Exhibit 10-20

                                                                   No. 3154-0006










                              PROPERTY AND CASUALTY
                      EXCESS OF LOSS REINSURANCE AGREEMENT

                                     between

                         PENN-AMERICA INSURANCE COMPANY
                           PENN-STAR INSURANCE COMPANY

                                       and

                          AMERICAN RE-INSURANCE COMPANY




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                     TABLE OF CONTENTS

    ARTICLE                                                         PAGE
    -------                                                         ----
       I                 EXHIBITS COVERED                              1
       II                TERRITORY                                     1

       III               ULTIMATE NET LOSS                             2

       IV                EXTRA CONTRACTUAL
                         OBLIGATIONS                                   2

       V                 EXCESS JUDGMENTS                              3

       VI                EXCLUSIONS                                    4

       VII               DEFINITIONS                                  17

       VIII              CLAIMS                                       20

       IX                SUBROGATION AND SALVAGE                      21

       X                 TAXES                                        22

       XI                ACCESS TO RECORDS                            22

       XII               INSOLVENCY                                   22

       XIII              OFFSET AND SECURITY                          23

       XIV               ERRORS AND OMISSIONS                         23

       XV                COMMENCEMENT AND
                         TERMINATION                                  24




<PAGE>

                                                                   No. 3154-0006


                      EXCESS OF LOSS REINSURANCE AGREEMENT

THIS  AGREEMENT  made and  entered  into by and between  PENN-AMERICA  INSURANCE
COMPANY, PENN-STAR INSURANCE COMPANY, both of Hatboro, Pennsylvania (hereinafter
referred to as the  "Company")  and AMERICAN  RE-INSURANCE  COMPANY,  a Delaware
Corporation with  Administrative  Offices in Princeton,  New Jersey (hereinafter
referred to as the "Reinsurer").

WITNESSETH:

The  Reinsurer  hereby  reinsures the Company to the extent and on the terms and
conditions and subject to the exceptions, exclusions and limitations hereinafter
set forth and nothing  hereinafter shall in any manner create any obligations or
establish any rights  against the Reinsurer in favor of any third parties or any
persons not parties to this  Agreement.  Performance of the  obligations of each
party under this Agreement shall be rendered solely to the other party.

                                    ARTICLE I

EXHIBITS COVERED

The Company will  reinsure  with the  Reinsurer  and the  Reinsurer  will accept
reinsurance from the Company as set forth in Exhibits A and B which are attached
hereto and made a part of this  Agreement,  such  Exhibits  being  entitled  for
purposes of identification as:

         EXHIBIT A - PROPERTY AND CASUALTY EXCESS OF LOSS

         EXHIBIT B - COMMERCIAL AUTOMOBILE LIABILITY AND GARAGE
                        LIABILITY EXCESS OF LOSS

                                   ARTICLE II
TERRITORY

A.       As respects  Property  business of the Company,  this  Agreement  shall
         cover  policies  issued for risks  located  within the United States of
         America, its territories and possessions, and Canada.

B.       As respects Casualty business of the Company, this Agreement shall
         follow the original policies of the Company.




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                                   ARTICLE III

ULTIMATE NET LOSS

A.       The term "Ultimate Net Loss" shall mean the sum or sums paid by the
         Company for which it is liable, under policies reinsured hereunder,
         including any Loss Adjustment Expenses, as hereinafter defined.
         Ultimate Net Loss shall also include 90% of any Extra Contractual
         Obligations, as provided in ARTICLE IV, EXTRA CONTRACTUAL OBLIGATIONS;
         and 90% of any Excess Judgment, as provided in ARTICLE V, EXCESS
         JUDGMENTS. All sums hereunder shall be subject to proper deductions for
         all salvages, recoveries and all other reinsurances or insurances that
         inure to the benefit of the Reinsurer under this Agreement, whether
         collectible or not. The Reinsurer's liability hereunder shall not
         increase by reason of the inability of the Company to collect from any
         other reinsurer or insurer, for any reason, any amount that may be due
         from such reinsurer or insurer.

B.       Except as specifically provided for or excluded under this Article, the
         term "Loss Adjustment Expenses" shall mean all expenses which have been
         paid by the Company in the investigation, adjustment, settlement or
         defense of specific claims covered under original policies of the
         Company reinsured hereunder, (also including prejudgment and
         post-judgment interests and salaries and expenses of salaried adjusters
         associated therewith), but not including office, administrative or
         overhead expenses of the Company or salaries and expenses of its
         officials and employees.

C.       In the event of the  insolvency  of the  Company,  "Ultimate  Net Loss"
         shall be as otherwise defined herein except it shall include the sum or
         sums which the Company has incurred  for which it is liable  instead of
         the sum or sums paid by the Company for which it is liable, and payment
         by the Reinsurer shall be made to the liquidator, receiver or statutory
         successor of the Company in accordance with the INSOLVENCY Article.

                                   ARTICLE IV

EXTRA CONTRACTUAL OBLIGATIONS

A.       As reinsured under this  Agreement,  the Company shall be protected for
         any  Extra  Contractual  Obligation  awarded  by a court  of  competent
         jurisdiction  against the Company.  (Such Extra Contractual  Obligation
         shall be added to the  amount of the  award or  settlement  within  the
         Company's policy limit and the sum thereof shall be considered one loss
         subject to the exclusions and limitations set forth in this Agreement.)

B.       "Extra  Contractual  Obligation"  shall be defined as those liabilities
         not covered under any other provision of this Agreement,  and any legal
         costs and expenses incurred in connection  therewith,  which arise from
         the Company's handling of any claim on business covered hereunder,




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         including  but not  limited  to, the  failure by the  Company to settle
         within the policy limit, or by reason of alleged or actual  negligence,
         fraud,  or bad  faith,  in  rejecting  an offer of  settlement,  in the
         preparation  of the  defense,  in the trial of any action  against  its
         insured or in the  preparation or  prosecution of an appeal  consequent
         upon such action.

C.       For  the  purpose  of the  application  of  this  Agreement,  an  Extra
         Contractual  Obligation shall be deemed to have arisen on the same date
         as  the  original  loss  that  gave  rise  to  the  Extra   Contractual
         Obligation.

D.       This Article shall not apply where the Extra Contractual Obligation has
         been incurred due to the fraud or criminal act of a member of the Board
         of Directors,  an officer,  an agent,  or an employee of the Company or
         any other person or organization involved in the presentation,  defense
         or  settlement  of  any  claim  covered   hereunder,   whether   acting
         individually  or  collectively  or in  collusion  with  any  person  or
         organization.

E.       Recoveries  from  any  form  of  insurance  or   reinsurance,   whether
         separately  purchased from another  insurance carrier or self insurance
         issued by the Company to itself,  which  protects  the Company  against
         claims which are the subject matter of this Article,  will inure to the
         benefit of the Reinsurer  and shall be first  deducted to arrive at the
         amount of any Extra Contractual  Obligation covered hereunder,  whether
         collectible or not.

F.       If  any  provision  of  this  Article  shall  be  rendered  illegal  or
         unenforceable  by the laws,  regulations or public policy of any state,
         such provision shall be considered  void in such state,  but this shall
         not affect the  validity or  enforceability  of any other  provision of
         this  Agreement or the  enforceability  of such  provision in any other
         jurisdiction.

                                    ARTICLE V

EXCESS JUDGMENTS

A.       As reinsured under this  Agreement,  the Company shall be protected for
         any  Excess  Judgment  awarded  by a court  of  competent  jurisdiction
         against the Company. (Such Excess Judgment shall be added to the amount
         of the award or settlement  within the  Company's  policy limit and the
         sum thereof shall be considered  one loss subject to the exclusions and
         limitations set forth in this Agreement.)

B.       "Excess  Judgment"  shall  mean any  amount in excess of the  Company's
         original policy limits,  but otherwise within the coverage terms of the
         policy, that is paid by the Company,  together with any legal costs and
         expenses incurred in connection  therewith,  resulting from the failure
         by the  Company  to settle  within the  policy  limit,  or by reason of
         alleged or actual  negligence,  fraud, or bad faith, in discharging its
         duty to defend,  in  preparing  the  defense in an action  against  its




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<PAGE>

         insured or in  discharging  its duty to prepare or  prosecute an appeal
         consequent upon such action.

C.       This  Article  shall  not  apply  where the  Excess  Judgment  has been
         incurred  due to the fraud or criminal  act of a member of the Board of
         Directors,  an officer,  an agent or an employee of the Company, or any
         other person or organization  involved in the presentation,  defense or
         settlement of any claim covered hereunder,  whether acting individually
         or collectively or in collusion with any person or organization.

D.       Recoveries  from  any  form  of  insurance  or   reinsurance,   whether
         separately  purchased from another  insurance carrier or self insurance
         issued by the Company to itself,  which  protects  the Company  against
         claims which are the subject matter of this Article,  will inure to the
         benefit of the Reinsurer  and shall be first  deducted to arrive at the
         amount of any Excess Judgment hereunder, whether collectible or not.

D.       If  any  provision  of  this  Article  shall  be  rendered  illegal  or
         unenforceable  by the laws,  regulations or public policy of any state,
         such provision shall be considered  void in such state,  but this shall
         not affect the  validity or  enforceability  of any other  provision of
         this  Agreement or the  enforceability  of such  provision in any other
         jurisdiction.

                                   ARTICLE VI

EXCLUSIONS

A.       The  reinsurance  provided  under  this  Agreement  is  subject  to the
         exclusions set forth below and shall not cover the excluded  coverages,
         risks or exposures unless individually  submitted by the Company to the
         Reinsurer for inclusion hereunder, and if specially accepted in writing
         by the  Reinsurer,  such business shall then be covered under the terms
         of this Agreement, except to the extent the terms of this Agreement are
         modified by the special acceptance.

B.       The  reinsurance  provided under this Agreement  shall not apply to the
         following:

         1.       Business derived from any Pool,  Association  (including Joint
                  Underwriting Associations), Syndicate, Exchange, Plan, Fund or
                  other   facility   directly   as  a  member,   subscriber   or
                  participant,   or   indirectly  by  way  of   reinsurance   or
                  assessments.  This  exclusion  shall not  apply to  automobile
                  assigned risks or workers'  compensation  assigned risks which
                  may be currently or  subsequently  covered  hereunder,  except
                  such   assigned   risks  arising  from  property  or  umbrella
                  coverages.

         2.       Liability  of the Company  arising from its  participation  or
                  membership,   whether   voluntary  or   involuntary,   in  any
                  insolvency  fund,  including any guarantee fund,  association,
                  pool, plan or other facility which provides for the assessment




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                  of,  payment by, or assumption by the Company of a part or the
                  whole of any claim,  debt, charge, fee or other obligations of
                  an  insurer,  or its  successors  or  assigns,  which has been
                  declared insolvent by any authority having jurisdiction.

         3.       Except as respects Workers'  Compensation  business hereunder,
                  liability  excluded by the provisions of the following Nuclear
                  clauses  attached  hereto.  The word  "Reassured" used therein
                  means "Company."

                  USA:
                    - Liability - Reinsurance No. 1B
                    - Physical Damage - Reinsurance No. 2
                    - Physical Damage and Liability
                      (Boiler and Machinery) - Reinsurance    No. 3.

                  Canada:
                    - Liability - Reinsurance  Canada Pre 1985
                    - Physical Damage -  Reinsurance  Canada Pre 1985
                    - Liability - Reinsurance Canada Post 1985
                    - Physical Damage - Reinsurance Canada Post 1985
                    - Physical  Damage and  Liability  Canada  -Reinsurance
                      (Boiler and Machinery)

                  As   respects   Workers   Compensation   business   hereunder,
                  operations  employing the process of nuclear fission or fusion
                  or handling of radioactive material,  which operations include
                  but are not limited to:

                  1.       the use of  nuclear  reactors  such as atomic  piles,
                           particle accelerators or generators, or
                  2.       the use,  handling or  transportation  of radioactive
                           materials, or
                  3.       the use,  handling or transportation of any weapon of
                           war or explosive device employing  nuclear fission or
                           fusion

                  The preceding exclusions a., b., and c. do not apply to:

                  a.       the exclusive use of particle accelerators incidental
                           to  ordinary   industrial  or  educational   research
                           pursuits, or
                  b.       the  exclusive  use,  handling or  transportation  of
                           radio isotopes for medical or industrial use;
                  c.       radium or radium compounds.

         4.       Coverage provided by the Company to insurance, or reinsurance
                  companies, captives, brokers or risk retention groups (each
                  hereinafter referred to as "insured" for purposes of this
                  exclusion) which provide insurance against liability of the
                  insured for any damages resulting from alleged or actual
                  tortious conduct by the insured in the handling of claims
                  brought against any policyholders of the insured or in the




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<PAGE>

                  handling of any other business matters with or on behalf of
                  any policyholders.

         5.       The following coverages:
                    a.   Financial Guarantees;
                    b.   Credit and Fidelity Coverage;
                    c.   Surety Bonds;
                    d.   Warranty Coverage;
                    e.   Political Risk Coverage;
                    f.   Currency Exchange Coverage;
                    g.   Forgery Coverage; or
                    h.   Kidnap, Extortion or Ransom Coverage.

         6.       Aggregate Excess of Loss or Stop Loss Coverages.

         7.       Retroactive  Coverage,   except  in  connection  with  unknown
                  incidents, covered under a claims made coverage.

         8.       Coverage  provided  on  a  co-indemnity   basis  with  another
                  insurer,  reinsurer or other entity including an insured under
                  the Company's policy;  however,  this exclusion does not apply
                  to  the  standard  co-insurance  provisions  of a  policy  and
                  facultative   reinsurance  inuring  to  the  benefit  of  this
                  Agreement.

         9.       Coverage  underwritten  or accepted by any third party  except
                  the  binding  authority  granted  by the  Company  to its duly
                  authorized agents.

         10.      Coverage written  specifically to insure or reinsure  punitive
                  damages.

         11.      Entertainment   business,   including   but  not  limited  to,
                  Commercial   Negative   Film   Coverage,   Cast  Coverage  and
                  Completion Bond Coverage.

         12.      The  Company's  liability  and any  related  expenses,  beyond
                  circumscribed policy provisions, including but not limited to,
                  punitive,  exemplary,  consequential or compensatory  damages,
                  resulting from a claim of an insured or an insured's  assignee
                  against  the  Company  its  agents  or  employees,  except  as
                  provided for in the Extra  Contractual  Obligations and Excess
                  Judgments Articles.

         13.      All reinsurance assumed by the Company,  except  intra-Company
                  pooling arrangements.

         14.      All loss,  cost or  expense  arising  out of,  resulting  as a
                  consequence of or related to War. "War",  as utilized  herein,
                  shall mean war  whether or not  declared,  civil war,  martial
                  law, insurrection,  revolution,  invasion,  bombardment or any
                  use  of  military  force,   usurped  power  or   confiscation,
                  nationalization  or  damage  of  property  by any  government,
                  military or other authority.




                                      -6-
<PAGE>

                  To the  extent  there is no  Insurance  Service  Office,  Inc.
                  current  standard   coverage  form  for  a  type  of  coverage
                  reinsured under this agreement, "War" as utilized herein shall
                  mean war  whether or not  declared,  civil war,  martial  law,
                  insurrection,  revolution, invasion, bombardment or any use of
                  military force, usurped power or confiscation, nationalization
                  or damage of  property  by any  government,  military or other
                  authority.

         15.      All loss, cost or expense  directly or indirectly  arising out
                  of,  resulting  as a  consequence  of or related to  Pollution
                  whether or not there is  another  cause of loss which may have
                  contributed concurrently or in any sequence to a loss.

                  "Pollution"  means  any  solid,  liquid,  gaseous  or  thermal
                  irritant or contaminant,  including smoke, vapor, soot, fumes,
                  acids, alkalis,  chemicals and waste. Waste includes materials
                  to be recycled, reconditioned or reclaimed.

                  This  exclusion  shall  not  apply  to the  extent  that  such
                  liabilities  would  be  covered  under  the  current  standard
                  unendorsed coverage forms issued by Insurance Services Office,
                  Inc. for each type of coverage reinsured under this Agreement.

         16.      Space or  space-related  risks  such as, but not  limited  to,
                  satellites,  spacecraft,  launch  sites  and  launch  vehicles
                  including cargo and freight carried therein,  in all phases of
                  operation.

         17.      a.       Any  coverage   written   specifically  to  apply  to
                           Internet exposures; or

                  b.       Any loss, cost or expense arising out of or related
                           to the Internet, except if covered under any coverage
                           not written or endorsed specifically to apply to
                           Internet exposures. Notwithstanding the above
                           referenced exception, the reinsurance provided under
                           this agreement shall not apply to the following
                           persons, entities or exposures, except for in force
                           policies with effective dates prior to 9/1/01 and
                           covered under this Agreement:

                           (1)      Internet  Service  Providers,   meaning  any
                                    person  or  entity  providing  access to the
                                    Internet,   content  over  the  Internet  or
                                    connection to the Internet; or
                           (2)      Application  Service Providers,  meaning any
                                    person or entity that provides  software and
                                    associated  services  to a  subscriber  base
                                    across an area network; or
                           (3)      Internet  Backbone  Providers,  meaning  any
                                    person or  entity  that  routes or  provides
                                    channels  for packets  that  transport  data
                                    from point to point on the Internet; or




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<PAGE>

                           (4)      Any  person or entity  that  derives  ninety
                                    percent or more of gross revenue or conducts
                                    or  executes   ninety  percent  or  more  of
                                    business  transactions  on  or  through  the
                                    Internet; or
                           (5)      Any   person   or   entity   that   provides
                                    electronic mail services; or
                           (6)      Any   person   or  entity   that   develops,
                                    supplies,    and/or   installs    encryption
                                    software for use on the Internet.

                  "Internet"  as utilized  in this  exclusion  shall  mean,  the
                  international   computer  network  of   interoperable   packet
                  switched  data  networks,  also known as the  worldwide web or
                  worldwide network of computers.

         18.      All  Workers'  Compensation  business,  except for  Employers'
                  Liability Stop Gap coverage.

C.       The reinsurance  provided under this Agreement for Automobile Liability
         business shall not apply to the following:

         1.       Primary  coverage written on a deductible basis or excess of a
                  self-insured   retention  when  such  deductible  or  retained
                  amounts are greater than $25,000.

         2.       Commercial Umbrella or Excess Liability Coverage.

         3.       Personal Umbrella Liability Coverage.

         4.       Motorcycles,  motorized scooters,  motorized bicycles,  racing
                  vehicles,   all-terrain  vehicles,  and  other  off  the  road
                  motorized   vehicles,   except  for  in  force  policies  with
                  effective dates prior to 9/1/01 and covered under Exhibit B of
                  this Agreement..

         5.       Operation  or use of  police,  fire  and  emergency  vehicles,
                  including ambulances.

         6.       Vehicles  normally  used for  hauling  goods for others  which
                  operate regularly beyond a radius of 200 miles of an insured's
                  garaged location,  except for in force policies with effective
                  dates  prior to 9/1/01  and  covered  under  Exhibit B of this
                  Agreement.

         7.       Vehicles while engaged in bobtail or  deadheading  operations,
                  except for in force  policies  with  effective  dates prior to
                  9/1/01 and covered under Exhibit B of this Agreement.

         8.       Vehicles  leased  or  rented to  others,  except  for in force
                  policies  with  effective  dates  prior to 9/1/01 and  covered
                  under Exhibit B of this Agreement.




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<PAGE>

         9.       Vehicles  engaged in the  transportation  and  distribution of
                  fireworks,  fuses,  nitroglycerine,   explosives,   magnesium,
                  ammunition, ammonium nitrate, natural or artificial fuel, gas,
                  butane, propane, liquefied petroleum gases or gasoline.

        10.       Vehicles which may be classified as "public  vehicles"  except
                  vehicles  used as school or church  buses.  "Public  vehicles"
                  shall be  defined  as  contract  buses,  taxicabs,  and livery
                  vehicles.

        11.       Commercial  vehicles over 45,000  pounds gross vehicle  weight
                  used for  purposes of hauling sand and gravel,  refuse,  logs,
                  timber or cement,  except for in force policies with effective
                  dates  prior to 9/1/01  and  covered  under  Exhibit B of this
                  Agreement.

        12.       Trucks utilized for logging and lumbering  operations,  except
                  for in force policies with effective dates prior to 9/1/01 and
                  covered under Exhibit B of this Agreement.

        13.       Retail vehicles  operating under time  constraints,  including
                  but not limited to messenger or delivery services,  except for
                  in force  policies  with  effective  dates prior to 9/1/01 and
                  covered under Exhibit B of this Agreement.

        14.       Sale of new and used  vehicles,  except for in force  policies
                  with effective dates prior to 9/1/01 and covered under Exhibit
                  B of this Agreement.

D.       The reinsurance  provided under this Agreement for Liability  business,
         other than Workers  Compensation,  and Automobile  Liability  business,
         shall not apply to the following:

         1.       Professional  Liability or Errors and Omissions Coverage other
                  than for the following:

                    a.       "Beau-T-Pak";
                    b.       Barbers;
                    c.       Opticians;
                    d.       Veterinarians that treat household pets;
                    e.       Morticians;
                    f.       Clergy;
                    g.       Employee Benefits Liability (E&O Coverage);
                    h.       Druggists;
                    i.       "Day Care Pak";
                    j.       "Adult Day Care;
                    k.       "Health Club Pak";
                    l.       "Instructor Pak";
                    m.       In-Home Day Care;
                    n.       "Pet Pak"; or
                    o.       "Wellness Pak".



                                      -9-
<PAGE>

         2.       Directors'  and  Officers'  Liability  Coverage,   except  for
                  Condominiums and Homeowners Associations.

         3.       The following coverages:
                    a.  Product recall;
                    b.  Product tampering;
                    c.  Product integrity impairment; or
                    d.   Product guarantee.

         4.       Coverage provided under or for liability arising from any
                  federal law, including but not limited to; USL&H, Jones Act,
                  Defense Base Act, Federal Employers' Liability Act, Outer
                  Continental Shelf Lands Act, the Federal Coal Mine Health and
                  Safety Act of 1969, the Non-appropriated Fund
                  Instrumentality's Act, any other federal law awarding damages
                  for violation of those laws or regulations issued there under
                  and any amendments to any of the aforementioned laws or
                  regulations.

         5.       Securities Act Liability Coverage (S.E.C. Liability).

         6.       Commercial Umbrella or Excess Liability Coverage.

         7.       Personal Umbrella Liability Coverage.

         8.       Environmental Impairment Liability Coverage.

         9.       Products   Liability   Coverage   written  without  an  annual
                  aggregate limit.

         10.      Employer's liability and/or common law liability of employer's
                  to their  employees  when coverage is provided  under Worker's
                  Compensation Coverage.

         11.      Protection and Indemnity Liability Coverage.

         12.      Primary  coverage written on a deductible basis or excess of a
                  self-insured   retention  when  such  deductible  or  retained
                  amounts are greater than $50,000.

         13.      Uninsured or Underinsured Motorists Coverage.

         14.      Advertising  or Personal  Injury  Liability  Coverage  for any
                  person or entity whose business is advertising,  broadcasting,
                  publishing or telecasting.

         15.      Aircraft and airports as respects  coverage for all  liability
                  arising out of the  ownership,  maintenance or use of aircraft
                  and/or flight or ground operations.

         16.      Blanket or all-risk type coverage, commonly known as
                  Organizational Liability, Organization Liability, Operational
                  Liability, Integrated Risk, Enterprise Risk or under similar




                                      -10-
<PAGE>

                  names, written in, or endorsed to, a policy covering all types
                  of losses incurred by, or claims against, an entity; provided,
                  however, that this exclusion shall not include any named-peril
                  grant of coverage which contemplates specifically enumerated
                  types of claims or losses.

         17.      Liability,   including  any  related   expenses   directly  or
                  indirectly  arising out of,  resulting as a consequence of, or
                  related to employment-related  practices,  including,  but not
                  limited  to   liability   related  to   harassment,   wrongful
                  termination or discrimination,  whether under coverage written
                  as such or otherwise.

         18.      Liability  including any related expenses,  arising out of the
                  Employee Retirement Income Security Act of 1974 and amendments
                  thereto.

         19.      Liability including any related expenses, directly or
                  indirectly arising out of, resulting as a consequence of or
                  related to Sexual Misconduct, whether or not there is another
                  cause of loss which may have contributed concurrently or in
                  any sequence to a loss for the Company's Day Care Pak, In Home
                  Day Care Pak or Adult Day Care policies, except for in force
                  policies with effective dates prior to 9/1/01, and for Day
                  Care Pak, In Home Day Care Pak or Adult Day Care policies of
                  the Company where the insured purchases the Company's buy-back
                  coverage.

                  "Sexual  Misconduct" as utilized herein shall include,  sexual
                  molestation,  sexual  harassment,  sexual abuse, any verbal or
                  nonverbal  communication,  behavior,  or conduct  with  sexual
                  connotations  or the  infliction  of  physical,  emotional  or
                  psychological   injury   whether   for   purpose   of   sexual
                  gratification, discrimination, intimidation, coercion or other
                  sexual purpose, regardless of whether such action or resulting
                  injury is alleged to be intentionally or negligently caused.

         20.      All loss, cost or expense directly or indirectly,  arising out
                  of,   resulting  as  a  consequence  of,  or  related  to  the
                  manufacture,   distribution,  testing,  remediation,  removal,
                  storage,  disposal, sale, use of or exposure to the following,
                  whether or not there is  another  cause of loss which may have
                  contributed concurrently or in any sequence to a loss:

                  a.    Asbestos or materials or products containing asbestos;
                  b.    2.4,5  Trichloroacetic  acid  ("2,4,5-1")  or  2.3,7,8 -
                        TCDD;
                  c.    Diethylstilbestrol  ("DES")  in any  dosage  or form Any
                        intrauterine device ("IUD");
                  d.    Any product  containing  silicone,  which is in any form
                        injected or implanted into the body;
                  e.    Phen-fen;
                  f.    Dioxin;
                  g.    Polychlorinated biphenyls;
                  h.    Lead or materials or products containing lead;


                                      -11-
<PAGE>

                  i.    Latex gloves;
                  j.    Polybutylene piping (acrylonitrile-butadine-styrene); or
                  k.    Bio-engineered products,  including any food products or
                        therapeutic or diagnostic  pharmaceutical products which
                        are developed using some form of bioengineering.

         21.      All loss, cost or expense  directly  arising out of, resulting
                  as a consequence of, or related to  Electromagnetic  Radiation
                  related to the manufacture or generation of:

                  a.    Electric power and/or power lines;
                  b.    Cellular phones;
                  c.    Radio and TV broadcasting and/or towers;
                  d.    Computers;
                  e.    Electric blankets;
                  f.    Military radar or weapons;
                  g.    Police or weather radar;
                  h.    Satellite stations;
                  i.    Magnetic resonance imaging equipment;
                  j.    X-ray equipment, except sales that are 10% or less of
                        insured's total sales; or
                  k.    Microwave ovens;

                  "Electromagnetic  Radiation"  as used  herein,  shall  include
                  magnetic energy waves,  fields or forces generated,  produced,
                  distributed,  transmitted or maintained by charges,  currents,
                  frequencies, forces of energy or electricity."

         22.      Products Liability or Completed  Operations  Liability related
                  to:

                  a.       Drugs,  except for liability  arising from the retail
                           sale or wholesale  distribution  of drugs by insureds
                           not engaged in their manufacture;

                  b.       Chemicals,  except  for  liability  arising  from the
                           retail sale or  wholesale  distribution  of household
                           chemicals   by   insureds   not   engaged   in  their
                           manufacture;

                  c.       Insecticides  and  pesticides,  except sales that are
                           20% or less of insured's total sales;

                  d.       Aircraft or aircraft parts;

                  e.       Animal feed, other than custom-blended grains without
                           chemical or pharmacological  additives,  except sales
                           that are 20% or less of insured's total sales;

                  f.       Cosmetics  manufacturing,  except for the manufacture
                           of soaps or shampoos where the insured's receipts are
                           less  than 10% of total  sales or skin and hair  care
                           products   prepared  at  beauty   salons  or  similar
                           establishments,;

                  g.       Tobacco  and  tobacco  products,  but this  exclusion
                           shall not apply to liability  arising from the retail
                           sale or wholesale distribution of tobacco products by
                           insureds not engaged in their manufacture;




                                      -12-
<PAGE>

                  h.       Automobiles,   trucks,  motorcycles  and  all-terrain
                           vehicles or component parts critical to the operation
                           of the foregoing,  but this exclusion shall not apply
                           to the  liability  arising  from the  retail  sale or
                           wholesale distribution of component parts critical or
                           non-critical  to the  operation of the  foregoing not
                           engaged in their manufacture;

                  i.       Fiberglass,  but this  exclusion  shall  not apply to
                           liability  arising  from the retail sale or wholesale
                           distribution  of fiberglass  products by insureds not
                           engaged in their manufacture;

                  j.       Firearms,  except  sales  that  are  10% or  less  of
                           insured's total sales;

                  k.       Medical equipment;

                  l.       Elevator   or  hoist   manufacturing,   installation,
                           inspection, service or repair;

                  m.       Security    and    alarm    system     manufacturing,
                           installation,  inspection,  service or repair, except
                           for  coverage  as  provided  for  in  the   Company's
                           guidelines as of 9/01/01; or

                  n.       Fire suppression system manufacturing,  installation,
                           inspection, service or repair, except for coverage as
                           provided  for  in  the  Company's  guidelines  as  of
                           9/01/01.

         23.      Wrecking or demolition of buildings, structures, watercraft or
                  aircraft, except for buildings three stories or less.

         24.      Railroad, subway and street railway construction, operation or
                  maintenance, excepting sidetrack agreements.

         25.      Bridge,   tunnel,  dam  or  reservoir  design,   construction,
                  operation or maintenance.

         26.      Mining,  except insureds with receipts from quarry  operations
                  of less than 5% of total sales.

         27.      Onshore or offshore gas or oil drilling operations, pipelines,
                  or wells.

         28.      Mill or grain elevator operation.

         29.      Manufacture,    assembly,   packing,   handling,   processing,
                  transportation,  sale,  storage or  detonation  of  fireworks,
                  fuses, nitroglycerine, ammonium nitrate, magnesium, celluloid,
                  pyroxylin,  ammunition,  explosives or any product in which an
                  explosive substance is an ingredient, or component part.

                  The  term  "explosive  substance,"  as  used  herein,  is  any
                  substance manufactured for the express purpose of exploding as
                  differentiated  from  those  commodities,   other  than  those
                  commodities  specified  in  this  exclusion,  which  are  only
                  fortuitously  explosive,   such  as  gasoline,  fuel  oil,  or
                  dyestuffs.



                                      -13-
<PAGE>


         30.      Manufacture, production, refining, storage, sale, distribution
                  or transportation of natural or artificial fuel, gas, butane,
                  methane, propane, other liquefied petroleum gases, gasoline or
                  gases or air under pressure, except this exclusion does not
                  apply to gasoline at hardware stores, convenience stores and
                  automobile service stations storing gasoline on premises for
                  retail sale, fuel oil dealers, and LPG sales that are 20% or
                  less of the insured's total sales.

         31.      Stevedoring.


         32.      Ski lodges, lifts, cable cars and tows.

         33.      Shipbuilding,  ship repair, ship breaking, dry dock, and quays
                  or wharf operations.

         34.      Watercraft over 50 feet in length.

         35.      Amusement parks,  amusement  devices (other than coin operated
                  devices),  fairs,  exhibitions,  carnivals,  circuses and zoos
                  (other than  petting  zoos),  except when  written  within the
                  guidelines of the of the Company's Special Events Program.

         36.      Sports  or  other   entertainment   events  with  an  expected
                  capacity, at any one time, of 25,000 or more people.

         37.      Arenas, grandstands,  stadiums,  theatres, halls and any other
                  indoor venue with an expected  capacity,  at any one time,  of
                  25,000 or more.

         38.      Electric and gas utilities and the municipalities, authorities
                  and all  boards,  commissions,  or  entities  responsible  for
                  administering or controlling these utilities.

         39.      Governmental agencies,  entities, or political subdivisions of
                  a state or municipalities with a population of 50,000 or more.

         40.      Insurance  companies,   agents,  brokers,  or  risk  retention
                  groups,   inspection  services,  claims  services  and  rating
                  bureaus,  unless coverage for errors and omissions is excluded
                  under the policy reinsured.

         41.      School boards or school districts.

         42.      Nursing homes and nursing home care, except for adult day care
                  centers  when  written  within the  Company  guidelines  as of
                  9/01/01.

         43.      Banks and other  financial  institutions  unless the Company's
                  coverage contains a financial  institution  endorsement agreed
                  to by the Reinsurer.



                                      -14-
<PAGE>

         44.      Contractors engaged in the construction,  erection or exterior
                  maintenance of structures in excess of three  stories,  except
                  for window washers or power washing operations.

         45.      Crop-dusting.

         46.      Insureds   in   the   business   of   Scaffold    manufacture,
                  installation, repair, removal or rental.

         47.      Inverse condemnation liability.

         48.      All loss,  cost or  expense  arising  out of,  resulting  as a
                  consequence of or related to poultry  products,  operations or
                  exposures,  including  but not  limited  to;  poultry  houses,
                  poultry processing  operations,  live birds,  processed birds,
                  egg laying operations, egg processing operations or eggs.

         49.      Contractors,  except as  provided  for by the  Company's  Penn
                  Amerigram  dated  November  7,  2001,  and  attached  to  this
                  Agreement as APPENDIX B.

E.       In the  event  the  Company  is  inadvertently  bound on any  exclusion
         enumerated  under  paragraph  D, the  reinsurance  provided  under this
         Agreement  shall apply until  discovery by the Company of the existence
         of the inadvertent  binding and for 30 days thereafter,  and shall then
         cease unless,  within the 30-day period,  the Company has received from
         the Reinsurer written notice of its approval of such binding.

F.       The  reinsurance  provided under this  Agreement for Property  business
         shall not apply to the following:

         1.       Difference in Conditions Coverage.

         2.       Ocean Marine Coverage.

         3.       Mortgage impairment  insurance and similar kinds of insurance,
                  however styled.

         4.       Mining including mining equipment.

         5.       Aviation business.

         6.       The following coverages:
                    a.   Product recall;
                    b.   Product tampering;
                    c.   Product integrity impairment; or
                    d.   Product guarantee.



                                      -15-
<PAGE>

         7.       Excess   Coverage,   meaning   coverage   written   to   apply
                  specifically in excess over underlying insurance.

         8.       Boiler and Machinery Coverage.

         9.       Livestock Mortality or Fertility Coverage.

         10.      Furriers' and Jewelers Block Coverage.

         11.      Contingency business interruption risks of any kind.

         12.      Transmission  and  distribution  lines other than those within
                  500 feet of an insured's premises. It is understood and agreed
                  that public utilities  extension  and/or  suppliers  extension
                  and/or  contingent  business  interruption  coverage  are  not
                  subject to this exclusion  provided that these are not part of
                  a transmitter's or distributor's policies.

         13.      All onshore or offshore:
                    a.   gas and oil drilling risks;
                    b.   petrochemical risks;
                    c.   pipeline risks; or
                    d.   well risks.

         14.      Flood,  surface  water,  waves,  tidal  water or tidal  waves,
                  overflow of streams or other bodies of water or spray from any
                  of the foregoing, all whether driven by wind or not; provided,
                  however,  this  exclusion  shall  not  apply to  losses  under
                  automobile physical damage coverage.

         15.      Earthquake,  landslide  and  other  earth  movement  provided,
                  however, this exclusion shall not apply to automobile physical
                  damage coverage.

         16.      Railroad property, rolling stock, tracks or roadbeds.

         17.      Fine arts collections exceeding $5,000,000 in total value.

         18.      Mobile homes, except mobile home parks written on a commercial
                  lines basis with less than 25% of the mobile homes being owned
                  by the insured.

         19.      Risks having total insurable value of more than $50,000,000.

         20.      Growing, standing or drying crops and timber.

         21.      Watercraft except  watercraft  insured under personal property
                  floaters.

         22.      Bridges, dams and tunnels.




                                      -16-
<PAGE>

         23.      All loss,  cost or  expense  arising  out of,  resulting  as a
                  consequence of or related to poultry  products,  operations or
                  exposures,  including  but not  limited  to;  poultry  houses,
                  poultry processing  operations,  live birds,  processed birds,
                  egg laying operations, egg processing operations or eggs.

                                   ARTICLE VII

DEFINITIONS

A.       The following Definitions apply as respects all Property business:

I.       Property Occurrence:

         A.       The term "Occurrence" shall mean the sum of all individual
                  losses directly occasioned by any one disaster, accident or
                  loss or series of disasters, accidents or losses arising out
                  of one event which occurs within the area of one state of the
                  United States or province of Canada and states or provinces
                  contiguous thereto and to one another. However, the duration
                  and extent of any one "Occurrence" shall be limited to all
                  individual losses sustained by the Company occurring during
                  any period of 168 consecutive hours arising out of and
                  directly occasioned by the same event except that the term
                  "Occurrence" shall be further defined as follows:

                  1.       As regards windstorm, hail, tornado, hurricane,
                           cyclone, including ensuing collapse and water damage,
                           all individual losses sustained by the Company
                           occurring during any period of 72 consecutive hours
                           arising out of and directly occasioned by the same
                           event. However, the event need not be limited to one
                           state or province or states or provinces contiguous
                           thereto.

                  2.       As regards riot, riot attending a strike, civil
                           commotion, vandalism and malicious mischief, all
                           individual losses sustained by the Company occurring
                           during any period of 72 consecutive hours within the
                           area of one municipality or county and the
                           municipalities or counties contiguous thereto arising
                           out of and directly occasioned by the same event. The
                           maximum duration of 72 consecutive hours may be
                           extended in respect of individual losses which occur
                           beyond such 72 consecutive hours during the continued
                           occupation of an assured's premises by strikers,
                           provided such occupation commenced during the
                           aforesaid period.

                  3.       As regards earthquake (the epicenter of which need
                           not necessarily be within the territorial confines
                           referred to in the opening paragraph of this Article)
                           and volcanic eruption, all of the Company's
                           individual losses (including losses from other perils
                           covered hereunder which directly arise from
                           earthquake and volcanic eruption) which occur during
                           a period of 168 consecutive hours shall be considered




                                      -17-
<PAGE>

                           one "Occurrence". The term "earthquake" means one or
                           more seismic disturbances emanating from the same or
                           adjacent geological faults. The term "volcanic
                           eruption" means all activity arising from a single
                           volcano.

                  4.       As regards flood, being the overflowing of a natural
                           body of water caused by torrential rain and the
                           resulting inundation of the adjacent land, all
                           individual losses sustained by the Company which
                           occur during a period of 168 hours in a territory
                           forming one river basin shall be considered one
                           "Occurrence." The term "river basin" shall mean the
                           land drained by a river, including all the
                           tributaries of such river, which flows directly into
                           an ocean, sound, bay gulf, or into one of the Great
                           Lakes.

                  5.       As regards  "Freeze," only individual losses directly
                           caused by falling trees or limbs, collapse,  breakage
                           of glass,  power  outage (off  premises),  automobile
                           physical damage (comprehensive only) and water damage
                           (caused by ice damming or by bursting of frozen pipes
                           and  tanks)  may  be   included   in  the   Company's
                           "Occurrence".

         B.       For all "Occurrences" the Company may choose the date and time
                  when any such period of consecutive hours commences provided
                  that it is not earlier than the date and time of the
                  occurrence of the first recorded individual loss sustained by
                  the Company arising out of that disaster, accident or loss and
                  provided that only one such period of 168 consecutive hours
                  shall apply with respect to one event, except for those
                  "Occurrences" referred to in subparagraphs 1. and 2. above
                  where only one such period of 72 consecutive hours shall apply
                  with respect to one event, regardless of the duration of the
                  event.

         C.       No  individual  losses  occasioned  by an event  that would be
                  covered  by  72  hours   clauses   may  be   included  in  any
                  "Occurrence" claimed under the 168 hours provisions.


II.      Property Definition of Risk

         A.       The Company  shall be the sole judge of what  constitutes  one
                  risk provided:

                  1.       One risk shall be defined from the  standpoint of the
                           peril of fire, however,  except as otherwise provided
                           hereunder,  a building  and its contents for a single
                           insured  shall never be  considered  as  constituting
                           more than one risk, nor shall time element  coverages
                           be considered a separate risk apart from the building
                           and its contents, and

                  2.       One  risk,   with  respect  to  the  peril  of  wind,
                           including  but  not  limited  to:  tornado,  cyclone,
                           hurricane, windstorm and hail, shall mean all insured




                                      -18-
<PAGE>

                           locations  listed on an  individual  policy  that are
                           within a legal  property  boundary  which  is  owned,
                           occupied or operated by the insured as one continuous
                           property   site,   including  a  site  that  contains
                           roadways,  streams or rights-of-way  intersecting the
                           site.

                  3.       The term "building" shall mean each separately roofed
                           structure enclosed within exterior walls.

                  4.       As  respects  Dealer  Open  Lot  risks,  all  insured
                           property at any one location  shall be considered one
                           risk.

III.     Casualty Occurrence:

         A.       The term  "occurrence"  as used herein means each  accident or
                  occurrence or series of accidents or occurrences,  arising out
                  of one event, provided that, as respects:

                  1.       Products   Liability   (bodily  injury  and  property
                           damage),  the term "occurrence" shall mean the sum of
                           all  damages  arising  from the  consumption,  use or
                           exposure to the insured's product(s) occurring during
                           each  original  policy  period,  in  respect  to each
                           insured, each policy,  emanating from or traceable to
                           the same causative agency.

                  2.       Third  Party   Bodily   Injury  or  Property   Damage
                           Liability,   other  than   Automobile  and  Products,
                           arising  or   emanating   from  or   traceable  to  a
                           continuous or repeated exposure to the same causative
                           agency,  the term "occurrence"  shall mean the sum of
                           all damages  sustained by each insured,  each policy,
                           during each original policy period.

         B.       The term "each  original  policy  period" as used herein means
                  each  annual  period the  original  policy  (i.e.,  the policy
                  reinsured  hereunder)  is in effect.  Policies in effect for a
                  period  greater than one year shall be deemed to have separate
                  annual policy periods.

         C.       If  the  date  of  loss,  accident  or  occurrence  cannot  be
                  specifically  determined,   the  date  of  loss,  accident  or
                  occurrence shall be the inception date of the original policy;
                  such policy  period  shall be deemed not to exceed 12 calendar
                  months.

         D.       As respects  Occupational Disease under Workers'  Compensation
                  each case of an employee  contracting an Occupational  disease
                  for which the Company is held liable  shall be  considered  an
                  occurrence  within the meaning of this Agreement and,  subject
                  to the  provisions  of  Paragraph  2  below,  the  date of the
                  occurrence shall be deemed to be the following:

                  1.       If  the  case  is  compensable   under  the  Workers'
                           Compensation   Law   or  any   Occupational   Disease
                           Compensation  Act,  the date of the  beginning of the
                           disability for which compensation is payable;



                                      -19-
<PAGE>

                  2.       If the case is not  compensable  under  the  Workers'
                           Compensation   Law   or  any   Occupational   Disease
                           Compensation  Act,  the date that  disability  due to
                           said disease actually began;

                  3.       Where claim is made after employment has ceased, then
                           the date of cessation of  employment  shall be deemed
                           to  be  the  date  of  disability,  unless  otherwise
                           determined  by  a  Workers'   Compensation  Board  or
                           similar authority.

                  4.       In the event an occupational disease is contracted by
                           two or more  employees  of the same  insured  and the
                           Company  sustains within a policy year several losses
                           resulting from such occupational  disease  contracted
                           by the  employees,  the  aggregate of all such losses
                           within  each   original   policy   period   shall  be
                           considered as  constituting  one  occurrence  and the
                           inception  date of  original  policy in which  losses
                           occur   shall  be  deemed  to  be  the  date  of  the
                           occurrence.

                           a)       The term "each  original  policy  period" as
                                    used  herein  means each  annual  period the
                                    original policy (i.e.,  the policy reinsured
                                    hereunder) is in effect.  Policies in effect
                                    for a period  greater than one year shall be
                                    deemed  to  have   separate   annual  policy
                                    periods.

                           b)       If the date of loss,  accident or occurrence
                                    cannot be specifically determined,  the date
                                    of loss, accident or occurrence shall be the
                                    inception date of the original policy;  such
                                    policy  period shall be deemed not to exceed
                                    12 calendar months.

                                  ARTICLE VIII

CLAIMS

A.       As a  condition  precedent  to the  Reinsurer's  liability  under  this
         Agreement,  the  Company  shall  give  timely  written  notice  to  the
         Reinsurer  of all  claims  which  may  develop  into  losses  involving
         reinsurance hereunder.

B.       In addition,  the  following  categories of claims shall be reported to
         the Reinsurer immediately,  regardless of any questions of liability of
         the insured or coverage under the policy:

         1.       Fatality;

         2.       Partial or Total Paralysis;

         3.       Severe brain injury or brain damage prognosis;



                                      -20-
<PAGE>

         4.       Severe burns;

         5.       Amputation of one or more limbs;

         6.       Loss of sight or hearing to a substantial degree;

         7.       Any injury  where  there is, or appears  probable,  an alleged
                  loss of earnings for one year or more; and,

         8.       Any  claim  with  a  loss  reserve  that  exceeds  50%  of the
                  Company's  net  retention,  provided  that  such  claim  might
                  involve the Reinsurer.

C.       The  Company has the  obligation  to  investigate  and defend any claim
         affecting  this  reinsurance,  to  advise  the  Reinsurer  promptly  of
         subsequent  developments pertaining thereto and to pursue such claim to
         final determination.

D.       It is  understood  that when so  requested  the Company will afford the
         Reinsurer  an  opportunity  to be  associated  with the  Company at the
         expense of the Reinsurer in the defense or control of any claim or suit
         proceeding  involving  this  reinsurance;   and  the  Company  and  the
         Reinsurer  shall cooperate in every respect in the defense of such suit
         or claim or proceeding.


                                   ARTICLE IX

SUBROGATION AND SALVAGE

A.       The Reinsurer shall be subrogated, as respects any loss for which the
         Reinsurer shall actually pay or become liable, but only to the extent
         of the amount of payment by or the amount of liability to the
         Reinsurer, to all the rights of the Company against any person or other
         entity who may be legally responsible in damages for said loss. The
         Company hereby agrees to enforce such rights, but in case the Company
         shall refuse or neglect to do so the Reinsurer is hereby authorized and
         empowered to bring any appropriate action in the name of the Company or
         its policyholders, or otherwise to enforce such rights.

B.       Any recoveries,  salvages or  reimbursements  applying to risks covered
         under  this  Agreement  shall  always be used to  reimburse  the excess
         carriers (from the last to the first, beginning with the carrier of the
         last excess),  according to their  participation,  before being used in
         any way to reimburse the Company for its primary loss.

C.       All salvages, recoveries or reimbursements, after deduction of expenses
         applicable thereto, recovered or received subsequent to a loss
         settlement under this Agreement shall be applied as if recovered or
         received prior to the aforesaid settlement and all necessary
         adjustments shall be made by the parties hereto, provided always, that
         nothing in this clause shall be construed to mean that losses under




                                      -21-
<PAGE>

         this Agreement are not recoverable until the Company's ultimate net
         loss has been ascertained. Expenses hereunder shall exclude all office
         expenses of the Company and all salaries and expenses of its officials
         and employees except those of salaried adjusters.

                                    ARTICLE X

TAXES

The Company will be liable for all taxes on premiums  reported to the  Reinsurer
hereunder and will reimburse the Reinsurer for such taxes where the Reinsurer is
required to pay the same.

                                   ARTICLE XI

ACCESS TO RECORDS

The Company shall place at the disposal of the Reinsurer and the Reinsurer shall
have the  right to  inspect,  through  its  authorized  representatives,  at all
reasonable  times  during the currency of this  Agreement  and  thereafter,  the
books,  records and papers of the Company pertaining to the reinsurance provided
hereunder and all claims made in connection therewith.

                                   ARTICLE XII

INSOLVENCY

The  reinsurance  provided by this  Agreement  shall be payable by the Reinsurer
directly to the Company or to its liquidator, receiver or statutory successor on
the basis of the  liability  of the  Company  under the  contract  or  contracts
reinsured.  Subject to the right of offset and the verification of coverage, the
Reinsurer  shall pay its share of the loss  without  diminution  because  of the
insolvency of the Company.  In the event of the  insolvency of the Company,  the
liquidator,  receiver or statutory  successor of the Company  shall give written
notice of the  pendency  of each claim  against  the Company on a policy or bond
reinsured  within a reasonable  time after such claim is filed in the insolvency
proceeding.  During the pendency of such claim,  the  Reinsurer  may, at its own
expense, investigate such claim and interpose in the proceeding where such claim
is to be adjudicated  any defense or defenses which it may deem available to the
Company,  its  liquidator or receiver or statutory  successor.  Subject to court
approval, any expense thus incurred by the Reinsurer shall be chargeable against
the  Company  as  part of the  expense  of  liquidation  to the  extent  of such
proportionate  share of the benefit as shall  accrue to the Company  solely as a
result of the defense  undertaken by the  Reinsurer.  The  reinsurance  shall be
payable as set forth above except where this Agreement specifically provides for
the  payment  of  reinsurance  proceeds  to  another  party in the  event of the
insolvency of the Company.



                                      -22-
<PAGE>

                                  ARTICLE XIII

OFFSET AND SECURITY

A.       Each party hereto has the right, which may be exercised at any time, to
         offset  any  amounts,  whether  on  account  of  premiums  or losses or
         otherwise, due from such party to another party under this Agreement or
         any other  reinsurance  agreement  heretofore or hereafter entered into
         between  them,  against any amounts,  whether on account of premiums or
         losses or otherwise due from the latter party to the former party.  The
         party asserting the right of offset may exercise this right, whether as
         assuming or ceding  insurer or in both roles in the relevant  agreement
         or agreements.

B.       Each party  hereby  assigns  and pledges to the other party (or to each
         other party,  if more than one) all of its rights under this  Agreement
         to receive  premium or loss  payments at any time from such other party
         ("Collateral"), to secure its premium or loss obligations to such other
         party  at any time  under  this  Agreement  and any  other  reinsurance
         agreement  heretofore or  hereinafter  entered into by and between them
         ("Secured Obligations"). If at any time a party is in default under any
         Secured   Obligation   or  shall  be   subject   to  any   liquidation,
         rehabilitation,  reorganization or conservation proceeding,  each other
         party shall be entitled in its discretion, to apply, or to withhold for
         the  purpose of applying in due course,  any  Collateral  assigned  and
         pledged to it by the former  party and  otherwise  to realize upon such
         Collateral as security for such Secured Obligations.

C.       The security  interest  described  herein,  and the term  "Collateral,"
         shall apply to all payments and other proceeds in respect of the rights
         assigned and pledged.  A party's security  interest in Collateral shall
         be deemed evidenced only by the counterpart of this Agreement delivered
         to such party.

D.       Each right  under this  Article is a separate  and  independent  right,
         exercisable,  without  notice or demand,  alone or together  with other
         rights,  in the sole  election of the party  entitled  thereto,  and no
         waiver,  delay, or failure to exercise,  in respect of any right, shall
         constitute a waiver of any other right.  The provisions of this Article
         shall survive any cancellation or other termination of this Agreement.

                                   ARTICLE XIV

ERRORS AND OMISSIONS

The  Reinsurer  shall  not be  relieved  of  liability  because  of an  error or
accidental  omission  by the  Company  in  reporting  any  claim  or loss or any
business reinsured under this Agreement,  provided that the error or omission is
rectified  promptly after  discovery.  The Reinsurer shall be obligated only for
the return of the premium paid for business  reported  but not  reinsured  under
this Agreement.



                                      -23-
<PAGE>

                                   ARTICLE XV

COMMENCEMENT AND TERMINATION

A.       This  Agreement  shall take  effect as of 12:01  a.m.,  Standard  Time,
         September 1, 2001, and shall, except as otherwise  stipulated herein or
         in any Exhibit hereto or any Endorsement hereof, continue in full force
         and effect until terminated as hereinafter provided.

B.       This  Agreement  may be canceled at any December 31,  unless  otherwise
         mutually agreed by either party, giving 90 days notice in writing prior
         to  such  date,  stating  to  the  other  its  desire  to  effect  such
         cancellation.  However,  this Agreement shall not be cancelled prior to
         January 1, 2003.

C.       In the event of  cancellation,  the  Company  shall  have the option to
         terminate this Agreement on a cut-off or run-off basis as follows:

         1.       In the  event  the  Company  elects  to  cancel  cut-off,  the
                  Reinsurer  shall remain liable for losses  occurring  prior to
                  such  cancellation  date,  but all liability  shall  terminate
                  hereunder   as  to   losses   occurring   subsequent   to  the
                  cancellation date.

         2.       In the  event  the  Company  elects  to  cancel  run-off,  the
                  Reinsurer  shall remain liable for losses  occurring  prior to
                  such cancellation  date, and any risk covered hereunder and in
                  effect as of said cancellation date shall remain in full force
                  until policy  cancellation or natural  expiration for a period
                  of time not to exceed twelve months.

D.       Should this Agreement  terminate  while a covered loss occurrence is in
         progress,  the entire loss arising out of such loss occurrence shall be
         subject to this Agreement.

E.       Every  notice  of  termination  shall  be  given  by  certified  letter
         addressed to the  intended  recipient  at such  recipient's  address as
         hereinabove set forth. In determining  whether the requisite  number of
         days' notice has been given in any case, the date of termination  shall
         be counted but the date of mailing shall not.

F.       Notwithstanding  the  termination  of  this  Agreement  as  hereinabove
         provided,  the provisions of this Agreement  shall continue to apply to
         all unfinished  business  hereunder to the end that all obligations and
         liabilities  incurred by each party hereunder prior to such termination
         shall be fully performed and discharged.




                                      -24-
<PAGE>


IN WITNESS  WHEREOF the parties hereto have caused this Agreement to be executed
in duplicate in Hatboro, Pennsylvania,  this _________ day of ________________ ,
2002;

ACCEPTED:
PENN-AMERICA INSURANCE COMPANY
PENN-STAR INSURANCE COMPANY

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

and in Princeton,  New Jersey,  this  __________  day of  ______________________
2002.

                                              AMERICAN RE-INSURANCE COMPANY


                                              -----------------------
                                              Vice President

DATED:  February 28, 2002

RG/rg



                                      -25-
<PAGE>


                                                                No. 3154-0006
                                                                EXHIBIT A

                                    EXHIBIT A

                      PROPERTY AND CASUALTY EXCESS OF LOSS

                                    Section 1

A.       BUSINESS COVERED

         The  Reinsurer  agrees to reimburse  the Company,  on an excess of loss
         basis,  for the amounts of ultimate  net loss which the Company may pay
         as a result of losses  occurring  on and after  September  1, 2001,  as
         respects the Company's in-force policies,  and new and renewal policies
         becoming  effective  on and after said date,  covering  the  Classes of
         Insurance  set forth  below,  except as excluded  under the  EXCLUSIONS
         Article of this Agreement, subject to the limitations set forth herein.

<TABLE>
<CAPTION>
                                                CLASSES OF INSURANCE

                            Property                                         Casualty
<S>                                                     <C>
           Fire                                          General Liability
           Commercial Multi Peril Section I              Commercial Multi Peril Section II
           Businessowners Section I                      Businessowners Section II
           Allied Lines                                  Employer's Liability Stop Gap coverage
           Inland Marine
           Automobile Physical Damage,                   Non-owned and Hired Automobile Liability when
               including Dealer's Open Lot               written as part of Commercial Multi Peril
                                                         Section II or General Liability policies.
</TABLE>

B.       The  term  "policies"  as used  herein  means  each of the  Company'  s
         binders,  policies and contracts providing insurance and reinsurance on
         the Classes of Insurance covered hereunder.

                                    Section 2

LIMITS OF COVER

A.       As respects one or more than one of the classes under Property Classes
         of Insurance as stated in Section 1, the Reinsurer shall not be liable
         for any loss until the Company's ultimate net loss for each and every
         risk exceeds $300,000 and then the Reinsurer shall be liable for the
         amount of the Company' s ultimate net loss for each and every risk in
         excess of $300,000 but the Reinsurer's liability shall not exceed 100%
         of $1,700,000 for each and every risk or exceed $3,000,000 in any one
         occurrence.




                                      -1-
<PAGE>

B.       As respects one or more than one of the classes under Casualty  Classes
         of Insurance as stated in Section 1, the Reinsurer  shall not be liable
         for any loss until the Company's  ultimate net loss in each  occurrence
         exceeds  $500,000 and then the Reinsurer shall be liable for the amount
         of the  Company' s ultimate  net loss in each  occurrence  in excess of
         $500,000  but  the  Reinsurer's  liability  shall  not  exceed  100% of
         $2,500,000 in any one occurrence.

C.       In the event of a  combination  loss  involving  a property  risk and a
         casualty occurrence  (excluding any Commercial Auto Liability or Garage
         Liability losses from Exhibit B), the Company's  retention shall be the
         greater retention of the Line of Business  applicable but not to exceed
         to $500,000.

                                    Section 3

REINSURANCE PREMIUM

A.       The premium for the  reinsurance  provided  under this Exhibit shall be
         computed at the rate of 9.10% of the Company's net written  premium for
         the in-force Property business covered as of September 1, 2001.

B.       For the period September 1, 2001 through February 28, 2002, the premium
         for the  reinsurance  provided  under this Exhibit shall be computed at
         the rate of 11.375% of the  Company's  net written  premium for the new
         and renewal Property business  effective during this period and covered
         hereunder.

C.       For the period March 1, 2002 through December 31, 2002, the premium for
         the  reinsurance  provided  under this Exhibit shall be computed at the
         rate of 13.65% of the  Company's  net  written  premium for the new and
         renewal  Property  business  effective  during  this period and covered
         hereunder.

D.       The premium for the  reinsurance  provided  under this Exhibit shall be
         computed at the rate of 7.917% of the Company's net written premium for
         the in-force Casualty business covered as of September 1, 2001.

E.       For the period September 1, 2001 through February 28, 2002, the premium
         for the  reinsurance  provided  under this Exhibit shall be computed at
         the rate of 7.917% of the Company's net written premium for the new and
         renewal  Casualty  business  effective  during  this period and covered
         hereunder.

E.       For the period March 1, 2002 through December 31, 2002, the premium for
         the  reinsurance  provided  under this Exhibit shall be computed at the
         rate of 11.875% of the  Company's  net written  premium for the new and
         renewal  Casualty  business  effective  during  this period and covered
         hereunder.

G.       "Net  written  premium"  shall  mean the total of the  Company's  gross
         premium  written  during the  agreement  year for the lines of business
         covered  hereunder,  less expense constants on admitted  policies,  and


                                      -2-
<PAGE>

         less return premiums and premiums paid for reinsurance, if any, inuring
         to the benefit of the Agreement.

H.       The subject written premium for the in-force  business at the inception
         of this Agreement shall be the Unearned Premium Reserve.

                                    Section 4
COMMISSION

  The Reinsurer shall make a commission allowance of 40.0% to the Company on the
premiums ceded to this Agreement.

                                    Section 5
REPORTS AND REMITTANCES

A.       The  Company  will  provide  the  Reinsurer  with  all  necessary  data
         respecting  premiums  and  forward it to the  Reinsurer  within 45 days
         after the close of each quarter, on forms mutually acceptable.

B.       Any balance due the  Reinsurer,  shall be remitted by the Company  with
         the  Account  Current.  The  Reinsurer  shall remit any balance due the
         Company promptly upon the Reinsurer's receipt of the Account Current.

C.       The  incoming  unearned  premium  reserve  shall be paid by the Company
         within 45 days of the Agreement's inception (i.e., September 1, 2001).

D.       Payment by the  Reinsurer of its portion of loss and loss expenses paid
         by the Company will be made by the  Reinsurer  to the Company  within 5
         days  after  proof  of  payment  by  the  Company  is  received  by the
         Reinsurer.

                                    Section 6

WARRANTY

The  maximum  limits of  liability  for any one policy of the  Company  shall be
deemed not to exceed the following:

1.       General  Liability - $1,000,000 each occurrence and $2,000,000  general
         aggregate.   a)  As  respects  Products  and  Completed   Operations  -
         $1,000,000 in the aggregate.

2.       Liquor Liability  Coverage - $1,000,000 each occurrence  (i.e., new and
         renewal Restaurant policies,  excluding Bars and Taverns, for the A, B,
         and C states as per attached  Appendix A, having liquor receipts of 40%
         or less of total  sales,  effective on or after the  effective  date of
         this Agreement).





                                      -3-
<PAGE>

3.       Commercial Auto Liability - $1,000,000 each person/each occurrence;

4.       Commercial Auto Property Damage - $250,000 each occurrence;

5.       Commercial Auto Liability (CSL) - $1,000,000 each occurrence;

6.       Commercial  Uninsured and Underinsured  Motorists Coverage - $1,000,000
         each person/each occurrence;

7.       Personal  Injury  Protection  Coverage-  Statutory  Limits;  and Garage
         Liability - $1,000,000 each occurrence.

This Exhibit A is attached to and forms part of Reinsurance Agreement No.
3154-TBD issued to PENN-AMERICA INSURANCE COMPANY, PENN-STAR INSURANCE COMPANY


DATED:  February 28, 2002

RG/rg














                                      -4-
<PAGE>


                                                                  No. 3154-0006
                                                                  EXHIBIT B


                                    EXHIBIT B

                   COMMERCIAL AUTOMOBILE AND GARAGE LIABILITY
                                 EXCESS OF LOSS

                                    Section 1

A.       BUSINESS COVERED

         The  Reinsurer  agrees to reimburse  the Company,  on an excess of loss
         basis,  for the amounts of ultimate  net loss which the Company may pay
         as a result of losses  occurring  on and after  September  1, 2001,  as
         respects the Company's  in-force policies until the natural  expiration
         thereof,  covering  Commercial  Automobile  Liability  including Garage
         Liability, Class of Insurance,  except as excluded under the EXCLUSIONS
         Article of this Agreement, subject to the limitations set forth herein.

                                    Section 2

LIMITS OF COVER

A.     First Layer
       As respects the Class of Insurance as stated in Section 1, the  Reinsurer
       shall not be liable for any loss until the Company's ultimate net loss in
       each occurrence  exceeds  $250,000 and then the Reinsurer shall be liable
       for the amount of the Company' s ultimate net loss in each  occurrence in
       excess of $250,000 but the Reinsurer's liability shall not exceed 100% of
       $750,000 in any one occurrence.

B.     In the  event of a  combination  loss  involving  a  property  risk and a
       casualty  occurrence  (i.e.,  any  Commercial  Auto  Liability  or Garage
       Liability losses covered hereunder), the Company's retention shall be the
       greater retention of the Line of Business applicable but not to exceed to
       $300,000.

C.     Second Layer
       As respects the Class of Insurance as stated in Section 1, the  Reinsurer
       shall not be liable for any loss until the Company's ultimate net loss in
       each occurrence exceeds $1,000,000 and then the Reinsurer shall be liable
       for the amount of the Company' s ultimate net loss in each  occurrence in
       excess of $2,000,000 but the Reinsurer's  liability shall not exceed 100%
       of $2,000,000 in any one occurrence.

                                    Section 3

REINSURANCE PREMIUM

A.       First Layer

         The  reinsurance  provided  under this Exhibit shall be computed at the
following rates as required by law:




                                      -1-
<PAGE>

                      Commercial Auto (Other than Courier)
    Policy Limit                                  Gross Reinsurance Rates
    ------------                                  -----------------------
    $300,000 CSL                                  6.31%
    $500,000 CSL                                  16.67%
    $1,000,000 CSL                                25.72%
    $100,000/$300,000                             1.47%
    $250,000/$500,000                             10.74%
    $500,000/$1,000,000                           22.89%
                            Garage
    Policy Limit                                  Gross Reinsurance Rates
    ------------                                  -----------------------
    $300,000 CSL                                  7.61%
    $500,000 CSL                                  18.82%
    $1,000,000 CSL                                27.75%

                           Courier
    Policy Limit                                  Gross Reinsurance Rates
    ------------                                  -----------------------
    $1,000,000 CSL                                32.33%

B        Second Layer

         The reinsurance provided under this Exhibit shall be computed at a rate
         of 1.67% of the Company's net written premium for the in-force business
         effective during period and covered hereunder.

C.       "Net  written  premium"  shall  mean the total of the  Company's  gross
         premium  written  during the  agreement  year for the lines of business
         covered  hereunder,  less expense constants on admitted  policies,  and
         less return premiums and premiums paid for reinsurance, if any, inuring
         to the benefit of the Agreement.

D.       The subject net written premium for the in-force business at the
         inception of this Agreement shall be the Unearned Premium Reserve.

                                    Section 4

COMMISSION

The Reinsurer  shall make a commission  allowance of 40.0% to the Company on the
premiums ceded to this Agreement.






                                      -2-
<PAGE>

                                    Section 5
REPORTS AND REMITTANCES

A.       Reinsurance premium (i.e., General Re's return of the unearned premium)
         shall be paid by the Company within 45 days of Agreement's inception
         (i.e., September 1, 2001).

B.       Renewal  policies  to be paid  within  45 days  after the close of each
         quarter, with all necessary data respecting premiums shall be forwarded
         to the Reinsurer on forms mutually acceptable.

C.       Any balance due the Reinsurer, shall be remitted by the Company with
         the Account Current. The Reinsurer shall remit any balance due the
         Company promptly upon the Reinsurer's receipt of the Account Current.

D.       Payment by the  Reinsurer of its portion of loss and loss expenses paid
         by the Company will be made by the  Reinsurer  to the Company  within 5
         days  after  proof  of  payment  by  the  Company  is  received  by the
         Reinsurer.

                                    Section 6
WARRANTY

The  maximum  limits of  liability  for any one policy of the  Company  shall be
deemed not to exceed the following:

1.       Commercial Auto Liability - $1,000,000 each person/each occurrence;

2.       Commercial Auto Property Damage - $250,000 each occurrence;

3.       Commercial Auto Liability (CSL) - $1,000,000 each occurrence;

4.       Commercial Uninsured and Underinsured Motorists Coverage - $1,000,000
         each person/each occurrence;

5.       Personal Injury Protection Coverage- Statutory Limits; and Garage
         Liability - $1,000,000 each occurrence.

This Exhibit B is attached to and forms part of Reinsurance Agreement No.
3154-TBD issued to PENN-AMERICA INSURANCE COMPANY, PENN-STAR INSURANCE COMPANY


DATED:  February 28, 2002

RG/rg




                                      -3-
<PAGE>





                                   APPENDIX A

Class A                     Class B                    Class C
-------                     -------                    -------
Delaware                    Arkansas                   Arizona
Kansas                      California                 Georgia
Maryland                    Colorado                   Idaho
Nebraska                    Connecticut                Indiana
Nevada                      Florida                    Iowa
South Carolina              Illinois                   Maine
Virgina                     Kentucky                   Michigan
                            Louisiana                  Mississippi
                            South Dakota               Montana
                            Tennessee                  New Mexico
                            Utah                       North Dakota
                            Wisconsin                  Ohio
                                                       Oklahoma
                                                       Oregon
                                                       Washington
                                                       Wyoming




                                      -1-
<PAGE>



                                             NUCLEAR INCIDENT EXCLUSION CLAUSE--
                                             PHYSICAL DAMAGE--REINSURANCE--NO. 2

     (1) This Reinsurance  does not cover any loss or liability  accruing to the
Reassured,  directly or indirectly and whether as Insurer or Reinsurer, from any
Pool of Insurers  or  Reinsurers  formed for the  purpose of covering  Atomic or
Nuclear Energy risks.

     (2) Without in any way  restricting  the operation of paragraph (1) of this
Clause,  this Reinsurance  does not cover any loss or liability  accruing to the
Reassured,  directly or indirectly and whether as Insurer or Reinsurer, from any
insurance   against  Physical  Damage   (including   business   interruption  or
consequential loss arising out of such Physical Damage) to:

         I.       Nuclear reactor power plants including all auxiliary property
                  on the site, or

         II.      Any other nuclear reactor installation, including laboratories
                  handling radioactive materials in connection with reactor
                  installations, and "critical facilities" as such, or

         III.     Installations for fabricating complete fuel elements or for
                  processing substantial quantities of "special nuclear
                  material," and for reprocessing, salvaging, chemically
                  separating, storing or disposing of "spent" nuclear fuel or
                  waste materials, or

         IV.      Installations other than those listed in paragraph (2) III
                  above using substantial quantities of radioactive isotopes or
                  other products of nuclear fission.

     (3) Without in any way restricting the operations of paragraphs (1) and (2)
hereof,  this  Reinsurance  does not cover any loss or liability by  radioactive
contamination accruing to the Reassured,  directly or indirectly, and whether as
Insurer or Reinsurer,  from any insurance on property  which is on the same site
as a  nuclear  reactor  power  plant or other  nuclear  installation  and  which
normally  would be insured  therewith  except that this  paragraph (3) shall not
operate:

         (a) where Reassured does not have knowledge of such nuclear reactor
         power plant or nuclear installation, or

         (b) where said insurance  contains a provision  excluding  coverage for
         damage  to   property   caused  by  or   resulting   from   radioactive
         contamination,  however  caused.  However on and after 1st January 1960
         this  sub-paragraph  (b) shall only apply provided the said radioactive
         contamination exclusion provision has been approved by the Governmental
         Authority having jurisdiction thereof.

     (4) Without in any way  restricting  the operations of paragraphs  (1), (2)
and (3)  hereof,  this  Reinsurance  does not  cover  any loss or  liability  by
radioactive contamination accruing to the Reassured, directly or indirectly, and
whether as Insurer or Reinsurer,  when such radioactive contamination is a named
hazard specifically insured against.

     (5) It is understood  and agreed that this Clause shall not extend to risks
using  radioactive  isotopes  in any form  where  the  nuclear  exposure  is not
considered by the Reassured to be the primary hazard.

     (6) The term "special nuclear  material" shall have the meaning given it in
the Atomic Energy Act of 1954 or by any law amendatory thereof.

     (7) Reassured to be sole judge of what constitutes:

         (a)  substantial quantities, and

         (b)  the extent of installation, plant or site.




                                      -1-
<PAGE>


     Note.--Without  in any way  restricting  the  operation  of  paragraph  (1)
hereof, it is understood and agreed that:


         (a) all policies  issued by the  Reassured  on or before 31st  December
         1957 shall be free from the application of the other provisions of this
         Clause until expiry date or 31st December 1960  whichever  first occurs
         whereupon all the provisions of this Clause shall apply,

         (b) With respect to any risk located in Canada  policies  issued by the
         Reassured  on or  before  31st  December  1958  shall be free  from the
         application of the other provisions of this Clause until expiry date or
         31st December 1960 whichever first occurs  whereupon all the provisions
         of this Clause shall apply.







                                      -2-
<PAGE>


      NUCLEAR INCIDENT EXCLUSION CLAUSE - LIABILITY - REINSURANCE - No. 1B

     (1) This reinsurance  does not cover any loss or liability  accruing to the
Reassured  as a member of, or  subscriber  to, any  association  of  insurers or
reinsurer formed for the purpose of covering nuclear energy risks or as a direct
or indirect reinsurer of any such member, subscriber or association.

     (2) Without in any way  restricting  the operation of paragraph (1) of this
Clause it is understood and agreed that for all purposes of this reinsurance all
the original  policies of the Reassured  (new,  renewal and  replacement) of the
classes  specified in Clause II of this paragraph (2) from the time specified in
Clause  III in this  paragraph  (2)  shall be deemed to  include  the  following
provision (specified as the Limited Exclusion Provision):

     Limited Exclusion Provision.*

       I.  It is agreed that the policy does not apply under any liability
           coverage,

           to     {    injury, sickness, disease, death or destruction
                        bodily injury or property damage
           with respect to which an insured  under the policy is also an insured
           under a nuclear  energy  liability  policy  issued by Nuclear  Energy
           Liability  Insurance  Association,  Mutual  Atomic  Energy  Liability
           Underwriters or Nuclear Insurance  Association of Canada, or would be
           an insured under any such policy for its termination  upon exhaustion
           of its limit of liability.

       II. Family  Automobile  Policies  (liability  only),  Special  Automobile
           Policies (private  passenger  automobiles,  liability only),  Farmers
           Comprehensive   Personal   Liability   Policies   (liability   only),
           Comprehensive   Personal  Liability  Policies   (liability  only)  or
           policies of similar nature;  and the liability portion of combination
           forms related to the four classes of policies  stated above,  such as
           the  Comprehensive  Dwelling  Policy  and  the  applicable  types  of
           Homeowners Policies.

       III.The  inception  dates and  thereafter  of all  original  policies  as
           described in II above,  whether new,  renewal or  replacement,  being
           policies which either

                (a) become effective on or after 1st May, 1960, or

                (b) become effective before that date and contain the Limited
                    Exclusion Provision set out above;

           provided  this  paragraph  (2)  shall  not be  applicable  to  Family
           Automobile  Policies,  Special  Automobile  Policies,  or policies or
           combination policies of a similar nature,  issued by the Reassured on
           New York  risks,  until 90 days  following  approval  of the  Limited
           Exclusion Provision by the Governmental Authority having jurisdiction
           thereof.

     (3)  Except  for  those  classes  of  policies  specified  in  Clause II of
paragraph (2) and without in any way  restricting the operation of paragraph (1)
of this  Clause,  it is  understood  and agreed  that for all  purposes  of this
reinsurance the original  liability  policies of the Reassured (new, renewal and
replacement) affording the following coverages:
           Owners,  Landlords  and  Tenants  Liability,  Contractual  Liability,
           Elevator  Liability,   Owners  or  Contractors  (including  railroad)
           Protective  Liability,   Manufacturers  and  Contractors   Liability,
           Product   Liability,    Professional   and   Malpractice   Liability,
           Storekeepers  Liability,   Garage  Liability,   Automobile  Liability
           (including Massachusetts Motor Vehicle or Garage Liability)
shall be  deemed to  include,  with  respect  to such  coverages,  from the time
specified in Clause V of this paragraph (3), the following provision  (specified
as the Broad Exclusion Provision):

     Broad Exclusion Provision.*
     It is agreed that the policy does not apply:

       I.    Under any Liability Coverage, to   {    Injury, sickness, disease,
                                                     death or destruction Bodily
                                                     injury or property damage

                (a) with respect to which an insured under the policy is also an
                    insured under a nuclear  energy  liability  policy issued by
                    Nuclear  Energy  Liability  Insurance  Association,   Mutual
                    Atomic Energy  Liability  Underwriters or Nuclear  Insurance
                    Association of Canada, or would be an insured under any such
                    policy but for its termination  upon exhaustion of its limit
                    of liability; or



                                      -1-
<PAGE>

                (b) resulting from the hazardous  properties of nuclear material
                    and with respect to which (1) any person or  organization is
                    required to maintain  financial  protection  pursuant to the
                    Atomic Energy Act of 1954, or any law amendatory thereof, or
                    (2) the insured is, or had this policy not been issued would
                    be, entitled to indemnity from the United States of America,
                    or any agency thereof,  under any agreement  entered into by
                    the United States of America,  or any agency  thereof,  with
                    any person or organization.

     II. Under any Medical Payments Coverage, or under any Supplementary
         Payments Provision relating

<TABLE>
<CAPTION>
<S>                                                            <C>
        to    {{  immediate medical or surgical relief,       to expenses incurred with respect
                  first aid,
        to        bodily injury, sickness, disease or death   resulting from the hazardous properties of
                  bodily injury

         nuclear material and arising out of the operation of nuclear facility
         by any person or organization.

    III.  Under any Liability Coverage, to    {    Injury, sickness, disease, death or destruction
                                                   Bodily injury or property damage
</TABLE>

         resulting from the hazardous properties of nuclear material, if

                (a) the nuclear  material (1) is at any nuclear  facility  owned
                    by, or  operated  by or on behalf  of, an insured or (2) has
                    been discharged or dispersed therefrom;

                (b) the nuclear  material is contained in spent fuel or waste at
                    any  time  possessed,   handled,  used,  processed,  stored,
                    transported or disposed of by or on behalf of an insured; or

                (c)  the   {    injury, sickness, disease, death or destruction
                                 bodily injury or property damage

                    arises out of the  furnishing  by an  insured  of  services,
                    materials,   parts  or  equipment  in  connection  with  the
                    planning, construction, maintenance, operation or use of any
                    nuclear facility, but if such facility is located within the
                    United States of America, its territories, or possessions or
                    Canada, this exclusion (c) applies only to
                  {      injury to or destruction of property at such nuclear
                         facility. property damage to such nuclear facility and
                         any property thereat.

     IV. As used in this endorsement:

         "hazardous   properties"  include   radioactive,   toxic  or  explosive
         properties;  "nuclear materials" means source material, special nuclear
         material or byproduct  material;  "source  material,"  "special nuclear
         material,"  "byproduct  material"  have the meanings  given them in the
         Atomic  Energy  Act of 1954 or in any law  amendatory  thereof;  "spent
         fuel" means any fuel element or fuel component,  solid or liquid, which
         has been used or exposed to  radiation  in a nuclear  reactor;  "waste"
         means any waste material (1) containing  byproduct  material other than
         the tailings or wastes produced by the extraction or  concentration  of
         uranium  or thorium  from any ore  processed  primarily  for its source
         material  content and (2) resulting from the operation by any person or
         organization of any nuclear facility  included within the definition of
         nuclear facility under paragraph (a) or (b) thereof; "nuclear facility"
         means

                (a) any nuclear reactor,

                (b) any equipment or device  designed or used for (1) separating
                    the  isotopes of uranium or  plutonium,  (2)  processing  or
                    utilizing  spent  fuel,  or  (3)  handling,   processing  or
                    packaging waste,

                (c) any equipment or device used for the processing, fabricating
                    or alloying of special  nuclear  material if at any time the
                    total amount of such  material in the custody of the insured
                    at the  premises  where such  equipment or device is located
                    consists of or contains  more than 25 grams of  plutonium or
                    uranium  233 or any  combination  thereof,  or more than 250
                    grams of uranium 235,

                (d) any structure, basin, excavation, premises or place prepared
                    or used for the storage or disposal of waste,



                                      -2-
<PAGE>

         and  includes the site on which any of the  foregoing  is located,  all
         operations  conducted  on such  site  and all  premises  used  for such
         operations;  "nuclear reactor" means any apparatus  designed or used to
         sustain  nuclear  fission in a  self-supporting  chain  reaction  or to
         contain a critical mass of fissionable material; With respect to injury
         to or  destruction  of  property,  the word  "injury" or  "destruction"
         includes all forms of radioactive contamination of property.  "Property
         damage" includes all forms of radioactive contamination of property.

     V.  The inception dates and thereafter of all original  policies  affording
         coverages  specified in this  paragraph  (3),  whether new,  renewal or
         replacement, being policies which become effective on or after 1st May,
         1960, provided this paragraph (3) shall not be applicable to

                  (i) Garage and Automobile Policies issued by the Reassured on
         New York risks, or

                (ii)statutory  liability  insurance  required  under Chapter 90,
         General Laws of Massachusetts,  until 90 days following approval of the
         Broad  Exclusion   Provision  by  the  Governmental   Authority  having
         jurisdiction thereof.

     (4) Without in any way  restricting  the operation of paragraph (1) of this
Clause,  it is understood  and agreed that  paragraphs (2) and (3) above are not
applicable  to original  liability  policies of the Reassured in Canada and that
with respect to such policies this Clause shall be deemed to include the Nuclear
Energy  Liability  Exclusion  Provisions  adopted by the Canadian  Underwriters'
Association or the Independent Insurance Conference of Canada.


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

     * NOTE: The words printed in italics in the Limited Exclusion Provision and
in the Broad  Exclusion  Provision  shall  apply only in  relation  to  original
liability  policies  which  include a  Limited  Exclusion  Provision  or a Broad
Exclusion Provision containing those words.




                                      -3-
<PAGE>



        NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE AND LIABILITY
              (BOILER AND MACHINERY POLICIES) - REINSURANCE - No. 3

         (1) This reinsurance  does not cover any loss or liability  accruing to
the Reassured as a member of, or subscriber  to, any  association of insurers or
reinsurers  formed for the  purpose of  covering  nuclear  energy  risks or as a
direct or indirect reinsurer of any such member, subscriber or association.

         (2) Without in any way  restricting  the  operation of paragraph (1) of
this  Clause  it is  understood  and  agreed  that  for  all  purposes  of  this
reinsurance  all  original  Boiler  and  Machinery  Insurance  contracts  of the
Reassured  (new,  renewal  and  replacement)  shall be  deemed  to  include  the
following provisions of this paragraph.

                This Policy does not apply to "loss," whether it be direct or
                indirect, proximate or remote

                (a)   from an Accident  caused directly or indirectly by nuclear
                      reaction,  nuclear radiation or radioactive contamination,
                      all whether controlled or uncontrolled; or

                (b)   from nuclear  reaction,  nuclear  radiation or radioactive
                      contamination,  all whether  controlled  or  uncontrolled,
                      caused  directly  or  indirectly  by,  contributed  to  or
                      aggravated by an Accident.

         (3)  However,  it is  agreed  that  loss  arising  out  of  the  use of
Radioactive  Isotopes  in any  form  is not  hereby  excluded  from  reinsurance
protection.

         (4) Without in any way restricting the operation of paragraph (1)
hereof, it is understood and agreed that

                (a)   all policies  issued by the Reassured to become  effective
                      on or  before  30th  April,  1958,  shall be free from the
                      application  of the other  provisions of this Clause until
                      expiry date or 30th April,  1961,  whichever first occurs,
                      whereupon all the provisions of this Clause shall apply,

                (b)   with respect to any risk located in Canada policies issued
                      by the  Reassured  to become  effective  on or before 31st
                      December,  1958, shall be free from the application of the
                      other  provisions of this Clause until expiry date or 31st
                      December,  1960, whichever first occurs, whereupon all the
                      provisions of this Clause shall apply.





                                      -1-