No. 3154-0028













                   PROPERTY AND CASUALTY CLASH EXCESS OF LOSS
                              REINSURANCE AGREEMENT
                         PENN-PATRIOT INSURANCE COMPANY

                                     between

                         PENN-AMERICA INSURANCE COMPANY
                           PENN-STAR INSURANCE COMPANY

                                       and

                          AMERICAN RE-INSURANCE COMPANY




<PAGE>


                             TABLE OF CONTENTS
                             -----------------
       ARTICLE                                                          PAGE
       -------                                                          ----

          I                 EXHIBITS COVERED                               1

          II                TERRITORY                                      1

          III               ULTIMATE NET LOSS                              2

          IV                EXTRA CONTRACTUAL
                            OBLIGATIONS                                    2

          V                 EXCESS JUDGMENTS                               3

          VI                DECLARATORY JUDGMENT EXPENSE                   4

          VII               EXCLUSIONS                                     4

          VIII              DEFINITIONS                                   16

          IX                CLAIMS                                        20

          X                 WARRANTY                                      21

          XI                SUBROGATION AND SALVAGE                       22

          XII               TAXES                                         23

          XIII              ACCESS TO RECORDS                             23

          XIV               INSOLVENCY                                    23

          XV                OFFSET AND SECURITY                           23

          XVI               ERRORS AND OMISSIONS                          24

          XVII              FEDERAL EXCESS RECOVERY                       24

          XVIII             COMMENCEMENT AND
                            TERMINATION                                   25




<PAGE>

                                                                 No. 3154-0028

                   PROPERTY AND CASUALTY CLASH EXCESS OF LOSS
                              REINSURANCE AGREEMENT


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

WITNESSETH:

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

                                    ARTICLE I
                                    ---------
EXHIBITS COVERED
----------------

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

         EXHIBIT A - FIRST PROPERTY AND CASUALTY CLASH EXCESS OF LOSS

         EXHIBIT B - SECOND PROPERTY AND CASUALTY CLASH EXCESS OF LOSS

                                   ARTICLE II
TERRITORY
---------

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

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





                                      -1-
<PAGE>



                                   ARTICLE III
                                   -----------

ULTIMATE NET LOSS
-----------------

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

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

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

                                   ARTICLE IV
                                   ----------

EXTRA CONTRACTUAL OBLIGATIONS
------------------------------

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

     B.   "Extra  Contractual  Obligation" shall be defined as those liabilities
          not covered under any other provision of this Agreement, and any legal
          costs and expenses



                                      -2-
<PAGE>



          incurred  in  connection  therewith,  which  arise from the  Company's
          handling  of any claim on business  covered  hereunder  including  the
          Company's  umbrella  policies,  and  including but not limited to, the
          failure by the Company to settle within the policy limit, or by reason
          of alleged or actual negligence,  fraud, or bad faith, in rejecting an
          offer of settlement,  in the preparation of the defense,  in the trial
          of any action against its insured or in the preparation or prosecution
          of an appeal consequent upon such action.

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

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

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

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

                                    ARTICLE V
                                   ----------

EXCESS JUDGMENTS
----------------

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

     B.   "Excess  Judgment"  shall mean any  amount in excess of the  Company's
          original policy limits including the Company's umbrella policies,  but
          otherwise within the coverage terms of the policy, that is paid by the
          Company,  together  with any legal  costs  and  expenses  incurred  in
          connection  therewith,  resulting  from the  failure by the Company to
          settle  within  the  policy  limit,  or by reason of alleged or actual




                                      -3-
<PAGE>

          negligence, fraud, or bad faith, in discharging its duty to defend, in
          preparing  the  defense  in  an  action  against  its  insured  or  in
          discharging its duty to prepare or prosecute an appeal consequent upon
          such action.

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

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

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

                                   ARTICLE VI
                                   ----------

DECLARATORY JUDGMENT EXPENSES
-----------------------------

     A.   This  Agreement  shall  protect the Company for  Declaratory  Judgment
          Expenses  which are paid by the Company,  as otherwise  provided under
          this Agreement.

     B.   "Declaratory  Judgment  Expenses" as used in this Agreement shall mean
          legal  expenses  paid by the Company in the  investigation,  analysis,
          evaluation,  resolution or litigation of coverage  issues  between the
          Company and its insured(s),  under policies reinsured hereunder, for a
          specific loss or losses  tendered under such  policies,  which loss or
          losses are not excluded under this Agreement.

                                   ARTICLE VII
                                   -----------

EXCLUSIONS
----------

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



                                      -4-
<PAGE>


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

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

          2.   Liability  of the  Company  arising  from  its  participation  or
               membership,  whether voluntary or involuntary,  in any insolvency
               fund,  including any guarantee fund,  association,  pool, plan or
               other  facility which provides for the assessment of, payment by,
               or assumption by the Company of a part or the whole of any claim,
               debt,  charge,  fee or other  obligations  of an insurer,  or its
               successors or assigns,  which has been declared  insolvent by any
               authority having jurisdiction.

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

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

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

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

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

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




                                      -5-
<PAGE>


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

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

          5.   The following coverages:

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

          6.   Aggregate Excess of Loss or Stop Loss Coverages.

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

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

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

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

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

          12.  The  Company's   liability  and  any  related  expenses,   beyond
               circumscribed  policy  provisions,  including but not limited to,
               punitive,  exemplary,   consequential  or  compensatory  damages,
               resulting  from a claim of an  insured or an  insured's  assignee
               against the Company its agents or


                                      -6-
<PAGE>


               employees,  except as provided for in the Extra  Contractual
               Obligations  and Excess  Judgments Articles.

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

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

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

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

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

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

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

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

          b.   Any  loss,  cost or  expense  arising  out of or  related  to the
               Internet,  except if covered  under any  coverage  not written or
               endorsed   specifically   to   apply   to   Internet   exposures.
               Notwithstanding the above referenced  exception,  the reinsurance
               provided  under this  agreement  shall not apply to the following
               persons, entities or



                                      -7-
<PAGE>


               exposures,  except for in force  policies  with  effective  dates
               prior to 9/1/01 and covered under this Agreement:

                           (1)      Internet Service Providers, meaning any
                                    person or entity providing access to the
                                    Internet, content over the Internet or
                                    connection to the Internet; or
                           (2)      Application Service Providers, meaning any
                                    person or entity that provides software and
                                    associated services to a subscriber base
                                    across an area network; or
                           (3)      Internet Backbone Providers, meaning any
                                    person or entity that routes or provides
                                    channels for packets that transport data
                                    from point to point on the Internet; or
                           (4)      Any person or entity that derives ninety
                                    percent or more of gross revenue or conducts
                                    or executes ninety percent or more of
                                    business transactions on or through the
                                    Internet; or
                           (5)      Any person or entity that provides
                                    electronic mail services; or
                           (6)      Any person or entity that develops,
                                    supplies, and/or installs encryption
                                    software for use on the Internet.

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

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

          19.  All automobile Liability business when written as such.

          20.  All loss,  cost or expense  arising out of or related to,  either
               directly or  indirectly,  any  "Terrorist  Activity,"  as defined
               DEFINITIONS  Article,  and any  action  taken to  hinder,  defend
               against or respond to any such activity.  This exclusion  applies
               regardless   of  any  other  cause  or  event  that  in  any  way
               contributes  concurrently or in any sequence to the loss, cost or
               expense.

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

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

                    a.   "Beau-T-Pak";
                    b.   Barbers;
                    c.   Opticians;
                    d.   Veterinarians that treat household pets;
                    e.   Morticians;
                    f.   Clergy;




                                      -8-
<PAGE>

                    g.   Employee Benefits Liability (E&O Coverage);
                    h.   Druggists;
                    i.   "Day Care Pak";
                    j.   "Adult Day Care;
                    k.   "Health Club Pak";
                    l.   "Instructor Pak";
                    m.   In-Home Day Care;
                    n.   "Pet Pak";
                    o.   "Wellness Pak"; or
                    p.   Massage Program.

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

          3.   The following coverages:

                    a.   Product recall;
                    b.   Product tampering;
                    c.   Product integrity impairment; or
                    d.   Product guarantee.

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

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

          6.   Commercial Umbrella or Excess Liability  Coverage,  however Extra
               Contractual  Obligations or Excess Judgments  liabilities arising
               from such  coverage  shall be reinsured  as provided  within this
               Agreement.

          7.   Personal Umbrella Liability Coverage.

          8.   Environmental Impairment Liability Coverage.

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

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

          11.  Protection and Indemnity Liability Coverage.



                                      -9-
<PAGE>


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

          13.  Uninsured or Underinsured Motorists Coverage.

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

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

          16.  Blanket   or   all-risk   type   coverage,   commonly   known  as
               Organizational  Liability,  Organization  Liability,  Operational
               Liability,  Integrated  Risk,  Enterprise  Risk or under  similar
               names, written in, or endorsed to, a policy covering all types of
               losses  incurred  by, or claims  against,  an  entity;  provided,
               however,  that this exclusion  shall not include any  named-peril
               grant of  coverage  which  contemplates  specifically  enumerated
               types of claims or losses.

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

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

          19.  Liability including any related expenses,  directly or indirectly
               arising  out of,  resulting  as a  consequence  of or  related to
               Sexual Misconduct,  whether or not there is another cause of loss
               which may have  contributed  concurrently or in any sequence to a
               loss  for the  Company's  Day Care  Pak,  In Home Day Care Pak or
               Adult  Day  Care  policies,  except  for in force  policies  with
               effective  dates  prior to 9/1/01,  and for Day Care Pak, In Home
               Day Care Pak or Adult Day Care  policies of the Company where the
               insured  purchases  the Company's  buy-back  coverage or when the
               Company  attaches  the  Penn-America   S2092  (03/04)  abuse  and
               molestation exclusion.

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



                                      -10-
<PAGE>


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


                    a.   Asbestos or materials or products containing asbestos;
                    b.   2.4,5  Trichloroacetic  acid  ("2,4,5-1")  or 2.3,7,8 -
                         TCDD;
                    c.   Diethylstilbestrol  ("DES")  in any  dosage or form Any
                         intrauterine device ("IUD");
                    d.   Any product containing  silicone,  which is in any form
                         injected or implanted into the body;
                    e.   Phen-fen;
                    f.   Dioxin;
                    g.   Polychlorinated biphenyls;
                    h.   Lead or materials or products containing lead;
                    i.   Latex gloves;
                    j.   Polybutylene  piping  (acrylonitrile-butadine-styrene);
                         or
                    k.   Bio-engineered products, including any food products or
                         therapeutic or diagnostic pharmaceutical products which
                         are developed using some form of bioengineering.

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

                    a.   Electric power and/or power lines;
                    b.   Cellular phones;
                    c.   Radio and TV  broadcasting  and/or  towers  except  for
                         insured's with total sales less than $500,000;
                    d.   Computers;
                    e.   Electric blankets;
                    f.   Military radar or weapons;
                    g.   Police or weather radar;
                    h.   Satellite stations;
                    i.   Magnetic resonance imaging equipment;
                    j.   X-ray  equipment,  except sales that are 10% or less of
                         insured's total sales; or
                    k.   Microwave ovens;

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

          22.  Products Liability or Completed Operations Liability related to:

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



                                      -11-
<PAGE>

                    b.   Chemicals, except for liability arising from the retail
                         sale or wholesale  distribution of household  chemicals
                         by insureds not engaged in their manufacture;
                    c.   Insecticides and pesticides,  except sales that are 20%
                         or less of insured's total sales;
                    d.   Aircraft or aircraft parts;
                    e.   Animal feed, other than  custom-blended  grains without
                         chemical or  pharmacological  additives,  except  sales
                         that are 20% or less of insured's total sales;
                    f.   Cosmetics manufacturing,  except for the manufacture of
                         soaps or shampoos where the insured's receipts are less
                         than 10% of total sales or skin and hair care  products
                         prepared at beauty salons or similar establishments,
                    g.   Tobacco and tobacco products,  but this exclusion shall
                         not apply to liability  arising from the retail sale or
                         wholesale  distribution of tobacco products by insureds
                         not engaged in their manufacture;
                    h.   Automobiles,   trucks,   motorcycles   and  all-terrain
                         vehicles or component  parts  critical to the operation
                         of the foregoing, but this exclusion shall not apply to
                         the liability arising from the retail sale or wholesale
                         distribution    of   component    parts   critical   or
                         non-critical  to the  operation  of the  foregoing  not
                         engaged in their manufacture;
                    i.   Fiberglass,  but  this  exclusion  shall  not  apply to
                         liability  arising  from the retail  sale or  wholesale
                         distribution  of  fiberglass  products by insureds  not
                         engaged in their manufacture;
                    j.   Firearms,   except  sales  that  are  20%  or  less  of
                         insured's  total  sales;  k.  Medical   equipment;   l.
                         Elevator   or   hoist   manufacturing,    installation,
                         inspection, service or repair;
                    m.   Security and alarm system manufacturing,  installation,
                         inspection,  service or repair,  except for coverage as
                         provided for in the Company's guidelines as of 9/01/01;
                         or
                    n.   Fire suppression  system  manufacturing,  installation,
                         inspection,  service or repair,  except for coverage as
                         provided for in the Company's guidelines as of 9/01/01.

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

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

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

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



                                      -12-
<PAGE>


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

          28.  Mill or grain elevator operation.

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

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

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

          31.  Stevedoring.

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

          33.  Shipbuilding,  ship repair, ship breaking, dry dock, and quays or
               wharf operations,  except boat slips or docks that are incidental
               to restaurants, condominiums, or similar operations or risks.

          34.  Watercraft over 50 feet in length.

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

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

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

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



                                      -13-
<PAGE>


          39.  Governmental  agencies,  entities, or political subdivisions of a
               state or  municipalities  with a  population  of  50,000 or more,
               except for insureds required to name the local  municipality as a
               named insured for special events.

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

          41.  School boards or school districts.

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

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

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

          45.  Crop-dusting.

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

          47.  Inverse condemnation liability.

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

          49.  All loss, cost or expense,  directly or indirectly arising out of
               or  related  to the  liability  of  Contractors  for  Residential
               Construction in Arizona,  California,  Colorado,  Nevada, Oregon,
               New York, Texas and Washington.

               "Contractors" shall mean all developers,  general contractors and
               subcontractors who sub out more than 50% of their work.

               "Residential  Construction"  shall mean all development,  design,
               building or other  construction,  improvements,  site  selection,
               surface or subsurface site preparation,  or any work, products or
               component parts thereof,  or services provided in relation to any
               of the foregoing, involving property intended in


                                      -14-
<PAGE>


               whole or in part for  residential  habitation,  or any  common or
               public areas or facilities related thereto.

                  Notwithstanding the foregoing, "Residential Construction"
                  shall not include repair work, remodeling or any other
                  contracting work which is begun after the date of initial
                  occupancy provided such work is unrelated to or not completing
                  work begun prior to the date of initial occupancy.

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

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

          1.   Difference in Conditions Coverage.

          2.   Ocean Marine Coverage.

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

          4.   Mining including mining equipment.

          5.   Aviation business.

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

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

          8.   Boiler and Machinery Coverage.

          9.   Livestock Mortality or Fertility Coverage.

          10.  Furriers' and Jewelers Block Coverage.

          11.  Contingency business interruption risks of any kind.

          12.  Transmission and  distribution  lines other than those within 500
               feet of an insured's  premises.  It is understood and agreed that
               public  utilities


                                      -15-
<PAGE>


               extension and/or suppliers  extension and/or contingent  business
               interruption  coverage are not subject to this exclusion provided
               that  these  are not  part of a  transmitter's  or  distributor's
               policies.

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

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

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

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

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

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

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

          20.  Growing, standing or drying crops and timber.

          21.  Watercraft  except  watercraft  insured under  personal  property
               floaters.

          22.  Bridges, dams and tunnels.

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

                                  ARTICLE VIII
                                  ------------

DEFINITIONS
-----------

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



                                      -16-
<PAGE>


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

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

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

          3.   As  regards   earthquake   (the   epicenter  of  which  need  not
               necessarily be within the territorial confines referred to in the
               opening paragraph of this Article) and volcanic eruption,  all of
               the  Company's  individual  losses  (including  losses from other
               perils covered hereunder which directly arise from earthquake and
               volcanic eruption) which occur during a period of 168 consecutive
               hours shall be considered one "Occurrence". The term "earthquake"
               means one or more seismic disturbances emanating from the same or
               adjacent  geological faults.  The term "volcanic  eruption" means
               all activity arising from a single volcano.

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


                                      -17-
<PAGE>


               river,  which flows directly into an ocean,  sound,  bay gulf, or
               into one of the Great Lakes.

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

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

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

II.      Property Definition of Risk
         ---------------------------

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

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

          2.   One risk,  with respect to the peril of wind,  including  but not
               limited to:  tornado,  cyclone,  hurricane,  windstorm  and hail,
               shall mean all insured  locations listed on an individual  policy
               that  are  within  a legal  property  boundary  which  is  owned,
               occupied or operated  by the insured as one  continuous  property
               site,  including  a  site  that  contains  roadways,  streams  or
               rights-of-way intersecting the site.

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

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


                                      -18-
<PAGE>


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

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

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

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

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

IV.      Terrorist Activity
         ------------------
         A. "Terrorist Activity" shall mean any deliberate, unlawful act that:

               1.   is declared by any authorized governmental official to be or
                    to  involve   terrorism,   terrorist  activity  or  acts  of
                    terrorism; or

               2.   includes,  involves,  or  is  associated  with  the  use  or
                    threatened  use of  force,  violence  or  harm  against  any
                    person, tangible or intangible property, the environment, or
                    any natural  resources,  where the act or threatened  act is
                    intended, in whole or in part, to


                    (a)  promote,   further   or  express   opposition   to  any
                         political, ideological,  philosophical, racial, ethnic,
                         social or religious cause or objective; or
                    (b)  influence,  disrupt or  interfere  with any  government
                         related operations, activities or policies; or
                    (c)  intimidate,  coerce or frighten  the general  public or
                         any segment of the general public; or
                    (d)  disrupt or  interfere  with a  national  economy or any
                         segment of a national economy; or

              3.    includes, involves, or is associated with, in whole or in
                    part, any of the following activities, or the threat
                    thereof:



                                      -19-
<PAGE>


                    (a)  hijacking or sabotage of any form of  transportation or
                         conveyance,  including  but not limited to  spacecraft,
                         satellite, aircraft, train, vessel, or motor vehicle;
                    (b)  hostage taking or kidnapping;
                    (c)  the use or threatened  use of, or release or threatened
                         release  of  any  nuclear,   biological,   chemical  or
                         radioactive agent, material, device or weapon;
                    (d)  the use of any bomb,  incendiary  device,  explosive or
                         firearm;
                    (e)  the interference  with or disruption of basic public or
                         commercial  services  and  systems,  including  but not
                         limited  to  the   following   services   or   systems:
                         electricity,     natural    gas,     power,     postal,
                         communications, telecommunications, information, public
                         transportation, water, fuel, sewer or waste disposal;
                    (f)  the  injuring  or   assassination  of  any  elected  or
                         appointed   government   official  or  any   government
                         employee;
                    (g)  the seizure,  blockage,  interference with,  disruption
                         of,   or   damage   to   any   government    buildings,
                         institutions, functions, events, tangible or intangible
                         property or other assets; or
                    (h)  the seizure,  blockage,  interference with,  disruption
                         of, or damage to tunnels, roads, streets,  highways, or
                         other places of public transportation or conveyance.

     B.   Any of the activities listed in section A(3) above shall be considered
          Terrorist  Activity  except where the Company can  demonstrate  to the
          Reinsurer  that the  foregoing  activities  or  threats  thereof  were
          motivated  solely by personal  objectives of the perpetrator  that are
          unrelated, in whole or in part, to any intention to

          1.   promote,   further  or  express   opposition  to  any  political,
               ideological,  philosophical,  racial, ethnic, social or religious
               cause or objective; or
          2.   influence,  disrupt  or  interfere  with any  government  related
               operations, activities or policies; or
          3.   intimidate,  coerce or frighten the general public or any segment
               of the general public; or
          4.   disrupt or interfere with a national  economy or any segment of a
               national economy.

                                   ARTICLE IX
                                   ----------
CLAIMS
------

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



                                      -20-
<PAGE>


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

          1.   Fatality;
          2.   Partial or Total Paralysis;
          3.   Severe brain injury or brain damage prognosis;
          4.   Severe burns;
          5.   Amputation of one or more limbs;
          6.   Loss of sight or hearing to a substantial degree;
          7.   Any injury where there is, or appears  probable,  an alleged loss
               of earnings for one year or more; and,
          8.   Any claim with a loss reserve  that exceeds 50% of the  Company's
               net  retention,  provided  that  such  claim  might  involve  the
               Reinsurer.

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

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

                                    ARTICLE X
                                   ----------

WARRANTY
--------

Casualty
--------

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

          1.   General  Liability - $1,000,000  each  occurrence  and $2,000,000
               general   aggregate.   a)  As  respects  Products  and  Completed
               Operations - $1,000,000 in the aggregate.
          2.   Massage  Program -  $2,000,000  each  occurrence  and  $3,000,000
               general aggregate.



                                      -21-
<PAGE>

          3.   Professional   Liability  -  $1,000,000   each   occurrence   and
               $1,000,000 in the annual aggregate.

          4.   Umbrella  Liability  - The  Company  will  purchase  or so deemed
               umbrella  facultative   reinsurance  covering  Extra  Contractual
               Obligations and Excess Judgments liability as defined within this
               Agreement  for an amount equal to and in addition to the umbrella
               policy limit, subject to an annual aggregate limit of $5,000,000.
               Facultative   reinsurance   coverage  for  any   umbrella   extra
               contractual obligations or excess judgments liability shall inure
               to the benefit of this Agreement.

Property

     A.   It  shall  be  deemed  that  the  Company  will  purchase  facultative
          reinsurance on all risks in excess of $2,000,000.

     B.   It  shall  be  deemed  that  the  Company  will  purchase  catastrophe
          reinsurance  for  $29,000,000  in  excess  of  $1,000,000  for any one
          occurrence.

                                   ARTICLE XI
                                   ----------

SUBROGATION AND SALVAGE
-----------------------

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

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

     C.   All  salvages,  recoveries  or  reimbursements,   after  deduction  of
          expenses  applicable  thereto,  recovered or received  subsequent to a
          loss settlement  under this Agreement shall be applied as if recovered
          or  received  prior  to the  aforesaid  settlement  and all  necessary
          adjustments shall be made by the parties hereto, provided always, that
          nothing in this clause  shall be  construed  to mean that losses under
          this Agreement are not  recoverable  until the Company's  ultimate net
          loss has been ascertained. Expenses hereunder shall exclude all office
          expenses of the Company and all


                                      -22-
<PAGE>


          salaries and expenses of its officials  and employees  except those of
          salaried adjusters.

                                   ARTICLE XII
                                   -----------

TAXES

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

                                  ARTICLE XIII
                                  ------------

ACCESS TO RECORDS

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

                                   ARTICLE XIV

INSOLVENCY

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

                                   ARTICLE XV

OFFSET AND SECURITY



                                      -23-
<PAGE>


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

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

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

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

                                   ARTICLE XVI
                                   -----------

ERRORS AND OMISSIONS

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

                                  ARTICLE XVII
                                  -------------

FEDERAL EXCESS RECOVERY

          As respects the Insured  Losses of the Insurer for each Program  Year,
          it is hereby agreed that to the extent the Insurer's total reinsurance
          recoverables for Insured Losses,  whether


                                      -24-
<PAGE>


          collected or not, combined with the financial  assistance available to
          the  Insurer  under the Act exceeds  the  aggregate  amount of Insured
          Losses   paid  by  the   Insurer,   less  any  other   recoveries   or
          reimbursements,  such excess amounts (the "Excess  Recovery") shall be
          allocated  to the  Company.  The  allocation  to the Company  shall be
          deemed  to be an amount  equal to the  proportion  that the  Company's
          Insured  Losses bear to the Insurer's  total  Insured  Losses for each
          Program Year.  The Company shall then  reimburse the Reinsurer for its
          share of the Excess Recovery allocated to the Company. The Reinsurer's
          share of the Excess  Recovery shall be deemed to be an amount equal to
          the proportion  that the  Reinsurer's  payment of Insured Losses under
          this  Agreement  bears to the Company's  total  collected  reinsurance
          recoverables  for Insured  Losses.  The Company also agrees to provide
          the Reinsurer  with all necessary  data  respecting  the  transactions
          covered under this Clause.

          "Act" as utilized  herein shall mean the Terrorism  Risk Insurance Act
          of 2002  and  any  subsequent  amendment  thereof  or any  regulations
          promulgated there under.  "Insurer",  "Insured  Losses",  and "Program
          Year" as utilized  herein shall follow the  definitions as provided in
          the Act."

                                  ARTICLE XVIII
                                  -------------

COMMENCEMENT AND TERMINATION
----------------------------

     A.   This Agreement  shall take effect as of 12:01 a.m.,  Eastern  Standard
          Time,  January 1,  2004,  and shall,  except as  otherwise  stipulated
          herein or in any Exhibit hereto or any Endorsement hereof, continue in
          full force and effect until terminated as hereinafter provided.

     B.   This  Agreement may be canceled at any December 31,  unless  otherwise
          mutually  agreed by either  party,  giving 90 days  notice in  writing
          prior to such date,  stating  to the other its  desire to effect  such
          cancellation.

     C.   In the event of  cancellation,  the Reinsurer  shall remain liable for
          losses  occurring prior to such  cancellation  date, but all liability
          shall  terminate  hereunder as to losses  occurring  subsequent to the
          cancellation date.

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

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

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



                                      -25-
<PAGE>


          IN WITNESS WHEREOF the parties hereto have caused this Agreement to be
          executed in duplicate in Hatboro, Pennsylvania, this day of , 2004;

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


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


          and in Princeton, New Jersey, this day of 2004.


                                         AMERICAN RE-INSURANCE COMPANY



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

DATED:  June 4, 2004

RG/rg


                                      -26-
<PAGE>





                                    EXHIBIT A

                           FIRST PROPERTY AND CASUALTY
                              CLASH EXCESS OF LOSS

                                    Section 1

A.        BUSINESS COVERED

          The Reinsurer  agrees to reimburse  the Company,  on an excess of loss
          basis,  for the amounts of ultimate net loss which the Company may pay
          as a result of losses  occurring  on and after  January  1,  2004,  as
          respects the Company's  in-force,  new and renewal  policies  becoming
          effective  on and after said date,  covering  the Classes of Insurance
          set forth below,  except as excluded under the  EXCLUSIONS  Article of
          this Agreement, subject to the limitations set forth herein.

                              CLASSES OF INSURANCE

                                    Property
                                   ----------
                                      Fire
                        Commercial Multi Peril Section I
                            Businessowners Section I
                                  Allied Lines
                                  Inland Marine

                                    Casualty
                                   ----------
                                General Liability
                        Commercial Multi Peril Section II
                            Businessowners Section II
                     Employer's Liability Stop Gap coverage

                  Non-owned and Hired Automobile Liability when
              written as part of Commercial Multi Peril Section II
                    or General Liability policies, including
                             Professional Liability

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

                                    Section 2

LIMITS OF COVER
---------------

     A.   As respects one or more than one of the classes under Property Classes
          of Insurance as stated in Section 1, the Reinsurer shall not be liable
          for any loss until the  Company's  ultimate  net loss for each risk in
          each  occurrence  exceeds  $2,000,000 and then the Reinsurer  shall be
          liable  for the amount of the  Company'  s ultimate  net


                                      -1-
<PAGE>


          loss for each risk in each  occurrence in excess of $2,000,000 but the
          Reinsurer's  liability  shall not exceed 100% of  $3,000,000  for each
          risk in any one  occurrence or $3,000,000 as respects all risks in any
          one loss occurrence.

     B.   As respects one or more than one of the classes under Casualty Classes
          of Insurance as stated in Section 1, the Reinsurer shall not be liable
          for any loss until the Company's  ultimate net loss in each occurrence
          exceeds  $3,000,000  and then the  Reinsurer  shall be liable  for the
          amount of the  Company'  s  ultimate  net loss in each  occurrence  in
          excess of $3,000,000 but the  Reinsurer's  liability  shall not exceed
          100% of $2,000,000 in any one occurrence.

     C.   In the event of a  combination  loss  occurrence  involving a Property
          Class of  Insurance  and a Casualty  Class of  Insurance  as stated in
          Section 1, the Reinsurer's  liability  shall not exceed  $3,000,000 in
          the  aggregate  in any one  occurrence,  further  subject to  Casualty
          Classes of Insurance sub-limit of $2,000,000 in any one occurrence.

                                    Section 3
                                    ---------

REINSURANCE PREMIUM

          The annual minimum and deposit  premium for the  reinsurance  provided
          under this Exhibit shall be $210,000.

                                    Section 4
                                    ---------
REPORTS AND REMITTANCES

     A.   The  minimum  and  deposit  premium  shall be fully  earned  as of the
          inception  date of this  Agreement and shall be paid in advance by the
          Company to the Reinsurer in equal installments on 1/1, and 7/1, during
          the term of this Agreement.

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

                                    Section 5
                                    ---------

REINSTATEMENT

          Each claim  hereon  reduces the amount of  indemnity  from the time of
          occurrence of the loss by the sum paid, but any amount so exhausted is
          hereby  reinstated  from the time of occurrence  of the loss,  and for
          each  amount so  reinstated  the Company  agrees to pay an  additional
          premium  calculated  at the  annual  earned  premium  hereon  for  the
          Agreement  Year during which the loss  occurred,  being pro rata as to
          the fraction of the face value of this Agreement  (i.e.,  the fraction
          of $3,000,000 as respects  Property Classes and $2,000,000 as respects
          Casualty  Classes)  so  reinstated  and  100%  as to the  time  of the



                                      -2-
<PAGE>

          Agreement Year. Nevertheless,  the Reinsurer's liability hereunder, as
          respects  Property Classes shall never exceed $3,000,000 in respect of
          any  risk  in  any  one  occurrence  and  the  Reinsurer's   liability
          hereunder, as respects Casualty Classes, shall never exceed $2,000,000
          in respect  of any one  occurrence,  and shall be  further  limited to
          $6,000,000  as respects  Property  Classes or  $4,000,000  as respects
          Casualty  Classes,  in any one Agreement Year by reason of any and all
          claims arising  hereunder.  However,  the Reinsurer's  liability shall
          never exceed  $6,000,000  for both  Property  and Casualty  Classes of
          Insurance in any one Agreement Year.

          This Exhibit A is attached to and forms part of Reinsurance  Agreement
          No.  3154-0028  issued to PENN-AMERICA  INSURANCE  COMPANY,  PENN-STAR
          INSURANCE COMPANY and PENN-PATRIOT INSURANCE COMPANY

          DATED: June 4, 2004
          RG/rg






                                      -3-
<PAGE>


                                                              No. 3154-0028
                                                                  EXHIBIT B

                                    EXHIBIT B
                                    ---------

                          SECOND PROPERTY AND CASUALTY
                              CLASH EXCESS OF LOSS
                               -------------------

                                    Section 1
                                    ---------

     A.   BUSINESS COVERED

          The Reinsurer  agrees to reimburse  the Company,  on an excess of loss
          basis,  for the amounts of ultimate net loss which the Company may pay
          as a result of losses  occurring  on and after  January  1,  2004,  as
          respects the Company's  in-force,  new and renewal  policies  becoming
          effective  on and after said date,  covering  the Classes of Insurance
          set forth below,  except as excluded under the  EXCLUSIONS  Article of
          this Agreement, subject to the limitations set forth herein.

                              CLASSES OF INSURANCE

                                    Property
                                    ---------
                                      Fire
                        Commercial Multi Peril Section I
                            Businessowners Section I
                                  Allied Lines
                                  Inland Marine

                                    Casualty
                                    ---------
                                General Liability
                        Commercial Multi Peril Section II
                            Businessowners Section II
                     Employer's Liability Stop Gap coverage

                  Non-owned and Hired Automobile Liability when
              written as part of Commercial Multi Peril Section II
                    or General Liability policies, including
                             Professional Liability

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

                                    Section 2
                                    ---------

LIMITS OF COVER

     A.   As respects one or more than one of the classes under Property Classes
          of Insurance as stated in Section 1, the Reinsurer shall not be liable
          for any loss until the  Company's  ultimate  net loss for each risk in
          each  occurrence  exceeds  $5,000,000 and then the Reinsurer  shall be
          liable  for the amount of the  Company'  s ultimate  net loss for each
          risk in each  occurrence in excess of $5,000,000


                                      -1-
<PAGE>


          but the Reinsurer's  liability shall not exceed 100% of $5,000,000 for
          each risk in any one occurrence or $5,000,000 as respects all risks in
          any one loss occurrence.

     B.   As respects one or more than one of the classes under Casualty Classes
          of Insurance as stated in Section 1, the Reinsurer shall not be liable
          for any loss until the Company's  ultimate net loss in each occurrence
          exceeds  $5,000,000  and then the  Reinsurer  shall be liable  for the
          amount of the  Company'  s  ultimate  net loss in each  occurrence  in
          excess of $5,000,000 but the  Reinsurer's  liability  shall not exceed
          100% of $5,000,000 in any one occurrence.

     C.   In the event of a  combination  loss  occurrence  involving a Property
          Class of  Insurance  and a Casualty  Class of  Insurance  as stated in
          Section 1, the Reinsurer's  liability  shall not exceed  $5,000,000 in
          the aggregate in any one occurrence.

     D.   Reinsurance  recoveries  under Exhibit A of this Agreement shall inure
          to the sole  benefit  of the  Company  in  determining  the  Company's
          Ultimate Net Loss under this Exhibit.

                                    Section 3
                                    ---------

REINSURANCE PREMIUM

          The annual minimum and deposit  premium for the  reinsurance  provided
          under this Exhibit shall be $275,000.

                                    Section 4
                                    ---------
REPORTS AND REMITTANCES

     A.   The  minimum  and  deposit  premium  shall be fully  earned  as of the
          inception  date of this  Agreement and shall be paid in advance by the
          Company to the Reinsurer in equal installments on 1/1, and 7/1, during
          the term of this Agreement.

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

                                    Section 5
                                    ---------

REINSTATEMENT

          Each claim  hereon  reduces the amount of  indemnity  from the time of
          occurrence of the loss by the sum paid, but any amount so exhausted is
          hereby  reinstated  from the time of occurrence  of the loss,  and for
          each  amount so  reinstated  the Company  agrees to pay an  additional
          premium  calculated  at the  annual  earned  premium  hereon  for  the




                                      -2-
<PAGE>

          Agreement  Year during which the loss  occurred,  being pro rata as to
          the fraction of the face value of this Agreement  (i.e.,  the fraction
          of  $5,000,000) so reinstated and 100% as to the time of the Agreement
          Year.  Nevertheless,  the Reinsurer's  liability hereunder shall never
          exceed  $5,000,000  in  respect  of any  risk in one  occurrence  and,
          subject  to the  limit  in  respect  of any one  occurrence,  shall be
          further  limited to $10,000,000 in any one Agreement Year by reason of
          any  and  all  claims  arising  hereunder.  However,  the  Reinsurer's
          liability  shall  never  exceed  $10,000,000  for  both  Property  and
          Casualty Classes of Insurance in any one Agreement Year.

          This Exhibit B is attached to and forms part of Reinsurance  Agreement
          No.  3154-0028  issued to PENN-AMERICA  INSURANCE  COMPANY,  PENN-STAR
          INSURANCE COMPANY and PENN-PATRIOT INSURANCE COMPANY

          DATED:  June 4, 2004
          RG/rg





                                      -3-
<PAGE>



                                                                No. 3154-0028
                       NUCLEAR INCIDENT EXCLUSION CLAUSE--
                       PHYSICAL DAMAGE--REINSURANCE--NO. 2

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

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

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

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

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

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

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

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

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

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

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

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

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

               (a)  substantial quantities, and

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



                                      -1-
<PAGE>


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


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

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





                                      -2-
<PAGE>


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

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

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

     Limited Exclusion Provision.*

     I.   It is  agreed  that the  policy  does not apply  under  any  liability
          coverage, to { injury, sickness,  disease, death or destruction bodily
          injury or property  damage with respect to which an insured  under the
          policy is also an  insured  under a nuclear  energy  liability  policy
          issued by  Nuclear  Energy  Liability  Insurance  Association,  Mutual
          Atomic Energy Liability  Underwriters or Nuclear Insurance Association
          of  Canada,  or would be an  insured  under  any such  policy  for its
          termination upon exhaustion of its limit of liability.

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

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

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

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

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

     (3)  Except  for  those  classes  of  policies  specified  in  Clause II of
          paragraph  (2) and without in any way  restricting  the  operation  of
          paragraph (1) of this Clause, it is understood and agreed that for all
          purposes of this  reinsurance the original  liability  policies of the
          Reassured  (new,  renewal and  replacement)  affording  the  following
          coverages:

          Owners,  Landlords  and  Tenants  Liability,   Contractual  Liability,
          Elevator  Liability,   Owners  or  Contractors   (including  railroad)
          Protective Liability, Manufacturers and Contractors Liability, Product
          Liability,   Professional  and  Malpractice  Liability,   Storekeepers
          Liability,   Garage   Liability,   Automobile   Liability   (including
          Massachusetts  Motor Vehicle or Garage  Liability)  shall be deemed to
          include,  with respect to such  coverages,  from the time specified in
          Clause V of this paragraph (3), the following provision  (specified as
          the Broad Exclusion Provision):


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

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

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



                                      -1-
<PAGE>


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

     II.  Under  any  Medical  Payments  Coverage,  or under  any  Supplementary
          Payments  Provision  relating  to {{  immediate  medical  or  surgical
          relief, to expenses incurred with respect first aid, to bodily injury,
          sickness,  disease or death resulting from the hazardous properties of
          bodily  injury  nuclear  material and arising out of the  operation of
          nuclear facility by any person or organization.

     III. Under any Liability Coverage, to { Injury, sickness, disease, death or
          destruction  Bodily  injury  or  property  damage  resulting  from the
          hazardous properties of nuclear material, if

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

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

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

     IV. As used in this endorsement:

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

               (a)  any nuclear reactor,
               (b)  any equipment or device  designed or used for (1) separating
                    the  isotopes of uranium or  plutonium,  (2)  processing  or
                    utilizing  spent  fuel,  or  (3)  handling,   processing  or
                    packaging waste,
               (c)  any equipment or device used for the processing, fabricating
                    or alloying of special  nuclear  material if at any time the
                    total amount of such  material in the custody of the insured
                    at the  premises  where such  equipment or device is located
                    consists of or contains  more than 25 grams of  plutonium or
                    uranium  233 or any  combination  thereof,  or more than 250
                    grams of uranium 235,
               (d)  any structure, basin, excavation, premises or place prepared
                    or used for the storage or disposal of waste,



                                      -2-
<PAGE>






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

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

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

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

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


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

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



                                      -3-
<PAGE>





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

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

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

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

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

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

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

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

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

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