Document:

exv10w17

 

Exhibit 10.17

EXECUTION COPY

FIRST MERCURY FINANCIAL CORPORATION

 

SERIES A CONVERTIBLE PREFERRED STOCK

PURCHASE AGREEMENT

 

MARCH 1, 2004

 

 

TABLE OF CONTENTS

	 	 	 	 	 
	 	 	Page	 
	SECTION 1

PURCHASE AND SALE
	 	 	 	 
	 
	 	 	 	 
	1.1 Description of Securities
	 	 	1	 
	 
	 	 	 	 
	1.2 Purchase Price and Closing
	 	 	1	 
	 
	 	 	 	 
	1.3 Use of Proceeds by the Holding Company from the Closing
	 	 	1	 
	 
	 	 	 	 
	1.4 Adjustment for Loss Reserves
	 	 	2	 
	 
	 	 	 	 
	1.5 Transfer Taxes
	 	 	4	 
	 
	 	 	 	 
	SECTION 2

REPRESENTATIONS AND WARRANTIES OF THE COMPANY
	 	 	 	 
	 
	 	 	 	 
	2.1 Organization and Corporate Power
	 	 	4	 
	 
	 	 	 	 
	2.2 Authorization and Non-Contravention
	 	 	5	 
	 
	 	 	 	 
	2.3 Corporate Records
	 	 	5	 
	 
	 	 	 	 
	2.4 Capitalization
	 	 	6	 
	 
	 	 	 	 
	2.5 Subsidiaries
	 	 	7	 
	 
	 	 	 	 
	2.6 Financial Statements; Projections
	 	 	7	 
	 
	 	 	 	 
	2.7 Absence of Certain Developments
	 	 	9	 
	 
	 	 	 	 
	2.8 Absence of Undisclosed Liabilities
	 	 	9	 
	 
	 	 	 	 
	2.9 Accounts Payable; Accounts Receivable
	 	 	9	 
	 
	 	 	 	 
	2.10 Transactions with Affiliates; Distributions to Stockholders
	 	 	10	 
	 
	 	 	 	 
	2.11 Title to Properties
	 	 	11	 
	 
	 	 	 	 
	2.12 Tax Matters
	 	 	11	 
	 
	 	 	 	 
	2.13 Certain Contracts and Arrangements
	 	 	12	 
	 
	 	 	 	 
	2.14 Intellectual Property
	 	 	13	 
	 
	 	 	 	 
	2.15 Litigation
	 	 	14	 
	 
	 	 	 	 
	2.16 Labor Matters
	 	 	14	 
	 
	 	 	 	 
	2.17 Employee Benefit Programs
	 	 	15	 
	 
	 	 	 	 
	2.18 List of Certain Employees and Producers
	 	 	15	 
	 
	 	 	 	 
	2.19 Insurance
	 	 	16	 
	 
	 	 	 	 
	2.20 Licenses and Permits
	 	 	16	 
	 
	 	 	 	 
	2.21 Compliance with Laws
	 	 	17	 
	 
	 	 	 	 
	2.22 Reinsurance
	 	 	18	 

-i-

 

TABLE OF CONTENTS

(Continued)

	 	 	 	 	 
	 	 	Page	 
	2.23 Environmental Matters
	 	 	19	 
	 
	 	 	 	 
	2.24 Investment Banking; Brokerage
	 	 	19	 
	 
	 	 	 	 
	2.25 Securities Exemption
	 	 	19	 
	 
	 	 	 	 
	2.26 Information Supplied by the Company
	 	 	19	 
	 
	 	 	 	 
	2.27 Broker Dealer; Investment Advisor
	 	 	20	 
	 
	 	 	 	 
	SECTION 3

REPRESENTATIONS AND WARRANTIES OF THE INVESTOR
	 	 	 	 
	 
	 	 	 	 
	 
	 	 	 	 
	3.1 Investment Status
	 	 	20	 
	 
	 	 	 	 
	3.2 Authority
	 	 	20	 
	 
	 	 	 	 
	3.3 Investment Banking; Brokerage Fees
	 	 	21	 
	 
	 	 	 	 
	3.4 Disclosure of Information
	 	 	21	 
	 
	 	 	 	 
	SECTION 4

INTERIM CONDUCT COVENANTS OF THE HOLDING COMPANY
	 	 	 	 
	 
	 	 	 	 
	4.1 Conduct of Business
	 	 	21	 
	 
	 	 	 	 
	4.2 Quantum Direct Financial Merger
	 	 	22	 
	 
	 	 	 	 
	4.3 Purchase of Arpco Shares
	 	 	22	 
	 
	 	 	 	 
	4.4 Consents and Approvals
	 	 	22	 
	 
	 	 	 	 
	4.5 Notification of Breach
	 	 	22	 
	 
	 	 	 	 
	4.6 Exclusivity
	 	 	22	 
	 
	 	 	 	 
	4.7 No Action Resulting in Breach
	 	 	22	 
	 
	 	 	 	 
	SECTION 5

CONDITIONS OF PURCHASE BY THE INVESTOR
	 	 	 	 
	 
	 	 	 	 
	5.1 Satisfaction of Conditions
	 	 	23	 
	 
	 	 	 	 
	5.2 Performance by the Holding Company
	 	 	23	 
	 
	 	 	 	 
	5.3 Opinion of Counsel
	 	 	23	 
	 
	 	 	 	 
	5.4 Authorization
	 	 	23	 
	 
	 	 	 	 
	5.5 Amended and Restated Charter
	 	 	23	 
	 
	 	 	 	 
	5.6 Delivery of Documents
	 	 	23	 
	 
	 	 	 	 
	5.7 Quantum Direct Financial Merger
	 	 	24	 
	 
	 	 	 	 
	5.8 Purchase of Arpco Shares
	 	 	24	 
	 
	 	 	 	 
	5.9 Registration Rights Agreement
	 	 	24	 

-ii-

 

TABLE OF CONTENTS

(Continued)

	 	 	 	 	 
	 	 	Page	 
	5.10 Stockholders Agreement
	 	 	24	 
	 
	 	 	 	 
	5.11 No Material Adverse Effect
	 	 	25	 
	 
	 	 	 	 
	5.12 All Proceedings Satisfactory
	 	 	25	 
	 
	 	 	 	 
	5.13 Investor’s and Glencoe’s Fees; Glencoe Management Fee
	 	 	25	 
	 
	 	 	 	 
	5.14 No Violation or Injunction
	 	 	25	 
	 
	 	 	 	 
	5.15 Consents and Waivers
	 	 	25	 
	 
	 	 	 	 
	5.16 Election of Directors
	 	 	26	 
	 
	 	 	 	 
	5.17 Non-Competition and Confidentiality Agreements
	 	 	26	 
	 
	 	 	 	 
	5.18 Management Rights Letter
	 	 	26	 
	 
	 	 	 	 
	5.19 Employment Agreement
	 	 	26	 
	 
	 	 	 	 
	5.20 Option Exercise
	 	 	26	 
	 
	 	 	 	 
	5.21 Termination of Executive Benefit Plans
	 	 	26	 
	 
	 	 	 	 
	SECTION 5A CONDITION OF THE HOLDING COMPANY
	 	 	 	 
	 
	 	 	 	 
	5A.1 Consents and Waivers
	 	 	27	 
	 
	 	 	 	 
	SECTION 6

POST-CLOSING COVENANTS OF THE COMPANY
	 	 	 	 
	 
	 	 	 	 
	6.1 Financial Statements
	 	 	27	 
	 
	 	 	 	 
	6.2 Operational Covenants
	 	 	28	 
	 
	 	 	 	 
	6.3 Intentionally Omitted
	 	 	29	 
	 
	 	 	 	 
	6.4 Annual Plan
	 	 	29	 
	 
	 	 	 	 
	6.5 Corporate Existence and Permits
	 	 	30	 
	 
	 	 	 	 
	6.6 Compliance with Laws
	 	 	30	 
	 
	 	 	 	 
	6.7 Insurance
	 	 	30	 
	 
	 	 	 	 
	6.8 Directors and Officers Insurance
	 	 	30	 
	 
	 	 	 	 
	6.9 Information and Inspection
	 	 	30	 
	 
	 	 	 	 
	6.10 Enforcement of Certain Agreements
	 	 	31	 
	 
	 	 	 	 
	6.11 Investment Expenses
	 	 	31	 
	 
	 	 	 	 
	6.12 Payment of Taxes
	 	 	31	 
	 
	 	 	 	 
	6.13 Negative Covenants
	 	 	31	 
	 
	 	 	 	 
	6.14 Pre-Tax Operating Income
	 	 	34	 

-iii-

 

TABLE OF CONTENTS

(Continued)

	 	 	 	 	 
	 	 	Page	 
	SECTION 7

SURVIVAL; INDEMNIFICATION; REMEDIES
	 	 	 	 
	 
	 	 	 	 
	7.1 Survival of Representations, Warranties and Covenants
	 	 	34	 
	 
	 	 	 	 
	7.2 Indemnification
	 	 	34	 
	 
	 	 	 	 
	7.3 Other Remedies
	 	 	35	 
	SECTION 8

DEFINITIONS
	 	 	 	 
	 
	 	 	 	 
	SECTION 9

TERMINATION
	 	 	 	 
	9.1 Termination or Abandonment
	 	 	45	 
	 
	 	 	 	 
	9.2 Effect of Termination
	 	 	45	 
	 
	 	 	 	 
	SECTION 10

GENERAL
	 	 	 	 
	 
	 	 	 	 
	10.1 Amendments, Waivers and Approvals
	 	 	45	 
	 
	 	 	 	 
	10.2 Investor’s and Glencoe’s Fees and Expenses
	 	 	46	 
	 
	 	 	 	 
	10.3 Legend on Securities
	 	 	46	 
	 
	 	 	 	 
	10.4 Governing Law
	 	 	46	 
	 
	 	 	 	 
	10.5 Section Headings and Gender
	 	 	47	 
	 
	 	 	 	 
	10.6 Counterparts
	 	 	47	 
	 
	 	 	 	 
	10.7 Notices and Demands
	 	 	47	 
	 
	 	 	 	 
	10.8 Jurisdiction; Venue; Waiver of Jury Trial
	 	 	48	 
	 
	 	 	 	 
	10.9 Remedies; Severability
	 	 	48	 
	 
	 	 	 	 
	10.10 Assignment
	 	 	48	 
	 
	 	 	 	 
	10.11 Adjustment
	 	 	49	 
	 
	 	 	 	 
	10.12 Entire Agreement; Integration
	 	 	49	 

-iv-

 

List of Exhibits

To

Series A Convertible Preferred Stock Purchase Agreement

	 	 	 	 	 
	Exhibit A

	 	-
	 	Form of Amended and Restated Certificate of Incorporation
	 
	 	 	 	 
	Exhibit B

	 	-
	 	Form of Arpco Stock Purchase Agreement
	 
	 	 	 	 
	Exhibit C

	 	-
	 	Form of Quantum Merger Agreement
	 
	 	 	 	 
	Exhibit D

	 	-
	 	Form of Opinion of Company Counsel
	 
	 	 	 	 
	Exhibit E

	 	-
	 	Form of Registration Rights Agreement
	 
	 	 	 	 
	Exhibit F

	 	-
	 	Form of Stockholders Agreement
	 
	 	 	 	 
	Exhibit G

	 	-
	 	Form of Agreement with Glencoe for Advisory Services
	 
	 	 	 	 
	Exhibit H

	 	-
	 	Form of Director Indemnification Agreement
	 
	 	 	 	 
	Exhibit I

	 	-
	 	Form of Non-Competition and Confidentiality Agreement
	 
	 	 	 	 
	Exhibit J

	 	-
	 	Form of Management Rights Letter Agreement
	 
	 	 	 	 
	Exhibit K

	 	-
	 	Form of Employment Agreement
	 
	 	 	 	 
	Exhibit L

	 	-
	 	Form of Compliance Certificate
	 
	 	 	 	 
	Exhibit M

	 	-
	 	Form of Annual Plan for Fiscal Year 2004

 

 

List of Schedules

to

Series A Convertible Preferred Stock Purchase Agreement

Disclosure Schedule:

	 	 	 	 	 
	Section 2.1

	 	-
	 	Organization and Foreign Qualification
	Section 2.2

	 	-
	 	Authorization and Non-Contravention
	Section 2.4

	 	-
	 	Capitalization
	Section 2.5

	 	-
	 	Subsidiaries
	Section 2.6(a)

	 	-
	 	Financial Statements
	Section 2.6(b)

	 	-
	 	Projections
	Section 2.6(c)

	 	-
	 	Statutory Statements
	Section 2.6(e)

	 	-
	 	Company Investments
	Section 2.7

	 	-
	 	Certain Developments
	Section 2.8

	 	-
	 	Undisclosed Liabilities
	Section 2.9(a)

	 	-
	 	Accounts Payable
	Section 2.9(b)

	 	-
	 	Accounts Receivable
	Section 2.10(a)

	 	-
	 	Transactions with Affiliates
	Section 2.10(b)

	 	-
	 	Distributions to Stockholders
	Section 2.11

	 	-
	 	Properties
	Section 2.12

	 	-
	 	Tax Matters
	Section 2.13

	 	-
	 	Certain Contracts and Arrangements
	Section 2.14

	 	-
	 	Intellectual Property
	Section 2.15

	 	-
	 	Litigation
	Section 2.16

	 	-
	 	Labor Matters
	Section 2.17

	 	-
	 	Employee Benefit Programs
	Section 2.18(a)

	 	-
	 	Employees
	Section 2.18(b)

	 	-
	 	Producers
	Section 2.19

	 	-
	 	Insurance
	Section 2.20

	 	-
	 	Licenses and Permits
	Section 2.21(a)

	 	-
	 	Compliance with Laws
	Section 2.21(b)

	 	-
	 	Policies and Business Guidelines
	Section 2.21(e)

	 	-
	 	Deposits
	Section 2.22

	 	-
	 	Reinsurance
	Section 2.24

	 	-
	 	Investment Banking; Brokers
	 
	 	 	 	 
	Schedule 5.15

	 	-
	 	Required Consents
	Schedule 5.20

	 	-
	 	Outstanding Stock Options

Schedule of Key Employees

(ii)

 

SERIES A CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT

     This Series A Convertible Preferred Stock Purchase Agreement (this “Agreement”) is
made as of this 1st day of March, 2004 by and between First Mercury Financial Corporation, a
Delaware corporation (the “Holding Company”), and FMFC Holdings, LLC, a Delaware limited
liability company (the “Investor”). Except as otherwise indicated, capitalized terms used
herein shall have the meanings set forth in Section 8 hereof.

SECTION 1 PURCHASE AND SALE

          1.1 Description of Securities. The Holding Company has authorized the issuance and
sale to the Investor of up to 400 shares of its Series A Convertible Preferred Stock, par value
$.01 per share (the “Series A Preferred Stock”), with the rights, preferences and other
terms set forth in Exhibit A attached hereto, which are convertible into shares of the
Holding Company’s Common Stock, par value $.01 per share (the “Common Stock”). For
purposes of this Agreement, the shares of Common Stock issuable upon conversion of the Series A
Preferred Stock issued hereunder are referred to as the “Conversion Shares.” The Holding
Company has authorized and reserved and covenants to continue to reserve, free of preemptive rights
and other preferential rights, a sufficient number of its authorized but unissued shares of Common
Stock necessary to satisfy the conversion rights of the holders of Series A Preferred Stock issued
hereunder.

          1.2 Purchase Price and Closing. Upon the terms and subject to the conditions
contained herein, and in reliance on the representations, warranties, covenants, terms and
conditions of this Agreement, the Holding Company shall issue and sell to the Investor, and the
Investor shall purchase from the Holding Company at the purchase price of $100,000 per share either
(i) 400 shares of Series A Preferred Stock if the closing condition specified in Section 5.8(a) is
satisfied or (ii) 250 shares of Series A Preferred Stock if the closing condition specified in
Section 5.8(b) is satisfied. The number of shares of Series A Preferred Stock to be issued at
Closing is referred to herein as the “Applicable Number” of shares of Series A Preferred Stock.
The purchase and sale of the Series A Preferred Stock shall take place at a closing (the
“Closing”) at such location and at such time as may be mutually agreed upon by the parties
hereto, on the date which is two (2) business days after the satisfaction or written waiver of all
of the conditions to the Closing specified in Sections 5 and 5A (the “Closing Date”). At
the Closing, the Holding Company shall issue and deliver a certificate or certificates evidencing
the shares of Series A Preferred Stock to be sold at the Closing to the Investor in consideration
of payment in full by the Investor of the aggregate purchase price therefor by wire transfer of
immediately available funds to an account designated by the Holding Company (net of expenses to be
paid by the Holding Company hereunder).

          1.3 Use of Proceeds by the Holding Company from the Closing. The Holding Company
covenants and agrees that the proceeds from the sale of the Series A Preferred Stock hereunder
shall be (i) contributed to the statutory capital and surplus of First Mercury Insurance Company,
an Illinois corporation and wholly-owned subsidiary of the Holding Company (“FMIC”) to be
invested in accordance with the Business Guidelines (as defined below), (ii) if the closing
condition in Section 5.8(a) is satisfied, used to pay the cash portion of the consideration payable
to the shareholders of American Risk Pooling Consultants,
Inc. and

 

 

Public Entity Risk Services of Ohio, Inc. (collectively, “Arpco”) pursuant to
the Stock Purchase Agreement between the Investor and the shareholders of Arpco in the form
attached hereto as Exhibit B (the “Arpco Stock Purchase Agreement”) which Arpco
Stock Purchase Agreement shall provide for, among other things, a consulting and non-competition
agreement between Arpco and Jerome Shaw, and (iii) used to pay certain fees and expenses incurred
by the Holding Company and, as provided in Section 5.13 and Section 10.2 hereof, certain of the
fees incurred by the Investor and Glencoe Capital, LLC, an Illinois limited liability company
(“Glencoe”).

          1.4 Adjustment for Loss Reserves. If any shares of Series A Preferred Stock remain
outstanding on or after January 1, 2007, the parties shall, if required as set forth below, adjust
the Conversion Price (as defined in the Charter) pursuant to following procedures:

               (a) On or before April 1, 2007, the Holding Company shall deliver a written report prepared by
a reputable actuarial firm (the “Loss Statement”) setting forth its calculation of the
Actual Loss Result. The Holding Company shall provide the Investor and its representatives with
all reasonable access to its and its Insurance Companies’ books, records, work papers, calculations
and personnel as Investor or such representatives reasonably request to review the Loss Statement.

               (b) If the Investor disputes any portion of the Loss Statement, then the Investor shall
provide the Holding Company with a written notice within sixty (60) days after the Holding
Company’s delivery of the Loss Statement (the “Loss Statement Objection Notice”). The Loss
Statement Objection Notice shall indicate the Investor’s objections to the Loss Statement. If the
Investor does not deliver a Loss Statement Objection Notice within the specified sixty (60) day
period, then the Loss Statement and the Holding Company’s computation of the Actual Loss Result
shall be final and binding on the parties. If the Holding Company and the Investor cannot resolve
any objections set forth in the Loss Statement Objection Notice, then such objections shall be
resolved by an independent nationally recognized actuarial firm reasonably acceptable to the
Holding Company and the Investor (the “Independent Actuarial Firm”). The Holding Company
shall provide the Independent Actuarial Firm with all reasonable access to its and its Insurance
Companies’ books, records, work papers, calculations and personnel as the Independent Actuarial
Firm reasonably requests to review the Loss Statement. The determination of the Independent
Actuarial Firm shall be made as promptly as practicable, and in no event later than ninety (90)
days after delivery of the Loss Statement, and shall be final and binding on the parties. The fees
and expenses of the Independent Actuarial Firm shall be paid by the Holding Company.

               (c) If the Actual Loss Result as finally determined pursuant to Section 1.4(b) above exceeds
the amount of Initial Loss Reserves by more than $500,000, then the Conversion Price shall be
deemed to have been adjusted as of the date of determination under Section 1.4(b) to account for
the excess. The amount equal to the Actual Loss Result less the Initial Loss Reserves less
$500,000 shall be the “Excess Reserve Amount”; provided, however, that in no event
shall the Excess Reserve Amount exceed $6,500,000. The adjustment shall be based on the following
formula:

-2-

 

	 	 	 	 	 	 	 
	 

	 	$85,000,000 – Excess Reserve Amount
 

14,783.425
	 	=
	 	 Deemed Closing

Conversion Price

               (d) To the extent any other adjustments to the Conversion Price have been required pursuant to
the Charter following the Closing Date, such adjustments shall be recalculated as if the Deemed
Closing Conversion Price had been the Conversion Price on the Closing Date.

               (e) For purposes of this Section 1.4, the terms below will be defined as set forth below:

               “Actual Loss Result” shall be calculated as follows:

(a) the total amount that the Insurance Companies have paid from
December 31, 2003 to and including December 31, 2006 in connection
with the Specialty Policies including (i) Insurance Losses and (ii)
Allocated Loss Adjustment Expenses, net of (y) cash recoveries and
subrogations actually received on or prior to December 31, 2006 and
(z) reinsurance collected or then owed by the applicable reinsurer,
calculated in accordance with SAP (net of reasonable reserves); plus

(b) the amount as of December 31, 2006 for the Insurance Companies’
actual or potential loss obligation on the Specialty Policies,
including reserves for (i) Insurance Losses, including Insurance
Losses incurred but not yet reported and (ii) Allocated Loss
Adjustment Expenses and for future loss development, net of, without
duplication, reinsurance with respect to the Specialty Policies, all
as calculated in accordance with SAP.

               “Allocated Loss Adjustment Expenses” means all allocated loss adjustment expenses
incurred with respect to the investigation, adjustment, negotiation, settlement, or defense of a
claim or loss under the Specialty Policies or the protection of subrogation rights with respect
thereto.

               “Initial Loss Reserves” means the amount of reserves recorded on the books of the
Insurance Companies as of December 31, 2003 on account of the Insurance Companies’ actual or
potential obligations under the Specialty Policies for (i) Insurance Losses, including Insurance
Losses incurred but not yet reported and (ii) Allocated Loss Adjustment Expenses net of reinsurance
with respect to the Specialty Policies recorded on the Insurance Companies’ books as of December
31, 2003, all as calculated in accordance with SAP.

               “Insurance Companies” shall mean First Mercury Insurance Company and All Nation
Insurance Company.

-3-

 

               “Insurance Losses” means any and all amounts paid or payable, and any and all
obligations or liabilities incurred, under the terms of the Specialty Policies, including any
amounts payable in excess of the policy limit of the Specialty Policies as a result of alleged or
actual negligence in failing to settle or rejecting a settlement within the policy limit, in the
preparation of the defense, in the trial of any action against the insured or reinsured, or in the
preparation of or prosecution of an appeal consequent upon such action and those liabilities and
obligations that are outside the provisions of the Specialty Policies, including punitive or
exemplary damages, fines, penalties, or any other liabilities, that arise from the handling of any
claim under the Specialty Policies.

               “Specialty Policies” means all policies, binders, certificates, cover notes,
endorsements, facilities, treaties and other contracts of insurance underwritten, issued, reinsured
or entered into by the Insurance Companies with regard to the Insurance Companies’ specialty
general liability lines for accident year 2000 through 2003 at or prior to December 31, 2003.

          1.5 Transfer Taxes. All transfer taxes, fees and duties under applicable law incurred
in connection with the sale and transfer by the Holding Company of the Series A Preferred Stock to
the Investor under this Agreement will be borne and paid by the Holding Company and the Holding
Company shall promptly reimburse the Investor for any such tax, fee or duty it is required to pay
under applicable law.

SECTION 2 REPRESENTATIONS AND WARRANTIES OF THE COMPANY

     In order to induce the Investor to enter into this Agreement and consummate the transactions
contemplated hereby, the Company hereby represents and warrants to the Investor that the statements
contained in this Section 2 are true, complete and correct as of the date hereof and as of the
Closing Date. For purposes of this Section 2, the term “Company” shall refer to all of the
following:

          (i) the Holding Company and all of its Subsidiaries as of the date hereof; and

          (ii) Quantum Direct Financial Corporation, a Delaware corporation (“Quantum”)
and all of its Subsidiaries (collectively, the “Other Subsidiaries”).

     Such representations and warranties are subject to the qualifications and exceptions set forth
in the corresponding section of the disclosure schedule attached to this Agreement (the
“Disclosure Schedule”). The Disclosure Schedule makes explicit reference to the particular
representation or warranty (or section of a representation or warranty) as to which exception is
taken, which in each case shall constitute the sole representation and warranty (or section of a
representation or warranty) as to which such exception shall apply.

          2.1 Organization and Corporate Power. The Holding Company is a corporation duly
organized, validly existing and in good standing under the laws of Delaware, and is duly qualified
or registered to do business as a foreign corporation (i) in each jurisdiction listed on
Section 2.1 of the Disclosure Schedule and (ii) in each other jurisdiction in which the
failure to be so qualified would have a Material Adverse Effect. Each Subsidiary is a

-4-

 

corporation or other entity duly organized, validly existing and in good standing under the
laws of its jurisdiction of organization set forth in Section 2.1 of the Disclosure
Schedule, and is duly qualified or registered to do business as a foreign corporation or other
entity (i) in each jurisdiction listed on Section 2.1 of the Disclosure Schedule and (ii)
in each other jurisdiction in which the failure to be so qualified would have a Material Adverse
Effect. The Holding Company and each Subsidiary, as applicable, has all required power and
authority: to own and hold its properties; to carry on its business as presently conducted; to
enter into and perform this Agreement, the Registration Rights Agreement, the Stockholders
Agreement, the Management Rights Letter Agreement and the Director Indemnification Agreements
(collectively, the “Related Agreements”) to which it is a party and to carry out the
transactions contemplated hereby and thereby; and, with respect to the Holding Company, to issue,
sell and deliver the Series A Preferred Stock and, upon conversion thereof, to issue and deliver
the Conversion Shares. The copies of the Charter Documents of the Company, which have been
furnished to the Investor and/or its counsel for review by the Company, are true, complete and
correct as of the date hereof, and the Company is not in violation of any term of its Charter
Documents. The Company is not in violation of any term or provision of any judgment, decree or
order applicable to it or to which it is a party.

          2.2 Authorization and Non-Contravention. This Agreement, the Related Agreements and
all documents executed pursuant hereto and thereto are valid and binding obligations of the Holding
Company, enforceable in accordance with their terms except as may be limited by (i) applicable
bankruptcy, insolvency, reorganization, fraudulent transfer or other laws of general application
relating to or affecting the enforcement of creditors’ rights generally and (ii) the effect of
rules of law governing the availability of equitable remedies. The execution, delivery and
performance of this Agreement, the Related Agreements and all agreements, documents and instruments
contemplated hereby and thereby, the sale and delivery of the Series A Preferred Stock and, upon
conversion thereof, the issuance and delivery of the Conversion Shares, have been duly authorized
by all necessary corporate or other action of the Holding Company. The execution of this Agreement
and the Related Agreements, the sale and delivery of the Series A Preferred Stock and, upon
conversion thereof, the issuance of the Conversion Shares, and the performance of any transaction
contemplated hereby and thereby will not (i) violate, conflict with or result in a default under
(a) any Disclosed Contract, or (b) any provision of the Charter Documents of the Company, (ii)
cause the creation of any Lien upon any of the assets of the Company; (iii) violate or result in a
violation of, or constitute a default (whether after the giving of notice, lapse of time or both)
under, any provision of any law, regulation or rule, or any order of, or any restriction imposed by
any court or other governmental agency applicable to the Company; (iv) require from the Company any
notice to, declaration or filing with, or consent or approval of any governmental authority or
other third party other than pursuant to federal and state securities or blue sky laws and notices
to and/or filings with state insurance regulatory authorities listed on Section 2.2 of the
Disclosure Schedule; or (v) accelerate any obligation under, or give rise to a right of
termination of, any Permit or Disclosed Contract to which the Company is a party or by which the
Company is bound.

          2.3 Corporate Records. The corporate record books of the Company record all corporate
action taken by its stockholders, board of directors, and committees thereof accurately in all
material respects. The copies of the corporate records of the Company, as

-5-

 

delivered to the Investor and/or its counsel for review, are true, complete and correct copies
of the originals of such documents.

          2.4 Capitalization. As of the Closing and after giving effect to the transactions
contemplated hereby, the authorized capital stock of the Holding Company will consist of (i) the
number of shares of Common Stock equal to 60,000 less the Applicable Number of shares of Series A
Preferred Stock, of which (a) 12,551.425 shares will be issued and outstanding, (b) 10,000 shares
will be reserved for conversion of the Series A Preferred Stock and (c) 5,000 shares will be
reserved under the Holding Company’s 1998 Stock Compensation Plan (the “Incentive Plan”);
and (ii) the Applicable Number of shares of Series A Preferred Stock, of which only the Applicable
Number of shares (as provided in Section 1.2) will be issued and outstanding. As of the Closing
and after giving effect to the transactions contemplated hereby, the outstanding shares of Common
Stock and Series A Preferred Stock will be held beneficially and of record by the persons
identified in Section 2.4 of the Disclosure Schedule in the amounts indicated thereon (and,
to the extent that any such shares are subject to vesting, along with the applicable vesting
schedule including any acceleration terms thereof). The Company has reserved an aggregate of up to
5,000 shares of Common Stock (as adjusted for stock splits, stock dividends and the like) for
issuance under the Incentive Plan, of which as of the date hereof 0 shares have been issued as
restricted stock awards, 0 shares have been issued upon exercise of options, 2,232 shares are
subject to outstanding, unexercised options and 2,768 shares remain available for future grants.
Section 2.4 of the Disclosure Schedule sets forth the name of each holder of options,
warrants or rights to purchase Common Stock, or any other securities of the Company, the number of
shares for which such options, warrants or rights are exercisable with respect to each holder,
along with the applicable vesting schedule (including any acceleration terms thereof), if any, and
exercise or purchase price thereof. Except for the Incentive Plan and as disclosed in Section
2.4 of the Disclosure Schedule, neither the Holding Company nor any Subsidiary has ever adopted
or maintained any stock incentive plan or other plan providing for equity compensation of any
Person. Except as contemplated under this Agreement or otherwise disclosed in Section 2.4 of
the Disclosure Schedule, there are no outstanding securities of the Holding Company or any
Subsidiary or any subscriptions, options, warrants, agreements, arrangements or commitments of any
kind for or relating to the issuance, or sale of, or outstanding securities convertible into or
exchangeable for, any shares of capital stock of any class or other equity interests of the Holding
Company or any Subsidiary. Except as set forth in Section 2.4 of the Disclosure Schedule,
neither the Holding Company nor any Subsidiary has any obligation to purchase, redeem, or otherwise
acquire any of its or their capital stock or any interests therein. As of the Closing, and after
giving effect to the transactions contemplated hereby, all of the outstanding shares of capital
stock of the Holding Company (i) will have been duly and validly authorized and issued and will be
fully paid and non-assessable, (ii) will be free and clear of all Liens or restrictions on transfer
(other than restrictions under this Agreement, the Related Agreements and applicable federal and
state securities laws) imposed by the Company, (iii) to the Company’s knowledge, will be free and
clear of all other Liens or restrictions on transfer, and (iv) will have been offered, issued, sold
and delivered by the Company in compliance with applicable federal and state securities laws and
not subject to any preemptive rights. The Conversion Sh
ares when issued will be validly issued,
fully paid and non-assessable. The relative rights, preferences, provisions, qualifications,
limitations and restrictions in respect of each class and series of authorized stock of the Holding
Company (including the Series A Preferred Stock) are as set forth in the Amended and Restated
Certificate

-6-

 

of Incorporation attached hereto as Exhibit A, and all such rights, preferences,
provisions, qualifications, limitations and restrictions are valid, binding and enforceable in
accordance with applicable law, subject to (i) applicable bankruptcy, insolvency, reorganization,
fraudulent transfer or other laws of general application relating to or affecting the enforcement
of creditors’ rights generally and (ii) the effect of rules of law governing the availability of
equitable remedies. As of the Closing and after giving effect to the transactions contemplated
hereby, except as set forth in (i) Section 2.4 of the Disclosure Schedule, (ii) the
Charter, (iii) the Stockholders Agreement or (iv) the Registration Rights Agreement, there will be
(a) no preemptive rights, rights of first refusal, put or call rights or obligations or
anti-dilution rights with respect to the issuance, sale or redemption of Holding Company’s capital
stock, (b) no rights to have the Holding Company’s capital stock registered for sale to the public
in connection with the laws of any jurisdiction, (c) no documents, instruments or agreements
relating to the voting of the Holding Company’s voting securities or restrictions on the transfer
of the Holding Company’s capital stock or (d) no agreement, document or commitment (written or
oral) of the Holding Company providing for the acceleration of vesting (or lapse of a repurchase
right) upon the occurrence of any event with respect to any outstanding securities, options,
warrants or other purchase rights.

          2.5 Subsidiaries. Section 2.5 of the Disclosure Schedule sets forth the
authorized and issued capital stock of each Subsidiary. Except as set forth on Section 2.5 of
the Disclosure Schedule, all of the issued and outstanding shares of capital stock of each
Subsidiary are duly authorized and are validly issued, fully paid and non-assessable and are owned
by the Holding Company (or in the case of the Other Subsidiaries will be owned by the Holding
Company at Closing), free and clear of any Lien and not subject to any option or right to purchase
any such shares or interests. None of the outstanding shares of capital stock of any Subsidiary
were issued in violation of the preemptive or other similar rights of any security holder of such
Subsidiary. No Subsidiary has violated any applicable foreign, federal or state securities laws in
connection with the offer, sale or issuance of any of its capital stock. As of the Closing and
after giving effect to the transactions contemplated hereby, there will be (a) no preemptive
rights, rights of first refusal, put or call rights or obligations or anti-dilution rights with
respect to the issuance, sale or redemption of any Subsidiary’s capital stock, (b) no rights to
have any Subsidiary’s capital stock registered for sale to the public in connection with the laws
of any jurisdiction, (c) no documents, instruments or agreements relating to the voting of any
Subsidiary’s voting securities or restrictions on the transfer of any Subsidiary’s capital stock or
(d) no agreement, document or commitment (written or oral) of any Subsidiary providing for the
acceleration of vesting (or lapse of a repurchase right) upon the occurrence of any event with
respect to any outstanding securities, options, warrants or other purchase rights. Except as
disclosed in Section 2.5 of the Disclosure Schedule, the Company has no written agreement
in respect of any strategic partnership or similar relationship and does not own or have any direct
or indirect interest in or possess, directly or indirectly, the power to direct or cause the
direction of the management and policies of a Person, whether through the ownership of voting
securities, by contract or otherwise.

          2.6 Financial Statements; Projections.

               (a) Included in Section 2.6(a) of the Disclosure Schedule are (i) the audited balance
sheets of the Company as of December 31, 2000, 2001 and 2002 (the balance

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sheet for the most recently completed fiscal year being referred to as the “Base Balance
Sheet”) and the related statements of income, cash flows and stockholders’ equity for the
fiscal year then ended, and (ii) the unaudited balance sheet as of September 30, 2003 and the
related statements of income, cash flows and stockholders’ equity for the nine (9) month period
then ended, all of which statements (including the footnotes and schedules thereto) were prepared
in accordance with generally accepted accounting principles (“GAAP”) consistently applied
during the periods covered thereby and fairly present the financial condition of the Company on the
dates of such statements and the results of their operations and cash flows for the periods covered
thereby (except, in the case of the unaudited interim statements, for the absence of footnote
disclosures and customary year-end adjustments).

               (b) Included in Section 2.6(b) of the Disclosure Schedule are projections for the
Company’s next two (2) fiscal years. Such projections of future financial results are based upon
information available to the Company as of the date thereof and upon assumptions believed by the
Company to be reasonable, subject to unforeseen general business conditions, world events, and
economic factors which are beyond its control or other unanticipated future events which could have
an unforeseen impact on the performance or condition of the Company. Such projections may not be
achieved in the event of any changes in the facts and circumstances upon which such forecasts,
projections and assumptions are based which changes could not reasonably have been foreseen at the
date on which such projections and assumptions were made. The projections involve known and
unknown risks and uncertainties that may cause the actual results, performance or achievements of
the Company, or industry results, to differ materially from any future results, performance or
achievements expressed or implied in the forecasts and projections. Nothing in the representation
in this Section 2.6(b) shall be deemed a guaranty of achievement of the financial results set forth
in such projections.

               (c) Included in Section 2.6(c) of the Disclosure Schedule are (i) audited annual
statements of each Subsidiary that is an insurance company as of December 31, 2000, 2001 and 2002,
and (ii) unaudited quarterly statements of each Subsidiary that is an insurance company as of March
31, June 30 and September 30, 2003, as filed with the insurance regulatory authority in its state
of domicile, together will all exhibits, schedules and notes thereto and any affirmations and
certifications filed therewith (the “Statutory Statements”), all of which Statutory
Statements were prepared in accordance with statutory accounting principles prescribed or permitted
by the Subsidiary’s state of domicile (“SAP”) consistently applied during the periods
covered thereby and fairly present the financial condition of those Subsidiaries on the dates of
such statements and the results of their operations and cash flows for the periods covered thereby,
and no insurance regulatory authority has asserted any material deficiency with respect to such
Statutory Statements.

               (d) The statutory reserves, and other liability amounts required by GAAP or SAP, as
applicable, to be determined using actuarial methods, in the Statutory Statements for the years
ended December 31, 2000, 2001 and 2002 for the Company were determined in accordance with commonly
accepted actuarial standards applied in each case in a manner consistent with past practices, are
fairly stated in accordance with sound actuarial principles, and are based on reasonable actuarial
assumptions necessary to meet the requirements of applicable law.

-8-

 

               (e) Section 2.6(e) of the Disclosure Schedule contains a complete, correct and
accurate list of each of the securities in the Company’s investment portfolio and their fair market
value as of November 30, 2003.

          2.7 Absence of Certain Developments. Except as set forth in Section 2.7 of the
Disclosure Schedule, since the date of the Base Balance Sheet, there has been: (a) no Material
Adverse Effect; (b) no declaration, setting aside or payment of any dividend or other distribution
with respect to, or any direct or indirect redemption or acquisition of, any capital stock of the
Company; (c) no waiver of any valuable right of the Company or cancellation of any debt or claim
held by the Company; (d) no loan by the Company to any officer, director, employee or stockholder
of the Company, or any agreement or commitment therefor; (e) no increase, direct or indirect, in
the compensation paid or payable to any officer, director, employee, consultant, agent or
stockholder of the Company (other than salary increases in the ordinary course of business and
consistent with past practice which, individually or in the aggregate, are not material); (f) no
material loss, destruction or damage to any property of the Company, whether or not insured; (g) no
labor trouble involving the Company and no change in the senior management or other key personnel
of the Company or the terms and conditions of their employment; (h) no acquisition or disposition
of any assets (or any contract or arrangement therefor) nor any other material transaction by the
Company other than for fair value in the ordinary course of business and consistent with past
practice (except for the purchase of the Arpco shares and the merger with Quantum (as defined
below)); (i) no material change or amendment to any Disclosed Contract; (j) no notice of
termination or amendment of any agreement with any Producer or reinsurer; (k) no sale, assignment,
transfer or grant of any exclusive license with respect to any Intellectual Property Right; (l) no
action or event which has or could reasonably be expected to have an adverse effect on the
Company’s A.M. Best Company, Inc. rating; (m) no material change in the classes and types of
insurance business written by the Company; (n) no change in the Company’s reserve practices and
methodologies; (o) no material change in the Company’s underwriting standards and practices; or (p)
no agreement or understanding, whether in writing or otherwise, for the Company to take any of the
actions specified in clauses (a) through (o) above.

          2.8 Absence of Undisclosed Liabilities. Except as set forth in Section 2.8 of the
Disclosure Schedule, the Company does not have any liabilities or obligations of any nature,
whether accrued, absolute, contingent or otherwise, asserted or unasserted, known or unknown
(including, without limitation, liabilities as guarantor or otherwise with respect to obligations
of others, or liabilities for Taxes due or then accrued or to become due, regardless of whether
claims in respect thereof had been asserted as of such date), except liabilities or obligations (i)
adequately reserved against in the Base Balance Sheet or (ii) accounts payable to third parties
incurred since the Base Balance Sheet in the ordinary course of business and in a manner which is
consistent with past practices.

          2.9 Accounts Payable; Accounts Receivable.

               (a) Except as set forth in Section 2.9(a) of the Disclosure Schedule, all accounts
payable of the Company arose in bona fide arm’s-length transactions in the ordinary course of
business and in a manner which is consistent with past practices and no material account payable is
delinquent by more than sixty (60) days in its payment. Since the date of the

-9-

 

Base Balance Sheet, the Company has paid its accounts payable in the ordinary course of
business and in a manner which is consistent with its past practices. As of the date hereof, the
Company has no account payable to any Person which is known by the Company to be affiliated with it
or any of its directors, officers, employees or stockholders, except as set forth in Section
2.9(a) of the Disclosure Schedule.

               (b) All of the reinsurance recoverables, premium receivables and other accounts receivable of
the Company (collectively, “Accounts Receivable”) arose in bona fide arm’s-length
transactions in the ordinary course of business and are valid and enforceable claims (subject to
(i) applicable bankruptcy, insolvency, reorganization, fraudulent transfer or other laws of general
application relating to or affecting the enforcement of creditors’ rights generally and (ii) the
effect of rules of law governing the availability of equitable remedies) not subject to any set-off
or counterclaim, and are collectible in the ordinary course of business, subject to the allowance
for doubtful accounts stated in the Base Balance Sheet in accordance with GAAP. Since the date of
the Base Balance Sheet, except as disclosed in Section 2.9 of the Disclosure Schedule, the
Company has collected its Accounts Receivable in the ordinary course of business and in a manner
which is consistent with past practices and has not accelerated or intentionally delayed any such
collections. Except as set forth in Section 2.9(b) of the Disclosure Schedule, as of the
date hereof, the Company does not have any Account Receivable from any Person which is known by the
Company to be affiliated with it or any of its directors, officers, employees or stockholders.

          2.10 Transactions with Affiliates; Distributions to Stockholders.

               (a) Except as set forth in Section 2.10(a) of the Disclosure Schedule and for
obligations to reimburse employees for customary and reasonable work-related expenses incurred
during the ordinary course of their employment, there are no loans, leases, agreements (including
any unwritten agreements) or other transactions or continuing transactions nor has there been any
such transactions since January 1, 2003 by and between the Company and any officer, employee,
director, Affiliate or stockholder (including any trustee or beneficiary of any trust which is a
stockholder) of the Company (other than Affiliates which as of the Closing Date are Subsidiaries of
the Holding Company), or to the Company’s knowledge any member of such officer’s, employee’s,
director’s, Affiliate’s or stockholder’s immediate family or Persons controlling, controlled by,
under common control with or otherwise affiliated with such officer, employee, director, Affiliate
or stockholder or his or her immediate family (other than Affiliates which as of the Closing Date
are Subsidiaries of the Holding Company) (each, an “Affiliated Transaction”). Any such
Affiliated Transaction was entered into and has been heretofore conducted in bona fide arm’s-length
transactions and approved by the Company’s Board of Directors and/or stockholders in accordance
with applicable state law. Except as set forth on Section 2.10(a) of the Disclosure
Schedule, no Affiliate of the Company owns any assets used or held for use in the conduct of
the business of the Company (other than Affiliates which as of the Closing Date are Subsidiaries of
the Holding Company).

               (b) Except as set forth in Section 2.10(b) of the Disclosure Schedule, no
distributions, dividends or other payments (other than salary and other compensation) have been
made by the Company to any of its stockholders and no stock has been repurchased or redeemed by the
Company since December 31, 2002.

-10-

 

          2.11 Title to Properties. Section 2.11 of the Disclosure Schedule sets forth
the addresses and uses of all real property that the Company owns, leases or subleases. Except as
set forth in Section 2.11 of the Disclosure Schedule, the Company has good, valid and (if
applicable) marketable title to all of its assets, free and clear of all Liens, and none of such
assets is subject to any conditional sale agreement. Such assets constitute all property which is
necessary to conduct the business of the Company as currently conducted and all equipment included
therein is in good condition and repair (ordinary wear and tear excepted). All leases of real or
personal property to which the Company is a party are in full force and effect and afford the
Company peaceful possession of the subject matter of the lease. The Company has not received any
written notice of any violation of any zoning, building or safety ordinance, regulation or
requirement or other law or regulation applicable to the operation of its owned or leased
properties. There are no material defaults by the Company, or to the Company’s knowledge by any
other party, under any lease or other agreements which might curtail in any adverse manner the
present use of the property of the Company.

          2.12 Tax Matters. The Company has timely and properly filed all federal, state, local
and foreign Tax returns required to be filed by it through the date hereof. The Company has paid
or caused to be paid or accrued all Taxes, required to be paid or accrued by it for all periods for
which the applicable statute of limitations has not expired through the date hereof whether
disputed or not, excepting only Taxes which are being actively disputed by appropriate proceedings
and for which appropriate provision has been made, as set forth in Section 2.12 of the
Disclosure Schedule. All Taxes and other assessments and levies which the Company was or is
required to withhold or collect including, without limitation, all Taxes which the Company is
obligated to withhold from amounts owing to employees, creditors and third parties have been
withheld and collected for all periods for which the applicable statute of limitations has not
expired and except for such Taxes which are not yet due and payable, have been paid over to the
proper governmental authorities. Except for automatically available extensions for the most recent
tax period, there are no current extensions with respect to the payment of Taxes or the filing of
Tax returns by or on behalf of the Company. Except as set forth in Section 2.12 of the
Disclosure Schedule, (i) the Company has not received written notice of any audit or of any
proposed deficiencies from the Internal Revenue Service (the “IRS”) or any other taxing
authority; (ii) there are no waivers in effect of applicable statutes of limitations with respect
to any Taxes owed by the Company for any year; (iii) neither the IRS nor any other taxing authority
is now asserting, or to the Company’s knowledge threatening to assert, against the Company any
deficiency or claim for additional Taxes or interest thereon or penalties in connection therewith
in respect of the income or sales of the Company; and (iv) the Company has never been a member of
an affiliated group of corporations filing a consolidated federal income Tax return nor does the
Company have any liability for Taxes of any other Person under Treasury Regulations Section
1.1502-6 (or any similar provision of foreign, state or local law) or otherwise. Except as set
forth in Section 2.12 of the Disclosure Schedule, the Company is not a party to any Tax
allocation or sharing arrangement pursuant to which the Company has any continuing liability or
obligation. Except as set forth on Section 2.12 of the Disclosure Schedule, the Company is
not a party to any contract, agreement, plan or arrangement covering any employee or former
employee thereof that, individually or collectively, could give rise to the payment of any amount
that would not be deductible pursuant to Section 280G or Section 162 of the Code. The Company is
not a “foreign person” within the meaning of Section 1445 of the Code and Treasury Regulations
Section 1.1445-2. The Company has not elected to be treated as

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an S corporation or a consenting corporation pursuant to Section 1362(a) or Section 341(f),
respectively, of the Code, nor has it made any other elections pursuant to the Code that could have
a Material Adverse Effect.

          2.13 Certain Contracts and Arrangements. Except as set forth in Section 2.13 of
the Disclosure Schedule (with true, complete and correct copies delivered to the Investor
and/or its counsel), the Company is not a party or subject to or bound by:

          (a) any contract or agreement with any Producer listed in Section 2.18 of the
Disclosure Schedule or any reinsurer;

          (b) any contract or agreement involving potential commitment or payment by the Company
in excess of $75,000 or which is otherwise material and not entered into in the ordinary
course of business and consistent with past practice excluding insurance policies written by
the Company in the ordinary course of business;

          (c) any contract, lease or agreement involving payments in excess of $75,000 or which
is not cancelable by the Company without penalty on not less than sixty (60) days notice;

          (d) any contract containing covenants directly or explicitly limiting the freedom of
the Company to compete in any line of business or geographic area or with any Person, to
solicit customers or to offer any of its products;

          (e) any contract or agreement with (i) any Affiliate of the Company or (ii) to the
knowledge of the Company, any stockholder of the Company which involves payments in excess
of $75,000;

          (f) any indenture, mortgage, promissory note, loan agreement, guaranty or other
agreement or commitment for borrowing or any pledge or security arrangement;

          (g) any employment contracts, non-competition agreements, loan agreements, severance or
other agreements involving payments in excess of $75,000 with officers, directors,
employees, stockholders or consultants of the Company or Persons related to or affiliated
with such Persons;

          (h) any stock redemption or purchase agreements or other agreements affecting or
relating to the capital stock of the Company, including, without limitation, any agreement
with any stockholder of the Company which includes, without limitation, anti-dilution
rights, voting arrangements or operating covenants;

          (i) any agreement or other arrangement involving payments in excess of $75,000 with any
service provider including arrangements pursuant to which investment advisory or management,
administrative or other services are performed;

          (j) any agreement or arrangement respecting tax sharing;

-12-

 

          (k) any agreement, understanding or arrangement with any insurance regulatory authority
and any agreement, understanding or arrangement with any non-insurance regulatory authority
in effect at any time since January 1, 2001;

          (l) any bonus, pension, profit sharing, retirement or stock option plans;

          (m) any royalty, dividend or similar arrangement based on the revenues or profits of
the Company or any material contract or agreement involving fixed price or fixed volume
arrangements;

          (n) any joint venture, partnership, manufacturer, development, distribution, supply or
similar agreement;

          (o) any acquisition, disposition, merger or similar agreement or letter of intent with
respect to the foregoing;

          (p) any agreement under which it has granted any Person any registration rights, other
than the Registration Rights Agreement; or

          (q) any other contract involving payments in excess of $75,000 not executed in the
ordinary course of business and consistent with past practice.

          All contracts, agreements, leases and instruments required to be identified on Section
2.13 of the Disclosure Schedule (the “Disclosed Contracts”) are (i) valid and are in
full force and effect, (ii) constitute legal, valid and binding obligations of the Company and to
the knowledge of the Company are legal, valid and binding obligations of the other party thereto
and (iii) are enforceable in accordance with their respective terms, subject to (x) applicable
bankruptcy, insolvency, reorganization, fraudulent transfer or other laws of general application
relating to or affecting the enforcement of creditors’ rights generally and (y) the effect of rules
of law governing the availability of equitable remedies. Except as disclosed in Section 2.13
of the Disclosure Schedule, the consummation of the transactions contemplated hereby, without
notice to or consent or approval of any party, will not constitute a breach of, violation of, or
default under any provision of any Disclosed Contract. The Company has not received any notice,
and, to the knowledge of the Company, there are no threats of termination or claims of material
breach or default by the other party to any Disclosed Contract. The Company is not in material
breach or default of, and to the knowledge of the Company no other party is in material breach or
default of, any Disclosed Contract, and no condition or event or fact exists which, with written
notice, lapse of time or both would constitute a material breach or default thereunder.

          2.14 Intellectual Property.

               (a) Section 2.14 of the Disclosure Schedule sets forth a true and complete list of all
Intellectual Property used or held for use by the Company and all jurisdictions where such
Intellectual Property is registered or protected or where applications have been filed, together
with all patent, registration and application numbers. The Company owns and has the right to use,
or, in the case of licensed rights, has valid license rights to use, such Intellectual Property.

-13-

 

               (b) Section 2.14 of the Disclosure Schedule sets forth a true and complete list of,
and the Company has made available to the Investor, all licenses, sublicenses and other agreements
pursuant to which (i) the Company has authorized any other Person to use Intellectual Property, or
(ii) any Person has authorized the Company to use any Intellectual Property.

               (c) The Intellectual Property does not infringe upon, violate or misappropriate the rights of
any Person. Consummation of the transactions contemplated hereby will not result in the loss or
impairment of any of the Intellectual Property or any right pertaining thereto. The Company is not
aware of any infringement or unauthorized use by any Person of any Intellectual Property.

          2.15 Litigation. Except as set forth in Section 2.15 of the Disclosure
Schedule, there is no action, claim, litigation or governmental or administrative proceeding or
investigation, including, without limitation, any claim of bad faith or any claim seeking punitive
or extracontractual damages, pending or, to the knowledge of the Company, threatened (i) against
the Company or (ii) affecting the properties or assets of the Company, (iii) as to matters relating
to the Company, against any officer, director or stockholder or key employee of the Company or (iv)
which might call into question the validity of, or hinder the enforceability of this Agreement and
the Related Agreements. No claim has been asserted in writing against the Company for
renegotiation or price redetermination of any business transaction. Section 2.15 of the
Disclosure Schedule includes a description of all litigation, claims, proceedings or
investigations involving the Company or any of its officers, directors, stockholders or key
employees in connection with the business of the Company occurring, arising or existing since
December 31, 2002.

          2.16 Labor Matters. The Company is not delinquent in payments to any of its
employees, consultants or independent contractors for any wages, salaries, commissions, bonuses or
other direct compensation for any service performed for it to the date hereof or amounts required
to be reimbursed to such employees, consultants or independent contractors. Except as set forth in
Section 2.16 of the Disclosure Schedule or as required by law, upon termination of the
employment or engagement of any such employees, consultants or independent contractors, no
severance or other payments will become due. Except as set forth in Section 2.16 of the
Disclosure Schedule, the Company has no policy, practice, plan or program of paying severance
pay or any form of severance compensation in connection with the termination of employment
services. The Company is and has been in compliance in all material respects with all applicable
laws and regulations, respecting labor, employment, fair employment practices, terms and conditions
of employment, and wages and hours. There are no pending charges of employment discrimination,
sexual harassment or unfair labor practices except as set forth in Section 2.16 of the
Disclosure Schedule, nor are there any strikes, slowdowns, stoppages of work, or any other
concerted interference with normal operations existing, pending or, to the Company’s knowledge,
threatened against or involving the Company. There are no union organizing activities pending or,
to the Company’s knowledge, threatened with respect to the Company and, to the Company’s knowledge,
no question concerning representations exists respecting the employees of the Company. No
collective bargaining agreement is in effect or is currently being or is about to be negotiated by
the Company. There are no grievances, complaints or charges that have been filed under any dispute
resolution procedure. No
arbitration or similar proceeding

-14-

 

relating to labor matters is pending and no claim therefor
has been asserted against the Company. The Company is in compliance with the requirements of the
Immigration Reform Control Act of 1986. There are no changes pending or, to the Company’s
knowledge, threatened with respect to senior management or any key employees or independent
contractors of the Company (including any resignations) nor has the Company received any notice or
information concerning any prospective change with respect to such senior management, key employees
or independent contractors.

          2.17 Employee Benefit Programs.

               (a) Section 2.17 of the Disclosure Schedule sets forth a list of every Employee
Program that is currently maintained by the Company or for which the Company has any liability or
obligation and (i) is subject to ERISA, (ii) involves the issuance of options or other securities,
or (iii) is otherwise material.

               (b) The terms and operation of each Employee Program comply in all material respects with all
applicable laws and regulations relating to such Employee Program. There are no unfunded benefit
liabilities, as defined in Section 4001(a)(18) of ERISA under any Employee Program and the Company
has made all contributions to or payments under each Employee Program as required by law and
applicable Employee Program documents. If required, each Employee Program which has been
maintained by the Company and which has at any time been intended to qualify under Section 401(a)
or Section 501(c)(9) of the Code has received a favorable determination or opinion or approval
letter from the IRS regarding its qualification under such Section (or an application for such a
determination or opinion or approval letter is not yet due to be filed with the IRS with respect to
any “disqualifying provision” within the meaning of Treasury Regulations, Section 1.401(b)-1 or has
been timely filed and is pending with the IRS or may rely on the opinion letter issued by the IRS
to the sponsor of a prototype plan adopted by the Company) and has, in fact, been qualified under
the applicable Section of the Code from the effective date of such Employee Program through and
including the Closing (or, if earlier, the date that all of such Employee Program’s assets were
distributed). The Company has no knowledge of any event or omission which would cause such
Employee Program to lose its qualification under the applicable Section. The Company is not
required to make any payments or contributions to any Employee Program pursuant to any collective
bargaining agreement or any applicable labor relations law, and all Employee Programs are
terminable at the discretion of the Company without liability to the Company upon or following such
termination. No Employee Program is a “multiple employer plan” or a “multiemployer plan,” within
the meaning of ERISA or the Code. The Company has never maintained or contributed to any
Employee Program providing or promising any health or other nonpension benefits to terminated
employees, other than as required by Section 4980B of the Code.

          2.18 List of Certain Employees and Producers.

               (a) Section 2.18(a) of the Disclosure Schedule sets forth a detailed description of
all compensation, including salary, bonus and deferred compensation paid or payable, for each
officer, employee, consultant and independent contractor of the Company who individually received
compensation in excess of $50,000 for the fiscal year ended December 31,

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2003 or is anticipated to receive compensation in excess of $50,000 for the fiscal year ending
December 31, 2004.

               (b) Section 2.18(b) of the Disclosure Schedule sets forth the name of the top one
hundred (100) Producers of the Company by dollar value of premiums written during the twelve (12)
month period prior to the date hereof (the “Major Producers”) showing with respect to each,
the name, address and dollar value involved. To the knowledge of the Company, the relationships of
the Company with its Producers are good commercial working relationships. Except as set forth in
Section 2.18(b) of the Disclosure Schedule, no Producer of the Company has canceled or
otherwise terminated its relationship with the Company or has decreased materially its volume of
policies written through the Company. No Producer has, to the knowledge of the Company, any plan
or intention to terminate, to cancel or otherwise materially and adversely modify its relationship
with the Company or to decrease materially or limit its volume of policies written through the
Company.

               (c) each Producer, at the time such Producer wrote, sold or produced business for the Company,
to the extent required by law, was duly appointed by the Company to act as a Producer for the
Company and, to the Company’s knowledge, was duly licensed as an insurance Producer (for the type
of business written, sold or produced by such insurance Producer) in the particular jurisdiction in
which such Producer wrote, sold or produced such business for the Company; and neither the Company
nor to the Company’s knowledge any such Producer violated (or with or without notice or lapse of
time or both would have violated) any term or provision of applicable law in any material respect
(including but not limited to, laws relating to the marketing, sale or production of the Company’s
products).

          2.19 Insurance. The physical properties, assets, business, operations, employees,
officers and directors of the Company are insured under policies maintained by the Company of the
type and in amounts set forth in Section 2.19 of the Disclosure Schedule. Except as set
forth in Section 2.19 of the Disclosure Schedule and except for claims for health care
benefits incurred in the ordinary course of business, there is no claim by the Company pending
under any such insurance policies. Said insurance policies and arrangements are in full force and
effect, all premiums with respect thereto are currently paid or not yet due, and the Company is in
compliance in all material respects with the terms thereof. Said insurance is sufficient for
compliance by the Company with all requirements of applicable law and all agreements and leases to
which it is a party. Each such insurance policy shall continue to be in full force and effect
immediately following consummation of the transactions contemplated by this Agreement. To the
Company’s knowledge, there is no threatened termination of any such policies or arrangements.

          2.20 Licenses and Permits. The Company has all Permits necessary to permit it to own
its property and to conduct its business as it is presently conducted and all such Permits are
valid and in full force and effect. Except as set forth on Section 2.20 of the Disclosure
Schedule, no Permit is subject to termination as a result of the execution of this Agreement or
consummation of the transactions contemplated hereby. The Company possesses a license, certificate
of authority, permit, authorization or other qualification to transact insurance or reinsurance,
including, but not limited to, a qualification to write insurance on a surplus lines or
non-admitted basis (a “Qualification”) in each state or other jurisdiction in which the
Company is

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required to possess a Qualification. Section 2.20 of the Disclosure
Schedule contains a list of each Qualification held by the Company indicating the jurisdiction
and lines of business covered thereby. All such Qualifications are in full force and effect and
are not conditioned on the payment of any fee or Tax (except with respect to premium Taxes and/or
other fees directly attributable to the writing of insurance business), nor to any regulatory or
administrative approval or consent (other than approvals and consents required pursuant to policy
form and rate filing requirements). Except as otherwise disclosed in Section 2.20 of the
Disclosure Schedule, the Company has not breached any provision of, and is not in default of
the terms of, and has not engaged in any activity which would cause revocation or suspension of,
any such Qualifications. The Company is not aware of and has not received any notice of any event,
inquiry, investigation or limitation of any such Qualification, and to the knowledge of the
Company, there is no sustainable basis for any such suspension, revocation or limitation. Except
as otherwise disclosed in Section 2.20 of the Disclosure Schedule the Company is not
currently the subject of any investigation, supervision, conservation, rehabilitation, liquidation,
receivership, insolvency or other similar proceeding nor is the Company operating under any written
or oral formal or informal agreement or understanding with the insurance licensing authority of any
jurisdiction or any other regulatory authority which restricts the conduct of its business or
requires it to take, or refrain from taking, any action.

          2.21 Compliance with Laws.

               (a) The Company is in compliance in all material respects with all applicable statutes,
ordinances, orders, rules and regulations promulgated by any federal, state, municipal or other
governmental authority, including the rules and regulations of the Securities and Exchange
Commission which apply to the conduct of its business or any of its assets or properties. The
Company has not in the last five (5) years been and is not currently subject to any judgment,
consent decree, compliance order or administrative order with respect to any aspect of the
business, affairs, properties or assets of the Company, and is not currently subject to any
administrative inquiry or formal or informal complaint or claim from any regulatory agency with
respect to any aspect of the business, affairs, properties or assets of the Company. Included in
Section 2.21(a) of the Disclosure Schedule are copies of the most recent financial
examination and market conduct examinations, if any, of the Company or its Subsidiaries, and all
responses, correspondence, orders and agreements in connection therewith. Except as disclosed in
Section 2.21(a) of the Disclosure Schedule, no financial examination or market conduct
examination is ongoing or to the Company’s knowledge is scheduled.

               (b) Section 2.21(b) of the Disclosure Schedule identifies all forms of insurance
policies and riders thereto (collectively, “Policies”) currently issued by the Company that
have been filed under applicable insurance laws requiring the approval of such forms by regulatory
authorities. Section 2.21(b) of the Disclosure Schedule contains a list of each such
Policy indicating those Policies which are currently issued and those which are filed pending
review by applicable regulatory authorities. All policy applications with respect to Policies
currently issued and required to be filed with or approved by applicable authorities under
applicable insurance laws have been so filed or approved. Any premium rates with respect to
Policies currently issued, required to be filed with or approved by applicable regulatory
governmental authorities under applicable insurance laws have been so filed or approved and
premiums charged conform thereto. Any premium rate with respect to Policies currently issued

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or in the past issued comply or complied with, as applicable, all insurance ratings laws and
regulations. The Company is in compliance with such filing requirements. No deficiencies have
been asserted by any regulatory authority with respect to any such filings which have not been
cured or otherwise resolved to the satisfaction of such regulatory authority. The underwriting
standards utilized and rates and rating factors and criteria applied by the Company with respect to
outstanding Policies have been previously disclosed to the Investor and with respect to any such
Policies reinsured in whole or in part, conform in all material respects to the standards and
ratings required pursuant to the terms of the related reinsurance or other agreement. Section
2.21(b) of the Disclosure Schedule sets forth all currently utilized underwriting, actuarial,
reserve (including claims department policies relating to establishing and maintaining appropriate
reserves) or investment policies or guidelines of the Company (collectively, “Business
Guidelines”).

               (c) The sale, marketing (including, but not limited to, any advertisements and point-of-sale
materials) and administration of the Company’s Policies and reinsurance contracts have been
conducted in compliance with all federal, state, local and foreign law (including, but not limited
to, common law) and regulations applicable to such sale, marketing and administration, including,
but not limited to, laws or regulations (i) requiring mandatory disclosure of policy information
and (ii) precluding, or granting a remedy with respect to, misrepresentation of insurance policies
and reinsurance contracts or non-payment of claims or other unfair trade practices with respect to
insureds of the Company in connection with such sale, marketing and administration of the Company’s
currently issued insurance Policies. All filings or submissions made by the Company with respect
to its Policies or reinsurance contracts with any governmental or other regulatory body were in
compliance with applicable law when filed and no deficiencies have been asserted by any such
governmental or regulatory body with respect to such filings or submissions that have not been
satisfied.

               (d) The Company has (a) timely paid all guaranty fund assessments that are due, or claimed or
asserted by any insurance regulatory authority to be due from the Company or (b) provided for all
such assessments in the Company’s financial statements to the extent necessary to be in conformity
with GAAP or SAP, as applicable.

               (e) Section 2.21(e) of the Disclosure Schedule lists all funds required to be
maintained under any applicable insurance law in each jurisdiction in which the Company holds a
Qualification (each a “Deposit”). Section 2.21(e) of the Disclosure Schedule
accurately sets forth the dollar amount of each such Deposit, the assets which comprise the Deposit
and the name of the bank and the number of the bank account in which such Deposit is maintained.

          2.22 Reinsurance. Section 2.22 of the Disclosure Schedule lists all ceded or
assumed reinsurance or retrocessional treaties and agreements and facultative certificates to which
the Company is currently a party and under which there is liability by either party to such
agreement or certificate (collectively, the “Existing Reinsurance Agreements”). Each of
the Existing Reinsurance Agreements is valid and binding in all respects in accordance with its
terms. The Company does not have any knowledge that the financial condition of any party to an
Existing Reinsurance Agreement is impaired to the extent that a default thereunder may be
reasonably anticipated. Except as disclosed in Section 2.22 of the Disclosure Schedule,
none of the Existing Reinsurance Agreements contains any provision providing that the other
party

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thereto may terminate such Existing Reinsurance Agreement, whether as a result of a
change of control or otherwise. Except as disclosed in Section 2.22 of the Disclosure
Schedule, the Company is entitled to take full credit on its statutory financial statements
filed with state insurance regulatory authorities with respect to any Existing Reinsurance
Agreement pursuant to which the Company has ceded reinsurance. Except as set forth in Section
2.22 of the Disclosure Schedule, no reinsurer of the Company has canceled or otherwise
terminated its relationship with the Company and no reinsurer has, to the knowledge of the Company,
any plan or intention to terminate, to cancel or otherwise materially and adversely modify its
relationship with the Company.

          2.23 Environmental Matters. The Company has complied with and is in compliance with
all applicable Environmental Laws (as defined below). The Company has no obligation or liability
with respect to any damage to any person, property or the environment (air, water, earth or
facilities) as a result of any use or disposal of Hazardous Substances. The Company has no
obligation to remediate any Hazardous Substances. There is no pending or, to the knowledge of the
Company, threatened civil or criminal litigation, written notice of violation, formal
administrative proceeding, or investigation, inquiry or information request by any Governmental
Entity, relating to any Environmental Law involving the Company or its premises. The Company has
provided the Investor with correct and complete copies and results of all reports, studies,
analyses, tests or monitoring possessed or initiated by the Company pertaining to Hazardous
Substances or compliance with Environmental Laws with respect to the conduct of its business. For
purposes of this Agreement, “Environmental Law” means any federal, state or local law,
statute, rule or regulation or the common law relating to the protection of human health or the
environment, including without limitation, the Comprehensive Environmental Response, Compensation
and Liability Act of 1980 (“CERCLA”) and the Resource Conservation and Recovery Act of
1976.

          2.24 Investment Banking; Brokerage. Except as set forth on Section 2.24 of the
Disclosure Schedule the Company has not incurred or become liable for any brokerage fees,
finder’s fees, banking fees, or similar compensation (collectively “Finder’s Fees”) in
connection with the transactions contemplated by this Agreement or based on any arrangement or
agreement made by or on behalf of the Company.

          2.25 Securities Exemption. Based in part on the representations made by the Investor
in Section 4 hereof, the offer and sale of the Series A Preferred Stock solely to the Investor in
accordance with this Agreement and (assuming no change in currently applicable law or the Charter,
no transfer of Series A Preferred Stock by the holder thereof and no commission or other
remuneration is paid or given, directly or indirectly, for soliciting the issuance of Conversion
Shares upon conversion or exercise of the Series A Preferred Stock) the issuance of Conversion
Shares are exempt from the registration and prospectus delivery requirements of the Securities Act
and the securities registration and qualification requirements of the currently effective
provisions of the securities laws of the state in which the Investor is resident, and neither the
Company nor any authorized agent acting on its behalf will take any action hereafter that would
cause the loss of such exemption.

          2.26 Information Supplied by the Company. This Agreement (including the schedules and
exhibits hereto), the Disclosure Schedule and the certificates and
statements

-19-

 

furnished pursuant to this Agreement by or on behalf of the Company, together with
all other information provided by the Company to the Investor in connection with the transactions
contemplated hereby (as of the date such information was prepared), when taken and considered as a
whole, do not contain any untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements contained therein not misleading in the light of the
circumstances under which they were made. To the Company’s knowledge, there is no material fact
directly relating to the properties, assets, business, operations, condition (financial or
otherwise) or prospects of the Company (including any competitive developments other than facts
which relate to general economic or industry trends or conditions) that materially adversely
affects the same that has not been set forth in this Agreement or in the Disclosure Schedule.

          2.27 Broker Dealer; Investment Advisor. The Company is not now and never has been
engaged in activities that would require the Company to register as a broker-dealer or investment
adviser under applicable federal or state law.

SECTION 3 REPRESENTATIONS AND WARRANTIES OF THE INVESTOR

     As a material inducement to the Holding Company to enter into this Agreement and consummate
the transactions contemplated hereby, the Investor hereby makes to the Holding Company the
representations and warranties contained in this Section as of the date hereof and as of the
Closing Date.

          3.1 Investment Status. The Investor represents that it is an “accredited investor” as
such term is defined in Rule 501 under the Securities Act. The Investor represents to the Holding
Company that it is purchasing the Series A Preferred Stock for its own account, for investment only
and not with a view to, or any present intention of, effecting a distribution of such securities or
any part thereof except pursuant to a registration statement or an available exemption under
applicable law. The Investor acknowledges that such securities have not been registered under the
Securities Act or the securities laws of any state or other jurisdiction and cannot be disposed of
unless they are subsequently registered under the Securities Act and any applicable state laws or
unless an exemption from such registration is available.

          3.2 Authority. The Investor represents that it has full right, authority and power
under its organizational documents to enter into this Agreement and each agreement, document and
instrument to be executed and delivered by or on behalf of the Investor pursuant to or as
contemplated by this Agreement and to carry out the transactions contemplated hereby and thereby,
and the execution, delivery and performance by the Investor of this Agreement and each such other
agreement, document and instrument have been duly authorized by all necessary action under the
Investor’s organizational documents. This Agreement and each agreement, document and instrument
executed and delivered by the Investor pursuant to or as contemplated by this Agreement constitute,
or when executed and delivered will constitute, valid and binding obligations of the Investor
enforceable in accordance with their respective terms, except as may be limited by (i) applicable
bankruptcy, insolvency, reorganization or other laws of general application relating to or
affecting the enforcement of creditors’ rights generally; (ii) the effect of rules of law governing
the availability of equitable remedies and (iii) to the extent the
indemnification provisions contained in this Agreement or the Registration Rights Agreement
may be limited by applicable federal or state securities laws.

-20-

 

          3.3 Investment Banking; Brokerage Fees. The Investor has not incurred or become
liable for any Finder’s Fee relating to or in connection with the transactions contemplated hereby.

          3.4 Disclosure of Information. The Investor represents that it has had an opportunity
to ask questions and receive answers from the Company regarding the terms and conditions of the
offering of the Series A Preferred Stock and the business, properties, prospects and financial
condition of the Company; provided however, that no investigation or inquiry by the
Investor shall in any way limit the Investor’s rights with respect to any breach of any
representation or warranty hereunder.

SECTION 4 INTERIM CONDUCT COVENANTS OF THE HOLDING COMPANY

     Unless otherwise agreed by the Investor, from the date of this Agreement through the earlier
of the Closing Date or the termination of this Agreement, the Holding Company shall:

          4.1 Conduct of Business. Operate, and cause the Subsidiaries to operate, its and
their businesses in the ordinary course and consistent with past practice. Without limiting the
generality of the foregoing, the Holding Company shall, and shall cause the Subsidiaries to:

               (a) except as contemplated by the Arpco Stock Purchase Agreement or the Quantum Merger
Agreement, not authorize or engage in any acquisition of any corporation or business concerns,
whether by acquisition of any capital stock or assets, merger or otherwise and whether in
consideration of the payment of cash, capital stock or otherwise, make any material investment in
another business entity or any joint venture or similar arrangement;

               (b) not sell, lease or otherwise dispose of or agree to sell, lease or otherwise dispose of,
any assets, properties, rights or claims other than in the ordinary course of business and
consistent with past practice;

               (c) not issue, or agree to issue any shares of capital stock or securities convertible into or
exchangeable for shares of capital stock or declare or pay dividends, repurchase any shares of
capital stock or make any distributions of cash, property or securities with respect to any shares
of capital stock, other than the issuance of shares of capital stock upon the exercise of currently
outstanding options listed in Section 2.4 of the Disclosure Schedule and the amendment of
such options to make them exercisable for Common Stock rather than class B common stock;

               (d) not incur any indebtedness other than indebtedness incurred in the ordinary course of
business under the Company’s revolving credit facility;

               (e) use its reasonable efforts to preserve and maintain its business as presently conducted
and preserve its present relationships with the Producers, customers, lenders,
employees and others having business relations with it in the ordinary course of business and
in accordance with past practice;

               (f) not change its Business Guidelines;

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               (g) not terminate, make any material modifications to or breach any material provision of the
Disclosed Contracts;

               (h) not engage in any transactions with the Principal Stockholders or their Affiliates, except
ongoing transactions which have been disclosed to the Investor in Section 2.10(a) of the
Disclosure Schedule as contemplated herein;

               (i) not make any changes in executive management or the compensation, benefits or terms of
their employment; or

               (j) not take or omit to take any action which would create a breach or inaccuracy of the
representations and warranties set forth in Section 2, or which could be reasonably anticipated to
have a Material Adverse Effect.

          4.2 Quantum Direct Financial Merger. Subject to obtaining the required approval of
applicable regulatory authorities, make effective the merger between the Holding Company and
Quantum pursuant to the Merger Agreement in the form attached hereto as Exhibit C (the
“Quantum Merger Agreement”).

          4.3 Purchase of Arpco Shares. If the Investor elects to assign the Arpco Stock
Purchase Agreement to the Holding Company, accept such assignment and, subject to obtaining the
required approval of applicable regulatory authorities and obtaining a fairness opinion from
Cochran, Caronia & Co. prepared at the expense of the Holding Company regarding the fairness of the
consideration to be paid by the Holding Company to the shareholders of Arpco pursuant to the Arpco
Stock Purchase Agreement (the “Fairness Opinion”), consummate the closing of the Arpco
share purchase pursuant to the Arpco Stock Purchase Agreement (which shall have been assigned to
the Holding Company) on the Closing Date and concurrently with the Closing of the transactions
contemplated hereunder (it being acknowledged that proceeds from the investment by the Investor
hereunder shall be used to consummate the Arpco purchase).

          4.4 Consents and Approvals. Exercise its best efforts to obtain all regulatory and
other consents and approvals necessary to fulfill its obligations under and effectuate the
transactions contemplated by this Agreement, the Related Agreements and all agreements and
documents contemplated hereby or thereby.

          4.5 Notification of Breach. Promptly notify the Investor of any information which
makes, or if known to the Holding Company would make, any representation, warranty or covenant of
the Holding Company contained herein untrue.

          4.6 Exclusivity. Not solicit, initiate or encourage any other proposal or offer from,
or otherwise enter into any other agreements or arrangements (other than this
Agreement) with, any other Person (other than the Investor), relating to any Alternative
Transaction Proposal.

          4.7 No Action Resulting in Breach. Not take or fail to take any action which would
result in a breach of any representation, warranty, covenant, agreement or other obligation set
forth in this Agreement, the Related Agreements or any agreement or document contemplated hereby or
thereby.

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SECTION 5 CONDITIONS OF PURCHASE BY THE INVESTOR

     The Investor’s obligation to purchase and pay for the Series A Preferred Stock to be purchased
by it hereunder at the Closing shall be subject to compliance by the Holding Company with the
agreements herein contained and to the fulfillment to the Investor’s satisfaction, or the waiver by
the Investor, on or before the Closing Date of the following conditions:

          5.1 Satisfaction of Conditions. The representations and warranties of the Holding
Company contained in this Agreement shall be true, complete and correct on and as of the Closing
Date and each of the conditions specified in this Section 5 shall have been satisfied or waived in
writing by the Investor.

          5.2 Performance by the Holding Company. All of the covenants, terms and conditions of
this Agreement and the Related Agreements shall be satisfied or performed by the Holding Company on
or before the Closing Date.

          5.3 Opinion of Counsel. The Investor shall have received from Dickinson Wright PLLC
an opinion dated as of the Closing Date substantially in the form attached hereto as Exhibit
D.

          5.4 Authorization. The Board of Directors and stockholders of the Holding Company
shall have duly adopted resolutions in form and substance reasonably satisfactory to the Investor
and shall have taken all actions necessary for the purpose of authorizing the Holding Company to
consummate all of the transactions contemplated hereby (including, without limitation, all
consents, permits, waivers and filings necessary for the issuance of the Series A Preferred Stock
and the Conversion Shares as contemplated hereunder).

          5.5 Amended and Restated Charter. The Holding Company shall have duly and properly
authorized and filed with the Secretary of State of the State of Delaware the Amended and Restated
Certificate of Incorporation which shall designate and authorize the Series A Preferred Stock and
the Amended and Restated Certificate of Incorporation shall be in effect as of the Closing Date on
the terms set forth in Exhibit A hereto. The Holding Company shall have delivered to the
Investor and/or its counsel a copy of the Holding Company’s Amended and Restated Certificate of
Incorporation certified as of a recent date by the Secretary of State of the State of Delaware.

          5.6 Delivery of Documents. The Holding Company shall have executed and delivered to
the Investor and/or its counsel (or shall have caused to be executed and delivered to the Investor
and/or its counsel by the appropriate Persons) the following:

               (i) Stock Certificates. A certificate or certificates in the name of the
Investor for the Series A Preferred Stock to be purchased hereunder at the Closing;

               (ii) Good Standing Certificates. Certificates issued by (a) the Secretary of
State (or similar authority) of each applicable jurisdiction certifying that the Holding
Company and its Subsidiaries have legal existence and are in good standing and (b) the
Secretary of State (or similar authority) of each jurisdiction in which the Holding

-23-

 

Company
and its Subsidiaries have qualified to do business as foreign corporations as to such
foreign qualification;

               (iii) Officer’s Certificate. Certificates executed by the President of the
Holding Company certifying that (a) the representations and warranties of the Holding
Company are true, complete and correct and (b) each of the conditions under this Section 5
have been satisfied or waived shall have been delivered to the Investor and/or its counsel;

               (iv) Secretary’s Certificate. A certificate of the Secretary of the Holding
Company certifying (a) the resolutions adopted by the Board of Directors and stockholders as
contemplated in Section 5.4 hereof, (b) the Holding Company’s bylaws and (c) the names of
the officers of the Holding Company authorized to sign this Agreement and the other
documents, instruments or certificates to be delivered pursuant to this Agreement by the
Holding Company or any of its officers, together with the true signatures of such officers;
and

               (v) Other Documents. Such other supporting documents and certificates as the
Investor may reasonably request and as may be required pursuant to this Agreement.

          5.7 Quantum Direct Financial Merger. The merger between the Holding Company and
Quantum pursuant to the Quantum Merger Agreement shall have been declared effective by all
applicable state authorities.

          5.8 Purchase of Arpco Shares.

               (a) If the Investor assigns to the Holding Company its right to purchase the Arpco shares
pursuant to the Arpco Stock Purchase Agreement as provided in Section 4.3 hereof, then the Investor
shall be satisfied in its sole discretion that all conditions to closing the Arpco Stock Purchase
Agreement have been satisfied, that the Holding Company shall have received the Fairness Opinion
and that the purchase of the Arpco shares pursuant to the Arpco Stock Purchase Agreement will be
completed concurrently with the Closing of the transactions contemplated hereunder; or

               (b) If the Investor does not assign to the Holding Company its right to purchase the Arpco
shares pursuant to the Arpco Stock Purchase Agreement and terminates the Arpco Stock Purchase
Agreement, the Holding Company and Arpco shall have entered into a cost-sharing agreement
reasonably satisfactory to the Investor.

          5.9 Registration Rights Agreement. The Holding Company and the Investor shall have
entered into the Registration Rights Agreement in substantially the form attached hereto as
Exhibit E.

          5.10 Stockholders Agreement. The Holding Company, the Investor and all other
stockholders of the Holding Company collectively owning at least 80% of the shares of Common Stock
of the Holding Company as of the Closing Date shall have entered into the Stockholders Agreement in
substantially the form attached hereto as Exhibit F.

-24-

 

          5.11 No Material Adverse Effect. There shall not have been any Material Adverse
Effect whether or not in the ordinary course of business. The Holding Company shall have conducted
its business and operations in the ordinary course of business and consistent with past practice
since the date of the Base Balance Sheet.

          5.12 All Proceedings Satisfactory. All corporate and other proceedings taken prior to
or at the Closing in connection with the transactions contemplated by this Agreement and the
Related Agreements, and all documents and instruments related thereto, shall be in form and
substance satisfactory to the Investor and its counsel and the issuance and sale of the Series A
Preferred Stock hereunder shall be made in compliance with applicable federal and state laws.

          5.13 Investor’s and Glencoe’s Fees; Glencoe Management Fee. The Holding Company shall
have paid (or made provision for payment on the flow of funds at Closing) all of the Investor’s and
Glencoe’s legal, accounting, consulting, actuarial and other expenses related to the transactions
contemplated hereby (collectively, the “Transaction Expenses”) pursuant to Section 10.2 of
this Agreement. The Holding Company shall also have entered into an agreement with Glencoe in the
form attached hereto as Exhibit G pursuant to which the Holding Company shall pay Glencoe
an annual fee of $750,000 in consideration of advisory services to be provided by Glencoe, and the
first such annual fee shall have been paid by the Holding Company.

          5.14 No Violation or Injunction. The consummation of the transactions contemplated by
this Agreement shall not be in violation of any law or regulation, and shall not be subject to any
injunction, stay or restraining order.

          5.15 Consents and Waivers. The Holding Company shall have made all filings with and
notifications of governmental authorities, regulatory agencies and other entities required to be
made by such parties in connection with the execution and delivery of this Agreement and the
Related Agreements, the performance of the transactions contemplated hereby and the continued
operation of the business of the Holding Company subsequent to the Closing (except for such as may
be properly obtained subsequent to the Closing). The Holding Company and the Investor shall have
received all authorizations, waivers, consents and permits, in form and substance satisfactory to
the Investor, including any and all notices, consents and waivers required from all third parties,
including, without limitation, applicable governmental authorities, regulatory agencies, lessors,
lenders and contract parties, required to permit the continuation of the business of the Holding
Company subsequent to the Closing and the consummation of the transactions contemplated by this
Agreement and the Related Agreements,
and to avoid a breach, default, termination, acceleration or modification of any indenture,
loan or credit agreement or any other material agreement, contract, instrument, mortgage, lien,
lease, permit, authorization, order, writ, judgment, injunction, decree, determination or
arbitration award as a result of, or in connection with, the execution and performance of this
Agreement and the Related Agreements. Such authorizations, waivers, consents and permits shall
include, without limitation, the authorizations, waivers, consents and permits set forth on
Schedule 5.15. The Investor shall have received approval from the insurance regulatory
authority in the states of domicile of the Holding Company’s insurance company Subsidiaries, and
from any other applicable insurance regulatory authority, in a form and subject to any conditions
or

-25-

 

qualifications satisfactory to the Investor, in order to consummate the transactions
contemplated in this Agreement.

          5.16 Election of Directors. The Holding Company shall have taken proper corporate
action to fix the size of the Board of Directors at no more than seven (7) members and to elect as
directors of the Holding Company in accordance with the provisions of the Stockholders Agreement
(pursuant to which four (4) directors are designated by the Principal Common Stockholders (as
defined therein) and three (3) directors are designated by the Investor), effective on the Closing
Date and immediately after the Closing, three (3) designees of the Investor (the “Series A
Directors”), who shall initially be David Evans, Steven Shapiro and Hollis Rademacher. The
Holding Company shall have entered into a Director Indemnification Agreement with each of the
Series A Directors in the form attached hereto as Exhibit H.

          5.17 Non-Competition and Confidentiality Agreements. Each key employee of the Holding
Company or its Subsidiaries identified on the Schedule of Key Employees shall have entered
into agreements containing non-competition, non-solicitation, and confidentiality provisions with
the Holding Company in the form attached hereto as Exhibit I (the “Non-Competition and
Confidentiality Agreement”).

          5.18 Management Rights Letter. The Holding Company and Glencoe Capital Partners III,
L.P., a Delaware limited partnership (“Glencoe Capital Partners”), shall have entered into
the Management Rights Letter Agreement in substantially the form attached hereto as Exhibit
J.

          5.19 Employment Agreement. The Holding Company and Jerome Shaw shall have entered
into an Employment Agreement in substantially the form attached hereto as Exhibit K.

          5.20 Option Exercise. Currently outstanding stock options to acquire 865.5 shares of
common stock for an aggregate exercise price of $1,434,720 as more particularly described on
Schedule 5.20 shall have been exercised and all proceeds thereof, together with general
corporate funds of the Holding Company, shall have been used to redeem outstanding shares of
preferred stock of the Holding Company held by ANIC for a redemption price not to exceed
$2,000,000. The Company shall have obtained commitment letters from Jerome Shaw, Richard Smith and
William Weaver to exercise stock options to acquire a total of (i) 127.8 shares of common stock for
an aggregate purchase price of $207,632 on or before July 15, 2004 and (ii) 235.3 shares of common
stock for an aggregate purchase price of $379,632 on or before July 15, 2005. Notwithstanding
anything herein to the contrary, any option holder exercising options
pursuant to this Section 5.20 shall be permitted to pledge the shares of common stock received
from such exercise as security for loans obtained to finance such exercise, and any pledgee thereof
may exercise its rights under such pledge, subject to the terms of the Stockholders Agreement.

          5.21 Termination of Executive Benefit Plans. The Holding Company shall have
terminated the First Mercury Financial Corporation Executive Benefit Plan effective October 1, 1998
and the Quantum Direct Financial Corporation Executive Benefit Plan effective December 29, 1998 and
all participants in such Executive Benefit Plans other than Michael

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Pinsel shall have consented to
such termination without any further liability to the Holding Company as a result of the
transactions contemplated by this Agreement or otherwise, except for any liability related to the
Pinsel litigation disclosed on Section 2.15 of the Disclosure Schedule. 

SECTION 5A CONDITION OF THE HOLDING COMPANY

     The Holding Company’s obligation to issue the Series A Preferred Stock hereunder at the
Closing shall be subject to the fulfillment on or before the Closing Date of the following
condition:

          5A.1 Consents and Waivers. The Holding Company shall have received the consents and
authorizations described on Schedule 5A.1; provided, that such failure shall not
have resulted from a breach of any covenant hereunder by the Holding Company.

SECTION 6 POST-CLOSING COVENANTS OF THE COMPANY

     Until the occurrence of a Qualified Public Offering or an Extraordinary Transaction (as
defined in the Charter) in which all the outstanding Series A Preferred Stock is converted to cash
or marketable securities, the Company agrees with the Investor that it shall comply with the
following covenants except as shall otherwise be expressly agreed pursuant to a written consent of
the holders of at least a majority of the outstanding shares of Series A Preferred Stock. For
purposes of this Section 6, the term “Company” shall be deemed to include the Holding
Company and all Subsidiaries of the Holding Company, including any Subsidiary of the Holding
Company formed or acquired after the date of this Agreement.

          6.1 Financial Statements. The Company shall maintain a system of accounts from which
financial statements prepared in accordance with GAAP consistently applied can be derived, keep
full and complete financial records and furnish to the Investor each of the following reports: (a)
within one hundred five (105) days after the end of each fiscal year, a copy of the consolidated
balance sheet of the Company as at the end of such year, together with consolidated statements of
income and cash flow of the Company for such year, audited by BDO Seidman, LLP or other independent
public accounting firm of similar stature selected by majority of the Holding Company’s Board of
Directors (such majority to include the Series A Directors), each of the foregoing balance sheet
and statements of income and cash flow to set forth in comparative form the corresponding figures
for the prior fiscal period; (b) within sixty (60) days after the end of each of the first three
(3) fiscal quarters of the Company, an unaudited consolidated balance sheet of the Company as at
the end of such quarter and an unaudited consolidated statement of income and cash flow for the
Company for such quarterly period and
for the year to date, including the corresponding figures for the prior fiscal periods in
comparative form, and accompanied with a certificate of the President, Vice President of Finance or
the Chief Financial Officer or similar officer of the Holding Company, on behalf of the Company,
stating that nothing has come to the attention of management of the Company which would indicate
that such financial statements were not true, complete and correct in all material respects as of
the date thereof; (c) within thirty (30) days after the end of each monthly accounting period, a
monthly management report in form and substance consistent with past practice; (d) promptly after
the same are available, copies of any financial statements and reports that the Company shall send
or make available generally to any of its stockholders or any

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regulatory authority (other than tax
returns or other reports provided to regulatory authorities in the ordinary course of business);
and (e) such other financial information as the Investor may reasonably request. Concurrently with
the delivery of the financial statements referred to in clauses (a) and (b) of this Section 6.1,
the Company shall deliver to the Investor a duly completed, true and correct Compliance Certificate
in the form attached hereto as Exhibit L with respect to the operational covenants set
forth in Section 6.2 signed by the President or Chief Financial Officer of the Holding Company.
Each Compliance Certificate shall be prepared based on the financial statements with which it is
required to be delivered and shall include a copy of the most recent estimate of the Company’s
Best’s Capital Adequacy Ratio prepared by A.M. Best.

          6.2 Operational Covenants.

               (a) Shareholder’s Equity. The Company shall not permit or suffer the consolidated
shareholder’s equity of the Company, determined on a consolidated basis in accordance with GAAP,
but excluding the effects of FASB 115, measured as of the end of each fiscal quarter of the Company
beginning with the fiscal quarter ending September 30, 2004, to be less than the sum of: (i)
$72,500,000 increased on a cumulative basis by 50% of the Company’s Net Income for each succeeding
fiscal quarter of the Company ended after the Closing Date, provided, if Net Income is
negative, such number will be zero; and (ii) 50% of the net proceeds to the Company from the
issuance of any capital stock (to the extent permitted by this Agreement, the Charter and the
Stockholders Agreement) after the Closing Date.

               (b) Leverage Ratio. The Company shall not permit or suffer the Leverage Ratio to be
greater than the ratio shown below for the period corresponding thereto, in each case as determined
as of the end of any fiscal quarter of the Company beginning with the fiscal quarter ending
September 30, 2004:

               (i) 0.40 to 1.0 at any time from and including the Closing Date to and including
December 31, 2004;

               (ii) 0.375 to 1.0 at any time from and including January 1, 2005 to and including
December 31, 2005;

               (iii) 0.35 to 1.0 at any time from and including January 1, 2006 to and including
December 31, 2006;

               (iv) 0.325 to 1.0 at any time from and including January 1, 2007 to and including
December 31, 2007; and

               (v) 0.30 to 1.0 at any time from and including January 1, 2008 and thereafter.

               (c) Fixed Charge Coverage Ratio. The Company shall not permit or suffer the Fixed
Charge Coverage Ratio for the twelve (12) month period ending on the end of any fiscal quarter of
the Company, beginning with the fiscal quarter ending September 30, 2004, to be less than 4.0 to
1.0 at any time from and including the Closing Date and thereafter.

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               (d) Risk-Based Capital. The Company shall not permit “total adjusted capital” (within
the meaning of the Risk-Based Capital for Insurers Model Act as promulgated by the NAIC as of the
Closing Date (the “Model Act”)) of FMIC, ANIC or of any of its future Insurance
Subsidiaries (on a combined basis), in each case as determined as of the end of any fiscal quarter
of the Company at any time from and including the first day of the fiscal quarter ending September
30, 2004 and thereafter to be less than 162.5% of the applicable “Company Action Level RBC” (within
the meaning of the Model Act) for such Insurance Subsidiary.

               (e) Surplus. The Company shall not permit or suffer the “surplus as regards
policyholders” (calculated in accordance with SAP), as determined as of the end of any fiscal
quarter of FMIC, ANIC or of any of its future Insurance Subsidiaries (on a combined basis)
beginning with the fiscal quarter ending September 30, 2004, at any time to be less than the sum
of: (i) $57,500,000; (ii) 50% of the Company’s Net Income for each succeeding fiscal quarter of the
Company ended after the Closing Date, provided, if Net Income is negative, such number will
be zero; and (iii) 50% of the net proceeds to the Company from the issuance of any capital stock
(to the extent permitted by this Agreement, the Charter and the Stockholders Agreement) after the
Closing Date that would be considered as such “surplus as regards policyholders”.

               (f) Adjustment to Covenants. Notwithstanding anything to the contrary contained
herein, in the event the Credit Agreement is amended, restated, or refinanced, or a new credit
agreement is entered into by the Company with a different lender or lenders, and the financial
covenants set forth in such credit agreement become more restrictive on the Company than those set
forth in this Section 6.2 or Section 6.14, the covenants set forth in this Section 6.2 and Section
6.14 shall automatically be adjusted so that such covenants are at least as restrictive on the
Company as the covenants set forth in the credit agreement. In addition, if such credit agreement
contains financial covenants which are not included herein, this Section 6.2 or Section 6.14 shall
be amended to include such new covenants which are at least as restrictive on the Company as the
additional financial covenants contained in such credit agreement. Finally, the parties shall
negotiate in good faith and agree to equitable amendments to this Section 6.2 and Section 6.14 in
the event that the Investor does not assign the Arpco Stock Purchase Agreement to the Holding
Company or the acquisition of the stock of Arpco pursuant to the Arpco Stock Purchase Agreement
does not close.

          6.3 Intentionally Omitted.

          6.4 Annual Plan. The Company shall prepare and submit to the Investor (i) a detailed
annual capital and operating budget and business plan for the Company for each fiscal year of the
Company and (ii) a detailed annual plan for the succeeding fiscal year (for each quarter within
such fiscal year) which sets forth the Company’s reserve, actuarial, reinsurance (including,
without limitation, the Company’s plan for quota share, excess share, aggregate stop loss, and
extra contractual punitive damages reinsurance coverages) policy (together, the “Annual
Plan”), in each case, at least thirty (30) days prior to the beginning of each fiscal year.
The Annual Plan shall be substantially in the form of the Annual Plan for fiscal year 2004 attached
hereto as Exhibit M. The Annual Plan shall be subject to approval by the affirmative vote
or written consent of the Board of Directors, including a majority of the Series A Directors. If
the Board of Directors, including a majority of the Series A Directors, does not approve the

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Annual Plan, the Annual Plan for the prior fiscal year shall remain in effect until such approval is
obtained.

          6.5 Corporate Existence and Permits. The Company will keep in full force and effect
its corporate existence and shall use reasonable best efforts to keep in full force and effect and
comply with all Permits (except such rights as the Company has reasonably determined are not
material to the Company’s continuing operations).

          6.6 Compliance with Laws. The Company shall comply with all applicable statutes,
ordinances, orders, rules, regulations, policies and practices promulgated by any federal, state,
municipal or other governmental authority which apply to the conduct of its business.

          6.7 Insurance. The Company will keep its insurable properties insured, upon
reasonable business terms, against liability and the perils of casualty, fire, business
interruption, and extended coverage in commercially reasonable amounts of coverage to the extent
customarily maintained by companies in the same or similar business, and of similar size, as the
Company. The Company will also maintain insurance against other hazards and risks and liability to
Persons and property in commercially reasonable amounts and to the extent and in the manner
customary for companies engaged in the same or similar business and of similar size, including
errors and omissions liability insurance.

          6.8 Directors and Officers Insurance. The Company shall obtain, maintain and continue
to pay the premiums on directors and officers liability insurance from financially sound and
reputable insurers in the amount of $1,000,000; provided, however, that if the
Company fails to obtain or continue to pay the premiums on such insurance, any Series A Director
may purchase his or her own policy of directors and officers liability insurance or pay such
premiums and obtain reimbursement from the Company therefor.

          6.9 Information and Inspection. The Company will furnish to the Investor such
information as may reasonably be requested by the Investor regarding the Company’s business and
during the Company’s normal business hours and as often as the Investor shall reasonably request,
permit any authorized representative designated by the Investor to visit and inspect any of its
properties, including its books and records (and to make copies and extracts therefrom), and to
discuss its affairs, finances and accounts with its officers. The Investor’s expenses in
connection with such inspections shall be covered by (and not in
addition to) the annual management fee paid by the Company to the Investor. The Investor
agrees to keep the financial information delivered pursuant to Section 6.1, the budget information
delivered pursuant to Section 6.4 and such other information delivered or made available to
Investor under this Section 6.9 or otherwise under this Agreement (other than information about the
Company which is in the public domain) confidential and to use, and to use its reasonable efforts
to insure that its authorized representatives use, the same degree of care as the Investor uses to
protect its own confidential information, except that the Investor may disclose such proprietary or
confidential information to any partner, employee, affiliate, authorized representative,
subsidiary, parent or prospective transferee of the Investor solely for the purpose of evaluating
its investment in the Company as long as such partner, employee, affiliate, authorized
representative, subsidiary, parent or prospective transferee is advised of, and agrees to be bound
by, the confidentiality provisions of this Section 6.9. In addition, in connection with a
potential sale of

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the Company or its assets which is initiated by the Investor in accordance with
the terms of the Stockholders’ Agreement, the Investor may disclose proprietary or confidential
information to any prospective purchaser of the Company or its assets provided such purchaser
executes a confidentiality agreement with respect thereto. Notwithstanding anything herein to the
contrary, it is expressly understood and agreed that access by the Investor to any such
confidential information of the Company shall not (i) preclude an individual who has seen such
confidential information from working on similar investment opportunities for the Investor,
provided that such individual does not use or make reference to such confidential
information and does not divulge the substance of such confidential information, or (ii) preclude
the Investor’s employees and representatives from utilizing information that becomes part of their
general business and industry skill and knowledge.

          6.10 Enforcement of Certain Agreements. The Holding Company hereby authorizes and
empowers the Investor to enforce all of the Holding Company’s rights under the Stockholders
Agreement, the Shaw Non-Competition and Confidentiality Agreements, the Arpco Stock Purchase
Agreement (including the decision to make the Section 338(h)(10) Election (as defined therein)) and
irrevocably appoints the Investor as its true and lawful agent and attorney-in-fact (with full
power of substitution) to effectuate the foregoing. The Holding Company agrees that it will not
waive or release any rights under, or make any amendment or modification to, any such agreements
without the written approval of the Investor.

          6.11 Investment Expenses. The Company shall pay and hold the Indemnified Parties (as
defined in Section 7.2) harmless against liability for payment of all reasonable out-of-pocket
costs and expenses incurred by them, including, without limitation, the reasonable fees and
disbursements of counsel, in connection with the enforcement of this Agreement and the agreements,
documents and instruments contemplated hereby and executed pursuant hereto.

          6.12 Payment of Taxes. The Company shall pay and discharge all lawful Taxes,
assessments and governmental charges or levies imposed upon it or its property before the same
shall become in default; provided, however, that the Company shall not be required
to pay and discharge any such Tax, assessment, charge, levy or claim so long as the validity
thereof is being contested by it in good faith by appropriate proceedings and an adequate reserve
therefor has been established.

          6.13 Negative Covenants.

               (a) So long as any shares of Series A Preferred Stock shall be outstanding, the Company shall
not, nor permit any Subsidiary to, without first having obtained the affirmative vote or written
consent of the holders of not less than a majority of the outstanding shares of Series A Preferred
Stock, voting as a single class:

               (i) amend, alter, repeal or waive any provision of, or add any provision to the Charter
Documents of any Subsidiary (whether by merger, consolidation or otherwise) or change the
number of directors of the Board of any Subsidiary;

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               (ii) increase or decrease the number of authorized shares of Common Stock or Preferred
Stock of any Subsidiary or create any additional class or series of Common Stock or
Preferred Stock of any Subsidiary;

               (iii) effect any liquidation, dissolution or winding up of any Subsidiary or
voluntarily file or consent to the filing of any insolvency or bankruptcy proceedings;

               (iv) declare or pay dividends or make any distributions of cash, property or securities
of any Subsidiary with respect to any shares of any Subsidiary’s Common Stock or any other
capital stock other than dividends payable solely in shares of Common Stock or dividends
payable solely to the Holding Company;

               (v) repurchase, redeem, retire or otherwise acquire (directly or indirectly, through
one or more subsidiaries or otherwise) any of the outstanding capital stock of any
Subsidiary, except for the repurchase of shares from officers, directors, employees or
consultants upon termination of employment or association at the original cost of such
shares;

               (vi) Except as otherwise contemplated by the Annual Plan, (i) change the nature of its
insurance business, underwrite any new lines of insurance not existing on the Closing Date
or materially change its Business Guidelines; or (ii) change in any material respect any of
the specific or aggregate risk exposure profiles set forth in the Annual Plan;

               (vii) agree with any applicable regulator to restrict FMIC’s ability to make dividends
or distributions (other than as required by law);

               (viii) increase the number of Reserved Employee Shares (as defined in the Charter), or
approve any new stock option plan or stock purchase plans or otherwise modify or amend the
Company’s existing stock option plans or stock purchase plans; or

               (ix) engage in any transactions with the Company’s Principal Stockholders or their
Affiliates or Related Persons.

               (b) So long as any shares of Series A Preferred Stock shall be
outstanding, the Company shall not, nor permit any Subsidiary to, without first having
obtained the affirmative vote or written consent of the Board of Directors, including a majority of
the Series A Directors:

               (i) (A) authorize, issue or enter into any agreements providing for the issuance,
contingent or otherwise, of any notes or debt securities, incur any indebtedness for
borrowed money (other than (I) indebtedness existing as of the Series A Issuance Date (as
defined in the Charter), (II) indebtedness incurred in the ordinary course of business under
the Company’s revolving credit facility not to exceed $13,500,000, or (III) indebtedness
otherwise incurred to an entity other than an Affiliate in the ordinary course of business
in aggregate amount not to exceed $1,000,000), or

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(B) except for deposits with state
regulators for licensing purposes, incur any liens or pledge as security for any obligations
of the Company other than with respect to permitted indebtedness described above or agree to
limit Subsidiary dividends;

               (ii) Except as otherwise contemplated by the Annual Plan, (A) enter into, amend or
terminate, or agree to enter into, amend or terminate, any contract or agreement involving
potential commitment or payment by the Company in excess of $300,000; or (B) make any loans
or payments to any third party or to any officers, directors, employees or affiliates of the
Company (other than in the ordinary course of business);

               (iii) authorize or engage in any acquisition of any corporation or business concerns,
whether by acquisition of any capital stock or assets, merger or otherwise and whether in
consideration of the payment of cash, capital stock or otherwise, make any material
investment in another business entity or any joint venture or similar arrangement;

               (iv) sell any assets (including assets of any Subsidiary) or Subsidiaries, other than
(A) sales of investment securities in the ordinary course of business, (B) sales of other
assets which are obsolete or are to be replaced with assets of similar utility, (C) sale of
assets otherwise not material to conduct of business of the Holding Company or any
Subsidiary, and (d) sales or other dispositions of assets which in the aggregate do not
constitute a Substantial Portion of the consolidated assets of the Holding Company and its
Subsidiaries;

               (v) make any changes to the compensation, benefits or terms of employment of Jerome
Shaw;

               (vi) delegate any duties of the Board of the Company or any Subsidiary to a committee;
or

               (vii) issue, or agree to issue any shares of capital stock or securities, notes or
other instruments convertible into or exchangeable for shares of capital stock, other than
the issuance of Excluded Shares (as defined in the Charter).

               (c) So long as any shares of Series A Preferred Stock shall be outstanding, the Company shall
not, without first having obtained the written consent of both
members of the Executive Committee:

                    (i) make any changes in the Company’s executive management or the compensation, benefits or
terms of their employment, excluding Jerome Shaw; or

                    (ii) amend or modify the Annual Plan.

               (d) The Company shall not, by amendment of the Charter Documents or through any Extraordinary
Transaction or other reorganization, transfer of assets, consolidation, merger, dissolution, issue
or sale of securities, agreement or any other voluntary

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action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed hereunder by the Company
but shall at all times in good faith assist in the carrying out of all the provisions set forth
herein and in the taking of all such action as may be necessary or appropriate in order to protect
the rights of the holders of the Series A Preferred Stock against impairment. Any successor to the
Company shall agree, as a condition to such succession, to carry out and observe the obligations of
the Company hereunder with respect to the Series A Preferred Stock.

          6.14 Pre-Tax Operating Income. The Company shall not permit or suffer the Pre-Tax
Operating Income of the Company for the twelve (12) month period ending on the end of any fiscal
quarter of the Company to be less than $12,487,000 at any time from and including the first day of
the fiscal quarter ending September 30, 2004 to and including the fiscal quarter ending December
31, 2004, or less than $17,673,000 at any time from and including January 1, 2005 to and including
December 31, 2005.

SECTION 7 SURVIVAL; INDEMNIFICATION; REMEDIES

          7.1 Survival of Representations, Warranties and Covenants. All covenants, agreements,
representations and warranties of the Holding Company, the Subsidiaries and the Investor made
herein and in the certificates, lists, exhibits, schedules or other written information delivered
or furnished to the Investor in connection herewith (i) are material, shall be deemed to have been
relied upon by the party or parties to whom they are made and shall survive the Closing
indefinitely regardless of any investigation on the part of such party or its representatives, and
(ii) shall bind the parties’ successors and assigns (including, without limitation, any successor
to the Holding Company or any Subsidiary by way of acquisition, merger or otherwise), whether so
expressed or not, and, except as otherwise provided in this Agreement, all such covenants,
agreements, representations and warranties shall inure to the benefit of the Investor’s successors
and assigns and to its transferees, whether so expressed or not; provided however,
that the representations and warranties contained in Section 2, other than Sections 2.1, 2.2, 2.4
and 2.5 which shall survive indefinitely, shall survive Closing for a period of three (3) years
from the date hereof; and provided further that the representations and warranties in
Sections 2.12 and 2.17 shall survive Closing for a period of six (6) months following the
expiration of the applicable statutes of limitation.

          7.2 Indemnification.

               (a) Without limitation of any other provision of this Agreement, the Holding Company and the
Subsidiaries agree to defend, indemnify and hold the Investor, its Affiliates and its and their
respective direct and indirect partners, members, stockholders, directors, officers, employees,
agents and representatives and Affiliates (collectively, the “Indemnified Parties” and each
individually, an “Indemnified Party”) harmless from and against any and all losses, claims,
damages (including, without limitation, damages measured by diminution in value), obligations,
liens, assessments, judgments, fines, liabilities and other costs and expenses, including, without
limitation, interest, penalties and any reasonable investigation, legal and other expenses incurred
in connection with, and any amount paid in settlement of, any action, suit or proceeding or any
claim asserted, as the same are actually incurred by the Indemnified Parties, of any kind or nature
whatsoever (collectively, “Losses”) which are

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sustained or suffered by any such Indemnified
Party, (i) arising out of, based upon or in connection with any breach of any representation or
warranty, or, subject to Section 7.3 hereof, any covenant or agreement made by the Holding Company
or any Subsidiary in this Agreement or in any schedule, exhibit, certificate or agreement delivered
in connection with this Agreement or (ii) to the extent not prohibited by the Delaware General
Corporation Law or other applicable law, in their capacity as a director, stockholder,
representative or controlling person of the Holding Company or any Subsidiary, or as a result of
any action taken or omitted to be taken by the Holding Company or any Subsidiary, without regard to
any investigation by any of the Indemnified Parties, based upon, arising out of, by reason of or
otherwise in respect of or in connection with third party or governmental claims including, without
limitation, claims under the Securities Act, the Exchange Act or other federal or state statutory
law or regulation, at common law or otherwise (“Laws”); provided, that (x) the
Investor shall not be entitled to indemnification pursuant to this clause (ii) with respect to any
Losses which result solely and exclusively from a breach by the Investor of the representations and
warranties set forth in Section 3.1, 3.2 or 3.3 and (y) no Indemnified Party shall be entitled to
indemnification pursuant to this clause (ii) to the extent the liability for which indemnity is
sought arises from the gross negligence or intentional misconduct of the Indemnified Party.

               (b) The Investor agrees to defend, indemnify and hold the Holding Company harmless from and
against any and all Losses which may be sustained or suffered by the Holding Company, its
stockholders, directors, officers, employees, agents, representatives and Subsidiaries, arising out
of, based upon or in connection with any breach of any representation, warranty, covenant or
agreement made by the Investor in this Agreement or in any schedule, exhibit, certificate or
agreement delivered in connection with this Agreement.

               (c) Notwithstanding the foregoing, no claim for indemnification shall be asserted by the
Investor until the Investor has claims for Losses that in the aggregate exceed $500,000 and
thereafter the Investor shall be entitled to recover all its Losses including the initial $500,000;
provided, however, that this paragraph (c) shall not apply to Losses arising from
any breach of Section 6.5, 6.6, 6.8 or 6.11.

               (d) In determining whether or not there has been a breach of any of the representations,
warranties, covenants or agreements contained in this Agreement or in any schedule, exhibit,
certificate or agreement delivered in connection herewith, for purposes of determining the Holding
Company’s obligation to indemnify the Investor under Section 7.2(a) and not for purposes of
determining if a Tier 1, Tier 2 or Tier 3 Default has occurred hereunder,
all references to a Material Adverse Effect and all materiality qualifications included in
such representations, warranties, covenants or agreements shall be disregarded.

          7.3 Other Remedies. 

               (a) Upon the occurrence and during the continuance of a Tier 3 Default, the Dividend Rate (as
defined in the Charter) and the Makewhole Rate (as defined in the Charter) accrued or payable
pursuant to the Charter shall increase by two percent (2%). The Investor’s sole and exclusive
remedies against the Company with respect to a Tier 3 Default (other than a Tier 3 Default relating
to Section 6.11) shall be as set forth in this paragraph (a) and

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(except in the case of the A.M.
Best Default) to seek specific performance or other equitable relief.

               (b) Upon the occurrence of a Tier 2 Default, the Investor shall have the remedies set forth in
this paragraph (b). Such remedies shall be cumulative and shall be in addition to every other
remedy given hereunder, or, now or hereafter existing or available to the Investor at law or equity
or by statute; provided, that the Investor shall not be entitled to indemnification for
monetary damages for a Tier 3 Default that becomes a Tier 2 Default (other than a Tier 3 Default
relating to Section 6.11).

                    (i) pursuant to the Stockholders Agreement, the Investor shall be entitled to appoint two (2)
additional members to the Holding Company’s Board of Directors;

                    (ii) pursuant to the Charter, the Dividend Rate and the Makewhole Rate shall increase by two
percent (2%) (except where such Tier 2 Default results from an uncured Tier 3 Default, in which
case the Dividend Rate and the Makewhole Rate shall not be increased by an additional two percent
(2%) in excess of the amount set forth in paragraph (a) above);

                    (iii) pursuant to the Registration Rights Agreement, the Investor shall be entitled to
exercise its demand registration rights at any time prior to the expiration of two (2) years
following Closing or at any time thereafter;

                    (iv) pursuant to the Stockholders Agreement, the Investor shall be entitled to transfer its
Shares (as defined in the Stockholders Agreement) at any time prior to the expiration of two (2)
years following Closing or at any time thereafter without the prior written consent of any other
party; and

                    (v) pursuant to the Stockholders Agreement, the Investor shall be entitled to exercise its
drag-along rights at any time prior to the expiration of two (2) years following Closing or at any
time thereafter.

               (c) Upon the occurrence of a Tier 1 Default, the Investor shall have the remedies set forth in
this paragraph (c). With respect to a Tier 1 Default set forth in clause (i) and (iii) of the
definition of Tier 1 Default, the Investor’s sole and exclusive remedy against the Company with
respect to such default shall be as set forth in this paragraph (c). With respect to a Tier 2
Default set forth in clause (ii) of the definition of Tier 1 Default, the Investor’s remedies
shall be cumulative and shall be in addition to every other remedy given hereunder, or, now or
hereafter existing or available to the Investor at law or equity or by statute.

                    (i) the Investor shall have all of the remedies which are available to it upon a Tier 2
Default pursuant to clause (b) above; and

                    (ii) pursuant to the Stockholders Agreement, the Investor shall be entitled to exercise its
drag-along rights with a minimum Equity Value (as defined in the Stockholders Agreement)
requirement of $152,500,000, provided the Investor initiates the sale process within one (1) year
of the Tier 1 Default (it being understood that the Investor shall not

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be obligated to consummate
such sale within one (1) year of the default for the minimum price requirement to be so reduced.)

               (d) The Company shall promptly advise the Investor of any event which has or is reasonably
likely to result in a Default, and of each suit or proceeding commenced or threatened against the
Company which, if adversely determined, is reasonably likely to result in a Material Adverse
Effect.

               (e) Notwithstanding anything to the contrary contained in this Section 7.3, the Investor shall
not be limited or precluded from seeking all available remedies, including indemnification and
reimbursement for costs and expenses with respect to the covenants of the Company set forth in
Sections 6.8 and 6.11 hereof.

SECTION 8 DEFINITIONS

     Unless the context specifically requires otherwise, capitalized terms used in this Agreement
shall have the meaning specified below:

     “Accounts Receivable” has the meaning set forth in Section 2.9(b) of this Agreement.

     “Affiliate” of a Person means any person controlling, controlled by, or under common
control with, such Person. For purposes of this definition, “control” means the power to direct
the management and policies of a Person, whether through the ownership of voting securities, by
agreement or otherwise, including control within the meaning of Section 15 of the Securities Act or
Section 20 of the Exchange Act.

     “Affiliated Transaction” has the meaning set forth in Section 2.10(a) of this
Agreement.

     “Agreement” has the meaning set forth in the Introduction.

     “Alternative Transaction Proposal” means any offer or proposal for, or any indication
of interest in, (i) any direct or indirect acquisition or purchase of ten percent (10%) or more of
the total assets of the Holding Company or any Subsidiary, (ii) any direct or indirect acquisition
or purchase of ten percent (10%) or more of any class of equity securities of the Holding Company
or any Subsidiary, (iii) any tender offer or exchange offer (including a self-tender offer) that if
consummated would result in any Person beneficially owning ten percent (10%) or more of any class
of equity securities of the Holding Company or any Subsidiary, (iv) any equity or debt financing,
or series of equity or debt financings, of the Holding Company or any Subsidiary
resulting in gross proceeds to the Holding Company or any Subsidiary of $1,000,000 or more
other than the issuance of stock upon the exercise of currently outstanding stock options, (v) any
merger, consolidation, share exchange, business combination, recapitalization, reclassification or
other similar transaction involving the Holding Company or any Subsidiary other than the Quantum
Merger, or (vi) any public announcement of an agreement, proposal, plan or intention to do any of
the foregoing, other than the transactions contemplated by this Agreement.

     “ANIC” means All Nation Insurance Company.

     “Applicable Number” has the meaning set forth in Section 1.2 of this Agreement.

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     “Arpco” has the meaning set forth in Section 1.3 of this Agreement.

     “Arpco Stock Purchase Agreement” has the meaning set forth in Section 1.3 of this
Agreement.

     “Base Balance Sheet” has the meaning set forth in Section 2.6(a) of this Agreement.

     “Business Guidelines” has the meaning set forth in Section 2.21(b) of this Agreement.

     “CERCLA” has the meaning set forth in Section 2.23 of this Agreement.

     “Charter” means the Amended and Restated Certificate of Incorporation of the Holding
Company attached hereto as Exhibit A.

     “Charter Documents” means the Charter and the bylaws of the Holding Company and the
certificate of incorporation and bylaws, certificate of formation and operating agreement,
certificate of limited partnership and limited partnership agreement or other organizational
documents, as applicable, of the Subsidiaries.

     “Closing” has the meaning set forth in Section 1.2 of this Agreement.

     “Closing Date” has the meaning set forth in Section 1.2 of this Agreement.

     “Code” means the Internal Revenue Code of 1986, as amended.

     “Commitment” means the commitment of Bank One, NA to make loans to the Holding Company
pursuant to the Credit Agreement in amounts not exceeding an aggregate principal amount outstanding
of $13,500,000 reducing by $250,000 on the last day of each calendar quarter, commencing September
30, 2003.

     “Common Stock” has the meaning set forth in Section 1.1 of this Agreement.

     “Compliance Certificate” means a certificate substantially in the form of Exhibit
L with respect to the operational covenants set forth in Section 6.2 of this Agreement
(including the Company’s estimate of its Best’s Capital Adequacy Ratio), properly completed and
signed by the President or Chief Financial Officer of the Holding Company.

     “Conversion Price” has the meaning set forth in the Charter.

     “Conversion Shares” has the meaning set forth in Section 1.1 of this Agreement.

     “Credit Agreement” means the Amended and Restated Credit Agreement dated as of July
25, 2003 by and between the Holding Company and Bank One, NA, as may be amended, restated or
refinanced from time to time.

     “Deposit” has the meaning set forth in Section 2.21(e) of this Agreement.

     “Deemed Closing Conversion Price” has the meaning set forth in Section 1.4(c) of this
Agreement.

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     “Default” means a Tier 1 Default, Tier 2 Default or Tier 3 Default.

     “Director Indemnification Agreement” means the Director Indemnification Agreement in
the form of Exhibit H hereto, dated as of the Closing Date, to be executed by the Holding
Company and each of the Series A Directors.

     “Disclosed Contracts” has the meaning set forth in Section 2.13 of this Agreement.

     “Disclosure Schedule” has the meaning set forth in Section 2 of this Agreement.

     “ERISA” means the Employee Retirement Income Security Act of 1974, as amended, and the
regulations promulgated thereunder.

     “Employee Program” means any employee benefit or welfare plan, savings and investment
plan, retirement, pension, profit sharing, stock option, bonus or incentive plan, severance pay
policy or agreement, deferred compensation agreement or any similar plan or agreement.

     “Environmental Law” has the meaning set forth in Section 2.23 of this Agreement.

     “Excess Reserve Amount” has the meaning set forth in Section 1.4(c) of this Agreement.

     “Exchange Act” means the Securities Exchange Act of 1934, as amended.

     “Executive Committee” has the meaning set forth in the Stockholders Agreement.

     “Existing Reinsurance Agreements” has the meaning set forth in Section 2.22 of this
Agreement.

     “Fairness Opinion” has the meaning set forth in Section 4.3 of this Agreement.

     “FASB 115” means Financial Accounting Standards Board Statement Number 115.

     “Fixed Charge Coverage Ratio” means, for the twelve (12) month period ended on the end
of any fiscal quarter of the Company, the ratio of (a) the sum of: (i) maximum dividends available
to be paid to the Company from its Insurance Subsidiaries without regulatory approval for the four
(4) consecutive fiscal quarters then ended (i.e. the greater of ten percent (10%) of the Insurance
Subsidiaries’ capital plus surplus or the Insurance Subsidiaries’ net income for the four
(4) consecutive fiscal quarters then ended) plus (ii) dividends paid to the Company from
non-insurance administrative services or marketing Subsidiaries for the four (4) consecutive fiscal
quarters then ended plus (iii) without duplication of any amounts referred to in clause (i) or
(ii), cash and cash equivalents held by the Company to (b) the sum of (i) Total Interest Expense
for the four (4) consecutive fiscal quarters then ended, plus (ii) scheduled reductions to the
Commitment for the four (4) consecutive fiscal quarters then ended, plus (iii) all dividends,
distributions and other obligations paid or payable with respect to the Company’s capital stock for
the four (4) consecutive fiscal quarters then ended.

     “FMIC” has the meaning set forth in Section 1.3 of this Agreement.

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     “Finder’s Fee” has the meaning set forth in Section 2.24 of this Agreement.

     “GAAP” has the meaning set forth in Section 2.6 of this Agreement.

     “Glencoe” has the meaning set forth in Section 1.3 of this Agreement.

     “Glencoe Capital Partners” has the meaning set forth in Section 5.18 of this
Agreement.

     “Hazardous Substances” means any solid, liquid or gaseous material, alone or in
combination, mixture or solution, which are now defined, listed or identified as “hazardous”
(including “substances” or “wastes”), “toxic”, a “pollutant” or a “contaminant” pursuant to any
Environmental Law which is applicable to the site in question, including asbestos, chlorinated
solvents, polychlorinated biphenyls, radon, fuel oil, petroleum (including its derivatives,
by-products or other hydrocarbons) and any other dangerous, explosive, corrosive, flammable,
infectious, radioactive, carcinogenic or mutagenic material which is prohibited, limited,
controlled or regulated under any applicable Environmental Law.

     “Holding Company” has the meaning set forth in the introduction to this Agreement.

     “Incentive Plan” has the meaning set forth in Section 2.4 of this Agreement.

     “Indemnified Parties” has the meaning set forth in Section 7.2(a) of this Agreement.

     “Independent Actuarial Firm” has the meaning set forth in Section 1.4(b) of this
Agreement.

     “Insurance Regulatory Authority” means, with respect to any Insurance Subsidiary, the
insurance department or similar governmental authority charged with regulating insurance companies
or insurance holding companies, in its state of domicile and, to the extent that it has regulatory
authority over such Insurance Subsidiary, in each other jurisdiction in which such Insurance
Subsidiary conducts business or is licensed to conduct business.

     “Insurance Subsidiary” means any Subsidiary of the Holding Company, the ability of
which to pay dividends is regulated by an Insurance Regulatory Authority or that is otherwise
required to be regulated thereby in accordance with the applicable Laws of its state of domicile.

     “Intellectual Property” means all patents, patent registrations, patent applications,
trademarks, trademark registration applications, service marks, service mark registration
applications; trade names, logos, copyrights, copyright applications, copyright registrations,
know-how, processes, trade secrets, proprietary data, formulae, and other intangible property used
or held for use by the Holding Company and all rights thereunder or in respect thereof, including
rights to sue and collect and remedies against past, present and future infringements or
misappropriations thereof, and rights of priority and protection of interests therein under the
laws of any jurisdiction worldwide and all tangible embodiments thereof used or held for use by the
Holding Company.

     “Investor” has the meaning set forth in the introduction to this Agreement.

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     “IRS” has the meaning set forth in Section 2.12 of this Agreement.

     “Knowledge” “Known” (whether or not capitalized) means the knowledge of Jerome
Shaw, Richard Smith, William Weaver, Marcia Paulsen, Tom Dulapa, John Bures, Brian Hurst, Frank
McGovern, Rob Butterworth and Dick Barrett after reasonable investigation.

     “Laws” has the meaning set forth in Section 7.2(a) of this Agreement.

     “Leverage Ratio” means, as of the end of any fiscal quarter of any Person, the ratio
of: (a) Total Debt of such Person to (b) Total Capital of such Person, all as determined in
accordance with GAAP.

     “Lien” means any lien, claim, option, charge, pledge, mortgage, security interest,
voting agreement, trust, encumbrance, right or restriction of any nature.

     “Losses” has the meaning set forth in Section 7.2(a) of this Agreement.

     “Loss Statement” has the meaning set forth in Section 1.4(a) of this Agreement.

     “Loss Statement Objection Notice” has the meaning set forth in Section 1.4(b) of this
Agreement.

     “Major Producers” has the meaning set forth in Section 2.18(b) of this Agreement.

     “Management Rights Letter Agreement” means the Management Rights Letter Agreement in
the form of Exhibit J hereto, dated as of the Closing Date, to be executed by the Holding
Company and Glencoe Capital Partners.

     “Material Adverse Effect” means any change or effect that is materially adverse to the
properties, assets, business, condition (financial or otherwise), or results of operations of the
Holding Company and its Subsidiaries, taken as a whole.

     “Model Act” has the meaning set forth in Section 6.2(d) of this Agreement.

     “NAIC” means the National Association of Insurance Commissioners.

     “Net Income” of any Person, means, for any period, the net income (after deduction for
income and other taxes of such Person determined by reference to income or profits of such Person)
for such period (but without reduction for any net loss incurred for any fiscal year during such
period), taken as one accounting period, all as determined in accordance with GAAP.

     “Non-Competition and Confidentiality Agreement” has the meaning set forth in Section
5.17 of this Agreement.

     “Other Subsidiaries” has the meaning set forth in Section 2 of this Agreement.

     “Permits” means any franchises, authorizations, approvals, orders, consents, licenses,
certificates, permits, registrations, qualifications or other rights and privileges.

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     “Person” means any individual, association, corporation, partnership, limited
liability company, joint venture, estate, trust or unincorporated organization or any government or
any agency or political subdivision thereof including, without limitation, any partner, officer,
director, member or employee of such Person.

     “Policies” has the meaning set forth in Section 2.21(b) of this Agreement.

     “Pre-Tax Operating Income” means consolidated Net Income before income taxes,
calculated in accordance with GAAP consistently applied (excluding income from discontinued
operations).

     “Principal Stockholder” has the meaning set forth in the Stockholders’ Agreement.

     “Producers” means agents, brokers, general agents, managing general agents,
reinsurance intermediaries and insurance producers that sell, market, solicit or underwrite the
Policies of the Holding Company or any Subsidiary.

     “Qualification” has the meaning set forth in Section 2.20 of this Agreement.

     “Quantum” has the meaning set forth in subsection (ii) of the introductory paragraph
of Section 2 of this Agreement.

     “Quantum Merger Agreement” has the meaning set forth in Section 4.2 of this Agreement.

     “Registration Rights Agreement” means the Registration Rights Agreement in the form of
Exhibit E hereto, dated as of the Closing Date, to be executed by and between the Holding
Company and the Investor.

     “Related Agreements” has the meaning set forth in Section 2.1 of this Agreement.

     “Related Person” shall mean (a) with respect to a particular individual natural
Person: (i) each member of such individual natural Person’s Family (as defined below), including
such individual natural person, and (ii) each Affiliate of such individual natural Person’s Family;
and (b) with respect to a specified Person other than an individual natural Person, each Affiliate
of the specified Person. For purposes of this definition, the “Family” of an individual
natural Person includes (i) the individual natural Person in question, (ii) such individual natural
Person’s spouse, and (iii) each other individual natural Person who is related by blood, adoption
or marriage to the individual natural Person or the individual natural Person’s spouse within the
second degree.

     “SAP” has the meaning set forth in Section 2.6(c) of this Agreement.

     “Securities Act” means the Securities Act of 1933, as amended.

     “Series A Director” has the meaning set forth in Section 5.16 of this Agreement.

     “Series A Preferred Stock” has the meaning set forth in Section 1.1 of this Agreement.

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     “Shaw Non-Competition and Confidentiality Agreement” means the agreement containing
non-competition, non-solicitation and confidentiality provisions between the Holding Company and
Jerome Shaw.

     “Statutory Statements” has the meaning set forth in Section 2.6(c) of this Agreement.

     “Stockholders Agreement” means the Stockholders Agreement in the form of Exhibit
F hereto, dated as of the Closing Date, to be executed by and among the Holding Company, the
Investor and all other stockholders of the Holding Company.

     “Subsidiary” means (i) any corporation more than fifty percent (50%) of the
outstanding voting securities of which, or any partnership, joint venture or other entity more than
fifty percent (50%) of the total equity interest of which, is directly or indirectly owned by the
Holding Company or any other entity otherwise controlled by or under common control with the
Holding Company and (ii) the Other Subsidiaries.

     “Substantial Portion” means, with respect to the assets of the Holding Company and its
Subsidiaries, assets which (i) represent more than 10% of the consolidated assets of the Holding
Company and its Subsidiaries as would be shown in the consolidated financial statements of the
Holding Company and its Subsidiaries as of the end of the immediately preceding fiscal year, or
(ii) is responsible for more than 10% of the consolidated net income of the Holding Company and its
Subsidiaries as reflected in the financial statements referred to in clause (i) above.

     “Taxes” means any federal, state, local, foreign or other taxes, including without
limitation income taxes, estimated taxes, excise taxes, sales taxes, use taxes, gross receipts
taxes, franchise taxes, employment and payroll related taxes, withholding taxes, stamp taxes,
transfer taxes and property taxes, whether or not measured in whole or in part by net income.

     “Tier 1 Default” means:

     (i) a breach by the Company of any of the covenants set forth in Section 6.2 or Section
6.14 or, prior to September 30, 2004, a breach by the Company of any of the covenants set
forth in Section 5.5, 5.6, 5.7, 5.8 or 5.10 of the Credit Agreement;

     (ii) a Tier 2 Default identified in clause (ii) of the definition thereof which results
in a Material Adverse Effect on the Company or on the Investor’s investment hereunder; or

     (iii) any breach of the non-competition obligations contained in the Shaw
Non-Competition and Confidentiality Agreement or any breach by Richard Smith of the
non-competition obligations contained in his employment agreement with the Company.

     “Tier 2 Default” means:

     (i) a breach by the Company of any of the covenants set forth in Sections 6.5, 6.6 or
6.12 which, individually or in the aggregate, has a Material Adverse Effect on the Company
or on the Investor’s investment hereunder; provided, that if the Company learns of a
breach which might result in a Material Adverse Effect, and the breach is

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cured before a
Material Adverse Effect occurs, a Tier 2 Default shall not be deemed to have occurred;

     (ii) a material breach by the Company of any of the covenants set forth in Section
6.13, which breach remains uncured to the reasonable satisfaction of the Investor for a
period of forty five (45) days following delivery of written notice of such breach by the
Investor to the Company; provided, that if such breach is not capable of being
cured, a Tier 2 Default shall be deemed to have occurred at the time of such breach;

     (iii) a Tier 3 Default which remains uncured to the reasonable satisfaction of the
Investor for a period of ninety (90) days (other than a Tier 3 Default set forth in clause
(ii) of the definition thereof); or

     (iv) a breach by the Company of any of the representations and warranties set forth in
Section 2 which, individually or in the aggregate, results in a Material Adverse Effect on
the Company or on the Investor’s investment hereunder; provided, that all
materiality qualifications (including references to a Material Adverse Effect) included in
such representations and warranties shall be disregarded for purposes of determining whether
a Material Adverse Effect has occurred.

     “Tier 3 Default” means (i) a material breach by the Company of any of the covenants
set forth in Sections 6.1, 6.4, 6.7, 6.9, 6.10 or 6.11 which remains uncured to the reasonable
satisfaction of the Investor for a period of forty five (45) days following delivery of written
notice of such breach by the Investor to the Company, or (ii) the failure of the Company to obtain
an A.M. Best Company, Inc. rating of “A-” or better by December 31, 2004 (the “A.M. Best
Default”).

     “Total Capital” means, as of any date, the sum of (a) Total Debt, plus (b) common
equity of the Holding Company and its Subsidiaries, plus (c) preferred equity of the Holding
Company and its Subsidiaries, all on a consolidated basis.

     “Total Debt” means, as of any date, all indebtedness of the Holding Company and its
Subsidiaries on a consolidated basis, determined in accordance with GAAP.

     “Total Interest Expense” means, for any period, total interest and related expense
(including, without limitation, that portion of any capitalized lease obligation attributable to
interest expense in conformity with GAAP, amortization of debt discount, all capitalized interest,
the interest portion of any deferred payment obligations, all commissions, discounts and other fees
and charges owed with respect to letter of credit and bankers acceptance financing, the net costs
and net payments under any interest rate hedging, cap or similar agreement or arrangement,
prepayment charges, agency fees, administrative fees, commitment fees and capitalized transaction
costs allocated to interest expense) paid, payable or accrued during such period, without
duplication for any other period, with respect to all outstanding indebtedness of the Holding
Company and its Subsidiaries, all as determined for the Holding Company and its Subsidiaries on a
consolidated basis for such period in accordance with GAAP.

     “Transaction Expenses” has the meaning set forth in Section 5.13 of this Agreement.

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SECTION 9 TERMINATION

          9.1 Termination or Abandonment. Notwithstanding anything contained in this Agreement
to the contrary, this Agreement may be terminated or abandoned at any time prior to the Closing:

               (a) by the mutual written consent of the Holding Company and the Investor;

               (b) by the Investor within fourteen (14) days of the date hereof if it is not satisfied in its
sole discretion with respect to the Company’s prospects of obtaining an A.M. Best Company, Inc.
rating of “A-” or better by December 31, 2004;

               (c) by the Holding Company or the Investor if any court of competent jurisdiction or
governmental body, authority or agency having jurisdiction shall have issued an order, decree or
ruling or taken any other action restraining, enjoining or otherwise prohibiting the transactions
contemplated hereby and such order, decree, ruling or other action shall have become final and
nonappealable; or

               (d) by the Holding Company or the Investor, as applicable, if one or more of its conditions
set forth in Sections 5 or 5A of this Agreement has not been fulfilled by June 30, 2004;
provided, that neither party may terminate this Agreement for a failure to satisfy a
condition that results from its breach of any provision of this Agreement.

          9.2 Effect of Termination. If any party terminates this Agreement pursuant to Section
9.1 above, all obligations of the parties hereunder shall terminate without any liability of any
party to any other party; provided, however, that each party shall remain liable
pursuant to Section 8 for any breach of any representation, warranty, covenant or agreement prior
to any termination of this Agreement; provided further that the provisions of
Sections 10.1, 10.2, 10.4, 10.5, 10.6, 10.7 and 10.8 shall survive termination of this Agreement.

SECTION 10 GENERAL

          10.1 Amendments, Waivers and Approvals. For the purposes of this Agreement and all
agreements executed pursuant hereto, no course of dealing between or among any of the parties
hereto and no delay on the part of any party hereto in exercising any rights hereunder or
thereunder shall operate as a waiver of the rights hereof and thereof. No provision hereof may be
waived otherwise than by a written instrument signed by the party or parties so waiving such
covenant or other provision. No amendment to this Agreement may be made without the written
consent of the Holding Company and the Investor (in accordance with the immediately succeeding
sentence). The Holding Company agrees to pay the reasonable fees and out-of-pocket expenses of the
Investor’s counsel in connection with the waiver or amendment of any provision of this Agreement,
the Related Agreements and any agreement executed pursuant hereto. For purposes of this Agreement
and all agreements executed pursuant hereto, all matters requiring the consent or approval of the
Investor shall require the consent or approval of the holders of a majority of the shares of Series
A Preferred Stock then outstanding.

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          10.2 Investor’s and Glencoe’s Fees and Expenses. The Holding Company agrees that on
the Closing Date the Holding Company shall reimburse all of the Investor’s and Glencoe’s
Transaction Expenses and shall pay Glencoe an investment structuring fee equal to (a) $1,450,000,
if the Applicable Number is as set forth in Section 1.2(i), or (b) $1,300,000 if the Applicable
Number is as set forth in Section 1.2(ii); provided, however, that in the event
that the Closing does not occur by June 30, 2004, the Holding Company shall reimburse the Investor
and Glencoe for fifty percent (50%) of all of their Transaction Expenses in an amount not to exceed
$250,000.

          10.3 Legend on Securities. The Holding Company and the Investor acknowledge and agree
that the following legend (or one substantially similar thereto), together with any legend required
pursuant to the Stockholders Agreement and any other legend required by applicable state law shall
be typed on each of the Series A Preferred Stock certificates issued hereunder:

     THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE “ACT”), OR ANY STATE SECURITIES OR BLUE SKY LAWS AND MAY NOT BE
OFFERED, SOLD, TRANSFERRED, HYPOTHECATED OR OTHERWISE ASSIGNED EXCEPT (1) PURSUANT TO A
REGISTRATION STATEMENT WITH RESPECT TO SUCH SECURITIES WHICH IS EFFECTIVE UNDER THE ACT OR
(2) PURSUANT TO AN AVAILABLE EXEMPTION FROM REGISTRATION UNDER THE ACT RELATING TO THE
DISPOSITION OF SECURITIES AND (3) IN ACCORDANCE WITH APPLICABLE STATE SECURITIES AND BLUE
SKY LAWS.

     THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO ADDITIONAL RESTRICTIONS
ON TRANSFER AND CERTAIN OTHER AGREEMENTS SET FORTH IN A STOCKHOLDERS AGREEMENT DATED AS OF
JUNE 7, 2004 BY AND AMONG THE COMPANY AND CERTAIN OF ITS STOCKHOLDERS, A COPY OF WHICH
MAY BE OBTAINED WITHOUT CHARGE BY THE HOLDER HEREOF AT THE COMPANY’S PRINCIPAL PLACE OF
BUSINESS.

     THE COMPANY WILL PROVIDE TO ANY HOLDER HEREOF UPON REQUEST AND WITHOUT CHARGE A FULL
STATEMENT OF THE DESIGNATION, RELATIVE RIGHTS, PREFERENCES AND LIMITATIONS OF THE SHARES OF
EACH CLASS OF THE COMPANY’S AUTHORIZED STOCK.

     A certificate shall not bear such legend if, in the opinion of counsel reasonably satisfactory
to the Holding Company, the securities represented thereby may be publicly sold without
registration under the Securities Act and any applicable state securities laws.

          10.4 Governing Law. This Agreement shall be deemed to be a contract made under, and
shall be construed in accordance with, the laws of the State of Delaware, without giving effect to
conflict of laws principles thereof.

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          10.5 Section Headings and Gender. The descriptive headings in this Agreement have
been inserted for convenience only and shall not be deemed to limit or otherwise affect the
construction of any provision thereof or hereof. The use in this Agreement of the masculine
pronoun in reference to a party hereto shall be deemed to include the feminine or neuter, and vice
versa, as the context may require.

          10.6 Counterparts. This Agreement may be executed in multiple counterparts, each of
which shall constitute but one and the same instrument. One or more counterparts of this Agreement
may be delivered via facsimile, with the intention that they shall have the same effect as an
original counterpart hereof.

          10.7 Notices and Demands. Any notice or demand which is required or provided to be
given under this Agreement shall be deemed to have been sufficiently given and received for all
purposes when delivered by hand, facsimile, or five (5) business days after being sent by certified
or registered mail, postage and charges prepaid, return receipt requested, or two (2) business days
after being sent by overnight delivery providing receipt of delivery, to:

     if to the Holding Company:

First Mercury Financial Corporation

29621 Northwestern Highway

Southfield, MI 48034

Attn: Richard Smith

Telephone: (248) 358-4010

Facsimile: (248) 353-5879

     or at such other address designated by the Holding Company to the Investor in writing with a
copy to:

Dickinson Wright PLLC

215 S. Washington Square, Suite 200

Lansing, MI 48933-1816

Attn: Joseph A. Fink, Esq.

Telephone: (517) 371-1730

Facsimile: (517) 487-4700

     if to the Investor:

FMFC Holdings, LLC

222 West Adams Street

Suite 1000

Chicago, IL 60606

Fax: (312) 795-0455

Attn: Douglas Patterson

     or at such other address designated by the Investor to the Holding Company in writing with a
copy to:

McDermott, Will & Emery

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227 West Monroe Street

Chicago, IL 60606

Fax: (312) 984-7700

Attn: Scott M. Williams

          10.8 Jurisdiction; Venue; Waiver of Jury Trial.

               (a) Each of the parties to this Agreement hereby agrees that the state and federal courts of
the State of Illinois shall have exclusive jurisdiction to hear and determine any claims or
disputes between the parties hereto pertaining directly or indirectly to this Agreement, and all
documents, instruments and agreements executed pursuant hereto or thereto, or to any matter arising
herefrom (unless otherwise expressly provided for herein or therein). To the extent permitted by
law, each party hereby expressly submits and consents in advance to such jurisdiction in any action
or proceeding commenced by any of the other parties hereto in any of such courts, and agrees that
service of such summons and complaint or other process or papers may be made by registered or
certified mail addressed to such party at the address to which notices are to be sent pursuant to
this Agreement. Each of the parties waives any claim that Chicago, Illinois is an inconvenient
forum or an improper forum based on lack of venue. The choice of forum set forth in this Section
shall not be deemed to preclude the enforcement of any judgment obtained in such forum or the
taking of any action to enforce the same in any other appropriate jurisdiction.

               (b) Each party hereto hereby waives, to the fullest extent permitted by applicable law, any
right it may have to a trial by jury in respect of any litigation directly or indirectly arising
out of, under or in connection with this Agreement. Each party hereto (i) certifies that no
representative, agent or attorney of the other party has represented, expressly or otherwise, that
the other party would not, in the event of litigation, seek to enforce the foregoing waiver and
(ii) acknowledges that it and the other parties hereto have been induced to enter into this
Agreement by, among other things, the mutual waivers and certifications in this Section.

          10.9 Remedies; Severability. Subject to the provisions of Section 7.3 hereof, it is
specifically understood and agreed that any breach of the provisions of this Agreement by any
person subject hereto will result in irreparable injury to the other parties hereto, that the
remedy at law alone will be an inadequate remedy for such breach, and that, in
addition to any other remedies which they may have, such other parties may enforce their
respective rights by actions for specific performance in the federal or state courts in the State
of Illinois (to the extent permitted by law). Whenever possible, each provision of this Agreement
shall be interpreted in such a manner as to be effective and valid under applicable law, but if any
provision of this Agreement shall be deemed prohibited or invalid under such applicable law, such
provision shall be ineffective to the extent of such prohibition or invalidity, and such
prohibition or invalidity shall not invalidate the remainder of such provision or the other
provisions of this Agreement.

          10.10 Assignment. The Investor may transfer the rights set forth in this Agreement to
(i) any Affiliate or limited partner, manager, member or shareholder of the Investor or its direct
or indirect owners to whom the Investor has transferred shares of Series A

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Preferred Stock, or (ii)
any transferee who receives at least fifty percent (50%) of the then outstanding shares of Series A
Preferred Stock.

          10.11 Adjustment. All references to share amounts and prices herein shall be
equitably adjusted to reflect any stock split, combination, reorganization, recapitalization,
reclassification, stock distribution, stock dividend or similar event affecting the capital stock
of the Holding Company.

          10.12 Entire Agreement; Integration. This Agreement, including the exhibits,
schedules, documents and instruments referred to herein, constitutes the entire agreement, and
supersedes all other prior agreements and understandings, both written and oral, among the parties
with respect to the subject matter hereof, including, without limitation, the term sheet dated
December 10, 2003 between the Investor and the Holding Company in respect of the transactions
contemplated herein.

[SIGNATURE PAGE FOLLOWS]

-49-

 

     IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and
delivered by their proper and duly authorized representatives as of the day and year first above
written.

	 	 	 	 	 	 	 
	 	 	HOLDING COMPANY:	 	 
	 
	 	 	 	 	 	 
	 	 	FIRST MERCURY FINANCIAL CORPORATION	 	 
	 
	 	 	 	 	 	 
	 

	 	By:	 	 /s/  Richard H.
Smith	 	 
	 

	 	 	 	 	 	 
	 

	 	Name:	 	 Richard H. Smith	 	 
	 

	 	 	 	 	 	 
	 

	 	Title:	 	 President	 	 
	 

	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	 	 	INVESTOR:	 	 
	 
	 	 	 	 	 	 
	 	 	FMFC HOLDINGS, LLC	 	 
	 
	 	 	 	 	 	 
	 

	 	By:
	 	Glencoe Capital, LLC	 	 
	 

	 	Its:
	 	Manager	 	 

	 	 	 	 	 	 	 	 	 
	 

	 	 
	 	By:
	 	 /s/  David S. Evans	 	 
	 

	 	 	 	 	 	 	 	 
	 

	 	 	 	Name:	 	 David S. Evans	 	 
	 

	 	 	 	 	 	 	 	 
	 

	 	 	 	Title:	 	 President	 	 
	 

	 	 	 	 	 	 	 	 

 -i-

 

 

SCHEDULE OF KEY EMPLOYEES

Jerome Shaw

Richard Smith

Frank McGovern

Richard Barrett

John Bures

 -ii-

 

 

ASSUMPTION AGREEMENT

     This
Assumption Agreement (this “Agreement”) is made and
entered into as of August 17, 2005 by and among First Mercury Holdings, Inc., a Delaware corporation (“Holdings”),
First Mercury Financial Corporation, a Delaware corporation (“FMFC”), and FMFC Holdings,
LLC, a Delaware corporation (the “Investor”). Capitalized terms used but not otherwise
defined herein shall have the meanings given to them in the Series A Convertible Preferred Stock
Purchase Agreement dated March 1, 2004 between FMFC and the Investor, as amended (the
“Securities Purchase Agreement”).

     WHEREAS, pursuant to the Securities Purchase Agreement, the Investor purchased 400 shares of
Series A Convertible Preferred Stock of FMFC (the “FMFC Preferred Stock”);

     WHEREAS, Holdings, the Investor and certain stockholders and option holders of FMFC are
parties to a Stock Contribution Agreement (the “Exchange Agreement”, and the transactions
contemplated thereby being referred to as the “Exchange”) pursuant to which, among other
things, the Investor shall contribute to Holdings all of its shares of FMFC Preferred Stock and
receive in exchange 400 shares of Series A Convertible Preferred Stock of Holdings (on terms
substantially the same as the FMFC Preferred Stock and on a fully accreted basis with all accrued
and unpaid dividends) (the “Holdings Preferred Stock”); and

     WHEREAS, Holdings desires to assume certain provisions of the Securities Purchase Agreement
such that the rights of the Investor as a holder of FMFC Preferred Stock are preserved when the
Investor is issued shares of Holdings Preferred Stock upon consummation of the Exchange.

     NOW THEREFORE, in consideration of the foregoing and other good and valuable consideration,
the receipt and sufficiency of which is hereby acknowledged, the parties hereby agree as follows:

     1. Assumption. Holdings hereby assumes all of the obligations of FMFC pursuant to
Section 1.4 and Section 7.3 of the Securities Purchase Agreement. Holdings acknowledges and agrees
that all rights and remedies available to the holders of FMFC Preferred Stock pursuant to Section
1.4 and Section 7.3 of the Securities Purchase Agreement shall be available to the holders of
Holdings Preferred Stock. Accordingly, the Conversion Price, Dividend Rate and Makewhole Rate of
the Holdings Preferred Stock shall be adjusted in the same manner and to the same extent as the
Conversion Price, Dividend Rate and Makewhole Rate of the FMFC Preferred Stock would be pursuant to
the Securities Purchase Agreement (the “Adjustments”). FMFC acknowledges and agrees that
all of its other obligations under the Securities Purchase Agreement shall continue in full force
and effect. Investor acknowledges that its exclusive remedy for breach of any obligation of FMFC
is the obligations to make the Adjustments assumed by Holdings hereunder.

     2. Preservation of Rights. Holdings acknowledges and agrees that any rights which the
Investor has prior to the Exchange as a holder of FMFC Preferred Stock shall be preserved as a
holder of Holdings Preferred Stock and Holdings hereby assumes all obligations of FMFC relating

 -iii-

 

 

thereto, including the obligation to pay any accrued and unpaid dividends on the FMFC Preferred
Stock.

     3. References to FMFC Preferred Stock. All references to the FMFC Preferred Stock in
the Securities Purchase Agreement, as such references pertain to any action requiring the consent
or approval of the holders of FMFC Preferred Stock, shall be deemed to refer to the Holdings
Preferred Stock and the holders thereof.

     4. Succession and Assignment. This Agreement shall be binding upon and inure to the
benefit of the parties named herein and their respective successors, assigns and heirs. Neither
FMFC nor Holdings may assign either this Agreement or any of their rights, interests, or
obligations hereunder without the prior written approval each of the other parties hereto.

     5. Counterparts. This Agreement may be executed in one or more counterparts, each of
which shall be deemed an original but all of which together will constitute one and the same
instrument.

     6. Headings. The section headings contained in this Agreement are inserted for
convenience only and shall not affect in any way the meaning or interpretation of this Agreement.

     7. Governing Law. This Agreement shall be governed by and construed in accordance
with the domestic laws of the State of Illinois without giving effect to any choice or conflict of
law provision or rule (either of the State of Illinois or any other jurisdiction) that would cause
the application of the laws of any jurisdiction other than the State of Illinois.

     8. Amendments and Waivers. No amendment of any provision of this Agreement shall be
valid unless the same shall be in writing and signed by each of the parties hereto. No waiver by
any party of any default or breach hereunder, whether intentional or not, shall be deemed to extend
to any prior or subsequent default or breach hereunder or affect in any way any rights arising by
virtue of any prior or subsequent such occurrence.

* * *

 -iv-

 

 

     IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above
written.

	 	 	 	 	 	 	 
	 	 	HOLDINGS:	 	 
	 
	 	 	 	 	 	 
	 	 	FIRST MERCURY HOLDINGS, INC.	 	 
	 

	 	By:	 	 	 	 
	 

	 	 	 	 	 	 
	 

	 	Name:	 	 	 	 
	 

	 	 	 	 	 	 
	 

	 	Title:	 	 	 	 
	 

	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	 	 	FMFC:	 	 
	 
	 	 	 	 	 	 
	 	 	FIRST MERCURY FINANCIAL CORPORATION	 	 
	 

	 	By:	 	 	 	 
	 

	 	 	 	 	 	 
	 

	 	Name:	 	 	 	 
	 

	 	 	 	 	 	 
	 

	 	Title:	 	 	 	 
	 

	 	 	 	 	 	 
	 
	 	 	 	 	 	 
	 	 	INVESTOR:	 	 
	 
	 	 	 	 	 	 
	 	 	FMFC HOLDINGS, LLC	 	 
	 
	 	 	 	 	 	 
	 

	 	By:
	 	Glencoe Capital, LLC	 	 
	 

	 	Its:
	 	Manager	 	 
	 
	 	 	 	 	 	 
	 

	 	By:	 	 	 	 
	 

	 	 	 	 	 	 
	 

	 	Name:	 	 	 	 
	 

	 	 	 	 	 	 
	 

	 	Title:	 	 	 	 
	 

	 	 	 	 	 	 

 -v-exv10w19

 

Exhibit 10.19

FIRST MERCURY FINANCIAL CORPORATION

OMNIBUS INCENTIVE PLAN OF 2006

 

 

FIRST MERCURY FINANCIAL CORPORATION

OMNIBUS INCENTIVE PLAN OF 2006

     1. Purpose. The purposes of the Plan are (a) to promote the interests of the Corporation and
its Subsidiaries and its stockholders by strengthening the ability of the Corporation and its
Subsidiaries to attract and retain highly competent officers and other key employees, and (b) to
provide a means to encourage Stock ownership and proprietary interest in the Corporation. The Plan
is intended to provide Plan Participants with forms of long-term incentive compensation that are
not subject to the deduction limitation rules prescribed under Code Section 162(m), and should be
construed to the extent possible as providing for remuneration which is “performance-based
compensation” within the meaning of Code Section 162(m) and the regulations promulgated thereunder.

     2. Definitions. Where the context of the Plan permits, words in the masculine gender shall
include the feminine gender, the plural form of a word shall include the singular form, and the
singular form of a word shall include the plural form. Unless the context clearly indicates
otherwise, the following terms shall have the following meanings:

	 	(a)	 	“Award” means the grant of incentive compensation under this Plan to a
Participant.
	 
	 	(b)	 	“Board” means the board of directors of the Corporation.
	 
	 	(c)	 	“Change of Control” means:

	 	(i)	 	upon the acquisition by any individual, entity or group,
including any Person, of beneficial ownership (as defined in Rule 13d-3
promulgated under the Exchange Act), directly or indirectly, of 20% or more of
the combined voting power of the then outstanding capital stock of the
Corporation that by its terms may be voted on all matters submitted to
stockholders of the Corporation generally (“Voting Stock”); provided, however,
that the following acquisitions shall not constitute a Change in Control: (A)
any acquisition directly from the Corporation (excluding any acquisition
resulting from the exercise of a conversion or exchange

 - 2 - 

 

	 	 	 	privilege in respect of outstanding convertible or exchangeable securities
unless such outstanding convertible or exchangeable securities were acquired
directly from the Corporation); (B) any acquisition by the Corporation; (C)
any acquisition by an employee benefit plan (or related trust) sponsored or
maintained by the Corporation or any corporation controlled by the
Corporation; or (D) any acquisition by any corporation pursuant to a
reorganization, merger or consolidation involving the Corporation, if,
immediately after such reorganization, merger or consolidation, each of the
conditions described in clauses (A), (B) and (C) of subsection (ii) below
shall be satisfied; and provided further that, for purposes of clause (B)
above, if (1) any Person (other than the Corporation or any employee benefit
plan (or related trust) sponsored or maintained by the Corporation or any
corporation controlled by the Corporation) shall become the beneficial owner
of 20% or more of the Voting Stock by reason of an acquisition of Voting
Stock by the Corporation, and (2) such Person shall, after such acquisition
by the Corporation, become the beneficial owner of any additional shares of
the Voting Stock and such beneficial ownership is publicly announced, then
such additional beneficial ownership shall constitute a Change in Control;
or
	 
	 	(ii)	 	upon the consummation of a reorganization, merger or
consolidation of the Corporation, or a sale, lease, exchange or other transfer
of all or substantially all of the assets of the Corporation; excluding,
however, any such reorganization, merger, consolidation, sale, lease, exchange
or other transfer with respect to which, immediately after consummation of such
transaction: (A) all or substantially all of the beneficial owners of the
Voting Stock of the Corporation outstanding immediately prior to such
transaction continue to beneficially own, directly or indirectly (either by
remaining outstanding or by being converted into voting securities of the
entity resulting from such transaction), more than [20]% of the combined

 - 3 - 

 

	 	 	 	voting power of the voting securities of the entity resulting from such
transaction (including, without limitation, the Corporation or an entity
which as a result of such transaction owns the Corporation or all or
substantially all of the Corporation‘s property or assets, directly or
indirectly) (the “Resulting Entity”) outstanding immediately after such
transaction, in substantially the same proportions relative to each other as
their ownership immediately prior to such transaction; and (B) no Person
(other than any Person that beneficially owned, immediately prior to such
reorganization, merger, consolidation, sale or other disposition, directly
or indirectly, Voting Stock representing 20% or more of the combined voting
power of the Corporation‘s then outstanding securities) beneficially owns,
directly or indirectly, 20% or more of the combined voting power of the then
outstanding securities of the Resulting Entity; and (C) at least a majority
of the members of the board of directors of the entity resulting from such
transaction were Continuing Directors of the Corporation at the time of the
execution of the initial agreement or action of the Board authorizing such
reorganization, merger, consolidation, sale or other disposition; or
	 
	 	(iii)	 	upon the approval of a plan of complete liquidation or
dissolution of the Corporation; or
	 
	 	(iv)	 	when the Continuing Directors cease for any reason to
constitute at least a majority of the Board.

	 	(d)	 	“Code” means the Internal Revenue Code of 1986, as amended.
	 
	 	(e)	 	“Committee” means the Compensation and Employee Benefits Committee of
the Board.
	 
	 	(f)	 	“Continuing Directors” means those individuals initially appointed as
the directors of the Corporation; provided, however, that any individual who
becomes a director of the Corporation at or after the first annual meeting

 - 4 - 

 

	 		 	of stockholders of the Corporation whose election, or nomination for
election by the Corporation’s stockholders, was approved by the vote of at
least a majority of the directors then comprising the Board (or by the
nominating committee of the Board, if such committee is comprised of
Continuing Directors and has such authority) shall be deemed to have been a
Continuing Director; and provided further, that no individual shall be
deemed to be a Continuing Director if such individual initially was elected
as a director of the Corporation as a result of: (i) an actual or threatened
solicitation by a Person (other than the Board) made for the purpose of
opposing a solicitation by the Board with respect to the election or removal
of directors; or (ii) any other actual or threatened solicitation of proxies
or consents by or on behalf of any Person (other than the Board).
	 
	 	(g)	 	“Corporation” means First Mercury Financial Corporation, a Delaware
corporation, or any successor thereto.
	 
	 	(h)	 	“Covered Employees” means covered employees within the meaning of Code
Section 162(m).
	 
	 	(i)	 	“Deferred Stock Unit” (“DSU”) means a vested right to a future award of
Stock granted pursuant to Section 10 below.
	 
	 	(j)	 	“Exchange Act” means the Securities Exchange Act of 1934, as amended.
	 
	 	(k)	 	“Fair Market Value” means the fair market value of Stock determined at
any time in such manner as the Committee may deem equitable, or as required by
applicable law or regulation.
	 
	 	(l)	 	“Incentive Stock Options” means a Stock Option designed to meet the
requirements of Code Section 422 or any successor law.
	 
	 	(m)	 	“Nonqualified Stock Option” means a Stock Option that is not an
Incentive Stock Option.

 - 5 - 

 

	 	(n)	 	“Participant” means (i) an employee of the Corporation or its
Subsidiaries; or (ii) a non-employee director of the Corporation designated by
the Committee as eligible to receive an Award under the Plan.
	 
	 	(o)	 	“Performance Cash Awards” means cash incentives subject to the
satisfaction of long-term Performance Criteria and granted pursuant to Section
12 below.
	 
	 	(p)	 	“Performance Criteria” means business criteria within the meaning of
Code Section 162(m), including, but not limited to: revenue; revenue growth;
earnings before interest and taxes; earnings before interest, taxes,
depreciation and amortization; earnings per share; operating income; pre-or
after-tax income; net operating profit after taxes; economic value added (or an
equivalent metric); ratio of operating earnings to capital spending; cash flow
(before or after dividends); cash-flow per share (before or after dividends);
net earnings; net sales; sales growth; share price performance; return on
assets or net assets; return on equity; return on capital (including return on
total capital or return on invested capital); cash flow return on investment;
total shareholder return; improvement in or attainment of expense levels; and
improvement in or attainment of working capital levels or Performance Criteria.
Any Performance Criteria may be used to measure our performance as a whole or
any of our business units and may be measured relative to a peer group or
index.
	 
	 	(q)	 	“Performance Period” means the period as designated by the Committee
with a minimum of one year and a maximum of five years.
	 
	 	(r)	 	“Performance Shares” means Awards subject to the satisfaction of
long-term Performance Criteria and granted pursuant to Section 11 below.
	 
	 	(s)	 	“Person” means any individual, entity or group, including any “person”
within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act.

 - 6 - 

 

	 	(t)	 	“Plan” means the First Mercury Financial Corporation Omnibus Incentive
Plan of 2006.
	 
	 	(u)	 	“Restricted Stock” means Stock subject to a vesting condition specified
by the Committee in an Award in accordance with Section 9 below.
	 
	 	(v)	 	“Resulting Entity” means the entity resulting from a transaction
(including, without limitation, the Corporation or an entity which as a result
of such transaction owns the Corporation or all or substantially all of the
Corporation’s property or assets, directly or indirectly).
	 
	 	(w)	 	“RSU” means a restricted stock unit providing a Participant with the
right to receive Stock at a date on or after vesting in accordance with the
terms of such grant and/or upon the attainment of Performance Criteria
specified by the Committee in the Award in accordance with Section 9 below.
	 
	 	(x)	 	“SAR” means a stock appreciation right granted pursuant to Section 8
below.
	 
	 	(y)	 	“Stock” means a share of common stock of the Corporation that, by its
terms, may be voted on all matters submitted to stockholders of the Corporation
generally.
	 
	 	(z)	 	“Stock Option” means the right to acquire shares of Stock at a certain
price that is granted pursuant to Section 7 below. The term Stock Option
includes both Incentive Stock Options and Nonqualified Stock Options.
	 
	 	(aa)	 	“Subsidiary” or “Subsidiaries” means any corporation or entity of which
the Corporation owns directly or indirectly, at least 50% of the total voting
power or in which it has at least a 50% economic interest, and which is
authorized to participate in the Plan.

 - 7 - 

 

     3. Administration. The Plan will be administered by the Committee consisting of two or more
directors of the Corporation as the Board may designate from time to time, each of whom shall
satisfy such requirements as:

	 	(a)	 	the Securities and Exchange Commission may establish for administrators
acting under plans intended to qualify for exemption under Rule 16b-3 or its
successor under the Exchange Act;
	 
	 	(b)	 	the New York Stock Exchange may establish pursuant to its rule-making
authority; and
	 
	 	(c)	 	the Internal Revenue Service may establish for outside directors acting
under plans intended to qualify for exemption under Code Section 162(m).

     The Committee shall have the discretionary authority to construe and interpret the Plan and
any Awards granted thereunder, to establish and amend rules for Plan administration, to change the
terms and conditions of Awards at or after grant (subject to the provisions of Section 20 below),
to correct any defect or supply any omission or reconcile any inconsistency in the Plan or in any
Award granted under the Plan, and to make all other determinations which it deems necessary or
advisable for the administration of the Plan.

     Awards under the Plan to a Covered Employee may be made subject to the satisfaction of one or
more Performance Criteria. Performance Criteria shall be established by the Committee for a
Participant (or group of Participants) no later than ninety (90) days after the commencement of
each Performance Period (or the date on which 25% of the Performance Period has elapsed, if
earlier). The Committee may select one or more Performance Criteria and may apply those
Performance Criteria on a corporate-wide or division/business segment basis; provided, however,
that the Committee may not increase the amount of compensation payable to a Covered Employee upon
the satisfaction of Performance Criteria.

     The Committee or the Board may authorize one or more officers of the Corporation to select
employees to participate in the Plan and to determine the number and type of Awards to be granted
to such Participants, except with respect to Awards to officers subject to Section 16 of the
Exchange Act, or to non-employee directors of the Corporation, or to officers who are, or

 - 8 - 

 

who are reasonably expected to be, Covered Employees. Any reference in the Plan to the Committee
shall include such officer or officers.

     The determinations of the Committee shall be made in accordance with their judgment as to the
best interests of the Corporation and its stockholders and in accordance with the purposes of the
Plan. Any determination of the Committee under the Plan may be made without notice or meeting of
the Committee, if in writing signed by all the Committee members.

     4. Participants. Participants may consist of all employees of the Corporation and its
subsidiaries and all non-employee directors of the Corporation; provided, however, the following
individuals shall be excluded from participation in the Plan: (a) contract labor; (b) employees
whose base wage or base salary is not processed for payment by the payroll department of the
Corporation or any subsidiary; and (c) any individual performing services under an independent
contractor or consultant agreement, a purchase order, a supplier agreement or any other agreement
that the Corporation enters into for service. Designation of a Participant in any year shall not
require the Committee to designate that person to receive an Award in any other year or to receive
the same type or amount of Award as granted to the Participant in any other year or as granted to
any other Participant in any year. The Committee shall consider all factors that it deems relevant
in selecting Participants and in determining the type and amount of their respective Awards.

     5. Shares Available under the Plan. There is hereby reserved for issuance under the Plan an
aggregate of 1,500,000 shares of Stock. Stock covered by an Award granted under the Plan shall
not be counted as used unless and until actually issued and delivered to a Participant.
Accordingly, if there is (a) a lapse, expiration, termination or cancellation of any Stock Option
or other Award outstanding under this Plan prior to the issuance of Stock thereunder or (b) a
forfeiture of any shares of Restricted Stock or Stock subject to Awards granted under this Plan
prior to vesting, then the Stock subject to these Stock Options or other Awards shall be added to
the Stock available for Awards under the Plan. In addition, any Stock covered by an SAR (including
an SAR settled in Stock which the Committee, in its discretion, may substitute for an outstanding
Stock Option) shall be counted as used only to the extent Stock is actually issued to the
Participant upon exercise of the right. Finally, any Stock exchanged by an

 - 9 - 

 

optionee as full or partial payment of the exercise price under any Stock Option exercised
under the Plan, any Stock retained by the Corporation to comply with applicable income tax
withholding requirements, and any Stock covered by an Award which is settled in cash, shall be
added to the Stock available for Awards under the Plan.

     All Stock issued under the Plan may be either authorized and unissued Stock or issued Stock
reacquired by the Corporation. All of the available Stock may, but need not, be issued pursuant to
the exercise of Incentive Stock Options; provided, however, notwithstanding a Stock Option’s
designation, to the extent that Incentive Stock Options are exercisable for the first time by the
Participant during any calendar year with respect to Stock whose aggregate Fair Market Value
exceeds $100,000, such Stock Options shall be treated as Nonqualified Stock Options.

     No
Participant may receive in any calendar year Awards
relating to more than 500,000 shares of Stock.

     The Stock reserved for issuance and the other limitations set forth above shall be subject to
adjustment in accordance with Section 15 hereto.

     6. Types of Awards, Payments, and Limitations. Awards under the Plan shall consist of Stock
Options, SARs, Restricted Stock, RSUs, DSUs, Performance Shares, Performance Cash Awards, and other
Stock or cash Awards, all as described below. Payment of Awards may be in the form of cash, Stock,
other Awards or combinations thereof as the Committee shall determine, and with the expectation
that any Award of Stock shall be styled to preserve such restrictions as it may impose. The
Committee, either at the time of grant or by subsequent amendment, and subject to the provisions of
Sections 20 and 21 hereto, may require or permit Participants to elect to defer the issuance of
Stock or the settlement of Awards in cash under such rules and procedures as the Committee may
establish under the Plan.

     The Committee may provide that any Awards under the Plan earn dividends or dividend
equivalents and interest on such dividends or dividend equivalents. Such dividends or dividend
equivalents may be paid currently or may be credited to a Participant’s Plan account and are
subject to the same vesting or Performance Criteria as the underlying Award. Any crediting of
dividends or dividend equivalents may be subject to such restrictions and conditions as the
Committee may establish, including reinvestment in additional Stock or Stock equivalents.

 - 10 - 

 

     Awards shall be evidenced by an agreement that sets forth the terms, conditions and
limitations of such Award. Such terms may include, but are not limited to, the term of the Award,
the provisions applicable in the event the Participant’s employment terminates, and the
Corporation’s authority to unilaterally or bilaterally amend, modify, suspend, cancel or rescind
any Award including without limitation the ability to amend such Awards to comply with changes in
applicable law. An Award may also be subject to other provisions (whether or not applicable to
similar Awards granted to other Participants) as the Committee determines appropriate, including
provisions intended to comply with federal or state securities laws and stock exchange
requirements, understandings or conditions as to the Participant’s employment, requirements or
inducements for continued ownership of Stock after exercise or vesting of Awards, or forfeiture of
Awards in the event of termination of employment shortly after exercise or vesting, or breach of
noncompetition or confidentiality agreements following termination of employment.

     The Committee may make retroactive adjustments to and the Participant shall reimburse to the
Corporation any cash or equity based incentive compensation paid to the Participant where such
compensation was predicated upon achieving certain financial results that were substantially the
subject of a restatement, and as a result of the restatement it is determined that the Participant
otherwise would not have been paid such compensation, regardless of whether or not the restatement
resulted from the Participant’s misconduct. In each such instance, the Corporation will, to the
extent practicable, seek to recover the amount by which the Participant’s cash or equity based
incentive compensation for the relevant period exceeded the lower payment that would have been made
based on the restated financial results. The Corporation will, to the extent permitted by
governing law, require reimbursement of any cash or equity based incentive compensation paid to any
named executive officer (for purposes of this policy “named executive officers” has the meaning
given that term in Item 402(a)(3) of Regulation S-K under the Securities Exchange Act of 1934)
where: (i) the payment was predicated upon the achievement of certain financial results that were
subsequently the subject of a substantial restatement, and (ii) in the Committee’s view the officer
engaged in fraud or misconduct that caused or partially caused the need for the substantial
restatement. In each instance described above, the Corporation will, to the extent practicable,
seek to recover the

 - 11 - 

 

described cash or equity based incentive compensation for the relevant period, plus a
reasonable rate of interest.

     Measurement of the attainment of Performance Criteria may exclude, if the Committee provides
in an Award agreement, impact of charges for restructurings, discontinued operations, extraordinary
items and other unusual or non-recurring items, and the cumulative effects of tax or accounting
changes, each as defined by Generally Accepted Accounting Principles and as identified in the
financial statements, in the notes to the financial statements, in the Management’s Discussion and
Analysis section of the financial statements, or in other Securities and Exchange Commission
filings.

     The Committee, in its sole discretion, may require a Participant to have amounts or Stock that
otherwise would be paid or delivered to the Participant as a result of the exercise or settlement
of an Award under the Plan credited to a deferred compensation or stock unit account established
for the Participant by the Committee on the Corporation’s books of account. In addition, the
Committee may permit Participants to defer the receipt of payments of Awards pursuant to such
rules, procedures or programs as may be established for purposes of this Plan.

     The Committee need not require the execution of any such agreement by a Participant.
Acceptance of the Award by the respective Participant shall constitute agreement by the Participant
to the terms of the Award.

     7. Stock Options. Stock Options may be granted to Participants, at any time as determined by
the Committee. The Committee shall determine the number of shares subject to each Stock Option and
whether the Stock Option is an Incentive Stock Option. The exercise price for each Stock Option
shall be determined by the Committee but shall not be less than 100% of the Fair Market Value of
the Stock on the date the Stock Option is granted unless the Stock Option is a substitute or
assumed Stock Option granted pursuant to Section 16 hereto. Each Stock Option shall expire at such
time as the Committee shall determine at the time of grant. Stock Options shall be exercisable at
such time and subject to such terms and conditions as the Committee shall determine; provided,
however, that no Stock Option shall be exercisable later than the tenth anniversary of its grant.
The exercise price, upon exercise of any Stock Option, shall be payable to the Corporation in full
by: (a) cash payment or its equivalent; (b) tendering

 - 12 - 

 

previously acquired Stock purchased on the open market having a Fair Market Value at the time
of exercise equal to the exercise price or certification of ownership of such previously-acquired
Stock; (c) to the extent permitted by applicable law, delivery of a properly executed exercise
notice, together with irrevocable instructions to a broker to promptly deliver to the Corporation
the amount of sale proceeds from the Stock Option shares or loan proceeds to pay the exercise price
and any withholding taxes due to the Corporation; and (d) such other methods of payment as the
Committee, in its discretion, deems appropriate. In no event shall the Committee cancel any
outstanding Stock Option with an exercise price greater than the then current Fair Market Value of
the Stock for the purpose of reissuing any other Award to the Participant at a lower exercise price
nor reduce the exercise price of an outstanding Stock Option without stockholder approval. Reload
options are not permitted.

     8. Stock Appreciation Rights. SARs may be granted to Participants at any time as determined
by the Committee. Notwithstanding any other provision of the Plan, the Committee may, in its
discretion, substitute SARs which can be settled only in Stock for outstanding Stock Options. The
grant price of a substitute SAR shall be equal to the exercise price of the related Stock Option
and the substitute SAR shall have substantive terms (e.g., duration) that are equivalent to the
related Stock Option. The grant price of any other SAR shall be equal to the Fair Market Value of
the Stock on the date of its grant unless the SARs are substitute or assumed SARs granted pursuant
to Section 16 hereto. An SAR may be exercised upon such terms and conditions and for the term the
Committee in its sole discretion determines; provided, however, that the term shall not exceed the
Stock Option term in the case of a substitute SAR or ten years in the case of any other SAR, and
the terms and conditions applicable to a substitute SAR shall be substantially the same as those
applicable to the Stock Option which it replaces. Upon exercise of an SAR, the Participant shall
be entitled to receive payment from the Corporation in an amount determined by multiplying (a) the
difference between the Fair Market Value of a share of Stock on the date of exercise and the grant
price of the SAR by (b) the number of shares with respect to which the SAR is exercised. The
payment may be made in cash or Stock, at the discretion of the Committee, except in the case of a
substitute SAR payment which may be made only in Stock. In no event shall the Committee cancel any
outstanding SAR with an exercise price greater than the then current Fair Market Value of the Stock
for the purpose of reissuing

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any other Award to the Participant at a lower grant price nor reduce the grant price of an
outstanding SAR without stockholder approval.

     9. Restricted Stock and RSUs. Restricted Stock and RSUs may be awarded or sold to
Participants under such terms and conditions as shall be established by the Committee. Restricted
Stock and RSUs shall be subject to such restrictions as the Committee determines, including,
without limitation, any of the following:

	 	(a)	 	a prohibition against sale, assignment, transfer, pledge, hypothecation
or other encumbrance for a specified period;
	 
	 	(b)	 	a requirement that the holder forfeit (or in the case of Stock or RSUs
sold to the Participant, resell to the Corporation at cost) such Stock or RSUs
in the event of termination of employment during the period of restriction; and
	 
	 	(c)	 	the attainment of Performance Criteria.

     All restrictions shall expire at such times as the Committee shall specify, but generally
shall require the Participant to complete three years of service to fully vest in the Award.

     10. DSUs. DSUs provide a Participant a vested right to receive Stock in lieu of other
compensation at termination of employment or service or at a specific future designated date.

     11. Performance Shares. The Committee shall designate the Participants to whom Performance
Shares are to be awarded and determine the number of shares, the length of the Performance Period
and the other terms and conditions of each such Award; provided the stated Performance Period will
not be less than 12 months and to the extent the Award is designed to constitute performance-based
compensation under Code Section 162(m), Performance Criteria shall be established within 90 days of
the period of service to which the Performance Criteria relate has elapsed. Each Award of
Performance Shares shall entitle the Participant to a payment in the form of Stock upon the
attainment of Performance Criteria and other terms and conditions specified by the Committee.

 - 14 - 

 

     Notwithstanding satisfaction of any Performance Criteria, the number of shares issued under a
Performance Shares Award may be adjusted by the Committee on the basis of such further
consideration as the Committee in its sole discretion shall determine. However, the Committee may
not, in any event, increase the number of shares earned upon satisfaction of any Performance
Criteria by any Participant who is a Covered Employee. The Committee may, in its discretion, make
a cash payment equal to the Fair Market Value of Stock otherwise required to be issued to a
Participant pursuant to a Performance Share Award.

     12. Performance Cash Awards. The Committee shall designate the Participants to whom
Performance Cash Awards are to be awarded and determine the amount of the Award and the terms and
conditions of each such Award; provided the Performance Period will not be less than 12 months and
to the extent the Award is designed to constitute performance-based compensation under Code Section
162(m), Performance Criteria shall be established within 90 days of the period of service to which
the Performance Criteria relate has elapsed. Each Performance Cash Award shall entitle the
Participant to a payment in cash upon the attainment of Performance Criteria and other terms and
conditions specified by the Committee. No Award may be paid to a Participant in excess of
[                    ] for any single year. If an Award is earned in excess of [                    ], the amount of the
Award in excess of this amount shall be deferred in accordance with the date the Participant ceases
to be covered by Code Section 162(m) (or six months after that date if the Participant ceases to be
covered by Code Section 162(m) because of Participant’s separation from service (as defined in Code
Section 409A).

     Notwithstanding the satisfaction of any Performance Criteria, the amount to be paid under a
Performance Cash Award may be adjusted by the Committee on the basis of such further consideration
as the Committee in its sole discretion shall determine. However, the Committee may not, in any
event, increase the amount earned under Performance Cash Awards upon satisfaction of any
Performance Criteria by any Participant who is a Covered Employee. The Committee may, in its
discretion, substitute actual Stock for the cash payment otherwise required to be made to a
Participant pursuant to a Performance Cash Award.

     13. Other Stock or Cash Awards. In addition to the incentives described in Sections 6 through
12 above, the Committee may grant other incentives payable in cash or in

 - 15 - 

 

Stock under the Plan as it determines to be in the best interests of the Corporation and
subject to such other terms and conditions as it deems appropriate; provided an outright grant of
Stock will not be made unless it is offered in exchange for cash compensation that has otherwise
already been earned by the recipient including without limitation awards earned under the First
Mercury Financial Corporation Performance-Based Annual Incentive Plan (or any successor annual
incentive plan of the Corporation) or the First Mercury Financial Corporation Non-qualified
Deferred Compensation Plan.

     14. Change of Control. Except as otherwise determined by the Committee at the time of grant
of an Award, upon a Change of Control, all outstanding Stock Options and SARs shall become vested
and exercisable; all restrictions on Restricted Stock and RSUs shall lapse; all Performance
Criteria shall be deemed achieved at target levels and all other terms and conditions met; all
Performance Shares shall be delivered; all Performance Cash Awards, DSUs and RSUs shall be paid out
as promptly as practicable; and all other Stock or cash Awards shall be delivered or paid.

     In the event that a payment or delivery of an Award following a Change of Control would not be
a permissible distribution event, as defined in Code Section 409A(a)(2) or any regulations or other
guidance issued thereunder, then the payment or delivery shall be made on the earlier of: (a) the
date of payment or delivery originally provided for such Award; or (b) the date of termination of
the Participant’s employment or service with the Corporation or six months after such termination
in the case of a “specified employee” (as defined in Code Section 409A(a)(2)(B)(i)).

     15. Adjustment Provisions.

	 	(a)	 	In the event of any change affecting the number, class, market price or
terms of the Stock by reason of share dividend, share split, recapitalization,
reorganization, merger, consolidation, spin-off, disaffiliation of a
subsidiary, combination of Stock, exchange of Stock, Stock rights offering, or
other similar event, or any distribution to the holders of Stock other than a
regular cash dividend, the Committee shall equitably substitute or adjust the
number or class of Stock which may be issued under the Plan in the

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	 	 	 	aggregate or to any one Participant in any calendar year and the number,
class, price or terms of shares of Stock subject to outstanding Awards
granted under the Plan.
	 
	 	(b)	 	In the event of any merger, consolidation or reorganization of the
Corporation with or into another corporation which results in the outstanding
Stock of the Corporation being converted into or exchanged for different
securities, cash or other property, or any combination thereof, there shall be
substituted, on an equitable basis, for each share of Stock then subject to an
Award granted under the Plan, the number and kind of shares of stock, other
securities, cash or other property to which holders of Stock will be entitled
pursuant to the transaction.

     16. Substitution and Assumption of Awards. The Board or the Committee may authorize the
issuance of Awards under this Plan in connection with the assumption of, or substitution for,
outstanding Awards previously granted to individuals who become employees of the Corporation or any
subsidiary as a result of any merger, consolidation, acquisition of property or stock, or
reorganization, upon such terms and conditions as the Committee may deem appropriate. Any
substitute Awards granted under the Plan shall not count against the Stock limitations set forth in
Section 5 hereto, to the extent permitted by Section 303A.08 of the Corporate Governance Standards
of the New York Stock Exchange.

     17. Nontransferability. Each Award granted under the Plan shall not be transferable other
than by will or the laws of descent and distribution, and each Stock Option and SAR shall be
exercisable during the Participant’s lifetime only by the Participant or, in the event of
disability, by the Participant’s personal representative. In the event of the death of a
Participant, exercise of any Award or payment with respect to any Award shall be made only by or to
the beneficiary, executor or administrator of the estate of the deceased Participant or the person
or persons to whom the deceased Participant’s rights under the Award shall pass by will or the laws
of descent and distribution. Subject to the approval of the Committee in its sole discretion,
Stock Options may be transferable to charity or to members of the immediate family of the
Participant and to one or more trusts for the benefit of such family members, partnerships in which
such

 - 17 - 

 

family members are the only partners, or corporations in which such family members are the
only stockholders. Members of the immediate family means the Participant’s spouse, children,
stepchildren, grandchildren, parents, grandparents, siblings (including half brothers and sisters),
and individuals who are family members by adoption.

     18. Taxes. The Corporation shall be entitled to withhold the amount of any tax attributable
to any amounts payable or Stock deliverable under the Plan, after giving notice to the person
entitled to receive such payment or delivery, and the Corporation may defer making payment or
delivery as to any Award, if any such tax is payable, until indemnified to its satisfaction. A
Participant may pay all or a portion of any withholding limited to the minimum statutory amount
arising in connection with the exercise of a Stock Option or SAR or the receipt or vesting of Stock
hereunder by electing to have the Corporation withhold Stock having a Fair Market Value equal to
the amount required to be withheld.

     19. Duration of the Plan. No Award shall be made under the Plan more than ten years after the
date of its adoption by the Board; provided, however, that the terms and conditions applicable to
any Stock Option granted on or before such date may thereafter be amended or modified by mutual
agreement between the Corporation and the Participant, or such other person as may then have an
interest therein.

     20. Amendment and Termination. The Board or the Committee may amend the Plan from time to
time or terminate the Plan at any time. However, unless expressly provided in an Award or the
Plan, no such action shall reduce the amount of any existing Award or change the terms and
conditions thereof without the Participant’s consent; provided, however, that the Committee may, in
its discretion, substitute SARs which can be settled only in Stock for outstanding Stock Options,
and may require an Award be deferred pursuant to Section 6 hereto, without a Participant’s consent;
and further provided that the Committee may amend or terminate an Award to comply with changes in
law without a Participant’s consent. Notwithstanding any provision of the Plan to the contrary,
the final sentence in each of Section 7 and Section 8 of the Plan (regarding the reissuing at a
relatively reduced price, Stock Options and SARs respectively) shall not be amended without
stockholder approval. Notwithstanding any provision of the Plan to the contrary, to the extent
that Awards under the Plan are subject to

 - 18 - 

 

the provisions of Code Section 409A, then the Plan as applied to those amounts shall be
interpreted and administered so that it is consistent with such Code section.

     The Corporation shall obtain stockholder approval of any Plan amendment to the extent
necessary to comply with applicable laws, regulations, or stock exchange rules.

     21. Other Provisions.

	 	(a)	 	In the event any Award under this Plan is granted to an employee who is
employed or providing services outside the United States and who is not
compensated from a payroll maintained in the United States, the Committee may,
in its sole discretion: (i) modify the provisions of the Plan as they pertain
to such individuals to comply with applicable law, regulation or accounting
rules consistent with the purposes of the Plan; and (ii) cause the Corporation
to enter into an agreement with any local subsidiary pursuant to which such
subsidiary will reimburse the Corporation for the cost of such equity
incentives.
	 
	 	(b)	 	Neither the Plan nor any Award shall confer upon a Participant any
right with respect to continuing the Participant’s employment with the
Corporation; nor interfere in any way with the Participant’s right or the
Corporation’s right to terminate such relationship at any time, with or without
cause, to the extent permitted by applicable laws and any enforceable agreement
between the employee and the Corporation.
	 
	 	(c)	 	No fractional shares of Stock shall be issued or delivered pursuant to
the Plan or any Award, and the Committee, in its discretion, shall determine
whether cash, other securities, or other property shall be paid or transferred
in lieu of any fractional shares of Stock, or whether such fractional shares or
any rights thereto shall be canceled, terminated, or otherwise eliminated.

 - 19 - 

 

	 	(d)	 	In the event any provision of the Plan shall be held to be illegal or
invalid for any reason, such illegality or invalidity shall not affect the
remaining parts of the Plan, and the Plan shall be construed and enforced as if
such illegal or invalid provisions had never been contained in the Plan.
	 
	 	(e)	 	Payments and other benefits received by a Participant under an Award
made pursuant to the Plan generally shall not be deemed a part of a
Participant’s compensation for purposes of determining the Participant’s
benefits under any other employee benefit plans or arrangements provided by the
Corporation or a subsidiary, unless the Committee expressly provides otherwise
in writing or unless expressly provided under such plan. The Committee shall
administer, construe, interpret, and exercise discretion under the Plan and
each Award in a manner that is consistent and in compliance with a reasonable,
good faith interpretation of all applicable laws, and that avoids (to the
extent practicable) the classification of any Award as “deferred compensation”
for purposes of Code Section 409A, as determined by the Committee.

     22. Governing Law. The Plan and any actions taken in connection herewith shall be governed by
and construed in accordance with the laws of the State of Michigan without regard to any state’s
conflict of laws principles. Any legal action related to this Plan shall be brought only in a
federal or state court located in Michigan.

     23. Stockholder Approval. This Plan shall be effective as of October 4, 2006, subject
to stockholder approval.

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