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                                                                    EXHIBIT 10.3

                              EMPLOYMENT AGREEMENT

      AGREEMENT made as of the 1st day of June, 2001 by and among MERCER MUTUAL
INSURANCE COMPANY, a Pennsylvania corporation ("Mercer"), FRANKLIN HOLDING
COMPANY, INC., a Delaware corporation ("FHI"), and H. THOMAS DAVIS.

      Mercer and FHI both desire to employ Mr. Davis, and Mr. Davis is willing
to serve Mercer and FHI on the terms and conditions herein provided.

      In order to effect the foregoing, the parties hereto desire to enter into
an employment agreement on the terms and conditions set forth below.
Accordingly, in consideration of the premises and the respective covenants and
agreements of the parties contained herein, and intending to be legally bound
hereby, the parties hereto agree as follows:

      1. DEFINITIONS AND SPECIAL PROVISIONS. Each capitalized word and term used
herein shall have the meaning ascribed to it in the glossary appended hereto,
unless the context in which such word or term is used otherwise clearly
requires. Such glossary is incorporated herein by reference and made a part
hereof. In addition, for so long as Mercer remains a mutual insurance company,
the provisions set forth at Appendix 1 also shall apply, notwithstanding
anything in this Agreement to the contrary.

      2. EMPLOYMENT. Mercer and FHI hereby agrees to employ the Executive, and
the Executive hereby agrees to serve Mercer and FHI on the terms and conditions
set forth herein.

      3. TERM OF AGREEMENT. The Executive's employment under this Agreement
shall commence on the date of this Agreement and, except as otherwise provided
herein, shall continue until June 1, 2006; provided, however, that commencing on
June 1, 2006 and each June 1, thereafter, the term of this Agreement may be
extended for one additional year beyond the term otherwise established if Mercer
and FHI shall deliver a Notice of Extension.

      4. POSITION AND DUTIES. The Executive shall serve as Vice President of
Planning and Marketing of Mercer FHI and each Subsidiary and he shall have such
responsibilities, duties and authority as may, from time to time, be generally
associated with such positions. During the term of this Agreement, he shall
devote substantially all of his working time and efforts to the business and
affairs of Mercer, FHI, the Subsidiaries and affiliated companies; provided,
however, that nothing herein shall be construed as precluding him from devoting
a reasonable amount of time to civic, charitable, trade association, and similar
activities or to managing his investments, at least to the extent he is
presently devoting time.

      5. COMPENSATION AND RELATED MATTERS.

      BASE COMPENSATION. During the period of the Executive's employment
hereunder, Mercer and FHI shall pay to him, in the aggregate, annual base
compensation of $65,000. Thereafter, the Board(s) of Directors of Mercer and FHI
shall periodically review the Executive's employment performance, in accordance
with policies generally in effect from time to time, for possible merit or
cost-of-living increases in such base compensation. The annual base compensation
paid to the Executive in any period commencing on an the date of this Agreement
or any anniversary date, as the case may be, and ending on the date immediately
preceding an


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anniversary date of this Agreement (an "Annual Compensation Period"), shall be
not less than the annual base compensation paid to him in the immediately
preceding Annual Compensation Period multiplied by a number (not less than one)
calculated by dividing the Consumer Price Index as of the last day of the month
preceding the new Annual Compensation Period by the Consumer Price Index as of
the last day of the month preceding the anniversary date of the immediately
preceding Annual Compensation Period. The frequency and manner of payment of
such base compensation shall be in accordance with Mercer's executive payroll
practices from time to time in effect. Nothing herein shall be construed as
precluding the Executive from entering into any salary reduction or deferral
plan or arrangement during the term of this Agreement; provided, however, that
his base compensation shall be determined without regard to any such salary
reduction or deferral for purposes of calculating the amount of any compensation
and benefits to which he or his surviving spouse may be entitled under Paragraph
6, 7, 10, or 11 following his termination of employment.

            (a) INCENTIVE COMPENSATION. During the period of the Executive's
employment hereunder, he shall be entitled to participate in all incentive
plans, stock option plans, stock appreciation rights plans, and similar
arrangements maintained by Mercer and/or FHI (but without duplication)for
executive officers on a basis and at award levels consistent and commensurate
with his position and duties hereunder.

            (b) EMPLOYEE BENEFIT PLANS AND OTHER PLANS OR ARRANGEMENTS. The
Executive shall be entitled to participate in all Employee Benefit Plans of
Mercer on the same basis as other executive officers of Mercer. In addition, he
shall be entitled to participate in and enjoy any other plans and arrangements
which provide for sick leave, vacation, sabbatical, or personal days,
company-provided automobile, club memberships and dues, education payment or
reimbursement, business-related seminars, and similar fringe benefits provided
to or for the executive officers of Mercer from time to time, but at least to
the same extent he is presently entitled to participate in and enjoy such plans
and arrangements as an employee of FHI prior to the date hereof. To the extent
that the Executive is eligible to participate in Employee Benefit Plans or other
plans and arrangements of Mercer and FHI that are duplicative of each other
(e.g. vacation), the Executive shall be deemed to participate in the Employee
Benefit Plan or other plan or arrangement that provides the greater benefit.
Nothing contained herein shall be construed to permit the Executive to cumulate
benefits under the Employee Benefit Plans or other plans or arrangements of
Mercer and FHI nor shall Mercer be prohibited from combining, or altering the
provisions of, any Employee Benefit Plan or other plan or arrangement of Mercer
or FHI.

            (c) EXPENSES. During the period of the Executive's employment
hereunder, he shall be entitled to receive prompt reimbursement for all
reasonable and customary expenses, including transportation expenses, incurred
by him in performing services hereunder in accordance with the general policies
and procedures established by Mercer and FHI.

      6. TERMINATION BY REASON OF DISABILITY.

            (a) IN GENERAL. In the event the Executive becomes unable to perform
his duties on a full-time basis by reason of the occurrence of his Disability
and, within 30 days after


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a Notice of Termination is given, he shall not have returned to the full-time
performance of such duties, his employment may be terminated by Mercer and FHI.

            (b) COMPENSATION AND BENEFITS. In the event of the termination of
the Executive's employment under Subparagraph (a), Mercer and FHI shall pay or
provide the compensation and benefits set forth below:

                  (1) The Executive shall be paid an amount per annum equal to
         the greater of (i) his highest base compensation received during one of
         the two calendar years immediately preceding the calendar year in which
         the Date of Termination occurs, or (ii) his base compensation in effect
         immediately prior to the Date of Termination (or prior to any reduction
         which entitled him to terminate his employment for Good Reason) for one
         year beginning with such Date of Termination. The frequency and manner
         of payment of such amounts shall be in accordance with Mercer's
         executive payroll practices from time to time in effect.

                  (2) The Executive shall be paid an amount equal to the higher
         of the aggregate bonus(es) paid to him with respect to one of the two
         years immediately preceding the year in which the Date of Termination
         occurs. Such amount shall be paid to him in cash on the first
         anniversary date of the Date of Termination.

                  (3) The Executive shall be paid an amount equal to the highest
         annual contribution made on his behalf (other than his own salary
         reduction contributions) to each tax-qualified and non-qualified
         Defined Contribution Plan of Mercer with respect to the year in which
         the Date of Termination occurs or one of the two years immediately
         preceding such year. The amount separately determined for each such
         plan shall be aggregated and shall be paid to him in cash on the first
         anniversary date of the Date of Termination.

                  (4) The Executive shall accrue benefits equal to the excess of
         (i) the aggregate retirement benefits he would have received under the
         terms of each tax-qualified and non-qualified Defined Benefit Plan of
         Mercer as in effect immediately prior to the Date of Termination had he
         (A) continued to be employed for one more year, and (B) received (on a
         pro rated basis, as appropriate) the greater of (I) the highest
         compensation taken into account under each such plan with respect to
         one of the two years immediately preceding the year in which the Date
         of Termination occurs, or (II) his annualized base compensation in
         effect immediately prior to the Date of Termination (or prior to any
         reduction which entitled him to terminate his employment for Good
         Reason), over (ii) the retirement benefits he actually receives under
         such plans. The frequency, manner and extent of payment of such
         benefits shall be consistent with the terms of the plans to which they
         relate and any elections made thereunder.

                  (5) The Executive and his eligible dependents shall be
         entitled to continue to participate at the same aggregate benefit
         levels, for one year and at no out-of-pocket or tax cost to him, in the
         Welfare Benefit Plans in which he was a participant immediately prior
         to the Date of Termination, to the extent permitted under the terms of
         such plans and applicable law. To the extent Mercer is unable to
         provide for continued


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         participation in a Welfare Benefit Plan, it shall provide an equivalent
         benefit directly at no out-of-pocket or tax cost to him. For purposes
         of the preceding two sentences, Mercer shall be deemed to have provided
         a benefit at no tax cost to him if Mercer pay an additional amount to
         him or on his behalf, with respect to those benefits that would
         otherwise be nontaxable to him, calculated in a manner consistent with
         the provisions of Paragraph 12.

            (c) ADJUSTMENT TO CERTAIN SUBPARAGRAPH (B) COMPENSATION AND
BENEFITS. Notwithstanding the provisions of Subparagraph (b)(5), Mercer's
obligation to pay or fund any disability insurance premiums on behalf of the
Executive shall be suspended while his Disability continues, provided the
cessation of payment or funding does not result in the termination of disability
benefits. Any amounts otherwise due under Subparagraph (b) shall be reduced (but
not below zero) by the dollar amount of disability benefits received by him
pursuant to plans or policies funded, directly at its cost, by Mercer or FHI.

            (d) EARLIER CESSATION OF CERTAIN WELFARE BENEFITS. Notwithstanding
the provisions of Subparagraph (b)(5), Mercer shall not be required to provide,
at its cost, the welfare benefits covered therein after the later of (i) the
attainment by the Executive and his spouse (if any) of age 65, or (ii) the date
specified in the relevant plan document for benefit termination (assuming that
he was employed until age 65 or the normal retirement date, if any, specified in
such document).

            (e) DEATH DURING REMAINING TERM OF AGREEMENT.

                  (1) In the event the Executive dies during the remaining term
         of this Agreement following his termination for Disability and he is
         survived by a spouse, the compensation and benefits remaining to be
         paid and provided under Subparagraph (b) shall be unaffected by his
         death and shall be paid and provided to her or on her behalf; provided,
         however, that the extent of her rights to the accrued benefits
         described in Subparagraph (b)(4) shall be determined by reference to
         the relevant plan provisions and any elections made under such plans;
         and provided further, that Mercer and FHI shall not be required to
         provide continued benefits with respect to her deceased husband; and
         provided further, that in no event shall Mercer and FHI be required to
         provide, at their cost, the other welfare benefits described in
         Subparagraph (b)(5) to such spouse and her eligible dependents after
         the earlier of (i) her death, or (ii) the later of (A) her attainment
         of age 65, or (B) the date specified in the relevant plan document for
         benefit termination (assuming that the Executive was employed until age
         65 or the normal retirement date, if any, specified in such document).

                  (2) In the event the Executive dies during the remaining term
         of this Agreement following his termination for Disability and he is
         not survived by a spouse, (i) Mercer and FHI shall thereafter make the
         remaining payments described in Subparagraphs (b)(1) through (b)(3)
         directly to his estate, (ii) the extent of the rights of any person to
         the accrued benefits described in Subparagraph (b)(4) shall be
         determined by reference to the relevant plan provisions and any
         elections made under such plans, and (iii) Mercer's and FHI's
         obligation to provide continued benefits under Subparagraph (b)(5)
         shall terminate.


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            (f) COMPENSATION AND BENEFITS UPON EXPIRATION OF REMAINING TERM OF
AGREEMENT. Upon the expiration of the remaining term of this Agreement following
the Executive's termination for Disability, and provided his Disability then
continues, he shall be entitled to receive the compensation and benefits
provided under the terms of Mercer's or FHI's long-term disability plan in
effect on the Date of Termination or, if greater, at the expiration of such
remaining term. Such compensation and benefits shall continue until the earlier
of (i) his death, or (ii) the later of (A) his attainment of age 65, or (B) the
date specified in the plan document for benefit termination. To the extent
Mercer or FHI is unable to provide such compensation and benefits under their
long-term disability plan, it shall provide equivalent compensation and benefits
directly at no out-of-pocket or tax cost to him. For purposes of the preceding
sentence, Mercer and FHI shall be deemed to have provided compensation and
benefits at no tax cost to him if it pays an additional amount to him or on his
behalf, with respect to the compensation and benefits which would otherwise be
nontaxable to him, calculated in a manner consistent with the provisions of
Paragraph 12.

      7.    TERMINATION BY REASON OF DEATH.

            (a) COMPENSATION AND BENEFITS TO SURVIVING SPOUSE. In the event the
Executive dies while he is employed under this Agreement and is survived by a
spouse, Mercer and FHI shall pay or provide the compensation and benefits set
forth below:

                  (1) The surviving spouse shall be paid an amount equal to the
         greater of (i) the Executive's highest base compensation received
         during one of the two calendar years immediately preceding the calendar
         year in which the Date of Termination occurs, or (ii) his base
         compensation in effect immediately prior to the Date of Termination (or
         prior to any reduction which entitled him to terminate his employment
         for Good Reason) for a period of one year, beginning with such Date of
         Termination. The frequency and manner of payment of such amounts shall
         be in accordance with Mercer's executive payroll practices from time to
         time in effect.

                  (2) The surviving spouse shall be paid an amount equal to the
         highest payment made to Executive under each incentive bonus plan of
         Mercer or FHI with respect to one of the two years immediately
         preceding the year in which the Date of Termination occurs. Such amount
         shall be paid in cash to her within 30 days after the Date of
         Termination.

                  (3) The surviving spouse shall be paid an amount equal to the
         sum of the highest annual contribution made on the Executive's behalf
         (other than his own salary reduction contributions) to each
         tax-qualified and non-qualified Defined Contribution Plan of Mercer and
         FHI with respect to the year in which the Date of Termination occurs or
         one of the two years immediately preceding such year. Such amount shall
         be paid in cash to her within 30 days after the Date of Termination or
         within 30 days after such amount can first be determined, whichever is
         later.

                  (4) Subject to the following sentence, the surviving spouse
         shall be paid benefits determined by reference to the excess of (i) the
         aggregate retirement benefits the Executive would have accrued under
         the terms of each tax-qualified and non-


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         qualified Defined Benefit Plan as in effect immediately prior to the
         Date of Termination, had he (A) continued to be employed for a period
         of one year following the Date of Termination, and (B) received (on a
         pro rated basis, as appropriate) the greater of (I) the highest
         compensation taken into account under each such plan with respect to
         one of the two years immediately preceding the year in which the Date
         of Termination occurs, or (II) his annualized base compensation in
         effect immediately prior to the Date of Termination (or prior to any
         reduction which entitled him to terminate his employment for Good
         Reason), over (ii) the retirement benefits actually determined under
         such plans. The frequency, manner, and extent of payment of such
         benefits shall be consistent with the terms of the plans to which they
         relate and any elections made thereunder.

                  (5) The surviving spouse and her eligible dependents shall be
         entitled to continue to participate at the same aggregate benefit
         levels, for a period of one year following the Date of Termination and
         at no out-of-pocket or tax cost to her, in the Welfare Benefit Plans in
         which the Executive was a participant immediately prior to the Date of
         Termination, to the extent permitted under the terms of such plans and
         applicable law; provided, however, that Mercer and FHI shall not be
         required to provide continued benefits with respect to her deceased
         husband; and provided further, that Mercer and FHI shall not thereafter
         be required to provide, at its cost, the other welfare benefits covered
         by such plans to such spouse and her eligible dependents after the
         earlier of (i) her death, or (ii) the later of (A) her attainment of
         age 65, or (B) the date specified in the relevant plan document for
         benefit termination (assuming the Executive was employed until age 65
         or the normal retirement date, if any, specified in such document). To
         the extent Mercer or FHI is unable to provide for continued
         participation in a Welfare Benefit Plan as required, it shall provide
         an equivalent benefit directly at no out-of-pocket or tax cost to her.
         For purposes of the preceding two sentences, Mercer or FHI shall be
         deemed to have provided a benefit at no tax cost to her if it pays an
         additional amount to her or on her behalf, with respect to those
         benefits which would otherwise be nontaxable to her, calculated in a
         manner consistent with the provisions of Paragraph 12.

            (b) COMPENSATION AND BENEFITS TO ESTATE, ETC. In the event the
Executive dies while he is employed under this Agreement and is not survived by
a spouse, (i) Mercer and FHI shall make the payments described in Subparagraphs
(a)(1) through (a)(3) directly to his estate, (ii) the extent of the rights of
any person to the accrued benefits described in Subparagraph (a)(4) shall be
determined by reference to the relevant plan provisions and any elections made
under such plans, and (iii) Mercer's and FHI's obligation to provide benefits
under Subparagraph (a)(5) shall terminate.

      8.    TERMINATION BY MERCER FOR CAUSE.

            (a) IN GENERAL. In the event Mercer and FHI intend to terminate the
Executive's employment for Cause, they shall deliver a Notice of Termination to
him that specifies a Date of Termination not less than 30 days following the
date of such notice, unless a shorter period of notice is required by the
principal regulator of Mercer or FHI or any affiliate of Mercer or FHI.


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            (b) COMPENSATION. Within 30 days after the Executive's termination
under Subparagraph (a), Mercer and FHI shall pay him, in one lump sum, his
accrued but unpaid base compensation and vacation compensation earned through
the Date of Termination.

      9.    TERMINATION BY THE EXECUTIVE WITHOUT GOOD REASON.

            (a) IN GENERAL. In the event the Executive intends to terminate his
employment without Good Reason, he shall deliver a Notice of Termination to
Mercer and FHI that specifies a Date of Termination not less than (i) 90 days
following the date of such notice, if a Change in Control shall not have
occurred, or (ii) 30 days following the date of such notice, if a Change in
Control shall have occurred.

            (b) COMPENSATION. Within 30 days after the Executive's termination
under Subparagraph (a), Mercer and FHI shall pay him, in one lump sum, his
accrued but unpaid base compensation and vacation compensation earned through
the Date of Termination.

      10.   TERMINATION WITHOUT DISABILITY OR CAUSE.

            (a) IN GENERAL. In the event Mercer and FHI intend to terminate the
Executive's employment for any reason other than Disability or Cause, it shall
deliver a Notice of Termination to him that specifies a Date of Termination not
less than 90 days following the date of such notice.

            (b) COMPENSATION AND BENEFITS DURING REMAINING TERM OF AGREEMENT. In
the event of the termination of the Executive's employment under Subparagraph
(a), Mercer and FHI shall pay or provide the compensation and benefits described
in Paragraph 6(b), except that all such compensation and benefits shall be for
the remaining term of this Agreement and, with respect to Subparagraphs 6(b)(2)
and (3), an additional pro rated amount shall be paid to him in cash on the last
day of the remaining term of this Agreement. Such pro rated amount shall be
determined by reference to a fraction, the numerator of which is the number of
whole months elapsed during the year in which termination occurs, and the
denominator of which is 12.

            (c) ADJUSTMENT TO CERTAIN SUBPARAGRAPH (B) COMPENSATION AND
BENEFITS. In the event the Executive suffers a Disability during the remaining
term of this Agreement following the Date of Termination, Mercer's and FHI's
obligation to pay or fund any disability insurance premiums on his behalf shall
be suspended while his Disability continues, provided the cessation of payment
or funding does not result in the termination of disability benefits. Any
amounts described in Paragraph 6(b) and otherwise payable under Subparagraph (b)
shall be reduced (but not below zero) by the dollar amount of disability
benefits received by him pursuant to plans or policies funded, directly at its
cost, by Mercer or FHI.

            (d) EARLIER CESSATION OF CERTAIN WELFARE BENEFITS. Notwithstanding
the provisions of Subparagraph (b), Mercer and FHI shall not be required to
provide, at their cost, the welfare benefits covered by Paragraph 6(b)(5) after
the later of (i) the attainment by the Executive and his spouse (if any) of age
65, or (ii) the date specified in the relevant plan document for benefit
termination (assuming that he was employed until age 65 or the normal retirement
date, if any, specified in such document).


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            (e) DEATH DURING REMAINING TERM OF AGREEMENT.

                  (1) In the event the Executive dies during the remaining term
         of this Agreement following his termination without Disability or Cause
         by Mercer and FHI and he is survived by a spouse, the compensation and
         benefits required to be paid and provided under Subparagraph (b) shall
         be unaffected by his death and shall be paid and provided to her or on
         her behalf; provided, however, that the extent of her rights to the
         accrued benefits described in Paragraph 6(b)(4) shall be determined by
         reference to the relevant plan provisions and any elections made under
         such plans; and provided further, that Mercer and FHI shall not be
         required to provide continued benefits with respect to her deceased
         husband; and provided further, that in no event shall Mercer and FHI be
         required to provide, at their cost, the other welfare benefits
         described in Paragraph 6(b)(5) to such spouse and her eligible
         dependents after the earlier of (i) her death, or (ii) the later of (A)
         her attainment of age 65, or (B) the date specified in the relevant
         plan document for benefit termination (assuming that the Executive was
         employed until age 65 or the normal retirement date, if any, specified
         in such document).

                  (2) In the event the Executive dies during the remaining term
         of this Agreement following his termination without Disability or Cause
         and he is not survived by a spouse, (i) Mercer and FHI shall thereafter
         make the remaining payments described in Paragraphs 6(b)(1) through
         6(b)(3) directly to his estate, (ii) the extent of the rights of any
         person to the accrued benefits described in Paragraph 6(b)(4) shall be
         determined by reference to the relevant plan provisions and any
         elections made under such plans, and (iii) Mercer's and FHI's
         obligation to provide the continued benefits described in Paragraph
         6(b)(5) shall terminate.

            11.   TERMINATION BY THE EXECUTIVE FOR GOOD REASON.

            (a) IN GENERAL. In the event the Executive intends to terminate his
employment for Good Reason, he shall deliver a Notice of Termination to Mercer
and FHI that specifies a Date of Termination not less than 30 days following the
date of such notice.

            (b) COMPENSATION AND BENEFITS DURING REMAINING TERM OF AGREEMENT. In
the event of the termination of the Executive's employment under Subparagraph
(a), Mercer and FHI shall pay or provide the compensation and benefits described
in Paragraph 6(b), except that all such compensation and benefits shall be for
the greater of three years or the remaining term of this Agreement and, with
respect to Subparagraphs 6(b)(2) and (3), an additional pro rated amount shall
be paid to him in cash on the last day of the remaining term of this Agreement.
Such pro rated amount shall be determined by reference to a fraction, the
numerator of which is the number of whole months elapsed during the year in
which termination occurs, and the denominator of which is 12.

            (c) ADJUSTMENT TO CERTAIN SUBPARAGRAPH (B) COMPENSATION AND
BENEFITS. In the event the Executive suffers a Disability during the remaining
term of this Agreement following the Date of Termination, Mercer's and FHI's
obligation to pay or fund any disability insurance premiums on his behalf shall
be suspended while his Disability continues, provided the cessation of payment
or funding does not result in the termination of disability benefits. Any


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<PAGE>
amounts described in Paragraph 6(b) and otherwise payable under Subparagraph (b)
shall be reduced (but not below zero) by the dollar amount of disability
benefits received by him pursuant to plans or policies funded, directly at its
cost, to Mercer.

            (d) EARLIER CESSATION OF CERTAIN WELFARE BENEFITS. Notwithstanding
the provisions of Subparagraph (b), Mercer and FHI shall not be required to
provide, at their cost, the welfare benefits covered by Paragraph 6(b)(5) after
the later of (i) the attainment by the Executive and his spouse (if any) of age
65, or (ii) the date specified in the relevant plan document for benefit
termination (assuming that he was employed until age 65 or the normal retirement
date, if any, specified in such document).

            (e) DEATH DURING REMAINING TERM OF AGREEMENT.

                  (1) In the event the Executive dies during the remaining term
         of this Agreement following his termination for Good Reason and he is
         survived by a spouse, the compensation and benefits required to be paid
         and provided under Subparagraph (b) shall be unaffected by his death
         and shall be paid and provided to her or on her behalf; provided,
         however, that the extent of her rights to the accrued benefits
         described in Paragraph 6(b)(4) shall be determined by reference to the
         relevant plan provisions and any elections made under such plans; and
         provided further, that Mercer and FHI shall not be required to provide
         continued benefits with respect to her deceased husband; and provided
         further, that in no event shall Mercer or FHI be required to provide,
         at its cost, the other welfare benefits described in Paragraph 6(b)(5)
         to such spouse and her eligible dependents after the earlier of (i) her
         death, or (ii) the later of (A) her attainment of age 65, or (B) the
         date specified in the relevant plan document for benefit termination
         (assuming that the Executive was employed until age 65 or the normal
         retirement date, if any, specified in such document).

                  (2) In the event the Executive dies during the remaining term
         of this Agreement following his termination for Good Reason and he is
         not survived by a spouse, (i) Mercer and FHI shall thereafter make the
         remaining payments described in Paragraphs 6(b)(1) through 6(b)(3)
         directly to his estate, (ii) the extent of the rights of any person to
         the accrued benefits described in Paragraph 6(b)(4) shall be determined
         by reference to the relevant plan provisions and any elections made
         under such plans, and (iii) Mercer's and FHI's obligation to provide
         the continued benefits described in Paragraph 6(b)(5) shall terminate.

      12.   PROVISIONS RELATING TO EXCISE TAXES.

            (a) IN GENERAL. In the event the Executive becomes liable, for any
taxable year, for the payment of an Excise Tax (because of a change in control)
with respect to the compensation and benefits payable under this Agreement or
otherwise, Mercer shall make one or more Gross-Up Payments to the Executive or
on his behalf. The amount of any Gross-Up Payment shall be calculated by a
certified public accountant or other tax professional designated jointly by the
Executive and Mercer. The provisions of this paragraph shall apply with respect
to the Executive's surviving spouse or estate, where relevant.


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<PAGE>
            (b) METHODOLOGY FOR CALCULATION OF GROSS-UP PAYMENT. For purposes of
determining the amount of any Gross-Up Payment, the Executive shall be deemed to
pay income taxes at the highest federal, state, and local marginal rates of tax
for the calendar year in which the Gross-Up Payment is to be made, net of the
maximum reduction in federal income tax that could be obtained from the
deduction of state and local income taxes. In the event that the Excise Tax is
subsequently determined to be less than the amount taken into account at the
time the Gross-Up Payment was made, the Executive shall repay to Mercer, at the
time that the amount of such reduction in Excise Tax is finally determined, the
portion of the Gross-Up Payment attributable to the reduction (plus a portion of
the Gross-Up Payment attributable to the Excise Tax and the federal, state, and
local income taxes imposed on the portion of the Gross-Up Payment being repaid
by the Executive to the extent such repayment results in a reduction in Excise
Tax or federal, state, or local income tax), plus interest on the amount of such
repayment. Such interest shall be calculated by using the rate in effect under
Section 1274(d)(1) of the IRC, on the date the Gross-Up Payment was made, for
debt instruments with a term equal to the period of time which has elapsed from
the date the Gross-Up Payment was made to the date of repayment. In the event
that the Excise Tax is subsequently determined to exceed the amount taken into
account at the time the Gross-Up Payment was made (including by reason of any
payment the existence or amount of that could not be determined at the time of
the Gross-Up Payment), Mercer shall make an additional Gross-Up Payment with
respect to the excess at the time the amount thereof is finally determined, plus
interest calculated in a manner similar to that described in the preceding
sentence.

            (c) TIME OF PAYMENT. Any Gross-Up Payment provided for herein shall
be paid not later than the 30th day following the payment of any compensation or
the provision of any benefit that causes such payment to be made; provided,
however, that if the amount of such payment cannot be finally determined on or
before such day, Mercer shall pay on such day an estimate of the minimum amount
of such payment and shall pay the remainder of such payment (together with
interest calculated in a manner similar to that described in Subparagraph (b))
as soon as the amount thereof can be determined. In the event that the amount of
an estimated payment exceeds the amount subsequently determined to have been
due, such excess shall constitute a loan by Mercer to the Executive, payable on
the 30th day after demand by Mercer (together with interest calculated in a
manner similar to that described in Subparagraph (b)).

            (d) Notwithstanding the provisions of this paragraph to the
contrary, the actual amounts payable hereunder as Gross-Up Payments shall be
coordinated with any similar amounts paid to the Executive under any other
contract, plan, or arrangement.

      13. FEES AND EXPENSES OF THE EXECUTIVE. After a Change in Control and
except as provided in the following sentence, Mercer and FHI shall pay, within
30 days following demand by the Executive, all legal, accounting, actuarial, and
related fees and expenses incurred by him in connection with the enforcement of
this Agreement. An arbitration panel or a court of competent jurisdiction shall
be empowered to deny payment to the Executive of such fees and expenses only if
it determines that he instituted a proceeding hereunder, or otherwise acted, in
bad faith.

      14. REDUCTION FOR COMPENSATION AND BENEFITS RECEIVED UNDER SEVERANCE
POLICY, ETC. Notwithstanding anything herein to the contrary, in the event the
Executive, his surviving


                                       10
<PAGE>
spouse, or any other person becomes entitled to continued compensation and
benefits hereunder by reason of the Executive's termination of employment and,
in addition, compensation or similar benefits are payable under a severance
policy, program or arrangement maintained by Mercer or FHI (other than
retirement plans), then the compensation or benefits otherwise payable hereunder
shall be reduced by the compensation or benefits provided under such severance
policy, program or arrangement.

      15. MITIGATION. The Executive shall not be required to mitigate the amount
of any compensation or benefits that may become payable hereunder by reason of
his termination by seeking other employment or otherwise, nor, except as
otherwise provided in the following sentence or elsewhere herein, shall the
amount of any such compensation or benefits be reduced by any compensation or
benefits received by the Executive as the result of his employment by another
employer. Notwithstanding anything in this Agreement to the contrary, Mercer's
and FHI's obligation to provide any medical and dental benefits hereunder may be
suspended, with the written concurrence of the Executive or, if applicable, his
surviving spouse during any period of time that such benefits are being provided
by reason of his or her employment.

      16. FUNDING OF COMPENSATION AND BENEFITS; ACCELERATION OF CERTAIN
PAYMENTS.

            (a) GRANTOR TRUST. In the event the Executive's employment is
terminated without Cause or he terminates his employment for Good Reason and a
Change in Control has occurred as of the Date of Termination or occurs
thereafter, the Executive shall have the right to require Mercer to establish a
grantor trust (taxable to Mercer) and fund such trust, on an actuarially sound
basis, to provide the compensation and benefits to which he is entitled
hereunder, other than those that may be paid pursuant to the provisions of
Subparagraph (c). The specific terms of such trust shall be as agreed to by the
parties in good faith; provided, however, that the trustee shall be a financial
institution independent of Mercer; and provided further, that in no event shall
Mercer be entitled to withdraw funds from the trust for its benefit, or
otherwise voluntarily assign or alienate such funds, until such time as all
compensation and benefits required hereunder are paid and provided. The
determination of the extent of required funding, including any supplemental
funding in the event of adverse investment performance of trust assets, shall be
made by an actuary or a certified public accountant retained by each party. To
the extent such professionals cannot agree on the proper level of funding, they
shall select a third such professional whose determination shall be binding upon
the parties. Notwithstanding the foregoing, Mercer shall remain liable for all
compensation and benefits required to be paid or provided hereunder.

            (b) ALTERNATE SECURITY. In lieu of the right given to the Executive
under Subparagraph (a), he shall have the right under such circumstances to
require that Mercer provide (i) an irrevocable standby letter of credit issued
by a financial institution other than the Company or any Subsidiary of Mercer
with a senior debt credit rating of "A" or better by Moody's Investors Service
or Standard & Poor's Corporation, or (ii) other security reasonably acceptable
to him, to secure the payment of such compensation and benefits.

            (c) ACCELERATED PAYMENT OF PRESENT VALUE OF CERTAIN COMPENSATION. In
the event the Executive's employment is terminated without Cause or he
terminates his employment for Good Reason and a Change in Control has occurred
as of the Date of


                                       11
<PAGE>
Termination or occurs thereafter, the Executive shall have the continuing right
to demand that the present value of the remaining payments described in
Paragraphs 6(b)(1) through (3), and payable by reason of the provisions of
Paragraph 10 or 11 (as the case may be), be paid to him in one lump sum within
30 days after the date written demand is given. For purposes of calculating the
present value of such payments, a discount factor shall be applied to each such
payment which is equal to the relevant applicable federal rate in effect on the
date written demand is given by him, determined by reference to the period of
time between the date of such notice and the scheduled time such payment would
otherwise be made. In the event any payment described in Paragraphs 6(b)(1)
through (3) is not yet determinable on the date written demand is made, the
other payments shall nonetheless be made as provided above; and the undetermined
payment shall be made within 30 days after it becomes determinable, calculated
as provided in the preceding sentence but by treating the date on which the
payment becomes determinable as the date of written notice. Nothing in this
subparagraph shall be construed as affecting the Executive's right to one or
more Gross-Up Payments in accordance with the provisions of Paragraph 12; and a
Gross-Up Payment (if applicable) will be calculated and made with any payment
made under this subparagraph, as well as any other Gross-Up Payments that may be
required hereunder at a subsequent date.

      17. WITHHOLDING TAXES. All compensation and benefits provided for herein
shall, to the extent required by law, be subject to federal, state, and local
tax withholding.

      18. CONFIDENTIAL INFORMATION. The Executive agrees that subsequent to his
employment with Mercer and FHI, he will not, at any time, communicate or
disclose to any unauthorized person, without the written consent of Mercer and
FHI, any proprietary or other confidential information concerning Mercer, FHI or
any Subsidiary of Mercer or FHI; provided, however, that the obligations under
this paragraph shall not apply to the extent that such matters (i) are disclosed
in circumstances where the Executive is legally obligated to do so, or (ii)
become generally known to and available for use by the public otherwise than by
his wrongful act or omission; and provided further, that he may disclose any
knowledge of insurance, financial, legal and economic principles, concepts and
ideas which are not solely and exclusively derived from the business plans and
activities of Mercer or FHI.

      19. COVENANTS NOT TO COMPETE OR TO SOLICIT.

            (a) NONCOMPETITION. If the Executive's employment terminates under
Paragraph 8 or 9 prior to a Change in Control, he agrees that for a period of 12
months after the Date of Termination he will not, without the written consent in
writing of the Board of Directors of Mercer or FHI , become an officer,
employee, agent, partner, director, or a four and nine-tenths percent or greater
shareholder or equity owner of any licensed direct property and casualty
insurance company with its corporate headquarters located within Pennsylvania or
New Jersey. If at the time of the enforcement of this paragraph a court holds
that the duration, scope, or area restrictions stated herein are unreasonable
under the circumstances then existing and, thus, unenforceable, Mercer, FHI and
the Executive agree that the maximum duration, scope, or area reasonable under
such circumstances shall be substituted for the stated duration, scope, or area.

            (b) NONSOLICITATION. During his employment and for a period of 12
months following the Date of Termination, the Executive shall not, whether on
his own behalf or on


                                       12
<PAGE>
behalf of any other individual or business entity, solicit, endeavor to entice
away from Mercer, FHI, a Subsidiary or any affiliated company, or otherwise
interfere with the relationship of Mercer, FHI, a Subsidiary or any affiliated
company with any person who is, or was within the then most recent 12 month
period, an employee or associate thereof; provided, however, that this
subparagraph shall not apply following the occurrence of a Change in Control.

      20. ARBITRATION. To the extent permitted by applicable law, any
controversy or dispute arising out of or relating to this Agreement, or any
alleged breach hereof, shall be settled by arbitration in Pennington, New
Jersey, in accordance with the commercial rules of the American Arbitration
Association then in existence (to the extent such rules are not inconsistent
with the provisions of this Agreement), it being understood and agreed that the
arbitration panel shall consist of three individuals acceptable to the parties
hereto. In the event that the parties cannot agree on three arbitrators within
20 days following receipt by one party of a demand for arbitration from another
party, then the Executive and Mercer each shall designate one arbitrator and the
two arbitrators selected shall select the third arbitrator. The arbitration
panel so selected shall convene a hearing no later than 90 days following the
selection of the panel. The arbitration award shall be final and binding upon
the parties, and judgment may be entered thereon in the Pennsylvania Court of
Common Pleas or in any other court of competent jurisdiction.

      21. ADDITIONAL EQUITABLE REMEDY. The Executive acknowledges and agrees
that the remedy at law for a breach or a threatened breach by the Executive of
the provisions of Paragraphs 18 and 19 would be inadequate; and, in recognition
of this fact and notwithstanding the provisions of Paragraph 20, in the event of
such a breach or threatened breach by him, it is agreed that Mercer and FHI
shall be entitled to request equitable relief in the form of specific
performance, temporary restraining order, temporary or permanent injunction, or
any other equitable remedy that may then be available. Nothing in this paragraph
shall be construed as prohibiting Mercer and FHI from pursuing any other remedy
available under this Agreement for such a breach or threatened breach.

      22. RELATED AGREEMENTS. Except as may otherwise be provided herein, to the
extent that any provision of any other agreement between Mercer and the
Executive shall limit, qualify, duplicate, or be inconsistent with any provision
of this Agreement, the provision in this Agreement shall control and such
provision of such other agreement shall be deemed to have been superseded, and
to be of no force or effect, as if such other agreement had been formally
amended to the extent necessary to accomplish such purpose.

      23. NO EFFECT ON OTHER RIGHTS. Except as otherwise specifically provided
herein, nothing contained in this Agreement shall be construed as adversely
affecting any rights the Executive may have under any agreement, plan, policy or
arrangement to the extent any such right is not inconsistent with the provisions
hereof.

      24. EXCLUSIVE RIGHTS AND REMEDY. Except for any explicit rights and
remedies the Executive may have under any other contract, plan or arrangement
with Mercer and FHI, the compensation and benefits payable hereunder and the
remedy for enforcement thereof shall constitute his exclusive rights and remedy
in the event of his termination of employment.


                                       13
<PAGE>
      25. DIRECTOR AND OFFICER LIABILITY INSURANCE; INDEMNIFICATION. Mercer
shall provide the Executive (including his heirs, executors, and administrators)
with coverage under a standard directors' and officers' liability insurance
policy, at Mercer's expense, in amounts consistent with amounts provided by peer
corporations to their directors and officers, and shall indemnify him as both a
director and as an officer (and his heirs, executors, and administrators) to the
fullest extent permitted under Pennsylvania law against all expenses and
liabilities reasonably incurred by him in connection with or arising out of any
action, suit, or proceeding in which he may be involved by reason of his having
been an officer or director of Mercer, FHI or any Subsidiary or affiliated
company (whether or not he continues to be such an officer or director at the
time of incurring such expenses or liabilities). Such expenses and liabilities
shall include, but not be limited to, judgments, court costs, and attorneys'
fees, and the costs of reasonable settlements.

      26. NOTICES. Any notice required or permitted under this Agreement shall
be sufficient if it is in writing and shall be deemed given (i) at the time of
personal delivery to the addressee, or (ii) at the time sent certified mail,
with return receipt requested, addressed as follows:

                  If to the Executive:

                           Mr. H. Thomas Davis
                           HCR 75 Box 23
                           Lock Haven, Pennsylvania 17745

                  If to Mercer or FHI:

                           10 North Highway 31
                           P.O. Box 278
                           Pennington, NJ  08534

                           Attention:  President and Chief Executive Officer

The name or address of any addressee may be changed at any time and from time to
time by notice similarly given.

      27. NO WAIVER. The failure by any party to this Agreement at any time or
times hereafter to require strict performance by any other party of any of the
provisions, terms, or conditions contained in this Agreement shall not waive,
affect, or diminish any right of the first party at any time or times thereafter
to demand strict performance therewith and with any other provision, term, or
condition contained in this Agreement. Any actual waiver of a provision, term,
or condition contained in this Agreement shall not constitute a waiver of any
other provision, term, or condition herein, whether prior or subsequent to such
actual waiver and whether of the same or a different type. The failure of Mercer
to promptly terminate the Executive's employment for Cause or the Executive to
promptly terminate his employment for Good Reason shall not be construed as a
waiver of the right of termination, and such right may be exercised at any time
following the occurrence of the event giving rise to such right.


                                       14
<PAGE>
      28. JOINT AND SEVERAL OBLIGATIONS OF MERCER AND FHI. Mercer and FHI shall
be jointly and severally liable for all compensation and benefits that may
become payable hereunder to or on behalf of the Executive or, if applicable, his
surviving spouse, estate or beneficiaries.

      29. SURVIVAL. Notwithstanding the nominal termination of this Agreement
and the Executive's employment hereunder, the provisions hereof that specify
continuing obligations, compensation and benefits, and rights (including the
otherwise applicable term hereof) shall remain in effect until such time as all
such obligations are discharged, all such compensation and benefits are
received, and no party or beneficiary has any remaining actual or contingent
rights hereunder.

      30. SEVERABILITY. In the event any provision in this Agreement shall be
held illegal or invalid for any reason, such illegal or invalid provision shall
not affect the remaining provisions hereof, and this Agreement shall be
construed, administered and enforced as though such illegal or invalid provision
were not contained herein.

      31. BINDING EFFECT AND BENEFIT. The provisions of this Agreement shall be
binding upon and shall inure to the benefit of the successors and assigns of
Mercer and FHI and the executors, personal representatives, surviving spouse,
heirs, devisees, and legatees of the Executive.

      32. ENTIRE AGREEMENT. This Agreement embodies the entire agreement among
the parties with respect to the subject matter hereof, and it supersedes all
prior discussions and oral understandings of the parties with respect thereto.

      33. NO ASSIGNMENT. This Agreement, and the benefits and obligations
hereunder, shall not be assignable by any party hereto except by operation of
law.

      34. NO ATTACHMENT. Except as otherwise provided by law, no right to
receive compensation or benefits under this Agreement shall be subject to
anticipation, commutation, alienation, sale, assignment, encumbrance, charge,
pledge, or hypothecation, or to set off, execution, attachment, levy, or similar
process, and any attempt, voluntary or involuntary, to effect any such action
shall be null and void.

      35. CAPTIONS. The captions of the several paragraphs and subparagraphs of
this Agreement have been inserted for convenience of reference only. They
constitute no part of this Agreement and are not to be considered in the
construction hereof.

      36. COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed one and the same instrument that may
be sufficiently evidenced by any one counterpart.

      37. NUMBER. Wherever any words are used herein in the singular form, they
shall be construed as though they were used in the plural form, as the context
requires, and vice versa.


                                       15
<PAGE>
      38. APPLICABLE LAW. Except to the extent preempted by federal law, the
provisions of this Agreement shall be construed, administered, and enforced in
accordance with the domestic internal law of the Commonwealth of Pennsylvania.

      IN WITNESS WHEREOF, the parties have executed this Agreement, or caused it
to be executed, as of the date first above written.

                                               /s/ H. Thomas Davis
                                               ---------------------------------
                                               H. Thomas Davis

                                               MERCER MUTUAL INSURANCE COMPANY

                                               By /s/ Andrew R. Speaker
                                                 -------------------------------

                                               FRANKLIN HOLDING COMPANY, INC.

                                               By
                                                 -------------------------------


                                       16
<PAGE>
                                   APPENDIX 1

      The parties hereto acknowledge that Mercer is organized as a mutual
company. Accordingly, literal application of the terms of this Agreement that
assume that Mercer is organized as a stock company may be inappropriate or
otherwise not feasible prior to any conversion by Mercer from the mutual to the
stock form of organization. Therefore, prior to any demutualization of Mercer,
the parties agree that, with respect to Mercer, this Agreement shall be
construed, administered and enforced, to the maximum extent practical, in a
manner consistent with the spirit and reasonably inferable intent hereof.


                                       1
<PAGE>
                                    GLOSSARY

      "BOARD OF DIRECTORS" means the board of directors of the relevant
corporation.

      "CAUSE" means (i) a documented repeated and willful failure by the
Executive to perform his duties, but only after written demand and only if
termination is effected by action taken by a vote of (A) prior to a Change in
Control, at least a majority of the directors of Mercer and FHI then in office,
or (B) after a Change in Control, at least 80% of the nonofficer directors of
Mercer and FHI then in office, (ii) his final conviction of a felony, (iii)
conduct by him which constitutes moral turpitude that is directly and materially
injurious to Mercer and FHI or any Subsidiary or affiliated company, (iv)
willful material violation of corporate policy, or (v) the issuance by the
regulator of Mercer or FHI or any Subsidiary or affiliated company of an
unappealable order to the effect that he be permanently discharged.

For purposes of this definition, no act or failure to act on the part of the
Executive shall be considered "willful" unless done or omitted not in good faith
and without reasonable belief that the action or omission was in the best
interest of Mercer, FHI or any of their Subsidiaries or affiliated companies.

      "CHANGE IN CONTROL" means the occurrence of any of the following events:

                  (a) any Person (except (i) Mercer or any Subsidiary or
         affiliate of Mercer, (ii) any Employee Benefit Plan (or any trust
         forming a part thereof) maintained by, or formed at the direction of,
         Mercer or any Subsidiary or affiliate of Mercer or (iii) any company
         formed by or at the direction of Mercer to become a holding company for
         Mercer in connection with a mutual to stock conversion of Mercer) is or
         becomes the beneficial owner, directly or indirectly, of Mercer's
         securities representing 19.9% or more of the combined voting power of
         Mercer's then outstanding securities, or 50.1% or more of the combined
         voting power of a Material Subsidiary's then outstanding securities,
         other than pursuant to a transaction described in Clause (c);

                  (b) there occurs a sale, exchange, transfer or other
         disposition of substantially all of the assets of Mercer or a Material
         Subsidiary to another entity, except to an entity controlled directly
         or indirectly by Mercer;

                  (c) there occurs a merger, consolidation, share exchange,
         division or other reorganization of or relating to Mercer, unless:

                           (i) the shareholders of Mercer immediately before
                  such merger, consolidation, share exchange, division or
                  reorganization own, directly or indirectly, immediately
                  thereafter at least two-thirds of the combined voting power of
                  the outstanding voting securities of the Surviving Company in
                  substantially the same proportion as their ownership of the
                  voting securities immediately before such merger,
                  consolidation, share exchange, division or reorganization; and


                                       1
<PAGE>
                           (ii) the individuals who, immediately before such
                  merger, consolidation, share exchange, division or
                  reorganization, are members of the Incumbent Board continue to
                  constitute at least two-thirds of the board of directors of
                  the Surviving Company; provided, however, that if the
                  election, or nomination for election by Mercer's shareholders
                  or members, of any new director was approved by a vote of at
                  least two-thirds of the Incumbent Board, such director shall,
                  for the purposes hereof, be considered a member of the
                  Incumbent Board; and provided further, however, that no
                  individual shall be considered a member of the Incumbent Board
                  if such individual initially assumed office as a result of
                  either an actual or threatened Election Contest or Proxy
                  Contest, including by reason of any agreement intended to
                  avoid or settle any Election Contest or Proxy Contest; and

                           (iii) no Person (except (A) Mercer or any Subsidiary
                  or prior affiliate of Mercer, (B) any Employee Benefit Plan
                  (or any trust forming a part thereof) maintained by , or
                  formed at the direction of, Mercer or any Subsidiary or prior
                  affiliate of Mercer, (C) any company formed by or at the
                  direction of Mercer to become a holding company for Mercer in
                  connection with a mutual to stock conversion of Mercer, or (D)
                  the Surviving Company or any Subsidiary or prior affiliate of
                  the Surviving Company) has beneficial ownership of 19.9% or
                  more of the combined voting power of the Surviving Company's
                  outstanding voting securities immediately following such
                  merger, consolidation, share exchange, division or
                  reorganization;

                  (d) a plan of liquidation or dissolution of Mercer, other than
         pursuant to bankruptcy or insolvency laws, is adopted; or

                  (e) during any period of two consecutive years, individuals
         who, at the beginning of such period, constituted the Board of
         Directors of Mercer cease for any reason to constitute at least a
         majority of such Board of Directors, unless the election, or the
         nomination for election by Mercer's shareholders, of each new director
         was approved by a vote of at least two-thirds of the directors then
         still in office who were directors at the beginning of the period;
         provided, however, that no individual shall be considered a member of
         the Board of Directors of Mercer at the beginning of such period if
         such individual initially assumed office as a result of either an
         actual or threatened Election Contest or Proxy Contest, including by
         reason of any agreement intended to avoid or settle any Election
         Contest or Proxy Contest.

Notwithstanding the foregoing, a Change in Control shall not be deemed to have
occurred if a Person becomes the beneficial owner, directly or indirectly, of
securities representing 19.9% or more of the combined voting power of Mercer's
then outstanding securities solely as a result of an acquisition by Mercer of
its voting securities which, by reducing the number of shares outstanding,
increases the proportionate number of shares beneficially owned by such Person;
provided, however, that if a Person becomes a beneficial owner of 19.9% or more
of the combined voting power of Mercer's then outstanding securities by reason
of share repurchases by Mercer and thereafter becomes the beneficial owner,
directly or indirectly, of any additional


                                       2
<PAGE>
voting securities of Mercer, then a Change in Control shall be deemed to have
occurred with respect to such Person under Clause (a).

Notwithstanding anything contained herein to the contrary, if the Executive's
employment is terminated and he reasonably demonstrates that such termination
(i) was at the request of a third party who has indicated an intention of taking
steps reasonably calculated to effect a Change in Control and who effects a
Change in Control, or (ii) otherwise occurred in connection with, or in
anticipation of, a Change in Control which actually occurs, then for all
purposes hereof, a Change in Control shall be deemed to have occurred on the day
immediately prior to the date of such termination of his employment.

      "DATE OF TERMINATION" means:

                  (a) if the Executive's employment is terminated for
         Disability, 30 days after the Notice of Termination is given (provided
         that he shall not have returned to the performance of his duties on a
         full-time basis during such 30-day period);

                  (b) if the Executive's employment terminates by reason of his
         death, the date of his death;

                  (c) if the Executive's employment is terminated by Mercer for
         Cause, the date specified in the Notice of Termination;

                  (d) if the Executive's employment is terminated by him without
         Good Reason, the date specified in the Notice of Termination;

                  (e) if the Executive's employment is terminated by Mercer for
         any reason other than for Disability or Cause, the date specified in
         the Notice of Termination; or

                  (f) if the Executive's employment is terminated by him for
         Good Reason, the date specified in the Notice of Termination;

provided, however that the Date of Termination shall mean the actual date of
termination in the event the parties mutually agree to a date other than that
described above.

      "DEFINED BENEFIT PLAN" has the meaning ascribed to such term in Section
3(35) of ERISA.

      "DEFINED CONTRIBUTION PLAN" has the meaning ascribed to such term in
Section 3(34) of ERISA.

      "DISABILITY" has the meaning ascribed to the term "permanent and total
disability" in Section 22(e)(3) of the IRC.

      "ELECTION CONTEST" means a solicitation with respect to the election or
removal of directors that is subject to the provisions of Rule 14a-11 of the
1934 Act.


                                       3
<PAGE>
      "EMPLOYEE BENEFIT PLAN" has the meaning ascribed to such term in Section
3(3) of ERISA.

      "ERISA" means the Employee Retirement Income Security Act of 1974, as
amended and as the same may be amended from time to time.

      "EXCISE TAX" means the tax imposed by Section 4999 of the IRC (or any
similar tax that may hereafter be imposed by federal, state or local law).

      "EXECUTIVE" means H. Thomas Davis, an individual residing HCR Box 23, Lock
Haven, Pennsylvania 17745

      "FHI" means Franklin Holding Company, Inc.

      "GOOD REASON" means:

            (a) prior to a Change in Control:

                  (i) a change in the Executive's position, or any material
         diminution in his duties or responsibilities;

                  (ii) a reduction in the Executive's base compensation;

                  (iii) a failure to increase the Executive's base compensation
         in accordance with the provisions of Section 5 of the Agreement;

                  (iv) any purported termination of the Executive's employment
         which is not in accordance with the terms of this Agreement; and

                  (v) requiring the Executive to be based anywhere other than
         Clinton County, Pennsylvania;

            (b) within one year after a Change in Control:

                  (i) a change in the Executive's status or position, or any
         material diminution in his duties or responsibilities;

                  (ii) any increase in the Executive's duties inconsistent with
         his position;

                  (iii) any reduction in the Executive's base compensation;

                  (iv) a failure to increase the Executive's base compensation,
         in accordance with the provisions of Section 5 of the Agreement;

                  (v) a failure to continue in effect any Employee Benefit Plan
         in which the Executive participates, including (whether or not they
         constitute Employee Benefit Plans) incentive bonus, stock option, or
         other qualified or


                                       4
<PAGE>
         nonqualified plans of deferred compensation (A) other than as a result
         of the normal expiration of such a plan, or (B) unless such plan is
         merged or consolidated into, or replaced with, a plan with benefits
         which are of equal or greater value;

                  (vi) requiring the Executive to be based anywhere other than
         Clinton County, Pennsylvania;

                  (vii) refusal to allow the Executive to attend to matters or
         engage in activities in which he was permitted to engage prior to the
         Change in Control;

                  (viii) failure to deliver to the Executive of a Notice of
         Extension;

                  (ix) failure to secure the affirmation by a Successor, within
         three business days prior to a Change in Control, of this Agreement and
         its or Mercer's continuing obligations hereunder (or where there is not
         at least three business days advance notice that a Person may become a
         Successor, within one business day after having notice that such Person
         may become or has become a Successor); or

                  (x) any purported termination of the Executive's employment
         that is not in accordance with the terms of this Agreement.

Notwithstanding anything herein to the contrary, at the election of the
Executive, beginning with the 181st day following a Change in Control and
continuing through the first anniversary of such Change in Control, he may
terminate his employment for any reason or no reason and such termination will
be treated as having occurred for Good Reason.

      "GROSS-UP PAYMENT" means an additional payment to be made to or on behalf
of the Executive in an amount such that the net amount retained by him, after
deduction of any Excise Tax on the Total Payments and any federal, state, and
local income tax and Excise Tax on such additional payment, equals the Total
Payments.

      "INCUMBENT BOARD" means the Board of Directors of Mercer as constituted at
any relevant time.

      "IRC" means the Internal Revenue Code of 1986, as amended and as the same
may be amended from time to time.

      "MATERIAL SUBSIDIARY" means FHI or any other Subsidiary whose net worth,
determined under generally accepted accounting principles, at the fiscal year
end immediately prior to any relevant time is at least 25% of the aggregate net
worth of the controlled group of corporations of which Mercer is the common
parent.

      "1934 ACT" means the Securities Exchange Act of 1934, as amended and as
the same may be amended from time to time.


                                       5
<PAGE>
      "MERCER" means Mercer Mutual Insurance Company.

      "NOTICE OF EXTENSION" means a written notice delivered to or by the
Executive which advises that the Agreement will be extended as provided in
Paragraph 3.

      "NOTICE OF TERMINATION" means a written notice that (i) indicates the
specific termination provision in this Agreement relied upon, (ii) sets forth in
reasonable detail the facts and circumstances claimed to provide a basis for
termination of the Executive's employment under the provision so indicated, and
(iii) gives the required advance notice of termination.

      "PERSON" has the same meaning as such term has for purposes of Sections
13(d) and 14(d) of the 1934 Act.

      "PROXY CONTEST" means the solicitation of proxies or consents by or on
behalf of a Person other than the Board of Directors of Mercer or FHI.

      "SUBSIDIARY" means any business entity of which a majority of its voting
power or its equity securities or equity interests is owned, directly or
indirectly by Mercer or FHI.

      "SUCCESSOR" means any Person that succeeds to, or has the practical
ability to control (either immediately or with the passage of time), Mercer's
business directly, by merger or consolidation, or indirectly, by purchase of
Mercer's voting securities or all or substantially all of its assets.

      "SURVIVING COMPANY" means the business entity that is a resulting company
following a merger, consolidation, share exchange, division or other
reorganization of or relating to Mercer or FHI.

      "TOTAL PAYMENTS" means the compensation and benefits that become payable
under the Agreement or otherwise (and which may be subject to an Excise Tax) by
reason of the Executive's termination of employment, determined without regard
to any Gross-Up Payments that may also be made.

      "WELFARE BENEFIT PLAN" has the meaning ascribed to the term "employee
welfare benefit plan" in Section 3(1) of ERISA. For purposes of determining the
Executive's or his dependents' right to continued welfare benefits hereunder
following his termination of employment, the meaning of such term shall include
any retiree health plan maintained by Mercer at any time after the relevant Date
of Termination, notwithstanding the fact that the Executive is not a participant
therein prior to such date.


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