GENERAL RE- NEW ENGLAND ASSET MANAGEMENT, INC.

                        Investment Management Agreement

     This Agreement is made as of the 15th day of April, 1997, between

1. GENERAL RE-NEW ENGLAND ASSET MANAGEMENT, INC., a corporation organized under
the laws of the State of Delaware ( "Manager"); and

2. PENN-AMERICA INSURANCE COMPANY and its subsidiary PENN-STAR INSURANCE
COMPANY, corporations organized under the laws of the State of Pennsylvania
("Client").

     WHEREAS,  Client desires to appoint  Manager as the  investment  manager of
that portion of Client's assets constituting the Account (as defined below);

     NOW THEREFORE,  in consideration of the mutual agreements herein contained,
it is agreed as follows:

Section 1. The Account

     The cash, securities and other assets placed by Client in the account to be
managed under this  Agreement  (the  "Account") are listed on Schedule A. Assets
may be added to the  Account at any time with the  consent of the  Manager.  The
Account  will  include  these  assets  and any  changes in them  resulting  from
transactions  directed by Manager,  withdrawals  made by Client,  or  dividends,
interest, stock splits and other earnings, gains or losses on the assets.

     Assets  placed in the  Account  by  Client  that are not to be  managed  by
Manager are separately  identified on Schedule A ("Unmanaged  Assets").  Manager
will include  these assets in its periodic  reports to Client,  but will exclude
their value from the Account in calculating Manager's fees.

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Section 2. Management of the Account

     Manager will make all  investment  decisions for the Account,  in Manager's
sole discretion and without first consulting or notifying  Client, in accordance
with the investment restrictions and guidelines which are attached as Schedule B
(the "Investment Guidelines").  Client may change these Investment Guidelines at
any time,  but Manager  will be bound by the changes  only after it has received
and agreed to them in writing.  Other than by the Investment  Guidelines and the
terms of this Agreement, the investments made by Manager on behalf of the Client
will not be restricted in any manner, except by operation of law.

     Manager  will  have full  power and  authority,  on  behalf of  Client,  to
instruct  any  brokers,  dealers  or banks to buy,  sell,  exchange,  convert or
otherwise trade in all securities, futures or other investments for the Account.

     Manager will not be  responsible  for giving  Client  investment  advice or
taking any other action with respect to Unmanaged Assets.

     Client  appoints  Manager as its true and lawful attorney of the Client for
and  in  the  name,  place  and  stead  of  Client,  in  Manager's  unrestricted
discretion,  to operate and conduct the brokerage  accounts of the Client and to
do and perform all and every act and thing  whatsoever  requisite in furtherance
of the  brokerage  accounts and this  Agreement,  including the execution of all
writings related for the purchase or sale (including short sales),  assignments,
transfers and ownership of any stocks, bonds, commodities,  or other derivatives
or  securities.  Manager  is  hereby  fully  authorized  to act and  rely on the
authority vested pursuant to said power of attorney.

     Effective as of January 1, 1997,  and until  further  notice,  Manager will
assist Client in preparing Client's  statutory  Schedule D. Client  acknowledges
that Manager  will  provide  accounting  data  according  to Manager's  standard
interpretation of accounting  principles,  unless expressly instructed otherwise
by Client's prior written notice.

Section 3. Transactions for the Account

     Manager  will  arrange for  securities  transactions  for the Account to be
executed  through  those  brokers,  dealers or banks that Manager  believes will
provide  best  execution.  In choosing a broker,  dealer or bank,  Manager  will
consider  the broker,  dealer or bank's  execution  capability,  reputation  and
access to the markets for the securities  being traded for the Account.  Manager
will seek  competitive  commission  rates,  but not necessarily the lowest rates
available.

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     Manager  may also send  transactions  for the Account to brokers who charge
higher commissions than other brokers,  provided that Manager determines in good
faith that the amount of  commissions  Manager pays is reasonable in relation to
the value of the  brokerage  and  research  services  provided,  viewed in terms
either of that particular transaction or Manager's overall responsibilities with
respect to all clients whose accounts Manager manages on a discretionary basis.

     If Manager  decides to purchase or sell the same  securities for Client and
other  clients at about the same time,  Manager may combine  Clients  order with
those of other  clients if Manager  reasonably  believes that it will be able to
negotiate better prices or lower  commission rates or transaction  costs for the
combined order than for Client's order alone.  Client will pay the average price
and  transaction  costs  obtained for such combined  orders.  If Manager  cannot
obtain execution of the combined orders at prices or for transaction  costs that
Manager believes to be desirable, Manager will allocate the securities purchased
or  sold as part  of the  combined  order  by  following  its  order  allocation
procedures.

     Manager generally will allocate  securities  purchased or sold as part of a
combined order to Client's  Account and to accounts of other clients pro rata in
proportion to the size of the order placed for each client. However, Manager may
increase  or  decrease  the amounts of  securities  allocated  to each client if
necessary to avoid having odd or small numbers of shares held for the account of
any client.  Each client that  participates  in a combined order will receive or
pay the  average  share  price  for  all  transactions  executed  as part of the
combined order and will pay its pro rata share of the transaction costs.

     If Client directs  Manager to use particular  brokers,  dealers or banks to
execute  transactions for the Account,  Manager will do so, but Manager will not
seek better execution services or prices for Client from other brokers,  dealers
or banks,  and Client may pay higher  prices or  transaction  costs as a result.
Manager  also may not be able to seek better  execution  services  for Client by
combining Client's orders with those of other clients.

     Client may direct all transactions for the Account to a particular  broker,
dealer or bank,  by writing the name and address of that broker,  dealer or bank
in the space provided on Schedule A.

     Client has the right to withdraw cash at any time with prior written notice
to the Manager.

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Section 4. Transaction Confirmations

     Manager  will   instruct   the  brokers,   dealers  or  banks  who  execute
transactions  for the  Account  to send  Client all  transaction  confirmations,
unless Client chooses not to receive  confirmations.  If Client does not wish to
receive individual confirmations, this box should be checked. []

     Client may elect to receive individual  confirmations at any time by giving
Manager written notices.

Section 5. Custody of Account Assets

     The assets in the Account will be held for Client by the custodian named on
Schedule A (the  "Custodian").  Manager  will not have  custody  of any  Account
assets. Client will pay all fees of the Custodian.

     Client will  authorize the Custodian to follow  Manager's  instructions  to
make and accept payments for, and to deliver or to receive,  securities, cash or
other investments purchased,  sold, redeemed,  exchanged,  pledged or loaned for
the Account.  Client also will instruct the Custodian to send Client and Manager
monthly  statements  showing the assets in and all  transactions for the Account
during the month, including any payments of Manager's fees.

     Client  will  provide  Manager  with  a  copy  of its  agreement  with  the
Custodian,  and will give  Manager  reasonable  advance  notice of any change of
Custodian.

Section 6. Reports to Client

     Manager  will send Client at least  monthly and  annually  written  reports
showing  the  identity,  cost,  and  current  market  value of the assets in the
Account,  each transaction made for the Account during the period covered by the
report, and the Account's performance.  Reports will be provided for each Client
company portfolio, as well as all Client companies, on a consolidated basis.

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Section 7. Account Valuation

     Manager will value the securities in the Account that are listed and traded
on a national  securities  exchange  or on NASDAQ on the  valuation  date at the
closing price on the principal  market where the securities are traded.  Manager
will value  other  securities  or  investments  in the  Account in a manner that
Manager  believes  in good faith  reflects  their fair market  value.  Where the
market  value of any security is not readily  available,  Client and the Manager
will each choose one broker dealer and the market value will be deemed to be the
average of the values determined by the two broker dealers.

Section 8. Manager's Fees

     For  Manager's  services,  Client will pay a  percentage  of the value,  as
determined  under Section 7 of this  Agreement,  of all assets on a consolidated
portfolio  basis in the  Account  (excluding  Unmanaged  Assets)  as of the last
trading  day of each  calendar  month.  The fees are  payable at the end of each
calendar quarter for services provided by Manager during the prior three months.
The  percentage  amount  of the  fees is  shown on  Schedule  A. In any  partial
quarter,  the fees  will be  reduced  pro rata  based on the  number of days the
Account was managed.

     Client agrees to pay Manager's fees as follows:

     [x]  The Custodian will deduct the fees from Client's  Account and pay them
          to Manager each quarter. Manager will send Client and the Custodian at
          the same time a bill showing the amount of Manager's fees, the Account
          value on which  they  were  based and how they  were  calculated.  The
          Custodian  will send  Client a monthly  statement  showing all amounts
          paid from the Account, including Manager's fees.

     [ ]  Client will be billed  directly by Manager and will pay Manager's fees
          within 30 days of receiving the bill.

     If Manager  invests in  securities  issued by money  market  funds or other
investment  companies for the Account,  these securities will be included in the
value of the Account when Manager's fees are calculated.  These same assets will
be subject to additional  investment  management and other fees that are paid by
the  investment  company  but  ultimately  borne  by  its  shareholders.   These
additional fees are described in each investment company's prospectus.

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Section 9. Proxy Voting

Proxies for securities in the Account should be voted as follows:

     [ ]  Client directs Manager not to vote proxies for securities held for the
          Account.

     [x]  Client  directs  Manager to vote all proxies for  securities  held for
          Client's Account in accordance with -

          [x]  Manager's own discretion
                                       or
          [ ]  Client's proxy voting guidelines attached as Schedule C.

     Client  will  direct  Custodian  to send  promptly  all proxies and related
shareholder  communications  to Manager  and to  identify  them as  relating  to
Client's  Account.  Client  understands  that  Manager  will not be able to vote
proxies  if they are not  received  on a timely  basis  from  the  Custodian  as
properly identified as relating to Client's Account.

     These proxy  voting  instructions  may be changed at any time by  notifying
Manager in writing.

Section 10. Legal Proceedings

     Manager is not the  attorney  for,  nor will it advise or act for Client in
any  legal  proceedings,  including  bankruptcies  or class  actions,  involving
securities held in the Account or issuers of those securities.

Section 11. Risk

     Subject to Section 12, the Manager cannot guarantee the future  performance
of the Account,  promise any specific  level of  performance or promise that its
investment  decisions,  strategies or overall  management of the Account will be
successful. The investment decisions Manager will make for Client are subject to
various market, currency,  economic,  political and business risks, and will not
necessarily be profitable.

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Section 12. Standard of Care; Limitation of Liability

     Except as may  otherwise be provided by law,  Manager will not be liable to
Client for any loss (i) that  Client may  suffer as a result of  Manager's  good
faith  decisions or actions where Manager  exercises the degree of care,  skill,
prudence and diligence that a prudent person acting in a like fiduciary capacity
would use; (ii) caused by following  Client's  instructions;  or (iii) caused by
the Custodian,  any broker, dealer or bank to which Manager directs transactions
for the Account or any other person.

     Federal  and  state  securities  laws  impose   liabilities  under  certain
circumstances  on persons who act in good  faith,  and this  Agreement  does not
waive or limit  Client's  rights under those laws,  except to the extent Manager
negligently  fails to comply with written  instructions  from Client relating to
Client's  investments to the extent the investments  must comply with applicable
insurance investment or tax laws .

     Manager  will not be  responsible  for  Client's  own  compliance  with the
insurance  investment  laws  of  Client's  state  of  domicile  or for  Client's
compliance with applicable tax laws.

     In managing  the Account,  Manager will not consider any other  securities,
cash, or other  investments or assets Client owns for  diversification  or other
purposes.  Manager shall have no responsibility whatsoever for the management of
the  Unmanaged  Assets or any assets of Client  other than the Account and shall
incur no liability  for any loss or damage which may result from the  management
of such other assets.

Section 13. Client Directions

     The names and specimen  signatures of each  individual who is authorized to
give directions to Manager on Client's behalf under this Agreement are set forth
on Schedule D.  Directions  received by Manager from Client must be signed by at
least one such person. If Manager receives  directions from Client which are not
signed by a person  designated  on Schedule D, Manager  shall not be required to
comply with such  directions  until it verifies that the directions are properly
authorized by Client.

     Manager shall be fully  protected in relying upon any  direction  signed or
given by a person that is designated on Schedule D hereto, as attested,  to give
such directions on Client's  behalf.  Manager also shall be fully protected when
acting  upon an  instrument,  certificate,  or  paper  that  Manager  reasonably
believes  to be  genuine  and to be signed or  presented  by any such  person or
persons. Manager shall be under no duty to make any

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<PAGE>

investigation or inquiry as to any statement contained in any writing and may
accept the same as conclusive evidence of truth and accuracy of statements
contained therein.

Section 14. Confidentiality

     Except as Client and Manager  otherwise agree or as may be required by law,
all  information  concerning  the  Account  and  services  provided  under  this
Agreement shall be kept confidential.

Section 15. Non-Exclusive Agreement

     Manager  provides  investment  advice  to other  clients  and may give them
advice or take actions for them,  for  Manager's own accounts or for accounts of
persons  related to or  employed  by  Manager,  that is  different  from  advice
provided to or actions taken for Client.

     Manager is not obligated to buy, sell or recommend for Client's Account any
security or other  investment  that Manager may buy, sell or recommend for other
clients  or for the  account of Manager  or its  related  persons or  employees.
Manager will treat all clients fairly and equitably.

     If Manager obtains material, non-public information about a security or its
issuer that  Manager may not  lawfully  use or  disclose,  Manager  will have no
obligation  to  disclose  the  information  to Client or to use it for  Client's
benefit.

Section 16. Term of Agreement

     Either Client or Manager may cancel this Agreement at any time upon 30 days
written notice.  Written notice is complete upon the date(s) of delivery of same
via fax  transmittal  or U.S. mail postage mark.  This  Agreement will remain in
effect until  canceled.  Termination  of this  Agreement will not affect (i) the
validity of any action that  Manager or Client has  previously  taken;  (ii) the
liabilities or obligations of Manager or Client for transactions  started before
termination; or (iii) Client's obligation to pay Manager's fees through the date
of termination.  Upon termination,  Manager will have no obligation to recommend
or take any action with regard to the  securities,  cash or other  assets in the
Account.

Section 17. Agreement Not Assignable

     This  Agreement  may not be assigned  within the meaning of the  Investment
Advisers Act of 1940 (the "Advisers Act") by Manager without Client's consent.

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Section 18. Governing Law

     The  internal  law of  Connecticut  will  govern this  Agreement.  However,
nothing in this  Agreement  will be construed  contrary to any  provision of the
Advisers Act or the rules thereunder.

Section 19. Miscellaneous

     If any  provision  of this  Agreement is or becomes  inconsistent  with any
applicable law or rule,  the provision  will be deemed  rescinded or modified to
the extent  necessary  to comply with such law or rule.  In all other  respects,
this Agreement will continue in full force and effect.  This Agreement  contains
the  entire  understanding  between  Manager  and  Client and may not be changed
except in writing signed by both parties. Failure to insist on strict compliance
with this  Agreement or with any of its terms or any continued  conduct will not
be considered a waiver by either party under this Agreement.

Section 20. Notices

     All notices and  instructions  with respect to the Account or other matters
covered  by this  Agreement  may be sent by U.S.  mail,  overnight  courier,  or
facsimile  transmission  (with a hard copy sent by U.S.  mail) to Client  and to
Manager at the  addresses  at the end of this  agreement  or to another  address
provided in writing.

Section 21. Representations of Client

     Client represents and warrants to Manager that (a) Client is the beneficial
owner of all  assets  in the  Account  and that  there  are no  restrictions  on
transfer  or sale of any of those  assets;  (b)  this  Agreement  has been  duly
authorized,  executed, and delivered by Client and is Client's valid and binding
obligation;  (c) the names of the  individuals  who are  authorized to act under
this Agreement on behalf of Client have been given to Manager in writing; (d) no
government authorizations,  approvals, consents, or filings not already obtained
are required in connection with the execution,  delivery, or performance of this
Agreement  by  Client;  and (e) the  assets in the  Account  are not and are not
deemed  to be  assets of any  employee  benefit  plan  subject  to the  Employee
Retirement  Income Security Act of 1974, as amended.  Client agrees to indemnify
and hold  harmless  Manager from all  liability  and costs  (including  costs of
defense)  which may be  asserted  or incurred by reason of any defect in Clients
authority  to appoint  Manager or any defect in the  conduct of Client in making
the appointment under this Agreement.


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<PAGE>

Section 22. Representations of Manager

     Manager   represents  and  warrants  that  this  Agreement  has  been  duly
authorized,  executed  and  delivered  by Manager  and is its valid and  binding
obligation.

Section 23. Disclosure

     Client has received  and  reviewed a copy of Part II of Manager's  Form ADV
and a copy of this Agreement.

AGREED TO AND ACCEPTED BY:

GENERAL RE NEW ENGLAND                               PENN-AMERICA INSURANCE
ASSET MANAGER, INC                                   COMPANY
/s/ Gerald T. Lynch                                  By: /s/ Rosemary Ferrero
Gerard T. Lynch                                          Rosemary Ferrero
Its President                                            Vice President, 
                                                         Treasurer, Secretary

Pond View Corporate Center                                    420 S York Road
76 Batterson Park Road                                        Hatboro, PA 19040
Farmington, Connecticut 06032

                                                         23-1997049
                                              (Taxpayer identification Number)

                                                    PENN-STAR INSURANCE COMPANY
                                                    By: /s/ Rosemary Ferrero
                                                        Rosemary Ferrero
                                                        Vice President,
                                                        Treasurer, Secretary

                                                              420 S. York Road
                                                              Hatboro, PA 19040


                                                              23-2865367
                                              (Taxpayer Identification Number)

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<PAGE>

                                   SCHEDULE A

ACCOUNT ASSETS.

     A. Managed Assets Client has deposited the following  securities.  cash and
other  assets  with the  Custodian  identified  below to be  managed  under this
Agreement:

                            See List attached hereto.

     B. Unmanaged  Assets Client also deposited with the Custodian the following
assets which are not to be managed under this Agreement:

                    Custodial Account number 32-32-300430029

II. CUSTODY OF ACCOUNT ASSETS. The assets to be managed under this Agreement and
any Unmanaged Assets will be held by:

PNC Bank, N.A.                    Custodial Account Number: 32-32-3004030011
Institutional Custody Service                               32-32-3004030029
200 Stevens Drive, Suite 425
Lester, PA 19113


III. FEES. Manager's fees for services provided under this Agreement shall be as
follows:

Annual fee of .20 of 1% on the first $50 million of market value of invested
assets of "Available for Sale" portfolios and .15 of 1% on remaining market
value of invested assets of "Available for Sale" portfolios; and .05 of 1% of
market value of invested assets of "Held to Maturity" portfolios.

Market values of Penn America Insurance Company and Penn Star Insurance Company
are aggregated for fee purposes.

IV.  BROKERAGE  DIRECTION.  Client directs Manager to cause all transactions for
the Account to be executed through the following broker, dealer or bank:

Client has read, understands and accepts the limitations that this direction
will place on Manager's ability to seek best execution for the Account. This
direction may be changed by Client at any time by notifying Manager in writing.

V. NAME OF CLIENT:                                       VI. DATE:
PENN-AMERICA INSURANCE COMPANY
By: /s/ Rosemary Ferrero                                  4/15/97



<PAGE>

                                   SCHEDULE A
ACCOUNT ASSETS.

     A. Managed Assets Client has deposited the following  securities,  cash and
other  assets  with the  Custodian  identified  below to be  managed  under this
Agreement:

                            See List attached hereto.

     B. Unmanaged  Assets Client also deposited with the Custodian the following
assets which are not to be managed under this Agreement:

II. CUSTODY OF ACCOUNT ASSETS. The assets to be managed under this Agreement and
any Unmanaged Assets will be held by:

PNC Bank, N.A.                      Custodian Account Number 32-32-300-4030053
Institutional Custody Service
200 Stevens Drive, Suite 425
Lester, PA 19113

III. FEES. Manager's fees for services provided under this Agreement shall be as
follows:

Annual fee of .20 of 1 % on the first $50 million of market value of invested
assets of "Available for Sale" portfolios and .15 of 1% on remaining market
value of invested assets of "Available for Sale" portfolios; and .05 of 1% of
market value of invested assets of "Held to Maturity" portfolios.

Market values of Penn-America Insurance Company and Penn-Star Insurance Company
are aggregated for fee purposes.

IV.  BROKERAGE  DIRECTION.  Client directs Manager to cause all transactions for
the Account to be executed through the following broker, dealer or bank:

Client has read, understands and accepts the limitations that this direction
will place on Manager's ability to seek best execution for the Account. This
direction may be changed by Client at any time by notifying Manager in writing.

V. NAME OF CLIENT:                                           VI. DATE:
PENN-STAR INSURANCE COMPANY
By: /s/ Rosemary Ferrero                                     4/15/97

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<PAGE>

SCHEDULE B

INVESTMENT  GUIDELINES:  The investment  guidelines to be followed by Manager in
managing Client's Account are set forth below:

                                  See attached






NAME OF CLIENT                                       DATE:

PENN-STAR INSURANCE COMPANY

BY: /S/ Rosemary Ferrero                            4/15/97

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<PAGE>
                                   SCHEDULE B
                                INVESTMENT PLAN
                                       OF
                         PENN-AMERICA INSURANCE COMPANY

                Investment Portfolio - Objectives and Guidelines

     The Board of Directors of  PENN-AMERICA  INSURANCE  COMPANY (the "Company")
authorizes  the  Company's  officers  to engage the  services  of an  Investment
Manager who possesses the necessary  personnel and research facilities to manage
the  Company's  investment  portfolio.  The  portfolio is a balanced  accounting
consisting  of  fixed  income  obligations,  asset  based  obligations  and cash
equivalents.

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

     Execution  of All  Trades:  It is  hereby  understood  that all  investment
transactions  must have prior approval either written or verbal, of the Chairman
of the Investment  Committee,  Irvin Saltzman,  prior to their initiation by the
Investment Manager.

                              Investment Portfolio

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

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

     (B) Fixed income  securities  including United States Government and Agency
     issues and other  issues  backed by the full faith and credit of the United
     States Government,  corporate bonds,  collateralized  mortgage obligations,
     municipal bonds, preferred stocks, and asset based obligations.

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

<PAGE>

                             Investment Objectives

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

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

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

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

                          Investment Policy Guidelines

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

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

                            Fixed Income Securities

     1. Allocations.  The target range of investments in fixed income securities
is zero percent (0%) to one hundred percent (100%) of the portfolio.

     2. Types of  Securities.  Funds not invested in cash  equivalents  shall be
invested  entirely in marketable debt securities issued by either (a) the United
States Government or agencies of the United States Government, (b) assets backed
by the full faith and credit of the United  States  Government,  (c)  issuers of
collateralized  mortgage  obligations,  (d)  domestic  corporations,   including
industrials and utilities and preferred stocks issued

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<PAGE>

by said  corporation,  and (e) domestic banks and other United States  financial
institutions.

     At least ninety percent (90%) of the portfolio  shall be rated A or better.
These ratings shall be established by recognized rating services (i.e., Moody's,
Standard & Poor's) and reinforced by independent  in house credit  analysis.  An
issue which is split rated will be governed by the lower quality designation.

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

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

                                   Exclusions

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

          (a)  Unregistered or restricted stock;

          (b)  Commodities, including gold or currency futures;

          (c)  Conditional sales contracts

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

          (e)  Margin buying;

          (f)  Short selling;

          (g)  Leasebacks; and

          (h)  Common or preferred stock.

                                       3

<PAGE>

Regulatory and Investment Classification Considerations

     * Risk Based Capital

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

     * Classifications for Fixed Income Securities

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

4/15/97

                                       4


<PAGE>

                                   SCHEDULE B

INVESTMENT GUIDELINES: The investment guidelines to be followed by Manager
in managing Client's Account are set forth below:

                           See attached






NAME OF CLIENT:                                      DATE:
PENN-STAR INSURANCE
COMPANY

/S/ Rosemary Ferrero                                 4/15/97

                                       13


<PAGE>

                                   SCHEDULE B

                                INVESTMENT PLAN
                                       OF
                          PENN-STAR INSURANCE COMPANY

                Investment Portfolio - Objectives and Guidelines

     The Board of  Directors  of PENN-STAR  INSURANCE  COMPANY  (the  "Company")
authorizes  the  Company's  officers  to engage the  services  of an  Investment
Manager who possesses the necessary  personnel and research facilities to manage
the  Company's  investment  portfolio.  The  portfolio is a balanced  accounting
consisting  of  fixed  income  obligations,  asset  based  obligations  and cash
equivalents.

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

     Execution  of All  Trades:  It is  hereby  understood  that all  investment
transactions  must have prior approval either written or verbal, of the Chairman
of the Investment  Committee,  Irvin Saltzman,  prior to their initiation by the
Investment Manager.

                              Investment Portfolio

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

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

     (B) Fixed income  securities  including United States Government and Agency
     issues and other  issues  backed by the full faith and credit of the United
     States Government,  corporate bonds,  collateralized  mortgage obligations,
     municipal bonds, preferred stocks, and asset based obligations.

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

<PAGE>

                             Investment Objectives

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

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

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

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

                          Investment Policv Guidelines

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

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

                            Fixed Income Securities

     1. Allocations.  The target range of investments in fixed income securities
is zero percent (0%) to one hundred percent (100%) of the portfolio.

     2. Types of  Securities.  Funds not invested in cash  equivalents  shall be
invested  entirely in marketable debt securities issued by either (a) the United
States Government or agencies of the United States Government, (b) assets backed
by the full faith and credit of the United  States  Government,  (c)  issuers of
collateralized  mortgage  obligations,  (d)  domestic  corporations,   including
industrials and utilities and preferred stocks issued

                                        2

<PAGE>

by said  corporation,  and (e) domestic banks and other United States  financial
institutions.

     At least ninety percent (90%) of the portfolio  shall be rated A or better.
These ratings shall be established by recognized rating services (i.e., Moody's,
Standard & Poor's) and reinforced by independent  in house credit  analysis.  An
issue which is split rated will be governed by the lower quality designation.

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

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

                                   Exclusions

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

          (a)  Unregistered or restricted stock;

          (b)  Commodities, including gold or currency futures;

          (c)  Conditional sales contracts;

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

          (e)  Margin buying;

          (f)  Short selling;

          (g)  Leasebacks; and

          (h)  Common  or  preferred   stock.  

                                        3

<PAGE>

Regulatory and Investment Classification Considerations

     * Risk Based Capital

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

     * Classifications for Fixed Income Securities

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

4/15/97

                                       4
<PAGE>

                                   SCHEDULE C

PROXY VOTING  GUIDELINES:  The proxy voting guidelines to be followed by Manager
in voting securities held in the Account are set forth below:

(If none, check here (X)










NAME OF CLIENT:                                               DATE:
PENN-AMERICA INSURANCE
COMPANY
Bv:  /s/ Rosemary Ferrero                                   4/15/97


                                       15
<PAGE>

                                   SCHEDULE C

PROXY VOTING  GUIDELINES:  The proxy voting guidelines to be followed by Manager
in voting securities held in the Account are set forth below:

(If none, check here (X)













NAME OF CLIENT:                                        DATE:
PENN-STAR INSURANCE COMPANY
By: /s/ Rosemary Ferrero                             4/15/97


                                       16

<PAGE>

                                   SCHEDULE D

                            SECRETARY'S CERTIFICATE

     I, Rosemary R. Ferrero,  the  Secretary of Penn America  Insurance  Company
(the "Corporation"),  a Corporation organized and existing under the laws of the
State of Pennsylvania, hereby certify that each of the following officers of the
Corporation,  acting  singly,  is  authorized  in the name and on  behalf of the
Corporation,  to give instructions to General Re - New England Asset Management,
Inc.  ("Manager") with respect to any and all matters,  including investment and
reinvestment of securities,  pertaining to the Investment  Management  Agreement
between  the  Corporation  and  Manager,  and to execute and deliver any and all
documents and to take any and all other action to carry out the purposes of said
Investment Management  Agreement.  I further certify that the specimen signature
set forth next to the names of such officers,  is the true and genuine signature
of such persons.
<TABLE>
<CAPTION>
Name of Officer                     Title                                     Signature
<S>                                <C>                                  <C>
Irvin Saltzrnan                     Chairman                            /s/ Irvin Saltzman

Jon S. Saltzman                     President and CEO                   /s/ Jon S Saltzman

Rosemary R. Ferrero                 V.P., Treasurer, & Secretary        /s/ Rosemary Ferrero

Greg Miscio                         Controller                          /s/ Greg Miscio

Anne Cullen                         Investment Manager                  /s/ Anne M Cullen
</TABLE>


     This  Certificate  shall be in effect  from the date hereof  until  written
notice is given on behalf of the Corporation to terminate or revise it.

         IN WITNESS WHEREOF, I set my hand and seal of the Corporation.



(Corporate Seal)           /s/ Rosemary Ferrero               4/15/97
                                  Secretary
                              Rosemary R. Ferrero


                                       17
<PAGE>

                                   SCHEDULE D

                            SECRETARY'S CERTIFICATE

     I, Rosemary R. Ferrero,  the Secretary of Penn-Star  Insurance Company (the
"Corporation"), a Corporation organized and existing under the laws of the State
of  Pennsylvania,  hereby  certify  that each of the  following  officers of the
Corporation,  acting  singly,  is  authorized  in the name and on  behalf of the
Corporation,  to give  instructions to General Re-New England Asset  Management,
Inc.  ("Manager") with respect to any and all matters,  including investment and
reinvestment of securities,  pertaining to the Investment  Management  Agreement
between  the  Corporation  and  Manager,  and to execute and deliver any and all
documents and to take any and all other action to carry out the purposes of said
Investment Management  Agreement.  I further certify that the specimen signature
set forth next to the names of such officers,  is the true and genuine signature
of such persons.
<TABLE>
<CAPTION>
         Name of Officer            Title                               Sign
<S>                                <C>                                <C>
         Irvin Saltzman             Chairman                           /s/ Irvin saltzman
         Jon S. Saltzman            President and CEO                  /s/ Jon S. Saltzman
         Rosemary R. Ferrero        V.P. Treasurer & Secretary         /s/ Rosemary R Ferrero
         Greg Miscio                Controller                         /s/ Greg Miscio
         Anne Cullen                Investment Manager                 /s/ Anne Cullen
</TABLE>

     This  Certificate  shall be in effect  from the date hereof  until  written
notice is given on behalf of the Corporation to terminate or revise it.

         IN WITNESS WHEREOF, I set my hand and seal of the Corporation.



         (Corporate Seal)  /s/ Rosemary Ferrero               4/15/97
                                  Secretary
                              Rosemary R. Ferrero


                                       18