CREDIT AGREEMENT


                                      among


                            PENN-AMERICA GROUP, INC.,


                            THE LENDERS NAMED HEREIN,


                                       and


                           FIRST UNION NATIONAL BANK,
                                    as Agent


                       $25,000,000 Senior Credit Facility


                                   Arranged by
                          FIRST UNION CAPITAL MARKETS A
                    division of Wheat First Securities, Inc.


                         Dated as of September 28, 1998









<PAGE>


                                TABLE OF CONTENTS

                                                                            Page

RECITALS.......................................................................1

                                    ARTICLE I

                                   DEFINITIONS

1.1      Defined Terms.........................................................1
1.2      Accounting Terms.....................................................21
1.3      Other Terms; Construction............................................21

                                   ARTICLE II

                          AMOUNT AND TERMS OF THE LOANS

2.1      Commitments..........................................................22
2.2      Borrowings...........................................................22
2.3      Disbursements; Funding Reliance; Domicile of Loans...................23
2.4      Notes................................................................24
2.5      Termination and Reduction of Commitments.............................24
2.6      Mandatory Payments and Prepayments...................................25
2.7      Voluntary Prepayments................................................26
2.8      Interest.............................................................26
2.9      Fees.................................................................28
2.10     Interest Periods.....................................................29
2.11     Conversions and Continuations........................................30
2.12     Method of Payments; Computations.....................................31
2.13     Recovery of Payments.................................................32
2.14     Use of Proceeds......................................................32
2.15     Pro Rata Treatment...................................................32
2.16     Increased Costs; Change in Circumstances; Illegality; etc............33
2.17     Taxes    ............................................................35
2.18     Compensation.........................................................37

                                   ARTICLE III

                                LETTERS OF CREDIT

3.1      Issuance.............................................................38
3.2      Notices..............................................................39
3.3      Participations.......................................................39
3.4      Reimbursement........................................................39
3.5      Payment by Loans.....................................................40
3.6      Payment to Lenders...................................................40

                                       i
<PAGE>
3.7      Obligations Absolute.................................................41
3.8      Cash Collateral Account..............................................42
3.9      Effectiveness........................................................43

                                   ARTICLE IV

                             CONDITIONS OF BORROWING

4.1      Conditions of Initial Borrowing......................................43
4.2      Conditions of All Borrowings.........................................46

                                    ARTICLE V

                         REPRESENTATIONS AND WARRANTIES

5.1      Corporate Organization and Power.....................................47
5.2      Authorization; Enforceability........................................47
5.3      No Violation.........................................................48
5.4      Governmental and Third-Party Authorization; Permits..................48
5.5      Litigation...........................................................49
5.6      Taxes................................................................49
5.7      Subsidiaries.........................................................49
5.8      Full Disclosure......................................................49
5.9      Margin Regulations...................................................50
5.10     No Material Adverse Change...........................................50
5.11     Financial Matters....................................................50
5.12     Ownership of Properties..............................................52
5.13     ERISA    ............................................................52
5.14     Environmental Matters................................................52
5.15     Compliance With Laws.................................................53
5.16     Regulated Industries.................................................53
5.17     Insurance............................................................54
5.18     Material Contracts...................................................54
5.19     Reinsurance Agreements...............................................54
5.20     Labor Relations......................................................54
5.21     Year 2000 Compatibility..............................................55

                                   ARTICLE VI

                              AFFIRMATIVE COVENANTS

6.1      Financial Statements.................................................55
6.2      Statutory Financial Statements.......................................56
6.3      Other Business and Financial Information.............................57
6.4      Corporate Existence; Franchises; Maintenance of Properties...........60
6.5      Compliance with Laws.................................................60
6.6      Payment of Obligations...............................................60

                                       ii
<PAGE>
6.7      Insurance............................................................60
6.8      Maintenance of Books and Records; Inspection.........................60
6.9      Permitted Acquisitions...............................................61
6.10     Year 2000 Compatibility..............................................62
6.11     Deposit Relationship.................................................62
6.12     Further Assurances...................................................62

                                   ARTICLE VII

                               FINANCIAL COVENANTS

7.1      Leverage Ratio.......................................................63
7.2      Consolidated Net Worth...............................................63
7.3      Fixed Charge Coverage Ratio..........................................63
7.4      Risk-Based Capital Ratio.............................................63
7.5      Combined Net Premiums to Capital Ratio...............................63
7.6      Statutory Surplus....................................................64

                                  ARTICLE VIII

                               NEGATIVE COVENANTS

8.1      Merger; Consolidation................................................64
8.2      Indebtedness.........................................................64
8.3      Liens................................................................66
8.4      Disposition of Assets................................................67
8.5      Investments..........................................................68
8.6      Restricted Payments..................................................69
8.7      Transactions with Affiliates.........................................70
8.8      Lines of Business....................................................70
8.9      Certain Amendments...................................................70
8.10     Limitation on Certain Restrictions...................................71
8.11     No Other Negative Pledges............................................71
8.12     Fiscal Year..........................................................71
8.13     Accounting Changes...................................................71
8.14     Reinsurance Agreements...............................................71

                                   ARTICLE IX

                                EVENTS OF DEFAULT

9.1      Events of Default....................................................73
9.2      Remedies: Termination of Commitments, Acceleration, etc..............75
9.3      Remedies: Set-Off....................................................76

                                      iii
<PAGE>
                                    ARTICLE X

                                    THE AGENT

10.1     Appointment..........................................................76
10.2     Nature of Duties.....................................................76
10.3     Exculpatory Provisions...............................................77
10.4     Reliance by Agent....................................................77
10.5     Non-Reliance on Agent and Other Lenders..............................78
10.6     Notice of Default....................................................78
10.7     Indemnification......................................................78
10.8     The Agent in its Individual Capacity.................................79
10.9     Successor Agent......................................................79
10.10    Issuing Lender.......................................................80

                                   ARTICLE XI

                                  MISCELLANEOUS

11.1     Fees and Expenses....................................................80
11.2     Indemnification......................................................80
11.3     Governing Law; Consent to Jurisdiction...............................82
11.4     Arbitration; Preservation and Limitation of Remedies.................83
11.5     Notices..............................................................84
11.6     Amendments, Waivers, etc.............................................84
11.7     Assignments, Participations..........................................85
11.8     No Waiver............................................................88
11.9     Successors and Assigns...............................................88
11.10    Survival.............................................................88
11.11    Severability.........................................................88
11.12    Construction.........................................................88
11.13    Confidentiality......................................................89
11.14    Counterparts; Effectiveness..........................................89
11.15    Disclosure of Information............................................89
11.16    Entire Agreement.....................................................89

                                       iv

<PAGE>
                                    EXHIBITS

Exhibit A         Form of Note
Exhibit B-1       Form of Notice of Borrowing
Exhibit B-2       Form of Notice of Conversion/Continuation
Exhibit B-3       Form of Letter of Credit Notice
Exhibit C         Form of Compliance Certificate
Exhibit D         Form of Assignment and Acceptance
Exhibit E         Form of Opinion of Reed Smith Shaw & McClay LLP
Exhibit F         Form of Financial Condition Certificate




                                    SCHEDULES

Schedule 5.4      Consents and Approvals
Schedule 5.7      Subsidiaries
Schedule 5.18     Material Contracts
Schedule 5.19     Reinsurance Agreements
Schedule 8.2      Indebtedness
Schedule 8.3      Liens
Schedule 8.5      Investments
Schedule 8.7      Transactions with Affiliates
Schedule 8.8      Lines of Business


<PAGE>
                                                                     Draft No. 6
                                                                         9/25/98



                                CREDIT AGREEMENT


     THIS CREDIT  AGREEMENT,  dated as of the 28th day of September,  1998 (this
"Agreement"), is made among PENN-AMERICA GROUP, INC., a Pennsylvania corporation
with its principal offices in Hatboro,  Pennsylvania (the "Borrower"), the banks
and financial  institutions  listed on the signature pages hereto or that become
parties hereto after the date hereof  (collectively,  the "Lenders"),  and FIRST
UNION NATIONAL BANK ("First Union"), as agent for the Lenders (in such capacity,
the "Agent").


                                    RECITALS

     A. The  Borrower  has  requested  that the Lenders  make  available  to the
Borrower a  revolving  credit  facility  in the  aggregate  principal  amount of
$25,000,000.  The Borrower  will use the  proceeds of this  facility for working
capital and general corporate purposes, all as more fully described herein.

     B. The Lenders are willing to make  available  to the  Borrower  the credit
facility  described  herein subject to and on the terms and conditions set forth
in this Agreement.


                                    AGREEMENT

     NOW,  THEREFORE,  in consideration of the mutual provisions,  covenants and
agreements herein contained, the parties hereto hereby agree as follows:


                                    ARTICLE I

                                   DEFINITIONS

     1.1 Defined Terms. For purposes of this Agreement, in addition to the terms
defined elsewhere herein,  the following terms shall have the meanings set forth
below (such  meanings to be equally  applicable to the singular and plural forms
thereof):

     "Account  Designation  Letter" shall mean a letter from the Borrower to the
Agent,  duly  completed  and  signed by an  Authorized  Officer  and in form and
substance  satisfactory to the Agent,  listing any one or more accounts to which
the  Borrower may from time to time request the Agent to forward the proceeds of
any Loans made hereunder.

     "Acquisition" shall mean any transaction or series of related transactions,
consummated  on or after the date  hereof,  by which the Borrower  directly,  or
indirectly through one or more

<PAGE>

Subsidiaries,  (i) acquires any going business,  or all or substantially  all of
the  assets,  of any  Person,  whether  through  purchase  of assets,  merger or
otherwise,  or (ii)  acquires  securities  or other  ownership  interests of any
Person  having  at  least a  majority  of  combined  voting  power  of the  then
outstanding securities or other ownership interests of such Person.

     "Acquisition  Amount" shall mean, with respect to any Acquisition,  the sum
(without  duplication)  of (i) the amount of cash paid by the  Borrower  and its
Subsidiaries in connection with such Acquisition,  (ii) the Fair Market Value of
all  Capital  Stock of the  Borrower  issued  or given in  connection  with such
Acquisition, (iii) the amount (determined by using the face amount or the amount
payable at maturity, whichever is greater) of all Indebtedness incurred, assumed
or  acquired  by the  Borrower  and its  Subsidiaries  in  connection  with such
Acquisition,  (iv) all additional purchase price amounts in connection with such
Acquisition in the form of earnouts and other contingent obligations that should
be  recorded  as a  liability  on the  balance  sheet  of the  Borrower  and its
Subsidiaries or expensed,  in either event in accordance  with GAAP,  Regulation
S-X  under  the  Securities  Act of  1933,  as  amended,  or any  other  rule or
regulation of the  Securities and Exchange  Commission,  (v) all amounts paid in
respect of covenants not to compete,  consulting agreements and other affiliated
contracts  in  connection  with  such  Acquisition,   (vi)  the  amount  of  all
transaction fees and expenses (including,  without limitation, legal, accounting
and finders' fees and expenses) incurred by the Borrower and its Subsidiaries in
connection  with such  Acquisition  and (vii) the aggregate fair market value of
all other consideration given by the Borrower and its Subsidiaries in connection
with such Acquisition.

     "Adjusted  Base Rate" shall mean, at any time with respect to any Base Rate
Loan, a rate per annum equal to the Base Rate as in effect at such time plus the
Applicable Margin Percentage for Base Rate Loans as in effect at such time.

     "Adjusted  LIBOR Rate" shall  mean,  at any time with  respect to any LIBOR
Loan,  a rate per annum  equal to the LIBOR  Rate as in effect at such time plus
the Applicable Margin Percentage for LIBOR Loans as in effect at such time.

     "Affiliate" shall mean, as to any Person,  each other Person that directly,
or  indirectly  through  one  or  more  intermediaries,  owns  or  controls,  is
controlled  by or under  common  control  with,  such Person or is a director or
officer of such  Person.  For purposes of this  definition,  with respect to any
Person "control" shall mean (i) the possession, direct or indirect, of the power
to direct or cause the direction of the  management and policies of such Person,
whether through the ownership of voting securities, by contract or otherwise, or
(ii) the beneficial ownership of securities or other ownership interests of such
Person having 10% or more of the combined  voting power of the then  outstanding
securities or other  ownership  interests of such Person  ordinarily  (and apart
from rights  accruing under special  circumstances)  having the right to vote in
the election of directors or other governing body of such Person.

     "Agent" shall mean First Union,  in its capacity as Agent  appointed  under
Article X, and its successors and permitted assigns in such capacity.

                                       2
<PAGE>
     "Agreement"  shall mean this  Credit  Agreement,  as  amended,  modified or
supplemented in accordance with its terms from time to time.

     "Annual Statement" shall mean, with respect to any Insurance Subsidiary for
any fiscal year, the annual financial statements of such Insurance Subsidiary as
required to be filed with the Insurance Regulatory Authority of its jurisdiction
of domicile and in accordance with the laws of such jurisdiction,  together with
all exhibits,  schedules,  certificates  and actuarial  opinions  required to be
filed or delivered therewith.

     "Applicable  Margin  Percentage" shall mean, at any time from and after the
Closing  Date,  the  applicable  percentage  (a) to be added  to the  Base  Rate
pursuant to Section 2.8 for purposes of determining  the Adjusted Base Rate, (b)
to be  added  to the  LIBOR  Rate  pursuant  to  Section  2.8  for  purposes  of
determining  the  Adjusted  LIBOR Rate,  and (c) to be used in  calculating  the
commitment fee payable  pursuant to Section  2.9(b),  in each case as determined
under the following matrix with reference to the Leverage Ratio:

<TABLE>
<CAPTION>
                                                                                                 Applicable Margin
                                               Applicable Margin        Applicable Margin         Percentage for
                                                Percentage for           Percentage for             Unutilized
              Leverage Ratio                    Base Rate Loans            LIBOR Loans            Commitments Fee
              --------------                    ---------------            -----------            ---------------
<S>                                                 <C>                      <C>                     <C>   
   Greater than or equal to .30 to 1.0               0.50%                    1.50%                   0.325%
 Greater than or equal to .25 to 1.0 but
           less than .30 to 1.0                      0.25%                    1.25%                   0.275%
 Greater than or equal to .20 to 1.0 but
           less than .25 to 1.0                      0.00%                    1.00%                   0.225%
           Less than .20 to 1.0                      0.00%                    0.75%                   0.200%
</TABLE>
On  each  Adjustment  Date  (as  hereinafter  defined),  the  Applicable  Margin
Percentage  for all Loans and the  commitment  fee  payable  pursuant to Section
2.9(b) shall be adjusted  effective as of such date (based upon the  calculation
of the  Leverage  Ratio as of the last day of the  fiscal  period to which  such
Adjustment Date relates) in accordance with the above matrix; provided, however,
that,  notwithstanding the foregoing or anything else herein to the contrary, if
at any time the Borrower  shall have failed to deliver the financial  statements
and a Compliance Certificate as required by Section 6.1(a) or Section 6.1(b), as
the case may be,  and  Section  6.3(a),  then at the  election  of the  Required
Lenders,  at all times from and including the date on which such  statements and
Compliance  Certificate  are  required  to have been  delivered  (or the date of
occurrence of such Default or Event of Default,  as the case may be) to the date
on which the same shall have been delivered (or such Default or Event of Default
cured or waived, as the case may be), each Applicable Margin Percentage shall be
determined  in  accordance  with the above matrix as if the Leverage  Ratio were
greater than or equal to 0.30 : 1.0 (notwithstanding the actual Leverage Ratio).
For purposes of this definition,  "Adjustment  Date"

                                       3
<PAGE>
shall mean, with respect to any fiscal period of the Borrower beginning with the
fiscal quarter  ending  September 30, 1998, the fifth (5th) day (or, if such day
is not a Business Day, on the next  succeeding  Business Day) after  delivery by
the Borrower in accordance  with Section 6.1(a) or Section  6.1(b),  as the case
may be, of (i) financial  statements as of the end of and for such fiscal period
and (ii) a duly  completed  Compliance  Certificate  with respect to such fiscal
period. Until the first Adjustment Date, each Applicable Margin Percentage shall
be determined in accordance  with the above matrix based upon the Leverage Ratio
as set forth in the pro  forma  Covenant  Compliance  Worksheet  required  to be
delivered pursuant to Section 4.1(k).

     "Asset  Disposition"  shall mean any sale,  assignment,  transfer  or other
disposition  by the  Borrower  or any of its  Subsidiaries  to any other  Person
(other than to the  Borrower or to a Wholly  Owned  Subsidiary),  whether in one
transaction  or in a  series  of  related  transactions,  of any of its  assets,
business units or other properties (including any interests in property, whether
tangible or intangible, and including Capital Stock of Subsidiaries),  excluding
(i) sales of investment  assets in the ordinary  course of business,  (ii) sales
and licenses of inventory  and other assets in the ordinary  course of business,
and (iii) the sale or exchange of used or obsolete  equipment  to the extent the
proceeds of such sale are applied  towards,  or such equipment is exchanged for,
similar replacement equipment.

     "Assignee" shall have the meaning given to such term in Section 11.7(a).

     "Assignment and Acceptance" shall mean an Assignment and Acceptance entered
into  between  a Lender  and an  Assignee  and  accepted  by the  Agent  and the
Borrower, in substantially the form of Exhibit D.

     "Authorized  Officer"  shall  mean,  with  respect to any action  specified
herein,  any officer of the Borrower duly  authorized by resolution of the board
of  directors  of the  Borrower  to take such  action on its  behalf,  and whose
signature and incumbency shall have been certified to the Agent by the secretary
or an assistant secretary of the Borrower.

     "Available  Dividend  Amount"  shall mean,  with  respect to any  Insurance
Subsidiary for any period of four  consecutive  fiscal  quarters,  the aggregate
maximum amount of dividends that is or, if such period were a fiscal year, would
be permitted  by the  Insurance  Regulatory  Authority  of its  jurisdiction  of
domicile,  under  applicable  Requirements  of Law (without the necessity of any
consent,  approval  or  other  action  of such  Insurance  Regulatory  Authority
involving  the  granting of  permission  or the exercise of  discretion  by such
Insurance Regulatory Authority),  to be paid by such Insurance Subsidiary to the
Borrower or another  Subsidiary of the Borrower in respect of such  four-quarter
period as if such period were a fiscal year  (whether or not any such  dividends
are actually paid).

     "Bankruptcy Code" shall mean 11 U.S.C.  ss.ss. 101 et seq., as amended from
time to time, and any successor statute.

     "Base  Rate"  shall  mean the  higher  of (i) the per annum  interest  rate
publicly  announced  from  time to time  by  First  Union  in  Charlotte,  North
Carolina,  to be its prime rate (which may not  necessarily  be its best lending
rate),  as  adjusted  to conform to changes as of the opening of

                                       4
<PAGE>
business on the date of any such change in such prime rate, and (ii) the Federal
Funds  Rate plus 0.5% per  annum,  as  adjusted  to conform to changes as of the
opening of business on the date of any such change in the Federal Funds Rate.

     "Base Rate Loan" shall mean, at any time,  any Loan that bears  interest at
such time at the Adjusted Base Rate.

     "Borrower  Margin Stock" shall mean shares of capital stock of the Borrower
that are held by the  Borrower or any of its  Subsidiaries  and that  constitute
Margin Stock.

     "Borrowing"  shall mean the  incurrence  by the  Borrower  (including  as a
result of conversions and continuations of outstanding Loans pursuant to Section
2.11) on a single  date of a group of Loans of a single Type and, in the case of
LIBOR Loans, as to which a single Interest Period is in effect.

     "Borrowing  Date" shall mean, with respect to any Borrowing,  the date upon
which such Borrowing is made.

     "Business  Day" shall mean (i) any day other than a Saturday  or Sunday,  a
legal holiday or a day on which commercial banks in Charlotte, North Carolina or
Philadelphia,  Pennsylvania are required by law to be closed and (ii) in respect
of any  determination  relevant to a LIBOR Loan, any such day that is also a day
on which tradings are conducted in the London interbank Eurodollar market.

     "Capital  Stock"  shall  mean  (i) with  respect  to any  Person  that is a
corporation,  any and all shares,  interests  or  equivalents  in capital  stock
(whether  voting  or  nonvoting,  and  whether  common  or  preferred)  of  such
corporation,  and (ii) with respect to any Person that is not a corporation, any
and all  partnership,  membership,  limited  liability  company or other  equity
interests  of such Person;  and in each case,  any and all  warrants,  rights or
options to purchase any of the foregoing.

     "Cash  Collateral  Account"  shall have the  meaning  given to such term in
Section 3.8.

     "Cash  Equivalents"  shall mean (i)  securities  issued or  unconditionally
guaranteed  by the United  States of  America  or any agency or  instrumentality
thereof, backed by the full faith and credit of the United States of America and
maturing  within 90 days from the date of  acquisition,  (ii)  commercial  paper
issued by any Person  organized  under the laws of the United States of America,
maturing  within  90 days  from  the  date of  acquisition  and,  at the time of
acquisition,  having  a rating  of at least  A-1 or the  equivalent  thereof  by
Standard & Poor's or at least P-1 or the  equivalent  thereof by Moody's,  (iii)
time deposits and  certificates of deposit maturing within 90 days from the date
of issuance and issued by a bank or trust  company  organized  under the laws of
the United States of America or any state thereof that has combined  capital and
surplus  of at least  $500,000,000  and that has (or is a  subsidiary  of a bank
holding company that has) a long-term unsecured debt rating of at least A or the
equivalent thereof by Standard & Poor's or at least A2 or the equivalent thereof
by Moody's, (iv) repurchase obligations with a term not exceeding seven (7) days
with respect to underlying securities of the types described in clause (i)

                                       5
<PAGE>
above  entered into with any bank or trust  company  meeting the  qualifications
specified in clause (iii) above,  and (v) money market funds at least 95% of the
assets of which are continuously invested in securities of the type described in
clause (i) above.

     "Closing  Date"  shall  mean  the  first  date  (which  may be  prior to or
concurrent  with the date of the  initial  Borrowing  hereunder)  upon which the
conditions set forth in Section 4.1 are satisfied or waived as provided herein.

     "CMOs" shall mean any security or certificate  representing any interest or
participation in a pool of Mortgage Backed  Securities (it being understood that
Mortgage Backed Securities themselves are not CMOs).

     "Combined  Net Cash Flow"  means,  for any period,  (i) the  aggregate  Net
Income of the non-Insurance  Subsidiaries for such period,  plus (ii) the sum of
depreciation expense,  amortization (whether positive or negative) of intangible
assets and other non-cash expenses,  losses and charges reducing income, in each
case to the extent taken into account in the  calculation of such Net Income for
such period,  minus (iii) the sum of capital expenditures and all non-cash gains
and other non-cash  items taken into account in determining  such Net Income for
such period,  plus (iv) any increase during such period in deferred taxes, minus
(v) any  decrease  during such period in deferred  taxes.  For  purposes of this
definition,  "non-Insurance Subsidiaries" shall not include any Subsidiary of an
Insurance Subsidiary.

     "Combined Net Premiums to Capital  Ratio" shall mean, as of the last day of
any fiscal quarter,  the ratio of (i) Combined Net Written Premiums for the four
fiscal quarters ending on such date, to (ii) the Combined  Statutory Capital and
Surplus as of such date.

     "Combined Net Written  Premiums" shall mean, for any period,  the aggregate
Net Written Premiums for all Insurance Subsidiaries for such period.

     "Combined  Statutory  and Capital  Surplus"  shall mean,  at any time,  the
aggregate  (without  duplication)  of  Statutory  and  Capital  Surplus  of each
Insurance Subsidiary at such time, after eliminating the effect thereupon of any
transactions among the Insurance Subsidiaries.

     "Commitment" shall mean, with respect to any Lender at any time, the amount
set forth  opposite such  Lender's  name on its signature  page hereto under the
caption  "Commitment" or, if such Lender has entered into one or more Assignment
and  Acceptances,  the  amount  set  forth  for such  Lender at such time in the
Register  maintained by the Agent  pursuant to Section  11.7(b) as such Lender's
"Commitment," as such amount may be reduced at or prior to such time pursuant to
the terms hereof.

     "Compliance  Certificate"  shall mean a fully  completed  and duly executed
certificate  in the form of  Exhibit  C,  together  with a  Covenant  Compliance
Worksheet.

         "Consolidated Indebtedness" shall mean, as of the last day of any
fiscal quarter, the aggregate of all Indebtedness (whether or not reflected on
the Borrower's or any Subsidiary's

                                       6
<PAGE>
balance sheet) of the Borrower and its Subsidiaries as of such date,  determined
on a consolidated basis in accordance with GAAP.

     "Consolidated  Interest  Expense"  shall  mean,  for  any  period,  the sum
(without  duplication)  of (i) total  interest  expense of the  Borrower and its
Subsidiaries  for such  period in respect of  Consolidated  Indebtedness  of the
Borrower and its Subsidiaries (including,  without limitation, all such interest
expense accrued or capitalized during such period,  whether or not actually paid
during such period), determined on a consolidated basis in accordance with GAAP,
(ii) all net amounts  payable  under or in respect of Hedge  Agreements,  to the
extent paid or accrued by the Borrower and its Subsidiaries  during such period,
and (iii) all commitment  fees and other ongoing fees in respect of Consolidated
Indebtedness (including the commitment fee provided for under Section 2.9(b) and
the fees provided for under the Fee Letter) paid,  accrued or capitalized by the
Borrower and its Subsidiaries during such period.

     "Consolidated Net Income" shall mean, for any period,  net income (or loss)
for  the  Borrower  and  its  Subsidiaries  for  such  period,  determined  on a
consolidated basis in accordance with GAAP.

     "Consolidated Net Worth" shall mean, as of any date of  determination,  the
net worth of the Borrower and its Subsidiaries as of such date,  determined on a
consolidated  basis in accordance  with GAAP but (i) excluding any  Disqualified
Capital  Stock and (ii)  without  regard to the  requirements  of  Statement  of
Financial  Accounting  Standards  No.  115  issued by the  Financial  Accounting
Standards Board of the American Institute of Certified Public Accountants.

     "Contingent  Obligation" shall mean, with respect to any Person, any direct
or indirect liability of such Person with respect to any Indebtedness, liability
or other  obligation (the "primary  obligation") of another Person (the "primary
obligor"),  whether or not contingent, (a) to purchase,  repurchase or otherwise
acquire such primary obligation or any property  constituting direct or indirect
security  therefor,  (b) to  advance  or  provide  funds (i) for the  payment or
discharge of any such primary  obligation or (ii) to maintain working capital or
equity capital of the primary  obligor or otherwise to maintain the net worth or
solvency or any balance  sheet item,  level of income or financial  condition of
the primary obligor, (c) to purchase property,  securities or services primarily
for the  purpose of assuring  the owner of any such  primary  obligation  of the
ability  of the  primary  obligor in  respect  thereof  to make  payment of such
primary  obligation or (d) otherwise to assure or hold harmless the owner of any
such  primary  obligation  against  loss or failure or  inability  to perform in
respect thereof;  provided,  however, that, with respect to the Borrower and its
Subsidiaries,  the term Contingent Obligation shall not include (y) endorsements
for collection or deposit in the ordinary  course of business or (z) obligations
entered into by an Insurance  Subsidiary in the ordinary  course of its business
under  insurance  policies or contracts  issued by it or to which it is a party,
including  reinsurance  agreements  (and security  posted by any such  Insurance
Subsidiary  in  the  ordinary  course  of its  business  to  secure  obligations
thereunder).

     "Covenant  Compliance  Worksheet" shall mean a fully completed worksheet in
the form of Attachment A to Exhibit C.

                                       7
<PAGE>
     "Credit  Documents"  shall mean this Agreement,  the Notes,  the Letters of
Credit, the Fee Letter, any Hedge Agreement to which the Borrower and any Lender
are parties and that is permitted or required to be entered into by the Borrower
hereunder, and all other agreements, instruments, documents and certificates now
or hereafter  executed and  delivered to the Agent or any Lender by or on behalf
of the Borrower or any of its  Subsidiaries  with respect to this  Agreement and
the  transactions  contemplated  hereby,  in  each  case as  amended,  modified,
supplemented or restated from time to time.

     "Debt  Issuance"  shall mean the issuance or sale by the Borrower or any of
its  Subsidiaries of any debt  securities,  whether in a public offering of such
securities or otherwise.

     "Debt  Service"  shall  mean,  for  any  period,   the  aggregate  (without
duplication) of all principal and Consolidated  Interest Expense paid or accrued
by  the  Borrower  and  its  Subsidiaries  during  such  period  in  respect  of
Indebtedness (including, without limitation, the Loans).

     "Default"  shall mean any event or condition that, with the passage of time
or giving of notice, or both, would constitute an Event of Default.

     "Disqualified  Capital Stock" shall mean,  with respect to any Person,  any
Capital Stock of such Person that, by its terms (or by the terms of any security
into  which it is  convertible  or for  which it is  exchangeable),  or upon the
happening of any event or otherwise, (i) matures or is mandatorily redeemable or
subject to any  mandatory  repurchase  requirement,  pursuant to a sinking  fund
obligation  or  otherwise,  (ii)  is  redeemable  or  subject  to any  mandatory
repurchase  requirement  at the sole option of the holder  thereof,  or (iii) is
convertible into or exchangeable for (whether at the option of the issuer or the
holder  thereof) (a) debt securities or (b) any Capital Stock referred to in (i)
or (ii)  above,  in each case under (i),  (ii) or (iii)  above at any time on or
prior to the first  anniversary of the Maturity Date;  provided,  however,  that
only the portion of Capital Stock that so matures or is mandatorily  redeemable,
is so redeemable at the option of the holder  thereof,  or is so  convertible or
exchangeable on or prior to such date shall be deemed to be Disqualified Capital
Stock.

     "Dollars" or "$" shall mean dollars of the United States of America.

     "Duff & Phelps"  shall mean Duff & Phelps  Rating Co., its  successors  and
assigns.

     "ERISA" shall mean the Employee  Retirement Income Security Act of 1974, as
amended  from  time to  time,  and any  successor  statute,  and all  rules  and
regulations from time to time promulgated thereunder.

     "ERISA  Affiliate" shall mean any Person  (including any trade or business,
whether or not  incorporated)  that would be deemed to be under "common control"
with, or a member of the same "controlled  group" as, the Borrower or any of its
Subsidiaries,  within the meaning of  Sections  414(b),  (c),  (m) or (o) of the
Internal Revenue Code or Section 4001 of ERISA.

     "ERISA  Event"  shall mean any of the  following  with respect to a Plan or
Multiemployer Plan, as applicable: (i) a Reportable Event with respect to a Plan
or a Multiemployer  Plan, (ii) a

                                       8
<PAGE>
complete or partial  withdrawal  by the Borrower or any ERISA  Affiliate  from a
Multiemployer  Plan that  results in  liability  under  Section  4201 or 4204 of
ERISA,  or the receipt by the  Borrower or any ERISA  Affiliate of notice from a
Multiemployer  Plan  that it is in  reorganization  or  insolvency  pursuant  to
Section 4241 or 4245 of ERISA or that it intends to terminate or has  terminated
under  Section  4041A of ERISA,  (iii) the  distribution  by the Borrower or any
ERISA  Affiliate  under  Section 4041 or 4041A of ERISA of a notice of intent to
terminate any Plan or the taking of any action to terminate  any Plan,  (iv) the
commencement  of  proceedings  by the PBGC under  Section  4042 of ERISA for the
termination of, or the appointment of a trustee to administer,  any Plan, or the
receipt  by  the  Borrower  or  any  ERISA   Affiliate  of  a  notice  from  any
Multiemployer  Plan that such action has been taken by the PBGC with  respect to
such Multiemployer Plan, (v) the institution of a proceeding by any fiduciary of
any  Multiemployer  Plan against the Borrower or any ERISA  Affiliate to enforce
Section 515 of ERISA,  which is not dismissed  within thirty (30) days, (vi) the
imposition upon the Borrower or any ERISA Affiliate of any liability under Title
IV of ERISA,  other than for PBGC premiums due but not delinquent  under Section
4007 of ERISA,  or the imposition or threatened  imposition of any Lien upon any
assets of the Borrower or any ERISA Affiliate as a result of any alleged failure
to comply with the Internal  Revenue Code or ERISA in respect of any Plan, (vii)
the  engaging  in  or  otherwise  becoming  liable  for a  nonexempt  Prohibited
Transaction  by the Borrower or any ERISA  Affiliate,  (viii) a violation of the
applicable  requirements of Section 404 or 405 of ERISA or the exclusive benefit
rule under Section  401(a) of the Internal  Revenue Code by any fiduciary of any
Plan for which the  Borrower or any of its ERISA  Affiliates  may be directly or
indirectly  liable  or (ix) the  adoption  of an  amendment  to any  Plan  that,
pursuant to Section  401(a)(29)  of the Internal  Revenue Code or Section 307 of
ERISA,  would result in the loss of tax-exempt status of the trust of which such
Plan is a part if the  Borrower or an ERISA  Affiliate  fails to timely  provide
security to such Plan in accordance with the provisions of such sections.

     "Eligible  Assignee"  shall mean (i) a commercial  bank organized under the
laws of the United States or any state thereof and having total assets in excess
of $1,000,000,000,  (ii) a commercial bank organized under the laws of any other
country  that is a member  of the  Organization  for  Economic  Cooperation  and
Development or any successor thereto (the "OECD") or a political  subdivision of
any such country and having total assets in excess of  $1,000,000,000,  provided
that  such bank or other  financial  institution  is acting  through a branch or
agency located in the United  States,  in the country under the laws of which it
is organized or in another country that is also a member of the OECD,  (iii) the
central bank of any country that is a member of the OECD, (iv) a finance company
or other financial institution or fund that is (A) engaged in making, purchasing
or otherwise investing in loans in the ordinary course of its business,  (B) has
total  assets  in excess of  $500,000,000,  and (C) is not,  and does not have a
substantial  interest in, an insurance company unless otherwise agreed to by the
Borrower,  (v) any  Affiliate  of an  existing  Lender or (vi) any other  Person
approved by the  Required  Lenders,  which  approval  shall not be  unreasonably
withheld.

     "Environmental Claims" shall mean any and all administrative, regulatory or
judicial actions,  suits, demands, demand letters,  claims, liens,  accusations,
allegations,  notices of noncompliance or violation,  investigations (other than
internal  reports  prepared by any Person in the ordinary course of its business
and not in  response  to any  third  party  action  or  request  of any kind) or
proceedings  relating  in any  way to any  actual  or  alleged  violation  of or
liability under

                                       9
<PAGE>
any  Environmental  Law or relating to any permit issued, or any approval given,
under any such Environmental Law (collectively,  "Claims"),  including,  without
limitation,  (i) any and all Claims by Governmental Authorities for enforcement,
cleanup, removal, response, remedial or other actions or damages pursuant to any
applicable  Environmental  Law and (ii) any and all  Claims by any  third  party
seeking damages, contribution,  indemnification,  cost recovery, compensation or
injunctive  relief  resulting from Hazardous  Substances or arising from alleged
injury or threat of injury to human  health or the  environment,  but  excluding
normal claims in the ordinary course of business pursuant to insurance  policies
written by an Insurance Subsidiary, the loss reserves for which are reflected in
such Insurance Subsidiary's most recent Annual or Quarterly Statements.

     "Environmental Laws" shall mean any and all federal,  state and local laws,
statutes, ordinances, rules, regulations, permits, licenses, approvals, rules of
common law and orders of courts or  Governmental  Authorities,  relating  to the
protection of human health or  occupational  safety or the  environment,  now or
hereafter  in effect and in each case as amended  from time to time,  including,
without  limitation,  requirements  pertaining to the  manufacture,  processing,
distribution,  use,  treatment,  storage,  disposal,  transportation,  handling,
reporting,  licensing,  permitting,  investigation  or  remediation of Hazardous
Substances.

     "Event of  Default"  shall have the  meaning  given to such term in Section
9.1.

     "Exchange Act" shall mean the  Securities  Exchange Act of 1934, as amended
from time to time, and any successor statute, and all rules and regulations from
time to time promulgated thereunder.

     "Fair Market  Value" shall mean,  with respect to any Capital  Stock of the
Borrower  given in  connection  with an  Acquisition,  the  value  given to such
Capital  Stock for  purposes  of such  Acquisition  by the parties  thereto,  as
determined  in good faith  pursuant to the  relevant  acquisition  agreement  or
otherwise in connection with such Acquisition.

     "Federal  Funds Rate" shall mean, for any period,  a fluctuating  per annum
interest  rate  (rounded  upwards,  if  necessary,  to the nearest  1/100 of one
percentage  point) equal for each day during such period to the weighted average
of the rates on overnight federal funds transactions with members of the Federal
Reserve System arranged by federal funds brokers, as published for such day (or,
if such day is not a Business Day, for the next  preceding  Business Day) by the
Federal  Reserve Bank of New York,  or if such rate is not so published  for any
day that is a Business Day, the average of the  quotations  for such day on such
transactions  received  by  the  Agent  from  three  federal  funds  brokers  of
recognized standing selected by the Agent.

     "Federal  Reserve  Board"  shall mean the Board of Governors of the Federal
Reserve System or any successor thereto.

     "Fee  Letter"  shall mean the  amended and  restated  fee letter from First
Union to the  Borrower,  dated  September  25,  1998,  relating to certain  fees
payable by the  Borrower  in respect of the  transactions  contemplated  by this
Agreement, as amended, modified or supplemented from time to time.

                                       10
<PAGE>
     "Financial  Condition  Certificate"  shall mean a fully  completed and duly
executed certificate,  substantially in the form of Exhibit F, together with the
attachments thereto.

     "Financial  Officer"  shall mean,  with respect to the Borrower,  the chief
financial  officer,  vice president - finance,  principal  accounting officer or
treasurer of the Borrower.

     "Fixed Charge  Coverage Ratio" shall mean, as of the last day of any period
of four consecutive fiscal quarters (the "Measurement Period"), the ratio of:

          (i) the sum (without duplication) of (w) the Available Dividend Amount
     for the Measurement Period for the Insurance Subsidiaries,  other than each
     Insurance Subsidiary that is a Subsidiary of another Insurance  Subsidiary,
     plus (x) the Net Tax  Sharing  Payments  with  respect  to the  Measurement
     Period,  plus (y) the Combined Net Cash Flow (whether positive or negative)
     of the  non-Insurance  Subsidiaries for the Measurement  Period,  minus (z)
     Holding Company Expenses accrued during such Measurement Period, to

          (ii) the  aggregate  of (x) the Debt Service with respect to the Loans
     and  all  other  Consolidated  Indebtedness  reasonably  determined  by the
     Borrower (and as set forth in the relevant Covenant  Compliance  Worksheet)
     to be required to be paid or accrued by the  Borrower  during the period of
     four  consecutive  fiscal  quarters  immediately  following the Measurement
     Period (the "Pro Forma Period"), based on the amount of the Loans and other
     Consolidated  Indebtedness  outstanding at the beginning of such period and
     assuming that the rates in effect at the  beginning of such period,  taking
     into account the benefit and costs of any Hedge  Agreement  with respect to
     the Loans, will remain in effect throughout such period, plus (y) dividends
     reasonably  estimated  by the  Borrower  (and as set forth in the  relevant
     Covenant Compliance Worksheet) to be required to be incurred or paid by the
     Borrower during the Pro Forma Period (based upon the most recent  quarterly
     dividend rate), plus (z) stock repurchases by the Borrower occurring during
     the Measurement Period;

provided that, the stock repurchases referred to in subclause (z) of clause (ii)
above shall not include the first $10,000,000 of such repurchases occurring
between June 30, 1998 and September 30, 1999.

     "GAAP" shall mean generally accepted accounting principles, as set forth in
the statements,  opinions and pronouncements of the Accounting Principles Board,
the  American  Institute  of  Certified  Public  Accountants  and the  Financial
Accounting Standards Board,  consistently  applied and maintained,  as in effect
from time to time (subject to the provisions of Section 1.2).

     "Governmental Authority" shall mean any nation or government,  any state or
other political subdivision thereof and any central bank thereof, any municipal,
local,  city  or  county  government,   and  any  entity  exercising  executive,
legislative,  judicial,  regulatory or administrative functions of or pertaining
to government, and any corporation or other entity owned or controlled,  through
stock or capital ownership or otherwise,  by any of the foregoing

                                       11
<PAGE>
and exercising  executive  legislative,  judicial,  regulatory or administrative
functions of or pertaining to government.

     "Gross  Written  Premiums"  shall  mean,  with  respect  to  any  Insurance
Subsidiary  at any time,  the amount of premiums  written  (after  deducting  or
adding  premiums on business  ceded to or assumed  from others) as shown on line
32,  page 9, Part 2B, sum of columns  1, 2a and 2b, of the Annual  Statement  of
such Insurance  Subsidiary,  or the amount determined in a consistent manner for
any date other  than a date as of which an Annual  Statement  of such  Insurance
Subsidiary is prepared.

     "Hazardous  Substances" shall mean any substances or materials (i) that are
or  become  defined  as  hazardous  wastes,  hazardous  substances,  pollutants,
contaminants or toxic  substances under any applicable  Environmental  Law, (ii)
that are  defined  by any  applicable  Environmental  Law as  toxic,  explosive,
corrosive, ignitable, infectious, radioactive, mutagenic or otherwise hazardous,
(iii)  the  presence  of which  require  investigation  or  response  under  any
applicable  Environmental  Law,  (iv) that  constitute  a nuisance,  trespass or
health or safety hazard to Persons or neighboring  properties,  (v) that consist
of underground or aboveground storage tanks,  whether empty, filled or partially
filled with any substance, or (vi) that contain,  without limitation,  asbestos,
polychlorinated   biphenyls,   urea  formaldehyde  foam  insulation,   petroleum
hydrocarbons,  petroleum derived substances or wastes,  crude oil, nuclear fuel,
natural gas or synthetic gas.

     "Hedge  Agreement"  shall mean any interest or foreign  currency rate swap,
cap,  collar,  option,  hedge,  forward  rate  or  other  similar  agreement  or
arrangement  designed  to protect  against  fluctuations  in  interest  rates or
currency exchange rates.

     "Holding Company Expenses" shall mean, for any period, the aggregate of the
following  expenses  incurred or paid by the Borrower  during such  period:  all
operating  costs  and  expenses  of the  Borrower,  including  rent,  utilities,
professional  fees,  taxes  (without  duplication  for  taxes  included  in  the
determination of Net Tax Sharing Payments) and payroll expenses.

     "Hybrid Equity Issuance" shall mean the issuance, sale or other disposition
by the Borrower or any of its Subsidiaries of trust preferred  securities or any
other security or instrument representing,  convertible into or exchangeable for
a similar interest in the Borrower or any of its Subsidiaries.

     "Indebtedness"   shall   mean,   with   respect  to  any  Person   (without
duplication),  (i) all  indebtedness and obligations of such Person for borrowed
money or in respect of loans or advances of any kind,  (ii) all  obligations  of
such Person evidenced by notes, bonds, debentures or similar instruments,  (iii)
all  reimbursement  obligations  of such  Person with  respect to surety  bonds,
letters of credit and bankers'  acceptances (in each case,  whether or not drawn
or matured  and in the stated  amount  thereof),  (iv) all  obligations  of such
Person to pay the  deferred  purchase  price of  property or  services,  (v) all
indebtedness  created  or  arising  under any  conditional  sale or other  title
retention  agreement with respect to property acquired by such Person,  (vi) all
obligations  of such Person as lessee  under  leases that are or are required to
be, in  accordance  with GAAP,  recorded as capital  leases,  to the extent such
obligations are required to be so

                                       12
<PAGE>
recorded,  (vii) all Disqualified  Capital Stock issued by such Person, with the
amount of  Indebtedness  represented  by such  Disqualified  Capital Stock being
equal to the greater of its voluntary or involuntary  liquidation preference and
its maximum fixed repurchase price, but excluding accrued dividends, if any (for
purposes  hereof,  the  "maximum  fixed  repurchase  price" of any  Disqualified
Capital Stock that does not have a fixed repurchase price shall be calculated in
accordance  with  the  terms  of  such  Disqualified  Capital  Stock  as if such
Disqualified  Capital  Stock were  purchased  on any date on which  Indebtedness
shall be required to be determined pursuant to this Agreement, and if such price
is based  upon,  or  measured  by, the fair  market  value of such  Disqualified
Capital Stock, such fair market value shall be determined reasonably and in good
faith by the board of  directors or other  governing  body of the issuer of such
Disqualified  Capital  Stock),  (viii) the net  termination  obligations of such
Person  under  any  Hedge  Agreements,  calculated  as of any  date  as if  such
agreement or arrangement  were  terminated as of such date,  (ix) all Contingent
Obligations of such Person and (x) all  indebtedness  referred to in clauses (i)
through (ix) above secured by any Lien on any property or asset owned or held by
such Person  regardless of whether the  indebtedness  secured thereby shall have
been assumed by such Person or is nonrecourse to the credit of such Person.

     "Insurance  Regulatory Authority" shall mean, with respect to any Insurance
Subsidiary,  the insurance department or similar Governmental  Authority charged
with  regulating  insurance  companies or insurance  holding  companies,  in its
jurisdiction  of domicile  and, to the extent that it has  regulatory  authority
over  such  Insurance  Subsidiary,  in each  other  jurisdiction  in which  such
Insurance Subsidiary conducts business or is licensed to conduct business.

     "Insurance  Subsidiary"  shall  mean any  Subsidiary  of the  Borrower  the
ability  of which to pay  dividends  is  regulated  by an  Insurance  Regulatory
Authority or that is otherwise  required to be regulated  thereby in  accordance
with the applicable  Requirements of Law of its  jurisdiction  of domicile,  and
shall mean and include, without limitation, PAIC and PSIC.

     "Interest  Period"  shall  have the  meaning  given to such term in Section
2.10.

     "Internal  Revenue  Code" shall mean the Internal  Revenue Code of 1986, as
amended  from  time to  time,  and any  successor  statute,  and all  rules  and
regulations from time to time promulgated thereunder.

     "Invested  Assets" shall mean, as to any  Insurance  Subsidiary,  as of any
date, the total amount shown on page 2, column 4, line 9 of the Annual Statement
of the Insurance Subsidiary,  or an amount determined in a consistent manner for
any date other than one as of which an Annual Statement is prepared.

     "Investment Grade  Securities" shall mean (i) non-equity  securities (other
than  those  issued by an  Affiliate  of the  Borrower  and other  than CMOs and
REMICs) or preferred  equity  securities  that, if rated by the NAIC,  are rated
"NAIC 2 (or the  equivalent  thereof) or better by the NAIC, or, if not rated by
the NAIC,  are rated "BBB" (or the  equivalent  thereof) or higher by Standard &
Poor's,  "Baa3" (or the equivalent  thereof) or higher by Moody's,  or "BBB" (or
the equivalent  thereof) or higher by Duff & Phelps,  (ii) municipal bonds that,
if rated by the NAIC, are rated "NAIC 2 (or the equivalent thereof) or better by
the NAIC,  or if not rated by the NAIC,

                                       13
<PAGE>
are rated  "SP-2" (or the  equivalent  thereof)  or higher by  Standard & Poor's
"Baa3" or "MIG4" (or the equivalent  thereof) or higher by Moody's, or "BBB" (or
the equivalent thereof) or higher by Duff & Phelps, and (iii) Permitted CMOs and
Mortgage  Backed  Securities  that, if rated by the NAIC, are rated "NAIC 2" (or
the  equivalent  thereof)  or  higher  by  Standard  &  Poor's,  "Baa3"  (or the
equivalent  thereof) or higher by Moody's,  or "BBB" (or the equivalent thereof)
or higher  by Duff & Phelps  (or,  in the case of  clauses  (i),  (ii) and (iii)
above,  in the  event  all such  rating  agencies  cease to  publish  investment
ratings,  carrying  an  equivalent  rating  of a  nationally  recognized  rating
agency).

     "Issuing  Lender"  shall mean First Union in its  capacity as issuer of the
Letters of Credit, and its successors in such capacity.

     "LIBOR Loan" shall mean, at any time,  any Loan that bears interest at such
time at the Adjusted LIBOR Rate.

     "LIBOR Rate" shall mean, with respect to each LIBOR Loan comprising part of
the same Borrowing for any Interest Period,  an interest rate per annum obtained
by dividing (i) (y) the rate of interest appearing on Telerate Page 3750 (or any
successor  page)  or (z) if no such  rate is  available,  the  rate of  interest
determined by the Agent to be the rate or the arithmetic  mean of rates (rounded
upward,  if  necessary,  to the nearest 1/16 of one  percentage  point) at which
Dollar  deposits in  immediately  available  funds are offered by First Union to
first-tier banks in the London interbank  Eurodollar  market, in each case under
(y) and (z) above at  approximately  11:00 a.m.,  London time,  two (2) Business
Days prior to the first day of such Interest  Period for a period  substantially
equal to such Interest Period and in an amount substantially equal to the amount
of First  Union's  LIBOR Loan  comprising  part of such  Borrowing,  by (ii) the
amount equal to 1.00 minus the Reserve Requirement  (expressed as a decimal) for
such Interest Period.

     "Lender" shall mean each financial  institution  signatory  hereto and each
other  financial  institution  that  becomes a "Lender"  hereunder  pursuant  to
Section 11.7, and their respective successors and permitted assigns.

     "Lending Office" shall mean, with respect to any Lender, the office of such
Lender  designated as its "Lending Office" on its signature page hereto or in an
Assignment and Acceptance,  or such other office as may be otherwise  designated
in writing  from time to time by such Lender to the  Borrower  and the Agent.  A
Lender may  designate  separate  Lending  Offices as provided  in the  foregoing
sentence for the  purposes of making or  maintaining  different  Types of Loans,
and,  with  respect to LIBOR  Loans,  such  office may be a domestic  or foreign
branch or Affiliate of such Lender.

     "Letter of Credit  Exposure"  shall mean, with respect to any Lender at any
time,  such Lender's  ratable share (based on the proportion that its Commitment
bears to the aggregate Commitments at such time) of the sum of (i) the aggregate
Stated  Amount of all  Letters of Credit  outstanding  at such time and (ii) the
aggregate amount of all Reimbursement Obligations outstanding at such time.

     "Letter  of Credit  Notice"  shall have the  meaning  given to such term in
Section 3.2.

                                       14
<PAGE>
     "Letters of Credit"  shall have the  meaning  given to such term in Section
3.1.

     "Leverage Ratio" shall mean, as of the last day of any fiscal quarter,  the
ratio  of (i)  Consolidated  Indebtedness  as of such  date  to (ii)  the sum of
Consolidated Indebtedness and Consolidated Net Worth as of such date.

     "Lien" shall mean any mortgage, pledge, hypothecation, assignment, security
interest, lien (statutory or otherwise),  preference,  priority, charge or other
encumbrance of any nature, whether voluntary or involuntary,  including, without
limitation,  the  interest of any vendor or lessor  under any  conditional  sale
agreement,  title  retention  agreement,  capital  lease or any  other  lease or
arrangement having substantially the same effect as any of the foregoing.

     "Loans" shall have the meaning given to such term in Section 2.1.

     "Margin Stock" shall have the meaning given to such term in Regulation U.

     "Material  Adverse  Change"  shall  mean a material  adverse  change in the
condition (financial or otherwise),  operations, prospects, business, properties
or assets of the Borrower and its Subsidiaries, taken as a whole.

     "Material Adverse Effect" shall mean a material adverse effect upon (i) the
condition (financial or otherwise),  operations, prospects, business, properties
or assets  of the  Borrower  and its  Subsidiaries,  taken as a whole,  (ii) the
ability of the Borrower or any Subsidiary to perform its obligations  under this
Agreement or any of the other  Credit  Documents to which it is a party or (iii)
the legality,  validity or  enforceability of this Agreement or any of the other
Credit  Documents  or the  rights  and  remedies  of the Agent  and the  Lenders
hereunder and thereunder.

     "Material  Contract"  shall have the meaning  given to such term in Section
5.18.

     "Material Insurance Subsidiary" shall mean any Insurance Subsidiary that is
a Material Subsidiary.

     "Material  Subsidiary" shall mean each of (i) PAIC, (ii) PSIC, (iii) at the
relevant time of determination,  any Subsidiary having (after the elimination of
intercompany accounts) (y) in the case of a non-Insurance Subsidiary, (A) assets
constituting  at least ten percent (10%) of the total assets of the Borrower and
its  Subsidiaries  on a consolidated  basis,  (B) revenues for the four quarters
most  recently  ended  constituting  at least  ten  percent  (10%) of the  total
revenues of the Borrower and its  Subsidiaries  on a consolidated  basis, or (C)
Net Income for the four quarters most recently ended  constituting  at least ten
percent  (10%)  of  the   Consolidated  Net  Income  of  the  Borrower  and  its
Subsidiaries,  in each case determined in accordance with GAAP as of the date of
the GAAP  financial  statements  of the Borrower and all its  Subsidiaries  most
recently  delivered  under  Section  6.1 prior to such time (or,  with regard to
determinations at any time prior to the initial delivery of financial statements
under  Section  6.1,  as of the date of the  most  recent  financial  statements
referred to in Section 5.11(a)),  or (z) in the case of an Insurance Subsidiary,
(A) assets  constituting  at least ten percent (10%) of the aggregate  assets of
all

                                       15
<PAGE>
Insurance Subsidiaries,  or (B) Gross Written Premiums for the four quarters
most  recently  ended  constituting  at least ten percent (10%) of the aggregate
Gross Written Premiums (without duplication) of all Insurance  Subsidiaries,  in
each case  determined  in  accordance  with SAP as of the date of the  statutory
financial  statements  most recently  delivered  under Section 6.2 prior to such
time  (or,  with  regard  to  determinations  at any time  prior to the  initial
delivery of financial  statements  under Section 6.2, as of the date of the most
recent  financial  statements  referred  to in  Section  5.11(e))  and  (iv) any
Subsidiary that has one of the foregoing as a Subsidiary.

     "Maturity Date" shall mean June 30, 2004.

     "Moody's" shall mean Moody's  Investors  Service,  Inc., its successors and
assigns.

     "Mortgage Backed Securities" shall mean investment securities  representing
any undivided  interest or participation  in, or which are secured by, a pool of
loans secured by mortgages or deeds of trust.

     "Multiemployer Plan" shall mean any "multiemployer plan" within the meaning
of Section  4001(a)(3)  of ERISA to which the  Borrower  or any ERISA  Affiliate
makes,  is  making or is  obligated  to make  contributions  or has made or been
obligated to make contributions.

     "NAIC" shall mean the National  Association of Insurance  Commissioners and
any successor thereto.

     "Net Amount  Recoverable from  Reinsurers"  shall mean, as to any Insurance
Subsidiary,  as of any time,  the amount as shown on Schedule F - Part 3, column
13 of the Annual Statement of such Insurance Subsidiary, or an amount determined
in a  consistent  manner  as of any date  other  than one as of which an  Annual
Statement is prepared.

     "Net Cash Proceeds"  shall mean, in the case of any Hybrid Equity  Issuance
or Debt Issuance,  the aggregate cash payments  received by the Borrower and its
Subsidiaries  less  reasonable  and  customary  fees  and  expenses   (including
underwriting  discounts  and  commissions)  incurred  by the  Borrower  and  its
Subsidiaries in connection therewith.

     "Net Income" shall mean, with respect to any Person for any period, the net
income (or loss),  after  extraordinary  items,  taxes,  and all other  items of
expenses and income of such Person for such  period,  determined  in  accordance
with GAAP.

     "Net Tax Sharing  Payments"  shall mean, for any period,  (i) the aggregate
(without  duplication) of all payments made or to be made to the Borrower by its
Subsidiaries   pursuant  to  tax  sharing  or  tax   allocation   agreements  or
arrangements  or otherwise  in respect of taxable  income  realized  during such
period, minus (ii) the aggregate (without duplication) of all foreign,  federal,
state or local  income,  franchise  and other tax payments made or to be made by
the Borrower in respect of taxable  income  realized  during such period and any
payments made or to be made by the Borrower  during such period pursuant to such
tax sharing or tax  allocation  agreement  or  arrangement.  For purposes of the
Fixed Charge  Coverage Ratio, if the amount in 

                                       16
<PAGE>
clause  (ii)  exceeds  the amount in clause  (i)  hereof,  the  result  shall be
expressed as a negative amount.

     "Net Written Premiums" shall mean, with respect to any Insurance Subsidiary
at any time, the amount of premiums  written (after deducting or adding premiums
on business  ceded to or assumed  from others) as shown on line 32, page 9, Part
2B, column 4 of the Annual Statement of such Insurance Subsidiary, or the amount
determined in a consistent  manner for any date other than a date as of which an
Annual Statement of such Insurance Subsidiary is prepared.

     "Notes" shall mean the  promissory  notes of the Borrower in  substantially
the  form  of  Exhibit  A,  together  with  any  amendments,  modifications  and
supplements thereto, substitutions therefor and restatements thereof.

     "Notice of Borrowing"  shall have the meaning given to such term in Section
2.2(b).

     "Notice of  Conversion/Continuation"  shall have the meaning  given to such
term in Section 2.11(b).

     "Obligations" shall mean all principal of and interest  (including,  to the
greatest  extent  permitted by applicable  law,  post-petition  interest) on the
Loans, all  Reimbursement  Obligations and all fees,  expenses,  indemnities and
other  obligations  owing,  due or  payable at any time by the  Borrower  to the
Agent,  any Lender,  the Issuing  Lender or any other Person  entitled  thereto,
under this Agreement or any of the other Credit Documents.

     "PAC I" shall mean a planned  amortization class bond which is a tranche or
class of CMO or REMIC that is retired according to a predetermined  amortization
schedule  independent  of the prepayment  rate on the underlying  collateral and
which has the highest level of protection within the pool against  prepayment or
extension.

     "PAIC" shall mean Penn-America  Insurance Company, a Pennsylvania insurance
company.

     "PBGC"  shall  mean  the  Pension  Benefit  Guaranty  Corporation  and  any
successor thereto.

     "PSIC" shall mean Penn-Star  Insurance  Company,  a Pennsylvania  insurance
company.

     "Participant" shall have the meaning given to such term in Section 11.7(d).

     "Permitted  Acquisition"  shall mean (a) any  Acquisition  with  respect to
which all of the following conditions are satisfied:  (i) each business acquired
shall be within the permitted  lines of business  described in Section 8.8, (ii)
any Capital  Stock  given as  consideration  in  connection  therewith  shall be
Capital Stock of the Borrower, (iii) in the case of an Acquisition involving the
acquisition of control of Capital Stock of any Person,  immediately after giving
effect  to such  Acquisition  such  Person  (or  the  surviving  Person,  if the
Acquisition is effected through a merger or consolidation) shall be the Borrower
or a Wholly Owned Subsidiary, and (iv) all of the conditions and requirements of
Sections 6.9  applicable to such  Acquisition  are  satisfied;  or 

                                       17
<PAGE>
(b) any other  Acquisition to which the Required  Lenders (or the Agent on their
behalf) shall have given their prior written  consent  (which  consent may be in
their sole  discretion  and may be given  subject to such  additional  terms and
conditions as the Required  Lenders shall  establish)  and with respect to which
all of the  conditions  and  requirements  set forth in this  definition  and in
Section  6.9,  and in or pursuant to any such  consent,  have been  satisfied or
waived in writing by the Required Lenders (or the Agent on their behalf).

     "Permitted  CMOs and Mortgage  Backed  Securities"  shall mean (i) mortgage
participation certificates issued by the Federal Home Loan Mortgage Corporation,
(ii)  mortgage  backed  securities  issued  by  the  Federal  National  Mortgage
Association,  (iii) securities  guaranteed by the Government  National  Mortgage
Association,   and  (iv)  other   securities   and   certificates   representing
participations  in any CMO or REMIC  which are PAC I's or which have  comparable
priority in respect of the repayment thereof.

     "Permitted Liens" shall have the meaning given to such term in Section 8.3.

     "Person"   shall  mean  any   corporation,   association,   joint  venture,
partnership,  limited liability  company,  organization,  business,  individual,
trust,  government or agency or political subdivision thereof or any other legal
entity.

     "Plan" shall mean any "employee pension benefit plan" within the meaning of
Section  3(2) of ERISA that is subject  to the  provisions  of Title IV of ERISA
(other  than a  Multiemployer  Plan)  and to which  the  Borrower  or any  ERISA
Affiliate may have any liability.

     "Pro Forma  Balance  Sheet"  shall have the  meaning  given to such term in
Section 5.11(b).

     "Prohibited  Transaction"  shall  mean  any  transaction  described  in (i)
Section  406 of ERISA that is not exempt by reason of Section 408 of ERISA or by
reason of a  Department  of Labor  prohibited  transaction  individual  or class
exemption  or (ii)  Section  4975(c) of the  Internal  Revenue  Code that is not
exempt by reason of Section 4975(c)(2) or 4975(d) of the Internal Revenue Code.

     "Projections" shall have the meaning given to such term in Section 5.11(c).

     "Quarterly  Statement" shall mean, with respect to any Insurance Subsidiary
for any fiscal  quarter,  the quarterly  financial  statements of such Insurance
Subsidiary  as required to be filed with the Insurance  Regulatory  Authority of
its   jurisdiction   of  domicile,   together  with  all  exhibits,   schedules,
certificates and actuarial opinions required to be filed or delivered therewith.

     "REMIC" shall mean a real estate mortgage investment conduit.

     "Register" shall have the meaning given to such term in Section 11.7(b).

     "Regulations  D,  T,  U and  X"  shall  mean  Regulations  D,  T,  U and X,
respectively, of the Federal Reserve Board, and any successor regulations.

                                       18
<PAGE>
     "Reimbursement  Obligation"  shall have the  meaning  given to such term in
Section 3.4.

     "Reinsurance  Agreement"  shall  mean  any  agreement,   contract,  treaty,
certificate  or other  arrangement  whereby any Insurance  Subsidiary  agrees to
transfer,  cede or retrocede to another  insurer or reinsurer all or part of the
liability assumed or assets held by such Insurance  Subsidiary under a policy or
policies of insurance issued by such Insurance Subsidiary or under a reinsurance
agreement assumed by such Insurance Subsidiary.

     "Reinsurance Premiums Ceded" shall mean, for any Insurance Subsidiary,  for
any  period,  the amount as shown on  Schedule F -Part 3, column 1 of the Annual
Statement of such  Insurance  Subsidiary,  or an amount  determined  in a manner
consistent  for any  period  other  than one for  which an Annual  Statement  is
prepared.

     "Reportable Event" shall mean (i) any "reportable event" within the meaning
of Section 4043(c) of ERISA for which the 30-day notice under Section 4043(a) of
ERISA has not been waived by the PBGC (including any failure to meet the minimum
funding standard of, or timely make any required  installment under, Section 412
of the Internal Revenue Code or Section 302 of ERISA, regardless of the issuance
of any waivers in accordance with Section 412(d) of the Internal  Revenue Code),
(ii) any such  "reportable  event"  subject to advance  notice to the PBGC under
Section  4043(b)(3) of ERISA,  (iii) any  application for a funding waiver or an
extension  of any  amortization  period  pursuant to Section 412 of the Internal
Revenue Code, and (iv) a cessation of operations described in Section 4062(e) of
ERISA.

     "Required  Lenders" shall mean the Lenders  holding  outstanding  Loans and
Unutilized   Commitments   (or,  after  the  termination  of  the   Commitments,
outstanding  Loans  and  Letter  of  Credit  Exposure)  representing  more  than
sixty-six and two-thirds  percent (66-2/3%) of the aggregate at such time of all
outstanding  Loans and Unutilized  Commitments (or, after the termination of the
Commitments,  the aggregate at such time of all outstanding  Loans and Letter of
Credit Exposure).

     "Requirement of Law" shall mean,  with respect to any Person,  the charter,
articles or certificate of  organization  or  incorporation  and bylaws or other
organizational  or governing  documents of such  Person,  and any statute,  law,
treaty, rule,  regulation,  order, decree, writ,  injunction or determination of
any arbitrator or court or other Governmental Authority, in each case applicable
to or binding upon such Person or any of its property or to which such Person or
any of its  property  is subject or  otherwise  pertaining  to any or all of the
transactions contemplated by this Agreement and the other Credit Documents.

     "Reserve  Requirement" shall mean, with respect to any Interest Period, the
reserve  percentage  (expressed as a decimal) in effect from time to time during
such Interest  Period,  as provided by the Federal  Reserve  Board,  applied for
determining the maximum reserve  requirements  (including,  without  limitation,
basic, supplemental,  marginal and emergency reserves) applicable to First Union
under Regulation D with respect to "Eurocurrency liabilities" within the meaning
of  Regulation D, or under any similar or successor  regulation  with respect to
Eurocurrency liabilities or Eurocurrency funding.

                                       19


<PAGE>
     "Responsible  Officer"  shall  mean,  with  respect  to the  Borrower,  the
president,  the chief  executive  officer,  the  chief  financial  officer,  any
executive officer, or any other Financial Officer of the Borrower, and any other
officer or similar official thereof  responsible for the  administration  of the
obligations of the Borrower in respect of this Agreement.

     "Standard  & Poor's"  shall  mean  Standard  & Poor's  Rating  Services,  a
division of McGraw-Hill Companies, its successors and assigns.

     "SAP" shall mean, with respect to any Insurance  Subsidiary,  the statutory
accounting   practices   prescribed  or  permitted  by  the  relevant  Insurance
Regulatory  Authority  of  its  state  of  domicile,  consistently  applied  and
maintained  and in  conformity  with those used in the  preparation  of the most
recent statutory financial statements described in Section 5.11(e).

     "Stated  Amount"  shall mean,  with  respect to any Letter of Credit at any
time,  the  aggregate  amount  available  to be drawn  thereunder  at such  time
(regardless of whether any conditions for drawing could then be met).

     "Statutory Capital and Surplus" shall mean, as to any Insurance Subsidiary,
as of any date,  the sum (without  duplication)  of the total  amounts shown (i)
with  respect to an  Insurance  Subsidiary  not legally  domiciled in the United
States, the shareholders'  equity of such Insurance  Subsidiary as determined in
accordance  with  GAAP  (without  regard to the  requirements  of  Statement  of
Financial  Accounting  Standards  No.  115  issued by the  Financial  Accounting
Standards Board),  and (ii) with respect to any other Insurance  Subsidiary,  on
line 25, column 1, page 3 of the Annual Statement of such Insurance  Subsidiary,
or the sum of amounts  determined in a consistent manner for any date other than
one as of which an Annual Statement is prepared.

     "Subordinated  Indebtedness"  shall have the meaning  given to such term in
Section 8.2.

     "Subsidiary"  shall mean,  with respect to any Person,  any  corporation or
other Person of which more than fifty percent (50%) of the  outstanding  Capital
Stock  having  ordinary  voting  power  to  elect a  majority  of the  board  of
directors,  board of managers or other governing body of such Person,  is at the
time,  directly or indirectly,  owned or controlled by such Person and/or one or
more  of its  other  Subsidiaries  or a  combination  thereof  (irrespective  of
whether,  at the time,  securities  of any other  class or  classes  of any such
corporation  or other  Person  shall or might have voting power by reason of the
happening of any  contingency).  When used without reference to a parent entity,
the term "Subsidiary" shall be deemed to refer to a Subsidiary of the Borrower.

     "Surplus Relief  Reinsurance  Agreement"  shall mean any agreement or other
arrangement whereby any Insurance  Subsidiary cedes business under a reinsurance
agreement that would not be considered a transaction that indemnifies an insurer
against  loss  or  liability  relating  to  insurance  risk,  as  determined  in
accordance with Statement of Financial  Accounting Standards No. 113 ("FAS 113")
issued  by the  Financial  Accounting  Standards  Board  (without  regard to the
effective date of FAS 113).

                                       20


<PAGE>
     "Termination  Date" shall mean the  Maturity  Date or such  earlier date of
termination of the Commitments pursuant to Section 2.5 or Section 9.2.

     "Type" shall have the meaning given to such term in Section 2.2(a).

     "Unfunded  Pension  Liability"  shall  mean,  with  respect  to any Plan or
Multiemployer  Plan,  the  excess  of  its  benefit  liabilities  under  Section
4001(a)(16)  of  ERISA  over the  current  value of its  assets,  determined  in
accordance with the applicable assumptions used for funding under Section 412 of
the Internal Revenue Code for the applicable plan year.

     "Unutilized Commitment" shall mean, with respect to any Lender at any time,
such  Lender's  Commitment  at such  time  less  the  sum of (i)  the  aggregate
principal  amount of all Loans made by such Lender that are  outstanding at such
time and (ii) such Lender's Letter of Credit Exposure at such time.

     "Wholly  Owned" shall mean,  with respect to any  Subsidiary of any Person,
that 100% of the outstanding Capital Stock of such Subsidiary is owned, directly
or indirectly, by such Person.

     1.2 Accounting  Terms.  Except as specifically  provided  otherwise in this
Agreement,  all accounting terms used herein that are not  specifically  defined
shall have the meanings  customarily  given them in accordance with GAAP (or, to
the extent  that such  terms  apply  solely to any  Insurance  Subsidiary  or if
otherwise expressly required, SAP).  Notwithstanding anything to the contrary in
this Agreement, for purposes of calculation of the financial covenants set forth
in Article VII, all accounting  determinations and computations  hereunder shall
be made in  accordance  with GAAP as in effect as of the date of this  Agreement
applied on a basis  consistent with the  application  used in preparing the most
recent financial  statements of the Borrower referred to in Section 5.11(a).  In
the event that any changes in GAAP after such date are required to be applied to
the  Borrower  and would  affect  the  computation  of the  financial  covenants
contained in Article VII, such changes shall be followed only from and after the
date this  Agreement  shall  have been  amended  to take into  account  any such
changes.  References to amounts on particular exhibits,  schedules, lines, pages
and columns of any Annual  Statement  or  Quarterly  Statement  are based on the
format  promulgated  by the NAIC for the 1997 Annual  Statements  and  Quarterly
Statements.  In the  event  such  format  is  changed  in  future  years so that
different  information is contained in such items or they no longer exist, or if
the Annual  Statement or  Quarterly  Statement is replaced by the NAIC or by any
Insurance  Regulatory  Authority after the date hereof such that different forms
of  financial   statements  are  required  to  be  furnished  by  the  Insurance
Subsidiaries in lieu thereof, such references shall be to information consistent
with that  reported  in the  referenced  item in the 1997 Annual  Statements  or
Quarterly Statements, as the case may be.

     1.3 Other Terms;  Construction.  Unless  otherwise  specified or unless the
context  otherwise  requires,  all  references  herein  to  sections,   annexes,
schedules  and  exhibits are  references  to sections,  annexes,  schedules  and
exhibits in and to this Agreement, and all terms defined in this Agreement shall
have  the  defined  meanings  when  used in any  other  Credit  Document  or any
certificate or other document made or delivered  pursuant hereto. All 

                                       21

<PAGE>
references  herein to the  Lenders or any of them shall be deemed to include the
Issuing  Lender  unless  specifically  provided  otherwise or unless the context
otherwise requires.


                                   ARTICLE II

                          AMOUNT AND TERMS OF THE LOANS

     2.1 Commitments.  Each Lender severally agrees, subject to and on the terms
and  conditions  of  this  Agreement,   to  make  loans  (each,  a  "Loan,"  and
collectively,  the "Loans") to the  Borrower,  from time to time on any Business
Day during the period from and  including  the Closing Date to but not including
the Termination  Date, in an aggregate  principal amount at any time outstanding
not greater  than the excess,  if any, of its  Commitment  at such time over its
Letter of Credit  Exposure at such time,  provided  that no  Borrowing  of Loans
shall be made if,  immediately  after giving effect thereto,  the sum of (y) the
aggregate  principal  amount  of  Loans  outstanding  at such  time  and (z) the
aggregate Letter of Credit Exposure of all Lenders at such time would exceed the
aggregate  Commitments at such time.  Subject to and on the terms and conditions
of this Agreement, the Borrower may borrow, repay and reborrow Loans.

     2.2  Borrowings.  (a) The Loans  shall,  at the option of the  Borrower and
subject to the terms and conditions of this Agreement, be either Base Rate Loans
or LIBOR Loans (each, a "Type" of Loan),  provided that all Loans comprising the
same Borrowing shall, unless otherwise  specifically  provided herein, be of the
same  Type;  provided  further  that the  foregoing  proviso  shall not  prevent
multiple Borrowings, respectively having different Types, from being made on the
same Business Day, subject to the terms of clause (iii) of Section 2.10.

     (b)  In  order  to  make  a  Borrowing  (other  than  Borrowings  involving
continuations or conversions of outstanding  Loans, which shall be made pursuant
to Section 2.11), the Borrower will give the Agent written notice not later than
11:00 a.m.,  Charlotte time,  three (3) Business Days prior to each Borrowing to
be comprised of LIBOR Loans and one (1) Business Day prior to each  Borrowing to
be  comprised  of Base Rate Loans;  provided,  however,  that  requests  for the
Borrowing of any Loans to be made on the Closing Date may, at the  discretion of
the Agent, be given later than the times specified hereinabove. Each such notice
(each, a "Notice of Borrowing") shall be irrevocable, shall be given in the form
of Exhibit B-1 and shall specify (1) the aggregate  principal amount and initial
Type of the Loans to be made  pursuant to such  Borrowing,  (2) in the case of a
Borrowing of LIBOR Loans, the initial Interest Period to be applicable  thereto,
and (3) the requested date of such Borrowing (the "Borrowing Date"), which shall
be a Business  Day.  Upon its receipt of a Notice of  Borrowing,  the Agent will
promptly notify each Lender of the proposed Borrowing.  Notwithstanding anything
to the contrary contained herein:

          (i) the aggregate principal amount of each Borrowing comprised of Base
     Rate Loans shall not be less than  $1,000,000  or, if greater,  an integral
     multiple of $500,000 in excess  thereof (or, if less,  in the amount of the
     aggregate  Unutilized  Commitments),  and the aggregate principal amount of
     each Borrowing  comprised of LIBOR Loans shall not be less than  $1,000,000
     or, if greater, an integral multiple of $500,000 in excess thereof;

                                       22

<PAGE>
          (ii) if the Borrower  shall have failed to designate the Type of Loans
     comprising a Borrowing,  the Borrower  shall be deemed to have  requested a
     Borrowing comprised of Base Rate Loans; and

          (iii) if the Borrower  shall have failed to select the duration of the
     Interest Period to be applicable to any Borrowing of LIBOR Loans,  then the
     Borrower  shall be  deemed  to have  selected  an  Interest  Period  with a
     duration of one month.

     (c) Not later than 1:00 p.m.,  Charlotte  time, on the requested  Borrowing
Date,  each Lender will make available to the Agent at its office referred to in
Section 11.5 (or at such other  location as the Agent may  designate) an amount,
in Dollars and in immediately  available funds,  equal to the amount of the Loan
to be made by such  Lender.  To the extent the  Lenders  have made such  amounts
available  to the  Agent  as  provided  hereinabove,  the  Agent  will  make the
aggregate of such amounts  available to the Borrower in accordance  with Section
2.3(a) and in like funds as received by the Agent.

     2.3  Disbursements;  Funding Reliance;  Domicile of Loans. (a) The Borrower
hereby  authorizes  the Agent to  disburse  the  proceeds of each  Borrowing  in
accordance with the terms of any written instructions from any of the Authorized
Officers, provided that the Agent shall not be obligated under any circumstances
to forward amounts to any account not listed in an Account  Designation  Letter.
The Borrower may at any time deliver to the Agent an Account  Designation Letter
listing any  additional  accounts or deleting any accounts  listed in a previous
Account Designation Letter.

     (b) Unless the Agent has received,  prior to 1:00 p.m.,  Charlotte time, on
the relevant  Borrowing Date, written notice from a Lender that such Lender will
not make  available to the Agent such Lender's  ratable  portion of the relevant
Borrowing, the Agent may assume that such Lender has made such portion available
to the Agent in immediately available funds on such Borrowing Date in accordance
with the  applicable  provisions  of Section 2.2, and the Agent may, in reliance
upon such assumption, but shall not be obligated to, make a corresponding amount
available to the Borrower on such Borrowing Date. If and to the extent that such
Lender  shall not have made such portion  available to the Agent,  and the Agent
shall  have made such  corresponding  amount  available  to the  Borrower,  such
Lender, on the one hand, and the Borrower, on the other,  severally agree to pay
to the Agent  forthwith  on demand  such  corresponding  amount,  together  with
interest thereon for each day from the date such amount is made available to the
Borrower  until the date such amount is repaid to the Agent,  (i) in the case of
such Lender, at the Federal Funds Rate, and (ii) in the case of the Borrower, at
the rate of  interest  applicable  at such time to the Type of Loans  comprising
such  Borrowing,  as  determined  under the  provisions  of Section 2.8. If such
Lender  shall repay to the Agent such  corresponding  amount,  such amount shall
constitute  such  Lender's  Loan as part of such  Borrowing for purposes of this
Agreement.  The failure of any Lender to make any Loan required to be made by it
as part of any Borrowing  shall not relieve any other Lender of its  obligation,
if any,  hereunder  to make its Loan as part of such  Borrowing,  but no  Lender
shall be responsible  for the failure of any other Lender to make the Loan to be
made by such other Lender as part of any Borrowing.

                                       23


<PAGE>
     (c) Each Lender may, at its option,  make and  maintain  any Loan at, to or
for the account of any of its Lending  Offices,  provided  that any  exercise of
such option shall not affect the  obligation  of the Borrower to repay such Loan
to or for the  account  of such  Lender  in  accordance  with the  terms of this
Agreement.

     2.4 Notes.  (a) The Loans made by each Lender  shall be evidenced by a Note
appropriately completed in substantially the form of Exhibit A.

     (b) Each Note issued to a Lender  shall (i) be  executed  by the  Borrower,
(ii) be payable to the order of such  Lender,  (iii) be dated as of the  Closing
Date  (or,  in the case of a Note  issued  after  the  Closing  Date,  dated the
effective date of the applicable Assignment and Acceptance), (iv) be in a stated
principal  amount  equal  to such  Lender's  Commitment,  (v) bear  interest  in
accordance  with the  provisions  of Section 2.8, as the same may be  applicable
from time to time to the Loans made by such Lender,  and (vi) be entitled to all
of the benefits of this Agreement and the other Credit  Documents and subject to
the provisions hereof and thereof.

     (c) Each Lender will record on its internal  records the amount and Type of
each Loan made by it and each  payment  received  by it in respect  thereof  and
will,  in the event of any transfer of any of its Notes,  either  endorse on the
reverse  side  thereof or on a schedule  attached  thereto (or any  continuation
thereof)  the  outstanding  principal  amount  and Type of the  Loans  evidenced
thereby as of the date of transfer or provide such  information on a schedule to
the Assignment and Acceptance relating to such transfer; provided, however, that
the  failure of any  Lender to make any such  recordation  or  provide  any such
information,  or any error therein,  shall not affect the Borrower's obligations
under this Agreement or the Notes.

     2.5 Termination and Reduction of Commitments.  (a) The Commitments shall be
automatically  and  permanently  terminated  on  the  Termination  Date  (or  on
September  30, 1998,  but only if the Closing Date shall not have occurred on or
prior to such date).

     (b) On each date set forth below,  the Commitments  shall be  automatically
and permanently reduced by the amount set forth below opposite such date:

                 Date                                        Amount

          December 31, 2000                                $2,500,000
          June 30, 2001                                    $2,500,000
          December 31, 2001                                $3,000,000
          June 30, 2002                                    $3,000,000
          December 31, 2002                                $3,000,000
          June 30, 2003                                    $3,000,000
          December 31, 2003                                $4,000,000
          June 30, 2004                                    $4,000,000

     (c) The  Commitments  shall,  on the day two (2)  Business  Days  after the
receipt of Net Cash Proceeds therefor,  be automatically and permanently reduced
by the amount of the Net Cash  Proceeds  with respect to any Asset  Disposition,
Hybrid Equity Issuance or Debt Issuance.


                                       24
<PAGE>

Promptly  upon (and in any event not later than two (2) Business Days after) its
receipt of such Net Cash  Proceeds,  the  Borrower  will  deliver to the Agent a
certificate  signed by a Financial Officer of the Borrower in form and substance
satisfactory  to the Agent and setting  forth the  calculation  of such Net Cash
Proceeds.  Such  certificate  shall be  accompanied  by any required  prepayment
pursuant to Section  2.6(b) or Section  2.6(c).  Notwithstanding  the foregoing,
nothing in this subsection  shall be deemed to permit any Asset  Disposition not
expressly permitted under Section 8.4.

     (d) At any time and from time to time after the date hereof,  upon not less
than three (3) Business  Days' prior written  notice to the Agent,  the Borrower
may terminate in whole or reduce in part the aggregate  Unutilized  Commitments,
provided that any such partial  reduction shall be in an aggregate amount of not
less than $1,000,000 or, if greater, an integral multiple thereof. The amount of
any  termination or reduction made under this  subsection (d) may not thereafter
be reinstated.

     (e) Each  reduction of the  Commitments  pursuant to this Section  shall be
applied  ratably among the Lenders  according to their  respective  Commitments.
Each reduction of the  Commitments  pursuant to subsections  (c) or (d) shall be
applied to reduce  the  scheduled  reductions  of the  Commitments  set forth in
subsection (b) in the inverse order of maturity.

     2.6  Mandatory  Payments and  Prepayments.  (a) Except to the extent due or
paid  sooner  pursuant  to the  provisions  of  this  Agreement,  the  aggregate
outstanding  principal  of the  Loans  shall be due and  payable  in full on the
Maturity Date.

     (b) In the event that, at any time, the sum of (y) the aggregate  principal
amount of Loans  outstanding at such time and (z) the aggregate Letter of Credit
Exposure of all Lenders at such time shall exceed the aggregate  Commitments  at
such time  (after  giving  effect to any  concurrent  termination  or  reduction
thereof),  the Borrower will immediately prepay first, the outstanding principal
amount of the Loans in the  amount of such  excess  and next,  the amount of any
outstanding Reimbursement Obligations;  provided that, to the extent such excess
amount is greater than the aggregate principal amount of Loans and Reimbursement
Obligations outstanding immediately prior to the application of such prepayment,
the  amount  so  prepaid  shall be  retained  by the  Agent and held in the Cash
Collateral Account as cover for Letter of Credit Exposure,  as more particularly
described in Section 3.8, and thereupon  such cash shall be deemed to reduce the
aggregate Letter of Credit Exposure by an equivalent amount.

     (c) If a Default or an Event of Default has occurred and is  continuing  at
such time,  promptly upon (and in any event not later than two (2) Business Days
after) its receipt of Net Cash Proceeds for any Asset Disposition, Hybrid Equity
Issuance or Debt  Issuance,  the Borrower  will prepay  first,  the  outstanding
principal  amount  of  the  Loans  and  next,  the  amount  of  any  outstanding
Reimbursement  Obligations  in an amount equal to 100% of the Net Cash  Proceeds
from such Asset Disposition,  Hybrid Equity Issuance or Debt Issuance;  provided
that,  to the  extent  such  prepayment  amount is  greater  than the  aggregate
principal amount of Loans and Reimbursement  Obligations outstanding immediately
prior to the  application  of such  prepayment,  the amount so prepaid  shall be
retained  by the  Agent  and held in the Cash  Collateral  Account  as cover for
Letter of Credit Exposure,  as more  particularly  described in Section 3.8, 



                                       25
<PAGE>
and thereupon such cash shall be deemed to reduce the aggregate Letter of Credit
Exposure by an equivalent amount.

     (d) Each  prepayment of the Loans made pursuant to subsections  (b) and (c)
above shall be applied (i) first, to reduce the outstanding  principal amount of
the  Loans,  and (ii)  second,  to the  extent  of any  excess  remaining  after
application   as  provided  in  clause  (i)  above,   to  pay  any   outstanding
Reimbursement  Obligations,  and shall be applied  first to prepay all Base Rate
Loans before any LIBOR Loans are prepaid. Each payment or prepayment pursuant to
the  provisions  of this  Section  shall be applied  ratably  among the  Lenders
holding the Loans being prepaid,  in proportion to the principal  amount held by
each.

     (e) Each  payment  or  prepayment  of a LIBOR  Loan  made  pursuant  to the
provisions  of this  Section  on a day other  than the last day of the  Interest
Period applicable thereto shall be made together with all amounts required under
Section 2.18 to be paid as a consequence thereof.

     2.7  Voluntary  Prepayments.  (a) At any time and  from  time to time,  the
Borrower shall have the right to prepay the Loans, in whole or in part,  without
premium or penalty  (except as provided in clause  (iii)  below),  upon  written
notice given to the Agent not later than 11:00 a.m.,  Charlotte time,  three (3)
Business  Days  prior to each  intended  prepayment  of LIBOR  Loans and one (1)
Business Day prior to each intended prepayment of Base Rate Loans, provided that
(i) each partial  prepayment  shall be in an aggregate  principal  amount of not
less than $1,000,000 or, if greater,  an integral multiple of $500,000 in excess
thereof,  (ii) no partial  prepayment of LIBOR Loans made pursuant to any single
Borrowing  shall  reduce  the  aggregate  outstanding  principal  amount  of the
remaining  LIBOR Loans under such  Borrowing to less than  $1,000,000  or to any
greater amount not an integral multiple of $500,000 in excess thereof, and (iii)
unless made together with all amounts  required under Section 2.18 to be paid as
a consequence of such prepayment,  a prepayment of a LIBOR Loan may be made only
on the last day of the  Interest  Period  applicable  thereto.  Each such notice
shall specify the proposed date of such  prepayment and the aggregate  principal
amount and Type of the Loans to be prepaid (and, in the case of LIBOR Loans, the
Interest  Period  of the  Borrowing  pursuant  to  which  made),  and  shall  be
irrevocable  and shall bind the  Borrower to make such  prepayment  on the terms
specified  therein.  Loans  prepaid  pursuant  to  this  subsection  (a)  may be
reborrowed, subject to the terms and conditions of this Agreement.

     (b) Each  prepayment  of the Loans made  pursuant to  subsection  (a) above
shall be applied ratably among the Lenders  holding the Loans being prepaid,  in
proportion to the principal amount held by each.

     2.8  Interest.  (a) The Borrower will pay interest in respect of the unpaid
principal  amount of each Loan,  from the date of Borrowing  thereof  until such
principal  amount shall be paid in full,  (i) at the Adjusted  Base Rate,  as in
effect from time to time  during such  periods as such Loan is a Base Rate Loan,
and (ii) at the Adjusted  LIBOR Rate, as in effect from time to time during such
periods as such Loan is a LIBOR Loan.

     (b) Upon the occurrence  and during the  continuance of an Event of Default
as the result of failure by the Borrower to pay any  principal of or interest on
any Loan,  any fees or other  


                                       26
<PAGE>
amount  hereunder  when due (whether at maturity,  pursuant to  acceleration  or
otherwise),  and (at the election of the Required  Lenders) upon the  occurrence
and  during the  continuance  of any other  Event of  Default,  all  outstanding
principal  amounts  of the  Loans  and,  to the  greatest  extent  permitted  by
applicable  law,  all  interest  accrued on the Loans and all other  accrued and
outstanding fees and other amounts hereunder,  shall bear interest at a rate per
annum equal to the interest rate applicable from time to time thereafter to such
Loans  (whether the Adjusted Base Rate or the Adjusted  LIBOR Rate) plus 2% (or,
in the case of fees and other amounts,  at the Adjusted Base Rate plus 2%), and,
in each case, such default interest shall be payable on demand.  To the greatest
extent permitted by applicable law,  interest shall continue to accrue after the
filing  by or  against  the  Borrower  of any  petition  seeking  any  relief in
bankruptcy or under any law pertaining to insolvency or debtor relief.

     (c) Accrued (and theretofore unpaid) interest shall be payable as follows:

          (i) in respect of each Base Rate Loan (including any Base Rate Loan or
     portion thereof paid or prepaid  pursuant to the provisions of Section 2.6,
     except as provided  hereinbelow),  in arrears on the last  Business  Day of
     each calendar quarter, beginning with the first such day to occur after the
     Closing Date;  provided,  that in the event the Loans are repaid or prepaid
     in full and the Commitments have been terminated,  then accrued interest in
     respect  of all  Base  Rate  Loans  shall be  payable  together  with  such
     repayment or prepayment on the date thereof;

          (ii) in  respect  of each  LIBOR  Loan  (including  any LIBOR  Loan or
     portion thereof paid or prepaid  pursuant to the provisions of Section 2.6,
     except as provided hereinbelow), in arrears (y) on the last Business Day of
     the Interest Period applicable thereto (subject to the provisions of clause
     (iv) in Section 2.10) and (z) in addition, in the case of a LIBOR Loan with
     an Interest  Period having a duration of six months,  on each date on which
     interest  would have been  payable  under  clause (y) above had  successive
     Interest  Periods of three months'  duration been  applicable to such LIBOR
     Loan; provided, that in the event all LIBOR Loans made pursuant to a single
     Borrowing are repaid or prepaid in full,  then accrued  interest in respect
     of such  LIBOR  Loans  shall be payable  together  with such  repayment  or
     prepayment on the date thereof; and

          (iii) in  respect  of any  Loan,  at  maturity  (whether  pursuant  to
     acceleration or otherwise) and, after maturity, on demand.

     (d) Nothing  contained in this  Agreement  or in any other Credit  Document
shall be deemed to establish or require the payment of interest to any Lender at
a rate in excess of the maximum rate permitted by applicable  law. If the amount
of interest  payable for the account of any Lender on any interest  payment date
would exceed the maximum  amount  permitted by  applicable  law to be charged by
such  Lender,  the amount of interest  payable for its account on such  interest
payment date shall be automatically  reduced to such maximum permissible amount.
In the event of any such  reduction  affecting any Lender,  if from time to time
thereafter the amount of interest  payable for the account of such Lender on any
interest  payment  date  would be less  than the  maximum  amount  permitted  by
applicable law to be charged by such Lender, then the amount of interest payable
for its account on such subsequent  interest payment date shall be 


                                       27
<PAGE>
automatically  increased to such maximum permissible amount, provided that at no
time shall the  aggregate  amount by which  interest paid for the account of any
Lender has been increased  pursuant to this sentence exceed the aggregate amount
by which interest paid for its account has theretofore  been reduced pursuant to
the previous sentence.

     (e) The Agent shall  promptly  notify the  Borrower  and the  Lenders  upon
determining  the  interest  rate for each  Borrowing  of LIBOR  Loans  after its
receipt    of   the    relevant    Notice    of    Borrowing    or   Notice   of
Conversion/Continuation,  and  upon  each  change  in the Base  Rate;  provided,
however,  that the failure of the Agent to provide  the  Borrower or the Lenders
with any such notice shall neither affect any obligations of the Borrower or the
Lenders  hereunder  nor result in any  liability on the part of the Agent to the
Borrower or any Lender. Each such determination (including each determination of
the Reserve Requirement) shall, absent manifest error, be conclusive and binding
on all parties hereto.

     2.9 Fees. The Borrower agrees to pay:

     (a) To First Union,  for its own account,  on the date of its  execution of
this Agreement,  the fees described in paragraphs (1) and (2) of the Fee Letter,
in the  amounts  set forth  therein  as due and  payable on such date and to the
extent not theretofore paid to First Union;

     (b) To the Agent, for the account of each Lender, a commitment fee for each
calendar  quarter  (or  portion  thereof)  for the period  from the date of this
Agreement to the  Termination  Date, at a per annum rate equal to the Applicable
Margin  Percentage in effect for such fee from time to time during such quarter,
on such Lender's  ratable  share (based on the  proportion  that its  Commitment
bears to the aggregate  Commitments) of the average daily  aggregate  Unutilized
Commitments,  payable in arrears (i) on the last  Business Day of each  calendar
quarter,  beginning with the first such day to occur after the Closing Date, and
(ii) on the Termination Date;

     (c) To the Agent,  for the account of each  Lender,  a letter of credit fee
for each  calendar  quarter  (or  portion  thereof) in respect of all Letters of
Credit  outstanding  during  such  quarter,  at a per  annum  rate  equal to the
Applicable Margin Percentage in effect from time to time during such quarter for
Loans that are maintained as LIBOR Loans, on such Lender's  ratable share (based
on the proportion that its Commitment bears to the aggregate Commitments) of the
daily  average  aggregate  Stated  Amount of such Letters of Credit,  payable in
arrears (i) on the last Business Day of each calendar  quarter,  beginning  with
the first such day to occur after the Closing Date, and (ii) on the later of the
Termination Date and the date of termination of the last  outstanding  Letter of
Credit;

     (d) To the Issuing Lender, for its own account, the facing fee described in
the Fee Letter, on the terms, in the amounts and at the times set forth therein;

     (e) To the Issuing Lender, for its own account, such commissions,  issuance
fees,  transfer fees and other fees and charges  incurred in connection with the
issuance and administration of each Letter of Credit as are customarily  charged
from time to time by the Issuing Lender for the  performance of such services in
connection with similar letters of credit,  


                                       28
<PAGE>
or as may be otherwise agreed to by the Issuing Lender, but without  duplication
of amounts payable under subsection (d) above; and

     (f) If,  at any  time,  there is a Lender  other  than  First  Union or any
Affiliate thereof, to the Agent, for its own account, the annual  administrative
fee, in the amount and at the times  agreed to at such time by the  Borrower and
the Agent.

     2.10  Interest  Periods.  Concurrently  with  the  giving  of a  Notice  of
Borrowing  or Notice of  Conversion/Continuation  in  respect  of any  Borrowing
comprised  of Base  Rate  Loans  to be  converted  into,  or  LIBOR  Loans to be
continued as, LIBOR Loans, the Borrower shall have the right to elect,  pursuant
to  such  notice,  the  interest  period  (each,  an  "Interest  Period")  to be
applicable to such LIBOR Loans,  which Interest  Period shall,  at the option of
the Borrower, be a one, two, three or six-month period; provided, however, that:

          (i) all LIBOR Loans  comprising a single  Borrowing shall at all times
     have the same Interest Period;

          (ii) the initial  Interest Period for any LIBOR Loan shall commence on
     the date of the  Borrowing  of such LIBOR Loan  (including  the date of any
     continuation  of, or conversion into, such LIBOR Loan), and each successive
     Interest Period  applicable to such LIBOR Loan shall commence on the day on
     which the next preceding Interest Period applicable thereto expires;

          (iii)  LIBOR  Loans may not be  outstanding  under  more than five (5)
     separate  Interest  Periods  at any one time (for  which  purpose  Interest
     Periods shall be deemed to be separate even if they are coterminous);

          (iv) if any Interest  Period  otherwise  would expire on a day that is
     not a  Business  Day,  such  Interest  Period  shall  expire  on  the  next
     succeeding  Business Day unless such next succeeding  Business Day falls in
     another  calendar month, in which case such Interest Period shall expire on
     the next preceding Business Day;

          (v) the Borrower may not select any Interest  Period that begins prior
     to the Closing Date or that expires after the Maturity Date;

          (vi) no  Interest  Period  may be  selected  that  would  end  after a
     scheduled  date for  repayment of  principal  of the Loans  occurring on or
     after the first  day of such  Interest  Period  unless,  immediately  after
     giving effect to such selection,  the aggregate  principal  amount of Loans
     that are Base  Rate  Loans or that have  Interest  Periods  expiring  on or
     before such principal repayment date equals or exceeds the principal amount
     required to be paid on such principal repayment date;

          (vii) if any  Interest  Period  begins on a day for which  there is no
     numerically  corresponding  day in the  calendar  month  during  which such
     Interest Period would otherwise  expire,  such Interest Period shall expire
     on the last Business Day of such calendar month; and

                                       29
<PAGE>
          (viii) if, upon the expiration of any Interest Period  applicable to a
     Borrowing  of LIBOR Loans,  the  Borrower  shall have failed to elect a new
     Interest  Period to be  applicable  to such LIBOR Loans,  then the Borrower
     shall be deemed to have  elected to convert such LIBOR Loans into Base Rate
     Loans as of the expiration of the then current  Interest Period  applicable
     thereto.

     2.11 Conversions and Continuations.  (a) The Borrower shall have the right,
on any Business  Day  occurring  on or after the Closing  Date,  to elect (i) to
convert all or a portion of the  outstanding  principal  amount of any Base Rate
Loans into LIBOR Loans,  or to convert any LIBOR Loans the Interest  Periods for
which end on the same day into Base Rate  Loans,  or (ii) to  continue  all or a
portion of the  outstanding  principal  amount of any LIBOR  Loans the  Interest
Periods  for  which  end on the  same  day for an  additional  Interest  Period,
provided that (x) any such  conversion of LIBOR Loans into Base Rate Loans shall
involve  an  aggregate  principal  amount  of not less  than  $1,000,000  or, if
greater, an integral multiple of $500,000 in excess thereof; any such conversion
of Base Rate Loans into,  or  continuation  of,  LIBOR  Loans  shall  involve an
aggregate  principal  amount of not less than  $1,000,000  or,  if  greater,  an
integral  multiple of $500,000 in excess thereof;  and no partial  conversion of
LIBOR Loans made  pursuant to a single  Borrowing  shall reduce the  outstanding
principal  amount of such LIBOR Loans to less than  $1,000,000 or to any greater
amount not an integral  multiple of  $500,000 in excess  thereof,  (y) except as
otherwise  provided in Section  2.16(d),  LIBOR Loans may be converted into Base
Rate Loans only on the last day of the Interest Period applicable  thereto (and,
in any  event,  if a LIBOR  Loan is  converted  into a Base Rate Loan on any day
other than the last day of the Interest Period applicable thereto,  the Borrower
will pay, upon such  conversion,  all amounts  required under Section 2.18 to be
paid as a  consequence  thereof),  and (z) no conversion of Base Rate Loans into
LIBOR  Loans or  continuation  of LIBOR  Loans  shall be  permitted  during  the
continuance of a Default or Event of Default.

     (b) The Borrower  shall make each such election by giving the Agent written
notice not later than 11:00 a.m.,  Charlotte time, three (3) Business Days prior
to the intended  effective  date of any  conversion  of Base Rate Loans into, or
continuation  of,  LIBOR Loans and one (1)  Business  Day prior to the  intended
effective date of any conversion of LIBOR Loans into Base Rate Loans.  Each such
notice (each, a "Notice of Conversion/Continuation") shall be irrevocable, shall
be given in the  form of  Exhibit  B-2 and  shall  specify  (x) the date of such
conversion or continuation (which shall be a Business Day), (y) in the case of a
conversion  into, or a continuation  of, LIBOR Loans,  the Interest Period to be
applicable  thereto,  and (z) the  aggregate  amount and Type of the Loans being
converted or continued. Upon the receipt of a Notice of Conversion/Continuation,
the Agent  will  promptly  notify  each  Lender of the  proposed  conversion  or
continuation.  In the event that the Borrower  shall fail to deliver a Notice of
Conversion/Continuation as provided herein with respect to any outstanding LIBOR
Loans, such LIBOR Loans shall automatically be converted to Base Rate Loans upon
the expiration of the then current  Interest Period  applicable  thereto (unless
repaid  pursuant  to the terms  hereof).  In the event the  Borrower  shall have
failed  to select in a Notice of  Conversion/Continuation  the  duration  of the
Interest  Period to be applicable to any conversion  into, or  continuation  of,
LIBOR  Loans,  then the  Borrower  shall be deemed to have  selected an Interest
Period with a duration of one month.

                                       30
<PAGE>
     2.12 Method of  Payments;  Computations.  (a) All  payments by the Borrower
hereunder  shall be made  without  setoff,  counterclaim  or other  defense,  in
Dollars and in immediately  available funds to the Agent, for the account of the
Lenders entitled to such payment (except as otherwise  expressly provided herein
as to  payments  required  to be made  directly  to the  Issuing  Lender and the
Lenders)  at its  office  referred  to in  Section  11.5,  prior to 12:00  noon,
Charlotte  time,  on the date  payment  is due.  Any  payment  made as  required
hereinabove,  but after 12:00 noon, Charlotte time, shall be deemed to have been
made on the next succeeding Business Day. If any payment falls due on a day that
is not a  Business  Day,  then  such due  date  shall  be  extended  to the next
succeeding  Business  Day  (except  that in the case of LIBOR Loans to which the
provisions of clause (iv) in Section 2.10 are applicable, such due date shall be
the next  preceding  Business  Day),  and such  extension  of time shall then be
included in the  computation  of payment of interest,  fees or other  applicable
amounts.

     (b) The Agent will  distribute  to the  Lenders  like  amounts  relating to
payments made to the Agent for the account of the Lenders as follows: (i) if the
payment is received by 12:00 noon,  Charlotte  time,  in  immediately  available
funds,  the Agent will make available to each relevant  Lender on the same date,
by wire transfer of immediately  available funds, such Lender's ratable share of
such payment  (based on the percentage  that the amount of the relevant  payment
owing to such Lender bears to the total  amount of such payment  owing to all of
the relevant  Lenders),  and (ii) if such payment is received  after 12:00 noon,
Charlotte time, or in other than  immediately  available  funds,  the Agent will
make  available  to each such Lender its ratable  share of such  payment by wire
transfer of immediately  available funds on the next succeeding Business Day (or
in the case of uncollected  funds, as soon as practicable after  collected).  If
the Agent shall not have made a required distribution to the appropriate Lenders
as  required  hereinabove  after  receiving  a payment  for the  account of such
Lenders, the Agent will pay to each such Lender, on demand, its ratable share of
such payment with  interest  thereon at the Federal Funds Rate for each day from
the date such amount was  required to be  disbursed  by the Agent until the date
repaid to such  Lender.  The Agent will  distribute  to the Issuing  Lender like
amounts  relating to  payments  made to the Agent for the account of the Issuing
Lender in the same manner, and subject to the same terms and conditions,  as set
forth hereinabove with respect to distributions of amounts to the Lenders.

     (c) Unless the Agent shall have received  written  notice from the Borrower
prior to the date on which any payment is due to any Lender  hereunder that such
payment  will not be made in full,  the Agent may assume that the  Borrower  has
made such  payment  in full to the Agent on such  date,  and the Agent  may,  in
reliance  on such  assumption,  but  shall  not be  obligated  to,  cause  to be
distributed  to such Lender on such due date an amount  equal to the amount then
due to such  Lender.  If and to the extent the  Borrower  shall not have so made
such payment in full to the Agent,  and without  limiting the  obligation of the
Borrower to make such payment in accordance  with the terms hereof,  such Lender
shall repay to the Agent  forthwith on demand such amount so distributed to such
Lender, together with interest thereon for each day from the date such amount is
so distributed to such Lender until the date repaid to the Agent, at the Federal
Funds Rate.

                                       31
<PAGE>
     (d) All computations of interest and fees hereunder (including computations
of the Reserve  Requirement)  shall be made on the basis of a year consisting of
365 or 366 days,  as the case may be (in the case of interest on Base Rate Loans
and the  facing fee  described  in  Section  2.9(d)),  or 360 days (in all other
instances),  and the  actual  number  of days  (including  the  first  day,  but
excluding the last day) elapsed.

     2.13 Recovery of Payments.  (a) The Borrower  agrees that to the extent the
Borrower  makes a payment or payments  to or for the  account of the Agent,  any
Lender or the Issuing Lender,  which payment or payments or any part thereof are
subsequently invalidated,  declared to be fraudulent or preferential,  set aside
or  required  to be repaid to a trustee,  receiver  or any other party under any
bankruptcy,  insolvency or similar state or federal law, common law or equitable
cause, then, to the extent of such payment or repayment, the Obligation intended
to be  satisfied  shall be revived and  continued in full force and effect as if
such payment had not been received.

     (b) If any amounts  distributed by the Agent to any Lender are subsequently
returned  or  repaid  by the  Agent to the  Borrower  or its  representative  or
successor in interest,  whether by court order or by settlement  approved by the
Lender in question,  such Lender will,  promptly upon receipt of notice  thereof
from the Agent, pay the Agent such amount.  If any such amounts are recovered by
the Agent from the Borrower or its representative or successor in interest,  the
Agent will  redistribute  such  amounts to the Lenders on the same basis as such
amounts were originally distributed.

     2.14 Use of  Proceeds.  The proceeds of the Loans shall be used for working
capital and general  corporate  purposes  and in  accordance  with the terms and
provisions of this Agreement  (including to finance  Permitted  Acquisitions  in
accordance with the terms and provisions of this Agreement,  including,  without
limitation, the provisions set forth in Section 6.9).

     2.15 Pro Rata Treatment. (a) All fundings, continuations and conversions of
Loans  shall be made by the  Lenders  pro rata on the basis of their  respective
Commitments  (in the case of the  initial  funding of Loans  pursuant to Section
2.2) or on the  basis  of their  respective  outstanding  Loans  (in the case of
continuations   and   conversions   of  Loans  pursuant  to  Section  2.11,  and
additionally in all cases in the event the Commitments have expired or have been
terminated),  as the case may be from time to time.  All  payments on account of
principal of or interest on any Loans, fees or any other Obligations owing to or
for the account of any one or more Lenders  shall be  apportioned  ratably among
such Lenders in proportion to the amounts of such principal,  interest,  fees or
other Obligations owed to them respectively.

     (b) Each  Lender  agrees  that if it shall  receive  any  amount  hereunder
(whether by voluntary payment,  realization upon security, exercise of the right
of setoff or banker's lien,  counterclaim or cross action,  or otherwise,  other
than  pursuant  to or  Section  11.7)  applicable  to the  payment of any of the
Obligations  that exceeds its ratable share  (according to the proportion of (i)
the amount of such  Obligations  due and  payable to such Lender at such time to
(ii) the aggregate  amount of such Obligations due and payable to all Lenders at
such time) of payments on account of such Obligations then or therewith obtained
by all the Lenders to which such  payments are required to have been made,  such
Lender shall forthwith  purchase from the other Lenders such  participations  in
such Obligations as shall be necessary to cause such purchasing  

                                       32
<PAGE>
Lender to share the excess payment or other recovery  ratably with each of them;
provided,  however,  that  if all or any  portion  of  such  excess  payment  is
thereafter  recovered from such purchasing Lender,  such purchase from each such
other Lender  shall be  rescinded  and each such other Lender shall repay to the
purchasing  Lender the purchase price to the extent of such  recovery,  together
with an amount equal to such other  Lender's  ratable  share  (according  to the
proportion of (i) the amount of such other Lender's  required  repayment to (ii)
the total amount so  recovered  from the  purchasing  Lender) of any interest or
other  amount paid or payable by the  purchasing  Lender in respect of the total
amount so  recovered.  The  Borrower  agrees  that any  Lender so  purchasing  a
participation  from another Lender pursuant to the provisions of this subsection
may, to the fullest  extent  permitted  by law,  exercise  any and all rights of
payment (including,  without limitation,  setoff, banker's lien or counterclaim)
with respect to such participation as fully as if such participant were a direct
creditor  of the  Borrower  in the  amount of such  participation.  If under any
applicable bankruptcy,  insolvency or similar law, any Lender receives a secured
claim in lieu of a setoff to which this subsection  applies,  such Lender shall,
to the extent practicable,  exercise its rights in respect of such secured claim
in a manner  consistent  with the  rights of the  Lenders  entitled  under  this
subsection to share in the benefits of any recovery on such secured claim.

     2.16 Increased Costs; Change in Circumstances;  Illegality; etc. (a) If, at
any time after the date hereof and from time to time, the introduction of or any
change in any  applicable  law, rule or regulation or in the  interpretation  or
administration   thereof  by  any  Governmental   Authority   charged  with  the
interpretation or administration  thereof,  or compliance by any Lender with any
guideline or request from any such Governmental Authority (whether or not having
the force of law), shall (i) subject such Lender to any tax or other charge,  or
change the basis of taxation of  payments to such  Lender,  in respect of any of
its LIBOR Loans or any other  amounts  payable  hereunder or its  obligation  to
make,  fund or maintain  any LIBOR  Loans  (other than any change in the rate or
basis of tax on the overall net income of such Lender or its applicable  Lending
Office), (ii) impose, modify or deem applicable any reserve,  special deposit or
similar  requirement  (other  than as a  result  of any  change  in the  Reserve
Requirement)  against assets of,  deposits with or for the account of, or credit
extended by, such Lender or its applicable  Lending  Office,  or (iii) impose on
such Lender or its applicable Lending Office any other condition, and the result
of any of the  foregoing  shall be to increase the cost to such Lender of making
or maintaining any LIBOR Loans or issuing or  participating in Letters of Credit
or to reduce  the  amount  of any sum  received  or  receivable  by such  Lender
hereunder  (including  in  respect of Letters of  Credit),  the  Borrower  will,
promptly upon demand therefor by such Lender, pay to such Lender such additional
amounts as shall  compensate such Lender for such increase in costs or reduction
in return.

     (b) If, at any time after the date hereof and from time to time, any Lender
shall have reasonably  determined that the  introduction of or any change in any
applicable  law,  rule  or  regulation  regarding  capital  adequacy  or in  the
interpretation or administration  thereof by any Governmental  Authority charged
with the interpretation or administration  thereof, or compliance by such Lender
with any guideline or request from any such Governmental  Authority  (whether or
not having the force of law), has or would have the effect,  as a consequence of
such Lender's  Commitment,  Loans or issuance of or participations in Letters of
Credit  hereunder,  of reducing the rate of return on the capital of such Lender
or any Person controlling such Lender to a level 

                                       33
<PAGE>
below that which such Lender or  controlling  Person could have achieved but for
such  introduction,  change or compliance  (taking into account such Lender's or
controlling  Person's policies with respect to capital  adequacy),  the Borrower
will, promptly upon demand therefor by such Lender therefor,  pay to such Lender
such additional amounts as will compensate such Lender or controlling Person for
such reduction in return.

     (c) If, on or prior to the first day of any Interest Period,  (y) the Agent
shall  have  determined  that  adequate  and  reasonable  means do not exist for
ascertaining the applicable LIBOR Rate for such Interest Period or (z) the Agent
shall  have  received   written  notice  from  the  Required  Lenders  of  their
determination  that the rate of interest referred to in the definition of "LIBOR
Rate" upon the basis of which the  Adjusted  LIBOR Rate for LIBOR Loans for such
Interest  Period is to be determined  will not adequately and fairly reflect the
cost to such Lenders of making or  maintaining  LIBOR Loans during such Interest
Period,  the Agent will  forthwith so notify the Borrower and the Lenders.  Upon
such notice,  (i) all then outstanding LIBOR Loans shall  automatically,  on the
expiration date of the respective  Interest Periods  applicable  thereto (unless
then repaid in full), be converted into Base Rate Loans,  (ii) the obligation of
the Lenders to make,  to convert  Base Rate Loans into,  or to  continue,  LIBOR
Loans shall be  suspended  (including  pursuant to the  Borrowing  to which such
Interest  Period  applies),  and (iii)  any  Notice  of  Borrowing  or Notice of
Conversion/Continuation given at any time thereafter with respect to LIBOR Loans
shall be deemed to be a request  for Base  Rate  Loans,  in each case  until the
Agent or the Required  Lenders,  as the case may be, shall have  determined that
the  circumstances  giving  rise to such  suspension  no longer  exist  (and the
Required  Lenders,  if making such  determination,  shall have so  notified  the
Agent), and the Agent shall have so notified the Borrower and the Lenders.

     (d) Notwithstanding any other provision in this Agreement,  if, at any time
after the date hereof and from time to time, any Lender shall have determined in
good faith that the introduction of or any change in any applicable law, rule or
regulation  or  in  the   interpretation  or   administration   thereof  by  any
Governmental   Authority  charged  with  the  interpretation  or  administration
thereof,  or compliance with any guideline or request from any such Governmental
Authority (whether or not having the force of law), has or would have the effect
of making it unlawful for such Lender to make or to continue to make or maintain
LIBOR Loans,  such Lender will  forthwith so notify the Agent and the  Borrower.
Upon such notice,  (i) each of such Lender's then outstanding  LIBOR Loans shall
automatically,  on  the  expiration  date  of  the  respective  Interest  Period
applicable  thereto  (or, to the extent any such LIBOR Loan may not  lawfully be
maintained as a LIBOR Loan until such  expiration  date,  upon such notice),  be
converted into a Base Rate Loan,  (ii) the obligation of such Lender to make, to
convert  Base Rate Loans into,  or to  continue,  LIBOR Loans shall be suspended
(including  pursuant to any  Borrowing for which the Agent has received a Notice
of Borrowing  but for which the Borrowing  Date has not arrived),  and (iii) any
Notice  of  Borrowing  or Notice  of  Conversion/Continuation  given at any time
thereafter with respect to LIBOR Loans shall, as to such Lender, be deemed to be
a request  for a Base Rate  Loan,  in each case  until  such  Lender  shall have
reasonably  determined that the circumstances  giving rise to such suspension no
longer exist and shall have so notified  the Agent,  and the Agent shall have so
notified  the  Borrower  (and the Lenders  and Agent  shall act with  reasonable
promptness in giving such notices).

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<PAGE>
     (e)  Determinations by the Agent or any Lender for purposes of this Section
of any increased costs, reduction in return, market contingencies, illegality or
any other matter shall, absent manifest error, be conclusive, provided that such
determinations  are made in good faith and documented in reasonable  detail in a
certificate to the Borrower. Each Lender, upon determining that any amounts will
be payable  pursuant  to this  Section  2.16,  will give prompt  written  notice
thereof to the Borrower,  although the failure to give any such notice shall not
release or diminish any of the Borrower's  obligations to pay additional amounts
pursuant  to this  Section  2.16;  provided,  however,  that if any  Lender  has
intentionally or unreasonably withheld or delayed such notice, such Lender shall
not be entitled to receive  additional amounts pursuant to this Section 2.16 for
periods occurring prior to the 180th day before the giving of such notice.  Each
Lender agrees that in making the  determinations and giving notices described in
this  Section  2.16,  such Lender  shall not  discriminate  against the Borrower
compared with borrowers  under credit  facilities of similar  sizes.  Nothing in
this  Section  shall  require or be construed to require the Borrower to pay any
interest, fees, costs or other amounts in excess of that permitted by applicable
law.

     2.17 Taxes. (a) Any and all payments by the Borrower hereunder or under any
Note shall be made,  in accordance  with the terms hereof and thereof,  free and
clear of and without deduction for any and all present or future taxes,  levies,
imposts, deductions,  charges or withholdings,  and all liabilities with respect
thereto,  other than net income and franchise  taxes imposed on the Agent or any
Lender by the United States or by the  jurisdiction  under the laws of which the
Agent or such Lender, as the case may be, is organized or in which its principal
office or (in the case of a Lender) its applicable Lending Office is located, or
any political  subdivision  or taxing  authority  thereof (all such  nonexcluded
taxes, levies, imposts, deductions,  charges, withholdings and liabilities being
hereinafter referred to as "Taxes"). If the Borrower shall be required by law to
deduct any Taxes from or in respect of any sum  payable  hereunder  or under any
Note to the Agent or any Lender,  (i) the sum payable  shall be increased as may
be necessary so that after making all required deductions  (including deductions
applicable to additional  sums payable  under this  Section),  the Agent or such
Lender,  as the case may be,  receives an amount  equal to the sum it would have
received had no such  deductions  been made,  (ii) the  Borrower  will make such
deductions, (iii) the Borrower will pay the full amount deducted to the relevant
taxation authority or other authority in accordance with applicable law and (iv)
the  Borrower  will  deliver  to the Agent or such  Lender,  as the case may be,
evidence of such payment.

     (b) The  Borrower  will  indemnify  the Agent and each  Lender for the full
amount  of Taxes  (including,  without  limitation,  any  Taxes  imposed  by any
jurisdiction  on amounts  payable  under this Section) paid by the Agent or such
Lender, as the case may be, and any liability (including penalties, interest and
expenses) arising  therefrom or with respect thereto,  whether or not such Taxes
were correctly or legally asserted. This indemnification shall be made within 30
days from the date the Agent or such Lender,  as the case may be, makes  written
demand therefor.

     (c)  Each of the  Agent  and the  Lenders  agrees  that if it  subsequently
recovers, or receives a permanent net tax benefit with respect to, any amount of
Taxes (i) previously paid by it and as to which it has been indemnified by or on
behalf of the Borrower or (ii) previously  deducted by the Borrower  (including,
without  limitation,  any Taxes deducted from any additional  sums payable under
clause (i) of subsection (a) above),  the Agent or such Lender,  as

                                       35
<PAGE>
the case may be, shall reimburse the Borrower to the extent of the amount of any
such  recovery or permanent net tax benefit (but only to the extent of indemnity
payments made, or additional amounts paid, by or on behalf of the Borrower under
this  Section  with  respect to the Taxes  giving  rise to such  recovery or tax
benefit,  together  with the  amount  recovered  by the Agent or such  Lender as
interest attributable to the amount to be reimbursed to the Borrower hereunder);
provided,  however,  that the  Borrower,  upon the  request of the Agent or such
Lender,  agrees to repay to the Agent or such  Lender,  as the case may be,  the
amount paid over to the Borrower (together with any penalties, interest or other
charges), in the event the Agent or such Lender is required to repay such amount
and/or such  penalties,  interest or other  charges,  as the case may be, to the
relevant taxing authority or other Governmental Authority.  The determination by
the Agent or any Lender of the amount of any such  recovery or permanent net tax
benefit shall be, in the absence of manifest  error,  be conclusive and binding,
provided such  determination  is made in good faith and documented in reasonable
detail in a certificate to the Borrower.

     (d) If any  Lender  is  incorporated  or  organized  under  the  laws  of a
jurisdiction  other  than the United  States of America or any state  thereof (a
"Non-U.S.  Lender") and claims  exemption  from United  States  withholding  tax
pursuant to the Internal Revenue Code, such Non-U.S. Lender will deliver to each
of the Agent and the Borrower,  on or prior to the Closing Date (or, in the case
of a Non-U.S.  Lender that  becomes a party to this  Agreement as a result of an
assignment  after the Closing Date, on the effective  date of such  assignment),
(i) in the case of a Non-U.S.  Lender  that is a "bank" for  purposes of Section
881(c)(3)(A) of the Internal Revenue Code, a properly completed Internal Revenue
Service Form 4224 or 1001, as applicable (or successor  forms),  certifying that
such  Non-U.S.  Lender  is  entitled  to an  exemption  from or a  reduction  of
withholding or deduction for or on account of United States federal income taxes
in connection  with payments under this Agreement or any of the Notes,  together
with  a  properly  completed  Internal  Revenue  Service  Form  W-8 or  W-9,  as
applicable (or successor forms), and (ii) in the case of a Non-U.S.  Lender that
is not a "bank" for purposes of Section  881(c)(3)(A)  of the  Internal  Revenue
Code, a certificate in form and substance  reasonably  satisfactory to the Agent
and the Borrower and to the effect that (x) such Non-U.S. Lender is not a "bank"
for  purposes of Section  881(c)(3)(A)  of the  Internal  Revenue  Code,  is not
subject to regulatory or other legal requirements as a bank in any jurisdiction,
and has not been  treated as a bank for purposes of any tax,  securities  law or
other filing or submission made to any governmental  authority,  any application
made to a  rating  agency  or  qualification  for any  exemption  from  any tax,
securities law or other legal requirements,  (y) is not a 10-percent shareholder
for purposes of Section 881(c)(3)(B) of the Internal Revenue Code and (z) is not
a controlled  foreign  corporation  receiving interest from a related person for
purposes of Section  881(c)(3)(C) of the Internal Revenue Code,  together with a
properly  completed  Internal Revenue Service Form W-8 or W-9, as applicable (or
successor forms). Each such Non-U.S. Lender further agrees to deliver to each of
the Agent and the Borrower an  additional  copy of each such relevant form on or
before  the date  that  such  form  expires  or  becomes  obsolete  or after the
occurrence of any event  (including a change in its applicable  Lending  Office)
requiring a change in the most  recent  forms so  delivered  by it, in each case
certifying  that such  Non-U.S.  Lender is  entitled to an  exemption  from or a
reduction of withholding or deduction for or on account of United States federal
income taxes in  connection  with  payments  under this  Agreement or any of the
Notes, unless an event (including, without limitation, any change in treaty, law
or  regulation)  has occurred prior to the date on which any such delivery would
otherwise be required,  which event renders all such forms  

                                       36
<PAGE>
inapplicable  or the exemption to which such forms relate  unavailable  and such
Non-U.S.  Lender  notifies the Agent and the Borrower that it is not entitled to
receive  payments  without  deduction or  withholding  of United States  federal
income taxes.  Each such Non-U.S.  Lender will promptly notify the Agent and the
Borrower of any changes in circumstances that would modify or render invalid any
claimed exemption or reduction.

     (e) If any  Lender  is  entitled  to a  reduction  in (and  not a  complete
exemption from) the applicable  withholding  tax, the Borrower and the Agent may
withhold  from any interest  payment to such Lender an amount  equivalent to the
applicable  withholding tax after taking into account such reduction.  If any of
the forms or other  documentation  required  under  subsection (d) above are not
delivered  to the  Agent as  therein  required  or if a  Non-U.S.  Lender is not
entitled to receive payments without deduction or withholding, then the Borrower
and the  Agent  may  withhold  from any  interest  payment  to such  Lender  not
providing  such  forms  or  other  documentation  an  amount  equivalent  to the
applicable withholding tax.

     2.18 Compensation. The Borrower will compensate each Lender upon demand for
all losses, expenses and liabilities (including,  without limitation,  any loss,
expense or liability  incurred by reason of the  liquidation or  reemployment of
deposits or other funds required by such Lender to fund or maintain LIBOR Loans)
that such  Lender  may incur or  sustain  (i) if for any  reason  (other  than a
default by such Lender) a Borrowing or  continuation  of, or conversion  into, a
LIBOR Loan does not occur on a date specified  therefor in a Notice of Borrowing
or Notice  of  Conversion/Continuation,  (ii) if any  repayment,  prepayment  or
conversion  of any LIBOR  Loan  occurs on a date  other  than the last day of an
Interest Period applicable  thereto  (including as a consequence of acceleration
of the maturity of the Loans  pursuant to Section 9.2),  (iii) if any prepayment
of any LIBOR Loan is not made on any date  specified  in a notice of  prepayment
given by the  Borrower  or (iv) as a  consequence  of any other  failure  by the
Borrower to make any payments with respect to any LIBOR Loan when due hereunder.
Calculation of all amounts  payable to a Lender under this Section shall be made
as though such Lender had actually  funded its  relevant  LIBOR Loan through the
purchase of a Eurodollar deposit bearing interest at the LIBOR Rate in an amount
equal to the amount of such LIBOR  Loan,  having a  maturity  comparable  to the
relevant Interest Period; provided, however, that each Lender may fund its LIBOR
Loans in any manner it sees fit and the foregoing  assumption  shall be utilized
only for the calculation of amounts  payable under this Section.  Determinations
by any Lender for  purposes  of this  Section of any such  losses,  expenses  or
liabilities  shall,  absent manifest  error,  be conclusive,  provided that such
determinations  are made in good faith and documented in reasonable  detail in a
certificate delivered to the Borrower.


                                   ARTICLE III

                                LETTERS OF CREDIT

     3.1  Issuance.  Subject  to and upon the terms and  conditions  herein  set
forth, so long as no Default or Event of Default has occurred and is continuing,
the  Issuing  Lender  will,  at any time and from  time to time on and after the
Closing  Date and  prior to the  earlier  of (i) the  seventh  day  prior to the
Maturity Date and (ii) the Termination Date, and upon request by the Borrower 

                                       37
<PAGE>
in accordance  with the provisions of Section 3.2, issue for the account of PAIC
one or more irrevocable  standby letters of credit denominated in Dollars and in
a form  customarily  used or otherwise  approved by the Issuing Lender (together
with  all  amendments,  modifications  and  supplements  thereto,  substitutions
therefor and renewals and restatements  thereof,  collectively,  the "Letters of
Credit"). The Stated Amount of each Letter of Credit shall not be less than such
amount as may be reasonably  acceptable to the Issuing  Lender.  Notwithstanding
the foregoing:

     (a) No Letter of Credit shall be issued the Stated  Amount upon issuance of
which (i) when added to the aggregate  Letter of Credit  Exposure of the Lenders
at such time,  would exceed  $1,000,000 or (ii) when added to the sum of (y) the
aggregate  Letter of Credit  Exposure  of all  Lenders  at such time and (z) the
aggregate  principal  amount of all Loans  then  outstanding,  would  exceed the
aggregate Commitments at such time;

     (b) No Letter of Credit  shall be issued  that by its terms  expires  later
than the seventh day prior to the Maturity Date or, in any event,  more than one
(1) year after its date of issuance;  provided, however, that a Letter of Credit
may, if requested by the Borrower, provide by its terms, and on terms acceptable
to the Issuing  Lender,  for renewal for successive  periods of one year or less
(but not beyond the seventh day prior to the  Maturity  Date),  unless and until
the  Issuing  Lender  shall  have  delivered  a  notice  of  nonrenewal  to  the
beneficiary of such Letter of Credit; and

     (c) The Issuing  Lender shall be under no obligation to issue any Letter of
Credit if, at the time of such  proposed  issuance,  (i) any order,  judgment or
decree of any Governmental Authority or arbitrator shall purport by its terms to
enjoin or restrain the Issuing Lender from issuing such Letter of Credit, or any
Requirement  of Law applicable to the Issuing Lender or any request or directive
(whether or not having the force of law) from any  Governmental  Authority  with
jurisdiction over the Issuing Lender shall prohibit, or request that the Issuing
Lender refrain from, the issuance of letters of credit  generally or such Letter
of Credit in particular or shall impose upon the Issuing  Lender with respect to
such Letter of Credit any  restriction  or reserve or capital  requirement  (for
which the  Issuing  Lender is not  otherwise  compensated)  not in effect on the
Closing Date, or any unreimbursed loss, cost or expense that was not applicable,
in effect or known to the  Issuing  Lender as of the  Closing  Date and that the
Issuing  Lender in good faith deems  material to it, or (ii) the Issuing  Lender
shall have  actual  knowledge,  or shall have  received  notice from any Lender,
prior  to the  issuance  of  such  Letter  of  Credit  that  one or  more of the
conditions  specified  in  Sections  4.1 (if  applicable)  or 4.2  are not  then
satisfied  and/or have not been waived in writing as required herein or that the
issuance of such Letter of Credit would violate the provisions of subsection (a)
above.

     3.2 Notices.  Whenever PAIC desires the issuance of a Letter of Credit, the
Borrower will give the Issuing  Lender  written  notice with a copy to the Agent
not later than 11:00 a.m.,  Charlotte  time,  three (3)  Business  Days (or such
shorter period as is acceptable to the Issuing Lender in its sole  discretion in
any given  case) prior to the  requested  date of  issuance  thereof.  Each such
notice (each, a "Letter of Credit Notice") shall be irrevocable,  shall be given
in the form of Exhibit B-3 and shall specify (i) the requested date of issuance,
which shall be a Business Day, (ii) the requested  Stated Amount and expiry date
of the  Letter  of  Credit,  and  (iii) the name and  address  of the  requested
beneficiary  or  beneficiaries  of the Letter of Credit.  

                                       38
<PAGE>
The Borrower  will also complete  (and if requested by the Issuing  Lender,  the
Borrower will cause PAIC to complete  jointly with the Borrower) any application
procedures and documents  required by the Issuing Lender in connection  with the
issuance of any Letter of Credit. Upon its issuance of any Letter of Credit, the
Issuing Lender will promptly  notify the Agent of such  issuance,  and the Agent
will give prompt notice thereof to each Lender.

     3.3 Participations.  Immediately upon the issuance of any Letter of Credit,
the Issuing Lender shall be deemed to have sold and  transferred to each Lender,
and  each  Lender  shall  be  deemed  irrevocably  and  unconditionally  to have
purchased and received from the Issuing Lender, without recourse or warranty, an
undivided interest and  participation,  pro rata (based on the percentage of the
aggregate Commitments  represented by such Lender's Commitment),  in such Letter
of Credit,  each drawing made  thereunder  and the  obligations  of the Borrower
under this Agreement with respect thereto and any security  therefor or guaranty
pertaining  thereto;  provided,  however,  that the fee  relating  to Letters of
Credit  described  in Section  2.9(d)  shall be payable  directly to the Issuing
Lender as provided  therein,  and the Lenders shall have no right to receive any
portion  thereof.  Upon any  change  in the  Commitments  of any of the  Lenders
pursuant to Section 11.7(a),  with respect to all outstanding  Letters of Credit
and  Reimbursement  Obligations  there shall be an automatic  adjustment  to the
participations  pursuant  to this  Section to reflect the new pro rata shares of
the assigning Lender and the Assignee.

     3.4  Reimbursement.  The Borrower  hereby  agrees to reimburse  the Issuing
Lender by making payment to the Agent, for the account of the Issuing Lender, in
immediately  available  funds,  for any payment made by the Issuing Lender under
any Letter of Credit (each such amount so paid until  reimbursed,  together with
interest thereon payable as provided hereinbelow, a "Reimbursement  Obligation")
immediately  after,  and in any  event  within  one (1)  Business  Day after its
receipt  of  notice  of,  such  payment  (provided  that any such  Reimbursement
Obligation  shall be deemed timely  satisfied (but  nevertheless  subject to the
payment of interest thereon as provided  hereinbelow) if satisfied pursuant to a
Borrowing of Loans made on or prior to the next  Business Day following the date
of the Borrower's receipt of notice of such payment),  together with interest on
the amount so paid by the Issuing Lender,  to the extent not reimbursed prior to
1:00 p.m., Charlotte time, on the date of such payment or disbursement,  for the
period  from the date of the  respective  payment to the date the  Reimbursement
Obligation created thereby is satisfied, at the Adjusted Base Rate applicable to
Loans as in effect from time to time during such period,  such  interest also to
be payable on demand. The Issuing Lender will provide the Agent and the Borrower
with  prompt  notice of any  payment  or  disbursement  made under any Letter of
Credit,  although the failure to give,  or any delay in giving,  any such notice
shall not release, diminish or otherwise affect the Borrower's obligations under
this Section or any other provision of this  Agreement.  The Agent will promptly
pay to the Issuing Lender any such amounts received by it under this Section.

     3.5  Payment  by Loans.  In the event  that the  Issuing  Lender  makes any
payment  under any  Letter  of Credit  and the  Borrower  shall not have  timely
satisfied in full its Reimbursement Obligation to the Issuing Lender pursuant to
Section 3.4, and to the extent that any amounts then held in the Cash Collateral
Account  established  pursuant to Section 3.8 shall be  insufficient  to satisfy
such  Reimbursement  Obligation in full, the Issuing Lender will promptly notify
the Agent, and the Agent will promptly notify each Lender,  of such failure.  If

                                       39
<PAGE>
the Agent gives such notice prior to 11:00 a.m., Charlotte time, on any Business
Day,  each  Lender  will make  available  to the Agent,  for the  account of the
Issuing  Lender,  its pro rata share (based on the  percentage  of the aggregate
Commitments  represented  by such  Lender's  Commitment)  of the  amount of such
payment on such Business Day in immediately  available funds. If the Agent gives
such notice after 11:00 a.m.,  Charlotte  time,  on any Business  Day, each such
Lender  shall make its pro rata share of such amount  available  to the Agent on
the next succeeding Business Day. If and to the extent any Lender shall not have
so made its pro rata share of the amount of such payment available to the Agent,
such Lender agrees to pay to the Agent,  for the account of the Issuing  Lender,
forthwith on demand such amount,  together with interest  thereon at the Federal
Funds Rate for each day from such date until the date such amount is paid to the
Agent.  The  failure of any Lender to make  available  to the Agent its pro rata
share of any  payment  under any Letter of Credit  shall not  relieve  any other
Lender of its  obligation  hereunder to make available to the Agent its pro rata
share of any  payment  under  any  Letter of  Credit  on the date  required,  as
specified above, but no Lender shall be responsible for the failure of any other
Lender to make  available to the Agent such other Lender's pro rata share of any
such  payment.  Each such payment by a Lender under this Section of its pro rata
share of an amount paid by the Issuing  Lender  shall  constitute a Loan by such
Lender (the  Borrower  being  deemed to have given a timely  Notice of Borrowing
therefor)  and shall be  treated  as such for all  purposes  of this  Agreement;
provided that for purposes of determining the aggregate  Unutilized  Commitments
immediately  prior to giving effect to the  application  of the proceeds of such
Loans, the Reimbursement  Obligation being satisfied thereby shall be deemed not
to be outstanding at such time.

     3.6 Payment to Lenders.  Whenever the Issuing Lender  receives a payment in
respect of a  Reimbursement  Obligation as to which the Agent has received,  for
the account of the Issuing  Lender,  any payments  from the Lenders  pursuant to
Section 3.5, the Issuing  Lender will  promptly pay to the Agent,  and the Agent
will  promptly pay to each Lender that has paid its pro rata share  thereof,  in
immediately  available  funds,  an amount equal to such  Lender's  ratable share
(based on the proportionate amount funded by such Lender to the aggregate amount
funded by all Lenders) of such Reimbursement Obligation.

     3.7 Obligations  Absolute.  The Reimbursement  Obligations of the Borrower,
and the  obligations  of the Lenders  under  Section 3.5 to make payments to the
Agent, for the account of the Issuing Lender, with respect to Letters of Credit,
shall be irrevocable, shall remain in effect until the Issuing Lender shall have
no  further  obligations  to  make  any  payments  or  disbursements  under  any
circumstances  with respect to any Letter of Credit,  and,  except to the extent
resulting  from any gross  negligence  or willful  misconduct on the part of the
Issuing  Lender,  shall be absolute and  unconditional,  shall not be subject to
counterclaim,  setoff or other defense or any other  qualification  or exception
whatsoever and shall be made in accordance with the terms and conditions of this
Agreement under all circumstances,  including,  without  limitation,  any of the
following circumstances:

     (a) Any lack of validity or  enforceability  of this Agreement,  any of the
other Credit Documents or any documents or instruments relating to any Letter of
Credit;


                                       40
<PAGE>
     (b) Any change in the time,  manner or place of payment of, or in any other
term of, all or any of the Obligations in respect of any Letter of Credit or any
other amendment,  modification or waiver of or any consent to departure from any
Letter of Credit or any documents or instruments  relating thereto, in each case
whether or not the Borrower has notice or knowledge thereof;

     (c) The  existence  of any claim,  setoff,  defense or other right that the
Borrower may have at any time against a beneficiary named in a Letter of Credit,
any  transferee  of any  Letter  of  Credit  (or any  Person  for  whom any such
transferee may be acting),  the Agent,  the Issuing Lender,  any Lender or other
Person,  whether in connection  with this Agreement,  any Letter of Credit,  the
transactions  contemplated hereby or any unrelated  transactions  (including any
underlying transaction between PAIC and the beneficiary named in any such Letter
of Credit);

     (d) Any draft, certificate or any other document presented under the Letter
of Credit  proving to be forged,  fraudulent,  invalid  or  insufficient  in any
respect or any  statement  therein  being  untrue or  inaccurate  in any respect
(provided that such draft,  certificate or other document appears on its face to
comply  with  the  terms of such  Letter  of  Credit),  any  errors,  omissions,
interruptions  or delays in transmission  or delivery of any messages,  by mail,
telecopier or otherwise,  or any errors in translation or in  interpretation  of
technical terms;

     (e) Any defense  based upon the  failure of any  drawing  under a Letter of
Credit to conform to the terms of the Letter of Credit (provided that any draft,
certificate  or other  document  presented  pursuant  to such  Letter  of Credit
appears on its face to comply with the terms  thereof),  any  nonapplication  or
misapplication  by the  beneficiary  or any  transferee  of the proceeds of such
drawing  or any other act or  omission  of such  beneficiary  or  transferee  in
connection with such Letter of Credit;

     (f) The exchange,  release, surrender or impairment of any security for the
Obligations;

     (g) The occurrence of any Default or Event of Default; or

     (h)  Any  other  circumstance  or  event  whatsoever,   including,  without
limitation,  any other  circumstance  that might otherwise  constitute a defense
available to, or a discharge of, the Borrower or a guarantor.

Any  action  taken or  omitted  to be taken by the  Issuing  Lender  under or in
connection  with any  Letter of Credit,  if taken or  omitted in the  absence of
gross negligence or willful  misconduct,  shall be binding upon the Borrower and
each  Lender  and shall not  create or result in any  liability  of the  Issuing
Lender to the  Borrower or any Lender.  It is  expressly  understood  and agreed
that, for purposes of determining  whether a wrongful  payment under a Letter of
Credit  resulted  from  the  Issuing   Lender's  gross   negligence  or  willful
misconduct,  (i) the Issuing  Lender's  acceptance  of documents  that appear on
their  face  to  comply  with  the  terms  of such  Letter  of  Credit,  without
responsibility   for  further   investigation,   regardless  of  any  notice  or
information to the contrary, (ii) the Issuing Lender's exclusive reliance on the
documents  presented to it under such Letter of Credit as to any and all matters
set forth therein, including the amount of any draft presented 


                                       41
<PAGE>
under such  Letter of Credit,  whether or not the amount due to the  beneficiary
thereunder  equals  the amount of such  draft and  whether  or not any  document
presented  pursuant to such Letter of Credit  proves to be  insufficient  in any
respect (so long as such  document  appears on its face to comply with the terms
of such Letter of Credit),  and whether or not any other  statement or any other
document  presented  pursuant  to such  Letter of Credit  proves to be forged or
invalid  or any  statement  therein  proves  to be  inaccurate  or untrue in any
respect whatsoever, and (iii) any noncompliance in any immaterial respect of the
documents presented under such Letter of Credit with the terms thereof shall, in
each case, be deemed not to constitute gross negligence or willful misconduct of
the Issuing Lender.

     3.8 Cash  Collateral  Account.  At any time and from time to time (i) after
the occurrence and during the continuance of an Event of Default,  the Agent, at
the  direction  or with the  consent of the  Required  Lenders,  may require the
Borrower to deliver to the Agent such  additional  amount of cash as is equal to
the  aggregate  Stated  Amount of all Letters of Credit at any time  outstanding
(whether or not any  beneficiary  under any Letter of Credit shall have drawn or
be  entitled  at such  time to  draw  thereunder)  and  (ii) in the  event  of a
prepayment  under  Section  2.6(b),  or to the  extent  any amount of a required
prepayment  under Section  2.6(c)  remains after  prepayment of all  outstanding
Loans and Reimbursement  Obligations , as contemplated by such subsections,  the
Agent will  retain such  amount as may then be  required  to be  retained,  such
amounts in each case under clauses (i) and (ii) above to be held by the Agent in
a cash collateral account (the "Cash Collateral  Account").  The Borrower hereby
grants to the Agent,  for the benefit of the Issuing  Lender and the Lenders,  a
Lien upon and security  interest in the Cash Collateral  Account and all amounts
held therein from time to time as security  for Letter of Credit  Exposure,  and
for application to the Borrower's Reimbursement Obligations as and when the same
shall arise. The Agent shall have exclusive dominion and control,  including the
exclusive right of withdrawal, over such account. Other than any interest on the
investment of such amounts in Cash Equivalents,  which investments shall be made
at the  direction  of the Borrower  (unless a Default or Event of Default  shall
have  occurred  and  be  continuing,  in  which  case  the  determination  as to
investments  shall be made at the option and in the  discretion  of the  Agent),
amounts in the Cash  Collateral  Account shall not bear  interest.  Interest and
profits,  if any, on such investments  shall accumulate in such account.  In the
event of a drawing,  and  subsequent  payment by the Issuing  Lender,  under any
Letter of  Credit at any time  during  which  any  amounts  are held in the Cash
Collateral Account, the Agent will deliver to the Issuing Lender an amount equal
to the Reimbursement  Obligation created as a result of such payment (or, if the
amounts  so held  are  less  than  such  Reimbursement  Obligation,  all of such
amounts) to reimburse the Issuing Lender therefor.  Any amounts remaining in the
Cash  Collateral  Account  after the  expiration  of all  Letters  of Credit and
reimbursement  in  full  of the  Issuing  Lender  for  all  of  its  obligations
thereunder  shall be held by the Agent,  for the benefit of the Borrower,  to be
applied  against the  Obligations  in such order and manner as the  Borrower (so
long as no Default or Event of  Default  has  occurred  and is  continuing,  and
otherwise  the Agent) may direct.  If the  Borrower is required to provide  cash
collateral pursuant to Section 2.6(b), such amount (to the extent not applied as
aforesaid)  shall be returned to the  Borrower  on demand,  provided  that after
giving effect to such return (i) the sum of (y) the aggregate  principal  amount
of all Loans  outstanding  at such time and (z) the  aggregate  Letter of Credit
Exposure of all Lenders at such time would not exceed the aggregate  Commitments
at such time and (ii) no Default or Event of Default  shall have occurred and be
continuing at such time. If the Borrower is required to 


                                       42
<PAGE>
provide cash collateral as a result of an Event of Default,  such amount (to the
extent not applied as aforesaid)  shall be returned to the Borrower within three
(3) Business Days after all Events of Default have been cured or waived.

     3.9  Effectiveness.  Notwithstanding  any termination of the Commitments or
repayment of the Loans,  or both,  the  obligations  of the Borrower  under this
Article  shall remain in full force and effect until the Issuing  Lender and the
Lenders shall have no further  obligations to make any payments or disbursements
under any circumstances with respect to any Letter of Credit.


                                   ARTICLE IV

                             CONDITIONS OF BORROWING

     4.1 Conditions of Initial Borrowing.  The obligation of each Lender to make
Loans in connection with the initial Borrowing hereunder,  and the obligation of
the Issuing Lender to issue Letters of Credit  hereunder on the Closing Date, is
subject to the satisfaction of the following conditions precedent:

     (a) The Agent  shall  have  received  the  following,  each dated as of the
Closing  Date  (unless  otherwise  specified)  and,  except  for the  Notes,  in
sufficient copies for each Lender:

          (i) A Note for each  Lender  that is a party  hereto as of the Closing
     Date, in the amount of such  Lender's  Commitment,  each duly  completed in
     accordance with the relevant  provisions of Section 2.4 and executed by the
     Borrower;

          (ii) the  favorable  opinion of Reed Smith Shaw & McClay LLP,  special
     counsel to the Borrower,  in substantially the form of Exhibit E, addressed
     to the Agent and the Lenders and addressing such other matters as the Agent
     or any Lender may reasonably request.

     (b) The Agent shall have received a  certificate,  signed by the president,
the chief executive officer or the chief financial  officer of the Borrower,  in
form  and  substance  satisfactory  to  the  Agent,   certifying  that  (i)  all
representations  and warranties of the Borrower  contained in this Agreement and
the other Credit  Documents  are true and correct as of the Closing  Date,  both
immediately   before  and  after  giving  effect  to  the  consummation  of  the
transactions  contemplated hereby, the making of the initial Loans hereunder and
the application of the proceeds thereof, (ii) no Default or Event of Default has
occurred and is continuing,  both immediately  before and after giving effect to
the  consummation of the  transactions  contemplated  hereby,  the making of the
initial Loans hereunder and the application of the proceeds thereof, (iii) there
are no  insurance  regulatory  proceedings  pending  or,  to  such  individual's
knowledge,   threatened  against  any  of  the  Insurance  Subsidiaries  in  any
jurisdiction that, if adversely determined, would be reasonably likely to have a
Material 


                                       43
<PAGE>

Adverse  Effect;  (iv) both  immediately  before and after giving  effect to the
consummation of the transactions  contemplated hereby, the making of the initial
Loans hereunder and the application of the proceeds thereof, no Material Adverse
Change  has  occurred  since  December  31,  1997,  and  there  exists no event,
condition  or state of facts that could  reasonably  be  expected to result in a
Material  Adverse  Change,  and (v) all conditions to the initial  extensions of
credit  hereunder  set  forth in this  Section  and in  Section  4.2  have  been
satisfied or waived as required hereunder.

     (c) The Agent shall have  received a  certificate  of the  secretary  or an
assistant secretary of the Borrower,  in form and substance  satisfactory to the
Agent,  certifying (i) that attached  thereto is a true and complete copy of the
articles or  certificate  of  incorporation  and all  amendments  thereto of the
Borrower, certified as of a recent date by the Secretary of State (or comparable
Governmental  Authority) of its jurisdiction of organization,  and that the same
has not been amended  since the date of such  certification,  (ii) that attached
thereto is a true and complete  copy of the bylaws of the  Borrower,  as then in
effect  and as in  effect at all  times  from the date on which the  resolutions
referred to in clause (iii) below were adopted to and including the date of such
certificate,  and (iii) that  attached  thereto is a true and  complete  copy of
resolutions  adopted by the board of directors of the Borrower  authorizing  the
execution,  delivery  and  performance  of this  Agreement  and the other Credit
Documents to which it is a party,  and as to the incumbency  and  genuineness of
the signature of each officer of the Borrower executing this Agreement or any of
such other Credit  Documents,  and  attaching  all such copies of the  documents
described above.

     (d) The Agent shall have received (i) a certificate  as of a recent date of
the good  standing of each of the Borrower and its Material  Subsidiaries  under
the laws of its  jurisdiction of  organization,  from the Secretary of State (or
comparable  Governmental  Authority) of such  jurisdiction;  and (ii) as to each
Material Insurance Subsidiary,  a certificate of compliance as of a recent date,
issued  by the  Insurance  Regulatory  Authority  of its  jurisdiction  of legal
domicile  and any other  jurisdiction  in which  such  Insurance  Subsidiary  is
reasonably  likely to be  commercially  domiciled as defined  under the laws and
regulations of such jurisdiction.

     (e) All legal matters,  documentation,  and corporate or other  proceedings
incident to the transactions  contemplated  hereby shall be satisfactory in form
and  substance  to  the  Agent;  all  approvals,  permits  and  consents  of any
Governmental Authorities (including,  without limitation, all relevant Insurance
Regulatory  Authorities)  or  other  Persons  required  in  connection  with the
execution and delivery of this Agreement and the other Credit  Documents and the
consummation of the transactions contemplated hereby and thereby shall have been
obtained,  without the  imposition of conditions  that are not acceptable to the
Agent,  and all  related  filings,  if any,  shall have been made,  and all such
approvals,  permits,  consents and filings shall be in full force and effect and
the Agent shall have  received such copies  thereof as it shall have  requested;
all  applicable  waiting  periods shall have expired  without any adverse action
being taken by any Governmental  Authority having  jurisdiction;  and no action,
proceeding, investigation, regulation or legislation shall have been instituted,
threatened  or proposed  before,  and no order,  injunction or decree shall have
been  entered  by, any court or other  Governmental  Authority,  in each case to
enjoin,  restrain or prohibit,  to obtain substantial  damages in respect of, or
that is otherwise related to or arises out of, this Agreement,  any of the other
Credit Documents or the consummation of the transactions  contemplated hereby or
thereby,  or that, in the opinion of the Agent,  could reasonably be expected to
have a Material Adverse Effect.

                                       44
<PAGE>
     (f) The Agent shall have  received  certified  reports from an  independent
search  service  satisfactory  to it listing any  judgment or tax lien filing or
Uniform  Commercial  Code  financing  statement  that names the  Borrower or any
Material  Subsidiary as debtor, and the results thereof shall be satisfactory to
the Agent.

     (g) Since  December  31,  1997,  both  immediately  before and after giving
effect to the consummation of the  transactions  contemplated by this Agreement,
there  shall  not have  occurred  any  Material  Adverse  Change  or any  event,
condition  or state of facts that could  reasonably  be  expected to result in a
Material Adverse Change.

     (h) The Borrower shall have paid (i) to First Union,  the unpaid balance of
the fees  described in  paragraphs  (1) and (2) of the Fee Letter,  and (ii) all
other fees and expenses of the Agent and the Lenders required hereunder or under
any other Credit  Document to be paid on or prior to the Closing Date (including
fees and  expenses  of  counsel)  in  connection  with  this  Agreement  and the
transactions contemplated hereby.

     (i) The Agent shall have received the financial  statements as described in
Sections  5.11(a)  and  5.11(e),  all of which  shall  be in form and  substance
satisfactory to the Agent.

     (j) The Agent  shall  have  received  a  Financial  Condition  Certificate,
together with the Pro Forma Balance  Sheet and the  Projections  as described in
Sections  5.11(b)  and  5.11(c),  all of which  shall  be in form and  substance
satisfactory to the Agent.

     (k) The Agent shall have  received a Covenant  Compliance  Worksheet,  duly
completed  and certified by the chief  financial  officer of the Borrower and in
form and  substance  satisfactory  to the Agent,  demonstrating  the  Borrower's
compliance  with the financial  covenants set forth in Sections 7.1 through 7.6,
determined  on a pro forma basis as of June 30, 1998 after giving  effect to the
making of the initial Loans hereunder and the  consummation of the  transactions
contemplated hereby.

     (l) The Agent shall be satisfied with the certification  with respect to an
actuarial review and valuation  statement of, and opinion as to the adequacy of,
each Insurance  Subsidiary's loss and loss adjustment  expense reserve positions
as of December 31, 1997,  with respect to the insurance  business then in force,
prepared and given by an independent actuarial firm acceptable to the Agent; and
such  certification  and opinion  shall not differ in any  material and negative
respect from any such materials previously delivered to the Agent.

     (m) The Agent shall have received satisfactory  confirmation from A.M. Best
& Company that PAIC's current rating is "A-" or better.

     (n) The  Consolidated  Net  Worth of the  Borrower  shall  not be less than
$90,000,000 as of the Closing Date.

     (o) The Agent  shall  have  received  a Federal  Reserve  Form U-1 for each
Lender,  duly executed by an Authorized Officer of the Borrower,  the statements
made in which  shall be such,  

                                       45

<PAGE>
in the opinion of the Agent, as to permit the transactions  contemplated by this
Agreement in accordance with Regulation U.

     (p) The Agent shall have received an Account Designation  Letter,  together
with written  instructions from an Authorized  Officer,  including wire transfer
information,  directing  the payment of the proceeds of the initial  Loans to be
made hereunder.

     (q) The Agent shall have received the Fee Letter.

     (r) The Agent and each Lender  shall have  received  such other  documents,
certificates,  opinions and  instruments  in  connection  with the  transactions
contemplated hereby as it shall have reasonably requested.

     4.2 Conditions of All Borrowings. The obligation of each Lender to make any
Loans hereunder,  including the initial Loans, and the obligation of the Issuing
Lender to issue any Letters of Credit hereunder,  is subject to the satisfaction
of the following  conditions precedent on the relevant Borrowing Date or date of
issuance:

     (a) The Agent shall have received a Notice of Borrowing in accordance  with
Section 2.2(b),  or (together with the Issuing Lender) a Letter of Credit Notice
in accordance with Section 3.2, as applicable;

     (b) Each of the representations  and warranties  contained in Article V and
in the  other  Credit  Documents  shall  be true and  correct  on and as of such
Borrowing  Date  (including  the Closing  Date, in the case of the initial Loans
made hereunder) or date of issuance with the same effect as if made on and as of
such date,  both  immediately  before and after giving effect to the Loans to be
made or Letter of Credit to be issued on such date  (except  to the  extent  any
such  representation  or warranty is expressly  stated to have been made as of a
specific date, in which case such  representation  or warranty shall be true and
correct in all material respects as of such date); and

     (c) No Default or Event of Default shall have occurred and be continuing on
such date,  both  immediately  before and after giving effect to the Loans to be
made or Letter of Credit to be issued on such date.

     Each giving of a Notice of Borrowing or a Letter of Credit Notice,  and the
consummation  of each  Borrowing  or  issuance  of a Letter of Credit,  shall be
deemed to  constitute  a  representation  by the  Borrower  that the  statements
contained in subsections (b) and (c) above are true, both as of the date of such
notice or request and as of the relevant Borrowing Date or date of issuance.

                                       46
<PAGE>
                                    ARTICLE V

                         REPRESENTATIONS AND WARRANTIES

     To induce the Agent and the  Lenders to enter  into this  Agreement  and to
induce  the  Lenders  to extend the credit  contemplated  hereby,  the  Borrower
represents and warrants to the Agent and the Lenders as follows:

     5.1  Corporate  Organization  and  Power.  Each  of the  Borrower  and  its
Subsidiaries (i) is a corporation  duly organized,  validly existing and in good
standing under the laws of the jurisdiction of its  incorporation,  (ii) has the
full  corporate  power and authority to execute,  deliver and perform the Credit
Documents to which it is or will be a party, to own and hold its property and to
engage in its business as presently conducted, and (iii) is duly qualified to do
business as a foreign  corporation and is in good standing in each  jurisdiction
where the nature of its business or the ownership of its properties  requires it
to be so  qualified,  except  where the  failure to be so  qualified  would not,
individually  or in the  aggregate,  be  reasonably  likely  to have a  Material
Adverse Effect.

     5.2   Authorization;   Enforceability.   Each  of  the   Borrower  and  its
Subsidiaries  has taken,  or on the Closing Date will have taken,  all necessary
corporate action to execute, deliver and perform each of the Credit Documents to
which it is or will be a party,  and has, or on the  Closing  Date (or any later
date of execution and delivery) will have,  validly  executed and delivered each
of the  Credit  Documents  to  which it is or will be a  party.  This  Agreement
constitutes,  and each of the other Credit Documents upon execution and delivery
will constitute, the legal, valid and binding obligation of each of the Borrower
and its Subsidiaries that is a party hereto or thereto,  enforceable  against it
in  accordance  with its  terms,  except as  enforceability  may be  limited  by
bankruptcy,  insolvency,  reorganization,   moratorium  or  other  similar  laws
affecting  creditors'  rights generally,  by general equitable  principles or by
principles of good faith and fair dealing.

     5.3 No Violation.  The execution,  delivery and  performance by each of the
Borrower and its  Subsidiaries  of this  Agreement  and each of the other Credit
Documents to which it is or will be a party, and compliance by it with the terms
hereof  and  thereof,  do not and  will not (i)  violate  any  provision  of its
articles or  certificate  of  incorporation  or bylaws or  contravene  any other
Requirement of Law  applicable to it, (ii) conflict with,  result in a breach of
or  constitute  (with  notice,  lapse  of time  or  both) a  default  under  any
indenture,  agreement or other instrument to which it is a party, by which it or
any of its properties is bound or to which it is subject, or (iii) except to the
Agent for the  benefit  of the  Issuing  Lender  and the  Lenders,  result in or
require the creation or  imposition  of any Lien upon any of its  properties  or
assets.  No  Subsidiary  is a party to any  agreement or instrument or otherwise
subject to any  restriction or encumbrance  that restricts or limits its ability
to make  dividend  payments  or other  distributions  in respect of its  Capital
Stock, to repay  Indebtedness owed to the Borrower or any other  Subsidiary,  to
make loans or advances to the Borrower or any other  Subsidiary,  or to transfer
any of its assets or properties to the Borrower or any other Subsidiary, in each
case other than such restrictions or encumbrances existing under or by reason of
the Credit Documents or applicable Requirements of Law.

                                       47
<PAGE>
     5.4 Governmental and Third-Party  Authorization;  Permits.  (a) No consent,
approval, authorization or other action by, notice to, or registration or filing
with,  any  Governmental  Authority  or other Person is or will be required as a
condition to or otherwise in  connection  with the due  execution,  delivery and
performance  by each of the Borrower and its  Subsidiaries  of this Agreement or
any of the  other  Credit  Documents  to  which  it is or will be a party or the
legality, validity or enforceability hereof or thereof, other than (i) consents,
authorizations  and filings  that have been (or on or prior to the Closing  Date
will have been) made or obtained  and that are (or on the Closing  Date will be)
in full force and effect, which consents,  authorizations and filings are listed
on Schedule  5.4,  and (ii)  consents  and filings the failure to obtain or make
which  would not,  individually  or in the  aggregate,  have a Material  Adverse
Effect.

     (b) Each of the Borrower and its Subsidiaries  has, and is in good standing
with   respect   to,  all   governmental   approvals,   licenses,   permits  and
authorizations  necessary to conduct its business as presently  conducted and to
own or lease and operate its properties,  except for those the failure to obtain
which would not be reasonably likely,  individually or in the aggregate, to have
a Material Adverse Effect.

     (c) Schedule 5.4 lists with respect to each Material Insurance  Subsidiary,
as of the  Closing  Date,  all of  the  jurisdictions  in  which  such  Material
Insurance Subsidiary holds licenses (including, without limitation,  licenses or
certificates  of authority  from  relevant  Insurance  Regulatory  Authorities),
permits  or  authorizations  to  transact  insurance  and  reinsurance  business
(collectively,  the "Licenses"), and indicates the line or lines of insurance in
which each such  Material  Insurance  Subsidiary is permitted to be engaged with
respect to each License therein listed. To the knowledge of the Borrower, (i) no
such  License is the  subject of a  proceeding  for  suspension,  revocation  or
limitation or any similar  proceedings;  (ii) there is no sustainable  basis for
such a  suspension,  revocation  or  limitation;  and (iii) no such  suspension,
revocation or limitation  is  threatened  by any relevant  Insurance  Regulatory
Authority.  No Material Insurance  Subsidiary  transacts any insurance business,
directly or indirectly,  in any jurisdiction other than those listed on Schedule
5.4, where such business requires any license,  permit or other authorization of
an Insurance Regulatory Authority of such jurisdiction.

     5.5 Litigation. There are no actions, investigations,  suits or proceedings
pending or, to the knowledge of the Borrower,  threatened,  at law, in equity or
in arbitration,  before any court, other Governmental Authority or other Person,
(i) against or affecting the Borrower,  any of its  Subsidiaries or any of their
respective properties that would, if adversely determined,  be reasonably likely
to have a Material Adverse Effect, other than actions, investigations,  suits or
proceedings  arising  in the  ordinary  course  of  business  of  the  Insurance
Subsidiaries  for which reserves have been prudently  estimated and set aside in
accordance with sound and standard industry  practices;  or (ii) with respect to
this Agreement or any of the other Credit Documents.

     5.6 Taxes.  Each of the Borrower and its  Subsidiaries has timely filed all
federal,  state and local tax returns and reports required to be filed by it and
has paid all taxes,  assessments,  fees and other charges levied upon it or upon
its properties that are shown thereon as due and payable,  other than those that
are  being  contested  in good  faith and by  proper  proceedings  and for which
adequate  reserves have been  established in accordance  with GAAP. Such returns

                                       48
<PAGE>
accurately  reflect in all  material  respects  all  liability  for taxes of the
Borrower  and its  Subsidiaries  for the periods  covered  thereby.  There is no
ongoing  audit or  examination  or,  to the  knowledge  of the  Borrower,  other
investigation by any Governmental Authority of the tax liability of the Borrower
or any of its Subsidiaries, and there is no unresolved claim by any Governmental
Authority   concerning  the  tax  liability  of  the  Borrower  or  any  of  its
Subsidiaries  for any period for which tax returns have been or were required to
have been  filed,  other  than  claims  for which  adequate  reserves  have been
established  in  accordance  with  GAAP.  Neither  the  Borrower  nor any of its
Subsidiaries has waived or extended or has been requested to waive or extend the
statute of limitations relating to the payment of any taxes.

     5.7  Subsidiaries.  Schedule 5.7 sets forth a list, as of the Closing Date,
of all of the Subsidiaries of the Borrower and, as to each such Subsidiary,  the
percentage  ownership (direct and indirect) of the Borrower in each class of its
capital  stock and each direct owner  thereof and indicates in each case whether
such Subsidiary is a Material Subsidiary. Except for the shares of capital stock
expressly  indicated  on  Schedule  5.7,  there are no shares of capital  stock,
warrants,  rights, options or other equity securities, or other Capital Stock of
any  Subsidiary  of the Borrower  outstanding  or reserved for any purpose.  All
outstanding  shares of capital stock of each Subsidiary of the Borrower are duly
and validly issued, fully paid and nonassessable.

     5.8   Full   Disclosure.    All   factual    information    heretofore   or
contemporaneously  furnished  to the  Agent or any  Lender in  writing  by or on
behalf  of  the  Borrower  or  any of its  Subsidiaries  for  purposes  of or in
connection with this Agreement and the transactions  contemplated hereby is, and
all other  such  factual  information  hereafter  furnished  to the Agent or any
Lender in writing  by or on behalf of the  Borrower  or any of its  Subsidiaries
will be, true and accurate in all material respects on the date as of which such
information is dated or certified (or, if such  information  has been amended or
supplemented,  on the date as of which any such amendment or supplement is dated
or  certified)  and not made  incomplete  by omitting  to state a material  fact
necessary  to  make  the  statements   contained   therein,   in  light  of  the
circumstances under which such information was provided, not misleading.

     5.9 Margin Regulations. Neither the Borrower nor any of its Subsidiaries is
engaged principally,  or as one of its important activities,  in the business of
extending  credit for the purpose of  purchasing or carrying  Margin  Stock.  No
proceeds of the Loans will be used, directly or indirectly, to purchase or carry
any Margin  Stock,  to extend  credit for such purpose or for any other  purpose
that  would  violate  or be  inconsistent  with  Regulations  T,  U or X or  any
provision of the Exchange Act.

     5.10 No Material Adverse Change.  There has been no Material Adverse Change
since December 31, 1997, and there exists no event,  condition or state of facts
that could reasonably be expected to result in a Material Adverse Change.

     5.11 Financial  Matters.  (a) The Borrower has heretofore  furnished to the
Agent copies of (i) the audited  consolidated balance sheets of the Borrower and
its  Subsidiaries  as of December  31,  1997,  1996,  and 1995,  and the related
statements of income,  cash flows and stockholders'  equity for the fiscal years
then ended, together with the opinion of KPMG Peat Marwick LLP thereon, and (ii)
the unaudited consolidated balance sheet of the Borrower and its 

                                       49
<PAGE>
Subsidiaries  as of June 30, 1998,  and the related  statements of income,  cash
flows and  stockholders'  equity  for the  six-month  period  then  ended.  Such
financial  statements have been prepared in accordance with GAAP (subject,  with
respect to the unaudited financial statements,  to the absence of notes required
by GAAP and to normal  year-end  adjustments)  and present  fairly the financial
condition of the Borrower and its Subsidiaries on a consolidated basis as of the
respective  dates  thereof and the  consolidated  results of  operations  of the
Borrower and its Subsidiaries for the respective  periods then ended.  Except as
fully reflected in (x) the most recent  financial  statements  referred to above
and  the  notes  thereto,  (y) the  financial  statements  previously  delivered
pursuant  to Section  6.1,  or (z) any Form 8-K filed by the  Borrower  with the
Securities and Exchange  Commission and previously  delivered by the Borrower to
Lenders,  there are no material  liabilities or obligations  with respect to the
Borrower or any of its Subsidiaries of any nature whatsoever  (whether absolute,
contingent or otherwise and whether or not due).

     (b) The  unaudited  pro forma  balance sheet of the Borrower as of June 30,
1998, a copy of which has  heretofore  been  delivered  to the Agent,  gives pro
forma effect to the consummation of the initial  extensions of credit made under
this Agreement,  and the payment of transaction fees and expenses related to the
foregoing,  all as if such  events  had  occurred  on such date (the "Pro  Forma
Balance  Sheet").  The Pro Forma  Balance  Sheet has been prepared in accordance
with GAAP  (subject to the absence of footnotes  required by GAAP and subject to
normal year-end  adjustments)  and,  subject to stated  assumptions made in good
faith and  having a  reasonable  basis set forth  therein,  presents  fairly the
financial  condition of the  Borrower on an unaudited  pro forma basis as of the
date  set  forth  therein  after  giving  effect  to  the  consummation  of  the
transactions described above.

     (c) The Borrower has prepared,  and has heretofore furnished to the Agent a
copy of, annual projected balance sheets and statements of income and cash flows
of the Borrower for the five-year  period beginning with the year ended December
31,  1998,  giving  effect to the initial  extensions  of credit made under this
Agreement  and the  payment  of  transaction  fees and  expenses  related to the
foregoing (the "Projections"). In the opinion of management of the Borrower, the
assumptions used in the preparation of the Projections  were fair,  complete and
reasonable when made and continue to be fair,  complete and reasonable as of the
date hereof.  The Projections  have been prepared in good faith by the executive
and financial personnel of the Borrower, are complete and represent a reasonable
estimate of the future  performance  and  financial  condition of the  Borrower,
subject to the uncertainties and approximations inherent in any projections.

     (d) Each of the Borrower and its  Subsidiaries,  after giving effect to the
consummation of the transactions contemplated hereby, (i) has capital sufficient
to carry on its  businesses as conducted  and as proposed to be conducted,  (ii)
has assets with a fair saleable value,  determined on a going concern basis, (y)
not less than the amount required to pay the probable  liability on its existing
debts as they become  absolute and matured and (z) greater than the total amount
of its liabilities (including identified contingent  liabilities,  valued at the
amount that can  reasonably  be expected to become  absolute and  matured),  and
(iii)  does not intend to, and does not  believe  that it will,  incur  debts or
liabilities beyond its ability to pay such debts and liabilities as they mature.

                                       50
<PAGE>
     (e) The  Borrower has  heretofore  furnished to the Agent copies of (i) the
Annual Statements of each of its Insurance Subsidiaries as of December 31, 1997,
1996 and 1995,  and for the fiscal  years  then  ended,  and (ii) the  Quarterly
Statements of each of its Insurance  Subsidiaries  as of June 30, 1998,  and the
six-month  period  then  ended,  each  as  filed  with  the  relevant  Insurance
Regulatory Authority. Such financial statements (including,  without limitation,
the provisions made therein for investments and the valuation thereof, reserves,
policy and contract  claims and  statutory  liabilities)  have been  prepared in
accordance  with SAP  (except  as may be  reflected  in the  notes  thereto  and
subject,  with  respect to the  Quarterly  Statements,  to the  absence of notes
required by SAP and to normal  year-end  adjustments),  were in compliance  with
applicable  Requirements  of Law when filed and  present  fairly  the  financial
condition of the respective  Insurance  Subsidiaries  covered  thereby as of the
respective  dates thereof and the results of operations,  changes in capital and
surplus and cash flow of the respective  Insurance  Subsidiaries covered thereby
for the respective  periods then ended.  Except for  liabilities and obligations
disclosed  or provided  for (x) in the  Quarterly  Statements  referred to above
(including,  without  limitation,  reserves,  policy  and  contract  claims  and
statutory  liabilities),  (y)  the  financial  statements  previously  delivered
pursuant  to Section  6.2,  or (z) any Form 8-K filed by the  Borrower  with the
Securities and Exchange  Commission and previously  delivered by the Borrower to
the Lenders,  there are no material  liabilities  or  obligations  of any nature
whatsoever  (whether  absolute,  contingent or otherwise and whether or not due)
that, in accordance with SAP, would have been required to have been disclosed or
provided for in  statutory  financial  statements.  All books of account of each
Insurance Subsidiary fully and fairly disclose all of its material transactions,
properties,  assets,  investments,  liabilities  and  obligations,  are  in  its
possession and are true, correct and complete in all material respects.

     5.12 Ownership of Properties. Each of the Borrower and its Subsidiaries (i)
has good and  marketable  title to all real  property  owned by it,  (ii)  holds
interests  as lessee under valid leases in full force and effect with respect to
all  material  leased real and personal  property  used in  connection  with its
business,  (iii) possesses or has rights to use licenses,  patents,  copyrights,
trademarks,  service marks, trade names and other assets sufficient to enable it
to continue to conduct its business  substantially  as heretofore  conducted and
without any material conflict with the rights of others, and (iv) has good title
to all of its other properties and assets reflected in the most recent financial
statements  referred to in Section 5.11(a) (except as sold or otherwise disposed
of since the date  thereof in the  ordinary  course of  business),  in each case
under (i),  (ii),  (iii) and (iv)  above free and clear of all Liens  other than
Permitted Liens.

     5.13  ERISA.  (a)  Each of the  Borrower  and its  ERISA  Affiliates  is in
compliance in all material respects with the applicable provisions of ERISA, and
each Plan is and has been  administered  in compliance in all material  respects
with all applicable  Requirements of Law,  including,  without  limitation,  the
applicable provisions of ERISA and the Internal Revenue Code. No ERISA Event (i)
has occurred  within the five-year  period prior to the Closing  Date,  (ii) has
occurred  and is  continuing,  or (iii) to the  knowledge  of the  Borrower,  is
reasonably  expected to occur with respect to any Plan. No Plan has any Unfunded
Pension  Liability  as of the  most  recent  annual  valuation  date  applicable
thereto,  and  neither the  Borrower  nor any ERISA  Affiliate  has engaged in a
transaction that could be subject to Section 4069 or 4212(c) of ERISA.

                                       51
<PAGE>
     (b)  Neither the  Borrower  nor any ERISA  Affiliate  has had a complete or
partial withdrawal from any Multiemployer Plan, and neither the Borrower nor any
ERISA  Affiliate  would  become  subject  to any  liability  under  ERISA if the
Borrower  or  any  ERISA   Affiliate  were  to  withdraw   completely  from  all
Multiemployer  Plans as of the most recent valuation date. No Multiemployer Plan
is in  "reorganization" or is "insolvent" within the meaning of such terms under
ERISA.

     5.14 Environmental  Matters.  (a) No Hazardous  Substances are or have been
generated,  used,  located,  released,  treated,  disposed  of or  stored by the
Borrower or any of its Subsidiaries or, to the knowledge of the Borrower, by any
other Person  (including any  predecessor  in interest) or otherwise,  in, on or
under any portion of any real property,  leased or owned, of the Borrower or any
of  its  Subsidiaries,   except  in  material  compliance  with  all  applicable
Environmental  Laws,  and no  portion  of any  such  real  property  or,  to the
knowledge of the Borrower,  any other real property at any time leased, owned or
operated by the Borrower or any of its  Subsidiaries,  has been  contaminated by
any Hazardous Substance;  and no portion of any real property,  leased or owned,
of the Borrower or any of its  Subsidiaries has been or is presently the subject
of an environmental audit, assessment or remedial action.

     (b) No portion of any real  property,  leased or owned,  of the Borrower or
any of its Subsidiaries has been used by the Borrower or any of its Subsidiaries
or, to the knowledge of the Borrower,  by any other Person,  as or for a mine, a
landfill,  a dump or other disposal  facility,  a gasoline service  station,  or
(other than for petroleum  substances stored in the ordinary course of business)
a petroleum  products storage facility;  no portion of such real property or any
other real property at any time leased, owned or operated by the Borrower or any
of its Subsidiaries has,  pursuant to any Environmental  Law, been placed on the
"National  Priorities List" or "CERCLIS List" (or any similar federal,  state or
local list) of sites subject to possible  environmental  problems; and there are
not and have never  been any  underground  storage  tanks  situated  on any real
property, leased or owned, of the Borrower or any of its Subsidiaries.

     (c) All activities and operations of the Borrower and its  Subsidiaries are
in compliance with the requirements of all applicable Environmental Laws, except
to the extent the failure so to comply,  individually or in the aggregate, would
not be reasonably likely to have a Material Adverse Effect. Each of the Borrower
and its Subsidiaries  has obtained all licenses and permits under  Environmental
Laws necessary to its respective  operations;  all such licenses and permits are
being maintained in good standing; and each of the Borrower and its Subsidiaries
is in  compliance  with all terms and  conditions  of such licenses and permits,
except for such  licenses and permits the failure to obtain,  maintain or comply
with which would not be reasonably likely,  individually or in the aggregate, to
have a Material Adverse Effect. Neither the Borrower nor any of its Subsidiaries
is involved  in any suit,  action or  proceeding,  or has  received  any notice,
complaint or other request for information  from any  Governmental  Authority or
other Person, with respect to any actual or alleged  Environmental  Claims that,
if adversely  determined,  would be reasonably  likely,  individually  or in the
aggregate,  to have a Material  Adverse  Effect;  and, to the  knowledge  of the
Borrower,  there are no threatened actions, suits, proceedings or investigations
with respect to any such Environmental Claims, nor any basis therefor.

                                       52
<PAGE>
     5.15 Compliance With Laws.  Each of the Borrower and its  Subsidiaries  has
timely filed all material reports,  documents and other materials required to be
filed by it  under  all  applicable  Requirements  of Law with any  Governmental
Authority,  has  retained  all  material  records and  documents  required to be
retained by it under all  applicable  Requirements  of Law,  and is otherwise in
compliance with all applicable  Requirements of Law in respect of the conduct of
its business and the ownership and operation of its properties,  except for such
Requirements  of Law the failure to comply with  which,  individually  or in the
aggregate, would not be reasonably likely to have a Material Adverse Effect.

     5.16 Regulated Industries. Neither the Borrower nor any of its Subsidiaries
is (i)  an  "investment  company,"  a  company  "controlled"  by an  "investment
company,"  or an  "investment  advisor,"  within the  meaning of the  Investment
Company Act of 1940,  as  amended,  or (ii) a "holding  company," a  "subsidiary
company" of a "holding  company," or an "affiliate" of a "holding company" or of
a "subsidiary  company" of a "holding company," within the meaning of the Public
Utility Holding Company Act of 1935, as amended.

     5.17 Insurance. The assets, properties and business of the Borrower and its
Subsidiaries  are  insured  against  such  hazards and  liabilities,  under such
coverages  and  in  such  amounts,  as are  customarily  maintained  by  prudent
companies similarly situated and under policies issued by insurers of recognized
responsibility.

     5.18 Material Contracts.  Schedule 5.18 lists, as of the Closing Date, each
"material  contract"  (within the meaning of Item  601(b)(10) of Regulation  S-K
under  the  Exchange  Act)  (other  than  Reinsurance  Agreements)  to which the
Borrower or any of its  Subsidiaries  is a party,  by which any of them or their
respective properties is bound or to which any of them is subject (collectively,
"Material Contracts"),  and also indicates the parties,  subject matter and term
thereof. As of the Closing Date, (i) each Material Contract is in full force and
effect and is  enforceable  by the  Borrower or the  Subsidiary  that is a party
thereto in accordance  with its terms,  and (ii) neither the Borrower nor any of
its  Subsidiaries  (nor,  to the  knowledge  of the  Borrower,  any other  party
thereto) is in breach of or default under any Material  Contract in any material
respect or has given  notice of  termination  or  cancellation  of any  Material
Contract.

     5.19 Reinsurance  Agreements.  (a) Except as set forth on Schedule F to the
Annual  Statements  for the  Insurance  Subsidiaries  for the fiscal year ending
December  31,  1997,  there are no material  liabilities  outstanding  as of the
Closing Date under any Reinsurance  Agreement.  Each Reinsurance Agreement is in
full force and effect;  none of the Insurance  Subsidiaries or, to the knowledge
of the Borrower,  any other party thereto,  is in breach of or default under any
such  contract;  and the Borrower  has no reason to believe  that the  financial
condition  of any  other  party to any such  contract  is  impaired  such that a
default  thereunder  by  such  party  could  reasonably  be  anticipated.   Each
Reinsurance  Agreement is qualified under all applicable  Requirements of Law to
receive the  statutory  credit  assigned to such  Reinsurance  Agreement  in the
relevant  Annual  Statement or Quarterly  Statement at the time  prepared.  Each
Person  to  whom  any of the  Insurance  Subsidiaries  has  ceded  any  material
liability  pursuant to any Reinsurance  Agreement on the Closing Date either has
(i) a rating of "A-" or  better by A.M.  Best &  Company,  (ii) a claims  paying
ability  rating of "A-" or better  by  Standard  and  Poor's or  Moody's,  (iii)
provided collateral in favor of the applicable  Insurance Subsidiary of the type
and in an amount  described 

                                       53
<PAGE>
in Schedule 5.19, or (iv) (x) an aggregate amount of Net Amount Recoverable from
Reinsurers for the Insurance Subsidiaries  attributable to it (collectively with
all other such Persons not  described in clauses (i), (ii) and (iii) above) that
is less than $1,500,000 as of the end of the most recent fiscal year, and (y) an
aggregate amount or Reinsurance Premiums Ceded by the Insurance Subsidiaries for
the current fiscal year (or portion thereof) to it (collectively  with all other
such Persons not  described  in clauses (i),  (ii) and (iii) above) that is less
than $1,500,000.

     (b) As of the  Closing  Date,  no  Insurance  Subsidiary  is a party to any
Surplus Relief Reinsurance Agreement.

     5.20 Labor  Relations.  Neither the Borrower nor any of its Subsidiaries is
engaged in any unfair labor  practice  within the meaning of the National  Labor
Relations  Act of 1947,  as  amended.  There  is (i) no  unfair  labor  practice
complaint before the National Labor Relations Board, or grievance or arbitration
proceeding arising out of or under any collective bargaining agreement,  pending
or, to the knowledge of the Borrower, threatened, against the Borrower or any of
its Subsidiaries, (ii) no strike, lock-out, slowdown, stoppage, walkout or other
labor dispute pending or, to the knowledge of the Borrower,  threatened, against
the  Borrower  or any of its  Subsidiaries,  and (iii) to the  knowledge  of the
Borrower,  no petition for  certification  or union election or union organizing
activities taking place with respect to the Borrower or any of its Subsidiaries.

     5.21 Year 2000 Compatibility. The Borrower will use commercially reasonably
efforts  to  ensure  that  any  reprogramming  required  to  permit  the  proper
functioning, before, on and after January 1, 2000, of (i) the Borrower's and its
Subsidiaries'  computer-based  systems and (ii)  equipment  containing  embedded
microchips (including systems and equipment supplied by others or with which the
Borrower's or any of its Subsidiaries'  systems  interface),  and the testing of
all such systems and equipment,  as so  reprogrammed,  will be completed by June
30, 1999. To the knowledge of the Borrower, after reasonable investigation,  the
cost to the Borrower and its Subsidiaries of such  reprogramming and testing and
of the reasonably foreseeable  consequences of the year 2000 to the Borrower and
its Subsidiaries  (including,  without limitation,  reprogramming errors and the
failure  of  others'  systems  or  equipment)  will not  result in a Default  or
Material  Adverse  Effect.  To the knowledge of the Borrower,  after  reasonable
investigation, except for such of the reprogramming referred to in the preceding
sentence as may be necessary, the computer and management information systems of
the Borrower and its  Subsidiaries  are and, with ordinary course  upgrading and
maintenance  will continue for the term of this  Agreement to be,  sufficient to
permit the Borrower and its Subsidiaries to conduct their respective  businesses
without a Material Adverse Effect.


                                   ARTICLE VI

                              AFFIRMATIVE COVENANTS

     The  Borrower  covenants  and agrees  that,  until the  termination  of the
Commitments,  the  termination  or  expiration  of all Letters of Credit and the
payment in full of all  principal and 

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interest with respect to the Loans and all  Reimbursement  Obligations  together
with all other amounts then due and owing hereunder:

     6.1 Financial Statements. The Borrower will deliver to each Lender:

     (a) As soon as available and in any event within fifty-five (55) days after
the end of  each of the  first  three  fiscal  quarters  of  each  fiscal  year,
beginning  with  the  fiscal  quarter  ending  September  30,  1998,   unaudited
consolidated  and   consolidating   balance  sheets  of  the  Borrower  and  its
Subsidiaries  as of the end of such fiscal  quarter and  unaudited  consolidated
statements of income,  cash flows and stockholders'  equity for the Borrower and
its  Subsidiaries  for the fiscal quarter then ended and for that portion of the
fiscal year then ended,  in each case  setting  forth  comparative  consolidated
figures  as of the end of and  for the  corresponding  period  in the  preceding
fiscal  year,  all in  reasonable  detail and prepared in  accordance  with GAAP
(subject to the absence of notes required by GAAP and subject to normal year-end
adjustments) applied on a basis consistent with that of the preceding quarter or
containing  disclosure  of the effect on the  financial  condition or results of
operations  of any  change  in the  application  of  accounting  principles  and
practices during such quarter; and

     (b) As soon as  available  and in any event  within one hundred  (100) days
after  the end of each  fiscal  year,  beginning  with the  fiscal  year  ending
December 31, 1998, (i) an audited consolidated balance sheet of the Borrower and
its  Subsidiaries  as of the end of such fiscal  year and  audited  consolidated
statements of income,  cash flows and stockholders'  equity for the Borrower and
its Subsidiaries for the fiscal year then ended, including the notes thereto, in
each  case  setting  forth  comparative  figures  as of the  end of and  for the
preceding fiscal year together with comparative projected figures for the fiscal
year then ended,  all in  reasonable  detail and  certified  by the  independent
certified public  accounting firm regularly  retained by the Borrower or another
independent  certified public  accounting firm of recognized  national  standing
reasonably  acceptable  to the  Required  Lenders,  together  with  (y) a report
thereon by such  accountants  that is not qualified as to going concern or scope
of audit and to the effect that such  financial  statements  present  fairly the
consolidated  financial  condition and results of operations of the Borrower and
its  Subsidiaries  as of the dates and for the periods  indicated in  accordance
with GAAP  applied  on a basis  consistent  with that of the  preceding  year or
containing  disclosure  of the effect on the  financial  condition or results of
operations  of any  change  in the  application  of  accounting  principles  and
practices  during such year, and (z) a report by such  accountants to the effect
that,  based  on and in  connection  with  their  examination  of the  financial
statements of the Borrower and its  Subsidiaries,  they obtained no knowledge of
the  occurrence  or  existence  of any  Default or Event of Default  relating to
accounting or financial reporting matters, or a statement  specifying the nature
and period of  existence  of any such  Default or Event of Default  disclosed by
their audit;  provided,  however,  that such accountants  shall not be liable by
reason of the  failure to obtain  knowledge  of any  Default or Event of Default
that  would  not  be  disclosed  or  revealed  in  the  course  of  their  audit
examination,  and (ii) an unaudited  consolidating balance sheet of the Borrower
and  its  Subsidiaries  as  of  the  end  of  such  fiscal  year  and  unaudited
consolidating statements of income for the Borrower and its Subsidiaries for the
fiscal year then ended, all in reasonable detail.

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<PAGE>
     6.2  Statutory  Financial  Statements.  The  Borrower  will deliver to each
Lender:

     (a) As soon as available and in any event within fifty-five (55) days after
the end of  each of the  first  three  fiscal  quarters  of  each  fiscal  year,
beginning  with the  first  fiscal  quarter  ending  after  the date  hereof,  a
Quarterly  Statement of each  Insurance  Subsidiary as of the end of such fiscal
quarter and for that  portion of the fiscal  year then ended,  in the form filed
with the relevant Insurance  Regulatory  Authority,  prepared in accordance with
SAP;

     (b) As soon as available  and in any event  within  seventy (70) days after
the end of each fiscal year,  beginning  with the fiscal year ended December 31,
1998,  an Annual  Statement of each  Insurance  Subsidiary as of the end of such
fiscal  year and for the  fiscal  year then  ended,  in the form  filed with the
relevant Insurance Regulatory Authority, prepared in accordance with SAP; and

     (c) As soon as  available  and in any event  within one hundred  thirty-one
(131) days after the end of each  fiscal  year,  beginning  with the fiscal year
ended  December  31,  1998,  the  combined  Annual  Statement  of the  Insurance
Subsidiary as of the end of such fiscal year and for the fiscal year then ended,
in the form filed with the relevant Insurance Regulatory Authority,  prepared in
accordance with SAP.

     6.3 Other Business and Financial Information.  The Borrower will deliver to
each Lender:

     (a) Concurrently with each delivery of the financial  statements  described
in Sections 6.1 and 6.2, a Compliance Certificate in the form of Exhibit C-1 (in
the case of the  financial  statements  described in Section 6.1) or Exhibit C-2
(in the case of the financial  statements described in Section 6.2) with respect
to the period covered by the financial statements then being delivered, executed
by a Financial  Officer of the  Borrower,  together in each case with a Covenant
Compliance  Worksheet  reflecting the  computation  of the respective  financial
covenants set forth in the  Worksheets as of the last day of the period  covered
by such financial statements;

     (b) As soon as  available  and in any event  prior to  December  15 of each
fiscal  year,  beginning  with the fiscal year ending  December  31,  1998,  (i)
consolidated  projections  showing the actual results for the most recent fiscal
year and the pro forma results for the next five (5)  successive  years prepared
in  accordance  with GAAP for the Borrower and its  Subsidiaries,  including (x)
projected income  statements,  (y) projected  stockholder equity (including book
value and maximum debt calculation analyses),  and (z) projected balance sheets;
and (ii) combined and combining  projections  showing the actual results for the
most  recent  fiscal  year  and the pro  forma  results  for the  next  five (5)
successive years prepared in accordance with SAP for the Insurance Subsidiaries,
including (x) a combined  statutory  balance  sheet,  (y) combined and combining
statutory income  statements,  and (z) projected  statutory  surplus  (including
maximum  dividend  calculations,  A.M. Best & Company  coverage and  performance
ratios),  together with a certificate of a Financial  Officer of the Borrower to
the effect that all such  projections  have been  prepared in good faith and are
reasonable  estimates of the financial position and results of operations of the
Borrower and its  Subsidiaries  for the period covered  

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thereby;   and  as  soon  as  available  from  time  to  time  thereafter,   any
modifications or revisions to or restatements of such projections;

     (c) Promptly upon filing with the relevant Insurance  Regulatory  Authority
and in any event  within one  hundred  (100)  days after the end of each  fiscal
year,  beginning  with the fiscal year ended  December  31, 1998, a copy of each
Insurance   Subsidiary's   "Statement  of  Actuarial   Opinion"  (or  equivalent
information should the relevant Insurance  Regulatory Authority not require such
a statement) as to the adequacy of such Insurance Subsidiary's loss reserves for
such fiscal year, together with a copy of its management discussion and analysis
in  connection  therewith,  each  in the  format  prescribed  by the  applicable
insurance laws of such Insurance Subsidiary's jurisdiction of domicile;

     (d) As soon as  available  and in any event  within one hundred  (100) days
after the end of each fiscal year, a certification  with respect to an actuarial
review of the liabilities and other items of each Insurance Subsidiary as of the
end of such fiscal year,  prepared at the Borrower's expense, by an actuary or a
firm of actuaries  reasonably  acceptable to the Agent, such certification to be
in form and substance reasonably acceptable to the Required Lenders;

     (e)  Promptly  upon  receipt  thereof,  copies of any  "management  letter"
submitted to the Borrower or any of its  Subsidiaries  by its  certified  public
accountants  in  connection  with each  annual,  interim or special  audit,  and
promptly upon completion thereof,  any response reports from the Borrower or any
such Subsidiary in respect thereof;

     (f) Promptly upon the sending, filing or receipt thereof, copies of (i) all
financial statements, reports, notices and proxy statements that the Borrower or
any  of  its  Subsidiaries  shall  send  or  make  available  generally  to  its
shareholders,  (ii) all  regular,  periodic  and special  reports,  registration
statements and prospectuses (other than on Form S-8) that the Borrower or any of
its  Subsidiaries  shall  render to or file  with the  Securities  and  Exchange
Commission, the National Association of Securities Dealers, Inc. or any national
securities  exchange,  and (iii) all press  releases and other  statements  made
available  generally  by the Borrower or any of its  Subsidiaries  to the public
concerning  material  developments in the business of the Borrower or any of its
Subsidiaries; (iv) all significant reports on examination, financial examination
reports  or market  conduct  examination  reports  by the NAIC or any  Insurance
Regulatory  Authority  or  other  Governmental  Authority  with  respect  to any
Insurance  Subsidiary's  insurance  business;  (v) all significant  filings made
under applicable state insurance  holding company acts by the Borrower or any of
its Subsidiaries,  including,  without  limitation,  filings seeking approval of
transactions  with  Affiliates;  and (vi) all material  information sent to A.M.
Best & Company.

     (g) Promptly  upon (and in any event  within five (5) Business  Days after)
any Responsible  Officer of the Borrower obtaining  knowledge  thereof,  written
notice of any of the following:

          (i) the occurrence of any Default or Event of Default, together with a
     written statement of a Responsible  Officer of the Borrower  specifying the
     nature of such Default or Event of Default, the period of existence thereof
     and the  action  that the  Borrower  has  taken and  proposes  to take with
     respect thereto;

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<PAGE>
          (ii) the  institution or threatened  institution of any action,  suit,
     investigation or proceeding against or affecting the Borrower or any of its
     Subsidiaries,  including  any  such  investigation  or  proceeding  by  any
     Governmental    Authority   (other   than   routine   periodic   inquiries,
     investigations  or  reviews),  that  would,  if  adversely  determined,  be
     reasonably  likely,  individually  or in the aggregate,  to have a Material
     Adverse  Effect,  and any material  development  in any litigation or other
     proceeding previously reported pursuant to Section 5.5 or this subsection;

          (iii) the receipt by the Borrower or any of its Subsidiaries  from any
     Governmental  Authority  of (y) any  notice  asserting  any  failure by the
     Borrower or any of its  Subsidiaries  to be in compliance  with  applicable
     Requirements  of Law or that threatens the taking of any action against the
     Borrower or such Subsidiary or sets forth  circumstances  that, if taken or
     adversely determined, would be reasonably likely to have a Material Adverse
     Effect,  or  (z)  any  notice  of  any  actual  or  threatened  suspension,
     limitation  or  revocation  of,  failure  to renew,  or  imposition  of any
     restraining  order,  escrow or impoundment of funds in connection with, any
     license,  permit,  accreditation or authorization of the Borrower or any of
     its  Subsidiaries,  where such action would be reasonably  likely to have a
     Material Adverse Effect;

          (iv) the  occurrence  of any ERISA Event,  together with (x) a written
     statement of a Responsible  Officer of the Borrower  specifying the details
     of such ERISA Event and the action that the Borrower has taken and proposes
     to take with respect thereto, (y) a copy of any notice with respect to such
     ERISA  Event that may be  required to be filed with the PBGC and (z) a copy
     of any notice delivered by the PBGC to the Borrower or such ERISA Affiliate
     with respect to such ERISA Event;

          (v) the occurrence of any material  default under,  or any proposed or
     threatened  termination or cancellation of, any Material  Contract or other
     material  contract  or  agreement  to  which  the  Borrower  or  any of its
     Subsidiaries is a party,  the termination or cancellation of which would be
     reasonably likely to have a Material Adverse Effect;

          (vi) the occurrence of any of the following:  (x) the assertion of any
     Environmental  Claim  against  or  affecting  the  Borrower,   any  of  its
     Subsidiaries or any of their respective real property, leased or owned; (y)
     the  receipt by the  Borrower or any of its  Subsidiaries  of notice of any
     alleged violation of or noncompliance  with any Environmental  Laws; or (z)
     the taking of any remedial action by the Borrower,  any of its Subsidiaries
     or any other  Person in  response  to the  actual  or  alleged  generation,
     storage, release, disposal or discharge of any Hazardous Substances on, to,
     upon or from any real  property  leased or owned by the  Borrower or any of
     its  Subsidiaries;  but in each case under  clauses (x), (y) and (z) above,
     only to the extent the same would be  reasonably  likely to have a Material
     Adverse Effect;

          (vii) the occurrence of any actual changes in any insurance statute or
     regulation  governing the investment or dividend practices of any Insurance
     Subsidiary  that  would be  reasonably  likely to have a  Material  Adverse
     Effect; and

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<PAGE>
          (viii)  any other  matter or event  that has,  or would be  reasonably
     likely  to  have,  a  Material  Adverse  Effect,  together  with a  written
     statement of a Responsible Officer of the Borrower setting forth the nature
     and period of existence  thereof and the action that the Borrower has taken
     and proposes to take with respect thereto;

     (h) Promptly,  notice of (i) the  occurrence  of any material  amendment or
modification to any Reinsurance  Agreement (whether entered into before or after
the Closing Date),  including any such  agreements  that are in a runoff mode on
the Closing Date, which amendment or modification  would be reasonably likely to
have a Material  Adverse  Effect,  or (ii) the receipt by the Borrower or any of
its  Subsidiaries  of any written notice of any denial of coverage,  litigation,
claim or arbitration  arising out of any Reinsurance  Agreement to which it is a
party which would be reasonably likely to have a Material Adverse Effect; and

     (i) As promptly as reasonably  possible,  such other  information about the
business,  condition  (financial or otherwise),  operations or properties of the
Borrower  or any of its  Subsidiaries  (including  any Plan and any  information
required  to be filed  under  ERISA) as the Agent or any Lender may from time to
time reasonably request.

     6.4  Corporate  Existence;  Franchises;   Maintenance  of  Properties.  The
Borrower  will,  and will cause each of its  Subsidiaries  to, (i)  maintain and
preserve in full force and effect its corporate  existence,  except as expressly
permitted  otherwise by Section 8.1, (ii) obtain,  maintain and preserve in full
force   and   effect   all  other   rights,   franchises,   licenses,   permits,
certifications,   approvals   and   authorizations   required  by   Governmental
Authorities and necessary to the ownership,  occupation or use of its properties
or the conduct of its business,  except to the extent the failure to do so would
not be reasonably  likely to have a Material Adverse Effect,  and (iii) keep all
material  properties in good working  order and condition  (normal wear and tear
excepted) and from time to time make all  necessary  repairs to and renewals and
replacements  of  such  properties,  except  to the  extent  that  any  of  such
properties are obsolete or are being replaced.

     6.5  Compliance  with Laws.  The Borrower  will, and will cause each of its
Subsidiaries  to, comply in all respects with all Requirements of Law applicable
in respect of the conduct of its business and the ownership and operation of its
properties,  except  to  the  extent  the  failure  so to  comply  would  not be
reasonably likely to have a Material Adverse Effect.

     6.6 Payment of  Obligations.  The Borrower will, and will cause each of its
Subsidiaries  to,  (i) pay all  liabilities  and  obligations  as and  when  due
(subject  to any  applicable  subordination  provisions),  except to the  extent
failure  to do so would  not be  reasonably  likely to have a  Material  Adverse
Effect,  and (ii) pay and  discharge  all taxes,  assessments  and  governmental
charges or levies imposed upon it, upon its income or profits or upon any of its
properties,  prior to the date on which penalties would attach thereto,  and all
lawful claims that, if unpaid, might become a Lien upon any of the properties of
the Borrower or any of its  Subsidiaries;  provided,  however,  that neither the
Borrower  nor any of its  Subsidiaries  shall be  required  to pay any such tax,
assessment,  charge,  levy or claim that is being contested in good 

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faith and by proper  proceedings and as to which the Borrower or such Subsidiary
is maintaining adequate reserves with respect thereto in accordance with GAAP.

     6.7 Insurance.  The Borrower will, and will cause each of its  Subsidiaries
to, maintain with financially sound and reputable  insurance companies insurance
with respect to its assets,  properties  and business,  against such hazards and
liabilities,  of such types and in such amounts, as is customarily maintained by
companies in the same or similar businesses similarly situated.

     6.8  Maintenance of Books and Records;  Inspection.  The Borrower will, and
will cause each of its  Subsidiaries to, (i) maintain  adequate books,  accounts
and  records,  in which  full,  true and  correct  entries  shall be made of all
financial  transactions in relation to its business and properties,  and prepare
all  financial  statements  required  under  this  Agreement,  in  each  case in
accordance with GAAP and in compliance with the requirements of any Governmental
Authority  having  jurisdiction  over it, and (ii) permit employees or agents of
the Agent or any  Lender to  inspect  its  properties  and  examine or audit its
books,  records,  working  papers and accounts and make copies and  memoranda of
them,  and to discuss its affairs,  finances and accounts  with its officers and
employees and, upon notice to the Borrower,  the independent  public accountants
and actuarial firms of the Borrower and its Subsidiaries  (and by this provision
the Borrower  authorizes  such  accountants  and actuarial  firms to discuss the
finances and affairs of the Borrower  and its  Subsidiaries),  all at such times
and from time to time, upon reasonable  notice and during business hours, as may
be reasonably requested.

     6.9 Permitted Acquisitions. (a) Subject to the provisions of subsection (b)
below and the requirements contained in the definition of Permitted Acquisition,
and subject to the other terms and  conditions of this  Agreement,  the Borrower
may  from  time  to  time  on  or  after  the  Closing  Date  effect   Permitted
Acquisitions, provided that, with respect to each Permitted Acquisition:

          (i) no  Default  or  Event  of  Default  shall  have  occurred  and be
     continuing at the time of the consummation of such Permitted Acquisition or
     would exist immediately after giving effect thereto; and

          (ii) the Acquisition  Amount with respect  thereto  (regardless of the
     form of consideration) (y) shall not exceed  $15,000,000,  and (z) together
     with the aggregate of the  Acquisition  Amounts  (regardless of the form of
     consideration) for all other Permitted Acquisitions  consummated during the
     same  fiscal  quarter or the period of three  consecutive  fiscal  quarters
     immediately prior thereto, shall not exceed $20,000,000.

     (b) Not less than five (5) Business Days prior to the  consummation  of any
Permitted  Acquisition  with  respect to which the  Acquisition  Amount  exceeds
$5,000,000  the Borrower  shall have  delivered to the Agent and each Lender the
following:

          (i) a reasonably  detailed  description  of the material terms of such
     Permitted Acquisition  (including,  without limitation,  the purchase price
     and method and structure of payment) and of each Person or business that is
     the subject of such Permitted Acquisition (each, a "Target");

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          (ii) historical  financial  statements of the Target (or, if there are
     two or more Targets that are the subject of such Permitted  Acquisition and
     that are  part of the  same  consolidated  group,  consolidated  historical
     financial  statements  for all such  Targets)  for the two (2) most  recent
     fiscal years available and, if available, for any interim periods since the
     most recent fiscal year-end; and

          (iii) a certificate,  in form and substance reasonably satisfactory to
     the Agent,  executed by a Financial  Officer of the Borrower  setting forth
     the Acquisition  Amount and further to the effect that, to the best of such
     individual's knowledge,  (x) the consummation of such Permitted Acquisition
     will not result in a violation of any provision of this Section,  and after
     giving effect to such  Permitted  Acquisition  and any  Borrowings  made in
     connection therewith, the Borrower will be in compliance with the financial
     covenants contained in Sections 7.1 through 7.6, such compliance determined
     with regard to  calculations  made on a pro forma basis in accordance  with
     GAAP as if each Target had been  consolidated  with the  Borrower for those
     periods  applicable to such covenants (such  calculations to be attached to
     the  certificate),  (y) the  Borrower  believes  in good faith that it will
     continue to comply with such  financial  covenants for a period of one year
     following the date of the consummation of such Permitted  Acquisition,  and
     (z) after giving effect to such Permitted Acquisition and any Borrowings in
     connection therewith, the Borrower believes in good faith that it will have
     sufficient  availability  under the Commitments to meet its ongoing working
     capital requirements.

     (c) As  soon  as  reasonably  practicable  after  the  consummation  of any
Permitted Acquisition,  the Borrower will deliver to the Agent and each Lender a
copy of the  fully  executed  acquisition  agreement  (including  schedules  and
exhibits  thereto) and other material  documents and closing papers delivered in
connection therewith.

     (d) The consummation of each Permitted  Acquisition shall be deemed to be a
representation  and  warranty by the  Borrower  that  (except as shall have been
approved in writing by the Required Lenders) all conditions thereto set forth in
this Section and in the description furnished under clause (i) of subsection (b)
above have been  satisfied,  that the same is permitted in  accordance  with the
terms of this  Agreement,  and that the matters  certified  to by the  Financial
Officer  of the  Borrower  in the  certificate  referred  to in clause  (iii) of
subsection (b) above are, to the best of such individual's  knowledge,  true and
correct in all material respects as of the date such certificate is given, which
representation  and warranty shall be deemed to be a representation and warranty
as  of  the  date  thereof  for  all  purposes  hereunder,   including,  without
limitation, for purposes of Sections 4.2 and 9.1.

     6.10 Year 2000 Compatibility. The Borrower will, and will cause each of its
Subsidiaries  to,  use  commercially  reasonable  efforts  to  take  all  action
necessary  to ensure  that its  computer-based  systems  are able to operate and
effectively  process data  including  dates on and after January 1, 2000. At the
request  of the  Agent  or the  Required  Lenders,  the  Borrower  will  provide
reasonable assurance of its Year 2000 compatibility.

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     6.11 Deposit  Relationship.  The Borrower will  maintain a deposit  account
with First Union at all -------------------- times.

     6.12  Further  Assurances.  The Borrower  will,  and will cause each of its
Subsidiaries to, make, execute, endorse, acknowledge and deliver any amendments,
modifications  or  supplements  hereto  and  restatements  hereof  and any other
agreements,  instruments or documents,  and take any and all such other actions,
as may from time to time be  reasonably  requested  by the Agent or the Required
Lenders  to  effect,  confirm or further  assure or  protect  and  preserve  the
interests, rights and remedies of the Agent and the Lenders under this Agreement
and the other Credit Documents.


                                   ARTICLE VII

                               FINANCIAL COVENANTS

     The  Borrower  covenants  and agrees  that,  until the  termination  of the
Commitments,  the  termination  or  expiration  of all Letters of Credit and the
payment in full of all  principal and interest with respect to the Loans and all
Reimbursement  Obligations  together  with all other  amounts then due and owing
hereunder:

     7.1  Leverage  Ratio.  The Borrower  will not permit the Leverage  Ratio to
exceed 0.35 : 1.0 at any -------------- time.

     7.2 Consolidated  Net Worth. The Borrower will not permit  Consolidated Net
Worth  as of the last  day of any  fiscal  quarter,  beginning  with the  fiscal
quarter  ending  September  30,  1998,  to be  less  than  the sum of (i) 85% of
Consolidated  Net Worth as of June 30,  1998 plus (ii) 50% of the  aggregate  of
Consolidated  Net Income for each  fiscal  quarter  ending  after June 30,  1998
(provided  that  Consolidated  Net Income for any such fiscal  quarter  shall be
taken into account for purposes of this calculation only if positive) plus (iii)
75% of the  aggregate  amount  of  all  increases  in  the  stated  capital  and
additional  paid-in capital  accounts of the Borrower and its  Subsidiaries,  as
determined on a consolidated  basis in accordance with GAAP,  resulting from the
issuance of equity  securities  (including  pursuant to the exercise of options,
rights or warrants or pursuant to the conversion of  convertible  securities) or
other  Capital  Stock after June 30, 1998 minus (iv) the amount (up to a maximum
of $10,000,000) of stock repurchases by the Borrower  occurring between June 30,
1998 and September 30, 1999.

     7.3 Fixed Charge  Coverage  Ratio.  The Borrower  will not permit the Fixed
Charge Coverage Ratio as of the last day of any fiscal  quarter,  beginning with
the fiscal quarter ending September 30, 1998, to be less than 1.25 : 1.0.

     7.4 Risk-Based  Capital Ratio. The Borrower will not permit "total adjusted
capital" (within the meaning of the Risk-Based Capital for Insurers Model Act as
promulgated by the NAIC as of the date hereof (the "Model Act")), as of the last
day of any fiscal year, beginning with the fiscal year ending December 31, 1998,
of (i) PAIC or any Material Insurance  Subsidiary (other than a Subsidiary of an
Insurance  Subsidiary)  to be less than 150% of the applicable  

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"Company  Action  Level RBC"  (within  the  meaning of the Model Act) as of such
date, or (ii) any other  Material  Insurance  Subsidiary to be less than 100% of
the applicable "Company Action Level RBC as of such date.

     7.5 Combined Net Premiums to Capital  Ratio.  The Borrower  will not permit
the  Combined Net  Premiums to Capital  Ratio,  as of the last day of any fiscal
quarter,  beginning  with the fiscal  quarter  ending  September 30, 1998, to be
greater than 2.25 : 1.0.

     7.6 Statutory Surplus.  The Borrower will not permit the Combined Statutory
Capital and  Surplus of the  Insurance  Subsidiaries,  as of the last day of any
fiscal quarter,  beginning with the fiscal quarter ending September 30, 1998, to
be less than the greater of (i) 90% of Combined Statutory and Capital Surplus as
of June  30,  1998 or  (ii)  $78,000,000,  plus  50% of the  aggregate  (without
duplication)  of the  increases  in the stated  capital and  additional  paid-in
capital accounts of the Insurance Subsidiaries occurring after June 30, 1998, as
determined in each case in accordance with SAP.


                                  ARTICLE VIII

                               NEGATIVE COVENANTS

     The  Borrower  covenants  and agrees  that,  until the  termination  of the
Commitments,  the  termination  or  expiration  of all Letters of Credit and the
payment in full of all  principal and interest with respect to the Loans and all
Reimbursement  Obligations  together  with all other  amounts then due and owing
hereunder:

     8.1 Merger;  Consolidation.  The Borrower  will not, and will not permit or
cause any of its Subsidiaries to, liquidate,  wind up or dissolve, or enter into
any  consolidation,  merger  or  other  combination,  or  agree to do any of the
foregoing; provided, however, that:

          (i) the Borrower may merge or consolidate  with another Person so long
     as (x) the Borrower is the surviving  entity,  (y) unless such other Person
     is a Wholly Owned  Subsidiary  immediately  prior to giving effect thereto,
     such merger or consolidation  shall constitute a Permitted  Acquisition and
     the  applicable  conditions  and  requirements  of  Section  6.9  shall  be
     satisfied,  and (z) immediately after giving effect thereto,  no Default or
     Event of Default would exist; and

          (ii) any Subsidiary  may merge or  consolidate  with another Person so
     long as (x) the  surviving  entity is the  Borrower  or a  Subsidiary,  (y)
     unless such other Person is a Wholly Owned Subsidiary  immediately prior to
     giving effect  thereto,  such merger or  consolidation  shall  constitute a
     Permitted  Acquisition  and the applicable  conditions and  requirements of
     Section 6.9 shall be  satisfied,  and (z)  immediately  after giving effect
     thereto, no Default or Event of Default would exist.

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     8.2  Indebtedness.  The Borrower will not, and will not permit or cause any
of  its  Subsidiaries  to,  create,   incur,  assume  or  suffer  to  exist  any
Indebtedness other than:

          (i)  Indebtedness  incurred under this Agreement  (including,  without
     limitation,  reimbursement  obligations  with respect to Letters of Credit)
     and the Notes;

          (ii)  Indebtedness  existing  on the  Closing  Date and  described  in
     Schedule 8.2;

          (iii) accrued expenses (including salaries, accrued vacation and other
     compensation),  current trade or other  accounts  payable and other current
     liabilities  arising in the  ordinary  course of business  and not incurred
     through the  borrowing of money,  provided that the same shall be paid when
     due except to the extent being  contested in good faith and by  appropriate
     proceedings;

          (iv) loans and advances by the Borrower or any Subsidiary to any other
     Subsidiary or by any  Subsidiary  to the  Borrower,  provided that any such
     loan or advance if payable by the  Borrower  is  subordinated  in right and
     time of payment to the Obligations;

          (v)  unsecured   Indebtedness   of  the  Borrower  that  is  expressly
     subordinated  and  made  junior  in  right  and  time  of  payment  to  the
     Obligations  and that is  evidenced by one or more  written  agreements  or
     instruments  having terms,  conditions and provisions  (including,  without
     limitation,  provisions relating to principal amount, maturity,  covenants,
     defaults,  interest, and subordination)  satisfactory in form and substance
     to the Required  Lenders in their sole  discretion and which shall provide,
     at a minimum  and  without  limitation,  that such  Indebtedness  (a) shall
     mature by its terms no earlier than the second  anniversary of the Maturity
     Date, (b) shall not require any scheduled payment of principal prior to the
     first  anniversary  of the  Maturity  Date,  (c) shall have  covenants  and
     undertakings  that,  taken as a whole, are materially less restrictive than
     those contained herein,  and (d) shall bear interest at an overall rate not
     exceeding  ten percent  (10%) per annum and, to the extent  payable only in
     cash, at a rate not exceeding ten percent (10%) per annum (the Indebtedness
     described  hereinabove,  "Subordinated  Indebtedness");  provided  that, as
     further  conditions to the issuance of any Subordinated  Indebtedness,  (1)
     immediately  after  giving  effect  to the  issuance  of such  Subordinated
     Indebtedness,  no  Default  or  Event  of  Default  shall  exist,  (2)  all
     agreements  and  instruments  evidencing  or  governing  such  Subordinated
     Indebtedness  shall have been  approved in writing by the Required  Lenders
     (or the Agent on their behalf),  and (3) prior to or concurrently  with the
     issuance  of  such  Subordinated  Indebtedness,  the  Borrower  shall  have
     delivered to each Lender a  certificate,  signed by a Financial  Officer of
     the Borrower,  satisfactory  in form and substance to the Required  Lenders
     and to the effect  that,  after  giving  effect to the  incurrence  of such
     Subordinated Indebtedness, the Borrower is in compliance with the financial
     covenants  set forth in Sections 7.1 through  7.6,  such  compliance  being
     determined  with  regard  to  calculations  made on a pro  forma  basis  in
     accordance  with GAAP as of the last day of the  fiscal  quarter  then most
     recently ended and as if such  Subordinated  Indebtedness had been incurred
     on  the  first  day  of the  period  applicable  to  such  covenants  (such
     calculations to be attached to such certificate); and provided further

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<PAGE>
     that  the  Net  Cash  Proceeds  from  the  issuance  of  such  Subordinated
     Indebtedness  shall be applied to prepay the Loans in accordance  with, and
     to the extent required under, the provisions of Section 2.6(c);

          (vi) purchase money  Indebtedness of the Borrower and its Subsidiaries
     incurred solely to finance the payment of all or part of the purchase price
     of any  equipment,  real  property  or other fixed  assets  acquired in the
     ordinary course of business,  including  Indebtedness in respect of capital
     lease obligations,  and any renewals,  refinancings or replacements thereof
     (subject to the  limitations  on the principal  amount thereof set forth in
     this  clause  (vi)),  which  Indebtedness  shall not exceed  $8,000,000  in
     aggregate principal amount outstanding at any time; and

          (vii)  other  unsecured   Indebtedness  not  exceeding  $5,000,000  in
     aggregate principal amount outstanding at any time.

     8.3 Liens.  The Borrower  will not, and will not permit or cause any of its
Subsidiaries to, directly or indirectly,  make, create,  incur, assume or suffer
to exist,  any Lien upon or with  respect to any part of its property or assets,
whether  now owned or  hereafter  acquired,  or file or permit the filing of, or
permit to remain in effect,  any financing  statement or other similar notice of
any Lien with respect to any such property,  asset,  income or profits under the
Uniform  Commercial  Code of any state or under any similar  recording or notice
statute,  or  agree  to do  any of  the  foregoing,  other  than  the  following
(collectively, "Permitted Liens"):

          (i) Liens in  existence  on the Closing Date and set forth on Schedule
     8.3;

          (ii) Liens  imposed by law,  such as Liens of carriers,  warehousemen,
     mechanics,  materialmen and landlords,  and other similar Liens incurred in
     the ordinary  course of business for sums not  constituting  borrowed money
     that are not overdue for a period of more than thirty (30) days or that are
     being  contested  in good faith by  appropriate  proceedings  and for which
     adequate  reserves have been  established  in  accordance  with GAAP (if so
     required);

          (iii) Liens  (other than any Lien  imposed by ERISA,  the  creation or
     incurrence  of which  would  result in an Event of  Default  under  Section
     9.1(j))  incurred in the  ordinary  course of business in  connection  with
     worker's   compensation,   unemployment   insurance   or  other   forms  of
     governmental insurance or benefits, or to secure the performance of letters
     of credit, bids, tenders,  statutory obligations,  surety and appeal bonds,
     leases,  government  contracts  and other similar  obligations  (other than
     obligations  for borrowed  money)  entered  into in the ordinary  course of
     business;

          (iv) Liens for taxes,  assessments  or other  governmental  charges or
     statutory obligations that are not delinquent or remain payable without any
     penalty  or  that  are  being   contested  in  good  faith  by  appropriate
     proceedings  and for  which  adequate  reserves  have been  established  in
     accordance with GAAP (if so required);

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<PAGE>
          (v) Liens securing the purchase  money  Indebtedness  permitted  under
     clause (vi) of Section 8.2, provided that any such Lien (a) shall attach to
     such  property  concurrently  with  or  within  ten  (10)  days  after  the
     acquisition  thereof  by the  Borrower  or such  Subsidiary,  (b) shall not
     exceed the lesser of (y) the fair market value of such  property or (z) the
     cost thereof to the Borrower or such  Subsidiary and (c) shall not encumber
     any other property of the Borrower or any of its Subsidiaries;

          (vi) any  attachment  or judgment  Lien not  constituting  an Event of
     Default  under  Section  9.1(h)  that is being  contested  in good faith by
     appropriate   proceedings  and  for  which  adequate   reserves  have  been
     established in accordance with GAAP (if so required);

          (vii) Liens  arising from the filing,  for notice  purposes  only,  of
     financing statements in respect of true leases;

          (viii) Liens on Borrower  Margin Stock,  to the extent the fair market
     value  thereof  exceeds 25% of the fair  market  value of the assets of the
     Borrower and its Subsidiaries (including Borrower Margin Stock);

          (ix) with respect to any real property occupied by the Borrower or any
     of its  Subsidiaries,  all easements,  rights of way,  licenses and similar
     encumbrances  on  title  that  do not  materially  impair  the  use of such
     property for its intended purposes; and

          (x)  other  Liens  securing   obligations  of  the  Borrower  and  its
     Subsidiaries not exceeding  $1,000,000 in aggregate  amount  outstanding at
     any time.

     8.4  Disposition  of Assets.  The Borrower will not, and will not permit or
cause  any of its  Subsidiaries  to,  sell,  assign,  lease as  lessor,  convey,
transfer or  otherwise  dispose of (whether in one or a series of  transactions)
all or any portion of its assets,  business or  properties  (including,  without
limitation, any Capital Stock of any Subsidiary),  or enter into any arrangement
with any Person  providing  for the lease by the Borrower or any  Subsidiary  as
lessee of any asset that has been sold or  transferred  by the  Borrower or such
Subsidiary to such Person, or agree to do any of the foregoing, except for:

          (i) sales of inventory and licenses or leases of intellectual property
     and other assets, in each case in the ordinary course of business;

          (ii) the sale or exchange of used or obsolete  equipment to the extent
     (y) the  proceeds of such sale are applied  towards,  or such  equipment is
     exchanged  for,  replacement  equipment or (z) such  equipment is no longer
     necessary for the operations of the Borrower or its  applicable  Subsidiary
     in the ordinary course of business;

          (iii)  the  sale  or  other   disposition  by  the  Borrower  and  its
     Subsidiaries  of any  Borrower  Margin  Stock to the extent the fair market
     value  thereof  exceeds 25% of the fair  market  value of the assets of the
     Borrower and its Subsidiaries  (including Borrower Margin Stock),  provided
     that fair value is received in exchange therefor;

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<PAGE>
          (iv) the sale, lease or other disposition of assets by a Subsidiary of
     the  Borrower to the  Borrower or to a  Subsidiary  if,  immediately  after
     giving effect thereto, no Default or Event of Default would exist;

          (v) sales of investment assets in the ordinary course of business; and

          (vi) the sale by the Borrower and its  Subsidiaries of (x) the capital
     stock or all or any portion of the  assets,  business  or  properties  of a
     Subsidiary  that is not a  Material  Subsidiary;  (y) any asset or group of
     assets of an Insurance Subsidiary  constituting less than (A) in any single
     transaction  or  series  of  related  transactions,  ten  percent  (10%) of
     Combined  Statutory  Capital  and  Surplus as of the last day of the fiscal
     quarter  ending on or  immediately  prior to the date of such sale, and (B)
     during the term of this  Agreement,  in the  aggregate  with all such other
     sales  pursuant  to this  clause  (vi),  thirty  percent  (30%) of Combined
     Statutory  Capital and Surplus as of the end of the  immediately  preceding
     fiscal  quarter;  and (z) any asset or group of  assets of a  non-Insurance
     Subsidiary  constituting less than (A) in any single  transaction or series
     of  related  transactions,  ten  percent  (10%) of the total  assets of the
     Borrower  and its  Subsidiaries  on a  consolidated  basis,  determined  in
     accordance  with GAAP as of the last day of the fiscal quarter ending on or
     immediately prior to the date of such sale, and (B) during the term of this
     Agreement,  in the  aggregate  with all such other  sales  pursuant to this
     clause (vi),  thirty  percent (30%) of the total assets of the Borrower and
     its  Subsidiaries  on a consolidated  basis,  determined in accordance with
     GAAP as of the end of the immediately preceding fiscal quarter; provided in
     the case of any sale  pursuant  to this  clause  (vi) that (A) the Net Cash
     Proceeds from such sales are  delivered to the Agent  promptly upon (and in
     any event not later than ten (10) Business Days after) receipt  thereof for
     application  in  prepayment  of the Loans in  accordance  with,  and to the
     extent required  under,  the provisions of Section 2.6(b) or 2.6(c) and (B)
     immediately  after giving  effect  thereto,  no Default or Event of Default
     would exist.

     8.5 Investments. The Borrower will not, and will not permit or cause any of
its  Subsidiaries  to,  directly  or  indirectly,  purchase,  own,  invest in or
otherwise  acquire  any  Capital  Stock,   evidence  of  indebtedness  or  other
obligation or security or any interest  whatsoever in any other Person,  or make
or  permit to exist any  loans,  advances  or  extensions  of credit  to, or any
investment in cash or by delivery of property in, any other Person,  or purchase
or otherwise  acquire (whether in one or a series of related  transactions)  any
portion of the  assets,  business or  properties  of another  Person  (including
pursuant to an  Acquisition),  or create or acquire any Subsidiary,  or become a
partner or joint  venturer in any  partnership  or joint venture  (collectively,
"Investments"),  or  make  a  commitment  or  otherwise  agree  to do any of the
foregoing, other than:

          (i) Cash Equivalents;

          (ii)   Investments   consisting  of  purchases  and   acquisitions  of
     inventory,  supplies,  materials  and  equipment  or  licenses or leases of
     intellectual property and other assets, in each case in the ordinary course
     of business,

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<PAGE>
          (iii)  Investments  consisting  of loans and advances to employees for
     reasonable travel,  relocation and business expenses in the ordinary course
     of business, extensions of trade credit in the ordinary course of business,
     and prepaid expenses incurred in the ordinary course of business;

          (iv)  without  duplication,  Investments  consisting  of  intercompany
     Indebtedness permitted under clause (iv) of Section 8.2;

          (v) Investments existing on the Closing Date and described in Schedule
     8.5;

          (vi) Investments  consisting of the making of capital contributions or
     the purchase of Capital Stock (a) by the Borrower or any  Subsidiary in any
     other Wholly Owned Subsidiary and (b) by any Subsidiary in the Borrower;

          (vii) Permitted Acquisitions; and

          (viii)  other  Investments  by  Insurance  Subsidiaries  to the extent
     permitted under  applicable  Requirements of Law and in compliance with the
     following restrictions:

               (a)  Investments  of  each  Insurance   Subsidiary  shall  be  in
          compliance at all times with the  applicable  Insurance  Code and with
          all applicable  insurance  laws and  regulations of any other relevant
          jurisdictions relating to investments by such Insurance Subsidiary;

               (b) the aggregate Investments (other than Investments  consisting
          of  publicly-traded  common  stock ) of any  Insurance  Subsidiary  in
          non-Investment  Grade Securities shall constitute at all times no more
          than five percent (5%) of Invested Assets (other than  publicly-traded
          common stock) of such Insurance Subsidiary;

               (c) the  aggregate  Investments,  at any time,  of any  Insurance
          Subsidiary  consisting  of  equity  securities   (including,   without
          limitation,    common   and   preferred   stock,    whether   or   not
          publicly-traded)  shall not be  greater  than  one-third  (1/3) of the
          Statutory  Capital and Surplus of such  Insurance  Subsidiary  at such
          time; and

               (d) with respect to  Investments  in securities  other than those
          issued or unconditionally  guaranteed by the United States Government,
          the  aggregate   Investments  of  any  Insurance   Subsidiary  in  the
          securities of any single issuer shall  constitute at all times no more
          than  five  percent  (5%)  of  Invested   Assets  of  such   Insurance
          Subsidiary.

     8.6 Restricted Payments.  (a) The Borrower will not, and will not permit or
cause any of its  Subsidiaries  to, directly or indirectly,  declare or make any
dividend payment, or make any other distribution of cash, property or assets, in
respect  of any of its  Capital  Stock or any  warrants,  rights or  options  to
acquire its Capital Stock, or purchase,  redeem, retire or otherwise 

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<PAGE>
acquire for value any shares of its  Capital  Stock or any  warrants,  rights or
options  to  acquire  its  Capital  Stock,  or set  aside  funds  for any of the
foregoing, except that:

          (i) the  Borrower  may  declare  and make  dividend  payments or other
     distributions  to holders of its common stock,  in cash or in shares of its
     common stock, and may purchase,  redeem, retire or otherwise acquire shares
     of its Capital  Stock,  in cash or  in-kind,  in each case  provided  that,
     immediately  after giving  effect  thereto,  no Default or Event of Default
     would exist; and

          (ii) each Wholly Owned Subsidiary of the Borrower may declare and make
     dividend payments or other  distributions to the Borrower or another Wholly
     Owned  Subsidiary  of the  Borrower,  to the  extent not  prohibited  under
     applicable Requirements of Law.

     (b) The  Borrower  will  not,  and will  not  permit  or  cause  any of its
Subsidiaries  to,  make (or give any  notice in  respect  of) any  voluntary  or
optional payment or prepayment of principal on any Subordinated Indebtedness, or
directly or indirectly make any redemption  (including pursuant to any change of
control provision), retirement, defeasance or other acquisition for value of any
Subordinated Indebtedness,  or make any deposit or otherwise set aside funds for
any of the foregoing purposes.

     8.7  Transactions  with  Affiliates.  The  Borrower  will not, and will not
permit  or  cause  any  of its  Subsidiaries  to,  enter  into  any  transaction
(including,  without  limitation,  any  purchase,  sale,  lease or  exchange  of
property  or  the  rendering  of  any  service)  with  any  officer,   director,
stockholder or other Affiliate of the Borrower or any Subsidiary,  except in the
ordinary  course of its business and upon fair and reasonable  terms that are no
less favorable to it than would obtain in a comparable arm's length  transaction
with a Person  other  than an  Affiliate  of the  Borrower  or such  Subsidiary;
provided, however, that nothing contained in this Section shall prohibit:

          (i)  transactions  described on Schedule  8.7 or  otherwise  expressly
     permitted under this Agreement; and

          (ii) the payment by the Borrower of reasonable  and customary  fees to
     members of its board of directors.

     8.8 Lines of Business.  The Borrower will not, and will not permit or cause
any of its  Subsidiaries  to, engage in any business other than (i) the lines of
business  engaged in by it on the date  hereof  and  businesses  and  activities
reasonably related thereto or (ii) in the case of an Insurance  Subsidiary,  the
sale of any of the insurance  products within the lines of business described in
Schedule 8.8.

     8.9 Certain Amendments. The Borrower will not, and will not permit or cause
any of its Subsidiaries to, (i) amend, modify or waive, or permit the amendment,
modification  or  waiver  of,  any  provision  of any  agreement  or  instrument
evidencing or governing any Subordinated Indebtedness, the effect of which would
be to  (a)  increase  the  principal  amount  due  thereunder,  (b)  shorten  or
accelerate  the time of payment of any amount due  thereunder,  (c) increase the

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applicable  interest  rate or amount of any fees or costs  due  thereunder,  (d)
amend  any of the  subordination  provisions  thereunder  (including  any of the
definitions relating thereto), (e) make any covenant therein more restrictive or
add any new covenant,  or (f)  otherwise  materially  and  adversely  affect the
Lenders,  or breach or  otherwise  violate any of the  subordination  provisions
applicable thereto, including, without limitation,  restrictions against payment
of principal and interest thereon, or (ii) amend, modify or change any provision
of its articles or certificate of incorporation  or bylaws,  or the terms of any
class or series of its  Capital  Stock,  other  than in a manner  that could not
reasonably be expected to adversely affect the Lenders.

     8.10  Limitation on Certain  Restrictions.  The Borrower will not, and will
not permit or cause any of its Subsidiaries  to, directly or indirectly,  create
or otherwise  cause or suffer to exist or become  effective any  restriction  or
encumbrance on (i) the ability of the Borrower and its  Subsidiaries  to perform
and comply with their respective  obligations under the Credit Documents or (ii)
the ability of any  Subsidiary of the Borrower to make any dividend  payments or
other  distributions in respect of its Capital Stock, to repay Indebtedness owed
to the  Borrower  or any other  Subsidiary,  to make  loans or  advances  to the
Borrower or any other Subsidiary, or to transfer any of its assets or properties
to  the  Borrower  or any  other  Subsidiary,  in  each  case  other  than  such
restrictions or encumbrances existing under or by reason of the Credit Documents
or applicable Requirements of Law.

     8.11 No Other Negative Pledges.  The Borrower will not, and will not permit
or cause any of its  Subsidiaries  to,  directly  or  indirectly,  enter into or
suffer to exist any agreement or  restriction  that  prohibits or conditions the
creation,  incurrence or assumption of any Lien upon or with respect to any part
of its property or assets,  whether now owned or hereafter acquired, or agree to
do any of the foregoing, other than as set forth in (i) this Agreement, (ii) any
agreement or instrument  creating a Permitted  Lien (but only to the extent such
agreement or restriction  applies to the assets subject to such Permitted Lien),
and (iii)  operating  leases of real or personal  property  entered  into by the
Borrower  or any of its  Subsidiaries  as  lessee  in  the  ordinary  course  of
business.

     8.12 Fiscal Year.  The Borrower  will not, and will not permit or cause any
of its  Subsidiaries  to,  change the ending  date of its fiscal  year to a date
other than December 31.

     8.13  Accounting  Changes.  The  Borrower  will not, and will not permit or
cause any of its  Subsidiaries  to,  make or permit any  material  change in its
accounting policies or reporting practices, except as may be required by GAAP or
SAP.

     8.14 Best Rating.  The Borrower will not permit or cause the rating by A.M.
Best & Company of (i) PAIC or (ii) any  pooling  arrangement  in which PAIC is a
participant to be lower than "A-" at any time.

     8.15 Reinsurance Agreements.  The Borrower will not, and will not permit or
cause any of its Insurance Subsidiaries to do any of the following:

          (i) be or  become a party to any  Reinsurance  Agreement  (whether  in
     effect as of the Closing Date or at any time thereafter) with any reinsurer
     that both (1) is not rated 

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     "A-" or better by A.M. Best & Company and (2) does not have a claims paying
     ability  rating of "A-" or better by Standard & Poor's or Moody's (any such
     reinsurer,  a "Rating  Deficient  Reinsurer")  unless such Rating Deficient
     Reinsurer  has  either (x)  provided a letter of credit  issued by a United
     States  bank  having a long  term  senior  debt  rating of "A" or better by
     Standard & Poor's and Moody's,  in favor of the Borrower or the  applicable
     Insurance  Subsidiary in an amount equal to or greater than the obligations
     transferred pursuant to such Reinsurance  Agreement,  (y) placed the assets
     transferred  by the  Insurance  Subsidiary  pursuant  to  such  Reinsurance
     Agreement in a trust with a fiduciary and under terms, including investment
     restrictions consistent with this Agreement,  satisfactory to the Agent, or
     (z)  otherwise  provided  collateral  in  favor  of  the  Borrower  or  the
     applicable  Insurance  Subsidiary  in form and amount  satisfactory  to the
     Required  Lenders;  provided,  however,  that any Insurance  Subsidiary may
     remain a party to a Reinsurance  Agreement  --------  ------- with a Rating
     Deficient  Reinsurer  that  has not  provided  the  collateral  of the type
     described in clauses  (x),  (y) and (z) above (all such  Ratings  Deficient
     Reinsurers,  collectively, the "Non-Approved Reinursers") provided that (A)
     as of the end of each fiscal year,  the aggregate  amount of the Net Amount
     --------  Recoverable  from  Reinsurers  for  the  Insurance   Subsidiaries
     attributable  to all  Non-Approved  Reinsurers  as of such  year end is not
     greater than $1,500,000,  and (y) for each fiscal year (or portion thereof)
     ending  with  each  fiscal  quarter   thereof,   the  aggregate  amount  of
     Reinsurance Premiums Ceded by the Insurance Subsidiaries during such fiscal
     year (or portion  thereof) to all  Non-Approved  Reinsurers as of each such
     quarter ended is not greater than $1,500,000;

          (ii) enter into any Reinsurance  Agreements,  or make any amendment or
     modification  to or  waiver  of any  Reinsurance  Agreements,  that  would,
     individually or in the aggregate,  be reasonably  likely to have a Material
     Adverse Effect; or

          (iii) be or become a party to any Surplus Relief Reinsurance Agreement
     if the increase in Combined Statutory and Capital Surplus as a result of or
     arising from such Surplus Relief Reinsurance  Agreement,  when added to the
     increase  in  Combined  Statutory  and  Capital  Surplus  as a result of or
     arising from all other Surplus Relief  Reinsurance  Agreements  theretofore
     entered  into  by any  Insurance  Subsidiary,  net of  any  surplus  relief
     recaptured  in  respect  of such  Surplus  Relief  Reinsurance  Agreements,
     exceeds ten percent (10%) of Combined  Statutory and Capital  Surplus as of
     the most recent fiscal year end.


                                   ARTICLE IX

                                EVENTS OF DEFAULT

     9.1 Events of Default.  The  occurrence of any one or more of the following
events shall constitute an "Event of Default":

     (a) The  Borrower  shall fail to pay any  principal  of or  interest on any
Loan, any Reimbursement Obligation, any fee or any other Obligation when due;

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     (b) The  Borrower  shall  fail to  observe,  perform  or  comply  with  any
condition,  covenant or agreement  contained in any of Sections 2.14,  6.1, 6.2,
6.3(g), 6.8, 6.9 or in Article VII or Article VIII;

     (c) The Borrower or any of its Subsidiaries shall fail to observe,  perform
or comply with any condition,  covenant or agreement contained in this Agreement
or any of the other Credit  Documents other than those enumerated in subsections
(a) and (b) above,  and such  failure (i) is deemed by the terms of the relevant
Credit  Document  to  constitute  an Event of  Default  or (ii)  shall  continue
unremedied for any grace period  specifically  applicable thereto or, if no such
grace period is  applicable,  for a period of thirty (30) days after the earlier
of (y) the  date  on  which  a  Responsible  Officer  of the  Borrower  acquires
knowledge  thereof and (z) the date on which written notice thereof is delivered
by the Agent or any Lender to the Borrower;

     (d) Any  representation  or warranty made or deemed made by or on behalf of
the  Borrower or any of its  Subsidiaries  in this  Agreement,  any of the other
Credit  Documents or in any  certificate,  instrument,  report or other document
furnished  in  connection  herewith  or  therewith  or in  connection  with  the
transactions  contemplated  hereby or thereby  shall prove to have been false or
misleading  in any  material  respect  as of  the  time  made,  deemed  made  or
furnished;

     (e) The Borrower or any of its Subsidiaries  shall (i) fail to pay when due
(whether by  scheduled  maturity,  acceleration  or  otherwise  and after giving
effect to any  applicable  grace  period)  any  principal  of or interest on any
Indebtedness  (other than the Indebtedness  incurred pursuant to this Agreement)
having an  aggregate  principal  amount of at least  $5,000,000  or (ii) fail to
observe,  perform or comply with any condition,  covenant or agreement contained
in any agreement or instrument  evidencing or relating to any such Indebtedness,
or any other event shall occur or condition  exist in respect  thereof,  and the
effect of such failure,  event or condition is to cause, or permit the holder or
holders of such  Indebtedness  (or a trustee or agent on its or their behalf) to
cause (with the giving of notice,  lapse of time, or both), such Indebtedness to
become due, or to be prepaid,  redeemed,  purchased  or  defeased,  prior to its
stated maturity;

     (f) The  Borrower  or any of its  Subsidiaries  shall (i) file a  voluntary
petition  or  commence  a  voluntary  case  seeking   liquidation,   winding-up,
reorganization,  dissolution,  arrangement,  readjustment  of debts or any other
relief  under the  Bankruptcy  Code or under any  other  applicable  bankruptcy,
insolvency  or  similar  law now or  hereafter  in effect,  (ii)  consent to the
institution  of, or fail to controvert in a timely and appropriate  manner,  any
petition or case of the type described in subsection (g) below,  (iii) apply for
or consent to the appointment of or taking  possession by a custodian,  trustee,
receiver or similar  official for or of itself or all or a  substantial  part of
its  properties  or  assets,  (iv)  fail  generally,  or  admit in  writing  its
inability,  to pay its debts  generally  as they become due,  (v) make a general
assignment  for the benefit of  creditors or (vi) take any  corporate  action to
authorize or approve any of the foregoing;

     (g) Any  involuntary  petition or case shall be filed or commenced  against
the  Borrower  or any  of  its  Subsidiaries  seeking  liquidation,  winding-up,
reorganization, dissolution, arrangement, readjustment of debts, the appointment
of a  custodian,  trustee,  receiver  or  similar  

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official  for it or all or a  substantial  part of its  properties  or any other
relief  under the  Bankruptcy  Code or under any  other  applicable  bankruptcy,
insolvency or similar law now or hereafter in effect,  and such petition or case
shall continue  undismissed  and unstayed for a period of sixty (60) days; or an
order,  judgment or decree  approving or ordering any of the foregoing  shall be
entered in any such proceeding;

     (h) Any one or more  money  judgments,  writs or  warrants  of  attachment,
executions  or similar  processes  involving an aggregate  amount  (exclusive of
amounts  fully bonded or covered by insurance as to which the surety or insurer,
as the case may be, has  acknowledged  its  liability  in  writing) in excess of
$1,000,000  shall  be  entered  or  filed  against  the  Borrower  or any of its
Subsidiaries  or any of their  respective  properties  and the same shall not be
dismissed, stayed or discharged for a period of thirty (30) days or in any event
later than five days prior to the date of any proposed sale thereunder;

     (i) Any ERISA  Event or any other event or  condition  shall occur or exist
with  respect  to any Plan or  Multiemployer  Plan  and,  as a  result  thereof,
together  with all other  ERISA  Events  and other  events  or  conditions  then
existing,  the  Borrower  and its ERISA  Affiliates  have  incurred  or would be
reasonably  likely to incur liability to any one or more Plans or  Multiemployer
Plans or to the PBGC (or to any combination thereof) in excess of $1,000,000;

     (j) Any one or more licenses, permits,  accreditations or authorizations of
the  Borrower  or  any  of its  Subsidiaries  shall  be  suspended,  limited  or
terminated or shall not be renewed,  or any other action shall be taken,  by any
Governmental Authority in response to any alleged failure by the Borrower or any
of its Subsidiaries to be in compliance with applicable Requirements of Law, and
such action, individually or in the aggregate, has or would be reasonably likely
to have a Material Adverse Effect;

     (k) Any one or more  Environmental  Claims shall have been asserted against
the Borrower or any of its Subsidiaries;  the Borrower and its Subsidiaries have
incurred or would be reasonably  likely to incur  liability as a result thereof;
and such liability, individually or in the aggregate, has or would be reasonably
likely to have a Material Adverse Effect; or

     (l) Any of the  following  shall occur:  (i) any Person or group of Persons
acting in concert as a partnership or other group,  other than Penn  Independent
Corporation or a group comprised solely of such Persons, shall, as a result of a
tender or exchange offer, open market purchases,  privately negotiated purchases
or otherwise, have become, after the date hereof, the "beneficial owner" (within
the meaning of such term under Rule 13d-3 under the Exchange  Act) of securities
of the Borrower  representing  20% or more of the  combined  voting power of the
then  outstanding  securities of the Borrower  ordinarily (and apart from rights
accruing under special  circumstances)  having the right to vote in the election
of  directors;  or (ii) the Board of Directors  of the  Borrower  shall cease to
consist of a majority of the  individuals who constituted the Board of Directors
as of the date hereof or who shall have become a member  thereof  subsequent  to
the date hereof after having been nominated,  or otherwise  approved in writing,
by at least a majority of individuals  who constituted the Board of Directors of
the  Borrower  as of the date hereof (or their  replacements  approved as herein
required).

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     9.2 Remedies:  Termination of Commitments,  Acceleration,  etc. Upon and at
any time  after  the  occurrence  and  during  the  continuance  of any Event of
Default,  the Agent  shall at the  direction,  or may with the  consent,  of the
Required  Lenders,  take  any or all of the  following  actions  at the  same or
different times:

     (a) Declare the  Commitments and the Issuing  Lender's  obligation to issue
Letters  of  Credit,  to be  terminated,  whereupon  the  same  shall  terminate
(provided that,  upon the occurrence of an Event of Default  pursuant to Section
9.1(f) or Section 9.1(g), the Commitments and the Issuing Lender's obligation to
issue Letters of Credit shall automatically be terminated);

     (b)  Declare  all or any part of the  outstanding  principal  amount of the
Loans to be  immediately  due and payable,  whereupon  the  principal  amount so
declared to be immediately due and payable,  together with all interest  accrued
thereon and all other amounts  payable under this  Agreement,  the Notes and the
other  Credit  Documents,  shall  become  immediately  due and  payable  without
presentment,  demand, protest, notice of intent to accelerate or other notice or
legal  process of any kind,  all of which are  hereby  knowingly  and  expressly
waived  by the  Borrower  (provided  that,  upon the  occurrence  of an Event of
Default  pursuant to Section 9.1(f) or Section  9.1(g),  all of the  outstanding
principal amount of the Loans and all other amounts described in this subsection
(b) shall automatically  become immediately due and payable without presentment,
demand, protest, notice of intent to accelerate or other notice or legal process
of any kind,  all of which are  hereby  knowingly  and  expressly  waived by the
Borrower);

     (c) Direct  the  Borrower  to  deposit  (and the  Borrower  hereby  agrees,
forthwith upon receipt of notice of such  direction from the Agent,  to deposit)
with the Agent from time to time such  additional  amount of cash as is equal to
the aggregate Stated Amount of all Letters of Credit then  outstanding  (whether
or not any  beneficiary  under  any  Letter  of Credit  shall  have  drawn or be
entitled at such time to draw  thereunder),  such amount to be held by the Agent
in the Cash Collateral  Account as security for the Letter of Credit Exposure as
described in Section 3.8;

     (d) Take any and all action necessary to obtain, at the Borrower's  expense
and as soon as reasonably possible, with respect to each Insurance Subsidiary, a
current  actuarial  review and  valuation  statement  of, and  opinion as to the
adequacy  of,  such  Insurance  Subsidiary's  loss and loss  adjustment  expense
reserve  positions  with respect to the insurance  business  then in force,  and
covering such other subjects as are customary in actuarial reviews and as may be
requested by the Required  Lenders,  prepared by an  independent  actuarial firm
acceptable  to the Required  Lenders in  accordance  with  reasonable  actuarial
assumptions  and  procedures  (the  Borrower  hereby  agreeing to  cooperate  in
connection therewith); and

     (e) Exercise all rights and remedies  available to it under this Agreement,
the other Credit Documents and applicable law.

     9.3  Remedies:  Set-Off.  In  addition  to all other  rights  and  remedies
available under the Credit Documents or applicable law or otherwise, upon and at
any time  after  the  occurrence  and  during  the  continuance  of any Event of
Default,  each Lender may, and each is hereby authorized by the Borrower, at any
such time and from time to time, to the fullest  extent  permitted by applicable
law, without  presentment,  demand,  protest or other notice of any kind, 

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all of which are hereby knowingly and expressly  waived by the Borrower,  to set
off and to apply any and all  deposits  (general  or  special,  time or  demand,
provisional or final but specifically  excluding deposits in trust accounts) and
any other  property at any time held  (including  at any  branches or  agencies,
wherever located),  and any other indebtedness at any time owing, by such Lender
to or for the credit or the  account of the  Borrower  against any or all of the
Obligations  to such  Lender  now or  hereafter  existing,  whether  or not such
Obligations may be contingent or unmatured, the Borrower hereby granting to each
Lender a  continuing  security  interest in and Lien upon all such  deposits and
other property as security for such Obligations.  Each Lender agrees promptly to
notify  the  Borrower  and the Agent  after any such  set-off  and  application;
provided,  however,  that the failure to give such  notice  shall not affect the
validity of such set-off and application.


                                    ARTICLE X

                                    THE AGENT

     10.1 Appointment.  Each Lender hereby  irrevocably  appoints and authorizes
First Union to act as Agent  hereunder and under the other Credit  Documents and
to take such actions as agent on its behalf hereunder and under the other Credit
Documents,  and to  exercise  such  powers and to perform  such  duties,  as are
specifically  delegated  to the Agent by the terms  hereof or thereof,  together
with such other powers and duties as are reasonably incidental thereto.

     10.2 Nature of Duties.  The Agent shall have no duties or  responsibilities
other than those  expressly  set forth in this  Agreement  and the other  Credit
Documents.  The Agent shall not have,  by reason of this  Agreement or any other
Credit Document, a fiduciary  relationship in respect of any Lender; and nothing
in this Agreement or any other Credit Document,  express or implied, is intended
to or shall be so  construed  as to impose  upon the Agent  any  obligations  or
liabilities in respect of this Agreement or any other Credit  Document except as
expressly  set forth herein or therein.  The Agent may execute any of its duties
under this  Agreement  or any other  Credit  Document  by or  through  agents or
attorneys-in-fact  and shall not be responsible for the negligence or misconduct
of any agents or  attorneys-in-fact  that it selects with  reasonable  care. The
Agent  shall be  entitled  to consult  with legal  counsel,  independent  public
accountants  and  other  experts  selected  by it with  respect  to all  matters
pertaining  to this  Agreement  and the other  Credit  Documents  and its duties
hereunder and thereunder and shall not be liable for any action taken or omitted
to be taken in good faith by it in  accordance  with the advice of such counsel,
accountants or experts.  The Lenders hereby acknowledge that the Agent shall not
be under any duty to take any  discretionary  action permitted to be taken by it
pursuant to the provisions of this Agreement or any other Credit Document unless
it shall be requested in writing to do so by the Required  Lenders (or,  where a
higher percentage of the Lenders is expressly required hereunder, such Lenders).

     10.3  Exculpatory  Provisions.  Neither the Agent nor any of its  officers,
directors,  employees,  agents,  attorneys-in-fact  or  Affiliates  shall be (i)
liable for any action taken or omitted to be taken by it or such Person under or
in  connection  with the Credit  Documents,  except for its or such Person's own
gross  negligence or willful  misconduct,  (ii) responsible in 

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any   manner  to  any  Lender  for  any   recitals,   statements,   information,
representations  or warranties  herein or in any other Credit Document or in any
document,  instrument,   certificate,  report  or  other  writing  delivered  in
connection herewith or therewith, for the execution, effectiveness, genuineness,
validity,  enforceability  or  sufficiency of this Agreement or any other Credit
Document,  or for the financial  condition of the Borrower,  its Subsidiaries or
any other Person, or (iii) required to ascertain or make any inquiry  concerning
the  performance or observance of any of the terms,  provisions or conditions of
this  Agreement  or any other  Credit  Document  or the  existence  or  possible
existence  of any  Default or Event of Default,  or to inspect  the  properties,
books or records of the Borrower or any of its Subsidiaries.

     10.4 Reliance by Agent.  The Agent shall be entitled to rely,  and shall be
fully  protected  in  relying,  upon any  notice,  statement,  consent  or other
communication  (including,   without  limitation,   any  thereof  by  telephone,
telecopy,  telex,  telegram or cable) believed by it in good faith to be genuine
and  correct  and to have  been  signed,  sent or made by the  proper  Person or
Persons.  The Agent may deem and treat each Lender as the owner of its  interest
hereunder  for all  purposes  hereof  unless  and until a written  notice of the
assignment,  negotiation or transfer  thereof shall have been given to the Agent
in accordance with the provisions of this Agreement. The Agent shall be entitled
to refrain  from taking or omitting to take any action in  connection  with this
Agreement or any other Credit  Document (i) if such action or omission would, in
the reasonable opinion of the Agent, violate any applicable law or any provision
of this Agreement or any other Credit Document or (ii) unless and until it shall
have received such advice or  concurrence  of the Required  Lenders (or, where a
higher percentage of the Lenders is expressly required hereunder,  such Lenders)
as it  deems  appropriate  or it  shall  first  have  been  indemnified  to  its
satisfaction  by the Lenders  against any and all liability  and expense  (other
than  liability  and expense  arising from its own gross  negligence  or willful
misconduct)  that may be incurred by it by reason of taking,  continuing to take
or omitting to take any such action.  Without limiting the foregoing,  no Lender
shall have any right of action  whatsoever  against the Agent as a result of the
Agent's  acting or  refraining  from acting  hereunder or under any other Credit
Document in accordance with the  instructions of the Required Lenders (or, where
a higher  percentage  of the  Lenders  is  expressly  required  hereunder,  such
Lenders),  and such instructions and any action taken or failure to act pursuant
thereto  shall be binding  upon all of the  Lenders  (including  all  subsequent
Lenders).

     10.5  Non-Reliance  on Agent  and  Other  Lenders.  Each  Lender  expressly
acknowledges  that  neither  the  Agent  nor  any  of its  officers,  directors,
employees,  agents,  attorneys-in-fact or Affiliates has made any representation
or warranty  to it and that no act by the Agent or any such  Person  hereinafter
taken, including any review of the affairs of the Borrower and its Subsidiaries,
shall be deemed to constitute any representation or warranty by the Agent to any
Lender.  Each Lender represents to the Agent that (i) it has,  independently and
without  reliance upon the Agent or any other Lender and based on such documents
and  information  as it has deemed  appropriate,  made its own  appraisal of and
investigation into the business, prospects,  operations,  properties,  financial
and other condition and  creditworthiness  of the Borrower and its  Subsidiaries
and made its own decision to enter into this  Agreement and extend credit to the
Borrower  hereunder,  and (ii) it will,  independently and without reliance upon
the Agent or any other Lender and based on such documents and  information as it
shall deem  appropriate at the time,  continue to make its own credit  analysis,
appraisals and decisions in taking or not taking action  hereunder and under 

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the other Credit Documents and to make such  investigation as it deems necessary
to  inform  itself  as  to  the  business,  prospects,  operations,  properties,
financial  and other  condition  and  creditworthiness  of the  Borrower and its
Subsidiaries.  Except as  expressly  provided  in this  Agreement  and the other
Credit  Documents,  the  Agent  shall  have no duty  or  responsibility,  either
initially  or on a  continuing  basis,  to provide any Lender with any credit or
other information concerning the business,  prospects,  operations,  properties,
financial  or  other  condition  or  creditworthiness   of  the  Borrower,   its
Subsidiaries  or any other Person that may at any time come into the  possession
of  the  Agent  or  any  of  its   officers,   directors,   employees,   agents,
attorneys-in-fact or Affiliates.

     10.6 Notice of Default.  The Agent shall not be deemed to have knowledge or
notice of the  occurrence  of any  Default or Event of Default  unless the Agent
shall have received  written  notice from the Borrower or a Lender  referring to
this  Agreement,  describing  such  Default or Event of Default and stating that
such notice is a "notice of default." In the event that the Agent  receives such
a  notice,  the  Agent  will  give  notice  thereof  to the  Lenders  as soon as
reasonably practicable; provided, however, that if any such notice has also been
furnished  to the  Lenders,  the Agent  shall have no  obligation  to notify the
Lenders  with respect  thereto.  The Agent shall  (subject to Sections  10.4 and
11.6) take such action with respect to such Default or Event of Default as shall
reasonably be directed by the Required Lenders;  provided that, unless and until
the Agent shall have received such  directions,  the Agent may (but shall not be
obligated to) take such action, or refrain from taking such action, with respect
to such  Default  or Event of Default  as it shall  deem  advisable  in the best
interests  of the  Lenders  except to the extent that this  Agreement  expressly
requires  that such action be taken,  or not be taken,  only with the consent or
upon the authorization of the Required Lenders or all of the Lenders.

     10.7  Indemnification.  To the extent the Agent is not  reimbursed by or on
behalf of the Borrower,  and without  limiting the obligation of the Borrower to
do so, the Lenders agree (i) to indemnify the Agent and its officers, directors,
employees,  agents,  attorneys-in-fact and Affiliates,  ratably in proportion to
their  respective  percentages as used in determining the Required Lenders as of
the  date  of   determination,   from  and  against  any  and  all  liabilities,
obligations,  losses,  damages,  penalties,  actions,  judgments,  suits, costs,
expenses  (including,  without  limitation,  attorneys'  fees and  expenses)  or
disbursements of any kind or nature  whatsoever that may at any time (including,
without limitation, at any time following the repayment in full of the Loans and
the  termination  of the  Commitments)  be imposed  on,  incurred by or asserted
against the Agent in any way relating to or arising out of this Agreement or any
other Credit Document or any documents  contemplated by or referred to herein or
the transactions  contemplated  hereby or thereby or any action taken or omitted
by the  Agent  under or in  connection  with any of the  foregoing,  and (ii) to
reimburse  the Agent upon  demand,  ratably in  proportion  to their  respective
percentages  as used in  determining  the  Required  Lenders  as of the  date of
determination,  for any expenses  incurred by the Agent in  connection  with the
preparation,   negotiation,  execution,  delivery,  administration,   amendment,
modification,   waiver  or  enforcement  (whether  through  negotiations,  legal
proceedings  or  otherwise)  of,  or  legal  advice  in  respect  of  rights  or
responsibilities  under,  this  Agreement or any of the other  Credit  Documents
(including,  without  limitation,  reasonable  attorneys'  fees and expenses and
compensation of agents and employees paid for services rendered on behalf of the
Lenders);  provided,  however, that no Lender shall be liable for any portion of
such liabilities,  obligations,  

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losses,  damages,  penalties,  actions,  judgments,  suits,  costs,  expenses or
disbursements  to the  extent  resulting  from the gross  negligence  or willful
misconduct of the party to be indemnified.

     10.8 The Agent in its Individual Capacity.  With respect to its Commitment,
the Loans made by it, the Letters of Credit issued or  participated in by it and
the Note or Notes issued to it, the Agent in its individual  capacity and not as
Agent shall have the same rights and powers  under the Credit  Documents  as any
other  Lender and may  exercise  the same as though it were not  performing  the
agency duties specified  herein;  and the terms "Lenders,"  "Required  Lenders,"
"holders  of Notes" and any similar  terms  shall,  unless the  context  clearly
otherwise indicates, include the Agent in its individual capacity. The Agent and
its Affiliates may accept deposits from, lend money to, make investments in, and
generally  engage in any kind of  banking,  trust,  financial  advisory or other
business with the Borrower,  any of its  Subsidiaries or any of their respective
Affiliates  as if the Agent  were not  performing  the agency  duties  specified
herein,  and may  accept  fees  and  other  consideration  from  any of them for
services in  connection  with this  Agreement and  otherwise  without  having to
account for the same to the Lenders.

     10.9 Successor  Agent.  The Agent may resign at any time by giving ten (10)
days' prior written notice to the Borrower and the Lenders. Upon any such notice
of resignation, the Required Lenders will, with the prior written consent of the
Borrower (which consent shall not be unreasonably withheld),  appoint from among
the Lenders a successor to the Agent (provided that the Borrower's consent shall
not be required in the event a Default or Event of Default  shall have  occurred
and be continuing). If no successor to the Agent shall have been so appointed by
the  Required  Lenders  and shall have  accepted  such  appointment  within such
ten-day period,  then the retiring Agent may, on behalf of the Lenders and after
consulting  with the Lenders and the  Borrower,  appoint a successor  Agent from
among  the  Lenders.  Upon  the  acceptance  of any  appointment  as  Agent by a
successor  Agent,  such successor  Agent shall  thereupon  succeed to and become
vested with all the rights, powers, privileges and duties of the retiring Agent,
and the  retiring  Agent  shall be  discharged  from its duties and  obligations
hereunder  and under the other  Credit  Documents.  After any  retiring  Agent's
resignation as Agent,  the provisions of this Article shall inure to its benefit
as to any actions  taken or omitted to be taken by it while it was Agent.  If no
successor to the Agent has accepted appointment as Agent by the thirtieth (30th)
day following a retiring  Agent's notice of  resignation,  the retiring  Agent's
resignation shall nevertheless thereupon become effective, and the Lenders shall
thereafter  perform all of the duties of the Agent hereunder and under the other
Credit  Documents  until such time,  if any, as the Required  Lenders  appoint a
successor Agent as provided for hereinabove.

     10.10 Issuing  Lender.  The  provisions of this Article (other than Section
10.9) shall apply to the Issuing Lender  mutatis  mutandis to the same extent as
such provisions apply to the Agent.

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                                   ARTICLE XI

                                  MISCELLANEOUS

     11.1  Fees  and  Expenses.  The  Borrower  agrees  (i)  whether  or not the
transactions  contemplated by this Agreement  shall be consummated,  to pay upon
demand all reasonable  out-of-pocket costs and expenses of the Agent (including,
without limitation, the reasonable fees and expenses of counsel to the Agent) in
connection with the Agent's due diligence  investigation in connection with, and
the  preparation,  negotiation,  execution,  delivery and  syndication  of, this
Agreement and the other Credit  Documents,  and any amendment,  modification  or
waiver hereof or thereof or consent with respect hereto or thereto,  (ii) to pay
upon demand all  reasonable  out-of-pocket  costs and  expenses of the Agent and
each Lender  (including,  without  limitation,  reasonable  attorneys'  fees and
expenses) in connection with (y) any refinancing or  restructuring of the credit
arrangement  provided  under  this  Agreement,   whether  in  the  nature  of  a
"work-out," in any insolvency or bankruptcy  proceeding or otherwise and whether
or  not  consummated,   and  (z)  the  enforcement,   attempted  enforcement  or
preservation  of any rights or remedies under this Agreement or any of the other
Credit  Documents,  whether in any action,  suit or  proceeding  (including  any
bankruptcy or insolvency proceeding) or otherwise, and (iii) to pay and hold the
Agent  and  each  Lender  harmless  from  and  against  all  liability  for  any
intangibles,  documentary,  stamp or other similar taxes,  fees and excises,  if
any,  including any interest and penalties,  and any finder's or brokerage fees,
commissions  and  expenses  (other  than any fees,  commissions  or  expenses of
finders or brokers  engaged by the Agent or any Lender),  that may be payable in
connection  with the  transactions  contemplated by this Agreement and the other
Credit Documents.

     11.2  Indemnification.   (a)  The  Borrower  agrees,  whether  or  not  the
transactions  contemplated by this Agreement shall be consummated,  to indemnify
and hold the  Agent  and each  Lender  and each of their  respective  directors,
officers,  employees,  agents and Affiliates  (each,  an  "Indemnified  Person")
harmless  from and  against any and all claims,  losses,  damages,  obligations,
liabilities,  penalties,  costs and  expenses  (including,  without  limitation,
reasonable  attorneys'  fees and  expenses)  of any kind or  nature  whatsoever,
whether direct, indirect or consequential  (collectively,  "Indemnified Costs"),
that may at any time be imposed on,  incurred  by or  asserted  against any such
Indemnified  Person as a result of,  arising  from or in any way relating to the
preparation,  execution,  performance or enforcement of this Agreement or any of
the other  Credit  Documents,  any of the  transactions  contemplated  herein or
therein  or any  transaction  financed  or to be  financed  in whole or in part,
directly  or  indirectly,  with the  proceeds  of any Loans or Letters of Credit
(including,  without  limitation,  in  connection  with the  actual  or  alleged
generation,  presence, discharge or release of any Hazardous Substances on, into
or from, or the  transportation  of Hazardous  Substances  to or from,  any real
property at any time owned or leased by the Borrower or any of its Subsidiaries,
any  other  Environmental  Claims or any  violation  of or  liability  under any
Environmental Law), or any action, suit or proceeding  (including any inquiry or
investigation) by any Person, whether threatened or initiated, related to any of
the foregoing, and in any case whether or not such Indemnified Person is a party
to any such  action,  proceeding  or suit or a subject  of any such  inquiry  or
investigation;  provided,  however,  that no  Indemnified  Person shall have the
right to be  indemnified  hereunder  for any  Indemnified  Costs  to the  extent
resulting from the gross  negligence or willful  misconduct of such  

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Indemnified  Person.  All of the foregoing  Indemnified Costs of any Indemnified
Person  shall be paid or  reimbursed  by the  Borrower in  accordance  with this
Section 11.2, as and when incurred and upon demand.

     (b) Promptly upon becoming aware of circumstances  that may give rise to an
indemnification  obligation under this Agreement,  the Indemnified  Person shall
give written notice thereof to the Borrower;  provided,  however, the failure of
any Indemnified  Person to so notify the Borrower shall not relieve the Borrower
of any  indemnification  obligation  hereunder except to the extent the Borrower
demonstrates   that  the  defense  of  any  claim  or  demand   giving  rise  to
indemnification obligations hereunder is materially prejudiced by the failure to
give such notice.  With respect to any claim in which the Borrower has expressly
acknowledged in writing (with reference to this Section 11.2) its obligations to
indemnify the Indemnified Persons hereunder, such Indemnified Persons shall give
the Borrower the sole and complete  opportunity to direct and manage all events,
including litigation,  from which such an indemnification  obligations may arise
(x) the Borrower provides to the Indemnified Person evidence  acceptable to such
Indemnified  Persons  that the  Borrower  will have the  financial  resources to
defend the claim and to fulfill its indemnification  obligations hereunder,  (y)
the Borrower  conducts the defense of the claim  actively  and  diligently  with
counsel  reasonably  satisfactory to such  Indemnified  Persons,  and (z) if the
Borrower  is a  party  to the  proceeding,  joint  representation  would  not be
inappropriate. The Indemnified Person shall cooperate fully with the Borrower in
responding to and  defending  against all claims of any nature giving rise to an
indemnification  obligation provided that all out-of-pocket expenses incurred by
the Indemnified  Person shall be paid by the Borrower.  If the Borrower  assumes
the defense of a  proceeding  with  respect to any  Indemnified  Person,  (i) no
compromise or settlement of such claims may be effected by the Borrower  without
the Indemnified  Person's consent unless (A) there is no finding or admission of
any  violation of law or any violation of the rights of any Person and no effect
on any other claims that may be made against the Indemnified Person, and (B) the
sole relief provided is monetary  damages that are paid in full by the Borrower;
and (ii) the  Indemnified  Person  will have no  liability  with  respect to any
compromise or settlement of such claims effected without its consent.  The terms
of this Section shall not preclude the Indemnified Person from retaining its own
counsel to  represent  it, but the fees and  expenses of such  counsel  shall be
solely the  responsibility of the Indemnified Person and shall not be covered by
the foregoing indemnity.

     (c) If (i)  notice  is given to the  Borrower  of the  commencement  of any
proceeding  and the  Borrower  does not,  within ten days after the  Indemnified
Person's notice is given, give notice to the Indemnified  Person of its election
to assume the defense of such  proceeding,  (ii) any of the conditions set forth
in clause (x)-(z) of Section 11.2(b) become unsatisfied, or (iii) an Indemnified
Person  determines in good faith that there is a reasonable  probability  that a
proceeding  may adversely  affect it other than as a result of monetary  damages
for which it would be  entitled to  indemnification  under this  Agreement,  the
Indemnified  Person will (upon further notice to the Borrower) have the right to
undertake the defense, compromise or settlement of such claim, provided that the
Borrower will reimburse the Indemnified Person promptly and periodically for the
costs of defending against the claim (including  reasonable  attorneys' fees and
expenses) and the Borrower will remain responsible for any indemnifiable amounts
arising  from or related to such claim to the  fullest  extent  provided in this
Section  11.2.  The  Borrower  may  elect to  participate  in such  proceedings,
negotiations or defense at any time at its own expense.

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     11.3 Governing Law; Consent to  Jurisdiction.  THIS AGREEMENT AND THE OTHER
CREDIT  DOCUMENTS  HAVE BEEN  EXECUTED,  DELIVERED AND ACCEPTED IN, AND SHALL BE
DEEMED  TO HAVE BEEN  MADE IN,  NORTH  CAROLINA  AND  SHALL BE  GOVERNED  BY AND
CONSTRUED  AND  ENFORCED  IN  ACCORDANCE  WITH  THE  LAWS OF THE  STATE OF NORTH
CAROLINA (WITHOUT REGARD TO THE CONFLICTS OF LAW PROVISIONS  THEREOF);  PROVIDED
THAT EACH LETTER OF CREDIT  SHALL BE GOVERNED BY AND  CONSTRUED  AND ENFORCED IN
ACCORDANCE WITH THE LAWS OR RULES  DESIGNATED IN SUCH LETTER OF CREDIT OR, IF NO
SUCH LAWS OR RULES  ARE  DESIGNATED,  THE  UNIFORM  CUSTOMS  AND  PRACTICES  FOR
DOCUMENTARY CREDITS,  INTERNATIONAL  CHAMBER OF COMMERCE, AS IN EFFECT FROM TIME
TO TIME (THE "UNIFORM CUSTOMS"),  AND, AS TO MATTERS NOT GOVERNED BY THE UNIFORM
CUSTOMS,  THE  LAWS OF THE  STATE  OF  NORTH  CAROLINA  (WITHOUT  REGARD  TO THE
CONFLICTS  OF LAW  PROVISIONS  THEREOF).  THE  BORROWER  HEREBY  CONSENTS TO THE
NONEXCLUSIVE  JURISDICTION OF ANY STATE COURT WITHIN MECKLENBURG  COUNTY,  NORTH
CAROLINA OR ANY FEDERAL COURT LOCATED  WITHIN THE WESTERN  DISTRICT OF THE STATE
OF NORTH  CAROLINA FOR ANY PROCEEDING  INSTITUTED  HEREUNDER OR UNDER ANY OF THE
OTHER CREDIT  DOCUMENTS,  OR ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT
OR ANY OF THE OTHER CREDIT  DOCUMENTS,  OR ANY  PROCEEDING TO WHICH THE AGENT OR
ANY LENDER OR THE BORROWER IS A PARTY, INCLUDING ANY ACTIONS BASED UPON, ARISING
OUT OF,  OR IN  CONNECTION  WITH ANY  COURSE  OF  CONDUCT,  COURSE  OF  DEALING,
STATEMENT (WHETHER ORAL OR WRITTEN) OR ACTIONS OF THE AGENT OR ANY LENDER OR THE
BORROWER.  THE BORROWER IRREVOCABLY AGREES TO BE BOUND (SUBJECT TO ANY AVAILABLE
RIGHT OF APPEAL) BY ANY JUDGMENT  RENDERED OR RELIEF GRANTED THEREBY AND FURTHER
WAIVES ANY OBJECTION THAT IT MAY HAVE BASED ON LACK OF  JURISDICTION OR IMPROPER
VENUE OR FORUM  NON  CONVENIENS  TO THE  CONDUCT  OF ANY  SUCH  PROCEEDING.  THE
BORROWER CONSENTS THAT ALL SERVICE OF PROCESS BE MADE BY REGISTERED OR CERTIFIED
MAIL  DIRECTED TO IT AT ITS ADDRESS SET FORTH  HEREINBELOW,  AND SERVICE SO MADE
SHALL BE DEEMED TO BE COMPLETED  UPON THE EARLIER OF ACTUAL  RECEIPT  THEREOF OR
THREE (3) DAYS AFTER DEPOSIT IN THE UNITED STATES MAILS,  PROPER POSTAGE PREPAID
AND PROPERLY ADDRESSED.  NOTHING IN THIS SECTION SHALL AFFECT THE RIGHT TO SERVE
LEGAL  PROCESS IN ANY OTHER  MANNER  PERMITTED BY LAW OR AFFECT THE RIGHT OF THE
AGENT OR ANY LENDER TO BRING ANY ACTION OR  PROCEEDING  AGAINST THE  BORROWER IN
THE COURTS OF ANY OTHER JURISDICTION.

     11.4 Arbitration;  Preservation and Limitation of Remedies. (a) Upon demand
of any party hereto,  whether made before or after  institution  of any judicial
proceeding,  any dispute, claim or controversy arising out of, connected with or
relating to this Agreement or any other 

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<PAGE>
Credit Document  ("Disputes")  between or among the Borrower,  its Subsidiaries,
the  Agent  and the  Lenders,  or any of them,  shall  be  resolved  by  binding
arbitration as provided herein.  Institution of a judicial proceeding by a party
does not waive the right of that party to demand arbitration hereunder. Disputes
may include, without limitation, tort claims,  counterclaims,  claims brought as
class actions, claims arising from documents executed in the future, disputes as
to whether a matter is  subject  to  arbitration,  or claims  arising  out of or
connected  with the  transactions  contemplated  by this Agreement and the other
Credit  Documents.  Arbitration  shall be  conducted  under and  governed by the
Commercial Financial Disputes Arbitration Rules (the "Arbitration Rules") of the
American  Arbitration  Association (the "AAA"),  as in effect from time to time,
and the Federal  Arbitration  Act,  Title 9 of the U.S.  Code,  as amended.  All
arbitration hearings shall be conducted in the Borough of Manhattan, in the City
of New York, State of New York. A hearing shall begin within ninety (90) days of
demand for  arbitration  and all hearings shall be concluded  within 120 days of
demand for  arbitration.  These time  limitations  may not be extended  unless a
party shows cause for  extension and then for no more than a total of sixty (60)
days. The expedited  procedures set forth in Rule 51 et seq. of the  Arbitration
Rules shall be  applicable  to claims of less than  $1,000,000.  All  applicable
statutes of limitation shall apply to any Dispute. A judgment upon the award may
be  entered  in  any  court  having  jurisdiction.  The  panel  from  which  all
arbitrators are selected shall be comprised of licensed  attorneys selected from
the  Commercial  Financial  Dispute  Arbitration  Panel of the AAA.  The  single
arbitrator  selected for expedited  procedure  shall be a retired judge from the
highest court of general jurisdiction,  state or federal, of the state where the
hearing will be  conducted.  Notwithstanding  the  foregoing,  this  arbitration
provision  does not apply to  Disputes  under or related to any Hedge  Agreement
that is a Credit Document.  The parties do not waive applicable federal or state
substantive law except as provided herein.


     (b)  Notwithstanding  the preceding  binding  arbitration  provisions,  the
parties hereto agree to preserve, without diminution,  certain remedies that any
party hereto may employ or exercise freely, either alone, in conjunction with or
during a Dispute.  Any party hereto shall have the right to proceed in any court
of proper  jurisdiction  or by self-help to exercise or prosecute  the following
remedies,  as  applicable:  (i) all  rights  of  self-help,  including  peaceful
occupation  of real  property and  collection  of rents,  set-off,  and peaceful
possession  of  personal  property;  (ii)  obtaining  provisional  or  ancillary
remedies, including injunctive relief, sequestration,  garnishment,  attachment,
appointment of a receiver and filing an involuntary bankruptcy  proceeding;  and
(iii) when  applicable,  a judgment  by  confession  of  judgment.  Any claim or
controversy  with  regard  to any  party's  entitlement  to such  remedies  is a
Dispute.  Preservation  of  these  remedies  does  not  limit  the  power  of an
arbitrator  to grant  similar  remedies  that may be  requested  by a party in a
Dispute.  The parties hereto agree that no party shall have a remedy of punitive
or  exemplary  damages  against any other party in any  Dispute,  and each party
hereby  waives any right or claim to punitive or  exemplary  damages that it has
now or that may arise in the future in connection with any Dispute, whether such
Dispute is resolved by arbitration or judicially.  The parties  acknowledge that
by agreeing to binding  arbitration they have irrevocably  waived any right they
may have to a jury trial with regard to a Dispute.

     11.5 Notices. All notices and other  communications  provided for hereunder
shall be in writing (including  telegraphic,  telex,  facsimile  transmission or
cable communication) and 

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mailed, telegraphed, telexed, telecopied, cabled or delivered to the party to be
notified at the following addresses:

          (a) if to the Borrower, to 420 South York Road, Hatboro,  Pennsylvania
     19040 Attention: Rosemary Ferrero, Telecopy No. (215) 443-3603, with a copy
     to Penn-America  Group,  Inc.,  Attention:  Garland Pezzuolo,  Telecopy No.
     (215) 443-3603;

          (b) if to the  Agent,  (i) if, at such time,  there is a Lender  other
     than First Union or any Affiliate  thereof,  to First Union  National Bank,
     One First Union Center,  DC-4, 301 South College Street,  Charlotte,  North
     Carolina 28288-0680,  Attention:  Syndication Agency Services, Telecopy No.
     (704) 383-0288; and (ii) otherwise, (A) for a Notice of Borrowing, a Notice
     of  Conversion/Continuation  and a Letter of Credit Notice, to First Union,
     at the  address  for the  Lending  Office set forth on its  signature  page
     hereto,  and (B) for all other notices,  to First Union, at the address for
     notices as a Lender set forth on its signature page hereto; and

          (c) if to any Lender,  to it at the address set forth on its signature
     page hereto (or if to any Lender not a party  hereto as of the date hereof,
     at the address set forth in its Assignment and Acceptance);

or in each case,  to such other address as any party may designate for itself by
like notice to all other  parties  hereto.  All such notices and  communications
shall be deemed to have been given (i) if mailed as provided above by any method
other than overnight  delivery service,  on the third Business Day after deposit
in the  mails,  (ii) if  mailed  by  overnight  delivery  service,  telegraphed,
telexed, telecopied or cabled, when delivered for overnight delivery,  delivered
to  the  telegraph  company,  confirmed  by  telex  answerback,  transmitted  by
telecopier  or  delivered  to the  cable  company,  respectively,  or  (iii)  if
delivered by hand, upon delivery;  provided that notices and  communications  to
the Agent shall not be effective until received by the Agent.

     11.6  Amendments,  Waivers,  etc.  No  amendment,  modification,  waiver or
discharge  or  termination  of, or consent to any  departure  by the Agent,  the
Issuing Lender or ainy Lender from, any provision of this Agreement or any other
Credit  Document shall be effective  unless in a writing signed by the Borrower,
and then the same shall be effective  only in the specific  instance and for the
specific  purpose  for  which  given.  No  amendment,  modification,  waiver  or
discharge or  termination  of, or consent to any departure by the Borrower from,
any provision of this Agreement or any other Credit Document, shall be effective
unless  in a  writing  signed by the  Required  Lenders  (or by the Agent at the
direction or with the consent of the Required Lenders),  and then the same shall
be  effective  only in the specific  instance  and for the specific  purpose for
which given; provided,  however, that no such amendment,  modification,  waiver,
discharge, termination or consent shall:

     (a) unless agreed to by each Lender directly affected  thereby,  (i) reduce
or forgive the principal  amount of any Loan,  reduce the rate of or forgive any
interest thereon, or reduce or forgive any fees or other Obligations (other than
fees payable to the Agent for its own account), or (ii) extend the Maturity Date
or any other date  (including any scheduled date for the mandatory  reduction or
termination  of any  Commitments)  fixed for the payment of any  principal 

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of or interest on any Loan (other than additional interest payable under Section
2.8(b) at the election of the Required Lenders,  as provided therein),  any fees
(other  than  fees  payable  to the  Agent  for its own  account)  or any  other
Obligations or extend the expiry date of any Letter of Credit beyond the seventh
day prior to the Maturity Date;

     (b) unless  agreed to by all of the  Lenders,  (i)  increase  or extend any
Commitment  of any  Lender  (it being  understood  that a waiver of any Event of
Default,  if agreed to by the requisite Lenders hereunder,  shall not constitute
such an increase), (ii) change the percentage of the aggregate Commitments or of
the aggregate  unpaid principal amount of the Loans, or the number or percentage
of  Lenders,  that shall be  required  for the Lenders or any of them to take or
approve,  or direct the Agent to take,  any action  hereunder  (including as set
forth in the definition of "Required Lenders"), or (iii) change any provision of
Section 2.15 or this Section; and

     (c) unless agreed to by the Issuing  Lender or the Agent in addition to the
Lenders  required  as  provided  hereinabove  to take such  action,  affect  the
respective  rights  or  obligations  of the  Issuing  Lender  or the  Agent,  as
applicable, hereunder or under any of the other Credit Documents;

and provided further that the Fee Letter and any Hedge Agreement to which any
Lender is a party may be amended or modified, and any rights thereunder waived,
in a writing signed by the parties thereto.

     11.7 Assignments, Participations. (a) Each Lender may assign to one or more
other Eligible  Assignees  (each,  an "Assignee") all or a portion of its rights
and obligations under this Agreement  (including,  without limitation,  all or a
portion of its Commitment,  the outstanding  Loans made by it, the Note or Notes
held by it and its participations in Letters of Credit); provided, however, that
(i) any such assignment (other than an assignment to a Lender or an Affiliate of
a Lender) shall not be made without the prior  written  consent of the Agent and
the Borrower (to be evidenced by its counterexecution of the relevant Assignment
and Acceptance), which consent shall not be unreasonably withheld (provided that
the Borrower's  consent shall not be required in the event a Default or Event of
Default shall have occurred and be continuing),  (ii) each such assignment shall
be of a uniform,  and not varying,  percentage of all of the assigning  Lender's
rights and  obligations  under this  Agreement,  (iii)  except in the case of an
assignment to a Lender or an Affiliate of a Lender,  no such assignment shall be
in an aggregate  principal  amount  (determined as of the date of the Assignment
and Acceptance with respect to such assignment) less than $2,500,000  determined
by combining the amount of the assigning Lender's  outstanding Loans,  Letter of
Credit  Exposure  and  Unutilized  Commitment  being  assigned  pursuant to such
assignment  (or, if less, the entire  Commitment of the assigning  Lender),  and
(iv) the parties to each such  assignment will execute and deliver to the Agent,
for its acceptance and recording in the Register,  an Assignment and Acceptance,
together  with any  Note or Notes  subject  to such  assignment,  and will pay a
nonrefundable  processing  fee of $3,000 to the Agent for its own account.  Upon
such  execution,  delivery,  acceptance  and  recording  of the  Assignment  and
Acceptance, from and after the effective date specified therein, which effective
date shall be at least five Business Days after the  execution  thereof  (unless
the Agent shall otherwise agree),  (A) the Assignee  thereunder shall be a party
hereto  and,  to the extent  that  rights and  obligations  hereunder  have been
assigned to it pursuant to such Assignment and 

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Acceptance,  shall have the  rights  and  obligations  of the  assigning  Lender
hereunder with respect thereto and (B) the assigning Lender shall, to the extent
that rights and obligations  hereunder have been assigned by it pursuant to such
Assignment  and  Acceptance,  relinquish its rights (other than rights under the
provisions  of this  Agreement  and  the  other  Credit  Documents  relating  to
indemnification  or  payment of fees,  costs and  expenses,  to the extent  such
rights relate to the time prior to the  effective  date of such  Assignment  and
Acceptance) and be released from its  obligations  under this Agreement (and, in
the case of an Assignment and Acceptance  covering all or the remaining  portion
of such assigning  Lender's  rights and obligations  under this Agreement,  such
Lender  shall  cease to be a party  hereto).  The terms and  provisions  of each
Assignment and Acceptance shall, upon the effectiveness thereof, be incorporated
into  and  made a part of this  Agreement,  and the  covenants,  agreements  and
obligations of each Lender set forth therein shall be deemed made to and for the
benefit  of the  Agent and the  other  parties  hereto as if set forth at length
herein.

     (b) The Agent will maintain at its address for notices referred to herein a
copy of each  Assignment  and  Acceptance  delivered to and accepted by it and a
register for the  recordation  of the names and addresses of the Lenders and the
Commitments  of, and  principal  amount of the Loans  owing to, each Lender from
time to time (the  "Register").  The entries in the Register shall be conclusive
and binding for all purposes, absent manifest error, and the Borrower, the Agent
and the Lenders may treat each Person  whose name is recorded in the Register as
a Lender  hereunder for all purposes of this  Agreement.  The Register  shall be
available for inspection by the Borrower and each Lender at any reasonable  time
and from time to time upon reasonable prior notice.

     (c) Upon its receipt of a duly completed Assignment and Acceptance executed
by an assigning Lender and an Assignee and, if required,  counterexecuted by the
Borrower,  together  with the Note or Notes subject to such  assignment  and the
processing  fee referred to in subsection  (a) above,  the Agent will (i) accept
such Assignment and Acceptance,  (ii) on the effective date thereof,  record the
information  contained  therein in the Register and (iii) give notice thereof to
the Borrower and the Lenders. Within five (5) Business Days after its receipt of
such notice, the Borrower,  at its own expense,  will execute and deliver to the
Agent, in exchange for the surrendered Note or Notes, a new Note or Notes to the
order of the Assignee (and, if the assigning  Lender has retained any portion of
its rights and  obligations  hereunder,  to the order of the assigning  Lender),
prepared  in  accordance  with the  provisions  of Section 2.4 as  necessary  to
reflect, after giving effect to the assignment,  the Commitments of the Assignee
and (to the extent of any retained  interests) the assigning  Lender,  dated the
date of the replaced  Note or Notes and otherwise in  substantially  the form of
Exhibit A. The Agent will return canceled Notes to the Borrower.

     (d) Each Lender may, without the consent of the Borrower,  the Agent or any
other  Lender,  sell  to one or  more  other  Persons  (each,  a  "Participant")
participations  in any  portion  comprising  less  than  all of its  rights  and
obligations under this Agreement  (including,  without limitation,  a portion of
its Commitment,  the outstanding  Loans made by it, the Note or Notes held by it
and its participations in Letters of Credit);  provided,  however, that (i) such
Lender's obligations under this Agreement shall remain unchanged and such Lender
shall remain solely responsible for the performance of such obligations, (ii) no
Lender shall sell any  participation  

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that,  when taken together with all other  participations,  if any, sold by such
Lender, covers all of such Lender's rights and obligations under this Agreement,
(iii) the  Borrower,  the Agent and the other  Lenders  shall  continue  to deal
solely and directly with such Lender in connection with such Lender's rights and
obligations under this Agreement,  and no Lender shall permit any Participant to
have any voting  rights or any right to  control  the vote of such  Lender  with
respect  to  any  amendment,  modification,  waiver,  consent  or  other  action
hereunder  or under any other Credit  Document  (except as to actions that would
(x) reduce or forgive the  principal  amount of any Loan,  reduce the rate of or
forgive  any  interest  thereon,   or  reduce  or  forgive  any  fees  or  other
Obligations,  (y)  extend  the  Maturity  Date or any other  date  fixed for the
payment  of any  principal  of or  interest  on any Loan,  any fees or any other
Obligations,  or (z) increase or extend any Commitment of any Lender),  and (iv)
no  Participant  shall have any rights under this  Agreement or any of the other
Credit  Documents,  each  Participant's  rights  against the granting  Lender in
respect  of any  participation  to be  those  set  forth  in  the  participation
agreement, and all amounts payable by the Borrower hereunder shall be determined
as if such  Lender  had not  granted  such  participation.  Notwithstanding  the
foregoing,  each  Participant  shall have the rights of a Lender for purposes of
Sections  2.16(a),  2.16(b),  2.17,  2.18 and 9.3,  and shall be entitled to the
benefits  thereto,  to the extent that the Lender  granting  such  participation
would be  entitled  to such  benefits  if the  participation  had not been made,
provided  that no  Participant  shall be entitled to receive any greater  amount
pursuant to any of such  Sections than the Lender  granting  such  participation
would  have  been   entitled  to  receive  in  respect  of  the  amount  of  the
participation made by such Lender to such Participant had such participation not
been made.

     (e) Nothing in this  Agreement  shall be  construed  to prohibit any Lender
from  pledging  or  assigning  all or any  portion of its  rights  and  interest
hereunder  or  under  any  Note to any  Federal  Reserve  Bank as  security  for
borrowings therefrom; provided, however, that no such pledge or assignment shall
release a Lender from any of its obligations hereunder.

     (f) Any Lender or  participant  may, in connection  with any  assignment or
participation or proposed assignment or participation  pursuant to this Section,
disclose to the Assignee or Participant or proposed  Assignee or Participant any
information relating to the Borrower and its Subsidiaries  furnished to it by or
on behalf of any other party hereto,  provided that such Assignee or Participant
or proposed  Assignee or Participant  agrees in writing to keep such information
confidential to the same extent required of the Lenders under Section 11.13.

     11.8 No  Waiver.  The  rights  and  remedies  of the Agent and the  Lenders
expressly  set  forth in this  Agreement  and the  other  Credit  Documents  are
cumulative  and in  addition  to, and not  exclusive  of,  all other  rights and
remedies  available at law, in equity or  otherwise.  No failure or delay on the
part of the Agent or any  Lender in  exercising  any right,  power or  privilege
shall operate as a waiver thereof,  nor shall any single or partial  exercise of
any such right, power or privilege preclude other or further exercise thereof or
the  exercise of any other  right,  power or  privilege  or be construed to be a
waiver of any Default or Event of Default.  No course of dealing  between any of
the Borrower and the Agent or the Lenders or their agents or employees  shall be
effective to amend,  modify or discharge any provision of this  Agreement or any
other  Credit  Document  or to  constitute  a waiver of any  Default or Event of
Default.  No notice to or demand upon the Borrower in any case shall entitle the
Borrower  to any  other  or  further  notice  or  demand  in  similar  or  other
circumstances  or constitute a waiver of the right of the Agent or any Lender to

                                       86
<PAGE>
exercise  any  right or  remedy  or take  any  other or  further  action  in any
circumstances without notice or demand.

     11.9 Successors and Assigns. This Agreement shall be binding upon, inure to
the benefit of and be enforceable  by the  respective  successors and assigns of
the parties  hereto,  and all references  herein to any party shall be deemed to
include its successors  and assigns;  provided,  however,  that (i) the Borrower
shall not sell,  assign or  transfer  any of its  rights,  interests,  duties or
obligations under this Agreement without the prior written consent of all of the
Lenders  and (ii) any  Assignees  and  Participants  shall have such  rights and
obligations with respect to this Agreement and the other Credit Documents as are
provided for under and pursuant to the provisions of Section 11.7.

     11.10 Survival.  All representations,  warranties and agreements made by or
on behalf of the Borrower or any of its  Subsidiaries  in this  Agreement and in
the other Credit  Documents  shall survive the execution and delivery  hereof or
thereof, the making and repayment of the Loans and the issuance and repayment of
the Letters of Credit.  In addition,  notwithstanding  anything  herein or under
applicable  law to the contrary,  the provisions of this Agreement and the other
Credit  Documents  relating  to  indemnification  or payment of fees,  costs and
expenses,  including,  without  limitation,  the provisions of Sections 2.16(a),
2.16(b),  2.17,  2.18, 10.7, 11.1 and 11.2, shall survive the payment in full of
all Loans and Letters of Credit,  the  termination  of the  Commitments  and all
Letters of Credit,  and any  termination  of this  Agreement or any of the other
Credit Documents.

     11.11  Severability.  To the  extent any  provision  of this  Agreement  is
prohibited  by or invalid under the  applicable  law of any  jurisdiction,  such
provision  shall  be  ineffective  only to the  extent  of such  prohibition  or
invalidity and only in such  jurisdiction,  without  prohibiting or invalidating
such  provision in any other  jurisdiction  or the remaining  provisions of this
Agreement in any jurisdiction.

     11.12  Construction.  The  headings of the various  articles,  sections and
subsections of this Agreement have been inserted for convenience  only and shall
not in any way  affect  the  meaning or  construction  of any of the  provisions
hereof.  Except as otherwise  expressly  provided herein and in the other Credit
Documents,  in the event of any  inconsistency or conflict between any provision
of this  Agreement and any provision of any of the other Credit  Documents,  the
provision of this Agreement shall control.

     11.13 Confidentiality. Each Lender agrees to keep confidential, pursuant to
its customary  procedures  for handling  confidential  information  of a similar
nature and in accordance  with safe and sound banking  practices,  all nonpublic
information  provided  to it by or on  behalf  of  the  Borrower  or  any of its
Subsidiaries  in connection  with this  Agreement or any other Credit  Document;
provided,  however,  that any Lender may disclose  such  information  (i) to its
directors,  employees, agents, auditors, counsel and other professional advisors
that such Lender has reasonably  determined need to know such information,  (ii)
at the  demand  or  request  of any bank  regulatory  authority,  court or other
Governmental Authority having or asserting jurisdiction over such Lender, as may
be required  pursuant to subpoena or other legal process,  or otherwise in order
to comply with any applicable  Requirement of Law, (iii) in connection  with any

                                       87
<PAGE>
proceeding to enforce its rights hereunder or under any other Credit Document or
any other  litigation  or proceeding  related  hereto or to which it is a party,
(iv) to the Agent or any other  Lender,  (v) to the  extent  the same has become
publicly available other than as a result of a breach of this Agreement and (vi)
pursuant to and in accordance with the provisions of Section 11.7(f).

     11.14  Counterparts;  Effectiveness.  This Agreement may be executed in any
number of counterparts and by different parties hereto on separate counterparts,
each of which when so executed and  delivered  shall be an original,  but all of
which shall  together  constitute  one and the same  instrument.  This Agreement
shall become effective upon the execution of a counterpart hereof by each of the
parties  hereto  and  receipt  by the  Agent  and the  Borrower  of  written  or
telephonic notification of such execution and authorization of delivery thereof.

     11.15  Disclosure of  Information.  The Borrower agrees and consents to the
Agent's  disclosure of information  relating to this  transaction to Gold Sheets
and other similar bank trade publications. Such information will consist of deal
terms and other information customarily found in such publications.

     11.16  Entire  Agreement.  THIS  AGREEMENT  AND  THE  OTHER  DOCUMENTS  AND
INSTRUMENTS  EXECUTED AND DELIVERED IN CONNECTION HEREWITH (A) EMBODY THE ENTIRE
AGREEMENT AND  UNDERSTANDING  BETWEEN THE PARTIES HERETO AND THERETO RELATING TO
THE  SUBJECT  MATTER  HEREOF  AND  THEREOF,  (B)  SUPERSEDE  ANY AND  ALL  PRIOR
AGREEMENTS AND UNDERSTANDINGS OF SUCH PERSONS, ORAL OR WRITTEN,  RELATING TO THE
SUBJECT MATTER HEREOF AND THEREOF, INCLUDING, WITHOUT LIMITATION, THE COMMITMENT
LETTER FROM FIRST  UNION TO THE  BORROWER  DATED JULY 17, 1998 BUT  SPECIFICALLY
EXCLUDING THE FEE LETTER, AND (C) MAY NOT BE AMENDED, SUPPLEMENTED, CONTRADICTED
OR OTHERWISE  MODIFIED BY EVIDENCE OF PRIOR,  CONTEMPORANEOUS OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES.

                                       88
<PAGE>
     IN WITNESS  WHEREOF,  the parties  hereto have caused this  Agreement to be
executed by their duly authorized officers as of the date first above written.


                                     PENN-AMERICA GROUP, INC.

                                     By:/s/ Jon S Saltzman

                                     Title: President
                                            ----------------------------------













                             (signatures continued)

                                       89
<PAGE>


                                         FIRST UNION NATIONAL BANK, as Agent
                                         and as a Lender
                                         By: __________________________________
Commitment:
$25,000,000                              Title: _______________________________


                                         Instructions for wire
                                         transfers to the Agent:

                                         First Union National Bank
                                         ABA Routing No. 031201467
                                         Charlotte, North Carolina
                                         Account Number: 465906 5101544
                                         Reference: Penn-America Group, Inc.
                                         Attention: Callie Moses

                                         Address for notices as a Lender:

                                         First Union National Bank
                                         Financial Institutions Group
                                         1339 Chestnut Street, PA4819
                                         Philadelphia, Pennsylvania  19101-4819
                                         Attention: Joseph DiFrancesco
                                         Telephone: (215) 973-2944
                                         Telecopy: (215) 786-4114

                                         Lending Office:

                                         First Union National Bank
                                         One First Union Center, 5th Floor
                                         301 South College Street
                                         Charlotte, North Carolina 28288-0735
                                         Attention: Callie Moses
                                         Telephone: (704) 383-9326
                                         Telecopy: (704) 383-7611


                                       90
<PAGE>
                                    EXHIBIT A


                               Borrower's Taxpayer Identification No. 23-2731409

                                  FORM OF NOTE


$___________                                                  ____________, 1998
                                                       Charlotte, North Carolina


     FOR VALUE RECEIVED,  PENN-AMERICA  GROUP, INC., a Pennsylvania  corporation
(the "Borrower"), hereby promises to pay to the order of

     ______________________________  (the  "Lender"),  at the  offices  of First
Union National Bank (the "Agent")  located at One First Union Center,  301 South
College Street,  Charlotte,  North Carolina (or at such other place or places as
the Agent may designate),  at the times and in the manner provided in the Credit
Agreement,   dated  as  of  _______________,   1998  (as  amended,  modified  or
supplemented from time to time, the "Credit Agreement"), among the Borrower, the
Lenders from time to time parties  thereto,  and First Union  National  Bank, as
Agent, the principal sum of

     __________________________ DOLLARS ($___________), or such lesser amount as
may  constitute  the unpaid  principal  amount of the Loans made by the  Lender,
under the terms and  conditions  of this  promissory  note (this "Note") and the
Credit Agreement. The defined terms in the Credit Agreement are used herein with
the same meaning. The Borrower also unconditionally  promises to pay interest on
the  aggregate  unpaid  principal  amount of this  Note at the rates  applicable
thereto from time to time as provided in the Credit Agreement.

     This Note is one of a series of Notes  referred to in the Credit  Agreement
and is issued to  evidence  the Loans made by the Lender  pursuant to the Credit
Agreement.  All of the terms,  conditions and covenants of the Credit  Agreement
are expressly  made a part of this Note by reference in the same manner and with
the same effect as if set forth herein at length, and any holder of this Note is
entitled to the benefits of and remedies  provided in the Credit  Agreement  and
the other  Credit  Documents.  Reference  is made to the  Credit  Agreement  for
provisions  relating to the interest  rate,  maturity,  payment,  prepayment and
acceleration of this Note.

     In the event of an  acceleration  of the  maturity of this Note,  this Note
shall become immediately due and payable, without presentation,  demand, protest
or notice of any kind, all of which are hereby waived by the Borrower.


<PAGE>
     In the event  this Note is not paid when due at any  stated or  accelerated
maturity, the Borrower agrees to pay, in addition to the principal and interest,
all costs of collection, including reasonable attorneys' fees.

     This  Note  shall be  governed  by and  construed  in  accordance  with the
internal  laws and  judicial  decisions  of the  State of  North  Carolina.  The
Borrower  hereby  submits  to the  nonexclusive  jurisdiction  and  venue of the
federal and state courts located in Mecklenburg County, North Carolina, although
the Lender shall not be limited to bringing an action in such courts.

     IN WITNESS WHEREOF, the Borrower has caused this Note to be executed by its
duly authorized corporate officer as of the day and year first above written.


                                         PENN-AMERICA GROUP, INC.


                                         By: __________________________________

                                         Title: _______________________________

<PAGE>
                                   EXHIBIT B-1


                                     FORM OF
                               NOTICE OF BORROWING

                                     [Date]


First Union National Bank
One First Unioin Center, 5th Floor
301 South College Street
Charlotte, North Carolina  28288-0735
Attention: Callie Moses

Ladies and Gentlemen:

     The undersigned,  PENN-AMERICA GROUP, INC. (the "Borrower"),  refers to the
Credit  Agreement,  dated as of  _________________,  1998,  among the  Borrower,
certain banks and other financial institutions from time to time parties thereto
(the  "Lenders"),  and you, as Agent for the Lenders  (as  amended,  modified or
supplemented  from time to time,  the  "Credit  Agreement,"  the  terms  defined
therein being used herein as therein  defined),  and, pursuant to Section 2.2(b)
of the Credit Agreement, hereby gives you, as Agent, irrevocable notice that the
Borrower requests a Borrowing of Loans under the Credit  Agreement,  and to that
end sets forth below the  information  relating to such Borrowing (the "Proposed
Borrowing") as required by Section 2.2(b) of the Credit Agreement:

               (i) The aggregate  principal amount of the Proposed  Borrowing is
          $_______________.1

               (ii)  The  Loans  comprising  the  Proposed  Borrowing  shall  be
          initially made as [Base Rate Loans] [LIBOR Loans].2

               [(iii) The initial Interest Period for the LIBOR Loans comprising
          the Proposed Borrowing shall be [one/two/three/six months].]3

               (iv)  The   Proposed   Borrowing  is  requested  to  be  made  on
          __________________ (the "Borrowing Date").4

1    Amount of Proposed  Borrowing must comply with Section 2.2(b) of the Credit
     Agreement.

2    Select the applicable Typr of Loans

3    Include this clause in the case of a Proposed Borrowing  comprised of LIBOR
     Loans, and select the applicable Interest Period.

<PAGE>
The Borrower hereby  certifies that the following  statements are true on and as
of the date hereof and will be true on and as of the Borrowing Date:

          A. Each of the representations  and warranties  contained in Article V
     of the Credit  Agreement  and in the other Credit  Documents is and will be
     true and  correct on and as of each such date,  with the same  effect as if
     made on and as of each such date, both immediately  before and after giving
     effect to the Proposed  Borrowing  and to the  application  of the proceeds
     therefrom  (except to the extent any such  representation  or  warranty  is
     expressly  stated to have been made as of a  specific  date,  in which case
     such representation or warranty shall be true and correct as of such date);

          B. No Default or Event of Default has  occurred and is  continuing  or
     would result from the Proposed  Borrowing  or from the  application  of the
     proceeds therefrom; and

          C. After giving effect to the Proposed  Borrowing,  the sum of (i) the
     aggregate  principal  amount of Loans  outstanding,  and (ii) the aggregate
     Letter of Credit  Exposure of all  Lenders,  will not exceed the  aggregate
     Credit Commitment

                                     Very truly yours,

                                     PENN-AMERICA GROUP, INC.


                                     By: ___________________________________

                                     Title: __________________________________



4    Shall be a Business Day at least one Business Day after the date hereof (in
     the case of Base Rate Loans) or at least three Business Days after the date
     hereof (in the case of LIBOR Loans).



<PAGE>
                                   EXHIBIT B-2


                                     FORM OF
                        NOTICE OF CONVERSION/CONTINUATION

                                     [Date]


First Union National Bank
One First Unioin Center, 5th Floor
301 South College Street
Charlotte, North Carolina  28288-0735
Attention: Callie Moses

Ladies and Gentlemen:

     The undersigned,  PENN-AMERICA GROUP, INC. (the "Borrower"),  refers to the
Credit Agreement, dated as of _______________, 1998, among the Borrower, certain
banks and other  financial  institutions  from time to time parties thereto (the
"Lenders"),  and  you,  as  Agent  for the  Lenders  (as  amended,  modified  or
supplemented  from time to time,  the  "Credit  Agreement,"  the  terms  defined
therein being used herein as therein defined),  and, pursuant to Section 2.11(b)
of the Credit Agreement, hereby gives you, as Agent, irrevocable notice that the
Borrower  requests  a  [conversion]  [continuation]1  of Loans  under the Credit
Agreement,  and to that end sets forth  below the  information  relating to such
[conversion]  [continuation]  (the "Proposed  [Conversion]  [Continuation]")  as
required by Section 2.11(b) of the Credit Agreement:

          (i) The Proposed  [Conversion]  [Continuation] is requested to be made
     on _______________.2

          (ii) The Proposed [Conversion]  [Continuation] involves $____________3
     in  aggregate  principal  amount of Loans made  pursuant to a Borrowing  on
     ________________,4  which  Loans are  presently  maintained  as 
________________________

1    Insert "conversion" or "continuation" throughout the notice, as applicable.
     

2    Shall be a Business Day at least one Business Day after the date hereof (in
     the case of any conversion of LIBOR Loans into Base Rate Loans) or at least
     three Business Days after the date hereof (in the case of any conversion of
     Base Rate Loans into, or continuation of, LIBOR Loans),  and  additionally,
     in the case of any  conversion  of LIBOR  Loans  into Base Rate  Loans,  or
     continuation  of LIBOR Loans,  shall be the last day of the Interest Period
     applicable to such LIBOR Loans.

3    Amount of Proposed  Conversion  or  Continuation  must comply with  Section
     2.11(a) of the Credit Agreement.

4    Insert the  applicable  Borrowing  Date for the Loans  being  converted  or
     continued. 

<PAGE>
     [Base Rate]  [LIBOR] Loans and are proposed  hereby to be  [converted  into
     Base Rate Loans] [converted into LIBOR Loans] [continued as LIBOR Loans].5

          [(iii) The  initial  Interest  Period for the Loans  being  [converted
     into]  [continued  as] LIBOR Loans  pursuant to the  Proposed  [Conversion]
     [Continuation] shall be [one/two/three/six months].]6

     The Borrower hereby certifies that the following  statement is true both on
and as of the date hereof and on and as of the  effective  date of the  Proposed
[Conversion]  [Continuation]:  no Default  or Event of Default  has or will have
occurred  and is  continuing  or would  result  from the  Proposed  [Conversion]
[Continuation].

                                    Very truly yours,

                                    PENN-AMERICA GROUP, INC.


                                    By: ___________________________________

                                    Title: __________________________________











5    Complete with the applicable  bracketed  language.  

6    Include this clause in the case of a Proposed  Conversion  or  Continuation
     involving a conversion of Base Rate Loans into, or  continuation  of, LIBOR
     Loans, and select the applicable Interest Period.
<PAGE>
                                   EXHIBIT B-3


                                     FORM OF
                             LETTER OF CREDIT NOTICE

                                     [Date]


First Union National Bank
One First Unioin Center, 5th Floor
301 South College Street
Charlotte, North Carolina  28288-0735
Attention: Callie Moses

Ladies and Gentlemen:

     The undersigned,  PENN-AMERICA GROUP, INC. (the "Borrower"),  refers to the
Credit  Agreement,  dated as of  ___________________,  1998, among the Borrower,
certain banks and other financial institutions from time to time parties thereto
(the  "Lenders"),  and you, as Agent for the Lenders  (as  amended,  modified or
supplemented  from time to time,  the  "Credit  Agreement,"  the  terms  defined
therein being used herein as therein  defined),  and, pursuant to Section 3.2 of
the Credit Agreement,  hereby gives you, as Issuing Lender,  irrevocable  notice
that the Borrower requests the issuance of a Letter of Credit for the account of
PAIC  under  the  Credit  Agreement,  and to  that  end  sets  forth  below  the
information relating to such Letter of Credit (the "Requested Letter of Credit")
as required by Section 3.2 of the Credit Agreement:

          (i) The Requested  Letter of Credit is to be issued for the account of
     Penn-America Insurance Company, a Wholly Owned Subsidiary of the Borrower.

          (ii) The  Business  Day on which  the  Requested  Letter  of Credit is
     requested to be issued is _______________.1



          (iii)  The  Stated  Amount  of  the  Requested  Letter  of  Credit  is
     $____________.

          (iv)  The  expiry   date  of  the   Requested   Letter  of  Credit  is
     ____________.  [The  undersigned  requests  that  the  expiry  date  of the
     Requested  Letter of Credit be  subject  to  extension,  on such  terms and
     conditions  acceptable to the Issuing Lender, for successive periods of one
     year or less until such time as the Issuing  Lender shall

1    Shall be at  least  three  Business  Days (or  such  shorter  period  as is
     acceptable to the Issuing Lender in any given case) after the date hereof.

<PAGE>
     have delivered a notice of nonrenewal to the  beneficiary of such Requested
     Letter of  Credit  provided  that no  Requested  Letter of Credit  shall be
     renewed  for a term that would  expire  beyond the seventh day prior to the
     Maturity Date.]2.

          (v) The name and address of the beneficiary of the Requested Letter of
     Credit is ------------.

     The undersigned agrees to complete all application procedures and documents
required by you in connection with the Requested Letter of Credit.

     The undersigned hereby certifies that the following  statements are true on
the date hereof and will be true on the date of issuance of the Requested Letter
of Credit:

          A. Each of the representations  and warranties  contained in Article V
     of the Credit  Agreement  and in the other Credit  Documents is and will be
     true and  correct on and as of each such date,  with the same  effect as if
     made on and as of each such date, both immediately  before and after giving
     effect to the  issuance of the  Requested  Letter of Credit  (except to the
     extent any such representation or warranty is expressly stated to have been
     made as of a specific date, in which case such  representation  or warranty
     shall be true and correct as of such date);

          B. No Default or Event of Default has  occurred and is  continuing  or
     would result from the issuance of the Requested Letter of Credit; and

          C. After  giving  effect to the  issuance of the  Requested  Letter of
     Credit, the sum of (i) the aggregate principal amount of Loans outstanding,
     and (ii) the aggregate  Letter of Credit Exposure of all Lenders,  will not
     exceed the aggregate Commitments.

                                        Very truly yours,

                                        PENN-AMERICA GROUP, INC.


                                        By: ___________________________________

                                        Title: ________________________________



2    Include this clause in case of an "evergreen" Letter of Credit.

<PAGE>
                                   EXHIBIT C-1


                                     FORM OF
                             COMPLIANCE CERTIFICATE
                                     (GAAP)


     THIS  CERTIFICATE  is  given  pursuant  to  Section  6.3(a)  of the  Credit
Agreement,   dated  as  of  _______________,   1998  (as  amended,  modified  or
supplemented  from time to time,  the  "Credit  Agreement,"  the  terms  defined
therein being used herein as therein defined),  among  PENN-AMERICA  GROUP, INC.
(the  "Borrower"),  certain banks and other financial  institutions from time to
time parties  thereto (the  "Lenders"),  and First Union National Bank, as Agent
for the Lenders.

     The undersigned hereby certifies that:

     1. [He][She] is the duly elected [chief financial officer][vice  president,
finance] [principal accounting officer] [treasurer] of the Borrower.

     2. Enclosed with this Certificate are copies of the financial statements of
the  Borrower  and  its   Subsidiaries   as  of   _____________,   and  for  the
[________-month  period]  [year] then  ended,  required  to be  delivered  under
Section [6.1(a)][6.1(b)] of the Credit Agreement. Such financial statements have
been prepared in accordance with GAAP [(subject to the absence of notes required
by GAAP and subject to normal  year-end  adjustments)]1  and fairly  present the
financial condition of the Borrower and its Subsidiaries on a consolidated basis
as of the date  indicated  and the results of  operation of the Borrower and its
Subsidiaries on a consolidated basis for the period covered thereby.

     3. The undersigned  has reviewed the terms of the Credit  Agreement and has
made, or caused to be made under the supervision of the undersigned, a review in
reasonable  detail of the  transactions  and  condition  of the Borrower and its
Subsidiaries during the accounting period covered by such financial statements.

     4. The examination described in paragraph 3 above did not disclose, and the
undersigned  has no  knowledge  of the  existence  of,  any  Default or Event of
Default during or at the end of the accounting  period covered by such financial
statements or as of the date of this Certificate. [, except as set forth below.

1    Insert in the case of quarterly statements.
<PAGE>
Describe here or in a separate attachment any exceptions to paragraph 4 above by
listing,  in reasonable  detail,  the nature of the Default or Event of Default,
the period during which it existed and the action that the Borrower has taken or
proposes to take with respect thereto.]

     5. Attached to this  Certificate  as Attachment A is a Covenant  Compliance
Worksheet  reflecting the computation of the financial covenants subject to GAAP
set forth in Sections  7.1,  7.2 and 7.3 of the Credit  Agreement as of the last
day of the period covered by the financial statements enclosed herewith.

     IN WITNESS  WHEREOF,  the  undersigned  has  executed  and  delivered  this
Certificate as of the _______ day of -------------, ----.


                                     PENN-AMERICA GROUP, INC.


                                     By:      _________________________________

                                     Name:    _________________________________

                                     Title:   _________________________________




<PAGE>
                                  ATTACHMENT A

                          COVENANT COMPLIANCE WORKSHEET


             A. Leverage Ratio (Section 7.1 of the Credit Agreement)
                          (shall not exceed 0.35:1.00)


(1)      Consolidated Indebtedness as of the date
         of determination

         (a)      Indebtedness set forth on the
                  Borrower's consolidated balance
                  sheet                          $______________

         (b)      Other Indebtedness of the
                  Borrower or any Subsidiary
                  (Please list separately)

                  PAIC                           $______________
                  PSIC                           $______________
                  (list any others)              $______________

         (c)      Consolidated Indebtedness of the
                  Borrower (sum of Lines 1(a) and 1(b))            $ 
                                                                    ===========

(2)      Sum of Consolidated Indebtedness and
         Consolidated Net Worth as of the date of
         determination

         (a)      Consolidated Indebtedness
                  (from Line 1(c) above)         $______________

         (b)      Consolidated Net Worth
                  (from balance sheet, exclusive of
                  Disqualified Capital Stock)    $______________

         (c)      Sum of Lines 2(a) and 2(b)                       $  
                                                                    ===========

(3)      Leverage Ratio:
              Divide Line 1(c) by Line 2(c)                         ===========

                                       i
<PAGE>
         B. Consolidated Net Worth (Section 7.2 of the Credit Agreement)
                      (line 1 may not be less than line 3)


(1)      Actual Consolidated Net Worth (as of date of determination) $
                                                                      =========
(2)      Base for calculating required Consolidated Net Worth

         (a)      85% of Consolidated Net Worth as of 6/30/98 $__________

         (b)      50% of aggregate of Consolidated Net Income for each fiscal
                  quarter ending after 6/30/98 (Consolidated Net Income for any
                  such quarter
                  included only if positive)                  $__________

         (c)      75% of aggregate increases from
                  issuance of equity securities               $__________

         (d)      Stock repurchases occurring between
                  6/30/98 and 9/30/992                        $__________

(3)      Required Consolidated Net Worth:
                  (Line 2(a) plus Line 2(b) plus
                  Line 2(c) minus Line 2(d))                         $
                                                                      =========


                                       ii
<PAGE>
      C. Fixed Charge Coverage Ratio (Section 7.3 of the Credit Agreement)
                       (shall not be less than 1.25 : 1.0)

(1)      Available coverage as of the last day of any period of four consecutive
         fiscal quarters (the "Measurement Period"):

         (a)      Available Dividend Amount for the
                  Measurement Period (list by
                  Insurance Subsidiary other than
                  Subsidiaries of Insurance
                  Subsidiaries):

                   (i)     PAIC                                $__________

                  (ii)     Other (list separately)             $__________

                 (iii)     Total                               $__________


         (b)      Net Tax Sharing Payments with respect
                  to the Measurement Period

                   (i)     Tax Payments received by Borrower   $__________
                           
                  (ii)     Tax Payments to be received by
                           Borrower                            $__________
                           
                 (iii)     Tax Payments made by Borrower       $__________
                           
                  (iv)     Tax Payments to be made by Borrower $__________
                           
                   (v)     Net Payments (the sum of Lines 1(b)
                           (i) and 1(b)(ii) minus Lines 1(b)
                           (iii) and 1(b)(iv)                  $__________
                                     

                                      iii
<PAGE>
         (c)      Combined Net Cash Flow of
                  non-Insurance Subsidiaries for the
                  Measurement Period (attach detail)           $__________

         (d)      Holding Company Expenses accrued
                  during the Measurement Period                $__________

         (e)      Available coverage: add Lines
                  1(a)(iii), 1(b)(v) and 1(c), and
                  subtract Line 1(d)                                $ 
                                                                     ==========
(2)      Fixed Charges:

         (a)      Debt Service for the period of four consecutive fiscal
                  quarters immediately following the Measurement Period (the
                  "Pro Forma
                  Period")

                   (i)     Debt Service on the Loans           $__________
                           
                  (ii)     Debt Service on other consolidated
                           Indebtedness                        $__________
                           
                 (iii)     Total Debt Service (add Lines
                           2(a)(i) and 2(a)(ii))               $__________
                                   

         (b)      Dividends to shareholders of the Borrower for the Pro Forma
                  Period (based upon the most recent
                  quarterly rate)                              $__________

         (c)      Stock purchases for the Measurement Period (net of stock
                  repurchases occurring between 6/30/98 and 9/30/99 in the
                  amount
                  of _________3)                               $__________

1    Not to exceed $10,000,000.

                                       iv
<PAGE>
         (d)      Fixed Charges:
                      Add Lines 2(a)(iii), 2(b) and 2(c)           $ 
                                                                    ===========


(3)      Fixed Charge Coverage Ratio:
              Divide Line 1(e) by Line 2(d)                         ===========


                                       v

<PAGE>
                                   EXHIBIT C-2


                                     FORM OF
                             COMPLIANCE CERTIFICATE
                                      (SAP)


     THIS  CERTIFICATE  is  given  pursuant  to  Section  6.3(a)  of the  Credit
Agreement, dated as of ___________________ (as amended,  modified,  supplemented
or restated from time to time, the "Credit Agreement," the terms defined therein
being used herein as therein  defined),  among  PENN-AMERICA  GROUP,  INC.  (the
"Borrower"),  certain banks and other financial  institutions  from time to time
parties  thereto (the "Lenders") and First Union National Bank, as Agent for the
Lenders.  Capitalized  terms  used  herein  without  definition  shall  have the
meanings given to them in the Credit Agreement.

     The undersigned hereby certifies that:

     1. [He] [She] is the duly elected [chief financial officer][vice president,
finance] [principal accounting officer] [treasurer] of the Borrower.

     2. Enclosed  with this  Certificate  are copies of the statutory  financial
statements  of  each  Insurance  Subsidiary  as of  ______________,  and for the
[_________________-month  period]  [year] then ended,  required to be  delivered
under Section [6.2(a)] [6.2(b)] [6.2(c)] of the Credit Agreement. Such statutory
financial  statements have been prepared in accordance with Statutory Accounting
Principles  and  fairly  present  the  financial  condition  of  each  Insurance
Subsidiary as of the date  indicated and the results of  operations,  changes in
capital and surplus and cash flow of each  Insurance  Subsidiary  for the period
covered thereby.

     3. The undersigned  has reviewed the terms of the Credit  Agreement and has
made, or caused to be made under the supervision of the undersigned, a review in
reasonable  detail of the  transactions  and  condition  of the Borrower and its
Subsidiaries during the accounting period covered by such financial statements.

     4. The examination described in paragraph 3 above did not disclose, and the
undersigned  has no  knowledge  of the  existence  of,  any  Default or Event of
Default during or at the end of the accounting  period covered by such financial
statements or as of the date of this Certificate. [, except as set forth below.

     Describe  here or in a separate  attachment  any  exceptions to paragraph 4
above by listing,  in reasonable  detail,  the nature of the Default or Event of
Default, the period during which it existed and the action that the Borrower has
taken or proposes to take with respect thereto.]

     5. Attached to this  Certificate  as Attachment A is a Covenant  Compliance
Worksheet  reflecting the computation of the financial  covenants subject to SAP
set forth in Sections  7.4,  7.5 

                                       i
<PAGE>
and 7.6 of the Credit  Agreement as of the last day of the period covered by the
financial statements enclosed herewith.

     IN WITNESS  WHEREOF,  the  undersigned  has  executed  and  delivered  this
Certificate as of the ______ day of ------------, ------.


                                  PENN-AMERICA GROUP, INC.


                                  By:      ____________________________________

                                  Name:    ____________________________________

                                  Title:   ____________________________________


                                       ii

<PAGE>
                                  ATTACHMENT A

                          COVENANT COMPLIANCE WORKSHEET


        A. Risk-Based Capital Ratio (Section 7.4 of the Credit Agreement)

(1)      PAIC

         (a)      Applicable Company Action Level
                  RBC4                                             $ 
                                                                    ===========

         (b)      Minimum total adjusted capital1 the as of the
                  date of determination (multiply Line 1 by 1.50)  $ 
                                                                    ===========

         (c)      Total adjusted capital as of the
                  determination date                               $ 
                                                                    ===========

(2)      [Each other Material Insurance Subsidiary
         (excluding Subsidiaries of Insurance
         Subsidiaries)] [Repeat Lines 2(a)-(c) as
         needed]

         (a)      Applicable Company Action Level RBC              $ 
                                                                    ===========

         (b)      Minimum total adjusted capital the as of the
                  date of determination (multiply Line 1 by 1.50)  $ 
                                                                    ===========

         (c)      Total adjusted capital as of the
                  determination date                               $ 
                                                                    ===========



(1)  "Company Action Level RBC" and "total  adjusted  capital" have the meanings
     given to such terms in the Risk-Based Capital for Insurers Model Act.

<PAGE>


(3)      [Other Material Insurance 
         Subsidiaries] [Repeat Lines 3(a)-(c)
         as needed]

         (a)      Applicable Company Action Level RBC              $ 
                                                                    ===========

         (b)      Minimum total adjusted capital the as of the
                  date of determination (multiply Line 1 by 1.00)  $ 
                                                                    ===========

         (c)      Total adjusted capital as of the
                  determination date                               $ 
                                                                    ===========

                                       2
<PAGE>
                    B. Combined Net Premiums to Capital Ratio
                      (Section 7.5 of the Credit Agreement)
                            (not to exceed 2.25:1.00)


(1)      Combined Net Written Premiums for the period of four
         consecutive fiscal quarters then ending

         (a)      PAIC                                 $__________

         (b)      PSIC                                 $__________

         (c)      Other Insurance Subsidiaries         $__________

         (d)      Total (sum of Lines 1(a)-1(c))                   $ 
                                                                    ===========

(2)      Combined Statutory Capital and Surplus (excluding
         Subsidiaries of Insurance Subsidiaries) as of the date
         of determination

         (a)      PAIC                                 $__________

         (b)      Other Insurance Subsidiaries         $__________

         (c)      Total (sum of Lines 2(a)-2(b))                   $ 
                                                                    ===========
(3)      Combined Net Premiums to Capital Ratio:
         Divide Line (1)(d) by Line (2)(c)                         $ 
                                                                    ===========


                                       3
<PAGE>
                        C. Statutory Capital and Surplus
                      (Section 7.6 of the Credit Agreement)


(1)      Combined Statutory Capital and Surplus as
         of the date of determination                              $ 
                                                                    ===========

(2)      Minimum Combined Statutory Capital and
         Surplus

         (a)      90% of the combined Statutory
                  Capital and Surplus as of 6/30/98       $ 
                                                           ===========

         (b)      $78,000,000 plus 50% of 
                  aggregate increases in capital
                  for the Insurance Subsidiaries 
                  occurring after June 30, 1998           $ 
                                                           ===========

         (c)      Greater of Lines 2(a) and 2(b)                   $ 
                                                                    ===========


                                       4

<PAGE>

                                    EXHIBIT D


                                     FORM OF
                            ASSIGNMENT AND ACCEPTANCE


         THIS ASSIGNMENT AND ACCEPTANCE (this "Assignment and Acceptance") is
made this _____ day of ____________, ____, by and between
_________________________ (the "Assignor") and ________________________ (the
"Assignee"). Reference is made to the Credit Agreement, dated as of
_______________, 1998 (as amended, modified or supplemented from time to time,
the "Credit Agreement"), among PENN-AMERICA GROUP, INC. (the "Borrower"),
certain banks and other financial institutions from time to time parties thereto
(the "Lenders"), and First Union National Bank, as Agent for the Lenders (the
"Agent"). Unless otherwise defined herein, capitalized terms used herein without
definition shall have the meanings given to them in the Credit Agreement.

         The Assignor and the Assignee hereby agree as follows:

         1. Assignment and Assumption. Subject to the terms and conditions
hereof, the Assignor hereby sells and assigns to the Assignee, and the Assignee
hereby purchases and assumes from the Assignor, without recourse to the Assignor
and, except as expressly provided herein, without representation or warranty by
the Assignor, the interest as of the Effective Date (as hereinafter defined) in
and to all of the Assignor's rights and obligations under the Credit Agreement
and the other Credit Documents (in its capacity as a Lender thereunder)
represented by the percentage interest specified under the heading "Assigned
Share" in Item 4 of Annex I (such assigned interest, the "Assigned Share"),
including, without limitation, the Assigned Share of all rights and obligations
of the Assignor with respect to its Commitment, Letter of Credit Exposure, Note
and Loans.

         2. The Assignor. The Assignor (i) represents and warrants that it is
the legal and beneficial owner of the interest being assigned by it hereunder,
that such interest is free and clear of any adverse claim, and that as of the
date hereof the amount of its Commitment and outstanding Loans (and Letter of
Credit Exposure, if applicable) is as set forth in Item 4 of Annex I, (ii)
except as set forth in clause (i) above, makes no representation or warranty and
assumes no responsibility with respect to any statements, warranties or
representations made in or in connection with the Credit Agreement, any other
Credit Document or any other instrument or document furnished pursuant thereto
or the execution, legality, validity, enforceability, genuineness, sufficiency
or value of the Credit Agreement, any other Credit Document or any other
instrument or document furnished pursuant thereto, and (iii) makes no
representation or warranty and assumes no responsibility with respect to the
financial condition of the Borrower or any of its Subsidiaries or the
performance or observance by the Borrower or any of its Subsidiaries of any of
their respective obligations under the Credit Agreement, any other Credit
Document or any other instrument or document furnished pursuant thereto.


<PAGE>
         3. The Assignee. The Assignee (i) represents and warrants that it is
legally authorized to enter into this Assignment and Acceptance, (ii) confirms
that it has received a copy of the Credit Agreement, together with copies of the
financial statements most recently required to have been delivered under
Sections 6.1 and 6.2 of the Credit Agreement and such other documents and
information as it has deemed appropriate to make its own credit analysis and
decision to enter into this Assignment and Acceptance, (iii) agrees that it
will, independently and without reliance upon the Agent, the Assignor or any
other Lender, and based on such documents and information as it shall deem
appropriate at the time, continue to make its own credit decisions in taking or
not taking action under the Credit Agreement, (iv) confirms that it is an
Eligible Assignee, (v) appoints and authorizes the Agent to take such actions as
agent on its behalf under the Credit Agreement and the other Credit Documents,
and to exercise such powers and to perform such duties, as are specifically
delegated to the Agent by the terms thereof, together with such other powers and
duties as are reasonably incidental thereto, and (vi) agrees that it will
perform in accordance with their respective terms all of the obligations that by
the terms of the Credit Agreement are required to be performed by it as a
Lender. [To the extent legally entitled to do so, the Assignee will deliver to
the Agent, as and when required to be delivered under the Credit Agreement, duly
completed and executed originals of the applicable tax withholding forms
described in Section 2.17(d) of the Credit Agreement].1

         4. Effective Date. Following the execution of this Assignment and
Acceptance by the Assignor and the Assignee, an executed original hereof,
together with all attachments hereto, shall be delivered to each of the Agent
and the Borrower (and also to the Agent, the processing fee referred to in
Section 11.7(a) of the Credit Agreement). The effective date of this Assignment
and Acceptance (the "Effective Date") shall be the date designated as the
Effective Date in Item 5 of Annex I. As of the Effective Date, (y) the Assignee
shall be a party to the Credit Agreement and, to the extent provided in this
Assignment and Acceptance, shall have the rights and obligations of a Lender
thereunder and under the other Credit Documents, and (z) the Assignor shall, to
the extent provided in this Assignment and Acceptance, relinquish its rights
(other than rights under the provisions of the Credit Agreement and the other
Credit Documents relating to indemnification or payment of fees, costs and
expenses, to the extent such rights relate to the time prior to the Effective
Date) and be released from its obligations under the Credit Agreement and the
other Credit Documents.

         5. Payments; Settlement. On or prior to the Effective Date, in
consideration of the sale and assignment provided for herein and as a condition
to the effectiveness of this Assignment and Acceptance, the Assignee will pay to
the Assignor an amount (to be confirmed between the Assignor and the Assignee)
that represents the Assigned Share of the principal amount of the Loans made by
the Assignor and outstanding on the Effective Date (together, if and to the
extent the Assignor and the Assignee so elect, with the Assigned Share of any
related accrued but unpaid interest, fees and other amounts). From and after the
Effective Date, the Agent will make all payments required to be made by it under
the Credit Agreement in respect of the interest assigned hereunder (including,
without limitation, all payments of principal, interest and fees in respect of

------------------
1    Insert if the Assignee is organized under the laws of a jurisdiction
     outside the United States.
<PAGE>

the Assigned Share of the Assignor's Commitment and Loans assigned hereunder)
directly to the Assignee. The Assignor and the Assignee shall be responsible for
making between themselves all appropriate adjustments in payments due under the
Credit Agreement in respect of the period prior to the Effective Date. All
payments required to be made hereunder or in connection herewith shall be made
in Dollars by wire transfer of immediately available funds to the appropriate
party at its address for payments designated in Annex I.

         6. Governing Law. This Assignment and Acceptance shall be governed by,
and construed in accordance with, the internal laws of the State of North
Carolina (without regard to the conflicts of laws principles thereof).

         7. Entire Agreement. This Assignment and Acceptance, together with the
Credit Agreement and the other Credit Documents, embody the entire agreement and
understanding between the parties hereto and supersede all prior agreements and
understandings of the parties, verbal or written, relating to the subject matter
hereof.

         8. Successors and Assigns. This Assignment and Acceptance shall be
binding upon, inure to the benefit of and be enforceable by the parties hereto
and their respective successors and assigns.

         9. Counterparts. This Assignment and Acceptance may be executed in any
number of counterparts and by different parties hereto on separate counterparts,
each of which, when so executed and delivered shall be an original, but all of
which shall together constitute one and the same instrument.


                                       3
<PAGE>
         IN WITNESS WHEREOF, the parties have caused this Assignment and
Acceptance to be executed by their duly authorized officers as of the date first
above written.


                                   ASSIGNOR:

                                   --------------------------------
                                   By: ___________________________________

                                   Title: __________________________________



                                   ASSIGNEE:

                                   --------------------------------


                                   By: ___________________________________

                                   Title: __________________________________



Accepted this _______ day of ______________, 19___:

FIRST UNION NATIONAL BANK, as Agent


By: ___________________________________

Title: __________________________________


Consented and agreed to:

PENN-AMERICA GROUP, INC.


By: ___________________________________

Title: __________________________________




                                       4
<PAGE>
                                     ANNEX I


1.       Borrower:         Penn-America Group, Inc.

2.       Name and Date of Credit Agreement:

         Credit Agreement, dated as of _________________, 1998, among
         Penn-America Group, Inc., certain Lenders from time to time parties
         thereto, and First Union National Bank, as Agent.

3.       Date of Assignment and Acceptance:  ________________, 19___.

4.       Amounts:
<TABLE>
<CAPTION>
                                                                                                      Aggregate
                                                                                   Amount of        for Assignor
                                                   Aggregate          Assigned     Assigned      (after assignment)
                                                 for Assignor          Share2       Share

<S>                                             <C>                   <C>         <C>              <C>         
(a)    Commitment                               $_________             _____%     $________        $___________

(b)    Loans3                                   $_________             _____%     $________        $___________

(c)    Letter of Credit Exposure                $_________             _____%     $________        $___________
</TABLE>

5.       Effective Date:  ___________________, 19___. (4)

6.       Addresses for Payments:

         Assignor:                  _________________________________
                                    =================================
                                    Attention: ___________________
                                    Telephone: __________________
                                    Telecopy: ___________________
                                    Reference: __________________


(2)  Percentage taken up to a ten decimal places, if necessary.

(3)  Insert amounts outstanding as of the date of the Assignment and Acceptance.

(4)  Shall be a date not less  than  five  Business  Days  after the date of the
     Assignment and Acceptence.

<PAGE>

         Assignee:                  _________________________________
                                    =================================
                                    Attention: ___________________
                                    Telephone: __________________
                                    Telecopy: ___________________
                                    Reference: __________________


7.       Addresses for Notices:

         Assignor:                  _________________________________
                                    =================================
                                    Attention: ___________________
                                    Telephone: __________________
                                    Telecopy: ___________________

         Assignee:                  _________________________________
                                    =================================
                                    Attention: ___________________
                                    Telephone: __________________
                                    Telecopy: ___________________

8.       Lending Office of Assignee:
         =================================
         ---------------------------------
         Attention: ___________________
         Telephone: __________________
         Telecopy: ___________________


                                       2

<PAGE>
                                    EXHIBIT F


                                     FORM OF
                         FINANCIAL CONDITION CERTIFICATE


         THIS FINANCIAL CONDITION CERTIFICATE is delivered pursuant to Section
4.1(j) of the Credit Agreement, dated as of September ___, 1998 (the "Credit
Agreement"), among PENN-AMERICA GROUP, INC., a Pennsylvania corporation (the
"Borrower"), certain banks and other financial institutions from time to time
parties thereto (the "Lenders"), and First Union National Bank, as Agent.
Capitalized terms used herein without definition shall have the meanings given
to such terms in the Credit Agreement.

         The undersigned hereby certifies for and on behalf of the Borrower as
follows:

         1. Capacity. The undersigned is, and at all pertinent times mentioned
herein has been, the duly qualified and acting chief financial officer of the
Borrower, and in such capacity has responsibility for the management of the
Borrower's financial affairs and for the preparation of the Borrower's financial
statements. The undersigned has, together with other officers of the Borrower,
acted on behalf of the Borrower in connection with the negotiation and
consummation of the Credit Agreement and the consummation of the transactions
contemplated thereby.

         2. Procedures. For purposes of this Certificate, the undersigned has,
as of or prior to the date hereof, undertaken the following activities in
connection herewith:

         2.1      The undersigned has carefully reviewed the following:

                    (a)  the contents of this Certificate;

                    (b)  the  Credit  Agreement   (including  the  exhibits  and
                         schedules thereto);

                    (c)  the audited  consolidated  and unaudited  consolidating
                         balance sheets of the Borrower and its  Subsidiaries as
                         of December  31, 1995,  1996 and 1997,  and the related
                         consolidated  and  consolidating  statements of income,
                         stockholders' equity and cash flows of the Borrower and
                         its Subsidiaries for the fiscal years then ended,  each
                         certified by KPMG Peat Marwick LLP;

                    (d)  the unaudited  consolidated and  consolidating  balance
                         sheets of the Borrower and its  Subsidiaries as of June
                         30,   1998,   and   the   related    consolidated   and
                         consolidating   statements  of  income,   stockholders'
                         equity  and  cash  flows  of  the   Borrower   and  its
                         Subsidiaries for the six-month period then ended; and



<PAGE>

         2.2 Additionally, in preparation for the consummation of the
transactions contemplated by the Credit Agreement, the undersigned has prepared
or supervised the preparation of and has reviewed (i) an unaudited consolidated
balance sheet of the Borrower as of June 30, 1998, a copy of which balance sheet
(together with the supporting detail and underlying assumptions) is attached
hereto as Annex A (the "Pro Forma Balance Sheet"), and (ii) annual projected
balance sheets and statements of income and cash flows of the Borrower on a
consolidated basis for the five-year period ending December 31, 2002, copies of
which projected financial statements (together with the supporting detail and
underlying assumptions) are attached hereto as Annex B (the "Projections").

         2.3 The undersigned, together with the other officers and personnel of
the Borrower who were involved in the preparation of the Pro Forma Balance Sheet
and the Projections, have relied on historical financial and other information
and upon information with respect to sales, costs and other data obtained in
discussions with executive officers of the Borrower and other officers and
supervisory personnel directly responsible for the various operations involved.
The undersigned has reexamined the Pro Forma Balance Sheet and the Projections
as of the date hereof, and has considered the continuing reasonableness of the
assumptions set forth therein and the effect thereon of any changes since the
date of preparation thereof on the financial condition set forth and the results
projected therein.

         2.4 The undersigned has made inquiries of certain other officers and
personnel of the Borrower with responsibility for financial and accounting
matters regarding (i) whether the unaudited financial statements described in
paragraph 2.1(d) above and the Pro Forma Balance Sheet are in conformity with
GAAP applied on a basis consistent with that of the audited financial statements
described in paragraph 2.1(c) above (subject to the absence of footnotes
required by GAAP and subject to normal year-end adjustments), and whether notes
omitted from such unaudited financial statements and the Pro Forma Balance Sheet
would have disclosed any new information that would be necessary to make the
statements contained therein not misleading, and (ii) whether such persons were
aware of any events or conditions that, as of the date hereof, would cause the
statements made in paragraph 3 below to be untrue.

         2.5 With respect to any contingent liabilities of the Borrower on a pro
forma basis after giving effect to the transactions contemplated by the Credit
Agreement, the undersigned:

                    (a)  has inquired of certain officers and other personnel of
                         the  Borrower  who have  responsibility  for the legal,
                         financial and accounting affairs of the Borrower, as to
                         the existence and estimated  amounts of all  contingent
                         liabilities known to them;

                    (b)  has confirmed  with senior  accounting  officers of the
                         Borrower that, to the best of such officers' knowledge,
                         (i)  all  appropriate   items  have  been  included  in
                         contingent liabilities made known to the undersigned in
                         the  course  of  the  inquiry  of  the  undersigned  in
                         connection  herewith,  and  (ii) the  amounts  relating
                         thereto were the maximum estimated amounts of liability
                         reasonably  likely to result  therefrom  as of the date
                         hereof, and


<PAGE>

                    (c)  confirms  that,  to  the  best  of his  knowledge,  all
                         material contingent liabilities that may arise from any
                         pending  litigation,  asserted claims and  assessments,
                         guarantees,   uninsured   risks,   and  other  relevant
                         contingencies and circumstances have been considered in
                         making the  certification  set forth  herein,  and with
                         respect to each such  contingent  liability the maximum
                         estimated  amount of liability with respect thereto was
                         used in making such certification.

         2.6 The undersigned has conferred with counsel to the Borrower for the
purpose of discussing the meaning of the contents of this Certificate.

         3. Certifications. Based on the foregoing, the undersigned hereby
certifies as follows:

         3.1 The Pro Forma Balance Sheet attached hereto as Annex A gives pro
forma effect to the consummation of the transactions contemplated by the Credit
Agreement, all as if such events had occurred on June 30, 1998. The Pro Forma
Balance Sheet has been prepared in accordance with GAAP (subject to the absence
of footnotes required by GAAP and subject to normal year-end adjustments) and,
subject to stated assumptions made in good faith and having a reasonable basis
set forth therein, presents fairly the financial condition of the Borrower and
its Subsidiaries on an unaudited pro forma consolidated basis as of the date set
forth therein after giving effect to the consummation of the transactions
contemplated by the Credit Agreement as described above.

         3.2 The Projections attached hereto as Annex B give effect to the
consummation of the transactions contemplated by the Credit Agreement. In the
opinion of the undersigned, the assumptions used in the preparation of the
Projections were fair, complete and reasonable when made and continue to be
fair, complete and reasonable as of the date hereof. The Projections have been
prepared in good faith by the executive and financial personnel of the Borrower,
are complete and represent a reasonable estimate of the future performance and
financial condition of the Borrower and its Subsidiaries, subject to the
uncertainties and approximations inherent in any projections.

         3.3 After giving effect to the transactions contemplated by the Credit
Agreement, all material accounts and other liabilities of the Borrower and its
Subsidiaries are current and not past due.

         3.4 Neither the Borrower nor any Subsidiary is insolvent now, and the
incurrence by the Borrower and each Subsidiary of its liabilities and
obligations pursuant to the Credit Agreement and the other Credit Documents will
not render it insolvent. The undersigned understands that, in this context, (i)
"insolvent" means that the present fair saleable value of assets is less than
the amount that will be required to be paid on or in respect of the existing
debts as such debts mature, (ii) "fair value" of assets means the aggregate
amount that could be realized 


<PAGE>

within a reasonable time, either through collection or sale of such assets at
the regular market value as an ongoing business, conceiving of the latter as the
amount that could be obtained for the property in question within such period by
a capable and diligent seller from an interested buyer who is willing to
purchase under ordinary selling conditions, and (iii) "debts" includes any legal
liability, whether matured or unmatured, liquidated or unliquidated, absolute,
fixed or contingent, including any guaranty or other contingent obligation. The
foregoing is supported by an analysis of the Pro Forma Balance Sheet. A
valuation of the Borrower and its Subsidiaries, on the basis thereof and with
reasonable allowance for error, would reflect the net worth of the Borrower and
its Subsidiaries (on a consolidated basis) in the aggregate (excess of fair
value of assets over liabilities) as not less than $90,000,000.

         3.5 The undersigned reasonably believes that, by the incurrence of its
liabilities and obligations pursuant to the Credit Agreement and the other
Credit Documents neither the Borrower nor any Subsidiary will incur debts beyond
its ability to pay as they mature (taking into account the timing and amounts of
cash to be payable on or in respect of its debts). The foregoing conclusion is
based in part on the Projections, which demonstrate that the cash flow of the
Borrower and its Subsidiaries, after taking into account all anticipated uses of
cash of each such Person, will at all times be sufficient to pay all amounts on
or in respect of Indebtedness of each such Person when such amounts are required
to be paid (including without limitation scheduled payments pursuant to the
Credit Agreement). The undersigned has concluded that the realization of current
assets in the ordinary course of business should be sufficient to pay recurring
current debt, short-term debt and long-term debt as such debts mature, that the
cash flow (including earnings plus non-cash charges to earnings) should be
sufficient to provide cash necessary to repay loans made under the Credit
Agreement and other long-term indebtedness as such debt matures, and that the
Borrower should have sufficient availability under the Credit Agreement to
satisfy its working capital and short-term liquidity requirements.

         3.6 After giving effect to the consummation of the transactions
contemplated by the Credit Agreement, the assets of the Borrower and each
Subsidiary do not constitute "unreasonably small capital" (within the meaning of
Section 548(a) of the Bankruptcy Code, 11 U.S.C. Section 548(a)) for such Person
to carry on its business as now conducted and as proposed to be conducted,
taking into account the particular capital requirements of the business
conducted and to be conducted by it and the availability of capital in respect
thereof (with reference to, without limitation, the Projections and the
Borrower's available credit capacity).

         3.7 Neither the Borrower nor any Subsidiary has executed the Credit
Agreement or any other documents mentioned therein, or made any transfer or
incurred any obligations thereunder, with intent to hinder, delay or defraud
either present or future creditors of such Person.

         3.8 The statements made herein by the undersigned are based upon the
personal knowledge of the undersigned, or upon reports and other information
given to the undersigned by supervisory personnel of the Borrower having
responsibility for the reports and information given, and who in the opinion of
the undersigned are reliable and entitled to be relied upon. The statements made
herein are made in good faith and, to the best of the knowledge and belief of



<PAGE>

the undersigned, and subject to the assumptions set forth in Annexes A and B,
are reasonable in all material respects.

         3.9 The undersigned understands that the Lenders have performed their
own review and analysis of the financial condition of the Borrower, but that the
Lenders are relying on the foregoing statements in connection with the extension
of credit to the Borrower pursuant to the Credit Agreement.



<PAGE>


         Executed this ___ day of September, 1998.



                                  -----------------------------------------
                                  Chief Financial Officer
                                  PENN-AMERICA GROUP, INC.




<PAGE>
                         FINANCIAL CONDITION CERTIFICATE

                                     ANNEX A

                            PENN-AMERICA GROUP, INC.
                             Pro Forma Balance Sheet


                                 [see attached]





<PAGE>



                         FINANCIAL CONDITION CERTIFICATE

                                     ANNEX B

                            PENN-AMERICA GROUP, INC.
                                   Projections


                                 [see attached]



<PAGE>



                             Penn-America Group, Inc
                          Governmental and Third Party
                              Authorization Permits
                                  Schedule 5.4a


                                      NONE





<PAGE>

                          ADMISSION APPLICATINO STATUS
                        LAST REVISION: February 22, 1999
<TABLE>
<CAPTION>
              ==========================================================================================================

                                                                     PENN-AMERICA

              ==========================================================================================================
                                            SURPLUS       APP
              STATE              ADMITTED    LINES        DIFF *                         NOTES
<S>                           <C>            <C>       <C>              <C>
              ----------------------------------------------------------------------------------------------------------
              Alabama             5/14/96
              ----------------------------------------------------------------------------------------------------------
              Alaska              6/7/96
              ----------------------------------------------------------------------------------------------------------
              Arizona             4/1/96
              ----------------------------------------------------------------------------------------------------------
              Arkansas                      5/18/95           2
              ----------------------------------------------------------------------------------------------------------
              California         00/00/83
              ----------------------------------------------------------------------------------------------------------
              Colorado            1/17/95
              ----------------------------------------------------------------------------------------------------------
              Connecticut                  10/31/89           3      App. received; Filing window 3/31 to 10/31
              ----------------------------------------------------------------------------------------------------------
              Delaware            4/5/79
              ----------------------------------------------------------------------------------------------------------
              DC                                  X           2
              ----------------------------------------------------------------------------------------------------------
              Florida                             X          3+
              ----------------------------------------------------------------------------------------------------------
              Georgia                             X           2
              ----------------------------------------------------------------------------------------------------------
              Hawaii              4/15/97
              ----------------------------------------------------------------------------------------------------------
              Idaho               1/8/96
              ----------------------------------------------------------------------------------------------------------
              Illinois           10/10/97
              ----------------------------------------------------------------------------------------------------------
              Indiana            12/31/97     
              ----------------------------------------------------------------------------------------------------------
              Iowa               11/17/97
              ----------------------------------------------------------------------------------------------------------
              Kansas              1/31/97
              ----------------------------------------------------------------------------------------------------------
              Kentucky            1/19/95
              ----------------------------------------------------------------------------------------------------------
              Louisiana                           X          2+
              ----------------------------------------------------------------------------------------------------------
              Maine                               X          2+
              ----------------------------------------------------------------------------------------------------------
              Maryland                            X                  App. received
              ----------------------------------------------------------------------------------------------------------
              Massachusetts                       X          3+
              ----------------------------------------------------------------------------------------------------------
              Michigan           10/13/95
              ----------------------------------------------------------------------------------------------------------
              Minnesota           5/3/91
              ----------------------------------------------------------------------------------------------------------
              Mississippi         11/1/98                     1
              ----------------------------------------------------------------------------------------------------------
              Missouri               X
              ----------------------------------------------------------------------------------------------------------
              Montana             11/3/97     
              ----------------------------------------------------------------------------------------------------------
              Nebraska               X
              ----------------------------------------------------------------------------------------------------------
              Nevada             10/26/95
              ----------------------------------------------------------------------------------------------------------
              N. Hampshire                     9/1/94         3
              ----------------------------------------------------------------------------------------------------------
              N. Jersey                           X           3
              ----------------------------------------------------------------------------------------------------------
              N. Mexico                        7/3/95         3      Admission app filed 6/26/98
              ----------------------------------------------------------------------------------------------------------
              N. York             5/24/95
              ----------------------------------------------------------------------------------------------------------
              N. Carolina                         X           2      Admission app filed 4/2/98 - Not expecting intial review 
                                                                       until 8/98; Initial review to be completed by January, 1999
              ----------------------------------------------------------------------------------------------------------
              N. Dakota              X
              ----------------------------------------------------------------------------------------------------------
              Ohio                   X
              ----------------------------------------------------------------------------------------------------------
              Oklahoma                            X                  App. received
              ----------------------------------------------------------------------------------------------------------
              Oregon                 X
              ----------------------------------------------------------------------------------------------------------
              Pennsylvania           X
              ----------------------------------------------------------------------------------------------------------
              Rhode Island                        X           2
              ----------------------------------------------------------------------------------------------------------
              S. Carolina                         X           2
              ----------------------------------------------------------------------------------------------------------
              S. Dakota              X
              ----------------------------------------------------------------------------------------------------------
              Tennessee           9/18/98                     2      App filed 6/2/98
              ----------------------------------------------------------------------------------------------------------
              Texas                               X           3
              ----------------------------------------------------------------------------------------------------------
              Utah                1/15/98     
              ----------------------------------------------------------------------------------------------------------
              Vermont                             X          3+
              ----------------------------------------------------------------------------------------------------------
              Virginia                            X          3+      App. received
              ----------------------------------------------------------------------------------------------------------
              Washington             X
              ----------------------------------------------------------------------------------------------------------
              W. Virginia                         X           2      App. received
              ----------------------------------------------------------------------------------------------------------
              Wisconsin           6/28/96
              ----------------------------------------------------------------------------------------------------------
              Wyoming                             X           1      App. received
              ----------------------------------------------------------------------------------------------------------
                   Totals           30           21
              ==========================================================================================================
</TABLE>
         Notes:
          1)   "X" indicates  that the state has been  addmitted or approved for
               more than five years
          2)   *  Application  difficulty:  Range  of 1 to 3 (3  being  the most
               difficult)

<PAGE>
                          ADMISSION APPLICATION STATUS
                        Last Revision: February 22, 1999
<TABLE>
<CAPTION>
<S>                <C>            <C>        <C>       <C>           <C>
=================================================================================================================================

                                                                   Penn-Star

=================================================================================================================================
                                   SURPLUS      APP     SEASONING
 STATE               ADMITTED       LINES      DIFF      REQ'S.               NOTES
------------------------------------------------------------------------------------------------------------------------------
Alabama                                                             App.received; No deadline - but now is good time for them
------------------------------------------------------------------------------------------------------------------------------
Alaska
------------------------------------------------------------------------------------------------------------------------------
Arizona                            8/18/97                          App. filed 5/28/97; S/L approval received
------------------------------------------------------------------------------------------------------------------------------
Arkansas                                         2        3 yrs     App. received
------------------------------------------------------------------------------------------------------------------------------
California           11/18/97                                       App. filed 4/4/97
------------------------------------------------------------------------------------------------------------------------------
Colorado                                                            S/L app filing window 3/1 to7/1
------------------------------------------------------------------------------------------------------------------------------
Connecticut                                      3                  App. received;  Filing window 3/31 to 10/31. 
                                                                      Plan to file 2nd Qtr. '98
------------------------------------------------------------------------------------------------------------------------------
Delaware
------------------------------------------------------------------------------------------------------------------------------
DC                                               2        2 yrs     App. received
------------------------------------------------------------------------------------------------------------------------------
Florida                                         3+        3 yrs
------------------------------------------------------------------------------------------------------------------------------
Georgia               7/1/98                     2        0 yrs
------------------------------------------------------------------------------------------------------------------------------
Hawaii
------------------------------------------------------------------------------------------------------------------------------
Idaho
------------------------------------------------------------------------------------------------------------------------------
Illinois             10/10/97
------------------------------------------------------------------------------------------------------------------------------
Indiana                            5/19/98
------------------------------------------------------------------------------------------------------------------------------
Iowa                                                                App. withdrawn 11/6  Requested Surplus Lines app.
------------------------------------------------------------------------------------------------------------------------------
Kansas                             5/19/98
------------------------------------------------------------------------------------------------------------------------------
Kentucky                           6/18/98      2+
------------------------------------------------------------------------------------------------------------------------------
Louisiana                                                           App. received
------------------------------------------------------------------------------------------------------------------------------
Maine                                            2        0 yrs     App. received
------------------------------------------------------------------------------------------------------------------------------
Maryland             5/22/98
------------------------------------------------------------------------------------------------------------------------------
Massachusetts                                   3+        5 yrs     App. received
------------------------------------------------------------------------------------------------------------------------------
Michigan
------------------------------------------------------------------------------------------------------------------------------
Minnesota                                                           App. ordered 3/18; Had moratorium, currently lifted. 
                                                                      Aprox. 6-9 mo. process.
------------------------------------------------------------------------------------------------------------------------------
Mississippi                        11/1/98       1        2 yrs
------------------------------------------------------------------------------------------------------------------------------
Missouri
------------------------------------------------------------------------------------------------------------------------------
Montana              9/25/98
------------------------------------------------------------------------------------------------------------------------------
Nebraska                                                            No deadline - aprox 6 mo. process
------------------------------------------------------------------------------------------------------------------------------
Nevada                                                              Application tentatively approved 12/28/98
------------------------------------------------------------------------------------------------------------------------------
N. Hampshire                                     3        5 yrs     App. received
------------------------------------------------------------------------------------------------------------------------------
N. Jersey                                        3    3 yrs - flexible          App. received
------------------------------------------------------------------------------------------------------------------------------
N. Mexico                          2/17/99       3        3 yrs     S/L app. tentatively approved 2/17/99
------------------------------------------------------------------------------------------------------------------------------
N. York
------------------------------------------------------------------------------------------------------------------------------
N. Carolina                       12/31/97       2        3 yrs
------------------------------------------------------------------------------------------------------------------------------
N. Dakota                                                           App received; Window between 4/1 and 6/30
------------------------------------------------------------------------------------------------------------------------------
Ohio                                                                App received; Deadline was 6/30 - Admission committee decided to
                                                                        complete app by 1/98.
------------------------------------------------------------------------------------------------------------------------------
Oklahoma             3/10/98
------------------------------------------------------------------------------------------------------------------------------
Oregon
------------------------------------------------------------------------------------------------------------------------------
Pennsylvania          2/1/97
------------------------------------------------------------------------------------------------------------------------------
Rhode Island                                     2                  App. received
------------------------------------------------------------------------------------------------------------------------------
S. Carolina          12/15/98                    2        0 yrs
------------------------------------------------------------------------------------------------------------------------------
S. Dakota                                                           App. received
------------------------------------------------------------------------------------------------------------------------------
Tennessee                          5/1/98        2
------------------------------------------------------------------------------------------------------------------------------
Texas                                            3        0 yrs     App. received
------------------------------------------------------------------------------------------------------------------------------
Utah                                                                App. received
------------------------------------------------------------------------------------------------------------------------------
Vermont                                         3+                  App. received
------------------------------------------------------------------------------------------------------------------------------
Virginia                           9/17/98       3
------------------------------------------------------------------------------------------------------------------------------
Washington           8/28/97
------------------------------------------------------------------------------------------------------------------------------
W. Virginia                                      2        5 yrs     App. received; No deadline, aprox. 1 1/2 year process
------------------------------------------------------------------------------------------------------------------------------
Wisconsin
------------------------------------------------------------------------------------------------------------------------------
Wyoming                                          2        2 yrs     App. received
------------------------------------------------------------------------------------------------------------------------------
      Totals            9             8
==============================================================================================================================
</TABLE>

  Notes:
    1) * Application difficulty: Range of 1 to 3 (3 being the most difficult)
<PAGE>
                            Penn-America Group, Inc.
                               List of Subsidiary
                                  Schedule 5.7

                            Penn-America Group, Inc


                                                       Owns 100%


                           Penn-America Insurance Co


                                                       Owns 100%


                             Penn-Star Insurance Co




<PAGE>
                                  Schedule 5.18
                               Material Contracts

     Borrower  and/or its  Subsidiaries  are parties to the  following  material
contracts:

(1)  Amended  Agency  Agreement  between  Penn-America   Insurance  Company  and
     Carnegie General Agency, effective March 1, 1998 (1), providing for general
     agency services from Carnegie to Penn-America;

(2)  Amended Cost Sharing  Agreement between  Penn-America  Group, Inc. and Penn
     Independent  Corporation,  effective January 1, 1998, regarding the sharing
     of certain operating and employment costs;

(3)  Amended  Investment  Advisory  Agreement  between  and  among  Penn-America
     Insurance Company,  Penn-Star Insurance Company and Carl Domino Associates,
     L.P.,  effective  September  1, 1997,  providing  for  investment  advisory
     services from Carl Domino to Penn-America and Penn-Star;

(4)  Investment  Management  Agreement between and among Penn-America  Insurance
     Company,  Penn-Star  Insurance  Company and General  Re-New  England  Asset
     Management,  Inc.,  effective  April 15,  1997,  providing  for  investment
     advisory services from New England to Penn-America and Penn-Star;

(5)  Lease Agreement  between  Penn-America  Group,  Inc. and Irvin Saltzman and
     Marion-Louise  Saltzman,  effective  June 30, 1995  through  June 30, 2000,
     providing for the lease of office space by Penn-America from Irvin Saltzman
     and Marion-Louise Saltzman.




          (1)  Unless   otherwise   indicated,   all  material   contracts   are
               continuously  effective  unless  terminated  in writing by either
               party to the agreement.
<PAGE>
                            Penn-America Group, Inc.
                               Liens In Existence
                                  Schedule 8.3

                                      NONE

<PAGE>
                            Penn-America Group, Inc.
                        Investment (per Credit Agreement)
                                  Schedule 8.5

                                      NONE

<PAGE>
                            Penn-America Group, Inc.
                             Reinsurance Agreements
                             (Per Credit Agreement)
                                  Schedule 5.19

                                      NONE

<PAGE>
                            Penn-America Group, Inc.
                                  Indebtedness
                                  Schedule 8.2

                           Capital Lease as of 8/31/98

                          Asset           2,084,272.00

                          Obligation      2,122,172.00

<PAGE>
                            Penn-America Group, Inc.
                          Transactions with Affiliates
                                  Schedule 8.7

                                      NONE

<PAGE>
                            Penn-America Group, Inc.
                                Lines of Business
                                  Schedule 8.8

                Fire
                Allied Lines
                Commercial Multi Peril
                Inland marine
                Other Liability - Occurrence
                Product Liability - Occurrence
                Private Passenger Auto Liability
                Commercial Auto Liability
                Auto Physical Damage

<PAGE>
                             Penn-America Group Inc.
                          Transactions with Affiliates
                                  Schedule 8.7

                                      NONE

<PAGE>
                             Penn-America Group, Inc
                                Lines of Business
                                  Schedule 8.8

                Fire
                Allied Lines
                Commercial Multi Peril
                Inland marine
                Other Liability - Occurrence
                Product Liability - Occurrence
                Private Passenger Auto Liability
                Commercial Auto Liability
                Auto Physical Damage