<PAGE>

                                                                     EXHIBIT 4.1


     THIS DEBENTURE IS INITIALLY ISSUED AS PART OF AN ISSUANCE OF UNITS,
CONSISTING OF CONVERTIBLE EXCHANGEABLE DEBENTURES DUE 2006 AND SHARES OF SERIES
A PREFERRED STOCK OF MUTUAL RISK MANAGEMENT LTD. 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 EXCHANGEABLE DEBENTURES DUE 2006
PROPOSED TO BE TRANSFERRED OR ASSIGNED REPRESENTS OF THE TOTAL PRINCIPAL AMOUNT
OF OUTSTANDING CONVERTIBLE EXCHANGEABLE DEBENTURES DUE 2006.

THIS CONVERTIBLE EXCHANGEABLE DEBENTURE AND THE SECURITIES ISSUABLE UPON
CONVERSION OR EXCHANGE 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.


                          MUTUAL RISK MANAGEMENT LTD.
                  CONVERTIBLE EXCHANGEABLE DEBENTURE DUE 2006


No. [   ]

U.S.$[       ]                                                     May 17, 2001


     The undersigned, Mutual Risk Management Ltd., 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 17, 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.
<PAGE>

                                      -2-

     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 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 11 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 date of the disbursement of funds hereunder (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 June 20, 2001, to the holder of this Debenture at
------------
the close of business on the immediately preceding March 1, June 1, September 1
and December 1, respectively (whether or not a Business Day). 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 or exchanged in accordance with the terms of
Section 4 or 5 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

<PAGE>


                                      -3-

unpaid interest thereon, shall be due and payable on the Maturity Date. The
parties agree that any payment of 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, 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
5 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, 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 MRM 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 10 hereof immediately
available funds in an amount equal to the aggregate principal amount of all
Debentures tendered for redemption by such Holder.

     SECTION 4. EXCHANGE.

     (a)  Exchange of Debenture for Newco Debentures. (i) The Holder shall have
          ------------------------------------------
the right (the "Debenture Exchange Right") to exchange this Debenture, in whole
                ------------------------
or in part, at any time prior to the Newco Exchange Right Termination Date, for
an equal principal amount

<PAGE>

                                      -4-

of senior convertible debentures due 2006 of Newco (each, a "Newco Debenture"
                                                             ---------------
and, collectively, the "Newco Debentures"); provided, however, that only holders
                        ----------------    --------  -------
of Debentures in an aggregate principal amount of at least 20% of the principal
amount of the Debentures then outstanding may exercise the first Debenture
Exchange Right. The Newco Debentures shall be convertible into shares of common
stock of Newco and otherwise have substantially the same terms and provisions of
this Debenture (other than with respect to the exchange rights set forth in this
Section 4). The Newco Debenture shall be substantially in the form of Exhibit
                                                                      -------
A-2 attached to the Securities Purchase Agreement.
---
     (ii)   In order to exercise the Debenture Exchange Right, the Holder
shall provide written notice thereof to the Issuer and Newco, in the form of
Annex I attached hereto, and setting forth (A) the fact that the Holder intends
-------
to exercise a Debenture Exchange Right, (B) the aggregate principal amount of
this Debenture for which the Holder is exercising a Debenture Exchange Right and
(C) the date for such exchange (the "Debenture Exchange Date"), which shall be a
                                     -----------------------
Business Day and be between 15 and 30 days after the date of such notice.

     (iii) On the Debenture Exchange Date, (A) the Holder shall tender this
Debenture and the related MRM 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, (B) the Issuer shall cause Newco to
issue, execute and deliver to the Holder, at the expense of Newco, (I) one or
more Newco Debentures, registered in the name of the Holder (or its nominee or
assignee), in an aggregate principal amount equal to the aggregate principal
amount of this Debenture tendered to the Issuer in connection with the exercise
of such Debenture Exchange Right and (II) a certificate representing shares of
Newco Voting Preferred Stock entitling the holder thereof to voting rights in
Newco equal to the aggregate voting rights of the Common Stock of Newco issuable
to the Holder upon conversion of the Newco Debentures owned by such Holder, (C)
in case this Debenture is exchanged in part only, upon such exchange, the Issuer
shall execute and deliver to the Holder, at the expense of the Issuer, (I) a new
Debenture of an authorized denomination in aggregate principal amount equal to
the unexchanged portion of the aggregate principal amount of the Debenture
tendered to the Issuer in connection with the exercise of such Debenture
Exchange Right and (II) a certificate representing the related MRM Voting
Preferred Stock and (D) the Issuer shall deliver to the Holder an opinion of
counsel satisfactory to the Holder, in form and substance satisfactory to the
Holder, to the effect that (w) Newco has been duly organized, is validly
existing and in good standing, (x) the Newco Debenture has been duly authorized,
executed and delivered to the Holder by Newco, (y) the Newco Debenture is a
valid and binding obligation of Newco, enforceable against Newco in accordance
with its terms (y) the Newco Voting Preferred Stock issued to such Holder has
been duly authorized and will, upon issuance, be validly issued, fully paid and
nonassessable.

<PAGE>

                                      -5-

     (b)   Exchange of Debenture for Newco Common Stock. (i) The Holder shall
           --------------------------------------------
have the right (the "Newco Common Stock Exchange Right") to exchange this
                     ---------------------------------
Debenture, in whole or in part, at any time prior to the Newco Exchange Right
Termination Date, for Common Stock of Newco; provided, however that only holders
                                             --------  -------
of Debentures in aggregate principal amount of at least 20% of the aggregate
principal amount of the Debentures then outstanding may exercise the first Newco
Common Stock Exchange Right. The number of shares of Common Stock of Newco
issuable to the Holder upon each exchange of this Debenture pursuant to any
exercise of a Newco Common Stock Exchange Right shall be equal to the amount
that will result in the percentage ownership of the equity of Newco, on a Fully
Diluted Basis (calculated as of the first such exchange), of the Holder
following such exchange to be equal to the Newco Ownership Percentage.

     (ii)  In order to exercise the Newco Common Stock Exchange Right, the
Holder shall provide written notice thereof to the Issuer and Newco, setting
forth (A) the fact that the Holder intends to exercise a Newco Common Stock
Exchange Right, (B) the aggregate principal amount of this Debenture for which
the Holder is exercising a Newco Common Stock Exchange Right and (C) the date
for such exchange (the "Newco Common Stock Exchange Date"), which shall be a
                        --------------------------------
Business Day and be between 15 and 30 days after the date of such notice.

     (iii) On the Newco Common Stock Exchange Date, (A) the Holder shall tender
this Debenture and the related MRM 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, (B) the Issuer shall cause Newco to
issue, execute and deliver to the Holder, at the expense of Newco, shares of
Common Stock of Newco, registered in the name of the Holder (or its nominee or
assignee), in an amount equal to the Newco Ownership Percentage for the Holder,
(C) in case this Debenture is exchanged in part only, upon such exchange, the
Issuer shall execute and deliver to the Holder, at the expense of the Issuer,
(I) a new Debenture of an authorized denomination in aggregate principal amount
equal to the unexchanged portion of the aggregate principal amount of the
Debenture tendered to the Issuer in connection with the exercise of such
Debenture Exchange Right and (II) a certificate representing the related MRM
Voting Preferred Stock, (D) the Issuer shall pay to the Holder an amount in cash
equal to the accrued and unpaid interest on the portion of this Debenture
surrendered by the Holder for exchange pursuant to exercise of a Newco Common
Stock Exchange Right through but excluding the Newco Common Stock Exchange Date
and (E) the Issuer shall deliver to the Holder an opinion of counsel, in form
and substance satisfactory to the Holder, to the effect that (x) Newco has been
duly organized and is validly existing and in good standing and (y) the Common
Stock of Newco has been duly authorized and will, upon issuance, be validly
issued, fully paid and nonassessable.

<PAGE>

                                      -6-

     (c)  Issuer to Cause Newco to Reserve Common Stock. The Issuer shall, at
          ---------------------------------------------
all times up until the day after the Newco Common Stock Exchange Right
Termination Date, cause Newco to reserve and keep available, free from
preemptive rights, out of Newco's authorized but unissued Common Stock, for the
purpose of effecting the conversion of the Newco Debentures and the exercise of
the Newco Common Stock Exchange Right, the full number of shares of Common Stock
of Newco then issuable upon conversion of all outstanding Newco Debentures and
exchange of all outstanding Debentures.

     SECTION 5. CONVERSION.

     (a)  Conversion Right and Conversion Price. Subject to and upon compliance
          -------------------------------------
with the provisions of this Section 5, at the option of the Holder hereof, this
Debenture or any portion 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 $7.00; provided, however, that
          ----------------                            --------  -------
the Conversion Price shall be reduced by $0.20 beginning on September 17, 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 5(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 II 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
                         ---------------

                                      -6-
<PAGE>

                                      -7-

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 MRM Voting Preferred Stock, duly endorsed or assigned to the
Issuer or in blank, at the office or agency described in Section 10 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 Issuer shall issue
and deliver at the office or agency described in Section 10 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 5(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 MRM Voting Preferred Stock with voting rights equal to the aggregate
voting rights of the Common Stock issuable upon conversion or exchange 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 5(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 5(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 5(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
                    ------

<PAGE>

                                      -8-

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 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 5(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 5(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

<PAGE>

                                      -9-

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 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 at a rate not exceeding $0.07 per share per
quarter 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

<PAGE>

                                     -10-

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 5(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.

     (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 5(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 5(d) or clauses (ii)
and (iv) of this Section 5(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; provided, however, that the 10 consecutive Business Days selected for
          --------  -------
determination shall commence no earlier than three Business Days following the
expiration of the Put Period. 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

<PAGE>

                                     -11-

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.

     (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 5(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 5(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 10; 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.
<PAGE>

                                      -12-


     (g)  Notice of Certain Corporate Action. In case:
          ----------------------------------

           (i)   the Issuer shall declare a dividend (or any other distribution)
     on its Common Stock payable other than in cash out of its retained earnings
     at a rate not in excess of $0.07 per share per quarter; 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

           (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.
<PAGE>

                                      -13-

     (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 5(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 MRM 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 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 5(k). The above provisions of this Section 5(k) shall similarly apply to
successive consolidations, mergers, sales or transfers.
<PAGE>

                                      -14-

     (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 5 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)  Certain Limitations on Voting and Conversion Rights. (i) In the event
          ---------------------------------------------------
that the Conversion Date in respect of any exercise by the Holder of its right
to convert this Debenture into Common Stock of the Issuer pursuant to this
Section 5 occurs prior to the time that the Form A approvals relating to the
Transactions shall have been received by the Issuer, then, until such time as
such Form A approvals are received by the Issuer, the Common Stock issuable to
the Holder upon each conversion of this Debenture shall be limited in its voting
rights to the Maximum Voting Right Percentage. The limitations on voting rights
contained in this Section 5(m)(i) shall not in any way restrict the ability of
the Holder to exercise its right to convert all or any portion of this
Debenture. In addition, the provisions of this Section 5(m)(i) shall not in any
manner restrict or otherwise affect the economic ownership percentage
represented by the Common Stock of the Issuer issued in connection with any
conversion of this Debenture; and

     (ii) In the event that the Conversion Date in respect of any exercise by
the Holder of its right to convert this Debenture into Common Stock of the
Issuer pursuant to this Section 5 occurs prior to the time that the shareholder
approvals relating to the Transactions shall have been received by the Issuer,
then, until such time as such shareholder approvals are received by the Issuer,
the number of shares of Common Stock issuable to the Holder upon each conversion
of this Debenture shall be limited to the Maximum Conversion Right Percentage.

     (n)  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.

     All calculations under this Section 5 shall be made to the nearest 1/100th
of a share.

     SECTION 6. 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 ow-
<PAGE>

                                      -15-

ing 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,
         an opinion in form and substance reasonably satisfactory to the Holder
         as to the loss reserves of the Insurance Subsidiaries as of the end of
         such fiscal year by Tilling-
<PAGE>

                                      -16-

         hast, 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, 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 years ending
         December 31, 2001 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)  As soon as available, copies of all reports and memoranda
         relating to the current status of the Restructuring and copies of all
         related applications, agreements and other documents executed in
         connection with the Restructuring;
<PAGE>

                                      -17-

               (ix)   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

               (x)    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.
<PAGE>

                                      -18-

     (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 Revenue 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. (i) At any time that any Subsidiary of the
          ---------------------
Issuer (A) shall be formed or acquired by the Issuer, including Newco (other
than a U.S. Insurance Subsidiary) and such Subsidiary constitutes a Significant
Subsidiary, (B) becomes a Significant Subsidiary or (C) shall guarantee any Debt
of the Issuer or Newco other than the Debentures, then, in each such case, the
Issuer will, at its expense:

          (A)  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 III attached hereto;
<PAGE>

                                      -19-

          (B)  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

          (C)  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.

     (ii) Upon any exchange of this Debenture for a Newco Debenture pursuant to
Section 4(a):

          (A)  Mutual Risk Management Ltd. and Mutual Group Ltd. will
     immediately authorize, execute and deliver to the Holder a Guaranty,
     substantially in the form of Annex IV attached hereto;
                                  --------

          (B)  within ten days after such exchange, 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

          (C)  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.

     (j)  Compliance Certificate. Concurrently with the delivery of each of the
          ----------------------
financial statements required by Sections 6(a)(i) and (ii), it will deliver to
the Holders a compliance certificate 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.
<PAGE>

                                      -20-

     SECTION 7. 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 7(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) quarterly dividends to all shareholders of the
         Issuer, pro rata, in an amount no greater than $0.07 per share per
                 --- ----
         quarter, (ii) the dividend or distribution by the Issuer of shares of
         Newco in order to comply with Section 2.1(b)(ii) of the Debenture
         Registration Rights Agreement entered into in connection with the
         issuance of the Debentures, (iii) Restricted Payments made to the
         Issuer or any Guarantor, (iv) Restricted Payments made to the holders
         of the Debentures pro rata based on the principal amount of Debentures
                           --- ----
         held by each Holder, (v) dividends on Policy Holder Preferred Shares
         made solely in connection with the CRM business and determined in a
         manner consistent with past practices and (vi) dividends made in
         respect of shares issued pursuant to the Hemisphere Restricted Stock
         Plan and the repurchase of such shares, in each case in accordance with
         such plan and 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,
         (iii) the Restructuring or (iv) so long as no Default or Event of
         Default shall have occurred and be continuing or would result
         therefrom, acquisitions of Persons in the
<PAGE>

                                      -21-

same or substantially the same business as the Issuer and its Subsidiaries for
aggregate consideration of no more than $30.0 million in any twelve-month
period.

     (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 of directors and in accordance with the Issuer's annual plan
and budget, (ii) after the completion of the Restructuring, the Investment of up
to $80.0 million of the net proceeds from the original issuance of the
Debentures into the Issuer's U.S. Insurance Subsidiaries, as contemplated by the
Securities Purchase Agreement, (iii) Investments in Subsidiaries of the Issuer
made in connection with the Restructuring, (iv) Investments in the Collateral
Account (as defined in the Securities Purchase Agreement) and in Cash
Equivalents and U.S. Government Obligations (as defined in the Collateral
Agreement), (v) Investments by Subsidiaries of the Issuer in the Issuer or any
Guarantor and (vi) other Investments not exceeding $10.0 million 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 in excess of $32.0 million consisting of, or
issued in connection with, the RHINOS, (D) no more than $15.0 million of
principal amount of accreted value of other Debt of the Issuer outstanding on
the Original Issue Date, (E) additional Debt of the Issuer in an aggregate
principal amount not to exceed $22.0 million at any one time outstanding;
provided, however, that any Debt incurred pursuant to this clause (E) shall be
--------  -------
subordinated to the Debentures pursuant to subordination provisions in form and
substance satisfactory to the Requisite Holders and (F) 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 pre-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
<PAGE>

                                      -22-

          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 funds deposited into the Collateral Account
          (as defined in the Collateral Agreement) and other Liens on assets of
          the Issuer and its Subsidiaries in favor of the holders of the
          Debentures, (iii) Liens 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 7(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 prop-
<PAGE>

                                      -23-

          erty, 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.

               (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)  The Newco Debentures;

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

                    (D)  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

                    (E)  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
<PAGE>

                                      -24-

          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) $350.0 million in any quarterly period beginning May
          1, 2001.

               (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 125%. 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 120%, the
          Issuer and the U.S. Insurance Subsidiaries will establish and
          implement a plan in order to lower the statutory combined ratio below
          115%.

               (m)  Minimum Risk-Based Capital. It will not permit the Risk-
                    --------------------------
          Based Capital for any U.S. Insurance Subsidiary to be less than 175%
          of the Authorized Control Level and for all such U.S. Insurance
          Subsidiaries (collectively, on a combined basis) to be less than 175%
          of the Authorized Control Level. The Issuer will measure Risk-Based
          Capital as of each December 31, commencing December 31, 2001, and will
          run the "early warning" tests established by the NAIC as of each March
          31, June 30, September 30 and December 31, commencing June 30, 2001.
          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
<PAGE>

                                      -25-

          have been obtained and the Restructuring has been consummated;
          provided, however, that the Issuer may comply with its obligations
          --------  -------
          under the RHINOS and the documents executed in connection therewith.

               (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 (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; provided,
                                                                      --------
          however, that after the earlier of (i) the addition of Newco as a
          -------
          Guarantor of the Debentures and (ii) the exchange of at least 51% of
          the Convertible Exchangeable Debentures due 2006 of the Issuer issued
          on the Original Issue Date for Newco Common Stock or Newco Debentures
          (or any combination thereof) pursuant to Section 3 hereof, the
          Existing Bank Debt Documents may be amended solely to add Newco as an
          additional obligor thereunder.

               (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 Newco or any of
          its Subsidiaries and the Issuer or any of its Subsidiaries relating to
          the retention of a portion of any premium by, or the payment of any
          fees to, the Issuer or any of 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) 0.50 to 1 at any time from the Original Issue
          Date to March 21, 2002, or (ii) 0.45 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) $350.0
          million (without giving effect to no more than $15.0 million of
          adjustments required by FASB 115), 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 March 31,
          2001.

               (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.
<PAGE>

                                      -26-

               (u)   XL Consent Rights. 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 7(a),
          7(c), 7(h), 7(i), 7(p), 7(q) and 7(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
          policies relating to the CRM business in connection with the Issuer's
          IPC (i.e., rent-a-captive) companies.
               ---

          SECTION 8. 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 7(a), 7(b),
          7(f), 7(h), 7(j), 7(q), 7(r) or 7(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 the Issuer or any of its 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>

                                      -27-

          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 the 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>

                                      -28-

          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; provided, further, however, that in the case
     of an Event of Default specified in clause (vi)(B) above, then any Holder
     may, by notice to the Issuer, declare all amounts under the Debenture held
     by such Holder to be 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 8(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 9. 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.
<PAGE>

                                      -29-

          (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, 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 9(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
<PAGE>

                                      -30-

     issuer and its successors and assigns thereof, and shall inure to the
     benefit of the Holder, and its successors and assigns.

          (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 9(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 9 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
<PAGE>

                                      -31-

     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 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 10. 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 MRM 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 and Exchange 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
<PAGE>

                                      -32-

     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
     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 the Issuer or XL or any
     entity 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 their shareholders).

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

          (iii) Upon surrender of this Debenture and the related MRM 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 MRM Voting Preferred Stock with voting rights equal to the
     aggregate voting rights of the Common Stock issuable upon conversion or
     exchange 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.
<PAGE>

                                      -33-

     (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

          (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 11. DEFINITIONS; CONSTRUCTION.

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

     "Adjusted Net Assets" has the meaning set forth in Section 9(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.

<PAGE>

                                      -34-

          "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.

          "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 (other than (w) Tremont International Insurance LTD., (x) as a
result of the conversion of any Debentures, (y) the exercise of any Newco Common
Stock Exchange Right or (z) the Policy Holder Preferred Shares) or (ii) any
Person or "group" (within the meaning of Rules 13d-3 and 13d-5 under the
Exchange Act) 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 the
conversion of Debentures (for purposes of this calculation, only the denominator
shall be calculated on a Fully Diluted Basis) or (y) obtained the power (whether
<PAGE>

                                      -35-

or not exercised) to elect a majority of the Issuer's directors or (iii) the
board of directors of the Issuer shall cease to consist of a majority of
Continuing Directors or (iv) any event or condition which constitutes 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 5(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 5(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 5(b).
           ---------------

          "Conversion Price" has the meaning set forth in Section 5(a).
           ----------------

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

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

          "Debenture Exchange Date" has the meaning set forth in Section 4(a).
           -----------------------

          "Debenture Exchange Right" has the meaning set forth in Section 4(a).
           ------------------------
<PAGE>

                                      -36-

          "Debenture Register" has the meaning set forth in Section 10(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 8(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 similar 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 8(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 Issuer, Mutual Group, Ltd., Bank of America, N.A.,
as Administrative
<PAGE>

                                      -37-

Agent, and the Lenders party thereto, as in effect on the Original Issue Date or
as amended, modified or refinanced in accordance with Sections 7(e) and 7(p)
hereof.

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

          "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 7(e) and 7(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 9(e).
           -----------------

          "GAAP" has the meaning set forth in Section 11(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
<PAGE>

                                      -38-

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
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 9.1(a).
      ----------------------

     "Guarantors" means each of the Subsidiaries of the Issuer named on the
      ----------
signature pages to this Debenture and each additional entity required to become
a Guarantor pursuant to Section 6(h) hereof.

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

     "Independent Financial Advisor" has the meaning set forth in Section 5(e).
      -----------------------------

     "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 (i) Legion Insurance Company, Legion
      ----------------------
Indemnity Ltd. and Villanova Insurance Company and (ii) each other 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.

     "IPC" means Insurance Profit Center.
      ---

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

<PAGE>

                                      -39-

          "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.

          "Maximum Conversion Right Percentage" means a percentage of the total
           -----------------------------------
equity ownership of the Issuer, calculated in accordance with the rules and
regulations of the New York Stock Exchange, equal to the product of (i) 19.9%
and (ii) a fraction, the numerator of which is the number of shares of Common
Stock of the Issuer issuable upon conversion of this Debenture subject to the
conversion right giving rise to the need to calculate such Maximum Conversion
Right Percentage and the denominator of which is the sum of (x) the aggregate
number of shares of Common Stock of the Issuer issued or issuable upon
conversion of the Convertible Exchangeable Debentures due 2006 of the Issuer and
(y) the number of shares of Common Stock of the Issuer issued or issuable upon
exercise of the Warrants.

          "Maximum Voting Rights Percentage" means a percentage of the total
           --------------------------------
voting power of the Issuer equal to (A) the product of (i) 9.9% and (ii) a
fraction, the numerator of which is the number of shares of Common Stock of the
Issuer issuable upon conversion of this Debenture subject to the conversion
right giving rise to the need to calculate such Maximum Voting Right Percentage
and the denominator of which is the sum of (w) the aggregate number of issued
and outstanding shares of MRM Voting Preferred Stock held by the Holder of this
Debenture, (x) the number of shares of Common Stock of the Issuer issued to the
Holder of this Debenture as a result of conversion of the Convertible
Exchangeable Debentures due 2006 of the Issuer, (y) in case this Debenture is
held by a holder who holds Warrants, the number of shares of Common Stock of the
Issuer issued or issuable upon exercise of the Warrants held by such holder
minus (B) the percentage of the total voting power of the Issuer represented by
-----
securities of the Issuer (other than the Transaction Securities) then held by
the Holder.

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

          "MRM 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

<PAGE>

                                      -40-

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.

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

          "Newco Aggregate Ownership Percentage" means 35.9% of the equity
           ------------------------------------
ownership of Newco, on a Fully Diluted Basis; provided, however, that if the
                                              --------  -------
RHINOS Debentures are issued, "Newco Aggregate Ownership Percentage" shall mean
42.4% of the equity ownership of Newco, on a Fully Diluted Basis.

          "Newco Common Stock Exchange Date" has the meaning set forth in
           --------------------------------
Section 4(b).

          "Newco Common Stock Exchange Right" has the meaning set forth in
           ---------------------------------
Section 4(b).

          "Newco Debenture" has the meaning set forth in Section 4(a).
           ---------------

          "Newco Exchange Right Termination Date" means the date on which the
           -------------------------------------
closing sale price of the Issuer's Common Stock exceeds two times the then
applicable Conversion Price on each trading day during any period of consecutive
trading days beginning no earlier than 90 days after the Required Approvals are
obtained and the Restructuring is completed and consisting of 120 trading days
plus, if the holders of Debentures exercise a demand registration right pursuant
----
to Section 2.1 of the Registration Rights Agreement entered into in connection
with the issuance of the Debentures during such 120 trading day period, the
number of trading days from such exercise until 15 days after the effective date
of the registration statement filed in connection with such demand registration.

          "Newco Ownership Percentage" means a percentage ownership of the
           --------------------------
equity of Newco, on a Fully Diluted Basis, equal to the product of (i) the Newco
Aggregate Ownership Percentage and (ii) a fraction, the numerator of which is
the aggregate principal amount of this Debenture subject to the Newco Common
Stock Exchange Right giving rise to the need to calculate such Newco Ownership
Percentage and the denominator of which is the aggregate principal amount of all
Debentures originally issued, including the RHINOS Debentures, if any.
<PAGE>

                                      -41-

          "Newco Voting Preferred Stock" means shares of preferred stock of
           ----------------------------
Newco 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 Newco issuable upon conversion of all Debentures issued on the Original
Issue Date.

          "non-electing share" has the meaning set forth in Section 5(k).
           ------------------

          "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., Century Capital Partners II and Taracay Investors
Company.

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

          "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 stan-
<PAGE>

                                      -42-

dards 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 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 8(a).
           ----------

          "Program Business" means the business of the Issuer 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 17, 2001 and ending
           --------
on the earlier of (i) November 17, 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 Deben-

<PAGE>

                                      -43-

tures), "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 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 the
           -------------
Issuer into two separate holding company structures, resulting in (i) one
holding company owning the Issuer'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 second holding
company, a newly formed company organized under the laws of Bermuda ("Newco"),
                                                                      -----
owning (A) all of the Issuer's fee generating businesses that presently comprise
its Corporate Risk Management ("CRM"), Specialty Brokerage and Financial
                                ---
Services business segments and all of the Issuer's non-U.S. insurance operations
and (B) the Issuer'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) Newco 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)
Newco 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.
<PAGE>

                                      -44-

          "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.
<PAGE>

                                      -45-


         "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; provided, however, that
                                                      --------  -------
for all purposes of this Debenture, MRM Capital Trust I shall not constitute a
Subsidiary of the Issuer.

         "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 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.

         "Transaction Securities" means, collectively, the Debentures, the MRM
          ----------------------
Voting Preferred Stock, the Newco Voting Preferred Stock, the Warrants and the
Common Stock of the Issuer or Newco issuable upon conversion or exchange of
Debentures or upon exercise of the Warrants.
<PAGE>

                                      -46-

         "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
exchanges and/or conversions of the Debentures.

         "U.S. Insurance Subsidiaries" means Legion Insurance Company, Legion
          ---------------------------
Indemnity Ltd. and Villanova Insurance Company.

         "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 11(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."
 ---------

         (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
<PAGE>

                                      -47-

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 12.    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

                         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 fur-
<PAGE>

                                      -48-

nished to the other party hereto in writing in accordance with provisions of
this Section 12. 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, 5, 8(a)(i), 8(a)(ii), this Section
12(c), Sections 12(d) and (f) and Section 11 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 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.
<PAGE>

                                      -49-

          (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 12(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.

          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.
<PAGE>

                                      -50-

          (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>

                                      -51-

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

                                        MUTUAL RISK MANAGEMENT LTD.


                                        By:    _________________________________
                                               Name:
                                               Title:


                                        By:    _________________________________
                                               Name:
                                               Title:


                                        MUTUAL GROUP LTD.


                                        By:    _________________________________
                                               Name:
                                               Title:


                                        LEGION FINANCIAL CORP.


                                        By:    _________________________________
                                               Name:
                                               Title:


                                        MGL INVESTMENTS LTD.


                                        By:    _________________________________
                                               Name:
                                               Title:

<PAGE>

                                      -52-

                                        MRM SECURITIES LTD.


                                        By:    _________________________________
                                               Name:
                                               Title:


                                        MUTUAL FINANCE LTD.


                                        By:    _________________________________
                                               Name:
                                               Title:


                                        MUTUAL RISK MANAGEMENT (HOLDINGS) LTD.


                                        By:    _________________________________
                                               Name:
                                               Title:
<PAGE>

                                    ANNEX I

           FORM OF NOTICE OF ELECTION TO EXERCISE AN EXCHANGE RIGHT


Date:

To:               Mutual Risk Management, Ltd. and
                  [Name of Newco]

From:

Re:               Exercise of an Exchange Right

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

         Pursuant to the terms of the Convertible Exchangeable Debenture Due
2006 (the "Debenture") issued by Mutual Risk Management, Ltd. (the "Issuer") to
           ---------                                                ------
______________ ("Holder") dated ___________, 200_, specifically Section 4
                 ------
thereof, the Holder hereby notifies the Issuer and [Insert name of Newco] of its
intention to exercise a right of exchange.

         [insert one of the following two paragraphs as appropriate:]

         [Pursuant to Section 4 of the Debenture, the Holder hereby elects to
exchange U.S.$__________ in aggregate principal amount and all accrued and
unpaid interest thereon for shares of Newco's Common Stock, par value $.01 per
share. The date of exchange shall be __________, 200_.]

         [Pursuant to Section 4 of the Debenture, the Holder hereby elects to
exchange U.S.$__________ in aggregate principal amount and all accrued and
unpaid interest thereon for an equal aggregate principal amount of Newco's
Debentures. The date of exchange shall be __________, 200_.]

         We have instructed our attorneys to contact the Issuer and [Insert name
of Newco] to discuss the timing and documentation of the conversion.

                                         Sincerely,

                                         [HOLDER]

                                         By: __________________________________
                                             Name:
                                             Title:
<PAGE>

                                   ANNEX II

           FORM OF NOTICE OF ELECTION TO EXERCISE A CONVERSION RIGHT


Date:

To:            Mutual Risk Management, Ltd.

From:

Re:            Exercise of a Conversion Right

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

         Pursuant to the terms of the Convertible Exchangeable Debenture Due
2006 (the "Debenture") issued by Mutual Risk Management, Ltd. (the "Issuer") to
           ---------                                                ------
______________ ("Holder") dated ___________, 200_, specifically Section 5
                 ------
thereof, the Holder hereby notifies the Issuer of its intention to exercise a
right of conversion.

         Pursuant to Section 5 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, par value $.01 per
share. 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 III

                               FORM OF GUARANTY

          The undersigned (the "Guarantor") hereby jointly and severally
                                ---------
unconditionally guarantees, to the extent set forth in the Convertible
Exchangeable Debenture Due 2006 dated as of May 17, 2001, issued by Mutual Risk
Management Ltd. (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 9 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 9 of the Debenture
and reference is hereby made to the Debenture for the precise terms and
limitations of this Guaranty.

                                            [GUARANTOR]

                                            By: _______________________________
                                                Name:
                                                Title:
<PAGE>

                                   ANNEX IV

                               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 May 17, 2001, 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 9
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 9 of the Debenture
and reference is hereby made to the Debenture for the precise terms and
limitations of this Guaranty.

                                           [GUARANTOR]

                                           By: ________________________________
                                               Name:
                                               Title: