Investment Management Agreement

     AGREEMENT made this, 25th day of February, 1999, to be effective as of
February 19, 1999 (the "Effective Date") by and between Penn-America Insurance
Company, an insurance company incorporated under the laws of the Commonwealth of
Pennsylvania and maintaining its head office at 420 South York Road, Hatboro,
Pennsylvania 19040 (the "Client") and Madison Monroe, Inc., a corporation
established under the laws of the Commonwealth of Pennsylvania and maintaining
its principal office at 621 East Germantown Pike (Suite 105), Plymouth Valley,
Pennsylvania 19401 ("MMI").

     WHEREAS, the Client has established and maintains a custodial arrangement
(the "Custodial Arrangement") with PNC Bank, N.A. (the "Custodian"); and

     WHEREAS, the Client has identified to the Custodian certain assets (the
"Assets") held under the Custodial Arrangement to be held or maintained in a
custodial account that is segregated for accounting and investment purposes (the
"Account") from all other assets held under the Custodial Arrangement (see
Appendix B, "Administrative Procedures" for a list of the Assets and the
location and number of the Account); and

     WHEREAS, the Client wishes to engage MMI to direct the manner assets in the
Account are invested; and

     WHEREAS, MMI agrees to direct the investment of the Assets held in the
Account under the terms and conditions hereinafter set forth (see Appendix C,
"Investment Plan of Penn-America Insurance Company for Madison Monroe, Inc."),

     NOW, THEREFORE, the parties hereto, for and in consideration of the
premises and of the mutual covenants herein contained, agree as follows:

1.   Appointment and Status of MMI. The Client hereby appoints MMI as the
     exclusive investment manager with respect to the Account. MMI shall act as
     agent for the Client in connection with the Account insofar as investment
     direction thereof and the Assets held therein is concerned, but MMI shall
     not at any time take physical custody of the Assets. MMI shall direct the
     investment of the Assets subject, however, to prior confirmation and
     approval of the contemplated transaction by Jerry Lynch at New England
     Asset Management ("NEAM") and by a member of the Investment Committee of
     the Client who is authorized to confirm or approve each transaction. See
     Section V of Appendix B, attached hereto.

2.   Acceptance of Appointment by MMI. MMI hereby accepts the appointment
     described in paragraph 1 above, and agrees to direct the Custodian to
     invest the Assets in accordance with the Investment Objectives set forth in
     Appendix C to this Agreement. Subject thereto, and also subject to
     applicable governmental statutory and other regulatory guidelines and
     restrictions, MMI may direct the Custodian to buy, sell or otherwise
     execute transactions


<PAGE>


     pertaining to sovereign indebtedness, including, without limitation, direct
     debt obligations of sovereign states and debt obligations issued by central
     banks (regardless of the currency in which denominated, as limited to
     directions set forth in Appendix B, Section VI).

3.   Management Services and the Account. MMI shall have power and authority to
     manage the Account within the Investment Guidelines set forth in Appendix
     C. As provided in Section 1 of this Agreement, subject to prior
     confirmation and approval by NEAM and to prior confirmation and approval of
     each transaction by an authorized member of the Client's Investment
     Committee, MMI shall be authorized to notify and instruct the Custodian
     concerning the management, sale or disposition of the Assets of the Account
     and the purchase or acquisition of other assets of the same type and
     quality of the Assets, for deposit to the Account. Subject to the
     Investment Guidelines as set forth in Appendix C, the investment management
     authority granted to MMI hereunder shall comprise, and shall not exceed,
     all powers, authority and discretion granted to investment managers duly
     appointed under the terms of the Custodial Arrangement. In the performance
     of its investment management functions, and in the making of investment
     management decisions, MMI shall not take into account the tax or accounting
     consequences that might be experienced by the Client with respect to any
     investment(s), nor shall it take into account other considerations (such
     as, by way of example, regulatory agency reporting requirements) peculiar
     to the nature or circumstance of the Client, except as stipulated in
     Appendix C, Investment Guidelines.

4.   Account Information. The client shall instruct the Custodian to send to MMI
     and to NEAM (or such other entity as may be stipulated in writing by the
     Client in Appendix B hereto) confirmations of all transactions for the
     Account. In addition, the client shall instruct the Custodian to provide
     promptly to MMI all information concerning the Account at the same time as
     such information is provided to the Client by the Custodian. The Client
     hereby holds MMI harmless from any injury or damage suffered by Client as a
     result of the Custodian's failure to promptly forward the information.

     MMI shall provide the Client with statements, not less frequently than
     monthly, but within three (3) business days of the monthly close (except in
     extenuating circumstances, in which case such statements shall be provided
     as promptly as practicable), showing investment performance of the Account
     for the period covered by the statement, a listing of Assets held in the
     Account and a list of the transactions occurring with respect to the
     Account during the reporting period. MMI shall furnish such additional
     information concerning activities undertaken for the Account as the Client
     may reasonably request, including, but not limited to, the date of each
     such transaction, and, if such broker or dealer was selected by MMI, the
     names of brokers or dealers through whom such transactions were effected
     and the amounts of fees and commissions payable in connection therewith.

                                       2
<PAGE>
     If MMI fails to forward the information within three (3) business days
     after the end of the month, or as soon thereafter as is practicable due to
     extenuating circumstances, the Client may terminate this Agreement in
     accordance with paragraph 8 herein. MMI will be entitled to its fees, in
     accordance with paragraph 8 herein. However, the Client expressly reserves
     the right to seek indemnification from MMI in the event that the Account
     information is not forwarded to the Client within three (3) business days
     of the monthly close, or as soon thereafter as is practicable given
     extenuating circumstances, IF such delay is the result of any action or
     inaction on the part of MMI and/or NEAM.

5.   Brokerage. MMI shall effect all securities transactions for the Account
     with or through such broker or dealer as Client shall stipulate in Appendix
     B. If Client does not stipulate a broker or dealer, MMI may place buy and
     sell orders with or through such brokers or dealers as it may select;
     provided, however, that in the latter case MMI shall use its best efforts
     to effect such orders through brokers and dealers whose fees and
     commissions are reasonable in the aggregate and competitive in the
     marketplace.

6.   Fees, Invoicing and Payment. MMI shall be paid the fees set forth in the
     Fee Schedule attached as Appendix A hereto, which payment shall be complete
     compensation for all services and performance rendered by MMI under this
     Agreement. Invoices for said fees are to be sent by MMI to the Client at
     the name and address specified in Appendix B. Generally, such invoices will
     be sent within thirty (30) days after the close of the quarterly period in
     which such fees are earned. All invoices and fee statements are due and
     payable upon receipt. Any such fee which is undisputed and unpaid within
     five (5) business days of the date on which the invoice or fee statement is
     received by the Client shall be charged directly against the Account and
     deducted therefrom.

7.   Confidential Information. All information regarding the Account provided by
     the Custodian and by the Client shall be considered confidential by MMI.
     Information and directions provided by MMI to the Custodian not already
     subject to prior confirmation and approval by the Client, as set forth in
     Section 1, may be shared by the Custodian with the Client and all such
     information and directions may be shared with NEAM (or such other entity as
     is designated in Appendix B by the Client) and information provided by MMI
     to the Client may be shared by the Client with the Custodian and with NEAM
     (or such other entity as is designated by the Client with the consent of
     MMI), but will otherwise be considered confidential. None of the Custodian
     nor the Client nor any entity designated by the Client in Appendix B (such
     as NEAM) will use such information, directly or indirectly, in connection
     with investment of assets other than the Assets of the Account, nor will
     any of them share such information with any other party except to the
     extent compelled by court or regulatory agency order or as provided in the
     following sentence. Information and directions shared by either MMI with
     NEAM (or other party designated by the Client) or by the Client with NEAM
     (or other party designated by the Client with the consent of MMI) shall be
     so

                                       3

<PAGE>
     shared only on the condition that the party with which such information is
     to be shared (NEAM or other entity designated by the Client) has agreed to
     treat such information as confidential and that it will not use such
     information, directly or indirectly, in connection with the investment of
     assets other than the assets of the Account; and, to the extent that
     information is disclosed by either the Client or MMI with NEAM (or other
     party designated by the Client), solely for the purpose of such disclosure,
     both MMI and the Client waive confidentiality.

8.   Resignation or Removal of MMI. The appointment of MMI hereunder may be
     terminated by Client, or MMI may resign as investment manager hereunder,
     upon thirty (30) days' notice in writing by one party to the other, with a
     simultaneous copy to the Custodian. On or before the thirtieth (30th) day
     after the receipt of such notice by the recipient of the written notice of
     such removal or resignation, MMI shall provide the Client with a final
     report containing the same information as provided in a monthly investment
     report hereinabove described. Upon the resignation or removal of MMI, all
     deferred and current fees earned by MMI will be accelerated and will become
     immediately payable.

9.   Representations and Warranties of the Client.

          A.   The Client represents and warrants to MMI that it has legal
               capacity to enter into this Agreement, to perform in full its
               obligations and duties hereunder, and that neither its entry into
               this Agreement nor its performance of the terms and provisions
               thereof will constitute a violation of any law, regulation, order
               or contractual undertaking by which it is bound; and

          B.   The Client represents and warrants to MMI that none of the funds
               in the Account are assets of any employee benefit plan subject to
               the provisions of the Employee Retirement Income Security Act of
               1974, as amended, and that, therefore, MMI shall not, by reason
               of services rendered pursuant to this Agreement, be a fiduciary
               with respect to any such plan.

10.  Representation and Warranty of MMI. MMI represents and warrants to the
     Client that it will use its best efforts to satisfy the Investment
     Guidelines attached hereto as Appendix C, and that it has legal capacity to
     enter into this Agreement, to perform in full its obligations and duties
     hereunder, and that neither its entry into this Agreement nor its
     performance of the terms and provisions thereof will constitute a violation
     of any law, regulation, order or contractual undertaking by which it is
     bound and that it, and each associated person of MMI engaged in the
     services described hereunder, is duly registered and licensed in the
     applicable jurisdictions and has the qualifications and legal capacity to
     perform the obligations and duties assigned to it or him hereunder. MMI
     also represents and warrants that a copy of this

                                       4
<PAGE>
     Agreement has been delivered to the Custodian and that the Custodian has
     communicated its approval of this arrangement to MMI.

11.  Services to Other Clients. The Client understands and acknowledges that MMI
     may, at any time and from time to time, represent and perform services for
     other clients, and that, in connection with such services, MMI may be
     advising such clients and managing assets for such clients in a manner
     inconsistent with the advice being given and investment management services
     being rendered on behalf of the Client. By way of example, and not by way
     of limitation,

          A.   MMI may be advising or directing the sale or disposition of
               certain assets for the Account while advising or directing the
               purchase or acquisition of the same or similar assets for the
               account of one or more other clients;

          B.   MMI may be advising or directing the purchase or acquisition of
               certain assets for the Account while advising or directing the
               sale or disposition of the same or similar assets for the account
               of one or more other clients;

          C.   MMI may give advice to any other client or may direct the
               management of assets for any other client in a manner
               inconsistent with the advice being rendered or management by MMI
               of the Account, and MMI shall not be required to share any such
               advice or directions relating to the assets of any other client
               with the Custodian or with the Client, nor will MMI be required
               to take action in connection with the Account in a manner
               consistent with such advice or management direction by MMI for
               any other client; and

          D.   MMI may be directing transactions for the Account substantially
               simultaneously with similar transactions for others of its
               clients under circumstances which result in varied asset and
               market availability, varied brokerage commissions and fees,
               varied currency exchange rates, varied timing and other varied
               conditions, any or all of which may work to the relative benefit
               or relative detriment of the Account. The existence of such
               variable conditions is in the nature of the marketplace and is
               beyond the control of MMI. Accordingly, MMI shall not be liable
               for any aspect of financial impact on the Account attributable to
               any of the foregoing or to the inherent nature of the
               marketplace.

MMI's relationship with clients other than the Client, the transactions in which
it engages for clients other than the Client and the advice it gives to clients
other than the Client shall be proprietary information as to MMI. On its own
behalf, and on behalf of its agents and nominees, Client agrees not to seek, and
disavows all right to or interest in information relating to MMI's relationships
with parties other than the Client, transactions in which MMI engages on behalf
of persons or entities

                                       5
<PAGE>
other than the Client, and advice MMI gives, directly or indirectly, to persons
or entities other than the Client.

12.  Protection of Custodian. The Custodian may at all times treat MMI as agent
     of the Client unless and until the Custodian has received written notice
     from the Client or MMI to the contrary. Any instruction, direction or
     authority granted the Custodian by MMI shall be considered an instruction,
     direction or authority granted by the Client without any requirement that
     the Custodian authenticate the same unless (a) it is patently unreasonable
     to believe such communication to be genuine, or (b) such communication is
     not made through customary channels or means. Investment directions with
     respect to the Account from MMI to the appropriate identified Custodian
     employee as outlined in Appendix B, may be made in writing, by electronic
     means, by facsimile transmission, or by any other mutually agreed
     communication mode, provided that all transactions shall be confirmed by
     the Custodian in writing in the normal course.

13.  Liability of MMI. MMI is the exclusive developer and owner of various
     methodologies, data applications, and financial projection devices (the
     "MMI Property"). The Client has specifically requested that MMI apply, as
     it sees fit, some or all of the MMI Property for the benefit of the
     Account. Client acknowledges that MMI's use or application of MMI Property
     for its benefit does not give Client any right to own, use or disclose any
     of the MMI Property, nor does Client have an exclusive right to the use of
     such MMI Property for its benefit. While MMI believes that the data it
     receives from sources upon which it relies are accurate, that the
     methodologies employed by MMI and the models created by MMI are valid, and
     that the projections provided by MMI are provided in good faith, MMI does
     not warrant in any way the validity of the methodologies or models created
     by MMI, the accuracy of the projections provided by MMI, or advice given by
     MMI. Moreover, the historical performance of funds under management by MMI,
     whether or not invested in a manner consistent with the dictates of the MMI
     Property, are not to be considered a prediction of future performance of
     any such funds. The parties agree that MMI has no obligation to inquire
     into the accuracy or applicability of data received from sources reasonably
     considered to be reliable by MMI unless such data would appear on its face,
     to any reasonable person, to be faulty or to raise in any reasonable person
     questions as to its accuracy or application, or the prospective accuracy of
     projections made by MMI at any time, and that MMI shall be free from all
     liability to the Client with respect to the application of MMI Property as
     herein described; that MMI shall be free to rely on the MMI Property in
     directing the investment of the Account, and that under no circumstance
     shall MMI be considered a guarantor as to either the preservation of the
     principal of the Account or the magnitude of the yield generated by the
     investment of the Account. If this contract is assigned by MMI to an
     affiliate of MMI (as defined in Section 17 of this Agreement), MMI or its
     affiliate shall notify the Client within thirty (30) days of the occurrence
     of the event, if the affiliate's license from MMI to utilize MMI Property
     for the benefit of the Client is

                                       6
<PAGE>
     terminated or revoked, or if limitations are introduced into such license
     such that the affiliate would no longer be free to use MMI Property as a
     basis for direction of the investment of the Account.

14.  Reliance on Documents, Communications and Employee Authority. Each of the
     parties hereto may rely without further inquiry or verification on the
     authenticity and genuineness of any document or other communication
     received from an authorized employee of the other, and may rely on the
     authority of the employee to whom such document or other communication is
     ascribed unless, under the circumstances then prevailing, it is
     unreasonable to rely on such apparent authority.

15.  Tern of Agreement. The term of this Agreement shall commence on the
     Effective Date and shall continue until terminated at will by either party
     in accordance with the written notice of termination required by paragraph
     8 hereof. If this Agreement is terminated by the Client, the Client shall,
     prior to the effective date of the termination, provide MMI with written
     instructions as to the liquidation or settlement of the Account, which
     instructions may, at the Client's option, limit the discretion of MMI to
     enter into further transactions after the date such instructions are first
     received. MMI agrees to be bound by such instructions after receipt thereof
     (It is understood that fees (see Appendix A) shall be prorated to the date
     of settlement of the Account.)

16.  Notices. Any notice from MMI or from the Custodian to the Client shall be
     mailed to the following address and shall be effective on the date that it
     is deposited, postage prepaid, in certified or registered U.S. mail:

               Penn-America Insurance Company
               (Attn: Mr. Jon S. Saltzman)
               420 South York Road
               Hatboro, PA 19040

     Any notice from the Client or from the Custodian to MMI shall be mailed to
     the following address and shall be effective on the date it is deposited,
     postage prepaid, in certified or registered U.S. mail:

               Madison Monroe, Inc. (Attn: Mr. James Saltzman)
               621 E. Germantown Pike (Suite 105)
               Plymouth Valley, PA 19401

                                       7
<PAGE>
     Any notice from MMI or the Client to the Custodian shall be mailed to the
     following address and shall by effective on the date it is deposited,
     postage paid, in certified or registered U.S. mail:

               PNC Bank, N.A.
               Institutional Custody Service
               200 Stevens Drive, Suite 425
               Lester, PA 19113

17.  Binding Effect; Assignment. This Agreement shall be binding upon and shall
     inure to the benefit of each of the parties hereto, and their respective
     successors. However, except as provided in the following sentence, the
     rights and obligations hereunder shall not be assignable, transferable or
     delegable without the prior written consent of the other party, and any
     attempted assignment, transfer or delegation thereof without such consent
     shall be void. MMI shall have the right (but not the obligation) to assign
     any or all of its rights, benefits, duties and obligations under this
     Agreement to any affiliate of MMI; provided, however, that no such
     assignment, transfer or delegation by MMI shall be effective until at least
     thirty (30) days after notice in writing of such proposed assignment,
     transfer or delegation has been delivered by MMI to the Client, unless (a)
     the Client waives such notice, or (b) the giving of such notice would
     violate a confidentiality agreement associated with an information
     "blackout" relating to a transaction involving MMI and not uniquely,
     peculiarly or specifically related to the Account. For the purpose of the
     preceding sentence (and for the purposes of Section 13 of this Agreement),
     the term "affiliate" shall mean any entity in which MMI has at least a 50%
     ownership interest, effective control of the Board of Directors or other
     governing body of such entity, and has licensed the entity to use MMI
     Property for the benefit of the Client (or for the benefit of the Client
     and others).

18.  Amendment. This Agreement may be amended only by written instrument
     executed by both parties.

19.  Severability. Any term or provision of this Agreement which is invalid or
     unenforceable in any jurisdiction shall, as to such jurisdiction, be
     ineffective to the extent of such invalidity or unenforceability without
     rendering invalid or unenforceable the remaining terms or provisions of
     this Agreement or affecting the validity or enforceability of any of the
     terms or provisions of this Agreement in any other jurisdiction.

20.  Preservation of Rights and Remedies. The failure of either party to enforce
     any right provided under this Agreement or the waiver by such party of any
     breach of this Agreement shall be an indulgence only, and shall not be
     construed to be either an abandonment of such

                                       8
<PAGE>
     right or a waiver of any subsequent breach thereof, nor shall it be
     considered a waiver of any other provision of this Agreement.

21.  Headings and Captions. The headings and captions in this Agreement are for
     convenience of reference only, and shall not be considered a substantive
     part of the Agreement nor used in the interpretation or construction of any
     provision thereof.

22.  Entire Agreement; Supersedeas. This Agreement constitutes the entire
     agreement between the parties with respect to the subject matter hereof
     This Agreement supersedes all prior discussions and writings, if any, with
     respect to the subject matter hereof.

23.  Governing Law. Except to the extent that it may be superseded by federal
     law, each and every provision of this Agreement shall be construed and
     applied in accordance with the laws of the Commonwealth of Pennsylvania,
     without regard to any principles of conflict of law.

     IN WITNESS WHEREOF, and as evidence of their respective intentions to be
legally bound hereby, the parties hereto have caused this instrument to be
executed by their respective duly authorized officers and their corporate seals
to be affixed as of the day and date first above written.

                                        Penn-American Insurance Company

                                        By: /s/ Rosemary Ferrero
                                        Title: Vice President of Finance

                                        Madison Monroe, Inc.

                                        By: /s/ James S. Saltzman
                                        Title: Vice Chairman

Receipt of a copy of this Agreement and the applicability of the notice
provisions set forth in Section 16 hereof acknowledged by the Custodian:

                                       9
<PAGE>
                                        PNC Bank, N.A.

                                        By: /s/ Brian R. Burns
Date: March 1, 1999                     Title: SVP

                                       10
<PAGE>
                                   APPENDIX A

                                MMI Fee Schedule

A Management Fee, being the sum of the Base Fee and the Performance Incentive
Fee (if any), will be paid on the Amount Under Management for the period. For
the purposes hereof, the "Amount Under Management" with respect to any period
is the opening cost basis of investments in the Account for such period,
increased by all amounts deposited into the Account during the period and
reduced by all amounts withdrawn from the Account during the period, calculated
on the basis of month-end balances using the AIMR time-weighted calculation.
Except as to the first such period during which this Agreement is in effect,
each period shall commence on the calendar day next following the calendar day
on which the preceding period ended, whether or not either or both of such days
was a business day. Percentages set forth herein are expressed on an annual or
annualized basis, and shall be applied to any period of less than one year by
proration on the basis of a 365-day year.

Base Fee

     The Base Fee shall be 0.20 percent (.20 of 1 percent) of the original cost
of securities Under Management for the period with respect to which the fee is
calculated. The base fee will be paid quarterly in arrears based upon the fee
invoicing and payment schedule in paragraph 6.

Performance Incentive Fee

     The Performance Incentive Fee, if any, due for a period shall be based on
performance in excess of the Performance Incentive Fee Base plus 100 basis
points, as defined below.

     "The Performance Incentive Fee Base" - The Performance Incentive Fee Base
shall be based on the categories of assets under management by MMI, as follows:

(1)  Performance with respect to investment by MMI in money market and cash
     equivalent funds, fixed income securities of the United States government
     and debt obligations guaranteed by the full faith and credit of the United
     States government during the period will be measured with reference to the
     Lehman Brothers Intermediate Corporate Government Bond Fund, plus 100 basis
     points.

(2)  Performance with respect to investment by MMI in Sovereign debt issued by
     central banks on the approved list will be measured with reference to the
     benchmark index

                                       11


<PAGE>




     stipulated by the parties in an addendum to this Agreement to be adopted
     prior to the making of the first such investment.

" Actual Percentage Yield" with respect to any period means the annualized rate
of return on the Amount Under Management for that period, calculated prior to
charging against the Amount Under Management any fees hereunder, taxes, or other
expenses properly charged thereto. The "Actual Percentage Yield for the Period"
is the Actual Percentage Yield, multiplied by a fraction, the numerator of which
is the number of calendar days in the period, and the denominator of which is
365.

" Performance Incentive Fee Payment" shall be based on the applicable Incentive
Fee Base category of managed assets based on the Actual Percentage Yield as
previously defined, calculated using a time weighted calculation from AIMR on a
rolling two year period with 100 basis points added to the Performance Incentive
Fee Base at the end of the calculation period. The reference to "100 basis
points" herein is a reference to the same "100 basis points" as the "100 basis
points" referred to in (1) and (2) above, and is NOT 100 basis points in
addition to the basis points referred to therein.

The Performance Incentive Fee Base and the amount of the Performance Incentive
Fee Payment (if any) shall be determined separately as to each category of
assets under management.

The payment of the "Performance Incentive Fee Payment" will be as follows:

NOTE: Calculation of Performance Incentive Fees will be based on a rolling
average over a 2-year period, payable for that year at the end of the two-year
period commencing with that year.

Example

Year                                         1       2       3       4

Actual Percentage Yield (after 100           20%     30%     35%     25%
Basis points added on at the end of
Each 12-month period)

o    Pay-out for Year 1: at end of Year 2, based on rolling average of Years 1
     and 2 performance (i.e., 25%, being the average of 20% and 30%)*

o    Pay-out for Year 2: at end of Year 3, based on rolling average of Years 2
     and 3 performance (i.e., 32.5%, being the average of 30% and 35%)*

                                       12
<PAGE>
o    The actual rolling average will vary from the example given since example
     is based on straight average. AIMR time-weighted fee illustration is
     attached.

                                       13
<PAGE>
                                   APPENDIX B

                           Administrative Procedures

I. ACCOUNT ASSETS: Penn-America Insurance Company (hereinafter "Client") has
deposited the following securities, cash and other assets with the Custodian
identified below to be managed by Madison Monroe, Inc. (hereinafter "MMI")
under the Agreement attached hereto (the "Agreement") and of which this Appendix
is a part:

               United States dollars: Ten million ($ 10,000,000) in cash

II. CUSTODY OF ACCOUNT: The assets to be managed under the Agreement will be
                        held by:

PNC Bank, N.A.                                         Custodial Account Number:
Institutional Custody Service                                 32-32-300-40330168
200 Stevens Drive, Suite 425
Lester, PA 19113

III. BROKERAGE DIRECTION: Client directs MMI to cause all transactions for the
Account to be effected solely through the following broker, dealer or bank:

               New England Asset Management (Jerry Lynch) ("NEAM")

     This direction may be changed by the Client at any time and from time to
time, subject to prior written notification to MMI.
     Client has read, understands and accepts the limitations that these
directions and any prospective changes will place on MMI's ability to seek best
execution for the Account, and hereby holds MMI harmless for any loss, cost or
damage experienced by Client or the Account, directly or indirectly, by reason
of MMI's compliance with this direction.

IV. REPORTING:

     MMI, or its appointed administrative agent, shall provide to Client (to the
attention of Rosemary R. Ferrero, Chief Financial Officer, Penn-America
Insurance Company, 420 S. York Road, Hatboro, PA 19040), not less frequently
than monthly, but within three (3) business days of the monthly close,
statements showing the assets managed by MMI as of the date of the statement.
Such statement shall include the following information: par value, cost basis
and fair market value of the securities managed by MMI, along with unrealized
gains and losses and income received.

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<PAGE>
Unless denominated in United States dollars, if securities are of sovereign debt
of a country other than the United States, currency pricing will also need to be
provided by MMI as of the statement date.

V. AUTHORIZATION FOR INVESTMENTS:

     Approvals for all security transactions made within the Account under
management by MMI must be obtained by MMI from Jerry Lynch at NEAM and a member
of Penn-America's Investment Committee prior to the consummation of such
transaction. The members of the Investment Committee are the persons whose names
are set forth in the attached list. Penn-America will be responsible for
notifying MMI in writing of any additional appointments to the said list and of
any persons whose names are to be deleted from said list. MMI shall at all times
be fully protected by Penn-America in reasonably relying on said list, as from
time to time modified by Penn-America. MMI shall at all times be fully protected
by Penn-America in relying on the authenticity of signatures purporting to be
signatures of members of the Investment Committee of Penn-America except where
MMI knew or clearly should have known that any such signature is a forgery.

VI. APPROVED COUNTRIES:

                     [List to be provided by Penn-America]

     Penn-America may modify this list at any time and from time to time,
provided, however, that no such modification shall be effective unless set forth
in writing and delivered to MMI in accordance with the notice procedures set
forth in the Agreement. MMI shall at all times be fully protected by
Penn-America in relying on said list, as from time to time modified by
Penn-America. If Penn-America notifies MMI of the removal of the name of any
country from the Approved Countries list, and if at the time of such removal
some of the Assets of the Account are invested in sovereign debt of such
country, MMI shall take such removal as an Investment Committee instruction to
liquidate all securities so invested as promptly as practicable following the
receipt of such notice, UNLESS Penn-America has specifically provided in such
notice that the securities so invested may continue to be held as Assets in the
Account. MMI shall not be responsible for, nor shall it be held liable for, any
losses suffered by the Account by reason of the liquidation of securities
pursuant hereto, nor for any extraordinary cost borne by the Account to
effectuate the liquidation transaction.

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VII. BILLING:

     All invoices from MMI to Client shall be directed to:

     Rosemary R. Ferrero
     Chief Financial Officer
     Penn-America Insurance Company
     420 S. York Road
     Hatboro, PA 19040

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<PAGE>
                                   APPENDIX C

                                 INVESTMENT PLAN
                                       OF
                         PENN-AMERICA INSURANCE COMPANY

                            FOR MADISON MONROE, INC.

                Investment Portfolio - Objectives and Guidelines

     The Board of Directors of PENN-AMERICA INSURANCE COMPANY (the " Company")
authorizes the Company's officers to engage the services of Madison Monroe, Inc.
("MMI") to manage a portion of the Company's investment portfolio. The
portfolio consists of fixed income obligations and cash equivalents.

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

     Execution of All Trades: It is hereby understood that all investment
transactions must be initially reported to Jerry Lynch of New England Asset
Management ("NEAM" ) and must receive approval, either written or oral, of the
Chairman of the Investment Committee, Irvin Saltzman, or a member thereof, prior
to their implementation by MMI.

                              Investment Portfolio

     The Company's designated portfolio consists of assets allocated and
invested in one of (3) basic forms of investment:

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

     (B)  Fixed income securities including, but not limited to, United States
          Government and Agency issues and other issues backed by the full faith
          and credit of the United States Government.

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<PAGE>
     (C)  Sovereign debt issued by central banks for countries on the approved
          list (Appendix B).

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

                             Investment Objectives

     1.   The Company's designated portfolio is to be managed in a conservative,
          risk-adverse style with the objective of achieving, for each portion
          of the portfolio, long-term performance superior to the index
          identified in Appendix A to this Agreement as the "benchmark" index
          for that type of investment.

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

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

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

It shall be the exclusive responsibility of the Company to notify MMI as to its
anticipated liquidity requirements relating to the portfolio under management by
MMI. Such notification shall be sufficiently in advance of the Company's need
for cash to permit orderly liquidation by MMI of investments. Company shall hold
MMI harmless from any investment loss or extraordinary expense experienced by
the Account by reason of a need to conform to the Company's liquidity
requirements as communicated by the Company to MMI.

                      Investment Policy Guidelines for MMI

     Assets are to be managed with a view toward achieving the specific
investment objectives previously described. Consistency of performance,
protection of principal as well as purchasing power and maintenance of
sufficient liquidity, shall be the overriding guidelines for the portfolio.
Additionally, all investments shall comply with the Insurance Regulatory Laws of
Pennsylvania and the National Association of Insurance Companies (NAIC) Model
Investment Act.

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

     In order to comply with certain loan covenants, the following limitations
are also placed on the investment decisions:

     For the purposes of defining the term " investment grade security" as set
     forth under our loan covenants, Investment Grade means: (1) Non-equity
     securities or preferred equity securities rated "NAIC 2" or better by the
     NAIC, "BBB" or better by Standard & Poor's ("S&P"), "Baa3" or better by
     Moody's, or "BBB" or better by Duff & Phelps; (2) municipal bonds rated
     "NAIC 2" or better by the NAIC, "SP-2" or better by S&P, "Pa a3/MiG4" or
     better by Moody's, or "BBB" or better by Duff & Phelps, and (3) permitted
     CMO's and mortgaged backed securities, and investments in sovereign debt of
     countries outside of the United States and partnership and real estate
     interest.

     Any investment which does not meet the definition of " investment grade" as
     defined in the previous paragraph will be considered, for purposes of the
     policy guidelines, "Noninvestment grade" and will be limited to NO more
     than 5% of the Company's invested assets.

Inasmuch as the Company has information with regard to the composition of its
entire portfolio, and MMI has information only as to that portion of the
Company's portfolio that is within its scope of investment management, it shall
be the exclusive responsibility of the Company to notify MMI at any time and
each time that an adjustment of holdings is required to satisfy the investment
quality requirements and investment diversity requirements described herein.
Moreover, the Company shall hold MMI harmless from any losses or expenses
experienced by the Account by reason of a need to change the investment
composition of the Account to comply with the foregoing standards.

                           A. Fixed Income Securities

     1.   Types of Securities. Funds not invested in cash equivalents shall be
          invested entirely in sovereign indebtedness, including direct debt
          obligations of sovereign states and debt obligations issued by central
          banks for countries on the approved list (Appendix B).

          At least ninety percent (90%) of the portfolio shall be rated A or
          better. These ratings shall be established by recognized rating
          services (i.e., Moody's, S&P, etc.) and

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<PAGE>
          reinforced by independent in-house credit analysis. An issue which is
          split-rated will be governed by the lower quality designation.

     2.   Diversification. Except for U.S. Treasury and Agency obligations, the
          debt portion of the fixed income securities shall contain no more than
          five percent (5%) of a given issuer (irrespective of the number of
          differing issues). Other diversification standards shall be developed
          and applied by MMI.

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

                                   Exclusions

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

          1.   Unregistered or restricted stock;

          2.   Common stocks;

          3.   Commodities, including commodity fund shares, gold or currency
               futures;

          4.   Conditional sales contracts;

          5.   Options, including the purchase, sale or writing of options,

          6.   Margin buying;

          7.   Short selling; and

          8.   Leasebacks.

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<PAGE>
     Regulatory and Investment Classification Considerations

     $    Risk-Based Capital ("RBC")

          The Company, as an insurance entity, is regulated by various state
          insurance departments, NAIC and A.M. Best. One element of the
          regulation is risk-based capital which has a RBC component related to
          the investment portfolio. There are three factors which are evaluated
          by RBC: quality of invested assets, mixture of invested assets, and
          affiliate risk. MMI should be aware of the RBC's current factors at
          all times when evaluating appropriate investment considerations. MMI
          shall not be required to perform an RBC analysis in connection with
          any transaction the consummation of which is contingent upon approval
          by a member of the Investment Committee of the Company or by an agent
          of the Company. MMI shall not execute any transaction if, prior to the
          execution thereof, MMI is notified by the Company that the
          consummation of such transaction would be detrimental to Client's
          overall Risk-Based Capital.

     $    Classifications for Fixed Income Securities

          When new securities are purchased for the portfolio, a determination
          will be made by MMI and Client as to their appropriate
          classifications, "Held to Maturity" or "Available for Sale." This may
          be done after each purchase transaction or minimally once each
          quarter. The decision as to the appropriate investment category will
          be determined after taking into consideration maturity, yield, cash
          flow requirements, and anticipated changes in interest rates.

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