of investments, minimum capital and surplus requirements, deposits of
securities
95
<PAGE> 98

for the protection of policyholders, statutory financial reporting, and
restrictions on stockholder dividends. Superior National and its insurance
subsidiaries are also subject to periodic examination by the DOI. In addition,
assessments are made against Superior Pacific and other California insurers to
cover liabilities to policyholders of insolvent insurance companies. The
regulation and supervision of insurance companies by state agencies is designed
only for the benefit of policyholders, not stockholders. Superior National
believes that it and its Subsidiaries are in material compliance with state
regulatory requirements that are relevant to their respective businesses.

The DOI Triennial Examination of SNIC, which covered 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. SPCC's Triennial Examination, which was completed in 1996, resulted
in an additional $18.5 million of claim and claim adjustment expense reserves
being recorded as of December 31, 1996, and other significant adjustments
totalling $4.1 million in aggregate. An additional $12.0 million in claim and
claim adjustment expense was recorded by SPCC in the first quarter of 1997.
These events preceded SPCC's acquisition on April 11, 1997.

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 without DOI approval or
non-disapproval in any 12-month period to the extent it exceeds the greater of
(a) net income from operations 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. The maximum dividends permitted under
the California Insurance Code are not necessarily indicative of an insurer's
actual ability to pay dividends or other distributions to a parent company,
which also may be constrained by business and regulatory considerations, such as
the impact of dividends on surplus, that could affect an insurer's competitive
position, the amount of premiums that can be written, and the ability to pay
future dividends. Further, the California Insurance Code requires that the
statutory surplus of an insurance company following any dividend or distribution
by such company be reasonable in relation to its outstanding liabilities and
adequate for its financial needs. Moreover, dividends may only be paid out of
"earned surplus" as defined in the California Insurance Code. New York and
Delaware, the respective domiciles of CCIC and BICO, also limit the amount of
dividends that may be paid by an insurance subsidiary.

In 1989, 1991, 1993, and 1995, various workers' compensation reform laws
that were passed into law by the California legislature materially impacted the
Company's rates, claims experience, financial condition, and results of
operations.

Under the last important measure, adopted in 1993 and declared effective as
of 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
and rules can only be disapproved by the DOI after a hearing and only on the
basis of solvency, market share, or improper filing. Superior Pacific cannot
predict the ultimate effect of open rating on its workers' compensation
business, but during the first three years of open rating, the intense price
competition that ensued led to lower average premiums per policy. Rates
stabilized in 1996 and appeared to increase slightly during 1997. Superior
Pacific 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.

In 1996, the California legislature implemented a set of workers'
compensation reforms, referred to as Assembly Bill 1913 ("AB 1913"), and the DOI
issued its guidelines with respect to their interpretation. AB 1913 causes,
among other things, 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 single claim used in a modification
closes on or after January 1, 1995, for a value of 60% or less of its highest
earlier reported value, if the highest reported incurred value was $10,000 or
more. AB 1913 was amended effective January 1, 1998 by Senate bill 1217 ("SB
1217"). Under the new guidelines of SB 1217, if the aggregate
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<PAGE> 99

amount of incurred claims (as opposed to a single claim) changes by the
threshold amount, than the WCIRB will calculate a new experience modification
factor. Such a change in the experience modification factor will require the
current workers' compensation carrier to return a portion of a policyholder's
premium for the current and preceding two policies' periods without regard to
whether the current workers' compensation insurance carrier was the insured's
previous carrier. WCIRB estimates the ultimate cost to California workers'
compensation underwriters will be less than 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.

Proposed federal legislation has been introduced from time to time in
recent years that would provide the federal government with substantial power to
regulate P&C 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.

In order to enhance the regulation of insurer solvency, the NAIC has
adopted a formula and model law to implement risk-based capital ("RBC")
requirements for P&C (including workers' compensation) insurance companies
designed to assess minimum capital requirements and to raise the level of
protection that statutory surplus provides for policyholder obligations. The
NAIC model law has been incorporated into the California Insurance Code. The RBC
formula for P&C insurance companies measures four major areas of risk: (i)
underwriting, which encompasses the risk of adverse loss developments and
inadequate pricing, (ii) declines in asset values arising from credit risk,
(iii) declines in asset values arising from investment risks, and (iv)
off-balance sheet risk arising from adverse experience from non-controlled
assets, guarantees for affiliates, contingent liabilities, and reserve and
premium growth. Pursuant to the model law, insurers having less statutory
surplus than that required by the RBC calculation will be subject to varying
degrees of regulatory action, depending on the level of capital inadequacy.

The RBC model law provides for four levels of regulatory action. The extent
of regulatory intervention and action increases as the level of surplus as a
percentage of the RBC amount falls. The first level, the Company Action Level
(as defined by the NAIC), requires an insurer to submit a plan of corrective
actions to the regulator if surplus falls below 200% of the RBC amount. The
Regulatory Action Level (as defined by the NAIC) requires an insurer to submit a
plan containing corrective actions and requires the relevant insurance
commissioner to perform an examination or other analysis and issue a corrective
order if surplus falls below 150% of the RBC amount. The Authorized Control
Level (as defined by the NAIC) gives the relevant insurance commissioner the
option either to take the aforementioned actions or to rehabilitate or liquidate
the insurer if surplus falls below 100% of the RBC amount. The fourth action
level is the Mandatory Control Level (as defined by the NAIC), which requires
the relevant insurance commissioner to rehabilitate or liquidate the insurer if
surplus falls below 70% of the RBC amount. Based on the foregoing formulae, as
of December 31, 1997, the RBC ratios of SNIC and SPCC were in excess of the
Company Action Level, the first trigger level that would require regulatory
action.

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 may lead to
increased regulatory oversight. Based on its 1997 statutory financial statement,
SNIC was within the usual range of all twelve IRIS tests, and SPCC fell outside
the usual range of three of the twelve IRIS tests. SPCC was outside of the usual
range of the tests measuring change in net writings, two-year overall operating
ratio, and two-year reserve development to surplus. The unusual values were the
result of 1996 claim and claim adjustment expense reserve increases, and the
runoff of SPCC's premium in force during 1997.

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<PAGE> 100

principally in the following respects: (a) premium income is taken into
operations over the periods covered by the policies, whereas the related
acquisition and commission costs are expensed when incurred; (b) deferred income
taxes are not recognized under SAP; (c) certain assets such as agent's 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 the Company's estimates are required.

It is not possible to predict the future impact of changing state and
federal regulation on the Company's operations and there can be no assurance
that laws and regulations enacted in the future will not be more restrictive
than existing laws.

EMPLOYEES

As of September 30, 1998, the Company had 270 employees, none of whom was
covered by a collective bargaining agreement.

BUSINESS PROPERTIES

The Company's principal executive offices are located in Calabasas,
California and are subject to a lease that expires in 2000. The Company also
leases space for branch offices in Woodland Hills, Pleasanton, Sacramento, and
Fresno (all in California). Such leases expire in 2002, 2003, 2001, and 2000,
respectively. The Company's Phoenix, Arizona office is the subject of a lease
that expires in 2001.

The Company's principal executive office is located at 26601 Agoura Road,
Calabasas, California 91302, and the telephone number is (818) 880-1600.

LEGAL PROCEEDINGS

Superior National 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 Superior National 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.

The Company is subject to class action litigation filed against all
workers' compensation insurers in California, related principally to claims
paying practices. Such litigation is being vigorously contested by the Company.
Although the likelihood of a material adverse result in such matters is regarded
by the defendants as low, there can be no assurance that, should a trial be
held, the class plaintiffs will not receive a substantial award.

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<PAGE> 101

SUPERIOR NATIONAL
MANAGEMENT

DIRECTORS

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

<TABLE>
<CAPTION>
DIRECTOR
DIRECTORS AGE POSITION WITH THE COMPANY SINCE
- ----------------------------- --- -------------------------------------------------- --------
<S> <C> <C> <C>
C. Len Pecchenino(1)......... 71 Director, Chairman of the Board 1988
Steven D. Germain(2)......... 45 Director 1995
Steven B. Gruber............. 41 Director 1997
Thomas J. Jamieson(1)(3)..... 55 Director 1985
Gordon E. Noble(2)........... 70 Director 1990
Craig F. Schwarberg(1)(3).... 42 Director 1992
Robert A. Spass.............. 42 Director 1992
Bradley E. Cooper(2)(3)...... 32 Director 1992
William Gentz................ 57 President, Chief Executive Officer and Director 1994
J. Chris Seaman(3)........... 43 Executive Vice President, Chief Financial Officer 1993
and Director
Roger W. Gilbert............. 66 Director 1997
</TABLE>

- ------------------------------
(1) Member of Audit Committee

(2) Member of Compensation Committee

(3) Member of Investment Committee

No arrangement or understanding exists between any nominee and any other
person or persons pursuant to which any nominee was or is to be selected as a
director or nominee, except that IP Delaware and IP Bermuda nominated Steven B.
Gruber to the Board of Directors in April 1997, pursuant to the terms of the
1996 Stock Purchase Agreement. Under the 1996 Stock Purchase Agreement, which
will be reaffirmed upon the consummation of the Equity Financings, IP and
certain related parties have agreed that they will nominate no more than five
directors to the eleven-member Board.

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 September 1991 to August 1992. Until his retirement in 1986, Mr. Pecchenino
held various executive officer positions, including President and Chief
Operating Officer, with IC Industries, Inc. and Pneumo Corporation.

Steven D. Germain was elected to the 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 General Counsel of Zurich Centre Group
LLC, a company that provides management services to the Centre Reinsurance Group
of Companies. Mr. Germain continues to serve as a Senior Vice President, General
Counsel and Secretary to Centre Re and as a director, Senior Vice President,
General Counsel and Secretary of CentreLine. Mr. Germain is also a director of
Home Holdings, Inc.

Steven B. Gruber became a director of the Company in April 1997. He was a
founder of, and since February 1994, has served as a Managing Partner of,
Insurance Partners Advisors, L.P. ("IPA"). From May 1990 to present, Mr. Gruber
has served as a Managing Director of Oak Hill Partners, Inc. and from October
1992 to present, has served as a Vice President of Keystone, Inc. From 1981 to
April 1990 he was associated with Lehman Brothers Inc., most recently as
Managing Director and Co-Head of high-yield securities. From 1994 to 1997, he
served as a director of Unionamerica Holdings plc. From 1990 to 1996, he served
as a

99
<PAGE> 102

director of National Reinsurance Holding, Corp. He is also a director of Reliant
Building Products, Inc., Grove Worldwide L.L.C., and MVE Inc.

Thomas J. Jamieson has been a director of the Company since December 1985.
Since 1971, he has served as President of Jaco Oil Company, and since 1993, he
has been a director of Berry Oil Co.

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. Previously he 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.

Craig F. Schwarberg was appointed to the Board of Directors in March 1992.
From 1991 to 1997, Mr. Schwarberg worked for 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. Prior to 1991, he held
various positions at Lehman Brothers Inc., most recently as Senior Vice
President.

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 IPA. Prior to 1990, Mr. Spass held various positions at Salomon
Brothers Inc, most recently as a Director. Since January 1996, he has served as
a director of Highlands Insurance Group, Inc. Since January 1998, he has served
as a director of MMI Companies, Inc. From 1990 to 1996, he served as a director
of National Reinsurance Holdings Corp. From 1994 to 1997, he served as a
director of Unionamerica Holdings plc, and from 1994 to 1996 he served as a
director of NACOLAH Holding Corporation.

Bradley E. Cooper became a director of the Company in May 1992. Currently,
Mr. Cooper is a Partner of IPA, joining at its formation in 1994. From May 1990
to February 1994, Mr. Cooper served as Vice President of IIA. Prior to 1990, Mr.
Cooper was an analyst with Salomon Brothers Inc. 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 Chief Financial Officer 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.

Roger W. Gilbert became a director of the Company in April 1997. From May
1988 until his retirement in June 1993, Mr. Gilbert served simultaneously as the
Chief Executive Officer and Chairman of the Board of TIC Indemnity Co., the
Chief Executive Officer of TMIC Insurance Co. Inc., and a California Special
Deputy Insurance Commissioner, a position to which he was appointed by the
California Insurance Commissioner. Prior to 1988, Mr. Gilbert served as Senior
Vice President and director of Great American Insurance Companies, and as
President of Great America West Inc.

COMMITTEES

The standing committees of the Board of Directors are the Audit Committee,
the Compensation Committee, and the Investment Committee.

The Audit Committee recommends to the Board of Directors the engagement or
discharge of the Company's independent auditors; reviews with the independent
auditors the scope, timing and plan for the annual audit, any non-audit
services, and the fees for audit and other services; reviews outstanding
accounting
100
<PAGE> 103

and auditing issues with the independent auditors; and supervises or conducts
such additional projects as may be relevant to its duties. The Audit Committee
is also responsible for reviewing and making recommendations with respect to the
Company's financial condition, its financial controls, and its accounting
practices and procedures. The Audit Committee, which presently consists of
Messrs. Pecchenino, Jamieson, and Schwarberg, held five meetings during the
fiscal year ended December 31, 1997.

The Compensation Committee reviews and approves the Company's executive
compensation policies and bonus distributions to officers and key employees of
the Company. The Compensation Committee, which during the fiscal year ended
December 31, 1997 held four meetings, consists of Messrs. Noble, Cooper, and
Germain.

The Investment Committee reviews the investment practices of the Company's
primary insurance subsidiaries, SNIC and SPCC, and oversees the relationship
between SNIC and SPCC and their investment manager. It carries out this function
through the fact that its members are the directors of SNIC and SPCC responsible
for the same oversight at SNIC and SPCC. The Investment Committee, which
presently consists of Messrs. Jamieson, Cooper, Seaman, and Schwarberg, held
five meetings during the fiscal year ended December 31, 1997.

MEETINGS AND REMUNERATION

During the fiscal year ended December 31, 1997, the Board of Directors held
eight meetings and took various actions by unanimous written consent. Each
incumbent director attended at least 75% of (i) the total number of meetings
held by the Board of Directors during fiscal 1997, other than Mr. Germain, who
attended 63% of all such meetings, and (ii) the total number of meetings held by
all Committees of the Board of Directors on which he served during that period,
other than Mr. Germain, who attended 25% of all such meetings.

Each director is elected to hold office until the next annual meeting of
stockholders and until his respective successor is elected and qualified. Each
incumbent director who is not an officer of the Company is paid a fee of $4,000
for each regular Board of Directors meeting attended and $500 for each committee
meeting attended. The Board of Directors regularly meets once each quarter. All
directors are reimbursed for their out-of-pocket expenses in serving on the
Board.

In May 1997, the Board of Directors approved the payment to C. Len
Pecchenino, the Chairman of the Board, of $50,000 per year so long as he remains
Chairman of the Board and serves on the Audit Committee. This amount is to be
paid in addition to the fees he normally receives for attendance at regularly
scheduled Board meetings. Mr. Pecchenino was paid $50,000 in September 1997 and
since then he has been paid this amount in four equal quarterly installments.

Messrs. Spass and Cooper are employees of IIA, and Mr. Schwarberg is a
former IIA employee. Mr. Spass is also an officer and director of IIA. Mr.
Germain is an officer and director of Centre Re, Centre Solutions, and
CentreLine, each of which are affiliates of Zurich. Messrs. Spass and Gruber are
executive officers of the ultimate general partner of each of IP Delaware and IP
Bermuda. In addition, Messrs. Spass and Cooper are officers of Capital Z, the
ultimate general partner of IP II. Each of IIA, Centre Re, Centre Solutions,
CentreLine, Zurich, IP Delaware, IP Bermuda, IP II, IPA, and Capital Z are
parties to transactions with the Company described in "Certain Relationships and
Related Transactions." Additionally, Mr. Gentz and Mr. Seaman have participated
in transactions pursuant to which they acquired or are acquiring Common Stock
and/or warrants issued by the Company. See "Certain Relationships and Related
Transactions."

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<PAGE> 104

EXECUTIVE OFFICERS

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

<TABLE>
<CAPTION>
EXECUTIVE
OFFICER
NAME AGE POSITION WITH THE COMPANY SINCE
---- --- ------------------------- ---------
<S> <C> <C> <C>
William L. Gentz 57 President and Chief Executive Officer 1994
J. Chris Seaman 43 Executive Vice President and Chief Financial Officer 1991
Arnold J. Senter 56 Executive Vice President and Chief Operating Officer 1997
Thomas I. Boggs, Jr. 52 Senior Vice President -- Underwriting 1995
Karl O. Johnson 66 Senior Vice President, Superior Pacific 1989
Douglas R. Roche 57 Senior Vice President -- Management Information Systems 1990
Robert E. Nagle 49 Senior Vice President, General Counsel and Secretary 1996
James L. Cinney 57 Senior Vice President, Superior Pacific 1994
Edward C. Shoop 54 Senior Vice President and Chief Actuary 1997
Theresa A. Sealy 50 Senior Vice President -- California Operations 1998
Doris K.T. Lai 42 Vice President -- Finance and Treasurer 1998
</TABLE>

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 director or to any other executive officer of the
Company. Set forth below is a brief description of the business experience for
at least the previous five years of all of the executive officers.

William L. Gentz has held the positions of President and Chief Executive
Officer since mid-1994, and has served as a director of the Company since June
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 Chief Financial Officer 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 positions 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.

Thomas I. Boggs, Jr. was appointed Senior Vice President -- Underwriting
effective March 1995. From October 1993 to March 1995, he served as Assistant
Vice President of Fremont Compensation Insurance Company and from October 1991
to October 1993 served as Business Development Executive for the Southern
California Commercial Insurance Center for Fireman's Fund Insurance Company.
Prior to October 1991, Mr. Boggs held various underwriting and marketing
positions at Cypress Insurance Company, Industrial Indemnity Insurance Company,
and Safeco.

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<PAGE> 105

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 and served in such position until January 1997 at
which point he was appointed Senior Vice President -- Claims. He served in such
position until September 1997 when he was reappointed Senior Vice President --
Management Information Systems. Before 1994, 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 positions 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 been responsible for Superior Pacific's Woodland Hills
branch since 1997. Prior to that, he held the position of Senior Vice
President -- Loss Control of SNIC from 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 California Compensation & Fire Insurance
Company.

Edward C. Shoop was appointed Senior Vice President and Chief Actuary in
October 1997. From April 1995 to August 1997 he served as Senior Vice President
and Actuary with Zenith Insurance Company, and from March 1994 to April 1995
served as Vice President and Actuary with Great States Insurance Company. Prior
to that, Mr. Shoop was Vice President and Actuary with the Workers' Compensation
Insurance Rating Bureau of Massachusetts from November 1991 to March 1994. Mr.
Shoop's 31 years of actuarial experience also includes working for Fireman's
Fund Insurance Company and Royal Insurance Company of Canada, as a Vice
President, and for Aetna Life and Casualty Company.

Theresa A. Sealy was appointed Senior Vice President -- California
Operations in July 1998. From November 1997 to June 1998 she served as Vice
President of the Company. From June 1997 until she joined the Company, she
served as regional manager for CalComp and, prior to that, served as a Senior
Vice President of Allianz Insurance Company since February 1992.

Doris K.T. Lai has held the position of Vice President -- Finance and
Treasurer since August 1998. From November 1997 until she joined the Company,
Ms. Lai was employed by Zenith National Insurance Company as director of
financial services. From October 1996 to November 1997 she served as Vice
President and controller with Fremont Financial Corporation and from May 1994 to
October 1996 she served as a controller with Superior National. Prior to that,
Ms. Lai served as SEC Reporting Manager with TIG Holdings, Inc. from April 1991
to April 1994.

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 5 were
required for those persons, the Company believes that its Insiders complied with
all applicable Section 16(a) filing requirements for fiscal 1997, with the
exception of (i) Curtis H. Carson, an executive officer of the Company, who
filed a Form 5 to report one transaction that was not reported on a Form 4 on a
timely basis, and (ii) IIA and International Insurance Investors (Bermuda)
Limited, each of which filed a late Form 4 to report the same two transactions.
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<PAGE> 106

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, 1997, 1996, and 1995 of those persons who were, at December
31, 1997, (i) the chief executive officer and (ii) the other four most highly
compensated executive officers of the Company.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
-------------------------------- -----------------------------------
AWARDS PAYOUT
----------------------- ---------
OTHER RESTRICTED SECURITIES
ANNUAL STOCK UNDERLYING ALL OTHER
COMPEN- AWARDS OPTIONS/ LTIP COMPEN-
NAME AND PRINCIPAL POSITION YEAR SALARY(1) BONUS(2) SATION($) ($)(3) SARS(#) PAYOUT(#) SATION($)(4)
- -------------------------------- ---- --------- -------- --------- ---------- ---------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
William L. Gentz................ 1997 $293,830 $ -- -- $121,250(5) 18,800 -- $2,250
President and Chief 1996 298,300 278,500 -- 46,874 17,875 -- 2,250
Executive Officer 1995 294,508 203,500 -- 53,690 19,175 -- 2,250
J. Chris Seaman................. 1997 231,616 -- -- 109,125(6) 17,500 -- 2,250
Executive Vice President 1996 235,298 128,500 -- 36,223 13,813 -- 2,250
and Chief Financial Officer 1995 215,500 128,500 -- 40,170 39,325 -- 2,250
Arnold J. Senter(7)............. 1997 229,335 -- -- -- 25,000 -- 2,250
Executive Vice President 1996 -- -- -- -- -- -- --
and Chief Operating Officer 1995 -- -- -- -- -- -- --
Matthew Natalizio............... 1997 183,292 -- -- 18,188(9) 2,786 -- 2,250
Vice President -- 1996 131,004 35,000 -- 20,058 6,500 -- 1,875
Finance and Treasurer(8) 1995 138,504 30,000 -- 7,280 2,600 -- 2,078
Thomas I. Boggs, Jr............. 1997 164,261 -- -- 30,313(11) 4,643 -- 2,250
Senior Vice President -- 1996 155,800 32,000 -- 21,306 8,125 -- 2,163
Underwriting(10) 1995 115,917 7,000 -- 13,000 12,150 -- 1,098
</TABLE>

- ------------------------------
(1) The amounts set forth for fiscal year 1997 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 to
which they apply, although payment typically is made in April of the
subsequent year. No bonus payments were made for fiscal year 1997.

(3) Represents the fair market value of the underlying shares on the date of
grant.

(4) Represents the employer's contribution under the Company's 401(k) Plan.

(5) Represents a grant of 10,000 shares of Restricted Stock that vests in nine
equal annual increments following the date of grant. As of December 31,
1997, Mr. Gentz held an aggregate of 29,950 shares of Restricted Stock
valued at $434,275, based upon the $14.50 per share fair market value of
the Common Stock on such date.

(6) Represents a grant of 9,000 shares of Restricted Stock that vests in nine
equal annual increments following the date of grant. As of December 31,
1997, Mr. Seaman held an aggregate of 24,163 shares of Restricted Stock
valued at $350,364, based upon the $14.50 per share fair market value of
the Common Stock on such date.

(7) Mr. Senter began his employment with the Company in February 1997.

(8) In August 1998, Mr. Natalizio became Vice President -- Operations of the
Company.

(9) Represents a grant of 1,500 shares of Restricted Stock that vests in nine
equal increments following the date of grant. As of December 31, 1997, Mr.
Natalizio held an aggregate of 6,399 shares of Restricted Stock valued at
$92,786, based upon the $14.50 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 2,500 shares of Restricted Stock that vests in nine
equal annual increments following the date of grant. As of December 31,
1997, Mr. Boggs held an aggregate of 9,375 shares of Restricted Stock
valued at $135,938, based upon the $14.50 per share fair market value of
the Common Stock on such date.

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<PAGE> 107

EMPLOYMENT AGREEMENTS

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

William L. Gentz, President and Chief Executive Officer. Mr. Gentz's
agreement expires on June 1, 1999, 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 payment 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.

Arnold J. Senter, Executive Vice President and Chief Operating Officer. Mr.
Senter's agreement expires on February 17, 1999, 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 payment 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.

J. Chris Seaman, Executive Vice President and Chief Financial Officer. Mr.
Seaman's agreement expires on June 1, 1999, 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 annual salary under the
agreement is $200,000, plus benefits and incidentals generally provided to
officers of the Company, and is thereafter as determined by the Board. If Mr.
Seaman's employment is terminated by the Company other than for cause, he is
entitled to payment 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. Seaman
would be deemed terminated without cause and his employment agreement would be
deemed to have a three-year remaining term.

Edward C. Shoop, Senior Vice President and Chief Actuary. Mr. Shoop's
agreement expires on October 6, 1999 and provides that, if his employment with
the Company is terminated as a result of a change in control, he will be
entitled to his salary and benefits for two years from the date of his
termination.

Each of Messrs. Gentz, Senter, Seaman, and Shoop has acknowledged that the
acquisition by IP of a majority of the outstanding Common Stock, should it occur
as a result of the Equity Financings, does not constitute a change in control
for purposes of their employment agreements.

Matthew Natalizio, Vice President -- Operations. 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 payment 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.

Doris K.T. Lai, Vice President -- Finance. Ms. Lai's agreement is
open-ended. Her compensation and benefits are determined by the Board. If Ms.
Lai's employment is terminated by the Company other than for cause, she is
entitled to payment of her salary and benefits for one year from the date of the
termination. Ms. Lai's agreement does not provide any special rights in the
event of a change in control.

CHANGE IN CONTROL ARRANGEMENTS

In addition to the rights described above with respect to Messrs. Gentz,
Senter, Seaman, and Shoop, the only change in control arrangement in place is in
connection with the Company's stock incentive plans. Under the terms of the 1986
Non-Statutory Stock Option and 1986 Non-Statutory Stock Purchase Plan (the "1986

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<PAGE> 108

Plan"), in a reorganization, merger, or consolidation in which the Company does
not survive or in which a change in control takes place, 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 Company's
1995 Stock Incentive Plan (the "1995 Plan"), under similar circumstances, the
Compensation 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

Officers, key employees, including directors who are key employees, and
consultants chosen by the Compensation Committee are eligible to participate in
the 1995 Plan.

Under the 1995 Plan, officers, key employees, and consultants 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 under Section 422 of the Code and those
that do not, referred to as Nonqualified Stock Options. The 1995 Plan also
allows for the issuance of Restricted Stock, which is subject to the Company's
right of repurchase, which expires over time.

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 1997 to each of the executive officers named in the Summary
Compensation Table set forth above under "-- Executive Compensation."

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------- POTENTIAL REALIZABLE VALUE AT
% OF TOTAL ASSUMED ANNUAL RATES OF
NUMBER OF OPTIONS/SARS EXERCISE STOCK PRICE APPRECIATION FOR
SECURITIES GRANTED TO OR OPTION TERM
UNDERLYING EMPLOYEES BASE ------------------------------
OPTIONS/SARS IN FISCAL PRICE EXPIRATION 5% 10%
NAME GRANTED(#) YEAR ($/SH)(1) DATE 0%(2) ($)(3) ($)(3)
- ----------------------------- ------------ ------------ ------------ ---------- ----- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
William L. Gentz............. 18,800(4) 14.9 12.125 3/31/07 -- 143,414 363,294
J. Chris Seaman.............. 17,500(4) 13.8 12.125 3/31/07 -- 133,497 338,172
Arnold J. Senter............. 25,000(4) 19.8 11.380 2/17/07 -- 178,920 453,419
Matthew Natalizio(5)......... 2,786(4) 2.2 12.125 3/31/07 -- 21,244 53,837
Thomas I. Boggs, Jr.......... 4,643(4) 3.7 12.125 3/31/07 -- 35,419 89,722
</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 stockholders
commensurately, an option holder will realize no gain.

(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 Common 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.

(5) In August 1998, Mr. Natalizio became Vice President -- Operations of the
Company.

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<PAGE> 109

OPTION EXERCISES AND YEAR-END VALUE

The following table sets forth information concerning the aggregate number
of options exercised during fiscal 1997 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, 1997.

<TABLE>
<CAPTION>
NUMBER OF
SECURITIES
UNDERLYING
UNEXERCISED
OPTIONS/ VALUE OF UNEXERCISED
SARs AT IN-THE-MONEY OPTIONS/
FISCAL YEAR- SARs AT
END(#) FISCAL YEAR-END(1)
------------------ ---------------------
SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE(#) REALIZED($) UNEXERCISABLE UNEXERCISABLE
- ---------------------------- --------------- ----------- ------------------ ---------------------
<S> <C> <C> <C> <C>
William Gentz............... -- -- 29,995/57,105 $280,133/405,606
J. Chris Seaman............. -- -- 40,591/45,047 392,016/304,878
Arnold J. Senter............ -- -- 0/25,000 0/78,000
Matthew Natalizio(2)........ -- -- 8,340/13,546 78,068/104,719
Thomas I. Boggs, Jr......... -- -- 6,485/18,433 60,847/141,419
</TABLE>

- ------------------------------
(1) Uses a fair market value at December 31, 1997 of $14.50 per share, with the
aggregate exercise price deducted from the total value of the Common Stock
underlying the options.

(2) In August 1998, Mr. Natalizio became Vice President -- Operations of the
Company.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Compensation Committee during the fiscal year ended December 31, 1997
consisted of Messrs. Noble, Cooper, and Germain, each of whom was a non-employee
director. Mr. Cooper is an employee of IIA, which was paid $250,000 by the
Company in fiscal 1997 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 1997 involving payments in excess
of $60,000. See "Certain Relationships and Related Transactions."

During fiscal 1997, no officers participated in deliberations of the
Compensation Committee concerning executive officer compensation, except William
Gentz, the Company's President and Chief Executive Officer.

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 October 1, 1998 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 and the estimated
beneficial ownership of the Company's voting securities by each such person as
of October 30, 1998, the Rights Offering Record Date, after giving effect to the
consummation of the Equity Financings. On March 31, 1992, the Company issued its
Voting Notes in connection with a transaction wherein the Company issued its
14.5% Notes in an aggregate principal amount of $11.0 million, together with
warrants to purchase approximately 1,616,886 shares of Common Stock. The Company
redeemed all of the 14.5% Notes with a prepayment, effective June 30, 1994,
except for the Voting Notes, with respect to which prepayment is prohibited. See
"Certain Relationships and Related Transactions -- Transactions with Affiliates
of Zurich, Including Centre Re." 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 that remain
outstanding and are unexercised as of the applicable record date for a
stockholder vote. As of October 1, 1998, the number of votes held by III, the
holder of the Voting Notes, was equivalent to 1,566,465 shares of Common Stock.
The holder of the Voting Notes is permitted to

107
<PAGE> 110

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 under 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 Certificate of Incorporation and Bylaws.

CERTAIN BENEFICIAL OWNERS

<TABLE>
<CAPTION>
COMMON STOCK
AS ADJUSTED
FOR THE EQUITY
COMMON STOCK(1) FINANCINGS(2) VOTING NOTES
---------------------- ---------------------- --------------------
SHARES
NAME AND ADDRESS SHARES PERCENT(3) SHARES PERCENT(4) EQUIVALENT PERCENT
- ---------------------------------------- --------- ---------- --------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
"III"................................... 204,759(5) 3.32% 409,518(5) 2.24% 1,566,465(5) 100%
International Insurance Investors, L.P.,
c/o International Insurance Investors
(Bermuda) Limited, General Partner
Cumberland House
One Victoria Street
Hamilton HM HX, Bermuda
"IP DELAWARE"........................... 1,375,547(6) 23.07% 3,361,928(6) 18.32% -- --
Insurance Partners, L.P.
201 Main Street
Suite 2600
Ft. Worth, Texas 76102
"IP II"................................. -- -- 3,348,206(7) 18.27% -- --
Insurance Partners II, L.P. and/or
Insurance Partners II Private Fund, L.P.
One Chase Manhattan Plaza
New York, New York 10005
"IIA"................................... 1,243,332(8) 17.26% 1,243,332(8) 6.42% -- --
International Insurance Advisors, Inc.
One Chase Manhattan Plaza
44th Floor
New York, New York 10005
"CENTRE SOLUTIONS"...................... 974,484(9) 14.05% 1,948,968(9) 10.21% -- --
Centre Solutions (Bermuda) Limited
One Victoria Street
Seventh Floor
Hamilton HM HX, Bermuda
"IP BERMUDA"............................ 765,304(10) 12.84% 1,571,137(10) 8.63% -- --
Insurance Partners Offshore (Bermuda),
L.P.
Cedar House
41 Cedar Avenue
P.O. Box HM 1179
Hamilton HM HX, Bermuda
"TJS"................................... 529,652(11) 8.88% 1,405,750(11) 7.69% -- --
TJS Partners, L.P.
52 Vanderbilt Avenue, 5th Floor
New York, New York 10017
"BISHOP ESTATE"......................... 326,552(12) 5.19% 653,104(12) 3.54% -- --
Trustees of the Estate of Bernice P.
Bishop
567 South King Street
Suite 200
Honolulu, Hawaii 96813
</TABLE>

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

(1) Includes warrants expiring on April 1, 2002 to purchase 1,566,465 shares of
Common Stock and a warrant expiring on April 1, 2002 to purchase 579,356
shares of Common Stock described more fully in footnote 9, below. All such
warrants are subject to an agreement among all warrant holders that
prohibits the exercise or transfer of any such warrants until April 2000
unless prior approval from the Board of Directors is obtained. Assuming
that the Company's stockholders have approved the removal of certain
transfer restrictions contained in the Company's Certificate of
Incorporation at the Annual Meeting, it is anticipated that this agreement
will terminate upon the consummation of the Equity Financings. Certain
warrants were issued on March 31, 1992 in a transaction in which the
Company

108
<PAGE> 111

issued (a) warrants to purchase approximately 1,616,886 shares of Common
Stock and (b) promissory notes in the aggregate principal amount of $11.0
million to III and certain members of the Company's management. These
warrants are exercisable at $4.00 per share. The warrants purchased by III,
initially 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. These warrants have since been distributed to the
partners of III; however, IIA's revocable agency relationship with such
partners was reestablished after the distribution. Since the distribution,
some of these partners sold their warrants to certain third parties that do
not have such an agency relationship with IIA. See footnote 8 below. The
Company has retired certain warrants issued to members of management no
longer employed by the Company.

(2) Assumes that the Rights issued in the Rights Offering to such person, if
any, are exercised in full by that person and that the number of shares of
Common Stock beneficially owned by that person on the record date of the
Rights Offering and immediately prior to the consummation of the Equity
Financings is the same number beneficially owned as of October 1, 1998.
Also assumes that there is no exercise of the Standby Commitment.

(3) Percent ownership is based on the number of shares outstanding as of
October 1, 1998, which number is 5,961,497 shares, plus any shares issuable
pursuant to warrants held by the entity in question that may be exercised
within 60 days after October 1, 1998. See footnote 1 regarding certain
contractual provisions that restrict the ability of warrant holders to
exercise such warrants.

(4) Percent ownership is based on the number of shares estimated to be
outstanding as of October 30, 1998, which number is 18,117,480 shares, plus
any shares issuable pursuant to warrants held by the entity in question
that may be exercised within 60 days thereof. See footnote 1 regarding
certain contractual provisions that restrict the ability of warrant holders
to exercise warrants.

(5) Represents warrants to purchase 204,759 shares of Common Stock. Shares As
Adjusted for the Equity Financings include these warrants. Robert A. Spass,
Craig F. Schwarberg, and Bradley E. Cooper, each of whom is a director 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 ("III (Bermuda)"), the general partner of III;
however, pursuant to an agreement between the board of directors of III
(Bermuda) and Mr. Spass, the board of directors (of which Mr. Spass is not
a member) is entitled to make all voting and investment decisions with
respect to the warrants held by III (Bermuda) and the Common Stock issuable
upon the exercise thereof. III (Bermuda) beneficially owns warrants to
purchase 13,183 shares of Common Stock that are subject to IIA's revocable
agency relationship. Centre Solutions and the limited partners of III and
III (Bermuda) transferred warrants to purchase an aggregate of 204,759
shares of Common Stock to III to be held by III (subject to IIA's revocable
agency relationship) in reserve for the payment to IIA and Centre Re of
their incentive fee under III's investment advisory agreements with IIA and
Centre Re. Upon the occurrence of certain events, Messrs. Spass,
Schwarberg, and Cooper, Centre Solutions and others will be entitled to a
distribution of the warrants presently held by III (subject to IIA's
revocable agency relationship) in amounts to be determined at the time of
distribution. Each such party presently disclaims beneficial ownership (as
defined in Rule 13d-3 under the Exchange Act) of all such warrants. See
footnote 8 below. See also "Certain Relationships and Related
Transactions -- 1996-97 Transactions with IP and Limitations on Related
Party Control" and "-- Participation by IP in the Equity Financings and
Limitations on Related Party Control," regarding restrictions on III's
ability to acquire additional equity securities of the Company.

(6) Represents shares of Common Stock held by IP Delaware. Robert A. Spass and
Steven B. Gruber, directors of the Company, are the President and a Vice
President, respectively, of Insurance GenPar MGP, Inc. ("GenPar Inc."), the
general partner of Insurance GenPar MGP, L.P. ("GenPar MGP"), the general
partner of Insurance GenPar, L.P. ("GenPar," and, together with GenPar MGP
and IP Delaware, the "Delaware Partnerships"), which is the general partner
of IP Delaware. Mr. Spass owns 40% and Messrs. Gruber and Daniel L.
Doctoroff each own 30% of the voting capital stock of GenPar Inc. In
addition, Messrs. Spass, Gruber, Doctoroff, and Cooper own direct or
indirect limited

109
<PAGE> 112

partnership interests in certain of the Delaware Partnerships. Each of
Messrs. Spass, Gruber, Cooper, and Doctoroff disclaims beneficial ownership
(as defined in Rule 13d-3 under the Exchange Act) of all shares of Common
Stock held by IP Delaware. See "Certain Relationships and Related
Transactions -- 1996-97 Transactions with IP and Limitations on Related
Party Control" and "-- Participation by IP in the Equity Financings and
Limitations on Related Party Control," regarding restrictions on IP
Delaware's ability to acquire additional equity securities of the Company.
Assuming no shares of Common Stock are purchased by IP Delaware under the
Standby Commitment, then, upon consummation of the Equity Financings, IP
Delaware would beneficially own 3,361,928 shares of Common Stock, which
includes 229,754 shares of Common Stock issuable upon exercise of the
Commitment Fee Warrants to be acquired by IP Delaware. In the event that IP
Delaware is required to exercise the Standby Commitment in full, then IP
Delaware would beneficially own 5,342,805 shares of Common Stock, which
includes 229,754 shares of Common Stock issuable upon exercise of the
Commitment Fees Warrants to be acquired by IP Delaware, representing 29.47%
of the Common Stock estimated to be then outstanding.

(7) Represents shares of Common Stock to be purchased by IP II pursuant to the
IP Stock Issuance and 205,520 shares issuable upon exercise of the
Commitment Fee Warrants to be acquired by IP II assuming that it is not
required to purchase any shares of Common Stock under the Standby
Commitment. Robert A. Spass and Bradley E. Cooper, directors of the
Company, are officers of Capital Z, the ultimate general partner of IP II.
In addition, each of Messrs. Spass and Cooper own 9.9% of the voting
capital stock of Capital Z. No person or entity owns 10% or more of the
voting capital stock of Capital Z. Each of Messrs. Spass and Cooper
disclaims beneficial ownership (as defined in Rule 13d-3 under the Exchange
Act) of all shares of Common Stock that will be held by IP II. Certain
members of management of the Company are investors in an investment fund
that is a limited partner of IP II. In the event that IP II is required to
exercise the Standby Commitment in full, then IP II would beneficially own
6,892,087 shares of Common Stock, which includes 205,520 shares of Common
Stock issuable upon exercise of the Commitment Fee Warrants to be acquired
by IP II, representing 38.06% of the Common Stock estimated to be then
outstanding.

(8) Represents warrants to purchase shares of Common Stock that are subject to
IIA's revocable agency relationship with Centre Solutions and the limited
partners and the general partner of III, as discussed in footnotes 1 and 5
above. As agent, 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 parties who, upon revocation of IIA's authority, would be entitled to
exercise warrants covering more than 5% of the Common Stock are Centre
Solutions and Bishop Estate, in the share amounts and percentages stated.
See "Certain Relationships and Related Transactions -- 1996-97 Transactions
with IP and Limitations on Related Party Control" and "-- Participation by
IP in the Equity Financings and Limitations on Related Party Control,"
regarding restrictions on IIA's ability to acquire additional equity
securities of the Company or exercise warrants to purchase Common Stock.
Because IIA is not the record holder of the warrants it beneficially owns,
IIA will not receive any Rights in the Rights Offering; as a result, its
beneficial ownership will not change upon consummation of the Equity
Financings.

(9) Includes warrants to purchase 395,128 shares of Common Stock held by Centre
Solutions, which were transferred to it by Centre Re in 1997. Centre Re
received the warrants upon a distribution by III to its partners of
warrants, as described in footnote 1 above. These warrants are subject to
IIA's revocable agency relationship. Also includes a warrant to purchase
579,356 shares of Common Stock issued to CentreLine as of June 30, 1994
(the "CentreLine Warrant"). CentreLine is an affiliate of Centre Solutions
and Centre Re. Steven D. Germain, a director of the Company, is an officer
and director of both Centre Solutions and CentreLine. In addition to Mr.
Germain, each of Scott Levine, Tara Leonard, and David A. Brown is a
director of both Centre Solutions and CentreLine. Messrs. Germain, Levine,
and Brown and Ms. Leonard disclaim any beneficial interest in the
CentreLine Warrant and the Common Stock issuable upon its exercise, and in
the warrants held by Centre Solutions (which are subject to IIA's revocable
agency relationship, as described in footnote 8 above), and the shares of

110
<PAGE> 113

Common Stock issuable upon the exercise of such warrants. However, as
officers and/or directors of both Centre Solutions and CentreLine, such
persons share voting and/or investment power over such securities (subject
to the agency appointment described in footnotes 1 and 8 above). See
"Certain Relationships and Related Transactions -- 1996-97 Transactions
with IP and Limitations on Related Party Control" and "-- Participation by
IP in the Equity Financings and Limitations on Related Party Control,"
regarding restrictions on Centre Solution's and CentreLine's ability to
acquire additional equity securities of the Company. The CentreLine
Warrant, which is exercisable at $5.20 per share, was issued in connection
with a $20.0 million investment in the Company (and its affiliate, Superior
National Capital, L.P.) by CentreLine and a second Centre Re affiliate. The
reported number of shares issuable upon exercise of warrants does not
include warrants to purchase 75,262 shares of Common Stock held by III
(subject to IIA's revocable agency relationship) in reserve for the payment
by Centre Solutions to IIA and Centre Re of their incentive fee under III's
investment advisory agreements with IIA and Centre Re. See footnote 5
above.

(10) Represents shares of Common Stock held by IP Bermuda. Robert A. Spass and
Steven B. Gruber, directors of the Company, are the President and a Vice
President, respectively, of Insurance GenPar (Bermuda) MGP, Ltd. ("GenPar
(Bermuda) Ltd."), the general partner of Insurance GenPar (Bermuda) MGP,
L.P. ("GenPar (Bermuda) MGP"), the general partner of Insurance GenPar
(Bermuda), L.P. ("GenPar (Bermuda)" and, together with GenPar (Bermuda) MGP
and IP Bermuda, the "Bermuda Partnerships"), which is the general partner
of IP Bermuda. Robert A. Spass owns 40% and Messrs. Gruber and Doctoroff
each own 30% of the voting capital stock of GenPar (Bermuda) Ltd. In
addition, each of Messrs. Spass, Gruber, and Doctoroff and Bradley E.
Cooper, a director of the Company, owns direct or indirect limited
partnership interests in certain of the Bermuda Partnerships. Each of
Messrs. Spass, Gruber, Cooper, and Doctoroff disclaims beneficial ownership
(as defined in Rule 13d-3 under the Exchange Act) of all shares of Common
Stock held by IP Bermuda. See "Certain Relationships and Related
Transactions -- 1996-97 Transactions with IP and Limitations on Related
Party Control" and "-- Participation by IP in the Equity Financings and
Limitations on Related Party Control," regarding restrictions on IP
Bermuda's ability to acquire additional equity securities of the Company.
Assuming no shares of Common Stock are purchased by IP Bermuda under the
Standby Commitment, then upon consummation of the Equity Financings, IP
Bermuda would beneficially own 1,571,137 shares of Common Stock, which
includes 93,206 shares of Common Stock issuable upon exercise of the
Commitment Fee Warrants to be acquired by IP Bermuda. In the event that IP
Bermuda is required to exercise the Standby Commitment in full, then IP
Bermuda would beneficially own 2,374,737 shares of Common Stock, which
includes 93,206 shares of Common Stock issuable upon exercise of the
Commitment Fee Warrants to be acquired by IP Bermuda, representing 13.20%
of the Common Stock estimated to be then outstanding.

(11) 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; exercise voting control and
dispositive power over all shares presently owned; and are the beneficial
owners of all such shares. The information contained in this footnote is
based, in part, on an Amendment No. 2 to Schedule 13D/A, filed with the SEC
in May 1997. Does not include 173,223 shares issuable upon the exercise of
warrants acquired since May 1997 that are subject to an agreement among all
holders of warrants, which prohibits the exercise or transfer of these
warrants until April 2000 unless prior approval from the Board of Directors
is obtained. See footnote 1 above. Because of these restrictions, TJS, TJS
Management, L.P., TJS Corporation, and Mr. Salvatore disclaim beneficial
ownership (as defined in Rule 13d-3 under the Exchange Act) of such
warrants. Upon consummation of the Equity Financings and assuming the
Company's stockholders have approved the removal of certain transfer
restrictions in the Company's Certificate of Incorporation at the Annual
Meeting, it is anticipated the agreement containing these restrictions will
terminate. As a result, the number of shares TJS will beneficially own, as
adjusted for the Equity Financings, would include the 173,223 shares of
Common Stock issuable upon such warrants.

(12) Represents warrants to purchase shares of Common Stock received upon the
distribution by III to its partners of warrants, as described in footnote 1
above. Shares As Adjusted for the Equity Financings

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<PAGE> 114

include these warrants. These warrants are subject to IIA's revocable
agency relationship. 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 reported number of
shares issuable upon exercise of warrants does not include warrants to
purchase 62,200 shares of Common Stock held by III (subject to IIA's
revocable agency relationship) in reserve for the payment to IIA and Centre
Re of their incentive fee under III's investment advisory agreements with
IIA and Centre Re. See footnote 5 above.

SECURITY OWNERSHIP OF MANAGEMENT

The following table sets forth certain information regarding the beneficial
ownership of Common Stock as of October 1, 1998 and the estimated beneficial
ownership of Common Stock as of October 30, 1998, after giving effect to the
consummation of the Equity Financings, by (i) each director and certain
executive officers of the Company, individually, and (ii) all directors and
executive officers as a group:

OWNERSHIP OF MANAGEMENT

<TABLE>
<CAPTION>
AS ADJUSTED
FOR THE EQUITY
FINANCINGS
-------------------------
SHARES SHARES
NAME OWNED PERCENT(1) OWNED(2) PERCENT(3)
- ---------------------------------------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C>
William L. Gentz........................ 115,349(4) 1.92% 270,383(4) 1.49%
J. Chris Seaman......................... 183,209(5) 3.01% 394,437(5) 2.16%
Arnold J. Senter........................ 7,000(6) * 46,500(6) *
Matthew Natalizio....................... 26,351(7) * 62,862(7) *
Douglas R. Roche........................ 32,481(8) * 75,034(8) *
Thomas J. Jamieson...................... 300(9) * 600(9) *
Gordon E. Noble......................... 6,000 * 12,000 *
C. Len Pecchenino....................... 14,250 * 28,500 *
Robert A. Spass......................... 15,216(10) * 30,432(10) *
Craig F. Schwarberg..................... 2,790(11) * 5,580(11) *
Bradley E. Cooper....................... 4,930(12) * 9,860(12) *
Steven D. Germain....................... 980,964(13) 14.14% 1,961,928(13) 10.27%
Steven B. Gruber........................ --(14) -- --(14) --
Roger W. Gilbert........................ -- -- -- --
Directors and Executive Officers as a
Group (21 persons).................... 1,508,277(15) 20.94% 3,211,168(15) 16.58%
</TABLE>

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

* Less than 1%

(1) Percent ownership is based on the number of shares outstanding as of
October 1, 1998, which number is 5,961,497 shares, plus any shares issuable
pursuant to options or warrants held by the person in question that may be
exercised within 60 days after October 1, 1998. See footnote 1 to the
preceding "Certain Beneficial Owners" table regarding certain contractual
provisions that restrict the ability of warrant holders to exercise
warrants.

(2) Assumes that the Rights issued in the Stock Offering to such person are
exercised in full by that person and that the number of shares of Common
Stock beneficially owned by that person on the Rights Offering record date
and immediately prior to the consummation of the Equity Financings is the
same number beneficially owned as of October 1, 1998.

(3) Percent ownership is based on the number of shares estimated to be
outstanding as of October 30, 1998, which number is 18,117,480 shares, plus
any shares issuable pursuant to options or warrants held by the person in
question that may be exercised within 60 days thereof.

(4) Includes 47,415 shares issuable upon exercise of options that are
exercisable within 60 days of October 1, 1998, in addition to 29,950
Restricted Stock grants awarded under the 1995 Plan, of which the
restrictions have lapsed as to 6,698 shares. As adjusted for the Equity
Financings, includes 47,415 shares issuable upon exercise of options that
are exercisable within 60 days of October 30, 1998, and 29,950 Restricted
Stock grants, of which the restrictions have lapsed as to 6,698 shares.

112
<PAGE> 115

(5) Includes 58,795 shares issuable upon exercise of warrants and 57,619 shares
issuable upon exercise of options, each of which is exercisable within 60
days of October 1, 1998, in addition to 24,163 Restricted Stock grants
awarded under the 1995 Plan, of which the restrictions have lapsed as to
5,240 shares. As adjusted for the Equity Financings, includes 58,795 shares
issuable upon exercise of warrants and 57,619 shares issuable upon exercise
of options, each of which are exercisable within 60 days of October 30,
1998, and 24,163 Restricted Stock grants, of which the restrictions have
lapsed as to 5,240 shares.

(6) Includes 5,000 shares issuable upon exercise of options that are
exercisable within 60 days of October 1, 1998. As adjusted for the Equity
Financings, includes 5,000 shares issuable upon the exercise of options
that are exercisable within 60 days of October 30, 1998.

(7) Includes 12,726 shares issuable upon exercise of options that are
exercisable within 60 days of October 1, 1998, in addition to 6,399
Restricted Stock grants awarded under the 1995 Plan, of which the
restrictions have lapsed as to 1,425 shares. As adjusted for the Equity
Financings, includes 12,726 shares issuable upon exercise of options that
are exercisable within 60 days of October 30, 1998 and 6,399 Restricted
Stock grants, of which the restrictions have lapsed as to 1,425 shares. In
August 1998, Mr. Natalizio became Vice President -- Operations of the
Company.

(8) Includes 11,471 shares issuable upon exercise of options that are
exercisable within 60 days of October 1, 1998, in addition to 6,387
Restricted Stock grants awarded under the 1995 Plan, of which the
restrictions have lapsed as to 1,320 shares. As adjusted for the Equity
Financings, includes 13,798 shares issuable upon exercise of options that
are exercisable within 60 days of October 30, 1998 and 6,387 Restricted
Stock grants, of which the restrictions have lapsed as to 1,320 shares.

(9) Represents shares owned of record by Jaco Oil Company, an entity controlled
by Mr. Jamieson.

(10) Includes 8,000 shares of Common Stock owned directly by Mr. Spass. Also
includes warrants to purchase 7,216 shares of Common Stock that are owned
by Mr. Spass (as a limited partner of III) that are subject to IIA's
revocable agency relationship, as described in footnote 8 of the preceding
"Certain Beneficial Owners" table. Mr. Spass disclaims beneficial ownership
(as defined in Rule 13d-3 under the Exchange Act) of warrants to purchase
13,183 shares of Common Stock held by III (Bermuda) (the general partner of
III) (subject to IIA's revocable agency relationship) and warrants to
purchase an aggregate of 204,759 shares of Common Stock held by III in
reserve for the payment to IIA and Centre Re of their incentive fee under
III's investment advisory agreements with IIA and Centre Re. See footnotes
5 and 8 of the preceding "Certain Beneficial Owners" table. Mr. Spass is an
officer of IIA, which has a revocable agency relationship with the partners
of III and Centre Solutions with respect to warrants to purchase 1,243,332
shares of Common Stock that are held by such partners and Centre Solutions.
In addition, see footnote 5 to the preceding "Certain Beneficial Owners"
table concerning Mr. Spass' affiliation with III, the owner of the Voting
Notes. Separately, 1,375,547 shares of Common Stock are beneficially owned
by IP Delaware and 765,304 shares of Common Stock are beneficially owned by
IP Bermuda. As adjusted for the Equity Financings, IP Delaware and IP
Bermuda will beneficially own 3,361,928 and 1,571,137 shares of Common
Stock, respectively, assuming no shares are purchased under the Standby
Commitment. In the event that the Standby Commitment is exercised in full,
then IP Delaware and IP Bermuda would beneficially own 5,342,805 and
2,374,737 shares of Common Stock, respectively. See footnotes 6 and 10 to
the preceding "Certain Beneficial Owners" table. Mr. Spass is the President
of GenPar Inc. and GenPar (Bermuda) Ltd., the ultimate general partners of
IP Delaware and IP Bermuda, respectively. Mr. Spass disclaims beneficial
ownership (as defined in Rule 13d-3 under the Exchange Act) of all shares
of Common Stock held, and the Commitment Fee Warrants to be acquired, by IP
Delaware and IP Bermuda. See footnotes 6 and 10 to the preceding "Certain
Beneficial Owners" table for information concerning such partnerships. In
addition, Mr. Spass is an officer of Capital Z, the ultimate general
partner of IP II. Upon consummation of the Equity Financings, IP II will
beneficially own 3,348,206 shares of Common Stock, assuming no shares are
purchased under the Standby Commitment. In the event that IP II is required
to exercise the Standby Commitment in full, then IP II would beneficially
own 6,892,087 shares of Common Stock. Mr. Spass disclaims beneficial
ownership (as defined in Rule 13d-3 under the Exchange Act) of all shares
of Common Stock, and the Commitment Fee Warrants, to be acquired by IP II
in connection

113
<PAGE> 116

with the Equity Financings. See footnote 7 to the preceding "Certain
Beneficial Owners" table for information concerning IP II.

(11) Represents warrants to purchase 2,790 shares of Common Stock that are
subject to a revocable agency relationship with IIA, as described in
footnote 8 of the preceding "Certain Beneficial Owners" table.

(12) Includes 4,000 shares of Common Stock owned directly by Mr. Cooper. Also
includes warrants to purchase 930 shares of Common Stock that are subject
to a revocable agency relationship with IIA, as described in footnote 8 of
the preceding "Certain Beneficial Owners" table. Mr. Cooper is also an
officer of Capital Z, the ultimate general partner of IP II. Upon
consummation of the Equity Financings, IP II will beneficially own
3,348,206 shares of Common Stock, assuming no shares are purchased under
the Standby Commitment. In the event that IP II is required to exercise the
Standby Commitment in full, then IP II would beneficially own 6,892,087
shares of Common Stock. Mr. Cooper disclaims beneficial ownership (as
defined in Rule 13d-3 under the Exchange Act) of all shares of Common Stock
and the Commitment Fee Warrants to be acquired by IP II in connection with
the Equity Financings. See footnote 7 to the preceding "Certain Beneficial
Owners" table for information concerning IP II.

(13) Includes (i) 5,600 shares of Common Stock owned directly, (ii) 880 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 and the warrants to purchase 395,128 shares held by Centre
Solutions (subject to IIA's revocable agency relationship). See the
preceding "Certain Beneficial Owners" table and footnote 9 thereto. Mr.
Germain is an officer and director of both Centre Solutions 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
Solutions). Mr. Germain disclaims any beneficial interest in the CentreLine
Warrant, the warrants held by Centre Solutions, and the Common Stock
issuable upon their exercise.

(14) Mr. Gruber, a director of the Company, is a Vice President of each of
GenPar Inc. and GenPar (Bermuda) Ltd., the ultimate general partners of IP
Delaware and IP Bermuda, respectively. IP Delaware beneficially owns
1,375,547 shares of Common Stock and IP Bermuda beneficially owns 765,304
shares of Common Stock. As adjusted for the Equity Financings, IP Delaware
and IP Bermuda will beneficially own 3,361,928 and 1,571,137 shares of
Common Stock, respectively, assuming no shares are purchased under the
Standby Commitment. In the event that the Standby Commitment is exercised
in full, then IP Delaware and IP Bermuda would beneficially own 5,342,805
and 2,374,737 shares of Common Stock, respectively. See footnotes 6 and 10
to the preceding "Certain Beneficial Owners" table. Mr. Gruber disclaims
beneficial ownership (as defined in Rule 13d-3 under the Exchange Act) of
all shares of Common Stock held, and the Commitment Fee Warrants to be
acquired, by IP Delaware and IP Bermuda. See footnotes 6 and 10 to the
preceding "Certain Beneficial Owners" table for information concerning such
partnerships.

(15) Includes (i) 1,048,477 shares issuable upon exercise of warrants and (ii)
192,506 shares issuable upon exercise of options, each of which are
exercisable within 60 days of October 1, 1998. Also includes 92,786
Restricted Stock grants, of which the restrictions have lapsed as to 20,653
shares. As adjusted for the Equity Financings, includes (i) 1,048,477
shares issuable upon exercise of warrants and (ii) 195,026 shares issuable
upon exercise of options, each of which are exercisable within 60 days of
October 30, 1998. Also includes 92,786 Restricted Stock grants, of which
the restrictions have lapsed as to 20,653 shares. Refer to footnotes 10
through 13 for information regarding beneficial interests in warrants.

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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

TRANSACTIONS WITH IIA

Messrs. Spass and Cooper, directors of the Company, are employees of IIA.
Mr. Spass is also an officer and director of IIA. Mr. Schwarberg, a director of
the Company, is a former employee of IIA. IIA was paid $250,000 by the Company
during each of fiscal 1997, 1996, and 1995 for investment banking and financial
consulting services. Such payments were made pursuant to a consulting agreement
entered into in 1992 that continues through the end of 1998.

TRANSACTIONS WITH AFFILIATES OF ZURICH, INCLUDING CENTRE RE

Zurich, Centre Solutions, Centre Re, and CentreLine are affiliates of each
other. Mr. Germain, a director of the Company, is an officer and director of
Centre Solutions, Centre Re, and CentreLine and an officer of Zurich.

Financing Transactions

In December 1997, Centre Solutions purchased $10.0 million of the Trust
Preferred Securities.

Effective June 11, 1998, ZRNA advanced to SNIC $5.5 million of a
reinsurance commutation amount to be paid to SNIC in July 1998. SNIC used the
proceeds of the advance to purchase Common Stock from a director of the Company,
and other investments. See "-- Purchase of Common Stock by SNIC from Thomas J.
Jamieson, Director." Until the commutation occurs, ZRNA will receive interest on
the funds advanced at current short-term borrowings rates.

As of June 30, 1994, the Company completed a $20.0 million financing
transaction (the "1994 Transaction") with CentreLine and another affiliate of
Centre Re. The 1994 Transaction resulted in Centre Re's affiliate owning
preferred securities issued by an entity controlled by the Company, with a 9.7%
annual rate of return payable semi-annually, and in the issuance of the
CentreLine Warrant. Because no cash dividends were paid on the preferred
securities, additional preferred securities were issued. In December 1997, the
Company applied the proceeds from the issuance and sale of the Trust Preferred
Securities and the underlying Senior Subordinated Notes to redeem all of the
approximately $26.6 million in such preferred securities then outstanding.

In March 1992, the Company engaged in an $11.0 million financing
transaction with International Insurance Investors, L.P.("III") in which the
Company issued its 14.5% Senior Subordinated Promissory Notes (the "14.5%
Notes") and detachable warrants to purchase Common Stock. III is an investment
partnership that was formed to make investments in the insurance and related
industries. It is no longer actively making investments. See "Security Ownership
of Certain Beneficial Owners and Management -- Security Ownership of Certain
Beneficial Owners" table, including footnotes 1 and 5. Substantially all the
14.5% Notes were repaid in 1994 but the III warrants remain outstanding. In 1997
Centre Re, which is a limited partner of III, transferred to Centre Solutions
the warrants that were distributed to Centre Re from III. Messrs. Spass,
Schwarberg, and Cooper, directors of the Company, are each the beneficial owner
of less than one percent of the limited partnership interests in III. In
addition, Mr. Spass has voting power over all of the voting capital stock of
III's general partner. Messrs. Seaman and Johnson, each of whom is an officer of
the Company (Mr. Seaman is also a director), Joseph Wolonsky (an officer who
resigned from the Company in June 1997), Richard Hotchkiss (an officer who
retired from the Company in June 1996), and Edwin Wilson (an officer who
resigned from the Company in May 1995) each received warrants in this 1992
transaction as a result of their purchase of 14.5% Notes.

In addition to its interest in the 14.5% Notes, Centre Re, because of its
limited partnership position in III, was further interested because, under the
terms of the CentreLine Warrant, the exercise price thereof would have been
reduced from $5.20 to $4.00 had the 14.5% Notes not been refinanced prior to
December 31, 1994. If that reduction had occurred, the aggregate exercise price
that CentreLine would have had to pay to exercise the CentreLine Warrant in full
would have decreased by $695,228.

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Under the terms of the warrants issued to III and the CentreLine Warrant,
Centre Solutions, and CentreLine, among other things, have preemptive rights on
the issuance by the Company of equity securities, including rights or warrants
to purchase equity securities.

Reinsurance

Effective January 1, 1993, SNIC entered into an aggregate excess of loss
reinsurance contract (the "1993 Contract") with Centre Re under which SNIC was
required to cede not less than $15.0 million and not more than $20.0 million of
claim and claim adjustment expense to Centre Re with respect to any covered
accident year. During 1995 the Company paid $15.0 million into a funds withheld
account on behalf of Centre Re for reinsurance services. Effective January 1,
1996, the Company cancelled prospectively the 1993 Contract. The Company
remained subject to the funds withheld arrangement in the 1993 Contract and the
interest on the funds withheld balance significantly exceeded the accretion to
the experience account under the 1993 Contract. Thus, the Company made a
business decision to terminate the funds withheld arrangement via a negotiated
settlement with Centre Re. In 1996, after lengthy negotiations with Centre Re,
the Company agreed to freeze the experience account at $45 million and expensed
$5.3 million in consideration of the termination of the funds withheld
arrangement. The $5.3 million was paid to Centre Re in 1997.

At present, the Company owes Centre Re $45 million of funds withheld
premiums, and Centre Re owes the Company $45 million of experience refunds,
neither of which have been accruing interest or accreting since June 30, 1996.
Because the Company and Centre Re enjoy the legal right of contractual offset
under the 1993 Contract, the two amounts offset to zero in the balance sheet.
The 1993 Contract has no further economic effect on either the Company or Centre
Re, and the Company will neither receive from nor pay to Centre Re any cash at
the future commutation date of the 1993 Contract.

Effective January 1, 1994, SNIC entered into the ZRNA Quota-Share with
ZRNA, an affiliate of Zurich, which also applies to business written by SPCC
since April 1, 1997. Under the ZRNA Quota-Share, ZRNA may provide Superior
Pacific with an Assumption of Liability Endorsement facility, or, effective
January 1, 1997, Superior Pacific may write directly on policy forms of ZCIC, an
affiliate of ZRNA (the "ZCIC Underwriting Agreement"). The ceding rate under the
contract was 20% for 1994, and ZRNA and Superior Pacific mutually agreed to
reduce the quota-share participation to 5% for 1995 and 1996. Further, Superior
Pacific receives ceding commissions ranging between 22.5% and 24.5% for premiums
ceded to ZRNA. The purpose of the ceding commission is to cover Superior
Pacific'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 ZRNA Quota-Share were amended.
Under the amended terms of the ZRNA Quota-Share, ZRNA increased its
participation from 5% of premiums written in 1996 to 6.5% in 1997. In exchange
for the increased participation, ZRNA will no longer receive a separate fee for
policies written on Assumption of Liability Endorsement facilities, but will
receive 2% of premiums written on ZCIC Underwriting Agreement policies only.

Superior Pacific entered into a reinsurance transaction with Centre Re
effective June 30, 1997 under which Centre Re assumed $10.0 million of reserves
associated with claims open for future medical payments only from Superior
Pacific in consideration of $1 million in cash and the assignment of the rights
of Superior Pacific's contribution and subrogation recoveries during the term of
the contract. The contract is accounted for as a deposit, and no gain or loss
will be recognized until net cash payments from (or to) Centre Re are either
greater (or less) than Superior Pacific's $1.0 million premium.

Claim Severity Management Program

Beginning December 31, 1997 the Company entered into agreements with Risk
Enterprise Management Limited ("REM") and an affiliate of REM to provide the
Claim Severity Management Program. The total cost of this program to the Company
is expected to be approximately the same as the Company's regular claim
management functions would have cost over the expected five-year life of the
program. The Company believes its operating costs would have been similar had it
not determined to pursue the program, while its claim

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<PAGE> 119

severity risk has been reduced. See "Superior National -- Business -- Claim
Severity Management Program."

Acquisition and Equity Financings

In connection with the Acquisition and Equity Financings, Zurich Centre
Group LLC or its designee will purchase BICO from the Company immediately after
the Closing, and will cause BICO to enter into an underwriting arrangement with
the Company. See "Acquisition of Business Insurance Group, Inc. -- Disposition
of BICO." In addition, Zurich will receive 205,520 of the Commitment Fee
Warrants in exchange for certain financing commitments provided to IP II. Also,
due to their status as holders of warrants, Centre Solutions and CentreLine will
be issued Rights in the Rights Offering or will have the opportunity to exercise
preemptive rights arising out of the IP Stock Issuance.

1996-97 TRANSACTIONS WITH IP AND LIMITATIONS ON RELATED PARTY CONTROL

Messrs. Spass and Gruber, directors of the Company, are executive officers
of the ultimate general partner of each of IP Delaware and IP Bermuda. In April
1997, IP Delaware and IP Bermuda purchased an aggregate of 2,124,834 shares of
Common Stock at $7.53 per share, for an aggregate purchase price of $16.0
million, pursuant to the 1996 Stock Purchase Agreement among the Company, IP
Delaware, IP Bermuda, TJS, and certain members of the Company's management. The
Company used the proceeds to fund, in part, its acquisition of Pac Rim. The
price of the Common Stock was determined based on its per share price as quoted
on Nasdaq during a certain period preceding the September 17, 1996 announcement
of the Pac Rim Transaction, and represented, in April 1997, a significant
discount to the then-current market price of the Common Stock. Mr. Gruber's
election as a director of the Company was effective upon the consummation of the
acquisition of Pac Rim. The Board of Directors (without Messrs. Gentz, Seaman,
Spass, Germain, and Cooper, who disclosed their conflict of interest, withdrew
from the discussion, and abstained from the vote) unanimously approved the 1996
Stock Purchase Agreement. The negotiations of the 1996 Stock Purchase Agreement
were conducted by Mr. Pecchenino on behalf of the Company.

The 1996 Stock Purchase Agreement contains, in addition to customary terms
and provisions, certain covenants by IP Delaware and IP Bermuda that shall
remain effective so long as IP Delaware and IP Bermuda and their "Associates"
beneficially own an aggregate of 15% or more of the Common Stock on a fully
diluted basis. As used herein and for purposes of the 1996 Stock Purchase
Agreement, "Associates" means each of CentreLine, Centre Re, Centre Solutions,
III, IIA, and any person or entity that controls, is under common control with,
or is controlled by IP Delaware and IP Bermuda or such persons or entities, and
all individuals who are officers, directors, or control persons of any such
entities, including IP Delaware and IP Bermuda. One such covenant, with certain
limited exceptions, prohibits IP Delaware and IP Bermuda or any of their
Associates from acquiring any additional shares of Common Stock, entering into a
merger or business combination involving the Company, participating in any
solicitation of proxies, or participating in any group with respect to the
foregoing, without a two-third majority vote of (i) the non-Associate and
non-employee directors or (ii) the Company's stockholders (excluding those
shares held by IP Delaware and IP Bermuda and their Associates and by executive
officers having to report transactions in Common Stock under securities laws).
Other covenants provide that IP Delaware and IP Bermuda and their Associates
would not elect more than five directors (or the highest number that is less
than a majority of the Board of Directors) and that IP Delaware and IP Bermuda
and their Associates would not transfer any of their shares except in certain
types of specified transactions. Further, other than with respect to the
election of directors of the Company, IP Delaware and IP Bermuda and their
Associates agreed that, with respect to any vote of the stockholders of the
Company on a particular matter, if the aggregate number of all shares that are
voted in like manner by IP Delaware and IP Bermuda and their Associates shall be
greater than 35% of the total number of shares voted, then those votes that
exceed such 35% threshold shall be voted in the same proportion as the other
stockholders voted their shares with respect to such matter.

In connection with the 1996 Stock Purchase Agreement, the Company entered
into an agreement with all holders of the Company's outstanding warrants
pursuant to which such holders are prohibited from exercising their warrants
until April 2000 unless prior approval of the Board of Directors is obtained.
This restriction was

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<PAGE> 120

implemented in order to reduce the risk that the Company would undergo an
ownership change for purposes of Section 382 of the Code and thus be limited in
its ability to use its NOLs. Assuming stockholder approval is obtained, it is
anticipated that this restriction will be terminated effective at the Closing.
See "Description of Superior National Capital Stock -- Delaware Anti-Takeover
Law and Certain Charter Provisions."

The relevant provisions of the 1996 Stock Purchase Agreement will be
superseded by the Stock Purchase Agreement effective upon the Closing. See
"-- Participation by IP in the Equity Financings and Limitations on Related
Party Control."

In addition, each of Messrs. Spass and Gruber are executive officers of
Insurance Partners Advisors, L.P. ("IPA"). On April 11, 1997, IPA received a
transaction fee from the Company of $625,000 representing a percentage of all of
the funds raised in connection with the Pac Rim Transaction.

PURCHASE OF COMMON STOCK BY SNIC FROM THOMAS J. JAMIESON, DIRECTOR

Effective June 11, 1998, SNIC agreed to purchase an aggregate of 245,000
shares of Common Stock from Thomas J. Jamieson, a director of the Company, and
Jaco Oil Company, an entity controlled by Mr. Jamieson. The price per share paid
was $21.00, for total consideration of $5,145,000. The closing sales price per
share of Common Stock on June 10, 1998 was $22.88. The Common Stock purchased by
SNIC is held as an investment. The Board of Directors, with disclosure of the
conflicts of interest of Mr. Jamieson, and also Mr. Germain (due to ZRNA's
advance of funds discussed above), unanimously approved SNIC's purchase of Mr.
Jamieson's and Jaco Oil Company's Common Stock.

PARTICIPATION BY IP IN THE EQUITY FINANCINGS AND LIMITATIONS ON RELATED PARTY
CONTROL

On May 3, 1998, in connection with the Acquisition and in accordance with
the terms of the 1996 Stock Purchase Agreement, the non-Associate and
non-employee directors of the Company unanimously approved the IP Stock Issuance
and the Standby Commitment. Under the IP Stock Issuance, concurrently with the
Acquisition, IP Delaware, IP Bermuda, and IP II, collectively, will purchase an
aggregate of 5,611,940 shares of Common Stock at a price of $16.75, for a total
of $94.0 million. Under the Standby Commitment, IP has agreed to purchase up to
an additional 6,328,358 shares of Common Stock in an amount of shares of Common
Stock necessary to bring the total proceeds of the Equity Financings to $200.0
million. Any shares purchased pursuant to the Standby Commitment will be
purchased privately at the Stock Offering's Subscription Price of $16.75. The
purchase of shares by IP under each of the IP Stock Issuance and, if necessary,
the Standby Commitment will be governed by the Stock Purchase Agreement. The
terms of the Stock Purchase Agreement, and the $16.75 Subscription Price, were
negotiated by independent directors on behalf of the Company. Because the $16.75
price equals the Subscription Price in the Stock Offering, and the Subscription
Price was set with the intention of inducing participation by the Company's
stockholders, at the time the price was determined, the $16.75 price represented
a discount to the market price of the Common Stock.

As in the 1996 Stock Purchase Agreement, the Stock Purchase Agreement
contains, in addition to customary terms and provisions, including customary
representations and warranties, covenants, and reciprocal indemnification
provisions, certain covenants by IP that shall remain effective so long as IP
and its Associates beneficially own an aggregate of 15% or more of the
outstanding Common Stock on a diluted basis. One such covenant, with certain
limited exceptions, prohibits IP or any of its Associates from acquiring any
additional shares of Common Stock, entering into a merger or business
combination involving the Company, participating in any solicitation of proxies,
or participating in any group with respect to any of the foregoing, without a
two-third majority vote of (i) the directors not affiliated with IP or its
Associates, or (ii) the stockholders (other than IP and its Associates). Other
covenants provide that IP and its Associates will not elect more than five
directors (or the highest number that is less than a majority of the Board of
Directors) and that IP will not transfer any of its shares except in certain
types of specified transactions. Further, other than with respect to the
election of directors of the Company, IP has agreed that, with respect to any
vote of the stockholders of the Company on a particular matter, if the aggregate
number of all shares that are voted in like manner by IP and its Associates
shall be greater than 35% of the total number of shares voted, then those votes
that exceed such 35% threshold shall be voted in the same proportion as the
other stockholders voted their shares with respect to such matter.

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<PAGE> 121

The Company has agreed to pay $3.9 million to IP as a transaction fee upon
consummation of the IP Stock Issuance in consideration of IP's providing the
Company with the opportunity to undertake the Acquisition, originating a portion
of the financing for the Acquisition, and assisting in negotiating the terms of
the Acquisition.

In consideration of its agreement to provide the Standby Commitment, IP
will receive a commitment fee from the Company, regardless of whether the Stock
Offering and Standby Commitment are consummated, consisting of Commitment Fee
Warrants to purchase 734,000 shares of Common Stock at $16.75 per share. Zurich
will receive 205,520 of these Commitment Fee Warrants in consideration of
certain financing commitments to IP II in connection with the Stock Purchase
Agreement.

MANAGEMENT PURCHASE OF EQUITY IN 1997

In April 1997, 30 members of the Company's management and TJS, at the time
a 10% or greater stockholder of the Company, purchased an aggregate of 265,604
shares of Common Stock at $7.53 per share for an aggregate purchase price of
$2.0 million under the 1996 Stock Purchase Agreement. As is its policy, IP
Delaware and IP Bermuda requested that management participate with IP Delaware
and IP Bermuda in their purchase of Common Stock under the 1996 Stock Purchase
Agreement. Of the 2,390,438 shares of Common Stock issued under the 1996 Stock
Purchase Agreement, 2,124,834 shares were acquired by IP Delaware and IP
Bermuda, as discussed above, 132,802 shares were acquired by TJS; 25,234 were
acquired by William Gentz (a director and the President and Chief Executive
Officer of the Company); 25,232 were acquired by J. Chris Seaman (a director, an
Executive Vice President and the Chief Financial Officer of the Company); 9,296
were acquired by Joseph P. Wolonsky (who was then a Senior Vice President of the
Company, but who subsequently resigned from the Company as of June 30, 1997);
9,296 were acquired by Karl O. Johnson (a Senior Vice President of Superior
Pacific); 9,296 were acquired by Douglas R. Roche (a Senior Vice President of
the Company); and 54,448 were acquired by other members of management.

PARTICIPATION BY MANAGEMENT IN THE STOCK OFFERING

The Board of Directors has approved the opportunity to participate in the
Stock Offering for employees and consultants of the Company holding vested and
unvested stock options and Restricted Stock, all previously issued under the
terms of equity incentive plans approved by the Company's stockholders. The
opportunity to participate will be effected through the issuance of the same
form of Right issued pursuant to the Rights Offering (bearing an identical
$16.75 Subscription Price), except that each employee or consultant, in order to
participate, will be required to agree that his or her Rights are
non-transferable. In addition, the Board of Directors has approved making
certain financing arrangements available to the participating employees and
consultants and the Company will have the power to dispose of Common Stock and
Common Stock equivalents pledged as collateral. Up to 645,239 shares of Common
Stock may be issued pursuant to the Employee Participation portion of the Stock
Offering. Messrs. Gentz and Seaman, who are employees and directors of the
Company, and all other executive officers of the Company, will be eligible to
purchase Common Stock through the Employee Participation. It is expected that
several of these participants may incur obligations in excess of $60,000 to the
Company as a result of financing arrangements provided as part of the Employee
Participation. See "The Stock Offering -- Employee Participation."

Those directors and executive officers who own Common Stock (whether
acquired through open market purchases, in private transactions, or through the
exercise of options or the lapse of restrictions on Restricted Stock), will, by
virtue of such holdings, have the opportunity to purchase shares of Common Stock
in the Rights Offering. See "The Stock Offering -- Employee Participation" and
"Security Ownership of Certain Beneficial Owners and Management."

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BUSINESS INSURANCE GROUP, INC.

INFORMATION

SELECTED COMBINED FINANCIAL DATA

The following selected combined financial data are qualified by reference
to and should be read in conjunction with the combined financial statements and
notes thereto included elsewhere in this document. The selected combined
financial data set forth below as of December 31, 1997 and 1996 and for the
years ended December 31, 1997, 1996, and 1995 have been derived from the audited
financial statements of BIG included in this document. The selected combined
financial data set forth below as of December 31, 1995, 1994, and 1993 and for
the years ended December 31, 1994 and 1993 have been derived from unaudited
combined financial statements of BIG not included in this document. The selected
combined financial data as of and for the six months ended June 30, 1998 and
1997 have been derived from unaudited combined financial statements of BIG, but
include all adjustments, including normally occurring accruals, that BIG
considers necessary for a fair presentation of the results of operations for the
periods presented. The results of operations for the six months ended June 30,
1998 are not necessarily indicative of the results that may be expected for
BIG's fiscal year ending December 31, 1998.

<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30, YEAR ENDED DECEMBER 31,
----------------------- ----------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ---------- -------- --------
(UNAUDITED) (RESTATED) (RESTATED) (RESTATED) (UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Gross premiums written.................. $ 299,845 $ 326,290 $ 668,906 $ 641,113 $421,422 $364,466 $332,772
Net premiums written.................... 207,392 260,675 526,925 490,367 397,077 343,006 240,991
Net premiums earned................... 215,911 246,282 515,272 480,828 390,974 340,097 233,341
Net investment income (excluding
capital gains and losses)........... 18,215 19,283 37,548 33,317 24,005 16,146 13,711
Net capital gain (loss)............... 275 284 7,176 892 1,667 (61) 2,539
Other income, net..................... 100 1,528 3,512 2,823 248 96 --
---------- ---------- ---------- ---------- -------- -------- --------
Total revenues................. 234,501 267,377 563,508 517,860 416,894 356,278 249,591
EXPENSES:
Claim and claim adjustment expenses,
net of reinsurance.................. 182,385 176,348 443,204 381,897 245,522 218,240 169,828
Underwriting and general and
administrative expenses............. 63,156 70,037 170,070 111,477 118,572 75,364 49,262
Policyholder dividends................ 1,763 -- 793 (5,250) 5,494 11,176 24,487
Goodwill amortization................. 447 227 1,262 909 256 146 175
Interest expense...................... 4,718 4,216 8,326 4,330 -- -- 946
---------- ---------- ---------- ---------- -------- -------- --------
Total expenses................. 252,469 250,828 623,655 493,363 369,844 304,926 244,698
Income (loss) from continuing
operations.......................... (17,968) 16,549 (60,147) 24,497 47,050 51,352 4,893
Income tax benefit (expense).......... 10,191 (2,125) 29,506 (1,591) (11,673) (13,832) 1,461
---------- ---------- ---------- ---------- -------- -------- --------
Net income (loss).............. $ (7,777) $ 14,424 $ (30,641) $ 22,906 $ 35,377 $ 37,520 $ 6,354
========== ========== ========== ========== ======== ======== ========
GAAP RATIOS:
Claim and claim adjustment expense
ratio............................... 84.5% 71.6% 86.0% 79.4% 62.8% 64.2% 72.8%
Expense ratio......................... 30.1% 28.4% 33.2% 22.1% 31.7% 25.4% 31.6%
---------- ---------- ---------- ---------- -------- -------- --------
Continuing operations combined ratios,
net of reinsurance.................. 114.6% 100.0% 119.2% 101.5% 94.5% 89.6% 104.4%
========== ========== ========== ========== ======== ======== ========
FINANCIAL POSITION:
Total cash and investments
Carrying value...................... $ 768,203 $ 771,042 $ 763,171 $ 754,652 $529,515 $419,943 $362,133
Market value........................ 768,404 771,063 763,339 754,745 529,650 419,053 370,437
Total assets.......................... 1,225,649 1,146,967 1,222,406 1,093,773 749,104 627,855 602,023
Long-term debt........................ 121,750 121,750 121,750 128,250 -- -- --
Claim and claim adjustment expense
liability........................... 690,515 623,087 728,421 590,595 443,600 412,666 386,194
Total liabilities..................... 982,066 855,225 970,060 825,881 508,214 479,543 466,139
Net stockholder's equity.............. 243,583 291,742 252,346 267,892 240,890 148,312 135,884
</TABLE>

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BUSINESS INSURANCE GROUP, INC.

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

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

SIX MONTHS ENDED JUNE 30, 1998 AS COMPARED TO SIX MONTHS ENDED JUNE 30, 1997

Gross written premium for the six months ended June 30, 1998 and 1997 were
$299.8 million and $326.3 million, respectively. The $26.5 million decline was
the result of $31.8 million less premium in California, offset by a premium
increase of $5.3 million outside of California. Net premium written for the
first six months of 1998 of $207.4 million is $53.3 million less than the first
six months of 1997. Under the May 1, 1998 quota share reinsurance treaty, $56.3
million of earned premium was ceded during the period. In the first six months
of 1997, earned premium of $29.8 million was ceded under an aggregate excess of
loss treaty and $21.9 million was ceded under a 7.5% quota share agreement.
Neither of these two treaties were in effect during the six months ended June
30, 1998. Net premium earned declined $30.4 million in the first six months of
1998, due primarily to the effect of these reinsurance agreements.

Net claim and claim adjustment expense for the six months ended June 30,
1998 increased $6.1 million to $182.4 million compared to $176.3 million for the
same period in 1997. The net claim and claim adjustment expense ratio for the
period was 84.5% compared to 71.6% in 1997. The increase in claim and claim
adjustment expenses and expense ratio was primarily due to two factors. The
first factor was the expiration of BIG's aggregate excess of loss reinsurance
treaty on January 1, 1998. During the six months ended June 30, 1997, BIG ceded
$37.3 million of claims and claim adjustment expenses under this treaty, while
no comparable cession occurred during the six months ended June 30, 1998. The
second factor is the continued increase in the severity of BIG's California
workers' compensation claims. The increase in California workers' compensation
severity is believed by BIG's management to be caused by several factors: first,
legal decisions in late 1996 permitted injured workers to provide greater
direction in their treatments and also allowed treating physicians more
discretion, which resulted in an increase in surgeries and higher medical costs;
second, increased claims and legal costs associated with a change in the
permanent disability rating schedule effective April 1997; third, higher
treating physician back to work restrictions and less modified work usage by
employers, as a result of a $16,000 limit on vocational rehabilitation costs.

The Company and BIG differ on their analysis of the reasons for the losses
that were incurred by BIG in 1997 and 1998 relating to adverse development in
prior accident years. Reserve estimates, and the amount eventually paid on
claims, are a product of estimated and actual outcomes of claim frequency and
claim severity. Both the Company and BIG correctly predicted, to a large extent,
that claim frequency in California would decline after the advent of open rating
for workers' compensation in 1995. Neither the Company nor BIG correctly
predicted that claim severity would increase relative to historic levels for
accidents occurring in 1995 and 1996. The Company believes the reason it has not
suffered losses equivalent to BIG is because the Company maintained a pricing
strategy that resulted in lost premiums, but reduced claim frequency. Operating
margins were admittedly eroded by the increase in claim severity for the
relevant years, but the Company did not suffer significant adverse development.
BIG added significant new premium during the 1995 - 96 period using, the Company
believes, aggressive pricing. When the increase in claim severity occurred, in
the Company's view, the magnitude of the loss at BIG was increased because of
the large volume of premium written, and because BIG had established reserves in
a manner that predicted operating margins in line with historic levels despite
the more attractive pricing offered to insureds.

BIG's view, which the Company believes is equally plausible, is that the
losses were solely attributable to changes in severity and did not arise out of
the original pricing strategy adopted in connection with the shift to open
rating. If that is the case, then factors such as court decisions, changes in
disability rating schedules, and limits on vocational rehabilitation costs that
led to increased severity are in fact of greater materiality to an understanding
of the development in BIG's reserves than if the Company's
explanation -- namely, that the
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<PAGE> 124

development arose out of initial pricing decisions -- was correct. The Company
believes the factors listed here contributed to the increase in claim severity,
but are not as significant as the weeding out of low dollar claims by workers'
compensation reform, creating a statistical increase in per claim severity, and
a general inflation in medical costs.

Underwriting and general and administrative expenses, excluding
policyholder dividends, decreased $6.9 million for the six months ended June 30,
1998, due primarily to the 33.5% ceding commission on the quota share treaty,
effective May 1, 1998.

Policyholder dividend expense for the six months ended June 30, 1998 was
$1.8 million due to the dividend plans on policies outside of California with no
comparable expense in 1997. The expense reflects the Company's geographic
diversification outside of California and policyholder dividend plans for the
1997 and 1998 policy years. Participating policies are now offered in 22 states
outside of California with the concentration in Florida, Georgia, Arizona and
Colorado.

Net investment income of $18.2 million for the six months ended June 30,
1998 was $1.1 million less than the same period in 1997 due to the lower yields
and higher investment expenses.

Interest expense increased $0.5 million during the first six months of 1998
compared to the same period in 1997 on lower principal balances because the
interest rate charged BIG by FHC on its credit facility (the "FHC Credit
Facility") increased to 7.75% in 1998 from 6.75% in 1997.

YEAR ENDED DECEMBER 31, 1997 AS COMPARED TO YEAR ENDED DECEMBER 31, 1996

Gross premiums written for the years ended December 31, 1997 and 1996 were
$668.9 million and $641.1 million, respectively. This increase in gross premiums
written represents an increase of $27.8 million or 4.3% for the 1997 calendar
year as compared to the 1996 calendar year. Gross premiums written relating to
states other than California increased $42.2 million or 28.8% to $188.5 million
in 1997, as BIG experienced premium growth through BICO's nationwide operations.
Offsetting this increase was a decline of $14.4 million, or 2.9% of premiums
written in California. The 2.9% decrease reflects the continued price
competition in the California workers' compensation insurance marketplace since
the advent of open rating in January 1995. Net premiums written increased $36.5
million or 7.4% to $526.9 million for the year ended December 31, 1997, as
compared to the year ended December 31, 1996. The increase in net premiums
reflects the increase in gross premiums and a decrease in the quota-share ceding
percentage from 30% for the second six months of 1996 to 7.5% for the first six
months of 1997. The decrease in the quota-share ceding percentage resulted in
$68.3 million in additional net premiums. Partially offsetting these increases
is a reinsurance charge of $93.5 million related to an aggregate excess of loss
treaty purchased by BIG in 1997. Net premiums earned increased $34.5 million or
7.2% to $515.3 million for the year ended December 31, 1997, as compared to the
year ended December 31, 1996.

Net claim and claim adjustment expenses increased $61.3 million or 16.1% to
$443.2 million for the year ended December 31, 1997, as compared to $381.9
million for the year ended December 31, 1996. This increase is primarily
attributable to the increase in the claim and claim adjustment expense ratio to
86.0% in 1997 as compared to 79.4% in 1996. The 1997 increase is primarily due
to an increase in the estimates for accident year 1996 and prior loss and loss
adjustment expenses incurred, which estimates were increased by $75.2 million in
1997. The cause of the increase in the accident year 1996 and prior estimates
were due, BIG's management believes, to increases in claim severity resulting
from the factors described in the discussions of the six-month period results,
above, thereby contributing to the higher 1997 accident year claim and claim
adjustment cost expense ratio compared to 1996.

Underwriting and general and administrative expenses, excluding
policyholder dividends, increased $58.6 million or 52.6% to $170.1 million for
the year ended December 31, 1997, as compared to the same period in 1996. The
underwriting expense ratio was 33.0% in calendar year 1997 as compared to 23.2%
in 1996. The expense increase is attributable to a $33.5 million decrease in
ceding commissions as a result of the reduced quota-share reinsurance ceding
percentage in 1997, and approximately $20 million of the expense increase
resulted from the growth in BIG's non-California operations as BIG fully
developed its expense

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<PAGE> 125

infrastructure during 1997 to support the higher in force premium levels for
policies issued during 1995 and 1996.

Policyholder dividends increased to $0.8 million for the year ended
December 31, 1997, as compared to a credit to expense of $5.2 million for the
same period in 1996. The increase primarily resulted from BIG's issuing
participating workers' compensation insurance policies in a limited number of
states where dividends play an important role in the marketing of policies, and
BIG's reduction of its California policyholder dividend liability by $6.0
million in 1996.

Net investment income increased $4.2 million or 12.6% to $37.5 million for
the year ended December 31, 1997, as compared to 1996. BIG's average invested
assets increased to $758.9 million in 1997 from $642.1 million in 1996. The
investment income increase was due to higher investable assets as BIG borrowed
$130.0 million in mid-1996 under the FHC Credit Facility and contributed $120.0
million of the proceeds to the statutory policyholders' surplus of CalComp and
BICO.

Net capital gains increased $6.3 million to $7.2 million for the year ended
December 31, 1997, from $0.9 million for 1996. The increase is due to BIG's
decision to take advantage of decreases in long-term interest rates throughout
1997 and increases in the market value of its bond portfolio. BIG sold $350.9
million of available-for-sale bonds in 1997, primarily during the fourth quarter
of 1997, realizing investment gains of $7.2 million.

Interest expense increased 92.3% to $8.3 million for the year ended
December 31, 1997, as compared to the year ended December 31, 1996. The higher
interest expense is primarily due to incurring a full year of interest expense
on funds borrowed in mid-1996 from the FHC Credit Facility.

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

Gross premiums written increased $219.7 million or 52.1% to $641.1 million
in 1996 from 1995. In California, BIG's premiums increased $102.2 million or
26.0% to $494.7 million. Additionally, in 1996, BIG experienced very strong
growth in its non-California operations. BIG's non-California gross premiums
written increased $117.5 million to $146.4 million. This level of growth was
consistent with BIG's change in its strategic plan regarding geographic
diversification. Net premium written increased $93.3 million or 23.5% to $490.4
million, reflecting the increase in gross premium written, partially off-set by
an increase in premium ceded to reinsurers. The increase in premium ceded was
the result of BIG entering into a 30% quota-share treaty effective July 1, 1996.
Net premium earned increased $89.8 million or 23.0% to $480.8 million in 1996
from 1995. The change in net premium earned is consistent with the changes
affecting net premium written.

Net claim and claim adjustment expenses increased $136.4 million or 55.6%
to $381.9 million in 1996 from $245.5 million for the year ended December 31,
1995. The increase in claim and claim adjustment expenses occurred primarily due
to BIG's growth in gross premium written and a $20.1 reserve strengthening
recorded in 1996 for accident year 1995. However, BIG recorded a $26.9 million
decrease in claim and claim adjustment expense in 1995 for accident years 1994
and prior.

Underwriting and general and administrative expenses, excluding
policyholder dividends, decreased $7.1 million or 6.0% to $111.5 million in 1996
as compared to $118.6 million in 1995. The underwriting expense ratio decreased
to 23.2% in calendar year 1996 as compared to 30.3% in 1995. The lower
underwriting and general and administrative expenses was due to ceding
commissions of $28.7 million recorded in 1996 under the quota-share reinsurance
treaty effective July 1, 1996. The other reason for the lower expense ratio was
due to an increase in gross premiums earned in states outside California, as BIG
did not have its operating infrastructure fully in place until 1997 to support
the higher premium volume of non-California policies issued in 1995 and 1996.

Policyholder dividend expense decreased $10.7 million for the year ended
1996 as compared to the same period in 1995. This decrease is due primarily to
the fact that in California 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 price
at a policy's inception under open

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<PAGE> 126

rating, dividends are no longer a significant factor. Therefore, BIG
discontinued its payment of dividends in the state of California and reduced its
outstanding policyholder dividend liability by $6.0 million in 1996.

Net investment income increased $9.3 million or 38.8% to $33.3 million for
the year ended December 31, 1996 as compared to 1995. BIG's average invested
assets increased to $642.1 million in 1996 from $474.7 million in 1995. The
increased investment income in 1996 is due to higher invested assets produced
from net cash flows from operations during the year of $104.8 million and funds
borrowed under the FHC Credit Facility in May and August of 1996, totalling a
net amount of $128.2 million.

LIQUIDITY AND CAPITAL RESOURCES

BIG's cash inflows are generated from cash collected from policies sold,
investment income generated from its exiting portfolio, and sales and maturities
of investments. BIG's cash outflows consist primarily of payments for
policyholders' claims, operating expenses, and debt service. For its insurance
operations, BIG must have available cash and liquid assets to meet obligations
to policyholders and claimants in accordance with contractual obligations in
addition to meeting ordinary operating costs. Absent adverse material changes in
the workers' compensation insurance market, management believes BIG's present
cash resources are sufficient to meet its needs for the foreseeable future. BIG
believes that it has adequate short-term investments and readily marketable
investment-grade securities to cover both claim payments and expenses.

During the year ended December 31, 1997, operating activities provided the
Company with $7.9 million of cash versus $104.8 million for the year ended
December 31, 1996. The decrease in cash generation is due primarily to
reinsurance payments of $93.5 million under an aggregate excess of loss
reinsurance treaty that commenced on January 1, 1997. At December 31, 1997, BIG
had total cash and cash equivalents of $98.1 million in an investable asset
portfolio of $763.2 million. Of the fixed income portfolio, 76.9% was rated "AA"
or better and 95.7% was rated "A" or better.

BIG generated $65.7 million in cash from investing activities during the
year ended December 31, 1997, as compared to a use of cash of $237.2 million in
1996. The Company's cash and cash equivalents position increased in 1997 as a
result of the sales of bonds available for sale as BIG repositioned its
portfolio during the fourth quarter to take advantage of a decline in long-term
interest rates.

BIG used $1.3 million in financing activities in 1997 with the repayment of
$6.5 million of debt to FHS and the excess of book value over net asset acquired
related to the purchase of Christania General Insurance Corporation (renamed
Commercial Compensation Insurance Company), offset by a $10.8 million dividend
received from BIG's non-insurance subsidiaries. The non-insurance subsidiaries
are not part of the Acquisition transaction with Superior National and will
remain subsidiaries of FHS.

BIG is party to several leases principally associated with BIG's home and
regional office space. Such leases contain provisions for scheduled lease
charges and escalations in base rent over the lease term. BIG's \minimum lease
commitment with respect to these leases in 1998 is $8.9 million. These leases
expire between 1998 and 2005.

The effect of inflation on the revenues and net income of BIG during the
years ended December 31, 1997, 1996, and 1995 was not significant.

PRIMARY DIFFERENCES BETWEEN GAAP AND SAP

The financial statements contained herein for BIG have been prepared in
conformity with GAAP as opposed to SAP prescribed or permitted for insurance
companies by regulatory authorities. For a discussion of the differences between
GAAP and SAP, see "Superior National -- Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Primary Differences Between
GAAP and SAP."

YEAR 2000 STRATEGY

A significant percentage of the software that runs most of the computers in
the United States and the rest of the world relies on two-digit date codes to
perform computations and decision making functions. For insurance policies with
an expiration date of January 1, 2000 or later, these computer programs may fail
from an inability to interpret date codes properly, misinterpreting "00" as the
year 1900 rather than 2000. BIG is
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<PAGE> 127

currently upgrading its computer software to address the Year 2000 problem,
which it believes will be completed by August 1998, prior to issuing policies
with a Year 2000 expiration date. Upon the completion of such upgrade, BIG
believes that its computer systems will be fully Year 2000 compliant; there can
be no assurance, however, that BIG will complete the computer upgrade before
issuing policies with a Year 2000 expiration date or that such upgrade will
successfully prevent any Year 2000 problems from occurring. BIG does not expect
the cost associated with its Year 2000 project to be material. See "Risk
Factors -- Year 2000 Compliance."

SUPPLEMENTARY DATA

Summarized quarterly financial data for 1998, 1997, and 1996 is as follows:

<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
--------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
1998
Earned premiums................................. $137,675 $ 78,236 $ -- $ --
Income before income taxes, preferred securities
dividends and accretion and extraordinary
items......................................... $(11,067) $ (6,901) $ -- $ --
Net income (loss)............................... $ (4,879) $ (2,898) $ -- $ --
1997
Earned premiums................................. $121,388 $124,894 $127,084 $141,906
Income before income taxes, preferred securities
dividends and accretion and extraordinary
items......................................... $ 12,540 $ 4,009 $ 9,565 $(86,261)
Net income (loss)............................... $ 10,146(1) $ 4,278(1) $ 8,265(1) $(53,330)
1996
Earned premiums................................. $126,212 $140,288 $109,475 $104,853
Income before income taxes, preferred securities
dividends and accretion and extraordinary
items......................................... $ 18,759 $ 20,900 $ 22,292 $(37,454)
Net income (loss)............................... $ 13,206(1) $ 15,253(1) $ 16,720(1) $(22,273)(1)
</TABLE>

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

(1) Restated.

NEW ACCOUNTING STANDARDS

The FASB has recently adopted a number of new standards. The impact of
these new standards did not have a material effect on BIG's results. For a
discussion of the new standards, see "Superior National -- Management's
Discussion and Analysis of Financial Condition and Results of Operations -- New
Accounting Standards."

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<PAGE> 128

BUSINESS INSURANCE GROUP, INC.

BUSINESS

OVERVIEW

BIG, a wholly owned indirect subsidiary of FHS, is an insurance holding
company that writes workers' compensation and group health insurance,
principally in California, with regional and branch operations throughout the
continental United States. BIG has four insurance subsidiaries: CalComp, BICO,
CBIC, and CCIC. Some members of BIG's current senior management team established
BIG, formerly Business Insurance Corporation, in 1987, and in 1988 purchased
CalComp from Hanover Insurance Company ("Hanover"). BIG was subsequently
acquired in 1993 by FHC. Based on available data on 1997 direct written premium,
BIG ranks as the largest private sector writer of workers' compensation
insurance in California.

BIG currently conducts its insurance operations through its four wholly
owned subsidiaries. CalComp, a specialty workers' compensation carrier writing
business primarily in California, is the largest of these and is licensed in 12
states. BICO, acquired in February 1995, is licensed in 49 states and the
District of Columbia and writes workers' compensation insurance primarily in
states other than California. CBIC was acquired in January 1995 and writes
single source workers' compensation and employee group health insurance in
California. CCIC is licensed in 40 states and was acquired in May 1997 to create
a broader range of products and pricing plans.

Of the $647.4 million of BIG's direct written premium in 1997, $465.0
million was written in California; $20.4 million, $19.4 million, $18.9 million,
$16.9 million, and $13.4 million in direct premium was written in Georgia,
Texas, Louisiana, Colorado, and Oregon, respectively; and the remaining 14.4% of
direct premium was written in other states. The premium outside of California
primarily was written through BICO.

MARKETING

BIG has developed an extensive nationwide presence through 16 regional
offices and 21 branch offices, with eight regional offices and two branch
offices in California. BIG has historically expanded into a new region by
establishing a branch office with a few employees specializing in marketing,
underwriting, and loss control. As the branch office grew and there were
demonstrated needs for further infrastructure to support growth, resources were
added and certain branches became regional offices. Regional offices have
additional local management and support the growth of additional branch offices.
BIG's expanding presence outside of California is indicated by the growth in
direct written premium outside of California from $27.1 million in 1995 to
$182.4 million in 1997. As of June 1, 1998, BIG employed a staff of
approximately 270 outside California.

BIG markets its products through a distribution network of approximately
1,700 producers. Of these, over 1,300 are located in California, and
approximately 400 are outside California.

BIG markets its policies through major national brokers as well as through
small- to medium-sized producers focusing on regional customers. The top ten
producers accounted for 18.5% of direct written premium in fiscal 1997, and the
top 50 producers accounted for 42.9%. Of the top 50 producers for BIG in
California and Arizona, 8 are also among the top 50 producers for Superior
National.

BIG enters into brokerage contracts with producers as opposed to agency
relationships. Certain states require that all appointments be made through an
agency contract. No agent in these states has the ability to bind BIG to issue
policies, and the same basic contract that is used for brokerage appointments is
also used for agency appointments. BIG also has relationships with certain other
producers ("Program Administrators") that have the ability to bind BIG to issue
coverage to a customer based on its program administration agreement with BIG.
These agreements call for override commissions to be paid to the Program
Administrators and most of the Program Administrators' agreements provide for
direct premium billing to policyholders. These agreements may be cancelled by
BIG if the Program Administrator violates the terms of the agreement with no
recourse whatsoever. All new and renewal policyholder applications (other than
those handled under a program administration agreement) must be submitted to BIG
for approval. BIG is not committed to accept a
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<PAGE> 129

fixed portion of any producer's business, but must accept all policies written
consistent with the underwriting and pricing templates of the program
administration agreements. BIG also has in force a variety of override,
contingency, and profit-sharing commission agreements with certain of its
producers in order to encourage a certain level of pricing and profitability.

CalComp focuses on the California workers' compensation market. The
regional offices and BIG's national account marketing group focus on accounts
with estimated annual premiums ("EAP") over $25,000. Overall, BIG's average
policy size of $16,165 generated $562.3 million in EAP as of December 31, 1997.
Within California, the average policy size of $15,708 generated $404.6 million
in EAP, and outside of California the average policy size was $17,471 and
generated an EAP of $157.7 million. Policies with over $25,000 in EAP at
inception as of March 31, 1998 accounted for 73.7% of BIG's combined EAP.

Producer commissions are generally determined by negotiation and are
dependent on the size and profit potential of the producer's accounts. BIG's
average direct commission rate was 9.5% for the year ended December 31, 1997,
11.0% for the year ended December 31, 1996, and 14.0% for the year ended
December 31, 1995. The reduction in the average direct commission rate from 1995
to 1996 was due to policies issued with an expiration date after January 1,
1995, in which higher commissions were paid to brokers in an effort to increase
market share to position themselves for the start of open rating on January 1,
1995. The reduction from 1996 to 1997 was due to an increase in BIG's national
business, which has a lower commission rate than California, lowering the
average direct commission rate.

UNDERWRITING

BIG's workers' compensation underwriting is conducted almost entirely
through regional and branch offices nationwide. As a policy matter, BIG does not
write policies in employment classifications that represent historically higher
risk exposure, particularly those risks in the classifications generally
considered specialized workers' compensation insurance.

For new and renewal policies effective on or after January 1, 1998, BIG
filed a rate increase in California. In March 1998, BIG management implemented a
program to increase rates on policies with unacceptable hazard grade and loss
ratio combinations. In the first and the second quarters of 1998, BIG
experienced a substantial reduction in premium due to the non-renewal of these
accounts. Reduction in premium related in part to changes in pricing.
Additionally, a reduction by A.M. Best of BIG's rating and the uncertainty
related to the sale of BIG by FHS contributed to the loss of business in 1998.
See " -- Ratings." Following the execution of the Acquisition Agreement, BIG
modified the March 1998 pricing program to be more competitive and to stem the
loss of premium. BIG also implemented the Quota-Share Arrangement effective May
1, 1998.

BIG offers a number of alternative pricing plans for its customers,
including retrospectively rated policies, deductible plans, contingent surcharge
plans, and, only outside of California, dividend plans for customers.
Retrospective rating results in a return of premium to customers if certain loss
criteria are achieved. Deductible plans offer customers lower premiums in
exchange for the customers' participating in the first layer of losses.
Contingent surcharge plans add additional premium at specified dates after
expiration of the policy if the account exceeds an expected loss ratio. The
surcharge premium is subject to return if the loss ratio is reduced in future
periods.

In many states, workers' compensation insurers issue participating
policies, which allow the insurer to declare and pay dividends to a policyholder
after expiration of the policy. Although policyholder dividends are no longer an
important component of the workers' compensation insurance marketplace in
California, they remain a significant tool for BIG to obtain and retain business
outside of California. In 1997, BIG paid $1.2 million in policyholder dividends,
and participating policies represented 2.1% of BIG's workers' compensation
policies overall, 8.2% outside of California. Policyholder dividends may be
computed as a flat rebate to the policyholder upon achievement of certain loss
ratios or expense factors, or, more commonly, reflect an amount that is not
guaranteed but is determined based on the insurer's view of a number of related
factors including loss ratio, the class of business, geographic location and
premium payment history of the

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<PAGE> 130

policyholder, risk and expense factors, competition in the marketplace, and the
overall financial condition of the insurer.

LOSS CONTROL

BIG has a loss control department that seeks to control claims before they
occur, and loss control has formed a key component of BIG's business strategy.
BIG has specialized employer and employee safety management schools that are
unique in the industry. In addition, BIG utilizes comprehensive reports to track
loss control results and key factors in reducing claims. The loss control unit
had approximately 100 employees at June 1, 1998. BIG requires that every
regional and branch office be staffed with a loss control specialist from the
time it is established. The employer safety management school involves
approximately 28 employees, and all but two of these specialists are based in
California.

CLAIM MANAGEMENT

BIG's claims department is organized on the basis of claim supervisory
units consisting of four to six claims examiners, each responsible for 150 - 170
claims; one claims assistant for each claims examiner; one file clerk for each
supervisory unit; and one data entry clerk/processor for each supervisory unit.
A vocational rehabilitation specialist is utilized in each unit to evaluate
vocational rehabilitation plans and attend formal and informal rehabilitation
planning conferences. Claims examiners are responsible for vocational
rehabilitation plan approval and statutory filings. Each claims unit also
employs a specialist to handle settlement negotiations. BIG's claims handling
policy includes contacting the injured worker within 24 hours of notification of
the injury, obtaining a recorded statement during the initial claimant contact,
and maintaining monthly contact while the injured worker is receiving total
disability payments. BIG uses third party administrators for the handling of
claims and loss control services that are associated with captive programs,
representing approximately 5% of BIG's EAP as of December 31, 1997.

Since 1992, BIG has maintained a Special Investigations Unit ("SIU") to
handle potentially fraudulent claims. The group consists of former law
enforcement officers and medical and claims experts, and provides training to
employees and customers in areas of fraud recognition, trends, and legal
updates. Through 1997, the SIU was responsible for 241 referrals to insurance
departments and district attorneys, 80 criminal cases filed, 23 arrests, and 14
convictions.

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<PAGE> 131

CLAIM AND CLAIM ADJUSTMENT EXPENSE RESERVES

BIG's claim and claim adjustment expense reserves are established in a
manner similar to Superior National's. See "Superior National -- Business" and
"Risk Factors -- Uncertainty Associated with Estimating Reserves for Unpaid
Claim and Claim Adjustment Expense."

The following table provides a reconciliation of the beginning and ending
claim and claim adjustment expense reserves of BIG for each of the years in the
three-year period ended December 31, 1997, computed in accordance with GAAP.

RECONCILIATION OF LIABILITY FOR CLAIM AND CLAIM ADJUSTMENT EXPENSE

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Beginning reserve, gross of reinsurance................. $ 590,595 $ 443,600 $ 412,666
Less: Reinsurance recoverable on unpaid losses.......... (121,170) (76,154) (90,326)
--------- --------- ---------
Beginning reserve, net of reinsurance................... 469,425 367,446 322,340
========= ========= =========
Provision for net claim and claim adjustment expenses:
For claims occurring in current year.................. 367,971 361,750 272,388
For claims occurring in prior years................... 75,233 20,147 (26,866)
--------- --------- ---------
Total claim and claim adjustment expenses............. 443,204 381,897 245,522
--------- --------- ---------
Payments for net claim and claim adjustment expense:
Attributable to insured events incurred in current
year............................................... (135,202) (106,757) (71,899)
Attributable to insured events incurred in prior
years.............................................. (255,877) (173,161) (128,517)
--------- --------- ---------
Total claim and claim adjustment expense payments..... (391,079) (279,918) (200,416)
--------- --------- ---------
Ending reserves, net of reinsurance..................... 521,550 469,425 367,446
Reinsurance recoverable on unpaid losses................ 206,871 121,170 76,154
--------- --------- ---------
Ending reserves, gross of reinsurance................... $ 728,421 $ 590,595 $ 443,600
========= ========= =========
</TABLE>

In 1997, claim and claim adjustment expenses incurred in prior years
increased by $75.2 million due primarily to unfavorable development of the 1996
and 1995 accident years. The cause of the increase in the accident year 1996 and
prior estimates was in part due, BIG's management believes, to a 1996 court
ruling that gave the treating physician expanded authority in determining the
level of disability of the injured worker. The impact of this court ruling is
believed to be the primary cause of increased claim severity. In addition,
changes to the California permanent disability rating schedules in April 1997
adversely affected average claim severity in California, thereby contributing to
the higher 1997 accident claim and claim adjustment cost expense ratio compared
to 1996.

In 1996, BIG experienced adverse loss development related to accident year
1995. The increases for prior accident year claim and claim adjustment expense
reserves is primarily attributable to increases in BIG's average claim severity.
On a per claim basis, the average gross case loss reserve for the 1995 accident
year increased 55.2% from 1995 to 1996, and the average gross case loss paid for
the 1995 accident year increased 37.8% from 1995 to 1996.

In 1995, BIG experienced favorable loss development on net claim and claim
adjustment expense reserves estimated on December 31, 1994. The decrease in
prior accident year claim and claim adjustment expense reserves is primarily
attributable to reductions in the estimates for the 1993 and 1994 accident
years. The favorable impact of the reforms passed by the California State
Legislature in 1993 related to fraudulent claims, as well as the impact from
BIG's continued use of managed care techniques, including network utilization
and medical case management, also contributed to the reduction in the prior year
loss estimates.

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<PAGE> 132

The following table discloses the development of net workers' compensation
claim and claim adjustment expense reserves of BIG from December 31, 1987
through December 31, 1997.

ANALYSIS OF NET CLAIM AND CLAIM ADJUSTMENT EXPENSE DEVELOPMENT
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------
1987 1988 1989 1990 1991 1992 1993 1994
------- ------- ------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Liability for unpaid
losses and loss
adjustment expenses.... $53,170 $55,089 $76,296 $158,268 $206,993 $219,464 $268,191 $322,394
Paid (cumulative) as of:
One year later......... 14,186 11,649 20,541 59,110 103,361 106,693 115,189 129,284
Two years later........ 21,998 20,780 36,151 106,334 167,932 191,397 184,304 204,245
Three years later...... 27,849 28,389 44,665 130,826 211,087 233,537 214,676 243,210
Four years later....... 33,527 31,492 50,240 146,186 233,168 249,012 226,187
Five years later....... 35,630 34,015 53,896 154,514 241,693 252,921
Six years later........ 37,448 35,975 56,301 161,152 244,308
Seven years later...... 39,121 37,374 58,577 164,606
Eight years later...... 40,346 38,970 59,858
Nine years later....... 41,854 39,780
Ten years later........ 42,637
Liability re-estimated as
of:
One year later......... 53,321 51,147 75,988 160,141 218,747 251,012 262,032 295,856
Two years later........ 51,382 51,991 65,376 162,040 242,231 257,134 256,132 270,293
Three years later...... 54,349 43,651 61,098 172,981 242,533 262,582 250,238 296,016
Four years later....... 47,241 41,513 66,135 172,269 245,877 268,031 254,791
Five years later....... 46,116 44,701 66,174 173,581 249,220 270,478
Six years later........ 47,011 45,364 66,569 174,892 257,332
Seven years later...... 47,928 45,452 66,963 175,053
Eight years later...... 47,883 45,541 67,786
Nine years later....... 47,839 46,906
Ten years later........ 49,371
Redundancy
(deficiency)........... $ 3,799 $ 8,183 $ 8,510 $(16,785) $(50,339) $(51,014) $ 13,400 $ 26,378
Net reserve -- end of
period.......................................................................................... $322,394
Reinsurance recoverable on
unpaid losses and loss
adjustment expenses............................................................................. 90,366
--------
Gross reserve -- end of
period.......................................................................................... $412,760
========
Net re-estimated reserve --
end of period................................................................................... $296,016
Re-estimated reinsurance
recoverable..................................................................................... 91,848
--------
Gross re-estimated
reserve -- end of period........................................................................ 387,864
--------
Gross cumulative redundancy
(deficiency).................................................................................... $24,896
========

<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1995 1996 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Liability for unpaid
losses and loss
adjustment expenses.... $367,061 $469,258 $521,550
Paid (cumulative) as of:
One year later......... 173,161 255,856
Two years later........ 288,885
Three years later......
Four years later.......
Five years later.......
Six years later........
Seven years later......
Eight years later......
Nine years later.......
Ten years later........
Liability re-estimated as
of:
One year later......... 387,426 544,491
Two years later........ 410,082
Three years later......
Four years later.......
Five years later.......
Six years later........
Seven years later......
Eight years later......
Nine years later.......
Ten years later........
Redundancy
(deficiency)........... $(43,021) $(75,233)
Net reserve -- end of
period................. $367,061 $469,258 $521,550
Reinsurance recoverable o
unpaid losses and loss
adjustment expenses.... 76,309 121,326 206,871
-------- -------- --------
Gross reserve -- end of
period................. $443,370 $590,584 $728,421
======== ======== ========
Net re-estimated reserve
end of period.......... $410,082 $544,679
Re-estimated reinsurance
recoverable............ 83,202 134,668
-------- --------
Gross re-estimated
reserve -- end of perio 493,284 679,347
-------- --------
Gross cumulative redundan
(deficiency)........... $(49,914) $(88,763)
======== ========
</TABLE>

The first line of the preceding table depicts the estimated liability for
unpaid claim and claim adjustment expense recorded on the balance sheets of BIG
at the indicated balance sheet dates. This liability represents the estimated
amount of claim and claim adjustment expense for claims arising during all years
prior to the indicated balance sheet date that are unpaid as of that balance
sheet date, net of reinsurance recoverables, including losses that have been
incurred but not yet reported. The table also shows the re-estimated liability
as of the end of each succeeding year through the latest balance sheet date, and
the cumulative payments made for such claims, at annual intervals after the
initial indicated balance sheet date. The claim and claim adjustment expense
liability estimates change as more information becomes known about the frequency
and severity of claims for each year. A net reserve redundancy or deficiency is
displayed for each balance sheet date in the center of the table when the
initial liability estimate is greater (or less) than the re-estimated liability
at the latest balance sheet date. A gross-of-reinsurance redundancy (deficiency)
is displayed for each of the years ended December 31, 1994, 1995, and 1996 at
the bottom of the table.

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<PAGE> 133

The net reserve deficiencies associated with the years ended December 31,
1987, 1988, and 1989 were due to CalComp's reassessment of the outstanding
reserve liability of all open claims at December 31, 1988, after BIG acquired
CalComp from Hanover in December, 1988. The net deficiencies associated with
reserves as of December 31, 1990, 1991, and 1992 were due to unexpected
increases in claims costs resulting from increased litigation in the California
workers' compensation system, an economic recession in California, and workers'
compensation laws that at the time effectively encouraged workers to file
unwarranted psychiatric stress and fraudulent claims. The net redundancies
associated with the years ended December 31, 1993 and 1994 occurred as a result
of significant reforms in the California workers' compensation laws that became
effective January 1, 1993 and an improvement in the California economy that were
not anticipated when reserves were established. The net reserve deficiencies
associated with the years ended December 31, 1995 and 1996 occurred as a result
of unexpected increases in severity affecting claims occurring in 1995 and 1996.

BIG's experience with net reserve deficiencies occurring for the years
ended December 31, 1990 through 1992, 1995, and 1996 and net redundancies
occurring for the years ended December 31, 1993 and 1994 is believed by BIG to
be consistent with the results experienced by the California workers'
compensation industry during the same time periods. The underlying improvement
in claims frequency and severity during the years ended December 31, 1993 and
1994 that caused BIG to develop net redundant reserves is also consistent with
industry experience. The net reserve deficiencies occurring for the years ended
December 31, 1995 and 1996 resulted from unexpected increases in claims
severity, consistent, BIG believes, with some California workers' compensation
insurers' experience. The direct net-of-reinsurance redundancies displayed at
the bottom of the table reflect BIG's per risk excess of loss, quota-share, and
aggregate excess of loss reinsurance, the effects of which were to reduce BIG's
net redundancies/deficiencies due to the cession of a portion of BIG's
development.

Currently, BIG's management prepares on a monthly basis a comprehensive
analysis of workers' compensation experience, and the process of estimating
claim and claim adjustment expense liabilities is continually modified to
consider additional information regarding trends in pricing, frequency, and
severity. Further, conditions and trends that have historically affected BIG's
claims may not necessarily be indicative of conditions and trends that will
affect future claims, and it is not appropriate to extrapolate future reserve
redundancies or deficiencies based on the data set forth above.

By frequently reviewing reserves, management is generally able to detect
trends in claim and claim adjustment expenses and take appropriate actions in a
timely manner to avoid having to increase reserves substantially at a later
date. See "Risk Factors -- Uncertainty Associated with Estimating Reserves for
Unpaid Claim and Claim Adjustment Expense."

REINSURANCE

Under reinsurance agreements, BIG reinsures certain workers' compensation
risks with other insurance companies. Reinsurance contracts do not relieve BIG
from its obligations to policyholders, and failure of reinsurers to honor their
obligations could result in losses to BIG. See "Risk Factors -- Importance of
Reinsurance." BIG has regularly evaluated the financial condition of its
reinsurers. Based on that evaluation, BIG's management believes the reinsurers
are creditworthy and that any potential losses on these agreements will not have
a material impact on the consolidated financial statements. At December 31,
1997, there were no disputes related to BIG's reinsurance agreements.

BIG has a treaty with Gen Re providing for an aggregate unsecured
recoverable for losses, paid and unpaid, including incurred but not reported
loss adjustment expense, and unearned premiums in excess of 3% of the Company's
surplus at December 31, 1996, of $122.2 million, and December 31, 1997, of
$194.5 million.

BIG maintains specific excess of loss reinsurance on workers' compensation
policies, which provides coverage in excess of $1,000,000 per occurrence for
accident years 1996 through 1998, in excess of $500,000 per occurrence for
accident years 1994 and 1995, in excess of $350,000 per occurrence for accident
years 1992 and 1993, and in excess of $250,000 per occurrence for accident years
1989 through 1991. The agreements provide coverage up to a maximum of $200
million per occurrence, including BIG's retention.

In addition, BIG also purchased several pro rata reinsurance agreements
wherein the reinsurer assumed a proportional amount of net premiums earned and
related losses. The quota-share percentage ranged from 5%
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<PAGE> 134

to 40% (5% at June 30, 1994). As of July 1, 1994 the quota-share agreement was
terminated, and this treaty was commuted in 1997. Effective July 1, 1996, BIG
entered into a 30% quota-share treaty to cede a proportional amount of net
premiums earned and related loss and loss adjustment expenses incurred. The 30%
ceding rate is applicable from July 1, 1996 to December 31, 1996. Effective
January 1, 1997, the quota-share reinsurance ceding rate was reduced to 7.5%
through June 30, 1997. The quota-share treaty contains a provisional ceding
commission, which adjusts based on actual reported loss experience on the
subject business. BIG stopped ceding under the quota share treaty effective July
1, 1997.

BIG entered into an aggregate excess of loss reinsurance agreement ("First
Aggregate Treaty") with Gen Re effective January 1, 1997. Under the terms of the
First Aggregate Treaty, $32.0 million of premiums were ceded to Gen Re and $37.3
million of losses and allocated loss adjustment expenses were ceded to Gen Re.
Effective July 1, 1997 a second six-month Aggregate Treaty was entered into with
Gen Re ("Second Aggregate Treaty"). Under the terms of the Second Aggregate
Treaty, $61.5 million of premiums were ceded to Gen Re and $75.0 million of
losses and allocated loss adjustment expenses were ceded to Gen Re. The First
and the Second Aggregate Treaties are expected to be commuted at or prior to the
Closing.

Effective May 1, 1998, BIG entered into two additional reinsurance
agreements. One is an excess of loss reinsurance arrangement whereby losses in
excess of $500,000, per occurrence, are ceded. The other is a Quota-Share
Arrangement identical to Superior Pacific's whereby all policies with estimated
annual premium at inception of $25,000 or more are ceded to the reinsurer. See
"Superior National -- Business -- Reinsurance."

In connection with the Acquisition, FHC will fulfill the Loss Reserves
Guarantee by causing BIG to obtain a binding commitment for an aggregate excess
of loss reinsurance agreement with a third-party reinsurer. The agreement will
provide $150.0 million of adverse loss development indemnification on BIG's
December 31, 1997 claim and claim adjustment expense reserves. In addition, FHC
will cause BIG further to obtain a binding commitment for a second aggregate
excess of loss reinsurance agreement providing $25.0 million of adverse loss
development indemnification for claims and claim adjustment expense incurred
through the Closing.

COMBINED CARE BENEFITS

BIG, through CBIC in California and through BICO in Utah, markets a program
of "24-hour care," providing the insureds' employees with workers' compensation
and group health benefits. The intent of the program is to provide the insured
with "one-stop shopping," so that the same medical provider who handles illness
off the job can treat workplace injuries as well. Additionally, the insureds
obtain centralized claims service on both health and workers' compensation
benefits. The combined care benefits product generated $7.5 million in premium
in 1997, or 1.2% of BIG's overall direct written premium.

INVESTMENTS

After the close of the Acquisition, BIG's invested cash will be invested in
a manner consistent with Superior Pacific's investment guidelines described in
"Superior National -- Business -- Investments."

The amount and types of investments that may be made by BIG are regulated
under the California Insurance Code and rules and regulations promulgated by the
DOI, and are similarly regulated by the States of Delaware and New York. As of
December 31, 1997, approximately 98% of BIG's investment portfolio was held in
fixed income securities, of which 93% are rated "A" or better and 89% are
invested in municipal securities. BIG maintains a minimum rating requirement of
"BBB." As of December 31, 1997, the average duration of BIG's portfolio was 3.88
years, the market value of the portfolio was $625.4 million, and its book value
was $617.7 million.

INFORMATION SERVICES

BIG uses a proprietary policy and claims administration system that was
developed in 1990. The system issues multistate policies for most
non-monopolistic states. Policies are issued, billed, endorsed, and final
audited through the system. Agency and direct billing are also supported by the
system. All functions except for premium audit and credit and collections are
decentralized through the system and may be carried out in

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<PAGE> 135

any office that has proper authorization. The claims system enforces benefit
limits and vocational rehabilitation benefits, and automatically places claims
on diaries and produces required notices. BIG is currently upgrading its
computer software to address the Year 2000 problem, which BIG believes will be
completed by August 1998, prior to issuing policies with a Year 2000 expiration
date. Upon the completion of such upgrade, BIG believes that its computer
systems will be 100% Year 2000 compliant; there can be no assurance, however,
that BIG will complete the computer upgrade before issuing policies with a Year
2000 expiration date or that such upgrade will successfully prevent any Year
2000 problems from occurring. See "Business Insurance Group,
Inc. -- Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Year 2000 Strategy."

BIG operates a client/server wide area network ("WAN") in a Windows
environment. This system shares a similar technical background with the
Company's, which will make a conversion to the Company's computer system easier
than if BIG utilized a mainframe system.

COMPETITION

Within California, BIG and Superior National compete for the same accounts
and face similar issues. See "Superior National -- Business -- Competition."

Nationally, several of the largest and best known multi-line insurance
carriers seek to obtain accounts for their workers' compensation arms in direct
competition with BIG. These carriers include Liberty Mutual, American
International Group and the Travelers Group. Many competing carriers have higher
A.M. Best ratings, enhancing their competitive position. Thus, BIG competes with
better capitalized and higher rated insurance concerns to write workers'
compensation insurance for the nation's largest industrial and service
companies. Additionally, many large companies self-insure for workers'
compensation where permitted by local regulations.

The workers' compensation market is commodity-oriented, highly fragmented,
and reflective of intense price competition. Nevertheless, because each risk is
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 of operations. Therefore, although workers' compensation insurance is
a commodity, the price of insurance does not necessarily reflect commodity
pricing. BIG's existing and prospective customer bases are vulnerable to
competition, especially from larger insurers that at any time are capable of
penetrating BIG's markets with products priced at levels substantially below
BIG's.

RATINGS

A.M. Best has currently assigned a "B++" (Very Good) rating to BIG, a
rating it was assigned in February 1998. The "B++" rating marks a downgrade from
the "A-" (Excellent) rating BIG had held from 1993 through 1998. The following
factors were relevant in A.M. Best's decision to downgrade the rating: BIG's
projected 1997 underwriting loss and reduced capital position following the
announcement that it would increase its loss reserves in response to adverse
loss development on its most recent accident years, the continued uncertainty
related to the pricing environment in BIG's core California market, BIG's
aggressive premium growth over the past few years, the potential for further
adverse loss development impacting future earnings, the capital position of BIG,
and the uncertainty regarding BIG's future ownership. In February 1998, the
"B++" rating was placed under review by A.M. Best with negative implications. In
May 1998, however, following announcement of the Acquisition, A.M. Best stated
BIG's "B++" rating was under review with developing (a change from negative)
implications.

A.M. Best's ratings are based upon an evaluation of an insurer's: (i)
financial strength (leverage/ capitalization, capital structure/holding company,
quality, appropriateness of reinsurance program, adequacy of loss/ policy
reserves, quality, diversification of assets, and liquidity); (ii) operating
performance (profitability, revenue composition, and management experience and
objectives); and (iii) market profile (market risk,

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<PAGE> 136

competitive market position, spread of risk, and event risk) subject to
confirmation of A.M. Best procedure. A rating of "B++" from A.M. Best is
considered by A.M. Best to be a "secure rating." BIG is currently rated "BBB" by
S&P, a claims paying rating it has held since 1995. Such ratings are subject to
change and are not recommendations to buy, sell, or hold securities.

One factor in an insurer's ability to compete effectively is its A.M. Best
rating because some customers and insurance brokers require certain ratings as a
prerequisite for writing business with an insurance company. The reduction of
BIG's A.M. Best rating in February 1998 may have had an adverse effect on BIG's
competitive position in the nationwide workers' compensation insurance market.

A.M. Best often follows a practice of assigning an equal rating to all
insurers within an affiliated group of companies. If this practice is followed
with respect to Superior National's insurance subsidiaries after the
Acquisition, there can be no assurance that Superior Pacific's "B+" A.M. Best
rating will not be assigned to the BIG Insurance Subsidiaries. Such a rating
would reflect a further downgrade of BIG's rating and would likely have a
material adverse effect on Superior National's competitive position and results
of operations.

REGULATION

BIG and its insurance subsidiaries, like Superior National and its
insurance subsidiaries, are subject to extensive governmental regulation and
supervision. See "Superior National -- Business -- Regulation." Moreover,
outside of California, workers' compensation insurers may be required to
participate in assigned risk plans that provide coverage to individuals or
entities unable to obtain coverage from existing insurers in those states. The
net profit or loss incurred in administration of these plans is allocated back
to participant insurers based on each insurer's relative market share in each
state. In addition to DOI regulation, BICO is subject to regulation by the
Delaware Department of Insurance, and CCIC is subject to regulation by the New
York Department of Insurance.

California law also limits the ability of the BIG Insurance Subsidiaries to
pay stockholder dividends to BIG. See "Superior
National -- Business -- Regulation." Based upon restrictions presently in
effect, the maximum amount available for payment of dividends by the BIG
Insurance Subsidiaries during 1998 without prior regulatory approval is
approximately $21.3 million. In ordinary circumstances, following a change in
control BIG's subsidiaries would have a two-year moratorium on payment of
dividends. Superior National expects to obtain a waiver of such restrictions.

The NAIC's RBC formulae are also applied to BIG's subsidiaries. See
"Superior National -- Business -- Regulation." As of December 31, 1997, all of
the BIG Insurance Subsidiaries engaged in continuing operations that exceed all
RBC levels requiring any regulatory intervention.

Like Superior National, BIG's operations are subjected to the IRIS tests to
assist state regulators in their oversight function. Based on its 1997 statutory
financial statement, CBIC was within the usual range of eleven of the twelve
IRIS tests, CalComp and CCIC were within the usual range of nine of the twelve
IRIS tests, and BICO was within the usual range of six of the twelve IRIS tests.
CBIC was outside the range of the one-year reserve development to surplus test.
CalComp was outside of the usual range of the tests measuring two-year overall
operating ratio, one-year reserve development to surplus, and two-year reserve
development to surplus. CCIC was outside the usual range of tests measuring
change in net writings, two-year overall operating ratio, and investment yield.
BICO was outside of the usual range of the tests measuring net premiums to
surplus, change in net writings, two-year overall operating ratio, change in
surplus, agents' balances to surplus, and one-year reserve development to
surplus.

As a result of the statutory financial results filed by BICO for the year
ended December 31, 1997, and BICO's only passing six of the twelve IRIS tests
for 1997, insurance regulators in certain states in which BICO is licensed have
requested an explanation for the 1997 financial results as filed. Two states,
Minnesota and North Carolina, accounting for $662,000 in direct written premium
in 1997 (representing 0.1% of BIG's total direct written premium), summarily
restricted BICO's issuance of new workers' compensation policies based on BICO's
reported financial results. In responding to the various regulatory authorities,
BICO has replied by stating that the reason for the reduced 1997 income and
policyholders' surplus result was due to BICO's increased percentage of the BIG
intercompany pooling reinsurance agreement effective January 1, 1997. In 1996,
BICO's reinsurance pooling percentage was 15%. In 1997, the percentage was
increased to
134
<PAGE> 137

25%. On a consolidated basis, BIG reported an increase to its estimate for the
1996 accident year loss and loss adjustment expenses by $53.2 million in its
1997 financial statements. BICO's proportionate share of this adverse prior
accident year development increased BICO's 1997 calendar year loss before income
taxes by $5.3 million. In addition, the higher percentage of the 1997 accident
year results accounted for another $2.1 million of losses, for a total of $7.4
million on a pre-tax basis. BICO's response to regulators also disclosed: the
May 5, 1998 announcement of the sale of BIG and its four insurance subsidiaries
from FHC to Superior, and the Loss Reserves Guarantee in favor of Superior
National in the amount of $175.0 million, obtained at FHC's cost through the
purchase of reinsurance (See "-- Reinsurance"). In addition, effective May 1,
1998, BIG entered into two new reinsurance treaties: the first is a specific
excess of loss agreement for losses between $0.5 million and $1.0 million, per
occurrence; and the second is the Quota-Share Arrangement whereby BIG will cede
100% of the gross premiums earned on accounts with an estimated annual premium
at inception greater than $25,000, and 100% of the net losses and allocated loss
adjustment expenses incurred on those associated policies for claims with an
accident date of May 1, 1998 and subsequent. BIG will also recognize a 33.5%
ceded commission of premiums ceded under this agreement. Pursuant to the
Acquisition Agreement, BIG and Superior National are jointly discussing these
financial and regulatory issues with regulators. Additionally, Zurich Centre
Group LLC, an affiliate of Zurich has agreed that it, or a designee, will
purchase BICO from Superior National immediately after the Closing.

The California DOI Triennial Examination for CalComp, which covered the
five years ended December 31, 1995, was completed in 1997. As of December 31,
1995, CalComp reported policyholders' surplus of $151.6 million. Based on the
Triennial Examination, the DOI reported CalComp's statutory surplus at $103.7
million, a difference of $47.9 million from the surplus reported by CalComp. The
entire difference between CalComp's reported surplus and the surplus balance per
the DOI exam was included and accounted for in CalComp's statutory financial
statements for the year ended December 31, 1996. Of the $47.9 million
difference, $10.0 million was due to the non-admission of a promissory note due
CalComp from FHC, $27.2 million was due to an increase to CalComp's claim and
claim adjustment expenses, including $6.8 million related to the statutory
excess liability, and $10.7 million was due to other miscellaneous adjustments.
During 1996, CalComp made the necessary adjustments to its internal control
structures and its policies and procedures to address the issues raised by the
DOI in connection with the Triennial Examination. Triennial Examinations as of
December 31, 1995 were also completed for BICO and CBIC by the Delaware
Department of Insurance and DOI, respectively. BICO's reported surplus at
December 31, 1995 of $7.2 million was reduced by $0.7 million by Delaware to
$6.5 million. The BICO surplus adjustment was primarily related to a federal
income tax recoverable of $0.5 million deemed to be non-admitted for statutory
accounting purposes. The DOI made no surplus adjustments to CBIC's reported
statutory policyholder surplus balance of $7.4 million at December 31, 1995.

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<PAGE> 138

MANAGEMENT

As of the date hereof, the management of BIG is as follows:

<TABLE>
<CAPTION>
YEAR
JOINED
NAME AGE TITLE BIG
---- --- ----- -----------
<S> <C> <C> <C>
Maurice A. Costa............... 51 Chairman, President and Chief Executive 1988
Officer
Robert P. White................ 51 Senior Vice President-Field Operations 1988
Dana P. Brown.................. 54 Senior Vice President-Chief Information 1988
Officer
Jacqueline Andersen-McAuley.... 42 Senior Vice President-Underwriting 1997
Paul W. Souza.................. 38 Vice President-Finance and Treasurer 1995
Gregory L. Johnson............. 51 Vice President-Marketing 1988
Robert A. Kamrath.............. 54 Vice President-Administration 1996
Deborah Day, M.D., MPH......... 45 Medical Director 1997
Trecia M. Nienow, Esq. ........ 37 Corporate Counsel and Secretary 1997
</TABLE>

Maurice A. Costa was a founder of the company that acquired CalComp from
Hanover in December 1988. He has been Chairman, President, and Chief Executive
Officer since November 1993, and has directed the operations of BIG since 1988.
Mr. Costa has more than 29 years of insurance industry experience having worked
for Industrial Indemnity Company from 1969 to 1988 in various claims,
underwriting, and management positions, including Division Manager from 1983 to
1988.

Robert P. White was a founder of the company that acquired CalComp from
Hanover in December 1988. He has been Senior Vice President -- Field Operations
since 1993 and, since 1988, has held various management positions with BIG
including Southern California Division Manager and Division Manager of Special
Programs, and was responsible for the expansion into states outside of
California. He has more than 24 years of insurance industry marketing and
underwriting experience, having worked for Industrial Indemnity Company from
1977 to 1988, including as Division Manager from 1980 to 1988 and prior to that
with Royal Globe Insurance Company and Insurance Company of North America.

Dana P. Brown was a founder of the company that acquired CalComp from
Hanover in December 1988. Mr. Brown has 21 years of insurance industry
information services and data processing experience having held similar
positions at Employee Benefits Insurance Company from 1976 to 1982. Following
the acquisition by the predecessor to FHS, Mr. Brown became Senior Vice
President of Information Technology for FHC in 1994 and subsequently returned to
BIG in his current position in 1996. Mr. Brown has a Doctorate in Physics from
the University of California.

Jacqueline Andersen-McAuley joined BIG as Senior Vice
President -- Underwriting in July 1997, having most recently held the position
of Executive Vice President -- Workers' Compensation at Golden Eagle Insurance
Company, where she was employed from 1991 to 1997 and was responsible for
workers' compensation underwriting, loss control, and claims operations. Ms.
McAuley has more than 19 years of insurance industry experience in claims and
marketing with Guarantee National Insurance Company, Occidental Fire and
Casualty Insurance Company, National Farmers Union Insurance Company, and State
Farm Insurance Company. She also owned and operated a fire and casualty
insurance brokerage firm in California and Wyoming from 1985 to 1991.

Paul W. Souza has been Vice President -- Finance and Treasurer since 1995
and had been previously employed as a Vice President and Controller from 1989 to
1991. Mr. Souza has 16 years of insurance accounting, finance, and premium
accounting/collection experience, having worked for Fireman's Fund Insurance
Company and Beaver Insurance Company. Mr. Souza was employed by Pac Rim, where
he was Vice President and Treasurer, from 1991 to 1995.

Gregory L. Johnson has been employed by BIG since 1988 in various positions
including Regional Manager and Northern California Division Manager prior to
assuming the position of Vice President -- Marketing in 1995. Mr. Johnson has
more than 23 years of insurance industry experience, having worked for
Industrial Indemnity Company from 1970 to 1973 and 1985 to 1988, which included
a Marketing Manager position. Mr. Johnson has held marketing positions with
Employee Benefits Insurance Company, Mission Insurance Company, and Insurance
Company of the West.

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<PAGE> 139

Robert A. Kamrath joined BIG in 1996 as Vice President -- Administration.
Mr. Kamrath served in the U.S. Navy for 30 years in various command positions
including Captain of Submarines and Surface Ships. He also held the position of
Chief of Staff of the Naval Base of Charleston, South Carolina, where he
provided management oversight to a combined military and civilian workforce of
20,000. Prior to joining BIG, he worked for Tracor Applied Services as a
Director. Mr. Kamrath has a M.S. in Systems Engineering from George Mason and a
M.S. in Management from the Naval Post Graduate School.

Deborah Day, M.D., MPH, joined BIG in 1997 as Medical Director. Dr. Day has
over 13 years of experience in Occupational and Environmental Medicine as a
Clinician and as Medical Director for the UCLA self-insured workers'
compensation program from 1988 to 1992, where she was responsible for developing
treatment protocols and return-to-work programs. Prior to joining BIG, Dr. Day
was employed by Zenith National Insurance Company as Medical Director from 1992
to 1997, including a role in the management and development of their Single
Point product. Dr. Day is a member of the American College of Physicians and the
American College of Occupational and Environmental Medicine.

Trecia M. Nienow, Esq., joined BIG as Corporate Counsel and Secretary in
1997 from FHS, where she had been employed in the corporate tax and law
departments since 1992. Since the Company's acquisition by FHS's predecessor in
1993, Ms. Nienow has provided compliance, licensing, and general corporate legal
support to BIG. Ms. Nienow is licensed by the State Bar of California and holds
a Master of Laws in Taxation.

EMPLOYEES

As of September 30, 1998, BIG had approximately 1,170 employees, none of
whom was covered by a collective bargaining agreement.

BUSINESS PROPERTIES

BIG's principal executive offices are located in Rancho Cordova, California
and are subject to a lease that expires in 2005. All of the facilities housing
BIG's 37 branch and regional offices in 42 states are leased, with lease
expiration dates ranging from 1998 to 2005. Nine of these facilities lease space
from FHS or its affiliates, and at nine facilities, Superior National has agreed
to provide FHS or its affiliates with subleases after the Closing.

The address for BIG's principal executive office is 11171 Sun Center Drive,
Rancho Cordova, California 95670, and the telephone number is (916) 853-7540.

LEGAL PROCEEDINGS

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

BIG, like Superior National, is subject to class action litigation filed
against all workers' compensation insurers in California, related principally to
claims paying practices. Such litigation is being vigorously contested by BIG.
Although the likelihood of a material adverse result in such matters is regarded
by the defendants as low, there can be no assurance that, should a trial be
held, the class plaintiffs will not receive a substantial award.

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DESCRIPTION OF SUPERIOR NATIONAL CAPITAL STOCK

The following summary description of Superior National's capital stock does
not purport to be complete and is qualified in its entirety by reference to the
Company's Certificate of Incorporation, Bylaws, the forms of outstanding
warrants, the Registration Rights Agreement (as defined herein), and the Amended
Registration Rights Agreement (as defined herein), copies of which are
incorporated by reference as exhibits to the Registration Statement of which
this Prospectus is a part, and by provisions of applicable law.

AUTHORIZED AND ISSUED CAPITAL STOCK

The authorized capital stock of the Company consists of 25 million shares
of Common Stock, par value $.01 per share. Assuming the stockholders have
approved an amendment to increase the number of authorized shares of Common
Stock at the Company's upcoming annual meeting of stockholders, the number of
authorized shares of Common Stock will be increased to 40 million at the
closing.

On October 30, 1998, there were shares of Common Stock
outstanding held of record by stockholders. Upon consummation of the Equity
Financings, and assuming full exercise of Rights and/or warrant holder
preemptive rights, there will be approximately shares of Common
Stock outstanding, assuming no outstanding options or warrants are exercised.

COMMON STOCK

Each share of Common Stock is entitled to one vote on all matters submitted
to a vote of the stockholders of the Company. In electing directors, subject to
complying with certain notice requirements, each stockholder is entitled to
cumulate such holder's votes and give one candidate a number of votes equal to
the number of directors to be elected multiplied by the number of shares of
Common Stock held, or to distribute such votes among as many candidates as the
holder sees fit. The holders of Voting Notes vote with holders of Common Stock
on elections of directors, as a single class. Generally, all matters to be voted
upon by stockholders must be approved by a majority of the votes cast or
entitled to be cast by all shares of Common Stock. Holders of Common Stock are
entitled to receive ratably dividends, if any, as may be declared by the Board
of Directors out of funds legally available therefor. See "Market Price of and
Dividends on the Common Stock." In the event of a liquidation, dissolution, or
winding up of the Company, holders of the Common Stock are entitled to share
ratably in all assets remaining after payment of liabilities and the liquidation
preference of any then outstanding class or series of stock ranking prior to the
Common Stock. Holders of Common Stock have no preemptive rights and no right to
convert their Common Stock into any other securities. There are no redemption or
sinking fund provisions applicable to the shares of Common Stock. All
outstanding shares of Common Stock are, and the Common Stock to be outstanding
upon completion of the Stock Offering will be, fully paid and nonassessable.

VOTING NOTES

On March 31, 1992, the Company issued the Voting Notes in connection with a
transaction wherein the Company issued its 14.5% Notes in an aggregate principal
amount of $11.0 million, together with warrants to purchase approximately
1,616,886 shares of Common Stock. The Company redeemed all of its 14.5% Notes
with a prepayment, effective June 30, 1994, except for the Voting Notes, with
respect to which prepayment is prohibited. See "Certain Relationships and
Related Transactions -- Transactions with Affiliates of Zurich, Including Centre
Re." 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 that remain outstanding and are
unexercised as of the applicable record date for a stockholder vote. As of June
30, 1998, the number of votes held by III, the holder of the Voting Notes, was
equivalent to 1,566,465 shares of Common Stock. The holder of the Voting Notes
is 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 under 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 Certificate of Incorporation and
Bylaws.

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WARRANTS

The Company has issued warrants to purchase an aggregate of 2,145,821
shares of Common Stock, which expire on April 1, 2002. The exercise price of the
warrants range from $4.00 to $5.20 per share. The Company granted certain
registration rights to the holders of these warrants upon their issuance. See
"-- Registration Rights." These warrants also contain certain customary
preemptive rights, exercise price adjustments, and anti-dilutive provisions.

In consideration of the commitment to provide the Standby Commitment, IP
and an affiliate of Zurich will receive a commitment fee, regardless of whether
the Stock Offering and Standby Commitment are consummated, consisting of the
Commitment Fee Warrants to purchase 734,000 shares of Common Stock at $16.75 per
share. The Commitment Fee Warrants expire five years after their date of
issuance. The Commitment Fee Warrants contain certain customary anti-dilutive
provisions and exercise price adjustments.

REGISTRATION RIGHTS

The warrants (excluding the Commitment Fee Warrants, the holders of which
will have, upon the exercise thereof, the registration rights set forth in the
Amended Registration Rights Agreement) provide the holders thereof certain
rights with respect to registration of shares which could be received upon
exercise of the warrants. Under the terms of the warrants, under certain
conditions, the holders of the warrants may require the Company to register the
shares of Common Stock that could be issued upon exercise of the warrants.
Moreover, if the Company proposes to register any of its securities under the
Securities Act for its own account or for the account of others, the holders of
the warrants are entitled to elect to include in such registration the shares
issuable upon exercise of the warrants.

The Registration Rights Agreement, dated as of April 11, 1997 (the
"Registration Rights Agreement"), by and among the Company, IP Delaware, and IP
Bermuda provides that, with respect to the approximately 2.2 million shares of
Common Stock purchased by IP Delaware and IP Bermuda under the 1996 Stock
Purchase Agreement, IP Delaware, IP Bermuda, and any affiliate thereof (as
defined in Rule 12b-2 promulgated pursuant to the Exchange Act) to whom or which
such shares have been transferred may, on not more than three occasions at any
time commencing after the date thereof, require the Company at its sole expense
to prepare and file with the SEC a registration statement under the Securities
Act covering the public offer and sale of such shares, in addition to other
shares requested to be so covered by other securities holders having similar,
preexisting registration rights, and use its best efforts to cause to be
declared effective and remain effective for up to the lesser of 180 days or the
period during which all of the shares requested to be so registered by IP
Delaware or IP Bermuda and any affiliate thereof have been sold (a "Demand
Registration"). IP Delaware, IP Bermuda, and their affiliates also have
customary "piggyback" registration rights allowing them to register shares in
the event the Company proposes to sell any of its Common Stock or other
securities to the public in a transaction registered under the Securities Act.
Notwithstanding the terms described above, the Company is not required to file a
registration statement in response to a Demand Registration if certain
conditions are not met, including the anticipated failure of a Demand
Registration to earn aggregate net offering proceeds of $7.5 million or more. In
addition, the ability of IP Delaware, IP Bermuda, and any affiliate thereof to
request three Demand Registrations shall be reduced to two requests if the
Company has registered shares of such Common Stock held by IP Delaware, IP
Bermuda, or any of its affiliates having an anticipated net offering proceeds of
not less than $5 million pursuant to an exercise of their "piggyback" rights.
The Common Rights Agreement contains additional customary terms and provisions,
including reciprocal indemnification and contribution provisions with respect to
information furnished or provided by the Company or IP Delaware and IP Bermuda
for inclusion in any such registration statement.

The Amended and Restated Registration Rights Agreement to be entered into
by the Company and IP as a condition to the IP Stock Issuance ("Amended
Registration Rights Agreement") provides that IP and any affiliate thereof (as
defined in Rule 12b-2 promulgated pursuant to the Exchange Act) to whom or which
shares of Common Stock have been transferred by IP may, on not more than four
occasions at any time after the Closing Date, initiate a Demand Registration
covering the public offer and sale of shares of Common Stock they hold
(including shares issued in the IP Stock Issuance and upon exercise of the
Commitment Fee Warrants), in addition to other shares requested to be so covered
by other securities holders having similar,

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preexisting registration rights. Notwithstanding the terms described above, the
Company is not required to file a registration statement in response to a Demand
Registration if certain conditions are not met, including the anticipated
failure of a Demand Registration to achieve aggregate net offering proceeds of
$7.5 million or more. Under the Registration Rights Agreement, IP and its
affiliates have customary "piggyback" registration rights allowing them to
register shares in the event the Company proposes to sell any of its Common
Stock or other securities to the public in a transaction registered under the
Securities Act. The Amended Registration Rights Agreement contains additional
customary terms and provisions, including reciprocal indemnification and
contribution provisions with respect to information furnished or provided by the
Company or IP for inclusion in any such registration statement. Under the terms
of the Stock Purchase Agreement, the Amended Registration Rights Agreement will
be executed by the Company and IP at the Closing, at which point it will amend
and supersede in its entirety the Registration Rights Agreement.

DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS

Transfer Restrictions

On April 11, 1997, the Company, with Board of Director and stockholder
approval, adopted provisions (the "Transfer Restrictions") in its Certificate of
Incorporation that were designed to restrict, for a period of three years,
direct and indirect transfers of the Company's equity securities that could
result in the imposition of limitations on the use by the Company, for federal
income tax purposes, of NOLs and other tax attributes that were and will be
available to the Company. In general, NOLs can benefit the Company by offsetting
taxable income dollar-for-dollar by the amount of the NOLs, thereby eliminating
(subject to a relatively minor alternative minimum tax) the federal corporate
tax on such income. The Transfer Restrictions prohibit 4.9% or greater
stockholders from accumulating additional shares of Common Stock (or securities
exercisable into Common Stock) without prior approval from the Board of
Directors. The Board of Directors has waived the Transfer Restrictions for
purposes of approving the Equity Financings.

The Board of Directors has also approved the removal of the Transfer
Restrictions from the Company's Certificate of Incorporation and anticipates
receiving stockholder approval for their removal at the Company's upcoming
annual meeting of stockholders. Assuming stockholder approval is obtained, the
removal of the Transfer Restrictions will be effective upon consummation of the
Acquisition. If the Acquisition is not consummated, the Transfer Restrictions
will remain in the Certificate of Incorporation.

Because some corporate takeovers occur through an acquiror's purchase (in
the public market or otherwise) of sufficient stock to give it control of a
company, any provision that restricts the transferability of shares can have the
effect of preventing such a takeover. The Transfer Restrictions therefore may be
deemed to have an "antitakeover" effect because they restrict, up to April 2000,
the ability of a person or entity or group thereof from accumulating an
aggregate of 4.90% or more of the Common Stock or Voting Notes and the ability
of persons, entities or groups now owning 4.90% or more of the Common Stock or
Voting Notes from acquiring additional securities. Further, the Transfer
Restrictions discourage or prohibit accumulations of substantial blocks of
shares for which stockholders might receive a premium above market value.

Section 203 of the Delaware General Corporation Law

The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law, an anti-takeover law. In general, the statute prohibits
a publicly held Delaware corporation from engaging in a business combination
with an "interested stockholder" for a period of three years after the date of
the transaction in which the person became an interested stockholder, unless the
business combination is approved by the Board of Directors and the holders of at
least 66 2/3% of the outstanding voting stock of the corporation (excluding
shares held by the interested stockholder). A "business combination" includes a
merger, asset sale, or other transaction resulting in financial benefit to the
interested stockholder. An "interested stockholder" is a person who, together
with affiliates and associates, owns (or within the three prior years, did own)
15% or more of the corporation's voting stock. This statutory prohibition does
not apply if, upon consummation of the transaction in which any person becomes
an interested stockholder, the interested stockholder owns at least 85% of the
outstanding voting stock of the corporation (excluding shares held by persons
who are both directors and officers or by certain stock option plans).

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RIGHTS

In connection with the Stock Offering, the Company is issuing Rights,
consisting of the right to subscribe for and purchase an aggregate of 6,544,043
shares of Common Stock at a Subscription Price of $16.75 per share. See "The
Stock Offering."

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the Common Stock is U.S. Stock
Transfer Corporation. The Subscription Agent for the Rights is Wilmington Trust
Company. The Information Agent for Rights is Corporate Investor Communications,
Inc.

LISTING

The Common Stock is listed for trading under the symbol "SNTL" on Nasdaq.
The Rights will be listed for trading under the symbol "SNTLR" on Nasdaq.

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SHARES ELIGIBLE FOR FUTURE SALE

As of October 30, 1998, the Company had outstanding shares of
Common Stock. Upon completion of the Equity Financings, assuming full exercise
of Rights and/or warrant holder preemptive rights, the Company will have
outstanding approximately shares of Common Stock, assuming no
exercise of outstanding options or warrants. Of these shares, approximately
shares of Common Stock will be tradeable without restriction or
further registration under the Securities Act, except for any shares purchased
by "affiliates" (as defined in Rule 144) of the Company, the resale of which
shall be subject to the volume limitations of Rule 144 promulgated under the
Securities Act ("Rule 144"). Shares to be issued in the Employee Participation,
due to certain contractual restrictions, will be non-transferable for a period
of one year.

In general, under Rule 144, as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned "restricted securities"
for at least one year, including an affiliate of the Company, would be entitled
to sell, within any three-month period, that number of shares that does not
exceed the greater of 1% of the then-outstanding shares of Common Stock and the
average weekly trading volume in the Common Stock during the four calendar weeks
immediately preceding the date on which the notice of sale is filed with the
SEC, provided certain manner of sale and notice requirements and requirements as
to the availability of current public information about the Company are
satisfied. Under Rule 144(k), a holder of "restricted securities" who is not
deemed an affiliate of the issuer and who has beneficially owned shares for at
least two years would be entitled to sell shares under Rule 144(k) without
regard to the limitations described above. As defined in Rule 144, an
"affiliate" of an issuer is a person who directly or indirectly through the use
of one or more intermediaries controls, or is controlled by, or is under common
control with, such issuer.

The shares to be issued in the Rights Offering will be registered under the
Securities Act and immediately available for sale to the public. The shares
issued through the Employee Participation will be registered under the
Securities Act and will be available for sale to the public after restrictions
on transferability applicable to them under the terms of the Employee
Participation lapse, subject to restrictions on sales of Common Stock by
affiliates of the Company. Thus, if all the issued Rights are exercised, the
6,544,043 shares issued in the Stock Offering will be eligible for sale as
stated in this paragraph.

The Company has registered approximately 1,605,350 shares of Common Stock
reserved for issuance pursuant to the 1986 Plan and the 1995 Plan, under which
options to purchase approximately shares of Common Stock have been
granted as of October 30, 1998 and shares of Restricted Stock have
been granted. Effective upon completion of the Acquisition, the Company intends,
subject to stockholder approval, to increase the total number of shares of
Common Stock reserved for issuance under the 1995 Plan to 3,000,000 shares of
Common Stock, to adopt a stock purchase plan with 500,000 shares reserved for
issuance, and to register the future issuance of all these shares on Form S-8.

In addition, there are approximately 4.6 million shares of Common Stock
issuable or outstanding that are "restricted securities" within the meaning of
Rule 144 that were sold by the Company in private transactions and may be
publicly sold only if registered under the Securities Act or sold in accordance
with an applicable exemption from registration, such as Rule 144. These shares
include an aggregate of approximately 2.2 million shares issuable upon exercise
of outstanding warrants and approximately 2.4 million shares issued privately.
All of these warrants are subject to an agreement among all warrant holders that
prohibits the exercise or transfer of any such warrants until April 2000 unless
prior approval from the Board of Directors is obtained. Assuming that the
Company's stockholders have approved a proposal to remove the Transfer
Restrictions contained in the Company's Certificate of Incorporation at the
Company's upcoming annual meeting of stockholders, it is anticipated that this
agreement will terminate upon the consummation of the Equity Financings. A
significant portion of these shares may be eligible for sale under Rule 144
immediately upon exercise, subject to the volume limitations set forth in Rule
144. Additionally, the Company has granted registration rights to each holder of
these warrants. These shares eligible for future sale also include approximately
2.4 million shares issued to IP Delaware, IP Bermuda, TJS, and certain members
of the Company's management in April 1997 under the terms of the 1996 Stock
Purchase Agreement. These shares are now eligible for sale under Rule 144,
subject to the volume limitations thereof except that the shares by IP Delaware
and IP Bermuda are subject to certain restrictions on transfer. See "Certain
Relationships and

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Related Transactions -- 1996-97 Transactions with IP and Limitations on Related
Party Control." Additionally, the Company has granted registration rights to IP
Delaware and IP Bermuda with respect to the shares they acquired under the 1996
Stock Purchase Agreement. See "Description of Superior National Capital
Stock -- Registration Rights."

The 5,611,940 shares to be purchased by IP in the IP Stock Issuance, and
any shares purchased by warrant holders exercising preemptive rights they have
in connection with the IP Stock Issuance, will be issued in a private
transaction and thus will be restricted from resale upon issuance. Under Rule
144, these shares will be eligible for sale beginning one year after their
issuance, subject to the volume limitations set forth in Rule 144. Any shares
purchased (i) by warrant holders exercising their preemptive rights to purchase
Common Stock under the terms of the IP Stock Issuance, or (ii) under the Standby
Commitment will be subject to identical treatment. In addition, the Company has
agreed to provide IP additional registration rights in consideration of the
transactions contemplated by the IP Stock Issuance. See "Description of Superior
National Capital Stock -- Registration Rights."

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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS

GENERAL

The following is a general discussion of certain U.S. federal income tax
considerations applicable upon the issuance, exercise, disposition and lapse of
Rights issued to the existing stockholders (other than holders of shares of
Restricted Stock) (the "Existing Stockholders") and warrant holders pursuant to
the Rights Offering and to the employees and consultants of the Company pursuant
to the Employee Participation. This summary is based upon current provisions of
the Code, regulations of the Treasury Department, administrative rulings and
pronouncements of the Service, and judicial decisions currently in effect, all
of which are subject to change, possibly with retroactive effect. This
discussion does not deal with all aspects of federal income taxation that may be
relevant to particular holders of Common Stock, warrants and/or options in light
of their personal investment circumstances (for example, to persons holding
interests in the Company as part of a conversion transaction or as part of a
hedge or hedging transaction, or as a position in a straddle for tax purposes),
nor does it discuss federal income tax considerations applicable to certain
holders of interests in the Company subject to special treatment under the
federal income tax laws (for example, insurance companies, tax-exempt
organizations, financial institutions or broker-dealers, taxpayers subject to
the alternative minimum tax, or non-United States persons).

Except as provided below with respect to Rights issued in connection with
the Employee Participation, this discussion is limited to the Existing
Stockholders and the warrant holders who will both hold their respective
interests in the Company as capital assets and will hold any Common Stock
received upon exercise of the Rights as capital assets (persons who may not be
holding their interests in the Company as capital assets might include, for
example, securities dealers or traders who do not hold their interests primarily
for investment or who treat their interests as inventory for federal income tax
purposes). In addition, this discussion does not consider the effect of any
foreign, state, local, gift or estate or other tax laws that may be applicable
to a particular investor. No ruling has been or will be sought from the Service
concerning the tax issues addressed herein, and such issues may be subject to
substantial uncertainty resulting from the lack of definitive judicial or
administrative authority and interpretations applicable thereto. THEREFORE, ALL
HOLDERS OF COMMON STOCK, WARRANTS AND OPTIONS ARE URGED TO CONSULT WITH THEIR
TAX ADVISORS REGARDING THE SPECIFIC TAX CONSEQUENCES TO THEM OF THE RIGHTS
OFFERING AND EMPLOYEE PARTICIPATION, AS APPLICABLE, INCLUDING THE EFFECTS OF
FEDERAL, STATE, LOCAL, FOREIGN, AND OTHER TAX LAWS.

TAX CONSEQUENCES TO HOLDERS OF COMMON STOCK

Issuance of Rights. Existing law is not clear as to whether the
distribution of Rights to the Existing Stockholders would be characterized as a
distribution under Section 305(a) of the Code or, alternatively, as a
distribution under Sections 301 and 305(b) of the Code. The Company believes
that it is most likely that the Rights Offering to Existing Stockholders will be
properly characterized as a Section 305(a) distribution. Assuming that the
Rights Offering to Existing Stockholders is properly characterized as a Section
305(a) distribution, the distribution of Rights to holders of Common Stock would
be nontaxable without regard to the Company's earnings and profits. If the
distribution of Rights to Existing Stockholders were treated as a Section 301
distribution, and provided the Company has current or accumulated earnings and
profits, the fair market value of the Rights distributed would be treated as
dividends (taxable as ordinary income) to the extent of such earnings and
profits. To the extent that the amount of the distribution exceeded the earnings
and profits of the Company, it would be treated first as a tax-free return of
capital to the extent of the holder's tax basis in the underlying Common Stock,
and thereafter as capital gain.

Basis and Holding Period. If, as is most likely, the Rights Offering to
Existing Stockholders is properly characterized as a nontaxable Section 305(a)
distribution and either (i) the fair market value of the Rights on the date of
distribution is equal to 15% or more of the fair market value on the date of
issuance of the Common Stock with respect to which they are received or (ii) the
stockholder elects, in his or her federal income tax return of the taxable year
in which the Rights are received, to allocate part of the tax basis of the
Common Stock to the Rights, then upon exercise or transfer of the Rights, the
stockholder's tax basis in the Common Stock will be allocated between the Common
Stock and the Rights in proportion to the fair market values of each on the date
of the issuance of the Rights. Otherwise, as a nontaxable Section 305(a)

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distribution, the tax basis of Rights received by a stockholder as a
distribution with respect to the stockholder's Common Stock will be zero. If,
however, the distribution of Rights to the Existing Stockholders were treated as
a taxable Section 301 distribution, each Existing Stockholder would have a tax
basis in the Rights that such stockholder received equal to the fair market
value of the Rights on the date of distribution of the Rights and the holder's
tax basis in his or her Common Stock would be reduced by the nontaxable portion
of the distribution, if any (as discussed above).

If, as is most likely, the Rights Offering to the Existing Stockholders is
treated as a nontaxable Section 305(a) distribution, the holding period of an
Existing Stockholder with respect to Rights received as a distribution on the
stockholder's Common Stock will include the stockholder's holding period for the
Common Stock with respect to which the Rights were issued. If, however, the
Rights Offering to the Existing Stockholders were treated as a taxable Section
301 distribution, the Existing Stockholders would have a holding period that
begins on the day following the date of distribution of the Rights.

Transfer of Rights. An Existing Stockholder who sells Rights received in
the Rights Offering rather than exercising them will recognize capital gain or
loss equal to the difference between the sale proceeds and the stockholder's tax
basis, if any, in the Rights sold.

Lapse of Rights. If, as is most likely, the Rights Offering to the Existing
Stockholders is treated as a nontaxable Section 305(a) distribution, an Existing
Stockholder who allows Rights received by him or her to lapse without exercising
or selling them will not recognize any gain or loss, and, as the Rights were
neither exercised nor sold, no adjustment will be made to the tax basis of the
Common Stock, if any, owned by the stockholder. If, however, the Rights Offering
to the Existing Stockholders were treated as a taxable Section 301 distribution,
an Existing Stockholder who allows the Rights to lapse would have a capital loss
in an amount equal to his or her tax basis in the Rights (as discussed above),
and no adjustment would be made to the tax basis of the Common Stock, if any,
owned by the stockholder.

Exercise of Rights; Basis and Holding Period of Common Stock. An Existing
Stockholder will not recognize any gain or loss upon the exercise of Rights. The
tax basis of the Common Stock acquired through exercise of Rights will be equal
to the sum of the Subscription Price therefor and the holder's tax basis in the
Rights, if any. The holding period for the Common Stock acquired through
exercise of the Rights will begin on the day following the date the Rights are
considered exercised.

TAX CONSEQUENCES TO HOLDERS OF WARRANTS

Exercise of Preemptive Rights. All warrant holders have preemptive rights
pursuant to the terms of their warrants. See "The Stock Offering -- Preemptive
Rights of Warrant Holders." The Company has the obligation to offer the warrant
holders the opportunity to exercise their preemptive rights in connection with
the Equity Financings. Pursuant to such preemptive rights, the warrant holders
will have the right to subscribe for Common Stock at the price of $16.75 per
share or the right to be issued Rights in the Rights Offering. Although not free
from doubt due to the lack of directly applicable authority, the Company
believes that the triggering and/or exercise of preemptive rights of warrant
holders who do not elect to receive Rights most likely will be treated as a
nontaxable purchase of Common Stock pursuant to a previously bargained for
contractual right. If the triggering and/or exercise of preemptive rights is not
treated as a nontaxable purchase of Common Stock, the transaction could be
treated as a taxable distribution of the right to acquire Common Stock.
Therefore, all warrant holders who exercise their preemptive rights should
consult and rely upon their own tax advisors as to the specific tax consequences
to them relating to the triggering and/or exercise of their preemptive rights.

Issuance of Rights. The Company believes the distribution of Rights to
warrant holders pursuant to the Rights Offering most likely would be
characterized as a taxable distribution of the right to acquire Common Stock and
not as a nontaxable distribution under Section 305(a) of the Code nor as a
distribution under Sections 301 and 305(b) of the Code. Therefore, the holders
of warrants would recognize taxable income for federal income tax purposes in
connection with the receipt of Rights in an amount equal to the then-fair market
value of the Rights received on the date of their distribution.

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Basis and Holding Period. The tax basis of Rights received by a warrant
holder as a distribution in respect of the holder's warrants will equal the
Rights' fair market value when issued and his or her holding period will
commence on the day following the date of distribution of the Rights.

Transfer of Rights. A warrant holder who sells Rights received in the
Rights Offering rather than exercising them will recognize capital gain or loss
in an amount equal to the difference between the sale proceeds and the holder's
basis in the Rights sold.

Lapse of Rights. Warrant holders who allow Rights received by them pursuant
to the Rights Offering to lapse will recognize capital loss in an amount equal
to the holder's tax basis.

Exercise of Rights; Basis and Holding Period of Common Stock. Warrant
holders will not recognize any gain or loss upon the exercise of Rights. The tax
basis of the Common Stock acquired through exercise of the Rights will be equal
to the sum of the Subscription Price therefor and the holder's tax basis in the
Rights. The holding period for the Common Stock acquired through exercise of the
Rights will begin on the day following the date the Rights are considered
exercised.

TAX CONSEQUENCES TO HOLDERS OF RIGHTS RECEIVED IN CONNECTION WITH EMPLOYEE
PARTICIPATION

Issuance of Rights. The Company will grant an opportunity to participate in
the Employee Participation only to employees and consultants holding vested and
unvested stock options issued pursuant to the Company's current equity incentive
plans or holding shares of Restricted Stock (collectively, the "Equity Plan
Participants"). Therefore, the Company believes that Rights issued pursuant to
the Employee Participation should be treated as issued in connection with the
performance of services for federal income tax purposes and, thus, the federal
income tax treatment resulting from the issuance of Rights to Equity Plan
Participants pursuant to the Employee Participation should be governed by
Section 83 of the Code. Accordingly, no gain or loss will be recognized by the
Equity Plan Participants receiving Rights pursuant to the Employee Participation
provided that the Rights do not have a readily ascertainable fair market value
within the meaning of Treasury Regulation Section 1.83-7(b) when issued. The
Company believes that Rights issued pursuant to the Employee Participation
should not be treated as having a readily ascertainable fair market value at the
time of grant because the Rights issued pursuant to the Employee Participation
are non-transferable and, thus, will not be actively traded on an established
market and the fair market value of the rights otherwise cannot be measured with
reasonable accuracy, as required under the Treasury Regulations.

Lapse of Rights. Equity Plan Participants who allow Rights received by them
pursuant to the Employee Participation to lapse will not recognize any gain or
loss, and no adjustment will be made to the basis, if any, of any other
ownership interest in the Company owned by the holders of the Rights.

Exercise of Rights; Basis and Holding Period of Common Stock. If an Equity
Plan Participant exercises Rights received pursuant to the Employee
Participation, with respect to the Common Stock so purchased, the holder will
recognize taxable income at the time the Common Stock is purchased in an amount
equal to the amount, if any, that the fair market value of the Common Stock
determined at the time of exercise exceeded the Subscription Price. Any income
so recognized would be taxed at ordinary income rates and any gain or loss
recognized on the subsequent disposition of the Common Stock so acquired would
be treated as a capital gain or loss.

Under these circumstances, the tax basis of the Common Stock acquired
through the exercise of Rights will be equal to the fair market value of the
Common Stock on the date of exercise and the holding period for the Common Stock
acquired through the exercise of the Rights generally begins on the day
following exercise.

EQUITY PLAN PARTICIPANTS SHOULD CONSULT WITH THEIR OWN TAX ADVISORS
REGARDING THE SPECIFIC CONSEQUENCES TO THEM UPON THE EXERCISE OF RIGHTS.

146
<PAGE> 149

LEGAL MATTERS

The validity of the Rights and the Common Stock offered hereby will be
passed upon for the Company by Riordan & McKinzie, a Professional Corporation,
Los Angeles, California. A principal of Riordan & McKinzie is the beneficial
owner of 3,000 shares of Common Stock of the Company. In addition, principals of
Riordan & McKinzie have made commitments to an investment fund that will, among
other investments, make a commitment of capital to IP II. It is anticipated that
as a result of IP II's investment in the Company the aggregate market value of
the indirect interests of the firm's principals in the Common Stock will exceed
$50,000.

EXPERTS

The financial statements of Superior National Insurance Group, Inc. as of
December 31, 1997 and 1996, and for each of the years in the three-year period
ended December 31, 1997, and the financial statements of Pac Rim Holding
Corporation as of December 31, 1996 and 1995, and for each of the years in the
three-year period ended December 31, 1996, have been included herein and
elsewhere in this Prospectus and the Registration Statement in reliance upon the
reports of KPMG Peat Marwick LLP, independent certified public accountants,
appearing elsewhere herein and upon the authority of such firm as experts in
accounting and auditing. The report on the financial statements of Superior
National Insurance Group, Inc. dated March 27, 1998, except as to note 19 which
is as of October 12, 1998, refers to certain reclassifications made to the
consolidated financial statements that resulted in restatements of amounts that
were previously reported. The report on the financial statements of Pac Rim
Holding Corporation dated August 28, 1997, contains an explanatory paragraph
which states that the consolidated financial statements as of and for the year
ended December 31, 1996 have been restated.

The combined financial statements of the insurance operations of BIG as of
December 31, 1997 and 1996 and for each of the three years in the period ended
December 31, 1997, included in this Prospectus and Registration Statement have
been audited by Deloitte & Touche LLP, independent auditors, as stated in their
reports appearing herein and elsewhere in the Registration Statement, and have
been so included in reliance upon the reports of such firm given upon their
authority as experts in accounting and auditing.

147
<PAGE> 150

INDEX TO FINANCIAL STATEMENTS

SUPERIOR NATIONAL INSURANCE GROUP, INC.

<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF SUPERIOR
NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES........... F-1
INDEPENDENT AUDITORS' REPORT................................ F-3
AUDITED CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of December 31, 1997 and
1996................................................... F-4
Consolidated Statements of Operations for the years ended
December 31, 1997 (restated), 1996 and 1995............ F-5
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1997, 1996 and 1995... F-6
Consolidated Statements of Cash Flows as restated for the
years ended December 31, 1997, 1996 and 1995........... F-7
Notes to Consolidated Financial Statements................ F-8
FINANCIAL STATEMENTS SCHEDULES:
Schedule I: Condensed Financial Information of the
Registrant, Superior National Insurance
Group, Inc................................... F-33
Schedule II: Valuation and Qualifying Accounts and
Reserves.................................... F-38
Schedule V: Supplemental Insurance Information,
Reinsurance and Supplemental Property and
Casualty Insurance Information............... F-39
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
Condensed Consolidated Balance Sheets as of June 30, 1998
(unaudited) and December 31, 1997...................... F-42
Condensed Consolidated Statements of Income for the three
and six months ended June 30, 1998 (unaudited) and June
30, 1997 (restated) (unaudited)........................ F-43
Condensed Consolidated Statement of Changes in
Stockholders' Equity for the six months ended June 30,
1998 (unaudited) and year ended December 31, 1997
(unaudited)............................................ F-44
Condensed Consolidated Statements of Cash Flows as
restated for the six months ended June 30, 1998
(unaudited) and June 30, 1997 (unaudited).............. F-45
Notes to Condensed Consolidated Financial Statements
(unaudited)............................................ F-46

THE INSURANCE OPERATIONS OF BUSINESS INSURANCE GROUP, INC

INDEX TO COMBINED FINANCIAL STATEMENTS OF THE INSURANCE
OPERATIONS OF BUSINESS INSURANCE GROUP, INC............... F-52
INDEPENDENT AUDITORS' REPORT................................ F-53
COMBINED FINANCIAL STATEMENTS:
Combined Balance Sheets as of December 31, 1997 and
1996................................................... F-54
Combined Statements of Operations and Comprehensive Income
for the years ended December 31, 1997, 1996 and 1995 as
restated............................................... F-55
Combined Statements of Stockholder's Equity for the years
ended December 31, 1997, 1996 and 1995 as restated..... F-56
Combined Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995 as restated........... F-57
Notes to Combined Financial Statements.................... F-58
UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS:
Condensed Combined Balance Sheets as of June 30, 1998
(unaudited) and December 31,
1997................................................... F-73
Condensed Combined Statements of Operations and
Comprehensive Income for the three months and six
months ended June 30, 1998 and 1997 (unaudited)........ F-74
Condensed Combined Statement of Changes in Stockholder's
Equity for the six months ended June 30, 1998
(unaudited) and twelve months ended December 31,
1997................................................... F-75
</TABLE>

F-1
<PAGE> 151

<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Condensed Combined Statements of Cash Flows for the six
months ended June 30, 1998 and 1997 (unaudited)........ F-76
Notes to Condensed Combined Financial Statements.......... F-77

PAC RIM HOLDING CORPORATION

CONSOLIDATED FINANCIAL STATEMENTS:
INDEPENDENT AUDITORS' REPORT................................ F-78
Consolidated Balance Sheets as of December 31, 1996
(restated) and 1995.................................... F-79
Consolidated Statements of Operations for the years ended
December 31, 1996 (restated), 1995, and 1994........... F-80
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1996 (restated), 1995, and
1994................................................... F-81
Consolidated Statements of Cash Flows for the years ended
December 31, 1996 (restated), 1995, and 1994........... F-82
Notes to Consolidated Financial Statements................ F-83
Consolidated Balance Sheets as of March 31, 1997
(unaudited) and December 31, 1996 (restated)........... F-97
Consolidated Statements of Operations for the three months
ended March 31, 1997 (unaudited) and March 31, 1996
(unaudited)............................................ F-98
Consolidated Statements of Cash Flows for the three months
ended March 31, 1997 (unaudited) and March 31, 1996
(unaudited)............................................ F-99
Notes to Unaudited Consolidated Financial Statements...... F-100
</TABLE>

F-2
<PAGE> 152

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 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, 1997 and
1996, and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1997, in conformity with
generally accepted accounting principles. Also, in our opinion, the 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.

As discussed in note 19 to the consolidated financial statements, certain
reclassifications were made to the accompanying consolidated financial
statements that resulted in restatements to amounts previously reported.

KPMG PEAT MARWICK LLP

Los Angeles, California
March 27, 1998, except as to
note 19 which is as
of October 12, 1998

F-3
<PAGE> 153

SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996

<TABLE>
<CAPTION>
1997 1996
--------- ---------
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C>
ASSETS
Investments:
Bonds and Notes
Available-for-sale, at market (cost: 1997, $203,373;
1996, $46,549)......................................... $205,214 $ 46,330
Equity securities, at market
Common stock (cost: 1997, $1,356; 1996, $1,199)......... 1,526 1,173
Short-term investments, at cost........................... 6,634 67,514
-------- --------
TOTAL INVESTMENTS.................................. 213,374 115,017
Cash and cash equivalents (restricted cash: 1997, $651;
1996, $1,747)............................................. 28,742 34,423
Reinsurance recoverable:
Paid and unpaid claims and claim adjustment expenses...... 53,082 25,274
Premiums receivable (less allowance for doubtful accounts
of $800 in 1997 and $300 in 1996)....................... 24,364 9,390
Earned but unbilled premiums receivable................... 12,524 5,251
Accrued investment income................................. 2,661 1,035
Deferred policy acquisition costs......................... 5,879 3,042
Deferred income taxes..................................... 25,104 9,520
Funds held by reinsurer................................... 5,152 1,948
Receivable from a related party reinsurer................. -- 110,527
Prepaid reinsurance premiums.............................. 1,598 1,039
Goodwill.................................................. 35,887 --
Prepaid and other......................................... 21,106 7,364
-------- --------
TOTAL ASSETS....................................... $429,473 $323,830
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Claims and claim adjustment expenses...................... $201,255 $115,529
Unearned premiums......................................... 12,913 9,702
Reinsurance payable....................................... 3,412 874
Long-term debt............................................ 30 98,961
Policyholder dividends.................................... 1,370 --
Capital lease obligation.................................. 7,626 --
Discontinued operations liability......................... 12,904 17,261
Accounts payable and other liabilities.................... 28,868 12,741
-------- --------
TOTAL LIABILITIES.................................. 268,378 255,068
1994 PREFERRED SECURITIES ISSUED BY AFFILIATE; authorized
1,100,000 shares; issued and outstanding 1,013,753 shares
in 1996................................................... -- 23,571
COMPANY-OBLIGATED TRUST PREFERRED SECURITIES OF SUBSIDIARY
TRUST HOLDING SOLELY SENIOR SUBORDINATED NOTES OF SNIG;
$1,000 face per share; issued and outstanding 105,000
shares in 1997............................................ 101,277 --

STOCKHOLDERS' EQUITY
Common stock, $0.01 par value; authorized 25,000,000 shares;
issued and outstanding 5,871,279 shares in 1997 and
3,446,492 shares in 1996.................................. 59 34
Paid-in capital excess of par............................... 34,242 15,988
Unrealized (loss) gain on investments, net of taxes......... 1,327 (162)
Paid-in capital -- warrants................................. 2,206 2,206
Retained earnings........................................... 21,984 27,125
-------- --------
NET STOCKHOLDERS' EQUITY........................... 59,818 45,191
-------- --------
TOTAL LIABILITIES, PREFERRED SECURITIES AND NET
STOCKHOLDERS' EQUITY.............................. $429,473 $323,830
======== ========
</TABLE>

See accompanying notes to consolidated financial statements.
F-4
<PAGE> 154

SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
(RESTATED)

<CAPTION>
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C> <C>
REVENUES:
Premiums written, net of reinsurance ceded................ $136,929 $87,715 $89,139
Net change in unearned premiums........................... 3,991 933 596
-------- ------- -------
Net premiums earned....................................... 140,920 88,648 89,735
Net investment income..................................... 12,674 7,769 9,784
-------- ------- -------
TOTAL REVENUES...................................... 153,594 96,417 99,519
-------- ------- -------
EXPENSES:
Claims and claim adjustment, net of reinsurance recoveries
of $32,383, $6,064 and $2,418 in 1997, 1996 and 1995
respectively............................................ 90,447 55,638 53,970
Commissions, net of reinsurance ceding commissions of
$4,868, $2,030 and $1,350 in 1997, 1996 and 1995
respectively............................................ 13,838 10,426 11,881
Policyholder dividends.................................... -- (5,927) (5,742)
Interest.................................................. 6,335 7,527 9,619
General and administrative
Underwriting............................................ 23,857 23,712 17,566
Loss on termination of financing transaction with a
related party reinsurer................................ 15,699 -- --
Other................................................... 817 (186) 536
Goodwill................................................ 1,039 -- --
-------- ------- -------
TOTAL EXPENSES...................................... 152,032 91,190 87,830
-------- ------- -------
Income before income taxes, preferred securities dividends
and accretion, discontinued operations, and extraordinary
items..................................................... 1,562 5,227 11,689
Income tax expense (benefit)................................ 1,099 1,597 (12)
-------- ------- -------
Income before preferred securities dividends and accretion,
discontinued operations and extraordinary items........... 463 3,630 11,701
Preferred Securities dividends and accretion, net of income
tax benefit of $1,260, $858 and $767 in 1997, 1996 and
1995 respectively......................................... (2,445) (1,667) (1,488)
Trust Preferred Securities dividends and accretion, net of
income tax benefit of $321 in 1997........................ (624) -- --
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 $762................................ (1,480) -- --
Extraordinary loss on redemption of Pac Rim's outstanding
debentures, net of income tax benefit of $327............. (635) -- --
Extraordinary loss on retirement of preferred securities,
net of income tax benefit of $134......................... (259) -- --
Extraordinary loss on early retirement of Imperial Bank loan
net of income tax benefit of $83.......................... (161) -- --
-------- ------- -------
NET (LOSS) INCOME................................... $ (5,141) $ 1,963 $ 371
======== ======= =======
BASIC EARNINGS PER SHARE:
Income before preferred securities dividends and
accretion, and extraordinary items...................... $ 0.09 $ 1.06 $ 3.41
Preferred securities dividends and accretion.............. (0.58) (0.49) (0.43)
Discontinued operations................................... -- -- (2.87)
Extraordinary items....................................... (0.49) -- --
-------- ------- -------
NET (LOSS) INCOME................................... $ (0.98) $ 0.57 $ 0.11
======== ======= =======
DILUTED EARNINGS PER SHARE:
Income before preferred securities dividends and
accretion, and extraordinary items...................... $ 0.07 $ 0.75 $ 2.97
Preferred securities dividends and accretion.............. (0.44) (0.34) (0.38)
Discontinued operations................................... -- -- (2.50)
Extraordinary items....................................... (0.37) -- --
-------- ------- -------
NET INCOME.......................................... $ (0.74) $ 0.41 $ 0.09
======== ======= =======
</TABLE>

See accompanying notes to consolidated financial statements.
F-5
<PAGE> 155

SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

<TABLE>
<CAPTION>
NET
UNREALIZED UNREALIZED
COMMON STOCK GAIN GAIN (LOSS)
-------------------- (LOSS) ON AVAILABLE- PAID IN TOTAL
SHARES $.01 PAR ON EQUITY FOR-SALE CAPITAL -- RETAINED STOCKHOLDERS'
ISSUED VALUE SECURITIES INVESTMENTS WARRANTS EARNINGS EQUITY
--------- -------- ---------- ------------- ---------- -------- -------------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
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 a stock
option plan.............. 3,100 12 -- -- -- -- 12
Common stock issued under a
stock incentive plan..... 13,019 67 -- -- -- -- 67
--------- ------- ---- ------- ------ ------- -------
Balance at December 31,
1996..................... 3,446,492 16,022 (17) (145) 2,206 27,125 45,191
--------- ------- ---- ------- ------ ------- -------

Net Loss................... -- -- -- -- -- (5,141) (5,141)
Unrealized gain on equity
securities............... -- -- 129 -- -- -- 129
Change in unrealized gain
on available-for-sale
investments, net of
taxes.................... -- -- -- 1,360 -- -- 1,360
Common stock issued........ 2,390,438 18,000 -- -- -- -- 18,000
Stock issued under a stock
option plan.............. 22,127 105 -- -- -- -- 105
Common stock issued under a
stock incentive plan..... 12,222 174 -- -- -- -- 174
--------- ------- ---- ------- ------ ------- -------
Balance at December 31,
1997..................... 5,871,279 $34,301 $112 $ 1,215 $2,206 $21,984 $59,818
========= ======= ==== ======= ====== ======= =======
</TABLE>

See accompanying notes to consolidated financial statements.
F-6
<PAGE> 156

SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS AS RESTATED
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- ---------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income......................................... $ (5,141) $ 1,963 $ 371
-------- -------- ---------
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Amortization of bonds and preferred stock............... (1,073) (1,581) (3,575)
Amortization of long-term debt.......................... 68 -- --
Loss/(gain) on sale of investments...................... 98 (31) 525
Gain on sale of Centre Re investments................... -- (2,036) (4,891)
Amortization of goodwill................................ 1,039 -- --
Loss on termination of financing transaction with a
related party reinsurer................................ 15,699 -- --
Extraordinary loss...................................... 2,535 -- --
Interest expense on long-term debt...................... 3,581 -- --
Preferred securities dividends and accretion............ 3,069 2,526 2,255
(Increase) decrease in reinsurance balances
receivable............................................. (23,789) 14,339 28,516
Decrease (increase) in investments withheld from a
related party reinsurer................................ -- 117,980 (13,339)
(Increase) decrease in premiums receivable.............. (1,848) 2,184 6,901
(Increase) decrease in earned but unbilled premiums
receivable............................................. (3,131) (2,101) 3,336
(Increase) decrease in accrued investment income........ (986) 792 (491)
(Increase) decrease in deferred policy acquisition
costs.................................................. (2,837) (262) 125
Decrease in income taxes receivable..................... -- -- 1,721
Decrease (increase) in deferred taxes................... 1,095 735 (5,853)
Increase in funds held by reinsurer..................... (3,204) (976) (972)
Increase in receivable from a related party reinsurer... -- (110,527) --
Increase in prepaid reinsurance premiums................ (2,406) (287) (88)
Decrease (increase) in other assets..................... 1,637 (1,287) (1,413)
Decrease in claims and claim adjustment expense
reserves............................................... (24,523) (25,966) (29,763)
Decrease in unearned premium reserves................... (3,648) (645) (508)
Increase (decrease) in reinsurance payable.............. 2,538 504 (2,835)
Decrease in policyholder dividends payable.............. -- (8,094) (10,970)
Decrease in discontinued operations..................... -- -- (4,223)
(Decrease) increase in accounts payable and other
liabilities............................................ (11,143) 5,321 (1,994)
-------- -------- ---------
Total adjustments....................................... (47,229) (9,412) (37,536)
-------- -------- ---------
Net cash (used in) provided by operating
activities.......................................... (52,370) (7,449) (37,165)
-------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Paid-in-capital -- stock options taken.................. 279 79 2
Proceeds from issuance of common stock.................. 18,000 -- --
Proceeds from Trust Preferred Securities net of $3.7
million issuance....................................... 101,272 -- --
Long-term debt -- Chase Manhattan Bank.................. 41,257 -- --
Retirement of long-term debt -- Chase Manhattan Bank.... (44,000) -- --
Retirement of 1994 Preferred Securities................. (27,668) -- --
Retirement of long-term debt............................ (7,250) (1,250) (1,200)
Prepayment penalty on long-term debt.................... (244) -- --
Retirement of long-term debt -- Chase financing......... -- (1,410) --
Proceeds from Chase Financing........................... -- 93,091 --
-------- -------- ---------
Net cash provided by (used in) financing
activities.......................................... 81,646 90,510 (1,198)
-------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of bonds and notes:
Investments available-for-sale.......................... (226,749) (43,257) (4,611)
Purchases of common stock................................. (1,496) (513) (680)
Purchase of Pacific Rim Holding Company................... (44,016) -- --
Investments and cash for discontinued operations.......... (4,357) 17,261 (1,581)
Sales of bonds and notes: Investments
available-for-sale...................................... 109,082 25,343 17,643
Maturities of bonds and notes:
Investments held-to-maturity............................ -- -- 2,250
Investments available-for-sale.......................... 15,042 12,771 3,035
Sales of equity securities................................ 1,197 -- --
Net decrease in short-term investment..................... 116,340 (66,431) 25,962
-------- -------- ---------
Net cash (used in) provided by investing activities....... (34,957) (54,826) 42,018
-------- -------- ---------
Net (decrease) increase in cash........................... (5,681) 28,235 3,655
Cash and cash equivalents at beginning of period.......... 34,423 6,188 2,533
-------- -------- ---------
Cash and cash equivalents at end of period................ $ 28,742 $ 34,423 $ 6,188
======== ======== =========
Supplemental disclosure of cash flow information:
Cash paid during the year for income taxes.............. $ 4 $ 4 $ 4
======== ======== =========
Cash paid during the year for interest.................. $ 2,803 $ 641 $ 808
======== ======== =========
</TABLE>

See accompanying notes to consolidated financial statements.
F-7
<PAGE> 157

SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements include the accounts of Superior
National Insurance Group, Inc. ("SNIG") and all subsidiaries (together with
SNIG, the "Company"). The Company's principal insurance subsidiaries
(collectively referred to as "Superior Pacific"), Superior National Insurance
Company ("SNIC") and Superior Pacific Casualty Company ("SPCC"), are licensed to
write workers' compensation insurance and commercial property and casualty
insurance in 20 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
1997, 1996, and 1995 reflect workers' compensation premiums 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 1997 presentation.

Acquisition

On April 11, 1997, the Company acquired all of the outstanding stock of Pac
Rim Holding Corporation ("Pac Rim") for aggregate consideration of $42.0 million
in cash. This consideration resulted in payments of $20.0 million to Pac Rim
stockholders, $20.0 million to Pac Rim's convertible debenture holders, and $2.0
million to Pac Rim's warrant and option holders. In addition, the Company
incurred $2.0 million in transaction fees and related expenses. The Company
financed the acquisition of Pac Rim through a $44.0 million term loan and the
sale of $18 million of newly issued shares of common stock. The term loan was
subsequently retired from funds raised from the sale of $105 million of 10.75%
Trust Preferred Securities. As a result of the term loan's being retired, the
Company recorded an extraordinary loss, net of federal income taxes, of $1.5
million.

The transaction resulted in $36.9 million in goodwill that is being
amortized on a straight line basis over 27.5 years. The transaction was
accounted for using the purchase method and the results of operations since the
date of the acquisition have been included in operations. The transaction's
designated accounting effective date is April 1, 1997.

The balance sheet of Pac Rim at the acquisition date included the following
assets: investments of $105,913, cash of $2,627, receivables of $17,268, and
other assets of $22,272. Liabilities assumed in the acquisition included
unearned premiums of $6,859, claims and claim adjustment expense reserves of
$107,743, and other liabilities of $32,289.

F-8
<PAGE> 158
SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The unaudited pro forma condensed consolidated results of operations
presented below assume the transaction occurred had the acquisition taken place
at the beginning of each period presented.

<TABLE>
<CAPTION>
PRO FORMA RESULTS FOR THE YEAR
ENDED DECEMBER 31,
-------------------------------
1997 1996
------------ ------------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Revenues.................................................... $174,550 $187,732
Loss before income taxes, preferred securities dividends and
accretion, and extraordinary items........................ $ (253) $(18,620)
Net (loss).................................................. $(23,280) $(23,226)
Basic earnings per share.................................... $ (4.43) $ (3.01)
Diluted earnings per share.................................. $ (3.32) $ (2.55)
</TABLE>

These unaudited pro forma results are not necessarily indicative of the
results of operations that would have occurred had the acquisition taken place
at the beginning of each period or of future operations of the combined
companies.

Reverse Stock Split

Effective May 25, 1995, shareholders of SNIG approved a four-into-one
reverse split of SNIG's common stock. The purpose of the reverse split was to
increase the per-share price of the SNIG 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 Cash Equivalents and Short-term Investments

Cash includes currency on hand and demand deposits with financial
institutions. Short-term investments represents short-term, highly liquid
investments, with an original maturity date of less than a year and greater than
90 days. Short-term investments is carried at cost, which approximates market.

Investments

Investments in debt instruments consist primarily of bonds and
collateralized mortgage obligations. 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 stockholders' equity, net of
applicable income tax effect). The premiums and discounts on fixed maturities
and collateralized mortgage obligations are amortized using the interest 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 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.

F-9
<PAGE> 159
SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

Premiums Receivable

Superior Pacific records premiums receivable for both billed and unbilled
amounts. Unbilled premiums receivable, which are substantially all earned,
primarily represent Superior Pacific'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.
Superior Pacific 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, loss control, 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:

<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Balance at beginning of year....................... $ 3,042 $ 2,780 $ 2,905
Cost deferred during the year...................... 22,814 17,132 18,163
Amortization charged to expense.................... (19,977) (16,870) (18,288)
-------- -------- --------
Balance at end of year............................. $ 5,879 $ 3,042 $ 2,780
======== ======== ========
</TABLE>

Claims and Claim Adjustment Expenses

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 expenses 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. The adoption of new data processing
systems, shifts to underwriting more or less hazardous

F-10
<PAGE> 160
SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

risk classifications, the hiring of new claims personnel, changes in claims
servicing vendors and third party administrators, may all change rates of
reserve development, payments, and claims closings, increasing or decreasing
claims severity and closing rates.

Policyholder Dividends

Prior to the inception of open rating in January 1995, policyholder
dividends served both as an economic incentive to employers for safe operations
and as a means of price differentiation; however, since open rating, the
consumer's preference has been for the lowest net price at a policy's inception.
This is evidenced by the decline in participating policies written by Superior
Pacific as a percent of total policies from 24% of workers' compensation
premiums in force at December 31, 1995 to 1% at December 31, 1996. A small
increase in the percentage of participating policies to 3% at December 31, 1997
is attributable to policies written in Arizona. In 1995, as a result of the
diminishing value of policyholder dividends, Superior Pacific'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 Superior Pacific. 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 Standard 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")

In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 128, "Earnings per Share", which
requires presentation of basic and diluted earnings per share for all publicly
traded companies effective for fiscal years ending after December 15, 1997. Note
16 contains the required disclosures which make up the calculation of basic and
diluted earnings per share. The required restatement of prior years earnings per
share reflect an immaterial difference.

Property, Equipment, Leasehold Improvements and Assets Under Capital Lease

Property, equipment, and leasehold improvements are stated at cost, net of
accumulated depreciation and amortization. The accumulated depreciation and
amortization as of December 31, 1997 and 1996 was $2,207 and $4,289
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 affect the amounts of assets, liabilities, and

F-11
<PAGE> 161
SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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; earned but unbilled premiums; and deferred tax 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

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.

Business Relationships with Related Parties

In April 1997, Insurance Partners, L.P. ("IP Delaware") and Insurance
Partners (Offshore) Bermuda, L.P. ("IP Bermuda" and, together with IP Delaware,
"IP") purchased 2,124,834 shares of Common Stock at $7.53 per share, for an
aggregate purchase price of $16.0 million. As a result of this purchase, IP owns
approximately 36.2% of the outstanding Common Stock (approximately 24.8% on a
fully diluted basis). Certain affiliates of Zurich Reinsurance Centre Holdings
LLC ("Zurich") are limited partners of IP Delaware and IP Bermuda and hold
approximately 23% of the limited partnership interests in those partnerships on
an aggregate basis (representing an aggregate, indirect ownership by such
affiliates of approximately 5.7% of the Common Stock on a fully diluted basis).

In March 1992, the Company issued warrants (the "Warrants") to purchase
1,616,886 shares of Common Stock in connection with the sale of its 14.5% Senior
Subordinated promissory notes in an aggregate principal amount of $11.0 million,
which notes have since been redeemed. The Warrants are exercisable at $4.00 per
share and expire April 1, 2002. International Insurance Investors, L.P. ("III")
purchased 1,474,306 of the Warrants (which have since been distributed to III's
partners), 1,243,332 of which are subject to a revocable agency relationship
with International Insurance Advisors, Inc. ("IIA"), pursuant to which IIA
exercises the voting or consent rights of such Warrants and the underlying
shares of Common Stock. Management acquired the remaining 142,580 Warrants.
Centre Solutions (Bermuda) Limited ("Centre Solutions"), an affiliate of Zurich,
holds 395,128 of the Warrants (subject to the revocable agency relationship with
IIA), representing approximately 4.6% of the Common Stock on a fully diluted
basis. As of December 31, 1997, Warrants to purchase 1,566,465 shares of Common
Stock were outstanding, as Warrants to purchase 50,421 shares of Common Stock
held by management have since been retired upon the termination of their
employment with the Company.

In June 1994, in connection with a $20.0 million investment in the Company
(and its affiliate, Superior National Capital, L.P.) by CentreLine Reinsurance
Limited ("Centre Line"), an affiliate of Zurich, the Company issued to
CentreLine a warrant to purchase 579,356 shares of Common Stock at an exercise
price of $5.20 per share, which expires April 1, 2002. These warrants represent
approximately 6.8% of the Common Stock on a fully diluted basis.

F-12
<PAGE> 162
SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(2) INVESTMENTS

The amortized cost and market values of bonds and notes classified as
available-for-sale at December 31, 1997 are as follows:

<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Available-for-sale:
United States government agencies and
authorities........................ $ 89,884 $ 420 $(207) $ 90,097
Collateralized mortgage obligations... 72,478 1,100 (97) 73,481
Corporate instruments................. 41,011 657 (32) 41,636
State and political subdivisions...... -- -- -- --
-------- ------ ----- --------
Total available-for-sale.............. $203,373 $2,177 $(336) $205,214
======== ====== ===== ========
</TABLE>

The market values of equity securities as of December 31, 1997 are as
follows:

<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ------
<S> <C> <C> <C> <C>
Equity Securities:
Corporate Instruments................... $1,356 $171 $(1) $1,526
------ ---- --- ------
Total Equity Securities................. $1,356 $171 $(1) $1,526
====== ==== === ======
</TABLE>

The amortized cost and estimated market values of investments classified as
available for sale at December 31, 1997 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.

<TABLE>
<CAPTION>
AVAILABLE FOR SALE
---------------------
AMORTIZED FAIR
COST VALUE
--------- --------
<S> <C> <C>
Due in one year or less..................................... $ 25,044 $ 25,086
Due after one year through five years....................... 44,254 44,710
Due after five years through ten years...................... 42,101 42,776
Due after ten years......................................... 91,974 92,642
-------- --------
Total....................................................... $203,373 $205,214
======== ========
</TABLE>

F-13
<PAGE> 163
SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -------
<S> <C> <C> <C> <C>
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
======= ==== ===== =======
</TABLE>

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

<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- ------
<S> <C> <C> <C> <C>
Equity Securities:
Corporate Instruments................... $1,199 $73 $(99) $1,173
------ --- ---- ------
Total Equity Securities................. $1,199 $73 $(99) $1,173
====== === ==== ======
</TABLE>

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

<TABLE>
<CAPTION>
1997 1996 1995
------- ------ -------
<S> <C> <C> <C>
Interest on bonds and notes............................ $ 9,124 $6,628 $ 9,310
Interest on short-term investments, cash and cash
equivalents.......................................... 4,068 1,609 1,297
Realized gains (losses)................................ 44 31 (525)
Other.................................................. 190 -- --
------- ------ -------
Total investment income................................ 13,426 8,268 10,082
Investment expense..................................... (752) (499) (298)
------- ------ -------
Net investment income.................................. $12,674 $7,769 $ 9,784
======= ====== =======
</TABLE>

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

<TABLE>
<CAPTION>
1997 1996 1995
---- ---- -----
<S> <C> <C> <C>
Bonds and notes............................................. $44 $31 $(525)
Equity securities........................................... -- -- --
--- --- -----
Total....................................................... $44 $31 $(525)
=== === =====
</TABLE>

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

<TABLE>
<CAPTION>
1997 1996 1995
------ ----- ------
<S> <C> <C> <C>
Bonds and notes........................................... $2,060 $(472) $4,154
Equity securities......................................... 196 (29) 2
------ ----- ------
Total..................................................... $2,256 $(501) $4,156
====== ===== ======
</TABLE>

Proceeds from sales of bonds and notes held as available-for-sale for the
years ended December 31, 1997, 1996, and 1995 were $109,082, $25,343, and
$17,643, respectively. Gross gains of $176 and gross losses of
F-14
<PAGE> 164
SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

$132 were realized on those sales in 1997. 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.

Bonds and other securities with a market value of $180,447 at December 31,
1997, $127,112 at December 31, 1996 and $143,462 at December 31, 1995, were on
deposit with various insurance regulatory authorities.

(3) FAIR VALUE OF FINANCIAL INSTRUMENTS

The following table represents the carrying amounts and estimated fair
values of the Company's financial liabilities at December 31, 1997 and 1996.
Statement of Financial Accounting Standard No. 107, "Disclosure about Fair Value
of Financial Instruments," ("SFAS 107") defines the fair value of a financial
instrument as the amount at which the instrument could be exchanged in a current
transaction between willing parties. Fair values with respect to investments are
presented in Note (2) and the fair value of all other investments approximates
their fair value.

The carrying amounts shown in the table below are included in the
Consolidated Balance Sheet under the indicated options:

<TABLE>
<CAPTION>
1997 1996
-------------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Financial liabilities:
Chase financing agreement................. $ -- $ -- $91,681 $91,374
Imperial Bank debt........................ $ -- $ -- $ 7,250 $ 7,541
1994 Preferred Securities issued by
affiliate............................... $ -- $ -- $23,571 $19,998
Trust Preferred Securities issued by
affiliate............................... $101,277 $104,990 $ -- $ --
</TABLE>

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. However, there can be no
assurances that in the event the assets and liabilities would be required to be
liquidated that the amounts received or due would be the amounts reflected
herein.

F-15
<PAGE> 165
SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(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,
--------------------------------
1997 1996 1995
-------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Beginning reserve, gross of reinsurance............ $115,529 $141,495 $171,258
Less: Reinsurance recoverable on unpaid losses..... 24,986 27,076 31,897
-------- -------- --------
Beginning reserve, net of reinsurance.............. 90,543 114,419 139,361
Pac Rim reserves at acquisition.................... 104,588 -- --
Provision for net claims and claim adjustment
expenses
For claims occurring in current year............. 95,826 57,614 58,842
For claims occurring in prior years.............. (5,379) (1,976) (4,872)
-------- -------- --------
Total claims and claim adjustment expenses....... 90,447 55,638 53,970
-------- -------- --------
Payments for net claims and claim adjustment
expense:
Attributable to insured events incurred in
current year.................................. (37,945) (19,816) (19,732)
Attributable to insured events incurred in prior
years......................................... (95,533) (59,698) (59,180)
-------- -------- --------
Total claims and claim adjustment expense
payments...................................... (133,478) (79,514) (78,912)
-------- -------- --------
Ending reserves, net of reinsurance................ 152,100 90,543 114,419
Reinsurance recoverable on unpaid losses........... 49,155 24,986 27,076
-------- -------- --------
Ending reserves, gross of reinsurance.............. $201,255 $115,529 $141,495
======== ======== ========
</TABLE>

During 1997, the Company continued to experience decreased frequency of
claims and at the same time experienced an increase in claims severity for
accident years 1995 and thereafter. The Company's net claim and claim adjustment
expense ratio for accident year 1997, at the end of calendar year 1997, was
68.0%, versus 65.0% and 65.6% for accident years 1996 and 1995, 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. 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. Offsetting the favorable 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.

F-16
<PAGE> 166
SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(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, 1997 and 1996, liabilities of discontinued operations
relating to unpaid claim and claim adjustment expenses, off-set by certain
assets, have been reclassified in the balance sheet. Management estimates the
discontinued operations will be "run off" by the year 2000. The assets and
liabilities of discontinued operations are summarized below.

<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1996
------- -------
<S> <C> <C>
Assets:
Reinsurance recoverables.................................. $ 5,937 $ 8,604
------- -------
Total Assets...................................... $ 5,937 $ 8,604
======= =======
Liabilities:
Claims and claim adjustment expense reserves.............. $18,686 $25,466
Other liabilities......................................... 155 399
------- -------
Total Liabilities................................. $18,841 $25,865
======= =======
</TABLE>

(6) INCOME TAXES

Total income tax expense (benefit) for the years ended December 31, 1997,
1996, and 1995 was allocated as follows:

<TABLE>
<CAPTION>
1997 1996 1995
------- ------ -------
<S> <C> <C> <C>
Continuing operations.................................. $ 1,099 $1,597 $ (12)
Dividend accrued on preferred securities............... (1,581) (858) (767)
Discontinued operations................................ -- -- (5,070)
Extraordinary items.................................... (1,305) -- --
------- ------ -------
Total........................................ $(1,787) $ 739 $(5,849)
======= ====== =======
</TABLE>

F-17
<PAGE> 167
SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Income tax expense (benefit) from continuing operations for the years ended
December 31, 1997, 1996, and 1995 is composed of the following amounts:

<TABLE>
<CAPTION>
1997 1996 1995
------ ------ ----
<S> <C> <C> <C>
Current.................................................... $ 4 $ 4 $ 4
Deferred................................................... 1,095 1,593 (16)
------ ------ ----
Total............................................ $1,099 $1,597 $(12)
====== ====== ====
</TABLE>

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

<TABLE>
<CAPTION>
1997 1996 1995
------ ------ -------
<S> <C> <C> <C>
Income taxes at statutory rates......................... $ 531 $1,777 $ 3,974
Effect of tax-exempt interest........................... (10) (22) (15)
Effect of meals and entertainment....................... 42 38 38
Effect of goodwill amortization......................... 353 -- --
Research and development credit......................... 179 (200) --
Change in valuation allowance for tax assets............ -- -- (4,013)
Other................................................... 4 4 4
------ ------ -------
Total......................................... $1,099 $1,597 $ (12)
====== ====== =======
</TABLE>

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:

<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Deferred tax assets:
Original issue discount................................... $ -- $ 5,764
Net operating loss carryforward........................... 43,918 29,062
Alternate minimum tax credit carryforward................. 1,035 701
Loss reserve discounting.................................. 7,787 --
Unearned premium liability................................ 878 660
Policyholder dividends.................................... 466 --
Deferred gain on capital lease............................ 546 --
Unrealized loss on available-for-sale securities.......... -- 84
Research and development credit........................... 21 200
Other..................................................... 403 281
-------- --------
Total gross deferred tax assets........................... 55,054 36,752
Less: Valuation allowance................................. (8,129) --
-------- --------
Total............................................. 46,925 36,752
-------- --------
Deferred tax liabilities:
Loss reserves............................................. -- (9,139)
Discontinued operations................................... (3,039) (1,245)
Reinsurance experience refunds............................ (15,300) (15,300)
Deferred acquisition costs................................ (1,999) (1,034)
Direct collection allowance............................... (799) (510)
Unrealized gain on available-for-sale investments......... (684) --
Reinsurance payable....................................... -- (4)
-------- --------
Total gross deferred tax liabilities...................... (21,821) (27,232)
-------- --------
Net deferred tax asset................................. 25,104 9,520
======== ========
</TABLE>

F-18
<PAGE> 168
SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Management believes it is more likely than not that the existing net
deductible temporary differences will reverse during the 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, 1997, the Company had a tax net operating loss carryforward
of $130.2 million that begins to expire in the year 2006. Based on projections
of taxable income expected to be realized during the carryforward period for the
Company's net operating losses, there is a possibility that up to $24.0 million
of such net operating loss carryforwards may expire prior to their utilization.
Accordingly, a valuation allowance has been established to reflect the
possibility that this portion of the net operating loss carryforwards may
expire.

(7) REINSURANCE

Superior Pacific 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. Superior Pacific
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, 1997, SNIC was involved in a dispute with certain of its
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 $456. Management expects to recover
the entire disputed amount from the reinsurers. At December 31, 1997, 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 expenses incurred on or prior to June 30, 1991 to
the extent that these 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 remained in effect until the treaty was
commuted in June 1997.

In 1996, as a result of the transaction entered into between the Company,
Centre Re, and Chase Manhattan Bank (see Note 8), the reinsurance receivables
related to the 1991 Contract no longer qualify as reinsurance receivables under
the conditions established in SFAS 113. Therefore, in 1996 the receivables were
reclassified as receivables from a related party 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

F-19
<PAGE> 169
SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

As disclosed in the Company's Form 8-K dated January 1, 1996, effective
January 1, 1993, Superior National Insurance Company ("SNIC") entered into a
multi-year 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, however, the 1993 Contract could have been
canceled by either SNIC or Centre Re upon 30 days notice. Any accident year
covered by the 1993 Contract may be commuted at SNIC's option alone on any
January 1 subsequent to December 31, 1997. 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 each of the post-1992 accident years that
were covered by the contract. Claims and allocated claim adjustment expenses
occurring during the accident years covered by the 1993 Contract may be ceded to
Centre Re in excess of variable percentages of earned premium (60%, 56.5%, and
57.5% for the 1995, 1994, and 1993 accident years, respectively).

As further disclosed in the Company's Form 8-K dated January 1, 1996, SNIC
ceded $15 million to Centre Re during each of the years 1993-1995 resulting in
an aggregate cession of $45 million of premium to Centre Re under the 1993
Contract. Because SNIC's loss and allocated expense ratios for accident years
1993-1995 were not expected to exceed the percentages set forth above, no losses
have been ceded to Centre Re under the 1993 Contract to date. Under the terms of
the contract, however, SNIC will receive a refund at least equal to the $45
million of premium ceded to Centre Re at any future commutation date for the
1993 Contract. Because the ceded premium was required by statutory reinsurance
rules to be held in a "funds withheld" arrangement, the Company did not actually
transfer to Centre Re the premiums due under the 1993 Contract. Hence, the 1993
Contract contemplates that the refund due would be offset against the premiums
held in the funds withheld account.

As further disclosed in the Company's Form 8-K dated January 1, 1996, the
1993 Contract was canceled prospectively effective January 1, 1996, as a result
of which SNIC has not ceded premium or loss under the 1993 Contract to Centre Re
subsequent to accident year 1995. The cancellation of the 1993 Contract did not
affect the measurement or recognition of income or loss previously recorded in
the Company's financial statements at any time the 1993 Contract was in force.
The reinsurance premiums ceded and experience account balance due from Centre Re
with respect to accident years 1993-1995 were not affected by the cancellation
of the contract. SNIC retains the right, however, to exercise its option to
commute the 1993-1995 accident years at a future date in accordance with the
terms of the contract.

Effective January 1, 1996, the 1993 Contract was canceled prospectively at
the Company's election, however, because the 1993 Contract was not commuted from
its January 1, 1993 inception date the Company was still subject to the
contract's provisions applying to the 1993-1995 accident years. No losses were
ceded under the 1993 Contract, and the Company's only recoveries were through
the contract's experience account, which would be payable no earlier than
January 1, 1998. The experience account accreted at varying rates depending on
the commutation date selected by the Company.

Because Centre Re is an offshore reinsurer, statutory reinsurance security
rules required Centre Re to secure the experience account balance via a "funds
withheld" arrangement. The Company did not actually transfer to Centre Re
premiums due under the 1993 Contract, but withheld the premiums for security
purposes. In conjunction with the funds withheld arrangement, the Company agreed
to pay Centre Re interest at the Company's average portfolio rate of interest.

F-20
<PAGE> 170
SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The interest on the funds withheld balance significantly exceeded the
accretion to the experience account. Thus, the Company made a business decision
to terminate the funds withheld arrangement via a negotiated settlement with
Centre Re. In 1996, after lengthy negotiations with Centre Re, the Company
agreed to freeze the experience account at $45 million and expensed $5.3 million
in consideration of termination of the funds withheld arrangement. The $5.3
million was paid to Centre Re in 1997.

Effective January 1, 1994, SNIC entered into a quota-share reinsurance
contract ("Quota-Share Contract") with Zurich Reinsurance (North America), Inc.,
("ZRNA") an affiliate of Zurich. Under the Quota-Share Contract, ZRNA may
provide Superior Pacific with an Assumption of Liability Endorsement facility
("ALE"), or, effective January 1, 1997, Superior Pacific may write directly on
policy forms of ZC Insurance Company ("ZCIC"), an affiliate of Zurich (the "ZCIC
Front"). The ceding rate under the Quota-Share Contract was 20% for 1994, and
ZRNA and Superior Pacific mutually agreed to reduce the quota-share
participation to 5% for 1995 and 1996. Further, Superior Pacific receives ceding
commissions ranging between 22.5% and 24.5% for premiums ceded to ZRNA. The
purpose of the ceding commission is to cover Superior Pacific'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, ZRNA increased its
participation from 5% of premiums written in 1996 to 6.5% in 1997. In exchange
for the increased participation, ZRNA will no longer receive a separate fee for
policies written on ALEs, but will receive 2% of premiums written on ZCIC Front
policies only.

Superior Pacific entered into a reinsurance contract with Centre Re
effective June 30, 1997, under which Centre Re assumed $10 million of reserves
associated with claims open for future medical payments from Superior Pacific in
consideration of $1 million in cash and the assignment of the rights of Superior
Pacific's contribution and subrogation recoveries during the term of the
contract. The contract is accounted for as a deposit, and no gain will be
recognized until net cash payments from Centre Re are greater than Superior
Pacific's $1 million premium.

Superior Pacific's contracts are generally entered into on an annual basis.
Superior Pacific has maintained reinsurance treaties with many reinsurers for a
number of years. In general, Superior Pacific's reinsurance contracts are of the
treaty variety, and cover underwritten risks specified in the treaties. Superior
Pacific also from time to time purchases facultative reinsurance covering
specific liabilities or policies underwritten. As of December 31, 1997, ZRC,
General Reinsurance Corporation, and Allstate Insurance account for 24.5%,
21.6%, and 10.4%, respectively, of total amounts recoverable from all reinsurers
on paid and unpaid claims and claim adjustment expenses.

F-21
<PAGE> 171
SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES

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:

<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- -------
<S> <C> <C> <C>
Net Premiums written:
Premiums written.................................. $159,352 $ 99,282 $97,084
Premiums ceded.................................... (22,423) (11,567) (7,945)
-------- -------- -------
Net premiums written........................... $136,929 $ 87,715 $89,139
======== ======== =======
Net change in unearned premiums:
Direct............................................ $ (3,649) $ (645) $ (381)
Ceded............................................. (342) (288) (215)
-------- -------- -------
Net change in unearned premiums................ $ (3,991) $ (933) $ (596)
======== ======== =======
Net claims and claim adjustment expenses:
Claims and claim adjustment expenses.............. $122,830 $ 61,702 $56,388
Reinsurance recoveries............................ (32,383) (6,064) (2,418)
-------- -------- -------
Net claims and claim adjustment expenses....... $ 90,447 $ 55,638 $53,970
======== ======== =======
</TABLE>

(8) LONG-TERM DEBT

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

<TABLE>
<CAPTION>
1997 1996
---- -------
<S> <C> <C>
Chase Financing Agreement -- 6.87% due through 2004......... $-- $91,681
Imperial Bank debt -- 8.25% due through 2001................ -- 7,250
Voting Notes due 2002....................................... 30 30
--- -------
Balance at end of period.................................... $30 $98,961
=== =======
</TABLE>

Effective June 30, 1994, the Company entered into a $10 million term loan
agreement ("1994 Loan") with Imperial Bank, which was used to retire
subordinated notes issued during 1992. This term loan was 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 it until July 1, 1996.

The Company adhered to certain requirements and provisions in compliance
with the terms of the 1994 Loan. The provisions required SNIC to maintain
certain financial ratios and SNIG to maintain Imperial Bank certificates of
deposit in an amount equal to 20% of the Company'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. On April 11, 1997, the Company
retired its outstanding 1994 Loan with Imperial Bank. As a result of the early
extinguishment, the Company recognized an extraordinary loss of $0.2 million,
net of a tax benefit of $0.1 million.

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 was collateralized by receivables due from the reinsurer and amortized
based upon the payout pattern of the underlying claims of the reinsurance
receivables. In June 1997, the $93.1 million term loan was retired,

F-22
<PAGE> 172
SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

$110.5 million of receivables from a related party reinsurer, in connection with
a financing transaction, was transferred to Chase in exchange for the
cancellation of the Company's $94.9 million debt due to Chase under the loan.
The retirement of this collateralized financing resulted in the Company's
recognizing a $15.7 million charge.

Voting notes ("Voting Notes") in the amount of $30 related to SNIG's 14.5%
Senior Subordinated Series A and Series B Notes ("14.5% Senior Subordinated
Notes") were still outstanding as of December 31, 1997. The 14.5% Senior
Subordinated Notes were retired in 1994. The Voting Notes of $30 will mature in
the year 2002. Warrants related to the 14.5% Senior Subordinated Notes remain
outstanding and provide their holders the right to purchase 1,566,465 shares of
SNIG common stock at a strike price of $4 per share. These warrants, which are
currently exercisable and expire on April 1, 2002, are held by senior management
and a nominee for III.

The Company has an agreement with a national brokerage house to allow it to
enter into $20 million of reverse repurchase transactions that must be secured
by either U.S. treasuries, government agency bonds, or corporate debt. There
were no outstanding transactions at December 31, 1997.

(9) PREFERRED SECURITIES ISSUED BY AFFILIATES

On June 30, 1994, SNIG 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 California Department of Insurance ("DOI"). The
preferred securities were subordinate to the 1994 Loan. 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 ("1994 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 579,356 shares of SNIG's common shares at $5.20 per share, representing
a fully-diluted 6.8 percent interest in SNIG. The warrants may be exercised at
any time and expire in 2002.

In December 1997, SNIG formed a trust, whose sole purpose was to issue
10 3/4% Trust Preferred Securities (the "Trust Preferred Securities"), having an
aggregate liquidation amount of $105 million, and to invest the proceeds thereof
in an equivalent amount of 10 3/4% Senior Subordinated Notes due 2017 of the
Company (the "Senior Subordinated Notes"). The Company owns directly all of the
common securities issued by the Trust, which it purchased for an aggregate
consideration of $3.25 million. The proceeds from the sale of the Trust
Preferred Securities were used solely to purchase SNIG's Senior Subordinated
Notes. In addition, the Company entered into several contractual undertakings,
that when taken together, guarantee to the holders of the Trust Preferred
securities an unconditional right to enforce the payment of the distributions
with respect to such securities. Holders of the Trust Preferred Securities are
entitled to receive cumulative cash distributions at an annual rate of 10 3/4%
of the stated liquidation amount of $1,000 per Trust Preferred Security,
accruing from the date of original issuance of the Trust Preferred Securities
and payable semi-annually, in arrears, commencing on June 1, 1998. The Company
has the right to defer payments at any time or from time to time for a period
not exceeding 10 consecutive semi-annual periods, provided that no extension
period may extend beyond the stated maturity date. In the event there is a
change in control, holders of the Trust Preferred Securities may redeem their
securities at 101% of the principal.

The Company used the net proceeds from the sale of the 10 3/4% Senior
Subordinated Notes in the amount of approximately $101.2 million, (i) to repay
outstanding debt, consisting of $40.8 million of bank debt and interest incurred
in connection with the acquisition of Pac Rim that would have matured in April
2003, bearing an average effective interest rate of 10.2%, (ii) to redeem from
an affiliate of Zurich $27.7 million of principal and interest, with an
effective rate of 11.7%, of the 1994 Preferred Securities, and (iii) to make a
$15 million capital contribution to SNIC. The remaining proceeds are invested in
short-term, income-generating, investment-grade securities.
F-23
<PAGE> 173
SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The difference between the face value and the carrying value of the Trust
Preferred Securities is amortized over their nineteen-year maturity 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:

<TABLE>
<CAPTION>
1997 1996
-------- -------
<S> <C> <C>
Beginning balance........................................... $ 23,571 $21,045
Dividends and accretion..................................... 3,709 2,526
Retirement of 1994 Preferred Securities..................... (27,275) --
Issuance of Trust Preferred Securities...................... 101,272 --
-------- -------
Balance at end of period.................................... $101,277 $23,571
======== =======
</TABLE>

(10) STATUTORY SURPLUS AND DIVIDEND RESTRICTIONS

SNIC and SPCC are domiciled in the State of California and prepare their
statutory financial statements in accordance with accounting practices
prescribed or permitted by the 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's statutory policyholders' surplus as reported to regulatory
authorities was $71,663 and $51,998 at December 31, 1997, and 1996,
respectively. SNIC's statutory net income, as reported to regulatory
authorities, was $2,888, $791 and $1,050 for the years ended December 31, 1997,
1996, and 1995 respectively.

SPCC's statutory policyholders' surplus as reported to regulatory
authorities was $30,542 and $20,930 at December 31, 1997 and 1996, respectively.
SPCC's statutory net income, as reported to regulatory authorities, was
$(6,074), $(13,069), and $4,879 for the years ended December 31, 1997, 1996, and
1995 respectively.

Insurance companies are subject to insurance laws and regulations
established by the states in which they transact business. The laws of 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 Superior
Pacific 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 Superior Pacific.

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 and SPCC
have calculated and met their RBC requirements.

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 the maximum amount that may be paid as dividends on an annual noncumulative
basis without prior notice to, or approval by, the DOI is 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. At December 31, 1997, SNIC and
SPCC could pay approximately $7.2 million and $3.1 million, respectively, in
dividends and advances to the Company without the DOI's prior approval based on
10% of reported statutory surplus.

F-24
<PAGE> 174
SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

In 1995, after receiving prior approval from the DOI, SNIC made an
extraordinary dividend distribution to SNIG of 100% of its shares in Superior
(Bermuda) Limited, which represented $15 million of SNIC's statutory capital and
surplus.

(11) EMPLOYEE BENEFIT PLANS

SNIG 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 SFAS 123, 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.

SNIG has two equity option plans, the 1986 Stock Option Plan ("1986 Plan")
and the 1995 Stock Incentive Plan ("1995 Plan"). The terms of the 1986 Plan
permit SNIG, at the Board of Directors' discretion, to grant options to its
management to purchase up to 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 ("Code"). The
1995 Plan permits the 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 SNIG
common stock or may be given the opportunity to receive restricted stock of
SNIG. Under the 1995 Plan, the aggregate 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 SNIG'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 SFAS 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 in the calculation is the 10 year
Treasury Note rate on the date the options were granted. The risk free interest
rate range used for options granted during 1997, 1996, and 1995 was 5.8% to
6.9%, 6% to 6.79%, and 6% to 7.11%, respectively. The volatility factors for the
expected market price of the common stock of 65%, 70%, and 77% were used for
options granted in 1997, 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-25
<PAGE> 175
SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES

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):

<TABLE>
<CAPTION>
1997 1996
------- ------
<S> <C> <C>
Pro forma net income........................................ $(5,366) $1,857
Pro forma earnings per share
Basic..................................................... (1.02) 0.54
Diluted................................................... $ (0.77) $ 0.38
</TABLE>

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

<TABLE>
<CAPTION>
1997 1996 1995
-------------------------- -------------------------- --------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE
OF SHARES EXERCISE PRICE OF SHARES EXERCISE PRICE OF SHARES EXERCISE PRICE
--------- -------------- --------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
Stock options outstanding
beginning of year......... 389,516 $ 5.13 252,500 $4.90 138,750 $4.47
Stock options granted....... 132,257 12.43 146,516 5.46 135,000 5.20
Stock options exercised..... (22,127) 4.74 (3,100) 4.00 (500) 4.00
Stock options canceled...... (38,567) 5.94 (6,400) 4.61 (20,750) 4.00
-------- -------- --------
Stock options outstanding,
end of year............... 461,079 $ 7.17 389,516 $5.13 252,500 $4.90
======== ====== ======== ===== ======== =====
Exercisable at end of
year...................... 152,525 -- 102,200 -- 56,690 --
Weighted-average fair value
of options granted during
the year.................. $ 9.76 $ 4.41 $ 4.40
</TABLE>

Exercise prices for options outstanding as of December 31, 1997 ranged from
$4 to $14.875. The weighted-average remaining contractual life of those options
is 8.3 years. Since the range of exercise prices is wide, the following is a
summary of information for each exercise price range:

<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
NUMBER WEIGHTED-AVERAGE NUMBER OF EXERCISE PRICE
OF OPTIONS REMAINING OPTIONS (SHARES) OF CURRENTLY
EXERCISE PRICE (SHARES) WEIGHTED-AVERAGE CONTRACTUAL LIFE CURRENTLY EXERCISABLE
RANGE OUTSTANDING EXERCISE PRICE (YEARS) EXERCISABLE OPTIONS
- --------------- ----------- ---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
$ 4.00-$ 4.99 111,566 $ 4.54 7.56 48,261 $ 4.25
$ 5.00-$ 5.99 176,450 5.18 7.68 95,130 5.18
$ 6.00-$ 6.99 40,112 6.25 9.00 7,864 6.25
$ 7.00-$11.99 28,850 10.89 9.85 770 7.70
$12.00-$12.99 81,851 12.16 10.00 500 12.75
$13.00-$14.99 22,250 14.64 10.00 -- --
------- -------
461,079 $ 7.17 8.30 152,525 $ 4.98
======= ====== ===== ======= ======
</TABLE>

F-26
<PAGE> 176
SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

<TABLE>
<CAPTION>
1997 1996 1995
----------------------- ----------------------- -----------------------
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.............. 120,000 $4.00-$5.20 127,500 $4.00-$5.20 138,750 $4.00-$5.20
Stock options
granted.............. -- -- -- -- 10,000 5.20
Stock options
exercised............ (9,125) 4.00 (3,100) 4.00 (500) 4.00
Stock options
canceled............. (2,125) 4.00 (4,400) 4.00-5.20 (20,750) 4.00
------- ------- ---------
Stock options
outstanding, end of
year................. 108,750 $4.00-$5.20 120,000 $4.00-$5.20 127,500 $4.00-$5.20
======= =========== ======= =========== ========= ===========
</TABLE>

At December 31, 1997, 72,475 vested options were exercisable under the 1986
Plan. No additional options or purchase rights will be granted under the 1986
Plan.

The following is a summary of the transactions under the 1995 Plan for the
years ended December 31:

<TABLE>
<CAPTION>
1997 1996 1995
------------------------- ----------------------- ------------------
NUMBER OPTION NUMBER OPTION NUMBER OPTION
OF SHARES PRICE OF SHARES PRICE OF SHARES PRICE
--------- ------------- --------- ----------- --------- ------
<S> <C> <C> <C> <C> <C> <C>
Stock Options:
Stock options
outstanding
beginning of
year............ 269,516 $5.20-$7.70 125,000 $5.20 -- --
Stock options
granted......... 132,257 11.375-14.875 146,516 5.20-7.70 125,000 $5.20
Stock options
exercised....... (13,002) 4.87-7.70 -- -- -- --
Stock options
canceled........ (36,442) 4.87-12.125 (2,000) 5.20 -- --
------- ------- -------
Stock options
outstanding end
of year......... 352,329 $4.87-$14.875 269,516 $5.20-$7.70 125,000 $5.20
======= ============= ======= =========== ======= =====
</TABLE>

<TABLE>
<CAPTION>
1997 1996 1995
------------------------- ----------------------- ------------------
NUMBER OPTION NUMBER OPTION NUMBER OPTION
OF SHARES PRICE OF SHARES PRICE OF SHARES PRICE
--------- ------------- --------- ----------- --------- ------
<S> <C> <C> <C> <C> <C> <C>
Restricted Options:
Shares outstanding
beginning of
year............ 69,265 $4.87-$6.25 36,350 $5.20 -- $--
Shares granted..... 36,450 12.125 45,934 4.87-6.25 36,350 5.20
Shares issued...... (12,222) 4.87-12.125 (13,019) 4.87-5.20 -- --
Shares canceled.... (9,813) 4.87-12.125 -- -- -- --
------- ------- -------
Shares outstanding
end of year..... 83,680 $4.87-$12.125 69,265 $4.87-$6.25 36,350 $5.20
======= ============= ======= =========== ======= =====
</TABLE>

At December 31, 1997, 80,050 vested options were exercisable under the 1995
Plan. Shares available for future grants under the 1995 Plan at December 31,
1997 were 188,991.

Effective January 1, 1990, the Company implemented a 401(k) Plan ("Company
Plan") which is available for substantially all employees and under which the
Company matches a percentage of the

F-27
<PAGE> 177
SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

participant's compensation. The employer contributions are discretionary and
vest over a five year period. The employer contributions for plan years 1997,
1996, and 1995 were $186, $170, and $150, 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 $366, $48, and $322 of accrued expenses were
recorded at December 31, 1997, 1996, and 1995, respectively.

The Pac Rim Assurance Company 401(k) Plan ("Pac Rim Plan") permits
employees of Pac Rim who attain the age of 21 and complete 30 days of employment
to elect to make tax-deferred contributions of a specified percentage of their
compensations during each year through payroll deductions. As of December 31,
1997, there were 38 participants in the Pac Rim Plan employed by the Company.
Under the Pac Rim Plan, the Company, as successor to Pac Rim, has discretion to
make additional contributions. The Company made a $200 discretionary employer
contribution to the Pac Rim Plan in April 1997. The Company plans to merge the
Pac Rim Plan into the Company Plan by December 31, 1998.

(12) COMMITMENTS

The Company occupies offices under various operating leases and leases
substantially all of its fixed assets through a capital lease. The future
minimum lease payments at December 31, 1997, are as follows:

<TABLE>
<CAPTION>
OPERATING CAPITAL INTEREST ON CAPITAL TOTAL LEASE
COMMITMENTS COMMITMENTS COMMITMENTS COMMITMENTS
----------- ----------- ------------------- -----------
<S> <C> <C> <C> <C>
1998........................ $ 4,655 $1,659 $ 685 $ 6,999
1999........................ 4,681 2,005 552 7,238
2000........................ 3,414 2,232 325 5,971
2001........................ 3,083 1,797 16 4,896
2002........................ 1,279 -- -- 1,279
------- ------ ------ -------
$17,112 $7,693 $1,578 $26,383
======= ====== ====== =======
</TABLE>

Rental expenses totaled approximately $4,020, $1,918, and $1,772 for the
years ended December 31, 1997, 1996, and 1995 respectively.

Effective December 1, 1997, the Company entered into an $8,000 capital
lease with BancBoston for substantially all of the property and equipment of
both SNIC and SPCC acquired on or before March 31, 1997. The transaction
resulted in a deferred gain of $1,651 that will be amortized over 36 months.

In a transaction associated with the sale of the 14.5% 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 14.5% Senior Subordinated 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.

F-28
<PAGE> 178
SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(14) PREPAID AND OTHER ASSETS

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

<TABLE>
<CAPTION>
1997 1996
------- ------
<S> <C> <C>
Furniture and fixtures, net................................. $ 7,970 $1,260
Data processing equipment, net.............................. 71 3,560
Prepaid and advances........................................ 2,178 1,091
Funds due from lender....................................... 8,000 --
Other....................................................... 2,887 1,453
------- ------
$21,106 $7,364
======= ======
</TABLE>

(15) ACCOUNTS PAYABLE AND OTHER LIABILITIES

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

<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Escheatment payable......................................... $ 1,401 $ 333
Rent and lease liability.................................... 371 527
Accounts payable............................................ 15,526 8,683
Liabilities associated with Pac Rim acquisition............. 7,608 --
Other liabilities........................................... 3,962 3,198
------- -------
$28,868 $12,741
======= =======
</TABLE>

(16) EARNINGS PER SHARE RECONCILIATION

The following is an illustration of the reconciliation of the numerators
and denominators of the basic and diluted earnings per share (EPS) computations:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED 1997 FOR THE YEAR ENDED 1996
------------------------------------------ ------------------------------------------
INCOME SHARES PER SHARE INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- --------- -------------- ------------- ---------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS
Income before items
below................. $ 463 5,249,736 $ 0.09 $ 3,630 3,432,679 $ 1.06
Preferred Securities.... (3,069) (0.58) (1,667) (0.49)
Discontinued
Operations............ -- -- -- --
Extraordinary Items..... (2,535) (0.49) -- --
-------- ------ ------- ------
Net Income.............. $ (5,141) $(0.98) $ 1,963 $ 0.57
======== ====== ======= ======
EFFECT OF DILUTIVE
SECURITIES
Options................. 295,065 266,183
Warrants................ 1,471,364 1,167,178
DILUTED EPS
Income before items
below................. $ 463 7,016,165 $ 0.07 $ 3,630 4,826,040 $ 0.75
Preferred Securities.... (3,069) (0.44) (1,667) (0.34)
Discontinued
Operations............ -- -- -- --
Extraordinary Items..... (2,535) (0.37) -- --
-------- ------ ------- ------
Net Income............... $ (5,141) $(0.74) $ 1,963 $ 0.41
======== ====== ======= ======

<CAPTION>
FOR THE YEAR ENDED 1995
------------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
-------------- ------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
BASIC EPS
Income before items
below................. $11,701 3,429,915 $ 3.41
Preferred Securities.... (1,488) (0.43)
Discontinued
Operations............ (9,842) (2.87)
Extraordinary Items..... -- --
------- ------
Net Income.............. $ 371 $ 0.11
======= ======
EFFECT OF DILUTIVE
SECURITIES
Options................. 47,052
Warrants................ 464,627
DILUTED EPS
Income before items
below................. $11,701 3,941,594 $ 2.97
Preferred Securities.... (1,488) (0.38)
Discontinued
Operations............ (9,842) (2.50)
Extraordinary Items..... -- --
------- ------
Net Income............... $ 371 $ 0.09
======= ======
</TABLE>

F-29
<PAGE> 179
SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Options to purchase 1,250 shares at $14.81, 12,500 shares at $14.875, 7,250
shares at $14.25, and 1,250 shares at $14.31 were outstanding during the last
quarter of 1997 but were not included in the computation of diluted EPS because
the options' exercise price was greater than the average market price of the
common shares. The options, which expire in 2002, were still outstanding at the
end of year 1997.

(17) RELATED PARTY TRANSACTIONS

The following is a summary of related party transactions presented
elsewhere herein.

Robert A. Spass and Steven B. Gruber, directors of the Company, are
executive officers of the ultimate general partner of each of IP Delaware and IP
Bermuda. In April 1997, IP purchased an aggregate of 2,124,834 shares of Common
Stock, representing approximately 36.2% of the outstanding Common Stock
(approximately 24.8% on a fully diluted basis). Certain affiliates of Zurich are
limited partners of IP Delaware and IP Bermuda and hold approximately 23% of the
limited partnership interests in those partnerships on an aggregate basis
(representing an aggregate, indirect ownership by such affiliates of
approximately 5.7% of the Common Stock on a fully diluted basis). In addition,
an affiliate of Zurich holds 395,128 Warrants (subject to the revocable agency
relationship with IIA) which are exercisable at $4.00 per share, and another
Zurich affiliate holds warrants to purchase 579,356 which are exercisable at
$5.20 per share, all of which expire April 1, 2002. These warrants represent in
the aggregate approximately 11.4% of the Common Stock on a fully diluted basis.

Robert A. Spass and Bradley E. Cooper, directors of the Company, are
employees of IIA. Mr. Spass is also an officer and director of IIA. Mr.
Schwarberg, a director of the Company, is a former employee of IIA. IIA was paid
$250,000 by the Company during each of fiscal 1997, 1996, and 1995 for
investment banking and financial consulting services. Such payments were made
pursuant to a consulting agreement entered into in 1992 that continues through
the end of 1998.

The Company has several reinsurance contracts with certain affiliates of
Zurich which are discussed in Note 7. The following is a summary of significant
reinsurance transactions with affiliates of Zurich occurring in 1997. The 1991
Contract with Centre Re was commuted in June 1997. In 1997, the Company paid
Centre Re $5.3 million related to the cancellation of the 1993 Contract.
Superior Pacific entered into a reinsurance contract with Centre Re effective
June 30, 1997, under which Centre Re assumed $10 million of reserves associated
with open claims for future medical payments from Superior Pacific in
consideration of $1 million cash.

In June 1997, the entire amount of reinsurance receivable balance due from
Centre Re associated with the 1991 Contract was used to pay the $93.1 million
Chase term loan, as discussed in Note 8. In December 1997, the Company redeemed
from an affiliate of Zurich $27.7 million of the 1994 Preferred Securities, as
described in Note 9.

Beginning December 31, 1997 the Company entered into agreements with Rick
Enterprise Management Limited ("REM") and an affiliate of REM to provide the
Claim Severity Management Program.

In December 1997, Centre Solutions purchased $10.0 million of the Trust
Preferred Securities.

(18) NON-CASH TRANSACTION

As discussed in Note 8, in 1997, the Company transferred $110.5 million of
receivables from a related party reinsurer, in connection with a financing
transaction, to Chase in exchange for the cancellation of the Company's $94.9
million debt due to Chase. The retirement of this collateralized financing
resulted in the Company's recognizing a $15.7 million charge.

F-30
<PAGE> 180
SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

(19) RECONCILIATION WITH PREVIOUSLY REPORTED AMOUNTS

The amounts shown in the Consolidated Statement of Cash Flows differ from
those previously reported as a result of reclassifications made to the
Consolidated Balance Sheet. A reconciliation of amounts restated are as follows:

<TABLE>
<CAPTION>
1997 1996 1995
-------- --------- --------
<S> <C> <C> <C>
Net cash (used in) provided by operating activities
As previously reported.................................. $(52,370) $ (14,902) $(23,826)
Reclass of investments withheld from a related party
reinsurer............................................ 117,980 (13,339)
Reclass of receivable from a related party reinsurer.... -- (110,527) --
-------- --------- --------
As restated.......................................... $(52,370) $ (7,449) $(37,165)
======== ========= ========
Net cash provided by (used in) financing activities
As previously reported.................................. $ 77,289 $ 90,510 $ (1,198)
Reclass of investments and cash for discontinued
operations........................................... 4,357 -- --
-------- --------- --------
As restated.......................................... $ 81,646 $ 90,510 $ (1,198)
======== ========= ========
Net cash (used in) provided by investing activities
As previously reported.................................. $(91,480) $ 20,041 $ 28,779
Reclass of investments withheld from a related party
reinsurer............................................ -- (117,980) 13,339
Reclass of receivable from a related party reinsurer.... 93,266 --
Reclass of investments and cash for discontinued
operations........................................... (4,357) 17,261
Reclass of invested cash from cash and cash equivalents
to short-term investments............................ 60,880 (67,414) (100)
-------- --------- --------
As restated.......................................... $(34,957) $ (54,826) $ 42,018
======== ========= ========
Cash and cash equivalents at the end of the period
As previously reported.................................. $ 35,376 $ 101,937 $ 6,288
Reclass of invested cash from cash and cash equivalents
to short-term investments............................ (6,634) (67,514) (100)
-------- --------- --------
As restated.......................................... $ 28,742 $ 34,423 $ 6,188
======== ========= ========
</TABLE>

F-31
<PAGE> 181
SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Additionally, in 1997 the Company previously reported a $10.4 million
extraordinary loss on retirement of long-term debt, net of income tax benefit.
Subsequently, this amount was reclassified to an operating expense separately
disclosed as loss on termination of financing transaction with related party
reinsurer. This reclass resulted in no change to net income or stockholders'
equity. A reconciliation of amounts restated are as follows:

<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
------------
<S> <C>
Total Expenses
As previously reported.................................... $136,333
Reclass of loss on termination of financing transaction
with related party reinsurer........................... 15,699
--------
As restated............................................ $152,032
========
Income tax expense (benefit)
As previously reported.................................... $ 6,437
Reclass on tax effect of loss on termination of financing
transaction with related party reinsurer............... (5,338)
--------
As restated............................................ $ 1,099
========
Income before preferred securities dividends and accretion,
discontinued operations, and extraordinary items
As previously reported.................................... $ 10,824
Reclass of extraordinary loss on retirement of long-term
debt, net of tax....................................... (10,361)
--------
As restated............................................ $ 463
========
</TABLE>

<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
---------------------------------------
AS PREVIOUSLY
REPORTED RECLASS AS RESTATED
------------- ------- -----------
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE
Income before preferred securities dividends and
accretion, and extraordinary items.................... $ 2.06 $(1.97) $ 0.09
Preferred Securities..................................... (0.58) -- (0.58)
Extraordinary items...................................... (2.46) 1.97 (0.49)
------ ------ ------
Net loss................................................. $(0.98) $ -- $(0.98)
====== ====== ======
DILUTED EARNINGS PER SHARE
Income before preferred securities dividends and
accretion, and extraordinary items.................... $ 1.54 $(1.47) $ 0.07
Preferred Securities..................................... (0.44) -- (0.44)
Extraordinary items...................................... (1.84) 1.47 (0.37)
------ ------ ------
Net loss................................................. $(0.74) $ -- $(0.74)
====== ====== ======
</TABLE>

F-32
<PAGE> 182

SCHEDULE I.1

SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES

CONDENSED FINANCIAL INFORMATION OF REGISTRANT
SUPERIOR NATIONAL INSURANCE GROUP, INC.
BALANCE SHEET

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
--------- ---------
(AMOUNTS IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
ASSETS
INVESTMENTS
Bonds and Notes:
Available-for-sale, at market (cost: 1997, $7,539)........ $ 7,533 $ --
-------- --------
TOTAL INVESTMENTS................................. 7,533 --
Cash and cash equivalents................................. 5,404 1,787
Accrued investment income................................. 38 1
Receivable from a related party reinsurer................. -- 110,527
Investment in subsidiaries................................ 168,856 72,788
Intercompany receivable................................... 91 91
Deferred income taxes..................................... 1,884 4,957
Other..................................................... 174 1,087
-------- --------
TOTAL ASSETS...................................... $183,980 $191,238
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Long-term debt.............................................. $ 30 $ 98,961
Intercompany liability...................................... 21,462 23,465
Accounts payable and other liabilities...................... 1,393 50
-------- --------
TOTAL LIABILITIES................................. 22,885 122,476
1997 PREFERRED SECURITIES ISSUED BY AFFILIATE;
authorized 105,000 shares in 1997......................... 101,277 --
1994 PREFERRED SECURITIES ISSUED BY AFFILIATE;
authorized 1,100,000 shares: issued and outstanding
1,013,753 shares in 1996.................................. -- 23,571

STOCKHOLDERS' EQUITY
Common stock, $0.01 par value; authorized 25,000,000 shares:
issued and outstanding 5,871,279 shares in 1997 and
3,446,492 shares in 1996.................................. 59 34
Paid-in capital excess of par............................... 34,242 15,988
Paid in capital -- warrants................................. 2,206 2,206
Unrealized gain on equity securities, net of taxes.......... 112 (17)
Unrealized gain (loss) on available-for-sale investments,
net of income taxes....................................... 1,215 (145)
Retained earnings........................................... 21,984 27,125
-------- --------
TOTAL STOCKHOLDERS' EQUITY........................ 59,818 45,191
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........ $183,980 $191,238
======== ========
</TABLE>

See notes to condensed financial information
F-33
<PAGE> 183

SCHEDULE I.2

SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES

CONDENSED FINANCIAL INFORMATION OF REGISTRANT
SUPERIOR NATIONAL INSURANCE GROUP, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
DECEMBER 31,
--------------------------------
1997 1996 1995
---------- ------- -------
<S> <C> <C> <C>
(RESTATED)

<CAPTION>
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
REVENUES:
Net investment income..................................... $ (112) $ 89 $ 330
-------- ------- -------
TOTAL REVENUES.................................... (112) 89 330
EXPENSES:
Interest expense.......................................... 5,965 1,465 804
Loss on termination of financing transaction with a
related party reinsurer................................ 15,699 -- --
Other operating expenses.................................. 518 (446) 304
-------- ------- -------
TOTAL EXPENSES.................................... 22,182 1,019 1,108
-------- ------- -------
LOSS BEFORE INCOME TAXES, PREFERRED SECURITIES DIVIDENDS AND
ACCRETION, AND EXTRAORDINARY ITEMS........................ (22,294) (930) (778)
Income tax expense.......................................... 2,908 858 767
-------- ------- -------
INCOME BEFORE PREFERRED SECURITIES DIVIDENDS AND ACCRETION,
AND EXTRAORDINARY ITEMS................................... (25,202) (1,788) (1,545)
Equity in net income of subsidiaries........................ 25,709 5,418 3,404
1994 Preferred securities dividends and accretion, net of
income tax benefit of $1,260 and $858 in 1997 and 1996,
respectively.............................................. (2,445) (1,667) (1,488)
1997 Preferred securities dividends and accretion, net of
income tax benefit of $321 in 1997........................ (624) -- --
Extraordinary loss on retirement of long-term debt, net of
income tax benefit of $785 in 1997........................ (1,524) -- --
Extraordinary loss on redemption of Pac Rim's outstanding
debentures, net of income tax benefit of $327 in 1997..... (635) -- --
Extraordinary loss on retirement of preferred securities,
net of income tax benefit of $134 in 1997................. (259) -- --
Extraordinary loss on early retirement of Imperial Bank Loan
net of income tax benefit of $83 in 1997.................. (161) -- --
-------- ------- -------
NET INCOME (LOSS)................................. $ (5,141) $ 1,963 $ 371
======== ======= =======
</TABLE>

See notes to condensed financial information
F-34
<PAGE> 184

SCHEDULE I.3

SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES

CONDENSED FINANCIAL INFORMATION OF REGISTRANT
SUPERIOR NATIONAL INSURANCE GROUP, INC.
STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
TWELVE MONTHS ENDED
DECEMBER 31,
-------------------------------
1997 1996 1995
-------- ---------- -------
(RESTATED)
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income......................................... $ (5,141) $ 1,963 $ 371
-------- --------- -------
Adjustments to reconcile net (loss) income to net cash
used in operating activities:
Amortization of bonds and preferred stock............... -- -- (1)
Loss on sale of investment.............................. 7 5 --
Income from subsidiaries................................ (25,709) (5,418) (3,404)
Loss on termination of financing transaction with a
related party reinsurer................................ 15,699 -- --
Extraordinary loss...................................... 2,579 -- --
Interest expense on long-term debt...................... 3,581 -- --
Preferred securities dividends and accretion............ 3,069 2,525 2,255
Increase in current income taxes........................ -- -- 1,721
(Increase) decrease in accrued investment income........ (37) 8 1
Decrease in deferred income taxes....................... 2,909 -- --
Decrease (increase) in receivable from a related party
reinsurer.............................................. -- (110,527) --
(Increase) decrease in other assets..................... 2,209 (994) (11)
Increase in accounts payable and other liabilities...... 446 19,334 78
-------- --------- -------
Total adjustments..................................... 4,753 (95,067) 639
-------- --------- -------
Net cash (used in) provided by operating activities... (388) (93,104) 1,010
-------- --------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Paid-in-capital -- restricted stock....................... 279 78 2
Proceeds from issuance of common stock.................... 18,000 -- --
Proceeds from 1997 Trust Preferred Securities............. 101,272 -- --
Long-term debt -- Chase Manhattan Bank.................... 41,257 -- --
Retirement of long-term debt -- Chase Manhattan Bank...... (44,000) -- --
Retirement of 1994 Preferred Securities................... (27,668) -- --
Retirement of long-term debt -- Imperial Bank............. (7,250) (1,250) (1,200)
Prepayment penalty on long-term debt...................... (244) -- --
Retirement of long-term debt -- Chase financing........... -- (1,410) --
Proceeds from Chase financing............................. -- 93,091 --
-------- --------- -------
Net cash provided by (used in) financing activities... 81,646 90,509 (1,198)
-------- --------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of bonds and notes:
Investments available-for-sale.......................... (7,539) -- (1,496)
Purchase of Pacific Rim Holding Company................... (44,016) -- --
Investment in subsidiary.................................. (1,175) -- --
Sales of bonds and notes: Investments available for
sale.................................................... -- 1,493 --
Capital contribution to subsidiaries...................... (25,000) -- (1,500)
Net decrease in short-term investments.................... 89 -- --
-------- --------- -------
Net cash (used in) provided by investing activities... (77,641) 1,493 (2,996)
-------- --------- -------
Net increase (decrease) in cash....................... 3,617 (1,102) (3,184)
Cash and cash equivalents at beginning of period.......... 1,787 2,889 6,073
-------- --------- -------
Cash and cash equivalents at end of period................ $ 5,404 $ 1,787 $ 2,889
======== ========= =======
Supplemental disclosure of cash flow information:
Cash paid during the year for income taxes.............. $ 1 $ 1 $ 1
======== ========= =======
Cash paid during the year for interest.................. $ 2,433 $ 641 $ 808
======== ========= =======
</TABLE>

See notes to condensed financial information

F-35
<PAGE> 185

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:

<TABLE>
<CAPTION>
1997 1996
---- -------
<S> <C> <C>
Chase Financing Agreement -- 6.87% due through 2004......... $-- $91,681
Imperial Bank Debt -- 8.25% due through 2001................ -- 7,250
Voting Notes due 2002....................................... 30 30
--- -------
Balance at end of period.................................... $30 $98,961
=== =======
</TABLE>

The voting notes of $30 will mature in the year 2002.

3. DIVIDENDS FROM SUBSIDIARIES

During 1997, 1996, and 1995, there were no dividends paid to SNIG by its
consolidated subsidiaries; however SNIC paid SNIG $2.9 million for its current
income taxes.

4. NON-CASH TRANSACTION

As discussed in Note 8 of the Consolidated Financial Statements in 1997,
the Company transferred $110.5 million of receivables from a related party
reinsurer, in connection with a financing transaction, to Chase in exchange for
the cancellation of the Company's $94.9 million debt due to Chase. The
retirement of this collateralized financing resulted in the Company's
recognizing a $15.7 million charge.

5. 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.

F-36
<PAGE> 186

6. RECONCILIATION WITH PREVIOUSLY REPORTED AMOUNTS

The amounts shown in the Condensed Financial information of Registrant
Statement of Cash Flows as restated differ from those previously reported as a
result of reclassifications made to the Condensed Financial information of
Registrant Balance Sheet.

A reconciliation of amounts restated are as follows:

<TABLE>
<CAPTION>
1997 1996 1995
-------- --------- -------
<S> <C> <C> <C>
Net cash (used in) provided by operating activities
As previously reported.................................... $ (388) $ 17,423 $ 1,010
Reclass of receivable from a related party reinsurer...... -- (110,527) --
-------- --------- -------
As restated....................................... $ (388) $ (93,104) $ 1,010
======== ========= =======
Net cash (used in) provided by investing activities
As previously reported.................................... $(77,641) $(109,034) $(2,996)
Reclass of receivable from a related party reinsurer...... -- 110,527 --
-------- --------- -------
As restated....................................... $(77,641) $ 1,493 $(2,996)
======== ========= =======
</TABLE>

A reconciliation of amounts restated are as follows:

<TABLE>
<CAPTION>
1997
--------
<S> <C>
Total Expenses
As previously reported.................................... $ 6,483
Reclass of loss on termination of financing transaction
with related party reinsurer........................... 15,699
--------
As restated....................................... $ 22,182
========
Income tax expenses (benefit)
As previously reported.................................... $ 8,246
Reclass on tax effect of loss on termination of financing
transaction with related party reinsurer............... (5,338)
--------
As restated....................................... $ 2,908
========
Income before preferred securities dividends and accretion,
discontinued operations, and extraordinary items
As previously reported.................................... $(14,841)
Reclass of extraordinary loss on retirement on long-term
debt, net of tax....................................... (10,361)
--------
As restated....................................... $(25,202)
========
</TABLE>

F-37
<PAGE> 187

SCHEDULE II

SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES

VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

<TABLE>
<CAPTION>
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
---------- ------------ ---------- ---------- ---------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997
Allowance for possible losses on
premiums receivable............... $300 $2,311 -- $(1,811) $800
==== ====== ===== ======= ====
Allowance for possible losses on
reinsurance recoverable........... -- -- -- -- --
==== ====== ===== ======= ====
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........... -- -- -- -- --
==== ====== ===== ======= ====
</TABLE>

F-38
<PAGE> 188

SCHEDULE V.1

SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES

SUPPLEMENTAL INSURANCE INFORMATION
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F COLUMN G COLUMN H
-------- ----------- -------------- -------- ------------ -------- ---------- ----------
FUTURE POLICY BENEFITS,
DEFERRED BENEFITS, OTHER POLICY CLAIMS,
POLICY LOSSES, CLAIMS CLAIMS AND NET LOSSES AND
ACQUISITION AND LOSS UNEARNED BENEFITS PREMIUM INVESTMENT SETTLEMENT
COSTS EXPENSES PREMIUM PAYABLE REVENUE INCOME EXPENSES
----------- -------------- -------- ------------ -------- ---------- ----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
1997
Workers' Compensation.......... $5,879 $201,255 $12,913 $ -- $140,920 $12,674 $90,447
====== ======== ======= ====== ======== ======= =======
1996
Workers Compensation........... $3,042 $115,529 $ 9,702 $ -- $ 88,648 $ 7,769 $55,638
====== ======== ======= ====== ======== ======= =======
1995
Workers' Compensation.......... $2,780 $141,495 $10,347 $ -- $ 89,735 $ 9,784 $53,970
====== ======== ======= ====== ======== ======= =======

<CAPTION>
COLUMN A COLUMN I COLUMN J COLUMN K
-------- ------------ --------- --------
AMORTIZATION
OF DEFERRED
POLICY OTHER
ACQUISITION OPERATING PREMIUMS
COSTS EXPENSES WRITTEN
------------ --------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
1997
Workers' Compensation.......... $19,977 $41,608 $136,929
======= ======= ========
1996
Workers Compensation........... $16,870 $24,609 $ 87,715
======= ======= ========
1995
Workers' Compensation.......... $18,288 $21,314 $ 89,139
======= ======= ========
</TABLE>

F-39
<PAGE> 189

SCHEDULE V.2

SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES

REINSURANCE

<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
-------- -------- --------- ------------ -------- -------------
PERCENTAGE OF
CEDED TO ASSUMED FROM AMOUNT
GROSS OTHER OTHER NET ASSUMED
AMOUNT COMPANIES COMPANIES AMOUNT TO NET
-------- --------- ------------ -------- -------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997
Premiums:
Workers' compensation insurance... $152,253 $22,081 $10,748 $140,920 7.6%
-------- ------- ------- -------- ---
Total premiums................. $152,253 $22,081 $10,748 $140,920 7.6%
======== ======= ======= ======== ===
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%
======== ======= ======= ======== ===
</TABLE>

F-40
<PAGE> 190

SCHEDULE V.3

SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES

SUPPLEMENTAL PROPERTY AND CASUALTY INSURANCE INFORMATION

<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F COLUMN G COLUMN H
-------- ----------- ---------- ----------- -------- -------- ---------- ---------------------
DISCOUNT
IF ANY,
DEDUCTED
RESERVES IN RESERVES CLAIMS AND CLAIM
FOR UNPAID FOR UNPAID ADJUSTMENT EXPENSES
DEFERRED CLAIMS AND CLAIMS AND INCURRED RELATED TO:
POLICY CLAIMS CLAIM NET ---------------------
ACQUISITION ADJUSTMENT ADJUSTMENT UNEARNED EARNED INVESTMENT CURRENT PRIOR
COSTS EXPENSES EXPENSES PREMIUM PREMIUM INCOME YEAR YEAR
----------- ---------- ----------- -------- -------- ---------- --------- ---------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1997
Workers' Compensation.... $5,879 $201,255 $ -- $12,913 $140,920 $12,674 $95,826 $(5,379)
====== ======== ====== ======= ======== ======= ======= =======
1996
Workers' Compensation.... $3,042 $115,529 $ -- $ 9,702 $ 88,648 $ 7,769 $57,614 $(1,976)
====== ======== ====== ======= ======== ======= ======= =======
1995
Workers' Compensation.... $2,780 $141,495 $ -- $10,347 $ 89,735 $ 9,784 $58,842 $(4,872)
====== ======== ====== ======= ======== ======= ======= =======
</TABLE>

F-41
<PAGE> 191

SUPERIOR NATIONAL INSURANCE GROUP, INC.
AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

ASSETS

<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED) *
<S> <C> <C>
INVESTMENTS
Bonds and notes:
Available-for-sale, at market (cost: 1998, $179,057; 1997,
$203,373)............................................... $180,830 $205,214
Equity securities, at market (cost: 1998, $5,179; 1997,
$1,356)................................................... 5,263 1,526
Short-term investments, at cost............................. 650 6,634
-------- --------
TOTAL INVESTMENTS.................................. 186,743 213,374
Cash and cash equivalents (Restricted cash: 1998, $449;
1997, $651)............................................... 4,421 28,742
Reinsurance recoverable..................................... 55,474 53,082
Premiums receivable (less allowance for doubtful accounts:
1998 and 1997, $800)...................................... 34,518 36,888
Deferred income taxes (less valuation allowance of $8,129,
1998 and 1997)............................................ 22,592 25,104
Prepaid reinsurance premiums................................ 25,822 1,598
Goodwill.................................................... 35,248 35,887
Prepaid and other........................................... 31,218 34,798
-------- --------
TOTAL ASSETS....................................... $396,036 $429,473
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Claims and claim adjustment expenses........................ $154,843 $201,255
Unearned premiums........................................... 16,198 12,913
Reinsurance payable......................................... 17,964 3,412
Discontinued operations liability........................... 10,861 12,904
Accounts payable and other liabilities...................... 36,424 37,894
-------- --------
TOTAL LIABILITIES.................................. 236,290 268,378
COMPANY-OBLIGATED TRUST PREFERRED SECURITIES OF
SUBSIDIARY TRUST HOLDING SOLELY SENIOR SUBORDINATED
NOTES OF SNIG; $1,000 face per share; issued and
outstanding 105,000 shares in 1997 and 1998............ 101,051 101,277
STOCKHOLDERS' EQUITY
Common stock, $0.01 par value; authorized 25,000,000 shares:
issued 5,876,399 shares in 1998 and 5,871,279 shares in
1997...................................................... 59 59
Paid-in capital excess of par............................. 34,274 34,242
Paid-in capital -- warrants................................. 2,206 2,206
Accumulated other comprehensive income; Unrealized gain on
investments, net of taxes................................. 1,225 1,327
Retained earnings........................................... 26,076 21,984
Less: 245,000 shares of treasury stock at cost.............. (5,145) --
-------- --------
TOTAL STOCKHOLDERS' EQUITY......................... 58,695 59,818
======== ========
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY......... $396,036 $429,473
======== ========
</TABLE>

- ------------------------------
* Derived from audited financial statements.

See Notes to Condensed Consolidated Financial Statements.
F-42
<PAGE> 192

SUPERIOR NATIONAL INSURANCE GROUP, INC.
AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
(RESTATED) (RESTATED)
<S> <C> <C> <C> <C>
REVENUES:
Premiums written, net of reinsurance ceded.................. $13,579 $ 43,703 $42,080 $ 63,706
Net change in unearned premiums............................. 6,040 1,707 8,126 682
------- -------- ------- --------
Net premiums earned......................................... 19,619 45,410 50,206 64,388
Net investment income....................................... 3,761 3,435 8,014 5,521
------- -------- ------- --------
TOTAL REVENUES..................................... 23,380 48,845 58,220 69,909
EXPENSES:
Claims and claim adjustment expenses, net of reinsurance
recoveries................................................ 8,031 34,724 26,319 44,995
Commissions, net of reinsurance ceding commissions.......... (1,497) 4,687 1,467 6,888
Interest expense............................................ -- 2,417 -- 4,144
General and administrative expenses
Underwriting.............................................. 9,912 6,158 16,939 10,961
Loss on termination of financing transaction with a
related party reinsurer................................. -- 15,699 -- 15,699
Other..................................................... 196 340 375 521
Goodwill.................................................. 335 137 639 137
------- -------- ------- --------
TOTAL EXPENSES..................................... 16,977 64,162 45,739 83,345
------- -------- ------- --------
INCOME BEFORE INCOME TAXES, PREFERRED SECURITIES DIVIDENDS
AND ACCRETION............................................. 6,403 (15,317) 12,481 (13,436)
Income tax expense.......................................... 2,354 (5,240) 4,665 (4,569)
------- -------- ------- --------
INCOME BEFORE PREFERRED SECURITIES DIVIDENDS AND
ACCRETION................................................. 4,049 (10,077) 7,816 (8,867)
Preferred Securities dividends and accretion, net of income
tax....................................................... -- (453) -- (907)
Trust Preferred Securities dividends and accretion, net of
income tax................................................ (1,852) -- (3,724) --
------- -------- ------- --------
NET INCOME.................................................. $ 2,197 $(10,530) $ 4,092 $ (9,774)
======= ======== ======= ========
BASIC EARNINGS PER SHARE:
INCOME BEFORE PREFERRED SECURITIES DIVIDENDS AND
ACCRETION................................................. $ 0.69 $ (1.72) $ 1.34 $ (1.91)
Preferred securities dividends and accretion................ (0.32) (0.08) (0.64) (0.20)
------- -------- ------- --------
NET INCOME.................................................. $ 0.37 $ (1.80) $ 0.70 $ (2.11)
======= ======== ======= ========
DILUTED EARNINGS PER SHARE:
INCOME BEFORE PREFERRED SECURITIES DIVIDENDS AND
ACCRETION................................................. $ 0.50 $ (1.33) $ 0.99 $ (1.38)
Preferred securities dividends and accretion................ (0.23) (0.06) (0.47) (0.14)
------- -------- ------- --------
NET INCOME.................................................. $ 0.27 $ (1.39) $ 0.52 $ (1.52)
======= ======== ======= ========
</TABLE>

See Notes to Condensed Consolidated Financial Statements.
F-43
<PAGE> 193

SUPERIOR NATIONAL INSURANCE GROUP, INC.
AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE
INCOME
-------------
UNREALIZED
NUMBER OF GAIN (LOSS) PAID-IN
SHARES COMMON TREASURY ON CAPITAL- COMPREHENSIVE RETAINED
OUTSTANDING STOCK STOCK INVESTMENTS WARRANTS INCOME EARNINGS
----------- ------- -------- ----------- ------------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996........... 3,446,492 $16,022 $ -- $ (162) $2,206 $ 27,125
Comprehensive income
Net income........................... -- -- -- -- -- (5,141) (5,141)
-------
Other comprehensive income, net of
tax
Change in unrealized gain (loss) on
investments...................... -- -- -- 1,489 -- 1,489 --
-------
Other comprehensive income........... 1,489
-------
Comprehensive income................... $(3,652)
=======
Common stock issued.................... 2,390,438 18,000 -- -- -- --
Stock issued under stock option plan... 22,127 105 -- -- -- --
Common stock issued under stock
incentive plan....................... 12,222 174 -- -- -- --
---------- ------- ------- ------ ------ --------
Balance at December 31, 1997........... 5,871,279 34,301 -- 1,327 2,206 21,984
---------- ------- ------- ------ ------ --------
Comprehensive income
Net income........................... -- -- -- -- -- 4,092 4,092
-------
Other comprehensive income, net of
tax
Change in unrealized gain (loss) on
investments...................... -- -- -- (102) -- (102) --
-------
Other comprehensive income........... (102)
-------
Comprehensive income................... $ 3,990
=======
Common stock issued.................... -- -- -- -- -- --
Stock issued under stock option plan... 5,120 32 -- -- -- --
Common stock issued under stock
incentive plan....................... -- -- -- -- -- --
Treasury stock......................... (245,000) -- (5,145) -- -- --
========== ======= ======= ====== ====== ========
Balance at June 30, 1998............... 5,631,399 $34,333 $(5,145) $1,225 $2,206 $ 26,076
========== ======= ======= ====== ====== ========

TOTAL
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
Balance at December 31, 1996........... $ 45,191
Comprehensive income
Net income........................... (5,141)
Other comprehensive income, net of
tax
Change in unrealized gain (loss) on
investments...................... 1,489
Other comprehensive income...........
Comprehensive income...................
Common stock issued.................... 18,000
Stock issued under stock option plan... 105
Common stock issued under stock
incentive plan....................... 174
--------
Balance at December 31, 1997........... 59,818
--------
Comprehensive income
Net income........................... 4,092
Other comprehensive income, net of
tax
Change in unrealized gain (loss) on
investments...................... (102)
Other comprehensive income...........
Comprehensive income...................
Common stock issued.................... --
Stock issued under stock option plan... 32
Common stock issued under stock
incentive plan....................... --
Treasury stock......................... (5,145)
========
Balance at June 30, 1998............... $ 58,695
========
</TABLE>

See Notes to Condensed Consolidated Financial Statements.
F-44
<PAGE> 194

SUPERIOR NATIONAL INSURANCE GROUP, INC.
AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS AS RESTATED
(IN THOUSANDS)
(UNAUDITED)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------
1998 1997
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income........................................... $ 4,092 $ (9,774)
-------- --------
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Amortization of bonds and preferred stock................. 30 (803)
Amortization of capital lease obligation.................. (666) --
(Gain) loss on sale of investments........................ (1,028) 123
Loss on termination of financing transaction with a
related party reinsurer................................. -- 15,699
Amortization of goodwill.................................. 639 136
Interest expense on long-term debt........................ -- 3,146
Preferred securities dividends and accretion.............. 3,724 907
Increase in reinsurance receivables....................... (2,392) (4,216)
Decrease in premiums receivable........................... 2,370 2,004
Increase in other assets.................................. (4,420) (3,149)
Decrease in deferred income taxes......................... 4,485 (4,569)
(Decrease) increase in claims and claim adjustment expense
reserves................................................ (46,413) 2,714
Increase (decrease) in unearned premium reserves.......... 3,286 (909)
Decrease in accounts payable and other liabilities........ (3,692) (13,238)
-------- --------
Total adjustments.................................. (44,077) (2,155)
-------- --------
Net cash used in operating activities.............. (39,985) (11,929)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Paid-in-capital -- restricted stock....................... 31 3
Proceeds from issuance of common stock.................... -- 18,000
Long-term debt -- Chase Manhattan Bank.................... -- 44,000
Retirement of long-term debt -- Imperial Bank............. -- (7,250)
Reinsurance deposit....................................... (12,654) --
Purchase of treasury stock................................ (5,145) --
-------- --------
Net cash (used in) provided by financing activities..... (17,768) 54,753
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of bonds and notes:
Investments available-for-sale.......................... (108,103) (90,283)
Purchase of equity security............................... (64,536) (145)
Investments and cash for discontinued operations.......... (2,043) (17,125)
Purchase of Pac Rim Holding Corporation................... -- (41,170)
Sale of property, plant and equipment..................... 8,000 --
Sales of bonds and notes: Investments
available-for-sale...................................... 114,120 13,540
Maturities of bonds and notes: Investments
available-for-sale...................................... 19,121 6,968
Sale of equity securities................................. 60,745 517
Net decrease in short-term investment..................... 6,128 76,753
-------- --------
Net cash provided by (used in) investing activities..... 33,432 (50,945)
-------- --------
Net decrease in cash.................................... (24,321) (8,121)
Cash and cash equivalents at beginning of period............ 28,742 34,423
-------- --------
Cash and cash equivalents at end of period.................. $ 4,421 $ 26,302
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the year for income taxes.................. $ 181 $ 4
======== ========
Cash paid during the year for interest...................... $ 5,614 $ 191
======== ========
</TABLE>

See Notes to Condensed Consolidated Financial Statements.
F-45
<PAGE> 195

SUPERIOR NATIONAL INSURANCE GROUP, INC.
AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)

NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A.1 BASIS OF PRESENTATION

Superior National Insurance Group, Inc. ("SNIG") is a holding company that
through its wholly-owned subsidiaries, Superior National Insurance Company
("SNIC") and Superior Pacific Casualty Company ("SPCC"), is engaged in writing
workers' compensation insurance principally in the States of California and
Arizona, and until September 30, 1993, was engaged in writing commercial
property and casualty insurance. SNIC and SPCC conduct business under the
"Superior Pacific" trade name. Unless the context indicates otherwise, "Superior
Pacific," as used herein, refers to SNIC and SPCC and their combined operations
from April 1997 to the present, and refers only to SNIC and its operations for
all prior periods. The "Company" refers to SNIG and its subsidiaries.

The accompanying unaudited condensed consolidated financial statements of
the Company have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments, including normally occurring accruals, considered necessary for a
fair presentation have been included. Certain reclassifications of prior year
amounts have been made to conform with the 1998 presentation. Operating results
for the six months ended June 30, 1998 are not necessarily indicative of the
results to be expected for the year ending December 31, 1998. These consolidated
financial statements should be read in conjunction with the consolidated
financial statements and footnotes thereto contained in the Company's Annual
Report on Form 10-K for the year ended December 31, 1997.

A.2 ACQUISITION OF PAC RIM HOLDING CORPORATION

On April 11, 1997, the Company completed its acquisition of Pac Rim Holding
Corporation ("Pac Rim") and its wholly-owned subsidiary, The Pacific Rim
Assurance Company, for total consideration of approximately $42.0 million in
cash. This consideration resulted in payments of approximately $20.0 million to
Pac Rim stockholders; $20.0 million to Pac Rim's convertible debenture holders;
and $2.0 million to Pac Rim's warrant and option holders. In addition, the
Company incurred $2.0 million in transaction fees and related expenses. The
Pacific Rim Assurance Company was renamed Superior Pacific Casualty Company upon
its acquisition by the Company. The Company financed the acquisition of Pac Rim
through a $44.0 million term loan and the sale of $18.0 million in newly issued
shares of common stock in a private transaction. Approximately $6.6 million of
the loan proceeds was used to prepay SNIG's previously outstanding long-term
debt, and approximately $10.0 million was contributed by SNIG to the capital of
SPCC. The $44.0 million term loan was subsequently retired from funds raised
from the sale of $105.0 million of 10 3/4% Trust Preferred Securities by a
subsidiary of SNIG. See Note A.5.

The purchase of Pac Rim resulted in $36.9 million of goodwill that is being
amortized on a straight line basis over 27.5 years. The transaction was
accounted for using the purchase method and the results of operations since the
date of acquisition have been included in operations. The designated accounting
date of the purchase of Pac Rim is April 1, 1997.

The balance sheet of Pac Rim at the acquisition date included the following
assets: investments of $105.9 million, cash of $2.6 million, receivables of
$17.3 million, and other assets of $22.3 million. Liabilities assumed in the
acquisition included unearned premiums of $6.9 million, claim and claim
adjustment expense reserves of $107.7 million and other liabilities of $32.3
million.

F-46
<PAGE> 196
SUPERIOR NATIONAL INSURANCE GROUP, INC.
AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)

A.3 EARNINGS PER SHARE ("EPS"); COMPREHENSIVE INCOME

In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 128 ("FAS No. 128"), "Earnings Per Share,"
which requires presentation of basic and diluted earnings per share for all
publicly traded companies effective for fiscal years ending after December 15,
1997.

The following is an illustration of the reconciliation of the numerators
and denominators of the basic and diluted earnings per share (EPS) computations
for the six months ended June 30, 1998 and June 30, 1997:

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1998 SIX MONTHS ENDED JUNE 30, 1997
------------------------------------------ ------------------------------------------
INCOME SHARES PER SHARE INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
-------------- ------------- --------- -------------- ------------- ---------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS
Income before items
below............. $ 7,816 5,853,713 $ 1.34 $ (8,867) 4,641,954 $(1.91)
Preferred
Securities........ (3,724) (0.64) (907) (0.20)
------- ------ -------- ------
Net Income........... $ 4,092 $ 0.70 $ (9,774) $(2.11)
======= ====== ======== ======
EFFECT OF DILUTIVE
SECURITIES
Options.............. 386,280 336,603
Warrants............. 1,672,234 1,432,309
DILUTED EPS
Income before items
below............. $ 7,816 7,912,227 $ 0.99 $ (8,867) 6,410,866 $(1.38)
Preferred
Securities........ (3,724) (0.47) (907) (0.14)
------- ------ -------- ------
Net Income........... $ 4,092 $ 0.52 $ (9,774) $(1.52)
======= ====== ======== ======
</TABLE>

F-47
<PAGE> 197
SUPERIOR NATIONAL INSURANCE GROUP, INC.
AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)

The following is an illustration of the reconciliation of the numerators
and denominators of the basic and diluted earnings per share (EPS) computations
for the three months ended June 30, 1998 and June 30, 1997:

<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 1998 THREE MONTHS ENDED JUNE 30, 1997
------------------------------------------ ------------------------------------------
INCOME SHARES PER SHARE INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
-------------- ------------- --------- -------------- ------------- ---------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS
Income before items
below............. $ 4,049 5,834,347 $ 0.69 $(10,077) 5,837,173 $(1.72)
Preferred
Securities........ (1,852) (0.32) (453) (0.08)
------- ------ -------- ------
Net Income........... $ 2,197 $ 0.37 $(10,530) $(1.80)
======= ====== ======== ======
EFFECT OF DILUTIVE
SECURITIES
Options.............. 417,582 321,992
Warrants............. 1,732,524 1,387,215
DILUTED EPS
Income before items
below............. $ 4,049 7,984,453 $ 0.50 $(10,077) 7,546,380 $(1.33)
Preferred
Securities........ (1,852) (0.23) (453) (0.06)
------- ------ -------- ------
Net Income........... $ 2,197 $ 0.27 $(10,530) $(1.39)
======= ====== ======== ======
</TABLE>

In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 130, "Reporting Comprehensive Income" ("SFAS
No. 130"). SFAS 130 is effective for periods ending after December 15, 1997,
including interim periods. SFAS No. 130 requires companies to report
comprehensive income and its components in a financial statement and display the
accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in-capital. Comprehensive income includes all
changes in equity during a period except those resulting from investments by
stockholders and distributions to stockholders. The Company has included the
required disclosure of SFAS No. 130 in this filing.

A.4 CLAIM AND CLAIM ADJUSTMENT EXPENSE RESERVES

The liability for unpaid claim and claim adjustment expenses is based on an
evaluation of reported losses and on estimates of incurred but unreported
losses. The reserve liabilities are determined using adjusters' individual case
estimates and statistical projections, which can be affected by many external
factors that are difficult to predict, including changes in the economy, trends
in medical treatments and litigation, changes in regulatory environment, medical
services, and employment rights. The liability is reported net of estimated
salvage and subrogation recoverables. Adjustments to the liability resulting
from subsequent developments or revisions to the estimate are reflected in
results of operations in the period in which such adjustments become known.
While there can be no assurance that reserves at any given date are adequate to
meet the Company's obligations, the amounts reported on the balance sheet are
management's best estimate of that amount.

A.5 TRUST PREFERRED SECURITIES

In December 1997, SNIG formed Superior National Capital Trust I, a
statutory business trust (the "Trust"), whose sole purpose was to issue 10 3/4%
Trust Preferred Securities (the "Trust Preferred Securities"), having an
aggregate liquidation amount of $105 million, and to invest the proceeds thereof
in an

F-48
<PAGE> 198
SUPERIOR NATIONAL INSURANCE GROUP, INC.
AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)

equivalent amount of 10 3/4% Senior Subordinated Notes due 2017 of the Company
(the "Senior Subordinated Notes"). The Company owns directly all of the common
securities issued by the Trust, which it purchased for an aggregate
consideration of $3.25 million. The proceeds from the sale of the Trust
Preferred Securities were used solely to purchase SNIG's Senior Subordinated
Notes in the aggregate principal amount of $108.25 million, which are the sole
assets of the Trust. In addition, the Company entered into several contractual
undertakings which, the Company believes, when taken together, guarantee to the
holders of the Trust Preferred Securities an unconditional right to enforce the
payment of the distributions with respect to such securities.

A.6 LARGE ACCOUNT QUOTA-SHARE ARRANGEMENT

Effective February 1, 1998, Superior Pacific entered into a Quota-Share
Arrangement with United States Life Insurance Company, rated "A+" by A.M. Best
Company, Inc., under which Superior Pacific ceded 100% of premiums and claim and
claim adjustment expenses associated with policies having $100,000 or more of
estimated annual premium. Superior Pacific received a 35.0% ceding commission on
premiums ceded under this contract. Effective May 1, 1998, the Quota-Share
Arrangement was amended so that the ceding level was reduced to $25,000 in
estimated annual premium at inception, and the ceding commission was adjusted to
33.5%. The term of the amended agreement is three years, with two one-year
extensions.

NOTE B. DISCONTINUED OPERATIONS

Outstanding discontinued operations claim and claim adjustment expense
reserves were $15.7 million at June 30, 1998, which was consistent with
management's expectations. Offsetting these liabilities are $5.0 million of
reinsurance recoverable on paid and unpaid claim and claim adjustment expenses.

F-49
<PAGE> 199
SUPERIOR NATIONAL INSURANCE GROUP, INC.
AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)

NOTE C. RECONCILIATION WITH PREVIOUSLY REPORTED AMOUNTS

The amounts shown in the Condensed Consolidated Statement of Cash Flows
differ from those previously reported as a result of reclassifications made to
the Condensed Consolidated Balance Sheet. A reconciliation of amounts restated
are as follows:

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
------------------------------
1998 1997
------------- -------------
<S> <C> <C>
Net cash (used in) provided by operating activities
As previously reported.................................... $(37,800) $(11,929)
Reclass of investments withheld from reinsurer............ (2,185) --
-------- --------
As restated............................................ $(39,985) $(11,929)
======== ========
Net cash provided by (used in) financing activities
As previously reported.................................... $(19,811) $ 37,628
Reclass of investments and cash for discontinued
operations............................................. 2,043 17,125
-------- --------
As restated............................................ $(17,768) $ 54,753
======== ========
Net cash (used in) provided by investing activities
As previously reported.................................... $ 27,306 $(55,209)
Reclass of investments withheld from reinsurer............ 2,185 --
Reclass of investments and cash for discontinued
operations............................................. (2,043) (17,125)
Reclass of invested cash from cash and cash equivalents to
short-term investments................................. 5,984 21,389
-------- --------
As restated............................................ $ 33,432 $(50,945)
======== ========
Cash and cash equivalents at the end of the period
As previously reported.................................... $ 5,071 $ 72,427
Reclass of invested cash from cash and cash equivalents to
short-term investments................................. (650) (46,125)
-------- --------
As restated............................................ $ 4,421 $ 26,302
======== ========
</TABLE>

F-50
<PAGE> 200
SUPERIOR NATIONAL INSURANCE GROUP, INC.
AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 1997 JUNE 30, 1997
------------- -------------
<S> <C> <C>
Total Expenses
As previously reported.................................... $ 48,463 $ 67,646
Reclass of loss on termination of financing transaction
with related party reinsurer........................... 15,699 15,699
-------- --------
As restated............................................ $ 64,162 $ 83,345
======== ========
Income tax expense (benefit)
As previously reported.................................... $ 98 $ 769
Reclass on tax effect of loss on termination of financing
transaction with related party reinsurer............... (5,338) (5,338)
-------- --------
As restated............................................ $ (5,240) $ (4,569)
======== ========
Income before preferred securities dividends and accretion,
discontinued operations, and extraordinary items
As previously reported.................................... $ 284 $ 1,494
Reclass of extraordinary loss on retirement on long-term
debt, net of tax....................................... (10,361) (10,361)
-------- --------
As restated............................................ $(10,077) $ (8,867)
======== ========
</TABLE>

<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1997 JUNE 30, 1997
------------------------------- -------------------------------
AS AS
PREVIOUSLY AS PREVIOUSLY AS
REPORTED RECLASS RESTATED REPORTED RECLASS RESTATED
---------- ------- -------- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE
Income before preferred securities
dividends and accretion, and
extraordinary items.................... $ 0.05 $(1.77) $(1.72) $ 0.32 $(2.23) $(1.91)
Preferred Securities...................... (0.08) -- (0.08) (0.20) -- (0.20)
Extraordinary Items....................... (1.77) 1.77 -- (2.23) 2.23 --
------ ------ ------ ------ ------ ------
Net loss.................................. $(1.80) $ -- $(1.80) (2.11) $ -- $(2.11)
====== ====== ====== ====== ====== ======
DILUTED EARNINGS PER SHARE
Income before preferred securities
dividends and accretion, and
extraordinary items.................... $ 0.04 $(1.37) $(1.33) $ 0.23 $(1.61) $(1.38)
Preferred Securities...................... (0.06) -- (0.06) (0.14) -- (0.14)
Extraordinary Items....................... (1.37) 1.37 -- (1.61) 1.61 --
------ ------ ------ ------ ------ ------
Net loss.................................. $(1.39) $ -- $(1.39) $(1.52) $ -- $(1.52)
====== ====== ====== ====== ====== ======
</TABLE>

F-51
<PAGE> 201

THE INSURANCE OPERATIONS OF
BUSINESS INSURANCE GROUP, INC.

INDEX

<TABLE>
<CAPTION>
PAGE
<S> <C>
INDEPENDENT AUDITORS' REPORT................................ F-53
COMBINED FINANCIAL STATEMENTS:
Combined Balance Sheets as of December 31, 1997 and
1996................................................... F-54
Combined Statements of Operations and Comprehensive Income
for Each of the Three Years Ended December 31, 1997,
1996 and 1995 as restated.............................. F-55
Combined Statements of Stockholder's Equity for Each of
the Three Years
Ended December 31, 1997, 1996 and 1995 as restated..... F-56
Combined Statements of Cash Flows for Each of the Three
Years Ended December 31, 1997, 1996 and 1995 as
restated............................................... F-57
Notes to Combined Financial Statements.................... F-58
</TABLE>

F-52
<PAGE> 202

INDEPENDENT AUDITORS' REPORT

To the Board of Directors of
Business Insurance Group, Inc.:

We have audited the accompanying combined balance sheets of the Insurance
Operations of Business Insurance Group, Inc. (the "Company") as of December 31,
1997 and 1996 and the related combined statements of operations and
comprehensive income, stockholder's equity, and cash flows for each of the three
years in the period ended December 31, 1997. These combined financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these combined financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the combined 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, such combined financial statements present fairly, in all
material respects, the financial position of the Insurance Operations of
Business Insurance Group, Inc. at December 31, 1997 and 1996, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1997 in conformity with generally accepted accounting
principles.

As discussed in Note 16 to the combined financial statements, the
accompanying financial statements have been restated.

DELOITTE & TOUCHE LLP
San Francisco, California
June 19, 1998 (August 24, 1998 as to Note 16)

F-53
<PAGE> 203

THE INSURANCE OPERATIONS OF
BUSINESS INSURANCE GROUP, INC.

COMBINED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996

ASSETS

<TABLE>
<CAPTION>
1997 1996
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Invested Assets:
Bonds, available-for-sale, at fair value.................. $ 611,163 $ 671,629
Bonds, held-to-maturity, at amortized cost................ 14,059 15,978
Real estate............................................... 29,821 31,184
Note from parent.......................................... 10,000 10,000
---------- ----------
TOTAL INVESTED ASSETS.............................. 665,043 728,791
Cash and cash equivalents................................... 98,128 25,861
Reinsurance recoverable:
Paid loss and loss adjustment expenses.................... 18,518 14,939
Unpaid loss and loss adjustment expenses.................. 206,871 121,170
Premiums receivable -- net.................................. 80,008 84,575
Earned but unbilled premiums receivable..................... 24,401 17,876
Accrued investment income................................... 10,605 12,812
Receivable from reinsurer................................... 4,132 --
Deferred policy acquisition costs........................... 23,841 19,946
Income taxes receivable from parent......................... 40,857 19,933
Deferred income taxes....................................... 15,807 14,665
Prepaid reinsurance premiums................................ -- 10,659
Goodwill.................................................... 14,266 9,964
Property and equipment -- net............................... 14,556 9,922
Prepaid expenses and other assets........................... 5,373 2,660
---------- ----------
TOTAL ASSETS....................................... $1,222,406 $1,093,773
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Loss and loss adjustment expenses......................... $ 728,421 $ 590,595
Unearned premiums......................................... 45,004 44,010
Reinsurance payable....................................... 28,027 35,478
Long-term debt due to parent.............................. 121,750 128,250
Policyholder dividends.................................... 3,015 3,385
Accounts payable and other liabilities.................... 43,843 24,163
---------- ----------
TOTAL LIABILITIES.................................. 970,060 825,881
---------- ----------
Stockholder's Equity:
Invested Capital.......................................... 247,476 266,093
Accumulated other comprehensive income.................... 4,870 1,799
---------- ----------
Total Stockholder's Equity......................... 252,346 267,892
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY......... $1,222,406 $1,093,773
========== ==========
</TABLE>

See notes to combined financial statements.
F-54
<PAGE> 204

THE INSURANCE OPERATIONS OF BUSINESS INSURANCE GROUP, INC.

COMBINED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(AS RESTATED -- SEE NOTE 16)

<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
REVENUES:
Net premiums earned...................................... $515,272 $480,828 $390,974
Net investment income.................................... 37,548 33,317 24,005
Net realized gain on investments......................... 7,176 892 1,667
Other income............................................. 3,512 2,823 248
-------- -------- --------
TOTAL REVENUES................................... 563,508 517,860 416,894
-------- -------- --------
EXPENSES:
Loss and loss adjustment, net of reinsurance
recoveries............................................ 443,204 381,897 245,522
Underwriting expenses.................................... 170,070 111,477 118,572
Policyholder dividends................................... 793 (5,250) 5,494
Interest................................................. 8,326 4,330 --
Goodwill................................................. 1,262 909 256
-------- -------- --------
TOTAL EXPENSES................................... 623,655 493,363 369,844
-------- -------- --------
Income (loss) before income taxes.......................... (60,147) 24,497 47,050
Income tax benefit (expense)............................... 29,506 (1,591) (11,673)
-------- -------- --------
NET INCOME (LOSS)................................ (30,641) 22,906 35,377
Other comprehensive income, net of tax:
Unrealized gain on available-for-sale investments, net of
deferred taxes........................................ 3,071 464 16,791
-------- -------- --------
Comprehensive income (loss)................................ $(27,570) $ 23,370 $ 52,168
======== ======== ========
</TABLE>

See notes to combined financial statements.
F-55
<PAGE> 205

THE INSURANCE OPERATIONS OF
BUSINESS INSURANCE GROUP, INC.

COMBINED STATEMENTS OF STOCKHOLDER'S EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(AS RESTATED -- SEE NOTE 16)

<TABLE>
<CAPTION>
TOTAL
INVESTED COMPREHENSIVE STOCKHOLDER'S
CAPITAL INCOME (LOSS) EQUITY
--------- -------------- -------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Balance at December 31, 1994.............................. $163,769 $148,313
Comprehensive income:
Net income.............................................. 35,377 $ 35,377 35,377
Unrealized gain on available-for-sale investments, net
of deferred taxes.................................... 16,791 16,791
--------
Comprehensive income...................................... $ 52,168
========
Capital contributions................................... 39,797 39,797
-------- --------
Balance at December 31, 1995.............................. 238,943 240,278
Comprehensive income:
Net income.............................................. 22,906 $ 22,906 22,906
Unrealized gain on available-for-sale investments, net
of deferred taxes.................................... 464 464
--------
Comprehensive income...................................... $ 23,370
========
Capital contributions................................... 4,244 4,244
-------- --------
Balance at December 31, 1996.............................. 266,093 267,892
Comprehensive loss:
Net loss................................................ (30,641) $(30,641) (30,641)
Unrealized gain on available-for-sale investments, net
of deferred taxes.................................... 3,071 3,071
--------
Comprehensive loss........................................ $(27,570)
========
Capital contributions................................... 12,024 12,024
-------- --------
Balance at December 31, 1997.............................. $247,476 $252,346
======== ========
</TABLE>

See notes to combined financial statements.
F-56
<PAGE> 206

THE INSURANCE OPERATIONS OF
BUSINESS INSURANCE GROUP, INC.

COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(AS RESTATED -- SEE NOTE 16)

<TABLE>
<CAPTION>
1997 1996 1995
-------- --------- ---------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $(30,641) $ 22,906 $ 35,377
-------- --------- ---------
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Amortization of bond premium............................ 1,813 4,261 4,933
Depreciation of real estate............................. 658 813 323
Depreciation on property, plant and equipment........... 2,876 2,558 1,129
Loss (gain) on sale of investments...................... (7,256) (597) (1,228)
Loss (gain) on sale of real estate...................... 80 (295) (439)
Amortization of goodwill................................ 1,262 909 256
(Increase) decrease in reinsurance recoverables......... (89,280) (54,564) 23,028
(Increase) decrease in premiums receivable.............. 4,567 (28,118) (11,408)
(Increase) decrease in earned but unbilled
receivables............................................ (6,525) (2,289) (9,865)
(Increase) decrease in accrued investment income........ 2,207 1,000 (7,178)
(Increase) decrease in receivable from reinsurer........ (4,132) -- --
(Increase) decrease in deferred policy acquisition
costs.................................................. (3,895) (5,934) 1,222
(Increase) decrease in income taxes receivable.......... (20,924) (14,829) (5,104)
(Increase) decrease in deferred income taxes............ (2,808) 3,046 (973)
(Increase) decrease in prepaid reinsurance premiums..... 10,659 (10,659) 11
(Increase) decrease in prepaid and other assets......... (2,713) (5,286) 4,720
Increase (decrease) in loss and loss adjustment
expenses............................................... 137,826 147,146 30,783
Increase (decrease) in unearned premium reserves........ 994 20,198 6,103
Increase (decrease) in reinsurance payable.............. (7,451) 33,192 (6,338)
Increase (decrease) in policyholder dividend payable.... (370) (6,086) (12,086)
Increase (decrease) in accounts payable and other
liabilities............................................ 20,904 (2,539) 12,584
-------- --------- ---------
Total adjustments................................... 38,492 81,927 30,473
-------- --------- ---------
Net cash provided by operating activities........... 7,851 104,833 65,850
-------- --------- ---------
Cash flows from investing activities:
Purchases of bonds available for sale..................... (280,184) (350,311) (155,958)
Sales of bonds available for sale......................... 350,947 119,334 57,569
Maturities of bonds held to maturity...................... 1,801 1,248 7,258
Purchases of property, plant and equipment................ (7,509) (6,353) (4,064)
Purchases of real estate.................................. (13) (1,647) (34,916)
Sales of real estate...................................... 638 487 10,570
-------- --------- ---------
Net cash provided by (used in) investing
activities.......................................... 65,680 (237,242) (119,541)
-------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt................ -- 130,000 --
Principal payments on long-term debt.................... (6,500) (1,750) --
Capital contributions................................... 10,800 1,750 37,422
Excess of book value over net assets acquired........... (5,564) -- (6,109)
-------- --------- ---------
Net cash provided by (used in) financing
activities.......................................... (1,264) 130,000 31,313
-------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 72,267 (2,409) (22,378)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.............. 25,861 28,270 50,648
-------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR.................... $ 98,128 $ 25,861 $ 28,270
======== ========= =========
</TABLE>

See notes to combined financial statements.
F-57
<PAGE> 207

THE INSURANCE OPERATIONS OF
BUSINESS INSURANCE GROUP, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)

1. BASIS OF PRESENTATION

Business Insurance Group, Inc. ("BIG"), is an insurance holding company and
ultimately a wholly owned subsidiary of Foundation Health Systems, Inc. ("FHS").
BIG serves as the immediate parent company for four workers' compensation
insurance subsidiary companies as well as certain non-insurance entities. On May
5, 1998, FHS entered into a definitive agreement to sell BIG and its four
insurance subsidiaries [California Compensation Insurance Company ("CalComp"),
Business Insurance Company ("BICO"), Combined Benefits Insurance Company
("CBIC"), and Commercial Compensation Insurance Company ("CCIC")] to Superior
National Insurance Group, Inc. ("Superior") of Calabasas, California. The
transaction, subject to customary closing conditions including regulatory
approvals and a favorable vote from Superior's shareholders, is expected to
close in the fourth quarter of 1998.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Combination -- The accompanying combined financial statements
include the accounts of BIG and its insurance subsidiaries, CalComp, BICO, CBIC
and CCIC (together with BIG, the "Company"). BIG is also the parent company of
Foundation Integrated Risk Management Solutions, Inc. ("FIRMS"), which is a
workers' compensation risk management and third party claims administrator, and
Foundation Health Medical Resources Management ("ReviewCo.") which provides bill
review, access to provider networks and other managed care service for workers'
compensation carriers and third party administrators. FIRMS and ReviewCo. are
not included in the sale to Superior. Therefore, for purposes of this report,
the operations, assets and liabilities of these non-insurance subsidiaries are
not included in the accompanying financial statements. Also, under the terms of
the agreement with Superior, certain assets and liabilities (including the note
from parent, long-term debt due to parent and other intercompany balances) will
be settled at or prior to the closing of the transaction. In addition,
investment real estate will be purchased by FHS at book value prior to or at the
closing date of the transaction.

The financial information included herein does not necessarily reflect the
financial position and results of operations in the future or what the financial
position and results of operations would have been had the Company been a
separate, stand-alone entity during the periods presented.

The Company's combined financial statements have been prepared on the basis
of generally accepted accounting principles. The results of all significant
intercompany transactions have been eliminated.

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

Investments in debt instruments consist primarily of bonds. Debt
instruments are classified as (i) "available-for-sale" (carried at fair value
with differences between amortized cost and fair value being reflected as a
separate component of stockholder's equity, net of applicable income tax
effect); (ii) "held-to-maturity" (carried at amortized cost); or (iii) "trading"
(carried at fair value with differences between cost and fair value being
reflected in the results of operations). 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 determined using the specific
identification method. The premiums and discounts on fixed maturities are
amortized using the effective yield method. Current fair values of investments
are obtained from published sources. Declines in fair value that are considered
other than temporary are charged to operations.

F-58
<PAGE> 208
THE INSURANCE OPERATIONS OF
BUSINESS INSURANCE GROUP, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)

Investment real estate which the Company has held for the production of
income is carried at depreciated cost less any write-downs to fair value for
impairment losses. Depreciation on real estate is computed using the
straight-line method over the estimated lives of the properties.

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.

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

The ultimate collectibility of the unbilled receivables can be affected to
a significant degree by general changes in the economy and the regulatory
environment due to the increased time required to determine the billable amount.
The Company considers these factors when estimating the receivable for unbilled
premiums. The allowance for doubtful accounts was $13,841 and $11,488 as of
December 31, 1997 and 1996, respectively.

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 the Company'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 against 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:

<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Balance at beginning of year................... $ 19,946 $ 14,012 $ 15,234
Cost deferred during the year.................. 40,069 35,926 24,561
Amortization charged to expense................ (36,174) (29,992) (25,783)
-------- -------- --------
Balance at end of year......................... $ 23,841 $ 19,946 $ 14,012
======== ======== ========
</TABLE>

Losses and loss adjustment expenses ("LAE") are estimates based on
case-basis amounts of reported claims and unreported losses and loss adjustment
expenses based on experience and industry data. The provision for unpaid losses
and loss 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 losses and loss adjustment expense reserves. Management has selected
ultimate losses and loss adjustment expenses 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

F-59
<PAGE> 209
THE INSURANCE OPERATIONS OF
BUSINESS INSURANCE GROUP, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)

settlement philosophy, current and perceived social and economic factors,
inflation, current and future court rulings and jury attitudes, and many other
economic, legal, political, and social factors all can have significant effects
on the ultimate cost of claims. Changes in Company operations and management
philosophy also may cause actual experience to vary from the historical trends.

Policyholder Dividends -- Prior to the inception of open rating in
California in January 1995, policyholder dividends served both as an economic
incentive to employers for safe operations and as a means of price
differentiation; however, since the start of open rating, the consumer's
preference has been for the lowest net price at a policy's inception. This is
evidenced by the decline in participating policies written by the Company as a
percent of total policies from 20.9% of workers' compensation premiums in force
at December 31, 1995 to 3.4% and 2.7% at December 31, 1996 and 1997,
respectively. In 1995, as a result of the diminishing value of policyholder
dividends, the Company's management declared a moratorium on the payment of
policyholder dividends on California policies expiring between March 1, 1994 and
December 31, 1995. In December 1996, the Company formally discontinued
policyholder dividend payments on California policies expiring between March 1,
1994 and December 31, 1996. Estimated amounts to be returned to policyholders
for non-California policies are accrued when the related premium is earned. For
non-California business, dividends are paid to the extent that a surplus is
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, with FHS.

Pursuant to a tax allocation agreement with FHS, the Company reflects a
provision for income taxes under the liability method as if it were to file
separate federal tax returns. In fiscal years in which the Company incurs net
losses, FHS allocates a tax benefit to the Company based on an appropriate tax
rate.

Property, Equipment and Leasehold Improvements -- Property, equipment, and
leasehold improvements are stated at cost, net of accumulated depreciation and
amortization. Depreciation is computed using the straight-line method over the
lesser of estimated useful lives of the various classes of assets or the lease
term lives of the assets which range from 3 to 7 years.

Expenditures for maintenance and repairs are expensed as incurred.
Significant improvements which increase the estimated useful life of an asset
are capitalized. Upon the sale or retirement of assets recorded cost and related
accumulated depreciation are removed from the accounts, and any gain or loss on
disposal is reflected in operations.

Acquisitions and Related Goodwill -- In May 1997, Christiania General
Insurance Corporation of New York (renamed Commercial Compensation Insurance
Company) was purchased by the Company for $12,813, including goodwill of $5,564.

In February 1995, London Guarantee and Accident Company of New York
(renamed Business Insurance Company) was purchased by the Company for $13,201,
including goodwill of $4,590.

In January 1995, Foundation Health Benefit Life Insurance Company (renamed
Combined Benefits Insurance Company) was purchased at book value by the Company
for $7,950.

Goodwill represents the excess of the cost of companies acquired over the
fair value of their net assets at dates of acquisition and is being amortized on
the straight-line method over a range of 20-40 years.

F-60
<PAGE> 210
THE INSURANCE OPERATIONS OF
BUSINESS INSURANCE GROUP, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)

Concentrations of Credit Risk -- Financial instruments that potentially
subject the Company to concentrations of credit risk consist primarily of cash
equivalents, investments and premium receivables. All cash equivalents and
investments are managed within established guidelines which limit the amounts
which may be invested with one issuer. Concentrations of credit risk with
respect to premium receivables are limited due to the large number of payers
comprising the Company's customer base. The Company's ten largest employer
groups accounted for 3.7% and 3.2% of receivables as of December 31, 1997 and
1996, respectively, and 1.9%, 2.5% and 5.4% of premium revenue for the years
ended December 31, 1997, 1996 and 1995, respectively.

Recently Issued Accounting Pronouncements -- In June 1997, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standard
("SFAS") No. 131, Disclosures About Segments of an Enterprise and Related
Information, which establishes annual and interim reporting standards for an
enterprise's business segments and related disclosures about its products,
services, geographic areas, and major customers; and SFAS No. 132, Employers'
Disclosures About Pensions and Other Postretirement Benefits, which revises and
standardizes pension and other benefit plan disclosures. Adoption of these
statements will not impact the Company's combined financial position, results of
operations or cash flows. These statements are effective for fiscal years
beginning after December 15, 1997.

Use of Management Estimates -- The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect 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 loss and
loss adjustment expenses; policyholder dividends; allowance for doubtful
accounts; deferred policy acquisition costs; earned but unbilled premiums; and
deferred taxes balances in its financial statements. While these estimates are
based upon analyses performed by management and outside actuaries, the amounts
the Company will ultimately pay or collect may differ materially from the
amounts presently estimated.

3. INVESTMENTS

The amortized cost and fair values of bonds classified as
available-for-sale and held-to-maturity at December 31, 1997 are as follows:

<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Available-for-sale:
United States government agencies and
authorities.............................. $ 43,454 $ 233 $(102) $ 43,585
Collateralized mortgage obligations......... 2,999 1 -- 3,000
Corporate instruments....................... 16,263 52 -- 16,315
State and political subdivisions............ 540,812 8,120 (779) 548,153
Certificates of deposit..................... 110 -- -- 110
-------- ------ ----- --------
Total available-for-sale............ $603,638 $8,406 $(881) $611,163
======== ====== ===== ========
</TABLE>

F-61
<PAGE> 211
THE INSURANCE OPERATIONS OF
BUSINESS INSURANCE GROUP, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Held-to-maturity:
United States government agencies and authorities.... $ 763 $ -- $ (2) $ 761
Corporate instruments................................ 24 -- -- 24
State and political subdivisions..................... 12,847 198 (28) 13,017
Certificates of deposit.............................. 425 -- -- 425
------- ---- ---- -------
Total held-to-maturity....................... $14,059 $198 $(30) $14,227
======= ==== ==== =======
</TABLE>

The amortized cost and estimated fair values of investments classified as
available-for-sale and held-to-maturity at December 31, 1997 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.

<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE
---------------------
AMORTIZED FAIR
COST VALUE
--------- --------
<S> <C> <C>
Due in one year or less................................ $ 37,396 $ 37,426
Due after one year through five years.................. 199,568 201,745
Due after five years through ten years................. 190,820 193,574
Due after ten years.................................... 175,854 178,418
-------- --------
Total........................................ $603,638 $611,163
======== ========
</TABLE>

<TABLE>
<CAPTION>
HELD-TO-MATURITY
--------------------
AMORTIZED FAIR
COST VALUE
--------- -------
<S> <C> <C>
Due in one year or less................................. $ 2,749 $ 2,756
Due after one year through five years................... 6,402 6,437
Due after five years through ten years.................. 3,508 3,590
Due after ten years..................................... 1,400 1,444
------- -------
Total......................................... $14,059 $14,227
======= =======
</TABLE>

The amortized cost and fair values of bonds classified as
available-for-sale and held-to-maturity at December 31, 1996 are as follows:

<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Available-for-sale:
United States government agencies and
authorities.............................. $ 60,679 $ 41 $ (828) $ 59,892
State and political subdivisions............ 608,051 5,952 (2,376) 611,627
Certificates of deposit..................... 110 -- -- 110
-------- ------ ------- --------
Total available-for-sale............ $668,840 $5,993 $(3,204) $671,629
======== ====== ======= ========
</TABLE>

F-62
<PAGE> 212
THE INSURANCE OPERATIONS OF
BUSINESS INSURANCE GROUP, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Held-to-maturity:
United States government agencies
and authorities........................... $ 766 $ -- $(16) $ 750
State and political subdivisions............. 14,787 151 (42) 14,896
Certificates of deposit...................... 425 -- -- 425
------- ---- ---- -------
Total held-to-maturity............... $15,978 $151 $(58) $16,071
======= ==== ==== =======
</TABLE>

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

<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Interest on bonds and notes........................... $35,009 $29,303 $20,492
Interest on cash and cash equivalents................. 2,791 2,681 3,478
Real estate rental income............................. 1,959 2,774 757
------- ------- -------
Total investment income..................... 39,759 34,758 24,727
Investment expense.................................... (2,211) (1,441) (722)
------- ------- -------
Net investment income................................. $37,548 $33,317 $24,005
======= ======= =======
</TABLE>

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

<TABLE>
<CAPTION>
1997 1996 1995
------ ---- ------
<S> <C> <C> <C>
Bonds...................................................... $7,256 $597 $1,228
Real estate................................................ (80) 295 439
------ ---- ------
Total............................................ $7,176 $892 $1,667
====== ==== ======
</TABLE>

The Company's investment real estate of $29,821 and $31,184 at December 31,
1997 and 1996, respectively, is held through direct ownership. The Company's
investment real estate consists of commercial properties, land and construction
in progress. In connection with the sale of the Company to Superior, FHS has
agreed to purchase the investment real estate at current book value prior to or
at the closing of the transaction.

Proceeds from sales of bonds held as available-for-sale for the years ended
December 31, 1997, 1996, and 1995 were $350,947, $119,334 and $57,569,
respectively. Gross gains of $7,262 and gross losses of $6 were realized on
those sales in 1997. Gross gains of $689 and gross losses of $92 were realized
on those sales in 1996. Gross gains of $1,858 and gross losses of $630 were
realized on those sales in 1995.

Bonds and other securities with a fair value of $480,584, $405,167 and
$340,676 at December 31, 1997, 1996 and 1995, respectively, were on deposit with
various insurance regulatory authorities.

4. FAIR VALUE OF FINANCIAL INSTRUMENTS

The estimated fair value of cash equivalents, investments
available-for-sale, note from parent and long-term debt due to parent
approximate their carrying amounts in the financial statements and have been
determined by the Company using available market information and appropriate
valuation methodologies. The carrying amount of cash equivalents approximate
fair value due to the short-term maturity of those instruments. The fair values
of investments available-for-sale are estimated based upon quoted market prices

F-63
<PAGE> 213
THE INSURANCE OPERATIONS OF
BUSINESS INSURANCE GROUP, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)

for the same or similar investments. In connection with the sale of the Company
to Superior, the note from parent and the long-term debt due to parent will be
settled at current book value; therefore, carrying amounts approximate fair
values. Considerable judgment is required to develop the estimates of fair
value. Accordingly, the estimates are not necessarily indicative of the amounts
the Company could have realized in a current market exchange. The use of
different market assumptions and/or estimation methodologies may have a material
effect on the estimated fair value amounts.

The fair value estimates are based on pertinent information available to
management as of December 31, 1997 and 1996. Although management is not aware of
any factors that would significantly affect the estimated fair value amounts,
such amounts have not been comprehensively revalued for purposes of these
financial statements since that date and, therefore, current estimates of fair
value may differ significantly.

5. LOSSES AND LOSS ADJUSTMENT EXPENSE RESERVES

The activity in the losses and loss adjustment expense reserve account is
summarized as follows:

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Beginning reserve, gross of reinsurance......... $ 590,595 $ 443,600 $ 412,666
Less reinsurance recoverable on unpaid losses
and LAE....................................... (121,170) (76,154) (90,326)
--------- --------- ---------
Beginning reserve, net of reinsurance...... 469,425 367,446 322,340
--------- --------- ---------
Provision for net losses and loss adjustment
expenses:
For losses occurring in current year.......... 367,971 361,750 272,388
For losses occurring in prior years........... 75,233 20,147 (26,866)
--------- --------- ---------
Total losses and loss adjustment
expenses............................ 443,204 381,897 245,522
--------- --------- ---------
Payments for net losses and loss adjustment
expenses:
Attributable to insured events incurred in
current year............................... (135,202) (106,757) (71,899)
Attributable to insured events incurred in
prior years................................ (255,877) (173,161) (128,517)
--------- --------- ---------
Total loss and loss adjustment expense
payments............................ (391,079) (279,918) (200,416)
--------- --------- ---------
Ending reserves, net of reinsurance............. 521,550 469,425 367,446
Reinsurance recoverable on unpaid losses and
LAE........................................... 206,871 121,170 76,154
--------- --------- ---------
Ending reserves, gross of reinsurance........... $ 728,421 $ 590,595 $ 443,600
========= ========= =========
</TABLE>

In 1997, loss and LAE incurred in prior years increased by $75,233 due
primarily to unfavorable development of the 1996 and 1995 accident years. This
increase is primarily a result of a court ruling in late 1996 which expanded the
presumption of the treating physician related to California workers'
compensation workplace injuries in determining the disability of the injured
worker. This has led to increased severity on partial permanent disability
injuries.

In 1996, the Company experienced $20,147 in adverse loss development on net
loss and LAE reserves estimated at December 31, 1995. The increase for prior
accident year loss and LAE reserves is primarily attributable to increases in
the estimates for the 1995 accident year, primarily due to changes in the
Company's average claim severity. On a per claim basis, the average gross case
loss reserve for the 1995 accident year increased 55.2% from 1995 to 1996, and
the average gross case loss paid for the 1995 accident year increased 37.8% from
1995 to 1996.

F-64
<PAGE> 214
THE INSURANCE OPERATIONS OF
BUSINESS INSURANCE GROUP, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)

In 1995, the Company experienced $26,866 in favorable loss development on
net loss and LAE reserves estimated at December 31, 1994. The decrease in prior
accident year loss and LAE reserves is primarily attributable to reductions in
the estimates for the 1993 and 1994 accident years. The favorable impact of the
reforms passed by the California State Legislature in 1993 related to fraudulent
claims, as well as the impact from the Company's continued use of managed care
techniques, including network utilization and medical case management, also
contributed to the reduction in the prior year loss estimates.

6. INCOME TAXES

Income tax expense (benefit) for the years ended December 31, 1997, 1996,
and 1995 is composed of the following amounts:

<TABLE>
<CAPTION>
1997 1996 1995
-------- ------- -------
<S> <C> <C> <C>
Current...................................... $(26,698) $(1,455) $15,340
Deferred..................................... (2,808) 3,046 (3,667)
-------- ------- -------
Total.............................. $(29,506) $ 1,591 $11,673
======== ======= =======
</TABLE>

A reconciliation of the statutory federal income tax rate and the effective
income tax rate is as follows for the years ended December 31:

<TABLE>
<CAPTION>
1997 1996 1995
----- ----- ----
<S> <C> <C> <C>
Income taxes at statutory rates...................... (35.0)% 35.0% 35.0%
Effect of tax-exempt interest........................ (16.1) (24.8) (9.6)
Other................................................ 2.0 (3.7) (0.6)
----- ----- ----
Total...................................... (49.1)% 6.5% 24.8%
===== ===== ====
</TABLE>

F-65
<PAGE> 215
THE INSURANCE OPERATIONS OF
BUSINESS INSURANCE GROUP, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)

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

<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts...................... $ 4,844 $ 4,021
Accrued compensation................................. 794 376
Accrued expenses..................................... 577 512
Loss reserve discounting............................. 27,678 23,745
Unearned premium liability........................... 3,150 2,335
Policyholder dividends............................... 912 984
Other, net........................................... 40 11
-------- --------
Total deferred tax assets.................... 37,995 31,984
======== ========
Deferred tax liabilities:
Bond discount........................................ (453) (752)
Depreciable and amortizable property................. (10,735) (8,597)
Policy acquisition costs............................. (8,344) (6,981)
Unrealized gain on available-for-sale investments.... (2,656) (989)
-------- --------
Total deferred tax liabilities............... (22,188) (17,319)
-------- --------
Net deferred tax assets................................ $ 15,807 $ 14,665
======== ========
</TABLE>

7. REINSURANCE

Under reinsurance agreements, the Company cedes various amounts of risk to
other insurance companies. A contingent liability exists with respect to
reinsured losses which would become an actual liability of the Company in the
event that the reinsurers should be unable to meet the obligations assumed by
them under the reinsurance agreements. The Company regularly evaluates the
financial condition of its reinsurers. Based on this evaluation, management
believes the reinsurers are creditworthy and that any potential losses on these
arrangements will not have a material impact on the Company.

Effective January 1, 1996, the Company's insurance subsidiaries, CalComp,
BICO and CBIC, entered into a reinsurance pooling agreement. The agreement
applies to calendar year 1996 and subsequent net premiums earned, accident year
1996 and subsequent net loss and loss adjustment expenses incurred, and
underwriting expenses. Effective January 1, 1997, an additional affiliate, CCIC,
became a member of the agreement. The pooling percentages at December 31 were as
follows:

<TABLE>
<CAPTION>
1997 1996
----- -----
<S> <C> <C>
CalComp..................................................... 72.0% 83.5%
BICO........................................................ 25.0 15.0
CBIC........................................................ 1.5 1.5
CCIC........................................................ 1.5 --
----- -----
Total............................................. 100.0% 100.0%
===== =====
</TABLE>

F-66
<PAGE> 216
THE INSURANCE OPERATIONS OF
BUSINESS INSURANCE GROUP, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)

CalComp acts as the lead company and assumes all gross business of the
pooling participants, and cedes to the participants their percentage of the
combined results. All authorized lines and types of business are subject to the
pooling arrangement.

Effective July 1, 1996, the Company entered into a quota share reinsurance
agreement with General Reinsurance Corporation ("Gen Re") wherein Gen Re assumed
a 30% share of net premiums and related losses and allocated loss adjustment
expenses. Effective January 1, 1997, the quota share percentage on this
agreement was reduced to 7.5%, and effective July 1, 1997, this agreement was
terminated. Effective June 30, 1997, the Company commuted its 1990 - 1994 quota
share reinsurance agreement with Gen Re. Under terms of the commutation, Gen Re
paid $7,581 for ceded loss reserves of $7,259 and ceded loss adjustment expense
reserves of $570 offset by a $248 return of ceded commissions.

Effective January 1, 1997, the Company entered into a six-month aggregate
excess of loss reinsurance agreement with Gen Re which provides coverage in
excess of $1,000 per occurrence. The agreement contains two layers of coverage,
the first, with a maximum of $37,250 in excess of the Company's retention of
$153,500 and the second, with a maximum of $5,500 in excess of the Company's
retention of $235,000. Premium for this coverage is based on the loss ratio and
consists of a fixed premium of $2,000 plus a variable reinsurance premium equal
to 14.6% of net loss sustained by the Company with a minimum of $28,000 and a
maximum of $31,500.

Effective July 1, 1997, a second six-month aggregate excess of loss
agreement was entered into with Gen Re which provides coverage in excess of
$1,000 per occurrence. The agreement also contains two layers of coverage, the
first, with a maximum of $75,000 in excess of the Company's retention of
$150,977 and the second, with a maximum of $13,000 in excess of the Company's
retention of $251,251. Premium for this coverage is based on the loss ratio and
consists of a fixed premium of $4,000 plus a variable reinsurance premium equal
to 24.77% of net loss sustained by the Company with a minimum of $56,000 and a
maximum of $60,500.

The Company maintains specific excess reinsurance with various reinsurers
which provides coverage in excess of $1,000 per occurrence for 1997 and 1996.
The agreements provide coverage up to a maximum of $200,000 per occurrence,
including the Company's retention for 1997 and 1996.

In addition, effective April 1, 1995, the Company entered into an excess of
loss treaty with FH Assurance Company ("FHAC"), an affiliated reinsurer. The
treaty provides coverage for $100 in excess of $400 per occurrence for those
policies written in California through December 31, 1996, and, nationwide,
thereafter. Effective January 1, 1998, the treaty with FHAC was terminated.

F-67
<PAGE> 217
THE INSURANCE OPERATIONS OF
BUSINESS INSURANCE GROUP, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)

The effect of reinsurance on premiums written, change in unearned premiums
and losses and LAE for each of the years ended December 31, are shown in the
following tables.

<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- --------
<S> <C> <C> <C>
Premiums written:
Gross.................................. $ 668,906 $ 641,113 $421,422
Ceded.................................. (141,981) (150,746) (24,345)
--------- --------- --------
Net premiums written..................... $ 526,925 $ 490,367 $397,077
========= ========= ========
Change in unearned premiums:
Gross.................................. $ 994 $ 20,198 $ 6,103
Ceded.................................. 10,659 (10,659) --
--------- --------- --------
Net change in unearned premiums.......... $ 11,653 $ 9,539 $ 6,103
========= ========= ========
Losses and loss adjustment expenses:
Losses and loss adjustment expenses.... $ 601,688 $ 468,533 $254,401
Reinsurance recoveries................. (158,484) (86,636) (8,879)
--------- --------- --------
Net loss and loss adjustment expenses.... $ 443,204 $ 381,897 $245,522
========= ========= ========
</TABLE>

The Company has an aggregate unsecured recoverable for losses, paid and
unpaid, including incurred but not reported, LAE and unearned premiums from
individual reinsurers in excess of 3% of the Company's surplus at December 31 as
follows:

<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
General Reinsurance Corporation........................ $194,462 $122,205
======== ========
</TABLE>

In connection with the sale of the Company to Superior, the Company has
obtained a binding commitment for an Aggregate Excess of Loss reinsurance
agreement with a third-party reinsurer. The agreement will provide $150,000 of
adverse loss development indemnification on the Company's December 31, 1997 loss
and LAE reserves.

In addition, the Company has obtained a binding commitment for a second
Aggregate Excess of Loss reinsurance agreement providing $25,000 of adverse loss
development indemnification for claims which have occurred during the period
from January 1, 1998 until the date at which the sale transaction closes.

8. PROPERTY AND EQUIPMENT

<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Property and equipment................................... $20,826 $13,483
Leasehold improvements................................... 2,875 2,708
Accumulated depreciation................................. (9,145) (6,269)
------- -------
Net property and equipment............................... $14,556 $ 9,922
======= =======
</TABLE>

F-68
<PAGE> 218
THE INSURANCE OPERATIONS OF
BUSINESS INSURANCE GROUP, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)

9. STATUTORY SURPLUS AND DIVIDEND RESTRICTIONS

CalComp and CBIC are domiciled in the State of California, BICO is
domiciled in the State of Delaware and CCIC is domiciled in the State of New
York. Each entity prepares its statutory financial statements in accordance with
accounting practices prescribed or permitted by the respective Departments 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.

CalComp's statutory policyholders' surplus as reported to regulatory
authorities was $204,330 and $223,964 at December 31, 1997, and 1996,
respectively. CalComp's statutory net income (loss), as reported to regulatory
authorities, was $(17,607), $17,642, and $30,087 for the years ended December
31, 1997, 1996 and 1995, respectively.

BICO's statutory policyholders' surplus as reported to regulatory
authorities was $38,644 and $54,142 at December 31, 1997, and 1996,
respectively. BICO's statutory net income (loss), as reported to regulatory
authorities, was $(11,842), $1,180, and $(751) for the years ended December 31,
1997, 1996 and 1995, respectively.

CBIC's statutory policyholders' surplus as reported to regulatory
authorities was $8,402 and $7,942 at December 31, 1997, and 1996, respectively.
CBIC's statutory net income, as reported to regulatory authorities, was $350,
$925 and $ 59 for the years ended December 31, 1997, 1996 and 1995 respectively.

CCIC's statutory policyholders' surplus as reported to regulatory
authorities was $6,734 and $7,462 at December 31, 1997, and 1996, respectively.
CCIC's statutory net income (loss), as reported to regulatory authorities, was
$(918), $2,059, and $(2,286) for the years ended December 31, 1997, 1996 and
1995, respectively.

Insurance companies are subject to insurance laws and regulations
established by the states in which they transact business. The laws of 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. CalComp, CBIC, BICO and CCIC
have registered as holding company systems pursuant to such legislation in
California, Delaware and New York. 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 insurance entities.

The Risk Based Capital Model ("RBC") for property and casualty insurance
companies was adopted by the NAIC in December of 1993, and, starting in 1995,
companies were required to report their RBC ratios to the NAIC. CalComp, BICO,
CBIC and CCIC have calculated and met their RBC requirements.

Insurance companies are also subject to restrictions affecting the amount
of stockholder dividends and advances that may be paid within any one year
without DOI prior approval. The California Insurance Code provides that the
maximum amount that may be paid as dividends on an annual non-cumulative basis
without prior notice to, or approval by, the DOI is the greater of (1) net
income for the preceding year or (2) 10% of statutory surplus as of the
preceding December 31. At December 31, 1997, CalComp and CBIC could pay
stockholder dividends in 1998 of $20,433 and $840, respectively. The Delaware
Insurance Code provides that an insurer may not declare or pay a dividend or
other distribution from any source other than earned surplus, without DOI prior
approval. At December 31, 1997, BICO had negative unassigned funds and as such,
cannot

F-69
<PAGE> 219
THE INSURANCE OPERATIONS OF
BUSINESS INSURANCE GROUP, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)

declare and pay any stockholders dividends in 1998 without the prior approval of
the Delaware Commissioner of Insurance. The maximum amount of dividends which
can be paid by State of New York insurance companies to stockholders without
prior approval is subject to restrictions relating to statutory earned surplus.
CCIC's statutory surplus at December 31, 1997, was $6,734. At December 31, 1997,
CCIC had negative earned surplus and, as such, cannot declare and pay any
stockholders dividends in 1998 without the prior approval of the New York
Commissioner of Insurance. In May 1998, CCIC received a capital contribution of
$1,500 from BIG.

10. TRANSACTIONS WITH AFFILIATES

ReviewCo. (a non-insurance subsidiary) paid stockholder dividends which
have been accounted for as capital contributions to BIG of $10,800, $1,750 and
$0 in 1997, 1996 and 1995, respectively. ReviewCo. also paid BIG $57 under an
Administrative Services Agreement effective in 1997.

BIG's insurance subsidiaries entered into various agreements for Medical
Bill Review Services with ReviewCo. wherein the companies utilize the services
of ReviewCo. to provide managed care services and review of medical bills for
duplicate, unauthorized and excessive charges. The amounts paid to ReviewCo.
totaled $14,429, $12,263 and $6,010 in 1997, 1996 and 1995, respectively.

CBIC entered into a Letter of Agreement by and on behalf of FHC and
ReviewCo., effective July 1, 1995, wherein CBIC and FHC provide network access
to their provider network to ReviewCo. in return for administrative services
performed by ReviewCo. The net amounts paid by ReviewCo. totaled $1,590, $701
and $247 in 1997, 1996 and 1995, respectively.

CalComp entered into a Loan Agreement with Foundation Health Corporation
("FHC"), the Company's immediate parent and a wholly-owned subsidiary of FHS,
effective August 23, 1994, wherein it loaned FHC $10,000. The amounts paid for
interest by FHC to CalComp were $775, $774 and $777 in 1997, 1996 and 1995,
respectively.

FHC made capital contributions of $35,000, and $2,442 to the Company in
1995.

CalComp entered into an administrative services agreement with Foundation
Health, a California Health Plan ("FHCA"), and affiliate, effective September 1,
1994, wherein the company provides certain non-discretionary support services to
each other with regard to coverage issued under a jointly written Combined Care
program. This agreement was superseded by an administrative services agreement
between BIG, FHS and FHCA, effective October 1, 1997.

BIG's insurance subsidiaries utilize the services of FIRMS to provide
claims adjusting and administration services on some of its policies. The
amounts paid to FIRMS totaled $512, $508 and $45 in 1997, 1996 and 1995,
respectively.

BIG utilizes the services of Axis Integrated Resources, Inc. ("AXIS")
(formerly Claims Technical Services, Inc.), an affiliate, to provide temporary
employment services. The amounts paid to AXIS totaled $660, $149 and $242 in
1997, 1996 and 1995, respectively.

Foundation Health Corporation made loans to BIG totaling $130,000 in May
($75,000) and August ($55,000) of 1996. The notes accrue interest at an annual
rate of 6.75% per annum. Interest paid on the notes totaled $8,363 and $3,423 in
1997 and 1996, respectively. Principal payments were made on the notes in the
amounts of $1,750, $4,500 and $2,000 in June 1996, February 1997 and June 1997,
respectively. The balance of the two notes at December 31, 1997 and 1996 were
$121,750 and $128,250, respectively. Interest payable

F-70
<PAGE> 220
THE INSURANCE OPERATIONS OF
BUSINESS INSURANCE GROUP, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)

on the notes at December 31, 1997 and 1996 was $870 and $907, respectively.
Effective January 1, 1998, the annual interest rate on the notes was increased
to 7.75%.

CalComp purchased four health care centers and land from Foundation Health
Medical Services ("FHMS") for $31,114 in 1995. Subsequent to the purchase, as of
September 29, 1995, CalComp leased the care centers to Foundation Health Medical
Group. Rental income earned on these properties from affiliates at December 31,
1997, 1996 and 1995 was $0, $2,773, and $755, respectively. In November 1996, in
conjunction with the sale of FHC's physician practices and medical management
company to FPA Medical Management, Inc. ("FPA"), an unaffiliated company, three
properties previously leased to FHC were leased to FPA.

11. EMPLOYEE BENEFIT PLANS

The Company's employees participated in the FHC 401(k) Plan (the "Plan"), a
qualified plan under Sections 401(a) and 401(k) of the Internal Revenue Code,
until August 31, 1997. Effective September 1, 1997, the FHC Plan was merged into
the FHS 401(k) Plan. Substantially all of the Company's employees are eligible
to participate in the Plan. Under the Plan, the Company makes matching
contributions equal to 50% of a participant's salary deferral up to a maximum of
6%, which is equal to a maximum of 3% of each participating employee's
compensation. The Company's contribution to the Plan totaled $929, $742 and $608
for the years ended December 31, 1997, 1996 and 1995, respectively.

Certain members of management and highly compensated employees participate
in a deferred compensation plan which allows the participants to defer payment
of up to 90% of their compensation. In connection with the FHC and Health
Systems International, Inc. 1997 merger, the plan was frozen in May 1997, at
which time each participant's account was credited with three times the 1996
Company match (or a lesser amount for certain prior participants) and each
participant became 100% vested in all such contributions. The current provisions
with respect to the form and timing of payments under the plan remain unchanged.
The Company's expense relating to these benefits totaled $795, $652 and $605 for
the years ended December 31, 1997, 1996 and 1995, respectively.

12. COMMITMENTS

The Company is obligated under several non-cancellable operating leases for
office facilities and certain equipment. These leases contain rent adjustment
provisions to compensate the lessor for increases in operating costs.

Future minimum lease payments under the operating leases are as follows:

<TABLE>
<S> <C>
1998....................................................... $ 8,874
1999....................................................... 7,245
2000....................................................... 6,392
2001....................................................... 5,299
2002....................................................... 1,591
Thereafter................................................. 1,675
-------
Total minimum lease payments..................... $31,076
=======
</TABLE>

Rental expenses totaled approximately $8,696, $8,389, and $7,333 for the
years ended December 31, 1997, 1996 and 1995 respectively.

F-71
<PAGE> 221
THE INSURANCE OPERATIONS OF
BUSINESS INSURANCE GROUP, INC.

NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(DOLLARS IN THOUSANDS)

13. LITIGATION

In the ordinary course of its business, the Company is a party to claims and
legal actions. The Company also undergoes regulatory audits with respect to
operations. After consulting with legal counsel, management is of the opinion
that any liability that may ultimately be incurred as a result of these claims,
legal actions or audits will not have a material adverse effect on the financial
position or results of operations of the Company.

14. PREPAID EXPENSES AND OTHER ASSETS

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

<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Deposits.................................................... $ 1,652 $ 1,193
Notes receivable............................................ 1,258 --
Prepaid expenses............................................ 681 1,448
Other....................................................... 1,782 19
------- -------
Total.............................................. $ 5,373 $ 2,660
======= =======
</TABLE>

15. ACCOUNTS PAYABLE AND OTHER LIABILITIES

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

<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Premium taxes, regulatory and assessment fees............... $ 8,905 $ 9,172
Payables to affiliates...................................... 10,443 3,019
Accrued expenses and other payables......................... 10,562 6,617
Payable for investments..................................... 10,430 3,049
Salary and related expenses................................. 3,503 2,306
------- -------
Total.............................................. $43,843 $24,163
======= =======
</TABLE>

16. ACCOUNTING CHANGES

Prior to October 1, 1997, FHS provided certain services (i.e. treasury, tax,
accounts payable and networking services) to the Company without cost. In
accordance with the requirements of the Securities and Exchange Commission,
Company management has estimated the cost of the services provided and has
retroactively recorded charges to operations with an offsetting credit, net of
income taxes, to invested capital. Management believes the amount of expenses
recorded have been determined on a reasonable basis; however, they do not
necessarily equal the costs that would have been incurred on a stand-alone
basis. The effects of the changes are as follows:

<TABLE>
<CAPTION>
1995 1996 1997
-------- ------- --------
<S> <C> <C> <C>
As previously reported:
Income (loss) before income taxes.............. $ 50,704 $28,334 $(58,264)
Income tax benefit (expense)................... (12,952) (2,934) 28,847
-------- ------- --------
Net income (loss).............................. $ 37,752 $25,400 $(29,417)
======== ======= ========
As restated:
Income (loss) before income taxes.............. $ 47,050 $24,497 $(60,147)
Income tax benefit (expense)................... (11,673) (1,591) 29,506
-------- ------- --------
Net income (loss).............................. $ 35,377 $22,906 $(30,641)
======== ======= ========
</TABLE>

In addition, the Company has adopted the provisions of FASB Statement No.
130, "Reporting Comprehensive Income," ("SFAS No. 130") effective December 31,
1997. SFAS No. 130 requires companies to report comprehensive income and its
components in a financial statement and display the accumulated balance of other
comprehensive income separately from invested capital. Comprehensive income
includes all changes in equity during a period except those resulting from
investments by stockholders and distributions to stockholders. The previously
reported financial statements have been reclassified to reflect retroactive
application of the provisions of SFAS No. 130.

F-72
<PAGE> 222

THE INSURANCE OPERATIONS OF
BUSINESS INSURANCE GROUP, INC.

CONDENSED COMBINED BALANCE SHEETS
(IN THOUSANDS)

ASSETS

<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
----------- ------------
(UNAUDITED)
<S> <C> <C>
Invested Assets:
Bonds, available-for-sale, at fair value.................. $ 667,290 $ 611,163
Bonds, held-to-maturity, at amortized cost................ 10,838 14,059
Real estate............................................... 29,496 29,821
Note from parent.......................................... 10,000 10,000
---------- ----------
Total invested assets............................. 717,624 665,043
Cash and cash equivalents................................... 50,579 98,128
Reinsurance recoverable:
Paid loss and loss adjustment expenses.................... 13,920 18,518
Unpaid loss and loss adjustment expenses.................. 227,851 206,871
Premiums receivable -- net.................................. 75,536 80,008
Earned but unbilled premiums receivable..................... 15,194 24,401
Accrued investment income................................... 11,232 10,605
Receivable from reinsurer................................... 1,767 4,132
Deferred policy acquisition costs........................... 21,629 23,841
Income taxes receivable from parent......................... 17,509 40,857
Deferred income taxes....................................... 18,585 15,807
Goodwill.................................................... 13,813 14,266
Property & equipment, net................................... 15,098 14,556
Prepaid reinsurance premiums................................ 19,400 --
Prepaid expenses and other assets........................... 5,912 5,373
---------- ----------
Total assets...................................... $1,225,649 $1,222,406
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES
Loss and loss adjustment expenses......................... $ 690,515 $ 728,421
Unearned premiums......................................... 47,827 45,004
Reinsurance payable....................................... 67,942 28,027
Long-term debt due to parent.............................. 121,750 121,750
Policyholder dividends.................................... 3,473 3,015
Accounts payable and other liabilities.................... 50,559 43,843
---------- ----------
Total liabilities................................. 982,066 970,060
Stockholder's equity:
Invested capital............................................ 239,699 247,476
Accumulated other comprehensive income...................... 3,884 4,870
---------- ----------
TOTAL STOCKHOLDER'S EQUITY........................ 243,583 252,346
========== ==========
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY........ $1,225,649 $1,222,406
========== ==========
</TABLE>

See notes to condensed combined financial statements.
F-73
<PAGE> 223

THE INSURANCE OPERATIONS OF
BUSINESS INSURANCE GROUP, INC.
THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997

CONDENSED COMBINED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(IN THOUSANDS)
(UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- -------------------
1998 1997 1998 1997
<S> <C> <C> <C> <C>
REVENUES:
Net premiums earned............................... $ 78,236 $124,894 $215,911 246,282
Net investment income............................. 8,587 9,709 18,215 19,283
Net realized gain on investments.................. 49 284 275 284
Other income (loss)............................... (66) 675 100 1,528
-------- -------- -------- --------
TOTAL REVENUES............................ 86,806 135,562 234,501 267,377
EXPENSES:
Losses and loss adjustment, net of reinsurance
recoveries..................................... 67,306 92,381 182,385 176,348
Underwriting expenses............................. 22,261 36,925 63,156 70,037
Policyholder dividends............................ 1,643 -- 1,763 --
Interest.......................................... 2,359 2,088 4,718 4,216
Goodwill.......................................... 138 159 447 227
-------- -------- -------- --------
TOTAL EXPENSES............................ 93,707 131,553 252,469 250,828
Income (loss) before income taxes................... (6,901) 4,009 (17,968) 16,549
Income tax benefit (expense)........................ 4,003 269 10,191 (2,125)
-------- -------- -------- --------
NET INCOME (LOSS)......................... (2,898) 4,278 (7,777) 14,424
======== ======== ======== ========
Other comprehensive income, net of tax:
Unrealized loss on available-for-sale investments,
net of deferred taxes.......................... 158 5,365 (986) (184)
-------- -------- -------- --------
Comprehensive income (loss)......................... $ (2,740) $ 9,643 $ (8,763) $ 14,240
======== ======== ======== ========
</TABLE>

See notes to condensed combined financial statements.
F-74
<PAGE> 224

THE INSURANCE OPERATIONS OF
BUSINESS INSURANCE GROUP, INC.
CONDENSED COMBINED STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
SIX MONTHS ENDED JUNE 30, 1998 AND TWELVE MONTHS ENDED DECEMBER 31, 1997
(IN THOUSANDS)

ACCUMULATED OTHER COMPREHENSIVE INCOME

<TABLE>
<CAPTION>
TOTAL
INVESTED COMPREHENSIVE STOCKHOLDER'S
CAPITAL INCOME (LOSS) EQUITY
------------ ------------- -------------
<S> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996............................ $266,093 $267,892
Comprehensive loss
Net loss.............................................. (30,641) $(30,641) (30,641)
Unrealized gain on available-for-sale investments, net
of deferred taxes.................................. -- 3,071 3,071
--------
Comprehensive loss...................................... -- $(27,570) --
========
Capital contributions................................. 12,024 12,024
-------- --------
BALANCE AT DECEMBER 31, 1997............................ 247,476 252,346
-------- --------
Comprehensive loss
Net loss.............................................. (7,777) $ (7,777) (7,777)
Unrealized loss on available-for-sale investments, net
of deferred taxes.................................. (986) (986)
--------
Comprehensive loss...................................... -- $ (8,763) --
-------- ======== --------
BALANCE AT JUNE 30, 1998 (UNAUDITED).................... $239,699 $243,583
======== ========
</TABLE>

See notes to condensed combined financial statements.
F-75
<PAGE> 225

THE INSURANCE OPERATIONS OF
BUSINESS INSURANCE GROUP, INC.

CONDENSED COMBINED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(IN THOUSANDS)
(UNAUDITED)

<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------
1998 1997
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ (7,777) $ 14,424
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Amortization of bonds.................................. 2,527 1,997
Depreciation on real estate............................ 326 320
Depreciation on property, plant & equipment............ 1,851 1,360
Loss (gain) on sale of investments..................... (275) (284)
Amortization of goodwill and intangible assets......... 453 485
(Increase) decrease in reinsurance recoverables........ (16,382) (38,967)
(Increase) decrease in premiums receivable............. 4,472 6,979
(Increase) decrease in earned but unbilled
receivables........................................... 9,207 1,284
(Increase) decrease in accrued investment income....... (627) 242
(Increase) decrease in receivable from insurer......... 2,365 --
(Increase) decrease in deferred policy acquisition
costs................................................. 2,212 (6,616)
(Increase) decrease in income taxes receivable......... 23,348 898
(Increase) decrease in prepaid reinsurance premiums.... (19,400) 7,557
(Increase) decrease in deferred income taxes........... (2,232) 99
(Increase) decrease in prepaid and other assets........ (539) 55
(Increase) decrease in loss and loss adjustment
expenses.............................................. (37,906) 33,449
(Increase) decrease in unearned premium reserves....... 2,823 4,455
(Increase) decrease in reinsurance payable............. 39,915 5,057
(Increase) decrease in policyholder dividend payable... 458 (272)
(Increase) decrease in accounts payable and other
liabilities........................................... 6,715 (6,846)
-------- --------
Total adjustments................................. 19,311 11,252
-------- --------
Net cash provided by (used in) operating
activities...................................... 11,534 25,676
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of bonds available for sale..................... (290,700) (42,731)
Sales of bonds available for sale......................... 230,790 41,171
Maturities of bonds:
Bonds held to maturity................................. 3,221 1,355
Purchases of property, plant & equipment.................. (2,394) (4,545)
Purchases of real estate.................................. -- --
-------- --------
Net cash provided by (used in) investing
activities...................................... (59,083) (4,750)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt...................... -- (6,500)
Excess of book value over net assets acquired............. -- (5,535)
Capital contributions..................................... -- 9,610
-------- --------
Net cash provided by (used in) financing
activities...................................... -- (2,425)
-------- --------
Net increase (decrease) in cash and cash equivalents........ (47,549) 18,501
Cash and cash equivalents at beginning of period............ 98,128 25,861
-------- --------
Cash and cash equivalents at end of period.................. $ 50,579 $ 44,362
======== ========
</TABLE>

See notes to condensed combined financial statements.
F-76
<PAGE> 226

THE INSURANCE OPERATIONS OF
BUSINESS INSURANCE GROUP, INC.

NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
NOTE A.1 SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES AND BASIS OF PRESENTATION

Business Insurance Group, Inc. ("BIG"), is an insurance holding company and
ultimately a wholly owned subsidiary of Foundation Health Systems, Inc. ("FHS").
BIG serves as the immediate parent company for four workers' compensation
insurance subsidiary companies, as well as certain non-insurance entities. On
May 5, 1998, FHS entered into a definitive agreement to sell BIG and its four
insurance subsidiaries [California Compensation Insurance Company ("CalComp"),
Business Insurance Company ("BICO"), Combined Benefits Insurance Company
("CBIC"), and Commercial Compensation Insurance Company ("CCIC")] to Superior
National Insurance Group, Inc. ("Superior") of Calabasas, California. The
transaction, subject to customary closing conditions including regulatory
approvals and a favorable vote from Superior's shareholders, is expected to
close in the fourth quarter of 1998.

The accompanying combined financial statements include the accounts of BIG
and its insurance subsidiaries, CalComp, BICO, CBIC and CCIC. BIG is also the
parent company of Foundation Integrated Risk Management Solutions, Inc.
("FIRMS"), which is a workers' compensation risk management and third party
claims administrator, and Foundation Health Medical Resources Management
("ReviewCo."), which provides bill review, access to provider networks and other
managed care service for workers' compensation carriers and third party
administrators. FIRMS and ReviewCo. are not included in the sale to Superior.
Therefore, for the purposes of this report, the operations, assets and
liabilities of these non-insurance subsidiaries are not included in the
accompanying financial statements. Also, under the terms of the agreement with
Superior, certain assets and liabilities (including the note from parent,
long-term debt due to parent and other intercompany balances), will be settled
at or prior to the closing of the transaction. In addition, investment real
estate will be purchased by FHS at book value prior to or at the closing date of
the transaction.
The accompanying unaudited condensed combined financial statements of BIG
have been prepared in accordance with generally accepted accounting principles
for interim financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments, including normally occurring accruals, considered necessary for
fair presentation have been included. Operating results for the six months ended
June 30, 1998 are not necessarily indicative of the results to be expected for
the year ending December 31, 1998.
NOTE A.2 LOSSES AND LOSS ADJUSTMENT EXPENSES ("LAE")
Losses and LAE are estimates on case-basis amounts of reported claims and
unreported losses and loss adjustment expenses based on experience and industry
data. The provision for unpaid losses and loss 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.
NOTE A.3 ACCOUNTING CHANGE
Prior to October 1, 1997, FHS provided certain services (i.e. treasury,
tax, accounts payable and networking services) to the Company without cost. In
accordance with the requirements of the Securities and Exchange Commission,
Company management has estimated the cost of the services provided and has
retroactively recorded charges to operations with an offsetting credit, net of
income taxes, to invested capital. Management believes the amount of expenses
recorded have been determined on a reasonable basis; however, they do not
necessarily equal the costs that would have been incurred on a stand-alone
basis. The effects of the change for the six months ended June 30, 1998 are not
considered material.

F-77
<PAGE> 227

INDEPENDENT AUDITORS' REPORT
The Board of Directors
Superior National Insurance Group, Inc.:

We have audited the accompanying consolidated balance sheets of Pac Rim
Holding Corporation and subsidiaries as of December 31, 1996 (as restated -- see
Note 2) and 1995, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1996 (restated as to 1996 -- see Note 2). These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 Pac Rim
Holding Corporation 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.

As discussed in Note 2, the Company restated the consolidated financial
statements as of and for the year ended December 31, 1996.

KPMG Peat Marwick LLP

Los Angeles, California
August 28, 1997

F-78
<PAGE> 228

PAC RIM HOLDING CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

ASSETS

<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1995
---------- --------
(RESTATED)
<S> <C> <C>
Investments:
Bonds, available-for-sale at fair value (amortized cost
$55,245 and $119,314).................................. $ 54,759 $121,771
Short-term investments (at cost, which approximates fair
value)................................................. 56,794 7,260
-------- --------
Total investments................................. 111,553 129,031
Cash........................................................ 1,731 773
Reinsurance recoverable on outstanding losses............... 3,124 3,884
Reinsurance receivable on paid losses....................... 785 184
Premiums receivable, less allowance for doubtful accounts of
$2,516 (Restated) and $1,221.............................. 14,278 11,616
Earned but unbilled premiums................................ 4,142 4,880
Investment income receivable................................ 609 2,207
Deferred policy acquisition costs........................... 1,065 974
Property and equipment, less accumulated depreciation and
amortization of $4,978 and $3,803......................... 4,411 2,434
Unamortized debenture issue costs........................... 1,063 1,468
Federal income taxes recoverable............................ -- 1,456
Deferred federal income taxes, net.......................... 8,745 8,348
Prepaid reinsurance premiums................................ 198 227
Other assets................................................ 3,731 1,569
-------- --------
Total Assets...................................... $155,435 $169,051
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Reserve for losses and loss adjustment expenses............. $100,588 $ 96,525
Convertible debentures payable, less unamortized discount of
$1,059 and $1,393......................................... 18,941 18,607
Unearned premiums........................................... 6,917 5,715
Reserve for policyholder dividends.......................... 364 381
Obligation under capital lease.............................. 1,203 --
Accrued expenses and accounts payable....................... 8,148 3,668
-------- --------
Total Liabilities................................. 136,161 124,896
Commitments and contingencies
Stockholders' Equity:
Preferred Stock:
$.01 par value -- shares authorized 500,000; none
issued and outstanding................................ -- --
Common Stock:
$.01 par value -- shares authorized 35,000,000 issued
and outstanding 9,528,200............................. 95 95
Additional paid-in capital.................................. 29,624 29,624
Warrants.................................................... 1,800 1,800
Unrealized gain (loss) on available-for-sale securities,
net....................................................... (324) 1,622
Retained earnings (deficit)................................. (11,921) 11,014
-------- --------
Net Stockholders' Equity.................................... 19,274 44,155
-------- --------
Total Liabilities and Stockholders' Equity........ $155,435 $169,051
======== ========
</TABLE>

See notes to consolidated financial statements.
F-79
<PAGE> 229

PAC RIM HOLDING CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
---------- ------- -------
(RESTATED)
<S> <C> <C> <C>
REVENUES:
Net premiums earned...................................... $ 82,654 $76,016 $92,894
Net investment income.................................... 7,013 8,089 6,514
Realized capital gains................................... 1,640 453 --
A&H commission income.................................... 8 -- --
-------- ------- -------
Total revenue.................................... 91,315 84,558 99,408
COSTS AND EXPENSES:
Losses and loss adjustment expenses...................... 79,890 50,957 63,788
Amortization of policy acquisition costs -- net.......... 14,672 18,647 19,565
Administrative, general, and other....................... 16,752 11,662 11,927
Policyholder dividends................................... (11) 132 1,301
Interest expense......................................... 2,341 2,306 857
-------- ------- -------
Total costs and expenses......................... 113,644 83,704 97,438
-------- ------- -------
Income (loss) before income taxes.......................... (22,329) 854 1,970
Income tax expense......................................... 606 279 812
-------- ------- -------
NET INCOME (LOSS).......................................... $(22,935) $ 575 $ 1,158
======== ======= =======
PER SHARE DATA:
NET INCOME (LOSS) PRIMARY AND FULLY DILUTED.............. $ (2.41) $ 0.06 $ 0.12
======== ======= =======
</TABLE>

See notes to consolidated financial statements.
F-80
<PAGE> 230

PAC RIM HOLDING CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(AMOUNTS IN THOUSANDS, EXCEPT FOR NUMBER OF SHARES)

<TABLE>
<CAPTION>
UNREALIZED
GAIN (LOSS)
COMMON STOCK ON
------------------ AVAILABLE-
NUMBER ADDITIONAL FOR-SALE RETAINED
OF PAID-IN SECURITIES, EARNINGS
SHARES AMOUNT CAPITAL WARRANTS NET (DEFICIT) TOTAL
--------- ------ ---------- -------- ----------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994......... 9,528,200 $95 $29,624 -- -- $ 9,281 $39,000
Unrealized gain on
available-for-sale securities at
January 1, 1994, net............. -- -- -- -- 96 -- 96
Additional paid in
capital-warrants................. -- -- -- 1,800 -- -- 1,800
Net income......................... -- -- -- -- -- 1,158 1,158
Change in unrealized loss of
available-for-sale securities,
net.............................. -- -- -- -- (4,877) -- (4,877)
--------- --- ------- ------ ------- -------- -------
Balance at December 31, 1994....... 9,528,200 95 29,624 1,800 (4,781) 10,439 37,177
--------- --- ------- ------ ------- -------- -------
Net income....................... -- -- -- -- -- 575 575
Change in unrealized gain of
available-for-sale securities,
net............................ -- -- -- -- 6,403 -- 6,403
--------- --- ------- ------ ------- -------- -------
Balance at December 31, 1995....... 9,528,200 95 29,624 1,800 1,622 11,014 44,155
--------- --- ------- ------ ------- -------- -------
Net loss (Restated)................ -- -- -- -- -- (22,935) (22,935)
Change in unrealized loss of
available-for-sale securities,
net.............................. -- -- -- -- (1,946) -- (1,946)
--------- --- ------- ------ ------- -------- -------
Balance at December 31, 1996,
(Restated)....................... 9,528,200 $95 $29,624 $1,800 $ (324) $(11,921) $19,274
========= === ======= ====== ======= ======== =======
</TABLE>

See notes to consolidated financial statements.
F-81
<PAGE> 231

PAC RIM HOLDING CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
---------- -------- -------
(RESTATED)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Income (loss)......................................... $(22,935) $ 575 $ 1,158
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Depreciation and amortization.......................... 2,001 1,421 930
Provision for losses on premiums receivable............ 1,295 150 (143)
Provision for deferred income taxes.................... 606 1,340 1,188
Realized capital gains................................. (1,640) (453) --
Changes in:
Reserve for losses and loss adjustment expenses...... 4,063 (20,104) (19,336)
Unearned premiums.................................... 1,202 (4,202) 1,655
Reserve for policyholder dividends................... (17) (609) (1,539)
Ceded reinsurance payable............................ -- -- (252)
Premiums receivable.................................. (3,219) 255 5,413
Reinsurance recoverable.............................. 159 (1,936) 13,044
Aggregate excess of loss reinsurance recoverable..... -- -- 10,812
Prepaid reinsurance premiums......................... 29 153 2,435
Deferred policy acquisition costs.................... (91) 1,111 (953)
Income taxes recoverable............................. 1,456 (1,013) 1,916
Accrued expenses and accounts payable................ 4,466 116 319
Investment income receivable......................... 1,598 148 (1,372)
Other assets......................................... (2,162) 229 630
---------- -------- -------
NET CASH PROVIDED (USED) BY OPERATING
ACTIVITIES...................................... (13,189) (22,819) 15,905
---------- -------- -------
INVESTING ACTIVITIES
Purchase of investments -- bonds.......................... (47,622) (40,524) (67,788)
Sales of investments -- bonds............................. 104,172 61,343 --
Maturity and calls of investments -- bonds................ 9,080 1,028 7,228
Additions to property and equipment....................... (1,949) (836) (918)
---------- -------- -------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES....... 63,681 21,011 (61,478)
---------- -------- -------
FINANCING ACTIVITIES
Proceeds from issuance of convertible debentures.......... -- -- 20,000
Debenture issuance costs.................................. -- -- (2,025)
---------- -------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES.............. -- -- 17,975
---------- -------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ 50,492 (1,808) (27,598)
Cash and cash equivalents at beginning of period............ 8,033 9,841 37,439
---------- -------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............. $58,525 $ 8,033 $ 9,841
========== ======== =======
SUPPLEMENTAL DISCLOSURE:
Interest paid............................................. $1,600 $ 1,615 $ -0-
========== ======== =======
Income taxes paid......................................... $-0- $ 37 $ -0-
========== ======== =======
</TABLE>

The Company entered into a capital lease during 1996, to acquire certain
operating system hardware and software; the lease obligation at December 31,
1996 was $1,203,000.

See notes to consolidated financial statements.
F-82
<PAGE> 232

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

PAC RIM HOLDING CORPORATION AND SUBSIDIARIES
DECEMBER 31, 1996
(RESTATED)

NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization: Pac Rim Holding Corporation ("Pac Rim Holding") is a holding
company that was incorporated in 1987 in Delaware. The accompanying consolidated
financial statements include the accounts and operations of the holding company
and its subsidiary, The Pacific Rim Assurance Company ("Pacific Rim Assurance")
and its subsidiary, Regional Benefits Insurance Services, Inc., (collectively
referred to herein as "the Company"). All significant intercompany transactions
and balances are eliminated in consolidation. Pacific Rim Assurance is engaged
exclusively in the business of writing workers' compensation insurance in
California, Arizona, Georgia, Alabama and Texas. Regional Benefits Insurance,
Inc. ("RBIS") is an insurance agency.

Sale of Pac Rim Holding: The previously announced acquisition of Pac Rim
Holding by Superior National Insurance Group, Inc. ("SNTL") was completed on
April 11, 1997. Pac Rim Holding was acquired for aggregate consideration of $42
million in cash. The $42 million payment by SNTL resulted in the payment of
approximately $20 million ($2.105 per share) to Pac Rim Holding's common
stockholders, $20 million to Pac Rim Holding's convertible debenture holders,
and $2 million to Pac Rim Holding's warrant and option holders.

Accounting Principles: The accompanying consolidated financial statements
are presented on the basis of generally accepted accounting principles ("GAAP"),
which differ in some respects from prescribed and permitted statutory accounting
practices followed in reports to the Insurance Departments. Prescribed statutory
accounting practices include a variety of publications of the National
Association of Insurance Commissioners, as well as state laws, regulations, and
general administrative rules. Permitted statutory accounting practices encompass
all accounting practices not so prescribed. The principal differences relate to
the non-admission of certain assets, examples are, deferred income taxes,
deferred policy acquisition costs, earned but unbilled premiums, premiums
receivable, and software.

Earned Premiums: Earned premiums and the liability for unearned premiums
are calculated by formula such that the premium written is earned pro rata over
the term of the policy. The insurance policies currently written by the Company
are for a period of one year or less. Premiums earned include an estimate for
earned but unbilled premiums.

Reserve for Losses and Loss Adjustment Expenses: The reserve for losses and
loss adjustment expenses ("LAE") is based on the accumulation of cost estimates
for each loss reported prior to the close of the accounting periods and
provision for the probable cost of losses that have occurred but have not yet
been reported. The Company does not discount such reserves for financial
reporting purposes. The methods for making such estimates and for establishing
the resulting liabilities are continually reviewed and updated and any
adjustments resulting therefrom are included in current operations when
determined. While the ultimate amount of losses incurred and the related expense
is dependent on future developments, management is of the opinion that, given
the inherent variability in any such estimates, the reserve for unpaid losses,
and LAE is within a reasonable range of adequacy.

Policy Acquisition Costs: Policy acquisition costs, such as commissions,
premium taxes, and other underwriting costs related to the production and
retention of business, are deferred and amortized as the related premiums are
earned. Anticipated investment income is considered in determining the
recoverability of this asset. Other policy acquisition costs that do not vary
with the production of new business are expensed when incurred and are included
in administrative, general, and other expenses.

Policyholder Dividends: Certain policies written by the Company are
eligible for policyholder dividends. An estimated provision for policyholder
dividends is accrued as the related premiums are earned. Such
F-83
<PAGE> 233
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

PAC RIM HOLDING CORPORATION AND SUBSIDIARIES (CONTINUED)

dividends do not become a legal liability of Pacific Rim Assurance unless, and
until, declared by the board of directors.

Investments: The Company has designated all of its portfolio as
"available-for-sale" and accordingly, bonds are carried at market with the
unrealized gain (loss) reflected in equity, net of the applicable income taxes.
The cost of investments sold is determined by specific identification.

Property and Equipment: Property and equipment is stated at cost.
Depreciation of property and equipment is computed using the straight-line
method over an estimated useful life of five years for financial reporting
purposes. Leasehold improvements are amortized on the straight-line method over
the life of the lease.

Taxes: The Company recognizes deferred tax assets and liabilities based on
the expected future tax consequences of existing differences between financial
reporting and tax reporting bases of assets and liabilities and operating loss
and tax credit carry forwards for tax purposes. The insurance subsidiary pays
premium taxes on gross premiums written in California in lieu of state income
taxes.

Cash and Cash Equivalents: For purposes of the statements of cash flows,
certificates of deposit and short-term investments with an original maturity of
three months or less, at date of purchase, are considered to be cash
equivalents.

Stockholders' Equity: The issuance of the convertible debentures included
issuing detachable warrants to purchase common stock (See Note 6). The value of
these warrants was $1,800,000, which was recorded as warrants in the
Consolidated Balance Sheets.

Earnings Per Share: Net income (loss) per share is computed on the basis of
the weighted average shares of common stock, plus common stock equivalent shares
arising from the effect of the stock options, warrants, and convertible
debentures to the extent they are dilutive. (See Notes 6 and 7). The number of
shares used in the computation of primary and fully diluted earnings per share
for the years ended December 31, 1996, 1995 and 1994 was 9,528,200.

New Accounting Standards: In October 1995, FASB issued Statement No. 123,
"Accounting For Stock-Based Compensation" which established a fair value based
method of accounting for stock-based compensation plans. This statement is
effective for financial statements with fiscal years beginning after December
15, 1995. The Company elected to continue accounting for stock-based
compensation based on Accounting Principles Board (APB) No. 25; and thus, the
Company adopted only the disclosure provision of FASB Statement No. 123.

Fair Values of Financial Instruments: The carrying amounts of financial
instruments, other than investment securities, approximate their fair values.
For investment securities, the fair values for fixed maturity securities are
based on quoted market prices. The carrying amounts and fair values for all
investment securities are disclosed in Note 3.

Reclassifications: Certain prior year amounts in the accompanying financial
statements have been reclassified to conform with the 1996 presentation.

F-84
<PAGE> 234
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

PAC RIM HOLDING CORPORATION AND SUBSIDIARIES (CONTINUED)

NOTE 2 -- RESTATEMENT OF 1996 FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
NET
STOCKHOLDERS'
NET LOSS EQUITY
-------- -------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
As originally stated at December 31, 1996............ $(15,900) $26,309
Change in EBUB....................................... (3,385) (3,385)
Change in allowance for doubtful accounts............ (1,460) (1,460)
Write-off of deferred merger expenses................ (479) (479)
Additional accrued expenses and accounts payable..... (1,278) (1,278)
Write-off of gain contingencies...................... (433) (433)
-------- -------
As restated at December 31, 1996..................... $(22,935) $19,274
======== =======
</TABLE>

Earned But Unbilled Premiums: Earned but unbilled premiums ("EBUB")
represent management's estimate of future additional or return premiums
generated by interim and final audits of payroll and rate classification data
associated with the Company's expired and inforce workers' compensation
policies. EBUB is generally based upon estimated and actual payrolls and rates
provided by policyholders, and historical billing patterns adjusted for changes
in regulations, pricing, and billing practices and procedures. The Company's
former management recorded $7.9 million in EBUB at December 31, 1996.

Current management attempted to reconcile its estimates with that of prior
management's recorded EBUB, and found prior management's methodology to be
fundamentally flawed. In light of the flawed methodology used by prior
management, current management reduced EBUB by $3.385 million.

Premiums receivable: At December 31, 1996, the Company had recorded
premiums receivable of $15.7 million, net of an allowance of doubtful accounts
of $1.1 million. Further, included in the $15.7 million premiums receivable, net
of the allowance for doubtful accounts were $1.6 million in premiums receivable
that had been turned over to an attorney for collection.

Based upon information contained in the December 31, 1996, 10-(K) and other
sources available to prior management, it was apparent to current management
that an additional allowance was required.

Deferred merger expenses: GAAP provides that certain costs related to an
acquisition of another company may be deferred by the acquiring Company. Costs
related to the acquisition of the company being acquired may not be deferred.
Pac Rim Holdings at December 31, 1996, had improperly deferred $0.479 million in
legal and investment banking costs related to its acquisition by SNTL.

Accrued expenses and accounts payable: At December 31, 1996, former
management estimated it had unpaid liabilities of $7.3 million. The current
management identified an additional $1.278 million in accrued liabilities and
accounts payable relating to legal, commissions, and miscellaneous general and
administrative expenses that were substantially known at year-end.

Gain contingencies: GAAP does not provide for the recognition of a gain
prior to its realization. At December 31, 1996, the Company recorded $433,000 in
such contingent gains. These gains related to anticipated legal actions that had
not gone to trial or had not been settled at December 31, 1996. Therefore, in
accordance with GAAP these contingent gains were eliminated from the
Consolidated Statements of Operations.

F-85
<PAGE> 235
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

PAC RIM HOLDING CORPORATION AND SUBSIDIARIES (CONTINUED)

NOTE 3 -- INVESTMENTS

Major categories of investment income, net of investment expenses, for
1996, 1995 and 1994 are summarized as follows (amounts in thousands):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Investment Income:
U.S. Treasury and Other Governmental Agency
Securities.................................. $4,065 $5,365 $5,508
Money Market Funds............................. 418 309 291
Funds Held by Reinsurer........................ -- -- 169
Corporate Bonds................................ 2,762 2,655 700
Tax-Exempt Bonds............................... -- 4 102
Certificates of Deposit........................ 31 22 9
------ ------ ------
Investment Income.............................. 7,276 8,355 6,779
Less: Investment Expenses...................... 263 266 265
------ ------ ------
Net Investment Income............................ $7,013 $8,089 $6,514
====== ====== ======
</TABLE>

Proceeds from the sales of investments in bonds during 1996 were
$104,172,000; gross gains of $1,888,000 and gross losses of $248,000 were
realized on those sales. Proceeds from the sales of investments in bonds during
1995 were $61,343,000; gross gains of $657,000 and gross losses of $204,000 were
realized on those sales. There were no sales of investments in bonds during
1994.

The amortized cost and fair values of investments in debt securities are
summarized as follows (amounts in thousands):

<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
--------- ---------- ---------- --------
<S> <C> <C> <C> <C>
1996
U.S. Treasury and other governmental $ 28,808 $ 5 $(184) $ 28,629
agencies..............................
Corporates.............................. 13,765 2 (204) 13,563
U.S. agencies........................... 12,341 8 (118) 12,231
Asset backed............................ 331 5 -- 336
-------- ------ ----- --------
Total......................... $ 55,245 $ 20 $(506) $ 54,759
======== ====== ===== ========
1995
U.S. Treasury and other governmental $ 68,963 $ 17 $(157) $ 68,823
agencies..............................
Corporates.............................. 33,793 1,886 -- 35,679
U.S. agencies........................... 10,546 418 -- 10,964
Asset backed............................ 6,012 293 -- 6,305
-------- ------ ----- --------
Total......................... $119,314 $2,614 $(157) $121,771
======== ====== ===== ========
</TABLE>

F-86
<PAGE> 236
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

PAC RIM HOLDING CORPORATION AND SUBSIDIARIES (CONTINUED)

The amortized cost and fair value of debt securities at December 31, 1996,
by contractual maturity are summarized as follows (amounts in thousands):

<TABLE>
<CAPTION>
AMORTIZED FAIR
COST VALUE
--------- -------
<S> <C> <C>
Due in 1997....................................... $10,701 $10,696
Due 1998 - 2001................................... 44,544 44,063
------- -------
$55,245 $54,759
======= =======
</TABLE>

The expected maturities will differ from contractual maturities in the
preceding table, because borrowers have the right to call or prepay certain
obligations with or without call or prepayment penalties. At December 31, 1996,
debt securities and short-term investments with a fair value of $105,301,000
were on deposit to meet the Company's statutory obligation under insurance
department regulations.

NOTE 4 -- RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES

The Company recognized adverse development during 1996, for the accident
years 1995 and prior. Despite experiencing favorable trends in the overall
frequency and severity of claims for the 1995 and 1996 accident years, the
Company and its internal and independent actuaries observed development patterns
in the 1990-1994 accident years that were volatile when compared to previous
historical patterns. In particular, 1990-1992, were very difficult accident
years to predict, due to the impact of fraud and stress claims from adverse
economic conditions. The 1993-1994 accident years were very favorable transition
years, following legislative reforms to the workers' compensation benefits
system. Nevertheless, it was unclear how each of those years ultimately would
develop, and how subsequent accident year patterns would thus be affected, given
paid loss and case reserve activity during 1996.

F-87
<PAGE> 237
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

PAC RIM HOLDING CORPORATION AND SUBSIDIARIES (CONTINUED)

The following table provides a reconciliation of beginning and ending loss
and LAE reserves for the years 1996, 1995, and 1994. All reserve totals are net
of reinsurance deductions. There are no material differences between the
Company's reserves for losses and LAE calculated in accordance with GAAP and
those reserves calculated based on statutory accounting practices.

RECONCILIATION OF RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
---------- -------- --------
(RESTATED)
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Liability for losses and LAE, net of
reinsurance recoverables on unpaid
losses, at beginning of year........... $ 92,641 $114,709 $111,109
Provisions for losses and LAE, net of
reinsurance recoverable:
Current accident year.................. 62,244 49,962 60,989
Prior accident years................... 17,646 995 2,799
-------- -------- --------
Incurred losses during the current year,
net of reinsurance recoverable......... 79,890 50,957 63,788
Losses and LAE payment for claims, net of
reinsurance recoverable, occurring
during:
Current year........................... 16,398 13,473 13,641
Prior years............................ 58,669 59,552 46,547
-------- -------- --------
75,067 73,025 60,188
-------- -------- --------
Liability for losses and LAE, net of
reinsurance recoverable on unpaid
losses, at end of year................. 97,464 92,641 114,709
Reinsurance recoverable, at end of
year................................... 3,909 4,068 2,132
Less reinsurance recoverable on paid
losses................................. (785) (184) (212)
-------- -------- --------
Reinsurance recoverable on unpaid losses,
at end of year......................... 3,124 3,884 1,920
-------- -------- --------
Liability for losses and LAE, gross of
reinsurance recoverable on unpaid
losses, at end of year................. $100,588 $ 96,525 $116,629
======== ======== ========
</TABLE>

During 1991 through 1994, the Company, and the workers' compensation
industry in California in general, went through a dramatically changing
experience in losses and LAE incurred. During 1991 and 1992, the Company
experienced a substantial number of claims related to adverse economic
conditions, particularly for the 1990 and 1991 accident years.

In addition, there were "stress and strain" claims that did not involve
traumatic physical loss or injury, many of which were suspected by the Company
to be fraudulently submitted.

Throughout 1994, 1995 and 1996, the Company continued to experience a
favorable trend in the frequency of new claims. The positive trends and
experience related to new claims since the second half of 1992 have been
consistent with favorable experience of other workers' compensation insurance
specialty companies in California. In addition, the level of claims closed was
in excess of the level of new claims reported during 1994 and 1995. As a result,
the Company's estimate of loss and LAE reserves for the 1993, 1994, 1995 and
1996 accident years is based on substantially lower loss ratios than the 1991
and prior accident years. Nevertheless, despite improved frequency and lower
overall loss and LAE ratios in those years, the volatile changes in legislative,
economic, managed medical care, and litigation expense factors, affecting
historical paid loss and case reserve development patterns, have made it more
difficult to estimate the ultimate
F-88
<PAGE> 238
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

PAC RIM HOLDING CORPORATION AND SUBSIDIARIES (CONTINUED)

dollar cost of those reported claims. Thus, the inherent variability has
increased, and recognition of adverse development of prior years' estimates has
occurred.

NOTE 5 -- REINSURANCE

Under the Company's specific excess of loss reinsurance treaty, the
reinsurers assume the liability on that portion of workers' compensation claims
between $350,000 and $80,000,000 per occurrence.

The components of net premiums written are summarized as follows (amounts
in thousands):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
---------- ------- --------
(RESTATED)
<S> <C> <C> <C>
Direct.................................... $85,796 $75,553 $101,661
Assumed................................... 2,568 375 112
Ceded..................................... (4,479) (3,962) (4,789)
------- ------- --------
Net premiums written...................... $83,885 $71,966 $ 96,984
------- ------- --------
</TABLE>

The components of net premiums earned are summarized as follows (amounts in
thousands):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
---------- ------- --------
(RESTATED)
<S> <C> <C> <C>
Direct.................................... $84,916 $79,920 $100,008
Assumed................................... 2,247 209 110
Ceded..................................... (4,509) (4,113) (7,224)
------- ------- --------
Net premiums earned....................... $82,654 $76,016 $ 92,894
------- ------- --------
</TABLE>

The components of net losses and loss adjustment expenses are summarized as
follows (amounts in thousands):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1996 1995 1994
------- -------- -------
<S> <C> <C> <C>
Direct....................................... $79,840 $ 54,454 $64,700
Assumed...................................... 1,559 188 149
Ceded........................................ (1,509) (3,685) (1,061)
------- -------- -------
Net losses and loss adjustment expenses...... $79,890 $ 50,957 $63,788
------- -------- -------
</TABLE>

A contingent liability exists to the extent that losses recoverable under a
reinsurance treaty are not paid to the Company by the reinsurer.

NOTE 6 -- LONG TERM DEBT

The Company had $20,000,000 in principal outstanding on its August 16,
1994, issue of Series A Convertible Debentures, with detachable warrants to
purchase 3,800,000 shares of the Company's common stock, of which 90% were owned
by PRAC, Ltd., a Nevada limited partnership. PRAC, Ltd. is controlled by Mr.
Richard Pickup, a former director. Mr. Pickup controlled approximately 26% of
the outstanding shares of the Company through various investment entities, which
together were the Company's largest stockholder. The remaining 10% were held by
the Company's primary reinsurer.

F-89
<PAGE> 239
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

PAC RIM HOLDING CORPORATION AND SUBSIDIARIES (CONTINUED)

The Debentures carried an 8% rate of interest, payable semi-annually and
were due on August 16, 1999. The Debentures were convertible at the holder's
option, into shares of common stock at a conversion price of $2.75 per share.
The Debentures were subject to automatic conversion if, after three years from
issuance, the price of the Common Stock exceeds 150% of the conversion price for
a period of 20 out of 30 consecutive trading days.

The Debenture Agreement also provided for the issuance to the Investor of
detachable warrants (the "Warrants") to acquire 1,500,000 shares of the
Company's common stock at an exercise of $2.50 per share (the "Series 1
Warrants"), 1,500,000 shares at an exercise price of $3.00 per share (the
"Series 2 Warrants"), and 800,000 shares at an exercise price of $3.50 per share
(the "Series 3 Warrants"). The Warrants expired on August 16, 1999, and the
exercise price of the Warrants was subject to downward adjustment in the event
of adverse development in the Company's December 31, 1993 loss and allocated
adjustment expense reserves related to the 1992 and 1993 accident years,
measured as of June 30, 1997. Under the terms of the Debenture Agreement, the
maximum adverse development that would impact the exercise price of the Warrants
is $20,000,000. In the event that the adverse development of reserves for those
periods exceeds $20,000,000, the exercise price of Series 1 Warrants would be
reduced to $0.01, and the exercise price of the Series 2 Warrants would be
reduced to $1.39 per share.

The Debenture Agreement includes covenants, which provide, among other
things, the Company maintain at least $32,200,000 in total stockholders' equity.
At December 31, 1996, the Company was not in compliance with certain of the
covenants. In April 1997, the debentures were repaid and the warrants purchased
in connection with the acquisition of the Company by SNTL.

The Debentures are carried on the balance sheet net of unamortized discount
of $1,059,000 at December 31, 1996. The effective average interest rate of this
debt after consideration of debt issuance costs and discount was 13.3%.

During 1996, the Company completed design and implementation of an
enhancement to its electronic data processing system. That system created
electronic files of claim and policyholder information, which substantially
decreases the need to access paper files and allows for more efficient handling
of claims and other underwriting activities. The project included an investment
in electronic data processing equipment, as well as software. The investment was
financed through a capital lease obligation covering a period of 36 months. The
lease contains a bargain purchase option at the end of the lease term. The total
cost of the equipment and software, $1,203,000, has been included in property
and equipment, and the present value of the capital lease obligation has been
recorded as a liability. Minimum lease payments are as follows (amounts in
thousands):

<TABLE>
<CAPTION>
YEAR AMOUNT
---- ------
<S> <C>
1997................................................ $504
1998................................................ 504
1999................................................ 307
</TABLE>

NOTE 7 -- STOCK OPTIONS

The Company has stock option plans that provide for options to purchase Pac
Rim Holding common stock at a price not less than fair values as of the date of
the grant. The options under those plans are

F-90
<PAGE> 240
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

PAC RIM HOLDING CORPORATION AND SUBSIDIARIES (CONTINUED)

exercisable over a period of up to ten years, at which time they expire. A
summary of the activity in the stock option plans is as follows:

<TABLE>
<CAPTION>
STOCK OPTIONS
--------------------------------
SHARES PRICE RANGE
--------- -----------
<S> <C> <C> <C> <C>
Outstanding at January 1, 1994................... 1,214,000 $1.00 - $11.41
Granted........................................ 500,000 2.75 - 5.50
Exercised...................................... --
Cancelled...................................... (736,375) 2.50 - 11.41
---------
Outstanding at December 31, 1994................. 977,625 1.00 - 8.50
Granted........................................ 65,000 2.50 - 3.19
Exercised...................................... --
Cancelled...................................... (85,000) 3.25 - 8.50
---------
Outstanding at December 31, 1995................. 957,625 1.00 - 8.50
Granted........................................ -- -- --
Exercised...................................... -- -- --
Cancelled...................................... (52,750) 2.50 - 8.50
---------
Outstanding at December 31, 1996................. 904,875 1.00 - 8.50
=========
</TABLE>

Under the 1988 stock option plan, 510,125 shares of common stock are
available for future grants of options. As of December 31, 1996, options to
purchase 676,000 shares of the Company's common stock at a price range of $1.00
to $8.50 were vested and were exercisable under the Company's stock option plan.
Subject to certain conditions, such as continued employment, the exercise of the
options is not restricted. The options expire at various dates through 2003. The
Company accounts for these plans under APB Opinion No. 25, under which no
compensation cost has been recognized. Had compensation cost for these plans
been determined consistent with SFAS No. 123, the Company's net income (loss)
and earnings (loss) per share would not have been materially different from that
reported.

Certain current officers and directors of the Company purchased as
aggregate of 136,000 shares of common stock at a purchase price of $1.00 per
share pursuant to the Pac Rim Holding 1987 Stock Purchase Plan (the "Stock
Purchase Plan"). The Stock Purchase Plan was terminated in 1988. Shares
purchased pursuant to the Stock Purchase Plan may be repurchased by Pac Rim
Holding in the event that the purchaser's service to the Company terminates
prior to specified points of time.

NOTE 8 - COMMITMENT AND CONTINGENCIES

The Company currently leases office facilities in Woodland Hills, and
Fresno, California as well as Phoenix, Arizona under noncancellable operating
leases that are subject to escalation clauses. Minimum rental commitments on the
operating leases are as follows (amounts in thousands):

<TABLE>
<CAPTION>
YEAR AMOUNT
---- ------
<S> <C>
1997................................................ 2,430
1998................................................ 2,381
1999................................................ 2,297
2000................................................ 2,269
2001................................................ 2,226
All Years Thereafter................................ 742
</TABLE>

Rent expense for 1996, 1995 and 1994, was $2,468,000, $2,461,000 and
$2,491,000, respectively.

F-91
<PAGE> 241
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

PAC RIM HOLDING CORPORATION AND SUBSIDIARIES (CONTINUED)

The Company is a party to two industrywide lawsuits, involving two medical
facilities. This litigation claims the insurance industry conspired to delay
payments of claims. While the ultimate outcome of this litigation is uncertain,
management believes that such litigation will not have a material adverse
financial effect on the Company's financial position and results of operations.

In addition, in the ordinary course of business, the Company is named as a
defendant in legal proceedings relating to policies of insurance that have been
issued and other incidental matters. Management does not believe that any such
litigation, taken as a whole, will have a material adverse financial effect on
the Company's financial position and results of operations.

NOTE 9 -- REGULATORY MATTERS

Under regulatory restrictions the ability of Pacific Rim Assurance to pay
dividends to its stockholders is limited. Generally, dividends payable during a
twelve month period, without prior regulatory approval, is limited to the
greater of net income for the preceding year or 10% of policyholders' surplus as
of the preceding December 31. The payment of dividends without prior California
Insurance Department ("DOI") approval can only be paid out of "earned surplus".
Under these provisions, Pacific Rim Assurance paid $1,100,000 in dividends in
1996 to Pac Rim Holding.

As reported to insurance regulatory authorities, statutory-basis capital
and surplus of Pacific Rim Assurance at December 31, 1996 and 1995, was
$27,216,000 and $46,549,000, respectively, and the net income (loss) amounted to
$(13,069,000), $4,879,000, and $(2,878,000) for 1996, 1995, and 1994,
respectively. At December 31, 1996, Pacific Rim Assurance had a deficit balance
of $(17,202,000) in its earned surplus account. Accordingly, Pacific Rim
Assurance cannot pay dividends to its parent during 1997, without prior DOI
approval.

Subsequent to Pacific Rim Assurance filing its 1995 annual statement with
regulatory authorities, the DOI issued its triennial report for the three years
ended December 31, 1995. As a result of the DOI's triennial report the Company
was required to reduce its statutory surplus by $27 million, leaving Pacific Rim
Assurance with a statutory surplus of $19 million at December 31, 1995. Pacific
Rim Assurance did not reflect or only partially reflected the DOI required
adjustments in their 1996 annual statement. The following table summarizes the
amounts required to be recorded and the amounts reflected in the Pacific Rim
Assurance 1996 annual statement. As the table reflects, Pacific Rim Assurance's
statutory surplus would have been reduced by an additional $4.626 million.

<TABLE>
<CAPTION>
REDUCTION IN
SURPLUS RECORDED
REDUCTION IN SURPLUS IN THE ANNUAL UNRECORDED
PER EXAMINATION STATEMENT REDUCTIONS IN SURPLUS
-------------------- ------------------ ---------------------
<S> <C> <C> <C>
Premiums and agents' balances due in
the course of collections........... $ 2,918 $ 2,918 --
Federal income tax recoverable........ 1,318 1,318 --
Electronic data processing
equipment........................... 1,626 -- $1,626
Loss and Loss Adjustment Expense...... 21,500 18,500 3,000
------- ------- ------
Total................................. $27,362 $22,736 $4,626
======= ======= ======
</TABLE>

The Risk Based Capital Model (RBC) for property and casualty companies was
adopted by the National Association of Insurance Commissioners in December 1993,
requiring companies to calculate and report their RBC ratios annually. RBC is a
company's statutory surplus adjusted through a formula for trends in premiums
written and claims activities, credit risk, asset risk, and underwriting risk.
The Company's total adjusted capital is compared to its authorized control
level. Pacific Rim Assurance previously reported that it had met its RBC
requirements for 1996.

F-92
<PAGE> 242
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

PAC RIM HOLDING CORPORATION AND SUBSIDIARIES (CONTINUED)

As a result of the adjustments discussed in Note 2 that have been recorded
as part of this restatement and adjustments indicated to be recorded as a result
of the DOI's triennial examination not reflected in its 1996 annual statement
filed with the DOI and other regulatory bodies, the RBC level of Pacific Rim
Assurance would have placed it in an action level. Depending upon the action
level that Pacific Rim Assurance would be categorized as, the DOI could have
required it to develop a rehabilitation plan, restrict or eliminate its ability
to write additional premiums, require additional surplus to be raised or take
other actions considered necessary. As a result of SNTL's acquisition of Pacific
Rim Assurance with the DOI's approval and SNTL's contribution of $10 million to
its surplus, Pacific Rim Assurance's adjusted statutory capital exceeds the
minimal RBC level.

NOTE 10 -- INCOME TAXES

The components of the provision for total income tax expense are summarized
as follows (amount in thousands):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
---------- ------- ------
(RESTATED)
<S> <C> <C> <C>
Current..................................... $ 0 $(1,061) $ (376)
Deferred.................................... 606 1,340 1,188
---- ------- ------
Total............................. $606 $ 279 $ 812
---- ------- ------
</TABLE>

A reconciliation of income tax computed at the U.S. federal statutory tax
rates to total income tax expense is as follows (amounts in thousands):

<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995 1994
---- ---- ----
(RESTATED)
<S> <C> <C> <C>
Federal statutory rate............................. $(7,592) $290 $670
Increase (decrease) in taxes resulting from:
Valuation allowance.............................. 8,129 -- --
Tax-exempt interest.............................. -- (1) (30)
Other............................................ 69 (10) 172
------- ---- ----
Total tax expense........................ $ 606 $279 $812
======= ==== ====
</TABLE>

At December 31, 1996, the Company has an alternative minimum tax credit of
$334,000 for tax purposes. Alternative minimum tax credits may be carried
forward indefinitely to offset future regular tax liabilities. At December 31,
1996, the Company has a tax net operating loss of $23,403,000 (restated) which
can be used to offset taxable income in future years, of which $2,676,000
expires in 2010 and $20,727,000 (restated) expires in 2011.

F-93
<PAGE> 243
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

PAC RIM HOLDING CORPORATION AND SUBSIDIARIES (CONTINUED)

Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are summarized as follows
(amounts in thousands):

<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1995
------- ------
(RESTATED)
<S> <C> <C>
Deferred tax assets
Discounting of loss reserves.......................... $ 7,273 $7,189
Unearned premiums..................................... 470 373
Allowance for doubtful accounts....................... 855 415
Rental expense........................................ 512 518
Unrealized loss of securities......................... 167 --
Net operating loss carry forward...................... 7,957 910
Alternative minimum tax credit carry forward.......... 334 334
Policyholder dividends................................ 121 --
Other -- net.......................................... 21 93
------- ------
Total deferred tax assets............................... 17,710 9,832
Less: Valuation allowance............................... 8,129 --
Deferred tax liabilities:
Deferred policy acquisition........................... 362 331
Earned but unbilled premiums.......................... 282 165
Prepaid insurance..................................... 56 86
Unrealized gain on securities......................... -- 835
Other -- net.......................................... 136 67
------- ------
Total deferred tax liabilities.......................... $ 836 $1,484
------- ------
Net deferred tax assets................................. $ 8,745 $8,348
======= ======
</TABLE>

There were no taxes paid in 1995 and 1996.

Because of the significant operating loss during 1996, management believed
that it was prudent to record a valuation allowance of $8.1 million. Management
believes that it is more likely than not the net deductible temporary
differences not supported by the valuation allowance 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
benefits.

NOTE 11 -- DISCLOSURE OF CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES

Nature of Operations

During the year ended December 31, 1996, the Company wrote 88% of its
business in the state of California. The workers' compensation industry in the
state of California has seen many changes to regulations in the past few years
including the adoption of open rating. The Company cannot predict what
regulatory changes will be made in the future; therefore, the Company cannot
with certainty predict what material effects any potential changes will have on
the Company.

F-94
<PAGE> 244
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

PAC RIM HOLDING CORPORATION AND SUBSIDIARIES (CONTINUED)

At December 31, 1996, 35% of the Company's premiums in force had been
generated by its five highest producing agencies and brokerage firms, two of
which accounted for 17% of total premiums in force at that date.

Use of Estimates

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

Loss and Loss Adjustment Expenses

Loss and loss adjustment expenses are based on case-basis estimates of
reported claims and on estimates, based on experience and industry data, for
unreported loss and loss adjustment expenses. The provision for unpaid loss and
loss 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 loss and loss adjustment expense reserves. Management has selected
ultimate loss and loss 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.

NOTE 12 -- RELATED PARTY TRANSACTIONS

The Company had a five-year employment contract with its former president
that expired on August 16, 1997. Under the provisions of the contract, the
President received annual compensation of $400,000 and a possible bonus, based
on achievement by the Company of various earnings-based performance criteria.
The agreement also provided for the payment of certain other fringe benefits.

The Company loaned to the former President $150,000 annually in 1991, 1992,
1993. As of December 31, 1996 and 1995, the loan balance was $450,000. The loan
bore interest at 6.3% on the principal amount, which was secured by the
President's pledge of shares of the Company's common stock, and payable in full
by February 16, 1998. As of December 31, 1996, the loan was secured by shares of
the Company's common stock with a market value equal to 100% of the principal
balance. The loan was eliminated on April 11, 1997, in conjunction with the
purchase of Pac Rim Holding.

The Company granted the former President options to purchase 250,000 shares
of the Company's common stock at an exercise price of $2.75 per share and
250,000 shares at $5.50 per share.

The Company used the law firm of Barger & Wolen for legal services. Dennis
W. Harwood was a member of the Company's Board of Directors, and Richard D.
Barger was a member of Pacific Rim Assurance's Board of Directors, as well as
being a partner with Barger & Wolen. During 1996, the Company paid Barger &
Wolen $711,000 for legal services. The fees paid for these services were charged
to the Company at the normal rates charged to the firm's other clients.

F-95
<PAGE> 245
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

PAC RIM HOLDING CORPORATION AND SUBSIDIARIES (CONTINUED)

The Company also used the legal services of The Busch Firm. Timothy R.
Busch, former Chairman of the Company's Board of Directors, is a partner in The
Busch Firm. During 1996, the Company paid the Busch Firm $20,000 for legal
services. The fees paid for these services are charged to the Company at the
normal rates charged to the firm's other clients.

NOTE 13 -- 401(K) PLAN

The Pacific Rim Assurance Company 401(K) Plan (the "Plan") permits
employees of the Company who attain the age of 21 and complete 30 days of
employment to elect to make tax-deferred contributions of a specified percentage
of their compensations during each year through payroll deductions. Under the
Plan, the Company has discretion to make additional contributions. The Company
has not yet made any discretionary employer contributions to the plan.

F-96
<PAGE> 246

PAC RIM HOLDING CORPORATION AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

ASSETS

<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
(UNAUDITED) (RESTATED)
----------- ------------
<S> <C> <C>
Investments:
Bonds, available-for-sale, at fair value.................. $ 54,358 $ 54,759
Cash and Short-term investments (at cost, which
approximates
fair value)............................................ 54,182 58,525
-------- --------
Total Investments................................. 108,540 113,284
Reinsurance recoverable on outstanding losses............... 3,486 3,124
Reinsurance receivable on paid losses....................... 534 785
Premiums receivable, less allowance for doubtful accounts... 13,126 14,278
Earned but unbilled premiums................................ 4,142 4,142
Investment income receivable................................ 661 609
Deferred policy acquisition costs........................... -- 1,065
Property and equipment less accumulated depreciation and
amortization.............................................. 3,907 4,411
Unamortized debenture issuance costs........................ -- 1,063
Deferred income taxes....................................... 8,860 8,745
Prepaid reinsurance premiums................................ (292) 198
Other assets................................................ 5,116 3,731
-------- --------
Total Assets...................................... $148,080 $155,435
======== ========

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Reserve for losses and loss adjustment expenses........... $107,743 $100,588
Debentures payable, less unamortized discount............. 19,030 18,941
Unearned premiums......................................... 6,859 6,917
Reserve for policyholder dividends........................ 1,370 364
Obligation under capital lease............................ -- 1,203
Accrued expenses and accounts payable..................... 11,889 8,148
-------- --------
Total Liabilities................................. 146,891 136,161
Commitments and contingencies
Stockholders' Equity
Preferred Stock:
$.01 par value -- shares authorized 500,000; none
issued
and outstanding...................................... -- --
Common Stock
$.01 par value -- shares authorized 35,000,000; issued
and
outstanding 9,528,200................................ 95 95
Additional paid-in capital.................................. 29,624 29,624
Warrants.................................................... 1,800 1,800
Unrealized gain on available-for-sale securities, net....... (548) (324)
Retained earnings........................................... (29,782) (11,921)
-------- --------
Total Stockholders' Equity........................ 1,189 19,274
-------- --------
Total Liabilities and Stockholders' Equity........ $148,080 $155,435
======== ========
</TABLE>

F-97
<PAGE> 247

PAC RIM HOLDING CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------
1997 1996
-------- -------
<S> <C> <C>
REVENUES:
Net premiums earned....................................... $ 19,507 $18,885
Net investment income..................................... 1,449 1,901
-------- -------
Total revenue..................................... 20,956 20,786
COSTS AND EXPENSES:
Losses and allocated loss adjustment expenses............. 25,841 14,675
Administrative, general, and other........................ 10,769 6,288
Policyholder dividends.................................... 1,006 40
Interest expense.......................................... 589 581
-------- -------
Total costs and expenses.......................... 38,205 21,584
Income (loss) before income taxes........................... (17,249) (798)
Income tax expense (benefit)................................ 612 (257)
-------- -------
Net (loss).................................................. (17,861) (541)
======== =======
Per common share:
Income (loss)............................................... $ (1.87) $ (0.06)
======== =======
</TABLE>

F-98
<PAGE> 248

PAC RIM HOLDING CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1997 1996
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net (Loss)................................................ $(17,861) $ (541)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization.......................... 488 421
Provision for losses on accounts receivable............ (921) (139)
Provision (benefit) for deferred income taxes.......... (115) (252)
Realized capital gains................................. -- (88)
Changes in:
Reserve for losses and loss adjustment expenses...... 7,155 (3,497)
Unearned premiums.................................... (58) 354
Reserve for policyholders' dividends................. 1,006 40
Premiums receivable.................................. 1,152 (1,481)
Reinsurance receivable............................... (111) (296)
Prepaid reinsurance premiums......................... 490 13
Deferred policy acquisition costs.................... 1,065 (320)
Income taxes recoverable............................. -- 476
Accrued expenses and accounts payable................ 3,741 814
Investment income receivable......................... (52) 274
Other assets......................................... (322) (54)
-------- --------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES.. (4,343) (4,276)
INVESTING ACTIVITIES
Purchase of Investments -- bonds.......................... -- (23,943)
Sales of investments -- bonds............................. -- 24,400
Net additions to property and equipment................... -- (912)
-------- --------
NET CASH PROVIDED (USED) IN INVESTMENT
ACTIVITIES...................................... -- (455)
Increase (decrease) in cash and cash equivalents............ (4,343) (4,731)
Cash and cash equivalents at beginning of period............ 58,525 8,033
-------- --------
Cash and cash equivalents at end of period.................. $ 54,182 $ 3,302
======== ========
Supplemental Disclosure:
Interest paid............................................. -- $ 800
</TABLE>

F-99
<PAGE> 249

PAC RIM HOLDING CORPORATION AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

March 31, 1997

NOTE 1 -- BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements of Pac Rim
Holding Corporation ("Pac Rim Holding") and its subsidiary, The Pacific Rim
Assurance Company ("Pacific Rim Assurance"), and its subsidiary, Regional
Benefits Insurance Services, Inc., (collectively referred to herein as "the
Company") have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the Instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and notes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three months ended
March 31, 1997 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1996. For further information, refer
to the consolidated financial statements for the year ended December 31, 1996,
and notes thereto, included in the Company's Annual Report on Form 10-K for the
year ended December 31, 1996.

Certain amounts in the accompanying financial statements have been
reclassified to conform with current period presentation.

NOTE 2 -- EARNINGS PER SHARE

Earnings per common and common equivalent shares are based on the weighted
average number of common shares outstanding during each period, plus common
stock equivalent shares arising from the effects of stock options, warrants, and
convertible debentures. (See Note 4.)

The number of shares used in the three months ended March 31, 1997 and 1996
in the computation of primary earnings per share was 9,528,000. The number of
shares used in the three months ended March 31, 1997 and 1996 in the computation
of fully diluted earnings per share was 9,528,000.

NOTE 3 -- REINSURANCE

Under the Company's specific excess of loss reinsurance treaties, the
reinsurers assume the liability on that portion of workers' compensation claims
between $350,000 and $80,000,000 per occurrence.

The Company accounts for reinsurance transactions in accordance with the
Financial Accounting Standards Board ("FASB") Statement 113, "Accounting and
Reporting for Reinsurance Short-Duration and Long-Duration Contracts", which
established the conditions required for a contract with a reinsurer to be
accounted for as reinsurance and prescribes accounting and reporting standards
for those contracts.

The components of net premiums written are summarized as follows (amounts
in thousands):

<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1997 1996
------- -------
<S> <C> <C>
Direct................................................... $19,045 $19,918
Assumed.................................................. 1,315 294
Ceded.................................................... (929) (961)
------- -------
Net premiums written..................................... $19,431 $19,251
======= =======
</TABLE>

F-100
<PAGE> 250
PAC RIM HOLDING CORPORATION AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 3 -- REINSURANCE (CONTINUED)
The components of net premiums earned are summarized as follows (amounts in
thousands):

<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1997 1996
------- -------
<S> <C> <C>
Direct................................................... $19,583 $19,596
Assumed.................................................. 835 264
Ceded.................................................... (911) (975)
------- -------
Net premiums earned...................................... $19,507 $18,885
======= =======
</TABLE>

The components of net losses and loss adjustment expenses are summarized as
follows (amounts in thousands):

<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------
1997 1996
------- -------
<S> <C> <C>
Direct................................................... $26,103 $14,899
Assumed.................................................. 343 160
Ceded.................................................... (605) (384)
------- -------
Net losses and loss adjustment expenses.................. $25,841 $14,675
======= =======
</TABLE>

NOTE 4 -- LONG TERM DEBT

The Company has $20,000,000 in outstanding principal on its August 16, 1994
issue of Series A Convertible Debentures, with detachable warrants to purchase
3,800,000 shares of the Company's common stock, which are primarily owned by
PRAC, Ltd., a Nevada limited partnership (which is controlled by Mr. Richard
Pickup), and other individuals and entities. Mr. Pickup presently controls
approximately 26% of the outstanding shares of the Company through various
investment entities, which together are the Company's largest stockholder.

The Debentures carry an 8% annual rate of interest, payable semiannually,
and are due on August 16, 1999. The Debentures are convertible at the holder's
option, into shares of common stock at a conversion price of $2.75 per share.
The Debentures are subject to automatic conversion if, after three years from
issuance, the price of the Common Stock exceeds 150% of the conversion price for
a period of 20 out of 30 consecutive trading days.

The Debenture Agreement also provided for the issuance to the Investor of
detachable warrants (the "Warrants") to acquire 1,500,000 shares of the
Company's Common Stock at an exercise price of $2.50 per share (the "Series 1
Warrants"), 1,500,000 shares at an exercise price of $3.00 per share (the
"Series 2 Warrants"), and 800,000 shares at an exercise price of $3.50 per share
(the "Series 3 Warrants"). The Warrants expire on August 16, 1999, and the
exercise price of the Warrants is subject to downward adjustment in the event of
adverse development in the Company's December 31, 1993 loss and allocated loss
adjustment expense reserves related to the 1992 and 1993 accident years,
measured as of June 30, 1996, which date has been extended to the earlier of
June 30, 1997 or the date of a change in control of the Company, by agreement of
the parties. Under the terms of the Debenture Agreement, the maximum adverse
development that would impact the exercise price of the Warrants is $20,000,000.
In the event that the adverse development of reserves for those periods exceeds
$20,000,000, the exercise price of the Series 1 Warrants would be reduced to
$0.01, and the exercise price of the Series 2 Warrants would be reduced to $1.39
per share.

F-101
<PAGE> 251
PAC RIM HOLDING CORPORATION AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 4 -- LONG TERM DEBT (CONTINUED)
The Debentures are carried on the balance sheet net of the unamortized
discount of $970,000 at March 31, 1997. The effective average interest rate of
this debt after consideration of debt issuance costs and discount was 13.3%.

Pacific Rim Assurance has an unsecured line of credit for $2,000,000 at
Imperial Bank of California. Borrowing under the line of credit bears interest
at a rate of 1% in excess of prime rate. No borrowing has occurred under the
line of credit.

NOTE 5 -- NEW ACCOUNTING STANDARDS

In October 1995, FASB issued Statement 123, "Accounting For Stock-Based
Compensation" which established a fair value based method of accounting for
stock-based compensation plans. This statement is effective for financial
statements with fiscal years beginning after December 15, 1995. The Company
elected to continue accounting for stock-based compensation based on Accounting
Principles Board Opinion 25; and thus, the Company adopts only the disclosure
provision of FASB Statement 123. The Company does not expect the implementation
of this pronouncement to have a material effect on the Company's financial
position or results of operations, as the Company does not anticipate having any
stock based compensation.

In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard presentation No. 128, and "Earnings per Share"
("SFAS 128"), which establishes the computation, presentation, and disclosure
requirements for earnings per share. SFAS 128 is effective for fiscal periods
ending after December 15, 1997. The effects of SFAS 128 on the Company's
earnings per share calculation is not expected to be materially different than
that historically presented.

NOTE 6 -- DEFINITIVE AGREEMENT AND PLAN OF MERGER

On September 17, 1996, the Company executed a Definitive Agreement and Plan
of Merger with Superior National Insurance Group, Inc., a California
corporation, and SNTL Acquisition Corp., a Delaware corporation ("Superior"),
regarding an acquisition of the Company by Superior for total consideration of
approximately $42,000,000 in cash upon closing of the transaction.

F-102
<PAGE> 252

GLOSSARY

DEFINED TERMS AND SELECTED INSURANCE TERMS

Acquisition................... The acquisition of BIG and its insurance
subsidiaries by the Company pursuant to the
Acquisition Agreement.

Acquisition Agreement......... The Purchase Agreement dated as of May 5, 1998
between the Company and FHC.

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

ALE........................... Assumption of Liability Endorsement

A.M. Best..................... A.M. Best Company, Inc.

Associate..................... A person or entity that controls, is under
common control with, or is controlled by
another person, and all individuals who are
officers, directors, or control persons of any
of such entities. IP's Associates include
CentreLine, Centre Re, III, and IIA.

BICO.......................... Business Insurance Company, a wholly owned
insurance subsidiary of BIG.

BIG........................... Business Insurance Group, Inc., a Delaware
corporation, and, where the context indicates,
its wholly owned insurance subsidiaries.

BIG Insurance Subsidiaries.... BICO, CalComp, CCIC, and CBIC.

Bishop Estate................. Estate of Bernice P. Bishop, a limited partner
of III.

Board or Board of Directors... Board of directors of the Company.

CalComp....................... California Compensation Insurance Company, a
wholly owned insurance subsidiary of BIG.

CBIC.......................... Combined Benefits Insurance Company, a wholly
owned
subsidiary of BIG.

CCIC.......................... Commercial Compensation Insurance Company, a
wholly owned insurance subsidiary of BIG.

Centre Re..................... Centre Reinsurance Limited.

CentreLine.................... CentreLine Reinsurance Limited, a Bermuda
Corporation.

CentreLine Warrant............ A warrant exercisable to purchase 579,356
shares of Common Stock at $5.20 per share that
was issued in connection with a $20.0 million
investment in the Company (and its affiliate,
Superior National Capital, L.P.) by CentreLine
and a second Centre Re affiliate, Centre
Reinsurance Services (Bermuda) III Limited.

Centre Solutions.............. Centre Solutions (Bermuda) Limited.

Chase......................... The Chase Manhattan Bank.

Claim and claim adjustment
expenses...................... The estimated ultimate cost of claims, whether
reported or unreported, charged against
earnings when claims occur, including the
estimated expenses of settling claims (claim
adjustment expenses).

G-1
<PAGE> 253

Closing....................... Consummation of the Acquisition, the Equity
Financings, and the Senior Debt Financing,
which are conditioned on each other and are to
occur simultaneously.

Closing Date.................. Date on which the Stock Offering, the Senior
Debt Financing, the IP Stock Issuance, and the
Acquisition all will be consummated.

Code.......................... Internal Revenue Code of 1986, as amended.

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.

Commission.................... Securities and Exchange Commission (also
referred to as the "SEC").

Commitment Fee Warrants....... Warrants to purchase 734,000 shares of Common
Stock at $16.75 per share that will be issued
to IP and an affiliate of Zurich as payment for
the Standby Commitment

Common Stock.................. Common Stock of the Company.

Company....................... Superior National Insurance Group, Inc., a
Delaware corporation and its subsidiaries (also
referred to as "Superior National").

CSMP.......................... Claim Severity Management Program.

DOI........................... California Department of Insurance.

EBITDA........................ Earnings before interest, taxes, minority
interest, depreciation, and amortization.

Employee Participation........ The offering of non-transferable Rights to
holders of options and grants of Restricted
Stock as part of the Stock Offering.

Employee Participation
Agreement..................... Agreement between the Company and each employee
and consultant electing to receive Rights under
the Employee Participation that contains
restrictions on transferability of such Rights.

Equity Financings............. The Stock Offering, the Standby Commitment, and
the IP Stock Issuance.

Exchange Act.................. Securities Exchange Act of 1934, as amended.

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

Expiration Date............... , 1998

FASB.......................... Financial Accounting Standards Board.

FHC........................... Foundation Health Corporation, a Delaware
corporation, a subsidiary of FHS and the
immediate parent of BIG.

FHS........................... Foundation Health Systems, Inc., the insurance
holding company that is the ultimate parent of
BIG.

GAAP.......................... Generally accepted accounting principles.

Gen Re........................ General Reinsurance Corporation.

IBNR.......................... A reserve for incurred but not yet reported
claims.

G-2
<PAGE> 254

IIA........................... International Insurance Advisors, Inc., a New
York corporation, investment advisors to III.

III........................... International Insurance Investors, L.P., a
Bermuda limited partnership.

IP............................ IP Bermuda, IP Delaware, and IP II,
collectively.

IP Bermuda.................... Insurance Partners Offshore (Bermuda), L.P., a
Bermuda limited partnership.

IP Delaware................... Insurance Partners, L.P., a Delaware limited
partnership.

IP II......................... Capital Z Financial Services Fund II, L.P. and
Capital Z Financial Services Private Fund II,
L.P., collectively.

IP Stock Issuance............. The Company's issuance and sale of 5,611,940
shares of Common Stock for $16.75 per share,
aggregating approximately $94.0 million, in a
private transaction pursuant to the Stock
Purchase Agreement.

IPA........................... Insurance Partners Advisors, L.P.

IRIS.......................... The NAIC's Insurance Regulatory Information
System, developed to assist state insurance
departments in assessing the financial health
of insurance companies through application of
financial ratios.

Loss ratio.................... The ratio of claims and claim adjustment
expenses to net premiums earned.

Loss Reserves Guarantee....... FHC's guarantee of BIG's claim and claim
adjustment expense reserves, covering $150.0
million in reserves for losses incurred prior
to December 31, 1997 and an additional $25.0
million for losses incurred through the
Closing.

Moody's....................... Moody's Investor Services, Inc.

NAIC.......................... National Association of Insurance
Commissioners.

Nasdaq........................ The Nasdaq National Market.

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

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

1996 Stock Purchase
Agreement..................... The Stock Purchase Agreement dated September
17, 1996, as amended and restated February 17,
1997, pursuant to which IP Delaware, IP
Bermuda, TJS and members of the Company's
management purchased Common Stock in connection
with the Company's acquisition of Pac Rim.

NOLs.......................... Net Operating Loss Carryforwards under the
Code.

Open rating................... The elimination of required minimum workers'
compensation premium rates in California,
instituted in January 1993.

P&C........................... Property and casualty insurance.

Pac Rim....................... Pac Rim Holding Corporation, and where the
context requires, its subsidiaries including
The Pacific Rim Assurance Company.
G-3
<PAGE> 255

Pac Rim Transaction........... The Company's April 1997 acquisition of Pac Rim
and its subsidiary, The Pacific Rim Assurance
Company (subsequently renamed Superior Pacific
Casualty Company).

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

Participation Note............ Secured promissory note delivered by an
employee or consultant as payment for all or a
portion of the Subscription Price for shares of
Common Stock purchased in the Employee
Participation.

Persistency risk.............. The risk that insureds will not renew upon
expiration of a policy and will select a
different carrier.

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 incurred to
net premiums earned. Policyholder dividends are
amounts refunded by an insurance company to
policyholders.

Policyholders' surplus........ The amount remaining after all liabilities are
subtracted from all admitted 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.

Quota-Share Arrangement....... Either of the substantially identical
three-year quota-share reinsurance treaties
entered into by the Company and BIG.

RBC........................... Risk-based capital.

Record Date................... October 30, 1998, the Record Date for the Stock
Offering.

Reinsurance................... An agreement 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," which automatically cover 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.

REM........................... Risk Enterprise Management Limited, a Zurich
affiliate, which provides claim severity
management services to Superior Pacific.

Restricted Stock.............. Restricted Common Stock which were issued
pursuant to the Company's stock incentive plans
but for which a valid Code Section 83(b)
election has not been made.

Rights........................ Subscription rights granted in respect of each
share of Common Stock, option or warrant held,
with each Right entitling the holder thereof to
purchase one share of Common Stock for $16.75.

Rights Offering............... The Company's distribution to existing
stockholders (excluding IP Delaware and IP
Bermuda) and warrant holders (excluding those
exercising their preemptive rights to purchase
shares under the terms of the IP Stock
Issuance) of transferable Rights, the proceeds
of which, upon exercise, will be used to
acquire BIG.

S&P........................... Standard & Poor's Corporation.

G-4
<PAGE> 256

SAP........................... Statutory Accounting Practices. An accounting
method prescribed or permitted by state
insurance regulators, which differs from GAAP
principally in the following respects: (a)
premium income is taken into operations over
the periods covered by the policies, whereas
the related acquisition and commission costs
are expensed when incurred; (b) deferred income
taxes are not recognized under SAP; (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.

SEC........................... Securities and Exchange Commission (also
referred to as the "Commission").

Securities Act................ Securities Act of 1933, as amended.

Securities Pledge Agreement... Agreement by which securities (which may
include Common Stock already owned or purchased
in the Employee Participation, options, or
warrants) will be pledged by an employee or
consultant to the Company as security for a
Participation Note.

Senior Debt Financing......... Senior debt financing in the aggregate
principal amount of approximately $110.0
million that the Company intends to obtain
through a public or private offering of senior
notes or through a contemplated bank credit
facility, the proceeds of which will be used,
among other things, to acquire BIG.

Senior Subordinated Notes..... The Senior Subordinated Notes issued by the
Company to the Trust, in exchange for the
proceeds of the Trust's issuance of the Trust
Preferred Securities.

Service....................... Internal Revenue Service.

Service Agreements............ Long-term agreements that the Company and BIG
will enter into with various subsidiaries of
FHC that are not being purchased in the
Acquisition, covering such services as medical
bill review, PPO utilization, certain managed
care services, claim negotiation and review,
recruitment of employees, placement of
temporary workers, and transitional corporate
administrative services.

SNIC.......................... Superior National Insurance Company, a wholly
owned insurance subsidiary of the Company.

SPCC.......................... Superior Pacific Casualty Company, a wholly
owned insurance subsidiary of the Company.

Standby Commitment............ Commitment of IP to purchase at the
Subscription Price up to 6,328,358 shares of
Common Stock in an amount equal to the number
of shares of Common Stock necessary to bring
the total proceeds of the Equity Financings to
$200.0 million.

State Fund.................... California State Compensation Insurance Fund, a
quasi-public insurer required to provide
insurance to all applicants.

G-5
<PAGE> 257

Stock Offering................ The Company's offering of approximately $107.9
million of Common Stock, consisting of the
Rights Offering and the Employee Participation.

Stock Purchase Agreement...... The Stock Purchase Agreement dated as of May 5,
1998 among the Company, IP Delaware, IP
Bermuda, and Capital Z Partners Ltd., general
partner of IP II (which subsequently assigned
its interest to IP II).

Stock Subscription
Agreement..................... Agreement under which purchases of Common Stock
by participants in the Employee Participation
will take place, which will restrict transfer
of the shares purchased for one year.

Subordinated Notes
Indenture..................... Indenture relating to the Senior Subordinated
Notes.

Subscription Certificates..... Certificates representing Rights to be
delivered by the Subscription Agent to
participants in the Stock Offering, which, in
the case of the Rights Offering, will be
transferable, and, in the case of the Employee
Participation, will not be transferable.

Subscription Price............ $16.75 per share.

Subsidiaries.................. The direct and indirect subsidiaries of the
Company, including, after the Acquisition, BIG.

Superior National............. Superior National Insurance Group, Inc., a
Delaware corporation, and its subsidiaries
(also referred to as the "Company").

Superior Pacific.............. SNIC and SPCC, together.

TJS........................... TJS Partners, L.P., a New York limited
partnership.

Treaty........................ A reinsurance agreement. See "Reinsurance,"
above.

Triennial Examination......... A regularly scheduled triennial review of the
operations and financial condition of a
regulated California insurance company by the
DOI as required under various provisions of the
California Insurance Code.

Trust......................... Superior National Capital Trust I, a subsidiary
of the Company.

Trust Preferred Securities.... $105 million in 10 3/4% Trust Preferred
Securities issued by the Trust on December 3,
1997. Superior National simultaneously issued
the Senior Subordinated Notes which were
purchased by the Trust with the proceeds of the
Offering, and provided certain guarantees in
favor of the holders of the Trust Preferred
Securities.

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 claims and claims adjustment expenses,
underwriting expenses, and policyholder
dividends.

G-6
<PAGE> 258

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

Voting Notes.................. 14.5% Senior Subordinated Voting Notes issued
by the Company on March 31, 1992, and due April
1, 2002.

WCIRB......................... California Workers' Compensation Insurance
Rating Bureau.

Zurich........................ Zurich Centre Group Holdings, Limited, a
Bermuda corporation.

ZRNA.......................... Zurich Reinsurance (North America), Inc. a
Zurich affiliate.

1986 Plan..................... The Company's 1986 Non-Statutory Stock Option
and 1986 Non-Statutory Stock Purchase Plan.

1995 Plan..................... The Company's 1995 Stock Incentive Plan.

14.5% Notes................... 14.5% Senior Subordinated Promissory Notes
issued by the Company in 1992 and redeemed in
1994.

G-7
<PAGE> 259

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

NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE DEALER MANAGER.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY THE SHARES BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING THE OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL CREATE ANY IMPLICATION THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
<S> <C>
Available Information....................... 2
Prospectus Summary.......................... 3
Risk Factors................................ 24
Use of Proceeds............................. 36
Capitalization.............................. 37
Market Price of and Dividends on the Common
Stock..................................... 38
Dilution.................................... 39
Acquisition of Business Insurance Group,
Inc....................................... 40
Unaudited Pro Forma Financial Information... 49
The Stock Offering.......................... 54
Superior National Information Selected
Consolidated Financial Data............... 63
Superior National Management's Discussion
and Analysis of Financial Condition and
Results of Operations..................... 66
Superior National Business.................. 76
Superior National Management................ 99
Security Ownership of Certain Beneficial
Owners and Management..................... 107
Certain Relationships and Related
Transactions.............................. 115
Business Insurance Group, Inc. Information
Selected Combined Financial Data.......... 120
Business Insurance Group, Inc. Management's
Discussion and Analysis of Financial
Condition and Results of Operations....... 121
Business Insurance Group, Inc. Business..... 126
Description of Superior National Capital
Stock..................................... 137
Shares Eligible for Future Sale............. 142
Certain Federal Income Tax Considerations... 144
Legal Matters............................... 147
Experts..................................... 147
Index to Consolidated Financial
Statements................................ F-1
Glossary.................................... G-1
</TABLE>

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

6,544,043 SHARES

SUPERIOR NATIONAL
INSURANCE GROUP, INC.

COMMON STOCK

[LOGO]
------------------------

PROSPECTUS
------------------------
DEALER MANAGER:

DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
, 1998

- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 260

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth the various expenses and costs expected to
be incurred in connection with the sale and distribution of the securities being
registered hereby. In the case of printing, legal and accounting fees, the
expenses and costs reflect estimates of the amount of such expenses attributable
to this Stock Offering, and not to the Acquisition or other related financing
transactions. All of the amounts shown are estimated except the registration fee
of the Securities and Exchange Commission, the NASD filing fee and the Nasdaq
National Market listing fee.

<TABLE>
<CAPTION>
ITEM AMOUNT
---- --------
<S> <C>
Securities and Exchange Commission registration fee......... $ 32,359
NASD filing fee............................................. 11,469
Nasdaq National Market listing fee.......................... 49,743
Blue Sky fees and expenses.................................. 5,000
Printing expenses........................................... 100,000
Legal fees and expenses..................................... 250,000
Accounting fees and expenses................................ 125,000
Subscription Agent, Transfer Agent, and Custodian fees...... 20,000
Miscellaneous............................................... 46,429
--------
Total............................................. $640,000
========
</TABLE>

ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS

Pursuant to Section 145 of the General Corporation Law of the State of
Delaware (the "Delaware Corporation Law"), Article VI of the By-laws of the
Company, a copy of which is incorporated by reference as Exhibit 3.2 to this
Registration Statement (the "By-laws"), provides that the Company shall
indemnify and hold harmless to the fullest extent authorized by applicable law,
including the Delaware Corporation Law, any person made a party or threatened to
be made a party to or involved in any action, suit or proceeding, whether civil,
criminal, administrative or investigative (provided that any such party shall
only be so indemnified in connection with any such action, suit or proceeding
commenced by such party if such commencement was authorized by the Board of
Directors of the Company) by reason of the fact that he, or a person for whom he
is the legal representative, is or was a director or officer of the Company or,
while a director or officer of the Company, is or was serving at the request of
the Company as a director, officer, employee or agent of another corporation or
of a partnership, joint venture, trust, enterprise or nonprofit entity,
including service with respect to employee benefit plans, against all expense,
liability and loss (including attorneys' fees) reasonably incurred or suffered
by such person in connection therewith. If a claim under the foregoing provision
of the By-laws is not paid in full by the Company within sixty days after its
receipt of a written claim, the claimant may bring suit against the Company to
recover the unpaid amount of the claim, and if successful, in whole or in part,
the claimant is entitled to the expenses of prosecuting such claim. In any such
action, the Company shall have the burden of proving that the claimant is not
entitled to the requested indemnification under applicable law.

Pursuant to Section 102(b)(7) of the Delaware Corporation Law, Article
Eleventh of the Certificate of Incorporation of the Company (the "Certificate of
Incorporation") provides that no director of the Company shall be liable to the
Company or its stockholders for monetary damages for a breach of his duty as a
director, except for liability (i) for any breach of the director's duty of
loyalty to the Company or its stockholders, (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the Delaware Corporation Law or (iv) for any
transaction from which the director derived an improper personal benefit.

II-1
<PAGE> 261

The foregoing discussion of the By-laws, Certificate of Incorporation and
the Delaware Corporation Law is not intended to be exhaustive and is qualified
in its entirety by the By-laws, Certificate of Incorporation and the relevant
provisions of applicable law, including the Delaware Corporation Law.

Reference is made to the Dealer Manager Agreement (attached as Exhibit 99.7
to this Registration Statement), pursuant to which the Dealer Manager has agreed
to indemnify the directors and officers of the Company against certain
liabilities, including those arising under the Securities Act, with respect to
the Preliminary Prospectus and the Prospectus relating to the Stock Offering.

Reference also is made to the Acquisition Agreement (incorporated by
reference herein as Exhibit 2.2), the 1996 Stock Purchase Agreement
(incorporated by reference herein as Exhibit 10.22), the Stock Purchase
Agreement (incorporated by reference herein as Exhibit 10.56), the Registration
Rights Agreement (incorporated by reference herein as Exhibit 10.23 to this
Registration Statement) and the Registration Rights Agreement (incorporated by
reference herein as Exhibit 10.24 to this Registration Statement), each of which
provides for indemnification by certain parties thereto of the directors and
officers of the Company, against certain liabilities, including those arising
under the Securities Act, with respect to the subject matter thereof.

The directors and officers of the Company and its subsidiaries are insured
under certain insurance policies against claims made during the period of the
policies against liabilities arising out of claims for certain acts in their
capacities as directors and officers of the Company and its subsidiaries.

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted with respect to directors, officers or persons controlling the
Company pursuant to the foregoing provisions, the Company has been informed
that, in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Securities Act and
is therefore unenforceable.

ITEM 16. EXHIBITS

The following Exhibits are attached to, or incorporated by reference in,
this Registration Statement.

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<S> <C>
2.1 Amended and Restated Agreement and Plan of Merger, dated as
of February 17, 1997, among the Company, SNTL Acquisition
Corp., and Pac Rim Holding Corporation(1)
2.2 Purchase Agreement dated as of May 5, 1998 by and between
FHC and the Company(2)
4.1 Amended and Restated Declaration of Trust of the Trust,
dated as of December 3, 1997, including the Trust's
Certificate of Trust and the forms of Trust Common
Securities, Trust Preferred Securities, and Exchange Trust
Preferred Securities(3)
4.3 Senior Subordinated Indenture, including forms of the Senior
Subordinated Notes and Exchange Senior Subordinated Notes,
dated as of December 3, 1997, between the Company and
Wilmington Trust Company, as trustee, providing for the sale
by the Company to the Trust of the Senior Subordinated
Notes(3)
4.4 Guarantee Agreement, dated as of December 3, 1997, between
the Company and Wilmington Trust Company, as trustee, with
respect to the Trust Preferred Securities(3)
4.5 Guarantee Agreement with Respect to Common Securities, dated
as of December 3, 1997, by the Company(3)
4.6 Form of Exchange Guarantee Agreement between the Company and
Wilmington Trust Company, as trustee, with respect to the
Exchange Trust Preferred Securities(3)
5 Opinion of Riordan & McKinzie as to legality of the
securities being offered(7)
23.1 Consent of KPMG Peat Marwick LLP
23.2 Consent of Deloitte & Touche LLP
24 Power of Attorney(7)
27.1 Amended Financial Data Schedule -- Company -- Fiscal Year
ended December 31, 1997(4)
27.2 Amended Financial Data Schedule -- Company -- Quarter ended
March 31, 1997(5)
27.3 Financial Data Schedule -- BIG -- Fiscal Year ended December
31, 1997
</TABLE>

II-2
<PAGE> 262

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<S> <C>
27.4 Financial Data Schedule -- BIG -- Quarter ended June 30,
1998
27.5 Amended Financial Data Schedule -- Pac Rim -- Fiscal Year
ended December 31, 1996(6)
99.1 Form of Subscription Certificate to be used in the Rights
Offering
99.2 Subscription Certificate to be used in the Employee
Participation(8)
99.3 Form of Employee Participation Agreement to be used in the
Employee Participation(8)
99.4 Form of Stock Subscription Agreement to be used in the
Employee Participation
99.5 Form of Securities Pledge Agreement to be used in the
Employee Participation
99.6 Form of Promissory Note to be used in the Employee
Participation
99.7 Dealer Manager Agreement(8)
</TABLE>

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

(1) Previously filed as an exhibit to the Company's statement on Schedule 13D,
as filed with the SEC on February 27, 1997.

(2) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1998, as filed with the SEC on May
15, 1998.

(3) Previously filed as an exhibit to the Company's and the Trust's
Registration Statement on Form S-4 (Registration No. 333-43505), as filed
with the SEC on December 30, 1997.

(4) Previously filed as an exhibit to the Company's Annual Report on Form
10-K/A for the fiscal year ended December 31, 1997, as filed with the SEC
on October 16, 1998.

(5) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q/A for the quarter ended March 31, 1998, as filed with the SEC on
October 16, 1998.

(6) Previously filed as an exhibit to the Company's Current Report on
Amendment No. 2 to Form 8-K/A, as filed with the SEC on October 16, 1998.

(7) Previously filed as an exhibit to the Company's Registration Statement on
Form S-1 with respect to the Stock Offering (Registration No. 333-58579),
as filed with the SEC on July 7, 1998.

(8) To be filed by amendment.

II-3
<PAGE> 263

ITEM 17. UNDERTAKINGS

1. Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the undersigned Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.

2. The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.

II-4
<PAGE> 264

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Amendment No. 1 on Form S-3 to Form S-1 Registration
Statement and has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Calabasas,
State of California, on the 20th day of October, 1998.

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 Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.

<TABLE>
<CAPTION>
NAME TITLE DATE
<C> <S> <C>

/s/ WILLIAM GENTZ* Director, President and October 20, 1998
- ----------------------------------------------------- Chief Executive Officer
William Gentz (Principal Executive
Officer)

/s/ J. CHRIS SEAMAN Director, Executive Vice October 20, 1998
- ----------------------------------------------------- President and Chief
J. Chris Seaman Financial Officer (Principal
Financial Officer and
Principal Accounting
Officer)

/s/ STEVEN D. GERMAIN* Director October 20, 1998
- -----------------------------------------------------
Steven D. Germain

/s/ CRAIG F. SCHWARBERG* Director October 20, 1998
- -----------------------------------------------------
Craig F. Schwarberg

/s/ THOMAS J. JAMIESON* Director October 20, 1998
- -----------------------------------------------------
Thomas J. Jamieson

/s/ GORDON E. NOBLE* Director October 20, 1998
- -----------------------------------------------------
Gordon E. Noble

/s/ C. LEN PECCHENINO* Director October 20, 1998
- -----------------------------------------------------
C. Len Pecchenino

/s/ ROBERT A. SPASS* Director October 20, 1998
- -----------------------------------------------------
Robert A. Spass
</TABLE>

II-5
<PAGE> 265

<TABLE>
<CAPTION>
NAME TITLE DATE
<C> <S> <C>
/s/ BRADLEY E. COOPER* Director October 20, 1998
- -----------------------------------------------------
Bradley E. Cooper

/s/ STEVEN B. GRUBER* Director October 20, 1998
- -----------------------------------------------------
Steven B. Gruber

/s/ ROGER W. GILBERT* Director October 20, 1998
- -----------------------------------------------------
Roger W. Gilbert
</TABLE>

By: /s/ J. CHRIS SEAMAN

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

J. Chris Seaman

Agent and Attorney-in-fact

II-6
<PAGE> 266

EXHIBIT INDEX

<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF DOCUMENT PAGE
<C> <S> <C>
2.1 Amended and Restated Agreement and Plan of Merger, dated as
of February 17, 1997, among the Company, SNTL Acquisition
Corp., and Pac Rim Holding Corporation(1)...................
2.2 Purchase Agreement dated as of May 5, 1998 by and between
FHC and the Company(2)......................................
4.1 Amended and Restated Declaration of Trust of the Trust,
dated as of December 3, 1997, including the Trust's
Certificate of Trust and the forms of Trust Common
Securities, Trust Preferred Securities, and Exchange Trust
Preferred Securities(3).....................................
4.3 Senior Subordinated Indenture, including forms of the Senior
Subordinated Notes and Exchange Senior Subordinated Notes,
dated as of December 3, 1997, between the Company and
Wilmington Trust Company, as trustee, providing for the sale
by the Company to the Trust of the Senior Subordinated
Notes(3)....................................................
4.4 Guarantee Agreement, dated as of December 3, 1997, between
the Company and Wilmington Trust Company, as trustee, with
respect to the Trust Preferred Securities(3)................
4.5 Guarantee Agreement with Respect to Common Securities, dated
as of December 3, 1997, by the Company(3)...................
4.6 Form of Exchange Guarantee Agreement between the Company and
Wilmington Trust Company, as trustee, with respect to the
Exchange Trust Preferred Securities(3)......................
5 Opinion of Riordan & McKinzie as to legality of the
securities being offered(7).................................
23.1 Consent of KPMG Peat Marwick LLP............................
23.2 Consent of Deloitte & Touche LLP............................
24 Power of Attorney(7)........................................
27.1 Amended Financial Data Schedule -- Company -- Fiscal Year
ended December 31, 1997(4)..................................
27.2 Amended Financial Data Schedule -- Company -- Quarter ended
March 31, 1997(5)...........................................
27.3 Financial Data Schedule -- BIG -- Fiscal Year ended December
31, 1997....................................................
27.4 Financial Data Schedule -- BIG -- Quarter ended June 30,
1998........................................................
27.5 Amended Financial Data Schedule -- Pac Rim -- Fiscal Year
ended December 31, 1996(6)..................................
99.1 Form of Subscription Certificate to be used in the Rights
Offering....................................................
99.2 Subscription Certificate to be used in the Employee
Participation(8)............................................
99.3 Form of Employee Participation Agreement to be used in the
Employee Participation(8)...................................
99.4 Form of Stock Subscription Agreement to be used in the
Employee Participation......................................
99.5 Form of Securities Pledge Agreement to be used in the
Employee Participation......................................
99.6 Form of Promissory Note to be used in the Employee
Participation...............................................
99.7 Dealer Manager Agreement(8).................................
</TABLE>

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

(1) Previously filed as an exhibit to the Company's statement on Schedule 13D,
as filed with the SEC on February 27, 1997.

(2) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended March 31, 1998, as filed with the SEC on May
15, 1998.

<PAGE> 267

(3) Previously filed as an exhibit to the Company's and the Trust's
Registration Statement on Form S-4 (Registration No. 333-43505), as filed
with the SEC on December 30, 1997.

(4) Previously filed as an exhibit to the Company's Annual Report on Form
10-K/A for the fiscal year ended December 31, 1997, as filed with the SEC
on October 16, 1998.

(5) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q/A for the quarter ended March 31, 1998, as filed with the SEC on
October 16, 1998.

(6) Previously filed as an exhibit to the Company's Current Report on
Amendment No. 2 to Form 8-K/A, as filed with the SEC on October 16, 1998.

(7) Previously filed as an exhibit to the Company's Registration Statement on
Form S-1 with respect to the Stock Offering (Registration No. 333-58579),
as filed with the SEC on July 7, 1998.

(8) To be filed by amendment.

<PAGE> 1

EXHIBIT 23.1

INDEPENDENT AUDITORS' CONSENT

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

We consent to the use of our reports on the financial statements of Superior
National Insurance Group, Inc. and Pac Rim Holding Corporation, included herein
and to the reference to our firm under the heading "Experts" in the Prospectus.

Our report on the financial statements of Superior National Insurance Group,
Inc., dated March 27, 1998, except as to note 19 which is as of October 12,
1998, refers to certain reclassifications made to the consolidated financial
statements that resulted in restatement of amounts that were previously
reported.

Our report on the financial statements of Pac Rim Holding Corporation dated
August 28, 1997, contains an explanatory paragraph which states that the
consolidated financial statements as of and for the year ended December 31,
1996 have been restated.

/s/ KPMG Peat Marwick LLP
Los Angeles, California
October 20, 1998

<PAGE> 1

EXHIBIT 23.2

We consent to the use in this Amendment No. 1 to Registration Statement
No. 333-58579 of Superior National Insurance Group, Inc. of our report, dated
June 19, 1998 (August 24, 1998 as to Note 16), on our audit of the combined
financial statements of the Insurance Operations of Business Insurance Group,
Inc. and to the reference to us under the headings "Selected Financial Data" and
"Experts" in such Registration Statement.

/s/ DELOITTE & TOUCHE LLP

San Francisco, California
October 20, 1998

<ARTICLE> 7
<RESTATED>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<DEBT-HELD-FOR-SALE> 611,163
<DEBT-CARRYING-VALUE> 14,059
<DEBT-MARKET-VALUE> 14,227
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 29,821
<TOTAL-INVEST> 665,043
<CASH> 98,128
<RECOVER-REINSURE> 18,518
<DEFERRED-ACQUISITION> 23,841
<TOTAL-ASSETS> 1,222,406
<POLICY-LOSSES> 728,421
<UNEARNED-PREMIUMS> 45,004
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 3,015
<NOTES-PAYABLE> 121,750
0
0
<COMMON> 0
<OTHER-SE> 252,346
<TOTAL-LIABILITY-AND-EQUITY> 1,222,406
515,272
<INVESTMENT-INCOME> 37,548
<INVESTMENT-GAINS> 7,176
<OTHER-INCOME> 3,512
<BENEFITS> 443,204
<UNDERWRITING-AMORTIZATION> 36,174
<UNDERWRITING-OTHER> 133,896
<INCOME-PRETAX> (60,147)
<INCOME-TAX> (29,506)
<INCOME-CONTINUING> (30,641)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (30,641)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 469,425<F1>
<PROVISION-CURRENT> 369,971
<PROVISION-PRIOR> 75,233
<PAYMENTS-CURRENT> (135,202)
<PAYMENTS-PRIOR> (255,877)
<RESERVE-CLOSE> 521,550
<CUMULATIVE-DEFICIENCY> 75,233
<FN>
<F1>Reserves for unpaid claims are reflected net of reinsurance.
</FN>

</TABLE>

<ARTICLE> 7
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<DEBT-HELD-FOR-SALE> 667,290
<DEBT-CARRYING-VALUE> 10,838
<DEBT-MARKET-VALUE> 11,039
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 29,496
<TOTAL-INVEST> 717,624
<CASH> 50,579
<RECOVER-REINSURE> 13,920
<DEFERRED-ACQUISITION> 21,629
<TOTAL-ASSETS> 1,225,649
<POLICY-LOSSES> 690,515
<UNEARNED-PREMIUMS> 47,827
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 3,473
<NOTES-PAYABLE> 121,750
0
0
<COMMON> 0
<OTHER-SE> 243,583
<TOTAL-LIABILITY-AND-EQUITY> 1,225,649
215,911
<INVESTMENT-INCOME> 18,215
<INVESTMENT-GAINS> 275
<OTHER-INCOME> 100
<BENEFITS> 182,385
<UNDERWRITING-AMORTIZATION> 15,940
<UNDERWRITING-OTHER> 47,216
<INCOME-PRETAX> (17,968)
<INCOME-TAX> (10,191)
<INCOME-CONTINUING> (7,777)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,777)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0

</TABLE>

<PAGE> 1

EXHIBIT 99.1

868224 11 4
- ---------------------------------------- ----------------
SUBSCRIPTION CERTIFICATE NUMBER CUSIP NUMBER

Shares
- ----------------------------------------
RIGHT TO SUBSCRIBE

SUBSCRIPTION CERTIFICATE FOR RIGHTS OFFERING

TO HOLDERS OF RECORD ON OCTOBER 30, 1998

SUPERIOR NATIONAL INSURANCE GROUP, INC.

Superior National Insurance Group, Inc. (the "Company") is conducting a
rights offering (the "Rights Offering") which entitles each holder of the
Company's common stock, $.01 par value per share (the "Common Stock"), as of the
close of business on October 30, 1998 (the "Record Date") to receive one
transferable right (a "Right") for each share of Common Stock held of record on
the Record Date. Each Right entitles the holder thereof to subscribe for and
purchase one share of the Company's Common Stock (the "Underlying Common
Shares"), at a subscription price of $16.75 (the "Subscription Price") for each
Underlying Share (the "Subscription Privilege"), subject to the conditions set
forth in the Prospectus dated , 1998 (the "Prospectus"). Listed
above is the number of Underlying Common Shares to which the holder of this
Certificate is entitled to subscribe pursuant to the Subscription Privilege.

FOR A MORE COMPLETE DESCRIPTION OF THE TERMS AND CONDITIONS OF THE RIGHTS
OFFERING, PLEASE REFER TO THE PROSPECTUS. A COPY OF THE PROSPECTUS HAS BEEN
DELIVERED TO YOU HEREWITH. UNDEFINED CAPITALIZED TERMS USED HEREIN ARE DEFINED
IN THE PROSPECTUS.

WILMINGTON TRUST COMPANY (THE "SUBSCRIPTION AGENT") MUST RECEIVE THE
SUBSCRIPTION ORDER FORM (FORM 1 ATTACHED HERETO) WITH PAYMENT IN IMMEDIATELY
AVAILABLE FUNDS BY 5:00 P.M., NEW YORK CITY TIME, ON , 1998 (UNLESS
EXTENDED, IN THE SOLE DISCRETION OF THE COMPANY, THE "EXPIRATION DATE") ANY
RIGHTS NOT EXERCISED PRIOR TO THE EXPIRATION DATE WILL BE NULL AND VOID. IF
IMMEDIATELY AVAILABLE FUNDS ARE NOT DELIVERED ON OR BEFORE THE EXPIRATION DATE,
THE RIGHTS WILL EXPIRE AND ANY PURPORTED EXERCISE WILL BE VOID. ANY SUBSCRIPTION
FOR THE UNDERLYING SHARES IN THE RIGHTS OFFERING MADE HEREBY IS IRREVOCABLE.

The Address of the Subscription Agent is:
Wilmington Trust Company
[To Come]

The Rights represented by this Subscription Certificate may be exercised by
duly completing Form 1. The Rights represented by this Subscription Certificate
may be transferred, assigned, or sold through a bank or broker by duly
completing Form 2. Share certificates may be issued to or may be sent to someone
other than the registered holder or to an address other than that appearing on
the face of this Subscription Certificate by duly completing Form 3. Rights
holders are advised to review carefully and in its entirety the Prospectus, a
copy of which has been delivered herewith, before exercising, transferring,
assigning or selling their Rights.

The registered owner whose name appears hereon, or such registered owner's
assigns, is entitled to subscribe for the Underlying Common Shares upon the
terms and subject to the conditions set forth in the Prospectus and instructions
relating to the use thereof.
<PAGE> 2

Certificate No. __________

Because of the Company's desire to complete the Acquisition as soon as
possible after the Expiration Date, the Company is requiring that all
Subscription Price payments be made in IMMEDIATELY AVAILABLE FUNDS on or before
the Expiration Date. HOLDERS EXERCISING RIGHTS IN THE WEEK PRIOR TO THE
EXPIRATION DATE ARE URGED TO DELIVER IMMEDIATELY AVAILABLE FUNDS TO THE
SUBSCRIPTION AGENT, BY WIRE TRANSFER IF POSSIBLE. Although personal checks may
be accepted, to the extent that a check does not clear by the Expiration Date,
the subscription will not be valid.

THIS SUBSCRIPTION CERTIFICATE IS TRANSFERABLE AND MAY BE COMBINED OR
DIVIDED (BUT ONLY INTO SUBSCRIPTION CERTIFICATES EVIDENCING A WHOLE NUMBER OF
RIGHTS) AT THE SUBSCRIPTION AGENT'S OFFICE.

RIGHTS HOLDERS SHOULD BE AWARE IF THEY CHOOSE TO EXERCISE OR TRANSFER LESS
THAN ALL OF THE RIGHTS EVIDENCED HEREBY, A NEW SUBSCRIPTION CERTIFICATE MAY NOT
BE RECEIVED IN SUFFICIENT TIME TO EXERCISE OR TRANSFER THE REMAINING RIGHTS
EVIDENCED THEREBY. NEITHER THE COMPANY NOR THE SUBSCRIPTION AGENT SHALL HAVE ANY
LIABILITY TO A TRANSFEREE OR TRANSFEROR OF RIGHTS IF SUBSCRIPTION CERTIFICATES
ARE NOT RECEIVED IN TIME FOR EXERCISE, TRANSFER, ASSIGNMENT OR SALE PRIOR TO THE
RIGHTS EXPIRATION DATE.

AN EXERCISE OF RIGHTS EVIDENCED HEREBY IS IRREVOCABLE.

FOR FURTHER INFORMATION CONCERNING COMPLETION AND EXECUTION OF THE ATTACHED
FORMS, PLEASE CONTACT THE INFORMATION AGENT, CORPORATE INVESTOR COMMUNICATIONS,
AT 1-800- - .

2
<PAGE> 3
Certificate No. __________

FORM 1

EXERCISE AND SUBSCRIPTION: The undersigned hereby irrevocably exercises one or
more Rights to subscribe for the Underlying Common Shares as indicated below, on
the terms and conditions specified in the Prospectus, receipt of which is hereby
acknowledged.

The Company will accept or reject this subscription in accordance with the
terms set forth in the Prospectus. All questions concerning the timeliness,
validity, form and eligibility of any exercise of Rights will be determined by
the Company, whose determinations shall be final and binding.

Shares of Common Stock will be issuable promptly upon the valid exercise of
this Shareholder Rights Subscription Certificate and certificates delivered
immediately after completion of the Acquisition. Such shares will be registered
in the same manner as set forth on the face of this Shareholder Rights
Subscription Certificate unless otherwise set forth below. If your shares are
held in joint ownership, all joint owners must sign. When signing as a
fiduciary, representative or corporate officer, give full title as such.

(a) Number of Rights exercised pursuant to the Subscription Certificate:

_________ X $16.75 = $________ payment

METHOD OF PAYMENT (CHECK AND COMPLETE APPROPRIATE BOX(ES)):

[ ] Bank draft, certified check or money order payable to "Wilmington
Trust Company, as Subscription Agent"

[ ] Wire transfer directed to Wilmington Trust Company, ABA No.
, Credit Account No. (Superior National Rights
Offering), Attention: The confirmation of the wire should reference
this Subscription Certificate Number and name of the Subscriber.

[ ] Personal check payable to "Wilmington Trust Company, as
Subscription Agent" PAYMENT BY PERSONAL CHECK IS NOT RECOMMENDED
BECAUSE IMMEDIATELY AVAILABLE FUNDS MUST BE RECEIVED ON OR PRIOR TO
THE EXPIRATION DATE.

(b) If the Rights being exercised pursuant the Subscription Privilege do
not account for all of the Rights represented by this Subscription
Certificate (check only one):

[ ] Deliver to the undersigned a new Subscription Certificate
evidencing the remaining Rights to which the undersigned is
entitled.

[ ] Deliver a new Subscription Certificate in accordance with the
undersigned's Form 2 instructions (which include any required
signature guarantees).

[ ] Sell the remaining unexercised Rights in accordance with the
undersigned's Form 2 instructions.

1
<PAGE> 4
Certificate No. __________

If the total Subscription Price enclosed or transmitted is insufficient to
purchase the total number of shares included in line (a), or if the number of
shares being subscribed for is not specified, the Rights Holder exercising this
Subscription Certificate shall be deemed to have subscribed for the maximum
amount of shares that could be subscribed for upon payment of such amount. To
the extent any portion of the Subscription Price enclosed or transmitted exceeds
the amount required for the Subscription, such excess funds shall be mailed to
the subscriber without interest or deduction as soon as practicable.

<TABLE>
<S> <C>
- ----------------------------------------------------- Address for delivery of Common Stock:
Subscriber's Signature(s)

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

- ----------------------------------------------------- -----------------------------------------------------
Printed Name(s)

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

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

Telephone No.: ( -----) ----------------------------

Return to: [Subscription Agent]

By Mail: By Hand/Overnight Delivery:

Wilmington Trust Company Wilmington Trust Company
[Address] [Address]
</TABLE>

2
<PAGE> 5

Certificate No. ________

FORM 2

TO TRANSFER YOUR SUBSCRIPTION CERTIFICATE OR SOME OR ALL OF YOUR RIGHTS, OR TO
EXERCISE OR SELL RIGHTS THROUGH YOUR BANK OR BROKER: For value received, the
number of Rights represented by this Subscription Certificate as set forth below
are hereby assigned to (please print name and address and Taxpayer
Identification Number or Social Security Number of transferee in full):

<TABLE>
<S> <C>
Name of Transferee:
------------------------------------------------------------
(Please Print)

Address:
------------------------------------------------------------

------------------------------------------------------------
(Include Zip Code)
</TABLE>

Social Security Number or Taxpayer Identification Number:

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

Number of Rights transferred: --------------------------------------------------

<TABLE>
<S> <C>
Dated: -------------------------------------- , 1998
Signature(s) Guaranteed by: Signature(s) of Transferor(s):
- ----------------------------------------------------- -----------------------------------------------------

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

THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE Printed name(s) of Transferor(s):
GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS
AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH -----------------------------------------------------
MEMBERSHIP IN AN APPROVED MEDALLION SIGNATURE
GUARANTEE PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
-----------------------------------------------------
NOTE: The signature must correspond with the name as
written and the name must be that of the registered
owner.
</TABLE>

Proceeds from the sale of Rights may be subject to backup withholding of
U.S. taxes unless the Seller's correct taxpayer identification number, typically
the Seller's social security or federal employer identification number, on a
valid Form W-9 or substitute form (or in the case of a non-U.S. Seller, a valid
Form W-8) is on file with the Subscription Agent or, alternatively, the Seller
establishes another basis for exemption from backup withholding.

1
<PAGE> 6

Certificate No. ____________

FORM 3

SPECIAL DELIVERY INSTRUCTIONS: Unless otherwise indicated below, the
Subscription Agent is hereby authorized to issue and deliver any check and
certificates for Common Stock to the undersigned at the address appearing on the
face of this Subscription Certificate.

1. SPECIAL DELIVERY INSTRUCTIONS: (See Section 3 of the Instructions).

To be completed ONLY if the name in which the certificate representing the
Common Stock is to be issued is to someone other than the registered holder
of this Subscription Certificate.

Issue and mail to:

Name:
- ------------------------------------
(Please Print)

Address:

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

- ------------------------------------
(Include Zip Code)

Social Security Number or Taxpayer Identification Number:

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

IMPORTANT: RIGHTS HOLDERS SIGN HERE AND, IF RIGHTS ARE BEING TRANSFERRED
ASSIGNED OR SOLD, COMPLETE THE ATTACHED FORM W-9.

Dated:
- -------------------------------------- , 1998

<TABLE>
<S> <C>
Signature(s) of Registered Holder(s) Printed name(s) of Registered Holder(s):

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

Signature(s) Guaranteed by:

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

THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS
AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED MEDALLION SIGNATURE
GUARANTEE PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
</TABLE>

Must be signed by the registered holder(s) as name(s) appear(s) on this
Subscription Certificate. If signature is by trustee(s), executor(s),
administrator(s), attorney(s)-in-fact, agent(s), officer(s) of a corporation or
another acting in a fiduciary or representative capacity, please provide the
following information. See the Instructions.

1
<PAGE> 7
Certificate No. ____________

Name:
- ------------------------------------
(Please Print)

Capacity (Full Title):
- ------------------------------------

Address:
- ------------------------------------

- ------------------------------------
(Include Zip Code)

Tax Identification or Social
Security Number:

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

2
<PAGE> 8

INSTRUCTIONS FOR USE OF RIGHTS SUBSCRIPTION CERTIFICATE

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

SUPERIOR NATIONAL INSURANCE GROUP, INC.

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

CONSULT THE INFORMATION AGENT OR YOUR BANK OR BROKER
IF YOU HAVE ANY QUESTIONS AFTER READING THESE INSTRUCTIONS.
------------------------

These instructions are being sent in connection with the rights offering
(the "Rights Offering") by Superior National Insurance Group, Inc., a Delaware
corporation (the "Company"), to the holders of its Common Stock, par value $.01
per share (the "Common Stock"), and outstanding warrants to purchase Common
Stock, as described in the Company's Prospectus dated , 1998
(the "Prospectus"). The following summarizes the terms of the Rights Offering.

Holders of record of Common Stock at the close of business on
, 1998 (the "Record Date") shall receive one transferable
subscription right (a "Right") for each share of Common Stock held on the
Record Date. Each Right entitles the holder of the Right to subscribe for
and purchase from the Company one share of Common Stock at the subscription
price (the "Subscription Price") of $16.75 per share (the "Subscription
Privilege"). The Rights will expire at 5:00 p.m., New York City time on
November 20, 1998, unless extended by the Company (the "Expiration Date").

The number of Rights to which you are entitled is printed on the face
of your Subscription Certificate. You should indicate your wishes with
regard to the exercise or transfer of your Rights by completing the
appropriate form or forms on the reverse side of your Subscription
Certificate and returning the Subscription Certificate to the Subscription
Agent in the envelope provided.

YOUR SUBSCRIPTION CERTIFICATE OR NOTICE OF GUARANTEED DELIVERY MUST BE
RECEIVED BY THE SUBSCRIPTION AGENT AND PAYMENT OF THE SUBSCRIPTION PRICE,
INCLUDING FINAL CLEARANCE OF ANY UNCERTIFIED CHECKS, MUST BE RECEIVED BY THE
SUBSCRIPTION AGENT AT OR BEFORE 5:00 P.M., NEW YORK CITY TIME, ON ,
1998. YOU MAY NOT REVOKE ANY EXERCISE OF A RIGHT.

1. Subscription Privileges.

a. How to Exercise Rights. To exercise your Rights, complete the front
of your Subscription Certificate and send to the Subscription Agent your
properly completed and executed Subscription Certificate, with payment in
full of the Subscription Price for each Share of Common Stock subscribed
for under the Rights Offering. Payment of the Subscription Price must be
made in U.S. dollars for the full number of shares of Common Stock being
subscribed for (a) by check or bank draft drawn upon a U.S. bank, or
postal, telegraphic or express money order, in each case, payable to
"Wilmington Trust Company, as Subscription Agent," or (b) by wire transfer
of same day funds to the account maintained by the Subscription Agent for
the purpose of accepting subscriptions described in Section 2 below. The
Subscription Price will be deemed to have been received by the Subscription
Agent only upon (i) clearance of any uncertified check, (ii) receipt by the
Subscription Agent of any certified check or bank draft drawn upon a U.S.
bank, or of any postal, telegraphic or express money order or (iii) receipt
of collected funds in the Subscription Agent's account designated above.

IF PAYING BY UNCERTIFIED CHECK, PLEASE NOTE THAT THE FUNDS PAID THEREBY MAY
TAKE AT LEAST FIVE BUSINESS DAYS TO CLEAR. ACCORDINGLY, RIGHTS HOLDERS WHO
WISH TO PAY THE SUBSCRIPTION PRICE BY MEANS OF UNCERTIFIED CHECK ARE URGED
TO MAKE PAYMENT SUFFICIENTLY IN ADVANCE OF THE RIGHTS EXPIRATION DATE TO
ENSURE THAT SUCH PAYMENT IS RECEIVED AND CLEARS BEFORE THE EXPIRATION TIME
AND ARE URGED TO CONSIDER, IN THE ALTERNATIVE, PAYMENT BY MEANS OF
CERTIFIED CHECK, BANK DRAFT, MONEY ORDER OR WIRE TRANSFER OF FUNDS.

1
<PAGE> 9

If you exercise less than all of the Rights evidenced by your
Subscription Certificate by so indicating on Form 1 attached to your
Subscription Certificate, the Subscription Agent will either (i) issue you
a new Subscription Certificate representing the remaining Rights, (ii) if
you so indicate on your Subscription Certificate, issue a new Subscription
Certificate to a designated transferee, or (iii) sell the remaining
unexercised Rights in accordance with your instructions. If no indication
is made, the Subscription Agent will issue you a new Subscription
Certificate evidencing your unexercised Rights. If you choose, however, to
have a new Subscription Certificate sent to you or a designated transferee,
any such new Subscription Certificate may not be received in sufficient
time to permit you or the designated transferee to sell or exercise the
Rights evidenced thereby.

A new Subscription Certificate will be issued to a submitting Rights
Holder, or to any designated transferee, upon the partial exercise or sale
of Rights only if the Subscription Agent received a properly endorsed
Subscription Certificate no later than 5:00 p.m., New York City time, on
, 1998. After such time, no new Subscription Certificates
will be issued.

If you have not indicated the number of Rights being exercised, or if
you have not forwarded full payment of the Subscription Price for the
number of Rights that you have indicated are being exercised, then you will
be deemed to have subscribed for the maximum amount of shares that could be
subscribed for upon payment of such amount. To the extent any portion of
the Subscription Price enclosed or transmitted exceeds the amount required
for the Subscription, such excess funds shall be mailed to the subscriber
without interest or deduction as soon as practicable.

b. Exercise of Rights through a Nominee. Banks, brokers and other
nominees who exercise the Subscription Privilege on behalf of the
beneficial owners of Rights will be required to certify to the Subscription
Agent and the Company, by delivery to the Subscription Agent of a Nominee
Holder Subscription Certification in the form available from the
Subscription Agent or the Information Agent, the aggregate number of Rights
as to which the Subscription Privilege is being exercised and the number of
shares of Common Stock thereby subscribed for by each beneficial owner of
Rights on whose behalf such nominee holder is acting.

2. The Subscription Agent.

The address, telephone and facsimile numbers of, and wire information
for, the Subscription Agent are as follows:

By Mail: -----------------------------------------------------
-----------------------------------------------------
-----------------------------------------------------
-----------------------------------------------------

By Hand or
Overnight: -----------------------------------------------------
-----------------------------------------------------
-----------------------------------------------------
-----------------------------------------------------
</TABLE>

2
<PAGE> 10

<TABLE>
<S> <C> <C>
By Wire: ----------------------------------------------[Bank]

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

ABA: -----------------------------------------------

Credit Acct. # -------------------------------------

--------------- (Superior National Rights Offering )

Attn: ----------------------------------------------

(___) ----------------------------------------------

Facsimile: (For Eligible Institutions Only): (___) ------------------------------

For Confirming Fax ONLY: (___) ------------------------------
</TABLE>

3. Information Agent.

If you have questions regarding how to properly complete the
Subscription Certificate or any document related thereto, please contact
the Information Agent.

The address and telephone number of the Information Agent are as
follows:
---------------------------------------------
---------------------------------------------
---------------------------------------------
(___) ---------------------------------------

4. Issuance and Delivery of Stock Certificates. The following issuances,
deliveries and payments will be made to you at your address of record on the
Record Date unless you provide special payment, issuance or delivery
instructions to the contrary by completing the applicable part of your
Subscription Certificate. See "The Stock Offering -- Exercise of Rights" in the
Prospectus.

a. Subscription Privilege. As soon as practicable after November 20,
1998, the Subscription Agent will issue and mail in accordance with the
instruction of the exercising Rights Holder, a certificate representing the
shares of Common Stock purchased under the Subscription Privilege. See "The
Stock Offering -- Exercise of Rights" in the Prospectus.

b. Refunding of Excess Payments. As soon as practicable after November
20, 1998, the Subscription Agent will return by mail without interest or
deduction, any excess funds received in payment of the Subscription Price
for shares of Common Stock.

5. Sale or Transfer of Rights.

a. Sale of Rights Through a Bank, Broker or other Nominee. To sell or
transfer all Rights evidenced by a Subscription Certificate through your
bank, broker or other nominee, so indicate on your Subscription Certificate
and deliver your properly completed and executed Subscription Certificate
to your bank or broker. Your Subscription Certificate should be delivered
to your bank or broker in sufficient time for the Rights to be sold. If the
form on the reverse of your Subscription Certificate is completed without
designating a transferee, the Subscription Agent may thereafter treat the
bearer of the Subscription Certificate as the absolute owner of all of the
Rights evidenced by such Subscription Certificate for all purposes, and the
Subscription Agent will not be affected by any notice to the contrary.

b. Transfer of Rights to a Designated Transferee. To sell or transfer
all of your Rights, you must complete the form on the reverse of your
Subscription Certificate in its entirety, execute the Subscription
Certificate and have your signature guaranteed by a bank, broker, dealer,
municipal securities dealer, municipal securities broker, government
securities dealer, government securities broker, credit union, national
securities exchange, registered securities association, or clearing agency
or savings association (an "Eligible Guarantor Institution"). A
Subscription Certificate that has been properly transferred in its

3
<PAGE> 11

entirety may be exercised by a new Rights Holder without having a new
Subscription Certificate issued. To exercise, or otherwise take action with
respect to, such a transferred Subscription Certificate, the new Rights
Holder should deliver the Subscription Certificate, together with payment
of the applicable Subscription Price and complete separate instructions
signed by the new Rights Holder to the Subscription Agent in sufficient
time to permit the Subscription Agent to take the desired action. Only the
Subscription Agent can issue Subscription Certificates. However, you may
transfer a portion of the Rights evidenced by a single Subscription
Certificate (but not fractional Rights) by delivering to the Subscription
Agent a Subscription Certificate properly endorsed for transfer, with
instructions to register that portion of the Rights indicated therein in
the name of the transferee and to issue a new Subscription Certificate to
the transferee evidencing the transferred Rights. In that event, a new
Subscription Certificate evidencing the balance of the Rights will be
issued to you or if you so instruct, to an additional transferee.
Alternatively, you may divide your Subscription Certificate into new
Subscription Certificates evidencing appropriate numbers of Rights for
transfer by following the instructions in Section 6 below.

If you wish to transfer all or a portion of your Rights (but not
fractional Rights), you should allow a sufficient amount of time prior to
the Expiration Date for (i) the transfer instructions to be received and
processed by the Subscription Agent, (ii) new Subscription Certificates to
be issued and transmitted to the transferee(s), with respect to transferred
Rights, and to you with respect to retained Rights, if any, and (iii) the
Rights evidenced by the new Subscription Certificates to be exercised or
sold by the recipients thereof. Such amount of time could range from two to
four business days, depending upon the method by which delivery of the
Subscription Certificate and payment is made and the number of transactions
which you instruct the Subscription Agent to effect. Neither the Company
nor the Subscription Agent will have any liability to a transferee or
transferor of Rights if Subscription Certificates are not received in time
for exercise or sale prior to November 20, 1998.

6. Dividing a Subscription Certificate. To have your Subscription
Certificate divided into two or more Subscription Certificates, evidencing the
same aggregate number of Rights, send your Subscription Certificate, together
with complete separate instructions (including specification of the
denominations into which you wish your rights to be divided) signed by you, to
the Subscription Agent, allowing a sufficient amount of time for new
Subscription Certificates to be issued and returned so they can be used prior to
the Expiration Date. Alternatively, you may ask a bank or broker to effect such
action on your behalf. Your signature must be guaranteed by an Eligible
Guarantor Institution (as defined in Section 5) if any of the new Subscription
Certificates are to be issued in a name other than that in which the original
Subscription Certificate was issued. Subscription Certificates may not be
divided into fractional Rights, and any instruction to do so will be rejected.
As a result of delays in the mail, the time of the transmittal, the necessary
processing time and other factors, you or your transferee may not receive such
new Subscription Certificates in time to enable the Rights Holder to complete a
sale or exercise by November 20, 1998. Neither the Company nor the Subscription
Agent will be liable to either a transferor or transferee for any such delays.

7. Signatures.

a. Execution by Rights Holder. The signature on the Subscription
Certificate must correspond with the name of the Rights Holder exactly as
it appears on the face of the Subscription Certificate without any
alteration or change whatsoever. Persons who sign the Subscription
Certificate in a representative or other fiduciary capacity must indicate
their capacity when signing and, unless waived by the Company in its sole
and absolute discretion, must present to the Subscription Agent
satisfactory evidence of their authority to so act.

b. Execution by Person Other Than Rights Holder. If the Subscription
Certificate is executed by a person other than the Rights Holder named on
the face of the Subscription Certificate, proper evidence of authority of
the person executing the Subscription Certificate must accompany the same
unless, for good cause, the Company dispenses with proof of authority.

c. Signature Guarantees. Unless your Subscription Certificate (i)
provides that the shares of Common Stock to be issued pursuant to the
exercise of Rights are to be issued to you or (ii) is submitted

4
<PAGE> 12

for the account of an Eligible Institution (as defined in Section 1), your
signature on each Subscription Certificate must be guaranteed by an
Eligible Guarantor Institution (as defined in Section 5).

8. Method of Delivery. The method of delivery of Subscription Certificates
and payment of the Subscription Price to the Subscription Agent will be at your
election and risk, but, if sent by mail, you are urged to send such materials by
registered mail, properly insured, with return receipt requested, and are urged
to allow a sufficient number of days to ensure delivery to the Subscription
Agent, if you are paying by uncertified check, for the clearance of payment of
the Subscription Price prior to November 20, 1998. Because uncertified checks
may take at least five business days to clear, you are strongly urged to
consider payment by means of certified check, cashier's check, money order or
wire transfer.

9. Form W-9. Each Rights Holder who elects to exercise Rights should
provide the Subscription Agent with a correct Taxpayer Identification Number on
the Form W-9 attached to the Subscription Certificate. Additional copies of Form
W-9 may be obtained upon request from the Information Agent or Subscription
Agent. Failure to provide the information on the Form W-9 may subject such
Rights Holder to a $50 penalty and to a 31% Federal income tax withholding with
respect to dividends that may be paid by the Company on shares of Common Stock
purchased upon the exercise of Rights (for those Rights Holders exercising
Rights).

10. Transfer Taxes. Except for the fees charged by the Subscription Agent
(which will be paid by the Company as described in Section 3 above), all
commissions, fees and other expenses (including brokerage commissions and
transfer taxes) incurred in connection with the purchase, sale or exercise of
Rights will be for the account of the Rights Holder, and none of such
commissions, fees or expenses will be paid by the Company or the Subscription
Agent.

11. Irregularities. All questions concerning the timeliness, validity, form
and eligibility of any exercise of Rights will be determined by the Company,
whose determinations will be final and binding. The Company, in its sole
discretion, may waive any defect or irregularity, or permit a defect or
irregularity to be corrected within such time as it may determine, or reject the
purported exercise of any Right. Subscription Certificates will not be deemed to
have been received or accepted until all irregularities have been waived or
cured within such time as the Company determines, in its sole discretion.
Neither the Company nor the Subscription Agent will be under any duty to give
notification of any defect or irregularity in connection with the submission of
Subscription Certificates or incur any liability for failure to give such
notification. The Company reserves the right to reject any exercise if such
exercise is not in accordance with the terms of the Rights Offering or not in
proper form or if the acceptance thereof or the issuance of these shares of
Common Stock pursuant thereto could be deemed unlawful.

5
<PAGE> 13

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

<TABLE>
<S> <C> <C>
SUBSTITUTE PART 1 -- PLEASE PROVIDE YOUR TIN IN
THE BOX AT RIGHT AND CERTIFY BY TIN ........................
FORM W-9 SIGNING AND DATING BELOW SOCIAL SECURITY NUMBER OR
EMPLOYER IDENTIFICATION NUMBER
--------------------------------------------------------------------------------------
DEPARTMENT OF THE TREASURY PART 2
INTERNAL REVENUE SERVICE AWAITING
TIN [ ]
---------------------------------------
CERTIFICATION -- UNDER THE PENALTIES OF PERJURY, I CERTIFY THAT (1) THE NUMBER SHOWN
ON THIS FORM IS MY CORRECT TAXPAYER IDENTIFICATION NUMBER (OR I AM WAITING FOR A
NUMBER TO BE ISSUED TO ME), (2) I AM NOT SUBJECT TO BACKUP WITHHOLDING EITHER
BECAUSE I HAVE NOT BEEN NOTIFIED BY THE INTERNAL REVENUE SERVICE ("IRS") THAT I AM
SUBJECT TO BACKUP WITHHOLDING AS A RESULT OF A FAILURE TO REPORT ALL INTEREST OR
DIVIDENDS OR THE IRS HAS NOTIFIED ME THAT I AM NO LONGER SUBJECT TO BACKUP
WITHHOLDING, AND (3) ANY OTHER INFORMATION PROVIDED ON THIS FORM IS TRUE AND
CORRECT.
PAYOR'S REQUEST FOR TAXPAYER SIGNATURE ......................................................DATE ...............
IDENTIFICATION NUMBER (TIN)
AND CERTIFICATION You must cross out item (2) above if you have been notified by the IRS that you are
subject to backup withholding because of underreporting interest or dividends on
your tax return and you have not been notified by the IRS that you are no longer
subject to backup withholding.
</TABLE>

- ------------------------------------------
<PAGE> 14

GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9

GUIDELINES FOR DETERMINING THE PROPER IDENTIFICATION NUMBER TO GIVE THE
PAYOR--Social Security numbers have nine digits separated by two hyphens: i.e.,
000-00-0000. Employer identification numbers have nine digits separated by one
hyphen: i.e., 00-0000000. The table below will help determine the number to give
the payor.

<TABLE>
<CAPTION>
- -------------------------------------------------------------- --------------------------------------------------------
GIVE THE GIVE THE EMPLOYER
FOR THIS TYPE OF ACCOUNT: SOCIAL SECURITY FOR THIS TYPE OF ACCOUNT: IDENTIFICATION
NUMBER OF -- NUMBER OF --
- -------------------------------------------------------------- --------------------------------------------------------
<S> <C> <C> <C>
1. An individual's account The individual 6. A valid trust, estate, The legal entity (Do
or pension trust not furnish the
2. Two or more individuals The actual owner of identifying number of
(joint account) the account or, if the personal
combined funds, the representative or
first individual on trustee unless the
the account(1) legal entity itself is
not designated in the
3. Custodian account of a minor The minor(2) account title)(4)
(Uniform Gift to Minors Act)

4. a. The usual revocable savings The grantor-trustee(1) 7. Corporate account The corporation
trust account (grantor is
also trustee) 8. Association, club, The organization
religious, charitable,
b. So-called trust account that The actual owner(1) educational or other
is not a legal or valid tax-exempt organization
trust under State law
9. Partnership account The partnership
5. Sole proprietorship account The owner(3)
10. A broker or registered The broker or nominee
nominee

11. Account with the The public entity
Department of Agriculture
in the name of a public
entity (such as a State or
local government, school
district or prison) that
receives agricultural
program payments
- -------------------------------------------------------------- --------------------------------------------------------
</TABLE>

(1) List first and circle the name of the person whose number you furnish.

(2) Circle the minor's name and furnish the minor's social security number.

(3) Show the name of the owner.

(4) List first and circle the name of the valid trust, estate or pension trust.

NOTE: If no name is circled when there is more than one name, the number will be
considered to be that of the first name listed.
<PAGE> 15

GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9

PAGE 2

OBTAINING A NUMBER
If you don't have a taxpayer identification number or you don't know your
number, obtain Form SS-5, Application for a Social Security Number Card, or Form
SS-4, Application for Employer Identification Number, at the local office of the
Social Security Administration or the Internal Revenue Service and apply for a
number.

PAYEES EXEMPT FROM BACKUP WITHHOLDING

Payees specifically exempt from backup withholding on ALL payments include the
following:
- - A corporation.
- - A financial institution.
- - An organization exempt from tax under section 501(a), or an individual
retirement plan, or a custodial account under 403(b)(7).
- - The United States or any agency or instrumentality thereof.
- - A State, the District of Columbia, a possession of the United States, or any
subdivision or instrumentality thereof.
- - A foreign government, a political subdivision of a foreign government, or
any agency or instrumentality thereof.
- - An international organization or any agency, or instrumentality thereof.
- - A dealer in securities or commodities required to register in the U.S. or a
possession of the U.S.
- - A real estate investment trust.
- - A common trust fund operated by a bank under section 584(a).
- - A trust exempt from tax under Section 644 or described in Section 4947.
- - An entity registered at all times during the tax year under the Investment
Company Act of 1940.
- - A foreign central bank of issue.
- - Payments made to a middleman known in the investment community as a nominee
or listed in the most recent publication of the American Society of
Corporate Secretaries, Inc., Nominee List.
- - A futures commission merchant registered with the Commodity Futures Trading
Commission.

Payments of dividends and patronage dividends not generally subject to backup
withholding include the following:
- - Payments to nonresident aliens subject to withholding under section 1441.
- - Payments to partnerships not engaged in a trade or business in the U.S. and
which have at least one nonresident partner.
- - Payments of patronage dividends where the amount received is not paid in
money.
- - Payments made by certain foreign organizations.

Payments of interest not generally subject to backup withholding include the
following:
- - Payments of interest on obligations issued by individuals.
Note: You may be subject to backup withholding if this interest is $600 or
more and is paid in the course of the payor's trade or business and you have
not provided your correct taxpayer identification number to the payor.
- - Payments of tax-exempt interest (including exempt interest dividends under
Section 852).
- - Payments described in Section 6049(b)(5) to nonresident aliens.
- - Payments of tax-free covenant bonds under Section 1451.
- - Payments made by certain foreign organizations.
- - Mortgage interest paid by you.

Exempt payees described above should file Form W-9 to avoid possible erroneous
backup withholding. FILE THIS FORM WITH THE PAYOR, FURNISH YOUR TAXPAYER
IDENTIFICATION NUMBER, WRITE "EXEMPT" ON THE FACE OF THE FORM, AND RETURN IT TO
THE PAYOR, IF THE PAYMENTS ARE INTEREST, DIVIDENDS, OR PATRONAGE DIVIDENDS, ALSO
SIGN AND DATE THE FORM.

Certain payments other than interest, dividends, and patronage dividends, that
are not subject to information reporting are also not subject to backup
withholding. For details, see Sections 6041, 6041A(a), 6042, 6044, 6045, 6049,
6050A, and 6050N, and the regulations thereunder.

PRIVACY ACT NOTICE.--Section 6109 requires most recipients of dividend, interest
or other payments to give taxpayer identification numbers to payers who must
report the payments to IRS. IRS uses the numbers for identification purposes.
Payors must be given the numbers whether or not recipients are required to file
tax returns. Payors must generally withhold 20% of certain taxable payments to a
payee who does not furnish a taxpayer identification number to a payor. Certain
penalties may also apply.

PENALTIES

(1) PENALTY FOR FAILURE TO FURNISH TAXPAYER IDENTIFICATION NUMBER.--If you fail
to furnish your taxpayer identification number to a payor, you are subject to a
penalty of $50 for each such failure unless your failure is due to reasonable
cause and not to willful neglect.

(2) FAILURE TO REPORT CERTAIN PAYMENTS.--If you fail to include properly on your
tax return certain items reported to the IRS such failure will be treated as
being due to negligence and will be subject to a penalty of 5% on any portion of
an under payment of tax attributable to that failure unless there is clear and
convincing evidence to the contrary.

(3) CIVIL PENALTY FOR FALSE INFORMATION WITH RESPECT TO WITHHOLDING.--If you
make a false statement with no reasonable basis which results in no imposition
of backup withholding, you are subject to a penalty of $500.

(4) CRIMINAL PENALTY FOR FALSIFYING INFORMATION.--Willfully falsifying
certifications or affirmations may subject you to criminal penalties including
fines and/or imprisonment.

FOR ADDITIONAL INFORMATION CONTACT YOUR TAX
CONSULTANT OR THE INTERNAL REVENUE SERVICE

<PAGE> 1

EXHIBIT 99.4

STOCK SUBSCRIPTION AGREEMENT

This STOCK SUBSCRIPTION AGREEMENT (this "Agreement") is made as of
, 1998, by and between SUPERIOR NATIONAL INSURANCE GROUP, INC., a
Delaware corporation (the "Company"), and , an individual (the
"Purchaser").

In consideration of the mutual covenants and conditions contained herein,
the parties agree as follows:

1. Sale and Purchase of Stock. The Company hereby sells to the Purchaser,
subject to the conditions and restrictions contained in this Agreement and in
the Company's 1995 Stock Incentive Plan (the "1995 Plan"), and the Purchaser
hereby purchases, shares (the "Shares") of the Company's common stock,
par value $.01 per share (the "Common Stock"), upon payment of the subscription
price of $16.75 per share (the "Subscription Price"). In payment for the Shares,
the Purchaser shall deliver to the Company any combination of (i) cash, (ii) a
certified or cashier's check, or (iii) a secured promissory note (the
"Promissory Note"), together with a stock pledge agreement (the "Stock Pledge
Agreement"), in the amount of the purchase price (unless some other form of
consideration is specifically authorized pursuant to Section 7 of the 1995
Plan).

2. Shares Non-Transferrable. Except as otherwise provided in this
Agreement, the Purchaser may not sell, transfer, assign, pledge, hypothecate or
otherwise dispose of or encumber any of the Shares, or any right or interest
therein (collectively referred to as a "Transfer") until the first anniversary
of this Agreement; provided, however, that the Transfer of any Shares must be in
accordance with the Stock Pledge Agreement, if applicable. Any purported
Transfer not in compliance with this Agreement and the Stock Pledge Agreement
shall be null and void.

3. Escrow, Shareholder Rights. To assure compliance with the terms of this
Agreement, the certificates evidencing the Shares shall be delivered to and
deposited with the Secretary of the Company, as escrow agent (the "Escrow
Agent"), along with a stock assignment executed in blank by the Purchaser for
each certificate representing the Shares. The Shares represented by any
certificate are to be held by the Escrow Agent for so long as Section 2
continues to apply to such Shares. Subject to compliance with the provisions of
Section 2 of this Agreement, the registered holder of each certificate
representing the Shares shall retain all rights and privileges of ownership of
those Shares that are held in escrow, except that while such Shares are held in
escrow, the Escrow Agent shall vote such Shares in a shareholder vote or
election in the same proportion as the other Common Stock of the Company voting
in such matters and not subject to escrow.

1
<PAGE> 2

4. Investment Representations. The Purchaser represents and warrants to the
Company that he or she is acquiring the Shares for his or her account for
investment purposes and not with a view to or for sale in connection with any
distribution of the Shares.

5. Termination. This Agreement shall terminate with respect to each of the
Shares upon the restrictions on the transfer of such shares as set forth in
Section 2 of this Agreement and under the terms of the Stock Pledge Agreement
are no longer applicable.

6. Miscellaneous.

6.1 Legends on Certificates. Certificates evidencing the Shares shall bear
such legends and shall be subject to such restrictions on transfer as the
Company may reasonably deem necessary to comply with the Agreement, the Stock
Pledge Agreement, and all applicable state and federal securities laws and
regulations.

6.2 No Right to Employment. This Agreement shall not confer upon the
Purchaser any right to employment or continuance of performance of services for
the Company or any affiliate of the Company. Purchaser acknowledges and agrees
that, unless otherwise provided for by an employment or consulting agreement or
other similar agreement entered into between the Purchaser and the Company or
any affiliate of the Company, his or her employment with the Company is not for
any fixed term and that it will continue only at the will of both Purchaser and
the Company.

6.3 Further Assurances. Each party hereto agrees to perform any further
acts and to execute and deliver any document which may be reasonably necessary
to carry out the intent of this Agreement.

6.4 Binding Agreement. This Agreement shall bind and inure to the benefit
of the successors, assigns, personal representatives, heirs and legatees of the
Purchaser and the Company.

6.5 Other Restrictions on Transfers. The restrictions on transfer set
forth in this Agreement are in addition to any and all restrictions on transfer
of shares imposed pursuant to any applicable state or federal law or regulation
or the 1995 Plan.

6.6 Notice. Except as otherwise provided herein, all notices, requests,
demands and other communications under this Agreement shall be in writing, and
if by telegram or telecopy, shall be deemed to have been validly served, given
or delivered when sent, or if by personal delivery or messenger or courier
service, or by registered or certified mail, shall be deemed to have been
validly served, given or delivered upon actual

2
<PAGE> 3

delivery, at the following addresses, telephone and facsimile numbers (or such
other address(es), telephone and facsimile numbers a party may designate for
itself by like notice):

If to Company:

Superior National Insurance Group, Inc.
26601 Agoura Road
Calabasas, California 91302
Attention: Robert E. Nagle, Esq.
Telephone: (818) 880-1600

Telecopy: (818) 880-8615

If to Purchaser:

____________________________

7. Amendments. This Agreement may be amended at any time by the written
agreement and consent of all the parties hereto.

8. Governing Law. This Agreement is made in the State of California, and
shall be governed by and construed in accordance with the laws of said State.

9. Disputes. In the event of any dispute among the parties arising out of
this Agreement, the prevailing party shall be entitled to recover from the
nonprevailing party the reasonable expenses of the prevailing party, including,
without limitation, reasonable attorneys' fees.

10. Entire Agreement. This Agreement constitutes the entire agreement and
understanding between the parties pertaining to the subject matter hereof and
supersedes any and all prior agreements, whether written or oral, relating
thereto.

11. Headings. Introductory headings at the beginning of each section of
this Agreement are solely for the convenience of the parties and shall not be
deemed to be a limitation upon or description of the contents of any such
section and subsections of this Agreement.

12. Counterparts. This Agreement may be executed in two counterparts, each
of which shall be deemed an original and both of which, when taken together,
shall constitute one and the same Pledge Agreement.

IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as
of the day and year first above written.

<TABLE>
<S> <C>
PURCHASER: SUPERIOR NATIONAL INSURANCE
GROUP, INC.
- ----------------------------------------------------- By:
-------------------------------------------------
Its:
Address: -------------------------------------------------
- -----------------------------------------------------
- ----------------------------------------------------- Address:
- -----------------------------------------------------
26601 Agoura Road
Calabasas, CA 91302
</TABLE>

<PAGE> 1

EXHIBIT 99.5

SECURITIES PLEDGE AGREEMENT

THIS SECURITIES PLEDGE AGREEMENT (this "Pledge Agreement") is made as of
, 1998, between as pledgor ("Pledgor"), and Superior
National Insurance Group, Inc., a Delaware corporation, as pledgee ("Pledgee").

RECITALS:

A. Pursuant to that certain Stock Subscription Agreement of even date
herewith (the "Subscription Agreement") by and between Pledgee and Pledgor,
Pledgor was issued ( ) shares (the "Shares") of
common stock, $.01 par value per share ("Common Stock"), of Pledgee in exchange
for an aggregate purchase price of $ ("Subscription Price").
Capitalized terms used, but not defined herein, have the meanings given them in
the Subscription Agreement.

B. Pursuant to the Employee Participation approved by the Board of
Directors of Pledgee in connection with the Pledgee's Stock Offering, as
described in the Pledgee's Registration Statement No. 333-58579 on Form S-3 (the
"Right's Offering"), each employee and consultant eligible to purchase shares of
Common Stock under the Employer Participation may, in lieu of delivering cash
for the Subscription Price, borrow funds from the Pledgee and use the borrowed
funds to pay all or a portion of the Subscription Price and any federal or state
income taxes ("Taxes") incurred as a result of the purchase of Common Stock
through the Employee Participation.

C. Pursuant to the terms of the Subscription Agreement and that certain
Secured Promissory Note delivered by Pledgor to Pledgee, dated as of even date
herewith (the "Note"), in the amount of $ , which amount represents the
amount of funds borrowed by the Pledgor to pay for all or a portion of the
Subscription Price plus additional borrowings made by Pledgor for the payment of
Taxes, Pledgor has agreed to make payments of principal and interest to Pledgee
as provided in the Note.

D. Pursuant to the terms of the Subscription Agreement and the Note,
Pledgor is required to execute this Pledge Agreement to secure payment in full
of all obligations under the Note, whether for principal, interest, fees,
expenses or otherwise and to ensure compliance with the terms and conditions of
the Subscription Agreement and this Pledge Agreement.

AGREEMENT:

NOW, THEREFORE, in consideration of the foregoing recitals and the mutual
covenants and conditions contained herein, the parties hereto agree as follows:

1. Grant of Security Interest in the Shares. Pledgor hereby grants to
Pledgee a security interest in the following (hereinafter, collectively referred
to as the "Securities"): (i) all of the Shares purchased by the Pledgor under
the Employee Participation, and (ii) to the extent delivered to the Escrow
Agent, as defined in the Subscription Agreement, to secure payment in full of
all obligations under the Note, (a) other shares of Common Stock owned by the
Pledgor, (b) warrants held by Pledgor, and (c) vested and unvested options and
Restricted Common Stock issued to Pledgor pursuant to the Pledgee's stock
incentive plans ("Restricted Stock"). Pledgor hereby pledges and hypothecates
the Securities to Pledgee, and deposits the certificates, warrants, and option
agreements, and any related documents evidencing the Securities (the
"Collateral") with the Escrow Agent, as collateral security for the payment by
Pledgor of all obligations existing under the Note, whether for principal,
interest, fees, expenses or otherwise, and the satisfaction of all obligations
of Pledgor under the Subscription Agreement and this Pledge Agreement. The
Collateral, together with (i) one or more stock assignments duly executed in
blank with signatures appropriately guaranteed or witnessed and (ii)
endorsements, assignments or other instruments of conveyance or transfer with
respect to all or any of the Shares and any other documentation necessary for
the Pledgee to sell or transfer the Securities as provided for

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in this Pledge Agreement, are being delivered herewith to the Escrow Agent, to
be retained by the Escrow Agent as the pledgeholder for the Securities.

2. Representation and Warranty of Pledgor. Pledgor represents and warrants
to Pledgee that the Securities are free and clear of all claims, mortgages,
pledges, liens and other encumbrances of any nature whatsoever, except (a) the
liens and restrictions set forth herein and in the Note and (b) any restrictions
upon sale and distribution imposed by the Securities Act of 1933, as amended
(the "Act"), applicable state securities laws, and the Subscription Agreement.

3. Dividends. So long as there shall exist no Event of Default, as defined
in Section 8 hereof, Pledgor shall be entitled to receive any cash dividend or
other distribution of property with respect to the Securities. Any dividend paid
in shares of Common Stock with respect to the Securities shall be transferred to
the Escrow Agent as additional collateral on the Note. If there exists and Event
of Default, such dividend or other distribution shall be delivered to Pledgee to
be held as additional collateral security under this Pledge Agreement.

4. Pledgee's Duties. So long as Pledgee exercises reasonable care with
respect to the Securities in its possession, Pledgee shall have no liability for
any loss or damage to such Securities, and in no event shall Pledgee have
liability for any diminution in value of the Securities occasioned by economic
or market conditions or events. Pledgee shall be deemed to have exercised
reasonable care within the meaning of the preceding sentence if the Securities
in its possession are accorded treatment substantially equal to that which
Pledgee accords its own property, it being understood that Pledgee shall not
have any responsibility under this Pledge Agreement for (a) ascertaining or
taking action with respect to calls, conversions, exchanges, maturities, tenders
or other matters relating to the Securities, whether or not Pledgee has or is
deemed to have knowledge of such matters, or (b) taking any necessary steps to
preserve rights against any person or entity with respect to the Securities.

5. Transfers of Shares. Subject to any other restrictions on transfer
created by federal and state securities laws, the 1995 Plan, or the terms of the
Subscription Agreement, the Pledgor may transfer Securities pledged hereunder
for consideration consisting of cash or other Securities, so long as the gross
proceeds of such transfer are not less than the fair market value of the
Securities at the time of transfer. The proceeds of any transfer shall be
delivered to the Escrow Agent. In the event cash proceeds are realized on the
transfer, the Escrow Agent shall apply the proceeds to prepay the Note as
follows: (i) to any interest accrued but unpaid; then (ii) to principal, but in
an amount not to exceed the percentage of the principal amount outstanding equal
to the percentage obtained by dividing the number of shares of Common Stock
transferred (without giving effect to any shares transferred to the Pledgee to
effect a cashless exercise of warrants or options) into the number of shares of
Common Stock originally purchased under the Subscription Agreement.

6. Mandatory Contributions to Collateral and Prepayment of Note. If at any
time the aggregate amount outstanding under the Note, including accrued
interest, exceeds the Value, as defined below, of the Collateral, the Pledgor
shall (i) make a prepayment on the Note in amount which will reduce the
aggregate amount outstanding under the Note, including accrued interest, to an
amount which at least equals the Value of the Collateral, and/or (ii) contribute
additional Securities in the manner and of the types set forth in Section 1
hereof so that the Value of the additional Securities when added to the Value of
the Securities already pledged under this Pledge Agreement shall at least equal
the aggregate amount outstanding under the Note, including accrued but unpaid
interest. "Value" for purposes of this Pledge Agreement shall mean (i) for
shares of Common Stock (including Restricted Stock) pledged as Collateral, the
average closing price (last trade) on Nasdaq, or any other national securities
exchange, of a share of Common Stock for the ten trading days immediately
preceding a date of measurement, and (ii) for options or warrants pledged as
collateral, the deemed value of the underlying share of Common Stock, less the
exercise price of such security.

7. Sale of Collateral. Upon the occurrence of any Event of Default, Pledgee
shall have all the rights and remedies of a secured party under the applicable
Uniform Commercial Code and also may, without notice, except as specified below,
at its option, sell all or any part of the Securities, for cash, note or other
property upon credit for future delivery or upon such other terms as Pledgee may
deem commercially reasonable. Upon such sale, Pledgee, unless prohibited by a
provision of any applicable statute, may purchase

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all or any part of the Securities being sold, free from and discharged of all
trusts, claims, rights of redemption and equities of Pledgor. If the proceeds of
any sale of the Securities pursuant to this Section 7 shall be insufficient to
pay all amounts due under the Note and satisfy the obligations of Pledgor under
the Subscription Agreement and this Pledge Agreement, including collection costs
and expenses of such sale, Pledgor shall remain obligated and liable for any
deficiency with respect thereto. If, at any time when Pledgee shall determine to
exercise its rights to sell all or any part of the Securities pursuant to this
Section 7, such Securities, or the part thereof to be sold, shall not be
effectively registered under the Securities Act of 1933, as amended (the
"Securities Act"), as then in effect or any similar statute then in force,
subject to the provisions of Section 8 hereof, Pledgee, in its sole and absolute
discretion, is hereby expressly authorized to sell such Securities, or any part
thereof, by private sale in such manner and under such circumstances as Pledgee
may deem necessary or advisable in order that such sale may be effectuated
legally without such registration. Without limiting the generality of the
foregoing, Pledgee, in its sole and absolute discretion, may approach and
negotiate with a restricted number of potential purchasers to effectuate such
sale or restrict such sale to a purchaser or purchasers who shall represent and
agree that such purchaser or purchasers are purchasing for its or their own
account, for investment only, and not with a view to the distribution or sale of
such Securities or any part thereof. Any sale conducted in the manner described
in the foregoing sentence shall be deemed to be a sale conducted in a
commercially reasonable manner within the meaning of the applicable Uniform
Commercial Code, and Pledgor hereby consents and agrees that Pledgee shall incur
no responsibility or liability for selling all or any part of the Securities at
a price which is not unreasonably low, notwithstanding the possibility that a
substantially higher price might be realized if the sale were public. Pledgee
shall not be obligated to make any sale of the Securities regardless of notice
of sale having been given. Pledgee may adjourn any public or private sale from
time to time by announcement at the time and place fixed therefor, and any such
sale may, without further notice, be made at the time and place to which it was
so adjourned.

8. Redemption of Collateral. Notwithstanding any other provision of this
Pledge Agreement, upon the occurrence of an Event of Default, Pledgee shall give
Pledgor written notice of the time and place of any public sale or of the time
on or after which any private sale or other Transfer is to be made at least five
(5) days before the date fixed for any public sale or before the day on or after
which any private sale or other Transfer is to be made. Pledgor agrees that, to
the extent notice of sale shall be required by law, such five (5) days' notice
shall constitute reasonable notification. This notice shall also specify the
aggregate outstanding monetary obligations of the Pledgor to Pledgee at the date
of such notice (the "Total Obligation"). At any time during such five-day
period, Pledgor shall have the right to redeem the Securities by the payment by
certified or bank cashier's check of an amount equal to the Total Obligation.

9. Events of Default. At the option of Pledgee, the principal balance of
the Note and all accrued and unpaid interest thereon, and all other obligations
of Pledgor to Pledgee thereunder, under the Subscription Agreement and
hereunder, shall become and be immediately due and payable, without notice of
default, presentment or demand for payment, protest or notice of nonpayment or
dishonor, or other notices or demands of any kind (all of which are hereby
expressly waived by Pledgor), upon the occurrence of any of the events set forth
below (individually, an "Event of Default"):

(a) 30 days after Pledgor shall cease to be an employee of or a
consultant to the Company or an affiliate of the Company or Comprehensive
Compensation Claims Management, Inc.;

(b) Pledgor shall fail to make complete payment of any installment of
accrued interest under the Note on the date such installment of accrued
interest is due, after being given notice and an opportunity of at least
five (5) days to cure such nonpayment;

(d) Pledgor shall commit a breach of or default under the Subscription
Agreement or this Pledge Agreement, including failure to make payment or
contribute additional Collateral pursuant to Section 7 of this Pledge
Agreement.

10. Termination. This Pledge Agreement shall terminate only upon (i)
satisfaction in full of all obligations of Pledgor existing under the Note,
whether for principal, interest, fees, expenses or otherwise, and

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(ii) satisfaction in full of all obligations of Pledgor under the Subscription
Agreement and this Pledge Agreement. Pledgor shall be entitled to the return of
the Collateral then held by Pledgee and any other collateral security then held
by Pledgee pursuant to Section 3 of this Pledge Agreement upon the later of (i)
termination of the Subscription Agreement or (ii) termination of this Pledge
Agreement.

11. Cumulation of Remedies; Waiver of Rights. The remedies provided herein
in favor of Pledgee shall not be deemed exclusive but shall be cumulative and
shall be in addition to all of the remedies in favor of Pledgee existing at law
or in equity. Nothing in this Pledge Agreement shall require Pledgee to proceed
against or exhaust its remedies against the Securities before proceeding against
Pledgor or executing against any other security or collateral securing
performance of Pledgor's obligations to Pledgee under the Note, the Subscription
Agreement or this Pledge Agreement. No delay on the part of Pledgee in
exercising any of its options, powers or rights, or the partial or single
exercise thereof, shall constitute a waiver thereof.

12. Execution of Endorsements, Assignments, Etc. Upon the occurrence of an
Event of Default, Pledgee shall have the right for and in the name, place and
stead of Pledgor to execute endorsements, assignments or other instruments of
conveyance or transfer with respect to all or any of the Securities or other
property which is held by Pledgee as collateral security pursuant to this Pledge
Agreement.

13. Miscellaneous.

(a) Further Assurances; Changes in Capitalization. Each party hereto agrees
to perform any further acts and execute and deliver any documents which may be
reasonably necessary to carry out the intent of this Pledge Agreement. The
provisions of this Pledge Agreement shall apply to any and all stock or other
securities of the Pledgee or any successor or assign of the Pledgee, which may
be issued in respect of, in exchange for or in substitution of, the Securities
by reason of any split, reverse split, stock dividend, recapitalization,
reclassification, combination, merger, consolidation or otherwise, and such
Securities or other securities shall be encompassed within the term "Securities"
for purposes of this Pledge Agreement and the Pledgee shall have a security
interest in all such securities on the same terms set forth in this Pledge
Agreement.

(b) Notice. Except as otherwise provided herein, all notices, requests,
demands and other communications under this Agreement shall be in writing, and
if by telegram or telecopy, shall be deemed to have been validly served, given
or delivered when sent, or if by personal delivery or messenger or courier
service, or by registered or certified mail, shall be deemed to have been
validly served, given or delivered upon actual delivery, at the following
addresses, telephone and facsimile numbers (or such other address(es), telephone
and facsimile numbers a party may designate for itself by like notice):

If to Pledgee:

Superior National Insurance Group, Inc.
26601 Agoura Road
Calabasas, California 91302
Attention: Robert E. Nagle, Esq.
Telephone: (818) 880-1600

Telecopy: (818) 880-8615

If to Pledgor:

____________________________

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(d) Governing Law. This Pledge Agreement shall be governed by and construed
in accordance with the laws of the State of California.

(e) Disputes. In the event of any dispute between the parties arising out
of this Pledge Agreement, the prevailing party shall be entitled to recover from
the nonprevailing party the reasonable expenses of the prevailing party
including, without limitation, reasonable attorneys' fees.

(f) Entire Agreement. This Pledge Agreement constitutes the entire
agreement and understanding among the parties pertaining to the subject matter
hereof and supersedes any and all prior agreements, whether written or oral,
relating hereto.

(g) Successors and Assigns. Pledgee shall have the right to assign with
absolute discretion any or all of its rights and/or obligations and/or delegate
any or all of its duties under this Pledge Agreement and the Note to any of its
affiliates, successors and/or assigns, including, without limitation (i) to any
of its banks or lending institutions as collateral security, or (ii) to any
entity succeeding the Pledgee by merger, consolidation or acquisition of all or
substantially all of the Pledgee's assets, and this Pledge Agreement and the
Note shall inure to the benefit of, and be binding upon, such respective
affiliates, successors and/or assigns of Pledgee in the same manner and to the
same extent as if such affiliates, successors and/or assigns were original
parties hereto. Unless specifically provided herein to the contrary, Pledgor may
not assign any or all of its rights and/or obligations and/or delegate any or
all of its duties under this Pledge Agreement or the Note without the prior
written consent of Pledgee. Upon an assignment of any or all of Pledgor's rights
and/or obligations and/or a delegation of any or all of its duties under this
Pledge Agreement and the Note in accordance with the terms of this Pledge
Agreement, this Pledge Agreement and the Note shall inure to the benefit of, and
be binding upon, Pledgor's respective affiliates, successors and/or assigns in
the same manner and to the same extent as if such affiliates, successors and/or
assigns were original parties hereto.

(h) Headings. Introductory headings at the beginning of each section and
subsection of this Pledge Agreement are solely for the convenience of the
parties and shall not be deemed to be a limitation upon or description of the
contents of any such section and subsection of this Pledge Agreement.

(i) Counterparts. This Agreement may be executed in two counterparts, each
of which shall be deemed an original and both of which, when taken together,
shall constitute one and the same Pledge Agreement.

IN WITNESS WHEREOF, the parties hereto have duly executed this Pledge
Agreement as of the day and year first above written.

PLEDGEE:

Superior National Insurance Group,
Inc.,

a Delaware corporation

By:

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Its:

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PLEDGOR:

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EXHIBIT 99.6

SECURED PROMISSORY NOTE

$
- ------------------ ------------------, 1998

FOR VALUE RECEIVED, the undersigned ("Borrower") hereby
promises to pay to the order of Superior National Insurance Group, Inc., a
Delaware corporation ("Payee"), the principal sum of
($ ), together with interest on the unpaid balance of such principal
amount from the date hereof at the rate of interest equal to [the
rate of interest established by the Board of Directors of the Payee on the
record date of the Rights Offering, as defined in that certain Securities Pledge
Agreement dated as of even date herewith by and between Payee and Borrower (the
"Pledge Agreement")]. Accrued interest to be paid on this Secured Promissory
Note (this "Promissory Note") shall be payable in arrears commencing on December
31, 1998 (with respect to interest accrued from the date hereof) and continuing
on each succeeding December 31 thereafter with respect to interest accrued
during the previous year ending December 31 until this Note is paid in full. The
principal balance of, and all accrued and unpaid interest on, this Promissory
Note shall be payable in full by Borrower on the earlier to occur of (i) that
date which is ten (10) years from the date hereof or (ii) termination of
Borrower's employment or consulting relationship with the Payee, its affiliates,
or Comprehensive Compensation Claims Management, Inc. ("3CM").

Payments of principal and interest on this Promissory Note shall be made in
legal tender of the United States of America and shall be made at such place as
Payee shall have designated to Borrower (and may be made by payroll deduction by
mutual consent of Borrower and Payee). If the date set for any payment of
principal or interest on this Promissory Note is a Saturday, Sunday or legal
holiday, then such payment shall be due on the next succeeding business day.

As of the date hereof, Borrower has purchased certain shares of common
stock of the Payee, par value $.01 per share, pursuant to the terms of that
certain Stock Subscription Agreement dated as of even date herewith, by and
between Payee and Borrower (the "Subscription Agreement"). Payment of this
Promissory Note shall be secured by the Securities, as defined in that certain
Securities Pledge Agreement dated as of even date herewith by and between Payee
and Borrower (the "Pledge Agreement").

The principal balance of, and accrued and unpaid interest on, this
Promissory Note may be prepaid at any time, in whole or in part, without premium
or penalty. Any such prepayment shall be first applied to the payment of any
accrued and unpaid interest and then to the unpaid balance of the principal
amount.

If Event of Default, as defined in the Pledge Agreement, shall occur, Payee
may accelerate this Promissory Note and declare the entire unpaid principal
amount of this Promissory Note and all accrued and unpaid interest hereon to be
immediately due and payable and, thereupon, the unpaid principal amount and all
such accrued and unpaid interest shall become and be immediately due and
payable, without notice of default, presentment or demand for payment, protest
or notice of nonpayment or dishonor, or other notices or demands of any kind
(all of which are hereby expressly waived by Borrower). The failure of Payee to
accelerate this Promissory Note shall not constitute a waiver of any of Payee's
rights under this Promissory Note as long as Borrower's default under this
Promissory Note or breach of or default under the Subscription Agreement or the
Pledge Agreement continues.

The provisions of this Promissory Note shall be governed by and construed
in accordance with the laws of the State of California without regard to the
conflicts of law rules thereof. In the event that Payee is required to take any
action to collect or otherwise enforce payment of this Promissory Note, Borrower
agrees to pay such reasonable attorneys' fees, court costs and other expenses as
Payee may incur as a result thereof, whether or not suit is commenced.

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All notices, requests, demands or other communications under this
Promissory Note shall be delivered in accordance with the provisions of Section
8.6 of the Subscription Agreement to the address(es) set forth therein.

IN WITNESS WHEREOF, this Promissory Note has been duly executed and
delivered by Borrower on the date first above written.

BORROWER:

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