<PAGE>

                                                                   EXHIBIT 10.40

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                 ASSUMPTION AND INDEMNITY REINSURANCE AGREEMENT

                                  BY AND AMONG

                      UNITED STATES FIRE INSURANCE COMPANY

                                 (THE "COMPANY")

                                       AND

                         INTERNATIONAL INSURANCE COMPANY
                 CRUM & FORSTER INSURANCE COMPANY (BERMUDA) LTD.
                          INDUSTRIAL INDEMNITY COMPANY
                       WESTCHESTER FIRE INSURANCE COMPANY
                           MT. AIRY INSURANCE COMPANY

                          (THE "ASSUMING REINSURER(S)")

                           DATED AS OF JANUARY 1, 1993

================================================================================




<PAGE>


                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                               PAGE
                                                                                                               ----
<S>                   <C>                                                                                        <C>
Article I             Definitions.................................................................................1

Article II            Business Reinsured..........................................................................2

Article III           Assignment of Third Party Reinsurance Agreements............................................4

Article IV            Assignment of Structured Settlements........................................................5

Article V             Option Letters; Assumption Certificates; Endorsements to Reinsurance Agreements Where
                      the Company Is the Assuming Reinsurer.......................................................5

Article VI            Territory...................................................................................6

Article VII           Policy Administration.......................................................................7

Article VIII          Indemnification.............................................................................7

Article IX            Premiums....................................................................................8

Article X             Records and Accounting......................................................................8

Article XI            Transfer of Assets..........................................................................9

Article XII           Covenants...................................................................................9

Article XIII          Insolvency.................................................................................10

Article XIV           Offsets....................................................................................11

Article XV            Rights With Respect to Quota Share Policies................................................11

Article XVI           Errors and Omissions.......................................................................11

Article XVII          Duty of Cooperation........................................................................12

Article XVIII         Arbitration................................................................................12

Article XIX           General Provisions.........................................................................13
</TABLE>


                                      -i-


<PAGE>


                                    EXHIBITS

Exhibit A -       Notice and Certificate of Assumption

                                    SCHEDULES

Schedule 1.01     Business Assumed by Assuming Reinsurers
Schedule 1.02     Special Agent Reinsurers
Schedule 2.01     Quota Share Reinsurance and Designated Quota Share Reinsurers
Schedule 19.01    Addresses and Facsimile Numbers to be Used for Notices




                                      -ii-

<PAGE>



                 ASSUMPTION AND INDEMNITY REINSURANCE AGREEMENT

         THIS ASSUMPTION AND INDEMNITY REINSURANCE AGREEMENT (this "Agreement"),
dated as of January 1, 1993, is made by and among United States Fire Insurance
Company, a New York domiciled property/casualty insurance company (the
"Company"), and International Insurance Company, an Illinois domiciled stock
property/casualty insurance company, Crum & Forster Insurance Company (Bermuda)
Ltd., a Bermuda domiciled stock property/casualty insurance company, Industrial
Indemnity Company, a California domiciled stock property/casualty insurance
company, Westchester Fire Insurance Company, a New York domiciled stock
property/casualty insurance company, and Mt. Airy Insurance Company, an Indiana
domiciled stock property/casualty insurance company (hereinafter collectively
referred to as "`Assuming Reinsurers" or individually as an "Assuming
Reinsurer").

         WHEREAS, the Company desires to cede to the Assuming Reinsurers one
hundred percent (100%) of its Insurance Liabilities (as defined herein) relating
to certain lines of the Company's direct and assumed insurance business and the
Assuming Reinsurers desire to assume such obligations and liabilities of the
Company with respect to such business on the terms and conditions provided
herein;

         NOW THEREFORE, in consideration of the mutual covenants contained
herein, and subject to the terms and conditions, stated herein, the parties
hereto agree as follows.

                                   ARTICLE I

                                   DEFINITIONS

         The following terms shall have the respective meanings set forth below
throughout the Agreement:

         "Assumed Reinsurance Agreements" shall have the meaning set forth in
Article V.

         "Agreement" means this Assumption and Indemnity Reinsurance Agreement.

         "Assuming Reinsurer" and "Assuming Reinsurers" shall have the meaning
set forth in the first paragraph of this Agreement.

         "Business" means the Company's direct and assumed insurance business as
listed on the report described in Article XII, Covenant 4, or as listed, by
jurisdiction and Assuming Reinsurer, on Schedule 1.01 attached hereto.

         "Notice and Certificate of Assumption" shall have the meaning set forth
in Article V.

         "Company" shall have the meaning set forth in the first paragraph of
this Agreement.

         "Policyholder" shall have the meaning set forth in Article V.


<PAGE>


         "Effective Date" shall have the meaning set forth in Article II.

         "Insurance Policies" means all policies, binders, slips, certificates,
contracts of assumed reinsurance and other agreements of insurance, whether
individual or group, (including all supplements, endorsements, riders and
ancillary agreements in connection therewith) which are written, issued, renewed
or assumed by the Company on or prior to the Effective Date, or after the
Effective Date as provided in Article XII, Covenants 3 and 4, whether or not
they are currently in force, in connection with the Business.

         "Insurance Liabilities" shall have the meaning set forth in Article II.

         "Loss/Losses" shall mean claims, losses, liabilities, damages,
deficiencies, costs or expenses, as set forth in more detail in Article VIII.

         "Novated Policies" shall have the meaning set forth in Article V.

         "Option Letter" shall have the meaning set forth in Article V.

         "Quota Share Policies" shall have the meaning set forth in Article II.

         "Third Party Reinsurance Agreements" shall mean all reinsurance
agreements between the Company (as cedent) and Third Party Reinsurers, as set
forth in more detail in Article III.

         "Third Party Reinsurers" shall mean all reinsurers which are not
affiliates of the Company and all of the special agent reinsurers set forth on
Schedule 1.02. For purposes of this definition, the term "affiliates" has the
meaning given in Section 107(a)(4) of the New York Insurance Law and includes,
without limitation, Viking County Mutual Insurance Company and Commonwealth
Lloyds Insurance Company.

                                   ARTICLE II

                               BUSINESS REINSURED

         Effective as of 12:01 a.m., Eastern Time, January 1, 1993 (the
"Effective Date"), the Company hereby cedes and transfers to each of the
Assuming Reinsurers and each Assuming Reinsurer hereby assumes from the Company,
100% of the Insurance Liabilities arising from the Business listed for such
Assuming Reinsurer on Schedule 1.01 or the report described in Article XI,
Covenant 4.

         The term "Insurance Liabilities" shall mean the gross liability of the
Company for Losses under the Insurance Policies before deduction for all other
applicable cessions under the Company's reinsurance programs and shall include:

         (a)      all liability for premium taxes arising on account of premiums
                  arising out of the Insurance Policies received by agents of
                  the Company or an Assuming Reinsurer and actually remitted to
                  an Assuming Reinsurer or otherwise actually received by an
                  Assuming Reinsurer on or after the Effective Date;



                                     - 2 -
<PAGE>




         (b)      all liability in connection with the participation by the
                  Company or an Assuming Reinsurer, whether involuntary or
                  voluntary, in any guaranty fund, assigned risk plan or other
                  government mandated programs or associations of any kind
                  established or governed by the state of the Company's domicile
                  or any other state or jurisdiction, which participation is
                  based on premiums arising under the Insurance Policies
                  received by agents of the Company or an Assuming Reinsurer and
                  actually remitted to an Assuming Reinsurer or otherwise
                  received by an Assuming Reinsurer on or after the Effective
                  Date;

         (c)      all liability for returns or refunds of premiums under the
                  Insurance Policies payable on or after the Effective Date;

         (d)      all liability arising out of claims of Third Party Reinsurers
                  relating to the Insurance Policies, whether for additional
                  premiums or otherwise; and

         (e)      all liability (to the extent permitted by law) for
                  consequential, exemplary, punitive or similar damages which
                  relate to or arise in connection with any alleged or actual
                  act, error or omission by the Company, whether intentional or
                  otherwise, or from any reckless conduct or bad faith by the
                  Company in connection with the handling of any claim under any
                  of the Insurance Policies or in connection with the issuance,
                  delivery or cancellation of any of the Insurance Policies.

         Each of the Assuming Reinsurers accepts and assumes Insurance
Liabilities subject to any and all defenses, setoffs and counterclaims to which
the Company would be entitled with respect to the Insurance Liabilities, it
being expressly understood and agreed by the parties hereto that no such
defenses, setoffs or counterclaims are waived by the execution of this Agreement
or the consummation of the transactions contemplated hereby and that each
Assuming Reinsurer shall be fully subrogated to all such defenses, setoffs and
counterclaims.

         Each Assuming Reinsurer shall be the successor to the Company under the
Novated Policies that it assumes as if the Novated Policies were direct
obligations originally issued by the Assuming Reinsurer. Each Assuming Reinsurer
shall be substituted in the place and instead of the Company, and each insured
under a Novated Policy may disregard the Company as a party thereto and treat
the applicable Assuming Reinsurer as if it had been originally obligated
thereunder except as otherwise provided herein. The insureds shall file claims
arising under the Novated Policies on or after the effective date of such
novation directly with the applicable Assuming Reinsurer. The insureds under the
Novated Policies shall also have a right to assert claims related to such
Novated Policies directly against the applicable Assuming Reinsurer and the
applicable Assuming Reinsurer hereby consents to be subject to such claims by
any insured under a Novated Policy.

         To the extent any Assuming Reinsurer is designated as a quota share
reinsurer for blocks of business specified on Schedule 2.01 or is unable for any
reason to assume by novation any Insurance Policies or Insurance Liabilities,
such Assuming Reinsurer shall accept and reinsure, on a quota share basis, 100%
of the Company's Insurance Liabilities under such Insurance Policies (the "Quota
Share Policies"), in accordance with the terms and conditions of this Agreement,
and hereby agrees to pay directly, on behalf of the Company, any claims or

                                     - 3 -

<PAGE>


losses reinsured under this Agreement which arise under such Quota Share
Policies; provided, however, that the insureds under such Quota Share Policies
shall not have a right to assert claims related to such Quota Share Policies
directly against the applicable Assuming Reinsurer.

                                  ARTICLE III

                ASSIGNMENT OF THIRD PARTY REINSURANCE AGREEMENTS

         Regardless of whether reinsurance novation agreements are entered into
between an Assuming Reinsurer and any Third Party Reinsurer of the Company, each
Assuming Reinsurer is hereby substituted for and succeeds to all of the rights
and liabilities of the Company relating to the Insurance Policies, and is hereby
recognized for all purposes as the "Company" thereunder in substitution for the
Company, under any applicable Third Party Reinsurance Agreements whether or not
in effect as of the Effective Date relating to the Insurance Policies assumed by
such Assuming Reinsurer. Such rights and liabilities of the Company relating to
the Insurance Policies under any Third Party Reinsurance Agreement include
amounts held by or which may become due from Third Party Reinsurers for losses
or loss adjustment expenses on the Insurance Policies for which the Assuming
Reinsurer assumed liability or for losses paid by the Company prior to the
Effective Date. If an Assuming Reinsurer requests that an endorsement be made to
a Third Party Reinsurance Agreement to substitute the appropriate Assuming
Reinsurer for the Company, to the extent of the Assuming Reinsurer's assigned
interests thereunder, the Company agrees to enter into such endorsements and to
provide reasonable assistance to the Assuming Reinsurer, at the Assuming
Reinsurer's expense, in obtaining any such endorsement.

         The Company shall, if requested by an Assuming Reinsurer, provide
reasonable assistance to the Assuming Reinsurer, at such Assuming Reinsurer's
expense, in collection of all amounts due in respect of the Insurance
Liabilities from Third Party Reinsurers which do not have or agree to an
endorsement to Third Party Reinsurance Agreements and shall forward any funds
collected to the Assuming Reinsurer. The collectibility of such reinsurance
shall be at the risk and for the account of the Assuming Reinsurer.

         Each Assuming Reinsurer shall have full power and authority to act for
and on behalf of the Company with respect to any and all letters of credit
outstanding for the benefit of the Company pursuant to the terms of the
applicable Third Party Reinsurance Agreement(s). The Company and each applicable
Assuming Reinsurer shall, at the expense of such Assuming Reinsurer, each use
its best efforts to the extent mutually agreed to be necessary, to cause the
Third Party Reinsurers of the Company, under the applicable Third Party
Reinsurance Agreements to post replacement letters of credit to be issued
directly in favor and for the benefit of the Assuming Reinsurer in the same or a
greater amount, unless such Assuming Reinsurer shall consent to a reduced
amount.



                                     - 4 -
<PAGE>




                                   ARTICLE IV

                      ASSIGNMENT OF STRUCTURED SETTLEMENTS

         1. The appropriate Assuming Reinsurer shall be substituted for and
succeed to all of the rights and liabilities of the Company, and shall be
recognized for all purposes as the "Company" thereunder in substitution for the
Company, under any annuity contracts purchased and owned by the Company in
effect on the Effective Date (or after the Effective Date with regard to new or
renewal Business described in Article XII, Covenants 3 and 4) between the
Company and any applicable party relating to structured settlements in
connection with the Insurance Policies. As of the Effective Date, the Company
shall sell, assign, transfer and convey, and the appropriate Assuming Reinsurer
shall purchase, be bound by and assume, any and all rights and obligations of
the Company under any such annuity contracts.

         2. Such Assuming Reinsurer shall have full power and authority to act
for and on behalf of the Company in accordance with the designation of the
Assuming Reinsurer as attorney-in-fact for the Company pursuant to Article VII
hereof for purposes of administering the above referenced annuity contracts.

                                   ARTICLE V

            OPTION LETTERS; ASSUMPTION CERTIFICATES; ENDORSEMENTS TO
                        REINSURANCE AGREEMENTS WHERE THE
                        COMPANY IS THE ASSUMING REINSURER

         With respect to direct Insurance Policies which are in force on the
Effective Date or which have an open claim on the Effective Date, the Company
shall prepare for mailing to every holder of such an Insurance Policy (a
"Policyholder") resident in a state where the applicable Assuming Reinsurer is
licensed to conduct a property/casualty insurance business an option letter (the
"Option Letter"), together with a Notice and Certificate of Assumption,
including, where required, a form for rejection or for rejection or acceptance
and a self-addressed return envelope, substantially in the form attached hereto
as Exhibit A (the "Notice and Certificate of Assumption"). The Option Letters
and Notices and Certificates of Assumption shall be delivered to the applicable
Assuming Reinsurer and mailed by such Assuming Reinsurer on the Effective Date
to such Policyholders, at the expense of the Assuming Reinsurer. In addition,
the Company shall prepare and deliver to such Assuming Reinsurer for mailing an
Option Letter and Notice and Certificate of Assumption for each direct insured
who, after the date of this Agreement, files a claim under any Insurance Policy.

         Upon each Assuming Reinsurer's becoming licensed to conduct a
property/casualty insurance business in additional states where it has agreed to
assume Business under this Agreement, it shall promptly notify the Company of
such licensing. Promptly thereafter the Company shall prepare Option Letters and
Notices and Certificates of Assumption for direct Insurance Policies which are
in force or have an open claim on the Effective Date in each such state. The
Company shall deliver such Option Letters and Notices and Certificates of
Assumption to such Assuming Reinsurer for mailing, at the expense of the
Assuming Reinsurer, to the Policyholders resident in such state. Option Letters
and Notices and Certificates of

                                     - 5 -

<PAGE>


Assumption shall not be sent with respect to such direct Insurance Policies
covering risks in more than one state unless and until the applicable Assuming
Reinsurer is licensed to conduct a property/casualty insurance business in each
such state. In addition, the Company shall prepare and deliver to each Assuming
Reinsurer for mailing an Option Letter and Notice and Certificate of Assumption
for each direct insured who after the date of this Agreement, files a claim
under any applicable Insurance Policy.

         Notwithstanding the terms of the Option Letter, the Company and each
Assuming Reinsurer agree that the Policyholder will be allowed to remain a
Policyholder of the Company if a rejection of the assumption is delivered by the
Policyholder to the Company or the applicable Assuming Reinsurer prior to the
earlier of (i) such Policyholder's first premium payment to the applicable
Assuming Reinsurer after the receipt of the Option Letter, or (ii) such
Policyholder's first action which could be reasonably construed to manifest
acceptance of the assumption by the applicable Assuming Reinsurer (for example,
correspondence or other communication with such Assuming Reinsurer (other than
to object to the assumption), the acceptance of payments from or similar
dealings with the Assuming Reinsurer).

         Direct Insurance Policies assumed by Assuming Reinsurers hereunder with
no rejection having been received by the Company or the applicable Assuming
Reinsurer from the Policyholder as provided for above shall be deemed to have
been assumed by novation and shall be defined herein as "Novated Policies".
Notwithstanding the foregoing, in the event that an Insurance Policy defined
herein as a Novated Policy is determined by appropriate regulatory authorities,
by judicial decision or otherwise to be not novated from the Company to the
applicable Assuming Reinsurer (including but not limited to jurisdictions
requiring the insured's affirmative consent for novation where the insured
either did not or refused to provide such consent), such Insurance Policy shall
for all purposes of this Agreement be deemed retroactive to the Effective Date
to be a Quota Share Policy.

         Each Assuming Reinsurer shall use its best efforts to effect, as
promptly as possible after the Effective Date, an endorsement to each
reinsurance agreement included as an Insurance Policy where the Company is the
assuming reinsurer. The Company agrees to enter into such endorsements and, if
requested by the Assuming Reinsurer, provide reasonable assistance to the
Assuming Reinsurer, at such Assuming Reinsurer's expense, in obtaining any such
endorsement.

                                   ARTICLE VI

                                    TERRITORY

         This Agreement shall apply to Insurance Policies covering risks
wherever situated.


                                     - 6 -

<PAGE>




                                  ARTICLE VII

                              POLICY ADMINISTRATION

         The Company grants to each Assuming Reinsurer authority in all matters
relating to the administration of the Insurance Policies assumed by such
Assuming Reinsurer to the extent such authority may be granted pursuant to
applicable law and agrees to cooperate fully with the Assuming Reinsurer in the
transfer of such administration. Each Assuming Reinsurer agrees, at its expense,
to be responsible for such administration. In order to assist and to evidence
more fully the substitution of each Assuming Reinsurer in the place and stead of
the Company, the Company hereby nominates, constitutes and appoints each
Assuming Reinsurer as its attorney-in-fact with respect to the rights, duties,
privileges and obligations of the Company in and to the Insurance Policies
assumed by that Assuming Reinsurer, with full power and authority to act in the
name, place and stead of the Company with respect to such Insurance Policies
including, without limitation, the power, without reservation, to service all
such Insurance Policies, to adjust, to defend, to settle and to pay all claims,
to recover salvage and subrogation for any losses incurred and to take such
other and further actions as may be necessary or desirable to effect the
transactions contemplated by this Agreement. In addition to other
responsibilities set forth in this Agreement, each Assuming Reinsurer shall also
issue on the Company's behalf, but wherever possible in the name of the Assuming
Reinsurer, all Insurance Policies assumed by such Assuming Reinsurer which the
Company is contractually or otherwise obligated to issue on and after the
Effective Date.

         The Company agrees that, after the Effective Date, it will forward to
the appropriate Assuming Reinsurer, within forty-five (45) days of receipt, all
notices and other written communications received by it relating to the
Insurance Policies assumed by that Assuming Reinsurer (including, without
limitation, all inquiries or complaints from state insurance regulators, agents,
brokers and insureds and all notices of claims, suits and actions for which it
receives services of process).

                                  ARTICLE VIII

                                 INDEMNIFICATION

         Each Assuming Reinsurer agrees to indemnify, defend and hold harmless
the Company (and its directors, officers, employees, successors and permitted
assigns) from and against all Losses (as hereinafter defined) arising under or
related to the Insurance Policies assumed by such Assuming Reinsurer and payable
on or after the Effective Date.

         As used herein, Loss and/or Losses shall mean claims, losses,
liabilities, damages, deficiencies, costs or expenses (including, without limit,
interest on amounts actually paid at the base rate announced from time to time
by Citibank, New York, New York, penalties and reasonable attorneys' fees and
disbursements), after taking into account the tax cost and the tax benefits to
the Company of any such indemnification payment.

         Within forty-five (45) days of receipt by the Company of notice of any
demand, claim or circumstances which, with the lapse of time, would give rise to
a claim or the



                                     - 7 -
<PAGE>


commencement (or threatened commencement) of any action, proceeding or
investigation (an "Asserted Liability") that may result in an indemnification
obligation on the part of the Company under the terms of this Article VIII, the
Company shall give notice thereof (the "Claims Notice") to the appropriate
Assuming Reinsurer. The Claims Notice shall describe the Asserted Liability in
reasonable detail and shall indicate the amount (estimated, if necessary) of the
Loss that has been or may be suffered by the Company.

         The Assuming Reinsurer shall defend, at its own expense and by its own
counsel, any such Asserted Liability; provided, however, that the Assuming
Reinsurer may not compromise or settle any Asserted Liability without the
consent of the Company unless such compromise or settlement requires no more
than a monetary payment for which the Company hereunder is fully indemnified or
involves other matters not binding upon the Company. If the Assuming Reinsurer
does not defend the Asserted Liability, the Company may pay, compromise or
defend such Asserted Liability in respect of any Asserted Liability for which
the Assuming Reinsurer may have an indemnification obligation under this
Article. In any event, the Company and the Assuming Reinsurer may participate,
at the expense of the Assuming Reinsurer, in the defense of such Asserted
Liability in respect of any Asserted Liability for which the Assuming Reinsurer
may have an indemnification obligation under this Article.

                                   ARTICLE IX

                                    PREMIUMS

         Each Assuming Reinsurer shall be entitled to 100% of all premiums and
other considerations received on and after the Effective Date by the Company or
the applicable Assuming Reinsurer with respect to the Insurance Policies which
it has assumed as described in Schedule 1.01. Within forty-five (45) days of
receipt, the Company shall remit and hereby assigns to the applicable Assuming
Reinsurer such premiums and other considerations. Furthermore, with respect to
any such remittance, the Company shall also, within forty-five (45) days of
receipt, furnish the applicable Assuming Reinsurer with all pertinent
information which the Company receives on and after the Effective Date
pertaining thereto (e.g., the nature of payment, source of funds, contract
number or agreement (as appropriate) and period(s) to which it relates and any
special rates or instructions accompanying same).

         Effective on the Effective Date, each Assuming Reinsurer shall have the
responsibility for billing and collecting premiums in respect of the Insurance
Policies it has assumed as described in Schedule 1.01.

                                   ARTICLE X

                             RECORDS AND ACCOUNTING

         As soon as practicable after the Effective Date, the Company shall
forward to each Assuming Reinsurer all reports, records, underwriting files,
claims files and information in any form (the "Records") relating to the
Insurance Policies which it has assumed as described in Schedule 1.01 and shall
cooperate with the applicable Assuming Reinsurer in the transfer of the
administration of such Insurance Policies. All right, title and interest in such
Insurance Policies,


                                     - 8 -

<PAGE>


and such Records shall vest in the applicable Assuming Reinsurer for utilization
and disposition in any manner by the applicable Assuming Reinsurer, provided,
that the applicable Assuming Reinsurer (i) shall provide the Company access,
during the applicable Assuming Reinsurer's normal business hours, to all such
Records necessary to permit the Company to respond to or comply with requests
for information by governmental or judicial authorities, insurance regulatory
bodies, financial auditors or tax auditors or to defend lawsuits or for any
other valid business purpose, (ii) shall be responsible for reasonable expenses
related to such requests for information and (iii) shall not destroy any such
Records without at least 30 days written notice to the Company, during which
time the Company shall have the right to take possession of such Records, at the
expense of the Company.

         All reserves for unearned premiums and unpaid losses and loss
adjustment expenses with regard to Novated Policies will be accounted for by the
Company as a transfer of direct business and by the applicable Assuming
Reinsurer as direct business as of the Effective Date. All premiums written and
earned, and all losses and loss adjustment expenses incurred after the Effective
Date with regard to Novated Policies will be accounted for as direct business of
the applicable Assuming Reinsurer. The Company will have no further obligations
for accounting for Novated Policies under this Agreement after the Effective
Date.

         Each Assuming Reinsurer shall also provide accounting and cash
settlement reports as to the Quota share Policies it has assumed within thirty
days after the end of each calendar quarter. Such reports shall contain
sufficient information regarding the Quota Share Policies it has assumed to
permit the Company to prepare its tax returns and statutory financial
statements. The accounting and cash settlement referred to herein shall not be
conditioned or conditional upon the performance of any other agreement or person
not a party to this Agreement.

                                   ARTICLE XI

                               TRANSFER OF ASSETS

         As consideration for the assumption of liability by the each Assuming
Reinsurer with respect to the Insurance Policies outstanding as of the Effective
Date hereof which it has assumed as described in Schedule 1.01, the Company
shall transfer to the Assuming Reinsurer on the Effective Date assets having a
market value equal to the sum of the Company's net unearned premium reserve and
net Insurance Liabilities (including reserves for losses that have been incurred
but not reported), if any, as of 12:01 a.m., Eastern Time, January 1, 1993, and
attributable to such Insurance Policies.

                                  ARTICLE XII

                                    COVENANTS

         1. Each Assuming Reinsurer shall maintain unearned premium and loss and
loss adjustment expense reserves consistent with the law of any jurisdiction
having regulatory authority with respect to the particular Insurance Policies
which it has assumed as described in Schedule 1.01 and Schedule 2.01 reinsured
hereunder. Each Assuming Reinsurer shall provide



                                     - 9 -

<PAGE>


the Company with a copy of the actuarial certification of such reserves that is
filed with its annual statement in each such jurisdiction within forty-five (45)
days of such filing.

         2. Each Assuming Reinsurer shall at its own expense take all steps
necessary to ensure that the Company obtain full financial statement credit in
all applicable jurisdictions for the reinsurance ceded to such Assuming
Reinsurer hereunder, including the posting of letters of credit or other
acceptable security.

         3. Except as specified on Schedule 2.01, each Assuming Reinsurer shall,
wherever permissible under the Insurance Policies which it has assumed as
described in Schedule 1.01 and unless prohibited or precluded by law or
regulation or by any regulatory authority, take all action as may be appropriate
and reasonable (a) to substitute bonds, binders, riders, policies and contracts
issued by and in the name of the Assuming Reinsurer as the direct insurer for
all Insurance Policies which it has assumed as described in Schedule 1.01 issued
by and in the name of the Company, at the time of any individual Insurance
Policy's annual renewal or such other time as is permissible under any
applicable law, or, alternatively, (b) to exercise, as soon as practicable in
keeping with the Company's commercial objectives but no later than eighteen (18)
months from July 30, 1993, the Company's right not to renew the Insurance
Policies which such Assuming Reinsurer has assumed as described in Schedule
1.01.

         4. Each Assuming Reinsurer shall treat those Insurance Policies written
and reported by the Company after the Effective Date as provided in this
Covenant 4 as Quota Share Policies, until novation becomes practicable. The
Company shall report such Insurance Policies to the applicable Assuming
Reinsurer within fifteen (15) days of the last day of each month. Such reports
shall cover such business transacted by the Company during the preceding month,
setting forth the following information as to such Insurance Policies:

         (a)      Premium and return premium;

         (b)      Incurred losses;

         (c)      Loss payments; and

         (d)      Such other information as may be mutually agreed upon.

         5. Each Assuming Reinsurer shall obtain, as soon as possible, licenses
to conduct appropriate lines of property/casualty insurance business in all
jurisdictions where it has agreed to assume Business as defined on Schedule 1.01
under this Agreement, if not already so licensed as of the Effective Date.

                                  ARTICLE XIII

                                   INSOLVENCY

         With respect only to any Quota Share Policy, each Assuming Reinsurer
hereby agrees that, as to all reinsurance made, ceded, renewed or otherwise
becoming effective hereunder, the reinsurance shall be payable by the Assuming
Reinsurer immediately upon demand on the basis of the liability of the Company
under the Insurance Policy or Policies



                                     - 10 -
<PAGE>


reinsured, without diminution because of the insolvency of the Company or
because its conservator, liquidator, receiver or other statutory successor has
failed to pay all or a portion of any claims, directly to the Company or to its
conservator, liquidator, receiver or other statutory successor. It is agreed
that the conservator, liquidator, receiver or other statutory successor of the
Company shall give prompt written notice to the Assuming Reinsurer of the
pendency or submission of a claim under the Insurance Policy or Policies
reinsured. During the pendency of such claim, the Assuming Reinsurer may
investigate such claim and interpose, at its own expense, in the proceeding
where such claim is to be adjudicated any defense available to the Company or
its conservator, liquidator, receiver or other statutory successor. The expense
thus incurred by the Assuming Reinsurer is chargeable against the Company as a
part of the expense of liquidation to the extent of a proportionate share of the
benefit which accrues to the Company solely as a result of the defense
undertaken by the Assuming Reinsurer.

                                  ARTICLE XIV

                                     OFFSETS

         Notwithstanding any provision of this Agreement to the contrary, any
debts or credits, regardless of when they arose or were incurred under this
Agreement, in favor of or against either the Company or any Assuming Reinsurer
to this Agreement are deemed mutual debts or credits, as the case may be, and
shall be set off, and only the balance shall be allowed or paid.

                                   ARTICLE XV

                   RIGHTS WITH RESPECT TO QUOTA SHARE POLICIES

         Each Assuming Reinsurer's quota share reinsurance of 100% of the
Insurance Liabilities of the Company with respect to any of the Quota Share
Policies is intended for the sole benefit of the parties to this Agreement and
shall not create any right on the part of any Policyholder, insured, claimant or
beneficiary under such Quota Share Policies against the appropriate Assuming
Reinsurer or any legal relation between such Policyholders, insureds, claimants
or beneficiaries and the appropriate Assuming Reinsurer.

                                  ARTICLE XVI

                              ERRORS AND OMISSIONS

         Inadvertent delays, errors or omissions made in connection with this
Agreement or any transaction hereunder shall not relieve any party from any
liability which would have attached had such delay, error or omission not
occurred, provided always that such error or omission is rectified as soon as
possible after discovery.



                                     - 11 -
<PAGE>




                                  ARTICLE XVII

                               DUTY OF COOPERATION

         Each party hereto shall cooperate fully with the other parties in all
reasonable respects in order to accomplish the objectives of this Agreement.

                                 ARTICLE XVIII

                                   ARBITRATION

         Any dispute or difference arising with reference to the applicable
interpretation or effect of this Agreement, or any part thereof, shall be
referred to a Board of Arbitration (the "Board") of two (2) arbitrators and an
umpire.

         The members of the Board shall be U.S. citizens and shall be active or
retired disinterested officers of insurance or reinsurance companies.

         One arbitrator shall be chosen by the party initiating the arbitration
and designated in the letter requesting arbitration. The other party shall
respond, within fifteen (15) days, advising of its arbitrator. The umpire shall
thereafter be chosen by the two (2) arbitrators. In the event either party fails
to designate its arbitrator as indicated above, the other party is hereby
authorized and empowered to name the second arbitrator, and the party which
failed to designate its arbitrator shall be deemed to have waived its right to
designate an arbitrator and shall not be aggrieved thereby. The two (2)
arbitrators shall then have thirty (30) days within which to choose an umpire.
If they are unable to do so, the umpire shall be chosen by the manager of the
American Arbitration Association who shall be a person meeting the
qualifications set forth above.

         Each party shall submit its case to the Board within one (1) month from
the date of the appointment of the umpire, but this period of time may be
extended by unanimous written consent of the Board.

         The sittings of the Board shall take place in Morristown, New Jersey,
unless otherwise agreed in writing by the parties. The Board shall make its
decision with regard to the custom and usage of the insurance and reinsurance
business. The Board is released from all judicial formalities and may abstain
from the strict rules of law. The written decision of a majority of the Board
shall be rendered within sixty (60) days following the termination of the Boards
hearings, unless the parties consent to an extension. Such majority decision of
the Board shall be final and binding upon the parties both as to law and fact,
and may not be appealed to any court of any jurisdiction. Judgment may be
entered upon the final decision of the Board in any court of proper
jurisdiction.

         If more than one Assuming Reinsurer is involved in the same dispute or
difference, all such Assuming Reinsurers shall constitute and act as one party
for the purpose of naming an arbitrator under this Article XVIII, and
communications shall be made by the Company to each of the Assuming Reinsurers
constituting one party, provided, however, that nothing herein shall impair the
rights of such Assuming Reinsurers to assert several, rather than


                                     - 12 -

<PAGE>


joint, defenses or claims, nor be construed as changing the liability of such
reinsurers participating under the terms of this Agreement from several to
joint.

         Each party shall bear the fees and expenses of the arbitrator selected
by or on its behalf, and the parties shall bear the fees and expenses of the
umpire as determined by the Board.

                                  ARTICLE XIX

                               GENERAL PROVISIONS

         1. Notices. Any notice or other communication required or permitted
hereunder shall be in writing and shall be delivered personally, telegraphed,
telexed, sent by facsimile transmission or sent by certified, registered or
express mail, postage prepaid. Any such notice shall be deemed given when so
delivered personally, telegraphed or telexed or sent by facsimile transmission
to the appropriate facsimile number on Schedule 19.01 or, if mailed, three days
after the date of deposit in the United States mails, to the appropriate address
on Schedule 19.01.

         Any party may, by notice given in accordance with this Agreement to the
other parties, designate another address or person for receipt of notices
hereunder.

         2. Invalidity. Unless the invalidity or unenforceability of any
provision or portion hereof frustrates the intent of the parties or the purpose
of this Agreement, such invalidity or unenforceability shall not affect the
validity or enforceability of the other provisions or portions hereof.

         3. Amendment. This Agreement cannot be modified, changed, discharged or
terminated, except by an instrument in writing signed by the Company and the
Assuming Reinsurer(s) as would be affected by such amendment.

         4. Counterparts. This Agreement may be executed by the parties hereto
in separate counterparts, each of which when so executed and delivered shall be
an original, but all such counterparts shall together constitute one and the
same instrument. Each counterpart may consist of a number of copies hereof each
signed by less than all, but together signed by all of the parties hereto.

         5. No Third Party Beneficiaries.

         (a) Except as specifically set forth herein, nothing in this Agreement
is intended or shall be construed to give any Person, other than the parties
hereto, their successors and permitted assigns, any legal or equitable right,
remedy or claim under or in respect of this Agreement or any provision contained
herein.

         (b) The rights and liabilities of each Assuming Reinsurer hereunder are
independent of those of each other Assuming Reinsurer and may be separately
enforced.

         6. Assignment. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and permitted
assigns. Neither this


                                     - 13 -

<PAGE>


Agreement nor any right hereunder may be assigned by any party without the prior
written consent of the Company and the Assuming Reinsurer affected thereby,
which consent shall not be unreasonably withheld.

         7. Waivers. The terms of this Agreement may be waived only by the party
waiving compliance. No delay on the part of any party in exercising any right,
power or privilege hereunder shall operate as a waiver thereof. Nor shall any
waiver on the part of any party of any right, power or privilege, nor any single
or partial exercise of any such right, power or privilege, preclude any further
exercise thereof or the exercise of any other such right, power or privilege.

         8. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE COMPANY'S STATE OF DOMICILE WITHOUT GIVING
EFFECT TO THE PRINCIPLES OF CONFLICTS OF LAWS THEREOF.




                                     - 14 -

<PAGE>


         IN WITNESS WHEREOF, this Agreement is hereby executed by duly
authorized officers of the parties hereto as of the date first above written.

                            UNITED STATES FIRE INSURANCE COMPANY

                            By:    /s/ James A. Stark
                                   --------------------------------------------
                            Title: Ch./Bd., President
                                   --------------------------------------------

                            By:    /s/ James K. Killelea
                                   --------------------------------------------
                            Title: Secretary
                                   --------------------------------------------


                            INTERNATIONAL INSURANCE COMPANY

                            By:    /s/ John Igoe
                                   --------------------------------------------
                            Title: Senior VP, Treasurer
                                   --------------------------------------------

                            By:    /s/ David G. Staples
                                   --------------------------------------------
                            Title: Asst. Secretary
                                   --------------------------------------------


                            CRUM & FORSTER INSURANCE COMPANY (BERMUDA) LTD.

                            By:    /s/ William R. Burns
                                   --------------------------------------------
                            Title: Vice President
                                   --------------------------------------------
Attest:

By:     /s/ Valerie J. Gasparik
        --------------------------------------------
Title:  Asst. Secretary
        --------------------------------------------


                                     - 15 -

<PAGE>


                                        INDUSTRIAL INDEMNITY COMPANY

                                        By:    /s/ Robert A. Puccinelli
                                               ---------------------------------
                                        Title: Ch./Bd., President
                                               ---------------------------------

Attest:

By:     /s/ Michael J. Cassanego
        ---------------------------------
Title:  Secretary
        ---------------------------------

                                        WESTCHESTER FIRE INSURANCE COMPANY

                                        By:    /s/ Dennis B. Reding
                                               ---------------------------------
                                        Title: Ch./Bd., Pres. & CEO
                                               ---------------------------------

                                        By:    /s/ D. H. Biaett
                                               ---------------------------------
                                        Title: Secretary
                                               ---------------------------------

                                        MT. AIRY INSURANCE COMPANY

                                        By:    /s/ Robert P. Cuthbert
                                               ---------------------------------
                                        Title: Senior Vice President
                                               ---------------------------------

Attest:

By:     /s/ Valerie J. Gasparik
        ---------------------------------
Title:  Secretary
        ---------------------------------




                                     - 16 -