PENN-AMERICA INSURANCE COMPANY
                           PENN-STAR INSURANCE COMPANY
                         PENN-PATRIOT INSURANCE COMPANY
                              Hatboro, Pennsylvania
        and any additional company established or acquired by the Company


                    property catastrophe SECOND REINSTATEMENT
                       EXCESS OF LOSS REINSURANCE contract



                                   PREPARED BY

                                 WILLIS RE INC.


<PAGE>


                         PENN-AMERICA INSURANCE COMPANY
                           PENN-STAR INSURANCE COMPANY
                         PENN-PATRIOT INSURANCE COMPANY
                              Hatboro, Pennsylvania


                    property catastrophe SECOND REINSTATEMENT
                       excess of loss REINSURANCE contract



Reinsurer                                          Contract Participation
---------                                          ----------------------

                                                          36880-004
                                                          ---------
Everest Reinsurance Company                                100.00%

Total                                                      100.00%


<PAGE>

                                TABLE OF CONTENTS


ARTICLE                                                                     PAGE
-------                                                                     ----

I                   BUSINESS COVERED                                         1
II                  TERM                                                     1
III                 SPECIAL TERMINATION                                      2
IV                  DEFINITIONS                                              2
                           Declaratory Judgment Expense                      2
                           Gross Net Written Premium Income                  3
                           Loss Adjustment Expense                           3
                           Loss Occurrence                                   3
                           Policy or Policies                                5
                           Ultimate Net Loss                                 5
V                   TERRITORY                                                5
VI                  EXCLUSIONS                                               5
VII                 AMOUNT OF COVERAGE AND RETENTION                         7
VIII                PREMIUM                                                  7
IX                  NOTICE OF LOSS AND LOSS SETTLEMENTS                      7
X                   AGENCY AGREEMENT                                         8
XI                  SALVAGE AND SUBROGATION                                  8
XII                 ERRORS AND OMISSIONS                                     8
XIII                OFFSET                                                   8
XIV                 CURRENCY                                                 9
XV                  TAXES                                                    9
XVI                 FEDERAL EXCISE TAX                                       9
XVII                UNAUTHORIZED REINSURANCE                                 9
XVIII               NET RETAINED LIABILITY                                  11
XIX                 OTHER REINSURANCE                                       11
XX                  THIRD PARTY RIGHTS                                      12
XXI                 SEVERABILITY                                            12
XXII                GOVERNING LAW                                           12
XXIII               ACCESS TO RECORDS                                       12
XXIV                CONFIDENTIALITY                                         12
XXV                 INSOLVENCY                                              13
XXVI                BINDING ARBITRATION                                     13
XXVII               SERVICE OF SUIT                                         14


<PAGE>


XXVIII              INTERMEDIARY                                            15
                    Pools, Associations & Syndicates Exclusion Clause
                    Insolvency Funds Exclusions Clause
                    War Exclusion
                    Nuclear Incident Exclusion Clause - Physical Damage -
                    Reinsurance - U.S.A.
                    Terrorism Exclusion Clause


<PAGE>


                    PROPERTY CATASTROPHE SECOND REINSTATEMENT
                       excess of loss reinsurance contract
                                (the "Contract")

                                     between

                         PENN-AMERICA INSURANCE COMPANY
                           PENN-STAR INSURANCE COMPANY
                         PENN-PATRIOT INSURANCE COMPANY
                              Hatboro, Pennsylvania
        and any additional company established or acquired by the Company
                                 (the "Company")

                                       and

                   THE SUBSCRIBING REINSURER(S) EXECUTING THE
                     INTERESTS AND LIABILITIES AGREEMENT(S)
                                 ATTACHED HERETO
                                (the "Reinsurer")


                                    ARTICLE I
                                    ---------

BUSINESS COVERED
----------------

By this Contract the Reinsurer agrees to reinsure the liability of the Company
under its Policy or Policies in force at the effective time and date hereof or
issued or renewed at or after the effective time and date, and classified by the
Company as Property business, including but not limited to Fire and Allied
Lines; Inland Marine; Commercial Multiple Peril (Property Coverages only);
Businessowners (Property Coverages only); and Commercial and Private Passenger
Automobile Physical Damage (excluding Collision but including Garagekeepers and
Garage Physical Damage Coverages only), subject to the terms, conditions and
limitations hereafter set forth.


                                   ARTICLE II
                                   ----------

TERM
----

A.     This Contract shall become effective at 12:01 a.m., Eastern Daylight
       Time, September 28, 2004, as respects losses occurring at or after that
       time and date, and shall continue in effect until 12:01 a.m., Eastern
       Standard Time, January 1, 2005.

B.     If this Contract expires or is terminated while a Loss Occurrence covered
       hereunder is in progress, the Reinsurer's liability hereunder shall,
       subject to the other terms and conditions of this Contract, be determined
       as if the entire Loss Occurrence had occurred prior to the

                                     Page 1

<PAGE>

       expiration or termination of this Contract, provided that no part of that
       Loss Occurrence is claimed against any renewal or replacement of this
       Contract.


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

SPECIAL TERMINATION
-------------------

A.     The Company may terminate this Contract at any time by the giving of 10
       days' notice in writing to the Reinsurer upon the happening of any one of
       the following circumstances:

       1.     A State Insurance Department or other legal authority orders the
              Reinsurer to cease writing business; or

       2.     The Reinsurer has become insolvent or has been placed into
              liquidation or receivership (whether voluntary or involuntary), or
              there has been instituted against it proceedings for the
              appointment of a receiver, liquidator, rehabilitator, conservator,
              trustee in bankruptcy or other agent known by whatever name, to
              take possession of its assets or control of its operations; or

       3.     The Reinsurer's policyholders' surplus has been reduced by
              whichever is greater, either 25% of the amount of surplus at the
              inception of this Contract or 25% of the amount at the latest
              anniversary, or has lost any part of, or has reduced its paid in
              capital; or

       4.     The Reinsurer has become merged with, acquired or controlled by
              any company, corporation or individual(s) not controlling the
              party's operations at the inception of this Contract; or

       5.     The Reinsurer has reinsured its entire liability under this
              Contract without the terminating party's prior written consent; or

       6.     The Reinsurer ceases writing new or renewal business.

B.     Notwithstanding any other termination provision of this Contract, if this
       Contract is terminated under the provisions of this Article, the Company
       shall have the right to terminate liability for losses occurring
       subsequent to termination of this Contract. In such event, the Reinsurer
       shall return the unearned portion, if any, less any commission allowed
       thereon, of premiums paid hereunder and the minimum premium provisions,
       if any, shall be waived.


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

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

A.     Declaratory Judgment Expense

       "Declaratory Judgment Expense" as used herein shall mean all expenses
       incurred by the Company in connection with a declaratory judgment action
       brought to determine the

                                     Page 2

<PAGE>

       Company's defense and/or indemnification obligations that are allocable
       to a specific claim subject to this Contract. Declaratory Judgment
       Expense shall be deemed to have been incurred on the date of the original
       loss (if any) giving rise to the declaratory judgment action.

B.     Gross Net Written Premium Income

       "Gross Net Written Premium Income" as used herein shall be defined as
       gross written premiums plus any additional premiums and less any
       cancellations and return premiums on the Policies reinsured hereunder,
       and less premiums paid for reinsurances, recoveries under which inure to
       the benefit of this Contract.

C.     Loss Adjustment Expense

       "Loss Adjustment Expense" as used herein shall mean all costs and
       expenses allocable to a specific claim that are incurred by the Company
       in the investigation, appraisal, adjustment, settlement, litigation,
       defense or appeal of specific claims covered under the Policies reinsured
       hereunder, including court costs and costs of supersedeas and appeal
       bonds, and including a) pre-judgment interest, unless included as part of
       the award or judgment; b) post-judgment interest; c) legal expenses and
       costs incurred in connection with coverage questions and legal actions
       connected thereto, including Declaratory Judgment Expense (as defined
       herein); and d) a pro rata share of salaries and expenses of Company
       field employees, and expenses of other Company employees who have been
       temporarily diverted from their normal and customary duties and assigned
       to the field adjustment of losses covered by this Contract. Loss
       Adjustment Expense does not include unallocated loss adjustment expense.
       Unallocated loss adjustment expense includes, but is not limited to,
       salaries and expenses of employees, other than (d) above, and office and
       other overhead expenses.

D.     Loss Occurrence

       "Loss Occurrence" as used herein 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 anywhere in the world but limited in the United States of America
       and the Dominion of Canada to within the area of one state of the United
       States or province of Canada and states or provinces contiguous thereto
       and to one another. The duration and extent of any one Loss 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. The term "Loss 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

                                     Page 3

<PAGE>

              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 insured'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 fire following directly occasioned
              by the earthquake, only those individual fire losses which
              commence during the period of 168 consecutive hours may be
              included in the Company's Loss Occurrence.

       4.     As regards "Freeze," only individual losses directly occasioned by
              collapse, breakage of glass and water damage (caused by bursting
              of frozen pipes and tanks) may be included in the Company's Loss
              Occurrence.

       5.     As regards "Cyberrisk," losses arising, directly or indirectly,
              out of:

              a. the use or misuse of the Internet or similar facility;

              b.    any electronic transmission of data or other information;

              c.    any malicious code, that goes by the name computer virus,
                    worm, logic bomb, or Trojan horse;

              d.    the use or misuse of any Internet address, Website or
                    similar facility; or

              e.    any data or other information posted on a Website or similar
                    facility;

              do not in and of themselves constitute an event unless arising out
              of one or more of the following perils:

              fire, lightning, explosion, aircraft or vehicle impact, falling
              objects, windstorm, hail, tornado, cyclone, hurricane, earthquake,
              volcano, tsunami, collapse, flood, freeze, ice or weight of snow.

       For all Loss Occurrences, except as referred to under sub-paragraph 2
       above, 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 Loss Occurrences
       referred to in sub-paragraph 1 above, where only one such period of 72
       consecutive hours shall apply with respect to one event, regardless of
       the duration of the event.

       As respect those Loss Occurrences referred to in sub-paragraph 2 above,
       if the disaster, accident or loss occasioned by the event is of greater
       duration than 72 consecutive hours, then the Company may divide that
       disaster, accident, or loss into two or more Loss Occurrences, provided
       no two periods overlap and no individual loss is included in more

                                     Page 4

<PAGE>

       than one such period and provided that no period commences 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.

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

E.     Policy or Policies

       "Policy" or "Policies" as used herein shall mean all binders, policies,
       and contracts of insurance or reinsurance which are issued by or on
       behalf of the Company, all as respects the business covered under this
       Contract, as set forth in the BUSINESS COVERED ARTICLE.

F.     Ultimate Net Loss

       "Ultimate Net Loss" as used herein shall mean the actual loss, including
       pre-judgment interest which is included as part of the award or judgment,
       Loss Adjustment Expense, which amounts are paid or to be paid by the
       Company on its net retained liability after making deductions for all
       recoveries, salvages, subrogations and all claims on inuring reinsurance,
       whether collectible or not; provided, however, that, in the event of the
       insolvency of the Company, payment by the Reinsurer shall be made in
       accordance with the provisions of the INSOLVENCY ARTICLE. Nothing herein
       shall be construed to mean that losses under this Contract are not
       recoverable until the Company's Ultimate Net Loss has been ascertained.


                                    ARTICLE V
                                    ---------

TERRITORY
---------

The territorial limits of this Contract shall be identical with those of the
Company's Policies.


                                   ARTICLE vI
                                   ----------

EXCLUSIONS
----------

The following shall be excluded from the scope of this Contract:

A. Assumed treaty reinsurance other than:

       (1)    Reinsurance from the Company's affiliated companies (i.e.,
              companies which are under common management or common ownership of
              the Company),

       (2)    Local agency reinsurance on a share basis accepted in the normal
              course of business,

       (3)    Reinsurance assumed from State and County Mutuals;

                                     Page 5

<PAGE>

B.     Pools, Associations and Syndicates pursuant to the "Pools, Associations
       and Syndicates Exclusion Clause," attached hereto;

C.     Insolvency Funds pursuant to the "Insolvency Fund Exclusion Clause,"
       attached hereto;

D.     War Risks pursuant to the "War Exclusion Clause," attached hereto;

E.     Loss, damage, cost, and/or expense attributable to any Act or Acts of
       Terrorism as certified by the Secretary of the Treasury and the Attorney
       General as defined in and excluded by the Terrorism Exclusion Clause
       attached hereto.

F.     Nuclear, Biological and Chemical Terrorism losses as excluded under the
       Terrorism Exclusion Clause attached hereto.

G.     Nuclear Incident pursuant to the "Nuclear Incident Exclusion Clause -
       Physical Damage - Reinsurance - U.S.A.," attached hereto;

H.     Earthquake Insurance when written as such.

I.     Losses arising out of Extra Contractual Obligations and/or Excess of
       Original Policy Limits Judgments.

       The term "Extra Contractual Obligations" is defined as those liabilities
       not covered under any other provision of this Contract and which arise
       from the handling of any claim on business covered hereunder, such
       liabilities arising because of, but not limited to, the following:
       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 or in the preparation of the defense or in the trial of any
       action against its insured or in the preparation or prosecution of an
       appeal consequent upon such action.

       The term "Excess of Original Policy Limits" is defined as those
       liabilities which arise in connection with any judgment in excess of the
       limit of the original Policy, such loss in excess of the limit having
       been incurred because of 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 or in the preparation of the
       defense or in the trial of any action against its insured or in the
       preparation or prosecution of an appeal consequent upon such action.

J.     Losses in respect of overhead transmission and distribution lines and
       their supporting structures, other than those on or within 300 meters (or
       1,000 feet) of the insured premises. It is understood and agreed that
       public utilities extension and/or suppliers' extension and/or contingent
       business interruption coverages are not subject to this exclusion,
       provided that these are not part of a transmitters' or distributors'
       Policy;

K.     Pollution to the extent that it is excluded under the Company's original
       Policies;

L.     Rolling stock business;

M.     Satellite business;

                                     Page 6

<PAGE>

N.     Insurance on growing crops;

O.     Difference in Conditions coverage, however styled;

P.     Boiler and Machinery business.


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

AMOUNT OF COVERAGE AND RETENTION
--------------------------------

A.     The Reinsurer shall be liable for 100% of the Ultimate Net Loss in excess
       of the Company's retention of $1,000,000 as a result of each Loss
       Occurrence subject to a limit of liability to the Reinsurer of $4,000,000
       in respect to each Loss Occurrence. The Reinsurer's liability in respect
       of all losses occurring during the term of this Contract shall not exceed
       100% of $4,000,000.

B.     It is warranted that losses from hurricanes Charley, Frances, Ivan, and
       Jeanne are excluded from coverage under this Contract.

C.     The coverage hereunder is subject to at least two risks being involved in
       the same Loss Occurrence.

D.     The Company shall be the sole judge of what constitutes each risk.

E.     "Company's Retention" shall be satisfied if this amount is retained by
       the Company or any affiliated company under common management or common
       ownership of the Company.


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

PREMIUM
-------

The Company shall pay the Reinsurer a premium of $400,000 on September 28, 2004.


                                   ARTICLE IX
                                   ----------

NOTICE OF LOSS AND LOSS SETTLEMENTS
-----------------------------------

A.     The Company shall advise the Reinsurer promptly of all losses which may
       result in a claim hereunder and of all subsequent developments thereto
       which may materially affect the position of the Reinsurer.

B.     When so requested in writing, the Company shall afford the Reinsurer or
       its representatives an opportunity to be associated with the Company, at
       the expense of the Reinsurer, in the defense of any claim, suit or
       proceeding involving this reinsurance, and the Company and the Reinsurer
       shall cooperate in every respect in the defense of such claim, suit or
       proceeding.

                                     Page 7

<PAGE>

C.     All loss settlements made by the Company that are within the terms and
       conditions of the Policy shall be binding upon the Reinsurer. Upon the
       Reinsurer's receipt of satisfactory proof of loss, the Reinsurer agrees
       to pay within 45 days following its receipt thereof its share of each
       such loss settlement in accordance with this Contract.


                                    ARTICLE X
                                    ---------

AGENCY AGREEMENT
----------------

If more than one reinsured company is named as a party to this Contract, the
first named company will be deemed the agent of the other reinsured companies
for purposes of sending or receiving notices required by the terms and
conditions of this Contract and for purposes of remitting or receiving any
monies due any party.


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

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

The Reinsurer shall be credited with salvage or subrogation recoveries (i.e.,
reimbursement obtained or recovery made by the Company, less Loss Adjustment
Expense incurred in obtaining such reimbursement or making such recovery) on
account of claims and settlements involving reinsurance hereunder. Salvage and
subrogation recoveries thereon shall always be used to reimburse the excess
carriers in the reverse order of their priority according to their participation
before being used in any way to reimburse the Company for its primary loss. The
Company hereby agrees to enforce its rights to salvage or subrogation relating
to any loss, a part of which loss was sustained by the Reinsurer, and to
prosecute all claims arising out of such rights.


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

ERRORS AND OMISSIONS
--------------------

Any inadvertent delay, omission or error shall not be held to relieve either
party hereto from any liability which would attach to either party if such
delay, omission or error had not been made, provided such omission or error is
rectified upon discovery.


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

OFFSET
------

The Company and the Reinsurer, each at its option, may offset any balance or
balances, whether on account of premiums, claims and losses, loss expenses or
salvages due from one party to the other under this Contract; provided, however,
that in the event of the insolvency of a party hereto, offsets shall only be
allowed in accordance with applicable statutes and regulations.


                                     Page 8

<PAGE>

                                   ARTICLE XIV
                                   -----------

CURRENCY
--------

A.     Whenever the word "Dollars" or the "$" sign appears in this Contract,
       they shall be construed to mean United States Dollars and all
       transactions under this Contract shall be in United States Dollars.

B.     Amounts paid or received by the Company in any other currency shall be
       converted to United States Dollars at the rate of exchange at the date
       such transaction is entered on the books of the Company.


                                   ARTICLE XV
                                   ----------

TAXES
-----

In consideration of the terms under which this Contract is issued, the Company
will not claim a deduction in respect of the premium hereon when making tax
returns, other than income or profits tax returns, to any state or territory of
the United States of America or the District of Columbia or Canada.


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

FEDERAL EXCISE TAX
------------------

(Applicable to those subscribing reinsurers, excepting underwriters at Lloyd's
London and other subscribing reinsurers exempt from Federal Excise Tax, who are
domiciled outside the United States of America.)

A.     The subscribing reinsurer has agreed to allow for the purpose of paying
       the Federal Excise Tax the applicable percentage of the premium payable
       hereon (as imposed under Section 4371 of the Internal Revenue Code) to
       the extent such premium is subject to the Federal Excise Tax.

B.     In the event of any return of premium becoming due hereunder the
       subscribing reinsurer will deduct the applicable percentage from the
       return premium payable hereon and the Company or its agent should take
       steps to recover the tax from the United States Government.


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

UNAUTHORIZED REINSURANCE
------------------------

(Applies only to a subscribing reinsurer who does not qualify for full credit
with any insurance regulatory authority having jurisdiction over the Company's
reserves.)

A.      As regards Policies issued by the Company coming within the scope of
        this Contract, the Company agrees that when it shall file with the
        insurance regulatory authority or set up on

                                     Page 9

<PAGE>

its    books reserves for losses covered hereunder which it shall be required by
       law to set up, it will forward to the subscribing reinsurer a statement
       showing the proportion of such reserves which is applicable to the
       subscribing reinsurer. The subscribing reinsurer hereby agrees to fund
       such reserves in respect of known outstanding losses that have been
       reported to the subscribing reinsurer and allocated loss adjustment
       expense relating thereto, losses and allocated loss adjustment expense
       paid by the Company but not recovered from the subscribing reinsurer,
       plus reserves for losses incurred but not reported, as shown in the
       statement prepared by the Company (hereinafter referred to as
       "subscribing reinsurer's obligations") by funds withheld, cash advances
       or a Letter of Credit. The subscribing reinsurer shall have the option of
       determining the method of funding provided it is acceptable to the
       insurance regulatory authorities having jurisdiction over the Company's
       reserves.

B.     When funding by a Letter of Credit, the subscribing reinsurer agrees to
       apply for and secure for timely delivery to the Company (in accordance
       with the Company's reporting requirements) a clean, irrevocable and
       unconditional Letter of Credit issued by a bank and containing provisions
       acceptable to the insurance regulatory authorities having jurisdiction
       over the Company's reserves in an amount equal to the subscribing
       reinsurer's proportion of said reserves. Such Letter of Credit shall be
       issued for a period of not less than one year, and shall be automatically
       extended for one year from its date of expiration or any future
       expiration date unless 30 days (60 days where required by insurance
       regulatory authorities) prior to any expiration date the issuing bank
       shall notify the Company by certified or registered mail that the issuing
       bank elects not to consider the Letter of Credit extended for any
       additional period.

C.     The subscribing reinsurer and Company agree that the Letters of Credit
       provided by the subscribing reinsurer pursuant to the provisions of this
       Contract may be drawn upon at any time, notwithstanding any other
       provision of this Contract, and be utilized by the Company or any
       successor, by operation of law, of the Company including, without
       limitation, any liquidator, rehabilitator, receiver or conservator of the
       Company for the following purposes, unless otherwise provided for in a
       separate Trust Agreement:

       1.     to reimburse the Company for the subscribing reinsurer's
              obligations, the payment of which is due under the terms of this
              Contract and which has not been otherwise paid;

       2.     to make refund of any sum which is in excess of the actual amount
              required to pay the subscribing reinsurer's obligations under this
              Contract;

       3.     to fund an account with the Company for the subscribing
              reinsurer's obligations. Such cash deposit shall be held in an
              interest bearing account separate from the Company's other assets,
              and interest thereon not in excess of the prime rate shall accrue
              to the benefit of the subscribing reinsurer;

       4.     to pay the subscribing reinsurer's share of any other amounts the
              Company claims are due under this Contract.

D.     In the event the amount drawn by the Company on any Letter of Credit is
       in excess of the actual amount required for 1 or 3 or, in the case of 4,
       the actual amount determined to be due, the Company shall promptly return
       to the subscribing reinsurer the excess amount so

                                    Page 10

<PAGE>

       drawn. All of the foregoing shall be applied without diminution because
       of insolvency on the part of the Company or the subscribing reinsurer.

E.     The issuing bank shall have no responsibility whatsoever in connection
       with the propriety of withdrawals made by the Company or the disposition
       of funds withdrawn, except to ensure that withdrawals are made only upon
       the order of properly authorized representatives of the Company.

F.     At annual intervals, or more frequently as agreed but never more
       frequently than quarterly, the Company shall prepare a specific statement
       of the subscribing reinsurer's obligations, for the sole purpose of
       amending the Letter of Credit, in the following manner:

       1.     If the statement shows that the subscribing reinsurer's
              obligations exceed the balance of credit as of the statement date,
              the subscribing reinsurer shall, within 30 days after receipt of
              notice of such excess, secure delivery to the Company of an
              amendment to the Letter of Credit increasing the amount of credit
              by the amount of such difference.

       2.     If, however, the statement shows that the subscribing reinsurer's
              obligations are less than the balance of credit as of the
              statement date, the Company shall, within 30 days after receipt of
              written request from the subscribing reinsurer, release such
              excess credit by agreeing to secure an amendment to the Letter of
              Credit reducing the amount of credit available by the amount of
              such excess credit.


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

NET RETAINED LIABILITY
----------------------

A.     This Contract applies to only that portion of any Policy which the
       Company retains net for its own account (prior to deduction of any
       underlying reinsurance specifically permitted in this Contract) and, in
       calculating the amount of any loss hereunder and also in computing the
       amount or amounts in excess of which this Contract attaches, only loss or
       losses in respect of that portion of any Policy which the Company retains
       net for its own account shall be included.

B.     The amount of the Reinsurer's liability hereunder in respect of any loss
       or losses shall not be increased by reason of the inability of the
       Company to collect from any other Reinsurer(s), whether specific or
       general, any amounts which may have become due from such Reinsurer(s),
       whether such inability arises from the insolvency of such other
       Reinsurer(s) or otherwise.


                                   ARTICLE XIX
                                   -----------

OTHER REINSURANCE
-----------------

The Company shall maintain in force other reinsurance, recoveries under which
shall inure to the benefit of this Contract.

                                    Page 11


<PAGE>


                                   ARTICLE XX
                                   ----------

THIRD PARTY RIGHTS
------------------

This Contract is solely between the Company and the Reinsurer, and in no
instance shall any other party have any rights under this Contract except as
expressly provided otherwise in the INSOLVENCY ARTICLE.


                                   ARTICLE XXI
                                   -----------

SEVERABILITY
------------

If any provision of this Contract should be invalid under applicable laws, the
latter shall control but only to the extent of the conflict without affecting
the remaining provisions of this Contract.


                                  ARTICLE XXII
                                  ------------

GOVERNING LAW
-------------

This Contract shall be governed as to performance, administration and
interpretation by the laws of the State of Pennsylvania, exclusive of the rules
with respect to conflicts of law, except as to rules with respect to credit for
reinsurance in which case the applicable rules of all states shall apply.


                                  ARTICLE XXIII
                                  -------------

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 representative, at all
reasonable times during the term of this Contract and thereafter, the books,
records and papers of the Company pertaining to the reinsurance provided
hereunder and all claims made in connection therewith.


                                  ARTICLE XXIV
                                  ------------

CONFIDENTIALITY
---------------

The Reinsurer, except with the express prior written consent of the Company,
shall not directly or indirectly, communicate, disclose or divulge to any third
party, any knowledge or information that may be acquired either directly or
indirectly as a result of the inspection of the Company's books, records and
papers. The restrictions as outlined in this Article shall not apply to
information which is already in the public domain or communication or
disclosures that the Reinsurer is required to make to its statutory auditors,
retrocessionaires, legal counsel, parent company, arbitrators involved in any
arbitration procedures under this Contract or disclosures required upon subpoena
or other duly-issued order of a court or other governmental agency or regulatory
authority.

                                    Page 12

<PAGE>

                                   ARTICLE XXV
                                   -----------

INSOLVENCY
----------

A.     In the event of the insolvency of the Company, this reinsurance shall be
       payable directly to the Company or to its liquidator, receiver,
       conservator or statutory successor upon demand, with reasonable provision
       for verification, on the basis of the liability of the Company without
       diminution because of the insolvency of the Company or because the
       liquidator, receiver, conservator or statutory successor of the Company
       has failed to pay all or a portion of any claim. It is agreed, however,
       that the liquidator, receiver, conservator or statutory successor of the
       Company shall give written notice to the Reinsurer of the pendency of a
       claim against the Company indicating the Policy reinsured which claim
       would involve a possible liability on the part of the Reinsurer within a
       reasonable time after such claim is filed in the conservation or
       liquidation proceeding or in the receivership, and that during the
       pendency of such claim, the Reinsurer may investigate such claim and
       interpose, at its own expense, in the proceeding where such claim is to
       be adjudicated, any defense or defenses that it may deem available to the
       Company or its liquidator, receiver, conservator or statutory successor.
       The expense thus incurred by the Reinsurer shall be chargeable, subject
       to the approval of the Court, against the Company as part of the expense
       of conservation or liquidation to the extent of a pro rata share of the
       benefit which may accrue to the Company solely as a result of the defense
       undertaken by the Reinsurer.

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

C.     It is further agreed that, in the event of the insolvency of the Company,
       the reinsurance under this Contract shall be payable directly by the
       Reinsurer to the Company or its liquidator, receiver, conservator, or
       statutory successor, except as provided by Section 4118(a) of the New
       York Insurance Law or except (a) where this Contract specifically
       provides another payee of such reinsurance in the event of the insolvency
       of the Company or (b) where the Reinsurer with the consent of the direct
       insured or insureds has assumed such Policy obligations of the Company as
       direct obligations of the Reinsurer to the payee under such policies and
       in substitution for the obligations of the Company to such payees.

D.     In the event of the insolvency of the Company or companies listed in the
       designation of "Company" under this Contract, this Article shall apply
       only to the insolvent company or companies.


                                  ARTICLE XXVI
                                  ------------

BINDING ARBITRATION
-------------------

A.     If any dispute shall arise between the parties to this Contract, either
       before or after its termination, with reference to the interpretation of
       this Contract, including the formation or validity thereof, or the rights
       of either party with respect to any transactions under this Contract, the
       dispute shall be referred to three arbitrators. One arbitrator is to be
       chosen by each party and the third by the two so chosen. If either party
       refuses or neglects to appoint

                                    Page 13

<PAGE>

       an arbitrator within 30 days after the receipt of written notice from the
       other party requesting it to do so, the requesting party may nominate two
       arbitrators who shall choose the third.

B.     In the event the arbitrators do not agree on the selection of the third
       arbitrator within 30 days, each arbitrator shall name three, of whom the
       other arbitrator shall decline two and the decision shall be made by
       drawing lots. All arbitrators shall be executive or retired officers of
       insurance or reinsurance companies or underwriters at Lloyd's of London,
       not under the control of either party to this Contract.

C.     If more than one Reinsurer is involved in the same dispute, all such
       Reinsurers shall constitute and act as one party for the purposes of this
       Article, provided, however, that nothing herein shall impair the rights
       of such Reinsurers to assert several, rather than joint, defenses or
       claims, nor be construed as changing the liability of the Reinsurer under
       the terms of this Contract from several to joint.

D.     Each party shall submit its case to the arbitrators within 30 days of the
       appointment of the arbitrators. The arbitrators shall consider this
       Contract an honorable engagement rather than merely a legal obligation;
       they are relieved of all judicial formalities and may abstain from
       following the strict rules of law. The decision of a majority of the
       arbitrators shall be final and binding on both the Company and the
       Reinsurer. Judgment may be entered upon the award of the arbitrators in
       any court having jurisdiction.

E.     Each party shall bear the fee and expenses of its own arbitrator, one
       half of the fees and the expenses of the third arbitrator and one half of
       the other expenses of the arbitration. In the event both arbitrators are
       chosen by one party, the fees of the arbitrators shall be equally divided
       between parties.

F.     Any such arbitration shall take place in Hatboro, Pennsylvania, unless
       some other location is mutually agreed upon by the parties.


                                  ARTICLE XXVII
                                  -------------

SERVICE OF SUIT
---------------

(Applicable if the subscribing reinsurer is not domiciled in the United States
of America, and/or is not authorized in any State, Territory or District of the
United States where authorization is required by insurance regulatory
authorities).

A.     It is agreed that in the event the subscribing reinsurer fails to pay any
       amount claimed to be due hereunder, the subscribing reinsurer, at the
       request of the Company, will submit to the jurisdiction of any court of
       competent jurisdiction within the United States. Nothing in this Article
       constitutes or should be understood to constitute a waiver of the
       subscribing reinsurer's rights to commence an action in any court of
       competent jurisdiction in the United States, to remove an action to a
       United States District Court, or to seek a transfer of a case to another
       court as permitted by the laws of the United States or of any state in
       the United States.

                                    Page 14

<PAGE>

B.     Further, pursuant to any statute of any state, territory or district of
       the United States which makes provision therefor, the subscribing
       reinsurer hereby designates the party named in its Interests and
       Liabilities Agreement, or if no party is named therein, the
       Superintendent, Commissioner or Director of Insurance or other officer
       specified for that purpose in the statute, or his successor or successors
       in office, as its true and lawful attorney upon whom may be served any
       lawful process in any action, suit or proceeding instituted by or on
       behalf of the Company or any beneficiary hereunder arising out of this
       Contract.


                                 ARTICLE XXVIII
                                 --------------

INTERMEDIARY
------------

Willis Re Inc., 1835 Market Street, Suite 2700, Philadelphia, Pennsylvania 19103
is hereby recognized as the intermediary negotiating this Contract and through
whom all communications relating thereto shall be transmitted to the Company or
the Reinsurer. However, all communications concerning accounts, claim
information, funds and inquiries related thereto shall be transmitted to the
Company or the Reinsurer through Willis Re Inc., 5420 Millstream Road, Suite
200, P.O. Box 3000, McLeansville, North Carolina 27301-3000. Payments by the
Company to Willis Re Inc. shall be deemed to constitute payment to the Reinsurer
and payments by the Reinsurer to Willis Re Inc. shall be deemed to constitute
payment to the Company only to the extent that such payments are actually
received by the Company.

IN WITNESS WHEREOF, the Company by its duly authorized representative has
executed this Contract as of the date specified below:

Signed this                    day of                           , 2004.
           --------------------      ---------------------------

PENN-AMERICA INSURANCE COMPANY
PENN-STAR INSURANCE COMPANY
PENN-PATRIOT INSURANCE COMPANY


By
  --------------------------------------------------


                                    Page 15

<PAGE>

                POOLS, ASSOCIATIONS & SYNDICATES EXCLUSION CLAUSE
                -------------------------------------------------

SECTION A:
----------

EXCLUDING:

         (a)      All Business derived directly or indirectly from any Pool,
                  Association or Syndicate which maintains its own reinsurance
                  facilities.

         (b)      Any Pool or Scheme (whether voluntary or mandatory) formed
                  after March 1, 1968 for the purpose of insuring Property
                  whether on a country-wide basis or in respect of designated
                  areas. This exclusion shall not apply to so-called Automobile
                  Insurance Plans or other Pools formed to provide coverage for
                  Automobile Physical Damage.

SECTION B:
----------

It is agreed that business written by the Company for the same perils, which is
known at the time to be insured by, or in excess of underlying amounts placed in
the following Pools, Associations, or Syndicates, whether by way of insurance or
reinsurance, is excluded hereunder:

         Industrial Risk Insurers,
         Associated Factory Mutuals,
         Improved Risk Mutuals,
         Any Pool, Association or Syndicate formed for the purpose of
                  writing Oil, Gas or Petro-Chemical Plants and/or Oil or Gas
                  Drilling Rigs,
         United States Aircraft Insurance Group, Canadian Aircraft Insurance
         Group, Associated Aviation Underwriters, American Aviation
         Underwriters.

SECTION B does not apply:

         (a)      Where the Total Insured Value over all interests of the risk
                  in question is less than $250,000,000.

         (b)      To interests traditionally underwritten as Inland Marine or
                  Stock and/or Contents written on a Blanket basis.

         (c)      To Contingent Business Interruption, except when the Company
                  is aware that the key location is known at the time to be
                  insured in any Pool, Association or Syndicate named above,
                  other than as provided for under Section B (a).

         (d)      To risks as follows:

                  Offices, Hotels, Apartments, Hospitals, Educational
                  Establishments, Public Utilities (other than Railroad
                  Schedules) and Builder's Risks on the classes of risks
                  specified in this subsection (d) only.

Where this Clause attaches to catastrophe excesses, the following Section C is
added:

SECTION C:
----------

NEVERTHELESS the Reinsurer specifically agrees that liability accruing to the
Company from its participation in residual market mechanisms including but not
limited to:

                                  Page 1 of 2


<PAGE>


         (l) The following so-called "Coastal Pools":

                  ALABAMA INSURANCE UNDERWRITING ASSOCIATION
                  LOUISIANA INSURANCE UNDERWRITING ASSOCIATION
                  MISSISSIPPI WINDSTORM UNDERWRITING ASSOCIATION
                  NORTH CAROLINA INSURANCE UNDERWRITING ASSOCIATION
                  SOUTH CAROLINA WINDSTORM AND HAIL UNDERWRITING
                          ASSOCIATION
                  TEXAS WINDSTORM INSURANCE ASSOCIATION

                                                    AND

         (2)      All "FAIR Plan" and "Rural Risk Plan" business

                                                    AND

         (3)      The Citizens Property Insurance Corporation ("CPIC") and the
                  California Earthquake Authority (CEA)

         for all perils otherwise protected hereunder shall not be excluded,
         except, however, that this reinsurance does not include any increase in
         such liability resulting from:

         (i)      The inability of any other participant in such "Coastal Pool"
                  and/or "FAIR Plan" and/or "Rural Risk Plan" and/or Residual
                  Market Mechanisms to meet its liability.

         (ii)     Any claim against such "Coastal Pool" and/or "FAIR Plan"
                  and/or "Rural Risk Plan" and/or Residual Market Mechanisms, or
                  any participant therein, including the Company, whether by way
                  of subrogation or otherwise, brought by or on behalf of any
                  Insolvency Fund (as defined in the Insolvency Fund Exclusion
                  Clause incorporated in this Contract).

SECTION D:
----------

         (1)      Notwithstanding Section C above, in respect of the CEA, where
                  an assessment is made against the Company by the CEA, the
                  Company may include in the Ultimate Net Loss only that
                  assessment directly attributable to each separate loss
                  occurrence covered hereunder. The Company's initial capital
                  contribution to the CEA shall not be included in the Ultimate
                  Net Loss.

         (2)      Notwithstanding Section C above, in respect of the CPIC, where
                  an assessment is made against the Company by the CPIC, the
                  maximum loss that the Company may include in the Ultimate Net
                  Loss in respect of any loss occurrence hereunder shall not
                  exceed the lesser of:

                  (a)      The Company's assessment from the CPIC for the
                           accounting year in which the loss occurrence
                           commenced, or

                  (b)      The product of the following:

                           (i)      The Company's percentage participation in
                                    the CPIC for the accounting year in which
                                    the loss occurrence commenced; and

                           (ii) The CPIC's total losses in such loss occurrence.

Any assessments for accounting years subsequent to that in which the loss
occurrence commenced may not be included in the Ultimate Net Loss hereunder.
Moreover, notwithstanding Section C above, in respect of the CPIC, the Ultimate
Net Loss hereunder shall not include any monies expended to purchase or retire
bonds as a consequence of being a member of the CPIC. For the purposes of this
Contract, the Company may not include in the Ultimate Net Loss any assessment or
any percentage assessment levied by the CPIC to meet the obligations of an
insolvent insurer member or other party, or to meet any obligations arising from
the deferment by the CPIC of the collection of monies.

                                  Page 2 of 2

<PAGE>

                       INSOLVENCY FUNDS EXCLUSIONS CLAUSE
                       ----------------------------------

This Contract excludes: All liability of the Company arising, by contract,
operation of law, or otherwise, from its participation or membership, whether
voluntary or involuntary, in any insolvency fund. "Insolvency Fund" includes any
guaranty fund, insolvency fund, plan, pool, association, fund or other
arrangement, howsoever denominated, established or governed, which provides for
any assessment of or payment or assumption by the Company of part or all of any
claim, debt, charge, fee or other obligation of an insurer, or its successors or
assigns, which has been declared by any competent authority to be insolvent, or
which is otherwise deemed unable to meet any claim, debt, charge, fee, or other
obligation in whole or in part.


<PAGE>


                                  WAR EXCLUSION
                                  -------------


As regards interests which at time of loss or damage are on shore, no liability
shall attach hereto in respect of any loss or damage which is occasioned by war,
invasion, hostilities, acts of foreign enemies, civil war, rebellion,
insurrection, military or usurped power, or martial law or confiscation by order
of any government or public authority.

This War Exclusion Clause shall not, however, apply to interests which at time
of loss or damage are within the territorial limits of the United States of
America (comprising the fifty States of the Union and the District of Columbia,
its territories and possessions, including the Commonwealth of Puerto Rico and
including Bridges between the United States of America and Mexico provided they
are under United States ownership), Canada, St. Pierre and Miquelon, provided
such interests are insured under original policies, endorsements or binders
containing a standard war or hostilities or warlike operations exclusion clause.

Nevertheless, this clause shall not be construed to apply to loss or damage
occasioned by riots, strikes, civil commotion, vandalism, malicious damage,
including acts committed by agents of any government, party or faction engaged
in war, hostilities or other warlike operation, provided such agents are acting
secretly and not in connection with any operations of military or naval armed
forces in the country where the interests insured are situated.

<PAGE>


   NUCLEAR INCIDENT EXCLUSION CLAUSE - PHYSICAL DAMAGE - REINSURANCE - U.S.A.
   --------------------------------------------------------------------------


1)     This Agreement does not cover any loss or liability accruing to the
       Reinsured, 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 Agreement does not cover any loss or liability accruing to
       the Reinsured, 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 Agreement does not cover any loss or liability by
       radioactive contamination accruing to the Reinsured, 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 the Reinsured 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 Government Authority
                    having jurisdiction thereof.

4)     Without in any way restricting the operations of paragraphs 1), 2) and 3)
       hereof, this Agreement does not cover any loss or liability by
       radioactive contamination accruing to the Reinsured, 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 Reinsured 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)     Reinsured to be sole judge of what constitutes:

       a) substantial quantities, and

       b) the extent of installation, plant or site.

NOTE:  Without in any way  restricting  the  operations of paragraph 1) hereof,
it is understood and agreed that:

       a)     all policies issued by the Reinsured 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
              Reinsured 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.

<PAGE>

                           TERRORISM EXCLUSION CLAUSE
                           --------------------------


A.     This Contract excludes any "insured loss" under a "property and casualty
       insurance" policy which results from an "act of terrorism" that is
       certified under the Terrorism Risk Insurance Act of 2002 ("TRIA"), as
       those three terms are defined by TRIA.

B.     However, any non-certified terrorism loss shall be reinsured hereunder,
       except for any loss that is directly or indirectly caused by or related
       to the release of germs, disease or other chemical or biological
       contagions or contaminants, or the use of any nuclear device or
       radioactive substance.

C.     "Non-certified terrorism loss" as used herein shall mean any loss that is
       not eligible for reimbursement under TRIA but which results from a
       violent act or an act that is dangerous to human life, property, or
       infrastructure, that is committed by an individual or individuals, and
       that appears to be part of an effort to coerce a civilian population or
       to influence the policy or affect the conduct of any government by
       coercion.

D.     Should any judicial or regulatory entity having jurisdiction invalidate
       any exclusion in the Company's Policy that is also the subject of one or
       more of the exclusions herein, then a loss for which the Company is
       liable because of such invalidation shall not be excluded hereunder.


<PAGE>