-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LXls4bX2DPirJsOqCKHiqHz/ExQcvkp8OBhR+UGU5FICInaW1Qulx0uFgqgpm7e8 DKZCU+3txmTbmAi7609icw== 0000950142-98-000898.txt : 19981228 0000950142-98-000898.hdr.sgml : 19981228 ACCESSION NUMBER: 0000950142-98-000898 CONFORMED SUBMISSION TYPE: SC 13D PUBLIC DOCUMENT COUNT: 3 FILED AS OF DATE: 19981222 SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: SUPERIOR NATIONAL INSURANCE GROUP INC CENTRAL INDEX KEY: 0000810463 STANDARD INDUSTRIAL CLASSIFICATION: INSURANCE AGENTS BROKERS & SERVICES [6411] IRS NUMBER: 954610936 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 13D SEC ACT: SEC FILE NUMBER: 005-46333 FILM NUMBER: 98773223 BUSINESS ADDRESS: STREET 1: 26601 AGOURA RD STREET 2: ` CITY: CALABASAS STATE: CA ZIP: 91302 BUSINESS PHONE: 8188801600 MAIL ADDRESS: STREET 1: 26601 AGOURA ROAD CITY: CALABASAS STATE: CA ZIP: 91302 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: CAPITAL Z FINANCIAL SERVICES FUND II LP CENTRAL INDEX KEY: 0001075567 STANDARD INDUSTRIAL CLASSIFICATION: [] FILING VALUES: FORM TYPE: SC 13D BUSINESS ADDRESS: STREET 1: ONE CHASE MANHATTAN PLAZA CITY: NEW YORK STATE: NY ZIP: 10005 BUSINESS PHONE: 2128988700 SC 13D 1 SCHEDULE 13D SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 SCHEDULE 13D Under the Securities Exchange Act of 1934 (Amendment No. __)* Superior National Insurance Group, Inc. (Name of Issuer) Common Stock (par value $.01 per share) (Title of Class of Securities) 868224106 (CUSIP Number) Capital Z Management, Inc. One Chase Manhattan Plaza, 44th Floor New York, New York 10005 Attention: Mr. David A. Spuria Tel. No. (212) 898-8700 (Name, Address and Telephone Number of Person Authorized to Receive Notices and Communications) December 10, 1998 (Date of Event which Requires Filing of this Statement) If the filing person has previously filed a statement on Schedule 13G to report the acquisition which is the subject of this Schedule 13D, and is filing this statement because of Rule 13d-1(b)(3) or (4), check the following box [ ]. Note: Six copies of this statement, including all exhibits, should be filed with the Commission. See Rule 13d-1(a) for other parties to whom copies are to be sent. * The remainder of this cover page shall be filled out for a reporting person's initial filing on this form with respect to the subject class of securities, and for any subsequent amendment containing information which would alter disclosures provided in a prior cover page. The information required on the remainder of this cover page shall not be deemed to be "filed" for the purpose of Section 18 of the Securities Exchange Act of 1934 (the "Exchange Act") or otherwise subject to the liabilities of that section of the Exchange Act but shall be subject to all other provisions of the Exchange Act (however, see the Notes). SCHEDULE 13D CUSIP No. 868224106 --------- 1 NAME OF REPORTING PERSON S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON Capital Z Financial Services Fund II, L.P. 2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (A) [ ] (B) [X] 3 SEC USE ONLY 4 SOURCE OF FUNDS 00 - Contributions from Partners 5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) or 2(e) [ ] 6 CITIZENSHIP OR PLACE OF ORGANIZATION Bermuda 7 SOLE VOTING POWER NUMBER OF -0- SHARES BENEFICIALLY OWNED 8 SHARED VOTING POWER 5,276,960 BY EACH REPORTING PERSON 9 SOLE DISPOSITIVE POWER -0- WITH 10 SHARED DISPOSITIVE POWER 5,276,960 11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 5,276,960 12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES Not applicable [ ] 13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) 29.46% 14 TYPE OF REPORTING PERSON PN SCHEDULE 13D CUSIP No. 868224106 --------- 1 NAME OF REPORTING PERSON S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON Capital Z Partners, L.P. 2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (A) [ ] (B) [X] 3 SEC USE ONLY 4 SOURCE OF FUNDS Not Applicable 5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) or 2(e) [ ] 6 CITIZENSHIP OR PLACE OF ORGANIZATION Bermuda 7 SOLE VOTING POWER NUMBER OF -0- SHARES BENEFICIALLY OWNED 8 SHARED VOTING POWER 5,276,960 (1) BY EACH REPORTING PERSON 9 SOLE DISPOSITIVE POWER -0- WITH 10 SHARED DISPOSITIVE POWER 5,276,960 (1) 11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 5,276,960 (1) 12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES [ ] 13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) 29.46% 14 TYPE OF REPORTING PERSON PN (1) Solely in its capacity as the sole general partner of Capital Z Financial Services Fund II, L.P. SCHEDULE 13D CUSIP No. 868224106 --------- 1 NAME OF REPORTING PERSON S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON Capital Z Partners, Ltd. 2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (A) [ ] (B) [X] 3 SEC USE ONLY 4 SOURCE OF FUNDS Not Applicable 5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS 2(d) or 2(e) 6 CITIZENSHIP OR PLACE OF ORGANIZATION Bermuda 7 SOLE VOTING POWER NUMBER OF -0- SHARES BENEFICIALLY OWNED 8 SHARED VOTING POWER 5,276,960 (1) BY EACH REPORTING PERSON 9 SOLE DISPOSITIVE POWER -0- WITH 10 SHARED DISPOSITIVE POWER 5,276,960 (1) 11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 5,276,960 (1) 12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES [ ] 13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) 29.46% 14 TYPE OF REPORTING PERSON PN (1) Solely in its capacity as the sole general partner of Capital Z Partners, L.P., which is the sole general partner of Capital Z Financial Services Fund II, L.P. 5 ITEM 1. SECURITY AND ISSUER The title of the class of equity securities of Superior National Insurance Group, Inc., a Delaware corporation (the "Company"), to which this Statement on Schedule 13D (the "Statement") relates is the common stock, par value $.01 per share (the "Common Stock"), of the Company. The address of the principal executive offices of the Company is 26601 Agoura Road, Calabasas, California 91302. ITEM 2. IDENTITY AND BACKGROUND (a) This Statement is hereby filed by Capital Z Financial Services Fund II, L.P., a Bermuda limited partnership ("Cap Z Fund II"), Capital Z Partners, L.P., a Bermuda limited partnership ("Cap Z L.P."), and Capital Z Partners, Ltd., a Bermuda corporation ("Cap Z Ltd."). Cap Z Fund II, Cap Z L.P. and Cap Z Ltd. are sometimes hereinafter collectively referred to as the "Reporting Persons." (b) - (c) CAP Z FUND II Cap Z Fund II is a Bermuda limited partnership formed to invest in securities of financial services entities. The principal business address of Cap Z Fund II, which also serves as its principal office, is One Chase Manhattan Plaza, 44th Floor, New York, New York 10005. Pursuant to Instruction C to Schedule 13D of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), information with respect to Cap Z L.P., the sole general partner of Cap Z Fund II, is set forth below. CAP Z L.P. Cap Z L.P. is a Bermuda limited partnership, the principal business of which is serving as the sole general partner of Cap Z Fund II. The principal address of Cap Z Ltd., which also serves as its principal office, is One Chase Manhattan Plaza, 44th Floor, New York, New York 10005. Pursuant to Instruction C to Schedule 13D of the Exchange Act, information with respect to Cap Z Ltd., the sole general partner of Cap Z L.P., is set forth below. CAP Z LTD. Cap Z Ltd. is a Bermuda corporation, the principal business of which is serving as the sole general partner of Cap Z L.P. The principal address of Cap Z Ltd., which also serves as its principal office, is One Chase Manhattan Plaza, 44th Floor, New York, New York 10005. Pursuant to Instruction C to Schedule 13D of the Exchange Act, the name, residence or business address, and present principal occupation or employment of each director and executive officer of Cap Z Ltd. are as follows: CUSIP NO. 868224106 6
PRINCIPAL OCCUPATION OR NAME BUSINESS ADDRESS EMPLOYMENT - ----------------------------- ----------------------------------------- ------------------------------------------ Steven M. Gluckstern One Chase Manhattan Plaza, 44th Floor Chairman of the Board of Directors of New York, New York 10005 Capital Z Management, Inc. and Capital Z Partners, Ltd. Robert A. Spass One Chase Manhattan Plaza, 44th Floor Deputy Chairman of the Board of New York, New York 10005 Directors of Capital Z Management, Inc. and Capital Z Partners, Ltd. Laurence W. Cheng One Chase Manhattan Plaza, 44th Floor President and a Director of New York, New York 10005 Capital Z Management, Inc. and Capital Z Partners, Ltd. Bradley E. Cooper One Chase Manhattan Plaza, 44th Floor Senior Vice President and a Director of New York, New York 10005 Capital Z Management, Inc. and Capital Z Partners, Ltd. Mark K. Gormley One Chase Manhattan Plaza, 44th Floor Senior Vice President and a Director of New York, New York 10005 Capital Z Management, Inc. and Capital Z Partners, Ltd. Adam M. Mizel One Chase Manhattan Plaza, 44th Floor Senior Vice President and a Director of New York, New York 10005 Capital Z Management, Inc. and Capital Z Partners, Ltd. Paul H. Warren One Chase Manhattan Plaza, 44th Floor Senior Vice President and a Director of New York, New York 10005 Capital Z Management, Inc. and Capital Z Partners, Ltd. Scott M. Delman One Chase Manhattan Plaza, 44th Floor Senior Vice President and a Director of New York, New York 10005 Capital Z Management, Inc. and Capital Z Partners, Ltd. David A. Spuria One Chase Manhattan Plaza, 44th Floor General Counsel and Secretary of New York, New York 10005 Capital Z Management, Inc. and Capital Z Partners, Ltd. Roland V. Bernardon One Chase Manhattan Plaza, 44th Floor Chief Financial Officer and Treasurer New York, New York 10005 of Capital Z Management, Inc. and Capital Z Partners, Ltd.
Capital Z Management, Inc. is a Bermuda corporation, the principal business of which is performing investment management services for Cap Z Fund II and its portfolio companies. The principal business address of Capital Z Management, Inc. is One Chase Manhattan Plaza, 44th Floor, New York, New York 10005. (d) None of the entities or persons identified in this Item 2 has, during the last five years, been convicted in a criminal proceeding (excluding traffic violations or similar misdemeanors). (e) None of the entities or persons identified in this Item 2 has, during the last five years, been a party to a civil proceeding of a judicial or administrative body of competent jurisdiction and as a result of such proceeding was or is subject to a judgement, decree or final order enjoining future CUSIP NO. 868224106 7 violations of, or prohibiting or mandating activities subject to, federal or state securities laws or finding any violation with respect to such laws. (f) All of the natural persons identified in this Item 2 are citizens of the United States of America, except for Laurence W. Cheng who is a citizen of Canada. ITEM 3. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION As more fully described in Item 6 below, on December 10, 1998 Cap Z Fund II purchased an aggregate of 5,276,960 shares of Common Stock for an aggregate purchase price of $88,389,080. Cap Z Fund II used contributions from its partners to fund such purchase. ITEM 4. PURPOSE OF TRANSACTION The Reporting Persons consummated the transactions described herein in order to acquire a significant interest in the Company and for investment purposes. The Reporting Persons do not intent to obtain control (as defined in Rule 12b-2 of the Exchange Act) of the Company. The Reporting Persons intend to review continuously their position in the Company. Depending upon future evaluations of the business prospects of the Company and upon other developments, including, but not limited to, general economic and business conditions and stock market conditions, the Reporting Persons may retain or from time to time dispose of all or a portion of their holdings, subject to any applicable legal and contractual restrictions on their ability to do so. In addition, the matters set forth in Item 6 below are incorporated in this Item 4 by reference as if fully set forth herein. Except as set forth in this Item 4, the Reporting Persons have no present plans or proposals that relate to or that would result in any of the actions specified in clauses (a) through (j) of Item 4 of Schedule 13D of the Exchange Act. ITEM 5. INTEREST IN SECURITIES OF THE ISSUER (a) CAP Z FUND II Cap Z Fund II may, pursuant to Rule 13d-3 of the Exchange Act, be deemed to be the beneficial owner of 5,276,960 shares of Common Stock, which, based on calculations made in accordance with Rule 13d-3(d) of the Exchange Act and there being 17,906,882 shares of Common Stock outstanding (as represented by the Company to the Reporting Persons), represents approximately 29.46% of the outstanding shares of Common Stock. CAP Z L.P. In its capacity as the sole general partner of Cap Z Fund II, Cap Z L.P. may, pursuant to Rule 13d-3 of the Exchange Act, be deemed to be the beneficial owner of 5,276,960 shares of CUSIP NO. 868224106 8 Common Stock, which, based on calculations made in accordance with Rule 13d-3(d) of the Exchange Act and there being 17,906,882 shares of Common Stock outstanding (as represented by the Company to the Reporting Persons), represents approximately 29.46% of the outstanding shares of Common Stock. CAP Z LTD. In its capacity as the sole general partner of Cap Z L.P., the sole general partner of Cap Z Fund II, Cap Z Ltd. may, pursuant to Rule 13d-3 of the Exchange Act, be deemed to be the beneficial owner of 5,276,960 shares of Common Stock, which, based on calculations made in accordance with Rule 13d-3(d) of the Exchange Act and there being 17,906,882 shares of Common Stock outstanding (as represented by the Company to the Reporting Persons), represents approximately 29.46% of the outstanding shares of Common Stock. Schedule 1 hereto, which is hereby incorporated by reference, contains the information required by Item 5(a) of Schedule 13D of the Exchange Act for each person named in Item 2 for whom such information is not set forth above. (b) CAP Z FUND II 1. Sole power to vote or to direct the vote -0- 2. Shared power to vote or to direct the vote 5,276,960 3. Sole power to dispose or to direct the disposition -0- 4. Shared power to dispose of or to direct the disposition 5,276,960 CAP Z L.P. 1. Sole power to vote or to direct the vote -0- 2. Shared power to vote or to direct the vote 5,276,960 3. Sole power to dispose or to direct the disposition -0- 4. Shared power to dispose of or to direct the disposition 5,276,960 CUSIP NO. 868224106 9 CAP Z LTD. 1. Sole power to vote or to direct the vote -0- 2. Shared power to vote or to direct the vote 5,276,960 3. Sole power to dispose or to direct the disposition -0- 4. Shared power to dispose of or to direct the disposition 5,276,960 Schedule 1 hereto, which is hereby incorporated by reference, contains the information required by Item 5(b) of Schedule 13D of the Exchange Act for each person named in Item 2 for whom such information is not set forth above. (c) Except as set forth herein, in Schedule 1 hereto or in the Exhibits filed herewith, to the knowledge of the Reporting Persons with respect to the other persons named in response to paragraph (a), none of the persons named in response to paragraph (a) has effected any transactions in shares of Common Stock during the past 60 days. (d) Each of the Reporting Persons affirms that no person other than such Reporting Person has the right to receive or the power to direct the receipt of dividends from, or the proceeds from the sale of, the shares of Common Stock owned by such Reporting Person. To the knowledge of the Reporting Persons with respect to the other persons named in response to paragraph (a), only such persons have the right to receive or the power to direct the receipt of dividends from, or the proceeds from the sale of, the shares of Common Stock owned by such person. ITEM 6. CONTRACTS, ARRANGEMENTS, UNDERSTANDINGS OR RELATIONSHIPS WITH RESPECT TO THE ISSUER Pursuant to the Stock Purchase Agreement, dated as of May 5, 1998 (the "1998 Stock Purchase Agreement"), among the Company, Cap Z Ltd., Insurance Partners, L.P., a Delaware limited partnership ("IP Delaware"), and Insurance Partners Offshore (Bermuda), L.P., a Bermuda limited partnership ("IP Bermuda"), on December 10, 1998, Cap Z Fund II purchased an aggregate of 5,276,960 shares of Common Stock for an aggregate purchase price of $88,389,080. Cap Z Ltd. had previously assigned its rights and obligations under the 1998 Stock Purchase Agreement to Cap Z Fund II. The description of the 1998 Stock Purchase Agreement that follows is not, and does not purport to be, complete and is qualified in its entirety by reference to the 1998 Stock Purchase Agreement, which is incorporated by reference to Annex C of the Company's Proxy Statement, dated October 16, 1998, filed with the Securities and Exchange Commission. As more fully described in Section 4.2 of the 1998 Stock Purchase Agreement, so long as the shares of Common Stock owned by Cap Z Fund II, IP Delaware and IP Bermuda (collectively, the "Purchasers") and their respective Associates (as hereinafter defined), directly or indirectly, represent CUSIP NO. 868224106 10 15% (the "15% Threshold") of the outstanding shares of the Company on a fully diluted basis (including, without limitation, the Company's 14.5% Senior Subordinated Voting Notes due April 1, 2002 (the "Voting Notes")), the Company and the Purchasers agree as follows: (a) Pursuant to Section 4.2(a) of the 1998 Stock Purchase Agreement, the Purchasers agreed with respect to themselves and any person or entity that controls, is under common control with, or is controlled by any of the Purchasers or such persons or entities, and all individuals who are officers, directors or control persons of any such entities, including any of the Purchasers, that are not signatories to the 1998 Stock Purchase Agreement (collectively, "Associates") that the Purchasers and the Purchaser's Associates will not, subject to certain exceptions set forth in Section 4.2 of the 1998 Stock Purchase Agreement, (i) acquire or offer or agree to acquire, directly or indirectly, by purchase or otherwise, any shares of Common Stock or voting securities of the Company (or direct or indirect rights or options to acquire any such securities); (ii) enter, agree to enter into or propose to enter into, directly or indirectly, any merger or business combination involving the Company; (iii) make, or in any way participate, directly or indirectly, in any "solicitation" of "proxies" (as such terms are used in the rules of the Securities and Exchange Commission) or consent to vote, or seek to advise or influence any person or entity with respect to the voting of, any voting securities of the Company; or (iv) form, join or in any way participate in a "group" (within the meaning of Section 13d-3 of the Exchange Act) with any persons not referenced to in Section 4.2 of the 1998 Stock Purchase Agreement with respect to any of the foregoing; provided, however, that nothing in Section 4.2(a) of the 1998 Stock Purchase Agreement restricts any Purchaser or any of its Associates from (A) acquiring shares of Common Stock or voting securities as a result of a stock split, stock dividend or similar recapitalization of the Company, (B) exercising the Common Stock Purchase Warrants issued pursuant to the 1998 Stock Purchase Agreement, the warrant issued to International Insurance Advisors, Inc. pursuant to the Note Purchase Agreement, dated as of March 31, 1992, among the Company and each of the several purchasers listed on Schedule I thereto, the warrant issued to CentreLine Reinsurance Limited pursuant to the Preferred Securities Purchase Agreement, dated as of June 30, 1994, among the Company, Superior National Capital Holding Corporation, Superior National Capital, L.P. and Centre Reinsurance Services (Bermuda) III Limited, and any other warrants with respect to any capital stock of the Company issued prior to the date of the 1998 Stock Purchase Agreement (or any preemptive rights granted pursuant to any of them), (C) making, or in any way participating, directly or indirectly, in any "solicitation" of "proxies" (as such terms are defined in Rule 14a-1 under the Exchange Act) in connection with the election to the Board of Directors of directors nominated by any Purchaser or any of its Associates (to the extent not otherwise inconsistent with the 1998 Stock Purchase Agreement) or (D) with respect to a tender or exchange offer or a merger or other business combination involving the Company (a "Business Combination"), which was initiated without the encouragement by or the participation of any Purchaser or any of its Associates, making a tender or exchange offer or a proposal with respect to a Business Combination, or forming, joining or participating as a "group" to make such offer or proposal, in either case upon more favorable terms than those of the unsolicited tender or exchange offer or Business Combination; and provided, further, that nothing contained in Section 4.2(a) of the 1998 Stock Purchase Agreement affects or impairs the right of any director of the Company to (x) act as a member of the Board of Directors or any committee thereof or (y) take any action necessary or advisable to carry out his obligations and duties as a director of the Company. Notwithstanding anything to the contrary contained in the 1998 Stock Purchase Agreement, nothing in Section 4.2(a) (I) prohibits or restricts any Associate who is a director of the Company from acquiring, in one or more transactions, in his individual capacity, an aggregate of 25,000 shares of Common Stock so long as such acquisition does not violate any provision of the Company's charter as in effect from time to time or (II) prohibits or restricts CUSIP NO. 868224106 11 ordinary trading transactions on behalf of third party clients by an Associate engaged in the investment management business. (b) The limitations set forth in Section 4.2(a) of the 1998 Stock Purchase Agreement and described in paragraph (a) above may be waived by the affirmative vote of the nearest whole number representing 66 2/3 % or more of (i) the directors of the Company, excluding from the total number of directors voting those who are Associates of any Purchaser or (ii) the shares of the Company, not including in such total number of shares voting those beneficially owned by any Purchaser and its Associates. In addition, any material business relationship between the Company and any Purchaser or any Associate of any Purchaser must be approved in the manner described in the preceding sentence. (c) Other than with respect to the election of directors of the Company, with respect to any vote of the stockholders of the Company on a particular matter, if the aggregate number of all shares that are voted in like manner by the Purchasers and their respective Associates are greater than 35% of the total number of shares voted, then those votes that exceed such 35% threshold will be voted in the same proportion as the other stockholders voted their shares with respect to such matter. In addition, subject to the 15% Threshold, as more fully described in Section 4.2(e) of the 1998 Stock Purchase Agreement, each Purchaser agreed that the Purchasers and its Associates may not elect a total of more than five persons (or the highest number that is less than a majority of the Board of Directors, as the case may be), including the person nominated pursuant to Section 4.4 of the Stock Purchase Agreement, dated as of September 17, 1996, as amended and restated effective as of February 17, 1997 (the "1996 Stock Purchase Agreement"), among the Company, IP Delaware and IP Bermuda, who are Associates of any Purchaser or its Associates to be directors of the Company. Furthermore, subject to the 15% Threshold, the Purchasers agreed not to transfer, assign, sell or otherwise dispose of (each, a "Transfer") any of its shares of Common Stock, except for Transfers made in accordance with Section 4.3 of the 1998 Stock Purchase Agreement. Pursuant to Section 4.3 of the 1998 Stock Purchase Agreement, the Purchasers may at any time Transfer any or all of their shares of Common Stock (i) to any Associate of the Purchasers, if such Associate executes and delivers to the Company, prior to any such Transfer, an instrument in form and substance reasonably satisfactory to the Company pursuant to which such Associate agrees to be bound by the provisions of Section 4.2 and Section 4.3 of the 1998 Stock Purchase Agreement, (ii) pursuant to Rule 144 under the Securities Act of 1933, as amended (the "Securities Act"), or any successor to such rule, (iii) pursuant to a tender offer or exchange offer made by the Company or any "Affiliate" (as such term is defined in Rule 12b-2 of the Exchange Act) of the Company, (iv) pursuant to a tender offer or exchange offer initiated by any person or "group" (within the meaning of Section 13d-3 of the Exchange Act) other than the Purchasers or any Associate thereof or a Business Combination, which is approved or recommended by the Board of Directors of the Company or with respect to which the Board of Directors of the Company has announced its intention to remain neutral, (v) so long as the shares of Common Stock to be Transferred represent, in the aggregate, not greater than 10% of the outstanding Common Stock, in a transaction or series of transactions exempt from the registration and prospectus delivery requirements of the Securities Act, (vi) by the Transfer of greater than 10% of the outstanding shares of Common Stock in a transaction or series of transactions exempt from the registration and prospectus delivery requirements of the Securities Act to (x) one purchaser, (y) one purchaser and its Affiliates or (z) a "group" of purchasers, if such purchaser or purchasers of Common Stock in any such transaction or series of transactions execute and deliver to the Company prior to any such purchase or purchases an instrument in form satisfactory to the CUSIP NO. 868224106 12 Company pursuant to which such purchaser or purchasers agree to be bound by the provisions of Section 4.2 and Section 4.3 of the 1998 Stock Purchase Agreement (treating such purchaser or purchasers as an "Associate" for purposes of such Sections 4.2 and 4.3), (vii) pursuant to a registration statement filed under the Securities Act pursuant to the Amended and Restated Registration Rights Agreement (as hereinafter defined), or otherwise or (viii) pursuant to a pro rata distribution to its partners. In connection with the 1998 Stock Purchase Agreement, the Company, Cap Z Fund II, IP Delaware and IP Bermuda entered into the Amended and Restated Registration Rights Agreement, dated as of December 10, 1998 (the "Registration Rights Agreement"). The description of the Registration Rights Agreement that follows is not, and does not purport to be, complete and is qualified in its entirety by reference to the Registration Rights Agreement, a copy of which is attached hereto as Exhibit 1. Pursuant to the Registration Rights Agreement, the Purchasers and their affiliates (as defined in Rule 12b-2 of the Exchange Act) to which shares of Common Stock are transferred have the right, subject to certain limitations set forth in the Registration Rights Agreement, to request the Company at any time to register under the Securities Act, at the Company's expense, all or part of the shares of Common Stock owned by the Purchasers and their affiliates (a "Demand Registration"). The Company agreed to pay such expenses in connection with (i) two Demand Registrations initiated by IP Delaware or IP Bermuda and (ii) two Demand Registration initiated by Cap Z Fund II, provided, that such number of Demand Registrations may be reduced if the certain conditions set forth in Section 3(d) of the Registration Rights Agreement are satisfied. The Purchasers also have certain piggyback registration rights in connection with registrations by the Company under the Securities Act. In connection with the 1998 Stock Purchase Agreement, the Company, Cap Z Ltd., IP Delaware, IP Bermuda, International Insurance Advisors, Inc. ("IIA"), International Insurance Investors, L.P. ("III") (including its general partner and those limited partners that are signatories to the Letter Agreement), certain individuals listed on Schedule 2 thereto (the "Management Warrantholders") and Centreline Reinsurance Limited ("Centreline"), entered into a letter agreement (the "Letter Agreement"), dated as of October 16, 1998. The description of the Letter Agreement that follows is not, and does not purport to be, complete and is qualified in its entirety by reference to the Letter Agreement, a copy of which is attached hereto as Exhibit 2. Insofar as the Letter Agreement specifically relates to the Purchasers, the Letter Agreement clarifies the relationship between the registration rights of the Purchasers under the Registration Rights Agreement and the registration rights of IIA, III, the Management Warrantholders and Centreline (collectively, the "Warrantholders") under their respective warrants. Specifically, the Letter Agreement provides that in the event of a demand registration by either the Warrantholders or the Purchasers, the other party may participate in such registration, pro rata based on the number of shares proposed to be registered. The letter agreement also provides that in the event the Company proposes to register in an underwritten offering any shares of its Common Stock, then the number of shares of Common Stock that are entitled to be included in such offering shall be allocated (i) first, to the Company for shares of Common Stock being sold for its own account, (ii) second, among requesting Warrantholders and the Purchasers, pro rata based on the number of shares requested to be included in such offering and (iii) third, to any other requesting shareholder. CUSIP NO. 868224106 13 ITEM 7. MATERIAL TO BE FILED AS EXHIBITS. Incorporated by reference to Annex C of the Stock Purchase Agreement, dated as of Company's Proxy Statement, dated October May 5, 1998, by and among Superior 16, 1998, filed with the Commission National Insurance Group, Inc., Insurance Partners, L.P., Insurance Partners Offshore (Bermuda), L.P. and Capital Z Partners, Ltd. Exhibit 1: Amended and Restated Registration Rights Agreement, dated as of December 10, 1998, among the Superior National Insurance Group, Inc., Insurance Partners, L.P., Insurance Partners Offshore (Bermuda), L.P. and Capital Z Financial Services Fund II, L.P. Exhibit 2: Letter Agreement, dated as of October 16, 1998, among Superior National Insurance Group, Inc., Insurance Partners, L.P., Insurance Partners Offshore (Bermuda), L.P., Capital Z Partners, Ltd. and each of the several holders of warrants of the Company signatory thereto. CUSIP NO. 868224106 14 Signature After reasonable inquiry and to the best of the knowledge and belief of the undersigned, the undersigned hereby certifies that the information set forth in this statement is true, complete and correct. Dated: December 21, 1998 CAPITAL Z FINANCIAL SERVICES FUND II, L.P., a Bermuda limited partnership By: Capital Z Partners, L.P., a Bermuda limited partnership, its General Partner By: Capital Z Partners, Ltd., a Bermuda corporation, its General Partner By: /s/ Robert A. Spass ------------------- Name: Robert A. Spass Title: Deputy Chairman of the Board CAPITAL Z PARTNERS, L.P., a Bermuda limited partnership By: Capital Z Partners, Ltd., a Bermuda corporation, its General Partner By: /s/ Robert A. Spass ------------------- Name: Robert A. Spass Title: Deputy Chairman of the Board CAPITAL Z PARTNERS, LTD., a Bermuda corporation By: /s/ Robert A. Spass ------------------- Name: Robert A. Spass Title: Deputy Chairman of the Board CUSIP NO. 868224106 15 Schedule 1 Shares of Common Percentage of Outstanding Name Stock Beneficially Owned(1) Shares of Common Stock(2) - ---- --------------------------- ------------------------- Steven M. Gluckstern 32,825+(=) * Robert A. Spass 48,041(3)(=) * Laurence W. Cheng 32,825+(=) * Bradley E. Cooper 21,343(4)(=) * Mark K. Gormley 16,413+(=) * Adam M. Mizel 16,413+(=) * Paul H. Warren 19,203(5)(=) * Scott M. Delman 10,504+(=) * David A. Spuria 1,395+(=) * Roland V. Bernardon 523+(=) * - --------------------------- * Less than 1%. + Represents warrants to purchase Common Stock that, for the purposes of Rule 13d-3 of the Exchange Act, are exercisable within 60 days of the date hereof. All such warrants were issued on December 10, 1998 and each such person has the sole power to vote or to direct the vote and to dispose or to direct the disposition of such warrants and the underlying shares of Common Stock. (=) All of the warrants to purchase Common Stock issued on December 10, 1998 were issuable to Cap Z Fund II (as the assignee of Cap Z Ltd.) as a commitment fee in connection with the 1998 Stock Purchase Agreement and were issued by the Company to each such person directly in a private transaction at the instruction of Cap Z Fund II. (1) In each case calculated in accordance with Rule 13d-3 of the Exchange Act. (2) Based on there being 17,906,882 shares of Common Stock outstanding on the date hereof (as represented by the Company to the Reporting Persons) and calculated in accordance with Rule 13d-3 of the Exchange Act. (3) The aggregate number of shares of Common Stock that Robert A. Spass owns beneficially is 48,041 consisting of (a) 40,041 shares of Common Stock issuable upon exercise of warrants that, for purposes of Rule 13d-3 of the Exchange Act, are exercisable within 60 days of the date hereof and (b) 8,000 shares of Common Stock held directly. Mr. Spass acquired warrants to purchase 32,825 shares of Common Stock on December 10, 1998 and has the sole power to vote or to direct the vote and to dispose or to direct the disposition of such warrants, and such underlying shares of Common Stock. Mr. Spass shares the power to vote or to direct the vote of warrants to purchase 5,580 shares of Common Stock, and such underlying shares of Common Stock, with International Insurance Advisors, Inc. ("IIA"), pursuant to the Agency and Proxy Agreement, dated March 16, 1992 (the "Agency Agreement"), among IIA and the other parties signatory thereto. Mr. Spass also shares the power to vote or to direct the vote of warrants to purchase 1,636 shares of Common Stock, and such underlying shares of Common Stock, with (a) Beach Haven Investors, Inc., ("Beach Haven") a corporation of which Mr. Spass is the sole stockholder, and (b) IIA pursuant to the Agency Agreement. Mr. Spass shares the power to dispose or to direct the disposition of warrants to purchase CUSIP NO. 868224106 16 1,636 shares of Common Stock, and such underlying shares of Common Stock, with Beach Haven Investors, Inc. and has the sole power to dispose or to direct the disposition of 8,000 shares of Common Stock and warrants to purchase 5,580 shares of Common Stock, and such underlying shares of Common Stock. IIA and Beach Haven are each party to a Statement on Schedule 13G filed with the Securities and Exchange Commission with respect to the Common Stock. (4) The 21,343 shares of Common Stock that Bradley E. Cooper owns beneficially consist of (a) 4,000 shares of Common Stock held directly, and (b) 17,343 shares of Common Stock issuable upon exercise of warrants that, for purposes of Rule 13d-3 of the Exchange Act, are exercisable within 60 days of the date hereof. Mr. Cooper acquired warrants to purchase 16,413 shares of Common Stock on December 10, 1998 and has the sole power to vote or to direct the vote and to dispose or to direct the disposition of such warrants, and such underlying shares of Common Stock. Mr. Cooper shares the power to vote or to direct the vote of warrants to purchase 930 shares of Common Stock and the 930 shares of Common Stock issuable upon their exercise, with (a) IIA pursuant to the Agency Agreement and (b) the International Insurance Advisors, Inc. 401(K) and Pension Plans (the "IIA Pension Plans") (which hold the warrants for the benefit of Mr. Cooper, subject to IIA's revocable agency relationship). Mr. Cooper has the sole power to dispose or to direct the disposition of the 4,000 shares of Common Stock he holds directly and warrants to purchase 930 shares of Common Stock, and such underlying shares of Common Stock. IIA Pension Plans is party to a Statement on Schedule 13G filed with the Securities and Exchange Commission with respect to the Common Stock. (5) The 19,203 shares of Common Stock that Paul H. Warren owns beneficially consist of warrants that, for purposes of Rule 13d-3 of the Exchange Act, are exercisable within 60 days of the date hereof. Mr. Warren acquired 16,413 warrants to purchase Common Stock on December 10, 1998 and has the sole power to vote or to direct the vote and to dispose or to direct the disposition of such warrants, and such underlying shares of Common Stock. Mr. Warren shares the power to vote or to direct the vote of warrants to purchase 1,860 shares of Common Stock, and such underlying shares of Common Stock, with IIA, pursuant to the Agency Agreement. Mr. Warren also shares the power to vote or to direct the vote of warrants to purchase 930 shares of Common Stock, and such underlying shares of Common Stock, with (a) IIA pursuant to the Agency Agreement and (b) IIA Pension Plans (which hold the warrants for the benefit of Mr. Warren, subject to IIA's revocable agency relationship). Mr. Warren has the sole power to dispose or to direct the disposition of warrants to purchase 2,790 shares of Common Stock, and such underlying shares of Common Stock. CUSIP NO. 868224106 17 EXHIBIT INDEX Document Exhibit Number - ------------------------------------------- ------------------------------- Stock Purchase Agreement, dated as of May 5, 1998, by and among Superior National Insurance Group, Inc., Insurance Partners, L.P., Insurance Partners Offshore (Bermuda), L.P. and Capital Z Partners, Ltd. (Incorporated by reference to Annex C of the Company's Proxy Statement, dated October 16, 1998, filed with the Commission) Amended and Restated Registration Rights 1 Agreement, dated as of December 10, 1998, among the Superior National Insurance Group, Inc., Insurance Partners, L.P., Insurance Partners Offshore (Bermuda), L.P. and Capital Z Financial Services Fund II, L.P. Letter Agreement, dated as of October 16, 2 1998, among Superior National Insurance Group, Inc., Insurance Partners, L.P., Insurance Partners Offshore (Bermuda), L.P., Capital Z Partners, Ltd. and each of the several holders of warrants of the Company signatory thereto. CUSIP NO. 868224106 EX-1 2 EXHIBIT 1 ================================================================================ AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT among SUPERIOR NATIONAL INSURANCE GROUP, INC., INSURANCE PARTNERS, L.P., INSURANCE PARTNERS OFFSHORE (BERMUDA), L.P., and CAPITAL Z FINANCIAL SERVICES FUND II, L.P., Dated: December 10, 1998 ================================================================================ TABLE OF CONTENTS Page ---- 1. Definitions................................................................2 2. General; Securities Subject to this Agreement..............................5 (a) Grant of Rights...................................................5 (b) Registrable Securities............................................5 (c) Holders of Registrable Securities.................................6 3. Demand Registration........................................................6 (a) Request for Demand Registration...................................6 (b) Limitation on Demand Registrations................................7 (c) Effective Demand Registration.....................................7 (d) Expenses..........................................................7 (e) Underwriting Procedures...........................................8 (f) Selection of Underwriters.........................................8 4. Incidental or "Piggy-Back" Registration....................................8 (a) Request for Incidental Registration...............................8 (b) Reduction in Registrable Securities to be Registered..............9 (c) Expenses.........................................................10 5. Holdback Agreements.......................................................10 (a) Restrictions on Public Sale by Designated Holders................10 (b) Restrictions on Public Sale by the Company.......................11 6. Registration Procedures...................................................11 (a) Obligations of the Company.......................................11 (b) Seller Information...............................................13 (c) Preparation; Reasonable Investigation............................14 (d) Notice to Discontinue............................................14 7. Indemnification; Contribution.............................................14 (a) Indemnification by the Company...................................14 (b) Indemnification by Designated Holders............................15 (c) Conduct of Indemnification Proceedings...........................16 (d) Other Indemnification............................................17 (e) Contribution.....................................................17 (f) Insurance........................................................17 8. Rule 144..................................................................18 i Page ---- 9. Miscellaneous.............................................................18 (a) Recapitalizations, Exchanges, etc................................18 (b) No Inconsistent Agreements.......................................18 (c) Remedies.........................................................19 (d) Amendments and Waivers...........................................19 (e) Notices..........................................................19 (f) Successors and Assigns; Third Party Beneficiaries................21 (g) Counterparts.....................................................21 (h) Headings.........................................................21 (I) GOVERNING LAW....................................................21 (j) Severability.....................................................21 (k) Entire Agreement.................................................22 (l) Further Assurances...............................................22 ii AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT, dated December 10, 1998 (this "Agreement"), among Superior National Insurance Group, Inc., a Delaware corporation (the "Company"), Insurance Partners, L.P., a Delaware limited partnership ("IP"), Insurance Partners Offshore (Bermuda), L.P., a Bermuda limited partnership ("IP Bermuda"), and Capital Z Financial Services Fund II, L.P., a Bermuda limited partnership ("Cap Z Fund II" and, together with IP and IP Bermuda, "Insurance Partners"). WHEREAS, pursuant to the Amended and Restated Stock Purchase Agreement, dated as of September 17, 1996, as amended and restated effective as of February 17, 1997 (the "Stock Purchase Agreement"), by and among the Company, IP, IP Bermuda and such other persons or entities that executed the form of subscription agreement attached thereto as Exhibit A, pursuant to which the Company agreed to, among other things, issue and sell to (a) IP, and IP agreed to purchase from the Company, an aggregate of 1,369,856 shares of Common Stock and (b) IP Bermuda, and IP Bermuda agreed to purchase from the Company, an aggregate of 754,978 shares of Common Stock; WHEREAS, pursuant to the Stock Purchase Agreement, dated as of May 5, 1998 (the "New Stock Purchase Agreement"), by and among the Company, IP, IP Bermuda and Capital Z Partners, Ltd., a Bermuda corporation ("Cap Z"), pursuant to which the Company has agreed to, among other things, issue and sell to (a) IP, and IP has agreed to purchase from the Company, up to an aggregate of 3,737,504 shares of Common Stock; (b) IP Bermuda, and IP Bermuda has agreed to purchase from the Company, up to an aggregate of 1,516,227 shares of Common Stock; and (c) Cap Z, and Cap Z has agreed to purchase from the Company, up to an aggregate of 6,686,567 shares of Common Stock; WHEREAS, pursuant to the certain letter, dated December 7, 1998, among Cap Z, Cap Z Fund II and the Company, Cap Z assigned all of its rights and obligations under the Stock Purchase Agreement to Cap Z Fund II; WHEREAS, in order to induce each of IP and IP Bermuda to purchase shares of Common Stock pursuant to the Stock Purchase Agreement (in the aggregate, the "Original Shares"), the Company granted certain registration rights as set forth in the Registration Rights Agreement, dated April 11, 1997 (the "Original Agreement"), among the Company, IP and IP Bermuda; and 2 WHEREAS, in order to induce each of IP, IP Bermuda and Cap Z Fund II (as the assignee of Cap Z) to purchase shares of Common Stock pursuant to the New Stock Purchase Agreement (in the aggregate, the "New Shares" and, together with the Original Shares, the "Shares"), the Company has agreed to grant registration rights with respect to the Registrable Securities (as hereinafter defined) and to modify the Original Agreement, in each case as set forth in this Agreement. NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein and for other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, and notwithstanding anything to the contrary contained in the Original Agreement, the Original Agreement is hereby amended and restated in its entirety as follows: 1. Definitions. As used in this Agreement the following terms have the meanings indicated: "Affiliate" shall mean any Person who is an "affiliate" as defined in Rule 12b-2 of the General Rules and Regulations under the Exchange Act. "Approved Underwriter" has the meaning set forth in Section 3(f). "Cap Z" has the meaning assigned to such term in the recitals to this Agreement. "Cap Z Fund II" has the meaning assigned to such term in the recitals to this Agreement. "CentreLine" means CentreLine Reinsured Limited, a Bermuda corporation. "CentreLine Warrant" means the Common Stock Purchase Warrant, dated as of June 30, 1994, issued by the Company to CentreLine pursuant to the Preferred Securities Purchase Agreement, dated as of June 30, 1994, by and between the Company, Superior National Capital Holding Corporation, Superior National Capital, L.P. and Centre Reinsurance Services (Bermuda) III Limited. "Commission" means the Securities and Exchange Commission or any similar agency then having jurisdiction to enforce the Securities Act. "Common Stock" means the Common Stock, par value $.01 per share, of the Company or any other equity securities of the Company into which such securities are converted, reclassified, reconstituted or exchanged. 3 "Company" has the meaning assigned to such term in the recital to this Agreement. "Company indemnified party" has the meaning set forth in Section 7(b). "Demand Registration" has the meaning set forth in Section 3(a). "Designated Holder" means each of the Insurance Partners Stockholders and any transferee thereof to whom Registrable Securities have been transferred in accordance with Section 9(f). "Designated indemnified party" has the meaning set forth in Section 7(a). "Exchange Act" means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder. "IIA" means International Insurance Advisors, Inc., a Delaware corporation. "III" means International Insurance Investors, L.P., a Bermuda limited partnership. "Incidental Registration" has the meaning set forth in Section 4(a). "indemnified party" has the meaning set forth in Section 7(c). "Initiating Holder" has the meaning set forth in Section 3(a). "Insurance Partners" has the meaning assigned to such term in the recitals to this Agreement. "Insurance Partners Stockholders" means each of IP, IP Bermuda, Cap Z Fund II, ZCI, any Affiliate thereof to whom or which Registrable Securities are transferred. "IP" has the meaning assigned to such term in the recitals to this Agreement. "IP Bermuda" has the meaning assigned to such term in the recitals to this Agreement. 4 "New Shares" has the meaning assigned to such term in the recitals to this Agreement. "New Stock Purchase Agreement" has the meaning assigned to such term in the recitals to this Agreement. "1992 Common Stock Purchase Warrants" means each of the Common Stock Purchase Warrants, dated as of March 31, 1992, issued by the Company pursuant to the Note Purchase Agreement, dated as of March 31, 1992, among the Company and the purchasers listed on Schedule I thereto. "1998 Common Stock Purchase Warrants" means each of the Common Stock Purchase Warrants, dated as of December 10, 1998, issued by the Company pursuant to the New Stock Purchase Agreement. "Original Agreement" has the meaning assigned to such term in the recitals to this Agreement. "Original Shares" has the meaning assigned to such term in the recitals to this Agreement. "Other Rightholders" has the meaning set forth in Section 3(a). "Person" means any individual, firm, corporation, partnership, limited liability company, trust, incorporated or unincorporated association, joint venture, joint stock company, limited liability company, government (or an agency or political subdivision thereof) or other entity of any kind, and shall include any successor (by merger or otherwise) of such entity. "Registrable Securities" means each of the following: (a) any and all Shares owned by the Designated Holders and (b) any shares of Common Stock issued or issuable to any of the Designated Holders (i) upon conversion, exercise or exchange of the 1998 Common Stock Purchase Warrants or (ii) with respect to the Shares by way of stock dividend or stock split or in connection with a combination of shares, recapitalization, merger, consolidation or other reorganization or otherwise and shares of Common Stock issuable upon conversion, exercise or exchange thereof. "Registration Expenses" means all expenses arising from or incident to the Company's performance of, or compliance with, this Agreement, including, without limitation, all registration, filing and listing fees; all fees and expenses of complying with securities or "blue sky" laws (including reasonable fees and disbursements of counsel in connection with "blue sky" qualifications of Registrable Securities); all printing, messenger and delivery expenses; the fees and disbursements of counsel for the Company and its independent public accountants; the 5 fees and disbursements of one firm of counsel (other than in-house counsel) retained by the holders of Registrable Securities being registered; the expenses of any special audits required by or incident to such performance and compliance; and any liability insurance or other premiums for insurance obtained in connection with any registration pursuant to the terms of this Agreement; provided, however, that Registration Expenses shall not include underwriting discounts and commissions and transfer taxes, if any; and provided further, that in any case where Registration Expenses are borne by the holders pursuant to Section 3(d), Registration Expenses shall not include general overhead expenses of the Company or other expenses for the preparation of financial statements or other data normally prepared by the Company in the ordinary course of its business. "Registration Statement" means a registration statement filed pursuant to the Securities Act. "Securities Act" means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder. "Shares" has the meaning assigned to such term in the recitals to this Agreement. "Stock Purchase Agreement" has the meaning assigned to such term in the recitals to this Agreement. "Subsidiary" has the meaning set forth in Section 6(c). "ZCI" means Zurich Centre Investments Ltd. 2. General; Securities Subject to this Agreement. (a) Grant of Rights. The Company hereby grants registration rights to the Insurance Partners Stockholders upon the terms and conditions set forth in this Agreement. (b) Registrable Securities. For the purposes of this Agreement, Registrable Securities will cease to be Registrable Securities when (i) a Registration Statement covering such Registrable Securities has been declared effective under the Securities Act by the Commission and such Registrable Securities have been disposed of pursuant to such effective Registration Statement, (ii) the entire amount of Registrable Securities proposed to be sold in a single sale by a Designated Holder, in the opinion of counsel satisfactory to the Company and the Designated Holder, each in their reasonable judgment, may be distributed to the public without any limitation as to volume pursuant to Rule 144 (or any successor provision then in effect) under the Securities Act and the Designated Holder is not then an Affiliate of 6 the Company, or (iii) the Registrable Securities are proposed to be sold or distributed by a Person not entitled to the registration rights granted by this Agreement. (c) Holders of Registrable Securities. A Person is deemed to be a holder of Registrable Securities whenever such Person owns of record Registrable Securities, or holds an option to purchase, or a security convertible into or exercisable or exchangeable for, Registrable Securities whether or not such acquisition or conversion has actually been effected and disregarding any legal restrictions upon the exercise of such rights. If the Company receives conflicting instructions, notices or elections from two or more Persons with respect to the same Registrable Securities, the Company may act upon the basis of the instructions, notice or election received from the registered owner of such Registrable Securities. Registrable Securities issuable upon exercise of an option or upon conversion of another security shall be deemed outstanding for the purposes of this Agreement. 3. Demand Registration. (a) Request for Demand Registration. At any time any of the Insurance Partners Stockholders (the "Initiating Holders") shall be entitled to request in writing that the Company use its best efforts to effect the registration under the Securities Act, and under the securities or "blue sky" laws of any jurisdiction designated by such Initiating Holders, of all or part of such Initiating Holders' Registrable Securities in accordance with this Section 3 (a "Demand Registration"). Any such request for a Demand Registration shall specify the amount of Registrable Securities proposed to be sold and the intended method of disposition thereof. Upon receiving a request for a Demand Registration, the Company will promptly, but in no event more than 10 days after the receipt from the Initiating Holders of a request for a Demand Registration, give written notice of such Demand Registration to (i) all of the Insurance Partners Stockholders (other than the Initiating Holders), (ii) all holders of (x) the 1992 Common Stock Purchase Warrants, (y) the CentreLine Warrant and (z) the 1998 Common Stock Purchase Warrants, and (iii) in the event that any Insurance Partners Stockholder distributed Registrable Securities to its partners or members, all such partners and members (the Persons in clauses (i), (ii) and (iii) being referred to collectively as the "Other Rightholders"), and thereupon will, as provided in Section 6, use its best efforts to effect the registration under the Securities Act of (i) the Registrable Securities which the Company has been so requested by the Initiating Holders to register and (ii) all other shares of Common Stock which the Company has been requested in writing to register by such Insurance Partners Stockholders and Other Rightholders (which requests shall specify the number of shares of Common Stock proposed to be sold and the intended method of disposition thereof and shall be given to the Company within 30 days after the giving of such written notice of the Demand Registration by the Company). 7 (b) Limitation on Demand Registrations. Notwithstanding anything to the contrary set forth in Section 3(a), the Company shall not be obligated to file a Registration Statement with respect to a Demand Registration upon a request by the Initiating Holders under Section 3(a) if (i) the Company has any other Registration Statement on file but not yet declared effective, (ii) the Company has filed any other Registration Statement that has an effective date within a period of 180 days prior to the filing of the Registration Statement with respect to the Demand Registration, or (iii) Registrable Securities having an anticipated aggregate net offering price of less than $7,500,000 are to be registered in such Demand Registration. (c) Effective Demand Registration. A registration shall not constitute a Demand Registration until it has become effective and remains continuously effective for the lesser of (i) the period during which all Registrable Securities registered in the Demand Registration are sold and (ii) 180 days; provided, however, that a registration shall not constitute a Demand Registration if (x) after such Demand Registration has become effective, such registration or the related offer, sale or distribution of Registrable Securities thereunder is interfered with by any stop order, injunction or other order or requirement of the Commission or other governmental agency or court for any reason not attributable to the Initiating Holders and such interference is not thereafter eliminated or (y) the conditions to closing specified in the underwriting agreement, if any, entered into in connection with such Demand Registration are not satisfied or waived, other than by reason of a failure by the Initiating Holders. (d) Expenses. The Company will pay all Registration Expenses in connection with (i) two Demand Registrations of which IP or IP Bermuda were Initiating Holders and (ii) two Demand Registrations of which Cap Z Fund II was an Initiating Holder, under this Section 3 that either become effective under the Securities Act or are withdrawn prior to the effective date thereof; provided however, that any withdrawal prior to the effective date of a Demand Registration as the result of the actions of any Person or Persons other than the Initiating Holders, or based upon material adverse information relating to the Company that is different from the information known by or available (upon request from the Company or otherwise) to the Initiating Holders at the time of their request for a Demand Registration under this Section 3, shall not diminish the number of registrations in connection with which the Company agrees to pay Registration Expenses; and provided further, that if such withdrawal is the result of the actions of the Initiating Holders, then such Initiating Holders may in their sole and unlimited discretion elect to bear the Registration Expenses of such Demand Registration, in which case such registration shall not be counted as a Demand Registration pursuant to this Section 3. In the event that the Initiating Holders elect to bear the Registration Expenses (and underwriting discounts and commissions and transfer taxes, if any) in connection with any Demand Registration requested under this Section 3, such Registration Expenses shall be 8 apportioned among the holders whose shares of Common Stock are then being registered, on the basis of the respective amounts (by number of shares) of Common Stock then being registered by them or on their behalf. (e) Underwriting Procedures. If the Initiating Holders so elect, the offering of Registrable Securities pursuant to a Demand Registration shall be in the form of a firm commitment underwritten offering and the managing underwriter or underwriters selected for such offering shall be the Approved Underwriter (as hereinafter defined) selected in accordance with Section 3(f). In connection with any Demand Registration under this Section 3 involving an underwriting, none of the Registrable Securities held by any of the Insurance Partners Stockholders (other than the Initiating Holders) or shares of Common Stock held by any Other Rightholders making a request for inclusion thereof pursuant to Section 3(a) shall be included in such underwriting unless such Insurance Partners Stockholders or Other Rightholders, as the case may be, accept the terms of the underwriting as agreed upon by the Company, the Initiating Holders and the Approved Underwriter, and then only in such quantity as will not, in the opinion of the Approved Underwriter, jeopardize the success of such offering. If the Approved Underwriter advises the Company in writing that in its opinion the aggregate amount of Common Stock requested to be included in such offering is sufficiently large to have a material adverse effect on the success of such offering, then the Company shall include in such registration only the aggregate amount of Common Stock that in the opinion of the Approved Underwriter may be sold without any such material adverse effect and shall reduce, as to the Initiating Holders, the Insurance Partners Stockholders (other than the Initiating Holders) and the Other Rightholders as a group, the amount of Common Stock to be included in such registration, pro rata within such group based on the number of Registrable Securities and other shares of Common Stock included in the request for registration pursuant to Section 3(a). (f) Selection of Underwriters. If any Demand Registration of Registrable Securities is in the form of an underwritten offering, the Initiating Holders holding a majority of the Registrable Securities held by all such Initiating Holders shall select and obtain an investment banking firm of national reputation to act as the managing underwriter of the offering (the "Approved Underwriter"); provided, however, that the Approved Underwriter shall, in any case, be acceptable to the Company in its reasonable judgment. 4. Incidental or "Piggy-Back" Registration. (a) Request for Incidental Registration. If the Company, at any time or from time to time, proposes to register any of its shares of Common Stock for its own account under the Securities Act (other than a registration of shares of Common Stock solely in connection with any plan for the acquisition of shares of Common Stock by employees of the Company or any dividend reinvestment plan, 9 and other than a registration of shares of Common Stock, the Registration Statement pertaining to which does not permit secondary sales or include substantially the same information as would be required to be included in a Registration Statement covering the sale of Registrable Securities), then it will at each such time give written notice (given at least 30 days prior to the proposed filing date) describing the proposed registration and distribution to each of the Designated Holders of its intention to do so and, upon the written request of each of the Designated Holders, made within 30 days after the receipt of any such notice (which request shall specify the amount of Registrable Securities proposed to be sold by such Designated Holder and the intended method of disposition thereof), the Company will, as provided in Section 6, use its best efforts to effect the registration under the Securities Act of all of the Registrable Securities that the Company has been so requested to register by the Designated Holders, to the extent required to permit the disposition (in accordance with the intended methods thereof as aforesaid) of the Registrable Securities to be registered (each, an "Incidental Registration"); provided, however, that if, at any time after giving written notice of its intention to register any of its shares of Common Stock and prior to the effective date of the Registration Statement filed in connection with such Incidental Registration, the Company shall determine for any reason not to register such shares of Common Stock, the Company may, at its election, give written notice of such determination to each of the Designated Holders and, thereupon, shall be relieved from its obligation to register any Registrable Securities in connection with such Incidental Registration (but not from its obligation to pay the Registration Expenses in connection therewith), without prejudice, however, to the rights of any Insurance Partners Stockholder to request that such registration be effected as a Demand Registration under Section 3. In connection with any Incidental Registration under this Section 4(a) involving an underwriter, or a distribution with the assistance of a selling agent, the right of any Designated Holder to participate in such Incidental Registration shall be conditioned upon such Designated Holder's participation in such underwriting or distribution. (b) Reduction in Registrable Securities to be Registered. Notwithstanding anything to the contrary set forth in Section 4(a), if a proposed Incidental Registration is for a registered public offering involving an underwriting and the representative of the underwriters advises the Company in writing that the registration of all or part of the shares of Common Stock to be underwritten in such Incidental Registration would materially adversely effect such offering, then the Company shall so advise the Designated Holders and any other holders of shares of Common Stock requesting registration in such Incidental Registration, and the number of shares of Common Stock that are entitled to be included in the Incidental Registration shall be allocated (i) first, to the Company for shares of Common Stock being sold for its own account, (ii) second, among the Designated Holders and any other holders of shares of Common Stock entitled to "incidental" registration rights and requesting inclusion of shares of Common Stock in such Incidental Registration, pro rata on the basis of the number of shares of Common Stock requested to be 10 included in such Incidental Registration, and (iii) third, any other shares of Common Stock requested to be included in such Incidental Registration; provided, however, that if any Insurance Partners Stockholder or Other Rightholder does not request inclusion of the maximum number of shares of Common Stock allocated to it pursuant to the foregoing procedure, then the remaining portion of its allocation shall be reallocated among those Insurance Partners Stockholders and Other Rightholders whose allocations were not satisfied on the basis of the number of shares of Common Stock requested to be included in such Incidental Registration, and this procedure shall be repeated until all of the shares of Common Stock that may be included in the registration on behalf of the Insurance Partners Stockholders and the Other Rightholders have been so allocated. The Company shall not limit the number of shares of Common Stock to be included in an Incidental Registration pursuant to this Agreement in order to include shares held by stockholders with no registration rights or to include any shares of stock issued to employees, officers, directors or consultants pursuant to any stock option plan, or in order to include in such registration securities registered for the Company's own account. If any shares of Common Stock are withdrawn from the Incidental Registration or if the number of shares of Common Stock to be included in such Incidental Registration was previously reduced as a result of marketing factors, then the Company shall then offer to all Persons who have retained the right to include Common Stock in the Incidental Registration the right to include additional shares of Common Stock in the registration in an aggregate amount equal to the number of shares of Common Stock so withdrawn, with such shares of Common Stock to be allocated among the Persons requesting additional inclusion pro rata in accordance with the terms of this Section 4(b). (c) Expenses. The Company shall pay all Registration Expenses in connection with any Incidental Registration pursuant to this Section 4, whether or not such Incidental Registration becomes effective. No Incidental Registration under this Section 4 shall relieve the Company of its obligations to effect a Demand Registration upon request under Section 3(a). 5. Holdback Agreements. (a) Restrictions on Public Sale by Designated Holders. Each of the Designated Holders agrees not to effect any public sale or distribution of any Registrable Securities being registered or of any securities convertible into or exchangeable or exercisable for such Registrable Securities, including a sale pursuant to Rule 144 under the Securities Act, during the 90 day period beginning on the effective date of such Registration Statement (except as part of such registration), (i) in the case of a non-underwritten public offering, if and to the extent requested by the Company or (ii) in the case of an underwritten public offering, if and to the extent requested by the Approved Underwriter (in the event of a Demand Registration 11 pursuant to Section 3) or the Company's underwriters (in the event of an Incidental Registration pursuant to Section 4(a)), as the case may be. (b) Restrictions on Public Sale by the Company. The Company agrees not to effect any public sale or distribution of any of its securities, or any securities convertible into or exchangeable or exercisable for such securities (except pursuant to registrations on Form S-4 or Form S-8 or any successor thereto), during the period beginning on the effective date of any Registration Statement in which the Designated Holders of Registrable Securities are participating and ending on the earlier of (i) the date on which all Registrable Securities registered on such Registration Statement are sold and (ii) 180 days after the effective date of such Registration Statement. 6. Registration Procedures. (a) Obligations of the Company. If and whenever the Company is requested to effect the registration of any Registrable Securities under the Securities Act as provided in Sections 3 and 4, then the Company will promptly use its best efforts to: (i) prepare and (in any event within 90 days after the end of the period within which requests for registration may be given to the Company) file with the Commission a Registration Statement with respect to such Registrable Securities and use its best efforts to cause such Registration Statement to become effective; (ii) prepare and file with the Commission such amendments and supplements to such Registration Statement and the prospectus used in connection therewith as may be necessary to keep such Registration Statement effective and to comply with the provisions of the Securities Act with respect to the disposition of all Registrable Securities covered by such Registration Statement until such time as all of such securities have been disposed of in accordance with the intended methods of disposition thereof by the seller or sellers thereof set forth in such Registration Statement, but in no event for a period of more than six months (or, with respect to any Registration Statement covering Registrable Securities the distribution of which has been deferred pursuant to Section 4(c), nine months) after such Registration Statement becomes effective; (iii) as soon as reasonably possible, furnish to each seller of Registrable Securities, prior to filing a Registration Statement, such number of conformed copies of such Registration Statement and of each such amendment and supplement thereto (in each case including all exhibits, except that the Company shall not be obligated to furnish any seller of Registrable 12 Securities with more than two copies of such exhibits), such number of copies of the prospectus contained in such Registration Statement (including each preliminary prospectus and any summary prospectus), in conformity with the requirements of the Securities Act, and such other documents, as such seller may reasonably request in order to facilitate the disposition of the Registrable Securities owned by such seller; (iv) register or qualify such Registrable Securities covered by such Registration Statement under such other securities or "blue sky" laws of such jurisdictions as each seller of Registrable Securities shall request, and do any and all other acts and things which may be necessary or advisable to enable such seller to consummate the disposition in such jurisdic tions of the Registrable Securities owned by such seller, except that the Company shall not for any such purpose be required to qualify generally to do business as a foreign corporation in any jurisdiction wherein it is not so qualified, or to subject itself to taxation in any such jurisdiction, or to consent to general service of process in any such jurisdiction; (v) cause the Registrable Securities covered by such Registration Statement to be registered with or approved by such other governmental agencies or authorities as may be necessary by virtue of the business and operations of the Company to enable the seller or sellers of Registrable Securities to consummate the disposition of such Registrable Securities; (vi) notify each seller of any Registrable Securities covered by such Registration Statement, at any time when a prospectus relating thereto is required to be delivered under the Securities Act, upon discovery that, or upon the happening of any event as a result of which, the prospectus included in such Registration Statement, as then in effect, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make statements therein not misleading in the light of the circumstances then existing, and prepare and furnish to such seller a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of such Registrable Securities, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing; (vii) advise each seller of Registrable Securities as to the time when such Registration Statement becomes effective and as to the threat of or the issuance by the Commission of any stop order suspending the effectiveness of such Registration Statement or the institution of any 13 proceedings for that purpose, and use its best efforts to prevent the issuance of any such stop order and to obtain as soon as possible the removal thereof, if issued; (viii) comply with all applicable rules and regulations of the Commission, and make available to each seller of Registrable Securities, as soon as reasonably practicable, an earnings statement covering the period of at least 12 months, but not more than 18 months, beginning with the first month after the effective date of the Registration Statement, which earnings statement shall satisfy the provisions of Section 11(a) of the Securities Act and Rule 158 thereunder; (ix) list all the Registrable Securities on any securities exchange (or The Nasdaq Stock Market, Inc. or the over-the-counter market) on which similar securities are then listed, if such securities are not already so listed and such listing is then permitted under the rules of such exchange; (x) cooperate with each seller of Registrable Securities and each underwriter participating in the disposition of such Registrable Securities and their respective counsel in connection with any filings required to be made with the National Association of Securities Dealers, Inc.; and (xi) furnish to each seller a signed counterpart, addressed to the sellers, of (x) an opinion of counsel representing the Company for purposes of such registration, dated the effective date of such Registration Statement, and (y) a "comfort letter" signed by the independent public accountants of the Company who have certified the Company's financial statements included in such Registration Statement, in each case, covering substantially the same matters with respect to such Registration Statement (and the prospectus included therein) and, in the case of such accountants' letter, with respect to events subsequent to the date of such financial statements, as are customarily covered in opinions of issuer's counsel and in accountants' letters delivered to the underwriters in underwritten public offerings of securities; provided, however, that the Company shall not be obligated to furnish such accountants' letter except in connection with an underwritten offering. (b) Seller Information. The Company may require each seller of Registrable Securities as to which any registration is being effected to furnish to the Company such information regarding the distribution of such securities as the Company may from time to time reasonably request in writing and as shall be required by law in connection therewith. 14 (c) Preparation; Reasonable Investigation. In connection with the preparation and filing of each Registration Statement registering Registrable Securities under the Securities Act, the Company will give the holders of such Registrable Securities so registered and their underwriters, if any, and their respective counsel and financial advisors, the opportunity to participate in the preparation of such Registration Statement, each prospectus included therein or filed with the Commission, and each amendment thereof or supplement thereto, and will give each of them such access to its books and records (including the books and records of its Subsidiaries (as hereinafter defined)) and such opportunities to discuss the business of the Company with its officers and the independent public accountants who have certified its financial statements as shall be necessary, in the opinion of such holders' and such underwriters' respective counsel, to conduct a reasonable investigation within the meaning of the Securities Act; provided, however, that the Company shall not be obligated to give such opportunities and access to any holder of Registrable Securities holding less than 150,000 Registrable Securities other than the Initiating Holders, as a group, requesting a Demand Registration pursuant to Section 3(a). A "Subsidiary" means, with respect to the Company, a corporation or other entity of which 50% or more of the voting power of the outstanding voting securities or 50% or more of the outstanding equity interests is held, directly or indirectly, by the Company. (d) Notice to Discontinue. Each Designated Holder of Registrable Securities agrees that, upon receipt of any notice from the Company of the happening of any event of the kind described in Section 6(a)(vi), such Designated Holder shall forthwith discontinue disposition of Registrable Securities pursuant to the Registration Statement covering such Registrable Securities until such Designated Holder's receipt of the copies of the supplemented or amended prospectus contemplated by Section 6(a)(vi) and, if so directed by the Company, such Designated Holder shall deliver to the Company (at the Company's expense) all copies, other than permanent file copies then in such Designated Holder's possession, of the prospectus covering such Registrable Securities that is current at the time of receipt of such notice. If the Company shall give any such notice, the Company shall extend the period during which such Registration Statement shall be maintained effective pursuant to this Agreement (including, without limitation, the period referred to in Section 6(a)(ii)) by the number of days during the period from and including the date of the giving of such notice pursuant to Section 6(a)(vi) to and including the date when the Designated Holder shall have received the copies of the supplemented or amended prospectus contemplated by and meeting the requirements of Section 6(a)(vi). 7. Indemnification; Contribution. (a) Indemnification by the Company. In the event of any registration of any Registrable Securities pursuant to the terms of Section 3 or 15 Section 4, (i) the Company will indemnify and hold harmless, to the fullest extent permitted by law, each of the Designated Holders and their respective directors, officers, partners, members, trustees, employees, legal counsel, accountants, financial advisors and agents, and each other Person, if any, who controls (within the meaning of the Securities Act and the Exchange Act) such Designated Holder or any such directors, officers, partners, trustees, employees, legal counsel, accountants, financial advisors and agents (each of the foregoing, a "designated indemnified party") against any and all losses, claims, damages, liabilities and expenses (including reasonable costs of investigation), joint or several, to which such designated indemnified party may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages, liabilities or expenses (or actions or proceedings in respect thereof) arise out of or are based upon (x) any untrue statement or alleged untrue statement of any material fact contained in any Registration Statement under which such Registrable Securities were registered under the Securities Act, any preliminary prospectus, final prospectus or summary prospectus contained therein, any notification or offering circular, or any amendment or supplement thereto or (y) any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; and (ii) the Company will reimburse such designated indemnified party for any legal or any other expenses reasonably incurred by it in connection with investigating or defending any such loss, claim, liability or action; provided, however, that the Company shall not be liable in any such case to the extent that any such loss, claim, damage or liability (or actions or proceedings in respect thereof) arises out of or is based upon (x) any untrue statement or alleged untrue statement of any material fact made in such Registration Statement, any such preliminary prospectus, final prospectus, summary prospectus, notification or offering circular, or any amendment or supplement thereto or (y) any omission or alleged omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading, in reliance upon and in conformity with written information concerning such Designated Holder and furnished to the Company through an instrument duly executed by such Designated Holder specifically stating that it is for use in the preparation thereof. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such designated indemnified party and shall survive the transfer of such securities by any Designated Holder. (b) Indemnification by Designated Holders. The Company may require, as a condition to including any Registrable Securities in any Registration Statement filed pursuant to Section 3 or Section 4, that the Company shall have received an undertaking from each Designated Holder selling such Registrable Securities to indemnify and hold harmless the Company, its directors, officers, legal counsel, accountants and financial advisors and each other Person, if any, who controls (within the meaning of the Securities Act and the Exchange Act) the Company or any such directors, officers, legal counsel, accountants and financial advisors (each of the foregoing, a "Company indemnified party") against any losses, 16 claims, damages, liabilities or expenses, joint or several, to which such Company indemnified party may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages, liabilities or expenses (or actions or proceedings in respect thereof) arise out of or are based upon any statement of a material fact or omission to state a material fact in such Registration Statement, any preliminary prospectus or final prospectus contained therein, any notification or offering circular, or any amendment or supplement thereto, if such statement or omission was made in reliance upon and in conformity with written information concerning such Designated Holder and furnished to the Company through an instrument duly executed by such Designated Holder specifically stating that it is for use in the preparation of such Registration Statement, preliminary prospectus, final prospectus, summary prospectus, notification or offering circular, or amendment or supplement thereto. Such indemnity shall remain in full force and effect regardless of any investigation made by or on behalf of such Company indemnified party and shall survive the transfer of such securities by any Designated Holder. (c) Conduct of Indemnification Proceedings. Promptly after receipt by any designated indemnified party or Company indemnified party (each, an "indemnified party") of notice of the commencement of any action, suit, proceeding or investigation or threatened thereof in writing for which the indemnified party intends to claim indemnification or contribution pursuant to this Agreement, such indemnified party will give written notice thereof to the indemnifying party; provided, however, that the failure of any indemnified party to give notice as provided herein shall not relieve the indemnifying party of its obligations under this Agreement, except to the extent that the indemnifying party is actually prejudiced by such failure to give notice. If notice of commencement of any such action is brought against an indemnified party, the indemnifying party may (and, upon request by the indemnified party, will), at its expense, participate in and assume the defense thereof, with counsel reasonably satisfactory to such indemnified party; provided, however, that in the event of any failure by the indemnifying party diligently to assume and conduct such defense, the indemnifying party will pay all costs and expenses (including legal fees and expenses) incurred by such indemnified party in connection with such claim or litigation. The indemnified party shall have the right to employ separate counsel in any such action and participate in the defense thereof, but the fees and expenses of such counsel shall be paid by the indemnified party unless (i) the indemnifying party agrees to pay the same, (ii) the indemnifying party fails to assume the defense of such action with counsel satisfactory to the indemnified party in its reasonable judgment or (iii) the named parties to any such action (including any impleaded parties) have been advised by such counsel in writing that either (x) representation of such indemnified party and the indemnifying party by the same counsel would be inappropriate under applicable standards of professional conduct or (y) there may be one or more legal defenses available to the indemnified party which are different from or additional to those available to the indemnifying party. In either of such cases, the indemnifying party shall not have the right to assume the defense of such action on behalf of such 17 indemnified party. No indemnifying party, in the defense of any such claim or litigation, shall, except with the written consent of each indemnified party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such indemnified party of a release from all liability in respect of such claim or litigation. (d) Other Indemnification. Indemnification similar to that specified in this Section 7 (with appropriate modifications) shall be given by the Company and each seller of Registrable Securities with respect to any registration or other qualification of such Registrable Securities under any federal or state law or regulation of governmental authority other than the Securities Act. (e) Contribution. If the indemnification provided for in this Section 7 from the indemnifying party is unavailable to an indemnified party hereunder in respect of any losses, claims, damages, liabilities or expenses referred to therein, then the indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities or expenses in such proportion as is appropriate to reflect the relative fault of the indemnifying party and indemnified party in connection with the actions which resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative faults of such indemnifying party and indemnified party shall be determined by reference to, among other things, whether any action in question, including any untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact, has been made by, or relates to information supplied by, such indemnifying party or indemnified party, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such action. The amount paid or payable by a party as a result of the losses, claims, damages, liabilities and expenses referred to above shall be deemed to include, subject to the limitations set forth in Sections 7(a), 7(b) and 7(c), any legal or other fees, charges or expenses reasonably incurred by such party in connection with any investigation or proceeding. The parties hereto agree that it would not be just and equitable if contribution pursuant to this Section 7(e) were determined by pro rata allocation or by any other method of allocation that does not take account of the equitable considerations referred to in the immediately preceding paragraph. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person. (f) Insurance. In connection with any Demand Registration or Incidental Registration, the Company will provide at its expense a binder or binders of insurance in form satisfactory to the Designated Holders participating in such registration, and, as soon as practicable thereafter, a policy or policies of insurance, insuring each such Designated Holder, and each Person, if any, who 18 controls such Designated Holder within the meaning of the Securities Act and the Exchange Act, for the aggregate amount of the public offering price received for the Registrable Securities disposed of by such Designated Holder (subject to such deductible as is customarily contained in underwriting insurance policies at such time) against all losses, claims, damages, liabilities and expenses which arise out of or are based upon any untrue statement, alleged untrue statement, omission or alleged omission of the character described in this Section 7 in connection with such registration and disposition and which are customarily covered under underwriting insurance policies; provided, however, that the Company shall not be obligated to provide such insurance if it determines in good faith that such insurance is not available on commercially reasonable terms at the time of such registration, and the holders of a majority of the Registrable Securities to be registered reasonably agree. 8. Rule 144. The Company covenants that it shall file (a) any reports required to be filed by it under the Exchange Act and (b) take such further action as each Designated Holder of Registrable Securities may reasonably request (including providing any information necessary to comply with Rule 144 under the Securities Act), all to the extent required from time to time to enable such Designated Holder to sell Registrable Securities without registration under the Securities Act within the limitation of the exemptions provided by (i) Rule 144 under the Securities Act, as such rule may be amended from time to time, or (ii) any similar rules or regulations hereafter adopted by the Commission. The Company shall, upon the request of any Designated Holder of Registrable Securities, deliver to such Designated Holder a written statement as to whether it has complied with such requirements. 9. Miscellaneous. (a) Recapitalizations, Exchanges, etc. The provisions of this Agreement shall apply, to the full extent set forth herein, with respect to (i) the shares of Common Stock and (ii) any and all equity securities of the Company or any suc cessor or assign of the Company (whether by merger, consolidation, sale of assets or otherwise), which may be issued in respect of, in conversion of, in exchange for or in substitution of, the shares of Common Stock, and shall be appropriately adjusted for any stock dividends, splits, reverse splits, combinations, recapitalizations and the like occurring after the date hereof. The Company shall cause any successor or assign (whether by merger, consolidation, sale of assets or otherwise) to enter into a new registration rights agreement with the Designated Holders on terms substantially similar to this Agreement as a condition of any such transaction. (b) No Inconsistent Agreements. The Company shall not enter into any agreement with respect to its securities that is inconsistent with the registration rights granted in this Agreement or grant any additional registration rights to any Person or with respect to any securities that are not Registrable Securities that are prior in right to or inconsistent with the rights granted in this Agreement. If at 19 any time after the date hereof, any Person other than an Other Rightholder shall advise or give notice to the Company of such Person's exercise of registration rights granted by the Company to such Person prior to the date hereof, the Company shall use its best efforts to cause such Person to acknowledge the registration rights granted pursuant to this Agreement and agree that such Person's registration rights shall not be prior in right to the rights granted in this Agreement. (c) Remedies. The Designated Holders, in addition to being entitled to exercise all rights granted by law, including recovery of damages, shall be entitled to specific performance of their rights under this Agreement. The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Agreement and hereby agrees to waive in any action for specific performance the defense that a remedy at law would be adequate. (d) Amendments and Waivers. Except as otherwise provided herein, the provisions of this Agreement may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given unless consented to in writing by (i) the Company and (ii) the Insurance Partners Stockholders holding Registrable Securities representing (after giving effect to any adjustments) at least 60% of the aggregate number of Registrable Securities owned by all of the Insurance Partners Stockholders. Any such written consent shall be binding upon the Company, all of the Designated Holders and all other Persons party hereto. (e) Notices. All notices, demands and other communications provided for or permitted hereunder shall be made in writing and shall be made by registered or certified first-class mail, return receipt requested, telecopier, courier service, overnight mail or personal delivery: (i) if to the Company: Superior National Insurance Group, Inc. 26601 Agoura Road Calabasas, California 91302 Telecopy: (818) 880-8615 Attention: Chief Financial Officer 20 with a copy to: Riordan & McKinzie 5743 Corsa Avenue, Suite 116 Westlake Village, California 91362 Telecopy: (818) 706-2956 Attention: Dana M. Warren, Esq. (ii) if to IP or IP Bermuda c/o Insurance Partners Advisors, L.P. One Chase Manhattan Plaza 44th Floor New York, New York 10005 Telecopy: (212) 898-8720 Attention: Steven B. Gruber with a copy to: Paul, Weiss, Rifkind, Wharton & Garrison 1285 Avenue of the Americas New York, New York 10019-6064 Telecopy: (212) 757-3990 Attention: Marilyn Sobel, Esq. (iii) if to Cap Z Fund II: c/o Capital Z Partners, Ltd. One Chase Manhattan Plaza 44th Floor New York, New York 10005 Fax: (212) 898-8720 Attention: Bradley E. Cooper with a copy to: Paul, Weiss, Rifkind, Wharton & Garrison 1285 Avenue of the Americas New York, New York 10019-6064 Telecopy: (212) 757-3990 Attention: Marilyn Sobel, Esq. 21 (iv) if to any other Designated Holder or any other Person party hereto, at its address as it appears on the record books of the Company. All such notices and communications shall be deemed to have been duly given when delivered by hand, if personally delivered; when delivered by courier or overnight mail, if delivered by commercial courier service or overnight mail; five (5) Business Days after being deposited in the mail, postage prepaid, if mailed; and when receipt is mechanically acknowledged, if telecopied. (f) Successors and Assigns; Third Party Beneficiaries. This Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties hereto. The Demand Registration rights of the Insurance Partners Stockholders contained in Section 3 and the other rights of each of the Insurance Partners Stockholders with respect thereto and the incidental or "piggyback" registration rights of the Designated Holders contained in Section 4 and the other rights of each of the Designated Holders with respect thereto shall be, with respect to any Registrable Security, automatically transferred to any Person who is the transferee of such Registrable Security, provided that such transfer was made in compliance with applicable securities laws and such transferee is made a party to this Agreement and, after such transfer, is the holder of not less than 150,000 Registrable Securities. All of the obligations of the Company hereunder shall survive any such transfer. Subject to Section 7, no Person other than the parties hereto and their successors and permitted assigns is intended to be a beneficiary of any of the rights granted hereunder. (g) Counterparts. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. (h) Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. (i) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, WITHOUT REGARD TO THE PRINCIPLES OF CONFLICTS OF LAW THEREOF. (j) Severability. If any one or more of the provisions contained herein, or the application thereof in any circumstances, is held invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining 22 provisions hereof shall not be in any way impaired, it being intended that all of the rights and privileges of the Designated Holders shall be enforceable to the fullest extent permitted by law. (k) Entire Agreement. This Agreement is intended by the parties as a final expression of their agreement and intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein. There are no restrictions, promises, warranties or undertakings in respect of the subject matter contained herein, other than those set forth or referred to herein, in the Stock Purchase Agreement and in the New Stock Purchase Agreement. This Agreement supersedes the Original Agreement and all other prior agreements and understandings between the parties with respect to such subject matter. (l) Further Assurances. Each of the parties shall execute such documents and perform such further acts as may be reasonably required or desirable to carry out or to perform the provisions of this Agreement. 23 IN WITNESS WHEREOF, the undersigned have executed, or have caused to be executed, this Agreement on the date first written above. SUPERIOR NATIONAL INSURANCE GROUP, INC. By: /s/ Robert E. Nagle ------------------- Name: Robert E. Nagle Title: Secretary INSURANCE PARTNERS, L.P. By: Insurance GenPar, L.P., its General Partner By: Insurance GenPar MGP, L.P., its General Partner By: Insurance GenPar MGP, Inc., its General Partner By: /s/ Daniel L. Doctoroff ----------------------- Name: Daniel L. Doctoroff Title: Vice President INSURANCE PARTNERS OFFSHORE (BERMUDA), L.P. By: Insurance GenPar (Bermuda), L.P., its General Partner By: Insurance GenPar (Bermuda) MGP, L.P., its General Partner By: Insurance GenPar (Bermuda) MGP, Ltd., its General Partner By: /s/ Daniel L. Doctoroff ----------------------- Name: Daniel L. Doctoroff Title: Vice President 24 CAPITAL Z FINANCIAL SERVICES FUND II, L.P., a Bermuda limited partnership By: Capital Z Partners, L.P., its General Partner By: Capital Z Partners, Ltd., its General Partner By: /s/ Bradley E. Cooper --------------------- Name: Bradley E. Cooper Title: Senior Vice President EX-2 3 EXHIBIT 2 SUPERIOR NATIONAL INSURANCE GROUP, INC. 26601 Agoura Road Calabasas, California 91320 October 16, 1998 Insurance Partners, L.P. 201 Main Street, Suite 2600 Fort Worth, Texas 76102 Insurance Partners Offshore (Bermuda), L.P. Cedar House 41 Cedar Avenue P.O. Box HM 1179 Hamilton HM EX, Bermuda Capital Z Partners, Ltd. One Chase Manhattan Plaza 44th Floor New York, New York 10005 International Insurance Advisors, Inc. One Chase Manhattan Plaza 44th Floor New York, New York 10005 International Insurance Investors, L.P. c/o International Insurance Investors (Bermuda) Limited Cumberland House One Victoria Street Hamilton HM HX, Bermuda CentreLine Reinsurance Limited Cumberland House One Victoria Street Hamilton HM HX, Bermuda The persons listed on Schedule 1 hereto at the addresses set forth opposite the names of such persons The persons listed on Schedule 2 hereto c/o Superior National Insurance Group, Inc. 26601 Agoura Road Calabasas, California 91320 2 Ladies and Gentlemen: Reference is made to (i) the Stock Purchase Agreement, dated as of May 5, 1998 (the "1998 Stock Purchase Agreement"), among Superior National Insurance Group, Inc. (the "Company"), Insurance Partners, L.P. ("IP Delaware"), Insurance Partners Offshore (Bermuda), L.P. ("IP Bermuda") and Capital Z Partners, Ltd. ("Cap Z", and together with IP Delaware and IP Bermuda, the "Purchasers"), (ii) the Note Purchase Agreement, dated as of March 31, 1992 (the "Note Purchase Agreement"), among the Company and each of the several purchasers listed on Schedule I thereto, (iii) the Preferred Securities Purchase Agreement, dated as of June 30, 1994 (the "Preferred Securities Purchase Agreement"), among the Company, Superior National Capital Holding Corporation, Superior National Capital, L.P. and Centre Reinsurance Services (Bermuda) III Limited and (iv) the Letter, dated November 25, 1996 (the "1996 Letter"), from the Company to IP Delaware, IP Bermuda, International Insurance Advisors, Inc. ("IIA"), International Insurance Investors, L.P. ("III") and the other parties listed on the signature page thereto. Pursuant to (a) Section 1.2 of the Note Purchase Agreement, the Company issued to (i) IIA, as agent for the general partner and the limited partners of III, warrants (the "IIA Warrants") to purchase (subject to adjustment) 1,474,306 shares of Common Stock, par value $.01 per share (the "Common Stock"), of the Company and (ii) the individuals listed on Schedule 2 hereto (the "Management Warrantholders") warrants (the "Management Warrants") to purchase (subject to adjustment) 92,159 shares of Common Stock and (b) Section 5.8 of the Preferred Securities Purchase Agreement, the Company issued to CentreLine Reinsurance Limited ("CentreLine") a warrant (the "CentreLine Warrant") to purchase (subject to adjustment) 579,356 shares of Common Stock. Each of the IIA Warrants, the Management Warrants and the CentreLine Warrant may hereinafter be referred to collectively as the "Warrants" or individually as a "Warrant," and the holders of the Warrants may hereinafter be referred to collectively as the "Warrantholders" or individually as a "Warrantholder". The Company will, prior to the closing under the 1998 Stock Purchase Agreement, issue subscription rights for the purchase of up to an aggregate amount of $109,690,122 of Common Stock at a price per share of $16.75 (the "Rights Offering") to (i) the holders of its Common Stock (other than IP Delaware and IP Bermuda), (ii) the Warrantholders pursuant to preemptive rights and (iii) the Company's employees and consultants holding options to purchase Common Stock and authorized but unissued shares of restricted Common Stock. In addition, pursuant to the 1998 Stock Purchase Agreement, a copy of which is enclosed herewith, the Company has agreed to issue to the Purchasers (the "Stock Issuance"), and the Purchasers have agreed to purchase from the Company, (x) shares of Common Stock in an aggregate amount of $94,000,000 at a price per share of $16.75 and (y) the number of shares of Common Stock not subscribed for in the Rights Offering or 3 purchased by Warrantholders pursuant to their preemptive rights described in paragraph 6(a) below at a price per share of $16.75 up to an aggregate amount of $106,000,000 of Common Stock. Pursuant to the 1998 Stock Purchase Agreement, the Company, IP Delaware, IP Bermuda and Cap Z will enter into an Amended and Restated Registration Rights Agreement (as it may be amended, modified or otherwise supplemented from time to time in accordance with its terms, the "Amended and Restated Registration Rights Agreement"), the form of which is attached as Exhibit C to the copy of the 1998 Stock Purchase Agreement enclosed herewith, prior to the Closing under the 1998 Stock Purchase Agreement. Pursuant to the 1998 Stock Purchase Agreement, as payment of a commitment fee the Company has agreed to issue to the Purchasers warrants (the "1998 Warrants") to purchase (subject to adjustment) 734,000 shares of Common Stock (the "Warrants Issuance", and, together with the Rights Offering and the Stock Issuance, the "1998 Issuance"). Please find enclosed herewith the Company's proxy statement (the "Proxy") related to its Annual Meeting of Stockholders to be held November 3, 1998, which Proxy describes the transactions identified above in detail. Please review the Proxy in connection with your consideration of the items set forth in this letter. 1. Registration Rights Agreement. The parties hereto acknowledge that prior to the Closing under the 1998 Stock Purchase Agreement, the Company, IP Delaware, IP Bermuda and Cap Z will enter into the Amended and Restated Registration Rights Agreement. 2. Demand Registrations. If at any time pursuant to Section 8.3 of the IIA Warrants, the Management Warrants or the CentreLine Warrant any holder (the "Initiating Holder") thereof requests in writing that the Company effect the registration under the Securities Act of 1933, as amended (the "Securities Act"), and under the securities or "blue sky" laws of any jurisdiction designated by such holder (a "Demand Registration"), of all or part of such holder's shares of Common Stock issued or issuable upon exercise of its Warrant, then the Company shall, in addition to its obligations under Section 8.3 of each of the Warrants, promptly give written notice of such Demand Registration to the Insurance Partners Stockholders (as defined in the Amended and Restated Registration Rights Agreement) and use its best efforts to effect the registration under the Securities Act of the Registrable Securities (as defined in the Amended and Restated Registration Rights Agreement) which the Company has been requested by the Insurance Partners Stockholders to register. In connection with any Demand Registration involving an underwriting, if the managing underwriter of the offering advises the Company in writing that in its opinion the aggregate amount of shares of Common Stock requested to be included in such offering is sufficiently large to have a material adverse effect on the success of such offering, then the Company shall include in such registration only the aggregate 4 amount of shares of Common Stock that in the opinion of such managing underwriter may be sold without such material adverse effect and shall reduce, as to each Initiating Holder, each holder of Warrants (other than the Initiating Holder) requesting registration of shares of Common Stock in such Demand Registration pursuant to Section 8.3 of such Warrants (the "Other Rightholders") and the Insurance Partners Stockholders as a group, the amount of Common Stock to be included in such registration, pro rata within such group based on the number of shares of Common Stock included in the request for registration by such Initiating Holder, Other Rightholders and Insurance Partners Stockholders. The Insurance Partners Stockholders covenant and agree that in the event that any of the Insurance Partners Stockholders requests a Demand Registration pursuant to the Amended and Restated Registration Rights Agreement (an "IP Demand Registration"), each of the holders of the IIA Warrants, the Management Warrants and the CentreLine Warrant shall be entitled to participate in such IP Demand Registration to the same extent that the Insurance Partners Stockholders are entitled to participate in a Demand Registration pursuant to this paragraph 2. This paragraph 2 will supersede in its entirety paragraph 4 of the 1996 Letter upon the execution of the Amended and Restated Registration Rights Agreement, which will occur on the date the transactions under the 1998 Stock Purchase Agreement are consummated (the "Closing Date"). 3. Incidental Registrations. If (a) the Company, at any time or from time to time, proposes to register in an underwriting any of its shares of Common Stock for its own account under the Securities Act (subject to the limitations set forth in Section 4(a) of the Amended and Restated Registration Rights Agreement) (an "Incidental Registration") and (b) the representative of the underwriters advises the Company in writing that marketing factors require a limitation of the number of shares of Common Stock to be underwritten, then the number of shares of Common Stock that are entitled to be included in the Incidental Registration shall be allocated (i) first, to the Company for shares of Common Stock being sold for its own account, (ii) second, among each holder of Warrants requesting registration of shares of Common Stock in such Incidental Registration pursuant to Section 8.4(a) of such Warrants, each of the Insurance Partners Stockholders requesting registration of its Registrable Securities in such Incidental Registration pursuant to Section 4(a) of the Amended and Restated Registration Rights Agreement and any other holders of Common Stock entitled to "incidental" registration rights and requesting inclusion of shares of Common Stock in such Incidental Registration, pro rata on the basis of the number of shares of Common Stock requested to be included in such Incidental Registration and (iii) third, any other shares of Common Stock requested to be included in such Incidental Registration. The Insurance Partners Stockholders covenant and agree that pursuant to the Amended and Restated Registration Rights Agreement, in the event of an Incidental Registration in which marketing factors require a limitation of the number of shares of Common Stock to be underwritten, the allocation of the shares of Common Stock that are entitled to be included in such Incidental Registration shall be identical to the allocation described in the preceding sentence. This paragraph 3 will supersede in its entirety paragraph 5 of the 1996 5 Letter upon the execution of the Amended and Restated Registration Rights Agreement, which will occur on the Closing Date. 4. Waiver of Adjustments of Warrant Price and Certain Preemptive Rights and Consent. The parties hereto acknowledge that the Company has agreed to the 1998 Issuance. In addition, (a) Each of the holders of the IIA Warrants listed on Schedule 1 hereto (the "IIA Warrantholders") hereby (i) waives (x) its or his rights to any adjustments under Section 2 of the IIA Warrants with respect to the 1998 Issuance, including without limitation, Section 2.2.1 thereof, and (y) its or his preemptive rights under Section 9 of the IIA Warrants with respect to the Warrants Issuance, and (ii) consents to the honoring of its or his preemptive rights under Section 9 of the IIA Warrants with respect to the Stock Issuance and the Rights Offering in the manner described herein; (b) each of the Management Warrantholders hereby (i) waives (x) his rights to any adjustments under Section 2 of the Management Warrants with respect to the 1998 Issuance, including without limitation, Section 2.2.1 thereof, and (y) his preemptive rights under Section 9 of the Management Warrants with respect to the Warrants Issuance, and (ii) consents to the honoring of his preemptive rights under Section 9 of the Management Warrants with respect to the Stock Issuance and the Rights Offering in the manner described herein; and (c) CentreLine hereby (i) waives (x) its rights under Section 2 of the CentreLine Warrant with respect to the 1998 Issuance, including, without limitation, Section 2.3.1 thereof, and (y) its preemptive rights under Section 9 of the CentreLine Warrant with respect to the Warrants Issuance, and (ii) consents to the honoring of its preemptive rights under Section 9 of the CentreLine Warrant with respect to the Stock Issuance and the Rights Offering in the manner described herein. 5. Termination of Paragraph 1 of the 1996 Letter. At the Closing Date, paragraph 1 of the 1996 Letter will be deemed to be terminated and of no further force and effect. 6. Grant of Preemptive Rights with Respect to Stock Issuance and Rights Offering. The Company hereby agrees to honor the preemptive rights available to the Warrantholders pursuant to the terms of the Warrants in connection with the Stock Offering and the Rights Offering in one of two ways: (a) Purchase of Common Stock. A Warrantholder may exercise its or his preemptive rights by purchasing, at a price per share of Common Stock of $16.75 in cash, up to that number of shares of Common Stock equal to the number of Warrants held by such Warrantholder. The price per share at which a Warrantholder may purchase Common Stock pursuant to the preemptive rights set forth in this paragraph 6(a) is the same as the price per share of Common Stock under the 1998 6 Stock Purchase Agreement. Any Warrantholder interested in exercising its or his preemptive rights by purchasing Common Stock must deliver (i) an election form and (ii) a stock subscription agreement, which election form and stock subscription agreement shall be in the form attached to this letter. Any Warrantholder making such election hereby agrees that the Company will thereupon exclude such Warrantholder from participating in the Rights Offering (as described below). No Warrantholder may elect to exercise preemptive rights by purchasing Common Stock and also receive Rights in the Rights Offering. The shares of Common Stock purchased by a Warrantholder in connection with the exercise of its or his preemptive rights will not be registered under the Securities Act of 1933, as amended (the "Securities Act"), and may not be transferred in the absence of such registration or an exemption therefrom under the Securities Act. The election form and stock subscription agreement must be returned to the Company, by overnight delivery or by fax, no later than NOVEMBER 2, 1998 (the "Delivery Due Date") to the address set forth in paragraph 7. If a Warrantholder fails to deliver an election form and a stock subscription agreement on or prior to the Delivery Due Date, such Warrantholder will be issued Rights in connection with the Rights Offering, and will not have any further opportunity to exercise preemptive rights by purchasing Common Stock. Although the Company is requesting an election be made in a relatively short period of time, for planning purposes, the election will be revocable by a Warrantholder until the Payment Due Date described below, and after payment is made will be irrevocable. In order to allow the Company to timely complete its acquisition of Business Insurance Group, Inc., payment with respect to a Warrantholder's purchase of Common Stock referred to in paragraph 6(a) will be due to the Company no later than the expiration date of the Rights Offering, November 20, 1998 (the "Payment Due Date"). Payment must be made in immediately available funds in the manner set forth in paragraph 7. If payment is not received on or before the Payment Due Date, a Warrantholder will be deemed to have revoked its election to exercise preemptive rights by purchasing Common Stock. (b) Participation in the Rights Offering. The Company will issue to each Warrantholder who does not elect to exercise its or his preemptive rights by purchasing Common Stock in the manner described in paragraph 6(a) above (or who does not timely return an election form and stock subscription agreement) that number of Rights to purchase a share of Common Stock at $16.75 per share equal to the number of Warrants held by such Warrantholder. Such Rights will be identical to the Rights granted to the Stockholders of the Company, are intended to be freely transferrable and listed on the Nasdaq National Market under the symbol "SNTLR," and the shares purchased upon exercise of such Rights are intended to be registered under the Securities Act and designated for trading on Nasdaq. As these Rights are identical to the Rights issued to the stockholders of the Company, matters related to issuance, transferability, expiration date, and manner of payment will be the same for 7 participating Warrantholders and stockholders of the Company. This letter does not constitute an offering by the Company with respect to the Rights. Such offering will only be made pursuant to a registration statement declared effective under the Securities Act and the prospectus contained within such registration statement will be sent to each Warrantholder who is to receive Rights in connection with the Rights Offering. The Company believes that certain tax advantages will be available to those Warrantholders wishing to purchase additional Common Stock if such Warrantholders elect to purchase Common Stock in the manner described in paragraph 6(a). These matters are more fully described on Exhibit A to this letter. Warrantholders are requested to review the Warrants, as the consent given in this letter to the procedures established in paragraphs 6(a) and 6(b) will allow the Company to honor the preemptive rights in a manner not expressly permitted by the Warrants, but in a manner the Company believes will allow it to comply with its obligations under the purchase agreement pursuant to which Business Insurance Group, Inc. will be acquired, and applicable laws, including federal and state securities laws. 7. Delivery and Payment Instructions. Delivery of the election form and the stock subscription agreement shall be made to: Riordan & McKinzie 300 S. Grand Ave., 29th Floor Los Angeles, CA 90071 Attention: Douglas C. Carleton Reference: Superior National Insurance Group, Inc. Facsimile: (213) 229-8550 Telephone: (213) 229-8408 Delivery by facsimile is acceptable if original documents are provided within three (3) business days. Payments may be made by wire transfer to: Bank Name: Imperial Bank Account Name: Superior National Insurance Group Reference Name: Preemptive Rights Holding Account Account #: 017-108-832 ABA#: 122201444 NOTE: Payments by personal or bank check should be remitted to the address above AT LEAST (10) DAYS prior to the Payment Due Date. A subscription for shares will 8 not be effective if immediately available funds are not held in the Company's account at 5:00 p.m. on the Payment Due Date. If closing of the transactions contemplated by the 1998 Stock Purchase Agreement is not completed within 60 days of the Payment Due Date, the Company will cancel the certificates issued and return the funds paid for the shares, with interest accrued at the three-month U.S. treasury rate published on the Payment Due Date from (and including) the Payment Due Date to (but excluding) the date the funds are sent by the Company to the Warrantholder. 8. Agency and Proxy Agreement. Each Warrantholder hereby agrees that the Common Stock and Rights (and the Common Stock issued upon the exercise of the Rights) received by them pursuant to the exercise of preemptive rights in connection with the Stock Issuance and the Rights Offering will not be subject to the Agency and Proxy Agreement, dated as of March 2, 1992, among IIA, III and the other parties signatory thereto. 9. Counterparts. This letter agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same letter agreement. 10. Governing Law. This letter agreement shall be governed by and construed in accordance with the laws of the State of Delaware, without regard to the principles of conflicts of law thereof. 11. Binding Effect. This letter agreement shall be binding upon and inure to the benefit of the parties hereto and their permitted successors and assigns. 12. Ratification of Warrants. Except as otherwise expressly provided herein, all of the terms and conditions of each of the IIA Warrants, the Management Warrants and the CentreLine Warrant are ratified and shall remain in full force and effect. 13. Termination. If the transactions contemplated by the 1998 Stock Purchase Agreement are not consummated and such agreement thereby terminates, then upon such termination, this letter agreement shall immediately terminate without further action by the parties hereto, and all terms, rights, restrictions and conditions created hereunder shall terminate and have no further force and effect. 9 14. Further Assurances. Each of the parties shall execute such documents and perform such further acts as may be reasonably required or desirable to carry out or to perform the provisions of this letter agreement. Very truly yours, SUPERIOR NATIONAL INSURANCE GROUP, INC. By: /s/ J. Chris Seaman ------------------- Name: J. Chris Seaman Title: Chief Financial Officer Agreed and accepted on this 16th day of October, 1998 INSURANCE PARTNERS, L.P. By: Insurance GenPar, L.P., its General Partner By: Insurance GenPar MGP, L.P., its General Partner By: Insurance GenPar MGP, Inc., its General Partner By: /s/ Steven B. Gruber -------------------- Name: Steven B. Gruber Title: Vice President INSURANCE PARTNERS OFFSHORE (BERMUDA), L.P. By: Insurance GenPar (Bermuda), L.P., its General Partner By: Insurance GenPar (Bermuda) MGP, L.P., its General Partner By: Insurance GenPar (Bermuda) MGP, Ltd., its General Partner By: /s/ Steven B. Gruber -------------------- Name: Steven B. Gruber Title: Vice President 10 CAPITAL Z PARTNERS, LTD. By: /s/ Bradley E. Cooper --------------------- Name: Bradley E. Cooper Title: Senior Vice President INTERNATIONAL INSURANCE ADVISORS, INC. By: /s/ Robert Spass ---------------- Name: Robert Spass Title: President INTERNATIONAL INSURANCE ADVISORS, L.P. By: International Insurance Investors (Bermuda) Limited, its General Partner By: /s/ Bradley E. Cooper --------------------- Name: Bradley E. Cooper Title: Director 11 INTERNATIONAL INSURANCE INVESTORS (BERMUDA) LIMITED By: /s/ Bradley E. Cooper --------------------- Name: Bradley E. Cooper Title: Director CENTRE SOLUTIONS (BERMUDA) LIMITED By: /s/ Tara Leonard ---------------- Name: Tara Leonard Title: Senior Vice President and Chief Accounting Officer TRUSTEES OF THE ESTATE OF BERNICE P. BISHOP By: /s/ Henry Haalio Peters ----------------------- Name: Henry Haalio Peters Title: Trustee CARLISLE VENTURES, INC. By: /s/ Gary A. Poliner ------------------- Name: Gary A. Poliner Title: Vice President BEACH HAVEN INVESTORS, INC. By: /s/ Robert Spass ---------------- Name: Robert Spass Title: President FLUOR REINSURANCE INVESTMENTS, INC. By: /s/ T. H. Morrow ---------------- Name: T. H. Morrow Title: Assistant Treasurer 12 TJS PARTNERS, L.P. By: /s/ Thomas J. Salvatore ----------------------- Name: Thomas J. Salvatore Title: Managing General Partner THE RAVENSWOOD INVESTMENT COMPANY, L.P. By: /s/ Robert E. Robutti - ------------------------- Name: Robert E. Robutti Title: General Partner INTERNATIONAL INSURANCE ADVISORS, INC. 401(K) AND PENSION PLANS By: /s/ Steven Germain - ---------------------- Name: Steven Germain Title: Trustee /s/ Robert A. Spass - ------------------- Robert A. Spass /s/ Paul H. Warren - ------------------ Paul H. Warren /s/ Bradley E. Cooper - --------------------- Bradley E. Cooper 13 - --------------------- Craig Schwarberg CENTRELINE REINSURANCE LIMITED By: /s/ Tara Leonard - -------------------- Name: Tara Leonard Title: Senior Vice President and Chief Accounting Officer /s/ Karl O. Johnson - ------------------- Karl O. Johnson /s/ Joseph P. Wolonsky - ---------------------- Joseph P. Wolonsky /s/ J. Chris Seaman - ------------------- J. Chris Seaman - ---------------------- Richard D. Hotchkiss - ---------------------- Edwin J. Wilson Schedule 1 ---------- IIA Warrantholders ------------------ IIA Warrantholder Address ----------------- ------- International Insurance Investors (Bermuda) Cumberland House Limited One Victoria Street, Seventh Floor Hamilton HM HX, Bermuda Centre Reinsurance Limited Cumberland House One Victoria Street, Seventh Floor Hamilton HM HX, Bermuda Trustees of the Estate of Bernice P. Bishop 567 South King Street Suite 200 Honolulu, Hawaii 96813 Carlisle Ventures, Inc. 720 East Wisconsin Avenue Milwaukee, Wisconsin 53202 Beach Haven Investors, Inc. 10 Floral Court Westfield, New Jersey 07090 Fluor Reinsurance Investments, Inc. 3333 Michaelson Drive Irvine, California 92730 TJS Partners, L.P. 115 East Putnam Greenwich, Connecticut 06830 Robert A. Spass One Chase Manhattan Plaza 44th Floor New York, New York 10005 Paul H. Warren One Chase Manhattan Plaza 44th Floor New York, New York 10005 Bradley E. Cooper One Chase Manhattan Plaza 44th Floor New York, New York 10005 Craig Schwarberg 5407 Mission Hills Kansas City, Missouri 66208 International Insurance Advisors, Inc. One Chase Manhattan Plaza 401(k) and Pension Plans 44th Floor New York, New York 10005 The Ravenswood Investment Company, 52 Vanderbilt Avenue L.P. 5th Floor New York, New York 10017 Schedule 2 ---------- Management Warrantholders ------------------------- Karl O. Johnson Joseph P. Wolonsky J. Chris Seaman Richard D. Hotchkiss Edwin J. Wilson EXHIBIT A TAX DISCUSSION The following is a general discussion of certain U.S. Federal income tax considerations applicable to Warrantholders upon the exercise of their preemptive rights or, if applicable, upon the issuance, exercise, disposition and lapse of Rights issued pursuant to the Rights Offering. This summary is based upon current provisions of the Internal Revenue Code of 1986, as amended (the "Code"), regulations of the Treasury Department, administrative rulings and pronouncements of the Internal Revenue Service (the "Service"), and judicial decisions currently in effect, all of which are subject to change, possibly with retroactive effect. This discussion does not deal with all aspects of federal income taxation that may be relevant to particular Warrantholders in light of their personal investment circumstances (for example, to persons holding their warrants as part of a conversion transaction or as part of a hedge or hedging transaction, or as a position in a straddle for tax purposes), nor does it discuss federal income tax considerations applicable to Warrantholders subject to special treatment under the federal income tax laws (for example, insurance companies, tax-exempt organizations, financial institutions or broker-dealers, taxpayers subject to the alternative minimum tax or non-United States persons). This discussion assumes that the Warrantholders hold their warrants as capital assets and will hold any shares of common stock of the Company received upon the exercise of their preemptive rights or, if applicable, the exercise of the Rights as capital assets (persons who may not be holding their warrants as capital assets might include, for example, securities dealers or traders who do not hold their warrants primarily for investment or who treat their warrants as inventory for federal income tax purposes). In addition, this discussion does not consider the effect of any foreign, state, local, gift or estate or other tax laws that may be applicable to a particular warrant holder. No ruling has been or will be sought from the Service concerning the tax issues addressed herein, and such issues may be subject to substantial uncertainty resulting from the lack of definitive judicial or administrative authority and interpretations applicable thereto. THEREFORE, ALL WARRANTHOLDERS ARE URGED TO CONSULT WITH THEIR TAX ADVISORS REGARDING THE SPECIFIC TAX CONSEQUENCES OF THE EXERCISE OF THEIR PREEMPTIVE RIGHTS OR, IF APPLICABLE, RECEIVING RIGHTS PURSUANT TO THE RIGHTS OFFERING TO THEM, INCLUDING THE EFFECTS OF FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX LAWS. EXERCISE OF PREEMPTIVE RIGHTS. As discussed more fully in the letter agreement to which this Exhibit A is attached, all Warrantholders have preemptive rights pursuant to the terms of their warrants. The Company has the obligation to offer the warrant holders the opportunity to exercise their preemptive rights under the terms of the 1998 Stock Purchase Agreement. Pursuant to such preemptive rights, the Warrantholders will have the right to subscribe for common stock of the Company at the price of $16.75 per share or the right to be issued Rights in the Rights Offering. Although not free from doubt due to the lack of directly applicable authority, the Company believes that the exercise of preemptive rights of Warrantholders who do not elect to receive Rights most likely will be treated as a nontaxable purchase of common stock pursuant to a previously bargained for contractual right. If the exercise of preemptive rights is not treated as a nontaxable purchase of common stock, the transaction could be treated a taxable distribution of the right to acquire common stock. Therefore, all warrant holders who exercise their preemptive rights should consult and rely upon their own tax advisors as to the specific tax consequences to them relating to the exercise of their preemptive rights. The tax basis of the common stock acquired through the exercise of preemptive rights will be equal to the purchase price paid therefor. The holding period for the common stock acquired through the exercise of preemptive rights will begin on the day following the receipt of such stock. ISSUANCE, EXERCISE, DISPOSITION AND LAPSE OF RIGHTS. The Company believes that the distribution of Rights to warrant holders pursuant to the Rights Offering most likely would be characterized as a taxable distribution of the right to acquire common stock and not as a nontaxable distribution under Section 305(a) of the Code nor as a distribution under Sections 301 and 305(b) of the Code. Therefore, the holders of warrants would recognize taxable income for federal income tax purposes in connection with the receipt of Rights in an amount equal to the then-fair market value of the Rights received on the date of their distribution. The tax basis of Rights received by a Warrantholder as a distribution with respect to the holder's warrants will equal the Rights fair market value and his or her holding period will commence on the day following the date of distribution of the Rights. A Warrantholder who sells Rights received in the Rights Offering rather than exercising them will recognize capital gain or loss in an amount equal to the difference between the sale proceeds and the holder's basis in the Rights sold. Warrantholders who allow Rights received by them pursuant to the Rights Offering to lapse will recognize capital loss in an amount equal to the holder's tax basis. Warrantholders will not recognize any gain or loss upon the exercise of Rights. The tax basis of the common stock acquired through exercise of the Rights will be equal to the sum of the amount paid therefor and the holder's tax basis in the Rights. The holding period for the common stock acquired through exercise of the Rights will begin on the day following the date the Rights are considered exercised. ELECTION CERTIFICATE STOCK SUBSCRIPTION AGREEMENT -----END PRIVACY-ENHANCED MESSAGE-----