<PAGE>   1
                                                                   Exhibit 10(h)


                       PROPERTY CATASTROPHE EXCESS OF LOSS
                              REINSURANCE AGREEMENT
                      (HEREINAFTER CALLED THE "AGREEMENT")

                                     BETWEEN

                            MERCHANTS INSURANCE GROUP
                                BUFFALO, NEW YORK

                                  COMPRISED OF:
                       MERCHANTS MUTUAL INSURANCE COMPANY,
               MERCHANTS INSURANCE COMPANY OF NEW HAMPSHIRE, INC.,
                   (HEREINAFTER REFERRED TO AS THE "COMPANY")

                                       AND

                    THE SUBSCRIBING REINSURERS EXECUTING THE
                  INTERESTS AND LIABILITIES CONTRACTS ATTACHED
                                TO THIS AGREEMENT
            (HEREINAFTER COLLECTIVELY REFERRED TO AS THE "REINSURER")








                            EFFECTIVE JANUARY 1, 1998


<PAGE>   2


                                TABLE OF CONTENTS
<TABLE>
<CAPTION>

ARTICLE                                                                                                         PAGE

<S>                                                                                                           <C>
ARTICLE 1 -COVER..................................................................................................1

ARTICLE 2 - TERM..................................................................................................1

ARTICLE 3 - TERRITORY.............................................................................................1

ARTICLE 4 - EXCLUSIONS............................................................................................1

ARTICLE 5 - NET RETAINED LINES....................................................................................4

ARTICLE 6 - ULTIMATE NET LOSS.....................................................................................5

ARTICLE 7 - LOSS OCCURRENCE.......................................................................................5

ARTICLE 8 - RETENTION AND LIMIT...................................................................................6

ARTICLE 9 - REINSTATEMENT.........................................................................................7

ARTICLE 10 - REINSURANCE PREMIUM..................................................................................7

ARTICLE 11 - REPORTS AND REMITTANCES..............................................................................7

ARTICLE 12 - CURRENCY.............................................................................................8

ARTICLE 13 - TAXES................................................................................................8

ARTICLE 14 - FEDERAL EXCISE TAX...................................................................................8

ARTICLE 15 - ERRORS AND OMISSIONS.................................................................................8

ARTICLE 16 - LOSS NOTICE..........................................................................................8

ARTICLE 17 - LOSS SETTLEMENTS.....................................................................................9

ARTICLE 18 - OFFSET...............................................................................................9

ARTICLE 19 - ACCESS TO RECORDS....................................................................................9

ARTICLE 20 - UNAUTHORIZED REINSURANCE.............................................................................9

ARTICLE 21 - SERVICE OF SUIT.....................................................................................11

ARTICLE 22 - INSOLVENCY..........................................................................................11

ARTICLE 23 - ARBITRATION.........................................................................................12

ARTICLE 24 - INTERMEDIARY........................................................................................13

SCHEDULE A.......................................................................................................14
</TABLE>


<PAGE>   3



                       PROPERTY CATASTROPHE EXCESS OF LOSS
                              REINSURANCE AGREEMENT

ARTICLE 1 -COVER
----------------

A. 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 during the term of this Agreement, under policies of the
Company that are in force, new or renewed during the term of this Agreement,
covering business classified by the Company as Property, including but not
limited to: Fire, Allied Lines (including Extended Coverage), the Property
Sections of Homeowners Multiple Peril, Farmowners Multiple Peril and Commercial
Multiple Peril policies, Earthquake, Inland Marine (including Section I of
boatowners), and Automobile Physical Damage (excluding collision but including
water damage, fleet dealers' and garagekeepers' legal liability).

B. The term "policies" as used herein means each of the Company's binders,
policies, contracts, and other evidences of insurance, whether written or oral,
providing insurance on the business covered hereunder.

ARTICLE 2 - TERM
----------------

This Agreement shall become effective as respects losses occurring during the
period January 1, 1998 through December 31, 1998, both dates inclusive, at the
place of the loss occurrence.

B. Upon expiration, the Reinsurer shall remain liable for losses occurring prior
to the expiration date, but all liability shall terminate hereunder as to losses
occurring on or after the date and time of expiration, except as provided in
paragraph C below.

C. If this Agreement should terminate while an occurrence giving rise to a claim
hereunder is in progress, subject to the other conditions of this Agreement, the
Reinsurer shall be liable for its proportion of the entire loss or damage caused
by such occurrence.

ARTICLE 3 - TERRITORY
---------------------

This Agreement shall cover losses occurring in the United States of America, its
territories and possessions, and Canada.

ARTICLE 4 - EXCLUSIONS
----------------------

This Agreement shall not apply to:

1.   Reinsurance accepted by the Company other than:


                                     Page 3

<PAGE>   4



     (a)        Facultative reinsurance on a share basis of risks accepted
          individually and not forming part of any agreement, or

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

     (c)        From its affiliates;

2.   Nuclear incident per the following clauses which are deemed to form a part
     of this Agreement:

     (a)        "Nuclear Incident Exclusion Clause - Physical Damage - 
          Reinsurance" - U.S.A. (BRMA 35B)

     (b)        "Nuclear Incident Exclusion Clause - Physical Damage - 
          Reinsurance" - Canada (BRMA 35G) Clause;

3.   Any extra or non-contractual damages (including loss in excess of policy
     limits) or legal fees and expense attendant to the defense thereof,
     including but not limited to compensatory, exemplary and punitive damages
     or fines or statutory penalties which are awarded against the Company as a
     result of an act, omission, or course of conduct committed by or on behalf
     of the Company;

4.   Any loss or liability accruing to the Company directly or indirectly from
     any insurance written by or through any pool or association including pools
     or associations in which membership by the Company is required under any
     statutes or regulations; however this exclusion shall not apply to:

     (a)  The Alabama Insurance Underwriting Association;

     (b)  The Florida Windstorm Underwriting Association;

     (c)  The Louisiana Insurance Underwriting Association;

     (d)  The Mississippi Windstorm Underwriting Association;

     (e)  The New York Coastal Market Assistance Program (CMAP);

     (f)  The North Carolina Insurance Underwriting Association;

     (g)  The South Carolina Windstorm and Hail Underwriting Association;

     (h)  The Texas Catastrophe Property Insurance Association;

     (i)  All "Fair Plan" and "Rural Risk Plan" business;

     (j)  The Devco Mutual Association,

     However, this Agreement shall not cover any increase in such liability
     resulting from the inability of any other participant in any such pool or
     plan to meet its liability;

5.   Any liability of the Company arising from its participation or membership
     in any insolvency fund;


                                     Page 4
<PAGE>   5


6.   Any loss or damage which is occasioned by war, invasion, hostilities, acts
     of foreign enemies, civil war, rebellion, insurrection, military or usurped
     power, or martial law or confiscation by order of any government or public
     authority; however this exclusion shall not apply to any policy which
     contains a standard war exclusion;



                                     Page 5

<PAGE>   6


7.   Risks written on a layered basis, whether primary or excess of loss, or
     policies written with a deductible or franchise of more than $5,000;
     however, this exclusion shall not apply to policies which provide a
     percentage deductible or franchise in connection with windstorm;

7.   Insurance against earthquake, except when written in conjunction with fire
     and otherwise eligible perils;

8.   Insurance on growing crops;

9.   Insurance against flood, surface water, waves, tidal water or tidal wave,
     overflow of streams or other bodies of water or spray from any of the
     foregoing, all whether driven by wind or not except when written in
     conjunction with fire and otherwise eligible perils;

10.  Any loss in respect of overhead transmission and distribution lines and
     their supporting structures other than those on or within 1000 feet of the
     insured premises; however, this exclusion shall not apply to public
     utilities extension and/or suppliers extension and/or contingent business
     interruption coverage, provided that these are not part of a transmitters'
     or distributors' policy;

11.  Business classified as fidelity;

12.  Liability under coverage afforded for loss or damage resulting from failure
     to account or pay for any goods or merchandise sold on credit, delivered
     under deferred payment agreements, consigned for sale, or delivered under
     any trust or floor plan agreements, except under standard accounts
     receivable policies;

13.  Any loss or damage caused by or resulting from explosion, rupture, or
     bursting of steam boilers, steam pipes, steam turbines, steam engines, or
     rotating parts of machinery caused by centrifugal force; if owned by,
     leased by, or actually operated under the control of the insured. This
     exclusion shall not apply to ensuing loss by fire not otherwise excluded;

14.  Mortgage impairment insurance and similar kinds of insurance, howsoever
     styled, providing coverage to an insured with respect to its mortgagee
     interest in property or its owner interest in foreclosed property;

15.  Difference in conditions insurance and similar kinds of insurance,
     howsoever styled;

16.  Risks which have a total insurable value of more than $250,000,000; however
     this exclusion shall not apply if the Company writes 100% of the risk;

                                     Page 6

<PAGE>   7


17.  Any collection of fine arts with an insurable value of $5,000,000 or more;

18.  Mobile homes;


                                     Page 7

<PAGE>   8



19.  Inland marine business with respect to the following:

          (a)  All bridges and tunnels;

          (b)  Cargo insurance when written as such with respect to ocean, lake,
               or inland waterways vessels;

          (c)  Commercial negative film insurance and cast insurance;

          (d)  Drilling rigs;

          (e)  Furriers' customers policies;

          (f)  Garment contractors policies;

          (g)  Insurance on livestock under so-called "mortality policies";

          (h)  Jewelers' block policies and furriers' block policies;

          (i)  Mining equipment while underground;

          (j)  Motor truck cargo insurance written for common carriers operating
               beyond a radius of 300 miles;

          (k)  Radio and television broadcasting towers;

          (l)  Registered mail insurance when the limit of any one addressee on
               any one day is more than $50,000;

20.  Watercraft, other than watercraft insured under a standard homeowners
     policy;

21.  Loss of, damage to, or failure of, or consequential loss resulting
     therewith (including but not limited to earnings and extra expense) of
     satellites, spacecraft, and launch vehicles, including cargo and freight
     carried therein, in all phases of operation (including but not limited to
     manufacturing, transit, pre-launch, launch, and in-orbit);

22.  Coverage afforded by ISO Pollutant Clean Up and Removal Additional
     Aggregate Limit of Insurance Endorsement CP 04 07 (Ed., 4/86) or as
     subsequently amended or by any similar endorsement affording such coverage;

     Pollutant clean up or removal, including time element coverage associated
     therewith, under any commercial property policy or any inland marine policy
     written by the Company which does not contain ISO Changes- Pollutants
     Endorsement CP 01 86 (Ed. 4/86) or as subsequently amended; however this
     exclusion does not apply to any risk located in a jurisdiction which has
     not approved the Insurance Services Office exclusion or where other
     regulatory constraints prohibit the Company from attaching such
     endorsement. If the Company elects to file an endorsement independent of
     ISO, such endorsement will be deemed a suitable substitute provided the
     Company has submitted the wording to the Reinsurers and received the
     Reinsurers' prior approval.


ARTICLE 5 - NET RETAINED LINES
------------------------------

This Agreement applies only to that portion of any policy which the Company
retains net for its 

                                     Page 8

<PAGE>   9

own account, and in calculating the amount of any loss hereunder and also in
computing the amount or amounts in excess of which this Agreement attaches, only
loss or losses in respect of that portion of any policy which the Company
retains net for its own account shall be included.


                                     Page 9

<PAGE>   10


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

ARTICLE 6 - ULTIMATE NET LOSS
-----------------------------

The term "ultimate net loss" as used herein shall be understood to mean the sum
actually paid by the Company in settlement of losses for which it is liable,
after making proper deductions for all other reinsurance or insurance which
inures to the benefit of the Reinsurer under this Agreement, whether collectible
or not, and all salvages and all recoveries, and shall include all expenses
incurred by the Company in the settlement or defense of claims including the
salaries and expenses of salaried adjusters but excluding the office expenses of
the Company and the salaries and expenses of its other employees; provided,
however, that in the event of the insolvency of the Company, "ultimate net loss"
shall mean the amount of loss and expense which the Company has incurred or 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 provisions of the Insolvency Article of this Agreement.

ARTICLE 7 - LOSS OCCURRENCE
---------------------------
NMA 2244 Amended (BRMA 27a)

A. The term "Loss 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 "Loss Occurrence" shall be limited to all individual losses
sustained by the Company occurring during any period of 168 consecutive hours
arising out of and directly occasioned by the same event except that the term
"Loss Occurrence" shall be further defined as follows:

         (i) 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.

         (ii) 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.


                                    Page 10

<PAGE>   11


         (iii) As regards earthquake (the epicenter of which need not
         necessarily be within the territorial confines referred to in the
         opening paragraph of this Article) and fire following directly
         occasioned by the earthquake, only those individual fire losses which
         commence during the period of 168 consecutive hours may be included in
         the Company's "Loss Occurrence."

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

B. For all "Loss Occurrences," other than (ii) above, the Company may choose the
date and time when any such period of consecutive hours commences, provided that
it is not earlier than the date and time of the occurrence of the first recorded
individual loss sustained by the Company arising out of that disaster, accident
or loss and provided that only one such period of 168 consecutive hours shall
apply with respect to one event, except for any "Loss Occurrence" referred to in
sub-paragraph (i) above where only one such period of 72 consecutive hours shall
apply with respect to one event.

C. As respects those "Loss Occurrences" referred to in (ii) above, the Company
may choose the date and time when any such period of consecutive hours
commences. If the disaster, accident or loss occasioned by the event is of
greater duration than 72 consecutive hours, then the Company may divide that
disaster, accident or loss into two or more "Loss Occurrences" provided no
periods overlap and no individual loss is included in more than one such period
and provided that no period commences earlier than the date and time of the
occurrence of the first recorded individual loss sustained by the Company
arising out of that disaster, accident or loss.

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

ARTICLE 8 - RETENTION AND LIMIT
-------------------------------

A. As respects each Excess Layer of reinsurance coverage provided by this
Agreement, the Company shall retain the amount of ultimate net loss, shown as
the Company's Retention for each Excess Layer in SCHEDULE A attached hereto,
arising out of each and every loss occurrence. The Reinsurer shall then be
liable, as respects its participation in the Excess Layer, for the amount by
which such ultimate net loss exceeds the Company's Retention, each and every
loss occurrence, but the limit of liability of the Reinsurer shall not exceed
the amount shown in SCHEDULE A as Reinsurer's Limit of Liability, each and every
loss occurrence during the term of this Agreement.

B. In addition to the Company's Retention, the Company will retain net for its
own account, with respect to each loss occurrence, the remaining 5% in each
Excess Layer.


                                    Page 11

<PAGE>   12



ARTICLE 9 - REINSTATEMENT

A. In the event of a claim attaching to this Agreement, it is understood and
agreed that the amount of liability hereunder shall be reduced from the
commencement of the loss occurrence giving rise to such claim by the sum payable
on such claim, but any amount so exhausted shall be reinstated from the time of
the loss occurrence. Reinstatements of the limits hereunder for each Excess
Layer; i.e., the liability of the Reinsurer under each Excess Layer of
reinsurance coverage hereunder, shall not exceed the Reinsurer's Limit of
Liability as shown in SCHEDULE A with respect to each and every loss occurrence
under such Excess Layer, and shall be further limited to a Reinsurer's Maximum
Annual Limit as shown in SCHEDULE A for all loss occurrences under such Excess
Layer during the term of this Agreement.

B. For each amount so reinstated, the Company shall pay to the Reinsurer an
additional premium calculated as shown in SCHEDULE A. Any such additional
premium shall be immediately payable at the time the loss giving rise to such
reinstatement is settled; however, such additional premium shall be based on the
Deposit premium with adjustment as required at the end of the term of this
Agreement, when the actual reinsurance premium hereunder shall be finally
determined.

ARTICLE 10 - REINSURANCE PREMIUM
--------------------------------

A. The premium to be paid by the Company to the Reinsurer hereunder shall be
calculated by applying the Premium Rate, for each Excess Layer shown in SCHEDULE
A, to the Company's subject gross net earned premium income during the term of
this Agreement.

B. The Deposit Premium, for each Excess Layer as shown in SCHEDULE A, shall be
payable by the Company quarterly, in advance, in equal installments each on
January 1, April 1, July 1, and October 1, 1998. As promptly as possible after
the termination of this Agreement, the Company shall render a statement to the
Reinsurer showing the actual reinsurance premium due hereunder, calculated as
set forth in paragraph A. above. Subject to a Minimum Premium for each Excess
Layer as shown in SCHEDULE A, the difference between the actual reinsurance
premium and the Deposit Premium shall be paid by the debtor party to the
creditor party.

ARTICLE 11 - REPORTS AND REMITTANCES
------------------------------------

Within 60 days following expiration of this Agreement, the Company will furnish
the Reinsurers with a report of reinsurance premium due them for that period.
Such report will show and properly segregate the Company's subject premium to
which the reinsurance rate applies as well as contain such other information as
may be required by the Reinsurers for completion of their NAIC interim and/or
annual statements. The actual reinsurance premium will be calculated in
accordance with ARTICLE 10 - REINSURANCE PREMIUM, and any balance shown to be
due the Reinsurers will be remitted with said report. Any balance shown to be
due the Company will be payable within 30 days following receipt of the report
by the Reinsurers.

                                    Page 12
<PAGE>   13


ARTICLE 12 - CURRENCY

(BRMA 14C)

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

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

ARTICLE 13 - TAXES
------------------
(BRMA 50B)

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

ARTICLE 14 - FEDERAL EXCISE TAX
-------------------------------
(BRMA 17A)

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

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

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

ARTICLE 15 - ERRORS AND OMISSIONS
---------------------------------
(BRMA 12A)

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

ARTICLE 16 - LOSS NOTICE
------------------------
(BRMA 26B)

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


                                    Page 13

<PAGE>   14



ARTICLE 17 - LOSS SETTLEMENTS

(BRMA 29E)

All loss settlements made by the Company, under policies subject hereto, whether
under policy terms and conditions or by way of compromise, shall be binding upon
the Reinsurer, and, upon receipt of satisfactory proof of loss, the Reinsurer
agrees to pay or allow, as the case may be, its share of each such settlement in
accordance with this Agreement.

ARTICLE 18 - OFFSET
-------------------
(BRMA 36B)

The Company and the Reinsurer may offset any balance or amount due from one
party to the other under this Agreement or any other contract heretofore or
hereafter entered into between the Company and the Reinsurer, whether acting as
assuming reinsurer or ceding company. However, in the event of the insolvency of
any party hereto, offset shall only be allowed in accordance with applicable 
law.

ARTICLE 19 - ACCESS TO RECORDS
------------------------------
(BRMA 1D)

The Reinsurer or its designated representatives shall have access at any
reasonable time to all records of the Company which pertain in any way to this
reinsurance.

ARTICLE 20 - UNAUTHORIZED REINSURANCE
-------------------------------------
(BRMA 55D)

(Applies only to a Reinsurer who does not qualify for full credit with any
insurance regulatory authority having jurisdiction over the Company's
reserves.)A. As regards policies or bonds issued by the Company coming within
the scope of this Agreement, the Company agrees that when it shall file with the
insurance regulatory authority or set up on its books reserves for losses
covered hereunder which it shall be required by law to set up, it will forward
to the Reinsurer a statement showing the proportion of such reserves which is
applicable to the Reinsurer. The Reinsurer hereby agrees to fund such reserves
in respect of known outstanding losses that have been reported to the Reinsurer
and allocated loss adjustment expense relating thereto, and losses and allocated
loss adjustment expense paid by the Company but not recovered from the
Reinsurer, as shown in the statement prepared by the Company (hereinafter
referred to as "Reinsurer's Obligations") by funds withheld, cash advances or a
Letter of Credit. The Reinsurer shall have the option of determining the method
of funding provided it is acceptable to the insurance regulatory authorities
having jurisdiction over the Company's reserves.

B. When funding by a Letter of Credit, the Reinsurer agrees to apply for and
secure timely delivery to the Company of a clean, irrevocable and unconditional
Letter of Credit issued by a bank and containing provisions acceptable to the
insurance regulatory authorities having jurisdiction over the Company's reserves
in an amount equal to the Reinsurer's proportion of said reserves. Such Letter
of Credit shall be issued for a period of not less than one year, and shall be
automatically extended for one year from its date of expiration or any future
expiration date unless thirty (30) days (sixty (60) days where required by
insurance regulatory authorities) 

                                    Page 14


<PAGE>   15

prior to any expiration date the issuing bank shall notify the Company by
certified or registered mail that the issuing bank elects not to consider the
Letter of Credit extended for any additional period.

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

         (a) to reimburse the Company for the Reinsurer's Obligations, the
         payment of which is due under the terms of this Agreement and which has
         not been otherwise paid;

         (b) to make refund of any sum which is in excess of the actual amount
         required to pay the Reinsurer's Obligations under this Agreement;

         (c) to fund an account with the Company for the Reinsurer's
         Obligations. Such cash deposit shall be held in an interest bearing
         account separate from the Company's other assets, and interest thereon
         not in excess of the prime rate shall accrue to the benefit of the
         Reinsurer;

         (d) to pay the Reinsurer's share of any other amounts the Company
         claims are due under this Agreement.

B. In the event the amount drawn by the Company on any Letter of Credit is in
excess of the actual amount required for (a) or (c), or in the case of (d), the
actual amount determined to be due, the Company shall promptly return to the
Reinsurer the excess amount so drawn. All of the foregoing shall be applied
without diminution because of insolvency on the part of the Company or the
Reinsurer.

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

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

         (a) If the statement shows that the Reinsurer's Obligations exceed the
         balance of credit as of the statement date, the Reinsurer shall, within
         thirty (30) days after receipt of notice of such excess, secure
         delivery to the Company of an amendment to the Letter of Credit
         increasing the amount of credit by the amount of such difference.


                                    Page 15

<PAGE>   16

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

ARTICLE 21 - SERVICE OF SUIT
----------------------------
(BRMA 49A)

(This Article only applies to reinsurers domiciled outside of the United States
and/or unauthorized in any state, territory, or district of the United States
having jurisdiction over the Company).

A. It is agreed that in the event of the failure of the Reinsurer hereon to pay
any amount claimed to be due hereunder, the Reinsurer hereon, at the request of
the Company, will submit to the jurisdiction of a court of competent
jurisdiction within the United States. Nothing in this Article constitutes or
should be understood to constitute a waiver of the Reinsurer's rights to
commence an action in any court of competent jurisdiction in the United States,
to remove an action to a United States District Court, or to seek a transfer of
a case to another court as permitted by the laws of the United States or of any
state in the United States. It is further agreed that service of process in such
suit may be made upon Messrs. Mendes & Mount, 750 Seventh Avenue, New York, New
York l00l9, U.S.A., and that in any suit instituted, the Reinsurer will abide by
the final decision of such court or of any appellate court in the event of an
appeal.

B. The above-named are authorized and directed to accept service of process on
behalf of the Reinsurer in any such suit and/or upon the request of the Company
to give a written undertaking to the Company that they will enter a general
appearance upon the Reinsurer's behalf in the event such a suit shall be
instituted.

C. Further, pursuant to any statute of any state, territory or district of the
United States which makes provision therefore, the Reinsurer hereon hereby
designates the Superintendent, Commissioner or Director of Insurance or other
officer specified for that purpose in the statute, or his successor or
successors in office, as its true and lawful attorney upon whom may be served
any lawful process in any action, suit or proceeding instituted by or on behalf
of the Company or any beneficiary hereunder arising out of this Agreement of
reinsurance, and hereby designates the above-named as the person to whom the
said officer is authorized to mail such process or a true copy thereof.

ARTICLE 22 - 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 

                                    Page 16

<PAGE>   17

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 23 - ARBITRATION
------------------------
(BRMA 6B)

A. As a condition precedent to any right of action hereunder, any irreconcilable
dispute between the parties to this Agreement will be submitted for decision to
a board of arbitration composed of two arbitrators and an umpire meeting in
Buffalo, New York.

B. Arbitration shall be initiated by the delivery of a written notice of demand
for arbitration by one party to the other within a reasonable time after the
dispute has arisen.

C. The members of the board of arbitration shall be active or retired
disinterested officials of insurance or reinsurance companies, or Underwriters
at Lloyd's, London, not under the control or management of either party to this
Agreement. Each party shall appoint its arbitrator, and the two arbitrators
shall choose an umpire before instituting the hearing. If the respondent fails
to appoint its arbitrator within four (4) weeks after being requested to do so
by the claimant, the latter shall also appoint the second arbitrator. If the two
arbitrators fail to agree upon the appointment of an umpire within four (4)
weeks after their nominations, each of them shall name three of whom the other
shall decline two, and the decision shall be made by drawing lots. The claimant
shall submit its initial brief within forty-five (45) days from appointment of
the umpire. The respondent shall submit its brief within forty-five (45) days
thereafter, and the claimant may submit a reply brief within thirty (30) days
after filing of the respondent's brief.

D. The board shall make its decision with regard to the custom and usage of the
insurance and reinsurance business. The board shall issue its decision in
writing based upon a hearing in which evidence may be introduced without
following strict rules of evidence but in which cross-examination and rebuttal
shall be allowed. The board shall make its decision within sixty (60) days
following the termination of the hearings unless the parties consent to an
extension. The majority decision of the board shall be final and binding upon
all parties to the proceeding. Judgment may be entered upon the award of the
board in any court having jurisdiction.

E. If more than one reinsurer is involved in the same dispute, all such
reinsurers shall constitute and act as one party for purposes of this clause,
and communications shall be made by the Company to each of the reinsurers
constituting the one party provided, however, that nothing therein shall impair
the rights of such reinsurers to assert several rather than joint defenses or
claims, nor be construed as changing the liability of the reinsurers under the
terms of this Agreement from several to joint.

                                    Page 17

<PAGE>   18

F. Each party shall bear the expense of its own arbitrator and shall jointly and
equally bear with the other party the expense of the umpire. The remaining costs
of the arbitration proceedings shall be allocated by the board.

ARTICLE 24 - INTERMEDIARY

AM-RE Brokers, Inc. is hereby recognized as the Intermediary negotiating this
Agreement for all business hereunder. All communications (including but not
limited to notices, statements, premium, return premium, commissions, taxes,
losses, loss adjustment expense, salvages and loss settlements) relating thereto
shall be transmitted to the Company or the Reinsurer through AM-RE Brokers,
Inc., 685 College Road East, Princeton, New Jersey 08543-5212. Payments by the
Company to the Intermediary shall be deemed to constitute payment to the
Reinsurer. Payments by the Reinsurer to the Intermediary shall be deemed to
constitute payment to the Company only to the extent that such payments are
actually received by the Company.


                                    Page 19

<PAGE>   19



<TABLE>
<CAPTION>
                                  SCHEDULE A
                                  ----------

--------------------------------------------------------------------------------
EXCESS LAYER:         FIRST               SECOND             THIRD
FIRST                 EXCESS              EXCESS             EXCESS      
<S>                   <C>                 <C>                <C>     
SECOND                                                       $ 5,000,000 
THIRD                                                        $10,000,000 
FOURTH                                                       $20,000,000 
FIFTH                                                        $35,000,000 
--------------------------------------------------------------------------------

COMPANY'S             $5,000,000          $10,000,000        $20,000,000
RETENTION:
--------------------------------------------------------------------------------
REINSURER'S           $5,000,000          $10,000,000        $30,000,000 
OF LIMIT                                                     *See Below  
LIABILITY (95%                                               *See Below  
OF):                                                         *See Below  
                                                             *See Below  
--------------------------------------------------------------------------------
REINSURER'S MAXIMUM   $10,000,000         $20,000,000        $60,000,000
ANNUAL LIMIT 
(95% OF):           
$15,000,000
$30,000,000
$40,000,000
$70,000,000   
--------------------------------------------------------------------------------
PREMIUM RATE:         1.2276%             1.4800%            2.2110%


--------------------------------------------------------------------------------
DEPOSIT PREMIUM:      $425,800            $513,350           $766,900

--------------------------------------------------------------------------------
MINIMUM PREMIUM:      $378,500            $456,300           $681,680

--------------------------------------------------------------------------------
REINSTATEMENT         Pro-rata as to   Pro-rata as to        Pro-rata as to
PREMIUM               amount;          amount;               amount;         
CALCULATIONS:         100% for time    100% for time         100% for time

--------------------------------------------------------------------------------
</TABLE>



                                    Page 20
<PAGE>   20
                       INTEREST AND LIABILITIES CONTRACT
                       ---------------------------------

     
This Contract is made and entered into by and between the MERCHANTS INSURANCE
GROUP of Buffalo, New York, Comprised of MERCHANTS MUTUAL INSURANCE COMPANY and
MERCHANTS INSURANCE COMPANY OF NEW HAMPSHIRE, INC., (hereinafter call the
"Company"), and the following party (hereinafter called the "Subscribing
Reinsurer"):

It is mutually agreed between the parties hereto that the Subscribing Reinsurer
shall have the following share(s) of the interests and liabilities of the
"Reinsurer" as set forth in the attached PROPERTY CATASTROPHE EXCESS OF LOSS
REINSURANCE AGREEMENT:

     First Layer:
     Second Layer:
     Third Layer:

The share(s) of the Subscribing Reinsurer in the interests and liabilities of
the Reinsurer in respect of said Agreement shall be separate and apart from the
participation of the other Reinsurers, and shall not be joined with that of the
other Reinsurers and the Subscribing Reinsurer shall in no event participate in
the interests and liabilities of the other Reinsurers.

This Contract shall be effective at 12:01 A.M. Local Standard Time, January 1,
1998 with respect to losses occurring on and after that date, and it shall
continue in force until its expiration in accordance with the terms of the
attached Agreement at 12:01 A.M., Local Standard Time, January 1, 1999.

IN WITNESS WHEREOF the parties hereto have caused this Contract to be executed
in triplicate by their duly authorized representatives.

MERCHANTS INSURANCE GROUP
COMPRISED OF
MERCHANTS MUTUAL INSURANCE COMPANY, AND
MERCHANTS INSURANCE COMPANY OF NEW HAMPSHIRE, INC.

By:                                            Date:
   -----------------------------------------        -----------------

Title:
      --------------------------------------


By:                                            Date:
   -----------------------------------------        -----------------

Title:
      --------------------------------------