CARL DOMINO ASSOCIATES, L.P.

                         INVESTMENT ADVISORY AGREEMENT

     THIS AGREEMENT, effective as of September 1,1997, by and between Penn
America Insurance Company, and its subsidiary Penn-Star Insurance Company
(hereinafter collectively referred to as the "Client") and Carl Domino
Associates, L.P., a Delaware Limited Partnership and registered investment
advisor under the Investment Advisors Act of 1940, as amended (the "Advisor").

     WHEREAS, the Client desires to appoint and designate the Advisor to provide
investment advisory and management services for equity assets and such other
funds and/or securities as Client shall designate, any additions thereof or
changes therein (the "Account") and the Advisor agrees to so act;

     NOW, THEREFORE, in consideration of the mutual covenants herein contained,
it is hereby agreed between the parties hereto as follows:

1.   APPOINTMENT OF ADVISOR. The Client hereby designates and retains the
     Advisor to furnish investment advisory and management services for the
     Account, and the Advisor hereby accepts such appointment and agrees to
     supervise the investment and reinvestment of assets of the Account in
     accordance with the terms of this Agreement.

2.   CUSTODY SECURITIES AND FUNDS. The Advisor shall at no time receive, retain
     or physically control any cash, securities or other assets forming any part
     of the Account.

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<PAGE>


3.   DISCRETION. The Advisor is hereby granted complete discretion in the
     management of the investments in the Account, provided that all investment
     transactions first receive approval, either written or verbal, from the
     Chairman of the Investment Committee of the Client, and provided further,
     however, that if the Chairman of the Investment Committee is not available
     to give such approval and Advisor, in the exercise of its fiduciary
     responsibility, believes the investment transaction should be executed
     promptly, and the investment is within Client's Investment Objectives and
     Policy Guidelines and Advisor's investment selection criteria, then Advisor
     may execute the investment transaction and so advise the Chairman of the
     Investment Committee as soon thereafter as possible. Subject to the
     aforesaid, Advisor is authorized to invest and reinvest the assets in the
     Account, the proceeds thereof and any additions thereto, to make investment
     changes and to take any other lawful action with respect to the Account in
     furtherance of Client's investment objectives, including, without
     limitation, execution of documents, the making of investment decisions, the
     placing of brokerage orders, and the rendering of decisions as to the
     nature, amount and timing of transactions for the Account. Subject to the
     aforesaid, Advisor shall have complete discretion to designate brokers and
     to negotiate brokerage commissions and rates for transactions for the
     Account, subject to the

                                       2

<PAGE>

     requirements of applicable law. In acting as an investment advisor, the
     Advisor shall use its best judgment, and shall not be liable for any losses
     sustained by Client or for any error in judgment, except if Advisor fails
     to exercise the degree of care, skill, prudence and diligence that a
     prudent person acting in a like capacity would use, or if Advisor's conduct
     constitutes bad faith or gross negligence, provided, however, that the
     foregoing shall not constitute a waiver by the Client of any rights or
     claims the Client may have under federal or state securities laws,
     including the anti fraud provisions of those laws.

1.   INVESTMENT OBJECTIVE. The Client hereby directs the Advisor to manage the
     Account in furtherance of Client's investment objectives. The Client's
     investment objectives are set forth in its Investment Plans, copies of
     which are attached at Addendums "A" and "B" and incorporated herein as
     though fully set forth at length. The Client may establish additional or
     different investment objectives, or impose investment restrictions on the
     Advisor with respect to the Account, by furnishing written notice to the
     Advisor of such change. In furtherance of the Client's investment
     objectives, the Advisor is authorized to enter into those investments set
     forth in the "Investment Policy Guidelines" section of Client's Investment
     Plans. See Addendums "A" and"B," pp.2-3.

                                       3

<PAGE>

2.   COMPENSATION AND EXPENSES. Advisor shall be compensated in accordance with
     Addendum C in this Agreement.

3.   ALLOCATION OF BROKERAGE. Where the Advisor places orders for the execution
     of portfolio transactions for the Account, the Advisor may allocate such
     transactions to such brokers and dealers for execution on such markets at
     such prices and at such commission rates as in the good faith judgment of
     the Advisor will be in the best interest of the Account, taking into
     consideration in the selection of such brokers and dealers not only the
     available prices and rates of brokerage commissions but also other relevant
     factors such as research, execution capabilities, and other services
     provided by such brokers or dealers which are expected to enhance the
     general portfolio management capabilities of the Advisor and the value of
     any ongoing relationship of the Advisor with such brokers and dealers.

4.   SERVICE TO OTHER CLIENTS. It is understood that the Advisor performs
     investment advisory and management services for various clients. Client
     agrees that the Advisor may give advice and take action with respect to any
     of its other clients which may differ from advice given or the timing or
     nature of action taken with respect to the Account so long as it is the
     Advisor's policy, to the extent practical, to allocate investment
     opportunities to the Account over a period of time on a fair and equitable
     basis relative to other clients. It is understood

                                        4
<PAGE>

     that the Advisor shall not have any obligation to purchase or sell, or to
     recommend for purchase or sale, for the Account any security which the
     Advisor, its principals, affiliates, or employees may purchase or sell for
     its or their own accounts or for the account of any other client, if in the
     opinion of the Advisor such transaction or investment appears unsuitable,
     impractical, or undesirable for the Account, subject to Client's approval.

5.   CONFIDENTIAL RELATIONSHIP. All investment information and advice furnished
     by the Advisor to the Client shall be treated as confidential and shall not
     be disclosed to third parties except as required by law.

6.   TERMINATION, ASSIGNMENT, ASSIGNS. This Agreement shall continue until
     terminated by either party hereto. This Agreement may be terminated upon
     thirty (30) days written notice by either party to the other of such
     termination. Fees will be prorated to the date of termination specified in
     the notice of termination. The Advisor, a limited partnership, will notify
     the Client within a reasonable time after any change in the members of the
     partnership. No assignment, as that term is defined in the Investment
     Advisors Act of 1940, of this Agreement shall be made by Advisor. Subject
     to the foregoing, this Agreement shall inure to the benefit of the heirs,
     administrators, personal representatives, successors, or assigns of the
     parties hereto.

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<PAGE>

7.   REPRESENTATIONS BY CLIENT. Client represents and confirms that the
     employment of Advisor and the investment objectives set forth herein are
     authorized by the governing documents relating to the Account and that the
     terms hereof do not violate any obligation by which the Client is bound,
     whether arising by contract, operation of law, or otherwise, and that (a)
     this Agreement has been duly authorized by appropriate action and when
     executed and delivered will be binding upon Client in accordance with its
     terms, and (b) the Client will deliver to Advisor such evidence of such
     authority as Advisor may reasonably require, whether by way of a certified
     resolution or otherwise.

8.   REPRESENTATIONS OF ADVISOR. Advisor represents that it is a registered
     investment advisor under the Investment Advisors Act of 1940 as amended
     and, for employee benefit accounts, acknowledges that it is a fiduciary to
     the plan under Section 3 (38) of the Employee Retirement Income Security
     Act of 1974 (ERISA).

9.   REPORTS. The Advisor shall furnish the Client a quarterly statement of the
     value of the Account and the manner by which the fee is calculated. The
     Advisor shall also furnish such other reports or information as the Client
     may reasonably request.

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<PAGE>

10.  CONFIMATIONS. The Client's execution of this Agreement shall constitute
     authorization for the custodian of the Account to direct confirmation of
     all transactions in the Account to the Advisor.

11.  GENERAL.

     (A)  This Agreement shall be construed and enforced in accordance with the
          laws of Florida.

     (B)  All Notices shall be in writing and shall be deemed given if delivered
          or mailed, certified or registered mail postage prepaid, to the
          principal office of the party hereto. The Advisor may rely upon any
          Notice believed by it to be genuine and authorized.

     (C)  This Agreement constitutes the entire understanding of the parties and
          may be amended only by written instrument executed by the parties
          hereto.

     (D)  This Agreement supersedes any and all other agreements that may have
          been entered into by and between the parties.

     IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized officers on the dates appearing below.

                                    CARL DOMINO ASSOCIATES, L.P.
DATE: 1/12/98                       By: /s/ Carl J Domino
                                       General Partner
                                       Carl Domino, Inc.
                                       Carl Domino, President

                                       7
<PAGE>

DATE: 1/21/98                       By: /s/ Rosemary Ferrero
                                       Rosemary Ferrero
                                       Secretary and Treasurer
                                       Penn-America Insurance Company
                                       and Penn-Star Insurance Company


                                       8

<PAGE>

                                   Addendum A
                                INVESTMENT PLAN
                                       OF
                         PENN-AMERICA INSURANCE COMPANY

                Investment Portfolio - Objectives and Guidelines

     The Board of Directors of PENN AMERICA INSURANCE COMPANY (the "Company")
authorizes the Company's officers to engage the services of an Investment
Manager who possesses the necessary personnel and research facilities to manage
the Company's investment portfolio. The portfolio consists of common stocks,
preferred stocks and cash equivalents.

     The policy guidelines for the Investment Portfolio shall be as stated
herein, and are subject to modification with Board approval from time to time by
the Company after consideration of the advice and recommendations of the
Investment Manager.

     Execution of All Trades: It is hereby understood that all investment
transactions must have prior approval either written or verbal, of the Chairman
of the Investment Committee, Irvin Saltzman, prior to their initiation by the
investment manager, provided, however, that if the Chairman of the Investment
Committee is not available to give such approval and Advisor, in the exercise of
its fiduciary responsibility, believes the investment transaction should be
executed promptly, and the investment is within Client's Investment Objectives
and Policy Guidelines and Advisor's investment selection criteria, then Advisor
may execute the investment transaction and so advise the Chairman of the
Investment Committee as soon thereafter as possible.

                              Investment Portfolio

     The Company's investment portfolio consists of funds allocated and invested
in one of two (2) basic forms of investment:

     (A)  Money market and analogous cash equivalent funds, awaiting permanent
          investment into equities securities.

     (B)  Equity issues including common and preferred stocks, units of
          beneficial interest, American Depository Receipts, and convertible
          securities.

<PAGE>

     The Company shall establish percentage allocation ranges for each category,
which shall be monitored on a regular, periodic basis and which may be changed
from time to time.

                             Investment Objectives

     1. The Company's investment portfolio is to be managed in a conservative,
risk adverse style with the objective of achieving long-term performance
superior to the widely followed market averages.

     2. Primary investment emphasis shall be placed upon consistency of
performance, i.e., the achievement of investment objectives in such a manner as
to protect the Company's assets from excessive volatility in market value from
year to year.

     3. Significant investment emphasis shall also be placed upon the
preservation of the purchasing power of the assets.

     4. Sufficient liquidity shall be maintained to fund any possible corporate
outflows related to the property and casualty insurance business.

                          Investment Policv Guidelines

     Assets are to be managed with a view toward achieving the specific
investment objectives previously described. Consistency of performance,
protection of principal as well as purchasing power and the maintenance of
sufficient liquidity, should be the overriding guidelines for the investment
portfolio.

     To underscore these considerations, as well as to recognize the fiduciary
responsibilities associated with the management of the Company's assets, there
are certain characteristics which are expected to be associated with the
portfolio and which shall be viewed as guidelines in formulating investment
strategies.

                                A. Equity Issues

     1. Allocation. The target range of investments in equity issues is up to
thirty three and 1/3 percent (33 1/3%) of the value of the Company's capital
surplus.

     2. Types of Securities. Equity securities shall mean common and preferred
stocks or equivalents (e.g., units of beneficial interest, American Depository
Receipts, plus issues convertible into common stock).

                                       2

<PAGE>

     3. Cash Equivalents. At the discretion of the Investment Manager, short
term money market funds and/or investments may represent a material portion of
the equity issues. However, if commercial paper is used, it must have a minimum
quality rating of A-2 or P-2 as established by Moody's or Standard & Poor's. In
addition, bankers' acceptances or certificates of deposit must be issued by
banks incorporated in the United States.

     4. Diversification. Without prior approval of the Company, additions to a
single security may not be made once the market value of the security exceeds
five percent (5%) of the total portfolio (at market value). Other than these
constraints, there are no quantitative guidelines suggested as to insurer,
industry or individual security diversification. However, prudent
diversification standards should be developed and maintained by the Investment
Manger.

                                   Exclusions

The following categories of securities are not permissible for investment in the
Company's portfolio without prior written approval:

          (a)  Unregistered or restricted stock;

          (b)  Commodities, including gold or currency futures;

          (c)  Conditional sales contracts;

          (d)  Options, including the purchase, sale or writing of options;

          (e)  Margin buying;

          (f)  Short selling;

          (g)  Leasebacks; and

          (h)  Fixed income securities.

                                       3
<PAGE>

Regulatory Considerations

     *  Risk Based Capital

         The Company, as an insurance entity, is regulated by various state
insurance departments, NAIC and A.M. Best. One element of the regulation is risk
based capital which has a RBC component related to the investment portfolio.
There are three factors which are evaluated by RBC: quality of invested assets,
mixed of invested assets and affiliate risk. Manager should be aware of the
RBC's current factors at all times when evaluating appropriate investment
consideration and not participate in any investment decision which would be
detrimental to the client's Risk Based Capital.

                                       4

<PAGE>

                                   Addendum B
                                INVESTMENT PLAN
                                       OF
                           PENN STAR INSURANCE COMPANY

                Investment Portfolio- Objectives and Guidelines

     The Board of Directors of PENN-STAR INSURANCE COMPANY (the "Company")
authorizes the Company's officers to engage the services of an Investment
Manager who possesses the necessary personnel and research facilities to manage
the Company's investment portfolio. The portfolio consists of common stocks,
preferred stocks and cash equivalents.

     The policy guidelines for the Investment Portfolio shall be as stated
herein, and are subject to modification with Board approval from time to time by
the Company after consideration of the advice and recommendations of the
Investment Manager.

     Execution of All Trades: It is hereby understood that all investment
transactions must have prior approval either written or verbal, of the Chairman
of the Investment Committee, Irvin Saltzman, prior to their initiation by the
investment manager, provided, however, that if the Chairman of the Investment
Committee is not available to give such approval and Advisor, in the exercise of
its fiduciary responsibility, believes the investment transaction should be
executed promptly, and the investment is within Client's Investment Objectives
and Policy Guidelines and Advisor's investment selection criteria, then Advisor
may execute the investment transaction and so advise the Chairman of the
Investment Committee as soon thereafter as possible. 

                              Investment Portfolio

     The Company's investment portfolio consists of funds allocated and invested
in one of two (2) basic forms of investment:

     (A) Money market and analogous cash equivalent funds, awaiting permanent
     investment into equities securities.

     (B) Equity issues including common and preferred stocks, units of
     beneficial interest, American Depository Receipts, and convertible
     securities.

<PAGE>

     The Company shall establish percentage allocation ranges for each category,
which shall be monitored on a regular, periodic basis and which may be changed
from time to time.

                              Investment Objectives

     1. The Company's investment portfolio is to be managed in a conservative,
risk adverse style with the objective of achieving long term performance
superior to the widely followed market averages.

     2. Primary investment emphasis shall be placed upon consistency of
performance, i.e., the achievement of investment objectives in such a manner as
to protect the Company's assets from excessive volatility in market value from
year to year.

     3. Significant investment emphasis shall also be placed upon the
preservation of the purchasing power of the assets.

     4. Sufficient liquidity shall be maintained to fund any possible corporate
outflows related to the property and casualty insurance business.

                          Investment Policy Guidelines

     Assets are to be managed with a view toward achieving the specific
investment objectives previously described. Consistency of performance,
protection of principal as well as purchasing power and the maintenance of
sufficient liquidity, should be the overriding guidelines for the investment
portfolio.

     To underscore these considerations, as well as to recognize the fiduciary
responsibilities associated with the management of the Company's assets, there
are certain characteristics which are expected to be associated with the
portfolio and which shall be viewed as guidelines in formulating investment
strategies.

                                A. Equity Issues

     1. Allocation. The target range of investments in equity issues is up to
thirty three and 1/3 percent (33 1/3%) of the value of the Company's capital
surplus.

     2. Types of Securities. Equity securities shall mean common and preferred
stocks or equivalents (e.g., units of beneficial interest, American Depository
Receipts, plus issues convertible into common stock).

                                       2

<PAGE>

     3. Cash Equivalents. At the discretion of the Investment Manager, short
term money market funds and/or investments may represent a material portion of
the equity issues. However, if commercial paper is used, it must have a minimum
quality rating of A-2 or P-2 as established by Moody's or Standard & Poor's. In
addition, bankers' acceptances or certificates of deposit must be issued by
banks incorporated in the United States.

     4. Diversification. Without prior approval of the Company, additions to a
single security may not be made once the market value of the security exceeds
five percent (5%) of the total portfolio (at market value). Other than these
constraints, there are no quantitative guidelines suggested as to insurer,
industry or individual security diversification. However, prudent
diversification standards should be developed and maintained by the Investment
Manger.

                                   Exclusions

     The following categories of securities are not permissible for investment
in the Company's portfolio without prior written approval:


          (a)  Unregistered or restricted stock;

          (b)  Commodities, including gold or currency futures;

          (c)  Conditional sales contracts;

          (d)  Options, including the purchase, sale or writing of options;

          (e)  Margin buying; 

          (f)  Short selling;

          (g)  Leasebacks; and

          (h)  Fixed income securities.

                                       3
<PAGE>

Regulatory Considerations

     *  Risk-Based Capital

         The Company, as an insurance entity, is regulated by various state
insurance departments, NAIC and A.M. Best. One element of the regulation is risk
based capital which has a RBC component related to the investment portfolio.
There are three factors which are evaluated by RBC: quality of invested assets,
mixed of invested assets and affiliate risk. Manager should be aware of the
RBC's current factors at all times when evaluating appropriate investment
considerations and not participate in any investment decision which would be
detrimental to the client's overall Risk-Based Capital.

                                       4

<PAGE>

                                   ADDENDUM C

COMPENSATION AND EXPENSES The Client shall compensate the Advisor for its
services by the payment of an annual fee, calculated monthly, billed and payable
quarterly in arrears, based on the market value of the Account, including cash
or its equivalents, at the following rates.

Balanced Assets                     Annual Rate 
First          $ 1,000,000              .75%
Next           $ 2,000,000              .563%
Up to          $50,000,000              .375%
 Over          $50,000,000                 *

* To be negotiated on a case by case basis.


/s/ RF initial as acknowledgement of fee schedule

     The Advisor's fee shall be computed by applying 1/12th of the annual
percentage rate to the market value of the account computed on the last day of
each month. In computing the value of the assets in the Account, securities
listed on any national securities exchange shall be valued at the last quoted
sale price on the principal exchange in which the security is traded on the
valuation date. Any other asset shall be valued in a manner determined in good
faith by or as directed by the Advisor to reflect its fair market value. Advisor
shall exclude from the calculation of its fee any securities placed in the
account by Client which Advisor does not supervise and regarding which advisor
exercises no investment discretion and assumes no liability. Client shall inform
Advisor, in writing, when Client places any such securities in the Account.

     The Client's execution of this Agreement shall constitute authorization by
the Client to the Independent Custodian of Client's funds to deduct the
Management Fee from the Client's Account when due, in accordance with the
following procedures:

          1.   Client provides authorization permitting Advisor's fees to be
               paid directly from Client's account held by an independent
               custodian,

          2.   Advisor sends Client and custodian, at least seven days prior to
               the request for payment, a bill showing the amount of fee, the
               value of Client's assets on which it was based, and the specific
               manner in which Advisor's fee was calculated,

          3.   Custodian sends Client a statement, at least quarterly,
               indicating all amounts disbursed from the account, including the
               amount of the advisory fees paid directly to Advisor.

          4.   This billing arrangement may be terminated at any time by written
               notice from Client to Advisor and custodian.