<PAGE>

                                                                     Exhibit 4.4

THIS DEBENTURE IS INITIALLY ISSUED AS PART OF AN ISSUANCE OF UNITS, CONSISTING
OF CONVERTIBLE DEBENTURES DUE 2006 AND SHARES OF SERIES A PREFERRED STOCK OF
[NEWCO].  THIS DEBENTURE MAY NOT BE TRANSFERRED OR EXCHANGED SEPARATELY FROM,
AND MAY BE TRANSFERRED OR EXCHANGED ONLY TOGETHER WITH, SHARES OF SERIES A
PREFERRED STOCK REPRESENTING THE SAME PERCENTAGE OF THE TOTAL AMOUNT OF
OUTSTANDING SHARES OF SERIES A PREFERRED STOCK THAT THE PRINCIPAL AMOUNT OF
CONVERTIBLE DEBENTURES DUE 2006 PROPOSED TO BE TRANSFERRED OR ASSIGNED
REPRESENTS OF THE TOTAL PRINCIPAL AMOUNT OF OUTSTANDING CONVERTIBLE DEBENTURES
DUE 2006.

THIS CONVERTIBLE DEBENTURE AND THE SECURITIES ISSUABLE UPON CONVERSION HEREOF
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY
NOT UNDER ANY CIRCUMSTANCES BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF
WITHOUT AN EFFECTIVE REGISTRATION STATEMENT FOR SUCH SECURITIES UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, AND ANY APPLICABLE STATE SECURITIES LAWS, OR
PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT AND APPLICABLE STATE
SECURITIES LAWS.

                                    [NEWCO]
                         CONVERTIBLE DEBENTURE DUE 2006

No. [_]

U.S. $[_]                                                        [   ], 2001

     The undersigned, [Newco], a company organized under the laws of Bermuda
with offices at 44 Church Street, Hamilton HM 12 Bermuda (the "Issuer"),
                                                               ------
unconditionally promises to pay to [Name of Holder] or its permitted assigns,
transferees and successors as provided herein (each, a "Holder"), on May [_],
                                                        ------
2006 (the "Maturity Date"), at such place as may be designated by the Holder to
           -------------
the Issuer, the principal amount outstanding hereunder, or such lesser amount as
shall then be payable pursuant to the terms of Section 3 hereof, together with
all accrued and unpaid interest thereon.

     This Debenture is issued pursuant to a Securities Purchase Agreement, dated
as of May 8, 2001, by and among the Issuer, the guarantors named therein, XL
Insurance Ltd., First Union Merchant Banking 2001, LLC, High Ridge Capital
Partners II, L.P., Century Capital
<PAGE>

                                      -4-

Partners II, L.P., Robert A. Mulderig, Taracay Investors Company and Intrepid
Funding Master Trust (as such agreement may be amended at any time, the
"Securities Purchase Agreement"), and the Holder hereof is intended to be
 -----------------------------
afforded the benefits thereof, including the representations and warranties set
forth therein. The Issuer shall use the proceeds of the issuance and sale of
this Debenture solely in accordance with the provisions set forth therein and as
required thereby.

     Section 10 contains definitions of certain of the terms used herein.
Capitalized terms used but not otherwise defined herein shall, unless otherwise
indicated, have the meanings given such terms in the Securities Purchase
Agreement.

     SECTION 1.     INTEREST.

     Interest on this Debenture shall accrue at a rate per annum equal to 9
                                                       --- -----
3/8%, from and after the last Interest Payment Date in respect of which interest
was paid to the Holder of the Convertible Exchangeable Debenture Due 2006 of
Mutual Risk Management Ltd. ("MRM") surrendered in exchange for this Debenture
                              ---
or, if no interest has been paid to such Holder, from the date of original issue
of such Convertible Exchangeable Debenture Due 2006 (the "Original Issue Date");
                                                          -------------------
provided, however, that (x) from and after the 120th day after the Original
--------  -------
Issue Date to but excluding the date on which the Issuer has received all
Required Approvals and the Restructuring has been consummated, the interest rate
applicable to this Debenture shall increase by an additional 0.25% per annum,
                                                                   --- -----
such increased interest rate to further increase by an additional 0.25% per
                                                                        ---
annum for each subsequent 30-day period during which the Required Approvals have
-----
not been obtained or the Restructuring has not been consummated up to a maximum
total rate of interest on the Debentures of 11.0% per annum (it being understood
                                                  --- -----
that from and after such time as all Required Approvals have been obtained and
the Restructuring shall have been completed, the interest rate applicable to
this Debenture shall return to 9 3/8% per annum) and (y) from and after the
                                      --- -----
occurrence of an Event of Default and for so long as such Event of Default
continues, the interest rate applicable to the Debenture shall increase by an
additional 1.00% per annum over the otherwise then applicable rate.  Interest
                 --- -----
shall be compounded quarterly and payable quarterly in cash in arrears on each
March 20, June  20, September 20, and December 20 (each, an "Interest Payment
                                                             ----------------
Date"), beginning on the first such date after issuance of this Debenture.
----
Interest shall be calculated on the basis of a year of twelve 30-day months and
the actual number of days elapsed.

     SECTION 2.     PAYMENTS OF PRINCIPAL AND INTEREST.

     Unless earlier converted in accordance with the terms of Section 4 below,
or repaid in accordance with the terms hereof or redeemed pursuant to Section 3
below, the entire outstanding principal amount of this Debenture, together with
any accrued and unpaid interest thereon, shall be due and payable on the
Maturity Date.  The parties agree that any payment of
<PAGE>

                                      -5-

interest due to the Holder hereunder shall be net of any applicable withholding
taxes due in respect of this Debenture.

     SECTION 3.    REDEMPTION.

     (a)  At the Option of the Issuer. This Debenture shall not be redeemable at
          ---------------------------
the option of the Issuer at any time prior to the Maturity Date.

     (b)  Mandatory Redemption At the Option of the Holders. At any time during
          -------------------------------------------------
the Put Term or in the event that a RHINOS or Bank Event occurs, the Requisite
Holders and XL each have the right (the "Redemption Right") to require the
                                         ----------------
Issuer or any Guarantor to redeem and repay all of the Debentures, at a
redemption price (the "Redemption Price") initially equal to the higher of (i)
                       ----------------
100% of the aggregate principal amount of the Debentures and (ii) 100% of the
aggregate of the then current market price of the Issuer's Common Shares into
which the Debentures would be convertible pursuant to Section 4 at such time
(calculated using the average closing price for a three-day trading period
beginning on the second trading day following the public announcement of the
exercise of such mandatory redemption right), in each case, plus accrued and
unpaid interest thereon to the applicable redemption date; provided, however,
                                                           --------  -------
that the Redemption Price shall increase by an additional 25 basis points for
each subsequent 30-day period during the Put Term until all Required Approvals
have been obtained and the Restructuring has been completed.


     (c)  In the event the Requisite Holders or XL, as the case may be, desires
to exercise the Redemption Right, such exercising party shall provide written
notice thereof to the Issuer during the Put Term or within four Business Days
after a RHINOS or Bank Event occurs, setting forth (i) the fact that such Holder
intends to exercise the Redemption Right and (ii) the date for such redemption,
which shall be a Business Day and be between 10 and 15 days after the date of
such notice. Upon receipt by the Issuer of any request to exercise a Redemption
Right, the Issuer shall promptly provide written notification thereof to all
Holders of Debentures.


     (d)  On the applicable redemption date, (i) the holders of all Debentures
shall tender the Debentures and the related Newco Voting Preferred Stock to the
Issuer for cancellation, duly endorsed or assigned to the Issuer or in blank, at
the principal executive office of the Issuer and (ii) the Issuer shall deliver
to the address of the Holder described in Section 9 hereof immediately available
funds in an amount equal to the aggregate principal amount of all Debentures
tendered for redemption by such Holder.

     SECTION 4.     CONVERSION.

     (a)  Conversion Right and Conversion Price. Subject to and upon compliance
          -------------------------------------
with the provisions of this Section 4, at the option of the Holder hereof, this
Debenture or any por-
<PAGE>

                                      -6-

tion of the principal amount hereof may be converted into a number of fully paid
and nonassessable shares (calculated as to each conversion to the nearest 1/100
of a share) of Common Stock of the Issuer determined by dividing the aggregate
principal amount of the Debenture to be converted by the Conversion Price in
effect at the time of conversion.

     The "Conversion Price" shall be initially equal to the Initial Newco
          ----------------
Conversion Price; provided, however, that the Conversion Price shall be reduced
                  --------  -------
by $0.20 beginning on September [  ], 2001 and by an additional $0.20 on each
monthly anniversary thereafter until the date on which all Required Approvals
shall have been obtained and the Restructuring shall have been completed.  The
Conversion Price shall be adjusted in certain instances as provided in (i)
through (vii) of Section 4(e) hereof.

     In the event this Debenture is converted after any Interest Payment Date
but on or prior to the regular record date relating to the next succeeding
Interest Payment Date, the Issuer shall, on the Conversion Date (as defined
below), pay to the Holder the pro rata portion of interest due on the Holder's
                              --------
Debentures surrendered for conversion up to, but excluding, the Conversion Date.
In the event this Debenture is converted after any regular record date and on or
prior to the next succeeding Interest Payment Date, interest that is due on such
Interest Payment Date shall be payable on such Interest Payment Date
notwithstanding such conversion, and such interest (whether or not punctually
paid or duly provided for) shall be paid to the Person in whose name this
Debenture is registered at the close of business on such regular record date.
Except as otherwise expressly provided in the two immediately preceding
sentences, in the event this Debenture is converted, interest which would become
payable on an Interest Payment Date falling after the date of conversion of this
Debenture shall not be payable.

     (b)  Exercise of Conversion Right. The Holder of this Debenture may
          ----------------------------
exercise its conversion right by delivering to the Issuer irrevocable written
notice of such election, substantially in the form of Annex I attached hereto,
                                                      -------
at least five days prior to the Business Day designated in such notice as the
date of conversion (the "Conversion Date"). Such notice shall also specify the
                         ---------------
principal amount of this Debenture to be converted. In the event any portion of
this Debenture is to be converted, the Holder shall, on or before the Conversion
Date, surrender the Debenture for cancellation together with the related Newco
Voting Preferred Stock, duly endorsed or assigned to the Issuer or in blank, at
the office or agency described in Section 9 hereof.

     The portion of this Debenture as to which the Holder shall have elected to
convert shall be deemed to have been converted immediately prior to the close of
business on the Conversion Date, and at such time the rights of the Holder as
Holder shall cease as to such portion of this Debenture, and, upon conversion,
the Holder shall be treated for all purposes as the record holder of Common
Stock of the Issuer at such time.  On the Conversion Date, the
<PAGE>

                                      -7-

Issuer shall issue and deliver at the office or agency described in Section 9
hereof a certificate or certificates for the number of full shares of Common
Stock of the Issuer issuable upon conversion, together with payment in lieu of
any fraction of a share, as provided in Section 4(d).

     In the event this Debenture is converted in part only, upon such conversion
the Issuer shall execute and deliver to the Holder, at the expense of the
Issuer, (i) a new Debenture or Debentures of an authorized denomination in
aggregate principal amount equal to the unconverted portion of the aggregate
principal amount of such Debenture and (ii) a certificate representing the
related Newco Voting Preferred Stock with voting rights equal to the aggregate
voting rights of the Common Stock issuable upon conversion of such new
Debenture.

     (c)  Surrender of Debentures on Conversion Date. In the event the Holder
          ------------------------------------------
wishes to exercise its right to convert this Debenture into Common Stock
pursuant to Section 4(a) hereof, the Holder shall surrender to the Issuer
Debentures in an aggregate principal amount at least equal to the applicable
Conversion Price (as adjusted by Section 4(e), if applicable).

     (d)  Fractions of Shares. No fractional shares of Common Stock shall be
          -------------------
issued upon conversion of this Debenture. If all or a portion of the principal
amount of this Debenture shall be surrendered for conversion at one time, the
number of full shares which shall be issuable upon conversion thereof shall be
computed on the basis of the aggregate principal amount of the Debenture so
converted. Instead of any fractional share of Common Stock, which would
otherwise be issuable upon conversion of the Debenture (or specified portions
thereof), the Issuer shall pay a cash adjustment in respect of such fraction in
an amount equal to the same fraction of the market price per share of Common
Stock (as determined as provided in Section 4(e)(vi)) at the close of business
on the Conversion Date.


     (e)  Adjustment of Conversion Price. (i) In the event that the Issuer shall
          ------------------------------
pay or make a dividend or other distribution on any class of its capital stock
in Common Stock or securities convertible into, or exercisable or exchangeable
for, Common Stock ("Common Stock Equivalents"), the Conversion Price applicable
                    ------------------------
to conversions of this Debenture in effect at the opening of business on the day
following the date fixed for the determination of shareholders entitled to
receive such dividend or other distribution shall be reduced by multiplying such
Conversion Price by a fraction of which (A) the numerator shall be the number of
shares of Common Stock of the Issuer outstanding at the close of business on the
date fixed for such determination and (B) the denominator shall be the sum of
(x) such number of shares and (y) the total number of shares of Common Stock
constituting such dividend or other distribution and shares of Common Stock
issuable upon conversion, exercise or exchange of the Common Stock Equivalent
constituting such dividend or other distribution, in each case, such reduction
to become effective immediately after the opening of business on the day
following the date fixed for such determination. For the purposes of this
paragraph, the number of shares of Common Stock of the Issuer at any time
outstanding shall not include shares held in
<PAGE>

                                      -8-

the treasury of the Issuer or held by Subsidiaries of the Issuer but shall
include shares of Common Stock issuable in respect of scrip certificates issued
in lieu of fractions of shares of Common Stock of the Issuer. The Issuer will
not pay any dividend or make any distribution on shares of Common Stock held in
the treasury of the Issuer or held by Subsidiaries of the Issuer.


     (ii)   In case the Issuer shall issue Common Stock of the Issuer at a price
per share less than the higher of the Conversion Price then in effect or the
current market price per share (determined as provided in Section 4(e)(vi)) of
the Common Stock of the Issuer on the date on which such Common Stock is issued,
the Conversion Price applicable to conversions of Debentures of the Issuer in
effect at the opening of business on the day following such date shall be
reduced by multiplying such Conversion Price by a fraction of which (A) the
numerator shall be the number of shares of Common Stock of the Issuer
outstanding at the close of business on such date plus the number of shares of
Common Stock of the Issuer which the aggregate of the offering price of the
total number of shares of Common Stock of the Issuer so issued or offered for
subscription or purchase would purchase at the higher of such current market
price or the Conversion Price and (B) the denominator shall be the sum of (x)
the number of shares of Common Stock of the Issuer outstanding at the close of
business on such date and (y) the number of shares of Common Stock of the Issuer
so offered for subscription or purchase, such reduction to become effective
immediately after the opening of business on the day following such date.

     In case the Issuer shall issue Common Stock Equivalents of the Issuer with
a conversion, exercise or exchange price per share that, together with the
issuance price per share of such Common Stock Equivalents, is less than the
higher of the Conversion Price then in effect or the current market price per
share (determined as provided in Section 4(e)(vi)) of the Common Stock of the
Issuer on the date on which such Common Stock Equivalents are issued, the
Conversion Price applicable to conversions of Debentures in effect at the
opening of business on the day following such date shall be reduced by
multiplying such Conversion Price by a fraction of which (A) the numerator shall
be the number of shares of Common Stock of the Issuer outstanding at the close
of business on such date plus the aggregate number of shares of Common Stock of
the Issuer that the sum of (x) the aggregate conversion, exercise or exchange
price of all such Common Stock Equivalents and (y) the aggregate issuance price
of all such Common Stock Equivalents would purchase if the sum of the
conversion, exercise or exchange price, as applicable, per share of Common Stock
of the Issuer and the issuance price of such Common Stock Equivalents were equal
to the higher of such current market price or the Conversion Price and (B) the
denominator shall be the number of shares of Common Stock of the Issuer
outstanding at the close of business on such date plus the aggregate number of
shares of Common Stock of the Issuer that are issuable upon conversion, exercise
or exchange of all such Common Stock Equivalents at the actual conversion,
exercise or

<PAGE>

                                      -9-

exchange prices applicable to such Common Stock Equivalents, such reduction to
become effective immediately after the opening of business on the day following
such date.

     For the purposes of this clause (ii), the number of shares of Common Stock
of the Issuer at any time outstanding shall not include shares of Common Stock
held in the treasury of the Issuer or held by Subsidiaries of the Issuer but
shall include shares issuable in respect of scrip certificates issued in lieu of
fractions of shares of Common Stock.  The Issuer will not issue any rights or
warrants in respect of shares of Common Stock held in the treasury of the Issuer
or held by Subsidiaries of the Issuer.  If any rights or warrants shall expire
without having been exercised, the Conversion Price shall thereupon be
readjusted to eliminate the amount of its adjustment due to their issuance.

     (iii)  In case outstanding shares of Common Stock of the Issuer shall be
subdivided into a greater number of shares of Common Stock, the Conversion Price
applicable to conversions of this Debenture in effect at the opening of business
on the day following the day upon which such subdivision becomes effective shall
be proportionately reduced, and, conversely, in case outstanding shares of
Common Stock of the Issuer shall each be combined into a smaller number of
shares of Common Stock, the Conversion Price applicable to conversions of this
Debenture in effect at the opening of business on the day following the day upon
which such combination becomes effective shall be proportionately increased,
such reduction or increase, as the case may be, to become effective immediately
after the opening of business on the day following the day upon which such
subdivision or combination becomes effective.

     (iv)   In case the Issuer shall, by dividend or otherwise, distribute to
holders of its Common Stock evidences of its indebtedness or assets (including
securities, but excluding any Common Stock Equivalents referred to in clause
(ii) of this Section, any dividend or distribution paid in cash out of the
retained earnings of the Issuer and any dividend or distribution referred to in
clause (i) of this Section), the Conversion Price applicable to conversions of
this Debenture shall be adjusted so that the same shall equal the price
determined by multiplying the applicable Conversion Price in effect immediately
prior to the close of business on the date fixed for the determination of
shareholders entitled to receive such distribution by a fraction of which (A)
the numerator shall be the higher of the Conversion Price then in effect or the
current market price per share (determined as provided in Section 4(e)(vi)) of
the Common Stock of the Issuer on the date fixed for such determination less the
then fair market value (as determined in good faith by the board of directors of
the Issuer, whose determination shall be described in a board resolution
delivered to the Holder) of the portion of the assets or evidences of
indebtedness so distributed applicable to one share of Common Stock of the
Issuer and (B) the denominator shall be such current market price per share of
the Common Stock of the Issuer, such adjustment to become effective immediately
prior to the opening of business on the day following the date fixed for the
determination of shareholders entitled to receive such distribution.
<PAGE>

                                     -10

     (v)  The reclassification of Common Stock into securities including other
than Common Stock (other than any reclassification upon a consolidation or
merger to which Section 4(k) applies) shall be deemed to involve (A) a
distribution of such securities other than Common Stock to all holders of Common
Stock of the Issuer (and the effective date of such reclassification shall be
deemed to be "the date fixed for the determination of shareholders entitled to
receive such distribution" and "the date fixed for such determination" within
the meaning of clause (iv) of this Section), and (B) a subdivision or
combination, as the case may be, of the number of shares of Common Stock of the
Issuer outstanding immediately prior to such reclassification into the number of
shares of Common Stock of the Issuer outstanding immediately thereafter (and the
effective date of such reclassification shall be deemed to be "the day upon
which such subdivision becomes effective" or "the day upon which such
combination becomes effective", as the case may be, and "the day upon which such
subdivision or combination becomes effective" within the meaning of clause (iii)
of this Section).

     (vi) For the purpose of any computation under Section 4(d) or clauses (ii)
and (iv) of this Section 4(e), the current market price per share of Common
Stock of the Issuer on any date shall be deemed to be the average of the daily
closing prices for the 10 consecutive Business Days selected by the Issuer
commencing not less than 10 and no more than 20 Business Days before the day in
question. The closing price for each day shall be the closing price for such day
reported in The Wall Street Journal or, if not so reported, the last reported
sales price regular way or, in case no such reported sale takes place on such
day, the average of the reported closing bid and asked prices regular way, in
either case on the New York Stock Exchange or, if the Common Stock of the Issuer
is not listed or admitted to trading on such Exchange, on the principal national
securities exchange on which such Common Stock is listed or admitted to trading
or, if not listed or admitted to trading on any national securities exchange, on
the National Association of Securities Dealers Automated Quotations National
Market System or, if such Common Stock is not listed or admitted to trading on
any national securities exchange or quoted on such National Market System, the
average of the closing bid and asked prices in the over-the-counter market as
furnished by any New York Stock Exchange member firm selected from time to time
by such Issuer for that purpose. In the absence of one or more such sale prices,
quotes or bid and asked prices, the board of directors of the Issuer shall
determine the current market price based on (A) the most recently completed
arm's-length transaction between the Issuer and a Person other than an Affiliate
of the Issuer and the closing of which occurs on such date or shall have
occurred within the six months preceding such date, (B) if no such transaction
shall have occurred on such date or within such six-month period, the value of
the Common Stock most recently determined as of a date within the six months
preceding such date by a nationally recognized investment banking firm or
appraisal firm which is not an Affiliate of the Issuer (an "Independent
                                                            -----------
Financial Advisor") or (C) if neither clause (A) nor (B) is
-----------------
applicable, the value of the Common Stock determined as of such date by an
Independent Financial Advisor.
<PAGE>

                                     -11-

     (vii)  In addition to the reductions in the Conversion Price that are
required by clauses (i), (ii), (iii) and (iv) of this Section, the Issuer will
make such reductions in the Conversion Price (A) as it considers to be advisable
in order that any event treated for Federal income tax purposes as a dividend of
stock or stock rights shall not be taxable to the recipients and (B) as may be
necessary to account for any adjustments to conversion, exercise or exchange
prices or rates made to any Common Stock Equivalents of the Issuer after the
Original Issue Date, the result of which is that the conversion, exercise or
exchange price or rate applicable to such Common Stock Equivalents is below the
higher of the Conversion Price or the current market price per share (determined
as provided in Section 4(e)(vi)) of the Common Stock of the Issuer, in each case
in effect on the date of such adjustment.

     (f)    Notice of Adjustments of Conversion Price. Whenever the Conversion
            -----------------------------------------
     Price is adjusted as herein provided:

            (i)   the Issuer shall compute the adjusted Conversion Price in
     accordance with Section 4(a) and shall prepare a certificate signed by the
     Chief Financial Officer of the Issuer setting forth the adjusted Conversion
     Price and showing in reasonable detail the facts upon which such adjustment
     is based, and such certificate shall forthwith be filed at each office or
     agency maintained for the purpose of conversion of this Debenture pursuant
     to Section 9; and

            (ii)  a notice stating that the Conversion Price has been adjusted
     and setting forth the adjusted Conversion Price shall be mailed by the
     Issuer together with a copy of the certificate prepared in accordance with
     subsection (i) above to the Holder at its last address as it shall appear
     in the Debenture Register as soon as practicable after such adjustment.

     (g)    Notice of Certain Corporate Action.  In case:
            ----------------------------------
            (i)   the Issuer shall declare a dividend (or any other
     distribution) on its Common Stock; or

            (ii)  the Issuer shall authorize the granting to the holders of its
     Common Stock of rights or warrants to subscribe for or purchase any shares
     of capital stock of any class or of any other rights; or

            (iii) of any reclassification of the Common Stock of the Issuer, or
     of any consolidation or merger to which the Issuer is a party and for which
     approval of any of its shareholders is required, or of the sale or transfer
     of all or substantially all of the assets of the Issuer; or
<PAGE>

                                     -12-

          (iv) of the voluntary or involuntary dissolution, liquidation or
     winding up of the Issuer;

then the Issuer shall cause to be filed at each office or agency maintained for
the purposes of conversion of this Debenture pursuant to Section 10, and shall
cause to be mailed to the Holder at its last address as it shall appear in the
Debenture Register, at least 20 days (or 10 days in any case specified in clause
(i) or (ii) above) prior to the applicable record or effective date hereinafter
specified, a notice describing such event in reasonable detail and stating (x)
the date on which a record is to be taken for the purpose of such dividend,
distribution, rights or warrants, or, if a record is not to be taken, the date
as of which the holders of record of such Issuer's Common Stock to be entitled
to such dividend, distribution, rights or warrants are to be determined, or (y)
the date on which such reclassification, consolidation, merger, sale, transfer,
dissolution, liquidation or winding up is expected to become effective, and the
date as of which it is expected that holders of record of the Issuer's Common
Stock shall be entitled to exchange their shares of Common Stock of the Issuer
for securities, cash or other property deliverable upon such reclassification,
consolidation, merger, sale, transfer, dissolution, liquidation or winding up.

     (h)  Taxes on Conversions. The Issuer will pay any and all transfer or
          --------------------
stamp taxes that may be payable in respect of the issue or delivery of shares of
Common Stock on conversion of this Debenture pursuant hereto. The Issuer shall
not, however, be required to pay any income tax payable with respect to
conversion of this Debenture or any tax which may be payable in respect of any
transfer involved in the issue and delivery of shares of Common Stock in a name
other than that of the Holder of the Debenture to be converted, and no such
issue or delivery shall be made unless and until the Person requesting such
issue has paid to the Issuer the amount of any such tax, or has established to
the satisfaction of the Issuer that such tax has been paid.

     (i)  Covenant as to Common Stock. The Issuer covenants that all shares of
          ---------------------------
Common Stock which may be issued upon conversion of this Debenture will, upon
issue, be validly issued, fully paid and nonassessable and, except as provided
in Section 4(h), the Issuer will pay all taxes, liens and charges with respect
to the issue thereof.

     (j)  Cancellation of Converted Debenture. In the event this Debenture is
          -----------------------------------
delivered for conversion, in whole or in part, it and the related Newco Voting
Preferred Stock shall be delivered to and canceled by the Issuer.

     (k)  Provisions in Case of Consolidation, Merger or Sale of Assets. In case
          -------------------------------------------------------------
of any consolidation of the Issuer with, or merger of the Issuer into, any other
Person, any merger of another Person into the Issuer (other than a merger which
does not result in any reclassification, conversion, exchange or cancellation of
outstanding shares of Common Stock of the Issuer) or any sale or transfer of all
or substantially all of the assets of the Issuer, the Person
<PAGE>

                                     -13-

formed by such consolidation or resulting from such merger or which acquires
such assets, as the case may be, shall execute and deliver a supplement to this
Debenture providing that the Holder of this Debenture shall have the right
thereafter to convert this Debenture only into the kind and amount of
securities, cash and other property receivable upon such consolidation, merger,
sale or transfer by a holder of the number of shares (including fractional
shares) of Common Stock of the Issuer into which this Debenture might have been
converted immediately prior to such consolidation, merger, sale or transfer,
assuming such holder of Common Stock of the Issuer (i) is not a Person with
which the Issuer consolidated or into which the Issuer merged or which merged
into the Issuer or to which such sale or transfer was made, as the case may be
("constituent Person"), or an Affiliate of a constituent Person and (ii) failed
  ------------------
to exercise its rights of election, if any, as to the kind or amount of
securities, cash and other property receivable upon such consolidation, merger,
sale or transfer; provided, however, that if the kind or amount of securities,
                  --------  -------
cash and other property receivable upon such consolidation, merger, sale or
transfer is not the same for each share of Common Stock of the Issuer held
immediately prior to such consolidation, merger, sale or transfer by others than
a constituent Person or an Affiliate thereof and in respect of which such rights
of election shall not have been exercised ("non-electing share"), then for the
                                            ------------------
purpose of this Section the kind and amount of securities, cash and other
property receivable upon such consolidation, merger, sale or transfer by each
non-electing share shall be deemed to be the kind and amount so receivable per
share by a plurality of the non-electing shares. Such supplement to this
Debenture shall provide for adjustments which, for events subsequent to the
effective date of the event which triggers the requirement of such supplemental
indenture, shall be as nearly equivalent as may be practicable to the
adjustments provided for in this Section 4(k). The above provisions of this
Section 4(k) shall similarly apply to successive consolidations, mergers, sales
or transfers.



     (l)  No Impairment. The Issuer will not, by amendment of its memorandum of
          -------------
association or bye-laws or through any reorganization, recapitalization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, avoid or seek to avoid the observance
or performance of any of the terms to be observed or performed hereunder by the
Issuer, but will at all times in good faith assist in the carrying out of all
the provisions of this Section 4 and in the taking of all such action as may be
necessary or appropriate in order to protect the rights of the Holder against
impairment.


     (m)  When De Minimis Adjustment May Be Deferred. No adjustment in the
          ------------------------------------------
number of shares of Common Stock of the Issuer issuable upon conversion of
Debentures need be made unless the adjustment would require an increase or
decrease of at least 1% in the number of shares of Common Stock issuable upon
conversion of all Debentures. Any adjustments that are not made shall be carried
forward and taken into account in any subsequent adjustment.
<PAGE>

                                     -14-

     All calculations under this Section 4 shall be made to the nearest 1/100th
of a share.

     SECTION 5.  AFFIRMATIVE COVENANTS.

     The Issuer hereby agrees for the benefit of the Holder that, from and after
the date hereof, so long as any Debentures remain outstanding and unpaid or any
other amount is owing to the Holder under any Transaction Document, it will
deliver to the Holder, or cause to be delivered to the Holder, the following
materials and information:

     (a)  Information. (i) As soon as available and in any event within 45 days
          -----------
after the end of each of the first three fiscal quarters of each fiscal year,
(A) consolidated and consolidating balance sheets of the Issuer and its
Subsidiaries as of the end of such quarter and the related consolidated
statements of income, cash flows and shareholders' equity (deficit) for such
quarter and for the portion of the fiscal year ended at the end of such quarter,
setting forth, in each case, in comparative form the figures for the
corresponding quarter and the corresponding portion of the previous fiscal year,
accompanied by a certificate of the chief financial officer or the chief
accounting officer of the Issuer to the effect that they fairly present the
financial condition at such dates and the results of operations and cash flows
for such periods and were prepared in accordance with GAAP (or, in the case of
the Insurance Subsidiaries, Statutory Accounting Principles prescribed or
permitted by the Insurance Acts), subject to year-end audit adjustments
(consisting only of normal recurring accruals), (B) if the Holder is a holder of
at least 10% of the outstanding Debentures, such operating information of the
Issuer as may be reasonably requested by the Holder and (C) if the Holder is a
holder of at least 10% of the outstanding Debentures, a comparison of the
results of such quarter against the operating plan and budget, together with an
explanation of any deviations therefrom;

     (ii) As soon as available and in any event within 90 days after the end of
each fiscal year, (A) consolidated and consolidating balance sheets of the
Issuer and its Subsidiaries as of the end of such fiscal year and the related
consolidated statements of income, cash flows and shareholders' equity (deficit)
for such fiscal year, setting forth, in each case, in comparative form the
figures for the previous fiscal year, accompanied by a certificate of the chief
financial officer or the chief accounting officer of the Issuer to the effect
that they fairly present the financial condition at such dates and the results
of operations and cash flows for such periods and were prepared in accordance
with GAAP (or, in the case of the U.S. Insurance Subsidiaries, Statutory
Accounting Principles prescribed or permitted by the Insurance Acts) and a
report (unqualified as to scope) of a firm of independent public accountants of
nationally recognized standing, (B) if the Holder is a holder of at least 10% of
the outstanding Debentures, a "management letter" from such firm regarding the
internal control structure of the Issuer and (C) if the Holder is a holder of at
least 10% of the outstanding Debentures, and in exchange for the express
agreement of such Holder to keep such information confidential and in the event
the Issuer has an Insurance Subsidiary, an opinion in form and substance
reasonably sat-
<PAGE>

                                     -15-

isfactory to the Holder as to the loss reserves of the Insurance Subsidiaries as
of the end of such fiscal year by Tillinghast, Towers & Perrin or another
actuarial consultant selected by the Issuer and acceptable to the Holder;

       (iii)  If the Holder is a holder of at least 10% of the outstanding
Debentures, in the event the Issuer has an Insurance Subsidiary, as soon as
available and in any event within 60 days after the end of each fiscal quarter,
the results of the "early warning" tests described in Section 7(m) and any
supporting documentation requested by the Holder;

       (iv)   If the Holder is a holder of at least 10% of the outstanding
Debentures, as soon as available, prior to the beginning of each fiscal year and
in exchange for the express agreement of such Holder to keep such information
confidential, an annual budget and operating plan of the Issuer, including an
investment policy and plan, presented on a quarterly basis for such fiscal year;

       (v)    If the Holder is a holder of at least 10% of the outstanding
Debentures, and in exchange for the express agreement of such Holder to keep
such information confidential, as soon as available, annual financial
projections (including forecasted consolidated and consolidating balance sheets
of the Issuer and its Subsidiaries and the related consolidated statements of
income, cash flows and shareholders' equity (deficit)) for the fiscal year
including the Original Issue Date and each fiscal year thereafter through
December 31, 2006 (including monthly financial projections) and containing all
material assumptions relating to such projections and data, accompanied by a
statement by the Issuer that such projections are based on assumptions believed
by it in good faith to be reasonable as to the future financial performance of
the Issuer;

       (vi)   If the Holder is a holder of at least 10% of the outstanding
Debentures and in exchange for the express agreement of such Holder to keep such
information confidential, as soon as available, and in any event within 30 days
after the filing thereof, copies of annual and quarterly reports and all other
filings of the Insurance Subsidiaries filed with the Insurance Departments;

       (vii)  In exchange for the express agreement of the Holder to keep such
information confidential, promptly following the occurrence thereof, notice and
a description in reasonable detail of any material adverse change in the assets,
liabilities, business, results of operations, condition (financial or
otherwise), Permits or prospects of the Issuer and its Subsidiaries taken as a
whole;

       (viii) If the Holder is a holder of at least 10% of the outstanding
Debentures, and in exchange for the express agreement of such Holder to keep
such information confidential, from time to time such additional information
regarding the financial position or business of the Issuer or any of its
Subsidiaries as the Holder may reasonably request; and
<PAGE>

                                     -16-

       (ix) In exchange for the express agreement of such Holder to keep such
information confidential, copies of any presentation made by the Issuer or any
of its Subsidiaries to S&P, Moody's, A.M. Best Company or any other rating
agency.

       (b)  Payment of Obligations. It will pay and discharge, and will cause
            ----------------------
each of its Subsidiaries to pay and discharge, at or before maturity, all their
respective obligations and liabilities, including tax liabilities, except where
the same may be contested in good faith by appropriate proceedings, and will
maintain, in accordance with GAAP, appropriate reserves for the accrual of any
of the same.

       (c)  Maintenance of Property; Insurance. (i) It will keep, and will cause
            ----------------------------------
each of its Subsidiaries to keep, all property useful and necessary in its
business in good working order and condition, ordinary wear and tear excepted.

       (ii) It will maintain, and will cause each of its Subsidiaries to
maintain, (A) with financially sound and responsible insurance companies,
insurance in at least such amounts and against such risks as are usually insured
against in the same general areas by companies of established repute of similar
size that are engaged in the same or a similar business and (B) such other
insurance coverage in such amounts and with respect to such risks as the
Purchaser may reasonably request.  It will deliver to the Holder (x) upon
request from time to time, full information as to the insurance carried, (y)
within five days of receipt of notice from any insurer a copy of any notice of
cancellation or material change in coverage from that existing on the date of
this Debenture and (z) within five days of receipt, any notice of any
cancellation or nonrenewal of coverage for the Issuer or any of its
Subsidiaries.

     (d)    Conduct of Business and Maintenance of Existence. It will continue,
            ------------------------------------------------
and will cause each of its Subsidiaries to continue, to engage in business of
the same general type as now conducted by the Issuer and its Subsidiaries, and
will preserve, renew and keep in full force and effect, and will cause each of
its Subsidiaries to preserve, renew and keep in full force and effect their
respective corporate existence and their respective rights, privileges, licenses
and franchises necessary or desirable in the normal conduct of business, except
in each case as required or contemplated by the Restructuring.

     (e)    Compliance with Laws and Contractual Obligations. It will comply,
            ------------------------------------------------
and will cause each of its Subsidiaries to comply, in all material respects,
with all applicable laws, ordinances, rules, regulations, and requirements of
Governmental Entities, and with all contractual obligations, except where
compliance in all material respects therewith is contested in good faith by
appropriate proceedings, including, without limitation, with respect to itself
and each member of the ERISA Group, (i) maintaining each Plan in compliance, in
all material respects with the applicable provisions of ERISA, the Internal
Revenue Code and other applicable law; (ii) causing each Plan which is qualified
under Section 401(a) of the Internal Reve-
<PAGE>

                                     -17-

nue Code to maintain such qualification; and (iii) making all required
contributions to any Plan subject to Section 142 of the Internal Revenue Code.

     (f)  Inspection of Property, Books and Records. It will keep, and will
          -----------------------------------------
cause each of its Subsidiaries to keep, proper books of record and account in
which full, true and correct entries shall be made of all dealings and
transactions in relation to their respective businesses and activities; and will
permit, and will cause each of its Subsidiaries to permit (during normal
business hours and, unless a Default shall have occurred and be continuing, upon
reasonable advance notice) officers, attorneys, agents and other representatives
of the Holder to visit and inspect any of their respective properties, to
examine and make abstracts from any of their respective books and records and to
discuss their respective affairs, finances and accounts with their respective
directors, officers, senior employees, independent public accountants and
actuaries as often as may reasonably be requested.

     (g)  Reservation of Common Stock. It will at all times reserve and keep
          ---------------------------
available, free from preemptive rights, out of its authorized but unissued
Common Stock or out of Common Stock held by a Subsidiary of the Issuer, for the
purpose of effecting the conversion of the Debentures, the full number of shares
of Common Stock then issuable upon the conversion of this Debenture and all
outstanding Debentures.

     (h)  Covenant to Guarantee. At any time that any Subsidiary of the Issuer
          ---------------------
(i) shall be formed or acquired by the Issuer (other than a U.S. Insurance
Subsidiary) and such Subsidiary constitutes a Significant Subsidiary, (ii)
becomes a Significant Subsidiary or (iii) shall guarantee any Debt of the Issuer
other than the Debentures, then, in each such case, the Issuer will, at its
expense:

          (i)    within ten days after such event, cause each such Subsidiary to
     duly authorize, execute and deliver to the Holder a Guaranty, substantially
     in the form of Annex II attached hereto;

          (ii)   within ten days after such event, deliver to the Holder a
     signed copy of a legal opinion, addressed to the Holder, of counsel for the
     Issuer reasonably acceptable to the Holder, as to such Guaranty being a
     legal, valid and binding obligation of such party thereto, enforceable in
     accordance with its terms and as to such other matters as the Holder may
     reasonably request; and

          (iii)  at any time and from time to time, promptly execute and deliver
     any and all further instruments and documents and take all such action as
     the Holder may deem necessary or reasonably desirable to obtain the full
     benefits of such Guaranty.

     (i)  Insurance. It will maintain, in full force and effect, executive risk
          ---------
insurance in an amount which the Issuer reasonably believes to be sufficient for
the conduct of its business.
<PAGE>

                                     -18-

     (j)  Compliance Certificate. Concurrently with the delivery of each of the
          ----------------------
financial statements required by Sections 5(a)(i) and 5(a)(ii), it will deliver
to the Holders a compliance certificate executed by the Chief Financial Officer
of the Issuer stating that the Issuer and its Subsidiaries are in compliance
with each covenant contained in this Debenture, together with the calculations
demonstrating such compliance in reasonable detail.

     SECTION 6.   NEGATIVE COVENANTS.

     The Issuer hereby agrees for the benefit of the Holder that, from and after
the date hereof and so long as any portion of this Debenture remains outstanding
and unpaid or any other amount is owing to the Holder under any Transaction
Document, without the prior written consent of the Requisite Holders (which
consent, in the case of Section 6(i), shall not be unreasonably withheld):

          (a)  Restrictions on Amendments of Governance Documents. It will not,
               --------------------------------------------------
     directly or indirectly, amend, and will not suffer, cause or permit to be
     amended, the memorandum of association, bye-laws or any other
     organizational document of the Issuer or any of its Significant
     Subsidiaries, or any partnership or shareholder agreement to which the
     Issuer or any of its Significant Subsidiaries is a party.

          (b)  Prohibition on Restricted Payments. It will not, and will not
               ----------------------------------
     cause or permit any of its Subsidiaries to, directly or indirectly, declare
     or make any Restricted Payment other than, so long as no Default or Event
     of Default has occurred and is continuing or would result therefrom, (i)
     Restricted Payments made to the Issuer or any Guarantor, (ii) Restricted
     Payments made to the holders of the Debentures pro rata based on the
                                                    --- ----
     principal amount of Debentures held by each Holder and (iii) dividends on
     Policy Holder Preferred Shares made solely in connection with the CRM
     business and determined in a manner consistent with past practices.

          (c)  Consolidations and Mergers. It will not, and will not cause or
               --------------------------
     permit any of its Subsidiaries to, directly or indirectly, consolidate or
     merge with or into, or acquire, any other Person; provided, however, that
                                                       --------  -------
     the foregoing shall not prohibit (i) a merger of a Subsidiary of the Issuer
     with and into the Issuer or a Subsidiary, (ii) a merger or consolidation of
     the Issuer with a Subsidiary or any other Person incorporated under the
     laws of Bermuda or a state of the United States, if the Issuer is the
     surviving corporation and continues to be a Bermuda company and immediately
     after giving effect thereto no Default or Event of Default shall have
     occurred and be continuing or (iii) the Restructuring.

          (d)  Investments. It will not, and will not cause or permit any of its
               -----------
     Subsidiaries to, directly or indirectly, make or acquire any Investment,
     other than (i) Investments pursuant to the Issuer's investment policy as
     adopted by the Issuer's board
<PAGE>

                                     -19-

     of directors and in accordance with the Issuer's annual plan and budget,
     (ii) Investments in Subsidiaries of the Issuer made in connection with the
     Restructuring, (iii) Investments in Cash Equivalents, (iv) Investments by
     Subsidiaries of the Issuer in the Issuer or any Guarantor and (v) other
     Investments not exceeding $[  ] [insert amount reasonably satisfactory to
     XL and the Company at the time of issuance of this Debenture] in the
     aggregate outstanding at any one time.

          (e)  Limitation on Incurrence and Repayment of Debt.
               ----------------------------------------------

          (i)  It will not, and will not cause or permit any of its Subsidiaries
     to, directly or indirectly, create, incur, issue, assume or suffer to exist
     any Debt; provided, however, that the foregoing shall not prohibit the
               --------  -------
     issuance or existence of (A) the Debentures (including any Guarantees
     thereof), (B) the Existing Bank Debt and any Permitted Refinancings
     thereof, (C) Debt in an aggregate principal amount not to exceed $[  ] ]
     [insert amount reasonably satisfactory to XL and the Company at the time of
     issuance of this Debenture] at any one time outstanding; provided, however,
                                                              --------  -------
     that any Debt incurred pursuant to this clause (C) shall be subordinated to
     the Debentures pursuant to subordination provisions in form and substance
     satisfactory to the Requisite Holders, (D) Debt consisting of, or issued in
     connection with, the RHINOS in an aggregate principal amount not in excess
     of $32.0 million and (E) Debt consisting of reimbursement obligations (or
     guarantees thereof) in respect of letters of credit issued under a letter
     of credit facility entered into solely in connection with the issuance of
     Policy Holder Preferred Shares consistent with past practices.

          (ii) It will not, and will not cause or permit any of its Subsidiaries
     to, directly or indirectly, make any voluntary principal payments in
     respect of any Debt, whether at or prior to its stated maturity, other than
     (A) the Debentures in accordance with their terms, (B) Permitted
     Refinancings of the Existing Bank Debt in accordance with the terms of the
     Existing Bank Agreement as in effect on the date hereof, (C) Debt
     consisting of, or issued in connection with, the RHINOS in an aggregate
     principal amount not in excess of $32.0 million and (D) reimbursement
     obligations (or guarantees thereof) in respect of letters of credit issued
     under a letter of credit facility entered into solely in connection with
     the issuance of Policy Holder Preferred Shares consistent with past
     practices.

          (f)  Negative Pledge. It will not, and will not cause or permit any of
               ---------------
     its Subsidiaries to, directly or indirectly, create, assume or suffer to
     exist any Lien on any asset now owned or hereafter acquired by it, except
     for (i) Liens which may be created in the ordinary course of business (it
     being understood that no Lien securing Debt shall be deemed to have been
     created in the ordinary course of business), (ii) Liens on assets of the
     Issuer and its Subsidiaries in favor of the holders of the Debentures,
     (iii) Liens
<PAGE>

                                     -20-

     securing letters of credit issued under a letter of credit facility entered
     into solely in connection with the issuance of Policy Holder Preferred
     Shares, consistent with past practices, (iv) Liens on assets of the Issuer
     or any of its Subsidiaries that are junior to first priority Liens securing
     the Debentures on such assets and (v) after the expiration of the Put Term,
     Liens securing the Debentures, the Existing Bank Debt, any Permitted
     Refinancing of Existing Bank Debt, Debt permitted under Section 6(e)(i)(E)
     hereof, and the RHINOS on a pari passu basis.

          (g)  Transactions with Affiliates. It will not, and will not cause or
               ----------------------------
     permit any of its Subsidiaries to, directly or indirectly, pay any funds to
     or for the account of, make any investment (whether by acquisition of stock
     or indebtedness, by loan, advance, transfer of property, guarantee or other
     agreement to pay, purchase or service, directly or indirectly, any Debt, or
     otherwise) in, lease, sell, transfer or otherwise dispose of any assets to,
     purchase any assets from, or participate in, or effect or suffer to exist
     any other transaction with, or for the benefit of, any Affiliate of the
     Issuer or any Related Person, except (i) upon fair and reasonable terms
     that are no less favorable to it than it would obtain in a comparable
     arm's-length transaction with an unrelated Person and pursuant to the
     reasonable requirements of its business or (ii) as contemplated by this
     Debenture and the Securities Purchase Agreement (including, without
     limitation, the Restructuring).

          (h)  Fundamental Changes. It will not, and will not cause or permit
               -------------------
     any of its Subsidiaries to, wind-up, liquidate or dissolve their respective
     affairs, except any such action taken with the unanimous consent of the
     Issuer's board of directors. It will not, and will not cause or permit any
     of its Subsidiaries to, commence a voluntary case or other proceeding
     seeking liquidation, reorganization or other relief with respect to
     themselves or their respective debts under any bankruptcy, insolvency or
     other similar law now or hereafter in effect or seek the appointment of a
     trustee, receiver, liquidation, custodian or other similar official of them
     or any substantial part of their property, or consent to any such relief or
     to the appointment of or taking possession by any such official in an
     involuntary case or other proceeding commenced against them, or make a
     general assignment for the benefit or creditors, or fail generally to pay
     their respective debts as they become due or on demand, or take any
     corporate action to authorize any of the foregoing, except any such action
     taken with the unanimous consent of the Issuer's board of directors.

          (i)  Business.  It will not, and will not cause or permit any of its
               --------
     Subsidiaries to, make any material change in the nature of its business or
     its underwriting strategy or investment policy other than as expressly
     contemplated by the Restructuring.
<PAGE>

                                     -21-

          (j)  Limitation on Restrictions Affecting Subsidiaries. It will not,
               -------------------------------------------------
     and will not cause or permit any of its Subsidiaries to, directly or
     indirectly, enter into, or suffer to exist, any consensual agreement with
     any Person which prohibits or limits the ability of any Subsidiary to (i)
     pay dividends or make other distributions or pay any Debt owed to the
     Issuer or any of its Subsidiaries, (ii) make loans or advances to the
     Issuer or any of its Subsidiaries or (iii) transfer any of its properties
     or assets to the Issuer or any of its Subsidiaries, except for such
     agreement or restrictions existing under or by reason of any of the
     following:

          (A)  The Debentures, any agreement in effect on the Original Issue
               Date, including the Existing Bank Debt Documents and the
               documents governing the terms of any Permitted Refinancing
               thereof;

          (B)  Customary non-assignment provisions of any lease governing a
               leasehold interest of the Issuer or any of its Subsidiaries;

          (C)  Any agreement or other instrument of a Person acquired by the
               Issuer or any of its Subsidiaries in existence at the time of
               such acquisition (but not created in contemplation thereof),
               which encumbrance or restriction is not applicable to any Person,
               or properties or assets of any Person, other than the Person, or
               the Property or assets of the Person, so acquired; and

          (D)  Any limitations under applicable laws as to dividends payable by
               Insurance Subsidiaries.

          (k)  Minimum Capital and Surplus. It will not permit its U.S.
               ---------------------------
     Insurance Subsidiaries' capital and surplus, as defined in the
     [Pennsylvania or Illinois] Insurance Code, as applicable, to be less than
     the greater of (i) the minimum amount required under any applicable
     insurance law to which it is subject and (ii) $[  ] [insert amount
     reasonably satisfactory to XL and the Company at the time of issuance of
     this Debenture], in any quarterly period.

          (l)  Maximum Combined Ratio. The statutory "combined ratio" for the
               ----------------------
     Issuer's U.S. Insurance Subsidiaries, measured with respect to all business
     written by the Insurance Subsidiaries as the sum for such U.S. Insurance
     Subsidiaries of (i) the Loss Ratio and (ii) the Expense Ratio, shall not
     exceed [  ]% [insert percentage reasonably satisfactory to XL and the
     Company at the time of issuance of this Debenture]. The Issuer will measure
     the statutory combined ratio for the previous 12 months as of the end of
     each fiscal quarter. In the event such statutory combined ratio exceeds
     [ ]% [insert percentage reasonably satisfactory to XL and the Company at
     the time of issuance of this Debenture], the Issuer and the U.S. Insurance
     Subsidiaries will establish
<PAGE>

                                     -22-

     and implement a plan in order to lower the statutory combined ratio below
     [ ]% [insert percentage reasonably satisfactory to XL and the Company at
     the time of issuance of this Debenture].

          (m)  Minimum Risk-Based Capital. It will not permit the Risk-Based
               --------------------------
     Capital for any U.S. Insurance Subsidiary to be less than [ ]% [insert
     percentage reasonably satisfactory to XL and the Company at the time of
     issuance of this Debenture] of the Authorized Control Level and for all
     such U.S. Insurance Subsidiaries (collectively, on a combined basis) to be
     less than [ ]% [insert percentage reasonably satisfactory to XL and the
     Company at the time of issuance of this Debenture] of the Authorized
     Control Level. The Issuer will measure Risk-Based Capital as of each
     December 31, commencing on the first December 31 following the issuance of
     this Debenture, and will run the "early warning" tests established by the
     NAIC as of each March 31, June 30, September 30 and December 31, commencing
     on the first such date following the date of issuance of this Debenture. If
     the Issuer and the U.S. Insurance Subsidiaries fail to comply with any such
     "early warning" tests, the Issuer and the U.S. Insurance Subsidiaries will
     establish and implement a plan in order to improve such test results. In no
     event will the Issuer and the U.S. Insurance Subsidiaries fail to comply
     with more than three such "early warning" tests.

          (n)  Limitation on Asset Sales. It will not, and will not cause or
               -------------------------
     permit any of its Subsidiaries to, consummate an Asset Sale unless (i) the
     Issuer or the applicable Subsidiary, as the case may be, receives
     consideration at the time of such Asset Sale at least equal to the Fair
     Market Value of the assets sold or otherwise disposed of and (ii) the
     consideration received for the assets sold by the Issuer or such
     Subsidiary, as the case may be, in such Asset Sale are in the form of cash
     or Cash Equivalents, in each case received at the time of such Asset Sale.
     It will not, and will not cause or permit any of its Subsidiaries to, in a
     single transaction or a series of related transactions, directly or
     indirectly, sell, lease or otherwise transfer, directly or indirectly, all
     or substantially all of the assets of the Issuer and its Subsidiaries to
     any Person other than the Issuer or any of its wholly owned Subsidiaries.

          (o)  Restrictions on Certain Equity Issuances. It will not issue any
               ----------------------------------------
     Capital Stock or any Common Stock Equivalents (other than pursuant to
     employee stock option plans in effect on the Original Issue Date and other
     than upon conversion of the Debentures) until at least 30 days following
     the date on which the Required Approvals have been obtained and the
     Restructuring has been consummated.

          (p)  Restrictions on Amendments of Existing Debt. It will not, and
               -------------------------------------------
     will not cause or permit any of its Subsidiaries to, amend, supplement or
     otherwise modify any of the Existing Bank Debt Documents or any of the
     documents related to the RHINOS
<PAGE>

                                     -23-

     (or permit any of the foregoing) without the prior written consent of the
     Requisite Holders, which consent will not be unreasonably withheld or
     delayed, other than as may be necessary in order to complete the
     Restructuring.

          (q)  Restrictions on Amendment of Certain CRM Documents. It will not,
               --------------------------------------------------
     and will not cause or permit any of its Subsidiaries to, amend or modify
     any of the agreements or arrangements between the Issuer or any of its
     Subsidiaries and MRM or any of its Subsidiaries (other than the Issuer and
     its Subsidiaries) relating to the retention of a portion of any premium by,
     or the payment of any fees to, MRM or any of its Subsidiaries to or by the
     Issuer or any of its Subsidiaries (other than the Issuer and its
     Subsidiaries) in connection with the writing of the underlying insurance
     policies related to the CRM business.

          (r)  Consolidated Debt to Consolidated Total Capital Ratio. It will
               -----------------------------------------------------
     not permit the ratio of Consolidated Debt to Consolidated Total Capital to
     exceed (i) [0.45] [insert ratio reasonably satisfactory to XL and the
     Company at the time of issuance of this Debenture] to 1 at any time from
     date of issuance of this Debenture to March 21, 2002, or (ii) [0.40]
     [insert ratio reasonably satisfactory to XL and the Company at the time of
     issuance of this Debenture] to 1 at any time thereafter.

          (s)  Shareholders' Equity. It will maintain a Shareholders' Equity
               --------------------
     which is not at any time less than the sum of (i) $[  ] [insert amount
     reasonably satisfactory to XL and the Company at the time of issuance of
     this Debenture] plus (ii) 50% of cumulative positive consolidated net
     income (without deduction for any net loss for any period) of the Issuer
     and its Subsidiaries after the last day of the fiscal quarter during which
     the first Convertible Debenture due 2006 of the Issuer is issued.

          (t)  No Change in Accounting. It will not, and will not cause or
               -----------------------
     permit any of its Subsidiaries to, make any material change in any
     accounting policy or practice including, without limitation, with respect
     to accounting for loss reserves and/or reinsurance recoverables other than
     any such changes that are required by law or any order of any Governmental
     Entity having jurisdiction over the Issuer or any such Subsidiary.

          (u)  XL Consent Rights. (a) Until the earlier of such time as XL owns
               -----------------
     less than 20% of the principal amount of outstanding Debentures or such
     time as 80% or more of the principal amount of Debentures originally issued
     on the Original Issue Date are converted to Common Stock of the Issuer in
     accordance with Section 5, (x) it will not, and will not cause or permit
     any of its Subsidiaries to, enter into or consummate any transaction
     described in the foregoing Sections 6(a), 6(c), 6(h), 6(i), 6(p), 6(q) and
     6(t) without the prior written consent of XL and (y) XL shall have the
     right to approve the Insurance Subsidiary or other entity that writes the
     principal insurance
<PAGE>

                                     -24-

     policies relating to the CRM business in connection with the Issuer's IPC
     (i.e., rent-a-captive) companies.

          (b)  [At any time subsequent to exchange of at least 80% of the
     Debentures originally issued to Debentures issued by Newco or to Common
     Stock issued by Newco, the Issuer shall not, and shall not cause or permit
     any of its Subsidiaries (other than Subsidiaries of Newco) to, [engage in
     any transactions outside of the ordinary course of business with, or take
     any other action that would adversely affect, Newco], without the prior
     written consent of XL.]

     SECTION 7.  EVENTS OF DEFAULT.

     (a)  Events of Default. If one or more of the following events (each, an
          -----------------
"Event of Default") shall have occurred and be continuing:
 ----------------

          (i)    there shall be a failure to pay when due (whether at maturity,
     upon mandatory redemption, acceleration or otherwise) all or any part of
     the principal of this Debenture;

          (ii)   there shall be a failure to pay when due all or any part of the
     interest or premium due on this Debenture or any other amount payable by
     the Issuer or any of its Subsidiaries to the Holder under any Transaction
     Document, which failure remains unremedied for a period of 10 days after
     the due date thereof;

          (iii)  the Issuer or any of its Subsidiaries shall fail to observe or
     perform any covenant or agreement contained in Sections 6(a), 6(b), 6(f),
     6(h), 6(j), 6(q), 6(r) or 6(s) of this Debenture;

          (iv)   the Issuer or any of its Subsidiaries shall fail to observe or
     perform any of its other agreements or covenants hereunder (other than
     those covered by clauses (i), (ii) and (iii) above) or in any other
     Transaction Document and such failure continues for 30 days;

          (v)    any representation, warranty, certification or statement made
     by MRM or the Issuer or any of their Subsidiaries in any Transaction
     Document shall prove to have been untrue, misleading or inaccurate in any
     material respect when made or deemed made;

          (vi)   (A) the Issuer or any of its Subsidiaries shall default in the
     payment when due of any principal of or interest on any Debt (including the
     Existing Bank Debt) with an aggregate principal amount in excess of $5.0
     million beyond the grace period, if any, or the holder or holders of any
     Debt with an aggregate principal amount

<PAGE>

                                     -25-

     in excess of $5.0 million shall have accelerated the maturity of such Debt
     as a result of an event of default thereunder or (B) at any time prior to
     expiration of the Put Term, any principal amount of the Existing Bank Debt
     or the RHINOS shall become due or payable for any reason or the holders of
     any Existing Bank Debt or RHINOS shall have the right to accelerate the
     maturity thereof;

          (vii)    the Issuer or any of its Subsidiaries commences a voluntary
     case or other proceeding seeking liquidation, reorganization or other
     relief with respect to itself or its debts under any bankruptcy, insolvency
     or other similar law now or hereafter in effect or seeking the appointment
     of a trustee, receiver, liquidator, custodian or other similar official of
     it or any substantial part of its property, or consents to any such relief
     or to the appointment of or taking possession by any such official in an
     involuntary case or other proceeding commenced against it, or makes a
     general assignment for the benefit of creditors, or fails generally, or
     admits in writing its inability, to pay its debts as they become due or on
     demand, or takes any corporate action to authorize any of the foregoing;

          (viii)   an involuntary case or other proceeding is commenced against
     the Issuer or any of its Subsidiaries seeking liquidation, reorganization
     or other relief with respect to it or its debts under any bankruptcy,
     insolvency or other similar law now or hereafter in effect or seeking the
     appointment of a trustee, receiver, liquidator, custodian or other similar
     official of it or any substantial part of its property and such case or
     proceeding continues undismissed or undischarged for a period of 30 days,
     or an order for relief is entered against the Issuer or any of its
     Subsidiaries under the U.S. Bankruptcy Code or any other bankruptcy or
     insolvency law;

          (ix)     any material attachment, sequestration or similar proceeding
     (each, a "Proceeding") shall be filed against any assets or properties of
               ----------
     the Issuer or any of its Subsidiaries, which Proceeding remains
     undischarged, unbonded by the Issuer or undismissed for a period of 30 days
     after the commencement thereof;

          (x)      one or more judgments for the payment of money shall be
     rendered against the Issuer or any of its Subsidiaries for an amount in
     excess of $5.0 million and such judgment(s) shall continue unsatisfied and
     in effect for a period of 30 consecutive days without being vacated,
     discharged, satisfied or stayed or bonded pending appeal;

          (xi)     a Change of Control Event shall occur; or

          (xii)    any insurance license or other authorization or permit
     necessary for the conduct by any Insurance Subsidiary of its business is
     revoked or withdrawn or otherwise fails to be in full force and effect,
     which failure, revocation or withdrawal, in the judgment of the Holder, has
     a material adverse change in the assets, liabilities, busi-
<PAGE>

                                     -26-

     ness, results of operations, condition (financial or otherwise), Permits or
     prospects of the Issuer and its Subsidiaries taken as a whole.

then, and in every such occurrence, unless at such time all obligations under
the Transaction Documents have been paid in full in cash, the holders of at
least 25% in aggregate principal amount of the outstanding Debentures may, by
notice to the Issuer, declare all amounts under the Debentures and all other
amounts owing to the holders of Debentures under the Transaction Documents
(together with accrued interest thereon) to be, and the Debentures and such
other Debt held by the Holder and the other holders of Debentures shall thereon
become, immediately due and payable; provided, however, that in the case of any
                                     --------  -------
of the Events of Default specified in clause (vii) or (viii) above then, without
any notice to the Issuer or any other act by any holder, the entire principal
amount of the Debentures and such other Debt and amounts owing to the holders of
Debentures, together with accrued interest thereon, shall become immediately due
and payable.

     The rights provided for herein are cumulative and are not exclusive of any
other rights, powers, privileges or remedies provided by law.

     (b)  Waivers of Defaults. The Requisite Holders, by notice to the Issuer,
          -------------------
may waive an existing Default and its consequences; provided, however, that a
                                                    --------  -------
waiver of a Default described under Sections 7(a)(i) or (ii) shall not be
effective as to any holder without its consent. When a Default is waived, it is
cured and ceases, but no such waiver shall extend to any subsequent or other
Default or impair any right consequent thereon.

     SECTION 8. GUARANTEE.

     (a)  The Guarantee. Each of the Guarantors hereby, jointly and severally,
          -------------
unconditionally guarantees to the Holder and its successors and assigns the
prompt payment in full when due (whether at stated maturity, upon mandatory
redemption, by acceleration or otherwise) of the principal of and interest on
this Debenture and all other amounts from time to time owing to the Holder under
any Transaction Document (such obligations being herein collectively called the
"Guaranteed Obligations"). Each of the Guarantors hereby further agrees that if
 ----------------------
the Issuer shall fail to pay in full when due (whether at stated maturity, by
acceleration or otherwise) any of the Guaranteed Obligations, the Guarantors
will promptly pay the same, without any demand or notice whatsoever, and that in
the case of any extension of time of payment or renewal of any of the Guaranteed
Obligations, the same will be promptly paid in full when due (whether at
extended maturity, by acceleration or otherwise) in accordance with the terms of
such extension or renewal.

     (b)  Obligations Unconditional. The Guaranteed Obligations are absolute,
          -------------------------
irrevocable and unconditional, irrespective of the value, genuineness, validity,
regularity or enforceability of the obligations of the Issuer under any
Transaction Document, or any substitution,
<PAGE>

                                     -27-

release or exchange of any other guarantee of or security for any of the
Guaranteed Obligations, and, to the fullest extent permitted by applicable law,
irrespective of any other circumstance whatsoever that might otherwise
constitute a legal or equitable discharge or defense of a surety or guarantor,
it being the intent of this Section 8(b) that the Guaranteed Obligations shall
be absolute, irrevocable and unconditional, joint and several, under any and all
circumstances. Without limiting the generality of the foregoing, it is agreed
that the occurrence of any one or more of the following shall not alter or
impair the liability of the Guarantors hereunder which shall remain absolute,
irrevocable and unconditional as described above:

          (i)    at any time or from time to time, without notice to any of the
     Guarantors, the time for any performance of or compliance with any of the
     Guaranteed Obligations shall be extended, or such performance or compliance
     shall be waived;

          (ii)   any of the acts mentioned in any of the provisions of any
     Transaction Document shall be done or omitted; or

          (iii)  the maturity of any of the Guaranteed Obligations shall be
     accelerated, or any of the Guaranteed Obligations shall be modified,
     supplemented or amended in any respect, or any right under any Transaction
     Document shall be amended, modified or waived in any respect or any other
     guarantee of any of the Guaranteed Obligations or any security therefor
     shall be released or exchanged in whole or in part or otherwise dealt with.

     Each of the Guarantors hereby expressly waives diligence, presentment,
demand of payment, protest and all notices whatsoever, and any requirement that
the Purchaser or the Holder exhaust any right, power or remedy or proceed
against the Issuer under any Transaction Document, or against any other Person
under any other guarantee of, or security for, any of the Guaranteed
Obligations. Each of the Guarantors waives any and all notice of the creation,
renewal, extension or accrual of any of the Guaranteed Obligations and notice of
or proof of reliance by the Holder upon this guarantee or acceptance of this
guarantee. This guarantee shall be construed as a continuing, absolute,
irrevocable and unconditional guarantee of payment without regard to any right
of offset with respect to the Guaranteed Obligations at any time or from time to
time held by the Holder, and the Guaranteed Obligations shall not be conditioned
or contingent upon the pursuit by the Holder or any other Person at any time of
any right or remedy against the Issuer or against any other Person which may be
or become liable in respect of all or any part of the Guaranteed Obligations or
against any collateral security or guarantee therefor or right of offset with
respect thereto. This guarantee shall remain in full force and effect and be
binding in accordance with and to the extent of its terms upon the issuer and
its successors and assigns thereof, and shall inure to the benefit of the
Holder, and its successors and assigns.
<PAGE>

                                     -28-

     (c)  Subrogation; Subordination. Each of the Guarantors hereby agrees that
          --------------------------
until the payment and satisfaction in full in cash of all Guaranteed Obligations
it shall not exercise any right or remedy arising by reason of any performance
by it of its guarantee in Section 8(a), whether by subrogation or otherwise,
against the Issuer or any other guarantor of any of the Guaranteed Obligations
or any security for any of the Guaranteed Obligations. The payment of any
amounts due with respect to any indebtedness of the Issuer now or hereafter
owing to any of the Guarantors by reason of any payment by such Guarantor under
this Section 8 is hereby subordinated to the prior payment in full of the
Guaranteed Obligations. Each Guarantor agrees that it will not demand, sue for
or otherwise attempt to collect any such indebtedness of the Issuer to such
Guarantor until the Guaranteed Obligations shall have been paid in full. If,
notwithstanding the foregoing sentence, a Guarantor shall prior to the payment
in full of its Guaranteed Obligations collect, enforce or receive any amounts in
respect of such indebtedness, such amounts shall be collected, enforced and
received by such Guarantor as trustee for the Holder and paid over to the Holder
on account of its Guaranteed Obligations without affecting in any manner the
liability of such Guarantor under the other provisions of the guaranty contained
herein.

     (d)  Limitation on Guarantee. Each Guarantor and by its acceptance hereof
          -----------------------
the Holder hereby confirms that it is the intention of all such parties that the
guarantee by such Guarantor pursuant to its Guarantee not constitute a
fraudulent transfer or conveyance for purposes of any state or Federal
bankruptcy, insolvency, reorganization or other law affecting the rights of
creditors generally, the Uniform Fraudulent Conveyance Act, the Uniform
Fraudulent Transfer Act or any similar Federal or state law. To effectuate the
foregoing intention, the Holder and such Guarantor hereby irrevocably agree that
the obligations of such Guarantor under the Guarantee shall be limited to the
maximum amount as will, after giving effect to all other contingent and fixed
liabilities of such Guarantor and after giving effect to any collections from or
payments made by or on behalf of any other Guarantor in respect of the
obligations of such other Guarantor under its Guarantee or pursuant to
subsection (e) below, result in the obligations of such Guarantor under the
Guarantee not constituting such fraudulent transfer or conveyance.

     (e)  Contribution. In order to provide for just and equitable contribution
          ------------
among the Guarantors, the Guarantors agree, inter se, that in the event any
                                            ----- --
payment or distribution is made by any Guarantor (a "Funding Guarantor") under
                                                     -----------------
the Guarantee, such Funding Guarantor shall be entitled to a contribution from
all other Guarantors in a pro rata amount based on the Adjusted Net Assets of
                          --- ----
each Guarantor (including the Funding Guarantor) for all payments, damages and
expenses incurred by that Funding Guarantor in discharging the Issuer's
obligations with respect to any Debentures or any other Guarantor's obligations
with respect to the Guarantee. "Adjusted Net Assets" of such Guarantor at any
                                -------------------
date shall mean the lesser of the amount by which (x) the fair value of the
property of such Guarantor exceeds the total amount of liabilities, including,
without limitation, contingent liabilities (after giving effect to
<PAGE>

                                     -29-

all other fixed and contingent liabilities incurred or assumed on such date and
after giving effect to any collection from any other Subsidiary of the Guarantor
in respect of the obligations of its Guarantee), but excluding liabilities under
the Guarantee, of such Guarantor at such date and (y) the present fair salable
value of the assets of such Guarantor at such date exceeds the amount that will
be required to pay the probable liability of such Guarantor on its debts (after
giving effect to all other fixed and contingent liabilities incurred or assumed
on such date and after giving effect to any collection from any other Subsidiary
of the Issuer in respect of the obligations of such Guarantor under its
Guarantee), excluding debt in respect of the Guarantee of such Guarantor, as
they become absolute and matured.


     SECTION 9.  REGISTRATION; EXCHANGE, SUBSTITUTION OF DEBENTURES.

     (a)  Registration of Debentures. The Issuer shall keep at its principal
          --------------------------
executive office a register for the registration and registration of transfers
of this Debenture (the "Debenture Register"). The name and address of each
                        ------------------
holder of Debentures, each transfer of this Debenture and the related Newco
Voting Preferred Stock and the name and address of each transferee of one or
more Debentures shall be registered in such register. Prior to due presentment
for registration of transfer, the Person in whose name this Debenture shall be
registered shall be deemed and treated as the owner and Holder hereof for all
purposes hereof, and the Issuer shall not be affected by any notice or knowledge
to the contrary. The Issuer shall give to the Holder of at least 5% of the
original aggregate principal amount ($112.5 million) of all Debentures promptly
upon request therefor, a complete and correct copy of the names and addresses of
all registered holders of Debentures.

     (b)  Transfer of Debentures.
          ----------------------

     (i)  So long as XL owns any Debentures, any transfer of this Debenture or
portion hereof shall be subject to the prior written approval of XL, such
approval not to be unreasonably withheld (it being understood that it is
reasonable for XL to withhold its approval of any proposed transfer of this
Debenture or portion hereof to a competitor of the Issuer or XL or to any
investor whose ownership might, in the judgment of XL, adversely affect the tax
status of the Issuer, Newco, XL or any of their respective Subsidiaries or
shareholders). In the event the Holder desires to transfer this Debenture or any
portion hereof, the Holder shall deliver to XL written notice of such intention
(such notice shall identify the amount to be transferred and the identity of the
proposed transferee) at XL Insurance Ltd., c/o XL Capital Ltd., XL House, One
Bermudiana Road, Hamilton HM 11, Bermuda, telecopy: (441) 292-8618, Attention:
Paul Giordano. XL shall notify the Holder in writing by 5:00 p.m. (Bermuda time)
on the fifth Business Day following its receipt of written notice from the
Holder of its request to transfer this Debenture or portion hereof of its
decision whether to approve such transfer and, if its decision is not to approve
such transfer, its reasons therefor. The failure by XL to notify
<PAGE>

                                     -30-

the Holder of its decision to approve a proposed transfer within such time
period shall be deemed to be an approval by XL of the proposed transfer.
Notwithstanding the foregoing, the holders of the RHINOS Debentures will have
the right to transfer the RHINOS Debentures, subject to applicable securities
laws, to any institutional portfolio or hedge fund investor (other than a direct
or indirect competitor of MRM or XL or any entity whose ownership might, in the
judgment of XL, adversely affect the tax status of MRM, the Issuer, XL or any of
their respective Subsidiaries or their shareholders).

     (ii)   This Debenture may not be transferred separately from, and may be
transferred only together with, shares of Newco Voting Preferred Stock
representing the same percentage of the total amount of outstanding shares of
Newco Voting Preferred Stock that the principal amount of Convertible Debentures
due 2006 of the Issuer proposed to be transferred or assigned represents of the
total principal amount of outstanding Convertible Debentures due 2006.

     (iii)  Upon surrender of this Debenture and the related Newco Voting
Preferred Stock at the principal executive office of the Issuer for registration
of transfer or exchange (and in the case of a surrender for registration of
transfer, duly endorsed or accompanied by a written instrument of transfer duly
executed by the registered Holder or his attorney duly authorized in writing and
accompanied by the address for notices of each transferee of this Debenture or
part thereof), the Issuer shall execute and deliver, at the Issuer's expense
(except as provided below), one or more new Debentures (as requested by the
Holder) in exchange therefor, in an aggregate principal amount equal to the
unpaid principal amount of the surrendered Debenture and a new certificate
representing the related Newco Voting Preferred Stock with voting rights equal
to the aggregate voting rights of the Common Stock issuable upon conversion of
such new Debenture. Each such new Debenture shall be payable to such Person as
such Holder may request and shall be substantially in the form of this
Debenture. Each such new Debenture shall be dated and bear interest from the
date on which interest shall have been paid on the surrendered Debenture or
dated the date of the surrendered Debenture if no interest shall have been paid
hereon. The Issuer may require payment of a sum sufficient to cover any stamp
tax or governmental charge imposed in respect of any such transfer of
Debentures. This Debenture shall not be transferred in denominations of less
than $100.00; provided, however, that if necessary to enable the registration of
              --------  -------
transfer by the Holder of the entire amount of this Debenture, one Debenture may
be in a denomination of less than $100.00. Any transferee, by its acceptance of
a Debenture registered in its name (or the name of its nominee), shall be deemed
to have made the representation set forth in Sections 4.2 and 4.3 of the
Securities Purchase Agreement.

     (c)  Replacement of this Debenture. Upon receipt by the Issuer of evidence
          -----------------------------
reasonably satisfactory to it of the ownership of and the loss, theft,
destruction or mutilation of this Debenture, and
<PAGE>

                                     -31-

          (i)  in the case of loss, theft or destruction, of indemnity
     reasonably satisfactory to it, or
          (ii) in the case of mutilation, upon surrender and cancellation
     thereof,

the Issuer at its own expense shall execute and deliver, in lieu thereof, a new
Debenture, dated and bearing interest from the date to which interest shall have
been paid on this Debenture or dated the date of this Debenture if no interest
shall have been paid thereon.

     SECTION 10.  DEFINITIONS; CONSTRUCTION.

     (a)  Definitions. The following terms, as used herein, have the following
          -----------
meanings:

     "Adjusted Net Assets" has the meaning set forth in Section 8(e).
      -------------------

     "Affiliate" means, with respect to any Person (the "Subject Person"), (i)
      ---------                                          --------------
any other Person (a "Controlling Person") that directly, or indirectly through
                     ------------------
one or more intermediaries, Controls the Subject Person or (ii) any other Person
which is Controlled by or is under common Control with a Controlling Person;

provided, however, that the Holder and its Affiliates shall not be deemed
--------  -------
Affiliates of the Issuer or any of its Subsidiaries.

     "Asset Sale" means any direct or indirect sale, issuance, conveyance,
      ----------
lease, assignment, transfer or other disposition for value by the Issuer or any
of its Subsidiaries to any Person other than the Issuer or any of its wholly
owned Subsidiaries (any such transaction, a "disposition") of any asset of the
                                             -----------
Issuer or any of its Subsidiaries, excluding (i) any disposition in the ordinary
course of business, (ii) any disposition of Cash Equivalents in the ordinary
course of business, (iii) any disposition of Investment Securities in the
ordinary course of business the proceeds of which are used to purchase other
Investment Securities or invested in Cash Equivalents pending such purchase and
(iv) any disposition of assets (or series of related dispositions) the Fair
Market Value of which does not exceed $1.0 million in the aggregate.

     "Authorized Control Level" means "Authorized Control Level" as defined by
      ------------------------
the NAIC from time to time and as applied in the context of the Risk-Based
Capital Guidelines promulgated by the NAIC (or any term substituted therefor by
the NAIC).  In the event that there is a conflict between the risk-based capital
formulas adopted by the NAIC and any applicable department of insurance, the
calculation of the applicable department of insurance shall govern.

     "Business Day" means any day except a Saturday, Sunday or other day on
      ------------
which (i) commercial banks in The City of New York are authorized or required by
law to close or (ii) the New York Stock Exchange is not open for trading.
<PAGE>

                                     -32-

     "Capital Stock" means, with respect to any Person, any and all shares,
      -------------
partnership interests or equivalents (however designated and whether voting or
non-voting) of such Person's capital stock, whether outstanding on the date
hereof or hereafter issued.

     "Cash Equivalents" means (i) marketable direct obligations issued or
      ----------------
unconditionally guaranteed by the United States government or issued by any
agency thereof and backed by the full faith and credit of the United States of
America, in each case maturing within one year from the date of acquisition
thereof; (ii) marketable direct obligations issued by any state of the United
States of America or any political subdivision of any such state or any public
instrumentality thereof maturing within one year from the date of acquisition
thereof and, at the time of acquisition, having the highest rating obtainable
from either S&P or Moody's; (iii) commercial paper maturing no more than one
year from the date of creation thereof and, at the time of acquisition, having
the highest rating obtainable from either S&P or Moody's; (iv) certificates of
deposit or bankers' acceptances maturing within one year from the date of
acquisition thereof issued by any commercial bank organized under the laws of
the United States of America or any state thereof or the District of Columbia
that (A) is at least "adequately capitalized" (as defined in the regulations of
its primary Federal banking regulator) and (B) has Tier I capital (as defined in
such regulations) of not less than $250.0 million; (v) certificates of deposit
or banker's acceptances maturing within one year from the date of acquisition
thereof issued by the Bank of Bermuda or The Bank of N.T. Butterfield & Son
Limited; (vi) shares of any money market mutual fund that (a) has its assets
invested continuously in the types of investments referred to in clauses (i) and
(ii) above, (b) has net assets of not less than $500.0 million, and (c) has the
highest rating obtainable from either S&P or Moody's; and (vii) repurchase
agreements with respect to, and which are fully secured by a perfected security
interest in, obligations of a type described in clause (i) or clause (ii) above
and are with any commercial bank described in clause (iv) above.

     "Change of Control Event" shall mean any of the following:  (i) the Issuer
      -----------------------
shall cease to own, directly or indirectly, 100% on a Fully Diluted Basis of the
economic and voting interest in the Capital Stock of the Insurance Subsidiaries
or (ii) the Permitted Holders shall cease to own and control at least a majority
of the issued and outstanding Common Stock of the Issuer (for purposes of this
calculation, only the denominator shall be calculated on a Fully Diluted Basis)
or (iii) any Person or "group" (within the meaning of Rules 13d-3 and 13d-5
under the Exchange Act), except the Permitted Holders, shall have (x) acquired
beneficial ownership of 33% or more on a Fully Diluted Basis of the voting
and/or economic interest in the Issuer's Capital Stock other than any such
acquisition resulting solely from conversion of Debentures (for purposes of this
calculation, only the denominator shall be calculated on a Fully Diluted Basis)
and the Permitted Holders shall, at such time, beneficially own a lesser
percentage than such Person or group or (y) obtained the power (whether or not
exercised) to elect a majority of the Issuer's directors or (iv) the board of
directors of the Issuer shall cease to consist of a majority of Continuing
Directors or (v) any event or condition which consti-
<PAGE>

                                     -33-

tutes a change of control under the Existing Bank Agreement or the documents
governing the RHINOS.

     "Common Stock" means the common stock or common shares of the referenced
      ------------
Person.

     "Common Stock Equivalents" has the meaning set forth in Section 4(e).
      ------------------------

     "Consolidated Debt" means, with respect to the Issuer and its Subsidiaries
      -----------------
at any date, the Debt of the Issuer and its Subsidiaries, determined on a
consolidated basis as of such date including, without limitation, all Debt
evidenced by the Debentures.

     "Consolidated Total Capital" means, with respect to the Issuer and its
      --------------------------
Subsidiaries at any date, the sum, without duplication, of Consolidated Debt and
Shareholders' Equity.

     "Constituent Person" has the meaning set forth in Section 4(k).
      ------------------

     "Continuing Directors" shall mean the directors of the Issuer on the
      --------------------
Closing Date and each other director whose nomination for the election to the
board of directors of the Issuer is recommended by a majority of the then
Continuing Directors.

     "Control" (including, with correlative meanings, the terms "Controlling,"
      -------                                                    -----------
"Controlled by" and "under common Control with"), as used with respect to any
--------------       -------------------------
Person, means the possession, directly or indirectly, of the power to direct or
cause the direction of the management and policies of that Person, whether
through the ownership of voting securities or interests, by contract or
otherwise.

     "Conversion Date" has the meaning set forth in Section 4(b).
      ---------------

     "Conversion Price" has the meaning set forth in Section 4(a).
      ----------------

     "CRM" has the meaning set forth in the definition of "Restructuring."
      ---

     "Debenture" means this Convertible Debenture due 2006 and "Debentures"
      ---------                                                 ----------
means, collectively, this Debenture and any other Convertible Debentures due
2006 of the Issuer and Convertible Exchangeable Debentures due 2006 of MRM.

     "Debenture Register" has the meaning set forth in Section 9(a).
      ------------------

     "Debt" of any Person means at any date, without duplication, (i) all
      ----
obligations of such Person for borrowed money (other than (except for purposes
of Section 7(a)(vi)) regularly scheduled interest payments, including interest
payable in the form of additional Debt obligations), (ii) all obligations of
such Person evidenced by bonds, debentures, notes or other simi-
<PAGE>

                                     -34-

lar instruments issued by such Person, (iii) all obligations of such Person to
pay the deferred purchase price of property or services, except trade accounts
payable arising in the ordinary course of business, (iv) all obligations of such
Person under any Financing Lease, (v) all reimbursement obligations of such
Person in respect of letters of credit or other similar instruments, (vi)
Disqualified Capital Stock of such Person (other than Policy Holder Preferred
Shares), (vii) Preferred Stock of any Subsidiary of such Person (other than
Policy Holder Preferred Shares), (viii) all Debt of others secured by a Lien on
any asset of such Person, whether or not such Debt is otherwise an obligation of
such Person, and (ix) all Debt of others Guaranteed by such Person; provided,
                                                                    --------
however, that Debt shall not include the accretion of principal amount on zero
-------
coupon discount obligations.

     "Default" means any event or condition which constitutes an Event of
      -------
Default or which with the giving of notice or lapse of time or both would,
unless cured within the stated time period or waived, become an Event of
Default.

     "Disqualified Capital Stock" means that portion of any Capital Stock which,
      --------------------------
by its terms (or by the terms of any security into which it is convertible or
for which it is exchangeable at the option of the holder thereof), or upon the
happening of any event, matures or is mandatorily redeemable, pursuant to a
sinking fund obligation or otherwise, or is redeemable at the sole option of the
holder thereof, or requires the payment of any dividends, in each case at any
time that any obligation under the Transaction Documents is outstanding.

     "ERISA" means the Employee Retirement Income Security Act of 1974, as
      -----
amended.

     "ERISA Group" means the Issuer and its Subsidiaries and all members of a
      -----------
controlled group of corporations and all trades or businesses (whether or not
incorporated) under common control which, together with the Issuer or any of its
Subsidiaries, are treated as a single employer under Section 414 of the Internal
Revenue Code.

     "Event of Default" has the meaning set forth in Section 7(a).
      ----------------

     "Exchange Act" means the Securities Exchange Act of 1934, as amended.
      ------------

     "Existing Bank Agreement" means the Credit Agreement dated as of September
      -----------------------
21, 2000 among the MRM, Mutual Group, Ltd., Bank of America, N.A., as
Administrative Agent, and the Lenders party thereto, as in effect on the
Original Issue Date or as amended, modified or refinanced in accordance with
Sections 6(e) and 6(p) hereof.

     "Existing Bank Debt" means the Debt in an aggregate principal amount of no
      ------------------
more than $180.0 million of MRM outstanding under the Existing Bank Agreement.
<PAGE>

                                     -35-

     "Existing Bank Debt Documents" means the Existing Bank Agreement and all
      ----------------------------
other documentation related to the Existing Bank Debt as in effect on the
Original Issue Date or as amended, modified or re-executed in accordance with
Sections 6(e) and 6(p) hereof.

     "Expense Ratio" means a ratio equal to (i) Other Underwriting Expenses
      -------------
Incurred divided by (ii) Net Premiums Written (as set forth in the Issuer's
combined annual statements of the U.S. Insurance Subsidiaries).

     "Fair Market Value" means, with respect to any Asset Sale, the price (after
      -----------------
taking into account any liabilities relating to such asset) which could be
negotiated in an arm's-length free market transaction, for cash, between a
willing seller and a willing and able buyer, neither of which is under any
compulsion to complete the transaction.

     "FAS 115" means Statement No. 115 ("Accounting for Certain Investments in
      -------
Indebtedness and Equity Securities") issued by the Financial Accounting
Standards Board.

     "Financing Lease" means any lease of property, real or personal, the
      ---------------
obligations of the lessee in respect of which are required in accordance with
GAAP to be capitalized on a balance sheet of the lessee.

     "Fully Diluted Basis" means after giving effect to the exercise of all
      -------------------
outstanding options, warrants and other rights to purchase Capital Stock of the
relevant Person and the conversion or exchange of all securities convertible or
exchangeable into Capital Stock of the relevant Person (whether or not then
exercisable, exchangeable or convertible and whether or not "in the money").

     "Funding Guarantor" has the meaning set forth in Section 8(e).
      -----------------

     "GAAP" has the meaning set forth in Section 10(b).
      ----

     "Governmental Entity" means any court, arbitral tribunal, administrative
      -------------------
agency or commission or other governmental or other regulatory authority or
agency, including any insurance regulatory authority or agency or Insurance
Department.

     "Guarantee" by any Person means any obligation, contingent or otherwise, of
      ---------
such Person directly or indirectly guaranteeing (whether by virtue of
partnership arrangements, by agreement to keepwell, to purchase assets, goods,
securities or services, to take-or-pay, or to maintain a minimum net worth,
financial ratio or similar requirements, or otherwise) any Debt of any other
Person and, without limiting the generality of the foregoing, any obligation,
direct or indirect, contingent or otherwise, of such Person (i) to purchase or
pay (or advance or supply funds for the purchase or payment of) such Debt or
(ii) entered into for the purpose of assuring in any other manner the holder of
such Debt of the payment thereof or to protect such
<PAGE>

                                     -36-

holder against loss in respect thereof (in whole or in part). The term
"Guarantee" used as a verb has a corresponding meaning.
 ---------

     "Guaranteed Obligations" has the meaning set forth in Section 8.1(a).
      ----------------------

     "Guarantors" means each of the Subsidiaries of MRM named on the signature
      ----------
pages to this Debenture and each additional entity required to become a
Guarantor pursuant to Section 5(h) hereof.

     "Holder" has the meaning set forth in the introductory paragraphs hereto.
      ------

     "Independent Financial Advisor" has the meaning set forth in Section 4(e).
      -----------------------------

     "Initial Newco Conversion Price" means an amount, expressed as a dollar
      ------------------------------
amount, to be determined at the time of the first exchange of any 9 3/8%
convertible exchangeable debentures due 2006 of MRM for Debentures, that
(assuming the exchange of all 9 3/8% convertible exchangeable debentures due
2006 of MRM for Debentures and the conversion of all Debentures into Common
stock of the Issuer in accordance with Section 4 of this Debenture) would result
in the holders of the Debentures receiving Common Stock of the Issuer equal to
33.5% of the equity ownership of Newco, on a fully diluted basis; provided,
                                                                  --------
however, that if the RHINOS Debentures are issued, such ownership percentage
-------
shall be equal to 57.6%, on a Fully Diluted Basis,

     "Insurance Acts" means all applicable insurance laws and the applicable
      --------------
rules and regulations thereunder.

     "Insurance Department" means the Bermuda Registrar of Companies and the
      --------------------
Departments of Insurance of the States of [Pennsylvania and Illinois].

     "Insurance Subsidiaries" means each Subsidiary of the Issuer that is a
      ----------------------
licensed insurance company.

     "Interest Payment Date" has the meaning set forth in Section 1.
      ---------------------

     "Internal Revenue Code" means the Internal Revenue Code of 1986, as
      ---------------------
amended.

     "Investment" means any investment in any Person, whether by means of share
      ----------
purchase, capital contribution, loan, advance, time deposit or otherwise.

     "Investment Securities" means "securities" classified as "trading
      ---------------------
securities" or "available-for-sale securities" for purposes of FAS 115, in each
case within the meaning of FAS 115.
<PAGE>

                                     -37-


     "IPC" means Insurance Profit Center.
      ---

     "Issuer" has the meaning set forth in the introductory paragraphs hereto.
      ------

     "Lien" means any lien, mechanic's lien, materialmen's lien, lease,
      ----
easement, charge, encumbrance, mortgage, conditional sale agreement, title
retention agreement, voting trust agreement, assignment by way of security,
restriction on voting or transfer, agreement to sell or convey, option, claim,
title imperfection, encroachment or other survey defect, pledge, restriction,
security interest or adverse claim of any kind, whether arising by contract or
under law or otherwise (including any Financing Lease having substantially the
same economic effect as any of the foregoing, and the filing of any financing
statement under the UCC or comparable law of any jurisdiction in respect of any
of the foregoing).

     "Loss Ratio" means a ratio equal to (i) Losses Incurred plus Loss Expenses
      ----------
Incurred (inclusive of allocated and unallocated loss adjustments) divided by
(ii) Net Premiums Earned (as set forth in the Issuer's combined annual
statements of the U.S. Insurance Subsidiaries).

     "Maturity Date" has the meaning set forth in the introductory paragraphs
      -------------
hereto.

     "Moody's" means Moody's Investors Service, Inc. or its successor.
      -------

     "MRM" has the meaning set forth in Section 1.
      ---

     "MRM Voting Preferred Stock" means shares of preferred stock of MRM having
      --------------------------
a nominal liquidation preference and par value, no dividend rights and aggregate
voting rights equal to the aggregate voting rights of the Common Stock of MRM
issuable upon conversion of all Debentures issued on the Original Issue Date.

     "Multiemployer Plan" means at any time a multiemployer plan within the
      ------------------
meaning of Section 4001(a)(3) of ERISA to which any member of the ERISA Group is
then making or accruing an obligation to make contributions or has within the
preceding five plan years made contributions, including for these purposes any
Person which ceased to be a member of the ERISA Group during such five year
period.

     "NAIC" means the National Association of Insurance Commissioners.
      ----

     "Newco Voting Preferred Stock" means shares of preferred stock of the
      ----------------------------
Issuer having a nominal liquidation preference and par value, no dividend rights
and aggregate voting rights equal to the aggregate voting rights of the Common
Stock of the Issuer issuable upon conversion of all Debentures issued on the
Original Issue Date.

     "non-electing share" has the meaning set forth in Section 4(k).
      ------------------
<PAGE>

                                     -38-


     "Obligors" means, collectively, the Issuer and the Guarantors; and
      --------
"Obligor" means any of them.
 -------

     "Original Issue Date" has the meaning set forth in Section 1.
      -------------------

     "Other Investor Warrants" means the warrants to purchase Common Stock of
      -----------------------
the Issuer issued to First Union Merchant Banking 2001, LLC, High Ridge Capital
Partners II, L.P. and Century Capital Partners II.

     "Permits" means all domestic and foreign licenses, permits, consents,
      -------
franchises, orders, authorizations, clearances, certificates, and approvals from
Governmental Entities.

     "Permitted Holders" means (i) MRM or any of its wholly owned Subsidiaries
      -----------------
and (ii) XL Insurance Ltd. and its Affiliates.

     "Permitted Refinancings" means any incurrence by the Issuer of Debt that
      ----------------------
refunds, refinances, replaces or extends the Existing Bank Debt of the Company
or of a wholly owned Subsidiary of the Company, but only to the extent that (i)
such Debt is subject to the Subordination Agreement (if then in effect) to at
least the same extent as the Debt being refunded, refinanced, replaced or
extended; (ii) such Debt is scheduled to mature either (a) no earlier than the
Debt being refunded, refinanced or extended or (b) after the Maturity Date;
(iii) such Debt is in an aggregate principal amount that is equal to or less
than the sum of (a) the aggregate principal amount then outstanding under the
Debt being refunded, refinanced or extended, (b) the amount of accrued and
unpaid interest, if any, and premiums owed, if any, not in excess of preexisting
prepayment provisions on such Debt being refunded, refinanced or extended, and
(c) the amount of customary fees, expenses and costs related to the incurrence
of such Debt; (iv) such Debt does not have a Weighted Average Life to Maturity
that is less than the Weighted Average Life to Maturity of the Debt being
refinanced; (v) such Debt contains covenants no more onerous that the Debt being
refunded, refinanced, replaced or extended; and (vi) such Debt is incurred
either by the same Person that initially incurred the Debt being refunded,
refinanced, replaced or extended or by the Issuer.

     "Person" means an individual or a corporation, company, partnership, trust,
      ------
incorporated or unincorporated association, joint venture, joint stock company,
limited liability company, government (or any agency or political subdivision
thereof) or other entity of any kind.

     "Plan" means at any time an employee pension benefit plan (other than a
      ----
Multiemployer Plan) which is covered by Title IV of ERISA or subject to the
minimum funding standards under Section 412 of the Internal Revenue Code and
either (i) is maintained, or contributed to, by any member of the ERISA Group
for employees of any member of the ERISA Group or (ii) has at any time within
the preceding five years been maintained, or contributed
<PAGE>

                                     -39-


to, by any Person which was at the time a member of such ERISA Group for
employees of any Person which was at the time a member of the ERISA Group.

     "Policy Holder Preferred Shares" means shares of Preferred Stock of an IPC
      ------------------------------
(i.e., rent-a-captive) Subsidiary of the Issuer (or of a holding company
 ---
thereof) issued to policy holders solely in connection with the CRM business
consistent with past practices.

     "Preferred Stock" means, with respect to any Person, any Capital Stock of
      ---------------
such Person that has preferential rights over any other Capital Stock of such
Person with respect to dividends, distributions or upon liquidation.

     "Proceeding" has the meaning set forth in Section 7(a).
      ----------

     "Program Business" means the business of MRM in which it acts as a conduit
      ----------------
between producers of specialty books of business and reinsurers of such
business.

     "Put Term" means the period beginning on September [_], 2001 and ending on
      --------
the earlier of (i) November [  ], 2001 and (ii) the date on which all of the
Required Approvals have been obtained and the Restructuring has been completed;
provided, however, that if any holder of Debentures has exercised its right to
--------  -------
have any Debentures mandatorily redeemed pursuant to Section 3(b), the Put Term
shall mean such longer period until all such Debentures are indefeasibly paid in
full in cash.

     "Redemption Price" has the meaning set forth in Section 3(b).
      ----------------

     "Redemption Right" has the meaning set forth in Section 3(b).
      ----------------

     "Related Person" means any director, officer or employee of the Issuer or
      --------------
any of its Subsidiaries who is also an equity or debt holder of the Issuer or
any of its Subsidiaries.

     "Required Approvals" means all federal, state and local government
      ------------------
regulatory (including any Form A approvals and all other approvals relating to
insurance) and shareholders approvals necessary for consummation of the
Transactions, including all approvals necessary in order to remove any
restrictions or limitations on voting rights or conversion contained in any of
the Transaction Documents.

     "Requisite Holders" means the holders of a majority in principal amount of
      -----------------
all outstanding Debentures; provided, however, that at any time when XL holds or
                            --------  -------
has the right to vote a majority in principal amount of outstanding Debentures
(other than RHINOS Debentures), "Requisite Holders" shall mean a majority in
principal amount of outstanding Debentures (other than RHINOS Debentures);

provided, further, however, that as long as XL owns
--------  -------  -------
<PAGE>

                                     -40-


at least $50.0 million in principal amount of Debentures, XL will be deemed to
hold a majority of the principal amount of outstanding Debentures.

     "Restricted Payment" means, with respect to any Person, (i) any dividend or
      ------------------
other distribution on or in respect of any shares of Capital Stock of such
Person (except dividends payable solely in shares of Capital Stock of the same
class of such Person and except dividends or other distributions by a Subsidiary
of the Issuer to the Issuer) or (ii) any direct or indirect payment on account
of the purchase, redemption, retirement or acquisition of (a) any shares of such
Person's Capital Stock or (b) any option, warrant or other right to acquire
shares of such Person's Capital Stock.

     "Restructuring" means the restructuring of the operating units of MRM into
      -------------
two separate holding company structures, resulting in (i) one holding company
owning MRM's U.S. insurance operations and managing general agency entities and
operating through subsidiaries as a specialty insurer writing a selected book of
Program Business and (ii) the Issuer owning (A) all of MRM's fee generating
businesses that presently comprise its Corporate Risk Management ("CRM"),
                                                                   ---
Specialty Brokerage and Financial Services business segments and all of MRM's
non-U.S. insurance operations and (B) MRM's IPC (i.e., rent-a-captive)
                                                 ---
companies, other than Mutual Indemnity (Dublin) Limited (which will be confined
solely to its present business), that are principally dedicated to its CRM
business segment.  As part of the Restructuring, (x) the Issuer will be entitled
to receive all of the fees attributable to the CRM business except that MRM's
U.S. Insurance Subsidiaries that write the related policies (which will only be
Villanova Insurance Company ("Villanova") where Villanova is legally entitled to
                              ---------
write such policies and the prospective holder of the underlying policy does not
object to the use of Villanova, or a new company in the case of new or renewal
policies) may retain a portion of the premium equal to actual costs, but not
more than 1 1/4% and (y) the Issuer will be given an option to purchase
Villanova or such new company for book value.  The Restructuring shall be
effected in a manner reasonably acceptable to XL, including with respect to
capitalization.

     "RHINOS" means the Auction Rate Reset Preferred Securities, known as
      ------
"RHINOS," issued by an Affiliate of the Issuer, including the related
documentation.

     "RHINOS Debentures" means Debentures issued to any current or former
      -----------------
holders of RHINOS or any of their respective Affiliates in exchange for an equal
principal amount of RHINOS and any Debentures issued in exchange for any such
Debentures.

     "RHINOS or Bank Event" means the occurrence of any event upon or after
      --------------------
which any principal amount of the Existing Bank Debt or the RHINOS shall become
due or payable prior to its stated maturity for any reason or the holders of any
Existing Bank Debt or RHINOS shall have the right to accelerate the maturity
thereof.
<PAGE>

                                     -41-


     "Risk-Based Capital" means, for any Person, the ratio (expressed as a
      ------------------
percentage), at any time, of the Total Adjusted Capital of such Person to the
Authorized Control Level of such Person.

     "S&P" means Standard & Poor's Ratings Group or its successor.
      ---

     "Securities Act" means the Securities Act of 1933, as amended.
      --------------

     "Securities Purchase Agreement" has the meaning set forth in the
      -----------------------------
introductory paragraphs hereto.

     "Shareholders' Equity" means, with respect to the Issuer and its
      --------------------
Subsidiaries at any date, the shareholders' equity of the Issuer and its
Subsidiaries determined on a consolidated basis in accordance with GAAP;
provided, however, that, for purposes hereof, Shareholders Equity shall be
--------  -------
determined without regard to the requirements of FAS 115; and provided, further,
                                                              --------  -------
that the principal or face amount of the RHINOS shall not be considered to be
Shareholders Equity.

     "Significant Subsidiaries" has the meaning set forth in Section 1-02(w) of
      ------------------------
Regulation S-X under the Securities Act.

     "Statutory Accounting Principles" means generally accepted statutory
      -------------------------------
accounting principles for property and casualty insurance companies domiciled in
Pennsylvania or Illinois, as applicable.

     "Subsidiary" means, with respect to any Person, (i) any corporation or
      ----------
other entity of which more than 50% of the Capital Stock or other ownership
interests having ordinary voting power to elect more than 50% of the board of
directors or other persons performing similar functions are at the time directly
or indirectly owned by such Person and (ii) any partnership, association, joint
venture or other entity in which such Person, directly or indirectly through
Subsidiaries, has a greater than 50% equity interest.

     "Total Adjusted Capital" means "Total Adjusted Capital" as defined by the
      ----------------------
NAIC as of December 31, 1998 and as applied in the context of the Risk-Based
Capital Guidelines promulgated by the NAIC.  In the event that there is a
conflict between the risk-based capital formulas adopted by the NAIC and any
applicable department of insurance, the calculation of the applicable department
of insurance shall govern.

     "Transaction Documents" means (i) the Debentures, (ii) the Securities
      ---------------------
Purchase Agreement, (iii) the Collateral Agreement, (iv) the registration rights
agreements relating to the Debentures and the Warrants, (v) the Subordination
Agreement, (vi) the certificates of designations relating to the MRM Voting
Preferred Stock and the Newco Voting Preferred
<PAGE>

                                     -42-


Stock, (vii) the MRM Voting Preferred Stock and the Newco Voting Preferred
Stock, (viii) the Warrants and (ix) each other document executed in connection
with or pursuant to the Securities Purchase Agreement, including the lock-up
agreements and the directors' and officers' voting proxies.

     "Transactions" means the issuance, sale and conversion of the Debentures,
      ------------
the MRM Voting Preferred Stock, the Newco Voting Preferred Stock and each of the
other transactions contemplated by the Transaction Documents, including the
Restructuring, both before and after giving effect to permitted conversions of
the Debentures.

     "U.S. Insurance Subsidiaries" means each Insurance Subsidiary of the Issuer
      ---------------------------
that is organized under the laws of any State of the United States of America or
the District of Columbia.

     "Warrants" means collectively the XL Warrant and the Other Investor
      --------
Warrants.

     "Weighted Average Life to Maturity" means, when applied to any Debt at any
      ---------------------------------
date, the number of years obtained by dividing (a) the then outstanding
aggregate principal amount of such Debt into (b) the sum of the total of the
products obtained by multiplying (i) the amount of each then remaining
installment, sinking fund, serial maturity or other required payment of
principal, including payment at final maturity, in respect thereof, by (ii) the
number of years (calculated to the nearest one-twelfth) which will elapse
between such date and the making of such payment.

     "XL" means XL Insurance Ltd.
      --

     "XL Warrant" means the warrant to purchase Common Stock of the Issuer
      ----------
issued to XL in connection with its purchase of Debentures.

     (b)  Accounting Terms and Determinations. Unless otherwise specified
          -----------------------------------
herein, all accounting determinations hereunder shall be made, and all financial
statements required to be delivered hereunder shall be prepared, in accordance
with generally accepted accounting principles as in effect in the United States
on the date hereof applied on a consistent basis ("GAAP").
                                                   ----

     (c)  Rules of Construction.  The definitions in Section 10(a) shall apply
          ---------------------
equally to both the singular and plural forms of the terms defined. Whenever the
context may require, any pronoun shall include the corresponding masculine,
feminine and neuter forms. The words "include," "includes" and "including" shall
                                      -------    --------       ---------
be deemed to be followed by the phrase "without limitation."
<PAGE>

                                     -43-

     (d)  References. Unless the context shall otherwise require, all references
          ----------
herein to (i) Sections, Exhibits, Schedules and Annexes shall be deemed
references to Sections of, and Exhibits, Schedules and Annexes to, this
Debenture, (ii) Persons include their respective permitted successors and
assigns or, in the case of governmental Persons, Persons succeeding to the
relevant functions of such Persons, (iii) agreements and other contractual
instruments include subsequent amendments, assignments, and other modifications
thereto to the date hereof and thereafter, but in the case of any amendment,
assignment or modification after the date hereof, only to the extent such
amendments, assignments or other modifications thereto are not prohibited by
their terms or the terms of any Transaction Document, (iv) statutes and related
regulations include any amendments of same and any successor statutes and
regulations, (v) time shall be deemed to be to New York City time and (vi)
"ordinary course of business" (and similar phrases) shall mean the ordinary
course of business of the Issuer and its Subsidiaries consistent with past
practice.

     SECTION 11.    MISCELLANEOUS.

     (a)  This Debenture and all of the provisions hereof shall be binding upon
and inure to the benefit of the parties hereto and their respective successors
and permitted assigns, and shall be binding upon any entity succeeding to the
Issuer by merger or acquisition of all or substantially all the assets of the
Issuer. The Issuer may not assign this Debenture or any rights or obligations
hereunder except as specifically provided herein. The Holder may transfer or
assign this Debenture at any time without the prior consent of the Issuer,
subject to the provisions and restrictions on transfer set forth herein.

     (b)  All notices, demands and requests of any kind to be delivered to any
party in connection with this Debenture shall be in writing and shall be deemed
to have been duly given if personally or hand delivered or if sent by an
internationally-recognized overnight delivery courier or by registered or
certified mail, return receipt requested and postage prepaid, or by facsimile
transmission addressed as follows:

          (i)  if to the Issuer, to:

               Mutual Risk Management Ltd.
               44 Church Street
               Hamilton HM12
               Bermuda
               Attention:  Chief Executive Officer
               Facsimile:  (441) 292-1867
<PAGE>

               with a copy to:

               Mayer, Brown & Platt
               190 South LaSalle Street
               Chicago, Illinois 60603-3441
               Attention:  Richard W. Shepro
               Facsimile:  (312) 701-7711

          (ii) if to the Holder, the Holder's address as set forth in the books
     and records of the Issuer, or to such other address as the party to whom
     notice is to be given may have furnished to the other party hereto in
     writing in accordance with provisions of this Section 11. Any such notice
     or communication shall be deemed to have been effectively given (i) in the
     case of personal or hand delivery, on the date of such delivery, (ii) in
     the case of an internationally-recognized overnight delivery courier, on
     the second Business Day after the date when sent, (iii) in the case of
     mailing, on the fifth Business Day following that day on which the piece of
     mail containing such communication is posted and (iv) in the case of
     facsimile transmission, the date of telephone confirmation of receipt.

     (c)  This Debenture may not be modified or amended, or any of the
provisions hereof waived, except by written agreement of the Issuer and the
Requisite Holders dated after the date hereof; provided, however, that the
                                               --------  -------
provisions of Section 1, 2, 3(a), 3(b), 4, 7(a)(i), 7(a)(ii), this Section
11(c), Sections 11(d) and (f) and Section 10 with respect to the definitions of
terms used in connection with the foregoing Sections may not be amended without
the consent of each Holder of a Debenture affected thereby; and provided,
                                                                --------
further, however, that any modification or amendment which adversely affects the
-------  -------
rights of any Holder shall require the consent of such Holder unless the
modification or amendment adversely affects the rights of all Holders in the
same manner.

     (d)  THIS DEBENTURE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE INTERNAL LAWS OF THE STATE OF NEW YORK. ANY DISPUTE UNDER THIS DEBENTURE
THAT IS NOT SETTLED BY MUTUAL CONSENT SHALL BE FINALLY ADJUDICATED BY ANY
FEDERAL OR STATE COURT SITTING IN THE CITY, COUNTY AND STATE OF NEW YORK, AND
THE ISSUER CONSENTS TO THE EXCLUSIVE JURISDICTION OF SUCH COURTS (OR ANY
APPELLATE COURT THEREFROM) OVER ANY SUCH DISPUTE. THE ISSUER AND EACH GUARANTOR
HEREBY IRREVOCABLY SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE FEDERAL AND NEW
YORK STATE COURTS LOCATED IN NEW YORK COUNTY IN CONNECTION WITH ANY SUIT, ACTION
OR PROCEEDING RELATED TO THIS DEBENTURE OR ANY OF THE MATTERS CONTEMPLATED
HEREBY, IRREVOCABLY
<PAGE>

                                     -45-

WAIVES ANY DEFENSE OF LACK OF PERSONAL JURISDICTION AND IRREVOCABLY AGREES THAT
ALL CLAIMS IN RESPECT OF ANY SUIT, ACTION OR PROCEEDING MAY BE HEARD AND
DETERMINED IN ANY SUCH COURT. THE ISSUER AND EACH GUARANTOR IRREVOCABLY WAIVES,
TO THE FULLEST EXTENT IT MAY EFFECTIVELY DO SO UNDER APPLICABLE LAW, ANY
OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUCH
SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT AND ANY CLAIM THAT ANY SUCH
SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN
INCONVENIENT FORUM.

     (e)  By the execution and delivery of this Debenture, the Issuer and each
Guarantor (i) acknowledges that it will, by separate written instrument,
designate and appoint The CT Corporation System, Inc., 111 Eighth Avenue, New
York, New York 10011 (and any successor entity) as its authorized agent upon
which process may be served in any suit or proceeding arising out of or relating
to any of the Transaction Documents that may be instituted in any Federal or
state court in the State of New York, New York County or brought under Federal
or state securities laws, and acknowledges that The CT Corporation System, Inc.
will accept such designation, (ii) waives trial by jury, (iii) agrees that
service of process upon The CT Corporation System, Inc. and written notice of
said service to the Issuer in accordance with Section 11(b) shall be deemed in
every respect effective service of process upon the Issuer or such Guarantor, as
the case may be, in any such suit or proceeding and (iv) agrees that nothing
herein shall affect the right to effect service of process in any other manner
permitted by law.

     (f)  All payments made or required to be made hereunder shall be made in
U.S. dollars. The Issuer and each Guarantor, jointly and severally, agrees to
indemnify the Holder against any loss incurred by such party as a result of any
judgment or order being given or made against the Issuer or Guarantor, as the
case may be, for any U.S. dollar amount due under this Debenture and such
judgment or order being expressed and paid in a currency (the "Judgment
                                                               --------
Currency") other than United States dollars and as a result of any variation as
--------
between (i) the rate of exchange at which the United States dollar amount is
converted into the Judgment Currency for the purpose of such judgment or order
and (ii) the spot rate of exchange in The City of New York at which such party
on the date of payment of such judgment or order is able to purchase United
States dollars with the amount of the Judgment Currency actually received by
such party if such party had utilized such amount of Judgment Currency to
purchase United States dollars as promptly as practicable upon such party's
receipt thereof. The foregoing indemnity shall continue in full force and effect
notwithstanding any such judgment or order as aforesaid. The term "spot rate of
                                                                   ------------
exchange" shall include any premiums and costs of exchange payable in connection
--------
with the purchase of, or conversion into, United States dollars.
<PAGE>

                                     -46-

     All amounts paid to the Holder hereunder shall be paid free and clear of,
and without any deduction or withholding for or on account of, any present or
future taxes, duties, assessments or other governmental charges of whatever
nature imposed or levied by or on behalf of Bermuda or any political subdivision
thereof or by any authority therein or thereto or within any other jurisdiction
in which the Issuer and Guarantors or any of their Subsidiaries is organized or
engaged in business for tax purposes having power to tax, unless such deduction
or withholding is required by applicable law, in which event, each of the other
parties hereto agrees to pay additional amounts so that the persons entitled to
such payments will receive the amount that such persons would otherwise have
received but for such deduction or withholding.

     (g)  This Debenture may be executed and delivered to the Holder by a
facsimile transmission; such transmission shall be deemed a valid signature.


                           [Signature Pages Follow]
<PAGE>

     IN WITNESS WHEREOF, the Issuer and the Guarantors have executed and
delivered this Debenture on the date first above written.

                              [NEWCO]

                              By:_______________________________
                                    Name:
                                    Title:


                              By:_______________________________

                                    Name:
                                    Title:


                              MUTUAL RISK MANAGEMENT LTD.


                              By:_______________________________
                                    Name:
                                    Title:


                              MUTUAL GROUP LTD.


                              By:_______________________________
                                    Name:
                                    Title:

                              [OTHER GUARANTORS]


                              By:_______________________________
                                    Name:
                                    Title:
<PAGE>

                                    ANNEX I

           FORM OF NOTICE OF ELECTION TO EXERCISE A CONVERSION RIGHT

Date:

To:    [Name of Newco]

From:

Re:    Exercise of a Conversion Right

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

     Pursuant to the terms of the Convertible Debenture Due 2006 (the
"Debenture") issued by [Newco] (the "Issuer") to ______________ ("Holder") dated
 ---------                           ------                       ------
___________, 200_, specifically Section 4 thereof, the Holder hereby notifies
the Issuer of its intention to exercise a right of conversion.

     Pursuant to Section 4 of the Debenture, the Holder hereby elects to convert
U.S.$__________ in aggregate principal amount and all accrued and unpaid
interest thereon for shares of the Issuer's Common Stock.  The date of
conversion shall be __________, 200_.

     We have instructed our attorneys to contact the Issuer to discuss the
timing and documentation of the conversion.

                              Sincerely,

                              [HOLDER]

                              By: ________________________
                                  Name:
                                  Title:
<PAGE>

                                   ANNEX II


                               FORM OF GUARANTY

     The undersigned (the "Guarantor") hereby jointly and severally
                           ---------
unconditionally guarantees, to the extent set forth in the Convertible Debenture
Due 2006 dated as of [               ], issued by [Newco] (as amended, restated
or supplemented from time to time, the "Debenture") to which this Guaranty is
                                        ---------
attached, and subject to the provisions of the Debenture, (a) the due and
punctual payment of the principal of, and premium, if any, and interest on the
Debenture, when and as the same shall become due and payable, whether at
maturity, by acceleration or otherwise, the due and punctual payment of interest
on overdue principal of, and premium and, to the extent permitted by law,
interest, and the due and punctual performance of all other obligations of the
Issuer to the Holders, all in accordance with the terms set forth in Section 8
of the Debenture, and (b) in case of any extension of time or payment or renewal
of any Debenture or any of such other obligations, that the same will be
promptly paid in full when due or performed in accordance with the terms of the
extension or renewal, whether at stated maturity, by acceleration or otherwise.

     The obligations of the Guarantor to the Holder pursuant to this Guaranty
and the Debenture are expressly set forth in Section 8 of the Debenture and
reference is hereby made to the Debenture for the precise terms and limitations
of this Guaranty.

                              [GUARANTOR]


                              By:__________________________
                                 Name:
                                 Title: