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[SUPERIOR NATIONAL INSURANCE GROUP, INC. LETTERHEAD]
October 16, 1998
Stockholders of Superior National Insurance Group, Inc.
Dear SNTL Stockholder:
Enclosed you will find the Superior National Insurance Group, Inc. ("Superior
National" or "Company") 1997 Form 10-K/A, which is intended to serve as Superior
National's 1997 Annual Report to Stockholders. The delays in transmitting the
report and scheduling the 1998 Annual Stockholders' Meeting are due to the
timing of the announcement of the acquisition of Business Insurance Group, Inc.
("BIG"), and the timing of the several transactions and regulatory approvals
necessary to complete the acquisition. This letter briefly describes the terms
of the BIG acquisition, and timing of certain events necessary for its
completion.
Terms of the BIG Acquisition
On May 5, 1998, Superior National and Foundation Health Corporation ("FHC"), a
wholly owned subsidiary of Foundation Health Systems, Inc. (NYSE:FHS), entered
into an agreement under which the Company will purchase for approximately $256.5
million in cash all outstanding shares of the capital stock of BIG, an insurance
holding company that, through its wholly owned insurance subsidiaries,
California Compensation Insurance Company, Business Insurance Company, Combined
Benefits Insurance Company, and Commercial Compensation Insurance Company, write
workers' compensation and group health insurance, principally in California,
with branch operations throughout the continental United States. The contractual
purchase price is $285 million, less the cost of the "Loss Reserves Guarantee"
(described below) provided through reinsurance obtained by FHC. Superior
National will offset the reduction in BIG's surplus resulting from the cost of
that reinsurance with a capital contribution to BIG, so that the total cash
outlay in connection with the acquisition of BIG will be approximately $285
million, excluding transaction expenses.
Superior National will finance the acquisition of BIG through the issuance of
$200 million of common stock and approximately $110 million in aggregate
principal amount of senior debt. The amount raised in excess of $285 million
will be used to pay related transaction costs and for general corporate
purposes. Superior National will offer $106 million of common stock to Superior
National's existing common stock, warrant, and option holders on a pro-rata
basis (the "rights offering"). Superior National has entered into an agreement
with respect to the remaining $94 million of common stock with Insurance
Partners, L.P. and its successor fund (together, "IP") and other investment
affiliates of IP under which IP has committed to purchase the $94 million of
common stock, together with up to an additional $106 million of common stock.
This latter commitment is to purchase the number of shares of common stock for
which rights are not exercised in the rights offering. By providing this
"backstop," Superior National was able to provide FHC with satisfactory
assurances that all of the anticipated proceeds of the rights offering would be
available to complete the acquisition of BIG. All of the common stock will be
issued at a price of $16.75 per share. In connection with its investment, IP has
agreed to certain restrictions protecting minority stockholders.
In connection with the acquisition of BIG, FHC will obtain, at its expense,
through the purchase of reinsurance, the Loss Reserves Guarantee, consisting of
$175 million of adverse development protection on BIG's loss and allocated loss
adjustment expense reserves. Superior National has also entered into a three to
five-year quota share reinsurance agreement with a reinsurer rated "A+" by A.M.
Best, under which Superior National and BIG will reinsure policies with
estimated annual premiums in excess of $25,000. Superior National has also
agreed to enter into long-term contracts with affiliates of FHC under which
those affiliates will continue to provide bill review and other claims
management services to Superior National and BIG.
The $16.75 price and other terms of the rights offering were set by Superior
National's board of directors, in consultation with its financial advisors, and
will be materially the same as the terms of the IP transaction, subject to
adjustments determined by the board of directors to be reasonable and
appropriate. This description does not constitute an offer of any securities.
Any offering of securities in the transactions described above, other than the
issuance and sale of common stock to IP, will be made only by means of a
prospectus. Stockholders are cautioned,
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October 16, 1998 Page 2
however, that the mere decision to undertake a transaction does not change the
contingencies that apply to these prospective transactions, or the likelihood
that an offering will, in fact, occur.
The acquisition of BIG is subject to the expiration of the waiting period
(which, at the date of this letter has occurred) under the Hart-Scott-Rodino
Anti-Trust Improvements Act of 1976, as amended, and to approval by several
state insurance regulatory authorities, and miscellaneous other contractually
required approvals. In addition, the rights offering and the issuance and sale
of common stock to IP are each subject to stockholder approval, which the
company intends to solicit at its 1998 Annual Meeting of Stockholders, as
described below.
Timing of Events
Superior National filed a proxy statement and a registration statement for the
rights offering in early July. None of the securities issued in the rights
offering may be sold before the registration statement is declared effective.
The Company received approval from the Securities and Exchange Commission to
distribute the proxy statement on October 14. The proxy statement was mailed to
stockholders on October 16 and the stockholders' meeting will be held on
November 3.
Assuming stockholders approve the stock issuance transactions, promptly after
the stockholders' meeting the rights offering is expected to become effective
for 15 days, during which time the rights would trade independently from
Superior National stock. The Company believes Nasdaq-member firms will make a
market in the rights. Prior to the concluding date of the rights offering,
stockholders, warrant holders, and option holders who wish to purchase Superior
National stock would transmit funds to the Company's agent to effect the
purchase of stock.
The closure of the rights offering, the sale of stock to IP, and the completion
of the debt financing are all necessary prior to the completion of the
acquisition. The Company anticipates that the financing transactions and the
acquisition will all close on December 10.
* * * * *
Please do not hesitate to call Chris Seaman at (818) 878-2240 or me at (818)
878-2200 if you have any questions regarding the BIG acquisition, or the
associated financing transactions. Superior National's board of directors and
management are delighted to present this opportunity to our stockholders, and
look forward to working with you to assure its timely completion.
Very truly yours,
/s/ WILLIAM L. GENTZ
William L. Gentz
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The Company's Annual Report on Form 10-K/A for the fiscal year ended
December 31, 1997, as filed with the Securities Exchange Commission on October
16, 1998, is included in its entirety, excluding Exhibits, and is incorporated
in this filing by this reference.
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CORPORATE INFORMATION
BOARD OF DIRECTORS
BRADLEY E. COOPER
Partner of Insurance Partners Advisors, L.P.
WILLIAM L. GENTZ
President and Chief Executive Officer
STEVEN D. GERMAIN
Managing Director, General Counsel and Secretary of Centre Re; Managing
Director of Zurich Centre Group L.L.C.; Director, Senior Vice President and
Secretary of CentreLine; Director, President and Chief Executive Officer of
Home Holdings, Inc.
ROGER W. GILBERT
Retired Chief Executive Officer and Chairman of TIC Indemnity Co. and
Chief Executive Officer of TMIC Insurance Co. Inc.; former California
Special Deputy Insurance Commissioner.
STEVEN B. GRUBER
Managing Partner of Insurance Partners Advisors, L.P.; Managing Director
of Oak Hill Partners, Inc.; Vice President of Keystone, Inc.
THOMAS J. JAMIESON
President of Jaco Oil Company
GORDON E. NOBLE
Chairman and Chief Executive Officer of Commodore Insurance Services
C. LEN PECCHENINO
Chairman of the Board of Directors
CRAIG F. SCHWARBERG
Former Managing Director of International Insurance Advisors, Inc.
J. CHRIS SEAMAN
Executive Vice President and Chief Financial Officer
ROBERT A. SPASS
President, Chief Executive Officer and Director of International Insurance
Advisors, Inc.; Managing Partner of Insurance Partners Advisors, L.P.
OFFICERS
SUSAN A. BINDER
Vice President - Workers' Compensation Claims
THOMAS J. BOGGS, JR.
Senior Vice President - Workers' Compensation, Underwriting/Marketing
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CURTIS H. CARSON
Vice President - Human Resources
HAROLD J. FEDORA
Vice President - Workers' Compensation Claims Services
WILLIAM J. FERRIER
Vice President - Management Information Services
WILLIAM L. GENTZ
President, Chief Executive Officer and Director
ROBERT N. HENRY
Vice President - Management Information Systems (SWAMIr)
KARL O. JOHNSON
Senior Vice President, Central Region
JOHN E. KING
Resident Vice President, Arizona
ROBERT E. NAGLE
Senior Vice President, General Counsel and Secretary
MATTHEW NATALIZIO
Vice President - Finance and Treasurer
ROBERT J. NIEBUR
Resident Vice President, Northern Region
DALE K. O'BRIEN
Vice President - Rehabilitation/Disability Management Unit
YOOME K. PANNAVALEE
Senior Vice President - Safety Management Services
DOUGLAS R. ROCHE
Senior Vice President - Workers' Compensation Claims
J. CHRIS SEAMAN
Executive Vice President, Chief Financial Officer and Director
ARNOLD J. SENTER
Executive Vice President and Chief Operating Officer
EDWARD C. SHOOP
Senior Vice President and Chief Actuary
WILLIAM P. THOMAS
Resident Vice President, Sacramento
RONALD J. TONANI
Senior Vice President - Marketing
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SHAREHOLDER INFORMATION
CORPORATE HEADQUARTERS
26601 Agoura Road, Calabasas, California 91302
(818) 880-1600
ANNUAL MEETING
The Company expects that the annual meeting of the
shareholders will be held at 10:00 a.m., Pacific Time, on Thursday,
September 10, 1998 at:
Superior National Insurance Company
26601 Agoura Road
Calabasas, California 91302
Further details will be announced.
STOCK LISTING
The Company's Common Stock is traded on the Nasdaq National Market under
the symbol "SNTL"
INDEPENDANT AUDITORS
KPMG Peat Marwick LLP
Los Angeles, California
LEGAL COUNSEL
Riordan & McKinzie
Los Angeles, California
TRANSFER AGENT AND REGISTRAR
U.S. Stock Transfer Corporation
1745 Gardena Avenue, Second Floor
Glendale, California 91204-2991
(818)502-1404
FORM 10-K/A
Additional information, including the Annual Report on Form 10-K/A for the
fiscal year ended December 31, 1997 as filed with the Securities and
Exchange Commission, is available upon written request to:
Robert E. Nagle
Senior Vice President, General Counsel and Secretary
26601 Agoura Road, Calabasas, California 91302
(818)880-1600
