SUPERIOR NATIONAL INSURANCE GROUP INC, 10-Q, 1999-11-17

SUPERIOR NATIONAL INSURANCE GROUP INC
10-Q, 1999-11-17
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

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

FORM 10-Q

(MARK ONE)

<TABLE>
<C> <S>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
OR

<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>

FOR THE TRANSITION PERIOD FROM ______________ TO ______________.

COMMISSION FILE NUMBER 0-25984

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

SUPERIOR NATIONAL INSURANCE GROUP, INC.

(Exact name of registrant as specified in its charter)

<TABLE>
<S> <C>
DELAWARE 95-4610936
(State or other jurisdiction (I.R.S. Employer
of Identification No.)
incorporation or organization)
</TABLE>

26601 AGOURA ROAD
CALABASAS, CA 91302
(Address of principal executive offices)

(818) 880-1600
(Registrant's telephone number, including area code)

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

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /

Number of shares of Common Stock, $0.01 par value per share, outstanding as
of close of business on November 9, 1999: 17,969,895 shares.

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<PAGE>
SUPERIOR NATIONAL INSURANCE GROUP, INC.

INDEX TO FORM 10-Q

PART I. FINANCIAL INFORMATION

<TABLE>
<CAPTION>
PAGE
--------
<S> <C> <C>
Item 1. Financial Statements........................................ 3

Condensed consolidated balance sheets as of September 30,
1999 (unaudited) and December 31, 1998...................... 3

Condensed consolidated statements of operations for the
three and nine months ended September 30, 1999 (unaudited)
and September 30, 1998 (unaudited).......................... 4

Condensed consolidated statements of comprehensive income
(loss) for the three and nine months ended September 30,
1999 (unaudited) and September 30, 1998 (unaudited)......... 5

Condensed consolidated statement of changes in stockholders'
equity for the nine months ended September 30, 1999
(unaudited) and for the twelve months ended December 31,
1998........................................................ 6

Condensed consolidated statements of cash flows for the nine
months ended September 30, 1999 (unaudited) and
September 30, 1998 (unaudited).............................. 7

Notes to condensed consolidated financial statements
(unaudited)................................................. 8

Management's Discussion and Analysis of Consolidated
Item 2. Financial Condition and
Results of Operations....................................... 15

Quantitative and Qualitative Disclosures about Market
Item 3. Risk........................................................ 26

PART II. OTHER INFORMATION

Item 1. Legal Proceedings........................................... 28

Item 6. Exhibits and Reports on Form 8-K............................ 28

SIGNATURE.............................................................................. 29

EXHIBIT INDEX.......................................................................... 30
</TABLE>

2
<PAGE>
PART I. FINANCIAL INFORMATION

SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(IN THOUSANDS, EXCEPT PER SHARE DATA)

ITEM 1. FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998*
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS

INVESTMENTS
Fixed maturities; available-for-sale, at market (cost: 1999,
$526,105; 1998, $539,557)................................. $ 497,570 $ 541,678
Equity securities, at market (cost: 1999, $1,634; 1998,
$1,634)................................................... 1,294 1,544
Short-term investments, at cost............................. 75 7,343
Other investments........................................... 4,576 50
---------- ----------
TOTAL INVESTMENTS................................... 503,515 550,615
Cash and cash equivalents (Restricted cash: 1999, $270;
1998, $34,713)............................................ 46,226 316,786
Reinsurance recoverable..................................... 487,711 252,019
Reinsurance recoverable on loss reserves guarantee.......... 175,000 175,000
Premiums receivable (less allowance for doubtful accounts:
1999, $16,220; 1998, $18,941)............................. 128,001 90,126
Deferred income taxes (less valuation allowance: 1999,
$7,517; 1998, $8,368)..................................... 79,162 49,049
Prepaid reinsurance premiums................................ 20,090 20,767
Receivable from related party reinsurer..................... -- 16,075
Goodwill.................................................... 54,548 33,821
Investments withheld from reinsurer......................... -- 123,863
Prepaid and other assets.................................... 87,052 102,797
---------- ----------
TOTAL ASSETS........................................ $1,581,305 $1,730,918
========== ==========

LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES
Claim and claim adjustment expenses......................... $ 969,034 $1,076,206
Unearned premiums........................................... 58,075 52,928
Reinsurance payable......................................... 67,280 40,537
Long-term debt.............................................. 105,790 105,820
Discontinued operations liability........................... 4,397 8,151
Payable to BancBoston -- asset securitization............... 270 34,474
Payable to related party insurers........................... 29,276 21,610
Accounts payable and other liabilities...................... 71,746 66,146
---------- ----------
TOTAL LIABILITIES................................... 1,305,868 1,405,872
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 1999 and 1998................................... 101,135 101,084

STOCKHOLDERS' EQUITY
Common stock, $0.01 par value; authorized 40,000,000 shares
in 1999 and 1998; issued 17,960,632 shares in 1999 and
17,907,314 shares in 1998................................. 177 177
Paid-in capital excess of par........................... 228,897 228,512
Paid-in capital -- warrants................................. 2,206 2,206
Accumulated other comprehensive income; Unrealized gain
(loss) on investments, net of taxes....................... (18,768) 1,320
Retained earnings (deficit)................................. (21,679) 8,382
Unearned compensation....................................... (1,538) (1,107)
Less: Notes receivable from subscribed stock................ (9,850) (10,385)
Less: 245,000 shares of treasury stock at cost.............. (5,143) (5,143)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY.......................... 174,302 223,962
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.......... $1,581,305 $1,730,918
========== ==========
</TABLE>

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

* Derived from audited financial statements.

See Notes to Condensed Consolidated Financial Statements.

3
<PAGE>
SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998

(IN THOUSANDS, EXCEPT PER SHARE DATA)

(UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES:
Premiums written, net of reinsurance ceded.................. $ 62,474 $11,415 $178,694 $53,495
Net change in unearned premiums............................. (3,933) (669) (5,824) 7,457
-------- ------- -------- -------
Net premiums earned......................................... 58,541 10,746 172,870 60,952
Net investment income....................................... 8,519 3,421 29,400 11,435
-------- ------- -------- -------
TOTAL REVENUES.......................................... 67,060 14,167 202,270 72,387

EXPENSES:
Claim and claim adjustment expenses, net of
reinsurance recoveries.................................... 99,988 1,319 190,082 27,638
Commissions, net of reinsurance ceding commissions.......... (6,138) (6,223) (32,849) (4,756)
Policyholder dividend expense............................... 40 96 140 96
Interest expense............................................ 2,301 -- 8,436 --
General and administrative expenses
Underwriting............................................ 26,515 12,146 75,479 29,085
Other................................................... 1,476 254 152 629
Goodwill................................................ 858 336 1,582 975
-------- ------- -------- -------
TOTAL EXPENSES...................................... 125,040 7,928 243,022 53,667
-------- ------- -------- -------
INCOME (LOSS) BEFORE INCOME TAXES, PREFERRED SECURITIES
DIVIDENDS AND ACCRETION................................... (57,980) 6,239 (40,752) 18,720
Income tax (benefit) expense................................ (20,827) 2,271 (16,227) 6,936
-------- ------- -------- -------
INCOME (LOSS) BEFORE PREFERRED SECURITIES DIVIDENDS AND
ACCRETION................................................. (37,153) 3,968 (24,525) 11,784
Trust Preferred Securities dividends and accretion, net of
income tax................................................ (1,846) (1,873) (5,536) (5,597)
-------- ------- -------- -------
NET INCOME (LOSS)........................................... $(38,999) $ 2,095 $(30,061) $ 6,187
======== ======= ======== =======
BASIC EARNINGS PER SHARE:
INCOME (LOSS) BEFORE PREFERRED SECURITIES DIVIDENDS AND
ACCRETION................................................. $ (2.10) $ 0.70 $ (1.39) $ 2.04
Preferred securities dividends and accretion................ (0.10) (0.33) (0.31) (0.97)
-------- ------- -------- -------
NET INCOME (LOSS)........................................... $ (2.20) $ 0.37 $ (1.70) $ 1.07
======== ======= ======== =======
DILUTED EARNINGS PER SHARE:
INCOME (LOSS) BEFORE PREFERRED SECURITIES DIVIDENDS AND
ACCRETION, AND EXTRAORDINARY ITEMS........................ $ (2.10) $ 0.51 $ (1.39) $ 1.50
Preferred securities dividends and accretion................ (0.10) (0.24) (0.31) (0.71)
-------- ------- -------- -------
NET INCOME (LOSS)........................................... $ (2.20) $ 0.27 $ (1.70) $ 0.79
======== ======= ======== =======
</TABLE>

See Notes to Condensed Consolidated Financial Statements.

4
<PAGE>
SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998

(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net (loss) income....................................... $(38,999) $2,095 $(30,061) $ 6,187
Other comprehensive income, before tax:
Unrealized (loss) gain on securities:
Unrealized (loss) gain on available-for-sale
investments arising during period............. (7,716) 2,000 (30,774) 2,929
Unrealized loss on equity securities arising
during period................................. (196) (196) (273) (251)
Less: reclassification adjustments for losses
(gains) included in net income................ 260 (753) 141 (1,781)
-------- ------ -------- -------
Unrealized (loss) gain on securities............ (7,652) 1,051 (30,906) 897

Other comprehensive (loss) income, before tax........... (7,652) 1,051 (30,906) 897
-------- ------ -------- -------
Income tax (benefit) expense related to items of other
comprehensive income.................................. (2,678) 357 (10,818) 305
-------- ------ -------- -------
Other comprehensive (loss) income, net of tax........... (4,974) 694 (20,088) 592
-------- ------ -------- -------
Comprehensive (loss) income............................. $(43,973) $2,789 $(50,149) $ 6,779
======== ====== ======== =======
</TABLE>

See Notes to Condensed Consolidated Financial Statements.

5
<PAGE>
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
COMMON COMPREHENSIVE
STOCK NOTES INCOME
PAID-IN RECEIVABLE ---------------
NUMBER OF COMMON CAPITAL FROM UNREALIZED PAID IN
SHARES STOCK EXCESS TREASURY SUBSCRIBED GAIN (LOSS) ON CAPITAL-
OUTSTANDING PAR VALUE OF PAR STOCK STOCK INVESTMENTS WARRANTS
----------- ---------- -------- -------- ---------- --------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997...... 5,871,279 $ 59 $34,242 $ -- $ -- $ 1,327 $2,206
COMPREHENSIVE INCOME (LOSS)
Net loss........................ -- -- -- -- -- --
Other comprehensive:
Unrealized gain on
available-for-sale
investments arising during
period, net of income tax
expense of $732............. -- -- 1,307
Unrealized loss on equity
securities arising during
period, net of income tax
benefit of $56.............. -- -- (109)
Less: reclassification
adjustments for gains
included in net income, net
of income tax benefit of
$649........................ -- -- (1,205)
Other comprehensive loss, net of
tax...........................
Comprehensive loss................
Common stock issued............... 11,945,385 119 192,888 -- -- -- --
Stock issued under a stock option
plan............................ 6,970 -- 44 -- -- -- --
Common stock issued under stock
incentive plan.................. 83,680 1 1,338 -- -- -- --
Notes receivable from subscribed
stock........................... -- -- -- -- (10,385) -- --
Purchase of treasury stock from
director........................ (245,000) (2) -- (5,143) -- -- --
---------- ---- -------- ------- -------- -------- ------
Balance at December 31, 1998...... 17,662,314 177 228,512 (5,143) (10,385) 1,320 2,206
---------- ---- -------- ------- -------- -------- ------
COMPREHENSIVE INCOME (LOSS)
Net loss........................ -- -- -- -- -- --
Other comprehensive:
Unrealized loss on
available-for-sale
investments arising during
period, net of income tax
benefit of $10,771.......... -- -- (20,003)
Unrealized loss on equity
securities arising during
period, net of income tax
benefit of $96.............. -- -- (177)
Less: reclassification
adjustments for gains
included in net income, net
of income tax benefit of
$49......................... -- -- 92
Other comprehensive loss, net of
tax...........................
Comprehensive loss................
Stock issued in settlement of
warrants........................ 1,241 -- -- -- -- -- --
Stock issued under a stock option
plan............................ 40,219 -- 270 -- -- -- --
Common stock issued under stock
incentive plan.................. 21,974 -- 431 -- -- -- --
Common stock issued under the
Employee Stock Purchase Plan.... 13,745 -- 236 -- -- -- --
Notes receivable from subscribed
stock........................... (23,861) -- (552) -- 535 -- --
---------- ---- -------- ------- -------- -------- ------
Balance at September 30, 1999..... 17,715,632 $177 $228,897 $(5,143) $ (9,850) $(18,768) $2,206
========== ==== ======== ======= ======== ======== ======

RETAINED TOTAL
COMPREHENSIVE EARNINGS UNEARNED STOCKHOLDERS'
INCOME (LOSS) (DEFICIT) COMPENSATION EQUITY
-------------- --------- ------------- -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1997...... $ 21,984 $ -- $ 59,818
COMPREHENSIVE INCOME (LOSS)
Net loss........................ $(13,602) (13,602) -- (13,602)
--------
Other comprehensive:
Unrealized gain on
available-for-sale
investments arising during
period, net of income tax
expense of $732............. 1,307 1,307
Unrealized loss on equity
securities arising during
period, net of income tax
benefit of $56.............. (109) (109)
Less: reclassification
adjustments for gains
included in net income, net
of income tax benefit of
$649........................ (1,205) (1,205)
--------
Other comprehensive loss, net of
tax........................... (7)
--------
Comprehensive loss................ $(13,609)
========
Common stock issued............... -- -- 193,007
Stock issued under a stock option
plan............................ -- -- 44
Common stock issued under stock
incentive plan.................. -- (1,107) 232
Notes receivable from subscribed
stock........................... -- (10,385)
Purchase of treasury stock from
director........................ -- -- (5,145)
-------- ------- --------
Balance at December 31, 1998...... 8,382 (1,107) 223,962
-------- ------- --------
COMPREHENSIVE INCOME (LOSS)
Net loss........................ $(30,061) (30,061) -- (30,061)
--------
Other comprehensive:
Unrealized loss on
available-for-sale
investments arising during
period, net of income tax
benefit of $10,771.......... (20,003) (20,003)
Unrealized loss on equity
securities arising during
period, net of income tax
benefit of $96.............. (177) (177)
Less: reclassification
adjustments for gains
included in net income, net
of income tax benefit of
$49......................... 92 92
--------
Other comprehensive loss, net of
tax........................... (20,088)
--------
Comprehensive loss................ $(50,149)
========
Stock issued in settlement of
warrants........................ -- -- --
Stock issued under a stock option
plan............................ -- -- 270
Common stock issued under stock
incentive plan.................. -- (431) --
Common stock issued under the
Employee Stock Purchase Plan.... -- -- 236
Notes receivable from subscribed
stock........................... -- -- (17)
-------- ------- --------
Balance at September 30, 1999..... $(21,679) $(1,538) $174,302
======== ======= ========
</TABLE>

See Notes to Condensed Consolidated Financial Statements.

6
<PAGE>
SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN THOUSANDS)
(UNAUDITED)

<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1999 1998
--------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................... $ (30,061) $ 6,187
Adjustments to reconcile net income (loss) to net cash used
in operating activities:
(Amortization) discount of bonds and preferred stock.... (159) 17
Amortization of investments withheld from reinsurer..... -- 24
Amortization of capital lease obligation................ (1,484) (1,123)
Loss (gain) on sale of investments...................... 141 (1,781)
Loss on cancellation of contract with related party
reinsurer.............................................. 2,432 --
Amortization of goodwill................................ 1,582 975
Interest expense on long-term debt...................... 603 --
Preferred securities dividends and accretion............ 5,536 5,600
Increase in reinsurance receivables..................... (235,692) (29,896)
Increase in premiums receivable......................... (37,875) (1,231)
Decrease (increase) in prepaid reinsurance premiums..... 677 (11,779)
Decrease (increase) in investments withheld from
reinsurer.............................................. 123,863 (8,296)
Decrease in other assets................................ 19,913 4,879
Decrease (increase) in deferred income taxes............ (16,309) 6,732
Decrease in claim and claim adjustment expense
reserves............................................... (107,172) (45,049)
Increase in unearned premium reserves................... 5,147 4,026
Increase in reinsurance payable......................... 26,743 18,195
Increase in payable to related party insurers........... 7,666 --
Decrease in accounts payable and other liabilities...... (1,984) (7,414)
--------- --------
Net cash used in operating activities............... (236,433) (59,934)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Paid-in-capital -- stock options taken.................. 269 42
Paid-in-capital -- Employee Stock Purchase Plan......... 235 --
Payments related to subscribed stock.................... (17) --
Redemption of voting rights............................. (30) --
Payment to BancBoston -- asset securitization........... (34,204) --
Received from (paid to) related party reinsurer......... 13,643 (14,070)
Purchase of treasury stock.............................. -- (5,145)
--------- --------
Net cash used in financing activities............... (20,104) (19,173)
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investments available-for-sale.............. (555,931) (171,146)
Purchase of equity security............................. (101,875) (101,877)
Additions to goodwill................................... (22,309) --
Investments and cash for discontinued operations........ (3,754) (3,424)
Investment in partnership............................... (4,526) (50)
Purchase of property, plant and equipment............... (2,339) (3,017)
Sale of property, plant and equipment................... -- 8,000
Sales of investments available-for-sale................. 522,054 197,629
Sale of equity securities............................... 101,852 98,399
Maturities of investments available-for-sale............ 43,552 38,215
Net decrease in short-term investments.................. 9,253 4,518
--------- --------
Net cash provided by (used in) investing
activities.......................................... (14,023) 67,247
--------- --------
Net decrease in cash................................ (270,560) (11,860)
Cash and cash equivalents at beginning of period............ 316,786 28,742
--------- --------
Cash and cash equivalents at end of period.................. $ 46,226 $ 16,882
========= ========
Supplemental disclosure of cash flow information:
Cash paid during the year for income taxes.............. $ 81 $ 206
========= ========
Cash paid during the year for interest.................. $ 12,430 $ 5,614
========= ========
</TABLE>

See Notes to Condensed Consolidated Financial Statements.

7
<PAGE>
SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999

(UNAUDITED)

NOTE A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A.1 BASIS OF PRESENTATION

Superior National Insurance Group, Inc. ("SNIG") is the parent company of a
group of insurance companies that underwrite workers' compensation and, to a
limited extent, group health insurance. SNIG's wholly-owned insurance
subsidiaries include Superior National Insurance Company ("SNIC"), California
Compensation Insurance Company ("CalComp"), Superior Pacific Casualty Company
("SPCC"), Combined Benefits Insurance Company ("CBIC"), and Commercial
Compensation Insurance Company ("CCIC"). Our underwriting and marketing is
focused in large part in the State of California, but we also have branch
operations throughout the continental United States. Before we acquired Business
Insurance Group, Inc. ("BIG") the holding company of CalComp, CCIC, and CBIC, in
December 1998, we had no significant branch operations outside of California.
Unless indicated otherwise, "we," "us," "our," and "Superior National" refer to
SNIG and its subsidiaries.

The accompanying unaudited condensed consolidated financial statements of
Superior National 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 1999 presentation.
Operating results for the three months and nine months ended September 30, 1999
are not necessarily indicative of the results to be expected for the year ending
December 31, 1999. These consolidated financial statements should be read in
conjunction with the consolidated financial statements and footnotes thereto
contained in our Annual Report on Form 10-K for the year ended December 31,
1998.

A.2 EARNINGS PER SHARE ("EPS")

Basic earnings per share is calculated using the weighted-average shares
outstanding. Fully-diluted earnings per share considers the effects of dilutive
securities only if such securities would not have an antidilutive effect. The
following is an illustration of the reconciliation of the numerators and

8
<PAGE>
SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999

(UNAUDITED)

denominators of the basic and diluted earnings per share (EPS) computations for
the nine months ended September 30, 1999 and September 30, 1998:

<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1999 NINE MONTHS ENDED SEPTEMBER 30, 1998
------------------------------------------ -----------------------------------------
INCOME (LOSS) SHARES PER SHARE INCOME (LOSS) SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
------------- -------------- --------- ------------- ------------- ---------
(IN (IN
THOUSANDS) THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS
Income (loss) before items
below................... $(24,525) 17,692,644 $(1.39) $11,784 5,779,978 $ 2.04
Preferred Securities...... (5,536) (0.31) (5,597) (0.97)
------------- --------- ------------- ---------
Net income (loss)......... $(30,061) $(1.70) $ 6,187 $ 1.07
============= ========= ============= =========
EFFECT OF DILUTIVE
SECURITIES
Options................... Not applicable 383,236
Warrants.................. Not applicable 1,674,783
DILUTED EPS
Income (loss) before items
below................... $(24,525) 17,692,644 $(1.39) $11,784 7,837,997 $ 1.50
Preferred Securities...... (5,536) (0.31) (5,597) (0.71)
------------- --------- ------------- ---------
Net income (loss)......... $(30,061) $(1.70) $ 6,187 $ 0.79
============= ========= ============= =========
</TABLE>

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 September 30, 1999 and September 30, 1998:

<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 1999 THREE MONTHS ENDED SEPTEMBER 30, 1998
------------------------------------------ -----------------------------------------
INCOME (LOSS) SHARES PER SHARE INCOME (LOSS) SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
------------- -------------- --------- ------------- ------------- ---------
(IN (IN
THOUSANDS) THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BASIC EPS
Income (loss) before items
below................... (37,153) 17,716,860 $(2.10) $ 3,968 5,632,507 $ 0.70
Preferred Securities...... (1,846) (0.10) (1,873) (0.33)
------------- --------- ------------- ---------
Net income (loss)......... $(38,999) $(2.20) $ 2,095 $ 0.37
============= ========= ============= =========
EFFECT OF DILUTIVE
SECURITIES
Options................... Not applicable 390,721
Warrants.................. Not applicable 1,689,448
DILUTED EPS
Income (loss) before items
below................... $(37,153) 17,716,860 $(2.10) $ 3,968 7,712,676 $ 0.51
Preferred Securities...... (1,846) (0.10) (1,873) (0.24)
------------- --------- ------------- ---------
Net income (loss)......... $(38,999) $(2.20) $ 2,095 $ 0.27
============= ========= ============= =========
</TABLE>

A.3 NEW ACCOUNTING STANDARDS

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"). SFAS 133 is effective for fiscal years
beginning after June 15, 2000 and establishes standards for the reporting for
derivative instruments. It requires changes in the fair value of a derivative
instrument and the changes in fair value of assets or liabilities hedged by that
instrument to be included in income. To the extent that the hedge transaction is
effective, income is equally offset by both investments.

9
<PAGE>
SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999

(UNAUDITED)

Currently the changes in fair value of derivative instruments and hedged items
are reported in net unrealized gain (loss) on securities. Superior National has
not determined the impact of SFAS 133.

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 did not have an impact on our consolidated financial
statements.

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 Superior National'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 a trust, whose sole purpose was to issue 10
3/4% Trust Preferred Securities, having an aggregate liquidation amount of $105
million, and to invest the proceeds in an equivalent amount of 10 3/4% Senior
Subordinated Notes due 2017 issued by SNIG. SNIG owns directly all of the common
securities issued by the trust, which it purchased for $3.25 million. The sole
assets of the trust are the Senior Subordinated Notes, which have an aggregate
principal amount of $108.25 million. SNIG also entered into several contractual
undertakings when it formed the trust 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 those securities.

NOTE B. ACQUISITION OF BIG

On December 10, 1998, we acquired BIG and its wholly-owned subsidiaries,
CalComp, Business Insurance Company ("BICO"), and CBIC, under the terms of a
purchase agreement that we entered into on May 5, 1998 (the "Purchase
Agreement") with Foundation Health Corporation ("FHC"). Upon its acquisition,
BIG became a wholly-owned subsidiary of SNIG and CalComp, CBIC and BICO (BICO
was subsequently sold December 18, 1998) became indirect operating subsidiaries
of SNIG. Additionally, in accordance with the Purchase Agreement, on December
17, 1998, we acquired CCIC from FHC after we received all required regulatory
approvals. We paid FHC $285.0 million in cash to acquire BIG and its
subsidiaries. FHC paid $36.0 million of this purchase price to provide us with a
$212.5 million "loss reserves guarantee" which it implemented through the
purchase of reinsurance pursuant to aggregate excess of loss reinsurance
agreements on behalf of CalComp, CBIC, CCIC, and BICO. We are currently engaged
in a significant legal dispute with Inter-Ocean Reinsurance Company Ltd.
("Inter-Ocean") and one of Inter-Ocean's owners, American Re-Insurance Company
("American Re"), over their purported rescission of the aggregate excess of loss
agreement that gives effect to Inter-Ocean's $175 million portion of the loss
reserves guarantee. This dispute is discussed further in

10
<PAGE>
SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999

(UNAUDITED)

NOTE E. LITIGATION. Prior to the closing of the acquisition, FHC caused all of
BIG's intercompany balances and real estate holdings related to FHC and its
parent, Foundation Health Systems, Inc., and their affiliates, to be settled in
cash. FHC contributed an additional $12.6 million in capital to BIG prior to the
closing.

We funded the acquisition of BIG with senior debt financing in the amount of
$110.0 million and equity financing in the amount of $200.1 million. We obtained
the senior debt financing through a Credit Agreement dated December 10, 1998
that we entered into with The Chase Manhattan Bank and other lending
institutions. In addition, we obtained a working capital credit facility in the
amount of $15.0 million under the Credit Agreement that was unused as of
September 30, 1999. Prior to incurring this indebtedness, we obtained the
consent of holders of the outstanding Trust Preferred Securities, as required by
the terms of the Indenture relating to the Trust Preferred Securities. The cost
of the waiver was included as part of the debt issuance costs.

The acquisition was accounted for using the purchase method and the results
of operations of BIG and its subsidiaries since the acquisition have been
included in our operations.

The purchase price was allocated to the fair value of assets acquired and
liabilities assumed. Assets acquired in the acquisition included investments of
$203.0 million, cash and cash equivalents of $576.2 million, and other assets of
$485.7 million. Liabilities assumed in the acquisition included claim and claim
adjustment expense reserves of $716.6 million and other liabilities of $260.4
million.

NOTE C. REINSURANCE

Effective February 1, 1998, SNIC and SPCC entered into a Quota-Share
Agreement with All American Life Insurance Company, rated "A+" by A.M. Best.
Under the All American agreement, SNIC and SPCC ceded 100% of premiums and claim
and claim adjustment expenses associated with policies that incepted during the
agreement and have $100,000 or more of estimated annual premium. SNIC and SPCC
initially received a 35.0% ceding commission on premiums ceded under this
contract from February 1 to April 30, 1998, and 34.5% from May 1, 1998 to
January 31, 1999. This agreement expired January 31, 1999.

Effective May 1, 1998, we entered into a new Quota-Share Agreement with
United States Life Insurance Company ("US Life"), a company rated "A+" by A.M.
Best. Under this agreement SNIC and SPCC ceded 100% of premiums and claim and
claim adjustment expenses associated with policies incepting through
January 31, 1999 having at least an estimated annual premium of $25,000 but less
than $100,000. Since January 1, 1999, SNIC and SPCC have been ceding and will
cede 93% and 87% for policies incepting during 1999 and 2000, respectively, of
premiums and claim and claim adjustment expenses associated with policies having
at least an estimated annual premium of $25,000. Under the same arrangement,
CalComp, BICO, CCIC, and CBIC ceded 100% of premiums and claim and claim
adjustment expenses associated with policies incepting through December 31, 1998
having at least an estimated annual premium of $25,000. Since December 31, 1998,
CalComp, CCIC, and CBIC have been ceding and will cede 93% and 87% for policies
incepting during 1999 and 2000, respectively, of premiums and claim and claim
adjustment expenses associated with policies incepting through December 31, 2000
and having at least an estimated annual premium of $25,000. For policies
incepting during 2001, the ceding percentage for all of Superior National's
insurance companies may vary from 0.0% to 80.0%. For each percentage point below
a 66.5% cumulative ceded claim and allocated claim adjustment expense ratio for
the first three contract years, the maximum 80.0% cession will be reduced by
five percentage points, but to a number not less than 40.0% unless US Life
elects to select a lower

11
<PAGE>
SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999

(UNAUDITED)

number. For policies incepting during 2002, the ceding percentage for all of
Superior National's insurance companies may vary from 0.0% to 73.0%. For each
percentage point below a 66.5% cumulative ceded claim and allocated claim
adjustment expense ratio for the first four contract years, the maximum 73.0%
cession will be reduced by five percentage points, but to a number not less than
30.0% unless US Life elects to select a lower number. US Life may elect to
irrevocably terminate the agreement on January 1, 2001 or 2002.

If US Life does not elect to irrevocably terminate the agreement at either
January 1, 2001 or 2002, it may, at its sole option, prior to December 1, 2002,
elect to extend the agreement to policies incepting during the years 2003 and
2004. If the cumulative claim and allocated claim adjustment expense ratio is
greater than or equal to 66.5%, US Life may select a ceding percentage of 0.0%
to 50.0% for both years. If the cumulative claim and allocated claim adjustment
expense ratio is less than 66.5%, US Life may select a ceding percentage of 0.0%
to 25.0% for both years. All of the Superior National companies receive a 33.5%
ceding commission on premiums ceded under the US Life contract for policies
incepting during 1998 and 1999. For policies covered by the US Life agreement
incepting during 2000 to 2004, the ceding commission will be 33.5% less the
difference in percentage points between 66.5% and the actual cumulative claim
and allocated claim adjustment expense ratio, subject to a minimum ceding
commission of 31.0%. If the cumulative claim and allocated claim adjustment
expense ratio is 66.5% or less, the ceding commission will be 33.5% plus the
difference in percentage points between 66.5% and the actual cumulative claim
and allocated claim adjustment expense ratio, subject to a maximum ceding
commission of 36.0%. In addition to the ceding commissions described above, US
Life will pay Superior National a contingent commission. The contingent
commission is equal to 25.0% of any net positive balance, which is determined by
taking the earned premiums ceded to US Life and subtracting all ceding
commissions paid to Superior National, an expense provision of 17.5% of earned
premiums ceded, and claim and ceded allocated claim adjustment expense. The
February 1 and May 1, 1998 Quota-Share Agreements will be collectively referred
to as the "Quota-Share Arrangements."

As part of our acquisition of BIG, FHC obtained at its expense a loss
reserves guarantee on BIG's claim and allocated claim adjustment expense
reserves. The form of the loss reserves guarantee was two reinsurance contracts
covering $175.0 million in excess of BIG's estimated claim and allocated claim
adjustment expense reserves at December 10, 1998, plus 50.0% of $75.0 million in
excess of the sum of BIG's reserves plus $175.0 million. BIG's estimated
reserves at December 10, 1998, as defined under the contracts, was $495.0
million plus 75.7% of 1998 net earned premium excluding premium ceded under the
Quota-Share Arrangements, and less claim and allocated claim adjustment expenses
paid by BIG through December 10, 1998. The $175.0 million reinsurance contract
was entered into with Inter-Ocean, with a 100.0% retrocession of liability to
American Re. The $75.0 million reinsurance contract for which Superior National
has a 50.0% share was entered into with Insurance Corporation of Hanover
(26.7%), Scandinavian Re (20.0%), and Odyssey Re (3.33%). SEE NOTE B.
ACQUISITION OF BIG AND NOTE E. LITIGATION

Effective August 9, 1999, we canceled our Aggregate Excess of Loss
Agreement, which was originally effective July 1, 1998, with Zurich Reinsurance
(North America), Inc. ("Zurich Re"), a related party. We recorded a $2.4 million
loss, and received $17.8 million of cash, as a result of this cancellation.
Further, Zurich Re and Superior National have agreed to unwind a claim severity
management program under which affiliates of Zurich Re employed some of our
claims personnel and managed part of our claims department.

12
<PAGE>
SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999

(UNAUDITED)

NOTE D. DISCONTINUED OPERATIONS

Outstanding discontinued operations claim and claim adjustment expense
reserves were $11.5 million at September 30, 1999, which was consistent with
management's expectations. Offsetting these liabilities was a $7.3 million
reinsurance recoverable on paid and unpaid claim and claim adjustment expenses.

NOTE E. LITIGATION

We received on July 14, 1999 a demand for arbitration from legal counsel for
Inter-Ocean which included Inter-Ocean's purported rescission of the aggregate
excess of loss reinsurance agreement, which gives effect to its $175 million
portion of the loss reserves guarantee, between it and our subsidiary, BIG, on
behalf of BIG's subsidiaries, CalComp, BICO (which we subsequently sold, but
whose liabilities and obligations, in addition to most of its assets, we
retained), CBIC, and CCIC. The loss reserves guarantee was procured by FHC as
part of our acquisition of BIG from FHC on December 10, 1998. American Re
brokered the transaction through another of its affiliates. FHC is fully
cooperating with us in this litigation.

The loss reserves guarantee provides us with $212.5 million of reinsurance
protection for adverse claim and allocated claim adjustment expense reserve
development incurred by the BIG insurance subsidiaries after December 10, 1998.
We recorded a cession of $175 million of claims and claim adjustment expenses to
Inter-Ocean at December 31, 1998. We believe Inter-Ocean is attempting to
abrogate its contractual obligations and we intend to enforce our rights
pursuant to the loss reserves guarantee. We also intend to pursue compensation
from Inter-Ocean for any damages that we or our subsidiaries, stockholders, or
debt-holders incur as a result of Inter-Ocean's action.

Inter-Ocean reinsured the economic obligations associated with the loss
reserves guarantee to American Re. We also intend to enforce our rights against
American Re, whom we believe to have orchestrated and directed Inter-Ocean's
actions. According to an Inter-Ocean press release dated January 26, 1999,
Inter-Ocean is partially owned by American Re, which is a wholly-owned
subsidiary of Munich Re. The press release further stated that Inter-Ocean is
managed by Am-Re Managers (Bermuda) Ltd.

On August 11, 1999, BIG filed a demand for arbitration against American Re
simultaneously with our answer to Inter-Ocean's purported rescission and demand
for arbitration. We believe that American Re should participate in the
Inter-Ocean arbitration because we believe American Re is orchestrating and
directing Inter-Ocean's actions, and because we believe American Re is
substantively our reinsurer. On September 2, 1999, American Re filed a lawsuit
in a United States District Court for the Southern District of New York seeking
an order from the court that we have no arbitrable action against American Re.
On September 28, 1999, we filed a motion in that action requesting the court to
order American Re to participate in the Inter-Ocean arbitration. The court has
scheduled a December 2, 1999 status conference on this matter.

On September 7, 1999, we filed a civil lawsuit in Los Angeles County
Superior Court seeking substantial compensatory and punitive damages from
American Re and Inter-Ocean. The lawsuit alleges fraudulent conduct on the part
of American Re and Inter-Ocean with respect to their joint, wrongful attempt to
rescind the reinsurance agreement that creates their obligations with respect to
the loss reserves guarantee. Our complaint includes causes of action for fraud,
intentional interference with contractual relations, intentional interference
with prospective economic advantage, and unfair business

13
<PAGE>
SUPERIOR NATIONAL INSURANCE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999

(UNAUDITED)

practices, for which we intend to seek punitive and compensatory damages from
American Re and Inter-Ocean in excess of $200 million.

On October 22, 1999, we received from American Re, and shortly thereafter we
received from Inter-Ocean, virtually identical answers to our lawsuit. Both
American Re and Inter-Ocean defended their rescission of the loss reserves
guarantee on the grounds that (1) the reserve estimate selected by and disclosed
in the opinion of an independent actuary, which was provided to American Re and
Inter-Ocean, prior to their agreeing to provide the loss reserves guarantee, was
optimistic, (2) BIG withheld information from the actuary that caused the
actuary to develop an overly optimistic view of BIG's reserves, and
(3) American Re and Inter-Ocean were entitled to rely on the independent
actuary's selected reserve estimate in pricing its portion of the loss reserves
guarantee. American Re and Inter-Ocean further assert that the doctrine of
"utmost good faith" required BIG to disclose that the opinion of its independent
actuary as to the amount of its future reserves and prior years' loss ratios at
the time the opinion was delivered to American Re in early 1998 was overly
optimistic, and, in addition, that Superior National management was obligated to
inform American Re, prior to the time that it owned BIG, that it knew that the
independent actuary's reserve estimates were optimistic. A complete statement of
American Re's and Inter-Ocean's arguments and defenses is available in their
filed answers, which are publicly available from the Los Angeles Superior Court.

It is not possible for us to assess the probability that Inter-Ocean and
American Re will prevail in their attempt to rescind their $175.0 million
portion of the loss reserves guarantee, nor is it possible for us to assess the
ultimate probability of success, or the effects of success or failure, of the
lawsuit we have filed against Inter-Ocean and American Re in the California
courts. The effects of an adverse arbitration decision, in whole or in part,
most likely would have a significant and negative effect on us, including
adverse actions by regulators, rating agencies, our lenders, and others. The
potential loss associated with an adverse arbitration decision could be as much
as $146.5 million, before tax effects, if the full $175 million reinsurance
limit is ultimately found to have been utilized. The maximum potential pre-tax
loss is computed as the $175 million reinsurance limit less $28.5 million of
premium that Inter-Ocean would have to return to us if the loss reserves
guarantee is successfully rescinded. However, regardless of the outcome of this
dispute, it has adversely affected, and until it is resolved will adversely
affect, us and our financial condition by, among other things, causing us to
incur significant legal fees and to redirect significant amounts of our
management's time, energy and resources and possibly affect our rating with
A.M. Best Company, Inc., Moody's Investors Service, Inc., and Standard & Poor's
Corporation.

NOTE F. SUBSEQUENT EVENTS

Effective October 1, 1999, we commuted our Quota-Share Agreement, which was
originally effective July 1, 1996, with General Reinsurance Corporation. We
recorded no gain or loss, and received $18.5 million of cash, as a result of
this commutation.

14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION
AND RESULTS OF OPERATIONS

References to "we," "us," "our," and "Superior National" in this quarterly
report include the results of operations of the newly acquired Business
Insurance Group, Inc. ("BIG") together with its insurance subsidiaries
California Compensation Insurance Company ("CalComp"), Combined Benefits
Insurance Company ("CBIC"), and Commercial Compensation Insurance Company
("CCIC"), for the period beginning December 10, 1998.

This discussion and analysis contains statements that constitute
"forward-looking" statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements relate to future
events or the future financial performance of Superior National and involve
known and unknown risks, uncertainties and other factors that may cause the
actual results, performance or achievements of Superior National to be
materially different from any future results, performance or achievements
expressed or implied by the forward-looking statements. These factors include,
among other things, inherent uncertainties related to the effect of the
acquisitions, Superior National's leverage, and general conditions in the
economy and in the workers' compensation insurance market in particular, and
these factors could cause actual results to differ materially from those
indicated by the forward-looking statements.

OVERVIEW

We recorded an underwriting loss from continuing operations of $60.0 million
in the nine month period ended September 30, 1999, versus an underwriting profit
of $8.9 million in the corresponding period in 1998. The decrease in
underwriting profit from continuing operations was primarily the result of a
$60.0 million increase in our claim and claim adjustment expense reserves due to
adverse loss development and the cancellation of a contract with affiliates of
Zurich Reinsurance (North America), Inc. ("Zurich Re"), a related party. In
addition to the $60.0 million claim and claim adjustment expense reserve
increase, our underwriting profit from continuing operations decreased partially
due to costs associated with combining the operations of the newly acquired BIG
insurance subsidiaries, CalComp, CCIC, and CBIC (the "BIG insurance
subsidiaries"), with Superior National. During the nine months ended
September 30, 1999, we realized a net loss of $30.1 million or $1.70 diluted
earnings per share and $1.70 basic earning per share as compared to net income
of $6.2 million or $0.79 diluted earnings per share and $1.07 basic earnings per
share for the nine months ended September 30, 1998. The decrease in net income
of $36.2 million was primarily the result of the decrease reflected in the
underwriting profit from continuing operations which was partially offset by an
increase of $18.0 million in net investment income. The increase in net
investment income was due to an increase in invested assets which was the result
of the BIG acquisition. Partially offsetting the increase in net investment
income was an increase in interest expense. Our cash flow and general financial
condition has been and, until it is resolved, will be materially and adversely
affected by our dispute with Inter-Ocean Reinsurance Ltd. ("Inter-Ocean") and
American Re-Insurance Company ("American Re") to enforce their $175.0 million
loss reserves guarantee, which was procured by BIG's owner before we acquired
BIG. SEE LITIGATION AND LIQUIDITY AND CAPITAL RESOURCES.

GENERAL FINANCIAL CONDITION

Total assets decreased by $149.6 million or 8.6% for the nine months ended
September 30, 1999, as compared to December 31, 1998. Significant changes within
total assets consisted of a decrease of $317.7 million in cash and investments,
which were used primarily to fund operations and a decrease of $123.9 million in
investments withheld from a reinsurer. Offsetting the decrease in cash,
investments and investments withheld from a reinsurer was an increase of $235.7
million in reinsurance recoverable, an increase of $37.9 million in premiums
receivable, and an increase of $30.1 million in deferred tax asset.

15
<PAGE>
Total liabilities decreased by $100.0 million or 7.1% for the nine months
ended September 30, 1999, as compared to December 31, 1998. Significant changes
within total liabilities consisted of an $107.2 million reduction in claim and
claim adjustment expense reserves and a $34.2 million decrease in a payable to a
purchaser of receivables. Partially offsetting these decreases was a $26.7
million increase in reinsurance payables associated with the February 1, 1998
and May 1, 1998 Quota-Share Arrangements with American Life Insurance Company
and United States Life Insurance Company, respectively, collectively referred to
as the "Quota-Share Arrangements."

Total equity decreased by $49.7 million or 22.2% to $174.3 million for the
nine months ended September 30, 1999, as compared to December 31, 1998. This
decrease consisted of $30.1 million in net loss and $20.1 million in other
comprehensive loss.

RESULTS OF OPERATIONS

The following selected financial data and analysis provide an assessment of
Superior National's financial results for the three months ended September 30,
1999, as compared to the three months ended September 30, 1998. Certain prior
period amounts have been reclassified to conform to the current period
presentation.

Selected financial data as reported for the three months ended
September 30, 1999 and 1998 are presented below:

<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1999 1998
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Gross premium written....................................... $152,307 $54,234

Net premium written......................................... $ 62,474 $11,415

Net premium earned.......................................... $ 58,541 $10,746
Net claim and claim adjustment expenses..................... 99,988 1,319
Net underwriting and general and administrative expenses.... 20,377 5,923
Policyholder dividend expense............................... 40 96
-------- -------
Underwriting profit (loss).................................. $(61,864) $ 3,408
======== =======

Net investment income....................................... $ 8,519 $ 3,421

Underwriting ratios (GAAP Basis):
Claim and claim adjustment expense ratio.................. 170.8% 12.3%
Underwriting expense ratio................................ 34.8% 55.1%
Policyholder dividends ratio.............................. 0.1% 0.9%
-------- -------
Combined ratio............................................ 205.7% 68.3%
======== =======
</TABLE>

Gross premium written increased $98.1 million or 180.8% to $152.3 million in
the third quarter of 1999, as compared to the same period in 1998. Substantially
all of this increase can be attributed to the addition of business written by
the BIG insurance subsidiaries. Net premium written increased $51.1 million to
$62.5 million in the third quarter of 1999, as compared to the same period in
1998, reflecting the increase in gross premium written, which was partially
offset by an increase in ceded premium related to the Quota-Share Arrangements.
Net premium earned increased $47.8 million to $58.5 million in the third quarter
of 1999, as compared to the same period in 1998, reflecting the increase in net
premium written.

16
<PAGE>
Net claim and claim adjustment expenses increased $98.7 million to $100
million in the third quarter of 1999, as compared to the same period in 1998.
This increase is primarily attributable to a $60.0 million increase in claim and
claim adjustment expense reserves due to adverse loss development and
cancellation of a contract with Zurich Re, a related party on accident years
1998 and prior and an increase in claim and claim adjustment expense associated
with the increase reflected in net premium earned. The net claim and claim
adjustment expense ratio increased to 170.8% in the third quarter of 1999 from
12.3% in the same period of 1998. The 158.5 percentage point increase was
primarily due to the $60.0 million increase in claim and claim adjustment
expense reserves, reflected in the increase in net claim and claim adjustment
expenses, and a higher claim and claim adjustment expense ratio from the
business acquired from the BIG insurance subsidiaries. The 12.3% claim and claim
adjustment expense ratio for the third quarter of 1998 is due to the recognition
of $5.0 million of favorable development during the third quarter of 1998 on
prior accident years' reserves applied to net premiums earned that were
significantly reduced by the Quota-Share Arrangements.

Underwriting and general and administrative expenses, excluding net
commission expense, increased $14.4 million or 118.3% to $26.5 million in the
third quarter of 1999, as compared to the same period in 1998. This increase was
primarily the result of increased expenses associated with the addition of the
BIG insurance subsidiaries since December 1998 and partially due to a $2.4
million loss on the cancellation of the Aggregate Excess of Loss Agreement with
Zurich Re. Net commission expense increased $0.1 million or 1.4% to ($6.1)
million in the third quarter of 1999, as compared to the same period in 1998.
The decrease in net commission expense was primarily due to a $13.6 million
increase in ceded commissions associated with the Quota-Share Arrangements,
which was offset by an increase in gross commission expense reflected by the
increase in gross premiums written. Net underwriting and general and
administrative expenses, including net commission expense, increased 244.0% to
$20.4 million in the third quarter of 1999 from $5.9 million in the same period
of 1998. Superior National's underwriting expense ratio decreased 20.3
percentage points to 34.8% for the third quarter of 1999 from 55.1% for the same
period in 1998.

Underwriting profit from continuing operations decreased $65.3 million to
($61.9) million in the third quarter of 1999, as compared to the same period in
1998. The decrease in underwriting profit from continuing operations was
primarily the result of the increase in claim and claim adjustment expense, as
discussed above.

Net investment income, excluding realized investment gains and losses,
increased $6.1 million or 228.9% to $8.8 million in the third quarter of 1999,
as compared to the same period in 1998. The improvement was due to the increase
in assets available for investment resulting from the BIG acquisition.

Interest expense of $2.3 million was incurred in the third quarter of 1999
relating to the $110 million loan with The Chase Manhattan Bank. No interest
expense was incurred in the third quarter of 1998.

Distributions and accretion on preferred securities for the three months
ended September 30, 1999 remained at $2.8 million, which was unchanged from the
same period in 1998.

The following selected financial data and analysis provide an assessment of
Superior National's financial results for the nine months ended September 30,
1999, as compared to the nine months ended September 30, 1998. Certain prior
period amounts have been reclassified to conform to the current period
presentation.

17
<PAGE>
Selected financial data as reported for the nine months ended September 30,
1999 and 1998 are presented below:

<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1999 1998
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Gross premium written....................................... $480,626 $136,185

Net premium written......................................... $178,694 $ 53,495

Net premium earned.......................................... $172,870 $ 60,952
Net claim and claim adjustment expenses..................... 190,082 27,638
Net underwriting and general and administrative expenses.... 42,630 24,329
Policyholder dividend expense............................... 140 96
-------- --------
Underwriting profit (loss).................................. $(59,982) $ 8,889
======== ========

Net investment income....................................... $ 29,400 $ 11,435

Underwriting ratios (GAAP Basis):
Claim and claim adjustment expense ratio.................. 110.0% 45.3%
Underwriting expense ratio................................ 24.7% 39.9%
Policyholder dividends ratio.............................. 0.1% 0.2%
-------- --------
Combined ratio............................................ 134.8% 85.4%
======== ========
</TABLE>

Gross premium written increased $344.4 million to $480.6 million in the
first nine months of 1999, as compared to the same period in 1998. Substantially
all of this increase can be attributed to the addition of business written by
the BIG insurance subsidiaries. Net premium written increased $125.2 million to
$178.7 million in the first nine months of 1999, as compared to the same period
in 1998, reflecting the increase in gross premium written, which was partially
offset by an increase in ceded premiums related to the Quota-Share Arrangements.
Net premium earned increased $111.9 million to $172.9 million in the first nine
months of 1999, as compared to the same period in 1998, reflecting the increase
in net premium written.

Net claim and claim adjustment expenses increased $162.4 million to $190.1
million in the first nine months of 1999, as compared to the same period in
1998. This increase is primarily attributable to a $60.0 million increase in
claim and claim adjustment expense reserves due to adverse loss development and
cancellation of a contract with Zurich Re and an increase in claim and claim
adjustment expense associated with the increase reflected in net premium earned.
The net claim and claim adjustment expense ratio increased to 110.0% in the
first nine months of 1999 from 45.3% in the same period of 1998. The 64.7
percentage point increase was primarily due to the $60.0 million increase in
claim and claim adjustment expense reserves, reflected in the increase in net
claim and claim adjustment expenses, and a higher claim and claim adjustment
expense ratio from the business acquired from the BIG insurance subsidiaries.

Underwriting and general and administrative expenses, excluding net
commission expense, increased $46.4 million or 159.5% to $75.5 million in the
first nine months of 1999, as compared to the same period in 1998. This increase
was primarily the result of increased expenses associated with the addition of
the BIG insurance subsidiaries since December 1998 and partially due to a $2.4
million loss on cancellation of a contract with Zurich Re. Net commission
expense decreased $28.1 million to ($32.8) million in the first nine months of
1999, as compared to the same period in 1998. The decrease in net commission
expense was primarily due to a $75.0 million increase in ceded commissions
associated with the Quota-Share Arrangements, which was partially offset by an
increase in gross

18
<PAGE>
commission expense reflected by the increase in gross premiums written. Net
underwriting and general and administrative expenses, including net commission
expense, increased 75.2% to $42.6 million in the first nine months of 1999 from
$24.3 million in the same period of 1998. Superior National's underwriting
expense ratio decreased 15.2 percentage points to 24.7% for the first nine
months of 1999 from 39.9% for the same period in 1998. This decrease is due
primarily to a reduction in net commission expense relative to the related net
premium level. This reduction in net commission expense relative to the related
net premium level was due to an increase in reinsurance ceding commissions
received related to the Quota-Share Arrangements.

Underwriting profit from continuing operations decreased $68.9 million to an
underwriting loss of $60.0 million in the first nine months of 1999, as compared
to the same period in 1998. The decrease in underwriting profit from continuing
operations was primarily the result of the increase in claim and claim
adjustment expenses, as discussed above.

Net investment income, excluding realized investment gains and losses,
increased $19.9 million or 206.0% to $29.5 million in the first nine months of
1999, as compared to the same period in 1998. The improvement was due to the
increase in assets available for investment resulting from the BIG acquisition.

Interest expense of $8.4 million was incurred in the first nine months of
1999 primarily related to the $110 million loan with The Chase Manhattan Bank.
No interest expense was incurred in the first nine months of 1998.

Distributions and accretion on preferred securities for the nine months
ended September 30, 1999 remained at $8.5 million, which was unchanged from the
same period in 1998.

Set forth below is a summary of net investment income, excluding capital
gains and losses, for the three and nine months ended September 30, 1999 and
1998 (in thousands):

<TABLE>
<CAPTION>
THREE MONTHS
ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Interest on bonds and notes....................... $7,857 $2,652 $26,288 $ 9,337
Interest on short-term investments, cash and cash
equivalents..................................... 893 189 3,785 707
Other............................................. 289 79 340 222
------ ------ ------- -------
Total investment income......................... 9,039 2,920 30,413 10,266
Capital gains (losses)............................ (260) 752 (141) 1,781
Investment expense................................ 260 251 872 612
------ ------ ------- -------
Net investment income........................... $8,519 $3,421 $29,400 $11,435
====== ====== ======= =======
</TABLE>

We monitor the matching of our assets and liabilities and attempt to
maintain our portfolio's investment duration at the mid-point of the length of
its net claim and claim adjustment expenses 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 our
investment portfolio, we consider 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 September 30, 1999 was 6.04 years
compared to 3.72 years at December 31, 1998. At September 30, 1999, 99.7% of the
carrying values of investments in our fixed maturities portfolio were rated as
investment grade by the Securities Valuation Office of the National Association
of Insurance Commissioners.

19
<PAGE>
DISCONTINUED OPERATIONS

Discontinued operations had outstanding claim and claim adjustment expense
reserves of $11.5 million as of September 30, 1999, which were consistent with
our expectations. Offsetting these liabilities was a $7.3 million reinsurance
recoverable on paid and unpaid claim and claim adjustment expenses. We have
significant exposure to construction defect liabilities on property and casualty
insurance policies underwritten from 1986 to 1993. We continue to closely
monitor our potential exposure to construction defect claims and have not
changed our estimates of ultimate claim and claim adjustment expenses on
discontinued operations since 1995. We believe our current reserves are adequate
to cover claims activity. There can be no assurance, however, that further
upward development of ultimate loss costs associated with construction defect
claims will not occur. We will continue to closely monitor the adequacy of our
loss reserves in the discontinued operations.

LITIGATION

We received on July 14, 1999 a demand for arbitration from legal counsel for
Inter-Ocean which included Inter-Ocean's purported rescission of the aggregate
excess of loss reinsurance agreement, which gives effect to its $175 million
portion of the loss reserves guarantee, between it and our subsidiary, BIG, on
behalf of BIG's subsidiaries, CalComp, BICO (which we subsequently sold, but
whose liabilities and obligations we retained), CBIC, and CCIC. The loss
reserves guarantee was procured by FHC as part of our acquisition of BIG from
FHC on December 10, 1998. American Re brokered the transaction through another
of its affiliates. FHC is fully cooperating with us in this litigation.

On September 7, 1999, we filed a civil lawsuit in Los Angeles County
Superior Court seeking substantial compensatory and punitive damages from
American Re and Inter-Ocean. The lawsuit alleges fraudulent conduct on the part
of American Re and Inter-Ocean with respect to their joint, wrongful attempt to
rescind the reinsurance agreement that creates its obligations with respect to
the loss reserves guarantee. Our complaint includes causes of action for fraud,
intentional interference with contractual relations, intentional interference
with prospective economic advantage, and unfair business

20
<PAGE>
practices, for which we intend to seek punitive and compensatory damages from
American Re and Inter-Ocean in excess of $200 million.

It is not possible for us to assess the probability that Inter-Ocean and
American Re will prevail in their attempt to rescind the loss reserves
guarantee, nor is it possible for us to assess the ultimate probability of
success, or the effects of success or failure, of the lawsuit we have filed
against Inter-Ocean and American Re in the California courts. The effects of an
adverse arbitration decision, in whole or in part, most likely would have a
significant and negative effect on us, including adverse actions by regulators,
rating agencies, our lenders, and others. The potential loss associated with an
adverse arbitration decision could be as much as $146.5 million, before tax
effects, if the full $175 million reinsurance limit is ultimately found to have
been utilized. The maximum potential pre-tax loss is computed as the $175
million reinsurance limit less $28.5 million of premium that Inter-Ocean would
have to return to us if the loss reserves guarantee is successfully rescinded.
However, regardless of the outcome of this dispute, it has adversely affected,
and until it is resolved will adversely affect, us and our financial condition
by, among other things, causing us to incur significant legal fees and to
redirect significant amounts of our management's time, energy and resources and
possibly affect our rating with A.M. Best Company, Inc., Moody's Investors
Service, Inc., and Standard & Poor's Corporation.

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. Our cash inflows are
generated from cash collected for policies sold, investment income on the
existing portfolio, and sales and maturities of investments. Our cash outflows
consist primarily of payments for policyholders' claims, reinsurance payments,
operating expenses, and debt service. For our insurance operations, we must have
available cash and liquid assets to meet our obligations to policyholders and
claimants in accordance with contractual obligations in addition to meeting our
ordinary operating costs.

Our 1999 operating plan initially anticipated negative cash flows from
operations due to significant premium cessions to the Quota-Share Arrangements,
payment during 1999 of premiums withheld under the Quota-Share Arrangements in
1998, and the paying down of relatively higher prior years' claim and claim
adjustment reserves against current year written premium volume. Negative
operating cash flows for the nine months ended September 30, 1999 are generally
in line with our expectations.

In addition to traditional operating cash flow inflows and outflows
described above, our cash available for operations is also affected by special
deposits that we are required to maintain with various regulatory agencies,
principally the California Department of Insurance. Special workers'
compensation deposits are required under the California Insurance Code to secure
our workers'

21
<PAGE>
compensation claim and claim adjustment expense obligations to California
claimants. While the California Insurance Code sets forth rules pertaining to
the amount of special workers' compensation deposits required to be maintained
by workers' compensation companies or reinsurers who directly or indirectly
underwrite California workers' compensation risks, the California Department of
Insurance has effectively unlimited discretion with respect to the control of
our special workers' compensation deposits. To the extent that the California
Department of Insurance refuses to release excess special deposit funds posted
in prior years that we need to conduct operations in the current year, our
liquidity may be adversely affected. The California Department of Insurance has
not released to us the full amount of funds to which we believe we are entitled
because of uncertainties surrounding our actual California workers' compensation
liabilities arising from the attempted rescission of the loss reserves guarantee
by Inter-Ocean and American Re. SEE LITIGATION.

The California Department of Insurance has required that Superior National's
insurance subsidiaries maintain a special workers' compensation deposit
sufficient to cover the special deposit obligations of both Superior National's
insurance subsidiaries and American Re until the arbitration proceedings between
Superior National and American Re and Inter-Ocean are completed. The effect of
this requirement has been to defer the release to us of approximately
$197 million of excess funds and other securities currently held on deposit by
the California Department of Insurance. Since the litigation with Inter-Ocean
and American Re commenced, the California Department of Insurance has released
$20 million to us, and we have requested the release of additional funds from
our excess deposits. There can be no assurance, however, that the California
Department of Insurance will release any additional excess deposit funds pending
the resolution of our litigation with Inter-Ocean and American Re.

In order to maintain adequate liquidity, since the decision in July 1999 by
the California Department of Insurance to hold our excess deposits pending
resolution of the Inter-Ocean and American Re arbitration, we have generated
cash needed for operations by commuting or canceling reinsurance or other
contracts. We do not believe that canceling and commuting contracts is a viable
long-term source of operating cash flow, but until the California Department of
Insurance releases our excess deposits, we may have to continue to resort to
extraordinary means to generate cash with which to conduct our operations,
including the commutation of additional reinsurance contracts. Because our
business plan had anticipated these deposits being released to us in the
ordinary course of business in amounts sufficient to meet our needs and the
uncertainty surrounding our dispute with Inter-Ocean and American Re has
prompted the California Department of Insurance to withhold these deposits, we
are not in a position to state that we have adequate financial resources
available to us in the near-term to meet operational needs, despite our
undertaking extraordinary measures to generate cash with which to conduct our
operations.

NINE MONTH COMPARISON

During the first nine months of 1999, Superior National used $236.4 million
of cash in its operations versus $59.9 million during the same period in 1998.
This $176.5 million increase in net cash used in 1999 was due to significant
cessions to the Quota-Share Arrangements, a payment made in 1999 of premiums
withheld under this Arrangement in 1998, and the paying down of relatively
higher prior years' claim and claim adjustment reserves against current year
written premium volume. The addition of BIG's operations beginning December 10,
1998 also contributed to net cash used in operations in 1999. As of
September 30, 1999, we had total cash, cash equivalents, and investments of
$549.7 million and we had 98.9% of our investment portfolio invested in cash,
cash equivalents, and short-term investments, and fixed maturities. In addition,
94.4% of our fixed income portfolio had ratings of "AA" or equivalent or better
and 100% had ratings of "BBB" or equivalent or better.

Net cash used in financing activities for the nine months ended
September 30, 1999 was $20.1 million, as compared to cash used of $19.2 million
for the nine months ended September 30, 1998.

22
<PAGE>
During the nine months ended September 30, 1999, $34.2 million was paid to
BancBoston for the amounts collected in 1998 under a Receivable Purchase and
Sale Agreement dated as of December 9, 1998. Partially offsetting the $34.2
million decrease in payable to BancBoston--asset securitization was $13.6
million in net cash received from the cancellation of a contract with Zurich Re.

In order to obtain part of the funding we needed to acquire BIG, we entered
into a Credit Agreement with The Chase Manhattan Bank and other lending
institutions, and incurred $110.0 million in senior debt, less $4.8 million in
transaction costs. In addition, we obtained a working capital credit facility of
$15.0 million under the Credit Agreement that was unused as of September 30,
1999.

This senior debt is to be fully amortized over six years with semi-annual
principal paydowns of $10 million beginning June 30, 2000 and continuing through
December 31, 2002. After December 31, 2002, the principal paydown will increase
to $12.5 million and continue until maturity at December 10, 2004. The senior
debt interest rate is equivalent to the Eurodollar rate plus 3%. We have the
option to select various interest periods varying from one, two, three or six
months. As of September 30, 1999, the interest rate for the current period was
8.94%, which will be reset in March 2000.

We must adhere to certain requirements and covenants, including some
relating to financial ratios, in order to comply with the terms of the Credit
Agreement. As of September 30, 1999, we were not in compliance with all of our
loan covenants. We are currently discussing waivers of those covenants with
which we are not in compliance with the bank syndicate. If we do not obtain
these waivers and default under the Credit Agreement, all of the unpaid
principal and interest under the Credit Agreement would become due. This
acceleration of payments could also trigger a default and similar acceleration
of the payment of principal and interest under the Indenture relating to the
Trust Preferred Securities if holders of 25% or more of these securities voted
for such an acceleration. If any of these payments were accelerated, we would
not have adequate resources available to us to pay these amounts in full.
Furthermore, if our dispute with Inter-Ocean and American Re over their
$175.0 million loss reserves guarantee is not resolved at the time of such a
default, we almost certainly would be unable to find adequate refinancing to
meet all of our obligations under the Credit Agreement and the Trust Preferred
Securities. We are not in default of any requirements or covenants associated
with our Trust Preferred Securities.

In December 1997, SNIG formed a trust, whose sole purpose was to issue and
sell 10 3/4% Trust Preferred Securities, having an aggregate liquidation amount
of $105 million, and to invest the proceeds in an equivalent amount of 10 3/4%
Senior Subordinated Notes due 2017 issued by SNIG. SNIG owns directly all of the
common securities issued by the trust, which it purchased for $3.25 million. The
sole assets of the trust are the Senior Subordinated Notes, which have an
aggregate principal amount of $108.25 million. SNIG also entered into several
contractual undertakings when it formed the trust 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 those
securities.

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, beginning June 1, 1998. Subject to certain conditions,
on or after December 1, 2005, SNIG 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
the redemption prices. In addition, SNIG has the right, at any time, subject to
certain conditions, to defer payments of interest on the Senior Subordinated
Notes for extension periods, 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 SNIG
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

23
<PAGE>
payment of all amounts then due, SNIG may commence a new extension period,
subject to certain requirements.

We have a reverse repurchase facility with a national securities brokerage
firm that allows us to engage in up to $20 million in reverse repurchase
transactions secured either by U.S. Treasury instruments, U.S. Agency debt, or
corporate debt. This arrangement provides us with additional short-term
liquidity. Reverse repurchase transactions may be rolled over from one period to
the next, at which time the transaction is repriced. This type of financing
allows us a great deal of flexibility to manage short-term investments, avoiding
the unnecessary realization of losses to satisfy short-term cash needs. Further,
this method of financing is less expensive than bank debt. As of September 30,
1999, we had no obligation outstanding under this facility.

Because SNIG is a holding company, it depends on dividends and tax
allocation payments from its insurance subsidiaries, SNIC, SPCC, CalComp, CCIC,
and CBIC for its net cash flow requirements, which consist primarily of periodic
payments on its outstanding debt obligations, principally the Trust Preferred
Securities and the senior bank debt. Absent other sources of cash flow, SNIG
cannot expend funds materially in excess of the amount of dividends or tax
allocation payments that could be paid to it by SNIC, SPCC, CalComp, CCIC, and
CBIC. Further, insurance companies are subject to restrictions affecting the
amount of shareholder dividends and advances that may be paid within any one
year without the prior approval of the California Department of Insurance. The
California Insurance Code prohibits payment, other than from accumulated earned
surplus, shareholder dividends which exceed the greater of net income or 10% of
statutory policyholders' surplus without prior approval of the California
Department of Insurance. New York, the domicile state of CCIC, also limits the
amount of dividends that may be paid by an insurance subsidiary. Superior
National's policyholders' surplus as originally reported to regulatory
authorities at December 31, 1998 was $340.2 million. Subsequently, Superior
National revised its statutory policyholders' surplus to $292.8 million. As of
December 31, 1998, the maximum dividend payments that may be made during 1999 by
our insurance subsidiaries without prior approval of regulatory authorities is
$8.5 million. No dividends were paid during the nine months ended September 30,
1999.

Superior National is a party to various leases principally associated with
Superior National's home, branch and regional office space. These leases contain
provisions for scheduled lease charges and escalations in base rent over the
lease term. Our minimum commitment with respect to these leases in 1999 is
approximately $22.6 million. These leases expire from 2000 to 2009.

While we do not presently foresee any expenditures during the remainder of
1999 other than those arising in the normal course of business or arising out of
or relating to our legal dispute with Inter-Ocean and American Re over their
purported rescission of Inter-Ocean's $175 million loss reserves guarantee,
which is discussed above and in LITIGATION, we may seek to expand market share
without deviating from our pricing strategy, by seeking strategic alliances,
investment opportunities or acquisitions. However there can be no assurances
that any such opportunities will be realized. The effect of inflation on our
revenues and net income during the nine months ended September 30, 1999 was not
significant.

TAXES

As of December 31, 1998, Superior National had available $204.0 million in
net operating loss carryforwards ("NOLs") to offset taxable income recognized by
us in periods after December 31, 1998. For federal income tax purposes, these
NOLs will expire in material amounts beginning in the year 2006. Because the
sale of our common stock to fund the acquisition of BIG caused us to undergo an
"ownership change" under Section 382 of the Internal Revenue Code, we will be
able to use only a maximum of approximately $8.0 million per year of our NOLs,
together with additional amounts to offset "built-in gains." Built-in gains are
unrealized gains related to appreciated property, including investments, that we
own. Limitations imposed by Section 382 may cause the availability of our NOLs

24
<PAGE>
to be deferred, causing us to incur tax obligations when we otherwise would not,
or may allow some portions of the NOLs to expire before we can use them to
reduce our tax obligations. Our tax obligations affect our cash position and
therefore affect our ability to make payments on our long-term debt as it
becomes due.

YEAR 2000 STRATEGY

Information technology continues to be an integral part of our business. We
also recognize the critical nature and technological challenges of the "Year
2000" issue. The Year 2000 issue results from computer programs and computer
hardware that utilize only two digits to identify a year in the date field,
rather than four digits.

We have completed our work on the first four stages involved in managing
Year 2000 issues: (1) identifying information technology ("IT") and
non-information technology ("non-IT") systems that are non-compliant, (2)
formulating strategies to remedy any problems, (3) making the changes necessary
to upgrade existing systems to Year 2000 compliance, and (4) testing the
changes. We have nearly completed our work on the final Year 2000 management
stage, developing contingency and other business continuation plans to counter
likely Year 2000 problems.

We have recently completed a number of projects in our efforts to make our
system components Year 2000 compliant. We concentrated on the following major
areas: database compliance, interactive program compliance and reporting
compliance.

To date, all database, interactive program and external reporting compliance
issues that we have identified have been resolved. We believe that our IT
structure is now Year 2000 compliant with four-digit year format and
corresponding program adherence. Our production systems have successfully
undergone a number of forward-dating tests in our efforts to ensure data
integrity and accuracy into the 21st century.

We are also engaged in the process of contacting our business partners to
determine their Year 2000 readiness. Thus far, correspondence received generally
has been positive and suggests that our significant business partners have
addressed a substantial portion of their Year 2000 issues in a timely manner.

We have taken what we believe to be prudent steps to minimize interruptions
to normal business operations. However, we cannot assure you that we will not be
adversely affected by Year 2000 issues. Our operations are dependent upon a
variety of third-party suppliers of goods and services whose Year 2000 readiness
is beyond our control. We will endeavor to develop contingency plans to support
the continuation of our operations in the event of failures by such
third-parties, but it is possible that some disruptions may occur as the result
of such third-party failures.

The cost of Year 2000 related efforts were approximately $250,000 for the
year ended 1998. Costs are expected to total approximately $750,000 during 1999.
Due to the complexities of estimating these costs and the difficulties in
assessing our vendors' and business partners' abilities to become Year 2000
compliant, estimates are likely to change. We believe that we are not exposed to
the risk of significant data loss due to Year 2000 complications because our IT
systems are backed-up at the end of each business day.

We expect that by the end of 1999, all of our critical systems, in-house or
vendor-obtained, that are not Year 2000 compliant will be corrected or replaced.
However, there can be no assurance that all of our systems or those of our
business partners will be Year 2000 compliant, that the costs to be Year 2000
compliant will not exceed our current expectations, that our contingency plans
will be effective or that the failure of our systems or those of our business
partners to be Year 2000 compliant will not have a material and adverse effect
on our business.

25
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our consolidated balance sheet includes a substantial amount of assets and
liabilities whose fair values are subject to market risks. Due to our
significant level of investments in fixed maturity securities (bonds), interest
rate risk represents the largest market risk factor affecting our consolidated
financial position, although we also have limited exposure to equity price risk.
The following sections address the significant market risks associated with our
financial activities as of September 30, 1999.

Caution should be used in evaluating our overall market risk from the
information below, because actual results could differ materially from the
estimates and assumptions used below and because unpaid claim and claim
adjustment expenses and reinsurance recoverables on unpaid claim and claim
adjustment expenses are not included in the hypothetical effects of changes in
market conditions discussed below. As of September 30, 1999, unpaid claim and
claim adjustment expenses represented 74.2% of our total liabilities and
reinsurance recoverables on unpaid claim and claim adjustment expenses,
excluding reinsurance recoverable from loss reserves guarantee, represented
29.5% of our total assets.

INTEREST RATE RISK

We employ a conservative investment strategy emphasizing asset quality and
the matching of maturities of our fixed maturity investments to our anticipated
claim payments, expenditures and other liabilities. Our fixed maturity portfolio
includes investments in Collateralized Mortgage Obligations ("CMOs") which are
exposed to accelerated prepayment risk generally caused by interest rate
movements. As of September 30, 1999, our fixed maturity portfolio represented
31.5% of our total assets and 90.5% of our invested assets. We intend to hold
all of our fixed maturity investments for indefinite periods of time but these
investments are available for sale in response to changes in interest rates, tax
planning considerations or other aspects of asset/liability management. We do
not utilize stand-alone derivatives to manage interest rate risks.

Our fixed maturity investments, including CMOs, notes payable and notes
payable to banks are subject to interest rate risk. Increases and decreases in
prevailing interest rates generally translate into decreases and increases in
fair values of those instruments. Additionally, fair values of interest rate
sensitive instruments may be affected by the credit worthiness of the issuer,
CMO prepayment rates, relative values of alternative investments, the liquidity
of the instrument and other general market conditions.

The table below summarizes the estimated effects of hypothetical increases
and decreases in interest rates. We have assumed that the changes occur
immediately and uniformly to each category of instrument containing interest
rate risks. The hypothetical changes in market interest rates reflect what could
be deemed best or worst case scenarios. The hypothetical fair values are based
upon the same prepayment assumptions utilized in computing fair values as of
September 30, 1999. Should interest rates decline, mortgage holders are more
likely to refinance existing mortgages at lower rates. Acceleration of
repayments could adversely affect future investment income, if reinvestment of
the cash received from repayments is in lower yielding securities. Such changes
in prepayment rates are not taken into account in the following disclosures.

26
<PAGE>
INTEREST RATE RISK

<TABLE>
<CAPTION>
ESTIMATED HYPOTHETICAL
FAIR VALUE PERCENTAGE
AFTER INCREASE
HYPOTHETICAL HYPOTHETICAL (DECREASE)
FAIR VALUE AT CHANGE IN CHANGE IN IN
SEPTEMBER 30, INTEREST RATE INTEREST STOCKHOLDERS'
1999 (BP=BASIS POINT) RATE EQUITY
------------- ---------------- ------------ -------------
(IN THOUSANDS, EXCEPT BASIS POINTS)
<S> <C> <C> <C> <C>
Assets:
United States Government Agencies and
Authorities........................... $165,979 100 bp decrease $175,378 $ 9,399
100 bp increase $156,530 $ (9,449)
200 bp increase $147,031 $(18,948)

Municipals.............................. $120,076 100 bp decrease $130,744 $ 10,668
100 bp increase $110,176 $ (9,900)
200 bp increase $101,045 $(19,031)

Corporate Instruments................... $ 27,713 100 bp decrease $ 29,153 $ 1,440
100 bp increase $ 26,403 $ (1,310)
200 bp increase $ 25,223 $ (2,490)

Collateralized Mortgage Obligations and
Other Asset Backed Securities......... $183,802 100 bp decrease $192,522 $ 8,720
100 bp increase $174,807 $ (8,995)
200 bp increase $165,536 $(18,266)

Liabilities:
Long-term Debt.......................... $105,790 100 bp decrease $103,012 $ (2,778)
100 bp increase $108,568 $ 2,778
200 bp increase $111,347 $ 5,557

Trust Preferred Securities.............. $101,135 100 bp decrease $ 93,579 $ (7,556)
100 bp increase $108,691 $ 7,556
200 bp increase $116,248 $ 15,113
</TABLE>

The interest rate on our long-term debt is adjustable based on market indices.

27
<PAGE>
PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The discussion of our legal proceedings with Inter-Ocean and American Re
over Inter-Ocean's purported rescission of its $175 million loss reserves
guarantee, which is set forth in Part I. Financial Information--Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Litigation, is hereby incorporated by reference into this Item 1.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) EXHIBITS:

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
27 Financial Data Schedule
</TABLE>

(b) REPORTS ON FORM 8-K: Superior National did not file any reports on Form 8-K
during the third quarter of 1999.

28
<PAGE>
SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

<S> <C> <C>
SUPERIOR NATIONAL INSURANCE GROUP, INC.
Dated: November 16, 1999

By: /S/ J. CHRIS SEAMAN
------------------------------------------
J. Chris Seaman
PRESIDENT AND CHIEF EXECUTIVE OFFICER
(AND ACTING CHIEF FINANCIAL OFFICER)
</TABLE>

29
<PAGE>
EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
27 Financial Data Schedule
</TABLE>

<PAGE>
<ARTICLE> 7
<RESTATED>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<DEBT-HELD-FOR-SALE> 497,570
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 1,294
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 503,515
<CASH> 46,226
<RECOVER-REINSURE> 21,449
<DEFERRED-ACQUISITION> 5,691
<TOTAL-ASSETS> 1,581,305
<POLICY-LOSSES> 969,034
<UNEARNED-PREMIUMS> 58,075
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 8,168
<NOTES-PAYABLE> 105,790
101,135
0
<COMMON> 229,074
<OTHER-SE> (54,772)
<TOTAL-LIABILITY-AND-EQUITY> 1,581,305
172,870
<INVESTMENT-INCOME> 29,400
<INVESTMENT-GAINS> (141)
<OTHER-INCOME> 0
<BENEFITS> 190,082
<UNDERWRITING-AMORTIZATION> (9,264)
<UNDERWRITING-OTHER> 51,894
<INCOME-PRETAX> (40,752)
<INCOME-TAX> (16,227)
<INCOME-CONTINUING> (24,525)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (30,061)
<EPS-BASIC> (1.70)
<EPS-DILUTED> (1.70)
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0

</TABLE>