<PAGE>
 
                      SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C. 20549
                                   FORM 10-K

       (Mark One)
          [X]     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                    SECURITIES EXCHANGE ACT OF 1934 (Fee Required)
                      For the fiscal year ended December 31, 1996

                              OR

          [_]     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                  THE SECURITIES EXCHANGE ACT OF 1934 (No Fee Required)

                    For the transition period from ________ to  ________

                        Commission File Number 0-18779

                          PAC RIM HOLDING CORPORATION
            (Exact name of Registrant as specified in its charter)

               Delaware                              95-4105740
     (State or other jurisdiction                    (I.R.S. Employer
     of incorporation or organization)               Identification No.)

     6200 Canoga Avenue
     Woodland Hills, California                      91367-2402
     (Address of principal executive offices)        (Zip Code)

      Registrant's telephone number, including area code: (818) 226-6200

          Securities Registered Pursuant to Section 12(b) of the Act:

                                     None

          Securities Registered Pursuant to Section 12(g) of the Act:
                                        
     Title of each class                      CUSIP Number
     -------------------                      ------------
     Common Stock, $.01 par value             693-71P-10-0

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

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Paragraph 229.405 of this Chapter) is not contained
herein, and will not be contained, to the best of Registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K.  _____

     The aggregate market value of Common Stock held by non-affiliates of the
Registrant on March 4, 1997 was approximately $13,865,199, based on the closing
sale price of such stock on such date.

     On March 4, 1997, Registrant had 9,528,200 shares of Common Stock
outstanding.


                      DOCUMENTS INCORPORATED BY REFERENCE

The definitive Proxy Statement for the 1997 Annual Meeting of Stockholders,
which Registrant intends to file with the Securities and Exchange Commission not
later than 120 days from the close of its fiscal year, is incorporated by
reference in Part III of this Annual Report.

<PAGE>
 
                                    PART I

Item 1. Business.

General
Pac Rim Holding Corporation ("Pac Rim Holding") is engaged through its
subsidiary, The Pacific Rim Assurance Company ("Pacific Rim Assurance"), and its
subsidiary, Regional Benefits Insurance Services, Inc. ("RBIS") exclusively in
the writing of workers' compensation insurance.  The Company markets its
policies through approximately 200 independent insurance agencies and brokerage
firms.  Pac Rim Holding was founded in 1987 and became a publicly held company
in 1991.  Historically, the Company concentrated primarily on the Southern
California market.  During 1995, in connection with efforts to expand its
business into additional geographic areas and increase future revenues, Pacific
Rim Assurance received Certificates of Authority to write workers' compensation
insurance in Arizona and Texas, and it commenced writing in those states.  In
March 1996 and October 1996, respectively, the Company received certificates of
authority to write workers' compensation in Georgia and Alabama, and it
commenced operating in those states.  Also in 1996, RBIS produced workers'
compensation insurance business, as an insurance agency, for other insurance
carriers, in Florida and certain other states in which the Company is not
directly licensed; the Company in turn participated as a reinsurer of those
other carriers.  RBIS also produced accident and health insurance business, as
an insurance agency, for other insurance carriers, for which it earned
commission revenue without assuming risk.  Unless the context indicates
otherwise, the "Company" refers to Pac Rim Holding, Pacific Rim Assurance, and
RBIS.

Statements herein that use the words, "the Company believes","the Company
expects", and "in the Company's opinion", are forward-looking statements, and
the actual results could differ materially from those projected in the forward-
looking statement.  For the significant factors that may cause actual results to
differ, see Management's Discussion and Analysis of Financial Condition and
Results of Operations.

Definitive Agreement and Plan of Merger

Since February 1995, the Company has retained as consultants, Salomon Brothers,
Inc. ("Salomon"), the investment banking firm that assisted the Company in
previous capital-raising transactions, to advise the Company regarding future
strategic alternatives.  In early June 1996, with the assistance of Salomon,
representatives of the Company and Superior National Insurance Group, Inc.
("Superior") contemplated a merger opportunity.  Soon after, representatives of
Superior commenced a due diligence review of the Company's operations and
financial condition.  That review involved representatives of the executive,
operating, and financial management of Superior and its principal investor,
Insurance Partners, L.P., Zurich Reinsurance Centre, Keystone, Inc., and Chase
Manhattan Bank, as well as Superior's independent auditors and independent
actuaries.  In the process of negotiating a possible merger, and after
consulting with their respective actuaries, the Company and Superior mutually
agreed that an increase of approximately $4,500,000 to loss and loss adjustment
expense ("LAE") reserves during the third quarter would be reasonable.

On September 17, 1996, the Company announced that it had executed a definitive
Agreement and Plan of Merger ("Definitive Agreement") with Superior regarding an
acquisition of the Company by Superior for total consideration of approximately
$54,000,000 in cash upon closing of the transaction, which would have resulted
in payment of approximately $3.00 to $3.10 per share of common stock held by its
common stockholders, and a like sum to convertible debenture holders, and
warrant and option holders (assuming the conversion of such security interests).
The close of the transaction was subject to regulatory and shareholder approval;
and if such approvals were obtained, it was expected to close before December
31, 1996 or early in 1997.  The actual sum that would be paid per share of
common stock upon closing was subject to final analysis of loss and allocated
LAE reserves, and downward adjustment to the warrant exercise price per share,
for a certain level of adverse development in December 31, 1993 loss and
allocated LAE reserves with respect to the 1992 and 1993 accident years.  In
connection with its decision to sign the Definitive Agreement, the Company's
Board of Directors obtained an opinion from its financial advisor, Salomon ,
that the consideration to be paid to the stockholders in the merger was fair
from a financial point of view.

During the third quarter of 1996, the Company did in fact increase its loss and
LAE reserves related to accident years 1995 and prior by approximately
$4,500,000 in recognition of the advice of both its internal and independent
actuaries, and the reserve strengthening agreed upon with Superior.  The total
adverse development recognized on prior accident years during the first nine
months of the year was approximately $5,600,000.  At September 30, 1996, the
Company's loss and LAE reserves were within the independent actuaries'
reasonable range, and the Company believed that its recorded loss and LAE
reserves were adequate.

                                       1
<PAGE>
 
Simultaneously, in July 1996, the California Department of Insurance
("Department") began a triennial examination of Pacific Rim Assurance.  The last
triennial examination was as of December 31, 1991, and no significant situations
regarding reserves were raised in that examination.  The Department advised the
Company during December 1996 that it had linked the approval of the pending
Superior transaction with the completion of the triennial examination, and that
approval of the transaction would be delayed.  That was the first knowledge that
the Company had that the announced transaction would not close in 1996 as
previously thought.  Thus, having already distributed a proxy statement to
shareholders on November 20, 1996, the Company, on December 10, 1996 and January
10, 1997, announced postponements of its planned Special Meeting of Stockholders
to approve the transaction.

In connection with its examination, the Department undertook studies of Pacific
Rim Assurance's loss and LAE reserves. In December 1996, the Department advised
the Company that the Department's consulting actuaries had a difference of
opinion regarding the adequacy of the Company's loss and LAE reserves, from that
of the Company and its internal and independent actuaries.  At the direction of
the Department, the Company and its actuaries met with representatives of the
Department and its actuaries, to provide additional data and assist in
reconciling the Company's recorded loss and LAE reserves to the preliminary
findings of the Department's actuaries.  Following approximately two months of
extensive meetings with the Department and its actuaries, Pacific Rim Assurance,
in conjunction and consultation with its internal and external actuaries,
reached agreement with the Department, to increase its loss and LAE reserves by
$12,000,000 to take a more conservative approach for accident years 1995 and
prior.  As a result of the increase, the Company believes that the Department
will approve the pending transaction with Superior shortly.  The $12,000,000
increase was greater than the amount that was needed to be within the reasonable
range of the Company's independent actuaries; but the Company believes the
pending transaction could no longer be delayed, and Department approval was and
is essential to completion of the transaction.

The principal differences in opinion between the Company and the Department
related to the 1991, 1992, and 1993 accident years, which were among the most
volatile in the history of California workers' compensation insurance industry
claims experience.  That volatility was the result of adverse economic
conditions in California, layoffs and unemployment that led to massive numbers
of fraudulent or questionable claims, and the pervasive need for several years
to have effective legislative changes in the California workers' compensation
system.  The California workers' compensation insurance industry in general
experienced such conditions during that period.  In response to that experience,
the California legislature enacted subsequent reforms in July 1993, to correct
many of the abusive claim situations that befell the industry and the Company.
(See "Business-Claims, Losses, and Loss Reserves".)

On February 18, 1997, the Company announced that it had executed an Amended and
Restated Agreement and Plan of Merger ("Amended Agreement") with Superior,
regarding an acquisition of the Company pursuant to the terms of which the
stockholders would receive $2.11 per share (a total of approximately
$20,063,293), the convertible debenture holders would receive face value for the
debentures or $20,000,000, and $1,957,739 would be paid to acquire all of the
issued and outstanding warrants of the Company and options to purchase common
stock that are "in-the-money", for a total consideration of approximately
$42,021,032.  The above-mentioned adjustment to increase the loss and LAE
reserves of Pacific Rim Assurance by $12,000,000 necessitated renegotiation of
the terms of the prior Definitive Agreement with Superior.  The revised terms
reflect a reduction of $12,000,000 from the $54,000,000 total consideration
previously announced.  The reduction in the purchase price to be paid by
Superior under the Amended Agreement was attributable to the reserve increase
described above.  The Company and its actuaries believe that this strengthening
of reserves will now conclude the Department's triennial examination and result
in the securing of the necessary regulatory approval of the pending transaction.
However, other unforeseen factors could affect either the regulatory approval
process or the ultimate closing of the transaction.

Workers' Compensation System

Workers' compensation is a statutory system under which an employer is required
to provide its employees with the costs of medical care and other specified
benefits for work-related injuries and illnesses.  Most employers provide for
this liability by purchasing workers' compensation insurance.  The principal
concept underlying workers' compensation insurance laws is that an employee
injured in the course of his or her employment has only the legal remedies for
that injury available under workers' compensation law and does not have any
other claims against his or her employer. Generally, insurers must pay
compensation to an insured's employees injured in the course and scope of their
employment.  The obligation to pay such compensation does not depend on any
negligence or wrong on the part of the employer, and exists even for injuries
that result from the negligence or wrongs of another person, including the
employee.

                                       2
<PAGE>
 
The standard workers' compensation insurance policy issued by most insurance
companies, including Pacific Rim Assurance, obligates the carrier to pay all
benefits that the insured employer may become obligated to pay under applicable
workers' compensation laws.  The benefits payable under workers' compensation
policies fall under the following four categories: (i) temporary or permanent
disability benefits (either in the form of short-term to life-term payments or
lump sum payments); (ii) vocational rehabilitation benefits; (iii) medical
benefits; and (iv) death benefits. The amount of benefits payable for various
types of claims is determined by regulation and varies with the severity and
nature of the injury or illness and the wage, occupation, and age of the
employee.

The amount of the premiums charged for workers' compensation insurance is
dependent on the size of an employer's payroll and the type of business, and the
application of corresponding rate schedules setting forth the appropriate rate.
In California and Texas, rates are independently filed.  In Arizona, Georgia and
Alabama, premium rates are based on the National Council of Compensation
Insurance (NCCI) rate filings.

In addition to established premium rates, premium levels based on the insured's
payroll could be affected by inflation and/or the application of Experience
Rating Plans.  Experience Rating Plans govern all policyholders whose annual
premiums are in excess of certain levels and are based on the insured's loss
experience over a three-year period commencing four years prior to, and
terminating one year prior to, the date for which the experience modification is
to be established.  Application of the Experience Rating Plan generally results
in an increase or decrease to the insured's premium rate, and is therefore
intended to provide an incentive to employers to reduce work-related injuries
and illnesses.

Significant Changes in the California Workers' Compensation System

There have been material changes in the laws and regulations affecting the
workers compensation industry in California, the jurisdiction in which the
Company has in the past, conducted all its activities.

Prior to 1995 within California, a minimum rate law was in effect, which law was
intended to curtail indiscriminate rate cutting, which rate cutting was felt to
threaten the solvency of private workers' compensation insurers.  Although an
insurer could not charge less than the minimum rates set by the Department,
insurers could charge more than the minimum rates.  The minimum rates for
workers' compensation policies were reviewed annually by the Workers'
Compensation Insurance Rating Bureau ("WCIRB") and the Department.  In reviewing
the WCIRB's proposed rates, the Department considered the loss experience for
the industry as a whole and, after adding factors for reasonable underwriting
costs and profits, approved publication of rate schedules for various
classifications of employees.  Rates could be revised and approved by the
Insurance Commissioner whenever the legislature changed the levels of benefits
payable or industry loss experience indicated the need for a rate revision.

In July 1993, the California state legislature passed two sets of workers'
compensation law reforms, which have significantly impacted the benefits
available under the California workers' compensation system.  While the
legislation was designed to reduce the claim costs and rates applicable to
California workers' compensation coverage, its ultimate impact upon the
operations and profitability of the Company is uncertain.  The more significant
aspects of the legislation are outlined below.

Initially, the legislature enacted two sets of legislation dealing with the
premium rates applicable to California workers' compensation coverage.  The
first item of legislation repealed the California minimum rate law effective
January 1, 1995. As of that date, the repeal of the minimum rate law opened the
workers' compensation insurance market to  direct price competition among
insurers.  Thus, the official end to the minimum rate law and the start of open
price competition in the industry was January 1, 1995.  Although repeal of the
minimum rating law formally became effective January 1, 1995, the Company
believed that competitive forces working in the marketplace during 1994 already
showed signs of informal price competition, through the use of higher
commissions paid to agents and brokers, which in turn were rebated in part to
policyholders.  The ultimate effect of open rating on the Company's operations
and profitability cannot be stated with certainty.  However, since January 1,
1995, open rating has created an intense level of price competition and an
overall erosion of premium rate levels.

The second item of rate-related legislation required a 7% decrease in the
minimum premium rates charged with respect to California workers' compensation
coverage.  The 7% minimum premium rate decrease was effective July 16, 1993, for
all policies inforce at that date.  Effective January 1, 1994, the minimum
premium rate was decreased another 12.7%, to be phased-in upon the insured's
policy renewal date during 1994.  Effective October 1, 1994, the minimum premium
rate was decreased another 16% for all policies inforce at that date.  The
reduced minimum rates were to remain in effect until a policy renewed in 1995,
at which time the open price competition resulting from the repeal of the
minimum rate law took effect.

                                       3
<PAGE>
 
Along with that legislation affecting workers' compensation rates, the
California legislature further enacted legislation designed to reform the
benefits available and combat fraud within the California workers' compensation
system.  In particular, the legislation provided for increased benefit payments
applicable to totally disabled and seriously injured workers, while at the same
time cutting benefits for certain over-utilized treatments and psychiatric
injury claims.  The ultimate impact of these reforms on the operations and
profitability of the Company cannot be stated with certainty.  The more
significant provisions of the benefits reform legislation are outlined below.

The reform legislation increased the weekly benefits payable for temporary total
disability from $336 per week to $490 per week and is being phased in over a
three-year period that began July 1, 1994.  In addition, benefit payments to
seriously injured workers have increased.  Each of these benefit level increases
will result in increased California claims costs to the Company.  While it
cannot be stated with certainty, proponents of the legislation have urged that
such increased costs will be more than offset by the following benefit reduction
reforms:

     The legislation tightened restrictions on the number of permissible
     evaluations utilized to resolve medical issues associated with a claim.

     Under previous law, claims for psychiatric injury, including stress, were
     compensable if 10% or more of their cause was attributable to employment-
     related factors.  The legislation raised this standard to require that
     employment be the "predominant" cause of the psychiatric injury.  The
     legislation further limited post termination (including terminations and
     layoffs) psychiatric injury claims to those in which the employee can
     establish that the injury at issue arose prior to termination.

     The legislation limited vocational rehabilitation benefits to a total of
     $16,000 per claim, a decrease from $25,000 previously.  Of the $16,000
     limit, no more than $4,500 can be claimed for counseling services.

     The legislation allows certain employers to direct the treatment of work-
     related injuries under a system of managed care for a period of up to 365
     days.  The availability of the managed care option is dependent on the type
     of group health coverage provided by the employer.

     The legislation prohibits insurers, doctors, and rehabilitation counselors
     from referring claimants to facilities in which such persons or entities
     maintain a financial interest.

     The legislation adopted certain anti-fraud provisions, which make any
     efforts to bribe adjusters a felony, and provides for restitution of
     benefits paid on fraudulent claims.

The ultimate effect of the workers' compensation reform legislation, repeal of
the minimum rate law, and premium rate decrease on the Company's operations and
profitability cannot be stated with certainty.

Rating Organizations

In August 1996, Pacific Rim Assurance received a Standard & Poor's claims-paying
ability rating of BBBq, defined as "Adequate financial security, but capacity to
meet policyholder obligations is susceptible to adverse economic and
underwriting conditions."  That rating is the fourth highest of nine ratings,
and is within Standard & Poor's "Secure" range.

In May 1994, Pacific Rim Assurance received its initial Best's rating of B+
(Very Good) by A.M. Best Company, Inc. ("Best"), a nationally recognized
insurance rating service.  Generally, many employers, or their agents and
brokers, will do business only with a company rated by Best.  The Best's rating
of B+ was the sixth highest of fifteen ratings published by Best.

In June 1996, Best assigned Pacific Rim Assurance a rating of B (Adequate), the
seventh of the fifteen Best's ratings. That rating change was the result of what
Best believed was a major change occurring in the California workers'
compensation insurance market, potentially weaker loss and LAE reserves of the
Company, and concern about the debt service burden of Pac Rim Holding and the
ability of Pacific Rim Assurance to assist in that repayment.

Following receipt of the rating in June 1996, and continuing throughout the
second half of 1996, the Company continued to convey additional information to
Best, as well as the belief that the pending merger transaction, elimination of
debt, additional capital and reserve strengthening taken during the first nine
months of the year would relieve the concerns

                                       4
<PAGE>
 
previously expressed by Best.  Accordingly, in October 24, 1996, following the
Company's September 17, 1996 announcement of the pending acquisition by
Superior, Best reported that it had placed the rating of Pacific Rim Assurance
"under review with positive implications".

On February 24, 1997, Best advised the Company that as a result of the
announcement of a further increase in loss and LAE reserves, the Company would
be downgraded until the pending transaction with Superior closes, which is
anticipated to be April 1997.  Best expressed concern with the Company's claims
strengthening, debt service burden, and debt payment ability.  The Company
believes that these concerns ultimately will be alleviated by closing the
transaction. Nevertheless, Best believed that in the interim, a Best's rating of
C++ (Marginal), the ninth of the fifteen ratings, was appropriate.  The Company
does not agree with the Best rating, and has so advised Best; but the Company
believes that the successful closure of the transaction in April 1997 will
result in the proper rating.  Best did state in its public release of the rating
that, upon successful completion of the transaction, it likely will upgrade the
rating of Pacific Rim Assurance.

Marketing

The Company markets its insurance policies through approximately 200 independent
insurance agencies and brokerage firms, many of which specialize in workers'
compensation insurance.  The independent insurance agencies and brokerage firms
that sell the Company's insurance policies also represent other insurance
companies.  The Company pays such independent insurance agents and brokers a
commission consistent with workers' compensation insurance industry practices.

At December 31, 1996, 35% of the Company's premiums in force had been generated
by its five highest producing agencies and brokerage firms, two of which
accounted for 17% of total premiums in force at that date.  The Company believes
that it has favorable operating relationships with these agencies and brokerage
firms.  No agency or brokerage firm is obligated to place insurance policies
with the Company, and the Company is not obligated to accept business submitted
from any agency or brokerage firm.  The loss of any one or more of these
agencies or brokerage firms could materially effect the Company's business.

At December 31, 1996, service industry policyholders represented over 66% of
premiums in force.  Typical service industry policyholders include convalescent
homes, restaurant companies, agricultural enterprises, garbage collection, and
parking lot operators.  Light manufacturing, including assembly businesses,
accounted for 23%, and other industry policyholders represented 11% of premiums
in force.

During 1995, the Company experienced premium rate erosion.  During 1996, the
Company achieved premium rate increases of approximately 9%.  There can be no
assurance that the Company's premium rates in the California marketplace will
remain at such 1996 levels in 1997.  The Company's underwriting philosophy
continues to be predicated on adequate pricing for anticipated claims, services,
and expenses.  To offset expected premium loss in California resulting from open
rating, the Company implemented a strategy of expanding into specific new
marketplaces in the southwestern and southeastern United States, by becoming
licensed in Arizona and Texas in 1995, and Georgia and Alabama in 1996, and also
producing and assuming business in Florida and certain other states.

Underwriting

The Company specializes in underwriting larger premium accounts that generate
annual premiums in excess of $30,000. These accounts generally are comprised of
employers, with approximately 50 or more employees, primarily engaged in service
and light manufacturing industries, and which have a favorable loss experience
or are willing to attempt to improve their loss experience through application
of the Company's loss control programs.  Pacific Rim Assurance carefully
evaluates the potential profitability of each application for insurance.  This
evaluation is based on numerous factors, including the Company's analysis of the
adequacy of the premium rates for various potential loss exposure
classifications, a team analysis utilizing underwriting, risk management, and
claims personnel to determine whether to accept a specific risk, and the
development of an account service plan for each insured employer to reduce claim
incidents and control loss costs.  The Company's employees generally inspect all
businesses prior to issuing coverage.  The Company generally does not insure
employers known to be engaged in businesses considered by the WCIRB as large
loss exposure classifications.

Prior to insuring a particular risk, a two-tiered evaluation of the employer is
conducted.  The Company reviews the policyholder's loss exposure, loss history,
and financial stability.  In addition, representatives of the Company's loss
control department meet with the policyholder and evaluate safety attitude,
employee/employer relations, and the employer's willingness to work in
partnership with the Company to reduce work-related injuries and illnesses.
Based

                                       5
<PAGE>
 
on this evaluation, premiums are established that take into account the
additional cost for increased loss control services that may be required for
that insured.  The Company may decline particular risks, regardless of prior
histories, due to potential hazards inherent in certain businesses.  Examples of
such classifications include risks associated with aviation or the operation of
aircraft, the manufacture, storage, filling, breaking down, or transport of
fireworks, ammunition, explosive gases, explosives, or various other volatile
materials, mining or quarry operations, and the demolition of structures. The
Company will initiate on-site inspections for inforce accounts if the employer
had a high loss experience since being insured with the Company.

Employer Services

Employer services encompass the areas of loss control and claims administration.
The Company believes that effective loss control procedures and claims
administration services are the keys to controlling employers' workers'
compensation insurance costs.

Loss Control.  The Company's emphasis on loss control is an integral part of its
------------                                                                    
marketing and underwriting effort. Generally, the Company's loss control
personnel meet with large and medium-sized accounts to discuss hiring practices,
orientation, and training, with the goal of producing a loss control service
plan for the employer soon after the policy is issued.  In addition, the
Company's loss control personnel often assist insureds on a continuing basis in
developing and maintaining safety programs and procedures to minimize on-the-job
injuries and industrial health hazards, and may help insureds comply with state
and federal laws relating to safety and health in the workplace.  The Company's
loss control consultants provide Industrial Hygiene Services as well as a
complete Psychiatric Stress Prevention Program.  Loss control service programs
include the use of video recording for analyzing work practices, customized
orientation programs, hazard recognition, and materials handling.  The Company
also regularly provides detailed loss analyses to employers containing
information relevant to each incident, claim frequency and severity, and
information as to paid and anticipated future losses and LAE.  These reports are
used as a trend analysis of the loss control service plan and assist in
determining areas in which improvement may be needed.

Claims Administration.  The Company's claims administration service focuses on
---------------------                                                         
developing a close relationship with its policyholders and returning employees
to work as soon as possible.  The Company believes that this goal ultimately
benefits all parties, including the employee, the insured, and the Company.  The
Company is staffed with claims personnel, some of whom are bilingual in Spanish
and English, who handle the investigation, management, disposition, and payment
of claims.  The Company also employs specialists in litigation and vocational
rehabilitation.  The Company seeks to contact each injured worker within 24
hours of the first report of injury and to contact promptly the medical provider
and employer.  Direct contact with all the involved parties can assist the
claims examiner in establishing a claims reserve, beginning benefit payments to
the injured worker in a timely manner, and developing a return-to-work plan.
The Company believes personal contact can also help to establish a rapport with
the injured worker.  In the event an injured worker is unable to return to his
or her prior employment, the Company provides voluntary vocational
rehabilitation in the form of testing, development of an alternative return-to-
work plan, retraining and placement services, and disability benefits during the
retraining and placement stages.  To assist in its achievement of these goals,
the Company has established an alliance with MetraComp, a subsidiary of United
Health Services and MetraHealth, to provide managed medical care services.
Although the length of time that has passed has been too limited to provide
definitive results, as a result of the above actions, the Company has
experienced improvement in average severity of paid claims, and has experienced
a favorable trend in overall claim severity during 1996.

The Company's Claims Special Investigative Team is responsible for the
investigation of suspected fraudulent claims and preparing these cases for
litigation.  The need for such a unit originally arose during the early 1990's
as a result of the number of claims stemming from adverse economic conditions in
Southern California, including "stress and strain" claims.  This team's efforts
have resulted in several prosecutions, numerous withdrawals of alleged
fraudulent claims, and successful closure of other questionable claims.
Investigation results are shared with the Department Fraud Bureau and the
applicable county's District Attorney's office in preparation of cases for
criminal prosecution.

The Company's claims policy emphasizes a rapid claims processing function, so
that earlier and more immediate processing of incidents would occur, with more
prompt intervention by Company claims personnel, earlier recognition of claims
closing possibilities, and refined claim reserving techniques.

Policyholder Dividends

California law permits workers' compensation insurers to issue participating
policies.  Participating policies accounted for 7% of the premiums in force at
December 31, 1996.  Although workers' compensation insurance carriers are

                                       6
<PAGE>
 
prohibited by law from promising policyholders that future policyholder
dividends will be paid or stating the amount or rate of dividends to be paid,
companies compete by informing policyholders of the amounts of dividends that
have been paid historically.

The Company concentrates on insuring workers' compensation accounts where it
competes primarily on the basis of service and reducing the overall cost of
workers' compensation insurance, and where the payment of policyholder dividends
are less of a factor.  Effective January 1, 1995, when the end of the minimum
rate law occurred and open price competition officially began, the use of
policyholder dividends in the pricing process became even less of a competitive
factor in California.  The competitive pricing of business is more impacted by
the cost of insurance at the inception of the policy, not with the payment of
policyholder dividends after the policy expires.

The Company also issues participating policies in Arizona.  It is not
anticipated that the payment of dividends will be a significant factor to the
Company's marketing strategy.

Any payment of dividends to policyholders determined by the Board of Directors
of an insurance company is subject to the legal requirements in California that
such dividends may not exceed the historical earned surplus related to such
company's workers' compensation policies, may not be unfairly discriminatory,
and may not be declared or paid until after policy expiration.  The Board of
Directors of Pacific Rim Assurance considers a number of factors in connection
with the declaration of policyholder dividends, including risk and expense
factors, the loss ratio of an insured, class of business, premium payment
history of the policyholder, adequacy of premium rates, and the overall loss
ratio and financial condition of the Company.

Premium Collection

At the time the Company issues a policy to an insured, the Company bills the
appropriate independent insurance agency or broker for the deposit premium.  The
independent agent or broker is responsible for the deposit premium regardless of
whether they collect the deposit premium from the insured.  The deposit premium
is a percentage of the estimated annual premium of the policy at the time of
issuance.  The percentages range from 10% to 100% of the estimated annual
premium depending on the premium payment schedule, the insured's credit history,
employment classifications, and the industry in which the insured operates.  The
deposit premium is applied to premiums due to the Company.  The Company utilizes
both Agency Bill and Direct Bill systems.  As of December 31, 1996, 94% of the
Company's premiums receivable were Agency billings.

The insured remits its premiums based on a payment plan or amounts calculated
from periodic reports of the insureds payrolls.  In the latter case, the insured
is required to report periodically to the Company the amount of payroll paid
within each of the insured's employment classifications.  When the Company
receives this information, it invoices the independent agency, broker, or
insured for the amount due from the insured for the coverage period.  The
independent agency, broker, or insured must submit the amount due to the Company
within 10 to 45 days from the date in which the premium is billed (depending on
the independent agency's, broker's, or insured's credit terms with the Company).
If the insured fails to remit the premium due or submit the appropriate payroll
reporting, the policy is cancelled.

At the end of the policy term or if the policy is cancelled, a final audit of
the insured's records is conducted to determine the correct amount of premium
due to the Company.  If the Company is owed any balance after application of the
deposit premium, the Company notifies the insured and submits a premium invoice
to the independent agency, broker, or insured. If the insured fails to remit the
amount due, under Agency Bill, the independent agency or broker is responsible
for paying the amount due to the Company, unless the agent or broker returns the
premium due back to the Company for direct collection.  In such event, the
Company initiates collection procedures against the insured.

Since inception, the Company's premium billings that have been written off, and
the allowance for doubtful accounts, have had a negligible impact on the
Company's operations.  During the period from 1987 through 1995, the total of
uncollected premiums written off and allowance for doubtful accounts has been
 .67% of net premiums earned.  That collection experience is the result of a
ratio of approximately .7% for the years 1987 through 1995, and a ratio of
approximately .4% for the year ended December 31, 1996.

The Company's allowance for doubtful accounts as of December 31, 1996 and 1995,
was $1,055,000 and $1,221,000, respectively.  Such reserves are based on the
Company's analysis of its aging of receivable balances and collection
experience.  The Company believes that its allowance for doubtful accounts as of
December 31, 1996, provides a reasonable allowance for uncollectible premiums.
For statutory accounting purposes, if any portion of the premiums due from an
insured is over 90 days past-due, the entire amount of the total premiums due
from that insured is considered a

                                       7
<PAGE>
 
non-admitted asset and a reduction to surplus, without regard to collectibility.
At December 31, 1996 and 1995, the statutory past-due premiums of Pacific Rim
Assurance, excluding amounts that the Company considered to be "in-transit",
which were recovered within approximately 30 days following the applicable date,
were $2,452,000 and $2,158,000, respectively.  However, in connection with its
statutory triennial examination of Pacific Rim Assurance as of December 31,
1995, during the second half of 1996, the Department instructed the Company to
include such in-transit amounts in the measurement of statutory past-due
premiums.  Therefore the adjusted statutory past-due premiums at December 31,
1996 and 1995 were $5,850,000 and $5,076,000.

Claims, Losses, and Loss Reserves

The Company conducts all claims operations, which include reviews of initial
reports of work-related injuries, assignments of appropriate field
investigators, determinations of whether subrogation should be pursued, and
vocational rehabilitation counseling from its principal office in Woodland
Hills, California, and its claim service offices in Fresno, and Phoenix,
Arizona.  Certain claims are administered by third-party claim agencies under
the supervision of the Company.

As an insurance company, Pacific Rim Assurance is required to maintain reserves
to cover its estimated ultimate liability for losses and LAE with respect to
reported and unreported claims incurred as of the end of each accounting period,
net of estimated reinsurance recoveries.  These reserves are estimates involving
actuarial and statistical projections at a given time of what the Company
expects the ultimate settlement and administration of claims to cost, based on
facts and circumstances then known, late reported claims, estimates of future
trends, and other variable factors such as inflation or changes in regulations.
There are inherent uncertainties in estimating loss reserves as a result of the
period of time that often elapses between the occurrence of a loss, the
reporting of that loss, and the final disposition of the loss.

When a claim is reported to the Company, its claims personnel establish a "case
reserve" for the estimated amount of the ultimate payment.  The estimate
reflects the informed judgment of such personnel based on workers' compensation
regulations, and other experience and knowledge of such personnel regarding the
nature and value of each claim.  These claims are continually investigated and
regularly updated.  A reserve is also established for allocated LAE for
individual claims, which represents the estimated expenses of settling the claim
(including legal and other fees).

The claims department completes a thorough investigation of all allegations made
by injured workers.  Once all facts are in, a decision to either accept or deny
the claim is made by the Company, in accordance with the appropriate state
regulations.  If a dispute arises, it will be settled either directly with the
injured worker, through the worker's attorney, or through a formal hearing in
accordance with the state regulations.  In California, monetary settlements must
be approved through the State of California Workers' Compensation Appeals Board.

In most cases, benefits are paid by the Company for lost wages (temporary
disability) and medical expenses from the initial stages of the claim until the
injured worker is able to return to work.  After the worker returns to work, the
Company may continue to pay medical expenses for ongoing treatment and
additional disability benefits (for permanent disability).  Until all payments
are made, the Company will continue to reserve for the estimated future
disability payments to the injured worker, medical costs, as well as other
related settlement expenses.

In accordance with industry practice, the Company maintains an incurred but not
reported ("IBNR") reserve.  That reserve is established to provide for future
case reserves and loss payments on incurred claims that have not yet been
reported to the Company, and for future increases of known case reserves.  In
calculating its IBNR reserves, the Company uses generally accepted actuarial
reserving techniques that take into account loss experience data.  The IBNR
reserve is based on the Company's loss experience and frequency patterns for
late reported claims.  The IBNR reserve also takes into account certain factors
such as changes in workers' compensation regulations, the mix of business,
claims processing, current economic conditions, and inflation that can be
expected to affect losses over time.

Accurate assessments of case reserves and IBNR reserves are made more difficult
when current underlying conditions affecting claims differ from prior underlying
conditions.  The 1992 and 1992 legislative reforms in California workers'
compensation insurance laws resulted in significant changes in the frequency and
severity of claims, as well as changes in claims payment and settlement
patterns.  Some of the types of claims that were affected include cumulative
trauma, stress claims, strain claims, vocational rehabilitation, and litigated
claims.

Liabilities known as "cumulative trauma" or "cumulative injury" may include
hearing loss, back injuries, lung problems, or heart attacks.  Cumulative trauma
claims are evaluated by the Company in the same manner as other types of claims.

                                       8
<PAGE>
 
However, the Company evaluates each such claim to determine whether the trauma
was suffered prior to, or after the commencement of, the Company's coverage.

From 1991 through 1992, the California workers' compensation industry
experienced an increase in the number of "stress and strain" claims that did not
involve traumatic physical loss or injury. These claims typically related to
alleged injuries or illnesses arising out of psychological pressures in the
workplace. A claimant may have asserted, for example, that verbal abuse,
harassment, plant closures, or a change in job status precipitated illness.
Concurrently with the increase in "stress and strain" claims, an increase in the
number of fraudulent workers' compensation claims also occurred. The Company
established a special unit to address the effect that these developments had on
its business by scrutinizing and evaluating "stress and strain" claims that do
not involve traumatic physical injuries. This unit employs numerous specialized
techniques in connection with its activities.

In July 1991, legislation was enacted in the State of California with respect to
"stress and strain" claims.  Under one measure, which became effective January
1, 1992, physicians and attorneys, as well as claimants, who engage in
fraudulent workers' compensation practices can face imprisonment and other
criminal penalties such as loss of their professional licenses.  Other
legislation enacted in the same month and effective since July 16, 1993
prohibits an employee from asserting a "stress and strain" claim for psychiatric
injury caused by a "regular and routine employment event" (including a
nondiscriminatory good faith personnel action such as discipline, work
evaluation, transfer, demotion, layoff, or termination), unless the employee has
been employed by that employer for six months.  Further, the benefits reform
legislation enacted during 1993 (See "Significant Changes in the California
Workers' Compensation System") raised the standard for determining the
compensability of a psychiatric injury claim to be "predominately" related to
employment. Since late 1992, the frequency of newly reported stress and strain
claims has steadily and significantly decreased.

Another area giving rise to increased loss costs and difficulty in reserve
assessment is the mandatory vocational rehabilitation benefit afforded under
California law.  The Company has established procedures to minimize losses in
this area.  The Company's claims department staff encourages vocational
rehabilitation for injured workers who choose to receive that benefit and
encourages voluntary early return-to-work programs, and works with the employer
to develop a modified job assignment promptly following recovery from an injury.

The Company has implemented a program to utilize in-house legal staff versus
outside legal counsel for those claims requiring legal assistance.  The Company
believes that this program has and will continue to reduce the legal costs for
these claims.

The Company evaluates reserves in the aggregate based on monthly indications
using actuarial methods, and interim reviews by internal and independent
actuaries, and makes adjustments where deemed appropriate.  However, during past
years, like many other casualty insurance companies, the Company experienced
adverse loss development from prior accident years.  The increases in reserves
for prior years reduced results of operations for periods in which the
adjustments were made.  During the nine months ended September 30, 1996, the
Company increased total losses and LAE related to 1995 and prior accident years
by approximately $5,600,000, including approximately $4,500,000 recognized
during the third quarter of 1996 related to the 1990-1993 accident years.  Based
on the Company's internal actuarial analysis and input from its independent
actuaries, the Company believed that its recorded loss and LAE reserves at
September 30, 1996 were adequate and within the independent actuaries'
reasonable range as of that date.

During the fourth quarter of 1996, the Department, in connection with its
statutory triennial examination of Pacific Rim Assurance as of December 31,
1995, and its regulatory review prior to granting approval of the pending
acquisition of the Company by Superior, undertook studies of the Company's loss
and LAE reserves.  Following extensive review by, and meetings with the
Department, and giving recognition to the combined impacts on loss and LAE
development patterns of the volatility in legislative, economic, managed medical
care, litigation expense, and other significant factors, the Company, in
conjunction and consultation with its internal and independent actuaries,
reached agreement with the Department to increase its loss and LAE reserves by
approximately $12,000,000 for accident years 1995 and prior in its fourth
quarter 1996 operating results.  The $12,000,000 increase was greater than the
amount that was needed to be within the reasonable range of the Company's
independent actuaries; but the Company believes the pending transaction with
Superior could no longer be delayed, and Department approval was and is
essential to completion of the transaction.

The reason for recognizing such adverse development was that during 1996,
despite experiencing favorable trends in the overall frequency and severity of
claims for the 1995 and 1996 accident years, the Company and its internal and
independent actuaries observed development patterns in the 1990-1994 accident
years that were volatile when compared to previous historical patterns.  In
particular, 1990-1992 were very difficult accident years, due to the impact of
fraud and stress claims from adverse economic conditions, although the 1992
accident year began the transition to improved claims

                                       9
<PAGE>
 
experience during the second half of the year.  The 1993-1994 accident years
were very favorable transition years, following legislative reforms to the
workers' compensation benefits system.  Nevertheless, it was unclear how each of
those years ultimately would develop, and how subsequent accident year patterns
would thus be affected, given paid loss and case reserve activity during 1996.

To illustrate the uncertainty and its effects, paid loss activity during the
second half of 1996 has continued at a level higher than previously projected on
the more difficult 1990-1992 accident years, which were affected by the negative
impacts of legislative, economic, and litigation factors; and 1996 case reserve
activity on remaining open claims from those years has accelerated in response
to the paid loss activity.  Thus, as a precaution, the Company has further
increased loss and LAE reserves on those years.  Further, even though there has
been more favorable case reserve and paid loss activity on the 1993-1994
accident years following positive impacts of legislative reforms, improved
managed medical care cost containment, and cost-effective litigation expense
factors, the Company, with the concurrence of its actuaries and the Department,
has elected to take a precautionary stance and maintain higher 1996 reserves on
those more recent and favorable accident years.  The Company believes that given
the patterns of claim payments and closures, despite the gradual reduction in
the number of claims that remain outstanding on 1990-1992 accident years and the
generally improved 1993 and subsequent accident years, it should not anticipate
further favorable loss and LAE development.

It should be noted that despite the increases recorded during 1996 to loss and
LAE reserves from accident years 1995 and prior, the 1993 through 1995 accident
year results appear to have produced underwriting profits, even at the current
higher reserve estimates.  The improving conditions in the California workers'
compensation market, including legislation reforms and some economic recovery,
have improved the frequency and severity of claims.  The accident years that
produced significant underwriting losses were 1992 and prior; the actual size of
these losses has become known only with additional passage of time.

The Company has filed with the Department an independent actuarial opinion that
states that the Company's loss and LAE reserves make reasonable provision for
loss and LAE obligations of the Company as of December 31, 1996.  While no
assurance can be given, the Company believes that, given the inherent
variability in any such estimates, its reserve for losses and LAE is within a
reasonable range of adequacy.  If the assumptions on which the estimates are
based prove to be incorrect and reserves are insufficient based on the Company's
actual experience, future results of operations and the financial condition of
the Company would be adversely affected.

The following table provides a reconciliation of beginning and ending loss and
LAE reserves for the years 1996, 1995, and 1994.  All reserve totals are net of
reinsurance deductions.  There are no material differences between the Company's
reserves for losses and LAE calculated in accordance with generally accepted
accounting principles ("GAAP") and those reserves calculated based on statutory
accounting practices.

                                       10
<PAGE>
 
       Reconciliation of Reserve for Losses and Loss Adjustment Expenses
<TABLE>
<CAPTION>
 
                                                   Year Ended December 31 ,
                                               ---------------------------------
 
                                                    1996       1995       1994
                                                    ----       ----       ----
                                                     (amounts in thousands)
<S>                                              <C>        <C>        <C>
Liability for losses and LAE, net of
 reinsurance recoverables on unpaid losses,
 at beginning of year                            $ 92,641   $114,709   $111,109
 
Provision for losses and LAE, net
 of reinsurance recoverable:
  Current accident year                            62,244     49,962     60,989
  Prior accident years                             17,646        995      2,799
                                                   ------     ------     ------
 
Incurred losses during the current year,
 net of reinsurance recoverable                    79,890     50,957     63,788
Losses and LAE payment for claims, net of
 reinsurance recoverable, occurring during:
   Current year                                    16,398     13,473     13,641
   Prior years                                     58,669     59,552     46,547
                                                   ------     ------     ------
                                                   75,067     73,025     60,188
                                                   ------     ------     ------
 
Liability for losses and LAE, net of
 reinsurance recoverable on unpaid
 losses, at end of year                            97,464     92,641    114,709
 
Reinsurance recoverable, at end of year             3,849      4,068      2,132
 
Less:  reinsurance recoverable on paid losses        (725)      (184)      (212)
                                                   ------     ------     ------
 
Reinsurance recoverable on unpaid losses,
 at end of year                                     3,124      3,884      1,920
                                                   ------     ------     ------
 
Liability for losses and LAE, gross of
 reinsurance recoverable on unpaid losses,
 at end of year                                  $100,588   $ 96,525   $116,629
                                                 ========   ========   ========
</TABLE>

During 1991 through 1994, the Company, as did the workers' compensation industry
in California in general, went through a dramatically changing experience in
losses and LAE incurred.  During 1991 and 1992, the Company experienced a
substantial number of claims related to adverse economic conditions,
particularly for the 1990 and 1991 accident years.  In addition, there were
"stress and strain" claims that did not involve traumatic physical loss or
injury, many of which were suspected by the Company to be fraudulently
submitted.  The Company initially took a general denial stance and non-
settlement posture on such fraudulent claims, to send a clear message to
claimants and vendors of its position.

The Company referred fraudulent claim matters to prosecutors, who have secured
successful indictments and prosecutions of fraudulent claimants or vendors, and
the Company secured withdrawals of such claims by others.  In addition, the
enactment of effective legislative and regulatory reforms has been implemented.
That technique was effective, as the Company believes that the frequency of new
suspected fraudulent claims has nearly stopped.  Late in 1993, the Company
refined its approach to promote the settlement of certain of these claims, where
minimal settlement cost could facilitate early closure and prevent cost
escalation.

Throughout 1994, 1995 and 1996, the Company continued to experience a favorable
trend in the frequency of new claims. The positive trends and experience related
to new claims since the second half of 1992 have been consistent with the
favorable experience of other workers' compensation insurance specialty
companies in California.  In addition, the level of claims closed was in excess
of the level of new claims reported during 1994 and 1995.  As a result, the
Company's estimate of loss and LAE reserves for the 1993, 1994, 1995 and 1996
accident years is based on substantially lower loss ratios than the 1991 and
prior accident years.  Nevertheless, despite improved frequency and lower
overall loss and LAE

                                       11
<PAGE>
 
ratios in those years, the volatile changes in legislative, economic, managed
medical care, and litigation expense factors, affecting historical paid loss and
case reserve development patterns, have made it more difficult to estimate the
ultimate dollar cost of those reported claims.  Thus, the inherent variability
has increased, and recognition of adverse development of prior years' estimates
has occurred.

The following table shows changes in historical loss reserves (net of
reinsurance ceded) for the Company for 1987 and subsequent years.  The upper
portion of the table (reserve re-estimated) shows the re-estimated amount of the
previously reported reserves based on experience as of the end of each
succeeding year.  The lower portion (paid) presents the amounts paid as of
subsequent years on those claims for which reserves were carried as of each year
end.  The estimate changes as more information becomes known about the actual
claims for which the initial reserves were carried.  An adjustment to the
carrying value of reserves for a prior year will also be reflected in the
adjustments for all years subsequent to such year.  For example, an adjustment
made in 1996 for 1991 loss reserves will be reflected in the re-estimated
ultimate net loss for each of the years 1991 through 1995.  The cumulative
deficiency line represents the cumulative change in estimates since the initial
reserve was established.  It is equal to the latest liability re-estimated
amount less the initial reserve.  For example, the reserves recorded at December
31, 1995, for 1995 and all prior accident years, have developed a $17,646,000
deficiency, or 19%, through December 31, 1996.

<TABLE> 
<CAPTION> 
                                    Analysis of the Reserve for Losses and Loss Adjustment Expense Development (as restated)
                                                                (Net of Reinsurance Ceded)                               
                                                                --------------------------
                                                                       December 31,      
                                -----------------------------------------------------------------------------------------------
                                1987     1988      1989       1990       1991       1992        1993        1994        1995   
                                -----  --------  ---------  ---------  ---------  ---------  ----------  ----------  ----------
                                                                (amounts in thousands)
<S>                             <C>    <C>       <C>        <C>        <C>        <C>        <C>         <C>         <C>       
Reserve for unpaid losses                                                                                                      
 and loss adjustment expenses   $ 121  $ 7,900   $ 27,294   $ 53,410   $ 86,702   $113,620    $111,109    $114,709    $ 92,641 
                                                                                                                               
Reserve re-estimated as of:                                                                                                    
  One year later                  108    8,072     27,386     56,523     97,719    135,589     113,908     115,701     110,287 
  Two years later                 150    8,549     31,142     61,038    130,377    138,315     115,515     133,666             
  Three years later               125   10,086     33,551     78,154    133,151    140,350     133,474                         
  Four years later                128   10,229     37,637     81,989    135,911    167,932                                     
  Five years later                130   10,483     39,188     83,445    150,143                                                
  Six years later                 102   10,591     39,048     88,162                                                           
  Seven years later               102   10,827     40,101                                                                      
  Eight years later               103   10,890                                                                                 
  Nine years later                103                                                                                          
Cumulative redundancy                                                                                                          
 (deficiency)                      18   (2,990)   (12,807)   (34,752)   (63,441)   (54,312)    (22,365)    (18,957)    (17,646)
                                                                                                                               
Cumulative amount of reserve                                                                                                   
 paid through:                                                                                                                 
  One year later                   33    3,902     12,633     28,725     52,962     77,313      46,547      59,552      58,669 
  Two years later                 117    7,040     23,847     53,130    101,761    111,487      88,225      99,658             
  Three years later               120    8,906     31,364     71,376    119,765    136,620     115,711                         
  Four years later                127    9,690     35,916     77,324    134,811    155,820                                     
  Five years later                102   10,312     37,221     83,063    144,642                                                
  Six years later                 102   10,445     38,910     86,323                                                           
  Seven years later               102   10,795     39,697                                                                      
  Eight years later               103   10,862                                                                                 
  Nine years later                102                                                                                          
Net Reserve - December 31                                                                     $111,109    $114,709    $ 92,641 
Reinsurance Recoverable on                                                                                                     
 unpaid losses                                                                                  24,856       1,920       3,884 
                                                                                              --------   ---------   --------- 
Gross Reserve - December 31                                                                    135,965     116,629      96,525 
 
Net Re-estimated Reserve                                                                       133,474     133,666     110,287
Re-estimated Reinsurance
 Recoverables                                                                                   29,131       6,841       5,120
                                                                                              --------   ---------   ---------
Gross Re-estimated Reserve                                                                    $162,605    $140,507    $115,407
                                                                                              ========   =========   =========
 
Gross Cumulative Deficiency                                                                   $ 26,640    $ 23,878    $ 18,882
                                                                                              ========   =========   =========

<CAPTION> 
                                December 31,      
                           ----------------------
                                    1996
                                  --------
                           (amounts in thousands)          
<S>                               <C>
Reserve for unpaid losses       
 and loss adjustment expenses       97,462
                                
Reserve re-estimated as of:     
  One year later                
  Two years later               
  Three years later             
  Four years later              
  Five years later              
  Six years later               
  Seven years later             
  Eight years later             
  Nine years later              
Cumulative redundancy           
 (deficiency)                   
                                
Cumulative amount of reserve    
 paid through:                  
  One year later                
  Two years later               
  Three years later             
  Four years later              
  Five years later              
  Six years later               
  Seven years later             
  Eight years later             
  Nine years later              
Net Reserve - December 31         $ 97,464
Reinsurance Recoverable on      
 unpaid losses                       3,124
                                  --------
Gross Reserve - December 31        100,588
                                
Net Re-estimated Reserve        
Re-estimated Reinsurance        
 Recoverables                   
                                
Gross Re-estimated Reserve      
                                
                                
Gross Cumulative Deficiency     
                                
 
</TABLE>

As discussed above, the deficiency experienced by the Company during 1996, on
claims incurred prior to 1995, is the result of the Company's increase of
reserves for those years in response to current estimates.  As previously
mentioned, the 1990 and 1991 accident years were among the worst accident years
in the history of the California workers' compensation industry.  The adverse
development of those accident years is evident in the Analysis of the Reserve
for Losses and Loss Adjustment Expense Development table shown above.  The
development recognized for those two accident years is attributable to the
substantial number of claims related to adverse economic conditions in
California. These types of claims, called "stress and strain" claims, do not
involve traumatic physical loss or injury; many of these claims were suspected
by the Company to be fraudulently submitted. In response to a January 1, 1992
law that made submission of a fraudulent claim a felony, the Company took a
general denial stance and non-settlement posture on such fraudulent claims. The
Company incurred allocated LAE costs in defending against these fraudulent
claims. In addition, the Company had experienced increases in LAE as a result of
the higher reported number of claims and of the increased level of
administrative procedures that has developed and been imposed by the Workers'
Compensation Reform Act that was effective January 1, 1990.

                                       12
<PAGE>
 
Conditions and trends that have historically affected the Company's claims may
not necessarily be indicative of conditions and trends that will affect future
claims.  Accordingly, it would not be appropriate to extrapolate future
redundancies or deficiencies based on the results set forth in the preceding
tables.

Investments

The amount and type of investments that may be made by Pacific Rim Assurance are
regulated under the California Insurance Code and related rules and regulations
promulgated by the Department.  Subject to such applicable state laws and
regulations, the investments of the Company are managed by an independent
investment advisory firm, which is paid a customary fee for such services.
Investment decisions are reviewed and approved by the Investment Committee of
the Board of Directors of Pacific Rim Assurance.

The Company has a policy of investing, with the intent of holding to maturity,
primarily in high quality U.S. Treasury securities, other governmental agency
securities, and corporate bonds.  Although the Company has the intent to hold
its investments to maturity, the Company also recognizes that unforeseeable
circumstances, such as changes in market conditions, tax considerations, and
operational needs may require the sale of securities prior to maturity.
Therefore, the Company has designated all of its portfolio as "available for
sale", as of December 31, 1996.  (See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources".)

The Company accounts for investments in accordance with Financial Accounting
Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS")
No. 115, "Accounting for Certain Investments in Debt and Equity Securities".  In
accordance with Statement 115, during the year ended December 31, 1994, the
Company's investment portfolio experienced a net unrealized holding loss of
$4,877,000 (net of deferred tax benefit of $2,513,000); the net unrealized
holding loss was $4,781,000 at December 31, 1994.  During the year ended
December 31, 1995, the Company's investment portfolio experienced a net
unrealized holding gain of $6,403,000 (net of deferred tax expense of
$3,299,000); the net unrealized holding gain was $1,622,000 at December 31,
1995.  During the year ended December 31, 1996, the Company's investment
portfolio experienced a net unrealized holding loss (net of deferred tax benefit
of $1,002,000) of $1,946,000; the net unrealized holding loss was $324,000 at
December 31, 1996.

The Company has never invested in equity securities or high-yield debt
securities.  Investments are maintained in one or more custodial accounts with
commercial banks or other financial institutions authorized to act in such
capacity. Additionally, the Company invests a portion of its portfolio in short-
term investments, which are comprised primarily of U.S. Treasury obligations,
U.S. Treasury money market funds, and high quality commercial paper.  There were
no sales of investments during 1994.  Proceeds from the sale of investments in
bonds during 1995 were $61,343,000, which resulted in a pre-tax gain of
$453,000.  Proceeds from the sale of investments during 1996 were  $104,172,000,
which resulted in a pre-tax gain of $1,640,000.

                                       13
<PAGE>
 
The following tables set forth certain information concerning the investment
portfolio of the Company (amounts in thousands):

<TABLE>
<CAPTION>
                                                                 Summary of Investments
 
                                                                       December 31,
                                                         -----------------------------------------
                                                                 1996                 1995
                                                         -------------------  --------------------
                                                         Amortized    Fair    Amortized    Fair
                                                           Cost      Value      Cost       Value
                                                         ---------  --------  ---------  ---------
                 <S>                                     <C>        <C>       <C>        <C>
                  Fixed income securities:
                    U.S. Treasury and 
                      other governmental           
                      agency bonds                        $ 28,808  $ 28,629   $ 68,963   $ 68,823
                    Tax exempt bonds                                                -0-        -0-
                    Corporate bonds                         13,765    13,563     33,793     35,679
                    U.S. Agencies                           12,341    12,231     10,546     10,964
                    Asset backed                               331       336      6,012      6,305
                                                          --------  --------   --------   --------
                     Total fixed income securities          55,245    54,759    119,314    121,771
                  Short-term investments                    56,799    56,794      7,260      7,260
                                                          --------  --------   --------   --------
                     Total investments                    $112,044  $111,553   $126,574   $129,031
                                                          ========  ========   ========   ========
 
</TABLE>
<TABLE>
<CAPTION>
                                    Maturity Distribution of Bonds
                  
                                         December 31, 1996
                                    ---------------------------
                  
                                     Amortized           Fair
                                      Cost              Value
                                    ----------        ---------
                                   <S>                <C>     
                  Due in 1997        $10,701           $10,696
                  Due 1998 - 2002     44,544            44,063
                                     -------           -------
                                     $55,245           $54,759
                                     =======           =======
 
</TABLE>
<TABLE>
<CAPTION>
                                                    Average Annual Yield on Investments
 
                                                          Year Ended December 31,
                                                      ------------------------------
 
                                                         1996     1995       1994
                                                         ----     ----       ----
                  <S>                                 <C>        <C>        <C>
                  Total investments at end of year
                   (at amortized value)               $112,044   $126,574   $149,694
                                                      ========   ========   ========
 
                  Net investment income               $  7,013   $  8,089   $  6,514
                                                      ========   ========   ========
 
                  Average annual yield                     5.9%       6.0%       5.0%
                                                      ========   ========   ========
 
</TABLE>
<TABLE> 
<CAPTION> 
                     Distribution of Bond Investments by Quality Rating
                                        
                                          December 31, 1996
                                       ----------------------

                                         Fair
                                        Value        Percent
                                        -----        -------
                 <S>                   <C>          <C> 
                  S&P/Moody's Ratings
                  -------------------
                  AAA/Aaa               $43,455          79%
                  A/A                    11,304          21
                                        -------         ---
                                        $54,759         100%
                                        =======         === 
</TABLE> 

                                       14
<PAGE>
 
Reinsurance

The Company purchases reinsurance to reduce its net liability on individual
risks, to protect against catastrophic losses, to stabilize its regulatory
financial ratios, and to protect underwriting capacity.  Under the Company's
excess of loss reinsurance treaty, the reinsurers assume the liability on that
portion of workers' compensation claims between $350,000 and $80,000,000 per
occurrence.

A contingent liability exists to the extent that losses recoverable under a
reinsurance treaty are not paid to the Company by the reinsurer.  The Company
selects its reinsurers carefully.  The majority of the Company's reinsurers are
domestic companies with a Best rating of A- (Excellent) or higher.  The
remainder are foreign reinsurers, unrated by Best, but believed by the Company
to be of high quality.  The Company requires that unpaid losses and LAE for non-
admitted reinsurers (unregulated by the Department) be collateralized.  As of
December 31, 1996, the Company did not have any claims that were ceded to non-
admitted reinsurers.  Since its inception, the Company has not incurred any
losses as a result of uncollectible reinsurance balances.  In the event that the
Company were unable to collect balances due from reinsurers, such inability
could have a material adverse effect on the Company's earnings and financial
condition.

The components of net premiums written are summarized as follows (amounts in
thousands):

<TABLE>
<CAPTION>
 
                                                               Year Ended December 31,
                                                          -----------------------------
                                                            1996       1995      1994
                                                           -----       ----      ----
                  <S>                                     <C>       <C>       <C>
 
                   Direct                                  $88,972   $75,553   $101,661
                   Assumed                                   2,568       375        112
                   Ceded                                    (4,407)   (3,962)    (4,789)
                                                           -------   -------   --------
 
                   Net premiums written                    $87,133   $71,966   $ 96,984
                                                           =======   =======   ========
 
</TABLE>
The components of net premiums earned are summarized as follows (amounts in
thousands):
<TABLE>
<CAPTION>
 
                                                               Year Ended December 31,
                                                            -----------------------------
                                                             1996       1995       1994
                                                             ----       ----       ----
                   <S>                                     <C>       <C>        <C>
                   Direct                                  $88,678    $79,920   $100,008
                   Assumed                                   2,247        209        110
                   Ceded                                    (4,437)    (4,113)    (7,224)
                                                           -------    -------   --------
                                                           
                   Net premiums earned                     $86,488    $76,016   $ 92,894
                                                           =======    =======   ========
</TABLE> 
The components of net losses and loss adjustment expenses are summarized as
 follows (amounts in thousands):

<TABLE> 
<CAPTION> 
 
                                                              Year Ended December 31,
                                                           -------------------------------
                                                             1996       1995       1994
                                                             ----       ----       ----
                  <S>                                      <C>        <C>       <C>  
                   Direct                                  $79,840    $54,454   $ 64,700
                   Assumed                                   1,559        188        149
                   Ceded                                    (1,509)    (3,685)    (1,061)
                                                           -------    -------   --------
                   Net losses and loss                 
                    adjustment expenses                    $79,890    $50,957   $ 63,788
                                                           =======    =======   ========
</TABLE>
Regulation

Pacific Rim Assurance is subject to regulation and supervision by the Insurance
Departments in each state the Company is licensed.  These Departments have broad
regulatory, supervisory, and administrative powers over insurance companies.
Regulations relate to such matters as premium rates, the adequacy of reserves,
types and quality of investments, minimum capital and surplus requirements,
deposit of securities for the benefit of policyholders, restrictions on
stockholder dividends, periodic examination of the Company's business and
records, the filing of annual statements and other reports on the financial
condition and other aspects of the Company, assessments against the Company to
cover liabilities to policyholders of insolvent insurance companies, and
requirements regarding other matters.  The regulations are concerned

                                       15
<PAGE>
 
primarily with protecting policyholders and offer only incidental protection, if
any, to holders of Pac Rim Holding common stock.

As a prerequisite to offering workers' compensation insurance in California, all
workers' compensation companies must file and maintain with the State Treasurer
of California, or certain depositories thereof, approved securities having a
deposit value equal to the statutory loss and LAE reserves applicable to their
business in that state.  Accordingly, Pacific Rim Assurance presently maintains
an approved depository arrangement with securities having a fair value at
December 31, 1996 of $101,766,000 deposited therein.

In order to write workers' compensation insurance in Arizona, companies must
file and maintain with the insurance Department of Arizona, or certain appointed
depositories thereof, approved securities with a deposit value equal to a
calculated Arizona requirement. The Arizona requirement is a calculation
involving earned premium, losses and LAE incurred, as well as loss and LAE
payments. In order to meet this requirement as of December 31, 1996, the Company
had securities with a fair value of $3,450,000 on deposit with an approved
depository. In order to write workers' compensation insurance in Georgia, the
Company as of December 31, 1996 had securities with a fair value of $85,000 on
deposit, in compliance with Georgia regulations.

Pacific Rim Assurance, like other insurers, may be subject to assessments from
time to time to cover unpaid policyholder claims of insolvent workers'
compensation insurers doing business.  Such assessments are spread among
licensed insurers on a pro-rata basis according to premiums written in the
applicable states.  Some of these assessments must be billed  to the Company's
policyholders.

Although the federal government does not directly regulate the business of
insurance, federal initiatives often affect the insurance business in a variety
of ways.  State regulation remains the dominant form of regulation; however, the
federal government has shown increasing concern over the adequacy of state
regulation.  In view of the savings and loan industry crisis and several
significant insurer insolvencies, several Congressional inquiries are
considering the adequacy of existing state regulations related to the financial
health of insurance companies.  Congressional committees are also reviewing the
McCarran-Ferguson Act of 1945, which currently provides a limited exemption from
federal antitrust laws for the "business of insurance".  The exemption allows
limited cooperative activities by rating organizations and other joint industry
efforts.  These include the development of standardized policy forms and
endorsements, statistical plans, the collection and compilation of premium,
loss, and expense data, and the development of advisory rates or loss costs.
The proposal would limit the insurance industry's limited exemption from federal
antitrust laws and was introduced in the belief that it would foster competitive
pricing among insurers.  The proposal would curtail the activities of rating
organizations and thus could require the expansion of individual insurer
internal resources.  With the possible loss of statistically valid data and/or
increased costs, market niches could become even more focused.  California is
reviewing its statutory exemptions for the "business of insurance" from its
antitrust laws.

In addition to the regulatory supervision of Pacific Rim Assurance, the Company
is also subject to regulation under the California Insurance Holding Company
System Regulatory Act (the "Holding Company Act").  The Holding Company Act
contains certain reporting requirements, including those requiring the Company
to file information relating to its capital structure, ownership, financial
condition, and general business operations of Pacific Rim Assurance.

The National Association of Insurance Commissioners' ("NAIC") Committee on
Financial Regulation and Standards and Accreditation (the "NAIC Committee")
voted to require, as a condition of NAIC accreditation of a state's insurance
regulatory system, adoption of the NAIC's 1986 Model Insurance Holding Company
System Regulatory Act (the "Model Act").  Among other matters, the Model Act
requires states to enact legislation further restricting the payment of
dividends by insurance companies.  (See "Business - Restrictions on Dividends to
Stockholders".)

The California Insurance Code requires the prior approval of the Commissioner of
any proposed change of control of the Company.  Under the Code, "control" is
presumed to exist if any person, directly or indirectly, owns, controls, holds
with the power to vote, or holds proxies representing more than 10% of the
voting securities of the Company.

The Clinton Administration previously proposed to reform the nation's health
care system.  In light of the uncertain status of national health care reform
and the complex nature of its implementation, including changes in federal and
state laws and other administrative regulatory procedures, the Company cannot
predict the outcome of national health care reform or its impact on the Company.

Restrictions on Dividends to Stockholders

In an effort to satisfy the dividend payment restrictions of the Model Act,
amendments to the California Insurance Code designed to implement dividend
payment limitations that would yield results substantially equivalent to the
Model Act

                                       16
<PAGE>
 
were passed by the California legislature on October 9, 1993.  These amendments
were incorporated into California Senate Bill 482.  The amendments limit
dividends payable during the twelve month period, without prior regulatory
approval, to the greater of net income for the preceding year or 10% of
policyholders' surplus as of the preceding December 31.  The amendments further
prohibit the payment of dividends without prior Department approval unless the
insurer has available "earned surplus".  The term "earned surplus" is defined as
unassigned funds (surplus) as reported on the insurer's annual statement,
excluding earned surplus derived from the appreciation of assets not yet
realized or from an exchange of assets, unless such earned surplus has been
realized or the assets received in exchange are currently realized in cash.  The
legislation further requires insurers to report to the Department all dividends
within five days of declaration and prohibits the payment of the dividend
declared until ten days after the Department's receipt of such notice. Under
these provisions, Pacific Rim Assurance paid $1,100,000 in dividends to Pac Rim
Holding during 1996.

As reported to insurance regulatory authorities, statutory-basis capital and
surplus of Pacific Rim Assurance at December 31, 1996 and 1995, was $27,216,000
and $46,549,000, respectively, and the net income (loss) amounted to
$(13,069,000) $4,879,000, and $(2,878,000) for 1996, 1995, and 1994,
respectively.  At December 31, 1996, Pacific Rim Assurance had a deficit of
$17,202,000 in its earned surplus account.  Accordingly, Pacific Rim Assurance
cannot pay dividends to Pac Rim Holding during 1997, without prior Department
approval.

Risk Based Capital Rules

The NAIC has finalized a formula to calculate Risk Based Capital ("RBC") of
property and casualty insurance companies. The purpose of the RBC Model is to
help the NAIC monitor the capital adequacy of property and casualty insurance
companies.  The RBC model for property and casualty insurance companies measures
three major areas of risk facing property and casualty insurers:  underwriting,
credit, and investment.  Companies having less statutory surplus than the RBC
model calculates are required to adequately address these three risk factors and
will be subject to varying degrees of regulatory intervention, depending on the
level of capital inadequacy.  The NAIC adopted an RBC model for property and
casualty insurance companies in 1993 for inclusion in the 1994 Annual Statement.
The results of the RBC model for 1994, 1995, and 1996, showed that Pacific Rim
Assurance had adequate capital and required no form of regulatory monitoring or
intervention.

Insurance Regulatory Information System Ratios

The NAIC annually calculates 11 key financial ratios to assist state insurance
departments in monitoring the financial condition of insurance companies.
Results are compared against a usual range of results for each ratio established
by the NAIC.  For the year ended December 31, 1996, Pacific Rim Assurance had
six ratios outside of the usual range, as follows:

     Net Premium Written to Policyholders' Surplus -- The ratio was 3.22 to 1,
     as opposed to the usual range of 3 to 1 or lower.

     Two-Year Overall Operating Ratio -- The ratio was 107%, as opposed to the
     usual range of 100% or lower.

     Change in Policyholders' Surplus -- The ratio was a decrease of 40%, as
     opposed to the usual range of a decrease of 10% to an increase of 50%.

     One-Year Reserve Development to Surplus -- The ratio was 38%, as opposed to
     the usual range of 20% or lower.

     Two-Year Reserve Development to Policyholders' Surplus -- The ratio was
     45%, as opposed to the usual range of 20% or lower.

     Estimated Current Reserve Deficiency to Surplus -- The ratio was 92%, as
     opposed to the usual range of 25% or lower.

According to the NAIC, a "usual range" of results for each ratio has been
established from studies of the ratios for companies which have become insolvent
or have experienced financial difficulties in recent years.  Falling outside the
usual range is not considered a failing result.  For example, an increase larger
than "usual" in surplus or in premium is not necessarily unsound.  Furthermore,
in some years, it may not be unusual for financially sound companies to have
several ratios with results outside the usual range.  In normal years, about 15%
of the companies included in the system are expected to be outside the usual
range on four or more ratios.

                                       17
<PAGE>
 
Statutory Triennial Examination

The Department conducts statutory examinations of each domestic insurance
company, generally once every three years. The most recent completed statutory
examination of Pacific Rim Assurance was conducted as of December 31, 1991.
During the second half of 1996, the Department commenced a statutory triennial
examination of Pacific Rim Assurance as of December 31, 1995.  That examination
has not yet been completed; it is expected to be completed during the second
quarter of 1997.  The two items of significance known to the Company as a result
of that examination are (1) a $12,000,000 increase to loss and LAE reserves
recognized during the fourth quarter of 1996 (see "Business-Definitive Agreement
and Plan of Merger"), and (2) a $3,398,000 increase in statutory past-due
premiums (see "Business-Premium Collection").

Competition

The workers' compensation insurance industry is extremely competitive.  Many of
the Company's competitors have been in business longer, have a larger volume of
business, offer a more diversified line of insurance coverage, have greater
financial resources, have greater distribution capabilities, and are more widely
known than Pacific Rim Assurance.  Of the approximately 300 companies that wrote
workers' compensation insurance in California in 1996, the Company believes that
Pacific Rim Assurance ranks in the top 25 insurers, based on direct premiums
written.  As 1995 was the Company's first year to write premiums in Arizona and
Texas, and 1996 was the first year to write premiums in Georgia, the Company
does not have a significant market share of workers' compensation premiums in
those states.  Also, many of the Company's competitors in those states have been
in business longer, have a larger volume of business, offer a more diversified
line of insurance coverage, have greater distribution capabilities, and are more
widely known than Pacific Rim Assurance.

The Company writes approximately 80% of its premiums in the Southern California
marketplace.  The operating environment for workers' compensation insurance
companies doing business in Southern California has recently undergone a
dramatic change.  During the fourth quarter of 1992, many insurers were leaving
the Southern California marketplace due to the perceived premium rate inadequacy
that existed at that time, and the high number of potentially fraudulent stress
and strain claims being reported.  During 1994, a number of workers'
compensation insurers returned to the Southern California marketplace, drawn by
a marked decline in the frequency of new claims reported during 1994. This
influx of insurers resulted in significantly increased levels of competition in
the marketplace during 1995 and 1996, resulting in a higher level of commissions
paid to agents and brokers, as well as competitive pricing of premiums.  There
are many companies in the California workers' compensation insurance industry
that have greater financial resources, longer operating histories, and more
successful records of operations than the Company.  As a result, it has become
more difficult for the Company to retain current business and obtain new
business.  (See "Business - Marketing".)

Employees

At December 31, 1996, the Company had 226 full-time employees.

Item 2. Properties and Computer Resources.

The Company entered into a lease agreement effective May 1992 for the leasing of
93,000 square feet of office space for its principal office.  The lease expires
in 2002.  The space is in Woodland Hills, California, which is within Los
Angeles County.  The Company also entered into a lease agreement effective
November 1992 for the leasing of 3,000 square feet of office space in Fresno,
California.  That lease expires in 1997.  The Company entered into a lease
agreement effective August 1995 for the leasing of 3,692 square feet of office
space in Phoenix, Arizona.  That lease expires in 2000.

In September 1996, the Company subleased approximately 3,574 square feet of its
Woodland Hills office space to a third party for a period of five years and
eight months.  In August 1995, the Company subleased approximately 3,000 square
feet of its Woodland Hills office space to a third party for one year, subject
to an additional one-year option.  In May 1994, the Company subleased an
additional 1,000 square feet of its Woodland Hills office to a third party for a
period of three years, which was extended by an additional five years in 1996.
Also, in March 1994, the Company subleased an additional 12,000 square feet of
its Woodland Hills office to a third party for a period of five years.

In 1992, the Company started a project to design a new computer system.  This
system, which was completed in 1993, provides a more sophisticated, economical,
and a better managed flow of information, as well as efficient insurance
processing.  This project included investment in electronic data processing
equipment, as well as the development of proprietary software.

                                       18
<PAGE>
 
In 1995, the Company started a project to design a system to create electronic
files of claim and policyholder information that would substantially decrease
the need to access paper files.  This system was completed in 1996.  It allows
for more efficient handling of claims and underwriting activities.  The project
included an investment in electronic data processing equipment, as well as
software.

Item 3. Legal Proceedings.

The Company is a party to two industry wide legal matters, involving two medical
facilities.  This litigation claims that the insurance industry conspired to
delay payments of claims.  While the ultimate outcome of this litigation is
uncertain, management believes that such litigation will not have a material
adverse financial effect on the Company's financial position and results of
operations.

In addition, in the ordinary course of business, the Company is named as a
defendant in legal proceedings relating to policies of insurance that have been
issued and other incidental matters.  Management does not believe that any such
litigation, taken as a whole, will have a material adverse financial effect on
the Company's financial position and results of operations.

Item 4. Submission of Matters to a Vote of Security Holders.

No matters were submitted to a vote of the Company's stockholders during the
fourth quarter of the fiscal year covered by this report.

Executive Officers of the Registrant

The executive officers of the Company or operating subsidiary are as follows:

<TABLE>
<CAPTION>
 
      Name             Age             Position
      ----             ---             --------                     
<S>                    <C>    <C>
Stanley Braun           59    President, Chief Executive Officer
Paul W. Craig           42    Executive Vice President, Chief Financial Officer
Sandra L. Richards*     49    Senior Vice President
Ronald J. Tonani*       55    Senior Vice President
</TABLE>
----------
*These persons serve in the indicated capacities as officers of the Registrant's
operating subsidiary; they are not executive officers of Pac Rim Holding.

Officers of the Company are appointed annually, and serve at the discretion of
the Board of Directors of the Company.

Mr. Braun, the founder of the Company, has been President and Chief Executive
Officer of the Company since its formation.  He has been Chairman of the Board
of Pacific Rim Assurance since inception.  From 1984 until February 1987, Mr.
Braun occupied senior management positions with Fairmont Insurance Company, a
California workers' compensation insurance company, and served as its President
and Chief Executive Officer from 1986 to 1987, when the company was acquired by
Transamerica Insurance Company.

Mr. Craig was appointed Executive Vice President and Chief Financial Officer of
the Company in August 1994.  He previously had served as Executive Vice
President since June 1990, and Chief Financial Officer from March 1990 to July
1991.  From 1976 to 1990, Mr. Craig was employed by the accounting firm of Ernst
& Young, and was a partner in that firm from 1988 to 1990, specializing in
service to clients in the property and casualty insurance industry.  Mr. Craig
is a certified public accountant.

Ms. Richards was appointed Senior Vice President of Pacific Rim Assurance in
July 1991 and has directed the underwriting function of Pacific Rim Assurance
since September 1987.  During 1986 and 1987, she was employed as an underwriter
of large accounts at Fairmont Insurance Company, a California workers'
compensation insurance company. From 1980 until 1986, she was an underwriting
supervisor at the Insurance Company of the West, another workers' compensation
insurance company.

Mr. Tonani was appointed Senior Vice President of Pacific Rim Assurance in July
1991 and has directed the client services function of the Company since August
of 1987.  During 1986 and 1987, Mr. Tonani was a vice president of

                                       19
<PAGE>
 
claims at Fairmont Insurance Company, a California workers' compensation
insurance company.  From 1977 until 1986, he served as vice president-marketing
of the Insurance Company of the West, another worker's compensation insurance
company.

None of the executive officers of the Registrant or executive officers of its
insurance subsidiary has any family relationship with any other executive
officer of the Registrant, any executive officer of its insurance subsidiary, or
any director of the Registrant; although Dina Braun-Puetz, daughter of Stanley
Braun, President and Chief Executive Officer of the Company, does hold an office
of Vice President of Pacific Rim Assurance (an officer position not considered
an executive officer).

                                    PART II


Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.

The Company's common stock is listed on the National Association of Securities
Dealers Automated Quotation System's ("NASDAQ") National Market System, under
the symbol PRIM.  The following table sets forth the high and low closing prices
(as reported by NASDAQ) for the Company's common stock during 1994, 1995 and
1996.

<TABLE>
<CAPTION>
                                       High            Low
      ---------------------------------------------------------
<S>                                    <C>             <C>
      First Quarter 1994               $ 2 3/4         $ 1 7/8
      Second Quarter 1994                3               2
      Third Quarter 1994                 3               2 1/8
      Fourth Quarter 1994                3 1/8           2 1/4
                                                     
      First Quarter 1995               $ 3 1/4         $ 2 1/4
      Second Quarter 1995                2 7/8           2 3/8
      Third Quarter 1995                 3 3/8           2 5/8
      Fourth Quarter 1995                3 5/16          2 1/8
                                                     
      First Quarter 1996                 2 5/8           2 3/16
      Second Quarter 1996                2 7/16          2
      Third Quarter 1996                 3               1 3/4
      Fourth Quarter 1996                2 31/32         2 5/16
</TABLE>

The Company has never paid a dividend to stockholders and does not anticipate
paying cash dividends on its common stock in the foreseeable future.  In
addition, Pac Rim Holding is dependent on dividends received from Pacific Rim
Assurance for operating funds.  The payment of dividends by Pacific Rim
Assurance is subject to regulation under California law.

As of March 4, 1997 there were approximately 850 holders of Pac Rim Holding
common stock, including holders in nominee name.

                                       20
<PAGE>
 
Item 6.  Selected Consolidated Financial Data.

The following selected consolidated financial data is derived from the audited
financial statements of the Company and should be read in conjunction with the
audited consolidated financial statements included elsewhere herein.

<TABLE>
<CAPTION>
                                                                     Year Ended December 31,
                                                     -----------------------------------------------------
                                                       1996       1995       1994       1993       1992
                                                       ----       ----       ----       ----       ----  
In Thousands, Except Per Share Data                
                                                                                      Restated   Restated
                                                                                      --------   --------
<S>                                                  <C>        <C>        <C>        <C>        <C>
Revenues:                                          
  Net premiums earned                                 $86,488    $76,016    $92,894    $99,917   $117,829
  Net investment income                                 7,013      8,089      6,514      5,989      6,416
  Realized investment gains (losses)                    1,640        453                 3,905        (14)
  A&H commission income                                     8
                                                     --------   --------   --------   --------   -------- 
  Total revenue                                        95,149     84,558     99,408    109,811    124,231
                                                   
Costs and Expenses:                                
  Losses and loss adjustment expenses                  79,890     50,957     63,788     87,689    100,595
  Amortization of policy acquisition costs - net       14,853     18,647     19,565     11,646     12,864
  Administrative, general, and other                   13,370     11,662     11,927     13,257     12,647
  Policyholder dividends                                  (11)       132      1,301      1,258      1,722
  Interest expense                                      2,341      2,306        857
                                                     --------   --------   --------   --------   -------- 
  Total costs and expenses                            110,443     83,704     97,438    113,850    127,828
                                                   
Income (loss) before income taxes and cumulative   
  effect of a change in accounting principle          (15,294)       854      1,970     (4,039)    (3,597)
                                                   
Income tax expense (benefit)                              606        279        812     (2,658)    (3,027)
                                                     --------   --------   --------   --------   -------- 
Income (loss) before cumulative effect of a change 
  in accounting principle                             (15,900)       575      1,158     (1,381)      (570)
Cumulative effect of a change in                   
  accounting for income taxes                                                                         278
                                                     --------   --------   --------   --------   -------- 
Net income (loss)                                    $(15,900)  $    575   $  1,158   $ (1,381)  $   (292)
                                                     ========   ========   ========   ========   ========
                                                   
Per Share Data:                                    
 Income (loss) before cumulative effect of a change
  in accounting principle                              $(1.67)  $   0.06      $0.12     $(0.14)    $(0.06)
 Cumulative effect of a change in                  
  accounting for income taxes                                                                        0.03
                                                     --------   --------   --------   --------   -------- 
  Net income (loss)                                    $(1.67)  $   0.06      $0.12     $(0.14)    $(0.03)
                                                     ========   ========   ========   ========   ========
                                                   
  Weighted average number of shares outstanding         9,528      9,528      9,528      9,528      9,624
GAAP Combined Ratio Data:                          
  Loss ratio                                             92.4%      67.0%      68.7%      87.8%      85.4%
  Underwriting expense ratio                             32.6       39.9       33.9       24.9       21.6
  Policyholder dividend ratio                                        0.2        1.4        1.2        1.5
                                                     --------   --------   --------   --------   -------- 
  Combined ratio                                        125.0%     107.1%     104.0%     113.9%     108.5%
                                                     ========   ========   ========   ========   ========
                                                   
Balance Sheet Data--at end of year:                
 Cash and total investments                          $113,284   $129,804   $143,075   $117,173   $121,441
 Premiums receivable                                   15,739     11,616     11,855     15,197     20,037
 Earned but unbilled premiums                           7,904      4,880      5,046      6,974      7,923
 Total assets                                         161,605    169,051    186,570    189,241    198,501
                                                   
 Reserve for losses and loss adjustment expenses      100,588     96,525    116,629    135,965    135,460
 Unearned premiums                                      6,917      5,715      9,917      8,262      7,233
 Reserve for policyholder dividends                       364        381        990      2,529      3,069
 Total liabilities                                    135,296    124,896    149,393    150,241    158,120
 Total stockholders' equity                            26,309     44,155     37,177     39,000     40,381
</TABLE>

                                       21
<PAGE>
 
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.

General

The Company increased its 1996 premium revenue base, through increased premium
rates in California, and continued expansion into additional geographic areas.
The Company managed underwriting expenses in 1996, to a level below 1995.  As a
result of continued negative cash flow during 1996, due to an overall erosion of
premium rate levels in California from the 1995 beginning of statewide open
premium rating, the Company sold investments during 1996 to meet cash flow
needs, and realized capital gains from those sales.

During the third quarter of 1996, the Company increased loss and loss adjustment
expense ("LAE") reserves related to accident years 1995 and prior by
approximately $4,500,000; the total adverse development recognized on prior
accident years during the first nine months of the year was approximately
$5,600,000.  Also during the third quarter, the Company signed a definitive
agreement to be acquired by Superior National Insurance Group, Inc. ("Superior")
for total consideration that would have been $54,000,000 in cash upon closing of
the transaction, which would have resulted in payment of approximately $3.00 to
$3.10 per share of common stock held by its common stockholders, and a like sum
to convertible debenture holders, and warrant and option holders (assuming the
conversion of such security interests).

During the fourth quarter of 1996, subsequent to the Company's November 20
distribution of a proxy statement to stockholders announcing a December 11
special meeting of stockholders to approve the acquisition by Superior, the
California Department of Insurance ("Department") linked its approval of the
acquisition with the completion of its triennial examination of Pacific Rim
Assurance as of December 31, 1995.  After taking into account the volatility of
claims experience in prior accident years, due to the significant changes in
legislative, economic, managed medical care, and other significant factors
affecting loss and LAE reserves, Pacific Rim Assurance, in conjunction and
consultation with its internal and independent actuaries, reached agreement with
the Department to increase its loss and LAE reserves by a further amount of
approximately $12,000,000 for accident years 1995 and prior, in its fourth
quarter 1996 operating results.  As a result of the increases to strengthen
reserves, the Company reported significant losses in its results of operations
for the third and fourth quarters of 1996 and the year ended December 31, 1996.

As a result of the $12,000,000 increase in reserves during the fourth quarter,
on February 17, 1997, the Company signed the Amended Agreement regarding the
acquisition by Superior, pursuant to the terms of which the stockholders would
receive $2.11 per share (a total of approximately $20,063,293), the convertible
debenture holders would receive face value for the debentures or $20,000,000,
and $1,957,739 would be paid to acquire all of the issued and outstanding
warrants of the Company and options to purchase common stock that are "in-the-
money", for a total consideration of approximately $42,021,032.  The $12,000,000
reduction in the purchase price was directly attributable to the fourth quarter
increase in reserves.  The Company and its actuaries believe that the
strengthening of reserves will conclude the Department's triennial examination
and facilitate securing of the necessary regulatory approval of the acquisition.
However, other unforeseen factors could affect either the regulatory approval
process or the ultimate closing of the transaction. (See "Business-Claims, Loss,
and Loss Reserves".)

Statements herein that use the words "the Company believes", "the Company
expects", and "in the Company's opinion," are forward-looking statements and the
actual results could differ materially from those projected in the forward-
looking statement.  These forward-looking statements therefore involve risks and
uncertainties that could render them materially different, including, but not
limited to, the effect of economic conditions, premium rate adequacy as a result
of pricing factors related to competition or regulation, actual versus estimated
claims experience, the effect of the Company's accounting policies, the effect
of regulatory and legal developments, and other factors detailed herein.

Results of Operations

1996 Compared to 1995

Net premiums earned increased by $10,472,000 or 13.8% during 1996, to
$86,488,000 from $76,016,000 during 1995. This increase was primarily the result
of increased premium rates by the Company in California, during 1996, as well as
continued expansion by the Company into additional geographic areas, which had
begun in 1995.  In May 1995, Pacific Rim Assurance received a Certificate of
Authority to write workers' compensation insurance in the State of Arizona, and
commenced operations in June 1995.  During August 1995, Pacific Rim Assurance
received a Certificate of Authority

                                       22
<PAGE>
 
to write workers' compensation insurance in the State of Texas, and commenced
operations in October 1995.  In March 1996, Pacific Rim Assurance received a
Certificate of Authority to write workers' compensation insurance in the State
of Georgia, and commenced operations in April 1996.  Pacific Rim Assurance also
received a Certificate of Authority to write workers' compensation insurance in
the State of Alabama, in October 1996; it commenced operations there, but did
not earn premium there in 1996.  Premiums earned outside of California equaled
approximately $10,510,000 or 12.2% of the Company's total premiums earned during
1996.  The Company believes that geographic expansion will enable it to increase
its premium revenues and operate regionally in more, and potentially less
volatile, markets.  However, there can be no assurance that such expansion will
ultimately increase revenues or prove to be profitable.

Net investment income decreased 13.3%, to $7,013,000 in 1996, from $8,089,000 in
1995.  The amount of average invested assets decreased 12.4% to $118,400,000 for
the year ended December 31, 1996, compared to 1995.  This decrease in invested
assets was the result of the Company experiencing negative cash flow from
operations during 1995 and 1996.  As a result, the Company sold securities, or
utilized maturing securities, to meet its cash flow needs.  The average yield on
average invested assets was 5.9% for 1996, as compared to 6.0% for 1995.

The Company sold bonds with total proceeds of $104,172,000 during 1996 to take
advantage of favorable market conditions, and to meet cash flow demands.  These
sales resulted in a net pre-tax realized investment gain of $1,640,000. During
1995, the Company sold bonds with total proceeds of $61,343,000 and realized net
pre-tax gains of $453,000.

Losses and LAE incurred increased by $28,933,000 during 1996, compared to 1995.
The loss and LAE ratio increased to 92.4% during 1996, compared to 67.0% during
1995.  During the nine months ended September 30, 1996, the Company increased
total losses and LAE related to 1995 and prior accident years by approximately
$5,600,000, including approximately $4,500,000 recognized during the third
quarter of 1996.  Based on the Company's internal actuarial analysis and input
from its independent actuaries, the Company believed that its recorded loss and
LAE reserves at September 30, 1996 were adequate and within the independent
actuaries' reasonable range as of that date.

During the fourth quarter of 1996, the Department, in connection with its
statutory triennial examination of Pacific Rim Assurance as of December 31,
1995, and its regulatory review prior to granting approval of the pending
acquisition of the Company by Superior, undertook studies of the Company's loss
and LAE reserves.  Following extensive review by, and meetings with the
Department, and giving recognition to the combined impacts on loss and LAE
development patterns of the volatility in legislative, economic, managed medical
care, litigation expense, and other significant factors, the Company, in
conjunction and consultation with its internal and independent actuaries,
reached agreement with the Department to increase its loss and LAE reserves by
approximately $12,000,000 for accident years 1995 and prior in its fourth
quarter 1996 operating results.  The $12,000,000 increase was greater than the
amount that was needed to be within the reasonable range of the Company's
independent actuaries; but the Company believes the pending transaction with
Superior could no longer be delayed, and Department approval was and is
essential to completion of the transaction.

The reason for recognizing such adverse development was that during 1996,
despite experiencing favorable trends in the overall frequency and severity of
claims for the 1995 and 1996 accident years, the Company and its internal and
independent actuaries observed development patterns in the 1990-1994 accident
years that were volatile when compared to previous historical patterns.  In
particular, 1990-1992 were very difficult accident years, due to the impact of
fraud and stress claims from adverse economic conditions, although the 1992
accident year began the transition to improved claims experience during the
second half of the year.  The 1993-1994 accident years were very favorable
transition years, following legislative reforms to the workers' compensation
benefits system.  Nevertheless, it was unclear how each of those years
ultimately would develop, and how subsequent accident year patterns would thus
be affected, given paid loss and case reserve activity during 1996.

To illustrate the uncertainty and its effects, paid loss activity during 1996
has continued at a level higher than previously projected on the more difficult
1990-1992 accident years, which were affected by the negative impacts of
legislative, economic, and litigation factors; and 1996 case reserve activity on
remaining open claims from those years has accelerated in response to the paid
loss activity.  Thus, as a precaution, the Company has further increased loss
and LAE reserves on those years.  Further, even though there has been more
favorable case reserve and paid loss activity on the 1993-1994 accident years,
following positive impacts of legislative reforms, improved managed medical care
cost containment, and cost-effective litigation expense factors, the Company,
with the concurrence of its actuaries and the Department, has elected to take a
precautionary stance and maintain higher 1996 reserves on those more recent and
favorable accident years.  The Company believes that given the patterns of claim
payments and closures, despite the gradual reduction in

                                       23
<PAGE>
 
the number of claims that remain outstanding on 1990-1992 accident years and the
generally improved 1993 and subsequent accident years, it should not anticipate
further favorable loss and LAE development.

It should be noted that despite the increases recorded during 1996 to loss and
LAE reserves from accident years 1995 and prior, the 1993 through 1995 accident
year results even at the current higher reserve estimates appear to have
produced underwriting profits.  The improving conditions in the California
workers' compensation market, including legislation reforms and some economic
recovery, have improved the frequency and severity of claims.  The accident
years that produced significant underwriting losses were 1992 and prior; the
actual size of these losses has become known only with additional passage of
time.

The Company has filed with the Department an independent actuarial opinion that
states that the Company's loss and LAE reserves make reasonable provision for
loss and LAE obligations of the Company as of December 31, 1996.  While no
assurance can be given, the Company believes that, given the inherent
variability in any such estimates, its reserve for losses and LAE is within a
reasonable range of adequacy.  If the assumptions on which the estimates are
based prove to be incorrect and reserves are insufficient based on the Company's
actual experience, future results of operations and the financial condition of
the Company would be adversely affected.

Total underwriting expenses decreased $2,086,000, or 6.9%, during 1996, compared
to 1995.  The decrease was primarily the result of a decrease in commissions
paid to agents and brokers.  The average commission rate to agents and brokers
decreased to 14.1% for 1996, compared to 21.6% for 1995.

The general and administrative expense component of the Company's underwriting
expenses increased by $1,708,000, or 14.6%, to $13,370,000 during 1996, from
$11,662,000 during 1995.  The increase in general and administrative expense was
primarily due to the Company's recent expansion into other geographical areas
and the related increased premium levels, as well as increased legal expenses
related to certain industry lawsuits (see Legal Proceedings), and actuarial
expenses related to the pending acquisition of the Company by Superior and the
triennial examination by the Department.  The ratio of general and
administrative expenses to net premiums earned was 15.5% for 1996, compared to
15.3% for 1995.

Policyholder dividends for 1996 were a net credit of ($11,000), compared to a
net charge of $132,000 for 1995.  The net credit reflects the elimination of
approximately $291,000 of dividend reserves for which no further future
liability is expected.  The remaining reserve for policyholder dividends of
$364,000 as of December 31, 1996 represents current expectations of future
policyholder dividend payments on participating policies inforce.  In
determining the appropriate policyholder dividend reserve level, the Company
analyzes competitive factors related to quality of service, loss prevention,
claims management and cost control, and adequacy of premium rates, as well as
its own underwriting results.

The loss before taxes was $15,294,000 for the year ended December 31, 1996,
compared to net income before taxes of $854,000 for 1995.  This loss was due
primarily to an increase in losses and LAE from adverse development of accident
years prior to 1995, offset by decreases in underwriting expenses and dividends,
and an increase in premiums earned.

Because of the significant operating loss during 1996, management believed that
it was prudent to record a valuation allowance against a portion of the deferred
tax asset.  That resulted in a deferred tax provision of $606,000 for the year
ended December 31, 1996.

The net loss for the year ended December 31, 1996 was $15,900,000, compared to
net income of $575,000 for 1995.

1995 Compared to 1994
Net premiums earned during 1995 were $76,016,000, which represents a decrease of
18.2%.  This decrease is the result of a state-mandated premium rate decrease of
16% on October 1, 1994, which affected earned premium revenues generated during
1995 from business originally written during the fourth quarter of 1994.
Further, the beginning of statewide open premium rating for California workers'
compensation insurance, effective January 1, 1995, created an intense level of
price competition and an overall erosion of premium rate levels.

In connection with efforts to expand its business into additional geographic
areas and increase future revenues, during May 1995, Pacific Rim Assurance
received a Certificate of Authority to write workers' compensation insurance in
the State of Arizona, and commenced operations in June 1995.  The Company's net
premiums earned in Arizona were

                                       24
<PAGE>
 
$787,000 through December 31, 1995.  During August 1995, the Company received a
Certificate of Authority to write workers' compensation insurance in the State
of Texas, and it commenced operations in October.  The Company's net premiums
earned in Texas were $20,000 through December 31, 1995.  In March 1996, the
Company received a Certificate of Authority to write workers' compensation
insurance in the State of Georgia.  In addition, during September 1995, Pacific
Rim Assurance filed an application to write workers' compensation insurance in
the State of Florida.  The Company also is considering the filing of
applications in certain other states.  The Company believes that geographic
expansion will enable it to increase its premium revenues and operate regionally
in more, and potentially less volatile, markets.  However, there can be no
assurance that such expansion will ultimately increase revenues or prove to be
profitable.

Net investment income increased 24.2%, to $8,089,000 in 1995, from $6,514,000 in
1994.  The average invested assets of $138,100,000 for the year ended December
31, 1995, increased 6.5% over 1994.  The increase in invested assets was the
result of funds received from the sale of debentures and the commutation of the
aggregate excess of loss and quota share reinsurance treaties during the third
and fourth quarters of 1994.  The average yield on average invested assets
increased to 6.0% for the year ended December 31, 1995, from 5.0% for 1994.
Prior to the increase in invested assets, the Company maintained a large
position in lower-yielding short-term securities, for liquidity purposes, which
accounts for the lower overall average yield in 1994.  After the Company was
able to reposition its investment portfolio into longer term, higher yielding
securities, by October 1994, the Company's investment yield increased to 5.7%
for the fourth quarter of 1994.

The Company sold bonds with total proceeds of $61,343,000 during 1995 to take
advantage of certain advantageous market conditions, reposition into higher
yielding securities, and to meet cash flow demands.  These sales resulted in a
net pre-tax realized investment gain of $453,000.  There were no sales in 1994.

Losses and LAE incurred decreased $12,831,000 for the year ended December 31,
1995 as compared to 1994.  The loss and LAE ratio decreased to 67.0% in 1995
from 68.7% in 1994.  The improvement in the losses and LAE was attributable to
the continued favorable decline in the frequency of new claims during the first
half of 1995, offset in part by higher frequency of new claims in the second
half of 1995; a reduction in the overall number of outstanding claims; and a
continued stable trend in the severity of claims.

Total underwriting expenses decreased 3.8% to $30,309,000 for the year ended
December 31, 1995, from $31,492,000 for 1994.  This decrease is primarily due to
a decrease in premium volume.  Commissions paid to agents and brokers during
1995 decreased by $614,000.  However, the average commission ratio to agents and
brokers increased to 21.6% for the year ended December 31, 1995 from 18.3% for
1994, due to the impact of highly competitive conditions on business written in
the California workers' compensation insurance market during the third and
fourth quarters of 1994 on premiums earned during 1995.  New business written
during 1995 was at a lower average commission rate than premiums written in the
third and fourth quarters of 1994.

The general and administrative expense component of underwriting expenses
decreased $265,000 or 2.2% to $11,662,000 in 1995 from $11,927,000 in 1994.
This decrease is due to reduced employee staff costs and related expenses.  The
general and administrative expense ratio increased to 15.3% in 1995 from 12.8%
in 1994 reflecting the Company's position to maintain a high quality of service
personnel and agents, despite a decrease in premium volume.

Policyholder dividends decreased to $132,000 for the year ended December 31,
1995, from $1,301,000 for the year ended December 31, 1994.  In determining the
appropriate policyholder dividend accrual level, the Company analyzes
competitive factors related to quality of service, loss prevention, claims
management and cost control, and adequacy of premium rates, as well as its own
underwriting results.  The Company believes that given the decrease in premium
rate levels, California policyholders already have benefited from reduced
workers' compensation premiums.  Thus, the importance of dividends to
policyholders has diminished in the competitive market.

Interest expense increased to $2,306,000 in 1995 from $857,000 in 1994.  This
increase was the result of having its Series A Convertible Debenture outstanding
for all of 1995 versus only four and one-half months in 1994.

Income before taxes was $854,000 for the year ended December 31, 1995, as
compared to $1,970,000 for the year ended December 31, 1994.  This decrease was
due primarily to increased investment income and decreased expenses, offset by
decreased premium volume.

                                       25
<PAGE>
 
Net income for the year ended December 31, 1995 was $575,000, as compared to
$1,158,000 for 1994.

Combined Ratio Data

Four ratios are traditionally used to measure underwriting performance in the
workers' compensation insurance industry: the loss ratio, the underwriting
expense ratio, and the policyholder dividend ratio, which when added together
constitute the combined ratio.  A combined ratio greater than 100% indicates an
underwriting loss, while a combined ratio less than 100% indicates an
underwriting profit.

The following table sets forth the Company's combined ratio and its component
ratios, as measured on the basis of generally accepted accounting principles
("GAAP"):

<TABLE>
<CAPTION>
                                                  Year Ended December 31,
                                                  -----------------------
                                              1996          1995          1994
                                              ----          ----          ---- 
               <S>                           <C>           <C>           <C> 
                                                                       
               Loss ratio                     92.4%         67.0%         68.7%
               Underwriting expense ratio     32.6          39.9          33.9
               Policyholder dividend ratio     0.0           0.2           1.4
                                             -----         -----         -----
               Combined ratio                125.0%        107.1%        104.0%
                                             =====         =====         =====
</TABLE>

The following table sets forth the Company's combined ratio and its component
ratios, as measured on the basis of statutory accounting practices.

<TABLE>
<CAPTION>
                                                  Year Ended December 31,
                                                  -----------------------
                                              1996          1995          1994
                                              ----          ----          ---- 
               <S>                           <C>           <C>           <C> 
               Loss ratio                     92.4%         67.0%         72.3%
               Underwriting expense ratio     32.1          40.4          33.4
               Policyholder dividend ratio    (0.4)          0.2           2.6
                                             -----         -----         -----
               Combined ratio                124.1%        107.6%        108.3%
                                             =====         =====         =====
</TABLE>

The differences in the GAAP and statutory loss ratios, underwriting expense
ratios, policyholder dividend ratios, and combined ratios for the periods
presented are due primarily to GAAP permitting, but statutory accounting
practices prohibiting or delaying, certain accruals.  The statutory loss ratios
differed from the GAAP loss ratios in 1994 primarily as a result of the cession
of amounts under the Company's quota share and aggregate excess of loss
reinsurance treaties. The statutory underwriting expense ratios are different
than the GAAP underwriting expense ratios primarily as a result of the
amortization of policy acquisition costs.  The statutory policyholder dividend
ratios differ from the GAAP policyholder dividend ratios because policyholder
dividends are recognized for statutory purposes when declared and are accrued
for GAAP purposes based on anticipated future declarations as the related
premiums are earned.

Liquidity and Capital Resources

Pac Rim Holding was organized in May 1987 and has been capitalized from sales of
the Company's common stock.  Pac Rim Holding is dependent on dividends from
Pacific Rim Assurance for operating funds.  Pacific Rim Assurance may pay
dividends without prior California Insurance Department approval to the extent
it has available "earned surplus". Dividends are further limited to an amount up
to the greater of net income from the preceding calendar year or 10% of
policyholders' surplus as of the end of the preceding year.  Under these
provisions, Pacific Rim Assurance paid $1,100,000 in dividends to Pac Rim
Holding in 1996.  At December 31, 1996, Pacific Rim Assurance had a deficit of
$17,202,000 in its earned surplus account.  Accordingly, Pacific Rim Assurance
cannot pay dividends to Pac Rim Holding during 1997 without Department approval.

One of the most widely accepted factors used by regulators and rating agencies
in evaluating insurance companies is the ratio of net premiums written to
policyholders' surplus, which is an indication of the degree to which an insurer
is leveraged.  While there is no statutory requirement applicable to Pacific Rim
Assurance that establishes a permissible net premiums written to policyholders'
surplus ratio, as determined in accordance with statutory accounting practices,
the National Association of Insurance Commissioners ("NAIC") uses a ratio of
three to one as an appropriate guideline in

                                       26
<PAGE>
 
assessing a property/casualty insurance company's financial condition.  The
lower the ratio, the less leveraged is the company.

In August 1994, the Company completed a capital-raising transaction and issued
$20,000,000 of convertible debentures to PRAC, Ltd. ("PRAC").  As a result of
the capital transaction, the Company increased the policyholders' surplus of
Pacific Rim Assurance by $16,800,000.  At December 31, 1996, the statutory-basis
policyholders surplus of Pacific Rim Assurance was $27,215,652.  Pacific Rim
Assurance's ratio of net premiums written to policyholders' surplus for 1996, as
determined on the basis of statutory accounting practices, was 3.22 to 1.

Insurance companies are required to maintain on deposit with the Regulatory
Agencies deposits for the benefit of policyholders, in an amount prescribed by
regulations.  At December 31, 1996, the Company was in good standing with all
Departments of Insurance with respect to its deposit requirements, maintaining
securities with a total fair value of $105,301,000 on deposit with authorized
depositories in various states.

The Company's present policyholders surplus is not adequate to sustain 1996
premium volume at a leverage ratio of 3 to 1.  Concerns regarding the financial
strength of the Company could adversely affect the Company's relationships with
its policyholders, agents and brokers, reinsurers, and regulators.  On February
17, 1997, the Company executed the Amended Agreement with Superior.  The Company
believes that obtaining regulatory and shareholder approval for, and completing
the pending merger with Superior, which contemplates the contribution of
additional capital, will restore confidence in Pacific Rim Assurance and enable
it to support its present operations and moderate growth  in premium volume for
the foreseeable future.

In the event that the Company is unable to complete the pending merger with
Superior or raise additional capital from another party, a reduction in premium
writings might be necessary, in order to meet regulatory leverage guidelines. If
such premium reduction is necessary, the Company would have to substantially
alter the nature and scope of its operations. Such changes might include staff
and expense reductions, a change in the level of service provided to
policyholders, and a change in the number and type of policyholders and agents
with whom it currently does business. In addition, the Company likely would seek
capital from other sources. No assurance can be given that such a plan can be
successfully accomplished.

A workers' compensation insurance company must maintain sufficient liquid assets
to meet its contractual obligations to policyholders, in addition to maintaining
funds to meet ordinary operating expenses.  The Company typically has several
sources of funds to meet obligations, including cash flow from operations,
interest from fixed-income securities, recoveries from reinsurance contracts, as
well as the ability to sell portions of its investment portfolio.  The Company
has an investment portfolio of high quality, highly liquid, U.S. Treasury, other
governmental agency, and corporate obligations.  The Company's cash flows
provided by (used in) operating activities for the years ended December 31,
1996, 1995, and 1994 were $(13,189,000), $(22,819,000), and $15,905,000,
respectively.  In light of the reduced level of premiums currently being
written, due to state-mandated reductions in premium rates, and the repeal of
the minimum rate law, coupled with claim payments required on premiums
previously written, should further reduction in premium be necessary in the
event that the Company is unable to complete the pending acquisition by Superior
or obtain additional capital from another party, it is probable that the Company
will experience a continued period of negative cash flow, until the level of
loss payments decreases to the level proportionate to the level of premiums
collected.

As a result of its ownership of debentures of Pac Rim Holding, PRAC, together
with certain affiliated entities, is entitled to vote the equivalent of 55.2% of
the Company's voting securities with respect to certain matters, and will be
entitled to vote the equivalent of approximately 61.6% of the Company's voting
securities as to those matters on exercise of Warrants.  These voting rights,
together with PRAC's right to designate certain members of the Board of
Directors, give PRAC effective control of the Board of Directors and over all
major corporate matters and transactions.  It may also have the effect of
discouraging certain types of transactions involving an actual or potential
change of control of the Company, including transactions in which the holders of
the Company's shares might otherwise receive a premium for their shares over
then current market prices.  These actions will have the effect, among other
things, of limiting the ability of the Company to enter into certain significant
transactions without the support of PRAC, and allowing PRAC to cause the Company
to enter into certain transactions.  These transactions may include transactions
between PRAC, or its affiliates, and the Company, as well as transactions for
the sale of the Company or the sale of control of the Company.  PRAC may have
interests that diverge from or conflict with those of the Company.  Although
such conflicts may arise, Directors designated by PRAC to the Board of Directors
have a fiduciary responsibility to act in the Company's best interest.

                                       27
<PAGE>
 
Effects of Inflation

Inflation can be expected to affect the operating performance and financial
condition of the Company in several aspects. Inflation can reduce the market
value of the investment portfolio.  However, generally the intent of the Company
is to hold its investments to maturity.  (See "Liquidity and Capital Resources")
Inflation adversely affects the portion of reserve for losses and LAE that
relates to hospital and medical expenses, as these expenses normally increase
during inflationary periods (and in recent years have increased at a greater
rate than prevailing inflation).  The liabilities for losses and LAE relating to
indemnity benefits for lost wages are not directly affected by inflation, as
these amounts are established by statute.  To the extent that the reserve for
losses and LAE and claim payments have increased as a result of inflation,
premium rates have historically increased by operation of the rate setting
process.  This process established the minimum rates in effect in California
prior to January 1, 1995.  However, no assurance can be given that following the
introduction of open premium rating in California effective January 1, 1995,
premium rates will keep pace with inflation.  Another result of inflation is an
expected escalation of wages paid to employees.  To the extent that wages
increase, premium revenues will proportionately increase, since rates are based
on the employer's payroll.  Since the Company's inception in May 1987, the
Company believes that the effect of inflation on the Company has not been
material.

Recent Accounting Pronouncements

In October 1995, FASB issued Statement No. 123, "Accounting For Stock-Based
Compensation" which established a fair value based method of accounting for
stock-based compensation plans.  This statement is effective for financial
statements with fiscal years beginning after December 15, 1995.  The Company
elected to continue accounting for stock-based compensation based on Accounting
Principles Board (APB) No. 25; and thus, the Company adopted only the disclosure
provision of FASB Statement No. 123. 

Item 8. Financial Statements and Supplementary Data.

Information with respect to this Item is incorporated by reference to the
financial statements and supplementary data listed in Item 14 of Part IV of this
report.

Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.

None.


                                   PART III


Item 10. Directors and Executive Officers of the Registrant.

The information required by this Item is contained in the Company's definitive
proxy statement for the April 8, 1997 special meeting of stockholders, which was
filed with the Securities and Exchange Commission on March 3, 1997.  Such
information is incorporated herein by this reference.

Item 11. Executive Compensation.

The information required by this Item is contained in the Company's definitive
proxy statement for the April 8, 1997 special meeting of stockholders, which was
filed with the Securities and Exchange Commission on March 3, 1997.  Such
information is incorporated herein by this reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management.

(a)   Security ownership of certain beneficial owners:

                                       28
<PAGE>
 
The information required by this Item is contained in the Company's definitive
proxy statement for the April 8, 1997 special meeting of stockholders, which was
filed with the Securities and Exchange Commission on March 3, 1997.  Such
information is incorporated herein by this reference.

(b)   Security ownership of management:

The information required by this Item is contained in the Company's definitive
proxy statement for the April 8, 1997 special meeting of stockholders, which was
filed with the Securities and Exchange Commission on March 3, 1997.  Such
information is incorporated herein by this reference.

(c)   Changes in control:

The Company knows of no arrangements, including any pledges by any person of its
securities, the operation of which may at a subsequent date result in a change
of control, except for the Amended Agreement (see "Business -- Definitive
Agreement and Plan of Merger").

Item 13. Certain Relationships and Related Transactions.

The information required by this Item is contained in the Company's definitive
proxy statement for the April 8, 1997 special meeting of stockholders, which was
filed with the Securities and Exchange Commission on March 3, 1997.  Such
information is incorporated herein by this reference.

                                       29
<PAGE>
 
                                    PART IV

Item 14.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K.

(a) Documents Filed with Report.

1.  The following consolidated financial statements of Pac Rim Holding and
    subsidiaries are filed as part of this report.

        Consolidated Balance Sheets - December 31, 1996 and 1995

        Consolidated Statements of Operations - Years ended December 31, 1996,
        1995, and 1994

        Consolidated Statements of Cash Flows - Years ended December 31, 1996,
        1995, and 1994

        Consolidated Statements of Stockholders' Equity - Years ended December
        31, 1996, 1995, and 1994

        Notes to Consolidated Financial Statements

2. The following financial statement schedules of Pac Rim Holding and 
subsidiaries are filed as part of this report.

        Schedule II       Condensed Financial Information of Registrant

        Schedule III      Supplementary Insurance Information

        Schedule IV       Reinsurance

        Schedule VI       Supplemental Information Concerning Property/Casualty
                          Insurance Operations

All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instruction or are inapplicable and therefore have been omitted.

3. The exhibits listed on the accompanying Exhibit Index are filed as part of
   this report.

(b) Reports on Form 8-K.

The Company filed a current report on Form 8-K, dated October 2, 1996 reporting 
on Item 5, Other Events, in connection with the Agreement and Plan of Merger 
with Superior National Insurance Group, Inc.

The Company filed a current report on Form 8-K, dated March 4, 1997 reporting on
Item 5, Other Events, in connection with the Amended and Restated Agreement and
Plan of Merger with Superior National Insurance Group, Inc.

                                       30
<PAGE>
 
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



Stockholders and Board of Directors
Pac Rim Holding Corporation:

We have audited the accompanying consolidated balance sheets of Pac Rim Holding
Corporation and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1996. These financial
statements and schedules are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
schedules based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Pac Rim Holding
Corporation and subsidiaries as of December 31, 1996 and 1995, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1996 in conformity with generally accepted accounting
principles.

Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole.  The schedules following the financial statements
are presented for purposes of complying with the Securities and Exchange
Commission's rules and are not a required part of the basic financial
statements.  These schedules have been subjected to the auditing procedures
applied in the audit of the basic financial statements, and in our opinion, are
fairly stated in all material respects in relation to the basic financial
statements taken as a whole.



Los Angeles, California
February 26, 1997


                                                ARTHUR ANDERSEN LLP

                                       31
<PAGE>
 
                   PAC RIM HOLDING CORPORATION AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS
            (Amounts in Thousands, Except Share and Per Share Data)
<TABLE>
<CAPTION>
 
                                                                December 31,
                                                             -------------------
                                                               1996       1995
                                                             ---------  --------
<S>                                                          <C>        <C>
ASSETS
Investments:
  Bonds, available-for-sale at fair value (amortized cost
   $55,245 and $119,314)                                     $ 54,759   $121,771
  Short-term investments (at cost, which approximates fair
   value)                                                      56,794      7,260
                                                             --------   --------
    Total Investments                                         111,553    129,031
 
Cash                                                            1,731        773
Reinsurance recoverable on outstanding losses                   3,124      3,884
Reinsurance receivable on paid losses                             725        184
Premiums receivable, less allowance for doubtful
   accounts of $1,055 and $1,221                               15,739     11,616
Earned but unbilled premiums                                    7,904      4,880
Investment income receivable                                      609      2,207
Deferred policy acquisition costs                               1,162        974
Property and equipment, less accumulated depreciation
     and amortization of $4,978 and $3,803                      4,411      2,434
Unamortized debenture issue costs                               1,063      1,468
Federal income taxes recoverable                                           1,456
Deferred federal income taxes, net                              8,745      8,348
Prepaid reinsurance premiums                                    1,515        227
Other assets                                                    3,324      1,569
                                                             --------   --------
   Total Assets                                              $161,605   $169,051
                                                             ========   ========
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
Liabilities:
  Reserve for losses and loss adjustment expenses            $100,588   $ 96,525
  Convertible debentures payable, less
    unamortized discount of $1,059 and $1,393                  18,941     18,607
  Unearned premiums                                             6,917      5,715
  Reserve for policyholder dividends                              364        381
  Income taxes payable                                             14
  Obligation under capital lease                                1,203
  Accrued expenses and accounts payable                         7,269      3,668
                                                             --------   --------
             Total Liabilities                                135,296    124,896
 
Commitments and contingencies
 
Stockholders' Equity:
  Preferred Stock:
    $.01 par value--shares authorized 500,000;
    none issued and outstanding
 
  Common Stock:
    $.01 par value--shares authorized 35,000,000
    issued and outstanding 9,528,200                               95         95
  Additional paid-in capital                                   29,624     29,624
  Warrants                                                      1,800      1,800
  Unrealized gain (loss) on available-for-sale securities,
   net                                                           (324)     1,622
  Retained earnings (deficit)                                  (4,886)    11,014
                                                             --------   --------
          Total Stockholders' Equity                           26,309     44,155
                                                             --------   --------
          Total Liabilities and Stockholders' Equity         $161,605   $169,051
                                                             ========   ========
</TABLE>
See notes to consolidated financial statements.

                                       32
<PAGE>
 
                   PAC RIM HOLDING CORPORATION AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF OPERATIONS

                 (Amounts in Thousands, Except Per Share Data)

<TABLE>
<CAPTION>
                                                       Year Ended December 31,
                                                    ----------------------------
                                                      1996      1995      1994
                                                      ----      ----      ----  
<S>                                                  <C>       <C>       <C>
Revenues:
 
   Net premiums earned                              $ 86,488    $76,016  $92,894
   Net investment income                               7,013      8,089    6,514
   Realized capital gains                              1,640        453
   A&H commission income                                   8
                                                    --------    -------  -------
      Total revenue                                   95,149     84,558   99,408
 
Costs and Expenses:
 
   Losses and loss adjustment
    expenses                                          79,890     50,957   63,788
   Amortization of policy
    acquisition costs - net                           14,853     18,647   19,565
   Administrative, general, and
    other                                             13,370     11,662   11,927
   Policyholder dividends                                (11)       132    1,301
   Interest expense                                    2,341      2,306      857
                                                    --------    -------  -------
 
      Total costs and expenses                       110,443     83,704   97,438
                                                    --------    -------  -------
 
  Income (loss) before income taxes                  (15,294)       854    1,970
 
  Income tax expense                                     606        279      812
                                                    --------    -------  -------
 
  Net Income (Loss)                                 $(15,900)   $   575  $ 1,158
                                                    ========    =======  =======
 
Per share data:
 
  Net Income (Loss) Primary and Fully Diluted         $(1.67)      $.06    $0.12
                                                    ========    =======  ======= 
</TABLE>
See notes to consolidated financial statements.

                                       33
<PAGE>
 
                   PAC RIM HOLDING CORPORATION AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
              (Amounts in Thousands, Except for Number of Shares)

<TABLE>
<CAPTION>
                                                                                          Unrealized      
                                                Common Stock                            Gain (Loss) on  
                                          -----------------------                         Available-
                                             Number                Additional               for-Sale      Retained
                                               of                   Paid-in                Securities,    Earnings
                                             Shares      Amount     Capital     Warrants       Net        (Deficit)       Total
                                             ------      ------     -------     --------    --------     -----------     ------
<S>                                        <C>           <C>       <C>          <C>     <C>              <C>             <C>
Balance at January 1, 1994                 9,528,200         95       29,624                                   9,281      39,000
                                                                                                                     
 Unrealized gain on available-for-sale                                                                               
   securities at January 1, 1994, net                                                             96                          96
 Additional paid in capital-warrants                                              1,800                                    1,800
 Net income                                                                                                    1,158       1,158
 Change in unrealized loss of                                                                                        
  available-for-sale securities, net                                                          (4,877)                     (4,877)
                                           ---------        ---       ------      -----       -------         ------      ------ 
Balance at December 31, 1994               9,528,200         95       29,624      1,800       (4,781)         10,439      37,177
                                                                                                                     
 Net income                                                                                                      575         575
 Change in unrealized gain of                                                                                        
  available-for-sale securities, net                                                           6,403                       6,403
                                           ---------        ---       ------      -----       ------          ------      ------ 
Balance at December 31, 1995               9,528,200         95       29,624      1,800        1,622          11,014      44,155
                                                                                                                     
Net loss                                                                                                     (15,900)    (15,900)
Change in unrealized loss of                                                                                         
 available-for-sale securities, net                                                           (1,946)                     (1,946)
                                           ---------        ---     --------     ------      -------        --------    --------
Balance at December 31, 1996               9,528,200        $95      $29,624     $1,800      $  (324)       $ (4,886)   $ 26,309
                                           =========        ===     ========     ======      =======        ========    ========
 
</TABLE>
See notes to consolidated financial statements.

                                       34
<PAGE>
 
                   PAC RIM HOLDING CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOW
                             (Amounts in Thousands)
<TABLE>
<CAPTION>
                                                Year Ended December 31,
                                          ------------------------------------
                                            1996           1995          1994
                                            ----           ----          ----
<S>                                       <C>             <C>          <C>
OPERATING ACTIVITIES
  Net Income (loss)                       $(15,900)       $    575     $  1,158
  Adjustments to reconcile net 
  income (loss) to net cash provided 
  by operating activities:
   Depreciation and amortization             2,001           1,421          930
   Provision for losses on premiums
    receivable                                (166)            150         (143)
   Provision (benefit) for deferred 
    income taxes                               606           1,340        1,188
   Realized capital gains                   (1,640)           (453)
   Changes in:
     Reserve for losses and loss
      adjustment expenses                    4,063         (20,104)     (19,336)
     Unearned premiums                       1,202          (4,202)       1,655
     Reserve for policyholder 
      dividends                                (17)           (609)      (1,539)
     Ceded reinsurance payable                                             (252)
     Premiums receivable                     (6,981)           255        5,413
     Reinsurance recoverable                    219         (1,936)      13,044
     Aggregate excess of loss
      reinsurance recoverable                                            10,812
     Prepaid reinsurance premiums            (1,288)           153        2,435
     Deferred policy acquisition
      costs                                    (188)         1,111         (953)
     Income taxes recoverable                 1,456         (1,013)       1,916
     Accrued expenses and accounts
      payable                                 3,601            116          319
     Investment income receivable             1,598            148       (1,372)
     Other assets                            (1,755)           229          630
                                            --------       --------     --------
      NET CASH PROVIDED (USED) BY
       OPERATING ACTIVITIES                 (13,189)       (22,819)      15,905
                                            --------       --------     --------
 
INVESTING ACTIVITIES
     Purchase of investments - bonds        (47,622)       (40,524)     (67,788)
     Sales of investments - bonds           104,172         61,343
     Maturity and calls of
      investments - bonds                     9,080          1,028        7,228
     Additions to property
      and equipment                          (1,949)          (836)        (918)
                                            --------       --------     --------
      NET CASH PROVIDED (USED) BY
       INVESTMENT ACTIVITIES                 63,681         21,011      (61,478)
                                            --------       --------     --------
 
FINANCING ACTIVITIES
     Proceeds from issuance of
      convertible debentures                                             20,000
     Debenture issuance costs                                            (2,025)
                                            --------       --------     --------
      NET CASH PROVIDED BY FINANCING
       ACTIVITIES                                                        17,975
                                            --------       --------     --------
INCREASE (DECREASE) IN CASH AND 
 CASH EQUIVALENTS                            50,492         (1,808)     (27,598)
Cash and cash equivalents at 
 beginning of period                          8,033          9,841       37,439
                                            --------       --------     --------
         CASH AND CASH EQUIVALENTS
          AT END OF PERIOD                 $ 58,525       $  8,033     $  9,841
                                            ========       ========     ========
 
SUPPLEMENTAL DISCLOSURE:
 Interest paid                             $  1,600       $  1,615     $    -0-
                                            ========       ========     ========
 Income taxes paid                         $   - 0-       $     37     $    -0-
                                            ========       ========     ========
The Company entered into a capital lease
during 1996, to acquire certain operating 
system hardware and software; the lease 
obligation at December 31, 1996 was
$1,203,000.
</TABLE>

See notes to consolidated financial statements.

                                       35
<PAGE>
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                  PAC RIM HOLDING CORPORATION AND SUBSIDIARIES

                               December 31, 1996


NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization:  Pac Rim Holding Corporation ("Pac Rim Holding") is a holding
------------                                                               
company  that was incorporated in 1987 in Delaware.  The accompanying
consolidated financial statements include the accounts and operations of the
holding company and its subsidiary, The Pacific Rim Assurance Company and its
subsidiary, Regional Benefits Insurance Services, Inc., (collectively referred
to herein as "the Company").  All significant intercompany transactions and
balances are eliminated in consolidation.  The Pacific Rim Assurance Company
("Pacific Rim Assurance") is engaged exclusively in the business of writing
workers' compensation insurance in California, Arizona, Georgia, Alabama and
Texas. Regional Benefits Insurance Services, Inc. ("RBIS") is an insurance
agency.

Accounting Principles:  The accompanying consolidated financial statements are
---------------------                                                         
presented on the basis of generally accepted accounting principles ("GAAP"),
which differ in some respects from those followed in reports to the Insurance
Departments.  The principal differences relate to the recognition of deferred
income taxes, deferred policy acquisition costs, earned but unbilled premiums,
and policyholder dividends.

Earned Premiums:  Earned premiums and the liability for unearned premiums are
---------------                                                              
calculated by formula such that the premium written is earned pro rata over the
term of the policy.  The insurance policies currently written by the Company are
for a period of one year or less.  Premiums earned include an estimate for
earned but unbilled premiums and retrospectively rated premiums.

Reserve for Losses and Loss Adjustment Expenses:  The reserve for losses and
-----------------------------------------------                             
loss adjustment expenses ("LAE") is based on the accumulation of cost estimates
for each loss reported prior to the close of the accounting period and provision
for the probable cost of losses that have occurred but have not yet been
reported.  The Company does not discount such reserves for financial reporting
purposes.  The methods for making such estimates and for establishing the
resulting liabilities are continually reviewed and updated and any adjustments
resulting therefrom are included in current operations when determined.  While
the ultimate amount of losses incurred and the related expense is dependent on
future developments, management is of the opinion that, given the inherent
variability in any such estimates, the reserve for unpaid losses and LAE is
within a reasonable range of adequacy.  The Company has filed with the
Department of Insurance in each state it is licensed, an independent actuarial
opinion that states that the Company's reserve for losses and LAE as of December
31, 1996 makes a reasonable provision for all unpaid loss and LAE obligations of
the Company under the terms of its policies and agreements.

Policy Acquisition Costs:  Policy acquisition costs, such as commissions,
------------------------                                                 
premium taxes, and other underwriting costs related to the production and
retention of business, are deferred and  amortized as the related premiums are
earned. Anticipated investment income is considered in determining the
recoverability of this asset.  Other policy acquisition costs that do not vary
with the production of new business are expensed when incurred and are included
in administrative, general, and other expenses.

Policyholder Dividends:  A portion of all policies written by the Company are
----------------------                                                       
eligible for policyholder dividends.  An estimated provision for policyholder
dividends is accrued as the related premiums are earned.  Such dividends do not
become a legal liability of Pacific Rim Assurance unless, and until, declared by
the Board of Directors.

Investments: In May 1993, the Financial Accounting Standards Board ("FASB")
-----------                                                                
issued Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting
for Certain Investments in Debt and Equity Securities".  As of January 1, 1994,
the Company adopted the provisions of that Standard for investments held as of
or acquired after that date.  In accordance with Statement 115, prior-period
financial statements have not been restated to reflect the change in accounting
principle.  The cumulative effect as of January 1, 1994 of adopting Statement
115 increased stockholders' equity by $96,000 (net of deferred income taxes of
$50,000) to reflect the net unrealized holding gains on bonds previously carried
at amortized cost; there was no effect on net income as a result of the adoption
of Statement 115.  In

                                       36
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

PAC RIM HOLDING CORPORATION AND SUBSIDIARIES

NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued


the year ended December 31, 1994 net unrealized holding gains decreased by
$4,877,000 (net of deferred tax benefit of $2,513,000; the net unrealized
holding loss was $4,781,000 at December 31, 1994.  In the year ended December
31, 1995, net unrealized holding gains increased by $6,403,000 (net of deferred
tax expense of $3,299,000); the net unrealized holding gain was $1,622,000 at
December 31, 1995.  In the year ended December 31, 1996, net unrealized holding
gains decreased $1,946,000 (net of deferred tax benefit of $1,002,000); the net
unrealized holding loss was $324,000 at December 31, 1996.

The cost of investments sold is determined by specific identification.  The
Company's investment guidelines emphasize buying, with the intent of holding to
maturity, high quality U.S. Treasury securities, other governmental agency
securities, and corporate bonds.  The Company does not actively trade its
securities.  Although the Company has the intent to hold its investments to
maturity, the Company also recognizes that unforeseeable circumstances, such as
changes in market conditions, tax considerations, and operational needs, may
require the sale of securities prior to maturity.  As of December 31, 1996 the
Company has designated all of its portfolio as "available for sale".

Property and Equipment:  Property and equipment is stated at cost.  Depreciation
----------------------                                                          
of property and equipment is computed using the straight-line method over an
estimated useful life of five years for financial reporting purposes. Leasehold
improvements are amortized on the straight-line method over the life of the
lease.

Taxes:  The Company recognizes deferred tax assets and liabilities based on the
-----                                                                          
expected future tax consequences of existing differences between financial
reporting and tax reporting bases of assets and liabilities and operating loss
and tax credit carryforwards for tax purposes.

The insurance subsidiary pays premium taxes on gross premiums written in
California in lieu of state income taxes.

Cash and Cash Equivalents:  For purposes of the statements of cash flows,
-------------------------                                                
certificates of deposit and short-term investments with an original maturity of
three months or less, at date of purchase, are considered to be cash
equivalents.

Stockholders' Equity:  The issuance of the convertible debentures included
--------------------                                                      
issuing detachable warrants to purchase common stock (See Note 5).  The value of
these warrants was $1,800,000, which was recorded as warrants in the
Consolidated Balance Sheets.

Earnings Per Share:  Net income (loss) per share is computed on the basis of the
------------------                                                              
weighted average shares of common stock, plus common stock equivalent shares
arising from the effect of the stock options, warrants, and convertible
debentures. (See Notes 5 and 6).

The number of shares used in the computation of primary and fully diluted
earnings per share for the twelve month periods ended December 31, 1996, 1995,
and 1994 was 9,528,000.

New Accounting Standards:  In October 1995, FASB issued Statement No. 123,
------------------------                                              
"Accounting For Stock-Based Compensation" which established a fair value based
method of accounting for stock-based compensation plans. This statement is
effective for financial statements with fiscal years beginning after December
15, 1995. The Company elected to continue accounting for stock-based
compensation based on Accounting Principles Board (APB) No. 25; and thus, the
Company adopted only the disclosure provision of FASB Statement No. 123.

Fair Values of Financial Instruments:  The carrying amounts of financial
------------------------------------                                    
instruments, other than investment securities, approximate their fair values.
For investment securities, the fair values for fixed maturity securities are
based on quoted market prices.  The carrying amounts and fair values for all
investment securities are disclosed in Note 2.

                                       37
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

PAC RIM HOLDING CORPORATION AND SUBSIDIARIES

NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--Continued


Reclassifications:  Certain prior year amounts in the accompanying financial
-----------------
statements have been reclassified to conform with the 1996 presentation.

NOTE 2--AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER

On February 18, 1997, the Company announced that it had executed an Amended and
Restated Agreement and Plan of Merger ("Amended Agreement") with Superior 
National Insurance Group, Inc. ("Superior"), regarding an acquisition of the
Company pursuant to the terms of which the stockholders would receive $2.11 per
share (a total of approximately $20,063,293), the convertible debenture holders
would receive face value for the debentures or $20,000,000, and $1,957,739 would
be paid to acquire all of the issued and outstanding warrants of the Company and
options to purchase common stock that are "in-the-money", for a total
consideration of approximately $42,021,032.

NOTE 3--INVESTMENTS

Major categories of investment income, net of investment expenses, for 1996,
1995 and 1994 are summarized as follows (amounts in thousands):
<TABLE>
<CAPTION>
                                                Year Ended December 31,
                                                -----------------------
                                                 1996    1995    1994
                                                 ----    ----    ----
<S>                                             <C>     <C>     <C>
Investment Income:
 U.S. Treasury and other governmental
  agency securities                              4,065  $5,365  $5,508
 Money Market Funds                                418     309     291
 Funds Held by Reinsurer                                           169
 Corporate Bonds                                 2,762   2,655     700
 Tax-Exempt Bonds                                            4     102
 Certificates of Deposit                            31      22       9
                                                ------  ------  ------
 Investment Income                               7,276   8,355   6,779
 Less:  Investment Expenses                        263     266     265
                                                ------  ------  ------
Net Investment Income                           $7,013  $8,089  $6,514
                                                ======  ======  ======
</TABLE>

Proceeds from the sales of investments in bonds during 1996 were $104,172,000;
gross gains of $1,888,000 and gross losses of $248,000 were realized on those
sales.  Proceeds from the sales of investments in bonds during 1995 were
$61,343,000; gross gains of $657,000 and gross losses of $204,000 were realized
on those sales.  There were no sales of investments in bonds during 1994.

                                       38
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

PAC RIM HOLDING CORPORATION AND SUBSIDIARIES

NOTE 3--INVESTMENTS--Continued


The amortized cost and fair values of investments in debt securities are
summarized as follows (amounts in thousands):
<TABLE>
<CAPTION>
                                             Gross       Gross
                               Amortized  Unrealized   Unrealized     Fair
                                 Cost        Gains      (Losses)     Value
                               ---------  -----------  -----------  --------
    <S>                        <C>        <C>          <C>          <C>
    1996
    U.S. Treasury and other
     governmental agencies      $ 28,808           5      $  (184)   $28,629
    Corporates                    13,765           2         (204)    13,563
    U.S. Agencies                 12,341           8         (118)    12,231
    Asset backed                     331           5                     336
                                --------      ------      -------   --------
       Total                    $ 55,245      $   20      $  (506)  $ 54,759
                                ========      ======      =======   ========
 
    1995
    U. S. Treasuries and other
     governmental agencies      $ 68,963      $   17      $  (157)  $ 68,823
    Corporates                    33,793       1,886                  35,679
    U.S. Agencies                 10,546         418                  10,964
    Asset backed                   6,012         293                   6,305
                                --------      ------      -------   --------
       Total                    $119,314      $2,614      $  (157)  $121,771
                                ========      ======      =======   ========
 
</TABLE>
The amortized cost and fair value of debt securities at December 31, 1996 by
contractual maturity are summarized as follows (amounts in thousands):
<TABLE>
<CAPTION>
                                          Amortized              Fair
                                            Cost                Value
                                          ---------            --------
    <S>                                   <C>                  <C>
                                                   
    Due in 1997                            $10,701             $10,696
    Due 1998 - 2001                         44,544              44,063
    Due 2002 and after                     -------             -------
                                           $55,245             $54,759
                                           =======             =======
</TABLE>

The expected maturities will differ from contractual maturities in the preceding
table because borrowers have the right to call or prepay certain obligations
with or without call or prepayment penalties.

At December 31, 1996, debt securities and short-term investments with a fair
value of $105,301,000 were on deposit to meet the Company's statutory obligation
under insurance department regulations.

At December 31, 1996, there were individual investments in short-term and long-
term United States Treasury securities with a total amortized cost of
$80,504,000, which exceeded 10% of stockholders' equity.

                                       39
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

PAC RIM HOLDING CORPORATION AND SUBSIDIARIES

NOTE 4--RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES

The Company recognized adverse development during 1996. Despite experiencing 
favorable trends in the overall frequency and severity of claims for the 1995 
and 1996 accident years, the Company and its internal and independent actuaries 
observed development patterns in the 1990-1994 accident years that were volatile
when compared to previous historical patterns. In particular, 1990-1992 were 
very difficult accident years, due to the impact of fraud and stress claims from
adverse economic conditions, although the 1992 accident year began the 
transition to improved claims experience during the second half of the year. The
1993-1994 accident years were very favorable transition years, following
legislative reforms to the workers' compensation benefits system. Nevertheless,
it was unclear how each of those years ultimately would develop, and how
subsequent accident year patterns would thus be affected, given paid loss and
case reserve activity during 1996.

The following table provides a reconciliation of beginning and ending loss and
LAE reserves for the years 1996, 1995, and 1994.  All reserve totals are net of
reinsurance deductions.  There are no material differences between the Company's
reserves for losses and LAE calculated in accordance with generally accepted
accounting principles and those reserves calculated based on statutory
accounting practices.

       Reconciliation of Reserve for Losses and Loss Adjustment Expenses
<TABLE>
<CAPTION>
 
                                                    Year Ended December 31,
                                                -------------------------------
                                                  1996       1995       1994
                                                ---------  ---------  ---------
                                                    (amounts in thousands)
<S>                                             <C>        <C>        <C>
Liability for losses and LAE, net of
  reinsurance recoverables on unpaid losses,
  at beginning of year                          $ 92,641   $114,709   $111,109
 
Provision for losses and LAE, net
  of reinsurance recoverable:
      Current accident year                       62,244     49,962     60,989
      Prior accident years                        17,646        995      2,799
                                                --------   --------   --------
 
Incurred losses during the current year,
  net of reinsurance recoverable                  79,890     50,957     63,788
 
Losses and LAE payment for claims, net of
  reinsurance recoverable, occurring during:
           Current year                           16,398     13,473     13,641
           Prior years                            58,669     59,552     46,547
                                                --------   --------   --------
                                                  75,067     73,025     60,188
                                                --------   --------   --------
 
Liability for losses and LAE, net of
  reinsurance recoverable on unpaid
  losses, at end of year                          97,464     92,641    114,709
 
Reinsurance recoverable, at end of year            3,849      4,068      2,132
 
Less reinsurance recoverable on paid losses         (725)      (184)      (212)
                                                --------   --------   --------
 
Reinsurance recoverable on unpaid losses,
  at end of year                                   3,124      3,884      1,920
                                                --------   --------   --------
 
Liability for losses and LAE, gross of
  reinsurance recoverable on unpaid losses,
  at end of year                                $100,588   $ 96,525   $116,629
                                                ========   ========   ========
</TABLE>

During 1991 through 1994, the Company, as did the workers' compensation industry
in California in general, went through a dramatically changing experience in
losses and LAE incurred.  During 1991 and 1992, the Company experienced a
substantial number of claims related to adverse economic conditions,
particularly for the 1990 and 1991 accident years.

                                       40
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

PAC RIM HOLDING CORPORATION AND SUBSIDIARIES

NOTE 4--RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES - Continued


In addition, there were "stress and strain" claims that did not involve
traumatic physical loss or injury, many of which were suspected by the Company
to be fraudulently submitted.  The Company initially took a general denial
stance and non-settlement posture on such fraudulent claims, to send a clear
message to claimants and vendors of its position.

The Company referred fraudulent claim matters to prosecutors, who have secured
successful indictments and prosecutions of fraudulent claimants or vendors, and
the Company secured withdrawals of such claims by others.  In addition, the
enactment of effective legislative and regulatory reforms has been implemented.
That technique was effective, as the Company believes that the frequency of new
suspected fraudulent claims has nearly stopped.  Late in 1993, the Company
refined its approach to promote the settlement of certain of these claims, where
minimal settlement cost could facilitate early closure and prevent cost
escalation.

Throughout 1994, 1995 and 1996, the Company continued to experience a favorable
trend in the frequency of new claims. The positive trends and experience related
to new claims since the second half of 1992 have been consistent with the
favorable experience of other workers' compensation insurance specialty
companies in California.  In addition, the level of claims closed was  in excess
of the level of new claims reported during 1994 and 1995.  As a result, the
Company's estimate of loss and LAE reserves for the 1993, 1994, 1995 and 1996
accident years is based on substantially lower loss ratios than the 1991 and
prior accident years.  Nevertheless, despite improved frequency and lower
overall loss and LAE ratios in those years, the volatile changes in legislative,
economic, managed medical care, and litigation expense factors, affecting
historical paid loss and case reserve development patterns, have made it more
difficult to estimate the ultimate dollar cost of those reported claims.  Thus,
the inherent variability has increased, and recognition of adverse development
of prior years' estimates has occurred.

NOTE 5 -- REINSURANCE

Under the Company's specific excess of loss reinsurance treaty, the reinsurers
assume the liability on that portion of workers' compensation claims between
$350,000 and $80,000,000 per occurrence.

The components of net premiums written are summarized as follows (amounts in
thousands):
<TABLE>
<CAPTION>
                                                                               
                                         Year Ended December 31,               
                                       -----------------------------           
                                         1996      1995      1994              
                                       --------  --------  ---------           
             <S>                       <C>       <C>       <C>                 
                                                                               
             Direct                    $88,972   $75,553   $101,661            
             Assumed                     2,568       375        112            
             Ceded                      (4,407)   (3,962)    (4,789)           
                                       -------   -------   --------            
                                                                               
                                                                               
             Net premiums written      $87,133   $71,966   $ 96,984            
                                       =======   =======   ========             
</TABLE>

                                       41
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

PAC RIM HOLDING CORPORATION AND SUBSIDIARIES

NOTE 5--REINSURANCE - Continued


The components of net premiums earned are summarized as follows (amounts in
thousands):
<TABLE>
<CAPTION>
 
                                                    Year Ended December 31,
                                                 ------------------------------
                                                    1996      1995      1994
                                                 ---------  --------  ---------
               <S>                               <C>        <C>       <C> 
 
               Direct                             $88,678   $79,920   $100,008
               Assumed                              2,247       209        110
               Ceded                               (4,437)   (4,113)    (7,224)
                                                  -------   -------   --------
 
               Net premiums earned                $86,488   $76,016   $ 92,894
                                                  =======   =======   ========
</TABLE> 
 
The components of net losses and loss adjustment expenses are summarized as 
follows (amounts in thousands):

<TABLE> 
<CAPTION> 
                                                    Year Ended December 31,
                                                  ---------------------------- 
                                                    1996      1995      1994
                                                  -------   -------   -------
               <S>                               <C>        <C>       <C>  

               Direct                             $79,840   $54,454   $ 64,700
               Assumed                              1,559       188        149
               Ceded                               (1,509)   (3,685)    (1,061)
                                                  -------   -------   --------
 
               Net losses and loss
               adjustment expenses                $79,890   $50,957   $ 63,788
                                                  =======   =======   ========
 
</TABLE>
A contingent liability exists to the extent that losses recoverable under a
reinsurance treaty are not paid to the Company by the reinsurer.

Reinsurance recoverable on paid losses as of December 31, 1996 and 1995, are
$725,000 and $184,000, respectively.

NOTE 6 -- LONG TERM DEBT

The Company has $20,000,000 in principal outstanding on its August 16, 1994
issue of Series A Convertible Debentures, with detachable warrants to purchase
3,800,000 shares of the Company's common stock, of which 90% are owned by PRAC,
Ltd., a Nevada limited partnership.  PRAC, Ltd. is controlled by Mr. Richard
Pickup.  Mr. Pickup presently controls approximately 26% of the outstanding
shares of the Company through various investment entities, which together are
the Company's largest stockholder.

The Debentures carry an 8% rate of interest, payable semi-annually and are due
on August 16, 1999.  The Debentures are convertible at the holder's option, into
shares of common stock at a conversion price of $2.75 per share.  The Debentures
are subject to automatic conversion if, after three years from issuance, the
price of the Common Stock exceeds 150% of the conversion price for a period of
20 out of 30 consecutive trading days.

The Debenture Agreement also provided for the issuance to the Investor of
detachable warrants (the "Warrants") to acquire 1,500,000 shares of the
Company's common stock at an exercise price of $2.50 per share (the "Series 1
Warrants"), 1,500,000 shares at an exercise price of $3.00 per share (the
"Series 2 Warrants"), and 800,000 shares at an exercise price of $3.50 per share
(the "Series 3 Warrants").  The Warrants expire on August 16, 1999, and the
exercise price of the Warrants is subject to downward adjustment in the event of
adverse development in the Company's

                                       42
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

PAC RIM HOLDING CORPORATION AND SUBSIDIARIES

NOTE 6--LONG TERM DEBT- Continued


December 31, 1993 loss and allocated loss adjustment expense reserves related to
the 1992 and 1993 accident years, measured as of June 30, 1997.  Under the terms
of the Debenture Agreement, the maximum adverse development that would impact
the exercise price of the Warrants is $20,000,000.  In the event that the
adverse development of reserves for those periods exceeds $20,000,000, the
exercise price of the Series 1 Warrants would be reduced to $0.01, and the
exercise price of the Series 2 Warrants would be reduced to $1.39 per share.

The Debenture Agreement includes covenants, which provide, among other things,
that the Company maintain at least $32,200,000 in total stockholders' equity.
At December 31, 1996, the Company's stockholders' equity was $26,309,000. As of
December 31, 1996 the Company has obtained a waiver of that covenant.

The Debentures are carried on the balance sheet net of unamortized discount of
$1,059,000 at December 31, 1996.  The effective average interest rate of this
debt after consideration of debt issuance costs and discount was 13.3%.

During 1996, the Company completed the design and implementation of an
enhancement to its electronic data processing system.  That system created
electronic files of claim and policyholder information, which substantially
decreases the need to access paper files and allows for more efficient handling
of claims and other underwriting activities.  The project included an investment
in electronic data processing equipment, as well as software.  The investment
was financed through a capital lease obligation covering a period of 36 months. 
The lease contains a bargain purchase option at the end of the lease term.
The total cost of the equipment and software, $1,203,000, has been included in
property and equipment, and the present value of the capital lease obligation
has been recorded as a liability. Minimum lease payments are as follows (amounts
in thousands):

<TABLE>
<CAPTION>
 
                   Year                 Amount
                   ----                 ------
                   <S>                   <C>
                   1997                  $504
                   1998                   504
                   1999                   307
</TABLE> 

                                       43
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

PAC RIM HOLDING CORPORATION AND SUBSIDIARIES


NOTE 7--STOCK OPTIONS

The Company has stock option plans that provide for options to purchase Pac Rim
Holding common stock at a price not less than fair value as of the date of the
grant.  The options under those plans are exercisable over a period of up to ten
years, at which time they expire.  A summary of the activity in the stock option
plans is as follows:
<TABLE>
<CAPTION>
 
                                                           Stock Options        
                                                 -------------------------------
                                                 Shares         Price Range
                                                 ------         -----------
          <S>                                 <C>               <C>     <C>   
                                                                              
          Outstanding at January 1, 1994      1,214,000         $1.00 - $11.41
                                                                              
            Granted                             500,000          2.75 -   5.50
            Exercised                                                         
            Cancelled                          (736,375)         2.50 -  11.41
                                               ---------                      
          Outstanding at December 31, 1994      977,625          1.00 -   8.50
                                                                              
            Granted                              65,000          2.50 -   3.19
            Exercised                                                         
            Cancelled                           (85,000)         3.25 -   8.50
                                               ---------                      
          Outstanding at December 31, 1995      957,625          1.00 -   8.50
                                                                              
            Granted                                                           
            Exercised                                                         
            Cancelled                           (52,750)         2.50 -   8.50
                                               ---------                      
          Outstanding at December 31, 1996      864,875          1.00 -   8.50              
                                               =========                      
</TABLE>

Under the 1988 stock option plan, 510,125 shares of common stock are available
for future grants of options.  As of December 31, 1996, options to purchase
676,000 shares of the Company's common stock at a price range of $1.00 to $8.50
were vested and were exercisable under the Company's stock option plans.
Subject to certain conditions, such as continued employment, the exercise of the
options is not restricted.  The options expire at various dates through 2003.
These plans will be terminated at the earlier of the exercise of outstanding
options or in 2003.  The Company accounts for these plans under APB Opinion No.
25, under which no compensation cost has been recognized.  Had compensation cost
for these plans been determined consistent with SFAS No. 123, the Company's net
income (loss) and earnings (loss) per share would not have been materially
different from that reported.

Certain current officers and directors of the Company purchased an aggregate of
136,000 shares of common stock at a purchase price of $1 per share pursuant to
the Pac Rim Holding 1987 Stock Purchase Plan (the "Stock Purchase Plan"). The
Stock Purchase Plan was terminated in 1988.  Shares purchased pursuant to the
Stock Purchase Plan may be repurchased by Pac Rim Holding in the event that the
purchaser's service to the Company terminates prior to specified points of time.

                                       44
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

PAC RIM HOLDING CORPORATION AND SUBSIDIARIES


NOTE 8--COMMITMENT AND CONTINGENCIES

The Company currently leases office facilities in Woodland Hills, and Fresno,
California and Phoenix, Arizona under noncancellable operating leases that are
subject to escalation clauses.  Minimum rental commitments on the operating
leases are as follows (amounts in thousands):
<TABLE>
<CAPTION>
 
                   Year                 Amount
                   ----                 ------
                   <S>                  <C>
                   1997                  2,430
                   1998                  2,381
                   1999                  2,297
                   2000                  2,269
                   2001                  2,226
               All Years Thereafter        742
</TABLE>

Rent expense for 1996, 1995 and 1994 was $2,468,000, $2,461,000 and $2,491,000,
respectively.

The Company is a party to two industrywide legal matters, involving two medical
facilities.  This litigation claims that the insurance industry conspired to
delay payments of claims.  While the ultimate outcome of this litigation is
uncertain, management believes that such litigation will not have a material
adverse financial effect on the Company's financial position and results of
operations.

In addition, in the ordinary course of business, the Company is named as a
defendant in legal proceedings relating to policies of insurance that have been
issued and other incidental matters.  Management does not believe that any such
litigation, taken as a whole, will have a material adverse financial effect on
the Company's financial position and results of operations.

NOTE 9--REGULATORY MATTERS

The National Association of Insurance Commissioners' ("NAIC") Committee on
Financial Regulation and Standards and Accreditation (the "NAIC Committee")
voted to require, as a condition of NAIC accreditation of a state's insurance
regulatory system, adoption of the NAIC's 1986 Model Insurance Holding Company
System Regulatory Act (the "Model Act").  Among other matters, the Model Act
requires states to enact legislation further restricting the payment of
dividends by insurance companies.

In an effort to satisfy the dividend payment restrictions of the Model Act,
amendments to the California Insurance Code designed to implement dividend
payment limitations that would yield results substantially equivalent to the
Model Act were passed by the California legislature on October 9, 1993.  These
amendments were incorporated into California Senate Bill 482.  The amendments
limit dividends payable during the twelve month period, without prior regulatory
approval, to the greater of net income for the preceding year or 10% of
policyholders' surplus as of the preceding December 31.  The amendments further
prohibit the payment of dividends without prior California Insurance Department
("Department") approval unless the insurer has available "earned surplus".  The
term "earned surplus" is defined as unassigned funds (surplus) as reported on
the insurer's annual statement, excluding earned surplus derived from the
appreciation of assets not yet realized or from an exchange of assets, unless
such earned surplus has been realized or the assets received in exchange are
currently realized in cash.  The legislation further requires insurers to report
to the

                                       45
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

PAC RIM HOLDING CORPORATION AND SUBSIDIARIES

NOTE 9--REGULATORY MATTERS--Continued


Department all dividends within five days of declaration and prohibits the
payment of the dividend declared until ten days after the Department's receipt
of such notice.  Under these provisions, Pacific Rim Assurance paid $1,100,000
in dividends in 1996 to Pac Rim Holding.

As reported to insurance regulatory authorities, statutory-basis capital and
surplus of Pacific Rim Assurance at December 31, 1996 and 1995 was $27,216,000
and $46,549,000, respectively, and the net income (loss) amounted to
$(13,069,000), $4,879,000, and $(2,878,000) for 1996, 1995, and 1994,
respectively.  At December 31, 1996, Pacific Rim Assurance had a deficit balance
of $(17,202,000) in its earned surplus account.  Accordingly, Pacific Rim
Assurance cannot pay dividends to Pac Rim Holding during 1997, without prior
Department approval.

NOTE 10--INCOME TAXES

The components of the provision for total deferred taxes are summarized as
follows (amounts in thousands):

<TABLE>
<CAPTION>
                                                 Year Ended December 31,    
                                           ---------------------------------
                                                 1996     1995     1994
                                                 ----     ----     ----
          <S>                                    <C>    <C>       <C>    
                                                                          
          Current                                $  0   $(1,061)  $ (376)
          Deferred                                606     1,340    1,188
                                                 ----   -------   ------
          Total                                  $606   $   279   $  812
                                                 ====   =======   ======  
</TABLE>

A reconciliation of income tax computed at the U.S. federal statutory tax rates
to total income tax expense is as follows (amounts in thousands):

<TABLE>
<CAPTION>
                                                 Year Ended December 31,
                                           ---------------------------------
                                                 1996     1995     1994  
                                                 ----     ----     ---- 
          <S>                                  <C>        <C>      <C>  
                                                                        
          Federal statutory rate               $(5,200)   $290     $670 
                                                                        
          Increase (decrease) in taxes                                  
           resulting from:                                              
            Valuation allowance                  5,738       0        0 
            Tax-exempt interest                      0      (1)     (30) 
            Other                                   68     (10)     172 
                                               -------    ----     ---- 
          Total tax expense                    $   606    $279     $812 
                                               =======    ====     ====  
</TABLE>

At December 31, 1996, the Company has an alternative minimum tax credit of
$334,000 for tax purposes.  Alternative minimum tax credits may be carried
forward indefinitely to offset future regular tax liabilities.  At December 31,
1996, the Company has a tax net operating loss of $17,561,000 which can be used
to offset taxable income in future years, of which $2,676,000 expires in 2010 
and $14,885,000 expires in 2011.

                                       46
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

PAC RIM HOLDING CORPORATION AND SUBSIDIARIES


NOTE 10--INCOME TAXES - Continued


Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.  Significant components
of the Company's deferred tax assets and liabilities are summarized as follows
(amounts in thousands):

<TABLE>
<CAPTION>
                                                        December 31,
                                               -----------------------------
                                                  1996               1995     
                                                 ------             ------  
            <S>                                  <C>                <C>     
                                                                            
            Deferred tax assets                                             
             Discounting of loss reserves        $ 7,273            $7,189  
             Unearned premiums                       417               373  
             Allowance for doubtful accounts         359               415  
             Rental expense                          511               518  
             Unrealized loss on securities           167                    
             Net operating loss carry forward      5,856               910  
             Alternative minimum tax credit                                 
              carry forward                          334               334  
             Other - net                             258                93  
                                                 -------            ------  
            Total deferred tax assets             15,175             9,832  
                                                                            
            Less:  Valuation allowance on NOL      5,738                    
            Deferred tax liabilities:                                       
             Deferred policy acquisition costs       396               331  
             Earned but unbilled premiums            168               165  
             Prepaid insurance                        61                86  
             Unrealized gain on securities                             835  
             Other - net                              67                67  
                                                 -------            ------  
            Total deferred tax liabilities       $   692            $1,484  
                                                 -------            ------  
            Net deferred tax assets              $ 8,745            $8,348  
                                                 =======            ======   
</TABLE>

There were no taxes paid in 1995 and 1996.

Because of the significant operating loss during 1996, management believed that 
it was prudent to record a valuation allowance against a portion of the deferred
tax asset.

Pacific Rim Assurance pays premium taxes to California on gross premiums written
in lieu of state income taxes. Amounts paid for premium taxes during 1996, 1995,
and 1994 were $1,144,000, $1,858,000, and $2,346,000, respectively.

NOTE 11--DISCLOSURE OF CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES

Nature of Operations

During the year ended December 31, 1996, the Company wrote 88% of its business
in the state of California.  The workers' compensation industry in the state of
California has seen many changes to regulations in the past few years including
the adoption of open rating.  The Company cannot predict what regulatory changes
will be made in the future; therefore, the Company cannot with certainty predict
what material effects any potential changes will have on the Company.  To
mitigate such risk, during 1996, the Company expanded into additional states.

The Company markets its insurance policies through approximately 200 independent
insurance agencies and brokerage firms, many of which specialize in workers'
compensation insurance.  The independent insurance agencies and brokerage firms
that sell the Company's insurance policies also represent other insurance
companies.  The Company pays such independent insurance agents and brokers a
commission consistent with workers' compensation industry practices.

                                       47
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

PAC RIM HOLDING CORPORATION AND SUBSIDIARIES

NOTE 11-DISCLOSURE OF CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES - Continued


At December 31, 1996, 35% of the Company's premiums in force had been generated
by its five highest producing agencies and brokerage firms, two of which
accounted for 17% of total premiums in force at that date.  The Company believes
that it has favorable operating relationships with these agencies and brokerage
firms.  Recent market conditions have resulted in higher average commissions
being paid to agencies and brokerage firms of the Company.  No agency or
brokerage firm is obligated to place insurance policies with the Company, and
the Company is not obligated to accept business submitted from any agency or
brokerage firm.  The loss of any one or more of these agencies or brokerage
firms could materially affect the Company's business.

Pervasiveness of Estimates
--------------------------

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

Loss and Loss Adjustment Expenses/Reinsurance
---------------------------------------------

Reserves for losses and LAE are established by examining the facts of reported
claims and adjusted in the aggregate for ultimate loss expectations, based upon
historical experience patterns and current economic trends. Due to these
factors, among others, the process cannot provide an exact forecast of future
payments. Rather, it produces a best estimate of liability as of a certain date.
Management believes the reserves for loss and loss adjustment expenses
established are adequate, and the associated estimate of reinsurance recoverable
is reasonable. While the eventual ultimate liability and reinsurance recoverable
may differ from the current estimates, management does not believe that the
difference will have a material effect, either adversely or favorably, on the
Company's financial position and results of operations.

Liquidity and Capital Resources
-------------------------------

In August 1994, the Company completed a capital-raising transaction and issued
$20,000,000 of convertible debentures to PRAC, Ltd. ("PRAC").  As a result of
the capital transaction, the Company increased the policyholders' surplus of
Pacific Rim Assurance by $16,800,000.  At December 31, 1996, the statutory-basis
policyholders surplus of Pacific Rim Assurance was $27,215,652.  Pacific Rim
Assurance's ratio of net premiums written to policyholders' surplus for 1996, as
determined on the basis of statutory accounting practices, was 3.22 to 1.

Insurance companies are required to maintain on deposit with the Regulatory
Agencies deposits for the benefit of policyholders, in an amount prescribed by
regulations.  At December 31, 1996, the Company was in good standing with all
Departments of Insurance with respect to its deposit requirements, maintaining
securities with a total fair value of $105,301,000 on deposit with authorized
depositories in various states.

The Company's present policyholders surplus is not adequate to sustain 1996
premium volume at a leverage ratio of 3 to 1.  Concerns regarding the financial
strength of the Company could adversely affect the Company's relationships with
its policyholders, agents and brokers, reinsurers, and regulators.  On February
17, 1997, the Company executed the Amended Agreement with Superior.  The Company
believes that obtaining regulatory and shareholder approval for, and completing
the pending merger with Superior, which contemplates the contribution of
additional capital, will restore confidence in Pacific Rim Assurance and enable
it to support its present operations and moderate growth  in premium volume for
the foreseeable future.

In the event that the Company is unable to complete the pending merger with
Superior or raise additional capital from another party, a reduction in premium
writings might be necessary, in order to meet regulatory leverage guidelines.
If such premium reduction is necessary, the Company would have to substantially
alter the nature and scope of its operations.  Such changes might include staff
and expense reductions, a change in the level of service provided to
policyholders, and a change in the number and type of policyholders and agents
with whom it currently does business.  In addition, the Company likely would 
seek capital from other sources.  No assurance can be given that such a plan
can be successfully accomplished.

A workers' compensation insurance company must maintain sufficient liquid assets
to meet its contractual obligations to policyholders, in addition to maintaining
funds to meet ordinary operating expenses.  The Company typically has several
sources of funds to meet obligations, including cash flow from operations,
interest from fixed-income securities, recoveries from reinsurance contracts, as
well as the ability to sell portions of its investment portfolio.  The Company
has an investment portfolio of high quality, highly liquid, U.S. Treasury, other
governmental agency, and corporate obligations.  The Company's cash flows
provided by (used in) operating activities for the years ended December 31,
1996, 1995, and 1994 were $(13,189,000), $(22,819,000), and $15,905,000,
respectively.  In light of the reduced level of premiums currently being
written, due to state-mandated reductions in premium rates, and the repeal of
the minimum rate law, coupled with claim payments required on premiums
previously written, should further reduction in premium be necessary in the
event that the Company is unable to complete the pending acquisition by Superior
or obtain additional capital from another party, it is probable that the Company
will experience a continued period of negative cash flow, until the level of
loss payments decreases to the level proportionate to the level of premiums
collected.

NOTE 12--RELATED PARTY TRANSACTIONS

The Company has a five-year employment contract with its President that expires
on August 16, 1997.  Under the provisions of the contract, the President
receives annual compensation of $400,000 and a possible bonus, based on
achievement by the Company of various earnings-based performance criteria.  The
agreement also provides for the payment of certain other fringe benefits.

Under the previous employment agreement, which expired on August 16, 1994 the
Company loaned to the President $150,000 annually in 1991, 1992, 1993.  As of
December 31, 1993 and 1994, the loan balance was $450,000.  Under the previous
employment agreement, the loan bore interest at 10%.  Under the current
employment agreement, the loan bears interest at 6.3% on the principal amount,
which is secured by the President's pledge of shares of the Company's common
stock, and payable in full by February 16, 1998.  As of December 31, 1996, the
loans are secured by shares of the Company's common stock with a market value
equal to 100% of the principal balance.

The Company has granted the President options to purchase 250,000 shares of the
Company's common stock at an exercise price of $2.75 per share and 250,000
shares at $5.50 per share.

The Company uses the law firm of Barger & Wolen for legal services.  Dennis W.
Harwood is a member of the Company's Board of Directors and Richards D. Barger
is a member of Pacific Rim Assurance's Board of Directors, as well as partners
with Barger & Wolen.  During 1996, the Company paid Barger & Wolen $711,000 for
legal services. The fees paid for these services are charged to the Company at
the normal rates charged to the firm's other clients.

                                       48
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

PAC RIM HOLDING CORPORATION AND SUBSIDIARIES

NOTE 12-RELATED PARTY TRANSACTIONS - Continued


The Company also uses the legal services of The Busch Firm.  Timothy R. Busch,
Chairman of the Company's Board of Directors, is a partner with The Busch Firm.
During 1996, the Company paid the Busch Firm $20,000 for legal services.  The
fees paid for these services are charged to the Company at the normal rates
charged to the firm's other clients.

NOTE 13--401(K) PLAN

The Pacific Rim Assurance Company 401(K) Plan (the "Plan") permits employees of
the Company who attain the age of 21 and complete 30 days of employment to elect
to make tax-deferred contributions of a specified percentage of their
compensation during each year through payroll deductions.  Under the Plan, the
Company has discretion to make additional contributions.  The Company has not
yet made any discretionary employer contributions to the Plan.

                                       49
<PAGE>
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

PAC RIM HOLDING CORPORATION AND SUBSIDIARIES


NOTE 14--QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

The following table sets forth unaudited data regarding operations for each
quarter of 1996 and 1995.  In the  opinion of management, such unaudited data
includes all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the information presented.  The operating results
for any quarter are not necessarily indicative of the operating results for any
future period (in thousands, except per share data).

<TABLE>
<CAPTION>
 
                                                            Quarter Ended
                                                            -------------
                                              Mar 31,    June 30,    Sept 30,    Dec 31,
                                              -------    --------    --------    -------
1996
----
<S>                                           <C>         <C>         <C>       <C>
Net premiums earned                           $18,885     $22,374     $22,156   $ 23,073
 
Net investment income and
 realized investment gains                      1,901       1,793       1,898      3,061 
                                                                                       
 Total revenue                                 20,786      24,169      24,057     26,137
                                                                                       
Income (loss) before income taxes                (798)        173      (4,425)   (10,244)
 
Net income (loss)                                (541)        101      (5,216)   (10,244)
                                                                                     
Primary and fully diluted net income          $ (0.06)    $  0.01     $ (0.55)  $  (1.07)
 (loss) per share

</TABLE> 
<TABLE> 
<CAPTION> 
                                                            Quarter Ended
                                                            -------------
                                              Mar 31,    June 30,    Sept 30,    Dec 31,
                                              -------    --------    --------    -------
1995
----
<S>                                           <C>         <C>         <C>       <C>
Net premiums earned                           $18,242     $20,914     $18,992   $ 17,868
 
Net investment income and
 realized investment gains                      2,097       2,125       2,151      2,169
                                              -------     -------     -------   --------
 Total revenue                                 20,339      23,039      21,143     20,037
 
Income (loss) before income taxes               1,570         491        (868)      (339)
 
Net income (loss)                               1,022         322        (532)      (237)
 
Primary net income (loss) per share           $  0.10     $  0.03     $ (0.06)  $  (0.02)
 
Fully diluted net income (loss) per share     $  0.08     $  0.03     $ (0.06)  $  (0.02)
</TABLE>

The 1995 quarterly per share amounts do not aggregate to the annual net income
per share amounts due to the effect of the warrants issued with the convertible
debenture in August 1994.

                                       50
<PAGE>
 
                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
 


                                           By: /s/ Stanley Braun
                                              -------------------------------
                                           Stanley Braun
                                           President and Chief Executive Officer

Date:  March 4, 1997

Pursuant to the requirements of Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant and in
the capacities indicated on March 4, 1997.

Signature                                             Capacity
---------                                             --------

Principal Executive Officer:


                                                                      
/s/ Stanley Braun                            Director, Chief Executive
------------------------------               Officer and President    
Stanley Braun


Principal Financial Officer:

                                                                         
/s/ Paul W. Craig                            Executive Vice President and
------------------------------               Chief Financial Officer     
Paul W. Craig


Principal Accounting Officer:


/s/ Jonathan T. Wallace                      Controller
------------------------------
Jonathan T. Wallace


/s/ Timothy R. Busch                         Chairman of the Board
------------------------------               of Directors
Timothy R. Busch


/s/ Dennis W. Harwood                        Director
------------------------------
Dennis W. Harwood


/s/ Richard H. Pickup                        Director
------------------------------
Richard H. Pickup


/s/ Carl A. Strunk                           Director
------------------------------
Carl A. Strunk

                                       51
<PAGE>
 
                                 EXHIBIT INDEX
                                                                    Sequentially
Exhibit                                                             Numbered
Number                           Description                        Page
-------                          -----------                        ----------

 3.1    Restated Certificate of Incorporation of the Company          
         (incorporated by reference from Exhibit 17 3.1 to            
         Company's Registration Statement on Form S-1                 
         (File #33-36371) filed August 14, 1990, hereinafter          
         referred to as "Form S-1"). (1)                              
                                                                      
 3.2    Bylaws of the Company (incorporated by reference from         
         Exhibit 3.2 of Form S-1). (1)                                
                                                                      
 3.3    Certificate of Amendment of Restated Certificate of           
         Incorporation of the Company (incorporated by                
         reference from Exhibit 3.3 of Form S-1). (1)                 
                                                                      
 3.4    Amendment to Bylaws (incorporated by reference from           
         Exhibit 3 (ii) - 1 from Form 10-K/A-1 for the year           
         ended December 31, 1993 filed on May 2, 1994).               
                                                                      
 4      Specimen Stock Certificate of the Company (incorporated       
         by reference from Exhibit 4 of Form S-1). (1)                
                                                                      
 5.1    Agreement and Plan of Merger dated September 17, 1996         
         by and between Superior National Insurance Group Inc.;       
         a California corporation, SNTL Acquisition Corp., a          
         Delaware corporation, and Pac Rim Holding Corporation,       
         a Delaware corporation. (3)                                  
                                                                      
 5.2    Press Release dated September 16, 1996. (3)                   
                                                                      
 5.3    Press Release dated September 17, 1996. (3)                   
    
 5.4    Amended and Restated Agreement and Plan of Merger dated
         February 17, 1997 by and between Superior National 
         Insurance Group, Inc.; a California corporation, SNTL
         Acquisition Corp., a Delaware corporation, and Pac Rim
         Holding Corporation, a Delaware corporation. (4)

 5.5    Press Release dated February 18, 1997 (4)

10.1    Workers' Compensation Quota Share Reinsurance Agreement       
         between The Pacific Rim Assurance Company and                
         Constitution Reinsurance Corporation effective 
         October 1, 1989 (incorporated by reference from 
         Exhibit 10.1 of Form S-1). (1)
                                                                      
10.2    Endorsement No. 1 to Workers' Compensation Quota Share        
         Reinsurance Agreement effective October 1, 1989              
         (incorporated by reference from Exhibit 10.2 of              
         Form S-1). (1)                                               
                                                                      
10.3    Endorsement No. 2 to Workers' Compensation Quota Share        
         Reinsurance Agreement effective January 1, 1990              
         (incorporated by reference from Exhibit 10.3 of              
         Form S-1). (1)                                               
                                                                      
10.4    Agreement of Reinsurance No. 7310 (First Excess of            
         Loss Agreement) effective October 15, 1987 between           
         General Reinsurance Corporation and Pacific Rim              
         Assurance Company, with all Endorsements currently           
         for $4,800,000 excess of $200,000 (incorporated by           
         reference from Exhibit 10.4 of Form S-1). (1)                
                                                                      
10.5    Willcox Incorporated Reinsurance Intermediaries               
         Cover No. 08-09-0012 documenting Worker's Compensation       
         Second Excess of Loss Reinsurance Agreement, effective       
         October 15, 1989, for $15,000,000 excess of $5,000,000       
         (incorporated by reference from Exhibit 10.5 of              
         Form S-1). (1)                                               
                                                                      
10.6    Willcox Incorporated Reinsurance Intermediaries               
         Cover No. 01-89-0334 documenting Worker's Compensation       
         Third Excess of Loss Reinsurance Agreement, effective        
         October 15, 1989, for $15,000,000 excess of $20,000,000      
         (incorporated by reference from Exhibit 10.6 of              
         Form S-1). (1)                                                

                                       52
<PAGE>
 
                                                                 Sequentially
Exhibit                                                          Numbered
Number                            Description                    Page
-------                           -----------                    ----------
        
10.7     Willcox Incorporated Reinsurance Intermediaries 
          Cover No. 01-89-0400 documenting Worker's Compensation 
          Fourth Excess of Loss Reinsurance Agreement, effective 
          October 15, 1989, for $15,000,000 excess of $35,000,000 
          (incorporated by reference from Exhibit 10.7 of 
          Form S-1). (1)
        
10.8     1988 Stock Option Plan and forms of stock option 
          agreements, as amended (incorporated by reference from 
          Exhibit 10.8 of Form S-1). (1)
        
10.9     1987 Stock Option Plan and forms of stock option 
          agreements (incorporated by reference from Exhibit 10.9 
          of Form S-1). (1)
        
10.10    1987 Stock Purchase Plan (incorporated by reference from 
          Exhibit 10.10 of Form S-1). (1)
        
10.11    The Pacific Rim Assurance Company 401(K) Plan 
          (incorporated by reference from Exhibit 10.11 of 
          Form S-1). (1)
        
10.12    Employment Agreement dated as of January 1, 1991 
          between Pac Rim Holding Corporation and Stanley Braun 
          (incorporated by reference from Exhibit 10 of 
          Form 8-K filed October 15, 1991). (1)
        
10.13    $5,000,000 Life Insurance Policy issued by Valley Forge 
          Life Insurance Company, insuring Stanley Braun, 
          effective November 15, 1989 (incorporated by reference 
          from Exhibit 10.13, of Form S-1). (1)
        
10.14    $1,700,000 Adjustable Life Insurance Policy issued by 
          American General Life Insurance Company of Delaware, 
          insuring Stanley Braun, effective March 23, 1988 
          (incorporated by reference from Exhibit 10.14 of 
          Form S-1). (1)
        
10.15    $2,000,000 Adjustable Life Insurance Policy issued by 
          American General Life Insurance Company of Delaware, 
          insuring Stanley Braun, effective October 27, 1987 
          (incorporated by reference from Exhibit 10.15 of 
          Form S-1). (1)
        
10.16    Office Building Lease dated January 4, 1989 between 
          the Company, Pacific Rim Assurance Company and 16030 
          Associates for office space in Encino, California 
          (incorporated by reference from Exhibit 10.16 of 
          Form S-1). (1)
        
10.17    Sublease dated January 5, 1989 between Coastline 
          Financial Corp. and Pacific Rim Assurance Company for 
          office space in Encino, California (incorporated by 
          reference from Exhibit 10.17 of Form S-1). (1)
        
10.18    Office Building Lease dated September 30, 1988 between 
          The Pacific Rim Assurance Company and The Austin Family 
          Trust dated November 6, 1980 for office space in 
          San Bernardino, California (incorporated by reference 
          from Exhibit 10.18 of Form S-1). (1)
        
10.19    Corporate Loan dated January 11, 1989 in the amount of 
          $75,000 executed by Stanley Braun in favor of the 
          Company (incorporated by reference from 
          Exhibit 10.19 of Form S-1). (1)
        
10.20    Investment Advisory Agreement dated December 7, 1989 
          between Joel R. Mogy Investment Counsel Inc. and 
          The Pacific Rim Assurance Company (incorporated by 
          reference from Exhibit 10.20 of Form S-1). (1)

                                       53
<PAGE>
 
                                                                  Sequentially
Exhibit                                                           Numbered
Number                            Description                     Page
-------                           -----------                     ----------

10.21     Depository Agreement dated September 22, 1987 between 
           City National Bank and The Pacific Rim Assurance 
           Company (incorporated by reference from Exhibit 10.21 
           of Form S-1). (1) March 1, 1990 (incorporated by 
           reference from Exhibit 10.23 of Form S-1). (1)

10.22     Cover Note and letters documenting Directors and 
           Officers and Company Reimbursement Indemnity Policies, 
           effective June 19, 1990, for $1,000,000 and $4,000,000 
           excess of $1,000,000 (incorporated by reference from 
           Exhibit 10.22 of Form S-1). (1)

10.23     The Pacific Rim Assurance Company Flexible Benefits  
           Plan No. 95-4111441, effective January 1, 1990.

10.24     Office Space Lease dated February 11, 1991 between 
           Rancon Realty Fund V and The Pacific Rim Assurance 
           Company (incorporated by reference from 
           Exhibit 10.24 of Form S-1). (1)

10.25     Obligatory Reinsurance Agreement effective 
           August 1, 1989 between Hamilton Management, Ltd. and 
           The Pacific Rim Assurance Company (incorporated by 
           reference from Exhibit 10.25, of Form S-1). (1)

10.26     Cover note effective October 15, 1989 among American 
           Accident Reinsurance Group, CIGNA Reinsurance 
           Corporation and The Pacific Rim Assurance Company 
           (incorporated by reference from Exhibit 10.26 of 
           Form S-1). (1)

10.27     Industrial Aid Aviation/Land Travel Hazard Workers' 
           Compensation Excess of Loss Reinsurance Agreement 
           effective October 15, 1989 between American Accident 
           Reinsurance Group and The Pacific Rim Assuranc
           Company (incorporated by reference from Exhibit 10.27 
           of Form S-1). (1)

10.28     Amendment dated November 1, 1990 to Investment 
           Advisory Agreement between Joel R. Mogy Investment 
           Counsel Inc. and Pacific Rim Assurance Company 
           (incorporated by reference from Exhibit 10.28 of
           Form S-1). (1)

10.29     Willcox Incorporated Reinsurance Intermediaries 
           Cover No. 08-90-0012 documenting Workers' Compensation 
           Second Excess of Loss Reinsurance Agreement, effective 
           October 15, 1990, for $15,000,000 excess of $5,000,000 
           (incorporated by reference from Exhibit 10.29 of 
           Form S-1). (1)

10.30     Willcox Incorporated Reinsurance Intermediaries 
           Cover No. 08-90-0022 documenting Workers' Compensation 
           Third Excess of Loss Reinsurance Agreement, effective 
           October 15, 1990, for $15,000,000 excess of $20,000,000 
           (incorporated by reference from Exhibit 10.30 of 
           Form S-1). (1)

10.31     Willcox Incorporated Reinsurance Intermediaries 
           Cover No.08-90-0023 documenting Workers' Compensation 
           Fourth Excess of Loss Reinsurance Agreement, effective 
           October 15, 1990, for $15,000,000 excess of $35,000,000 
           (incorporated by reference from Exhibit 10.31 of 
           Form S-1). (1)

10.32     Industrial Aid Aviation/Land Travel Hazard Workers' 
           Compensation Excess of Loss Reinsurance Agreement 
           effective October 15, 1990 between American Accident 
           Reinsurance Group and The Pacific Rim Assurance Company 
           (incorporated by reference from Exhibit 10.32 of 
           Form S-1). (1)

                                       54
<PAGE>
 
                                                                    Sequentially
Exhibit                                                             Numbered
Number                           Description                        Page
-------                          -----------                        ----------

10.33    Willcox Incorporated Reinsurance Intermediaries             
          Cover No. 08-90-0024 documenting Per Person                
          Occupational Accident Excess of Loss Reinsurance           
          Agreement, effective October 15, 1990, (incorporated by    
          reference from Exhibit 10.33 of Form S-1). (1)             
                                                                     
10.34    Letter of confirmation dated February 25, 1991              
          regarding placement of Workers' Compensation               
          Catastrophe Excess of Loss Reinsurance, effective          
          October 15, 1990, for $20,000,000 excess of $50,000,000    
          (incorporated by reference from Exhibit 10.34 of           
          Form S-1). (1)                                             
                                                                     
10.35    Amendment No. 1 dated as of January 1, 1992 to              
          Employment Agreement between Pac Rim Holding Corporation    
          and Stanley Braun. (1)                                     
                                                                     
10.36    Willcox Incorporated Reinsurance Intermediaries             
          Cover No. 01-88-0400 documenting Workers' Compensation     
          Second Excess of Loss Reinsurance, effective               
          October 15, 1988, for $10,000,000 excess of $10,000,000    
          (incorporated by reference from Exhibit 10.36 of           
          Form S-1). (1)                                             
                                                                     
10.37    Willcox Incorporated Reinsurance Intermediaries             
          Cover No. 01-87-0335 Industrial Aid Aviation/Land Travel    
          Hazard Workers' Compensation Excess of Loss Reinsurance,    
          effective October 15, 1987, for $3,750,000 excess of       
          $250,000 (incorporated by reference from Exhibit 10.37     
          Form S -1). (1)                                            
                                                                     
10.38    Willcox Incorporated Reinsurance Intermediaries             
          Cover No. 01-88-0335 documenting Industrial Aid            
          Aviation/Land Travel Hazard Workers' Compensation Excess    
          of Loss Reinsurance, effective October 15, 1988, for       
          $3,750,000 excess of $250,000 (incorporated by             
          reference from Exhibit 10.38 of Form S-1). (1)             
                                                                     
10.39    Willcox Incorporated Reinsurance Intermediaries             
          Cover No. 01-87-0334 documenting Workers' Compensation     
          Excess of Loss Reinsurance, effective October 15, 1987,    
          for $10,000,000 excess of $5,000,000 (incorporated         
          by reference from Exhibit 10.39 of Form S-1). (1)          
                                                                     
10.40    Willcox Incorporated Reinsurance Intermediaries             
          Cover No. 01-88-0334 documenting Workers' Compensation     
          First Excess of Loss Reinsurance, effective                
          October 15, 1988, for $5,000,000 excess of $5,000,000      
          (incorporated by reference from Exhibit 10.40 of           
          Form S-1). (1)                                             
                                                                     
10.41    Industrial Aid Aviation/Land Travel Hazard Workers'         
          Compensation Excess of Loss Reinsurance Agreement,         
          effective October 15, 1987, between American Accident      
          Reinsurance Group and The Pacific Rim Assurance Company    
          (incorporated by reference from Exhibit 10.41 of           
          Form S-1). (1)                                             
                                                                     
10.42    Workers' Compensation Excess of Loss Reinsurance            
          Agreement, effective October 15, 1987, between             
          Pinehurst Accident Reinsurance Group and The               
          Pacific Rim Assurance Company (incorporated by             
          reference from Exhibit 10.42 of Form S-1). (1)             
                                                                     
10.43    Letters of confirmation of amendment of Quota Share         
          Reinsurance Treaty (incorporated by reference from         
          Exhibit 10.43 of Form S-1). (1)                            
                                                                     
10.44    Office building lease dated January 21, 1992 between        
          The Pacific Rim Assurance Company and Trizec Warner, Inc.    
          for office space in Woodland Hills, California, and        
          related Guaranty of Pac Rim Holding Corporation. (1)        

                                       55
<PAGE>
 
                                                                    Sequentially
Exhibit                                                             Numbered
Number                           Description                        Page
-------                          -----------                        ----------

10.45    Willcox Incorporated Reinsurance Intermediaries                 
          Cover No. 08-91-0033 documenting Workers' Compensation         
          First Excess of Loss Reinsurance, effective                    
          October 15, 1991, for $4,750,000 excess of $250,000. (1)       
                                                                         
10.46    Willcox Incorporated Reinsurance Intermediaries                 
          Cover No. 08-91-0012 documenting Workers' Compensation         
          Second Excess of Loss Reinsurance Agreement, effective         
          October 15, 1991, for $15,000,000 excess of                    
          $5,000,000. (1)                                                
                                                                         
10.47    Willcox Incorporated Reinsurance Intermediaries                 
          Cover No. 08-91-0022 documenting Workers' Compensation         
          Third Excess of Loss Reinsurance Agreement, effective          
          October 15, 1991, for $15,000,000 excess of $20,000,000. (1)   
                                                                         
10.48    Guy Carpenter & Company, Inc. Cover No. P3791-2                 
          documenting Workers' Compensation Fourth Excess of             
          Loss Reinsurance Agreement, effective October 15, 1991,        
          for $15,000,000 excess of $35,000,000. (1)                     
                                                                         
10.49    Guy Carpenter & Company, Inc. Cover No. P3791-1 documenting     
          Workers' Compensation Fifth Excess of Loss Reinsurance         
          Agreement, effective October 15, 1991, for $30,000,000         
          excess of $50,000,000. (1)                                     
                                                                         
10.50    Industrial Aid Aviation/Land Travel Hazard Workers'             
          Compensation Excess of Loss Reinsurance Agreement              
          effective October 15, 1991 between American Accident           
          Reinsurance Group and The Pacific Rim Assurance Company. (1)   
                                                                         
10.51    Willcox Incorporated Reinsurance Intermediaries                 
          Cover No. 08-91-0024 documenting Per Person Occupational       
          Accident Excess of Loss Reinsurance Agreement, effective       
          October 15, 1991. (1)                                          
                                                                         
10.52    Workers' Compensation Quota Share Reinsurance Agreement         
          effective October 1, 1990 between The Pacific                  
          Rim Assurance Company and Constitution Reinsurance             
          Corporation and Endorsement Number 1 thereto. (1)              
                                                                         
10.53    Guy Carpenter & Company, Inc. Cover, effective                  
          October 15, 1990, for $20,000,000 excess of $50,000,000. (1)   
                                                                         
10.54    Forms of Indemnity Agreements (incorporated by reference        
          from Exhibit 28.1 of Form S-1). (1)                            
                                                                         
10.55    Second Amendment to Lease dated February 22, 1991 among         
          The Pacific Rim Assurance Company and 16030 Associates,        
          a Joint Venture. (1)                                           
                                                                         
10.56    Security Agreement (Stock Pledge) dated as of                   
          February 25, 1992 between Stanley Braun and                    
          Pac Rim Holding Corporation. (1)                               
                                                                         
10.57    Aggregate Excess of Loss Reinsurance Agreement,                 
          Reference No. 01-92-0641, effective July 1, 1992,              
          between Underwriters Reinsurance Company and                   
          The Pacific Rim Assurance Company. (1)                         
                                                                         
10.58    Workers' Compensation Quota Share Reinsurance Agreement         
          effective October 1, 1992, between The Pacific Rim             
          Assurance Company and Constitution Reinsurance                 
          Corporation. (1)                                               
                                                                         
10.59    Addendum No. 2 dated as of September 2, 1992 of                 
          Office Building Lease between The Pacific Rim Assurance        
          Company and Trizec Warner, Inc. (1)                             

                                       56
<PAGE>
 
                                                                    Sequentially
Exhibit                                                             Numbered
Number                          Description                         Page
-------                         -----------                         ----------

10.60    Office Building Lease dated October 2, 1992, between The               
          Pacific Rim Assurance Company and Richard V.                          
          Gunner & George Andros, for office space in Fresno,                   
          California. (1)                                                       
                                                                                
10.61    Willcox Incorporated Reinsurance Intermediaries                        
          Cover No. 08-92-0033 documenting Workers' Compensation                
          First Excess of Loss Reinsurance, effective                           
          October 15, 1992, for $4,750,000 excess of $250,000. (1)              
                                                                                
10.62    Willcox Incorporated Reinsurance Intermediaries                        
          Cover No. 08-92-0012 documenting Workers' Compensation                
          Second Excess of Loss Reinsurance Agreement, effective                
          October 15, 1992, for $15,000,000 excess of $5,000,000. (1)           
                                                                                
10.63    Guy Carpenter & Company, Inc. Cover No. 
          3791-00-0001-00-92-03-03-00 documenting Workers' 
          Compensation Third Excess of Loss Reinsurance Agreement, 
          effective October 15, 1992, for $15,000,000 excess of 
          $20,000,000. (1)                            
                                                                                
10.64    Guy Carpenter & Company, Inc. Cover No. 
          3791-00-0001-00-92-03-04-00 documenting Worker's 
          Compensation Fourth Excess of Loss Reinsurance Agreement, 
          effective October 15, 1992, for $15,000,000 excess of 
          $35,000,000. (1)                            
                                                                                
10.65    Guy Carpenter & Company, Inc. Cover No. 
          3791-00-0001-00-92-03-05-00 documenting Workers' 
          Compensation Fifth Excess of Loss Reinsurance Agreement, 
          effective October 15, 1992, for $30,000,000 excess of 
          $50,000,000. (1)                            
                                                                                
10.66    Guy Carpenter & Company, Inc. Cover No. 
          3791-00-0004-00-92-03-00-00 documenting Industrial Aid 
          Aviation/Land Travel Hazard Workers' Compensation Excess 
          of Loss Reinsurance  Agreement effective October 15, 1992 
          between American Accident Reinsurance Group and The Pacific 
          Rim Assurance Company. (1)
                                                                                
10.67    Guy Carpenter & Company, Inc. Cover No. 
          3791-00-0003-00-92-03-00-00 documenting Per Person 
          Occupational Accident Excess of Loss Reinsurance Agreement, 
          effective October 15, 1992. (1)
                                                                                
10.68    Workers' Compensation Quota Share Reinsurance Agreement                
          effective October 1, 1992, between The Pacific Rim                    
          Assurance Company and Constitution Reinsurance Corporation            
          and Endorsement Number 1 thereto. (1)                                 
                                                                                
10.69    Aggregate Excess of Loss Reinsurance Agreement,                        
          Reference No. 01-92-0641, effective July 1, 1992, between             
          Underwriters Reinsurance Company and The Pacific                      
          Rim Assurance Company and Endorsement Number 1 thereto.(1)            
                                                                                
10.70    Investment Advisory Agreement dated April 1, 1993                      
          between Conning and Company and The Pacific Rim Assurance             
          Company. (1)                                                          
                                                                                
10.71    Cover Note and letters documenting Directors and Officers              
          and Company Reimbursement Indemnity Policies, effective               
          March 4, 1991, for $5,000,000 and $20,000,000 excess                  
          of $5,000,000. (2)                                                    
                                                                                
10.72    Willcox Incorporated Reinsurance Intermediaries                        
          Cover No. 08-93-0033 documenting Workers' Compensation                
          First Excess of Loss Reinsurance, effective                           
          October 15, 1993, for $4,650,000 excess of $350,000. (1)

                                       57
<PAGE>
 
                                                                    Sequentially
Exhibit                                                             Numbered    
Number                             Description                      Page        
-------                            -----------                      ----------  

10.73    Willcox Incorporated Reinsurance Intermediaries                       
          Cover No. 08-93-0012 documenting Workers' Compensation               
          Second Excess of Loss Reinsurance Agreement, effective               
          October 15, 1993, for $15,000,000 excess of $5,000,000. 
          (1)          
                                                                               
10.74    Guy Carpenter & Company, Inc. Cover No. 
          3791-00-0001-00-93-03-03-00 documenting Workers' 
          Compensation Third Excess of Loss Reinsurance Agreement, 
          effective October 15, 1993, for $15,000,000 excess of 
          $20,000,000. (1)                           
                                                                               
10.75    Guy Carpenter & Company, Inc. Cover No. 
          3791-00-0001-00-93-03-04-00 documenting Workers' 
          Compensation Fourth Excess of Loss Reinsurance Agreement, 
          effective October 15, 1993, for $15,000,000 excess of 
          $35,000,000. (1)                           
                                                                               
10.76    Guy Carpenter & Company, Inc. Cover No. 
          3791-00-0001-00-93-03-05-00 documenting Workers' 
          Compensation Fifth Excess of Loss Reinsurance Agreement, 
          effective October 15, 1993, for $30,000,000 excess of 
          $50,000,000. (1)                           
                                                                               
10.77    Guy Carpenter & Company, Inc. documenting Industrial Aid              
          Aviation/Land Travel Hazard Workers' Compensation Excess             
          of Loss Reinsurance Agreement effective October 15, 1993             
          between American Accident Reinsurance Group and                      
          The Pacific Rim Assurance Company. (1)                               
                                                                               
10.78    Guy Carpenter & Company, Inc. Cover No. 
          3791-00-0003-00-93-03-00-00 documenting Per Person 
          Occupational Accident Excess of Loss Reinsurance 
          Agreement, effective October 15, 1993. (1)
                                                                               
10.79    Sublease dated February 3, 1994 between The Pacific Rim 
          Assurance Company and the Federal Emergency Management 
          Agency, for office space in Woodland Hills, California. (1)
                                                                               
10.80    Sublease dated February 25, 1994 between The Pacific                  
          Rim Assurance Company and The Money Store, for office                
          space in Woodland Hills, California. (1)                             
                                                                               
10.81    Amendment to Employment Agreement and Consulting Agreement            
          dated as of January 1, 1993 between Pac Rim Holding                  
          Corporation and Stanley Braun. (1)                                   
                                                                               
10.82    Lease Amendment #1, dated April 1, 1993, to the Office                
          Property Lease between Rancon Realty Fund V, and                     
          The Pacific Rim Assurance Company. (1)                               
                                                                               
10.83    Proxy Statement of Pac Rim Holding Corporation dated                  
          July 25, 1994. (1)                                                   
                                                                               
10.84    Proxy Supplement of Pac Rim Holding Corporation dated                 
          August 4, 1994. (1)                                                  
                                                                               
10.85    Commutation of the Aggregate Excess of Loss Reinsurance               
          Agreement between The Pacific Rim Assurance Company                  
          and Underwriters Reinsurance Company. (1)                            
                                                                               
10.86    Agreement to purchase Series A Convertible Debentures                 
          and Series, 1, 2 and 3 Detachable Warrants. (1)                      
                                                                               
10.87    Commutation of the Workers Compensation Quota Share                   
          Reinsurance Agreement between The Pacific Rim Assurance
          Company and Constitution Reinsurance Corporation. (1)                 

                                       58
<PAGE>
 
                                                                    Sequentially
Exhibit                                                             Numbered
Number                             Description                      Page
-------                            -----------                      ----------

10.88    Willcox Incorporated Reinsurance Intermediaries            
          Cover No. 08-94-0033 documenting Workers' Compensation
          First Excess of Loss Reinsurance, effective                          
          October 15, 1994, for $4,650,000 excess of $350,000. (1)             
                                                                               
10.89    Willcox Incorporated Reinsurance Intermediaries                       
          Cover No. 08-94-0012 documenting Workers' Compensation               
          Second Excess of Loss Reinsurance Agreement, effective               
          October 15, 1994, for $15,000,000 excess of $5,000,000. 
          (1)          
                                                                               
10.90    Workers' Compensation Third Excess of Loss Reinsurance                
          Agreement, No. 3791-00-0001-00-94-03-03-00 effective                 
          October 15, 1994, for $15,000,000 excess of $20,000,000. 
          (1)         
                                                                               
10.91    Workers' Compensation Fourth Excess of Loss Reinsurance               
          Agreement No. 3791-00-0001-00-94-03-04-00 documenting,               
          effective October 15, 1994, for $15,000,000 excess                   
          of $35,000,000. (1)                                                  
                                                                               
10.92    Workers' Compensation Fifth Excess of Loss Reinsurance 
          Agreement, No. 3791-00-0001-00-94-03-05-00 documenting, 
          effective October 15, 1994, for $30,000,000 excess of 
          $50,000,000. (1)         
                                                                               
10.93    Per Person Occupational Accident Excess of Loss Reinsurance
          Contract, No. 3791-00-0003-00-94-03-00-00, effective                 
          October 15, 1994. (1)                                                
                                                                               
10.94    Industrial Aid Aviation/Land Travel Hazard Reinsurance 
          Workers' Compensation Excess of Loss Contract No. 
          3791-00-0004-00-94-03-00-00, effective October 15, 1994.
          (1)                                                
                                                                               
10.95    Sublease dated May 1, 1994 between The Pacific Rim                    
          Assurance Company and Group Data Services, Incorporated. 
          (1)         
                                                                               
10.96    Office lease between L.A.X. Business Center, and                      
          Pac Rim Holding Corporation dated June 1, 1995. (1)                  
                                                                               
10.97    Certificate of Authority from Department of Insurance, 
          State of Arizona to transact the business of Casualty 
          With Workers' Compensation Insurance. (1)
                                                                               
10.98    Certificate of Authority from Department of Insurance,                
          State of Texas to transact the business of casualty                  
          with workers' compensation insurance. (1)                            
                                                                               
10.99    Sublease dated August 15, 1995 between The Pacific Rim                
          Assurance Company and the General Services                           
          Administration. (1)                                                  
                                                                               
10.100   Agreement between the Pacific Rim Assurance Company and               
          MetraComp, Inc. dated August 17, 1995 to provide managed             
          care services. (1)                                                   
                                                                               
10.101   Interest and Liabilities Contract for Workers' Compensation           
          Quota Share Reinsurance Agreement with Reliance                      
          National Insurance Company, No. 08-95-0057, effective                
          April 1, 1995. (1)                                                   
                                                                               
10.102   Underwriting Facility Agreement dated April 1, 1995, 
          between Reliance National Risk Specialists and the Pacific 
          Rim Assurance Company. (1)

                                       59
<PAGE>
 
                                                                    Sequentially
Exhibit                                                             Numbered
Number                             Description                      Page
-------                            -----------                      ----------

10.103   Workers' Compensation Quota Share Retrocessional Agreement            
          with Allstate Insurance Company, No. 08-95-0058,                     
          effective April 1, 1995. (1)                                         
                                                                               
10.104   Willcox Incorporated Reinsurance Intermediaries                       
          Cover No. 08-95-0033 documenting Workers' Compensation               
          First Excess of Loss Reinsurance, effective                          
          October 15, 1995, for $4,650,000 excess of $350,000. (1)             
                                                                               
10.105   Willcox Incorporated Reinsurance Intermediaries                       
          Cover No. 08-95-0012 documenting Workers' Compensation               
          Second Excess of Loss Reinsurance Agreement, effective               
          October 15, 1995, for $15,000,000 excess of $5,000,000. 
          (1)          
                                                                               
10.106   Willis Faber North America Reinsurance Intermediaries                 
          Cover No. 38450-950 documenting Workers' Compensation                
          Third Excess of Loss Reinsurance Agreement, effective                
          October 15, 1995, for $15,000,000 excess of $20,000,000. 
          (1)         
                                                                               
10.107   Willis Faber North America Reinsurance Intermediaries                 
          Cover No. 38451-950 documenting Workers' Compensation                
          Fourth Excess of Loss Reinsurance Agreement, effective               
          October 15, 1995, for $15,000,000 excess of $35,000,000. 
          (1)         
                                                                               
10.108   Willis Faber North America Reinsurance Intermediaries                 
          Cover No. 38452-950 documenting Workers' Compensation                
          Fifth Excess of Loss Reinsurance Agreement, effective                
          October 15, 1995, for $30,000,000 excess of $50,000,000. 
          (1)         
                                                                               
10.109   Willis Faber North America Reinsurance Intermediaries                 
          Cover No. 38453-950 documenting Per Person Occupational              
          Accident Excess of Loss Reinsurance Contract, effective              
          October 15, 1995. (1)                                                
                                                                               
10.110   Willis Faber North America Reinsurance Intermediaries                 
          Cover No. 38454-950 documenting Industrial Aid                       
          Aviation/Land Travel Hazard Reinsurance Workers'                     
          Compensation Excess of Loss Contract, effective                      
          October 15, 1995. (1)                                                
                                                                               
10.111   Willis Faber North America Reinsurance Intermediaries                 
          Cover No. 38455-950 documenting Additional Land Travel               
          Hazard Excess of Loss Reinsurance Contract, effective                
          October 15, 1995. (1)                                                
                                                                               
10.112   Sales, License and Service Agreement dated November 14, 
          1995 between Macess Corporation and The Pacific Rim 
          Assurance Company for equipment purchases, software 
          license and professional prepaid support and software 
          maintenance. (1)           
                                                                               
10.113   Master Equipment Lease dated November 15, 1995 between 
          General Electric Capital Computer Leasing Corporation 
          and The Pacific Rim Assurance Company for the lease of 
          computer equipment and software. (1)
                                                                               
10.114   Certificate of Authority from the State of Georgia Office 
          of Commissioner of Insurance, to transact the business 
          of Property and Casualty (including Workers' 
          Compensation). (1)
                                                                               
10.115   Quota Share reinsurance agreement between TIG Insurance               
          Company and The Pacific Rim Assurance Company, a 
          subsidiary of Pac Rim Holding Corporation, dated April 1, 
          1996. (2)

                                       60
<PAGE>
 
                                                                    Sequentially
Exhibit                                                             Numbered
Number                             Description                      Page
-------                            -----------                      ----------

10.116   Producer agreement between Regional Benefits Insurance                
          Services, a subsidiary of Pac Rim Holding Corporation,               
          and Hull & Co., Inc., dated May 15, 1996. (2)                        
                                                                               
10.117   Producer agreement between Regional Benefits Insurance                
          Services, a subsidiary of Pac Rim Holding Corporation,               
          and Gulf Atlantic Management Group, Inc., dated                      
          May 15, 1996. (2)                                                    
                                                                               
10.118   Office lease between Gulf Atlantic Investment Group, Inc.             
          and Regional Benefits Insurance Services, Inc., a 
          subsidiary of Pac Rim Holding Corporation, dated May 20, 
          1996. (2)              
                                                                               
11       Computation of Per Share Earnings.                                    
                                                                               
22       Subsidiary of the Company (incorporated by reference from             
          Exhibit 22 of Form S-1). (1)                                         
                                                                               
27       Financial Data Schedule

27.1     Agreement to Purchase Series A Convertible Debentures and             
          Series 1, 2, and 3 Detachable Warrants. (1)                          
                                                                               
27.2     Press Release dated April 18, 1994. (1)                               
                                                                               
27.3     Amendment #1 to Agreement to Purchase Series A Convertible
          Debentures and Series 1, 2, and 3 Detachable Warrants. (1)           
                                                                               
29.3     Information from reports furnished to state insurance                 
          regulatory authorities for the year ended December 31, 
          1996.          


(1) Incorporated by reference from the Exhibits to the Registrant's 
    Annual Report on Form 10-K, for the year ended December 31, 1995.

(2) Previously filed with the Registrant's Quarterly Report on 
    Form 10-Q, for the quarter ended June 30, 1996.

(3) Previously filed with the Registrant's Report on Form 8-K dated 
    October 2, 1996, reporting on Item 5, Other Events, the Agreement 
    and Plan of Merger with Superior National Insurance Group, Inc. 
    and SNTL Acquisition Corp.

(4) Previously filed with the Registrant's Report on Form 8-K dated
    March 4, 1997, reporting on Item 5, Other Events, the Amended and
    Restated Agreement and Plan of Merger with Superior National 
    Insurance Group, Inc. and SNTL Acquisition Corp.

                                       61
<PAGE>
 
                                                                     SCHEDULE II
                 PAC RIM HOLDING CORPORATION (PARENT COMPANY)
                 CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                            (Amounts in Thousands)
<TABLE>
<CAPTION>
 
                                                             December 31,
                                                        --------------------
                                                           1996         1995
                                                           ----         ----
<S>                                                       <C>          <C>
Balance Sheet
  Assets
  Investments                                             $   513      $ 1,067
  Unrealized gain (loss)                                                     1
  Cash                                                        679           14
  Investment in subsidiary                                 44,418       60,181
  Other assets                                              2,008        2,163
                                                          -------      -------
                                                          $47,618      $63,426
                                                          =======      =======
Liabilities and Stockholders' Equity
  Other liabilities                                       $19,846      $19,271
  Stockholders' equity                                     27,772       44,155
                                                          -------      -------
                                                          $47,618      $63,426
                                                          =======      =======
 
                                                     Year Ended December 31,
                                                 -----------------------------
                                                 1996        1995        1994
                                                 ----        ----        ----
Statements of Operations
------------------------
  Investment income                           $  1,144     $    94     $   622
  Expenses                                       2,084       2,464       1,663
                                              --------     -------     -------
  Loss before equity in earnings of
   subsidiary, and income taxes                   (940)     (2,370)     (1,041)
Income tax benefit                                            (472)       (574)
                                               -------     -------     -------
  Loss before equity in earnings of
   subsidiary                                     (940)     (1,898)       (467)
Equity in earnings (losses) of subsidiary      (14,960)      2,473       1,625
                                              --------     -------     -------
  Net income (loss)                           $(15,900)    $   575     $ 1,158
                                              ========     =======     =======
 
Statements of Cash Flows
------------------------
  Operating Activities:
  Loss before equity in earnings of
   subsidiary                                   $ (940)    $(1,898)    $  (467)
  Depreciation and amortization                    739         706         257
  Changes in other assets and other
   liabilities                                     181          17        (150)
  Adjustment for prior federal income taxes        133                     220
                                                ------     -------    --------
  Net cash provided by (used in) operating
   activities                                      113      (1,175)       (140)
 
Investing Activities:
  Investment in subsidiary                                             (15,630)
  Change in investments                            523          (7)       (514)
                                                ------     -------    --------
  Net cash provided by (used in) investing
   activities                                      523          (7)    (16,144)
                                                ------     -------    --------
Financing Activities:
  Proceeds from issuance of convertible
   debentures and common stock                                          20,000
  Cost of issuance of convertible
   debentures and common stock                                          (2,025)
                                                ------     ------     --------
  Net cash provided by financing activities                             17,975
                                                ------     ------     --------
 
Increase (decrease) in cash and cash
 equivalents                                       636      (1,182)      1,691
  Cash and cash equivalents, beginning of
   year                                            556       1,738          47
                                                ------     -------    --------
  Cash and cash equivalents, end of year        $1,192     $   556     $ 1,738
                                                ======     =======    ========
</TABLE>
See Notes to Consolidated Financial Statements (Beginning on Page 36 of the
Company's 1996 Form 10-K)

                                      S-1
<PAGE>
 
                                                                    SCHEDULE III

                     PAC RIM HOLDING CORPORATION AND SUBSIDIARIES
                      SUPPLEMENTARY INSURANCE INFORMATION
                              1994, 1995, and 1996
                             (Amounts in Thousands)
<TABLE>
<CAPTION>
 
 
                          December 31,
-------------------------------------------------------------------------
Column A         Column B        Column C     Column D      Column E
 
                  Deferred     Reserve for
                   Policy    Losses and Loss               Policyholder
                 Acquisition   Adjustment      Unearned      Dividends
                    Costs       Expenses       Premiums       Payable
                    -----       --------       --------       -------
<S>              <C>         <C>              <C>          <C>
1994                2,085        116,629        9,917           990
1995                  974         96,525        5,715           381
1996                1,162        100,588        6,917           364

<CAPTION> 
 
                                   Year Ended December 31,
        ------------------------------------------------------------------------
         Column F    Column G    Column H      Column I      Column J  Column K
         --------    --------    --------      --------      --------  --------
 
                                              Amortization
                                Net Losses    of Deferred
           Net         Net       and Loss       Policy        Other      Net
         Premium    Investment  Adjustment    Acquisition   Operating  Premiums
         Revenue      Income     Expenses       Costs       Expenses    Written
         -------      ------     --------       -----       --------    -------
<S>      <C>         <C>         <C>          <C>           <C>       <C> 
1994     92,894       6,514       63,788        19,565       11,927      96,984
1995     76,016       8,089       50,957        18,647       11,662      71,966
1996     86,488       7,013       79,890        14,853       13,370      87,133
 
</TABLE>

                                      S-2
<PAGE>
 
                                                                     SCHEDULE IV


                   PAC RIM HOLDING CORPORATION AND SUBSIDIARIES
                                  REINSURANCE

                             (Amounts in Thousands)
<TABLE>
<CAPTION>
 
Column A    Column B    Column C         Column D     Column E  Column F
--------    --------    --------         --------     --------  --------
 
                          Premiums        Premiums              Percentage
              Gross        Ceded          Assumed       Net      of Amount
            Premiums      to Other       from Other  Premiums     Assumed
             Earned     Companies (1)    Companies    Earned      to Net
             ------     -------------    ---------    ------      ------
<S>         <C>         <C>              <C>          <C>       <C>
1994         100,008        7,224            110      92,894       0.1%
1995          79,920        4,113            209      76,016       0.3%
1996          88,678        4,437          2,247      86,488       2.6%
 
</TABLE>
(1) The Company does not net reinsurance-related items against premiums ceded.

                                      S-3
<PAGE>
 
                                                                     SCHEDULE VI

             SUPPLEMENTAL INFORMATION CONCERNING PROPERTY-CASUALTY
                              INSURANCE OPERATIONS
                              1994, 1995, and 1996
                             (Amounts in Thousands)
<TABLE>
<CAPTION>
 
 
                          December 31,
---------------------------------------------------------------------
 Column A   Column B     Column C       Column D     Column E
 --------   --------     --------       --------     --------
 
                           Reserve      Discount,
             Deferred    for Losses      If any,
              Policy      and Loss      Deducted
           Acquisition   Adjustment       from       Unearned
              Costs       Expenses      Column C     Premiums
              -----       --------      --------     --------
 <S>       <C>           <C>            <C>          <C>
1994         2,085         116,629                    9,917
1995           974          96,525                    5,715
1996         1,162         100,588                    6,917

<CAPTION> 

        Column F     Column G          Column H           Column I
        --------     --------          --------           --------   
                                 Net Losses and Loss
                                 Adjustment Expenses
                                 Incurred Related To
                                 -------------------
          Net           Net        (1)         (2)     Amortization of
        Premiums     Investment  Current      Prior    Deferred Policy
         Earned        Income      Year       Years    Acquisition Costs
         ------        ------      ----       -----    -----------------
<S>     <C>          <C>         <C>         <C>       <C> 
1994      92,894       6,514      60,989      2,799         19,565
1995      76,016       8,089      49,962        995         18,647
1996      86,488       7,013      62,244     17,646         14,853
<CAPTION> 
          Column J          Column K
       Net Paid Losses         Net
     and Loss Adjustment    Premiums
          Expenses           Written
          --------           -------
<S>  <C>                    <C> 
1994       60,188            96,984
1995       73,025            71,966
1996       75,069            87,133

</TABLE>

                                      S-4