No. 3154-0026














                              PROPERTY AND CASUALTY
                      EXCESS OF LOSS REINSURANCE AGREEMENT

                                     between

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

                                       and

                          AMERICAN RE-INSURANCE COMPANY





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                                                                   No. 3154-0026


                                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                                         18

     XIX               CLAIMS                                              22

     X                 SUBROGATION AND SALVAGE                             23

     XI                TAXES                                               23

     XII               ACCESS TO RECORDS                                   24

     XIII              INSOLVENCY                                          24

     XIV               OFFSET AND SECURITY                                 24

     XV                ERRORS AND OMISSIONS                                25

     XVI               FEDERAL EXCESS RECOVERY                             25

     XVII              COMMENCEMENT AND
                       TERMINATION                                         26





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                                                                   No. 3154-0026



                              PROPERTY AND CASUALTY
                      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 - PROPERTY EXCESS OF LOSS

         EXHIBIT B - CASUALTY EXCESS OF LOSS

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

TERRITORY
---------

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

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


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                                                                   No. 3154-0026

                                   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



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                                                                   No. 3154-0026


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

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

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

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

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

                                    ARTICLE V
                                    ---------

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

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

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


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                                                                   No. 3154-0026



         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 EXPENSE
----------------------------

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

B.       "Declaratory  Judgment  Expense" 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


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                                                                   No. 3154-0026


         covered  under the terms of this  Agreement,  except to the  extent the
         terms of this Agreement are modified by the special acceptance.

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

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

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


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                                                                   No. 3154-0026




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

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

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


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                                                                   No. 3154-0026


                  consequential or compensatory damages,  resulting from a claim
                  of an insured or an insured's assignee against the Company its
                  agents  or  employees,  except  as  provided  for in the Extra
                  Contractual   Obligations  and  Excess   Judgments   Articles.
                  However,  this Agreement shall exclude from recovery any Extra
                  Contractual Obligations or Excess Judgments loss covered under
                  the Company's umbrella reinsurance agreement.

         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


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                                                                   No. 3154-0026



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

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

                  a)       Any one risk at any one location where the risk Total
                           Insured  Value  (hereinafter  TIV),  inclusive of all
                           coverages  is  greater  than  $50,000,000;  or
                  b)       The  aggregate  TIV  for  all  risks  insured  by the
                           company  at  any  one  location,   inclusive  of  all
                           coverages is greater than $50,000,000,; or


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                                                                   No. 3154-0026



                  c)       Locations  written on a subscription  basis where the
                           100% TIV,  inclusive of all coverages is greater than
                           $50,000,000; and

                  d)       Any of the  following  risks  (i.e.,  owners  of, not
                           tenants in): 1. Airlines or Airports

                           2.       Apartments,  Condos, or Co-Operatives (i.e.,
                                    Urban Only and  greater  than 25 stories)
                           3.       Bridges  (i.e.,  greater  than  300  feet in
                                    length)
                           4.       Casinos of Las Vegas and Atlantic City only
                           5.       Chemical   Manufacturing   or   Distributing
                                    Companies except for liability  arising from
                                    the retail sale or wholesale distribution of
                                    household  chemicals by insureds not engaged
                                    in their manufacture
                           6.       Convention  or  Exhibition   Centers  (i.e.,
                                    Urban  only) with an expected  capacity,  at
                                    any one time, of 25,000 or more
                           7.       Dams (i.e., greater than 300 feet in length)
                           8.       Defense or Aerospace Industries
                           9.       Department  Stores  that  are  part of malls
                                    over 1,000,000 sq. feet
                           10.      Financial  Institutions (i.e., Building. and
                                    Time Element coverages or multiple locations
                                    (i.e.,  Office  Schedules  of  greater  than
                                    10,000 sq. feet per location))
                           11.      Government   buildings  (i.e.,   Federal  or
                                    State) and National Landmarks
                           12.      High  Tech   Manufacturing   Companies   and
                                    Telecommunication   Companies   with   Total
                                    Insured Values greater than $5,000,000.
                           13.      Hospitals (i.e., Urban only)
                           14.      Hotels (i.e., Urban only and greater than 25
                                    stories)
                           15.      Internet Companies and Major Media Companies
                                    with  Total  Insured   Values  greater  than
                                    $5,000,000.
                           16.      Office  Buildings  (i.e.,   Urban  only  and
                                    greater than 25 stories)
                           17.      Oil and Gas  Manufacturing  or  Distributing
                                    Companies
                           18.      Public School Districts (i.e., Urban only)
                           19.      Port or Transit Authorities
                           20.      Railroads
                           21.      Shopping Malls over 1,000,000 sq. feet
                           22.      Arenas,  grandstands,   stadiums,  theatres,
                                    halls and any  other  indoor  venue  with an
                                    expected  capacity,  at  any  one  time,  of
                                    25,000 or more.
                           23.      Tunnels  (i.e.,  greater  than  300  feet in
                                    length)
                           24.      Universities (i.e., Urban only)
                           25.      Utilities electric, gas, water & sewer

         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";


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                                                                   No. 3154-0026

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

                  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.


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                                                                   No. 3154-0026


                  11.      Protection and Indemnity Liability Coverage.

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

                  13.      Uninsured or Underinsured Motorists Coverage.

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

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

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


                                      -11-


<PAGE>


                                                                   No. 3154-0026


                           gratification, discrimination, intimidation, coercion
                           or other sexual  purpose,  regardless of whether such
                           action  or   resulting   injury  is   alleged  to  be
                           intentionally or negligently caused.

                  20.      All loss,  cost or expense  directly  or  indirectly,
                           arising out of,  resulting  as a  consequence  of, or
                           related to the  manufacture,  distribution,  testing,
                           remediation, removal, storage, disposal, sale, use of
                           or exposure to the following, whether or not there is
                           another  cause of loss  which  may  have  contributed
                           concurrently  or  in  any  sequence  to  a  loss:  a.
                           Asbestos  or   materials   or   products   containing
                           asbestos;  b. 2.4,5  Trichloroacetic acid ("2,4,5-1")
                           or 2.3,7,8 - TCDD; c.  Diethylstilbestrol  ("DES") in
                           any dosage or form Any  intrauterine  device ("IUD");
                           d. Any product containing  silicone,  which is in any
                           form   injected  or  implanted   into  the  body;  e.
                           Phen-fen; f. Dioxin; g. Polychlorinated biphenyls; h.
                           Lead or materials  or products  containing  lead;  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."


                                      -12-


<PAGE>



                                                                   No. 3154-0026



                  22.      Products Liability or Completed  Operations Liability
                           related to:
                           a.       Drugs, except for liability arising from the
                                    retail  sale or  wholesale  distribution  of
                                    drugs  by  insureds  not  engaged  in  their
                                    manufacture;
                           b.       Chemicals, except for liability arising from
                                    the retail sale or wholesale distribution of
                                    household  chemicals by insureds not engaged
                                    in their manufacture;
                           c.       Insecticides  and  pesticides,  except sales
                                    that  are  20% or less  of  insured's  total
                                    sales;
                           d.       Aircraft or aircraft parts;
                           e.       Animal  feed,   other  than   custom-blended
                                    grains without  chemical or  pharmacological
                                    additives, except sales that are 20% or less
                                    of insured's total sales;
                           f.       Cosmetics  manufacturing,   except  for  the
                                    manufacture  of soaps or shampoos  where the
                                    insured's  receipts  are  less  than  10% of
                                    total  sales or skin and hair care  products
                                    prepared   at  beauty   salons  or   similar
                                    establishments,
                           g.       Tobacco  and  tobacco  products,   but  this
                                    exclusion   shall  not  apply  to  liability
                                    arising  from the retail  sale or  wholesale
                                    distribution of tobacco products by insureds
                                    not engaged in their manufacture;
                           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.


                                      -13-



<PAGE>


                                                                   No. 3154-0026


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

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

                  28.      Mill or grain elevator operation.

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

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

                  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.


                                      -14-


<PAGE>



                                                                   No. 3154-0026



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

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


                                      -15-


<PAGE>


                                                                   No. 3154-0026


                  "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 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.


                                      -16-


<PAGE>


                                                                   No. 3154-0026


         11.      Contingency business interruption risks of any kind.

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

         13.      All onshore or  offshore:

                  a.       gas and oil drilling risks;
                  b.       petrochemical risks;
                  c.       pipeline risks; or
                  d.       well risks.

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


                                      -17-


<PAGE>


                                                                   No. 3154-0026

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

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

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

         I.       Property Occurrence:
                  --------------------

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

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

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

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



                                      -18-


<PAGE>


                                                                   No. 3154-0026


                                    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  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



                                      -19-


<PAGE>



                                                                   No. 3154-0026


                                    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.

         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.


                                      -20-


<PAGE>


                                                                   No. 3154-0026



         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:
                                    (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


                                      -21-


<PAGE>


                                                                   No. 3154-0026



                                    (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.

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.


                                      -22-


<PAGE>


                                                                   No. 3154-0026


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
                                    ---------

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


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

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.


                                      -23-


<PAGE>


                                                                   No. 3154-0026


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

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 XIII
                                  ------------

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 XIV
                                   -----------

OFFSET AND SECURITY
-------------------

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


                                      -24-


<PAGE>


                                                                   No. 3154-0026



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 XV
                                   ----------

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 XVI
                                   -----------

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  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


                                      -25-


<PAGE>


                                                                   No. 3154-0026


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 XVII
                                  ------------

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  Company  shall  have the option to
         terminate this Agreement on a cut-off or run-off basis as follows:

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

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

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

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

F.       Notwithstanding  the  termination  of  this  Agreement  as  hereinabove
         provided,  the provisions of this Agreement  shall continue to apply to
         all unfinished  business

                                      -26-


<PAGE>


                                                                   No. 3154-0026


         hereunder to the end that all obligations  and liabilities  incurred by
         each party hereunder prior to such termination shall be fully performed
         and discharged.





                                      -27-


<PAGE>


                                                                   No. 3154-0026



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


                                      -28-


<PAGE>



                                                                   No. 3154-0026
                                                                       EXHIBIT A

                                    EXHIBIT A
                                    ---------

                             PROPERTY 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 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

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

                                    Section 2
                                    ---------

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

A.       As respects one or more than one of the classes under Property  Classes
         of Insurance as stated in Section 1, the Reinsurer  shall not be liable
         for any loss until the  Company's  ultimate net loss for each and every
         risk exceeds  $500,000 and then the  Reinsurer  shall be liable for the
         amount of the  Company' s ultimate  net loss for each and every risk in
         excess of $500,000 but the Reinsurer's  liability shall not exceed 100%
         of $1,500,000  for each and every risk or exceed  $4,500,000 in any one
         occurrence.

B.       As  respects  Terrorist  Activity  as defined  within  the  DEFINITIONS
         Article,  involving one or more than one of the classes under  Property
         Classes of Insurance as stated in Section 1, the Reinsurer shall not be
         liable for any loss until the Company's  ultimate net loss for each and
         every risk exceeds  $500,000 and then the Reinsurer shall be liable for
         the amount of the  Company' s ultimate net loss for each and every risk
         in excess of $500,000 but the  Reinsurer's  liability  shall not


                                      -1-



<PAGE>


                                                                   No. 3154-0026
                                                                       EXHIBIT A


         exceed 100% of $1,500,000 for each and every risk or exceed  $3,000,000
         in any one occurrence,  subject further to an annual aggregate limit of
         $3,000,000.

C.       In the event of a  combination  loss  involving  a property  risk and a
         casualty  occurrence loss from Exhibit B, the Company's retention shall
         be the greater retention of the Line of Business  applicable but not to
         exceed to $500,000.

                                    Section 3
                                    ---------

REINSURANCE PREMIUM
-------------------

A.       The premium for the  reinsurance  provided  under this Exhibit shall be
         computed at the rate of 7.25% of the Company's net written  premium for
         the new and renewal Property business covered as of January 1, 2004.

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

                                    Section 4
                                    ---------
COMMISSION
----------

The Reinsurer shall make a commission  allowance of 37.50% to the Company on the
premiums ceded to this Agreement.

                                    Section 5
                                    ---------
REPORTS AND REMITTANCES
-----------------------

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

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

C.       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.

This  Exhibit A is  attached  to and forms  part of  Reinsurance  Agreement  No.
3154-0026 issued to PENN-AMERICA INSURANCE COMPANY,  PENN-STAR INSURANCE COMPANY
and PENN-PATRIOT INSURANCE COMPANY


DATED:  June 4, 2004


                                      -2-


<PAGE>

                                                                   No. 3154-0026

                                    EXHIBIT B
                                    ---------

                             CASUALTY EXCESS OF LOSS
                             -----------------------

                                    Section 1
                                    ---------

A.       BUSINESS COVERED
         ----------------
         The  Reinsurer  agrees to reimburse  the Company,  on an excess of loss
         basis,  for the amounts of ultimate  net loss which the Company may pay
         as a result of  losses  occurring  on and after  January  1,  2004,  as
         respects the Company's 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

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

B.       As  respects  Terrorist  Activity  as defined  within  the  DEFINITIONS
         Article,  involving one or more than one of the classes under  Casualty
         Classes of Insurance as stated in Section 1, the Reinsurer shall not be
         liable  for any loss  until  the  Company's  ultimate  net loss in each
         occurrence  exceeds $500,000 and then the


                                      -1-


<PAGE>


                                                                   No. 3154-0026


         Reinsurer shall be liable for the amount of the Company' s ultimate net
         loss in each  occurrence  in excess  of  $500,000  but the  Reinsurer's
         liability  shall not exceed 100% of $2,500,000  in any one  occurrence,
         subject further to an annual aggregate limit of $2,500,000.

C.       In the event of a  combination  loss  involving  a  property  risk from
         Exhibit A and a casualty  occurrence,  the Company's retention shall be
         the greater  retention  of the Line of Business  applicable  but not to
         exceed to $500,000.

                                    Section 3
                                    ---------

REINSURANCE PREMIUM
-------------------

A.       The premium for the  reinsurance  provided  under this Exhibit shall be
         computed at the rate of 11.061% of the  Company's  net written  premium
         for the new and  renewal  Casualty  business  covered  as of January 1,
         2004.

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

                                    Section 4
                                    ---------
COMMISSION
----------

The Reinsurer shall make a commission  allowance of 37.50% to the Company on the
premiums ceded to this Agreement.

                                    Section 5
                                    ---------
REPORTS AND REMITTANCES
-----------------------

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

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

C.       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.


                                      -2-


<PAGE>


                                                                   No. 3154-0026


                                    Section 6
                                    ---------

         WARRANTY
         --------

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

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

         2.       Massage  Program - $2,000,000  each  occurrence and $3,000,000
                  general aggregate.

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

This  Exhibit B is  attached  to and forms  part of  Reinsurance  Agreement  No.
3154-0026 issued to PENN-AMERICA INSURANCE COMPANY,  PENN-STAR INSURANCE COMPANY
and PENN-PATRIOT INSURANCE COMPANY

DATED:  June 4, 2004



                                      -3-


<PAGE>

                                                                   No. 3154-0026



                       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-


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                                                                   No. 3154-0026


     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>


                                                                   No. 3154-0026




      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,

                              { Injury,  sickness,  disease,  death or
                                destruction to 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>


                                                                   No. 3154-0026



                (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 to first  aid,  to
                  { bodily  injury,  sickness,  disease  or death
                    resulting  from the  hazardous  properties  of  bodily
                    injury to 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
               to { 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>

                                                                   No. 3154-0026



                           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>


                                                                   No. 3154-0026




        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.




<PAGE>