<PAGE>
                                                                   Exhibit 10.12







                    EXCESS OF LIABILITY REINSURANCE AGREEMENT

                                     BETWEEN

                   STATE NATIONAL SPECIALTY INSURANCE COMPANY

                                       AND

                        DIRECT GENERAL INSURANCE COMPANY




                           EFFECTIVE: OCTOBER 1, 2002


<PAGE>
                                TABLE OF CONTENTS

<TABLE>
<CAPTION>
  ARTICLE                                                                    PAGE
<S>              <C>                                                         <C>
                 Preamble                                                       1

       1         Business Reinsured                                             1

       2         Original Conditions                                            2

       3         Commencement, Termination, Terms & Conditions                  2

       4         Loss and Loss Adjustment Expense                               3

       5         Reports and Remittances                                        4

       6         Errors and Omissions                                           6

       7         Premium and Commission                                         6

       8         Access to Records                                              7

       9         Arbitration                                                    7

      10         Assessments, Assignments, Fines and Penalties                  8

      11         Premium Financing                                              9

      12         Insolvency                                                     9

      13         Alternate Payee                                               10

      14         Hold Harmless Provisions                                      10

      15         Loss in Excess of Policy Limits/ECO                           12

      16         Regulatory Matters                                            12

      17         The General Agent                                             13

      18         Reinsurer or General Agent Sale or Transfer                   14

      19         Miscellaneous                                                 14

      20         Loss and Unearned Premium Reserve Funding                     16

      21         T.B.A. Insurance Group, Ltd. ("T.B.A.")                       16

      22         Savings Clause                                                17

      23         Inuring Reinsurance                                           17
</TABLE>



<PAGE>

                    EXCESS OF LIABILITY REINSURANCE AGREEMENT


THIS EXCESS OF LIABILITY REINSURANCE AGREEMENT (this "Agreement") is made and
entered into as of October 1, 2002, by and among DIRECT GENERAL INSURANCE
COMPANY, an insurance company organized under the laws of South Carolina
("Reinsurer") and STATE NATIONAL SPECIALTY INSURANCE COMPANY, an insurance
company organized under the laws of the State of Texas ("Company");

                              W I T N E S S E T H:

THAT, in consideration of the mutual covenants hereinafter contained and upon
the terms and conditions hereinbelow set forth, the parties hereto agree as
follows:

                                    PREAMBLE

         The Company and Direct General Insurance Agency, Inc., a Texas
corporation, have entered into a General Agency Agreement dated as of October 1,
2002 (the "General Agency Agreement") a true and correct copy of which is
attached hereto as Exhibit A and fully incorporated herein by this reference. It
is understood that, in relation to the business produced under the General
Agency Agreement, the Company and the Reinsurer (hereinafter identified
collectively as the "Parties") wish to enter into a reinsurance arrangement
through which the Company is to bear no business, credit or insurance risk
whatsoever in connection with the private passenger automobile insurance
policies issued through the General Agent (the "Subject Program"). In this
regard, all underwriting risks arising from the Subject Program, with the
exception of private passenger automobile physical damage, will be ceded to and
assumed by The North Carolina Reinsurance Facility (the "Facility"). As a
condition precedent to the Company's agreement to permit policies to be issued
in the name of the Company pursuant to the Subject Program, the Reinsurer shall
hold the Company harmless and indemnify it for these and all risks arising from
the Subject Program other than those assumed and actually paid by the Facility.
The sole consideration provided by the Company, in exchange for the fees set
forth in Article VII herein, is to permit the Policies (as hereinafter defined)
which are reinsured under this Agreement, to be issued in the name of the
Company. All provisions of this Agreement shall be interpreted so as to be in
accord with this Preamble.

                                    ARTICLE I
                               BUSINESS REINSURED

1.01 The Reinsurer hereby reinsures and accepts any and all liability accruing
to the Company in connection with the Subject Program and all policies,
certificates, contracts, binders, agreements or other proposals or evidences of
insurance, new and renewal policies, binders, and contracts of insurance
(hereinafter called "Policies") issued by and on behalf of the Company in its
sole discretion as auto liability, and miscellaneous coverages as endorsed in
North Carolina during the term of this Agreement, produced by or through the
General Agent appointed by the Company at the request of the Reinsurer as
provided in 17.02 of this Agreement (other than those liabilities assumed by the
Facility), including without limitation, every claim, demand, liability, loss,
damage, cost, charge, attorneys' fees, expense, suit, order, judgment, and
adjudication of whatever kind or character arising out of or in connection with
the Subject Program, the business reinsured thereunder (including, but not
limited to, credit loss, and/or run-off expense and/or all legal fees and
expenses incurred by the Company in asserting its rights under this Agreement).
The Reinsurer's obligation hereto relates to, but is not limited




                                       1
<PAGE>

to, the following: all liability for agents' balances; return premiums and
commissions; deceptive trade practice liability; premiums, policy fees or other
charges; costs, liability, damages, fees and/or expenses incurred by the Company
due to a lawsuit between the Reinsurer and the General Agent (any dispute
involving the Company and the Reinsurer is subject to arbitration); all actions
or inactions by the General Agent relating to this Agreement, any agreement with
a premium finance company or claims administrator; and/or all fees and/or
commissions owing to the General Agent under this and the aforementioned related
agreements.

                                   ARTICLE II
                               ORIGINAL CONDITIONS

2.01 Business ceded hereunder shall include every original policy, rewrite,
renewal or extension (whether before or after the termination of this Agreement)
required by applicable statute, or by rule or regulation of any policy of
insurance ceded hereunder by the Company to the Reinsurer.

2.02 The liability of the Reinsurer shall commence obligatorily and
simultaneously with that of the Company as soon as the Company becomes liable,
and the premium on account of such liability shall be credited, as applicable,
to the Reinsurer from the original date of the Company's liability.

2.03 All reinsurance for which the Reinsurer shall be liable, by virtue of this
Agreement, shall be subject, in all respects, to the same rates, terms,
conditions, interpretations, waivers, the exact proportion of premiums paid to
the Company without any deduction for brokerage, and to the same modifications,
alterations and cancellations, as the respective insurance of the Company to
which such reinsurance relates, the true intent of this Agreement being that the
Reinsurer shall, in every case to which this Agreement applies and in the
proportion specified herein, follow the fortunes of the Company.

2.04 Nothing herein shall in any manner create any obligations, establish any
rights or create any direct right of action against the Reinsurer in favor of
any third party, or other person not party to this Agreement; or create any
privity of contract between the policyholders and the Reinsurer.

                                   ARTICLE III
                 COMMENCEMENT, TERMINATION, TERMS AND CONDITIONS

3.01 This Agreement shall become effective on October 1, 2002 at 12:01 A.M. as
respects losses arising out of occurrences commencing under Policies written on
or after such date at the offices of the Company, and shall remain continuously
in force unless terminated as provided herein.

3.02 This Agreement shall continue from the effective date and thereafter until
termination of the General Agency Agreement (as hereinafter defined). The
parties may not cancel this Agreement independent of the General Agency
Agreement, and this Agreement shall terminate automatically and only upon
termination of the General Agency Agreement.

3.03 When this Agreement terminates for any reason, reinsurance hereunder shall
continue to apply to the business in force at the time and date of termination
until expiration or cancellation of such business. It is understood that any
Policies with effective dates prior to the termination date but issued after the
termination date are covered under this Agreement.




                                       2
<PAGE>

Additionally, the reinsurance hereunder shall continue to apply as to Policies
which must be issued or renewed, as a matter of state law or regulation or
because a sub-agent has not been timely canceled, until the expiration dates on
said Policies.

3.04 Upon termination of this Agreement, the Reinsurer, General Agent and the
Company shall not be relieved of or released from any obligation created by or
under this Agreement in relation to payment, expenses, reports, accounting or
handling, which relate to outstanding insurance business under this Agreement
existing on the date of such termination. The parties hereto expressly covenant
and agree that they will cooperate with each other in the handling of all such
run-off insurance business until all policies have expired either by
cancellation or by terms of such policies and all outstanding losses and loss
adjustment expenses have been settled. While by law and regulation, the Company
recognizes its primary obligations to its policyholders, the Reinsurer
recognizes that to the extent possible there shall be no cost or involvement by
the Company in servicing this run-off. All costs and expenses associated with
handling of such run-off business following the cancellation or termination of
this Agreement shall be borne solely by the General Agent and, to the extent not
borne by the General Agent, solely by Reinsurer. If for any reason the General
Agent fails or is unable to service any such run-off business (or any business
while this Agreement is still in effect), including the payment of claims, then
consistent with this Agreement, the Reinsurer's obligation with respect to such
run-off business shall continue and the Reinsurer shall either service such
run-off business directly or appoint, at the Reinsurer's expense, a successor to
the General Agent, subject to the approval of the Company, which approval shall
not be unreasonably withheld. Such successor shall perform all of the duties and
obligations of the General Agent with respect to servicing such run-off business
including the payment of claims.

3.05 This Agreement provides for termination on a run-off basis. The relevant
provisions of this Agreement shall apply to business being run off.

3.06 Upon termination of this Agreement, the Reinsurer shall ensure the General
Agent takes those actions necessary, including, but not limited to, sending
statutorily prescribed non-renewal notices to insureds in a timely manner to
effectuate the intent that there be no renewals or new policies (but for those
required by applicable law or regulation) after the termination of this
Agreement.

                                   ARTICLE IV
                        LOSS AND LOSS ADJUSTMENT EXPENSE

4.01 All loss settlements made by the Company or the General Agent under the
terms of this Agreement, whether under strict policy conditions or by way of
compromise, shall be unconditionally binding upon the Reinsurer in proportion to
its participation, and the Reinsurer shall benefit proportionately in all
salvage and recoveries. The Reinsurer shall assume and be liable for and pay on
behalf of the Company, all losses incurred in connection with the risks covered
by this Agreement, including, but not limited to, judgments (including interest
thereon) and settlements in connection therewith. The Reinsurer shall also be
liable for and pay on behalf of the Company all costs, expenses, and fees
(including, but not limited to, attorney's fees) incurred by the Company in
connection with the investigation or settlement or contesting the validity of
claims or losses covered under this Agreement (this shall include but, of
course, is not limited to, costs, expenses and fees resulting from a declaratory
judgment or injunctive action brought by an insured or other person).



                                       3
<PAGE>

4.02 The Reinsurer's share of losses, expense and loss recovery shall be carried
into the monthly accounting for which provision is hereinafter made.

4.03 All records pertaining to claims arising under insurance policies issued on
behalf of the Company through or by the General Agent subject to this Agreement
shall be deemed to be jointly owned records of the Company and the Reinsurer,
and shall be made available to the Company or the Reinsurer or their respective
representatives or any duly appointed examiner for any state within the United
States; and these records shall be kept in the State of North Carolina or such
other jurisdiction as may be required or permitted by applicable state law or
regulation. Notwithstanding the foregoing, the Reinsurer is authorized to
maintain duplicate working files of all such records outside the State of North
Carolina. The Company, the Reinsurer and the General Agent each agree that it
will not destroy any such records in its possession without the prior written
approval of the other parties except that neither party shall be required to
retain files longer than required by the guidelines set forth by any applicable
state department of insurance.

4.04 The Reinsurer shall, or shall cause the General Agent to, establish a
separate claim register or method of recording claims arising under the Policies
covered by this Agreement so that all claims may be segregated and identified
separate and apart from other records of the Reinsurer or General Agent, with
such claims register to identify each claim on an individual case basis both as
to identify the insured(s) and the claimant, the reserve for loss and adjusting
expense. Such claim register shall be kept in a manner whereby the Company can,
at any time, determine the status of any claim arising under Policies covered by
this Agreement. Such records shall reflect the amount of reserves established
for the individual claim and the date when such reserve was established, and if
closed, whether such claim was closed with or without payment, and if with
payment, the amount paid thereon.

                                    ARTICLE V
                             REPORTS AND REMITTANCES

5.01 In lieu of the Company furnishing the Reinsurer with bordereaux showing the
particulars of all reinsurances ceded hereunder, the Reinsurer shall furnish or
cause to be furnished to the Company, within forty-five (45) days after the
close of each of the respective periods indicated below (on forms agreeable to
the Parties) with monthly, quarterly and annual reports showing the following
statistical data in respect to the business reinsured hereunder:

         (a)  Monthly, with the data segregated by major classes.

                  (i)      Net and ceded premiums written.
                  (ii)     Net and ceded unearned premiums.
                  (iii)    Net and ceded losses paid.
                  (iv)     Net and ceded adjustment expenses paid during this
                           month.
                  (v)      Ceded adjustment expenses paid during this month.
                  (vi)     Losses outstanding.
                  (vii)    Ceding commission due the Company.
                  (viii)   Commission due the General Agent.

         (b)      Annually, with the data segregated by major classes.

                  (i)      Annual summaries of net premiums written, net losses
                           paid, net adjusting expenses paid during the year in
                           such form so as to enable the Company



                                       4
<PAGE>

                           to record such data in its annual convention
                           statement. Such information is to be furnished not
                           later than February 15th of the following year. In
                           force and unearned premium segregated as to advance
                           premiums, premiums running twelve (12) months or less
                           from inception date of policy, and premiums running
                           more than twelve (12) months from inception date of
                           policy in such form as to enable the Company to
                           record such data in its convention annual statement.

                  (ii)     If applicable, annual summaries of net premiums
                           written by geographical location in such form as to
                           enable the Company to record such premiums in its
                           annual report to the Texas Catastrophe Property
                           Insurance Association.

         (c)      Periodic, with data segregated by major lines.

                           Statistical or other data as may be requested from
                           time to time by regulatory authorities.

5.02 In order to facilitate the handling of the business reinsured under this
Agreement, the Reinsurer agrees to furnish the Company with any additional
reports necessary to provide the information needed by the Company to prepare
its monthly, quarterly and annual statements to regulatory authorities.

5.03 Within 60 days after the end of each month, the General Agent shall remit
to the Reinsurer the following:

         (a)      Reinsurance Premium as collected in accordance with Section
                  7.06, less;

         (b)      ceded portion of Net Paid losses and loss adjustment expenses
                  paid, provided such losses and loss adjustment expenses have
                  not been deducted on behalf of the Company in any previous
                  monthly report.

The positive balance of (a) less (b) shall be remitted by the General Agent with
its report. Any balance shown to be due the Company shall be remitted by the
Reinsurer as promptly as possible after receipt and verification of the General
Agent's report, but no later than 60 days after the end of each month.

                                   ARTICLE VI
                              ERRORS AND OMISSIONS

6.01 The Company shall not be prejudiced in any way by any omission through
clerical error, accident or oversight to cede to the Reinsurer any reinsurance
rightly falling under the terms of this Agreement, or by erroneous cancellation,
either partial or total, or any cession, or by omission to report, or by
erroneously reporting any losses, or by any other error or omission, but any
such error or omission shall be corrected immediately upon discovery.

6.02 Should the Company suffer any loss whatsoever, the Reinsurer shall assume
loss for its own account and save and hold the Company harmless therefor.



                                       5
<PAGE>

                                   ARTICLE VII
                             PREMIUM AND COMMISSION

7.01 It is understood that the General Agent shall pay, and the Reinsurer shall
guarantee, the Company directly a fee within forty-five (45) days following the
end of each month (to the Company's designated agent, T.B.A. Insurance Group,
Ltd. ("TBA"), as a ceding fee), 19% of Net Premiums, and in addition guarantees
the amount of assessments and state premium taxes as provided in this Article X.
(The ceding fee amount shall be computed on a calendar year basis based on
premium written in each annual period ended December 31st.) Notwithstanding
anything else contained herein to the contrary, regardless of the amount of Net
Premiums, the minimum ceding fee due the Company shall be $37,500 for each
six-month period, plus the aforementioned assessments and state premium taxes.
(This minimum ceding fee applicable to each successive six-month period shall
not be affected by the amounts of Net Premiums written in other six-month
periods and shall not be reduced by reason of payments in excess of the minimum
in other periods. The minimum ceding fee for each period shall be paid within
sixty (60) days of the end of each period. For these purposes, a policy's entire
premium shall be applied to the period in which the policy is written.) "Net
Premiums" shall mean the gross premiums (including policy fees) charged on all
original and renewal Policies written on behalf of the Company, less return
premiums.

7.02 The General Agent shall allow and pay within forty-five (45) days of the
end of each month to the Company an amount equal to the state premium tax on the
Net Premiums for the past month. Should any additional premium tax be assessed
at any time on written premium reinsured hereunder, the Reinsurer shall pay the
Company such additional premium tax within (fifteen) 15 days of being informed
by the Company of such additional premium tax. The Parties acknowledge that at
the effective date of this Agreement, the North Carolina Department of Insurance
(or other state agency responsible for collecting premium taxes) may require the
payment of estimated premium taxes in advance on a semi-annual basis. The
Reinsurer shall, therefore, pay to the Company within five days prior to the due
date of any such estimated premium tax payment, the amount that would be due
based upon the business produced hereunder.

7.03 The Reinsurer hereby guarantees that (i) the Company will receive the
ceding fee provided hereunder irrespective of any events, losses or developments
for the term of this Agreement (Such payment is not dependent upon the
performance of the General Agent, underwriting experience, loss experience,
whether premium is collected or not, or any other event foreseen or unforeseen
by the parties at the inception of this Agreement.), and in addition (ii) those
amounts described in Section 7.05 of this Agreement and is directly responsible
for payment of the amount described in Article X. The Company shall allow return
ceding fees on return premiums at the same rates.

7.04 RESERVED.

7.05 General Agent shall pay to the Company all premium taxes payable for
policies subject to reinsurance hereunder. In the event that the ceding fee and
premium taxes are not so paid by the General Agent within 60 days following the
end of the month, the unpaid balance shall be paid directly to the Company by
the Reinsurer.

7.06 The Company shall pay the Reinsurer a premium equal to 15.0% of Net Premium
(the "Reinsurance Premium"). The Reinsurance Premium is payable by the Company
to the Reinsurer at the same time, and on the same basis, the ceding fee is
payable to the Company



                                       6
<PAGE>

under section 7.01 hereunder.


                                  ARTICLE VIII
                                ACCESS TO RECORDS

         The Reinsurer or its duly appointed representatives shall have free
access at any and all reasonable times to such books and records of the Company
or General Agent, its departmental or branch offices, as shall reflect premium
and loss transactions of the Company and/or the business produced hereunder, for
the purpose of obtaining any and all information concerning this Agreement or
the subject matter thereof. Likewise, the Company or its duly appointed
representatives shall have free access at any and all reasonable times to such
books and records of the Reinsurer and/or General Agent, its departmental or
branch offices as shall reflect premium and loss transactions of the Company
and/or the business produced hereunder, for the purpose of obtaining any and all
information concerning this Agreement or the subject matter hereof.

                                   ARTICLE IX
                                   ARBITRATION

9.01 As a condition precedent to any right of action hereunder, in the event of
any dispute or difference of opinion hereafter arising between the Company and
the Reinsurer with respect to this Agreement, or with respect to these Parties'
obligations hereunder, it is hereby mutually agreed that such dispute or
difference of opinion shall be submitted to arbitration.

9.02 One arbiter (an "Arbiter") shall be chosen by the Company and one Arbiter
shall be chosen by the Reinsurer and an umpire (an "Umpire") shall be chosen by
the Arbiters, all of whom shall be active or retired disinterested executive
officers of property and casualty insurance or reinsurance companies.

9.03 In the event that a party fails to choose an Arbiter within thirty (30)
days following a written request by either party to the other to name an
Arbiter, the party who has chosen its Arbiter may choose the unchosen Arbiter.
Thereafter, the Arbiters shall choose an Umpire before entering upon
arbitration. If the Arbiters fail to agree upon the selection for the Umpire
within thirty (30) days following their appointment, each Arbiter shall name
three nominees, of whom the other shall decline two, and the decision shall be
made by drawing lots.

9.04 Each party shall present its case to the Arbiters and Umpire within a
reasonable amount of time after selection of the Umpire, unless the period is
extended by the Arbiters and the Umpire in writing and/or at a hearing in
Dallas, Texas. The Arbiters and Umpire shall consider this Agreement as an
honorable engagement, as well as a legal obligation, and they are relieved of
all judicial formalities and may abstain from following the strict rules of law
regarding entering of evidence. The decision in writing by a majority of the
Arbiters and Umpire when filed with the Parties shall be final and binding on
the parties. Judgment upon the final decision of the Arbiters and Umpire may be
entered in any court of competent jurisdiction.

9.05 In the event of a dispute between the Company and the Reinsurer concerning
this Agreement and the General Agency Agreement (regardless of whether either
party has claims against the General Agent), the entire dispute between the
Company and the Reinsurer shall be subject to arbitration as provided in this
Article IX.



                                       7
<PAGE>

9.06 The costs of the arbitration, including the fees of the arbitrators and the
umpire, shall be borne equally unless the Arbiters and Umpire shall decide
otherwise.

9.07 This Agreement shall be interpreted under the laws of Texas and the
arbitration shall be governed and conducted according to the Texas General
Arbitration Act.

                                    ARTICLE X
                  ASSESSMENTS, ASSIGNMENTS, FINES AND PENALTIES

10.01 The Reinsurer hereby assumes liability for any and all assessments and
assignments imposed as a result of Policies reinsured hereunder (whether before
or after the termination of this Agreement). The Reinsurer shall immediately
reimburse the Company for any assessments made against the Company pursuant to
those laws and regulations creating obligatory funds (including, but not limited
to, insurance guaranty and insolvency funds), pools, joint underwriting
associations, FAIR plans and similar plans. Amounts owed by the Reinsurer under
this Section shall be payable directly by the Reinsurer to the Company. The
Reinsurer shall be entitled to receive from the Company on or prior to the 31st
day of March of each year thereafter (or such date on which such premium taxes
are paid) a sum equal to the premium tax credit that is allowed to the Company
with respect to such assessments. The premium tax credit allowed the Reinsurer
hereunder is to be on a pro-rata and first-in, first-out basis. The Company
shall promptly return to the Reinsurer any amount of assessment refunded to or
credited to the Company.

10.02 This Agreement shall apply to risks assigned to the Company under any
assigned risk plan if, in the reasonable judgment of the Company, such risks
were assigned to the Company because of the business written and reinsured
hereunder.

10.03 The Reinsurer shall also pay promptly and directly to the Company the
fines, penalties and/or any other charge incurred by the Company as respects the
business reinsured hereunder arising out of the actions or inactions of the
General Agent unless such fines, penalties and/or any other charge was a direct
result of any willful misconduct on the part of the Company, which has been
finally determined by a court of competent jurisdiction after the exhaustion of
all appeals.

10.04 The Reinsurer shall cause the General Agent to act on behalf of the
Company to produce, prepare, and file statistical information with the
designated statistical reporting bureau. Such costs and expenses shall be
remitted in advance by the General Agent, and the Reinsurer hereby guarantees
the timely payment of such costs and expenses, to the Company with its monthly
account, based on the Company's good faith estimation. Adjustments to the
estimation shall be made annually by the Company to reflect the actual costs
related to the business produced hereunder. The Reinsurer shall also cause the
General Agent to furnish the Company, and other parties as designated by the
Company, with monthly, quarterly and annual reports showing statistical data in
respect of the business written as required.

                                   ARTICLE XI
                                PREMIUM FINANCING

         With respect to Policies covered under the provisions of this
Agreement, if any premiums are financed, the General Agent shall receive and
accept on behalf of the Company all notices required by statute, contract or
otherwise to be given to the Company, including, without limitation, notices of
the existence of premium finance agreements or of cancellation of policies




                                       8
<PAGE>

the premiums of which are financed ("financed policies"). No producing agent or
any other agent shall be entitled to receive or accept any notice on behalf of
the Company, and the General Agent shall be responsible for and will indemnify
and hold the Company harmless from and against any and all liabilities, losses,
claims, damages and expenses incurred by reason of or arising out of any action
taken or inaction suffered as a result of receipt of any notice by any person,
firm or entity other than the General Agent or the Company. Notwithstanding any
other term or provision of this Agreement, the General Agent agrees to return
and pay over to any premium finance company (whether affiliated with the Company
or not) which has sent notice of cancellation of a financed policy to the
General Agent, on behalf of the Company, within 30 days of receipt of such
notice of cancellation, any and all unearned commissions as of the date of
cancellation, together with any and all unearned premiums due any premium
finance company. The General Agent agrees to and does hereby relinquish any and
all rights to any unearned commissions for any such financed policy as of the
date of cancellation. The obligation of the General Agent to refund unearned
commissions and unearned premiums on a canceled financed policy shall survive
the termination or cancellation of this Agreement for so long as any policy
written under the terms of this Agreement remains in force. If the General Agent
does not fulfill its obligations to refund unearned commissions and unearned
premiums as provided in this Article XI and/or to indemnify the Company as
provided in this Article XI, then the Reinsurer shall pay the amount of the
refund owed and/or shall indemnify the Company even if the premium finance
company is an affiliate of the Company.

                                   ARTICLE XII
                                   INSOLVENCY

12.01 In the event of insolvency of the Company, this reinsurance shall be
payable directly to the Company or to its liquidator, receiver, conservator or
statutory successor on the basis of the liability of the Company without
diminution because of the insolvency of the Company or because the liquidator,
receiver, conservator or statutory successor of the Company has failed to pay
all or a portion of any claims.

12.02 It is agreed, however, that the liquidator, receiver, conservator or
statutory successor of the Company shall give written notice to the Reinsurer of
the pendency of a claim against the Company indicating the policy or bond
reinsured which claim would involve a possible liability on the part of the
Reinsurer within thirty (30) days after such claim is filed in the insolvency,
conservation or liquidated proceeding or in the receivership, and that during
the pendency of such claim, the Reinsurer may investigate such claims and
interpose, at its own expense, in the proceeding where such claim is to be
adjudicated, any defense or defenses that it may deem available to the Company
or its liquidator, receiver, conservator or statutory successor. The expense
thus incurred by the Reinsurer shall be chargeable, subject to the approval of
the Court, against the Company as part of the expense of conservation or
liquidation to the extent of a pro rata share of the benefit which may accrue to
the Company solely as a result of the defense undertaken by the Reinsurer.

12.03 Where two or more reinsurers are involved in the same claim and a majority
in interest elect to interpose defense to such claim, the expense shall be
apportioned in accordance with the terms of this Agreement as though such
expense had been incurred by the Company.

12.04 It is further understood and agreed that, in the event of the insolvency
of the Company, the reinsurance under this Agreement shall be payable directly
by the Reinsurer to the Company or to its liquidator, receiver or statutory
successor, except (i) as provided by applicable law, (ii) where the Agreement
specifically provides another payee of such




                                       9
<PAGE>

reinsurance in the event of the insolvency of the Company and (iii) where the
Reinsurer with the consent of the direct insured or insureds has assumed such
policy obligations of the Company as direct obligations of the Reinsurer to the
payees under such policies and in substitution for the obligation of the Company
to such payees.

                                  ARTICLE XIII
                                 ALTERNATE PAYEE

13.01 As respects subject business assumed as reinsurance under this Agreement,
it is agreed that if the Company has a conservator, liquidator or receiver
appointed for it, or becomes the subject of any conservation, liquidation or
insolvency proceeding, and the General Agent exercises its option to require the
Company to permit all its liabilities under the Policies reinsured hereunder to
be assumed by another licensed insurer as is permitted pursuant to the General
Agency Agreement, such assuming insurer shall be substituted for the Company as
payee of any reinsurance recoverable hereunder in respect of losses under
Policies subject hereto, and the Reinsurer, shall make payment thereof directly
to the substituted insurer. In the event of assumption, the Company shall,
however, be entitled to any ceding fees and other sums owing hereunder with
respect to Policies originally issued on its behalf.

13.02 In the event that an assuming insurer is submitted for the Company under
Section 13.01, all the other provisions of this Agreement shall apply to the
substituted insurer in the same manner as if said insurer were substituted for
the Company as the reinsured party hereunder, and to the extent this Agreement
reinsures such substituted insurer, coverage hereunder shall be excluded as
respects the Company.

                                   ARTICLE XIV
                            HOLD HARMLESS PROVISIONS

14.01 Notwithstanding anything else contained herein to the contrary, as
respects all matters related to this Agreement, in addition to those specific
provisions insulating the Company from specific risks hereunder, the Reinsurer
hereby covenants and agrees to reimburse and hold the Company harmless from and
against every claim, demand, liability, loss, damage, cost, charge, attorneys'
fees, expense, suit, order, judgment and adjudication of whatever kind or
character regarding (i) this Agreement and/or (ii) the business reinsured
hereunder (including, but not limited to, underwriting loss, credit loss, and/or
run-off expense and/or all legal fees and expenses incurred by the Company in
asserting its rights under this Agreement) whether or not such claim, demand,
loss, damage, cost, charge, attorneys' fees, expense, suit, order, judgment or
liability is within the terms of Policies written and reinsured hereunder. The
Reinsurer's obligation hereto relates to, but is not limited to the following:
all liability for agents' balances; return premiums and commissions; deceptive
trade practice liability; premiums, policy fees or other charges (whether
collected or not); costs, liability, damages, fees and/or expenses incurred by
the Company due to a lawsuit between the Reinsurer and the General Agent (any
dispute involving the Company and the Reinsurer is subject to arbitration); all
actions or inactions by General Agent relating to this Agreement, any agreement
with a premium finance company or claims administrator; and/or all fees and/or
commissions owing to the General Agent under this and the aforementioned related
agreements.

14.02 The Company shall not be liable to the Reinsurer for premiums unless the
Company itself has actually received those premiums and wrongfully not remitted
them to the Reinsurer. The Reinsurer may not offset, unless otherwise
contemplated in this Agreement, any balances on account of losses, loss
adjustment expenses or any other amounts due except as to




                                       10
<PAGE>

premiums actually received by the Company itself (as distinct from premiums not
collected, or premiums collected by the General Agent, or premium placed in the
premium trust account pursuant to the General Agency Agreement) which have
wrongfully not been transmitted to the Reinsurer.

14.03 If for any reason the General Agent fails or is unable to administer the
policies reinsured hereunder (whether the Agreement is still in effect or the
business is being run-off), (i) the Reinsurer shall appoint a party (acceptable
and approved by the Company) to administer the business and the Reinsurer shall
be responsible for the cost of said administration and (ii) the General Agent
will fully cooperate with the Company (or its designated representative) in
providing access to such of the General Agent's personnel, computer systems or
other assets or procedures as the Company may deem necessary to provide for an
orderly transition of the administration of the Policies reinsured hereunder. If
return premiums or other funds need to be returned to premium finance companies,
policyholders or sub-agents, the Reinsurer shall pay of these amounts if the
successor or administrator does not.

14.04 The Reinsurer shall not sue, or seek arbitration, against the Company for
any acts of the General Agent for any monies which the General Agent owes unless
the Company has actually received those monies and has wrongfully not remitted
them to the Reinsurer; and the Reinsurer shall indemnify the Company for any
damages, liabilities and expenses incurred by reason of the General Agent's acts
or failure to act. The Company is not responsible for any commissions or other
monies payable to the General Agent in connection with this Agreement and the
General Agent shall not sue, or seek arbitration against, the Company for any
actions by, or debts owing from, the Reinsurer. The Reinsurer shall not seek to
recover from, or offset against, the Company any sums, whether premiums or other
monies, which the General Agent was unable or unwilling to remit to the Company
or the Reinsurer.

14.05 In the event the Reinsurer, or any agent appointed pursuant to this
Agreement, binds the Company for insurance coverage on insurance risks which are
in excess of the policy limits set forth in Article I, and/or are not within the
terms of business specified in Article I, and/or are not within the territory
specified in Article I, whether intentional or not, the Reinsurer and General
Agent will do such things and take such actions as may be necessary to reduce
the Company's exposure to such risks and to hold the Company harmless against
any liability or loss which may be incurred by the Company in excess hereof. At
the Company's request, the General Agent in accordance with applicable law, and
policy terms, shall cancel or not renew any risk bound which is not in
conformance with this Agreement. Any such insurance coverage on insurance risks
bound contrary to the limitations which are in excess of the policy limits set
forth in Article I, and/or are not within the classes of business specified in
Article I, and/or are not within the territory specified in Article I, whether
intentional or not, shall be reinsured and subject to this Agreement.

14.06 In furtherance of the protections afforded to the Company under this
Agreement, the Reinsurer expressly acknowledges that certain circumstances may
come to exist with respect to the Policies reinsured hereunder that require
adjustment to the timing of Reinsurer remittances. If, in the sole discretion of
the Company, an advance payment or payments of the Reinsurer's obligations under
this Agreement is necessary to avoid irreparable harm to the Company (as, for
example, in the circumstance where the funds available in the premium trust
account established pursuant to Section 2.01 of the General Agency Agreement are
insufficient to provide for timely payment of claims), the Reinsurer shall make
such payment or payments promptly upon the Reinsurer's receipt of the Company's
good faith estimate or calculation of the necessity thereof.



                                       11
<PAGE>

14.07 In the event any provision, term and/or condition of this Agreement (other
than the Preamble hereof) is inconsistent with the provision, terms and/or
conditions of Section 14.01 above, the provision, terms, and/or conditions of
said Section 14.01 above shall control over and supercede such inconsistent
provision, terms, and/or conditions.

14.08 The Reinsurer's indemnification obligations to the Company under this
Agreement shall occur when the Company incurs or becomes liable for any
indemnifiable damage, liability or expense hereunder and not upon the actual
payment by the Company of such damage, liability or expense.

14.09 This indemnification provision shall not apply with respect to actions,
causes of actions, suits, arbitrations, or proceedings of any kind, liabilities,
losses, claims, damages, costs, or expenses that result from the gross
negligence or willful misconduct of the Company or attributable to the Company.

                                   ARTICLE XV
                       LOSS IN EXCESS OF POLICY LIMITS/ECO

15.01 In the event the Company pays or is held liable to pay an amount of loss
in excess of its policy limit, but otherwise within the terms of its policy
(hereinafter called "loss in excess of policy limits") or any punitive,
exemplary, compensatory or consequential damages, other than loss in excess of
policy limits (hereinafter called "extra contractual obligations") because of
alleged or actual bad faith or negligence on its part in rejecting a settlement
within policy limits, or in discharging its duty to defend or prepare the
defense in the trial of an action against its policyholder, or in discharging
its duty to prepare or prosecute an appeal consequent upon such an action, or in
otherwise handling a claim under a policy subject to this Agreement, 100% of the
loss in excess of policy limits and/or 100% of the extra contractual obligations
shall be added to the Company's loss, if any, under the Policy involved, and the
sum thereof shall be reinsured under this Agreement; except to the extent that
such loss or obligation is assumed and actually paid by the Facility.

15.02 An extra contractual obligation shall be deemed to have occurred on the
same date as the loss covered or alleged to be covered under the Policy.

15.03 Notwithstanding anything stated herein, this Agreement shall not apply to
any loss incurred by the Company as a result of any fraudulent and/or criminal
act which has been finally determined by a court of competent jurisdiction,
after the exhaustion of all appeals, by any officer or director of the Company
acting individually or collectively or in collusion with any individual,
corporation or any other organization or party involved in the presentation,
defense or settlement of any claim covered hereunder.

                                   ARTICLE XVI
                               REGULATORY MATTERS

16.01 It is the Parties' understanding that any premiums which are overdue from
the General Agent to the Company may be deemed non-admitted assets. In
confirmation of the liabilities assumed by the Reinsurer under this Agreement,
the Reinsurer hereby assumes all liability and responsibility for all premiums
in the course of collection.

16.02 The Reinsurer shall agree, at no cost to the Company, to take those
actions (including,




                                       12
<PAGE>

but not limited to, modifications in how funds are handled and how accounts are
cleared, settled and the manner in which incurred losses are accounted for) and
agree to those arrangements necessary to ensure that the Company suffers no
adverse impact because of this reinsurance program and is in compliance with any
applicable laws of a state insurance department, insofar as this reinsurance
program is concerned.

                                  ARTICLE XVII
                                THE GENERAL AGENT

17.01 The Reinsurer has selected the General Agent to administer the business
reinsured hereunder. While for regulatory purposes, the General Agent will need
to be appointed as the Company's agent, it is recognized that the General Agent
is acting on behalf of the Reinsurer. The Company is making no evaluation of the
General Agent's qualification, has no obligation to furnish reports or
statistics to the Reinsurer, or to monitor the performance of the General Agent.
The Company shall file with the State all reports requested by the State based
upon information received from the General Agent and Reinsurer.

17.02 The Company will, at the request of the General Agent and the Reinsurer,
appoint producing agents to produce business through the General Agent. The
Company, in its sole discretion, may refuse to appoint any such agent; provided,
however, that such appointment shall not be unreasonably withheld. The General
Agent will not establish any sub-general agencies or any agencies with the
authority of a general agency. The Reinsurer shall hold the Company harmless
from and indemnify it for any damage, liability, claim, expense, cost or fees
(including attorneys' fees and expenses) of whatever kind or character caused
directly or indirectly by any action of or failure to act, by any such producing
agent.

17.03 The General Agent shall be responsible for the control of the producing
agents appointed by the Company at the request of and on behalf of the
Reinsurer, including compliance with state licensing laws and the financial
condition of such agents.

17.04 The Reinsurer shall guarantee payment to the Company of any amounts due
the Company (or the Company's designated agent, TBA) from business produced by
and/or policies issued by or through the producing agents appointed by the
Company at the request of and on behalf of the General Agent and the Reinsurer.
The Reinsurer and the General Agent shall be solely responsible for notifying
such agents of this Agreement and of any termination hereof, and the Reinsurer
shall be responsible for the consequences of any failure to provide such
notification.

17.05 The General Agent shall not sue, or seek arbitration, against the Company
for any acts of the Reinsurer and shall indemnify and hold the Company harmless
from and against any damages, liabilities and expenses incurred by reason of the
Reinsurer's acts or failures to act.

17.06 The Company shall conduct or have conducted the examinations of the
General Agent as provided in Section 5.13 of the General Agency Agreement. The
examinations provided for herein shall be at no cost to the Company, and the
Reinsurer shall indemnify and hold the Company completely harmless as respects
any liability, damage, charge, cost, fine, or penalty, the Company may incur as
a result of such examinations.



                                       13
<PAGE>

                                  ARTICLE XVIII
                   REINSURER OR GENERAL AGENT SALE OR TRANSFER

         The Reinsurer and/or the General Agent agree to give the Company or its
designated agent, TBA, 90 days advance written notice of any sale or transfer of
such party's business, or such party's consolidation with a successor firm, in
order that the Company may, in its sole discretion:

         (a) Assign this Agreement to the successor; or

         (b) Terminate this Agreement.

                                   ARTICLE XIX
                                  MISCELLANEOUS

19.01 This Agreement has been made and entered into in the State of Texas and
the Agreement shall be subject to and construed under the laws of the State of
Texas. This Agreement shall be deemed performable at the Company's
administrative office in Fort Worth, Texas, and it is agreed that the venue of
any controversy arising out of this Agreement, or any breach thereof, shall be
in Tarrant County, Texas.

19.02 All notices required to be given hereunder shall be deemed to have been
duly given by personally delivering such notice in writing or by mailing it,
Certified Mail, return receipt requested, with postage prepaid. Any Party may
change the address to which notices and other communications hereunder are to be
sent to such Party by giving the other Party written notice thereof in
accordance with this provision.

19.03 This Agreement shall be binding upon the Parties hereto, together with
their respective successors and permitted assigns. Neither the Reinsurer nor the
General Agent may assign any of its rights or obligations under this Agreement
without the prior written consent of the Company. The foregoing notwithstanding,
the General Agent may delegate any duties or obligations under this Agreement or
the General Agency Agreement to affiliates under common control.

19.04 This Agreement may be executed in one or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.

19.05 This Agreement is the entire agreement between the parties and supersedes
any and all previous agreements, written or oral, and amendments thereto with
respect to the subject matter hereof.

19.06 This Agreement may be amended, modified or supplemented only by a written
instrument executed by all Parties hereto.

19.07 A waiver by the Company, Reinsurer or General Agent of any breach or
default by the other party under this Agreement shall not constitute a
continuing waiver or a waiver by the Company or the Reinsurer of any subsequent
act in breach or of default hereunder.

19.08 Headings used in this Agreement are for reference purposes only and shall
not be deemed a part of this Agreement.



                                       14
<PAGE>

19.09 The Parties hereto intend all provisions of this Agreement to be enforced
to the fullest extent permitted. Accordingly, should a court of competent
jurisdiction or arbitration panel determine that the scope of any provision is
too broad to be enforced as written, the Parties intend that the court or
arbitration panel should reform the provision to such narrower scope as it
determines to be enforceable under present or future law; such provision shall
be fully severable; this Agreement shall be construed and enforced as if such
illegal, invalid, or unenforceable provision were never a part hereof; and the
remaining provisions of this Agreement shall remain in full force and effect and
shall not be affected by the illegal, invalid, or unenforceable provision or by
its severance.

19.10 This Agreement is not exclusive and the Company reserves the right to
appoint or contract with other reinsurers, agents and/or managing agents in the
territory covered by this Agreement.

19.11 The Reinsurer or General Agent shall not insert any advertisement
respecting the Company or the business to be written under this Agreement in any
publication or issue any circular or paper referring to the Company or such
business without first obtaining the written consent of the Company. The
Reinsurer and/or General Agent shall establish and maintain records of any such
advertising as required by applicable statutes and regulations.

19.12 Policy cancellations at the Company's request will be made strictly
subject to requirements imposed by the Company's underwriting rules and
practices or the Reinsurer's underwriting rules and practices, as approved by
the Company, and in compliance with applicable statutes and regulations and the
applicable provisions contained in this Agreement and the pertinent policy. Such
cancellation authority shall be exercised only for causes inherent in the
particular risk and shall not be construed as authority to make general or
indiscriminate cancellations or replacement of the Policies with those of
another Company, except upon specific written instructions from the Company.
When directed by the Company, the Reinsurer will cancel any and all Policies
produced by it for any reason the Company deems necessary.

19.13 This Agreement shall be interpreted in conformance with applicable Texas
law and regulation. If it is found or ordered by a court or regulatory body that
a term or provision of this Agreement does not conform to such law or regulation
then this Agreement shall be deemed to be amended and modified in accordance
with such law. However, where this Agreement is found not to comply with
applicable law or regulation, and such compliance cannot be obtained by
amendment or modification to the Agreement that is mutually agreeable between
the Parties, then either Party may in its sole discretion terminate this
Agreement immediately and without prior notice.

19.14 The Company agrees that the Reinsurer shall have the right, with the
approval of the Company, to determine the rates and prepare the rate filing for
the Company to file during the term of this Agreement and during the term of the
run-off. The Reinsurer and General Agent understand and agree that no business
shall be produced, until a written approval of the applicable rate rules and
forms is received from the regulatory authority of competent jurisdiction.

                                   ARTICLE XX
                    LOSS AND UNEARNED PREMIUM RESERVE FUNDING

20.01 The Reinsurer will secure its obligations under this Agreement via a
Security Fund Agreement, a copy of which is attached hereto as Exhibit B and
incorporated fully by this




                                       15
<PAGE>

referenced or letter of credit to be obtained by the Reinsurer in the amount of
$6,000,000 in favor of the Company, which letter of credit and/or security fund
shall be in all respects acceptable to the Company.

         (a)      At a minimum, the letter of credit and/or security fund must:

                  (i)      comply with the provisions of Texas Insurance Code,
                           art 5.75-1(d)(3) and 28 Texas Administrative Code
                           7.610;and;

                  (ii)     be issued by a Qualified United States Financial
                           Institution (as defined by the foregoing statute and
                           regulation).

         (b)      The Company may draw the full amount of the letter of credit
                  to satisfy, in whole or in part the obligations of reinsurer
                  hereunder or, if:

                  (i)      the Reinsurer fails to comply with the provisions of
                           this Article; or

                  (ii)     the issuer of the letter of credit gives the Company
                           notice of cancellation or non-renewal under the
                           evergreen provisions of the letter of credit.

20.02 Upon termination of this Agreement, the funding required under the
Security Fund Agreement shall be reduced as follows:

         (a)      $1,200,000 six (6) months after the date of termination of the
                  Reinsurance Agreement;

         (b)      $1,600,000 twelve (12) after the date of termination of the
                  Reinsurance Agreement;

         (c)      $400,000 eighteen (18) months after the date of termination of
                  the Reinsurance Agreement;

         (d)      All other securities deposited by Reinsurer when all of
                  Reinsurer's obligations to the Company under this Agreement
                  have been extinguished.


                                   ARTICLE XXI
                      T.B.A. INSURANCE GROUP, LTD. ("TBA")

         The Company has contracted with TBA as its designated intermediate
agent to perform certain duties on the Company's behalf and to issue certain
checks on behalf of the Company in exchange for certain fees. The Reinsurer
agrees that TBA is to bear no business, credit or insurance risk and can bear no
liability whatsoever to the Reinsurer save liability for any actual fraud or
violation of criminal law it commits, which has been finally determined by a
court of competent jurisdiction after the exhaustion of any appeals. TBA shall
receive all the protections from liability which are contained herein for the
benefit of the Company.



                                       16
<PAGE>

                                  ARTICLE XXII
                                 SAVINGS CLAUSE

22.01 If any law or regulation of any Federal, State or local government of the
United States of America, or the ruling of officials having supervision over
insurance companies, should prohibit or render illegal this Agreement, or any
portion thereof, as to risks or properties located in the jurisdiction of such
authority, either the Company or the Reinsurer may upon written notice to the
other suspend or abrogate this Agreement insofar as it relates to risks or
properties located within such jurisdiction to such extent as may be necessary
to comply with such law, regulations or ruling. Such illegality shall in no way
affect any other portion thereof; provided, however, that the Reinsurer or the
Company may terminate or suspend this Agreement insofar as it relates to the
business to which such law or regulation may apply.

22.02 This Agreement shall be interpreted in accordance with the laws of the
State of Texas. All provisions of this Agreement are intended to be enforced to
the fullest extent permitted. Accordingly, should a court of competent
jurisdiction or arbitration panel determine that the scope of any provision is
too broad to be enforced as written, the Parties intend that the court or
arbitration panel should reform the provision to such narrower scope as it
determines to be enforceable under present or future law; such provision shall
be fully severable; this Agreement shall be construed and enforced as if such
illegal, invalid, or unenforceable provision were never a part hereof; and the
remaining provisions of this Agreement shall remain in full force and effect and
shall not be affected by the illegal, invalid, or unenforceable provision or by
its severance; provided, however, that where this Agreement is so found not to
comply with applicable law or regulation, if the parties are unable to amend
this Agreement upon mutual acceptable terms to bring it into compliance, then
either may in its sole discretion terminate this Agreement immediately without
prior notice.

IN WITNESS WHEREOF, the Parties hereto by their respective duly authorized
representatives have executed this Agreement as of the date first above
mentioned.

STATE NATIONAL SPECIALTY INSURANCE COMPANY


BY: /s/ Terry L. Ledbetter
    --------------------------------

ITS: President
     -------------------------------


DIRECT GENERAL INSURANCE COMPANY


BY: /s/ J. Todd Hagely
    --------------------------------

ITS: VP -- Finance & Treasurer
     -------------------------------



                                       17