October 4, 1996
Swiss Reinsurance America Corporation
237 Park Avenue
New York, NY 10017

     Re: Certain Reinsurance Arrangements


Gentlemen:

        As of the date of this Agreement, Swiss Reinsurance America Corporation
("Swiss Re") is purchasing $5,000,000 of Series A Cumulative Voting Preferred
Stock and Class A Warrants of Home State Holdings, Inc. (the "Company")
pursuant to that certain Securities Purchase Agreement of even date herewith
(the "Purchase Agreement") by and among Swiss Re, Reliance Insurance Company and
the Company. In connection with such purchase, the parties desire to enter into
and deliver this Agreement.

        Each of the Company and Swiss Re, intending to be legally bound, hereby
agrees as follows (capitalized terms used herein and not otherwise defined shall
have the meanings ascribed to them in the Purchase Agreement):

          1. Undertaking to Renew Reinsurance Agreements. Appended hereto as
     Exhibit A are copies of the Reinsurance Binders (collectively, the
     "Reinsurance Binder") being entered into on the date hereof by Swiss Re,
     the Company and the various Insurance Subsidiaries named therein reflecting
     Swiss Re's agreement to reinsure certain classes of property and casualty
     insurance business underwritten by various of the Insurance Subsidiaries,
     such reinsurance representing not less than 50% of the Company's aggregate
     ceded property and casualty excess of loss reinsurance programs. The
     Company acknowledges and agrees that, pursuant to the Reinsurance Binder,
     Swiss Re is and shall be the lead reinsurer (having set the terms and
     conditions, and written the language, of the reinsurance treaties evidenced
     by the Reinsurance Binder) on the Company's property and casualty excess of
     loss reinsurance programs, and at no time that Swiss Re holds any of the
     Preferred Stock or the Warrants shall the Company (subject to agreement of
     the renewal terms of the reinsurance coverage as hereinbelow contemplated)
     negotiate or seek to negotiate with any other reinsurer to provide
     reinsurance coverage in an amount (or, if greater, a percentage) in excess
     of that being provided by Swiss Re with respect to the Company's ceded
     property and casualty excess of loss reinsurance programs as more fully
     described in the Reinsurance Binder.

<PAGE>

          Effective for the calendar year commencing January 1, 1998 and for
     each year subsequent thereto (each a "Coverage Year"), for so long as Swiss
     Re owns any of the Preferred Stock or the Warrants: (i) the Company will
     cause the Insurance Subsidiaries to, and the Insurance Subsidiaries will,
     annually renew those reinsurance agreements entered into pursuant to the
     Reinsurance Binder hereinbefore referenced, with the renewal terms of such
     reinsurance agreements (A) computed on the same or similar basis as those
     underlying the 1997 reinsurance agreements, varying with loss ratio,
     expenses and otherwise constituting for and reasonable terms (provided,
     however, in assessing whether the renewal terms are "reasonable", multiple
     factors, including without limitation the credit rating of Swiss Re and
     Swiss Re's claims paying ability as historically demonstrated, shall be
     taken into account) and (B) allowing for adjustments in limits and
     retention levels and otherwise to take into consideration business and
     financial developments or plans of the Company and changing market
     conditions, and (ii) Swiss Re shall retain, in each and every Coverage Year
     subsequent to 1997, its position (subject to renewal of the reinsurance
     agreements as herein contemplated) as the reinsurer which sets the terms
     and conditions, and writes the language, of the reinsurance treaties with
     respect to the Company's ceded property and casualty excess of loss
     reinsurance programs as described in the Reinsurance Binder. In furtherance
     of the foregoing, each of Swiss Re, the Company and each of the Insurance
     Subsidiaries agrees to negotiate in good faith, from year to year, terms of
     renewal of the reinsurance agreements entered into pursuant to the
     Reinsurance Binder.

          2. Redemption of Preferred Stock: Appointment of Actuary.
     Notwithstanding the foregoing, in the event the Insurance Subsidiaries are
     unable, or fail, to agree with Swiss Re by November 15, 1997 and by
     November 15 of each calendar year thereafter on the terms and conditions of
     renewal of the reinsurance agreements applicable to the next succeeding
     Coverage Year, Swiss Re, at its option, shall have the right to:

               (a) require the Company to redeem all of the shares of the
          Preferred Stock held by Swiss Re at a redemption price per share equal
          to 102.5% of the Preferred Liquidation Value (as defined in the
          Certificate of Designations of the Company filed with the Secretary of
          State of Delaware on the date hereof), plus accrued and unpaid
          dividends thereon, if any, whether or not earned or declared, and
          otherwise exercise the rights available to a holder of the Preferred
          Stock upon the occurrence of a Redemption Event (as defined in the
          Certificate of Designations), or

               (b) refer the matter to a nationally recognized actuarial firm
          mutually acceptable to Swiss Re, the Company and the Insurance
          Subsidiaries (the "Actuary"), which Actuary shall determine, prior to
          January 1 of the applicable

<PAGE>


          forthcoming Coverage Year, the terms and conditions for Swiss Re's
          reinsurance coverage of the Insurance Subsidiaries' insured risks for
          that forthcoming Coverage Year, based on information and proposals
          submitted to the Actuary by the Insurance Subsidiaries and by Swiss
          Re.

               (i) In the event Swiss Re, the Company and the Insurance
          Subsidiaries are unable to agree by the November 20 prior to the next
          succeeding Coverage Year on the identity of the Actuary, the Actuary
          shall be Allan M. Kaufman of Milliman & Robertson or, if Mr. Kaufman
          shall at such time not be a partner of Milliman & Robertson, then such
          other partner as may be designated by the managing partner of Milliman
          & Robertson's New York office.

               (ii) In making the determination of terms and conditions for
          Swiss Re's reinsurance renewal coverage for the Insurance Subsidiaries
          (the "Actuarial Determination"), the Actuary shall apply a computation
          utilizing the same, or as substantially similar to the same as
          possible, basis underlying the 1997 reinsurance agreements, such basis
          varying with loss ratio, expenses and otherwise containing fair and
          reasonable terms for the reinsurance proposed for cession to Swiss Re
          by the Insurance Subsidiaries, based upon proposals of the Insurance
          Subsidiaries and Swiss Re. The costs for the Actuarial Determination
          shall be paid equally by the Company and the Insurance Subsidiaries on
          the one hand and by Swiss Re on the other hand.

               (iii) In the event Swiss Re, in its sole discretion, is not
          satisfied with the terms and conditions proposed by the Actuary as set
          forth in the Actuarial Determination, Swiss Re shall have the right to
          reject the selected terms and conditions for Swiss Re's reinsurance
          coverage for the Insurance Subsidiaries for that forthcoming Coverage
          Year, and not assume the reinsurance coverage for the Insurance
          Subsidiaries that would have been ceded by the Insurance Subsidiaries
          pursuant to the selected terms and conditions for that reinsurance
          coverage provided by the Acturial Determination. Under such
          circumstances, Swiss Re also may elect to (but need not) exercise its
          option to require the Company to redeem all of the shares of the
          Preferred Stock held by Swiss Re as set forth in this Section 2.


<PAGE>

               (iv) If Swiss Re elects to accept the terms and conditions for
          Swiss Re's reinsurance coverage for the Insurance Subsidiaries for the
          forthcoming Coverage Year as proposed by the Actuary in the Actuarial
          Determination, the Actuarial Determination of the Actuary shall be
          final and binding on both the Insurance Subsidiaries on the one hand
          and Swiss Re on the other hand.



          3. Assignment. This Agreement shall be binding upon and inure to the
     benefit of Swiss Re, the Company and the Insurance Subsidiaries and their
     respective successors and assigns; provided, however, Swiss Re may assign
     this Agreement to any affiliate of Swiss Re.


          4. Entire Agreement. This Agreement supersedes any and all prior
     agreements, whether written or oral, among Swiss Re, the Company and the
     Insurance Subsidiaries with respect to the subject matter hereof, and this
     Agreement, along with the Purchase Agreement and all exhibits, schedules
     and agreements contemplated therein, constitute the full and complete
     agreement among the parties with respect thereto. No amendment to this
     Agreement shall be effective unless set forth in a writing executed by all
     parties to this Agreement.

          5. Governing Law. This Agreement shall be governed by and construed in
     accordance with the substantive laws of the State of New York, without
     regard to the conflicts of laws provisions thereof.

          6. No Waiver. The failure of Swiss Re, the Company or the Insurance
     Subsidiaries to insist on strict compliance with the provisions of this
     Agreement or to exercise any right or remedy shall not constitute a waiver
     of any rights contained herein nor estop the parties from demanding full
     and complete compliance herewith nor prevent the parties from exercising a
     remedy in the future.

          7. Counterparts. This Agreement may be executed in any number of
     counterparts, each of which shall be deemed an original but all of which
     together shall constitute one instrument.

<PAGE>

        To acknowledge your agreement to the foregoing, please execute this
Agreement in the space provided below, whereupon it shall constitute a binding
agreement among the parties hereto.

                                        Very truly yours,

                                        HOME STATE HOLDINGS, INC.
                                        (a Delaware corporation)

                                        By: /s/ Mark Vaughn
                                            -------------------
                                            Name: Mark Vaughn
                                            Title: Acting President

                                        HOME STATE INSURANCE COMPANY
                                        (A New Jersey corporation)

                                        By: /s/ Mark Vaughn
                                            -------------------
                                            Name: Mark Vaughn
                                            Title: Chief Executive Officer


                                        NEW YORK MERCHANT BAKERS
                                         INSURANCE COMPANY
                                        (A New York corporation)

                                        By: /s/ Mark Vaughn
                                            -------------------
                                             Name: Mark Vaughn
                                             Title: Chief Executive  Officer


                                        PINNACLE INSURANCE COMPANY
                                        (A Georgia corporation)

                                        By: /s/ Mark Vaughn
                                            -------------------
                                            Name: Mark Vaughn
                                            Title: Chief Executive Officer

<PAGE>


                                        QUAKER CITY INSURANCE COMPANY
                                        (A Pennsylvania corporation)

                                        By: /s/ Mark Vaughn
                                            -------------------
                                            Name: Mark Vaughn
                                            Title: Chief Executive Officer


                                        WESTBROOK INSURANCE COMPANY
                                        (A Connecticut corporation)

                                        BY: /s/ Mark Vaughn
                                            -------------------
                                            Name: Mark Vaughn
                                            Title: Chief Executive Officer

ACCEPTED AND AGREED TO:

SWISS REINSURANCE AMERICA
 CORPORATION

BY: /s/ Thomas L. Forsyth
    -----------------------------
    Name: Thomas L. Forsyth
    Title: Senior Vice President and
           General Counsel