REINSURANCE POOLING AGREEMENT


         THIS AGREEMENT (the "Agreement") made and concluded at Hatboro,
Pennsylvania, this 7th day of July, 1998, to be effective as of 12:01 a.m., July
1, 1998 (the "Effective Time"), by and between Penn-America Insurance Company
(PAIC) and Penn-Star Insurance Company (PSIC), witnesseth that:
         WHEREAS, it is the view of PAIC and PSIC that the business of each
party would be more efficiently and economically processed by a single company
instead of by each party separately; and
         WHEREAS, in the interests of simplification of the operations of each
party, PAIC and PSIC have determined that the underwriting operations of each
party should be conducted, by means of mutual reinsurance on the percentage
bases herein provided, by PAIC on behalf of both parties; and
         WHEREAS, the parties hereto desire to form a pooling arrangement to
effectuate the pooling of risks for Losses Incurred at or after the Effective
Time under policies in force and for policies issued or renewed on or after the
Effective Time.
         NOW THEREFORE, the parties hereto agree as follows:


                     ARTICLE 1 - REINSURANCE ASSUMED BY PAIC

         (a) In Force Business:

          (1)  PAIC hereby reinsures, and PSIC hereby cedes and transfers to
               PAIC on a quota share basis, 100% of PSIC's unexpired liability
               under all policies, certificates, contracts, and other evidences
               of insurance and reinsurance (herein "Policies") issued by PSIC
               prior to and in force on the Effective Time. The cession herein
               shall not apply to any portion of PSIC's liability with respect
               to losses occurring under such Policies prior to the Effective
               Time, regardless of when such losses are reported by the
               underlying insureds or reinsureds.

          (2)  As consideration for the reinsurance described in Article
               1(a)(1), PSIC shall assign and transfer to PAIC an amount, in
               cash or other assets acceptable to PAIC, equal in the aggregate
               to the PSIC Subject Unearned Premium on such business, less the
               PSIC Ceding Commission thereon. In no event shall the net
               transfer contemplated herein exceed twenty-five percent (25%) of
               PSIC policyholders' surplus.

         (b) New Business:

          (1)  PAIC hereby reinsures, and PSIC hereby cedes and transfers to
               PAIC on a quota share basis, 100% of PSIC's liability under all
               Policies issued or renewed by PSIC on or after the Effective
               Time.

          (2)  As consideration for the reinsurance described in Article
               1(b)(1), PSIC shall assign to PAIC 100% of the PSIC Subject
               Premium on such business.



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           ARTICLE 2 - REINSURANCE OF POOLED BUSINESS ASSUMED BY PSIC

         (a) In Force Business:

          (1)  PSIC hereby reinsures, and PAIC hereby cedes and transfers to
               PSIC on a quota share basis, a 35% quota share of PAIC's
               unexpired liability under all Policies issued by PAIC prior to
               and in force on the Effective Time, including but not limited to
               the liability assumed by PAIC from PSIC pursuant to Article 1(a)
               of this Agreement. The cession herein shall not apply to any
               portion of PAIC's liability with respect to losses occurring
               under such Policies prior to the Effective Time, regardless of
               when such losses are reported by the underlying insureds or
               reinsureds.

          (2)  As consideration for the reinsurance described in Article
               2(a)(1), PAIC shall assign and transfer to PSIC an amount, in
               cash or other assets acceptable to PSIC, equal in the aggregate
               to 35% of the Pooled Subject Unearned Premium on such business,
               less the PAIC Ceding Commission on PAIC's Subject Unearned
               Premium.

         (b) New Business:

          (1)  PSIC hereby reinsures, and PAIC hereby cedes and transfers to
               PSIC on a quota share basis, a 35% quota share of PAIC's
               liability under all Policies issued or renewed by PAIC on or
               after the Effective Time, including but not limited to the
               liability assumed by PAIC from PSIC pursuant to Article 1(b) of
               this Agreement.

          (2)  As consideration for the reinsurance described in Article
               2(b)(1), PAIC shall pay to PSIC 35% of the Pooled Subject Premium
               on such business.


                ARTICLE 3 - AUTHORIZATION FOR PAIC TO MANAGE POOL

          Effective as of the Effective Time of this Agreement, PAIC is hereby
authorized and empowered by PSIC to: (a) collect and receive all premiums; (b)
pay all underwriting expenses, including commissions and premium taxes; (c) pay
all facultative reinsurance; (d) take charge of, adjust and pay all Losses with
respect to any and all Policies issued by both parties; (e) and to issue,
reinsure or cancel any and all such Policies and make any changes therein. PAIC
(sometimes referred to as the "Pool Manager") shall pay all Losses of PSIC and
collect all reinsurance on such Losses, it being understood and agreed, however,
that PSIC at monthly intervals shall reimburse PAIC for its respective
percentage of the Losses, as set forth in Article 5 herein, net of reinsurance
collected from companies not a party to this Agreement with respect to all
Policies of both parties. PAIC shall also initially set and maintain PSIC's Case
and IBNR reserves, as well as unearned premium reserves (using the semi-monthly
pro rata method), in its capacity as Pool Manager, subject to review and
approval by PSIC. Nothing herein shall be deemed to be a grant or delegation of
management control to the substantial exclusion of the Board of Directors of the
respective parties contrary to Section 1721 of Title 15 of the Pennsylvania
Consolidated Statutes Annotated.


              ARTICLE 4 - ALLOCATION OF CLAIMS DEPARTMENT EXPENSES

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         Both PAIC and PSIC agree that Claims Department Expenses (CDEs) shall
be allocated to accident years using the following formula:

          1)   50% of the CDEs shall be allocated to accident years based on the
               percentage of the number of claims reported in a given year
               compared to the total for all years; and
          2)   50% of the CDEs shall be allocated to accident years based on the
               percentage of Adjustment Expenses paid in a given year compared
               to the total for all years.

          PSIC agrees to pay to PAIC thirty-five percent (35%) of the CDEs
allocated to all accident years which are covered by this Agreement. If the
accident year is the year of inception or termination, then the CDEs shall be
prorated.


                       ARTICLE 5 - SETTLEMENTS OF ACCOUNTS

         Commencing with the first month after the Effective Time:

          (A)  PAIC agrees to pay PSIC monthly, thirty-five percent (35%) of all
               Pooled Subject Premiums (including premiums assumed from PSIC
               pursuant to Article 1), less premiums (net of Ceding Commission)
               ceded to companies other than the parties hereto; and,

          (B)  PSIC agrees to pay PAIC monthly the following:

               (1)  PSIC's proportionate share of the Claims Department Expenses
                    (CDE's) pursuant to Article 4; and,

               (2)  Thirty-five percent (35%) of the following:

                    (a)  Commission paid to agents, including contingent
                         commissions accrued;

                    (b)  Underwriting and administrative expenses, which include
                         all premium taxes, underwriting, executive, accounting,
                         and systems expenses, but not CDE's which are allocated
                         pursuant to Article 4; and,

                    (c)  Losses having a loss date at or after the Effective
                         Time of this Agreement.

         On termination of this Agreement, PSIC's obligations under Article
5(B)(2)(a)-(c) shall cease.


                     ARTICLE 6 - TERMINATION OF POOL MANAGER

         PAIC may be terminated as Pool Manager by PSIC upon ninety (90) days
notice to PAIC. Both parties shall, by mutual agreement, appoint another pool
manager but, in the event the parties cannot reach mutual agreement, PAIC shall
be appointed Pool Manager to provide the services specified in Articles 3, 4 and
5 and upon performing said services shall be entitled to the reimbursement of
expenses as provided for in Article 5.

                           ARTICLE 7 - RIGHT OF OFFSET

         It is understood and agreed that, insofar as is practicable and
consistent with the purposes and intentions of this Agreement, the obligations
of each party to this Agreement to transfer assets to the other party may, in
whole or in part, be offset against the reciprocal obligations of the other
party so that each party shall deliver hereunder only a net amount of assets
required under such offset.

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         ARTICLE 8 - EXCLUSION OF INVESTMENT INCOME AND TAXES FROM POOL

         This Agreement shall not apply to investment operations or liabilities
for federal, foreign or state income tax of the parties hereto.


                     ARTICLE 9 - DETERMINATION OF PROCEDURES

         The appropriate officers of PAIC and PSIC shall determine the methods
and procedures, including accounting transactions, by which the terms of this
Agreement shall be performed by and on behalf of the parties hereto. All methods
and procedures adopted pursuant to this Agreement shall be in compliance with
applicable Pennsylvania laws.


                     ARTICLE 10 - PENNSYLVANIA LAW TO GOVERN

         The law of the Commonwealth of Pennsylvania shall govern and determine
the validity, interpretation, enforcement and performance of this Agreement.


                  ARTICLE 11 - AMENDMENTS TO POOLING AGREEMENT

         This Agreement may be modified from time to time, so as to adapt its
provisions to the varying conditions of the business of the parties, by mutual
agreement in writing by the parties, subject to approval by the Board of
Directors of each party and by approval of the Office of the Insurance
Commissioner of the Commonwealth of Pennsylvania.


                        ARTICLE 12 - CONTINUOUS AGREEMENT

         This Agreement shall remain in full force and effect for a period of
one (1) year commencing as of the Effective Time of this Agreement. This
Agreement shall thereafter automatically renew for additional one year periods
unless terminated pursuant to written notice by one or more of the parties
hereto. In the event of termination, the parties' obligations under this
Agreement shall cease no later than ninety (90) days after the date notice of
termination is given, unless otherwise stated herein or otherwise agreed upon by
the parties.



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                         ARTICLE 13 - INADVERTENT ERRORS

         Wherever required to give the correct meaning throughout this
Agreement, the singular number shall be interpreted in the plural. Clerical
errors or errors of involuntary or inadvertent omission or commission shall not
be interpreted as a discharge of liability on behalf of any of the parties to
this Agreement. Such errors shall be rectified at the time of discovery or as
soon as practicable thereafter.


                             ARTICLE 14 - INSOLVENCY

         In the event of the insolvency of either party, the reinsurance payable
to such party member as a ceding company (the "Ceding Company") under this
Agreement by the other party as reinsurer (the "Reinsurer") shall be payable,
without diminution because of the Ceding Company's insolvency, by the Reinsurer
to the Ceding Company's liquidator, receiver or statutory successor on the basis
of the claim or claims allowed on the contracts of insurance against the
insolvent Ceding Company by any court of competent jurisdiction or any justice
or judge thereof, or by any receiver, liquidator or statutory successor having
authority to determine and allow such claims. It is agreed, however, that the
liquidator, receiver or statutory successor of the Ceding Company shall have to
give written notice to the Reinsurer of the pendency of a claim against the
Ceding Company under the contracts of insurance within a reasonable time after
such claim is filed in the insolvency proceeding, and that during the pendency
of such claim the Reinsurer may investigate such claim and interpose, at its own
expense in the proceeding where such claim is to be adjudicated, any defense or
defenses which it may deem available to the Ceding Company or its liquidator,
receiver or statutory successor. The expense thus incurred by the Reinsurer
shall be chargeable, subject to court approval, against the Ceding Company as
part of the expense of liquidation to the extent of a proportionate share of the
benefits which may accrue to the Ceding Company solely as a result of the
defense undertaken by the Reinsurer.


                         ARTICLE 15 - ENTIRE AGREEMENT 

         This Agreement shall constitute the entire agreement between the
parties and provides no guarantee of profit, directly or indirectly, to or from
either party hereto.



                             ARTICLE 16 - REPORTING

         This Agreement shall provide for monthly reporting of premiums (written
and unearned), Losses (paid and reserved for on a Case and IBNR basis) and
underwriting expenses, unless there is no activity during the period.



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                          ARTICLE 17 - TRUST AGREEMENT 

         PAIC and PSIC shall each establish and maintain their quota share of
all unearned premium and loss reserves required on the policies subject to this
Agreement.

         If either PAIC or PSIC would not be entitled to full reserve credit for
reinsurance herewith in a jurisdiction in which either party is subject to
financial reporting, both parties agree to establish a trust account in an
amount equal to the Ceding Company's share of the reserves for which credit is
sought for all outstanding amounts ceded to the unauthorized reinsurer (the
"Unauthorized Reinsurer") at a given date. The trust account shall be
established with a bank which is a member of the Federal Reserve System (herein
called "Trustee") for the purpose of establishing a trust account for the
exclusive benefit and use of the Ceding Company. Such account shall consist
solely of cash (United States legal tender), and investments of the type
specified in subsections (1), (2), (3) and (13) of subsection (a) of Section
1404 of the New York Insurance Law, provided that such investments are qualified
reserve investments under the insurance laws of the Commonwealth of
Pennsylvania. The trust agreement shall comply with the requirements of Title
11, Part 126, of the New York Code of Rules and Regulations (Insurance
Regulation No. 114).

         Prior to depositing assets with the Trustee, the Unauthorized Reinsurer
shall execute assignments, endorsements in blank, or transfer legal title to the
Trustee of all shares, obligations or other assets requiring assignments, so
that the Ceding Company, or the Trustee upon the direction of the Ceding
Company, may, whenever necessary, negotiate any such assets without consent or
signature from the Unauthorized Reinsurer or any other entity. The assets
deposited in such trust account shall be valued, for the purpose of determining
the extent thereof, according to their current fair market value on the date as
of which such valuation is to be made.

         The Unauthorized Reinsurer may from time to time, while there is no
deficiency in the trust account, request the Ceding Company to withdraw from the
trust account all or any part of the assets contained therein, and the Ceding
Company shall deliver same to the Unauthorized Reinsurer or to its order, if it
first replaces the withdrawn assets with other qualified assets of equal value
approved by the Ceding Company so that at all times the market value of the
trust account is not less than the amount required to be on deposit. The Ceding
Company shall not unreasonably or arbitrarily withhold its approval. So long as
there is no deficiency in the trust account, the Unauthorized Reinsurer shall
have the full and unqualified right to vote and execute consents with respect to
any shares of voting stock deposited and shall be entitled to receive from time
to time from the Trustee payments of any dividends, interest or other income
upon any shares of stock or obligations included in the trust account.

         The Ceding Company or its successor in interest by operation of law or
otherwise, including, without limitation, any liquidator, rehabilitator,
receiver, or conservator, may withdraw assets from the trust account at any time
and from time to time, notwithstanding any other provisions in this Agreement,
and such funds shall be applied without diminution because of insolvency on the
part of the Ceding Company or the Unauthorized Reinsurer, for one or more of the
following purposes only:
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          (i)  to reimburse the Ceding Company for the Unauthorized Reinsurer's
               share of the premiums returned to the owners of reinsured
               policies under this Agreement on account of cancellations of such
               policies;

          (ii) to reimburse the Ceding Company for the Unauthorized Reinsurer's
               share of Losses paid by the Ceding Company under the terms and
               provisions of the reinsured policies under this Agreement;

          (iii) to fund an account with the Ceding Company in an amount at least
               equal to the deduction for reinsurance ceded from the Ceding
               Company's liabilities for policies ceded under the Agreement,
               such amount to include, if applicable, (but not be limited to)
               amounts for loss reserves (including IBNR), loss adjustment
               expense reserves, and unearned premiums;

          (iv) to pay any other amounts for the Ceding Company claims that are
               due under this Agreement;

          (v)  to return to the Unauthorized Reinsurer any assets in excess of
               102 percent of the amount required to be on deposit; and;

          (vi) to permit the substitution of assets as authorized hereinabove.


                              ARTICLE 18 - HEADINGS

                  The headings of any paragraph or Article of this Agreement are
for convenience only and shall not be used to interpret any provision of this
Agreement.



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                            ARTICLE 19 - DEFINITIONS

         "Adjustment Expenses" shall mean payments within the terms of the
policies in the direct defense of claims as allocated to an individual claim or
loss (other than for CDE) made in conjunction with the disposition of a claim,
loss, or legal proceeding including investigation, negotiation, and legal
expenses, court costs, prejudgment interest or delay damages, and interest on
any judgment or award.

         "Case" shall refer to loss reserves which are established by PAIC or
PSIC on a case by case or individual claim basis, with respect to losses which
have been incurred and reported to either PAIC or PSIC.

         "Claims Department Expenses" or "CDEs" shall mean office expenses and
salaries and expenses of employees of PAIC or any subsidiary of PAIC's claims
department.

         "Ceding Commission" shall mean the commissions, premium taxes and other
underwriting expenses incurred in writing Subject or Pooled Subject Unearned
Premiums, to be calculated by multiplying such premium by the prior twelve (12)
month statutory expense ratio.

         "IBNR" shall mean the estimated reserves, at a given point in time,
with respect to losses which have been incurred but not yet reported to PAIC or
PSIC, and for future development on reported claims.

         "Losses" shall mean payments on policies within the terms and limits of
such policies in settlement of claims or judgements, including Adjustment
Expenses, after deduction of deductibles, salvage and subrogation, and all
amounts due from reinsurers not a party to this Agreement.

         "Losses Incurred" shall mean Losses and Adjustment Expenses both paid
and the reserves (both Case and IBNR) thereon.

         "PSIC Losses Incurred" shall mean PSIC's Losses and Adjustment Expenses
both paid and the reserves (both Case and IBNR) thereon.

         "PAIC Subject Unearned Premiums" shall mean PAIC Subject Premiums which
are unearned by PAIC at the Effective Time of this Agreement.

         "PSIC Subject Premiums" shall mean gross premiums written by PSIC, less
policy specific reinsurance such as facultative reinsurance which inures to the
benefit of this Agreement.

         "PSIC Subject Unearned Premiums" shall mean PSIC Subject Premiums which
are unearned by PSIC at the Effective Time of this Agreement.

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         "Pooled Subject Premiums" shall mean gross premiums written by both
parties, less policy specific reinsurance such as facultative reinsurance, and
less reinsurance ceded to parties other than the parties hereto including treaty
and catastrophe reinsurance, all of which inure to the benefit of this
Agreement.

         "Pooled Subject Unearned Premiums" shall mean Pooled Subject Premiums
which are unearned at the Effective Time of this Agreement.

         "Pooled Losses Incurred" shall mean Losses and Adjustment Expenses of
PAIC and PSIC both paid and the reserves (both case and IBNR) thereon.




IN WITNESS WHEREOF, the parties have hereunto set their hands hereof the day and
the year first above written.


In the presence of:



/s/ Sherry Blomgren                      By: /s/ Rosemary Ferrero
Sherry Blomgren                              Rosemary Ferrero



/s/ Adele Hoegermeyer                    By: /s/ Jon S. Saltzman
Adele Hoegermeyer                            Jon S. Saltzman






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                                    RIDER #1

         This Rider forms a part of, and is incorporated in, the Reinsurance
Pooling Agreement ("Agreement") between Penn-America Insurance Company ("PAIC")
and its wholly owned subsidiary, Penn-Star Insurance Company ("PSIC"). This
Rider applies to all risks placed in California and sought to be reinsured by
PAIC and PSIC therein.

         Notwithstanding any of the terms or conditions in the Agreement to the
contrary:

(a)           PAIC will not reinsure risks for the "Team and Vehicle" or
              "Aircraft and Miscellaneous" lines of insurance or any other line
              of insurance which it is not authorized to write in California
              until such time that it is authorized to write such line(s) of
              insurance in California; and,
(b)           PSIC will not reinsure risks for the "Boiler and Machinery" line
              of insurance or any other line of insurance which it is not
              authorized to write in California until such time that it is
              authorized to write such line(s) of insurance in California.

         IN WITNESS WHEREOF, the parties have hereunto set their hands the day
and the year first above written.


In the presence of:




/s/ Sherry Blomgren                      By: /s/ Rosemary Ferrero
Sherry Blomgren                              Rosemary Ferrero



/s/ Adele Hoegermeyer                    By: /s/ Jon S. Saltzman
Adele Hoegermeyer                            Jon S. Saltzman


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