<PAGE>

                                                                   Exhibit 10(r)



                             AMENDED AND RESTATED

                             REINSURANCE AGREEMENT

                                     among

                 PHYSICIANS HEALTH SERVICES OF NEW JERSEY, INC.

                              Paramus, New Jersey,

                   PHYSICIANS HEALTH SERVICES (BERMUDA) LTD.

                               Hamilton, Bermuda

                                      and

                 THE GUARDIAN LIFE INSURANCE COMPANY OF AMERICA

                               New York, New York
<PAGE>

             AMENDED AND RESTATED REINSURANCE AGREEMENT
             ------------------------------------------


     Reference is hereby made to the Reinsurance Agreement (the "Reinsurance
Agreement") made and entered into as of May 1, 1996 by and among PHYSICIANS
HEALTH SERVICES OF NEW JERSEY, INC., a corporation organized under the laws of
the State of New Jersey as a health maintenance organization (the "Company"),
PHYSICIANS HEALTH SERVICES (BERMUDA) LTD., a stock insurance company organized
under the laws of Bermuda ("PHS (Bermuda)") and THE GUARDIAN LIFE INSURANCE
COMPANY OF AMERICA, a mutual life insurance company organized under the laws of
the State of New York (the "Reinsurer"). This Amended and Restated Reinsurance
Agreement is dated as of October 1, 1996, and when executed by the parties
hereto, shall supersede and replace the Reinsurance Agreement and shall
constitute a binding and enforceable amendment to the Reinsurance Agreement in
its entirety.

     THE REINSURANCE AGREEMENT IS AMENDED AND RESTATED IN ITS ENTIRETY AS
FOLLOWS:

     This Amended and Restated Reinsurance Agreement (this "Agreement") is made
and entered into as of this 1st day of October, 1996 between the Company, PHS
(BERMUDA) and the Reinsurer.

          The Company, PHS (Bermuda) and the Reinsurer mutually agree to enter
into the Agreement on the terms and conditions stated herein. This Agreement is
a reinsurance agreement solely between the Company, PHS (Bermuda) and the
Reinsurer, and the performance of the obligations of each party under this
Agreement
<PAGE>

shall be rendered solely to the other parties. In no instance, except as set
forth in Article XII, shall anyone other than the Company, PHS (Bermuda) or the
Reinsurer have any rights under this Agreement, and the Company shall be and
remain solely liable to any insured, contractholder, physician or other provider
or beneficiary under any contract reinsured hereunder.

                                   ARTICLE I

                                  DEFINITIONS
                                  -----------

                 As used in this Agreement, the following terms shall have the
       following meanings (definitions are applicable to both the singular and
       the plural forms of each term defined in this Article):

                 "Accounting Period" means the Fiscal Quarter, except that the
                  -----------------
       first Accounting Period shall be the period commencing with the Effective
       Date and ending with the last day of the then current Fiscal Quarter, and
       the last Accounting Period shall be the period commencing with the first
       day of the last Fiscal Quarter preceding the Terminal Accounting Date and
       ending on the Terminal Accounting Date.

                 "Administrative Expense" means an expense which will be
                  ----------------------
       reimbursable each Accounting Period and is intended to compensate the
       Company or the Reinsurer for a reasonable estimate of the actual cost of
       performing administrative services in connection with the HMO and POS
       Plans, as set forth in the Marketing and Administrative Services
       Agreement, without provision for profit.



                                       2
<PAGE>

                  "Affiliate" means with respect to a specified person, a person
                   ---------
        that directly, or indirectly through one or more intermediaries,
        controls, or is controlled by, or is under common control with, the
        person specified.

                  "Business Day" means any day except Saturday or Sunday or any
                   ------------
        legal Federal or New Jersey holiday.

                   "Capitation Agreement" means a health care provider contract
                    --------------------
        pursuant to which the Company agrees to pay a provider or risk entity a
        per subscriber fee in lieu of all or a portion of actual claims made.

                  "Capitation Fees" means the per subscriber fees to health care
                   ---------------
        providers incurred under Capitation Agreements, net of amounts paid or
        payable to the Company by providers under such agreements.

                  "Change of Control" means the acquisition, in a single
                   -----------------
        transaction or in a series of related transactions, by a person, an
        entity, or a group of persons or entities acting in concert of: (i)
        twenty-five percent (25%) or more (a) of the voting common stock of the
        Company, PHS or PHS (Bermuda) (excluding any acquisition of stock by a
        party currently owning twenty-five percent (25%) or more of such common
        stock), or (b) fifty-one percent (51%) or more of the of the aggregate
        value of the assets of the Company, PHS or PHS (Bermuda); or (ii)
        twenty-five percent (25%) or more of any ownership interest in the
        Reinsurer.

                  "Commissions" means commissions and other incentives or
                   -----------
        bonuses applicable to the marketing of the HMO and POS Plans.

                  "Continuation Plan" has the meaning set forth in Section 8.6.
                   -----------------

                                    3
<PAGE>

          "Contract Termination Date" means the effective date upon which the
           -------------------------
Agreement terminates pursuant to the applicable Section in Article VIII below.

          "Contractholder" means an employer in the Service Area who or which
           --------------
executes an enrollment agreement with respect to any Plan subject to this
Agreement.

          "Direct Paid Claims" means amounts paid to health care providers for
           ------------------
medical claims and/or to subscribers for services covered by HMO and POS Plans,
including withholds paid to providers, but not including Capitation Fees.

          "Direct Paid Premium" means premiums received.
           -------------------

          "Earned Premium" shall consist of the item shown on Schedule C, line
           --------------
I.A.7.

          "Effective Date" shall have the meaning set forth in Section 2.1.
           --------------

          "Fiscal Quarter" means each of the four consecutive three-month
           --------------
periods in a fiscal year commencing on January 1 of each year and ending on
December 31 of that calendar year.

          "HMO Plans" means commercial contracts for health care services, other
           ---------
than POS Plans, provided by Company to Contractholders in the Service Area
utilizing Company's network of healthcare providers to provide health care
services when such contracts are marketed and sold under the tradename "The
Guardian & PHS Healthcare Solutions," or such other tradename as the parties may
mutually agree to from time to time.



                                       4
<PAGE>

          "Insurance Taxes" means all taxes, licenses and fees directly imposed
           ---------------
on the HMO and POS Plans reinsured hereunder and shall be given the same meaning
as Insurance Taxes, Licenses and Fees, Excluding Federal Income Taxes in the
Summary of Operations Schedule in the NAIC Life, Accident and Health Convention
Blank which is taken from the Taxes, Licenses and Fees Exhibit, or similar
entries on financial statements filed by the Company. Such term shall not
include any franchise or other federal, state or local tax measured by net
income.

          "Interest Compensation Rate" means the rate of interest defined in
           --------------------------
Schedule D as applicable to delayed payments.

          "Investment Rate" means the rate of interest defined in Schedule D as
           ---------------
applicable to cash reserve balances held by the Company, the Reinsurer or PHS
(Bermuda) for the benefit of any other party.

          "LIBOR" means, at any time of determination, the London Interbank
           -----
Offered Rate paid on U.S. dollar deposits for the applicable period of time as
published under "Money Rates" in the New York City edition of the Wall Street
Journal or, if there is no such publication or statement therein as to LIBOR,
then in any publication used in the New York City financial community.

          "Marketing and Services Agreement" shall have the meaning set forth in
           --------------------------------
Section 3.1.

          "PHCS" shall mean Private Health Care Systems Incorporated, a
           ----
corporation with its corporate offices in Waltham, Massachusetts that develops
medical provider networks and provides utilization review services.


                                       5
<PAGE>

          "PHS" shall mean Physicians Health Services, Inc., a Delaware
           ---
corporation and the parent of the Company.

          "POS Plans" means commercial contracts for health care services, other
           ---------
than HMO Plans, provided by Company to Contractholders in the Service Area
utilizing Company's network of healthcare providers to provide health care
services when such contracts are marketed and sold under the tradename "The
Guardian & PHS Healthcare Solutions," or such other tradename as the parties may
mutually agree to from time to time. POS Plans include: (i) an in-network
benefit ("In-Network") under which enrollees are required to utilize health care
providers who are part of the PHS Network (as defined in the Marketing and
Services Agreement); and (ii) an "out-of-network" benefit ("Out-of-Network")
under which enrollees may choose to utilize health care providers who are not
part of the PHS Network.

          "Profit or Loss" shall have the meaning set forth in Article X.
           --------------

          "Quarterly Accounting Report" means the report required to be prepared
           ---------------------------
in accordance with Section 7.2 and providing the data as shown on Schedules C
and F.

          "Quarterly Settlement" means the net amount due and payable to any
           --------------------
party with respect to any Accounting Period as set forth in Section 7.3.

          "Renewal Date" means, with respect to a HMO or POS Plan, the date that
           ------------
is the anniversary of the day on which the liability of the Company began under
such HMO or POS Plan.

          "Reserves" means amounts shown in the Company's annual statement as
           --------
filed with the State of New Jersey as reserves for the HMO and POS
Plans.

                                       6
<PAGE>

          "Service Area" means the State of New Jersey.
           ------------

          "Stop Loss Reinsurance" means reinsurance other than the reinsurance
           ---------------------
under this Agreement obtained by the Company and provided in connection with HMO
and POS Plans.

          "Stop Loss Reinsurance Premium" means consideration paid by the
           -----------------------------
Company for Stop Loss Reinsurance provided.

          "Stop Loss Reinsurance Recoveries Received" means amounts collected
           -----------------------------------------
pursuant to Stop Loss Reinsurance.

          "Terminal Accounting and Settlement" means the final accounting and
           ----------------------------------
payment of any amount due any party upon the termination of this Agreement, as
described in Section 9.1.

          "Terminal Accounting Date" shall have the meaning set forth in
           ------------------------
Section 9.1.

          "Withholds" means amounts withheld by the Company from payments of
           ---------
claims submitted by primary care physicians and specialists.



                                       7
<PAGE>

                                   ARTICLE II

                              REINSURANCE COVERAGE
                              --------------------

     2.1  Coverage.   (a) Effective May 1, 1996 (the "Effective Date"), the
          --------
Company agrees to cede to the Reinsurer: (i) fifty percent (50%) of the risks
under the HMO Plans, and (ii) fifty percent (50%) of the risks under the In-
Network portion of the POS Plans, all as more specifically described in Schedule
A, and the Reinsurer agrees to indemnify the Company against fifty percent (50%)
of the risks under such HMO and In-Network portion of the POS Plans.



     (b) Effective the Effective Date, the Company agrees to cede to the
Reinsurer one hundred percent (100%) of the risks under the Out-of-Network
portion of the POS Plans, all as more specifically described in Schedule A, and
the Reinsurer agrees to indemnify the Company against one hundred percent (100%)
of the risks under such Out-of-Network portion of the POS Plans.



     (c) Effective the Effective Date, the Reinsurer agrees to retrocede to PHS
(Bermuda) fifty percent (5O%) of the risks under the Out-of-Network portion of
the POS Plans, all as more specifically described in Schedule A, and PHS
(Bermuda) agrees to indemnify the Reinsurer against fifty percent (50%) of the
risks under such Out-of-Network portion of the POS Plans.



     2.2  Plan of Reinsurance. The reinsurance hereunder shall be on a
          -------------------
coinsurance basis. Each party agrees to establish and maintain Reserves in an
amount


                                       8
<PAGE>

appropriate for the risks assumed by such party, as set forth in Section 2.1

above; provided, however, that, the parties agree that the Reinsurer will
       -------- ------- ----
establish and maintain 100% of the Reserves for the Out-of-Network portion of
the POS Plans.

     2.3  Conditions. The reinsurance hereunder is subject to the same
          ----------
limitations and conditions as the HMO and POS Plans, except as otherwise
expressly provided for in this Agreement.

     2.4  Exclusions. The reinsurance hereunder does not apply to the following
          ----------
risks: (i) any portion of the risk under any HMO or POS Plan issued by the
Company other than the risk reinsured hereunder; (ii) any HMO or POS Plan issued
and delivered in a jurisdiction in which issuance and delivery of such contract
constituted the doing of business where the Company was not properly licensed;
and (iii) those risks for which the Reinsurer is not liable pursuant to the
provisions of Section 3.11 hereof.

                                  ARTICLE III

                               GENERAL PROVISIONS
                               ------------------

     3.1  Contract Administration. The Company and the Reinsurer each shall have
          -----------------------
responsibility for certain aspects of the marketing and administration of the
HMO and POS Plans, in accordance with the Amended and Restated Marketing and
Services Agreement dated as of October 1, 1996 between the Reinsurer, the
Company and PHS (the "Marketing and Services Agreement").

     3.2  Non-Solicitation. (a) During the term of this Agreement, the Reinsurer
          ----------------
shall not contact, solicit or contract for services with any health care
provider in the


                                       9
<PAGE>

Service Area under contract with the Company. In addition, during the term of
this Agreement, and following its termination, the Reinsurer will not provide
any party with lists of health care providers under contract with the Company or
non-public information concerning contracts between the Company (or its
Affiliates) and its health care providers under contract; provided, however,
                                                          --------  -------
that provider lists must be made available to the Departments of Health or
Insurance of the State of New Jersey, to prospective Contractholders, to the
Reinsurer's insureds and as otherwise required under applicable law. This
Section 3.2 shall not apply (i) to contracting efforts by third parties,
including, but not limited to, PHCS acting on behalf of the Reinsurer, for the
purpose of developing managed care networks, provided, however, that, the names
of health care providers solicited by such third parties shall not have been
furnished by the Reinsurer, its employees or agents, or (ii) following the
Contract Termination Date, as described in the provisions of Article VIII
hereof. The Reinsurer further agrees not to replace a HMO or POS Plan with a
PHCS managed health care plan during the term of this Agreement.

     (b) No party, nor any of its Affiliates, shall contact, solicit or contract
with any other party's full-time employees who have been engaged in the
activities covered by this Agreement without the consent of such other party.

     3.3  Inspection. Any party, or its designated representative, may inspect,
          ----------
at the offices of the Company, PHS (Bermuda) or the Reinsurer, as the case may
be, where such records are located, and conduct reasonable audits of, the papers
and any and all other books or documents of the Company, PHS (Bermuda) or the
Reinsurer


                                       10
<PAGE>

reasonably relating to the HMO or POS Plans and the administrative
responsibilities hereunder, during normal business hours for such period as this
Agreement is in effect or for as long thereafter as the Company, PHS (Bermuda)
or the Reinsurer, as the case may be, seeks performance by any other party
pursuant to the terms of this Agreement. The information obtained shall be used
only for purposes relating to the reinsurance provided under this Agreement and
shall not be disclosed to any person without the express permission of the other
party, except to the extent that disclosure is required by law. Each party's
rights under this Section 3.3 shall survive termination of this Agreement.

     3.4  Misunderstandings and Oversights. If any delay, omission, error or
          --------------------------------
failure to pay amounts due or to perform any other act required by this
Agreement is unintentional and caused by misunderstanding or oversight, the
Company, PHS (Bermuda) and the Reinsurer will adjust the situation to what it
would have been had the misunderstanding or oversight not occurred. The party
that first discovers such oversight or incorrect act as a result of the
misunderstanding will notify the other parties in writing promptly upon
discovery of the misunderstanding or oversight. The parties shall act to correct
the error, omission or oversight within twenty (20) calendar days of
notification of the problem. This Section 3.4 shall not be construed as a waiver
by any party of its right to enforce strictly the terms of this Agreement.

     3.5  Reinstatements. If a HMO or POS Plan reinsured hereunder that was
          --------------
terminated or lapsed is reinstated while this Agreement is in effect, the
reinsurance for such Plan shall be reinstated automatically as if such Plan had
not been terminated or


                                       11
<PAGE>

lapsed. All amounts received in connection with such reinstatement shall be
treated as Direct Paid Premiums.

     3.6  Contract Changes or Reserve Changes. The Company, PHS (Bermuda) and
          -----------------------------------
the Reinsurer shall share, based upon the percentages set forth in Section 2.1
and Schedule A, in any increase or decrease in the Company's liability that
results from any change in the terms or conditions of any HMO or POS Plan
reinsured hereunder or in the calculation of Reserves. The Company must provide
written notification to the Reinsurer and PHS (Bermuda) within fifteen (15)
calendar days after any such change, if such change can reasonably be expected
to have a significant effect on the transactions contemplated by this Agreement.

     3.7  Compliance with Applicable Laws and Regulations. It is the intention
          -----------------------------------------------
of the parties that this Agreement comply with all existing applicable laws and
regulations, as from time to time are in effect, so that the agreement remains
in full force and the HMO and POS Plans remain reinsured hereunder. Each of the
parties agrees to comply with all laws, ordinances, rules, regulations and
orders of regulatory bodies applicable to the transactions contemplated by this
Agreement, including those relating to the payment of commissions.

     3.8  Amendment and/or Termination Upon Failure to Comply. In the event that
          ---------------------------------------------------
it is determined by an insurance or health regulatory authority, the Internal
Revenue Service or any other federal, state or local regulatory authority or by
any party to this Agreement upon the advice of an insurance or health regulatory
authority or the Internal Revenue Service that this Agreement fails to conform
to, or that the intent of


                                       12
<PAGE>

this Agreement cannot be effected as a result of, the requirements of existing
applicable laws and regulations and that this Agreement may be brought into
conformity with said requirements, or the intent of this Agreement may be
effected, only by means of a material change to this Agreement, or in the event
that such laws or regulations are changed subsequent to the Effective Date and
such change has a material adverse effect on any party or requires a material
change to this Agreement in order for this Agreement to conform with applicable
laws and regulations or for its intent to be effected, the parties shall
exercise reasonable efforts to reach an agreement to amend this Agreement so as
to return the parties to the economic position that they would have been in had
no such change occurred or so that both parties share the economic detriment of
such change proportionately. If the parties are unable to reach an agreement to
amend the Agreement, then the differences between the parties shall be resolved
through arbitration in accordance with the provisions of Article XIII. In the
event that any required change is not material, this Agreement shall be amended
in accordance with such requirement.

     3.9  Notification of Disapproval or Change in Law. The Company shall
          --------------------------------------------
promptly notify the Reinsurer and PHS (Bermuda) of any actual or anticipated
disapprovals or required changes regarding this Agreement that are made by any
insurance or health regulatory authority or taxing authority and of any change
in the laws, regulations or rulings affecting this Agreement or related
documents. The Reinsurer and PHS (Bermuda) shall be allowed to participate in
the defense of this



                                       13
<PAGE>

Agreement or related documents on its own behalf with such authority after
consultation with the Company.

     3.10  Setoff. It is expressly understood that any debts or credits, matured
           ------
or unmatured, liquidated or unliquidated, arising or incurred pursuant to the
terms hereof, including but not limited to such debts and credits arising under
Articles IV, V and VI shall, at all times and under all circumstances relevant
to the rights and liabilities of the parties to this Agreement, be deemed mutual
debts or credits, as the case may be, and shall be set off and only the net
balance shall be allowed or paid.

     3.11  Limitations on Liability. (a) The Reinsurer shall not indemnify or be
           ------------------------
liable pursuant to this Agreement or otherwise for any of the Company's risk, to
the extent any damages result from the negligent acts or omissions to act,
reckless or intentional wrongs, fraud, oppression or bad faith of the Company.
PHS (Bermuda) or the Reinsurer, as the case may be, shall be liable and
indemnify the Company fully for all losses arising from the negligent acts or
omissions to act, reckless or intentional wrongs, fraud, oppression or bad faith
of the Reinsurer or PHS (Bermuda), as the case may be, acting in connection with
a HMO or POS Plan reinsured hereunder.

     (b) The Company does not indemnify and shall not be liable pursuant to
this Agreement or otherwise for any of the Reinsurer's risk, to the extent any
damages result from the negligent acts or omissions to act, reckless or
intentional wrongs, fraud, oppression or bad faith of the reinsurer. The company
shall be liable and indemnify the Reinsurer fully for all losses arising from
the negligent acts or omissions to act,



                                       14
<PAGE>

reckless or intentional wrongs, fraud, oppression or bad faith of the Company
acting in connection with a HMO or POS Plan reinsured hereunder.

     (c) The Reinsurer and PHS Bermuda shall be liable, based on the applicable
percentages set forth in Section 2.1 and Schedule A, and subject to the election
permitted by Section 6.2, for any losses arising from non-negligent acts or
omissions to act taken by the Company in good faith pursuant to HMO or POS Plans
reinsured hereunder.

     (d) For purposes of this Agreement, any damages, claims, liabilities or
other expenses for which the Reinsurer shall be liable shall be net of the
appropriate share of any recoveries from third parties, including, without
limitation, recoveries under Stop-Loss Reinsurance Contracts.

     (e) The Reinsurer shall not be liable for any damages incurred by the
Company, PHS (Bermuda) or the Reinsurer to the extent such liability or damages
arise from the action or actions of a health care provider or health care
facility in connection with the HMO or POS Plans reinsured hereunder.

     3.12  Exclusivity. The Company and the Reinsurer shall not enter into an
           -----------
arrangement with other parties similar to this Agreement for reinsurance of
Managed Care Contracts (as defined in the Marketing and Services Agreement),
except as expressly permitted under the Marketing and Services Agreement.

     3.13  Press Releases. No public statement or press release regarding the
           --------------
existence of this Agreement or the terms thereof shall be made by any party
hereto



                                       15
<PAGE>

without the prior written consent of the other parties, except as required by
applicable laws, ordinances, rules and regulations.

     3.14  Restrictions on the Reinsurer PHS (Bermuda) and the Company Relating
           --------------------------------------------------------------------
to Other Agreements. During the period from the Effective Date through the last
-------------------
date on which the provisions of this Agreement are in effect, each of the
Reinsurer, PHS (Bermuda) and the Company shall be prohibited from directly or
indirectly, entering into any contract, lease, sublease, license, sublicense,
promissory note, evidence of indebtedness or other contract or commitment
(whether oral or written), which will, or can reasonably be expected to at any
time, place any material restriction or restrictions on such party's ability to
perform any or all of its obligations under this Agreement; provided, however,
that, nothing herein shall limit either party's right to enter into a Change of
Control transaction in accordance with the provisions set forth herein.

     3.15  Investigations. Each party to this Agreement shall immediately notify
           --------------
the other parties, in writing, of any and all investigations of such party or
its directors, principal officers or shareholders conducted by any federal,
state or local governmental or regulatory authority other than routine
examinations or surveys by state insurance or health regulatory authorities and
federal or state tax authorities.

     3.16  Change of Control. Each party shall fully disclose the details of any
           -----------------
pending Change of Control known to it to the other parties, and shall provide
the other parties with copies of any and all applications for approval therefor
made to Federal, state or local regulatory authorities. Such disclosure shall be
made prior to or


                                       16
<PAGE>

concurrent with notification and/or application for approval to such Federal,
state or local regulatory authorities of a Change of Control. In the event that
such Change of Control shall be approved, the party that intends to undergo the
Change of Control shall notify the other parties immediately thereof and the
other parties shall have the rights set forth in Section 8.6.

     3.17  Reinsurance or Sale of HMO or POS Plans. (a) The Company agrees that,
           ---------------------------------------
during the period in which this Agreement is in effect, it shall not reinsure,
sell or assign the HMO or POS Plans to another entity (other than in connection
with Stop Loss Reinsurance).

     (b) Notwithstanding paragraph (a) above, this Section 3.17 shall not
restrict the ability of the Company to (i) enter into a merger or consolidation,
(ii) effect a sale of all or a portion of its capital stock or (iii) effect a
sale of its business as an entirety or substantially as an entirety; provided,
however, that the Company may not enter into a transaction listed in (i), (ii)
or (iii) above with another entity unless such other entity provides the
Reinsurer and PHS (Bermuda) with a writing, in form and substance satisfactory
to the Reinsurer and PHS (Bermuda) which shall state that the entity agrees to
be bound by the terms of this Agreement to the same extent and effect as if such
entity had been a party to this Agreement.

     3.18  Commission Scale and Commission Scale Changes. Commission payments
           ---------------------------------------------
made with respect to any HMO or POS Plans reinsured hereunder shall be made
according to the same commission scale used by the Company with respect to the



                                       17
<PAGE>

specific types of products listed in Schedule A, or substantially similar
products, that are not subject to this Agreement, as that scale may be changed
from time to time.

     3.19  Stop-Loss Reinsurance. The Company agrees, during the period that
           ---------------------
this Agreement is in effect, that it will maintain Stop-Loss Reinsurance with
respect to the HMO Plans and the POS Plans in effect, with deductibles,
coverages and limits of liability that are substantially the same as those that
apply under the Stop Loss Reinsurance contract or contracts of the Company that
are in effect on the Effective Date, a copy or copies of which are attached as
Exhibit I; provided, however, that each Stop Loss Reinsurance contract or
contracts of the Company relating to HMO or POS Plans must provide coverage with
respect to claims relating to any periods during which the Company is obligated
to provide services with respect to HMO or POS Plans, without regard to (i) the
failure of the Company to remain qualified to conduct the business for which it
is organized, or (ii) the insolvency or the commencement of supervision,
conservation, rehabilitation, liquidation or similar proceedings against the
Company. In the event that any Stop Loss Reinsurance contract issued to the
Company does not meet the requirements of this Section 3.19 at the Effective
Date, or at any time thereafter, the Company will obtain substitute Stop Loss
Reinsurance meeting such requirements from a qualified reinsurer, including the
Reinsurer.

     3.20  Statement of Actuarial Opinion. Within forty-five (45) calendar days
           ------------------------------
after the end of the calendar year, the Company shall provide the Reinsurer with
a Statement of Actuarial Opinion certifying the adequacy of the reserves which
are covered under this Agreement. In addition, the Actuarial Opinion must state
whether


                                       18
<PAGE>

or not the reserves covered under this Agreement meet the minimum standards of
all states where the Company is licensed, and if not the difference between the
Company's reserves and state minimums. The Actuarial Opinion shall meet the
requirements as set forth in the NAIC'S Actuarial Opinion and Memorandum
Regulation. The Opinion shall be signed by the Company's "Appointed Actuary."



                                   ARTICLE IV

                             PREMIUMS AND RESERVES
                             ---------------------

     4.1  Premiums - HMO Plans and In-Network Portion of the POS Plans.
          -------------------------------------------------------------
Premiums under HMO Plans and under the In-Network portion of the POS Plans
received by the Reinsurer, pursuant to the terms of the Marketing and Services
Agreement, shall be allocated to the Company and the Reinsurer in accordance
with the applicable percentages set forth in Section 2.1 and in Schedule A, and
the portion of the Premiums allocated to the Reinsurer shall constitute the
consideration in respect of the Reinsurer's acceptance of risk under this
Agreement. The portion of Premiums allocated to the Company shall be paid over
to the Company in accordance with the settlements required by Section 7.3 of
this Agreement.

     4.2  Premiums - Out-of-Network Portion of the POS Plans. Premiums under the
          --------------------------------------------------
Out-of-Network portion of the POS Plans received by the Reinsurer, pursuant to
the terms of the Marketing and Services Agreement, shall be allocated to the
Reinsurer and PHS (Bermuda) in accordance with the applicable percentages set
forth in Section 2.1 and in Schedule A, and the portion of the Premiums
allocated to the Reinsurer and


                                       19
<PAGE>

PHS (Bermuda) shall constitute the consideration in respect of the Reinsurer's
and PHS (Bermuda)'s acceptance of risk under this Agreement. The portion of
Premiums allocated to PHS (Bermuda) shall be paid over to PHS (Bermuda) in
accordance with the settlements required by Section 7.3 of this Agreement.

     4.3  HMO and POS Plan Reserves. With respect to the HMO Plans and the In-
          -------------------------
Network portion of the POS Plans reinsured hereunder, the Company and the
Reinsurer shall establish and maintain Reserves in an amount appropriate for the
risk assumed by such party and all applicable regulatory requirements. With
respect to the Out-of-Network portion of the POS Plans reinsured hereunder, the
Reinsurer shall establish and maintain 100% of the Reserves in accordance with
all applicable regulatory requirements. The Reinsurer will fund 50% of such
Reserves on behalf of PHS (Bermuda) by deducting the appropriate amount from the
Quarterly Settlements due PHS (Bermuda), as set forth in Section 7.3, to the
extent that such Quarterly Settlements are sufficient for such purpose. To the
extent that the Quarterly Settlements are not sufficient for such purpose, PHS
(Bermuda) will, within 45 calendar days of a request by Reinsurer, pay to the
Reinsurer the amount necessary to fund 50% of such Reserves. The Reinsurer will
credit interest on the Reserve funds held on behalf of PHS (Bermuda) at a rate
equal to the Investment Rate set forth in Schedule E.



                                       20
<PAGE>

                                   ARTICLE V

                               EXPENSE ALLOWANCE
                               -----------------

     5.1  Administrative Expenses. Each party shall be entitled to reimbursement
          -----------------------
for its Administrative Expenses (not including pre-marketing expenses),
identified in Schedule B, for each Accounting Period. Such Administrative
Expenses, plus any Insurance Taxes and Commissions, paid by such party with
respect to the HMO and POS Plans during the Accounting Period, shall be
considered reimbursable expenses.

     5.2  Payment. The Company, PHS (Bermuda) and the Reinsurer shall be
          -------
reimbursed for the amounts shown as Company Expenses, PHS (Bermuda) Expenses or
Reinsurer Expenses, as set forth in Section 7.3 below.



                                   ARTICLE VI

                                     CLAIMS
                                     ------

     6.1  Notice of Claim. Upon receipt of any claim on any HMO or POS Plan,
          --------- -----
which claim is reasonably anticipated to exceed fifty thousand dollars
($5O,OOO), the Company shall promptly notify the Reinsurer and PHS (Bermuda) of
such claim. Copies of notification, claim papers, and proofs shall be furnished
by the Company to the Reinsurer and to PHS (Bermuda) upon request.

     6.2  Determination of Claims by the Company. The Reinsurer and PHS
          --------------------------------------
(Bermuda) will accept the decision of the Company with respect to the payment of
a claim under a HMO or POS Plan; provided, however, that the Company shall
promptly advise the Reinsurer and PHS (Bermuda) of the Company's intention to
contest a claim


                                       21
<PAGE>

under a HMO or POS Plan, and the Reinsurer and PHS (Bermuda) shall have the
right to advise and assist the Company in its determination of liability and in
the best procedure to follow with respect to any such claim of doubtful
validity. The Company, PHS (Bermuda) and the Reinsurer shall share, in
accordance with the applicable percentages set forth in Section 2.1 and Schedule
A, all expenses incurred in connection with contesting, compromising or settling
claims under a HMO or POS Plan, subject to the limitations of Section 3.11. Such
expenses may include, but are not limited to, all costs and expenses of
investigation, settlement of claims, litigation costs and judgments. If,
however, the Reinsurer or PHS (Bermuda), as the case may be, has advised the
Company that a contested claim should be paid, and elects to assume liability
for its applicable percentage (as set forth in Section 2.1 and Schedule A) of
the claim as originally presented, the Reinsurer or PHS (Bermuda), as the case
may be, shall not share in any additional costs or expenses associated with such
claim.



                                  ARTICLE VII

                            ACCOUNTING AND REPORTING
                            ---------- -------------

     7.1  Reinsurance Accounting. The Company shall maintain separate books or
          ----------------------
details of account with respect to the HMO and POS Plans reinsured hereunder,
setting forth the data required in Schedules C, E and F.

     7.2  Ouarterly Accounting Reports. Following the end of each Accounting
          ----------------------------
Period, the Company shall supply the Reinsurer and PHS (Bermuda) with a
Quarterly Accounting Report providing the data required in Schedules C and E.
The Quarterly


                                       22
<PAGE>

Accounting Report shall be submitted within forty-five (45) calendar days of the
end of each calendar quarter.

          7.3  Settlements. Settlement of amounts payable between the Company,
               -----------
the Reinsurer and PHS (Bermuda) shall be made in a reasonably expeditious manner
once the amounts or estimates are known or determined. All settlement payments
shall be made by wire transfer with same or next day availability unless
otherwise agreed.



     (a) Weekly Settlements. Reinsurer shall make reimbursement payments to the
         ------------------
Company for estimated weekly cash claims paid by the Company. Such estimates are
to be mutually determined, and appropriately adjusted from time to time, to
reasonably approximate the timing and amounts of cash claim expenditures made by
the Company and to minimize the quarterly settlement amounts with respect to
claims. Such payments are due weekly based upon a mutually agreed upon schedule.



     (b) Monthly Settlements. Reinsurer shall make reimbursement payments to the
         -------------------
Company monthly for any actual or estimated monthly administrative expenses,
premium taxes, licenses, fees or assessments incurred by the Company. Such
payments are due within 20 Business Days after the end of each month in which
they were incurred. Reinsurer's actual or estimated administrative or commission
expenses incurred are also deemed payable at that time. By mutual agreement,
certain expenses may be added to or deleted from this monthly reimbursement.


                                       23
<PAGE>

     (c) Quarterly Settlements. Based upon the Quarterly Accounting Reports,
         ---------------------
including Schedules C, E and F, settlement payment or payments shall be made to
the Company or Reinsurer, or PHS Bermuda as the case may be, within 45 calendar
days from the end of such quarter. If such reports or schedules are not
finalized within this time frame, reasonable estimated payments shall be made
followed by adjustment payments. The Quarterly Settlement payments shall
represent settlement, net of any interim reimbursements or other related
settlement payments, of all amounts due during that quarter and any mutually
agreed upon adjustments to prior periods. The quarterly calculation of this
payment shall be substantially in the form of Schedule E with any positive
amounts listed on Line 24 of such Schedule being payable from the Reinsurer to
the Company and any negative amounts being payable from the Company to the
Reinsurer. For the purpose of calculating interest on delayed payments relating
to this quarterly settlement payment, the parties agree that the due date is the
15th day (unless such 15th day falls on a day other than a Business Day, in
which case the due date is the Business Day immediately preceding such 15th day)
of the middle month of the settlement quarter unless otherwise mutually agreed.



     (d) Other Settlements. Other settlement payments between the Company and
         -----------------
the Reinsurer such as payment adjustments, preliminary quarterly settlements,
withhold payout reimbursements or interest compensation may be made separately
or along with other settlement payments upon mutual agreement. For the purpose
of calculating


                                       24
<PAGE>

interest on delayed payments relating to these payments, due dates are to be
mutually agreed upon if not otherwise specified in this Agreement.

     7.4  Reconciliation. Each party shall have the right to review all
          --------------
individual components of transactions entered into each Quarterly Accounting
Report, such as Premiums received, Commissions and Insurance Taxes, claims
incurred or paid, and similar items. The parties shall have a reasonable period
from the day the Quarterly Accounting Report is submitted to report any
deficiency in such report and to request an adjustment of any payment made to or
received by any party. Any amount due any party in connection with such
reconciliation shall be paid within forty-five (45) calendar days of the receipt
of notice that additional amounts are due.

     7.5  Best Efforts to Supply Actual Data. In preparing all reports required
          ----------------------------------
in this Agreement, the Reinsurer, PHS (Bermuda) or the Company, as the case may
be, shall make its best efforts to supply the actual data. If the actual data
cannot be supplied with the appropriate report, the Reinsurer, PHS (Bermuda) or
the Company, as the case may be, shall produce best estimates, and shall provide
amended reports based on actual data no more than forty-five (45) days after
such report was originally due.

     7.6  Interest on Delayed Payments. Should any payment in connection with
          ----------------------------
the Quarterly Settlements due the Company, PHS (Bermuda) or the Reinsurer as set
forth in Section 7.3 above be delayed beyond its due date, as defined or
determined, such delayed payment shall accrue interest during such period of
delay at the Interest Compensation Rate as defined on Schedule D. Interest is to
be calculated based upon


                                       25
<PAGE>

an actual/365 day basis. Any such interest accrued or paid shall not be included
in Schedule C as a jointly shared income or expense item, but rather be paid
directly to the deficient party either separately or as a separate item added to
the Schedule E settlement. The application of this calculation shall also apply
to any over payments, with interest accruing back to the deficient party.

     7.7  Interest on Cash Reserves. The Reinsurer shall pay PHS (Bermuda) at
          -------------------------
the Investment Rate as defined in Schedule D for any net cumulative cash reserve
balances held by the Reinsurer for the benefit of PHS (Bermuda) after adjusting
for any settlement payments. Interest will be calculated quarterly based upon an
actual/365 day basis and is due and payable at the time of the Quarterly
Settlement. Any such interest accrued or paid shall not be included in Schedule
C as a jointly shared income or expense item, but will be paid directly to PHS
(Bermuda) either separately or as a separate item added to the Schedule E
settlement. Such interest shall be calculated and reported as set forth in
Schedule G.



                                  ARTICLE VIII

                            DURATION AND TERMINATION
                            ------------------------

     8.1  Duration. Except as otherwise provided herein, this Agreement shall be
          --------
unlimited in duration.

     8.2  Commencement of Liability. The liability of the Reinsurer and PHS
          -------------------------
(Bermuda) on reinsurance ceded hereunder shall commence on the later of the
Effective



                                       26
<PAGE>

Date and the date the liability of the Company commences under a HMO or POS
Plan, as the case may be, reinsured hereunder.

     8.3  Termination of Liability. Except as provided in the next sentence of
          ------------------------
this Section 8.3, the liability of the Reinsurer or PHS (Bermuda) with respect
to any HMO or POS Plan, as the case may be, shall terminate on the date the
liability of the Company on such HMO Plan or POS Plan is terminated. If this
Agreement is terminated, as provided in this Article VIII, the Reinsurer's and
PHS (Bermuda)'s liability with respect to HMO and POS Plans that remain in
force shall terminate on the day that all Direct Paid Claims incurred prior to
the date of such termination are satisfied.

     8.4  Termination of Agreement.  Any party shall have the right to terminate
          ------------------------
this Agreement without cause upon the giving of one hundred eighty (180) days
advance written notice to the other parties; provided, however, that, the
liability of the Reinsurer and PHS (Bermuda) with respect to HMO and POS Plans
that remain in force will terminate on the day that all Direct Paid Claims
incurred prior to the date of such termination are satisfied. The Contract
Termination Date under this Section 8.4 shall be the 180th day following the
giving of the notice required by this Section 8.4.



     8.5  Automatic Termination. If, at the end of an Accounting Period, none of
          ---------------------
the HMO or POS Plans is in force, this Agreement shall automatically terminate.
In the event of termination pursuant to this Section 8.5, the last day of such
Accounting Period shall be the Contract Termination Date.


                                       27
<PAGE>

     8.6  Termination Due to Insufficient Premium. If the total annualized
          ---------------------------------------
premiums for (i) all HMO and POS Plans reinsured hereunder, plus (ii) premiums
for health insurance contracts issued by the Reinsurer in multi-choice
arrangements with HMO or POS Plans do not exceed five million dollars
($5,000,000) on the first anniversary of the implementation of this Agreement,
then any party May, within forty-five (45) days thereafter, elect to terminate
this Agreement. The Termination Date shall be ninety (90) days thereafter. The
implementation of this Agreement shall be construed as the date the HMO and POS
Plans are available for sale under the Marketing and Services Agreement. The
Contractholder of each HMO or POS Plan reinsured hereunder shall, in compliance
with applicable law, be given the choice of terminating its coverage at the
Termination Date or continuing coverage under such Contract until the Renewal
Date applicable thereto next following the Termination Date.

     8.7  Termination Subsequent to a Change of Control. In the event of a
          ---------------------------------------------
Change of Control of the Company (for purposes of this Section 8.7, the term
"Company" shall include PHS), PHS (Bermuda) or the Reinsurer, the party not
undergoing the Change of Control may elect to terminate this Agreement. In the
event that this Agreement is terminated as a result of a Change of Control: (i)
without any further action required of any party, the Marketing and Services
Agreement shall be deemed to be terminated as of the effective date of the
Change of Control except with respect to the provisions regarding the
administration of the HMO and POS Plans continued under this Section 8.7 which
provisions shall be deemed to survive such


                                       28
<PAGE>

termination for the period set forth in clause (ii) of this sentence; and (ii)
the party not undergoing the Change of Control may elect to continue the
reinsurance arrangements provided in this Agreement solely with respect to the
reinsurance of any case that was originally written as an HMO Plan or POS Plan
and that was in force on the Contract Termination Date, until the tenth (10th)
Renewal Date applicable to such HMO or POS Plan, or continuation managed care
contract issued by the Company (collectively, "Continuation Plans,") following
the Contract Termination Date. The Contract Termination Date under this Section
8.7 shall be the effective date of the Change of Control.

     8.8  Termination for Cause. (a) In the event that any party shall default
          ---------------------
in the performance of the duties and obligations imposed on it pursuant to the
terms of this Agreement or the Marketing and Services Agreement, or breach any
of the provisions contained herein or Therein, including the failure to pay any
amount when due, or the failure of any party to maintain a level of services
under the Marketing and Services Agreement that is reasonably satisfactory to
the other parties, the defaulting party shall be allowed thirty (30) calendar
days from receipt of written notice of such default or breach to present to the
non-defaulting parties a plan to cure such default or breach that is reasonably
satisfactory to the non-defaulting parties. If a reasonably satisfactory plan to
cure the default or breach is not submitted within that time, or if the plan is
not carried out according to its terms, each of the non-defaulting parties shall
have the right to terminate this Agreement upon delivery of written notice of
such termination to the defaulting party, which shall be effective on receipt,
without prejudice to any other


                                       29
<PAGE>

rights or remedies available to the non-defaulting parties by reason of such
default or breach.

     (b) In the event that any party shall engage in fraudulent, illegal or
grossly negligent conduct with respect to its duties and obligations under this
Agreement or the Marketing and Services Agreement, each of the other parties
shall have the right to terminate this Agreement upon delivery of written notice
of such termination to the defaulting party, which shall be effective upon
receipt, without prejudice to any other rights or remedies available to the non-
defaulting parties by reason of the defaulting Party's conduct.

     (c) The Contract Termination Date under this Section 8.8 shall be the date
of receipt of the notice of termination.

     8.9  Termination of Agreement Upon the Occurrence of Certain Events. (a)
          --------------------------------------------------------------
Upon the occurrence of either of the following events:

     (i) one of the parties to this Agreement fails to remain in good standing
under the laws of its state of domicile, or fails for any reason to remain
qualified to engage in the transaction contemplated by this Agreement under
applicable laws, ordinances, rules or regulations; or

     (ii) a voluntary or involuntary proceeding is commenced in any state by or
against one of the parties to this Agreement for the purpose of supervising,
conserving, rehabilitating or liquidating such party;

this Agreement may be terminated at the election of either of the other parties
pursuant to a written notice.


                                       30
<PAGE>

     The Contract Termination Date under this Section 8.9 will be the day of
receipt of the notice of termination. In the event that the Company shall be
subject to (i) or (ii) above, the Reinsurer shall have the exclusive right
(subject to appropriate regulatory approvals) to acquire the HMO and POS Plans
or to require the Company to assign the HMO and POS Plans to a designated entity
authorized to operate a health maintenance organization in the geographic areas
in which the Company operates.



     8.10  Termination for Material Change in PHS Network. In the event that
           ----------------------------------------------
the PHS Network (as that term is defined in the Marketing and Services
Agreement) undergoes a material change within the meaning of Section 6.3 of the
Marketing and Services Agreement, Company shall be allowed thirty (30) calendar
days to present to Reinsurer a plan to cure such Material Change that is
reasonably satisfactory to Reinsurer. If a reasonably satisfactory plan to cure
the Material Change is not submitted within that time, or if the plan is not
carried out according to its terms, Reinsurer shall have the right to terminate
this Agreement upon delivery of written notice of such termination to Company,
which shall be effective upon receipt (the date of receipt being the Contract
Termination Date under this Section 8.10), without prejudice to any other rights
or remedies available to Reinsurer.



                                       31
<PAGE>

                                   ARTICLE IX

                     PAYMENTS UPON TERMINATION OF AGREEMENT
                     --------------------------------------

     9.1  Payments on Termination. (a) In the event that this Agreement shall be
          -----------------------
terminated pursuant to Article VIII, a net accounting and settlement as to any
balance due under this Agreement shall be undertaken by the parties to this
Agreement (the "Terminal Accounting and Settlement"), which calculations shall
be performed as of the day that is one (1) year from the date that the liability
of the Reinsurer and PHS (Bermuda) shall have terminated (the "Terminal
Accounting Date"). During the period between the termination of this Agreement
and the Terminal Accounting Date, Direct Paid Claims that accrued prior to the
termination of this Agreement shall continue to be paid, and Reserves shall
continue to be held, in accordance with the terms set forth herein.

     (b)   The Company shall supply the Reinsurer and PHS (Bermuda) with final
Schedules C and D which shall show the Terminal Accounting and Settlement. If
the Terminal Accounting and Settlement shows that the Company owes the
Reinsurer, then the Company shall pay the amount owing to the Reinsurer. If the
Terminal Accounting and Settlement shows that the Reinsurer owes the Company or
PHS (Bermuda), then the Reinsurer shall pay the amount owing the Company or PHS
(Bermuda), as the case may be. If the Terminal Accounting and Settlement shows
that PHS (Bermuda) owes the Reinsurer, then PHS (Bermuda) shall pay the amount
owing the Reinsurer. Such Schedules shall be supplied by the Company within the
period agreed by the parties.



                                       32
<PAGE>

     (c) Any payment required under the Terminal Accounting and Settlement by
the Company shall be paid by the Company no later than the day on which the
final Schedules C, E and F, as required by Section 9.1(b), are due. The
Reinsurer and PHS (Bermuda) shall make any payment required to be made by the
Reinsurer or PHS (Bermuda) hereunder within ten (10) calendar days of receipt of
such final schedules. In the event that the calculation for the payment required
under the Terminal Accounting and Settlement cannot be accurately calculated by
such date, then an estimate shall be paid, with a supplemental accounting being
made when the accurate information shall become available.

     9.2  Supplemental Accounting. In the event that, subsequent to the Terminal
          -----------------------
Accounting and Settlement, an adjustment is made with respect to any amount
taken into account in the Terminal Accounting and Settlement, or in the event
that the Company pays a Direct Paid Claim that accrued prior to the termination
hereof, a supplemental accounting shall be made. Any net amount owed to the
Reinsurer, PHS (Bermuda) or the Company by reason of such supplemental
accounting, plus any interest due pursuant to Section 7.6, shall be paid
promptly upon the completion of such supplemental accounting.

                                   ARTICLE X

                         CALCULATION OF PROFIT AND LOSS
                         ------------------------------

     10.1  Determination and Allocation of Profit or Loss. The Company shall
           ----------------------------------------------
calculate Profit or Loss with respect to the HMO and POS Plans, and the
Reinsurer, PHS (Bermuda) or the Company, as appropriate, shall make settlements
as required by


                                       33
<PAGE>

Section 7.3 or Section 9.1, as appropriate, according to the calculations as
shown on Schedules C and E and shall be made part of each Quarterly Accounting
Report.



                                   ARTICLE XI

                              CONDITION PRECEDENT
                              -------------------

     11.1  Condition Precedent. When, under insurance, public health or other
           -------------------
applicable laws or regulations, approval of arrangements of the type
contemplated by this Agreement by one or more Federal, state or local
governmental or regulatory authorities is required, the receipt by the Company,
PHS (Bermuda) and the Reinsurer of any and all such approvals shall be a
condition precedent to the other party's liability under this Agreement. Subject
to Section 11.2, if this condition precedent is not met by the Company, PHS
(Bermuda) or the Reinsurer by the Effective Date, this Agreement shall be void
as of the Effective Date.

     11.2  Extension of Time. In the event that the necessary approvals set
           ------------ ----
forth in Section 11.1 have not been obtained by the Company, PHS (Bermuda) or
the Reinsurer as of the Effective Date, the parties may mutually agree to modify
the Effective Date of this Agreement.

     11.3  Cooperation of the Parties. Each of the Reinsurer, PHS (Bermuda) and
           --------------------------
the Company shall each use its best efforts to cooperate with and assist the
other parties in obtaining the necessary approvals referred to in Section 11.1.

     11.4  Guarantee of PHS (Bermuda). As a further condition precedent to the
           --------------------------
obligation of the Reinsurer to retrocede the Out-of-Network portion of the POS
Plans.


                                       34
<PAGE>

on or before the Effective Date hereof PHS (Bermuda) shall deliver to the
Reinsurer an agreement by PHS to guarantee the solvency of PHS (Bermuda). Such
agreement shall be in the form attached hereto as Exhibit A, and shall be
effective for as long as the Reinsurer seeks performance by PHS (Bermuda) under
this Agreement. Any termination or substantial amendment of PHS' agreement to
guarantee the obligations of PHS (Bermuda) shall be cause for termination by the
Reinsurer under Section 8.8 above.



                                       35
<PAGE>

                                  ARTICLE XII

                           INSOLVENCY OF THE COMPANY
                           -------------------------

     12.1  Pavments by the Reinsurer or PHS (Bermuda). (a) In the event of the
           ------------------------------------------
insolvency of the Company, payments due the Company on all reinsurance made,
ceded, renewed or otherwise becoming effective under this Agreement shall,
subject to Section 12.2, be payable by the Reinsurer directly to the Company or
to its liquidator, receiver, or statutory successor on the basis of the
liability of the Company and the Reinsurer under the HMO Plans and the In-
Network Portion of the POS Plans reinsured hereunder without diminution because
of the insolvency of the Company.

     (b) In the event of the insolvency of the Reinsurer, payments due the
Reinsurer on all reinsurance made, ceded, renewed or otherwise becoming
effective under this Agreement shall, subject to Section 12.2, be payable by PHS
(Bermuda) directly to the Reinsurer or to its liquidator, receiver, or statutory
successor on the basis of the liability of the Reinsurer and PHS Bermuda under
the Out-of-Network Portion of the POS Plans reinsured hereunder without
diminution because of the insolvency of the Reinsurer.

     12.2  Claims (a) In the event of the insolvency of the Company, the
           ------
Reinsurer shall be given written notice of the pendency of a claim against the
insolvent Company on a HMO or the In-Network portion of a POS Plan reinsured
hereunder within a reasonable time after such claim is filed in the insolvency
proceeding. During the pendency of such claim, the Reinsurer may investigate
such claim and interpose, at its own expense, in the proceeding where such claim
is to be adjudicated, any defense


                                       36
<PAGE>

or defenses which it may deem available to the Company or its liquidator or
receiver or statutory successor. The expense thus incurred by the Reinsurer
shall be chargeable, subject to court approval, against the insolvent Company as
part of the expense of liquidation to the extent of a proportionate share of the
benefit which may accrue to the Company solely as a result of the defense
undertaken by the Reinsurer. Where two or more assuming reinsurers are involved
in the same claim and a majority in interest elect to interpose defenses to such
claim, the expense shall be apportioned in accordance with the terms of this
Agreement as though such expense had been incurred by the Company.

     (b) In the event of the insolvency of the Company, the Reinsurer and PHS
(Bermuda) shall be given written notice of the pendency of a claim against the
insolvent Company on the Out-of-Network portion of a POS Plan reinsured
hereunder within a reasonable time after such claim is filed in the insolvency
proceeding. During the pendency of such claim, the Reinsurer or PHS (Bermuda),
as the case may be, may investigate such claim and interpose, at its own
expense, in the proceeding where such claim is to be adjudicated, any defense or
defenses which it may deem available to the Company or its liquidator or
receiver or statutory successor. The expense thus incurred by the Reinsurer or
PHS Bermuda), as the case may be, shall be chargeable, subject to court
approval, against the insolvent Company as part of the expense of liquidation to
the extent of a proportionate share of the benefit which may accrue to the
Company solely as a result of the defense undertaken by the Reinsurer or PHS
(Bermuda), as the case may be. Where two or more assuming reinsurers are
involved in the same claim

                                      37
<PAGE>

and a majority in interest elect to interpose defenses to such claim, the
expense shall be apportioned in accordance with the terms of this Agreement as
though such expense had been incurred by the Company.



                                  ARTICLE XIII

                                  ARBITRATION
                                  -----------

     13.1  Appointment of Arbitrators. In the event of any disputes or
           -------------- -----------
differences arising hereafter between the contracting parties with respect to
any transaction, matter or issue arising from or relating in any way to this
Agreement on which agreement between the parties hereto cannot be reached, the
same shall be decided by arbitration. Three arbitrators will decide any dispute
or difference. The arbitrators must be disinterested officers or retired
officers of health maintenance organizations or managed health care companies,
or insurance companies with experience in managed health care, other than the
parties to this Agreement or their Affiliates. Each of the Company and the
Reinsurer agrees to appoint one of the arbitrators with the third, the "Umpire,"
to be chosen by the other arbitrators. In the event that either such party
should fail to choose an arbitrator within 30 days following a written request
by the other party to do so, the requesting party may choose an Umpire before
entering upon arbitration. In the event that the two arbitrators shall not be
able to agree on the choice of the Umpire within 30 days following their
appointment, each arbitrator shall nominate five candidates within 10 days
thereafter, four of whom the other arbitrator shall decline,



                                       38
<PAGE>

and the Umpire shall be chosen from the two remaining nominees by the President
of the American Arbitration Association.

     13.2  Decision of Arbitrators: Expenses. The arbitrators shall consider
           ---------------------------------
customary and standard practices in the HMO and managed health care insurance
businesses. They shall decide by a majority vote of the arbitrators. There shall
be no appeal from their written decision. Judgment may be entered on the
decision. Each party shall bear the expense of its own arbitrator and outside
attorney fees, and shall jointly and equally bear with the other party the
expenses of the third arbitrator.

     13.3  Applicable Law; Survival. Any arbitration instituted pursuant to this
           ------------------------
Article XIII shall be held in New Jersey and the laws of the State of New Jersey
and, to the extent applicable, the Federal Arbitration Act shall apply. This
Article XIII shall survive termination of this Agreement.

     13.4  Other Actions. Submission of a matter to arbitration shall be a
           -------------
condition precedent to any right to institute a proceeding at law or in equity
concerning such matter, except for injunctive or other provisional relief
pending the arbitration of a matter subject to arbitration pursuant to this
Agreement.



                                  ARTICLE XIV

                         REPRESENTATIONS AND WARRANTIES
                         ------------------- ----------

     14.1  Representations and Warranties of the Reinsurer. The Reinsurer hereby
           -----------------------------------------------
represents and warrants to the Company and PHS (Bermuda) as follows:



                                       39
<PAGE>

     The Reinsurer is a mutual life insurance company organized and existing
under the laws, including the insurance laws, of the State of New York and is in
good standing under these laws. The Reinsurer further represents and warrants
that it is duly licensed and admitted as an insurer under the laws of those
jurisdictions in which the HMO and POS Plans reinsured hereunder have been
issued and is authorized under the laws and regulations of said jurisdictions to
act as a reinsurer in those jurisdictions. In addition, the Reinsurer covenants
that, so long as this Agreement is in effect, the Reinsurer shall take all
actions reasonably necessary to remain duly licensed under the laws of those
jurisdictions wherein the HMO and POS Plans have been issued. The Reinsurer
shall notify the Company and PHS (Bermuda) immediately in the event that any
license shall be revoked or suspended in any jurisdiction hereunder.

     The Reinsurer has full corporate power and authority to execute and deliver
this Agreement and the other agreements and documents contemplated hereby and to
carry out all of its obligations hereunder.

     The execution and delivery by the Reinsurer of this Agreement and the other
agreements and documents contemplated hereby, the consummation by the Reinsurer
of the transactions as herein contemplated and the carrying out by the Reinsurer
of its obligations contemplated hereby have been duly and validly authorized by
all necessary corporate action.

     14.2  Renresentations and Warranties of PHS (Bermuda). PHS (Bermuda) hereby
           -----------------------------------------------
represents and warrants to the Company and the Reinsurer as follows:



                                       40
<PAGE>

     PHS (Bermuda) is a corporation organized and existing under the laws,
including the insurance laws, of Bermuda and is in good standing under these
laws. PHS (Bermuda) covenants that, so long as this Agreement is in effect, that
it shall take all reasonable actions necessary to remain duly licensed within
the purview of this Agreement under the insurance laws of Bermuda. PHS (Bermuda)
shall notify the Company and the Reinsurer immediately in the event that its
license shall be revoked or suspended in any jurisdiction hereunder.

     PHS (Bermuda) has full corporate power and authority to execute and deliver
this Agreement and the other agreements and documents contemplated hereby and to
carry out all of its obligations hereunder.

     The execution and delivery by PHS (Bermuda) of this Agreement and the other
agreements and documents contemplated hereby, the consummation by PHS (Bermuda)
of the transactions as herein contemplated and the carrying out by PHS (Bermuda)
of its obligations contemplated hereby have been duly and validly authorized by
all necessary corporate action.



     14.3  Representations and Warranties of the Company. The Company hereby
           ---------------------------------------------
represents and warrants to the Reinsurer and PHS (Bermuda) as follows:

     The Company is a corporation organized and existing under the laws,
including the insurance and/or public health laws, of the State of New Jersey
and is in good standing under these laws. The Company further represents and
warrants that it is duly licensed as a health maintenance organization under the
laws of those jurisdictions

                                      41
<PAGE>

wherein the HMO and POS Plans have been issued. In addition, the Company
covenants that, so long as this Agreement is in effect, the Company shall take
all reasonable actions necessary to remain duly licensed as a health maintenance
organization within the purview of this Agreement under the laws of those
jurisdictions wherein the HMO and POS Plans have been issued. The Company shall
notify the Reinsurer and PHS (Bermuda) immediately in the event that any license
shall be revoked or suspended in any jurisdiction hereunder.

     The Company has full corporate power and authority to execute and deliver
this Agreement and the other agreements and documents contemplated hereby and to
carry out all of its obligations hereunder.

     The execution and delivery by the Company of this Agreement and the other
agreements and documents contemplated hereby, the consummation by the Company of
the transactions as herein contemplated and the carrying out by the Company of
its obligations contemplated hereby have been duly and validly authorized by all
necessary corporate action.



                                   ARTICLE XV

                                CONFIDENTIALITY
                                ---------------

     15.1  Obligations of the Parties. Each party agrees that all information
           -------------- -----------
concerning the business affairs of the Company, PHS (Bermuda) or the Reinsurer,
as the case may be, which is not generally available to the public, including
but not limited to, lists of physicians and other health care providers, lists
of brokers and other


                                       42
<PAGE>

information of a proprietary nature relating to methods of doing business
heretofore or hereinafter received by it from the other parties shall be kept
and maintained as confidential and in complete Secrecy. No party shall, without
the prior written consent of the other parties, disclose at any time, either
orally, or in writing, or otherwise, in any manner, directly or indirectly, to
any person or entity, except to other employees or agents of the non-disclosing
party, any such proprietary information. Any breach of confidentiality shall
give the non-breaching party the right of injunctive relief in addition to any
other remedy permitted by law.

     15.2  Survival of Article XV. This Article XV shall survive termination of
           ----------------------
this Agreement.



                                  ARTICLE XVI

                            MISCELLANEOUS PROVISIONS
                            ------------------------

     16.1  Notices. All notices required pursuant to this Agreement shall be in
           -------
writing and shall become effective when received. Each written notice shall be
sent by certified or registered mail, return receipt requested, or a nationally
recognized overnight delivery service providing for delivery receipt) or
delivered by hand. All notices under this Agreement shall be addressed as
follows:

If to the Reinsurer:

          The Guardian Life Insurance Company of America
          201 Park Avenue South
          New York, New York 10003
          ATTENTION:  Edward K. Kane, Esq.
          Senior Vice President & General Counsel


                                       43
<PAGE>

If to the Company:

          Physicians Health Services of New Jersey, Inc.
          Mach Center 4
          South 61
          Paramus Road
          Paramus, New Jersey 07652
          ATTENTION:
          Executive Director

If to PHS (Bermuda):

          Physicians Health Services (Bermuda) Ltd.
          120 Hawley Lane
          Trumbull, Connecticut 06611
          ATTENTION:  Regina M. Campbell
          Senior Vice President & Chief Administrative Officer

If to PHS:

          Physicians Health Services, Inc.
          120 Hawley Lane
          Trumbull, Connecticut 06611
          ATTENTION:  Regina M. Campbell
          Senior Vice President & Chief Administrative Officer


     16.2  Successors and Assigns. Except as provided in Section 3.17(b) this
           ----------------------
Agreement cannot be assigned by the Company, PHS (Bermuda) or the Reinsurer
without the prior written approval of the other parties. The provisions of this
Agreement shall be binding upon and inure to the benefit of and be enforceable
by the parties hereto and their respective permitted successors and assigns.

     16.3  Counterparts. This Agreement may be executed simultaneously in any
           ------------
number of counterparts, each of which will be deemed an original, but all of
which will constitute one and the same agreement.



                                       44
<PAGE>

     16.4  Currency. All payments and accounts shall be made in United States
           --------
Dollars, and all fractional amounts shall be rounded to the nearest whole
dollar.

     16.5  Amendment. This Agreement shall be amended only by written agreement
           ---------
signed by a duly authorized officer of each of the Company, PHS (Bermuda) and
the Reinsurer, and any change to this Agreement shall be null and void unless
made by such amendment; provided, however, that where, under insurance, public
health or other applicable laws or regulations, the approval of any such
amendment to this Agreement by one or more Federal, state or local governmental
or regulatory authorities is required, the amendment shall not take effect
unless and until all such necessary approvals have been received by the Company.
In the event that such an approval is required, the Company, PHS (Bermuda) and
the Reinsurer shall each be obligated to take all necessary actions in order to
obtain such approval.

     16.6  Entire Agreement. This Agreement and the Schedules and Exhibits
           ----------------
attached hereto, together with the Marketing and Services Agreement, supersede
all prior discussions and written and oral agreements between the parties with
respect to the subject matter of this Agreement, and contain the sole and entire
agreement between the parties hereto with respect to the subject matter hereof.
Headings are not part of this Agreement, and shall not affect the terms hereof.

     16.7  Binding Effect. This Agreement is binding upon and will inure to the
           --------------
benefit of the parties and their respective successors and permitted assigns.



                                       45
<PAGE>

     16.8  Governing Law. This Agreement shall be governed by and construed in
           -------------
accordance with the laws of the State of New Jersey, without giving effect to
its provisions relating to conflicts of law.

     16.9  Severability. In the event any section or provision of this Agreement
           ------------
or related documents is found to be void and unenforceable by a court of
competent jurisdiction, the remaining sections and provisions of this Agreement
or related documents shall nevertheless be binding upon the parties with the
same force and effect as though the void or unenforceable part had not been
severed or deleted.

     16.10 Waivers and Remedies. The waiver by any of the parties of any other
           --------------------
party's prompt and complete performance, or breach or violation, of any
provisions of this Agreement and related documents shall not operate nor be
construed as a waiver of any subsequent breach or violation, and the waiver by
any of the parties to exercise any right or remedy which it may possess
hereunder shall not operate nor be construed as a bar to the exercise of such
right or remedy by such party upon the occurrence of any subsequent breach or
violation.

     16.11 Regulatory Review. The parties acknowledge and agree that this
           -----------------
Agreement is subject to the review and approval of the New Jersey and New York
State Departments of Insurance. The parties expressly agree that any revisions
to this Agreement required by the New Jersey or New York State Departments of
Insurance will be addressed in an amendment to, or restatement of, the
Agreement.



                                       46
<PAGE>

                                   EXECUTION
                                   ---------

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



                              PHYSICIANS HEALTH SERVICES
                               OF NEW JERSEY

                              By   /s/ Regina M. Campbell
                                -------------------------------
                                Name   REGINA M. CAMPBELL
                                Title  Senior Vice President



                              PHYSICIANS HEALTH SERVICES
                               (BERMUDA) LTD.

                              By   /s/ Regina M. Campbell
                                -------------------------------
                                Name   REGINA M. CAMPBELL
                                Title



                              THE GUARDIAN LIFE INSURANCE
                               COMPANY OF AMERICA

                              By   /s/ Joseph D. Sargent
                                -------------------------------
                                Name   JOSEPH D. SARGENT
                                Title  Vice President and CEO


                                       47
<PAGE>

                                  SCHEDULE A
                                  ----------

                         CONTRACTS AND RISKS REINSURED
                         -----------------------------


<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------
                CONTRACT                                                RISKS REINSURED
------------------------------------------------------------------------------------------------------------
<S>                                                     <C>

- HMO Contracts and In-Network Portion of POS           - The Reinsurer agrees to accept 50% of the risks
Contracts                                               under such Contracts
------------------------------------------------------------------------------------------------------------

- Out of Network Portion of POS Contracts               - The Reinsurer agrees to accept 100% of the
                                                        risks under such Contracts and to re-trocede 50%
                                                        of such risks to PHS (Bermuda)

                                                        - PHS (Bermuda) agrees to accept 50% of the
                                                        risks under such Contracts
------------------------------------------------------------------------------------------------------------
</TABLE>

                                      A-1
<PAGE>

                                      NJ
                                  Schedule B
                Contract Allowances Administrative Service Fee
                ----------------------------------------------


I.  Guardian's Adminstrative Services Fee (as a percentage of premium)
----------------------------------------------------------------------

                                        HMO      POS
                                        ---      ---
Marketing                               0.63%    0.63%
Sales                                   1.38%    1.38%
Administration                          1.30%    1.30%
Billing/Collections                     1.69%    1.69%
Advertising                             0.15%    0.15%
             Total                      5.15%    5.15%



II. PHS' Adminstrative Services Fee (as a percentage of premium)
----------------------------------------------------------------


                                        HMO      POS
                                        ---      ---

Health Services, UR                     1.67%  1.67%
Net Mgt, MDD, QA                        2.43%  2.43%
Operations                              3.58%  3.58%
Acct Svc., Cust Srv.                    1.44%  1.44%
Marketing                               0.63%  0.63%
Sales                                   0.15%  0.15%
Administration                          1.30%  1.30%
Advertising                             0.15%  0.15%
        Total                          11.35% 11.35%
<PAGE>

<TABLE>
<CAPTION>
                                 Schedule C
                           Year To Date Accounting
                               Quarter Ending:
                                                                        NJ         NJ

                                                                        HMO
                                                                      & POS-IN  POS-OUT
<S>                                                                   <C>       <C>
1.      Profits/Losses From Underwriting
A.      Earned Premium
        --------------
          1  Cash Received
          2  Change in D/U
          3  Change in UPR
          4  Change in Advance Premium
          5  Gross Earned Premium (A1+A2+A3+A4)
          6  CSEHRP & Other Reins. Pool Premium Ceded
          7  Net Earned Premium (A5+A6)
B.      Incurred Claims
        ---------------
          1  Cash Claims (including Capitations) Paid
          2  Cash Withholds + PCP Bonuses Paid
          3  Cash Rein. Pl., COB, Subrog. Recov.
          4  Nurses Line Expenses
          5  Total Cash Claims (B1+B2+B3+B4)
          6  Change in IBNR
          7  Change in Withholds + PCP Bonuses Payable
          8  Change in Rein. Pl., COB, Subrog. Recov.
          9  Total Change in Reserves (B6+B7+B8)
         10  Total Incurred Claims (B5+B9)
C.      Expenses
        --------
          1  Commissions
             a. Cash
             b. Change in Liability
             c. Total Incurred (C1a+C1b)
          2  PX Taxes, Licenses & Fees (if applicable)
             a. Cash
             b. Change in Liability
             c. Total Incurred (C2a+C2b)
          3  Assessments (if applicable)
             a. Cash
             b. Change in Liability
             c. Total Incurred (C3a+C3b)
          4  Field Expenses
             a. Cash
             b. Change in Liability
             c. Total Incurred (C4a+C4b)
          5  Guardian Admin. Exp.
          6  PHS Admin. Exp.
          7  Total Incurred Expenses (C1c+C2c+C3c+C4c+C5+C6)

II.     Profit (Loss) (A7-B10-C7)
D.           Guardian Profit (50%)
E.           PHS Profit (50%)
</TABLE>

<PAGE>

                                  SCHEDULE D
                                  ----------

                                INTEREST RATES
                                --------------


The Interest Compensation Rate applicable for any given fiscal quarter is
    --------------------------
defined as the annual rate of interest equal to the closing yield on 3-month
LIBOR as of the last trading day of the prior fiscal quarter plus 1.00%. Such
rate shall remain in effect for that entire quarter regardless of any interim
fluctuations or changes in 3-month LIBOR yields.

The Investment Rate applicable for any given fiscal quarter is defined as the
annual rate of interest equal to the closing yield on the then current 2-year
Treasury Note as of the last trading day of the prior fiscal quarter plus 1.00%.
Such rate shall remain in effect for that entire quarter regardless of any
interim fluctuations or changes in 2-year Treasury Note yields.

The above interest rates may be changed or modified as appropriate upon mutual
agreement between the Company, Reinsurer and PHS (Bermuda).
<PAGE>

<TABLE>
<CAPTION>
                                 Schedule E                             NJ         NJ
                     Cash Flow and Funds Reconciliation                 HMO
                               Quarter Ending:                        & POS-IN  POS-OUT

                (All numbers reflect year to date totals.)
<S>                                                                   <C>       <C>
Underwriting Cash Flows
        1  Cash Premiums Received (Sched C: A1)

        2  Reins. Pool Premiums Ceded (Sched C: A6)
        3  Cash Claims (Total) (Sched C: B4)
        4  Commissions Incurred (Sched C: C1c)
        5  Premium Tx, Licenses, Fees Incurred (Sched C: C2c)
        6  HRA Assessment Incurred (Sched C: C3c)
        7  Field Expenses (Sched C: C4c)
        8  Guardian Admin. Expenses (Sched C: C5)
        9  PHS Admin. Expenses (Sched C: C6)
       10      Total Cash Out (2+3+4+5+6+7+8+9)

       11      Net Cash Generated for Period (1-10)

Distribution of Cash Flows
     For HMO POS In:
       12  Cash Flow to PHS (1-4-7-8-50% of 11)
       13  Cash Flow to Guardian (4+7+8+50% of 11)
     For POS Out:
       12  Cash Flow to PHS (3+9+Sched C: E)
       13  Cash Flow to Guardian (1-3-9-Sched C: E)

       14  Marketing Expenses Reimbursable from Guardian
       15  Marketing Expenses Reimbursable from PHS
       16  Interst on Delayed Payments Owed from Guardian
       17  Interest on Delayed Payments Owed from PHS
       18  Interest on Cash Reserves held Owed from Guardian
       19  Interest on Cash Reserves held Owed from PHS
       20  Other amounts Owed from Guardian
       21  Other amounts Owed from PHS

       22  Gross Amount Due to PHS (12+14+15+16+17+18+-19+20-21)
       23  Less Related YTD Payments Made

       24  Net Amount Due to (from) PHS (22-23)
</TABLE>
<PAGE>

                                  SCHEDULE F

                 CALCULATION OF INTEREST ON CASH RESERVES HELD
                 ---------------------------------------------

A.      Beginning of the calendar quarter's cash reserve balance
        held for the benefit of the Reinsurer*                          $
                                                                         ----
        Plus 50% of the net cash generated for the quarter (from
        Schedule E Line 11**)                                           $
                                                                         ----
        Minus Reinsurer's Quarterly Profit (Loss) (from Schedule C
        Line E**)                                                       $
                                                                         ----
B.      Equals End of Quarter's cash reserve balance held for the
        benefit of the Reinsurer                                        $
                                                                         ====
C.      Interest on Cash Reserve = ((A + B)/2) x (Investment Rate
        from Schedule E) x (Number of days in the quarter/365)          $
                                                                         ====


*       The Beginning of the calendar quarter's cash reserve balance is defined
        as the prior quarter's cash reserve balance (prior quarter's Schedule F
        line B).

**      Schedules C and E are annual exhibits; however, the above calculation
        will use quarterly values. The quarterly values are defined as the
        current quarter's year to date values less the current year's prior
        quarter year to date values, if applicable.